5 Burning Questions Surrounding Oracle Right Now

Some troubling, lingering questions are casting a cloud over Larry Ellison & Co.'s current party.

Right before the big holiday break in mid-December, Oracle executives somewhat quietly delivered the vendor's second quarter (FY 2010) results.

Christmas came a bit early for Oracle: Revenue increased 4 percent and net income leapt 12 percent, when compared to the same period last year.

Even new software-license revenues, which during Q1 2010 declined a whopping 17 percent, grew a surprising 2 percent in this second quarter. CEO Larry Ellison and his lieutenants offered up rosy snapshots of growth and stability amid loads of cash ($8.4 billion in free cash flow generated during previous 12 months) and a positive outlook to the end of the Sun Microsystems acquisition saga.

Fa-la-la-la-la...la-la-la-larry!

Those highlights certainly would be just cause for a raucous celebration around Larry's Lagoon. But Oracle execs must address several lingering questions and disconcerting, systemic issues now—or there could be a lot less celebrating going on in the vicinity of Redwood Shores, Calif.

Maintenance Margin Madness?

The Q2 results are real ($5.9 billion in total revenues), but are they spectacular? Not really. Peel back a layer, and something starts to stink a bit: Those maintenance and support fees that customers pony up tallied an astounding $3.2 billion in revenues last quarter, against just $264 million in related expenses. The profit margin, for those scoring at home, is 92 percent.

That, obviously, is not the problem.

The problem, as detailed by Informationweek's Bob Evans, is that after accounting for Oracle's operating expenses, the maintenance business achieved $3 billion in profitability while the rest of the company's operations lost $800 million.

In this quarter, then, the cash cow that is software maintenance has never been more obvious. But what if many of customers start declining their Oracle renewals and take their business elsewhere?

Contented or Locked-In Customers?

The maintenance quandary leads to the next vital question: Whether customers are contented cows, satisfied with the proverbial Oracle teat, or just locked-in heifers that are too lazy and well-fenced-in to amble down to another farmer's grounds?

Oracle executives, in delivering the second-quarter results, staunchly contend it's the former, claiming that its enterprise software and database customers have been renewing at record rates, though they didn't provide any supporting data.

But locked-in can only work as a business model for so long, especially as the depth and breadth of new enterprise software options (ERP, CRM, BI and supply chain apps) expand even more in 2010 and beyond.

Why Isn't Oracle's Stock Flying High?

I'm certainly no Wall Street expert and do not understand the intricacies of how financial analysts value Oracle's share price. (For the record: I've tried in the past, but no financial analyst has ever agreed to speak with me on how they assign "Buys" or "Sells" to Oracle and other high-tech vendors.)

But since the dotcom implosion, the ORCL share price has hovered in the teens and twenties, which always struck me as oddly and even embarrassingly low.

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