(Repeats Saturday story to additional subscribers)
By Jim Finkle
BOSTON, June 22 "What the hell is cloud
computing?" Oracle Corp ORCL.O Chief Executive Larry Ellison
said during a diatribe against the whole concept at an investor
Q&A in 2008.
Asked to describe his strategy for expanding into a
then-small but rapidly expanding sphere, the software giant's
head said he had no idea what people were talking about when
they referred to cloud computing, describing it as "nonsensical"
and those writing about it as "insane".
Five years after Ellison's rant went viral on YouTube, the
billionaire is struggling to fit his ageing IT giant into a
newly cloud-centric world - a hard scramble spotlighted by what
analysts said was Oracle's first fourth-quarter miss on new
software sales in a decade. [ID:nL2N0EW1SJ]
Its rivals have grown, winning business from corporate and
government customers seeking cloud-based software that is
cheaper and faster-to-deploy than traditional offerings housed
in massive inhouse datacenters.
Oracle is now striving to catch up with its own line of
cloud software, built up partly through acquisitions. Ellison
has forged alliances with long-time bitter rivals Microsoft Corp
(MSFT.O) and Salesforce.com Inc (CRM.N) to drum up new business.
On Thursday, Ellison said he will announce those partnerships
next week, but provided few details.
Oracle stuck for years to building high-end multi-million
dollar "engineered systems" that bundle hardware and software in
one package. It started selling them with Hewlett-Packard Co
(HPQ.N) in 2008 and then partnered with ailing computer maker
Sun Microsystems, which it agreed to buy in 2009.
Oracle says the engineered systems strategy has been a big
success, helping woo business from rivals IBM (IBM.N)and SAP
"They spent the last four years focusing on engineered
systems when the bigger industry trend was the cloud," JMP
Securities analyst Pat Walravens said. "They now have a
Oracle's shares plummeted 9.3 percent on Friday, their
biggest one-day drop since releasing another weak set of results
in March. [ID:nL1N0CCC13]
Investors took the disappointing results hard because it was
the first time in more than a decade that Oracle missed software
sales estimates in its traditionally strongest fiscal
fourth-quarter, according to analysts. That's when sales
representatives hustle to close deals to qualify for year-end
And it was the third miss in the past seven quarters for
Oracle, Walravens said.
Cloud companies such as Salesforce price their products
below the levels at which Oracle can make a decent return,
analysts say. Some rivals even sell their products at a loss.
Salesforce, for example, posted a net loss of $270 million last
Less quantifiably, industry executives have said that
emergent business software providers such as Workday (WDAY.N)
started from scratch by focusing on ease of use and simpler
interfaces, while old-school IT giants like Oracle have been
hampered by legacy systems and software products that they were
slow to re-tool.
"This is causing a real disruption in Oracle's business,"
said Tim Ghriskey, chief investment officer with Solaris Group,
which manages about $1.5 billion. "It is going to pressure their
business for a while."
Ellison, a renowned sailing enthusiast who is now devoting
time and energy to his company's entry in this summer's Americas
Cup, built Oracle from a scrappy operation building a database
for the Central Intelligence Agency into one of Silicon Valley's
foremost corporate icons.
In past months, he has championed Oracle's resurgent foray
into cloud software, at his annual Oracle OpenWorld conference
for clients and developers, even while continuing to buy up
assets in Hawaii, such as commuter airline Island Air. He bought
almost all of the island of Lanai last year.
He and Oracle executives dispute the view that the company
is failing in the cloud. They blamed their quarterly miss on the
economy, particularly in Asia and Latin America, during a
conference call on Thursday.
In the previous quarter, executives blamed disappointing
software revenue on poor execution by its salesforce.
"Our success in the cloud is significant and undeniable,"
Oracle President Mark Hurd said on a Thursday conference call
with analysts. He said Oracle had added 500 new customers during
the quarter including eBay Inc (EBAY.O), Intuit Inc (INTU.O) and
Yahoo Inc (YHOO.O).
Fred Hickey, editor of The High-Tech Strategist, a
newsletter widely read by investors, said he does believe a bad
economy was behind Oracle's rough quarter, pointing to problems
in Brazil, China, India and Mexico and similar comments from
other old-guard tech giants including EMC Corp EMC.N, IBM
(IBM.N) and Hewlett-Packard Co (HPQ.N).
Even up-and-coming cloud software provider Workday had
mentioned "economic pressures" in its earnings conference call.
Other analysts said Oracle's installed user base - forged
over decades in the business on a reputation of reliability -
will be hard to displace in the short term.
"Does Oracle have pressure from the cloud over time? Yes,"
said Hickey. "Is it imminent? No. They are too big and
Cowen & Co analyst Peter Goldmacher, who describes
68-year-old Ellison as "the most brilliant enterprise software
person ever," also said that Oracle's problems are structural.
He believes there is little Ellison could have done to avoid the
slowdown the company is now seeing.
Ellison has grown profits at a healthy clip over the past
decade by acquiring other makers of software that customers run
in their own data centers, selling customers software up front
and then cajoling them into buying long-term maintenance
contracts that are highly profitable for Oracle.
That business model does not work with cloud computing
because companies like WorkDay and Salesforce do not charge
extra for maintenance. The cost of the software and support is
combined into a single subscription fee, which generates far
lower margins than the products Oracle has traditionally sold.
"The inevitable is the inevitable," Goldmacher said. “You
can get as many tummy tucks and face lifts as you as want, but
it doesn’t make your heart and liver and kidneys any younger."
(Reporting by Jim Finkle; Editing by Edwin Chan, Patricia
Kranz, Martin Howell and Tim Dobbyn)
Keywords: ORACLE CLOUD/
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