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Oracle’s Engineered Systems Drives Its Hardware Growth

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Jul. 7 2015, Updated 3:05 p.m. ET

Engineered Systems posts double-digit growth

In its fiscal 4Q15 earnings release, Oracle (ORCL) stated that its Engineered Systems business continued to post double-digit growth. In March 2014, Oracle executive chairman and chief technology officer Larry Ellison mentioned that Engineered Systems accounts for more than 30% of hardware product sales, which are expected to rise to 50%. The contribution of Hardware Systems’ revenue toward overall revenue is declining, contributing 13.9% to overall revenues in fiscal 3Q15.

Engineered Systems’ product line encompasses Exadata, Exalogic, Exalytics, Big Data Appliance, and SPARC SuperCluster. Due to the improved features over standalone servers, these engineered systems carry higher prices and margins than standalone servers.

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Fiscal 3Q15 earnings

In its fiscal 3Q15 earnings release, Oracle co-CEO Mark Hurd stated that the Engineered Systems business forms a “significant part” of its hardware business. Oracle’s Engineered Systems segment contains hardware and software designed to work together to enhance customer value and satisfaction. These integrated solutions—where hardware, software, and services work in unison—are strongly preferred in the technology market. Oracle’s Engineered Systems business, due to its efficient integration and associated benefits, has shown steady growth, contributing to the growth in Hardware Systems.

In its recent earnings release, Oracle reiterated that it is gaining market share from other companies in the industry—IBM (IBM) and HP (HPQ). Despite Engineered Systems’ double-digit growth, Oracle’s Hardware Systems revenue continued its decline, falling 4% and 3% in fiscal 4Q15 and fiscal 2015, respectively. The following chart shows Oracle’s Hardware Systems’ revenues and their contribution to overall revenues.

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Engineered Systems should lead hardware growth

At the end of fiscal 1Q15, Oracle stated that Engineered Systems accounted for one-third of its overall hardware product revenue. Its contribution is expected to increase to 50% to overall hardware product revenue. In each quarter during fiscal 2015, revenues from Engineered Systems grew at double-digit rates, significantly overtaking the growth of the total hardware business.

The company no longer reports the individual components of its Hardware Systems segment. Considering that Oracle’s overall hardware segment has posted flattish or marginal revenues growth, it wouldn’t be too much of a presumption to say that Engineered Systems will drive growth in this segment.

If Oracle’s Engineered Systems business continues to post good results, it will not only benefit Oracle investors, but also ETFs like the Technology Select Sector SPDR Fund (XLK) and the PowerShares QQQ Trust ETF (QQQ). XLK and QQQ invest about 3.41% and 3.08% of their holdings in Oracle, respectively.

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