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Talk about practicing what you preach. Oracle Corp. (ORCL) executives announced on Apr. 4 that they will save $2 billion this year, thanks to internal e-business initiatives such as unifying their multiple computer networks and using the Internet for procurement. Analysts reacted immediately with a passel of reports virtually declaring the company the patron saint of e-commerce. Hyperbole aside, it's hard to avoid getting carried away when a company that was considered declasse just a year or two ago has reinvented itself as the biggest B2B player in the software business. Unlike numerous pretenders to the throne, moreover, Oracle has plenty of revenue and profits with which to back up its claim. It also can cite itself as a success story in a B2B marketplace that Forrester Research figures will reach $1.3 trillion in revenues by 2003. "Business is very healthy at Oracle and appears to be getting better," says Salomon Smith Barney analyst Neil Herman, who rates the stock a buy. "The company...is increasingly viewed as a vendor that companies need to work with when making decisions regarding Internet infrastructure technology." That's why investors have bid up Oracle's shares. Even after the Nasdaq rout of the past two weeks, Oracle boasted a price of $78.25 as of the market's close on Apr. 5, some 13% below its 52-week high of $90, which it recorded at the end of March. By comparison, the Nasdaq is down more than 20% from its late-March high. Thanks to the Nasdaq's retreat, moreover, Oracle's valuation hasn't gotten completely out of hand. It has a price-to-estimated-earnings ratio for 2000 of 118, vs. an average p-e for the Standard & Poor's software index of 100. UNIFIED NETWORK. The most heartening figure for Oracle shareholders is its steadily rising profit margin. Over the past four quarters, the company had an operating margin of 25.8%. Compare that with the previous four quarters, when Oracle had operating margins of only 20.2%. Executive Vice-President Gary Bloom thinks that the company can reach operating margins of 40% this year. "We're just at the beginning of margin improvement," says Bloom. The source of these dramatic profit improvements has been the companywide e-business initiatives that have let Oracle streamline its operations, and thus cut costs and improve productivity. For instance, the company now has an enterprise-wide system for managing customer contacts. Previously, the salesforce used a network that was different from the fulfillment and shipping network. By unifying these networks, salespeople don't have to duplicate the efforts of others in the organization, and thereby save time and money. At the beginning of the year, the company said that it expected the changeover to save $1.2 billion over the next four quarters. Just three months later, Chief Financial Officer Jeff Henley told analysts that Oracle will save nearly twice that by yearend. Better yet, Oracle is now selling the same enterprise e-business software that it used to enhance its own business. "We believe Oracle's internal success has caught the eye of senior executives at Oracle's current and potential customers," says Salomon analyst Herman. "Additionally, the company's continued focus of cutting out its corporate fat through the internal use of its own Internet applications should help drive the bottom line." In other words, using its own software, Oracle has proved that's it's possible to save a lot of money by buying your paper clips online. DE FACTO STANDARD. All this is quite a success story for a company that was supposed to be buried by the Internet in 1998. Back then, some experts argued that the database software market Oracle dominates would quickly erode as companies found cheaper and simpler ways of managing their data on the Web. Instead, the opposite happened -- after CEO Larry Ellison ordered an "Internetization" of his company. The result was Oracle 8i, a new version of his company's flagship product that can be managed via an Internet browser and could seamlessly integrate into a company's Web infrastructure so that all of that company's database functions can be done on the Web. Oracle 8i was an enormous success, and the database product has since become the de facto standard for B2B applications such as supply-chain management and customer response software, muscling aside such potential competitors as Sybase (SYBS), Microsoft (MSFT), and Informix (IFMX). The most ambitious B2B project to date, the recently announced auto-parts exchange that is a joint project of Ford (F), DaimlerChrysler (DCX), and General Motors (GM), will be built on Oracle's software. "The Oracle database has apparently become the standard for e-business," says Prudential analyst Douglas Crook. Thanks to the Net, Oracle is again a pure software company and loving its role in the hottest sector of the industry. Jaffe covers the markets for Business Week Online *Correction: The original version of this story erroneously reported that Oracle had gotten out of the consulting business. In response, Oracle contacted Business Week Online (which has corrected the story above) and provided the following information: "Oracle has a consulting force 13,000 strong and is an integral part of Oracle's strategy to help customers become an e-business. Our consulting practice, for example, has been instrumental in developing implementation programs that allow customers to achieve rapid implementations. In some cases, these implementations have been in as little as five days. These programs are used by Oracle consulting and numerous implementation partners, including the Big 5 consultants. The emphasis on rapid implementations and greater partner leverage have resulted in planned slower consulting growth than experienced in the past." |
