Oracle Q3 earnings: Our perspective

For the fourth consecutive quarter Oracle beat analyst expectations. The software behemoth’s net income was up 78% compared to the previous period. And revenue, from new software sales, grew an impressive 29% to $2.2bn. This figure is often used by analysts as an indicator of general market performance. It’s great to see growing confidence in IT spend and competitive advantage in Oracle products.

At the time of the announcement Larry was serving jury duty, so Oracle presidents Safra Catz and Mark Hurd performed the usual routine of chest beating against HP, IBM and SAP and feigned surprise at their performance compared to expectations, while setting positive but perhaps modest ambitions for its important Q4.

So, what can we interpret from this set of impressive results?

Software

The US led the growth in the software arena, and EMEA followed close behind. Oracle’s application software sales were strong and highly comparable with SAP results earlier this year.

However, there has been an apparent drop off in mid-market, smaller Oracle software deals. Historically, these have been driven by business change programmes or often by compliance issues where enterprises have lost control of the ever increasing complexity of Oracle licensing and have found significant holes after Oracle license reviews.

By contrast, ULA (unlimited license agreement) and ELA (Enterprise license agreement) style deals have increased dramatically. Oracle has managed to transact these deals with increasing efficiency, tying enterprises to the vendor for fixed periods of time.

Support

Support remains Oracle’s cash cow and is increasingly its most protected asset. The predictability of support fees has given the software giant phenomenal power to forecast earnings, and the level of protection from leakage is impressive, contractually tighter and difficult to fault from an analyst perspective.

The same ULA secret weapon used to boost software revenues is now being used in the Oracle fight against support fee cancellations as once a ULA is entered, the realistic option to cancel support for unused products is signed away.

Hardware

When Gartner’s figures for global server revenues were published in February, it told an interesting story. IBM and HP hold top spots for market share with 35.5% and 30.1% respectively.  Dell is in third place with 13.1% and Oracle/Sun is trailing with 5.5%. IBM and Dell grew by over 20% whilst Oracle fell by 5.5%.

But Oracle wasn’t too concerned about this as it had said it would stop selling unprofitable lines and third party components to focus on margin growth. It succeeded, and amazingly margins began to reflect those displayed in their software sales.

Oracle has pushed its Exadata database machines aggressively, and this strategy appears to have worked! High-end big ticket sales and pipeline are growing more than we expected. The story of ‘engineered and supported as one’ is resonating and we see signs of deep concern in the IBM camp. IBM realise, that if Oracle keeps winning share in high end servers, its position will become difficult to shift.

Oracle has unusual power over the market, demonstrated recently with changes to Itanium server pricing and the recent announcement of end of software development for that platform – a move designed to increase licensing fees and disadvantage its competitors.

In conclusion

Oracle is performing with impressive strategic precision and clearly is a safe technology bet with a long future. However, its methods are not always obvious but are always sophisticated and long ranging in their impact. While increasing operational dependence on Oracle is almost an inevitability, we see relatively little increase in vendor management investment and Oracle asset management activity. This is becoming a real area of concern for many of our clients and will increasingly become a tension in the market.

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