The Question in Oracle's Numbers
By Sarah Lacy
When Oracle (ORCL ) reports earnings for its fiscal fourth quarter on June 29, expect more tea-leaf reading than usual. Not only is it seasonally the software giant's best quarter, it's the first full quarter that PeopleSoft has been in the fold, following a contentious 18-month takeover battle.
To impress Wall Street, Oracle will have to do more than post good overall numbers. The Street already is expecting $3.9 billion in revenues, up from $3 billion last year. That's based on the addition of PeopleSoft and strong revenues from Oracle's core database business.
JMP Securities analyst Pat Walravens says he uncovered an undisclosed database deal worth $100 million when calling around to customers. "When deals like that are coming in, you're pretty sure they're making their numbers," he says. Expectations aren't just for a good quarter -- many are expecting a blow out.
Oracle's top-line numbers may not disappoint. But scratch the surface and some of the outfit's nagging problems are still apparent. The company doesn't appear to be winning its long-fought battle to grow its applications business organically. Analysts will be looking closely at Oracle's application software revenues and overall expectations for 2006 revenues as clues to how well the PeopleSoft merger is going -- and whether or not another big deal could be in Oracle's immediate future.
Oracle still has a tough road ahead in applications. Right now, Wall Street is expecting $300 million in application license revenues, up about 30% year-over-year, including $78 million from PeopleSoft and $10 million from Retek, a smaller software outfit it acquired in March for $650 million. It's a welcome change from an application business that has been flat-to-negative for much of the last few years.
But the boost is largely attributable to those acquisitions. Strip out the applications revenue from those deals and some analysts, like Walravens, expect sales of what used to be Oracle's core applications to record a 9% decline for the quarter.
The Oracle numbers won't exactly be black or white because big software companies that sell multiple products to the same customers have latitude with how they record revenue, analysts say. That leads some analysts to focus more on what they hear from customers -- and the word so far has been that database and application servers sold better than expected, while sales of application software slipped.
"I don't think it has gone as well as advertised," says Bruce Richardson, analyst at AMR Research. "In the last [few months], I haven't seen a press release saying Oracle has won any big, competitive [application] deals."
Another problem: PeopleSoft cut prices on its software in the months it was fighting off Oracle. While Oracle will benefit from the ongoing maintenance revenues from those sales, the PeopleSoft move also thinned out the pipeline for the next few quarters, potentially dampening future sales.
What's more, during that period of uncertainty new customers turned to SAP (SAP ) as the safer choice. SAP commands 40% of the so-called enterprise resource planning market, a collection of applications that helps companies run their businesses. That's up from 39% last year, according to a recent study by AMR Research.
Oracle, too, was able to increase its market share from 12% to 22%, thanks to the PeopleSoft acquisition. But had the companies remained independent, both would have lost market share by a few percentage points apiece. AMR's Richardson expects that trend to continue. By yearend, AMR believes SAP will have a 43% market share, while Oracle slips to 19%.
Unless, Oracle stays true to its promise to do more acquisitions, that is. That's something some analysts hope they don't hear on Wednesday -- or anytime soon, for that matter. "I think that would be a disaster," Richardson says. Fears of another big deal are one reason SAP trades at a near 60% premium to Oracle. Oracle] "isn't in the position they want to be in," says Peter Coleman, an analyst at ThinkEquity Partners in San Francisco. "If they were, they wouldn't be buying anything."
Still, the signs continue to point to more deals. At a Silicon Valley conference in late April, Oracle's president, Charles Phillips, was talking up the company's ambitions, saying, "Critical mass and scale are essential in this business." With more than $7 billion in cash, Oracle has the financial wherewithal.
There are struggling companies to be had -- BEA Systems (BEAS ) and Siebel Systems (SEBL ) top the lists of most industry watchers. Hyperion Solutions (HYSL ), a maker of business intelligence software, is another potential target. The market also is abuzz with the recent hiring of Gregory Maffei, as Oracle co-president and CFO. Maffei is a former Microsoft (MSFT ) executive, known for an eye for deal making.
If Oracle can deliver a blow-out quarter, thanks to the acquisitions it has already done, another big deal may not be far behind.
Lacy is a reporter for BusinessWeek Online in the Silicon Valley bureau
Edited by Ira Sager