Oracle Bets on the Cloud as Software Sales Slump on European Mess

by Trefis Team
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Oracle (NASDAQ:ORCL) reported its Q2 FY12 earnings results this week with software and hardware sales lower than expected, which sent the stock down almost 10% in after-hours trading. [1] The gloomy macroeconomic situation has finally caught up with Oracle as it reported near zero growth in software sales and a decrease in hardware sales, in America and Europe. Oracle is one of the largest enterprise software makers in the world, which competes primarily with  SAP (NYSE:SAP), IBM (NYSE:IBM), (NYSE:CRM) and Microsoft (NASDAQ:MSFT).

Check out our complete analysis of Oracle.

Enterprise software accounts for almost 80% of Oracle’s $37 Trefis price estimate, while hardware accounts for 10%. Our current Trefis price estimate stands nearly 35% above its current market price.

Oracle focused on sales of cloud-based software

Oracle’s overall software sales, comprised of database, middleware and application software, were almost flat this quarter in its biggest markets – America and Europe, as companies across these regions tightened their purse strings when it came to software spending. Oracle which recently launched new cloud-based offerings and also acquired RightNow, a leading provider of cloud based customer service, is now focusing on boosting its on-demand software sales. It added 1,700 sales professionals globally, and aims to increase sales of cloud-based ERP and CRM software in the next six months. [2] We expect cloud-based software to account for a significant portion of Oracle’s software revenues going forward.

Oracle President, Mark Hurd said:

We have expanded our worldwide sales capacity by adding over 1,700 sales professionals in the first half of this fiscal year. We believe that this increase in our field organization combined with innovative new products like Fusion Cloud ERP and Cloud CRM will enable solid organic growth in the second half of this year.

Gross hardware margins on the rise

Oracle reported a significant increase in sales of its engineered hardware systems. While overall hardware sales declined, sales of its Exadata, Exalytics and Big Data appliance almost doubled year-over-year.

Oracle CEO, Larry Ellison said:

Sales of our engineered systems accelerated in Q2. Exadata growth was well over 100% compared to last year, and Exalogic grew more than 100% on a sequential basis. We shipped our first SPARC SuperCluster in Q2 and expect to begin deliveries of our Exalytics system and the Oracle Big Data Appliance in Q3.

By phasing out low-margin legacy hardware products, Oracle has succeeded in increasing its gross hardware margins from 48% to 54% in a year. We expect its gross hardware margins to continue to increase going forward. You can see the impact of gross hardware margins on Oracle’s stock by tweaking the chart above.

Understand How a Company’s Products Impact its Stock Price at Trefis

  1. Oracle results shock investors, shares plunge, Yahoo News []
  2. Oracle’s CEO Discusses Q2 2012 Results – Earnings Call Transcript, Seeking Alpha []
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