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Oracle Corporation (ORCL): Will Hewlett-Packard Company (HPQ) Win Big Bucks From It?

Struggling tech giant Hewlett-Packard Company (NYSE:HPQ) and its new nemesis Oracle Corporation (NASDAQ:ORCL) are headed back to court next week. The companies have been embroiled in a major lawsuit for nearly two years over Oracle’s support for HP servers running on Intel (NASDAQ:INTC)‘s Itanium chips. Last year, the court found that Oracle had breached its contract with HP by stating that it would end support for Itanium; now a jury will decide how much to award in damages. Any award is virtually certain to be appealed by Oracle, and media sources have reported a wide range of estimates for damages. Nevertheless, any significant award will be great news for HP, which is trying to rebuild its balance sheet after a string of overpriced acquisitions.

The background
Intel’s Itanium architecture (which actually originated at HP) was once hailed as a revolutionary development for the server market. However, sales never lived up to expectations, as most customers have opted for systems based on the common x86 architecture. Hewlett-Packard Company (NYSE:HPQ) is the only major company that has stuck with Itanium, which it uses in its Business Critical Systems product line. Low sales of Itanium servers eventually led to a loss of developer support. In March, 2011, Oracle Corporation (NASDAQ:ORCL) announced that it would stop all software development for Itanium. In the press release announcing the decision, Oracle noted that Microsoft Corporation (NASDAQ:MSFT) and Red Hat, Inc. (NYSE:RHT) had already abandoned Itanium as well.

The problem was that HP and Oracle had signed a settlement agreement six months earlier (after former HP CEO Mark Hurd was hired as co-president of Oracle) in which Oracle specifically agreed to continue offering its product suite on HP platforms. While Oracle’s management claimed that the settlement merely implied a cooperative relationship, HP maintained that Oracle Corporation (NASDAQ:ORCL) was required to develop Itanium versions for new software products. The case went to trial last year, and after the judge found in favor of HP, Oracle was forced to resume full support for the Itanium platform.

The damages
While Hewlett-Packard Company (NYSE:HPQ) prevailed in court, the damage to its business was done. In the announcement that it was ending development for the Itanium platform, Oracle stated that the platform was reaching the end of its life (something that has been disputed by HP and Intel). The resulting customer uncertainty played a large role in the rapid decline of HP’s Itanium business. For the first six months of FY11 (through April 30, 2011), Business Critical Systems revenue was up 1% compared to the same period in FY10. BCS revenue then posted a 9% year-over-year drop in Q3 and a 23% year-over-year drop in Q4. BCS revenue then dropped another 23% in FY12.

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