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Final Report

Financial Analysis: Oracle and Salesforce

ACCT 540-702 Financial Accounting

SECTION-I: TEST OF PROFITABILITY

1. RETURN ON EQUITY

ORACLE 23.663% 24.486%

SALESFORCE -8.669% -13.851%

Return on equity is a measure of profitability on return for stockholders’ investment. A positive and high value is normally favorable as it indicates such firm is efficient at generating income on new investment.

As we examine both companies’ ROE ratio, we can see that ORACLE (OCLF) has a much higher return on equity yielding a 23.6 % when compared to SALESFORCE (CRM) -8.6% ROE. However, even though ORACLE’s ROE seems to be doing fine, we can appreciate a decrease performance of 1.3% when comparing 2013 and 2014 ROE ratio. In contrast, SALESFORCE shows signs of recovery in 2014 as it reduced its negative ROE value by 5.1 %. SALESFORCE ROE value was impacted by low profitability represented by net loss reported for two consecutive years.

2. RETURN ON ASSETS

2014 2013 ORACLE 12.72% 13.857% SALESFORCE -1% -4.864%

The Return on Asset (ROA) is an excellent measure to assess the management’s ability to utilize assets and effectively generate earnings.

ORACLE’s ROA for 2014 was of 12.72% while SALESFORCE was -1%. ORACLE’s higher percentage reflects a much more efficient use of assets and higher profit than SALESFORCE. However, ORACLE’s asset management and profitability seemed to be in a downtrend as it experience a decreased of 1.13% from previous year.

On the other hand, SALESFORCE 2014 ROA of -1% seem to be an improvement from 2013 as it increased ROA by 3.86%. SALESFORCE experience a net loss on both years, which explains the negative ROA ratio. Contributing factors to SALESFORCE net loss in 2013 and 2014 include a vastly increased competition from giants such IBM, ORACLE, SAP, and Microsoft and several others small competitors. SALESFORCE market has also being affected by the current U.S slowdown/recession. It’s because of the external factors SALESFORCE administrative expenses and R&D expenses have been on the rise in order to maintain the competitive edge.

Based on the ratio comparison for ORACLE and SALESFORCE, ORACLE’s management team is doing a much better job at utilizing assets to generate profit.

3. FINANCIAL LEVERAGE PERCENTAGE (ROE – ROA)

ORACLE 10.949%

SALESFORCE - 7.66%

Financial Leverage Percentage describes the relationship between the return on equity and the return on assets.

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Revenues: Subscription and support $ 38,24,542 93.95% $ 28,68,808 94.05% Professional services and other 246,461 6.05% 1,81,387 5.95% Total revenues 4,071,003 100.00% 3,050,195 100.00% Cost of revenues (1)(2): 0.00% 0.00% Subscription and support 711,880 17.49% 494,187 16.20% Professional services and other 256,548 6.30% 189,392 6.21% 0.00% 0.00% Total cost of revenues 968,428 23.79% 683,579 22.41% Gross profit 3,102,575 76.21% 2,366,616 77.59% Operating expenses (1)(2): 0.00% 0.00% Research and development 623,798 15.32% 429,479 14.08% Marketing and sales 2,168,132 53.26% 16,14,026 52.92% General and administrative 5,96,719 14.66% 4,33,821 14.22% 0.00% 0.00% Total operating expenses 33,88,649 83.24% 24,77,326 81.22% Loss from operations -286,074 -7.03% -110,710 -3.63% Investment income 10,218 0.25% 19,562 0.64% Interest expense -77,211 -1.90% -30,948 -1.01% Other expense -4,868 -0.12% -5,698 -0.19% 0.00% 0.00% Loss before benefit from (provision for) 0.00% 0.00% income taxes -357,935 -8.79% -127,794 -4.19% Benefit from (provision for) income taxes 125,760 3.09% -142,651 -4.68% 0.00% 0.00% Net loss $ (232,175) -5.70% $ (270,445) -8.87% Earnings per share-basic and diluted: Basic net loss per share (3) $ (0.39) $ (0.48) Diluted net loss per share (3) $ (0.39) $ (0.48) Shares used in computing basic net loss per share (3) 597,613 564, Shares used in computing diluted net loss per share (3) 597,613 564,

ORACLE CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Years Ended May 31, 2014 and 2013 Year Ended May 31 (in millions, except per share data) 2014 2013 Revenues: New software licenses $ 9,416 24.60% $ 9,411 25.31% Cloud software-as-a-service and 0.00% 0.00% platform-as-a-service 1,121 2.93% 910 2.45% Cloud infrastructure-as-a-service 456 1.19% 457 1.23% Software license updates and product support 18,206 47.57% 17,142 46.11% Software and cloud revenues 29,199 76.29% 27,920 75.09% Hardware systems products 2,976 7.78% 3,033 8.16% Hardware systems support 2,396 6.26% 2,313 6.22% Hardware systems revenues 5,372 14.04% 5,346 14.38% Services revenues 3,704 9.68% 3,914 10.53% Total revenues 38,275 100.00% 37,180 100.00% Operating expenses: 0.00% 0.00% Sales and marketing(1) 7,567 19.77% 7,062 18.99% Cloud software-as-a-service and 0.00% 0.00% platform-as-a-service(1) 455 1.19% 327 0.88% Cloud infrastructure-as-a-service 308 0.80% 304 0.82% Software license updates and product support(1) 1,162 3.04% 1,175 3.16% Hardware systems products(1) 1,521 3.97% 1,501 4.04% Hardware systems support(1) 836 2.18% 890 2.39% Services(1) 2,954 7.72% 3,182 8.56% Research and development 5,151 13.46% 4,850 13.04% General and administrative 1,038 2.71% 1,072 2.88% Amortization of intangible assets 2,300 6.01% 2,385 6.41% Acquisition related and other 41 0.11% -604 -1.62% Restructuring 183 0.48% 352 0.95% Total operating expenses 23,516 61.44% 22,496 60.51% Operating income 14,759 38.56% 14,684 39.49% Interest expense -914 -2.39% -797 -2.14% Non-operating (expense) income, net -141 -0.37% 11 0.03% Income before provision for income taxes 13,704 35.80% 13,898 37.38% Provision for income taxes 2,749 7.18% 2,973 8.00% Net income $ 10,955 28.62% $ 10,925 29.38%

3. INVENTORY TURNOVER RATIO

ORACLE NA

SALESFORCE NA

The inventory turnover ratio is not applicable in these firms as ORACLE does not have cost of goods sold or cost of revenue and SALESFORCE does not hold any inventory. Being a service provider firms, inventory is not held by the firm.

SECTION-III: TESTS OF SOLVENCY

1. TIMES INTEREST EARNED RATIO

ORACLE 25.

SALESFORCE -3.

Time interest earned ratio is use as an indicator of a firm’s ability to meet the interest payments on its debt. The calculated value represents a margin of protection for creditors. ORACLE’s TIE ratio of 25.72 indicates its income is 25 times greater than its annual interest expense and therefore it present less risk to creditors. In contrast, SALESFORCE’s -3.7 TIE indicates this firm is unable to cover its interest expenses and therefore presents a much higher risk to creditors than ORACLE.

2. DEBT TO EQUITY RATIO

ORACLE 0.

SALESFORCE 2.

The debt to equity ratio is a financial, liquidity ratio that expresses firms ‘debt as a proportion of stockholders’ equity.

Based on the on both companies debt to equity ratio, it can be inferred that SALESFORCE relies heavily on external lenders more so than ORACLE and therefore it presents a higher risk. However, ORACLE’s debt to equity ratio has been on an uptrend in the past couple of years. This could of concern as it indicates that percentage of assets being finance through external lenders is increasing and thus increasing the debt to equity ratio.

SECTION- IV: MARKET TESTS

1. PRICE/EARNINGS (P/E) RATIO

ORACLE 17.

SALESFORCE -112.

The price/earning ratio calculates the market value of a stock relative to its earnings. It compares the market price per share by the earnings per share.

ORACLE’s P/E ratio of 17.36 shows a gradual growth rate when compared previous years performance (Based on annual report 2012-2014 EPS). However, ORACLES active acquisition program may impact future earning. For instance, ORACLE’s operating results were severely impacted by the acquisition of Tekelec in the first quarter, Responsys in the third quarter and Acme Packet in the fourth quarter of 2013. SALESFORCE’s P/E negative value is as a result of a -.39 calculated EPS derived from current year’s net loss.

SECTION-V: RECOMMENDATION

Based on the financial ratio analysis, ORACLE showed to have a much better position on all of the three assessments areas liquidity, solvency and market test. Even though, SALESFORCE is showing signs of improvements and gradual growth from previous years it can take many years before they are able to cash in on their invested R&D (83%) efforts. Both companies have a slow gradual growth rate. However, ORACLE seems to be a much better investment choice due to their larger net income, lower operating expense, higher sales volume and growth potential.

-270,445_ = - 13.851%

2. Return on assets

✓ Oracle:

■ Net Income: $10, ■ Interest Expense: $ ■ Effective Tax Rate: 20.10% ■ Total Assets (Average Beg and Ending Balance):

• May 31, 2014: $90,
• May 31, 2013: $ 81,

■ Net Income: $10, ■ Interest Expense: 797 ■ Effective Tax Rate: 21.14% ■ Total Assets (Average Total Assets):

• May 31, 2013: $90,
• May 31, 2012: $ 81,

✓ Salesforce:

■ Net Loss: $(232,175) ■ Interest Expense: 77, ■ Effective Tax Rate: 35% ■ Total Assets (Average Total Assets):

• Jan 31, 2014: $9,152,
• Jan 31, 2013: $ 5,528,

■ Net Loss: $(270,445) ■ Interest Expense: 30,

■ (^) Net Tax: -112% ■ Total Assets (Average Beg and Ending Balance):

• (^) Jan 31, 2013: $5,528,
• Jan 31, 2012: $ 4,164, -270,445+(30,948*1.12) = - 4.864% (5,528,956+4,164,154) / 2

3. Financial leverage percentage

✓ Oracle: ROE-ROA= Financial Leverage Percentage

✓ Salesforce: ROE-ROA= Financial Leverage Percentage

4. Component percentage analysis of the income statements

✓ Oracle:

Base Amount: Components of income statement / Revenue

✓ Salesforce:

Base Amount: Components of income statement / Revenue

Section II – Tests of Liquidity

1. Current ratio

✓ Oracle:

■ Total Current Assets: $ 48,138 (2014), $ 41,692 (2013) ■ Total Current Liabilities: $ 14,389 (2014), 12,872 (2013)

48,138 = 3.34 (2014) 14,

41,692 = 3.23 (2013) 12,

✓ Salesforce:

■ Total Current Assets: $ 2,680,252 (2014), $ 2,015,880 (2013) ■ Total Current Liabilities: $ 3,980,188 (2104), $ 2,917,624 (2013)

✓ Oracle:

■ EBIT: 23516

■ Interest: 914

TIE = EBIT / Interest = 25.

✓ Salesforce:

■ EBIT: -

■ Interest: 77211

TIE = EBIT / Interest = -3286074/ = -3.

2. Debt to equity ratio

✓ Oracle:

■ Total debt:

■ Total equity: 47447

Debt Equity ratio = Debt / Equity = 42897/47447 = 0.

✓ Salesforce:

■ Total debt: 6087715

■ Total equity: 3038510

Debt Equity ratio = Debt / Equity = 6087715 / 3038510 = 2.

Section IV – Market Tests

1. Price/earnings (P/E) ratio

✓ Oracle:

■ Price of share: 42.

■ EPS = 2.

P/E ratio == Price / EPS = 42.02 / 2.42 = 17.

✓ Salesforce:

■ Price of share:43.

■ EPS: 0.

P/E ratio == Price / EPS = 43.75 / -0.39 = -112.