Technology

Oracle's Squeeze Play for Profits


Software giant Oracle (ORCL) has blown hot and cold over the years, but thanks to strong results in its database business and an active M&A strategy, Ellison & Co. is hot again. Oracle's results for its fiscal fourth quarter, announced June 29, showed a 26% increase in revenues to $3.88 billion, and a 3% increase in net income to $1.02 billion. In non-GAAP (generally accepted accounting principles) terms, net income was up 35%.

Corporate-application revenues gained a strong 52%, reflecting income brought in with Oracle's acquisition of rival PeopleSoft in January. Oracle founder and Chief Executive Lawrence Ellison sat down with BusinessWeek writers and editors on June 29 to talk over Oracle's strategy and issues of import in the tech industry. Here's a summary of his comments:

How Oracle was able to integrate PeopleSoft into its operations so quickly

We had 18 months to think about it. We had a clear plan. A lot of things were done in 30 days, including integrating the two salesforces. The secret to these mergers is to make the hard decisions and move quickly.

The problem with a lot of mergers in the tech industry is they're not real mergers. People don't eliminate duplication of effort. We wanted to get the economies immediately. We watch how GE (GE) does it. They have a clear plan and rapid decision-making.

On acquisition plans

We have no plans to buy anything that doesn't contribute to our five-year plan to grow profitability by 20% per year. We won't do anything to jeopardize those targets.

If we do a big acquisition, it would have to be accretive. We had 41% operating margins last year. PeopleSoft's margins were 8%-9%. We're a good operator. We can buy a company like PeopleSoft and move it up to higher profit margins. If we can buy them at the right price and execute right, there are dozens of companies we're looking at [see BW Online, 6/30/05, "Larry Ellison's Roving Eye"].

On running a tight ship

We watch every penny. That's really what makes us different from our Silicon Valley brethren. We're really trying to build a GE culture that watches expenses ruthlessly. I think we can get to 50% [operating margins] if we want to, but it's not obvious to me we want to. But we can get to 45%. I'm expecting to get margins up another point this year.

How Oracle has fared against rival SAP (SAP) during the PeopleSoft merger

We have very good growth in applications. We have 24,000 customers. If they took 10 of our customers, that's not a lot. I wouldn't call it a hemorrhage. If that's the best they can do, I wouldn't say we're running much of a risk.

On threats from open-source software

MySQL [an open-source database] is not terribly threatening to us. Open-source software wins if it's better, or if it gets a lot of support from the industry. The Apache Web server beat Microsoft (MSFT) because it was better. Linux has had a lot of support from IBM (IBM), Oracle, Intel (INTC), and Hewlett Packard (HPQ).

MySQL has no similar support from the industry. They'll hurt Microsoft, in the low end of the database market, long before they'll hurt us.

On software piracy in China

We were smart not to complain publicly about piracy. As the economy matures, there will be more and more people willing to pay for our software. It's not about enforcement. It's about a gradual cultural change.

Microsoft went a different way, and they have complained. But they should be grateful. It has helped them maintain their monopolies. If Microsoft had been successful at slowing piracy in China, they'd have a competitor by now. But the free versions of Windows and Office squeezed out competition.

On competition in the tech industry

This is not a tide that lifts all ships now. The strong are getting stronger, and the weak are getting weaker.

On what he calls the "consolidation phase" in the software industry

I'm just as excited about the industry. The entrepreneurial phase was very interesting. But the consolidation phase is very interesting, too.

I think of this as the GE operational-excellence phase. Alfred Sloan was the consolidator in the auto industry. Ford (F) had been the early winner, but General Motors (GM) got bigger.

History repeats itself. It happened in railroads and cars. Now it's happening in software. And there, we're the consolidator. The magic in the software industry is called scale.

The big challenge for the tech industry

The big problem is data fragmentation. It's ludicrous that we don't have a national health-care database. If you had one, you'd be able to find out which drugs work and which don't. People would have their records at their fingertips, wherever they are.

We have a national financial and credit database, but not a health-care database. America has its priorities right. What's more important, your life or shopping? Obviously, shopping is more important.

We should set up a health-care database. The way we'd deal with privacy concerns is you'd have the choice to opt in or opt out.


Steve Ballmer, Power Forward
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