Oracle's technology licensing revenue adjusting for currency and acquisitions may be showing a few caution flags, but the software giant can weather the worries because of its maintenance and support cash cow.
The big question: How long can the maintenance cash cow last?
Earlier this week, Cowen & Co. analyst Peter Goldmacher published an interesting analysis of Oracle's organic licensing growth. Simply put, Goldmacher's math shows that Oracle's database and middleware business as well as applications are under pressure.
In a research report, Goldmacher said:
Our math indicates that adjusting for currency and M&A, Oracle's Technology license sales grew -3.5% in FY09 and -4.5% in FY10, and the Apps license sales grew -9.5% in FY09 and +5.3% in FY10.
Why the slowdown? Goldmacher has highlights a few interesting cross currents. To wit:
- There are low-cost database alternatives to Oracle's core database. Goldmacher said that until just a few years ago low-cost databases didn't exist. In other words, enterprise databases were needed to meet every workload. Today, there are open source databases and platforms like Amazon Web Services. Add it up and IT buyers aren't going to go with Oracle for non-mission critical workloads.
- Meanwhile, the database demand is focused on unstructured data. "There is huge data growth as the digital age kicks into overdrive, but the vast majority of that data is unstructured; blogs, machine data, search indexes, media feeds, video, etc.," said Goldmacher. "The opportunity is to capture and analyze these data sets for the purpose of forecasting. This cannot be done well in a traditional relational DBMS...where Oracle is the undisputed leader."
- On the apps side of Oracle's house, Goldmacher is also skeptical about future growth prospects. Why? High-end ERP is a saturated market. Meanwhile, other parts of the application equation---customer relationship, human capital and supply chain management software---are being dominated by on-demand software players.
Toss in a potential market pause ahead of Oracle's Fusion launch and there could be some problems ahead for the company. Goldmacher estimates that organic application revenue growth will be about 5.8 percent in fiscal 2011. The historical average is 23 percent and the last two year average has been a decline of 5.2 percent. Overall, technology licensing growth is expected to be 11.8 percent for fiscal 2011 a point better than the historical average, according to Goldmacher's estimates.
If anything, Goldmacher's analysis shows just how dependent Oracle is on maintenance revenue. In fact, Oracle's license revenue growth can fall further and maintenance fees can still support the company.
Given the recent organic decline in license revenue, one may wonder if software maintenance revenue contraction is far behind. This is highly unlikely as long as Oracle can generate $4B in license revenues which will generate roughly $1B in new maintenance fees to offset our estimate for 8% annual churn on $14B in maintenance. At present, Oracle generates nearly $8B in license sales. This assumes that Oracle can maintain its current maintenance pricing and there's no change in maintenance churn rates.
In other words, new licensing fees can result in maintenance gains until they hit a threshold that Oracle is not close to hitting. Everything works out nicely for Oracle as long as it can derive enough licensing revenue to offset maintenance churn and raise rates.
The dynamics exhibited by maintenance revenue streams suggests that there is a point at which Oracle's license revenues will no longer be able to support maintenance revenue growth due to pressure from churn. We are a very long ways away from that point.
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