Oracle Study Points to Concerns on Customer Satisfaction

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According to a recent study by Computer Economics, 42% of Oracle ( ORCL ) customers are dissatisfied with the quality of Oracle's support while 58% are dissatisfied with the cost of the support. We believe that continued dissatisfaction could mean that in spite of high switching costs attached with changing software license providers, some unhappy customers might migrate from Oracle's support and services program, which could weigh on the stock given the high sensitivity to licensing renewals.

The license renewal rate is an important factor for Oracle, and even a modest decline in renewal rates could result in material downside to our near $36 Trefis price estimate for Oracle stock , which is about 15% higher than the current market price. Our analysis is as follows.

License Renewal Rates Important for Oracle

Oracle's software business mainly consists of database software and middleware software, in which it mainly competes with IBM ( IBM ), and applications software, in which it competes with SAP ( SAP ) and Microsoft ( MSFT ). Customers typically renew their software license support contracts with Oracle, and Oracle has been able to maintain high levels of 95% renewal rate in the past. We currently expect Oracle to maintain high renewal rates of around 95% in to the future.

Normally, organizations hesitate to switch their IT applications to a different software vendor due to high switching costs involved, which is a key reason why Oracle has been able to maintain higher renewal rates. For example, applications written in Java and deployed on the Weblogic Application Server and configured with the Oracle database will be almost impossible to switch to IBM Websphere and configured on IBM DB2 database.

Potential Downside to Oracle Stock

If the Computer Economics report indicates potentialhigh dissatisfaction among customers, this could be concerning for Oracle as the possibility of a few customers switching could weigh on renewal rates. As an example, if license renewal rates lower to 90%, or about 5 percentage points, this translates to around 10% downside to our near $36 Trefis price estimate for Oracle stock .

You can see the complete $35.98 Trefis Price estimate for Oracle stock here .



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.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: CRM , IBM , MSFT , ORCL , SAP

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