“COVID-19, are you going to be naughty or nice to me?” – Steve Magee –
Oracle provides products and services that address enterprise information technology (IT) environments.
| (In Billions) | FY16 | FY17 | FY18 | FY19 | Y-Y Growth | 4 Year Growth |
| Revenue | 37.7 | 39.8 | 39.5 | 39.0 | -1% | 3% |
| Operating Income | 13.2 | 14.3 | 14 | 14.2 | 1% | 8% |
| Operating Margin | 35% | 36% | 35% | 36% | 3% | 4% |
| Net Income | 9.3 | 3.8 | 11 | 10.1 | -8% | 9% |
| Net Margin | 25% | 10% | 28% | 26% | -7% | 5% |
Oracle Business Analysis
Oracle Business is reported as three different segments.
1. Oracle Cloud Services
Oracle Cloud Software-as-a-Service and Infrastructure-as-a-Service (SaaS and IaaS, respectively, and collectively, Oracle Cloud Services) offerings provide acomprehensive and integrated stack of applications and infrastructure services delivered via a cloud-based deployment model.
As of FY19, Cloud Services revenue makes up 83% of the total revenue.
2. Hardware
Oracle cloud license and on-premise license deployment offerings include Oracle Applications, Oracle Database and Oracle Middleware software offerings,among others, which customers deploy using IT infrastructure from the Oracle Cloud or their own cloud-based or on-premise IT environments. Substantially all customers, at their option, purchase license support contracts when they purchase an Oracle license. Oracle hardware product offerings include Oracle Engineered Systems, servers, storage and industry-specific products, among others. Customers generally opt to purchase hardware support contracts when they purchase Oracle hardware.
As of FY19, Hardware revenue makes up 9% of the total revenue.
3. Service
Oracle also offers services to assist their customers and partners to maximize the performance of their Oracle purchases.
As of FY19, Services revenue makes up 8% of the total revenue.
Flagship Products
- Enterprise Resource Planning (ERP)
- Enterprise Performance Management (EPM)
- Supply Chain Management (SCM)
- Human Capital management (HCM)
- NetSuite Application Suite
- Java language
In fiscal 2020, 2019 and 2018, Oracle invested $6.1 billion, $6.0 billion and $6.1billion, respectively, in research and development to enhance their existing portfolio of offerings and products and to develop new technologies and services.
This tells us that the competition to just to stay in the business is quite tough. Out-innovating competitors, if any, is or will be a mere luck.
Market Share
Oracle Market Share in ERP application is believed to be around 13%.
Oracle is a Market leader in EPM application with 20% market share.
Oracle is distant third in CRM application with ~8% market share.
Management
Oracle is led by Larry Ellison, the founder of the company, for the most part. Even though, Safra is CEO, Larry has final say, if not big influence in any key decisions.
As you can see below, Oracle pays its executives heavily with share options. Apparently, it is quite common in the Tech world.
Following is the summary of Oracle Executive’s total compensation for FY19.
| Name And Title | Total Cash | Equity | Other | Total Compensation |
|---|---|---|---|---|
| Safra A. Catz Chief Executive Officer | $950,000 | $0 | $15,981 | $965,981 |
| Lawrence J. Ellison Chairman and Chief Technology Officer | $1 | $0 | $1,662,827 | $1,662,828 |
| Jeffrey O. Henley Vice Chairman | $650,000 | $3,556,000 | $8,615 | $4,214,615 |
| Mark V. Hurd Chief Executive Officer | $950,000 | $0 | $1,531,646 | $2,481,646 |
| Edward Screven Executive Vice President, Chief Corporate Architect | $700,000 | $33,460,000 | $8,619 | $34,168,619 |
| Dorian E. Daley Executive Vice President and General Counsel | $1,225,000 | $6,766,500 | $8,291 | $7,999,791 |
As of December 31, 2019, Ellison owns 36.2% of the shares of Oracle Corporation, which is worth around $52 billion at current stock price.
Repurchase of Capital Stock
In fiscal 2020, their Board of Directors approved expansions of their stock repurchase program totaling $30.0 billion. As of May 31, 2020, approximately $16.6 billion remained available for stock repurchases pursuant to their stock repurchase program.
The summary of stock repurchase activity.
For detail refer to 10-k Statement at page 34.
In the last four years, Oracle Corp repurchased its capital stock of $72.1 billion.
| FY16 | FY17 | FY18 | FY19 | Total | |
| Share Repurchase | 19.9 | 36.6 | 11.8 | 3.8 | 72.1 |
Since their revenue is slowing down, but the cash flow is still quite high, they are actively repurchasing their common stock, which has increased their Earning per share by 32% in the last four years.
Valuation
As of now, Oracle is not a growth company. Its revenue is actually falling. In last 4 years, its revenue grew just by 3% and net income grew by just 5%, which is due to growth of 4% in operating margin. Their operating cash flow is down by 13% to 13 billions from 15 billions in FY18.
| FY16 | FY17 | FY18 | FY19 | Y-Y Growth | 4 Year Growth | |
| ROA | 6.9% | 2.8% | 10.1% | 8.8% | -13% | 27% |
| ROE | 17.2% | 8.3% | 50.0% | 84.2% | 68% | 389% |
| Price/FCF | 12.0 | 14.2 | 18.0 | 12.5 | -30% | 5% |
| Price/OI | 10.4 | 12.9 | 15.3 | 11.1 | -28% | 7% |
| Price/Earning | 15.6 | 50.7 | 20.9 | 14.3 | -32% | -8% |
| Dividend Yield | 1.8% | 1.6% | 1.3% | 2.1% | 65% | 16% |
Their return on Equity is going up because of the huge stock repurchase, which has boosted the dividend yield as well.
Their cash flow and return on assets is quite stable. The silver-lining here is the market capitalization is actually down from four years ago, which has brought the company into a fair value territory.
| FY16 | FY17 | FY18 | FY19 | Y-Y Growth | 4 Year Growth | |
| Free Cash Flow | 12.1 | 13.6 | 12.8 | 11.5 | -10% | -5% |
| Market Capital | 145 | 193 | 230 | 144 | -37% | -1% |
| # Shares | 3.73 | 4.24 | 4.22 | 3.07 | -27% | -18% |
| Share Price | 38.9 | 45.5 | 54.6 | 47 | -14% | 21% |
| EPS | 2.5 | 0.9 | 2.6 | 3.3 | 26% | 32% |
At present situation, we believe the stock price of $45 is a good buy. Given that the valuation of other similar tech companies is quite high, Oracle seems to be a decent buy. Perhaps there is no growth insight for Oracle and its selling for a right price. It certainly is not a wall-street-darling type company like Tesla and Snowflake, and therefore, you should only expect decent return off of it.
The COVID-19 has yielded a stroke of luck for us and we scooped some shares at average price of $47. At current price, a hefty 30% return in six months, way beyond what we have expected, but we will take it.
Oracle and TikTok
Oracle has $43 billion in Total Cash and their executives are pumped to boost their ego and stocks options for them. Who cares about the price, size, quality, and color in a sweater if someone hands me their credit card to go Christmas shopping! We will soon make TikTok videos about Oracle.
Their Goodwill is $44 billion and Long term Debt is $69 billion, which is up 44% in last four years. Perfect recipe for disaster for shareholders.
Historically, oracle is an acquisition hungry company. In general, most of the acquisition will become value destroyer rather than value creator for stockholders. And most likely Oracle partnering with TikTok will be another example of it. Yay! One more example coming up for prospective business writers.
Arrow of Performance 