Oracle Hikes Prices to Fend off Flagging Dollar

Who has the audacity to raise prices in a soft market? Oracle does.

The business-software giant recently tacked 15% to 20% onto its fiscal 2009 prices. It's a bold move that gives the company more wiggle room in competitive sales negotiations. But it also addresses a fatal flaw in Oracle's worldwide pricing model.

This month, Oracle raised prices across the board, according to Jane Disbrow, research vice president at Gartner. The company had not raised per-server license prices in over six years, she said.

Increases of that magnitude "track with the industry," which had continued to nudge prices upward, says Stuart Williams, senior analyst at Technology Business Research.

Oracle's move follows a policy change at business-application competitor SAP within the past two months that effectively raised maintenance fees to match Oracle's.

Now, Oracle's new price hikes open the door for SAP to follow suit, Disbrow says.

Although it has so far not raised prices broadly, SAP has restructured some products in ways that push prices higher, Gartner analyst Daniel Sholler says.

Oracle is the leader in database software, but also has a broad portfolio of business applications and so-called middleware. SAP is the leader in business applications, but Microsoft is also strong in applications and database software. IBM is the middleware leader, also selling database and collaboration software. Big Blue said it has not raised across-the-board prices in the past year.

Oracle shares were off 2.7% to $22.08 in recent trading amid the market's broad selloff.

The effect of Oracle's increase, at least initially, will be to grow license revenue at a time when IT budgets are under pressure. IDC estimates worldwide corporate technology spending will slow to 4% growth for 2008, from a rate of 6% last year. But a Gartner survey of U.S. IT chiefs found that 25% reduced their budgets in the first quarter, while only 10% spent more.

However, Oracle's international revenue will begin to climb almost immediately, Disbrow says. The list increases are a reaction to pricing outside the U.S., which has fallen as the dollar has weakened, she says.

Unlike SAP, which prices software on a regional basis, Oracle sets worldwide prices. As a result, Oracle software has gotten cheaper abroad. Yet international customers who bought the software years ago at higher prices pay maintenance at a fixed percentage based on the original price. Those customers are paying more for annual support than customers who bought Oracle software recently.

The price increase addresses that disparity, Disbrow says. While both SAP and Oracle offer deep discounts of 50% to 60% off list prices, Disbrow expects Oracle to discount less outside the U.S., beginning immediately.

But don't look for a big, first-quarter jump in Oracle license revenue. Analysts say Oracle will likely phase in the new prices, with greater discounts being given initially and dropping in fiscal 2010.

Actual deal pricing will creep up slowly -- on a curve, Williams says.

Sholler says software prices and maintenance charges across vendors will tick up a couple of points every quarter over the next year. But all developers will keep increases just below the tripwire for switching to another vendor, he adds.

Landing new clients willing to pay hefty license fees is only part of the story. "License pricing gets you to the altar, and gets you married," Williams says. "Maintenance is the long-term relationship."

Oracle has built a revenue-generating machine by buying three dozen software companies in recent years whose clients pay regular maintenance fees entitling them to software upgrades. At BEA Systems, which Oracle bought in 2008, license fees made up just 36% of last year's revenue. Maintenance payments contributed $774 million.

During the first three quarters of the fiscal year just ended, Oracle's maintenance and upgrade revenue rose 24% to $7.5 billion.

Williams says he does not expect a shift in Oracle's maintenance pricing this year.

SAP recently changed its maintenance policy to match Oracle's by getting rid of a cheaper support option. SAP now requires customers to pay the 22% rate, in line with Oracle's, Disbrow says. It includes additional services, but SAP customers "are struggling with justifying those benefits," she said.

Avian Securities analyst Jeff Gaggin said in a note Wednesday he believes SAP is "struggling to generate business due to macro factors and competition from Oracle."

While SAP is well-positioned, "the macro environment is putting considerable pressure on deal sizes and close rates for applications, which is SAP's bread and butter," Gaggin wrote.

Author: Ivy Lessner @ www.thestreet.com

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Oracle looks to rebound in typically strong quarter

Oracle Corp. is expected to post solid profit and sales gains when it reports results after the market's close Wednesday for its fiscal fourth-quarter, typically its strongest period of the year.

The software giant is looking to rebound after delivering largely disappointing results in its previous, third quarter. See related story.
Analysts on average estimate business software maker Oracle (ORCL 22.70, +0.26, +1.2%) will report earnings excluding special items of 45 cents a share for the period ended in May, and $6.85 billion in revenue, according to FactSet Research.
That compares to earnings excluding special items of 37 cents a share, and $5.83 billion in revenue in the same period a year earlier.

While concerns have been raised about Oracle's performance amid the U.S. economic slowdown, the company is expected to be bolstered by overseas sales and an acquisition spree that has it well positioned in its various businesses.
Shares of Oracle have risen nearly 15% in the past three months, and closed Thursday at $22.70.

Oracle closed its $8.5 billion acquisition of middleware provider BEA Systems Inc. in April, and Jefferies & Co. analyst Ross MacMillan wrote in a note to clients Wednesday that he expects that to contribute earnings of a penny a share in Oracle's fiscal 2009, and 3 cents a share in 2011.

MacMillan wrote that Oracle is now able to make deep cost cuts at BEA, which should increase BEA's operating margin to 43% from 21% by the end of fiscal 2009.
For its recently ended quarter, MacMillan predicted a "rebound" in the Oracle's applications business, and "modest U.S. weakness."

"Europe and [Asia] remain strong and should continue to bolster the weaker Americas," MacMillan wrote.
Citigroup analyst Brent Thill wrote in a note to clients Wednesday that Oracle's recent price increases are a positive sign. On June 16, the company issued new prices for products that reflected a significant jump.

"We view this hike as positive for [Oracle's] overall business," Thill wrote, because they reflect the company's dominant or second place position in its various markets.

"We have not witnessed a price lift of this magnitude for many years," Thill wrote.
While Oracle may well eventually drain the well of potential new acquisitions to further fuel its growth, Thill wrote that this is still a number of years away.
The company should be able to grow and expand margins through fiscal 2011, "as it makes further purchases," Thill wrote.

Author: John Letzing @ www.marketwatch.com

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Oracle Reportedly Raises Prices 15%-20% On Major Pdts

Oracle (ORCL) has raised prices by 15%-20% “across all major product lines,” according to a brief research note this afternoon by Citigroup’s Brent Thill. Now, you want to keep in mind that Oracle negotiates prices with customers of any significant size, so the numbers on the price list are not necessarily what people actually pay. But that said, it still is an eye-opening development.

Thill says the company has not installed a price increase of this magnitude “for many years.”

According to the note, Thill examined the price list release earlier this week and compared it to previous lists to uncover the price increases.

So how can they get away with this in an soft IT spending environment? Thill says there are three reasons. One, the company is the first or second leading player in each of the categories in which they play. Two, it has been a long time since it raised prices this much. And three, he notes that customers rarely pay list prices after negotiating.

Oracle today is up 5 cents at $22.58.

Author: Eric Savitz @ http://blogs.barrons.com/techtraderdaily

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