Special Report: Oracle "not running out of gas"

Another strong quarter for Oracle, but as it lowers expectations for the current quarter could it be feeling the effects of the economic downturn? "We are not running out of gas" is the message.

By Stuart Lauchlan, news and analysis editor

Oracle turned in another stellar quarter, but there are signs that even Larry Ellison's software behemoth is not invulnerable to the gathering clouds of an economic downturn.

Oracle's net income in the fourth quarter rose with new licences up 27% to $3.14 billion from $2.48 billion. But the firm was quick to lower expectations for the current first quarter, a seasonally weak one that could be even worse than normal given the slowdown of the US economy in particular.

“We are aware of the broader economic environment in which we operate, and we can't predict the economy from one quarter to the next,” said Oracle co-president Safra Catz, adding that she expects to see weaker growth in new software licenses of 10.0% to 20.0% in the first quarter. While most software firms would be pleased with that run rate, it's down on Oracle's recent performance where technology new licence revenues were up 23% to $2.1 billion in Q4 and up 24% to $5.1 billion for the full year. Geographically, licence revenues grew 16% in the Americas, 42% in Europe, Middle East and Africa, and 6% in Asia Pacific.

"Oracle’s application new software licence revenues grew 38% while SAP’s new software licence revenues grew only 13% in their most recent fiscal year. This is the third consecutive year we’ve taken applications market share from SAP."


Charles Phillips, president, Oracle

But Catz added: “I don't think we think that our strategy is in any way running out of gas. Our model is such that we have so much leverage in it that when we sell a retail application, invariably those customers also buy some of our other applications, whether CRM or ERP. Invariably they buy database and middleware, and so as our global business units continue and as our product line continues to expand, these products are very synergistic. We really feel that our strategy has a lot of time ahead of it. In fact, as far as a nine-inning baseball game, I’m not sure we are even in the second inning at this point.”

The applications business delivered new licence growth of 36% in Q4 and even more for the full year. “Oracle’s application new software licence revenues grew 38%” in fiscal year 2008, the company co-president Charles Phillips said, “while SAP’s new software licence revenues grew only 13% in their most recent fiscal year. This is the third consecutive year we’ve taken applications market share from SAP.

“We continue to land strategic, enterprise-wide design wins because of the breadth of our technology products complemented by strong ERP, CRM and vertical applications. For example, I met with Morrisons earlier this week, an $18 billion grocer in the UK with 120,000 employees. Morrisons had their vertically-integrated business model because they produce and sell their own food products. Therefore, they need applications ranging from manufacturing to supply chain to retail to CRM. They have decided to replace 25-year old mainframe systems and move to Oracle for pricing, and promotions, merchandising, business intelligence, financials, manufacturing, human resources because they need more flexible systems. Essentially, they are moving every key business process to an Oracle application.

“In CRM, we had a strong performance in the quarter, greater than 50% growth. Siebel remains the world’s leading application for managing customer data. Key wins were at Motorola; Enel, which is Europe’s second-largest utility; Farmers’ Insurance, American Airlines and Southwest Airlines. We also had a good win for Demantra at Volvo, for G-Log and the Oracle Transportation Management and at Toll Holdings, which is expansion of our footprint of one of Asia’s largest integrated logistics companies as well as JVC and First Quality Enterprise.”

Mixed messages

During the fourth quarter, the company closed its $8.5 billion acquisition of BEA Systems, a move that expands Oracle’s software offerings and makes Oracle the largest publisher of middleware. Oracle CEO Larry Ellison said that the company would continue to plough ahead, particularly in this area of software infrastructure with middleware and database enhancements. “Our strategy in technology is to remain number one in database and increase our overall market share and we are doing that because we have better products than the competition,” he said.

“The Oracle database is faster than IBM DB2 on the high end, more faster and more scalable, and we deliver better cost performance than Microsoft SQL server. That's all documented by industry standard benchmarks. So we are faster on the high-end and more scalable, more secure and we actually cost less to own and run, even than Microsoft SQL server on the low end. We are not going to sit on our laurels. We have a major database innovation that we will announce in September of this year. It is going to be a very big and important announcement for us, so we are not standing still in database.”

It's the same on the applications front. “We tend to compete by developing applications based on modern internet standards and service-oriented architectures and Java, he said. “SAP’s applications, our number one competitor in applications, still base their development on proprietary ABAP technology and not modern internet standards. To compete in the applications business we have to go beyond just ERP, where SAP remains very strong. We are the number one player in CRM and we are the number one player in industry-specific applications. SAP continues to focus on ERP, where they recently announced Business ByDesign, which is an ERP product suite aimed at small business.

“In contrast to that, where we want to sell more applications and more value is to existing mid-size and large accounts. Here we have dedicated business units in retail and telecommunications and banking. Our strategy to beat SAP in applications is to focus on industry standards and go beyond ERP to CRM and industry-specific applications where they are really often not competitive, often don’t even have products in those areas.”

In applications, innovation is clearly centred on the company's much-publicised Fusion next-generation. “We have launched a variety of CRM applications based on Fusion technology,” commented Ellison. “They are available as Software as a Service (SaaS). Maybe the most interesting one is one called Sales Prospector, which offers a capability not available with Salesforce.com. Specifically, it data mines your installed base and tells you what product you should be selling to that customer next and who your best references are for selling that product.

"So we have got a whole second generation set of CRM products to make salespeople more productive versus the first generation, which really was to help managers do a better job forecasting their sales. We will continue to deliver Fusion technology applications until ultimately we have a Fusion version of every application that we sell. It will take some time before we get all the way through all the different applications that we offer. But there will be a suite of Fusion applications coming out this year, next year and the year after.”

On the SaaS front there are still some mixed messages from the company. “We’ve been in the on-demand business for almost a decade and we’re the second-largest on-demand provider in terms of sales behind Salesforce.com,” insisted Ellison. “I’ll say that Q4 was the first quarter we actually made money in the on-demand business. If you look at the on-demand business overall, we’re enthusiastic about it. We continue to get better at it and grow the business. It’s not really growing any faster than our overall business. It’s staying at a constant small percentage. We think that’s going to change over time.

"But the entire on-demand industry has to get better at making money in selling on-demand software. If you look at the leader, Salesforce.com, they don’t make very much money and they’ve been at it for almost ten years. It’s hard to point to any software as a service provider that’s doing a good job of improving their profitability. I think that’s what we are focused on before we scale the business. The last thing we want to do is have a very large business that is not terribly profitable and drags our margins down.”

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