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Oracle Fin. Ser.: Lower license fee hits profits - Views on News from Equitymaster
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Oracle Fin. Ser.: Lower license fee hits profits
Aug 6, 2010

Oracle Financial Services announced its 1QFY11 results. The company has reported 14% QoQ fall in sales and a 24% QoQ growth in net profits. Here is our analysis of the results.

Performance summary
  • Net sales fell by 14% QoQ during the quarter owing to a sharp decline in license fees that led to a decline in product related revenues.
  • Operating margins contracted by 10.1% QoQ due to lower sales and higher expenses.
  • Net profits grew by 24% QoQ during the quarter. This was mainly due to higher interest and other income as compared to a negative number in the last quarter. It was also supported by a lower tax outgo during the quarter.
  • Employee count stood at 9,904 at the end of the quarter, lower by 547 as compared to last quarter.
  • Added 11 new customers during the quarter, and signed new licenses of US$ 7.2 m, down 77% QoQ.

Consolidated financial performance snapshot
(Rs m) 4QFY10 1QFY11 Change
Sales 7,578 6,503 -14.2%
Expenditure 4,510 4,527 0.4%
Operating Profit 3,067 1,976 -35.6%
Operating Profit margin (%) 40.5% 30.4%  
Other income and Interest expense (707) 289  
Depreciation 114 111 -2.9%
Profit before tax 2,246 2,155 -4.1%
Tax 686 221 -67.8%
Profit after tax/(loss) 1,560 1,933 23.9%
Net profit margin (%) 20.6% 29.7%  
No. of shares (m) 83.8 83.9  
Diluted earnings per share (Rs)*   93.1  
P/E ratio (x)*   21.9  
* On a trailing 12-months basis

What has driven performance in 1QFY11?
  • Oracle Financial Services (OFS) recorded a 14% QoQ fall in sales during 1QFY11. This was mainly due to a decline in the products segment. Its IT products business (about 61% of consolidated sales) declined by 26% QoQ during the quarter. This was attributable to a 79% QoQ decline in license revenues. The company’s IT services segment (36% of sales) witnessed a growth of 16% QoQ during the quarter. The KPO (Knowledge Process Outsourcing) segment registered a muted growth of 0.8% QoQ during the quarter.

  • On a geographic basis, sales declined across all segments except North America (37% of sales) which grew by 2% QoQ. Sales from other regions like Middle East & Africa (12% of sales), Asia Pacific (22% of sales) and Europe (27% of sales) declined by 26%, 21% and 20% QoQ respectively. Sales from Latin America (2% of total sales) declined by 14% QoQ. During the quarter, the company won orders from banks in US and Middle East, the benefits of which are likely to be seen in the coming quarters.

    Revenue Breakup
    (Rs m) 4QFY10 1QFY11 Change
    Segment wise8/6/2010      
    Products 5,385 3,988 -25.9%
    Services 2,020 2,342 15.9%
    KPO 172 173 0.8%
    North America 2,349 2,406 2.4%
    Middle East & Africa 1,061 780 -26.4%
    Asia -Pacific 1,819 1,431 -21.3%
    Europe 2,198 1,756 -20.1%
    Latin America and Caribbean 152 130 -14.2%
    Product revenue breakup      
    License Fees 1,562 319 -79.6%
    Professional Services 2,639 2,632 -0.3%
    Annual Maintenance Charges 1,185 1,037 -12.5%

  • OFS’ operating margins declined by 10.1% QoQ during the quarter due to a decline in sales and still an increase in operating expenses. The employee base also reduced versus last fiscal contributing to a decline in employee costs.

  • OFS’ net profits grew by 24% QoQ during the quarter. This was driven by higher interest and other income compared to a negative figure during the last quarter. Lower tax outlay also helped boost the net income.

What to expect?
At the current price of Rs 2,116, the stock is trading at a multiple of 17.1 times our estimated FY13 earnings (Research Pro subscribers please click here). At these levels, we believe the stock is overpriced.

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