Oracle's Weak Software, Hardware Sales Dampen Q2 Results

Hit by a 14 percent decrease in sales of hardware systems products and slower software license sales, Oracle reported disappointingly slow growth for its second quarter financial results.

Oracle's shares fell more than 8 percent in after-hours trading. But Oracle executives, speaking on a conference call with financial analysts, attributed the slowdown to short-term events in the second quarter and expressed optimism that the company's robust growth would resume in the current quarter.

"We feel good about the momentum that we've got," Co-President Mark Hurd said on the call, referring several times to what he called a strong sales pipeline for the current quarter.

Oracle reported that total revenue for its second fiscal quarter ended Nov. 30 was $8.79 billion, up only 2 percent from $8.58 billion in the same period one year earlier. Oracle reported net income of $2.19 billion for the quarter, up 17 percent from $1.87 billion in the second quarter last year.

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"Clearly, this quarter was not as we thought it would be," acknowledged CFO and Co-President Safra Catz, on the conference call.

Total hardware systems revenue for the quarter was $1.58 billion, down 10 percent from one year earlier. That number includes sales of hardware systems products ($953 million, down 14 percent year-over-year) and hardware systems support revenue ($625 million, down 2 percent year-over-year).

Oracle became a player in the computer hardware business early last year when it acquired Sun Microsystems for $7.3 billion. Since then Oracle's sales of Sun hardware products have been steadily declining – a trend Oracle executives say is largely the result of the company halting sales of low-margin commodity server products.

Catz said the drop in hardware sales was due in part to customer hesitation during Oracle's product transition to servers that use the new SPARC T4 microprocessors.

Oracle has been emphasizing sales of its "engineered systems" that combine hardware and software for specific tasks such as handling huge volumes of data. In the second quarter Oracle sold 200 Exadata and Exalogic engineered systems, CEO Larry Ellison said on the conference call, a number he said would reach 300 in the current quarter and 400 in the fourth quarter.

"That would make our annualized Q4 engineered systems sales approximately $1 billion," he said. "Then, we plan to double those sales again next fiscal year."

The company shipped its first SPARC SuperCluster server in the second quarter, Ellison said, and expects to make the first deliveries of the Exalytics system and Oracle Big Data Appliance in the current third quarter.

Growth in Oracle's software sales also was slow in the second quarter. Total software revenue for the quarter was $6.03 billion, up a modest 7 percent from the same period one year earlier. But sales of new software licenses, a key growth indicator, were up only 2 percent in the quarter to $2.05 billion. Revenue from software license updates and product support was up 9 percent to $3.99 billion.

New software licenses for database and middleware products was up only 4 percent to $1.48 billion in the quarter, while new software licenses for application software fell 2 percent to $569 million.

Catz attributed much of the slower software sales to a number of deals near the end of the quarter that didn't close because customers required additional approvals at the last minute. She said the company has put processes in place to better monitor such deals.