It's clear following Oracle's fiscal third quarter earnings call that CEO Larry Ellison has two enemies of choice: SAP and IBM. However, Oracle's prospects are much more believable vs. SAP. It remains to be seen whether Sun can tackle the high-end server market and wrest control from IBM.
Analysts were generally upbeat about Oracle's quarter. The integration of Sun is moving along, Exadata is showing progress, and -- on the applications front -- Oracle's Fusion effort is on deck. Meanwhile, Oracle is notching customer wins as SAP works out its vision amid management changes.
Now onto the enemies. Simply put, Ellison wants to be number one in apps and high-end servers. Oracle isn't there yet on either front. Here are some excerpts from Oracle's conference call transcript and the reaction to the comments.
First, there's IBM. Ellison, who loves Exadata, sees the machine as an IBM killer. Ellison said:
It is not uncommon for an Exadata benchmark, when going up against a big IBM pSeries machine, to beat them by a factor of 10. Because they just don't have a clustered architecture, they're stuck with kind of an old-fashioned SMP architecture for transaction processing. So we're taking advantage of new technologies, not just InfiniBand by the way, but Flash -- very large scale memory -- integrated memories. You will see all of that has allowed as to deliver stunning performance using -- if you will, commodity parts. And not only do we run much faster than the IBM pSeries, but also our architecture is clustered -- there are multiple servers, multiple piece of storage. There is no single point of failure, so much more reliable, while delivering this fantastic performance. And finally it is much lower in cost, because the components themselves if you will are commodities. The components that we -- the disk drives and memory and processors which we assemble with our software. So again we think we can challenge IBM on the high end of the server market. Better performance, lower cost and much more reliability.
Later in the call he responded to an analyst question about hardware plans:
Well, stage one of the version one of Exadata was really aimed at Teradata, and Netezza -- and really the specialists data companies that focused on building custom hardware designed to tackle large-scale data warehouses. And that was Exadata version one. Exadata version two, handles not only data warehouses but also handles transaction processing. We added a lot of flash memory into it. And we are going to have new Exadata models, and I don't want to pre-announce anything, but we're going to get better and better at very large scale transaction processing. Our intent is that the Exadata line challenged the biggest IBM pSeries machines, and beats them badly in performance, reliability, and cost. And we think -- and we think we can do that where -- in transaction processing where we're twice as fast , and in data warehousing, we're 10 times as fast. Those are our goals, to be twice as fast as IBM's biggest, best box, and again, at a dramatically lower price.
Credibility check: When Ellison focuses on something---even when you think his statements are initially nuts---you should pay attention. Analysts, however, are in the wait-and-see mode on Sun. Right now, Oracle has to fix Sun, focus on higher-margin servers, eradicate old business practices, and get used to the hardware business. In addition, Ellison alluded to new product launches---specifically an Exadata server line. That's a lot of work just to get to the starting line. Simply put, it's unclear what happens with Oracle's hardware business once all the low-hanging integration fruit has been plucked. JMP Securities analyst Patrick Walravens quipped: "If Larry Can Fix Sun, Imagine What He’ll Do for the Warriors." For those of you not following along, Ellison is trying to buy the Golden State Warriors. The rehab work for both the Warriors and Sun are similar. Also see: Oracle-Sun’s great society vision: Will customers bite? Oracle-Sun: Strategy set; Will buyers go for the integrated stack?
And now let's look at SAP. Ellison and president Charles Phillips talked a lot about SAP on its conference call. That's nothing new, but Oracle's comments had a lot of detail this go round. As a veteran of Oracle conference calls, the SAP bluster runs high usually. Ellison cranked up the bluster-o-meter, but also made some interesting points. Overall, it's hard to argue that Oracle isn't in a better spot than SAP today. SAP is the big dog in apps, but it's changing management and is building the narrative around its product line. Simply put, it's not that hard for Oracle to win some deals with its focus on industries, functionality, a good story and some good old fashioned fear, uncertainty and doubt (FUD).
Here's Ellison's scene setter:
In applications -- SAP is the leader. But their technology -- that they use for their applications -- is a proprietary technology, a German programming language called ABAP, where later this year -- and that is a 25-year-old technology. But it is still the center of their architecture and strategy for applications going forward is ABAP. The center of our strategy going forward is Java, and a modern service-oriented architecture. And during this calendar year, we will deliver our Fusion applications. We have been working on them for a while, but we have rewritten -- and written in Java, all of our accounting software, all of our supply chain software, all of our HR software, our sales automation, our service automation -- it's all been rewritten in Java with a modern service oriented architecture. And we're going to go compete with SAP's 25 year old technology. The interesting thing is we're competing quite well against SAP now.
We think once we deliver Fusion, we're going to be well-positioned to challenge for the number one slot. One of the important things about our Fusion applications is they are designed not simply to run on premise, which of course they do. But they're all on-demand or if you prefer, cloud-ready. So we'll be delivering those applications, both by selling the software directly -- kind of the old way of doing it, which is still the most popular way, by the way. We'll be selling the Fusion applications integrated with our hardware, our servers, and our storage and our networks. We'll be selling it on the cloud, all modern service-orientated 21st century stuff, competing against SAP. We think SAP is vulnerable. And we can take them on in a variety of industries. The other thing that we're doing, that SAP is not doing, is we're emphasizing industry functionality. So it is not just technology where we are competing with SAP, we're also competing with them in functionality. So we think we have much more functionality for intelligent -- for a telco, a phone company, a large-scale retail operation, in insurance and in banking. We have industry-specific applications for a variety of industries. Health care, I could go on. So our strategy is to have much better industry focus than SAP, in terms of functionality, and a much more modern technology underlying all of that functionality. Again it is a company that we think is vulnerable, and we think we have an excellent chance of becoming number one in applications.
Phillips, after touting customer wins, added:
I'm certainly seeing a shift there, where I would say two years ago SAP was considered a safe choice even if the technology was a little old and complex to implement and all that. But that seems to be changed, as customers appear more nervous about their technology and strategic directions, and are more open to discussing things with Oracle, even the SAP customers, some of the largest customers. And secondly, they don't have anything new to talk about.
Of the customer wins, the one that caught my eye was an Oracle win with the Australian government, which is building out a national broadband network. See ZDNet Australia for the history on that project.
Later in the call, Ellison said that Oracle's ERP sales were up 26 percent in its fiscal third quarter. Ellison noted success in specific verticals---health care, pharma and telecom---and executing while SAP was switching coaches. While SAP was revamping management, Ellison was going on sales calls.
Credibility check: Analysts had no problem believing that Oracle was a big threat to SAP on apps. Sure, Oracle has a lot of ground to cover, but SAP is in transition on many fronts.
Walravens said in a research note:
We believe that Oracle is significantly better positioned than SAP. We see two main areas of comparison. The first is the attempt by the world’s largest on premise software companies to adapt to the computing as a service trend. Oracle seems to be taking the approach of selling shovels in the gold rush – rather than risking adopting the on demand model. Oracle has a full infrastructure stack – middleware, operating system, database, servers – which it can sell to operators of public and private clouds. Oracle also has a new generation of applications coming to market, which it argues can be made available as software as a service solutions. SAP seems to be stuck in the middle in a classic innovator’s dilemma. In the small and medium-sized market, SAP plans to accelerate the deployment of its Business by Design solution in 2010. One problem with on demand accounting solutions for SME is that the SMEs tend to have a lot of accounting questions – and they burn up the phone lines. This is a problem NetSuite struggled with in the past.
Heather Bellini, an analyst with ISI Group, produced this organic growth chart for license revenue that tells the tale.
The big question here is whether Oracle has a significant long-term technology and functionality edge over SAP as it claims, or is taking advantage of a company in turmoil. In other words, when will SAP get off the mat?