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:
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.
Goldmacher notes:
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.
Goldmacher notes:
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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