Oracle - How to Disappoint Analysts by Doubling Profits

Oracle - How to Disappoint Analysts by Doubling Profits
P.J. Jakovljevic - October 10, 2000

Event Summary

In a press release dated September 14, Oracle Corporation, the largest database provider and one of the largest providers of software applications for e-business, announced record results for the first quarter (Q1) of its fiscal year 2001. In addition, Oracle announced a two-for-one stock split of its outstanding common shares.

First quarter net income increased 111% to $501 million, while revenue grew to $2.3 billion. This compares to $237 million in net income and $2.0 billion in revenue, in Q1 last year. First quarter applications software sales increased 42% to $156 million, while database software sales grew 32% to $585 million. Total software license revenue was up 28% to $807 million, while total service revenue increased 8% to $1.5 billion for the quarter (See Figure 1).

Figure 1.

"We are off to our fastest start in six years," said Oracle CEO, Larry Ellison. "The spectacular growth in our database business demonstrates that we are continuing to take market share from IBM and Microsoft. The world's largest Web sites - from to Yahoo! - rely on the Oracle database to handle huge numbers of users and enormous quantities of information. The Oracle database is the software that powers the Internet. Sales of our new applications software - the Oracle e-Business suite - will just get stronger and stronger throughout the year. The e-Business suite puts every aspect of a business - marketing, sales, supply chain, manufacturing, customer service, accounting, human resources - everything, on the Internet. Our complete and integrated E-business suite is proving to be a compelling alternative to buying applications from several different vendors, and trying to make them work together."

"A little more than a year ago, Oracle set out to save one billion dollars annually by using our own Internet e-Business applications," said Oracle Chief Financial Officer, Jeff Henley. "A billion dollars in annual savings translates to a 10 point improvement in our margins. We did better than that again this quarter. In Q1 our operating margin improved over last year's Q1 by 11.7 points - from 17.4% to 29.1%. And now that we are in the second year of our e-Business transformation, we are seeing the sales and marketing productivity gains that should accelerate revenue growth throughout fiscal 2001. It should be a great year."

This marks the tenth time that Oracle's common stock has been split since the company's initial public offering in March 1986. Oracle's stock will reflect the post-split price at the opening of the trading session on October 13, 2000.

Market Impact

Oracle Corporation continues with its impressive growth and profitability track of the recent years. Yes, the analysts would indeed prefer more predictable and consistent performance of its distinct lines of business. This time the revenue driver was the database sales, whereas the applications took somewhat a back seat, as opposed to the last quarter's situation. This is, however, Oracle's blessing in disguise - to be able to provide an almost complete technology infrastructure and environment as well as accompanying consulting services. The result is the better performing parts of the business can 'cover up' for the under performers in an alternating manner.

With e-business and the Internet currently boosting the enterprise applications market's growth, we expect Oracle's further growth and upbeat posture. While the statement that Oracle is the most improved applications vendor within the last few years would be a dead certainty, the idea of it becoming the No. 1 applications vendor remains far-fetched. SAP gained such a commanding position during the salad days of ERP that Oracle, to become No. 1, would have to more than double its application business, which we find very unlikely to happen (20% probability within 5 years).

Where Oracle is surely winning, however, is in its quest to prove that the business application market's move toward e-business and the Internet is a prerequisite for survival and any subsequent success. Oracle has recently made inroads into SAP's and Siebel's absolute leadership in their respective markets. It holds the No. 2 position in ERP and arguably the No. 3 position in CRM sales. While still not quite breathing down SAP's and Siebel's necks, Oracle has much more momentum than any of its rivals. We envision a healthy annual Oracle applications growth, higher than those of main competitors, particularly owing to its association with Internet exchanges. However, toppling SAP's ERP and Siebel's CRM market shares remains a very tall order (for more information including our predictions on Oracle, see Oracle Applications - An Internet-Reinvented Feisty Challenger).

Moreover, while Oracle announced general availability of 11i at the end of May, it has not yet released all envisioned components. Further, since 11i also requires the latest version of Oracle's database product, 8i, companies have to upgrade their databases first. However, since 8i is also a relatively new product, many customers and prospects may be reticent to be 'guinea pigs' for either product. On the other hand, owing to Oracle's announcement that support for its earlier releases of applications (Release 10.7 and earlier) will cease by June 2001, the sales of these has all but stalled. The release before 11i, Release 11, again, does not exhibit some of the new features of 11i like a new order management module, improved CRM and SFA modules, and supply-chain planning products, which vouches for yet another 'vicious circle' and subsequent customer hesitation.

As a summary, should 11i live up to its huge marketing hype during the last 12 months, Oracle's prospects will continue to be rosy.

User Recommendations

It should be irrelevant for users who the biggest vendor is and who sold the most during the last quarter. Oracle, SAP, Siebel, and PeopleSoft are viable companies that will be around for a long time to come. Attention should be paid to satisfying customers' unique requirements. While selecting a strategic software partner is a challenging and risky undertaking, the positive news is there are more companies competing for your dollars.

Existing Oracle customers should certainly consider the new offering, but avoid selecting it without looking at what the other vendors have to offer. We recommend identifying your clear e-business strategy and conducting a thorough comparison-shopping, if for no other reason than getting negotiation leverage. Contact an Oracle sales representative for more information on Oracle Applications 11i , request a list of recent customers and ask them about the product. Understand what functionality you're interested in and investigate what Oracle Applications 11i can offer. Identify the requirements and related costs to upgrade your systems to support the added functionality. Be wary of pre-selling efforts and focus on the current release version. Existing users of Oracle's client/server-based products may want to inquire about Oracle's future product support and/or migration strategy. Beware of the potentially hidden cost of a migration.

As for potential customers, Oracle Applications are worth considering in the vast majority of selections of enterprise business applications for global organizations due to the attractive product portfolio and outstanding global service and support. We generally recommend including Oracle in an enterprise application selection long list for enterprises with more than $500 million in revenues and within the following industries: telecommunications, utilities, service providers, financial institutions, public sector, and manufacturing. Remotely hosted Internet solutions may offer cost effective applications to small or mid-sized organizations. Consider all options. Most importantly identify what needs are "must have" requirements and a timeline for additional components. Once identified, comparison-shop and use the related information to negotiate the best price for the solution.

Use the existence of other alternative, e-procurement, marketplaces and CRM applications to leverage the best price. If you already have a significant investment in Oracle technology, then pursue the Oracle option. However, do not hesitate to venture elsewhere. Improvements in product interconnectivity makes going beyond Oracle Applications a more viable option than in the past.

Existing and potential users currently evaluating Oracle 11i, particularly its eCRM suite of products, will likely have to decide between opting for the 'one-stop' shop hype (which means integrated suite and possibly sub-optimal functionality) and considering disparate but 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. Customers should insist on a contractual timeframe for delivery of a solution, and seek reference sites (preferably in their vertical market space), which have been successful with the product suite. Each eBusiness component should be put through its paces using a well-documented set of requirements, scripted scenario demonstrations, and rigorous reference checking. Moreover, companies within industries for which Oracle has not developed vertical solutions may want to inquire about impending customization ramifications.

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