Wednesday, June 27, 2007

Oracle Apps Slows in Q4, More Acquisitions on the way

Oracle announced Q4 earnings today and had by my estimation a modest quarter in the applications business. That didn't stop company leadership from doing some trash talking about the competition and set out some very bold guidance for next quarter.

You can get at Oracle's full earnings release here. If you're deeply interested in how they are doing on the database and middleware front, follow the link and have at it. There will also be plenty of commentary by the press and the analysts regarding the quarter, so I'll try not to duplicate what you'll find there. Just as a frame of reference, the time period we are talking about for Oracle's fiscal Q4 is Feb 1st to April 30th

So, to get right to the piece of Oracle's business I'm most interested in, Oracle delivered $726 million in new license sales in the application business, up 13% from last year. They set guidance for new license growth of 20-30% next quarter (against a tough compare). Per CFO Safra Catz, next quarter could be biggest Q1 ever for the company. I really dislike that kind of spin. If your business is currently larger than it has ever been, you can grow revenues by .001% each quarter and still claim to have delivered record revenue for the quarter.

Frankly, 13% growth is better than I expected given what happened last quarter. Three months ago when Oracle announced a very good Q3, there was specutlation that this was due to heavy discounting that pulled deals from Q4 into Q3, leaving the Q4 pipeline bare. In some analysis I provided to a few of my clients I wrote...

...don't be surprised if Oracle's next quarter (fiscal Q4) is much less up beat. They had an outstanding Q4 last year, making large growth numbers highly unlikely. In addition, they may have the converse of SAP's current situation. Rather than deals slipping a quarter, there is some speculation that the company went to great lengths to pull every possible deal into Q3, presumably to take advantage of the opportunity to contrast a strong quarter against SAP's weak one.

Emptying the pipeline to hit current quarter numbers is not at all uncommon in this business. I don't have to tell you that, do I? It's nice if your vendor hits their quarterly goal, but of course that goal is meaningless to prospects (except for the discounting leverage it gives them), and too much of this sort of thing can come back to bite you.

I made reference in that commentary to Frank Scavo over at Enterprise System Spectator who was raising questions about Oracle's pipeline for this just ended quarter. Today Frank has posted a piece in which he gives Oracle credit for proving him wrong. I think he's being a bit hasty. Oracle did share today that Hyperion contributed $43 million of new license sales during this quarter, and that 60% ($25.8 million) of it can be categorized as applications license revenue (the other 40% Oracle lumps in with it's platform business). Backing out that amount leaves Oracle with application license revenue of just under 10%...respectable, but not blowing the market away, and down significantly from last quarter.

Bear in mind there are a number of smaller acquisition related figures to back out in order to get to a true organic figure which would be well under 10%. Hyperion is the only one they elected to disclose. Despite the modest quarter, applications license revenue for the fiscal year was up nicely. From the earnings press release:

“Over the last twelve months Oracle’s application new software license revenues grew at a rate of 32% while SAP’s growth slowed to 10% in their most recent fiscal year”, said Oracle President Charles Phillips. “Our strategy of combining innovation with acquisitions is clearly beating SAP’s strategy of trying to build everything themselves using a 1970s-era proprietary programming language.”
Again, 32% is a nice number. However, Oracle is increasing market share, but not growing it. I think the distinction is important. Here is what I mean. If you look at Oracle, Hyperion, Siebel, Retek, and PeopleSoft as though they were a combined entity for all of the last two years, the collective license revenue of that group is up about 7%, not 32%. Depending on which analyst datapoint you use, that growth rate is basically just keeping up with market growth. In other words, Oracle is not gaining additional momentum from the acquisitions, at least not in terms of new application license revenue. They have been successful at hanging on to customers and not losing share on this measure, but this is a case of one plus one being two, not three or more.

So what do you do when you've posted impressive acquisition driven growth, been rewarded for it with a nice increase in your earnings and your share price, but cannot seem to drive the organic growth necessary to continue to meet EPS expectations? Just ask Sage. You look for more acquisitions. Larry Ellison made it clear on the earnings call that this is exactly what they intend to do.

Recommended Reading:
Oracle struts its way into FY08
Oracle Application Growth Nose-dives; More Deals Likely
Sometimes it’s too important

Update: Oracle gave some pretty aggressive growth projections for Q1, including 20-30% growth in new license sales. I suspect that's for database and apps. They sure better hit that figure for the apps business alone. I've run the numbers and by my estimation the acquisitions of Hyperion and Agile will spot them about 24% Y/Y inorganic growth for apps.

No comments:

Post a Comment