Oracle Corporation Form 10-Q Summary
Business context and reporting period
Oracle filed an unaudited Form 10-Q for the quarter and six months ended November 30, 2022, representing the second quarter and first half of fiscal 2023. Oracle operates through three businesses: cloud and license, hardware, and services. The company completed its $28.2 billion cash acquisition of Cerner on June 8, 2022; Cerner’s results are included prospectively from that date.
Financial performance and key metrics
| Metric | Three months ended November 30, 2022 | Year-over-year comparison | Six months ended November 30, 2022 | Year-over-year comparison |
|---|---|---|---|---|
| Total revenue | $12.275 billion | Up 18% | $23.720 billion | Up 18% |
| Operating income | $3.071 billion | Compared with $(824) million | $5.694 billion | Up 119% |
| Operating margin | 25% | Compared with negative 8% | 24% | Compared with 13% |
| Net income | $1.741 billion | Compared with $(1.247) billion | $3.289 billion | Up from $1.209 billion |
| Diluted EPS | $0.63 | Compared with $(0.46) | $1.20 | Up from $0.43 |
| Operating cash flow | Not separately provided for the quarter | — | $7.243 billion | Up from $1.709 billion |
Revenue growth was led by cloud services and license support revenue of $8.598 billion in the quarter and $17.015 billion year to date. Cloud services revenue increased 43% in the quarter and 44% year to date, while license support revenue declined 2% in both periods. Cloud license and on-premise license revenue increased 16% in the quarter and 14% year to date. Services revenue increased 74% in both periods, substantially reflecting Cerner contributions.
- Cloud and license: Revenue of $10.033 billion in the quarter and $19.354 billion year to date; segment margin was 63% in both periods, down from 67% in the comparable periods.
- Hardware: Revenue of $850 million in the quarter and $1.613 billion year to date; segment margin was 57% and 58%, respectively.
- Services: Revenue of $1.392 billion in the quarter and $2.753 billion year to date; segment margin was 20% and 23%, respectively.
Total operating expenses were $9.204 billion in the quarter and $18.026 billion year to date. Expenses included $907 million and $1.826 billion of intangible-asset amortization, respectively; $137 million and $281 million of restructuring costs; and $62 million and $103 million of acquisition-related and other expenses.
As of November 30, 2022, cash and cash equivalents were $6.813 billion and marketable securities were $537 million, compared with combined balances of $21.902 billion at May 31, 2022. Working capital was negative $9.545 billion. Notes payable and other borrowings totaled $90.919 billion, consisting of $9.746 billion current and $81.173 billion non-current borrowings.
Six-month investing cash outflows were $32.094 billion, including $27.799 billion for acquisitions and $4.154 billion of capital expenditures. Financing cash inflows were $10.455 billion, including new senior notes, term loans and commercial paper, partially offset by debt repayments, dividends and share repurchases. Trailing four-quarter free cash flow was $8.395 billion, based on $15.073 billion of operating cash flow and $6.678 billion of capital expenditures.
Material changes versus the prior comparable period
- Cerner contributed $1.5 billion of second-quarter revenue and $3.0 billion of first-half revenue. The acquisition added approximately $17.7 billion of goodwill and $10.0 billion of net intangible assets to the balance sheet.
- Revenue growth was 25% in constant currency for both the quarter and first half, versus reported growth of 18%, reflecting significant foreign-exchange headwinds.
- Operating results benefited from the absence of approximately $4.7 billion of litigation-related charges recorded in the fiscal 2022 comparable periods. The prior-year periods also included operating-asset-sale gains of $125 million in the quarter and $250 million year to date.
- Interest expense increased to $856 million in the quarter and $1.643 billion year to date, primarily because of higher borrowings related to the Cerner acquisition.
- Amortization expense increased materially because of acquired intangible assets, primarily from Cerner.
- Oracle changed the estimated useful lives of its servers from four years to five years at the beginning of fiscal 2023. The change reduced operating expenses by $114 million in the quarter and $245 million year to date.
- Oracle repurchased 13.6 million shares for $981 million under its repurchase program during the first half, compared with 170.9 million shares for $15.0 billion in the prior-year period. Approximately $8.5 billion remained available for repurchases at November 30, 2022.
Guidance, outlook, commentary, risks and unusual items
Management did not provide specific quantitative revenue or earnings guidance in the filing. It expects total cloud and license revenue generally to continue increasing on a constant-currency basis, driven by cloud services, 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 both current-year periods versus 26% in the comparable prior-year periods.
Oracle expects continued investment in research and development, cloud capacity and additional geographic data-center locations. The company expects most of the remaining estimated restructuring costs under its 2022 Restructuring Plan, totaling approximately $420 million, to be incurred by the end of fiscal 2023. Total estimated program costs are up to $927 million.
Liquidity and refinancing are significant considerations. The $15.7 billion Bridge Credit Agreement matures on March 7, 2023 unless repaid earlier. Oracle had $1.9 billion of commercial paper outstanding at November 30, 2022, maturing through March 2023. The company issued $7.0 billion of senior notes in November 2022 and borrowed $5.6 billion under term loan facilities to refinance portions of the bridge debt. Management stated that available cash, operating cash flow and its $6.0 billion revolving credit agreement should be sufficient for working capital, capital expenditures and contractual obligations.
- Risks include foreign-currency volatility, global economic conditions, customer renewals, competitive pressure, cloud capacity requirements, technology-component supply constraints, governmental budget limitations and the integration of Cerner.
- Future expenses may increase as COVID-19-related reductions in variable expenditures normalize.
- Operating lease commitments, primarily for data centers and expected to commence between the remainder of fiscal 2023 and fiscal 2026, increased to $7.1 billion and were not recorded on the balance sheet at November 30, 2022.
- Tax authorities are examining Oracle and acquired entities in multiple jurisdictions, with significant amounts under controversy in several countries. Management believes adequate tax provisions have been recorded but cannot assure the ultimate outcomes.
- A proposed $17.5 million settlement of a securities class action received preliminary approval, subject to final approval scheduled for January 12, 2023. A separate NetSuite-related derivative case remained pending after trial, with no court decision issued as of the filing.
- Management concluded that disclosure controls and procedures were effective as of November 30, 2022. Internal control over financial reporting incorporated additional controls related to Cerner.
Investor verification priorities
- Verify the pace of cloud-services growth and whether cloud and license segment margins stabilize after declining to 63%.
- Monitor Cerner integration, revenue contribution, acquired-intangible amortization, goodwill and potential purchase-accounting adjustments during the measurement period.
- Assess refinancing and repayment of the Bridge Credit Agreement, commercial paper maturities and the effect of higher interest rates on interest expense and cash flow.
- Reconcile operating cash flow and free cash flow with acquisition spending, capital expenditures, dividends and share repurchases.
- Track the remaining $420 million of estimated restructuring costs and the timing of expected cost savings.
- Evaluate foreign-exchange effects, supply-chain constraints affecting hardware, tax examinations and outstanding litigation or settlement obligations.