Ellison: “Guys, hardware’s a great business, really!”

Oracle(s orcl) must be really worried about its hardware business. In its second quarter earnings release, the  company trotted out a canned quote from CEO Larry Ellison to defend hardware’s honor. Said Ellison:  Sun has proven to be “one of the most strategic and profitable acquisitions we have ever made.”  Oracle bought Sun Microsystems for $7.4 billion three years ago.

But given that hardware revenue fell 23 percent to $734 million from $954 million for the year-ago quarter, that optimism seems a tad forced. Oracle’s hardware business revolves around its high-end Exadata, Exalogic and Exalytics “engineered systems” and Sun T-4 systems. The decline in that business, as Nomura Securities Analyst Rick Sherlund  pointed out, was “worse than the low end of guidance.” Last quarter, Oracle saw a similar sickly performance, with hardware revenue off 24 percent year over year.


On the earnings call, Ellison said engineered systems saw a 70 percent sequential growth in bookings. “We are just about finished with the downsizing phase and the transformation of that business [and are] about to start growing our hardware business,” he told analysts on the earnings call Tuesday night. “In Q3 we’ll be turning the corner and in Q4, we expect the top line growth to go along with continually improving margins.”

In the past Oracle has been able to manage big acquisitions with nary a hiccup. But those were software acquisitions and hardware is a new beast for the company. Plus it’s a beast without the rich margins of databases and middleware. To be fair, there is a natural constituency for these big Oracle data center appliances — big Oracle database and financial applications shops in financial services, retail and other verticals. And there are lots of those companies.

The CIO of a large bank told me that his company has bought several Exadata machines in the past year. The initial, admittedly high, upfront cost of those systems, was offset by a few things. First, the bank is able to consolidate more of its existing Oracle workloads on fewer machines. And it no longer needs an army of database admins, storage experts and networking people to man them. Plus, it already owned all the Oracle software it needs to run — so there was little in the way of additional software license fees.

But his situation just proves that Oracle sales are still led by software. Good thing software was a prettier picture this quarter. Revenue from new software license and “cloud subscriptions” grew 18 percent to $2.4 billion from $2 billion for the year-ago quarter.

Since Oracle bought Sun, co-presidents Safra Catz and  Mark Hurd have repeatedly said that these engineered systems are highly profitable — that may be true. But it’s also true that hardware, is very different from software, and it’s not clear that Oracle gets that yet.