Seeking Alpha
Long/short equity, growth at reasonable price, contrarian, growth
Profile| Send Message|
( followers)  

Oracle (NYSE:ORCL) is a provider of enterprise software and computer hardware products and services. It is organized into three businesses: software, hardware and services. The software business consists of two segments: new software licenses and software license updates and product support. The hardware systems business consists of two segments: hardware systems products and hardware systems support. Oracle's services business consists of the remainder of its segments and offers consulting services, managed cloud services, and education services.
(Click to enlarge)

Industry Outlook


(Click to enlarge)

Increasing demand for ERP and business intelligence software along with data storage and integration tools is expected to fuel the industry in the future.

ERP spending worldwide is projected to grow from $26.03B in 2013 to $34.3B in 2017, attaining a compound annual growth rate (OTCPK:CAGR) of 7% in the forecast period 2012 - 2017.

Business Intelligence worldwide is projected to grow from $14B in 2013 to $18.6B in 2017, attaining a CAGR in the forecast period 2012 - 2017 of 7.3%.

Data Integration and Data Quality tools worldwide are projected to grow from $4B in 2013 to $6B in 2017, attaining a CAGR of 10.3% in the forecast period 2012 - 2017.

Future outlook

As the macroeconomic environment continues to show incremental improvement, inflow of new contracts show customer readiness to consider net - new spending initiatives in enterprise software, cloud storage and other supporting packages. Along with this customers also maintain a laser focus on driving efficiencies from those investments already in-house; Oracle is positioned to address both segments.

New launches as well as ongoing monetization of acquisition-fueled expansion into newer market segments will create opportunities for Oracle's direct sales team to engage with install base customers and realizing growth in revenues.

Building from the strength provided by long-time database license and maintenance revenue leadership, Oracle is positioned to increase its market presence in applications and cloud segments, taking on longtime competitors like SAP, Microsoft and any newcomer.

With dedicated management, global presence, surplus cash and refined processes the company has a comparative advantage over its peers. Oracle also has a history of allocating sufficient capital that brings innovation in products and processes.

Historical performance

Revenues

CAGR in revenues over past five year was 12.45%.

In fiscal year 2013 the company reported total revenues of $37.18 billion which represents growth of 2% in constant currency terms from the same period previous year. This growth is mainly because of increase in its software business revenues, which are attributable to growth in software license updates and product support revenues and its new software licenses and cloud software subscription revenues.

This constant currency increase was partially offset by reductions in company's hardware systems and services business revenues. On a constant currency basis, the Americas region contributed 77% while Asia Pacific region contributed 23% to the company's growth in total revenues during fiscal 2013.

New software licenses and cloud software subscription revenues represented 28%, 27% and 26% of total revenues in fiscal 2013, 2012 and 2011 respectively. Whereas software license updates and product support revenues represented 46%, 43% and 42% of total revenues in fiscal 2013, 2012 and 2011 respectively.

Hardware systems products represented 8%, 10% and 12% of total revenues in fiscal 2013, 2012 and 2011, respectively. Services segment represented 12% of total revenue in fiscal 2013.

Operating expense

Total operating expenses decreased 2% in constant currency terms in fiscal 2013 to $22.49 B. Low OPEX was primarily due to a $387 million acquisition related benefit. Another $306 million benefit was related to certain litigation and lower hardware systems products costs. These were associated with lower hardware systems products revenues. Certain other operating expense decreases in most of Oracle's other lines of business were primarily due to lower variable compensation expenses, lower external contractor expenses and lower amortization of intangible assets. In constant currency, these total expense decreases during fiscal 2013 were partially offset by higher salary and benefit expenses. The company had additional sales, marketing, research and development headcount added during fiscal 2013.

Profitability

Over the past five years CAGR of operating and net income has been 14.87% and 18.25% respectively. Oracle reported operating income of $14.4 billion and net income of 10.92 billion in fiscal 2013 representing operating profit and net profit margin of 38.74% and 29.38% respectively. Margins as a percentage of total revenues have improved in fiscal 2013.

Capital structure

The company has $18.49 billion debt on its balance sheet which increased by 40.1% from last year level mainly because interest rates have been low for some time. The company opted to finance a major portion of funds required to acquire targets. Current capital structure contains 29.3% debt.

Oracle paid $3.0 billion of borrowings pursuant to senior notes maturities which was partially offset by new issuance of $5.0 billion of senior notes in October 2012. The company also re-paid some other expired credit facilities during fiscal 2013.

Capital expenditures

In house research and development expenditures which are aimed to create growth opportunities by bringing innovation were $4.9 billion in fiscal 2013 and $4.5 billion in each of fiscal 2012 and 2011, or13%, 12% and 13% of total revenues in fiscal 2013, 2012 and 2011, respectively.

Cash flows from operations

CAGR over past five years in operating cash flows has been 14.45%.

Net cash provided by operating activities is $14.22 billion which has increased in fiscal 2013 in comparison to fiscal 2012 by 3%, primarily due to cash favorable impacts of increased net income adjusted for amortization of intangible assets, stock-based compensation and depreciation during fiscal 2013 in comparison to fiscal 2012.

Valuation

Oracles price to earnings of 14.6% and price to book value of 3.4 are slightly better than industry average. One year Forward price to earnings and estimated earnings per share is forecasted to be $11 and $2.89 which gives us intrinsic value of stock at $32.67. Oracle's stock is currently trading at $33.26 which is close to the estimated intrinsic value.

Conclusion

Oracle has performed exceptionally well in the past. Over several years through innovation, global presence and dedicated management the company has been able to out-perform its peers. Based on the company's current market capitalization of $156.68 billion, it is trading slightly above its intrinsic value. The company has free cash flow yield of 9.2%. Global demand for products and services the company offers has been increasing. Oracle is well poised to meet this increased demand and capitalize on this opportunity.

Long-term investors should add Oracle to their portfolio since the company is a high quality technology market leader with exceptional financial strength and handsome cash in hand. BUY

Source: A Peek Into Oracle's Future