ORACLE CORP quarterly report, Q3 FY2014

Oracle Corporation Form 10-Q Summary

Business context and reporting period

This filing covers Oracle’s fiscal third quarter and first nine months ended February 28, 2014, with comparative periods ended February 28, 2013. Oracle provides enterprise software, cloud subscriptions, hardware systems, support, consulting, managed cloud, and education services. The filing was signed March 20, 2014. The request labels the period “2013 Q3,” but the filing identifies it as fiscal 2014 third quarter.

Key financial metrics

Metric	Three months ended Feb. 28, 2014	Three months ended Feb. 28, 2013	Nine months ended Feb. 28, 2014	Nine months ended Feb. 28, 2013
Total revenue	$9.307 billion	$8.958 billion	$26.955 billion	$26.233 billion
Operating income	$3.567 billion	$3.334 billion	$9.850 billion	$9.684 billion
Operating margin	38%	37%	37%	37%
Net income	$2.565 billion	$2.504 billion	$7.309 billion	$7.119 billion
Diluted EPS	$0.56	$0.52	$1.58	$1.46
Operating cash flow	Not separately provided for the quarter	Not separately provided for the quarter	$10.465 billion	$9.660 billion

Software revenue was $6.979 billion in the quarter and $19.958 billion for the nine-month period, up 5% in both comparisons.
New software licenses and cloud subscriptions revenue increased 4% in the quarter and 2% for the nine months. Cloud subscription revenue rose to $287 million from $231 million in the quarter and to $800 million from $653 million for the nine months.
Software license updates and product support revenue increased 5% in the quarter and 6% for the nine months; reported segment margin was 89% in both periods.
Hardware systems revenue increased 7% in the quarter but was essentially flat for the nine months. Hardware systems products revenue declined 3% for the nine months, while hardware systems support revenue increased 4%.
Services revenue declined 4% in the quarter and 6% for the nine months, primarily because of lower consulting revenue.
Trailing-four-quarter free cash flow was $14.420 billion, up 11%, equal to 130% of trailing-four-quarter net income.
Cash, cash equivalents, and marketable securities totaled $37.225 billion at February 28, 2014, including $32.9 billion held by foreign subsidiaries considered indefinitely reinvested overseas.
Working capital was $31.312 billion, compared with $28.820 billion at May 31, 2013. Current assets were $44.404 billion and current liabilities were $13.092 billion.
Total borrowings were approximately $24.2 billion, including $1.516 billion classified as current and $22.677 billion classified as non-current. Oracle reported compliance with debt covenants.
Net cash used in investing was $5.932 billion, including $3.066 billion for acquisitions and $426 million for capital expenditures.
Financing cash outflows included $7.841 billion of share repurchases and $1.640 billion of dividends, partially offset by $5.566 billion of net borrowings.

Material changes versus the prior comparable period

Quarterly revenue increased 4%, while revenue increased 3% for the first nine months. On a constant-currency basis, growth was 6% and 4%, respectively.
Quarterly operating income increased 7% and the operating margin expanded to 38%. Nine-month operating income increased 2%, while the operating margin remained 37%.
Quarterly net income increased 2% and diluted EPS increased 8%, benefiting in part from a lower share count following repurchases. Nine-month net income increased 3% and diluted EPS increased 8%.
Operating cash flow increased 8% to $10.465 billion for the nine months.
Quarterly software growth was led by support revenue and cloud subscriptions. Services revenue declined, while hardware products improved in the quarter but declined for the nine-month period.
Interest expense increased 15% for the nine months to $674 million because of higher average borrowings.
Foreign currency losses increased to $226 million for the nine months from $150 million, including a $111 million Venezuelan bolivar remeasurement loss.
Oracle completed the approximately $1.6 billion acquisition of Responsys on February 6, 2014. Fiscal 2014 acquisitions contributed $195 million of revenue during the first nine months, and goodwill increased to $29.322 billion from $27.343 billion.
Oracle issued €2.0 billion and $3.0 billion of senior notes in July 2013. The company repurchased 231.4 million shares for $7.8 billion during the first nine months and had approximately $6.3 billion remaining under its repurchase authorization at February 28, 2014.

Guidance, outlook, commentary, risks, and unusual items

Management expects software revenue generally to continue increasing, supported by demand for software and cloud offerings, high support-renewal rates, and acquisitions. Management also expects support revenue and margins to grow over the longer term.
Oracle expects to continue acquisitions and significant research and development investment. Hardware margins are expected to remain lower than software margins.
Quarterly hardware revenue is difficult to predict because a few large orders, customer delays, or manufacturing and delivery timing can materially affect results.
The business is seasonal, with revenue and operating margins typically highest in the fourth fiscal quarter and lowest in the first fiscal quarter.
The 2013 Restructuring Plan has estimated total costs of $705 million. Oracle recorded $134 million in the first nine months of fiscal 2014 and expected to incur approximately $246 million of remaining costs, primarily through fiscal 2015.
Future amortization of acquired intangible assets was estimated at $6.494 billion, plus $64 million of in-process research and development. Estimated remaining fiscal 2014 amortization was $554 million.
Venezuela remains a significant foreign-currency risk. A further 50% to 90% devaluation of the bolivar from its February 28, 2014 level could generate approximately $65 million to $120 million of additional remeasurement losses.
A 100-basis-point increase in LIBOR-based rates was estimated to increase annual interest expense by approximately $35 million. Oracle also has Euro-denominated debt exposure despite hedging activities.
Material proceedings include the SAP intellectual-property litigation, the HP Itanium litigation, and Pillar-related derivative litigation. Management did not believe reasonably foreseeable losses would be materially above amounts already recognized, if any; certain outcomes remain uncertain.
Tax authorities were examining U.S. and international returns. Management believed it had adequately provided for reasonably foreseeable outcomes, but acknowledged that final results cannot be assured.
Management reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter.

Important facts for investors to verify

Confirm the filing period: fiscal third quarter ended February 28, 2014, not calendar-year 2013 third quarter.
Assess whether recurring support and cloud growth can offset weakness in services and legacy hardware products.
Review the sustainability of earnings growth after adjusting for acquisitions, share repurchases, amortization, restructuring, stock compensation, foreign-exchange losses, and prior-period litigation and acquisition benefits.
Monitor leverage, refinancing requirements, floating-rate exposure, and the effect of continued borrowing to fund acquisitions, dividends, or repurchases.
Evaluate the concentration of liquidity in foreign subsidiaries and the potential U.S. tax cost of repatriation.
Track Responsys and other acquisition integration, preliminary purchase-price accounting, goodwill, and future intangible amortization.
Review developments in the Venezuela currency situation, tax audits, SAP and HP litigation, and the Pillar derivative matter.
Consider the company’s non-GAAP free-cash-flow presentation alongside GAAP operating cash flow and capital expenditures.