Channel Marker

Jun 24 2011   5:09PM GMT

Hardware continues to flummox Oracle

badarrow Barbara Darrow Profile: badarrow

Oh, Oracle, Oracle, Oracle. You’re nothing if not predictable.

On yesterday’s Oracle fourth quarter  earnings call, there was the usual happy talk about fat margins and great execution. The by-now-expected great software license sales numbers, we all know the drill. 

But the hardware business has not been kind to Oracle and Wall Street is finally taking notice.  

Oracle stock was down nearly 3.57% Friday to $31.30 per share as I type these words. Pundits attribute that to growing anxiety around Oracle’s ability to execute its high-margin hardware push even as it guts Sun’s bread-and-butter commodity hardware lineup. And there is growing irritation among Oracle/Sun shops over the vendor’s support and maintenance policies.

For the quarter, in which Oracle’s direct team put its patented year-end  discount push on Exadata systems, actual sales of hardware systems fell 6% to $1.2 billion.  Oracle co-president Safra Catz said she expects hardware growth to come in between -5% to +5% next year–not including support revenue. Note to Oracle: That is not exactly hitting the cover off the ball.

But back to support. That support and maintenance money is really what this game is all about. If Oracle can persuade companies to move their database workloads to Exadata and their middleware/Java/applications load to Exalogic, it can lock in all of those software AND hardware support loads into very, very lucrative long-term support contracts. And that, is where the real money is.

On the call, the Other Oracle Co-president (OOC for short) Mark Hurd referred to the importance of “attach rates” of software, support and service to Oracle hardware. (For more on the earnings call check out Eye On Oracle.)

The problem for Oracle is customers listened to their savvy VAR advisors or otherwise figured out that these attach-rates equate to vendor lock-in and all the unpleasantness that entails.  

Catz stressed that hardware margins–at least on the stuff Oracle does sell–are a remarkable 56%. The reason? Oracle no longer sells much hardware at a loss or much third-party hardware. Instead,  it “is focused on value-added systems,” aka the Exadata and Exalogic data center appliances, she reminded analysts.

But even figuring in those caveats, the overall hardware numbers were not good. When Oracle closed its acquisition of Sun Microsystems in January 2010, channel sources warned  that digesting a hardware company would be a lot harder than integrating software companies. They have been proven right.

If you listen very hard, you may hear Sun hardware resellers laughing–or they would be if it wasn’t so painful to watch their hardware sale and services business disappear.

Oracle disenfranchised die-hard Sun channel players as it incorporated Sun by taking all support and maintenance revenue direct. Many Sun-only hardware VARs went out of business altogether or reconstituted themselves with new vendor alliances. Some retained their Sun/Oracle ties but quietly shifted more business to Hewlett-Packard, IBM or even (gasp!) Dell hardware.

Many Sun/Oracle shops remain supremely unhappy about what they call Oracle’s scorched-earth support policies. Several started moving hardware sales to rivals last year. Some may kick the tires of Exadata and Exalogic, but I’d bet very few are inclined to commit more of their data center dollars to a company they view as draconian. CEOs and CIOs at those companies must love it when Oracle execs refer to software/hardware maintenance and support as “Oracle’s birthright.”

And they may well disagree that that is the case.

Let us know what you think about the story; email Barbara Darrow, Senior News Director at bdarrow@techtarget.com.

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