Krause Fund Research Spring 2018

Technology Oracle Corporation (NASDAQ: ORCL)

Recommendation: BUY April 17, 2018

Analysts Current Price $45.44 Sirui Li [email protected] Target Price Range $53.00-57.00 Yu Ling [email protected] Oracle Exhibits Potential Strength

COMPANY OVERVIEW  Constant growth prospects: large investment in research and development expenses enables Oracle to constantly develop and innovate its product lines, which can enlarge the customer bases. Under this strategy, Oracle will boost the revenue from Oracle Corporation (ORCL) is one of the leading companies the cloud system. And cloud system will be the key drive to in the industry. Oracle provides productions and boost Oracle’s revenue services in application, platform and infrastructure of environment. Oracle’s revenues  Wrong strategy to generate revenue: We estimated that consist of three segments: software and cloud, hardware, Oracle will have the decreased ROIC, which indicates the and services. Additionally, Oracle generates revenue managers do not have good strategy to invest the capital. As mainly from software licenses and cloud systems, such as Oracle decides to be very active in the acquisition market, it is SaaS, PaaS and IaaS, which accounted for 80% of revenue not an effective way to boost revenue. Even though it is still in FY 2017. Oracle is devoted to developing and innovating above the 50%, if Oracle cannot come up with some new market in the cloud segments and improving product performance. strategies, investors will be disappointed about the lower and lower payback Stock Performance Highlights 52 week High $53.48  Underestimated stock prices: From the DCF and EP 52 week Low $43.60 models, the target prices will increase at most $10 more. Oracle Beta Value 1.163 has the potential to attract more buyers, while they realize that Average Daily Volume 17.13 m Oracle has high correction with technology market and the technology sector increases significantly. Share Highlights Market Capitalization $190.481 B  Potential politics threat and high competitive environment: Shares Outstanding 4.137 B Considering the effect to technology sector by the recent trade EPS (TTM) $0.86 war with China and the high competitive environment for P/E Ratio 64.52 Oracle, Oracle faces losing large revenue because of the losing Dividend Yield 1.51% overseas customers and local customers in science licenses, Dividend Payout Ratio 1.28% which is Oracle’s primary revenue resources One-Year Stock Performance Company Performance Highlights ROA 7.93% ROE 17.33% Sales $37.728 b

Financial Ratios Current Ratio 3.08 Debt to Equity 0.93

Source: Yahoo! Finance [1]

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EXECUTIVE SUMMARY

Oracle Corporation is one of the leading companies in the , with a variety of products: Software and Cloud, Hardware, and Service. Even though the primary revenue generated product is the software license, Oracle is gradually shifting and developing its attention to the cloud [2] system markets because of the customer demand increment. Source: Mataloni L. and Aversa J.

In our valuation, our group forecasted Oracle’s intrinsic Although historical real GDP appears to increase quarterly, stock price over 5 projected years, based on heavy financial we believe that a profound negative effect will impact GDP assumptions. Due to the stagnant growth rate of revenue in growth rate because of the recent trading war that Present the historical performance, we forecasted the total revenue Trump announced to increase the China’s tariff aiming to growth rate will increase based on the optimistic growth of steel, aluminum, and some technological products. cloud system revenue. However, Oracle faces very Therefore, we estimate GDP will grow 1.8% for the next six competitive environment in cloud market with relatively months and an average of 2% for the next 5 years. For the small market shares, comparing with its competitors. From next six months, since the trading war is ongoing, the tariff our DCF and EP valuation models, Oracle’s target price on the goods will cause severe consequence on export and would be $53.00-57.00 per share. import. This is going to lower the GDP growth rate. However, we expect GDP to keep increasing because PMI Since the current trading stock price is lower than the index still reflects a fairly high consumer confidence. intrinsic value we estimated that Oracle is currently undervalued. Considering both potential problem and Consumer Spending advantages, our group recommends a BUY rating for Even though GDP growth partially indicates that consumers Oracle. may be more willing to spend, Consumer Price Index (CPI) is essentially a measure of individuals’ cost of living changes and provides a gauge of the inflation rate related to purchasing those goods and services. Furthermore, since ECONOMIC OUTLOOK CPI is released monthly and generally ahead of GDP, people tend to pay more attention to it.

U.S Real Gross Domestic Product The first graph below shows the increase in disposable Real Gross Domestic Product (GDP) measures a market’s personal income from 2013-2017. Compared to 2013, it has total economic output during a period after adjusting for increased nearly 20% which is a total of $2.5 billion. With inflation. Real GDP growth is the main gauge of economic the huge amount of extra income, the consumer spending health which makes it a crucial economic indicator. A over the last 5 years has increased as showed in the second positive GDP growth represents an increase for a nation’s graph below. Specifically, Information Technology whole economy. In this situation, more goods and services, performed extremely well, with spending up 155% in the 5- including software products, are purchased by consumers. year period. Consumers also tend to be more willing to pay for software services which will lead to an increase of company’s revenue.

The chart below shows the real GDP growth from previous quarters. In the chart, real GDP increased at an annual rate of 2.9 percent in the fourth quarter of 2017. The reason that caused positive real GDP growth is the increase of personal consumption expenditure (PCE) and private inventory investment, which indicates a higher willingness of [3] consumer spending. Source: FRED

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consumer spending. A declining index can signal a tightening of belts for both businesses and consumers.

Source: Fidelity [4]

As a result, there is a strong correlation in consumer disposable income and the tech industries market growth and performance. Our group believes that with increase in consumer spending, the technology sector will continue to see growth, as it is the fastest growing sector in the Source: us.spindices.com [6] economy. The table above shows S&P 500 sector breakdown as of Employment December 29th, 2017. As it shows, IT makes up nearly a Current Employment Statistics (CES) provides quarter of the whole index at 23.8%, up from 20.4 during comprehensive data on national employment, mid-2017. We believe the heavy weighting of technology as unemployment and wages and earnings data across all non- well as the massive growth the sector has been experiencing agricultural industries. Our group consider it as one of the is due to the ever-increasing demand for technology in most important indicators because it’s not only the earliest everyday lives and this growth will continue to drive the indicator of economic trends released each month, but also a S&P 500 going forward. sign of economic health through the change of wages and unemployment rate. In the health economy, unemployment Market Outlook rate generally continues to decrease. Overall, we believe this is a good time to invest in IT, as it is the fastest and largest growing sector in the economy that has outperformed the markets over the past 10 years. Our faith is supported by the increase of real GDP, consumer confidence, consumer spending and low unemployment rate under the current U.S. economy. To sum up, as stated above, growth over the last 5 years has averaged to about 19.3%, with the low being roughly 5.6% in 2013, when half of the other sectors experienced losses. (Bloomberg). Disposable income increased $2.5 billion and will drive the tech sector continues to increase in the market value.

[5] Unemployment rate continues to decline at a steady-going Source: BLS pace for the IT sector, which indicates healthy economy growth. In addition, with technology becoming more The graph above shows a general trend of the advanced and more in demand every year, we believe this unemployment rate from Dec 1997 to Dec 2017. Based on sector will continue to outperform as it has been doing. the changes in unemployment rate over the 20 years, the rate Especially, software boosted U.S. GDP by $1.14 trillion appears to fluctuate with the health of the economy. During dollars and grew the economy in all 50 states, while the financial depression, the rate increased dramatically. supporting 10.5 million jobs. We believe the software When the economy got better and better, the rate became industry has one of the highest potentials in this sector, as lower and lower and reached nearly 4% ultimately. software is continually becoming more common than Therefore, we expect the unemployment rate to continue to physical drives and hardware. be around 4% in the next six month. For the next 5 years, we believe the rate will be 3.5% because of Trump’s policies. INDUSTRY ANALYSIS S&P500 The Standard & Poor’s 500 is a market value-weighted index of 500 public stocks that are combined into one equity Industry Overview basket. It has become the industry standard and benchmark Oracle belongs to the industry under for the overall performance of the U.S. equity market. the technology sector. This industry consists of the Growth of the S&P 500 can translate into growth of development and marketing of application software. Some business investment. It can also indicate a higher future of the applications are operating systems, word processors, spreadsheet applications, and engines. Oracle, as 3 the second largest software company in U.S, has many competitors such as Adobe Systems, IBM, and . Firms like those typically invest a large portion of their cash flow into research and development so that they can create better software applications for individual or corporate users in order to satisfy their daily operations. In addition, firms will provide further services related to the software to provide better user experience so that customers will maintain their yearly subscription. We expect a prosperous future in this industry because the ever-increasing demand towards more convenient software products and the large growth in cloud subscribers.

Industry Trends We discover the industry trends in two parts. Currently, markets are tapping into private cloud as data breach, which Source: Statista [8] is costly. In 2016, 11.5 million leaked financial/legal documents of more than 214,000 companies because of SaaS has been the most popular segment because of its various data. The graph below shows the percentage of convenience. Consumers do not need to pay any companies that are using the private cloud or are going to. subscription fee and they can accomplish their work by choosing a specific software tools for a specific time period with a small amount of charge. Besides SaaS, spending on PaaS and IaaS market also has experienced a significant increase. These are the reasons that our group believes application software companies will benefit from these segments. Markets and Competition The current climate for the software industry is extremely competitive with many large and small companies. Source: Finances Online [7] Although the software industry has a high-level threshold for new entries, it is growing rapidly with many powerful In addition, “blockchain” has become a well-known topic competitors. The major players in this industry are and the technology behind this will be valuable in the near Microsoft, Oracle, SAP, Adobe Systems, .com, future. With the invention of cryptocurrencies such as VMware, , Fiserv, Symantec, and HCL Technologies. Bitcoin, Litecoin, and Etherum, the storage and protection Among these companies, Microsoft, Oracle, SAP, Adobe of these currencies has exploded within the last two years. Systems, and Salesforce.com are the top 5 with significant With these two major drivers, our group believes the use of market size and market share. We believe firms in the private cloud and software toward anytime data storage or software industry must have prominent market shares to security will gather more attention from the market. outstand other competitors. In addition, companies with product differentiation will be better survived under this Business Segments competition. The software industry has three product lines, including systems software for basic computing systems, application Porter's Five Forces software, and software related services. These product lines Threats of New Entry: High serve almost all industries. Although software industry forbids many companies from surviving, the threshold for new players to enter this To be more specific, one important business segment in industry this relatively low. One can easily start business by application software is Cloud system and service bringing a new product and compete with other existing application. It consists of three main segments: Software as firms. a service (SaaS), (PaaS) and Infrastructure as a service (IaaS). Especially, SaaS Threats of New Substitute: Low comprises most of the market spending as the chart shows Substitution in this industry is relatively low. Part of the below and is expected to continue to increase. reason is because customers are very preference based. There are many different companies for each sector but people generally gravitate towards what they’re already comfortable with. More importantly, like we mentioned above, most of the companies have their niche market. They survive because of their unique software system and services.

Bargaining Power of Customers: Moderate 4

Companies having extremely large numbers of customers more customer bases, Oracle prefers to acquire some with significant demand, is growing everyday due to companies that have already had specific products in cloud technological advancements and more people owning markets, showing as the picture below. In addition, Oracle technology devices that require software. Price sensitivity is believes that acquisitions help to motivate and accelerate generally low for customers because they require the innovation, which can boost the revenue and earnings. product to help perform their day-to-day operations. Based on the two purposes, Oracle will continue acquisition However, customers may pressure the company to update activities in the future. their products.

Bargaining Power of Suppliers: High Software companies typically have a high bargaining power towards their suppliers since a majority of the revenue relies on their software subscription rather than physical goods. However, a lot of companies do have a small portion of their sales are from physical goods. For example, Oracle currently has nearly 10% of their revenue comes from selling of hardware which has a low bargaining power towards certain suppliers.

Competitive Rivalry: High There is a large number of competitors in the overall Source: Oracle.com [9] market. Companies try to make an edge on the competitors in order to maintain a large market share. Oracle faces a strong competitive environment in the market because of frequent entrances of new products and companies, as well as the capricious change of the industry trend. This high competitive circumstance requires Oracle to COMPANY ANALYSIS develop their current products or introduce new product lines to generate more customers.

General Information Oracle is the second largest software company behind Microsoft, in terms of revenue. As the chart below shows, Overview and Business Description: though Oracle has rapidly increased revenue since Oracle Corporation is a multinational computer company incorporating from 11.8% to 35.62%, Oracle’s revenue over that provides products and services in applications, platform the last 5 fiscal years (2012-2017) has been relatively and infrastructure of information technology environments. stagnant, maintained around 37%. Therefore, Oracle, like After incorporating on October 9, 2005, Oracle specializes Microsoft and , would be considered as a mature in database software technology, cloud systems and other company with aspects of growth, due to high revenues and types of software products, including Oracle Application large research & development expenses (&D expenses) to , Oracle Fusion and . continue developing new products that can fuel future Oracle started to enter the hardware products and services growth. market by offering Oracle Engineered Systems, when finishing the acquisition of Sun Microsystem in January 2010. Oracle is a mature company in the software company and now is shifting to the cloud-based service company. Therefore, both the software and hardware businesses of Oracle have their products and services based on cloud environment.

Except for focusing on developing the software products and cloud systems, Oracle is also devoted to enhancing customer relations management, as well as . Oracle’s corporate strategy is similar to many current software companies, and that is to continue to invest Source: Statista.com [10] more to develop the cloud systems. The new cloud developments, legacy customer care environment and Product Lines and New Products compound implementations make the way customers deal with data easier and faster, which helps to enlarge business Oracle’s product lines can be divided into three segments: growth. Software and Cloud, Hardware, and Service. The software and cloud is the primary business of Oracle, which consists The other corporate strategy of Oracle is to active in M&A of two main streams, on-premise software licenses and market. In order to enlarge Oracle’s products lines to get integrated stack of SaaS, PaaS and IaaS 5 offerings. Hardware and services are the other two parts of the enterprise performance management. Based on the Oracle to maximize company’s potential profits. specific clouds, customers allow to innovate process to outstand their companies and organizations. Thus, the revenue generated by SaaS in FY2017 increased to 8.9%. Moreover, since Oracle offers the application in a solid quality and broad industries use range, the customer bases have been increasing over years. We believe that the trend will continue, due to Oracle’s stable innovation speed and customer satisfaction.

PaaS, that is the combination of Oracle and open source technologies which enables users to build, store, integrate,

Source: Oracle 2017 10-K [11] secure and manage on, has low cost of ownership- subscription based payments and flexible, practicable and Software detachable models to maintain Oracle customers’ benefits. Software stream make profits from Software Licenses by Oracle’s IaaS allows to assist firms with their application renewal fees that existing customers pay in order to use the same portfolio, such as assistance in how to run load-bearing software products. New Software License, aiming to new or application and allows firms to move existing applications existing customers to purchase a new Oracle platform that they to Oracle’s IaaS. Even though Cloud PaaS and IaaS do not did not have, is another significant segment to earn profit. take a large portion of Oracle’s revenue pie chart, Successfully offering customers comprehensive deployment, combining PaaS and IaaS together is the opportunity to Oracle attracts large customer bases on the software stream, expand the cloud business to potential customers gradually especially from the products. Software Licenses, the traditional by Oracle Database, and Java. business, is the primary area for Oracle to generate profits and Therefore, Oracle will increase its revenue growth. maintain the company’s stagnant revenue. Therefore, as the pie chart above indicates, the Software and Cloud generates 80% Hardware revenue of Oracle in FY 2017, which increased by 2% After acquisition with Sun Microsystem, Oracle started into comparing to FY 2016. Additionally, software licenses and new hardware segment. Oracle has provided many different software licenses, contribute 50.9% and 16.9% of the revenue, hardware products to maximize the company potential. The respectively primary hardware product is the Oracle Engineered Systems, whose three types of engineered servers allow to Cloud integrate a variety of components to work together and provide improved and efficiency, performance, and security. The other critical stream is Oracle’s Cloud system and service However, Oracle had fluctuated amount of its inventory sold application, platform and infrastructure, which contains the each year. The revenue of hardware segment in FY 2017 Oracle Cloud (SaaS), Platform as a service was 11%, which had 2% negative growth in FY 2016. The (PaaS) and Infrastructure as a Service (IaaS). With the high reason to interpret the situation is that Oracle entered demand of the cloud-based and on-premise models in the recent hardware market at the late growth stage and has less firm years, Oracle has invested more in development cloud and customer base, compared to the leading peers in the market sales. Oracle began its business in cloud market in 2014. hardware segments, such as and Microsoft. Oracle is From 2014 to 2016, Oracle was in the introduction business losing customers in hardware market. cycle in the cloud market. Since 2017, Oracle boost its revenue in Cloud products and then enter the growth business cycle. The critical advantage for Oracle to attract customers is providing a Service variety of products for customers and high reliable and secure Oracle works to maximize the customers experience application, platform and infrastructure based on the industry performance of the Oracle software and hardware that they standards. Therefore, Oracle had higher growth rate of Cloud invested by offering services solutions. The services can be revenue by obtaining customer preferences in FY 2017. And we regarded as the complement products for Software and predict that Oracle will keep the optimistic growth rate in the Cloud, it keeps a stable revenue portion as 8.9%. next few years. Production and Distribution SaaS, as the critical part of Oracle Cloud Application, offers the customers a bunch of modular cloud software Oracle relied heavily on suppliers to design, manufacture application, such as Human Capital Management (HCM), and deliver the necessary components for the hardware Enterprise Resource Planning (ERP) and Supply Chain products, because some components only available from a Management (SCM). These three typical software single vendor. The third-party partner manufacturing applications offer advantages in specific areas of company increased the risks of inventory shortcut. Besides, Oracle management. HCM is an all-in-one software program that markets and sells its offerings through indirect channels to simplifies and streamlines HR processes within companies. extend its customer coverage, which shares the profit with ERP is often applied in back office processes, including distributors. The majority of Oracle’s sales are purchased by Financial write up, risk management and inventory business of many sizes in different industries, government management. SCM is a software application that analyzes agencies and education institution. Therefore, cybersecurity 6 and high performance become the most significant AWS. Additionally, AWS and offer consideration of customers, so that it is better to decrease services that allow customers to quickly apply Oracle more parties’ interference between Oracle and the specific to their clouds, which expands Oracle’s extra customer organization. Based on this consideration, Oracle channel to attract customers. Considering the distribution of acquired several manufacturing companies, such as NetSuite Oracle, the fast running can satisfy the customer high in 2017 and MICROS Systems in 2015, to take control over demand, which imposes the future revenue growth. the supply chain and optimize the day-to-day flow of However, since recently decided to cutoff the products. From the acquisition, Oracle optimized the prices of cloud products to attract more customers, we production and distribution process and plans, which helps believe that this strategy will depress the optimistic cloud Oracle to generate more profit in the future. revenue growth rate from 2019 to 2022. Therefore, Oracle faces two methods to maintain the customer base by cutting Competition prices or provide more innovative products to the customers.

Oracle faces high intense in all aspect of the business with Since software and cloud improvement relies heavily on both technology involvement and customers demand high qualified and skilled employees, such as software pressure. Because of low barrier to entry Oracle’s market engineers, losing employees means losing competition segments, new technic competitors emerge to challenge the ability with large companies. The picture below presents the Oracle’s offering. Even though Oracle has stable large bell curve of software engineers’ salaries in 2018, where portion of customer bases in software market, it faces average salary is $109,442. Oracle’s software engineers obstacle to appear on more customer and to increase its have annual salary s $113,198. Even though Oracle has market shares. The main peer competitors of Oracle are beyond the average line, comparing with Google’s base large capital companies, which take large proportion of salary, $164,683 and 75th percentile salary, Oracle does not market shares. If Oracle decides to entry new market have strong competitive ability to appear on skilled segment, it faces competition with existing competitors, employees. Thus, Oracle may be confronted with failing to even the firms as partner previously. recruit new employees or retain existing employees due to higher and higher cost of hiring employees. Therefore, In the cloud infrastructure segment market share, Oracle has Oracle may increase employees’ salaries or lose employees, increased 3% market shares from 2017 to 2018 by providing both of which will draw back company’s growth. more cloud services. As the graph below shows, Oracle faces competitive environment with the leading companies: International Business Machines Corporation (IBM), Microsoft Azure, Google Cloud and (AWS). And AWS is the leading company in the cloud market. Oracle has relatively low public usage of databases running which is narrow, while AWS, Google Cloud and Microsoft offer more features and options for customers and more open to public.

Source: Paysa.com [2]

Other Topics

Research and Development Research and development expenses were $6.159 billion and $5.787 billion for 2017, 2016 respectively, increased 6.43% between years. Due to high change in technology market, Oracle’s increasing investment on products development and existing products improvement allow the company to maintain the power over product design and the

Source: 1redDrop [3] competitive position. The rise R&D expense was led by increasing the headcount and stock-based compensation, In addition, many strong competitors allow their customers which will benefit for the software engineers. Additionally, to use the software and intellectual property for free, so that Oracle bought many patent overseas and domestic, as well they will obtain more sales opportunities in the market. The as acquisition products from other companies. Oracle can intensive competition in cloud market forces Oracle to generate more profits, while the products bought from other decrease the product sales prices. This will reduce the companies enable Oracle to extend customer reach method. Oracles’ profit margin or net income, because Oracle generates the revenue primary from software license. In other words, in other platform potentially VALUATION ANALYSIS diminish revenue. However, Oracle has been increasing fast at SaaS and PaaS, because its workloads run faster than 7

Oracle has an increasing percentage for the last decade. According to the economic outlook, industry trend and Therefore, we decide to fix their selling and administrative company specific factors analysis, we forecasted the future expenses at 25% of their revenue. 5-year revenues and expenses based on various metrics assumptions by Oracle’s historical financial performance. Research and Development Expenses We recommend a BUY rating for Oracle due to the Our group decided to increase R&D by the market inflation prediction of intrinsic price range by valuation models and rate since the increase of historical value is about 2%. We the potential revenue growth. Our group used the believe the inflation rate will be a reasonable assumption for Discounted Cash Flow Model, Economic Profit Model, research and development expenses. Dividend Discount Model, and a relative valuation. Weighted Average Cost of Capital Revenue Decomposition We estimated the weighted average cost of capital of 7.46% Oracle’s revenue growth comes from their three product by using the cost of equity and cost of debt. Additionally, lines: software and cloud, hardware, and service. In these we used the market capitalization and debt values in FY lines, software and cloud has been the mainstream of total 2017, showing as notes payable in the balance sheet, to revenue. For this line, we separated the revenue from cloud calculate the equity value. We also used the marginal tax and the revenue from software. As to cloud revenue stream, rate of 21% and 30-year Treasury bond as the risk-free rate it contains Cloud Software as a Service (SaaS), Platform as in our assumptions. a Service (PaaS), and Infrastructure as a Service (IaaS). Cloud is a relatively new product line for Oracle, but it has Cost of Equity generated great vitality suggesting more and more To estimate Oracle’s cost of equity, we used the capital significant revenue composition for Oracle. Therefore, we asset pricing model (CAPM). In addition to using the 30- believe it will has a 5% annual growth. year Treasury bond as the risk-free rate, our group determined an equity risk premium of 4.96%, given by As the Cloud line has been growing prosperously, the Aswath Damodaran’s implicit risk premium. We obtained software line gains a decent growth as well. First, Software Oracle’s equity beta, which is 1.163, from Bloomberg. decomposes into two lines: New software licenses & cloud Using the CAPM with the three factors, the cost of equity software subscription and Software license updates & we estimated is 8.80% product support. These two lines have contributed to the majority of revenue for Oracle. After analyzing historical Cost of Debt data, we decided to give new software licenses & cloud As for estimating the cost of debt, we determined pre-tax software subscription a decline rate of 3% since it has been cost of debt as 4.14% by finding the 28-year bonds affected by the growth of the cloud line. However, software outstanding, which will mature in 2046, from Finra. Then, license updates & product support gets a growth rate of we calculated the after-tax cost of debt by using the pre-tax 2.32% which offsets the decrease of new software licenses cost of debt to reduce the tax shield. Therefore, we & cloud software subscription. calculated the after-tax cost of debt to be 3.27%.

Additionally, we expect hardware revenue to have a 1% CV Growth Assumptions decrease since the sales of hardware has been decreasing Our group determines the CV growth for NOPLAT and EPS through these years, while services revenue will increase 1% to be 2%, which matches expected long-term GDP in the annually because of the ever-increasing software business. macroeconomic outlook. We think that Oracle will be profitable in the next 5 years, but with a relatively slow Cost of Goods Sold revenue growth rate based on its 3-year performance as Cost of goods sold depends heavily on the sales. It also has 1.3%. We believe that Oracle will boost slightly by its cloud three types of expenses that related to each revenue stream. product lines satisfying the market customer’s demand, but First, we expect the cost of cloud will correlate to its with the decline of hardware segments. Therefore, Oracle revenue growth. Therefore, we also decide the growth of will not grow faster than the economy and the CV growth cost to be 5% yearly. Second, since Oracle has a declining for NOPLAT will be very close to the market. trend in new software licenses & cloud software subscription, the historical cost for software has also been From the estimation, we predicted CV o ROIC as 61.40%, decreasing. Thus, we expect it to continue to decrease about gained from NOPLAT divided by Invested Capital. The 4.27% every year. This is a similar situation to that of continuing value of ROIC includes a back sliding of ROIC hardware, so we expect a 10.26% decline annually in the on our assessment. It indicates that Oracle managers have cost. Finally, the cost for services expenses have been some wrong strategies, especially too much M&A activities declining as well. An explanation of this is the improvement investing Oracle’s capital to generate profits. And investors of working efficiency. Therefore, we expect it to keep may face the risks that they will not get the expected decreasing 4.61% yearly. payback in the long-term expectation.

Selling and Administrative Expenses Additionally, we forecasted the CV of ROE as 17.25% by Although as the firm grows the percentage of selling and the function of net income divided by stockholders’ equity. administrative expenses to total revenue will decrease, 8

The ROE ratios calculated from FY2015 to estimated Marginal Tax Rate and Risk-Free Rate FY2022 indicate a decreased trend. We analyze these two factors because we think they connect to each other closely and they also have a great impact on Share Repurchases the discount factors. Therefore, with a high marginal tax rate According to Oracle’s 10-Q ended February 28, 2018, and low risk-free rate, we get the lowest stock price at Oracle declared a repurchase of the common stock totaling $54.61, while with a low marginal tax rate and a high risk- $24 billion. $6.5 billion has already been spent by Oracle in free rate, we get the highest stock price at $60.01 in the the first 9 months of the FY2018. Therefore, we predicted table. that during the FY 2019, Oracle will slow its common stock repurchase due to the trading war. The new trading policies CV Growth of NOPLAT and Cost of Debt between China and U.S. will hit the technology industries, We tested these two factors because they are the key inputs and the companies need to adjust their strategies instead of to determine the terminal value. We wish to observe a clear increasing stock repurchasing. relationship between them. Thus, with a low CV growth of NOPLAT and a low cost of debt, we get the lowest stock Discounted Cash Flow and Economic Profit Models price at $55.76 in the table. With a high CV growth of We think that the discounted cash flow and economic profit NOPLAT and a high cost of debt, we get a high stock price models can help to estimate more accurate intrinsic stock of $58.96. price for Oracle. Based on the assumption metrics, the adjusted stock price as of April 31, 2018, is $57.30 per Capex Inflation Rate and Inflation Rate share. Comparing the trading stock price $46.78 per share as Additionally, since capex directly related to ROIC, we want of April 17, 2018, we think that Oracle is undervalued to test if there is a certain correlation between Capex because of the recent change of trading policies. Therefore, inflation rate and market inflation rate. After running the when the technology sector rebounces, Oracle’s stock price table, we get $56.88 as our lowest stock price with a high will increase aligning with the sector. capex inflation rate and high market inflation rate. We get $57.72 as our highest stock price with a low capex inflation Dividend Discount Model rate and low market inflation rate. Our team does not think this model will come out with a satisfying value in the first place since technology companies typically don’t have dividends. The management WACC and Risk Free Rate team is more willing to use it for development of their For these two factors, our group primarily want to analyze companies. However, Oracle does have a certain number of any change of these discount factors. The result shows that dividends every year, but the result of the model has an with a low wacc and high risk free rate, we get the highest unreasonable low intrinsic value of Oracle. Therefore, we stock price at $61.93. With a high wacc and low risk free didn’t want to use this model to predict the current price. rate, we get the lowest stock price at $53.30. This indicates that higher risk free rate and low wacc will give company Relative P/E Valuation higher value. In the valuation model, we use the average 2018 and 2019 P/E of the 10 biggest companies within the same industry to Marginal Tax Rate and Beta compare with Oracle’s 2018 and 2019 P/E so as to get an Comparing these two factors, stock price change greatly idea about how the general market values differ from our depends on the change of marginal tax rate. Not model. surprisingly, with high marginal tax rate and low beta, we We chose the pure players based on their growth, market get the lowest stock price at $54.24. With low marginal tax size and industry. As a result, Oracle’s stock price under the rate and high beta, we get the highest price at $60.41. implied relative value model is $82.64 for P/E (EPS18) and $68.11 for P/E (EPS19) which are not the same as what we predicted in our DCF model. Therefore, we don’t think this method is appropriate for estimating our stock price.

SENSITIVITY ANALYSIS

Risk Premium and Beta We analyze our stock price based on risk premium and beta because these two factors are important when calculating cost of capital such as cost of equity and WACC. We believe by estimating these metrics, we will get a clear change between stock price and discount factors. The result shows that with a low risk premium and low beta, we get a low stock price of $56.63, with a high-risk premium and high beta, we get a high stock price of $58.06.

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REFERENCES [8] GICS Sector. Industry Chart, 2017. Retrieved [1] ORCL one-year stock performance. (2018) th April 17th from: Retrieved April 18 from: https://us.spindices.com https://finance.yahoo.com [9] “2016 SaaS Industry Market Report: Key Global [2] Paysa.com (2018). The average Salary for Trends & Growth Forecasts.” Retrieved April 17th, Software Engineers is $109,442. Paysa.com. 2017 from Retrieved April 17, 2018, from: http://financesonline.com/2016-saas-industry-market- https://www.paysa.com/salaries/software-engineer-- report-key-global-trends-growth-forecasts/ t?gclid=CjwKCAjwk9HWBRApEiwA6mKWab- Knt6p8QGYcmsYjPhsiPrigMcnqa0pj8GALjGFsMD [10] Spending on public IT cloud services worldwide, FTo-iQZAxxxoCMdAQAvD_BwE by segment, in 2014 and 2018 (in billion U.S. dollars). Retrieved April 17th from: [3] reddrop. (2017). Microsoft azure and amazon web https://www.statista.com/statistics/370305/global- services aws 2. 1reddrop. Retrieved April 17, 2018, public-it-cloud-services-spending-by-segment/ from: https://1reddrop.com/2017/02/18/amazon-aws- [11] Oracle 10-K ended by May 31, 2017. microsoft-azure-cloud-computing-iaas- duopoly/microsoft-azure-and-amazon-web-services- [12] Oracle 10-Q ended by February 28, 2018. aws-2/

[4] Bureau of Economic Analysis. National Income and Product Accounts Gross Domestic Product: Fourth Quarter and Annual 2017 (Third Estimate) Corporate Profits: Fourth Quarter and Annual 2017. Retrieved April 17th from: https://www.bea.gov/newsreleases/national/gdp/gdpn ewsrelease.htm

[5] Fidelity, Information Technology Outperform S&P 500, 2017.

[6] BLS. (2018 April 12). Labor Force Statistics. Retrieved from https://data.bls.gov/timeseries/LNS14000000

[7] BLS. (2018 April 12). Civilian Unemployment Rate, 2017. Retrieved April 17th from: https://www.bls.gov/bls/newsrels.htm#OEUS

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Important Disclaimer

This report was created by students enrolled in the Applied Equity Valuation class at the University of Iowa. The report was originally created to offer an internal investment recommendation for the University of Iowa Krause Fund and its advisory board. The report also provides potential employers and other interested parties an example of the students’ skills, knowledge and abilities. Members of the Krause Fund are not registered investment advisors, brokers or officially licensed financial professionals. The investment advice contained in this report does not represent an offer or solicitation to buy or sell any of the securities mentioned. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Krause Fund may hold a financial interest in the companies mentioned in this report.

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Oracle Corporation Key Assumptions of Valuation Model

Ticker Symbol ORCL Current Share Price $45.44 Current Model Date 4/17/2018 FY End (month/day) May. 31

Pre‐Tax Cost of Debt 4.14% (Finra maturity 2046) Beta 1.163 (Bloomberg Raw Beta) Risk‐Free Rate 3.03% (Finra 30‐yr bond) Equity Risk Premium 4.96% (Damodaran) CV Growth of NOPLAT 2.00% (same as expected GDP) CV Growth of EPS 2.00% Current Dividend Yield 1.51% (Yahoo! Finance) Marginal Tax Rate 21% (Q3, 10‐Q 2018, p7) Effective Tax Rate 18.90% (2017, 10‐K 2017) WACC 7.50% CV ROIC 58.77% Operating Marginal Rate 36% Oracle Corporation Revenue Decomposition

Fiscal Years Ending May. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022E Cloud platform as a service & infrastructure as a serv $608 $646 $1,360 $1,428 $1,499 $1,574 $1,653 $1,736 Cloud software as a service & platform as a service $1,485 $2,207 $3,211 $4,174 $5,009 $5,761 $6,337 $6,653 New software licenses & cloud software subscription $8,535 $7,276 $6,418 $6,225 $6,039 $5,858 $5,682 $5,511 Software license updates & product support $18,847 $18,861 $19,229 $19,676 $20,133 $20,601 $21,080 $21,570 Total cloud & on-premise software revenues $29,475 $28,990 $30,218 $31,504 $32,681 $33,794 $34,752 $35,471 Total hardware revenues $5,205 $4,668 $4,152 $4,110 $4,069 $4,029 $3,988 $3,949 Total services revenues $3,546 $3,389 $3,358 $3,392 $3,425 $3,460 $3,494 $3,529 Total revenues $38,226 $37,047 $37,728 $39,006 $40,175 $41,282 $42,234 $42,948 Total Operating Expenses $24,355 $24,443 $25,018 $24,964 $25,712 $26,421 $27,030 $27,487 Total Operating Margin $13,871 $12,604 $12,710 $14,042 $14,463 $14,862 $15,204 $15,461

Total Revenues by Geography: Americas $21,107 $20,466 $21,038 $21,453 $22,096 $22,705 $23,229 $23,622 EMEA $11,380 $10,881 $10,630 $11,702 $12,053 $12,385 $12,670 $12,885 Asia Pacific $5,739 $5,700 $6,060 $5,851 $6,026 $6,192 $6,335 $6,442 Total Revenues $38,226 $37,047 $37,728 $39,006 $40,175 $41,282 $42,234 $42,948 % Revenues by Geography Americas 55% 55% 56% 55% 55% 55% 55% 55% EMEA 30% 29% 28% 30% 30% 30% 30% 30% Asia Pacific 15% 16% 16% 15% 15% 15% 15% 15%

Total Revenues by Business Cloud and on‐premise software $29,475 $28,990 $30,218 $31,504 $32,681 $33,794 $34,752 $35,471 Hardware $5,205 $4,668 $4,152 $4,110 $4,069 $4,029 $3,988 $3,949 Services $3,546 $3,389 $3,358 $3,392 $3,425 $3,460 $3,494 $3,529 Total Revenues $38,226 $37,047 $37,728 $39,006 $40,175 $41,282 $42,234 $42,948 % Revenues by Business Cloud and on‐premise software 77% 78% 80% 81% 81% 82% 82% 83% Hardware 14% 13% 11% 11% 10% 10% 9% 9% Services 9% 9% 9% 9% 9% 8% 8% 8% Oracle Corporation Income Statement

Fiscal Years Ending May. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022E May‐18 May‐18 May‐18 May‐18 May‐18 May‐18 May‐18 May‐18 Cloud platform as a service & infrastructure as a service $608 $646 $1,360 $1,428 $1,499 $1,574 $1,653 $1,736 Cloud software as a service $1,485 $2,207 $3,211 $4,174 $5,009 $5,761 $6,337 $6,653 New software licenses & cloud software subscriptions $8,535 $7,276 $6,418 $6,225 $6,039 $5,858 $5,682 $5,511 Software license updates & product support $18,847 $18,861 $19,229 $19,676 $20,133 $20,601 $21,080 $21,570 Total cloud & on-premise software revenues $29,475 $28,990 $30,218 $31,504 $32,681 $33,794 $34,752 $35,471 Total hardware revenues $5,205 $4,668 $4,152 $4,110 $4,069 $4,029 $3,988 $3,949 Total services revenues $3,546 $3,389 $3,358 $3,392 $3,425 $3,460 $3,494 $3,529 Total revenues $38,226 $37,047 $37,728 $39,006 $40,175 $41,282 $42,234 $42,948 Cloud platform as a service & infrastructure as a service $344 $366 $678 $712 $747 $785 $824 $865 Cloud software as a service & platform as a service expen $773 $1,152 $1,285 $1,799 $2,339 $2,806 $3,087 $3,241 Software license updates & product support expenses $1,199 $1,146 $1,052 $1,007 $964 $923 $884 $846 Hardware expenses $2,287 $2,064 $1,653 $1,483 $1,331 $1,195 $1,072 $962 Services expenses $2,929 $2,751 $2,801 $2,672 $2,549 $2,431 $2,319 $2,212 Cost of Good Sold $6,820 $6,608 $6,469 $6,381 $6,579 $6,676 $6,554 $6,271 Depreciation $712 $871 $1,000 1292 1351 1464 1632 1856 Amortization of intangible assets $2,149 $1,638 $1,451 1291 1149 1023 910 810 Research & development expenses $5,524 $5,787 $6,159 $6,405 $6,662 $6,928 $7,205 $7,493 SG&A $8,732 $9,039 $9,373 $9,751 $10,044 $10,321 $10,559 $10,737 Restructuring expenses $207 $458 $463 $350 $350 $350 $350 $350 Acquisition related & other operating expenses $211 $42 $103 $150 $150 $150 $150 $150 Total operating expenses $24,356 $24,444 $25,019 25621 26285 26912 27360 27668 Operating income $13,871 $12,604 $12,710 $13,384 $13,890 $14,371 $14,874 $15,281 Interest expense -$1,143 -$1,467 -$1,798 ‐1886 ‐1975 ‐2073 ‐2179 ‐2295 Non-operating income (expense), net $106 $305 $605 622 640 658 677 697 Income (loss) before provision for income taxes $12,834 $11,442 $11,517 $12,120 $12,556 $12,956 $13,372 $13,682 Provision for (benefit from) income taxes $2,896 $2,541 $2,182 $2,545 $2,637 $2,721 $2,808 $2,873 Net income (loss) $9,938 $8,901 $9,335 $9,575 $9,919 $10,236 $10,564 $10,809 Earning Per Share - basic $2.26 $2.11 $2.27 $2.39 $2.51 $2.63 $2.79 $2.94 Year end shares outstanding $4,343 $4,131 $4,137 $4,007 $3,959 $3,889 $3,782 $3,675 Dividends declared per common share $0.51 $0.60 $0.64 $0.67 $0.70 $0.74 $0.78 $0.82 Oracle Corporation Balance Sheet (Millions)

Fiscal Years Ending May. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022E Assets: May‐18 May‐18 May‐18 May‐18 May‐18 May‐18 May‐18 May‐18 Current Assets: Cash & cash equivalents 21,716 20,152 21,784 17,913 21,439 23,473 23,013 21,881 Marketable securities 32,652 35,973 44,294 48,010 52,038 56,404 61,137 66,266 Trade receivables, net 5,618 5,385 5,300 5,549 5,635 5,708 5,755 5,767 Deferred tax assets (current) 663 - - ‐ ‐ ‐ ‐ ‐ Other receivables - - - ‐ ‐ ‐ ‐ ‐ Inventories 314 212 300 285 289 293 295 296 Prepaid expenses & other current assets 2,220 2,591 2,837 2,933 3,021 3,104 3,176 3,230 Total current assets 63,183 64,313 74,515 74,690 82,423 88,982 93,376 97,439 Non-current Assets: Property, plant & equipment, net 3,686 4,000 5,315 5,557 6,023 6,713 7,633 8,801 Intangible assets, net 6,406 4,943 7,679 7,115 7,328 7,530 7,704 7,834 Goodwill, net 34,087 34,590 43,045 43,045 43,045 43,045 43,045 43,045 Deferred tax assets (non current) 795 1,291 1,143 1,171 1,200 1,230 1,261 1,292 Other assets 2,746 3,043 3,294 3,502 3,723 3,958 4,207 4,473 Total non-current assets 47,720 47,867 60,476 60,389 61,319 62,475 63,849 65,445 Total assets 110,903 112,180 134,991 135,079 143,742 151,457 157,226 162,884 Liabilities and Stockholders' Equity Current Liabilities: Notes payable, current$ 1,999 $ 3,750 $ 9,797 6,035 6,483 6,964 7,480 8,032 Accounts payable 806 504 599 585 603 619 634 644 Accrued compensation & related benefits 1,839 1,966 1,966 2,032 2,093 2,151 2,200 2,238 Deferred revenues 7,245 7,655 8,233 8,234 8,734 9,235 9,714 10,148 Income taxes payable 532 - - ‐ ‐ ‐ ‐ ‐ Accrued restructuring - - - ‐ ‐ ‐ ‐ ‐ Other current liabilities 2,870 3,333 3,583 3,695 3,811 3,931 4,055 4,182 Total current liabilities 15,291 17,208 24,178 20,582 21,724 22,899 24,082 25,244 Non-current Liabilties: Notes payable, non-current 39,959 40,105 48,112 51,120 53,361 55,840 58,557 61,520 Income taxes payable 4,386 4,908 5,681 5,133 5,317 5,487 5,663 5,794 Accrued restructuring - - - ‐ ‐ ‐ ‐ ‐ Deferred tax liabilities 0 0 0 ‐ ‐ ‐ ‐ ‐ Deferred revenues - - - ‐ ‐ ‐ ‐ ‐ Other non-current liabilities 2,169 2,169 2,774 3,221 3,741 4,345 5,045 5,859 Total non-current liabilities 46,514 47,182 56,567 59,474 62,419 65,671 69,265 73,173 Commitments and contingencies Stockholders' equity: Common stock, $0.01 per value and additional paid in capital--auth 23,156 24,217 27,065 27,442 27,820 28,197 28,574 28,876 Retained earnings 26,503 23,888 27,598 27,992 32,134 35,003 35,610 35,892 Accumulated other comprehensive income (loss) (996) (816) (803) (803) (803) (803) (803) (803) Total Oracle Corporation stockholders' equity 48,663 47,289 53,860 54,631 59,150 62,397 63,381 63,965 Noncontrolling interests 435 501 386 392 449 490 498 502 Total equity 49,098 47,790 54,246 55,023 59,600 62,887 63,879 64,467 Total liabilities and stockholders' equity 110,903 112,180 134,991 135,079 143,742 151,457 157,226 162,884 Oracle Corporation Common Size Balance Sheet % of Sales Fiscal Years Ending May. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022E Assets: May‐18 May‐18 May‐18 May‐18 May‐18 May‐18 May‐18 May‐18 Current Assets: Cash & cash equivalents 56.81% 54.40% 57.74% 45.92% 53.36% 56.86% 54.49% 50.95% Marketable securities 85.42% 97.10% 117.40% 123.09% 129.53% 136.63% 144.76% 154.29% Trade receivables, net 14.70% 14.54% 14.05% 14.23% 14.03% 13.83% 13.63% 13.43% Deferred tax assets (current) 1.73% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Other receivables 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Inventories 0.82% 0.57% 0.80% 0.73% 0.72% 0.71% 0.70% 0.69% Prepaid expenses & other current assets 5.81% 6.99% 7.52% 7.52% 7.52% 7.52% 7.52% 7.52% Total current assets 165.29% 173.60% 197.51% 191.48% 205.16% 215.55% 221.09% 226.87% Non-current Assets: Property, plant & equipment, net 9.64% 10.80% 14.09% 14.25% 14.99% 16.26% 18.07% 20.49% Intangible assets, net 16.76% 13.34% 20.35% 18.24% 18.24% 18.24% 18.24% 18.24% Goodwill, net 89.17% 93.37% 114.09% 110.36% 107.14% 104.27% 101.92% 100.22% Deferred tax assets (non current) 2.08% 3.48% 3.03% 3.00% 2.99% 2.98% 2.98% 3.01% Other assets 7.18% 8.21% 8.73% 8.98% 9.27% 9.59% 9.96% 10.41% Total non-current assets 124.84% 129.21% 160.29% 154.82% 152.63% 151.34% 151.18% 152.38% Total assets 290.12% 302.80% 357.80% 346.31% 357.79% 366.88% 372.27% 379.26% Liabilities and Stockholders' Equity Current Liabilities: Notes payable, current 5.23% 10.12% 25.97% 15.47% 16.14% 16.87% 17.71% 18.70% Accounts payable 2.11% 1.36% 1.59% 1.50% 1.50% 1.50% 1.50% 1.50% Accrued compensation & related benefits 4.81% 5.31% 5.21% 5.21% 5.21% 5.21% 5.21% 5.21% Deferred revenues 18.95% 20.66% 21.82% 21.11% 21.74% 22.37% 23.00% 23.63% Income taxes payable 1.39% 0.00% 0.00% Accrued restructuring 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Other current liabilities 7.51% 9.00% 9.50% 9.47% 9.49% 9.52% 9.60% 9.74% Total current liabilities 40.00% 46.45% 64.09% 52.77% 54.07% 55.47% 57.02% 58.78% Non-current Liabilties: Notes payable, non-current 104.53% 108.25% 127.52% 131.06% 132.82% 135.26% 138.65% 143.24% Income taxes payable 11.47% 13.25% 15.06% Accrued restructuring 0.00% 0.00% 0.00% 21.11% 21.74% 22.37% 23.00% 23.63% Deferred tax liabilities 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Deferred revenues 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Other non-current liabilities 5.67% 5.85% 7.35% 8.26% 9.31% 10.52% 11.95% 13.64% Total non-current liabilities 121.68% 127.36% 149.93% 152.47% 155.37% 159.08% 164.00% 170.37% Commitments and contingencies Stockholders' equity: Common stock 60.58% 65.37% 71.74% 70.35% 69.25% 68.30% 67.66% 67.23% Retained earnings 69.33% 64.48% 73.15% 71.76% 79.98% 84.79% 84.31% 83.57% Accumulated other comprehensive income (loss) ‐2.61% ‐2.20% ‐2.13% ‐2.06% ‐2.00% ‐1.95% ‐1.90% ‐1.87% Total Oracle Corporation stockholders' equity 127.30% 127.65% 142.76% 140.06% 147.23% 151.15% 150.07% 148.93% Noncontrolling interests 1.14% 1.35% 1.02% 1.00% 1.12% 1.19% 1.18% 1.17% Total equity 128.44% 129.00% 143.78% 141.06% 148.35% 152.33% 151.25% 150.10% Total liabilities and stockholders' equity 290.12% 302.80% 357.80% 346.30% 357.79% 366.88% 372.27% 379.25% Oracle Corporation Income Statement

Fiscal Years Ending May. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022E May‐18 May‐18 May‐18 May‐18 May‐18 May‐18 May‐18 May‐18 Cloud platform as a service & infrastructure as a service 1.59% 1.74% 3.60% 3.66% 3.73% 3.81% 3.91% 4.04% Cloud software as a service & platform as a service 3.88% 5.96% 8.51% 10.70% 12.47% 13.95% 15.00% 15.49% New software licenses & cloud software subscriptions 22.33% 19.64% 17.01% 16.30% 15.60% 14.93% 14.28% 13.64% Software license updates & product support 49.30% 50.91% 50.97% 51.50% 52.02% 52.50% 52.96% 53.40% Total cloud & on-premise software revenues 77.11% 78.25% 80.09% 80.36% 80.64% 80.92% 81.20% 81.49% Total hardware revenues 13.62% 12.60% 11.01% 10.76% 10.51% 10.27% 10.02% 9.78% Total services revenues 9.28% 9.15% 8.90% 8.88% 8.85% 8.82% 8.78% 8.74% Total revenues 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% Cloud platform as a service & infrastructure as a service 0.90% 0.99% 1.80% 1.83% 1.86% 1.90% 1.95% 2.01% Cloud software as a service & platform as a service expen 2.02% 3.11% 3.41% 4.61% 5.82% 6.80% 7.31% 7.55% Software license updates & product support expenses 3.14% 3.09% 2.79% 2.64% 2.49% 2.35% 2.22% 2.09% Hardware expenses 5.98% 5.57% 4.38% 3.88% 3.44% 3.04% 2.69% 2.38% Services expenses 7.66% 7.43% 7.42% 6.99% 6.58% 6.20% 5.83% 5.48% Cost of Good Sold 17.84% 17.84% 17.15% 15.53% 14.62% 13.65% 12.64% 11.56% Depreciation 1.86% 2.35% 2.65% 3.38% 3.49% 3.73% 4.10% 4.59% Amortization of intangible assets 5.62% 4.42% 3.85% 3.38% 2.97% 2.61% 2.29% 2.01% Research & development expenses 14.45% 15.62% 16.32% 16.44% 16.55% 16.66% 16.75% 16.83% SG&A 22.84% 24.40% 24.84% 25.00% 25.00% 25.00% 25.00% 25.00% Restructuring expenses 0.54% 1.24% 1.23% 0.92% 0.90% 0.89% 0.88% 0.87% Acquisition related & other operating expenses 0.55% 0.11% 0.27% 0.39% 0.39% 0.38% 0.38% 0.37% Total operating expenses 63.72% 65.98% 66.31% 65.04% 63.92% 62.92% 62.03% 61.23% Operating income 36.29% 34.02% 33.69% 34.96% 36.08% 37.08% 37.97% 38.77% Interest expense -2.99% -3.96% -4.77% -4.92% -5.08% -5.25% -5.44% -5.64% Non-operating income (expense), net 0.28% 0.82% 1.60% 1.63% 1.65% 1.68% 1.70% 1.72% Income (loss) before provision for income taxes 33.57% 30.89% 30.53% 31.66% 32.65% 33.51% 34.24% 34.85% Provision for (benefit from) income taxes 7.58% 6.86% 5.78% 6.65% 6.86% 7.04% 7.19% 7.32% Net income (loss) 26.00% 24.03% 24.74% 25.01% 25.80% 26.47% 27.05% 27.53% Earning Per Share - basic 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% Year end shares outstanding 11.36% 11.15% 10.97% 10.50% 10.24% 9.93% 9.53% 9.13% Dividends declared per common share 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Oracle Corporation Cash Flow Statement (Millions)

Fiscal Years Ending May. 31 2015 2016 2017 Cash flows from operating activities: Net income (loss)$ 9,938 $ 8,901 $ 9,335 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation$ 712 $ 871 $ 1,000 Amortization of intangible assets$ 2,149 $ 1,638 $ 1,451 Allowances for doubtful accounts receivable$ 56 $ 130 $ 129 Deferred income taxes$ (548) $ (105) $ (486) Stock-based compensation$ 933 $ 1,037 $ 1,350 Tax benefits on the exercise of stock options & vesting of restricted stock-based award $ 396 $ 311 - Excess tax benefits on the exercise of stock options & vesting of restricted stock-bas$ (244) $ (124) - Other adjustments, net$ 327 $ 143 $ 123 In-process research & development - - - Net investment losses (gains) related to equity securities - - - Changes in operating assets and liabiliites, net of effects from acquisitions: Decrease in trade receivables,net$ 208 $ 96 $ 18 (Increase) Decrease in Inventories$ (96) $ 88 $ (88) Decrease (Increase) in prepaid expenses & other assets$ (387) $ (90) $ 64 (Decrease) Increasein accounts payable & other liabilities$ 247 $ (13) $ (37) Increase in income taxes payable$ (10) $ 2 $ 732 Increase in deferred revenues$ 655 $ 676 $ 535 Net cash flows provided by operating activities$ 14,336 $ 13,561 $ 14,126 Cash flows from investing activities: Purchases of marketable securities - - - Purchase of equity & other investments - - - Purchases of marketable securities & other investments$ (31,421) $ (24,562) $ (25,867) Proceeds from maturities & sales of marketable securities & other investments$ 20,004 $ 21,247 $ 17,615 Acquisitions, net of cash acquired$ (6,239) $ (650) $ (11,221) Proceeds from sale of property - - - Capital expenditures$ (1,391) $ (1,189) $ (2,021) Net cash flows used for investing activities$ (19,047) $ (5,154) $ (21,494) Cash flows from financing activities: Payments for repurchases of common stock$ (8,087) $ (10,440) $ (3,561) Proceeds from issuances of common stock$ 1,802 $ 1,425 $ 2,181 Shares repurchased for tax withholdings upon vesting of restricted stock-based award -$ (89) $ (283) Payments of dividends to stockholders$ (2,255) $ (2,541) $ (2,631) Proceeds from borrowings, net of issuance costs$ 19,842 $ 3,750 $ 17,732 Repayments of borrowings$ (1,500) $ (2,000) $ (4,094) ess tax benefits on the exercise of stock options & vesting of restricted stock-based aw $ 244 $ 124 - Minority interests in income - - - Distributions to noncontrolling interests$ (196) $ (85) $ (258) Other financing activities, net - - - Net cash flows from financing activities$ 9,850 $ (9,856) $ 9,086 Effect of exchange rate changes on cash & cash equivalents$ (1,192) $ (115) $ (86) Net increase (decrease) in cash & cash equivalents$ 3,947 $ (1,564) $ 1,632 Cash & cash equivalents at beginning of period$ 17,769 $ 21,716 $ 20,152 Cash & cash equivalents at end of period$ 21,716 $ 20,152 $ 21,784

change rate in capital expediture $ (811) $ 202 $ (832) capitalization of intangible assets 118 (1,974) 2,549 Oracle Corporation Cash Flow Statement (Millions)

Fiscal Years Ending May. 31 2018E 2019E 2020E 2021E 2022E Cashfrom operating activities Net income 9575 9919 10236 10564 10809 Adjustments to reconcile net income to cash from operating acctivities: Add: Depreciation 1292 1351 1464 1632 1856

Change in deferred taxes 28 29 30 31 31 Changes (increases or decreases) in working Changes in receivables 249 86 73 47 11 Changes in inventories (15) 5 4 3 1 Change in prepaid expenses and other current 96 88 83 72 54 Change in accounts payable (14) 18 17 14 11 Change in accrued compensation and other 66 61 58 50 37 Change in income taxes payable (548) 184 170 176 131 Change in deferred revenue 1 500 501 479 435 Changes in other operating assets and liabilities: changes in other non-current liabilities 112 116 120 123 127 changes in other assets 208 221 235 250 265 Net cash provided by operating activities 10,843 12,356 12,754 13,190 13,503

Cash from investing activities (increase) decrease in short-term investments (3,716) (4,028) (4,366) (4,732) (5,129) Capital Expenditures (1,534) (1,817) (2,154) (2,552) (3,024) Capitalization of intangible assets (724) 71 75 61 30 Business acquisitions - - - - - Net cash used for investing activities (5,974) (5,774) (6,444) (7,223) (8,123)

Cash from financing activities Proceeds from issuance of notes payable and S-T (3,762) 447 481 516 552 Proceeds from issuance of long-term debt 3,008 2,241 2,479 2,717 2,963 Payment of dividends (2,681) (2,777) (2,866) (2,958) (3,027) Porceeds from issuance of common stock (ESOP 377 377 377 377 302 Repurchases of common stock (6,500) (3,000) (4,500) (7,000) (7,500) Changes in accumulated other comprehensive - - - - - Net cash provided by financing activities (9,558) (2,712) (4,029) (6,348) (6,710)

Net increase (decrease) in cash (3,283) 1,513 397 437 313 Cash & cash equivalent at the beginning of period $ 14,126 10,843 12,356 12,754 13,190 Cash & cash equivalent at the end of period 10,843 12,356 12,754 13,190 13,503 Oracle Corporation Value Driver Estimation

Fiscal Years Ending May. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022E NOPLAT EBITA Calculation Operating Revenue 38,226 37,047 37,728 $39,006 $40,175 $41,282 $42,234 $42,948 Less Cost of Revenues 6,820 6,608 6,469 $6,381 $6,579 $6,676 $6,554 $6,271 Less Depreciation 712 871 1,000 1292 1351 1464 1632 1856 Less Research and Development Expenses 5,524 5,787 6,159 $6,405 $6,662 $6,928 $7,205 $7,493 Less Selling, General and Administrative Expenses 8,732 9,039 9,373 $9,751 $10,044 $10,321 $10,559 $10,737 Add Implied Interest on Operating Leases 51.30 45.77 44.75 61.24 81.38 85.08 92.22 102.77 EBITA 16,489 14,788 14,772 15,237 15,621 15,979 16,377 16,694

Adjusted Taxes Income Tax Provision 2,896 2,541 2,182 2545 2637 2721 2808 2873 Add Tax Shield on Interest Expense 240 308 378 396 415 435 458 482 Add Tax Shield on Amortized Goodwill 00000000 Less Tax Non‐operating Income (22) (64) (127) (131) (134) (138) (142) (146) Add Tax Shield on Non‐Operating Losses 00000000 Less Operating Lease Interest ‐$11 ‐$10 ‐$9 ‐$13 ‐$17 ‐$18 ‐$19 ‐$22 Total Adjusted Taxes 3,103 2,775 2,423 2,798 2,900 3,000 3,104 3,187

NOPLAT Calculation EBITA 16,489 14,788 14,772 15,237 15,621 15,979 16,377 16,694 Less Adjusted Taxes (3,103) (2,775) (2,423) (2,798) (2,900) (3,000) (3,104) (3,187) Add Change in Deferred Taxes 293 167 148 (28) (29) (30) (31) (31) NOPLAT 13,679 12,179 12,497 12,411 12,692 12,949 13,242 13,475

Operating Current Assets: Normal Cash (10% of sales) 3,823 3,705 3,773 3,901 4,018 4,128 4,223 4,295 Accounts (Trade) Receivable, Net 5,618 5,385 5,300 5,549 5,635 5,708 5,755 5,767 Inventory 314 212 300 285 289 293 295 296 Prepaid expenses &Other current operating assets 2,220 2,591 2,837 2,933 3,021 3,104 3,176 3,230 Total Operating CA 11,975 11,893 12,210 12,668 12,963 13,233 13,450 13,587

Operating Current Liabilities: Accounts Payable 806 504 599 585 603 619 634 644 Accrued expenses 1,839 1,966 1,966 2,032 2,093 2,151 2,200 2,238 Deferred Revenue 7,245 7,655 8,233 8,234 8,734 9,235 9,714 10,148 Income Taxes payable 532 ‐ ‐ ‐ ‐ ‐ ‐ ‐ Total Operating CL 10,422 10,125 10,798 10,851 11,430 12,005 12,548 13,030 Net Operating Working Capital 1,553 1,768 1,412 1,816 1,533 1,229 902 557

Plus: Net PPE 3,686 4,000 5,315 5,557 6,023 6,713 7,633 8,801

Plus: Other LT Operating Assets: PV of Operating Leases 1,106 1,082 1,480 1,967 2,056 2,229 2,484 2,825 Net Intangible Assets (non‐goodwill) 6,406 4,943 7,679 7,115 7,328 7,530 7,704 7,834 other assets 2,746 3,043 3,294 3,502 3,723 3,958 4,207 4,473 Total Other LT CA 10,258 9,068 12,453 12,584 13,107 13,717 14,395 15,132

Less: Other LT operating Liabilities: ‐‐‐‐‐‐‐‐

Invested Capital 15,497 14,835 19,180 19,957 20,664 21,658 22,930 24,490

NOPLAT 13,679 12,179 12,497 12,411 12,692 12,949 13,242 13,475 Less: change in IC 404 (662) 4,345 776 707 994 1,272 1,559 FCF$ 13,276 $ 12,841 $ 8,152 $ 11,634 $ 11,985 $ 11,955 $ 11,970 $ 11,916

NOPLAT 13,679 12,179 12,497 12,411 12,692 12,949 13,242 13,475 Beginning IC 15,093 15,497 14,835 19,180 19,957 20,664 21,658 22,930 ROIC 90.63% 78.59% 84.23% 64.71% 63.60% 62.66% 61.14% 58.77%

Beginning IC 15,093 15,497 14,835 19,180 19,957 20,664 21,658 22,930 Multiplied by: (ROIC‐WACC) 82.63% 70.59% 76.23% 57.21% 56.10% 55.16% 53.64% 51.27% EP$ 12,471.82 $ 10,939.60 $ 11,309.78 $ 10,972.23 $ 11,195.47 $ 11,399.04 $ 11,617.80 $ 11,756.44 Oracle Corporation Weighted Average Cost of Capital (WACC) Estimation Cost of Capital Risk free rate 3.03% Equity Risk Premium 4.96% Beta 1.163 Cost of Equity 8.80%

Cost of Debt Pre tax Cost of Debt 4.14% Marginal Tax Rate 21% After Tax Cost of Debt 3.27%

Weight of Capital Total Shares Outstanding 4,137 Share Price $45.44 Value of Equity $187,985 short‐term debt 9,797 Long‐term Debt 48,112 PV of operating leases 1,480 Value of Debt 59,389

Total Value of Capital $247,375

Weight of Equity 75.99% Weight of Debt 24.01%

Weighted Cost of Equity 6.69% Weighted Cost of Debt 0.78%

Weighted Average Cost of Capital (WACC) 7.50% Oracle Corporation Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs: CV Growth 2.00% CV ROIC 58.77% WACC 7.50% Cost of Equity 8.80%

Fiscal Years Ending May. 31 2018E 2019E 2020E 2021E 2022E For Discounting: Number of Periods 12345 DCF Model NOPLAT 12,411 12,692 12,949 13,242 13,475 Less: Capital Expenditures 776 707 994 1,272 1,559 Free Cash Flows 11,634 11,985 11,955 11,970 11,916 Continuing Value(CV) 236,666 Discount Factor 1.08 1.16 1.24 1.34 1.34 Present Value of FCF 10,823 10,371 9,623 8,963 177,216 Total PV 216,995

Plus: Value of Non‐Operating Assets Excess Cash 18,011 Marketabke Securities 44,294 Value of Non‐operating Assets 62,305

Less: Value of Non‐Operating Liabilities Debt 57,909 ESOP 2,181 Noncontrolling interests 386 PV of Operating Leases 1,480 Value of Non‐Operating Liabilities 61,956

Value of Equity 217,344 Shares Outstandinbg 4,137 Intrinsic Value 52.54 Partial Year Adjustment Value 56.04

EP Model Economic Profit to Discount 10,972 11,195 11,399 11,618 11,756 Continuing Value(CV) 213,749 Discount Factor 1.08 1.16 1.24 1.34 1.34 PV of FCF Discounted by WACC 10,207 9,688 9,176 8,699 160,056 Total PV 197,825 Plus: Beginning Invested Capital 19,180 Value of Operating Assets 217,005

Plus: Value of Non‐operating Assets Excess Cash 18,011 Marketable Securities 44,294 Value of Non‐Operating Assets 62,305

Less: Value of Non‐Operating Liabilities: Long‐Term Debt 57,909 ESOP 2,181 Noncontrolling interest 386 PV of Operating Leases 1,480 Value of Non‐Operating Liabilities 61,956

Value of Equity 217,354 Shares Outstaniding 4,137 Intrinsic Value$ 52.54 Partial Year Adjusted value 56.04 Oracle Corporation Relative Valuation Models

EPS EPS Est. 5yr BV Tangible Tangible Ticker Company Price 2018E 2019E P/E 18 P/E 19 EPS gr. PEG 18 PEG 19 Equity BV Equity P/B P/B MSFT Microsoft $88.00 $3.67 $3.93 23.98 22.39 2.9 8.16 7.62 10.17 4.41 8.65 19.95 ADBE Adobe Systems $209.40 $6.46 $7.32 32.40 28.60 25.5 1.27 1.12 17.52 4.94 11.95 42.39 CRM Salesforce.com, Inc $113.98 $2.05 $2.60 55.74 43.77 35.1 1.59 1.25 12.86 1.51 8.86 75.48 SAP SAP SE $102.72 $4.48 $4.89 22.94 21.01 5.7 4.00 3.66 26.29 1.30 3.91 78.77 IBM IBM $149.00 $13.84 $14.15 10.76 10.53 ‐3.9 (2.75) (2.69) 19.08 ‐24.87 7.81 (5.99) DDD 3D Systems Corp $11.09 $0.15 $0.28 74.93 39.05 ‐38.2 (1.96) (1.02) 5.39 2.52 2.06 4.40 ATVI Activision Blizzard, Inc $64.37 $2.62 $2.99 24.58 21.53 8.1 3.02 2.64 12.49 ‐1.97 5.15 (32.68) ANSS ANSYS, Inc $153.09 $4.82 $5.27 31.77 29.07 7.3 4.35 3.98 26.68 8.43 5.74 18.16 Average 34.64 26.99 2.21 2.07 6.77 25.06

ORCL Oracle Corporation $45.44 $2.39 $2.51 19.0 18.1 4.2434 4.5 4.3 11.68 ‐0.39 3.89 (116.51)

Implied Relative Value: P/E (EPS18) $ 82.77 P/E (EPS19)$ 67.63 PEG (EPS18)$ 22.40 PEG (EPS19)$ 22.00 P/B$ 79.04 P/Tangible BV$ (9.77)

Notes for using this worksheet: 1. Not all ratios will be relevant to each company. Relative valuation metrics tend to be industry specific. 2. Choose those ratios which make the most sense for the target company. 3. Hide or delete the ratios and metrics which do not apply. 4. Remove cells that are outliers from the "Average" 5. Add or delte rows as necessary to fit the number of comparable firms. Oracle Corporation Dividend Discount Model (DDM) or Fundamental P/E Valuation Model

Fiscal Years Ending 2018E 2019E 2020E 2021E 2022E

EPS$ 2.39 $ 2.51 $ 2.63 $ 2.79 $ 2.94

Key Assumptions CV growth 2.00% CV ROE 16.90% Cost of Equity 8.80%

Future Cash Flows P/E Multiple (CV Year) 12.97 EPS (CV Year)$ 2.94 Future Stock Price $38.15 Dividends Per Share $0.67 $0.70 $0.74 $0.78 $0.82 Future Cash Flows $0.67 $0.70 $0.74 $0.78 $12.11

Discounted Cash Flows $0.61 $0.59 $0.57 $0.56 $8.65

Intrinsic Value $ 10.98 Partial Year Adjusted value $ 11.72

For Discounting: Number of Periods 12345

Model Date 4/17/2018 Next FYE 12/31/2017 Last FYE 12/31/2016 Days in FY 365 Days to FYE 472 Elapsed Fraction 1.293 Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding

Number of Options Outstanding (shares): 312,000,000 Average Time to Maturity (years): 4.80 Expected Annual Number of Options Exercised: 65,000,000

Current Average Strike Price:$ 29.02 Cost of Equity: 8.80% Current Stock Price: $45.44

2018E 2019E 2020E 2021E 2022E Increase in Shares Outstanding: 13,000,000 13,000,000 13,000,000 13,000,000 10,400,000 Average Strike Price:$ 29.02 $ 29.02 $ 29.02 $ 29.02 $ 29.02 Increase in Common Stock Account: 377,260,000 377,260,000 377,260,000 377,260,000 301,808,000

Change in Treasury Stock 6,500,000,000 3,000,000,000 4,500,000,000 7,000,000,000 7,500,000,000 Expected Price of Repurchased Shares:$ 45.44 $ 49.44 $ 53.79 $ 58.52 $ 63.67 Number of Shares Repurchased: 143,045,775 60,682,030 83,662,056 119,616,539 117,796,294

Shares Outstanding (beginning of the year) 4,137,000,000 4,006,954,225 3,959,272,195 3,888,610,139 3,781,993,599 Plus: Shares Issued Through ESOP 13,000,000 13,000,000 13,000,000 13,000,000 10,400,000 Less: Shares Repurchased in Treasury 143,045,775 60,682,030 83,662,056 119,616,539 117,796,294 Shares Outstanding (end of the year) 4,006,954,225 3,959,272,195 3,888,610,139 3,781,993,599 3,674,597,305 Oracle Corporation Key Management Ratios

Fiscal Years Ending 2015 2016 2017 2018E 2019E 2020E 2021E 2022E

Liquidity Ratios Current Ratio CA/CL 4.13 3.74 3.08 3.63 3.79 3.89 3.88 3.86 Quick Ratio (CA‐inventory)/CL 4.11 3.73 3.07 3.62 3.78 3.87 3.87 3.85 Cash Ratio (Cash +Market Securities)/CL 1.42 1.17 0.90 0.87 0.99 1.03 0.96 0.87

Activity or Asset‐Management Ratios Receivables Turnover Revenue/AR 6.53 6.73 7.06 7.19 7.18 7.28 7.37 7.46 Asset Turnoever Revenue/Average TA 0.42 0.33 0.34 0.29 0.30 0.29 0.28 0.27

Financial Leverage Ratios Debt Ratio TL/TA 0.27 0.38 0.39 0.43 0.42 0.42 0.41 0.42 Debt to Equity Ratio TL/SE 0.52 0.86 0.93 1.08 1.05 1.01 1.01 1.04 Long‐term debt to capitilization

Profitability Ratios ROA NI/Average TA 12.13% 8.96% 7.93% 6.92% 7.09% 6.90% 6.76% 6.72% ROE Ni/Average SE 20.42% 18.82% 17.33% 17.53% 16.77% 16.40% 16.67% 16.90% Gross profit margin 38.56% 36.28% 34.02% 33.69% 34.31% 34.57% 34.81% 35.22%

Payout Policy Ratios Divident payout Dividends PS/EPS 1.06% 1.12% 1.32% 1.41% 1.47% 1.54% 1.62% 1.72% Total payout ratio Divdends/Price 19.83% 22.57% 28.44% 28.19% 28.00% 28.00% 28.00% 28.00% VALUATION OF OPTIONS GRANTED IN ESOP

Ticker Symbol ORCL Current Stock Price $45.44 Risk Free Rate 3.03% Current Dividend Yield 1.51% Annualized St. Dev. of Stock Returns 19.93%

Average Average B‐S Value Range of Number Exercise Remaining Option of Options Outstanding Options of Shares Price Life (yrs) Price Granted Range 1 312,000,000 29.02 4.80 $ 17.97 $ 5,605,172,508 Total 312,000,000$ 29.02 4.80$ 20.89 $ 5,605,172,508 Present Value of Operating Lease Obligations (2017) Present Value of Operating Lease Obligations (2016) Present Value of Operating Lease Obligations (2015) Present Value of Operating Lease Obligations (2014) Present Value of Operating Lease Obligations (2013) Present Value of Operating Lease Obligations (2012)

Operating Operating Operating Operating Operating Operating Fiscal Years Ending May. 31 Leases Fiscal Years Ending May. 31 Leases #REF! Leases #REF! Leases Fiscal Years Ending Leases Fiscal Years Ending 56.0366563981861 Leases 2018 389 2017 328 2016 330 2015 373 2014 358 2013 406 2019 330 2018 273 2017 270 2016 304 2015 293 2014 307 2020 260 2019 211 2018 209 2017 230 2016 230 2015 227 2021 203 2020 152 2019 156 2018 168 2017 170 2016 172 2022 146 2021 110 2020 107 2019 120 2018 117 2017 129 Thereafter 393 Thereafter 164 Thereafter 175 Thereafter 203 Thereafter 238 Thereafter 294 Total Minimum Payments 1721 Total Minimum Payments 1238 Total Minimum Payments 1247 Total Minimum Payments 1398 Total Minimum Payments 1406 Total Minimum Payments 1535 Less: Interest 241 Less: Interest 156 Less: Interest 141 Less: Interest 158 Less: Interest 166 Less: Interest 185 PV of Minimum Payments 1480 PV of Minimum Payments 1082 PV of Minimum Payments 1106 PV of Minimum Payments 1240 PV of Minimum Payments 1240 PV of Minimum Payments 1350

Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases

Pre‐Tax Cost of Debt 4.14% Pre‐Tax Cost of Debt 4.14% Pre‐Tax Cost of Debt 4.14% Pre‐Tax Cost of Debt 4.14% Pre‐Tax Cost of Debt 4.14% Pre‐Tax Cost of Debt 4.14% Number Years Implied by Year 6 Payment 1.9 Number Years Implied by Year 6 Payment 1.1 Number Years Implied by Year 6 Payment 1.6 Number Years Implied by Year 6 Payment 1.7 Number Years Implied by Year 6 Payment 2.0 Number Years Implied by Year 6 Payment 2.3

Lease PV Lease Lease PV Lease Lease PV Lease Lease PV Lease Lease PV Lease Lease PV Lease Year Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment 1 146 140.2 1 110 105.6 1 330 316.9 1 373 358.2 1 358 343.8 1 406 389.9 2 389 358.7 2 328 302.5 2 270 249.0 2 304 280.3 2 293 270.2 2 307 283.1 3 330 292.2 3 273 241.7 3 209 185.1 3 230 203.7 3 230 203.7 3 227 201.0 4 260 221.1 4 211 179.4 4 156 132.6 4 168 142.9 4 170 144.6 4 172 146.3 5 203 165.8 5 152 124.1 5 107 87.4 5 120 98.0 5 117 95.5 5 129 105.3 6 & beyond 203 302.4 6 & beyond 152 128.4 6 & beyond 107 135.5 6 & beyond 120 157.0 6 & beyond 117 182.8 6 & beyond 129 224.7 PV of Minimum Payments 1480.4 PV of Minimum Payments 1081.7 PV of Minimum Payments 1106.4 PV of Minimum Payments 1240.0 PV of Minimum Payments 1240.5 PV of Minimum Payments 1350.2 Risk Premium CV Growth of NOPLAT $56.04 4.56% 4.76% 4.96% 5.16% 5.36% $56.04 1.80% 1.90% 2.00% 2.10% 2.20%

0.963 55.38 55.47 55.56 55.65 55.75 Cost of Debt 3.74% 54.54 55.25 55.99 56.75 57.54

Beta 1.063 55.60 55.70 55.80 55.90 56.00 3.94% 54.56 55.27 56.01 56.78 57.57 1.163 55.81 55.92 56.04 56.15 56.26 4.14% 54.59 55.30 56.04 56.80 57.59 1.263 56.03 56.15 56.27 56.39 56.52 4.34% 54.61 55.32 56.06 56.83 57.62 1.363 56.25 56.38 56.51 56.64 56.77 4.54% 54.64 55.35 56.09 56.85 57.64

Marginal Tax Rate Capex Inflation Rate 56.04 17.00% 19.00% 21.00% 23.00% 25.00% $56.04 17.50% 18.00% 18.50% 19.00% 19.50% R&D Growth

Risk Free 2.83% 58.48 57.21 55.94 54.67 53.40 3.00% 57.11 57.10 57.09 57.08 57.07

Rate 2.93% 58.53 57.26 55.99 54.72 53.45 Rate 3.50% 56.59 56.58 56.57 56.56 56.55 3.03% 58.58 57.31 56.04 54.77 53.49 4.00% 56.06 56.05 56.04 56.03 56.02 3.13% 58.63 57.36 56.08 54.81 53.54 4.50% 55.51 55.50 55.49 55.48 55.47 3.23% 58.68 57.41 56.13 54.86 53.59 5.00% 54.96 54.95 54.94 54.93 54.92

WACC Marginal Tax Rate 56.04 7.10% 7.30% 7.50% 7.70% 7.90% $56.04 17.00% 19.00% 21.00% 23.00% 25.00% Risk Free Rate 2.83% 60.35 58.06 55.94 53.97 52.13 0.963 58.08 56.82 55.56 54.30 53.04

2.93% 60.40 58.11 55.99 54.01 52.17 Beta 1.063 58.33 57.06 55.80 54.53 53.27 3.03% 60.45 58.16 56.04 54.06 52.22 1.163 58.58 57.31 56.04 54.77 53.49 3.13% 60.50 58.21 56.08 54.11 52.26 1.263 58.83 57.55 56.27 55.00 53.72 3.23% 60.56 58.26 56.13 54.15 52.31 1.363 59.07 57.79 56.51 55.23 53.95