Near the end of Oracle Corporation (NASDAQ:ORCL)‘s conference call last week, co-president Mark Hurd was asked about the company’s ambitions in the telecom space, following its acquisition last month of Acme Packet for $2.1 billion.
The big dog in the telecom space for most of the last decade has been Cisco Systems, Inc. (NASDAQ:CSCO), which itself has been moving into the cloud space with acquisitions like Solve Direct.
With Oracle and Cisco Systems, Inc. (NASDAQ:CSCO) now on a collision course, who is likely to win?
Telecom Becomes Software
The big trend in this space over the last decade was the dominance of IP networks over old-fashioned analog networks, like those companies such as AT&T had run for 100 years. The new trend is the dominance of software over hardware, exemplified by the rise of Software Defined Networking, which envisions the replacement of specialized network hardware with software housed in commodity systems.
Oracle Corporation (NASDAQ:ORCL) is moving into a version of this space, but in its own way. The companies it has been buying build software and hold patents that are important to the way fixed and mobile networks run now. Since that old-line business is dwindling, they’re bargains. Oracle hopes to turn these bargains into dominance of the phone industry customers, who still buy billions of dollars in equipment per year and are looking for a way forward.
Cisco Systems, Inc. (NASDAQ:CSCO) until now has been mostly focused on SDN start-ups, and on rivals like Juniper Systems, which have been building their own SDN solutions for IP networks through acquisitions and internal development. They’re adapting their existing fast switching fabrics to the new environment, and figure they have a big moat around the space.
But what if they don’t? Oracle Corporation (NASDAQ:ORCL) does not think they do. They seem to believe that, by controlling the heart of the old-line software, they can control standards, defining what customers do next.
It’s an audacious idea, but it’s not beyond Oracle’s ability to execute. It started with databases and acquired their applications. Database applications are networked and can easily be translated to telecom networks. Oracle Corporation (NASDAQ:ORCL) already sells to the phone companies in such areas as billing, so why couldn’t it take over the network operations center?
Who Might Win?
Oracle’s stock has been outpacing that of Cisco for years. Over the last half-decade Oracle Corporation (NASDAQ:ORCL) is up 56%, while Cisco shares are actually down 15%. Over the last year it’s up almost 10%, while Cisco is flat. While Cisco sells at about 2.5 times its annual revenues of $46 billion, Oracle sells at closer to four times its revenue. That’s after a stock collapse that saw it drop almost $4.50/share on third quarter earnings that came in behind analyst estimates.
Oracle was pounding the table for better results going forward on its call. Analysts were told that the arrival of new hardware probably slowed sales, and that economic uncertainty caused some slop-over of orders from the third quarter to the current one. If you believe that, Oracle is going to go up, and may gain 20% or more by the time the next quarterly earnings are released.
Cisco Systems, Inc. (NASDAQ:CSCO), meanwhile, is going nowhere fast, and is attractive mainly for its yield and its PE ratio a below-market 12. That’s partly because it’s stuck with the slow-growth telecom market, the same market Oracle is now targeting.
Why would Oracle Corporation (NASDAQ:ORCL) want a market that Cisco Systems, Inc. (NASDAQ:CSCO) is failing to execute in? Because software margins are fatter than hardware margins, and telecom hardware margins can be fatter than those in the general computing market. Oracle Corporation (NASDAQ:ORCL) believes it can sell a host of its fastest servers into the network operations space, turn industry standards into software, and bull its way through Cisco Systems, Inc. (NASDAQ:CSCO)’s moat with the lower prices that result.
They’re right on the technology trend, and we know they can execute on profits once they control industry standards. I’d say Cisco is in trouble. Watch carefully for its own SDN strategy announcements for your clue on how bad the trouble might be.
The article Will Oracle Eat Cisco For Lunch? originally appeared on Fool.com and is written by Dana Blankenhorn.
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