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