Founded by Larry Ellison in 1977, Oracle is the dominant provider of Relational Database Management Systems (RDBMS). In 1979, it launched the very first RDBMS for the commercial market for clients such as government agencies and US telecom operators. After growing to become one of the largest technology companies in the world with a vast product and solution portfolio across hardware and software, RDBMS still represents the lion’s share of Oracle’s business.
Roughly two-thirds of revenues and around 80% of profits are directly related to database licences and support. The enterprise environment database is the plumbing upon which businesses build solutions. They are as integral as an operating system and as difficult to switch away from. According to research company IDC, the worldwide RDBMS market was US$30.2 billion in 2013 and is estimated to grow to US$49.2 billion by 2018 at a compound annual growth rate (CAGR) of 10.2%. Oracle has a 44% share of the RDBMS market, followed by Microsoft (21%), IBM (17%) and SAP (6%).
Oracle is also a significant force in Middleware, a sort of intermediary software or “glue”/“mediator” that provides a bridge between various commonly used pieces of software/applications.
The middleware software market was US$28 billion in 2013 and is expected to grow to US$39.1 billion by 2018 at a CAGR of 6.8%. Oracle’s share of the middleware market is 15%, behind IBM (31%), but ahead of Microsoft (5%), SAP (4%) and TIBCO (3%).
Oracle is also a strong player in the huge Enterprise Application Software space (Customer Relationship, Human Resources, Supply Chain Management, etc), estimated at US$134 billion by IDC in 2013. Oracle is a solid number two with a 10% market share behind SAP (16%) and ahead of Microsoft (6%). This market is expected to grow to US$181 billion by 2018 at 6.3% CAGR.
Despite Oracle’s strong position in these large addressable areas, the stock has recently underperformed the rest of the market due to persistent concerns about the threats posed by a secular shift to the “Cloud”. Cloud software (also known as Software as a Service – SaaS) refers to a different way to deliver software applications: off-premises remotely-hosted software sold under a recurrent subscription model, as opposed to the traditional software package installed and maintained at customers’ premises (a typical and popular example of Cloud software would be the Customer Relationship Management products offered by competitor Salesforce.com).
While Oracle has been late to recognise the importance of Cloud, it has more recently accelerated its efforts to catch-up with the competition and the results are gradually becoming more evident. For the quarter ended in November 2014, Oracle reported good results with improving trends. Cloud revenues in particular grew by 45% year-on-year (admittedly, from a low base) and management are confident that this business can reach US$3 billion (around 10% of Oracle’s software revenues) by May 2016. The strong acceleration in Oracle’s Cloud business shows their success in penetrating the Cloud computing market, despite being late to the challenge, and its rapid growth is more than offsetting declines in traditional licence sales.
At 14.8x P/E for calendar year 2015 and potentially at an inflection point, we think Oracle will remain a cornerstone position of the Fund in the medium term.
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