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.
If you want to listen to a replay of the Oracle conference call, dial 719-457-0820. Confirmation code is 768923. If you want to listen to a replay over the web, try this RealPlayer link: nasdaq.com.
Copyright ¸ 1999 Briefing.com, Inc.
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