Oracle Corporation Fiscal 2010 Form 10-K Summary
Business context and reporting period
This filing is Oracle’s annual report for the fiscal year ended May 31, 2010, filed June 30, 2010. Although the request metadata references “2009 Q4,” the source filing is a fiscal 2010 Form 10-K, not a fiscal 2009 quarterly filing.
Oracle remained primarily an enterprise software company and, following its January 26, 2010 acquisition of Sun Microsystems for approximately $7.3 billion, added hardware systems products and support. Fiscal 2010 included approximately four months of Sun operations. Oracle reported three businesses: software, hardware systems and services.
Financial performance and key metrics
| Metric | Fiscal 2010 | Fiscal 2009 | Change |
|---|---|---|---|
| Total revenue | $26.820 billion | $23.252 billion | 15% reported; 14% constant currency |
| Operating income | $9.062 billion | $8.321 billion | 9% |
| Operating margin | 34% | 36% | Down 2 percentage points |
| Net income | $6.135 billion | $5.593 billion | 10% |
| Diluted EPS | $1.21 | $1.09 | 11% |
| Cash flow from operations | $8.681 billion | $8.255 billion | 5% |
| Free cash flow | $8.451 billion | $7.726 billion | 9% |
- Software revenue was $20.625 billion, or 77% of total revenue. New software licenses generated $7.533 billion, while software license updates and product support generated $13.092 billion.
- Hardware systems revenue was $2.290 billion, or 9% of total revenue, consisting of $1.506 billion of hardware products and $784 million of hardware support. Hardware systems had an 8% product margin and a 34% support margin.
- Services revenue declined 11% to $3.905 billion, primarily due to weaker demand for consulting and education services amid adverse economic conditions. Services represented 14% of total revenue.
- Software license updates and product support produced an 85% margin and accounted for approximately 80% of total company margins, according to management.
- Research and development expense was approximately $3.3 billion, or 12% of revenue, compared with $2.8 billion in fiscal 2009.
- Cash, cash equivalents and marketable securities totaled $18.469 billion at May 31, 2010, including $16.6 billion held by foreign subsidiaries. Working capital was $12.313 billion.
- Total borrowings were approximately $14.655 billion, including $3.145 billion current and $11.510 billion non-current. The company had $3.0 billion of unused revolving credit capacity and $881 million of commercial paper outstanding at year-end.
- Fiscal 2010 quarterly revenue was seasonally concentrated in the fourth quarter: $9.505 billion versus $5.054 billion in the first quarter.
Material changes versus the prior comparable period
- Sun contributed an estimated $2.8 billion of fiscal 2010 revenue and reduced operating income by an estimated $620 million, based on management allocations and estimates. Management estimated Sun’s adjusted operating income contribution at $371 million after excluding specified acquisition, restructuring, amortization and stock-based compensation items.
- The acquisition expanded Oracle into hardware and increased expenses, including manufacturing costs, support costs, research and development, amortization and restructuring.
- Operating margin fell from 36% to 34% because hardware operations and acquisition-related costs had lower margins than Oracle’s historical software business.
- New software license revenue increased 6% to $7.533 billion, and software license updates and product support revenue increased 11% to $13.092 billion. Consulting revenue fell 16% to $2.720 billion.
- Restructuring expense increased to $622 million from $117 million. Fiscal 2010 included $342 million under the Sun Restructuring Plan and $286 million under Oracle’s Fiscal 2009 Restructuring Plan.
- Amortization of acquired intangible assets increased to $1.973 billion from $1.713 billion. Estimated future amortization was $2.285 billion in fiscal 2011 and $8.936 billion over the disclosed forecast period through thereafter.
- Interest expense rose to $754 million from $630 million following additional debt issuance, including $4.5 billion of senior notes issued in July 2009.
- Non-operating income changed to a $65 million expense from $143 million of income, primarily because of foreign currency losses, including an $81 million loss related to the Venezuelan subsidiary’s devaluation.
- Oracle repurchased 43.3 million shares for approximately $1.0 billion, paid $1.0 billion of dividends, and had approximately $5.3 billion remaining under its repurchase authorization at year-end.
Guidance, outlook, commentary, risks and unusual items
- Management expected continued growth in software license updates and product support, supported by high renewal rates, new license sales and acquired support contracts.
- Management expected hardware systems to add significant revenue and expense but to produce lower operating margins than software. The Sun Restructuring Plan was estimated at approximately $1.1 billion, with the majority of remaining costs expected through calendar 2011.
- Management stated that cash, marketable securities, operating cash flow and available debt capacity were expected to fund working capital, capital expenditures, contractual obligations and planned acquisitions.
- Oracle agreed to acquire Phase Forward for approximately $810 million, subject to stockholder, regulatory and customary closing conditions.
- Key risks include integration of Sun, hardware demand and execution, component availability and inventory write-downs, competition, economic weakness, foreign currency volatility, acquisition-related charges, debt refinancing, tax audits, litigation, intellectual property claims and restructuring execution.
- As of May 31, 2010, contractual obligations totaled approximately $24.630 billion, including $14.630 billion of principal debt payments, $7.543 billion of interest payments, $1.697 billion of operating leases and $742 million of purchase obligations.
- Unrecognized tax benefits totaled approximately $2.5 billion, of which $1.9 billion would affect the effective tax rate if recognized. The filing states that timing of settlement for most such obligations could not be reliably estimated.
- No goodwill or intangible asset impairment charges were recorded in fiscal 2010. Internal controls and disclosure controls were reported effective, although Sun’s pre-acquisition internal controls were excluded from management’s assessment.
Important facts for investors to verify
- Confirm that comparisons use the fiscal year ended May 31, 2010 and appropriately reflect only approximately four months of Sun results.
- Reconcile reported revenue and operating income with management’s estimated Sun contribution and the disclosed non-GAAP or adjusted Sun measures.
- Assess whether hardware margins, support renewals and the Sun restructuring program improve as projected.
- Review debt maturities, particularly the approximately $3.1 billion due in fiscal 2011, available revolving capacity and refinancing requirements.
- Evaluate the sustainability of cash generation after acquisitions, dividends, repurchases, restructuring payments and debt service.
- Review the effect of acquired intangible amortization, deferred support revenue fair-value adjustments and other acquisition accounting charges on reported margins.
- Monitor foreign currency exposure after Oracle suspended its historical foreign-currency forward-contract program during the fourth quarter.
- Review pending litigation, tax audits, unrecognized tax benefits and the proposed Phase Forward acquisition for potential cash or earnings effects.