Oracle may have a cure for the guessing game that ensues every time the company reports its quarterly license revenue: Switch the business model.
At a recent conference, Oracle CEO Larry Ellison stoked speculation that the company is looking toward becoming a software subscription business. Ellison said at the Feb. 8 Credit Suisse Software Conference that licensing revenue "was an interesting number" but that "by far, our most profitable business is existing subscribers that renew their subscriptions every year."
Ellison has good reason to position the Redwood Shores, Calif., company that way, given that new-applications license revenue has been on a roller coaster ride. It disappointed Wall Street with $350 million in the fourth quarter of fiscal 2005, then again with a poky $127 million in the first quarter of fiscal 2006. In the second quarter of fiscal 06, it rebounded to $266 million, and third-quarter results were expected to impress on March 20, with applications license revenue growing at about 32 percent (thanks to 17 acquisitions since January 2005), according to Goldman Sachs.
In a research note released March 9, First Albany analyst Mark Murphy, in San Francisco, said: "Industry contacts state that the wheels have been set in motion from the highest level at Oracle to do away with license sales within roughly 18 to 36 months, if possible."
The key: If possible. While there is a substantial swing toward SAAS (software as a service)—look at the success of relative upstart Salesforce.com, which has close to 400,000 subscribers that pay for services on a monthly basis—a shift to a purely service model would be a major revolution, and Wall Street would quake.
But, as Ellison noted last month, Oracle already has a subscription model for large customers. "Were trying ... to turn our largest customers into all-you-can-eat customers," he said. "Now, thats very different than Oracle 10 years ago."
Oracle officials said the First Albany report is inaccurate and pointed to a research note put out March 9 by Goldman Sachs Group analyst Rick Sherlund concluding the companys switch to subscription accounting "is not likely."
Indeed, Oracle would have to tackle a few key issues before it made any switch. First is defining the subscription-based model. Its not clear whether the company would simply change the structure of users contracts to reflect monthly fees versus a perpetual license and annual maintenance fees, or if that would include some form of SAAS model, where users are charged for the services they use.
If Oracle were to move toward SAAS, it would have to change its mesh of suites to accommodate services delivery. Its next-generation, SOA (service-oriented architecture)-based Fusion applications may already be SAAS-enabled, but most current Oracle applications arent.
Through its acquisition of Siebel Systems, Oracle acquired Siebel CRM, which is ready for prime time in a subscription-based model, but thats a long way from service-enabling each of Oracles suites prior to the 2008 delivery date of Fusion.
Some structural changes within Oracle also would be required to track customer usage, said Judith Hurwitz, president of Hurwitz Associates, in Waltham, Mass., and some accommodations might be needed for multitenancy or isolated-tenancy models that enable upgrades and patches to be distributed on a wide scale, all at once.
In addition, analysts said Oracle would need to figure out how to improve its own on-demand business; few people think of Oracle when they think of on demand. Oracles on-demand model is still license-driven, but users pay monthly for Oracle to host their software.
Nevertheless, its hard to count Oracle out. For one thing, the company is experimenting with a subscription model in Latin America. "We are running a program in Latin America where we bundle software licenses, support, implementation, apps management and hosting for our E-Business Suite and then charge a monthly fee," said Chris Hummel, vice president of Oracle On Demand. "We continue to evaluate this program and incorporate the learning into our global products and services."
According to Jim Shepherd, an analyst with AMR Research, in Boston, Oracle is being coy about whether the SAAS experiment will reach U.S. shores. "Theyve been cagey about it," said Shepherd. "Theyve said, Yes, we could do that. The software is ready, were prepared to do it, but not yet."
Finally, Oracles biggest job would be to convince customers that a subscription model is the right way to go. "I would like to see Oracle come up with a fair model—not Larrys model—to take customers like us who are paying a boatload of fees and migrate us into the on-demand world," said a CIO from a midsize manufacturer in the Southeast, who requested anonymity. "But every time Larry has changed his business model, its to his benefit."
Other customers dont see how the switch to a subscription model could make much difference, besides taking the load off IT departments.
"I can see where its hugely beneficial to [an IT department], but Im not sure customers would be satisfied unless theres financial or other [types of benefits]," said Mike Johnson, CIO at AT Kearney, in Chicago.
Additional reporting by Lisa Vaas