Oracle Corporation Form 10-Q Summary
Business context and reporting period
This filing reports Oracle’s fiscal third quarter and first nine months ended February 28, 2010. The request metadata identifies “2009 Q3,” but the filing itself is for fiscal 2010. Oracle completed its approximately $7.3 billion acquisition of Sun Microsystems on January 26, 2010, adding hardware systems products and support to its software and services businesses. Sun’s results are included prospectively from the acquisition date.
Financial performance and liquidity
| Metric | Three months ended February 28 | Nine months ended February 28 |
|---|---|---|
| Total revenue | $6.404 billion, up 17% | $17.315 billion, up 6% |
| Operating income | $1.843 billion, down 5% | $5.762 billion, up 6% |
| Operating margin | 29%, versus 36% | 33%, versus 33% |
| Net income | $1.189 billion, versus $1.329 billion | $3.772 billion, versus $3.702 billion |
| Diluted EPS | $0.23, versus $0.26 | $0.74, versus $0.72 |
| Cash flow from operations | Not separately reported | $6.170 billion, versus $6.247 billion |
- Third-quarter revenue included $5.015 billion of software revenue, $458 million of hardware systems revenue and $931 million of services revenue. Sun contributed $543 million of reported revenue after acquisition.
- Software license updates and product support remained the largest and highest-margin business, producing $3.297 billion of quarterly revenue and an 85% management-reported direct margin.
- Services revenue declined 9% in the quarter and 15% for the nine-month period, reflecting weaker demand for consulting and education services amid global economic conditions.
- Hardware systems products generated $273 million of revenue with a reported segment margin of negative 25%; hardware systems support generated $185 million of revenue with a 24% margin. These figures include only the post-acquisition period.
- Cash, cash equivalents and marketable securities totaled $17.489 billion at February 28, 2010, up from $12.624 billion at May 31, 2009. Approximately $16.4 billion was held by foreign subsidiaries.
- Working capital was $9.728 billion. Current assets were $23.979 billion and current liabilities were $14.251 billion.
- Total borrowings were approximately $15.7 billion, including $4.2 billion of current borrowings and $11.5 billion of non-current borrowings. Estimated fair value of borrowings was $16.75 billion.
- Oracle issued $4.5 billion of senior notes in July 2009 and issued $2.0 billion of commercial paper to help finance the Sun acquisition; $951 million of commercial paper was outstanding at February 28, 2010.
- Trailing four-quarter free cash flow was $7.979 billion, essentially unchanged from the prior comparable period, based on $8.178 billion of operating cash flow and $199 million of capital expenditures.
Material changes versus the prior comparable period
- The Sun acquisition materially changed Oracle’s business mix by adding hardware systems, manufacturing and supply-chain exposure, inventory and lower-margin product revenue.
- Quarterly revenue increased 17%, but operating income declined 5% and operating margin contracted seven percentage points, primarily because Sun-related expenses, amortization and restructuring costs grew faster than revenue.
- Software revenue increased 13% in the quarter and 7% for the nine-month period. New software license revenue increased 13% in the quarter but was flat for the nine-month period on a reported-currency basis.
- Software license updates and product support revenue increased 13% in the quarter and 11% for the nine-month period, supported by renewals, new license sales and acquisitions.
- Restructuring expense rose to $306 million in the quarter and $467 million for the nine-month period, compared with $15 million and $46 million, respectively, in the prior periods.
- Amortization of intangible assets increased to $502 million in the quarter and $1.369 billion for the nine-month period, partly due to acquisition-related intangible assets.
- Non-operating expense was $75 million in the quarter and $41 million for the nine-month period, compared with non-operating income of $24 million and $114 million, respectively, in the prior periods. The change reflected lower interest income and increased foreign-currency losses.
- Interest expense increased 20% in the quarter and 17% for the nine-month period because of higher average borrowings.
- Oracle paid $753 million of dividends during the first nine months and repurchased approximately 33.3 million shares for $742 million. Approximately $5.5 billion remained available under the repurchase authorization at February 28, 2010.
Guidance, outlook, commentary and risks
- Management expects software support revenue to continue benefiting from high renewal rates and the installed base added through acquisitions, although acquired support contracts are subject to purchase-accounting revenue deferrals.
- Management expects the hardware systems business to have lower margins than the software business and intends to pursue cost efficiencies, supply-chain simplification, build-to-order manufacturing and a greater emphasis on direct sales.
- The Sun restructuring plan has estimated costs of $325 million. Oracle recorded $235 million through February 28, 2010 and expected to incur approximately $90 million more, primarily through fiscal 2011. The legacy Oracle restructuring plan has estimated total costs of $453 million, with approximately $126 million remaining, expected primarily in the fourth quarter of fiscal 2010.
- Future amortization of intangible assets subject to amortization was estimated at $9.453 billion, including $609 million for the remainder of fiscal 2010 and $2.259 billion in fiscal 2011.
- Oracle identified integration execution, hardware competition, sales-channel transition, product development, manufacturing and third-party supplier dependence as significant risks. Sun’s historical systems business was less profitable than Oracle’s software business, and Oracle warned that pre-acquisition margin levels may not be sustainable.
- Oracle designated its Venezuelan subsidiary as highly inflationary and recognized a $70 million foreign-currency loss following currency devaluation. Further currency volatility remains possible.
- Unrecognized tax benefits totaled $2.9 billion, including $579 million assumed from Sun. Tax audits, transfer-pricing matters and the Xilinx litigation could affect future tax expense, although management did not expect reasonably foreseeable tax audit outcomes to have a material adverse effect.
- Material legal matters included the appeal of a securities class-action dismissal, patent litigation involving Parallel Networks and Oracle’s intellectual-property litigation against SAP. The filing states that management does not believe the disclosed legal matters will have a materially adverse effect, but outcomes remain uncertain.
- Management stated that existing cash, marketable securities and operating cash flow should be sufficient for working capital, capital expenditures and contractual obligations. Total contractual obligations were estimated at $25.968 billion, including $15.701 billion of debt principal and $7.694 billion of debt interest payments.
Most important facts for investors to verify
- Whether Oracle realizes the expected cost savings, synergies and revenue growth from integrating Sun.
- Whether hardware systems products can improve from the reported negative 25% segment margin and whether support renewals offset purchase-accounting deferrals.
- The pace and ultimate cost of the Sun and legacy Oracle restructuring plans.
- The effect of approximately $15.7 billion of borrowings, upcoming maturities and variable-rate exposure on interest expense and liquidity.
- The sustainability of software support renewal rates and the decline in consulting and education demand.
- Potential impairment of Sun-related goodwill, intangible assets or inventory, including the effects of acquisition accounting.
- Potential tax liabilities, foreign-currency losses, litigation outcomes and supply-chain or manufacturing disruptions.