NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed Oracle Corporation's (Oracle) ratings as follows:
--Long-term Issuer Default Rating (IDR) at 'A+';
--Revolving credit facility at 'A+';
--Senior unsecured debt at 'A+';
--Short-term IDR at 'F1';
--Commercial paper at 'F1'.
The Rating Outlook is Stable. Approximately $22.8 billion of debt is affected by Fitch's action, including Oracle's undrawn $3 billion RCF.
KEY RATING DRIVERS
The ratings and Outlook reflect Oracle's:
--Significant financial flexibility due to cash and investments totaling $33.4 billion as of Feb. 28, 2013, an undrawn $3 billion RCF due 2018 and sustained annual free cash flow (FCF) after dividends in excess of $7.5 billion in the past four fiscal years (FYs). Fitch projects FCF in excess of $12 billion in FY 2013 and $13 billion in FY 2014, compared with $11.3 billion in the latest 12 months (LTM) ended Feb. 28, 2013.
--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. In the quarter ended Feb. 28, 2013, Oracle's maintenance renewal rate achieved its highest quarterly level in five years.
--Strong competitive position, especially in database and middleware software, and complete ownership of the systems stack, which offers opportunities to differentiate and strengthen the hardware business.
--Conservative financial policies and strong credit protection metrics, with historical leverage peaking at 1.3 times (x). Furthermore, Oracle has minimal reliance on external financing, excluding major acquisitions, due to staggered annual debt maturities and strong internal liquidity.
--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.
Rating concerns center on Oracle's:
--Competition from open source software and long-term profitability of Oracle's enterprise applications business (30% of new software license and cloud software subscription revenue [L&C]) given increasing demand for software as a service (SaaS) in lieu of traditional on premise software.
Fitch believes Oracle has and will continue to make significant investments, both organic and inorganic, to retain its long-term competitiveness relative to numerous relatively new entrants. Oracle's annualized SaaS revenue reached $1 billion, or 10%, of total L&C software revenue in the latest 12 months (LTM) ended Feb. 28, 2013. Cloud subscription revenue more than doubled to $231 million in the quarter ended Feb. 28, 2013, albeit benefitting from recent acquisitions.
--Aggressive acquisition strategy. However, Fitch expects the company will remain disciplined with its acquisition strategy and, in the event of a major debt-financed acquisition, will reduce leverage using FCF in lieu of meaningful share repurchases.
--Limited growth in Sun's core high-end enterprise server market due to the ongoing shift to low cost industry standard servers and declining UNIX market share. Fitch believes strong growth and increasing scale of Oracle's high-margin engineered systems will restore growth in the intermediate term.
KEY RATING SENSITIVITIES
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.
The ratings may be downgraded in the event of:
--A shift to more aggressive financial policies;
--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 requirements for share repurchases, acquisitions and dividends are in the U.S.
Oracle's credit protection metrics, pro forma for the $1.25 billion notes repaid in April 2013, remained relatively stable in the past year. Pro forma leverage (debt/ operating EBITDA) increased in 1x as of Feb. 28, 2013 compared with 0.8x in the year-ago period, while interest coverage (operating EBITDA / interest expense) was nearly unchanged at 22x. Fitch forecasts leverage below 1x and interest coverage in excess of 20x in fiscal 2014.
As of Feb. 28, 2013, total debt, pro forma for the $1.25 billion notes repaid in April 2013, was approximately $18.5 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;
--$1.75 billion of 5% senior notes due July 2019;
--$1 billion of 3.875% senior notes due July 2020;
--$2.5 billion of 2.50% notes due October 2022;
--$1.2 billion of 6.50% senior notes due April 2038;
--$1.25 billion of 6.125% senior notes due July 2039;
--$2.2 billion of $5.375% senior notes due July 2040.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=791583
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