Oracle Hardware Growth Will Come, Focusing on Profitability First

Oracle (NASDAQ:ORCL) recently announced its fiscal year Q4 2011 earnings, which was the first full quarter for a year-to-year comparison of its hardware business that it picked up in the Sun acquisition last year. ^[1] As it turned out, the hardware sales declined by 6% for this quarter compared to the same quarter last year. This news caused as much as a 6% decline to Oracle’s stock in after-hours trading. However, we believe this result was expected as Oracle’s focus over the last year has been to sell Sun’s profitable products while it has abandoned some of the legacy unprofitable ones. Higher profitability gives Oracle an edge over competitors SAP (NYSE:SAP), Microsoft (NASDAQ:MSFT), IBM (NYSE:IBM) and HP (NYSE:HPQ) in the hardware and software market.Our $37 price estimate for Oracle’s stock is about 20% above market price.

Oracle optimistic about its hardware business

Oracle has time and again mentioned that its Exadata and Exalogic line of hardware products are driving the growth for Oracle (see Exadata and Exalogic Driving Oracle’s Growth). During the earnings conference call, Oracle claimed that there are more than 1,000 Exadata machines installed at customer sites, and it plans to triple this number by this year end. ^[2]

The management notes:

The expansion of our Exadata business and our rapidly growing Exalogic business, plus a couple of new hardware and software appliances we plan to introduce this fall, should turbo charge the overall growth of our Hardware business, making the top line and bottom line better than ever. ^[2]

Our take

We believe the market may be over-reacting to the concerns of Oracle’s hardware business slowdown, and we as the outlook for Oracle’s hardware business remains robust. As per management’s comments, we should see hardware’s revenue growth pick up moving forward.

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See our complete analysis for Oracle stock

1. Oracle FY Q4 2011 earnings results, June 23rd 2011 [↩]
2. Oracle FY Q4 2011 earnings conference call transcript, SeekingAlpha, June 23rd 2011 [↩] [↩]