Friday, September 19, 2008

Oracle profits strong, thanks to your maintenance payments

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.

Related posts
Vendor software maintenance programs: top 10 wish list
Mad as hell: backlash brewing against SAP maintenance fee hike
Vendor maintenance fees: just say no
Legal basis for third-party ERP support industry
Custom systems: alternative to ERP
Total cost study for an open source ERP project
Reading the fine print on ERP contracts
High software maintenance fees and what to do about them


Anonymous said...

Frank, I don't know about you, but I'd get nervous when I start hearing about repeated quarter-after-quarter double-digit profit growth. It usually means someone is cooking the books. Did Oracle give any indication how much of this revenue/profit growth is attributable to troubled firms and how much they will have to write off as uncollectable?

Frank Scavo said...

I would be very surprised if Oracle as "cooking the books" as you say. Such a move, in this day and age, would be suicidal. Oracle's executive team is very aggressive but not stupid.

I have not seen any commentary on Oracle's bad-debt ratios or reserve levels. These figures should be part of Oracle's financial statements, so publicly available. It might be interesting to compare the public enterprise software companies with one another in this ratios.

fteter said...

Frank, I suspect that the financials of the major ERP companies will hold up pretty in this downturn compared to past economic slowdowns...the business model has changed. ERP is no longer driven by market share growth. The name of the game now seems to be: 1) creating new revenue streams from existing customers ("add-on" sales); 2) maintaining existing revenue streams from those same customers (license and maintenance renewals); and 3) maximizing the profit margin in each revenue stream. Not a sustainable model in the long haul, as it begs for the appearance of lower-cost competitors...even the courts will only protect the maintenance markets from the entry of new competitors for so long.