Sun’s Fiscal 3Q09 results raise further questions about Oracle’s lofty $1.5B operating profit target for Sun in year 1.

Sun’s revenue came in at $2.61B, down 20% yty from $3.26B.  Revenue was lower than analysts’ fairly conservative $2.86B consensus for the third quarter.  I suspect there were more than a few deals in the pipeline that stalled as a result of acquisition rumors.  On March 18, just before the quarter end of March 29, the WSJ reported that IBM was in talks to buy Sun.  It’ll be interesting to see what 4Q revenues look like since the Oracle acquisition was announced at the start of Sun’s 4Q.

On a positive note, Sun’s software billings were up 28% yty.  However the growth is based off a comparison to Fiscal 3Q08 during which software billings were down 9% while Sun’s overall revenue was flat.  Had software billings been flat in fiscal 3Q08, the 28% growth in fiscal 3Q09 would have been 19% growth. Even at 19%, this is a huge bright spot for Sun.

Sun reported an operating loss of $169M, up 10-fold from a loss of $16M last year.  Another strike against the $1.5B target.  As a result, unlike others, I simply don’t see Oracle being able to reach its $1.5B operating profit target through cost cutting alone.  Oracle must grow Sun’s top line.

Top line growth will come from generating higher revenue from current customers and attracting net new customers.  With Sun’s current revenue trajectory, it’s difficult to see top line growth driven significantly from customer base growth.  It seems more likely that Oracle will have to raise prices, especially ongoing maintenance costs, in order to generate higher revenue from current customers.  Oracle implemented this strategy with BEA license and subscription prices after the acquisition.  I don’t see a significant price increase flying in this economy.  But if Oracle decides to go this route, it’ll be a boon for competition.  But I’m sure they’ve done the math and can stand to lose X% of customers as a result of a price increase and still generate enough revenue to make it worth their while.  Say what you will about Oracle, they don’t fear tough decisions.

Do you think an Oracle price increase is inevitable?

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