Arik Hesseldahl

Recent Posts by Arik Hesseldahl

Oracle Shares Taking Off After a Strong Quarter

Shares in the software giant Oracle rose this morning, after a quarterly earnings report yesterday that displayed its resilience amid a sputtering economy that has caused persistent worries that companies might slash their spending on technology.

At least when it comes to Oracle software, they’re not cutting back at all, says Brian Schwartz of ThinkEquity research, in a note to clients out today. Sales of application licenses at Oracle saw their fastest growth rate during an Oracle Q1 since before the recession, making for a “sign of healthy Enterprise IT demand,” Schwartz wrote.

Overall, Oracle beat the consensus view of analysts on several metrics, including revenue ($8.4 billion, or $50 million ahead of the street) and per-share earnings (48 cents a share, two cents above consensus). On top of that, Oracle issued guidance that license revenue would continue to grow at a rate of six to 16 percent, which was also above consensus. Also: Free cash flow grew 42 percent to $5.3 billion in the quarter, a big improvement over the year-ago quarter when Oracle’s free cash flow was flat.

All good news, right? Not quite, Schwartz writes. Oracle’s hardware business is still on the comeback trail. Hardware systems product revenue declined five percent year over year, because of a shift toward higher-margin products and away from higher-volume, less profitable ones. Oracle’s plan is to essentially phase out the higher-volume servers that came with its Sun Microsystems acquisition from last year. The plan is to focus on higher-end hardware that commands a higher profit margin at sale and to phase out the less-profitable stuff. As CEO Larry Ellison said during a conference call with analysts last night: “I don’t care if our commodity x86 business goes to zero,” he said. “We don’t make any money selling those things. We have no interest in selling other people’s [intellectual property]. … We have interest in selling systems that include our IP.” By systems with “other people’s IP,” he’s referring to mainstream servers that use chips from Intel — hence the reference to x86, Intel’s DNA — and operating systems from Microsoft.

The end result, Schwartz says, is that hardware sales came in $200 million short of the consensus expectation, while the profitability of hardware sales was, at 54 percent, much better than a year ago. Clearly it’s taking awhile to turn the battleship. Oracle said that unit sales of Exadata and Exalogic hardware almost tripled; the company added 100 new customers and promised to triple the number of deployments yet again in 2012.

All that leads Schwartz to rate Oracle a Buy, with a price target of $36. As of this morning, the shares were already headed in that direction: Oracle rose by more than $2 a share — or more than seven percent, to $30.38 a share — after about a half hour of trading.


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