Oracle Still Struggling With Systems, But Hanging In There

September 24, 2012 Timothy Prickett Morgan

Oracle co-founder and CEO Larry Ellison doesn’t know the meaning of the word regret, and despite the shrinking systems business in the wake of the company’s acquisition of Sun Microsystems for $7.6 billion in January 2010, Ellison and Company are determined to make a real systems business out of this. And to their credit, they are doing a better job than Sun was doing by itself.

In Oracle’s first quarter of fiscal 2013 ended in August, the company posted revenues of $8.18 billion, down 2 percent and shy of Wall Street expectations. But thanks to cost controls, Oracle brought just over $2 billion to the bottom line, an increase of 11 percent compared to the year-ago period. And giving Ellison some breathing room as it tries to get the systems business it acquired and has reshaped onto firm and profitable footing.

Oracle’s total hardware sales, which includes servers, storage, and switches, dropped by 24 percent to $779 million in the quarter, and related support revenues (which include licenses for Solaris and Oracle Linux) were down 11 percent to $574 million. The total systems revenue stream in the first quarter was therefore $1.35 billion, down 19 percent compared to the period a year ago. But Oracle’s operating profit was only down 17.7 percent to $745 million. So that was improvement.

That collapse in hardware sales came even as the Exadata-Exalogic-Exalytics “engineered” systems business was gaining traction and sales of machines based on the Sparc T series processors from Oracle were up in the double digits, according to co-president Mark Hurd. Engineered systems, which includes all of the Exa clusters as well as Sparc SuperCluster machines, are expected to more than double in sales this fiscal year to $1 billion according to Hurd, and at current trends they could represent a quarter of Oracle’s server sales. The problem is that other parts of the former Sun systems business are crashing faster than the Exa and Sparc T lines are growing. Oracle did not name names, but clearly its plain vanilla X86 server business is dying faster, and something is clearly woefully wrong with its midrange and high-end Sparc Enterprise M systems business. (Not saying anything nice about these machines for two years will do that, not being clear about the partnership with Fujitsu will do that.) Everything else is growing, so these must be falling. Storage might be taking a big hit, too, aside from Oracle’s own ZFS-based disk arrays, which are doing alright according to Hurd.

Oracle no longer talks about its application, database, and middleware software businesses separately, so it is hard to say how these businesses did individually. But collectively, new software license and cloud subscription sales were up 5 percent to $1.57 billion in the quarter, and cloud subscription revenues were $222 million of that according to co-president Safra Catz, and Hurd said later in a call with Wall Street analysts that it would be at a $1 billion annual run rate next quarter. That vast installed base of database, middleware, and application software customers shelled out $4.14 billion in support fees in the fiscal first quarter, up 3 percent.

Catz said that the strengthening of the U.S. dollar was a big headwind in the quarter, shaving 5 points off revenues and 6 points off profits. Looking ahead to the second fiscal quarter, Catz said new software license and cloud subscription revenues would be up between 4 and 14 percent, but that hardware revenues would be down anywhere from 8 to 14 percent. Those are some pretty big error bars. But the company has a pretty right net earnings per share range of 45 to 49 cents for the second quarter, which is better than the 41 cents it posted in the one just finished.

Next week at the OpenWorld user and partner event, Oracle is expected to announce its cloud-ready 12c database, an infrastructure cloud service for the Oracle Cloud, and new Sparc T5 servers.