On Oracle's fiscal first quarter conference call, executives mentioned the word "cloud" 34 times. The focus on cloud computing makes sense, but you have to wonder if Oracle's detour into hardware and engineered systems kept the company from moving sooner.
Mark Hurd, president of Oracle, talked up the company's engineered systems and the Exa- line of engineered systems, but the tone has changed a bit. The story for Oracle is the same: Low margin systems are being tossed and the company is focused on high-end hardware.
"We will see growth in Q4 of the overall business in hardware. We are very focused right now because we've got hot products, as we described, with the T4. We're aggressively taking it to market. For us, it's in our best interest, and in the hardware business, if you just think about the products that we have released over the course of the past 18 months. Exadata, Exalogic, Exalytics, T4, ZFS, where we release new products, we drive growth, we gain share. I think you should expect that trend to continue," said Hurd.
But the numbers still stink for hardware. Overall, Oracle's quarter was mixed. Non-GAAP first quarter earnings were 59 cents a share in line with expectations, but revenue of $8.18 billion missed estimates due to weaker than expected hardware and software maintenance sales. Oracle said it expected second quarter revenue growth to be flat to up 4 percent with non-GAAP earnings per share of 59 to 63 cents.
How bad is Oracle's hardware picture? JMP Securities analyst Patrick Walravens framed the issue well in a research note. He said:
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 the first fiscal quarter, 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.
Wall Street was expecting Oracle to deliver first quarter hardware revenue of $899 billion and got $779 million. In other words, the rate of decline in Oracle's hardware business is accelerating.
The big picture to Walravens is that Oracle's love affair with hardware diverted the company's focus from cloud computing. "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," said Walravens.
With that backdrop it's likely that you'll see a shift in Oracle's focus to the cloud and from hardware, which has dominated the last few Open World conferences.
In fact, that shift is already happening. Oracle is talking cloud much more than it's talking hardware. The catch is that the transition to the cloud will hit software revenue. Oracle has stopped breaking out applications and database and middleware software revenue largely due to cloud revenue.
Oracle CEO Larry Ellison said:
A week from Sunday, at Oracle OpenWorld, we will announce the addition of infrastructure as a service to the Oracle cloud. With that addition, Oracle will be providing its customers with all three tiers of cloud computing -- software as a service, platform as a service, and infrastructure as a service.
Our SaaS offering includes complete application suites for CRM, HCM, and ERP. Today, Oracle delivers more SaaS applications than any other cloud service provider in the world. Our PaaS offering, or platform as a service, includes the most popular database in the world, Oracle, and the most popular programming language in the world, Java. Those two industry standard platform services, combined with our new social network service platform, gives our customers the tools they need to rapidly develop modern applications that run in the cloud.
It's unclear how an infrastructure as a service offering will mesh with hardware sales. The two businesses may not be zero sum, but if Oracle customers move to the cloud they aren't going to want those Exa- boxes.