In one week, the supreme gathering of Larry Ellison worship otherwise known as Oracle OpenWorld 2012 will take over a corner of San Francisco. Thousands will gather to party, learn about Oracle products, party, network, party and listen to Ellison’s keynote. (hashtag: #nextslide)
Oracle, in many ways, has had a phenomenal run over the past eight years. Ellison’s strategy of gobbling up software competitors left and right seems to have been the right one. Ellison has been confident enough to unleash his feistier side, picking public relations battles with Hewlett-Packard over the firing of Mark Hurd, and legal battles with no less than Google over the use of Java.
Even over the last six months, investors have cast aside some skepticism and become more bullish on Oracle, driving the stock up from about $25 in May to $31.17 per share. (That’s still off it’s most recent high of $35 in April 2011, but up substantially from $14 in March 2009.)
But amid all of this, Oracle’s strangest move by far was the decision to acquire the ailing Sun Microsystems in January 2010 and detour into the bloody battlefield of hardware sales. Oracle has remained confident that it could extract value from Sun, but last week we saw a giant red flag emerge in that effort.
And the question now is whether Oracle made a big bet at the wrong time on a deal that is now beginning to weigh it down?
I ask this in the wake of Oracle’s earnings last week. The company reported profits in line with expectations, but posted a rare dip in revenue. The main culprit? Hardware sales.
According to All Things D:
“On a constant currency basis, hardware sales are down by more than 20 percent. As analyst Karl Keirstead of BMO Capital Markets put it, Oracle missed the estimates for hardware sales “by a mile,” and he doesn’t expect it to begin growing until the fourth quarter of the 2013 fiscal year. (Yesterday’s report was for Q1 of fiscal 2013.) In fact, Oracle said that it expects hardware sales next quarter to show year-on-year declines in the range of 8 percent to 18 percent on a constant currency basis.”
That’s bleak. And a note to investors from Patrick Walravens of JMP Securities doesn’t sugar coat the problems. Walravens also raises a provocative point: Did Oracle spend so much time trying to fix Sun, that it didn’t move as quickly toward building a cloud strategy as it should have? Walravens:
“Overall, our sense is that Oracle would have been better off focusing on the cloud earlier instead of on engineered systems.”
Other critiques from Walravens’ note:
“Oracle has missed its own hardware systems guidance in five of the last nine quarters.”
“The hardware product business missed expectations with revenue of $779 million, down 24% yoy (down 21% constant currency), well below consensus of $899 million, down 13% versus our estimate of $936 million, down 9% and guidance of down 7% – 17%.”
“The biggest source of disappointment for Oracle remains the hardware systems products business. When Oracle acquired Sun in January 2010 for $7.4 billion, Oracle reported hardware systems products revenue of $1.23 billion in the first full quarter thereafter. In FQ13, Oracle had hardware systems products revenue of $779 million — down a whopping 37% in total. While Oracle is de-emphasizing the low-margin, commodity hardware parts of the Sun business; our due diligence suggests the Exa business has also missed internal expectations.”
Next week, folks will be watching to see what else Oracle has to introduce in terms of its cloud strategy. But one other interesting metric worth noting. OpenWorld comes just a couple of weeks after Salesforce.com held its Dreamforce gathering. Salesforce CEO Marc Benioff and Ellison have a well-known rivalry, and Benioff has long taunted Ellison for being slow to get with the cloud trend.
Walravens pointed out that Dreamforce attracted 90,000 attendees. Last year, OpenWorld had 45,000 attendees. Aside from the ego bump of having the title of largest tech conference in the world, you have to wonder if users are starting to vote with both their feet, and their IT budget dollars.
Going forward, Walravens didn’t think Oracle is doomed, but it does have its work to do:
“The most promising of these mega trends for Oracle is cloud computing in our opinion. Oracle is late to the cloud computing trend but attempting to catch up with its recent acquisitions and by virtualizing its Fusion applications in the Oracle Public Cloud. Overall, we think Oracle would have been better off focusing more intensely on cloud computing early – and we feel the Sun acquisition and engineered systems effort detracted from that focus.”