Oracle Corp. (ORCL): New Analyst Report from Zacks Equity Research - Zacks Equity Research Report

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Summary:
Oracle's third-quarter results were disappointing with both earnings and revenues missing the Zacks Consensus Estimate. However, management provided positive guidance for the fourth quarter. We believe that the speedy adoption of engineered systems and cloud suites will drive incremental top-line growth, going ahead. The company's newly launched low-cost engineered systems are expected to attract price-sensitive customers in the long run. Moreover, higher subscription revenues are expected to provide a recurring high-margin revenue base, going forward. Additionally, improvement in sales force hiring rate will continue to boost bookings. However, this may hurt margin expansion in the near term. Further, stiff competition remains a major near-term headwind. Thus, we remain Neutral on the stock and set a price target of $44.00.

Overview:

Redwood City, Calif.-based Oracle Corporation (ORCL) was founded in 1977 and incorporated later in 2005. Oracle is one of the largest database and enterprise Software providers. With the acquisition of Sun Microsystems in Jan 2010, Oracle began selling hardware products and services, primarily comprising computer server and storage products.

Oracle reported revenues of $37.22 billion in fiscal 2013. The company reports revenues under three heads Software (74.0% of revenues in fiscal 2013), Hardware systems (14.0% of revenues in fiscal 2013) and Services (12.0% of revenues in fiscal 2013).

The following is the graphical representation of the business segments:

Software The software segment is divided into two sub-segments - New Software Licenses and Software License Updates and Product Support. Revenues from the New Software Licenses segment (28.0% of 2013 revenues) include fees earned from granting customers license to use Oracle's database, middleware and applications software products, as well as subscriptions from cloud software contracts.

Application Software offers products catering to customer relationship management, financials, human resources, maintenance management, manufacturing, marketing, order fulfillment, product lifecycle management, enterprise project portfolio management, procurement, sales, services, enterprise resource planning and supply chain management.

The Software License Updates and Products Support segment offers unspecified software product upgrades and maintenance releases as well as Internet access to technical content and Internet and telephone access to technical support personnel. The segment also offers proactive and personalized support services, including Lifetime Support policy, product enhancements and upgrades.

Hardware Systems The hardware systems business consists of two operating segments Hardware Systems Products and Hardware Systems Support. Hardware Systems Products (8.0% of 2013 revenues) comprise servers, storage products, networking components, operating systems and other hardware-related software. The Hardware Systems Support (6.0% of 2013 revenues) segment provides customers software component updates and includes product repairs, maintenance services and technical support services.

Oracle's Engineered Systems are a part of its hardware segment. These systems are pre-integrated products comprising multiple elements of Oracle software and hardware products. Oracle Engineered Systems include Exadata Database Machine, Exalogic Elastic Cloud, Exalytics In-Memory Machine, SPARC SuperCluster, Oracle Database Appliance and Oracle Big Data Appliance.

Services The services business comprises three operating segments - Consulting, Managed Cloud Services and Education. The Consulting segment provides services in the areas of business strategy and analysis, business process simplification, solutions integration, product implementation and the enhancement and upgrade of software products. The Managed Cloud Services segment offers software and hardware management and maintenance services for its software products and lifecycle management services, database and application management services, industry-specific solution support centers and remote and on-site expert services. The Education segment provides instructor-led, media-based and Internet-based training for the use of its software products.

The company sells its products and services primarily through subsidiary sales and service organizations, as well as through indirect channels such as original equipment manufacturers (OEMs), distributors, large account resellers (LARs), value added resellers (VARs), system integrators/implementers, consultants, education providers, Internet service providers, network integrators and independent software vendors. The company's customer base includes large businesses, government agencies, educational institutions and resellers. No single customer accounted for more than 10% of the revenues in fiscal 2013.

Oracle operates in the Americas (approximately 53.0% of 2013 revenues), Europe, the Middle East and Africa or EMEA (30.0%) and the Asia-Pacific (17.0%).


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



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