Oracle's Q3: Hardware's turn, but don't lose sight of cloud

Oracle's Q3: Hardware's turn, but don't lose sight of cloud

Summary: Analysts are chirping about how Oracle's hardware business may deliver year over year growth in the fiscal third quarter, but organic growth in the cloud unit is far more important.

TOPICS: Hardware, Cloud, Oracle

Oracle's fiscal third quarter is expected to be the one where hardware product growth turns positive after quarters of falling sales since the Sun Microsystems acquisition. Once that milestone is past, however, organic cloud growth will be a key issue.

The database and applications giant is expected to report fiscal third quarter earnings of 70 cents a share on revenue of $9.36 billion, up 4 percent or so from a year ago.

Like the second quarter, there's optimism about Oracle's hardware sales. Hardware systems product revenue was down 3 percent in the second quarter, but some analysts expect that tally to be up about 2 percent to 3 percent from a year ago in the third quarter.

Wedbush analyst Steve Koenig said in a research note:

Oracle’s hardware product revenue may be turning the corner to year over year growth, as Oracle’s Exa revenue growth mitigates the headwinds in the high-end server market.

In other words, Oracle's Exa- line of engineered systems should have enough traction to offset slowing hardware revenue in the industry. These engineered systems could also lead to applications and database growth, said analysts.

Wells Fargo analyst Jason Maynard said:

We think this is the quarter where the hardware business returns to growth, and we estimate a 2.7% yr/yr increase.

Maynard also argued that the launch of Oracle's 12c database will also drive hardware sales, notably Exadata systems.

Now we've seen this movie before. A few quarters ago, analysts were expecting Oracle's hardware business to turn the corner. We're still waiting. That said, Oracle's hardware business---including support---does seem to be stabilizing.

If Oracle's hardware business shows growth you can expect the initial headlines to revolve around the Exa- story.

But the hardware business may just divert attention from Oracle's cloud business.

Koenig added:

Oracle’s cloud revenue appears to be growing only minimally on an organic basis, despite acquisitions of growers such as Taleo, RightNow, and Eloqua. As Oracle subsumes acquired companies under the Oracle Cloud brand – along with its own formerly-titled “Fusion” applications – and rationalizes overlapping products (such as Taleo’s performance management product), we believe the acquisitions have lost some momentum, despite being sold by a larger sales force.

Cowen analyst Peter Goldmacher did a deep dive on Oracle's cloud growth in February. His takeaway was that Oracle's cloud business is sputtering.

In the grand scheme of things, Oracle's cloud business is far more critical than the hardware unit. To gauge health of Oracle's future, it'll make sense to give hardware a nod and then focus on the cloud strategy.

Topics: Hardware, Cloud, Oracle

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  • Hardware is doomed

    There is an inherent contradiction in Oracle's strategy: focusing on the cloud and growing the hardware business. As the overall market goes SaaS, Oracle's customers will not need to buy hardware...or database software, for that matter. Just think about all Oracle's PeopleSoft customers: staying with Oracle they have to pay for the software, the database, buy servers. Moving to the likes of Workday they save on the last two. Oracle is stuck between the rock of its old business (database, on premise, hardware) and the hard place of 21st century computing: SaaS.

    Mind you, the strategy made sense when Oracle launched it by buying up the various parts of the whole value chain except that it was the value chain of OLD computing. New computing is a radically different beast. So far Oracle has not shown how it plans to adapt. As I wrote in one of my most popular blog posts, it is almost impossible for software dinosaurs to morph into cloud vendors.

    Ahmed Limam
    Independent Corporate/HR Technology Consultant/Advisor