- Oracle has continued on its acquisition spree, buying cloud companies Textura and Opower in the space of one week.
- Oracle has been integrating many of its latest acquisitions with its cloud.
- How well has the company's cloud strategy been working?
Oracle Corporation (NYSE:ORCL) is a highly acquisitive company, perhaps the most acquisitive company in the tech sector. Oracle's M&A activity over the last 10 years has crossed the $50B mark with most being small-ticket acquisitions of less than $1B. But with such an insatiable acquisitive appetite, it's hardly surprising that investors sometimes struggle to make sense of some of Oracle's acquisitions. Barely a week after announcing it was buying cloud-based contract and payment management solutions company Textura for $663M, Oracle is at it again and has announced that it will acquire Opower, the provider of customer engagement and energy efficiency cloud services to utilities, for $532M, or a 30% premium.
So why is Oracle on a seemingly never-ending acquisition spree?
Oracle's New Acquisitive Strategy
Oracle certainly does not lack the financial wherewithal to continue buying many of the companies it wants. With cash and short-term investments worth north of $50B, Oracle is well-placed to even square it off with tech heavyweights including Microsoft (NSDQ:MSFT), Alphabet Inc-C (NSDQ:GOOG) and Amazon (NSDQ:AMZN) whenever the need arises. The largest, and perhaps the best-known, Oracle acquisition to-date is, ironically a hardware company: Sun Microsystems, a server manufacturer that the company bought for $7.4B back in 2010.
Although Oracle has a significant exposure to the low-margin hardware business (13% of revenue), the company owns one of the most profitable enterprise legacy software business that allows it to enjoy very healthy profits. Oracle's gross margin of 79.6% beats that of cloud rivals HR/HCM company Workday (NYSE:WDAY) with 67.8% and Salesforce (NYSE:CRM) with 75.2% and even Microsoft with 62.9%, though, of course, Microsoft's hardware business is a much bigger part of the company (43% of revenue) than Oracle's.
Unlike in the past when Oracle mainly bought legacy database software companies as well as a few hardware businesses, it has now adopted a new acquisitive strategy that involves buying cloud (mostly SaaS) companies in different verticals then folding them into its cloud. These verticals include financial services, such as the Textura acquisition, database management business such as BlueKai which the company acquired in 2014, Micros Systems, a primary provider of retail and hospital software, Oracle's second largest acquisition that the company bought for $5.3B in 2014, and now utilities through the Opower acquisition. Oracle is busy making strategic acquisitions of companies that strengthen its SaaS offerings.
But Oracle's approach to the cloud appears to be out of necessity. After dismissing the cloud as a fad for several years, Oracle was later forced to do a mea culpa and is now busy playing catch up. The company now has Iaas, PaaS and SaaS cloud ops., something that only Microsoft (Amazon has IaaS but lacks SaaS) can boast of among the large cloud vendors. In terms of financial growth, Oracle's inorganic cloud strategy appears to be working quite well. For several years, Oracle's cloud grew in the mid-to-high 20s percentages, much slower growth than that by the likes of Azure (triple-digit growth for a couple of years now) and AWS (64% during the last quarter).
But Oracle's cloud growth is now gathering momentum. During the last quarter, Oracle posted cloud revenue growth of 40%. 8% of the company's revenue now comes from the cloud which compares well with Microsoft's cloud which contributes 11% to the top line. So Oracle might be spending a lot to grow its cloud inorganically but so far the strategy seems to be working well.
Meanwhile, Oracle stock is up 10.3% YTD, compared to -9.8% for MSFT, -0.6% for AMZN and -8.5% for GOOG. Much of the gains made by ORCL stock this year are driven by the company's improving cloud growth.
Oracle and Microsoft are two traditional software companies that are deep in the throes of business model restructuring from companies that sell on-premise software to cloud-subscription models. Whereas both companies are enjoying success in their cloud transitions, both are still posting revenue declines as their traditional businesses continue shrinking. Oracle posted a 1% revenue decline to $9.012B during the last quarter mainly due to a huge 13% contraction in revenue from its server hardware business.
Declines in Oracle's legacy software/hardware business have been bigger than the gains the company has been making in the cloud. Indeed, Citi's Walter Pritchard estimated last year that it would take at least five years before Oracle's cloud growth is able to offset declines by its legacy software business. I, however, think that the company can achieve this much sooner. During the last quarter, Oracle legacy software revenue remained flat year-over-year. Meanwhile, the server hardware business has shrunk from 20% of Oracle's top line five years ago to around 13% in the last quarter. So Oracle's traditional software business is beginning to stabilize while the hardware business is increasingly becoming a smaller part of the company thus making its revenue declines less impactful.
I believe that Oracle's cloud strategy that involves leveraging its cloud acquisitions is working well. Meanwhile, the company's software license business appears to be stabilizing. Oracle could be close to turning the corner and the stock appears well-primed for long-term gains.