Oracle Reports Strong Profits

Event Summary

Oracle Corp.'s second-quarter earnings rose 40 percent, exceeding even the most optimistic predictions made by the company's top executives last month. With old-line companies largely done fixing Y2K problems, sales are picking up for Oracle's flagship database and applications software, the company said. In addition, fast-growing Internet companies are buying Oracle software to help them manage vast amounts of data (See TEC News Analysis article: "IBM and Deutsche Telecom Announce Plans for 100 Terabyte Data Warehouse" December 17th, 1999). The Redwood Shores database software giant said net income for the quarter, ended Nov. 30, rose 40 percent to $384 million, or 26 cents a diluted share, compared with $274 million, or 19 cents a share in the same period last year. Securities analysts were officially predicting Oracle would earn 22 cents a share, according to First Call Corp., although many had quietly raised their estimates a few pennies after an upbeat briefing Nov. 16 by Oracle executives. Revenue increased to $2.3 billion in the quarter, compared with $2.06 billion a year ago. In addition, Oracle's costs are falling, as the company carries out efforts to cut $1 billion in annual expenses by using its own Internet-based business applications. The company said pre-tax profit margins improved by 5.5 percentage points, largely because of the cost-cutting campaign.

Oracle's positive earnings surprise continues a pattern in which the company routinely disappoints or pleases investors with its financial results, sending its stock price gyrating wildly. Analysts had predicted that some potential Oracle customers would hold back on technology upgrades and expansion until the New Year. "For Oracle to come through in this risky period should give some people encouragement about spending next year,'' said Christopher Shilakes, an analyst at Merrill Lynch Global Securities in San Francisco. "There will be a tailwind in the early part of next year by many companies that were doing their Y2K knitting throughout the fall.''

Oracle's management attributed the company's strong earnings performance to the growth of the Internet, which fueled demand for Oracle's database software and applications that help companies track customers and manage their sales and marketing. Database software sales increased 17 percent to $651 million, and applications software sales rose 31 percent to $168 million, driven by a boom in customer relationship management software. Services revenue, which came in at $1.4 billion, rose at a more sedate rate of 10 percent.

Market Impact

Oracle fortified its 2nd largest ERP vendor position during 1999 by increasing its ERP market share (up to ~14%) after being the only large vendor to achieve significant growth in both total revenue (~24%), license revenue (~16%) and net income (~59%) during the last 4 quarters. Oracle had a head start on most of its competition pertaining to Internet applications, 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 already begun to pay off through increased sales of its enterprise applications beyond its core ERP product. However, one should not discount future integration issues of disparate product modules that have not yet been resolved. Moreover, the market should observe Oracle's profitability in the future given the company's recent decision to drastically cut its database prices as a counter-measure to the SAP and IBM database pact.

User Recommendations

As a summary of our recommendations in TEC's note on Oracle Applications on September 1, 1999 (See "Oracle Co. - Internet Paradigm Boosts Applications Growth"), we generally recommend including Oracle in an enterprise application selection long list within following industries: utilities, service providers, financial institutions, public sector, flow manufacturing. However, 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.

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