CEO Larry Ellison talks up Oracle's Sun acquisition even as hardware sales slide 23%. Software sales rise.
Oracle on Tuesday reported robust 18% growth in new software license and cloud software subscription revenues for the company's second fiscal quarter that ended November 30. It was a performance worth crowing about, yet CEO Larry Ellison confined most of his comments to Oracle's Sun hardware business, where the numbers were far from encouraging.
Second quarter hardware sales totaled $734 million, down 23% from the year-earlier result of $953 million (all figures in constant currencies). The performance was well below Oracle's own low-end guidance of an 18% year-over-year decline, yet Ellison incongruously put a positive spin on the news.
"Our $7.5 billion purchase of Sun has already proven to be the most strategic and profitable acquisition Oracle has ever made," Ellison said during a conference call with analysts after the close of the stock market on Tuesday. "Sun hardware technology has enabled us to become a leader in the highly profitable engineered system segment of the hardware business."
Sun hardware sales were in decline when the company was acquired, but Oracle accelerated that slide by getting out of the commodity X86 Intel server business. Oracle has said all along has been that fast growth in higher-margin sales of engineered systems -- Exadata, Exalogic and Exalytics -- as well as the Sparc T4 Unix server would eventually counter the drop in commodity hardware sales while buoying profitability. It appears that transition is taking longer than expected.
"The declines in the [hardware] business had been beginning to moderate; however, the more rapid declines in the August quarter and now the November quarter make it unlikely this business' growth will turn positive in the upcoming February quarter," wrote Nomura equity analyst Rick Sherlund in a research note.
Ellison told analysts hardware sales will level off in the third quarter and turn positive in the fourth quarter. Engineered systems sales surpassed 700 units during the second quarter, with a 70% increase in sequential unit bookings, according to Oracle President Mark Hurd. Unit sales may have been boosted by October's introduction of a low-cost, eighth-rack Exadata appliance introduced at Oracle OpenWorld that cut the cost of entry into the Exa-series line with a list price of $200,000.
The most encouraging results for Oracle in 2Q were on the software front, with new software license and subscription sales hitting $2.39 billion, up 18% from $2.04 billion a year earlier. Software license update and product support revenues (otherwise known as maintenance fees) totaled $4.26 billion, up 8% from $3.98 billion in the year-earlier period.
Oracle's total revenues on the quarter were $9.09 billion, up 5% from $8.79 a year earlier measures in constant currencies. By region, sales were up 22% in the Americas, 13% in the Asia-Pacific region, and 12% in Europe, the Middle East and Africa. Oracle's database, middleware and application revenues were all up by double digits, according to Hurd, but the bright spot was Oracle applications, up 30%. Cloud application wins included Abercrombie & Fitch, Emirates Air, Expedia, Macy's and United Airlines. Engineered systems customer wins included China Mobile, Facebook, Time Warner Cable, Chevron, Vodaphone and Walmart.
Looking toward the third quarter, Oracle President and CFO Safra Catz projected new software and subscription sales would increase 4% to 14%. Hardware sales are expected to be negative 10% to flat, Catz said, putting Ellison's 3Q prediction at the top end of company guidance. Total revenue in the third quarter is expected to grow 2% to 6%.
Reminding analysts that the Sun purchase wasn't just about hardware, Ellison also pointed out that Oracle gained Java through that deal. "Today our Java business is booming, growing over 34% this past quarter," Ellison said. He also noted that engineered systems are bundled with Oracle software, which is where the margins are realized.
As is the case with the Exa-series products and other hardware, Oracle does not break out revenue or profit margins for Java, so it's tough to validate Ellison's claim that Sun has been Oracle's best acquisition ever. Is it more profitable and strategic than, say, Peoplesoft, Siebel or Hyperion, software businesses that have extended Oracle's reach into ERP, business intelligence, analytics and financial analysis? Time will tell.
6 Tools to Protect Big DataMost IT teams have their conventional databases covered in terms of security and business continuity. But as we enter the era of big data, Hadoop, and NoSQL, protection schemes need to evolve. In fact, big data could drive the next big security strategy shift.
Big Data Brings Big Security ProblemsWhy should big data be more difficult to secure? In a word, variety. But the business won’t wait to use it to predict customer behavior, find correlations across disparate data sources, predict fraud or financial risk, and more.
Top IT Trends to Watch in Financial ServicesIT pros at banks, investment houses, insurance companies, and other financial services organizations are focused on a range of issues, from peer-to-peer lending to cybersecurity to performance, agility, and compliance. It all matters.
Join us for a roundup of the top stories on InformationWeek.com for the week of October 9, 2016. We'll be talking with the InformationWeek.com editors and correspondents who brought you the top stories of the week to get the "story behind the story."