Oracle Corporation (ORCL)

Largest database vendor and second largest enterprise software company.

Databases are critical to modern commercial life and are ubiquitous. Every online service we use, every retail transaction we do (online or in store) or any medical procedure undertaken has a database supporting it on the back end, keeping track of people’s choices and results. Executives and managers rely on corporate dashboards to do their job, and these are backed by vast expertly organised data repositories.

Oracle Inc which was founded way back in 1997 has been the leading provider of database software and support to Enterprises and Institutions since then.  Its vintage means investors do not think of it a modern dynamic tech company but more like an large established player like IBM, one which makes decent money from the existing business but not located at the cutting edge of innovation.   

Oracle is the largest global provider of database software and the second largest supplier of enterprise software.  Oracle offers ~1,000 software products and has acquired over 140+ companies of all sizes and types.  In general, apart from their database software and ecosystem, which was developed in-house, most of their other offerings were developed by companies acquired by Oracle.

Some key acquisitions by Oracle and the Product Capability they acquired:

PeopleSoft (2005).   ERP Software Suite  

Siebel Systems (2006).  Customer Relationship Management (CRM) Software.

BEA Systems (2008). Enterprise Infrastructure Software

Sun Microsystems (2010).   Server/ Server Software                                                             

Given the wide range of their offerings, they compete with many companies including Databricks, MongoDB, Elastic, Snowflake, Microsoft and others (in Databases) and Microsoft, SAP, Salesforce, Google, Amazon and many others (in Cloud and Software). 

Larry Ellison. one of the three co-founders, is currently the Chief Technology Officer.  He owns 42% of the company, a stake worth some $ 120bn.  Ten years ago, his holding was closer to 25%.   His stake increased due to aggressive buybacks of shares by the company.  Ellison also owns large stakes in Tesla and Salesforce.

Most companies of any size established before say the year 2000, will be running Oracle Databases on on-premises infrastructure.  While many workloads may have moved to the Cloud, for most established companies, moving core database infrastructure was too difficult to contemplate. Companies kept running them on their premises, locked-in to Oracle’s system and hostage to their frequent and aggressive price increases.  

Every few years, when contracts were due to be renewed, Oracle could raise prices for maintenance and support - a business with margins hovering around 95%, according to Craig Guarente, a 16-year veteran of Oracle, who is now CEO and co-founder of consulting firm Palisade Compliance.

Introduction to Oracle

Oracle provides products and services that address all aspects of corporate information technology (IT) environments, including applications, platforms, and infrastructure.

The company reports its numbers in three segments:

1. Cloud and Licence business (83%)

2. hardware business (6%)

3. Services business (10.5%)

The Cloud and Licence Business

 Cloud and Licence business accounts for about 83% of the revenues.   

This can be further broken down as follows:

Applications Cloud Services / License support – 34%

Infrastructure Cloud / Licence Support - 40%

Cloud License and On-Premises License Revenue- 9%

Application Cloud Services and License support includes those lucrative multi-year licences agreements for software products, including Oracle Applications, Oracle Database, Oracle Middleware and Java.

Gartner estimates that ORCL is the second largest vendor (behind Microsoft) in the Enterprise Software space with a 9% market share. It has more than 400,000 customers, including 300,000+ customers for its flagship Oracle database offering, deployed across a variety of industries. These are very big numbers and testament to the longevity of the company and its broad multi-industry penetration.

For example, in financial services, almost all the banks of any size are customers of Oracle.  As the table below shows, Oracle has a wide range of applications and systems.

Oracles products and services serve the whole range of business functions as shown above. A huge list of their various products and services can be seen here. The website Goodfirms has a comprehensive summary and review of their various products, and it can be seen here. 

Hardware business

Oracle acquired Sun Microsystems in 2010.  As a result, Oracle acquired Sun's hardware product lines, such as SPARC Enterprise and Solaris Servers, as well as Sun's software product lines including the Java programming language.

Java powers a large part of today’s digital world, by providing the reliable platform upon which many services and applications are built. New, innovative products and digital services designed for the future rely on Java as well.

The Hardware segment offers a broad selection of enterprise hardware products and hardware-related software products. Most of the hardware products are sold through indirect channels, including independent distributors and value-added resellers.

Services Business

The services business accounts for about 10% to 11% of revenues. It helps customers and partners maximize the performance of their established investments in Oracle applications and infrastructure technologies.  The services offering include consulting services and advanced customer services.

Geographical distribution of revenues

Americas - 64%

EMEA -24%

Asia Pacific - 13%

Modern Data Systems 

To understand Oracle, we must understand a little about modern data systems in general and relational databases in particular. 

Relational Databases

Relational databases organise data into tables with rows and columns, where each row represents a record, and each column represents a specific attribute or field. These databases use structured query language (SQL) to manage and manipulate data.

The relational model allows for relationships between tables, enabling efficient data retrieval and storage. This type of database is widely for managing large volumes of structured data and ensuring data integrity.

A relational database organizes data into tables of rows and columns and links those tables through shared identifiers (keys). This architecture gained traction in the 1980s and 90s, when applications were monoliths supported by single servers, and the data structure backing them – the tables, fields, and data type of each field (integer, string) – could be specified in advance.

Relational databases are ideal for functions like accounting or order management systems, where the structure of the data store doesn’t change, and you know in advance how data is related.

Popular relational database management systems include Oracle Database, Informix, Microsoft SQL Server, and MySQL.

Advantages of Relational databases

The Advantages include data integrity, scalability, flexibility, and ease of querying.

1. Data Integrity: Relational databases enforce data integrity through constraints, such as primary keys, foreign keys, and unique constraints, ensuring that data remains accurate and consistent.

2. Scalability: Relational databases can easily scale to handle large volumes of data by adding more servers or optimizing performance through indexing and partitioning.

3. Flexibility: Relational databases allow for complex data relationships to be modelled using tables, rows, and columns, making it easier to represent real-world scenarios and adapt to changing business requirements.

4. Ease of Querying: Relational databases use SQL, a standardized language for querying and manipulating data, making it easy for users to retrieve specific information and perform complex operations on the data. SQL statements are used to perform tasks such as update data on a database or retrieve data from a database.   Some common relational database management systems that use SQL are Oracle, Sybase, Microsoft SQL Server, Microsoft Access etc.

Overall, the structured nature of relational databases makes them a popular choice for organizations looking to manage and analyse large amounts of data efficiently and securely.

Disadvantages of using Relational Databases. 

Relational databases can be less efficient when dealing with unstructured or semi-structured data, such as multimedia files or documents.

There can be performance issues when handling complex queries or large datasets, which can impact the speed of data retrieval and processing.

They may require a significant amount of upfront planning and design to establish the appropriate table structures and relationships, which can be time-consuming and complex.  Once established, the structure is set in stone and may be difficult to change. 

Scaling relational databases horizontally (adding more servers) can be challenging and may not always result in linear performance improvements.

For four decades, relational databases ruled the roost and Oracle was the leading supplier.  Oracle had database wars with Informix, Sybase and Microsoft SQL but has emerged victorious.  Customers had little choice but to use them and renew their database contracts year after year and decade after decade.

Fast forward to today and there have been three big changes.   

• Storage costs have fallen greatly thanks to developments in computer technology and development of cheap and abundant memory hardware. 

• The inflexibility of Relational Databases aggravates a new bottleneck, software developer efficiency, at a time when every company is using more software to compete.

• Much of the data that companies have is fast growing unstructured data in websites, documents etc.  

• In the last two decades, there has been a huge growth in companies migrating their data and workloads to the Cloud where they are hosted by the hyperscalers.   This is a pay as you go system.  Investing upfront in large on-premises infrastructure is increasingly hard to justify. 

As a direct result of this there have been several developments in technology work

Large, monolithic applications are being disaggregated into microservices with discrete independent data models run across containers distributed across clusters, fuelling demand for new enabling technologies, including NoSQL databases, which are often better suited to the needs of modern web apps than relational databases.

Definition:  Containers are packages of software with all necessary elements to run in any environment. Containers virtualize the operating system and run anywhere, from a private datacentre to the public cloud or even on a developer's personal laptop.

Definition:  NoSQL databases store data in documents rather than relational tables. They are "not only SQL" and subdivide into various flexible data models. Types of NoSQL databases include pure document databases, key-value stores, wide-column databases, and graph databases.

 NoSQL databases are becoming more relevant in this era of complex web apps and MongoDB is the most popular NoSQL. In fact, there are a number of dedicated cloud -native vendors such as Datadog, MongoDB, Elastic, Snowflake, Databricks. In addition, some of the hyperscaler such as AWS and Microsoft offer their own database solutions.  

Oracle offers its own NoSQL database and remains the dominant database software vendor player today.

Oracle and the Cloud

Oracle initially dismissed the threat to its on-premises database business.  In 2009, Larry Ellison used adjectives such “Fad," "Nonsense," and "Gibberish" to describe the Cloud.

In 2010, Amazon was already four years into AWS and Microsoft Azure became available for public use in 2010. Ellison’s scepticism started to wane in 2012. 

Oracle began to offer over 100 apps delivered in cloud-based software as a service model (SaaS). They claim that given the number of applications serving a wide range of business function the offering can be characterised as Platform as a Service (PaaS). Oracle also ventured into the infrastructure as a service (IaaS) market. 

This pivot has been successful and Cloud services revenues have grown strongly. The relevant division is called Oracle Cloud Infrastructure (OCI).  Oracle describe OCI as follows: 

“Oracle Cloud is the first public cloud built from the ground up to be a better cloud for every application. By rethinking core engineering and systems design for cloud computing, we created innovations that solve problems that customers have with existing public clouds. We accelerate migrations of existing enterprise workloads, deliver better reliability and performance for all applications, and offer the complete services customers need to build innovative cloud applications.”

https://www.oracle.com/uk/cloud/storage/file-storage/

The Company claims there are six key reasons customers choose OCI for all their cloud workloads.

1.     They claim it is far easier to migrate Critical enterprise workloads.

2.     They claim OCI has everything you need to build modern cloud native applications.

3.     They claim to have autonomous services that automatically secure, tune, and scale the clients’ applications.

4.     They claim OCI provides the most support for hybrid cloud strategies.

5.     Cloud Security is built in by default and no extra charge.

6.      OCI offers superior price-performance.

Oracle describe OCI as a “next generation cloud” that is “faster, more secure and reliable,” benefitting from a “second mover advantage” and leveraging a different architecture than the other public clouds.

Oracle have developed what they call Alloy Cluster.  There are many large entities who want a Private Cloud “Region” (a reserved area within the datacentre) for their own use or for reselling to other entities. There is demand for this in regulated industries such as Banking and Financial Services and Healthcare. 

Oracle has created Industry specific Clouds which have industry specific applications that can.

Automate core operations for specific industries.

Standardise industry operations across geographies and businesses. 

Comply with industry regulatory requirements.

Generate industry specific revenue opportunities.

Healthcare Cloud

Oracle is looking at establishing a first-mover advantage in sectors like healthcare, which has a poor history of adopting technology and adapting to the cloud. In mid-2023, it completed a $ 28bn acquisition of Cerner Corporation which was a leading company in the health technology space. Cerner is the largest acquisition in Oracle's history. They will integrate Cerner and are developing new products to sell to clinics, hospitals, government health agencies and national health systems. 

For example, Oracle is aiming to create a national health record database with data from several thousand hospitals. Patients' data will remain anonymous until individuals consent to sharing the same.

“We are in discussions with not companies, but countries about building and deploying global early warning systems so we can detect the next pathogen that threatens to turn into a pandemic. We can catch it early enough that we can prevent it from being a pandemic.”

“Our standard system that we have built is one patient, one record in the database. So, if you visit Stanford and UCLA and Mayo Clinic and Cleveland Clinic, even if you go to four different providers for a variety of different issues, all of your data will be in one database. this has been the holy grail sought by health professionals for years”

Ellison has stated he wants Healthcare to become Oracle's most significant business division.

Oracle Cloud strategy

In the last 15 years there has been a huge growth in the Cloud.  The emergence of large-scale cloud hosting companies has meant that IT infrastructure is no longer an upfront fixed cost but a pay as you go, variable cost. 

Many tech companies established in the last 20 years are cloud-native and older companies and organisations are moving more of their workloads, data and applications to the Cloud. 

Amazon, Microsoft, and Google have seen their cloud investments and revenues grow very strongly. IBM, Oracle, and Alibaba have also been significant players in this. 

The market is large but the hyperscalers are seeing a slowdown in the rate of demand growth as can be seen in the chart below. AWS growth in the most recent quarter was 13% while Microsoft Azure and Google Cloud Platform (GCP) was 28% and 13% respectively.  

OCI is an IaaS and PaaS offering which offers enterprise applications by combining Oracle's autonomous services, integrated security, and Serverless computing.

Definition:  Serverless computing enables developers to build applications faster by eliminating the need for them to manage infrastructure.

Oracle claims hardware in its datacentres is “fundamentally different” from hardware used by other public cloud hosting companies. They contain two separate sets of microprocessors and memory chips which creates a more secure environment.

“We have two networks, one of which is on the internet -- one of which interconnects all of our customers' computers and the other, which is our control network, computers that run our Cloud Control software, which is isolated from customer software. So, the customer can't tamper with our Cloud Control software. They can't get control of it, and we can't see the customers' data.”

They believe their datacentre’s architecture is such that it is less prone to failure.

“We have a fundamentally different network than any of the other cloud providers. We have what's called an RDMA network that we had to build because our Exadata machines and our database glued together a lot of computers. And when you had a single database application that could run on one computer or it could run on a cluster of computers, two computers, four computers, eight computers, whatever so that there was no single point of failure.”

“One of the big differences between the Oracle Database and other databases is that the Oracle Database is a single application, could run on multiple computers. If one of those computers would fail, the application would keep running. It would tolerate a failure of a machine.”

This type of network is also very fast.  Th speed means they are attracting customers with AI workloads.

“We're seeing a lot of machine learning and artificial intelligent workloads moving from other clouds to OCI, because we're faster. And again, in the cloud business faster when you charge by the minute, faster means cheaper.”

“NVIDIA is often recommending us as the best cloud for AI.”

Oracle highlight is the smaller size and greater quantity of its datacentres, which it believes should be located “in every major city on Earth” and “close to the consumers,” which it believes improves the resiliency of its cloud and the economics through lower network usage fees.

“More and more customers are recognizing our second-generation infrastructure cloud as being fundamentally better architected for higher performance, better security, and unmatched reliability versus the older first-generation hyperscale cloud providers.”

“Customers appreciate the flexibility of our service and business model that enables them to deploy our technologies, where it serves them best, whether that be in the public cloud, in dedicated regions around the world, or in a true cloud at customer implementation.”

The company is currently investing heavily in data centres at a rate of up to $ 2.5 bn per quarter, as they build capacity for their customers' needs.

Oracle believe the other hyperscalers, especially AWS, are trying to impose a closed garden. That is, they want all the clients’ data workloads on their cloud.  Oracle argues clients prefer a hybrid cloud approach and want to use more than one provider.  About two-thirds of companies use multiple clouds, according to a May 2021 report by Boston Consulting Group.

Microsoft and Oracle have established a cloud business partnership. This is surprising to people who remember their intense rivalry during the database wars in the 1980s and 1990s.   

Oracle has physically located its Exadata hardware in Microsoft’s datacentres, speeding up applications that customers use.  Azure’s customers will have direct access to Oracle database services running on Oracle Cloud Infrastructure but deployed in Microsoft Azure datacentres. Customers will be able to operate those Oracle services within Microsoft’s Azure Cloud dashboard, instead of having to run a separate Oracle dashboard.  Customers, who have contracted some pre-agreed contractual dollar spend with Azure. can use that to run Oracle services.

Oracle has claimed that there will be “very large brands moving off AWS and onto the Oracle Cloud,” further noting that some of “Amazon’s biggest customers will be their most vulnerable” as OCI can provide “better performance, much better security, and at a dramatically lower cost.”

The company believes that their core traditional business in database software, enterprise applications will grow steadily but what they are most excited about are the huge growth opportunities they see in OCI.   

Summary Financial Profile 

Annual revenues have been stable at ~$ 38-39bn for 8 years up to 2021 but have accelerated since due to the cloud and the inclusion of the Cerner revenues (which were running at about US$ 5.5bn per annum).   Sales growth was a steady 3% -4% but has risen in the last two years.   

Gross Profits and Operating Profits have grown steadily. 

Net Profit levels have been steady and have grown modestly at about 1.5% to 4%. 

Marins have been steady. Gross Margins are stable at about 75% to 80% thanks largely to the high gross margins in the database software business. Operating margins are at about 30% and 20% respectively. 

The Return on Capital Employed (ROCE) has been stable at about 14% to 16%. 

Capital Allocation

The chart above shows operating cash and free cash flow.  Between 2014 and 2021, capital expenditure was about $ 2bn per annum.  In the last two years this has increased due to datacentre investments, and this is expected to continue for a few years at an annual run rate of $ 8 bn to $ 10 bn. The gap between operating cash flow and free cash flow has thus increased in the last two years.

The company has been using the free cash flow to pay dividends and buyback stock.  In FY 2019 for example, the free cash flow was just $ 12.8 bn and the share buyback was $ 36bn and the dividend was 3bn.  In the four years, between 2019 and 2022, the outflow on these two items was much greater than the free cash flow generated as can be seen in the chart above. The gap was financed by borrowing.  Debt rose sharply and the number of shares outstanding declined as shown below. 

Long-term debt has risen from about US$ 51bn in 2019 to US$ 82bn currently.   This reflects, in part, the use of cash used for buybacks as well as the $ 25bn acquisition of Cerner in 2023.

The number of shares outstanding have fallen from 4.5mn in 2014 to 2.7mn currently due to share buybacks. Over this period, founder Larry Ellison’s stake has increased from about 25% to 42% currently.  His annual dividend income from the company is about US$ 1bn.

Debt coverage ratios have fallen significantly as debt has increased.  As shown above, Ebitda- capex dividend by interest expense has fallen from 17.7 times in 2014 to 4 times currently.  Revenues are very stable (huge number of corporate customers on long-term contracts) and therefore debt service should not be an issue but nevertheless, debt coverage is quite low.    

Summary of financial results 

Company has achieved steady growth in revenues and profits.  Sales have risen in the last couple of years due to greater cloud revenues and the contribution of Cerner.  Although gross margins are quite high. Operating and net margins have been much lower and show little sign of improvement.

The company has been a steady generator for operating cash flow and fee cashflow and the latter has been used to pay dividends and buy back shares.  In the four years to 2021, there was an increase in debt issuance to fund more aggressive share buybacks than had been seen hitherto.  As a result, debt has increased significantly, and the number of shares outstanding have fallen.

In the last two years and perhaps also for the next three years, share buybacks will be reduced significantly and the company will use the free cash flow to fund capex in new datacentres for the OCI business.  As demand is very strong, the capex will lead to a rapid increase in cashflow. 

The coming Cloud explosion in Revenues 

The company strongly believes that OCI will boost Oracle’s revenues and profits to a much higher level than they have achieved in recent years.   

ORCL has made meaningful changes in its business model and is well positioned for secular growth in SaaS. Oracle has long established relationships with most large and medium sized companies in the western world. 

Those customers are looking to move more of their workloads to the Cloud, but many are wary of vendor lock-in and would like to pursue a hybrid cloud strategy. 

Orace has developed a cloud offering that seems to be more flexible, faster and more cost effective than the existing players.  It has also developed industry-specific Cloud offerings targeted towards the Financial, Healthcare and Telecom sector among others.    

 Oracle was not an early leader in the Cloud, but its persistent development efforts, large footprint within IT, and sizable wallet share give it a unique position of account leverage.

As the Cloud business ramps up, the revenue profile will become becomes less volatile. The software license transactions are generally perpetual in nature and recognized as revenues up front at the point in time when the software is made available to the customer to download and use. The timing of a few large transactions can substantially affect the quarterly revenues due to the point-in-time nature of revenue recognition.  This is very different to the revenue recognition pattern for cloud services and license support revenues as revenues are recognized rateably over the contractual terms.

Highlights from Recent quarterly earnings call

The management started by talking about the strong performance and prospects for OCI.

“OCI has emerged as the largest driver of our overall revenue acceleration growing much, much faster than our cloud competitors. Customers have figured out that by moving to OCI, they can really get more while paying less.”

“Beyond the superior price performance of OCI, customers are choosing Oracle and Oracle Services for multiple reasons. First, we know better than anyone what it takes to run the full stack of technology that goes into mission critical workloads. I'm talking about running at enterprise scale with comprehensive security and unparalleled support. And that's from decades of experience running the world's most important workloads and optimizing clustering technology which is critical to artificial intelligence workloads and database services.”

“Secondly, our AI capabilities are unique as they're built in to help customers drive business outcomes. This is more than integrating generative AI across our Fusion and Industry Cloud applications and autonomous database, which we have done. It's also about enabling and refining these AI models with the customers' own data to better understand and serve their operations without them losing control of their own data. 3rd, we provide deployment flexibility for customers based on how they want to run-in the cloud.”

They seem to strongly believe that the ability to offer a dedicated industry specific cloud is a key differentiator.

“We remain the only vendor which also offers a dedicated and complete cloud to customer, dedicated regions, sovereign clouds and Alloy, our partner cloud.”

Their co-operative arrangements with Microsoft are a source of advantage, at least against AWS and Google.   

“We provide multi cloud offerings so customers can consume our cloud services in the public cloud of their choice. We offer Oracle Database at Azure with Microsoft as well as MySQL HeatWave through multiple clouds and you can expect more multi cloud services to come.”

“Cloud revenue that's SaaS and IaaS excluding Cerner was US$ 4.4bn, up 26%.”

“This quarter marks the first time our total cloud revenue is more than our total license support revenue.” 

 26% is a growth rate like that reported by Microsoft Azure and Google Cloud Platform and significantly higher than the 13% reported by AWS.

Other Cloud related businesses are growing strongly too. 

“Infrastructure Cloud Services revenue was up 49%. Strategic back-office SaaS applications now have annualized revenue of US$ 7.4 bn, up 18%. Were it not for some continuing supply constraints, consumption growth would have been even higher.”

Overall growth was a much lower pace as it includes the much larger, long standing core database and software business.

“So all in total revenues for the quarter was US $1.3 up 7% including Cerner and up 9% excluding Cerner.  Database subscription revenue, which includes database license support were up 5%. Software license revenues were $1.3 bn, down 3%. “

The company believes gross margins will rise even higher.

“The gross margin for cloud services and license support was 77%. …While we continue to build datacentre capacity, overall gross margins will go higher as more of our cloud regions fill up. We monitor these expenses carefully to ensure gross margin percentages expand as we scale.”

Operating margins are expected to rise.

“Operating margin was 44%, up from 42% last year as we continue to drive more efficiencies in our operating expenses.  We continue to benefit from economies of scale in the cloud and drive Cerner profitability to Oracle standards, we will not only continue to grow operating income, but we will also expand the operating margin percentages. “

OCI Datacentre capacity is being ramped very quickly.

“We are working as quickly as we can to get the cloud capacity built out given the enormity of our backlog and pipeline.”

“We now have 68 customer facing cloud regions live with 47 public cloud regions around the world and another 8 being built. 12 of these public cloud regions interconnect with Azure and more locations with Microsoft are coming online soon.”

“We also have 11 dedicated regions live and 13 more plans, several national security regions and EU sovereign regions live with increasing demand for more of each. And finally, we already have 2 Alloy cloud regions live with 5 more planned where Oracle partners become cloud providers offering customized cloud services alongside Oracle Cloud.”

 “As demand for our cloud services continues getting stronger, our pipeline is growing even faster, and our win rates are going higher as well. As our supply constraints ease, revenue growth rates will accelerate higher as our capacity expands and we get into fiscal year 2025.” 

“Total revenue the total cloud revenue excluding Cerner is expected to grow from 22% percent to 24% as more capacity comes online in Q4.”

They reported on progress being made in the Healthcare business after the takeover and integration of Cerner.

“Our new ambulatory clinic system is being delivered to customers this Q4. This completely new application features a voice interface called the clinical digital assistant. (CDA).  The CDA listens to a doctor's consultations with a patient and automatically generates prescriptions, doctor's orders, doctor's notes, then automatically updates the patient's electronic health records. The CDA's voice interface makes our new healthcare systems dramatically easier to use and saves hours of doctors’ precious time every day, which now can be spent with patients rather than typing into a computer. 

The delivery of our new AI centric healthcare cloud applications, including the ambulatory clinic system, the clinical digital assistant and the health data intelligence system will enable the rapid modernization of our customers' healthcare systems and transform Oracle Health and Cerner into a high growth business for years to come.”

They believe that their core database products are working so well in the crowd that they have not attracted any competitors.

“We think that will preserve our franchise and database where we've been the number one database in the IT ecosystem for a very long time. We think that's going to preserve that franchise and expand it because the autonomous database is a unique piece of technology and there's nothing like it in the world and maybe the most interesting thing no one else is working on anything like that.  No one else is even trying to duplicate the autonomous database.  So, we think it will become a very successful product in every cloud.”

They are seeing demand now not just from enterprises but from countries.

“For the first time, we're beginning to win business country for countries for Sovereign Clouds, where the national government and the state governments are moving to that Oracle OCI region. And of course, it's got to be at least 2 of them for redundancy in case of disaster recovery.

We have a number of countries where we're negotiating sovereign regions with the national government. We see major companies, governments, computer suppliers reselling our Alloy cloud.”

They are very optimistic about the share of the market they are going to capture. 

“The demand for our cloud regions is extraordinarily high.  we'll end up with more data centres in cloud regions than all the other hyperscalers combined.”

This sound over optimistic but time will tell. 

Summary 

Orace is investing heavily in the cloud business in response to strong customer demand.   In the next few years, the company will invest heavily this sector.  This will lead to a much higher revenues, profits and operating cashflows. 

Once the investment cycle is completed (perhaps in 4 to 5 years) there will be a much greater increase in free cash flows.   This will allow the company to reduce debt, increase dividends and /or increase the scale of share buybacks.  

EPS which has been in the range of US$ 1.5 to US$ 4 in the last ten years is likely to be in the range US$ 6 to US$ 10 in the next five years.

Valuation

The company is trading at a two year forward P/E ratio of ~20 times.  

The share price is likely to move higher as the company grows over the next few years and may give a satisfactory return over the next few years. 

There is some concern about the current high level of debt and low interest expense coverage ratio. However, the latter will improve as the operating cash flow will rise over the next few years. 

Conclusion

We think there is a good case for allocating 1-2% of the portfolio to Oracle. We will track it with a view to increasing this to 3% to 4% over time.