Oracle profits rise despite hardware hit

Strong software sales push the tech giant to rises in revenue and profit, despite a drop in hardware sales, as it shifts focus from x86 systems to high-end servers
Written by Ben Woods, Contributor

Despite taking a knock in low-end server sales in the first quarter of the year, Oracle is upbeat about prospects for its hardware business as it prepares to push out new Sparc products.

On Tuesday, the Silicon Valley-based company reported fiscal first-quarter revenue of $8.4bn (£5.4bn), a 12-percent increase year-on-year. Earnings were $1.8bn for the three months ending 31 August, a rise of 36 percent. A strong performance in new software sales — up 17 percent from the same period last year — contributed to the gains, as did a 17-percent increase in licence updates and support services revenue.

While the performance of the company's bedrock application, middleware and database products was strong, hardware sales were down five percent.

"Our high-end server business — Exadata, Exalogic and Sparc M-Series — delivered solid double-digit revenue growth in Q1," said Oracle president Mark Hurd in a statement. "In contrast, revenue declined in our low-end server business."

Hardware revamp

However, Oracle remained optimistic about its hardware business; it announced alongside its earnings that it will revamp its high-end line-up with a new Sparc microprocessor and Sparc SuperCluster server. The releases are part of an ongoing transition away from low-end commodity systems, such as x86 servers, to higher-end servers, the company said.

Our high-end server business — Exadata, Exalogic and Sparc M-Series — delivered solid double-digit revenue growth in Q1.
– Mark Hurd, Oracle

"In Q2, we will accelerate that trend when we introduce four brand new engineered systems products. Each of these new engineered systems optimally combine Oracle software, Oracle silicon and Oracle hardware," company chief executive Larry Ellison said during an investor conference call.

"We had growth in the core Sparc product line. Our strategy around high-intellectual property, high-attach, high-margin solutions, that include Exadata, Exalogic and the Sparc server products, is working," Hurd added.

The company plans to introduce the additions to the Sparc range at its Oracle OpenWorld event in San Francisco at the end of September. The Sparc SuperCluster server uses the new Sparc T4 microprocessor, which Ellison said runs up to five times faster than the T3 model it replaces.

Low-end servers

During the call, chief financial officer Safra Katz predicted Oracle could return to the operating margins it saw before its acquisition of Sun "quite quickly". Ellison also shrugged off the lacklustre performance in low-end servers as less important to the company's bottom line.

"I don't care if our commodity x86 business goes to zero. We don't make any money selling those things," Ellison said. "We have no interest in selling other people's IP. Commodity x86 includes Intel IP and Microsoft IP. We have interest in selling systems that include our IP. That's how we're going to drive the profitability of our overall hardware business, eventually."

Ellison's comments were "not too surprising", given Oracle's focus on profitability, said IDC analyst Nathaniel Martinez, who noted it was not the first time in Oracle-Sun's history that it had left the x86 market. He also gave a nod of approval to the new releases for the high-end line.

"The upcoming Sparc releases will help restore credibility in the Sparc roadmap, in particular for customers looking to an alternative to IBM," Martinez said.

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