by Brad Moon | September 27, 2013 6:00 am
Oracle (ORCL[1]), the world’s largest database company, has had problems hitting its revenue targets in recent years, resulting in some pretty unhappy shareholders.
ORCL has tanked by double digits several times this year after disappointing quarterly reports — CEO Larry Ellison saw $3 billion shaved from his personal worth[2] after the March dive. At roughly $34 per share, ORCL is well off its 2000 peak and nearly 7% lower than its 2013 high.
However, at the Oracle OpenWorld World 2013 conference, the company touted two major initiatives it hopes will turn things around: In-memory switching that Ellison says would make Oracle database queries 100 times faster, and a suite of new cloud services targeting Salesforce (CRM[3]) and Amazon (AMZN[4]) Web Services.
Larry Ellison has a well-deserved reputation for bombastic pronouncements and hyperbole — especially during conference keynotes — but is there a possibility that ORCL has room to climb based on these new developments?
Let’s look at in-memory switching first. Existing Oracle database users will be able to “flip a switch” to forgo traditional indexing (which has to be constantly updated, slowing things down) and use in-memory processing for a massive speed gain on queries, possibly doubling transaction speeds.
This isn’t exactly new technology, and Ellison’s announcement that Oracle was adopting it elicited a “welcome to the party”[5] retort from rival SAP (SAP[6]).
Oracle hasn’t said what the cost might be (in-memory switching is likely to incur a license fee increase), but expect it to be priced attractively enough to make Oracle customers think twice about jumping ship to SAP’s HANA, a rival database (also featuring in-memory switching) that has been booking impressive sales[7].
The second part of the in-memory switching announcement is new hardware to make installation even faster. The new M6-32 has 32 terabytes of DRAM memory. ZDNET covered the announcement and noted that Ellison told the crowd that the new M6-32 has double the system bandwidth of IBM’s (IBM[8]) biggest system while coming in at less than a third of the cost[9].
It’s no secret that Oracle has had challenges in selling expensive Sun servers since buying that company in 2010.
Oracle’s new M6-32 servers are purpose-built (optimized for the task); they should be faster, more efficient, save space and be cheaper to run than the lower-cost generic systems that many data centers have been turning to instead of Sun hardware. If in-memory switching takes off for Oracle, customers will be tempted to invest in equipment like the M6-32 to maximize their performance gain, possibly goosing Oracle’s flagging hardware sales.
As for web services, Oracle is seriously upping the ante against rivals like Salesforce and AWS that have been signing up customers for their cloud services at the expense of running Oracle business applications on Oracle hardware.
By adding a series of web products and three tiers of service, the company is now directly competing with AWS and Salesforce and pushing itself as a single cloud provider that can meet all needs and at a more premium level — instead of dealing with multiple vendors for different aspects of their business and leaving their IT department to try to integrate everything.
A slim majority of analysts have ORCL rated as a “moderate buy” or “strong buy,” so there’s some confidence on the Street that Ellison isn’t blowing smoke. However, in its guidance for the next quarter[10], Oracle warned that hardware sales are expected to slip by as much as 9%, with software license and cloud subscription revenue also slowing, possibly to the point of negative revenue growth for those divisions.
Those new cloud services are in preview mode right now and aren’t expected to be fully online until the first half of 2014. And, as pointed out in Forbes, if Oracle’s cloud ventures prove successful, that spreads revenue over multiple quarters during the term of a contract (instead of an upfront license fee) and could cannibalize its own hardware sales[11].
In 2013, ORCL has shown a trend of dropping after quarterly reports then slowly creeping back up. Last week, however, the company reported relative stability since Q1, suggesting the worst of the latest earnings reaction is over. That leaves room for substantial upside — at least until mid-December when the Q2 earnings report is expected.
Longer-term, much depends on the pricing of ORCL’s cloud services and a number of factors.
Even if its cloud services and purpose-built servers are a tough sell, they will help stabilize those businesses once they’re in production. Meanwhile, in-memory switching will help retain existing database clients.
With Oracle databases continuing to be the de facto standard — including being used behind the scenes in the cloud with AWS and Azure — my gut feeling is Oracle is in good shape to benefit as cloud computing continues to grow. Call me bullish on its long-term prospects, even if it whiffs again on earnings in December.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.
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