Oracle Corporation: Fiscal 2013 First-Quarter 10-Q Summary
Business Context and Reporting Period
Oracle filed an unaudited Form 10-Q for the three months ended August 31, 2012, the first quarter of fiscal 2013. Oracle operates through software, hardware systems and services businesses, with software representing approximately 70% of reported quarterly revenue. The filing was signed September 24, 2012.
Key Financial Metrics
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Total revenue | $8.181 billion | $8.374 billion | Down 2%; up 3% in constant currency |
| Operating income | $2.879 billion | $2.683 billion | Up 7% |
| Operating margin | 35% | 32% | Up 3 percentage points |
| Net income | $2.034 billion | $1.840 billion | Up 11% |
| Diluted EPS | $0.41 | $0.36 | Up 14% |
| Effective tax rate | 24.7% | 25.6% | Down 0.9 percentage points |
| Cash flow from operations | $5.671 billion | $5.421 billion | Up 5% |
| Capital expenditures | $139 million | $160 million | Down 13% |
Reported revenue was pressured by approximately five percentage points of unfavorable currency movements. Software revenue increased 4% to $5.714 billion, including $1.574 billion of new software licenses and cloud subscriptions and $4.140 billion of software license updates and product support. Cloud subscription revenue increased to $203 million from $85 million. Hardware systems revenue declined 19% to $1.353 billion, while services revenue declined 6% to $1.114 billion.
Cash and cash equivalents totaled $15.667 billion at August 31, 2012, and marketable securities totaled $15.940 billion, providing combined liquidity of $31.607 billion. Working capital was $24.217 billion. Total borrowings reported on the balance sheet were approximately $14.8 billion, including $1.25 billion of current borrowings and $13.521 billion of non-current borrowings.
Operating cash flow was $5.671 billion, compared with $510 million of cash used in investing activities and $4.520 billion of cash used in financing activities. Financing uses included $3.076 billion of share repurchases, $292 million of dividends and $1.700 billion of debt repayment. Trailing-four-quarter free cash flow was $13.366 billion.
Material Changes Versus the Prior Comparable Period
- Software growth and lower operating expenses more than offset the decline in hardware and services revenue.
- Hardware systems products revenue fell 24% and its reported margin declined to 10% from 17%, primarily because of lower sales volumes of legacy products.
- Software license updates and product support revenue increased 3%, with margin improving to 88% from 87%.
- Research and development expense increased 14% to $1.201 billion, primarily from higher headcount and employee-related costs.
- Operating expenses declined 7%, partly because of a $306 million litigation benefit related to the SAP matter.
- Oracle repurchased 104.2 million shares for $3.1 billion, compared with 27.5 million shares for $823 million in the prior-year quarter. Approximately $10.0 billion remained available under the repurchase authorization at quarter-end.
- Current deferred revenue increased to $8.316 billion from $7.035 billion at May 31, 2012, while total deferred revenue increased to $8.626 billion from $7.331 billion.
- Accounts receivable declined to $3.775 billion from $6.377 billion, and days sales outstanding improved to 42 days from 53 days.
Guidance, Outlook, Commentary, Risks and Unusual Items
- Management expects software revenue generally to continue increasing, supported by customer support renewals, acquisitions and demand for cloud offerings.
- Management expects software license updates and product support revenue and margins to grow over the longer term, assuming renewals and other relevant factors remain favorable.
- Management expects hardware operating margins to remain lower than software margins and plans continued investment in hardware research and development.
- Oracle expects to continue making acquisitions and believes available cash, operating cash flow, additional borrowings or securities issuance can fund acquisitions and other capital needs.
- A Fiscal 2013 restructuring plan is expected to cost $297 million in total. Oracle recorded $137 million in the quarter and expected to incur most of the remaining $160 million through fiscal 2014.
- The $306 million SAP litigation benefit was recorded as a non-current receivable and reduced acquisition-related and other expense. Both parties appealed, so collection and ultimate resolution remain subject to appellate proceedings.
- In the HP litigation, a court found that Oracle must continue developing certain software for HP Itanium-based servers while HP sells those servers. Oracle announced an appeal; damages and other issues were scheduled for jury trial beginning February 4, 2013. Oracle stated that it could not estimate a reasonably possible loss range.
- Approximately $25.2 billion of cash, cash equivalents and marketable securities was held by foreign subsidiaries and was considered indefinitely reinvested overseas, potentially subject to U.S. tax if repatriated.
- Key operating risks include foreign-currency volatility, long and unpredictable software license sales cycles, seasonal concentration of revenue and margin in the fourth quarter, competitive and technology changes, acquisition integration, renewal rates, tax examinations and litigation.
- Oracle reported effective disclosure controls and procedures and no material changes to internal control over financial reporting during the quarter.
Facts Investors Should Verify
- Whether software and cloud growth continues to offset the ongoing contraction and margin pressure in hardware systems.
- The sustainability of earnings growth excluding the $306 million SAP litigation benefit and other acquisition, amortization, restructuring and stock-based compensation items.
- The outcome and potential financial exposure from the SAP appeal and HP litigation.
- Progress and final cost of the $297 million Fiscal 2013 restructuring plan.
- Renewal rates for software support, hardware support and cloud subscriptions, including the conversion of deferred revenue into recognized revenue.
- The allocation and tax implications of the $25.2 billion held by foreign subsidiaries.
- The effect of acquisitions, including Taleo and RightNow, on recurring revenue, amortization, margins, goodwill and integration costs.
- Future capital allocation among share repurchases, dividends, acquisitions and debt repayment.