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Oracle is the world's largest enterprise software company. It has made its name in the software industry as the pioneer of relational database software, which lets businesses store and manage large amounts of data. The company's operations are separated into two divisions: software and services. Since 2005, Oracle's software licenses and software support have consistently brought in about 80% of their total revenue.^[1] The net revenue grew 24.6% to $22.43 billion for FY08 from $17.99 billion in the fiscal year for 2007. This has been attributed towards more sales along with revenues from the newly acquired companies.^[2]

Over the last three years Oracle has been on an acquisitions frenzy, spending $9.4 billion in FY08 alone to purchase smaller companies that specialize in other segments of the industry (i.e. not database software).^[3] These acquisitions have increased the number of customers that rely on Oracle for product support. By increasing its customer base Oracle has been able to reduce its software license prices to compete with other software giants, keeping their support fees level and increasing the number of customers requiring their support. As of June 2nd 2009, Oracle is in the process of buying Sun Microsystems for $7.4 billion dollars. This acquisition is currently waiting for stockholder approval, and will enable Oracle to become a middleware leader. ^[4]

Company Overview

Oracle develops and sells database and middleware as well as business application software and offers hardware and services related to the products. The company is one of the top 10 companies listed in the NASDAQ Composite index^[5].

Balance Sheet Data: 2nd Quarter Report 2010^[6]

Revenue and Profit Metrics: 2nd Quarter Report 2010^[6]

Revenue Breakdown between Segments 2008 ^[7]

Business and Financial Metrics

Oracle, through its earnings from its two business segments and from strategic acquisitions has been increasing its revenues with double digit growth per year for the last four years (2004-2008). The revenues have increased 121% from $10.15B in 2004 to $22.4B in 2008. The net income has also increased 106% to $5.5B from $2.6B in 2004.^[2]

Oracle’s revenue was up 4% to $23.2 billion during its 2009 fiscal year. Its earnings per share were reduced by $0.11 per share due to the reduced value of foreign currencies when compared to US dollars. Nonetheless, it still managed to increase net income by 1% to $5.5 billion. Oracle’s higher software license update and product support revenues was able to cover the companies losses in the falling value of foreign currencies.^[8]

Business Segments

Oracle's business is divided into two segments: software, and services. The software division represents new software licenses, license renewals and product support while the services division consists of consulting, education and on demand hosting services. The Software License Updates and Product Support division of the Software segments in the largest revenue generator for the the company, with 46% of the $22.4B being credited to this division.^[7]

Software

Oracle's total revenue is dominated by its software division which pulls in roughly 80% of total revenues each year.^[9] Within the software group revenues are split between new licenses (34% of total revenues for FY08) and renewals and product support (46% of total revenues for FY08).^[7]

Oracle began making software to organize data in the 1970s with their focus on relational database software. This software is used for storing data and relating different pieces to one another. Database software generally forms the lowest tier of a companies software infrastructure. The next tier, known as middleware, provides integration between the database and the applications that use the data stored in the database. The final tier, applications software, is the software with which users interact. Applications software is often tailored to fit the specific needs of a company. While the original company was focused on database software, Oracle has been expanding its offerings in middleware and applications software as well as providing hardware support and hosting through its On-Demand unit.

In Fiscal Year 2008, new software license sales grew 28% over previous year. This growth was spurred by a 38% increase in new application license sales. The 38% growth far outpaces SAP AG (SAP)'s quarterly growth of 15%. Oracle attributes this to an expanding focus on high end industry specific software. In comparison, SAP has shifted downwards by primarily offering Enterprise Revenue Planning (ERP) systems to smaller companies.

Oracle also sells off the shelf software products for business that provide services such as e-mail, file servers, and client resource management. While a historically a small percentage of total software revenues, application software in 2006 began to contribute a meaningful amount of Oracle's software revenue.

Services

Oracle maintains a separate business unit that helps customers take advantage of all the features and functionality of its software. Oracle provides services through consulting (16% of total revenues), education (2% of total revenues) and on-demand software (3% of total revenues).^[7] These services are offered in a variety of different contexts including in-house services and service by telephone.

Hardware

Oracle announced that they would begin selling hardware (computer servers) at the end of their first fiscal quarter 2009. The company has partnered with HP to sell servers that come with Oracle database software pre-installed. Oracle claims that their servers can provide faster computing for businesses than other competing hardware providers.^[10]

Internationalization

More than half of Oracle's revenues in 2008 came from international clients ($12.7B international to $9.6B domestic).^[11] This exposure to international markets is mitigating the risk to be affected by a domestic economic downturn. As of May 31, 2008, Oracle employed 56,154 of 84,233 full-time employees in foreign countries and is taking advantage of international skills and low cost labor.^[12]

Breakdown of Revenue based on Geography for 2008 ^[11]

Trends and Forces

Technology Advances and Oracle's Role in the Industry

A significant trend in the software and computing industries has been a shift towards what is known as cloud computing, an infrastructure that is based on centralized shared servers. Under this model everything that a company needs in terms of computing will be located and maintained off-site rather than in house. Furthermore, the same company that manages the servers and physical equipment will also license a platform and software to a firm, which can then be accessed over the internet as an on demand service. Under this model businesses are able to save money on various costs including software service, which is a significant source of revenue for Oracle. Cloud computing also offers more efficient processing, storage, and bandwidth usage by centralizing the equipment and optimizing the software. There are a few potential downsides to the cloud computing model, including concerns over the security of centralized computing as well as concerns over the current limitations of bandwidth.

A shift towards cloud computing would be a difficult one for companies like Oracle and Microsoft, who produce and distribute software to their clients in a traditional sense. The costs of developing and managing a cloud system are significant and provide barriers to entry. Companies like Amazon, Salesforce.com, Google, NetSuite and RightNow Technologies are examples of those which have already begun offering products based on cloud computing technology. In order to hold its position as a player in a changing industry Oracle will need to develop products to suit consumers' needs as the environment changes.

Open Source Influence on Premium Software Providers

Open source software refers to software for which the source code is freely available and distributable. Oracle competes with open source vendors, such as MySQL, and products, such as the Eclipse IDE, but it also benefits from their existence. Open source software is generally distributed free of charge or for only a small payment, and as such it can provide difficult competition for software producers like Oracle that rely on license fees to drive revenues. However, Oracle also benefits from some open source software. Many of Oracle's products are built on the open source operating system language Linux and as a result Oracle can take advantage of developments made in the open source community. Furthermore, open source extensions to Oracle's products frequently help to add to and experiment with functionality and extensions that are often later incorporated into Oracle's products.

Consolidation in the Software Industry

In the last three years the software industry has undergone consolidation. Oracle alone has spent around $9.4 billion on acquisitions during FY08 alone.^[3]

From Oracle's standpoint acquisitions have been a way to expand beyond the database software sector. For the industry as a whole, the consolidation trend can be attributed, at least in part, to a slow economy since mid-2007. Oracle can benefit from consolidated the software industry through strategic acquisitions that expand their customer base. The main benefit that acquisitions can provide for Oracle, beyond a more diverse product line, will be revenues the maintaince fees that all Oracle customers pay. As their customer base grows, the number of clients that require their software service increases. With more customers, Oracle has been able to lower prices on software license by keeping software service prices constant. As a result Oracle is able to put pressure on competitors like SAP AG (SAP) through lower license prices while growing revenues.

In 2004 Oracle acquired PeopleSoft, allowing them to penetrate the human resource management software market. They have also acquired Siebel Systems, a leader in customer relationship management software (CRM), Tetik who produces supply chain management software, and ProfitLogic, an India based banking software producer. Most recently, Oracle purchased BEA Systems (BEAS), a producer of middleware, for $8.5 billion.^[13] With its June 2009 acquisition of Sun Microsystems, Oracle has now become the world's largest provider of middleware.^[3]

Software Development Languages

Oracle has optimized its software to run primarily on Unix and Linux based operating systems with most of the software functionality intended to be used through the Java programming language. In doing so, Oracle tied its future to the proliferation of Linux and Unix based operating systems and businesses continuing to base their software on Java. Oracle has also made investments into developing productivity software for the Java platform, which further evidences its commitment to the Java environment. Oracle's acquisition of Sun Microsystems, the developer of the Java platform, in 2009 is a step towards securing its future on the Java platform.^[4]

While Java and Unix/ Linux are the predominant platforms for business software and enterprise development, Microsoft is making a push into this segment. With its Windows Server Operating system and the .Net programming platform, Microsoft is offering a complete solution for businesses that is not based on Unix/Linux and does not rely on Java. The .Net platform is said to have addressed many of Java's shortcomings and businesses are adopting it because it can provide more productive development of business applications. For many businesses this productivity boost is reason enough to switch and is beginning to affect Oracle's market share. Since inception in 2002, the .Net platform has gained market share and represents approximately 4% of software development today. Java represents about 20% by comparison.^[20]

Competition

The enterprise software industry is made up of a large number of smaller companies that specialize in a specific area of the business. Because Oracle has products in all three of these areas they faces competition from a large number of companies.^[21]

Database Software

Oracle's competition in the Database Software market includes large corporations like IBM and Microsoft along with many small database software companies like Sysbase, MySQL, Ingres, NCR (NCR), and Progress Software (PRGS). Oracle is however, the clear leader in this market with an estimated 45% market share.^[22] In line with their prediction of a more consolidated software industry in the future, Oracle has been strategically acquiring smaller, open source database software producers.

In an effort to become a supplier of everything, from chips and operating systems to databases and business programs, Oracle announced a $7.4 billion acquisition of Sun Microsystems in April 2009. If the deal gets done, Oracle will be able to stifle its competitors in the database market since MySQL, one of its current competitors, is currently owned by Sun Microsystems. ^[23]

Middleware

Oracle is attempting to further penetrate the middleware market through research and development and by acquiring smaller companies in the industry. As with the database software market, Oracle faces competition from a few large companies and a larger number of small companies that specialize within the industry. The main competitors for Oracle in the middleware market include IBM, Microsoft (MSFT), Novell (NOVL), TIBCO Software (TIBX), WebMethods (WEBM), Informatica (INFA), Borland Software (BORL), Cognos (COGN), Business Objects S.A. (BOBJ), and CA (CA). Oracle's position in the middleware market is not nearly as strong as that of the database software market, but the company is making efforts to expand its middleware product offerings. Oracle holds an estimated 8% market share in the middleware business.^[22]

Applications Software

Oracle's acquisition strategy over the past three years has helped them in the applications software market. Through their acquisitions of smaller applications software providers Oracle has grown their customer base significantly. Their strategy in this market has been lower licensing fees to compete with SAP AG (SAP), while keeping maintenance fees higher.^[22] As such, Oracle is hoping that their increased applications software customer base can bring in significant streams of revenue through maintenance fees. Oracle's competition in this market includes SAP AG (SAP), Microsoft (MSFT), Salesforce.com (CRM), RightNow Technologies (RNOW), JDA Software Group (JDAS), Manhattan Associates (MANH), and McKesson (MCK).

References

1. ↑ ORCL 2008 10K pg. 37  
2. ↑ ^{2.0 2.1} ORCL 2008 Annual Report pg. 25  
3. ↑ ^{3.0 3.1 3.2} ORCL 2008 10K pg. 1  
4. ↑ ^{4.0 4.1 4.2} Oracle's Sun buy: Ellison praises Solaris, thumbs nose at IBM. Computerworld.com (04-20-2009). Retrieved on 2009-06-05.
5. ↑ NASDAQ Composite Index Info
6. ↑ ^{6.0 6.1} Oracle 2nd Quarter 2010 Press Release
7. ↑ ^{7.0 7.1 7.2 7.3} ORCL 2008 Annual Report pg. 39,41,42,44,45  
8. ↑ ORCL 2009 10K pg. 41  
9. ↑ ORCL 2008 Annual Report pg. 36  
10. ↑ "Software giant Oracle to sell hardware with H-P", www.marketwatch.com, September 24, 2008.
11. ↑ ^{11.0 11.1} ORCL 2008 Annual Report pg. 108  
12. ↑ ORCL 2008 Annual Report pg. 11  
13. ↑ Oracle completes $8.5 billion acquisition of BEA Systems in biggest deal since 2005. TMCnet.com (2008-04-29). Retrieved on 06-17-2008.
14. ↑ Oracle Buys PeopleSoft. Oracle Press Release (2004-12-13). Retrieved on 06-17-2008.
15. ↑ Oracle announces acquisition of Retek. Oracle Press Release (2005-03-21). Retrieved on 06-17-2008.
16. ↑ Oracle Completes Acquisition Of Siebel. Oracle Press Release (2006-01-31). Retrieved on 06-17-2008.
17. ↑ Oracle Buys Enterprise Performance Management Leader, Hyperion. Oracle Press Release (2007-03-01). Retrieved on 06-17-2008.
18. ↑ Oracle and Agile Acquisition Announcement. Oracle Press Release (2007-05-15). Retrieved on 06-17-2008.
19. ↑ Oracle Completes Acquisition of BEA Systems. Oracle Press Release (2008-04-29). Retrieved on 06-17-2008.
20. ↑ TIOBE Programming Community Index for June 2008. www.tiobe.com. Retrieved on 06-12-2008.
21. ↑ Enterprise Software: Analysis of Product Strategies
22. ↑ ^{22.0 22.1 22.2}
23. ↑ Oracle’s Sun Deal: Oracle May Need to Loosen Its Grip (November 8, 2009).