Oracle Happy To See Its Low-End Business Tumble

When Oracle executives were positioning the company to buy Sun Microsystems in late 2009, they stressed that the plan was to abandon the low-end commodity server business, instead focusing on high-end systems bundled with its own enterprise software.

During a conference call with analysts and journalists to announced fiscal first-quarter 2012 results, Oracle executives reiterated that point, noting that while its Exadata, Exalogic and high-end SPARC businesses saw double-digit growth during the period, x86 server revenue continued to tumble. According to CEO Larry Ellison, that’s fine with him.

Plummeting  x86 Sales

“I don’t care if our commodity X86 business goes to zero,” Ellison (pictured) said. “We don’t make any money selling those things. We have no interest in selling other people’s IP [intellectual property]. X86 includes Intel IP and Microsoft IP. We don’t make money selling that. Sun sold that stuff and we are phasing out that business. We have no interest in it whatsoever. 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.”

Oracle’s high-end hardware business will reach profitability and the margins will continue to grow, and eventually will enable the software giant of reach its goal of getting back to its pre-Sun acquisition profit margins, he said.

In a quarter in which Oracle saw revenues jump 12 percent, to $8.4 billion (£5.4bn), and net income rise 36 percent, to $1.8 billion (£1.2bn), that hardware business – based on the systems inherited in the $7.4 billion (£4.8bn) acquisition of Sun – was a lone drag.

However, both Ellison and co-president Mark Hurd said they were unconcerned with the falling revenues in the low-margin commodity x86 systems. The company makes money on the high-end systems – Hurd said gross margins in the hardware business rose from 48 percent to 54 percent – and that is where the focus will stay.

“We’re not as focused … on the hardware growth as we are in growing the right things in the product line,” Hurd said, adding that the result has been better margins and market share growth.

That focus will be on display at the Oracle OpenWorld 2012 show on 2-6 October in San Francisco, when the company will unveil the latest high-end system, which Ellison called The Sparc SuperCluster.

Optimised Oracle SuperCluster

First discussed by Oracle late last year, the SuperCluster will be a highly-scalable, rack-based system that will run Oracle database software and other offerings. It will be powered by the upcoming Sparc T4 processor, an eight-core chip that Ellison said will be five-times faster than the current Sparc T3, optimised for Oracle’s applications.

Elizabeth Hedstrom Henlin, an analyst with Technology Business Research, said in a note that Oracle’s hardware business “is at a point of inflection”.

“Continued inconsistency in growth and performance may indicate that the Oracle hardware business is evolving into the stalking horse for growing software sales,” Henlin wrote. “Though Oracle executives have clearly stated that the path to corporate profitability lies in ‘selling systems that include [Oracle’s] IP’, software remains by far the stronger business and the core of Oracle’s growth.”

Ellison has argued that software will continue to be the focus at Oracle, but that having a hardware unit with systems optimised for Oracle applications will enable the company to offer bundled solutions and let it compete more directly with the likes of IBM and Hewlett-Packard.

Itanium Row With HP

Earlier this year, Oracle took another step in boosting its hardware business when it announced the company would no longer develop software for Intel’s Itanium platform, a move that was driven by conversations in which Intel engineers said, Oracle claims, that the plan was to end Itanium development soon in favour of Xeon chips.

Intel executives quickly disputed Oracle’s statements, saying they had a roadmap that would take Itanium development through at least to the end of the decade. Officials at HP, by far the largest consumer of Itanium chips, accused Oracle of putting their joint customers at risk in an attempt to hurt HP and bolster its own Sparc hardware business.

HP has sued Oracle, saying the company breached an agreement to support technologies used by their joint customers. The two vendors share about 140,000 customers.