There are some companies that comprise the very foundation upon which the Street performs its stock-based twists and turns and tech behemoth Oracle Corporation (NASDAQ:ORCL) happens to be one of them. So when such companies start taking a hit, investors’ faith in the whole cycle of events tends to become shaky. Beating Street expectations had become a regular habit for this software and hardware giant, until the company’s third quarter results came out and missed analyst expectations by a significant margin. Oracle’s management put up a brave face and blamed it all on a ‘not so enthusiastic’ sales force, and also assured investors that the results of some recent deals will start to correct the picture in the current fourth quarter.
But then, the big question remains if Oracle Corporation (NASDAQ:ORCL) is actually telling us the truth or is this part of a combination of several factors that had already been eroding the company’s profit margins for quite some time now? Let’s delve a little deeper to find out what lies beneath.
There’s one primary thing which comes to my mind whenever I’m thinking of Oracle’s poor third quarter show. Is Oracle’s 2010 acquisition of Sun Microsystems proving to be more of a curse than a boon in the longer term? Well, for a start, hardware revenues have never been a good show ever since that start and even if the company comes out with a ‘space age’ microprocessor, as it claims it will soon, I doubt if hardware sales (read server sales) will pick up as a result. Nobody wants to have on-premise, expensive-to-maintain hardware any more. Nobody wants to have expensively-priced licenses renewed year over year. Oracle needs to realize that.
Despite claims to the contrary by Oracle Corporation (NASDAQ:ORCL)’s management, the fact remains that IT departments of major corporates have become much more cost-conscious, post the economic downturn. The result is an increasing preference for paying a far more affordable annual subscription fee and installing cloud-based software that need not be backed up by expensive on-premise hardware. That’s precisely the area where Oracle’s traditional as well as newbie competitors are scoring brownie points at its expense. The screaming testimonial to this fact – a significantly worrying 1.8% drop in the licensing of new software and subscription-based sales for Oracle. That’s a very important metric if you want to find out the general direction in which the company’s future revenues are headed for.
The company needs to realize real fast that its combined ‘one-stop package’ featuring servers, databases and software that function seamlessly together may be overtaken by a single consideration – cost. Add to it Oracle’s general market perception as a ‘tough negotiator’ and you have clients scurrying into the arms of more willing competitors.
Of course, the company is doing all it can to put things right. Acquisitions have been a major part of this strategy and the company’s recent acquisitions of Taleo Corp and RightNow Technologies, both cloud software-based organizations, only highlights its determination. At the same time, Oracle will not let go of its dollar-generating licensing strategy anywhere soon, partly because the Sun Microsystems takeover forces it to recover costs this way. My only fear is that this can be a vicious cycle and it might result in the company continuing to bleed even in future. And even if Oracle manages to retain important customers that prefer to run the former’s software, they can always make use of less expensive hardware, a part of rival offerings. This may make it even more tough for Oracle’s sales team to sell ‘a complete package’ as well as they were able to do before, and make it tougher for the company as a whole to justify the Sun Micro takeover.
One smaller competitor that’s really been having a field day at Oracle Corporation (NASDAQ:ORCL)’s expense is salesforce.com, inc. (NYSE:CRM). One of the reasons for this is because Salesforce.com’s products are much more economically priced. But it’s also because Salesforce offers a wide variety of products in the areas of human resources, accounting and customer service management that are much easier to install and have significantly lower upfront expenses.
For instance, Salesforce charges a surprisingly low monthly fee for a one-year software contract with them. Compare that to the thousands of dollars that a company pays for Oracle’s software, not to mention the whopping annual fee-based expenses and the ‘minimum user number’ requirement that comes along with it, and you can see what makes the difference. Salesforce.com’s top as well as bottom lines exceeded Street expectations in the fourth quarter, but what’s more important is that four-fifths of its customers actually signed up for annual contracts during that period. That spells bad times for companies like Oracle, as people are now more willing to go long term with competitors like Salesforce.com.
Another area that Oracle really needs to be cautious about is the recent phenomenon of Big Data, mainly due to the overwhelming presence of long-time rival SAP AG (ADR) (NYSE:SAP). Like Oracle, SAP has also expanded its business largely through the acquisition route, with notable recent ones being Ariba and SuccessFactors. But the similarities seem to end there. SAP’s HANA offering in the cloud and mobile computing space has significant advantages over Oracle’s answer in the form of Exalytics. HANA is able to run on a real time mode and can be operated using a single database. That’s where it also scores over Exalytics as the latter requires as many as three levels of databases, along with the subsequent storage and server requirements. After all, this is one more way in which Oracle has to justify its Sun Micro buyout. But sadly for Oracle, HANA is obviously much more cost-efficient in the long run, a point which the market has increasingly realized. Big Data business may grow more than 150% over a five-year period, highlighting the urgency for Oracle to do something about it fast.
And this is not the end of the sad story for Oracle Corporation (NASDAQ:ORCL) these days. The company has also been plagued by the rise in open source, free to use database tech platforms such as Hadoop, a product developed jointly by software giants Google and Yahoo. Big Data operations can be carried out much faster and at a much lower cost by platforms like Hadoop, in contrast to Oracle’s own Exadata database software that is commercially marketed and is pretty expensive too. Not to mention the fact that Exadata is an instance of scale-up software as compared to Hadoop being a scale-out software. This means that while you can harness the power of multiple machines on a network while using scale-out software like Hadoop, scale-up ones like Exadata limit you to the scale or performance of a particular hardware. The result is Hadoop’s improved performance level at a lower risk.
The chinks in the armor are becoming pretty evident for Oracle Corporation (NASDAQ:ORCL). What also does not help is its significantly late start in the space of cloud computing. If there is one single biggest thing that the company needs to focus on now, it is probably the ‘cost’ factor at all levels. And that obviously requires a complete restructuring of its software approach, along with reduced focus on hardware. Having said that, this is too big a company to take an immediate tumble, but even then, blaming it all merely on the sales force will probably not help in the long run. It’s certainly not the whole truth as told by Oracle. Time to keep a close watch on this stock for the next couple of quarters just to see where things are really headed for.
The article Is Oracle Really Telling Us The Whole Truth? originally appeared on Fool.com and is written by Subhadeep Ghose.
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