While some industry observers are wondering whether Oracle can keep growing at its torrid pace, the company is showing no indications of slowing down. Last week, the software giant announced quarterly earnings and revenue that exceeded the forecasts of financial analysts. Oracle also reported exceptionally strong growth in sales in its applications group, of which JD Edwards is a part.
In what has become something of a tradition, Oracle chalked up financial figures last week that closed the distance between it and its archrival SAP. For the first quarter of its fiscal year 2008, the company announced that its net income grew by 25 percent to $840 million. In similar fashion, revenues grew by a strong 26 percent to $4.5 billion. By contrast, SAP grew its net income by 8 percent and revenues by 10 percent in its most recent quarterly report.
One area where Oracle was a big outperformer was in sales of new software licenses. For the quarter, the vendor grew new license revenues by 35 percent to $1.1 billion. By contrast, SAP reported 18 percent license revenue growth in its latest quarter. That said, it should be noted that a sizable chunk of Oracle’s growth came from vendors it acquired over the course of the last several months. Sales from these vendors – which include Agile, Hyperion, MetaSolv, and Stellent – did not contribute to Oracle’s new license revenue one year ago. By themselves, Agile and Hyperion added $87 million in sales to Oracle’s coffers during the last quarter. Those sales made up roughly 10 points of Oracle’s 35 percent new license revenue growth. This illustrates how much of Oracle’s growth versus SAP is being fueled by acquisitions.
Since most of Oracle’s acquisitions have been application and middleware vendors, much of the vendor’s software license growth is coming from those segments. In the latest quarter, sales of new applications grew by 65 percent to $376 million. As for the middleware segment, Oracle Co-President Charles Phillips stated that new license sales grew by a whopping 129 percent. On the heels of that revelation, CEO Larry Ellison claimed that if Oracle’s middleware business keeps growing at the same rate, it will challenge IBM as the number one middleware vendor by the end of this year. While such a challenge is probably not in the cards for 2007, Oracle is gaining ground on IBM and could continue to do so if it keeps buying middleware companies at its current rate.
Can Oracle continue its shopping streak in a market where funding to do new deals may be getting harder to find? At this moment, there is no sign that the investment banking community is worried about lending money to the well-oiled acquisition machine in Redwood Shores. Oracle’s balance sheet is still in good shape and the vendor is generating truckloads of cash that it could use to underwrite new deals. Indeed, the company has thrown off $6.2 billion in free cash flow over the last four quarters. That kind of money could make it easy for Oracle to add more vendors to its burgeoning bullpen.
In short, there appears to be little stopping Oracle from growing further. If anything could stand in its way, it would probably be Oracle itself. As those other industry observers that I mentioned at the start of this article often say, extended periods of growth like the one Oracle is engineering have a way of undermining themselves. So far, however, Oracle has shown that it can manage 20 percent growth without creating bloated organization charts or equally bloated cost structures. While the company’s winning streak will end someday, it does not look like that will be any time in the near future.