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Technology Stocks : Oracle Corporation (ORCL) -- Ignore unavailable to you. Want to Upgrade?

To: Maverick who wrote (16292)	11/14/2001 9:59:28 PM
From: Maverick	Read Replies (1) \| Respond to of 19080

SSB dwngrds to Neutral,tgt $13 Excerpts from Salomon SmithBarney follows, 11/14/01 INVESTMENT THESIS Oracle has leveraged its dominant position in the database market to take advantage of the new and growing market for applications. We believe that over the next few years, Oracle is going to try and leverage its presence in the database market and the power of the web to do to enterprise applications what Microsoft did to desktop applications - commoditize them by offering them for free as part of the platform. Oracle's dominant position in the database market is a strong platform for dominating enterprise software applications. We believe the Web has the potential to drive a new IT architecture under which the database takes on a more active role in the application delivery. Oracle has an aggressive strategy to increase its operating margins by automating its internal operations. The company recently increased the original cost savings goal of $1 billion to $2 billion. By capitalizing on the Internet's inherently low-cost operating structure, Oracle plans to reduce operating expenses through web-based automation and headcount reduction. RECENT RESULTS Oracle reported on September 14 earnings for the first quarter 2002 of $0.09, $0.01 above our $0.08 estimate. Reported revenue of $2.2 billion was in line with our estimate while license revenue was only slightly below our estimate. The company highlighted that trends suggest that demand has stabilized, but they are seeing no signs of any uptick. The company noted that America was the most adversely affected with total new license revenue down 20%. This decline resulted from a tough comparison in the database business. All database business units were up slightly; however the general business unit (which contains the "dot.com" revenue) was down 45% as dot.com revenue virtually disappeared. On October 24, we downgraded the stock based on valuation, concern over competitive landscape and downward estimate revisions. The competitive landscape in the database, application server and applications market is deteriorating with IBM beginning to get traction in the database and application server market and multiple vendors exhibiting pricing pressure in applications. The stock approached our price target resulting in us downgrading the stock to Neutral (3H) from Outperform (2H). Additionally, we lowered our ORCL price target to $13 from $15. On November 18, based on comments from management and additional channel checks, we lowered our 2Q01 EPS estimate to $0.10 from $0.11. We lowered 2002 estimates to $0.44 from $0.46 and 2003 estimates to $0.48 from $0.50. We also reduced 2Q01 license revenue by 8.1% to $829 million from $902 million based on continued lack of visibility and deterioration in the selling environment. VALUATION Based on a closing price on November 13th of $14.52, ORCL traded at 33x and 30x our 2002 and 2003 estimates. The NFY PEG is 3.5x, which we believe is an unwarranted premium given the lack of visibility. We value the stock using a DCF analysis incorporating a 12.5% discount rate and a 20x terminal multiple on year 10 Free Cash Flow. RISKS Difficulty Penetrating the Applications Market -- We continue to have reservations about Oracle's ability to penetrate the applications market. These concerns include the difficulty of upgrading from 10.7 to 11i, increased competition from best of breed vendors and functionality. That said, Oracle now has a referenceable customer base that may help to shorten the sales cycle in this division going forward. Speculative Revenue Stream-- In our opinion, much of Oracle's current valuation reflects the realization of the projected revenues associated with its new eBusiness Suite. Although the company has demonstrated growth in this area, this revenue stream still lacks visibility. The failure of the company to fully develop this revenue stream could result in the company not reaching our long-term projections. Inability to Quickly Release Competitive Product Offerings-- It is critical to future revenue growth that the Company gain traction with new product offerings. If the company fails to provide its existing client base with the functionality they require for inter-company collaboration, revenues may deteriorate as a result of an eroding client base. Errors or delays in the introduction of new products could materially affect the company's ability to realize our long-term earnings forecast.