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April 22, 2009

Can Oracle really generate a $1.5B profit from Sun?

My analysis leads me to question Oracle's target of generating over $1.5B in operating profit from Sun in the first year after the acquisition

By Savio Rodrigues
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This post is not a commentary on the impact of Oracle's profit target for Sun on Sun and Oracle employees. I don't want to make light of any potential cuts that may result. I simply want to understand what it will take for Oracle to hit the $1.5B profit target for Sun:

"We estimate that the acquired business will contribute over $1.5 billion to Oracle's non-GAAP operating profit in the first year, increasing to over $2 billion in the second year. This would make the Sun acquisition more profitable in per share contribution in the first year than we had planned for the acquisitions of BEA, PeopleSoft, and Siebel combined," said Oracle President Safra Catz.

[ For all news related to the acquisition, visit InfoWorld's special report: Oracle buys Sun for $7.4 billion ]

I started with Sun's fiscal 2009 results. Revenue from the first two quarters of fiscal 2009 is currently available. Going back to fiscal 2008, Sun's revenue appears to be fairly consistent, at approximately 25 percent per quarter (see page 92 of 172). I assumed we could double the first half of fiscal 2009 results to get a full-year fiscal 2009 view. You can see this in the "Est. Full Year @ Run Rate" column. Next, I estimated "Sun's Yr 1 as part of ORCL" column based on the assumptions below.

First, I assumed that product and services revenue would decline 12 percent and 4 percent, respectively, in the first year. These figures are the reported year-to-year declines for Sun's product and service revenue in the first half of fiscal 2009 versus first half of fiscal 2008.

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isaac32767 22-Apr-09 9:07am
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You're assuming that a Sun division of Oracle won't sell any more product than Sun has been able to sell on its own. It should be obvious that Oracle's management doesn't share that assessment. I think they might have something. There are two big ways in which Oracle could pump up Sun's sales figures. The most obvious one is that Sun products will now go through Oracle sales channels, and be backed by Oracle's support organization. Oracle has a lot more resources in this area than Sun has. Their sales organization alone employs more people than all of Sun. The other way Oracle can move more Sun product is by ditching some of Sun's obsolete assumptions. Sun has been trying for 10 years now to break into the commodity computer business, which is the only growth market for Sun's core hardware business. It's consistently failed because there are still too many Sun people who are obsessively loyal to SPARC based systems. That's why Sun ended up writing off its entire $1 billion acquisition of Cobalt Networks. This thriving little x86 server company simply died under Sun's SPARC-centric management and sales teams. Only 3 years after the acquisition, all the key Cobalt people had moved on, and the entire Cobalt product line was dead. This attitude isn't as bad as it used to be, and Sun now has an impressive line of x64 servers that is way ahead of the competition in terms of compute density and power efficiency. But they only account for a small fraction of Sun's server sales, thanks in part to a sales organization that insists on pushing SPARC systems, even to customers who clearly prefer commodity systems. Once people are able to buy Sun commodity servers without sitting through a sales pitch for SPARC systems they have no interest in, a lot more Sun x64 servers are going to get sold. Enough to earn $1.5 billion in profit? You tell me.
Savio Rodrigues 23-Apr-09 8:02pm
@isaac32767, that's a valid point. I guess time will tell if Oracle can drive higher sales out of Sun's products than Sun was able to itself. I personally don't see this happening. With the overlap in the software divisions, very few Sun software products will survive. So I don't see higher software revenues as a reality. On the hardware end, I think it'll take some time for Oracle's sales machine to get comfortable selling hardware. The wildcard is whether customers are more comfortable buying Sun hardware now that Oracle is standing behind the Sun products. Maybe....interesting times though!

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