Oracle Touts Apps Growth; Analysts Suggest Caution
It was clear the company was going to do wellpreliminary reports were published the previous weekbut no one knew exactly how well. Or the implications for Oracles biggest competitor, SAP.
The numbers, on face value, tell a pretty good story: Oracles total software revenue was up 29 percent to $2.7 billion, with database and middleware license revenue up a respectable 15 percent.
But the real heart-stopper: Applications new license revenues were up 80 percent.
SAPs software license revenues, meanwhile, were up 8 percent for its second quarter, reported in July.
Oracle never let that thought pass for a moment during its 35-minute press and analyst call Sept. 19.
A banner on its Web site said early in the day Sept. 20 "Oracle 80 Percent, SAP 8 Percent."
The numbers suggested that Oracles two-year acquisition spree is paying off.
In that time, Oracle has acquired more than 20 companies, reportedly spending more than $20 billion all-tolled. And the numbers suggest Oracle is gaining market share over SAP.
But in the midst of a flurry of optimistic research reports from financial analysts with headlines like "Kicking Apps and Taking Names," a note of caution can be heard.
Goldman Sachs and Credit Suisse, among others, have suggested that investors back out of Oracles acquisitions to get a clearer picture of organic license revenue growtha key indicator of how the software company is faring in the market, and against SAP.
Rick Sherlund, the lead analyst on Goldman Sachs research note, points out that Oracle Fusion Middleware showed a reported 56 percent growth, but that number actually includes some analytics revenues from Siebel.
Taking Siebel out of the equation, Oracles middleware growth is closer to 25 percentstill a good growth opportunity for Oracle and a pretty good showing overall.
But take a closer look at the applications numbers and a different story starts to emerge.
According to Goldman Sachs, the companys reported license revenue growth of 80 percent shrinks down to 46 percent if Oracles acquisitions of Siebel, i-Flex and Portal Software are excludedstill an impressive number, but not quite the massive gain Oracle reported.
"If we were to back out PeopleSoft and look at Oracles traditional applications business, we suspect growth of about 15 percent would be evident," wrote Sherlund, in New York.
Credit Suisse said that Siebel sales were about $100 million for the same first-quarter period last year.
The suggestion is that either sales in this part of the business have fallen by about 70 percent or, more likely, its sales are classified differently within Oracle.
By adding Siebels $100 million back into the Oracle mix for the same quarter a year ago, new license sales come out flat.
Bernstein analyst Charles DiBona wrote that despite Oracle beating consensus expectations, "we believe that license revenue performance still fell within normal seasonal patterns."
Bill Wohl, vice president of product and solutions public relations at SAP, said that its impossible to do an apples-to-apples comparison of SAP and Oracles earnings given each companys fiscal calendar.
"How theyre doing versus us in the current quarter, you cant write about that yet," said Wohl, in Newtown Square, Penn. "The only way to do that is to wait until we report our next quarter."
SAP, which saw an 8 percent increase in software license sales for its second quarter of 2006, reported in July, will announce its third-quarter earnings Oct. 19.
Wohl also threw a potshot at Oracles accounting, saying that its combined growth with Siebels combined growth is not quite adding up.
"The sum of the parts is greater than the sum of the whole," said Wohl.
"Oracle may have retained Siebels customer base, but theyre not actually growing. Theyre going in the reverse direction, with about a 4 percent decline in business."
Analysts suggest that much of Oracles growth for the quarterwhile maybe putting a dent in SAPs businesscan largely be attributed to PeopleSoft customers who, feeling a little more comfortable with Oracles strategy, are finally opening up their pockets to buy more software.
That growth, according to Goldman Sachs, is likely to slow over the next few quarters as Oracle begins to "anniversary" acquisitions.
Thats not to say Oracles strategy of growth through acquisition isnt working.
The company posted its best quarter in over a year, and exceeded analystsand its ownguidance.
Its also done remarkably well in retaining an acquired customer base that had one foot out the door from the start.
But even with all the brouhaha around one quarters earnings over another, the fact is, both Oracle and SAP are several years out in their respective service-oriented architecture strategiesand in luring their customer base to their next-generation suites.
It could be a few years before either one can claim true dominance.
"Real customer relationships take years to undo, and there is simply more noise about share shifts than actual customer movement," writes Goldman Sachs Sherlund.
"The migration to the next generation of applications based on SOA will take place over the next five to 10 years, and both companies are likely to benefit, in our view."
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