After two consecutive quarters of disappointing sales and subscription totals, technology database giant Oracle (ORCL 2.21%) provided investors with a welcome reprieve. The company's most recent quarter held a number of positive items that could represent a real and sustainable turnaround. Most of 2013 was a disappointment for Oracle, but a few encouraging trends may make 2014 a much better year.
Oracle's well-publicized shift into cloud-based services represents the key takeaway for investors after the company's third-quarter results. And, progress on this initiative should be the primary consideration going forward.
Oracle's strategy in the cloud
You must be concerned with the company's underlying results this year, which were sluggish to say the least. Sales of software and Internet-based subscriptions have disappointed, which sent up a big red flag that Oracle may miss out on the mammoth growth potential of cloud-based services.
Prior to its most recent quarterly results, Oracle missed forecasts on both software sales and subscriptions for two consecutive quarters. This was not received well, since Oracle has shifted a great deal of its strategic focus to cloud computing solutions. Thankfully, many of these trends reversed course in its fiscal second quarter.
With regard to its software business, Oracle's second-quarter bookings for cloud services rose 35%, and cloud-related revenue increased 20%. This is incredibly important to Oracle's future, because hardware is undergoing significant deterioration due to the popularity of the cloud. Oracle's total hardware sales fell 3% in the quarter and are down dramatically over the past two years.
Oracle's push into the cloud is further demonstrated by its acquisition of Responsys, (NASDAQ: MKTG), a provider of cloud-based marketing software, for $1.5 billion. The deal enhances Oracle's scale at delivering marketing interactions across platforms. The acquisition is expected to fit very well with Oracle's existing customer-oriented cloud segment. This should help accelerate Oracle's progress in its key strategic priorities.
The shift away from hardware servers has afflicted other large-cap technology giants such as IBM (IBM 2.20%), which is in a transition period of its own. Thankfully for investors, IBM is seeing the writing on the wall when it comes to hardware, and is transitioning itself into much more of an IT consulting business.
IBM's change in strategic direction, like Oracle's, will take time and patience. IBM reported 4% lower revenue in its fiscal third quarter, with particular weakness in its emerging-market segment. In fact, China was responsible for half the company's revenue decline. In all, IBM missed consensus estimates on revenue by nearly $1 billion, and this quarter's results marked the sixth consecutive quarter of falling sales.
In the meantime, IBM is hoping its massive share repurchases, as well as strict cost controls, will keep profits afloat. These efforts allowed IBM to post a 10.5% increase in quarterly earnings per share, and compelled management to reiterate its full-year fiscal 2013 outlook for at least $16.25 in EPS.
Why Oracle's 2014 depends on the cloud
You were probably relieved that Oracle's software results stabilized. Because two disappointing quarters might have raised concerns that the company's strategic initiatives weren't working. Thankfully, Oracle is reporting progress in its major transition. While the shift to the cloud has affected hardware providers broadly, Oracle's acquisition of Responsys should enhance and accelerate its own progress.
For now, it seems Oracle is back on track. At the same time, developments in technology move very quickly. This means that you need to watch its progress, to make sure the company doesn't veer off the tracks. Still, it appears Oracle is set up for a strong 2014.
