Oracle CFO Says Cloud Computing Will Lift Profit Margins

Oracle Corp., the world’s largest database-software maker, will boost operating margins by shifting to services delivered via the Web from software installed on computers, Chief Financial Officer Safra Catz said.

Oracle will be more profitable as technology spending is directed toward cloud-computing tools, Catz, who is also co-president, said at a meeting with analysts in San Francisco yesterday. Analysts project on average that Oracle will reach an operating margin of 48 percent for the fiscal year through May, compared with 39 percent in the previous year .

After spending more than $50 billion on acquisitions in the past decade, fueling an expansion in sales and earnings, Oracle is seeking new sources of growth. The software maker is grappling with Inc., Workday Inc. and other competitors delivering software via the Internet, leading Oracle to buy and develop its own cloud-computing products.

“They’re caught up in this transition between perpetual licensing and cloud,” said Brent Thill, an analyst at UBS AG who has a buy rating on the shares. Oracle’s hybrid approach of selling software that runs on businesses’ own computers and also over the Web is necessary for customers in financial services, telecommunications and government that aren’t ready to move entirely to the cloud, he said.

Oracle is poised to gain market share amid shifts to mobile and Web-based services, regardless of the state of the economy, Catz said.

Comeback Challenge

“Oracle will be left in the dust -- I’ve probably heard it half a dozen times,” Catz said. “Whatever the economy brings us, we will ultimately gain share.”

Chief Executive Officer Larry Ellison, whose Oracle Team USA won the America’s Cup yacht race Sept. 25 in a comeback victory over Emirates Team New Zealand, has charted a course for Oracle that relies on selling customers complete systems of computer servers, databases and application-connecting middleware to reverse slowing growth.

“You put all these pieces together,” Ellison said at the meeting with analysts. “It’s kind of like configuring the boat -- it’s not any one thing.”

The company this week introduced a way for customers of its new database software, called 12c, to run their existing applications by putting more of the data into computer memory instead of on disk for faster transaction processing and data analysis, challenging SAP AG.

Keeping Pace

The Redwood City, California-based company on Sept. 18 gave a weaker-than-projected profit forecast for the fiscal second quarter, which ends in November. Sales are also slowing -- they were unchanged last year and analysts on average predict 3 percent growth this year, according to data compiled by Bloomberg. Revenue increased by double digits for much of the past decade.

“On the applications side, they need to demonstrate they can keep pace with the upstarts,” said Israel Hernandez, an analyst at MKM Partners LLC who recommends buying Oracle shares.

Oracle’s compensation policies have also come under some scrutiny. CtW Investment Group, part of the labor group Change to Win, is urging Oracle to appoint a new director to oversee compensation practices. The group is also opposing the use of stock options to pay Ellison and other executives, said Michael Pryce-Jones, a research analyst at CtW, which holds 6 million Oracle shares.

In a letter sent this week to Bruce Chizen, the chairman of Oracle’s compensation committee and the former CEO of Adobe Systems Inc., CtW also urged Oracle to adopt industry pay benchmarks. Oracle plans to hold its annual shareholder meeting on Oct. 31.

Ellison’s pay package declined 18 percent to $78.4 million for fiscal 2013 after he gave up an annual bonus and the company missed some of its profit targets.

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