Oracle uses Sun as springboard in Q4
More hardware appliances on way
The first post-Sun-acquisition financial results are in for Oracle, and the software maker has turned a profit on its Sun business. But it's an operating profit, not a net profit with real black on the bottom line, and that does not take into account restructuring charges from layoffs and other tweaks to the Sun business. If not for those restructuring charges, it seems, the Sun business would have been marginally in the black.
In the fourth quarter ended May 31 in fiscal 2010, Oracle's revenues grew by 39 per cent, to $9.51bn. Net income rose 25 per cent, to $2.36bn.
For the full fiscal 2010 year, Oracle had $26.8bn in sales, up 15 per cent with only four months of contribution from Sun. Net income rose by 23 per cent, to $6.14bn. Oracle ended the year with $18.5bn in cash and securities but has $14.65bn in debt – mostly used to fund its huge number of acquisitions over the past decade.
In Q4, new software license revenues were up by 14 per cent, to $3.14bn and software license updates and product support sales accounted for another $3.43bn, bringing total software sales for the company to $6.57bn, increasing 13 per cent over 2009's fiscal Q4. Oracle's hardware business, which includes servers, disk and tape storage, switches, and other goodies bearing the Sun label, accounted for $1.23bn in the quarter, while hardware systems support brought in $598m in revenues. That's $1.83bn in hardware systems sales. Various other services accounted for another $1.11bn in sales in fiscal Q4, up 4 per cent.
While the addition of Sun fudged the revenue compare numbers a bit (as acquisitions always do), Oracle's database and middleware business was up 16 percent worldwide, to $4.59bn, with a mostly even split between new license sales and support. In a conference call with Wall Street analysts, Safra Catz, co-president at Oracle, called database sales "spectacular" in fiscal Q4, and added that database sales rose by 34 per cent in the Americas region (this figure includes middleware).
Application software revenues came to $1.98bn, up 7 per cent, with $855m coming from new license sales and $1.12bn coming from software license updates and product support. While this business was not growing fast, chief executive officer Larry Ellison said that Oracle continues to take share from rival SAP on the application front, and Catz pointed out that Oracle's gross margins, at 46 percent, are higher than SAP's - and that is with Oracle now being in the hardware biz.
Let's take a look under the hardware hood
There's no prior compare for the hardware systems and related support figures that Oracle provided in its Q4 figures since Oracle didn't own Sun last year and accounting rules do not require public companies to compare figures for the acquired firms prior to acquisition. This would have been very tough to do anyway, since Oracle's fiscal year ends in May and Sun ended in June. But it does bear pointing out how far Sun had fallen in such a short time to get a sense of where the floor might be for the Sun biz.
Given the rockiness of everyone's financials this time last year and the trials and tribulations of Sun being in play, the formerly independent company's sales hit a wall and then crashed. In the March 2009 quarter, Sun had $1.52bn in product sales and $1.1bn in services revenues, and lost $201m. In the June 2009 quarter, which is when the IBM acquisition had failed and Oracle had swept in, Sun's revenues swooned 30.6 per cent, to $2.62bn, with product sales of $1.49bn (down 38 per cent) and services sales of $1.14bn (falling 18 per cent). It posted a $147m loss. In the last quarter we have any visibility for Sun as a free-standing company, in the first quarter of its fiscal 2010 ended in September 2009, Sun had product revenues of $1.19bn and services revenues of $1.06bn, and booked a $120m loss.
Oracle does not say how much of the services revenue stream it reports comes from Sun, but it looks like a lot of those services are being reconciled as hardware support, but some is ending up in consulting and training. It is hard to say if the Sun business continues to shrink – Catz said the Sun hardware business was growing. She did not quantify or qualify that further.
What Oracle did say in its detailed financial results is that a portion of the "Sun's legacy business" is included in the results for the overall Oracle software and services businesses, and then added that the hardware systems business had an operating margin of $406m in fiscal Q4. The company said that the Sun products reduced Oracle's GAAP operating income by around $91m and increased non-GAAP operating income by $412m.
Oracle paid $4m in stock-based compensation and wrote off $176 in amortized intangible assets. After those charges, you get the $406m in margins for the hardware line, and Sun's other software and services units contributed another $139m in margins, for a total of $545m. Then Oracle allocated $338m in research and development costs, $98m in general and administrative costs, $93m in acquisition costs, and $107m in restructuring costs, which pushed the overall Sun business to a $91m operating loss.
In other words, this is about the kind of quarter that Sun itself might have done had it rationalized its product lines, cleaned up its manufacturing and distribution issues, and laid off employees, as Oracle has done. But the situation is not that simple. The difference between what Sun could have done (and should have done) and what Oracle has done is this: With Oracle owning Sun, there is a hope that the data centers of the world trust Oracle application, middleware, and database software give Oracle the benefit of the doubt as it gets it hardware and operating system act together. Sun had already burned its goodwill at data centers and on Wall Street between 2004 and 2008. Nothing short of another dot-com boom was going to change that.
Looking ahead to more systems sales
Oracle gave itself some pretty wide error bars when it dished out guidance for the first quarter of fiscal 2011 ended in August, but was pretty precise, if conservative, about what it expected from its hardware systems business.
Catz said on the call that new software license sales would grow by between 4 and 14 per cent at constant currency and given prevailing exchange rates, that would work out to growth of between 2 and 12 per cent as reported. Non-GAAP revenue growth would be between 41 and 45 per cent as reported, including Sun obviously, and earnings per share would be 17 to 18 cents. Not much in the way of a hard number.
But Catz said that the Sun business would generate $1bn in revenues worldwide at constant currency, putting a stake in the ground, and one that she said was conservative. She reiterated the long-held target from Oracle that it can extract $1.5bn in operating profit from Sun in its first year of possession in fiscal 2011 and another $2bn in fiscal 2012.
Ellison agreed that the $1bn hardware number for the first quarter was conservative. "We are focused on growing the Sun business and growing that business very rapidly," Ellison said. "We are adding a lot of sales people, but it takes a lot of time to get them up to speed." He said that Oracle would more than double the Sun sales force to help it peddle its more streamlined and profitable server, storage, and switching products.
One of the products that Ellison has been hot to trot on since last September is the Exadata V2 database appliance cluster, which is based on Sun hardware and Oracle software. Ellison said that in the fourth quarter, Oracle's Exadata V2 beat out IBM in thirty deals, Teradata in nine deals, and Netezza in seven deals. He added that the Exadata V2 revenue pipeline for fiscal 2011 is approaching $1bn.
Charles Phillips, the other co-president at Oracle, said that the company added 400 customers to its Red Hat Enterprise Linux knockoff, Oracle Enterprise Linux, during the quarter and that the customer base for this product now numbers 5,000 companies.
Phillips said that Oracle was working on what he called an "Oracle VM Machine," which would be a bundle of Sun server and storage hardware and presumably Oracle VM Xen-style virtualization. "We can package these technologies together in a way our competitors can't."
Well, at least in the x64 server racket. Makers of mainframes, proprietary midrange boxes, and RISC/Unix platforms have had such control for a decade or two, depending on the system. Which Phillips knows full well, or should. ®