Oracle Still Looking Ahead To Rebounding Systems Sales 

Oracle got into the systems business with its acquisition of Sun Microsystems more than three years ago, and it has yet to see that systems business stop falling. But co-president Mark Hurd told Wall Street analysts on a conference call going over the company's first quarter of fiscal 2014 financial results that the software giant still expected for its hardware business to reverse its declines.

"I think we will have some growth in hardware this year," said Hurd, and he did not elaborate on how much. Or when.

That growth is important for a number of reasons. For one thing, Oracle wants and needs to generate more sales of its so-called "engineered systems," which are preconfigured machines with servers, storage, and networking all set up and tuned to run specific Oracle software. The Exadata machines run parallel implementations of Oracle's database, Exalogic machines run its WebLogic middleware, and Exalytics analytics against its TimesTen in-memory database, plus there is a more generic setup based on Sparc T series servers called the Sparc SuperCluster that is aimed at Solaris shops and is intended to run mixed database and middleware workloads.)

Moreover, those increased systems sales drive more hardware support revenues. Since buying Sun, Oracle has required that customers buying new systems get support contracts for their new iron. (IBM does the same thing on its Power Systems, so Oracle is not alone in this.) The net effect is that even with hardware revenues dropping, the existing base of Sun gear on hardware support contracts plus the new Oracle iron that has mandatory support are actually showing revenue growth. And, when hardware growth returns, as Hurd said he expects it to, then the hardware support sales will grow even faster. Thus bolstering Oracle's bottom line and helping to justify the $5.6 billion acquisition of Sun (net of cash) back in early 2010.

In the quarter ended on August 31, Oracle had $669 million on hardware product revenues, which includes servers, storage, and switching sold separately as well as engineered systems, down 14.1 percent from the year ago period. Part of the decline in sales at Oracle is the effect of the company backing away from selling individual components and focusing on its engineered systems – something that CEO Larry Ellison has said is absolutely intentional and is what has brought the hardware business to profitability. The problem is that operating income from hardware fell at the same rate to $339 million. Oracle is not shifting its mix fast enough. But hardware systems support revenues in fiscal Q4 rose by 3.1 percent, to $592 million, and that is helping on the top line, and operating income from those support revenues was up 9.4 percent to $383 million. Add it all up, and the overall Oracle hardware business raked in $1.26 billion, off 6.8 percent, and operating income fell 3.1 percent to $722 million.

Just a reminder: This is a lot more money than Sun Microsystems brought in as operating income in many a quarter. If Ellison & Co can reverse the hardware declines and sell a richer mix of products, the profitability should improve.

For now, Oracle has plenty of cash and other profit-generating businesses that allow it to indulge in the systems racket, which Ellison is as committed to as he is to Americas Cup yacht racing. In fact, to put it bluntly, Team Oracle is doing better in the data center hardware business than it is doing right now up against Team New Zealand out in San Francisco harbor. (Ellison missed the conference call because he was attending a race for his team, which was down 7-1 against the Kiwis.)

Hurd said on the call that sales of the Sparc T systems, which scale from one to eight sockets using the latest Sparc T5 processors, were "ok," but that sales of the higher-end Sparc M series SMP servers "were not." He attributed the stall in the Sparc M line to new products, based on its own Sparc M5 processor, that were introduced in March of this year. These machines take a while to qualify, and given that they use the new "Bixby" NUMA interconnect, customers are probably very keen on testing them a little longer before they commit their Sparc workloads to them.

Hurd said that the network-attached storage business, driven by its ZFS arrays, had good sales in particular regions, but that tape sales were "unexciting."

Safra Catz, Oracle's other co-president who also does double-duty as the company's chief financial officer, said that older Sparc M series machines and Netra gear specifically geared for telecommunications and service provider firms, had "significant declines." She said that SAN storage sales were down "significantly" as well. She said that Exadata bookings looked "very good" and that revenues from the Exalytics and SuperCluster grew over 100 percent.

During the quarter, Oracle had double-digit growth in database sales, driven mostly by add-ons for doing compression or adding security or other features to its 11g database rather than a massive upgrade wave for the new 12c "cloud-ready" database that has recently started shipping. New software license sales and cloud subscriptions were up 5 percent to $1.65 billion, and software license updates and product support grew by 7 percent to $4.43 billion. Add in another $1 billion in services, off 8 percent in the quarter, and that brings Oracle's total sales to $8.37 billion, up 2 percent. The company brought $2.19 billion to the bottom line, an increase of 8 percent over the year-ago period.

The funny thing is what Catz said on the call right after going over the hardware sales. She said that cash flow has increased to $14.2 billion over the past four quarters, hitting a record of $6.1 billion in the first quarter. "We are now on the cusp of generating more free cash flow than IBM." Five years ago, Oracle generated about half the free cash flow on an annual basis as Big Blue. Oracle is sitting on more than $39 billion in cash and equivalents, and has $15 billion net of its debts.

That's just another demonstration that software is more profitable than hardware or services.