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Oracle Will Shop SaaS in 2009

Posted on Monday, Dec 22nd 2008

Oracle (NASDAQ:ORCL) reported its Q209 results on December 18. Revenue was up 6% to $5.6 billion, missing analyst estimates of $5.84 billion. However, as the company cut costs aggressively across the board, non-GAAP EPS of $0.34 met analyst estimates for earnings. Operating margin improved 166 basis points to 35% versus 34% last year. GAAP net income was down 1% to $1.3 billion.

Excluding the impact of the strengthening US dollar, GAAP EPS would have been up 11% to $0.29 and GAAP revenues would have been up 12% to about $6 billion. During the quarter, Oracle bought back shares for $1.8 billion and was left with $10.6 billion in cash and investments at the end of the quarter.

By segment, software revenues were up 8% to $4.5 billion with new software license revenues down 3% to $1.6 billion. Software license updates and product support revenues were up 14% to $2.9 billion. Services revenues were down 2% to $1.1 billion. Technology new license revenues were $1.2 billion, up 4%. Applications new license revenues were $469 million, down 15%. On-demand revenues grew 19%, consulting grew 4%, and education fell 3%.

During the earnings call, CEO Larry Ellison said that middleware sales were strong despite the economic turbulence and that Oracle might have overtaken IBM as the number one middleware company. A major factor for its accelerated growth was the acquisition of business software provider BEA, which brought in about $127 million in new license revenues.

Ellison added that the company’s on-demand business is growing and had some competitive wins against its main rival, Salesforce.com. Last year, Larry Ellison was against focusing on SaaS due to its high cost of sales and low operating margin. Oracle has spent about $25 billion since 2005 to acquire more than 40 companies and will probably consider some acquisitions in the SaaS space, as the economic downturn has eroded the value of SaaS companies by about 40-50%. Read my recent post on SaaS, Sector Overview: SaaS to get a list of excellent acquisition targets for the company.

For the third quarter, Oracle expects revenue to grow 8 to 11% in constant currency and 1% to 4% at current rates. Non-GAAP EPS is expected to be $0.34 to $0.36 in constant currency and $0.31 to $0.33 at current rates. GAAP EPS is expected to be $0.26 to $0.27 in constant currency and $0.22 to $0.24 at current rates. The company expects new software license revenues to grow in the range of -2% to + 8% in constant currency and -10% to flat at current rates. The stock is currently trading around $18 with market cap of about $91 billion. It hit a 52-week low of $15.28 on October 10.

Chart for Oracle Corp. (ORCL)

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Hi Sramana

I believe that there is little doubt that the SaaS market will grow however I believe increasingly we will see reducing revenue growth from the high cost majors and more dynamics from smaller and emergents in strategic partnerships.

There is an emergent trend for highly innovative smaller developers and the technological and tool improvements brings down barriers to entry to newer players. There is evidence of this trend in several sectors.

Despite the current blip the market will grow as access grows but will also become more fragmented.

In a number of established sectors the fragmentation demographic is already visible.

Best wishes and Happy holidays

David

David Bristow Monday, December 22, 2008 at 3:48 PM PT