Where Oracle’s Applications Stack Sees Red Ink, Its Customers See Opportunity

Lost amid the jubilance and “hip, hip, hurrays!” for Oracle’s recent third-quarter earnings announcement was that Oracle’s famous “Red Stack” of enterprise applications is bleeding into the red, and current (or prospective) Oracle customers should use that to their advantage.

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Sure, the first-ever quarterly cash dividend (5 cents per share!) was a nice touch given the economy, and Oracle’s year-over-year Q3 net income decline of 1 percent was tempered by an overall revenue increase of 2 percent, which delighted and surprised the financial analyst community.

CEO Larry Ellison, never one to miss taking shots at its biggest enterprise software competitor, proclaimed: “We’re better in applications than SAP.” (Oh, really?)

But when you peel back some layers of Oracle’s balance sheet, deep fissures can be found in Oracle’s applications business. Its acquired lines of ERP, CRM, BI and supply chain products, featuring PeopleSoft, JD Edwards, Siebel, Hyperion and many others, are in the midst of their own economic downturn.

In fact, Oracle’s overall Q3 financial good cheer was largely due to the contributions of its middleware and database business line, which is roughly double the size of the applications unit. As Jim Shepherd, SVP of research at AMR Research, points out in a report on Oracle’s earnings (registration required), while database and middleware software revenue grew 8 percent this quarter, applications software revenue was down 2 percent.

Compared with Q3 last year, Oracle’s new software license revenue—an important indicator of enterprise software vendors’ health—dropped 6 percent to $1.5 billion. (For the fiscal year to date, it’s dropped 13 percent.)

“It’s certainly not unusual for infrastructure software to hold up better in a recession,” writes Shepherd, “but Oracle’s new software license revenue in applications has been down for three quarters in a row.”

What’s somewhat ironic, of course, is that Oracle has spent the last several years (and billions of dollars) bulking up its applications portfolio through beefy acquisitions.

Corporate software buyers should pay close attention to Oracle’s declining application business for several reasons. The strengthening U.S. dollar and Oracle’s resultant foreign currency exchange-rate woes, coupled with general recessionary IT budget cuts, have cut into Oracle’s profits. And on the applications front, things aren’t likely to swing in Oracle’s favor any time soon. During the Q3 earnings call, Oracle co-President Safra Catz offered fourth-quarter guidance on new software license revenue that could plunge as much as 27 percent.

The timing of all this is beneficial for Oracle customers: The end of Oracle’s fiscal year arrives soon (May 31), and buyers may now have more leverage to sign very favorable end-of-year deals.

“Oracle provides the sweetest discounts and deals as it approaches its fiscal fourth quarter,” notes a March 2009 Forrester Research report (subscription required). “Forrester has seen indications that Oracle is displaying a growing willingness to provide incentives for new licenses, creative implementation proposals by Oracle Consulting, free training and vendor-led financing.”

Buyers may have even more fiscal leverage with their software salespeople as Oracle (and SAP, Microsoft and IBM, for that matter) works even harder to obtain corporate commitments to its all-inclusive “platform stacks,” notes the Forrester report. This could be one way for customers to get even better deals. (It’s also one way to achieve vendor lock-in, but that’s a different story.)

“In a recessionary economy,” states the Forrester report, “stack commitments may be the only way vendors can realistically produce growth from enterprise accounts.”