Oracle Corporation: Fiscal 2020 Second-Quarter 10-Q Summary
Business context and reporting period
Oracle provides cloud and on-premise applications and infrastructure technologies, hardware, and related services globally. Its operating segments are cloud and license, hardware, and services. This unaudited Form 10-Q covers the quarter and six months ended November 30, 2019, the second quarter and first half of fiscal 2020. The comparable periods ended November 30, 2018.
Key financial metrics
| Metric | Three months ended Nov. 30, 2019 | Three months ended Nov. 30, 2018 | Six months ended Nov. 30, 2019 | Six months ended Nov. 30, 2018 |
|---|---|---|---|---|
| Total revenue | $9.614 billion | $9.562 billion | $18.832 billion | $18.755 billion |
| Operating income | $3.183 billion | $3.101 billion | $6.060 billion | $5.878 billion |
| Operating margin | 33% | 32% | 32% | 31% |
| Net income | $2.311 billion | $2.333 billion | $4.448 billion | $4.598 billion |
| Diluted EPS | $0.69 | $0.61 | $1.32 | $1.18 |
| Net cash from operations | Not separately provided | Not separately provided | $6.513 billion | $7.268 billion |
- Quarterly revenue increased 1%; first-half revenue was essentially flat on a reported basis and increased 1% in constant currency.
- Quarterly net margin was approximately 24%; first-half net margin was approximately 24%.
- Cloud services and license support revenue increased 3% in the quarter and first half on a reported basis. Cloud license and on-premise license revenue declined 7% in both periods.
- Hardware revenue declined 2% in the quarter and 6% in the first half. Services revenue declined 1% and 2%, respectively.
- Quarterly cloud and license segment margin was $5.112 billion, or 64%, compared with $5.113 billion, or 65%, in the prior year. Hardware margin increased to $480 million, or 55%, from $448 million, or 50%. Services margin declined to $106 million, or 13%, from $140 million, or 17%.
- Cash, cash equivalents, and marketable securities totaled $27.444 billion at November 30, 2019, down from $37.827 billion at May 31, 2019. Working capital was $19.948 billion versus $27.756 billion.
- Current notes payable were $999 million and non-current notes payable and other borrowings were $50.670 billion. Aggregate borrowings were approximately $51.7 billion, before considering cash and investments.
- Operating cash flow declined 10% in the first half. Investing cash flow was $13.619 billion, largely reflecting marketable-security sales and maturities. Financing cash use was $16.096 billion.
- Capital expenditures were $735 million in the first half. The company reported trailing-four-quarter free cash flow of $12.205 billion.
- Remaining performance obligations were $32.8 billion at November 30, 2019; approximately 60% was expected to be recognized as revenue over the following twelve months.
Material changes versus the prior comparable period
- Operating income rose 3% in the quarter and first half, while operating margin expanded by approximately one percentage point in each period.
- Net income declined 1% in the quarter and 3% in the first half, primarily reflecting higher income-tax expense and lower non-operating income.
- Interest expense decreased 10% in the quarter and 8% in the first half as average borrowings declined following debt maturities and repayments. Oracle repaid $4.5 billion of borrowings during the first half.
- Non-operating income declined to $92 million from $192 million in the quarter and to $191 million from $484 million in the first half, mainly because of lower interest income.
- Cash used for share repurchases fell to $10.0 billion from $20.0 billion in the first half of fiscal 2019. Oracle repurchased 181.0 million shares and had approximately $10.8 billion remaining under its authorization at November 30, 2019.
- The company declared quarterly dividends of $0.24 per share in December 2019, compared with $0.19 per share for the comparable prior-year period.
- Restructuring expense declined to $42 million from $143 million in the quarter and to $120 million from $233 million in the first half. Approximately $25 million remained under the Fiscal 2019 Restructuring Plan, which had estimated total costs of up to $626 million.
- Oracle adopted the new lease accounting standard on June 1, 2019. The adoption produced $1.9 billion of operating lease right-of-use assets and corresponding liabilities, with no material impact on reported operating results or cash flows.
Guidance, outlook, commentary, risks, and unusual items
- Management expects total cloud and license revenue generally to increase on a constant-currency basis, supported by growth in cloud services and license support and continued demand for cloud and on-premise licenses.
- Oracle expects customer demand for its cloud services to increase and is emphasizing cloud-based offerings, including second-generation cloud infrastructure. Cost savings from restructuring are expected to be substantially offset by investments in resources and geographies supporting cloud development, marketing, and sales.
- Management expects substantially all license-support customers to renew annually, but renewals remain subject to customer decisions, pricing, competition, economic conditions, and foreign-exchange movements.
- Hardware revenue remains difficult to predict and is being pressured by Oracle’s emphasis on cloud infrastructure. Hardware margins are expected to remain lower than cloud and license margins over time.
- International operations represent a significant portion of revenue and expenses, creating foreign-currency exposure. The company also faces competition, technology shifts, customer budget constraints, acquisition and integration risks, and risks associated with continued cloud investment.
- Oracle is appealing a $3.0 billion Hewlett-Packard judgment, plus post-judgment interest. The company has posted a surety bond, has recorded no loss, and states that the outcome could materially affect future cash flows and results of operations.
- Oracle is involved in tax examinations and disputes in the United States and numerous foreign jurisdictions. The company believes its tax reserves are adequate, but unfavorable outcomes could result in additional expense or cash payments.
- Other disclosed litigation includes NetSuite acquisition derivative claims and securities and derivative litigation concerning Oracle’s cloud business. Management does not currently expect these matters to materially affect financial position or results of operations.
- The filing does not provide formal quarterly or full-year revenue or earnings guidance.
Most important facts for investors to verify
- Whether cloud services and license-support growth continues to offset declines in perpetual and on-premise licenses, hardware, and services.
- The sustainability of the reported operating-margin improvement amid continued cloud infrastructure and research-and-development investment.
- Debt maturities, refinancing needs, interest costs, and the company’s ability to balance debt repayment with dividends, acquisitions, and share repurchases.
- The resolution and potential cash impact of the $3.0 billion Hewlett-Packard judgment and related appeal.
- Trends in operating cash flow, free cash flow, deferred revenue, and the conversion of the $32.8 billion performance-obligation balance into revenue.
- Potential changes in tax liabilities from ongoing domestic and international audits and litigation.
- Execution of the restructuring plan and whether anticipated efficiencies are offset by incremental cloud-related spending.
- The effect of foreign-exchange movements, competitive cloud pricing, customer renewals, and hardware demand on future results.