Oracle FY12 Q2 earnings call preview...

As Oracle concludes its H1, we look back at six months of Oracle ‘Rock ‘n Roll’ and anticipate its earnings announcement. It’s certainly been eventful. Battle Stats The combative Ellison has not shied away from conflict...

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As Oracle concludes its H1, we look back at six months of Oracle ‘Rock ‘n Roll’ and anticipate its earnings announcement. It’s certainly been eventful.

Battle Stats

The combative Ellison has not shied away from conflict over the last half year;
Google - this patent and copyright case sees a scrap over Google’s use of Java in Android. This much anticipated showdown has been delayed so we’ll have to wait for the Larry vs. Larry £1bn verdict.

US Department of Justice Part I - earlier in the year, Oracle agreed to pay £46m to the United States to resolve ‘false claim’ allegations against Sun Microsystems for paying kickbacks to influence Government buying decisions.

Department of Justice Part II - just in October, Oracle settled a further US Department of Justice case for $199.5m for failing to meet the terms of an agreement with the GSA. A lucky former employee got a cool $40m for blowing the whistle.

Rimini Street - Oracle have accused this tiny third party support company of stealing its IP in a similar way to TomorrowNow. Although the model is actually quite different, this is a pivotal case whereby original software authors do not want third parties to be able to offer support for their products as they often achieve 90% margins on support. The case is delayed as Oracle has subpoenaed 275 Rimini Street customers. Rimini Street accuses them of ‘scare tactics’.

SAP - Oracle were triumphant last year with a record $1.3bn jury award against SAP as Oracle alleged the SAP subsidiary TomorrowNow workers had illegally downloaded thousands of Oracle files. As for Oracle, in September the US District Court in California ruled that the award was ‘grossly excessive’ and the fine was cut to $272m. Enough for a little party, even by Larry’s standards.

HP - sport and business blend when it comes to this coupling. Larry baited Leo Apotheker (ex SAP and then HP CEO) relentlessly until he announced his strategy for HP would be to ditch the PC and printer low margin units to focus on high margin servers and enterprise software, in increasing competition with Oracle. Although the strategy was backed by chairman and ex-Oracle, Ray Lane, shareholders rebelled, the stock plummeted and Leo was replaced by Meg Whitman. Success to Larry? Oracle continues to battle with HP. In June HP filed against Oracle over its stance on Itanium and various anti-competitive practices. So, we’ll need to wait and see - meanwhile regardless of the business logic and sporting satisfaction, Oracle is creating serious angst for its own clients.

Strategy; and in market activity - the inevitable ‘U’ turn from scathing ‘cloud’ critic to wholesale adoption finally happened as Oracle announced its Public Cloud based on its Exa product portfolio.

Fundamentally, Oracle’s strategy has remained steady - sell higher, sell bigger and sell to business better. This is working and Mark Hurd is working it pretty effectively. Oracle has historically sold to CIO’s and IT directors whilst SAP owned the board-room. At Rocela we are seeing increasing numbers of CIO’s losing control of IT strategy and spend as Oracle goes straight to the business and sells the total solution leaving IT with the legacies.

Challenges

Even Oracle doesn’t get it all its own way all the time, so what challenges has it wrestled with?

Sheer Complexity:

Although its mastery of market messaging makes light work of making the most complex solutions look pretty compelling, ultimately it needs to deliver upon promises. After 75 acquisitions, many with overlapping functionality, I have never yet met an Oracle executive who can even name more than 20 of these organisations let alone point at a product route-map that gives clients a sense of confidence of where an investment will lead to over 4-5 years.

Fusion is a brave attempt but it is already late to market and recent acquisitions suggest its development lifecycle will not be in phase with the applications market - by the time Fusion delivers, the next generation of Workday, Success Factors, Salesforce, Taleo etc will have won the client mindshare. As Larry knows from CA history, acquisition is not innovation; it is the death of innovation.

End user view

When market dominance is acquired rather than earned and commercial lock-in is a fundamental pillar of company valuation and ‘go to market’ strategy, that market dominance becomes a risk to its clients, and the sheer business dependency on a vendor requires significant trust at board level.

Many Fortune 1000 CEO’s are beginning to realise that Oracle no longer provides just database software - it has become the vendor of Finance Systems, CRM and Procurement, i.e. Core Ops Systems. These systems are mission critical, they run on the same vendors hardware stack in the same vendors datacentre. Uncomfortable? You bet, particularly when you ask how well the vendor is managed and you realise that your people find the commercials too complex and dynamic to manage effectively. It turns out Oracle is running your whole organisation, not through a decision, but by stealth.

Earnings expectations

So what do we expect from their H1 performance at the earnings call in December? Well last year’s FY11 Q2 saw GAAP EPS up 27% to 51 cents with new software sales up 21%
and total revenues up 47%. This year we expect performance aligned to higher end analyst expectations with potential to over perform. Our focus is in new software sales revenues where poor ULA renewals may indicate future issues. And hardware sales - we are seeing the greatest demand for Exadata when sales representatives bundle it as part of a solution and we are not seeing wins in straight competition.