01—Abstract
Summary
Summary of the 10-K filed June 28, 2011. Cited figures are marked; the original filing is the authoritative source.
Oracle's fiscal 2011 10-K (year ended May 31, 2011) shows a company in transition after its January 2010 acquisition of Sun Microsystems.
Total revenues rose 33% to $35.6 billiona (30% in constant currency), and operating income grew 33% to $12.0 billion, with operating margin holding at 34%. Net income reached $8.5 billion, up 39%, and diluted EPS rose to $1.67 from $1.21. Sun drove most of the growth: the hardware systems business contributed $6.9 billion of revenue (19% of the total) versus $2.3 billion the prior year, though management notes hardware carries lower margins than software.
Software remains the core profit engine, generating 68% of revenue and an 86% margin on software license updates and product support, which alone accounted for roughly 70% of total segment margin. Cash generation and balance sheet strength are notable. Operating cash flow rose 29% to $11.2 billionb and free cash flow reached $10.8 billion, or 126% of net income.
Cash, cash equivalents and marketable securities totaled $28.8 billionc against $15.9 billion of fixed-rate-dominated borrowings, leaving Oracle in a net cash position. The company repurchased $1.2 billion of stock, paid $1.1 billion in dividends ($0.21 per share), and raised the quarterly dividend to $0.06. Restructuring charges of $487 million, mostly tied to the Sun Restructuring Plan, fell from $622 million, and roughly $250 million of Sun-related restructuring costs remain to be recognized through fiscal 2012.
Key risks for investors include the unproven profitability of the hardware business, pending litigation (a $1.3 billiond jury award against SAP that is subject to post-trial motions and appeal, plus a U.S. government False Claims Act complaint with no estimable loss range), ongoing IRS transfer-pricing scrutiny, and dependence on sole-source suppliers such as Fujitsu. Management also flags that acquisition-driven amortization of intangibles ($2.4 billion) weighs on reported GAAP earnings.
02—Key points
Key Highlights
- Total revenues rose 33% to $35.6 billion, driven by the first full year of Sun Microsystems and a 19% share from the new hardware systems business ($6.9 billion).
- Net income grew 39% to $8.5 billion; diluted EPS of $1.67 vs. $1.21 in fiscal 2010, with GAAP effective tax rate of 25.1%.
- Free cash flow of $10.8 billion (up 27%), equal to 126% of net income, supported by $11.2 billion in operating cash flow.
- Software license updates and product support delivered $14.8 billion in revenue at an 86% margin, the company's highest-margin and most recurring business.
- Net cash position: $28.8 billion of cash and marketable securities against $15.9 billion of borrowings; $4.1 billion remained under the buyback authorization.
- Litigation: $1.3 billion jury verdict against SAP (under post-trial motions and appeal, not recorded as income) and an open U.S. government False Claims Act case with no estimable loss range.
- Sun integration costs are tapering: restructuring fell to $487 million from $622 million, with about $250 million of Sun-plan costs remaining through fiscal 2012.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2011, Oracle Corp kept $0.24.
- Revenue$35.62B100.0%
- Cost of revenue−$2.06B5.8%
- Gross profit$33.56B94.2%
- Operating costs−$21.53B60.4%
- Operating income$12.03B33.8%
- Interest, other & tax−$3.49B9.8%
- Net income$8.55B24.0%
Where FY2011 revenue went
$35.62B- Other operating costs: $17.01B, 48% of revenue
- Net income: $8.55B, 24% of revenue
- R&D: $4.52B, 13% of revenue
- Cost of revenue: $2.06B, 5.8% of revenue
- Interest, other & tax: $3.49B, 9.8% of revenue
Kept 24% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2011filed June 28, 2011Financial Statements
FY2011 against FY2010
| Line item | FY2011FY2010 | Change |
|---|---|---|
| Revenue | $35.62B$26.82B | +32.8% |
| Cost of Revenue | $2.06B$880.00M | +133.8% |
| Gross Profit | $33.56B$25.94B | +29.4% |
| R&D Expenses | $4.52B$3.25B | +38.9% |
| Operating Expenses | $23.59B$17.76B | +32.8% |
| Operating Income | $12.03B$9.06B | +32.8% |
| Interest Expense | $808.00M$754.00M | +7.2% |
| Net Income | $8.55B$6.13B | +39.3% |
| EPS (Basic) | $1.69$1.22 | +38.5% |
| EPS (Diluted) | $1.67$1.21 | +38.0% |
| Shares Outstanding (Basic) | 5.05B5.01B | +0.7% |
| Shares Outstanding (Diluted) | 5.13B5.07B | +1.1% |
05—Questions
Frequently Asked Questions
How much of Oracle's growth came from the Sun acquisition, and is the hardware business profitable?
Sun was the main driver: hardware systems revenue rose to $6.9 billion from $2.3 billion, and management attributed most of the expense increase to Sun's full-year contribution. Hardware segment margin was about 20% for products and 39% for support, well below the software business's margins. Management explicitly states it expects hardware to carry lower operating margins than software, so Oracle's overall margin is now more sensitive to hardware execution.
Is Oracle's revenue base recurring and predictable?
Largely, yes. Software license updates and product support contracts are typically priced as a percentage of new license fees and renew annually at a high rate, producing $14.8 billion (42% of revenue) in fiscal 2011. However, new software license revenue (26% of total) is lumpy, since a few large deals late in each quarter can materially move results, and the fourth fiscal quarter is consistently the strongest.
What are the biggest legal and financial risks disclosed in the filing?
The $1.3 billion SAP judgment is a potential gain but is not recorded and is subject to pending post-trial motions and an appeal bond posted by SAP. The False Claims Act case, brought with U.S. government intervention over GSA pricing, could result in treble damages, and management cannot estimate a reasonably possible loss range. Oracle also faces ongoing IRS transfer-pricing reviews, roughly $3.8 billion in gross unrecognized tax benefits, and $15.9 billion of debt maturing between 2011 and 2040.
Can Oracle sustain its dividend and share buybacks?
Based on the filing, cash flow appears sufficient. Fiscal 2011 free cash flow of $10.8 billion comfortably covered $1.1 billion in dividends and $1.2 billion in repurchases. Management raised the quarterly dividend to $0.06 per share and said it expects to continue comparable quarterly payments, though it noted that acquisitions, dividends and buybacks all compete for the same cash and that repurchase pace may be reduced.
Why does GAAP earnings look weaker than the underlying business?
Oracle's GAAP results include significant acquisition-related charges. Amortization of intangible assets was $2.4 billion in fiscal 2011, and restructuring, stock-based compensation and acquisition-related costs added further charges. Management's supplemental table shows that excluding these items and their tax effects, adjusted earnings were about $2.8 billion higher, which helps explain the gap between reported net income and cash flow.
06—Continue