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http://www.businessweek.com/technology/content/jul2007/tc20070711_640213.htm?campaign_id=yhoo
July 12, 2007
Given Oracle's penchant for juicy
headlines the past year—an espionage suit against one rival, a strategic
sucker punch against another, and $5 billion spent on a dozen
acquisitions—it's easy to forget what the world's second-biggest software
company actually does for a living.
Get ready for a reminder. At an
event in
The market has changed
considerably since Oracle introduced version 10g. Databases are ballooning in
size as companies process more transactions and analyze more information.
"What was considered a big database three years ago is now considered a
pipsqueak," says Andrew
Mendelsohn, Oracle's senior vice-president for
database development. Customers are increasingly storing new types of information
like e-mail messages, maps, and videos as they comply with federal regulations
and make use of new media. At the same time, they're trying to cut back on
labor costs for information technology.
Oracle has developed features for
11g to address those trends. The new software is designed for easier
installation, addressing pressures on IT departments to quickly change systems
to support new products or manage mergers and acquisitions. "That's the No.
1 thing we're going to deal with in this release," Mendelsohn
says. Also built into 11g is new data-compression technology to let companies
stuff more information into supersized databases
while spending less on disk space.
And 11g can cordon off information
so it's only changeable by a CFO or auditor. "If you're concerned about
security and compliance, then it's definitely a must-have," says Ari
Kaplan, president of the Independent Oracle Users Group, which includes 20,000
members. Kaplan is also a senior consultant at Datalink (DTLK),
which designs systems that use Oracle software. "Everything that happens
in the database is put in a lockbox."
It's a product Oracle is counting
on to keep its sales and stock price on the rise. Sales of databases and
related middleware have been growing more than 15% a quarter, accounting for
two-thirds of Oracle's $14.2 billion in software revenue for its fiscal year
ended May 31. Some Wall Street analysts expect the new database system, Oracle
11g, to help fuel a 20% gain in stock price over the next year. That's on top
of a 16% gain the shares have logged since the start of 2007.
In a positive sign, the 18%
growth in sales of new database and middleware licenses that Oracle posted in
its latest quarter offers "a strong indication" that corporate
software spending isn't slowing down, according to a late June report by Brent Thill, Citigroup's (C)
software research director (see BusinessWeek.com, 6/27/07, "Oracle's
Mixed Message"). Now, "many investors are questioning if Oracle
can deliver an encore," he said, raising his target for Oracle shares to
$24 over the next 12 months; the shares closed July 11, up 26 cents, at $19.98.
Credit Suisse (CS)
software analyst Jason
Maynard also predicts Oracle's shares can touch $24 within a year, arguing
in a June 26 research note that the company can improve on its impressive 46%
operating margins. Morgan Stanley (MS)
research analyst Peter
Kuper says Oracle's database business, especially
the lucrative technical support fees it collects from customers, have helped
the company achieve some of the highest margins in the software business.
"They're hitting levels few companies ever get to," he says.
In its just-ended fiscal year,
Oracle booked $9.5 billion in database and middleware revenue. It also
generated $4.7 billion in revenue from applications software, the result of a
two-and-a-half year buyout binge of PeopleSoft, Siebel Systems, and about 30
other companies. The pitch to investors along the way has been this: As Oracle
adds applications that manage human resources, sales, manufacturing, and other
operations, sales of that software pull along more installations of its
flagship database, which underpins those programs.
Partly as a result, Oracle keeps
adding market share. The company controlled more than 47% of the $15.2 billion
database market in 2006, according to market research company Gartner (IT).
That's way ahead of IBM's (IBM)
roughly 21% share and Microsoft's (MSFT)
17.4%. Oracle's Mendelsohn says the company's
dominant position on computers that run the open-source Linux operating system
has helped the market share gains. Oracle also has been investing in expanding
its business through
But there are challenges.
Microsoft's SQL Server database is capturing a bigger slice of the
market—its share grew by 28% in 2006, compared with 15% growth for
Oracle, Gartner says—as more companies use the Windows operating system
and other Microsoft products for key computing tasks. Meanwhile, IBM has made
efforts to scale down its DB2 database to appeal to customers with more modest
needs. And cheap, open-source databases from MySQL
and other companies have risen in popularity (see BusinessWeek.com, 6/26/07, "The
Worth of Open Source? Open Question").
Oracle is trying hard to
complement its database business by acquiring and developing more middleware,
the software that binds other programs together. Oracle reports database and
middleware sales together. "The middleware business is getting to the size
where it's really moving the needle now," CEO Larry
Ellison said during Oracle's last conference call with analysts.
It was a rare
stick-to-your-knitting performance by Ellison. For much of the past year, he's
been more apt to spend time deprecating SAP, filing a lurid espionage suit
against that German rival (see BusinessWeek.com, 7/4/07, "SAP's TomorrowNow Troubles"),
and undercutting Red Hat's (RHT)
Linux business by selling support for the open-source operating system at a
fraction of the price. For investors, a renewed emphasis on the basics could
make for an even better growth story.
Ricadela
is a writer for BusinessWeek.com in
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