Oracle’s Plans Beyond Sun?

Last week, Oracle (NASDAQ:ORCL) reported a strong second quarter and gave strong guidance that exceeded expectations. This year, with the economy recovering, the company made quite a few acquisitions. The biggest was Sun Microsystems for $7.8 billion, a deal that has yet to be approved by European regulators.

European Union (EU) regulators were concerned that Oracle will kill competition in the database market. To save the deal, Oracle has pledged to let other technology vendors like Google, Yahoo!, F5, and Twitter continue licensing MySQL for another five years. Oracle now expects regulators to give full and unconditional clearance in January 2010.

The delay in the acquisition has caused Sun’s revenues to decline significantly, by close to about $100 million a month, as rivals IBM, HP, Cisco, and Microsoft are poaching the former’s customer base by offering discounts.

Sun’s Q1 revenue declined 25% to $2.24 billion, lower than analyst estimates of $2.34 billion. However, lower operating expenses and higher gross margin helped Sun narrow its loss to $120 million or $0.16 per share from a loss of $1.68 billion or $2.24 per share last year. Analysts expected loss of $0.23 per share.

Sun has, however, maintained its No.4 position in the worldwide server market at 7.5% market share despite a 35% revenue decline. Oracle, during its recent earnings call, said that after the merger, Sun/Oracle would not be competing in the high-volume, low-margin business but would rather focus on the high-value, high-performance market with its SMP machines like the SPARC Solaris M9000. Oracle expects to earn a $1.5 billion profit in its first full year after acquiring Sun.

Sun ended the quarter with $2.38 billion in cash and short-term marketable securities, while long-term debt increased by $8 million to $589 million.

As for Oracle’s financials, Q2 revenue was up 4% to $5.9 billion while net income was up 12% to $1.5 billion or $0.29 per share. Non-GAAP EPS was up 15% to $0.39. Analysts expected earnings of $0.43 per share on revenue of $5.2 billion. Q1 coverage is available here.

By segment, software revenue was up 9% to $4.9 billion with new software license revenues up 2% to $1.66 billion and software license updates and product support revenue up 14% to $3.25 billion. Services revenue was $0.96 billion, down 15%. Technology new license revenue was up 1% to $01.2 billion. Applications new license revenue was up 2% to $478 million.

Oracle said that it has taken market share from SAP in every region for the fourth consecutive quarter. Oracle’s application business grew 1% in the Americas and 2% in Asia Pacific versus growth of negative 35% in the Americas and negative 34% in Asia Pacific for SAP. Oracle also had some wins against Microsoft SharePoint in the area of middleware through its product WebCenter.

Non-GAAP operating margins grew by 280 basis points in the quarter to a record 49%. Oracle repurchased shares worth $253 million in the quarter and declared a cash dividend of $0.05 per share. The company has generated $8.4 billion of free cash flow over the past 12 months thanks to tight cost controls and ended the quarter with $20.8 billion in cash and investments.

Apart from the Sun acquisition, in March of this year Oracle acquired Relsys, a leading provider of drug safety, risk management, and analytics applications for the health sciences industry. To further boost its healthcare portfolio, in June, it acquired Conformia Software, maker of the product and process life cycle management (PPLM) software, which is used to manage drug design and development in the life sciences sector. To make its data management offerings more competitive, Oracle acquired real-time data integration solutions provider GoldenGate in July and HyperRoll, a provider of financial reporting acceleration solutions, in September. Finally, Oracle acquired systems management companies mValent in February and Virtual Iron in May.

For Q3, Oracle expects revenue to grow 4% to 7%, EPS between $0.26 and $0.28, and non-GAAP EPS between $0.36 and $0.38. Analysts expect EPS of $0.35. The stock is currently trading around $24 with market cap of about $122 billion and annual revenue of $23.3 billion. It hit a 52-week high of $24.74 on December 18 after the strong results release.

Last year, I had expected Oracle to shop for SaaS players. The year is coming to a close without any SaaS acquisition from Oracle while Adobe, Intuit, and ADP have begun their SaaS rollups. Read my recent overview of SaaS Consolidation for more details on this. According to Gartner, worldwide SaaS revenue is expected to reach $14 billion for the enterprise application markets by 2013, and Oracle would do well to make its SaaS moves soon.