Oracle’s Legacy Business Is Steady As New Initiatives Outperform

Oracle (NASDAQ:ORCL) announced its Q2, 2012 earnings on December 18 and the numbers topped the guidance provided in new software licenses and cloud software subscriptions. The company also beat its guidance on earnings per share and revenues came in at the high end of the guidance provided. Total revenues increase by 3% y-o-y to $9.09 billion and as per global trends, the software division grew while the hardware division declined.

Software revenue grew 10% y-o-y to $6.65 billion while hardware revenues declined 16% to $1.3 billion. Services revenue declined 5% and came in at $1.1 billion. The new software licenses and cloud software subscription grew 18% y-o-y with cloud revenue coming in at $230 million for the quarter. Operating cash flow increased to $13.5 billion over the last 4 quarters, up from $13.1 billion last year while free cash flow grew to $12.8 billion over the last 4 quarters.

The company also provided a guidance for Q3, stating that new software license and cloud subscription revenue growth is expected to range 3% – 13% in reported dollars while the hardware product revenue growth will range from a negative 10% to 0% in reported dollars. GAAP EPS is expected to be between $0.51 – $0.55 in U.S. and constant dollars. This guidance assumes a GAAP tax rate of 24%. ^[1]

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Oracle Showing Broad Based Strength

The company has side-stepped the European crisis, with Europe, Middle East & Africa revenues increasing 12% y-o-y to $2.7 billion. Revenues in the Americas went up 22% to $4.787 billion and Asia Pacific grew 13% to $1.6 billion. The company showed significant strength in its legacy business as database, middleware and applications saw double digit growth. The company is also doing a good job reining in costs, as operating expenses declined 1% to $5.6 billion, giving Oracle an operating income of $3.4 billion for the quarter and a net income of $2.5 billion.

Oracle’s Cloud Business Paying Off

Oracle has had significant success entering new businesses via acquisitions in the past and this pattern repeats this quarter with cloud revenues coming in at $230 million. While this is not very significant now, it can be in the future as Oracle had key wins in the customer relationship management (CRM) and human capital management (HCM) space. To put this number in perspective, Salesforce.com, the top cloud CRM player in the world had revenues of $2.3 billion in 2011, and we estimate it to be $2.9 billion this year. Oracle had key wins in the CRM and HCM space including clients like Abercrombie & Fitch, Edwards Air, Expedia, Macy’s, T. Rowe Price, United Airlines, U.S. Bancorp, Whirlpool and Xerox. ^[2]

Oracle In Social Media

Oracle has shown interest in the social media space, by acquiring Involver. This company mainly caters to the creation of campaigns on Facebook. It is a Facebook Marketing Developer and a technology provider for Facebook’s internal marketing team. It pioneered social apps by creating the first social app suite on Facebook and is currently leading the industry with Social Markup Language (SML) and Visual SML. This allows front-end developers to achieve what Involver calls a “pixel-perfect” application and helps marketers customize applications. It also provides an intuitive interface to build the campaign with no requirement for coding. This is Oracle’s third acquisition in the social media marketing space after its acquisition of Vitrue and Collective Intellect and we will see this division becoming a significant revenue driver in the future as marketing spend on social media increases.

We are updating our Trefis price estimate for Oracle, which currently stands nearly 30% above its current market price. Database, middleware and application software accounts for nearly 80% of its value, while enterprise server and storage hardware accounts for more than 10%.

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1. Oracle Earnings Report, www.sec.gov, Dec 18, 2012 [↩]
2. Oracle Earnings Transcript, www.seekingalpha.com, Dec 18, 2012 [↩]