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Oracle Sails Slower In The Low Tide, But Mayday Signal Is Quite Far-Fetched

Written By: Predrag Jakovljevic
Published On: April 16 2001

Oracle Sails Slower In The Low Tide, But Mayday Signal Is Quite Far-Fetched
P.J. Jakovljevic - April 16, 2001

Event Summary 

Oracle Corporation, the largest database provider and one of the largest providers of software applications for e-business, said on March 20 it plans to cut 866 jobs, or 2% of its workforce, in an attempt to reduce costs amid a slowing economy. As it warned earlier, Oracle posted Q3 2001 results below original expectations.

On March 15, Oracle announced that third quarter income increased 16% to $583 million, while revenue grew to $2.7 billion, a 12.5% increase compared to $2.4 billion in revenue Q3 2000. Application software sales increased 25% to $249 million while database software sales grew 6% to $823 million. Service revenue increased 12% to $1.5 billion for the quarter. On a less optimistic note, application license revenue dropped 10.7% to $249 million, while applications service revenue dropped 5% to $471 million, compared to $279 million and $497 million respective revenues in the previous quarter (See Figure 1).

Figure 1.

Nevertheless, Oracle remains moderately upbeat as it claims over 3,000 customers in the process of implementing the 11i E-business suite, while more than 210 of those customers have already gone live on 11i applications. Also, the company touts that this past quarter, hundreds of additional companies have committed to the E-business Suite including Healthsouth, Cisco, Qwest, Americredit, Ciena, and McGraw Hill.

"Rapid application implementation is the key to customers getting a quick return on their software investment," said Oracle CEO Larry Ellison. "Oracle applications are ideally suited for rapid implementations because our E- business suite is complete and integrated - no application customizations are required. Customers can begin selling more with our Global CRM in 90 days, and spending less with our Internet Procurement in 30 days. No other applications can be implemented so quickly and inexpensively. Rapid application implementation is important in this economic climate because companies focus on projects with a rapid ROI."

"The U.S. economic downturn over the past several months clearly affected our revenue and profit growth more than we anticipated, due to a sharp downturn in completed transactions in the last few days of the quarter, and the current economic uncertainty continues to limit our visibility going forward," said Oracle CFO Jeffrey O. Henley. "However, we are proud of our ability to achieve 33% operating margins in the quarter, resulting in a 2 percentage point improvement compared to last year. Our ongoing efforts to improve our cost structure over the past two years have positioned us well to weather the current economic storm. Looking ahead, we plan to tightly adhere to the e-business cost reduction plan already in place, which hopefully will allow us to maintain our improvements in productivity and efficiency despite a difficult environment."

Market Impact 

Oracle Corporation remains one of the fastest growing and the most respected (or feared) software companies, with an impressive profitability track and a stellar balance sheet. However, the slowing of its profits cannot be denied, and the 64,000 dollar question is whether this is completely attributable to the slowing economy, or the problems run deeper than that. Perplexing was the company's misjudgment of applications' growth, which turned out to be less than a half of the preliminary expectations.

Until only recently, Oracle seemed complacent and unscathed by the economic slowdown affecting most of the market, justifying it by the fact that enterprises have still been dedicating IT budgets to create their e-business infrastructure, including trading exchanges, SCM and CRM systems, where Oracle remains a major player (see Oracle Sails Despite Market's Low Tide; How Far Will It Go?). The tune was abruptly changed immediately before the Q3 announcement and the blame was mainly pushed onto the slowing US economy, which left many shaking their heads and wondering where the truth lie.

The truth usually lies in the middle. It was somewhat nave not to expect the slowdown to affect Oracle's revenue, particularly given that its products had a very good acceptance among dot-com startups that are now going out of business in droves. On the other hand, it is even more nave to believe that the economy is the only reason to blame. Companies that sell strong e-business products that should solve supply chain inefficiency or improve customer relationship management should indeed be prodded if they hold the economy responsible for their underperformance. Recent positive announcements by some of the companies that compete in the same space, like Manugistics or IFS, speak in that regard.

With e-business and the Internet likely maintaining the enterprise applications market's growth and given Oracle's international diversification, we expect Oracle's further growth to continue. Still, its future also remains burdened with challenges. In the past, Oracle has miraculously been able to deliver just enough product functionality in time to continue to sail the latest market waves.

Challenges 

Oracle has a reputation of releasing unstable software to early adopters, relying on them to indicate the bugs and request patches afterwards, which would in turn provide for more reliable subsequent releases to other users. The 11i product release was no exception - over a few thousand of patches have been reportedly requested by early customers and subsequently released. Ironically, the latest product release, 11i.3, while perceived as stable and much improved over its previous incarnations, may suffer from the bad timing of the release. Namely, the customers' weariness and wait-and-see attitude may have been exacerbated by both economic slowdown and bad publicity of early 11i installations/migrations.

While Oracle may have rounded up an unrivaled portfolio for almost all aspects of e-business, it may also have overstretched itself by trying to be "all things to all people". "The lone warrior" stance has put it on a collision course with a number of formidable competitors, particularly in the promising e-business space, such as the duo of SAP and Commerce One and the number of strong niche players like Siebel Systems, i2 Technologies, Manugistics, PeopleSoft, and Ariba, which have also seen strong demand for their products. The competition in the database space against IBM and Microsoft remains fierce too, while Microsoft also joins the slew of competitors in the applications market with its acquisition of Great Plains.

Oracle's 'one-stop' shop mantra should be a compelling message, especially in the lower-end of the market. We were made aware of Oracle's success within the mid-market with its Fast Forward program. The fact that the first-time Oracle users experienced smooth 11i implementations may be encouraging for other prospects, too. Further, the tight integration with the native Oracle database where all configuration data, user fields modifications, etc. are stored, should facilitate upgrades. Also impressive is search capability throughout the entire suite and the availability of native business intelligence and data warehousing tools. However, as other established players will have made every effort to deliver integrated hybrid bundles of best-of-breed point solutions, it is unlikely that the high-end of market is going to buy Oracle's integrated solution mantra - flexibility is the word more valued in this environment.

The fact remains that most of Oracle's potential large customers have already invested in other solutions for some parts of their overall business requirement; most of them also have a significant man-hours of legacy code in place that they do not want to throw away. Even in an unlikely scenario of these customers deciding to replace existing components with Oracle's, Oracle would face a challenge of integrating with other vendors' software.

Many Oracle consultants do not have expertise in integrating Oracle applications to other 3rd-party and/or legacy products, and Oracle even recently pleaded with its customers to refrain from any customizations and to rather wait for these features in future product releases. This conspicuously resembles SAP's arrogant attitude during its complacent period of mid 1990s. Now that it has abandoned that attitude, realizing its inappropriateness in the current market, SAP seems to have regained its once stalled momentum, with mySAP.com contributing the lion share of the revenue (for more information, see SAP Defies Economic Slowdown, For Now). Thus, Oracle has to be willing to be more flexible and humble in terms of increasing its products' openness and of reducing module interdependencies if it is going to succeed in obtaining lucrative consulting projects. It should also attempt to be more accommodating towards potential customers in terms of providing them with 3rd-party and/or legacy applications integration and with certain levels of customization.

Further, Oracle' offering still has not achieved the maturity and depth of more-established niche CRM, SCM and e-business vendors such as Siebel, i2 and Ariba. The same holds with providing a significant number of reference sites where the notable range of 11i modules has been implemented. The merit of functionality gains even more importance here given that Oracle is only the leader in the database market; the only way it can overtake SAP's, Siebel's, Ariba's or i2's mind shares in their respective ERP, CRM, e-procurement, and SCM markets is through superior functionality, which has yet to happen. And, by being reticent to collaborate with more nimble software companies, a large vendor such as Oracle can and will lag months or years in terms of innovation and leading edge products or ideas.

Nevertheless, should 11i.3 demonstrate maturity and should Oracle start orchestrating its product releases in smaller, more manageable chunks and improve relationships with system integrating and consulting partners, Oracle's prospects will continue to be rosy, although less glowing for some time to come. Look for Oracle's more aggressive 'the turnkey e-business' message in the future, as it will strive to keep application sales rolling.

User Recommendations 

Potential and current Oracle users can rest assured about its viability and market position. The company disposes with gigantic resources and will be around for a long time to come, as opposed to a number of its smaller competitors. The scope of Oracle offerings is attractive and compelling at first sight as an e-business provider must be able to address all major aspects of a company's business. Therefore, ask every vendor in the selection process to demonstrate its ability to deliver functionality within your business environment, not in an ideal conference room world where everything works well on the vendor's proprietary technology.

Despite reported improvements in 11i stability, beware of possible functional gaps and implementation issues. Existing users of earlier Oracle's systems should diligently inform themselves about their peers' experiences. Potential customers should vigorously demand a reference site with a similar company profile. In any case, insist on a service level agreement that will unequivocally spell out either Oracle or its implementation partner as responsible for fixing any glitches.

More comprehensive recommendations for both current and potential Oracle users can be found in Oracle Applications - An Internet-Reinvented Feisty Challenger.

 
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