Oracle VARs get no piece of software maintenance agreements pie

By Barbara Darrow, Senior News Editor 19 Sep 2008 | SearchITChannel.com

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On Thursday night, Oracle executives touted 23% growth in software maintenance agreements and support contracts for the company's first quarter ending Aug. 31.

For that period, revenue from software license updates and support was $2.9 billion, up from about $2.4 billion for the corresponding quarter last year. By way of contrast, revenue from new software licenses for the most recent quarter was $1.2 billion (vs.nearly $1.1 billion for the year-ago quarter.)Support and maintenance dollars now make up 55% of total revenue, up from 53% last year.

Software maintenance agreements are extremely lucrative. Most customers automatically renew these contracts, typically paying 22% of the actual cost of the licenses.

"We have an enormous maintenance base [of] existing customers paying us annually for the newest software," Oracle co-president Safra Catz said on an Oracle earnings call. "That's a highly profitable part of our business. It is rare for a customer not to renew a maintenance contract. They still need to run their businesses on our software, which is critical to most of the industrial world. We're very much required."

Oracle CEO Larry Ellison echoed those remarks, stressing the importance of software maintenance agreements to Oracle's bottom line.

More Oracle news Oracle pledges future database growth Oracle sets middleware lineup post BEA deal Oracle rolls out price hikes on app server, database

"Software maintenance is now approximately half of our business. It's an extremely high-margin business and continues to grow in an extremely healthy manner," Ellison told analysts on the earnings call. "It's the highest-margin portion of our business and is now also the largest portion of our business."

That's good news for Oracle but not so perky for its business partners. While VARs and resellers get margin on the sale of new Oracle database, middleware or application licenses, they do not get any piece of the follow-on maintenance revenue -- a bone of contention for many. Some software companies let partners participate in the annual software maintenance "annuity."

Software maintenance agreements: VARs want to share the wealth

The issue is critical as Oracle acquires other vendors to expand into new application areas. Some of those acquired companies let partners participate in the software maintenance agreements' annuity, so Oracle's model is an unpleasant contrast, Oracle partners said.

A common meme among Oracle partners as well as VARs selling rival database and applications is that Oracle is following in the footsteps of Computer Associates, now CA. That Islandia, N.Y.-based vendor became famous, or infamous, for buying up smaller software companies mostly for their maintenance revenue streams. Oracle partners say the difference is that Oracle continues to invest in the products it buys whereas the old CA stopped investing in many of the products it bought and they withered away.

Asked if they would like to get a piece of maintenance with their active customers, four longtime Oracle partners were unanimous, if anonymous. "That's like asking a lion if he likes fresh meat," one quipped.

As for the rest of the earnings news: Oracle database sales were strong, rising a healthy 27% over the year-ago quarter.

Ellison crowed about the latest Gartner worldwide database market share numbers, showing Oracle with nearly a 49% share. "We're larger than the next four competitors combined -- IBM, Microsoft, Teradata plus Sybase," he said.

Gartner's 2007 figures put Oracle at 48.6% market share, IBM at 20.7%, Microsoft at 18.1%, Teradata at 3.9% and Sybase at 3.1%.

Oracle database earnings up, apps earnings down

Oracle was not so upbeat around application numbers. Oracle's apps business actually fell 14% year over year, and the company has spent a whopping $34 billion on apps-related acquisitions over the last three years.

Overall, the Redwood Shores, Calif.-based company reported net income of $1.08 billion, or 21 cents a share, up 28% from $840 million (16 cents per share) for the year-ago quarter. It expects profit for the current second quarter to hit 36 cents per share, excluding some costs.

The earnings call came just days before the vendor kicks off its huge Oracle OpenWorld 2008 show in San Francisco this weekend. On the last earnings call, Ellison hinted about a "killer feature" development to be announced at the show. Executives on Thursday remained coy about it.

Oracle president Charles Phillips said only that there will be an Oracle 11g database update this quarter with "major enhancements."

"This is more than a feature," he said. "It will put us in a new segment of the database market."

This story was updated Sunday with actual revenue figures on software license update sales.

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