Event
Summary
On September 13, in the somber aftermath of the September 11 terrorist
attack on the United States, Oracle Corporation (NASDAQ: ORCL),
the largest database provider and one of the largest providers of software
applications for e-business, announced its Q1 2002 quarterly results without
comment or elaboration, as the company had seven people missing in the
World Trade Center, and one person lost on United Flight 93.
Oracle
recorded first quarter 2002 income of $511 million on revenue of $2.2
billion, which is a 2% increase compared to $501million net income on
almost the same revenue of $2.26 billion in Q1 2001. Earnings per share
increased to 9 cents compared with 8 cents in Q1 last year. Operating
margins increased from 29% last year to 33% this year mostly owing to
Oracle's much publicized operating efficiencies improvements from its
strategy to switch to one corporate-wide database. It has reportedly resulted
in savings of $8.5 million from operations compared to Q1 2001.
The
bad news, however, came with the application license revenues for the
quarter being $145.9 million, a 57% decrease from $337.9 million in the
previous quarter (See Figure 1). Although the first quarter has traditionally
been a slow one for Oracle application sales, which, at $155 million a
year ago, was only 6% higher than in Q1 2002, meeting sales goals for
the rest of the year may now be even more daunting owing to the current
economic climate. While new applications licenses drop of 6% in Q1 2002
is an improvement compared to the 24% drop in Q4 2001, it is still way
off from the 42%, 66%, and 25% growth in the first three quarters of last
year. Further, deals larger than $500,000 dropped to 31% from 52% and
45% reported in the previous two quarters.
Figure
1.
The
database business was not a bright spot either - database license revenue
of $565.2 million was 8% less compared to $615.7 million a year ago, with
a hurting 26% decline in the Americas' market. Total license revenue of
$711.1 million represents an 8% decline compared to $771.2 million a year
ago. However, the license revenue drop of $70 million was largely compensated
for by an increase of $54 million in service & maintenance revenue.
On
September 17, Oracle held a conference call when the markets reopened.
In light of the terrorist attacks, Oracle executives said they now expect
Q2 2002 software sales to drop as much as 15% instead of 8% - 10% previously
expected drop before the events. This was in a sharp contrast to its archrival,
SAP's predictions. On September 20, SAP somewhat reassured the market
by stating that its current business activity shows it is still on track
to reach previously announced revenue and margin goals for the nine months
ending September 30. Although cognizant of difficult economic climate
ahead, SAP still expects revenue growth for the period to exceed 23% and
margins to exceed 20%.
Market
Impact
It
is interesting to see what a difference a year can make. A year ago, Oracle
seemed invincible, with stellar results backing up its perception as the
Internet leader. While a year ago, SAP, plagued with the perception of
a complex and cumbersome product of the past, was on the defensive trying
to explain in its muddled marketing message that its product was not technologically
backward. The positions have now been reversed in a manner of "no string
of luck lasts forever". It is again largely about perception and credibility
(see Technology Vendor - Can You Afford Credibility?), as the truth often
lies somewhere in the middle.
The
market believed a year or so ago that Oracle's web-based product was much
more technologically advanced than SAP's despite the fact that SAP's long
supported three-tier architecture should have assured a smooth web-enabling
job. By the same token, although mySAP.com is still not much more
of an open product than Oracle 11i, the market today seems to believe
that SAP, with the mySAP.com product providing a handful of APIs to selected
third-party products and its CEO's verbal statement of intent, this time
means business. Also, it has now become trendy to exploit recent Oracle
gaffs with product quality or its dubious 'one-stop-shop' product strategy,
just as it used to be the case with SAP's failed implementations. The
fact remains that "great winds blow upon high hills". To that end, while
both vendors will maintain their respective leadership positions, they
both also have multiple issues to worry about in the future.
Although
the 2% net income growth sounds better than the losses shown by many both
'new' and 'old economy' competitors, Oracle cannot disregard the declines
in total revenue and license revenue, as service & support revenues can
offset the difference for only so long. The company will have realized
that its long-term success depends on selling, maintaining, and upgrading
applications, but the most importantly - it depends on happy and trusting
customers. That is where Oracle needs thorough damage control - to regain
credibility. Recent bad publicity due to Oracle 11i implementation problems,
and the long stubborn stance on no modifications and no openness to other
products, as well the exodus of significant high-profile executives and
ongoing friction with the independent Oracle Applications User Group (OAUG),
only makes the road to improved revenues more difficult.
While
the slowing economy is partly to blame for Oracle's revenue slump, it
also appears that the company has fallen prey to overselling its product
over a year ago. Even without the blemishes on the product quality and
missing functionality which has been discouraging many customers from
buying the product, it would have been very difficult to maintain the
growth rates of over 40% simply by a virtue of numbers. Also, the declining
revenue of its database business additionally limits the prospects for
the applications given the product's confinement to its own database.
The time for trustworthy leadership and spotless execution within Oracle
is therefore now.
To
that end, on a positive note, sales of upgrades to the new 11i product
seem to be on the increase. There are now reportedly 750 live customers
on the new suite, compared to a mere dozen a year ago. Oracle also reports
that there are 3,500 other customers in various stages of transition to
the 11i suite, but the company should bear in mind that its statements
will be examined through a magnifying glass until firmly substantiated.
The
fact that Oracle's database still maintains the lion share amongst the
SAP or Siebel customer base despite these vendors announcing IBM
DB2 as their primary base may indicate the cutting edge technology.
Thus, it is not completely inconceivable to see some Oracle-technology
'religious' users not minding the technology lock-in and therefore opting
for going for Oracle Applications. These customers are opting for seamless
integration to the database and a strong development environment, on condition
that Oracle commits to delivering the needed product enhancements within
a reasonable period of time.
To
be fair, some components of Oracle 11i suite may already provide a good
fit for some industries without the need for any modifications. The company
seems to be doing well in the federal government, while it may likely
be the only vendor that caters for all modes of manufacturing: flow, repetitive,
discrete, complex/project, and process manufacturing.
On
the other hand, Oracle's 'one-stop' shop mantra should be a compelling
message for the lower-end of the market, which is seen in a growing percentage
of smaller deals. The fact that the first-time Oracle users experienced
somewhat smoother 11i implementations may be encouraging for other prospects,
too. Smaller and fledgling enterprises often have undeveloped or sub-optimally
developed processes and, therefore, they might benefit from leveraging
Oracle's experience in refining these and might find Oracle Fast Forward
Flows and Oracle Small Business Suite attractive. The company's ASP business
and ASP partnerships also seem to be picking up. The unfortunate fact
for Oracle is that its database's sweet spot is not in the lower end of
the market. Thus, Oracle's eventual willingness to be more flexible and
humble in terms of increasing its products' openness and of reducing module
interdependencies and the product's monolithic nature (see Oracle
Makes A U-Turn At The 'All Things To All People' Exit) could help
it succeed in obtaining more projects in the besieged and highly-contested
higher-end of the market. While nobody disputes the attractiveness of
simplicity, nobody can forsake flexibility at this stage when individual
products are still far from satisfying all the business requirements of
large global corporations.
SAP
Expected Results
On
the other hand, SAP's expected results should be excellent, considering
the state of the economy and the above results of possibly the fiercest
rival Oracle. Still, there is no room for complacency, since "fortune
is made of glass" as seen many times in the past. SAP will also be closely
observed on the delivery of its open and modular product, as the market
still verily questions the short-term reality of all vendors' interconnectivity
plans.
Since
most ERP products including SAP R/3 were traditionally not devised
to integrate externally, one should still not expect real-time external
integration except for an inquiry level via portals in the short term,
despite SAP's vocal exuberance. Sill, conversely to Oracle, SAP seems
to be getting the benefits of its 'slow and steady' approach to delivering
new components and vertical solutions. It is very likely that when SAP
releases its official results for Q3 2001 that strong service & maintenance
revenue and the adoption of SAP's Customer Relationship Management (mySAP
CRM), Product Lifecycle Management (mySAP PLM) and Supply Chain Management
(my SAP SCM) products will have fueled this growth.
However,
like Oracle, SAP has a strong customer base in airlines, banks, hotels
and insurance companies, which have been hit the hardest by the recent
tragic events. It does not take a rocket scientist to expect SAP to feel
the pinch too. Furthermore, after a closer look, it appears that Oracle
and SAP have been maintaining an equidistance in the important North American
market. Namely, as Oracle's applications license revenue drop was 2%,
and SAP's (in its most recent reported quarter that ended in June) was
an almost unpleasant 11%, one is to wonder who else has been getting an
ever bigger slice of the cake (PeopleSoft, IFS, Microsoft
Great Plains, Navision, or some other dark horse)?
User
Recommendations
While there will always be losers, there will not likely be an absolute
winner despite vendors' current auras. SAP's and Oracle's business applications
market's leaderships should remain unscathed although they will continue
to be vigorously challenged by some and by the economic climate. The companies
dispose with gigantic resources and will keep on trying to find new ways
to capture the market. The scopes of both offerings are attractive and
compelling at first sight too, as any e-business provider must be able
to address all major aspects of a company's business. More important will
be how well the companies will execute their impressive but highly ambitious
visions. The market has often in the past witnessed how long the road
is between the vision and execution, SAP's and Oracle's huge resources
notwithstanding.
Nonetheless,
one could hardly imagine a case where SAP and Oracle should not be included
on at least an initial long list of vendors in a global application software
selection (except for when Oracle is disqualified by a non-Oracle database
platform in place). The rivalry of products in selections will remain
as exciting to watch as it has ever been - a mere nuance will decide the
winner in every selection instance.
Companies,
however, should not limit their selections to only these two vendors,
as there are many other worthy product offerings that will (and have)
give both vendors a run for their money. To that end, SAP's and Oracle's
new mindset of interconnectivity should be regarded favorably. In reality,
you will probably have some best-of-breed components in your overall systems
because it is very rare for a single vendor to meet 100% of a company's
needs. You should strive to minimize the total number of vendors in your
total business solution, though. While TEC has long endorsed the "let
the best applications component win in each individual selection case"
mantra, in case of opting for a multiple vendor solution ensure the system's
stability and unhampered high-volume transactional throughputs, as well
as the main contact to call in case one vendor's portal is unable to invoke
other vendors' applications.