Oracle: Worries about engineered systems, databases mount

Questions emerge about Oracle's engineered systems strategy and threats to the company's core database business as well as maintenance revenue.
Written by Larry Dignan, Contributor

An analyst downgraded shares of Oracle based on growth worries and concern that the company's engineered systems strategy was struggling.

Jefferies analyst Ross MacMillan said in a research note that there were three persistent worries about Oracle:

  • Challenges with engineered systems;
  • Threats to Oracle's core relational database business;
  • And checks that indicate Oracle's sales aren't lighting up the charts.

Jefferies downgraded Oracle to hold from a buy. Oracle is expected to report earnings of 56 cents a share on revenue of $9.02 billion for its third quarter. Oracle reports its financial results March 20.

MacMillan's concerns play into a broader worry: Oracle's maintenance revenue stream is under attack from SaaS vendors as well as third party support providers such as Rimini Street. MacMillan is the latest analyst to question Oracle's hardware strategy. Oracle's last two quarters highlighted a bevy of questions from analysts about hardware margins and ultimate sales. MacMillan poked around and found that enthusiasm for Oracle's systems are lacking. He said:

Concerns that the engineered systems strategy (integrated hardware and software appliances) is facing challenges. Our checks suggest momentum for Exadata has slowed, enthusiasm for the Oracle Database Appliance (ODA) has waned and products like Exalogic are still looking for a broad use case.

Patience for Oracle's hardware business has been in ample supply ever since the Sun acquisition, but the unit is getting more focus since there are concerns about the software giant's database and applications business going forward.

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On the database front, MacMillan noted SAP HANA and SaaS vendors such as Salesforce.com and Workday as threats. Toss in big data---an Oracle threat that has been noted before---and it's unclear whether Larry Ellison and the gang can deliver strong growth. MacMillan said:

Our concern is that Oracle’s business lacks catalysts to accelerate growth given the engineered system strategy appears to be losing momentum and that the large software updates and support revenue stream that fuels earnings growth appears to have more headwinds.

MacMillan's take isn't the consensus view. William Blair analyst Laura Lederman said she expects Oracle's fiscal third quarter, ended Feb. 29, to be strong. She argued that tech spending has improved and the execution issues with the second quarter won't repeat.

In addition, Morgan Stanley analyst Adam Holt expects strong third quarter. Holt said:

Expecting progress in Q3 on key transitions: We believe FQ2 will mark a trough and see growth upticking in FQ3 ahead of a more meaningful re-acceleration in the back half of CY12. We see this driven by: 1) new sales capacity coming online as Oracle manages thru the addition of 3,000 sales people (1,700 incremental), 2) Fusion Apps becoming a more material driver, 3) New Exa products reaching critical mass to offset the a shrinking commodity hardware biz, 4) easier compares and 5) contribution from recent and pending acquisitions.

Bottom line: Oracle's prospects are becoming a battleground.


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