Stronger growth in new software license and cloud subscription
revenues during Q3FY14 for Oracle are suggestive signs of a revival
in IT spending. In the Q3FY14 earnings released on March
18, Oracle (
) reported a 6% year-on-year expansion in new software license and
cloud subscription revenues , on a GAAP, constant currency basis.
In comparison, new software license and cloud subscription revenues
were flat in constant currency terms during in the prior year. This
increase in new license revenues was driven by a 24% expansion in
cloud subscription revenues to reach $292 million for the quarter.
Strong growth in new license revenues also lifted overall software
segment revenues, which grew 6% to reach $6,979 million.
Another key feature from the Q3FY14 earnings release was the
strong growth in hardware revenues. Hardware product revenues,
which are generated by the sale of hardware systems, grew 10% in
constant currency terms over the same quarter last fiscal year to
reach $725 million. This growth in hardware system revenues was the
strongest since its acquisition of Sun Microsystems in January
2010. Oracle's hardware system revenues had growth rates of -22%
and -16% in Q3FY13 and Q3FY12, which puts the positive growth in
Q3FY14 into perspective. Revenues from Oracle's Engineered Systems
grew 30%, which was the factor driving overall hardware system
revenues. We believe the decline in Oracle's hardware system
division may have bottomed out and expect continued expansion in
revenues as bookings for its Engineered Systems increase.
Non-GAAP operating profit stood at $12,353 million for the nine
months completed in fiscal 2014, up 4% from a similar period in
fiscal 2013. Non-GAAP operating profit margins were flat at 46%
during both the comparable periods. Non-GAAP net income also
expanded 4% during these periods. During the nine months in fiscal
2014, Oracle repurchased common stock to the tune of $7,841
million. This share buyback resulted in a 10% jump in the nine
months non-GAAP EPS to $1.96/share despite only a 4% gain in net
We are currently reviewing our price estimate of
Trefis price estimate for Oracle
, which stands nearly 14% above its current market price, to
incorporate the latest Q3FY14 earnings.
See our complete analysis of Oracle here
Hardware System Revenues Should Drive Top Line Going
Since the acquisition of Sun Microsystems in January 2010,
revenues for the hardware division have been declining. Barring
fourth quarter revenues, which tend to be higher on a sequential
basis, hardware system revenues for Oracle have declined at a
compounded annual rate of 6.15% on a sequential basis since
November 2010. Oracle reported the first quarter of growth in
hardware system revenues in November 2013, with revenues of $714
million. In the recently concluded Q3FY14, revenues stood 1.5%
higher on a sequential basis, at $725 million. This growth in
hardware system revenues is a result of Oracle's shift in focus
from the acquired Sun x86 server line to its homegrown Engineered
systems. On the earnings call, CEO Larry Ellison claimed sales of
x86 servers were (perhaps with some hyperbole) "almost nothing"
while CFO Safra Catz stated Engineered systems accounted for 30% of
Hardware sales. We expect Engineered systems to drive top line for
Oracle's hardware business in the future.
Hardware support revenues on the other hand fared much better
since the acquisition of Sun Microsystems and have ranged between
$570 million - $673 million between May 2010 and February 2014.
Going forward, we believe positive growth in new hardware system
sales should lend a hand to growth in the hardware support segment
as well. Oracle derives these revenues through assistance on its
hardware system installations and other technical support
functions. With declining new hardware sales, incremental revenues
from these support functions has slowed in recent times. Going
forward, the expansion in new hardware system sales should
translate into higher support revenues for Oracle.
Oracle's 12c Database Should Gain Traction In
We expect the recently released 12c cloud database from Oracle
should gain traction in 2014. Larry Ellison, CEO of Oracle, stated
that even companies such as competitor
) are excited by the performance potential of their applications
offering with the 12c database on the Oracle Exadata Machine to
derive maximum benefit. We are of the view that Oracle's rapid
growth in its Engineered systems should induce growth of its new
12c database release as well. The availablity of in-memory
capability by mid-year should help as well, allowing customers to
leverage a technology introduced by SAP AG (
) with its HANA.
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