Oracle
Oracle Inc.
Latest Results:
2013 Q1
Industry View:
Company Rating:
Country:
Sector:
USA
Software
Risk
Quality
1
0
0
1
0
0
www.indigo-equity-research.com
Valuation
0
1
0
26 Sep 2012
RIC (Ticker):
ORCL.OQ
ATTRACTIVE
N. Landell-Mills CFA
LOW MED. HIGH
Indigo Equity Research Limited
Share Price - Last 10 Years
Company Profile - Struggling to adapt
40
35
Weak 2013 Q1 results - Revenues contract. Underlying EPS deteriorates.
30
- Q1 Revenue fell $0.2 bn (-2%), to $8.2 bn; in-line with guidance given last Q.
- Recent acquisitions (RightNow & Taleo) boosted growth with an undisclosed impact.
- Sales were strongest in Software (+4%); but fell in Services (-6%) & Hardware (-19%).
- Growth rose 3% in constant currency. Excluding Hardware, revenues rose 2%.
- Software grew 4%; New Licenses was up 5% and Support & Updates were up 3%.
- By Region, revenues continued to be relatively strongest in AsiaPac & Americas
(both up 2%); but while Europe was particularly weak (down 12%).
- EBIT* fell $0.1 bn (-4%), to $2.6 bn, partly due to $ 0.2 bn restructuring & acquisition costs.
- EBIT margins only fell 0.6% to 31.5%.; helped by a better business mix, due to growing
high-margin software sales, while lower margin services & hardware sales shrink.
- Net Income* fell $0.1 bn (-6%), to $1.7 bn; helped by a lower tax rate (down -1%, to 25%).
- GAAP EPS* fell $0.01 (-2%), to $0.35, boosted by 4% of its shares being repurchased.
* = Excluding a one-off $306m litigation gain in Q1 2013.
Note: data is on a GAAP basis.
- GAAP EPS rose $0.05 (+15%), to $0.41.
USD
25
20
15
10
Oracle
(See Page 25)
Valuation
($)
2011
2012
2010
Bear
Base
Bull
29.0
32.6
36.6
Potential Return
-9%
Capital Structure
Share Price
2%
14%
Per Share
Total
($)
($ Bn)
32.2
Number of Shares
(bn)
4.9
Market Capitalization
159.1
Net Cash / (Debt)
Enterprise Value (EV)
3.4
16.8
28.8
142.3
Net Debt / Market Cap.
--
Main Shareholder:
CEO Larry Ellison (c. 23%)
Consensus Estimates
Financial Results
Investment thesis - Where's the growth?
Oracle's fundamental value depends on enhancing competitive edge to grow sales & EPS via:
(i) Upgrade cycle with Oracle's new Fusion (database, middleware & applications) software,
E-Business Suite and the introduction of a complete Oracle cloud services in 2012.
(ii) Anticipated Hardware turnaround; as engineered systems (Exadata, Exalogic & Exalytics)
growth offsets the decline in traditional Sun hardware; which has yet to materialise.
(iii) Cross selling products to clients, using a vertical business model (complete IT systems).
(iv) Managing the shift from selling software for "on-premises" equipment, to cloud services
and SaaS; but this shift also threatens its maintenance fees & ability to lock in customers.
Oracle's size & market dominance in target segments, as well as its strategic focus on large
corporates means that it is well-positioned to succeed. Whereas, key issues are its weak organic
revenue growth and dependence on volatile corporate IT, product replacement & sales cycles.
2009
S&P 500 rebased
Fundamental Valuation
Note: Comparisons (eg. growth rates) are stated on a Year-on-Year (YoY) basis.
Significant recent events
- A court rules in favor of HP in Oracle case
- SAP agreed to pay Oracle $306 m in damages to settle a 2010 litigation case.
2008
2007
2006
2005
2004
0
2003
5
2002
- Growth continues to slow sequentially in all the main areas, and fell significantly in
Hardware (-19%) & Services (-6%) and Europe (-12%) which was hit by weak forex.
Despite all the hype, Oracle is struggling to adapt to the changing industry dynamics.
Oracle's Q2 guidance of 0-4% sales growth suggests a potential rebound in growth
driven by Fusion. But YoY growth comparisons for Q2 & Q3 2013 are undemanding, and
as Hardware revenues shrink, their decline becomes less material at the Group level.
Oracle has stopped disclosing core Database & Middleware revenues; which is ominous.
2012
2013e
2014e
($ Bn)
($ Bn)
($ Bn)
Revenue
37.1
38.6
41.1
EBIT
13.7
15.4
17.0
Net Income
10.0
10.9
11.9
Capital
44.1
48.9
53.5
y/e 31 May
Total Assets
78.3
83.4
88.1
Per Share Data
2012
2013e
2014e
EPS
($)
1.96
2.20
2.42
DPS
($)
0.24
0.24
0.24
Cash EPS
($)
2.57
2.75
2.91
BV Per Share
($)
8.65
9.91
10.84
Efficiency Analysis
2012
2013e
2014e
EBIT Margin
36.9 %
40.0 %
41.4 %
Net Income Margin
26.9 %
28.2 %
29.0 %
Asset Turnover
47.4 %
46.2 %
46.7 %
177.7 %
170.5 %
164.5 %
22.6 %
22.2 %
22.3 %
Net Gearing
ROE
Net Gearing = Net Assets / Share Capital & Reserves
Growth Analysis
SWOT analysis
2012
2013e
4.2 %
3.9 %
6.6 %
EBIT
13.9 %
12.6 %
10.4 %
Net Income
16.8 %
9.0 %
9.6 %
2012
2013e
2014e
P / Sales
4.3
4.1
3.9
EV / EBITDA
8.8
8.2
7.5
15.9
14.6
13.3
PEG
0.9
1.2
1.4
P / BV
3.6
3.3
3.0
12.2
11.7
11.1
Revenue
Strengths
- Large size & leading market positions.
in databases, middleware & servers.
- Strong management (CEO). §
- Significant recurring revenues.
Weaknesses
- Low organic revenue growth.
- Volatile New License revenues.
- Volatile cash flows.
- Low Hardware margins.
Opportunities
- Cloud computing & SaaS. §
- New product cycles (eg. Fusion).
- Cross-selling products.
- Hardware turnaround in 2013?
Threats
- Increasing costs will limit EPS growth.
- Increasing competition from SAP,
Salesforce.com and new start-ups.
- Weak sales in Europe.
Valuation Ratios
PE
P / FCF
Dividend Yield
Pay-Out Ratio
--
2014e
0.7 %
0.7 %
12.3 %
10.9 %
9.9 %
--
--
--
Net Debt / EBITDA
Valuation Ratios are based on the current share price.
§ = Both a Weakness/Threat and a Strength/Opportunity.
Page 1 of 38
CONFIDENTIAL
SaaS = Software as a Service.
For illustration purposes only.
* = Excluding Unusual Items
Sources: Oracle, Indigo Equity Research
Oracle
26 Sep 2012
Contents
Description
Page
News Flow - Significant Recent Events
………………………………………………………………………………………………………………
Page 3
Industry & Company Analysis
Overview of the Enterprise Software Industry
……………………………………………………………………………………………………
Page 4
Oracle - Company Background Information ………………………………………………………………………………………………………………
Page 5
Revenues & Profits
………………………………………………………………………………………………………………………………………
Page 7
Description of the Key Divisions
…………………………………………………………………………………………………………………………
Page 8
Business Model - Snapshot of the last 12 Months
……………………………………………………………………………………………………
Page 9
SWOT Analysis …………………………………………………………………………………………………………………………………………
Page 10
Key Issues (in addition to the SWOT Analysis)
……………………………………………………………………………………………………
Page 11
Financial Results Analysis
Profit & Loss Summary
………………………………………………………………………………………………………………………………………
Page 13
Revenue Analysis
………………………………………………………………………………………………………………………………………
Page 14
Customer Advances (Deferred Revenues)
………………………………………………………………………………………………………………
Page 15
Revenue Analysis by Region
…………………………………………………………………………………………………………………………
Page 15
Gross Profit Analysis
………………………………………………………………………………………………………………………………………
Page 16
EBIT Analysis
…………………………………………………………………………………………………………………………………………
Page 16
Cost Analysis
…………………………………………………………………………………………………………………………………………
Page 17
Cash Flow Analysis
………………………………………………………………………………………………………………………………………
Page 18
Balance Sheet Analysis
………………………………………………………………………………………………………………………………………
Page 19
Return Analysis …………………………………………………………………………………………………………………………………………
Page 20
Unusual Items
…………………………………………………………………………………………………………………………………………
Page 21
Valuation
Share Price Performance & Valuation Multiples
……………………………………………………………………………………………………
NEW ………………………………….Page 23
Historical Valuation Multiples
…………………………………………………………………………………………………………………………
NEW ………………………………….Page 24
Fundamental Valuation of Oracle
…………………………………………………………………………………………………………………………
NEW ………………………………….Page 25
DCF & Sensitivity Analysis
…………………………………………………………………………………………………………………………
NEW ………………………………….Page 26
APPENDIX
Additional Industry Analysis
Enterprise Software Industry Overview
………………………………………………………………………………………………………………
Page 28
IT & Software Industry Trends
…………………………………………………………………………………………………………………………
Page 29
Financial Tables
Quarterly Financial Accounts
…………………………………………………………………………………………………………………………
Page 32
Annual Financial Accounts
…………………………………………………………………………………………………………………………
Page 32
Revenue Data
…………………………………………………………………………………………………………………………………………
Page 33
Software Revenue Data
………………………………………………………………………………………………………………………………………
Page 34
Services & Hardware Revenue Data
………………………………………………………………………………………………………………
Page 35
Gross Profit Data
………………………………………………………………………………………………………………………………………
Page 36
EBIT Data
…………………………………………………………………………………………………………………………………………
Page 37
Explanations and Definitions
Legal and Important Information
Page 2 of 38
…………………………………………………………………………………………………………………………
Page 38
…………………………………………………………………………………………………………………………
Page 38
CONFIDENTIAL
For illustration purposes only.
Sources: Oracle, Indigo Equity Research
Oracle
26 Sep 2012
Explanations and Definitions
Brief business description - Oracle
Oracle provides database, middleware and applications software, as well as hardware (servers & storage) & services. It sells primarily to companies, government
agencies & educational institutions. Oracle has c. 370,000 enterprise customers in all industry sectors. It's based in San Francisco and it has c. 112,000 employees.
Explanation of Company Ratings used by Indigo Equity Research Ltd:
Industry View:
Industry View = This is an assessment from an investor's perspective of the potential for the industry as a whole to generate
ATTRACTIVE
profits in the future based on criteria such as: market structure (eg. number of competitors and industry
concentration), growth prospects, maturity (stage of the industry life cycle), regulations, technology,
disruptive forces, expected changes and speed of any changes.
Risk = The risk of earnings disappointment & volatility as well as the risk of a change in the valuation ratios that
Company Rating:
impact the company's share price. This depends on items such as revenue growth, profit margin volatility,
investor sentiment towards the company etc..... But this does not include the market risk of these elements
changing.
LOW MED. HIGH
Risk
Quality
### ### -
Valuation
-
-
Quality = The quality of the company reflects its ability to maintain or increase earnings from its competitive
###
advantages, strategy, brand, management, market position, pricing power, services etc…..
Valuation = This is an absolute measure of valuation multiples of the company, based on a range of metrics (multiples)
such as: P/Sales, PE, PEG, P/BV, P/ FCF, EV/EBITDA, EV/Sales, Div Yield …..
Comment on Ratings: These qualitative assessments of "Company Ratings" are made for each company on a relative basis
compared to other companies with large capitalizations; but are nonetheless subjective and dependent on
the analyst's individual opinion & analysis of the company.
Financial definitions & abbreviations:
FCF = Free Cash Flow
Op FCF = Operating Free Cash Flow
EBIT = Earnings Before Interest & Tax
(ie. Operating Income)
EBITDA = Earnings Before Interest, Tax,
12m av. = 12 month average
(ie. Average for the last 12 months.)
y/e = (financial) year end
EV = Enterprise Value
P = (Share) Price
PE = Price / Earnings
PEG = PE / Growth
BV = Book Value
Div. = Dividend
EPS = Earnings Per Share
DPS = Dividends Per Share
Depreciation & Amortisation
Explanation of what constitutes an unusual or significant item: Indigo Equity Research determined what constituted "Unusual items" in this report on the basis of
assessing what items were significantly or materially separate or different to the Company's core business and activities. This a highly subjective assessment made by
the analyst on a case-by-case basis.
Legal and Important Information
Copyright © 2012 Indigo Equity Research Limited
Analyst certification: The analyst Nicholas Landell-Mills primarily responsible for the preparation of this research report attests to the following: (1) that the views and
opinions rendered in this research report reflect the views of Indigo Equity Research Limited about the subject companies or issuers; and (2) that no part of the research
analyst’s compensation was, is, or will be directly related to the specific recommendations or views in this research report.
Disclosures: Indigo Equity Research Limited has no investment banking or share trading operations or activities. Reports are prepared at irregular intervals depending
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Page 38 of 38
CONFIDENTIAL
For illustration purposes only.
Sources: Oracle, Indigo Equity Research