Prepared by Morgan Stanley Dean Witter analyst Charles E. Phillips
NASDAQ: ORCLPrice (Oct. 3, 2000): $69.5052-Week Range: $92.24-21
Oracle held its analyst meeting on Oct. 3, 2000. Here are the conclusions made after attending the meeting:
- Applications should accelerate this quarter.
- Oracle has reached a critical number of reference sites; Oracle 11i is at an unprecedented level and growing.
- The product portfolio is the strongest ever.
- License revenue is likely to accelerate.
- Large company CEOs and boards of directors are cycling through Oracle headquarters to hear the e-business story and to see how Oracle spiked its margins so quickly.
- Margin improvement is likely to continue for another year.
- The new application server is a natural add-on sale for the installed base and is available now.
- The stock was down nine points.
There was nothing said at the meeting that was negative, but of course, pundit spin is an independent variable as it should be. In our view, there was no incremental information that would sway anyone one way or the other, so we expect most analysts to reiterate preexisting opinions. We think nothing will be settled until the scorecard comes in with the company’s December earnings report. In the meantime, reasonable people can differ on what the same facts mean, but we think they look fairly positive and the train is about to leave the station on this one.
The analyst meeting was held in conjunction with the Oracle Open World user conference. More than 30,000 people checked into the user conference on site while 7,000 joined in virtually through a Web cast.
It's show time—11i eBusiness Suite
We believe Oracle’s new application suite has the right architecture, the right footprint, and the right message. It’s now execution time. The pipeline is there, the demos have finally been completed, and the company now has 27 reference sites for some credibility.
The reference count should be up to 50 by the end of the quarter and that should cover most industries and geographies. Some key references in the pipeline include Agilent, which is deploying 11i globally, UPS and General Electric, which were sizable supply chain deals for Oracle (and which are expected to go live in November and January 2001, respectively), and Citibank (multiyear strategic rollout).
These were all necessary steps in the ramp-up process and now momentum is building, according to the company. The Oracle message of simplicity leading to efficiency and insight is one that plays well at large and small organizations around the globe.
By reducing the complexity of information architecture, reducing the amount of integration points, and creating a single data model for key elements (customers, suppliers, employees, etc.), companies gain in two ways. They lower their cost and they have more information. Fragmented systems and data destroy insight and create a need for a separate data warehouse to reaggregate the data and convert it to a consistent format.
Technical and nontechnical managers can identify with the message. Simplified, consolidated suites are easier to manage than a collection of point solutions. The suite must have a minimum threshold of features in key areas, after which the integration costs are the key variable.
Customer visit center is full
Judging from the activity at the Oracle CVC, we think the market is interested in 11i. The number of senior executives and, in some cases, entire boards of directors coming in to learn about Oracle’s vision for the online enterprise is sharply accelerating.
Oracle currently has 52 announced exchanges and the company expects to make more exchange announcements in the near term. Expected announcements include a financial services exchange with a multibillion dollar spend and a definitive agreement on the Covisint exchange in the auto industry.
By geographic segments, the company has one exchange in Japan, three exchanges in Latin America, 14 exchanges in the United States and Canada, 17 exchanges in EMEA, and 17 exchanges in Asia Pacific. These exchanges are capturing revenue in one of three ways: licenses, equity, and revenue share agreements. Of the announced exchanges, 65 percent of the revenue is derived from license-based agreements, 25 percent from equity-based agreements, and 15 percent from revenue share agreements.
Supply chain products
The company announced the availability dates for the following products:
- Supply Chain Exchange (Real Time Visibility)—Available today
- Change Order Management—October 2000
- Logistics Exchange—December 2000
According to management, the services business is on track to turn positive this quarter as license revenue accelerates. Consulting growth slowed over the last year as a result of:
- A focus on profitable engagements which dampened consulting growth in exchange for margin improvement.
- The strategic decision to improve the Oracle ecosystem by giving more business to partners.
- A delayed impact to the consulting business from the Y2K application sales slowdown.
- Success with the Fast Forward program which resulted in decreased implementation times—implementations ranged anywhere from 5 days to 5 weeks.
We expect the consulting growth to accelerate modestly over the next few quarters. Consulting demand tends to lag software license sales by about six months, which now supports the consulting business while comparisons are getting easier. The book-to-bill has been positive for two quarters.
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Business in Europe remains soft but management believes it is too early to write off this region. We had the opportunity to speak with the head of EMEA, who pointed out that Poland, Spain, and the UK are working well right now; however, as large deals float between countries from quarter to quarter, country-by-country performance remains uncertain. According to the company, the iProcurement product is a great leadoff sale in EMEA, and the sales force is still picking at the SAP customer base.
Recent announcements on the exchange front in EMEA fair well for the region, although no revenue has been generated from these exchanges to date. The significant opportunity in establishing exchange presence is the upsell of additional applications to the participants and the B2B credibility that comes along with the headlines. In this region, 17 exchanges have been signed in the last six months and nine of the exchanges are currently live.
Given the weak market environment, Oracle believes that potential growth areas for EMEA include B2B exchanges, CRM growth, and Database/Applications penetration in the mid market. The company believes there is a good opportunity to improve top-line growth in Europe before the end of the year. As a result, management has been conservative with regard to cutting expenses in this region.
9i application server—An obvious upgrade
Lost in the shuffle were some significant product announcements. The one of immediate import is the application server. Oracle shipped an application server that is really a database-caching product.
Pehong Chen of Broadvision likes to say the secret to throughput in computer science is about three things: caching, caching, and caching. Whether it is network caching (Inktomi), memory cashing (Windows swap files), or data (Oracle Application Server), creating copies of data for fast reference while retaining one master copy of record is a well-known design concept.
Oracle will introduce database caching to its large installed base of users, who can always use more performance. The caching product is expected to speed up existing applications with no change, which is particularly beneficial to Web sites. The company issued a challenge by offering $1 million to anyone who installed the product and did not realize at least a three times improvement in performance. In testing, the company stated that gains are more like 20 to 50 times so the three times seems to be a safe bet.
In addition to the application server, the company announced the Oracle 9i database, which will not ship until April 2001 or so. The company has a strong leadership position in database and can afford to announce products this far ahead of shipment. The primary new feature on the database side is application clustering—using a clustering configuration to cache data for improved performance. Unlike past attempts, the product will require no changes to the underlying application to benefit from the clustering technology.
The benchmarks showed near linear scalability as additional nodes were added to the cluster. The product represents the next evolution of what was once called Oracle Parallel Server. But Parallel Server was never widely adopted because applications had to be changed to explicitly support it. With that onerous requirement removed, an increase in performance, and improved hardware support, Oracle clustering technology could become more widely adopted.
Of the two main products, the caching technology has, in our view, the greater potential and we think it could add $100 million in revenue over the next year.
We reiterate our Strong Buy and our estimates remain unchanged. Oracle has a large opportunity to step up to the next level and it’s theirs to lose. We recommend purchase of Oracle shares at these levels.
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