Enterprise Tech giant Oracle (ORCL) took it on the chin last week after weaker-than-expected quarterly earnings landed the stock in the dog house. ORCL stock has recovered on long-rumored news of a major hospitality IT company buyout, but since Oracle can be viewed as a microcosm of the enterprise IT sector, breaking down the specifics of where ORCL missed and why can shed light on the prospects for other major players like Microsoft (MSFT), IBM (IBM) and SAP (SAP).
First, the facts about ORCL, which reported earnings after market close on June 19: Oracle’s fourth-quarter profit fell to $3.6 billion from $3.8 billion a year ago. ORCL earnings per share were 92 cents, missing the 95 cents analysts expected. ORCL also missed on the top line, delivering $11.3 billion — Wall Street was looking for $11.48 billion in total revenue for the fiscal fourth quarter.
Underlying those numbers is a paradigm shift toward cloud-based services and away from traditional enterprise servers and software licenses. Those powerful trends impact all enterprise tech stocks, and as the cloud infrastructure, platform and software space becomes more competitive, market-leading companies like ORCL must deliver greater functionality at a lower cost of ownership to remain competitive.
That said, here are three things we learned about enterprise tech from ORCL earnings:
Cloud Services Are the Next Big Thing — But Beware Price Wars
Oracle’s high-performance database management software (DBMS) continues to dominate the market, but shifts in demand for traditional software licenses are likely to erode revenue in the coming quarters.
CEO Larry Ellison, who in 2008 memorably equated cloud computing to the whims of women’s fashion, seems to have figured out the cloud while also turbocharging ORCL to deliver service in all three layers of the cloud: Infrastructure-as-a-Service (IaaS), Platform-as-a-Service (PaaS) and Software-as-a-Sevice (SaaS).
The good news: ORCL’s cloud sales grew by 22% in the most recent quarter. The bad news: Cloud still accounts for less than 5% of ORCL’s revenue — and leaner, meaner rivals are not afraid of waging a price war to gain market share. Such cut-throat competition will drive cloud services prices lower, which is great news for buyers but will weighi on margins of enterprise tech companies.
Bigger Is Better
News that ORCL would buy hospitality-focused Micros Systems (MCRS) gave both stocks a boost on Monday, even though the industry has been abuzz with rumors about the deal. The $5.3 billion deal represents the largest acquisition by ORCL since it bought Sun Microsystems in 2010.
Micros brings a robust vertical market solutions portfolio in the hospitality point-of-sale solutions sector — a high-growth sector. Micros, which also competes with retail point-of-sale hardware vendors like NCR (NCR) and VeriFone (PAY), gives ORCL a foothold in the payments space — and opens the door to cross-selling its high-test enterprise payments solutions.
Hardware Is History
Obviously virtualization and cloud-based infrastructure, platforms and applications will not be the nail in the coffin for the server industry, but the value proposition of enterprises owning and managing their own server farms is being supplanted by lower-cost, easier-to-manage hosted solutions.
ORCL continues to invest in high-end enterprise class servers like the Sun Server X4-4 and 4-8, which were launched earlier this month. The company is betting big on the growing need for servers powerful enough to deliver business intelligence and Big Data analytics — combined with the In-Memory option in ORCL’s database, these servers can speed up processes significantly.
Nevertheless, the server hardware market is shrinking. Industry analysts IDC said the worldwide server market declined by 2.2% year over year — high-end systems fared worst, as demand fell more than 25% year-over-year.
ORCL’s earnings miss is not a warning sign to investors to jump ship. There are a lot of good things happening — particularly the plays in all three layers of the cloud — that will pan out in time. That said, enterprise tech companies are facing a powerful paradigm shift away from traditional hardware sales and software licenses as enterprises embrace cloud solutions that are scalable, quicker-to-market, and less expensive up front.
ORCL and other entrenched enterprise tech firms have a tough tightrope to walk in a space that includes low-cost web services providers like Salesforce.com (CRM), Workday (WDAY), Amazon (AMZN) and Google (GOOG). So don’t sell ORCL stock just yet, but keep a close eye on the sector.
As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.