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Oracle's $1.3 billion verdict over SAP: Six big questions

Oracle won $1.3 billion in damages in its TomorrowNow lawsuit against SAP and here's the bottom line: SAP will have to pay out about a third of its estimated 2011 free cash flow to Oracle. Another key question is what the verdict means for third party support.

Written by Larry Dignan, Contributor Nov. 23, 2010 at 9:10 p.m. PT

Oracle won $1.3 billion in damages in its TomorrowNow lawsuit against SAP and now the financial calculations begin. Bottom line: SAP will have to pay out about a third of its estimated 2011 free cash flow to Oracle.

In the big picture, Oracle's win also means that SAP will be limited in the acquisitions it can make. That fact gives Oracle less competition should it consolidate more software players.

Barclays Capital Raimo Lenschow said in a research note:

The final settlement may still change over the next couple of days based upon the judge's decision. The next stage is for SAP to appeal, which they still haven't decided firmly on. The financial impact for SAP will be limited as the company had already provisioned $160m for this case. Of this $120m will be used for the Oracle legal fees that the company committed to paying 3 weeks ago. This means that SAP still needs to pay just under $1.26bn which is about 1/3 of our 2011 free cash flow forecast.

SAP's earnings excluding the Oracle settlement---that's the way Wall Street views results---won't be impacted. But SAP was dealt a heavy body blow over the TomorrowNow suit. Deutsch Bank analyst Marc Geall said SAP will likely do a one-time payment.

A few moving parts to ponder:

Will SAP appeal? That's uncertain. SAP will surely look at its options, but there's a lot to be said for paying the settlement and moving on. Analysts are mixed on the appeal idea. Geall said it may be best if SAP just moves on.

Will the damages be lowered? Analysts say that the judge can review jury verdict and adjust the value.

What's the fallout for IT buyers? Patrick Walravens, an analyst at JMP Securities, summed this one up well. He said in a research note:

First, (the verdict) reinforces the most fundamental aspect of Oracle's business model, which is simply this: if you want to use our stuff, you have to pay for it. Oracle's reputation as a fearsome enforcer of its legal rights remains intact. Likewise, Oracle generated a very nice return on its investment of three years, $120 million in legal fees, and a great deal of its executives' time, especially co-President Safra Catz, who sat through most of the proceedings. Second, by using the fair market value license approach, the jury effectively sent a message that those infringing copyrights should not expect to get off lightly simply because it is hard to demonstrate the actual harm to the copyright owner. Third, the fact that SAP stipulated to liability and did not try to defend its action reflects in part on the fact that SAP is also completely wedded to the license and maintenance model and did not want to bite the hand that feeds.

Is this really over? Maybe not. Even if SAP doesn't appeal, Walravens and other analysts note that the Department of Justice could file criminal charges.

How does this affect other lawsuits? Oracle is being sued by i2 Technologies, which is now part of JDA Software. Oracle may choose to settle that patent infringement case since it has the moral high ground now, said Walravens.

And what's the hit on third party support? The big question here is how this TomorrowNow verdict impacts the Oracle-Rimini Street case over third party support. Rimini Street isn't comparable to TomorrowNow in any fashion, but the Oracle vs. SAP suit is going to at least color the arguments in court (assuming it gets there).

Evercore Partners analyst Kirk Materne said:

Third-party maintenance support has been a somewhat contentious topic in the software industry over the past several years and we believe the jury’s decision, and in particular, the size of the penalty sends a clear message that support offerings are part of a company's intellectual property and we anticipate that the ruling could discourage other companies from trying to offer 3rd party maintenance services.

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Oracle's $1.3 billion verdict over SAP: Six big questions

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