Oracle Corporation: Fiscal 2023 First-Quarter 10-Q Summary
Business Context and Reporting Period
Oracle filed its unaudited Form 10-Q for the three months ended August 31, 2022, the first quarter of fiscal 2023, with comparative results for the three months ended August 31, 2021. Oracle operates through cloud and license, hardware, and services businesses. The quarter includes Cerner results prospectively from the June 8, 2022 acquisition date.
Key Financial Metrics
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Total revenue | $11.445 billion | $9.728 billion | 18% reported; 23% constant currency |
| Operating income | $2.623 billion | $3.427 billion | Down 23% |
| Operating margin | 23% | 35% | Down 12 percentage points |
| Net income | $1.548 billion | $2.457 billion | Down 37% |
| Diluted EPS | $0.56 | $0.86 | Down 35% |
| Net cash from operations | $6.394 billion | $5.391 billion | Up 19% |
| Capital expenditures | $1.719 billion | $1.062 billion | Up 62% |
| Interest expense | $787 million | $705 million | Up 12% |
| Effective tax rate | 6.5% | 8.4% | Down 1.9 percentage points |
Revenue mix was $8.417 billion from cloud services and license support, $904 million from cloud license and on-premise license, $763 million from hardware, and $1.361 billion from services. Cloud services revenue was $3.579 billion, up 45% reported, while license support revenue was $4.838 billion, down 1% reported.
Segment revenue and margin were: cloud and license revenue of $9.321 billion and margin of $5.771 billion, or 62%; hardware revenue of $763 million and margin of $441 million, or 58%; and services revenue of $1.361 billion and margin of $354 million, or 26%. Segment margins exclude several corporate and acquisition-related costs and are not equivalent to GAAP operating income.
At August 31, 2022, cash and cash equivalents were $10.448 billion and marketable securities were $772 million, compared with combined cash and marketable securities of $21.902 billion at May 31, 2022. Total debt was approximately $91.6 billion on a carrying-value basis, comprising $16.1 billion current and $75.5 billion non-current borrowings. Total stockholders’ deficit was $5.449 billion.
Remaining performance obligations were $60.7 billion, with approximately 49% expected to be recognized as revenue over the next twelve months. Total deferred revenue was $11.261 billion.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven substantially by the Cerner acquisition, which contributed approximately $1.4 billion of revenue, including $870 million to cloud and license, $41 million to hardware, and $529 million to services.
- Operating income and operating margin declined because of higher Cerner-related amortization, increased cloud infrastructure and employee costs, higher research and development, sales and marketing, services, and restructuring expenses, and the absence of a $125 million operating asset-sale gain recorded in the prior-year quarter.
- Amortization of intangible assets increased to $919 million from $303 million, primarily because of acquired Cerner intangible assets. Estimated future amortization was $12.499 billion as of August 31, 2022.
- Operating cash flow increased despite lower net income, primarily because of favorable working-capital changes and a $2.034 billion increase in deferred revenues.
- Investing cash outflows increased to $29.436 billion, principally reflecting $27.798 billion of cash used for the Cerner acquisition and $1.719 billion of capital expenditures.
- Financing activities generated $12.310 billion, including $20.046 billion of borrowing proceeds and $5.883 billion of debt repayments. Share repurchases were $552 million, compared with $7.995 billion in the prior-year quarter.
- Trailing four-quarter free cash flow declined to $5.374 billion from $12.564 billion, reflecting lower operating cash flow and substantially higher capital expenditures.
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.
- Management expects the proportion of cloud services revenue to continue increasing. Cloud services represented 31% of total revenue in the quarter versus 25% in the prior-year quarter.
- Oracle expects continued investment in research and development, cloud capacity, data centers, and second-generation cloud infrastructure. Cloud and license expenses are expected to grow during fiscal 2023 as capacity expands.
- The fiscal 2022 Oracle Restructuring Plan has estimated total costs of up to $888 million. Oracle recorded $146 million in restructuring expense during the quarter and expected to incur the majority of the remaining estimated $519 million through fiscal 2023.
- Oracle changed its estimated server useful lives from four years to five years effective at the beginning of fiscal 2023, reducing first-quarter operating expenses by $131 million.
- The Cerner acquisition was funded partly with a $15.7 billion bridge loan due March 7, 2023 unless repaid earlier. Oracle also borrowed $4.4 billion under term facilities and used the proceeds to reduce bridge-loan borrowings. The company was in compliance with the term-loan covenant requiring at least a 3.0-to-1.0 consolidated EBITDA-to-net-interest ratio as of August 31, 2022.
- Oracle entered into interest-rate swaps that effectively fixed the applicable term-loan rate at 3.07% plus the relevant credit spread. Higher borrowings and interest rates increased interest expense.
- Hardware results remain exposed to supply-chain shortages, manufacturing delays, customer demand shifts, competition from cloud infrastructure, and foreign-currency fluctuations. COVID-19 impacts remained present, although future effects are uncertain.
- Oracle remains subject to domestic and foreign tax audits and controversies, including matters where amounts under dispute are significant. Management believes its tax reserves are adequate but cannot assure the ultimate outcomes.
- Legal matters include derivative litigation related to the NetSuite acquisition and cloud-business securities litigation. The cloud-business class-action settlement proposed a $17.5 million payment, subject to court approval. Management did not believe these matters would materially affect financial position or results of operations.
- Management stated that cash, marketable securities, operating cash flow, and available credit facilities should be sufficient for working capital, capital expenditures, contractual obligations, acquisitions, dividends, and repurchases.
Most Important Facts for Investors to Verify
- Whether Cerner revenue growth and integration benefits offset the acquired amortization, restructuring costs, higher infrastructure spending, and additional interest burden.
- The refinancing or repayment plan for the bridge loan maturing March 7, 2023 and the effect of higher interest rates on future earnings and cash flow.
- Progress toward the $888 million restructuring program and whether expected cost savings materialize.
- Cloud services growth, renewal rates, remaining performance obligations, and the effect of foreign currency on reported growth.
- Capital expenditure intensity and whether free cash flow recovers after the Cerner acquisition and cloud-capacity investments.
- Potential changes to Cerner purchase-price allocations, goodwill, intangible assets, amortization, tax positions, and legal contingencies during the acquisition measurement period.
- Whether the company maintains liquidity and covenant compliance while continuing dividends, share repurchases, acquisitions, and debt repayments.