Oracle Brings Some Cheer

Oracle (NASDAQ:ORCL) last week reported strong results driven by its software business. Hardware sales continued to decline and were at the lower end of the company’s guidance. Oracle maintained that rather than revenue numbers, its focus is on increasing the profitability of its hardware business. Let’s take a closer look.

Oracle’s Financials
Oracle reported first-quarter revenue of $8.4 billion, up 12% in line with analyst expectations. Net income was up 36% to $1.8 billion or $0.36 per share. Non-GAAP EPS was up 14% to $0.48, beating analyst estimates of $0.47. Annual revenue in fiscal 2011 was $35.6 billion.

During the quarter, Oracle bought back 27.5 million shares and announced a quarterly dividend of $0.06 per share. It ended the quarter with $32 billion in cash and investments. In July, Oracle announced plans to acquire two companies: KSplice and InQuira, both for an undisclosed sum. Ksplice, a privately-held company based in Cambridge, Massachusetts, is the creator of innovative zero downtime update technology for Linux. Oracle believes it will be the only enterprise Linux provider that can offer zero downtime updates, and it expects to make the Ksplice technology a standard feature of Oracle Linux Premier Support for the Unbreakable Enterprise Kernel. InQuira is a provider of knowledge management solutions that support Web self-service, agent-assisted service, and customer communities. Together, Oracle and InQuira plan to provide customers with advanced search and a scalable knowledge management platform as a part of a comprehensive CRM solution.

Revenue from hardware systems products was down 5% to $1 billion, which was at the lower end of Oracle’s guidance. Revenue from hardware system support was up 4% to $645 million. Hardware gross margins were 54% up from 48% last year. Oracle bought Sun Microsystems for $7.8 billion last year and since then has been focusing on increasing its profitability. Oracle reported that in the first quarter, the transition away from selling low-margin commodity servers to selling high-margin engineering systems increased both the gross margins and the overall profitability of its hardware business.

Oracle’s software business more than made up for the decline in hardware sales. New software license revenue, an indicator of future revenue, increased 16% to $1.5 billion. Technology new license revenue was $1.1 billion, up 14%. Applications new license revenue grew 23% to $428 million with Europe particularly strong. Geographically, the quarter was balanced with new license growing 10% in the Americas, 20% in APAC, and 25% in EMEA.

Software license updates and product support revenue was $4 billion, up 16%. Database and middleware revenue was $3.78 billion, up 16.2% from the year-ago quarter. Applications revenue was $2.34 billion, up 17.3% from the year-ago quarter. Services revenue was $1.18 billion, up 10%.

For the second quarter, Oracle expects revenue to grow 5% to 9% and GAAP EPS to be $0.44 to $0.46. Non-GAAP EPS is expected to be $0.56 to $0.58. New software license revenue growth is expected to range from 6% to 16%. Hardware product revenue growth is expected to range from flat to negative 5%. However, the company expects gross margins and profitability of overall hardware business to improve during the quarter as it continues to move away from selling low-margin commodity servers and focus on selling engineered systems like Exadata, Exalogic, and SPARC Solaris systems. The stock is trading around $29.45 with market cap of about $149 billion. It hit a 52-week high of $36.50 on May 3.

Mark Gongloff on Wall Street Journal reports that the results that barely beat estimates have greatly pleased Wall Street analysts. Even in the face of a potential recession, Oracle has maintained its momentum, and that brings some cheer. Also, given the drama going on at HP, Oracle maintains a relatively focused, steady ship, with no ambiguity about who is in charge. Between the three – Oracle, IBM, and HP – the first two are executing solidly, while HP has seemed unfocused in recent years. Oracle will definitely do its best to capitalize on that situation.