Independent Equity Research Chisinau, Moldova +373-796-24706

December 2006

Equity Research Report

Analyst Opinion: NEUTRAL
(in $ millions, except per share data) Year Ends May 31 Total revenues Operating income Net income Diluted Earnings per share (US GAAP)
Source: Analyst estimates, SEC filings.

Q1 FY07 3,591 936 663 $0.13

Q2 FY07 4,163 1,357 967 $0.18

Q3 FY07E 4,347 1,228 831 $0.16

Q4 FY07E 5,947 2,199 1,508 $0.28

FY06 14,380 4,736 3,381 $0.64

FY07E 17,858 5,714 4,024 $0.76

FY08E 20,942 6,568 4,560 $0.86

We believe Oracle is fairly valued. Oracle is a successful software and IT services company, which has exhibited strong growth, fuelled by an aggressive acquisition-driven strategy. It is a multibillion company with a strong brand name and large customer base. However, the company has been relying on acquisitions for its growth and faces very strong competition, represented by such industry giants as Microsoft, IBM and SAP. The latter is a leader in many business software segments and is developing its own set of SOA tools, an area heavily targeted by Oracle. However, unlike Oracle, SAP has reported strong organic growth and is in no position to give up its market share. Currently, Oracle has built a strong portfolio of companies, but it will need to consolidate them efficiently, recovering the margins that suffered in the past two years. It will also have to make an effort at pushing organic growth to rates comparable with SAP’s to keep and gain market share.

Investment Highlights
Company size Large size provides numerous benefits: credibility, rich resource base (including human capital, research facilities, intellectual property), cross-subsidization possibilities, relative ease of entry into new industries/segments, possibility to work with large customers (governments, multinationals etc), economies of scale, bargaining power and lobbying, purchasing power for acquisitions. Wide range of products Oracle targets the corporate segment of the software consumer market and offers a wide range of business software, developed both internally and acquired through purchase of subsidiaries. The products include: • Technology Products: Database and Grids, Middleware, Data Hubs, Developer Tools, Security, Search, Enterprise Management, Business Intelligence, Collaboration, Content, Data Warehousing, Linux; • Application Products: Customer Relationship Management, Financial Accounting, Human Resources, Supply Chain, Public Sector Applications, Banking Applications, Retail Applications, Telecom Applications, Higher Education Applications and other; • Services: Support, Education, On Demand, Financing, INSIGHT, Consulting. The company is also developing a new integrated product suite planned for initial release in 2008 – the Fusion Project (discussed below). With such an extensive portfolio and significant expertise, Oracle is a world-class leader and a standard-setting player in its domain. Expansion into industry subsectors through acquisitions Oracle has been acquiring subsidiaries in other market segments, benefiting from existing customer bases, technology and trust already gained by the target companies. Oracle’s size and customer base both allow and require the company to keep looking for new directions to expand to. In the past several years, Oracle has been very active in terms of acquisitions, buying both small and big IT companies. Page 1 of 9 This is a free sample – not to be used for trading. assumes no responsibility for decisions based on information presented in this report.

com Chisinau. Source: +373-796-24706 Company Collaxa PeopleSoft Oblix Retek TripleHop TimesTen ProfitLogic Context Media i-flex G-Log Innobase Thor Technologies OctetString Temposoft 360Commerce Siebel Systems Sleepycat HotSip Portal Software Net4Call Demantra Telephony@Work Sigma Dynamics Sunopsis MetaSolv Software SPL WorldGroup Stellent Month/Year June 2004 January 2005 March 2005 April 2005 June 2005 June 2005 July 2005 July 2005 August 2005 September 2005 October 2005 November 2005 November 2005 December 2005 January 2006 January 2006 February 2006 February 2006 April 2006 April 2006 June 2006 June 2006 August 2006 October 2006 October 2006 November 2006 December 2006 Industry Business Process Management Enterprise Software Identity Management Solutions Retail Industry Solutions Context-sensitive Enterprise Search Real-time Enterprise Solutions Retail Industry Solutions Enterprise Content Integration Banking Industry Solutions Logistics Hib Solutions Discrete Transactional Open Source Database Technology Enterprise-wide User Provisioning Solutions. The company is a leader in many of the market segments it is present in. present in several key software An analyst notes that “if Fusion works as advertised. Virtual Directory Solutions Workforce Management Applications Retail Industry Solutions Customer Relationship Management Solutions Open Source Database Software for Embedded Applications Communications Infrastructure Solutions Software Suite for Communications Industry Service Delivery Platform for Communications Industry Demand-driven Planning Solutions IP-based Contact Center Technology Real-time Predictive Analytics Software Enterprise Integration Software Solutions for Communications Service Providers Revenue and Operations Management Software Content Management Solutions Valuation n/a $11.1 billion n/a n/a n/a n/a n/a n/a n/a n/a $219 million n/a $440 million * As of August 31. Source: http://en. Oracle could wind up 2 dominating the software world this decade much as Microsoft dominated the last one.html.” Fusion 1 2 Based on 2005 data.Independent Equity Research AskAnalyst.1 billion n/a $701 million n/a n/a n/a n/a $847 million* n/a n/a n/a n/a n/a n/a $6.wikipedia. which allowed Oracle to narrow the gap between itself and SAP in the CRM market from 20 to just 3 percentage 1 points ). offering greater data management capabilities to businesses than standalone applications. Oracle leads in many market segments Oracle is an experienced multibillion company. Moldova assumes no responsibility for decisions based on information presented in this report. . SEC filings. source: Gartner. Page 2 of 9 This is a free sample – not to be used for trading. This leadership is the result of both internal developments (such as its database business) and acquisitions (such as the acquisition of Siebel. Fusion Applications scheduled for release in 2008 Oracle plans to launch a new business software suite that will combine the functionality of its currently separate software packages. 2006.zdnet.

The company plans to buy back $1 billion worth of shares every quarter until the end of the fiscal year. in H1FY07. with its NetWeaver SOA platform launched in 2004.8 billion of its shares for a total of $20. available at http://seekingalpha.5 14.4 11. competitors also rely on partnerships and Oracle partnering with other companies mostly offsets similar relationships between competitors. Pro forma data includes only Siebel and PeopleSoft acquisitions. among which are Dell. Partnerships with industry leaders Oracle has partnered with a number of leading companies in the IT industry. organic revenue year-over-year growth was 17% with 28% total revenue year4 over-year growth. our calculations assumes no responsibility for decisions based on information presented in this report.Independent Equity Research 3 AskAnalyst.0% 2003 2004 2005 5. Moldova info@askanalyst. 3 4 Source: Q1FY07 Earnings +373-796-24706 Middleware already has 30. During the six months ended November 30.2% 7. Intel and others. However. ORCL repurchased 121. Oracle benefits from greater exposure to potential customers. AskAnalyst.1% 0% 2006 -5% Total revenues Organic revenue growth (based on pro forma data) revenue year-over-year growth 21. Oracle uses a very aggressive business strategy. Transcript available at http://seekingalpha.9% 25% 20% 15% 10% 5% Annual growth rate Fiscal year ends May 31. much of the revenue growth came from acquisitions: Revenue volume and growth rates 17 15 13 11 9 7 5 3 1 -1 -3 9. Revenue. Sound financials with healthy balance sheet Oracle has exhibited accelerating revenue growth rates in the past several years following revenue stagnation in 2003. resulting from its aggressive business strategy and partly fueled by acquisitions. Of course. HP.7 9. $ billions . and in July 2006 the company’s Board extended the repurchase program so that another $4 billion worth of shares could be repurchased. The company’s EPS has also been growing steadily as a result of both revenue increase and share buybacks. SAP is planning to launch its own SOA-based suite in 2007. 2006. Through such partnerships. trying to “steal” customers from competitors or at least to make competitors’ lives harder.0% 2002 -2. Source: SEC filings. the company’s CFO noted that in Q1FY07 Oracle had its strongest Q1 licensed growth in more than five years and that the company was gaining share across all product lines. This was also the third consecutive quarter in which Oracle had applications license growth 5 greater than 75% .2 16. Such high growth rates are not typical for multi-billion companies and represent a strength on their own. 5 Data from management in this paragraph reflect non-GAAP measures. In the Q1FY07 Earnings Call .2% 0. However. This strategy is also exemplified by the acquisition activity discussed above and by numerous partnerships that Oracle keeps establishing with various industry players.2% from increased trust inferred from the expertise of its partners and from cross-marketing opportunities.8 10.7 billion.3 million shares for $2. Since the inception of Oracle’s share repurchase program in 1992 through FY06. Page 3 of 9 This is a free sample – not to be used for trading.000 users allowing customers to use software from different billion. the company repurchased 1. Aggressive business strategy As illustrated by Oracle’s move to provide low cost support to Red Hat Enterprise Linux users and by the announcement to create and offer its own version of Linux operating system.

Independent Equity Research AskAnalyst.19. SAP. It’s SOA platform – NetWeaver – was launched in 2004.html. evaluate and develop tools in or 20.14 last year.html. any errors/malfunctions in products immediately create bad publicity.” SAP is one of Oracle’s main competitors. and has partnered with Microsoft to make its applications integrate easily with MS Office applications. • GAAP EPS is expected to be $0. and has issued a positive outlook for the year in October.289142. SAP also has a large customer base and a strong brand name. 6 . financial debt stood at $5. developers will be able to purchase individual subscriptions to SAP software.00.6 billion. SAP is also developing a Services Oriented Architecture suite which may be launched as soon as in 2007. For example. On the other hand. and net working capital standing at $5. access to development tools was available only for companies that had purchased SAP software. cash & equivalents and marketable securities together accounting for 27% of all assets. premium content and online access for testing enterprise services.zdnet.sid21_gci1225126. antitrust attention from governments. where it had 15% growth of Software revenues in Q3FY06. one year before Oracle’s Fusion application Strong competition Oracle faces competition from Microsoft. with the current ratio at 1.4% of total assets. Page 4 of 9 This is a free sample – not to be used for trading. • Total revenue is expected to be up 23% to 25% on a GAAP basis.zdnet.asp?ArticleID=6162. 10 Source: http://news. At the same time. SAP also boasts growing revenues.html. allowing them to test. SAP is the market share leader in the CRM. In the longer term. ERP. assumes no responsibility for decisions based on information presented in this report. SAP expects full-year 2006 product revenues to increase by 13-15% year-over-year. – some of the biggest corporations in the world. SAP 10 attacked Oracle earlier this year. according to Gartner Dataquest . Moldova info@askanalyst. At its recent European TechEd conference in 9 Amsterdam. Just like Oracle attacked Red Hat. including in Oracle’s home market – the US. the revenues that Oracle might take away from Red Hat would not make 7 much of a difference at the bottom line for Oracle .9 billion. the move to compete with Red Hat in the corporate Linux space has been received by the industry with mixed feelings. SAP opened the NetWeaver platform to a broader development community . • Net income is expected to growth 24% to 29% on a GAAP basis. 9 Source: http://searchsap. 6 Investment Risks Company size Large size also brings some disadvantages: multiple levels of management increase bureaucracy. Positive guidance provided by management for Q3FY07 : • New software license revenues are expected to be up 16% to 22% year-over-year. while stating that SAP was gaining market share and growing mainly Chisinau. 8 Source: http://www. 2006. Oracle F2Q07 (Qtr End 11/30/06) Earnings Call from December 18. 7 Some of these opinions can be found here: http://news. IBM Besides. Other competitors are also well established big companies with large resource and customer bases. this could actually reinforce Red Hat’s preeminence. AskAnalyst. Red Hat is forced to cut down pricing and faces a threat of customer outflow.18-0. as opposed to Oracle’s acquisition11 driven growth .com +373-796-24706 The Q2FY07 balance sheet exhibited decent liquidity. a RedMonk analyst Stephen O’Grady considers that “in the short term. small but highly lucrative niches may remain unnoticed/unattended and left to smaller players to fill in. offering support to Siebel customers at lower rates than Oracle’s. On one hand. Via the online SAP Developers Network. analysts observe that customer loyalty and Red Hat’s software certification program are very hard to beat. and SCM 8 spaces. transcript available at http://seekingalpha. The program is scheduled to begin in 2007. Thus competing with all of them efficiently requires a lot of financial and marketing resources.75. up from $0. this will be a problem in terms of perception and customer Previously. as well as management attention. 11 Source: Q3FY06 earnings call. Some moves by the company to fend off competition may prove to be ineffective and considered too costly by shareholders and the professional public. The subscription program will include access to technical support. difficulties to implement corporation-wide changes.destinationcrm. available at http://seekingalpha. +373-796-24706 based on the expectation for full-year 2006 software revenue growth in the range of 15% to 17%. especially when data security is being addressed on national level in many Chisinau.pdf.3% security vendor Argeniss has announced that it will have a “week of Oracle Database bugs” in December focusing on Oracle’s poor security record. The number of security flaws in the Oracle and Microsoft database servers that have been discovered and fixed since December 2000 until November 2006: Source: http://www.3% 2003 2004 Operating and Net margins 13 36.Independent Equity Research also notes Oracle’s relatively poor security record.4% 24.0% 2002 24. Source: http://www.1% 32.5% 2006 Fiscal year ends May 31. AskAnalyst.0% 36. 12 . 13 Source: http://www. Fast expansion and tight competition have eroded Oracle’s profit margins Rapid expansion came at the price of margins. Moldova info@askanalyst. a security researcher from NGS Software published a white paper comparing security robustness of database 12 software from several producers . In fact.vnunet. 40% 36% 32% 28% 24% 20% 23. Oracle’s products were recognized to contain more security bugs than Microsoft’s SQL Server products. Such poor security record can cast a shadow of doubt on Oracle’s other products and reduce customer trust. Recently. white paper available at 2005 assumes no responsibility for decisions based on information presented in this report.pdf Another report by the Enterprise Management Group .databasesecurity.9% operating margin net margin 26. compared to 2005.9% Relative security weakness of Oracle databases The company’s key product suffers from weak security compared to competitors. with both operating and net margins experiencing a decline during 2005-2006. Page 5 of 9 This is a free sample – not to be used for

• Strong brand name and reputation. • Diversified product portfolio. Opportunities • Continuous adoption of BPO and related software. • Increasing adoption of software-as-aservice concept. Threats • Tough competition against very large players.2% higher than in 2005. While Oracle is expected to maintain its second position in terms of market share. • Positive guidance. Industry Overview Enterprise resource planning (ERP) applications market: Oracle is the fastest market share gainer 14 The ERP applications market is expected to reach $29 billion in 2006 or 14. • Fast expansion erodes margins. AskAnalyst. Weaknesses • Relatively poor safety assumes no responsibility for decisions based on information presented in this report. for the next five years the market is expected to grow at a CAGR of 10%. • Increasing size of corporation may deteriorate management focus. • Leadership in many market segments. it is likely to enjoy the largest growth in the ERP application segment compared to other Top 5 ERP vendors and at 2x the overall market growth rate. • Acquisitions have been the main source of revenue growth. Top 5 ERP Vendors SAP Oracle Sage Group Microsoft SSA Global TOTAL MARKET Source: AMR Research (2006) 2004 Revenue Share 40% 10% 5% 3% 3% 2005 Revenue Share 42% 20% 6% 4% 3% 100% = $25. +373-796-24706 SWOT Analysis Strengths • Big size: large resource base. • Partnerships with industry leaders. • SAP is developing a competing SOA suite. Ellison likes to make unsubstantiated statements which eventually may lead to trouble. . • Strong revenue growth. • Globalization driving multinational companies to implement software that reduces costs and increases efficiency. • Sound financial situation. our calculations. while organic growth slowed down in FY06. • Fusion suite to be launched in 2008.Independent Equity Research Source: SEC filings. Moldova info@askanalyst.4 billion 2006 Revenue Share 43% 23% 6% 4% 3% 100% = $29 billion Revenue Growth Rate 2005-06 17% 29% 10% 18% 3% 14% Business analytics software and data warehousing tools market: Oracle is the market leader 14 Source: AMR Research Page 6 of 9 This is a free sample – not to be used for trading. • Aggressive business strategy. to remain competitive. • Mr. Also.

top vendors Oracle IBM Microsoft Teradata Sybase Other TOTAL Source: Gartner.1% increase over 2004.2% 100% = $13. Oracle is the world leader in the data warehousing tools market with a 19. 18 Source: Gartner. Worldwide relational database market (RDBMS): Oracle is the market leader Worldwide relational database management systems (RDBMS) total software revenue increased by 8. . Oracle’s closest competitor in the category had a 22.6% 22.8 billion . In 2005.5%). Application integration and middleware (AIM) market: Oracle has the strongest momentum in the segment The application integration market reached $8. a 7.8 billion. Salesforce. 2005 Worldwide Vendor Revenue Estimates for AIM Software (Millions of Dollars) Company 2004 2005 2004-2005 2004 2005 Growth (%) Market Market Share (%) Share (%) IBM BEA Systems Oracle 15 16 19 2.2 14.5 739.0% (5%) and Amdocs (5%). RDBMS.9 16 billion in 2005 software revenues.6 billion in revenues for 2005. Moldova info@askanalyst.9% 8.8 1. retaining a market share of 13. followed by Siebel (17%). However after the acquisition of Siebel Systems in January 2006.8% market share and $1. Oracle (8.3% yoy growth Customer relationship management (CRM) software market: Oracle is much closer to the leading position after the acquisition of Siebel 18 Worldwide CRM software market reached $5.8 3. Page 7 of 9 This is a free sample – not to be used for trading.7 37. Oracle (6%).7 Source: IDC.4 6. This market grew by 11% in 2005. 2005 Market Share 48.0% 3.5 8.6 billion total market . Oracle attained a 23% market share. Oracle is also the leading vendor in the data warehouse management category with a assumes no responsibility for decisions based on information presented in this report.6 billion.7 6.7% market share. SAP was the top CRM vendor in terms of revenue (26% market share). 8.959.4 1. BEA Systems (14. Source: IDC.159.5 billion in 2005.gartner.2 billion of the $16. AskAnalyst. primarily due to pent-up demand for SQL Server 2005. experiencing 14% growth in 2005 over 2004. just Microsoft experienced a growth rate above the industry average.Independent Equity Research +373-796-24706 Oracle was recognized as the leading business analytics software and data warehousing tools vendor for 15 2005.3 14.html. driven by companies looking for more opportunities to drive revenue and expand business lines.3 529.232.7%) and Tibco (3.3% 17 in 2005 reaching $13. Oracle – with the highest momentum in the segment – witnessed revenue growth of 40% in 2005.1% or $2.3% market share and $1.7%).163. The main players were: IBM (a clear leader with market share of 37%).7%).2% 2. 19 Source: http://www. Microsoft (4. 17 Source: Gartner.7 6 Chisinau. Of the top 5 vendors.

3 8.5% assumes no responsibility for decisions based on information presented in this report. • GAAP diluted EPS of $0.57 24.44 17. Growth (yoy): Revenue per employee. While estimated P/S ratio unveils a premium of ORCL over peers multiple.81 22.5 7. According to peers’ median P/E multiple.57 3.95 24.1% 40.89 PE CAL 2006 19.936. except per share data 20 Q1 FY07 Q2 FY07 Q3 FY07E Q4 FY07E FY06 FY07E FY08E Software segment only.42 16.42 3.27 77.8 5.0 7.500.5% 0. $Bn: Revenue.27 3.81 23.2% Valuation We expect ORCL to report: • $18 billion in sales for FY07 and $21 billion in FY08.643. ORCL maintains superior profitability level compared to other giants from the IT space.89 24.73 4.99 4.43 5.82 9% P/S CAL 2006 2.5% NA 87.47 PE CAL 2007 17.7 33. Mn Gross Margin (ttm): EBITDA Margin (ttm): Operating Margin (ttm): Net Margin (ttm): Source: Yahoo! Finance.861 1. the investment gain is limited.0% 18. we believe it is warranted by superior profitability.83 6. ORCL seems fairly valued.4 11.5% NA 31.2% 41.1 11.2 13.39 5.81 5.baselinedirect.62 3.0% 101.3 289.24 -25% ORACLE ORCL Discount (premium) to peers median 88.3 100 Chisinau.82 9.1 4.76 (FY07) and $0.COM SAP AG ADR TIBCO SOFTWARE MICROSOFT BEA SYSTEMS SYBASE Median TICKER SYMBOL DOX CRM SAP TIBX MSFT BEAS SY MRKT CAP (MILS) 7.70 27.73 2.66 24.48 20.151 66.05 24.64 82. Page 8 of 9 This is a free sample – not to be used for trading. SEC filings. But we consider that at current stock price.843 17.7 31.1 397.1% 27.5% MSFT +373-796-24706 Microsoft Tibco Other Vendors TOTAL 350.12 85. annual (2005) values.00 36.4% 28.981 295.1 Source: Analyst estimates for ORCL. other stocks – www.590 2. we are quite optimistic about ORCL and consider it may show further positive developments.1% 23. in terms of operating and net margin being exceeded just by Microsoft.4 2.98 8.0% 0.41 30. Moldova info@askanalyst.3 100 Source: Gartner Dataquest (May 2006) Oracle Versus Peers Despite its aggressive acquisition strategy.13 17.9% 30.87 20.4 8. $ millions.9% 39.99 2. 12/28/06 COMPANY NAME AMDOCS SALESFORCE.59 5.8 15.5% 34.268 PRICE PER SHR 38.42 19.1 314.4 3.7 3.5% IBM20 NA 15.657.1 45.7% 0. Overall.34 65. SAP 258.65 26.110 5.Independent Equity Research AskAnalyst.2 29.69 160. . $Bn (ttm): Latest Quarter Rev.758 4. ORCL Market Cap.9 Income statement Forecast US GAAP.96 52.37 3.1 12.86 (FY08). AskAnalyst.14 3.98 3% P/S CAL 2007 2.02 12.5 0.

429 3.991 4.636 5.523 3.941 2.942 4.009 3.29 $0.551 1.Independent Equity Research AskAnalyst.64 $0.174 9.858 6.745 846 3. analyst estimates.516 1.591 1.007 3.849 17.736 -169 243 4.354 387 967 954 222 819 588 174 222 60 11 3.78 $0.177 -99 79 2.156 634 1.235 2.554 Chisinau.809 14.839 +373-796-24706 Fiscal Year Ends May 31 Revenues: New software licenses Software license updates and product support Software revenues Services Total revenues Operating expenses: Sales and marketing Software license updates and product support Cost of services Research and development General and administrative Amortization of intangible assets Acquisition related Restructuring Total operating expenses Operating income Interest expense Non-operating income.364 2.806 1.17 $0.144 5.672 11.560 $0. .207 2. net Income before provision for income taxes Provision for income taxes Net income Earnings per share: (US GAAP) Basic Diluted Source: SEC filings.670 785 961 156 46 14.76 $0.65 $0.19 $0.568 -390 373 6.961 16.357 -82 79 1.675 4.13 $0.655 936 -83 102 955 292 663 915 205 820 519 170 202 -36 11 2.378 916 4.18 $0.86 Page 9 of 9 This is a free sample – not to be used for trading.143 3.698 1.136 4.380 2.883 878 3.177 719 2.381 3. AskAnalyst. Moldova info@askanalyst.277 669 873 142 42 12.872 555 583 137 85 9.380 750 200 780 506 157 205 48 9 2.294 2.214 949 4.029 4.810 1.308 4.610 8.374 6.633 2.807 20.051 1.173 2.714 -354 339 5.244 -90 79 1.644 4.399 14.163 1.233 362 870 1.29 $0.905 6.88 $0.137 2.024 4. 804 1.541 assumes no responsibility for decisions based on information presented in this report.16 $0.264 251 961 664 168 244 70 11 3.13 $0.

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