Oracle Squeaks Out Growth, Promises Revenues from Sun

April 5, 2010 Timothy Prickett Morgan

As the second-largest provider of application software in the world and now a server maker with aspirations of selling integrated systems, Oracle is now, by definition, a direct competitor to the AS/400 and its progeny. And how well or poorly it does, financially as well as technically, matters to i For Business shops. Because for a lot of the larger i shops that account for the bulk of the platform’s revenues these days, the next stop if they don’t continue to invest in IBM gear is a move to an Oracle platform.

While The Four Hundred was on hiatus, Oracle reported its financial results for the third quarter of fiscal 2010 ended in February, and sales of Oracle’s products minus Sun rose by 7 percent. Including one month of sales attributable to Sun, Oracle’s revenues were up 17 percent, to $6.4 billion. (Accounting rules allow Oracle to count the Sun sales as growth, but if you wanted to be fair and accurate, Oracle would have to show how this compared to the same month a year ago, or all merged companies would be require to backcast their financials for one year to show what the real growth was–or was not.) Oracle said that Sun contributed $273 million in hardware systems sales since the $7.4 billion Sun acquisition closed at the end of January, and another $185 million came in for hardware support. In total, including software and services, Sun brought Oracle $596 million in revenues during the quarter, which is where 10 points of 17 point revenue growth for the quarter came from.

By virtue of its application software business, Oracle has become a bellwether for the IT industry despite the fact that it is dwarfed by the size of IBM and Hewlett-Packard, and is still a lot smaller than Microsoft; Cisco Systems, the true server wannabe that is starting from scratch instead of buying its way in like Oracle, is a bit larger than Oracle and has not gone all the way to wanting to sell applications as well as iron. Cisco may yet get there. Imagine a combined SAP and Cisco? Stranger things have happened. Like Oracle buying Sun, for instance. Or IBM deciding not to.

In the fiscal third quarter, Oracle booked $1.7 billion in new software license sales, up 10 percent, and only $46 million of that came from Sun products. (Sun had more or less stopped selling software, taking its products open source and relying on support contracts for revenue.) Software license updates and product support revenues came to $3.3 billion in the quarter, an uptick of 13 percent compared to the year-ago quarter.

Non-GAAP operating income, excluding Sun, was $1.9 billion, up 9 percent. But Oracle booked $306 million in restructuring charges and $34 million in acquisition costs relating to the Sun deal, and that chewed into net earnings, which only rose by 10 percent, to $1.2 billion.

Safra Catz, one of the two co-presidents of Oracle, said in a conference call with Wall Street analysts that the Sun unit would have hardware sales of $1.2 billion to $1.3 billion in the fiscal second quarter ending in May, and added that Oracle still believed it could extract $1.5 billion in operating margins out of the Sun business in the first 12 months following the acquisition and $2 billion in the year after that.

One way Oracle is confident that it can do this is that it is stopping selling products that helped Sun get revenues but did nothing at all for profits. So, for instance, Oracle is winding down the high-end disk array partnership with Hitachi, and it will very likely be very picky about how many different X64 servers it brings to market, too. The Sun unit is now building systems as orders come in, not building up inventory, which cuts down on costs even if it means slightly longer lead times on deliveries. The Oracle sales force is taking control of the top several thousand Sun accounts, too, and hardware sales reps are being compensated based on the profit margins of their deals, as all of Oracle’s other sales reps peddling software and services are. Oracle also walked away from some big supercomputer deals that would have made nice press releases, but no money.

To think that Sun was run by a Stanford MBA and a McKinsey consultant. This all seems like pretty obvious and necessary changes from the outside. Small wonder Sun’s egotistical top brass had to sell the company. They don’t appear to have known how to run it. I often joked that Sun was merely a means by which a lot of Silicon Valley researchers could get paychecks from something that smelled like a university but gave stock options. I had not realized how close I was in that assessment.

Now that it is part of Oracle, Sun is very dangerous indeed. We’ll see if IBM truly appreciates just how bad a move it was to let Sun out of its grip. I still don’t think IBM understands the threat that Windows NT was to the company, and that was a decade and a half ago. History does not repeat itself always, of course; It’s not like it has post traumatic stress disorder. But people–and companies–do behave in consistent ways. IBM has a habit of not understanding threats to its business, and Oracle has a habit of making acquisitions and making money.

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