Favorable Omens for Oracle
The database giant appears to have weathered the downturn. Now, its new-product lineup has industry analysts thinking rebound
NOVEMBER 25, 2002
BusinessWeek
INFORMATION TECHNOLOGY/Online Extra
When Oracle (ORCL ) Chairman and CEO Lawrence J. Ellison delivered his keynote address to the software giant's annual user conference in San Francisco on Nov. 14, he was merely a virtual presence. His image was piped in via satellite from New Zealand, where he's competing in the preliminaries of the America's Cup sailing championship.
But Ellison had plenty of high-powered stand-ins -- including such important technology partners as Michael Dell, chairman of Dell Computer (DELL ); Carlton Fiorina, chairman of Hewlett-Packard (HPQ ); and Paul Otellini, president of Intel (INTC ). The presence of such luminaries testifies that despite Oracle's encounter with rough seas over the past two years, it remains a force in the tech industry.
In fact, many observers believe that the worst may be over for Oracle, No. 20 on BusinessWeek's most recent list of the 100 best-performing information-technology companies.
SITTING PRETTY. Even though demand for corporate software hasn't picked up yet, Oracle is well positioned in terms of both staying power and new products to regain some ground in the market for run-the-business applications and to hold its own as the co-leader in the market for database software. "The tech industry will evolve into a small number of companies that corporations buy their software from -- and Oracle is one of them," says Charles E. Phillips, an analyst at Morgan Stanley, which has an investment-banking relationship with Oracle.
If Phillips is right, it may be a good time to start thinking about buying Oracle's stock. It has been trading at about $10 a share since April, a level it last visited in mid-1999. With a price-to-earnings ratio of 27, it's relatively cheap compared with competitors such as Siebel Systems (SEBL ), with a p-e ratio of 66, and PeopleSoft (PSFT ), at 32.
That's why 21 of the analysts who cover Oracle rate it a buy, while 19 call it a hold, and only one analyst has a sell recommendation. John McPeake, an analyst for Prudential Securities, has set a near-term price target of $13 on the stock.
A DISMAL SEASON. Oracle's downturn began in the summer of 2000, when it released a broad suite of applications called Oracle 11i. The package included more than 100 modules that are designed to run a corporation's basic functions from financial operations and customer-relationship management to supply-chain planning.
Ellison hailed it as the first fully integrated set of such products for big companies. The package, which costs $4,000 a head for top executives and $1,000 for regular employees, hadn't been tested thoroughly, however. Thousands of bugs popped up, making it hard to install and to use -- not to mention to sell.
Then came the worst downturn ever to hit the tech industry. Oracle's revenues dropped from a peak of $10.96 billion in fiscal 2001 to $9.67 billion in fiscal 2002, ended last May. In its fiscal first quarter that ended Aug. 31, revenues remained weak, dropping 10.4%, from $2.26 billion in the same period last year to $2.03 billion in 2002.
That reflects both the tech implosion and intensified competition from IBM (IBM ), which says it prices its database products at about 40% below Oracle's -- and tries to take advantage of what it calls Oracle's reputation for mediocre customer service. "They're wonderful to compete against," taunts Steve Mills, senior vice-president for IBM's software group.
STILL DELIVERING. Whatever the case, for the first time IBM has edged past Oracle as the market-share leader in database software, which accounts for 72% of Oracle's product revenues. Thanks to IBM's purchase of also-ran Informix, the computing giant now holds a 34.6% market share, compared with 32% for Oracle, according to market researcher Gartner Dataquest.
Even so, Oracle has continued to deliver strong earnings -- $2.22 billion in fiscal 2002 and $343 million in the most recent quarter. Its operating margin was 28.6% in the most recent quarter, making it one of the most profitable companies in the computer industry.
Oracle has maintained such margins partly by trimming its workforce by 5% over the past two years, to 41,496 employees. Oracle is also cutting costs by making good use of its own technology -- putting it in the unusual position of creating its own testimonials. Oracle claims that it has used its new Internet File System for storing data to eliminate 1,000 servers scattered across 60 countries and consolidate all the information they held onto a single, much larger server in the U.S.
"NICE KICK"? "Profitability is at record levels," says Jeffrey Henley, Oracle's chief financial officer. "But things aren't growing. That's the big concern," he adds. Prudential's McPeake expects fiscal 2003 revenues to decline to $9.41 billion from $9.67 billion in 2002. Prudential says it has no conflicts of interest involving Oracle.
To get revenues rising again, Oracle has released a handful of new products and put additional marketing muscle behind others. Its latest offering is its Collaboration Suite, specialized database software that sells for as little as $60 per user and stores e-mail, voice mail, calendar items, and documents in one place, greatly simplifying a corporation's computer systems. "If this is as big as we think it is, it will be another nice kick for our database business," says Henley.
In database software, moreover, Oracle's price comparisons with IBM have improved, and its products remain superior to IBM's in terms of their raw performance and breadth of features, according to Morgan Stanley's Phillips. Besides, "most customers already use Oracle, so, when the price is close, they won't switch," he says.
LOTS OF UPGRADES LEFT. Oracle has 200,000 database customers, and a 63% share of the non-mainframe market, which includes Windows and Unix computers, compared to IBM's 15% share, according to Gartner Dataquest. On the applications front, Oracle has finally solved the quality problems in 11i, analysts say. More than 3,000 customers have installed the software, Oracle says, leaving more than 10,000 who haven't yet upgraded. So plenty of revenue is left to gather as those customers switch.
"Oracle has an opportunity to gain over the next couple of years," says Jim Shepherd, senior vice-president at market researcher AMR Research. "They were able to hold on to the No. 2 [applications] spot while not performing well. So now they have a nice upside."
And a challenge, too: Oracle had a 14% market share last year in corporate applications -- products that contribute 28% of its revenues -- compared with German software behemoth SAP's (SAP ) 33% share of the market. The gap remains so wide that Ellison has for now dropped his long-standing boast that he'll overtake SAP.
Ellison doesn't like playing second fiddle, however. So look for him to make a determined run at SAP, and at IBM in database software. And don't forget about those America Cup preliminaries, where at the moment his boat is running a close second.
By Steve Hamm in New York
yahoo.businessweek.com |
