ORCL - Oracle

[boilermaker75]

I was exercising yesterday and had CNBC on and saw Maria's interview of Larry Ellison.

 

It was a long interview, there are links at the following link to different pieces of it,

 

http://www.cnbc.com/id/15838421?__source=vty%7Cclosingbell%7C&par=vty

 

(Transcript at http://www.cnbc.com/id/49264980 )

 

It intrigued me, so I just took a quick look at some numbers. ORCL's market cap is $152.52 billion, the enterprise value is $135.7 billion, and the TTM FCF of $13.37 billion.

 

I did a search of the forum and didn't find any previous discussions of ORCL. I am going to start investigating ORCL, but wondering if anyone else had and had any quick thoughts?

 

TIA

[PLynchJr]

I have not looked at it very closely but I did notice that it's held by a lot of noted value investors.

 

http://www.dataroma.com/m/stock.php?sym=orcl

 

[onyx1]

High client switching costs, massive R&D spend, and economies of scale give ORCL a durable competitive advantage.  Owner/operator with big financial stake in company, and capital being returned to shareholders at reasonable prices through buybacks and dividends.  ROE in mid 20's every year over last ten years.  No net debt.  No doubt this is a moat protected business and at the right price would be an outstanding company to own.

 

A little pause for me is that they have been spending around 30% of cash for acquisitions.

 

My biggest issue is understanding the breadth of their products.  I am not a client (or in the business) and find myself quickly confused with industry jargon when reading through their business description. 

 

[boilermaker75]

 

 

A little pause for me is that they have been spending around 30% of cash for acquisitions.

 

 

Ellison did address that and said they were done with acquisitions for a while, on the couple of years time frame, as they digest all their acquisitions. He said growth would be organic for a while.

[racemize]

Isn't Ellison's salary massively large?  That always bothered me, at least when they weren't making much money.

[boilermaker75]

Isn't Ellison's salary massively large?  That always bothered me, at least when they weren't making much money.

 

He is paid $5.5 million per year. But the bigger issue is probably stock options. How much of the FCF is actually going to employees, instead of "current owners," through stock options. Good point and something to check into.

[dexter]

Stock options are indeed a pretty big problem with Oracle, take a look at this:

 

http://allthingsd.com/20120924/oracle-ceo-ellison-got-a-big-raise-in-2012/

The filing shows that while Ellison took a token $1 salary, his combined compensation from stock options and other items for the year jumped by 24 percent year on year to north of $96 million from $77.6 million in 2011. Ellison’s compensation package included about $90 million worth of stock options, an $8.4 million $3.9 million incentive payment that was only half one-quarter as large as the maximum allowed under the bonus plan, and a $1.5 million payment for security at his home.

[racemize]

Isn't Ellison's salary massively large?  That always bothered me, at least when they weren't making much money.

 

He is paid $5.5 million per year. But the bigger issue is probably stock options. How much of the FCF is actually going to employees, instead of "current owners," through stock options. Good point and something to check into.

 

sorry, I should have said compensation.  In any event, as indicated above, it looks really large (maybe the highest CEO compensation or near there?).

[mysticdrew]

I don't necessarily see the options to be a major problem.  The media headlines throw out big numbers and yes he gets a lot of options... but that "$91 million" and "$77 million" in options he got in 2012 and 2011 are actually both worth $0 (they are underwater).  They are only valued as such through accounting valuations.  So unless he wants to see anything close to actually $91 million from these options, he'll want the stock price to rise above their strikes.

[Guest rimm_never_sleeps]

in the case of orcl stock options were shareholder money well spent. it lead to value creation. stock options should not be evaluated in a vacuum. an increase in shares outstanding is not in and of itself bad. Over the last 10 years orcl has demolished the indexes.

[Palantir]

Seems to be a really good company by most measures, and an example of why you shouldn't avoid investing in large caps....a 50B company ten years ago has tripled since then.

[boilermaker75]

I decided to take a conservative approach and wrote a few Nov 30-strike puts. (I got $0.32 per share.) That would put my cost basis 6.7% below the close for today, if I get put to, and will motivate me to dig through the 10-ks.

[longlake95]

I took a position in ORCL in late May/early June @ 26.50. Here's some quick thoughts. Probably, nothing here you don't know.

 

There is 3 or 4 key drivers with ORCL:

 

1) big global player with large installed base - big R&D budget

2) customers become more dependant as time goes on - switching risks

3) in the right space - data and data analytics has solid growth ahead.

4) the guy running the business, has skin in the game.

 

 

Oracle is a giant in database software business. They control roughly 60% of the global dbase market.

What's great about Oracle and others in the business ( very good competitors - like IBM and SAP ) is that when you purchase their dbase, you generally purchase a long-term service contract with the product. So, as a customer you are tied to their products for the long-pull. It's expensive to leave them. As you use their database, and build reams of very important data, you are less likely to want to switch database providers and risk data loss. A major data loss could be devastating to your business. So - Oracle's customers are sticky - that's good. Some 43% of ORCL's revenue comes from software licence updates and product support - all high margin business. Investors are concerned that companies will only use web-based ( cloud computing ) offerings in the future. Oracle is there (SaaS, software-as-a-service). The dbase installed on your server, on your premisis, is here for a while  yet.

 

ORCL also sells some hardware (server and storage products thru the Sun division), which is generally a low margin commodity business. They are scaling down this side of the business. Here's just a few numbers to outline why ORCL is a good business;

 

10yr revenue growth 12.5%

10yr earnings growth 18%

 

Net profit margins ( 5 yr avg ) 31.6%

Return on equity ( 5yr avg ) 28%

Cash per share $3.50/share ( net of debt) ( ya, much $$$ is abroad, but that could change)

Returning cash to shareholders: dividend: 0.24/share and growing, share buy backs. $10+ Billion in FCF

CEO: Larry Ellison owns 22.4% of the company - remember this is a $150 Billion company, his eye is on the ball - except for his recent purchase of a whole Hawaiian Island - hmmmm. If he buys England, I will really worry. Overall, he's a value creator.

 

The CEO of SAP, recently (today actually) discussed business conditions:

 

- business is generally good with Southern/Eastern Europe slow, but Western Europe and Middle East firm.

- good conditions in US and strong growth in Asia.

- raised revenue guidance

- not just database, but data analylitics has very bright future

 

One can figure that ORCL is seeing roughly the same conditions.

 

It's still a 70 cent dollar that's growing. My base case is a fair value of $40-42 and a bull case, with better business conditions of $50.

 

 

[ItsAValueTrap]

You won't lose data if you switch to a competitor's solution.  It's just that switching costs a lot of money because what Oracle builds is so critical and important to the customer AFAIK.

 

For example, look at JC Penney.  Incredibly, they want to switch all their systems over to Oracle.  This will cost them a lot of money.  When somebody purchases Sephora products from Sephora inside JCP, their purchase will be credited towards their Sephora rewards.  JCP probably developed some software that integrates their systems with Sephora's (e.g. handling differences in their database formats if they are different, integration of Sephora rewards with JCP's point of sale, etc.).  I'm guessing that Oracle doesn't have such software for that specific task... so JCP is going to have to develop that software again, or they have to pay Oracle to do it.

 

JCP used to have endless promotions.  I am guessing that their point of sale system is highly customized so that it is easier to implement the latest promotion and all its gotchas.  If you have a $10 gift certificate, you have to buy at least $10 worth of stuff at once.  That is programmed into their point of sale.

JCP doesn't have to worry about that when switching to Oracle because they got rid of almost all their promotions.  So far JCP has seen a massive drop in same-store sales from getting rid of their promotions.  If JCP went back to its old promotional business modek, then it would be even harder for them to switch.  They send you a $10 gift certificate/reward/card on your birthday... there is software that automates this.  They have a web store that knows JCP's inventory levels and is coded to handle JCP's rewards program (and presumably its gotchas).  All of this stuff is integrated and there is probably custom software that manages the integration.

 

Bill Ackman's presentation on JCP notes that there are over 100+ applications that JCP uses.  He thinks that JCP can cut costs by reducing the number of apps and in-house IT spend.

 

Anyways what I guess I am trying to say is:

A- In some cases, some companies will actually switch their mission critical systems.

B- If you start to think about it, it is typically very costly to switch.  JCP made it easier to switch by ditching its promotional business model.

[Palantir]

Thought I should dig this up.  How much are you guys adjusting share count to account for all the issued options? I'm just not that knowledgeable about that.

 

Also hat growth rate are you guys assuming for Oracle? Seems to me the past five years FCFE/share has grown at about 22% yoy, Sales at 15%, and OCF at about 19%. Needless to say that's awesome.

 

That being said, in the spirit of conservatism, I'm going with a 10% growth rate that declines to 4% annually, and it is still coming out cheap....but then again, I'm a n00b at this.

[siddharth18]

Isn't Ellison's salary massively large?  That always bothered me, at least when they weren't making much money.

 

He is paid $5.5 million per year. But the bigger issue is probably stock options. How much of the FCF is actually going to employees, instead of "current owners," through stock options. Good point and something to check into.

 

sorry, I should have said compensation.  In any event, as indicated above, it looks really large (maybe the highest CEO compensation or near there?).

 

Incidentally, the "highest" in 2011 was of Herbalife's CEO Michael Johnson (http://www.guardian.co.uk/business/2012/may/02/michael-johnson-highest-paid-ceo)

 

I don't necessarily see the options to be a major problem.  The media headlines throw out big numbers and yes he gets a lot of options... but that "$91 million" and "$77 million" in options he got in 2012 and 2011 are actually both worth $0 (they are underwater).  They are only valued as such through accounting valuations.  So unless he wants to see anything close to actually $91 million from these options, he'll want the stock price to rise above their strikes.

 

So they are basically equivalent to out of the money calls, right? The company is printing money at the rate of $36+ million/day and as such the "$91 million" and "$77 million" in annual compensation don't necessarily seem to be red flags. What overshadows this is the fact that Ellison owns 20%+ of equity and has the most skin in the game. His incentives are virtually guaranteed to be in line with other shareholders.

[ItsAValueTrap]

What overshadows this is the fact that Ellison owns 20%+ of equity and has the most skin in the game. His incentives are virtually guaranteed to be in line with other shareholders.

I would disagree with that.  If he steals from the company, then he gets 100% instead of 20%.  I'm not saying that he is stealing from the company.  But it's not unheard of for majority shareholders to do absolutely crazy things.

 

Some of the Chinese reverse merger frauds have high insider ownership.

The Crazy Eddie fraud had high insider ownership.

Dryships has no fraud, but its CEO has done a lot of related party transactions that came at the expense of shareholders.

 

It could be far easier and more profitable to invest in companies with a great CEO with integrity and low pay.  Berkshire is the obvious example.  There's nothing wrong with stepping over those one foot hurdles.

 

*I don't really understand Oracle.

[siddharth18]

What overshadows this is the fact that Ellison owns 20%+ of equity and has the most skin in the game. His incentives are virtually guaranteed to be in line with other shareholders.

I would disagree with that.  If he steals from the company, then he gets 100% instead of 20%.

 

Well in light of the facts that he co-founded the company and owns a $40 Billion stake, I just think a few hundred million here of there isn't a big deal. Honestly (forgive me for sounding heretic) I wouldn't even mind if Buffett wanted a $100 Million salary. We all know he doesn't "need" it but it makes no difference to me as long as he's on our - shareholder's - team.

[Guest wellmont]

ellison deserves every penny he gets for creating a powerhouse and creating so much value. when Steve Jobs was paid $1 a year, he was given a Gulfstream jet by the bod because they didn't like the idea of paying him $1 a year.

[dcollon]

I don't follow ORCL closely, but I thought this downgrade was funny.  I've never seen it done quite this way.

 

ORCL.pdf

[Palantir]

This is great that Oracle is falling. I've been waiting for it to come down. Capital light with high switching costs.

[boilermaker75]

This is great that Oracle is falling. I've been waiting for it to come down. Capital light with high switching costs.

 

I agree. I started writing some puts today at 32.5 and below.

[Palantir]

What's your estimate of IV? I'd say the current price gives you a 12% RoR, which is a good enough return for me to invest.

 

Why I am not yet buying - I just want to wait a few weeks, don't like to buy immediately after a big drop.

[boilermaker75]

What's your estimate of IV? I'd say the current price gives you a 12% RoR, which is a good enough return for me to invest.

 

Why I am not yet buying - I just want to wait a few weeks, don't like to buy immediately after a big drop.

 

 

Quick look,

 

(Market cap of 151.43B – cash of 14.955B – short term investments of 15.721B)/(TTM FCF of 12.823B) = 9.41

 

 

So no growth and you are still getting 10.62%

[Palantir]

^Out of curiosity, why are you not buying the underlying? Do you normally just prefer to get exposure via options?