Oracle Surprises With Strong Q2 License Growth

Oracle made significant gains in revenue and earnings for its fiscal second quarter, which ended November 30. While total revenue increased 8% from last year, it was the growth in new license revenue that was most impressive. The applications business had a particularly strong quarter, with a 27% jump in new license revenue.

The Bottom Line: The bid for PeopleSoft has gotten all of the attention lately, but Oracle has been steadily improving its products, marketing, and sales execution the last two years. Those investments, along with the U.S. economic recovery, appear to have led to these latest results.

What It Means: Oracle saw good license growth in its database and application businesses and all three of its geographic regions this past quarter. While Europe, the Middle East, and Africa (EMEA) and Asia Pacific grew 4% and 13%, respectively, the Americas region had an outstanding quarter with 21% improvement from the second quarter of last year. Oracle management pointed out that U.S. application license revenue was up 46% from a year ago. This is another indication that the Enterprise Resource Planning (ERP) market in North America is finally getting healthier, but it is also a sign that Oracle’s sales force reorganization and enhanced product functionality are making a difference.

Oracle seems quite pleased with the growth of its outsourcing business. Management did not provide specific revenue but did indicate that it was growing very rapidly and there are now “a few hundred customers on outsourcing.” They also stated that a number of this quarter’s application wins included outsourcing contracts. The outsourcing approach is particularly important for Oracle’s midmarket business, which it characterized as doing “extremely well.” The company is continuing to expand its telesales group, which targets this market, but management acknowledged that there is still a perception problem about the cost and complexity of the Oracle E-Business Suite in smaller organizations.

The Results for 2Q04:

• Total Revenue--$2.5B up 8%
• New License Revenue--$849M up 13%
• Net Income--$617M up 15%
• Earnings Per Share--12 cents up from 10 cents

Conclusion: Oracle is clearly an organization that is feeling very good about itself. The tone of the earnings call was very upbeat, and the revenue growth guidance for the third quarter was fairly optimistic, at 7% to 10%. Both of its major businesses are performing pretty well, and two of its three regions are reporting double-digit license growth. Oracle’s Research and Development (R&D) budget is likely to exceed $1.2B this year, which should allow it to continue to expand the scope of its products and innovate, while a war chest of more than $8B in cash and short-term investments gives it lots of acquisition options. The company is certainly in an enviable position in terms of products and financial status, but it still has work to do on its image. Brash and arrogant may be endearing, or at least tolerable, qualities in a high-tech start-up, but they are not appropriate for a $10B company cultivating long-term customer partnerships. In a market that is increasingly risk-averse, Oracle needs to be perceived as a bit more mature and a lot less combative.

AMR Research originally published this article on 17 December 2003.