Oracle reported Q2 results yesterday after the market close. Reactions from the sell-side were mixed, and the stock finished down 1% after being down more than 5% intraday. I'll leave the broader analysis to others, but I did have to comment on Oracle's latest salvo at SAP...
To hear Ellison and his co-Presidents tell it, Oracle was eating SAP's lunch out in the field...
Co-President Chuck Phillips [formerly of Morgan Stanley fame] had this to say:
"The most difficult place to beat SAP is in their home country of Germany," said Oracle President, Charles Phillips. "Oracle winning the applications business at SAP's retail systems development partner, German retailer Karstadt, is dramatic proof that our vertical industry strategy is working in the industries that we've targeted."
Great, so Oracle beat SAP on a deal in Germany. WOW. See, here's the problem with Chuck's statement, it invites any halfway competent investor to look at the comparitive numbers of the two companies in the region...
- SAP had license revenues of 113 millon EURO in Germany last Q alone...grew 12% [adjusted for currency] on a YOY basis
- Oracle didn't break out revenues in Germany but Ellison specifically noted weakness in Germany as a reason why EMEA software license revenues were down 7% YOY
- EMEA applications license revenue [last reported Q]: SAP [$329 million, up 6% YOY], ORCL [$75 million, down 6%]
Other luminescent wordplay by Oracle management last night included:
- Phillips said, "Some of the wins we had over SAP are: Dept. of Agriculture, Pfizer, U.S. Army, Iron Mountain, Engelhard, Money Gram, Kaiser Foundation, Dupont, Fidelity Investments, Bristol Myers, China Net Com, Chesapeake Energy...]
- "We beat SAP for a major contract for the automation of the Russian federal treasury"
Nice wins to be sure, but against the backdrop of the SUM TOTAL of recent bookings? Compare the total number of deals closed, the average deal size [for apps], and the global market share. It's so pronounced that it's almost embarrassing to think Oracle management would bother touting individual deal wins as evidence to the contrary. According to a recent analysis by Prudential Securities, SAP global market share among apps vendors has grown from 45% in 2001 to nearly 60% as of Q3-05. Meanwhile, ORCL+PSFT+JDEC+SEBL has fallen from 51% combined share in '01 to just 24% as of this past quarter.
- "In addition we're really going after the SAP install base with this vertical strategy. What we discovered, according to Gartner Group anyway, 94% of SAP customers are on old releases, some old release of R3. And, right now they're trying to get their customers to move --- to move to mySAP. The problem is they are charging for that upgrade, and they're dropping
support from some of the older releases. We see an opportunity. To give you an example. We did a call blitz at APAC--Asia Pacific. Cold calls to 965 customers. 18% said they were interested and wanted us to follow up about switching of off SAP and moving to Oracle applications. So it was a pretty productive day. So our sales reps are pumped up and see the opportunity, they have the confidence, they know we can switch customers off."
Sigh...where to begin? First of all, the fact that 94% of SAP seats are still running R/3 is an opportunity, not a problem [by the way, I question that metric in the first place, the upgrade cycle is more mature than 6%]. As Phillips himself points out, SAP is monetizing their upgrades. Moving to mySAP and NetWeaver = incremental revenues to SAP. As a shareholder, that's the kind of thing I like seeing. And SAP didn't gain 15% market share by making customers angry.
Second, an APAC blitz call? For those who don't realize what this is...picture customers being obtrusively cold-called over a few days and given a quick pitch where the ONLY goal is to get them to agree to take your next call. We have no idea what Oracle's reps said...did they lead with the promise of aggressive pricing? Were they already ORCL database customers? Was that 18% of customers who didn't hang up in their faces or 18% of the total? And do you know the historical conversion rate for things like this? It's equivalent to when someone calls you at your home with a get-rich-quick scheme and you simply tell them to "send me some information" and hang up. There's no way ORCL thinks they can convert more than a handful of those deals. 18% of customers said, "MAYBE" they would be interested...if you were about to renegotiate with your entrenched vendor, as a CIO, wouldn't you at least bring some competition in to try to increase your leverage? I sure would and yet, Oracle only got 18% to even entertain the idea? That sounds like a disastrous result to me, not something to spend five minutes touting on the earning call.
As a shareholder of both companies, I believe there value in fighting the fight. What SAP has done in the last two and a half years is nothing short of remarkable, but Oracle is a franchise that, if focused, could generate tremendous profits and distributable cash flow to its investors if they execute against plan [i.e., maintaining a lead in database and shoring up the #2 spot in apps]. However, listening to Ellison, Phillips and Catz on the call yesterday disheartened me. Phillips was a perennial II-ranked software analyst at Morgan Stanley...he's been on the other end of software earnings calls enough to realize that hollow boasts only serve to emphasize how far behind Oracle currently sits.
Spend more time talking about where your TRUE STRENGTHS LIE...like retail, where Oracle is doing well and SAP has to play catch up [still not sure Khimetrics closes the gap much.] Oracle's best metric of the call? That 12 of the 13 retailers in the Fortune 100 currently run Oracle retail applications. If there's a vertical chink in SAP's armor, it's retail as I see it.
Oracle should be focused on middleware, where BEA and the java-based app server vendors appear vulnerable. Come out strong against IBM and Microsoft, who oh-by-the-way, just released SQL Server 2005 and is trying to re-gain some share in its own right. Focus on the niche markets where SAP doesn't dominate. Tell us how you plan to take back some momentum in your own country [where Bill McDermott and his team have been absolutely ablaze of late].
I'd be curious to hear some other thoughts on the Oracle rhetoric, and when [if?] we'll see that bravado materialize in tangible results that reward shareholders.
Note: I and/or funds I maintain discretionary control over maintain a long equity position in SAP, ORCL but have no position [long or short] in BEAS.
Comments