Oracle Corporation Form 10-Q Summary
Business context and reporting period
Oracle develops and supports database, middleware, and applications software and provides consulting, On Demand, and education services. The filing covers the unaudited three months ended August 31, 2009, the first quarter of fiscal 2010; the comparable period ended August 31, 2008.
Key financial metrics
| Metric | Q1 FY2010 | Q1 FY2009 | Change |
|---|---|---|---|
| Total revenues | $5.054 billion | $5.331 billion | Down 5%; down 1% constant currency |
| Software revenues | $4.145 billion | $4.172 billion | Down 1%; up 4% constant currency |
| New software licenses | $1.028 billion | $1.237 billion | Down 17%; down 14% constant currency |
| License updates and product support | $3.117 billion | $2.935 billion | Up 6%; up 11% constant currency |
| Services revenue | $909 million | $1.159 billion | Down 22%; down 18% constant currency |
| Operating income | $1.740 billion | $1.521 billion | Up 14% |
| Operating margin | 34% | 29% | Up 5 percentage points |
| Net income | $1.124 billion | $1.077 billion | Up 4% |
| Diluted EPS | $0.22 | $0.21 | Up $0.01 |
| Effective tax rate | 28.0% | 25.4% | Up 2.6 percentage points |
| Cash flow from operations | $3.738 billion | $3.240 billion | Up 15% |
At August 31, 2009, cash and cash equivalents were $16.098 billion and marketable securities were $4.467 billion, for total cash, cash equivalents, and marketable securities of $20.565 billion. Working capital was $15.285 billion. Total borrowings were approximately $14.7 billion, including $1.0 billion current borrowings and $13.7 billion non-current borrowings. Oracle reported compliance with its debt covenants.
Trailing four-quarter free cash flow was $8.492 billion, or 151% of trailing four-quarter net income. Deferred revenue increased to $5.458 billion from $4.796 billion at May 31, 2009, primarily reflecting support contracts billed in advance.
Material changes versus the prior comparable period
- Revenue declined because of a 17% decrease in new software license revenue and a 22% decrease in services revenue. Support revenue increased 6% despite unfavorable currency effects.
- Operating expenses fell 13%, driven by lower services personnel and contractor costs, reduced variable compensation, and lower travel expenses. Operating income and margin consequently improved.
- Interest expense increased to $179 million from $159 million following the issuance of $4.5 billion of senior notes in July 2009.
- Non-operating income declined to $1 million from $82 million, primarily because of lower interest income and net foreign-currency losses.
- Operating cash flow increased due primarily to collections of receivables and favorable working-capital movements. Days sales outstanding declined to 46 days from 58 days at May 31, 2009.
- Oracle issued $4.5 billion of fixed-rate senior notes: $1.5 billion due 2014, $1.75 billion due 2019, and $1.25 billion due 2039.
- Oracle repurchased 11.4 million shares for $243 million and paid $251 million of dividends. Approximately $6.0 billion remained available under the repurchase authorization at August 31, 2009.
Guidance, outlook, commentary, risks, and unusual items
- Management expects software revenue growth to benefit from support-contract renewals, new license sales, acquisitions, and continued demand, but noted that new-license revenue is difficult to predict because of long sales cycles and the timing of large transactions.
- Management attributed weaker license and services demand to deteriorating global economic conditions, particularly in database and middleware licenses, consulting, and education.
- Management stated that substantially all eligible support customers historically renew their contracts. Support revenue represented the highest-margin business, with an 86% reported segment margin in the quarter.
- Oracle agreed to acquire Sun Microsystems for an estimated $7.4 billion, subject to closing conditions including regulatory clearance. The transaction remained pending at the reporting date. Oracle issued debt partly to fund the proposed acquisition and related expenses.
- The fiscal 2009 Oracle restructuring plan has estimated total costs of $441 million. Oracle recorded $48 million in the quarter and expected to incur approximately $300 million of remaining costs during fiscal 2010; estimates may change.
- Amortization of acquired intangible assets was $431 million. Estimated future amortization totaled $6.886 billion, excluding future acquisitions such as Sun.
- Oracle adopted revised business-combination accounting rules and retrospectively presented noncontrolling interests separately in equity. The filing states that these changes did not affect total revenues, operating income, or net income.
- Material litigation included an appeal of a dismissed securities class action, patent litigation involving Parallel Networks, and intellectual-property litigation against SAP. Management did not believe the matters would materially adversely affect consolidated financial condition, results, or cash flows, although outcomes remain uncertain.
- Oracle reported $2.3 billion of unrecognized tax benefits and approximately $79 million subject to settlement agreements; the timing of payments for the remainder was not reasonably estimable.
- On September 1, 2009, after the reporting date, Oracle entered into swaps that effectively converted the 2014 notes from fixed to LIBOR-based variable interest exposure. A 100-basis-point increase in LIBOR was estimated to increase annual interest expense by approximately $15 million.
Investor verification checklist
- Verify completion, regulatory status, financing, purchase accounting, and integration costs associated with the proposed Sun acquisition.
- Assess whether the decline in new-license and services revenue is cyclical or reflects longer-term demand or competitive pressure.
- Monitor support-contract renewal rates, deferred revenue growth, and the effect of acquired support obligations on reported revenue.
- Reconcile reported operating improvement with restructuring charges, acquired-intangible amortization, stock-based compensation, and other acquisition-related items.
- Review leverage, upcoming debt maturities, interest-rate swap exposure, and funding needs for acquisitions, dividends, repurchases, and tax settlements.
- Track restructuring cash payments and whether the remaining approximately $300 million of fiscal 2010 costs changes.
- Review the status and potential exposure of the disclosed litigation and tax examinations.