Sales of Sun/Oracle servers based on x86 microprocessors by Intel Corp. have been stagnating or declining for some time now. While Sun Microsystems was a significant maker of mainstream servers and was interested to innovate in this field, Oracle calls those systems "commodities" and does not mind if their sales go to "zero". The company believes that selling enterprise software and mission-critical hardware will make it more stronger and more profitable.
"I do not care if our commodity x86 business goes to zero. We do not make any money selling those things. We have no interest in selling other people's intellectual property; commodity x86 includes Intel IP and Microsoft IP. We do not make money selling that stuff, and we are phasing out that business. 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, eventually," said Larry Ellison, chief executive officer of Oracle, during a conference call with financial analysts on Tuesday.
The head of Oracle believes that the company's proprietary Solaris/SPARC servers will grow at a rapid pace, which means that the company will not only achieve high margins on sales of hardware, but will also be able to offer support, service, upgrades, etc.
"Our engineered systems will be growing at such a high rate that the overall hardware business top line will grow also. But what is really important is to continuously grow our margins and profitability in the hardware business so we can meet [our] goal, which is getting back to our pre-Sun acquisition's overall profit margins," added Mr. Ellison.
Apparently, Oracle even does not want to reward its sales staff for selling x86 servers and logically expects the business to decline. However, the company will attempt to boost revenue from its proprietary product lines and expects to be successful. The firm intends to phase out its "commodity" systems in fiscal year 2013, which begins in mid-2012.
"Sun had a practice of selling x86s at very, very low margins and we reward our salespeople based on margins. So we do not make money selling low-margin commodity x86 boxes, and our salespeople do not make any money selling them. [...] Our profitable businesses in servers, the Exa line and the SPARC line, are growing; our ZFS [storage] system is growing; our Pillar system is growing; the Exadata storage system is growing," stressed Mr. Ellison.
Even though it is clear that proprietary servers are sold at higher margins than industry-standard mass servers, it is noteworthy that mass products allow companies to get better prices on commodity components like memory, hard disk drives and so on. Moreover, it remains to be seen how successful will Oracle's proprietary machines be against mission-critical servers based on Intel Xeon microprocessors in long-term future.
Oracle said fiscal Q1 2012 total revenues were up 12% to $8.4 billion. New software license revenues were up 17% to $1.5 billion. Software license updates and product support revenues were up 17% to $4.0 billion. Hardware systems products revenues were down 5% to $1.0 billion. Operating income was up 40% to $2.7 billion, operating margin was 32%. Net income was up 36% to $1.8 billion, earnings per share were $0.36, up 34% compared to last year. Operating cash flow on a trailing twelve month basis was $12.8 billion, up 46% from last year.