Oracle Corporation Form 10-Q Summary
Business context and reporting period
Oracle provides enterprise applications and infrastructure technologies through cloud, on-premise and hybrid deployment models. Its operating businesses are cloud and license, hardware, and services. This unaudited Form 10-Q covers the three and six months ended November 30, 2020, representing the second quarter and first half of fiscal 2021. Fiscal 2021 runs from June 1, 2020 through May 31, 2021.
Financial performance and key metrics
| Metric | Three months ended November 30, 2020 | Year-over-year change | Six months ended November 30, 2020 | Year-over-year change |
|---|---|---|---|---|
| Total revenue | $9.8 billion | Up 2% | $19.2 billion | Up 2% |
| Cloud services and license support revenue | $7.1 billion | Up 4% | $14.1 billion | Up 3% |
| Cloud license and on-premise license revenue | $1.1 billion | Down 3% | $2.0 billion | Up 2% |
| Hardware revenue | $844 million | Down 3% | $1.7 billion | Down 2% |
| Services revenue | $752 million | Down 7% | $1.5 billion | Down 8% |
| Operating income | $3.6 billion | Up 13% | $6.8 billion | Up 12% |
| Operating margin | 37% | Up from 33% | 35% | Up from 32% |
| Net income | $2.4 billion | Up 6% | $4.7 billion | Up 6% |
| Diluted earnings per share | $0.80 | Up from $0.69 | $1.53 | Up from $1.32 |
Operating expense reductions, particularly in sales and marketing, hardware, and services, more than offset higher cloud infrastructure, research and development, acquisition-related, and restructuring costs. Interest expense increased 29% for the quarter and 27% for the six-month period to $600 million and $1.2 billion, respectively, primarily because of higher average borrowings following the April 2020 issuance of $20.0 billion of senior notes. Effective tax rates were 17.8% for the quarter and 15.7% for the six-month period.
Cloud and license represented approximately 83% of reported revenue in both comparable periods. Segment margins were 68% for cloud and license, 61% for hardware, and 21% for services in the quarter, compared with 64%, 55%, and 13%, respectively, in the prior-year quarter. These are management segment margins and exclude various corporate and other GAAP expenses.
Cash flow, liquidity, debt and capital allocation
- Cash provided by operating activities was $7.3 billion for the six months, up from $6.5 billion. Management attributed the increase to higher net income, stronger customer collections, and favorable working-capital changes.
- Investing activities used $5.8 billion, including $15.6 billion of purchases of marketable securities and other investments, $10.8 billion of maturities, and $1.0 billion of capital expenditures.
- Financing activities used $11.0 billion, including $9.0 billion of share repurchases, $1.4 billion of dividends, and $1.0 billion of debt repayments.
- Cash and cash equivalents were $28.0 billion at November 30, 2020, compared with $37.2 billion at May 31, 2020. Cash, cash equivalents and marketable securities totaled $38.6 billion, down from $43.1 billion.
- Working capital was $24.9 billion, down from $34.9 billion, primarily because of share repurchases, dividends, and the reclassification of $5.8 billion of long-term senior notes as current liabilities.
- Notes payable and other borrowings totaled approximately $70.8 billion, including $7.3 billion classified as current and $63.5 billion classified as non-current. The filing reports a fair value of approximately $82.1 billion for senior notes and related fair value hedges.
- Oracle repurchased 158.1 million shares for $9.0 billion during the six months. Approximately $7.6 billion remained available under the repurchase authorization at November 30, 2020. The company declared a quarterly dividend of $0.24 per share in December 2020.
- Trailing-four-quarter free cash flow was $12.1 billion, consisting of $14.0 billion of operating cash flow less $1.8 billion of capital expenditures.
Material changes versus the prior comparable period
- Revenue growth was modest overall, driven by cloud and license growth, while hardware and services declined.
- Operating margin expanded by four percentage points in both the quarter and first half, reflecting lower operating expenses and higher cloud and license margins.
- Cloud services and license support revenue increased 4% in the quarter and 3% year to date, with applications and infrastructure offerings both growing.
- Services revenue declined primarily because of COVID-19-related project delays, customer resource constraints, restrictions on in-person meetings, and lower billable travel and subcontractor activity.
- Restructuring expense increased to $96 million in the quarter and $270 million in the first half, compared with $42 million and $120 million, respectively. The company supplemented its 2019 Restructuring Plan during the second quarter.
- Acquisition-related and other expense increased to $76 million in the quarter and $95 million in the first half, primarily due to abandoned facilities-related right-of-use assets and other assets.
- Interest income declined substantially because of lower interest rates, contributing to net non-operating expense of $11 million in the quarter and $13 million in the first half, compared with non-operating income in the prior-year periods.
- Remaining performance obligations were $34.4 billion at November 30, 2020, of which approximately 60% was expected to be recognized as revenue over the following twelve months.
Guidance, outlook, management commentary, risks and unusual items
Management expects total cloud and license revenue generally to increase on a constant-currency basis, supported by growth in cloud services and license support and continued demand for cloud and on-premise licenses. Management expects substantially all customers to renew license support contracts annually and expects demand for Oracle Cloud Services to continue increasing. No specific quarterly or annual revenue, earnings, or margin guidance is provided in the filing.
COVID-19 adversely affected all three businesses during the reported periods. Oracle expects some effects to be temporary, but stated that the impact for the remainder of fiscal 2021 and future periods is unknown. Risks include economic weakness, governmental budget constraints, customer spending reductions, competitive pressures, foreign-currency fluctuations, cloud execution and infrastructure investment requirements, uncertain hardware demand, customer renewals, tax examinations, legal proceedings, and the timing and cost of restructuring actions.
The most significant disclosed contingency is litigation brought by Hewlett-Packard Enterprise concerning Oracle's support for HP Itanium-based servers. A $3.0 billion jury award, plus post-judgment interest, remains subject to appeal; Oracle has posted a mandated surety bond, has not recorded or paid the award, and cannot estimate a reasonably possible loss range. The company states that the matter could materially affect future cash flows and results of operations.
Oracle also faces tax examinations and disputes in the United States and several foreign jurisdictions, including matters with significant amounts under controversy. Management believes adequate tax provisions have been recorded but cannot assure the ultimate outcomes. The filing states that no material off-balance-sheet arrangements exist and that disclosure controls and internal control over financial reporting were effective at the reasonable-assurance level.
Oracle announced a change of corporate headquarters from Redwood City, California, to Austin, Texas, together with a more flexible employee work-location policy.
Important facts for investors to verify
- Whether cloud and license growth continues to offset declines in hardware and services, particularly under continuing COVID-19 and macroeconomic uncertainty.
- The sustainability of operating-margin expansion after temporary reductions in travel, marketing, and other variable spending.
- The timing and cash cost of the 2019 Restructuring Plan and related expected cost savings.
- Debt maturities, refinancing requirements, interest expense, and the effect of the $7.3 billion current debt classification on liquidity.
- The pace of share repurchases and dividends relative to operating cash generation, capital expenditures, acquisitions, and debt repayment needs.
- The outcome and potential cash impact of the HP litigation, tax examinations, and other legal contingencies.
- Conversion of the $34.4 billion remaining performance obligation balance into recognized revenue and cash collections.
- Whether management’s expectation of continued annual customer renewals remains valid as customers reassess IT budgets and deployment models.