NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings of Oracle Corp. (Oracle) at 'A+', including the long-term Issuer Default Rating (IDR). 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 facility (RCF).
KEY RATING DRIVERS
The Ratings and Outlook reflect:
--Significant financial flexibility, with cash and investments totaling $37.2 billion as of Feb. 28, 2014, an undrawn $3 billion RCF due 2018 and sustained annual free cash flow (FCF) after dividends in excess of $9 billion in the past three fiscal years (FYs). Fitch projects FCF of nearly $12.5 billion in FY 2014, compared with $12.1 billion in FY 2013 (ended May 31).
--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.
--Strong competitive position, especially in database and middleware software.
--Conservative financial policies and strong credit protection metrics, with historical leverage peaking at 1.3x. Oracle's external financing requirements were historically limited to acquisition funding due to strong internal cash generation, staggered debt maturities and materially lower cash payments for share repurchases and dividends prior to FY 2012.
--Size and diversity with respect to its installed software base and significant switching costs associated with mission-critical enterprise software.
--Established track record of integrating acquisitions.
Fitch's rating concerns are:
--Competition from open-source software and long-term profitability of Oracle's software as a service (SaaS) relative to traditional on-premise software. In the first nine months of fiscal 2014 (ended Feb. 28), the direct controllable margin on new software licenses and cloud subscriptions (L&C), excluding stock-based compensation, declined to 26.2% from 31.2% in the year-ago period, despite relatively flat new software license revenue.
Fitch believes Oracle has and will continue to make significant investments, both organic and inorganic, to retain its long-term competitiveness relative to SaaS providers. Oracle's SaaS revenue was $1.1 billion, or more than 10%, of total L&C software revenue over the LTM ending February 28, compared with $823 million in the year-ago period. Cloud subscription revenue increased 24.2% year-over-year to $287 million in the quarter ended Feb. 28, 2014.
--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 Feb 28, 2014, $32.9 billion, or 88%, of Oracle's total cash and investments of $37.2 billion was held offshore.
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.
--A shift to more aggressive financial policies, including a material sustained increase in leverage;
--Inability to adapt to major technology transitions, such as SaaS or any emerging database technologies.
Fitch believes Oracle's liquidity is strong, supported by a sizable cash position, the vast majority of which is held offshore, an undrawn $3 billion RCF due April 2018, and strong and consistent FCF. The significant offshore cash position is attributable to a considerable portion of FCF being derived outside the U.S., while significant funding is required in the U.S. for share repurchases, acquisitions and dividends.
Oracle's credit protection metrics remained relatively stable in the past year. Leverage (debt/operating EBITDA) increased to 1.3x as of Feb. 28, 2014 compared with 1.1x in the year-ago period, while interest coverage (operating EBITDA/interest expense) was decreased to 20.1x compared with 23.1x in the year-ago period. Fitch forecasts leverage below 1.3x and interest coverage in excess of 20x in fiscal 2015.
As of Feb. 28, 2014, total debt was $24.2 billion and consisted primarily of:
--$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 Issuer Default Rating (IDR) 'A+';
--Revolving credit facility 'A+';
--Senior unsecured debt 'A+';
--Short-term IDR 'F1';
--Commercial paper at 'F1'.
Additional information is available 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage