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. The filing covers the three months ended August 31, 2020, the first quarter of fiscal 2021, compared with the three months ended August 31, 2019. The financial statements are unaudited.
Key Financial Metrics
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Total revenue | $9.367 billion | $9.218 billion | 2% |
| Cloud services and license support revenue | $6.947 billion | $6.805 billion | 2% |
| Cloud license and on-premise license revenue | $886 million | $812 million | 9% |
| Hardware revenue | $814 million | $815 million | Flat |
| Services revenue | $720 million | $786 million | Down 8% |
| Operating income | $3.211 billion | $2.877 billion | Up 12% |
| Operating margin | 34% | 31% | Up 3 percentage points |
| Net income | $2.251 billion | $2.137 billion | Up 5% |
| Diluted EPS | $0.72 | $0.63 | Up 14% |
| Net cash from operating activities | $5.953 billion | $6.000 billion | Down 1% |
| Capital expenditures | $436 million | $386 million | Up 13% |
Cloud and license represented approximately 83% of total revenue, hardware 9%, and services 8%. Cloud and license segment margin was $5.243 billion, or 67%, compared with 65% in the prior-year quarter. Hardware segment margin was $477 million, or 59%, compared with 53%; services segment margin was $135 million, or 19%, compared with 16%.
Cash, cash equivalents and marketable securities totaled $42.279 billion at August 31, 2020, compared with $43.057 billion at May 31, 2020. Working capital was $31.191 billion, down from $34.940 billion. Current and non-current borrowings totaled approximately $70.8 billion, including $2.997 billion of current notes payable and $67.769 billion of non-current notes payable and other borrowings. The estimated fair value of senior notes and related fair value hedges was $80.6 billion.
Remaining performance obligations were $35.5 billion at August 31, 2020, with approximately 61% expected to be recognized as revenue over the next twelve months. Deferred revenue increased to $10.546 billion from $8.599 billion at May 31, 2020.
Material Changes Versus the Prior Comparable Period
- Total revenue increased 2% on both reported and constant-currency bases, led by cloud and license growth. EMEA and Asia Pacific grew on a constant-currency basis, while the Americas was flat.
- Operating margin improved primarily because revenue increased while operating expenses declined 3%. Sales and marketing, hardware, and services expenses decreased, partly offset by higher cloud infrastructure, research and development, and restructuring expenses.
- Restructuring expense increased to $174 million from $78 million, primarily under the Fiscal 2019 Oracle Restructuring Plan.
- Interest expense increased 24% to $614 million, principally because of higher average borrowings following the April 2020 issuance of $20.0 billion of senior notes.
- Interest income fell to $31 million from $190 million, primarily due to lower interest rates. Non-operating results shifted from $99 million of income to $2 million of expense.
- Net cash from operating activities was broadly stable, but delayed customer payments related to COVID-19 affected collections. Management expects to collect substantially all delayed payments in future periods.
- Investing cash flow changed from $12.386 billion of inflow to $9.655 billion of outflow, primarily because of increased purchases and reduced sales or maturities of marketable securities.
- Oracle repurchased 89.8 million shares for approximately $5.0 billion and paid $730 million of dividends. Approximately $11.6 billion remained available under the repurchase authorization at quarter-end.
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, license support, and cloud and on-premise license offerings.
- Oracle expects continued significant research and development investment and believes most customers will renew license support contracts annually.
- COVID-19 adversely affected all three businesses in the quarter. Services were particularly affected by consulting project delays, customer resource constraints, restrictions on in-person meetings, and lower reimbursable travel and subcontractor activity. The magnitude and duration of future effects remain unknown.
- Management curtailed variable expenditures, including travel and marketing, in response to COVID-19 and expects some expenses to normalize if economic conditions improve.
- Management believes existing cash, marketable securities and operating cash flow will fund working capital, capital expenditures and contractual obligations, as well as potential acquisitions, dividends, repurchases and debt repayments. Oracle states that it has no material off-balance-sheet arrangements.
- Oracle is involved in significant tax examinations and disputes in the United States and multiple foreign jurisdictions. Management believes adequate reserves have been recorded, but adverse outcomes could increase expense.
- HP litigation involves a $3.0 billion jury award, plus post-judgment interest. Oracle has posted a mandated surety bond, has not recorded or paid the award, and states that the appeal outcome could materially affect future cash flows and results of operations.
- Other shareholder and derivative litigation includes matters concerning the NetSuite acquisition, Oracle’s cloud business, board composition and hiring practices. Oracle does not currently believe these matters will materially affect its financial position or results of operations.
- Estimated future intangible-asset amortization totals $3.405 billion of remaining net intangible assets, including $1.012 billion for the remainder of fiscal 2021 and $1.106 billion in fiscal 2022.
Important Facts for Investors to Verify
- Whether cloud and license growth and renewal rates sustain the company’s revenue mix and margin expansion.
- The duration and financial effect of COVID-19, particularly on services demand, hardware activity and customer collections.
- Future restructuring charges and whether expected cost savings offset continued cloud infrastructure and research and development investments.
- Debt maturities, refinancing requirements and the effect of elevated borrowings on interest expense and capital allocation.
- The cash-flow impact of stock repurchases, dividends, acquisitions, debt repayment and marketable-securities purchases.
- The ultimate outcome and liquidity impact of the HP litigation and other legal and tax contingencies.
- Whether the $35.5 billion of remaining performance obligations converts to revenue at the disclosed pace and whether deferred revenue growth reflects sustainable contract demand.