True to the recent trend, Oracle reported strong first quarter profits yesterday, exceeding Wall Street expectations. Net income rose a whopping 28%, on revenue growth of 18%.
Oracle's results speak well for the prospects of the technology sector holding up amidst the turmoil in financial markets. That was not the case in the recession in the early part of this decade, when the downturn was led by the tech sector. Oracle's diversity in worldwide revenue sources--half of its sales come from outside the U.S.--is one factor in its success.
But I couldn't help but notice one other factor
in Oracle's financial success:
Chief Executive Larry Ellison, meanwhile, said the company is in a strong position because more than half its revenue comes from maintenance contracts and license renewals, which carry high profit margins.
Oracle's financial model--like SAP's--has really turned into an annuity business. New software sales just open the door to the place where these vendors really make money: maintenance contracts. In fact, I'm hearing of one case recently where the vendor is essentially willing to offer upfront licenses for FREE. The maintenance businesses is apparently so profitable--as much as 85% profit according to one source
--that they can actually give away the software and still make money.
Once again, however, I have to say that this model is unsustainable in the long run, as customers are already growing tired of it
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