Oracle's Support Revenue Is Its Key Driver

| About: Oracle Corporation (ORCL)

Last quarter we reversed our longstanding skepticism of Oracle’s (NASDAQ:ORCL) long-term prospects; i.e., smart orientation toward open source, strong position vis-a-vis high-growth industry verticals, and grid computing’s vitality to intelligence and data proliferation.

A review of the recently filed annual report brings more good news. Larry Ellison, for a while now, has been pointing to the importance of Oracle’s dull support revenue stream; when asked about maintenance renewals at Analyst Day, an Oracle executive responded, “I thought no one would ask about our largest business”

For the fiscal year 2006, software license and updates and product support generated gross margins just above 90%. This segment contributed 70% of the company’s gross margin dollars. Specifically, gross margin dollars grew 25% year-over-year to $6.35 billion.

One of the more important software trends is the gradual shift away from per-unit license sales and toward subscription-based models. Here’s what Oracle says about their subscription revenue base in the filing (emphasis mine):

Acquisitions over the past two years have significantly increased our support contract base, as well as the portfolio of products available to be licensed. Substantially all customers purchase license updates and product support subscriptions when they buy new software licenses, resulting in a further increase in our support subscription contract base. Even if license revenue growth was flat, software license updates and product support revenues would continue to grow assuming renewal and cancellation rates remained relatively constant since substantially all new software license transactions add to the support contract base. Substantially all of our customers, including customers from acquired companies, renew their support contracts when eligible for renewal. When support contract renewals are negotiated, inflationary price increases are assessed, where applicable. (Oracle 10-K filed 7/21/2006)