Oracle Shrugs Off EU Mess With Solid Growth & Margin Improvement
Oracle’s (NASDAQ:ORCL) results came in much better than consensus estimates with revenue growth exceeding 16%. The stock is up over 5% today on the news. In our earnings preview, we mentioned our focus on Oracle’s gross margins in the hardware business as well as the effect of the macro volatility in the European region given that it accounts for almost a third of its revenues. It turns out that Oracle has performed rather well on both fronts. Oracle competes primarily with SAP (NYSE:SAP) and Microsoft (NASDAQ:MSFT) in the software business, and IBM (NYSE:IBM) and HP (NYSE:HPQ) in the server hardware business.
Following the positive results, we have revised our Trefis price estimate for Oracle to $40, which stands about 30% above the current market price.
Hardware Gross Margins On the Rise
Just as we expected, Oracle has managed to boost its gross margins in the hardware business significantly. Oracle has been phasing out some of the legacy low margin products and introducing new profitable ones consistently, which has enabled it to boost its gross margins to almost 54% from 48% a year ago. However, the increase in profitability has come at the expense of top line growth, which has taken a slight hit year over year.
Oracle also announced plans to launch 4 new hardware products by Sun, which will help it drive sales of its database and middleware software, which is optimized for the new SPARC super clusters. We expect the growth in its hardware business to be relatively sluggish initially as it phases out the low margin products while pushing its new high margin products to customers. Once the transition is over, we expect higher revenues from the hardware business, and even higher gross margins.
Oracle also stated that its Exadata database appliance was seeing wide adoption in enterprises seeing over triple digit unit growth this quarter. With the Exadata appliance,and its new hardware offerings, we believe that its hardware business will show great growth going forward and also drive sales of Oracle’s database and middleware software. Oracle also seems to be quite keen on its goal of returning gross margins back to pre-Sun levels. [1]
Europe Shows Strong Growth
Despite the supposed crisis in Europe, Oracle posted excellent growth there especially in terms of Applications revenue, which grew more than 60% year on year thanks to its compelling product offerings. The overall revenue growth in Europe was close to 14%, which is quite encouraging given the current macroeconomic conditions in the region.
We expect to see continued growth in database and middleware revenues going forward. The fall in the hardware revenues shouldn’t be a cause for concern as it is being compensated by an increase in margins and a shift to high-margin hardware. The hardware business accounts for only about 10% of our stock value.
See our complete analysis for Oracle stock.
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