Oracle takes a victory lap...Q1 results back up Q4 bravado, but not without a little SAP controversy

Last quarter, I remarked that Oracle started talking the talk, but could they walk the walk? At issue was aggressive Q1 guidance despite Oracle's 3-year string of disappointing Q1 results. Well, three months later we have our answer...to the tune of Oracle's best Q1 result in the five years.

You don't need me to give you a blow-by-blow of the results or conference call; by now you're probably been inundated with glowing Oracle reports from sell-side research analysts, media and other bloggers. For the record, here are the key metrics:

The Basics:

• Total Revenues -- $3.59 billion (+30% YOY)
  
• Software License Revenues -- $804mm (+29% YOY)
• Total Applications Revenues -- $931mm (+57% YOY)
  • New License Revenues -- $228mm (+80% YOY)
  • Ex-Siebel, Portal and i-Flex -- $186mm (+47% YOY)
• Total Database & Middleware Revenues -- $1.81 billion (+18% YOY)
  • New License Revenues -- $576mm (+15% YOY)
• Income from Operations -- $943mm (+29% YOY)
• 36% operating margin (non GAAP)
• EPS (non GAAP) of $0.18 (+24% YOY)
• Free cash flow increased 32% YOY

Q2 Guidance:

• New software license revenue growth of 15%-20%
• Total software revenue growth of 19%-20%
• Total revenue growth of 22%-24%
• Net income growth of 13%-17%
• Non-GAAP EPS of $0.22 (16% growth)

It's no coincidence that Oracle is trading at 5-year highs after yesterday's trading.

In many ways, Oracle's earnings release and conference call was atypical. Usually the company is fond of very detailed press releases and long conference calls chock full of details that were often meant, in my view, to obfuscate an inescapable fact; they were losing a lot of share to SAP.

Well this quarter, it was just the opposite. The textual component of the press release was only a bit more than one page, and the conference call was equally short as Larry, Safra and Chuck were in different locations so they limited Q&A to three analysts (the 'lucky three' being Jason Maynard -- CSFB, Peter Kuper -- Morgan Stanley, and Heather Bellini -- UBS).

Although Oracle appears to be backing up its rhetoric with results, the conference call was not without controversy. Larry Ellison took pains to attack SAP but made some bold proclamations that will be hard to back up with any evidence.

• Point of Misinformation #1: SAP relies solely on a proprietary language whereas Oracle embraces completely open standards

Ellison: Now, Oracle has spent a long time in the middleware business. Oracle’s Fusion middleware is based on Java and other open standards. J-Developer is Oracle’s standards-based Java development tool. Again, this stands in stark contrast to SAP’s NetWeaver middleware, which is based on ABAP, SAP’s proprietary language. In other words, SAP is sticking with a proprietary approach to middleware while Oracle has adopted a completely standards-based approach from middleware and our next generation of Fusion applications.

Frankly, I'm not sure how anyone that's actually spoken to developers or customers of either Oracle or SAP could take Ellison's quote without a mountain of salt. He would have us think SAP is hellbent on being ABAP-only, while Oracle has abandoned all hints of proprietary code. Neither is true. SAP embraced Java years ago; if you don't believe me visit the SDN and search for ABAP versus Java. Ironically, ABAP developers are actually worried that SAP development is moving TOO much toward Java; just the opposite of Ellison's contention. Originally, Web Dynpro for Netweaver was exclusively a Java environment; it wasn't until mid-2005 that developers had the option to extend web-services with ABAP as an alternative. ABAP is absolutely a proprietary language, but since when is that a bad thing? It's been the developer language of chioce for SAP for 10+ years. There are hundreds of thousands of engineers who prefer ABAP, and have deep domain expertise using it. If you're an SAP customer with no intentions of ripping out your investments in R/3 and mySAP, why on Earth would you want the company to abandon ABAP wholeheartedly?

And on the other side of the ledger, does anyone honestly think Oracle is without proprietary aspects? PL/SQL anyone? BPEL extensions?

• Point of Misinformation #2: SAP pushed back its release schedule and won't release a new applications suite until 2010

Ellison: ...our Fusion applications come out in 2008, we think that is another chance to get way ahead of SAP, since again, I keep -- I will point out once again -- SAP has said they are going to have no other, no new release of their applications until 2010. Now, they still have to make a 2010 date. That means we are going to be out there in the marketplace for two years with modern, standards-based SOA applications while they are rewriting their -- presumably they are rewriting their applications, so I think it is a tremendous opportunity for us to get way ahead of them in ERP, and again, we will continue to acquire industry-specific applications and industry-specific knowledge with our ongoing acquisition strategy.

Here Ellison takes the opportunity to spin announcements made at SAP TechEd out of context, in my opinion. Specifically, SAP announced plans to shelve the release of mySAP ERP 2007 and in place release a series of iterative optional enhancement packages. In other words, release optional, componentized functionality every few months for the next few years versus trying to push a wholesale upgrade again just two years after mySAP 2005. How Ellison can contend this amounts to a pushback of a major release date when Oracle backed away from its own "One-size-fits-all" Fusion message in favor of a more gradual migration path for J.D., Peoplesoft and Siebel customers is beyond me.

Another critical point to understand is that, unless I missed something, SAP remains committed to launching BPP (Business Process Platform) and having 100% of its applications suite service-enabled by 2007. No delivery date should be believed until we see the code released, HOWEVER, if SAP holds true; they would be in the market with a full SOA-enabled apps layer a year before Oracle's target date.

Let me be clear, I am an investor in both Oracle and SAP and think Oracle's results the last few quarters deserve their just due. It's for that reason (i.e., the results speak for themselves) that I don't understand why Ellison feels compelled to layer in rhetoric of questionable validity. While it's great to see Oracle back on the scene as a viable #2, let's not mistake the fact that in applications they remain just that, a NUMBER TWO. SAP is forecast to generate nearly 3x the applications license revenue of Oracle over the next 12 months; and has done so almost entirely through organic growth.

SAP had a fantastic multi-year run where Oracle essentially took itself (and Peoplesoft, J.D. Edwards and more recently Siebel) out of the competitive market. It was only a matter of time before that normalized; which appears to be the case. However, this isn't a zero sum game when one considers that it's essentially a 2-horse race for Global 1000 enterprise applications.

Related:

• Seeking Alpha Oracle (ORCL) F1Q07 Transcript
• Oracle starting to walk the walk?

Note: At the time of this writing I, and/or funds I maintain discretionary control over, maintained long equity positions in both ORCL and SAP. We also may, at times, carry derivative options on underlying positions as a hedge.

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Comments

[Thomas Otter]

Neil,
Agreed
At the risk of ignoring my own dont throw mud commentary, The Psft payroll engine is cobol !-)

[Thomas Otter]

J,
Thanks for correcting Larry!
He must be really worried about SAP, given that he spent the whole conference dissing us...

Here at SAP I think we should say "okay, Oracle are back in business", rather than look for ways to argue that they are somehow fooling the analysts with clever numbers. Having a strong competitor keeps you on your toes. We need to behave like fusion is on track, even if it may not be.

We need to keep building better software than they do, and spend our time listening to customers, not Larry.

The share price will then look after itself.

[Niel Robertson]

on,

Nice wrap up as always. As to your misinformation point #1 - Ellison should really be careful what he is saying here. As far as I know, Fusion is not out. That leaves Oracle EBS, PeopleSoft, JDE, and Siebel. Each of these has a proprietary, ABAP-like language and with the exception of EBS, none of them natively support Java:

Oracle: PL/SQL
PeopleSoft: PeopleCode
Siebel: Siebel VB (Visual Basic for Siebel)
JDE: BFL (Business Function Language - a C derivative)

The only real question here is does Ellison prefer being the pot or the kettle, because they are both black. And to SAP's credit, you can actually USE java today with their apps where you can't (unless you write a web service in Java and connect it using OAS or BEA). Sometimes exec marketed FUD and positioning just goes to far. I think Ellison may have crossed the line here.

[Robbie]

Over analysis.

There is a simple reversion to the mean. These are cyclical companies and cyclical stocks. The mean license rate for SEBL had turned negative. ORCL bought this for the cash flow, There are a lot of other missconceptions (like license biz is more profitable than services).

But I guess people need something to write about and analysts need jobs. How about analysts like at Goldman downgrading/upgrading stocks using the last close in their reports vs. first available price. This is a concious attempt to pad performance.

[Wood]

Mark -

Thanks for the kind words. While I'm proud of my efforts on the sell-side, I was a junior guy at a non-banking firm in the midst of the bubble, so my experience probably wasn't typical of the household names in a lot of ways (Chuck Phillips being the top dog in the industry at the time, ironically). When you're at a small firm, and weren't generating deal flow, you had to be able to a) make differentiated calls and b) cover a wider array of companies. In any event, I saw the writing on the wall in terms of the way the sell-side research model was changing and happily transitioned to the buy-side in 2000.

Something to remember, being a good sell-side analyst is, unfortunately, not about making good investment recommendations. If you read Dan Reingold's book (Confessions of a Wall Street Analyst), you get a real sense of what it took to be a great sell-sider. It was as much, if not more, about glad-handing, travel, client relationships, and the ability to maintain good relationships with your coverage companies while, at the same time, being intellectually honest in your writing. Throw the conflicts of investment banking into the fold (that existed then, not now), and it's a tough, tough job.

As to your points on SAP.

1) I saw Citigroup's number and tried my best to vet the number, but simply couldn't. Frankly I think he did a very poor job of spelling out his conclusions if you read the entirety of the piece; and when I added up the numbers pro forma I got a different number. It showed Oracle did in fact have "organic" growth for the first time in a long time, but it was much lower than the reported Gaap numbers obviously.

2) As to Siebel, again I view that as a case of reclassification. It's not apples to apples because we don't know whether Oracle is including any deal that's got anything outside of CRM in their core Oracle apps number. My supposition is the $31 million relates to deals that were clearly, 100%, CRM-related.

Best,

J

[Mark Crofton]

J-
You must have been a pretty good sell side analyst in your day b/c you scratched beneath the surface more than almost any of the others have in the last couple days. The guys at Citi in the UK being the exception. In fact, they picked up on something that you didnt' mention: "pro forma licence revenues of the combined business were $249m in 2005 and thus licences have actually declined c8% y/y."

Here's another question: What the heck happened to Siebel? 112M in the comparable quarter a year ago (Siebel's Sept 05) and 31M this quarter. Even accounting for inflated Siebel quarter pre-acquisition and some Siebel Analytics revenue that Oracle puts into MW, there's a considerable delta.