ORACLE CORP quarterly report, Q2 FY2016

Oracle Corporation Form 10-Q Summary

Business context and reporting period

Oracle provides cloud and on-premise software, cloud infrastructure, hardware, and related services to more than 400,000 customers worldwide. The filing covers the quarter and six months ended November 30, 2015, representing the second quarter and first half of fiscal 2016. The financial statements are unaudited.

Key financial metrics

Metric	Three months ended Nov. 30, 2015	Three months ended Nov. 30, 2014	Six months ended Nov. 30, 2015	Six months ended Nov. 30, 2014
Total revenue	$8.993 billion	$9.598 billion	$17.441 billion	$18.194 billion
Operating income	$2.955 billion	$3.542 billion	$5.609 billion	$6.506 billion
Operating margin	32.9%	36.9%	32.2%	35.8%
Net income	$2.197 billion	$2.502 billion	$3.945 billion	$4.685 billion
Diluted EPS	$0.51	$0.56	$0.90	$1.04
Net margin	24.4%	26.1%	22.6%	25.7%

Revenue mix for the quarter was $7.009 billion from cloud and on-premise software, $1.123 billion from hardware, and $861 million from services. Cloud revenue totaled $649 million, including $484 million from SaaS and PaaS and $165 million from IaaS.

Software license updates and product support revenue was $4.683 billion for the quarter and $9.379 billion for the first half; management reported approximately 91% segment margins for both periods.
SaaS and PaaS revenue increased 34% year over year to $484 million for the quarter, while new software licenses declined 18% to $1.677 billion.
Hardware revenue declined 16% to $1.123 billion for the quarter, and the hardware products segment produced a negative $16 million margin.
Research and development expense increased to $1.444 billion for the quarter and $2.834 billion for the first half.
Interest expense increased to $371 million for the quarter and $745 million for the first half, primarily because of higher average borrowings.
Effective tax rates were 17.6% for the quarter and 20.8% for the first half, compared with 23.5% and 21.7%, respectively, in the prior-year periods.

Cash flow, liquidity, debt, and capital allocation

Six-month operating cash flow was $6.357 billion, down from $7.790 billion in the prior-year period.
Six-month investing cash flow was negative $3.338 billion, compared with negative $12.909 billion, reflecting lower acquisition spending and investment activity.
Six-month financing cash flow was negative $7.026 billion, primarily due to $6.258 billion of stock repurchases and $1.286 billion of dividends.
Cash and cash equivalents were $17.411 billion at November 30, 2015, compared with $21.716 billion at May 31, 2015. Marketable securities were $34.924 billion, producing total cash, cash equivalents, and marketable securities of $52.335 billion.
Working capital was $44.864 billion, down from $47.314 billion at May 31, 2015. Days sales outstanding declined to 40 days from 47 days.
Notes payable totaled approximately $41.940 billion, including $2.000 billion current and $39.940 billion non-current debt. The estimated fair value of borrowings was $43.5 billion.
Oracle repurchased 162.1 million shares for $6.2 billion during the first six months and had approximately $3.0 billion remaining under its authorization at November 30, 2015. Dividends declared were $0.30 per share for the first half.
Trailing four-quarter free cash flow was $11.297 billion, down 22% year over year, based on $12.903 billion of operating cash flow and $1.606 billion of capital expenditures.

Material changes versus the prior comparable period

Reported revenue declined 6% in the quarter and 4% in the first half, although constant-currency revenue was flat for the quarter and increased 3% for the first half.
Unfavorable currency movements reduced reported revenue growth by approximately 6 percentage points in the quarter and 7 percentage points in the first half.
Operating income declined 17% in the quarter and 14% in the first half; operating margin fell by approximately four percentage points in each comparison.
Cloud revenue growth and higher support revenue were offset by lower new software license, hardware, and certain services revenue. Management stated that its strategic emphasis on cloud offerings is contributing to higher SaaS and PaaS revenue but lower new software license revenue.
Operating expenses increased on a constant-currency basis, driven by higher headcount, sales and marketing, research and development, and cloud infrastructure costs.
Amortization expense declined to $423 million for the quarter and $875 million for the first half, primarily because certain intangible assets became fully amortized.
Restructuring expense increased to $95 million for the quarter and $178 million for the first half, compared with $51 million and $120 million, respectively.
The prior-year quarter included a $53 million litigation-related benefit in acquisition-related and other expenses, whereas the current-year quarter included a $19 million acquisition-related benefit.

Guidance, outlook, commentary, risks, and contingencies

Management expects cloud and on-premise software revenue generally to increase on a constant-currency basis and intends to continue emphasizing SaaS and PaaS growth.
Management expects software license updates and product support revenue and margins to grow over the longer term because of high renewal rates, support attached to new licenses, and acquired support contracts.
Oracle expects to continue significant research and development investment and to pursue additional acquisitions. Management believes available cash, operating cash flow, additional borrowings, or future securities issuances can fund acquisitions, dividends, repurchases, and other obligations.
The Fiscal 2015 Oracle Restructuring Plan has estimated total costs of up to $626 million. Approximately $339 million remained expected as of November 30, 2015, with the majority expected through the end of fiscal 2016.
Key operating risks include foreign currency volatility, long sales cycles and timing of large license transactions, unpredictable quarterly hardware orders, competition, customer renewal decisions, economic and governmental spending conditions, and continued execution of the cloud transition.
Approximately $45.3 billion of cash, cash equivalents, and marketable securities was held by foreign subsidiaries and considered indefinitely reinvested abroad; repatriation could result in additional U.S. income tax.
Oracle is involved in material litigation with Hewlett-Packard and the State of Oregon. The filing states that a reasonably possible loss range cannot currently be estimated for either matter.
U.S. and international tax authorities are examining various Oracle and acquired-entity tax returns. Management believes adequate provisions have been recorded, but outcomes and financial effects cannot be assured.
Oracle adopted new deferred-tax classification guidance retrospectively; other accounting standard adoptions had no material effect. The company was evaluating the future impact and timing of new cloud-computing and revenue-recognition standards.
Management concluded that disclosure controls and internal control over financial reporting were effective, with no material changes during the quarter.

Most important facts for investors to verify

Whether cloud SaaS, PaaS, and IaaS growth can offset continued declines in new software licenses and hardware.
Constant-currency revenue trends versus reported results and the potential effect of future foreign exchange movements.
Support-contract renewal rates, deferred revenue conversion, and the sustainability of approximately 90% support margins.
The pace and total cost of the restructuring plan, including the remaining approximately $339 million of expected costs.
Debt maturities, interest expense, refinancing needs, and the company’s ability to balance leverage with repurchases, dividends, and acquisitions.
The sustainability of operating cash flow and free cash flow after increased cloud-related capital expenditures.
Potential financial or operational effects from the Hewlett-Packard and Oregon litigation and ongoing tax examinations.