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Oracle Corporation (ORCL)Covering Analyst: Joshua [email protected]
Oracle History
› Founded in 1977– Larry Ellison, Bob Miner, and Ed Oates
› Incorporated in 1977– A Series of Re-Incorporations
› Oracle Systems merged with Oracle Corporation– June 1, 1995
› Many Acquisitions
Business Overview
› Software
› Hardware
› Services
› Americas (52%)
› EMEA (31%)
› Asia Pacific (17%)
Software Publishing Industry
› Low Concentration
› High Competition
› Enterprise Software Publishing Sub-segment– High Concentration
20.9%
7.0%
5.6%
66.5%
Software Publishing Market Share
Microsoft
Oracle
IBM
Other
Total: $183 billion
Software Business
› Software Licenses– Database Software
› MySQL
– Middleware Software› Fusion Middleware
– Business Intelligence, Cloud Application Foundation, Data Integration, Java
– Applications Software› Fusion Applications, Siebel, JD Edwards
– Customer Relationship Management, Supply Chain Management, Financials
Hardware Business
› Hardware Systems Products– Engineered Systems
› Exadata, Exalogic, SPARC SuperCluster
– Servers› SPARC microprocessor
– Storage› Sun ZFS Storage Appliance Network Attached Storage
– Operating Systems› Oracle Solaris
Services
› Consulting
› Managed Cloud Services
› Education
Oracle’s Strategy
› Retain customers through high-margin sales channels
› Innovation through research & development– Acquisitions
› Brand Name Growth
› Product Integration
Revenue
› Software– License Updates &
Product Support– New Software Licenses
› Hardware– System Products– System Support
› Services– Consulting, Cloud,
Education
43.67%
26.69%
10.31%
6.67%
12.67%
2012 Revenue
Software License Updates &Product Support
New Software Licenses
Hardware Systems Products
Hardware Systems Support
Consulting, Cloud Services,Education
47.42%
28.68%
7.88%
5.58%
10.44%
Projected 2018 Revenue
Software License Updates& Product Support
New Software Licenses
Hardware SystemsProducts
Hardware SystemsSupport
Consulting, CloudServices, Education
Risks and Potential Drawbacks
› Inexperience in Hardware Systems
› Legal issues
› Competition
› Security Threats
Positives
› Margin growth in nearly all revenue segments
› Expansion globally
› Elite-talent retention
› Continued acquisition program
› An expanding stock repurchase program and increasing dividend
DCF Expectations
› Slightly increasing COGS as a percent of revenue
› Most costs increase slightly into terminal year– Personnel related
› Tax rate of 24%
› Accelerating/Decelerating rates as opposed to straight-line rates
› Increasing capital expenditures and acquisitions
DCF Valuation (50%)
› Possible reasons for price differential– Market Risk Premium– Beta
Implied Price 35.06
Current Price 35.92
Overvalued (2.39%)
Comparables Screening
› Industry
› Business Operations
› Size
› Beta
› Growth
› Margins
Comparables
› Microsoft (MSFT) – 40%
› Intel (INTC) – 5%
› Salesforce.com (CRM) – 5%
› CA Technologies (CA) – 30%
› Red Hat (RHT) – 20%
Forward Comparables Valuation (50%)
› Discrepancies– Growth– Bottom-Line
Margins
Multiple Implied Price Weight
EV/Revenue $27.75 0%EV/Gross Profit 27.59 0%EV/EBIT 39.22 25%EV/EBITDA 38.02 50%EV/(EBITDA-Capex) 44.47 25%Market Cap/Net Income = P/E 97.92 0%
Price Target $39.93Current Price 35.92Undervalued 11.16%
Final Valuation
Source Implied Price WeightForward Comps $39.93 50%DCF 35.06 50%Price Target 37.50Current Price 35.92Undervalued 4.39%
Implied Price Undervalued/(Overvalued)
Terminal Growth Rate Terminal Growth Rate
37 2.3% 2.3% 3.0% 3.8% 4.5%
5.75% 40.5 40.5 42.8 45.9 50.6
6.25% 38.6 38.6 40.4 42.8 46.2
7.00% 36.2 36.2 37.5 39.2 41.4
7.75% 34.3 34.3 35.3 36.5 38.1
8.25% 33.2 33.2 34.0 35.0 36.3
Mar
ket R
isk
Prem
ium
Recommendation: Hold Tall Firs and Svigals› Strong brand name with history
› Continued long-term growth– Acquisitions– High-margin sales channels
› Revenue and margin growth in competitive industry
› Marginal undervaluation
Questions