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 filing covers the third quarter and first nine months of fiscal 2021 ended February 28, 2021, compared with the corresponding periods ended February 29, 2020. The filing is unaudited. The requested “2020 Q3” corresponds to the filing’s fiscal 2021 third quarter.
Key financial metrics
| Metric | Q3 FY2021 | Q3 FY2020 | 9M FY2021 | 9M FY2020 |
|---|---|---|---|---|
| Total revenue | $10.085 billion | $9.796 billion | $29.252 billion | $28.629 billion |
| Operating income | $3.878 billion | $3.528 billion | $10.672 billion | $9.588 billion |
| Operating margin | 38% | 36% | 36% | 33% |
| Net income | $5.021 billion | $2.571 billion | $9.714 billion | $7.019 billion |
| Diluted EPS | $1.68 | $0.79 | $3.19 | $2.10 |
| Cash flow from operations | Not separately provided for the quarter | Not separately provided for the quarter | $11.045 billion | $9.525 billion |
Revenue increased 3% in the quarter and 2% for the first nine months on a reported-currency basis. Constant-currency growth was 0% in the quarter and 1% for the first nine months. Cloud services and license support revenue increased 5% in the quarter and 4% for the first nine months. Cloud license and on-premise license revenue increased 4% and 3%, respectively.
Reported segment revenue was concentrated in cloud and license, which represented approximately 85% of Q3 revenue and 84% of nine-month revenue. Q3 cloud and license segment margin was 68%, hardware margin was 61%, and services margin was 20%; these are management measures excluding various corporate and GAAP expenses.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $22.321 billion at February 28, 2021, compared with $37.239 billion at May 31, 2020.
- Cash, cash equivalents and marketable securities totaled $35.864 billion, down from $43.057 billion at May 31, 2020.
- Current and non-current notes payable and other borrowings totaled approximately $69.299 billion, compared with $71.597 billion at May 31, 2020. Approximately $5.8 billion of long-term notes was classified as current.
- Net cash used in financing activities was $17.176 billion, including $12.958 billion of common-stock repurchases, $2.146 billion of dividends and $2.631 billion of debt repayments.
- Oracle repurchased 222.2 million shares for $13.0 billion during the first nine months. Approximately $3.6 billion remained available under the repurchase authorization as of February 28, 2021; the authorization was expanded by $20.0 billion on March 10, 2021.
- In March 2021, the quarterly dividend was increased to $0.32 per share from $0.24 per share.
- Trailing-four-quarter free cash flow was $12.808 billion, consisting of $14.659 billion of operating cash flow less $1.851 billion of capital expenditures.
Material changes versus the prior comparable period
- Operating income increased 10% in Q3 and 11% for the first nine months, reflecting higher revenue and lower total operating expenses.
- Net income benefited materially from a $2.3 billion net deferred tax benefit associated primarily with a partial legal-entity realignment and intra-group transfer of intellectual property. The effective tax rate was negative 53.3% in Q3 and negative 9.8% for the first nine months, compared with positive rates of 16.4% and 16.1% in the prior-year periods.
- Excluding the unusual tax benefit, the filing reports effective tax rates of approximately 16.7% for Q3 and 18.1% for the first nine months.
- Hardware revenue declined 4% in Q3 and 3% for the first nine months on a reported basis, while services revenue declined 5% and 7%, respectively. Management attributed these declines to the strategic emphasis on cloud-based infrastructure, reduced focus on certain hardware products, consulting declines and COVID-19-related project delays.
- Interest expense increased 28% in Q3 and 27% for the first nine months, primarily because of higher average borrowings following the issuance of $20.0 billion of senior notes in April 2020.
- Restructuring expense increased to $337 million for the first nine months from $181 million, primarily under the 2019 Restructuring Plan.
- Operating cash flow increased 16% for the first nine months, while investing cash flow shifted to a $9.187 billion use from a $14.099 billion source, principally due to the timing of marketable-securities purchases, maturities and sales.
Guidance, outlook, commentary and risks
- Management expects total cloud and license revenue generally to continue increasing on a constant-currency basis, supported by growth in cloud services, license support, cloud licenses and on-premise licenses.
- Remaining performance obligations were $35.3 billion at February 28, 2021, with approximately 61% expected to be recognized as revenue over the following twelve months.
- Management expects cloud and license margins to remain structurally higher than hardware margins and expects hardware quarterly revenue to remain difficult to predict.
- COVID-19 adversely affected all three businesses, including customer spending, consulting project timing, travel and marketing activity. The duration and future effects remain uncertain.
- Tax authorities are examining Oracle and acquired entities in multiple jurisdictions. Management believes reserves are adequate, but adverse outcomes could result in additional expense or cash payments.
- The HP litigation includes a $3.0 billion jury award plus post-judgment interest. Oracle has posted a surety bond, has not recorded or paid the award, and states that the appeal outcome could materially affect future cash flows and results.
- Oracle faces additional shareholder, derivative and cloud-business litigation. Management does not currently expect these matters to materially affect financial position or results, but outcomes remain uncertain.
- Management stated that current liquidity, operating cash generation and potential additional financing should be sufficient for working capital, capital expenditures, contractual obligations, acquisitions, dividends, repurchases and debt obligations.
Most important facts for investors to verify
- Separate recurring operating performance from the $2.3 billion discrete deferred tax benefit when assessing earnings quality and valuation.
- Track cloud services and license support growth, remaining performance obligations and renewal rates as indicators of recurring revenue momentum.
- Assess leverage, upcoming debt maturities, interest expense and the effect of continued share repurchases and dividend increases on liquidity.
- Monitor COVID-19 effects on hardware demand, consulting activity, customer budgets and future operating expenses.
- Review developments in the HP appeal and tax examinations, including any potential cash exposure not reflected in reported results.
- Reconcile management’s segment margins and constant-currency measures to GAAP results before comparing performance with other issuers.