Oracle Corporation (NASDAQ:ORCL) reported a decent quarter. The market hysteria surrounding the company’s earnings will be temporary. Eventually, investors will buy the stock based on the merits of the business. Companies like salesforce.com, inc. (NYSE:CRM) and International Business Machines Corp. (NYSE:IBM) could be hit by a wave of pessimism based on Oracle Corporation (NASDAQ:ORCL)’s weak results. However, it is more practical to focus on the long-term, rather than moving in and out of the three stocks based on short-term market fluctuations.
Earnings highlights
Not surprisingly, the company’s hardware systems revenue declined by 21% year-over-year in the second quarter. The company also had difficulty with hardware systems support, which reported a 7% year-over-year decline in revenue. 74% of the company’s revenue stream comes from cloud, software licenses, and product support. Therefore, the decline in hardware sales was offset by the growth in software and cloud. On a consolidated basis, the company grew revenue by 0% year-over-year.
The company cut back its total operating expense by 4% in the recent quarter. The cut in spending was primarily in the hardware systems segment. Because the company was so aggressive at cutting costs in its non-performing segments, it was able to grow net income by 9%.
The cost cutting wasn’t done blindly. The company has added to its sales staff in anticipation of economic recovery. The company also believes that it’s going to remain competitive in the cloud, and that it has a superior product offering when compared to salesforce.com, inc. (NYSE:CRM) and International Business Machines Corp. (NYSE:IBM).
The company anticipates software license and cloud subscription revenue to grow by 0%-8% for the next quarter. Following that, the company believes that hardware revenue will range from negative 6% to positive 2%. The forecast on hardware sales growth is driven by stabilization in one of its hardware categories and a potential product refresh cycle. The company provided guidance of $0.42-$0.45, assuming no currency fluctuations, for the next quarter.
Implication for other companies
For now, the hardware business seems to be in continuous free-fall. Unlike Oracle Corporation (NASDAQ:ORCL), International Business Machines Corp. (NYSE:IBM) is less dependent on its hardware business (it represents about 14% of the company’s pre-tax income). But, with Oracle reporting a 21% decline in hardware sales, you could only imagine how bad IBM’s hardware business will do in the second quarter.
International Business Machines Corp. (NYSE:IBM) is diversifying away from its hardware business and is hoping to generate 90% of its pre-tax income from its services and software segments. The company plans to grow earnings to $20 per share through a mix of revenue growth, cutting costs, and share buy-backs. The company’s performance still remains more or less on track, and it may have to accelerate cost-cutting efforts, like Oracle Corporation (NASDAQ:ORCL) did. But, by 2015, the company’s growth will most likely remain on track.
Buying the stock on the dip could be lucrative (broader stock market sell-offs are always good entry points).
I believe that there is a compelling investment case for salesforce.com, inc. (NYSE:CRM) that Oracle Corporation (NASDAQ:ORCL) cannot tap into. Oracle’s management team believes that it has superior cloud applications and services. The company also believes that, by selling the industry standard, it has better customization, which makes it superior to Salesforce.com. However, with salesforce.com, inc. (NYSE:CRM), limited flexibility allows for easier integration in small and medium-sized companies.
Going forward, salesforce.com, inc. (NYSE:CRM) is expected to grow earnings by 28.39%, on average, over the next five years. The company recently purchased ExactTarget, which offers consulting services for digital advertising. Magna Global projects digital advertising to grow by double-digits for the current year. Because of this fact, Salesforce.com is well-positioned going into the end of the year.
Salesforce.com is small, relative to International Business Machines Corp. (NYSE:IBM) and Oracle, giving it more upside potential.
Conclusion
Oracle reported an average quarter. Oracle is a good leading indicator for IBM shareholders. Investors should anticipate a continuous decline in the traditional super-computer mainframe business. Instead, it’s all about services, analytics, and software. IBM and Oracle will do well over the next five years, as they will continue to diversify away from hardware. I anticipate Salesforce.com to grow the most out of the three companies.
Alexander Cho has no position in any stocks mentioned. The Motley Fool recommends Salesforce.com. The Motley Fool owns shares of International Business Machines (NYSE:IBM). and Oracle.
The article Buy These Tech Companies On the Dip originally appeared on Fool.com and is written by Alexander Cho.
Alexander is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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