Oracle: continued growth and a demanding future

David Mitchell, SVP IT Research

If I may borrow the phrase that my friend Richard Holway uses to describe UK companies that deliver consistently good results, Oracle is in danger of becoming boring.

Oracle set out five years ago to deliver a minimum 20% compound growth in non-GAAP EPS, and for the past four years has been exceeding that target - posting a CAGR of 26%. The continuation of the acquisition strategy, together with good fiscal management, has generated consistent returns and the bravado that once characterised it has faded, for the most part. The growth in free cash flow being generated continues to impress, with the 4Q08 figure growing 38% to $7.159 billion.

In terms of the basic results, full-year 2008 revenues grew 25% to reach $22.4 billion, new software licences grew 28% to $7.5 billion, and software licence updates and product support grew 24% to $10.3 billion. Since the software licence updates and product support figure represents a recurring subscription revenue stream, crossing the $10 billion annual threshold is significant and is a good insulator from macro-economic changes. Within EMEA the annual growth for database and middleware was 33% (or 20% on a constant currency basis), and applications grew at 46% (35% on a constant currency basis). Within APAC the situation was slightly different, with database and middleware only growing at 5% on a constant currency basis - the only weakish part of the overall story.

In the question and answer session at the end of the basic call, Larry Ellison was asked whether he anticipated the proportion of overall revenues that were delivered by Oracle On Demand to increase above its current level. His response was fascinating, stating that "Q4 was the first quarter we actually made money in the on-demand business." This will generate a whole series of questions in the weeks ahead. It's been assumed that the on demand or software as a service (SaaS) business model would gradually begin to usurp the traditional licence model, as customers drove the market in that direction. While this may well be one potential scenario, the SaaS advocates must also face the reality that the traditional business model also has steam left in it, generating continued profitable growth when not many in the SaaS business are able to. Of course, it is still possible that the SaaS industry as a whole will mature to the stage where it delivers the strong profitability that its poster children do - but a lot of lessons still need to be learned from the more traditional players.

Of course, many are also looking to see whether the next quarters are going to see the growth continue. In the current macro-economic climate posting continued growth is a challenge, and it will be a doubly difficult challenge for Oracle - given that 1Q08 was a strong quarter for Oracle. Even with this context Safra Catz still talked in her 1Q09 guidance about revenue growth in the 18-20% range. Clearly a lot can change in the weeks and months ahead, but the indications are still looking good that Oracle will continue to move ahead.