There is an obvious lifeboat for a mature software vendor when sales growth makes a sharp turn south – services activities. And database and business applications software vendor Oracle has planted both feet firmly in that lifeboat.
In the company’s first fiscal quarter for 2003, ending 31 August, only 28% of its $2.28 billion in revenues were derived from new software sales; the remaining 72% flowed from maintenance, support, consulting, hosting and education services. Indeed, for the first time in the company’s history, quarterly maintenance revenues (pre-paid for patches and upgrades) actually outweighed licence sales.
Despite the shift, that services business itself showed weakness – at $1.46 billion it was down 5% on the year ago period. Licence sales fared considerably worse, dropping a deep 23% to $563.0 million quarter-on-quarter.
The decline in software sales – the true indicator of the company’s future health – was shared fairly equally between database software and business applications. Database sales fell 23% to $437.7 million, while new applications revenue sunk by 24% to $110.8 million. The applications operation was particularly hard hit in the US where new licence revenues fell by a painful 39% quarter-on-quarter.
That performance highlights just how saturated the high end of both the database and business applications software markets has become, and how Oracle has yet to make a major impact with its applications among small and medium sized businesses (SMBs).
There are some fundamentals underlying the rise in the proportion of services. Oracle is targeting many new customers, especially in the SMB area, with a hosting service for databases and applications. In addition, changes in the company’s pricing model have boosted maintenance revenues.
The focus on maintenance charges – and internal cost cutting – has meant the company has been able to sustain its profitability in the face of shrinking sales. The company’s net profit at $386.0 million, excluding a one-off hit for its investment in Internet TV company Liberate Technologies, amounted to a 19% margin – ensuring the lifeboat is still fairly luxurious.