Oracle Software Rebounds, Hardware Struggles

March 26, 2012 Timothy Prickett Morgan

Oracle’s software business deflated a bit in its second quarter of fiscal 2012 ended back in November 2011, but software was on the rebound in the third quarter ended in February and the company remained hopeful about its long-term prospects in the systems business thanks to its “engineered systems” and despite its backing out of commodity server and storage sales that don’t make it any money.

In the quarter, which had an extra day in it thanks to leap year, Oracle’s revenues were up 3 percent, to just a hair over $9 billion. Of that, software license, update, and support revenues brought in $6.43 billion, up 8 percent compared to the year ago period. Hardware systems sales, which includes free-standing Sparc servers, free-standing X86 servers, and engineered systems that mix Oracle hardware and software as a turnkey system aimed at very precise workloads, was down by 11 percent to $1.47 billion. Net income, nonetheless, rose by 18 percent, to just under $2.5 billion.

Those hardware sales were down because Oracle has been exiting from commodity server and storage businesses that are not profitable, or are profitable for partners who actually own the intellectual property. This appears to include bare-bones X86 servers, Fujitsu Sparc Enterprise M machines, and Hitachi high-end disk arrays. Mark Hurd, Oracle’s co-president and the guy in charge of sales at Oracle these days, said in a conference call with Wall Street analysts that Oracle expected for its engineered systems to exit fiscal 2012 in May with an annual revenue run rate of $1 billion. Exadata database cluster machines, which mix X86 servers, flash and disk storage, Oracle Linux and database, and Exadata storage server software, doubled their revenues in the quarter, and Exalogic middleware clusters, which are used to host Java and other application servers, quadrupled in the quarter. The new Exalytics in-memory database analytics machine, which Oracle showed off last fall and started shipping late in fiscal Q3, was the fastest growing product in Oracle’s history, according to Hurd, even better than Exalogic, which was faster than Exadata.

Oracle co-founder and CEO, Larry Ellison, said on the call that he expected for Oracle’s hardware sales to bottom out soon. “Next year, our overall hardware business will be a growth story,” Ellison said, and Hurd and other co-president, Safra Catz, backed him up on that prognostication.

On the software front, Oracle’s new licenses for its application software rose by 3 percent, to $658 million, in the fiscal third quarter, with software updates and product support for apps bringing in another $1.28 billion, up 5 percent. Database and middleware sales saw a rise of 9 percent for new licenses, to $1.72 billion, with updates and support up 10 percent, to $2.78 billion.

In the fourth quarter ending in May, Oracle is expecting for sales to be anywhere from down 2 percent to up 2 percent compared to the $10.8 billion in sales it had in its fourth quarter of fiscal 2011. A lot depends on what currency exchange rates come to, and they have been volatile lately. Oracle is pretty sure that its overall hardware business is going to be pretty bad again, with Catz saying to expect system revenues of between $870 million and $980 million, down from $1.16 billion for hardware sales in the final quarter of fiscal 2011. (Those numbers do not include hardware systems support, which should not decline as much.) Oracle probably has a quarter or two beyond that where the compares start to get easier for its systems business, and then the company will need to start actually growing from there. With 70,000 application customers, another 100,000 middleware customers, and 300,000 database customers, it has a vast base of customers to try to push its Exa line of systems into. Oracle has nothing but time, and lots of energy and gumption.