Analysts Question Oracle's 'Surround SAP' Strategy

Powering the stellar fourth quarter numbers Oracle announced yesterday—total revenues up 17 percent to 5.8 billion, beating the Street estimate of $5.6 billion—is an acquisition strategy that seems, on the surface at least, to be growing revenue and successfully making inroads into SAP's customer base.

During the earnings call yesterday, Oracle's CEO Larry Ellison outlined his company's "Surround SAP" strategy, which has seen Oracle acquire about 30 companies in the last three years, including PeopleSoft in 2005. That buy saw Oracle become the second largest application provider, bested only by SAP, which they vowed to best with third-party applications and middleware sales.

But several financial analysts question Oracle's strategy to grow its applications business minus input from acquisitions. And while the company's fourth quarter revenues appear to be proving out Ellison's tactics, a closer examination points to a slightly different story.

"Application license sales fell short of both our and consensus expectations," wrote Bernstein Research analyst Charles Di Bona in a June 27 research note. "Application license revenue of $726 million was a hair below our $727 million estimate and below consensus of $736 million. "We continue to have concerns about the organic growth rates of Oracle's core business absent ongoing acquisitions and about Oracle's necessary reliance on acquisitions to meet its stated EPS [earnings per share] goals, even as we are increasingly comfortable with management's ability to integrate the operations of such acquisitions," wrote Di Bona.

Di Bona notes that while application revenue grew 13.3 percent, the rate drops significantly to 5.5 percent if benefits from currency exchange rates and $26 million in revenue from Hyperion, which Oracle acquired in April, are removed from consideration. He suggests that Oracle's true growth rate in its applications business hovers somewhere less than 5.2 per-cent year-over-year.

Oracle is selling more applications by acquiring best-of-breed vendors, Di Bona said, but the company doesn't include the costs associated with those acquisitions in its earnings calculations.

Surround SAP

Ellison assured investors and analysts participating in the earnings call that the company will continue with its acquisition strategy—effectively beefing up its "Surround SAP" strategy with vertically aligned applications company purchases. The goal really is to surround SAP's existing customers with add-on applications that Oracle has acquired—transportation management, product lifecycle management or sales force management, for example —to get a foothold in SAP shops and sell more apps along with the middleware necessary to glue them all together.

Ellison and Phillips conceded that SAP customers would not in fact rip and replace their existing ERP (enterprise resource planning) implementations ("that would be unreasonable," Ellison said). Rather their thinking is that SAP customers are enticed to develop a two-vendor strategy.

"Customers are going to a two-vendor strategy and relying on Oracle, not SAP, to make all the pieces work together," said Ellison. "That's absolutely key to us, to our middleware strategy. We're seeing [SAP customers] chose our middleware versus [SAP's middleware platform] NetWeaver to link all the pieces together. We form very good relationships and now are able to sell new applications to customers that wouldn't talk to us about new apps."

Phillips concurred, saying that its plan to surround SAP is working "beautifully," but is still nascent. "Early on there was still a little nervousness when we first started buying [companies]," he said. "It's in our interest to coexist [with SAP]. It's not realistic if you spent a billion dollars to put [ERP] in, to rip it out." SAP, meanwhile, takes the stance that Oracle is not being true to its word with actual application sales growth rates. Steve Bauer, SAP's vice president of global communications, said an in-house apples-to-apples comparison between Oracle, Hyperion and Stellent, Oracle's real application performance is closer to -2 percent year-over-year.

"In spite of its recent claims of growth, the size of Oracle's applications business is still below the size of what it was in 2004, when Oracle and its acquired companies operated as stand-alone entities," said Bauer. "From a share perspective it will take Oracle 12+ quarters at current rates to return to 2004 consolidated market share."

If the modest numbers that Oracle posted in application sales in the North American region are any indication, next-quarter sales may be more tempered than Oracle would like to admit.

"While nearly all the numbers are very strong the year-to-year growth rate for Oracle applications and new licenses declined to 13 percent in calendar 2Q '07 from 57 percent in 1Q '07," wrote TBR analyst Stuart Williams in a June 27 research note.

"Applications revenue increased a modest 5.1 percent year-to-year in the Americas in 2Q '07, down from 68.9 percent in the pervious quarter. This is the lowest year-to-year growth rate for Oracle applications new license revenue since [the quarter] following the PeopleSoft acquisition."

Oracle reported overall license revenue of $2.5 billion, up 17 percent year-over-year, beating the street's expectations of 5 to 15 percent year-over-year growth.

During the fourth quarter conference call Ellison blamed flat sales in North America on a tough comparison to the same year ago quarter, where Oracle reported blow out results.

UBS analyst Heather Bellini said in a research note that Oracle's new application sales fell short of her expectations for 14 percent growth. She is looking for more numbers from Oracle's acquisitions to get a better sense of how quickly Oracle is gaining market share on SAP.

"We continue to believe that Oracle can sustain organic application license revenue in the low-to-mid double digit range over the next few years as we view the company's decision to offer unlimited support on its acquired products and its vertical focus as offering a point of differentiation and helping unfreeze customer's wallets," wrote Bellini, who pointed out that SAP's 2005 organic growth rate "dwarfed" Oracle's.

Bellini expects the gap to normalize in the latter half of the year, with Oracle starting to outpace SAP in the third quarter.

Of course SAP said Oracle's efforts are for naught. SAP's Bauer said Oracle has not been successful in gaining market share or customers from SAP, and Oracle's middleware doesn't integrate all its disparate applications. "It only connects them," he said.

Bauer said that SAP has more than 13,000 customers using NetWeaver and that the platform has a distinct advantage over Oracle's Fusion Middleware: the ability to integrate business processes.

"SAP has been delivering integrated SOA-based applications services across its ERP suite and composite xApps for several years," Bauer said.

Author: Renee Boucher Ferguson

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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

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Oracle and LODESTAR

On April 24, 2007, Oracle announced our agreement to acquire LODESTAR Corporation ("LODESTAR"), a leading provider of meter data management and competitive energy operation solutions. We expect the transaction to close in May 2007, subject to certain closing conditions. Until such time, each company will continue to operate independently.

LODESTAR delivers best-in-class meter data management, commercial and industrial (C&I) billing, load research, load forecasting and pricing, load profiling, and settlement and transaction management solutions to the utilities industry. The strengths of LODESTAR's solutions for utilities are planned to be combined with Oracle's industry leading database, middleware, and enterprise applications, including Oracle Utilities applications acquired through SPLWorldGroup. Combined, we plan to deliver the most comprehensive suite of mission critical operational systems for all segments of the utilities industry, combining meter data management, load profiling, pricing, marketing, sales, customer care, billing, analytics and management of the networks, work force, assets, and business to business transactions. We are also committed to supporting our respective customers, which include over 2,500 utilities worldwide, and 10 of the top 10 Global electric and gas companies.

On 6/1/2007, Oracle completed the acquisition of LODESTAR Corporation.

LODESTAR Corporation encompasses over 25 years of industry experience, spanning a customer base that includes the largest electricity and gas companies around the world. Our partnerships with these companies have allowed LODESTAR to stay in the forefront of the industry with leading energy software solutions.

Recognized globally for our suite of applications, LODESTAR Customer Choice Suite (CCS) is the cornerstone of many energy companies' mission critical applications. The CCS advantage lies in the ability to provide scalability and flexibility. Most solutions to date cannot handle the complexity involved in handling energy data. Thus, resources are consumed where they could be better utilized elsewhere. Because LODESTAR has applications that require configuration only around customer specific requirements, a business reduces expenditure as well as install time.

LODESTAR understands a business' need to forge ahead competitively. This is why we are dedicated to offering the industry software solutions that easily integrate into the entire enterprise. Our applications work easily with other third party packages and can easily be changed by your internal staff or with the help of a LODESTAR implementation specialist.

Chris Hamilos, Chairman and CEO had the vision to create a component-based suite of products to address the demands imposed by the ever-changing and dynamic energy markets worldwide. The first product to manage load research was introduced by LODESTAR Corporation (as part of TASC) in 1978. Since that time we have evolved our offerings into more than 10 different products that include portfolio management, financial management, pricing, billing, contract management, transaction management and more.
We lead with boldness, passion, speed and innovation. Our focus is to continuously provide the technology that makes a difference. We offer flexibility, efficiency, knowledge and over 70 years combined experience in our management team.

Source: www.oracle.com & www.lodestarcorp.com

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