Business Context and Reporting Period
Oracle Corporation filed this unaudited Form 10-Q for the fiscal quarter and nine months ended February 28, 2022. Oracle provides enterprise applications and infrastructure through cloud, on-premise and hybrid deployment models. Its operating businesses are cloud and license, hardware, and services.
The fiscal 2022 results include a $4.7 billion litigation-related charge associated primarily with the Hewlett-Packard litigation. The fiscal 2021 comparison includes a $2.3 billion net deferred tax benefit from a partial legal-entity restructuring, making year-over-year earnings comparisons less representative.
Financial Results and Key Metrics
| Metric | Q3 FY2022 | Q3 FY2021 | 9M FY2022 | 9M FY2021 |
|---|---|---|---|---|
| Total revenue | $10.513 billion | $10.085 billion | $30.600 billion | $29.252 billion |
| Revenue growth | 4% reported; 7% constant currency | 5% reported and constant currency | ||
| Operating income | $3.822 billion | $3.878 billion | $6.424 billion | $10.672 billion |
| Operating margin | 36% | 38% | 21% | 36% |
| Net income | $2.319 billion | $5.021 billion | $3.528 billion | $9.714 billion |
| Diluted EPS | $0.84 | $1.68 | $1.26 | $3.19 |
| Cash flow from operations | Not separately reported for the quarter | $5.554 billion | $11.045 billion |
- Cloud services and license support revenue was $7.637 billion in Q3 and $22.562 billion for the first nine months, increasing 5% and 6%, respectively, on a reported basis. It represented 73% of Q3 revenue and 74% of nine-month revenue.
- Cloud and license revenue increased 5% in Q3 and the first nine months on a reported basis; constant-currency growth was 7% and 6%, respectively. Segment margin was 66% in Q3 and 67% year to date, versus 68% in both prior-year periods.
- Hardware revenue was $798 million in Q3, down 3% reported but up 1% in constant currency. Nine-month revenue was $2.328 billion, down 6% reported and 5% constant currency. Hardware margin declined to 59% from 61% in Q3 and to 59% from 60% year to date.
- Services revenue increased 7% to $789 million in Q3 and 7% to $2.371 billion year to date. Services margin was 20% in Q3 and 21% year to date.
- Research and development expense increased 12% to $1.816 billion in Q3 and 9% to $5.254 billion year to date. Stock-based compensation increased to $674 million in Q3 and $1.900 billion year to date.
- Trailing-four-quarter free cash flow was $6.591 billion, down from $12.808 billion, reflecting lower operating cash flow and higher capital expenditures.
Liquidity, Debt and Capital Allocation
- Cash and cash equivalents were $22.682 billion at February 28, 2022, compared with $30.098 billion at May 31, 2021. Cash, cash equivalents and marketable securities totaled $23.389 billion, down from $46.554 billion.
- Working capital was $10.842 billion, down 65% from $31.403 billion at May 31, 2021.
- Notes payable and other borrowings totaled approximately $78.4 billion, comprising $6.248 billion current and $72.165 billion non-current debt. Interest expense increased 14% to $667 million in Q3 and $2.051 billion year to date.
- Oracle repaid $5.750 billion of borrowings during the first nine months and repurchased 177.9 million shares for $15.6 billion. Approximately $10.0 billion remained available under the repurchase authorization at February 28, 2022.
- Oracle paid $2.603 billion of dividends during the first nine months. A quarterly dividend of $0.32 per share was declared in March 2022.
- On March 8, 2022, Oracle entered into a $6.0 billion five-year revolving credit facility and a $15.7 billion 364-day delayed-draw term loan facility. No amounts had been drawn as of the filing date. The term loan was intended in part to finance the proposed Cerner acquisition.
Material Changes Versus the Prior Comparable Period
- Revenue growth continued, led by cloud and license and services, while hardware revenue declined year to date.
- Q3 operating income was broadly stable, but year-to-date operating income declined 40% because of the $4.7 billion litigation charge.
- Net income and EPS declined substantially because the prior-year period benefited from a $2.3 billion one-time tax benefit and the current year includes the litigation charge.
- Operating expenses increased 8% in Q3 and 30% year to date. The year-to-date increase primarily reflects the litigation charge, along with higher cloud infrastructure, personnel, sales and marketing, and research and development costs.
- Operating cash flow decreased 50% year to date, while investing cash flow was positive $12.381 billion, largely because of sales and maturities of marketable securities.
- Oracle initiated a fiscal 2022 restructuring plan with estimated total costs of up to $353 million. It recorded $117 million through February 28, 2022 and expected to incur most of the remaining $236 million through fiscal 2023.
Guidance, Outlook, Risks and Unusual Items
- Management did not provide specific quantitative revenue or earnings guidance in the filing. It expects cloud and license revenue to generally increase on a constant-currency basis, supported by cloud services, license support, and continued demand for cloud and on-premise licenses.
- Management expects the mix of cloud services and license support revenue to continue increasing. It also expects continued significant investment in research and development and cloud capacity.
- The proposed acquisition of Cerner was announced at an estimated purchase price of approximately $28.5 billion and was expected to close during calendar year 2022, subject to tender, regulatory and other customary conditions.
- Oracle suspended its Russian Federation operations in February 2022. Management stated that Russia and Ukraine were not material contributors to consolidated revenue, income, assets or workforce, but warned that escalation could adversely affect the business, particularly in Europe.
- COVID-19 continued to affect operations, including employee travel, variable spending and global technology-component supply chains. Management expects some curtailed variable expenditures to normalize if economic and health conditions improve.
- The filing identifies risks from competition, cloud capacity and execution, customer renewals, foreign currency movements, supply-chain constraints, acquisitions, tax audits, legal proceedings, and potentially higher U.S. taxes if legislation similar to the proposed Build Back Better Act is enacted.
- Oracle paid the $3.0 billion HP judgment and approximately $1.7 billion of accrued post-judgment interest and awarded costs during the first nine months. Oracle filed a petition with the U.S. Supreme Court, but the outcome is uncertain.
- Oracle stated that it believes existing liquidity, operating cash flow and new credit facilities are sufficient for working capital, capital expenditures, contractual obligations and the proposed Cerner acquisition.
Important Facts for Investors to Verify
- Assess normalized earnings and margins excluding the $4.7 billion litigation charge and the prior-year $2.3 billion tax benefit.
- Verify the funding mix, closing conditions and incremental leverage associated with the proposed $28.5 billion Cerner acquisition.
- Monitor cloud and license growth, cloud infrastructure spending and the effect of rising operating expenses on segment margins.
- Evaluate liquidity after share repurchases, dividends, debt repayments, capital expenditures and any Cerner-related financing.
- Review outstanding tax audits, international tax disputes and the potential impact of future tax-law changes.
- Track the effects of Russia-Ukraine developments, COVID-19-related demand changes and technology-component supply constraints.
- Confirm the pace and sustainability of stock repurchases relative to acquisition funding, debt reduction and cash generation.