Oracle’s Continuing Bid for Leadership in Enterprise Applications

We recently attended two different Oracle applications events, one aimed at the financial community to discuss the company’s vertical strategies and the other aimed at customers, partners and analysts unveiling Oracle’s “applications unlimited” launch of 5 major new releases of the company’s core ERP applications. Both events were very well attended and received. To the frustration of the financial community, Oracle’s president Charles Phillips did not comment on how the February fiscal Q3 period was shaping up, or to what extent Oracle has closed the deals missed in Q2.

While the focus of each of these events was different, there are a number of key themes common to both presentations. The most strategic advantage that Oracle has in its applications business is the strength of the Oracle technology stack. The benefits of Oracle’s leading positions in database and middleware are that this technology is available freely to Oracle’s applications businesses, freeing these development teams to focus solely on building domain expertise and expanding the breadth and depth of application functionality. The next most important benefit is simply Oracle’s scale as measured by the size of the organization as a whole as well as its financial strength.

Oracle’s applications businesses benefit from this scale in that they can provide extensive worldwide support 24 by 7 on a cost effective basis that few companies can match. In addition, particularly with respect to some of the much smaller companies Oracle acquired, Oracle’s scale eliminates customer anxieties not just about support but also about financial viability, which is often a big issue with smaller software vendors. Finally, and perhaps most importantly in light of Oracle’s very aggressive pace of significant acquisitions over the past few years, are Oracle’s promises not to discontinue support for any applications products and to continue to introduce new releases of existing products while continuing its development of its next generation Fusion release.

While none of these key themes are new and all of them have been discussed repeatedly over the past few years, what’s different now is that sufficient time has passed, that customers are able to see that Oracle is serious about delivering on these promises. As we have written on previous occasions this, in our opinion, has been the critical variable in Oracle’s success to date in the applications business. Our checks with various industry contacts have repeatedly underscored that where there was substantial anxiety a year or so over whether Oracle would continue to support its acquired products and whether Oracle would attempt to dictate the timing of upgrades, neither of these fears have been realized. As a consequence the sizeable installed base of applications customers has begun to recommit to Oracle and in many instances are expanding their licenses.

Oracle’s Focus on Verticals – “The Growth Area of the Applications Business”

Oracle’s interest in vertical applications is driven by the simple fact that the market opportunity is on the order of 2x the enterprise resource planning (ERP) market and that unlike the ERP market which has been defined by the packaged applications vendors, the vertical applications market is largely represented by custom built legacy applications. Further enhancing the appeal of the vertical applications market is that the emergence of services oriented architecture (SOA), along with the need to improve compliance and the ongoing dramatic improvements in the technology stack are catalysts to replacement of aging custom legacy systems.

In the bid to capture the vertical market opportunity as quickly as possible, Oracle has made a number of strategic acquisitions in key verticals. As of today Oracle has four vertical business units that have been built around these acquisitions. The largest is financial services which has Oracle’s 88% ownership interest in i-Flex at its core. The second is retail which is leveraging Oracle’s acquisition of Retek. Rounding out the four verticals is communications and utilities. Oracle’s strategy is to leverage its technology stack and to reapply the R&D savings realized toward accelerating the expansion of the functional footprint of these applications.

Oracle’s “Applications Unlimited” (Protect, Extend & Evolve)

Oracle’s Applications Unlimited event was designed to underscore the company’s progress since completing the acquisitions of PeopleSoft/JDEdwards and Siebel more than a year or so ago, with the announcement of new releases across all of these products as well as the Oracle e-Business Suite. More specifically Oracle announced the availability of the following: eBusiness Suite 12, PeopleSoft 9.0, Siebel 8.0, JDEdwards Enterprise 8.12 and JDEdwards World A9.1. The overarching theme of the event was to “protect, extend & evolve” customer’s applications investments so as to provide the utmost flexibility to meet customer needs.

While each of these releases includes significant enhancements in terms of traditional feature/function elements (we will spare readers all of the details), the real appeal is the addition of standard integrations across ERP suites, as well as a standard integration to Oracle’s industry suites and finally one-stop integration for independent software vendors and non-Oracle products. The integration across applications is particularly important since many Oracle customers have PeopleSoft for human capital management (HCM), Siebel for CRM, Oracle for e-Business financials and JDEdwards for plant management. Clearly the ability to integrate across these different applications represents tremendous potential benefits in terms of improving the productivity of operations as well as compliance. While there were many examples of these different integrations, one that resonates loudly is the integration between Siebel and the e-Business Suite in terms of tying Siebel’s “front office” order capture functionality with the “back office” order management capabilities in the e-Business Suite.In addition these latest releases are available via Oracle On-Demand for those customers who prefer a software as service business model. Finally, it is important to note that these new releases do not change Oracle’s continuing support of “stack” offerings from other vendors, such as IBM’s DB2 or BEA’s Websphere as well as other popular products.

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.

SAP’s Miss – Part II: New Attack on the SMB Market

When SAP released their disappointing Q4 results a few weeks ago, we raised the critical question as to what do they mean. Was it a company specific issue, or a reflection of a broader weakening of demand for enterprise software companies?

Recently SAP hosted a meeting with financial analysts to discuss in greater detail its results for 2006 and provided a preliminary outlook for 2007.

The 2007 outlook calls for product revenue growth in constant currency terms on the order of 12% to 14%, which is similar to the growth seen in 2006 and for operating margins to take a hit of 1 to 2 percentage points to a range of 26% to 27% owing to the decision to develop an on-demand offering. While the revenue outlook should not be surprising, the lack of license revenue guidance along with the indication that profit margins would decline took the market by surprise and led to a further sell-off in the shares.

The presentations by SAP’s senior management illustrated the challenges to the leading enterprise applications vendor. In its traditional market serving relatively large companies the market share gains that SAP has enjoyed over a number of years owing in part to Oracle’s various fumbling of earlier releases of its eBusiness suite, and later anxiety over the company’s aggressive acquisitions have come to an end. In addition the long standing effort to build SAP’s presence in the strategically important small, medium business (SMB) market has not been as successful as hoped. Or put another way, SAP recognizes the need to address the sizeable portion of the SMB market that wants a different value proposition that emphasizes the low upfront costs and predictability offered by the software as service subscription model. Finally, compounding the fundamental challenges SAP also confronted the significant increase in the value of the Euro which visibly dampened the company’s reported top line growth. Despite the disappointment the actual results in absolute terms are not bad rather management was clearly overly optimistic in initial outlook for the year.

The biggest surprise was management’s intention to sharply increase its investment in building an easy to use, on-demand solution to more effectively address the all important SMB market. The announcement represents an admission that despite SAP’s claims during the past several years of its success in the SMB market, that the company is losing ground to a range of competitors that arguably include a number of traditional ERP software companies (Lawson, Oracle, et al.) not to mention on-demand offerings from Salesforce.com, NetSuite and others. While the move to on-demand makes sense, it raises a lot of questions regarding SAP’s current mid-market offering as well as to the underlying assumptions the company is using with regard to prospective market penetration, revenue contribution and longer term profitability. Our conversations with investors underscore these concerns as does the reaction of the stock.

Perhaps most importantly nothing in SAP’s presentations suggested a fundamental softening of demand for broader IT spending on enterprise software. In fact management continues to characterize the spending environment as “healthy,” which is consistent with the inputs we get from various industry contacts (systems integrators, market research analysts, independent consultants and field sales).

One bit of good news for SAP is that Henning Kagermann will continue at least one more year as CEO, forestalling a much anticipated horse race between leading executive board members Shai Agassi and Leo Apotheker and the risks that one of these key executives will leave.

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.