Oracle is one of the world’s leading providers of cloud-based ERP systems, and its most recent 10-K says profitability and revenues have remained stable since COVID-19.
But there’s a lot missing from Oracle’s financial statements.
In 2011 Hewlett Packard Enterprise (HPE) filed a lawsuit against Oracle for breach of contract. HPE filed the suit after Oracle said it would stop using HPE’s Itanium servers for Oracle software. HPE said this violated their agreement and in 2016 a court agreed, awarding HPE $3 billion in damages. Oracle appealed the case, and litigation is ongoing.
But Oracle’s Balance Sheet doesn’t show a single dollar in liabilities related to this lawsuit.
Companies recognize a contingent liability when they believe (1) it is probable they will lose a lawsuit and (2) the damages are reasonably estimable. Oracle doesn’t believe it meets this threshold; its 10-K says:
We cannot currently estimate a reasonably possible range of loss for this action due to the complexities and uncertainty surrounding the appeal process and the nature of the claims. Litigation is inherently unpredictable…
I was surprised Oracle can’t estimate the potential loss, as the lawsuit initially resulted in $3 billion of damages. But because Oracle says it can’t estimate the loss, it’s not required to book a liability—or the associated expense.
But there’s a flip side to this.
Oracle has a lawsuit pending against Google in which Oracle could be awarded significant damages.
Oracle claims that Google violated Oracle’s copyright by using some of Oracle’s application programming interfaces to create the Android operating system. While a jury sided with Google, an appeals court decided in favor of Oracle. The case is currently being heard by the Supreme Court, and Oracle stands a chance of getting some money.
But this potential good news doesn’t appear in Oracle’s financial statements either.
That’s because companies can never recognize a contingent gain. Even if the company’s legal team believes there is a 99% chance of winning the lawsuit, and the windfall gain is reasonably estimable, the company cannot book a gain until the lawsuit is final.
Oracle’s financial statements could be significantly affected by the outcome of these lawsuits.
And that will be a happy day for Oracle’s lawyers; after nearly a decade of legal wrangling, they’ll finally be able to catch up on their Netflix queue. (I strongly recommend the show “Ozark” due to its accounting theme.)
Here’s a link to Oracle’s 10-K if you love reading the notes to financial statements: