Oracle Corporation 10-Q Summary
Business Context and Reporting Period
Oracle filed an unaudited Form 10-Q for the quarter ended November 30, 2010, covering the second quarter and first six months of fiscal 2011. Fiscal 2011 runs from June 1, 2010 through May 31, 2011. Oracle operates software, hardware systems and services businesses. Results include the effects of the January 2010 acquisition of Sun Microsystems, which added hardware systems products and support operations.
Key Financial Metrics
| Metric | Three Months Ended November 30 | Six Months Ended November 30 |
|---|---|---|
| Total revenue | $8.582 billion, up 47% | $16.084 billion, up 47% |
| Operating income | $2.770 billion; 32.3% margin | $4.687 billion; 29.1% margin |
| Net income | $1.870 billion, up 28% | $3.223 billion, up 25% |
| Diluted EPS | $0.37, versus $0.29 | $0.63, versus $0.51 |
| Operating cash flow | Not separately provided for the quarter | $4.761 billion, up 8% |
| Free cash flow | Not separately provided for the quarter | Trailing four-quarter free cash flow was $8.684 billion, up 3% |
Revenue for the quarter comprised $5.644 billion of software, $1.753 billion of hardware systems and $1.185 billion of services. Six-month revenue comprised $10.380 billion of software, $3.451 billion of hardware systems and $2.253 billion of services.
Six-month software revenue increased 15%, including 22% growth in new software licenses and 12% growth in software license updates and product support. Six-month services revenue increased 21%. Hardware systems revenue was new in the comparable period because of the Sun acquisition.
As of November 30, 2010, cash and cash equivalents were $10.420 billion and marketable securities were $14.425 billion, for combined cash, cash equivalents and marketable securities of $24.845 billion. Working capital was $19.387 billion.
Total borrowings were approximately $17.0 billion, including $2.25 billion of senior notes due January 2011. Oracle issued $3.25 billion of senior notes in July 2010 and had no commercial paper outstanding at November 30, 2010. Management stated that the company was in compliance with debt covenants.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by the Sun-acquired hardware business, higher new software license sales, increased support revenue and higher services revenue, particularly On Demand.
- Operating income increased 27% for the quarter and 20% for the first six months, but operating margin declined from 37.2% to 32.3% for the quarter and from 35.9% to 29.1% for the first six months.
- Margin pressure reflected the lower-margin hardware business and higher research and development, amortization, acquisition-related and restructuring expenses.
- Amortization of intangible assets increased to $614 million for the quarter and $1.217 billion for the six months, compared with $436 million and $867 million, respectively.
- Restructuring expense increased to $189 million for the quarter and $318 million for the six months, primarily due to the Sun restructuring plan.
- Research and development expense increased 58% for the quarter and 62% for the six months, largely due to Sun-related personnel and infrastructure costs.
- Non-operating income increased to $90 million for the quarter and $165 million for the six months, partly because of foreign-exchange gains compared with losses in the prior-year periods.
- General and administrative expense included a $120 million benefit from recovery of legal costs, an unusual item that reduced reported expenses.
Guidance, Outlook, Risks and Unusual Items
- Management expects software revenue and support revenue to continue benefiting from customer demand, support-contract renewals and acquisitions. The filing does not provide specific numerical revenue or EPS guidance.
- Management expects the hardware business to add significant revenue and expense but to have lower operating margins than the software business. Hardware revenue can be affected materially by the timing of large customer orders and manufacturing or delivery delays.
- The Sun restructuring plan was estimated at approximately $1.1 billion in total costs. Approximately $485 million remained to be incurred as of November 30, 2010, with most expected through fiscal 2012.
- Oracle agreed to acquire Art Technology Group for approximately $1.1 billion in cash. Closing was expected in the third quarter of fiscal 2011, subject to customary conditions.
- Oracle held $8.526 billion of net intangible assets and $20.889 billion of goodwill at November 30, 2010. Future amortization of intangible assets was estimated at $1.175 billion for the remainder of fiscal 2011 and $2.157 billion in fiscal 2012.
- In the SAP litigation, a jury awarded Oracle $1.3 billion. The award had not been received or recorded as income, and post-trial motions and appeal rights remained outstanding.
- Oracle faced ongoing litigation involving Parallel Networks, the U.S. government’s GSA-related claims and shareholder derivative actions. Management stated that it believed it had meritorious defenses and that the matters were not expected to have a material adverse effect, although outcomes were uncertain.
- Approximately $2.8 billion of unrecognized tax benefits, including interest and penalties, were excluded from the contractual-obligations table because settlement timing was uncertain. Approximately $120 million was subject to settlement agreements.
- Foreign-exchange exposure remained material. At November 30, 2010, foreign-currency forward contracts had notional amounts of $1.6 billion to purchase U.S. dollars, $153 million to sell U.S. dollars and approximately $384 million to purchase euros.
Important Facts for Investors to Verify
- Whether Sun integration delivers expected revenue growth and cost efficiencies without further margin deterioration.
- The timing and ultimate cost of the remaining Sun restructuring program.
- The January 2011 repayment or refinancing of the $2.25 billion senior notes.
- The closing and purchase-accounting effects of the planned Art Technology Group acquisition.
- Customer renewal rates for software and hardware support contracts, including the impact of acquisition-related deferred-revenue adjustments.
- The collectability and eventual accounting treatment of the $1.3 billion SAP jury award.
- Potential cash-tax payments and changes in the $2.8 billion of unrecognized tax benefits.
- The sustainability of reported profitability after amortization, restructuring, acquisition-related costs and the $120 million legal-cost recovery.