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Oracle insists it got a good deal when it outbid IBM for Sun Microsystems, but you’ve got to wonder if Oracle Chief Larry Ellison is looking at the same numbers Wall Street took in Tuesday.
Sun projected that its fourth quarter, which ended June 30, will result in a loss of between six cents to 16 cents a share on revenue of between $2.58 billion and $2.68 billion. That compares to a forecasted loss by analysts of one cent per share on revenue of $3.03 billion. Not only was the loss much steeper than expected, but the decline in revenues was a shocker. Consider that in the year ago quarter, Sun’s revenues were $3.78 billion.
More than $1 billion in revenues has been wiped off the books.
Even on Tuesday, Oracle was defending its purchase of Sun, saying the acquisition will boost its profits. But it’s clear the financial picture at Sun is much worse than expected and Oracle faces an uphill battle in turning the company around.
In the financial update Sun did not offer any reasons for the dismal results, but it doesn’t take a crystal ball to see what’s happening. Hardware buyers, who are already being extra cautious in the recession, are clearly uncomfortable with Sun’s situation and are looking for more clarity from Oracle on its intentions. Senior management at Sun, and most certainly the rank and file, are distracted by the Oracle deal and their tenuous futures. And finally, IBM and HP are probably having a field day playing off the uncertainty.
Ellison has put his pride on the line by declaring the Sun acquisition will be positive to earnings, so that can mean only one thing – cuts are coming and they will be drastic. Watch for Oracle to take a hatchet to Sun’s unprofitable or low-margin hardware lines and milk revenue from its higher-margin maintenance services. Oracle has said one of the greatest assets gained in the Sun purchase was its Java software, so look for the company to come up with a clear action plan to leverage that asset.
Oracle has previously said the Sun acquisition will contribute more than $1.5 billion to operating profit in the first year, increasing to $2 billion in the second. Based on the latest projections, it will be quite an achievement if Larry and company can pull it off.
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