Oracle had a lot to prove on Sept. 19, when it came time to report first-quarter results. Three months earlier, the software maker had posted a banner fourth quarter. A month after that, Oracle's chief rival SAP (SAP) had a rare earnings stumble, announcing results that fell short of expectations. The outlook for Oracle (ORCL) was brightening, and it was showing up in the stock. The shares were solidly in the vicinity of $16 for the first time since January, 2002.
But by mid-September, some analysts were bracing for disappointment. After all, Oracle had a reputation for bad fiscal first quarters, a reflection of the typically slow summer months. The company had failed to meet its own overly bullish forecasts for three years running, and it had even raised estimates after an upbeat fourth quarter.
WHAT SHARE? The cautiousness wasn't warranted after all. Oracle reported its best first quarter in four years, with gains in every area of its business. New license revenue for applications, the software that runs every part of a company's business from accounting to call centers, was up 80%. New license revenue from middleware, which connects disparate pieces of software, rose 56%. And even in the slower-growing core database business, new license sales gained an impressive 10%. The stock rose 13% in extended trading to close at $18.28—a high not seen since August, 2001.
Executives didn't miss the opportunity to crow. "This was our strongest first-quarter license revenue in more than five years, and there is no doubt we are gaining market share," Safra Catz, chief financial officer and co-president, told analysts on a conference call. Her boss, Chief Executive Larry Ellison, went on a long riff about SAP's reliance on its own programming language vs. Oracle's open-standards, Java-based approach, and its reluctance to do big deals. He boldly proclaimed that SAP would have to abandon both. "Until they do, we will continue to gain market share quarter after quarter, year after year," Ellison said.
That may be putting it a bit strongly, but there's no doubt Oracle is getting more credit for a bold strategy of buying its way into the applications business, an area where it stumbled on its own. There's still caution. After all, Oracle spent $20 billion to get into such a strong position. Even with the big deals squarely in the rear-view mirror, there are questions about whether the momentum will last. And although several Wall Street analysts like Brent Thill of Citigroup (C) and Jason Maynard of Credit Suisse First Boston agree that the company is taking share from SAP, it's unclear how much. After all, the two are pretty much competing in every single deal, so every win could be considered a market share gain.
BETTER MANAGED. SAP's next few quarters will be a big clue to how hard Oracle is charging. Although the German software maker had a disappointing second quarter, it didn't reduce its bullish revenue increases of 13% to 15% for the year. If it makes those numbers, some analysts say, it's clearly not hurting too badly.
Still, give Ellison & Co. credit: They've managed a flurry of acquisitions better than anyone expected. At the outset, the point of the deals was to get lucrative, ongoing maintenance revenues from inherited customers who would be reluctant to switch vendors. But along the way, Oracle also got better software for managing such operations as human resources and call centers and software aimed at specific industries like retail and banking.
Jim Shepherd, senior vice-president of AMR Research, says the company has even done an admirable job of retaining top management talent from the companies it has purchased. "Overall, Oracle is being better managed than it has ever been," he says. Of course, he notes, it doesn't hurt that there's a dearth of hot new startups in a market increasingly dominated by the four big business software makers: Oracle, SAP, Microsoft (MSFT), and IBM (IBM).
UNPRECEDENTED. Perhaps the most impressive feat has been customer retention. During the bitter 18-month battle for PeopleSoft, many analysts and customers fretted that Oracle would cease supporting PeopleSoft's products. It hasn't. Similarly, when Oracle touted its vision for "Fusion," a strategy of knitting together the spoils of its acquisition spree into a new suite of software, customers worried that they would be forced to upgrade to something totally different, like it or not. Oracle countered with announcements that it would support PeopleSoft, JD Edwards, and other purchased applications for as long as customers wanted to stay with them.
Still, even the analysts who applaud Oracle's work so far say it's too early to tell whether Ellison will be able to accomplish the goal of building a larger applications business than SAP. Because these large companies don't report revenue by product, it's hard to tell what is driving the growth and hard to know whether that growth will continue.
The whole approach started with one of the few hostile acquisition bids in the software business when Oracle first set its sights on PeopleSoft. And even still, this kind of an acquisition spree is unprecedented in a business whose core assets are smart people who can easily run for the doors. "It's too early to know whether a strategy like this will work, because no one has tried it," Shepherd says. "Five or seven years out we'll see if this is sustainable."
Lacy is a reporter for BusinessWeek.com in Silicon Valley
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