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Oracle (NASDAQ:ORCL) will report its Q4 fiscal 2013 earnings on June 20 after the market closes. We expect the company to report muted growth as it continues to face significant challenges in its hardware business. However, its software business could get back on the growth track after a dismal performance last quarter. An improved product / services mix and a continued focus on reining costs should reflect in higher operating margins.

Oracle had a fairly slow Q3 fiscal 2013 in terms of revenues as total revenues fell slightly y-o-y to $8.96 billion compared with $9.04 billion in the same period a year earlier. Net profit remained flat at $2.5 billion, or 52 cents a share, in Q3 2013 vis-a-vis $2.5 billion, or 49 cents a share (a higher number of shares were outstanding) in Q3 2012. For Q4, the company guides for 1-4% revenue growth. Below we discuss key factors that will influence its upcoming earnings results.

We currently have a $40 Trefis price estimate for Oracle, which stands nearly 15% above its current market price.

Eyes On New Software Licenses and Cloud-Based Services

In Q3, Oracle registered a slight decline in revenues from new software licenses as well as cloud subscriptions, which came in far below the company's expectations of 3%-13% growth. Cuts in IT spending by large enterprises and persistent weakness in the European market are evidently weighing on Oracle. A growing shift towards cloud computing has also been hurting its on-premise software business. While Oracle has increased its presence in the cloud software space, its performance has lagged other market leaders like Salesforce.com (NYSE:CRM). Cloud revenues were down 1% during the quarter even as the competitors registered double digit growth. However, strong revenue growth from software maintenance did offset some pressure as existing clients pay recurring fees for software support and updates.

In Q4, Oracle anticipates new software license and cloud subscription revenue growth to be in the 1%-11% range. We will closely watch the sales of new software licenses, including its much hyped next-generation Fusion Applications. Higher new software licenses sales would indicate the corporate sector's growing confidence in the economy. Growth in new software licenses also paves the way for recurring revenues from maintenance and support. Oracle may also announce the availability of its next-generation 12c database during the earnings call.

We will also keep a close tab on the performance of its cloud-based services, which disappointed in Q3. Oracle has been looking for growth opportunities for a while now, and has snapped up small companies such as Selectminds, Skire, Collective Intellect and Vitrue, among others. This has expanded its presence in the rapidly growing network virtualization and social media markets. While cloud-based software revenue remains a very small percentage of Oracle's overall revenue, we expect it to be the key growth driver on the back of these acquisitions going forward.

Hardware Business To Continue To Struggle In The Near Term

Ever since Oracle acquired Sun Microsystems, it has struggled to register growth in its hardware product sales. While part of this is due to dwindling IT spending amid a weak economic environment, the separation from its once-close partner, HP (NYSE:HPQ), also created challenges for the company. With the acquisition of Sun Microsystems, Oracle became a direct competitor of HP. The commoditization of hardware has also been weighing on the growth as Oracle continues to focus on higher-margin systems like Exadata. Last quarter its hardware revenues plunged 23% and is expected to remain under pressure in the remainder of 2013, before seeing some improvement in 2014.

Oracle is trying to own more of the high potential Big Data market with its Exalytics in-memory appliance, which competes directly with SAP's popular HANA offering. It also launched Advanced Analytics that enables users to run scripts for business intelligence applications in its Big Data appliance. Enterprise hardware offerings like the Exalytics appliance will not only help the company ride the Big Data trend, but also enable it to improve its hardware margins by phasing out older legacy hardware, launching new high-margin hardware, and bundling it with its software products. Further, with cost-cutting taking priority for many enterprises, software defined networking (SDN) is gaining traction.

To gain from this trend, Oracle acquired Xsigo last year. While Xsigo is not a strict SDN platform, it is similar in the sense that it reduces the amount of switches, physical hardware and cabling required to run a network of virtual machines. Last month Oracle launched its new data center fabric, integrating the Xsigo technology with its newest SPARC servers. We will look for updates on the response its new data center fabric has garnered.

Disclosure: No positions

Source: Oracle's Earnings Preview: Software Sales Could Signal A Recovery