Oracle System Sales Rebound, Underpin Future Cloud 

Four years ago, software giant Oracle bought Sun Microsystems and got into the systems business. Sun's business was in decline, and kept falling at a steep and steady rate for many years. But after years of paring down the product line and focusing on so-called engineered systems – clusters built with very precise components and tuned for specific workloads – that systems business hit rock-bottom and is now rebounding.

In the company's third quarter of fiscal 2014 ended on February 28, Oracle's hardware sales were up 8 percent to $725 million and hardware systems support, which includes traditional break/fix support as well as technical support for the Solaris and Linux operating systems that are bundled on all Oracle servers, rose by 4.9 percent to $598 million. Add it up, and the hardware line at Oracle rose 6.6 percent to $1.32 billion.  (That is a little more than half of new software license sales at the company, just to give you a sense of perspective.) Hardware operating profits rose by 3.6 percent, and were not rising as fast as revenues because, according to CFO and co-president Safra Catz, Oracle has doubled the main memory in the flash-accelerated Exadata line of database appliances without raising prices. Support operating margins were up 11.4, and so the overall operating margin for Oracle's hardware business was up 7.6 percent to $737 million.

Oracle still sells standalone Xeon and Sparc machines to customers. But on a conference call with Wall Street analysts going over the Q3 numbers, Oracle co-president Mark Hurd said that the Sparc T series servers, Sparc SuperClusters, engineered systems (that's Exadata, Exalogic, and Exalytics) and ZFS storage arrays now accounted for 70 percent of all hardware revenues. That is around a $2 billion annualized run rate, and growing, and the engineered systems sales (that is Sparc SuperClusters plus the Exa lineup together) now have a $1 billion annual run rate and few at more than 30 percent in the quarter.

Interestingly, the Sparc SuperClusters, which take Sparc T5 machines and glue them together into an Exa-like machine with the Exadata storage servers, are now growing at triple digits. So Solaris is having a bit of resurgence at least at some customers. Oracle did not say anything about how the Sparc M6-32 massive NUMA boxes, announced last fall, were doing in the market, which bring 32 sockets and 32 TB of main memory to bear on a single instance of Solaris.

When asked if Oracle could sustain its growth now that it has rebounded in systems, Oracle co-founder and CEO Larry Ellison said "it is absolutely sustainable" now that Oracle had shed the commodity X86 and storage businesses, which he said would soon "shrink to nothing." The other systems and storage were growing rapidly and have good margins, Ellison said, and as usually happens when Oracle talks about systems, he took aim at IBM.

"We compete against IBM all the time," Ellison said. "It is not uncommon for our systems to be several times as fast as IBM's."

Ellison said that in a short time, Oracle would ship its 10,000th engineered systems, and that the machines were selling because customers don't want to do the hardware and software integration and they want lower costs and faster time to market than they can get from integrating best-of-breed components for themselves. Moreover, with the 10:1 data compression that Exadata machines offer through its hybrid columnar datastore, Oracle is changing the dynamics of storage in the datacenter.

"We believe that engineered systems are well on the way to replacing IBM pSeries for high-end computing," Ellison said, using an old IBM brand for the Power-based Power Systems line at Big Blue.

Ellison said that the in-memory components of the Oracle 12c database, which shipped last fall, would be available sometime between June and August of this year, and that the performance gains were so dramatic that companies that would normally sit on the sidelines and wait six months or a year to deploy a new technology will be inclined to move to 12c as soon as possible. It is not clear, as yet, what impact 12c will have on Exadata sales. If the native in-memory functions are good enough, sales of flash-heavy Exadata configurations or memory-heavy Exalytics appliances could suffer.

But the important thing for Oracle is that either way, it is learning to put the pedal to the metal and push database, middleware, and application performance as hard as it can, with an order of magnitude or more change at the minimum. This, as Ellison has said in the past, is the kind of change that will get companies that are hesitant to change and not eager to take risks to nonetheless take the plunge.

Oracle is also getting ready to ramp up its compute infrastructure services on the Oracle Cloud, and Ellison said that when it is available this summer that Oracle would absolutely compete with Amazon Web Services on price and that the this will be "a commodity business and not in a bad way." Oracle already has a storage infrastructure service and is working on putting its 12c database and Fusion middleware out on its public cloud as a platform service. All of these functions will be available in the summer, and Oracle expects for customers to opt to run applications and analytics on the cloud instead of their own datacenters in many cases.

Oracle will be using its own engineered systems to support its public cloud, and it will be interesting to see what choices it makes to build its cloud. Will Sparc-based systems running Solaris have a place? Or will this just be Linux-based Xeon systems underneath everything?

In the quarter, Oracle booked $2.41 billion in new software licenses and cloud software subscription sales, up 4 percent year-on-year. Software license updates and product support for database, middleware, and applications accounted for another $4.56 billion and rose 5 percent. Oracle booked a little more than $1 billion in additional services sales. Add it all up, the company had $9.31 billion in sales, up 4 percent, and net income rose 2 percent to $2.57 billion.

Oracle exited the quarter with $37 billion in cash and equivalents, and net of its debts, it has $13 billion in the bank. It has plenty of money in which to invest in the cloud – a cloud that Ellison was mocking only a few years ago and that will drive a significant portion of revenues for the company in future years. The thing to remember is that Oracle has over 400,000 enterprise customers who will pay a premium for products. This is about as big as any customer base has ever gotten in the upper echelons of the IT sector.