ORACLE CORP quarterly report, Q1 FY2015

Oracle Corporation: Fiscal 2015 First-Quarter 10-Q Summary

Business context and reporting period

Oracle filed an unaudited Form 10-Q for the three months ended August 31, 2014, the first quarter of fiscal 2015. Oracle provides enterprise software, cloud infrastructure, hardware systems and related services. Results are compared with the three months ended August 31, 2013. The company operates through software and cloud, hardware systems and services businesses and has substantial international operations.

Key financial metrics

Metric	Q1 FY2015	Q1 FY2014	Change
Total revenue	$8.596 billion	$8.372 billion	+3%
Operating income	$2.963 billion	$2.873 billion	+3%
Operating margin	34.5%	34.3%	Approximately flat
Net income	$2.184 billion	$2.191 billion	Approximately flat, down less than 1%
Diluted EPS	$0.48	$0.47	+2%
Effective tax rate	19.7%	17.7%	Up 2.0 percentage points
Cash flow from operations	$6.728 billion	$6.292 billion	+7%
Capital expenditures	$201 million	$153 million	+31%

Software and cloud revenue increased 6% to $6.576 billion. New software licenses declined 2% to $1.370 billion, while SaaS and PaaS revenue increased 33% to $337 million, cloud IaaS revenue increased 27% to $138 million, and software license updates and product support increased 7% to $4.731 billion.
Hardware systems revenue declined 8% to $1.165 billion. Hardware products declined 14% to $578 million, while hardware support declined slightly to $587 million.
Services revenue declined 7% to $855 million.
Software and cloud represented approximately 76% of reported revenue, compared with 74% in the prior-year quarter. Management reported a 90% margin for software license updates and product support.
Cash, cash equivalents and marketable securities totaled $51.616 billion at August 31, 2014, up from $38.819 billion at May 31, 2014. Working capital was $44.817 billion.
Total borrowings were $32.567 billion at August 31, 2014, compared with $24.175 billion at May 31, 2014. Current borrowings were zero, and non-current borrowings were $32.567 billion.
Deferred revenue totaled $9.403 billion, including $8.939 billion current and $464 million non-current, versus $7.673 billion at May 31, 2014.
Trailing four-quarter free cash flow was $14.729 billion, calculated as operating cash flow of $15.357 billion less capital expenditures of $628 million.
Oracle repurchased 48.8 million shares for $2.0 billion and paid $537 million in dividends during the quarter. The quarterly dividend was $0.12 per share.

Material changes versus the prior comparable period

Growth was concentrated in recurring software support and cloud offerings, while new license revenue, hardware and services declined.
Operating income rose despite higher sales and marketing, research and development, cloud delivery and general and administrative expenses. Research and development expense increased 7% to $1.329 billion.
Amortization of intangible assets declined to $547 million from $595 million, partially offsetting higher operating expenses. Future amortization was estimated at $5.590 billion for amortizable intangible assets.
Interest expense increased 21% to $261 million, primarily because of higher average borrowings. The effective tax rate increased because of acquisition-related tax settlements in the prior-year period and changes in the current-period jurisdictional earnings mix.
Net cash from operating activities increased primarily because of favorable working-capital movements, including higher deferred revenues and income-tax payable changes.
Investing cash use increased to $6.700 billion, primarily because of greater net purchases of marketable securities and higher capital expenditures; acquisition cash payments fell to $37 million from $1.314 billion.
Financing cash provided increased to $6.520 billion, reflecting the issuance of $10.0 billion of senior notes, partially offset by repayment of $1.5 billion of maturing notes, share repurchases and dividends.
The weighted-average diluted share count declined to 4.548 billion from 4.674 billion, supporting the increase in diluted EPS despite slightly lower net income.

Guidance, outlook, commentary, risks and unusual items

Management expects software and cloud revenue generally to continue increasing on a constant-currency basis, supported by cloud subscriptions, software support renewals and acquisitions.
Management expects software license updates and product support revenue and margins to grow over the longer term, assuming customer renewals and relatively stable foreign-exchange rates.
Hardware margins are expected to remain lower than software and cloud margins. Hardware systems revenue is difficult to predict because the timing of a few large customer orders and delivery delays can materially affect quarterly results.
Management expects to continue significant research and development investment and to pursue acquisitions of companies, products, services and technologies.
Oracle completed the acquisition of MICROS Systems after the quarter end: approximately 80% of tendered shares were acquired for approximately $4.1 billion on September 3, 2014, an additional 7% for approximately $330 million was acquired by September 5, and the merger closed September 8. Purchase accounting remained preliminary at the filing date.
Oracle issued $10.0 billion of senior notes in July 2014 for general corporate purposes, including the MICROS acquisition, future acquisitions, dividends, repurchases and debt repayment. A 100-basis-point increase in LIBOR was estimated to increase annual interest expense by approximately $73 million.
The Fiscal 2013 Restructuring Plan had estimated total costs of $705 million. Oracle recorded $80 million of related expense in the quarter and expected approximately $126 million of remaining costs, mostly through the end of fiscal 2015.
Cash and marketable securities held by foreign subsidiaries totaled $39.2 billion. A significant portion was considered indefinitely reinvested overseas and could be subject to U.S. tax if repatriated.
Material litigation includes the SAP intellectual-property matter, remanded for a new trial subject to Oracle’s rejection of a $356.7 million remittitur, and the HP Itanium litigation, for which Oracle stated it could not estimate a reasonably possible loss range. The Pillar derivative litigation was concluded after court approval of a settlement and payment of $15 million in plaintiffs’ fees and costs.
Management stated that tax audits and other legal proceedings were not expected to have a material adverse effect, although outcomes cannot be assured. The filing identifies no material off-balance-sheet arrangements.
New accounting standards on revenue recognition, share-based payments, discontinued operations and going-concern disclosures were not yet effective; the company was evaluating their impact, and no material impact was expected from the going-concern standard.

Most important facts for investors to verify

Verify whether recurring support and cloud growth can offset continuing declines in new licenses, hardware products and services.
Assess the effect of the $10.0 billion debt issuance, MICROS acquisition financing, higher interest expense and exposure to floating interest rates.
Review MICROS purchase accounting, goodwill and intangible-asset additions, and the resulting future amortization and integration costs.
Monitor deferred revenue growth, customer renewal rates and the conversion of deferred revenue into reported revenue and operating cash flow.
Evaluate the sustainability of margins after restructuring, acquisition-related costs, stock-based compensation and amortization.
Consider foreign-exchange exposure, the concentration of cash overseas and possible tax consequences of repatriation.
Review the SAP and HP litigation developments, tax audits and remaining restructuring obligations.
Confirm the September 2014 $13.0 billion expansion of the share-repurchase authorization and how future repurchases compete with acquisitions, dividends and debt reduction for available cash.