Inorganic growth

When database and applications giant ORACLE released its financial results for its first fiscal quarter of 2007, which ended 31 August 2006, it could not hide its glee in having upstaged its bitter rival in the applications market, SAP.

Charles Phillips, one of Oracle’s presidents, was in an exuberant mood: “We’re rapidly taking applications market share from SAP,” he told analysts. “Q1 was the second consecutive quarter that Oracle’s applications new licence sales growth was 80% or more. That’s 10 times SAP’s 8% new license sales growth rate in their most recently completed quarter.”

One reason for Oracle’s emphasis on new revenue licence growth is that it provides a key indicator of future earning revenue streams. And the 80% increase from $127 million in the year-ago quarter, to $228 million, indicates an applications division that is in good shape to carry the company forward. Overall, revenue for its first three month period rose 27% from $2.8 billion to $3.6 billion. In comparison, total licence revenue from its database and middleware division rose a more modest, but still healthy 18%, from $1.54 billion to $1.81 billion.

It should not be surprising that Oracle’s revenue growth in the applications market is fast approaching three digits – it has spent almost $20 billion in under two years acquiring over 20 companies, including some of the biggest names in the software industry, such as PeopleSoft, JD Edwards and Siebel. Its most recent acquisition, is data integration specialist Sunopsis.

What is clear is that acquisitions – and not organic growth – are fuelling Oracle’s business. According to a research note by Rick Sherlund, lead analyst at investment bank Goldman Sachs, revenue drops to 46% when the Siebel, i-Flex and Portal Software acquisitions are excluded. And this drops to around 15% when the numbers from PeopleSoft are left out, he says.

Bill Wohl, vice president of product and solutions public relations at SAP, called Oracle’s description about its progress “inconsistent and misleading”. He also dismissed Oracle CEO Larry Ellison’s remarks about SAP’s falling market share as “a complete misrepresentation”.

Meanwhile, at rival business applications software provider LAWSON SOFTWARE, a different picture is emerging. The costs of merging with one of its main rivals, plus shrinking licence fees, put Lawson into a $15.8 million loss for its fourth quarter ending 31 August 2006, reversing its year-ago profits of $4.2 million.

“However, maintenance and consulting revenues were strong and expenses were well managed, thereby allowing us to achieve bottom-line results in line with our expectations,” said Harry Debes, Lawson’s president and CEO.

These expectations included an 84% increase in quarterly revenue, rising from $87.9 million to $161.8 million, largely due to the inclusion of the first full quarter of post-combination results for the April 2006 acquisition of Intentia. The revenue figure also does not reflect the $4.6 million in deferred maintenance and service revenue written down in the acquisition costs for Intentia.

Another company looking to flesh out its growth strategy through acquisition is Anglo-Dutch IT services group LOGICACMG. In August 2006, it announced plans to acquire Swedish-based IT services firm WM-data for $1.7 billion, to become the fourth largest IT services company in Europe. LogicaCMG’s chief executive, Dr Martin Read, believes that the “acquisition will deliver strong returns over the coming years.”

Last year, LogicaCMG bought French rival Unilog in a £630 million deal – an acquisition that Read believes is “proceeding well”. Together with a number of new contract wins, revenue was lifted by 39.4% to £1.24 billion from £892 million for the first fiscal half of the year, ending 30 June 2006.

However, acquisition costs are still being absorbed by LogicaCMG and net debt increased to £424.7 million from £96.1 million for the same period. As a result, profits also dropped 57%, from £23.7 million to £10.3 million.

Meanwhile, IT consultancy group ACCENTURE reported a 2% increase in revenues during the final quarter of its fiscal year ending 31 August 2006, with the top line rising to $4.39 billion from $4.31 billion in the year-ago quarter.

Revenues were hit by its decision to abandon the controversial £12.4 billion NHS Connecting for Health (CfH) programme, which resulted in a $339 million reduction in its fourth quarter net revenues. The move comes just months after the services giant booked a $450 million (£240 million) provision for expected losses associated with the contract.

 But analysts have broadly welcomed Accenture’s move to abandon the contract. “With the NHS misadventure now firmly behind it, Accenture can concentrate on the important issues,” says Ovum analyst Douglas Hayward. Those priorities should be to bring European growth in line with US performance, he adds.

In spite of the CfH troubles, however, net profits rose 52% for the same period, from $229 million to $346 million, largely due to strong sales from its outsourcing division which rose 12% to $1.77 billion from the year-ago quarter. And, including the impact of the NHS contract, profits for 2006 managed a healthy 9% increase to $16.65 billion, compared with $15.55 billion one year ago.


Alan Dobie

Alan Dobie is assistant editor at Vitesse Media Plc. He has over 17 years of experience in the publishing industry and has held a number of senior writing, editing and sub-editing roles. Prior to his current...

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