The State of the Company

Team Oracle, It's been a hell of a week. But then it's been a hell of a year. At the start of fiscal year 2000, we announced that Oracle would become an e-business, and in doing so, save one billion dollars. In other words, we would use our own application software - the Oracle e-business suite - to put every aspect of our business on the Internet. The success of our move into the new-economy would be measured the old-economy way - would our move to the Internet improve margins enough to save a billion? The answer turned out to be no. We're going to save a lot more. A billion dollars in annual savings translates to a 10 point improvement in our margins. But by the fourth quarter our operating margins were up almost 14 points to over 41%. For the full year, net income without investment gains increased 59% to over $2 billion, or 69 cents per share. Net income including investment gains was over $6 billion. Cash increased from $2 billion to $8 billion. Sales topped $10 billion. The stock was up 400%. Oracle's market capitalization approached a quarter of a trillion dollars. It was a good year. I know that some of you are concerned with the management changes at Oracle. Changes at the top are highly visible to the public, and that's resulted in a good deal of comment in the media this past week. But Oracle has been going through massive organizational and management changes throughout the entire year. This has been largely invisible. This note is a review of some of those changes, and an explanation of why they were necessary. Five years ago we decided to move all of our products to the Internet. Over one year ago we started the process of transforming Oracle into an e-business. We had to put every aspect of our business on the Internet because the world was about to change. And if we didn't move fast we would miss by far the biggest opportunity in business history. Our internal computer systems used to be managed by separate IT departments in many different countries. That had to change. We needed to build a single, integrated global system to transform Oracle into an e-business. We transferred the world-wide responsibility for all of our data centers and our networks to Gary Roberts, who works for Gary Bloom. Responsibility for implementing our application software as a world-wide system at Oracle went to Mark Barrenechea and Ron Wohl. Mark and Ron are responsible for the development of our e-business suite of applications products. In addition, they now had to make their applications work at Oracle. And they're doing it. Our IT costs are down, and service levels are up. Gary, Gary, Mark and Ron are leading Oracle's transformation into an e-business. I cannot imagine a better team. In the last year, we also had numerous changes in our applications product development organizations. We used to have separate development organizations dedicated to vertical industries such as CPG. Those so called "best of breed" industry suites included products from companies like IMI and I2. This flawed strategy, which included Oracle developing around and selling our competitors products, has been abandoned. The separate vertical development groups were all integrated into Mark Barrenechea's and Ron Wohl's teams. The emphasis here is on the word integrated. The features necessary for us to compete in specific vertical industries have now been developed as an integrated part of our e-business suite. These management and organizational changes were key to the fantastic success - 61% growth in Q4 - of our applications business this past year. The technology development groups were not immune to change either. We moved our email system under Bill Maimone, who works for Chuck Rozwat. Bill's team along with Gary Roberts' IT group implemented a global Internet based email system at Oracle. By next month, we will have gone from 97 email servers to 2 - and 1 extra for backup. We are saving a fortune, and while service levels are not perfect, they are far superior to our old client-server email systems. Bill and Gary doing a wonderful job with email. Gary Kelley, who also works for Chuck, took over our Application Server development. Gary along with Andy Mendelsohn and Sohaib Abbasi just released our brand new Internet Applications Server - iAS. Our new application server is a grand improvement over the old product. Thanks go to Gary, Andy and Sohaib and their teams for doing such a wonderful job with iAS. No big changes in the database team. None were needed with Chuck Rozwat and Mike Rocha making continuous improvements. The new releases of Oracle8i insure our technology and market leadership in database for years to come. Our products have never been more competitive. About two years ago, headquarters marketing moved to Mark Jarvis, who works for Gary Bloom. This year we reassigned all the marketing people around the world to Mark's team. That is, we globalized marketing just like we globalized IT. Everyone in marketing now works for Mark. We are consolidating all of the different web sites in all of the different countries so there is but one oracle.com - not 150. We are using the Internet to communicate a uniform message around the world. Customers in the United States, France, Brazil and Japan see the same Oracle and pay the same price for our products. Our developer programs and seminar series are the same all over the world. And they all exploit the Internet. Marketing costs are way down but leads and sales are up. Our developer program has nearly a million members. Mark and his team have found new and innovative ways to take advantage of the Internet. The changes in marketing have been huge and have impacted every country in which we do business. Already, these changes are paying huge dividends to Oracle. The field organization - sales and consulting - has also seen lots of changes. Our European organization is now headed by Sergio Giacoletto who headed European consulting last year. Sergio's proven track record of providing high quality services to our clients make him the ideal choice to lead our European team. Also new last year is Ian Smith, the head of our largest subsidiary, Oracle UK. Ian Smith, who also has a service background, joins Jimmy Anidjar, Mario Bonzano, Bob Gordon, Wolfgang Jaeger and Hans Jarnik. This brilliant team will lead Europe to a great year. Derek Williams, who had a great year last year in Asia Pacific, will have another. Chikara Sano will continue his brilliant career at Oracle Japan. Our international management team is deep and proven. We can count on them for a record setting year. The responsibility for selling and consulting in the Americas is split among Jay Nussbaum, George Roberts, Sandy Sanderson and Frank Varasano. All of them delivered record results last year and are poised to do even better this year. After years of success in our government business, Jay Nussbaum's responsibilities were expanded to run a number of different service industries for Oracle. Jay responded to his new responsibilities with new successes and record margins. George Roberts along with Hilarie Koplow have been very innovative in using the Internet to demo and sell our software products. George's results in his general business unit set a record for any US field sales organization. Sandy Sanderson and his team did a great job in Latin America, and provided much of the technical support helping Frank Varasano's team win numerous exchange deals last year. Sandy is also changing our consulting business by introducing programs like 'five day financials.' This lets our customer get access to our applications products for a fixed price over a short, fixed schedule. That is helping us sell to smaller businesses than we have ever sold to in the past. It is also a key enabler for our Oracle Business Online ASP, now run by Tim Chou. With Tim in charge, Business Online is beginning to take off. Support had planned to hire thousands of new people last year, and margins were expected to go down. Then we had a better idea. The new support management team, Gary Bloom and Ian Thacker, figured out how to use the Internet to improve customer satisfaction while at the same time eliminating the need to hire lots of additional support people. They are also using the Internet to reorganize our thousands of support analysts by product expertise rather than by geography. These changes immediately made the support organization more efficient. Support services improved quickly. And margins got better - not worse. At the beginning of last year, education submitted a budget for 13% profit margins. Then Gary Bloom and John Hall took over. John globalized education and ran classes on the Internet. Product development got more involved in creating class content. Things got better fast. John delivered over 40% margins last year. He is shooting for 50% margins this year. The administration of the company has also changed radically. No longer do the individual countries do their own purchasing, accounting, pricing, etc. All of this has been globalized under Jeff Henley. The sales approval process that used to go through layers of bureaucracy made up of hundreds of people now comes directly from sales to Safra Catz's team of four people. The approval process which used to take weeks now averages a few hours, and is always less than a day. Safra Catz, Oracle's Chief of Staff, is helping me and every other senior manager look at every detail of our business, so we can standardize our business processes around the world, and make them more efficient. Safra's job is best described as helping all Oracle executives do their jobs better. She leads project teams to standardize our contracts and make them more customer friendly, globalize pricing, simplify and standardize compensation plans - the list is endless. She participates in our product planning and development meetings. She is helping make every aspect of our business better. There has been tremendous change at Oracle this past year. People have changed the way they do their jobs, taken on new responsibilities, and new people have been added to the team. The changes are working. Oracle keeps getting stronger. And smarter. But we have lost people in the process. So, the question is, have all these management changes - in marketing, sales, support, consulting, development, IT, administration - created more problems then they solved? Have the changes put our business at risk? No. Quite the opposite. Without these changes, we would have missed the biggest opportunity in the history of business. Right now our products are better than they every have been before. Our business processes are more efficient. And our new management team is one that has proven that we can work together closely - as a team. That team was responsible for bringing a stunning increase in success to Oracle this past year. That team will do it again this year. We have, right now, the best management team we have ever had at Oracle. That team is going to lead Oracle to its best year ever. It is going to be an amazing year. Stay tuned. Stay focused. That big bet we placed on the Internet five years ago - and all those management and organizational changes we made last year - are about to pay off big-time. Larry