) is scheduled to report fiscal 2014 third quarter results Tuesday,
March 18, which should provide useful insights into the software
giant's strategy coming into 2014. Last calendar year, Oracle
lagged the benchmark NASDAQ index by a good 25 percentage points,
weighed down by missed earnings during the first half of CY2013
(Q3FY13 and Q4FY13 ending February 2013 and May 2013 respectively).
Oracle showed good correlation with the NASDAQ index in H2CY13 and
ended the period with gains 5 percentage points higher than the
index, supported by decent Q1FY14 and Q2FY14 numbers.
Coming into fiscal 2014, the stock has continued to maintain
fairly decent correlation with the NASDAQ index. But the software
giant has outperformed its closest legacy software rival
since the start of 2014. In this pre-earnings note, we list key
trends shaping Oracle's performance in Q3FY14 and CY14 in
general. We currently have a
Trefis price estimate for Oracle
, which stands nearly 15% above its current market price.
See our complete analysis of Oracle here
Cloud Subscription Revenues To Grow, New Software License
Sales To Decline
In the six months into fiscal 2014, Oracle's cloud subscription
revenues increased by 22% to $513 million from $421 million in
fiscal 2013. This $92 million increase in cloud subscription
revenues offset a $23 million decline in new software license
revenues in the six months in FY14, resulting in a $69 million rise
in total software license and cloud subscription revenues. Growth
in cloud subscription revenues was primarily driven by strong
demand and reflected as well in a 35% growth in bookings, with
triple digit growth in its Fusion Cloud applications. Oracle has
also completed the acquisition of Tekelec and Acme Packet in Q4FY13
and Q1FY14, which lent support to Oracle's organic revenue growth.
Oracle's cloud subscription revenues should continue expanding
strongly in Q3FY14, supported by an expansion in organic sales from
the Fusion Cloud application suite and from inorganic channels such
as Responsys (acquired in Demember 2013).
On the other hand, new software license sales have been roughly
flat for Oracle as businesses are increasingly migrating from
traditional on-premise deployment of software suites to a leaner
on-demand model. New product license revenues decreased less than
1% from $3.54 billion in H1FY13 to $3.52 billion in H1FY14.
Oracle's strong focus on developing cloud-based applications
satisfies this growing part of the software market, while demand
for on-premise software is stagnant. On the whole, however,
Oracle should be able to leverage its strong market position across
enterprise software product categories to offset the decline in
on-premise licenses with cloud subscriptions. We currently forecast
new license application revenues to grow 7% on a year-on-year basis
and cross $11 billion in CY14.
Decline In Hardware Sales Seem To Have Bottomed
Oracle ventured into the Enterprise hardware market by acquiring
SUN Microsystems in January 2010. Since the acquisition, revenues
from the segment have declined from $8.92 billion in CY09 to
approximately $5.26 billion in CY13. So far in fiscal 2014,
Oracle's hardware division revenues declined by 3% to $2.58 billion
from $2.67 billion in a similar period a year ago. To arrest this
decline in hardware revenues, Oracle has de-emphasized its x86
server line and focused on manufacturing and marketing high-end
SPARC servers. The company also began focusing on providing
holistic engineered Unix solutions that club its software
offerings with its high performance hardware.
In the six months in fiscal 2014, revenues from the software and
hardware integrated 'Engineered Systems' showed strong growth.
Oracle reports that overall revenue share of Engineered Systems now
stands at about 30% of the hardware business. Going forward, sales
of high-performance servers should increase, driven by strong
increase in cloud services that require the intense computing power
these engineered systems provide. Additionally, strong growth in
CRM and digital marketing industries should increase bookings in
its Exalytics in-memory computing and Exadata database machines.
However, seamless migration of client data across databases and
onto cloud data centers continues to remain the most important
factor determining the success of the high-end server market.
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