Good write-up on ORCL in Business Week:
See businessweek.com
Probably can't view "free" until after this weekend, so with apologies to BW, but for a few days only . . .
Oracle: A B2B Rebirth That Few Foretold
The database software giant, which the Net was supposed to wither, has instead prospered like few others
Talk about practicing what you preach. Oracle Corp. (ORCL) executives
announced on Apr. 4 that they will save $2 billion this year, thanks to internal
e-business initiatives such as unifying their multiple computer networks and
using the Internet for procurement. Analysts reacted immediately with a passel
of reports virtually declaring the company the patron saint of e-commerce.
Hyperbole aside, it's hard to avoid getting carried away when a company that
was considered declasse just a year or two ago has reinvented itself as the
biggest B2B player in the software business. Unlike numerous pretenders to the
throne, moreover, Oracle has plenty of revenue and profits with which to back
up its claim. It also can cite itself as a success story in a B2B marketplace that
Forrester Research figures will reach $1.3 trillion in revenues by 2003.
"Business is very healthy at Oracle and appears to be getting better," says
Salomon Smith Barney analyst Neil Herman, who rates the stock a buy. "The
company...is increasingly viewed as a vendor that companies need to work with
when making decisions regarding Internet infrastructure technology."
That's why investors have bid up Oracle's shares. Even after the Nasdaq rout of
the past two weeks, Oracle boasted a price of $78.25 as of the market's close
on Apr. 5, some 13% below its 52-week high of $90, which it recorded at the end
of March. By comparison, the Nasdaq is down more than 20% from its
late-March high. Thanks to the Nasdaq's retreat, moreover, Oracle's valuation
hasn't gotten completely out of hand. It has a price-to-estimated-earnings ratio
for 2000 of 118, vs. an average p-e for the Standard & Poor's software index of
100.
UNIFIED NETWORK. The most heartening figure for Oracle shareholders is its
steadily rising profit margin. Over the past four quarters, the company had an
operating margin of 25.8%. Compare that with the previous four quarters, when
Oracle had operating margins of only 20.2%. Executive Vice-President Gary
Bloom thinks that the company can reach operating margins of 40% this year.
"We're just at the beginning of margin improvement," says Bloom.
The source of these dramatic profit improvements has been the companywide
e-business initiatives that have let Oracle streamline its operations, and thus cut
costs and improve productivity. For instance, the company now has an
enterprise-wide system for managing customer contacts. Previously, the
salesforce used a network that was different from the fulfillment and shipping
network. By unifying these networks, salespeople don't have to duplicate the
efforts of others in the organization, and thereby save time and money. At the
beginning of the year, the company said that it expected the changeover to save
$1.2 billion over the next four quarters. Just three months later, Chief Financial
Officer Jeff Henley told analysts that Oracle will save nearly twice that by
yearend.
Better yet, Oracle is now selling the same enterprise e-business software that it used to enhance its own
business. "We believe Oracle's internal success has caught the eye of senior executives at Oracle's
current and potential customers," says Salomon analyst Herman. "Additionally, the company's continued
focus of cutting out its corporate fat through the internal use of its own Internet applications should help
drive the bottom line." In other words, using its own software, Oracle has proved that's it's possible to save
a lot of money by buying your paper clips online.
DE FACTO STANDARD. All this is quite a success story for a company that was supposed to be buried by the
Internet in 1998. Back then, some experts argued that the database software market Oracle dominates
would quickly erode as companies found cheaper and simpler ways of managing their data on the Web.
Instead, the opposite happened -- after CEO Larry Ellison ordered an "Internetization" of his company. The
result was Oracle 8i, a new version of his company's flagship product that can be managed via an Internet
browser and could seamlessly integrate into a company's Web infrastructure so that all of that company's
database functions can be done on the Web. Oracle 8i was an enormous success, and the database
product has since become the de facto standard for B2B applications such as supply-chain management
and customer response software, muscling aside such potential competitors as Sybase (SYBS), Microsoft
(MSFT), and Informix (IFMX). The most ambitious B2B project to date, the recently announced auto-parts
exchange that is a joint project of Ford (F), DaimlerChrysler (DCX), and General Motors (GM), will be built
on Oracle's software. "The Oracle database has apparently become the standard for e-business," says
Prudential analyst Douglas Crook.
Another smart Ellison move was to get out of the consulting business. Years ago, it made sense for the
company to give that a try: As database software sales slowed, it was logical to delve into a business, such
as consulting, that would have recurring earnings. Unfortunately, consultants such as Arthur Andersen and
PricewaterhouseCoopers took umbrage at having Oracle -- one of their suppliers -- compete with them in
the consulting business. Suddenly, their clients began mysteriously to turn away from Oracle's software.
Oracle's consulting business never got off the ground, and its software sales suffered for a time. But then
came the Net, and now Oracle is again a pure software company and loving its role in the hottest sector of
the industry. |
