While a handful of IT companies are hoping to play the dominant role in shaping the business-technology landscape in the coming decade, Oracle and CEO Larry Ellison stand alone in their willingness to state that strategy publicly in blunt, uncompromising, and stop-me-if-you-can terms.
IBM, Hewlett-Packard, and SAP are the other major contenders—and we'll dig into each of their broad approaches and corporate visions in forthcoming columns—but none has been as forthcoming as Ellison in spelling out what they'll do, when they'll do it, how they'll do it, and to whom they'll be doing it.
Of course, in a business that changes as rapidly and sometimes radically as the enterprise IT market—until a year or so ago, did anybody really think Oracle would ever become a hardware player?—these battle plans need to be recalibrated and refined in the face of major new developments, and we're sure to see more than a few of such overhauls among the major players here in 2011.
But, as the year kicks off, here's our first in-depth look at Oracle's strategic vision for the coming year, and, inspired by the stated ambitions of Oracle's founder and CEO, we're calling this installment "Larry Ellison's 10-Point Plan For World Domination." The core arguments from Oracle executives come from my transcription of the company's December 16, 2010 earnings report and conference call with analysts.
I've laid out these 10 pieces in descending order to follow the ways in which Oracle's moves in 2009 and 2010 have fostered the company's compelling and comprehensive approach to the world of enterprise IT.
1. The Exadata Phenomenon: the power of optimized systems. Noting that in competition for data-warehousing deals "it's not uncommon for our Exadata machine to be 10 times faster than the best of the competition," Ellison stressed that the new competitive battleground in corporate IT will be centered on optimizing the performance of hardware-plus-software systems that have been specifically engineered for superior performance, speed of installation, and minimum of integration:
"We expect overall that our new generation of Sun machines—Exadata, Exalogic, and Sparc Superclusters—will enable us to win significant share in the high-end server market and put us into the #2 position behind IBM very, very soon," Ellison said. "Then we'll fight it out with IBM for the #1 spot."
Clearly, Ellison and Oracle believe that their spectacular success with the Exadata Database Machine—its annual run rate is now pushing $2 billion—will pave the way for the Exalogic Elastic Cloud machine and the newer Sparc Supercluster machine, all three of which are predicated on ground-up engineering of Sun hardware with Oracle software to yield world-class performance: Oracle claims its machines are three times faster than IBM's top of the line, and more than seven times faster than HP's biggest servers.
And that is precisely the leverage point Ellison extends to exploit aggressively in 2011: "I think in terms of the halo effect, it's a general recognition now that when you buy these high-end servers, you usually buy them to run specific software," he said in response to an analysts' question. "And we believe that if we do a good job of engineering the software and the server at the same time and make sure they work well together, we have a huge competitive advantage over HP and IBM."
2) Customers Want Game-Changing Technologies—and Oracle is pumping them out.
President Mark Hurd was given significantly more air time in the Dec. 16 earnings call than he received when participating in the mid-September call shortly after joining Oracle, and Hurd focused on Oracle's growth opportunities. While he amplified some of Ellison's comments, Hurd also spoke of the future potential that Oracle's new strategy is generating in the marketplace:
"The deal volume was spread across companies of all sizes and we had a very healthy number of customer wins in the public sector as well," Hurd said. "The strength in the quarter was very broad-based. Our customers are reacting to the fact that we're delivering game-changing technologies that matter to our customers now. Exadata and Exalogic are creating tremendous buzz in the industry and among our customers."
Now, terms like "game-changing" are fairly fungible, and you could make the point that Oracle's goods are almost old-fashioned in comparison with some of the new new software models coming from companies like SAP or Salesforce.com and Workday, all of which Ellison called out by name in his comments.
But what cannot be disputed about Hurd's comments is the financial impact Oracle's products are making on the company's top and bottom lines: "Our earnings grew 33% this quarter and our margin performance made clear there's a ton of leverage in this business." Those are not the sorts of results some competitors and so-called experts were forecasting when Oracle acquired Sun a year ago—quite the opposite.
The naysayers harped on Ellison's acquisition, saying it was misguided and short-sighted because Sun was nothing but a financial sinkhole whose key people would bolt instantly from Oracle, leaving Ellison with nothing but a bunch of hardware nobody wanted and his own far-fetched day dream of turning Oracle from a software company into a "systems" company. One wag at the Motley Fool investment site went so far as to say it was "simply bad business," which a position with which we took great exception in our column called Global CIO: Oracle-Sun A Bad Deal? Only A Fool Would Say That. Here's an excerpt:
"No, the Sun deal is simply bad business," writes MotleyFool's Anders Bylund. "Oracle knows little about hardware, which is what Sun is good at. This deal positions Oracle closer to IBM and Hewlett-Packard as an all-around provider of everything, and I suppose there might be some synergies in there somewhere. But mashing together two very different corporate cultures often spells disaster, and when you sell everything including the kitchen sink to your customers, you end up competing with old partners like HP and Dell."
But instead of being "simply bad business," Oracle's acquisition of Sun triggered a huge wave of reactions across the industry as all the leading hardware and software players, seeing the customer value behind the Exadata model, rushed to emulate the approach. As Hurd noted in his comments to analysts, "Exadata and Exalogic are creating tremendous buzz in the industry and among our customers. All of our competitors as Larry mentioned are reacting to us (inaudible) and all are trying to buy or partner their way into integrated systems."
3) Becoming #1 in OLTP and Data Warehousing. Ellison opened his remarks by saying this about Oracle's overall strategy: "Our goal is to become #1 for both online transaction processing and data warehousing—both of those segments. We are not interested in the low-margins commodity segment of the server business; we are focused on high-end OLTP, high-end data warehousing, where the margins are good and we can have a highly differentiated product."
Citing Oracle's 3:1 OLTP performance lead over IBM and its 7.5:1 lead over HP, Ellison also touted Oracle's dominance in database performance: "In data warehousing, it's not uncommon for our Exadata machine to be 10 times faster than the best of the competition."
Ellison also specifically discounted the ability of IBM and EMC to use acquisitions to close that performance gap: "And IBM's purchase of Netezza and EMC's purchase of Greenplum technology is not likely to threaten Exadata sales for lots of reasons, but mainly because Exadata is much faster than either of those two technologies.
"And both in the case of Exadata [Ellison said "Exadata" but clearly meant Netezza] and in the case of Greenplum, the customer has to rewrite their applications to run on those machines."
4) Oracle-Sun Hardware Revenue Is Rising: the vision pays off. In her opening remarks, Oracle president Safra Catz said that "this quarter we saw sales growth for Sun hardware products as well as higher gross margins, which were 53% for the quarter."
On top of that, Hurd later added this perspective on the supposedly moribund Sun hardware business: "We've made more announcements relating to Sun's core technologies, specifically Solaris and Sparc. As an early indicator, we entered the quarter with a record hardware backlog."
Again, "record backlog" might be based on some relatively easy comparisons, but I'd suggest it would be prudent to view those two specific data points from Hurd and Catz in the context of the booming systems business cited in items #1 and #2 above. Oracle's not trying to sell commodity servers at rock-bottom prices; instead, it's looking to gain ever-greater entre' into the data center with the fastest and most-powerful integrated systems in the world.
And that's a whole new strategy for a hardware business—and it's one that Oracle's competitors will need to watch very closely.
Next is a look at the power behind Oracle's surging profit margins:
5) Growth Fuels Margins, And Margins Fuel R&D: Oracle's building for the future. Anybody who's followed this business even casually knows that Oracle, under the highly disciplined leadership of Catz, had demonstrated the ability to generate phenomenal operating margins of 50% or more from its traditional software business.
But with the Sun acquisition, many observers were expecting those operating margins to plummet due to Sun's money-losing ways in particular and the lower-margin nature of the hardware business in general.
Again, Oracle is defying its critics, and of all of the comments made by Oracle executives in during the earnings call, I found this one from Catz to be the most striking—and the one that Oracle's competitors could well find most daunting:
"In addition to our strong top-line performance, we also delivered very strong operating margins," Catz said. "With Sun included for the full quarter, our operating margin was 44%, substantially higher than our peers. Actually, our margins are 1500 basis points higher than SAP's operating margins even though we are also selling hardware. At this rate we could be back at pre-Sun operating margins quite quickly" (boldface emphasis added).
Even if Oracle's not quite able to match its pre-Sun operating margins (but I wouldn't bet against them), the broader point is that the company will have huge purchasing power for acquisitions that can further its objective to become the #1 high-end systems company in the world. And the company is broadening its appetite from software and hardware companies out to chip companies to help begin the optimization and engineering process at the very beginning of the stack—a capability that today only IBM has.
6) Cross-Selling And Up-Selling: Oracle leverages its huge customer base. Three key points here: First, Ellison said that a big part of his confidence in Exadata's future revenue potential comes from the fact that many customers are moving from tire-kicking to check-writing: "The close rates are definitely improving and I think you are going to see a significant jump in Exadata sales going from Q2 to Q3, Ellison said.
"So we're watching—this pipeline grew very, very rapidly. And again, there's a lot of buzz and a lot of interest. But because it's a new product, people were running a lot of benchmarks, they were trying it, they'd buy a small machine first. And we are beginning to see some significant re-buys, and a lot more customers translating their interest into purchases. And I think we're gonna sell a lot more Exadata in Q3 than in Q2."
Second, Ellison has often said that a huge benefit of Oracle's industry-specific applications is that those customers become prospects for Oracle's other products. So imagine the vertical-market prospecting power that Oracle is taking on as that business more than doubles:
"Our industry-focused businesses were up triple digits," Hurd told the analysts.
Third, Hurd also said that Oracle's huge installed bases of database customers and middleware customers will provide equally huge opportunities for Exadata and Exalogic: "We've got 295,000 database customers that can run their Oracle workloads orders of magnitudes faster by deploying Exadata," Hurd said. "Exadata customers are experiencing immediate performance increase measured in multiples, not percentages. Customers are seeing 15 to 50 times the improvement with Exadata."
And, once again, the Exadata impact is seen in paving the way for Exalogic: "We are seeing a lot of enthusiasm at the end of the quarter as we begin to build a backlog for Exalogic, which will be available next quarter in both Intel and Sparc versions. There are 150,000 middleware customers, many of them using our market-leading WebLogic app server—and ultimately, are prospects for Exalogic."
7) The Power Of Integrated Suites: Does Fusion have an advantage? "With Release 11 of our middleware, everything has now been rewritten," Ellison said. "All the pieces operate off a single metadata library. It's a much better user experience, because you can attach our entire middleware suite with a single file. Versus if you take IBM WebSphere, where IBM WebSphere is literally dozens if not more than a hundred separate products, all with separate patching technologies.
"So we think the fact that we have an integrated suite gives us a huge competitive advantage over IBM, and we're winning share there very, very rapidly. We'd expect the advantage we have in database you will see over the next five years also moving to middleware."
8) Applications Business Grew 20%--And new Fusion apps are coming. Oracle's planning a slow rollout of its long-delayed Fusion apps this year, but Ellison was bullish about the prospects those products will have in the context of Oracle's overall strategy:
"Next is our commitment to protecting customer's investment in their existing Oracle technology, whether it's PeopleSoft, Siebel, JD Edwards, or E-Business Suite, and then make this huge investment. I think coming down the runway very quickly next calendar year we're going to be talking a lot about Fusion. We've got this new generation of applications by the way that runs on-premise and in the cloud, in the public cloud—as well as private clouds on-premise—or public clouds. Nobody has this.
"SAP Business ByDesign runs just in the cloud. SAP's traditional applications run just on premise." [SAP contends that Ellison's statement is false; SAP claims that "For customers who want to take advantage of the cloud, SAP is working with partners such as Fujitsu, IBM and HP to provide a hosted version of Business Suite, which includes ERP applications for financials, operations and corporate services."
Back to Ellison: "Fusion runs both places. You decide where you want to put this. You can't do that with Salesforce.com. You can't do that, you know, with Workday, a lot of these guys. So we've got this brand new, extremely modern, Java-based suite of applications called Fusion that runs in the cloud, runs on-premise, and is going to dramatically strengthen our position against our cloud-based competitors like Salesforce and Workday, and our traditional competitor SAP. So we think you're just seeing the beginning of us gaining share in applications. That's gonna really take off next year."
9) Competing Against IBM And HP: Ellison says only one can keep up. Echoing a tack he began to take late last year, Ellison heaped considerable praise on IBM as a formidable competitor, while scorning HP as simply not a viable long-term player in the high-end systems business. Whether or not Ellison's comments reflect reality, they surely underscore a huge shift in top-level partnerships that are a vital part of the enterprise IT business.
"Right now our Sun servers—our numbers are behind IBM and HP in the high-end server business," Ellison said. "We think IBM's hardware and software technology is quite competitive, while HP's big servers are slow, expensive and have little or no software value-add. That makes HP extremely vulnerable to market share losses in the coming year. . . .
"We expect overall that our new generation of Sun machines—Exadata, Exalogic, and Sparc Superclusters—will enable us to win significant share in the high-end server market and put us into the #2 position behind IBM very, very soon. Then we'll fight it out with IBM for the #1 spot."
In the Q&A session, Ellison offered this assessment of the software capabilities of his primary competitors: "Now, IBM does have a lot of software, HP does not—which is why I emphasize that that makes them particularly vulnerable.
"But the notion of engineered systems, hardware and software that works together, I believe is going to dominate the high end of the business. By the way, it's already dominating the low end of the business, because I suspect you use either an Apple iPhone or an iPad, or an Android, where specifically in the case of iPad and iPhone, they were engineered to work together; the Android, not so."
10) Sailing And Software: All that success encourages a bit of humor. While earnings calls with analysts don't have to be as dull as reading the phone book, they're also generally fairly straightforward discussions of results, strategy, execution, and future prospects.
So I found it interesting—not important but at least interesting—that after Safra Catz made her prepared remarks and then handed the floor over to Ellison, she included a light-hearted comments that Ellison not only enjoyed but expanded upon. The brief exchange shows how good things are going right now at Oracle: the numbers are so strong that Catz—not exactly given to public displays of humor—engaged in some yuks with her boss in front of the very people who exert massive influence in Oracle's stock price.
I'd say it also reflects a collective sense of enormous confidence and momentum at Oracle. And while not exactly a knee-slapper, the exchange is worth noting if only for its uniqueness. Here's how it happened:
As Catz was concluding her numbers-oriented remarks, she began the hand-off to Ellison, which is almost always the pattern on Oracle earnings calls. But this time she added a little something else about Oracle's broad success:
Said Catz, "Now before I turn the call over to Larry, I want to congratulate him for driving his sail boat to a first-place ranking overall for the year. And with that—it's your turn, Larry."
Ellison replied, "Thank you, Safra. Well, of course the important thing around here is sailing, but right behind that is software and hardware. And I'm gonna talk about our strategy and our server business specifically."
And off Larry Ellison went, charting as he always does his own course in his own way, and ensuring that the sectors of the IT business in which Oracle competes will be anything but dull in 2011.
Bob Evans is senior VP and director of
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