Oracle Corporation Form 10-Q Summary
Business context and reporting period
Oracle provides cloud and on-premise software, hardware, and related services globally. This unaudited Form 10-Q covers the three and nine months ended February 28, 2018, representing fiscal 2018 third quarter and year-to-date results; prior-year comparisons are for the corresponding periods ended February 28, 2017. Oracle’s fiscal year ends May 31.
Key financial metrics
| Metric | Q3 FY2018 | Q3 FY2017 | 9M FY2018 | 9M FY2017 |
|---|---|---|---|---|
| Total revenue | $9.771 billion | $9.205 billion | $28.579 billion | $26.835 billion |
| Operating income | $3.410 billion | $2.959 billion | $9.299 billion | $8.636 billion |
| Operating margin | 34.9% | 32.1% | 32.5% | 32.2% |
| Income before taxes | $3.300 billion | $2.698 billion | $8.751 billion | $7.756 billion |
| Net income (loss) | $(4.024) billion | $2.239 billion | $418 million | $6.103 billion |
| Diluted EPS | $(0.98) | $0.53 | $0.10 | $1.45 |
| Operating cash flow | Not separately provided | Not separately provided | $10.726 billion | $9.660 billion |
Revenue growth was led by cloud and on-premise software. Q3 cloud revenue was $1.566 billion, up from $1.189 billion, including SaaS revenue of $1.151 billion and PaaS/IaaS revenue of $415 million. Q3 on-premise software revenue was $6.415 billion, hardware revenue was $994 million, and services revenue was $796 million.
For the first nine months, cloud revenue increased to $4.552 billion from $3.211 billion. Total cloud and on-premise software revenue increased to $23.190 billion from $21.334 billion, while hardware revenue declined to $2.878 billion from $3.037 billion and services revenue increased modestly to $2.511 billion from $2.464 billion.
Q3 operating margin increased primarily because revenue grew while operating expenses declined. Nine-month operating margin percentage was approximately flat. Q3 interest expense was $533 million, compared with $450 million, and nine-month interest expense was $1.477 billion, compared with $1.317 billion.
Liquidity, debt, and capital allocation
- Cash and cash equivalents were $19.487 billion at February 28, 2018, compared with $21.784 billion at May 31, 2017.
- Marketable securities were $50.968 billion, resulting in cash, cash equivalents, and marketable securities of $70.455 billion.
- Total borrowings were approximately $60.715 billion, consisting of $4.491 billion current and $56.224 billion non-current borrowings.
- Oracle issued $10.0 billion of senior notes in November 2017 and repaid $3.5 billion of senior notes during the first nine months.
- Operating cash flow increased 11% to $10.726 billion for the first nine months. Investing cash outflow was $8.785 billion, including $1.358 billion of capital expenditures. Financing cash outflow was $4.523 billion.
- Trailing-four-quarter free cash flow was $13.309 billion, up 13% from $11.777 billion.
- Oracle repurchased 131.6 million shares for approximately $6.5 billion during the first nine months and had approximately $22.8 billion remaining under its repurchase authorization at February 28, 2018.
- Dividends declared were $0.57 per share for the first nine months; a $0.19 per-share quarterly dividend was declared in March 2018.
Material changes versus the prior comparable period
- Total revenue increased 6% in both Q3 and the first nine months on a reported-currency basis. Constant-currency growth was 2% for Q3 and 4% for the first nine months.
- Cloud and on-premise software revenue increased 8% in Q3 and 9% for the first nine months on a reported basis. Cloud SaaS revenue increased 33% in Q3 and 49% for the first nine months; PaaS/IaaS revenue increased 28% and 26%, respectively.
- New software license revenue declined 2% in both Q3 and the first nine months on a reported basis, consistent with Oracle’s shift toward cloud offerings.
- Hardware revenue declined 3% in Q3 and 5% for the first nine months; services revenue declined 2% in Q3 but increased 2% for the first nine months.
- Q3 operating income increased 15%, while nine-month operating income increased 8%. Operating expenses increased 2% in Q3 and 6% for the first nine months.
- Restructuring expense was $91 million in Q3 and $506 million for the first nine months, compared with $161 million and $346 million, respectively. Total estimated costs under the 2017 Restructuring Plan were up to approximately $1.1 billion, with approximately $112 million remaining at February 28, 2018.
- Intangible-asset amortization increased to $1.205 billion for the first nine months from $1.010 billion, primarily due to NetSuite and other acquisitions.
Guidance, outlook, commentary, risks, and unusual items
- Management expects cloud SaaS, PaaS, and IaaS growth and continued demand for software support to drive generally higher cloud and on-premise software revenue on a constant-currency basis. Management expects the revenue mix to continue shifting toward cloud services.
- Oracle expects to continue significant research and development investment and to pursue additional acquisitions. Hardware is expected to have lower operating margins than the cloud and on-premise software business, and quarterly hardware revenue remains difficult to predict.
- The Tax Cuts and Jobs Act produced a $7.6 billion provisional one-time transition-tax expense, partially offset by a $744 million deferred-tax remeasurement benefit. The resulting effective tax rates were 222.0% for Q3 and 95.2% for the first nine months, versus 17.0% and 21.3% in the prior-year periods. The transition-tax liability is expected to be settled over eight years.
- The tax accounting remains provisional under SEC Staff Accounting Bulletin No. 118 and may be adjusted in future periods. Oracle states that it has sufficient liquidity to fund the transition-tax obligation.
- Oracle is appealing a Hewlett-Packard litigation judgment awarding HP $3.0 billion plus post-judgment interest. No amount has been paid or recorded, and Oracle cannot currently estimate a reasonably possible range of loss; the matter could materially affect future cash flows and results.
- Stockholder derivative litigation concerning the NetSuite acquisition was ongoing. Oracle does not currently believe it will materially affect financial position or results.
- Oracle states that it has no material off-balance-sheet arrangements and was in compliance with debt covenants at February 28, 2018.
Important facts for investors to verify
- Whether the provisional $7.6 billion transition-tax estimate changes as tax interpretations, foreign-cash assumptions, and deferred-tax balances are finalized.
- The sustainability of cloud SaaS and PaaS/IaaS growth, contract renewals, deferred revenue trends, and related infrastructure costs.
- The pace of hardware and services declines and the effect of the business mix on consolidated margins.
- Future borrowing, refinancing, interest expense, stock repurchases, dividends, and acquisition activity relative to operating cash generation.
- The status and potential financial impact of the HP appeal and other tax and legal proceedings.
- The remaining costs and expected savings from the restructuring plan, as well as future amortization from acquired intangible assets.