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.