Company Description:
Oracle Corporation (Oracle), incorporated in 2005, is an enterprise software company. The Company develops, manufactures, markets, distributes and services database and middleware software, as well as applications software that help organizations to manage their businesses. Oracle is organized into two businesses: software and services. These businesses are further divided into five operating segments. Its software business consists of two operating segments, new software licenses, and software license updates and product support. Its services business consists of three operating segments, consulting, On Demand (formerly known as advanced product services) and education. The Company's software business represented 79% of its total revenues and its services business represented 21% of total revenues during the fiscal year ended
Click here for a full description of the company’s operations (provided by Reuters).
Annual Report Highlights (latest report is for the period ending
General
We are the world’s largest enterprise software company. We develop, manufacture, market, distribute and service database and middleware software as well as applications software designed to help our customers manage and grow their business operations. We also provide support for the Linux open source operating system through our Oracle Unbreakable Linux Support program, which provides our customers with our industry-leading global support programs for Linux.
An active acquisition program is an important element of our corporate strategy. In the last three fiscal years, we have invested over $25 billion, in the aggregate, to acquire a number of companies, products, services and technologies, including the acquisition of PeopleSoft, Inc., Siebel Systems, Inc. and Hyperion Solutions Corporation.
Cyclicality and Seasonality
General economic conditions have an impact on our business and financial results. The markets in which we sell our products and services have, at times, experienced weak economic conditions that have negatively affected revenues. Our quarterly results reflect distinct seasonality in the sale of our products and services, as our revenues are typically highest in our fourth fiscal quarter and lowest in our first fiscal quarter.
Customers
Our customer base consists of a significant number of businesses of many sizes and industries, government agencies, educational institutions and resellers. No single customer accounted for 10% or more of revenues in fiscal 2007, 2006 or 2005.
Research and Development
We develop the majority of our products internally. In addition, we have acquired technology through business acquisitions. We also purchase or license intellectual property rights in certain circumstances. Internal development allows us to maintain technical control over the design and development of our products.
Research and development expenditures were $2.2 billion, $1.9 billion and $1.5 billion, or 12%, 13% and 13% of total revenues, in fiscal 2007, 2006 and 2005, respectively. As a percentage of new software license revenues, research and development expenditures were 37%, 38% and 37% in fiscal 2007, 2006 and 2005, respectively. We plan on continuing to dedicate a significant amount of resources to research and development efforts to maintain and improve our current product offerings including our database, middleware and applications software.
Employees
As of
Properties
Our headquarters facility consists of approximately 3.8 million square feet in
Stock Repurchase Program
Our Board of Directors has approved a program to repurchase shares of our common stock to reduce the dilutive effect of our stock option and stock purchase plans. From the inception of the stock repurchase program in 1992 to
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Software Business
We expect that our software business revenues will continue to increase, which should allow us to improve margins and profits and continue to make investments in research and development.
New Software Licenses: The growth in new software license revenues is affected by the strength of general economic and business conditions, governmental budgetary constraints, the competitive position of our software products and acquisitions. The new software license business is also characterized by long sales cycles. The timing of a few large software license transactions can substantially affect our quarterly new software license revenues. New software license revenues represented 33% of our total revenues in fiscal 2007.
Our goal is to maintain a first or second position in each of our software product categories and certain industry segments as well as to grow our software revenues faster than our competitors. We have focused on lowering the total cost of ownership of our software products by improving integration, decreasing installation times, lowering administration costs and improving the ease of use.
Software License Updates and Product Support: Customers that purchase software license updates and product support are granted rights to unspecified product upgrades and maintenance releases issued during the support period, as well as technical support assistance.
Software license updates and product support revenues, which represent approximately 46% of our total revenues in fiscal 2007, are our highest margin business unit. Support margins during fiscal 2007 were 90%, and accounted for 76% of our total margins over the same respective period.
We believe that software license updates and product support revenues and margins will continue to grow for the following reasons:
- Acquisitions over the past three years have significantly increased our support contract base, as well as the portfolio of products available to be licensed.
- Substantially all customers purchase license updates and product support when they buy new software licenses, resulting in a further increase in our support contract base. Even if new license revenue growth was flat, software license updates and product support revenues would continue to grow assuming renewal and cancellation rates remained relatively constant since substantially all new software license transactions add to the support contract base.
- Substantially all of our customers, including customers from acquired companies, renew their support contracts when eligible for renewal.
Services Business
Our services business, which represents 21% of our total revenues in fiscal 2007, has significantly lower margins than our software business.
Consulting: We expect consulting revenues to continue to grow as consulting revenues tend to lag software revenues by several quarters since consulting services, if purchased, are typically performed after the purchase of new software licenses and our new license growth rates have generally increased over the corresponding period in the prior year over the past several quarters.
On Demand: We believe that our On Demand offerings provide an additional opportunity for customers to lower their total cost of ownership and can therefore provide us with a competitive advantage. We have made and plan to continue to make investments in Oracle On Demand and CRM On Demand to support current and future revenue growth, which has negatively impacted On Demand margins and we expect may continue to do so in the future.
Education: The purpose of our education services is to further enhance the usability of our software products by our customers and to create opportunities to grow our software revenues. Education revenues have been impacted by personnel reductions in our customers’ IT departments, tighter controls over discretionary spending and greater use of outsourcing solutions. Despite these trends, we expect education revenues to increase in fiscal year 2008, primarily due to an increase in customer training on the use of our acquired application products and increases in license revenues from our database and middleware products.
Results of Operations
The comparability of our operating results in fiscal 2007 compared to fiscal 2006 is impacted by our acquisition of Siebel in the third quarter of fiscal 2006, the consolidation of i-flex beginning June 1, 2006 (beginning of fiscal 2007) and, to a lesser extent, the acquisition of Hyperion in the fourth quarter of fiscal 2007. The comparability of our operating results in fiscal 2006 compared to fiscal 2005 is also impacted by acquisitions, principally our acquisition of PeopleSoft in the third quarter of fiscal 2005, and, to a lesser extent, the acquisitions of Siebel in the third quarter of fiscal 2006 and Retek, Inc. in the fourth quarter of fiscal 2005.
Total Revenues and Operating Expenses
Fiscal 2007 Compared to Fiscal 2006: Total revenues increased in fiscal 2007 due to increased demand for our products and services offerings, strong sales execution, and incremental revenues from our acquisitions. Total revenues were positively affected by foreign currency rate fluctuations of 3 percentage points in fiscal 2007 due to the weakening of the
Excluding the effect of currency rate fluctuations, the increase in operating expenses is primarily due to higher salary and employee benefits associated with increased headcount levels (primarily resulting from our acquisitions in fiscal 2007 and fiscal 2006), as well as higher commissions and travel and entertainment expenses associated with both increased revenues and headcount levels.
Operating margins as a percentage of total revenues were flat in fiscal 2007 and were favorably affected by foreign currency rate fluctuations of 5 percentage points. Our revenues grew at a faster rate than our operating expenses, excluding amortization costs of intangible assets and stock-based compensation expenses. The increases in those cost categories offset the slower growth in other operating expenses.
International operations will continue to provide a significant portion of our total revenues. As a result, total revenues and expenses will be affected by changes in the relative strength of the
Financial Highlights:
Revenue Growth (1-yr): 25.1%
Revenue Growth (9-yr average): 11.4%
Net Income Growth (9-yr average): 49.5%
Earnings-Per-Share (9-yr average): 49.4%
Free Cash Flow Growth (9-yr average): 21.4%
Net Profit Margin (10-yr average): 25.7%
Return On Equity (10-yr average): 45.2%
Current Ratio (current): 1.37
- Oracle has been consistent with its debt levels and it currently has a decent debt ratio of 0.51.
- ROA hasn’t been very consistent and ranged between 13% and 26% during the past decade. Currently it’s at 13.4% and averages an impressive 18.7% for the past 10 years.
- ROE has been fairly consistent and has usually been around 30% for the past ten years (except for several exceptionally outstanding years). Currently it’s at 26.8% and averages 45.2% for the past 10 years.
- I’m really impressed with how gross margin, operating margin, and profit margin have all improved during the past decade even though company’s business model has been maturing. Profit margin has improved from 11.4% in 1998 to 23.7% in 2007 and posted a marvelous 25.7% 10-yr average.
- Revenue growth hasn’t been as consistent as one would have liked it to be, especially since the company has posted negative revenue growth in 2002 and 2003. Nevertheless it averaged an 11.4% growth for the past nine years. Net income growth has been even more sporadic. Craziness in growth can be highlighted in the following: 59% and 388% growth in 1999 and 2000, respectively, which were followed by declines of 59% and 13% in 2001 and 2002, respectively. As the company matures and tech bubble in the days past, growth rates maybe more stable in the future. In 2007, Oracle posted net income growth of 26.4% and for the past nine years it averages growth of 49.5% (it is, of course, largely because of the humongous 388% gain in 2000, which is not likely to happen again).
- Free Cash Flow margin has been fairly stable and hovered around 30% for most of the past ten years. FCF growth, on the other hand, hasn’t been nearly as consistent. In fact, it is about as sporadic as net income growth has been. FCF growth has dipped into negative territory in 2001 and 2003, posted a 20.8% gain in 2007 and averages 21.4% for the past nine years. Despite the lack of consistency, to average 21.4% free cash flow growth for nine years is just unbelievable.
Discounted Cash Flow (DCF) Analysis:
I used a discount rate of 11% because, in my opinion, Oracle’s dependence on IT spending presents a slightly higher than average risk for a wide moat company such as this one.
Using the assumptions listed above, my intrinsic value of the stock came out to $21.62. My intrinsic value of Oracle is pretty much identical with Morningstar’s “fair value” for this company.
Pros:
- Considerable cash outlays will allow Oracle to keep growing through acquisitions.
- Oracle has the largest market share (35%) of the enterprise database market where most of the revenue comes from.
- Majority of profits come from maintenance contracts, which make for a reliable stream of cash flow even during the economic downturn.
- Company spends a significant percentage of sales on R&D, which should support its future growth and limit customer attrition.
- Oracle consistently repurchases its common stock. Last year it repurchased $4 billion worth of common stock and plans to continue repurchasing.
Cons:
- Oracle’s organic grow is already slowing down due to increased competition and its own size. Much of the growth will have to come from acquisitions.
- Its financial performance still depends in the large part on the IT spending of a relatively small pool of large companies and if their IT budgets get slashed, Oracle will feel the consequences.
Final Decision:
I think this is a great software company with a lot of upside potential and I would like to buy it at the right price. Currently, Oracle’s stock trades at $21.30 vs. $.21.62 that I have for intrinsic value of the company. Given my safety margin of 30-50%, my buying price range for Oracle is $11-$15.
0 comments:
Post a Comment