Oracle's Analyst Day: Summary and Response

Jul.24.06 | About: Oracle Corporation (ORCL)

On Tuesday, Chuck Phillips, Oracle co-President, and Chuck Rozwat, EVP of Server Technology, hosted an analyst briefing in New York, primarily focusing on the database and middleware markets. According to Phillips, this will be the first in a ongoing series of quarterly analyst briefings; spearheaded by new IR director Krista Bessinger.

Rather than regurgitate the details of the formal presentation, I would simply point you toward the presentation (.ppt). Most of the presentation was as you would expect it:

  • Quick financial review
    • Taking a bow for the Q4 numbers
    • Reiterating long-term goals of 15% revenue growth, 20% EPS growth
  • Review of database market share dominance
  • Review of renewed strength in apps business (finally righting itself after years of losing share to SAP)
  • Review of the middleware business (growth and differentiating features)
  • Growing importance of unstructured data (and Oracle's interest in content management)
  • Growing importance of business intelligence

From there, Phillips opened the session up to Q&A:

...On Open Source

As opportunities come up, if it makes sense for something that's more unique and we can add some value around it and our customers want us to do it, we'll take a look at it. We have bought some open-source products already. In some of those areas, it was closer to our core, a little higher up the stack, it made sense to do that. So we don't have anything to announce today, but that's like any other category. We will continue to review it.

...On Future Acquisitions

Acquisitions in general, like we've said I guess in the recent past, that we continue to review ideas as they surface. Most of the things that are out there that could potentially be bought are kind of in the medium to small range. There just is not a lot left out there that's very large. We certainly have the capital and cash flow to be able to afford to do it. I think we've gotten very good at the quick integration of these acquisitions, 22 acquisitions later, we kind of have it down now. And so in terms of distraction, that's minimal.

...On Competing with SAP

Yes, we definitely think there's a changing of the guard taking place, and we will grow faster. That's definitely our plan, and we see lots of ways to do that. They're making a short-term decision not to invest in the next-generation architecture. They're tweaking what they have, but it's still an ABAP-driven system with some things wrapped around it. And they're trying to have it both ways, saying we're giving you all the next-generation features that people talk about, all these capabilities, but we're not changing anything, don't worry, but Oracle's changing everything.

...On SOA/Web Services

My view from talking to a lot of customers on that is the biggest one will be the faster adoption of applications, because one of the reasons they can't adopt applications is they have legacy systems, they need some of the processes that are embedded
in those legacy systems are so important they can't rewrite those, but they need to participate in the orchestration of those services across multiple applications. So you can install new applications, but they have to inter-operate with some of these
legacy applications in a way that's easy to install and get them integrated. And what this Web services will do is allow you to compartmentalize some of those services, share them across multiple applications and more easily extend them as your business changes. And so if you have a more flexible architecture of people theoretically to consume applications and technology by derivation, more quickly.

...On Maintenance Renewals

I thought no one would ask about our largest business. Good. It's our largest, most profitable business and it's going very well. Renewal rates are increasing. The renewal rates since we've acquired PeopleSoft have gone up. So I think we've always done that very well, people are getting better support, so they're happy and it's in the high 90s. No issues there.

...On Leveraging Up the Cap Structure

Well, we've certainly had that discussion at the board level about what's the right capital structure, and, obviously, based on what we're doing right now, we have come to the conclusion that we are probably under-leveraged, but this is a new thing for software companies and for tech companies in general, and probably advisable to go at a  measured pace. While you may be for a more aggressive posture there, certainly another set of shareholders who don't want to see too much debt because they're
used to us from the last 20 years not having any.

Nothing too Earth shattering but some interesting tidbits for sure. Oracle has been out in front on the idea of buying up market share to leverage the cash flows from the annual maintenance revenues and now they appear to be setting market expectations for further leverage. Although he didn't touch on the matter in the presentation, one would think that further debt would also portend a potential dividend payment, would it not?

As to acquisitions, I know several sell-side analysts pointed toward the business intelligence and content management segments as obvious areas for further Oracle M&A. While that may be true, I also wouldn't rule out further moves into the Linux market, particularly on the OS front. And, of course, there's the OnDemand market; of which Ellison has a natural candidate for acquisition in NetSuite (he's the majority owner).

Disclosure: At the time of this writing I, and/or funds I maintain discretionary control over, maintained long equity positions in several of the companies mentioned (ORCL included) but did not maintain a short position in any of the mentioned firms. We may also hold options positions as a hedge against our underlying long equity positions.