01—Abstract
Summary
Summary of the 10-K filed July 2, 2008. Cited figures are marked; the original filing is the authoritative source.
Oracle's fiscal 2008 10-K (year ended May 31, 2008) shows a company in the midst of a transformative consolidation.
Total revenues rose 25% to $22.4 billiona (19% in constant currency), with software revenues of $17.8 billion (80% of total) and services of $4.6 billion. Operating income grew 31% to $7.8 billion, lifting operating margin to 35%, and net income reached $5.5 billion, or $1.06 diluted EPS, up from $0.81. Growth was driven by organic demand, acquisitions (notably Hyperion in fiscal 2007 and BEA Systems, closed April 29, 2008, for about $8.6 billion), and a roughly 6-point tailwind from a weaker U.S. dollar.
The balance sheet expanded sharply. Total assets rose to $47.3 billion, goodwill to $18.0 billionb, and total borrowings to $11.2 billion after $5.0 billion of senior notes were issued in April 2008 to fund BEA. Cash, cash equivalents and marketable securities were $11.0 billion, and free cash flow was $7.2 billion, or 130% of net income.
Investors should weigh the heavier debt load and the large amortization burden: intangible amortization reached $1.2 billionc and is forecast at $1.66 billion in fiscal 2009, which pressures GAAP earnings even as software support revenue (46% of total) provides a recurring, high-margin base. Key risks flagged in the filing include integration of BEA and prior acquisitions, a $1.9 billion aggregate potential exposure under the PeopleSoft Customer Assurance Program, $1.7 billion of unrecognized tax benefits with ongoing IRS transfer-pricing review, the pending SAP and EpicRealm litigation, and the securities class action that remains unresolved. Management reports effective internal control over financial reporting, audited by Ernst & Young, with an unqualified opinion.
02—Key points
Key Highlights
- Revenue grew 25% to $22.43B in FY2008 (19% constant currency), with software at $17.84B and services at $4.59B.
- Operating income rose 31% to $7.84B, expanding operating margin to 35% from 33%.
- Net income of $5.52B and diluted EPS of $1.06 (up from $0.81), with free cash flow of $7.16B (130% of net income).
- Support revenue of $10.3B (46% of total) carries roughly 85% margins and renews at substantially all eligible customers, providing a recurring base.
- Acquired BEA Systems for about $8.6B (closed April 29, 2008), funded by $5.0B of senior notes; total borrowings rose to $11.2B.
- Intangible amortization rose to $1.21B and is projected at $1.66B for FY2009, a continuing drag on GAAP earnings.
- Contingent liabilities include up to $1.9B under the PeopleSoft Customer Assurance Program and $1.7B of unrecognized tax benefits under IRS and foreign review.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2008, Oracle Corp kept $0.25.
- Revenue$22.43B100.0%
- Cost of revenue$-00.0%
- Gross profit$22.43B100.0%
- Operating costs−$14.59B65.0%
- Operating income$7.84B35.0%
- Interest, other & tax−$2.26B10.1%
- Net income$5.58B24.9%
Where FY2008 revenue went
$22.43B- Operating costs: $14.59B, 65% of revenue
- Net income: $5.58B, 25% of revenue
- Cost of revenue: $0, 0.0% of revenue
- Interest, other & tax: $2.26B, 10% of revenue
Kept 25% as net incomeCost of revenue $0 · 0.0%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2008filed July 2, 2008Financial Statements
| Revenue | $22.43B |
| Cost of Revenue | $0 |
| Gross Profit | $22.43B |
| Operating Expenses | $14.59B |
| Operating Income | $7.84B |
| Interest Expense | -$394.00M |
| Net Income | $5.58B |
| EPS (Basic) | $1.08 |
| EPS (Diluted) | $1.06 |
| Shares Outstanding (Basic) | 5.13B |
| Shares Outstanding (Diluted) | 5.23B |
05—Questions
Frequently Asked Questions
How did Oracle's fiscal 2008 performance compare with fiscal 2007?
Revenue increased 25% to $22.4B and operating income increased 31% to $7.8B. Net income rose 29% to $5.5B and diluted EPS increased from $0.81 to $1.06. Roughly 6 percentage points of revenue growth came from a weaker U.S. dollar, and the rest came from organic demand and acquisitions such as Hyperion and BEA.
How is Oracle's balance sheet and leverage position after the BEA acquisition?
Total assets grew to $47.3B and goodwill to $18.0B. Borrowings rose to $11.2B, comprising $9.2B of fixed-rate and $2.0B of variable-rate debt, against $11.0B of cash and marketable securities. The company has $5.0B of undrawn credit facilities and was in compliance with its covenant that net debt not exceed 45% of total capitalization.
What are the main risks to future earnings that investors should monitor?
Key risks include heavy intangible amortization that will rise in FY2009, integration risk from BEA and other acquisitions, potential PeopleSoft CAP claims (up to $1.9B, though no liability is recorded), tax audits with $1.7B of unrecognized benefits, pending litigation with SAP and EpicRealm, and the long-running securities class action. Foreign currency swings also affect reported results, since international operations generate a large share of revenue.
Is Oracle's shareholder return policy focused on dividends or buybacks?
Oracle pays no cash dividends and does not expect to in the foreseeable future. Instead it repurchased about $2.0B of stock in fiscal 2008 and had $2.2B remaining under its buyback authorization as of May 31, 2008. Management has said buybacks have more than offset option dilution over the past decade, though the pace may slow as cash is redeployed to acquisitions and debt repayment.
06—Continue