Oracle Done with Sun, Now What?

After almost a year of announcing the Sun acquisition, Oracle (NASDAQ:ORCL) finally closed the deal on January 26, 2010. And in the first quarter including Sun’s results, it reported a 17% increase in revenue and earnings in-line with estimates. However, the decline in profit and the company’s dull guidance hasn’t gone down well with investors, and the stock dipped to take its valuation to a five-year low. Let’s take a closer look.

Right after completing the Sun deal, Oracle outlined its strategy for the acquisition. “We want to recreate the environment of the 1960s, but on open standards,” said president Charles Phillips. Oracle wants to be the mega IT vendor that customers depend on for all their IT needs: hardware, software, and support. With the Sun acquisition, Oracle the leader in software applications will now be able to offer an integrated technology stack from hardware to software. It will be able to offer the MySQL database technology, the Java programming language, and the Unix-based Solaris operating system on top of its hardware. Oracle also said that it would be hiring 2,000 sales people and engineers while layoffs will number about 1,000. Sun had already gone through severe restructuring: at the end of September, it had 27,596 employees and announced another 3,000 layoffs in October.

Excluding the impact of Sun, Oracle’s revenue grew 7% and including Sun, revenue grew 17% to $6.4 billion, beating estimates of $6.35 billion. Sun contributed to revenue of $596 million. GAAP net income was down 10% to $1.2 billion or $0.23 per share. Non-GAAP EPS was $0.38, in-line with estimates. During the quarter, the company bought back shares for about $250 million and has $17.5 billion in cash and investments. The company declared a dividend of $0.05 per share.  Q2 coverage is available here.

New software license revenues were up 13% to $1.7 billion including $46 million from Sun. Software license updates and product support revenue was up 13% to $3.3 billion including $25 million from Sun. Revenue from hardware systems products was $273 million while revenue from hardware systems support was $224 million. Services revenue was $931 million, down 9%.

Introduced last year, Exadata is Sun’s fastest-growing storage server with nearly $400 million in sales so far and Q4 bookings estimated at $100 million. Exadata was first launched in partnership with HP, but in September, using Sun’s hardware, Oracle launched a second version for online transaction processing and data warehousing.

Another important area of focus for Oracle is its development of Fusion applications. The delivery is expected this year and Oracle expects to challenge SAP’s leading position in applications with it. CEO Larry Ellison continued to take jibes at SAP.  “Every quarter we grab huge chunks of market share from SAP,” he said. “SAP’s most recent quarter was the best quarter of their year, only down 15%, while Oracle’s application sales were up 21%. But SAP is well ahead of us in the number of CEOs for this year, announcing their third and fourth, while we only had one.”

For the fourth quarter, Oracle expects revenue to grow 35%-40% to $9.5 billion. New software license revenue growth is expected to range from 3%-13% and hardware product revenues are expected to range from $1.2 billion to $1.3 billion. Non-GAAP EPS is expected to be $0.52 to $0.56, slightly above street estimate of $0.53. Oracle expects Sun to contribute $1.5 billion in non-GAAP operating income in fiscal year 2011 and $2 billion in fiscal year 2012.

Oracle is currently trading around $26 with market cap of about $129 billion. It hit a 52-week high of $25.70 on March 17 before its earnings report. Oracle has become an expert at integrating acquisitions, and I have no doubt it will handle Sun well, too. And once the Sun integration is completed, Oracle should  jump on the SaaS bandwagon. More and more Fortune 500 applications are moving to adopt SaaS. According to Gartner, SaaS enterprise application market is expected to grow consistently 2013 to over $14 billion. Oracle could get a jump start with some SaaS acquisitions.