Oracle delivered a solid third quarter, but worries about the hardware business are multiplying among analysts. On the bright side, Oracle's other big question mark---the cloud strategy---should be clarified more in the weeks ahead.
The third quarter featured an Oracle quarter that topped estimates with the help of a lower tax rate and an outlook that was mixed.
Oracle's third quarter numbers to know go like this:
- Non-GAAP earnings of 62 cents a share were a head of Wall Street estimates of 56 cents a share.
- Revenue for the quarter was $9.06 billion compared to Wall Street estimates of $9.02 billion.
- License revenue growth of 7 percent was ahead of expectations.
- Oracle will close the Taleo acquisition in April and it will exit fiscal 2012 with a SaaS business at a $1 billion run rate.
- Hardware revenue fell 16 percent in the third quarter after Oracle's outlook was for flat to a decline of 15 percent.
- The outlook calls for fourth quarter non-GAAP earnings of 76 cents a share to 81 cents a share. Wall Street was looking for 76 cents a share.
The biggest item in those figures---judging from analyst research reports on Wednesday---revolve around hardware. Oracle touted revenue growth of engineered systems of 139 percent in the third quarter and a "record pipeline" for the fourth quarter. What it didn't mention is that overall hardware revenue fell 11 percent in the third quarter.
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If you scroll beyond the quotes in the earnings release you find that Oracle's hardware revenue in the third quarter checked in at $1.47 billion, down from $1.66 billion a year ago. In the hardware category, support held its own, but product revenue fell 16 percent.
Some of this hardware deceleration is expected. Oracle is going for margins not market share. However, analysts are struggling to find the bottom. JMP Securities analyst Patrick Walravens noted:
Hardware product revenue guidance was disappointing at negative 15% to negative 25% versus our previous estimate of 0% and consensus of negative 4% signaling further declines in this business.
In addition, Oracle was mum on how many engineered systems were sold. "Oracle didn't give an engineered systems unit figure despite Larry Ellison setting a goal of 300 units last quarter and they missed the hardware number," said Walravens.
Oracle president Mark Hurd fielded a bevy of hardware questions, but stuck with the company mantra. Oracle doesn't care about share or revenue, but engineered systems that boost margins and deliver growth in the future. Hurd noted that engineered systems will be on a $1 billion revenue run rate exiting fiscal 2012 and touted Exadata wins at Sony, NTT and Samsung.
Meanwhile, Ellison got a bit testy when talking about SAP HANA, an in-memory analytics system aimed at Oracle. Ellison said HANA is aimed at Oracle's core competency---databases---and forgot about applications.
We have hundreds of Exalytics sales. We can't -- again, Exalytics is the competitor with HANA, the HANA appliance. And then one of the nice things about Exalytics is you plug it in and your existing Hyperion EPM system runs faster, your existing Oracle BI runs faster. With HANA, one of the problems is you plug in HANA and then you start to write programs. It's not compatible with anything. Exalytics is. That's one huge advantage.
But forget the huge advantage. Let's say you write a custom program for Exalytics and a custom program for HANA. I believe we will run dramatically faster. We should. We’ve been working on this in-memory database technology for more than a decade. They just brought this thing out of the lab. How can -- we don't think it's a serious threat to us at all.
On Oracle's earnings conference call much of the comments revolved around hardware. But it's worth mentioning that Ellison was Captain Cloud with his comments. He specifically took aim at Workday and its decision not to rely on outside databases.
In this current quarter, in Q4, after a long period of testing with hundreds of early adopter customers, Oracle's Cloud platform and applications will be generally available to all customers in Q4.The Oracle Cloud includes database and Java platform services as well as Fusion CRM, HCM, and financial Cloud applications, all for a simply monthly rental fee. We named our Cloud the Oracle Secure Cloud because we believe that we've addressed our customers' most serious concern about Cloud computing; namely, security.
The computers that are connected to Oracle's Secure Cloud run on multiple -- run in multiple Oracle data centers and optionally on computers connected to the Oracle Secure Cloud but installed in the customer's data center behind that customer's secure firewalls. This is especially important to large customers who want the simplicity and convenience of Cloud computing, but are unwilling to accept the security risks inherent in multi-tenant public internet Clouds. Salesforce.com does not offer this kind of security in their Cloud. This is a key advantage for us going forward.
But by far, our biggest application competitor is SAP, not Salesforce.com. And SAP does not even offer CRM, HCM, and financial applications in the Cloud to their large customers. And applications sold to big businesses are the bulk of SAP's revenue. So if you're a large customer that wants to run financial applications in the Cloud, SAP does not have a product for you, but we do. Six years ago we made the decision to write Fusion CRM, HCM, and financial applications for the Cloud. It will take years for SAP to catch up.
Now it remains to be seen how Oracle's cloud effort will fare. Partners even sound a bit skeptical, but the fourth quarter will deliver a view of Oracle's master plan.
Later in the call, Ellison indicated that part of his cloud plan was to punch Workday in the mouth. He noted that Workday has made two strategic architecture blunders. First, Workday uses its own database. And the user interface relies on Flash. Ellison noted that Salesforce.com, NetSuite, Taleo and RightNow all use Oracle databases and then ripped Workday.
The only Cloud company I know that decided to forego having a database, thinks that database technology isn't necessary anymore, the only one on the planet that I know of is Workday. So Workday doesn't use a database. They use their own technology. Let me tell you one thing. It's very hard to write reports, ad hoc reports, queries, and certain things on an underlying object database. Again, I don't want to go into all of the details. But the Oracle database has full support for object oriented programming. The Oracle database ceased being a pure relational database many, many years ago. We're an object database. We're an XML database. We support all different kinds of media and all different types of video. We support free text and unstructured data as well as structured data. Objects as well as relations. We support all sorts of different data types.
But the fact that Workday builds its own database is, I think, one of the two fundamental mistakes that they made. The other fundamental mistake is their UI is all Flash. It's all Flash UI. Adobe Flash, which is not supported on the iPad and is not supported on the iPhone, and they have begun the process to rewrite completely their UI. They said they built some special stuff for iPad, iPhone, but eventually they're going to have to move away from Flash to HTML5, I believe. Otherwise they're going to have to maintain two separate UIs, one for iPads and iPhones and the other for Android and personal computers, which makes no sense. That was one mistake. A much worse mistake was the fact that they are alone, of all the modern cloud companies to think they can do without a database.
Add it up and Oracle's cloud strategy appears to revolve around taking app share from SAP while honing in on Workday's long-term architecture. More importantly, the next three months could highlight Oracle's monthly cloud pricing as well as the line-up for IT buyers.