Oracle's Profit Dips Slightly In Q2, But Execs Say Engineered Systems Gaining Steam


Oracle Wednesday reported fiscal second-quarter results that were mostly better than what Wall Street was expecting and included promising signs in Oracle's struggling hardware business.

Oracle reported a $2.55 billion profit during the quarter, or 56 cents per share, down slightly from the $2.58 billion and 53 cents per share it reported in last year's second quarter. Oracle's overall revenue was $9.3 billion, a 3 percent jump year-over-year, with a 46 percent operating margin.

Excluding items, Oracle earned 69 cents per share, while Wall Street was expecting 67 cents per share. Oracle shares were up around 3 percent to $34.68 in after-hours trading.

[Related: 9 Things You Might Have Missed From Oracle's Annual Shareholder Meeting]

Oracle's overall hardware revenue grew 2 percent during the quarter to $71 million. Engineered systems such as the Oracle Exadata Database Machine, Oracle Database Appliance and Oracle Exalogic Elastic Cloud server have now "become a material part" of Oracle's hardware business, accounting for more than 30 percent of sales during the quarter, Safra Catz, Oracle co-president and CFO, said on the call.

Oracle CEO Larry Ellison said while some analysts have questioned the size of the market for Exadata products, it's important to understand that they provide other benefits besides high performance.

For example, Oracle is offering a multitenancy option with Exadata that makes life easier for enterprises. "It's about consolidating hundreds of separate apps and databases on a single machine," Ellison said in a Q&A session during the call.

Oracle's cloud business was another bright spot, with cloud bookings growing 35 percent during the quarter compared to last year. Oracle's strategy is to be a player in cloud apps, platform and infrastructure, which is something rivals can't match, Ellison said on the call.

The combination of Java and Oracle's 12c database, which is built specifically for the cloud, gives Oracle a stronger platform than any of its SaaS competitors, Ellison said.

Meanwhile, Oracle's software revenue for the quarter was $6.9 billion, up 5 percent from last year's quarter. Revenue from software updates and product support was $4.5 billion up 7 percent year-over-year.

Oracle's new software license revenue was $2.4 billion, a 1 percent increase from last year's second quarter. However, as Catz noted on the earnings call, software license revenue grew 18 percent in last year's second quarter, so "that was a tough compare" to this year's quarter.

Wall Street analysts peppered Oracle executives with questions about software license revenue being relatively flat. Mark Hurd, Oracle co-president, said this is normal and part of Oracle's ongoing effort to shift its sales model, and sales force, to a recurring revenue model.

Oracle had strong sales growth for its core Fusion SaaS apps, but those results show up as subscription revenue instead of licensing revenue, Hurd explained. Over time, he said, that business will behave more like Oracle's support business and less like a licensing business.

"We've had our sales organization on this sales model for almost a couple of years," Hurd said on the call. "We're happy with their progress, [and] over time, this will have an effect on operating margins."

For its third quarter, Oracle is expecting revenue growth of between 2 percent and 6 percent and earnings of 68 to 72 cents per share. Wall Street analysts are expecting 4.2 percent revenue growth and 70 cents per share.

PUBLISHED DEC. 18, 2013