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Oracle’s Next Frontier

Posted on Thursday, Mar 27th 2008

In my last post on Oracle (Nasdaq: ORCL), we observed that Oracle is wary of getting into SaaS due to the high cost of sales and long lead time to profitability. However, with increasing momentum in the SaaS market, it is striving to keep its on-demand solution competitive. It recently upgraded its Siebel CRM On Demand solution to include support for social networking and collaboration. But unlike SAP which is trying to target the SMB market with its Business ByDesign solution, Oracle continues to target large companies.

Another thing that hasn’t changed at Oracle is its acquisition strategy. It finally got round to striking a deal to acquire BEA in mid-January. BEA was asking for $21/share and Oracle had stuck to $17/share but finally agreed to a price of $19.37/share or $8.5 billion. With this acquisition, Oracle hopes to get past IBM to reach the No.2 position in the middleware market. In mid-January, it also announced plans to acquire Captovation, a leading content management solution provider.

Yesterday, Oracle reported its results for Q3 fiscal 2008 that narrowly missed sales estimates with cautious tech spending hitting its new license revenues. GAAP revenues were up 21% to $5.35 billion and net income was up 30% to $1.3 billion or $0.26 per share. Analysts estimated earnings of $0.30 per share on sales of $5.4 billion.

Software revenues went up 21% to $4.2 billion with new software license revenues increasing16% to $1.6 billion as against 27% growth last year. Software license updates and product support revenues grew 25% to $2.6 billion.

Database and middleware new license revenues grew 20% and applications new license revenues had growth of just 7%, compared to 57% growth rate last year. Two recent acquisitions– Hyperion put in $64 million in license revenue and Agile $14 million. Service revenues went up 21% to $1.1 billion with on-demand revenue growing 23% to $174 million.

Oracle repurchased about 24 million shares for around $500 million in the third quarter of fiscal 2008. For Q4, its seasonally strongest quarter, it gave a conservative outlook. It expects revenue growth of 15% to 19%. Its stock is currently trading around $21 after hitting a 52-week high of $23.21 in January. Market cap is around $100 billion.

So what’s next for Oracle? Presumably, bulking up through acquisitions would continue. An area that may come into focus is Collaboration, to compete with Microsoft, Cisco and IBM. Last year, Cisco acquired Webex and made a significant play for the segment. Oracle and SAP are silent thus far. But in 2008, Oracle is likely to start plugging this gap.

Chart for Oracle Corp. (ORCL)

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