Today we are going to analyze Oracle, a tech company that has always stood out for being a leader in database solutions and has expanded its services to other areas in the cloud, also offering a wide range of diverse services such as system infrastructure or enterprise management of all business areas, which allows the companies to obtain almost all the services needed to manage a company on a single IT platform.
Oracle’s beginnings date back to 1977 when Larry Ellison, Bob Miner and Ed Oates decided to found Software Development Laboratories (SDL), a consulting firm whose goal was to develop and sell database softwares. Ellison and Miner had experience in this field and had worked for government agencies, so after creating SDL they managed to sign their first contract with the CIA to develop a special database system with a code key called “Oracle”, which is why the company would later adopt that name. After this first agreement, Ellison became CEO of the company and took over sales while Miner oversaw software development.
While they were working on the CIA project, the IBM Journal published an article written by computer scientist Edgar F. Codd that described a relational model through a structured query language (SQL) that allows users to retrieve and define how to display desired information from a database, extracting from the database a selection of specific data that you want to analyze or query. For example, call the database and say “Give me the 4 tallest people between 30 and 40 years old”.
Ellison saw great potential in this development and so in 1978 decided to bet on this programming language and develop Oracle RDBMS (Relational Database Management System), which was the first database program in the world to use SQL. They decided to rename the company to Relational Software Incorporated (RSI), a name more consistent with their business objectives at the time.
The company was renamed Oracle Corporation in 1982, and developed the first portable RDBMS in 1983, which allowed companies to run their database systems by connecting multiple servers and personal computers. This product boosted sales, and thanks to a strong reputation and aggressive advertising campaigns, the company enjoyed a decade of boom and expansion with double-digit revenue growth, leading to a stock market listing in 1986. Oracle Database became the world’s largest database repository in 1987, and was already present in 55 countries.
The 1990s were not so successful. They began with lawsuits from several investors alleging illicit accounting methods that led the company to restate its accounts and significantly reduce its growth expectations, which led to a drastic drop in its share price. In addition, competition in the database market was increasing, leading to a reduction in margins. On the other hand, Oracle decided to invest a lot of money in Network Computer (NC), an operating system that turned out to be a failure as personal computers mostly opted for Microsoft’s Windows solution. All these setbacks led the company into a period of restructuring, from which it managed to emerge successfully thanks to an early adoption of the Internet by developing products compatible with the World Wide Web (www…).
From there, Oracle’s growth has been through a multitude of acquisitions. Oracle expanded its business and became a major player in business management applications. The company realized that to compete with the German multinational SAP in this sector it needed to make acquisitions, so in 2005 it acquired PeopleSoft and Siebel, while in 2007 it bought Hyperion, in 2012 Taleo and later Netsuite in 2016. All these acquisitions enable Oracle to provide a comprehensive set of business management solutions on a single IT platform.
Oracle also expanded its offering to infrastructures and systems with purchases such as BAE systems in 2010, and boosted its leadership in databases with acquisitions such as Sun Microsystems in 2010, and Datascience in 2016 which included the cloud datascience solution and Business Intelligence. The latest acquisition was Cerner in 2022, a company that offers all kinds of digital services for the healthcare industry.
We summarize Oracle’s most important acquisitions:
- 2005: Siebel Systems ($5.85 billion): CRM solutions.
- 2005: PeopleSoft ($10.3 billion): enterprise resource planning (ERP) and human resource management (HCM).
- 2007: Hyperion Solutions ($3.3 billion): Business Intelligence.
- 2008: BEA Systems ($8.5 billion): servers and middleware (software with which different applications connect to each other).
- 2010: Sun Microsystems ($7.4 billion): hardware and software offerings, incorporating among other functionalities the popular Java programming language, and the well-known open source MySQL database.
- 2012: Taleo ($1.2 billion): technology solutions applicable to talent management: recruiting, onboarding, professional development, etc.
- 2014: Micros Systems ($5.3 billion): business management software specialized in hospitality and retail.
- 2016: NetSuite ($9.3 billion): cloud-based business software solutions specialized in small and medium-sized businesses.
- 2018: Aconex ($1.2 billion): management system specialized in construction projects.
- 2018: Talari Networks (Price unknown): networking solutions to optimize remote work and performance in the cloud.
- 2018: Grapeshot (Price unknown): digital advertising and marketing solutions.
- 2018: DataScience.com (Price unknown): data science and machine learning in the cloud.
- 2022: Cerner ($28.3 billion): digital services specializing in the healthcare industry.
Oracle markets hardware systems, cloud services and enterprise software products serving mostly large enterprises, and its solutions are widely used in various industries, including financial services, healthcare, retail and government agencies.
Oracle separates its activity into 3 business segments:
1) Cloud and License: this is Oracle’s mainstay and this segment encompasses a multitude of applications with cloud subscription and licensing services. The services are very diverse:
- Database management: Oracle Database, MySQL.
- Cloud infrastructure: Oracle Cloud Infrastructure (OCI), Autonomous Database.
- ERP: Oracle Fusion Cloud ERP, Netsuite, Oracle E-Business Suite.
- CRM: Oracle CX Cloud, Siebel CRM.
- Supply Chain: Oracle SCM Cloud.
- Human Resources Management: Oracle HCM Cloud, Taleo.
- Business Intelligence: Oracle Analytics Cloud, Oracle Data Visualization.
- IT Security (Oracle Identity Management, Oracle CASB Cloud Service, etc.).
- Application development (Oracle Cloud Developer Services, Java, etc.).
- Specific solutions for some industries (Oracle Healthcare, Oracle Communications, Oracle Utilities, etc.).
2) Services: consulting services to provide technical support and maintenance to customers for their Oracle applications suite.
3) Hardware: Segment that provides devices mainly related to data storage.
Although it may seem that the weight in Cloud and Licence is very high, sales are very diversified due to the wide variety of services that Oracle markets. In terms of geographic diversity, the greatest weight is in North America.
Oracle is the market leader in database management and ERP software solutions. It also has significant presence in cloud infrastructure markets, however, other technology giants such as Amazon, Microsoft, Google have a much larger market share, so Oracle is not a major player in the Cloud Computing segment.
Given Oracle’s huge portfolio, we describe the main competitors depending on the activity:
- Databases: Microsoft SQL
- ERP: SAP, Microsoft
- CRM: Salesforce, Microsoft, SAP
- Supply Chain: SAP, Infor
- Human Capital Management: Workday, SAP SuccessFactors
- Business Intelligence: Tableau, Microsoft Power BI, SAP BO
- Cloud Infrastructure Service: Amazon Web Services (AWS), Microsoft Azure and Google Cloud
The Cloud Computing is growing strongly driven by increasing acceptance by both businesses and consumers. The use of mobile devices is increasing, and other factors such as the rise of artificial intelligence, machine learning, the Internet of Things (IoT), and the growing demand for data processing and storage are driving advances in cloud technology.
The industry is characterized by high competition among major players, who are also technology giants, who can compete on price, reliability, scalability, security, and range of services offered. Some companies have unique advantages, such as Amazon’s large customer base and extensive data center network, and Microsoft’s strong presence in the enterprise market. Cloud computing is expected to continue to grow in the coming years, and will also experience continued consolidation, with larger companies acquiring smaller players to expand their services.
Oracle has several competitive advantages such as brand recognition after more than 4 decades at the forefront of technology, high diversification allowing companies to offer all enterprise solutions on a single platform, a large customer base providing recurring revenue, and a high replacement cost, as switching software involves a large cost to the company in both employee training and data integration.
Oracle is listed on the New York Exchange under ticker ORCL and among the main shareholders are founder Larry Ellison with a 42.5% stake, Capital Research & Management with 18.2%, and other investment funds such as Vanguard with 4.81%, SSgA Funds Management with 2.28% or Berkshire Hathaway with 1.54%.
Let’s move on to analyze the financial statements.
1) FINANCIAL HEALTH: Balance Sheet
The balance sheet structure cannot be healthy with negative Equity. The weight of Goodwill is also high and confirms the multitude of acquisitions, while the positive part is that the Cash Ratio is higher than Current Liabilities. Let’s analyze in detail.
Short-Term Assets and Liabilities
In the short term the situation is very conservative with a very high cash position, presenting a liquidity ratio of 1.62 and a cash ratio of 1.1. Moreover, these ratios were even higher in previous years.
In addition, the largest item in current liabilities is “Deferred revenue”, money that Oracle has in cash for subscription services which have not yet rendered. Therefore, there is no cause for concern in the short-term.
Long-Term Assets and Liabilities
Oracle had a very healthy balance sheet a decade ago with almost no Financial Debt and high Equity, which has deteriorated due to many strategic acquisitions and high R&D spending (investments needed to stay on the cutting edge of technology), and has also issued debt to carry out strong share buyback programs.
In 2022 the Financial Autonomy is negative -5% and most of the Total Liabilities (66%) is Financial Debt. After the acquisition of Cerner, the Debt/EBITDA ratio is 3.88 in 2022. Most of the Debt matures in the long term, so maturities are not asphyxiating, but the amount of Financial Debt is high and interest is an important expense item, reaching 7% of Sales in Q2 2023, paying an effective annual rate of 3.75%.
As expected, Intangibles have a large weight in the Assets. Goodwill is high but not exorbitant, as these acquisitions allow the company to have a very diversified portfolio. However, as we will see below, sales have been flat for a decade.
2) PROFITABILITY: Income Statement 2022
Over the last decade, sales have remained flat due to the restructuring of the business model to transform its services to the cloud. However, in this segment Oracle is growing at very high single digits, and overall growth prospects are even brighter.
In 2022, Net Revenues grew by 5%; they would have been 10% at constant exchange rates. The Cloud segment grew by 19%, with infrastructure solutions (+36%) and ERP solutions from Fusion (+20%) and Netsuite (+27%) standing out.
In 2023 the outlook is even better, following the addition of Cerner (recall that no less than $28 billion was disbursed), in Q2 2023 total sales were up 18% compared to the previous year. Without the impact of the exchange rate, this growth would have risen to 25%. Likewise, if we exclude Cerner, Sales would have grown by 9% organically.
In 2023, growth in Infrastructure (+53%), applications (+40%) (where Cerner is included) and ERP Fusion (+23%) and Netsuite (+25%) stand out. These figures are more in line with a growing technology company than with a mature company such as Oracle.
Net Profit has also remained flat over the last decade. However, margins are excellent. Except for extraordinary years such as 2018 and 2022, the Net Margin has been between 20 and 30%, while the operating margin usually reaches figures close to 40%. There is no doubt that we are talking about a great business.
If we compare with the other giants in Cloud Computing, they all have high margins, which may slow down a bit when the market stabilizes and competition becomes more aggressive. But Oracle has consistently high margins, and is used to transforming itself when it needs to. Its enormous profitability and size allow it to continue to transform when necessary. In a market as competitive as the technology market, there is a risk that Oracle could become uncompetitive. Historically, however, it has always managed to hold its own.
As we will see in the Sankey chart, the most important expenses are Cost of Sales and R&D, while after increasing the Debt, interest represented 6% in 2022 and represents 7% in 2023.
ROA: 6% (Net Income/Total Assets)
ROE: -116% (Net Income/Equity)
ROCE: 22% (EBIT/(Equity + Net Debt))
Profitability ratios are generally very good. In 2022 they are lower than usual due to acquisition costs related to Cerner.
ROA usually reaches values around 10%, well above the interest paid on borrowings. While ROE, although it has negative values since 2022, has always been at very high values, and regarding ROCE, despite the recent increase in Debt and the diminished profits in 2022, It reaches quite respectable values.
Earnings per Share (EPS)
Despite flat sales, EPS has increased a lot due to Oracle’s large share repurchases over the last decade. Through 2021, annual growth was 9.81%. In 2022 EPS has fallen due to expenses derived from the acquisition discussed several times, and it is expected that these exceptional losses will also affect the 2023 financial year, but the outlook for the coming years is for high EPS increases in an organic way.
Dividend per Share (DPS)
The initial Dividend Yield is usually mediocre, and is usually less than 2%. However, the Dividend growth rate is very high.
In the last decade the Dividend has grown at a rate of 18.2% per year, and in the coming years it is expected to continue to grow substantially. If we analyze the returns that investors have obtained over the last decade, we see some quite interesting yields:
- Shareholders who bought ORCL in 2012 at about $27, earned an initial Dividend Yield around 0.9%, and in 2022 receive a yield close to 5% per year.
- Those who invested in 2017 at a price of $45, got initial Dividend Yields of 1.4% and now get a 2.7% yield each year.
It is not unreasonable to think that dividend growth will continue at double-digit rates over the next few years, so it may be an interesting option for a DGI strategy.
Payout is around 20-30%, while a decade ago it was around 10-15%. We can see that the Payout has increased, but the percentages are still low and with room to continue increasing the dividend despite having to invest in capital to stay at the forefront of technology.
1) Cash Flow – Maintenance CAPEX
Although Operating Cash Flow (OCF) has been stagnant for a few years, we see that the company needs little maintenance CAPEX to generate a very high FCF, which shows a very profitable business that generates plenty of cash to make acquisitions when needed, and reward shareholders through dividends and share buybacks.
Following the restructuring of the business, and once Cerner’s acquisition costs are adjusted, the outlook for OCF is very good, so we can expect even higher FCF in the coming years.
2) Cash Flow – Maintenance CAPEX + Investment
If we add acquisitions, we can observe some spike as in 2017 for the purchase of Netsuite. The acquisition of Cerner is already reflected in the quarterly results Q2 2023, and next year Oracle will present a negative FCF, as the magnitude of this acquisition is significant and represents approximately 2 times the FCF generated by the company. However, we see a generally very wide FCF, which allows for acquisitions when the opportunity or the need arises.
We do not include the total CAPEX chart. However, you can see from our Report that in years when there are no major acquisitions, Oracle allocates excess cash for financial investments, trying to make a return on excess cash.
Over the last decade Oracle has repurchased shares at a very high rate of -5.86% of the total each year, and therefore the number of shares outstanding has been reduced by almost half.
Share buybacks have been very aggressive, and this has helped to boost the share price and EPS. Even in a decade of flat sales the share price has increased by a factor of x4.
On the other hand, the company has gone from a strong Balance Sheet to negative Equity. So we would like to see Oracle slow the pace of buybacks over the next few years to clean up its Balance Sheet.
Today we have analyzed an interesting company for our investment strategy. Although the technology sector is very competitive, Oracle has a profitable business with good growth prospects. The margins are very high and we have appreciated high competitive advantages, in addition to very diversified services, which show guarantees for the future of the company in the coming years.
The negative point is its financial situation. After a decade of strong buybacks and the recent acquisition of Cerner, the Financial Debt has increased too much and the Equity is negative. In the short term, the situation is under control, and the business is very profitable and generates a very high FCF, so we would like the company to devote efforts to improve the Balance Sheet in the coming years, as it has the financial capacity to continue growing and improving the Balance Sheet.
In terms of our investment strategy, the initial dividend yield is low but increases at very high rates and can do so in a sustainable manner. The company is a great cash generator, with a very comfortable FCF. On the other hand, the payout has plenty of room for Oracle to continue to increase dividends as well as reinvest profits in staying at the forefront of technology. So it seems to us to be an absolutely valid company.
What do you think about Oracle, do you know it, do you think it is a good investment option, do you have it in your portfolio?
We encourage you to share your opinions!
Remember that, if you want to consult its historical data, our Report is available here.
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