Oracle buying Cerner - another chapter in Larry's playbook

Oracle buying more customers for $28.3 billion

Three uses for corporate capital

1. Invest for internal innovation and new customers. Do this when you have market presence, customers growing in use and quantity and the technology is architected to make enhancements natural.

2. Pay shareholders. When top line revenues begin to stagnate but EBITA is strong. This is done with share repurchasing and dividends.

3. Acquire another company to obtain new customers, technology and/or talent. By acquiring logos, profitable revenue and - hopefully - plays into a larger corporate strategy.

In the high tech industry it is interesting to watch these three options play out.

For Oracle corporation (ORCL), they lean heavily into the 3rd option through acquisition. For over 25 years, they have purchased their way into use cases and industries with over almost 100 acquisitions <wikipedia page>.

As with the previous acquisitions, Oracle acquired new customers with stickie vertical solutions - those that would take work to remove from the enterprise. An electronic health record (EHR) system like Cerner running in a hospital is the most strategic and sticky as it gets.

Oracle is paying CASH and has a focus on the profit – and not the growth

Oracle is paying cash for Cerner, rather than taking advantage of its stock appreciation. That’s a hefty load for a company that reported $23 billion in cash and marketable securities at the end of the latest quarter, and typically generates about $12 billion a year in free cash flow. Oracle didn’t say anything about how it would finance the $28.3 billion deal.

Cerner, like Oracle, is a slow-growth enterprise that throws off cash, the opposite of most modern subscription software businesses. Annual growth hasn’t reached double figures since 2015, and sales shrank by 3.3% in 2020. Revenue is on pace to increase by about 5% in 2021, to an estimated $5.8 billion.

However, Cerner is expected to generate almost $1 billion in net income this year. Oracle CEO Safra Catz said in the press release that the acquisition will be “immediately accretive to” non-GAAP earnings in the first full year after closing “and contribute substantially more to earnings in the second fiscal year and thereafter.”

Oracle wants this in their cloud

One aspect of Cerner’s business that’s likely to be of particular interest to Ellison is the company’s move to Amazon Web Services. In 2019, Cerner announced an initiative code-named “Project Apollo” that would run on AWS infrastructure and allow clients to access cloud technologies.

Oracle was a late entrant to the cloud-infrastructure business, and it trails AWS, Microsoft and Google in terms of market share. Far from conceding defeat, Ellison uses every opportunity to tout Oracle’s cloud capabilities, occasionally at the expense of AWS.

There’s every reason to believe that Ellison sees Oracle’s cloud as the eventual home for a good chunk of Cerner’s future migration.

The word “cloud” shows up 11 times in the deal press release, including in a quote from Oracle Executive Vice President Mike Sicilia, who said Oracle’s technology “enables us to rapidly modernize Cerner’s systems” in the move to the cloud.

Cerner’s biggest client is NOT HAPPY - but will keep paying The largest roll out in the history of medical records is over budget and behind schedule in the US Veterans Administration – the primary medical provider to active and retired military personnel. The initiative has now had numerous setbacks, with leadership repeatedly brought to testify before congressional committees and numerous watchdog reports zeroing in on budgetary problems and training concerns. A 90 day review unearthed a multitude of issues involved patient safety, productivity, governance and management, cost, patient portal experience, testing, data and change management. The original project plan was a 10 year roll out at a total cost of $16 billion. Upon further investigation this was underestimated by over $2.5 billion.<More information>

RESULT:

• Oracle is buying workloads for their cloud – they cannot win them, Using their cash flow to force them into the Oracle cloud. This also means all enhancements to Cerner will use only Oracle tools - Hyperian, Oracle database, etc.

• Expect to see big lay offs at Cerner as Oracle needs to realize the payoff.

• The largest of hospital systems have chosen an EHR - so winning new logos is not the plan. The hospital-land-rush is nearly over. All about the upsell-and-audit.

• Anything Cerner was doing with other technology will end immediately – especially inside Amazon – and pivot to Oracle technologies is the only way forward.

What you should do:

• If you invest in Oracle - might be a good time to cash out and get into higher growth stocks. High tech is already a risky market, either take the risk or move on.

• If you are a hospital - consider your options. Make sure future contracts do not add Oracle-centric language around audits, benchmarking, cloud or limiting factors that keep you from innovating

• If you a Cerner partner - be careful. Especially if you have technology you add to Cerner that competes with anything in Oracle.

• If you work for Cerner - good luck to you. In conversations with others who get 'red washed' into Oracle, consider updating your resume.