By Sarah Lacy
Judging by the 10,000-strong crowd that lined several San Francisco blocks waiting for the chance to see Oracle (ORCL ) Chief Executive Larry Ellison, it was clear how well the software company has burnished its image of late.
At Oracle's annual Open World conference, which drew some 35,000 attendees, gone were the gripes about strong-arm sales tactics that dogged the company in the late 1990s. And vanished were the comparisons of Ellison to Genghis Khan that abounded when Oracle launched its hostile bid for rival software maker PeopleSoft in 2003.
Ellison delivered a quick, 15-minute keynote address and opened the rest of the hourlong presentation to questions, saying he would rather hear what's on customers' minds. Several questioners hailed Ellison for his vision.
And when one West Coast-based client complained that every time she called Oracle customer service she got the call center in India and had to wait days for a response, Ellison furrowed his brow and said he was surprised. "Write me a note and we'll look into it," he said. The audience broke into applause.
This wasn't the same Ellison who, in 2003, famously implied that if he had one bullet, it would be aimed at former PeopleSoft CEO Craig Conway. No, this week showcased a kinder, gentler Oracle: One that announced it would provide lifetime support for any application acquired during its recent $18 billion shopping spree, and one that also pledged to make its products more compatible with those of other vendors, including IBM (IBM ).
"We have no interest in coercing anything from a platform [customers] are happy with," Ellison said. There was even good news for Wall Street. Annual sales, Ellison said, are expected to double, to about $30 billion over the next few years.
But the good feelings dissipated the following day, on Sept. 22, when Oracle reported results that missed analysts' expectations. Fiscal first-quarter revenue rose to $2.8 billion, from $2.2 billion a year earlier, falling short of Wall Street's expectations of $2.9 billion. Net income was $519 million, up from $509 million a year ago.
Particularly troubling was revenue from the company's core database software business, which rose only 1%. On a conference call, Ellison dismissed concerns, arguing that it grew 19% in the first quarter of last year and that, when the quarters are averaged, growth comes to 10% -- roughly on par with the historic norms.
Wall Street wasn't impressed -- in after-hours trading, shares fell 4.6%, to around $12.90. Oracle is using acquisitions, including the purchase of Siebel Systems (SEBL ), announced on Sept. 12, to expand in applications and lessen its dependence on the database business, which accounts for about three-fourths of sales (see BW Online, 9/12/05, "Now Oracle May Finally Rest").
Yet analysts continue to pay close heed to Oracle's performance in database programs, which help drive sales of other products and give Oracle an advantage over its bigger rival SAP (SAP ). "If at any time we start to see slowing in growth in infrastructure that could expose some weakness," says Peter Coleman, analyst for ThinkEquity Partners. Adding to concerns, Oracle held to its forecast for 2006 earnings of 78 cents to 81 cents a share, letting down analysts who had been hoping for an increase.
Analysts have been mostly bullish on Oracle's integration of PeopleSoft. And Oracle will have to keep Siebel's customers happy once they are brought on board. That job won't get any easier with SAP ready to take advantage of any sign that Oracle is faltering (see BW Online, 9/15/05, "SAP: What, Us Worry About Oracle?").
Nor is SAP is the only rival to worry about. Microsoft (MSFT ) is beefing up business software offerings, and upstarts like NetSuite and Salesforce.com (CRM ) are increasingly overlapping as Oracle reaches further down into the market for midsize businesses.
As customers upgrade their software and consider switching vendors, "the question will be how much of your install base can you hang on to?" says Pat Walravens, senior research analyst for JMP Securities. "You don't want to freak them out and Oracle did a really nice job this week" of reassuring its client base, he says.
Oracle has a long road ahead as it works to integrate its own applications with those of PeopleSoft, JD Edwards, and eventually Siebel. And as Oracle executives made clear this week, so-called "project fusion" is about more than just making all these programs work together -- it's also about reworking all the software so that customers can mix, match, and download as needed, using a so-called Web services architecture.
It's about rewriting all of the interfaces so they are more "Google-like." And it's about adding better business-intelligence software. It's a big, ambitious project that goes far beyond assimilating the spoils of Oracle's shopping spree -- one at which Oracle will be throwing more than $2 billion a year in R&D until the new applications debut in 2008.
As good as it may sound in theory, business-software upgrades are painful. And customers that just invested millions of dollars in PeopleSoft, JD Edwards, or Siebel software needed to hear they wouldn't be forced into anything anytime soon.
"This was the first time many of our new customers heard our strategy," said Oracle President Charles Phillips on the company's Sept. 22 conference call. "Clearly some of them were waiting until they heard more from company and I think they heard exactly what they wanted to hear."
It's a message Oracle will have to keep driving home. Now that Oracle has filled holes in its so-called "stack" of database software, middleware, and full suite of applications, SAP can no longer push a more complete offering. And so far, the German software giant hasn't done a very good job stealing customers that Oracle has purchased through its acquisitions.
But if Oracle stumbles, that could change. Before long, clients will be upgrading to a new Web services architecture, and many will survey their options again. That gives Ellison plenty of reason to keep playing nice.
Lacy is a writer for BusinessWeek Online in San Mateo, Calif.