Oracle - How to Disappoint Analysts by Doubling Profits
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.
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).
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 Amazon.com 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."
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."
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
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
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).
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).
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.
a summary, should 11i live up to its huge marketing hype during the last
12 months, Oracle's prospects will continue to be rosy.
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.
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.
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.
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
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.