Oracle Dives Headlong into Hardware

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Databases have ballooned in size as companies collect reams of information about their customers and store new types of information like e-mail messages and videos to comply with federal regulations and make use of new forms of online media. Last year, Oracle released a new version of its database (BusinessWeek.com, 7/12/07), called 11g, to capitalize on those trends.

Going After Cloud Computing

Yet users often need to wait too long for disk storage systems to transfer those terabytes of data into Oracle's database software. The Oracle-HP storage server is meant to address that problem by performing some of the computer processing closer to disk drives. The Database Machine server can speed up processing of financial transactions or data analysis. Oracle has also taken aim at the nascent market for "cloud computing," which lets companies run software in large, remote data centers, accessing it over the Internet. On Sept. 23, Oracle and Intel (INTC) announced joint work on database performance and security for cloud computing environments.

Investors are scrambling to gauge the impact on technology spending of the past two week's events on Wall Street, including the demise of Merrill Lynch (MER) and Lehman Brothers, the Federal Reserve's bailout of insurer AIG (AIG), and the government's proposed $700 billion economic recovery plan. There are signs the economic malaise is spilling into the tech sector. Dell (DELL) on Sept. 16 warned of weakening demand. And analysts have been revising their estimates to reflect lower sales expectations for Apple (AAPL) and other tech companies (BusinessWeek.com, 9/24/08) in the current quarter.

During Oracle's first-quarter conference call, co-president Safra Catz said the company's percentage of sales to U.S. banks is in the "low single digits." Oracle's software isn't widely used on Wall Street; investment banks' preferred database comes from Sybase (SY), and financial-services companies tend to spend heavily on developing their own software, vs. buying commercial applications from Oracle, SAP, and others.

Grim Environment for Software

But the economy is surely affecting Oracle's business more than the vendor has let on, says Sarah Friar, a managing director at Goldman Sachs (GS). "They're denying all knowledge of macroeconomic impact—I find that hard to believe," she says.

Shares of Oracle closed Sept. 24 up 26¢, or 1.3%, at $19.95. But the stock has lost 12.3% of its value since hitting a 52-week high in early August. And the company's outlook for its second quarter ending in November wasn't sanguine—it said revenues would grow 9% to 12% after accounting for the effects of a stronger dollar, which lowers revenues of companies with overseas sales. Revenues had grown by 28% during the second quarter of fiscal 2008.

Even as Oracle powers ahead in the database market, sales of its business applications have faltered. The company is fighting for applications market share with SAP, which held 22.4% of the $62.8 billion market in 2007, vs. 12.5% for Oracle, according to AMR. The company underwent a disruptive reorganization of its salesforce in the first quarter and faced a strong quarter for applications sales a year ago, analysts says.

As it taps into the computer hardware market in a search for new sales, Oracle is up against a 2009 spending environment that analysts say will have companies scrutinizing every IT dollar. "In terms of software spending, it's going to be bad," says JMP's Walravens. Ellison is hoping the same can't be said for hardware.

Ricadela is a writer for BusinessWeek.com in Silicon Valley.