Oracle had a very good earnings call this week. Steve Hamm at BusinessWeek Online concludes: "That means Oracle pulled off quite a smooth merger (PeopleSoft/JDE) in short order." Others are similarly declaring victory on the merger. Sorry, guys - to base this on one quarter - typically Oracle's strongest fourth quarter - is way pre-mature.
First, let's give Oracle credit. The employee transition in the merger has gone much better than I would have expected. Oracle would have encountered what outsourcers call a "hostile transition". This often happens when they are asked to try to capture knowledge, document processes etc at a data center or application area they are taking over and where incumbent employees are being laid off. Oracle says it retained 80%+ of PeopleSoft R&D staff and made most of the cuts in the SG&A areas. PeopleSoft employees who stayed appear to be pretty happy. One caution - in the outsourcing world it is common to "re-badge" select client employees for their unique operational knowledge, but typically only with a 12 month employment guarantee. In that time frame, the knowledge is transitioned to other team members. Hopefully, Oracle has longer-term plans for the PeopleSoft employees.
But happy employees is not why Oracle spent $ 10+ billion. They did it for customer base and revenue stream. And by that lens it is too early to say the acquisition has succeeded.
There are 3 ways the investment pays off:
a) New license revenue from existing PeopleSoft products
b) Maintenance revenue from PeopleSoft customers
c) New license and other revenues from Oracle/Fusion products from PeopleSoft customers
a) In the last 60 days of the quarter ending Feb 05, the first after acquisition that Oracle could show as its revenues, the PeopleSoft products generated just $ 31 m. Larry Ellison complained then that previous management had "bled the pipeline dry". For the quarter ending May 05, Oracle has decided not to break out comparable information saying the sales forces had been integrated. But the products have not been. In any case, total new application licenses this quarter were $ 350 m. If PeopleSoft were even half of that, it is a long way from justifying the $ 10 b price tag.
b) The major reason for acquiring PeopleSoft, of course, was its maintenance stream. In its last independent 10Q filing with the SEC PeopleSoft reported $ 919 m in maintenance revenue for the 9 months ended Sep 04. That revenue tends to be very high margin - often 90% plus. It is also normally predictable - high rates of renewal. While Oracle is unlikely to grow that much if product license sales do not grow (see a), if it can keep it somewhat stable, it helps better justify its acquisition price. The next 6-8 quarters
are extremely critical for this customer base to decide if Oracle is
indeed using the maintenance revenue to invest in their future or to
just fatten overall margins. If Fusion
version 1.0 appears weak, if Fusion delivery slips or if PeopleSoft
customers do not see solid, low cost migration paths to Fusion, they
will move to the alternatives or significantly negotiate down
maintenance rates. While Larry keeps talking about industry consolidation (see my post - Larry Ellison and the "Living Dead"), the reality is PeopleSoft customers have a growing number of alternatives (see my post PeopleSoft and JD Edwards Customers: In the Driver's seat).
c) This is where the acquisition may actually pay off. A number of PeopleSoft customers used its HR functionality, but SAP and others for financial and other functionality. Oracle may be able to convert some such customers to its own application functionality. It may also increase its database/apps server product penetration in the PeopleSoft customer base. The biggest payback, of course, comes if Fusion adoption is high. That could be another 10+ years of maintenance, services and other lock-in revenue.
But Fusion Applications will not be ready till 2007 - likely later. Lots of work to do between now and then. Put away the champagne for now.