Oracle's Hardware Strategy Focuses on High-End Servers

By CIOinsight  |  Posted 09-22-2011

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 Oracle's own enterprise software.

During a conference call Sept. 20 with analysts and journalists to announce fiscal first-quarter 2012 results, Oracle executives reiterated that point, noting that while the company's Exadata, Exalogic and high-end SPARC businesses saw double-digit growth during the period, x86 server revenue continued to tumble. And according to CEO Larry Ellison, that's fine with him.

"I don't care if our commodity X86 business goes to zero," Ellison said. "We don't make any money selling those things. We have no interest in selling other people's IP. 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, Ellison said.

In a quarter in which Oracle saw revenue jump 12 percent, to $8.4 billion, and net income rise 36 percent, to $1.8 billion, that hardware business--based on the systems inherited in the $7.4 billion acquisition of Sun--was a lone drag.

However, both Ellison and co-President Mark Hurd said they are 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 in San Francisco Oct. 2-6, when the company will unveil the latest high-end system, which Ellison called the SPARC SuperCluster. The SPARC SuperCluster, first discussed by Oracle officials late last year, will be a highly scalable rack-based system that will run Oracle database software and other offerings. It will be powered by Oracle's upcoming SPARC T4 processor, an eight-core chip optimized for Oracle software that Ellison said will be five times faster than the current SPARC T3.

In a Sept. 20 note, Elizabeth Hedstrom Henlin, an analyst with Technology Business Research, said 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."


To read the original eWeek article, click here: Oracle Hardware Focus Stays on High End of Server Business