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Oracle Fin. Ser.: Revival in license fee boosts profits - Views on News from Equitymaster

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  • Nov 4, 2010 - Oracle Fin. Ser.: Revival in license fee boosts profits

Oracle Fin. Ser.: Revival in license fee boosts profits
Nov 4, 2010

Oracle Fin. Ser. announced its 2QFY11 results. The company has reported 14% QoQ growth in sales and a 36% growth in net profits. Here is our analysis of the results.

Performance summary
  • Oracle Financial Services’ topline increased by 14.3% QoQ during the quarter due to a strong growth in the license fees. This offset the marginal decline in the professional fees segment during the quarter.
  • Operating margins increased by 5.8% 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 36.3% QoQ during the quarter. This was mainly due to higher interest and other income as well as lower depreciation charges during the quarter.
  • Employee count stands at 9,372 at the end of the quarter, lower by 532 as compared to last quarter.
  • The company added 15 new customers during the quarter and signed new licenses of US$ 24 m as against US$ 7.2 m signed during the previous quarter (June 2010).


Consolidated financial performance snapshot
(Rs m) 1QFY11 2QFY11 Change 1HFY10 1HFY11 Change
Sales 6,503 7,436 14.3% 13,890 13,939 0.4%
Expenditure 4,527 4,745 4.8% 9,540 9,272 -2.8%
Operating Profit 1,976 2,691 36.2% 4,350 4,667 7.3%
Operating Profit margin (%) 30.4% 36.2%   31.3% 33.5%  
Other income and Interest income 289 336 16.3% 145 625  
Depreciation 111 91 -18.0% 258 202 -21.7%
Profit before tax 2,155 2,936 36.3% 4,237 5,091 20.2%
Tax 221 301 36.2% 332 522 57.6%
Share of profit in associate - -   - -  
Minority Interest - -   2 -  
Profit after tax/(loss) 1,933 2,635 36.3% 3,903 4,569 17.0%
Net profit margin (%) 29.7% 35.4%   28.1% 32.8%  
No. of shares (m)       83.8 83.9  
Diluted earnings per share (Rs)*         100.17  
P/E ratio (x)*         23.7  
* On a trailing 12-months basis

What has driven performance in 2QFY11?
  • Oracle Financial Services (OFS) recorded a growth in sales of 14.3% QoQ during the quarter. The growth was on the back of a strong performance from the IT products business (about 68% of the consolidated revenues), which grew by 26.1% QoQ during the quarter. The growth was attributable to a revival in the license fee which increased to Rs 1,408 m as compared to Rs 319 m during the previous quarter. The company’s IT services segment (accounts for 30% of sales) witnessed a decline of 5% QoQ during the quarter. The KPO (Knowledge Process Outsourcing) segment registered a robust growth of 21.2% QoQ during the quarter.

  • On a geographic basis, sales declined in North America, Europe as well as in Latin America. Asia Pacific (33% of sales) and Middle East & Africa (14% of sales) witnessed a growth of 71.5% QoQ and 33.4% QoQ respectively. Sales from North America (30% of sales) and Europe (22% of sales) saw a decline of 7.3% QoQ and 6.8% QoQ respectively. Sales from Latin America (1% of sales) also declined by 42.8% QoQ during the quarter. During the quarter, the company has won orders from banks in North America and Hong Kong, the benefits of which are likely to be seen in the coming quarters.

    Revenue Breakup
    (Rs m) 1QFY11 2QFY11 Change
    Segment wise      
    Products 3,988 5,028 26.1%
    Services 2,342 2,226 -5.0%
    KPO 173 182 5.3%
    Geography-wise      
    North America 2,406 2,231 -7.3%
    Middle East & Africa 780 1,041 33.4%
    Asia -Pacific 1,431 2,454 71.5%
    Europe 1,756 1,636 -6.8%
    Latin America and Caribbean 130 74 -42.8%
    Product revenue breakup      
    License Fees 319 1,408 341.2%
    Professional Services 2,632 2,363 -10.2%
    Annual Maintenance Charges 1,037 1,257 21.2%
    Total 3,988 5,028  

  • The operating margins of OFS improved by 5.8% QoQ during the quarter due to savings in the cost of revenues which declined as a percentage of sales. The employee base also reduced versus last fiscal contributing to a decline in costs.

  • OFS’ net profits grew by 36.3% QoQ during the quarter. This growth was driven by higher interest and other income as well as lower depreciation charges during the quarter. It was also boosted by higher foreign exchange gains during the quarter.

What to expect?
At the current price of Rs 2,373, the stock is trading at a multiple of 19.2 times our estimated FY13 earnings (Research Pro subscribers please click here). At these levels, we believe the stock is overpriced.

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