Oracle vs. SAP: The next frontier

To one up Oracle, SAP must indicate a strong performance for its quarter ending next week, according to Bruce Richardson, vice president of research at Boston-based AMR Research.

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Oracle has posted it third-quarter results for the period ending February 28. With the PeopleSoft acquisition having closed this quarter, analysts were eagerly awaiting the revenue numbers for applications, especially for new software licenses.


 

Oracle versus SAP rivals only the Red Sox and Yankees: great theater with high emotions on all sides.
Bruce Richardson,
senior vice president of researchAMR Research Inc.

Total revenue came in at $2.95B, up 18% from the year earlier period. Database sales continue to make up the bulk of the company's revenue. These products accounted for $2.099B in revenue. A closer look at applications shows new license sales were $152M, up 9% from the same period last year, but down significantly from the $215M for 2Q05.

The application license business showed relatively steady growth for FY04, progressing from $107M, to $137M, to $140M, to $231M over the four quarters for that fiscal year. It's been incredibly lumpy this year. License sales for the three quarters so far have been $69M, $215M, and $152M. The good news, though, is that revenue from services, software updates, and product support has shown steady growth. At some point, Oracle is likely to have a $1B quarter for the total applications business.

PeopleSoft adds only $31M in license sales

Oracle completed the PeopleSoft deal on December 28; the quarter's numbers reflected the last few days of December and the first two months of the year. PeopleSoft had a blowout quarter, with $270M in new license sales. Unfortunately, most of that came before the acquisition was final. The revenue that Oracle could recognize was only $31M.

The PeopleSoft contribution should increase with time, as Oracle starts to recognize some of PeopleSoft's deferred revenue from licenses and maintenance. This adds up to $635M; now, whether the deal actually proves to be worth more than the $10.7B purchase price remains to be seen.

Retek to have modest impact on license revenues

The other news from Oracle this week was its successful bid for Retek at $670M in cash. As Tad Piper, analyst at PiperJaffray pointed out, this works out to more than $3M per Retek customer. The number gets a bit lower when you subtract Oracle's previous ownership stake and Retek's cash. Nonetheless, it is a healthy premium given that Retek's revenue has been near flat for the past two years.

Did SAP's counterbid cause Oracle to pay too much? In my view, yes.
Bruce Richardson,
senior vice president of researchAMR Research Inc.

A quick review of Retek's recent 10-K shows that licenses accounted for $58.5M and $59.9M out of total revenue of $174M and $168M for 2004 and 2003, respectively. In 2002, Retek reported license revenue of $101.4M on sales of $192M.

A more intriguing number was contract value for software. Starting with the first quarter of last year, the quarterly contract values reported were $9.7M, $6.4M, $18.1M, and $15.7M, respectively. Retek generates most of its revenue from its existing base of more than 200 customers. Last year, Retek stated the number of new customers in two of the four quarterly announcements. There were two new customers in 1Q04, and five in 4Q04. No mention was made in the middle periods.

Price aside, Retek is strategic to Oracle because of the pull-through effect. Most Retek customers use Oracle's database and run the financial and human resources software. Plus, Oracle didn't want SAP to box it out of the retail market. Did SAP's counterbid cause Oracle to pay too much? In my view, yes.

Spotlight turns to SAP

If SAP announces strong performance for the quarter ending next week, Oracle's recent license results and the premium prices paid for the PeopleSoft and Retek acquisitions will be under more intense scrutiny by Wall Street. While we have only anecdotal insights on how well SAP is doing, interviews with customers, prospects, and others indicate that SAP is aggressively pursuing some very big deals, especially in the U.S. market.

SAP needs a strong quarter. It wants to create the impression that it is no longer a two-horse race, that Oracle is less of a factor because of the distractions of trying to integrate PeopleSoft, two J.D. Edwards product lines, and now Retek. A miss or under-performance by SAP gives Oracle more breathing room. We'll know more in a week or so.

Who's the next acquisition target?

In our view, Oracle versus SAP rivals only the Red Sox and Yankees: great theater with high emotions on all sides. Like their baseball peers, the two software sluggers are looking to bolster their lineups with important additions, often at the expense of the other. Even better, they are not the only two teams. Don't forget that IBM and Microsoft are aggressively acquiring companies to round out their rosters, too.

A couple of reporters have called to ask about potential acquisition targets. I don't know who is in play, but I can pick a couple of categories that I would bet that all four are eyeing. These include infrastructure (enterprise and small to midsize), business intelligence/consolidation, and application vendors targeting the service industries, especially Healthcare, Public Sector, and Financial Services.

Longer term, there is going to be a play for companies providing management software and services for supporting Service-Oriented Architectures (SOAs). This category will include Web services management, security, and software and network management. It's too early to name a market leader, though I bet readers will send me their nominations.

As always, I welcome your comments and ideas—brichardson@amrresearch.com


 

All materials copyright © 2004 of the AMR Research Inc.

AMR Research, Inc. is a source of analysis and advice for executives responsible for delivering performance enhancement and cost savings aided by technology. AMR Research aggregates best practices from leading global companies and provides tailored, actionable advice and research reports to every client. More information is available at www.amrresearch.com.

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