Oracle results - above market expectations

After the close of markets yesterday Oracle announced the results of its fiscal year 2007, which ended on May 31st. Q4 GAAP revenues rose 20% to $5.8 billion, quarterly GAAP net income was up 23% to $1.6 billion, GAAP new license revenues were up 17% to $2.5 billion and EPS was up 27% to $0.31 basic per share. For fiscal 2007 as a whole GAAP revenues rose 25% t $18 billion, GAAP net income was up 26% to $4.3 billion, GAAP new licence revenues were up 20% to $5.9 billion, and EPS rose 27% to 0.83 basic per share. Cash flow from operation, crucial to sustain and continue the aggressive acquisition strategy, expanded by $1 billion to $5.5 billion.

These are impressive figures and ones that will be forensically analysed by the competition, trying to factor out acquisition led growth from organic growth and to calculate the implications for individual products in individual countries. Oracle is now such a large organisation, with so many product lines and has made so many acquisitions that this exercise is becoming harder and harder each quarter, generating progressively less insight. The prime obfuscating factor in any such analysis is revenue recognition - Oracle is more conservative in terms of revenue recognition that many of the companies that it acquires. Analysis of the Oracle results is most effective when the macro-level analysis of the numbers is blended with detail knowledge at the deal specific level, below the information publicly provided by Oracle.

The colour to the numbers was given by Charles Philips. There were three areas that were headlined. First, was the continued strength of the Oracle technology business, including the traditional database technology. That strength is driven by steady database growth, uptake of "Options" on the database product and continued acceleration of revenues from Fusion middleware - with the latter two being the prime revenue accelerators. In terms of geographic colour EMEA was strongest at 18% year-on-year growth, followed by the Americas and APAC at 15% and 13% respectively. Second, were the applications growth figures with the Americas, EMEA and APAC growing at 26%, 42% and 36% respectively. The vertical applications are undoubtedly an element of that growth, with EMEA now showing the growth spurt that the Americas experienced earlier - extending the channel and sales operations for industry vertical products is inherently more difficult in a geographically and culturally fragmented market such as EMEA. The vertical applications have also been used to effect a subtle change of positioning in the battle against SAP - moving their strategy gently from a head-to-head tussle towards trying to envelop and subsequently replace them. We expect more focus on this enveloping strategy in 2008. Third, was the mention of the growing importance of CRM On Demand for Oracle. Charles Phillips made special mention of the disadvantages of a multi-tenant architecture when dealing with sensitive customer data in the financial services or public services markets - a clear prod in the ribs for Salesforce.com and, potentially, an early signal that Oracle will begin to address this market more aggressively.

Below the headlines there are always one or two seemingly low key announcements on the results conference call that are actually quite significant. This time was no exception. The technology re-marketer programme mentioned, almost in passing, by Charles Phillips is a signal of a much harder push into the SMB market, attempting to remove friction from the channel and increase channel velocity. Oracle has traditionally been difficult to do business with for small companies and the re-sellers that serve them. As a result the SMB revenues, although not unimportant at current levels, are a fraction of the potential in that market. Expect 2008 to see Oracle push into the Microsoft strongholds during 2008. It's a continuation of the SMB technology battle between Microsoft and Oracle that Ovum first focused on in 2005 - with 2008 signalling increased fervour to the battle.

Oracle is definitely still on the acquisition trail, with the executive team confirming that they expect the 2008 M&A momentum to be as strong as it was in 2007. On that basis we should anticipate a double digit number of acquisitions in the year ahead. There are two prime candidates where these acquisitions will come from. First, is further specialist applications in its target vertical markets, with utilities and energy being a prime candidate. Second, continued infill acquisitions in middleware technology, to further build out its rapidly growing middleware market and continue the strong competition against the likes of IBM.

However, there are also likely to be twists and turns in the acquisition strategy. Oracle will surely expand the number of vertical markets that it focuses on and set out a new acquisition trail in those markets; potentially targeting markets considered to be SAP dominated. The market must also face up to the possibility of a totally left-field acquisition, taking Oracle into new markets entirely. Oracle has floated the idea of it attaining annual revenues of $50 billion. This will potentially require more than continued organic growth and numerous sub-$1 billion acquisitions. The acquisition of PeopleSoft signalled a change of strategic gear for Oracle and a push for major growth. 2008 or 2009 could well signal another change of gear for Oracle.

Author: David Mitchell