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Will Oracle Eat Cisco For Lunch?

24 Mar

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Near the end of Oracle‘s (NYSE: ORCL) conference call last week, co-president Mark Hurd was asked about the company’s ambitions in the telecom space, following its acquisition last month of Acme Packet for $2.1 billion.

“Phone companies have two IT systems,” he said, “One that manages the business, one that manages the network. This was an opportunity to get into the network side of the business.” On Monday the company accelerated the move into that business by buying Tekelec, a long-time provider of network signaling, subscriber data management and policy control software.

The big dog in the telecom space for most of the last decade has been Cisco Systems(NASDAQ: CSCO), which itself has been moving into the cloud space with acquisitions like Solve Direct.

With Oracle and Cisco now on a collision course, who is likely to win?

Telecom Becomes Software

The big trend in this space over the last decade was the dominance of IP networks over old-fashioned analog networks, like those companies such as AT&T had run for 100 years. The new trend is the dominance of software over hardware, exemplified by the rise of Software Defined Networking, which envisions the replacement of specialized network hardware with software housed in commodity systems.

Oracle is moving into a version of this space, but in its own way. The companies it has been buying build software and hold patents that are important to the way fixed and mobile networks run now. Since that old-line business is dwindling, they’re bargains. Oracle hopes to turn these bargains into dominance of the phone industry customers, who still buy billions of dollars in equipment per year and are looking for a way forward.

Cisco until now has been mostly focused on SDN start-ups, and on rivals like Juniper Systems, which have been building their own SDN solutions for IP networks through acquisitions and internal development. They’re adapting their existing fast switching fabrics to the new environment, and figure they have a big moat around the space.

But what if they don’t? Oracle does not think they do. They seem to believe that, by controlling the heart of the old-line software, they can control standards, defining what customers do next.

It’s an audacious idea, but it’s not beyond Oracle’s ability to execute. It started with databases and acquired their applications. Database applications are networked and can easily be translated to telecom networks. Oracle already sells to the phone companies in such areas as billing, so why couldn’t it take over the network operations center?

Who Might Win?

Oracle’s stock has been outpacing that of Cisco for years. Over the last half-decade Oracle is up 56%, while Cisco shares are actually down 15%. Over the last year it’s up almost 10%, while Cisco is flat. While Cisco sells at about 2.5 times its annual revenues of $46 billion, Oracle sells at closer to four times its revenue. That’s after a stock collapse that saw it drop almost $4.50/share on third quarter earnings that came in behind analyst estimates.

Oracle was pounding the table for better results going forward on its call. Analysts were told that the arrival of new hardware probably slowed sales, and that economic uncertainty caused some slop-over of orders from the third quarter to the current one. If you believe that, Oracle is going to go up, and may gain 20% or more by the time the next quarterly earnings are released.

Cisco, meanwhile, is going nowhere fast, and is attractive mainly for its yield and its PE ratio a below-market 12. That’s partly because it’s stuck with the slow-growth telecom market, the same market Oracle is now targeting.

Why would Oracle want a market that Cisco is failing to execute in? Because software margins are fatter than hardware margins, and telecom hardware margins can be fatter than those in the general computing market. Oracle believes it can sell a host of its fastest servers into the network operations space, turn industry standards into software, and bull its way through Cisco’s moat with the lower prices that result.

They’re right on the technology trend, and we know they can execute on profits once they control industry standards.  I’d say Cisco is in trouble. Watch carefully for its own SDN strategy announcements for your clue on how bad the trouble might be.

 

R.I.P. Internet — 1969-2014
At only 45 years old… the Internet will be laid to rest in 2014. And Silicon Valley is thrilled. Because they know… The Economist believes the death of the Internet “will be transformative.”

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