Oracle cash grows on new licenses, hardware

It looks like Larry Ellison's net worth is set to go up some more. And maybe yours too, if you own Oracle stock.

The software giant and recent hardware company turned in its numbers for its third quarter of fiscal 2011 today, and the numbers were solid. Oracle said that overall revenues in the quarter ended February 28 rose by 37 per cent, to $8.76bn.

A little less than half of that growth came from the Sun hardware and related support businesses, if you back these out of the numbers, and in some ways it was an easy compare for Oracle because it only had four weeks of Sun-related sales in the year-ago period compared to the full quarter this time around. But the underlying Oracle software business is growing regardless of the moves the company has made to expand into the systems business.

Oracle brought $2.12bn to the bottom line, a 70 per cent increase over the year-ago quarter, and it said that it would be boosting its quarterly revenue by 20 per cent because it was flush with cash. You will now get 6 cents a share instead of 5 cents.

In the quarter, Oracle's new software license sales, a kind of leading (or immediate) indicator for how the global economy is doing, rose by 29 per cent, to $2.21bn. Software license update and product support revenues were $3.74bn in the quarter, 13 per cent higher than in the third quarter of fiscal 2010. Overall software revenues were up 19 per cent, to just under $6bn.

On the hardware front, Oracle said that its system sales were $1.04bn, while system support revenues (which includes hardware support as well as Solaris and Linux operating support) hit $629m. The compares to the prior year are silly for these Sun-related products because last year didn't have a full quarter of Sun product and support sales. From this point forward, the compares get real for Oracle and it will have to show real growth in its hardware business - and profits.

The latter, Oracle can already demonstrate because it took the tough actions that Sun's co-founder and chairman, Scott McNealy, and president and CEO, Jonathan Schwartz, were unwilling to. This included shutting down unprofitable system businesses, moving to build-to-order, and doing more direct sales and relying less on channel partners, among other things.

In fiscal Q3, operating expenses for the Oracle systems business was $465m and for hardware systems support were $294m. Add it up, and you get an operating margin of 54.4 per cent, which is a lot better than the 29.7 margin on Sun gear and support for the four weeks of sales that Oracle did last year. Because of that significant boost in margins, Safra Catz, Oracle's co-president (along with former Hewlett-Packard CEO Mark Hurd), said in a statement accompanying the numbers that Oracle was "now completely confident that we will exceed the $1.5bn profit goal we set for the overall Sun business for the current fiscal year."

Oracle was talking about operating profits, of course, not net profits. Oracle's goal, you will remember, is to extract $2bn in operating profits in the Sun biz in fiscal 2012.

If I had to guess, I would say that the core Sun business, including the iron used to build Exadata and SuperCluster database appliances and Exalogic middleware appliances, might bring in a total of $7bn in revenues in the core hardware and support businesses for fiscal 2011. In its fiscal 2009 ended in June of that year - the last year Sun had as an independent company - Sun had $6.7bn in server and storage sales and $4.8bn in support revenues (including software licenses and support contracts for Solaris and other software as well as professional services).

That was $11.5bn in sales, but Sun lost $2.2bn raking in that money - not a good idea. Oracle will eliminate something on the order of $4.5bn in revenues with the Sun products, but will bring $1.5bn to the operating profit line and depending on how it attributes overhead, bring maybe $600m of that to the bottom line. This is a better idea.

Catz said as much on the call with Wall Street analysts going over the financials. Catz said that the product mix was important in any quarter that Oracle does, particularly when it comes to systems. "It is very easy to sell a couple of hundred million dollars of extra product in a quarter," she explained. "People will absolutely buy more stuff from you that you sell too cheaply." Oracle is focused on giving customers value and charging for it, and doing as much cross-selling and up-selling as it can. "The best place to get the second order is the place you got the first," as Hurd put it on the call.

Oracle co-founder and CEO Larry Ellison was on his second day of jury duty, so he could not be on the call as he would normally be. So Hurd waved the Exadata and Exalogic pom-poms without being too specific about the numbers. He said that customers were "energized" by Oracle's product directions, both on hardware and software, and that the engineered systems like Exadata and Exalogic were leaving competitors "scrambling" to try to catch up.

"Exadata continues to sell itself," Hurd said, adding that the combined Exadata and Exalogic lines had sequential unit and revenue growth from Q2 that was up over 50 per cent, and that in Q4 Oracle expected the growth rates would be even higher. Hurd was not about to give out precise revenue or unit shipment figures, but he said that Oracle shipped "a good number" of quarter rack Exadata systems, which would "seed the future," and that the company shipped a bunch of the larger Exadat X2-8 machines announced last September too.

Oracle had repeat buying from early adopters as well for Exadata appliances, and Hurd said that the pipeline for these database appliances continues to swell. The growth for the Exalogic middleware appliances is as high as for Exadata because Oracle learned from two years of selling Exadata products and could ramp the Exalogic appliances faster based on that experience.

The company had $11.9bn in cash and $12.5bn in securities as the third quarter came to a close, but also owes $14.8bn in notes and other debt to various lends, so don't go thinking that Oracle can make blockbuster moves. That's only $9.6bn in net cash if Oracle sells its securities and pays off its debts. Whatever Oracle might buy, Catz assured everyone that it would not pay the kind of multiple that HP did to get its hands on disk array maker 3PAR. Catz joked that had Oracle done that with Sun, it would have paid $140bn instead of the $5.7bn net of cash it actually paid.

As for fiscal Q4, Catz said that Oracle expected new software license sales to grow by between 9 and 19 per cent, with hardware product sales (not including hardware and OS support) growing 6 to 12 per cent. Total revenues are anticipated to grow somewhere between 10 and 14 per cent, with earnings per share on a GAAP basis to come in at between 56 and 60 cents, compared to 46 cents in the final quarter of fiscal 2010. ®