Oracle To Avoid Large Acquisitions

Oracle (NASDAQ:ORCL) last week reported strong results driven by its software business. Hardware sales were below expectations and raised investor concerns about the integration of the Sun acquisition. However, Oracle said that these results reflected its decision to go after profit rather than revenue. CEO Larry Ellison also said that Oracle would be focusing more on organic growth. Let’s take a closer look.

Oracle’s Financials
Oracle reported fourth-quarter revenue of $10.8 billion, up 13%. Net income was up 36% to $3.2 billion or $0.62 per share. Non-GAAP EPS was up 25% to $0.75 versus analyst estimates of $0.71 on revenue of $10.8 billion. For fiscal year 2011, GAAP total revenues were up 33% to $35.6 billion. GAAP net income was up 39% to $8.5 billion or $1.67.

During the quarter, Oracle bought back 12.5 million shares for $422 million and ended the quarter with $29 billion in cash and investments. It also declared a dividend of $0.06 per share.

Oracle reported weak hardware sales, raising concerns about the integration of the $7.8 billion Sun acquisition. Oracle executives played down the declining numbers by saying that they are walking away from large deals that are not profitable enough.

Revenue from hardware systems products was down 6% to $1.16 billion as against the company forecast of an increase of 6% to 12%. Revenue from hardware system support was up 13% to $673 million. Hardware gross margins were 55% up from 46% last year.

Oracle’s software business more than made up for the decline in hardware sales. New software license revenue, an indicator of future revenue, increased 19% to $3.6 billion. Technology new license revenue was $2.7 billion, up 18%. Applications new license revenue grew 22% to $1 billion. Software license updates and product support revenue was $3.96 billion, up 15%. Services revenue was $1.25 billion, up 13%.

For the first quarter, Oracle expects revenue to grow 10% to 13% and GAAP EPS to be $0.33 to $0.36. Non-GAAP EPS is expected to be $0.45 to $0.48 versus analyst estimates 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 growth is expected to range from negative 5% to positive 5%. The stock is trading around $31 with market cap of about $158 billion. It hit a 52-week high of $36.50 on May 3.

Oracle’s Acquisition Strategy
Last week, Oracle also announced its plans to acquire Web experience management vendor FatWire Software for an undisclosed sum. Fatwire is a software maker that specializes in managing users’ Web experience.  Oracle said the acquisition would complement its middleware, business intelligence, content management, and portal technology, alongside its CRM and ATG Web Commerce applications. Together, Oracle and FatWire plan to deliver what they say will be the most complete Web experience management solution and will enable companies to fully optimize the customer experience with innovative social tools.

Oracle has also announced this week its acquisition of enterprise data quality software provider Datanomic for an undisclosed sum. Datanomic’s products are expected to be part of Oracle’s data integration and master data management (MDM) solution.

During the earnings call, CEO Larry Ellison discussed the company’s acquisition strategy:

“I think we’re able to grow through acquisitions when they’re attractively priced and they make sense and they are by and large not attractively priced now and don’t make sense, so we’re not doing them. If these assets are wildly overpriced, we’re– we can’t make a good business case for buying them. Instead, we can focus our energies on organic growth.”

Oracle has $29 billion in cash but still wants to focus on organic growth. Its last large acquisition was that of Sun last year, and I believe that company will focus on integrating it thoroughly before making any new large acquisitions.

Oracle is rolling out its Fusion applications this year for accounting, human resources, and sales force automation. Oracle has been working on Fusion for the past six years. Ellison says that

“We’re the only application vendor now that offers the same exact technology as a service, a Software-as-a-Service on our cloud or you can buy the software and put it on your private cloud. And by the way, if you put it on your private cloud, we’ll run it for you, if you want us to, behind your firewall attached to your local area network with all the security inherent in that. We are — our whole approach to kind of, if you will, cloud 2.0 as people say, we’re not building multi-tenancy software. Remember that when I started my little company NetSuite and 6 months later, when Mark Benioff started his company, Salesforce.com, that was over a decade ago when virtualization wasn’t so common for isolating different customers running on the same machine. So cloud 2.0, we used virtualized elastic cloud technology, very different than, let’s say, what Salesforce.com is using more than almost a 15 -year-old multi-tenancy technology. We are offering that much higher degree of security and much higher degree of isolation when you run on our public cloud”

Ellison expects Fusion to give serious competition to Salesforce.com and over the years take significant share from Salesforce.com and SAP. Oracle may avoid large acquisitions, but small ones are not out of question; indeed, there are bound to be small SaaS acquisitions over the years to make Fusion stronger and take share from its SaaS rivals.