Fitch Ratings has affirmed the ratings of Oracle Corp. (Oracle) at 'A+',
including the long-term Issuer Default Rating (IDR). The affirmation
follows the company's announcement that it will access the debt capital
markets. The net proceeds of the proposed offering will be used for
general corporate purposes, including stock repurchases, dividends,
future acquisitions, including Oracle's pending acquisition of MICROS
Systems, Inc. (MICROS; expected to close in the second half of 2014),
and repayment of debt (including the 3.75% senior notes due July 2014;
$1.5 billion principal amount outstanding).
Furthermore, Fitch has assigned an 'A+' rating to Oracle's proposed
issuance of senior unsecured notes. The Rating Outlook is Stable. A full
list of ratings follows at the end of this press release.
The rating actions affect approximately $27 billion of total debt,
including the company's undrawn $3 billion unsecured revolving credit
KEY RATING DRIVERS
The Ratings and Outlook reflect:
--Significant financial flexibility, with cash and investments totaling
$38.8 billion as of May 31, 2014 ($35.2 billion offshore), an undrawn $3
billion RCF due 2018 and sustained annual free cash flow (FCF) after
dividends in excess of $11 billion in the past three fiscal years (FYs).
Oracle reported FCF of $12.2 billion in FY 2014 (May 31), in-line with
--Strong customer attach-and-renewal rates for software maintenance,
resulting in a steadily increasing, highly profitable (93% gross margin)
recurring revenue stream that significantly reduces FCF volatility.
Despite flat new license revenue, software maintenance grew 6.2% and
accounted for nearly 48% of total revenue in FY 14.
--Strong competitive position, especially in database and middleware
--Conservative financial policies and strong credit protection metrics.
--Size and diversity with respect to its installed software base and
significant switching costs associated with mission-critical enterprise
--Established track record of integrating acquisitions.
Fitch's rating concerns are:
--Competition from open-source software and long-term profitability of
Oracle's SaaS and PaaS offerings (cloud subscriptions) relative to
traditional on-premise software.
The direct controllable profit on new software licenses and cloud
subscriptions, excluding stock-based compensation, declined 8% to $3.7
billion in fiscal 2014. The decline reflects: i) a revenue mix shift
toward cloud subscriptions and associated delay in revenue recognition
compared with a traditional license; and ii) a 500 basis points decline
in the controllable gross margin for cloud subscriptions to 60.2% due to
incremental expenses to support cloud subscription growth.
Fitch believes Oracle has and will continue to make significant
investments, both organic and inorganic, to retain its long-term
competitiveness relative to other cloud subscription providers. Oracle's
cloud subscription revenue was $1.1 billion in fiscal 2014, or more than
10%, of aggregate revenue from new licenses and cloud subscriptios.
--Aggressive acquisition strategy; however, Fitch expects the company
will remain disciplined with its strategy and, in the event of a major
debt-financed acquisition, will reduce leverage using FCF in lieu of
meaningful share repurchases.
--Material and sustained growth in cash returned to shareholders via
stock repurchases and dividends since fiscal 2012 as well as U.S.
acquisitions increase Oracle's external U.S. funding requirements due to
significant offshore cash and FCF generation that is subject to
incremental taxation upon repatriation. As of May 31, 2014, $35.2
billion, or 91%, of Oracle's total cash and investments of $38.8 billion
was held by foreign subsidiaries.
Fitch believes the company's lack of a strategic rationale to maintain a
higher rating at the expense of financial flexibility required for
acquisitions limits further positive rating actions.
--Fitch believes Oracle currently has the financial flexibility to issue
up to $10 billion in incremental debt at the 'A+' rating. Debt issuance
in excess of $10 billion or deterioration in financial performance would
result in negative rating actions.
--Inability to adapt to major technology transitions, such as SaaS, PaaS
or any emerging database technologies.
Fitch believes Oracle's liquidity is strong even after discounting the
offshore cash for incremental taxes payable upon repatriation. The
significant $35.2 billion of offshore cash reflects a considerable
portion of FCF being derived outside the U.S., while significant U.S.
funding is required for share repurchases, acquisitions and dividends.
Fitch estimates pro forma leverage (debt/operating EBITDA) of 1.5x as of
May 31, 2014 compared with 1.3x, assuming Oracle issues $5 billion of
debt to fund the pending acquisition of MICROS.
As of May 31, 2014, total debt was $24.2 billion and consisted primarily
--$1.5 billion of 3.75% senior notes due July 2014;
--$2 billion of 5.25% senior notes due January 2016;
--$2.5 billion of 1.20% senior notes due October 2017;
--$2.5 billion of 5.75% senior notes due April 2018;
--$500 million of floating rate senior notes due January 2019;
--$1.5 billion of 2.375% senior notes due January 2019;
--$1.75 billion of 5% senior notes due July 2019;
--$1 billion of 3.875% senior notes due July 2020;
--$1.62 billion of 2.25% senior notes due January 2021;
--$2.5 billion of 2.50% senior notes due October 2022;
--$1 billion of 3.625% senior notes due July 2023;
--$975 million of 3.125% senior notes due July 2025;
--$1.25 billion of 6.50% senior notes due April 2038;
--$1.25 billion of 6.125% senior notes due July 2039;
--$2.23 billion of 5.375% senior notes due July 2040.
Fitch affirms Oracle's ratings as follows:
--Long-term IDR at 'A+';
--Revolving credit facility at 'A+';
--Senior unsecured debt at 'A+';
--Short-term IDR at 'F1';
--Commercial paper at 'F1'.
Additional information is available 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013).
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND
DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING
THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS.
AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'.
PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS
SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS
OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES
AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF
THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE
RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR
RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY
CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH
[ Back To NFVZone's Homepage ]