Special Report: Oracle apps revenues up

By Stuart Lauchlan, news and analysis editor

Application revenues are up less than expected at Oracle, where fourth-quarter profit climbed 23 percent to $1.6 billion, while annual revenue increased $3.6 billion to $18 billion.

Sales of new software licences grew 17 percent to $2.48 billion. New license revenue from database and middleware increased 18 percent, while license revenue from its application software was up 13 percent, somewhat lower than some analysts had expected. Services revenue increased 26 percent, to $1.1 billion.

“I've been waiting to say this for a while - our market share is now greater than IBM and Microsoft in the database business combined,” said Charles Phillips, co-president of Oracle. “Our lead over the competition is significant and we'll get larger on July 11th, that's when we are going to announce the 11g. A lot of new features are coming out there, that I think will help us. We've retained our number one status on Linux with an 82.6 percent market share, IBM has 9.3. We are also number one status on UNIX at 65.7 percent.

“The middleware business continued momentum, we achieved a major milestone in the quarter by completing the release of Oracle Fusion Middleware 10g R3. That product has over a 1,000 new features. That's important because these customers upgrade quickly. Some 80 percent of our customers are on the latest two releases of that product. They are seeing value and upgrading. It's also important because these new features act as a wedge to get into new accounts.

“The big development in the application industry this quarter was the announcement of Application Integration Architecture or AIA. It's a standard way to integrate all of our applications as well as customer and third party applications using standard middleware. There is a common object model, it is extensible by customers and partners. It is package integration package built-in standard BPEL. And this has been very helpful in explaining the customers, how standard [solo] technology can be used at an integration platform and to highlight the strength of our middleware. Several process integration impacts the shipping, more will come each month over the summer.”

Phillips highlighted various customer wins to illustrate his points. “Schneider, a leading logistic services company, was a competitive win over SAP,” he said. “Currently, we have the top five logistics services providers running Oracle applications. We continue to lead in high-tech with good wins at EMC, QUALCOMM. We use specialised products that extend the ERPs against our SAP accounts. We got some key SAP customers start to buy our products. So with demands up for instance Merck, Beckman, Texas Instruments and Bowater. [G-Log] for Circuit City on and on.”

Customer choice has changed

CEO Larry Ellison tried to defend the performance of the applications unit, which failed to meet analyst expectations. “The North American application business had a complete blowout in Q4 a year ago, which was a comparison we had to take this year,” he explained. “First of all, there is a very strong pipeline in Q1. So it's simply a matter of they had again spectacular growth a year ago and there was a tough comparison. But, again, we expect the North America to grow strongly in the Apps business in Q1.”

He suggested that the nature of customers and customer choice has changed. “A typical customer might have G-Log, Demantra, Siebel and people would then call PeopleSoft and Hyperion for connecting, and it’s very clear we are not going to replace all of those products, it's just not feasible. So the customers are going to a two supplier strategy, and maybe SAP for internationals and supply chain, Oracle for everything else and relying on Oracle, not SAP to make all the pieces work together.

“That's absolutely key to us, and the key to our middleware technology. Our retail technology or integration technology, out of our Fusion Middleware to tie all of these pieces together. And we are seeing them choose our middleware for integration. Again to link, as opposed to NetViewer they are picking our middleware to link all these pieces together. And we've got a very good relationship with these customers and we are not able to sell applications, new applications and the customers that historically has been on the SAP side of the ledger, it wouldn't talk to us about new applications, but they are now coming to us and since we are party as a dual vendor strategy, they are buying new applications from us as well.”

Raised eyebrows

But the apps results has caused a few raised eyebrows. "The only real disappointment in the quarter was the sharp drop in the growth rate of the application products," said Jim Shepherd of AMR Research. "Ellison suggested the drop was simply the result of being compared to a very strong fourth quarter in 2006, but that may not be the whole story. While 4Q06 was certainly a great quarter for applications, Oracle’s application sales team may have stumbled a bit in this latest quarter. The 13 percent new license growth is particularly low given that Q4 is Oracle’s seasonally strongest period, the global application software market is very healthy, and Oracle has acquired seven application companies the past year. Organic growth plus the revenue stream from these acquired products should have produced more than an $85m improvement over last year’s new licence revenue.

"While we believe that Oracle has done a remarkable job assimilating 17 acquired application companies since January 2005, there were bound to be a few problems. This quarter those problems seem to have surfaced in the Americas and Asia Pacific application sales execution. Application sales growth rates in the Americas dropped to 5 percent from 73 percent year over year, while Asia Pacific shrank to 1 percent from 94 percent growth in the same period.

"Oracle’s application sales team and its customers and prospects appear to be a bit overwhelmed by the ever-expanding product portfolio. The organisation structure may have had too many moving parts. Oracle has been busy creating vertical industry business units, territory sales units, a new channel organisation, and product specialist sales overlay teams. This inevitably results in new managers, new roles and new account assignments, and drives customers crazy. AMR Research has had a number of clients complain about Oracle arriving with a busload of sales people, each representing a different product line and none able to articulate a coherent overall story."

But he added: "Nothing is seriously wrong with Oracle’s application business. The shift to vertical industry business units is a very good strategy, and it is already paying off in retail, banking, and telecom. The slower than expected growth in Q4 appears to simply be growing pains, and we expect much better results in Q1 given the strength of their pipeline and the market."

Indeed, the overall figures were generally met with approval. “These are impressive figures and ones that will be forensically analysed by the competition, trying to factor out acquisition led growth from organic growth and to calculate the implications for individual products in individual countries,” says David Mitchell, software practice leader at Ovum.

He predicts further acquisition activity. “Oracle is definitely still on the acquisition trail, with the executive team confirming that they expect the 2008 M&A momentum to be as strong as it was in 2007,” he said. “On that basis we should anticipate a double digit number of acquisitions in the year ahead. There are two prime candidates where these acquisitions will come from. First, is further specialist applications in its target vertical markets, with utilities and energy been a prime candidate vertical. Second, continued infill acquisitions in middleware technology, to further build out its rapidly growing middleware market and continue the strong competition against the likes of IBM.”

“However, there are also likely to be twists and turns in the acquisition strategy. Oracle will surely expand the number of vertical markets that it focuses on and set out a new acquisition trail in those markets; potentially targeting markets considered to be SAP dominated. The market must also face up to the possibility of a totally left-field acquisition, taking Oracle into new markets entirely. Oracle has floated the idea of it attaining annual revenues of $50 billion. This will potentially require more than continued organic growth and numerous sub-$1 billion acquisitions. The acquisition of PeopleSoft signalled a change of strategic gear for Oracle and a push for major growth. 2008 or 2009 could well signal another change of gear for Oracle.”

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