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Oracle Fin. Ser.: License fee spoils the day - Views on News from Equitymaster
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Oracle Fin. Ser.: License fee spoils the day
Feb 10, 2011

Oracle Fin. Ser. announced its 3QFY11 results. The company has reported 0.8% QoQ decline in sales and a 7.2% QoQ growth in net profits. Here is our analysis of the results.

Performance summary
  • Oracle Financial Services' topline declined marginally by 0.8% QoQ during the quarter due to a decline in the license fee revenue.
  • Operating margins increased by 2.3% QoQ during the quarter mainly due to savings in the cost of revenues which fell as a percentage of total sales.
  • Net profits grew by 7.2% QoQ during the quarter. This was mainly due to higher interest and other income as well as lower tax charges during the quarter.
  • Employee count stands at 9,566 at the end of the quarter, higher by 194 as compared to last quarter.
  • The company added 18 new customers during the quarter and signed new licenses of US$ 14 m as against US$ 24 m signed during the previous quarter (September 2010).

Consolidated financial performance snapshot
(Rs m) 2QFY11 3QFY11 Change 9MFY10 9MFY11 Change
Sales 7,436  7,376 -0.8% 21,162 21,316 0.7%
Expenditure 4,745 4,534 -4.4%   13,948     13,806 -1.0%
Operating Profit 2,691 2,842 5.6%  7,214   7,510 4.1%
Operating Profit margin (%) 36.2% 38.5%   34.1% 35.2%  
Other income and Interest income    336 368 9.4% (149) 994  
Depreciation  91   95 4.4%   374 297 -20.7%
Profit before tax 2,936  3,116 6.1%  6,690   8,207 22.7%
Tax    301 291 -3.3%   512 814 59.0%
Share of profit in associate -   -      -      -    
Minority Interest  -   -       2    -    
Profit after tax/(loss) 2,635 2,824 7.2%  6,176   7,393 19.7%
Net profit margin (%) 35.4% 38.3%   29.2% 34.7%  
No. of shares (m)       83.8 83.9  
Diluted earnings per share (Rs)*         106.71  
P/E ratio (x)*         18.7  
* On a trailing 12-months basis

What has driven performance in 3QFY11?
  • Oracle Financial Services (OFS) recorded a sales decline of 0.8% QoQ during the quarter. The decline was on account of lower product (63% of total sales) revenues during the quarter. The segment witnessed a decline of 7.7% QoQ during the quarter. The decline was attributable to a lower license fee which fell to Rs 742 m as compared to Rs 1,408 m during the previous quarter. The company's IT services segment (accounts for 35% of sales) witnessed an increase of 14.6% QoQ during the quarter. The KPO (Knowledge Process Outsourcing) segment registered a marginal growth of 1.7% QoQ during the quarter.

  • On a geographic basis, sales from all the geographies saw an improvement, except for Asia Pacific region (23% of sales), which witnessed a decline of 30.9% QoQ. Sales from North America (32% of sales) and Europe (26% of sales) saw a growth of 5.8% QoQ and 17.2% QoQ respectively. Sales from Middle East & Africa (18% of sales) Latin America (2% of sales) also increased by 27.5% QoQ and 98.4% QoQ during the quarter. During the quarter, the company completed its roll out in 10 countries for its existing customers including 2 tier one banks in Japan and India.

    Revenue Breakup
    (Rs m) 2QFY11 3QFY11 Change
    Segment wise       
    Products 5,028 4,641 -7.7%
    Services 2,226 2,550 14.6%
    KPO   182    186 1.7%
    Geography-wise      
    North America 2,231 2,360 5.8%
    Middle East & Africa 1,041 1,328 27.5%
    Asia -Pacific  2,454 1,697 -30.9%
    Europe 1,636 1,918 17.2%
    Latin America and Caribbean  74    148 98.4%
    (Rs m) 2QFY11 3QFY11 Change
    Product revenue breakup      
    License Fees 1,408   742 -47.3%
    Professional Services 2,363 2,599 10.0%
    Annual Maintenance Charges 1,257 1,299 3.4%

  • The operating margins of OFS improved by 2.3% QoQ during the quarter due to savings in the cost of revenues which declined as a percentage of sales.

  • OFS' net profits grew by 7.2% QoQ during the quarter. This growth was driven by higher operating margins as well as higher interest and other income during the quarter. It was also boosted by lower tax charges during the quarter.

What to expect?
At the current price of Rs 2,000, the stock is trading at a multiple of 16.5 times our estimated FY13 earnings (Research Pro subscribers please click here). At these levels, we believe the stock is overpriced.

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