Oracle Promises Hardware Sales Turnaround In Upcoming Fiscal Year

Oracle's hardware revenue will stabilize and begin to grow in fiscal 2013 that begins June 1, company executives said Tuesday, as sales of the company's "engineered systems" offset declining sales of commodity servers.

"Next fiscal year our hardware business should be a growth story," CEO Larry Ellison said during the company's third-quarter earnings call, followed immediately by president and CFO Safra Catz who said: "It will be."

The comments came as Oracle reported third-quarter revenue that met the company's earlier forecasts, and new software license sales and earnings-per-share that exceeded expectations. Those results marked a rebound from three months ago when the company reported unexpectedly slower sales in the second quarter -- news that caused the company's stock to drop.

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For its third fiscal quarter ended Feb. 29 Oracle reported total revenue of $9.0 billion, up 3 percent from $8.8 billion in the same period one year earlier. Oracle reported net income of $2.5 billion for the quarter, up 18 percent from $2.1 billion in the third quarter last year.

Oracle's hardware sales have been steadily shrinking since it acquired Sun Microsystems in early 2010 for $7.3 billion. Oracle executives have attributed that decline to the decision to eliminate sales of low-margin commodity server products.

In the just-completed quarter total hardware systems revenue was $1.47 billion, down 11 percent from one year earlier. That number includes sales of hardware systems products ($869 million, down 16 percent year-over-year) and hardware systems support revenue ($604 million, down 4 percent year-over-year).

Oracle is focusing its efforts on what it calls "engineered systems" that combine Sun hardware with Oracle software products targeting specific tasks such as handling huge volumes of data. Those systems include the Exadata database appliance that launched in 2008, the Exalogic Elastic Cloud server that debuted in 2010, and the recently introduced Exalytics in-memory database appliance.

Next: Software Sales Rebound In Q3

Last week a report from the Jeffries & Co. market research firm suggested that sales of the engineered system products weren't meeting expectations, stunting the company's growth prospects.

Oracle executives on the earnings call, however, were bullish about the prospects for the engineered system products.

"Going into Q4 we have a record pipeline for engineered systems and we expect that we will materially surpass all past bookings records" for the products and meeting original order-booking forecasts, Oracle President Mark Hurd said on the call. He said Exadata sales showed "triple-digit growth" in the quarter while Exalogic bookings "quadrupled from last year."

Ellison made his prediction of hardware sales growth in the next fiscal year when an analyst asked when "the bleed-off" of the commodity hardware products would end. Ellison predicted that in Oracle's fiscal 2013, which starts June 1, sales of engineered systems would "more than offset the decline in some of the commodity [hardware] lines like the x86[-based server] lines that we just don't care about."

Oracle also will be refreshing some of its SPARC-based products at the end of calendar 2012, Ellison said.

Along with declining hardware sales, Oracle was hit in the second quarter with slower software sales, a problem that Catz attributed to a number of deals near the end of the quarter that didn't close because customers required additional approvals at the last minute.

Software sales rebounded in the third quarter. Total software revenue for the quarter was $6.43 billion, up 8 percent from the same period one year earlier. Sales of new software licenses, a key growth indicator, were up 7 percent in the quarter to $2.37 billion. Revenue from software license updates and product support was up 8 percent to $4.05 billion.

New software licenses for database and middleware products was up 9 percent to $1.72 billion in the quarter, while new software licenses for application software grew 3 percent to $658 million.

"It's clear from these numbers that Q2 was actually an aberration," Catz said on the earnings call. "As I said in the last quarter, all we really needed to do is focus on our execution and that we did."

During the earnings call Ellison also said Oracle is beginning to reap the rewards of sales of its next-generation Fusion applications and Oracle Secure Cloud services. He also challenged arguments that SAP's new HANA (high performance analytics appliance) in-memory database posed a competitive threat to Oracle's flagship database software.