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Tuesday, April 11, 2006

The Industry Has Changed But The Analysts Haven’t: Chuck Phillips

I have been highlighting the lukewarm response of the market towards Oracle’s performance. As I pointed out earlier, despite oracle's massive acquisitions & encouraging financial results,the stock is trading at its 15 year low P/E levels. Charles Phillips outlines Oracle’s acquisition strategy now in its second phase (think smaller) and his plans to develop vertical expertise in key industries. As I see it,some of his response in this interview are indeed insightful – but interestingly I did not see him talking anything about value from the customer perspective and how its recent strategy had helped customers, reduced TCO, portfolio rationalization, continued support etc. I firmly believe that the world would begin to look at oracle from a different lens, only if they begin to relate acknowledged customer benefits arising out of their grandiose strategy. Excerpts from his response with some edits with comments added:

- He believes that by making $2 billion more in pretax profit than two years ago, given the fact revenue is up, a better brand name and more customers and if the stock hasn't moved, it's an opportunity. If the last 1,000 years of markets are correct, the expectation is that sooner or later the stock will respond.(The issue is on future growth - one that comes out of already existing business, the second stream of business coming out of business from bought out components, third newer set of customers embracing oracle owing to all their acquisitions and changed startegy)

- We did change our strategy and change is viewed as a potential risk on Wall Street. (Agreed - most of oracle's moves are indeed gusty and trend setting)

- Oracle’s acquisition strategy is same but in a different phase now. Phase one was about getting scale, which allows you to charge less but still be more profitable (need more demonstrable facts here). Phase two is about going forward and adding industry dimensions that no one is dominant in.

- Industry applications are dominated by a bunch of niche players or [applications built] in-house and the space is wide open. Collectively, some vertical customers are spending way more on [home-grown systems] than they are on ERP [enterprise resource planning]. Oracle’s strategy is to harness four or five big industries with packaged applications and get telecom companies and banking companies to quit building their own systems. Banking spends $30 billion a year on IT and a lot of that is building stuff, and a lot of them are tired of doing it. Others are telecom, the public sector, health care, high tech and retail. ( Call this a strategy for an acknowledge player in the packaged application space!! I see for example packages like Siebel, acquired by Oracle have verticalised aggressively – one would like to see how this is plan to be leveraged, also SAP is heavily into verticalization for a long time.)

- While saying that the larger deals are probably behind them , he highlights that for most part of what's left to be bought for its strategy in verticalised areas are smaller companies- the plan is to take pieces of technology and quickly become a big player in those areas.

- He maintains that the declining growth in Oracle's core database may be an aberration but future shall see more growth. The unit volume is even faster than the dollar growth and those turn in to big deals later once you seed the customer and they start using your technology.

- Today’s industries require new models of analysis – The old model of 70% of the revenue stream coming from license sale may not be valid. It was just under 50% in the last quarter because the industry has evolved. He highlights having a very larger customer opportunities provides oracle with lot more opportunities – (One can hear investors asking for more data and customer asking for enhanced benefits owing to this).

- On Demand, or Software as a Service, may not happen in the next five years, maybe even 10. These systems take a long time to change and the shift in that direction but very slowly.( I agree)

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Sadagopan's Weblog on Emerging Technologies, Trends,Thoughts, Ideas & Cyberworld
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