TMCnet News
Fitch Affirms Oracle's Ratings 'A+'/'F1'; Outlook StableFitch Ratings has affirmed the ratings for Oracle (News - Alert) Corp. (Oracle), including the Long- and Short-Term Issuer Default Ratings (IDR) at 'A+'/'F1', respectively. The Rating Outlook is Stable. Fitch's affirmation affects $57.1 billion of debt, including the $3 billion undrawn revolving credit facility (RCF) expiring 2018 and $3.75 billion outstanding under a separate RCF that was repaid at maturity in June 2016. A full list of rating actions follows at the end of this release. KEY RATING DRIVERS Fitch's ratings and Outlook reflect the following expectations: Resumption of Revenue Growth: Fitch expects operating performance will strengthen from robust Oracle cloud adoption driving the resumption of overall top-line growth. Cloud represented only 8% of consolidated revenues in fiscal 2016 but Fitch's Rating Case incorporates hyper-growth through the intermediate term. Layered on top of update and support revenue growth (more than 50% of consolidated revenue) offsetting continued double-digit revenue declines for new on-premise licenses (20% of consolidated revenue), Fitch expects mid-single-digit software growth. Hardware and Services (20% of consolidated revenue combined) should reduce consolidated revenue by 100-200 basis points through the forecast period. Solid Financial Flexibility: Fitch expects Oracle's financial flexibility will remain solid from robust recurring free cash flow (FCF) and significant overseas cash, despite increasing debt over the intermediate term to fund domestic cash shortfalls. Cash, cash equivalents and marketable securities were $56.4 billion as of May 31, 2016, $7.9 billion of which was held in the U.S. The company also has an undrawn $3 billion RCF expiring 2018 that fully backstops a commercial paper (CP) program and Fitch expects roughly $10 billion of annual FCF over the intermediate term, just under half of which Fitch estimates is in the U.S. Significant Recurring Revenue: Fitch expects significant recurring revenue from Oracle's large installed customer base, high attach-and-renewal rates (ARR) and software support. Despite our expectations for ongoing double-digit declines for New Software License revenue through the intermediate term, Software License Updates & Product Support (more than half of fiscal 2016 total revenues) should continue its positive low- to mid-single-digit growth, driven by application modernization (on-premise to SaaS (News - Alert)) and support. Strong Competitive Position: Fitch believes Oracle's strong positions across key as-a-service markets (enterprise resource, human resource, supply chain and manufacturing, data and marketing), significant database and middleware installed base capable of running on-premise and in the cloud uniquely positions Oracle as a one-stop-shop cloud service provider. Oracle faces significant competition from strong and fast-growing but more focused as-a-service players, including Salesforce.com (News - Alert), Inc. (Salesforce), currently the largest SaaS provider with a significant lead in sales and service clouds, and Workday, Inc. (Workday), as well as historical on-premise competitors, including SAP (News - Alert) AG, also rapidly expanding cloud offerings. As a result, Fitch believes accelerating cloud revenue growth to be first to $10 billion in cloud revenues from $2.9 billion for fiscal 2016 is critical to Oracle's longer-term success, given Fitch's expectations for secular declines in on-premise, significant switching costs and high customer retention rates for cloud services and customer and product diversification. Lower Cloud Profit Margins: While Fitch expects the resumption of top-line growth in fiscal 2017 will drive operating EBITDA expansion, an increasing mix of lower gross margin cloud sales will weigh on profit margins. Fitch expects Oracle's recent cloud investments in growth capacity and sales efficiency to drive gross margin from a Fitch estimated 48% in fiscal 2016 (versus 96% for on-premise). Still, Oracle may be challenged to achieve its 80% cloud gross margin target in the intermediate term, which, if successful, would put it meaningfully ahead of competitors, Salesforce (mid-70%s) and Workday (low-70%s). Significant Shareholder Returns: Fitch expects shareholder returns will remain significant and approximate annual pre-dividend FCF, in the absence of large domestic acquisitions. Mid-single-digit annual dividend growth is expected with the remainder of pre-dividend FCF for share repurchases. Oracle has $8.8 billion remaining under the current $10 billion share repurchase authorization approved on March 15, 2016, and has bought back $28.3 billion of common stock over the last three years ($22.9 billion net of proceeds from the issuance of common stock). Fitch anticipates the company will fund shareholder returns with incremental borrowing, given a Fitch-estimated 55% of FCF is overseas. Historically Acquisitive: Despite expectations for strong organic cloud growth, Fitch believes acquisition risk remains elevated, given management's focus on winning the cloud and premium valuations for as-a-service companies. Fitch expects smaller tuck-in acquisitions aimed at strengthening cloud capabilities are more likely than blockbuster deals, although aggregate spending could be significant. Most cloud targets are in the U.S., potentially resulting in debt-financed deals that may not be meaningfully additive to profitability in the 12-18 months following the transaction's close. Fitch expectsOracle will curtail share repurchases if acquisitions are expected to result in elevated leverage beyond the near term. Supplemental Adjusted Net Leverage: Fitch expects incremental borrowing to plug domestic cash shortfalls will weigh on gross credit protection measures over time. We expect Oracle will avoid repatriating meaningful offshore cash to the U.S., given it would trigger significant tax liabilities. Pro forma for today's $14 billion senior notes issuance, Fitch estimates total leverage (debt to operating EBITDA) will be roughly 3x, up from 2.6x for fiscal 2016. However, supplemental adjusted net leverage (total debt netted against adjusted cash/operating EBITDA) will be and remain near 1.5x through the forecast period, compared to 1.1x for fiscal 2016. Fitch expects Oracle will use a portion of the senior notes issuance to refinance upcoming maturities, which include $3.75 billion of bank debt expiring in the current quarter and $6 billion of bond maturities in fiscal 2018. KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include: RATING SENSITIVITIES Positive rating actions are unlikely, given what Fitch believes is a strategic rationale for a higher rating at the expense of financial flexibility required for acquisitions and shareholder returns. However, management's commitment to maintain supplemental adjusted net leverage below 1x over the longer term and Fitch's expectations Oracle will be first to achieve $10 billion of cloud services, which Fitch believes would support the company's win the cloud strategy, could result in positive rating action. Negative rating actions could occur if:
--Fitch expects Oracle will sustain supplemental adjusted net leverage
above 2x and total leverage above 3x from incremental borrowings to fund
domestic cash shortfalls in conjunction with lack of profitability
growth; LIQUIDITY Fitch expects Oracle's liquidity will remain solid. As of May 31, 2016 liquidity was supported by:
--$56.1 billion of cash, cash equivalents and marketable securities, of
which all but $8 billion was located outside the U.S. and would be
subject to significant taxation if repatriated; Fitch's expectations for $10 billion of annual FCF through the intermediate term also supports liquidity, of which Fitch assumes just under half is generated inside the U.S. Total debt at May 31, 2016 was $43.9 billion and consisted of:
--$3.75 billion of RCF due June 2016; FULL LIST OF RATING ACTIONS Fitch affirms Oracle's ratings as follows:
--Long-Term IDR at 'A+'; Fitch also rates today's $14 billion senior notes issuance 'A+'. The Rating Outlook is Stable. Date of Relevant Rating Committee: June 29, 2016 Summary of Financial Statement Adjustments Financial adjustments include Fitch's application of Supplemental Adjusted Net Leverage ratio, which nets a portion of cash, cash and equivalents and marketable securities investments held outside the U.S. against debt. Fitch values cash and short-term investments based upon Fair Value Measurement observation levels, assumes a 35% tax rate upon repatriation and that a portion of repatriated cash will be returned to shareholders. Fitch nets the remaining cash against total debt, resulting in a ratio to operating EBITDA. Additional information is available on www.fitchratings.com.
Applicable Criteria
Additional Disclosures 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. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON (News - Alert) 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 WEBSITE. View source version on businesswire.com: http://www.businesswire.com/news/home/20160629006397/en/ |
