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Oracle: Cloudy With a Chance of M&A

Oracle: Cloudy With a Chance of M&A

DAN GALLAGHER

June 20, 2014 2:00 p.m. ET

Oracle ORCL -3.98% closed its fiscal year on a bum note. But the software giant left little doubt that it intends to get big in the cloud—and quickly.

The transition won’t be an easy one. Oracle’s stock fell Friday on the heels of its fiscal fourth-quarter report, in which it missed earnings and revenue forecasts. In part, the shortfall resulted from some customers choosing to subscribe to Oracle’s cloud offerings as opposed to licensing the software. This means less revenue being booked up front because recognition is spread out over time.

That dilemma won’t change overnight, as cloud services still represent only about 4% of revenue. But the company has set its sights high, with Chief Executive Larry Ellison proclaiming on Thursday that he is “focused like a laser” on making Oracle the largest cloud software firm in the next few years.

That is ambitious. Salesforce.com‘s CRM -0.64% revenue in its last fiscal year was $4.1 billion. Oracle’s two cloud segments made about $1.6 billion for the year ended in May.

How will Oracle try to close this gap? If history is anything to go by, the answer is: by opening its wallet.

Rumors surfaced this week that Oracle is close to buying Micros SystemsMCRS +0.80% for more than $5 billion. It also picked up LiveLOOK, a maker of collaboration software, on Friday for an undisclosed sum. Oracle has averaged about nine acquisitions a year from 2003 to 2013. According to data provider Dealogic, 11 of those deals have been in the $1 billion-plus category.

Oracle has nearly $39 billion in cash, and cloud companies are a little cheaper now, with stocks in the Bessemer cloud-computing index down an average of 14% over the past three months. Valuation multiples are still high in absolute terms. But Mr. Ellison isn’t known to pinch pennies when he sees something he wants.

 

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About bambooinnovator
KB Kee is the Managing Editor of the Moat Report Asia (www.moatreport.com), a research service focused exclusively on highlighting undervalued wide-moat businesses in Asia; subscribers from North America, Europe, the Oceania and Asia include professional value investors with over $20 billion in asset under management in equities, some of the world’s biggest secretive global hedge fund giants, and savvy private individual investors who are lifelong learners in the art of value investing. KB has been rooted in the principles of value investing for over a decade as an analyst in Asian capital markets. He was head of research and fund manager at a Singapore-based value investment firm. As a member of the investment committee, he helped the firm’s Asia-focused equity funds significantly outperform the benchmark index. He was previously the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. KB has trained CEOs, entrepreneurs, CFOs, management executives in business strategy, value investing, macroeconomic and industry trends, and detecting accounting frauds in Singapore, HK and China. KB was a faculty (accounting) at SMU teaching accounting courses. KB is currently the Chief Investment Officer at an ASX-listed investment holdings company since September 2015, helping to manage the listed Asian equities investments in the Hidden Champions Fund. Disclaimer: This article is for discussion purposes only and does not constitute an offer, recommendation or solicitation to buy or sell any investments, securities, futures or options. All articles in the website reflect the personal opinions of the writer.

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