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Oracle Corporation (ORCL) 5 September 2017 Americas/United States Equity Research Software Oracle Corporation (ORCL) Rating OUTPERFORM Price (31-Aug-17, US$) 50.33 INITIATION Target price (US$) 62.00 52-week price range (US$) 51.17 - 37.93 Transitioning Like There’s No Tomorrow Market cap(US$ m) 208,199 Target price is for 12 months. Initiating Coverage with Outperform Rating and $62 Target Price: Research Analysts Brad A Zelnick We believe the market underappreciates the staying power of Oracle’s 212 325-6118 technology stack and upside opportunities in the cloud. While traditional [email protected] financial metrics have lagged given a cloud transition, the stock is valued as if Jobin Mathew there’s no tomorrow, or no other side to the transition. Over the years, many 212 325 9676 [email protected] have bet against legendary founder Larry Ellison, but few have ever won. Syed Talha Saleem, CFA ■ Cloud ERP Opportunity: The cloud ERP opportunity is just now heating up, 212 538 1428 and ORCL is in pole position. Our field work suggests ORCL has the leading [email protected] cloud product in the largest of app software categories (ERP, $43bn in 2016) and an advantage given its incumbency. We size the Cloud ERP migration opportunity at $0.66 in recurring EPS, in addition to every five points of ERP share gain contributing $0.4 (currently at 8% share). ■ Database Durability: At 40% of revenue and a greater portion of profit, ORCL’s database lies central to our thesis. When considering the market for the world’s highest value transactional data, ORCL’s position is unwavering. With greater fragmentation of the market today, we expect ORCL to lose lower value units but more than compensate with innovation, pricing, and aggregation of adjacencies with DBaaS. We size the DBaaS migration opportunity at $3.61 in recurring EPS. ■ Aggregation Play: ORCL is our favorite aggregation play. We particularly like companies that can parlay dominant market positions into adjacencies to capture incremental wallet share. This has been a consistent strategy for ORCL over the years (M&A, Exa-series), and Cloud is just the latest chapter. ■ Valuation: Our $62 TP is based on our DCF analysis and equates to 20.0x CY18 P/E vs. 21.9x for MSFT and SAP at 19.2x. Risks to our target price include competition in the cloud and a failure to execute. Share price performance Financial and valuation metrics 5 5 Year 5/16A 5/17A 5/18E 5/19E NON-GAAP EPS (CS adj., ) 2.61 2.74 2.93 3.16 5 0 Prev. EPS (CS adj., US$) 4 5 P/E (CS adj.) (x) 19.3 18.4 17.2 15.9 4 0 P/E rel. (CS adj., %) - 87 90 93 3 5 Revenue (US$ m) 37,056 37,899 39,425 41,002 O ct - 1 6 Jan - 1 7 A p r - 1 7 Ju l- 1 7 Non-GAAP Operating Income 15,784 16,169 17,468 18,459 Net(US$ Debt m) (US$ m) -12,270 -8,169 -16,330 -25,215 O RCL.N S& P 5 0 0 IN D EX Unlevered Free Cash Flow 13,162 12,954 14,012 14,611 On 31-Aug-2017 the S&P 500 INDEX closed at 2471.65 Number(US$) of shares (m) 4,136.68 Price/Sales (x) 5.56 Daily Sep02, 2016 - Aug31, 2017, 09/02/16 = US$41.25 Net debt (Next Qtr., US$ m) -12,447.7 Dividend (current, US$) 0.8 Quarterly EPS Q1 Q2 Q3 Q4 Dividend yield (%) - 2017A 0.55 0.61 0.69 0.89 Source: Company data, Thomson Reuters, Credit Suisse estimates 2018E 0.60 0.68 0.73 0.91 2019E 0.67 0.75 0.79 0.95 DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. 5 September 2017 Oracle Corporation (ORCL) Price (31 Aug 2017): US$50.33; Rating: OUTPERFORM; Target Price: US$62.00; Analyst: Brad Zelnick Income Statement 5/16A 5/17A 5/18E 5/19E Company Background Revenue (US$ m) 37,056.0 37,899.0 39,424.7 41,001.7 Oracle is the second largest software company by revenue globally. EBITDA 18,293.0 18,620.0 20,265.6 21,190.0 The market leader in database software, Oracle offers an integrated Operating profit 15,784.0 16,169.0 17,467.9 18,458.9 array of applications, databases, servers, storage, and cloud Recurring profit 14,622.0 14,975.0 16,461.9 17,660.1 technologies designed to empower the modern business. Cash Flow 5/16A 5/17A 5/18E 5/19E Cash flow from operations 13,561 14,126 15,030 15,831 Blue/Grey Sky Scenario CAPEX (1,189) (2,021) (1,702) (1,763) Free cashflow to the firm 12,372 12,105 13,328 14,068 Cash flow from investments (5,154) (21,494) (1,702) (1,763) Net share issue(/repurchase) 1,336 2,181 0 0 Dividends paid (2,541) (2,631) (3,167) (3,183) Issuance (retirement) of debt - - - - Other (7,227) 3,803 (2,000) (2,000) Cashflow from financing activities (8,432) 3,353 (5,167) (5,183) Effect of exchange rates (115) (86) 0 0 Changes in Net Cash/Debt (140) (4,101) 8,161 8,885 Net debt at end (12,270) (8,169) (16,330) (25,215) Balance Sheet ($US) 5/16A 5/17A 5/18E 5/19E Assets Other current assets 2,591 2,837 2,837 2,837 Total current assets 64,313 74,515 75,586 81,787 Total assets 112,180 134,991 134,966 140,199 Liabilities Short-term debt 3,750 9,797 2,999 5,995 Total current liabilities 17,208 24,178 17,712 20,297 Long-term debt 40,105 48,112 46,995 40,300 Total liabilities 64,390 80,745 72,891 68,800 Shareholder equity 47,790 54,246 62,075 71,398 Total liabilities and equity 112,180 134,991 134,966 140,199 Net debt (12,270) (8,169) (16,330) (25,215) Our Blue Sky Scenario (US$) 71.00 Per share 5/16A 5/17A 5/18E 5/19E This scenario assumes continued transition to SaaS/PaaS/IaaS from No. of shares (wtd avg) 4,306 4,217 4,283 4,304 the on-prem offerings along with share gain and up-sell CS adj. EPS 2.61 2.74 2.93 3.16 opportunities, which results in UFCF growth of 20%/18% in the Prev. EPS (US$) medium term ('20/'21) Dividend (US$) 0.76 0.76 0.76 0.76 Free cash flow per share 2.87 2.87 3.11 3.27 Earnings 5/16A 5/17A 5/18E 5/19E Our Grey Sky Scenario (US$) 42.00 Sales growth (%) (3.1) 2.3 4.0 4.0 This scenario implies slowdown of the SaaS transition and EBIT growth (%) (9.3) 2.4 8.0 5.7 continued disruption in the database market from other cloud Net profit growth (%) (10.0) 2.9 8.7 8.3 vendors like AWS. In this scenario, UFCF growth is flattish in the EPS growth (%) (5.9) 5.0 6.9 7.8 medium term ('20-'21) EBIT margin (%) 42.6 42.7 44.3 45.0 Share price performance Valuation 5/16A 5/17A 5/18E 5/19E EV/Sales (x) 5.29 5.28 4.87 4.46 EV/EBIT (x) 12.4 12.4 11.0 9.9 5 5 P/E (x) 19.3 18.4 17.2 15.9 5 0 Quarterly EPS Q1 Q2 Q3 Q4 2017A 0.55 0.61 0.69 0.89 4 5 2018E 0.60 0.68 0.73 0.91 2019E 0.67 0.75 0.79 0.95 4 0 3 5 O ct - 1 6 Jan - 1 7 A p r - 1 7 Ju l- 1 7 O RCL.N S& P 5 0 0 IN D EX On 31-Aug-2017 the S&P 500 INDEX closed at 2471.65 Daily Sep02, 2016 - Aug31, 2017, 09/02/16 = US$41.25 Source: Company data, Thomson Reuters, Credit Suisse estimates Oracle Corporation (ORCL)2 5 September 2017 Table of contents Key Charts 4 Executive Summary 5 Investment Positives 6 Aggregation Play ..................................................................................................6 Lawrence J. Ellison...............................................................................................6 Margins to Benefit from Cloud Transition .............................................................9 Back to Traditional Metrics—We See an Inflection.............................................10 Down Market Opportunity...................................................................................11 Cloud Transition Could Be Material Positive to Revenues/EPS.........................12 Investment Risks 13 Database Share Erosion.....................................................................................13 License Revenue Volatility..................................................................................15 Public Cloud Competition ...................................................................................16 Markets 18 The Cloud ERP Opportunity 21 Meaningful Revenue Upside in Cloud ERP Migration ........................................24 Durable Database Business 27 Market Fragmentation at the Lower End ............................................................31 12c R2 as a Driver?............................................................................................34 Oracle Database User Survey 36 Management and Board 40 Management.......................................................................................................40 Board of Directors...............................................................................................41 Valuation—Initiating with Outperform 44 Appendix 1: Credit Suisse HOLT® 52 Oracle Corporation (ORCL)3 5 September 2017 Key Charts Figure 1: Many Tech Companies Have Term Limits, Figure 2: Oracle FCF Is Stabilizing and About to Oracle Has Showed Staying Power Return to Growth Indexed to peak market cap, first to peak brought to front Trailing Twelve Months (TTM) Free Cash Flow Wang Labs DEC Novell CA IBM Oracle TTM FCF yoy $16bn 20% 10% $12bn 0% $8bn -10% $4bn -20% $0bn -30% F F F F F F F F F F F F 1 3 1 3 1 3 1 3 1 3 1 3 Q Q Q Q Q Q Q Q Q Q Q Q 1 1 1 1 1 1 1 1 1 1 1 1 2 2 3 3 4 4 5 5 6 6 7 7 1973 1978 1983 1988 1993 1998 2003 2008 2013 Source: Thomson Reuters Datastream, Credit Suisse Research.
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