01—Abstract
Summary
Summary of the 10-K filed July 21, 2006. Cited figures are marked; the original filing is the authoritative source.
Oracle's fiscal 2006 10-K (year ended May 31, 2006) shows a company in the middle of a large acquisition-driven expansion.
Total revenues rose 22% (actual) to $14.38 billiona, with software revenues up 23% to $11.54 billion and services up 19% to $2.84 billion. Operating income grew 18% to $4.74 billion, though operating margin slipped to 33% from 34% as acquisition-related amortization of intangibles climbed to $583 million from $219 million. Net income reached $3.38 billion, up 17%, and diluted EPS was $0.64 versus $0.55.
Growth was helped by the PeopleSoft (closed January 2005) and Siebel (closed January 2006) acquisitions, which together with other deals totaled about $19.5 billionb of spending over two years. Cash generation remained strong. Operating cash flow rose 28% to $4.54 billion and free cash flow reached $4.31 billion, or 127% of net income.
Oracle took on $5.75 billionc of senior notes in January 2006 to fund Siebel, pushing total borrowings to about $5.9 billion, while cash, equivalents and marketable securities stood at $7.6 billion. The company repurchased $2.07 billion of stock during the year, including about $1.7 billion tied to offsetting Siebel share issuance, and the board later expanded the buyback authorization to $4.0 billion in July 2006. Investors should weigh several risks.
The PeopleSoft Customer Assurance Program carries a contingent liability with an aggregate potential exposure of $3.5 billiond, though management does not consider payment probable and has recorded no liability. Integration of Siebel and PeopleSoft is described as substantially complete, with remaining activities expected within three months. Revenue growth in the applications business, the sensitivity of quarterly new license revenue to a few large deals, and stock-based compensation expensing beginning in fiscal 2007 (estimated at $0.02 to $0.03 per diluted share) are also important considerations.
02—Key points
Key Highlights
- Total revenue grew 22% to $14.38B in FY2006, driven by acquisitions (PeopleSoft, Siebel) and strong new license sales, which rose 20% to $4.91B.
- Net income increased 17% to $3.38B; diluted EPS rose to $0.64 from $0.55.
- Operating income rose 18% to $4.74B, but operating margin fell to 33% from 34% due to amortization of acquired intangibles, which tripled to $583M.
- Operating cash flow of $4.54B (up 28%) produced free cash flow of $4.31B, equal to 127% of net income.
- Balance sheet expanded: total assets reached $29.0B and goodwill $9.8B, while $5.75B of senior notes issued in January 2006 raised long-term debt to $5.7B.
- Software license updates and product support, the highest-margin line at 84% margin, reached $6.64B (46% of revenue), providing recurring revenue.
- PeopleSoft Customer Assurance Program carries an aggregate potential contingent obligation of $3.5B, not recorded as a liability; no claims received as of May 31, 2006.
03—Questions
Frequently Asked Questions
How much did Oracle's acquisitions cost, and how are they affecting results?
Oracle paid about $19.5 billion for acquisitions over the last two years, including PeopleSoft (about $11.1B, closed January 2005) and Siebel (about $6.1B, closed January 2006). These deals boosted revenue and headcount but also increased amortization of intangible assets to $583M in FY2006 from $219M in FY2005, which weighed on operating margin and new license margin.
Is Oracle's debt load a concern?
Total borrowings were about $5.9B at May 31, 2006, up from $2.9B, mainly from $5.75B of senior notes issued in January 2006 to fund Siebel. Management reported compliance with debt covenants, including a net debt to total capitalization ratio below 45%. Cash, equivalents and marketable securities of $7.6B and $4.5B of operating cash flow provide substantial coverage, and interest expense rose to $169M.
What is the PeopleSoft Customer Assurance Program and why does it matter?
The CAP is a contractual provision in PeopleSoft licenses that could require Oracle to pay customers two to five times their license and first-year support fees if Oracle fails to take certain business actions for a fixed period. The maximum aggregate exposure is $3.5B, expiring progressively through December 2008. Oracle believes payment is not probable and has recorded no liability, but a successful claim would be a material charge.
How is Oracle returning capital to shareholders?
Oracle does not pay cash dividends. It repurchased $2.07B of stock in FY2006, including 122.8M shares in Q4 tied to the Siebel share issuance. In July 2006 the board expanded the repurchase program to $4.0B of available capacity, and management said it intends to repurchase about $1.0B per quarter in fiscal 2007.
What are the main risks to Oracle's growth outlook?
Key risks include reliance on large, lumpy new license transactions that make quarterly results hard to forecast, intense competition from IBM, Microsoft, SAP and open-source alternatives, integration risk from multiple overlapping applications lines (including the planned Fusion Applications), international currency exposure, and tax audits including an ongoing IRS transfer pricing review. Stock-based compensation expensing starting in fiscal 2007 will also reduce EPS by an estimated $0.02 to $0.03.
04—Continue