Oracle Revamps Sun, Sees Upside

REDWOOD SHORES, Calif. ( TheStreet) -- Oracle ( ORCL), which posted strong third-quarter results on Thursday, is breathing new life into its Sun acquisition.

New software licenses helped drive Oracle's results, although the database giant is also eyeing upside from its $7.4 billion Sun acquisition. After a protracted battle with European regulators, Oracle finally grabbed Sun earlier this year and has started to overhaul the underperforming hardware giant.

"Where Sun was specifically a distributor of someone else's intellectual property and lost money doing it, we are out of that business," said Oracle CEO Larry Ellison, during a conference call after market close on Thursday.
Oracle
Oracle CEO Larry Ellison

Ellison's CFO Safra Catz explained that Oracle is also compensating its sales teams on margin, not just revenue, shifting Sun's sales mix from loss-making commodity products. These changes will enable Oracle to grow revenue and profits from Sun's hardware in fiscal 2011, she added.

Analyst firm Jefferies raised its Oracle price target from $26 to $30 on Friday, thanks partly to the streamlined Sun.

"We continue to edge our price target higher as our estimates tick up, given strong performance from core Oracle and higher confidence on accretion targets from the Sun acquisition," wrote Ross MacMillan, a Jefferies analyst, in a note.

After completing the acquisition in January, Sun contributed only one month of revenue to Oracle's third-quarter results, although the software maker said that the $596 million haul was more than they were expecting. Excluding items, Oracle expects Sun to contribute $1.5 billion of operating income in fiscal 2011 and $2 billion in fiscal 2012.

"Oracle is fixing the Sun business model, which is no mean feat," wrote Patrick Walravens, an analyst at JMP Securities, in a note, adding that the software maker is also taking app share from rival SAP ( SAP).

There were some raised eyebrows when Oracle launched its Sun bid last year. In addition to Sun's longstanding execution problems, the move also marked a strategic shift for Oracle into hardware. Oracle made its initial hardware play back in 2008 when it launched its Exadata database device. Initially built on Hewlett-Packard ( HPQ) kit, Oracle tapped Sun for its Exadata gear last year and is reaping the benefits of the hardware/software combo.

"Exadata is gaining more traction in the marketplace," wrote Joel Fishbein, senior analyst at Lazard Capital Markets, in a note released on Friday. " Exadata bodes well as an example of product success from both a consumer and product perspective for the Oracle/Sun story."

The latest version of Exadata handles both data warehousing and transaction processing, although Oracle says that it is planning new versions of the technology.

Oracle did not reveal specifics during the conference call, but the company's president, Charles Phillips, promised that the new machines will get "better and better" at large scale transaction processing. Phillips also indulged his company's passion for IBM ( IBM)-baiting:

"Our intent is that the Exadata line will challenge the biggest IBM P-series machines and beat them badly in performance, reliability and cost," he said, in response to an analyst's question.

Investors were underwhelmed by Oracle's results. The company's stock fell 43 cents, or 1.65%, to $25.61 in Friday trading, outpacing the broader tech market as the Nasdaq dipped 0.07%.

-- Reported by James Rogers in New York

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