Thursday, September 25, 2008

Oracle Dives Headlong into Hardware

Oracle Dives Headlong into Hardware

Larry Ellison kicked off his annual speech to Oracle (ORCL) customers by comparing the engineering behind his new America's Cup racing yacht to Oracle's products. "Like a lot of families, I'm holding down two jobs," he quipped.

Oracle's billionaire CEO Ellison isn't personally feeling the sting of a weak economy, and he used his Sept. 24 speech at Oracle's OpenWorld conference in San Francisco to outline how he hopes to shield his company from it, too.

Oracle unveiled its first-ever hardware products, a pair of servers built by Hewlett-Packard (HPQ) that run Oracle software and is designed to speed the performance of Oracle databases running on them. A storage server lets data flow more quickly from disk drives into the company's database. And the companies' co-branded "Database Machine," which towered over Ellison on stage, is meant to deliver big performance boosts to companies that run an Oracle database on it. "Oracle's going into the hardware business, but we're not going alone," he said.

Safe Haven for Investors

Sales of database software are powering financial results at Oracle, even as sales of its business applications have faltered. The company has spent $34 billion to buy about 50 software companies since the beginning of 2005, it said this week. That's propelled Oracle into the market for applications that run payrolls, billing systems, and sales departments. But though application sales fell 12% in the most recent quarter, sales of databases and application-connecting middleware rose 27%, giving succor to investors worrying how well Oracle and other tech companies are weathering the U.S. economic storm.

Oracle's stock has served as a relative safe haven for investors this year, outperforming the Nasdaq composite index and the Standards & Poor's 500-stock index. Operating profit margins topped 40% (, 9/19/08) during the first quarter of Oracle's fiscal 2009, helped by a big dose of highly profitable technical support revenues.

Those margins make the company's shares "a very nice place to hide" from the market turmoil, even though revenue growth is slowing, says Pat Walravens, a senior software analyst at JMP Securities (JMP), who rates Oracle stock market outperform. "You have a balancing act between operating margin expansion and decelerating growth," says Walravens. "In this particular quarter, operating margin expansion came out ahead."

Focusing on Databases

Having built up the applications side of Oracle's business, Ellison's speech made it clear that he's now focusing on databases, the engine of Oracle's sales and profits. The company is the leader in database software, with a 48.6% share of the $17 billion market last year, according to market researcher Gartner (IT). IBM (IBM) controlled 20.7% of the market, slightly less than in 2006. And Microsoft (MSFT) gained a bit of share, to 18.1% of all sales.

Sales of database and middleware licenses, and customers' technical support fees for those products, accounted for two-thirds of Oracle's $4.2 billion in software revenue in the first quarter. And its January acquisition of middleware maker BEA Systems gives the company a new weapon against rivals IBM and SAP (SAP). "Anything you can do to reduce the cost of plumbing is a big win for customers", says Bruce Richardson, chief research officer at industry consultant AMR Research.

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