Oracle Kicks Sun Into Shape

I've been a critic of Oracle's (Nasdaq: ORCL  ) buyout of Sun Microsystems from the beginning. Today, Larry Ellison and his gang are starting to close my big mouth a bit. There's still more to be done before I'm entirely convinced of this deal's value, though.

Oracle's third-quarter sales came in at $6.4 billion, a 17% jump year over year. But that includes a month of Sun contributions that weren't there a year ago; when you back that component out, you get a 7% annual boost, because Sun pulled $596 million of revenue back to the Oracle anthill. GAAP earnings per share, where it's entirely fair to include restructuring costs Sun brought to the table because some acquisition indigestion was expected, fell 11% to $0.23 per share.

Sun is expected to contribute to earnings next quarter as Oracle trims some fat. I don't mean cutting back Sun's product lines, but simply making Sun a more efficient operation. Sun used to resell things like Hitachi (NYSE: HIT  ) storage arrays and Symantec's (Nasdaq: SYMC  ) Veritas backup software, which added sales but no profits to the income statement. Oracle won't resell products from Sun's old partners unless it's profitable for Oracle. That is a step that Sun should have taken on its own, years ago. Good move, Larry.

Moreover, Sun used to pre-build tons of server systems to have them ready to ship when a customer ordered them, but the new Sun is a build-to-order operation in the classic mold of Dell (Nasdaq: DELL  ) . It's a low-inventory model that cuts writedowns of systems that were built but left unsold, and a leaner operating model overall. Again, something Sun could have done alone but never did.

So the whole Sun idea seems to be working out OK so far, as Larry Ellison brings a measure of common sense to a sloppy operation. That's one way to unlock value from a buyout. Now let's see if Oracle can keep it up and integrate all of Sun before the clash of the corporate culture titans sets in, right after the honeymoon.

In other news, Oracle management took every opportunity to badmouth software rivals IBM (NYSE: IBM  ) , salesforce.com (NYSE: CRM  ) , and SAP (NYSE: SAP  ) . Ellison took a jab at SAP right in the earnings report, and the criticism continued at length in the earnings call. It's great entertainment, but this schadenfreude doesn't always look professional, guys. Grow up a bit, will you?

Will Sun become great once again as part of Oracle -- or not? The comment box is open for discussion.

Fool contributor Anders Bylund doesn't hold a position in any of the companies discussed here. salesforce.com is a Motley Fool Rule Breakers recommendation. The Fool owns shares of Oracle. Try any of our Foolish newsletters today, free for 30 days. You can check out Anders' holdings and a concise bio if you like, and The Motley Fool is investors writing for investors.


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  • Report this Comment On March 26, 2010, at 3:14 PM, russfellows wrote:

    Yes and no... Sun was not a well run business, as even ex president JS may concede.

    However, to be a true "Enterprise Systems" company, there are things that must be done differently than just pushing high margin software.

    What you are missing, is the fact that account control is critical for this type of a company. Which means that you must resell some things even if you don't make a profit on them, just to maintain account control. Take HDS storage as a case in point.

    It doesn't matter if Sun or Oracle makes money, it is necessary to maintain account control. If they don't have the big storage, they won't be called for the mid-range storage either. If they're not in for high-end and mid-range storage, why bother calling them for tape either? Which means if you are missing one important piece, you may miss it all.

    Account control is something IBM understand VERY well, and a part of their success. This is something Sun learned, and Oracle has yet to learn.

    This is where pure MBA financial analysis misses the reality of what it takes to be successful in this business.

  • Report this Comment On March 26, 2010, at 3:14 PM, russfellows wrote:

    Yes and no... Sun was not a well run business, as even ex president JS may concede.

    However, to be a true "Enterprise Systems" company, there are things that must be done differently than just pushing high margin software.

    What you are missing, is the fact that account control is critical for this type of a company. Which means that you must resell some things even if you don't make a profit on them, just to maintain account control. Take HDS storage as a case in point.

    It doesn't matter if Sun or Oracle makes money, it is necessary to maintain account control. If they don't have the big storage, they won't be called for the mid-range storage either. If they're not in for high-end and mid-range storage, why bother calling them for tape either? Which means if you are missing one important piece, you may miss it all.

    Account control is something IBM understand VERY well, and a part of their success. This is something Sun learned, and Oracle has yet to learn.

    This is where pure MBA financial analysis misses the reality of what it takes to be successful in this business.

  • Report this Comment On March 26, 2010, at 5:08 PM, TMFRhino wrote:

    Hi MrStorage,

    To speak for Anders, he doesn't have an MBA, his background is as a system admin.

    Not that your critique couldn't be without merit, I just see a lot of comments end with responses along the lines of "Well, you finance people have no idea."

    It's uncalled for, and several of our writers have spent time in the trenches in varying jobs that put them in contact with the companies they cover.

    Best,

    Eric

  • Report this Comment On March 28, 2010, at 11:29 PM, edeichinger wrote:

    I'm not a fool. I'm not in your gang!

    I called the thin-client revolution 18 months ago. I've been talking about how Msoft was going to get replaced 2 years ago. I guess someone finally heard me. The install with a CDKey was king but MetaFrame access is going to be the way to go and the operating system shell will be way more simple. The PC will NOT go away though as developers will still need its private computing power along with network access. Also there will be die hards who will insist on private surfing[some of us still like to go out on the web and look for viruses and trojans and racy websites and 'banned' ip addresses. On the "cloud" security will be the final operand and there will be some 'child-proofing' //Sun will be ok if they can come up with some new kicks. Of course Java is still working and they will have that. I was never that impressed with JAva. It is laggy and ambigupopup [too, click and wait] but with the advent of high speeds and more memory it's tolerable. I don't know if they will ever fix it. So yeah! thin-clients for the future and add me for bio-fuel factory on a semi-trailer with a hand crank. PArk it at the farm, throw your refuse in one side get the fuel out the other. that is all for now/"eat well, sleep well, be active once a day, be still once a day, Sing!"edeichinger2006/copy and paste at will

  • Report this Comment On March 29, 2010, at 12:22 AM, grendeth wrote:

    Hear hear TMFRhino. Well said....everyone has something against a guy with a MBA. I held SUN for over 5 years and it tanked. Just glad someone bought out that junk.

  • Report this Comment On April 27, 2010, at 6:31 PM, russfellows wrote:

    TMFRhino (on the value of an MBA vs. hands on)

    Yes, I understand your point. No needless bashing of MBA's. Here's the difference, I have trench experience in engineering, marketing, support, IT operations, etc. etc. PLUS, I also just happen to have an MBA, and no its not one of those from mail order versions either.

    An MBA is valuable, but not more so than experience. IMHO, the best people out there have both.

    So, I get the financial analysis point, I really do. But, it does miss the point, because account control is critical. That is something a financial anlaysts won't get unless they've been on sales calls, or responsible for P&L for a systems company.

    I can tell you, with inside knowledge a big reason Sun (Network Storage division under Mark Canepa at the time) added HDS was because they couldn't get account control. Then, after they had Hitachi products, they still had a hard time selling, which was about 50% of the reason they bought STK, due to their storage knowledgeable sales people.

    So, the "new" SnOracle is missing the boat. Without a highend storage product, no storage account control. No account control means no midrange storage sales either, and oh, by the way; Oracle dropping support on powderhorn tape libraries means customers are running from Sun tape like plutonium. I also happen to have some inside knowledge on that one.

    Oracle's business first focus is a HUGE improvement over Sun's past mentality. Sun was all about religion first, and engineering make work projects. If they happened to make money, so be it. That mentality can never last, and obviously it hasn't.

    Oracle is pragmatic about business, but doesn't know what it doesn't know yet. They have some learning to do...

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