by Thomas Wailgum

Oracle Q1 Results: A Tale of Two Companies

Sep 17, 2009
Enterprise Applications

How and why Oracle "substantially improved" its profitability during a global recession.

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity….”

Charles Dickens elegantly assembled those words in A Tale of Two Cities. The incongruity of the world Dickens describes then applies perfectly to the first-quarter financial results the Oracle aristocracy delivered on Wednesday.

In looking at the numbers, it becomes clear that Oracle is trapped in the age of foolishness and epoch belief that shareholders are more important than customers, while those customers are in the worst of times and full of incredulity.

Oracle’s profits rose by 4 percent year-over-year to $1.12 billion, but revenue fell by 5 percent to $5.1 billion, as the IDG News Service reported. New software license sales fell 17 percent year-over-year to $1 billion, due to the fact that Oracle’s enterprise software customers have pulled back on purchasing new software.

A neat trick, did Oracle pull: Increasing year-over-year profits while revenues fell. Oracle President Safra Catz said in a statement that the vendor accomplished the feat by “substantially improving” its operating margins.

For instance, Oracle’s enterprise software maintenance- and support-related revenues grew 11 percent to $3.1 billion—against just $226 million in expenses. How’s that for profit margins?

Publicly-traded companies exist, theoretically, to serve their two masters: the customers who pay the bills and the shareholders who invest their monies.

But let’s not ignore the obvious: Most publicly-traded companies don’t have the lucrative cash cow that is software maintenance and support fees—with their 90 percent profit margins. Which is why Oracle can, without much effort, placate shareholders and The Street during this global recession, and ignore the plight of its cash-strapped customers crying “Where’s the value?!” with maintenance and support costs.

Said Catz on the Q1 results: “Our operating model continues to drive earnings for our stockholders.” You’re telling me! On a conference call not long ago, Catz said of the bulging maintenance fee revenues that “as the number gets bigger and bigger it’s really impossible for us to actually spend our way through it, and so in general that’s the sort of overriding thing that guides our margins.”

So on one hand you have the database and software company that purportedly serves enterprise customers. On the other, there’s the maintenance-collection agency that serves its shareholders.

Expect to hear more—not less—from Catz and her intense focus on Oracle’s numbers, as a recent Fortune profile makes clear. The former investment banker has had Larry Ellison’s ear for a while now, and he likes what she’s been saying. In fact, just a short time ago, Oracle’s stock was at an amazing 52-week high.

Even though Oracle has forecasted flat or decreased new software-license revenues for the near future, if I were an Oracle shareholder, I wouldn’t be too worried. It’s been the best of times for them.

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