Larry Ellison got it half right.
The chairman and chief executive of Oracle (ORCL) had predicted that database licensing revenues in the Americas would jump 25 percent, and the company fared even better than that in numbers released yesterday for the third quarter. That performance by the bellwether company, following a particularly dismal report in December, is sure to ease at least some concerns that the database industry is comatose.
But not all of the news was good. Oracle's applications licensing business--an area targeted for expansion that has received most of the company's recent attention--missed its 50 percent annual growth projection, rising 35 percent in the Americas and 30 percent overall. It marked the second consecutive quarter that the business disappointed Wall Street, falling far short of the near triple-digit growth earlier in the fiscal year.
Analysts say this raises questions about Oracle's long-term ability to become a leader in this market. "Their applications business was up 30 percent, whereas their big competitors grew 60 percent. Given that applications is where they are focusing their business, this is concerning," said Jim Pickrel, an analyst with Hambrecht & Quist.
In some ways, the company has only itself to blame for this situation. Given that Oracle is the No. 1 provider of databases, it stands to reason that the company should be able to sell the applications that work with them. But the company has been accused of pressuring applications customers to buy other Oracle products--database software, tools, and middleware--in addition to consulting services, which can get expensive in a hurry.
"They tie themselves so tightly to the Oracle database that, for people who have other databases or don't want to be so dependent on one vendor, that kind of hurts them a bit," said Thomas Berquist, an analyst with Piper Jaffray.
A look at how some competitors have fared shows what he means. PeopleSoft reported a 64 percent jump in fourth quarter licensing income, while Baan and SAP each racked up an increase of roughly 60 percent in 1997 revenues. SAP still dominates the high end, Baan has a strong European presence, and PeopleSoft leads in a lot of the areas outside of manufacturing.
Moreover, partnerships between Oracle and some of these companies make things even more complicated. Oracle supplies database software to SAP and PeopleSoft, deriving a sizable piece of its database server revenue from their sales. As a result, Oracle finds itself in the unenviable position of competing against the very companies it has partnered with.
In addition, many of the its customers had business applications in place long before they bought they bought Oracle's database software--and most are in no rush to trash existing systems that work just fine.
Applications account for 18 percent of Oracle's licensing revenues. The company next month plans to roll out the 11th version of its Oracle Applications suite, which will feature additional Java support and changes intended to make the software more attractive to buyers eyeing competitors' packages.
So where does Oracle stand as it moves into the future?
"We're clearly excited about the health of the server business, especially in the Americas," said Ray Lane, the company's president and chief operating officer. "I read so many articles this past quarter about the database being dead that my mother also started believing it. Clearly we see health returning to that business."
Oracle's Ray Lane on applications business
Still, Oracle's database growth has slowed from a strong 50 percent during the early part of the decade to the low teens. That's not a good sign for a business that for 69 percent of the company's licensing revenues.
Berquist of Piper Jaffray said he doubts that the company can return to the 40 to 50 percent growth rate for database licensing revenues because too many companies already have databases and aren't looking to buy new ones. And Oracle continues to struggle with its tools business, which makes up less than 10 percent of its licensing sales and has suffered year-over-year revenue declines.
"With more and more customers buying more packaged applications, as opposed to developing proprietary applications, the demand for tools is less," said Stephen Dube, an analyst with Wasserstein and Perella Securities. "They will always have tools?but I think their next twist is to have Java development tools."
Help in this department is coming none too soon. This month, Oracle will deliver its Web Development Suite 1.6, which bundles the company's existing tools, such as Developer/2000, Designer/2000, and AppBuilder, a Java development tool formerly code-named Valhalla.
Oracle's services business, which accounts for more than half of its revenues of $1.7 billion, has consistently posted strong growth of around 40 percent.
Berquist said its possible that Oracle will also derive 15 to 20 percent of its revenues from its networking computing efforts in next three to five years. A majority shareholder in Network Computer Incorporated, Oracle hopes to sell server software that will help run NCs.
Oracle's NC effort, which got off to a slow start as it looked to focus on the corporate market and try to woo customers away from their installed base of PCs, is picking up steam in the consumer arena. One of the world's largest telecommunications companies, Cable & Wireless, earlier this week struck a deal with NCI to use its technology in upwards of 7 million set-top boxes worldwide.
Ian Mecklenburgh, head of its Internet and new media operations, said his company passed up Microsoft's CE software in favor of NCI's open system, portability, and immediate availability.
Mecklenburgh also noted that his company is looking at supplying NC devices to customers who don't have a PC but want to use a device to place orders, rather than calling in. He said Cable & Wireless already has a back-end system built to accommodate such a move.
Whether this or other Oracle initiatives ultimately succeed, one constant remains: Larry Ellison will continue to reap enormous profit from the company he cofounded.
Last year, Ellison earned nearly $1 million while right-hand man Lane took home slightly more. He also received a bonus of $1.85 million and 2.4 million options, which was about 50 percent higher than his usual grant, adjusted for a 3-for-2 split.
Lane received a smaller bonus of $1.3 million, but a far larger options grant than the CEO. Lane, who was rumored to be a CEO candidate for Novell, received an options grant roughly five times larger than his normal award. He landed 4.1 million options, adjusted for the split.