FINANCE 295:
ORACLE CORPORATION
PRESENTED BY:
SAURIN MEHTA
CRAIG COHEN
MARCH 2, 2000
ORCL: Quick Facts
• Initial public offering in 1986
• Current corporate headquarters are in Redwood City, CA
• World’s largest maker of database management systems (DBMS)
• World’s second largest software company
• Over $9.3 billion in revenue over past 4 quarters
• Over 43,000 employees – Lawrence J. Ellison CEO/Chairman
• $10,000 invested in 1994 would be worth over $900,000 today
• We are looking at a ten year time horizon for this stock
ORCL: Business Description
• Five Major Software Products
• Oracle Application Server – combines Oracle DB technology
with the Internet to form a cross-platform environment
• Oracle Applications – helps companies who wish to improve
and streamline their operations to transform into an e-business
• Data Warehousing and BIS – complete data warehousing
solution with the Oracle DB and over 60 3rd party programs
• Oracle DB – flagship product – relational DB that allows
users to manipulate data by using SQL language
• Oracle Tools – mainly Internet based – helps build and
complement a company’s Web applications and DB
ORCL: Business Description Contd.
• Non-software products
• Oracle Alliance Program
• Oracle Consulting
• Oracle Support Services
• Oracle Education – world’s largest IT training provider
• Venture Capital Fund
• Invests in small Internet companies with the hopes of them
one day becoming customers
• Oracle is the first software company to deploy 100% Internet
enabled enterprise software across its entire product line
• Oracle is currently the only company offering complete ebusiness solutions
ORCL: Oracle in the News
• Acquired Datalogix International 1997 – enhance company’s
technology offering in the consumer packaged goods industry
• Acquired Treasury Services Corporation 1998 – enhance
company’s offering in the financial services industry
• Deal with Sears Roebuck and Carrefour Supermarche SA to
launch the first global online exchange for the retail industry
• Deal with Ford to provide software, consulting and hosting for
the entire business supply-chain
• Alliance with Novistar to offer its products to the energy industry
• Alliance with Telia to provide mobile Internet service in the
international marketplace
ORCL: Who Uses Oracle?
• According to Morgan Stanley Dean Witter
• 24 of the top 25 Internet companies by market capitalization
are Oracle customers
• According to USA Today e-Business Composite
• 48 of the top 50 companies are Oracle customers
• According to USA Today e-Consumer Composite
• 44 of the top 50 companies are Oracle customers
• 93% of all Public.com companies run Oracle
• 65 of Fortune 100 companies use Oracle for e-businesses
ORCL: Oracle’s Market Share
Source: Oracle’s Corporate Website www.oracle.com
ORCL: Insider and Institutional Holdings
• Officers and Directors own approximately 25% of the stock
• 15 sell transactions in the past 6 months
• 2.34 million shares were sold in the time period
• 1,616 Institutions Hold approximately 49.0% of the stock
• Massachusetts Financial Services
106 million shares
• Barclays Bank
85 million shares
• Putnam Investment Management
53 million shares
• Fidelity Management
46 million shares
• Vanguard Group
45 million shares
• Institutions have purchased 67.6 million shares over the last quarter
ORCL: Income Statement Analysis
5/31/99
5/31/98
5/31/97
Revenues:
Licensing Fees
Services
3,688.37
5,138.87
3,193.49
3,950.38
2,896.70
2,787.64
Total Revenues
8,827.25
7,143.86
5,684.34
Cost of Sales
Operating Expenses
Interest Expense
3,064.14
3,890.21
21.42
2,273.60
3,459.00
16.65
1,550.47
2,870.89
6.81
Net Income
1,289.75
813.69
821.46
$0.89 (61.8%)
$0.55
$0.55
EPS
ORCL: Income Statement Analysis Contd.
5/31/99
5/31/98
5/31/97
% of Revenues
% of Revenues
% of Revenues
Revenues:
License Fees
Services
41.8%
58.2%
44.7%
55.3%
51.0%
49.0%
Total Revenues
100%
100%
100%
Cost of Sales
Operating Expenses
Interest Expense
34.7%
44.1%
0.2%
31.8%
48.4%
0.2%
27.3%
50.5%
0.1%
Net Income
14.6%
11.4%
14.5%
EPS
$0.89
$0.55
$0.55
ORCL: Balance Sheet Analysis
5/31/99
5/31/98
5/31/97
Cash
Receivables
Prop, Plant, Equip
Investments (FMV)
2,562.75
2,238.20
987.48
249.54
1,919.19
1,857.48
934.35
186.51
1,213.19
1,540.47
868.95
116.34
Total Assets
7,259.65
5,819.01
4,624.31
Notes Payable
Accounts Payable
Accrued Expenses
Long-Term Debt
3.63
283.89
1,474.04
304.14
2.92
239.69
1,183.10
304.33
3.36
185.44
926.83
300.84
Total Liabilities
3,564.38
2,861.45
2,254.60
Common Stock
Retained Earnings
1,475.76
2,266.91
976.27
2,023.05
696.02
1,686.17
Total Owner’s Equity
3,695.26
2,957.55
2,369.71
ORCL: Common Size Balance Sheet
5/31/99
5/31/98
5/31/97
Cash
Receivables
Prop, Plant, Equip
Investments (FMV)
35.3%
30.8%
13.6%
3.4%
33.0%
31.9%
16.1%
3.2%
26.2%
33.3%
18.8%
2.5%
Total Assets
100%
100%
100%
Notes Payable
Accounts Payable
Accrued Expenses
Long-Term Debt
0.0%
3.9%
20.3%
4.2%
0.0%
4.1%
20.3%
5.2%
0.0%
4.0%
20.0%
6.5%
Total Liabilities
49.1%
49.2%
48.8%
Common Stock
Retained Earnings
20.3%
31.2%
16.8%
34.8%
15.1%
36.5%
Total Owner’s Equity
50.9%
50.8%
51.2%
ORCL: Cash Flow Analysis
6/30/99
6/30/98
6/30/97
319.82
20.37
55.56
(486.43)
154.47
136.70
286.32
23.09
42.25
(464.99)
159.13
123.83
238.24
6.29
26.53
(628.03)
108.70
144.33
Financing Activities
Purchase of PPE
Proceeds from Maturity of Inv.
Purchase of Investments
(346.59)
1,055.94
(1,250.50)
(328.36)
803.40
(1,196.07)
(390.74)
252.08
(524.31)
Investing Activities
Issuance of Common Stock
Repurchase of Common Stock
306.42
(1,086.95)
204.29
(489.82)
138.18
(528.21)
512.03
383.52
174.42
Operating Activities
Depreciation
Deferred Income Taxes
Gain on Sale of Inv.
Accounts Receivable Change
Accrued Expenses Change
Other Liabilities Change
Net Increase (Decrease) In Cash
ORCL: Key Financial Ratios
5/31/99
5/31/98
5/31/97
P/E Ratio
Gross Margin (%)
Operating Margin (%)
Net Margin (%)
28.2
65.3%
22.4%
14.6%
29.2
68.2%
18.6%
11.4%
38.4
72.7%
22.5%
14.5%
Return on Equity (%)
Return on Assets (%)
Return on Invest. (%)
34.9%
17.8%
50.0%
27.5%
14.0%
-33.0%
34.7%
17.8%
55.0%
Current Ratio
Debt to Equity (%)
Book Value / Share
1.79
8.0%
$1.29
1.74
10.0%
$1.01
1.70
13.0%
$0.81
ORCL: Other Key Financial Stats
• 52 Week Low - $10.50
52 Week High - $76.50
• Beta – 1.67
52 Week Change – 304.5%
• Daily Volume – 21.9 million shares (3 month average)
• Market Capitalization - $201.7 billion
• Shares Outstanding – 2.82 billion
• Price / Earnings Ratio – 157.98
ORCL: Recent Earnings Surprises
November
1998
February
1999
May 1999
August 1999
November
1999
Estimate
0.08
0.09
0.16
0.08
0.11
Actual
0.09
0.10
0.18
0.08
0.13
Difference
0.01
0.01
0.02
0.00
0.02
16.75%
11.11%
12.50%
0.00%
18.18%
Surprise
ORCL: How It Fares vs. Competitors
Net
Profit
Margin
P/E
Ratio
ROA
ROE
Net
Income
EPS
Oracle (ORCL)
14.6%
157
17.8%
34.9%
1,289.7
0.89
JD Edwards (JDEC)
-4.6%
N/A
-4.6%
-7.28%
-39.2
-0.09
Peoplesoft (PSFT)
-13.1%
N/A
-13.1%
-31.8%
-177.8
-0.67
Baan (BAANF)
-45.6%
N/A
-40.1%
-268.2%
N/A
N/A
Vignette (VIGN)
-47.6%
N/A
-45.7%
-78.7%
N/A
N/A
Computer Assoc. (CA)
12.1%
49.3
7.49%
28.6%
626.0
1.84
Microsoft
40.0%
56.6
23.6%
31.4%
7,785.0
1.42
ORCL: Application License Growth
40
30
20
10
0
-10
-20
-30
-40
-50
-60
-70
ORCL
SAP
JDEC
PSFT
BAANF
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
ORCL: Revenue Growth
9000
8000
7000
6000
5000
4000
3000
2000
1000
0
1988
1990
1992
1994
1996
1998
ORCL: Broker Recommendations
• 35 brokers are covering the stock
• Average recommendation = 1.53
• 15 brokers – Strong Buy
• 18 brokers – Moderate Buy
• 2 brokers – Hold
• Notables:
• A.G. Edwards
Strong Buy
• Credit Suisse First Boston
Buy
• Deutsche Bank Securities
Buy
• Goldman Sachs
Strong Buy
• J.P. Morgan
Strong Buy
• Merrill Lynch
Strong Buy
• Salomon Smith Barney
Buy
• Warburg Dillon Read
Strong Buy
ORCL: Fiscal Year 2000 Quarter 2
• Fiscal Year 2000 Quarter 2 results released December 14
• Actual earnings of $0.13 v. estimates of $0.11
• Compared to earnings of $0.095 the same period one year ago
• Total revenue grew to $2.3 billion
• Compared to $2.1 billion the same period one year ago
• Net income increased 40% to $384 million
• Compared to $274 million the same period one year ago
• Software license revenue grew 18% compared to last year
• Database software sales increased 17% to $651 million
•Application software sales increased 31% to $168 million
• Service revenue grew 10% to $1.4 billion
• Next earnings announcement is March 14, 2000
ORCL: Initiatives for 2000
• Application outsourcing – Oracle runs its software on its computers
and lets customers use the applications for a monthly fee
• Moving operations to the Internet to enhance efficiency
• Customers can add users and buy software over the Web
• Expected to reduce the cost structure by $1 billion
• Continuing to offer complete e-business solutions for customers
• Providing software, consulting and hosting for all operations
• Everything from front-door customer relationships to back room
operations and platform designs
ORCL: What the Future Holds
• Revenues are expected to grow at record rates
• Internet is the second industrial revolution
• More and more businesses will have to go online to survive
• Revenues from application outsourcing are expected to grow
• Many small businesses cannot afford the complete system
• Allows customers the same services without high fixed costs
• Moving more operations to the Web will increase overall efficiency
• Savings are expected to be $1 billion
• Serving those markets which are expected to explode by 2003
• Customer Relationship Management $16.8B (49% CAGR)
• Supply Chain Applications
$19.7B (48% CAGR)
• Internet Procurement Applications
$5.3B (82% CAGR)
ORCL: Stock Price Projections
• Assume sales grow at 20% annually
• Most expenses remain the same as a percentage of revenues
• Cost of goods sold is adjusted for $1B cost reduction
• Current P/E ratio is approximately 140
• Assume it reduces to a more reasonable level of 90 by 2010
• EPS in 2000 = $0.57
• EPS in 2001 = $0.69
• EPS in 2002 = $0.83
• EPS in 2009 = $2.96
• EPS in 2010 = $3.55
Stock Price in 2000 = $79.80
Stock Price in 2001 = $93.15
Stock Price in 2002 = $107.90
Stock Price in 2009 = $281.20
Stock Price in 2010 = $319.50
• Ten Year Average Annual Rate of Return = 17.3%
• Assumes purchase price of $65 per share
ORCL: Stock Price Projections Contd.
• Assume sales grow at 30% annually
• Most expenses remain the same as a percentage of revenues
• Cost of goods sold is adjusted for $1B cost reduction
• Current P/E ratio is approximately 140
• Assume it reduces to a more reasonable level of 90 by 2010
• EPS in 2000 = $0.57
• EPS in 2001 = $0.86
• EPS in 2002 = $1.03
• EPS in 2009 = $3.70
• EPS in 2010 = $4.44
Stock Price in 2000 = $79.80
Stock Price in 2001 = $116.10
Stock Price in 2002 = $133.90
Stock Price in 2009 = $351.50
Stock Price in 2010 = $399.60
• Ten Year Average Annual Rate of Return = 19.9%
• Assumes purchase price of $65 per share
ORCL: How Does It Look within CAPM?
17.3%
11.7%
9%
5%
=0
 = 1.0
 = 1..67
• Assumes risk free rate of 5% and market return of 9%
• Expected return = 5% + 1.67 * (9% - 5%) = 11.7%
• Oracle’s expected return = 17.3%
• Alpha =  = 17.3% - 11.7% = 5.6%
ORCL: Conclusion / Recommendation
• Oracle’s revenues will soar as e-business continues to expand
• Dominant leader in markets with enormous growth potentials
• Only software company to offer complete e-business solutions
• Alliances have diversified Oracle’s operations into other highgrowth, technology markets (ex. wireless Internet)
• Very strong revenue and earnings growth over the past several years
• Moving operations to the Web to help reduce costs – save $1 billion
• Projected annual returns of between 17% and 20%
• RECOMMENDATION: BUY 400 SHARES @ $62.50