What the Oracle Says
Cecil is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Oracle (NASDAQ: ORCL) released its first quarter report on investors on the afternoon of September 20th, after the bell. Oracle’s results are considered a bellwether for the entire software industry so the results of the Redwood City company will most likely have a ripple effect on the industry as a whole.
Oracle is the third largest player in the software, but their Q1 results have been disappointing to say the least. An analyst at Citigroup called it “atrocious”. However, the fact is Oracle has traditionally reported weak sales during the June-August period. The period falls in the peak vacation period and comprises Oracle’s first quarter, a time when sales representatives in the organization don’t perform as well due to the fact that they dry up their leads the previous quarter so that it reflects in a nice large bonus check.
The declaration exudes the feeling that decision makers in software and government agencies are not spending on new technology, especially in Personal Computing and Hardware in this uncertain business climate thanks to weak European demand and the upcoming US presidential elections.
Oracle’s specialty is database and software that automate administrative tasks – these are seeing good sales even in this hard economic climate. And moreover, signs from Oracle’s transition to the cloud also seem to be quite good. Software revenues, which include cloud subscriptions jumped to 70% of the company’s total revenue. Cloud revenues alone increased between 5%-10% accounting for an unfavorable exchange rate, increasing their market share in what Forrester Research expects will be a $241 billion dollar industry by 2020. Ka-Ching!
Yet in spite of the good showing on the software and cloud side of things, Oracle’s Q1 performance has been disappointing. Pointing fingers, and it definitely needs to be pointed in the direction of the hardware division. There was a 24% decline in hardware sales, coming immediately after the 16% decline the previous quarter – Q4. Oracle’s revenues dipped to $8.18 billion when compared to $8.37 billion in the same quarter last year.
Oracle entered the hardware sector with the 2010 purchase of Sun Microsystems in a $7.3 billion move. The move hasn’t exactly paid great dividends till now but management seems to be convinced it will be a lucrative one.
As we all know, hardware world over doesn’t seem to be doing too well at this point. Oracle’s competitors in the server hardware space include Hewlett-Packard (NYSE: HPQ) and IBM. Even though both these companies tied for most server sales in Q2, they didn’t report any revenue increase – the only company that did being Dell.
Investors, therefore have no reason to be optimistic about the hardware division of Oracle, or any other company for that matter. It is a challenge that large hardware makers such as HP will be facing – to make a seamless transition from bulky hardware to tablets and cloud based technology. Oracle seems to have taken a giant step in that direction when you look at the results of their Q1.
Most recent comments by Cisco (NASDAQ: CSCO) Chief Executive John Chambers also seem to point in that direction. Chambers said that there was potential for HP to grow in the tablets and the cloud market but the company may not be able to catch up with leaders in the space. HP and CISCO are competitors in many fields including networking equipment.
"It’s a tough hand to play, but clearly as a competitor I like competing against that hand, and we are going to try and accelerate while they are struggling," Mr. Chambers said.
Perception amongst observers in the industry is that HP is only planning to refine their strategy and not alter it completely. In its drive to help customers building out data centers to handle cloud computing, HP is developing a system that combines server computers, data storage and networking components in the same device, which runs on chips from Intel and has software from providers such as SAP and IBM.
The personal computer industry in particular has been hit hard by the growth of the tablet and smart-phone industry. But HP recently released a few new products in the personal computing space including laptops and tablets.
The entire industry seems to be headed in the direction of cloud and the tablets and while it’s fairly safe to say the Apple seems to have the best bets in the tablet space thanks to the iPad, it’ll be very interesting to see who manages to corner the market in the clouds.
Interested in Additional Analysis?
It's been a frustrating path for Microsoft investors, who've watched their company fail to capitalize on the incredible growth in mobile over the past decade. However, with the release of its own tablet, along with the widely anticipated Windows 8 operating system, the company is looking to make a splash in this booming market. In this brand new premium report on Microsoft Fool analysts explain that while the opportunity is huge, the challenges are many. Also provided are regular updates as key events occur, so make sure to claim a copy of this report now by clicking here.
ceciljohn2002 has no positions in the stocks mentioned above. The Motley Fool owns shares of International Business Machines, Microsoft, and Oracle. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.