We are maintaining our Neutral recommendation on
) after the company reported better-than-expected second quarter
results, primarily driven by strong new software license sales
and stringent cost control. However, the decline in hardware
revenue continued for the company.
Going forward, lower hardware volumes remain a concern. As
Oracle sells higher-margin products compared to its competitors,
we anticipate that a sluggish market may act as a headwind for
Moreover, Oracle is a late entrant in the cloud computing
space and thus is trying to gain traction in the segment through
aggressive acquisitions. The company is paying a premium value
for these assets in order to catch up with the dominant players
International Business Machines Corp
). We believe that these acquisitions come with certain
integration issues and may not perform as per company
expectations, which will eventually hurt profitability going
As of November 30, 2012, the company had an aggregate of $19.8
billion outstanding notes payable (including the current portion)
compared with $14.8 billion as of May 1, 2012. The company
currently has $1.25 billion due for repayment in fiscal 2013.
Most recently, Oracle raised $5.0 billion in debt, which has
further leveraged the balance sheet.
Nonetheless, we believe Oracle's innovative product pipeline
is expected to drive market share in the emerging cloud
computing, business intelligence and big data analytics
Oracle enjoys a dominant position in the enterprise software
and database management system market and higher spending on
enterprise IT will positively impact the company. According to
market research firm Gartner, worldwide enterprise IT spending is
expected to increase 2.5% year over year to $2.68 trillion in
Moreover, increasing adoption of the company's engineered
systems (Exadata and Exalogic) will continue to drive market
share going forward. Additionally, Oracle's strong cash balance
of $33.70 billion and free cash flow of $12.82 billion enable it
to pursue strategic acquisitions, further share repurchase and
increase dividend payment.
The company's strong and relatively stable cash flow,
continuing share repurchase activity and dividend payout appears
sustainable and makes the stock quite attractive, in our
Currently, Oracle has a Zacks #2 Rank (Buy).
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