For those interested in ORCL
Daily Stock Brief by Briefing.com
Updated: 14-Sep-99
Notes From Oracle's Conference Call
Oracle's conference call after reporting earnings on Tuesday was largely an
attempt to put as positive a spin on their release as possible. Stressing that
the pipeline of sales in progress still speaks strongly for the future, CEO
Larry Ellison tried to paint Oracle as well positioned for the future. Reading
between the lines gives an interesting picture of how Mr. Ellison views the
future. Here are some notes on Oracle's conference call, as well as some
observations of where the software industry is going.
Why The News Was Poorly Received
Oracle (ORCL) met analyst expectations for earnings. The easy explanation
for the stock's drop on announcement is that Oracle didn't beat expectations
by the "whisper number."
But the real reason for analyst disappointment is the revenue growth
numbers. The overall revenue growth number wasn't really that bad. But
sales of database software were below expectations.
Basic software license revenue grew at just 9% overall, with database sales
growing only 8% to $443 million. Expectations were for a growth rate of
14%. This single fact alone can be blamed for why Oracle traded almost
15% lower, with some trades below $40 a share.
Why? Because the Oracle database is the heart of Oracle's business.
Although database sales are just 22% of total revenues, all of the other
revenues are dependent on database sales. No one hires Oracle consultants
or buys support contracts without first buying a database.
The only thing keeping the poor sales growth figures from having a greater
impact on the stock is the fact that this is a traditionally slow quarter. CFO
Jeffrey Henley went so far as to state that "no one was working" during
August at potential customer companies. If database sales show higher
growth rates next quarter, this quarter will be forgotten.
Nevertheless, weaker than expected database sales at a database company
just can't really be put in a positive light.
Oracle is Walking on Lily Pads
Oracle is in the midst of a transition in the industry, and is also reorganizing
at the same time.
The transition is from traditional enterprise software to a new web-based
model of software. This transition is both beneficial and detrimental to
Oracle at the same time. On the one hand, the growth of the web almost
invariably pulls database sales with it. On the other hand, the market for high
end enterprise software, the market that made Oracle great, is shrinking.
Expense Reduction Efforts
Oracle's reorganization is intended to take $1 billion out of operating
expenses. Some of the corrections being put in place sounded simply like
good management. These were problems that should have been fixed
before, but only a growth slowdown actually prompted action.
For example, Mr. Ellison stated that Oracle used to have 260 email servers,
but has reduced this to only 2. In addition, they used to have 70 different
Human Resources databases, and now have only one. This is obviously
good, but what is a database company doing with 70 different human
resource systems to begin with?
Most of the reorganization efforts discussed focused on the sales force and
sales process. Oracle's sales commission process has been revamped to
prevent sales people from "jumping on" to sales initiated by someone else.
This has meant Oracle has had to pay multiple commissions to sales people.
The new system prevents that. Analysts seemed concerned that this would
discourage the sales force, but Mr. Ellison was adamant that it only allows
the real producers to earn more.
The highly promoted reorganization has a goal of removing $1 billion in
expenses from Oracle's income statement.
Internet Sales
Oracle's press release for the earnings announcement makes a bold
statement that 80% of their sales will be done over their web site within 18
months.
But Mr. Ellison backpedaled from stating that this means direct sales rather
than having a sales force. Customers will simply enter their orders over the
net, eliminating paperwork costs for Oracle. Salespeople will still call on
customers, and guide them through the sales process. They aren't becoming
the Amazon.com of databases.
High End ERP is Dead, But No Post-Y2K Boom
Numerous times during the conference Larry Ellison stated that the market
at the high end for ERP software is "grim" or "dead."
Although "high end" wasn't defined, it most likely means sales in the
multi-million dollar range. This observation is right in line with the general
industry wide slump of enterprise software.
Oracle's does measure their percentage of sales deals which are over
$500,000. This percentage dropped to 30% in the just reported quarter,
from 36% a year ago.
Although Oracle seemed to go out of their way to say the slump in demand
is not caused by Y2K budget diversions, most analysts blame Y2K for
enterprise software spending slump seen this year.
But because they believe that enterprise spending is not due to Y2K, they
also believe there will be no post-Y2K resurgence in IT spending. This is
also in contrast to widely held beliefs.
ASP Model is Inevitable
Oracle believes that the Application Service Provider model is inevitable.
However, Larry Ellison's version of an ASP model is not much of a change
for the traditional software business model.
Mr. Ellison described the ASP model as one where the customer still pays
an upfront license fee for the database. If the customer then wants Oracle to
host the database, and maintain it for them, an additional fee is paid on an
ongoing basis. Presumably, the upfront license fee would not be lowered in
this ASP model.
In other words, rather than viewing the ASP model as hiring a taxi, Mr.
Ellison believes the customer should buy the car, then hire an Oracle
chauffeur.
Scott McNealy, of Sun Microsystems, describes the ASP model completely
differently than Mr. Ellison. Mr. McNealy talks about renting basic software
and IT functions on a leased basis, without making an initial capital
investment.
Briefing.com also believes that the ASP model will introduce a leased, or
rented model, to the software world. See the Stock Briefs of September 7,
The Software Business Evolves and September 9, The Sun Also Rises, for
more details.
Microsoft is Absent
Another interesting side note from the conference call is Mr. Ellison's
repeated assertion that Microsoft software is remarkably absent from pure
internet companies. Mr. Ellison claimed 93% market share among publicly
traded internet companies. He also stated that both Amazon.com and
Yahoo! were completely free of Microsoft operating systems in their web
hosting environments.
Mr. Ellison is one of the great promoters of the computer industry, prone to
hyperbole at times, but he doesn't invent statistics like these. Although we
knew that Unix is extremely popular for web hosting servers, it is news that
both Amazon.com and Yahoo! are Microsoft free.
Outlook for Oracle Now
Make no mistake: Oracle is a database software company. They sell
databases. Analyst focus for next quarter will be on actual database sales.
This is a harder figure to keep track of than earnings, because no one
collects this component of an analyst's projections, averages them, and
publishes the result and range. But database sales growth, even though it
isn't the largest component of revenue, is now the critical sales figure.
Regards
Neil |
