Oracle's Sun purchase: Grading the results so far

Oracle's Sun purchase: Grading the results so far

Summary: Oracle's purchase of Sun Microsystems is a little more than a year old and the results thus far look decent overall. The problem: Quantifying Oracle's success with Sun since the acquisition closed Jan. 27, 2010 is tricky.

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Oracle's purchase of Sun Microsystems is a little more than a year old and the results thus far look decent overall. The problem: Quantifying Oracle's success with Sun since the acquisition closed Jan. 27, 2010 is tricky.

Why is it so tricky? Oracle has melded software with hardware to sell integrated systems. The company has stopped selling many Sun boxes and nixed reseller agreements. Meanwhile, Sun has lost market share in the server market, according to IDC. Some of this share loss is by design, but it's hard to discern what share losses are actually good for Oracle. What's good market share loss versus bad?

Even Oracle's operating profit goal for Sun is a bit murky. For instance, Oracle trumpeted that it was "completely confident" that it will deliver $1.5 billion in operating profit from Sun by the end of the fiscal year at the end of May.

But on the conference call, co-president Safra Catz delivered a big asterisk to that $1.5 billion total. Catz said:

As I told you a couple of quarters ago, we are really no longer able to identify the exact contribution Sun has made to our operating profit this year, but based on our results we fully expect to exceed our goal of $1.5 billion in operating profit in the first full fiscal year. Remember, we paid $5.7 billion for Sun out of cash, and you know had we paid for Sun based on the [HP-3Par] multiple it would've cost us nearly $140 billion. Don't worry, we wouldn't do that.

Strip out that HP-3Par quip and you realize that Oracle's operating profit claim for Sun boils down to: Trust us.

Related: Oracle delivers strong third quarter, to hit Sun profit target

So how is Sun really doing? Simply put, we don't know. Historical data is moot. Oracle's hardware sales are increasingly wrapped into Exadata and Exadata machines. These engineered systems are hardware and software bundles. How exactly do you strip out Sun's results?

With all of those caveats in mind, here's a stab at grading Oracle's acquisition of Sun. Giving Sun a direction. Oracle gets an A on this front. You may disagree with what Oracle is doing with Sun, but the company has been upfront that the goal is to boost margins and cut any product that doesn't generate a profit. Sun hardware today is basically a nice optimized conduit to sell Oracle databases, middleware and applications. Catz said:

This quarter we delivered 55% gross margins on our hardware business. This is the result of the fact that really under the covers of the hardware number the Sun products are growing and the non-Sun products that are resold -- that we resell are shrinking dramatically. In addition, we are selling a lot more of the Exadata/Exalogic line. And remember that these systems are sold at good margins and also pull a lot of software with them, like [racks], partitioning and storage management.

Improving Sun operations. If Oracle just cleans up the mess that was Sun's supply chain it warrants at least a B. Sun just did a lot of things that just didn't make business sense. Catz said that Oracle thinks it can get margins near to levels when the company focused on just software. She said:

We are going to be able to ultimately bring the margins very close, if not even more than they ever were when we were just a software business. So, we still think there is actually quite a bit of room, to be honest with you. We're not quite at scale yet. We do still resell some third-party hardware. And, so we actually think there is -- it's going to continue to go up. It will obviously be higher than last year's Q4.

It's a bit hard not to be cynical about that statement. Hardware doesn't pull the margins of software---never has and never will. You could argue that if you sell less hardware that margins will naturally gravitate higher.

Nevertheless, Oracle seems to be doing better blocking and tackling than Sun did. Sun never really talked about blocking and tackling. It was either quips from Scott McNealy or a whiteboard seminar from Jonathan Schwartz. Catz added:

The first thing we needed to address was our supply chain, frankly, and getting it under control, which is now really is. And really optimizing the size that we are and not being very broadly and widely distributed all over. So, part of it is the cost, just the cost of the supply chain itself.

Getting Sun off life support. Oracle gets another high grade on this front, say an A. IT buyers know Oracle will be around. Sun was toast. There's no delicate way to put it, but Sun's future was becoming more dismal with every quarter. Co-president Mark Hurd said:

With Oracle you're certainly taking one issue that did concern some customers, which was the viability of the entity. You know, was the Company sustainable, was the Company going to be in a position? Because as you know, many of these customers made commitments and they look to be on this platform for years. And so when they make those decisions, they want to know that the Company is going to be there and be behind it. So, point one is sustainability -- I think very positive. I don't want to make it sound like we don't have work to do. This was a company that had been through several years of turmoil.

Sun's technology roadmap. On the roadmap front, the Oracle story began fuzzy and improved slightly. We'll give Oracle an incomplete here and that's probably being charitable. Oracle CEO Larry Ellison has repeatedly said that he will invest in Sparc and Solaris. On Solaris, Oracle is fighting for a flat at best Unix server pie. Exhibit A is Oracle's big squabble over Itanium with HP and Intel. Oracle last fall began outlining improvements and next releases for Sparc and Solaris.

Growth. Oracle hasn't grown Sun's business. Market share---and revenue share---is still falling. Then again, Sun is a fixer upper. Catz said Oracle can grow the Sun hardware platform. Theoretically, revenue will follow. Grade: F to incomplete. Here's a look at Oracle's hardware system revenue over the last five quarters.

  • Q4, fiscal 2010: $1.83 billion ($1.23 billion product, $598 support)
  • Q1, fiscal 2011: $1.7 billion ($1.07 billion product, $619 million support)
  • Q2, fiscal 2011: $1.75 billion ($1.1 billion product, $641 million support)
  • Q3, fiscal 2011: $1.66 billion ($1.03 billion product, $629 million support)

In Sun's last quarter as a public company---the three months ending Sept. 27, 2009---it reported product revenue of $1.18 billion and services of $1.05 billion. Those figures are a bit apples and oranges compared to Oracle's, but worth noting.

Market share. Oracle gets a C for charitable grading here. Why? For starters, Oracle isn't playing the market share game and focusing on high-end systems. In addition, Sun's market share could have tanked more. According to IDC, Sun's market share was 6.8 percent of the server market in 2010, down from 8.8 percent in 2009. HP, IBM and Dell took share from Sun. The 2011 server market share stats will give us a better feel for Sun's standing and ultimate landing spot.

Overall grade: Given the moving parts, so-so financial clarity and unknowns about future growth, I'd have to rate Oracle's purchase of Sun as an incomplete. The next year will reveal more details. Sun is better off than a year ago for sure, but we'll see if Oracle can become a hardware juggernaut. Exalogic and Exadata are a good start, but we need to see real sales figures not comments about great pipelines.

End note: You're probably wondering about how Oracle has done with Sun's software portfolio. Regarding Java, Sun never monetized it and Oracle probably won't either---unless it wins a lawsuit against Google over Android. And then there's MySQL, which was a big question mark after Oracle bought Sun. However, Oracle has updated MySQL, but the real value is control of what could be a database margin killer. Overall, it's impossible to quantify Sun's software contribution to Oracle.

Topics: Oracle, CXO, Hardware, IT Employment

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21 comments
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  • RE: Oracle's Sun purchase: Grading the results so far

    Wow. Speaking strictly as an "part time investor", any time I see that much lawyer speak in a financial statement I look for a "better opportunity".
    BrentRBrian
    • please let me know when you find one

      @BrentRBrian All financial statements are written in lawyer speak!
      otaddy
  • RE: Oracle's Sun purchase: Grading the results so far

    Larry, kind of missed a "final grade" so to speak. It sounds like your opinion is somewhat mixed but it looks closer to a B than a C? not sure.

    Overall I hear so much noise on this that I think people forget what happened sometimes. THere is so much angst over Oracle cutting this , or stopping that opensource project that its clear they forget that all those non-profit activities and focus helped ruin Sun. Oracle was clearly only there to salvage what it could and build the Exadata brand and seems to be doing pretty good at resurrecting the business. THey just get slammed by the ponytail group for not adherring to the goals that Sun had.
    georgef
    • Larry is correct in saying Sun lacked direction

      @georgef and that Oracle is providing direction now.

      It's too bad McNeely and Schwartz werent better leaders..instead they made snarky jabs against microsoft and then started preaching open-source silliness. Sun had some great ideas and engineering talent, but it was squandered due to lack of leadership.
      otaddy
    • RE: Oracle's Sun purchase: Grading the results so far

      @georgef good point. will add one now. I view it as a big incomplete at this point.
      Larry Dignan
  • RE: Oracle's Sun purchase: Grading the results so far

    the writer wrote an unknown facts?
    oldtechdudze
  • RE: Oracle's Sun purchase: Grading the results so far

    no mention of the OpenOffice and LibreOffice spat?
    doh123
    • RE: Oracle's Sun purchase: Grading the results so far

      @doh123 I'm following the money. And well there's no money in those hills. The open source Oracle stuff is probably a separate post completely.
      Larry Dignan
      • yep, libre is dead on arrival...just like OO

        @Larry Dignan If google docs cant make a dent in Office share, how can a third rate suite of code from the 90's hope to do so. And Im not sure why developers would waste their time working on such a project...
        otaddy
  • RE: Oracle's Sun purchase: Grading the results so far

    Too bad you didn't look into the support issue. My experience with Sun support was overall pretty good. Once Oracle took over support for Sun stuff is pretty dismal. You no longer can get live transfer, even for a down system. The first level types are truly clueless as it appears they do not look at any information (detailed descriptions, explorer output, etc.). Had a support type call me at 9:30PM for a severity 3,even though the contact info said EDT. It's to the point that I'm recommending we not purchase any more Oracle hardware. From my contacts and other sources I'm not the only one.
    shallow_diver
    • RE: Oracle's Sun purchase: Grading the results so far

      @shallow_diver

      + 1 We have a directive to remove all Oracle Hardware from the premises within a year. Besides support that's horrible, we were forced to maintain support on mothballed systems. Our response -- they'll stay on support until the end of the contract then Z E R O oracle hardware.
      bearded-grey
      • We've been given the opposite directive

        @bearded-grey Sun was wallowing. Support from Oracle has been much better.
        otaddy
  • Software margins

    I think the problem is that an engineer told the "magic smoke" joke one too many times, and all consumers started to believe it. Eventually, they're going to stop believing that all the software comes for the Flying Spaghetti Monster and expect(from actual HW FA contracts)

    1. <.02% failure rates in the field including interop
    2. Warranty replacement
    3. massive penalties on failure to deliver
    4. Assurance of Supply

    Then we'll see what happens to the margins on software.
    tkejlboom
  • RE: Oracle's Sun purchase: Grading the results so far

    Can't say I think the Sun boxes are much better of a deal now than they were a few years ago.
    I will say that Oracle's purchase of BEA and subsequent unilateral changes to the licensing agreement and support website drove me to drop BEA/Oracle products altogether and go with open source competitors. Good job Oracle!
    putty.master
  • RE: Oracle's Sun purchase: Grading the results so far

    Figure since the Sun site is going away and the Open Office disaster, I'll just wait for Oracle to go away! Please!!!
    LinuxPops
  • RE: Oracle's Sun purchase: Grading the results so far

    They may have 'ruined' Sun financially, but they still made cool stuff that people wanted, and were great fun to work for. Working for Oracle, on the other hand, is like repeatedly hitting yourself over the head with a concrete block from the 1980s.
    scottishwildcat
  • RE: Oracle's Sun purchase: Grading the results so far

    ABYSMAL<br><br>Here at the south side of the Rio Grande, SUN Support was at best pathetic. And after it was taken over by Oracle it has sunk to new lows.<br><br>I have customers that have been waiting for OVER a Year for Sun/Oracle whatever to allow them to purchase a support contract. In my country Oracle LOST virtually all its field service engineers and it's still struggling to hire new ones. Currently, It's absolutely impossible to get any support for Solaris or Sun hardware other than the info available on the Internet. If a customer asked me right for a hardware solution I'd answer ANYTHING BUT Oracle. And I suspect that will be the way things will be for quite a while.
    Imprecator
  • I dont think they are doing too well.

    Their server platform has tanked. Their OS marketshare has dropped. The Java platform is in disarray with them trying to change the licenses on Java itself. They have tried to price gouge on their database solutions, forcing people off their platforms again. They have failed with OpenOffice and caused a fork which is being widely adopted, and will replace OpenOffice in the future for good.
    So I would say they are moving backwards pretty quickly.
    Jimster480
    • RE: Oracle's Sun purchase: Grading the results so far

      @Jimster480 Well said!
      thombone
  • RE: Oracle's Sun purchase: Grading the results so far

    This writer is COMPLETELY UNQUALIFIED to be writing about this. Many seriously important things Oracle has done aren't even mentioned.

    So here, let me summarize it for you, writer: Oracle is proving to be one of the most boneheaded companies on the planet, is destroying many open-source projects, and in the name of greed is making enemies everywhere, especially in the OSS community.

    No, go rewrite your article to reflect reality, please. Oh and there's this thing called "research". Google it.
    thombone