Oracle Still Waiting for Apps to Live Up to Potential
Oracle turned its sales and marketing pitches on full blast this week at its AppsWorld conference in San Diego, but the noise failed to drown out the fact that the software maker's applications business remains troubled. And the economy is only compounding its woes.
In recent years, the world's second-largest software maker has been pushing its applications as a high-growth opportunity. But the business has stumbled because of numerous software bugs. Now that its applications business has matured, Oracle says its suite of applications is resonating with customers. But the numbers seem to contradict the hype at the three-day conference, whose registered 9,800 attendees is off from roughly 11,000 last year.
For the past two quarters, Oracle's revenue from new application licenses and updates declined by about 25%. That's a larger drop than Oracle's overall new-license and update revenue, which declined between 15% and 18% during those quarters. Oracle's applications aren't as important to the company as its core database business, which also has been suffering, but applications are still significant because they contribute about a quarter of the company's total revenue.
Battling a Bad Rep
Past versions of Oracle's applications software were plagued by bugs, which aren't necessarily unusual in new software. The problem was that Oracle set up customers to expect well-tested products, said Harry Tse, the Yankee Group's vice president of enterprise software. To make matters worse, in the past couple of years Oracle alienated its independent applications users group by declining to send executives to its conference.
Oracle has started mending ties with its users group and has improved its applications, which are now widely recognized as solid and stable. But customers forced to grapple with too may bugs don't easily forgive and forget. Because of past problems, Oracle isn't seen as a leader in business apps, Tse said.
Indeed, Oracle is still battling the perception that for a couple of years its products were not as good as best of breed, said Brendan Barnicle, an analyst with Pacific Crest Securities, who has a market perform rating on Oracle. His firm hasn't done any banking with Oracle.
While Oracle's products have improved, upgrading to the latest version remains difficult. Upgrades are free but take considerable time and work. Customers often add new products during an upgrade, which brings in revenue for Oracle.
Upgrades Become an Uphill Fight
But with money tight, customers are having more trouble justifying the cost of upgrades and new products. During one session, members of the audience were asked to raise their hand if they wanted to upgrade to the latest version of Oracle's applications but were having trouble justifying the expense. About 10% raised their hands.
Others expressed frustration with their upgrades, and even the moderators acknowledged that patching is a way of life.
Indeed, Oracle Chairman and CEO Larry Ellison acknowledged such obstacles in his keynote address, a combination sales pitch and handholding session. "It
upgrading is really difficult if you've never done it before," said Ellison, who suggested some people might view that as an exciting opportunity to learn something new. "That learning could be more exciting than you'd like it to be," he warned.
Ellison's solution: Pay Oracle a fixed fee to do the upgrade for you. And not stopping there, he added a pitch for Oracle's latest new hope -- hosting applications for customers.
There is one factor, however, that could fuel customer upgrades and lead to more revenue growth, said Barnicle. The clock is ticking on the deadline for servicing previous versions. Oracle will cut off support in June 2003, which means customers may have to pay extra if they have a problem with older versions after that. But that date has already changed once -- from December 2002 -- so customers may not yet be feeling a crunch.
Oracle now has 1,500 customers on its latest applications product, called 11i, out of a total 12,000 application customers. That's an increase from 1,400 at the end of its February quarter and 1,080 at the end of its November quarter.
Customers typically wait as long as they can to upgrade -- unless there's a new function they need that's available only in the latest version, said Tse of the Yankee Group.
Suite Idea
Oracle officials, meanwhile, contend things are different now for its apps business for another reason beyond just the quality of its products.Concerned with costs, customers are showing more interest in Oracle because it offers a wide array of products, including applications for financials, human resources and customer relationship management, eliminating additional integration costs. By comparison,
Siebel Systems
(SEBL)
, offers primarily CRM products, requiring integration with financial and other systems from other vendors.
In a "huge change" from last year, "the idea of the suite has really caught on," said Ron Wohl, executive vice president of e-business suite market development.
Third-party vendors report that Oracle's financial apps are the strongest in its lineup; CRM is low on the list but looks poised to grow.
John McPeake, an analyst with Prudential Securities, said he believes the integrated suite of applications should allow Oracle to take some share. "I wouldn't say it's too late" for Oracle applications, said McPeake, who has a buy rating on Oracle. His firm hasn't done any banking business with Oracle.
But McPeake pointed to one discouraging sign: Oracle announced no significant new customers at its conference in San Diego. That's probably because although third-party vendors at the conference were putting a positive face on Oracle's apps, they also said deals have been smaller and increased interest has yet to translate into sales.
Ellison said during a question and answer period following his keynote speech Tuesday that Oracle is assuming the economy doesn't get any better in the next three months. "Businesses are still being very cautious with their capital spending."
