Oracle announced its Q2 earnings as most of us were winding down for the festive season and broadly speaking it outperformed expectation, particularly in new software sales and cloud subscriptions which grew 18% in constant currency.
Last quarter Oracle started bundling traditional software and cloud in its reporting claiming its own internal systems could not record the split, so it is therefore difficult to compare absolute like for like growth year on year.
In the current economic climate this is a pretty good performance and is worthy of praise. What is less appealing to shareholders is the performance of the hardware systems division where revenues shrank by a cringing 24% worldwide and no less than 38% in EMEA.
Ellison headed off the usual cynicism about hardware performance by talking up the Engineered Systems performance such as Exadata and claiming that “Sun has proven to be one of the most strategic and profitable acquisitions we have ever made.” He has been saying this since April 2009 when he announced the $5.6bn acquisition of Sun Microsystems.
We thought it was a good time to review that strategy and whether it has worked out.
So firstly, why did Oracle acquire Sun in the first instance?
We don’t really know and even Ellison himself has probably rewritten the actual logic to fit subsequent trending, but here is our view on the real drivers of that moment: -
- An IBM killer. It’s worth remembering that it was IBM who made the first move on Sun. At that time, Oracle market capitalisation was narrowing in on IBM fairly rapidly. As Ellison regularly refers to IBM founder Watson as being ahead of his time, it is quite possible that Ellison believed that losing Sun to IBM would put IBM beyond his reach, and gaining it would give him the possibility of becoming the founder of the most valuable enterprise IT player of all time. This is speculation, but what we do know is that Java was the foundation of Oracle middleware and applications product set, and IBM controlling Java was seen to be an unacceptable strategic position.
- Engineered Systems. One of the stated rationales at the time was that Oracle believed that appliances (integrated hardware and software) could become important. It had started the Exadata journey with HP as a strategic partner; the Sun move then saw HP get turfed off Exadata to be replaced by Sun tin, and HP become a target for Ellison derision and legal tussles.
- Cloud? It’s fair to say that in 2009 Ellison was still deriding the potential for Cloud to impact the Oracle business model. In reality I guess Ellison did see Clouds on the horizon and certainly the Sun buy has benefited Oracle as the Cloud market takes shape, although I suspect it was far from the core driver.
- World Domination. At the time of the Sun announcement Oracle market Capitalisation was $98bn and IBM was $130bn - this was pretty much the closest Oracle has ever been to the valuation of IBM. Since the acquisition Oracle has climbed to its current position of $165bn which is a nice gain, but IBM is at $223b putting Ellison further away from global domination. He does however have control of his destiny through the ‘owning’ of Java, even if Oracle is yet to truly monetise this asset. It might not have turned out to be the pivotal moment Larry was dreaming of but we could call it a partial success.
- Engineered Systems. Oracle always wanted to focus on the high end, higher margin, less commoditised, more proprietary end of the server market. This has happened but it’s rather unlikely that Ellison anticipated the constant quarter on quarter decline in overall server sales. Certainly the analysts don’t like this and it must be galling for Ellison to see some of IBM gains coming from the loss of market share in the global server market. Oracle are still claiming that they are actively exiting loss making operations to focus on high end sales but few really see the end of this issue and it appears to suppress share price.
However, Appliance Servers are becoming a realistic market segment with most vendors including IBM and Microsoft releasing variants and Oracle is right in the game. The proprietary nature of appliances is the attraction and the resistance. If Oracle can win over client concerns over vendor lock-in, Oracle will gain in stickiness at the very time it needs it
..as Cloud emerges. Oracle is getting the benefit of earnings contribution and the strategic value, although not proven yet could still give Larry something to be smug about.
- Cloud. Since the Sun acquisition, Oracle has ramped up its Cloud-rush acquisition activity in a more focused way than the Sun deal which has only incidentally benefited Oracle in the cloud. However in this early stage land-grab, anything that helps Oracle catch up to the early cloud evangelists will help it to be a winner. Sun is potentially useful in Cloud dominance so we put this overall as another neutral, although given his anti-cloud stance in 2009 he may actually be feeling quietly pleased that Sun has helped his Cloud U-turn.
The true deal upside is still latent. If Oracle can stop the decline in server sales and show profitable growth with the next 12 months maybe we will listen to Larry when he talks about the success of the Sun deal and we’ll agree with him.
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