A complicated relationship: Oracle's database business gets SAP'd

Oracle and SAP make for an odd couple. The two companies are bitter rivals in the enterprise applications. Oracle CEO Larry Ellison delivers a SAP dig every chance he gets. But a more complicated relationship was revealed on Oracle's fiscal first quarter conference call: Oracle needs SAP---especially for its database business.

The enterprise software giant delivered a so-so quarter with revenue that was lighter than expected (statement), but the real kicker came from a remark by Safra Catz, co-president of Oracle. She said on a conference call:

We had slower than usual growth in database middleware license revenue in Europe and APAC. This is a result of two factors -- a very tough year-over-year comparison and the impact of some of our software company resellers, most notably SAP, who is selling less database because its applications business is down 40%.

Translation: SAP is selling less of Oracle's databases.

Reality check: That decline could be due to SAP's applications sales. For all the yapping between the companies SAP applications often ride shotgun with Oracle databases. Or SAP could just be selling other databases---like IBM's DB2.

Indeed, IBM and SAP put out a statement on Tuesday touting DB2 optimization for SAP. IBM said that more than 100 SAP clients switched their database software to DB2 in the last six months. IBM and SAP have a seven-year strategic alliance designed to enhance DB2's performance for ERP applications.

Oppenheimer analyst Brad Reback says in a research note:

After navigating the economic meltdown quite well, reduced demand and lack of acquisition activity caught up with Oracle as the company missed modest 1Q revenue expectations. Most surprising, the technology business experienced the greatest weakness as management indicated that its ISV resellers, most notably SAP, are reselling fewer Oracle databases. We wonder if some of the SAP "weakness" stems from SAP pushing Microsoft/IBM databases at the expense of Oracle.

Reback is right to wonder. It would make perfect sense if SAP, which competes with Oracle on enterprise applications, paired up with other database vendors. Why not hit Oracle in its strongest business (database)?

It's unclear whether SAP can really call those database shots, but at the very least Oracle's quarter reveals that the two companies need each other. William Blair analyst Laura Lederman, an enterprise software veteran, noted that there is a lag between when SAP sells its new applications licenses and when that customer needs to buy a database license. In other words, the database license comes closer to when SAP's software is implemented.

Simply put, if SAP---or big bang ERP implementations---really take a dive Oracle's database business follows.

Caris & Company analyst Curtis Shauger notes the irony:

Ironically, the company could simply not get out of the way of the substantial downturn in SAP’s application sales, which dragged on new database/middleware license sales...New database license sales of $711mm missed our $861mm estimate and was mostly related to sharp decline (-30 to -40% over the last couple of quarters) in SAP’s license revenue.

Bottom line: Oracle needs SAP to succeed despite all the bluster between the two companies.