Oracle Corporation Form 10-Q Summary
Business Context and Reporting Period
Oracle develops and sells database, middleware and applications software, related support, consulting, On Demand and education services. This unaudited Form 10-Q covers the quarter and six months ended November 30, 2009, representing the second quarter and first half of fiscal 2010. The comparable periods ended November 30, 2008.
Software represented 84% of quarterly revenue and 83% of first-half revenue. Management stated that substantially all support customers renew annually, while services demand was affected by weaker global economic conditions.
Key Financial Metrics
| Metric | Three months ended Nov. 30, 2009 | Prior year | Six months ended Nov. 30, 2009 | Prior year |
|---|---|---|---|---|
| Total revenue | $5.858 billion | $5.607 billion | $10.911 billion | $10.938 billion |
| Software revenue | $4.900 billion | $4.476 billion | $9.045 billion | $8.648 billion |
| Services revenue | $958 million | $1.131 billion | $1.866 billion | $2.290 billion |
| Operating income | $2.178 billion | $1.975 billion | $3.918 billion | $3.496 billion |
| Operating margin | 37% | 35% | 36% | 32% |
| Net income | $1.458 billion | $1.296 billion | $2.582 billion | $2.373 billion |
| Diluted EPS | $0.29 | $0.25 | $0.51 | $0.46 |
| Operating cash flow | Not separately provided | Not separately provided | $4.389 billion | $3.990 billion |
Quarterly revenue increased 4% as reported but was flat in constant currency. First-half revenue declined slightly as reported and 1% in constant currency. Quarterly software revenue increased 9% as reported and 4% in constant currency; support revenue increased 14% as reported and 9% in constant currency. Services revenue declined 15% as reported and 19% in constant currency.
Support revenue was $3.247 billion in the quarter and $6.364 billion for the first half, with reported margins of 85% and 86%, respectively. New software license revenue was $1.653 billion in the quarter and $2.681 billion for the first half; first-half revenue declined 6% as reported and 9% in constant currency.
Cash and cash equivalents were $14.919 billion at November 30, 2009, compared with $8.995 billion at May 31, 2009. Cash, cash equivalents and marketable securities totaled $20.784 billion, including $14.7 billion held by foreign subsidiaries. Working capital was $16.701 billion.
Total borrowings were approximately $14.7 billion, including $1.0 billion current borrowings and $13.7 billion non-current borrowings. Oracle issued $4.5 billion of senior notes in July 2009. Principal payments due through fiscal 2014 total $4.5 billion, with $10.25 billion due thereafter. Oracle reported compliance with debt covenants.
Six-month investing cash outflows were $2.589 billion, including $392 million for acquisitions and $100 million for capital expenditures. Financing cash inflows were $3.843 billion, driven primarily by new borrowings. Oracle repurchased $492 million of stock and paid $501 million of dividends during the first half.
Material Changes Versus the Prior Comparable Period
- Quarterly operating income increased 10% and first-half operating income increased 12%, while operating margin expanded by two and four percentage points, respectively.
- Quarterly net income increased 13%; first-half net income increased 9%.
- Services revenue fell substantially, particularly consulting and education, reflecting weaker demand and discretionary spending. Consulting revenue declined 18% in the quarter and 21% in the first half.
- Support revenue growth and expense controls offset weakness in new licenses and services.
- Operating cash flow increased 10% to $4.389 billion for the first half, supported by favorable working-capital movements and collections.
- Interest expense increased 20% in the quarter and 16% in the first half because of higher average borrowings.
- Restructuring expense increased to $114 million in the quarter and $162 million in the first half, compared with $17 million and $31 million, respectively, in the prior-year periods.
- Oracle repurchased approximately 23.0 million shares for $492 million in the first half, versus approximately 140.1 million shares for $2.5 billion in the prior-year period. Approximately $5.8 billion remained available under the repurchase authorization at November 30, 2009.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide specific quantitative revenue or earnings guidance. Management expected software revenue and profits to benefit from support renewals, acquisitions and continued demand, but noted that new-license timing is difficult to predict and depends on large transactions.
- Oracle proposed acquiring Sun Microsystems for approximately $7.4 billion in cash at $9.50 per Sun share. Completion required regulatory clearance. The European Commission issued a Statement of Objections on November 9, 2009, creating a material regulatory and transaction risk.
- Oracle expected to incur approximately $206 million of additional costs under its $453 million 2009 restructuring plan, mostly during the final two quarters of fiscal 2010. Restructuring estimates may change.
- Future amortization of acquired intangible assets was estimated at $796 million for the remainder of fiscal 2010 and $6.584 billion in total thereafter. These non-cash charges may continue to affect operating margins.
- Global economic weakness, long sales cycles, customer budget constraints, competition, foreign-exchange fluctuations and weaker services demand remain key operating risks.
- Oracle had $2.4 billion of unrecognized tax benefits and was subject to domestic and international tax examinations. Management believed adequate provisions had been recorded but could not assure the ultimate outcomes.
- Material litigation included an appeal in a securities class action, patent litigation involving Parallel Networks and intellectual-property litigation against SAP. Management did not believe the outcomes would materially adversely affect consolidated results, but damages and timing were uncertain.
- Oracle reported no material off-balance-sheet arrangements and concluded that disclosure controls and internal control over financial reporting were effective at the end of the reporting period.
Investor Verification Points
- Verify the closing status, regulatory conditions, financing and final purchase accounting for the proposed Sun acquisition.
- Monitor support-renewal rates, deferred revenue and the sustainability of high support margins.
- Assess whether services revenue and margins recover from the reported economic slowdown.
- Reconcile cash balances held by foreign subsidiaries with repatriation, tax and currency considerations.
- Review debt maturities, variable-rate exposure, interest-rate swaps and the effect of additional acquisition financing.
- Track remaining restructuring charges, facility obligations and future intangible-amortization expense.
- Review tax audits, unrecognized tax benefits and the status of disclosed litigation and appeals.