Since Oracle Corp. (Redwood Shores, CA) launched its acquisition strategy 21 months ago with the purchase of PeopleSoft and JD Edwards, the company has played the role of financial underachiever to archrival SAP AG's market-share juggernaut. While SAP (Walldorf, Germany) recorded a succession of major double-digit growth quarters -- allowing the company to build its market share to 43% in 2005 compared to 19% for Oracle, according to AMR Research -- Oracle often struggled to achieve organic growth in its applications business.
Following release of their most recent financial results, however, the rivals' roles have reversed, at least temporarily. During its most recent quarter, ended May 31, Oracle saw new applications software license revenue grow 83% compared to the same period a year before. That helped the company increase total applications software revenues by 66% during the quarter.
SAP, on the other hand, reported lower-than-expected results during its quarter, ended June 30. Blaming a failure to translate a number of booked orders into revenue, SAP reported that overall revenue for the quarter grew by 9% and software revenue was up just 8% compared to the year-earlier quarter. Those figures fell well short of SAP's recent strong performance. During the quarter ended March 31, for example, SAP reported that software revenues were up 22% and total revenues had surged 18%.
In response to the numbers, Oracle CEO Larry Ellison crowed to financial analysts, "We are growing the applications business faster than SAP." And SAP's own calculations showed Oracle gaining more than a percentage point of enterprise applications market share during the quarter.
So do the recent results signal an important and lasting shift in market momentum in favor of Oracle and against SAP?
Not necessarily, experts say. While Oracle president Charles Phillips claimed the company scored 266 competitive wins over SAP during the fourth quarter, the bulk of the company's surprising applications success during the period came from increased sales to its installed base of customers, experts say.
"We are not seeing a situation where buyers are dramatically favoring Oracle over SAP," says Jim Shepherd, a vice president at AMR Research Inc. (Boston). "Rather, Oracle has finally been able to reassure existing customers about its strategy and roadmap, and that contributed to a very strong quarter by getting customers who were long overdue to add seats and modules to stop holding off. Existing customers saw a signal that it was safe to go back into the water."
Specifically, analysts say, Oracle's announcement in April of its Applications Unlimited program persuaded many current customers to continue to invest in the company's applications. Under Applications Unlimited, Oracle promises to continue enhancing and supporting existing applications such as its Enterprise, World, and Siebel applications even after the planned 2008 release of the company's Fusion next-generation application suite.
In the recent financial reporting period, Oracle also benefited from the fact that the May quarter was the final three-month period of the company's fiscal year. Traditionally, analysts noted, Oracle sales representatives are incented to close business before the end of the company's fiscal year. SAP's most recent reporting period, in contrast, was its fiscal second quarter, a period that typically does not carry the same urgency.
"Given Oracle's track record, you never want to read too much into the fourth quarter," Shepherd says.
But Oracle, not surprisingly, says the contrast in the most recent quarterly financial results reflects a market shift in its favor. Much of Oracle's fourth-quarter sales spike came from customers in the small and medium-size (SMB) segment, a market that is growing much faster than the enterprise segment, says Oracle Senior Vice President Sonny Singh. In the SMB space, Singh contends, customers are selecting Oracle applications because they are easier to deploy.
At the same time, Singh says, SAP's revenue recognition shortcomings during the past quarter hint at underlying problems. SAP has promised customers service-oriented architecture features that it cannot yet deliver, according to Singh. As a result, he says, "Customers are holding SAP's feet to the fire."
SAP officials, on the other hand, insist that no fundamental market momentum shift has taken place. Oracle's fourth-quarter success was largely due to the company offering aggressive prices to its installed base of customers, says Steve Bauer, vice president of communications at SAP. SAP remains on track to double its customer base by 2010, according to Bauer, largely by increasing its sales to the SMB market. In the last year, SAP has increased the number of customers using its All-in-One product by 24% and the number using its Business One product by 54%.
But whether Oracle has turned a corner on SAP will not be known until the next round of financial reports, which are expected to be made public in the next few weeks, analysts say.
"If, after the next quarter, SAP doesn't deliver and Oracle does again, you can say that SAP has some sales execution issues, and Oracle has the momentum," says Ray Wang, a senior analyst at Forrester Research.
This article originally appeared in the September 2006 issue of Managing Automation magazine.