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Oracle Q2 profits rise 18 percent, but hardware sales continue to slide

New software licenses and cloud subscriptions jump 17 percent to $2.4 billion

Oracle on Tuesday reported that net income jumped 18 percent to US$2.6 billion while revenue rose 3 percent to $9.1 billion for the second quarter, but the company's hardware revenue continued to show weakness.

Hardware systems product revenues for the quarter fell 23 percent to $734 million, and hardware systems support revenues dropped 6 percent to $587 million.

New software license sales and cloud software subscriptions were up 17 percent to roughly $2.4 billion in the quarter, which ended Nov. 30. Oracle launched a wide variety of cloud services this year, including its Fusion Applications, a PaaS (platform as a service) and the Oracle Social Network.

Software license updates and product support revenues, which are highly profitable for Oracle and other software vendors, grew 7 percent to $4.26 billion.

"Applications, middleware and database all had double-digit growth in new software license and cloud subscriptions, with applications leading the pack with growth of over 30 percent," co-president Mark Hurd said in a statement.

Oracle executives have repeatedly attempted to soften expectations for the hardware business it gained through the acquisition of Sun Microsystems, saying the company is more focused on specialized systems like Exadata, which combine servers and other components with Oracle software, rather than compete in the commodity hardware market.

"Sun has proven to be one of the most strategic and profitable acquisitions we have ever made," Oracle CEO Larry Ellison said in a statement released with the earnings announcement. "Sun technology enabled Oracle to become a leader in the highly profitable engineered system segment of the hardware business. I believe that products like Exadata and the SPARC SuperCluster will not only continue to drive improved profitability in our hardware business, by the end of this fiscal year, they will also drive growth in our hardware business."

Sales of the specialized systems showed "excellent growth" during the quarter, co-president and CFO Safra Catz said during a conference call Tuesday.

The company sold more than 700 engineered systems in the quarter and saw strong growth for SPARC T-Series systems as well, Hurd said during the call. ZFS storage systems products also had double-digit growth, according to Hurd.

Oracle's Fusion Applications are seeing "rapid growth across the board," Ellison said during the conference call. The company is winning "the majority of deals" when it competes against cloud HCM (human capital management) software vendor Workday, he added.

"We're beating [Workday] in North America and almost shutting them out in Europe," Ellison claimed. Workday, which recently came off a successful IPO, has turned heads in recent years after winning a number of very large enterprise deals.

Even as Oracle sells more cloud subscriptions, however, this shouldn't make investors worried about a significant dip in Oracle's on-premises software support revenues, Catz said.

"It's just not going to have a material impact," Catz said during the call. "Our renewal rates remain extremely, extremely high."

"As a general matter, folks who are already on-premise will buy some [cloud-based] modules as add-ons," Catz added. "To the extent they're converting from one to another, as a general matter, we always get more money."

Ellison also cited the upcoming release of Oracle database version 12c as something that will help drive growth "for the next several years," both in terms of license revenue and by making Oracle's cloud services more attractive.

At one point, the topic turned to the global economic environment. Oracle's European results showed double-digit growth despite the economic weakness in the region. "The only ones that aren't surprised about Europe are us," Hurd said. Oracle began an expansion of its staff in Europe about a year ago and has generated a deal backlog because of that move, he said.

"We have a very strong organization in Europe," he said. It's not as if Oracle isn't finding sales more difficult to close in Europe, "but we're in more deals than before," Hurd added.

Overall, Oracle's second quarter is interesting from a timing perspective, said Craig Guarente, president of Palisade Compliance, a consulting firm that advises customers on software license audits and contract negotiations associated with Oracle.

For one, Oracle does most of its business in the fourth quarter, said Guarente, who spent 16 years at Oracle and served as the company's global vice president of contracts, business practices and migrations before leaving last year. "It's hard to get customers to commit to things when it's not the fiscal year end." That's because of a perception among customers that they can get the biggest discounts in the fourth quarter.

Guarente, who keeps many contacts within Oracle, said he sees "a lot of unhappy sales representatives" at the vendor. The high-profile departure of North American sales chief Keith Block in June was a blow, he said. "When Keith left, it took a while for those guys to get their territories in line, regroup and resettle."

Palisade is doing mostly Oracle software audit work for clients these days, and is encountering a "very aggressive audit team" at Oracle, Guarente said. In fact, Palisade has encountered a number of instances when a customer voluntarily went to Oracle for help managing their software licenses and figuring out what they own, he added. These cases "led to an audit and a multi-million dollar finding," Guarente said.

One thing any Oracle customer needs to do before negotiating with the vendor is some serious homework on the vendor's practices, according to Guarente. "Oracle is smart and well-organized," he said. "Their contracts are locked down. There's a reason they're written a certain way. If you don't know Oracle and you start trying to negotiate with them, you're going to lose."

Chris Kanaracus covers enterprise software and general technology breaking news for The IDG News Service. Chris' email address is Chris_Kanaracus@idg.com


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