Fitch Rates Oracle's (ORCL) Euro-Denominated Notes 'A+'; Outlook Stable

Fitch Ratings-New York-02 July 2013: Fitch Ratings has assigned an 'A+' rating to Oracle Corp.'s (Nasdaq: ORCL) proposed issuance of Euro-denominated senior unsecured notes. The Rating Outlook is Stable.

KEY RATING DRIVERS

The Ratings and Outlook reflect:

--Significant financial flexibility, with cash and investments totaling $32.2 billion as of May 31, 2013, an undrawn $3 billion revolving credit facility (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 $13 billion in FY 2014, compared with $12.1 billion in FY 2013 ended May 31, 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.

--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 1.3x). 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.

Fitch's rating concerns are:

--Competition from open-source software and long-term profitability of Oracle's enterprise applications business (30% of new software license and cloud [L&C] software subscription revenue) 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 in light of numerous relatively new entrants. Oracle's SaaS revenue was $910 billion, or nearly 9%, of total L&C software revenue in FY 2013, compared with $455 million in FY 2012. Cloud subscription revenue increased 50.9% year-over-year to $258 million in the quarter ended May 31, 2013.

--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.

--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.

RATING SENSITIVITIES

Positive:
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.

Negative:
--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 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 1x as of May 31, 2013 compared with 0.9x in the year-ago period, while interest coverage (operating EBITDA/interest expense) was nearly unchanged at 23x. Fitch forecasts leverage below 1x and interest coverage in excess of 20x in fiscal 2014.

As of May 31, 2013, total debt was $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.

Fitch currently rates Oracle 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'.

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