Oracle Stumbles in the Application Race

Did the latest version of Oracle's ERP system cause its sales shortfall?
Joseph RadiganMarch 2, 2001

Oracle Corp.’s management blamed the weakening U.S. economy and clients’ reluctance to commit to new technology purchases for its bombshell announcement that its fiscal third quarter sales fell would fall short of forecasts when they are reported later this month.

The problems stalled new orders for the Redwood Shores, Calif., company’s customer relationship management (CRM) systems and supply chain management software.

With clients concerned about the weakening U.S. economy’s impact on their financial condition, they were hesitant before committing to purchases of the latest editions of Oracle’s software.

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But the company’s stumble may be a little more complicated. Certainly, the economic slowdown isn’t helping, and a more complete picture of the company’s financial condition will emerge once it releases its quarterly results on March 15. But Oracle didn’t help its cause with a delayed rollout of the latest upgrade, 11i, of its enterprise resource planning (ERP) system.

An Oracle spokeswoman said CFO Jeff Henley would not be available for an interview and that the company had disclosed all the facts pertaining to its sales disappointment in its conference call with analysts and investors on Thursday.

Byron Miller, an analyst with the market research firm Giga Information Group says, “I’ve been waiting for a correction in Oracle’s growth.” The company announced its 11i application series last May, but it did not have the products fully available until the past few weeks.

Oracle’s missteps are hardly unusual in the software industry. For almost as long as computer software has been around, developers have announced products well in advance of their general availability.

Some analysts who follow the company say that some of its recent problems are no more than the normal growing pains a software developer suffers when it extends its products into new markets. Oracle expanded from its core database market into the ERP arena years ago as a means of building upon its database sales.

Until the last few years, the company’s applications were primarily centered on the financial management and reporting aspects of ERP. At the same time, it relied on marketing alliances with other software firms for supply chain management and CRM features. In the last year or so, it decided to incorporate those functions into its own system, and that’s where it’s run into problems.

Oracle is also known for charging a premium for its database software, says Doug Lynn, an analyst with Meta Group. The premium can help drive revenue growth when business is good. But in the current weak economic environment, Oracle sales reps have been offering heavy discounts to keep orders coming on. The discounting is also acting as a brake upon top-line growth.

In addition, the company’s CEO, Larry Ellison, may have raised expectations to an unreasonable degree by boasting of the features in its 11i series and deriding products from the company’s rivals.

Two attendees at Oracle’s February Apps World conference in New Orleans said that while Ellison was proclaiming the product’s strengths, some of the Oracle customers and third-party systems integrators at the show were openly complaining about the problems they faced implementing the software.

Giga’s Miller says that in adding CRM and supply chain management applications to the broader ERP system, the 11i series also had to incorporate common data definitions so that customer and supplier data could be shared smoothly among end users in several departments at a client site. But Oracle was slow in writing the definitions and getting the bugs worked out of the system. As that process dragged on, customers slowed down their orders for the 11i system.

For example, in the supply chain management function, a purchasing manager might enter a purchase order onto the Web page of a business-to- business E-marketplace, says Timothy Tow, an analyst with the market research firm, Gartner Group. That same data has to then be stored in the database and retrieved in another format by an accounting employee in the accounts payable department.

Tow says sharing of data is a function that any supplier of an ERP system, such as Oracle or its competitors like SAP and PeopleSoft, needs. But adding these features is a time-consuming development process. Writing the software can be so difficult that a supplier like Oracle needs to install beta versions of the system at customer sites before selling it to the broader market.

“They cannot emulate the customer environment no matter how much they try,” Tow says.

It didn’t help that Oracle got bogged down in development delays as the economy weakened.

Mary O’Rourke, a securities analyst with A.G. Edwards, says that, at least for the short term, the weak economy is as much of a problem for Oracle as the slow product rollout. Oracle’s database sales, although they have not grown since last year, are still two-thirds of the company’s revenue.

“This is more of a database-demand problem than anything else,” she says. The database market has matured in the past few years, and for corporate clients that have already settled on a database system, a slowdown in the economy merely gives them an excuse to delay any upgrades to their existing installation.

While Oracle is dependent on application sales to drive its revenue growth, many of its applications sales are often sold to users of its databases. If customers won’t upgrade their database, then they’re not going to get a new ERP system, either.

Despite all the problems on the product side, Oracle seems to be maintaining tight financial controls on the expense lines in its income statement.

“On the operating line, they were doing well,” says Bob Becker, a securities analyst with Argus Research. “They’ve done a tremendous job of keeping their expenses contained.”

Becker says the operating margin in the third quarter will come in at 33 percent, compared to 31 percent in the year ago quarter.

But concerns still remain. Becker says, “We don’t know what’s going to happen in their fourth quarter of fiscal 2001 and the first quarter of fiscal 2002. Decision makers don’t know how much money they want to spend given the uncertainty in the economy. Right now their cost structure is well contained. So when the market does rebound, they’ll be in a pretty good position.”

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