Oracle Corporation Form 10-Q Summary
Business context and reporting period
Oracle provides cloud and on-premise applications, platform and infrastructure technologies, hardware, support and services to more than 400,000 customers worldwide. This unaudited report covers the three months ended August 31, 2017, the first quarter of fiscal 2018, compared with the three months ended August 31, 2016.
Oracle’s principal businesses are cloud and on-premise software, hardware and services. Management continues to shift investment and customer activity toward cloud SaaS, PaaS and IaaS offerings, while maintaining its on-premise software and support businesses.
Key financial metrics
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Total revenue | $9.187 billion | $8.595 billion | +7% |
| Cloud revenue | $1.467 billion | $969 million | +51% |
| Operating income | $2.821 billion | $2.641 billion | +7% |
| Operating margin | 30.7% | 30.7% | Flat |
| Net income | $2.210 billion | $1.832 billion | +21% |
| Diluted EPS | $0.52 | $0.43 | +21% |
| Effective tax rate | 14.5% | 22.8% | Down 8.3 points |
| Operating cash flow | $6.566 billion | $5.875 billion | +12% |
| Capital expenditures | $473 million | $299 million | +58% |
Cloud SaaS revenue was $1.067 billion, up from $657 million, while cloud PaaS and IaaS revenue was $400 million, up from $312 million. New software license revenue declined 6% to $966 million. Software license updates and product support revenue increased 3% to $4.951 billion. Hardware revenue decreased 5% to $943 million, while services revenue increased 6% to $860 million.
GAAP net margin was approximately 24.1%, compared with approximately 21.3% in the prior-year quarter. Segment margins were 66% for cloud and on-premise software, 43% for hardware and 23% for services; these exclude several corporate and acquisition-related costs and are not directly comparable with GAAP operating margin.
Liquidity, cash flow and capital structure
- Cash and cash equivalents were $21.321 billion at August 31, 2017, compared with $21.784 billion at May 31, 2017.
- Marketable securities were $45.576 billion, resulting in cash, cash equivalents and marketable securities of $66.897 billion, up 1% from May 31, 2017.
- Working capital was $53.109 billion, up 6% from $50.337 billion at May 31, 2017.
- Total notes payable and other borrowings were approximately $53.291 billion, consisting of $4.998 billion current and $48.293 billion non-current borrowings.
- Oracle repaid $4.8 billion of borrowings during the quarter and paid $788 million of dividends. Interest expense increased 13% to $469 million, primarily because of higher average borrowings.
- Oracle repurchased 10.2 million shares for approximately $500 million. Approximately $4.8 billion remained available under the repurchase authorization at August 31, 2017.
- Trailing four-quarter free cash flow was $12.622 billion, calculated as operating cash flow of $14.817 billion less capital expenditures of $2.195 billion.
- Approximately $58.3 billion of cash, cash equivalents and marketable securities was held by foreign subsidiaries and considered indefinitely reinvested outside the United States.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by cloud offerings, software license updates and support, acquisitions and services. Hardware revenue declined as Oracle emphasized cloud-based infrastructure technologies.
- Cloud revenue increased 51%, raising cloud revenue to approximately 16% of consolidated revenue from approximately 11% in the prior-year quarter.
- Operating expenses increased 7% to $6.366 billion. Cloud delivery costs, sales and marketing, stock-based compensation and intangible amortization increased, partly offset by lower hardware and software-support costs.
- Amortization of intangible assets increased 32% to $411 million, primarily because of acquired intangible assets from NetSuite and other acquisitions.
- The effective tax rate declined to 14.5%, reflecting excess tax benefits from stock-based compensation and a favorable change in the jurisdictional mix of earnings.
- Operating cash flow increased despite a $1.818 billion use of cash in investing activities and a $5.441 billion use of cash in financing activities. The prior-year quarter included substantial net borrowing proceeds, making the financing comparison unfavorable.
- Total deferred revenue increased to $10.922 billion from $8.835 billion at May 31, 2017, including $1.397 billion of deferred cloud revenue and $7.690 billion of deferred software support revenue in current liabilities.
Guidance, outlook, commentary and risks
- Management expects total cloud and on-premise software revenue generally to increase on a constant-currency basis, supported by SaaS, PaaS and IaaS growth, continued demand for on-premise software and support renewals, and acquisitions.
- Oracle expects the revenue mix to continue shifting toward cloud-based services. Management expects cloud investment to increase infrastructure, headcount and sales and marketing costs.
- Hardware revenue is difficult to predict and hardware margins are expected to remain lower than cloud and on-premise software margins.
- The Fiscal 2017 Oracle Restructuring Plan was supplemented during the quarter. Total expected program costs are up to approximately $1.1 billion; $124 million was recorded in the quarter, and approximately $475 million remained to be incurred as of August 31, 2017, with most expected through fiscal 2018.
- Oracle completed the $9.1 billion NetSuite acquisition in fiscal 2017. Purchase accounting remains preliminary in certain areas, and the acquisition contributed to higher amortization and affected period comparability.
- Oracle plans to adopt the new revenue recognition standard, Topic 606, in the first quarter of fiscal 2019 using a retrospective method. Management does not expect a material impact on revenue but is continuing to evaluate effects on revenue-related costs and capitalization of contract acquisition costs.
- Oracle believes its liquidity and operating cash flow are sufficient for working capital, capital expenditures, contractual obligations, acquisitions, dividends, repurchases and debt repayment.
- Oracle faces ongoing tax examinations and disputes in multiple jurisdictions. Management believes adequate tax provisions have been recorded, but outcomes could differ from estimates.
- The Hewlett-Packard litigation involves a $3.0 billion jury award against Oracle. Oracle has appealed, has not recorded or paid the award, and states that the appeal’s resolution could materially affect future cash flows and results of operations.
- Two shareholder derivative lawsuits challenge the NetSuite acquisition price. Oracle does not currently believe these matters will materially affect its financial position or results of operations.
Most important facts for investors to verify
- Whether rapid cloud growth continues to offset declines in new software licenses and hardware revenue.
- The sustainability of the 14.5% effective tax rate and the effect of future tax audits, settlements or changes in tax law.
- The pace and final cost of the restructuring plan, including whether expected savings offset additional cloud investments.
- Debt maturities, refinancing needs and the effect of higher interest expense on future earnings and cash flow.
- The allocation and potential repatriation costs of the $58.3 billion held by foreign subsidiaries.
- The final purchase accounting for NetSuite and other acquisitions, including goodwill, intangible assets and future amortization.
- The outcome and potential cash impact of the Hewlett-Packard appeal and other legal proceedings.
- Customer renewal rates for software support and cloud contracts, which underpin deferred revenue and recurring revenue growth.