Special Report: Oracle ends 2007 on a high

Oracle post another set of strong results - providing Larry Ellison with more reasons to be bullish and Wall Street with a much needed shot in the arm.

By Stuart Lauchlan, news and analysis editor

Oracle ended 2007 on a high with second-quarter profits up 35 percent to $1.3 billion on strong software license sales and revenue up 28 percent to $5.31 billion.

Technology licence revenue grew 32 percent in the Americas, 23 percent in EMEA and 32 percent in Asia Pacific. The applications business was also strong, with new licence growth of 63 percent year over year to $553 million. Geographically, there was a strong performance across all regions, with 57 percent in the Americas, 72 percent in EMEA, and 66 percent in Asia Pacific.

New software license revenue, a key indicator of growth in the business of selling software to corporations, increased 38 percent to $1.7 billion. “We exceeded our guidance and our best case forecast with strong revenue growth across all product lines and geographies," said Safra Catz, Oracle’s president and chief financial officer.

"Our database business grew 19 percent in the quarter, dramatically higher than the growth of the overall market and considerably faster than IBM’s DB2 growth." Larry Ellison, CEO, Oracle

“Q2 was really a function of execution. We exceeded our own expectations in all regions and across all product lines. The quarter was broadly distributed and wasn’t dependent on any unusually large deals. New software license revenues were up 38 percent to $1.7 billion. Technology new licence revenues were exceptionally strong, growing 28 percent year over year to $1.1 billion, with database growing 19 percent. We are beating the competition and taking market share away from our competitors.”

The good results sparked the traditional bout of bullish comments from CEO Larry Ellison, with rival vendors firmly in his sights. “Our database business grew 19 percent in the quarter, dramatically higher than the growth of the overall market and considerably faster than IBM’s DB2 growth,” he said. “We continue to take share in the database market and grow that business. We continue to extend our lead over the number two player, IBM.

“Our middleware business grew 80 percent in the quarter. Our two major competitors in middleware are Microsoft and IBM. It’s a little hard to figure out how big Microsoft is and whether their business is growing or how fast their business is growing because Microsoft bundles their middleware with Windows, and their middleware is not based on industry standards. But they are, as far as we can tell on our own studies, the number one player. The number two player in middleware is IBM and, like Oracle, IBM sells middleware based on Java and other industry standards and we continue to gain share against IBM.”

Acquisitions strategy

Inevitably, any potshots at the competition comes around to the Germans pretty quickly. Oracle claims to have racked up 365 direct wins over SAP in the quarter, including life sciences firm CellGen, Korean Airlines, logistics giant Hellmann Worldwide and supermarket chain Morrisons.

“In applications, where our primary competitor is SAP, we grew at 63 percent versus their reported growth,” said Ellison. "We are growing our applications business very much faster than SAP and we think that’s a result of our strategy differences. SAP has elected to stick with ERP and build an all-new ERP system to sell to small businesses. They call that Business By Design.

“We’ve elected not to go into the small business market because we don’t see any synergy with our existing business, which sells to medium and large scale businesses. Our existing customers tend to be large companies or medium/large companies. If we were to go and sell it to small business, it’s a new set of customers requiring a new sales force requiring a new product. There is just no leverage, no synergy. It’s a business that we don’t think is right for Oracle.

“What we think we should be doing and what we are doing is selling; is moving beyond ERP and selling industry-specific applications to the same customers that we sell database to, the same customers we sell middleware to, the same customers we sell ERP to, the same customers we sell CRM to. We are now selling industry-specific solutions in banking, in telecommunications, in retail, in government, in the tax area, in utilities, in healthcare, in education and others. You’ll see us going into more and more industries. That’s our strategy for growth - to go beyond ERP, sell industry-specific applications to the customers we sell other things to. We think it allows us to leverage our relationships, leverage our support, leverage our existing products via cross-selling and is a more profitable business at the high end rather than the low end.”

Both SAP and Oracle have based future generations of applications on service oriented architectures (SOA), although Ellison admits that take-up of SOA has not been as fast as many had expected. “People have to understand when you have a fundamentally new computer software architecture like SOA, it takes a long time for adoption,” he insisted.

“This is not something someone flips a switch and everyone moves to SOA. It takes about 10 to 20 years to rewrite all of your applications. So that always was going to be a slow process. However, we see that process accelerating, at least in our middleware business. We think it’s a long-term growth story. It’s a very rapid growth story. We think it’s increasing so we have a SOA suite and in security, we have a single sign-on product. We have business intelligence products, balanced scorecard products, real-time measurement products. It’s a long time for our customers to have a majority of their applications modernised, that we think this is a growth story for a decade for us.”

In the wider market, the strong Oracle results gave a much-needed confidence boost to a jittery Wall Street. “Each quarter Oracle's results are eagerly anticipated by the market, acting as a bell weather stock that gives an indication of overall technology market health,” noted David Mitchell of research house Ovum. “In the climate surrounding the US credit crunch the Oracle results have been even more eagerly anticipated. On the basis of the Oracle results the credit crunch has yet to hit all aspects of the technology market, although the impact on technology companies with heavy financial services exposure is already being seen.”

The firm is also benefitting from its acquisitions strategy that has seen it gobble up firms such as Sybase and PeopleSoft. “[These] are resulting in Oracle having an applications footprint in many more customers than before,” explained Mitchell. “The footprint is giving Oracle sales representatives access to business executives more readily than in the past and is building a pipeline of up-sell and cross-sell opportunities. This part of the acquisition strategy is working well for Oracle.

“The acquisition strategy has created an Oracle that is very different from the Oracle of old. There are now nearly 80,000 Oracle employees - massively more than only five years ago. It is now a company that increasingly focuses on industry verticals, when it was almost totally horizontal in the past - with global industry business units. However, it is certain that the acquisition-led strategy will continue. New acquisitions will continue to change the company and the Oracle of 2010 will certainly not be the same as the one we see at the end of 2007.”

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