At first we viewed the Oracle acquisition of Sun as a purely defensive move with the value being more in IBM not having it than Oracle enjoying it.

However now it appears that Oracle is coming around to addressing the SaaS market more directly (over their own strenuous objections from the recent past.)  Some elements of Sun could provide Oracle with a “lite” stack that could be used as a full and viable SaaS solution (unlike Netsuite) that *might* not be as much of a threat to the core Oracle software business.

So far SAP has failed miserably in this space thanks to their profound over-engineering of what is supposed to be a lightweight and easy alternative to the “poured concrete” foundation of SAP software.  This gives Oracle a window of opportunity to at least not be “worst and last” in the space.

We expect Oracle to do far less with the core assets of Sun than Oracle management has promised.  A reasonable “failure strategy” may end up being to use most of the remaining Sun assets inside a SaaS-focused business entity.

From an investment standpoint the move into SaaS by Oracle is a classic good news/bad news situation.  While a nice strategic move it will be a difficult transition in terms of revenue growth and margins.  Although recurring revenues from SaaS models can justify higher valuation multiples, they deliver fewer dollars up-front and lower initial profit margins.  Any meaningful transition for Oracle would create substantial pressure on revenue growth and margins.  (This is probably the primary reason Larry Ellison dislikes this model so much.)

Oracle would seem to have little choice.  Salesforce.com has continued to be successful in creating and growing the market while platform technology providers like Microsoft and IBM are moving (perhaps with a few kicks and screams) to embrace the SaaS/Cloud model.  Even the mighty Oracle can’t afford to face down all competition.   These vendors have credible solutions and distribution channels and if they are waving a small monthly fee over a large Oracle proposal, many customers may opt for it.

Thusfar most analysts have cheered the Oracle purchase of Sun and expect it to generate additional earnings for shareholders.  We think they are at least wrong in magnitude and may even have the direction wrong depending on how things evolve at Sun.  Secondly the transition to SaaS will be a strategic improvement in Oracle positioning and may threaten other vendors, but it won’t be good news for Oracle shareholders in the short and medium term.

Pressure on revenue growth and declining margins are rarely good for a growth stock, we don’t think they will be good for Oracle.

[Disclosure: Research 2.0 has a short position in Oracle at the time of this writing.]

Primarily this is a defensive (meaning not very creative) move by Oracle.  IBM would have been a measurably stronger competitor for Oracle with Java and MySQL added to their formidable software stack.  So the real value for Oracle is more in IBM not having Sun rather than direct benefits for Oracle.  All their statements to the contrary are only corporate posturing.  That fact is not going to be good news for Sun employees who can expect Oracle to make the Sun acquisition highly profitable by dramatically eliminating costs, shutting down initiatives and exiting businesses.

We’re aware of the fact that many commentators are taking Oracle comments at face value that they are going to create a real full service counter to IBM in the industry by preserving all the major elements of the company and adding more global services.   We see no chance that this will actually happen.  Failing that the speculation is that HP will act in concert with Oracle to present a unified solution to large customers but we see the Oracle move as being more threatening to HP and that they will be extremely aggressive at undermining Oracle’s efforts.

Oracle may do some constructive things with the Java assets which hold great sway in the enterprise and are tied with Microsoft .NET in most corporate development environments.  However Oracle doesn’t exactly inspire confidence in the hearts and minds of end users.  That they will be around is a certainty but whether they will put the community and customers first is more questionable.

MySQL would seem to be doomed in the hands of a proprietary monopolist like Oracle.  However it may not be quite the case.  After all there are open source licenses in force and a community in place.  This will help to keep MySQL viable in the short and medium term.  What steps Oracle takes will influence the decisions of the key developers and users.  The rhetoric won’t be a tell at all.

From an end-user perspective we can be fairly sure this will force some strategic rethinking.   Java and MySQL in the hands of Sun meant they were safe and stable and owned by a company that wasn’t much of a threat.  Now it’s a bit different. Oracle is seen in the same light as Microsoft.  Providing a valuable set of technologies and services but also charging heavily for it thanks to their proprietary IP and very fat operating profit margins.

Implications by company:

Microsoft (MSFT) – Probably good news.  IBM would have been more customer and open source friendly than Oracle is likely to be.  It makes Java and MySQL along with frameworks based on them more similar to the .NET and SQL Server choice. Oracle may try and take OpenOffice into battle but we’ve seen similar efforts from Oracle for the past 10 years or so and they have never been able to “get” productivity applications.

IBM (IBM) – Looks like a bumbling loss from where we sit.  May force them to take a more serious look at Red Hat (RHT) which is doing very well in the enterprise.  We don’t know Red Hat management well enough to say if they are up to the task but they are sitting on a powerful industry opportunity right now.  IBM is big enough that it won’t effect the company but we expect the IBM Software Group is scrambling this week.

Cisco (CSCO) & HP (HPQ) – Many Sun customers are going to have to look at alternatives.  HP is the market leader in servers and this will bump up the pace of their share gains vis a vis Sun.  Cisco will have work to do in order to break into the server market but this event will spur some percentage of Sun server customers to start a fresh evaluation which will help Cisco get a foot in the door at some large accounts.

EMC (EMC) & VMware (VMW) – EMC is likely to pick up some share in the storage market and VMware gains some strategic value as in infrastructure layer that can help improve the fluidity of server infrastructure and enable a containment and migration from Sun servers in places where that will be happening.

Probably also good for: Salesforce.com (CRM), Sybase (SY), Google (GOOG) and Amazon (AMZN).

Probably also bad for: SAP (SAP) who is increasingly irrelevant with software that isn’t aging well.

We have published a number of full reports that are useful in looking at this sector including The IBM Software Group ($), Microsoft ($) , HP Software ($), Google ($) and Open Source ($).  (They are also available to clients in the research library after login.)

[Disclosure: At the time of this writing Research 2.0 does not have an investment position in any of the stocks mentioned in this post.]

Sun (JAVA)-MySQL. Oracle (ORCL)-BEA (BEAS). As I said (see in the Oracle-BEA post put up on this site on January 17), there is one major interconnecting theme in the two major software-supplier acquisitions this week: For users and investors the independent middleware market as we know it is going away.

In Oracle acquiring BEA, the thought process behind that statement is (hopefully) clear and explicit.

In the Sun-MySQL deal, which also will lead to the collapse of middleware independence, it’s actually implicit in Sun’s statement that it wants to get into the database market. That really means Sun wants back into the whole infrastructure stack market, offering a framework from hardware up through business process management, and even applications if you count openOffice.

Think about that (“Sun as a competitor against Oracle in the database market”). That makes Oracle the winner in both deals. Now, instead of worrying about competing against a bunch of hungry nerds toiling away in an aggressive freestanding start-up, conducting guerilla marketing worldwide the way Sun did against DEC and Data General 20 years ago, Oracle just needs to think about Sun as a competitor in the database market.

And on the same day, it put BEA out of its misery!!! A two-fer.

But of course that is not Sun’s objective. Sun wants to take on Oracle, IBM (IBM), SAP (SAP) and others and make sure the others think of Sun as a competitor all the way up and down the stack. As Larry said in the context of his deal, it was “a great day for Java.”

Sun CEO Jonathan Schwartz said the MySQL deal was the “most important acquisition in history of Sun” But he also said the MySQL acquisition was complementary to Sun’s JavaDB (Berkeley) and postgreSQL offerings. The latter are other open source software (OSS) projects in which Sun is involved that compete with MySQL. That the competing projects complement each other may be Sun’s intention but that’s just not human nature.

First point: Watch for a tumultuous period starting almost immediately (the deal will be finalized plus/minus April 1) where the multiple OSS database offerings sort themselves out within Sun’s sales force. This will retard MySQL’s growth from what the OSS database might have otherwise achieved in 2008. MySQL may even lose; IT development and marketing guys play hard ball. We have already seen aggressive PR campaigns badmouthing MySQL product and support quality.

Speaking of MySQL’s revenue, the losers in this acquisition were the OSS pureplays and those OSS dual-license guys that still like to call themselves OSS pureplays. Research 2.0 and others estimate MySQL did about $75 million in revenue in 2007. We applaud Sun’s negotiating skill. Even if MySQL only did $50 million in 2007, the lowest estimate we have heard, it means Sun “only” paid 20x annual revenue. In October 2007, Citrix (CTXS) acquired Xensource for some where north of 100x 2007 revenue. To be fair to Citrix, it believes it paid about 10x 2008 revenue for Xensource. But of course we won’t know if that’s true for a year and Citrix won’t tell us if it was wrong anyways.

Second point: The value of pureplay-heritage OSS hybrid companies, which is what MySQL was, is dropping by that valuation measurement, coming back to earth from the JBoss, Zimbra and XenSource acquisitions. As I said in my initial blog post on this acquisition, the OSS IPO parade band is turning into a quintet and might simply become a guy accompanying himself on a harmonica by the end of 2008. And as I said when MySQL was beating the IPO drum back in July, a good business case is still more important than a buzzword such as OSS.

In my opinion, the investment opportunities—and OSS’s future—lies on the application functionality side of the market, not the infrastructure side. Alfresco, Compiere, Jaspersoft, etc. are still in the parade but the others best get out of line and find their “proprietary partners” as soon as possible.

As for partners, MySQL allies such as Google (GOOG), HP (HP), IBM (IBM), and Unisys might really be thinking twice about Sun’s acquisition. Intel (INTL), Red Hat (RHT) and SAP (SAP) pulled a few dollars out of the deal because they were major MySQL investors. But presumably SAP would have preferred that MySQL stay independent because it was probably going to bet on MySQL as a counterweight to Oracle (it doesn’t like having its major competitor “owning” most of the file systems its customers’ SAP applications access). With this acquisition, SAP will now be equally beholden to Sun. But SAP can still switch easily to Ingres or postgreSQL, or even–although unlikely–its own SAP DB.

Smaller MySQL partners, many of whom are also OSS companies, should be helped by this move, as explained over at my OSS blog on ebizQ.net, where I research about OSS all the time.

As for users Sun believes it can drive new adoption of MySQL’s database in more traditional applications and enterprises. Today MySQL shows up more in embedded applications and “Web 2.0 stuff.” Sun says, “The integration with Sun will greatly extend the commercial appeal of MySQL’s offerings and improve its value proposition with the addition of Sun’s global services organization.” Schwartz said Sun’s research found that the lack of “peace of mind” by large enterprises was holding MySQL back. But some very large enterprises such as Nokia and Google weren’t having that problem.

The companies also said more than 100 million copies of MySQL’s OSS database software have been downloaded. A very large percentage of those were for Windows but MySQL said that by the time the database gets to production (only one in a thousand downloads turn into business MySQL had said previously), most are on Linux, with Windows and Solaris second and third in popularity.

Third point: So even major Sun partner, Microsoft (MSFT) might get some benefit out the acquisition.

But in the end, the real winner is Oracle.–Dennis Byron

Tags: open source software, OSS, Microsoft, Sun, Oracle, MySQL, SAP

Oracle-BEA. Sun-MySQL. Now that the enthusiastic financial-analyst briefings and press conferences have been held (well at least the Sun-MySQL was enthusiastic) and now that we’ve had time to crunch the numbers, let’s look at the details. Who wins and who loses in terms of competitors, partners, investors and users.

I analyze the two deals in two separate blog posts in order to pick up some separate issues such as the depressing effect of the Sun-MySQL deal on open source software (OSS) pureplay valuation and the depressing effect of the Oracle-BEA deal on WebLogic and AquaLogic revenues for the rest of 2008 (and maybe forever).

Oracle-BEA is discussed below. But there is one major interconnecting theme in the two deals: For users and investors the independent middleware market as we know it is going away.

BEA pretty much launched the independent middleware market as a separate entity in 1995 by acquiring several Bell Labs/Novell TUXEDO-based distributors, IMC and ITI. To be completely accurate, investors still have a few choices. TIBCO (TIBX) is left because Reuters spit it out a few years ago. And Iona (IONA)–which predated BEA–and Cape Clear are still standing presumably totally because of Irish hardheadedness. In addition, IBM (IBM) and Oracle have succeeded in changing the definition of middleware such that some might argue that Attunity (ATTU) and SAS Institute make middleware.

When I say middleware, I mean run-time code that’s really in the middle of something. And when I say independent I mean “pure play,” software suppliers not selling other types of information technology.

So what does this sea change mean for the users? In the 1990s, users did not buy from pure plays because they were pure but because they offered a choice other than–at the time–depending on the middleware built into application suites such as SAP R/3, built into their relational database, or spit out as a by product of their mostly systems-supplier-centric development tools. The bottom line for the user community now, as I have been modeling for years, is that because of the end of the independent middleware market each enterprise has to choose whether to get in bed with an application suppliers’ middleware—SAP’s NetWeaver or Oracle’s Fusion—or an infrastruture suppliers’ middleware. (The above paragraph summarizes extensive portions of a Research 2.0 client deliverable, so if you want to dig deeper, give us a call.)

Larry Ellison explained in his conference-call script how Oracle fits in both camps because of his commitment to open standards but that is not the same as open source. And therefore the Oracle approach does not really represent independent choice for the user.

Partners such as smaller ISVs that used BEA middleware in their products and even much larger companies than BEA that use BEA middleware in their services offerings face the same more limited middleware choice as users.

For investors, the independent middleware market was a great leading indicator of the overall IT market. This acquisition makes the challenge easier or harder depending on your investment-research technique. Do you try to understand the upstream/downstream aspects of the market when you are investing in auto makers? If so, your life just got harder because there is no more equivalent of Behr, Dana (DCNAQ), Delphi (DPHIQ), Eaton (ETN), Honeywell/Bendix (HON), Magna (MGA), Modine (MOD), Tower (TWRAQ), ZF and so forth in the IT market. But if you just bet on an auto maker because you like the looks of the latest coupe, and an IT supplier because the user interface looks cool, you’re all set.

The most important short term investment aspect of the deal is that it will probably kill BEA license sales until the deal is signed, sealed and delivered in about 6 months. I think the two companies recognize this, accounting for the difference between the $21 asking price and the $19.375 final bid. And the two companies will probably make every effort to prevent it from happening (but I’m not sure of that given the coldness of the joint conference call).

As for competitors, well, as I said above, there are none left– Dennis Byron

Tags: open source software, OSS, middleware, Sun, Oracle, BEA

So what kind of year did Oracle have? Oracle doesn’t think of it this way but the year ended for it on Nov 30, 2007. I say that because IBM and SAP and many other large software suppliers (except the obvious, the largest) report their annual results on a calendar-year basis. I may be stating the obvious but it is easier for people who build investment research models to adjust Oracle’s trailing 12 months ending Nov 30 to the other leaders than to adjust all the others to Oracle’s May 31 fiscal year ending.

After backcasting for Oracle’s acquisitions in 2006 and 2007, Research 2.0 estimates that the database/application software market leader grew all types of revenue about 16% in the 12 months ending November 30, 2007 vs. the 12 months ending Nov. 30, 2006. The difference between our estimate and the higher growth rate reported in press releases is due to the fact that the press release does not take into account the timing of such acquisitions as Hyperion, Agile, Stellent, SPL Worldgroup, MetaSolv and others. Oracle itself normalizes for this difference in its most recent 10-K filing, saying that it grew its proforma revenue 13.0% in the 12 months ending May 31, 2007 (vs. the 12 months ending May 31, 2006). With our estimate of 16% trailing-12-month growth six months later, the company certainly kept the needle going in the right direction.

The company highlighted software license growth rates, as opposed to what it calls “license updates and product support” in its conference call. It looks like there is very aggressive cross selling to all of its new installed base in progress. Oracle says there is still a lot of opportunity ahead of it. Dividing license revenue from support revenue gets a little tricky because every company accounts for the two a little differently. We believe it makes more sense to look at the combination of the two for the reasons outlined in the most recent Research 2.0 report on Oracle (and all our software analyses).

Our long-term valuation estimate that Oracle is now fairly priced in the low $20s, as outlined in that Research 2.0 report, holds because it already reflected the growth that Oracle realized in its Quarter 2 and gave guidance to for the rest of its fiscal year. It looks like the market saw these results coming but it’s always nice when theory matches reality.

As for competitors, we won’t know for sure until January when we hear from IBM, SAP and get the first 6 months of FY2008 results from Microsoft. But Oracle continued to outgrow IBM, and has pulled neck and neck with SAP in terms of company growth rates. Exchange rates make the comparison tricky however. More important, while the initial view in this blogpost looks at the two companies overall, the Research 2.0 report on Oracle looks at the applications businesses head to head.

Oracle is almost keeping pace with Microsoft. Microsoft said in its recent Q1 conference call that its growth rate was unusually high so presumably that statement applies to Microsoft’s 24% year to date growth as well. If that growth rate comes down a bit after the fourth calendar quarter, the two software suppliers’ growth rates will be more comparable. Again, it is more important to look at Research 2.0’s estimates of how Oracle ERP does against Microsoft ERP, how standalone Oracle applications do against standalone Microsoft applications, and so forth. But you’ll have a hard time finding anything to complain about over your eggnog in these results.

– Dennis Byron

When I did software marketing back in the day, user group meetings were not major events. The key information-technologist and IT-staff meetings of the year were the spring and fall ACM/DPMA/IEEE/etc. “Joint” conferences in the 1960s followed by the annual National Computer Conference (NCC) in the 1970s and—in the 1980s—the geeky tradeshow that probably single-handedly drove the mob out of Las Vegas, Comdex. From a marketing perspective, every IT supplier was on a level playing field in trying to get the attention of the press and prospective customers.

Beginning in the 1990s, smarter software marketeers than my generation’s figured out it would be much better to deal with a captive audience of already committed customers. Thus IT suppliers began to put the full court press on their own user conferences and the great all-comer IT trade shows faded away.

I noticed today that that idea has lead to another marketing technique. Rather than give the company holding its user conference the entire weekly news/blogger cycle, which this week could have been Oracle’s (ORCL) with its OpenWorld beginning November 12 in San Francisco, the other guys’ PR folks try to come up with a news blast that can’t be ignored. Hats off to IBM (IBM) with its proposed purchase of Cognos (COGN), announced on November 12, and Microsoft (MSFT) with its November 12 rollout of Windows Server 2008 details. Of course, IBM would say that they could not control the timing of the release of the Cognos deal once it was signed and Microsoft is holding its European TechED in Barcelona this week.

So the question is does Oracle have any news blasts itself to counter the IBM and Microsoft efforts? Based on Charles Phillips kick-off keynote, the answer is a resounding “maybe.” In addition to the usual platitudes about market and technology leadership in the various segments of its business (database/middleware and applications) in his keynote, Phillips joined with the “new” head of all Oracle development, Chuck Rozwat to demonstrate some mildly interesting new products. (With John Wookey’s recent demotion/departure, Rozwat now moves into a spot at Oracle that has about the half-life of a baseball manager’s.)

To kick things off, the pair demonstrated:

• Some rehashed applications features which I would summarize as “no news blasts here.”
  • Application integration architecture features that looked like SAP (SAP) BAPIs from the late 1990s, even leading with the order-to-cash example that has had a longer “demo shelf life” than Steve Jobs
• Compliance stuff inherited with the Logical Apps acquisition based on active governance and a lot of last-year yawn on Sarbanes-Oxley
• Former Agile PLM functionality designed to demonstrate Oracle’s best of breed plus suite strategy

• Some possibly interesting infrastructure stuff that might be more important than the demo illustrated. These included
  • Fusion 10g middleware beta (implicitly)
• Enterprise Manager and Software Configuration Management functionality
• Oracle VM, based on the Xen open source virtualization software, which looks like it will let users virtualize both applications as well as servers, including Linux servers

The show goes on all week at Moscone and there maybe a news blast buried somewhere. In terms of investment potential, unless Oracle uses the new Enterprise Manager functionality to more directly take on BMC (BMC) and CA (CA) or the VM product to be more aggressive in its Red Hat (RHT) Linux program, this week’s PR battle looks like “advantage” IBM and Microsoft.

–Dennis Byron

Tags: Oracle, open source software, OSS, IBM, Microsoft, virtualization

In acquiring Business Objects (BOBJ), the conventional wisdom is that SAP (SAP) has given in and adopted Oracle’s growth strategy. I actually think the acquisition was still more tactical (what SAP calls “tuck-in”) than strategic. It’s just that the tuck requires letting out more than a few holes in the belt. But, without changing strategy, SAP has bought into many of Oracle’s technical problems. That might be more an issue than if SAP had simply changed acquisition strategy.

First, did the acquisition represent a strategy change or a tactical move consistent with the already announced tuck-in strategy? At the conference call, Henning Kagermann confirmed that this was not a change and checking past conference calls, I agree. Because of SAP’s own presence in business intelligence (BI) and analytics, the acquisition only slightly increases the “addressable market” SAP is aiming at for 2010 (from $70 billion to $75 billion). But it does allow much faster penetration of what SAP calls the enterprise “business user” role, in the first leg of the strategy stool, growing SAP’s business process platform business. Kagermann estimated that the acquisition accelerated time to market relative to the business-user role by at least a few years. SAP made the analogy that this acquisition increases business user penetration in the same way that the earlier Versa, Pilot and Outlooksoft acquisitions did.

The acquisition does not change SAP’s other two strategic legs: entering the small/medium enterprise (SME) ERP market with Business ByDesign (BBD) and growing SAP’s middleware business (already over $1B annually and on target to overtake Oracle). These second two objectives are actually bigger pieces of SAP’s 2010 growth objective than the business-user role expansion enabled by the Business Objects acquisition.

But the bigger issue is that SAP now faces many of the same incompatible architectural challenges faced by Oracle with its many acquisitions. At the conference call, the talk was all about keeping Business Objects independent and only leveraging synergies in business infrastructure. For example, Business Objects might drop salesforce.com (CRM) and become a BBD user.

But product infrastructure was also mentioned with some tantalizing hints that the two entities are already thinking about things like incorporating BI Accelerator into the Business Object suite for example or having the Business Objects suite use SAP’s master data management NetWeaver functionality. The Oracle-like analogy is that Business Objects was only just beginning to normalize the four separate architectures in its suite, and SAP had not yet integrated Pilot and Outlooksoft into BW. The whole line-up is a mishmash of products that were not scheduled to come together for four-six more months even when the companies were separate. Assuming this mishmash can be decomposed into true services and re-hosted in a services oriented architecture (SOA), this will be a good test of NetWeaver’s enterprise SOA capability.

There was also talk of a joint portfolio of industry-specific BI products, which Business Objects lacks as discussed here last month. There was also a lot of talk about that old term, Operational BI, combining SAP’s ERP with BI.

Although not mentioned in the conference call, there was also a lot of blather in the blogosphere about this being some kind of EU play. Let’s see what Neelie Kroes of the EU Competition Commission (EU CC) thinks of the deal? If the EU CC fails to look at this acquisition after squashing GE and Honeywell a few years ago, it will prove that the EU is not anti-competition, just anti-American.

–Dennis Byron

Tags: business intelligence, ERP, services oriented architecture, NetWeaver, EU

Tags: business intelligence, ERP, services oriented architecture, NetWeaver, EU

When compared with its leading competitors, Oracle (ORCL) had good results on the topline for its quarter ending August 31, 2007. Subtracting estimates for Agile, SPL Worldgroup, Metasolv and especially Hyperion on the back of an envelope, and a bit more for the half dozen other smaller acquisitions since last year’s first fiscal quarter, Oracle year over year quarterly revenue growth was about 15%. By comparison, Microsoft (MSFT) grew about 13% in its most recent quarter and SAP (SAP) and IBM (IBM) grew about 10%. My estimate for IBM of 10% is for the Software Group only and includes a backcast calculation for its acquisitions.

My estimate isn’t based on an attempt to discriminate organic vs. acquired new license vs. maintenance vs. consulting; you can’t compare against the others if you do that. This is just top line. By its metrics, Oracle said “Our Q1 database and middleware new license sales growth rate of 23% was the highest in seven years… If we continue to grow our middleware software business at the same rate we grew it this quarter, Oracle will challenge IBM for the number one position in middleware by the end of this year.” As we guessed last December would happen, Chuck Phillips said he would stop picking on BEA (BEAS) on this metric.

Strangely out of nowhere, Larry Ellison said SAP NetWeaver had “disappeared” since Shai Aggassi resigned. “It is not doing very well,” he claimed without giving any specifics. Also based on new software license revenue, Oracle claims to be the fastest growing middleware company. Of course, Oracle does not provide middleware statistics so you have to take Oracle’s word for it or do some triangulation. The last time I did such a triangulation in the spring (I don’t agree new software license is the best metric), SAP was growing faster than Oracle in middleware while Oracle was growing faster than SAP in ERP. Somehow I doubt that Shai’s new fondness for wind-up cars would change that in a few months.

On the applications side, it was the usual mantra: “We continue to take applications market share from SAP.” Oracle is upfront about why; it bought the share. Oracle is less upfront—as you would expect—in explaining the difference between its strategy and SAP’s.

• Oracle’s growth strategy is acquisitive; SAP’s is organic.
• Oracle says it’s expanding in its own base (including non-Oracle-application Oracle database users); SAP’s growth strategy includes moving down market and into Software as a Service (SaaS) looking for totally new customers.
• Also, maybe a secret worth keeping, Oracle doesn’t say that it is already strong in the mid market via JDEdwards.
• Oracle says it is moving beyond ERP to industry-specific software; SAP already has both, an industry-specific integrated ERP/CRM capability (rather than, for example, an Oracle Pharma ERP product based on eBusiness Suite and an Oracle Pharma CRM product based on Siebel)

The most important difference is that Oracle has an objective of growing EPS 20% a year through 2010. SAP’s goal is different, raising its user count to over 100,000 by the end of 2010. With different goals, all of the tactics are going to be different as well.

One thing’s for sure. The installed base census Oracle bought two to four years ago is clearly paying off Vis a Vis the EPS goal and that really only kicked in earlier this calendar year. Look for more throughout the fiscal. The open question is: Did Oracle learn anything from the old Computer Associates as it began executing the Charles Wang strategy of the 1990s?

–Dennis Byron

Tags: middleware , ERP, SaaS, CRM, NetWeaver

Back when Oracle (ORCL) vs. SAP (SAP) hit the fan in late March/early April, I said some quiet settlement would occur on some day when no one was payiring attention to information-technology (IT) news such as Christmas Eve or July 3rd. Well I was half right. Today is that slow news day in the U.S. As a result, there were only hesitant questions from journalists and investment analysts at the initial SAP press conference on this subject (another will be held at 11:00 AM EDT on July 3). SAP’s answers were equally tepid, mostly the standard “can’t comment on ongoing litigation” or wording almost identical to the court filing. Neither SAP’s oral or written responses were the mea culpas they should have been.

In its response to the District Court, SAP admits on the first page: “certain downloads… may have erroneously exceeded (its) customers’ right of access.” On page 13 of the filing, SAP admits that it ripped off the daylight-savings-time booklet that someone at Oracle wrote. Every other word on this case by SAP and Oracle (and me) is wasted breath.

Disturbingly in its filing SAP did not really concede wrongdoing. It wasn’t grand theft according to SAP, it was just petty larceny. SAP says it denies Oracle’s claims of “heavy downloads,” using the Bill-Clinton defense that it does not know what the definition of heavy is. SAP says only Oracle knows if SAP downloaded 10,000 documents it shouldn’t have so it denies the allegation. Similarly dancing on the head of a pin, SAP makes a distinction between TomorrowNow and corporate headquarters that is likely legally correct but ethically defective. SAP apparently even denies that Oracle software includes databases, middleware and applications.

Coincidentally, a related case has been opened by the United States Department of Justice. Unfortunately from an SAP and Oracle investor’s point of view this is starting to get expensive. Once SAP knew that even one document had been taken inappropriately, it should have used the court system to aggressively reach a settlement. SAP indicated that it would negotiate according to U.S. court regulations but did not want to concede anything at this point because most of Oracle’s allegations were unfounded. Admittedly most of Oracle’s narrative reads like a dime novel but the key allegations appear to be spot on.

Meanwhile companies such as Rimini Street reap the benefits of Oracle reminding users that third-party options exist out there. Rimini, one of the leading independent maintenance and support providers and founded by the guy that sold TomorrowNow to SAP I believe, announced Monday that both 2007 new client sales exceeded plan with strong consecutive quarter-over-quarter growth and expansion. Rimini Street officially began serving the Canadian market in Q2.

Rimini says “Thanks Larry.”

–Dennis Byron

Tags: SAP, Oracle, Rimini, maintenance

I haven’t yet done any slicing and dicing of Oracle’s (ORCL) calendar 2Q07 numbers into database, middleware, transactional standalone apps and ERP but a quick top-line analysis says Oracle’s trailing-12-month growth rate dipped just a bit from calendar 1Q07. That’s to be expected given the law of large numbers but it’s a little bit of a yellow flag because the most recent reporting period (ended May 31, 2007 for Oracle) was Oracle’s fiscal 4Q, its traditional load-em-up period.

Maybe Oracle believes its approximately 14% trailing-12-month backcast growth rate (around 25% before backcasting for acquisitions) will still be good enough to gain share on BEA (BEAS), IBM (IBM) and SAP (SAP) in the middleware, database and ERP markets respectively when those other companies issue reports for comparable time periods. Maybe Oracle even kept a little business in the drawer for the summer quarter, traditionally its slowest period.

The admittedly random top-line growth-rate factoid and the general tone of the conference call leads me to believe that Oracle’s two-year PeopleSoft/Siebel-user-led growth spurt may be just about over. Up-selling and cross-selling can last only so long. Oracle has done an excellent job at both, especially at getting its acquired application users to try one or another part of Fusion middleware. But the Hyperion user base is not as likely to generate as many such opportunities, which is why many of Oracle’s remarks and answers at its June 26 conference call were rightly about execution. Oracle talked about:

• “World-class renewal rates.” Actually Oracle did lose all those name-brand users mentioned in the lawsuit against SAP, but, in fact, there is likely little difference in renewal rates company to company.

• Margin improvement “as earlier acquisitions are coming up to scale.” There was a long interesting answer about how that isn’t happening as fast as Oracle had earlier predicted, because the company chose top-line growth over margins.

• Taking “into account our commercial paper obligations.” That’s real boring stuff but it’s the necessary blocking and tackling Oracle has to do to make its many acquisitions pay off if the cross-selling and up-selling have really peaked.

In fact, in their remarks, Larry led off with a dissertation about GAAP and Charles talked about credit/debit benchmarks. Neither was as entertaining as the usual bombasts against competitors. There was no blowing by BEA or eating IBM for lunch, and just a bit of innocuous stuff about “surrounding SAP.”

Oracle did not talk much about “new software license revenue.” It said it grew that segment more slowly in fiscal 4Q than the fiscal year overall; one might have expected the opposite given the Hyperion acquisition. And I heard no mention of the Red Hat Linux knockoff program but I must admit that at about the halfway point in the conference call, all this nuts and bolt financials stuff was putting me to sleep. Well I guess that the summer doldrums affect all boats the same way as a rising tide.

–Dennis Byron

Tags: Oracle, margin expansion, Hyperion, SAP

Tags: Oracle, margin expansion, Hyperion, SAP