Oracle Corporation Form 10-Q Summary
Business context and reporting period
Oracle provides enterprise software, cloud software subscriptions, hardware systems, and related services. This unaudited Form 10-Q covers the three and nine months ended February 28, 2013, within fiscal 2013, which ends May 31, 2013. Comparisons are primarily with the periods ended February 29, 2012.
Key financial metrics
| Metric | Q3 FY2013 | Q3 FY2012 | 9M FY2013 | 9M FY2012 |
|---|---|---|---|---|
| Total revenue | $8.958 billion | $9.039 billion | $26.233 billion | $26.205 billion |
| Operating income | $3.334 billion | $3.317 billion | $9.684 billion | $9.111 billion |
| Operating margin | 37.2% | 36.7% | 36.9% | 34.8% |
| Net income | $2.504 billion | $2.498 billion | $7.119 billion | $6.529 billion |
| Diluted EPS | $0.52 | $0.49 | $1.46 | $1.28 |
| Operating cash flow | Not separately provided | Not separately provided | $9.660 billion | $9.686 billion |
- Q3 revenue declined 1% reported and was flat in constant currency; nine-month revenue was flat reported and increased 2% in constant currency.
- Software revenue increased 4% in Q3 and 6% for nine months. Software license updates and product support revenue increased 7% and 6%, respectively.
- New software licenses and cloud subscriptions revenue declined 2% in Q3 but increased 6% for nine months. Cloud subscription revenue increased to $231 million in Q3 from $110 million and to $653 million for nine months from $284 million.
- Hardware systems revenue decreased 16% in Q3 and 17% for nine months. Hardware systems products revenue declined 23% in both periods, while hardware support revenue declined 6% and 8%, respectively.
- Services revenue decreased 8% in Q3 and 6% for nine months, primarily reflecting weaker consulting demand, particularly in EMEA.
- Q3 net margin was approximately 28%; nine-month net margin was approximately 27%.
- Trailing four-quarter free cash flow was $13.033 billion, calculated as operating cash flow of $13.717 billion less capital expenditures of $684 million.
Liquidity, debt, and capital allocation
- At February 28, 2013, Oracle had $16.101 billion of cash and cash equivalents and $17.306 billion of marketable securities, totaling $33.407 billion. Working capital was $28.770 billion.
- Total borrowings were approximately $19.752 billion, comprising $1.250 billion of current borrowings and $18.502 billion of non-current borrowings, compared with approximately $16.474 billion at May 31, 2012.
- Oracle issued $5.0 billion of senior notes in October 2012: $2.5 billion due 2017 at 1.20% and $2.5 billion due 2022 at 2.50%. Management stated that current liquidity and operating cash flow should fund working capital, capital expenditures, contractual obligations, and repayment of $1.25 billion of notes due April 2013.
- During the first nine months, Oracle repurchased $8.204 billion of common stock, paid $1.433 billion of dividends, and had approximately $5.0 billion remaining under its repurchase authorization as of February 28, 2013.
- Oracle paid an accelerated dividend of $0.18 per share in December 2012. The next opportunity for the board to consider a dividend was expected with first-quarter fiscal 2014 results.
Material changes versus the prior comparable period
- Operating income increased 1% in Q3 and 6% for nine months despite essentially flat revenue, as operating expenses declined 2% in Q3 and 3% for nine months.
- Net income increased slightly in Q3 and 9% for nine months. Diluted EPS increased 6% in Q3 and 14% for nine months, aided by lower share counts resulting from repurchases.
- Software mix improved, representing 74% of Q3 revenue versus 71% in the prior-year quarter. Hardware systems declined to 14% from 16%.
- Software license updates and product support maintained an 88% segment margin in both Q3 and the nine-month period. New software licenses and cloud subscriptions margin fell to 22% in Q3 from 31%, primarily due to higher sales and marketing costs and intangible amortization.
- Research and development expense increased 4% in Q3 and 9% for nine months, reflecting higher headcount, salaries, benefits, and stock-based compensation.
- The effective tax rate decreased to 19.0% in Q3 from 20.7% and to 21.5% for nine months from 23.9%, primarily due to the retroactive extension of the U.S. research and development credit and a favorable earnings mix.
Guidance, outlook, commentary, risks, and unusual items
- Management expects software revenue, software support revenue, and software support margins generally to increase over time, supported by customer renewals, new license sales, cloud offerings, and acquisitions.
- Management expects hardware margins to remain lower than software margins and intends to continue investing in hardware research and development. Hardware quarterly revenue remains difficult to predict because of large customer orders and delivery timing.
- Oracle expects to continue acquisitions. It completed the approximately $935 million Eloqua acquisition in February 2013 and agreed to acquire Acme Packet for approximately $2.1 billion, subject to customary conditions including stockholder approval.
- The fiscal 2013 restructuring plan has estimated total costs of $420 million. Oracle recorded $294 million through February 28, 2013 and expected to incur most of the remaining $126 million through fiscal 2014.
- Nine-month results included a $306 million benefit from the SAP litigation judgment and a $118 million benefit from a decrease in the estimated Pillar Data contingent consideration liability. These items reduce comparability with the prior period.
- Q3 non-operating expense included a $64 million foreign-currency remeasurement loss related to the Venezuelan subsidiary. Further currency devaluation could cause additional losses.
- Material contingencies include the SAP appeal, the ongoing Hewlett-Packard litigation involving Itanium software support, derivative litigation, tax examinations, and the Pillar Data earn-out liability, valued at $269 million at February 28, 2013.
- International operations expose Oracle to foreign-exchange volatility, regional economic weakness, and tax and regulatory risks. The filing states that $27.4 billion of cash, cash equivalents, and marketable securities was held by foreign subsidiaries and considered indefinitely reinvested outside the United States.
Most important facts for investors to verify
- Whether software support growth and customer renewal rates offset continued weakness in hardware systems and services.
- The sustainability of reported margin and EPS improvements after excluding the $306 million litigation benefit, the $118 million acquisition-related benefit, restructuring costs, amortization, and other unusual items.
- The closing and financial impact of the proposed Acme Packet acquisition and the integration of Eloqua and other acquired businesses.
- Future cash deployment among stock repurchases, dividends, acquisitions, and debt repayment, including the effect of increased borrowings.
- The remaining $126 million restructuring estimate, future intangible amortization of $582 million for the remainder of fiscal 2013 and $2.043 billion in fiscal 2014, and related effects on earnings.
- Outcomes of the SAP and HP litigation, tax audits, currency exposure in Venezuela, and other legal and contingent liabilities.