Oracle Sets the Bar High for Competitors' Imminent Quarter End

Mar.21.07 | About: Oracle Corporation (ORCL)

How do you compare Oracle’s (NYSE:ORCL) FY 2007 Q3 results in terms of its usual litany of competitive share gains? The off-Gregorian-quarter/off-Gregorian-year fiscal periods that Oracle uses make a fair competitive comparison an IT investment research challenge: Should investors look just at the most recent three months, or the last 12? Which competitor reporting periods should you use: The one that overlaps the most with Oracle (in which case you have to wait to do the compare) or the one that closed most recently (even if that was two months ago)?

I prefer using trailing 12 month and comparing with the reporting periods that overlaps the most. The 12-month approach is most useful because Oracle’s fiscal year makes March-May its strongest quarter while the IT market in general ‘hockey sticks’ at the end of the calendar year. And I think of yesterday’s Oracle announcement as representing the first tea leaves of calendar quarter 1, 2007, and not reflective of the period ending December 31, 2006. That means that Oracle has set the bar high for IBM’s (NYSE:IBM) Software Group, Microsoft (NASDAQ:MSFT) and SAP (NYSE:SAP) for their quarters ending next week.

But timing is not the only issue:

• Should we look at Oracle as participating in:

o The two market segments it presents for SEC purposes: software and services?
o The two that its reports for financial analyst calls: technology and applications?
o The three markets it uses for marketing purposes: database, middleware, and applications?
o The four segments that I believe are most meaningful: database middleware, non-database middleware, application suites, and standalone non-engineering applications? (Note that I am adopting IBM’s definition of middleware because—well, because it’s IBM)

In addition, given the proposed Hyperion acquisition, should business intelligence [BI] be considered one of the two types of middleware, a standalone application, or a fifth segment? According we’ll have a quarter to make up our mind on that one.

It’s also important to decide whether to look at Oracle revenue in GAAP terms or “backcast” to account for its numerous acquisitions? As an ex-IDCer, of course I backcast.

In terms of Oracle’s overall results vs. competitors, backcast for its acquisitions:

• In the most recent12 months for which meaningful comparison is possible (through 12/31/06), Oracle grew its overall business about 10% whereas the IT Top 12 (Apple (NASDAQ:AAPL), CA (NASDAQ:CA), Dell (NASDAQ:DELL), EMC (NYSE:EMC), Fujitsu (OTCPK:FJTSY), Google (NASDAQ:GOOG), HP (NYSE:HPQ), IBM, Microsoft, SAP, and Sun (NASDAQ:SUNW) in addition to Oracle) grew around 9% as a group. This above-average performance represented a great comeback for Oracle which had been among the slowest growing IT suppliers in 2005 vs. 2004.
• But otherwise—as I said above—a meaningful comparison with the IT Top 12 group for the fiscal quarter just ended is not possible until late April. Oracle grew its overall revenue 14% in the 12 months ended 2/28/07 and the rate is likely to remain above-group-average performance. Oracle set expectations yesterday that it would keep up the pace in its fiscal fourth quarter ending May 31, 2007 but that the compare with its own FY 2006 fourth quarter would be tough.
• Neither of these Oracle growth rate numbers reflects Hyperion yet.

o Assuming that deal closes, Hyperion’s past results will drag down the Oracle CY 2006 backcast growth rate of “about 10%” because Hyperion’s growth rate had been 6% in its most recent fiscal year.
o But Hyperion’s 12% and 22% growth rate in its FY 2005 and FY 2004 respectively will retroactively have the effect of raising Oracle’s previous year growth rates.

Ah, the beauty of market statistics. But what do they mean? If 2007 IT spending will continue to slow the way 2006 IT spending slowed vs. 2005, and I expect it will, we won’t see it in Oracle’s results until the September report. Oracle is traditionally an outlier and not just because of its calendar timing. Next month’s Microsoft, IBM and SAP results will be the critical leading indicators.

As for looking at these Oracle results in terms of “software” revenue (combining what Oracle calls New Software License and Software License Updates and Product Support) and in terms of the four segments I mentioned (also backcast for acquisitions):

• In database middleware

o Oracle monopolizes the database market almost as much as Microsoft monopolizes the collaboration and project application markets. Oracle does three times the amount of business as Microsoft and IBM.
o For the 12 months ending 2/28/2007, Oracle database software revenue grew about 15%, pretty impressive given its market dominance

• In non-database-middleware (backcast for acquisitions such as Collaxa, Oblix, Siebel Analytics, Sunopsis, Thor, and so forth), Oracle continue to build on its billion-dollar FY 2006.

o It is still behind IBM and BEA on a trailing 12 month basis but is catching BEA as described in my December post.
o Oracle grew non-database middleware “software” revenue more than 30% in the 12 months ending 2/28/07, up from around a 25% growth rate in the 12 months ending 11/30/06.

• Remember Oracle does not split out these two segments; I have made an estimate of non-database middleware revenue based on the following

o Oracle’s claim to have exceeded a billion dollars in middleware software revenue in its FY 2006
o An assumption of a smoothed double-digit growth rate quarter to quarter
o subtraction of the non-database middleware estimate from the reported technology total as adjusted by acquisitions to arrive at an estimate of database revenue
o My database market estimate for Oracle for 2005 agrees with this press release on the relational database market issued by IDC

• In application suites

o The trailing-12-month growth rate for the period ending 2/28/07 was as high as 20% vs. around 15% for the trailing-12-month growth rate for the period ending 11/30/06.
o Oracle remains significantly behind SAP in application suites (typically called ERP). Most but not all SAP software revenue is for ERP suites but I estimate that almost half of Oracle’s applications revenue is for standalone applications (see below).
o SAP also gets a kicker this year in any such comparison by my and most other analysts’ exchange rate methodologies.
o Oracle says that it’s OK that it lags SAP so significantly because ERP is a slow growing market. Oracle feels it will catch SAP when looking at the applications total (although as I noted in January, I have not seen any signs of that yet—see my January addendum in the comments section).
o Oracle also says it has a different strategy than SAP in ERP. SAP trying to go down market horizontally, according to Oracle. Oracle apparently is not trying to go down market unless the smaller company is in one of Oracle’s key industries (served by one of its industry-specific application acquisitions)

• In standalone non-engineering applications, Oracle claims continued leadership in standalone CRM market via Siebel and most likely maintains the kind of lead in standalone HR that PeopleSoft always enjoyed. However I estimate that Oracle’s standalone applications business is basically flat with the revenue levels seen before these two companies were acquired. I make that estimate based on the success of salesforce.com draining opportunity in the CRM space and the simple maturity of the HR market.
• Although Oracle—as with the technology segment—does not split out its applications revenue into these two segments the way I do, I have made an estimate on its standalone applications revenue

o based on information available about Demantra, G-log, iFlex, PeopleSoft, Portal, Retek, Siebel, SPL, and Stellent before they were acquired;
o defining all estimated legacy Siebel and half of legacy PeopleSoft’s (not counting J.D. Edwards) revenue as standalone;
o subtracting the standalone application estimate from the reported applications total as adjusted by acquisitions to arrive at an estimate of application suite revenue
o assuming a smoothed high-single-digit growth rate for the applications software revenue total

The bottom line from an IT investment research perspective: not much new news here despite all the high numbers.