TBR 2Q11 Oracle Initial Response

Oracle

SOFTWARE BUSINESS QUARTERLYSM

2Q11 INITIAL RESPONSE

Publish Date: June 24, 2011 Author: Elizabeth Hedstrom Henlin, Software Practice Analyst ([email protected]) Content Editor: Stuart Williams, Software Practice Director

Second Calendar Quarter 2011

Fourth Fiscal Quarter 2011 Ended May 30, 2011

TBR

T EC H N O LO G Y B U S I N ES S R ES EAR C H , I N C .

mailto:[email protected]

TBR

Oracle 2Q11 Initial Response | Software Business Quarterly ©2011 Technology Business Research, Inc. 2

TBR Assessment Corporate Strategic Objectives

In posting global growth – particularly in APAC – as well as in its core product lines, TBR maintains that Oracle has refocused its business on higher-margin offerings, and has succeeded in cost-cutting such that selling its portfolio has resulted in more profit than the company has ever reported.

Oracle’s 2011 fiscal performance fuels its ongoing skirmishes with competitors SAP, HP and IBM. As these companies scale back their relationships with Oracle and “big data” appliances from all parties enter the market, Oracle will need to sustain, if not improve upon, its current performance in coming quarters.

Become the leading provider of complete IT solutions for the enterprise, encompassing hardware and software

Oracle hit its first $10 billion quarter in FY 4Q11, with double-digit software organic growth, notable customer wins in all segments, and improving hardware margins. Much of that success can be credited to going back to the basics of growing a strong, profitable business.

Embrace high margins to drive top- and bottom-line growth through improved profitability

Exadata and Exalogic were the success stories leading to Oracle’s higher hardware margins, as executives reported more than 1,000 Exadata platforms installed worldwide and a “ramp” for Exalogic that was higher-performing than Exadata’s at the same point.

These platforms galvanized the implied improved gross margin inside the hardware business, which executives noted as 56% during the earnings announcement.

Drive share growth in the enterprise market at the expense of key competitors, including IBM, SAP and HP

Per the discussion of Oracle’s cloud strategy on the FY 4Q11 announcement and the competitors named, Salesforce.com seems to have solidified its spot next to SAP, HP and IBM on the list of Oracle’s key market targets.

TBR Position

Oracle posted record quarterly and yearly results to close its fiscal 2011 by focusing on business “fundamentals”

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Key Developments

With strong organic growth, Oracle’s software business illustrated the depth of the value it brings to customers

• Oracle’s database business posted annual growth of 26% for FY11, which CEO Larry Ellison described as “twice as fast as any year in the past decade.”

• With the continued integration of Oracle’s hardware and software install bases, the cross-selling opportunities are deep.

• Posting 19% new license growth and 28% growth in its database business during the quarter, Oracle’s software business has a strong foundation from which the company can springboard 2012 profit and deeper market penetration for Exadata and Exalogic.

• TBR believes coming quarters will further accelerate the software business’ growth as the anticipated suite of Oracle Fusion application modules are brought in their entirety to general availability (Oracle Fusion Applications modules available to date include accounting and human resources).

The next challenge for Oracle – drive “cloud” to its install base

• TBR believes Oracle’s “Cloud 2.0” strategy, as outlined by Ellison during the earnings announcement, will further evolve the company’s businesses.

• The company that successfully integrated a struggling hardware company into a software business while retaining high margins is looking for a new challenge – and a “virtualized, elastic” public cloud offering that “looks more like Amazon” may well be it.

Can Oracle embrace cloud on its own terms?

Having criticized Amazon and other pure-play cloud vendors for low-margin, high-churn models, TBR believes Oracle will need to demonstrate how its “Cloud 2.0 strategy” will resemble Amazon while fitting within Oracle’s commitment to high-margin businesses.

Executive Summary – Software

Oracle’s investment in the integrations of its core technologies drove its database business to new heights in 2011

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Key Developments

For Oracle hardware, the numbers don’t tell the entire story

• Oracle executives noted that though hardware performance did not match the exuberance boasted by its software counterpart, the Sun portfolio improved year-to-year.

• Revenue gaps caused by cessation of the Hitachi and LSI-Engenio (now owned by NetApp) reselling relationships were substantial enough that the performance of the Sun line was unable to overcome them.

• While cost reduction is not a strategy that can work ad infinitum, TBR believes Oracle is ready to accelerate the go-to-market of its higher-margin portfolios, with Exadata and Exalogic leading the charge.

Exadata and Exalogic will be the engines moving Oracle’s hardware business to increased profitability

• Oracle committed to triple the current Exadata install base within a year, as executives noted Tier 1 reference customers including Apple and Boeing.

• TBR concurs with Oracle executives’ positive assessment of the cross-sell potential for Exadata and Exalogic within Oracle’s applications and middleware install bases – and successful leveraging of those opportunities will deliver the top- and bottom-line growth sought in this business unit.

• TBR predicts pending releases at Oracle OpenWorld of appliances for Exadata and Exalogic designed to capitalize on the market attention on “big data” will further accelerate the market visibility and success of these portfolios.

To win the war, Oracle will need to maintain high- growth and high-margin businesses

• TBR maintains that Oracle’s ability to present an end-to-end solution picture positions the company well for continued growth.

• Having called out the end of reselling as a key component of its hardware business, TBR believes Oracle must continue to accelerate the sales of core Sun platforms in the near term while driving volume within the Exadata and Exalogic portfolios to grow top-line revenue and retain its attractive margins.

Executive Summary – Hardware

Exadata and Exalogic are positioned to “turbo-charge” Oracle’s hardware business in coming quarters

TBR


Segment Revenue Performance and Strategies

Segment Financials

New License

Notable for Oracle and its history of acquisitions, new licenses posted largely organic 19% year-to-year growth during FY 4Q11.

Hardware

Hardware systems revenue climbed sequentially to $1.2 billion in FY 4Q11. Sun hardware improved its performance, as Oracle terminated existing reselling relationships.

Software and Hardware Maintenance

Software maintenance forms the bulk of revenue, based on 320,000 customers. Hardware support attach rates climbed in the quarter, increasing the profitability of the hardware business.

Services

Services revenue rose steadily across all sub-segments in FY 4Q11, with Consulting reaching $787 million, On-Demand/Advanced Product Services climbing to $367 million, and Education posting $94 million.

Financial Model Strategy

After a full fiscal year as a combined hardware and software vendor, Oracle continues to center its business around high-margin support

TBR


Financial Model Strategy

Revenues • FY 4Q11 revenues rose 13% to $10.8 billion, with

GAAP operating income growing 32% to $4.4 billion and operating margin stopping only two points short of a record at 40%.

• FY11 closed with record performance, posting a 33% increase in revenue year-to-year and a trailing 12-month basis cash flow of $10.8 billion.

Expenses • Total expense rose only 3.4% year-to-year and fell

10% sequentially to 59.5% of revenue, contributing to Oracle’s improved gross and operating margins while driving profitability.

• Further demonstrating the efficiency of ongoing cost reduction, sales & marketing as a percentage of revenue rose 1% sequentially to 19.5%, even as Oracle’s sales force added headcount.

Margins • In conjunction with improved overall operating

margins within the business, Oracle saw a 3% sequential improvement in gross margin – climbing to 79.9% in FY 4Q11.

• Oracle executives stated during the earnings announcement that they are dedicated to expanding the company’s sales force and continuing to drive high margins through improved distribution.

2011 results demonstrate Oracle’s commitment to running a profitable business that delivers value to customers and shareholders

TBR


With $29 billion in cash on its balance sheet alongside a record free cash flow of $10.8 billion, Oracle has the power of its purse ready and waiting

• Although Oracle executives – particularly CEO Ellison – chose to focus the quarterly narrative on the company’s organic growth, the Oracle “clan” is expanding.

o During FY 4Q11, NetSuite became the latest Exadata reference customer. With that announcement, Oracle fired a broadside at competitors, placing Exadata and Oracle inside the halo of NetSuite’s appealing SaaS ERP brand.

o Oracle also acquired FatWire Software, broadening its e-commerce suite with that company’s tailored content expertise, and furthered Datanomic’s integration, deepening the expertise of Oracle Product Data Quality.

TBR Position

• While Oracle executives may take the position that there are no acquisitions in front of them which are not “overpriced,” the company’s actions show that Oracle is – as always – focused on broadening its overall addressable market by delivering needed complements to its existing portfolio, through all available avenues.

Go-to-Market & Product Strategies

HW + SW Offerings

BI

Apps

MW

DB

OS

Consult

Premium

Base Support

Education

Services Offerings

Servers

Storage On-demand

Oracle is ready to spot – and own – the “next big thing”

Product Strategies

• Expand addressable markets in unstructured data , business intelligence and data warehousing

• Invest in new Fusion platforms while sustaining acquired applications platforms

• Acquire industry applications, adding domain specialization to access new markets

• Leverage integrated hardware and software through product releases

• Drive a profit-aware hardware business to increase profitability

Service Strategies

• Enable, educate and facilitate partner delivery of services and solution customization to end-customers

• Leverage acquired expertise in applications, middleware and systems architecture to enable successful deployments and expansion of Oracle footprint in accounts

• Expand delivery options through On-Demand investments

• Deliver services and support directly to large end-users that require a direct relationship with Oracle

TBR


Go-to-Market & Product Strategies

Oracle 2Q11 Revenue Mix By Segment

Services $1.25 billion

Applications $2.34 billion

Databases & Middleware $5.36 billion

Hardware $1.83 billion

22%

12%

17%

50%

Indirect Sales Strategies

• Leverage partners to provide sales coverage across a large global base; reuse direct sales’ field enablement, support & training

• Support partners with development tools, templates, marketing resources, training/certification and development funds

• Manage partners and distributors on territories and joint engagements

Direct Sales Strategies

• Target largest accounts directly to expand Oracle footprint and wallet share

• Provide higher level of services to the top 1,000 accounts to drive higher margins and increase customer satisfaction

• Sustain customer contact and control of accounts by addressing support contract renewals via direct sales force

Oracle’s install base of more than 320,000 customers is the continuing focus of cross-selling, and will fuel improving margins With the company’s first $10 billion revenue quarter behind them, Oracle looks to see more of the same • Oracle’s current product activity is crystallizing around ease of cross-sell. • Support for Exadata and Exalogic has a committed 100% attach rate in both portfolios, and results in top-line

growth to the enterprise. As these platforms continue to demonstrate exponential growth, the bulk of Oracle’s install base remains a key target.

• Long-awaited by customers, Oracle Fusion Applications are coming to market and have been configured to capitalize on the company’s deep database customer install base, whether the customer wishes to expand capabilities or upgrade entirely.

TBR Position • The sale of net-new product – new software licenses, servers and storage – represents both footprint and share-of-

wallet expansion in a multi-year relationship. Oracle derives the vast majority of its profit from the renewals and support contracts attached to these deals.

TBR


Resource Management Strategy

Leadership and Headcount Changes

Oracle Co-President Safra Catz was appointed to the position of Chief Financial Officer following the resignation of Jeff Epstein. She will retain her co-presidency while adding the responsibilities of CFO.

During the 2Q11 earnings announcement, Oracle executives noted increasing sales efficiency, driven in part by adding more than 800 total hires in both sales and pre-sales roles. They committed to continue that hiring in the coming quarters, with Mark Hurd noting that improvement in share-of-wallet with software customers was a key goal.

Acquisitions

Oracle announced the acquisition of FatWire Software and continued to close the integration of Datanomic.

Corporate Changes

During FY 4Q11, Oracle shed its OpenOffice platform, transferring it to the Apache Software Foundation.

A dominant FY 4Q11 and 2011 financial performance proves the strength of Oracle’s businesses

Strategy • Grow customer share-of-wallet through increasing

density of sales field coverage, particularly within the software business

• Drive further integration across the Oracle portfolio, improving value for customers and shareholders

TBR


Income Statement

ORACLE CORP.

Consolidated Statement of Income

(in $ Thousands Except Share Data)

CALENDAR QUARTER 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 Est.

FISCAL QUARTER F4Q10 F1Q11 F2Q11 F3Q11 F4Q11 F1Q12

Net Sales 9,505,000$ 7,502,000$ 8,582,000$ 8,764,000$ 10,775,000$ 8,167,300$

Cost of Sales 2,242,000 2,062,000 2,157,000 2,012,000 2,170,000 2,020,480

Gross Profit 7,263,000$ 5,440,000$ 6,425,000$ 6,752,000$ 8,605,000$ 6,146,820$

Sales and Marketing 1,745,000 1,333,000 1,530,000 1,618,000 2,098,000 1,572,940

General and Administrative 293,000 272,000 156,000 286,000 255,000 293,760

Research and Development 1,063,000 1,103,000 1,119,000 1,127,000 1,170,000 1,191,240

Amort. of Intangible Assets 605,000 603,000 614,000 612,000 598,000 651,240

Other Expenses (Acq. & Restruc.) 257,000 212,000 236,000 122,000 125,000 228,960

Operating Income 3,300,000$ 1,917,000$ 2,770,000$ 2,987,000$ 4,359,000$ 2,208,680$

Other, Net (225,000) (122,000) (124,000) (188,000) (189,000) (128,100)

EBIT 3,075,000$ 1,795,000$ 2,646,000$ 2,799,000$ 4,170,000$ 2,080,580$

Provision for Income Taxes 711,000 443,000 776,000 683,000 961,000 522,740

Net Income 2,364,000$ 1,352,000$ 1,870,000$ 2,116,000$ 3,209,000$ 1,557,840$

Net Income per Share 0.46$ 0.27$ 0.37$ 0.41$ 0.62$ 0.30$

Shares Outstanding 5,090,000 5,083,000 5,117,000 5,149,000 5,164,000 5,179,044

AS A PERCENTAGE OF REVENUE

Net Sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Cost of Sales 23.6% 27.5% 25.1% 23.0% 20.1% 24.7%

Gross Margin 76.4% 72.5% 74.9% 77.0% 79.9% 75.3%

Sales & Marketing 18.4% 17.8% 17.8% 18.5% 19.5% 19.3%

General & Administrative 3.1% 3.6% 1.8% 3.3% 2.4% 3.6%

SG&A 21.4% 21.4% 19.6% 21.7% 21.8% 22.9%

R&D 11.2% 14.7% 13.0% 12.9% 10.9% 14.6%

Operating Margin 34.7% 25.6% 32.3% 34.1% 40.5% 27.0%

Other, Net -2.4% -1.6% -1.4% -2.1% -1.8% -1.6%

EBITD 32.4% 23.9% 30.8% 31.9% 38.7% 25.5%

Income Taxes 7.5% 5.9% 9.0% 7.8% 8.9% 6.4%

Net Margin 24.9% 18.0% 21.8% 24.1% 29.8% 19.1%

YEAR-TO-YEAR CHANGE

Net Sales 38.5% 48.4% 46.5% 36.9% 13.4% 8.9%

Cost of Sales 90.2% 104.6% 96.8% 41.8% -3.2% -2.0%

Gross Profit 27.8% 34.5% 34.9% 35.4% 18.5% 13.0%

Sales and Marketing 31.6% 38.9% 35.0% 30.4% 20.2% 18.0%

General and Administrative 36.9% 35.3% -14.8% 21.2% -13.0% 8.0%

SG&A 32.3% 38.2% 28.1% 28.9% 15.5% 16.3%

R&D 45.4% 67.1% 58.1% 36.9% 10.1% 8.0%

Operating Income 14.4% 10.2% 27.2% 62.1% 32.1% 15.2%

Other, Net 73.1% -31.5% -20.0% -28.0% -16.0% 5.0%

EBITD 11.7% 14.9% 30.8% 76.9% 35.6% 15.9%

Income Taxes -17.6% 1.1% 37.3% 73.8% 35.2% 18.0%

Net Income 25.0% 20.3% 28.3% 78.0% 35.7% 15.2%

SOURCE: ORACLE AND TBR ESTIMATES

TBR

TBR


Balance Sheet

ORACLE CORP.

Consolidated Balance Sheets

(in $ Thousands)

CALENDAR QUARTER 2Q10 3Q10 4Q10 1Q11 2Q11

FISCAL QUARTER F4Q10 F1Q11 F2Q11 F3Q11 F4Q11

ASSETS

Current Assets

Cash and cash equivalents 9,914,000$ 12,018,000$ 10,420,000$ 11,864,000$ 16,163,000$

Marketable securities 8,555,000$ 11,619,000$ 14,425,000$ 12,491,000$ 12,685,000$

Accounts Receivable - Net 5,585,000 3,721,000 4,406,000 4,495,000 6,628,000

Deferred Tax Assets 1,159,000 1,142,000 1,219,000 1,193,000 1,189,000

Other 1,532,000 1,529,000 2,017,000 2,140,000 2,206,000

Total Current Assets 27,004,000 30,264,000 32,723,000 32,459,000 39,174,000

Long-term Cash Investments - - - - -

Property, Plant, Equip. (Net of Dep.) 2,763,000 2,835,000 2,870,000 2,894,000 2,857,000

Goodwill and Intangible Assets 29,746,000 30,025,000 29,415,000 29,749,000 29,413,000

Other, Net 2,065,000 2,131,000 2,235,000 2,564,000 2,091,000

Total Assets 61,578,000$ 65,255,000$ 67,243,000$ 67,666,000$ 73,535,000$

LIABILITIES AND EQUITY

Current Liabilities

Short Term Borrowings 3,145,000$ 2,260,000$ 2,255,000$ -$ 1,150,000$

Accounts Payable 775,000$ 706,000$ 762,000$ 673,000$ 701,000$

Income Taxes Payable - - - - -

Customer Advances and Unearned Rev. 5,900,000 6,903,000 5,742,000 5,849,000 6,802,000

Other 4,871,000 3,931,000 4,577,000 4,760,000 5,539,000

Total Current Liabilities 14,691,000 13,800,000 13,336,000 11,282,000 14,192,000

Long-term Debt 11,510,000 14,778,000 14,780,000 14,752,000 14,772,000

Long-term Liabilities 1,059,000 1,137,000 1,136,000 3,078,000 3,169,000

Deferred Income Taxes 2,695,000 2,679,000 2,791,000 1,145,000 1,098,000

Deferred Tax Liabilities 424,000 349,000 350,000 350,000 59,000

Total Liabilities 30,379,000 32,743,000 32,393,000 30,607,000 33,290,000

Total Stockholders' Equity 31,199,000 32,512,000 34,850,000 37,059,000 40,245,000

Total Liabilities & Equity 61,578,000$ 65,255,000$ 67,243,000$ 67,666,000$ 73,535,000$

FINANCIAL RATIOS

Days Sales Outstanding 52.9 44.6 46.2 46.2 55.4

Fixed Asset Turnover 13.5 10.7 12.0 12.2 15.0

Days Cash Outstanding 175 284 261 250 241

Total Asset Turnover 0.63 0.47 0.52 0.52 0.61

Debt/Asset Ratio 0.49 0.50 0.48 0.45 0.45

Current Ratio 1.84 2.19 2.45 2.88 2.76

Return on Assets 11.1% 10.9% 11.0% 12.0% 12.7%

Return on Equity 22.0% 21.6% 21.8% 23.4% 24.3%

Annual Revenue Per Employee $321,117 $347,518 $377,499 $396,892 $328,538

Number of Employees 104,569 105,236 105,730 107,870 108,429

SOURCE: ORACLE AND TBR

TBR

TBR

T EC H N O LO G Y B U S I N ES S R ES EAR C H , I N C .

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