Is Oracle Becoming Invincible?

Event Summary

According to the press release on June 20, Oracle Corporation announced that in its fiscal fourth quarter adjusted net income increased 76% to $926 million, or $0.31 per share, while revenue grew to $3.4 billion. This compares to $2.9 billion in revenue, $527 million in adjusted net income, and $0.18 per share in Q4 1999. Fiscal year 2000 adjusted net income increased 61% to $2.1 billion, or $0.69 per share, while revenue grew to $10.1 billion. Last year revenue was $8.8 billion and adjusted net income was $1.3 billion, or $0.43 per share (See Figure 1).

Figure 1.

For the quarter, total net income, which includes investment gains, increased to $4.9 billion, or $1.63 per share. This compares with $527 million in total net income, or $0.18 per share in Q4 last year. The investment gains primarily came from the sale of 12% of Oracle's holdings in Oracle Japan, of which Oracle Corporation now owns 74%. This equity reduction was necessary for Oracle Japan to comply with the listing requirements of the Tokyo Stock Exchange (TSE1).

Applications software sales increased 61% to $447 million in Q4, led by CRM sales, which grew at a 161% rate (See Figure 2). Database software sales increased 12% to $1.2 billion. Consulting, education and support revenues increased 7% to $1.5 billion.

Figure 2.

"This past quarter Oracle sold more application software than SAP, $447 million vs. $352 million," said Oracle CEO, Larry Ellison. "Applications Release 11i - the Oracle e-Business suite - hurdled us into the number one position in the applications software business. Our e-Business suite is the first complete and integrated set of applications that automate all aspects of a business. The Oracle e-Business suite competes in marketing with Broadvision, sales with Siebel, service with Clarify, supply chain with I2, Internet procurement with Ariba, exchanges with Commerce One, manufacturing and accounting with SAP, and in human resources with Peoplesoft. So, customers can buy all these applications from all these different vendors, and then hire a consulting firm to assemble the different applications and try to make them work together. Or, customers can buy the Oracle e-Business suite, where all the applications already work together - on the Internet."

"One year ago Oracle set out to save one billion dollars annually by using our own Internet e-Business applications. We did that - and more," said Oracle Chief Financial Officer, Jeff Henley. "A billion dollars in annual savings translates to a 10 point improvement in our margins. In Q4 our operating margin improved 13.7 points - from 27.4% to 41.1% percent. As we enter the second year of our e-Business transformation, we are beginning to benefit from the sales and marketing productivity gains that will accelerate revenue growth in fiscal 2001."

Market Impact

While the statement that Oracle is the most improved ERP vendor within the last few years would be a dead certainty, the idea of it becoming the No. 1 applications vendor remains too far-fetched. "One swallow does not make a summer". Oracle's first quarterly sales numbers greater than SAP are an encouraging victory for Oracle and disturbing news for SAP (which, in a knee-jerk reaction, released an abrasively toned rebuttal press release), but do not represent Oracle's inauguration as the No. 1 ERP vendor yet.

Where Oracle is surely winning, however, is in its quest to prove a point that the business application market's move toward e-business and the Internet is a prerequisite for survival and any subsequent success. To that end, 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-based applications, and the company still leads the ERP pack both on product technology vision and execution.

While Oracle had suffered initial setbacks as it abruptly 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, particularly beyond its core ERP product, not to mention the improvements in current mind share and market perception.

Oracle has also undisputedly succeeded in its declared objective of saving internal costs by deploying its own eCRM product. It has unified many of its sales and administrative processes and has reduced overhead by over 44% as a result. While the aim was to reduce cost by $1 billion, the actual savings have almost reached double that figure. Would anybody need a better living proof of what Oracle products could possibly do for another similar global corporation?

While we believe Oracle will continue to post strong results and generate strong new sales, its competition will inevitably rebound and become reciprocally hostile. Oracle will not create many friends with its swashbuckling rhetoric, and SAP realizes that it needs to change. Its partnerships with Commerce One and Clarify are a confirmation of a significant shift in its strategy as it tries to reinvent itself from a large, inert European business applications software company to an Internet leader, ready to fiercely fight even under more relentless American rules of the game.

While Oracle's 'one-stop' shop mantra is a compelling message, other established players, such as SAP, J.D. Edwards, and PeopleSoft will not sit still - they will make every effort to deliver a seamlessly integrated bundle of point solutions.

User Recommendations

It should be irrelevant for users who the biggest vendor is. Both Oracle and SAP are viable companies and 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. We generally recommend including Oracle in an enterprise application selection long list within the following industries: telecommunications, utilities, service providers, financial institutions, public sector, manufacturing, and energy.

However, existing and potential users currently evaluating Oracle products, particularly its eCRM suite of products, will 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.