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6/26/2009
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Global CIO: How 22% Annual Fees For You Equals 51% Operating Margins For Oracle

The enterprise-software powerhouse is rightfully proud of its financial prowess. But in this brutal economy, are its customers getting a fair return?

Oracle just reported that its fourth-quarter operating profit margin reached 51%. Oracle executives are rightfully proud of hitting that remarkably high number. And during a recession, no less.

So I take my hat off to Oracle for that singular achievement. At a time when so many companies are reporting losses and cutting back and retrenching, it’s great to see the financial health of Oracle as seen in that dazzling profit margin.

And here’s a corresponding financial detail from Oracle: For the fiscal year it just reported, the company generated more revenue from the annual maintenance fees you pay than it did from all of its new sales of applications, technologies, and services combined. Let me repeat that: Oracle now takes in more revenue from your annual maintenance fees ($12 billion) than it does from total sales of new licenses for its technologies, applications, and services ($11.5 billion).

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Corporate profits drive the American economy and the global economy, and if more companies had operating margins even within spitting distance of 50%, the world economy would be a whole lot better off. So corporate profits like Oracle's are essential, they are commendable, and they drive higher employment, higher standards of living, and an expanding economy. This country needs to have lots of well-run companies making lots of money.

But with that as a backdrop, something about the dynamics of Oracle's achievement deserves a lot more attention than it’s been getting, and you folks out there who have funded Oracle's 51% operating margin will probably be interested in a closer look inside the numbers. Let’s take that look.

Here are the major revenue lines as reported by Oracle for the fourth quarter ended May 31.

  • New software-license revenues totaled $2.7 billion. Year-on-year, that's down 4% in constant currency, and down 13% in U.S. dollars. That $2.7 billion breaks down into two categories: new technology-license revenues, and new applications-license revenue. Here are the details for those two categories:

  • New technology-license revenues were $1.9 billion. In constant currency, that's down 1%, and in U.S. dollars it's down 10%.

  • New applications-license revenues were $805 million. In constant currency, that's down 11%, and in U.S. dollars it's down 19%.

  • Services revenues were $1.1 billion, which is down 7% in constant currency and down 16% in U.S. dollars.

    So in terms of revenue generated by the products and services that Oracle sells and you buy, the numbers were down across all three categories the company specified: new technology licenses, down 10% in U.S. dollars; new applications licenses, down 19% in U.S. dollars; and professional services, down 16% in U.S. dollars.

    That’s hardly a top-line performance to celebrate but, in today's brutal global economic climate, it's at least understandable. But it’s also clearly not the type of performance that will deliver a spectacular 51% operating margin -- so where did all that profit come from?

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