Editor’s note: Elizabeth Hedstrom Henlin is an analyst with Technology Business Research.
HAMPTON, N.H. – Oracle (Nasdaq: ORCL) topped its own record second quarter performance, posting double digit growth in new licenses and support revenues, while reaching new heights of free cash flow at $12.3 billion (a 46 percent year-to-year improvement). With highlighted broad-based geographic and product momentum, Oracle saw its operating margin improve year-to-year from 26 percent to 32 percent.
Oracle’s hardware business is at a point of inflection. Continued inconsistency in growth and performance may indicate that the Oracle hardware business is evolving into the stalking horse for growing software sales. Though Oracle executives have clearly stated that the path to corporate profitability lies in “selling systems that include [Oracle’s] IP,” software remains by far the stronger business and the core of Oracle’s growth.
As Oracle co-president and Chief Financial Officer Safra Catz noted during the earnings announcement, the company remains committed to “returning value to [its] shareholders through technical innovation.”
(Read more about the earnings report here.
TBR maintains Oracle’s corporate mission will evolve the company’s product strategy from one primarily driven by acquisitions to one that will include a broader level of research and development as well as share buybacks to support “opportunistic” moves.
Oracle’s software portfolio delivered another consistent growth quarter
Not only did Oracle’s 3Q11 new software license revenue climb 17 percent year-to-year to $1.5 billion, support revenues also rose 17 percent year-to-year to $4 billion. Oracle posted 60 percent year-to-year improvement in its application performance within EMEA, meeting the challenge of regional uncertainty by committing to the region and investing in existing infrastructure. A planned hiring expansion in EMEA shows that Oracle’s dedication to the region will continue throughout 2011.
A notable discussion within the announcement was the reference to Fusion Applications and its impending general availability by the end of the year. Recent acquisition InQuira is planned to be a centerpiece of that portfolio’s CRM module. TBR predicts that Oracle will focus 2011 press announcements in support of customers who currently have Fusion Applications in “controlled availability” as well as Tier I partners delivering the solution, in order to set the stage for that release. Recently, the Oracle Partner Network singled out PwC as “[delivering] successful innovations across…technology offerings, such as Oracle Fusion Applications.”
Total hardware revenue fell 5% to $1 billion in 3Q11
Though revenues fell during CY 3Q11, improved hardware gross margins of 54 percent were a driver of corporate margin improvements. Exadata and Exalogic saw triple digit year-to-year growth, with more than 150 new customers in the quarter – of whom 100 were net-new to Exadata and Exalogic. TBR believes consistent support of the Exadata and Exalogic hardware portfolios, particularly with the recently announced Exastack partner program, will ensure this business continues to retrench and expand its contributions to Oracle’s bottom and top-line growth.
Continuing the theme of profitability discussed in CY 2Q11, Oracle executives reiterated that Oracle’s hardware commitment hinged on the “transition away from selling low margin commodity servers to selling high margin engineering systems [which] increased both the gross margins and the overall profitability of [the] hardware business. Oracle executives projected that planned launches of “four brand-new engineered systems products,” including extensions of the SPARC portfolio, would “accelerate that trend.”
Oracle continues to bulk out its product arsenal
With more than 65 acquisitions since 2005, Oracle’s executive team has a clear vision for the company’s solution-selling future. TBR believes that the successful integration of past acquisitions Sun, JD Edwards, and PeopleSoft validate Oracle’s willingness to change the landscape with large, industry-altering acquisitions. With no clear opportunity in front of them for such a large-scale change, Oracle is embracing growth through differentiated acquisitions providing value-add features to its software suite.
InQuira, its most recent purchase in 3Q11, will bring new CRM and BI functionality to Oracle’s Fusion Application and Siebel CRM products. Executives noted that InQuira is planned to be “the centerpiece for Oracle Fusion CRM,” a key component of Oracle’s Fusion Applications. InQuira and Oracle boast substantial customer overlap, and since 2009, InQuira has been an integrated partner to CRM on Demand.
TBR believes Oracle continues to chase IBM, looking to shoulder past HP as that firm wrestles with its own re-invention.
As Oracle executives mentioned in Tuesday’s announcement, Oracle was offered the opportunity to purchase Autonomy, but declined. IBM, meanwhile, continues to advance its own aggressive hardware and software strategy. Oracle’s track record of acquiring long standing partners suggests alliances established in 2011 may be future acquisitions.
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