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Oracle announced its fourth-quarter and full fiscal year 2012 results on June 18, 2012 when it revealed a strong quarter’s performance that closed out a solid if unspectacular year of growth. There was strong progress in new software license revenues, and the run rate for both engineered systems and Oracle’s SaaS applications is now around $1bn on an annualized basis, which is a sound indicator for 2013 performance. In a move that is a hallmark of Oracle president Mark Hurd’s stewardship, the company is putting increased focus on sales execution and specialization in these growth areas, and added 3,300 (net) new sales staff during the fiscal year to support this.

Strong growth in new applications software licenses

Oracle was subject to adverse currency effects of 5% on average across its business over the quarter. For consistency with prior research, Ovum’s analysis below uses the “as announced” figures rather than a constant currency comparison. Oracle’s fiscal 2012 Q4 earnings announcement (all figures on a GAAP basis) showed total revenues were up 1% at $10.92bn. Within this figure, new software license revenues were up 7% at $3.99bn, while software license updates and product support revenues were up 5% at $4.15bn, and hardware systems product revenues were down 16% at $977m. The operating margin stood at 42%, while net income was up 8% at $3.45bn. GAAP earnings per share were $0.69, up 11% compared to the previous year.

For fiscal 2012 as a whole, total revenues were up 4% at $37.12bn. This included new software license revenues, up 7% at $9.91bn, and software license updates and product support revenues, up 10% at $16.21bn. Meanwhile, hardware systems product revenues fell 13% to $3.83bn. The operating margin for the year was 37%, while net income was up 17% at $9.98bn. GAAP earnings per share were $1.96, up 18% compared to the previous year.

Growth in new software license sales during Q4 continued at 7%, with a particularly strong performance in applications, where the increase was 23%, compared to flat new licenses in the database and middleware business. Oracle reported that sales of industry-specific solutions outstripped other areas, and it is continuing to build up its strength in areas including banking, retail, and life sciences.

Geographically, Oracle claimed good performance across all regions in its earnings announcement, but closer analysis of the figures shows that business in EMEA was nearly flat over the year and showed a small decline in Q4, with almost all of the growth coming from the Americas and Asia-Pacific. However, considering that the macro-economic environment in Europe continues to be a challenge for all the major IT vendors, Oracle’s performance in the region represents a creditable effort.

Growing business in the cloud

The last two quarters have seen Oracle provide more detail about its cloud strategy, where it is looking to leverage the combined strengths of its hardware, database, middleware, and software assets. This culminated in a public webcast by Oracle CEO Larry Ellison shortly after quarter-end, describing the full range of Oracle Cloud services (the word “Public” has now been dropped from the branding), comprising database services, Java and non-Java-centric platform services, application services (comprising both Oracle Fusion Applications and the company’s acquired applications in the areas of customer experience and talent management), and social services that are being augmented by some of Oracle’s most recent acquisitions.

Oracle’s cloud strategy is quite distinct from that of its competitors because it emphasizes continuity and bi-directional migration from on-premise deployments, with a determination to offer the same technology stack in both environments. For enterprises with a significant existing commitment to Oracle technology this makes good sense because it provides them with continuity, and eases the process of transitioning toward the cloud. For non-Oracle clients the equation is more complex. There are certainly benefits in terms of simplicity and end-to-end support from a single vendor, but there is also a requirement to adopt the Oracle technology stack to get the full benefits, notwithstanding that this is based on open standards. There is of course a spectrum between these two perspectives, and with most enterprise clients having some Oracle technology within their IT environments, the company’s cloud offering should receive serious consideration.

Engineered systems is the big bet

The hardware systems that Oracle sees as the key to improving customer simplicity and price performance for on-premise deployments, and as the foundation for delivery of those cloud services, is of course its range of Exa engineered systems. On the earnings call, both Hurd and Ellison painted a picture of accelerating demand for these products, with strong pipelines for the now-established Oracle Exadata and Oracle Exalogic systems, and high initial demand for the new additions to the range including the Oracle Exalytics In-Memory Machine, where the pipeline is growing even faster than it did at an equivalent stage for the two aforementioned products.

While the commodity hardware business continues on a downward trajectory, Oracle expects to see its overall systems business return to positive growth during the course of fiscal year 2013. Customers are now moving past the stage of piloting one of the engineered systems to gauge its impact, and there is more evidence of companies looking to make integrated systems a core part of their infrastructure strategy, from which Oracle should benefit.

A continuing steady approach to R&D and M&A

Q4 2012 R&D spending was $1.22bn, which was up 5% from Q4 2011 spending of $1.17bn. For the full year, R&D for 2012 was $4.53bn versus 2011’s $4.52bn. The full-year R&D spending as a percentage of revenue for 2012 was 12.2%, which was the same as the average for the last five years.

M&A saw three further acquisition announcements in the quarter: ClearTrial, an industry-specific buy in the life sciences vertical that provides clinical trial management and analytics, Vitrue, which offers a cloud-based social marketing platform, and Collective Intellect, for cloud-based social intelligence. Acquisitions in the quarter were consistent with Oracle’s overall M&A strategy of filling in technology or product gaps and extending into new markets.

Oracle has maintained a consistent R&D and M&A strategy over time, which is critical because of the breadth and depth of products and services that need to be supported. Oracle’s approach has permitted it to roll out incremental improvements to existing products while generating entirely new businesses. For example, Oracle’s Exa engineered systems and SaaS revenues are both on a $1bn run rate. Enterprise and public sector CIOs should consider Oracle’s fourth-quarter and full-year investments in R&D and M&A as positive indicators of Oracle’s long-term commitment to delivering enterprise-grade solutions.

Strong free cashflow leading to cash and marketable securities of $30.68bn (up from $28.85bn) is another point of note. Cash gives Oracle the resources not only for M&A and R&D but also to invest in marketing and sales. In addition, cash can be deployed for dividends and stock buy-back, reducing pressure from stockholders to make radical changes to strategy or execution.