Mad Dog 21/21: Angry Hurd
January 30, 2012 Hesh Wiener
Oracle sure has headaches. It is not selling enough software to please investors. It isn’t making its numbers in hardware, either. It is governed by a two-headed executive reporting to CEO Larry Ellison. One of the presidents, Mark Hurd, is trying to get beyond the airing of a lawyer’s demand letter that turned his private folly into public obloquy. As a result, loyal Larry Ellison is saddled with his distracting, maladroit prince when he sorely needs to be fully focused, playing at the top of his game.
All this unfolded in late December, beginning on the 20th when, after the market closed, Oracle provided financial results for its fiscal second quarter, which had ended in November. (Oracle’s fiscal year runs from June through May.) By most measures and in its core software business, the company did a bit better than it had a year earlier. (Sales of hardware from the swallowed but still undigested Sun, slid.) In any event, Oracle’s shares were walloped because by one key measure, investors’ expectations, particularly those guided by Oracle itself, Oracle didn’t deliver the big O.
Oracle said its earnings shortfall was due to a number of good deals still up in the air when the quarter ended, deals that the software giant expected to soon close. But financial analysts didn’t buy that story, because it didn’t explain a lot of bothersome data, such as why Oracle’s software maintenance revenue, the largest source of corporate profit, has stubbornly refused to grow not just in the most recent quarter for the past few years.
Oracle also tried to dissuade doubters who asked about the 10 percent drop in hardware revenue by arguing that the decline was due to the company’s willingness to suffer attrition in the low margin portions of its server business. The company didn’t want to debate critics who suggested that the coattails of even a low margin hardware business, including software, services and maintenance, generally provide better earnings than initial hardware sales. The way hardware spawns other business seems to be a big influence on IBM’s strategy, and Wall Street has lots of respect for Big Blue’s way of doing business.
In any event, as the flacks and the faithful tried to massage investors’ moods during the closing days of 2011, a decision at the top of the Delaware court system opened up a formerly sealed letter (caution, large file size) that addressed in explicit terms the clumsy flirtations of Mark Hurd with Jodie Fisher as understood by Fisher’s lawyer Gloria Allred. (On the day the court decision was handed down, News Corp’s All Things Digital posted the same letter and promised to bring to light additional correspondence related to l’affaire d’Hurd.) Allred’s letter, written in mid-2010, was instrumental in enabling Fisher get over hurt feelings; so was a reported big money apology provided by Hurd as part of an out-of-court settlement of Fisher’s gripes. Currently Hurd and Fisher assert Allred’s letter is riddled with inaccuracies, but neither provided a corrected account of the events that helped Hurd rise from the big enchilada of Hewlett-Packard to co-second fiddle at Oracle.
While some HP shareholders were able to succeed with their argument that disclosure of the Allred letter is in their interest and the public interest, the steamy document didn’t shake the high regard in which Hurd was held by Larry Ellison. Ellison not only said HP had made a big mistake dumping its chief executive, he put his money and that of Oracle’s other shareholders where his mouth was. A month after HP gave Hurd the bum’s rush, Oracle invited Hurd to not merely join but to start as close to the top as anyone can get, sharing the rung on the corporate ladder one step down from that occupied by Larry Ellison.
Only one part of the Allred letter seems to be a direct attack on Hurd’s business smarts, and that is the part where Hurd is said to have blabbed to Fisher about the acquisition of EDS, which at the time was still in the works and very likely the biggest corporate secret at HP. This is a piece of the Hurd story that would make anyone who thinks about investing in Oracle wonder whether Ellison knew about Hurd’s vain indiscretion before Hurd was offered his current job. While it’s hard to imagine Hurd making a mistake like that again, it’s also hard to imagine him making that mistake in the first place.
Some critics in the financial community seem to be wondering whether Ellison’s support for Hurd is right or Oracle. There’s been a fair amount of reporting about the personal rapport between the two, a friendship that includes a shared love of tennis. Or course Hurd’s accomplishment in the computer business isn’t the result of tennis. Hurd spent 25 years rising through the ranks at NCR before HP hired him. He ran HP for five years and, until the very end, earned favorable opinions from the investment community, which reciprocated by making plenty of money for HP’s shareholders. Ellison apparently believed that Mark Hurd, like Flitcraft, would revert to his underlying productive character. But that may have been before Hurd led a reshuffling of the Oracle sales force, a shakeup that preceded the company’s fall from the grace of well-met investor expectations.
Hurd has two more quarters in this fiscal year, more like one if you look at the calendar rather than the reporting dates. He’s got to pull a rabbit out of the hat, or maybe a mink. If Ellison and the analysts who follow his corporate exploits don’t see that critter and only find pellets in the hat come June, there may be one less corporate head to wear any hat at all. The milliners’ lost client won’t be Hurd’s co-president, brainy bean counter (and lawyer) Safra Catz, who has had the wisdom and agility to remain clear of this mess (or at least look like she has). But if Oracle doesn’t get back on track very soon, if Ellison goes all gushy and sentimental, and if Oracle’s directors are cowed, Catz might have to pipe up. If the entire top rank at Oracle fails to grasp the nettle, absolutely no good can come of this, at least not for Oracle, its investors, or its customers.
A downside for Oracle could be an upside for its arch-rivals. IBM, HP, and Microsoft would seize any chance to attack an Oracle that’s lost its grip, and, best we can tell, they are trying their best to do this right now. IBM and HP are targeting the Sun server base, claiming Sparc is dead end technology or at best not as good their alternatives. Microsoft is sticking to software and doesn’t care whether X86 iron says Sun or HP or IBM or anything else on its cabinet, as long as the software inside comes from Redmond. Microsoft’s main weapon right now is pricing that makes its offerings look like a bargain compared to Oracle’s code. But Microsoft doesn’t have the full palette of software that Oracle does, and neither does IBM. SAP can pick off some nervous users, and maybe it has, particularly in Europe. But for any software company, moving users from Oracle to a different DBMS technology is a very difficult task. It might in fact be impossible . . . but that still doesn’t mean Oracle is safe. The real enemy might come flying from the cloud, like an angry bird.
Even if Oracle takes a pratfall or two before regaining its balance, it can probably recapture its former leadership, at least in software. It’s less certain how well it can survive the slippage in hardware. Without a fast and robust recovery, Sparc could follow Itanium to the dustbin of hardware history. So far Oracle has failed to persuade investors that resurgence lies ahead. The best it has been able to do is raise doubts among the doubters.
The persistent problem is that Oracle’s unimpressive numbers are, to put the best face on it, more likely a consequence of poor execution than the result of tough economic conditions or well executed attacks by competitors. Oracle absolutely needs its officers at the very best. And that might not happen if its stars are, like Tiger Woods, extraordinarily talented but distracted.