Oracle's first quarter: Can the hardware deliver?

Exadata is frequently mentioned as a positive data point in analysts' notes, but hardware revenue for Oracle continues to be sluggish at best.
Written by Larry Dignan, Contributor

Oracle's first quarter earnings are expected to be on target despite economic headwinds, but analysts are becoming more interested in the Exadata hardware line and wondering whether the company can grow the business.

The company is expected to report first quarter earnings of 46 cents a share on revenue of $8.35 billion. The first quarter is typically Oracle's weakest as it sets its fiscal 2012 plans into motion. Some analysts report that Oracle sales reps don't have their annual compensation plans in place yet. That fact in addition to a lumpy IT spending environment could point to interesting quarters ahead.

Analysts expect Oracle to report a roughly in line quarter based on checks with resellers around the U.S. and Europe. JMP Securities Patrick Walravens said in a research note:

Our checks in the quarter, while limited to the U.S. region, are better than expected overall. On the positive side, we came across one eight-figure mega deal with a Fortune 200 company. Our due diligence suggests that this deal may have slipped from 4Q11 and closed early in this quarter. We also spoke with a reseller in the Western U.S. who had one of his best quarters ever. In terms of solutions selling well, we believe Oracle's business intelligence solutions continue to be an area of strength for Oracle. Our sense is that Oracle is also doing a good job selling products from acquisitions it has made.

Walravens cited Oracle Coherence, which offers real-time data analysis and in-memory grid computations, as an application that's selling well.

Piper Jaffray analyst Mark Murphy, who highlighted chatter about an "Exadata mini" from Oracle, also expected a solid first quarter. Murphy said that Oracle partners were actually seeing real revenue around Exadata. At some point, however, analysts like Murphy are going to want to see real hardware revenue growth instead of talk about how the pipeline is growing. Murphy surveyed 11 people in the Oracle ecosystem and found a mixed bag when it came to hardware.

Murphy wrote:

We received mostly neutral/muted feedback on hardware trends, with one exception who was quite positive, and therefore believe hardware results could show some choppiness for the time being, which remains a continuing theme. Additionally, we found that Exadata is enjoying improved customer perception, and that "the integrated appliance approach is gaining momentum" and "IT departments are starting to be more comfortable with the integrated stack."

The challenge for Oracle is getting Exadata out of the evaluation phase into full-blown deployments. Exadata is frequently mentioned as a positive data point in analysts' notes, but hardware revenue for Oracle continues to be sluggish at best.

Oracle said last quarter that hardware revenue would fall somewhere between a year-over-year decrease of 5 percent and a gain of 5 percent. That guidance equates to $1.03 billion to $1.13 billion excluding support.

Jefferies analyst Ross MacMillan said his checks yielded optimism about Exadata, but confusion about Oracle's Exalogic rollout. "We have heard that customer interest in Exalogic has been low as the product is viewed as immature and use cases have not been defined," said MacMillan. "Partners and customers are waiting for Oracle to provide a list of successful reference customers before taking any action with the appliance."

William Blair analyst Laura Lederman said that hardware "could be a little weak" in the first quarter just as it was in the fourth quarter. Luckily for Oracle, databases and applications drive the earnings results.


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