Oracle Financial Services Software Ltd is IT solutions provider to global Financial Institutions & is majorly owned by Oracle.
Quick Links. Click to navigate directly to detailed paragraph:
- About Oracle Corporation
- A slow Cloud transition story – Oracle Corporation
- Products offered by Oracle Financial Services Software Ltd (OFSS)
- Executive Management of Oracle
- Shareholding Pattern
- Revenue Segments
- Geographical Spread of OFSS
- License Fee growth of OFSS
- Cost Structure
- Customers Concentration of OFSS
- Recent License Deals
- Deferred Revenue of OFSS
- More parameters to track for Investing Decision in IT company
Oracle’s ‘Flexcube’ product is famously known in India which is banking platform for retail, corporate & investment banking, consumer lending, asset management as well as investor servicing. Big Indian banks using Flexcube include HDFC Bank, Canara Bank, Yes Bank, Syndicate Bank, Dhanlaxmi Bank.
In addition, ‘FLEXCUBE Universal Banking platform’, powers around 10% of the world’s consumer bank accounts.
(A) About Oracle Corporation
Oracle Corporation originated in the year 1977 in California by engineers Larry Ellison, Bob Miner and Ed Oates by the name Software Development Laboratories. During the year 1986, Oracle got listed on NASDAQ.
In 2007, Oracle turned 30 with US $ 18 billion revenue, 65,000 employees, 2,75,000 plus customers in more than 145 countries.
During 2013, Oracle plugged into Cloud computing. Oracle Cloud offers a suite of integrated applications for Sales, Service, Marketing, Human Resources, Finance, Supply Chain and Manufacturing, plus Generation 2 Infrastructure featuring the Oracle Autonomous Database.
Currently, major companies using Oracle Cloud include Reliance Capital, AU Small Finance Bank, Air Asia, Western Digital, Vodafone, Phenix, Booster, Kingold, Federal Bank, Cern Openlab and many more.
Moreover, in 2019, Oracle was the second-largest software company by revenue and market capitalization.
New Gen 2 Cloud Regions in India
- In October 2019, Oracle announced opening of its Gen 2 Cloud region in Mumbai, with plans to open another region in Hyderabad next year.
- Consequently, over 100 customers already signed up for the new cloud region, signifying the rising adoption of Oracle Cloud in India.
- Early adopters & customers of Oracle Cloud include Federal Bank, TTK Healthcare, HARMAN Connected Services, Bajaj Electricals, Dorf Ketal Chemicals, Genpact, National Stock Exchange, AU Small Finance Bank, Ayuscare & Safexpress, amongst others.
- Further, in Dec 2019, Oracle announced its plan to launch 20 new Oracle Cloud regions by the end of 2020, for a total of 36 Oracle Cloud Infrastructure regions. Thus, customers will have access to all Oracle Cloud Infrastructure services including Oracle Autonomous Database; as well as Oracle Cloud Applications, in these regions.
- In addition, in April 2020, Zoom Video Communications, Inc. turned to Oracle Cloud Infrastructure to support its video communications. To meet rapidly increasing demand for its services, including a sudden spike to 300 million daily meeting participants, Zoom needed additional cloud capacity immediately.
A slow Cloud transition story – Oracle Corporation
In March 2018, Oracle Corporation missed its forecast of sales growth in cloud-related products, fueling concern that the company is struggling in efforts to shift away from traditional software & become a powerhouse in programs delivered over the internet. The company missed the cloud number and thus saw de-growth in revenue of cloud products.
Moreover, due to this concern, S&P global & Moody’s downgraded Oracle Corporation’s credit ratings in June 2019 and then in March 2020. Not only due to the slow transition but for the reasons of rising leverage & large share buybacks.
(B) Products offered
Oracle (OFSS) business classifies into 3 main segments. Firstly, Products business, comprising product licensing, consulting and support. Secondly, Prime Sourcing, which is consulting services business (IT applications & technology services). Lastly, Business Process Outsourcing (BPO) service segment.
Products Business Segment
Oracle Financial Services Software Ltd (OFSS)
- Oracle Financial Services PrimeSourcing – Comprehensive Suite of consulting & application services addressing retail, corporate & investment banking; funds, cash management; treasury, payments, lending; asset management, private wealth management; compliance, enterprise risk & business analytics.
- Oracle Business Process Outsourcing Services (BPO) – Back office work & contact center services for banking, capital markets, insurance and asset management.
(C) Executive Management of Oracle
Mr. S Venkatachalam – Chairperson
Joined OFSS as independent director in 2010. He is a Chartered Accountant by profession. He also worked with Citibank N. A. & its group for nearly 30 years & has held senior positions. Also, he served as an advisor to Fullerton India Credit Corporation Ltd. Prior to Citibank, he served as a consultant with A. F. Ferguson & Co., Chartered Accountants, Mumbai (now a part of Deloitte Haskins & Sells). Thus, he has vast experience of financial services industry.
Mr. Chaitanya Kamat – MD and CEO
He holds more than 35 years of financial services, consulting and business transformation experience. Prior to joining Oracle, Mr. Kamat was MD at STG, a private equity firm focused on investing in software & enterprise services companies. Earlier, he worked as the CEO of a retail financial services startup & at Accenture. He joined Oracle in the year 2010.
His remuneration from Oracle for FY19 is Rs. 23.25 crore which is 0.47% of revenue & 1.68% of PAT.
Mr. Makarand Padalkar – WTD and CFO
Mr. Padalkar is with Oracle since 1994. Prior to joining the company, he spent 12 years with Tata Unisys Limited (now Tata Consultancy Services Limited) consulting various clients in BFSI segments in Europe & United States.
(D) Shareholding Pattern
Revenue as per Business Segments
As per Geographical Segments
(F) License Fee
For an IT company, License fee is the best indication of current demand because it represents how much new software is sold during a given period. It is the most profitable source of revenue. This is because once the product is developed, it can be produced for quite less cost. On the other hand, service revenue is less profitable because it is expensive to employee consultants to install software. Thus, increasing license revenue is an important factor to consider as it denotes healthy demand. Also, licenses drive future service income.
OFSS’s licenses provide banks right to use the product up to a limit of number of users or sites or any other usage metric.
OFSS’ product revenue classifies into further three types of fee –
Click to enlarge the image
(G) Services Business Fee including BPO services
This fee charged either a fixed price or a time & material basis, based on the professional efforts incurred and associated out of pocket expenses. The ratio ‘fixed price contracts’ and ‘Time & material contracts’ is 25:75. Secondly, around 38-40% of the services business revenue is from onsite work & remaining is from offshore work.
(H) Cost Structure
In an IT business the expenses majorly include compensation for employees, project related travel expenses, cost of application software for internal use, professional fee to vendors, research & development, product advertising & marketing.
The above cost structure is based on expenses for the year 31 March 2020.
(I) Customer Concentration
For the year ended 31 March 2019, OFSS services 1,362 customers. The % of total revenue derived from largest, top 5 and top 10 customers FY19 is as follows:
- Largest customer – 47%
- Top 5 customers – 57%
- Top 10 customers – 62%
(J) License Deals Signed
For the year ended 31 March 2020, value of license deals signed by OFSS:
- During first quarter for FY20, OFSS license deals of US$ 29 million with customers in 35 countries.
- Then for the 2nd Quarter FY20, the company signed license deals of US$ 12 million & 23 customers went live on OFSS softwares.
- Further, during Q3 of FY20, OFSS signed license deals of US$ 12.2 million with customers in 24 countries. 27 customers went live during the quarter.
- Lastly, in 4th quarter for FY20, OFSS signed deals of US$ 23 million with customers in 33 countries. 13 customers went live on OFSS software during the quarter.
(K) Deferred Revenue
Although, deferred revenue is a liability but can be called as positive indicator. For IT companies, rising deferred revenue indicates healthy backlog of business. Thus declining deferred revenue may suggest that business has started to slow. So tracking deferred revenue gives a good estimate of potential trend in future revenue. Click to enlarge the image:
(L) Other Important Parameters to track
(i) Increasing Sales
Steady growth indicates that the company has either a growing demand for its software, loyal customers or the ability to raise prices without losing business. It also suggests recurring business.
Revenue growth of Oracle Financial Services Software Ltd (OFSS) has remained moderate from last many years. Click to enlarge the image:
(ii) Expansion in Profit Margins
IT companies are the top PAT generating companies. Successful IT companies should be able to expand margins over time. Also specially consider companies with increasing high-margin license revenue.
Margin ratios of Oracle Financial Services Software Ltd: Click to enlarge the image
The results for FY20 include the impact of slowdown in operation in lockdown due to COVID-19, Coronavirus pandemic. The product business revenue was reduced by 1% YOY compared to FY19. On the other hand services business revenue was lower by 14% YOY as compared to FY19. Still company’s margins expanded for FY20.
(iv) Large Installed Customer Base
Large loyal customer base as well as increasing customer count very important measures for healthy business of an IT company. OFSS’s customer base includes huge financial institutions and banks in over 154 countries. Moreover on year on year basis, its customer count has increased at around 3-5% p.a. The customer count for FY19 is 1362 which was 922 in FY10.
Moreover, the software products that Oracle provides to financial institutions & banks have huge switching costs for such organizations. Thus, it is an advantage for the company.
(v) Highly Competitive Environment
There are huge players working in same segment as Oracle Financial Services Software Ltd. The competition level also becomes significant wherein players are timely shifting to more efficient loud computing. Oracle Financial Services Software Ltd is highly focused to the much needed next generation cloud migration. Also, the company is in progress for its datacenter consolidation to reduce the need for physical datacenters. Also, this shall significantly reduce infrastructure, power and space related costs.
Other significant players:
- Infosys (Most successful product Finacle holds 60% market share in Indian core banking product space)
- Tech Mahindra
- HCL Technologies
- L&T Infotech
- Temenos Pvt Ltd
Drop us your query at – firstname.lastname@example.org or Visit pawealth.in
References: Annual Reports, News Publications, Investor Presentations, Corporate Announcements, Management Discussions, Analyst Meets & Management Interviews, Industry’s Publications.
Disclaimer: The report only represents personal opinions and views of the author. No part of the report should be considered as recommendation for buying/selling any stock. Thus, the report & references mentioned are only for the information of the readers about the industry stated.