Oracle's budget flush comments cheer software sector

Oracle's comments about a budget flush may be a good indicator that IT spending is showing some strength in what looked to be a challenging fourth quarter.

"Folks wanted to spend their budgets, continue to want to spend their budgets. We are having an absolutely wonderful December so far. What's going on in Washington, I don't know who it's necessarily influencing today. But I can tell you, our customers have been spending money with us even here in December."

That quote came from Oracle CFO Safra Catz on the company's earnings conference call on Tuesday. Catz's take---and Oracle's quarter---may be a good indicator that IT spending is showing some strength in what looked to be a challenging fourth quarter.

Previously:  Oracle Q2 mixed; Ellison defends Sun acquisition  |  Oracle updates NoSQL, big data appliance and connectors  |  Oracle's second quarter: Cloud offerings, engineered systems at odds

Oracle's fiscal second quarter was strong in software---applications and database---and weak in hardware.

The hardware figures even prompted a big defense by CEO Larry Ellison. He said:

Our $7.5 billion purchase of Sun has already proven to be the most strategic and profitable acquisition Oracle has ever made. Java, the world's most popular programming language, was a key software asset we acquired when we bought Sun. Today our Java business is booming, growing over 34% this past quarter. Sun hardware technology has enabled us to become a leader in the highly profitable engineered systems segment of the hardware business.

The rapid growth of highly differentiated products like Exadata and the SPARC T-4 has consistently, quarter after quarter, improved the profitability of our overall hardware business. Selling systems loaded with Oracle intellectual property, along with de-emphasizing the selling of low margin, undifferentiated products like commodity X-86 servers and LSI disc storage systems, products that contain no Oracle intellectual property, those two things have reshaped and down-sized our hardware business while making that business much more profitable.

Now that our hardware business is making a substantial contribution to Oracle's record levels of profitability, we are just about finished with the down-sizing phase and the transformation of that business. We're about to start growing our hardware business. In Q3, we'll be turning the corner and in Q4 we expect top line growth to go along with continually improving margin.

The upshot is that Ellison sees the downsizing phase of the hardware business ending and growth starting in the fiscal fourth quarter.

We'll see if that hardware guidance pans out, but most analysts are watching the budget flush and cheering. In other words, hardware from Oracle is a sideshow relative to the economic picture.



To wit:

JMP Securities analyst Patrick Walravens said:

The big takeaway from the call is that Oracle seems to be experiencing a strong, year-end budget flush, which has positive implications for other enterprise software vendors. In particular, we would highlight Informatica, SAP and Teradata as vendors who might be seeing similar trends.

Piper Jaffray analyst Mark Murphy said:

With software growing double digits, even in Europe, we believe stabilization of the hardware business would put an end to the drag on the overall growth of the company and might trigger future multiple expansion.

Stifel Nicolaus analyst Brad Reback said:

We believe Oracle's strong license revenue illustrates organizations are still willing to invest in projects and solutions with demonstrable ROIs. Also, based on managements' commentary about experiencing strong demand in December, we feel there is a solid chance that software vendors with a compelling value-proposition will see some "budget flush" in 4Q.