Oracle Vs. SAP: War of Words

Database giant reports a stellar quarter, but are its SAP claims overblown?

Oracles better-than-expected earnings report Sept. 19 for the first quarter of fiscal 2007 inspired some SAP bashing from CEO Larry Ellison, but a look behind the numbers indicates the war between the two applications giants is far from being decided.

Oracle reported net income of $670 million on revenue of $3.6 billion, and earnings of 13 cents per share. Excluding one-time items such as options expenses, Oracles earnings per share for the quarter were 18 cents, handily beating Wall Street expectations of $3.47 billion in revenue and earnings of 16 cents per share. At face value, those numbers tell a pretty good story. Oracles total software revenues were up 29 percent, to $2.7 billion, with database and middleware license revenues up 15 percent. New application license revenues were up 80 percent.

In Oracles earnings release, Ellison said SAP will be forced to change its strategy, delay a major product launch and buy more (and bigger) companies to compete with his company. SAP officials said Ellison misrepresented SAPs position in the market. SAP reported in July that its software-license revenues were up 8 percent for its calendar second quarter.

As if to drive home Oracles point even more, the companys Web site on Sept. 20 proclaimed "Oracle 80 percent, SAP 8 percent."

The rub: Its too early to call either side the victor. Wall Street analysts sounded a bit of caution trying to figure out what Oracles "organic," or without acquisitions, growth rate is.

A number of financial analyst companies said in separate research notes that investors should exclude Oracles acquisitions to get a clearer picture of organic license-revenue growth—a key indicator of how the software company is faring in the market and against SAP.

Goldman Sachs analyst Rick Sherlund said in a research note that Oracle Fusion Middleware showed license growth of 56 percent, but that actually includes some analytics revenue from Siebel Systems. Taking Siebel out of the equation, Oracles middleware growth is closer to 25 percent—still a good showing overall, he said.

But take a closer look at the applications numbers, and a different story starts to emerge, said Sherlund. According to Goldman Sachs, Oracles reported license-revenue growth of 80 percent shrinks to 46 percent if the companys acquisitions of Siebel, i-Flex Solutions and Portal Software are excluded. Still impressive, but its 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.

Adam Shepherd, of Dresdner Kleinwort, said Siebel reported about $100 million in license sales between June 2005 and August 2005. Excluding Siebel, Shepherd said Oracles first-quarter-2006 license sales suggest closer to flat growth in applications. "Market share gain looks negligible," wrote Shepherd in London.

Another analyst, Marc Geal, of Citigroup in London, said pro forma license revenues of Oracles combined businesses were $249 million in 2005, "thus licenses ... actually declined 8 percent year over year."

Bill Wohl, vice president of product and solutions public relations at SAP, said its impossible to do an apples-to-apples comparison of SAP and Oracle earnings, given that each companys fiscal calendar doesnt line up. Oracles fiscal year ends May 31, and SAPs ends Dec. 31. "How theyre doing versus us in the current quarter, you cant write about that yet," said Wohl in Newtown Square, Pa. SAP will announce its third-quarter earnings Oct. 19.

Analysts suggest that much of Oracles growth for the first fiscal quarter—which may be hurting SAPs business—can be attributed largely to PeopleSoft customers who are more comfortable with Oracle and are buying more software.

However, analysts said Oracle growth is likely to slow in upcoming quarters. Thats not to say Oracles strategy of growth through acquisition isnt working. The company posted its best quarter in more than a year and exceeded analysts—and its own—guidance. It has retained an acquired customer base, many of which initially had one foot out the door.

Even with all the brouhaha surrounding one quarters earnings over another, analysts said it will take several years to gauge the respective SOA (service-oriented architecture) strategies of Oracle and SAP. Meanwhile, both will have to lure customers to their next-generation suites. Analysts said it will 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," said Goldman Sachs Sherlund.