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Oracle Making Strong Entry Into Cloud; Is It Too Late to Grab Market Share

“What the Hell is Cloud Computing?”

That was the question posed by Oracle founder Larry Ellison about eight years ago when he spoke to a gathering of financial analysts.

Since then, it seems Ellison, now chief technology officer, of Oracle (NASDAQ: ORCL) has been enlightened. That, or Ellison has adopted the policy of, “if you can’t beat them, join them.” This is reflected in the company’s recent spending spree in buying small cloud computing businesses.

For investors, if Oracle’s acquisition efforts can help it carve out a significant portion of the cloud computing market share, this is great news. So far this year, the worldwide public cloud services market is projected to reach $204 billion, according to Gartner. That represents a 16.5% increase over last year’s market size of $175 billion.

Gaining market share in the cloud services business won’t be easy and breezy for Oracle. Despite its dominance as a tech player, the cloud business has some pretty dominant players. That includes Salesforce (NASDAQ: CRM), Microsoft (NASDAQ: MSFT) and Amazon (NASDAQ: AMZN).

 · So what is cloud computing; think layers

Back in 2008, when Ellison questioned cloud computing, he said this:
“I don’t understand what [Oracle] will do differently in the light of cloud computing, other than change the wording on some of our ads.”

If you share Ellison’ questions about what is cloud computing, to put it simply, cloud computing is a kind of Internet-based computing. It entails applications, servers and storage services that are accessed via the Internet by a company’s computers and devices that employees use, such as their smartphones.
Cloud computing consists of three segments, or layers: Infrastructure-as-a-Service (IaaS), Platform-as-a-Service (PaaS) and Software-as-a-Service (SaaS).

IaaS allows businesses to eliminate the costs associated with buying and maintaining servers in house. Instead, they outsource such needs to cloud providers. This allows businesses the ability to run their applications and access their data anytime on devices connected to the Internet.

With PaaS, businesses use a platform to develop, run and manage applications without having to build the infrastructure used to develop and launch applications. Google’s App Engine, Microsoft’s Azure and Saleforce’s Force.com, are examples of PaaS platforms.

SaaS allows businesses to eliminate the costs and time of installing and maintaining software. Businesses can access that software via the Internet. Among the companies that use SaaS applications are ADP, Citrix (Go To Meeting) and Cisco (WebEx).

 · Acquisitions paying off

Considering Oracle is a relative newcomer to the cloud services business that is already dominated by some pretty strong competitors, it is good that it set out on acquiring smaller businesses that already offer the services. It now provides all of the platforms explained above.

The following is a list of Oracle’s most recent acquisitions:
Maxymiser; August 2015; undisclosed amount
StackEngine; December 2015; undisclosed amount
AddThis; January 2016; $200 million
Ravello Systems; February 2016; $500 million
Textura; April 2016; $663 million
Crosswise; April 2016; $50 million
Opower; May 2016; $532 million

The acquisitions made during prior to the end of Oracle’s third quarter of 2016 seemed to have contributed positively to the company’s revenues. SaaS, PaaS and IaaS totaled $737 million, which represented a 43% increase from last year. Also, the Q3 gross margin for SaaS and PaaS was 51%, up from 43% last quarter. The company expects to see further improvement in Q4. After that, Oracle will be targeting 80% over time.

This is positive news, but Oracle should give as much focus as possible to its IaaS segment. That’s because the IaaS segment is, and is expected to remain, the fastest-growing segment in 2016. According to Gartner, IaaS is projected to grow 38.4% this year.

Gartner pointed out that the growth in the IaaS’s segment is due to enterprises moving away from data center build-outs and moving their infrastructure needs to the public cloud. Furthermore, it would behoove companies like Oracle to focus on differentiating their products because several market leaders have built a significant lead in this segment already.

Oracle is on the right track, expecting IaaS revenue to grow from negative 1% to positive 3% for Q4. However, Oracle CEO Safra Catz said the company’s IaaS revenue growth will be more moderate for now as it is currently dominated by its hosting business.

Also on guidance, Catz said, “Looking further out for Q1, SaaS and PaaS revenue growth should be higher than the 59% midpoint of my Q4 guidance. SaaS and PaaS gross margin are expected to be higher than Q4 gross margins. Q1 non-GAAP EPS growth should be very solid. I will revisit Q1 with you as part of the Q4 earnings call in June.”

We’ll see how Oracle has continued to grow its revenues from cloud computing in June when it reports earnings for Q4 and the full year. Oracle’s commitment to the cloud through the acquisitions, and its ability to embrace it despite the early on misgivings of its founder are positives. Consider Oracle as a long-term investment play.

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