Oracle Corporation (ORCL)Covering Analyst: Joshua Jordanjjordan3@uoregon.edu

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