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Oracle defies HP and IBM with 47% revenue leap

Hardware pulls own weight

If you were thinking that that acquisition of Sun Microsystems was going to drag Oracle down financially, you were wrong. That means you, Hewlett-Packard. And especially you, IBM .

In the quarter ended November 30, Oracle's overall revenues were up 47 per cent, to $8.58bn, and not just because of the addition of Sun's hardware, software, and support businesses. Oracle's core database, middleware, and application businesses are all expanding at double-digit clips and part of that, one might argue, is because Oracle has positioned itself as a key IT player that is in it for the long data center haul.

The company had $189m in restructuring charges in the quarter and another $47m in acquisition-related costs, but was nonetheless able to bring $1.87bn to the bottom line. That's a 28 per cent rise in net earnings compared to the year-ago period. Yes, Oracle has taken a profit hit by doing the Sun deal (net income was 22 per cent of revenues, compared to 25 per cent a year ago when Sun was not in the numbers), but look at all the controversy and PR the Sun deal has given Sun. How much would that have cost? And will it pay off in the near term with somewhat higher revenues and much higher profits?

Oracle certainly thinks so.

Safra Catz, Oracle's co-president who serves with ex-HPer and TBOL (tennis buddy of Larry) Mark Hurd in that role, said in a conference call with Wall Street analysts that the Sun hardware products had a 53 per cent gross margin in the quarter and that Oracle's overall operating margins were 44 per cent - some 15 points better than app rival SAP can do right now and it has no hardware business dragging it down.

"At this rate, we could be back to our pre-Sun operating margins quickly," said Catz cheerfully.

In the quarter, the Sun hardware business - which includes Sparc and x64 servers, storage arrays and devices, networking switches, and other devices - accounted for $1.11bn in revenues, and there is no compare because Oracle did not own Sun yet a year ago. Hardware support added up to $641m in sales, and all told, the Sun hardware systems sales in fiscal Q2 came to $1.75bn.

To put that into perspective, that is almost as large as Oracle's new software license sales in a quarter, which were just under $2bn in the quarter and up 21 per cent compared to the year-ago quarter. Operating expenses for the Sun hardware business came to $525m, which gives you that 53 per cent gross margin, and oddly enough, margins on hardware support were only 44.5 per cent, with $356m in operating expenses.

On the call, Oracle's chief executive officer and co-founder, Larry Ellison, said what he has been saying for the past year, which is that Oracle has no interest whatsoever in the low-end, low-margin part of the systems racket.

"Our goal is to become number one in the high-end server business, both for OLTP and data warehousing," Ellison said, putting a stake in the ground and perhaps in Hewlett-Packard's chances of ever being able to run a TPC-C online transaction processing or TPC-H data warehousing on HP Superdome 2 iron and Oracle database software ever again. Ellison said that Oracle's Sun hardware was number three behind IBM and HP, but the company was not aspiring to be second behind Big Blue, but rather to take over the crown that the Sun King believes he deserves.

"We think IBM's hardware is quite competitive," Ellison explained to the assembled Wall Street multitudes, who were no doubt happy that Oracle beat their estimates and was spoiling for a systems fight. "HP is slow and has very little software add, which makes them vulnerable," Ellison added.

It is hard to say how well or poorly HP's iron performs compared to IBM and Oracle big iron because, so the rumors say, Oracle is not allowing HP to publish benchmark results based on its eponymous database running atop HP-UX, HP's variant of Unix. Why HP has not put out results for a full-bore Superdome 2 machine running Microsoft's Windows and SQL Server combo might seem like a bit of a mystery, but Microsoft is backing off from supporting Itanium with future Windows stacks and HP doesn't want to bring that up.

As for Linux on Itanium, Red Hat is not supporting its RHEL 6 release on Itanium machines and you are basically back to Oracle databases in any event. Sybase remains a possible benchmaking choice, as does DB2 ironically, but Oracle owns the database space on Unix boxes (with some notable exceptions in data warehousing and telco) so the results would not necessarily be meaningful.

Oracle has 295,000 database customers and 150,000 middleware customers, and many of them are running their applications on HP iron using either x64 or Itanium processors. That is a huge base of customers to peddle new Exadata, Exalogic, and Sparc SuperCluster machines to as well as entry Sparc T Series servers and midrange and high-end Sparc Enterprise M series servers to.

Ellison said that the Exadata pipeline was now approaching $2bn, and that Oracle would be the number two high-end server vendor "very shortly." And without missing a beat, Ellison added "then we'll fight it out with IBM."

No one at Oracle has actually talked about how many Exadata and Exalogic machines Oracle has sold to date. If it was a large number, Ellison would have been bragging about it for sure. All that Hurd would say on the call is that Exadata machines have been sold in 50 countries so far and that around a third of the customers who bought initial machines have come back for more. Hurd added that somewhere between 70 and 75 per cent of Exadata machines sold have displaced an OLTP and data warehousing machine built by a competitor and the remaining 25 to 30 per cent came from customers consolidating existing Sun platforms. When pestered, Hurd said that about 60 per cent of the Exadata machines were supporting data warehousing workloads and 40 per cent were doing OLTP, with the share coming from OLTP on the rise.

Of course, Oracle is still mostly a software company, and will likely remain that way for the foreseeable future. In fiscal Q2, software license updates and product support contracts accounted for $3.65bn in revenues, up 12 per cent, with overall software revenues rising by 15 per cent, to $5.64bn. Services revenues - meaning professional services like systems integration, consulting, education. and application outsourcing - accounted for $1.75bn, up 24 per cent. Even if Oracle reaches its interim goal of doubling the revenues from the Sun hardware business - say it can do that in two years - the systems business would still only represent about a quarter of overall Oracle sales if growth rates persist in the software and services business Oracle operates.

Drilling down into the software business, Oracle said that it had $1.42bn in new software license sales for database and middleware products (up 21 per cent) and raked in 2.44bn in update and support revenues for these products (up 15 per cent. New software licenses across its many application suites came to $579m in the quarter (up 21 per cent), with support for these products bringing in $1.2bn (up 8 per cent).

By geography, Oracle's revenues in fiscal Q2 in the Americas region hit $4.45bn, rising 49.4 per cent, while sales in EMEA were $2.74bn, up 38.6 per cent. Oracle's sales in the Asia/Pacific region were $1.39bn, increasing 54.2 per cent over Q2 of fiscal 2010.

Looking ahead to fiscal Q3 ending in February, Catz said that Oracle expected for new software license sales to grow at between 10 and 20 per cent and total revenues to grow at between 31 and 35 per cent. A lot of that growth will come from the addition of Sun's hardware and software businesses, and Q3 will be the last such bump and easy compare that Oracle gets from the Sun acquisition.

Oracle is expecting to push somewhere between $1.1bn and $1.2bn in hardware in fiscal Q3, and will bring somewhere between 34 and 36 cents per share to the bottom line if all goes well. That is not phenomenal hardware growth, sequentially, but it beats the kinds of declines that Sun stomached since it started talking to IBM about being acquired two years ago. ®

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