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TBR: Channel management Oracle's greatest challenge 22 April, 2008 On the verge of completing the long-awaited BEA acquisition, Oracle is emerging as the only enterprise software vendor with a market leadership position across all three key enterprise software segments: database, middleware and applications. Oracle is currently No. 1 and No. 2 in database and applications, respectively, and has emerged as the No. 3 player in middleware behind Microsoft and IBM. Oracle CEO Larry Ellison has stated his intention for Oracle to be the top player in all three segments. One potential barrier to Oracle's growth plan is a slowdown in the U.S. economy. However, TBR believes that from a business and cash flow standpoint, the company is very well-positioned to weather a slowdown in the U.S. economy, and is better-positioned to pick up new business or to acquire competitors than other vendors. In 1Q08, Oracle experienced a slowdown in year-to-year applications revenue growth in the Americas, to 0.8 percent on $252 million. Database and middleware new license revenue, however, increased 24.3 percent in the United States to $476 million in 1Q08, indicating that Oracle has the potential to capitalize on the different business cycles for its software segments. The company's free cash flow has increased to $6.99 billion for the trailing four quarters, up 48 percent year-to-year, while cash and cash equivalents on the balance sheet have increased over 60 percent to $8.4 billion.
A second barrier to growth is Oracle's long-standing problems with its partner programs. The company intends to drive 50 percent of license revenue through partners; however, it still relies on its direct sales team to drive most of the revenue, and the indirect channel only contributes 44 percent of new license revenue. In addition, several key Oracle executives managing alliances and the channel departed in 1Q08, leaving the future of current programs somewhat in doubt. Oracle Worldwide Alliances and Channels Vice President Doug Kennedy was rapidly replaced by long-time Oracle platform executive Judson Althoff, and North American Channel Head Rauline Ochs was replaced by two executives who will split Ochs' responsibilities. TBR believes channel management is Oracle's greatest challenge; the volume of software license revenue the channel must drive to reach 50 percent is non-trivial. Of the $6.9 billion in trailing 12-month software license revenue, Oracle would need to shift nearly $550 million from direct sales to indirect channels to balance the contribution percentages. TBR believes the challenge is made more difficult as Oracle attempts to restart growth in software license sales in the current difficult climate. www.tbri.com
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