FOOL CONFERENCE CALL
By Dale Wettlaufer (MF Raleigh)
ANN ARBOR, Mich. (March 13, 1997) -- After the market closed today, Oracle announced results for its fiscal third quarter, which ended February 28. Revenues increased 35% to $1.37 billion from $1.02 billion in the same period last year. Net income for the period increased 32% to $193 million, or $0.29 per share (excluding a one-time charge of $37 million related to the acquisition of Datalogix), compared to net income of $146 million, or $0.22 per share, in the same period last year.
RESULTS BY GEOGRAPHICAL MARKET
Oracle reported strong growth in all of its major geographic regions, despite a 4 percentage-point negative currency translation during the third quarter. Quarterly sales increased 39% in local currencies, with Asia Pacific particularly impacted by a weaker yen relative to the dollar. Oracle Americas reported the greatest geographic revenue growth, up 40%, followed by Asia Pacific, up 32%, and EMEA (Europe, Middle East and Africa), up 28%, versus the same period last year. In local currency, EMEA sales were up 34%.
There has not been any noticeable weakening of sales in Japan. The plan there is for growth in the 50% to 60% range (measured in Yen), and sales are meeting that plan.
In the Americas, the business plan called for some growth in expenses through Q3 but then revenue growth after that.
Growth in Europe was much improved in Q3. France is improving somewhat but is still slow; no one is doing very well there. Spain is also slow. Business in the UK, Italy, and parts of Scandinavia is quite good. Oracle now has new management in place in virtually every European market area. In Germany, the current managing director has announced his retirement but will stay on until that position can be filled. Belgium is the only top leadership slot that is open. Europe had a strong Q4 last year, so they will have a challenge in front of them to match that. On the other hand, Release 10.7 of Oracle applications is now available in Europe, and that should increase customer interest there.
RESULTS BY PRODUCT CATEGORY
Overall license sales in the third quarter increased 29% year-to-year, led by 61% growth in Applications license revenue. Oracle services (Support, Consulting and Education) grew by 41% as compared to Q3 of fiscal 1996.
Sales of server products was up 32% in the quarter, the same as the year-to-date rate. Tools sales were down 9%. Sales of applications was up 61%. By platform, UNIX sales were up 33%, desktop sales up 39%, and proprietary systems down 18%. Sales of database products for the NT platform are up 201% year-to-date, and Oracle continues to gain market share on that platform. On the NT platform, sales of enterprise [high-end] products contribute twice as much to revenues as sales of lower-end work-group products do. The point is that even on the NT platform, Oracle is finding that customers want the additional features and capabilities of the enterprise product.
The Vertical applications roll-out is going very well, and competitors such as SAP have no real answer to what Oracle can offer. For example, Land O' Lakes, Inc. selected the Oracle CPG (consumer packaged goods) suite, that will enable Land O' Lakes to more closely integrate with suppliers, partners and customers to manufacture and deliver products quickly and efficiently to meet market demand. The CPG suite has shipped to approximately 20 clients already. Phillips Petroleum selected the Oracle Energy suite of integrated business-software applications. Oracle Energy has been shipping for some time now.
The new Banking Vertical will be selling on June 1. The Telecommunications Vertical group is still putting together its plan, but it will eventually be a big, big product -- perhaps second only to Oracles offerings for government.
The strategy is to have four global sales teams for the Vertical suites, each team having specific expertise in a particular business. Those teams will be supported by technical resource teams.
Management does not agree with the concerns of some analysts about the impact of Microsoft's SQL Server product. Oracle has maintained its market share and has not experienced pricing pressure, except in a few instances where Informix has acted out of desperation.
Oracle is not losing market share to Informix. In no instance has Informix won a large contract away from Oracle with their new product, and there are a number of instances in which Oracle has won contracts on which Informix has competed. According to Oracle, there are no large customers running Informix's Universal Server product.
According to management, Oracle8 will be a very powerful offering. There are approximately 170 customers beta-testing Oracle8 now, and the product is scheduled to ship in June. The company will be providing weekly bulletins to customers describing the product's advantages. Oracle8 will meet market needs. It has object-relational capabilities that can handle encapsulated data as objects as well as "pure" objects. Oracle8 can also manage very-large data arrays. You will see an evolving object-relational technology with versions 8.1 and 8.2. So far, 53% of beta customers are exploiting the very-large data capabilities of Oracle8, as compared with 47% who are exploiting the object-relational technology.
Moreover, Oracle has many other strong new offerings -- Vertical suites and Web Forms, for example -- that are generating strong interest with customers. The Oracle Web Forms tools, which will run on corporate intranets using a Web browser, promise to be very popular and should contribute to Q4. There is also strong interest in the "thin client" model, with its lower cost of ownership. This will be a major differentiator in the marketplace for Oracle -- the ability to deploy on thin clients.
Oracle has had every application sales person come to the U.S. recently for training on the new applications products so that they will know how to sell all of them effectively. The company is training the database people on new products, as well.
The applications business is meeting management's expectations. The second and third quarters have shown "pretty normalized" growth. As the "thin client" takes off, business will be even better. Peoplesoft, for example, has nothing comparable to offer.
There may be some cannibalization of sales of some of Oracle's other products by the company's newer NT offerings, but mostly what Oracle sees is new customers who move up to NT and as a result become interested in learning about how to build and use a database in their business. Also, many customers who migrate to NT still prefer to run Oracle's enterprise products on that platform, due to the added features of the enterprise products. Altogether, NT accounts for approximately 15% to 16% of total sales -- or about 20% to 25% as large as Unix sales. The multiplatform capability of Oracle is a big advantage, because many customers operate on multiple platforms currently.
Management had previously stated that the company would slow the rate of growth in hiring somewhat to trim internal costs, and that occurred in Q3. Headcount increased 5.5% sequentially, as compared with a company average of 8.5% growth over the previous three quarters. The slower rate of growth in headcount will not affect revenue growth.
There were no end-of-quarter "heroics" that occurred in Q3. Customers do try sometimes to wait until the very end of the quarter in hopes that they can secure a special deal, but Oracle offered no bonuses or discounts or anything like that. Days sales outstanding (DSO) stood at 73 days versus 74 days last year.
Ray Lane, Oracle's President and Chief Operating Officer, addressed rumors that he might be leaving Oracle. He said that he had no such plans and that as long as the Board and Larry treat him as well as they have in the past, he is at Oracle to stay.
The tax rate for the third quarter was 36%, two points higher than the year-ago period. That rate should decline in the coming year, and the company's guidance is to use a tax rate of 35% for FY98. That will help net margin.
Oracle has not seen any slowing down of customers' purchasing decisions in light of the possibility of moving from mainframes to the desktop or the "thin client" infrastructure. That is because by April all of Oracle's applications will run on the thin client as well as on the "heavy" desktop, so customers can have their choice. Also, the pending roll-out of Oracle8 is not affecting sales of Oracle7.3 at all, because the upgrade is very straightforward -- no reason to defer until Oracle8 debuts.
Nor are customers delaying decisions because of "Year 2000" concerns. If anything, that has accelerated Oracle's business because the company already has solutions in place. Of course if some businesses were to shift their purchasing budgets to hire a bunch of COBOL programmers to fix their legacy systems, that could hurt sales; but the major businesses already have their Y2K plans in operation. If anything, the transition to the EMU [European Monetary Unit] could be more of an issue than Y2K.
The fourth quarter is always Oracle's strongest, and Q4 for this fiscal year "feels very good." Management is also "very excited" about FY98.
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