Powering the stellar fourth quarter numbers Oracle announced yesterday—total revenues up 17 percent to 5.8 billion, beating the Street estimate of $5.6 billion—is an acquisition strategy that seems, on the surface at least, to be growing revenue and successfully making inroads into SAPs customer base.
During the earnings call yesterday, Oracles CEO Larry Ellison outlined his companys “Surround SAP” strategy, which has seen Oracle acquire about 30 companies in the last three years, including PeopleSoft in 2005. That buy saw Oracle become the second largest application provider, bested only by SAP, which they vowed to best with third-party applications and middleware sales.
But several financial analysts question Oracles strategy to grow its applications business minus input from acquisitions. And while the companys fourth quarter revenues appear to be proving out Ellisons tactics, a closer examination points to a slightly different story.
“Application license sales fell short of both our and consensus expectations,” wrote Bernstein Research analyst Charles Di Bona in a June 27 research note. “Application license revenue of $726 million was a hair below our $727 million estimate and below consensus of $736 million.
“We continue to have concerns about the organic growth rates of Oracles core business absent ongoing acquisitions and about Oracles necessary reliance on acquisitions to meet its stated EPS [earnings per share] goals, even as we are increasingly comfortable with managements ability to integrate the operations of such acquisitions,” wrote Di Bona.
Di Bona notes that while application revenue grew 13.3 percent, the rate drops significantly to 5.5 percent if benefits from currency exchange rates and $26 million in revenue from Hyperion, which Oracle acquired in April, are removed from consideration. He suggests that Oracles true growth rate in its applications business hovers somewhere less than 5.2 per-cent year-over-year.
Oracle is selling more applications by acquiring best-of-breed vendors, Di Bona said, but the company doesnt include the costs associated with those acquisitions in its earnings calculations.
Ellison assured investors and analysts participating in the earnings call that the company will continue with its acquisition strategy—effectively beefing up its “Surround SAP” strategy with vertically aligned applications company purchases. The goal really is to surround SAPs existing customers with add-on applications that Oracle has acquired—transportation management, product lifecycle management or sales force management, for example —to get a foothold in SAP shops and sell more apps along with the middleware necessary to glue them all together.
Ellison and Phillips conceded that SAP customers would not in fact rip and replace their existing ERP (enterprise resource planning) implementations (“that would be unreasonable,” Ellison said). Rather their thinking is that SAP customers are enticed to develop a two-vendor strategy.
“Customers are going to a two-vendor strategy and relying on Oracle, not SAP, to make all the pieces work together,” said Ellison. “Thats absolutely key to us, to our middleware strategy. Were seeing [SAP customers] chose our middleware versus [SAPs middleware platform] NetWeaver to link all the pieces together. We form very good relationships and now are able to sell new applications to customers that wouldnt talk to us about new apps.”
Phillips concurred, saying that its plan to surround SAP is working “beautifully,” but is still nascent. “Early on there was still a little nervousness when we first started buying [companies],” he said. “Its in our interest to coexist [with SAP]. Its not realistic if you spent a billion dollars to put [ERP] in, to rip it out.”
SAP Aint Buying It
SAP, meanwhile, takes the stance that Oracle is not being true to its word with actual application sales growth rates. Steve Bauer, SAPs vice president of global communications, said an in-house apples-to-apples comparison between Oracle, Hyperion and Stellent, Oracles real application performance is closer to -2 percent year-over-year.
“In spite of its recent claims of growth, the size of Oracles applications business is still below the size of what it was in 2004, when Oracle and its acquired companies operated as stand-alone entities,” said Bauer. “From a share perspective it will take Oracle 12+ quarters at current rates to return to 2004 consolidated market share.”
If the modest numbers that Oracle posted in application sales in the North American region are any indication, next-quarter sales may be more tempered than Oracle would like to admit.
“While nearly all the numbers are very strong the year-to-year growth rate for Oracle applications and new licenses declined to 13 percent in calendar 2Q 07 from 57 percent in 1Q 07,” wrote TBR analyst Stuart Williams in a June 27 research note.
“Applications revenue increased a modest 5.1 percent year-to-year in the Americas in 2Q 07, down from 68.9 percent in the pervious quarter. This is the lowest year-to-year growth rate for Oracle applications new license revenue since [the quarter] following the PeopleSoft acquisition.”
Oracle reported overall license revenue of $2.5 billion, up 17 percent year-over-year, beating the streets expectations of 5 to 15 percent year-over-year growth.
During the fourth quarter conference call Ellison blamed flat sales in North America on a tough comparison to the same year ago quarter, where Oracle reported blow out results.
UBS analyst Heather Bellini said in a research note that Oracles new application sales fell short of her expectations for 14 percent growth. She is looking for more numbers from Oracles acquisitions to get a better sense of how quickly Oracle is gaining market share on SAP.
“We continue to believe that Oracle can sustain organic application license revenue in the low-to-mid double digit range over the next few years as we view the companys decision to offer unlimited support on its acquired products and its vertical focus as offering a point of differentiation and helping unfreeze customers wallets,” wrote Bellini, who pointed out that SAPs 2005 organic growth rate “dwarfed” Oracles.
Bellini expects the gap to normalize in the latter half of the year, with Oracle starting to outpace SAP in the third quarter.
Of course SAP said Oracles efforts are for naught. SAPs Bauer said Oracle has not been successful in gaining market share or customers from SAP, and Oracles middleware doesnt integrate all its disparate applications. “It only connects them,” he said.
Bauer said that SAP has more than 13,000 customers using NetWeaver and that the platform has a distinct advantage over Oracles Fusion Middleware: the ability to integrate business processes.
“SAP has been delivering integrated SOA-based applications services across its ERP suite and composite xApps for several years,” Bauer said.
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