Oracle's Victory Lap

 |  Includes: ORCL, SAP
by: Jason Wood

Last quarter, I remarked that Oracle started talking the talk, but could they walk the walk? At issue was aggressive Q1 guidance despite Oracle's 3-year string of disappointing Q1 results. Well, three months later we have our the tune of Oracle's best Q1 result in the five years.

You don't need me to give you a blow-by-blow of the results or conference call; by now you're probably been inundated with glowing Oracle reports from sell-side research analysts, media and other bloggers. For the record, here are the key metrics:

The Basics:

  • Total Revenues -- $3.59 billion (+30% YOY)
  • Software License Revenues -- $804mm (+29% YOY)
  • Total Applications Revenues -- $931mm (+57% YOY)
  • New License Revenues -- $228mm (+80% YOY)
  • Ex-Siebel, Portal and i-Flex -- $186mm (+47% YOY)
  • Total Database & Middleware Revenues -- $1.81 billion (+18% YOY)
  • New License Revenues -- $576mm (+15% YOY)
  • Income from Operations -- $943mm (+29% YOY)
  • 36% operating margin (non GAAP)
  • EPS (non GAAP) of $0.18 (+24% YOY)
  • Free cash flow increased 32% YOY

  • Q2 Guidance:

  • New software license revenue growth of 15%-20%
  • Total software revenue growth of 19%-20%
  • Total revenue growth of 22%-24%
  • Net income growth of 13%-17%
  • Non-GAAP EPS of $0.22 (16% growth)
  • It's no coincidence that Oracle is trading at 5-year highs after yesterday's trading.

    In many ways, Oracle's earnings release and conference call was atypical. Usually the company is fond of very detailed press releases and long conference calls chock full of details that were often meant, in my view, to obfuscate an inescapable fact: they were losing a lot of share to SAP (NYSE:SAP).

    Well this quarter, it was just the opposite. The textual component of the press release was only a bit more than one page, and the conference call was equally short as Larry, Safra and Chuck were in different locations so they limited Q&A to three analysts (the 'lucky three' being Jason Maynard -- CSFB, Peter Kuper -- Morgan Stanley, and Heather Bellini -- UBS).

    Although Oracle appears to be backing up its rhetoric with results, the conference call was not without controversy. Larry Ellison took pains to attack SAP but made some bold proclamations that will be hard to back up with any evidence.

  • Point of Misinformation #1: SAP relies solely on a proprietary language whereas Oracle embraces completely open standards
  • Ellison: Now, Oracle has spent a long time in the middleware business. Oracle’s Fusion middleware is based on Java and other open standards. J-Developer is Oracle’s standards-based Java development tool. Again, this stands in stark contrast to SAP’s NetWeaver middleware, which is based on ABAP, SAP’s proprietary language. In other words, SAP is sticking with a proprietary approach to middleware while Oracle has adopted a completely standards-based approach from middleware and our next generation of Fusion applications.

    Frankly, I'm not sure how anyone that's actually spoken to developers or customers of either Oracle or SAP could take Ellison's quote without a mountain of salt. He would have us think SAP is hellbent on being ABAP-only, while Oracle has abandoned all hints of proprietary code. Neither is true. SAP embraced Java years ago; if you don't believe me visit the SDN and search for ABAP versus Java. Ironically, ABAP developers are actually worried that SAP development is moving TOO much toward Java; just the opposite of Ellison's contention. Originally, Web Dynpro for Netweaver was exclusively a Java environment; it wasn't until mid-2005 that developers had the option to extend web-services with ABAP as an alternative. ABAP is absolutely a proprietary language, but since when is that a bad thing? It's been the developer language of chioce for SAP for 10+ years. There are hundreds of thousands of engineers who prefer ABAP, and have deep domain expertise using it. If you're an SAP customer with no intentions of ripping out your investments in R/3 and mySAP, why on Earth would you want the company to abandon ABAP wholeheartedly?

    And on the other side of the ledger, does anyone honestly think Oracle is without proprietary aspects? PL/SQL anyone? BPEL extensions?

  • Point of Misinformation #2: SAP pushed back its release schedule and won't release a new applications suite until 2010
  • Ellison: ...our Fusion applications come out in 2008, we think that is another chance to get way ahead of SAP, since again, I keep -- I will point out once again -- SAP has said they are going to have no other, no new release of their applications until 2010. Now, they still have to make a 2010 date. That means we are going to be out there in the marketplace for two years with modern, standards-based SOA applications while they are rewriting their -- presumably they are rewriting their applications, so I think it is a tremendous opportunity for us to get way ahead of them in ERP, and again, we will continue to acquire industry-specific applications and industry-specific knowledge with our ongoing acquisition strategy.

    Here Ellison takes the opportunity to spin announcements made at SAP TechEd out of context, in my opinion. Specifically, SAP announced plans to shelve the release of mySAP ERP 2007 and in place release a series of iterative optional enhancement packages. In other words, release optional, componentized functionality every few months for the next few years versus trying to push a wholesale upgrade again just two years after mySAP 2005. How Ellison can contend this amounts to a pushback of a major release date when Oracle backed away from its own "One-size-fits-all" Fusion message in favor of a more gradual migration path for J.D., Peoplesoft and Siebel customers is beyond me.

    Another critical point to understand is that, unless I missed something, SAP remains committed to launching BPP (Business Process Platform) and having 100% of its applications suite service-enabled by 2007. No delivery date should be believed until we see the code released, HOWEVER, if SAP holds true; they would be in the market with a full SOA-enabled apps layer a year before Oracle's target date.

    Let me be clear, I am an investor in both Oracle and SAP and think Oracle's results the last few quarters deserve their just due. It's for that reason (i.e., the results speak for themselves) that I don't understand why Ellison feels compelled to layer in rhetoric of questionable validity. While it's great to see Oracle back on the scene as a viable #2, let's not mistake the fact that in applications they remain just that, a NUMBER TWO. SAP is forecast to generate nearly 3x the applications license revenue of Oracle over the next 12 months; and has done so almost entirely through organic growth.

    SAP had a fantastic multi-year run where Oracle essentially took itself (and Peoplesoft, J.D. Edwards and more recently Siebel) out of the competitive market. It was only a matter of time before that normalized; which appears to be the case. However, this isn't a zero sum game when one considers that it's essentially a 2-horse race for Global 1000 enterprise applications.

    Note: At the time of this writing I, and/or funds I maintain discretionary control over, maintained long equity positions in both ORCL and SAP. We also may, at times, carry derivative options on underlying positions as a hedge.

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