Oracle Backs Up Ellison's Big Talk

4/26/2010


  Recent Price
$26
  Dividend
$0.20
  Yield

0.8%

  P/E Ratio
17
  Shares (millions)
5,076
  Long-Term Debt as % of Capital
28%
  52-Week Price Range
$26.63 - $17.97

Oracle ($26; ORCL) CEO Larry Ellison enjoys baiting his competition. In March, he mocked SAP ($49; SAP) for its recent turnover at CEO. And last fall he issued a direct challenge to IBM ($130; IBM) in a full-page ad in The Wall Street Journal.

Under the direction of the swashbuckling Ellison, Oracle has grown into the biggest player in the $19 billion database market. The company focuses on high-end databases that store and analyze reams of corporate data, and it posts among the highest operating margins in the industry. Oracle is a Buy and Long-Term Buy.

Harnessing the Sun

Lately, Oracle has been busy integrating its latest acquisition, Sun Microsystems. This is somewhat familiar territory for Oracle, which has purchased more than 60 companies in the last seven years. But while Oracle has pulled off multibillion-dollar deals before, none of the acquired companies approached Sun’s scale in sales or business mix. In its last 12 months of operation, Sun generated more than $10 billion in revenue, more than 40% of Oracle’s $23 billion.

Historically, few software makers have dared to enter the hardware market, preferring to partner with hardware companies. Oracle’s Exadata database machine, launched in 2008, used Hewlett-Packard ($54; HPQ) equipment. But with the Sun acquisition, Oracle now makes the machine itself.

Business breakdown

Oracle reports its business in five segments: software licenses (30% of 12-month sales), software license updates and product support (53%), hardware products (1%), hardware support (1%), and services (16%). About one month of Sun’s sales is included in this breakdown, so the hardware percentage should rise in coming quarters.

Before the European Union would approve the Sun deal, Oracle had to demonstrate that it wouldn’t kill MySQL, Sun’s free, open-source database. Instead, Oracle has boosted investment in MySQL. Although the program remains free, Oracle sees revenue opportunities from subscriptions for upgrades and support. Oracle says MySQL will ultimately be able to compete with Microsoft’s ($31; MSFT) SQL Server.

Oracle is likely to continue its acquisitive ways. On April 16, Oracle agreed to pay $685 million for Phase Forward ($17; PFWD), a maker of data-management software for clinical trials.

Conclusion

Following a 1% dip in 2009, global technology spending is projected to bounce 5% this year, according to research firm Gartner ($24; IT). The U.S. Department of Commerce reported that U.S. shipments of computers and electronic products rose 13% in the first two months of 2010, with new orders up 9%.

The consensus projects double-digit sales and profit growth in fiscal 2010 ending May. Wall Street has its doubts about Oracle reaching operational targets it has set for Sun, and current estimates leave the company room to post a positive surprise. An annual report for Oracle Corp. is available from 500 Oracle Parkway, Redwood City, CA, 94065; (650) 506-7000; www.oracle.com.

ORACLE
Quarter

    Per-Share
     Earnings*

Sales
Change

      Quarterly
      Price Range

P/E Ratio
Range

Feb '10 $0.38 vs. $0.35 + 17% $25.64 -

$21.62

17 - 14
Nov '09 0.39 vs. 0.34 + 4% 22.95 - 20.10 16 - 14
Aug '09 0.30 vs. 0.29 - 5% 22.61 - 19.47 16 - 14
May '09 0.46 vs.

0.47

- 5% 20.28 - 13.80 14 - 10
           
Year
(May)

Sales
 (Bil.)

Per-Share
Earnings*
Per-Share
Dividend

52-Week Price Range

P/E Ratio
Range

2009 $23.25 $1.44 $0.05 $23.62
-
$13.80 16 - 10
2008 $22.43 $1.30 $0.00 23.31
-
18.18 18 - 14
2007 $18.00 $1.01 $0.00 19.75
-
13.07 20 - 13
2006 $14.38 $0.80 $0.00 15.21
-
11.75 19 - 15
             
————————————————— Quadrix Scores † —————————————————
Overall Momen-
tum
Value Quality Financial
Strength
Earnings
Estimates
Performance
93 80 58 95 85 93 51

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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