Oracle Hangs a Solid Q2 on a Thick Neck

Positive second-quarter earnings can be attributed largely to Oracle's acquisition strategy—42 companies in less than four years—and customer demand for "one throat to choke."

Oracle surprised Wall Street analysts and investors Dec. 20 by reporting better than expected fiscal second-quarter 2008 earnings, particularly in the area of software license revenue, much of which can be attributed to the fact that its acquisition strategy is finally paying off.

Oracle announced Dec. 20 that its earnings were up 35 percent to $1.3 billion and revenues were up 28 percent to $5.3 billion. Even more telling for Oracle's acquisition strategy, whidh has seen the company acquire 42 companies in just about as many months, software license revenues were up 29 percent to $4.2 billion, while new software license revenues were up 38 percent to $1.7 billion.

"The strength of the quarter comes down to the fact that we are selling more products to more customers in more industries," said Oracle Chief Financial Officer Safra Catz during the company's second-quarter conference call with analysts.

It is a sign, analysts and customers said, that buyers are looking for a single vendor—one throat to choke.

"Regardless of role, all the companies seem to appreciate the potential upside of the Oracle strategy," Bill Swanton and Lee Geishecker of AMR Research said in a November research note titled, "Oracle's Application Strategy—What's Your Five-Year Plan?"

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"In fact, once Oracle accounts for over half of their enterprise applications footprint, most companies adopt an Oracle-first policy of seeing if Oracle's product meets their needs before investigating other vendors. They like the idea of single-vendor responsibility," Swanton and Geishecker wrote.

In its "Midsize Enterprise ERP Spending Report, 2007-2008," AMR Research found that 48 percent of midsized companies will increase their enterprise resource planning budgets by an average of 5.1 percent in 2008. That increase in spending will be driven in part by a desire to have a broad spectrum of functionality delivered from a single software vendor, the report said—a finding that ties nicely into the acquisitions that Oracle has been making.

In a Dec. 19 research note, Goldman Sachs analysts Sarah Friar, Derek Bingham and Frederick Grieb wrote that Oracle turned in a "highly impressive" second fiscal quarter, beating estimates on both applications and technology revenues. The reason, they said, is Oracle's acquisition strategy is paying off.

"Oracle continues to execute on its consolidation strategy, which has afforded it an expansive product set, greater account control and tremendous cross-selling opportunities, as well as a recurring engine of maintenance revenue," the analysts wrote. "While many investors believe Oracle's acquisition strategy is now limited by the number of targets available, we do not agree. The software landscape remains fragmented with opportunities springing up in newer areas such as software as a service. A tougher economy might only abet Oracle's strategy by lowering valuations and creating more motivated sellers."

Existing customers agree that Oracle's acquisition strategy is working, for a couple of reasons. The first is the "one throat to choke" theory, which is becoming more of a reality as Oracle acquires more companies. The second is that Oracle has realized the integration nightmare brought on by acquiring 21 application companies since 2005; while the actual product is not yet a reality, Oracle announced in April it would take on integration for its customers with its AIA (Application Integration Architecture).

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"We have purchased Oracle's BPEL [Business Process Execution Language] engine and adapters for Siebel and Oracle E-Business Suite and we had spoken with some folks in the AIA group back when it was called Project Genesis. Really, the one thing that precluded us from taking advantage of AIA was at the time they did not have AIA for Siebel industry verticals," said Joshua Greenberg, project manager for Subaru of America. "We are eager for Oracle to be successful. We're a very small company with about 800 employees nationwide, with 400 in headquarters and 15 in IT. So if Oracle is successful in integrating apps, it takes a lot of the work out for us."

Swanton and Geishecker said in their report that they are seeing Oracle customers fall into five distinct categories:

single-product loyalists that continue to focus on the same product and ongoing enhancements;

multiple-product expansionists that are "starting to see the advantages of buying more products from the same vendor and holding the vendor responsible for integration";

industry specialists that entered the Oracle fold through the company's many vertical acquisitions;

best-of-breed opportunists that have chosen SAP as their backbone system and became Oracle customers through an acquisition; and

the new "architecture adventurer."

"We found no companies that are fully committing to move to Oracle's new Fusion Applications, but we expect it will take a rare breed," wrote Swanton and Geishecker. "Most existing customers will stick to the safety of their existing products, which Oracle has promised to continue to enhance for some time to come."

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