01—Abstract
Summary
Summary of the 10-K filed July 1, 2010. Cited figures are marked; the original filing is the authoritative source.
Oracle's fiscal 2010 10-K (year ended May 31, 2010) reflects a transformational year defined by the January 2010 acquisition of Sun Microsystems for about $7.3 billiona.
Total revenues rose 15% to $26.8 billionb (14% in constant currency), with Sun contributing an estimated $2.8 billion. Net income grew 10% to $6.1 billion and diluted EPS rose to $1.21 from $1.09. Software remained the core engine at 77% of revenue, with license updates and product support (49% of revenue, 85% margin) providing a highly recurring base.
Free cash flow reached $8.45 billionc, or 138% of net income. The headline growth masks meaningful margin pressure. Operating margin fell to 34% from 36%, driven by the lower-margin hardware business, $1.97 billion of intangible amortization, and restructuring charges that jumped to $622 million.
Management estimates Sun reduced operating income by about $620 milliond on a reported basis, or contributed roughly $371 million on an adjusted basis that excludes acquisition-related charges. The hardware systems segment generated $2.29 billion in revenue at a thin margin, and Oracle expects it to carry lower margins than software going forward. Services revenue fell 11% as IT spending weakened.
Balance sheet and capital allocation changed as well. Total assets grew to $61.6 billion, goodwill rose to $20.4 billion, and total borrowings reached about $14.7 billion after a $4.5 billion bond issuance. Cash and marketable securities rose to $18.5 billion.
Oracle initiated its first-ever quarterly dividend in fiscal 2009, paid $0.20 per share in fiscal 2010, and continued repurchases with about $5.3 billion authorized remaining. Investors should weigh the strong cash generation and recurring support revenue against the execution risk of integrating Sun, the lower-margin hardware mix, and ongoing restructuring costs, with a further $755 million of Sun restructuring expense still expected.
02—Key points
Key Highlights
- Total revenues up 15% to $26.8 billion (14% constant currency), including an estimated $2.8 billion contribution from Sun acquired January 26, 2010.
- Net income up 10% to $6.1 billion; diluted EPS of $1.21 versus $1.09 in fiscal 2009.
- Operating margin declined to 34% from 36% due to hardware mix, $1.97 billion in intangible amortization, and $622 million in restructuring charges.
- Software license updates and product support delivered $13.1 billion in revenue at an 85% margin, providing a large recurring revenue base.
- Free cash flow of $8.45 billion, up 9%, equal to 138% of net income.
- Total borrowings of $14.7 billion after issuing $4.5 billion of senior notes in July 2009; $881 million of commercial paper outstanding.
- Quarterly dividend of $0.05 per share declared in June 2010; $5.3 billion remained authorized for share repurchases as of May 31, 2010.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2010, Oracle Corp kept $0.23.
- Revenue$26.82B100.0%
- Cost of revenue−$880.0M3.3%
- Gross profit$25.94B96.7%
- Operating costs−$16.88B62.9%
- Operating income$9.06B33.8%
- Interest, other & tax−$2.93B10.9%
- Net income$6.13B22.9%
Where FY2010 revenue went
$26.82B- Other operating costs: $13.62B, 51% of revenue
- Net income: $6.13B, 23% of revenue
- R&D: $3.25B, 12% of revenue
- Cost of revenue: $880.0M, 3.3% of revenue
- Interest, other & tax: $2.93B, 11% of revenue
Kept 23% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2010filed July 1, 2010Financial Statements
FY2010 against FY2009
| Line item | FY2010FY2009 | Change |
|---|---|---|
| Revenue | $26.82B$23.25B | +15.3% |
| Cost of Revenue | $880.00M$0 | — |
| Gross Profit | $25.94B$23.25B | +11.6% |
| R&D Expenses | $3.25B$2.77B | +17.6% |
| Operating Expenses | $17.76B$14.93B | +18.9% |
| Operating Income | $9.06B$8.32B | +8.9% |
| Interest Expense | $754.00M$630.00M | +19.7% |
| Net Income | $6.13B$5.59B | +9.7% |
| EPS (Basic) | $1.22$1.10 | +10.9% |
| EPS (Diluted) | $1.21$1.09 | +11.0% |
| Shares Outstanding (Basic) | 5.01B5.07B | −1.1% |
| Shares Outstanding (Diluted) | 5.07B5.13B | −1.1% |
05—Questions
Frequently Asked Questions
What did the Sun Microsystems acquisition contribute to Oracle's fiscal 2010 results?
Oracle estimates Sun contributed about $2.8 billion of revenue and reduced operating income by about $620 million on a reported basis, including amortization, restructuring, and stock compensation. Excluding certain charges, Sun's adjusted operating income contribution was about $371 million. Sun's hardware systems business generated $2.29 billion in revenue with an 8% product margin for the products segment and a 34% margin for hardware support.
Why did Oracle's operating margin decline in fiscal 2010?
Operating margin fell to 34% from 36%, mainly because the Sun hardware business carries lower margins than software, and because intangible amortization rose to $1.97 billion. Restructuring expenses increased to $622 million from $117 million, reflecting the Sun Restructuring Plan (about $1.1 billion total) and the 2009 Oracle Restructuring Plan. Acquisition-related costs also rose.
How strong is Oracle's cash generation and balance sheet?
Cash from operations was $8.68 billion and free cash flow was $8.45 billion. Cash, cash equivalents and marketable securities totaled $18.5 billion, of which $16.6 billion was held by foreign subsidiaries. Total borrowings were $14.7 billion, all fixed rate apart from a swap on the 2014 notes. Management stated it believes existing cash and operating cash flow are sufficient to meet working capital, capital expenditure and contractual obligations.
What are the main risks highlighted in the filing?
Key risks include integrating Sun and managing a new hardware business with limited prior experience, lower hardware margins, reliance on third-party manufacturers and sole-source suppliers, and dependence on a Fujitsu strategic relationship. Other material risks include foreign currency volatility (including a Venezuelan subsidiary loss of $81 million), ongoing litigation such as the SAP and Parallel Networks cases, and evolving tax audits including IRS transfer pricing reviews. Forecasts are also difficult given reliance on large, late-quarter software deals.
What shareholder returns did Oracle provide in fiscal 2010?
Oracle paid $0.20 per share in dividends during fiscal 2010 (about $1.0 billion total) versus its first-ever $0.05 dividend in fiscal 2009, and declared a further $0.05 quarterly dividend in June 2010. It repurchased 43.3 million shares for $1.0 billion in fiscal 2010, down from $4.0 billion in fiscal 2009. About $5.3 billion remained under the repurchase authorization, which has no expiration date.
06—Continue