Oracle Hardware Focus Stays on High End of Server Business

Oracle CEO Larry Ellison said his company will continue to phase out its x86 server business in favor of high-end SPARC systems optimized to run Oracle applications.

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."

Ellison has argued that software will continue to be the focus at Oracle, but that having a hardware unit with systems optimized 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.

Oracle executives earlier this year took another step in boosting their hardware business when they announced the company will no longer develop software for Intel's Itanium platform, a move they said was driven by conversations in which Intel engineers told them the plan was to soon end Itanium development in favor of the Xeon chips.

Intel executives quickly disputed Oracle's statements, saying they have a roadmap that will take Itanium development through at least 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 sued Oracle, saying the company breached an agreement to support technologies used by their joint customers. The two vendors share about 140,000 customers.