Oracle (ORCL, Financial) is a company that dominates the relational database market, with almost 48% of the global market share under its belt. It has always been the leader in the software business, but over past few years, Oracle has also been inclined toward the hardware business. The inclination toward hardware is exemplified by the fact that it struck a $7.4 billion deal to acquire Sun Microsystems. Although Oracle's major interest was JAVA platform but looking into its efforts with SPARC server, it cannot be neglected that Oracle was always eying the hardware business of high end servers. The hardware business for Sun Microsystems then was a positive revenue stream which further gained Oracle's interest.
Oracle acquired Sun, and opened a new revenue stream as hardware business. But ever since the acquisition, it failed to impress the investor and revenue failed to record growth from hardware business. It was moving down on comparable year quarters and also fiscal year over year.
Hardware business recovering
The company recently declared results for Q3-2104, which shows that Oracle finally recorded a growth in its hardware business. The company recorded revenue of $725 million from its hardware business, which is growth of 8%. The hardware support revenue also saw a growth of 5% recording $598 billion. The growth in the hardware revenue was the result of Oracle’s persistence with its strategies of enhancing features of the high-end Sparc servers.
The overall revenue was recorded as $9.3 billion up by 4%, while net income touched $2.6 billion recording 2% growth.
What's most impressive is while various other companies are failing to record growth in High End server, Oracle has a taken a U-turn to record growth. Hardware giants like IBM (IBM) have been severely suffering from it hardware business to the extent that it plans to sell its server business.
Factors that paid off Oracle’s hardware segments
Oracle's cloud application has been a high revenue segment, backward integration of oracle cloud based application helped in pushing up the oracle hardware business.
Oracle engineered system where it provided all solution (hardware and software) under a single umbrella was fruitful to the hardware business for Oracle.
“Oracle’s Engineered Server Systems, including Exadata and Sparc SuperClusters, achieved over a 30% constant currency growth rate in the quarter, while throughout the industry traditional high-end server product lines are in steep decline,” said Oracle CEO, Larry Ellison.
Oracle has a policy of consistently enhancing the feature of the Sparc servers and releasing upgraded servers.
And finally the brand name Oracle was important in generating new clients for hardware business.
Journey ahead
It seems the jinx has been broken for Oracle's hardware business and future results may see a sustained positive growth. With the cloud maturing, we foresee more and more business moving on to cloud and creating new market for high end servers. Oracle's high end server is placed well with the maturing cloud business.
Oracle is focused on cloud-enabled IT services. IDC reports foresee the cloud enabled IT services to grow at a CAGR of 23.5% over 2013 to 2017. It is also anticipates that more than 80% of the apps will be hosted as SaaS and estimated to be $30 billion market by 2017. Oracle is one of the bigger players in market offering cloud-enabled SaaS application that can gain from this anticipated growth. SaaS-based application is also predicated to grow at a CAGR of 29.7% over 2013-2017.
Looking at the market growth of cloud-enabled services and SaaS, Oracle's hardware business will have a colorful future in term of revenue growth.
Conclusion
Oracle leaves no stone unturned to acquire a bigger market share for the gamut of services that it offers out of the box. The company has a good history of paying regular dividends to its investors. The stock has an EPS of around $2.40 with PE of 16.7. The stock is worth considering to add to your portfolio to reap benefits in the longer run.
