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It's counting on the database system to keep sales humming. Some analysts agree, predicting a 20% stock-price gain over the next year
Given Oracle's penchant for juicy headlines the past year—an espionage suit against one rival, a strategic sucker punch against another, and $5 billion spent on a dozen acquisitions—it's easy to forget what the world's second-biggest software company actually does for a living.
Get ready for a reminder. At an event in Manhattan on July 11, Oracle (ORCL) co-President Charles Phillips and other company executives christened the first new version of the company's $10 billion-a-year database software since 2004.
The market has changed considerably since Oracle introduced version 10g. Databases are ballooning in size as companies process more transactions and analyze more information. "What was considered a big database three years ago is now considered a pipsqueak," says Andrew Mendelsohn, Oracle's senior vice-president for database development. Customers are increasingly storing new types of information like e-mail messages, maps, and videos as they comply with federal regulations and make use of new media. At the same time, they're trying to cut back on labor costs for information technology.
Oracle has developed features for 11g to address those trends. The new software is designed for easier installation, addressing pressures on IT departments to quickly change systems to support new products or manage mergers and acquisitions. "That's the No. 1 thing we're going to deal with in this release," Mendelsohn says. Also built into 11g is new data-compression technology to let companies stuff more information into supersized databases while spending less on disk space.
And 11g can cordon off information so it's only changeable by a CFO or auditor. "If you're concerned about security and compliance, then it's definitely a must-have," says Ari Kaplan, president of the Independent Oracle Users Group, which includes 20,000 members. Kaplan is also a senior consultant at Datalink (DTLK), which designs systems that use Oracle software. "Everything that happens in the database is put in a lockbox."
Bigger Stock Boost?
It's a product Oracle is counting on to keep its sales and stock price on the rise. Sales of databases and related middleware have been growing more than 15% a quarter, accounting for two-thirds of Oracle's $14.2 billion in software revenue for its fiscal year ended May 31. Some Wall Street analysts expect the new database system, Oracle 11g, to help fuel a 20% gain in stock price over the next year. That's on top of a 16% gain the shares have logged since the start of 2007.
In a positive sign, the 18% growth in sales of new database and middleware licenses that Oracle posted in its latest quarter offers "a strong indication" that corporate software spending isn't slowing down, according to a late June report by Brent Thill, Citigroup's (C) software research director (see BusinessWeek.com, 6/27/07, "Oracle's Mixed Message"). Now, "many investors are questioning if Oracle can deliver an encore," he said, raising his target for Oracle shares to $24 over the next 12 months; the shares closed July 11, up 26 cents, at $19.98.
Credit Suisse (CS) software analyst Jason Maynard also predicts Oracle's shares can touch $24 within a year, arguing in a June 26 research note that the company can improve on its impressive 46% operating margins. Morgan Stanley (MS) research analyst Peter Kuper says Oracle's database business, especially the lucrative technical support fees it collects from customers, have helped the company achieve some of the highest margins in the software business. "They're hitting levels few companies ever get to," he says.
In its just-ended fiscal year, Oracle booked $9.5 billion in database and middleware revenue. It also generated $4.7 billion in revenue from applications software, the result of a two-and-a-half year buyout binge of PeopleSoft, Siebel Systems, and about 30 other companies. The pitch to investors along the way has been this: As Oracle adds applications that manage human resources, sales, manufacturing, and other operations, sales of that software pull along more installations of its flagship database, which underpins those programs.
Partly as a result, Oracle keeps adding market share. The company controlled more than 47% of the $15.2 billion database market in 2006, according to market research company Gartner (IT). That's way ahead of IBM's (IBM) roughly 21% share and Microsoft's (MSFT) 17.4%. Oracle's Mendelsohn says the company's dominant position on computers that run the open-source Linux operating system has helped the market share gains. Oracle also has been investing in expanding its business through U.S. computer resellers to reach more small and midsized companies. At the other end of the scale, Oracle recently inked large database deals with China Mobile (CHL), FedEx (FDX), and Daewoo Securities.
The Action in Middleware
But there are challenges. Microsoft's SQL Server database is capturing a bigger slice of the market—its share grew by 28% in 2006, compared with 15% growth for Oracle, Gartner says—as more companies use the Windows operating system and other Microsoft products for key computing tasks. Meanwhile, IBM has made efforts to scale down its DB2 database to appeal to customers with more modest needs. And cheap, open-source databases from MySQL and other companies have risen in popularity (see BusinessWeek.com, 6/26/07, "The Worth of Open Source? Open Question").
Oracle is trying hard to complement its database business by acquiring and developing more middleware, the software that binds other programs together. Oracle reports database and middleware sales together. "The middleware business is getting to the size where it's really moving the needle now," CEO Larry Ellison said during Oracle's last conference call with analysts.
It was a rare stick-to-your-knitting performance by Ellison. For much of the past year, he's been more apt to spend time deprecating SAP, filing a lurid espionage suit against that German rival (see BusinessWeek.com, 7/4/07, "SAP's TomorrowNow Troubles"), and undercutting Red Hat's (RHT) Linux business by selling support for the open-source operating system at a fraction of the price. For investors, a renewed emphasis on the basics could make for an even better growth story.