Analysts Question Oracle's 'Surround SAP' StrategyBy Renee Boucher Ferguson | Posted 06-27-2007
Powering the stellar fourth quarter numbers Oracle announced yesterdaytotal revenues up 17 percent to 5.8 billion, beating the Street estimate of $5.6 billionis an acquisition strategy that seems, on the surface at least, to be growing revenue and successfully making inroads into SAP's customer base.
During the earnings call yesterday, Oracle's CEO Larry Ellison outlined his company's "Surround SAP" strategy, which has seen Oracle acquire about 30 companies in the last three years, including PeopleSoft in 2005. That buy saw Oracle become the second largest application provider, bested only by SAP, which they vowed to best with third-party applications and middleware sales.
But several financial analysts question Oracle's strategy to grow its applications business minus input from acquisitions. And while the company's fourth quarter revenues appear to be proving out Ellison's tactics, a closer examination points to a slightly different story.
"Application license sales fell short of both our and consensus expectations," wrote Bernstein Research analyst Charles Di Bona in a June 27 research note. "Application license revenue of $726 million was a hair below our $727 million estimate and below consensus of $736 million.
"We continue to have concerns about the organic growth rates of Oracle's core business absent ongoing acquisitions and about Oracle's necessary reliance on acquisitions to meet its stated EPS [earnings per share] goals, even as we are increasingly comfortable with management's ability to integrate the operations of such acquisitions," wrote Di Bona.
Di Bona notes that while application revenue grew 13.3 percent, the rate drops significantly to 5.5 percent if benefits from currency exchange rates and $26 million in revenue from Hyperion, which Oracle acquired in April, are removed from consideration. He suggests that Oracle's true growth rate in its applications business hovers somewhere less than 5.2 per-cent year-over-year.
Oracle is selling more applications by acquiring best-of-breed vendors, Di Bona said, but the company doesn't include the costs associated with those acquisitions in its earnings calculations.
Ellison assured investors and analysts participating in the earnings call that the company will continue with its acquisition strategyeffectively beefing up its "Surround SAP" strategy with vertically aligned applications company purchases. The goal really is to surround SAP's existing customers with add-on applications that Oracle has acquiredtransportation management, product lifecycle management or sales force management, for example to get a foothold in SAP shops and sell more apps along with the middleware necessary to glue them all together.
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