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Oracle Sales Climb As Solid Software Offsets Hardware

Oracle (ORCL) found stability in a tumultuous time, reporting late Tuesday its strongest earnings growth in six quarters as revenue unexpectedly rose.

The business software giant's fiscal second-quarter earnings rose 18.5% to 64 cents a share. Analysts had expected 61 cents. Revenue rose 3% to $9.1 billion, defying forecasts for a second straight slim decline, to $9.01 billion. Software demand offset continued weakness in hardware.

Oracle sees Q3 EPS of 64-68 cents, in line with views of 66 cents. Revenue should rise 1%-5% vs. a year earlier. Analysts expect a 4.3% gain to $9.45 billion.

Shares rose 1.5% in late trading to around 33.38, which would be a 12-year high. Earlier, Oracle rose nearly 2% to 32.88 to just shy of its September peak.

Oracle In 'Transition'

Oracle is fully engaged on several fronts. It's vying with titans SAP (SAP), IBM (IBM) and many smaller rivals, slogging through a weak economy and fiscal cliff fears while trying to boost its ailing hardware business. It's also trying to adopt a cloud-computing-based model where firms store and access data over the Web.

"Oracle is going through a transition; they are not quite all of the way in the new world and they are not quite all of the way in the old world and (IT) budgets are under duress," said Brent Thill, an analyst for UBS Securities. "There are a lot of storm clouds that they are navigating.

Q2 software revenue rose 10% to $6.64 billion vs. a year earlier. New software licenses and cloud software subscriptions grew 17% to $2.38 billion. Revenue from license updates and product support jumped 7% to $4.26 billion.

"We still believe that there remains a lot of leverage in our business model," said Safra Catz, co-president and CFO, in Oracle's post-earnings conference call Oracle launched its cloud initiatives in October. During its Q1 call on Sept. 20, it said the business is on a $1 billion annual run rate. But with total revenue expected to reach $38.2 billion the cloud is still just a raindrop in the bucket, says UBS' Thill.

Hard Times For Hardware

Once again, Oracle' hardware was a big drag. Hardware systems revenue declined 16% to $1.32 billion vs. the year-ago period. Hardware services revenues also slipped 5% to $1.12 billion while hardware systems products revenue fell 23% to $734 million. Hardware systems support revenue sank 6% to $587 million.

CEO Larry Ellison said during the call that the 2010 Sun Microsystems buy was the "most strategic and profitable acquisition Oracle has ever made." He cited Java software, which grew Q2 revenue by 34%. He added that hardware downsizing is nearly over.

"They are slowly ... getting rid of certain product lines and they are emphasizing a few others so probably the hardware business will continue to show a decline for another six to eight months," said Trip Chowdhry, analyst for Global Equities Research.

Investors don't seem to care: Oracle shares are up 26% in 2012.

"None of the investors is really focused on owning Oracle for the hardware business; they are focused on owning it for the software business," Thill said.

Oracle enjoyed solid growth in the Americas and Asia-Pacific. But revenue from its Europe, Middle East and Africa region fell 1.9% to $2.7 billion.

"Europe is uncertain; customers don't know what their businesses look like and if they don't know they are not going to put more technology back," said Chowdhry.