Charles Phillips came to
from Morgan Stanley three years ago and has quickly become one of the three most powerful executives in the company.
As president, a title he shares with CFO Safra Catz, Phillips heads Oracle's sales, marketing and consulting organizations and is responsible for corporate strategy. His profile at the company rose as Oracle undertook an $18 billion acquisition binge that included software powerhouses PeopleSoft, Siebel Systems, JD Edwards and more.
In an interview last week in his 11th-floor Redwood City, Calif., office, Phillips talked about the company's acquisition strategy (think smaller) and his plans to go head-to-head with rival
by developing vertical expertise in key industries.
The Street.com: Your stock had a bit of a run-up just prior to earnings but is still trading below the levels of early 2004 while the Nasdaq as a whole has done much better. If you were still on Wall Street, what rating would you have on this stock? Be honest.
: Most logical people would conclude that if we're making $2 billion more in pretax profit than we were two years ago, revenue is up, we have a better brand name and more customers and the stock hasn't moved, it's an opportunity. There's not much we can do about the stock price. But we can do something about the profit growth and the revenue growth and those have been there. That's what we're focused on. If the last 1,000 years of markets are correct, the expectation is that sooner or later the stock will respond.
Oracle is a significantly different company than it was a few years ago, why aren't the markets responding more favorably?
You said the magic words -- significantly different. My conclusion, after talking to hundreds and hundreds of investors, is that we did change our strategy and change is viewed as a potential risk on Wall Street.
Oracle's acquisition strategy seems to be moving into a new phase, buying smaller companies, with emphasis on open source, instead of megabuys like PeopleSoft. How do the latest acquisitions fit into Oracle's growth plans? Is this indeed a shift, or is it merely a new phase of the same strategy?
Same strategy, different phase. We are in phase two. Phase one was about getting scale ... which allows you to charge less but still be more profitable. We had to get scale first and we did it with PeopleSoft. Phase two is about going forward and adding industry dimensions that no one is dominant in.
When you talk about industry applications, it's a bunch of niche players or
applications built in-house. It's wide open. Collectively, those customers are spending way more on
home-grown systems than they are on ERP
enterprise resource planning. We want to harness four or five big industries with packaged applications and get telecom companies and banking companies to quit building their own systems. We'll be moving into industries we are already strong in.
Banking will be huge for us; they spend $30 billion a year on IT and a lot of that is building stuff, and a lot of them are tired of doing it. Others are telecom, the public sector, health care, high tech and retail.
Sounds like there won't be a deal the size of PeopleSoft or Siebel in the foreseeable future.
The larger deals are probably behind us. I won't rule anything out down the road, but for the most part what's left to be bought for our strategy in these areas are smaller companies. That's the opportunity; we can go in and take pieces of technology and quickly become a big player in those areas.
If investors were trying to read your mind and say "Where can I find a company that could be an acquisition target for Oracle?" what sectors would you tell them to look at?
Well, I'm not sure I want investors reading my mind. We are targeting the industries I've talked about and will execute from there.
Would Retek be a good model to look at?
Yes. Retek worked well for us. We bought something where they had best-of-breed technology, and -- this is key -- they had the people who had the domain expertise and knew the retail industry well.
How does open source fit into that strategy?
It's just another choice for customers. Some prefer it, but we view it as a positive for Oracle. Open source lets people quickly learn about various technologies and get the skill sets they need. If they are serious about deploying and using those applications they'll want a commercial-grade product, they'll want global support, all the things you can't get from open source. Then they come to Oracle. It's sending us new customers and educating people we probably couldn't reach on our own. Having more people learn about Internet standards and Java and not
is good for us.
Can you tell us anything about the M&A discussion that many people believed took place between JBoss and Oracle?
No, I can't talk about that.
Growth in Oracle's core database business seems to have slowed down in the last few quarters. Is this a worrisome trend?
It's actually not that much slower if you adjust for currency. We had a 9-percentage-point hit in Europe from currency. Nothing we can do about it. I think it's a business that in any given quarter it will bound around some, but the growth is there. We are gaining market share in units because we have new low-end products we didn't have two years ago. The unit volume is even faster than the dollar growth and those turn in to big deals later once you seed the customer and they start using your technology.
The core business has oscillated in a range, but there is no trend line that shows we are slowing down. You should look at this on a trailing 12-month basis and if you do, our results have been consistent.
Will Oracle hire a new CFO or will co-President Safra Catz continue in that role?
We don't have a search on; for the foreseeable future we have a CFO and that's been working out well.
CEO Larry Ellison is a relatively young and apparently healthy man, but succession is an important issue for any large, public company. What is Oracle doing about this?
That is the board's purview, of course. There's no expectation of him leaving any time soon. He's engaged in the business aggressively day to day. It's not something I wake up and worry about every morning.
Does the increasing importance of recurring subscription revenue (as opposed to license revenue) mean investors should view software companies differently? Is there an over-emphasis on license revenue?
The business has changed -- the analysts haven't. People can't analyze the business the same way they did 10 years ago when license was 70% of the revenue stream. It was just under 50% in the last quarter because the industry has evolved. Investors are also missing what it means to have a certain number of customers. In our industry, unlike selling widgets, customers stay for decades ... that gives us a steady revenue stream, plus cross-sell and upsell opportunities. The value of that is hard to calculate, but it is much larger than people think it is.
Will On Demand, or Software as a Service, became the predominant mode of software delivery?
I don't think that's going to happen in the next five years, maybe even 10. These systems take a long time to change. You can't extrapolate too much from
. They have a very simple application. It will shift in that direction but very slowly.
Oracle has been talking about the new fusion apps that blend the best features from PeopleSoft, Retek, JD Edwards and other acquisitions with Oracle's own software. Will the fusion version of the existing Oracle e-business suite be markedly different?
No. We are not starting with a blank sheet of paper. The existing data model is the best in the world and we plan to move it over. The idea is to keep the best things; look across the applications and see what features people actually use and repurpose on a more modern platform.
Since you're moving the data model, can we conclude that the task of building the fusion applications may not be as difficult as some people think?
Will the new applications support non-Oracle databases, such as SQL Server and DB2 and non-Oracle middleware?
Middleware, yes; the databases are under evaluation.