Arik Hesseldahl

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Oracle’s Roaring, But Not Yet on Hardware

Software giant Oracle just reported fourth quarter earnings that beat the consensus of Wall Street analysts despite a 6 percent decrease in hardware sales.

The weakness in hardware sent shares down by more than 4 percent in after-hours trading. Oracle said that in the wake of its acquisition of Sun Microsystems a year ago, the company is focusing more on selling a lower volume of hardware at a higher profit margin. That process of transition is still underway as you can read in my liveblog coverage from the earnings conference call below.

2:12 pm: And the call is underway. President Safra Catz is making some opening remarks.

There’s the first reference to hardware. “We’re running the Sun business in a more profit-aware manner than before.” Hardware gross margins were 56 percent. Later this year I expect the growth in the Sun products to be “quite obvious.”

“We could be back at pre-Sun operating margins quite quickly as there remains a lot of leverage in our operating model.”

Catz: “We now have $29 billion in cash and marketable securities.”

Guidance: As you remember, we had a spectacular Q1 last year. Assuming exchange remains at current levels: New software is expected to show 10 to 20 percent growth, hardware is plus or minus 5 percent.

Total revenue expected to grown 9 to 12 percent non-GAAP.

EPS 45 to 48 non-GAAP.

2:17 pm: And here’s Larry. “We’re already nearly twice as big as IBM, and taking share away from them in databases.”

We did a number of cloud computing deals. We did a deal with this year. We did a deal with the biggest and best names in mobile devices and cloud computing. (Could he be referring to Apple?)

The expansion of our Exadata business plus our Exalogic business, should turbocharge our hardware business.

And here’s Mark Hurd. We sold a lot of software. Software growth was broad based. It was the first time we’ve ever sold more than $1 billion in apps.

Our sequential growth in Exadata was more than 50 percent. Proctor & Gamble, J.P. Morgan Chase and Apple (yes, Ellison was talking about Apple earlier) have helped us cross the 1,000-system threshold. (Paraphrasing Hurd there.)

2:21 pm: Time for Q&A from the analysts.

First question from Morgan Stanley: The hardware business: How material was the headwind relative to the shift in the model? What gives you confidence that you can get it growing again? And a question about attach rates.

Hurd answers: He is explaining attach rates. We’ve moved to a model where we have the service lined up to the sales activity. Selling units that have no gross margin is easy to do. We are focused on selling hardware systems at a higher price, that are of a higher value to the customer and that stay installed longer.

Question from Merrill Lynch: A question about guidance. How you might have incorporated a questionable macroeconomic forecast. And a second question about attach rates.

Larry jumps in: The attach rate to Exalogic and Exadata is 100 percent. They are becoming a bigger part of our overall hardware business. That improves our profitability. Exadata is growing faster than our traditional Sun line. We sell more and more engineered systems and fewer undifferentiated systems. This allows us to increase our sales of Middleware because it runs better on Exalogic.

Ellison: We sell more database and middleware because of Exadata and Exalogic.

Catz on the economy: We’ve got guys around the world who roll in a forecast for us. But its very much the same. The truth is the economy is as it is, and we continue to grow. This was an organic growth quarter for us. We’ve got a lot of very Oracle-specific momentum going.

Hurd: We added 800 people to the sales organization this quarter. If that gives you an idea of our confidence of where the market is.

Question from Credit Suisse: Question about the sales force change that the analyst focused on in his pre-earnings note last month.

Hurd on the sales force: We put more territories in the field by getting more density of coverage. We believe we are under-distributed. When we get in front of more customers we sell more software.

Hurd: One salesperson had 20 customers. We think that person can sell just as much software calling on five customers.

Ellison: We’re going to add a couple of appliances. One is a large memory addition to Exadata for Big Data. As memory becomes cheaper and larger scale. We’ll be announcing in the fall at Oracle Openworld.

He’s now answering a question about Hadoop boxes. He says they don’t replace databases. The Big Data accelerator includes some of the open source components like Hadoop and some other Oracle pieces that can speed up the MapReduce process that Hadoop does. Oracle has always followed database technology trends…and kept up and quite often led on innovation.

Ellison: IBM still hasn’t come out with an appliance that runs their DB2 database very fast. Instead they ran out and did an acquisition. (Seems IBM is the going to be the victim of his verbal jabs this call, not Hewlett-Packard.)

Question from J.P. Morgan: Hardware margins were strong. The higher margin business was better than the low margin. But this is the second quarter in a row that hardware has decrased. Is it because the commodity business is shrinking faster?

Hurd: Its just the fundamentals of building a business. We are putting more coverage out in the market. Making sure we attach all the peripherals. We want to grow the top line, but we want to grow it right. Getting these high margin sales is key. You’re going to see material growth in Exadata and Exalogic. We’ll be focused on some competitors that have some key vulnerabilities.

Catz: We used to resell Hitachi, but the other big storage we sold was LSI, which during the quarter was sold to NetApp. Our selling of those storage products overall is down, but selling our own storage products is up.

Hurd: You see the same thing in the server business. The higher margin products have higher growth rates, and the x86 line is slower.

Catz: We see deals come in that aren’t profitable and so we walk away from them. We want to make money. We’re funny that way.

Question from UBS: About the forecast for new license revenue.

Catz: We always have some spillover. We look at what the guys are forecasting. The Exadata and Exlogic systems really help because you have to buy software. On the app side, we’ve been on a roll. I add my own little bit of conservatism. The summer means chasing the contracts while people are on vacation.

Question for Elllison: You thought there would be 50 to 100 customers for Oracle Fusion.

Ellison: We have a number of Fusion customers that are live, and it’s being rolled out completely. We’re the only application vendor that offers the same technology on our cloud, or you can put it on your private cloud. And if you want we’ll run it for you.

Ellison: We think we’ve been competing very well with SAP, very effectively. They have no answers regarding the cloud at all. They have nothing. (Okay, now SAP gets a little bit of Larry’s abuse.)

Question from Lazard Capital: A question about Exalogic. What’s driving the growth and are there any significant customer wins?

Hurd: With Exalogic you go to Java applications and want to speed them up versus when you’re running them on x86. It’s an extremely attractive value proposition.

Question from Wells Fargo: You have a lot of cash on the balance sheet. How are you thinking about acquisitions? Valuations aren’t exactly low. (Oracle has $29 billion.)

Ellison: We had 19 percent growth without acquisitions. We can grow through acquisitions when they are attractive and make sense. Right now they aren’t and so we aren’t doing them. Right now we’re focusing on organic growth, which means increasing the sales force and introducing new products. We think we have a lot to sell. We can grow by acquistions when the opportunity presents itself and when the economics make sense. Right now they don’t make sense.

Catz: Every once in awhile we find a jewel. Price does matter to us. We just want to make sure it’s a good business case when we do it. Prices have recently been quite ridiculous.

And now a follow-up question on Catz’s earlier comment on returning to pre-Sun operating margins.

Catz: We ingested a money-losing hardware company and we still have the highest operating margins in the software industry. There is no reason why this year couldn’t be really spectacular.

With the software business and the enormous installed base who renew with us every year, there’s still a lot of room left in our model.

And that’s a wrap!

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I think the NSA has a job to do and we need the NSA. But as (physicist) Robert Oppenheimer said, “When you see something that is technically sweet, you go ahead and do it and argue about what to do about it only after you’ve had your technical success. That is the way it was with the atomic bomb.”

— Phil Zimmerman, PGP inventor and Silent Circle co-founder, in an interview with Om Malik