Equity Research Report

Oracle Corporation

Submitted By:-

Saquib Ali

Table of Contents

INTRODUCTION

Company Profile

Structure

Products

Strategic Initiatives

Growth Strategy

SWOT Analysis

TREND ANALYSIS

Current Assets

Total Assets

Revenues

Cash Flow

Net profit

STANDARDIZED FINANCIAL STATEMENTS TRENDS ANALYSIS

RATIO ANALYSIS

Operating Profitability Ratio

General Profitability Ratios

DuPont Analysis

Leverage Ratios

Earnings and Cash Flow Coverage Ratios

Inventory, Receivables and Payable Periods

Operating and Cash Conversion Cycle

Liquidity Ratios

Market Valuation Ratios

Analyzing Growth Potential

WEIGHTED AVERAGE COST OF CAPITAL

DIVIDEND GROWTH MODEL

REFERENCES

VALUATION OF ORACLE CORPORATION

INTRODUCTION

Company Profile

Oracle Corporation is a multinational company, founded in 1977, by Larry Ellison (current Chairman), Bob Miner and Ed Oates. Headquartered at California, U.S.A., Oracle is the third largest software manufacturer (by revenue) after Microsoft and IBM.[1] It has 122,458 employees and over 400,000 customers in 145+ countries.[2][3] It is traded as ‘ORCL’ in the New York Stock Exchange and is also a part of the S&P 500 index. S&P has given it an A+ credit rating.

Structure

Products

  • Oracle Cloud Solutions
  • Oracle Database
  • Oracle Operating Systems(Solaris and Linux)
  • Oracle Business Analytics
  • Oracle Middleware(Fusion)
  • Oracle Engineered Systems
  • Oracle Servers
  • Oracle Consulting and Financing[3]

Strategic Initiatives

Exadata: Oracle and Accenture have got together for a strategic initiative which involves bringing the performance and flexibility of Oracle Engineered Systems to customers, faster and in a cost-effective manner. Accenture has incorporated Oracle Engineering Systems into its consulting and outsourcing services. This allows customers to manage, process and analyze large amount of digital data along with reducing the total cost of data center ownership through integration of servers, storage and networking components.[4]

Growth Strategy

Acquisitions: Oracle has been very active in acquiring companies in order to aid its growth. In the past 3 years, it has acquired companies worth about 25 billion dollars (38 Firms). This has led to a 26% rise in its earnings and there has been a 64% rise in the company’s stock price since 2005. [5]

Business Partnering: Oracle has more than 25,000 business partners and they have played an important part in the company’s success. Partnering allows oracle to tap the markets which is otherwise would not be able to. It expands its reach into other segments like hardware, cloud etc.

SWOT Analysis

  • Strength
  1. Oracle research and development capabilities can be highlighted as one of its main points of competitive edge. Specifically, the company successfully operates Oracle Labs where a wide range of projects have been developed that contribute to the competitive edge of the company.
  2. Inorganic growth strategy that has enabled the company to achieve its current status and the robust market positioning of the brand. Moreover, the company has a strong and charismatic leader in the personality of Larry Ellison.
  3. the takeover of Sun Microsystems by Oracle considerable enhanced the position of the company in the global marketplace and the same time as increasing the ranges of products and services offered by Oracle,
  • Weakness
  1. The lack of Oracle presence in Asian marketplace can be considered as the weakness of the company due to the fact that the role of Asian businesses are growing in the international business arena, at the same time when US and European countries are faced with serious financial issues.
  2. Moreover, heavy reliance on partnerships and alliances rather than direct market entry in terms of engaging in international market expansion limits the level of Oracle control of international operations.
  • Opportunities
  1. Increasing the presence of the company in Chinese and Indian markets, increasing the market share of the company through the growth of global enterprise software market.
  2. Generating additional solid revenue for the company in the future through increasing the level of investment on the development of virtualization software programs.
  3. The company can achieve long-term growth through sophisticating its data storage services taking into account dramatically increasing demand for this type of service, and also research and development initiatives can be launched with the aim of developing innovative business applications for various types of devices.
  • Threats
  1. The major threat for the company is the emergence of new competitors from China, India or any other evolving superpowers from the East. This is because Oracle would find it challenging to compete with such a competitor on prices taking into account the access of competitors to considerably cheaper resources, including human resources in China and India.
  2. According to Wall Street Journal, Oracle CEO Larry Ellison is known for using ‘dirty tricks’ that included hiring people to examine the garbage from Microsoft with the aims of finding any evidences against their wrongdoing. There is a threat that such tactics might be repeated in the future and which might result in company image being damaged.

TREND ANALYSIS

Current Assets

  • Over 10 years we can see a smooth increase in the current assets. The cash, cash equivalents and Marketable Securities have shown a constant increase over the years. The company has shown a positive growth as the cash reserves are increasing over 10 years. The percentage change is the current assets is quite hazardous as its falling and rising at a very steep rate.
  • Other current assets has also shown a constant growth except in the year 2009 where we can see a drop in the current assets because the prepaid expenses was low in the fiscal year.
  • The accounts receivable is also constantly increasing over 10 years except over the year 2009 which shows that the collections of unpaid accounts was high in the fiscal year.

Total Assets

  • Over 10 years the assets are increasing constantly. The percent increase in the total assets in the fiscal year 2009 was less due to the decrease in accounts receivable, other current assets and also the subsequent decrease in the spend on the machinery and equipment. Another account that was decreased in the year 2009 was the deferred tax asset. In the year 2009 we can see the growth rate went down drastically but it improved in the coming years.
  • The intangible assets account was also decreased due to decrease in the spending in the software and patent rights. Therefore, the innovation of the company has decreased in the fiscal year 2009.

The overall trend we can see that the company is on a growing track over 10 years in the assets account and the company has a positive growth.

Revenues

The revenues are increasing constantly and the percentage of growth is high from the year 2005 to 2011. But in the year 2012 to 2014 the growth in the revenues has declined. The decline may be due to the decreasing demand in the market and the increasing competition from the new born companies which has led to shifting of revenues. Due to this reason the company might have decreased the prices of their product which has decreased the overall growth in the revenues. This percentage decrease in the growth can be increased by innovation and adapting new technologies.

We can clearly see from the graph that the last 3 years the percentage growth is very less.

Cash Flow

Over 10 years the cash flow is increasing and decreasing. The operating cash flow is constantly increasing over the years. The cash flow from investing is also increasing over the year which shows that the company is continuously investing in plant, machinery and equipment. The cash flow from financing is majorly increasing and decreasing over the years. The years in which the company has issued dividends and has taken long term loans the cash flow is positive, otherwise the cash flow is negative in other years. This shows the major change in the cash flow is due to the financing activities of the company.

Net profit

From the trend we can clearly see that the profits for the company has increased over the years. But as the percentage increase in the revenues has decreased in the last 3 years a similar impact was on the net profit. The cost of goods sold was decreasing from the years 2012 which has reduced the impact on the profits due to decreased growth in revenues. Overall the company has a good profit account, therefore, some technological and innovative changes may lead to better revenues and profits for the company in the coming years.

From the graph above we can see the growth in net profits has gone down from the year 2012 because of the above stated reasons.

STANDARDIZED FINANCIAL STATEMENTS TRENDS ANALYSIS

Operating Expenses are close to 45% of the total revenue in most of the years and has the maximum weightage amongst all the other parameters.

The COGS has been decreasing in the past 4 years which is a positive sign.

Oracle has been functioning at minimal debt as compared to the total revenue

The difference between EBIT and EBT has been growing every year showing an increase in interest expenses every year.

Variable difference between Net Income and EBT shows varying taxes every year.

The FCFF has been increasing from 2010 to 2013 given the high increase in growth rate of EBIT and comparative lower increase in working capital and capital expenditure.

Capital expenditure has been decreasing from 2005 to 2008 and then increasing from 2009 – 2011.

Both Capital Expenditure and change in Working Capital are minimal as compared to the revenue

RATIO ANALYSIS

Operating Profitability Ratio

  • Gross Profit Margin

The Gross profit margin has been pretty constant through the 10 years with 2014 having the best value at 80.19%. There has been a growth in revenue of 224% from 2005 and the COGS has increased only by 172% thus leading to a growth of 4.5% in the gross profit margin since 2005. The gross profit has increased by 239.29% since 2005.

  • Operating Profit Margin

The operating profit margin has been hovering around the 36% mark and has reached its highest point in 2013 with 39.49%. The 239.29% growth in gross profit was matched by a 217.59% growth in operating expenses which resulted in a growth of 13.12% growth in the operating Profit Margin.

General Profitability Ratios

  • Return On Asset

The return on asset has been declining since the past few years and 2014 has seen the lowest ROA at 42.37%. The reason for the decline is the levels of inventory Oracle has started maintaining since 2010. Before that they used to maintain no inventory at all. The second reason for the ROA going down is a 244% increase in intangible assets since 2005 and they are growing at an average of 15.7%. In all the Net Income growth of 78.5% in the last 5 years has been offset by a combined growth of 90.53% growth in Total Asset(which are much greater in value than the net income).

  • Return on Capital Employed

There has been a steady and minimal decline in ROCE. This is mainly because the total assets have growth at a higher rate than the EBIT or the Current Liabilities. There has been a decline of 39% in the 10 years. However rate of decline in the past 5 years has been much slower at 10.6%. The decline has been slowed down due to increase in the Total Tax Payable from 2010 onwards, due to which there has been an increase in the current liabilities.

  • Return On Owner’s Equity

The return on owner’s equity has been constant over the years. The Net income growth rate has been nullified by the equal growth rate of the retained earnings and the common stock. Common Stock and Retained Earnings make up 80% of the Owner’s Equity.

DuPont Analysis

Return on Equity = Tax Burden xInterest Burden xEBIT Margin xAsset Turnoverx

Financial Leverage

  • Tax Burden(1-Tax Rate or Net Income/EBT)

The Tax Burden has been fairly constant through the 10 years. In the last 5 years it has been increasing at the rate of 2.29% per year and hence pulling down the ROE.

  • Interest Burden(EBT/EBIT)

The interest burden has also fallen by 7.8% in the last 10 years which shows an increase in the interest expenses of Oracle which means it is taking more debt or the interest rates are increasing. This is pulling the ROE down.

  • EBIT Margin (EBIT/Revenue)

The revenue has been increasing at an average of 14.5% every year and the EBIT has been increasing at the rate of 16 % every year. Since EBIT has been growing at the faster rate, the EBIT Margin has been increasing in the last 5 years hence pulling up the ROE.

  • Asset Turnover

Asset turnover has decreased by 22% since 2005 and is continuing to decrease. This is happening since the total assets are increasing at a higher rate than the revenue. This is pulling the ROE down.

  • Financial Leverage

As compared to the other components, the financial leverage is very high and it pulls the ROE upwards. This shows that the total assets are greater than the total owner’s equity. It is a component that has the maximum fluctuations and since it is the largest component, it affects the ROE the most. This has put increasing since the past 3 years.

All in all Financial Leverage and EBIT margins are increasing and the rest of the factors are decreasing. The decreasing components are decreasing at a higher rate that the ones which are increasing hence leading to decrease in ROE.

Leverage Ratios

  • Debt Equity Ratio

Oracle is financing itself majorly by long term debts. The average growth rate of long term debts is 20% and that of Equity is 18% thus resulting in an overall increase of DE ratio by 276% since 2005. The great increase in debt puts the company at a high risk and more volatile earnings

  • Long Term Debt to Total Capital

As discussed above the rate of growth long term debts is more than equity and hence the long term debt to total capital ratio has been increasing over the years with a similar trend as the DE ratio.

Earnings and Cash Flow Coverage Ratios

  • Interest Coverage Ratio and Fixed Financial Cost Coverage Ratio

The Interest Coverage Ratio and Fixed Financial Cost Coverage Ratio are same for oracle since the balance sheets do not mention anything about the lease payments. Oracle currently maintains a very healthy Interest coverage ratio of 16.14 and is more that capable of paying out its interest expenses, thanks to its high EBT.

  • Cash Coverage Ratio

Oracle also maintains a healthy Cash Coverage Ratio of 19.23 and hence is in a healthy position to pay out all their interest expenses. The is presently declining due to decrease in depreciation expenses which have fallen by .7% in the last year. Furthermore, EBIT has increased only by .5% hence further reducing the Cash Coverage.

Inventory, Receivables and Payable Periods

  • Inventory Period

Until 2010, Oracle used to have no inventory. After that they have an inventory cycle of around 10.35 days which is a very good number as they can clear their inventory very soon.

  • Average Receivable Collection Period

The average receivable collection period has been declining in the past few years which is good sign as they are generating cash flows quicker and they can invest the cash flows into other profitable assets. It has been decreasing at the rate of 2% every year which is a good sign.

  • Average Payables Period

During 2010 just after the financial crisis, Oracle dint want to lose out on cash at this crucial juncture and hence due to its past reputation, its suppliers agreed to increase its payable days to a large extend. After that the payable days have always been on the lower side, hence showing its financial strength.

Operating and Cash Conversion Cycle

  • Operating Cycle

The has a short operating cycle 72.8 days at an average in the past 10 years which is quiet short and healthy. Its continuous process innovations are steadily decreasing the cycle cyle and it has reduced by 10 % in the past 5 years.

  • Cash Conversion Cycle

Oracle currently has a cash conversion cycle of 45 days which is very good compared to the industry average of 48 days. The sudden blimp in the cash conversion cycle in 2010 is due to Oracle holding its payables for a longer duration as discussed above.

Liquidity Ratios