Can Oracle's Database 11g Deliver?

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High Margins

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.

Ricadela is a writer for BusinessWeek.com in Silicon Valley.