Hurd At Oracle: Great Expectations

Oracle (NASDAQ:ORCL) reported strong results last week for a seasonally weak quarter. Early this month, Larry Ellison, CEO of Oracle, recruited his friend and former CEO of HP, Mark Hurd, as a copresident. Hurd will help to manage the recent $7.3 billion acquisition of Sun. Conceivably, Oracle will do many more acquisitions, and Hurd will be managing those as well. Let’s take a closer look.

Oracle, with annual revenue of $26.8 billion, reported a 48% increase in first quarter revenue to $7.5 billion with new software license revenue up 25% to $1.3 billion. Net income was up 20% to $1.4 billion or $0.27 per share. Non-GAAP EPS was $0.42 versus analyst estimates of $0.36 on revenue of $7.3 billion. During the quarter, Oracle bought back shares worth $250 million and ended the quarter with $23.6 billion in cash. It also announced a dividend of $0.05 per share. Q4 coverage is available here.

In the first quarter, new license revenues were $1.3 billion, up 25%. Technology new license revenue was $937 million, up 32%. Applications new license revenue was $349 million, up 10%. Software license updates and product support revenue was $3.5 billion, up 11%. Database and middleware revenue was $3.25 billion, up 17%. Applications revenue was $1.48 billion, up 8%. Services revenue was $1.1 billion, up 18%. Revenue from hardware systems products was $1.1 billion, while revenue from hardware system support was $680 million.

For the second quarter, Oracle expects revenue to grow 42% to 47%. Non-GAAP EPS is expected to be $0.45 to $0.47, and GAAP EPS is expected to be $0.28 to $0.30. New software license revenue growth is expected to range from 9% to 19%. Hardware product revenue is expected between $1 billion and $1.1 billion excluding hardware support revenue. The stock is currently trading around $27.49 with market cap of about $138.3 billion. It hit a 52-week high of $27.63 following the earnings announcement.

Both Mark Hurd and Larry Ellison are great at successfully integrating acquisitions. The integration of Sun’s business is on track. Oracle’s foray into hardware seems to have had some interesting impact on Sun. Since Oracle took over Sun, the latter’s gross margin has improved to 48.4% from 38%. Oracle is targeting a gross margin of 60%. There will be a lot of reorganization and relentless cost cutting. Oracle will be pursuing profits, not just revenues. There are some unprofitable areas of its hardware business that it will not be pursuing. It has cut about 2000 jobs but is also adding 2,000 sales jobs. At the OpenWorld this week, the company is going to introduce more hardware–software combinations.

With the Sun acquisition, Oracle will be competing with HP, which has server-side software and infrastructure software, and IBM, which has infrastructure software. IBM has just announced its plans to buy data analytics company Netezza for $1.7 billion. IBM has been shifting its focus from low-margin “commoditized” computer hardware to high-margin areas like software and services. Analytics accounted for about $9 billion of IBM’s $95.76 billion in revenue last year and is a huge area of growth. HP has also been changing its business mix, with its $13.9 billion EDS acquisition, $2.7 billion acquisition of 3Com and the $1.2 billion Palm acquisition.

Hurd’s job now is to help Oracle topple IBM and HP. Larry Dignan on ZDNet wonders if Oracle and Hurd can do so without services. As I said earlier, Oracle as well as Cisco will eventually need to acquire their own service arms just as HP did earlier by acquiring EDS. Accenture would be a natural fit for Oracle. Maybe Hurd’s first major move at Oracle will be the Accenture acquisition!