Oracle Flying High on Q3 Report: Is Gold All That Glitters?

Oracle Flying High on Q3 Report: Is Gold All That Glitters?
P.J. Jakovljevic - April 24th, 2000

Event Summary

On March 15, shares of Oracle surged after the company plowed past Wall Street estimates and reported strong database software sales fueling a solid third-quarter profit. Shortly after the opening bell, Oracle shares jumped $3.69, or nearly 5 percent, to $80.69, on heavy volume of 12.7 million shares. The company also got an early boost from investment firms, which raised their price targets and earning forecasts following yesterday's strong earnings report.

Oracle posted adjusted net income of $498 million, or 17 cents per share, for the third quarter, an 80 percent jump over adjusted net income of $277 million, or 9 cents per share, split-adjusted, for the same period last year (See Figure 1). A consensus of analysts polled by First Call expected the software maker to earn 13 cents per share. The figures track profit earned from sales of products and services. Including gains from investments, Oracle reported net income of 25 cents a share, or $763 million. For the same time period last year, net income came to $293 million, or 10 cents per share. Third-quarter revenue jumped 18 percent to $2.45 billion from $2.1 billion last year.

Oracle executives said database sales increased 32 percent to $778 million, while application software revenue jumped 35 percent to $199 million (See Figure 2). Revenue from consulting, education, and support services grew 10 percent to $1.4 billion. During a conference call with financial analysts, Oracle chief executive Larry Ellison said the company has already beat its goal of saving $1 billion this fiscal year by moving many of the company's operations, such as product sales, to the Internet.

The database software maker has expanded its reach into the growing realm of business-to-business e-commerce. Recently, Oracle inked deals with General Motors, Ford Motor and DaimlerChrysler to create an online exchange so suppliers in the industry can cut procurement costs. In the retail industry, Oracle formed an alliance with Sears and Carrefour, two of the world's largest merchants, to match up retailers and suppliers.

Ellison said he expects the company to grab a greater chunk of the e-commerce software market. "Everything runs on the Internet. We have a complete suite," Ellison said. "Never has one company become dominant in a fragmented applications market. Think of this as Microsoft Office - one company with all the pieces that fit together."

This spring, Oracle plans to release Web versions of its Enterprise Resource Planning (ERP) and Customer Relationship Management (CRM) software. Ellison said the company's third-quarter sales of CRM software reached $49 million, up 179 percent from a year ago. He predicted sales will double next quarter. Ellison also expects revenue from Oracle's Business Online, which rents software over the Web, to skyrocket.

The company's total earnings this quarter were boosted by a $432 million gain from the sale of investments in other companies, an increasingly common profit center for technology giants. The bulk of the gain stems from Oracle's recent sale of stock from Liberate Technologies, a network computer software developer spun off from Oracle. Oracle sold 11 percent of its holdings in Liberate.

However, Oracle has also confirmed that it is refocusing its European applications division and has hinted that it may reduce the unit's workforce. The move is likely to affect the database supplier's consultancy business and follows the company's decision to make some 60 UK consultants redundant last August. This was seen as part of a drive to cut $1billion a year from its costs. Mark Jarvis, Oracle's senior vice president of marketing, declined to comment on specific staff cuts, but he admitted that the company's skills mix needed to change as demand shifted from enterprise resource planning applications to customer relationship management (CRM) packages.

Market Impact

Oracle is the most improved ERP vendor within the last 18 months. Oracle fortified its position as the 2nd largest ERP vendor during 1999 by increasing its ERP market share (up to ~14%) after being the only large ERP vendor to achieve significant growth in both total revenue, license revenue, and net income during the above-mentioned period (See Figure 1).

The company has radically changed its product architecture within a short time bracket. Three years ago, it was struggling with its fat client architecture, and had a significant Y2K compliance issue. Today, Oracle has a head start on most of its competition pertaining to Internet applications (Web-enablement and self-service), and the company still leads the ERP pack both on product technology vision and execution. While Oracle had suffered initial setbacks as it moved its entire enterprise product line to the Internet, and was losing customers that were not ready to buy into the vision, we believe that Oracle's far-sighted strategy has begun to pay off through increased sales of its enterprise applications beyond its core ERP product (See Figure 2).

Larry Ellison's direct involvement in managing the applications business 18 months ago has resulted in the company's morale boost. Oracle's functional scope has been significantly increased, particularly with its CRM suite that is envisioned to be integrated with the back-office. Moreover, its large consulting resources provide it with a balanced revenue mix, which additionally contributes to enviable corporate viability.

Nevertheless, Oracle faces a number of inevitable challenges. The number of acquisitions over the last two years has created the clutter of many different technologies and applications that require true integration. It is apparent that Oracle's overly ambitious and visionary R&D program is wearing its new product delivery capabilities thin. Yet another CRM product suite delivery delay would all but annihilate the Oracle's highly publicized hopes of a success in its rivalry against CRM market leader Siebel. Also, the Oracle would significantly squander its current time-to-market advantage over its ERP competitors, particularly SAP, in its quest for CRM market share.

If one should judge by the past, it is to expect product quality problems with its immature product release as well as uneven functionality across the functional breadth. Oracle's modest results in the European market, with much more cautious buyers ('seeing is believing' attitude) speak for that. Last but not least, Oracle functionality is still very horizontal, except in its traditionally strong verticals like telecommunications, U.S. federal government, and energy.

User Recommendations

We generally recommend including Oracle in an enterprise application selection long list within the following industries: telecommunications, utilities, service providers, financial institutions, public sector, flow manufacturing, and energy. Oracle remains the No. 2 ERP player, and its strong resources give it the ability to overcome current obstacles much sooner than most of its competitors in a similar situation.

However, existing and potential users currently evaluating Oracle products, particularly its CRM suite of products, will have to decide between brand loyalty (which means waiting for a firm release date and possibly sub-optimal functionality) and considering already available and fully functional products from other vendors.

Users are also advised to consider both the maturity and the functionality of the product in their evaluations and make comparisons to competitive offerings. Any organization evaluating Oracle applications should only consider existing functionality, and, in the case of final selection, should negotiate the incorporation of new applications components now. Future clients are also advised to request the company's written commitment to promised functionality, length of implementation, and seamless future upgrades, particularly for the recently released products and the products whose release date is due shortly.

Users should be wary of the marketing hype and expect application integration problems, particularly in the case where a broad group of disparate applications is bundled together. Moreover, companies within industries for which Oracle has not developed vertical solutions may want to inquire about impending customization ramifications.

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