Stronger growth in new software license and cloud subscription revenues during Q3FY14 for Oracle are suggestive signs of a revival in IT spending. In the Q3FY14 earnings released on March 18, Oracle (NASDAQ:ORCL) reported a 6% year-on-year expansion in new software license and cloud subscription revenues , on a GAAP, constant currency basis. In comparison, new software license and cloud subscription revenues were flat in constant currency terms during in the prior year. This increase in new license revenues was driven by a 24% expansion in cloud subscription revenues to reach $292 million for the quarter.  Strong growth in new license revenues also lifted overall software segment revenues, which grew 6% to reach $6,979 million.
Another key feature from the Q3FY14 earnings release was the strong growth in hardware revenues. Hardware product revenues, which are generated by the sale of hardware systems, grew 10% in constant currency terms over the same quarter last fiscal to reach $725 million. This growth in hardware system revenues was the strongest since its acquisition of Sun Microsystems in January 2010. Oracle’s hardware system revenues had growth rates of -22% and -16% in Q3FY13 and Q3FY12, which puts the positive growth in Q3FY14 into perspective. Revenues from Oracle’s Engineered Systems grew 30%, which was the factor driving overall hardware system revenues. We believe the decline in Oracle’s hardware system division may have bottomed out and expect continued expansion in revenues as bookings for its Engineered Systems increase.
Non-GAAP operating profit stood at $12,353 million for the nine months completed in fiscal 2014, up 4% from a similar period in fiscal 2013. Non-GAAP operating profit margins were flat at 46% during both the comparable periods. Non-GAAP net income also expanded 4% during these periods. During the nine months in fiscal 2014, Oracle repurchased common stock to the tune of $7,841 million. This share buyback resulted in a 10% jump in the nine months non-GAAP EPS to $1.96/share despite only a 4% gain in net income.
We are currently reviewing our price estimate of $44 Trefis price estimate for Oracle, which stands nearly 14% above its current market price, to incorporate the latest Q3FY14 earnings.
Hardware System Revenues Should Drive Top Line Going Forward
Since the acquisition of SUN Microsystems in January 2010, revenues for the hardware division have been declining. Barring fourth quarter revenues, which tend to be higher on a sequential basis, hardware system revenues for Oracle have declined at a compounded annual rate of 6.15% on a sequential basis since November 2010. Oracle reported the first quarter of growth in hardware system revenues in November 2013, with revenues of $714 million. In the recently concluded Q3FY14, revenues stood 1.5% higher on a sequential basis, at $725 million. This growth in hardware system revenues is a result of Oracle’s shift in focus from the acquired SUN x86 server line to its homegrown Engineered systems. On the earnings call, CEO Larry Ellison sales of x86 servers was (perhaps with some hyperbole) “almost nothing” while CFO Safra Catz stated Engineered systems accounted for 30% of Hardware sales.  We expect Engineered systems to drive top line for Oracle’s hardware business in the future.
Hardware support revenues on the other hand fared much better since the acquisition of Sun Microsystems and have ranged between $570 million – $673 million between May 2010 and February 2014. Going forward, we believe positive growth in new hardware system sales should lend a hand to growth in the hardware support segment as well. Oracle derives these revenues through assistance on its hardware system installations and other technical support functions. With declining new hardware sales, incremental revenues from these support functions has slowed in recent times. Going forward, the expansion in new hardware system sales should translate into higher support revenues for Oracle.
Oracle’s 12c Database Should Gain Traction In 2014
We expect the recently released 12c cloud database from Oracle should gain traction in 2014. Larry Ellison, CEO of Oracle, stated that even companies such as competitor Salesforce (NYSE:CRM) are excited by the performance potential of their applications offering with the 12c database on the Oracle Exadata Machine to derive maximum benefit.  We are of the view that Oracle’s rapid growth in its Engineered systems should induce growth of its new 12c database release as well. The availability of in-memory capability by mid-year should help as well, allowing customers to leverage a technology introduced by SAP AG (NYSE:SAP) with its HANA.
- Oracle’s CEO Discusses F3Q2014 Results – Earnings Call Transcript, Seeking Alpha, March 2014
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