Analysis: Oracle's sales miss magnifies fears about cloud missteps

BOSTON Sat Jun 22, 2013 12:11pm EDT

Co-founder and Chief Executive of Oracle Corporation, Larry Ellison introduces the company's latest SPARC servers at Oracle Conference Center in Redwood Shores, California March 26, 2013. REUTERS/Stephen Lam

Co-founder and Chief Executive of Oracle Corporation, Larry Ellison introduces the company's latest SPARC servers at Oracle Conference Center in Redwood Shores, California March 26, 2013.

Credit: Reuters/Stephen Lam

BOSTON (Reuters) - "What the hell is cloud computing?" Oracle Corp ORCL.O Chief Executive Larry Ellison said during a diatribe against the whole concept at an investor Q&A in 2008.

Asked to describe his strategy for expanding into a then-small but rapidly expanding sphere, the software giant's head said he had no idea what people were talking about when they referred to cloud computing, describing it as "nonsensical" and those writing about it as "insane".

Five years after Ellison's rant went viral on YouTube, the billionaire is struggling to fit his ageing IT giant into a newly cloud-centric world - a hard scramble spotlighted by what analysts said was Oracle's first fourth-quarter miss on new software sales in a decade.

Its rivals have grown, winning business from corporate and government customers seeking cloud-based software that is cheaper and faster-to-deploy than traditional offerings housed in massive inhouse datacenters.

Oracle is now striving to catch up with its own line of cloud software, built up partly through acquisitions. Ellison has forged alliances with long-time bitter rivals Microsoft Corp (MSFT.O) and Salesforce.com Inc (CRM.N) to drum up new business. On Thursday, Ellison said he will announce those partnerships next week, but provided few details.

Oracle stuck for years to building high-end multi-million dollar "engineered systems" that bundle hardware and software in one package. It started selling them with Hewlett-Packard Co (HPQ.N) in 2008 and then partnered with ailing computer maker Sun Microsystems, which it agreed to buy in 2009.

Oracle says the engineered systems strategy has been a big success, helping woo business from rivals IBM (IBM.N)and SAP

"They spent the last four years focusing on engineered systems when the bigger industry trend was the cloud," JMP Securities analyst Pat Walravens said. "They now have a structural problem."

Oracle's shares plummeted 9.3 percent on Friday, their biggest one-day drop since releasing another weak set of results in March.

Investors took the disappointing results hard because it was the first time in more than a decade that Oracle missed software sales estimates in its traditionally strongest fiscal fourth-quarter, according to analysts. That's when sales representatives hustle to close deals to qualify for year-end bonuses.

And it was the third miss in the past seven quarters for Oracle, Walravens said.

Cloud companies such as Salesforce price their products below the levels at which Oracle can make a decent return, analysts say. Some rivals even sell their products at a loss. Salesforce, for example, posted a net loss of $270 million last year.

Less quantifiably, industry executives have said that emergent business software providers such as Workday (WDAY.N) started from scratch by focusing on ease of use and simpler interfaces, while old-school IT giants like Oracle have been hampered by legacy systems and software products that they were slow to re-tool.

"This is causing a real disruption in Oracle's business," said Tim Ghriskey, chief investment officer with Solaris Group, which manages about $1.5 billion. "It is going to pressure their business for a while."

SAILING ALONG?

Ellison, a renowned sailing enthusiast who is now devoting time and energy to his company's entry in this summer's Americas Cup, built Oracle from a scrappy operation building a database for the Central Intelligence Agency into one of Silicon Valley's foremost corporate icons.

In past months, he has championed Oracle's resurgent foray into cloud software, at his annual Oracle OpenWorld conference for clients and developers, even while continuing to buy up assets in Hawaii, such as commuter airline Island Air. He bought almost all of the island of Lanai last year.

He and Oracle executives dispute the view that the company is failing in the cloud. They blamed their quarterly miss on the economy, particularly in Asia and Latin America, during a conference call on Thursday.

In the previous quarter, executives blamed disappointing software revenue on poor execution by its salesforce.

"Our success in the cloud is significant and undeniable," Oracle President Mark Hurd said on a Thursday conference call with analysts. He said Oracle had added 500 new customers during the quarter including eBay Inc (EBAY.O), Intuit Inc (INTU.O) and Yahoo Inc (YHOO.O).

Fred Hickey, editor of The High-Tech Strategist, a newsletter widely read by investors, said he does believe a bad economy was behind Oracle's rough quarter, pointing to problems in Brazil, China, India and Mexico and similar comments from other old-guard tech giants including EMC Corp (EMC.N), IBM (IBM.N) and Hewlett-Packard Co (HPQ.N).

Even up-and-coming cloud software provider Workday had mentioned "economic pressures" in its earnings conference call.

Other analysts said Oracle's installed user base - forged over decades in the business on a reputation of reliability - will be hard to displace in the short term.

"Does Oracle have pressure from the cloud over time? Yes," said Hickey. "Is it imminent? No. They are too big and entrenched."

Cowen & Co analyst Peter Goldmacher, who describes 68-year-old Ellison as "the most brilliant enterprise software person ever," also said that Oracle's problems are structural. He believes there is little Ellison could have done to avoid the slowdown the company is now seeing.

Ellison has grown profits at a healthy clip over the past decade by acquiring other makers of software that customers run in their own data centers, selling customers software up front and then cajoling them into buying long-term maintenance contracts that are highly profitable for Oracle.

That business model does not work with cloud computing because companies like WorkDay and Salesforce do not charge extra for maintenance. The cost of the software and support is combined into a single subscription fee, which generates far lower margins than the products Oracle has traditionally sold.

"The inevitable is the inevitable," Goldmacher said. "You can get as many tummy tucks and face lifts as you as want, but it doesn't make your heart and liver and kidneys any younger."

(Reporting by Jim Finkle; Editing by Edwin Chan, Patricia Kranz, Martin Howell and Tim Dobbyn)

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
Comments (6)
Ideapete wrote:
Watch for bigger revenue drops as the world discovers that it really doesn’t need databases and sadly Larry has to get a smaller boat !

Jun 22, 2013 11:33am EDT  --  Report as abuse
Ananke wrote:
Meh :). “Cloud” computing is merely a lease of remote data centers through subscription of online services. It represents the lack of money and disposable income by everybody, including small and medium size businesses. In that regard, Larry is correct, it is a structural problem of the economy environment. People just pay much less for simplified online application, running on cheaper and simpler hardware owned by somebody else. All of this without any expensive hardware or software long term commitment. Result: the app industry growths 10 billion, the old industry decreases 20 billion – it simply represents overall market contraction, invisible yet , because FED is pumping in money to cover it.

Jun 22, 2013 12:21pm EDT  --  Report as abuse
rossryan wrote:
Lol, not so much. The author thinks that the reason Oracle is being punished is because it didn’t embrace the cloud hard enough; the truth is probably the opposite, as Adobe found out recently (http://www.channelregister.co.uk/2013/06/19/adobe_q2_customers_disappointed_with_no_boxed_wares/). Face it, the ‘cloud-centric’ universe exists only in the minds of a handful of marketing and business execs; for anyone who cares about ROI, or skipping an occasional upgrade, the cloud looks like a giant money pit. And it is, which is why they’re running into issues.

There’s also the other fun stuff affecting Oracle: the Fed stopped printing money (a good thing, but it looks like a bad thing), and, let’s see here, the NSA scandal. But what does the NSA scandal have to do with Oracle, you say? Well, Oracle is known as being pretty much the #1 or #2 for the biggest commercial database that money can buy; MySQL / MS SQL / PostgrSQL do not SQL anywhere near as well as Oracle does. So chances are, some people have figured that Oracle has some large contracts with the NSA, the NSA is super not popular right now, Oracle is going to take a hit. Now, the NSA may have rolled its own database, and probably does for several of its systems, but the fact remains that Oracle is known to have government contracts worth $$$ millions with everyone, and the NSA probably doesn’t use the uber-base for everything in its organization. So, for many large projects, it’s going to use Oracle. Now, it could be a conscientious stockholder / group of stockholders who are voicing their opinion / right to tell Oracle that they do not approve of its actions; the so-called activist stockholders; or it could be a high-powered AI, that has been analyzing trends and newsfeeds, looked at the negative reactions about the NSA, looked up everyone the NSA was doing business with, and ordered the stock under its control to sell, while purchasing shorts on the same.

Jun 22, 2013 2:24pm EDT  --  Report as abuse
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.