Oracle Mends Its Ways To Bounce Back

Event Summary

On December 13, Oracle Corporation (NASDAQ: ORCL), the largest database provider and one of the largest providers of software applications for e-business, announced Q2 2002 revenues of $2.4 billion and net income of $549 million, which represent 11% and 12% respective drops compared to $2.7 billion and $623 million a year ago. Even operating margins were lower, 35% versus 36% last year, despite Oracle's efficient cost curbing mechanism, and much publicized operating efficiencies improvements from its strategy to switch to single corporate-wide database. Total software license revenues were down 27% to $803.4 million from $1,093.2 million in Q2 2001, while software license renewals and product support services were up 8% and 12%, respectively. Services revenue was flat with the prior year.

Even worse news, however, came with the application license revenues for the quarter being $163.1 million, a 42% decrease from $279.3 million a year ago (See Figure 1), which caused the management to openly recant the expectation that it would meet its sales goals for the rest of the year. The database business a was cry far from being a savior either - database license revenue of $640.3 million was 21% less compared to $813.9 million a year ago, with a hurting 32% decline in the Americas' market. All the geographic markets have shown a sharp decline in revenues, the America's one being expectedly the most affected, with 36% drop of total license revenues and a whopping 45% drop in applications license revenues.

Despite the inexorable bad financial news, there have, however, recently been some positive developments of a somewhat softer, qualitative nature that may augur a brighter future for Oracle. Nearly two years after Oracle shipped its first major release of Web-based 11i application suite, many customers are reportedly now starting to deploy it in earnest. The momentum behind the 11i suite is seemingly building, as 1,080 of the 10,000 customers with Oracle applications have deployed 11i and can now be referenced, while 4,000 are in the process of doing so.

Enterprises have long been hesitant to proceed with the product upgrade for many valid reasons. First, the Oracle 11i E-Business Suite, which tightly integrates many business applications components including customer relationship management (CRM), financials, human resources (HR), and supply chain management (SCM), requires customers to replace applications and infrastructure at a time when IT managers are looking to consolidate and connect what they already have in place. In addition, the software requires a complex installation, replacing the client/server architecture and character-based user interfaces of the previous releases with a browser-based client. Also, until recently, Oracle 11i was plagued with software bugs and glitches. The issue is now seemingly resolved, albeit after five consecutive product upgrade releases, with the result that many Oracle customers are seriously considering deploying 11i. The current application suite, 11i, has some key advantages over its predecessors, as it offers a broader range of business processes and functions, and the thin client will require less maintenance in the long run.

Support for Release 10.7 Extended, A Bit

In any event, IT managers soon will not have a choice, as Oracle plans to end support for Release 10.7 in June 2003. It is still a six-month extension from the previously declared deadline of December 2002, which was met with serious customers' grumbling. This support applies to the client/server and Web-based versions of all 10.7 applications, with the exception of the payroll application, which has to be upgraded because of changes in IRS laws.

Oracle senior management called the extension a goodwill gesture to the Oracle Application Users Group (OAUG) to allow customers more time in their upgrade planning to the current versions of Oracle applications. More than a dozen members of the OAUG had reportedly petitioned Oracle in writing for an extension of the deadline. Moreover, the ongoing chasm between Oracle and its independent users group, which has hurt Oracle's perception of its service & support viability, may be slowly narrowing. Recently, the board of OAUG has begun discussions with Oracle about a possible collaboration on a joint trade event. With the recent goodwill gesture by Oracle of extending support for Release 10.7 and now OAUG's extension of an olive branch to seek reasonable areas of collaboration, a resolution may be coming. A software company with the size and clout of Oracle indeed has to have an energetic and collaborative users group.

Also, as recently as February, Oracle pleaded with 11i users that the product suite offered them everything they need "if not everything they want" and advised potential customers to deploy 11i and wait for any needed functionality rather than trying to integrate software from other vendors and/or to customize it. More recently however, departing slightly from its hard course, Oracle pledged to release its applications programming interfaces (APIs) and schemas to anyone who buys the upcoming release, including competitors who may use them to do their own Oracle integration (see Oracle Makes A U-Turn At The "All Things To All People" Exit.

Market Impact

It might sound quite heretic to some that we are more favorable of Oracle's state of affairs now amid its indisputable protracted disappointing results, which have given PeopleSoft an opportunity to close the applications market share gap, than we were at the time when Oracle had seemed invincible on the paper over a year ago. It finally appears that having set its sights on transforming itself into a total e-business solution provider, Oracle has painfully realized that it takes much more commitment and execution than a well-espoused marketing strategy.

While the slowing economy is certainly to blame for Oracle's revenue slump, it also appears that the company has admittedly fallen prey to overselling its product over a year ago. As Oracle cannot afford to gamble any longer with its customers' willingness to entrust it to support their complete applications, infrastructure and service requirements, the time for trustworthy leadership and spotless execution within Oracle is therefore now. Despite its inclination to traditionally thrive on a moderate amount of controversy and to fly a number of trial balloons, Oracle, has also been a practical company, and it has often modified its strategy and adopted the tack that would work better.

The increasing sales of upgrades to the new 11i product may indicate that Oracle has begun to clean its act. There are now reportedly over one thousand of live customers on the new 11i suite, compared to mere a dozen a year ago. Oracle also reports that there are over 4,000 other customers in various stages of transition to the 11i suite, but the company should also bear in mind that its statements will be examined through a magnifying glass and with a skeptical eye. Oracle's strategy to expand the functionality scope of the 11i e-Business Suite may indeed be attractive and encouraging for existing users because it could enable them to leverage their investments in the Oracle database and/or applications. However, both Oracle and its users seem to be getting increasingly aware of the following caveats in the company's original 'integration tune':

• 'No customization at all' is a utopian ideal in almost all implementation instances.

• The 11i e-Business Suite is either still lacking some functionality or showing sub-optimal functionality and/or industry focus despite its impressive breadth.

• 'No consultants or system integrators (SIs)' is also only a wishful thinking in most cases; Oracle's increasing reliance on its own professional services speaks in that regard.

Oracle advertises its 11i suite to be a "one-stop shop" business application solution, underpinned by a single, coherent data model that is resident in a single database. This convincing vision in a traditional ERP market that typically dreads building and maintaining multi-solutions integration mechanisms, has undeniably contributed to Oracle's strong growth to the No. 2 in the ERP market throughout the '90s. Even today, large global enterprises that particularly need the financial or human resources (HR) component of an ERP solution should evaluate Oracle Applications 11i. The fact that Oracle's database maintains the lion share amongst the SAP, PeopleSoft or Siebel install base despite these vendors announcing IBM DB2 as their primary base and despite their strong support for the Microsoft SQL Server as well should indicate the powerful database technology. Thus, it is not completely inconceivable to see some Oracle-file users not minding the technology lock-in and therefore opting to remain with Oracle Applications. These customers are opting for seamless integration to the database and a strong Java-based development environment that is finally permitting some level of customizations too.

Nevertheless, Oracle seems to be realizing with a heavy heart that the vast majority of real-world IT departments are a concoction of all sorts of enterprise applications - trading exchanges, Supply Chain Management (SCM), e-collaboration with business partners, Product Lifecycle Management (PLM), Customer Relationship Management (CRM), and a number of other components of e-business require disparate systems to work together. The fact also remains that most of Oracle's potential large customers already possess heterogeneous solutions for their overall business requirement, at least because 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. Thus, Oracle's belated humility in terms of increasing its products' openness is commendable, although not coming from the bottom of its heart, and should help it succeed in obtaining more projects.

Improved Relationship with OAUG

Possibly more important for Oracle's future could be the gradual defusing of animosity with its independent user group, OAUG, as it has indisputably hurt its corporate culture and service & support viability perception in the past. A gesture such as the extension of the support for 10.7 release could be regarded as a much needed indication of Oracle's willingness to listen and acknowledge its customer needs, while providing both more time and improved upgrade paths and tools.

The current weak economy is forcing many companies to rationalize staff levels and to be wary of any short-term disruptive changes to their business processes in place. Furthermore, in most cases, users are grappling with getting Return-on-Investment (ROI) rationale to justify the disruption of an upgrade to a new software release. Although six months longer support might not seem as an ample time, this decision should provide users a breathing space to reap benefits from their current 10.7 applications, while preparing for a future upgrade during possibly better economic climate.

The Application Server Market

Aside from the database market Oracle has also set its sights on the prosperous application server (AS) market. Although late to market, the recent 9iAS enhancements in terms of Java 2 Enterprise Edition (J2EE) compliance, Web Services support, and integration to other Oracle products, should increase Oracle's opportunity, especially in its database shops. Also, Oracle's strategy of providing tools and support to members of its development network as free downloads, may promote its applications server sales. Oracle, however, needs to embrace more profusely the emerging Web services in order to close the gap behind IBM and Microsoft, and to use it to the advantage to further open its applications.

Oracle's endeavor to deliver "software as a service" through its application service providers (ASP) Oracle.com offering (a.k.a. Oracle Business Online) has recently been bolstered by a management service provider (MSP) option, where Oracle will host customers' servers and manage the entire infrastructure. Although the program has challenges such as Oracle's well-known unwillingness to integrate with other software products, very limited customizations tolerance, and a likely channel conflict with other Oracle ASPs, as well as with SI partners, Oracle should become a fearsome player in the ASP market owing to the intimate knowledge of its own application in comparison with other ASPs, its infrastructure capabilities, and corporate viability, which have been a problem for many ASPs.

Time will only tell, however, whether Oracle will have used these slower economic times to get its act together and to position itself for a coveted surge of new projects in the future.

User Recommendations

The market should regard Oracle's new mindset as well as its new moves favorably. Larger enterprises seeking broader e-business capabilities should evaluate Oracle if they feel comfortable with Oracle's one-stop-shop offering and if Oracle has a good track record in their industry vertical. Enterprises that favor a multi-vendor approach should still evaluate Oracle if the functional fit is good, but they should reckon with a challenging integration project. They should strive to minimize the total number of vendors in the total business solution. Additional caution should be exercised when deploying 11i application components whose tires have not been quite kicked in live conditions.

Smaller companies with a need to automate many administrative (e.g., financials, human resources, customer relationship) chores should still benefit from evaluating Oracle Fast Forward Flows or Oracle Small Business Suite, possibly in the ASP mode. But, make sure to carefully read the fine print on the contract to discern all the probable limitations and exclusions. Clients should thoroughly evaluate the benefits, as well as the potential business constraints, of the ASP option, and should make evaluations based on referenceable clients. Given the more upbeat 11i product upgrade experiences of Oracle customers, 10.7 users with acute Euro compliance issues should opt for an upgrade without much delay. Other existing Oracle customers considering an upgrade to 11i should nonetheless base their decisions on the reference-proven functionality of the 11i components they are evaluating, rather than on mere "brochureware" enhancements.

More comprehensive recommendations for both current and potential Oracle users can be found in Oracle Applications - An Internet-Reinvented Feisty Challenger and 'Collaborative Commerce': ERP, CRM, e-Proc, and SCM Unite! A Series Study: Oracle