Oracle Corporation Form 10-Q Summary
Business Context and Reporting Period
Oracle provides enterprise applications and infrastructure technologies through cloud, on-premise and hybrid deployment models. Its three operating segments are cloud and license, hardware, and services. This filing covers the third quarter and first nine months of fiscal 2020, ended February 29, 2020, compared with the corresponding periods ended February 28, 2019. The filing was signed March 13, 2020.
Key Financial Metrics
| Metric | Q3 FY2020 | Q3 FY2019 | 9M FY2020 | 9M FY2019 |
|---|---|---|---|---|
| Total revenue | $9.796 billion | $9.614 billion | $28.629 billion | $28.369 billion |
| Operating income | $3.528 billion | $3.399 billion | $9.588 billion | $9.278 billion |
| Operating margin | 36% | 35% | 33% | 33% |
| Net income | $2.571 billion | $2.745 billion | $7.019 billion | $7.343 billion |
| Diluted EPS | $0.79 | $0.76 | $2.10 | $1.93 |
| Effective tax rate | 16.4% | 11.1% | 16.1% | 12.6% |
| Operating cash flow | Not separately provided | Not separately provided | $9.525 billion | $10.129 billion |
| Free cash flow, trailing four quarters | $12.403 billion | $13.164 billion | Not applicable | Not applicable |
- Cloud services and license support revenue increased 4% in Q3 and 3% in the first nine months on a reported basis. Applications cloud services and license support grew 6% in Q3 and 5% year to date; infrastructure cloud services and license support grew 2% in both periods.
- Cloud license and on-premise license revenue declined 2% in Q3 and 5% year to date. Hardware revenue declined 6% in both periods, while services revenue declined 1% in Q3 and 2% year to date.
- Q3 segment margins were 66% for cloud and license, 57% for hardware and 15% for services. First-nine-month margins were 65%, 55% and 15%, respectively.
- Cash, cash equivalents and marketable securities totaled $25.858 billion at February 29, 2020, compared with $37.827 billion at May 31, 2019. Cash and cash equivalents were $23.829 billion.
- Total debt was approximately $51.675 billion, consisting of $2.355 billion of current notes payable and $49.320 billion of non-current notes payable and other borrowings. The filing reports estimated fair value of senior notes and related hedges of $58.4 billion.
- Working capital was $17.702 billion at February 29, 2020, compared with $27.756 billion at May 31, 2019.
- Remaining performance obligations were $33.8 billion, approximately 60% of which Oracle expected to recognize as revenue within twelve months.
Material Changes Versus the Prior Comparable Period
- Reported revenue increased 2% in Q3 and 1% for the first nine months; constant-currency revenue increased 3% and 2%, respectively.
- Operating income increased 4% in Q3 and 3% year to date, while net income declined 6% in both periods.
- Diluted EPS increased despite lower net income, primarily reflecting substantially fewer weighted-average shares following stock repurchases: 3.271 billion in Q3 versus 3.617 billion, and 3.337 billion year to date versus 3.811 billion.
- Operating cash flow declined 6% year to date, and trailing-four-quarter free cash flow declined 6%.
- Interest expense declined 10% in Q3 and 9% year to date due primarily to lower average borrowings after repayment of $4.5 billion of senior notes during the first nine months.
- Non-operating income declined to $4 million in Q3 from $198 million and to $195 million year to date from $681 million, primarily due to lower interest income and higher foreign-currency losses.
- The effective tax rate increased materially because the prior-year periods included favorable adjustments related to the Tax Cuts and Jobs Act under SAB 118. The prior-year Q3 and nine-month tax benefits were $236 million and $389 million, respectively.
- Oracle repurchased $13.9 billion of common stock during the first nine months, compared with $29.9 billion in the prior-year period, and paid $2.330 billion in dividends versus $2.126 billion.
Guidance, Outlook, Risks, Contingencies and Unusual Items
- Management expected total cloud and license revenue to generally increase on a constant-currency basis, supported by cloud services, license support, cloud licenses and on-premise licenses. It also expected substantially all license-support customers to renew annually.
- Management continued to emphasize cloud-based offerings and second-generation cloud infrastructure. The shift toward cloud contributed to lower hardware product and hardware-support revenue.
- Oracle stated that the potential effects of COVID-19 were unknown as of the filing. It had modified employee travel, work locations and certain marketing events, and warned that the impact could be significant in the fourth quarter, historically its largest revenue quarter, particularly for transactional licenses, hardware and certain services.
- The 2019 Restructuring Plan had estimated total costs of up to $781 million. Approximately $119 million remained as of February 29, 2020, with most expected through the end of fiscal 2020. Restructuring expense was $181 million for the first nine months.
- Oracle adopted the new lease standard, Topic 842, on June 1, 2019. The adoption resulted in operating lease right-of-use assets of $1.8 billion and operating lease liabilities of $1.904 billion at February 29, 2020, with no material impact on reported operating results or cash flows.
- Oracle had a $3.0 billion jury award in the Hewlett-Packard litigation, plus post-judgment interest, secured by a surety bond. No amount had been paid or recorded in earnings; Oracle was appealing, and stated that the outcome could materially affect future cash flows and results.
- Income-tax audits and litigation remained active in the United States and various foreign jurisdictions, including Australia, Brazil, Canada, India, Indonesia, South Korea, Mexico, Pakistan and Spain. Oracle believed it had adequately provided for the matters but could not assure the ultimate outcomes.
- The stock-repurchase authorization had approximately $6.8 billion remaining as of February 29, 2020. In March 2020, the board approved additional expansions of the program, although the filing’s February 29 balance predates that approval.
- Oracle stated that current cash, investments and operating cash flow were sufficient for working capital, capital expenditures and contractual obligations, and that it had no material off-balance-sheet arrangements.
Most Important Facts for Investors to Verify
- Whether cloud and license growth continues to offset declines in hardware, on-premise license and services revenue.
- The effect of COVID-19 on fiscal fourth-quarter demand, collections, contract renewals and delivery of transactional products.
- Debt maturities, refinancing needs and the sustainability of large share repurchases and dividend payments relative to operating cash flow.
- The timing and final cost of the 2019 Restructuring Plan and whether expected savings offset ongoing cloud infrastructure investments.
- The ultimate resolution and cash exposure from the Hewlett-Packard litigation and significant tax examinations.
- The quality and conversion of the $33.8 billion remaining performance obligation balance into recognized revenue and cash.
- The filing’s unaudited interim results, non-GAAP free-cash-flow presentation and constant-currency comparisons should be evaluated alongside the audited annual filing and subsequent reports.