Oracle's Victory Lap

Oracle’s powerful Q1 performance represents the long awaited confirmation that the company’s aggressive acquisition strategy is working. While the past couple of quarters have shown dramatic growth in application license revenues, as long time observers well know, Q1 is typically a problem quarter. The impressive gains in a typically challenging seasonal period with the double whammy of summer and a new fiscal year, are the most compelling evidence to date that Oracle is in fact executing well and gaining share. As the detailed results have been widely circulated, we will not review the specifics in detail, but rather call out isolated highlights of the quarter.


As longstanding bulls on Oracle we are extremely pleased to see our views validated by Oracle’s gains. License revenues up 28% year to year is an extremely big number coming off the blow out Q4 ’05 gain of 32%. Oracle’s ability to not only post good results (as seen in 2005) but more recently accelerating gains, has finally begun to win over long standing skeptics. The big gains in Oracle’s stock price represent the inherent leverage when one looks at the valuation throughout much of last year, coupled with significant growth and the expansion in the valuation. Even with the recent gains, given where earnings estimates have gone and the prospect of 20% growth, the shares still look quite attractive.

Oracle’s success underscores successful execution with respect to a number of critical elements of Oracle’s strategy.

First, that Oracle will continue to actively support all of its acquired applications whether from PeopleSoft/JDEdwards, Siebel, Retek or otherwise. On this point we give a lot of credit to Charles Phillips and his tireless commitment to communicating Oracle’s plans to customers and in presenting a more customer-centric face to users. As a result of growing confidence among users, Oracle’s applications license revenue growth was 66% for all of 2005, and accelerated to 80% in Q1.

Second, Oracle’s significant investment in its middleware offerings and open-source has proven very effective in maintaining Oracle’s competitive edge. The strong Q1 gains in database/middleware license revenues, up 15% year to year, with a 10% gain for database and a 55% gain in middleware, indicate that despite Microsoft’s recent release of SQLServer as well as the continuing gains of open-source, Oracle’s performance advantages and presence in open-source have significantly blunted the impact of these lower cost alternatives.

And third, that the development of Fusion is a daunting, ambitious task, but one that is inevitable and something that cannot be forced on users. Again, we think Oracle has succeeded in finally getting the message out that this initiative is intended to be customer friendly. Likewise we also believe that users are increasingly recognizing that SAP faces a similar challenge architecturally and that they are arguably behind Oracle in building this next generation architecture.

While we tip our hat to Oracle, we also reiterate that while the big gains in applications licenses for the May Q4 and August Q1 periods indicate significant market share gains, and stand in sharp contrast to the comparatively anemic gains for SAP in the June Q2 period as well as the substantial slowdown in SAP’s growth, investors should keep perspective.

Ultimately we do not see the sharp slowdown in SAP’s growth as indicative of a major problem, but rather as due to a combination of factors. SAP clearly benefited from the confusion/concerns that disrupted Oracle’s momentum, and to some degree the natural ebb and flow of pulling revenues from a broad installed base. That is no longer the case, in addition, we believe the substantial differential in pricing for largely comparable application suites from a functional point of view is also contributing the divergence in performance. SAP has long been known to premium price its applications, while Oracle has been extremely aggressive in discounting theirs. As users have become more confident in the stability of Oracle’s offerings, and SAP has been resistant to discounting, the pendulum has shifted in Oracle’s favor.

Although we do not see SAP’s challenges in the current environment as indications that this powerful franchise is fading, we do believe that the combination of high valuation and the turn in Oracle’s momentum will cause the divergence in stock price performance between SAP and Oracle to continue for the foreseeable future (defined as the next 12 to 18 months).

We can’t help but be pleased to see many of our longstanding positions on Oracle and SAP being recognized more broadly in the market.

Legal Disclaimer Nothing herein constitutes an offer or solicitation to buy any security. Readers are advised to review their own financial situation, risk tolerance, and investment objectives as to any investment. Information provided here is based, in part, from sources believed to be accurate and reliable, although no representations or guarantees can be provided as to its accuracy or completeness.Blue Atlas Management, LLC is our official business entity for consulting related work. In addition, we also have a website for those of you who are interested in learning more a little more about our services http://www.blueatlasmanagement.com/. Please feel free to contact us at jmendelson@blueatlasmanagement.com, with any comments or questions.