I was finally able to listen to the Oracle Q2 call, and the picture looks pretty bad for Oracle, while looking much better for the rest of the enterprise software market, which is completely undeserving of the collateral damage that Wall Street visited on their share prices following the Oracle debacle.
The key takeaways were pretty damning. Applications license revenue fell, while technology revenue grew relatively anemically. Importantly, license revenues from vertical industry sales were clearly suffering, and the company clearly missed its own targets for selling Exadata and Exalogic by significant margin.
Most importantly, the damage from the Sun acquisition continued to be felt in the company’s overall margin performance: Safra Catz again made a vague promise about an eventual return to pre-Sun margins, but it was clear that a lot would have to improve over last quarter, as well as every quarter since the Sun acquisition, before those margins come back to lead the industry again. If they ever do.
Also important was the almost off-hand comment from Catz – “the quarter was not dependent on any large deals” – that indicated there was no single large wound that resulted in the bad quarter as much as a thousand small cuts. Triaging the big wounds is easy, staunching the losses from many smaller ones is much much harder.
Other details of interest. CRM grew close to 20 percent, ERP “did very well”. But verticals “need better management.” Considering the two largest volume components of the Oracle enterprise portfolio – CRM and ERP, which I assume mostly consists of EBS – did well or very well, the laggards – verticals – must have done really poorly if the overall apps license revenue was negative. Sucked wind may be a polite way to look at it.
I attribute this in part to the complexity of deploying these products – all of which were acquired and all of which require serious hardwiring in order actually integrate them to the rest of the suite. This is the essential fallacy of the company’s “engineered for investors” strategy: buying all these pieces makes it hard on customers who actually have to pay the price of integrating them to their ERP systems of record – regardless of whether that ERP system is from Oracle or some other vendor. The increased approval times Catz cited as a reason for why many deals didn’t close in the quarter may have really been a sign of better due diligence on the part of prospective customers as to the real total cost of ownership of deploying Oracle’s un-integrated vertical applications.
Other noteworthy issues can be found in what wasn’t said. Not a word about Fusion Applications, which means that they were neither material to Q2 nor a strategically important component of how the company plans to dig itself out of this revenue hole. In fact, Larry didn’t mention any applications products as being part of the hoped-for recovery in the next quarter – every forward looking statement he made was about hardware, particularly Exadata and Exalogics.
This is Larry being consistent with his hardware obsession, but it really begs the issue of what will happen to what was once a market-leading enterprise software company that has now been diverted by its CEO’s hardware obsession.
It was perhaps telling that the miss for the quarter was most evident in applications but the company’s focus in the earnings call was mostly on how it would grow its way out of the problem with hardware sales. I can see no way for Oracle to fix its applications business by selling more hardware, and the more the company focuses on hardware the more it seems that applications are becoming an afterthought. This, in my mind, is what happened in Q2, and will continue to happen until Oracle figures out what business it really wants to be in. Clearly, based on the last few quarters, the hardware business isn’t working out quite as well as the company had hoped.