Event
Summary
On March 15, shares of Oracle surged after the company plowed past Wall
Street estimates and reported strong database software sales fueling a
solid third-quarter profit. Shortly after the opening bell, Oracle shares
jumped $3.69, or nearly 5 percent, to $80.69, on heavy volume of 12.7
million shares. The company also got an early boost from investment firms,
which raised their price targets and earning forecasts following yesterday's
strong earnings report.
Oracle
posted adjusted net income of $498 million, or 17 cents per share, for
the third quarter, an 80 percent jump over adjusted net income of $277
million, or 9 cents per share, split-adjusted, for the same period last
year (See Figure 1). A consensus of analysts polled by First Call expected
the software maker to earn 13 cents per share. The figures track profit
earned from sales of products and services. Including gains from investments,
Oracle reported net income of 25 cents a share, or $763 million. For the
same time period last year, net income came to $293 million, or 10 cents
per share. Third-quarter revenue jumped 18 percent to $2.45 billion from
$2.1 billion last year.
Oracle
executives said database sales increased 32 percent to $778 million, while
application software revenue jumped 35 percent to $199 million (See Figure
2). Revenue from consulting, education, and support services grew 10 percent
to $1.4 billion. During a conference call with financial analysts, Oracle
chief executive Larry Ellison said the company has already beat its goal
of saving $1 billion this fiscal year by moving many of the company's
operations, such as product sales, to the Internet.
The database software maker has expanded its reach into the growing realm
of business-to-business e-commerce. Recently, Oracle inked deals with
General Motors, Ford Motor and DaimlerChrysler to create an online exchange
so suppliers in the industry can cut procurement costs. In the retail
industry, Oracle formed an alliance with Sears and Carrefour, two of the
world's largest merchants, to match up retailers and suppliers.
Ellison
said he expects the company to grab a greater chunk of the e-commerce
software market. "Everything runs on the Internet. We have a complete
suite," Ellison said. "Never has one company become dominant in a fragmented
applications market. Think of this as Microsoft Office - one company with
all the pieces that fit together."
This
spring, Oracle plans to release Web versions of its Enterprise Resource
Planning (ERP) and Customer Relationship Management (CRM) software. Ellison
said the company's third-quarter sales of CRM software reached $49 million,
up 179 percent from a year ago. He predicted sales will double next quarter.
Ellison also expects revenue from Oracle's Business Online, which rents
software over the Web, to skyrocket.
The
company's total earnings this quarter were boosted by a $432 million gain
from the sale of investments in other companies, an increasingly common
profit center for technology giants. The bulk of the gain stems from Oracle's
recent sale of stock from Liberate Technologies, a network computer software
developer spun off from Oracle. Oracle sold 11 percent of its holdings
in Liberate.
However,
Oracle has also confirmed that it is refocusing its European applications
division and has hinted that it may reduce the unit's workforce. The move
is likely to affect the database supplier's consultancy business and follows
the company's decision to make some 60 UK consultants redundant last August.
This was seen as part of a drive to cut $1billion a year from its costs.
Mark Jarvis, Oracle's senior vice president of marketing, declined to
comment on specific staff cuts, but he admitted that the company's skills
mix needed to change as demand shifted from enterprise resource planning
applications to customer relationship management (CRM) packages.
Market
Impact
Oracle is the most improved ERP vendor within the last 18 months. Oracle
fortified its position as the 2nd largest ERP vendor during 1999 by increasing
its ERP market share (up to ~14%) after being the only large ERP vendor
to achieve significant growth in both total revenue, license revenue,
and net income during the above-mentioned period (See Figure 1).
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 applications (Web-enablement
and self-service), 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 begun to pay off through increased
sales of its enterprise applications beyond its core ERP product (See
Figure 2).
Larry Ellison's direct involvement in managing the applications business
18 months ago has resulted in the company's morale boost. Oracle's functional
scope has been significantly increased, particularly with its CRM suite
that is envisioned to be integrated with the back-office. Moreover, its
large consulting resources provide it with a balanced revenue mix, which
additionally contributes to enviable corporate viability.
Nevertheless,
Oracle faces a number of inevitable challenges. The number of acquisitions
over the last two years has created the clutter of many different technologies
and applications that require true integration. It is apparent that Oracle's
overly ambitious and visionary R&D program is wearing its new product
delivery capabilities thin. Yet another CRM product suite delivery delay
would all but annihilate the Oracle's highly publicized hopes of a success
in its rivalry against CRM market leader Siebel. Also, the Oracle would
significantly squander its current time-to-market advantage over its ERP
competitors, particularly SAP, in its quest for CRM market share.
If
one should judge by the past, it is to expect product quality problems
with its immature product release as well as uneven functionality across
the functional breadth. Oracle's modest results in the European market,
with much more cautious buyers ('seeing is believing' attitude) speak
for that. Last but not least, Oracle functionality is still very horizontal,
except in its traditionally strong verticals like telecommunications,
U.S. federal government, and energy.
User
Recommendations
We generally recommend including Oracle in an enterprise application selection
long list within the following industries: telecommunications, utilities,
service providers, financial institutions, public sector, flow manufacturing,
and energy. Oracle remains the No. 2 ERP player, and its strong resources
give it the ability to overcome current obstacles much sooner than most
of its competitors in a similar situation.
However, existing and potential users currently evaluating Oracle products,
particularly its CRM suite of products, will have to decide between brand
loyalty (which means waiting for a firm release date and possibly sub-optimal
functionality) and considering already available and 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, 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. Moreover, companies within industries for which Oracle
has not developed vertical solutions may want to inquire about impending
customization ramifications.