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9/17/2009
10:04 PM
Bob Evans
Bob Evans
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Global CIO: Where Do Oracle's Profits Come From?

Oracle's quarterly numbers show all of its profits came from "software license updates and product support"--aka 22% maintenance fees--and only 20% of its revenue came from actual software sales.

Does Oracle make money from software or from the services it packs around its software? Perhaps I'm splitting hairs a bit, but the numbers don't lie: for the quarter, only 20.3% of Oracle's revenue came from the sale of new software licenses while four times that much, or 79.7%, is from annual maintenance fees and services.

My friend the CFO likes to say, "a dollar's a dollar," so maybe this is all irrelevant. But I think it's exactly the opposite. And I think that while a deeper look inside Oracle's just-released quarterly numbers will reflect a company with extraordinary software-development prowess, huge global brand equity and recognition for its software products, impressive profits and mountains of cash, and a storied history culminating in its current self-description as the world's largest business-software company, those numbers will also reveal a company that earns most of its profits and generates most of its revenue from its 22% maintenance fees and other services. And there's not a darned thing wrong with that.

But if only 20% of Oracle's revenue comes from the sale of software--$1.028 billion out of $5.054 billion—then is Oracle a software company that can offer services as needed by customers, or is it a services company that sells a relatively small amount of software but complements those sales with large portions of related services ranging from consulting to maintenance, upgrades, and support?

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This matters because Oracle's customers want and need to understand as fully as possible in this rapidly changing business-technology world how Oracle's business model works, how Oracle generates customer value, how Oracle packages and prices customer value, and how Oracle blends the various pieces of its business together as software and services and licenses and consulting, with probably some financing thrown in as well for good measure.

Indeed, let's look at precisely what numbers I'm talking about. Here are the details straight from Oracle's financial statement for the quarter ended Aug. 31:

*Annual maintenance fees: $3.117 billion (up 6%)

*Services revenue: $909 million (down 22%)

*Sum of maintenance fees + services = $4.026 billion

*Sum of new licenses for applications and technologies: $1.028 billion (down 17%) --(includes $711M from databases and middleware, and $317M from apps)

*Total Q1 revenue: $5.054 billion (down 5%)

*Net income: $1.1 billion (up 4%)

Of course the $3.117 billion in annual fees, which Oracle calls "software-license updates and product-support revenue," is inextricably linked to the original purchase of the software licenses, and I do realize that the "services" category isn't referring to carburetor repairs or grass-cutting or a personal shopper. And clearly Oracle is filling a huge need or those customers would take their dollars elsewhere.

But—the fact remains that Oracle does not in the most precise sense sell nearly as much software as many of us would have thought. That's worth bearing in mind when poseurs say things like, "What the hay does Oracle know about hardware? It's just a software company."

In fact, Oracle has made itself into a supplier of, if I may borrow a line from Microsoft, enterprise-class software plus services, spanning from the consulting work that goes into its formal "Services" revenue line of $909 million, plus software-maintenance services plus product-support services that are wrapped up in its staggeringly profitable "updates and support" line.

If you think about it that way, Oracle has two primary types of business: first, a $4.026 billion services business that supports the planning, installation, industry-insight, maintenance, and upkeep of enterprise software; and second, a $1.028 billion applications, databases, and middleware business.

That's a first step in understanding the current Oracle machine because it answers the question, where does the revenue come from, and how can it be best understood?

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