Ellison upbeat on Oracle growth

Despite a sales setback in the software industry, company has rosy outlook, points to growth in server applications market.

Dawn Kawamoto Former Staff writer, CNET News
Dawn Kawamoto covered enterprise security and financial news relating to technology for CNET News.
Dawn Kawamoto
5 min read
Oracle founder Larry Ellison reiterated his grid computing mantra and his take on Oracle's acquisition path during the company's annual analyst day Wednesday.

Despite a recent setback in sales in the software sector, Ellison and several other Oracle executives said they were optimistic about the company's growth. In the past few weeks, a number of enterprise software companies, from PeopleSoft to Siebel Systems, have recently issued quarterly warnings that sales were slow.

Ellison's mantra of grid computing was again raised during the analyst event. He noted how computers clustered together can provide faster processing power than mainframes and that the future will involve two- or four-processor machines hooked together in a grid.

"Being in Silicon Valley, we will have the opportunity to buy a lot of companies, some of which are in Silicon Valley and run by former Oracle people--and it's not the one in the East Bay."
-- Larry Ellison,
Oracle CEO

"We have a very different view of the world. Microsoft tries to make their software work better with mainframes, while we try to make them work better on grids," Ellison said.

He said the company is considering a number of pricing models, beyond basing price on the number of processors a customer uses. One such model may be based on a per-employee basis, he said.

Additionally, the issue of acquisitions frequently came up during his presentation, as analysts asked him the status of the PeopleSoft hostile bid and about other deals Oracle may consider.

"Being in Silicon Valley, we will have the opportunity to buy a lot of companies, some of which are in Silicon Valley and run by former Oracle people--and it's not the one in the East Bay," Ellison joked. Pleasanton, Calif.-based PeopleSoft is in the East Bay area.

During the Justice Department's trial to block Oracle's acquisition of PeopleSoft, Oracle submitted a list of potential acquisition targets it was considering in April last year. Among those companies are some run by former Oracle executives, including Siebel Systems and Business Objects.

Ellison noted he is interested in bolstering the company's middleware offerings, and less so in the database market, given the company's lead there.

Ellison was also asked by analysts what he will do if Microsoft makes another play to acquire competitor SAP, or if IBM looks at snapping up the German software giant.

"IBM has to be Switzerland as far as applications are concerned," Ellison said, noting that Microsoft could make another run for SAP, too. "It would use up all their cash, so maybe they'd have to go a month without free soft drinks."

Oracle, for the moment, is not entertaining ideas of making two acquisitions at once, Ellison said. He noted that although he believes his management team is up to handling the task, he would be concerned Wall Street would sell off Oracle's stock if it were to engage in two transactions at once.

"I think we could handle it. But I am concerned that people would discount the stock, and that (the) price to pay would be too high. We'll have to prove that we can do acquisitions that are accretive and once we do, then maybe we can do two at a time," Ellison said. "But saying that, I can't say no other opportunities may show up."

PeopleSoft strategy
Safra Catz, Oracle co-president, also discussed the current status of Oracle's fight to acquire PeopleSoft. She noted that Judge Vaughn Walker of the U.S. District Court in San Francisco may make his decision by the end of August or early September, after the parties present their closing arguments on Tuesday.

"The critical thing (about the PeopleSoft merger) is we would be acquiring their customer base," Catz said. "In the applications space, it is important to have scale."

That scale will allow Oracle to spread its fixed costs, such as research and development, over a larger customer base, reducing the cost of its operations.

Oracle's chief financial officer, Jeff Henley, reassured analysts the company is still anticipating a good year.

"Larry and I were eagerly waiting to see what SAP would do, but we thought they would do well," Henley said. "Unless there is some large external event, our sense is that customers were planning (to spend on IT) as much this year as last year."

Oracle also faces a "good chance" of hitting its 40 percent operating margin goal in fiscal 2005, a target the company has been aiming for over several years, Henley added.

The company has seen an improvement in its financial performance since realigning its sales force to sell its products based on the industry it's tailored to and the executive who would most likely be responsible for making the buying decision, Henley noted. For example, instead of only making a sales pitch to the chief information officer, a sales representative who is selling Oracle's human resources management software would try to establish contact with the prospective customer's head of human resources.

"One of the key things we're doing with our applications server business is doubling the sales force in fiscal 2005," said Charles Phillips, Oracle co-president. "We have that much confidence in that business...and so do others. We're getting a lot of resumes from people who work for our competitors."

On the database front
Phillips cited a number of indicators that point to growth in Oracle's database business, including a rise in the number of customers that are outsourcing their business and an anticipated 10 percent to 15 percent increase in customers of transaction-processing companies.

He also pointed to regulatory changes that require businesses to increase the period that they have for retaining information. Phillips noted that all of these factors mean that people will need to increasingly store and share data, which, in turn, will bolster Oracle's database business.

Oracle's midmarket database software, Oracle Standard Edition One, has captured 15 percent of the company's overall revenue over the past two quarters, Phillips noted.

He reiterated the benefits that Oracle has reaped from its partnership with Dell. Under that deal, the computer giant either preinstalls or offers the database software on a CD with its PowerEdge 2600 and PowerEdge 2650 servers.

On the applications side, Oracle is looking to beef up its business through several initiatives, Phillips said.

The company is focusing on offering more functions for the particular industry that a customer is in, for example.

"Going forward, we'll have more industry functionality," Phillips said.

He added that the company has recently hired the former Navy surgeon general to help develop applications to serve the health care industry, particularly the federal and military health care segments. "We're a lot bigger in the health care industry than people realize," Phillips said.

Oracle will break up its applications server suite and in the next 60 days will begin selling individual components of that product, Phillips said. The move was prompted by customers who were reluctant to purchase the entire suite, because they felt that they needed only one or two components.

"We can try to sell them more (components) later," Phillips said.

Oracle also introduced its new chief financial officer, Harry You. You will replace Henley, who recently become chairman of Oracle's board of directors. The former Accenture CFO spoke briefly and noted that he plans to focus on shareholders by expanding their return on investment and increasing Oracle's free cash flow.