When Oracle got into the hardware business three years ago with its $7.4 billion acquisition of Sun Microsystems, it probably hoped to avoid reports like the one just released by Nomura Securities analyst Rick Sherlund, which paints a bleak picture of the state of its hardware business.
Sherlund confirmed what GigaOM has already reported — that revenue on sales of high-end Oracle Exadata, Exalogic, Exa-whatever boxes (otherwise known as “engineered systems”) is not making up for lost revenue from other lower-end boxes, and that customers are defecting to cheaper X86-based machines. For the first fiscal quarter ending August 31, hardware revenue was off 14 percent compared to the year-ago period.
From the research note:
“The decline of Sun revenues has been expected, but has been worse in the rate of decline. At the same time, the growth in Engineered Systems has slowed, and we think is not well recognized as a contributor to the disappointing hardware business. The unit growth of Engineered Systems is strong, but it appears that the mix has shifted to 1/8th rack systems, so the revenue growth rate, which is not disclosed, may have fallen to 25 percent – 30 percent in the most recent quarter from about 50 percent – 100 percent a year earlier.”
Adding insult to injury, sales of new SPARC-based M Series servers “failed to fuel an upgrade cycle, as customers are moving to the enhanced performance of the lower-priced T Series and T Series customers have moved from Sun to commodity-priced X86-based Linux systems,” according to Sherlund.
Update: Oracle declined to comment on this story.
I’ve reached out to Oracle for comment and will update this story when that is forthcoming.
On the bright side from Oracle’s perspective: the “attach-rate” of software to hardware — meaning the amount of Oracle software that is bundled with hardware purchases — might be a healthy 60 percent, higher even than the 30 percent figure that Oracle co-president Mark Hurd has cited.
And, again, Oracle makes a profit on the hardware it does sell. Gross profit margin grew four percent, to 61.9 percent, in Oracle’s most recent quarter, from 53.7 percent in FY 2011. That is a pretty amazing number for hardware.
But the question remains: Can the revenue Oracle makes selling a smaller number of high-end boxes make up for revenue lost as customers flee to less pricey options?
The answer, thus far, is no.
Note: This story was updated at 3:48 p.m. PST with Oracle comment.