Oracle Corporation — Fiscal 2013 Second-Quarter Form 10-Q Summary
Business context and reporting period
Oracle is an enterprise software, hardware systems and services provider. The filing covers the three and six months ended November 30, 2012, within fiscal 2013, which runs from June 1, 2012 through May 31, 2013. Results are unaudited and should be read with the fiscal 2012 Form 10-K.
Oracle’s business mix continued to shift toward software: software represented 73% of total revenue on a trailing four-quarter basis, compared with 69% in the prior comparable period. The company cited acquisitions, including Taleo and RightNow, as affecting comparability.
Financial performance and liquidity
| Metric | Three months ended Nov. 30, 2012 | Prior year | Six months ended Nov. 30, 2012 | Prior year |
|---|---|---|---|---|
| Total revenue | $9.094 billion | $8.792 billion | $17.275 billion | $17.166 billion |
| Operating income | $3.471 billion | $3.111 billion | $6.350 billion | $5.794 billion |
| Operating margin | 38.2% | 35.4% | 36.8% | 33.7% |
| Net income | $2.581 billion | $2.192 billion | $4.615 billion | $4.032 billion |
| Diluted EPS | $0.53 | $0.43 | $0.94 | $0.78 |
| Effective tax rate | 21.3% | 25.9% | 22.9% | 25.8% |
- Second-quarter revenue increased 3% as reported and 5% in constant currency. First-half revenue increased 1% as reported and 4% in constant currency.
- Software revenue increased 10% in the quarter and 7% in the first half. New software licenses and cloud subscriptions increased 17% and 12%, respectively; cloud subscription revenue increased to $218 million for the quarter and $421 million for the first half.
- Software license updates and product support revenue increased 7% in the quarter and 5% in the first half. This high-margin business had an 89% reported segment margin in the quarter and 88% in the first half.
- Hardware systems revenue declined 16% in the quarter and 18% in the first half. Hardware systems products revenue declined 23% and 24%, respectively, while hardware support revenue declined 6% and 9%.
- Services revenue declined 5% in both the quarter and first half. Services margin declined to 17% in the quarter and 18% in the first half, from 20% in both prior-year periods.
- Research and development expense increased 9% in the quarter and 11% in the first half, primarily from higher employee-related costs and headcount.
- Cash provided by operating activities was $6.466 billion in the first half, versus $6.676 billion previously. Capital expenditures were $351 million, producing first-half operating cash flow less capital expenditures of approximately $6.115 billion.
- Trailing four-quarter free cash flow was $12.823 billion, up 2% from $12.629 billion. Free cash flow was 121% of trailing four-quarter net income.
- Cash, cash equivalents and marketable securities totaled $33.695 billion at November 30, 2012, including $26.0 billion held by foreign subsidiaries that Oracle considered indefinitely reinvested overseas.
- Working capital was $28.782 billion, up 17% from May 31, 2012. Days sales outstanding improved to 44 days from 53 days.
- Total borrowings were approximately $19.757 billion, consisting of $1.250 billion of current borrowings and $18.507 billion of non-current borrowings. Estimated fair value of borrowings was $22.8 billion.
Material changes versus the prior comparable period
- Net income increased 18% in the quarter and 14% in the first half; diluted EPS increased 23% and 21%, respectively. Share repurchases contributed to the reduction in weighted-average diluted shares, which fell to 4.868 billion in the quarter from 5.123 billion.
- Operating margin expanded by approximately 280 basis points in the quarter and 310 basis points in the first half, benefiting from revenue growth, lower or relatively flat operating expenses, and unusual items.
- Acquisition-related and other expenses were a benefit of $121 million in the quarter and $380 million in the first half, compared with expenses of $5 million and $25 million, respectively. The quarter included a $145 million benefit from a reduction in the estimated Pillar Data contingent consideration liability; the first half also included a $306 million SAP litigation benefit.
- Restructuring expense increased to $131 million in the quarter and $276 million in the first half, compared with $52 million and $154 million. Oracle expects total costs under its Fiscal 2013 Restructuring Plan of $297 million, with approximately $48 million remaining at November 30, 2012, primarily through fiscal 2014.
- In October 2012, Oracle issued $5.0 billion of fixed-rate senior notes: $2.5 billion due in 2017 at 1.20% and $2.5 billion due in 2022 at 2.50%. The proceeds may be used for general corporate purposes, including repurchases, acquisitions and debt repayment.
- Oracle repurchased 200.3 million shares for $6.1 billion in the first half, compared with 60.6 million shares for $1.8 billion in the prior-year period. Approximately $7.0 billion remained available under the repurchase authorization at November 30, 2012.
Guidance, outlook, commentary and risks
- Management expects software revenue generally to continue increasing, supported by customer demand, support-contract renewals and acquisitions. It expects software license updates and product support revenue and margins to grow over the longer term.
- Management expects hardware operating margins to remain lower than software margins and noted limited ability to predict quarterly hardware product revenue. The timing of a few large orders or manufacturing and delivery delays could materially affect quarterly results.
- Oracle expects to continue acquiring companies, products, services and technologies and believes available cash, operating cash flow, additional borrowings and securities issuance can fund acquisitions and other capital needs.
- Management expects to continue significant research and development investment and seeks to grow consulting revenue, although consulting revenue may lag product sales and is affected by customer IT spending.
- Oracle accelerated second-, third- and fourth-quarter fiscal 2013 dividends into a $0.18-per-share payment in December 2012. Future dividends remain subject to Board approval, with the next opportunity identified as the fiscal 2014 first-quarter earnings announcement.
- Material contingencies include the SAP intellectual-property litigation, for which Oracle recorded a $306 million receivable and benefit; appeals remained pending. In the HP litigation, a court ruled that Oracle must continue certain software development and porting for HP Itanium servers; damages and other claims were scheduled for trial beginning April 8, 2013, and Oracle could not estimate a reasonably possible loss range.
- Tax authorities were examining U.S. and international tax returns. Oracle stated that it had adequately provided for reasonably foreseeable outcomes, but acknowledged that outcomes could differ.
- Foreign exchange movements, international exposure, customer renewal rates, competitive conditions, acquisitions, seasonality, large transaction timing, restructuring execution and impairment of goodwill or intangible assets remain important risks.
Important facts for investors to verify
- Separate recurring growth in software support revenue from acquisition-related contributions and accounting adjustments to acquired deferred revenue.
- Underlying operating performance excluding the $145 million contingent-consideration benefit, $306 million SAP litigation benefit, restructuring costs and substantial amortization expense.
- Whether hardware systems revenue and margin stabilization offsets continued declines in legacy hardware products.
- Debt maturities, refinancing requirements and the effect of the $5.0 billion note issuance on future interest expense and capital allocation.
- The availability and geographic location of cash, including potential tax costs if foreign earnings considered indefinitely reinvested are repatriated.
- The outcome and potential financial exposure from the SAP appeals, HP litigation, tax examinations and other legal proceedings.
- Execution of the Fiscal 2013 Restructuring Plan and the remaining approximately $48 million of expected costs.
- The sustainability of large share repurchases and accelerated dividends while Oracle continues acquisitions and carries approximately $19.8 billion of borrowings.