Oracle reverses decline in hardware revenue during Q3

Engineered system sales push hardware product revenue up 8 percent

Oracle's third-quarter revenue rose 4 percent to US$9.3 billion while net income increased 2 percent to $2.6 billion, buoyed by growth in new software licenses and cloud subscriptions as well as a long-anticipated rise in hardware product revenue.

Hardware systems product sales, which had declined steadily since Oracle's acquisition of Sun Microsystems, were up 8 percent to $725 million in the quarter ended Feb. 28, while hardware systems support revenue increased 5 percent to $598 million. New software licenses and cloud subscription revenue rose a combined 4 percent to $2.4 billion.

Software license updates and product support revenue jumped 5 percent to $4.6 billion.

"Oracle Cloud Applications and Engineered Systems are both rapidly growing, billion dollar run-rate businesses," Oracle Chief Financial Officer Safra Catz said in a statement. The company has focused its marketing efforts on such systems, which include the Exadata database machine, while de-emphasizing sales of lower-margin commodity servers.

Oracle's engineered system line is experiencing rapid growth, "while throughout the industry traditional high-end server product lines are in steep decline," Oracle CEO Larry Ellison said in a statement.

Profit margins on engineered systems fell slightly, but that was due to the fact that Oracle is "packing more memory" into the latest models without raising prices, Catz said during a conference call Tuesday. However, Oracle makes significantly more money from the many Oracle software licenses customers load onto the systems than from the hardware itself.

Oracle will cross the 10,000 mark in sales of engineered systems over the next few months, Ellison said during the conference call.

While engineered systems revenue growth has been strong since Oracle launched the first Exadata in 2008, those sales represented a relatively small percentage of total hardware sales until recently, Ellison said. Now, engineered systems account for more than 30 percent of hardware product sales and soon will cover half, he said.

Meanwhile, Oracle's quarterly cloud application revenue "is now approaching $300 million," company President Mark Hurd said in a statement. "All of our strategic Cloud Application Suites, including Fusion Enterprise Resource Planning, Fusion Human Capital Management and Fusion Customer Experience, posted triple-digit revenue growth."

Oracle recently launched release eight of Fusion Applications, which first became generally available in 2011, Hurd said during the call. The release includes some 1,000 new features, and Oracle plans to roll out a similar number in release nine, which is due later this year, he added.

The company is seeing strong growth in "organic Fusion," and not just from the application companies it has acquired more recently, such as Eloqua and Taleo, Hurd added.

While Fusion offers customers the option of both on-premises and cloud deployments, the trend has been "cloud, cloud, cloud," Hurd said.

Cloud subscription contract sizes are growing as well, with more than 65 seven-figure or eight-figure deals in the quarter, according to Hurd.

He chalked up Oracle's SaaS (software as a service) revenue growth to experience.

"We thought we knew a lot a year ago, a couple years ago," Hurd said of Oracle's cloud strategy. "We just know a lot more now."

Oracle is also banking on uptake of its new 12c database. Later this year, the company will release an in-memory option for 12c that it says will provide dramatic performance improvements without the need to rewrite applications. On Tuesday's call, Ellison indicated the release could come within several months.

Oracle is keen to get the in-memory option to market in order to fend off challenges from the likes of SAP, which wants to convince customers now using Oracle's database for their SAP installations to switch over to its HANA in-memory database.

Still in nascent stages are Oracle's entries in IaaS (infrastructure as a service) and PaaS (platform as a service), which will compete with Amazon Web Services and Microsoft Azure, respectively.

Oracle has completed pricing for its IaaS service, and it will be "pretty much equivalent to Amazon," Ellison said. As for PaaS, Oracle expects many customers to "move a lot of their existing applications into Oracle's cloud," he said.

Oracle also plans to have dedicated sales teams for each service, with some 500 to 1,000 hires planned around the world during its next fiscal year, Ellison said. "We need specialist sales teams that are used to competing with Amazon."

Chris Kanaracus covers enterprise software and general technology breaking news for The IDG News Service. Chris' email address is

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