Oracle hammered as hardware sales soften

Software sales flaccid, as well

Software behemoth and systems player Oracle missed its projections for both hardware revenues and new software license sales in its second quarter of fiscal 2012. While Oracle was facing a very tough compare, the miss is something that will make Wall Street and the rest of the IT community jittery for a spell – at least until they can spike their egg nog.

In the quarter ended November 30, Oracle's overall sales were up only 2 per cent to $8.79bn, which was lower than the 5 to 9 per cent revenue growth that Oracle's CFO and co-president Safra Catz had guided for three months ago. Catz said back in late September that Oracle also projected for earnings per share in the range of 44 to 46 cents, and the company only hit 43 cents. Net income rose by a very healthy 17 per cent to $2.19bn, which shows that Oracle, unlike Sun Microsystems that it ate nearly two years ago, is more focused on the bottom line than it is on the top line.

Perhaps most disconcerting to Oracle, considering the very respectable Sparc T4 systems and mix of Exadata and Exalogic clusters it launched earlier this year, is that hardware sales, which includes both standalone servers and storage arrays as well as the "engineered systems" that combine servers, storage, switching, and systems software in a single stack, fell by 14 cent to $953m.

Back in September, Catz said the plan was for hardware sales to be flat to down 5 per cent, so clearly there was a little too much optimism about how the new systems would be received by customers.

In a conference call with Wall Street analysts after the market closed on Tuesday, Catz said that Oracle was seeing good demand building for the new Sparc T4 machines, but that a bunch of customers who might have otherwise bought Sparc T3 machines decided to wait and qualify T4 boxes instead.

The Sparc SuperCluster, an Exa-like cluster machine based on the quad-socket Sparc T4-4 servers, only began shipping at the end of the month, with retailer Macy's buying two and the state of California buying one. Co-president Mark Hurd said that Exadata database cluster systems had record bookings and the pipeline is the biggest Oracle has seen since launching the product.

Exalogic middleware cluster sales doubled sequentially and are growing at twice the rate of Exadata systems at the same point in their product cycles, and Hurd added that ZFS storage array sales doubled year-on-year.

Oracle co-founder and CEO, Larry Ellison, said that the company sold over 200 Exadata and Exalogic systems in the second fiscal quarter – by systems, Oracle appears to mean "racks" – and added that the company will do 300 machines in Q3 and 400 machines in Q4.

"It's easy to remember. We didn't plan it that way, but that's the way it is working out," Ellison quipped in the call.

Ellison said that that the combined Exadata and Exalogic systems would exit Q4 with an annualized revenue run rate of $1bn by Q4 of fiscal 2012 (which ends in June) and would have a $2bn run rate as the company exited fiscal 2013. He conceded to one analyst that rather than tripling the installed base this fiscal year, Oracle might only grow the combined Exadata and Exalogic installed base by a factor of 2.5. Hurd piped up there was still a chance to hit that 3X figure, but that is currently not the plan.

Oracle's hardware products had operating expenses of $471m, thus leaving $482m as an operating profit, or a rate of 50.6 per cent. That's not bad, and is an improvement over the prior quarter – and a hell of a lot better than Sun Microsystems did in the past decade. Hardware support revenues came to $625m, falling 2 per cent, but operating expenses for support fell by 27 per cent to $258m, leaving an operating profit of $340m, or 54.4 per cent of revenues.

Adding it all up, Oracle's hardware and related support businesses drove $1.58bn in sales and an operating profit of $849m. Of course, once you allocate R&D, SG&A, and other overhead costs attributed to the systems business, the actual net income from the Oracle hardware business is much lower. Oracle doesn't report its earnings this way, so we can't know how truly profitable the systems biz is for Ellison & Co.

While people expect Oracle to have some issues with its systems business, especially considering how many new products were announced in the fall, they might not have expected for the software side of the Ellison house to lose so much steam in fiscal Q2.

Catz said three months ago when Oracle reported its Q1 results that the company expected for new software license sales to rise between 6 and 16 per cent in Q2, but shiny new code only accounted for a little more than $2bn in sales, up only 2 per cent compared to the year-ago period. New software sales grew by 17 per cent in the first quarter, to $1.5bn, so sequentially Q3 still represented a 36.8 per cent jump. (The compare was a lot stiffer in Q2 than it was in Q1.) Software license updates and support revenues rose by a more Oracle-like 9 per cent, to just under $4bn.

This time around, on the Q2 call, Catz said that CRM software sales were up "close to 20 per cent" and that ERP "did very well," but that as the quarter was coming to a close, there was a sudden increase in the number and level of approvals needed to close software deals, and this pushed sales that might have otherwise closed in Q2 out into Q3. Catz said that Oracle had put procedures into place to prevent such last-minute surprises in the future. She also said that wild currency fluctuations in the quarter pushed down reported software revenues more than Oracle had anticipated in its prior guidance for Q2 from three months ago.

In the third quarter, Oracle's database and middleware products accounted for $1.48bn in new license sales (up 4 per cent), while support for these products was $2.71bn (up 11 per cent). Oracle pushed out $569m in new application license sales – down 2 per cent from a year ago and no doubt hurt by the announcement of Fusion apps for on premises and on the Oracle cloud back in October. Application support and update operations yielded $1.28bn in revenues, up 6 per cent from Q2 fiscal 2011.

Looking ahead to Q3, Catz provided guidance for Oracle in both constant currency and in US dollars as they will ultimately be reported. (We'll ignore the constant currency numbers for the purposes of this story.) Oracle is facing a much tougher compare in Q3 than it had in Q2, and expects new software license sales to be anywhere from flat to up 10 per cent. Hardware product sales (not including support) will be anywhere from 5 to 15 per cent down compared to a year ago. Total revenues will grow by anywhere from 2 to 5 per cent.

Predictably, given the miss and the might of Oracle in the IT racket – it is not always fun to be a bellwether, is it Larry? – Wall Street will not be happy. Oracle shares were up nearly 2 per cent as the market closed, rising on optimism about the European debt crisis being resolved and housing starts in the US, but in after-market trading in the wake of Oracle's numbers coming out, the company's shares were off nearly 10 per cent.

Wednesday will probably not be a lot of fun for Oracle shareholders, but with Wall Street, it is always hard to say until the second bell tolls. ®

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