Oracle to Support Itanuim Servers

According to Reuters, Oracle Corp (ORCL - Analyst Report) will continue to develop software and support Hewlett-Packard Co.’s (HPQ - Analyst Report) Itanuim-based servers after losing the high-profile trial against the latter. However, Oracle said it would appeal against the verdict.

Flashback

The lawsuit dates back to 2011 when Hewlett-Packard or H-P accused Oracle of breach of contract and anticompetitive behavior. The legal suit was filed on the basis of a formal legal demand, which H-P sent to Oracle on June 8, 2011, asking the latter to reverse its decision to discontinue its support for the Itanium-based servers.

In March 2011, Oracle decided to abandon the development of software needed to run Itanium chip-based servers. The cessation was based on the assumption that Intel Corp. (INTC - Analyst Report) could stop manufacturing Itanium chips due to its feared obsolescence. Oracle’s decision came as a major blow to H-P as it uses the same Itanium chips in servers needed to run large corporate databases and other demanding computing tasks.

However, Oracle denied the allegations and said that the formal agreement with H-P did not include a guarantee of continued support for Itanium-based servers. Moreover, Oracle had also claimed that Intel has been planning to phase out the product, something Intel denied. On the contrary, Intel said that it was developing two chips, namely Paulson and Kittson, based on the Itanium-architecture.

Oracle maintained that Itanium chips were expensive and could specifically be used in only a few applications. Therefore, Intel would scrap the Itanium plan and focus on a range of widely-accepted processors.

Recommendation

We believe that Oracle’s previous decision to stop developing software for Itanium-based servers was a strategy to push Sun servers into the market, in order to gain market share. Therefore, the negative ruling will definitely deal the company’s Sun expansion plan a major blow in the new term.

Oracle has been trying to get traction in the server market with its Sun acquisition, but so far the company’s market share in the server market has been nothing great. In the second quarter of 2012, Oracle had just 6% share in this market, way behind H-P and International Business Machines Corp’s (IBM - Analyst Report) 29.6% and 29.2%, respectively, according to IDC. Moreover, its market share and revenues have declined on a year-over-year basis.

However, the addition of servers, storage, SPARC processors, the Solaris operating system, Java and the MySQL database to Oracle's portfolio of database, middleware and business applications, will enable Oracle to expand in the database market.

We maintain our Neutral recommendation on Oracle over the long term (6-12 months). Currently, Oracle has a Zacks #3 Rank, which implies a Hold rating over the short term.