ORACLE CORP quarterly report, Q3 FY2023

Oracle Corporation Form 10-Q Summary

Business Context and Reporting Period

Oracle provides enterprise applications and infrastructure technologies through cloud, on-premise and hybrid deployment models. Its three operating businesses are cloud and license, hardware, and services. This unaudited Form 10-Q covers the three and nine months ended February 28, 2023, within fiscal 2023, which ends May 31, 2023.

Results include Cerner from its June 8, 2022 acquisition. Cerner contributed $1.5 billion of third-quarter revenue and $4.4 billion of nine-month revenue.

Key Financial Metrics

Metric	Three Months Ended February 28, 2023	Prior Year	Nine Months Ended February 28, 2023	Prior Year
Total revenue	$12.398 billion	$10.513 billion	$36.118 billion	$30.600 billion
Operating income	$3.260 billion	$3.822 billion	$8.953 billion	$6.424 billion
Operating margin	26%	36%	25%	21%
Net income	$1.896 billion	$2.319 billion	$5.184 billion	$3.528 billion
Diluted EPS	$0.68	$0.84	$1.88	$1.26
Operating cash flow	Not separately provided for the quarter	Not separately provided	$11.518 billion	$5.554 billion
Free cash flow	Not separately provided for the quarter	Not separately provided	Trailing four-quarter amount: $7.298 billion	$6.591 billion

Third-quarter revenue increased 18% reported and 21% in constant currency; nine-month revenue increased 18% reported and 23% in constant currency.
Cloud services and license support revenue was $8.923 billion in the quarter and $25.938 billion year to date. Cloud services revenue increased 45% in both periods, while license support revenue was approximately flat.
Cloud and license represented 82% of third-quarter and nine-month revenue; hardware represented 7% and services 11%.
Third-quarter segment margins were 64% for cloud and license, 61% for hardware and 17% for services. These are direct segment margins and exclude several corporate and acquisition-related costs.
Interest expense increased to $908 million in the quarter and $2.550 billion year to date, compared with $667 million and $2.051 billion, respectively, in the prior-year periods.
The effective tax rate was 14.5% for the quarter and 13.8% for the first nine months, compared with 18.4% and 12.3% in the prior-year periods.

Liquidity, Cash Flow and Capital Structure

Cash, cash equivalents and marketable securities were $8.769 billion at February 28, 2023, down from $21.902 billion at May 31, 2022.
Working capital was negative $4.184 billion, compared with positive $12.122 billion at May 31, 2022.
Cash used in investing activities was $34.872 billion, primarily reflecting the $27.721 billion cash acquisition of Cerner and $6.782 billion of capital expenditures.
Cash provided by financing activities was $10.350 billion, including proceeds from debt issuance, partially offset by debt repayments, dividends and share repurchases.
Notes payable and other borrowings totaled $91.811 billion, including $5.415 billion current and $86.396 billion non-current. The estimated fair value of senior notes and other borrowings and related hedges was $78.5 billion.
Oracle issued $12.3 billion of fixed-rate senior notes and borrowed $5.6 billion under term loan facilities. It fully repaid the $15.7 billion Cerner bridge loan during the first nine months.
Commercial paper outstanding was $1.9 billion at February 28, 2023, with maturities through May 2023. Oracle stated that it was in compliance with applicable debt covenants, including the 3.0-to-1.0 minimum consolidated EBITDA-to-net-interest-expense ratio.
Oracle paid $2.586 billion of dividends and repurchased $1.150 billion of common stock during the first nine months. Approximately $8.3 billion remained available under the repurchase authorization.

Material Changes Versus the Prior Comparable Period

The Cerner acquisition materially increased revenue, goodwill, intangible assets, services activity and operating expenses. Cerner added $17.837 billion of goodwill and $11.972 billion of acquired intangible assets on a preliminary basis.
Operating margin declined in the third quarter to 26% from 36%, primarily because expenses grew faster than revenue, including higher cloud infrastructure and personnel costs, acquisition-related amortization and restructuring expenses.
Nine-month operating margin increased to 25% from 21%, mainly because the prior-year period included $4.7 billion of litigation-related charges that did not recur.
Amortization of intangible assets increased to $886 million in the quarter and $2.712 billion year to date, primarily due to Cerner and other recent acquisitions.
Research and development expense increased 18% in the quarter and 22% year to date, reflecting higher personnel costs, stock-based compensation and Cerner-related expenses.
Operating cash flow increased 107% year to date, benefiting substantially from the absence of the prior-year litigation-related charges and favorable working-capital changes.
During fiscal 2023, Oracle changed the estimated useful lives of its servers from four years to five years. The change reduced operating expenses by $101 million in the quarter and $346 million year to date.

Guidance, Outlook, Risks and Unusual Items

Management expects cloud and license revenue to generally increase on a constant-currency basis, driven by growth in cloud services and license support and continued demand for cloud and on-premise licenses.
Management expects cloud services to represent an increasing proportion of total revenue and plans continued investment in data-center capacity, geographic expansion, research and development and second-generation cloud infrastructure.
Management expects certain COVID-19-related variable expenditures, including employee travel, to normalize if economic and health conditions improve.
The Fiscal 2022 Oracle Restructuring Plan has estimated total costs of up to $927 million. Oracle recorded $359 million during the first nine months of fiscal 2023 and expected to incur approximately $342 million of remaining costs through fiscal year-end.
Remaining performance obligations were $62.3 billion at February 28, 2023; approximately 48% was expected to be recognized as revenue within twelve months and 35% over months 13 through 36.
Oracle has substantial acquisition-related amortization, debt service and capital expenditure requirements. Estimated future amortization of existing intangible assets totaled $10.707 billion, including $2.995 billion in fiscal 2024.
Operating lease commitments, primarily for data centers and not recorded on the balance sheet, increased to $8.4 billion as of February 28, 2023.
Tax authorities are examining Oracle and acquired entities in multiple jurisdictions, including matters involving significant amounts under controversy. Management believes adequate tax reserves have been recorded, but outcomes are uncertain.
Oracle remains involved in litigation, including a NetSuite acquisition derivative action for which no court decision had been issued as of the filing date, and a stayed derivative action related to its cloud business. Management did not believe these matters would have a material financial impact.
Oracle disclosed that its disclosure controls and procedures were effective at the reasonable-assurance level. Internal controls incorporated additional Cerner-related controls following the acquisition.

Most Important Facts to Verify

Whether Cerner integration produces sustainable revenue synergies and whether acquired intangible amortization and restructuring costs subside as planned.
The effect of higher debt balances and variable interest rates on future interest expense, liquidity and covenant compliance.
Whether cloud services growth offsets slower license support growth and supports recovery in consolidated operating margins.
The timing and amount of remaining restructuring costs, capital expenditures and data-center lease commitments.
The quality and sustainability of the reported cash-flow improvement, particularly the impact of working-capital timing and nonrecurring prior-year litigation charges.
Potential tax assessments, litigation outcomes and changes in the preliminary valuation of Cerner’s acquired assets and liabilities.
Future share repurchases and dividends given negative working capital, acquisition spending and substantial debt obligations.