Oracle’s SaaS Shopping List

Oracle (NASDAQ:ORCL) in October announced its plans to acquire its first Software as a Service (SaaS) company, RightNow, for $1.5 billion. Oracle had for long shied away from making any acquisitions in the SaaS sector, but it can no longer ignore the SaaS market, which is projected by Gartner to reach $21.3 billion in 2015. RightNow was the first step for Oracle, and it is highly likely that many more SaaS acquisitions are to follow. Even its rival SAP has followed suit with the $3.4 billion acquisition of SuccessFactors, a SaaS talent management vendor. This year seems to be gearing up for a SaaS roll-up.

Oracle’s Financials
Oracle recently reported second-quarter revenue of $8.8 billion, up 2% but well below analyst expectations of $9.23 billion as it struggled to close deals. Net income was up 17% to $2.2 billion or $0.43 per share. Non-GAAP EPS was up 6% to $0.54, missing analyst estimates of $0.57. During the quarter, Oracle bought back 33.1 million shares for $1 billion and announced a quarterly dividend of $0.06 per share. It ended the quarter with $31 billion in cash and investments.

Revenue from hardware systems products was down 14% to $0.95 billion owing in part to a product transition to T4 processor-based products. Revenue from hardware system support was down 2% to $625 million. Hardware gross margins were 51% down from 54% last quarter. Exadata and Exalogic growth saw significant acceleration during the quarter, with triple-digit growth rates over last year’s second quarter.

New software license revenue, an indicator of future revenue, increased 2% to $2 billion. Technology new license revenue was $1.5 billion, up 4%. Applications new license revenue grew 2% to $569 million. Software license updates and product support revenue was $4 billion, up 9%. Software revenue was up 7% to $6 billion. Services revenue was $1.18 billion, the same as last year.

For the third quarter, Oracle expects GAAP revenue to grow 4% to 7%. GAAP EPS is expected to be $0.44 to $0.47, and non-GAAP EPS is expected to be $0.56 to $0.59. New software license revenue growth is expected to range from 2% to 12%. Hardware product revenue growth is expected to range from negative 4% to negative 14%. Annual revenue in fiscal 2011 was $35.6 billion. The stock is trading around $26 with market cap of about $130 billion. It hit a 52-week high of $36.50 on May 3.

Oracle’s Acquisition Strategy
According to Gartner, customer relationship management (CRM) continues to be the largest market for SaaS. SaaS revenue within the CRM market is forecast to reach $3.8 billion in 2011, up from $3.2 billion in 2010. Salesforce.com had annual revenue of $1.66 billion in 2010 and expects revenue of $2.25 to $2.6 billion in 2011. Oracle’s acquisition of RightNow, which had annual revenue of $185.5 million in 2010, can be seen as a move to gain market share against Salesforece.com in CRM, the hottest part of the SaaS market.

In the press release for the RightNow acquisition, Thomas Kurian, executive vice president of Oracle Development, says that

“Oracle is moving aggressively to offer customers a full range of Cloud Solutions, including sales force automation, human resources, talent management, social networking, databases and Java as part of the Oracle Public Cloud.”

So, what could be the possible acquisition targets for Oracle to expand its offerings in Oracle Public Cloud?

HCM and Talent Management: Taleo and Workday
After RightNow and the CRM sector, the most probable target sector is human resources and talent management. According to market research firm Bersin & Associates, the talent management market, worth about $3 billion in 2010, is expected to grow by 12%-15%.

Taleo, the leading Saas talent management vendor, is the most likely candidate. SAP’s recent $3.4 billion acquisition plans for SuccessFactors, the other leading player in the talent management sector, increases the chances of Oracle’s interest in Taleo. Oracle already has HCM and talent management offerings in the cloud, and Taleo would be a good acquisition target to gain market share and take on the SAP–SuccessFactors venture. Taleo has a market cap of about $1.6 billion. Its annual revenue in 2010 was $237.3 million, and it expects revenue of $324 million to $325 million in revenue in 2011.

Another interesting option in this sector is Workday, which I covered recently in my Thought Leaders in Cloud Computing series. Workday’s mission is to build the next generation of enterprise business services—human capital management, financial management, and payroll—and deliver its solutions through a SaaS model. Founded in 2005, Workday has raised $250 million in funding. It is planning its IPO this year and hopes to raise up to $500 million.

Social Networking: Jive Software
Social networking is a huge trend that Oracle would like to tap into. IDC estimates that the enterprise social business software market will be worth $10.3 billion by 2013. Although the consumer social networking market has grown phenomenally, the enterprise social networking market is only marginally tapped. Palo Alto–based Jive Software is one company targeting this segment. Other companies include Salesforce.com with their Chatter product, and a startup called Yammer. Jive recently filed for an IPO to raise $100 million. Its annual revenue in fiscal 2010 was $46 million. Bloomberg reports value Jive at $1 billion, while Gartner has a relatively conservative valuation estimate of $70 million.

Healthcare: AthenaHealth
Oracle could also consider buying AthenaHealth, building on its recent acquisition of Phase Forward to further pursue the health care segment. A Frost and Sullivan report, “U.S. Hospital EHR Market, 2009–2016: Charting the Course for Dramatic Change,” reveals that the electronic health records (EHR) market is on path to grow more than six times its 2009 revenues of under a billion dollars to $6.5 billion in 2012. Athenahealth reported annual revenue of $245 million in 2010 and has projected revenues of $315 million-$325 million for the current year. Its market cap is about $1.78 billion.

ERP: NetSuite and Concur
The proportion of enterprise resource planning (ERP) revenue attributed to SaaS overall is still in the single digits, at approximately 7% of the overall ERP market. ERP SaaS offerings contributed approximately $1.5 billion to the SaaS market in 2010, and by year-end 2011, Gartner expects this to increase to $1.7 billion. Oracle could also consider increasing its share in the SaaS ERP market by acquiring Netsuite or Concur. Oracle CEO Larry Ellison is a majority shareholder in NetSuite, whose annual revenue in 2010 was $193.1 million and whose market cap is about $2.64 billion. Concur is a SaaS vendor in the niche area of expense management and its annual revenue in fiscal 2011 was $349.5 million. According to TechNavio, the global SaaS expense management market in is expected to reach $1,333 million in 2014. Its market cap is about $2.68 billion.

Well, let the SaaS acquisition party for 2012 begin!