03/08/2013
Technology
Oracle Corporation
Ticker: ORCL
Recommendation: Hold
Company
Current Price: $35.05
Implied Price: $37.25
Investment Thesis
Key Statistics
52 Week Price Range
Logo

Oracle is one of the world’s largest providers of enterprise software and it
will continue to be as it continues to acquire smaller firms in order to
expand the software and hardware portfolio.

Oracle is a very recognizable name brand; customers continue to renew
software licenses and purchase other products from companies they know.

In an industry that is highly competitive, it has been able to maintain strong
margins and emphasize revenue channels that have the highest margins.
25.33-36.31
$34.92
50-Day Moving Average
Estimated Beta
1.12
Dividend Yield
1%
Five-Year Stock Chart
Market Capitalization
164B
3-Year Revenue CAGR
4.57%
$40.00
120,000,000
$35.00
100,000,000
$30.00
Trading Statistics
80,000,000
$25.00
Diluted Shares Outstanding
4.73 Billion
Average Volume (3-Month)
21 Million
$20.00
60,000,000
$15.00
40,000,000
$10.00
Institutional Ownership
Insider Ownership
60.40%
23.00%
Volume
UOIG Projections
50-Day Avg
200-Day Avg
79.90%
46.89%
2013E
08/31/2013E
11/30/2013E
02/28/2014E
05/31/2014E
2014E
Net Sales ($M)
$38,502
$8,642
$9,568
$9,967
$11,865
$40,042
EBITDA ($M)
$16,509
$3,640
$4,108
$4,294
$5,294
$17,336
Basic EPS ($)
2.14
0.45
0.55
0.55
0.70
2.25
$43,729
$18,585
2.65
$11,315
$4,865
0.73
$11,315
$4,865
0.73
$11,315
$4,865
0.73
$11,315
$4,865
0.73
$45,259
$19,461
2.92
$38,242
$18,653
2.70
$8,742
$4,229
0.58
$9,688
$4,961
0.69
$9,975
$5,052
0.72
$12,263
$6,516
0.96
$40,696
$20,862
2.95
Management Guidance
Net Sales ($M)
EBTIDA ($M)
Net Margin (LTM)
Adjusted Close
0
Forecast Summary
Margins and Ratios
EBITDA Margin (LTM)
$0.00
Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10 Feb-11 Aug-11 Feb-12 Aug-12
9.58
EV/EBITDA (LTM)
Gross Margin (LTM)
20,000,000
$5.00
28.37%
Basic EPS ($)
Consensus Estimates
Net Sales ($M)
Debt to Enterprise Value
.12
EBTIDA ($M)
Basic EPS ($)
Covering Analyst: Josh Jordan
jjordan3@uoregon.edu
1
University of Oregon Investment Group
University of Oregon Investment Group
03/08/2013
Business Overview
Oracle Corporation is a massive software and computer hardware company that
has operations internationally. It specializes in enterprise software that is used
for databases, applications, hardware systems, as well as many other business
systems. Its software is engineered to work together with other Oracle products
as an engineering system or independently with third-party applications.
It was founded in 1977 as Software Development Laboratories with Larry
Ellison, Bob Miner, and Ed Oates. It underwent various name changes before
settling on Oracle Corporation in 1995. On January 27, 2010, Oracle changed
from a software business to both a hardware and software business. With the
acquisition of Sun Microsystems, it expanded into the computer hardware
industry, specifically in regards to enterprise servers.
It is now headquartered in Redwood City, California even though it was
originally founded in Santa Clara, California. On June 16, 1977, it was
incorporated as a Californian corporation. It has undergone a series of reincorporations since then.
Its revenue is broken down into the following business segments and subsegments:
New Software Licenses
This business segment is by far the most complex and diverse business segment
for Oracle. It offers many different enterprise software products, primarily
database software. It also offers middleware software and applications software.
Essentially, the software solutions offered are meant to reduce the cost to
customers and also the complexity of IT systems. All products are designed to
work in various environments; they are compatible with other company’s
products. Software is designed this way so that customers have a greater choice.
In general, most software offerings can be fitted to the customer’s needs.
Software License Updates and Product Support
As an auxiliary purchase, nearly all customers purchase software license updates
and support contracts. These offerings enhance the customers’ investments by
providing product enhancements and upgrades. By purchasing these contracts,
they gain the rights to future upgrades, software patches, and personal product
support via the telephone or internet. Update and support contracts are, in
general, priced as a percentage of the net new software license fees. Software
renewals also fall into this business segment.
Hardware Systems Products
Oracle offers a wide selection of hardware systems to customers that include
storage centers, networks, servers, operating systems, and specialized software
for cloud computing. Many of the world’s largest clouds are supported by
Oracle servers. Even though its hardware products are designed to be
interoperable with third-party software, customers can really benefit from the
creation of engineering systems through the connection of Oracle hardware and
software. Customers look to Oracle because they provide systems that are
superior in performance and they are able to cut costs that way by moving the
storage of their data to a third-party.
Hardware Systems Support
This business segment is quite similar to software product support except that it
is applied to the hardware segment of the business. Software updates for
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software that is essential to hardware operations is also included in this category.
Other functions that are accounted for include product repairs, technical support
services, and maintenance services. These contracts are intended to provide the
customer the best experience with Oracle possible. Contracts are generally
priced as a percentage of revenue.
Services
Special services are offered to help customers understand the product offerings
and, potentially, their purchases. Individuals with specialized knowledge are
hired to fulfill the service contracts. This business segment is broken down
further into the three following sub-segments:
Consulting
Experienced consultants are paid to work with customers to create a system of
our products that help them achieve their business goals and reduce the risk
associated with IT functions. They consist of consultants that work at Oracle
headquarters and those that are part of a global system of solution centers.
Managed Cloud Services
Oracle will manage a customer’s database cloud for a fee. This service is meant
for those enterprises that have their cloud hosted at an Oracle data facility. This
adds value to the customers experience because they don’t have to be as
concerned about the management of their data, rather they can focus on other
aspects to make their own business more successful.
Education
Oracle provides “a school” for their software. It offers training via many
different methods including classes, virtual training, video conferencing, and
private tutoring. The purpose of this business segment is to ease the frictions
commonly associated with transitions from product to product. Oracle wants to
make the adoption of its software as simple as can be. Oracle even offers a
certification program for its database software.
Strategic Positioning
There are many business functions that Oracle must manage and align in order
to be successful in the software publishing industry. The most important
functions for Oracle include optimal sales channels, thorough marketing,
innovation through research and development, and product integration. These
are distinct strengths of Oracle and they aid in providing growth and increasing
margins.
The company is pushing its highest margin sales channel which is software
license updates and product support. The best way to do this is by getting
customers to purchase updates for their new software licenses. They distribute
their products through efficient distribution channels that include third-party
contractors. Employees that work in sales are very knowledgeable about their
products and market them appropriately to each customer
In order to gain new customers and even retain old customers, Oracle must stay
at the forefront of software and hardware innovation. Customers are looking for
the best performing and most cost efficient products; innovation leads to better
performing and new products. The research and development department is
creative, but in many cases acquisitions substitute. It is able to acquire other
companies that have specialized knowledge and developed new technologies
already.
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Even though it is important to create new technologies, the impact of innovation
will not be maximized if they are not designed to work with other Oracle
products. They are engineered to work cohesively with other Oracle products to
form an engineering system, something that other firms don’t offer as
prevalently. All products act as a suite that consists of software and hardware.
Business Growth Strategies
Oracle’s main strategy for growth is to increase revenue and expand margins.
Through that, they are trying to grow organically. The company also relies
greatly on an active acquisition program to grow; it gains emerging technologies
and specialized companies. It has been expanding into various industries that it
hadn’t previously, specifically through acquisitions. They have made it a goal to
gain market share in a global market and have been successful.
Over the past three years, Oracle has been able to increase its gross margin from
73% to nearly 79% and an expected 80% in the year 2013. This growth is not
something that can be sustained long-term, but I expect it to remain at nearly
80%. It has higher margins than its greatest competitors, including Microsoft.
EBIT, EBITDA, and net margins are far greater than Microsoft and Intel. They
are able to increase margins by increasing prices on premium products and by
pushing their highest margin sales channel: software license updates and product
support. At the same time they are also working to cut costs.
Oracle has a long history of acquiring other companies, and an extensive list can
be found online. Some noteworthy acquisitions include Sun Microsystems,
Java, and Acme Packet. This is expected to continue and management has
expressed that in its guidance. Annual costs associated with acquisitions can
vary depending on the size of the acquisition.
Overall, growth can be cyclical with strong ties to the release of new software.
It is also tied to the overall status of the economy because corporate investment
is dependent upon how successful they are.
Industry
Overview
Oracle is a part of the software publishing industry as well as sub-segments
within the software publishing industry that include the business analytics &
enterprise software publishing industry. The company is also a part of the
computer hardware manufacturing industry, but because these are typically very
similar I will focus on the software publishing industry.
This industry exists because customers (households, businesses, and
governments) demand the license to use software developed by others on their
own computers so that they can be more efficient and more organized.
Individual customers have various demands and that is why there is a large
amount of variance in the software available. The industry, as a whole, is in a
growth phase and is expected to remain that way into the foreseeable future.
Demand is growing for software from previously mentioned customers. There
are multiple economic factors that go into this projection and they are discussed
in the next section.
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The concentration in the entire industry is relatively low, but the sub-segment
that Oracle exists in is highly concentrated. In the enterprise software subsegment, Oracle, SAP, Microsoft, and IBM dominate the competitive landscape.
They own about 84% of the market share in the enterprise software industry.
Typically, these firms have large cash deposits that they can use to expand or
make acquisitions. They also maintain a steady percentage of debt to equity to
fund operations. The most successful in this industry are those that offer
superior value in their products, have access to highly-skilled employees, and
provide related products and services.
Macro factors
Private Investment in Computers and Software
In nearly all sales of computer equipment, software is sold alongside and that is
why hardware systems and software systems are so closely correlated. As the
economy recovers, the disposable income of private customers and households
increases. Market research has shown that the purchase of software and
hardware is a result of this. It is seen as a driver for this industry because
consumers’ disposable income is expected to increase in the following years
and, as a result, consumers are going to be more willing to spend on a product
they may not necessarily have the need for.
Corporate Profit
For most companies, IT software is a capital expenditure that is supposed to help
management make better decisions. Firms are more likely to invest when
corporate profit is high. When costs need to be cut, enterprise software can be
seen as expendable. The economy is expected to rebound from its most recent
recession and so far it has been. Software sales usually lag profit growth, so it
takes nearly a year for the enterprise software industry to see the effects of a
recovering economy.
Competition
Competition in both the software publishing and business analytics & enterprise
software publishing industries are high and only increasing. Firms compete not
only on a price basis, but on a product offerings basis which is reinforced by
support contracts. Enterprises require firms that have a large portfolio of
software, so that they maximize their benefit. In most cases, customers look for
companies that offer strong support services and those with the best will earn the
largest market share. Competition forces firms to develop better software and
hardware systems along with services that benefit the customer more than
anyone else. It would be cheaper for firms to offer smaller-scale services, but
they would not be able to compete with other firms.
Management and Employee Relations
Insider Ownership: 24%
Larry Ellison, Chief Executive Officer
Larry Ellison has recognized as one of the top technology moguls amongst the
likes of Bill Gates and the late Steve Jobs. He is the co-founder of Oracle and
has since retained the role of Chief Executive Officer. He is one of the
wealthiest citizens in the world with an estimated worth of $41 billion. His
annual compensation is largely composed of stock options.
Safra A. Catz, President and Chief Financial Officer
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Ms. Catz has been President of Oracle since 2004. She had a three-year stint as
Chief Financial Officer from 2005-2008, and resumed that role in April 2011.
Since 2001, she has maintained a position on the Board of Directors. She has
also served on the Board of Directors for HSBC Holdings, a large banking and
financial services firm.
Mark Hurd, President
Mr. Hurd has been the President of Oracle and a member of the board since
2010. He has proven himself over the past 30 years working in the technology
industry. His work record has shown that he is focused on building sustainable
strategies that improve the connection with the customer. Innovation and
continued growth have also been primary goals for Mr. Hurd. Through these he
has been able to improve operational efficiency. Prior to working at Oracle, he
was very successful serving as an executive for Hewlett-Packard. He has been
recognized for his success by Business 2.0 and Forbes. In 2007, he was named
one of Fortune Magazine’s 25 Most Powerful People in Business. He has
experience managing acquisition integrations which has fit in with Oracle’s
growth strategy moving forward.
Jeffrey O. Henley, Chairman of the Board
Mr. Henley has held the position of Chairman of Oracle Corporation since
January 2004. Prior to 2004, he was Oracle’s Chief Financial Officer and
Executive Vice President for 13 years. Before joining Oracle, Mr. Henley held
executive positions at Pacific Holding Company and Saga Corporation. He is
active in various organizations including those that support children and those
that support academic interests. He earned his bachelor’s in economics from the
University of California at Santa Barbara and an MBA in finance from UCLA.
Management Guidance
Management provides guidance for three main aspects of the business explicitly
and others somewhat implicitly. They provide expectations for EPS, revenue by
segment, and tax rate. As a part of each of these they share GAAP and nonGAAP expectations as well as the impact of currency rates.
Revenue segment projections show that there is great uncertainty in short-term
growth. For example, new software license and cloud subscription revenue
growth is expected to range from 3% to 13%. Hardware product revenue
growth is expected to range from -10% to 0%. As a result, total revenue growth
is expected to range from 1% to 5%. I have projected my revenue based off of
this guidance. Overall, I expect total revenue growth to be in the 3.5% to 4%
range. In the recent past, they have beaten their guidance fairly substantially
due to unexpected revenue gained through acquisitions.
Earnings per share is expected to increase by approximately 5% from third
quarter last year. Management believes EPS will grow nearly 10% from 20132014; I am slightly more skeptical and my models demonstrate that. The other
line item that management provides guidance for is the company’s tax rate.
Going forward, the tax rate is expected to remain steady around 24% and I
projected that and included a slightly increasing tax rate into the terminal year.
Portfolio Strategy
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The Investment Group has not held Oracle recently, at least. It was pitched as a
hold in November of 2010. The pitch was shortly after the hiring of Mark Hurd
who had recently experienced a controversial departure from Hewlett-Packard.
Oracle represents a good value stock with an expectation of long-term growth. I
believe this fits the portfolio strategies of Tall Firs and Svigals. At the moment,
I think Tall Firs is underweight in the technology sector, so a buy could help get
that in line with the benchmark.
Recent News
Oracle Announces Release of Oracle RightNow Cloud Service (02.27.2013)
Oracle has expanded and updated one of their cloud products. It is meant to help
organizations automate the management and deployment of complex business
policies that are required to support customers. Oracle recognizes the
importance of cloud software moving forward into the future and is adamant on
continuing development in that segment.
Oracle Expands in Oregon (02.19.2013)
Oracle decided to expand its facilities in Hillsboro, OR. It will use $1.4 million
in loans to add 130 jobs. It will move production of data-center servers and
storage systems from Mexico to Hillsboro.
Oracle is committed to continued growth domestically. This helps create an
image of a conscientious company that values the strength economically of the
community.
Oracle Buys Acme Packet (02.04.2013)
“Oracle [will] acquire Acme Packet, the leading global provider of session
border control technology for $1.7 billion. Acme enables the trusted, first-class
delivery of next-generation voice, data, and unified communications services
and applications across IP networks.”
This demonstrates Oracle’s continuing strategy towards acquisitions. It is a
must for large technology firms to acquire the innovative technologies that
smaller companies have an advantage at developing. They are able to specialize
and focus more closely on the specifics of the technology. The combination of
these two companies is expected to accelerate the migration to all-IP networks
by creating secure and reliable communications from any device, via any
network. They can work together to develop a portfolio of technologies that
meet changing customer demands regarding mobile communications.
Catalysts
Upside





Ability to fund the acquisition of emerging technologies
Expand globally and gain market share
An expanding stock repurchase program and increasing dividend
Focus on high-margin revenue channels such as software support
Continued employment of elite individuals
Downside
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



Relative inexperience in hardware systems could cause inefficient
operations
Possible lawsuits stemming from intellectual property disputes
The competition level could cause changes to Oracle’s price models
Security threats could compromise the integrity of large databases
Forward Comparable Analysis (50%)
Comparables were initially screened by their overall business model. I focused
on firms in the technology sector and filtered them further based upon industry;
technology firms tend to share many of the same risks even if they don’t make
the same products. At first, companies in the application software industry were
given priority. I chose companies that had similar estimated betas, margins, and
relatively similar market capitalization. Oracle is not just an application
software business though and for that reason I included Intel which represents
the risks associated with the hardware side of Oracles business. Growth
possibilities were also taken into consideration when choosing comparable
companies even though growth is strongly dictated by sector and industry.
Once comparable companies were chosen, I compared the last twelve months
valuation to the forward valuation. One distinct problem with the trailing
month’s method was that Saleforce.com had experienced a net loss which
caused inaccurate valuations. As a result, along with other circumstances, I
chose to valuate Oracle based on forward projections.
The following metrics were given weighting in the forward valuation of Oracle:
EV/EBIT, EV/EBITDA, and EV/(EBITDA-Capex). These multiples give the best
idea of what investors are willing to pay for the overall profitability of a firm
regardless of accounting differences frequently associated with depreciation and
taxes. The P/E multiple was not used because it is an extreme outlier caused by
the high multiple of Salesforce.com. EV/EBITDA was given the largest
weighting because it is supposed to represent the profitability of the firm the
best according to the investment group.
It is important to note that SAP AG ADS would have been a heavily weighted
comparable, given it were an American company. It is another large enterprise
software company that is quite similar. There are issues using SAP as a
comparable. They do not report to the SEC in the same way an American
company does, and they are largely exposed to European risk as opposed to
those in the U.S. I did not feel confident using them as a comparable as a result
of the international differences.
Microsoft Corporation (MSFT) – 40%
“Microsoft Corporation develops, licenses, and supports software products and
services; and designs and sells hardware worldwide. The company’s Windows
& Windows Live division offers PC operating system that primarily includes
Windows 7 operating system, Windows live suite of applications and Web
services, and PC hardware products…Microsoft Corporation markets and
distributes its products and services primarily through original equipment
manufacturers, distributors, and resellers, as well as through online.” –Yahoo
Finance
Microsoft is the only American software company that can match Oracle’s size
and market share. They are exposed to similar risks because they both provide
software solutions on a massive scale. Microsoft is somewhat more diverse in
its clientele. They target large enterprises and individual customers; Oracle is
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more focused on business clients and a large section of their revenue comes
from businesses. Microsoft has very similar profitability margins to Oracle and
its expected growth rates are the closest out of all the comparables selected. The
expected growth rates of Microsoft are slightly higher. The multiples are
slightly lower than Oracle’s meaning that investors are willing to spend less for
Microsoft’s earnings. Taking everything into account, it is the best comparable
for Oracle and I have given it the highest weighting.
Intel Corporation (INTC) – 5%
“Intel Corporation designs, manufactures, and sells integrated digital technology
platforms worldwide. The company operates through PC Client Group, Data
Center Group, Other Intel Architecture, Software and Services, and All Other
segments…it offers endpoint security, network and content security, risk and
compliance, and consumer and mobile security software products for consumer,
mobile, and corporate environments to protect systems from malicious virus
attacks, as well as loss of data. It sells its products primarily to original
equipment manufacturers, original design manufacturers, and industrial and
communications equipment manufacturers in the computing and
communications industries.” –Yahoo Finance
I thought that Intel would be an appropriate comparable for Oracle because they
are both in the technology sector and share many of the same risks. There is a
correlation between the demand for a computer chip and the software needed to
run on that chip. Growth in 2014 is somewhat similar; however there is a
problem with Intel’s expected growth. It is expected to be negative in 2013 and
that is not similar to Oracle. Also, the margins for these companies don’t line up
closely. In general, Intel has much higher costs inherent with its business.
Overall, the market is paying at a similar level for these companies evidenced by
the multiples for each. Some similarities exist between the two, but not enough
to warrant a significant weighting.
Salesforce.com, Inc. (CRM) – 5%
“Salesforce.com, inc provides cloud computing and social enterprise solutions to
various businesses and industries worldwide. The company delivers customer
relationship management applications through Internet or cloud. Its cloud
computing services enable customers to connect, engage, sell, service, and
collaborate with customers…The company markets its services primarily
through its direct sales, and referral and indirect sales.” –Yahoo Finance
Salesforce.com is somewhat of an anomaly. It trades at a significant premium
over Oracle and all other comparables chosen, yet over the last twelve months it
has reported a net loss. It has a strong gross margin that is just one percent
greater than Oracle; however, all other profitability margins are significantly
lower signifying that perhaps there are some structural problems that need to be
solved in order to improve efficiency. Oracle is exposed to many of the same
risks as it and has a similar level of risk as evident by the estimated beta of each.
Many expect a large amount of growth for salesforce.com which is one of the
reasons for its high price. It is in the same industry as Oracle, but there are
many differences between the two which is why I have chosen to give it a
minimal weighting.
CA Technologies (CA) – 30%
“CA Technologies, together with its subsidiaries, provides enterprise
information technology (IT) management software and solutions in the United
States and internationally. The company operates in three segments: Mainframe
Solutions, Enterprise Solutions, and Services…The company serves industries,
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including banks, insurance companies, and other financial services providers, as
well as government agencies, telecommunication providers, manufacturers,
technology companies, retailers, educational organizations, and health care
institutions.” –Yahoo Finance
CA Technologies should be a good comparable to an extent because it operates
in the same sector and industry as Oracle. There are issues with selecting CA as
a comparable though. CA is dwarfed by Oracle and other tech giants like
Microsoft and Intel. Expected growth for CA is lower than what I, and other
analysts, have projected for Oracle. I believe that this is the reason that its
multiples are smaller. In conclusion, CA resembles Oracle closely albeit on a
much smaller scale which is why I chose to give them an average weighting in
regards to the other comparables.
Red Hat, Inc. (RHT) – 20%
“Red Hat, Inc. provides open source software solutions to enterprise customers
worldwide. The company also offers enterprise-ready open source operating
system platforms… it provides various cloud, storage, and systems management
offerings, as well as offers training, consulting, and support services. The
company sells its enterprise technologies through annual or multi-year
subscriptions.” –Yahoo Finance
Red Hat’s business operations very closely resemble those of Oracle. Red Hat is
operating on a much smaller scale than Oracle which is somewhat due to its
relative youth. As a result of being relative small, they are able to grow at an
accelerated rate which is what analysts expect. It possesses the highest gross
margin and the rest of its profitability margins are similar to Oracles. In general,
the market is willing to pay more for Red Hat due its expected growth in the
coming years. I believe that Red Hat and Oracle are quite similar even if there
are differences, so I chose to give it an average weighting that is just below the
weighting of CA Technologies.
Discounted Cash Flow Analysis (50%)
Revenue
Total revenue growth was projected using management’s guidance of 2% to 6%
with flat currency changes and 2% to 5% with the inclusion of currency effects.
Revenue is somewhat difficult to project because the revenue gained from
acquisitions is included in total revenue. This causes growth to be extreme in
some cases. For example, Sun Microsystems was bought out in the fiscal year
2011 which caused growth top-line growth to be nearly 33%. For this reason, I
tend to side towards the higher end of expectations. I expect growth for 2013 to
be below growth in 2012, but I also expect a strong rebound year in 2014 as
company firms gain steam and invest in computer software and hardware
further. Sales growth is anticipated to reach its peak in 2015 and then slow
down into perpetuity. Overall, growth is estimated to reach nearly 30% between
2012 and 2018. Each segment should be growing at a decelerating rate in 2018.
Total revenue growth was my primary focus. After that had been projected
based on what is expected in their different business segments, I broke down
revenue into five segments. Each segment was then given concrete expected
growth values which were verified given what I believe will happen as a percent
of total revenue.
It is important to note that Oracle identifies geographic segments for revenue.
Upon review, it was determined that segment analysis by geographic regions
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was not necessary. There is a not a significant difference in the growth rates
between the United States, EMEA, and Asia Pacific. Asia Pacific is growing
faster than EMEA, but it is not necessary to project revenue, nor does it add
anything but marginal value to the projection of revenue.
Software License Updates and Product
Support
20000
90%
88%
15000
86%
10000
84%
5000
82%
0
80%
2009
2010
Revenue (millions)
2011
2012
Operating Margin
Software License Updates & Product Support
This revenue segment is composed of returning software customers that look to
upgrade their existing software and those that have chosen to buy support
contracts along with their software. Nearly all of Oracle’s software customers
renew their license updates and product support contracts. Updates and product
support is expected to be the fastest growing revenue segment. This segment is
expected to grow regardless if new software licenses growth remains flat
because nearly all software license sales result I updates and product support
contracts. If customers continue to return, this segment should really be
Oracle’s strongest. I anticipate growth to peak in the year 2015 and decline into
the terminal. Revenue from this segment has total expected growth of 41% from
2012 to 2018.
New Software Licenses
This segment includes new software contracts that have been sold and cloud
software subscriptions. This segment can vary depending on the ability to gain
large business customers, but historically it has been a large growth segment.
This segment can be cyclical due to economic conditions and the release of new
software. Growth is anticipated to outpace updates and support in the shortterm, but be outpaced in the long-term when sales cycles will become longer as
a result of longer-lasting software. Revenue from this segment has total
expected growth of 40% from 2012 to 2018.
Hardware Systems Products
Hardware products include servers, storage, networking, operating systems, and
software to support different technological environments. Oracle’s hardware
systems components are meant to be open so that customers can choose to use a
third-party software or hardware component if they choose. Revenues from this
segment are expected to slowly grow after 2014 and then decelerate. Once a
customer has bought a hardware product it is unlikely they will need to buy
another for a few years. Revenue from this segment has total expected growth
of (-3%) which is misleading because 2011 was an outstanding year and then
results tapered off.
Hardware Systems Support
Hardware systems support acts like a derivative of hardware systems products
just as software updates and support is a derivative of new software licenses.
This segment includes updates for hardware systems so that they are operating
properly and efficiently. It is expected to grow as long as hardware systems
products remain flat, and even if that doesn’t happen, support can have positive
growth. If customers continue to return to Oracle, as I expect they will, support
revenue should grow. Revenue from this segment has total expected growth of
9% from 2012 to 2018.
Services
Consulting, cloud services, and education make up the services segment of
revenue. Oracle provides professional assistance with the usage of its products,
so that customers can maximize their experience with Oracle products. An
increase in the portfolio of products will increase the demand for services and
that drives the expected growth. It is expected to peak in the year 2017.
Revenue from this segment has total expected growth of 7% from 2012 to 2018.
UOIG 11
University of Oregon Investment Group
03/08/2013
Cost of Goods Sold
COGS is broken down into the same segments as revenue with the exception of
new software licenses which is expressed through sales and marketing expenses.
I considered trends in each segment; however, in the discounted cash flows it is
incorporated into one category for simplicity. Figures are projected based upon
a percent of revenue. In its entirety, COGS is expected to grow ever so slightly
into the terminal year. It will accelerate, plateau, and then decelerate in 2018.
Software License Updates and Product Support
Expenses associated with software product support are largely personnel related.
Personnel are paid via salaries and stock-based compensation to provide
customer service to those that require software support. Costs associated with
personnel are expected to increase as higher wages are demanded; therefore,
increasing the total amount of COGS.
Hardware Systems Products
Hardware systems products is expensed more so as a traditional consumer good.
It takes into account the cost of materials needed to build the hardware, the cost
of employees to operate the manufacturing of these systems, warranty expenses,
and the expenses related to personnel which include sales commissions. These
expenses are projected to increase by small amounts as manufacturing processes
become more efficient to offset labor and materials cost increases.
Hardware Systems Support
Expenses attributed to hardware systems support include the cost of materials
used to repair customer products and the cost of personnel required to provide
support services. The price of replacement parts is expected to remain fairly
steady into the future dependent upon the price of computers in general and
personnel expenses are projected to increase.
Services
Service expenses are largely a result of labor wages. They are expected to
fluctuate closely with the expected level of wages which is trending upwards in
the future. Facility expenses and external contractor expenses are also expected
to increase in the future and that was considered when projecting COGS.
Sales and Marketing
Sales and marketing costs incorporate the costs needed to advertise and market
Oracle’s products. Historically, this cost has been, on average, 19% percent of
revenue. Moving forward, I projected this expense to remain at 19.28% with a
very slight increase in the terminal year. An increase in advertising and
marketing is not necessary to maintain or gain market share in the software
publishing industry. Most customers are aware of the largest firms in this
industry.
Research and Development
R&D expenses consist primarily of personnel related expenditures. Significant
investment in research and development is essential to the continuing success of
Oracle. It was projected as a percent of revenue that increases at an accelerating
rate, a steady rate, and then a decelerating rate going into the terminal year.
General and Administrative Expense
UOIG 12
University of Oregon Investment Group
03/08/2013
General and administrative expenses are projected as a percent of revenue.
They have tended to hover around three-percent annually with changes due to
the variance of personnel salaries. Changes in personnel expenses are largely a
result of legal, finance, technology, and human resource issues.
Amortization of Intangible Assets
The amortization of intangible assets has been fairly consistent over the past
four years. As a percent of revenue, it has been decreasing at an annual rate of
.27% and was nominally the same from 2011-2012 due to offsetting expenses.
Going into the terminal year, I believe this expense to continue the historical
trend which approaches a terminal value of 6.38%. I used a gradually
accelerating negative growth rate to arrive at this final value.
Other Operating Expenses
Other operating expenses include acquisition related & other and restructuring
expenses. These two expense categories are projected based on a percent of
revenue. They are largely a result of acquisitions and consist of personnel costs
for transitions which include stock-based compensation, integration related
professional services, and certain business combination adjustments. Because
these costs are related to acquisitions and I have projected acquisitions to
increase, I have also chosen to increase these two cost categories.
Net Working Capital
Projections for the third and fourth quarter of 2013 were made so that the days’
outstanding for the year were reasonable given historical results and trends.
They were then verified as a percent of revenue. If I was unable to use the days’
outstanding method, I would then project based on a percent of revenue. I prefer
to use gradual rates as opposed to straight-line rates because it gives a more
realistic growth estimate and smoother transitions.
Capital Expenditures
Capital expenditures include the costs associated with the expansion of factories,
server farms, equipment upgrades, and other expenses that are a result of
expanding the company. Capital expenditures for the fiscal year 2013 are
expected to be higher than in the past due to a large investment in quarter two. I
expect that expenditures as a percent of revenue will slightly decline in 2014
back to a more reasonable amount given historical values. Going into
perpetuity, I project expenditures to increase at a fairly steady rate that peaks in
2017.
Acquisitions
Acquisitions are an integral part of the continuing growth of Oracle. Over the
past four fiscal years, it has spent over $13 billion dollars on acquisitions. These
have been funded through cash and the issuance of debt and equity. Notable
acquisitions include Sun Microsystems, Acme Packet, Taleo, and Java. The
amount spent on acquisitions is particularly difficult to project due to volatility.
Historically, acquisitions have varied from 5% to 20%. Going forward, I
considered this and made a projection based off an average that increases at a
UOIG 13
University of Oregon Investment Group
03/08/2013
steady rate. Oracle will continue to sustain a strong long-term growth rate and
the acquisition of emerging technologies is vital to that.
Cost of Debt
The cost of debt for Oracle was calculated to be 3.38% using interest rates and
the amount of principal outstanding. Most of their bonds are trading at above
par value. The information was gathered via Factset and includes market prices
and yield to worst in the calculation.
Beta
Beta
SD
0.02
Weighting
3-Year Daily
1.13
30%
(Vasicek)
1.09
5%
(Hamada)
1.15
5%
1-Year Daily
1.17
0.01
30%
1-Year Weekly
1.06
0.03
30%
Adjusted Beta
1.12
100%
An estimated beta was calculated using weights for various methods and
differing time periods. The S&P 500 index was used to perform the regressions
for the three-year daily, one-year daily, and one-year weekly beta estimates. A
Vasicek Beta was used to account for standard error in estimating the regression
and to compare across the industry. A Hamada Beta was used to compare
companies with dissimilar capital structures. Some companies are funded
through the issuance of debt and others are not, the Hamada Method attempts to
account for this difference in its estimate.
The three-year time period was given the heaviest weight. It is able to capture
long term risks as well as short term risks. It is an intermediary time period and
the estimate benefits from this because it does not use estimates that are
outdated, and it is also not solely dependent upon risk within the last year. I
delegated the majority of the three-year weighting to the actual regression
because the regressions itself is the most important. The Vasicek and Hamada
Betas are dependent upon regressions, so the weightings corresponding to them
are small.
Tax rate
Management has projected the tax rate for the fiscal year of 2013 to be 24
percent. I used that projection in order to target a tax rate for the last two
quarters of the company’s fiscal year. Going into the future, I project the tax
rate to increase only slightly at an increasing rate and then a decreasing rate for
the last projected year. I believe a tax rate of 24 percent is an appropriate
estimate given the years prior. The tax rate for Oracle has been decreasing each
year; from 29% in 2009 to 23% in 2012. There is a limit to this trend, and I
believe that to be 24% for the long term.
Intermediate Growth Rate
I used an intermediate growth rate to bridge the gap between 2018 and 2023.
Given that free cash flow grew at a rate of 4% in 2018, I proceeded to continue
to grow free cash flow at a lower rate of 3.7% until 2023. I expect Oracle to
have strong long-term growth which is why set it higher than halfway between
3% and 4%.
Recommendation
UOIG 14
University of Oregon Investment Group
Source
Forward Comps
DCF
Price Target
Current Price
Undervalued
Implied Price Weight
$39.34 50%
35.17 50%
37.25
35.05
6.29%
03/08/2013
I am recommending a hold for Oracle at this moment in time. Going into this
report, I was prepared to recommend a buy based on recent news regarding the
Acme acquisition and recent price trends for Oracle. Both of my valuation
methods resulted in an undervaluation, and I decided to weight them equally
based on equal confidence in methods. I am not recommending a buy at this
time because the undervaluation is only marginal. In other words, if my
analyses had indicated a larger undervaluation, I would recommend a buy. It is
important to note that the final price target includes a market risk premium of
7% in its calculations and this is something currently being discussed in the
group. If the premium were to fall, the price target would rise and that can be
seen in the sensitivity analysis as a part of appendix 6.
Oracle is one of the dominant tech firms in the world, and I expect strong longterm growth. It is seen as a value stock, and short-term growth is not expected
to be extreme. For this reason, I believe it should only be considered for the Tall
Firs and Svigals portfolios.
UOIG 15
University of Oregon Investment Group
03/08/2013
Appendix 1 – Forward Comparables Analysis
Comparables Analysis
($ in millions)
Stock Characteristics
Current Price
Beta
Max
$185.89
1.40
Min
$21.27
0.92
Size
Short-Term Debt
Long-Term Debt
Cash and Cash Equivalent
Non-Controlling Interest
Preferred Stock
Diluted Basic Shares
Market Capitalization
Enterprise Value
2,241.0
18,507.0
15,192.0
427.0
0.2
8,376.2
235,791.3
243,962.3
0.0
36.1
521.7
0.0
0.0
153.0
10,061.6
9,491.9
19.0
1,282.0
2,353.0
0.0
0.0
455.9
28,174.3
27,861.2
Growth Expectations
% Revenue Growth 2013E
% Revenue Growth 2014E
% EBITDA Growth 2013E
% EBITDA Growth 2014E
% EPS Growth 2013E
% EPS Growth 2014E
26.6%
23.4%
29.6%
24.4%
29.0%
28.8%
0.8%
0.8%
-5.5%
0.1%
-9.0%
4.6%
86.30%
36.60%
42.97%
26.37%
Profitability Margins
Gross Margin
EBIT Margin
EBITDA Margin
Net Margin
Credit Metrics
Interest Expense
Debt/EV
Leverage Ratio
Interest Coverage Ratio
Operating Results
Revenue
Gross Profit
EBIT
EBITDA
Net Income
Capital Expenditures
Multiples
EV/Revenue
EV/Gross Profit
EV/EBIT
EV/EBITDA
EV/(EBITDA-Capex)
Market Cap/Net Income = P/E
Median Weight Avg.
$28.15
$39.37
1.01
1.06
ORCL
MSFT
INTC
CRM
CA
RHT
Oracle Corporation
Microsoft Corporation
Intel Corporation
Salesforce.com
CA Technologies
Red Hat, Inc.
40%
5%
30%
20%
$35.05
1.15
$28.15
0.92
$21.27
0.95
5%
$185.89
1.29
917.7
5,830.6
3,683.9
7.3
0.0
3,785.8
106,430.7
109,502.4
1,250.0
18,507.0
15,192.0
427.0
0.0
4,734.3
165,937.1
170,929.1
2,241.0
11,947.0
6,017.0
0.0
0.0
8,376.2
235,791.3
243,962.3
312.0
13,136.0
8,478.0
0.0
0.0
5,044.8
106,979.3
111,949.3
7.8%
8.2%
4.6%
8.3%
5.2%
10.5%
8.0%
7.8%
7.5%
8.4%
7.2%
11.1%
3.7%
4.0%
4.1%
4.9%
5.4%
4.9%
7.8%
8.2%
4.6%
8.2%
2.7%
10.5%
59.46%
12.24%
17.99%
1.94%
80.85%
25.34%
38.01%
14.52%
79.51%
31.79%
36.34%
13.23%
79.87%
36.47%
42.97%
26.37%
$764.00
0.13
1.19
232.67
$0.00
0.00
0.08
0.00
$44.00
0.06
0.41
40.40
$175.51
0.07
0.43
60.77
$85,988.7
64,153.4
31,473.8
34,986.4
10,153.6
12,698.2
$1,544.8
1,333.1
377.4
449.5
74.7
64.7
$4,676.8
3,958.4
1,619.6
1,777.5
946.0
216.9
7.22x
8.93x
59.02x
40.16x
58.42x
377.17x
2.07x
2.55x
6.23x
5.35x
6.00x
10.93x
2.84x
3.80x
8.19x
6.97x
13.58x
33.72x
$24.45
1.01
$52.08
1.40
0.0
63.6
521.7
145.0
0.0
153.0
28,174.3
27,861.2
19.0
1,282.0
2,353.0
0.0
0.0
455.9
11,147.3
10,095.3
0.0
36.1
605.9
0.0
0.2
193.2
10,061.6
9,491.9
1.2%
4.6%
-5.5%
8.3%
-9.0%
8.5%
26.6%
23.4%
29.6%
24.4%
29.0%
28.8%
0.8%
0.8%
2.5%
0.1%
5.2%
4.6%
16.1%
14.5%
18.4%
17.3%
17.9%
18.3%
74.61%
36.60%
40.69%
8.13%
59.46%
25.34%
38.80%
18.13%
80.85%
12.24%
17.99%
1.94%
84.64%
34.63%
38.01%
20.23%
86.30%
24.43%
29.10%
14.52%
$764.00
0.12
1.19
21.65
$391.00
0.06
0.41
89.48
$90.00
0.12
0.64
232.67
$28.26
0.00
0.09
24.55
$44.00
0.13
0.73
40.40
$0.00
0.00
0.08
0.00
$38,998.9
28,876.1
13,858.2
15,699.4
3,618.9
2,091.1
$38,501.51
30,752.55
14,040.74
16,542.97
10,153.64
760.79
$85,988.70
64,153.40
31,473.80
34,986.40
6,993.20
3,509.50
$53,970.60
32,093.20
13,674.10
20,939.90
9,784.60
12,698.20
$3,857.00
3,118.30
472.10
693.80
74.70
216.90
$4,676.80
3,958.40
1,619.60
1,777.50
946.00
95.20
$1,544.80
1,333.10
377.40
449.50
224.30
64.70
3.48x
4.33x
13.36x
10.99x
13.43x
45.40x
4.44
5.56
12.17
10.33
10.83
16.34
2.84
3.80
7.75
6.97
7.75
33.72
2.07
3.49
8.19
5.35
13.58
10.93
7.22
8.93
59.02
40.16
58.42
377.17
2.16
2.55
6.23
5.68
6.00
11.78
6.14
7.12
25.15
21.12
24.67
44.86
Multiple
EV/Revenue
EV/Gross Profit
EV/EBIT
EV/EBITDA
EV/(EBITDA-Capex)
Market Cap/Net Income = P/E
Price Target
Current Price
Undervalued
Implied Price
$27.31
27.17
38.66
37.44
43.82
97.37
$39.34
35.05
12.24%
Weight
0%
0%
25%
50%
25%
0%
UOIG 16
University of Oregon Investment Group
03/08/2013
Appendix 2 – Discounted Cash Flows Analysis
Discounted Cash Flow Analysis
($ in millions)
2009A
Total Revenue
2010A
23252.00
% YoY Growth
Cost of Goods Sold
4794.00
2011A
2012A
Q1
Q2
Q3
Q4
08/31/2012A
11/30/2012A
02/28/2013E
05/31/2013E
2013E
Q1
Q2
Q3
Q4
08/31/2013E
11/30/2013E
02/28/2014E
05/31/2014E
2014E
2015E
2016E
2017E
2018E
26820.00
35622.00
37121.00
8181.00
9094.00
9780.00
11446.51
38501.51
8642.00
9568.00
9967.00
11864.57
40041.57
42003.60
44019.77
46088.70
15.34%
32.82%
4.21%
(2.30%)
3.43%
8.20%
4.86%
3.72%
5.64%
5.21%
1.91%
3.65%
4.00%
4.90%
4.80%
4.70%
48208.78
4.60%
5764.00
8398.00
7858.00
1775.00
1794.00
1936.44
2243.51
7748.95
1762.97
1932.74
2023.30
2341.41
8060.41
8458.53
8867.84
9288.08
9717.14
% Revenue
20.62%
21.49%
23.58%
21.17%
21.70%
19.73%
19.80%
19.60%
20.13%
20.40%
20.20%
20.30%
19.73%
20.13%
20.14%
20.15%
20.15%
20.16%
Gross Profit
$18,458.00
$21,056.00
$27,224.00
$29,263.00
$6,406.00
$7,300.00
$7,843.56
$9,202.99
$30,752.55
$6,879.03
$7,635.26
$7,943.70
$9,523.16
$31,981.15
$33,545.08
$35,151.94
$36,800.62
$38,491.64
Gross Margin
79.38%
78.51%
76.42%
78.83%
78.30%
80.27%
80.20%
80.40%
79.87%
79.60%
79.80%
79.70%
80.27%
79.87%
79.86%
79.85%
79.85%
79.84%
Sales and Marketing
4638.00
5080.00
6579.00
7127.00
1545.00
1773.00
1897.32
2209.18
7424.50
1633.34
1865.76
1933.60
2289.78
7722.48
8102.98
8494.12
8895.65
9306.06
%Revenue
19.95%
18.94%
18.47%
19.20%
18.89%
19.50%
19.40%
19.30%
19.28%
18.90%
19.50%
19.40%
19.30%
19.29%
19.29%
19.30%
19.30%
19.30%
Research and Development
2767.00
3254.00
4519.00
4523.00
1201.00
1199.00
1134.48
1316.35
4850.83
1166.67
1245.75
1258.83
1376.11
5047.36
5299.94
5559.83
5826.91
6097.96
% Revenue
11.90%
12.13%
12.69%
12.18%
14.68%
13.18%
11.60%
11.50%
12.60%
13.50%
13.02%
12.63%
11.60%
12.61%
12.62%
12.63%
12.64%
12.65%
785.00
911.00
970.00
1126.00
275.00
263.00
295.36
354.84
1188.20
287.78
272.69
307.98
370.84
1239.29
1302.11
1366.81
1433.36
1501.70
General and Administrative Expense
% Revenue
Amortization of intangible assets
3.38%
3.40%
2.72%
3.03%
3.36%
2.89%
3.02%
3.10%
3.09%
3.33%
2.85%
3.09%
3.13%
3.10%
3.10%
3.11%
3.11%
3.12%
1713.00
1973.00
2428.00
2430.00
619.00
584.00
597.56
701.67
2502.23
623.09
611.40
624.93
727.27
2586.69
2700.83
2821.67
2945.07
3075.72
% Revenue
7.37%
7.36%
6.82%
6.55%
7.57%
6.42%
6.11%
6.13%
6.50%
7.21%
6.39%
6.27%
6.13%
6.46%
6.43%
6.41%
6.39%
6.38%
Acquisition related and other
117.00
154.00
208.00
56.00
-258.00
-121.00
293.40
343.40
257.80
43.21
47.84
49.84
59.32
200.21
212.64
228.35
244.85
265.15
% Revenue
Restructuring
%Revenue
Earnings Before Interest & Taxes
% Revenue
0.50%
0.57%
0.58%
0.15%
-3.15%
-1.33%
3.00%
3.00%
0.67%
0.50%
0.50%
0.50%
0.50%
0.50%
0.51%
0.52%
0.53%
0.55%
117.00
622.00
487.00
295.00
145.00
131.00
97.80
114.47
488.27
108.03
95.68
99.67
97.04
400.42
424.24
449.00
479.32
506.19
0.50%
2.32%
1.37%
0.79%
1.77%
1.44%
1.00%
1.00%
1.27%
1.25%
1.00%
1.00%
0.82%
1.00%
1.01%
1.02%
1.04%
1.05%
$8,321.00
$9,062.00
$12,033.00
$13,706.00
$2,879.00
$3,471.00
$3,527.65
$4,163.09
$14,040.74
$3,016.92
$3,496.15
$3,668.85
$4,602.79
$14,784.72
$15,502.34
$16,232.15
$16,975.47
$17,738.87
35.79%
33.79%
33.78%
36.92%
35.19%
38.17%
36.07%
36.37%
36.47%
34.91%
36.54%
36.81%
38.79%
36.92%
36.91%
36.87%
36.83%
36.80%
Interest Expense
630.00
754.00
808.00
766.00
188.00
195.00
190.71
227.79
801.50
179.75
200.93
209.31
247.07
837.06
885.43
935.63
987.67
1037.32
% Revenue
2.71%
2.81%
2.27%
2.06%
2.30%
2.14%
1.95%
1.99%
2.08%
2.08%
2.10%
2.10%
2.08%
2.09%
2.11%
2.13%
2.14%
2.15%
(143.00)
65.00
(186.00)
(22.00)
(11.00)
(4.00)
(48.90)
(57.23)
(121.13)
(17.28)
(19.14)
(19.93)
(78.03)
(134.39)
(158.61)
(184.71)
(212.75)
(252.91)
Other (Income), net
% Revenue
Earnings Before Taxes
% Revenue
Less Taxes (Benefits)
Tax Rate
Net Income
Net Margin
Add Back: Depreciation and Amortization
Add Back: Interest Expense*(1-Tax Rate)
Operating Cash Flow
% Revenue
Current Assets
% Revenue
Current Liabilities
% Revenue
Net Working Capital
% Revenue
(.62%)
.24%
(.52%)
(.06%)
(.13%)
(.04%)
(.50%)
(.50%)
(.31%)
(.20%)
(.20%)
(.20%)
(.66%)
(.34%)
(.38%)
(.42%)
(.46%)
(.52%)
7,834.00
8,243.00
11,411.00
12,962.00
2,702.00
3,280.00
3,385.84
3,992.54
13,360.38
2,854.45
3,314.36
3,479.48
4,433.76
14,082.04
14,775.53
15,481.23
16,200.55
16,954.46
33.69%
30.73%
32.03%
34.92%
33.03%
36.07%
34.62%
34.88%
34.70%
33.03%
34.64%
34.91%
37.37%
35.17%
35.18%
35.17%
35.15%
35.17%
2241.00
2108.00
2864.00
2981.00
668.00
699.00
842.40
997.34
3206.73
713.61
712.59
861.17
1093.63
3381.00
3549.72
3721.58
3896.93
4079.55
28.61%
25.57%
25.10%
23.00%
24.72%
21.31%
24.88%
24.98%
24.00%
25.00%
21.50%
24.75%
24.67%
24.01%
24.02%
24.04%
24.05%
24.06%
$5,593.00
$6,135.00
$8,547.00
$9,981.00
$2,034.00
$2,581.00
$2,543.44
$2,995.20
$10,153.64
$2,140.84
$2,601.77
$2,618.31
$3,340.12
$10,701.04
$11,225.81
$11,759.65
$12,303.62
$12,874.91
24.05%
22.87%
23.99%
26.89%
24.86%
28.38%
26.01%
26.17%
26.37%
24.77%
27.19%
26.27%
28.15%
26.72%
26.73%
26.71%
26.70%
26.71%
1,713.00
1,973.00
2,428.00
2,430.00
619.00
584.00
597.56
701.67
2,502.23
623.09
611.40
624.93
727.27
2,586.69
2,700.83
2,821.67
2,945.07
3,075.72
449.78
561.18
605.20
589.84
141.52
153.44
143.26
170.88
609.12
134.82
157.73
157.50
186.13
636.09
672.71
710.71
750.09
787.72
$7,755.78
$8,669.18
$11,580.20
$13,000.84
$2,794.52
$3,318.44
$3,284.26
$3,867.76
$13,264.99
$2,898.74
$3,370.89
$3,400.74
$4,253.52
$13,923.81
$14,599.35
$15,292.03
$15,998.78
$16,738.35
33.36%
32.32%
32.51%
35.02%
34.16%
36.49%
33.58%
33.79%
34.45%
33.54%
35.23%
34.12%
35.85%
34.77%
34.76%
34.74%
34.71%
34.72%
5,957.00
8,535.00
10,326.00
9,347.00
6,565.00
7,434.00
8,547.81
9,730.82
9,730.82
7,402.02
8,427.19
8,954.23
10,431.37
10,431.37
10,820.89
11,308.71
11,807.46
12,322.91
25.62%
31.82%
28.99%
25.18%
80.25%
81.75%
87.40%
85.01%
25.27%
85.65%
88.08%
89.84%
87.92%
26.05%
25.76%
25.69%
25.62%
25.56%
9,149.00
14,691.00
14,192.00
15,388.00
13,955.00
12,347.00
13,340.35
15,145.22
15,145.22
11,612.22
12,914.17
13,810.94
15,943.25
15,943.25
16,822.68
17,796.60
18,798.69
19,831.77
39.35%
54.78%
39.84%
41.45%
170.58%
135.77%
136.40%
132.31%
39.34%
134.37%
134.97%
138.57%
134.38%
39.82%
40.05%
40.43%
40.79%
41.14%
($3,192.00)
($6,156.00)
($3,866.00)
($6,041.00)
($7,390.00)
($4,913.00)
($4,792.55)
($5,414.40)
($5,414.40)
($4,210.19)
($4,486.98)
($4,856.71)
($5,511.89)
($5,511.89)
($6,001.78)
($6,487.88)
($6,991.23)
($7,508.86)
(54.02%)
(49.00%)
(47.30%)
(14.06%)
$120.45
($621.85)
$626.60
(13.73%)
(22.95%)
Change in Working Capital
($2,964.00)
(10.85%)
$2,290.00
(16.27%)
(90.33%)
($2,175.00)
($1,349.00)
$2,477.00
(48.72%)
$1,204.20
(46.90%)
(48.73%)
(46.46%)
(13.77%)
(14.29%)
(14.74%)
(15.17%)
(15.58%)
($276.79)
($369.73)
($655.17)
($97.49)
($489.90)
($486.10)
($503.35)
($517.63)
940.07
Capital Expenditures
529.00
230.00
450.00
648.00
139.00
212.00
195.60
206.04
752.64
151.24
192.32
200.34
216.90
760.79
802.27
845.18
894.12
% Revenue
2.28%
.86%
1.26%
1.75%
1.70%
2.33%
2.00%
1.80%
1.95%
1.75%
2.01%
2.01%
1.83%
1.90%
1.91%
1.92%
1.94%
1.95%
1159.00
5606.00
1847.00
4702.00
361.00
299.00
1760.40
457.86
2,878.26
652.47
722.38
752.51
909.27
3,036.64
3,230.79
3,433.41
3,644.56
3,864.28
Acquisitions
% Revenue
Unlevered Free Cash Flow
4.98%
20.90%
5.18%
12.67%
4.41%
3.29%
18.00%
4.00%
7.48%
7.55%
7.55%
7.55%
7.66%
7.58%
7.69%
7.80%
7.91%
8.02%
$6,067.78
5797.18
6993.20
9825.84
$3,643.52
$330.44
$1,207.81
$3,825.71
9,007.49
$890.84
2732.98
2817.63
3782.52
10,223.88
11,056.18
11,499.53
11,963.45
12,451.64
$1,182.21
$3,665.30
$835.40
2508.60
2531.50
3326.39
Discounted Free Cash Flow
EBITDA
EBITDA Margin
7773.14
11035.0
14461.0
16136.0
3498.0
4055.0
4125.2
4864.8
16543.0
3640.0
4107.5
4293.8
5330.1
17371.4
18203.2
19053.8
19920.5
20814.6
41.14%
40.60%
43.47%
42.76%
44.59%
42.18%
42.50%
42.97%
42.12%
42.93%
43.08%
44.92%
43.38%
43.34%
43.28%
43.22%
43.18%
9.98%
31.05%
11.58%
15.92%
1.73%
17.93%
2.52%
12.84%
4.53%
24.13%
5.01%
4.79%
4.67%
4.55%
4.49%
Intermediate Growth Rate:
3.70%
2020E
2021E
2022E
2023E
$12,879.18
$13,355.71
$13,849.87
$14,362.31
$14,893.72
6687.90
8136.39
43%
2019E
7025.96
8520.42
$10,034.00
EBITDA Growth
7381.11
8924.66
6366.10
6059.79
UOIG 17
University of Oregon Investment Group
03/08/2013
Appendix 3 – Revenue Model
Revenue Model
($ in millions)
2009A
2010A
2011A
2012A
Q1
Q2
Q3
Q4
08/31/2012A
11/30/2012A
02/28/2013E
05/31/2013E
2013E
Q1
Q2
Q3
Q4
08/31/2013E
11/30/2013E
02/28/2014E
05/31/2014E
2014E
2015E
2016E
2017E
2018E
Software
Software License Updates & Product Support
11754
13092
14796
16210
4140
4260
4240
4500
17140
4296
4436
4426
4897
18055
19200
20400
21600
22860
11.38%
13.02%
9.56%
2.93%
6.87%
4.67%
8.41%
5.74%
3.77%
4.13%
4.39%
8.82%
5.34%
6.34%
6.25%
5.88%
5.83%
50.55%
48.81%
41.54%
43.67%
50.61%
46.84%
43.35%
39.31%
44.52%
49.71%
46.36%
44.41%
41.27%
45.09%
45.71%
46.34%
46.87%
47.42%
7123
7533
9235
9906
1574
2389
2710
3870
10543
1700
2600
2900
3976
11176
11849
12505
13151
13827
5.76%
22.59%
7.27%
5.07%
16.65%
14.15%
(2.91%)
6.43%
8.01%
8.83%
7.01%
2.73%
6.00%
6.03%
5.53%
5.17%
5.14%
26.56%
28.09%
25.92%
26.69%
19.24%
26.27%
27.71%
33.81%
27.38%
19.67%
27.17%
29.10%
33.51%
27.91%
28.21%
28.41%
28.53%
28.68%
18877
20625
24031
26116
5714
6649
6950
8370
27683
5996
7036
7326
8872
29230
31049
32905
34751
36687
9.26%
62.42%
8.68%
3.51%
10.19%
8.17%
2.86%
6.00%
4.94%
5.82%
5.41%
6.00%
5.59%
6.22%
5.98%
5.61%
5.57%
76.90%
67.46%
70.35%
69.84%
73.11%
71.06%
73.12%
71.90%
69.38%
73.54%
73.50%
74.78%
73.00%
73.92%
74.75%
75.40%
76.10%
% YoY Growth
% of Total Revenue
New Software Licenses
% YoY Growth
% of Total Revenue
Total Software Revenue
% Growth
% of Total Revenue
81.18%
Hardware
Hardware Systems Products
1506
4382
3827
779
734
970
1124
3607
900
800
825
1071
3596
3650
3700
3750
3798
190.97%
(12.67%)
(24.30%)
(22.98%)
11.62%
15.18%
(5.74%)
15.53%
8.99%
(14.95%)
(4.70%)
(.30%)
1.49%
1.37%
1.35%
1.28%
5.62%
12.30%
10.31%
9.52%
8.07%
9.92%
9.82%
9.37%
10.41%
8.36%
8.28%
9.03%
8.98%
8.69%
8.41%
8.14%
7.88%
784
2562
2475
574
587
660
685
2506
606
592
656
656
2510
2558
2604
2647
2691
226.79%
(3.40%)
(11.01%)
(6.08%)
9.27%
14.03%
1.27%
5.57%
.85%
(.61%)
(4.28%)
.15%
1.92%
1.78%
1.67%
1.65%
2.92%
7.19%
6.67%
7.02%
6.45%
6.75%
5.99%
6.51%
7.01%
6.19%
6.58%
5.53%
6.27%
6.09%
5.91%
5.74%
5.58%
2290
6944
6302
1353
1321
1630
1810
6113
1506
1392
1481
1727
6106
6208
6304
6397
6489
% YoY Growth
% of Total Revenue
Hardware Systems Support
% YoY Growth
% of Total Revenue
Total Hardware Revenue
% Growth
% of Total Revenue
8.54%
203.23%
(9.25%)
(19.18%)
(16.29%)
10.66%
14.74%
(3.00%)
11.31%
5.37%
(9.14%)
(4.54%)
(.11%)
1.67%
1.54%
1.48%
1.43%
19.49%
16.98%
16.54%
14.53%
16.67%
15.81%
15.88%
17.43%
14.55%
14.86%
14.56%
15.25%
14.78%
14.32%
13.88%
13.46%
Services
Consulting, Cloud Services, Education
4375
3905
4647
4703
1114
1124
1200
1267
4705
1140
1140
1160
1265
4705
4746
4811
4941
5033
(10.74%)
19.00%
1.21%
(5.59%)
(4.75%)
5.17%
5.41%
.04%
2.33%
1.42%
(3.33%)
(.17%)
(.00%)
.88%
1.37%
2.69%
1.87%
18.82%
14.56%
13.05%
12.67%
13.62%
12.36%
12.27%
11.07%
12.22%
13.19%
11.91%
11.64%
10.66%
11.75%
11.30%
10.93%
10.72%
10.44%
23252
26820
35622
37121
8181
9094
9780
11447
38502
8642
9568
9967
11865
40042
42004
44020
46089
48209
15.34%
32.82%
4.21%
(2.30%)
3.43%
8.20%
4.86%
3.72%
5.64%
5.21%
1.91%
3.65%
4.00%
4.90%
4.80%
4.70%
4.60%
% YoY Growth
% of Total Revenue
Total Revenue
% YoY Growth
UOIG 18
University of Oregon Investment Group
03/08/2013
Appendix 4 – Working Capital Model
Working Capital Model
Q1
Q2
Q3
Q4
05/31/2013E
2013E
Q1
Q2
Q3
Q4
08/31/2013E
11/30/2013E
02/28/2014E
05/31/2014E
2009A
2010A
2011A
2012A
2014E
2015E
2016E
2017E
2018E
Total Revenue
$23,252.00
$26,820.00
$35,622.00
$37,121.00
$8,181.00
$9,094.00
$9,780.00
$11,446.51
$38,501.51
$8,642.00
$9,568.00
$9,967.00
$11,864.57
$40,041.57
$42,003.60
$44,019.77
$46,088.70
$48,208.78
4430.00
69.54
19.05%
0.00
0.00
0.00%
866.00
13.59
3.72%
661.00
10.38
2.84%
5957.00
25.62%
5585.00
76.01
20.82%
259.00
16.40
0.97%
1532.00
20.85
5.71%
1159.00
15.77
4.32%
8535.00
31.82%
6628.00
67.91
18.61%
303.00
13.17
0.85%
2206.00
22.60
6.19%
1189.00
12.18
3.34%
10326.00
28.99%
6377.00
62.87
17.18%
158.00
7.36
0.43%
1935.00
19.08
5.21%
877.00
8.65
2.36%
9347.00
25.18%
3775.00
42.45
46.14%
148.00
7.67
1.81%
1729.00
19.44
21.13%
913.00
10.27
11.16%
6565.00
80.25%
4401.00
44.04
48.39%
164.00
8.32
1.80%
1976.00
19.77
21.73%
893.00
8.94
9.82%
7434.00
81.75%
5433.33
50.00
55.56%
98.97
4.60
1.01%
2119.00
19.50
21.67%
896.50
8.25
9.17%
8547.81
87.40%
6220.93
50.00
54.35%
119.49
4.90
1.04%
2363.95
19.00
20.65%
1026.45
8.25
8.97%
9730.82
85.01%
6220.93
58.98
16.16%
119.49
5.63
0.31%
2363.95
22.41
6.14%
1026.45
9.73
2.67%
9730.82
25.27%
4696.74
50.00
54.35%
93.90
4.90
1.09%
1808.24
19.25
20.92%
803.14
8.55
9.29%
7402.02
85.65%
5362.29
51.00
56.04%
105.13
4.95
1.10%
2050.29
19.50
21.43%
909.49
8.65
9.51%
8427.19
88.08%
5725.49
51.70
57.44%
111.28
4.95
1.12%
2159.52
19.50
21.67%
957.94
8.65
9.61%
8954.23
89.84%
6757.64
52.40
56.96%
127.25
5.00
1.07%
2450.29
19.00
20.65%
1096.18
8.50
9.24%
10431.37
87.92%
6757.64
61.60
16.88%
127.25
5.76
0.32%
2450.29
22.34
6.12%
1096.18
9.99
2.74%
10431.37
26.05%
7041.92
61.36
16.77%
138.66
6.00
0.33%
2550.05
22.22
6.07%
1090.26
9.50
2.60%
10820.89
25.76%
7356.73
61.00
16.71%
146.99
6.05
0.33%
2677.37
22.20
6.08%
1127.63
9.35
2.56%
11308.71
25.69%
7689.87
60.90
16.68%
155.23
6.10
0.34%
2800.68
22.18
6.08%
1161.69
9.20
2.52%
11807.46
25.62%
8030.39
60.80
16.66%
163.73
6.15
0.34%
2926.87
22.16
6.07%
1201.92
9.10
2.49%
12322.91
25.56%
1575.0
529.00
-182.0
1922.0
7879
33.89%
1922.0
230.00
-298.0
2763.0
11298
42.13%
2763.0
450.00
-368.0
2857.0
13183
37.01%
2857.0
648.00
-486.0
3021.0
12368
33.32%
3021.0
139.00
-127.0
3037.0
9602
117.37%
3037.0
212.00
-134.0
3093.0
10527
115.76%
3093.0
195.60
-136.9
3151.7
11699.48693
119.63%
3151.7
206.04
-160.3
3197.5
12928
112.95%
3197.5
752.64
-558.2
3391.93
13123
34.08%
3391.9
151.24
-125.3
3417.86
10820
125.20%
3417.9
192.32
-138.7
3471.44
11899
124.36%
3471.4
200.34
-144.5
3527.25
12481
125.23%
3527.3
216.90
-172.0
3572.12
14003
118.03%
3572.1
760.79
-580.6
3752.31
14184
35.42%
3752.3
802.27
-630.1
3924.52
14745
35.11%
3924.5
845.18
-660.3
4109.40
15418
35.03%
4109.4
894.12
-691.3
4312.19
16120
34.98%
4312.2
940.07
-723.1
4529.13
16852
34.96%
271.00
20.63
1.17%
1409.00
22.12
6.06%
4592.00
19.75%
1001.00
4.31%
1876.00
8.07%
9149.00
39.35%
775.00
49.08
2.89%
1895.00
25.79
7.07%
5900.00
22.00%
3145.00
11.73%
2976.00
11.10%
14691.00
54.78%
494.00
21.47
1.39%
2320.00
23.77
6.51%
6802.00
19.09%
1150.00
3.23%
3426.00
9.62%
14192.00
39.84%
438.00
20.40
1.18%
2002.00
19.74
5.39%
7035.00
18.95%
2950.00
7.95%
2963.00
7.98%
15388.00
41.45%
388.00
20.11
4.74%
1472.00
16.55
17.99%
8316.00
101.65%
1250.00
15.28%
2529.00
30.91%
13955.00
170.58%
372.00
18.87
4.09%
1546.00
15.47
17.00%
6504.00
71.52%
1250.00
13.75%
2675.00
29.41%
12347.00
135.77%
387.29
18.00
3.96%
1706.07
15.70
17.44%
6748.20
69.00%
1467.00
15.00%
3031.80
31.00%
13340.35
136.40%
438.95
18.00
3.83%
2115.12
17.00
18.48%
7325.76
64.00%
1716.98
15.00%
3548.42
31.00%
15145.22
132.31%
438.95
20.68
1.14%
2115.12
20.05
5.49%
7325.76
19.03%
1716.98
4.46%
3548.42
9.22%
15145.22
39.34%
383.25
20.00
4.43%
1549.92
16.50
17.93%
5703.72
66.00%
1296.30
15.00%
2679.02
31.00%
11612.22
134.37%
424.78
20.00
4.44%
1629.71
15.50
17.03%
6697.60
70.00%
1339.52
14.00%
2822.56
29.50%
12914.17
134.97%
449.62
20.00
4.51%
1749.76
15.80
17.56%
6976.90
70.00%
1495.05
15.00%
3139.61
31.50%
13810.94
138.57%
509.00
20.00
4.29%
2205.26
17.10
18.59%
7711.97
65.00%
1779.68
15.00%
3737.34
31.50%
15943.25
134.38%
509.00
23.05
1.27%
2205.26
20.10
5.51%
7711.97
19.26%
1779.68
4.44%
3737.34
9.33%
15943.25
39.82%
554.66
24.00
1.32%
2312.49
20.15
5.51%
8098.29
19.28%
1908.89
4.54%
3948.34
9.40%
16822.68
40.05%
607.39
25.00
1.38%
2436.16
20.20
5.53%
8495.82
19.30%
2088.56
4.74%
4168.67
9.47%
17796.60
40.43%
661.62
26.00
1.44%
2556.98
20.25
5.55%
8904.34
19.32%
2278.90
4.94%
4396.86
9.54%
18798.69
40.79%
718.80
27.00
1.49%
2681.20
20.30
5.56%
9323.58
19.34%
2480.15
5.14%
4628.04
9.60%
19831.77
41.14%
Current Assets
Accounts Receivable
Days Sales Outstanding A/R
% of Revenue
Inventory
Days Inventory Outstanding
% of Revenue
Prepaid Expenses
Days Prepaid Expense Outstanding
% of Revenue
Deferred Tax Assets
Days Outstanding
% of Revenue
Total Current Assets
% of Revenue
Long Term Assets
Net PP&E Beginning
Capital Expenditures
Depreciation and Amortization
Net PP&E Ending
Total Current Assets & Net PP&E
% of Revenue
Current Liabilities
Accounts Payable
Days Payable Outstanding
% of Revenue
Accrued Compensation and Benefits
Days Outstanding
% of Revenue
Deferred Revenue
% of Revenue
Current Portion of Long Term Debt
% of Revenue
Other Liabilities
% of Revenue
Total Current Liabilities
% of Revenue
08/31/2012A 11/30/2012A
02/28/2013E
($ in millions)
UOIG 19
University of Oregon Investment Group
03/08/2013
Appendix 5 – Discounted Cash Flows Analysis Assumptions
Discounted Free Cash Flow Assumptions
Tax Rate
Risk Free Rate
Beta
Market Risk Premium
24.06% Terminal Growth Rate
1.86% Terminal Value
1.12 PV of Terminal Value
7.00% Sum of PV Free Cash Flows
Considerations
3.00%
258,726
Avg. Industry Debt / Equity
105,241
Avg. Industry Tax Rate
34.99
Current Reinvestment Rate
15.59
81,004
% Equity
89.36% Firm Value
186,245
Reinvestment Rate in Year 2018E
% Debt
10.64% Total Debt
19,757
Implied Return on Capital in Perpetuity
15,192
Terminal Value as a % of Total
6.17
7.56
39.66
Cost of Debt
3.39% Cash & Cash Equivalents
CAPM
9.70% Market Capitalization
WACC
8.94% Fully Diluted Shares
4,734
Implied Multiple in Year 2018E
5.
Implied Price
35.17
Free Cash Flow Growth Rate in Year 2018E
4
Current Price
35.05
Undervalued
0.33%
166,488
Implied 2014E EBITDA Multiple
UOIG 20
56.5
10.
University of Oregon Investment Group
03/08/2013
Appendix 6 –Sensitivity Analysis
Implied Price
Undervalued/(Overvalued)
Implied
Price
Terminal Growth
Rate
Terminal
Growth Rate
37
2.0%
2.5%
3.0%
3.5%
4.0%
37
2.0%
2.5%
3.0%
3.5%
4.0%
1.02
37.4
38.4
39.6
41.1
42.8
1.76%
35.8
36.6
37.6
38.7
40.0
1.81%
35.7
36.5
37.4
38.5
39.8
1.86%
35.6
36.3
37.3
38.3
39.6
1.96%
35.3
36.1
37.0
38.0
39.2
2.06%
35.1
35.8
36.7
37.7
38.9
1.07
36.5
37.3
38.4
39.6
41.1
1.12
35.6
36.4
37.3
38.4
39.7
1.17
34.8
35.5
36.3
37.2
38.3
1.22
34.0
34.7
35.4
36.2
37.2
Risk Free Rate
Adjusted Beta
Terminal Growth Rate
Implied Price
Undervalued/(Overvalued)
Market Risk
Premium
Terminal Growth Rate
Terminal Growth Rate
37
2.3%
2.3%
3.0%
3.8%
4.5%
5.75%
40.3
40.3
42.6
45.7
50.4
6.25%
38.3
38.3
40.1
42.6
46.0
7.00%
35.9
35.9
37.3
39.0
41.2
7.75%
34.0
34.0
35.0
36.3
37.8
8.25%
33.0
33.0
33.8
34.8
36.1
Appendix 7 – Sources











SEC Filings
Oracle Investor Relations
Oracle Presentations
Oracle Press Releases
Factset
Yahoo Finance
Google Finance
Associated Press
IBIS World
Morningstar
Associated Press
UOIG 21