Oracle’s potential cash reserve boost from the Netsuite buyout
So far in 2016, Oracle (ORCL) has made nine acquisitions: Dyn, Palerra, LogFire, NetSuite, Opower, Textura, Crosswise, Ravello Systems, and AddThis. A majority of these acquisitions were announced by Oracle to boost its place in the concentrated, competitive, and rapidly growing billion-dollar cloud space.
Commenting on its acquisition of Netsuite, Charles King, an analyst with Pund-IT, spoke to eweek and stated: “Though NetSuite has never been profitable, its losses are tiny when compared with Oracle’s overall profitability.” Oracle made a strategically wise decision in buying Netsuite as it would not only enhance company’s position in the cloud but also will boost its cash reserves by ~$2.5 billion.
Oracle’s significant cash reserves have paved the path for Oracle to go on an acquisition spree, similar to Microsoft (MSFT), IBM (IBM), and Google (GOOG). We also know that the technology sector (QQQ) was the only sector in the S&P 500 that had more cash than debt per share in 2015.
Netsuite as a separate entity and Oracle’s margins
Let’s see how these acquisitions are expected to impact company’s margins. We know that recently completed Netsuite acquisition is the company’s largest acquisition in more than a decade. In its soon-to-be-announced fiscal 2Q17 results, Oracle will shed more light on how this acquisition would impact its margins.
After the NetSuite acquisition, Oracle has clarified that Netsuite will continue to function as a separate entity. As the above chart shows, Oracle has spent more than $44 billion in R&D (research and development) since 2005. Given Oracle’s focus on increased R&D expenditure, the company’s margins are bound to suffer, though Oracle and its offerings will benefit in the long run.
Oracle highlighted that its comprehensive SaaS (software-as-a-service) offerings are built with the purpose to aid adoption by its on-premise as well as NetSuite users. Although NetSuite will likely benefit from Oracle’s diversified geographic presence and data centers, the company still aims to increase the allocation of resources for NetSuite to enable it to develop and sell more offerings. This translates to more R&D expenditure and, consequently, more pressure on Oracle’s margins.