Oracle’s Shopping List

Oracle (NASDAQ:ORCL) reported strong results last week driven by its Sun acquisition. With the acquisition, Oracle is competing aggressively against HP and IBM in addition to its age-old rivalry with SAP. Let’s take a closer look.

Oracle’s Financials
Oracle, with annual revenue of $26.8 billion, reported second quarter revenue of $8.6 billion, up 47%, with new software license revenue up 21% to $2 billion. Net income was up 28% to $1.87 billion or $0.37 per share. Non-GAAP EPS was $0.51 versus analyst estimates of $0.46 on revenue of $8.34 billion. During the quarter, Oracle bought back shares worth $250 million and ended the quarter with $24.8 billion in cash.

In the second quarter, new license revenue was $2 billion, up 21%. Technology new license revenue was $1.4 billion, up 21% as the Americas grew 36%, EMEA was down 1%, and Asia was up 27%. Applications new license revenue was $579 million, up 21%, as the Americas grew 26%, EMEA was up 23%, and Asia was down 1%. Software license updates and product support revenue was $3.7 billion, up 12%. Revenue from hardware systems products were $1.1 billion, while revenues from hardware system support were $686 million. Services revenue was $1.2 billion, up 24%.

For the third quarter, Oracle expects revenue to grow 32% to 36% and GAAP EPS to be $0.34 to $0.36. Non-GAAP EPS is expected to be $0.48 to $0.50 versus analyst estimate of $0.47 on revenue growth of 30% to $8.4 billion. New software license revenue growth is expected to range from 10% to 20%. Hardware product revenue is expected to be between $1.1 billion and $1.2 billion excluding hardware support revenue. The stock is trading around $31.74 with market cap of about $160 billion. It hit a 52-week high of $32.27 following its earnings announcement.

Sun’s Java Not Open?
Integration of the Sun acquisition is going well. Since Oracle took over Sun, the latter’s gross margin has steadily improved, from 38% to 48.4% last quarter and 53% this quarter. Oracle is targeting a gross margin of 60%. As we discussed last quarter, Oracle is relentlessly pursuing profits, and it seems to be foregoing its responsibility toward Java. Audrey Watters on ReadWriteWeb reports that the Apache Software Foundation (ASF) has announced its resignation from the Java Community Process (JCP):

“At issue is Oracle’s refusal to provide the technology compatibility kits under the suitable license for its Harmony implementation of Java, something that the Apache Software Foundation says is necessary in order to certify Java as an open language.”

Oracle’s Acquisition Strategy
Since 2005, under the leadership of Larry Ellison, Oracle has spent more than $42 billion on acquiring 65 companies. In November, Oracle bought e-commerce company Art Technology Group (ATG) for $1 billion. Klint Finley on ReadWriteWeb notes that

“Although Larry Ellison has been more known recently for railing against HP, IBM may be Oracle’s real arch-rival. Oracle and IBM have a history of competing in the database market. And more recently IBM acquired Netezza, challenging Oracle’s own business intelligence appliance. Earlier this year IBM acquired e-commerce vendor Sterling Commerce and began integrating social CRM functionality from KickApps into its WebSphere product.”

IBM, HP, and SAP are not the only companies that Oracle competes aggressively against. Arik Hesseldahl on All Things Digital reports that the British software company Autonomy might be the subject of a bidding war between Oracle and Microsoft. With a market valuation of about $7 billion, Autonomy specializes in meaning-based computing, in other words unstructured data analysis.

There are other companies that analysts wish were on Oracle’s shopping list. An analyst at ThinkEquity says Oracle could buy Brocade to augment its cloud-related infrastructure portfolio. Computer World on its list of 10 IT predictions says that Oracle could buy Salesforce.com and that IBM or HP could buy SAP. I don’t see Marc Benioff selling Salesforce.com to Oracle; it will do its own roll-up.

With Mark Hurd joining Oracle as a co-president, there are great expectations that the big acquisition spree will continue. Hurd could lead Oracle into acquiring a services company like Accenture just as he led HP into acquiring EDS. Cloud computing and outsourcing are two top tech trends, and Oracle could be focusing on them in 2011.