Oracle Says Sun Operations Are Now Profitable

Oracle has turned its Sun hardware operations into a profitable business, eliminating unprofitable reseller deals and streamlining internal operations, Oracle executives said during an earnings call Thursday.

The call also featured the first public comments by former Hewlett-Packard CEO Mark Hurd who was named Oracle co-president last week following the unexpected resignation of president Charles Phillips.

For the quarter ended Aug. 31 Oracle reported revenue of $7.5 billion, up 48 percent from $5.1 billion in the first quarter last year. Net income reached $1.4 billion, up 20 percent from $1.1 billion one year ago.

A good chunk of the year-to-year growth came from Oracle's $7.3-billion acquisition of Sun Microsystems in January. Sales of hardware systems products and support added nearly $1.7 billion in revenue to the company's top line, accounting for 23 percent of Oracle's total revenue.

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"I know there's been a lot of concern about Oracle going into the hardware business," said CEO Larry Ellison on the earnings call. "We now have a very profitable hardware business and we think it's going to become even more profitable" as the fiscal year goes forward.

Ellison said the gross margin of the Sun operations was 48.4 percent in the first quarter compared to around 38 percent before the acquisition. Ellison said Oracle stopped pursuing unprofitable deals, reduced the number of contract manufacturers, and stopped reselling products from Hitachi, Veritas and other vendors. He said the Sun operations, including its inventory and order management, human resource and payroll systems, would be fully integrated with Oracle's systems by January.

Oracle also has been making more direct sales of Sun hardware to large customers in a move that has improved Oracle's profit margins, but has angered some long-time Sun resellers. "We've ended numerous reselling agreements accounting for hundreds of millions of dollars of hardware revenue that usually came to Sun at little or no profit at all," co-president Safra Catz said on the call.

But a number of HP resellers have expressed interest in joining Oracle's channel program following Hurd's hiring.

NEXT: Hurd Discusses Oracle Wins, Opportunities

Ellison said that with most of the cost-cutting work complete, the focus now would be on growing hardware sales. "We think we can double the size of that hardware business," he said. He predicted that sales of Oracle's high-performance Exadata database machine alone would reach $1.5 billion for all of fiscal 2011.

Hurd, noting that he has competed against Oracle for 25 years, also spoke about what he described as "the clear growth opportunities I see going forward" and said increasing hardware sales will be one of his key goals. "I don't believe there is any other company in the industry that's better positioned than Oracle," he said.

Taking the role previously filled by Phillips, Hurd recapped Oracle's first-quarter financial results, including key customer wins.

New software license sales grew 25 percent to $1.3 billion in the first quarter while revenue from software license updates and product support was up 11 percent to $3.5 billion. Database and middleware software-related revenue was nearly $3.3 billion in the quarter while application software-related revenue was nearly $1.5 billion.

Catz said revenue in the current quarter is forecast to increase between 42 and 47 percent over the same period last year.

Ellison also said that Oracle, in a widely expected move, would formally announce its next-generation Fusion applications at next week's Oracle OpenWorld conference. He also disclosed that Oracle is currently developing an in-memory database product.

Ellison also said he was "flattered" by comments by IBM CEO Samuel Palmisano, in a Wall Street Journal story this week, that painted Oracle as a serious competitive threat to IBM. Ellison said IBM's business is increasingly focused on IT services while Oracle is focused more on IT products. The Oracle CEO took the position that if IT hardware and software are properly engineered and integrated from the start, there shouldn't be much need for such services.