Oracle Corp. is the world’s largest database software development company with revenues in excess of $38 billion and a market capitalization over $175 billion. The company competes in the enterprise software market with other software companies such as SAP, IBM and Microsoft. Recently, however, Oracle and other large cap software companies have faltered against a strong surge of pure-play software-as-a-service (SaaS). These large cap software companies have been late entrants into the extremely competitive on-demand software market, and the growth in pure-play SaaS players has been pressuring their results. In order to respond to increasing SaaS competition, large cap companies such as Oracle and SAP have been aggressively acquiring companies to catch up with their cloud-based competitors such as Salesforce and Workday. In a recent announcement, Oracle disclosed its plan to acquire TOA Technologies to bolster its cloud portfolio. TOA Technologies is a leading cloud-based field service solutions provider, and is Oracle’s third acquisition in the applications product category in 2014. In this article, we take a look at Oracle’s application software division and its strategy in acquiring TOA Technologies.
Acquisitions Aim To Boost Lagging Organic Application Software Growth
The application software division is Oracle’s second biggest revenue generator after its database product portfolio. The company has a variety of application software products across verticals such as Enterprise Resource Planning, Customer Relationship Management, Human Capital Management, Business Intelligence & Analytics (BI/BA), Supply Chain Management in addition to a few industry specific application suites. Despite this across-the-board presence in application software offerings, Oracle ranks second to SAP in the global market for application software products.
Last calendar year, Oracle derived about $8.9 billion in new application license and renewal & support sales, up 7.6% from $8.2 billion. In the same time period, SAP recorded revenues of about $18.5 billion, up 9.5% from $17 billion in CY12. ERP application software was the major contributor to Oracle’s application software sales in CY13, generating about $3.1 billion in revenues. However, sales declined marginally on a year-on-year basis even as the industry saw 3.8% growth.
Even in the explosive CRM software segment, Oracle fell short of industry and peer group growth, with revenues increasing 4% to nearly $3 billion while the industry expanded 14%. This trend of underperforming the industry also impacted sales from other segments such as BI/BA and SCM, which generated revenues of about $2 billion and $1.5 billion, respectively, in CY13. We believe Oracle’s weak performance in the application software industry is a result of the shift from on-premise to cloud-based deployments from enterprises globally.
Oracle has not been able to adapt to the changing IT environment, prompting it to acquire companies that complement its own on-premise offerings. More importantly, the strategy of acquiring companies provides crucial intangible assets such as human capital and patents for future growth. In the near term, however, we expect the company to underperform industry growth in the application software vertical, thereby losing further market share to SAP and other pure-play cloud companies.
TOA Technologies Strengthens Oracle Against Salesforce
TOA Technologies is a leading provider of cloud-based field service solutions that optimize the last mile of customer service for enterprises by coordinating and managing activities between dispatchers, mobile employees, and their customers. TOA’s solutions manage more than 120 million service events annually in over 20 countries across industries such as Media and Telecommunications, Utilities, Business to Business (B2B) and Retail and Consumer Services. TOA’s software helps its customers monitor service requests from contact centers and effectively plan and schedule field engagements with their representatives. Additionally, the company also monitors current inventories to accurately predict service windows and optimizes field operations for the customer. Through the acquisition, Oracle plans to strengthen its own cloud-based service, offering Oracle Service Cloud to improve productivity and expand operational excellence for its customers. Both the Oracle Service Cloud and TOA’s offerings in the field service market are similar to Salesforce’s Service Cloud.
Oracle Service Cloud provides services such as Web Customer Service, Cross-Channel Contact Center, Knowledge Management and Policy Automation to customers, with TOA adding its Field Service expertise to these offerings. Comparatively, Salesforce’s Service Cloud for businesses and Desk.com for small enterprises provide similar support features. Additionally, TOA’s ETAworkforce offering specifically structured for Salesforce users should help Oracle further expand its customer base. The ETAworkforce platform connects field sales and field service users to Salesforce as an alternative to its Service Cloud, and provides Oracle with an opportunity to grab customers from Salesforce’s core CRM offering, the Sales Cloud.
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