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Oracle systems group slammed again in Q3

Engineered systems will start to fill gaps soon

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Oracle has gotten its software business back on track and is fixing to get its systems house in order soon as well, the top brass at the software giant and hardware maker have declared.

In the financial quarter ended on leap day, Oracle's sales rose by 3 per cent to $9.04bn, driven by higher than expected sales of new software licenses, which rose 7 per cent to $2.37bn. Software license updates and product support revenues were up 8 per cent to $4.05bn, making total software revenues up 8 per cent to $6.43bn.

Despite rapid expansion of bookings and sales of its Exa line of "engineered systems" and a revamped Sparc T4 server line, hardware systems revenues took it on the chin once again, falling 16 per cent to $869m in the quarter.

Hardware systems support revenues were off 4 per cent as well, to $604m. Oracle co-president and CFO Safra Catz said in a call with Wall Street analysts that hardware sales were off due to "defocused" x86 commodity and third-party storage products that Oracle is mostly not interested in.

By moving away from those businesses, Oracle was able to get hardware gross margins up to 51 per cent, and its overall margins are back to levels they held before the company acquired the ailing Sun Microsystems in January 2010.

The bumper crop in software sales helped mask the issues in that legacy Sun hardware business, and thanks to belt-tightening the company was able to bring $2.5bn to the bottom line, 18 per cent more than in the year-ago period. That worked out to 49 cents per share.

In the call, Mark Hurd, Oracle's other co-president, said that the Exalytics in-memory database appliance was the fastest-selling product in Oracle's history, and that it had started shipping ten days before the end of the quarter.

Oracle's cofounder and CEO Larry Ellison said in the call that Oracle has sold hundreds of Exalytics machine – which are not exactly cheap – and that Oracle has scoured its sales channel and cannot find one customer using rival SAP's HANA in-memory appliance.

"We don't think it is a serious threat to us at all," Ellison said in disgust when asked if the HANA appliance was a threat to the Oracle database business. Ellison said that while SAP plans to use HANA to run its various ERP suites, he did not believe that they could get the job done.

"The one thing I do like is that they are talking about engineered systems. IBM, too," said Hurd. "It validates the market for what we have already brought to the marketplace."

By engineered systems, Oracle means boxes such as the Exalytics, which includes Oracle's Linux, its TimesTen in-memory database, and various business intelligence and analytics tools all wrapped up and ready to go as a finished machine. The Exadata database cluster and the Exalogic middleware cluster are also engineered systems, as is the Sparc T4 SuperCluster, a cluster of Sparc servers designed to support both database and applications at the same time.

Hurd said that Exalogic sales have quadrupled year-on-year, and that Exadata sales continue to ramp and have doubled again, as they have been doing for the past several quarters. Oracle expects "very strong" Exa product sales in its fourth fiscal quarter ending in May, and the company reiterated its original guidance from early in fiscal 2012 that it would exit the year with a $1bn annualized revenue run rate for these engineered systems.

The main problem for Oracle in the hardware business is that its commodity x86 and storage businesses are shrinking faster than the engineered systems can fill in the holes they leave. But Oracle is not just hopeful, but confident that this will soon change.

"Next year, our overall hardware business will be a growth story," Ellison declared, referring to Oracle's fiscal year. The Sparc T4 is selling well, he added, and Sparc sales would pick up later this calendar year when the company refreshes the upper end of its Sparc server line.

Oracle is expected to come out with its own Sparc M4 kicker to the chips and systems currently built by Fujitsu and rebadged by Oracle. The Sparc T5 chips for servers with up to eight sockets is due this year as well. Both the M4 chips, which will plug into machines with 8 to 64 sockets, and the T5 chips were being tested in Oracle's labs last fall – ahead of schedule.

Oracle closed its acquisition of RightNow during the quarter and expects to close its Taleo buy in April. Its SaaS business will have a $1bn run rate as fiscal 2012 comes to a close, just like engineered systems. Oracle's database and middleware business grew by 10 per cent in the quarter, with $4.49bn in revenues across new licenses, updates, and support. Application software sales rose by 4 per cent to $1.93bn.

Looking ahead to the fourth quarter, Catz said to expect hardware system sales in the range of $870m to $980m, and she could not bring herself to do the math to say that this would be a decline of between 15 and 25 per cent compared to Q4 of fiscal 2011, when Oracle pushed $1.16bn in iron and tin.

Oracle expects overall sales to be anywhere from down 2 per cent to up 2 percent compared with the $10.8bn it raked in during the fourth quarter last year, depending on what sells and doesn't, and depending on the exchange rate various currencies have relative to the US dollar. Earnings per share is projected to fall between 62 and 67 cents, compared to 62 cents a share in the year-ago period. ®

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