Oracle Corp.'s latest quarterly numbers were marred by a pocket of weakness: Revenue from computer hardware, mainly servers, declined, disappointing investors who were expecting more. Oracle's overall numbers were stronger than expected, and its guidance was in line with analyst estimates, so the stock regained some of its lost ground.
Still, the selloff showed how jittery some investors have become about Oracle's prospects for a server business it got as part of its $7.3 billion acquisition of Sun Microsystems last year. Sun, a fallen dot-com-era star, had been losing billions of dollars a year as demand for its niche of high-end servers waned. Oracle CEO Larry Ellison has repeated his strategy of ignoring low-margin server deals, even at the expense of overall sales.
On a conference call with analysts, Oracle's new co-president, Mark Hurd, who resigned under pressure as CEO of Hewlett-Packard Co. last year and was snapped up by his friend Ellison, addressed questions about Oracle's strategy of pursuing only the most profitable server deals. His experience is instructive: HP is one of the world's biggest server sellers.
QUESTION: My question is about the hardware business ... How material was the headwind in the quarter relative to the shift in the model? And what gives you confidence that the product business starts to grow again?
ANSWER: Selling units that have no gross margin are easy to do. You know, I could get _ I won't give you examples of what I could, but we have ways of selling lots of hardware without getting margin. We are focused on selling hardware systems. We are now selling fewer systems at a higher price that are of more value to the customer that stay installed longer. And also we're doing that at higher margins. So these are the fundamentals of a solid hardware business, and then of course to the point we have to eventually grow that business on a top line, and you have a very, very attractive business model.