Oracle's Shaky Math

sales surged beyond expectations

Never known for reticence, Oracle celebrated with a victory lap and some trash-talking. CEO Larry Ellison slammed chief applications rival SAP's strategy and product road map, while Oracle slapped a banner across the front of its Web site proclaiming, "Oracle Grows 10x Faster Than SAP!" But Oracle's posturing fudges facts and obscures the reality that its growth may prove hard to sustain once the effects of its buying binge wear off.

Oracle's claim to be growing ten times faster than SAP rests on its application license sales, which rose from $127 million last year to $228 million in this year's first quarter, an 80 percent increase. (In SAP's most recent quarter, which ended two months before Oracle's, it reported software sales of $792 Million in U.S. dollars, an 8 percent increase.

However, Oracle's year-over-year results are an apples-to-oranges comparison, factoring in its January purchase of Siebel Systems. Oracle claims Siebel added only $31 million to its applications license revenue during the quarter, about a third of what Siebel traditionally racked up in sales. Some of the disparity comes from changes Oracle has made in how it allocates Siebel's sales, a portion of which are now being counted in middleware revenue, not applications.

Nailing down Oracle's organic growth is confounding Wall Street. Fueled by the strong first-quarter results and Oracle executives' bullish forecasts, Oracle's shares shot up to a 52-week high following its earnings report. Several analysts enthusiastically applauded. "There can be no doubt that Oracle has found its way," Cowen and Co. analyst Peter Goldmacher wrote in a research note headlined "Wow." UBS analyst Heather Bellini quipped that Oracle bears have "nothing left to growl about" and cited Oracle as one of her top picks for the year.

But a pair of conflicting reports from Citigroup illustrates the difficulty of interpreting Oracle's results. Citigroup's Oracle analysts endorsed Oracle's strategy and said it looks to be taking share from SAP while Citigroup's SAP analysts drew the opposite conclusion and argued that SAP is the company with faster organic growth. "Oracle is showing fundamental improvement and continuing momentum," Citigroup Oracle analyst Brent Thill wrote in his research note. "Existing customers are adding seats or embarking on new projects now that they have solidified their relationships within Oracle. From a competitive landscape perspective, we believe Oracle is taking share against SAP. We have seen Oracle's applications business come back alive over the past two quarters."

Meanwhile, Citigroup SAP analyst Marc Geall wrote in a separate report that by his calculations, factoring out acquisitions, Oracle's applications sales growth trails SAP's. While acknowledging that calculating organic growth is "a challenging and subjective process," he found little evidence for Oracle's claim to be winning market share away from its chief rival. Bernstein Research analyst Charles Di Bona downgraded Oracle after its earnings report, also citing concerns that "much of [Oracle's] growth is due to the optics of Oracle's recent acquisitions."

The case studies Oracle plugs are similarly slippery. In Oracle's earnings call, co-president Charles Phillips touted 88 head-to-head victories over SAP during the quarter, including wins at Electrolux, Lockheed Martin, Walt Disney World and U.S. Steel. One customer, jewelry retailer Zale Corp., was singled out as a prime example of Oracle's "winbacks" against SAP.

"We lost to SAP a year ago at Zales," Phillips said. "[SAP] made some promises we knew they couldn't deliver on. The projects failed. They now have a new CIO and they replaced the SAP product with Oracle retail products."

But Zales was already a heavy Oracle customer one that made plans to switch to SAP, then canceled them after a management shakeup. Zales has an extensive deployment of Oracle's financials applications and has for years relied on retail software from Retek, which Oracle acquired in April. Early last year, Zales signed with SAP to replace some of its Retek functionality. But before the project got beyond the planning stages, a management sweep that cleaned out all of Zales' top executives ushered in a new CIO, Mark Stone, who took the job in May. Zales immediately canceled all IT projects begun by the previous regime, according to SAP.

Zales' press representative declined to comment on its IT projects or to make IT executives available for this article. Beset by turmoil in its executive ranks and slumping sales, Zales is working on a turnaround and is reportedly considering going private. The company and is unlikely to embark on any major IT overhauls until its fate is less uncertain.

Oracle's characterization of Zales as a "failed" project, along with its growth claims and other jabs, have SAP frothing.

"Zales may have been a customer on paper, but they never got started from a software perspective," said SAP spokesman Bill Wohl. "[We're] up against a company that does not think that getting the truth out into the market is an important component of the story.

SAP doesn't dispute that it loses scores of potential new-business deals to Oracle each quarter, but it wins an equal number, Wohl argued. More significantly, SAP says it's not seeing the rip-and-replace conversions Oracle insinuates it's generating. In the fifteen months since Oracle launched its "Off SAP" campaign to convert SAP R/3 customers, Oracle hasn't rolled a single one, SAP claims.

"We have not seen a single SAP customer that has changed from being a fully implemented and live SAP customer and switched to Oracle solutions," Wohl said.

Oracle blankets discussions about conversations with a fog of announcements about new business wins over SAP, but its press office was unable to name any recent customer conversions. Asked for an example, Oracle cited McData, a storage networking vendor profiled in a conversion case study Oracle published in March. However, McData switched from SAP applications to Oracle's more than four years ago.

While hard data on the relative successes Oracle and SAP are having in their sales tug-of-war is elusive, it's clear that the heated rhetoric between the two vendors is approaching the boiling point. When SAP reports its quarterly results next month, expect to see some sharp elbows thrown Oracle's way.