Oracle (NYSE:ORCL) is scheduled to report fiscal 2014 third quarter results Tuesday, March 18, which should provide useful insights into the software giant's strategy coming into 2014. Last calendar year, Oracle lagged the benchmark NASDAQ index by a good 25 percentage points, weighed down by missed earnings during the first half of CY2013 (Q3FY13 and Q4FY13 ending February 2013 and May 2013 respectively). Oracle showed good correlation with the NASDAQ index in H2CY13, and ended the period with gains 5 percentage points higher than the index, supported by decent Q1FY14 and Q2FY14 numbers.
Coming into fiscal 2014, the stock has continued to maintain fairly decent correlation with the NASDAQ index. But the software giant has outperformed its closest legacy software rival, SAP AG (NYSE:SAP) since the start of 2014. In this pre-earnings note, we list key trends shaping Oracle's performance in Q3FY14 and CY14 in general. We currently have a $44 Trefis price estimate for Oracle, which stands nearly 15% above its current market price.
Cloud Subscription Revenues To Grow, New Software License Sales To Decline
In the six months into fiscal 2014, Oracle's cloud subscription revenues increased by 22% to $513 million from $421 million in fiscal 2013. This $92 million increase in cloud subscription revenues offset a $23 million decline in new software license revenues in the six months in FY14, resulting in a $69 million rise in total software license and cloud subscription revenues. Growth in cloud subscription revenues was primarily driven by strong demand and reflected as well in a 35% growth in bookings, with triple-digit growth in its Fusion Cloud applications. Oracle has also completed the acquisition of Tekelec and Acme Packet in Q4FY13 and Q1FY14, which lent support to Oracle's organic revenue growth. Oracle's cloud subscription revenues should continue expanding strongly in Q3FY14, supported by an expansion in organic sales from the Fusion Cloud application suite and from inorganic channels such as Responsys (acquired in December 2013).
On the other hand, new software license sales have been roughly flat for Oracle, as businesses are increasingly migrating from traditional on-premise deployment of software suites to a leaner, on-demand model. New product license revenues decreased less than 1%, from $3.54 billion in H1FY13 to $3.52 billion in H1FY14. Oracle's strong focus on developing cloud-based applications satisfies this growing part of the software market, while demand for on-premise software is stagnant. However, on the whole, Oracle should be able to leverage its strong market position across enterprise software product categories to offset the decline in on-premise licenses with cloud subscriptions. We currently forecast new license application revenues to grow 7% on a year-on-year basis and cross $11 billion in CY14.
Decline In Hardware Sales Seem To Have Bottomed Out
Oracle ventured into the Enterprise hardware market by acquiring Sun Microsystems in January 2010. Since the acquisition, revenues from the segment have declined from $8.92 billion in CY09 to approximately $5.26 billion in CY13. So far in fiscal 2014, Oracle's hardware division revenues declined by 3% to $2.58 billion from $2.67 billion in a similar period a year ago. To arrest this decline in hardware revenues, Oracle has de-emphasized its x86 server line and focused on manufacturing and marketing high-end SPARC servers. The company also began focusing on providing holistic engineered Unix solutions that club its software offerings with its high-performance hardware.
In the six months in fiscal 2014, revenues from the software and hardware integrated "Engineered Systems" showed strong growth. Oracle reports that overall revenue share of Engineered Systems now stands at about 30% of the hardware business. Going forward, sales of high-performance servers should increase, driven by strong increase in cloud services that require the intense computing power these engineered systems provide. Additionally, strong growth in CRM and digital marketing industries should increase bookings in its Exalytics in-memory computing and Exadata database machines. However, seamless migration of client data across databases and onto cloud data centers continues to remain the most important factor determining the success of the high-end server market.
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