Enterprise software provider Oracle (ORCL 0.10%) recently reported second-quarter results that proved to be a pleasant surprise for Wall Street. After posting disappointing earnings figures for three consecutive quarters, Oracle's revenue ($9.28 billion) managed to stay above analyst estimates of $9.18 billion. Adjusted earnings at $0.69 per share also remained above the Street's expectations of $0.67. The future also looked reasonably bright, as the company's revenue and profit guidance for the current quarter remained at the high end of the Street's estimates.
Oracle's conventional networking equipment sales have been affected by recent adverse macroeconomic conditions that have compelled enterprise customers to curtail their tech expenditure. Subsequently, this has also boosted sales of Software-as-a-Service, the technical term for cloud-based software applications that eliminate the need for expensive on-site equipment. This is an area where Oracle has lagged behind newer competitors such as Salesforce.com (CRM -0.13%) and Workday (WDAY -0.44%), as both of these relatively smaller companies nibble into the former's established customer base by offering similar products at much lower prices.
Given these conditions, you can't help but wonder whether Oracle's current earnings scenario is just a temporary shot in the arm.
David and Goliath
The competitive situation has been particularly tough for Oracle in recent years, as rivals Salesforce and Workday are undercutting prices to such an extent that they are even willing to run at a loss as a result. In fact, Salesforce has reported net losses amounting to a whopping $270 million during the previous year. Oracle's other, smaller competitor, Workday, is also running at a loss, even as it offers innovative products targeted at mobile devices.
This has given rise to major concern at Oracle, as sales of new software licenses and cloud subscriptions remained relatively flat from the earlier period at $2.38 billion. This comprises an important metric for potential investors, as any new software licenses tend to generate long-lasting maintenance contracts that add to the company's upcoming profit margin.
However, Oracle investors can derive solace from the fact that the company's software licensing renewals actually went up by 6%, indicating that at least a small segment of customers still prefer the company's high-end services. Going forward, Oracle also expects revenue from new software licenses and subscriptions to increase by a few percentage points.
What else is good?
The most relevant aspect of Oracle's growth in the SaaS segment during the quarter has been the whopping 35% jump in orders placed for its cloud based products -- evidence that its strategy of revamping the sales team has paid off handsomely. In fact, part of Oracle's revised marketing strategy involves dividing salespeople into groups that are focused on rivals, as well as bigger industry competitor SAP AG, apart from helping the company become "price-competitive" in the long run.
The sales force's combined efforts should also receive a big boost from the launch of Oracle 12c, the company's first cloud computing database. With an updated and much faster version of the software already in circulation, Oracle 12c should prove an effective answer to competitors' offerings in the upcoming quarters, driving licensing revenue for the company.
The hardware division
Concerning Oracle's traditional hardware-based offerings, the company seems to have successfully stemmed the otherwise steep decline in sales witnessed during the past few quarters. For instance, although Oracle's sales of server equipment fell by 2.7% on a quarter-on-quarter basis, it was obviously much less compared to the 14% drop witnessed during the first quarter. With research firm IDC predicting a healthy 4% increase in global expenditure on servers and other storage equipment, the company's planned additions to its Exadata range of hardware products should find a few takers as well.
Foolish final thoughts
On the whole, seems to be good reason to remain hopeful about Oracle's successful transition into a cloud-enabled world. At the same time, you should remember that this company has terrific free cash flow, the majority of which it redistributes to shareholders in the form of buybacks and dividends.
However, with the company's sales and marketing expenditure rising rapidly (by as much as 11% on a year-on-year basis), the sales force realignment may ultimately prove to be a drag on future profitability. Although Oracle 12c is surely a well-executed product, its expected sales figures will largely be the outcome of the enterprise tech spending environment in the near future. This company has definitely improved upon its past performances, but it's still a bit early to make any fresh acquisitions.
