Advanced Computing in the Age of AI | Friday, March 29, 2024

Cloud, Engineered Systems Offset Oracle Software Slump 

The cloud business at Oracle is now almost as large as the engineered systems business that underpins it, and both are growing considerably faster than the rest of the company.

In the company's fourth quarter of its fiscal 2014 year, which ended in April, Oracle reported revenues of $11.32 billion, up 3 percent, but net income dropped 4 percent to $3.65 billion.  Oracle's cloud business – which includes infrastructure, platform, and software services sold on a utility basis – rose 21.6 percent to $450 million in the quarter, while system sales (including hardware, operating systems, and support) rose 2.5 percent to $1.47 billion. Oracle uses its own hardware to power its cloudy services, but no doubt represents a very small sliver of its own system sales. These figures are no doubt net revenues and operating income after canceling out internal sales between Oracle categories.

Drilling down a bit more deeply into the fourth quarter, Oracle said that total hardware sales rose by 2.5 percent to $870 million, with about a third of that coming from so-called "engineered systems." The two thirds of the hardware sales that are not for engineered systems are for plain vanilla servers, including the company's high-end Sparc M series NUMA machines as well as Sparc and Xeon rack servers with two, four, or eight sockets.

These engineered systems include prefabricated Exadata database, Exalogic middleware, and Exalytics in-memory appliances as well as Sparc SuperCluster machines, which are designed to host both database and middleware workloads. Safra Catz, Oracle's co-president and chief financial officer, said on a call with Wall Street analysts going over the results that engineered systems had double digit growth in the quarter. Ellison said that Oracle would ship its 10,000th engineered system sometime in the first quarter of fiscal 2015, and added that hardware support margins was approaching 70 percent (which stands to reason since a big component of that is support for Oracle Linux and Solaris) and that Sparc SuperCluster bookings were up in the triple digits.

Support revenues for Oracle's hardware rose 2.4 percent to $596 million. Because Oracle is doubling up the memory and adding compute capacity to the engineered systems without raising its prices, hardware operating margins fell 2.1 percent to $427 million, but system support services saw an 8 percent revenue bump to $391 million. Add it up, and operating income across systems was $818 million, up 2.5 percent.

Oracle may have a smaller systems business than IBM at this point, but it also has one that is throwing off a lot better margins. This is, in fact, what Oracle co-founder and CEO Larry Ellison had planned for when he acquired Sun Microsystems for $7.4 billion more than five years ago. That said, for the full year Oracle's total hardware sales were down 2 percent to $2.98 billion while support revenues grew 4 percent to just a smidgen under $2.4 billion. All told, Oracle's system business generated $5.37 billion in revenues for fiscal 2014, flat from a year ago, but operating margins rose 2 percent to just over $3 billion.

"Oracle has become the hardware company taking share, growing, and doing it profitably," Ellison bragged.

On the cloud front, revenues for Oracle's platform and software clouds rose by 25.3 percent to $322 million in the fiscal fourth quarter, with operating income of $185 million, up 18.6 percent. Infrastructure cloud services brought in $128 million, up 13.3 percent, with operating income of $44 million, up 19 percent. As you can see, the margins are not as high on cloud services as Oracle enjoys with its software, but the company is learning how to scale and margins will no doubt improve for cloud services as they have for the Sun hardware business.

"Just like hardware, where we focused on engineered systems, in software we are focused on the cloud," Ellison explained. "We are executing, we are winning, and we are going to be number one."

Oracle has $39 billion in cash and $14 billion net of its debts, so it has the means to take its time to build out its cloud in a way that appeals to existing customers of its database, middleware, and applications. Sales of new software licenses for these products might have been flat at $3.77 billion in the fiscal fourth quarter, but they account for 35 percent of the company's sales and, more importantly, the installed base of such software drove $4.7 billion in software support and update revenues, which is another 40 percent of sales. Oracle does not give operating expenses on its core software, so you can't calculate the operating margins, but on the software support and updates, the margins worked out to 93.5 percent of revenue in Q4.

For the full fiscal 2014 year, Oracle brought in $38.28 billion in sales across all of its product lines, up 3 percent, and net income was flat at $10.96 billion. Oracle's top and bottom line is no doubt being adversely affected by the shift away from software licensing and hardware product sales to cloudy subscriptions for both software and infrastructure. But the latter is a recurring and more predictable revenue stream provided that customers stick with the service and maintain or grow their workloads on it. Oracle really has no choice but to build clouds or let someone else do it with its own software and eat its lunch, which is why Ellison has gone from cloud gadfly to cloud believer in such a short time.

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