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Oracle's hardware wing keeps on bleeding

Cloud blots out Sun

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Oracle's shares dropped 7 per cent in after-hours trading in response to an quarterly earnings report that showed muted adoption for its latest software offerings and a continued shrinkage in its troubled hardware division.

The database giant reported on Wednesday third quarter earnings of $2.504bn on revenues of $8.958bn – down one percent year-on-year, and with significant drops across most of its key business indicators.

New software licenses and cloud software subscriptions were down 2 per cent year-on-year to $2.33bn, and the embers of Sun Microsystems look to be cooling rapidly with revenues in the hardware division of $671m, down a whopping 23 per cent year-over-year. These figures also mark a significant quarter-on-quarter reduction, with hardware products in Q2 coming in at $734m, and software subscriptions at $2.389bn.

The only major light came from the 7 per cent year-over-year uptick in money gained from software license updates and product support, with Ellison & Co. logging $4.340bn as customers converted to software-as-a-service technologies.

So what could be behind these poor numbers? On a call discussing the earnings Oracle executives blamed a new sales team for the muted figures in software and hardware, along with profit cannibalization in hardware from the introduction of the cheap (for Oracle, at least) 1/8th rack systems.

"We're not at all pleased with our revenue growth this quarter," Oracle CFO Safra Catz, said on the call. "What we really see is the lack of urgency we sometimes see in the sales force as Q3 deals fall into Q4."

The company also indicated that it had focused attentions on getting customers to sign up for its cloud products which are not yet significant earners, but are strategically important for the company's continued relevance in a new IT era.

"We've become very, very focused on not just Fusion applications but all of our cloud applications," Oracle chief Larry Ellison said. "A lot of the changes in [the sales] organization in the field have been based on the cloud."

Oracle is winning more deals against typical cloud rivals like Salesforce and Workday, Ellison said. This might be reassuring news to Oracle investors, but has come a little late: Oracle has undergone something of a conversion to the cloudy way of thinking in the past two years, with the database giant releasing its Fusion group of cloud-capable apps, and spinning up its own fleet of cloud services.

However, the database giant is still playing catch-up with rivals, and no mention was made on the call of its Amazon-fighting efforts in infrastructure-as-a-service or platform-as-a-service technologies.

But the growth in cloud doesn't appear to have been enough to offset the decline in overall new software license revenues – this is because "the [cloud] business is still relatively small", Ellison noted.

"In Q3, our SaaS revenue alone grew well over 100% as lots of new customers adopted our Sales, Service, Marketing and Human Capital Management applications in the Cloud," Oracle president Mark Hurd said in a canned statement.

As for hardware, the executives noted that widespread adoption of the new 1/8th rack systems meant the company was selling more systems than ever before – it shifted 800 boxes in the quarter taking overall shipped units to over 5,000 since its purchase of Sun – but that these were having a negative effect on the average selling price of the kit.

"This is actually good news: even though it lowers ASP, we've delivered a lot more technology and a lot more performance," Hurd said. Therefore, "we have the opportunity to upgrade those machines over the long run".

The company is expecting revenue growth for its next quarter to range from 1 to 11 percent, and for hardware revenue growth to reduce by 22 to 12 percent.

Further fallbacks in systems are expected because the company is just about to refresh its hardware line again, and therefore expects customers to spend a couple of months kicking the tires on the new M-series of servers, Ellison said, which could hit earnings in the quarter.

"Next year will be a big growth year for our entire hardware business," Ellison said. A remark that added little to the same statement which Ellison had made in the previous quarter.

While Oracle has spent the last four years plugging away at engineered systems that strongly integrate its software with its own hardware, the rest of the IT industry has been making more and more 'commodity'-style systems – data center gear that is designed to be interoperable, and software-agnostic.

Oracle seems more and more like an enterprise with an albatross on its back and a barely legible map giving it directions to the future. This vulture hack thinks there's a chance Ellison could have bet the wrong way on hardware. ®

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