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Summary:

Nomura Securities analyst Rick Sherlund sees sales of high-end Engineered Systems, the linchpin of Oracle’s hardware strategy, slowing down.

Oracle Exalogic Exadata

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.

Oracle hardware revenue breakdown.

Note: This story was updated at 3:48 p.m. PST with Oracle comment.

  1. This is what passes for news? Seriously? All you had to do was ask departed employees. Oracle’s brilliant management of the BU that I used to be part of “grew” that business from $1.2B to $70M in 2.5 years. It takes a lot of Exa to offset that kind of performance.

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    1. well it does to me since oracle keeps claiming big hardware gains. Just trying to keep ‘em honest. thanks for your note.

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  2. Agreed. Thanks for the note. I kept hearing Ellison and S Catz and Hurd talking on their earnings calls about how great the Engineered Systems pipeline and business was over the last 12-18+ months. But I could not see the market really buying into their scheme. I think more people are believing Intel’s and Red Hat’s and high-volume suppliers view of “Engineered Systems”, as in Engineering them to be cheaper, more powerful, and plug into many places in the computing landscape. Being “engineered” to drive Oracle software sales in a captive manner seems like dragging people back in caves.
    Good to see someone calling out reality here. I think the end users are not buying this charade, and it is a major boat anchor for Oracle to drag forward…

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  3. I don’t believe you fully understand Oracle’s Hardware business as this article has lots of flaws, misguidance and misleading statements. Even Rick Sherlund, who you quote, is a software analyst who, from his statements, doesn’t seem to have much experience in the hardware business-especially the history of Sun/Oracle HW.

    “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”

    First, Oracle sells both best of breed x86 and SPARC servers as well as Engineered Systems so the comment that customers are defecting to cheaper X86-based machines just doesn’t make sense as Oracle sells these “cheaper” x86 systems, Oracle also sells & supports RedHat Linux and an improved version called Oracle Linux.

    There is no evidence provided that competitors are taking share away from Oracle -and if you look at all the Tier 1 x86 vendors including HP, IBM and even Dell, they are all declaring quarterly revenue losses in the double-digits-Not Oracle.

    If you have access to IDC or Gartner data, who track server shipments, you’ll see that theres actually been growth the last few quarters in Oracle servers, Engineered Systems and especially SPARC and that Oracle has been gaining marketshare from HP and IBM who have both been seeing double-digit declines in their Itanium and Power businesses for last 4+ quarters.

    Oracle remains #4 in *server* revenues worldwide and grew ~33% on a sequential quarterly basis in last quarter and Oracle holds the number one server vendor spot in the $25K-100K price band and is showing impressive growth in the higher end 100K to 500K price band due to its continued focus on Engineered systems. In the last quarterly announcement, Oracle stated it shipped almost 2,000 Engineered systems in last two quarters. 800 in Q1FY14.

    And if you claim that “customers are defecting to cheaper X86-based machines” why then would IBM try to sell off its x86 server division?http://online.wsj.com/article/SB10001424127887323809304578431160192440582.html
    According to IDC, Oracle is also #1 in “Integrated systems” which for Oracle, is its Engineered Systems: http://www.idc.com/getdoc.jsp?containerId=prUS24367013

    Oracle is a technology company selling Software and Hardware engineered to work together. Oracles goal, as any company, is to make money, be profitable and drive great returns to its investors. Revenue and unit growth without margin in worthless as can be seen by the “commoditization” of x86 and especially its key vendors. Probably why IBM wants to get out, Dell went private and Intel changing direction.HP, we shall see. http://allthingsd.com/20131009/liveblogging-hps-2013-securities-analyst-meeting/

    Since the Sun acquisition in 2010, Oracle has continued to grow revenue quarter over quarter and provide great returns to investors. You can see for yourself here:

    http://www.oracle.com/us/corporate/investor-relations/financials/index.html

    Regarding the statement : “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”

    Oracles new M-Series, the SPARC M5-32, was just announced 6 months ago *with* the new SPARC T5 systems, and SPARC M6-32 announced this month so clearly they are just in the wake of the sales cycle. And note, Oracle has released several success stories showing that Oracle is seeing significant x86 consolidation towards SPARC today, with better TCO than commodity-priced X86-based Linux systems. http://www.oracle-downloads.com/sparc_difference.pdf

    And If you look at whats important to a successful business, margin, Oracles is doing great at ~50% margin. Margin translates mainly to R&D which translates to innovations and product advancement. If you look at Oracles R&D budget versus revenue, its 2x greater than IBM’s and almost 3x great than HP, its nearest competitors.

    I think this article best articulates Oracles new business and how its hardware is driving more revenue for the company.

    http://www.fool.com/investing/general/2013/10/08/oracles-delphic-announcement.aspx

    Disclosure: Although I work for Oracle, these comments are all my own and may not represent Oracles.

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  4. Hey-Now here is some news to chew on!! IBM’s 3Q14 results are in. Looks much much worse than Oracle. Maybe another article discussing whats newsworthy?

    IBM’s hardware biz lost more than $713m in first 9 months of this year, compared to $253M profit in same period last year. On a year-to-date basis, IBM had a $1 billion decline in profitability from its hardware business. Ouch!

    6 Quarters of negative revenue declines, 6 Quarters of Power Systems negative declines
    where the past 4 quarters of Power Systems are showing double-digit declines.

    And they blame it on China ? The central bank claims China 2013 GDP growth to exceed 7.5%. Wheres the problem? http://on.mktw.net/1fDA86h

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