We maintain that cloud and engineered systems businesses are transformative for Oracle (Nasdaq: ORCL), and have the potential to deliver significant revenue gains over the long-term — provided they remain tightly connected to Oracle’s database, applications and middleware businesses.
CY 4Q12 earnings results demonstrated the ongoing strength of Oracle’s software business – as new software licenses and cloud software subscriptions revenues rose nearly 17% year-to-year to reach nearly $2.4 billion. Co-President and CFO Safra Catz noted $230 million in cloud revenues for CY 4Q12 on the earnings announcement. Maintenance revenues rose nearly 7% year-to-year to top $4.2 billion.
The growth of Oracle’s software business in CY 4Q12 was countered by falling hardware systems products (23% year-to-year declines, $734 million), hardware systems support revenues (6% year-to-year declines, $587 million), and services revenues (4.7% year-to-year declines, $1.1 billion). The targeted nature of Oracle’s engineered systems (in both purpose and deployment) stands to increase the appeal of this business as Oracle customers seek targeted points of infrastructure refresh across CY 2013.
TBR believes cloud and engineered systems have the potential to rapidly expand the Oracle install base, creating cross-selling opportunities and revenue growth for core software (database, applications, and middleware) businesses.
Oracle remains a market-making technology leader, and can expand core products into solutions across CY 2013 to galvanize cross-segment revenue growth.
Oracle’s attention to its software portfolio across both CY 2012 and CY 4Q12 has set the stage for CY 2013 solution engineering and sales. Oracle’s recent product launches — particularly Oracle Customer Experience (CX), the Oracle Social Management Suite, and the Fusion Application human capital management (HCM) suite – are increasing the alignment of Oracle’s software business with the business needs of Oracle customers. Product extensions – including the refresh of the NoSQL database and the pending launch of Oracle Database 12c – reinforce the importance Oracle places both on organic development and on supporting core on-premise install bases.
Finally, recent acquisitions including DataRaker (utilities-focused software), Instantis (project portfolio management), and SelectMinds (social talent sourcing) will companion Oracle’s organic research and development with cloud-ready, business-focused functionality. Taking those announcements alongside Oracle’s energized sales force, we project Oracle’s development and refresh cycles in software and cloud are set to accelerate over CY 2013 as Oracle direct sales and partners deliver proof points in support of the business value Oracle customers are realizing from software and cloud deployments.
Attention across CY 2012 to direct sales efficiency and ecosystem engagement will deliver CY 2013 revenue opportunities for Oracle that span business lines.
TBR sees Oracle entering CY 2013 with a direct sales force energized to take Oracle’s expanded portfolio – spanning software, cloud, and engineered systems – to market. We expect Oracle direct sales to increase its profile across accounts in the near term, with new hires and realigned territories set to energize Oracle’s worldwide market presence. The challenge for Oracle will be to defuse territory conflicts between an empowered, energized direct sales force and its growing channel, ensuring install base customers remain engaged and set to buy-in to Oracle’s position as an end-to-end provider of seamless on- to off-premises infrastructure, technology, and applications.
Oracle’s focus on targeted specializations for its channel promises additional additive revenue growth in the first half of CY 2013. TBR sees the prominent engagement of solution partners at Oracle OpenWorld in September, most notably Fujitsu, taken in context with CEO Larry Ellison’s expectations of growth for Oracle’s hardware business in both CY and FY 2013 as promising increasing market opportunity for ecosystem partners to contribute to and benefit from Oracle’s engineered systems initiatives in CY 2013 and 2014.
Additional attention to cloud-focused programs and incentives will ensure that the Oracle Partner Network is energized and engaged. We project that accretive contributions to Oracle cloud and software revenue from partners will fuel 1 – 2% of the guidance for CY 1Q13 software revenue growth, as noted by CFO and Co-President Safra Catz today (3% – 13% in U.S. dollars).
Editor’s note: Elizabeth A. Hedstrom Henlin is Enterprise Software Analyst for Technology Business Research, Inc.