Henley: Yes. We don't offer client/server anymore. We call [our initiative] "Nothing but Net."
Jeff Henley, Oracle's chief financial officer and executive vice president, spoke to The Motley Fool about the company's soaring Internet business, cost saving plans, and push to stay on the technological edge.
"This whole shift to the Internet, I think, is a classic case of Oracle really getting it probably a couple of years ahead of most of our competitors. It has paid huge dividends and I think will continue to pay."
Henley: Our database business is our oldest and largest line of business, but even that has changed a lot. We've rebuilt it around e-business, so in some respects we think of it as a semi-new business. We're also in the applications business, both in the back office or enterprise resource planning (ERP) side, and in the front office or customer relationship management (CRM) side. And we've added a lot of e-commerce applications around the traditional ERP business, and we have a whole new CRM suite that's very much geared toward the Web. We also have a new business called applications hosting. In all three areas the big thrust is really helping companies transform themselves into e-businesses. That's really where we see the big growth.
TMF: All of your applications and products are now Web-enabled?
TMF: Did getting your applications Web-enabled help you avoid the struggles many of the other ERP vendors faced last year?
Henley: It was a down market but we were gaining share because of our new architecture. Also, we started early in the CRM business so that's given us some headway. So our newer-generation technology helped, and then extensions into the supply chain and the CRM area helped as well. That's really why we've had better applications results over the last year than our competitors.
TMF: You've made several significant CRM acquisitions over the last 24 months. Tell us about Oracle's CRM business.
Henley: We certainly acquired a handful of modules, but we've built most of them. We tried to establish a broad suite of applications as quick as we could, so in some cases buying was quicker than trying to build. We built over 30 modules. The ones we bought we've integrated back into the suite because we believe strongly that the market is going to move to buying suites, not individual products. It's important to have a broad set that's fully integrated.
"We've had five quarters now of margin expansion, the last quarter being the largest, and we think there's much more to come."
Henley: The CRM portion of applications is growing the fastest. In Europe we have supply chain and procurement [applications] that are also growing [at a] triple-digit [rate], so there are several segments of the applications business that are the fastest growing. CRM is the biggest opportunity. It's kind of a green field right now. We think that could be a very, very large number and grow at a very high rate for the coming year.
TMF: You developed an ERP business, then bought and built a range of CRM products. What applications are around the next bend?
Henley: There are truly a lot of special modules we can build, but we haven't defined them. We keep adding, and we'll just keep providing customers a broader and broader solution both in the front and back office.
TMF: Oracle's earnings and margin growth really impressed investors last quarter. Tell us about those improvements and what your goals are.
Henley: One of the things we've announced is that we're turning Oracle internally into an e-business company. We think that within 18 months to 24 months that we can save up to $1 billion annually. We think that will be a great testimonial toward the full integration, full use of this entire suite. So the earnings growth will help our stock but it will also be a great testimonial to customers as to the value of reinventing their entire company.
We've had five quarters now of margin expansion, the last quarter being the largest, and we think there's much more to come. We're definitely seeing some incremental improvements along the way of a several-year project. Again we've probably got another year and a half, maybe two, to finish everything.
TMF: Can you give an example of an operation you will take online to save money and become more efficient?
Henley: One that's very easy to understand is just information technology. We have a project to basically collapse all of our 60 countries onto a single data center here in the U.S. That's going to save probably $250 million of the $1 billion. It's a lot of work to get there, but having a real simple central location to service 60 countries gives us efficiency. Also, as we roll out new applications or upgrade applications, we can instantly offer that to every Oracle employee in the world.
We've also launched an Internet store that will be much like Cisco's (Nasdaq: CSCO) [method of selling products online]. We've figured about the same numbers: We think about 80% of our transactions can be conducted online when it's fully rolled out. We have 6,000 people around the world in call centers and we think we can improve the productivity of the service organization probably 50%. There are massive opportunities in sales and service as we change out all of our old legacy CRM applications to the new breed of CRM that we offer our customers, and centralize all that customer data.
TMF: Investors don't typically think of Oracle as a business-to-business e-commerce company. They think of companies such as Commerce One (Nasdaq: CMRC). Tell us about the opportunities surrounding the supply chain, AutoExchange partnership with Ford (NYSE: F). What other business-to-business projects are in the works?
Henley: Well, we're a big, complex company so there's a lot of things people don't understand about us. We definitely have an offering to compete with Commerce One and some of the other guys. I think what we bring to the table is size. We're global. Also, we've been around a long time. We have, I think, more scalable products than Commerce One or anybody. We think the whole exchange area is going to be enormous, but we think we have a lot more to offer than some of the niche players.
TMF: Any other upcoming business-to-business partnerships?
Henley: We think we can do a similar thing in a number of other vertical markets. The only thing we can say now is that we're in discussion with a number of other industry players.
TMF: Oracle is often criticized for the inconsistency of its earnings. How do you react when you hear these criticisms? Does Oracle need to become more consistent, or is that just a short-term view?
Henley: You know, in the nine years that I've been here we've missed one quarter of earnings. I think that's amazingly consistent on meeting or beating our EPS expectations. I think what people are referring to is that our license revenue growth tends to fluctuate. In other words, in one year every quarter isn't exactly the same. I think what they would like to see is more consistency because it's true that it has some affect on our income, although it hasn't caused us to miss quarters.
People always look at a slow quarter as a sign of the future, so there's a lot of legitimate reasons why people would like to see [consistency]. It jumps around more than we would like, but the reality is that I think you're buying Oracle for a multiyear play and so we always say that one quarter doesn't make a trend. There will always probably be a little lumpiness because we do a lot of our deals at the end of the quarter. We are trying smooth that out a little bit. I think there are some ways we can make it a little better, but I'm not sure our license number is ever going to be perfect. It's the nature of the enterprise market. But I think when you hear we have lumpiness, investors aren't quite specific enough. I think what they mean is license revenue growth rate is a little lumpy, not that our earnings have been that unpredictable.
TMF: What are the measures of performance you would stress for investors to key on?
Henley: Obviously, sales growth is always important, and you always have to understand what's making up the growth. Certainly license revenue is very important for a software company to focus on. The idea is to try to look through one quarter since one quarter doesn't always make a trend. Try to get a sense for what that's doing.... I think it still gets back to market position. Oracle is in some interesting, important markets, it's a leader, it's gaining share.... We don't want to be a little player in a big market or a little market. We want to be number one or number two, hopefully number one, in a big, important, growing market.
The last thing is technology change. For investors it can be hard to understand what's going on sometimes. It's hard for companies to understand. The thing is, do you have vision, do you have the leadership that's able to see change? This whole shift to the Internet, I think, is a classic case of Oracle really getting it probably a couple of years ahead of most of our competitors. It has paid huge dividends and I think will continue to pay. So sometimes you can read the balance sheets and financial statements, and sometimes you have to do a little research, and sometimes you have to go look at track records. We've got a 20-year track record so I think that it's not a guarantee but it should give people a little more confidence that we know a little bit about the future and will do a fair job of anticipating it, maybe better than some of the smaller guys who got on a quick ride but can't make the transition.
TMF: Thank you
Henley: Yes. We don't offer client/server anymore. We call [our initiative] "Nothing but Net."