Oracle Corporation — Fiscal 2024 Second-Quarter Form 10-Q
Reporting period: Quarter and six months ended November 30, 2023; fiscal year ends May 31. Results are unaudited and compared with the corresponding 2022 periods. Oracle provides cloud and license, hardware, and services offerings globally.
Financial highlights
| Metric | Q2 FY2024 | Q2 FY2023 | Six months FY2024 | Six months FY2023 |
|---|---|---|---|---|
| Revenue | $12.941 billion | $12.275 billion | $25.394 billion | $23.720 billion |
| Operating income | $3.622 billion | $3.071 billion | $6.918 billion | $5.694 billion |
| Operating margin | 28% | 25% | 27% | 24% |
| Net income | $2.503 billion | $1.741 billion | $4.923 billion | $3.289 billion |
| Diluted EPS | $0.89 | $0.63 | $1.75 | $1.20 |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $7.117 billion | $7.243 billion |
- Revenue mix: Cloud services and license support revenue was $9.639 billion in Q2, up 12%; cloud services revenue was $4.775 billion, up 25%. Cloud license and on-premise license revenue declined 18% to $1.178 billion. Hardware revenue declined 11% to $756 million, while services revenue declined 2% to $1.368 billion.
- Cloud and license: Segment revenue increased 8% to $10.817 billion and segment margin was 64%, compared with 63% in the prior-year quarter. Infrastructure cloud services and license support revenue increased 14%.
- Other segment performance: Hardware segment margin was 63%, compared with 57% in the prior-year quarter. Services segment margin declined to 15% from 20%.
- Taxes: Effective tax rates were 8.0% for Q2 and 3.4% for the six-month period, compared with 18.8% and 13.4%, respectively, in the prior-year periods. The filing attributes the lower rates primarily to stock-based compensation tax benefits and deferred-tax-asset revaluation.
- Liquidity: Cash, cash equivalents, and marketable securities totaled $8.690 billion at November 30, 2023, down from $10.187 billion at May 31, 2023. Working capital was negative $5.118 billion.
- Debt: Current and non-current notes payable and other borrowings totaled approximately $88.789 billion, compared with $90.481 billion at May 31, 2023. The company repaid $3.5 billion of senior notes during the first half and issued $1.749 billion of commercial paper, net of repayments.
- Capital allocation: Six-month cash dividends were $2.190 billion, and stock-repurchase-program payments were $600 million. Approximately $7.6 billion remained available under the repurchase authorization at November 30, 2023. The quarterly dividend declared in December was $0.40 per share.
- Free cash flow: Trailing-four-quarter free cash flow was $10.104 billion, up 20% year over year, based on $17.039 billion of operating cash flow and $6.935 billion of capital expenditures.
Material changes versus the prior comparable period
- Total revenue increased 5% in Q2 and 7% for the first six months on a reported basis; constant-currency growth was 4% and 6%, respectively.
- Operating margin expanded by three percentage points in Q2 and six-month results, driven primarily by higher revenue and lower amortization, acquisition-related, and restructuring expenses.
- Net income increased 44% in Q2 and 50% for the first six months; diluted EPS increased 41% and 46%, respectively.
- Operating cash flow declined 2% for the first six months despite higher net income, primarily because of unfavorable working-capital changes, including income-tax payments.
- Investing cash use fell to $2.811 billion from $32.094 billion, primarily because the prior-year period included approximately $27.8 billion of acquisition spending related to Cerner. Capital expenditures declined to $2.394 billion from $4.154 billion.
- Interest expense increased 4% in Q2 and 7% for the first six months because of higher average borrowings, partially offset by debt repayments.
- Restructuring expense was $83 million in Q2 and $222 million for the first six months. The Fiscal 2024 Oracle Restructuring Plan has estimated total costs of up to $609 million, with approximately $366 million remaining and expected primarily through fiscal 2025.
Outlook, commentary, risks, and unusual items
- Management expects cloud and license revenue generally to continue increasing on a constant-currency basis, supported by cloud-services growth and continued demand for license support and license offerings.
- Management expects the proportion of cloud-services revenue to continue increasing. Cloud services represented 37% of total revenue in both the quarter and six-month period, versus 31% in the prior-year periods.
- Oracle expects cloud infrastructure investments and related cloud-services expenses to continue increasing as it expands data-center capacity and geographic coverage.
- Management expects hardware margins to remain lower than cloud and license margins. Hardware revenue remains difficult to predict and is being affected by the shift toward cloud infrastructure and the de-emphasis of certain non-strategic hardware products.
- Remaining performance obligations were $65.5 billion at November 30, 2023; approximately 48% was expected to be recognized over the next 12 months and 35% over months 13 through 36.
- Unusual or nonrecurring influences included the low effective tax rate, restructuring charges, stock-based compensation of $1.878 billion for the first six months, amortization of acquired intangible assets of $1.518 billion, and reduced acquisition spending following the Cerner transaction.
- Tax authorities are examining Oracle and acquired entities in multiple jurisdictions, including the United States and various foreign countries. Oracle believes it has adequately provided for tax-audit outcomes but notes that final outcomes are uncertain.
- Pending legal matters include derivative litigation concerning the NetSuite acquisition and Oracle’s cloud business. Management does not currently expect these matters to have a material financial impact; the NetSuite fee application and costs motions remained unresolved at the filing date, while the cloud-business matter had an agreement in principle subject to final documentation.
- Operating lease commitments increased to $10.6 billion, primarily for data centers, with commencements generally expected from the remainder of fiscal 2024 through fiscal 2027. These commitments were not recorded on the balance sheet at November 30, 2023.
- Management stated that current liquidity, operating cash flow, and borrowing arrangements should be sufficient for working capital, capital expenditures, contractual obligations, acquisitions, dividends, and repurchases.
Investor verification checklist
- Verify whether cloud-services growth and remaining performance obligations convert into recognized revenue at the expected pace.
- Monitor data-center capital expenditures, cloud infrastructure costs, and their effect on consolidated and cloud-segment margins.
- Assess leverage, upcoming debt maturities, commercial-paper reliance, interest expense, and refinancing conditions.
- Separate sustainable operating improvement from the benefit of the unusually low effective tax rates and lower amortization expense.
- Track the remaining $366 million estimated restructuring costs and whether projected savings offset implementation costs.
- Review tax examinations, legal proceedings, lease commitments, and other contingencies for changes that could affect liquidity or earnings.
- Evaluate hardware and services declines, customer renewal rates, foreign-currency effects, and the pace of share repurchases relative to stock-based dilution.