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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

x
 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

  

For the quarterly period ended November 30, 2009

or

 

¨  

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

  

For the transition period from                  to                 .

Commission File Number: 000-51788

 

 

Oracle Corporation

(Exact name of registrant as specified in its charter)

 

Delaware   54-2185193

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

500 Oracle Parkway

Redwood City, California

 

94065

(Zip Code)

(Address of principal executive offices)  

(650) 506-7000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x         No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted to its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x        No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  x    Accelerated filer  ¨
Non-accelerated filer  ¨    Smaller reporting company  ¨
(Do not check if a smaller reporting company)   

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨        No  x

The number of shares of registrant’s common stock outstanding as of December 15, 2009 was: 5,011,220,000.

 

 

 


Table of Contents

ORACLE CORPORATION

FORM 10-Q QUARTERLY REPORT

 

 

TABLE OF CONTENTS

 

          Page

PART I.

  

FINANCIAL INFORMATION

  

Item 1.

  

Financial Statements (Unaudited)

  
  

Condensed Consolidated Balance Sheets as of November 30, 2009 and May 31, 2009

   1
   Condensed Consolidated Statements of Operations for the Three and Six Months Ended November 30, 2009 and 2008    2
   Condensed Consolidated Statements of Cash Flows for the Six Months Ended
November 30, 2009 and 2008
   3
  

Notes to Condensed Consolidated Financial Statements

   4

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   24

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

   45

Item 4.

  

Controls and Procedures

   46

PART II.

  

OTHER INFORMATION

  

Item 1.

  

Legal Proceedings

   47

Item 1A.

  

Risk Factors

   47

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

   47

Item 4.

  

Submission of Matters to a Vote of Security Holders

   47

Item 6.

  

Exhibits

   48
  

Signatures

   49


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1.    Financial Statements (Unaudited)

ORACLE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

As of November 30, 2009 and May 31, 2009

(Unaudited)

 

(in millions, except per share data)

  November 30,
2009
     May 31,   
2009
ASSETS    

Current assets:

   

Cash and cash equivalents

  $ 14,919   $ 8,995

Marketable securities

    5,865     3,629

Trade receivables, net of allowances of $265 and $270 as of November 30, 2009 and May 31, 2009

    3,086     4,430

Deferred tax assets

    703     661

Prepaid expenses and other current assets

    662     866
           

Total current assets

    25,235     18,581
           

Non-current assets:

   

Property, net

    1,956     1,922

Intangible assets: software support agreements and related relationships, net

    3,176     3,411

Intangible assets: other, net

    3,408     3,858

Goodwill

    19,098     18,842

Other assets

    960     802
           

Total non-current assets

    28,598     28,835
           

Total assets

  $ 53,833   $ 47,416
           
LIABILITIES AND STOCKHOLDERS’ EQUITY    

Current liabilities:

   

Notes payable, current and other current borrowings

  $ 1,001   $ 1,001

Accounts payable

    255     271

Accrued compensation and related benefits

    1,129     1,409

Deferred revenues

    4,395     4,592

Other current liabilities

    1,754     1,876
           

Total current liabilities

    8,534     9,149
           

Non-current liabilities:

   

Notes payable and other non-current borrowings

    13,751     9,237

Income taxes payable

    2,592     2,423

Deferred tax liabilities

    351     480

Other non-current liabilities

    690     682
           

Total non-current liabilities

    17,384     12,822
           

Commitments and contingencies

   

Oracle Corporation stockholders’ equity:

   

Preferred stock, $0.01 par value—authorized: 1.0 shares; outstanding: none

       

Common stock, $0.01 par value and additional paid in capital—authorized: 11,000 shares; outstanding: 5,009 shares as of November 30, 2009 and 5,005 shares as of May 31, 2009

    13,529     12,980

Retained earnings

    13,541     11,894

Accumulated other comprehensive income

    461     216
           

Total Oracle Corporation stockholders’ equity

    27,531     25,090

Noncontrolling interests

    384     355
           

Total equity

    27,915     25,445
           

Total liabilities and equity

  $ 53,833   $ 47,416
           

See notes to condensed consolidated financial statements.

 

1


Table of Contents

ORACLE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three and Six Months Ended November 30, 2009 and 2008

(Unaudited)

 

     Three Months Ended
November 30,
    Six Months Ended
November 30,
 

(in millions, except per share data)

       2009             2008             2009             2008      

Revenues:

        

New software licenses

   $ 1,653      $ 1,626      $ 2,681      $ 2,863   

Software license updates and product support

     3,247        2,850        6,364        5,785   
                                

Software revenues

     4,900        4,476        9,045        8,648   

Services

     958        1,131        1,866        2,290   
                                

Total revenues

     5,858        5,607        10,911        10,938   
                                

Operating expenses:

        

Sales and marketing

     1,133        1,146        2,093        2,258   

Software license updates and product support

     264        257        490        539   

Cost of services

     832        939        1,614        1,965   

Research and development

     708        651        1,368        1,360   

General and administrative

     183        174        383        379   

Amortization of intangible assets

     436        427        867        839   

Acquisition related and other

     10        21        16        71   

Restructuring

     114        17        162        31   
                                

Total operating expenses

     3,680        3,632        6,993        7,442   
                                

Operating income

     2,178        1,975        3,918        3,496   

Interest expense

     (188     (157     (368     (317

Non-operating income, net

     33        8        35        90   
                                

Income before provision for income taxes

     2,023        1,826        3,585        3,269   

Provision for income taxes

     565        530        1,003        896   
                                

Net income

   $ 1,458      $ 1,296      $ 2,582      $ 2,373   
                                

Earnings per share:

        

Basic

   $ 0.29      $ 0.25      $ 0.52      $ 0.46   
                                

Diluted

   $ 0.29      $ 0.25      $ 0.51      $ 0.46   
                                

Weighted average common shares outstanding:

        

Basic

     5,010        5,127        5,010        5,140   
                                

Diluted

     5,064        5,187        5,063        5,211   
                                

Dividends declared per common share

   $ 0.05      $      $ 0.10      $   
                                

See notes to condensed consolidated financial statements.

 

2


Table of Contents

ORACLE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Six Months Ended November 30, 2009 and 2008

(Unaudited)

 

     Six Months Ended
November 30,
 

(in millions)

   2009     2008  

Cash Flows From Operating Activities:

    

Net income

   $ 2,582      $ 2,373   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation

     123        134   

Amortization of intangible assets

     867        839   

Deferred income taxes

     (216     (151

Stock-based compensation

     188        186   

Tax benefits on the exercise of stock options

     71        121   

Excess tax benefits on the exercise of stock options

     (42     (79

Other, net

     56        39   

Changes in operating assets and liabilities, net of effects from acquisitions:

    

Decrease in trade receivables, net

     1,437        1,642   

Decrease in prepaid expenses and other assets

     235        388   

Decrease in accounts payable and other liabilities

     (523     (1,022

Increase (decrease) in income taxes payable

     59        (273

Decrease in deferred revenues

     (448     (207
                

Net cash provided by operating activities

     4,389        3,990   
                

Cash Flows From Investing Activities:

    

Purchases of marketable securities and other investments

     (6,185     (5,105

Proceeds from maturities and sales of marketable securities and other investments

     4,088        4,362   

Acquisitions, net of cash acquired

     (392     (1,065

Capital expenditures

     (100     (399
                

Net cash used for investing activities

     (2,589     (2,207
                

Cash Flows From Financing Activities:

    

Payments for repurchases of common stock

     (496     (2,344

Proceeds from issuances of common stock

     371        371   

Payment of dividends to stockholders

     (501       

Proceeds from borrowings, net of issuance costs

     4,461          

Repayments of borrowings

            (4

Excess tax benefits on the exercise of stock options

     42        79   

Distributions to noncontrolling interests

     (34     (30
                

Net cash provided by (used for) financing activities

     3,843        (1,928
                

Effect of exchange rate changes on cash and cash equivalents

     281        (764
                

Net increase (decrease) in cash and cash equivalents

     5,924        (909

Cash and cash equivalents at beginning of period

     8,995        8,262   
                

Cash and cash equivalents at end of period

   $         14,919      $           7,353   
                

Non-cash investing and financing transactions:

    

Fair value of stock awards assumed in connection with acquisitions

   $ 1      $ 1   

(Decrease) increase in unsettled repurchases of common stock

   $ (4   $ 152   

See notes to condensed consolidated financial statements.

 

3


Table of Contents

ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

November 30, 2009

(Unaudited)

 

1. BASIS OF PRESENTATION AND RECENT ACCOUNTING PRONOUNCEMENTS

Basis of Presentation

We have prepared the condensed consolidated financial statements included herein, without audit, pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. However, we believe that the disclosures are adequate to ensure the information presented is not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended May 31, 2009.

We believe that all necessary adjustments, which consisted only of normal recurring items, have been included in the accompanying financial statements to present fairly the results of the interim periods. The results of operations for the interim periods presented are not necessarily indicative of the operating results to be expected for any subsequent interim period or for our fiscal year ending May 31, 2010.

In July 2009, the Financial Accounting Standards Board (FASB) issued the FASB Accounting Standards Codification (Codification), which we adopted in our second quarter of fiscal 2010. There were no changes to our consolidated financial statements and related disclosures contained in this Quarterly Report due to our adoption and implementation of the Codification, other than changes in reference in this Quarterly Report to the various authoritative accounting pronouncements contained within the Codification.

During fiscal 2010, we adopted certain new accounting pronouncements that affected our significant accounting policies, including FASB Accounting Standards Codification (ASC) 805, Business Combinations. We disclosed our accounting policies for these new accounting pronouncements and all of our other significant accounting policies in Note 1 of Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended May 31, 2009. There have been no other significant changes to our significant accounting policies that were disclosed in our Annual Report on Form 10-K for the fiscal year ended May 31, 2009 other than the aforementioned reference changes resulting from the Codification.

As a result of our adoption of the FASB’s new accounting guidance for noncontrolling interests as contained in ASC 810, Consolidation, as of the beginning of fiscal 2010, we retrospectively classified noncontrolling interest positions of certain of our consolidated entities as a separate component of consolidated equity from the equity attributable to Oracle’s stockholders for all periods presented. The noncontrolling interests in our net income were not significant to our consolidated results for the periods presented and therefore have been included as a component of non-operating income, net in our condensed consolidated statements of operations.

Certain other prior year balances have been reclassified to conform to the current year’s presentation. Such reclassifications did not affect total revenues, operating income or net income.

In accordance with ASC 855, Subsequent Events, we evaluated subsequent events through the date and time our condensed consolidated financial statements were issued on December 21, 2009.

Acquisition Related and Other Expenses

Acquisition related and other expenses consist of personnel related costs for transitional and certain other employees, stock-based compensation expenses, integration related professional services, certain business combination adjustments after the measurement period or purchase price allocation period has ended, and certain other operating expenses, net. Stock-based compensation included in acquisition related and other expenses resulted from unvested options assumed from acquisitions whereby vesting was accelerated upon termination of the employees pursuant to the original terms of those options. As a result of our adoption of the FASB’s revised

 

4


Table of Contents

ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

November 30, 2009

(Unaudited)

 

accounting guidance for business combinations as of the beginning of fiscal 2010, certain acquisition related and other expenses are now recorded as expenses in our statements of operations that had been historically included as a part of the consideration transferred and capitalized as a part of the accounting for our acquisitions pursuant to previous accounting rules, primarily direct transaction costs such as professional services fees.

 

     Three Months Ended
November 30,
   Six Months Ended
November 30,

(in millions)

   2009    2008    2009    2008

Transitional and other employee related costs

   $ 2    $ 4    $ 5    $ 31

Stock-based compensation

          6           11

Professional fees and other, net

     4      10      7      19

Business combination adjustments

     4      1      4      10
                           

Total acquisition related and other expenses

   $ 10    $ 21    $ 16    $ 71
                           

Non-Operating Income, net

Non-operating income, net consists primarily of interest income, net foreign currency exchange gains (losses), the noncontrolling interests in the net profits of our majority-owned subsidiaries (Oracle Financial Services Software Limited and Oracle Japan), and net other income (losses), including net realized gains and losses related to all of our investments and net unrealized gains and losses related to the small portion of our investment portfolio that we classify as trading.

 

     Three Months Ended
November 30,
    Six Months Ended
November 30,
 

(in millions)

     2009         2008         2009         2008    

Interest income

   $ 30      $ 97      $ 65      $ 185   

Foreign currency losses, net

     (2     (22     (20     (12

Noncontrolling interests in income

     (16     (19     (40     (35

Other income (losses), net

     21        (48     30        (48
                                

Total non-operating income, net

   $ 33      $ 8      $ 35      $ 90   
                                

Comprehensive Income

Comprehensive income consists of the following, net of income tax effects: net income, net foreign currency translation gains and losses, net gains and losses related to certain of our derivative financial instruments that are reflected in Oracle Corporation stockholders’ equity and net unrealized gains and losses on marketable debt and equity securities that we classify as available-for-sale. The following table sets forth the calculation of comprehensive income:

 

     Three Months Ended
November 30,
    Six Months Ended
November 30,
 

(in millions)

       2009             2008           2009         2008    

Net income

   $ 1,458      $ 1,296      $ 2,582      $ 2,373   

Foreign currency translation gains (losses), net

     225        (440     276        (683

Unrealized losses on derivative financial instruments, net

     (25     (63     (31     (44

Unrealized gains on marketable securities, net

            10               10   
                                

Comprehensive income

   $ 1,658      $ 803      $     2,827      $     1,656   
                                

 

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Table of Contents

ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

November 30, 2009

(Unaudited)

 

Recent Accounting Pronouncements

Revenue Recognition for Multiple-Element Arrangements:    In October 2009, the FASB issued Accounting Standards Update No. 2009-13, Revenue Recognition (Topic 605) Multiple-Deliverable Revenue Arrangements (A Consensus of the FASB Emerging Issues Task Force) (ASU 2009-13), which amends existing accounting standards for revenue recognition for multiple-element arrangements. To the extent a deliverable within a multiple-element arrangement is not accounted for pursuant to other accounting standards, including ASC 985-605, Software-Revenue Recognition, ASU 2009-13 establishes a selling price hierarchy that allows for the use of an estimated selling price to determine the allocation of arrangement consideration to a deliverable in a multiple element arrangement where neither vendor-specific objective evidence nor third-party evidence is available for that deliverable. ASU 2009-13 is to be applied prospectively for revenue arrangements entered into or materially modified in our first quarter of fiscal 2012. Early adoption is permitted. If we were to adopt prior to the first quarter of fiscal 2012, we must apply ASU 2009-13 retrospectively to the beginning of the fiscal year of adoption or to all periods presented. We are currently evaluating the impact of the pending adoption of ASU 2009-13 on our consolidated financial statements.

Revenue Recognition for Certain Arrangements that Include Software Elements:    In October 2009, the FASB issued Accounting Standards Update 2009-14, Revenue Recognition (Topic 605)—Applicability of AICPA Statement of Position 97-2 to Certain Arrangements That Include Software Elements (ASU 2009-14). ASU 2009-14 excludes tangible products containing software components and non-software components that function together to deliver the product’s essential functionality from the scope of ASC 605-985, Software-Revenue Recognition. ASU 2009-14 shall be applied on a prospective basis to revenue arrangements entered into or materially modified in our first quarter of fiscal 2012. Early adoption is permitted. If we were to adopt prior to the first quarter of fiscal 2012, we must apply ASU 2009-14 retrospectively to the beginning of the fiscal year of adoption or to all periods presented. We are currently evaluating the impact of the pending adoption of ASU 2009-14 on our consolidated financial statements.

Transfers of Financial Assets:    In June 2009, the FASB issued a new accounting standard for the transfer of financial assets that eliminates the concept of a “qualifying special-purpose entity” and changes the requirements for derecognizing financial assets. We will adopt this new accounting standard in fiscal 2011 and are currently evaluating the impact of its pending adoption on our consolidated financial statements.

Variable Interest Entities:    In June 2009, the FASB issued a new accounting standard that amends the evaluation criteria to identify the primary beneficiary of a variable interest entity as provided pursuant to existing accounting standards and requires ongoing reassessments of whether an enterprise is the primary beneficiary of the variable interest entity. We will adopt this new accounting standard in fiscal 2011 and are currently evaluating the impact of its pending adoption on our consolidated financial statements.

 

2. ACQUISITIONS

Proposed Acquisition of Sun Microsystems, Inc.

On April 19, 2009, we entered into an Agreement and Plan of Merger (Merger Agreement) with Sun Microsystems, Inc. (Sun), a provider of enterprise computing systems, software and services. Pursuant to the Merger Agreement, our wholly owned subsidiary will merge with and into Sun and Sun will become a wholly owned subsidiary of Oracle. Upon the consummation of the merger, each share of Sun common stock will be converted into the right to receive $9.50 in cash. In addition, options to acquire Sun common stock, Sun restricted stock unit awards and other equity-based awards denominated in shares of Sun common stock outstanding immediately prior to the consummation of the merger will generally be converted into options, restricted stock unit awards or other equity-based awards, as the case may be, denominated in shares of Oracle common stock based on formulas contained in the Merger Agreement. The estimated total purchase price of Sun is approximately $7.4 billion.

 

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

November 30, 2009

(Unaudited)

 

The Merger Agreement contains certain termination rights for both Sun and Oracle and further provides that, upon termination of the Merger Agreement under certain circumstances, Sun may be obligated to pay Oracle a termination fee of $260 million.

Completion of this transaction is subject to customary closing conditions, including regulatory clearance under the applicable antitrust laws of the European Commission and other jurisdictions. On November 9, 2009, we received a Statement of Objections from the European Commission relating to our proposed acquisition of Sun. A hearing to consider the Statement of Objections and Oracle’s response to the Statement of Objections was held on December 10-11, 2009.

Fiscal 2010 Acquisitions

During the first six months of fiscal 2010, we acquired several companies and purchased certain technology and development assets to expand our product offerings. These acquisitions were not significant individually or in the aggregate. We have accounted for these acquisitions in accordance with the FASB’s revised accounting standard for business combinations, which we adopted as of the beginning of fiscal 2010. We have included the financial results of these companies in our consolidated results from their respective acquisition dates. The preliminary purchase price allocations for each of these acquisitions were based upon a preliminary valuation and our estimates and assumptions for certain of these acquisitions are subject to change as we obtain additional information for our estimates during the respective measurement periods. The primary areas of those purchase price allocations that are not yet finalized relate to identifiable intangible assets, certain legal matters, income and non-income based taxes and residual goodwill.

Fiscal 2009 Acquisitions

During fiscal 2009, we acquired several companies and purchased certain technology and development assets to expand our product offerings. These acquisitions were not individually significant. We have included the financial results of these companies in our consolidated results from their respective acquisition dates. In the aggregate, the total purchase price for these acquisitions was approximately $1.2 billion, which consisted of approximately $1.2 billion in cash, $1 million for the fair value of stock awards assumed and $13 million for transaction costs. In allocating the total purchase price for these acquisitions based on estimated fair values, we preliminarily recorded $712 million of goodwill, $587 million of identifiable intangible assets, $100 million of net tangible liabilities (resulting primarily from deferred tax and restructuring liabilities assumed as a part of these transactions) and $10 million of in-process research and development. The preliminary allocation of purchase price for certain of these acquisitions were based upon preliminary valuations and our estimates and assumptions are subject to change. The primary areas of the purchase price allocations that are not yet finalized relate to certain restructuring liabilities, intangible assets, legal matters, income and non-income based taxes and residual goodwill.

Unaudited Pro Forma Financial Information

The unaudited pro forma financial information in the table below summarizes the combined results of operations for Oracle and certain other companies that we acquired since the beginning of fiscal 2009 (which were collectively significant for purposes of unaudited pro forma financial information disclosure) as though the companies were combined as of the beginning of fiscal 2009. The pro forma financial information for all periods presented also includes the business combination accounting effects resulting from these acquisitions including our amortization charges from acquired intangible assets, stock-based compensation charges for unvested stock awards assumed and the related tax effects as though the aforementioned companies were combined as of the beginning of fiscal 2009. The pro forma financial information as presented below is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisitions had taken place at the beginning of fiscal 2009.

 

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

November 30, 2009

(Unaudited)

 

The unaudited pro forma financial information for the three and six months ended November 30, 2009 combined the historical results of Oracle for the three and six months ended November 30, 2009 and the historical results for certain other companies that we acquired since the beginning of fiscal 2010 based upon their respective previous reporting periods and the dates that these companies were acquired by us, and the effects of the pro forma adjustments (some of which are based upon preliminary estimates) listed above.

The unaudited pro forma financial information for the three and six months ended November 30, 2008 combined the historical results of Oracle for the three and six months ended November 30, 2008 and the historical results of certain other companies that we acquired since the beginning of fiscal 2009 based upon their respective previous reporting periods and the dates these companies were acquired by us, and the effects of the pro forma adjustments listed above. The unaudited pro forma financial information was as follows for the three and six months ended November 30, 2009 and 2008:

 

     Three Months Ended
November 30,
   Six Months Ended
November 30,

(in millions, except per share data)

       2009            2008        2009    2008

Total revenues

   $ 5,858    $ 5,678    $ 10,944    $ 11,111

Net income

   $ 1,458    $ 1,284    $ 2,579    $ 2,342

Basic earnings per share

   $ 0.29    $ 0.25    $ 0.51    $ 0.46

Diluted earnings per share

   $ 0.29    $ 0.25    $ 0.51    $ 0.45

 

3. FAIR VALUE MEASUREMENTS

We perform fair value measurements in accordance with the guidance provided by ASC 820, Fair Value Measurements and Disclosures. ASC 820 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, we consider the principal or most advantageous market in which we would transact and consider assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance.

ASC 820 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. An asset’s or liability’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC 820 establishes three levels of inputs that may be used to measure fair value:

 

   

Level 1:    quoted prices in active markets for identical assets or liabilities;

 

   

Level 2:    inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or

 

   

Level 3:    unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

November 30, 2009

(Unaudited)

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Our assets and liabilities measured at fair value on a recurring basis, excluding accrued interest components, consisted of the following types of instruments (Level 1 and 2 inputs are defined above):

 

    November 30, 2009   May 31, 2009
    Fair Value Measurements
Using Input Types
      Fair Value Measurements
Using Input Types
   

(in millions)

  Level 1   Level 2       Total       Level 1   Level 2       Total    

Assets:

           

Money market funds

  $ 1,597   $   $ 1,597   $ 467   $   $ 467

U.S. Treasury, U.S. government and U.S. government agency debt securities

    4,852         4,852     4,078         4,078

Commercial paper debt securities

        4,335     4,335         1,365     1,365

Corporate debt securities and other

        2,442     2,442         1,335     1,335

Derivative financial instruments

        27     27            
                                   

Total assets

  $ 6,449   $ 6,804   $ 13,253   $ 4,545   $ 2,700   $ 7,245
                                   

Liabilities:

           

Derivative financial instruments

  $   $ 19   $ 19   $   $ 35   $ 35
                                   

Total liabilities

  $   $ 19   $ 19   $   $ 35   $ 35
                                   

Our valuation techniques used to measure the fair values of our money market funds and U.S. Treasury, U.S. government and U.S. government agency debt securities were derived from quoted market prices as substantially all of these instruments have maturity dates (if any) within one year from our date of purchase and active markets for these instruments exist. Our valuation techniques used to measure the fair values of all other instruments listed in the table above, substantially all of which mature within one year and the counterparties to which have high credit ratings, were derived from the following: non-binding market consensus prices that are corroborated by observable market data; quoted market prices for similar instruments; or pricing models, such as discounted cash flow techniques, with all significant inputs derived from or corroborated by observable market data. Our discounted cash flow techniques use observable market inputs, such as LIBOR-based yield curves, and currency spot and forward rates.

Our cash and cash equivalents, marketable securities and derivative financial instruments are recognized and measured at fair value in the condensed consolidated financial statements. Based on the trading prices of our $14.75 billion and $10.25 billion senior notes that were outstanding as of November 30, 2009 and May 31, 2009, respectively, and the interest rates we could obtain for other borrowings with similar terms at those dates, the estimated fair value of our borrowings at November 30, 2009 and May 31, 2009 was $15.98 billion and $10.79 billion, respectively.

 

4. INTANGIBLE ASSETS AND GOODWILL

The changes in intangible assets for fiscal 2010 and the gross and net book value of intangible assets at November 30, 2009 and May 31, 2009 were as follows:

 

    Intangible Assets, Gross   Accumulated Amortization     Intangible Assets, Net   Weighted
Average
Useful
Life

(Dollars in millions)

  May 31,
2009
  Additions   November 30,
2009
  May 31,
2009
    Expense     November 30,
2009
    May 31,
2009
  November 30,
2009
 

Software support agreements and related relationships

  $ 5,012   $ 45   $ 5,057   $ (1,601   $ (280   $ (1,881   $ 3,411   $ 3,176   9 years

Developed technology

    3,844     87     3,931     (1,925     (360     (2,285     1,919     1,646   5 years

Core technology

    1,502     32     1,534     (687     (130     (817     815     717   6 years

Customer relationships

    1,284     14     1,298     (320     (78     (398     964     900   8 years

Trademarks

    273     4     277     (113     (19     (132     160     145   7 years
                                                       

Total

  $ 11,915   $ 182   $ 12,097   $ (4,646   $ (867   $ (5,513   $ 7,269   $ 6,584  
                                                       

 

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

November 30, 2009

(Unaudited)

 

Total amortization expense related to our intangible assets was $436 million and $867 million for the three and six months ended November 30, 2009, respectively and $427 million and $839 million for the three and six months ended November 30, 2008, respectively. Estimated future amortization expense related to our intangible assets was $796 million for the remainder of fiscal 2010, $1.4 billion in fiscal 2011, $1.3 billion in fiscal 2012, $1.1 billion in fiscal 2013, $900 million in fiscal 2014, $706 million in fiscal 2015 and $381 million thereafter.

The changes in the carrying amounts of goodwill, which is generally not deductible for tax purposes, for our software business operating segments and for our services business for the six months ended November 30, 2009 were as follows:

 

(in millions)

   New
Software
Licenses
    Software
License
Updates and
Product
Support
    Services     Total  

Balances as of May 31, 2009

   $ 5,716      $ 11,334      $ 1,792      $ 18,842   

Goodwill from acquisitions

     163        111        2        276   

Goodwill adjustments for acquisitions consummated prior to fiscal 2010(1)

     (7     (12     (1     (20
                                

Balances as of November 30, 2009

   $       5,872      $ 11,433      $       1,793      $     19,098   
                                

 

(1)

Pursuant to our business combinations accounting policy, we record goodwill adjustments for the effect on goodwill of changes to net assets acquired during the measurement or purchase price allocation period (either of which can be up to one year from the date of an acquisition).

 

5. NOTES PAYABLE AND OTHER BORROWINGS

In July 2009, we issued $4.5 billion of fixed rate senior notes comprised of $1.5 billion of 3.75% notes due July 2014 (2014 Notes), $1.75 billion of 5.00% notes due July 2019 (2019 Notes) and $1.25 billion of 6.125% notes due July 2039 (2039 Notes and, together with 2014 Notes and 2019 Notes, the Senior Notes). We issued the Senior Notes for general corporate purposes and future acquisitions, including our proposed acquisition of Sun and acquisition related expenses.

The effective interest yields of the 2014 Notes, 2019 Notes and 2039 Notes at November 30, 2009 were 3.75%, 5.06% and 6.19%, respectively. In September 2009, we entered into interest rate swap agreements that have the economic effect of modifying the fixed interest obligations associated with the 2014 Notes so that the interest payable on these notes effectively became variable (1.38% at November 30, 2009; see Note 8 for additional information).

The Senior Notes rank pari passu with any commercial paper notes that we may issue pursuant to our commercial paper program (see Note 7 of Notes to Consolidated Financial Statements included in our fiscal 2009 Annual Report on Form 10-K for further information on our commercial paper program) and all existing and future senior indebtedness of Oracle Corporation. All existing and future liabilities of the subsidiaries of Oracle Corporation will be effectively senior to the Senior Notes.

We were in compliance with all debt-related covenants at November 30, 2009. Future principal payments of our borrowings at November 30, 2009 were as follows: $1.0 billion in fiscal 2010, $2.25 billion in fiscal 2011, none in fiscal 2012, $1.25 billion in fiscal 2013, none in fiscal 2014 and $10.25 billion thereafter.

There have been no other significant changes in our notes payable and other borrowing arrangements that were disclosed in our Annual Report on Form 10-K for the fiscal year ended May 31, 2009.

 

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

November 30, 2009

(Unaudited)

 

6. RESTRUCTURING ACTIVITIES

Fiscal 2009 Oracle Restructuring Plan

During the third quarter of fiscal 2009, our management approved, committed to and initiated plans to restructure and further improve efficiencies in our Oracle-based operations (the 2009 Plan). Our management amended the 2009 Plan in the second quarter of fiscal 2010 to reflect additional actions that we expect to take over the course of fiscal 2010. The total estimated restructuring costs associated with the 2009 Plan are $453 million and will be recorded to the restructuring expense line item within our consolidated statements of operations as they are recognized. In the first half of fiscal 2010, we recorded $162 million of restructuring expenses in connection with the 2009 Plan, the majority of which were incurred in the second quarter of fiscal 2010. We expect to incur the majority of the approximately $206 million that is remaining during the last two quarters of fiscal 2010. Any changes to the estimates of executing the 2009 Plan will be reflected in our future results of operations.

Acquisition Related Restructuring Plans Adopted Prior to Fiscal 2010

During the fourth quarter of fiscal 2008 and third quarter of fiscal 2006, our management approved, committed to and initiated plans to restructure certain pre-acquisition operations of BEA Systems, Inc. (BEA Restructuring Plan) and Siebel Systems, Inc. (Siebel Restructuring Plan), respectively. Our management initiated these plans in connection with our acquisitions of these companies in order to improve the cost efficiencies in our operations. These plans were initiated and approved prior to our adoption of the revised business combinations accounting guidance contained in ASC 805 as of the beginning of fiscal 2010. Costs related to these restructuring plans were originally recognized as liabilities assumed in each of the respective business combinations and included in the allocation of the cost to acquire these companies and, accordingly, have resulted in an increase to goodwill. Our restructuring expenses may change as our management executes the approved plans. Future decreases to the estimates of executing these acquisition related restructuring plans will be recorded as an adjustment to goodwill indefinitely. Increases to the estimates of the acquisition related restructuring plans will be recorded to operating expenses. The total restructuring costs associated with exiting activities of BEA were $203 million, consisting of severance, excess facilities obligations through fiscal 2017, as well as other restructuring costs. The total restructuring costs associated with exiting activities of Siebel were $592 million, consisting of severance, excess facilities obligations through fiscal 2022, and other restructuring costs.

 

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

November 30, 2009

(Unaudited)

 

Summary of All Plans

 

(in millions)

  Accrued
May 31,
2009(2)
  Six Months Ended November 30, 2009     Accrued
Nov. 30,
2009(2)
  Total
Costs
Accrued
to Date
  Total
Expected
Program
Costs
    Initial
Costs(3)
  Adj. to
Cost(4)
    Cash
Payments
    Others(5)        

Fiscal 2009 Oracle Restructuring Plan

               

New software licenses

  $ 12   $ 60   $ 3      $ (34   $ 1      $ 42   $ 93   $ 162

Software license updates and product support

                                     1     21

Services

    22     72     3        (37     2        62     110     210

Other(1)

    13     26     (2     (10     (1     26     43     60
                                                     

Total Fiscal 2009 Oracle Restructuring

  $ 47   $ 158   $ 4      $ (81   $ 2      $ 130   $ 247   $ 453
                                                     

BEA Restructuring Plan

               

Severance

  $ 52   $   $ (12   $ (5   $ 2      $ 37   $ 132   $ 132

Facilities

    33         (3     (6            24     56     56

Contracts and other

    8                (1            7     15     15
                                                     

Total BEA Restructuring

  $ 93   $   $ (15   $ (12   $ 2      $ 68   $ 203   $ 203
                                                     

Siebel Restructuring Plan

               

Severance

  $   $   $      $      $      $   $ 59   $ 59

Facilities

    146         7        (15     1        139     502     502

Contracts and other

    7         (5                   2     31     31
                                                     

Total Siebel Restructuring

  $ 153   $   $ 2      $ (15   $ 1      $ 141   $ 592   $ 592
                                                     

Total Other Restructuring Plans

  $ 96   $ 2   $ (9   $ (14   $ 13      $ 88    
                                             

Total Restructuring Plans(6)

  $ 389   $ 160   $ (18   $ (122   $ 18      $ 427    
                                             

 

(1)

Includes severance costs associated with research and development, general and administrative functions, and certain other facility related costs.

 

(2)

Accrued restructuring at November 30, 2009 and May 31, 2009 was $427 million and $389 million, respectively. The balances include $259 million and $203 million recorded in other current liabilities and $168 million and $186 million recorded in other non-current liabilities in the accompanying condensed consolidated balance sheets at November 30, 2009 and May 31, 2009, respectively.

 

(3)

Initial costs recorded for the respective restructuring plans.

 

(4)

All plan adjustments are changes in estimates whereby all increases in costs are recorded to operating expenses in the period of adjustment with decreases in costs of Oracle-based plans recorded to operating expenses and decreases in costs of acquisition related plans adopted prior to fiscal 2010 recorded as adjustments to goodwill indefinitely.

 

(5)

Represents foreign currency translation and other adjustments.

 

(6)

Restructuring plans included in this footnote represent those plans that management has deemed significant.

 

7. DEFERRED REVENUES

Deferred revenues consisted of the following:

 

(in millions)

   November 30,
2009
      May 31,   
2009

Software license updates and product support

   $ 3,986    $ 4,158

Services

     214      243

New software licenses

     195      191
             

Deferred revenues, current

     4,395      4,592

Deferred revenues, non-current (in other non-current liabilities)

     176      204
             

Total deferred revenues

   $ 4,571    $ 4,796
             

 

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

November 30, 2009

(Unaudited)

 

Deferred software license updates and product support revenues represent customer payments made in advance for annual support contracts. Software license updates and product support contracts are typically billed on a per annum basis in advance and revenues are recognized ratably over the support periods. Deferred service revenues include prepayments for consulting, On Demand and education services. Revenue for these services is recognized as the services are performed. Deferred new software license revenues typically result from undelivered products or specified enhancements, customer specific acceptance provisions or software license transactions that cannot be segmented from consulting services, or certain extended payment term arrangements.

In connection with the purchase price allocations related to our acquisitions, we have estimated the fair values of the support obligations assumed. The estimated fair values of the support obligations assumed were determined using a cost build-up approach. The cost build-up approach determines fair value by estimating the costs relating to fulfilling the obligations plus a normal profit margin. The sum of the costs and operating profit approximates, in theory, the amount that we would be required to pay a third party to assume the support obligations. These fair value adjustments reduce the revenues recognized over the support contract term of our acquired contracts and, as a result, we did not recognize software license updates and product support revenues related to support contracts assumed from our acquisitions in the amount of $14 million and $80 million for the three months ended November 30, 2009 and 2008, respectively, and $23 million and $171 million for the six months ended November 30, 2009 and 2008, respectively, which would have been otherwise recorded by our acquired businesses as independent entities.

 

8. DERIVATIVE FINANCIAL INSTRUMENTS

On December 1, 2008, we adopted the new disclosure provisions that are included in ASC 815, Derivatives and Hedging, which had no impact on our consolidated financial position or results of operations and only required additional financial statement disclosures. We have applied the disclosure requirements of ASC 815 on a prospective basis from the date of adoption. Accordingly, disclosures related to interim periods prior to the date of adoption have not been presented.

Interest Rate Swap Agreements

Cash Flow Hedges

We use an interest rate swap agreement to manage the economic effect of variable interest obligations associated with our senior notes due May 2010 (Floating Rate Notes) so that the interest payable on the Floating Rate Notes effectively became fixed at a rate of 4.59%, thereby reducing the impact of future interest rate changes on our future interest expense. The critical terms of the interest rate swap agreement and the Floating Rate Notes match, including the notional amounts, interest rate reset dates, maturity dates and underlying market indices. Accordingly, we have designated this swap agreement as a qualifying hedging instrument and are accounting for it as a cash flow hedge pursuant to ASC 815. The unrealized losses on this interest rate swap agreement are included in accumulated other comprehensive income and the corresponding fair value payables are included in other current liabilities in our consolidated balance sheets. The periodic interest settlements on this interest rate swap agreement, which occur at the same interval as the periodic interest settlements pursuant to the Floating Rate Notes, are recorded as interest expense.

Fair Value Hedges

In September 2009, we entered into interest rate swap agreements that have the economic effect of modifying the fixed interest obligations associated with the 2014 Notes (as defined in Note 5) so that the interest payable on these notes effectively became variable based on LIBOR. The critical terms of the interest rate swap agreements and the 2014 Notes match, including the notional amounts and maturity dates. Accordingly, we have designated

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

November 30, 2009

(Unaudited)

 

these swap agreements as qualifying hedging instruments and are accounting for them as fair value hedges pursuant to ASC 815. These transactions are characterized as fair value hedges for financial accounting purposes because they protect us against changes in the fair value of our fixed rate borrowings due to benchmark interest rate movements. The changes in fair value of these interest rate swap agreements are recognized as interest expense in our consolidated statements of operations with the corresponding amount included in other assets or other non-current liabilities in our consolidated balance sheets. The amount of net gain (loss) attributable to the risk being hedged is recognized as interest expense in our consolidated statement of operations with the corresponding amount included in notes payable and other non-current borrowings. The periodic interest settlements, which occur at the same interval as the 2014 Notes, will be recorded as interest expense.

We do not use any interest rate swap agreements for trading purposes.

Net Investment Hedges

Periodically, we hedge net assets of certain of our international subsidiaries using foreign currency forward contracts to offset the translation and economic exposures related to our foreign currency-based investments in these subsidiaries. These contracts have been designated as net investment hedges pursuant to ASC 815. We use the spot method to measure the effectiveness of our net investment hedges. Under this method for each reporting period, the change in fair value of the forward contracts attributable to the changes in spot exchange rates (the effective portion) is reported in accumulated other comprehensive income on our consolidated balance sheet and the remaining change in fair value of the forward contract (the ineffective portion, if any) is recognized in non-operating income, net, in our consolidated statement of operations. We record settlements under these forward contracts in a similar manner. The fair value of both the effective and ineffective portions is recorded to our consolidated balance sheet as prepaid expenses and other current assets for amounts receivable from the counterparties or other current liabilities for amounts payable to the counterparties.

As of November 30, 2009, we had one net investment hedge in Japanese Yen. The Yen net investment hedge minimizes currency risk arising from net assets held in Yen as a result of equity capital raised during the initial public offering and subsequent offering of our majority owned subsidiary, Oracle Japan. As of November 30, 2009, the fair value of our net investment hedge in Japanese Yen was nominal and had a notional amount of $753 million.

Foreign Currency Forward Contracts Not Designated as Hedges

We transact business in various foreign currencies and have established a program that primarily utilizes foreign currency forward contracts to offset the risks associated with the effects of certain foreign currency exposures. Under this program, our strategy is to have increases or decreases in our foreign currency exposures offset by gains or losses on the foreign currency forward contracts to mitigate the risks and volatility associated with foreign currency transaction gains or losses. These foreign currency exposures typically arise from intercompany sublicense fees and other intercompany transactions. Our foreign currency forward contracts generally settle within 90 days. We do not use these forward contracts for trading purposes. We do not designate these forward contracts as hedging instruments pursuant to ASC 815. Accordingly, we record the fair value of these contracts as of the end of our reporting period to our consolidated balance sheet with changes in fair value recorded in our consolidated statement of operations. The balance sheet classification for the fair values of these forward contracts is prepaid expenses and other current assets for unrealized gains and other current liabilities for unrealized losses. The statement of operations classification for the fair values of these forward contracts is non-operating income, net, for both realized and unrealized gains and losses.

As of November 30, 2009, the notional amounts of the forward contracts we held to purchase and sell U.S. Dollars in exchange for other major international currencies were approximately $1.3 billion and $302 million,

 

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

November 30, 2009

(Unaudited)

 

respectively, and the notional amounts of the foreign currency forward contracts we held to purchase European Euros in exchange for other major international currencies were €217 million (approximately $326 million).

The effects of derivative instruments on our condensed consolidated financial statements were as follows as of November 30, 2009 and for the three and six months then ended (amounts presented exclude any income tax effects):

Fair Value of Derivative Instruments in Condensed Consolidated Balance Sheet

 

   

November 30, 2009

 

May 31, 2009

(in millions)

 

Balance Sheet Location

  Fair Value  

Balance Sheet Location

  Fair Value

Interest rate swap agreement designated as cash flow hedge

  Other current liabilities   $ 19   Other current liabilities   $ 35
               

Interest rate swap agreements designated as fair value hedges

  Other assets   $ 27   Not applicable   $
               

Foreign currency forward contracts not designated as hedges

  Other current liabilities   $   Other current liabilities   $
               

Effects of Derivative Instruments on Income and Other Comprehensive Income (OCI)

 

    Amount of Gain (Loss)
Recognized in Accumulated
OCI on Derivative
(Effective Portion)
   

Location and Amount of Gain (Loss)
Reclassified from Accumulated OCI into
Income (Effective Portion)

   

Location and Amount of Gain (Loss)
Recognized in Income on Derivative
(Ineffective Portion and Amount Excluded
from Effectiveness Testing)

(in millions)

  Three Months
Ended
November 30,
2009
    Six Months
Ended
November 30,
2009
        Three Months
Ended
November 30,
2009
    Six Months
Ended
November 30,
2009
        Three Months
Ended

November 30,
2009
  Six Months
Ended
November 30,
2009

Cash flow hedges:

               

Interest rate swap

  $ 9      $ 7      Interest Expense   $ (11   $ (20   Non-operating Income, net   $   $
                                               

Net investment hedges:

               

Foreign currency forward contract

  $ (49   $ (60   Not Applicable   $      $      Non-operating Income, net   $   $ 1
                                               

 

    

Location and Amount of Gain (Loss)
Recognized in Income on Derivative

  

Location and Amount of Gain (Loss) on
Hedged Item Recognized in Income
Attributable to Risk Being Hedged

 

(in millions)

        Three Months
Ended
November 30,
2009
   Six Months
Ended
November 30,
2009
        Three Months
Ended
November 30,
2009
    Six Months
Ended
November 30,
2009
 

Fair value hedges:

                

Interest rate swaps

   Interest Expense    $ 27    $ 27    Interest Expense    $ (27   $ (27
                                    

 

    

Location and Amount of Gain (Loss) Recognized in Income on
Derivative

 

(in millions)

        Three Months
Ended
November 30, 2009
    Six Months
Ended
November 30, 2009
 

Derivatives Not Designated as Hedges:

       

Foreign currency forward contracts

   Non-operating Income, net    $ (34   $ (63
                   

 

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

November 30, 2009

(Unaudited)

 

9. STOCKHOLDERS’ EQUITY

Stock Repurchases

Our Board of Directors has approved a program for us to repurchase shares of our common stock. On October 20, 2008, we announced that our Board of Directors approved the expansion of our repurchase program by $8.0 billion and as of November 30, 2009, approximately $5.8 billion was available for share repurchases pursuant to our stock repurchase program. We repurchased approximately 23.0 million shares for $492 million during the six months ended November 30, 2009 (including approximately 0.4 million shares for $8 million that were repurchased but not settled at November 30, 2009) and approximately 140.1 million shares for $2.5 billion during the six months ended November 30, 2008 (including 11.0 million shares for $176 million that were repurchased but not settled at November 30, 2008) under the applicable repurchase programs authorized.

Our stock repurchase authorization does not have an expiration date and the pace of our repurchase activity will depend on factors such as our working capital needs, our cash requirements for acquisitions and dividend payments, our debt repayment obligations or repurchase of our debt, our stock price, and economic and market conditions. Our stock repurchases may be effected from time to time through open market purchases or pursuant to a Rule 10b5-1 plan. Our stock repurchase program may be accelerated, suspended, delayed or discontinued at any time.

Dividends on Common Stock

During the first six months of fiscal 2010, our Board of Directors declared cash dividends of $0.10 per share of our outstanding common stock, which we paid during the same period.

In December 2009, our Board of Directors declared a quarterly cash dividend of $0.05 per share of outstanding common stock payable on February 9, 2010 to stockholders of record as of the close of business on January 19, 2010. Future declarations of dividends and the establishment of future record and payment dates are subject to the final determination of our Board of Directors.

Stock-Based Compensation Expense and Valuation of Awards

Stock-based compensation is included in the following operating expense line items in our condensed consolidated statements of operations:

 

     Three Months Ended
November 30,
   Six Months Ended
November 30,

(in millions)

   2009    2008    2009    2008

Sales and marketing

   $ 20    $ 16    $ 36    $ 35

Software license updates and product support

     4      3      8      6

Cost of services

     3      3      6      6

Research and development

     44      45      76      82

General and administrative

     33      22      62      46

Acquisition related and other

          6           11
                           

Total stock-based compensation

   $ 104    $ 95    $ 188    $ 186
                           

We estimate the fair value of our share-based payments using the Black-Scholes-Merton option-pricing model, which was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Option valuation models, including the Black-Scholes-Merton option-pricing model, require the input of assumptions, including stock price volatility. Changes in the input assumptions can materially affect the fair value estimates and ultimately how much we recognize as stock-based compensation

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

November 30, 2009

(Unaudited)

 

expense. The fair values of our stock options were estimated at the date of grant or date of acquisition for options assumed in a business combination. The weighted average input assumptions used and resulting fair values were as follows for the three and six months ended November 30, 2009 and 2008:

 

     Three Months Ended
November 30,
   Six Months Ended
November 30,
     2009    2008    2009    2008

Expected life (in years)

     4.7      4.9      5.3      5.3

Risk-free interest rate

     2.5%      2.7%      2.5%      3.3%

Volatility

     32%      40%      32%      36%

Dividend yield

     0.9%           1.0%     

Weighted-average fair value per share of grants

   $ 6.06    $ 6.76    $ 6.33    $ 7.91

The expected life input is based on historical exercise patterns and post-vesting termination behavior, the risk-free interest rate input is based on United States Treasury instruments and the volatility input is calculated based on the implied volatility of our longest-term, traded options. Our expected dividend rate was zero prior to our first dividend declaration on March 18, 2009 as we did not historically pay cash dividends on our common stock and did not anticipate doing so for the foreseeable future for grants issued prior to March 18, 2009. For grants issued subsequent to March 18, 2009, we used an annualized dividend yield based on the per share dividend declared by our Board of Directors.

 

10. INCOME TAXES

The effective tax rate for the periods presented is the result of the mix of income earned in various tax jurisdictions that apply a broad range of income tax rates. Our provision for income taxes differs from the tax computed at the U.S. federal statutory income tax rate due primarily to state taxes and earnings considered as indefinitely reinvested in foreign operations. Our effective tax rate was 27.9% and 28.0% for the three and six months ended November 30, 2009, respectively and 29.0% and 27.4% for the three and six months ended November 30, 2008, respectively.

Domestically, U.S. federal and state taxing authorities are currently examining income tax returns of Oracle and various acquired entities for years through fiscal 2007. Our U.S. federal and, with some exceptions, our state income tax returns have been examined for all years prior to fiscal 2000, and we are no longer subject to audit for those periods.

Internationally, tax authorities for numerous non-U.S. jurisdictions are also examining returns affecting unrecognized tax benefits. With some exceptions, we are generally no longer subject to tax examinations in non-U.S. jurisdictions for years prior to fiscal 1998.

We believe that we have adequately provided for any reasonably foreseeable outcomes related to our tax audits and that any settlement will not have a material adverse effect on our consolidated financial position or results of operations; however, there can be no assurances as to the actual outcomes.

We previously negotiated three unilateral Advance Pricing Agreements with the U.S. Internal Revenue Service (IRS) that cover many of our intercompany transfer pricing issues and preclude the IRS from making a transfer pricing adjustment within the scope of these agreements. These agreements are effective for fiscal years through May 31, 2006. We have submitted to the IRS a request for renewal of this Advance Pricing Agreement for the years ending May 31, 2007 through May 31, 2011. However, these agreements do not cover all elements of our transfer pricing and do not bind tax authorities outside the United States. We have finalized one bilateral Advance Pricing Agreement, which was effective for the years ending May 31, 2002 through May 31, 2006 and we have submitted a renewal for the years ending May 31, 2007 through May 31, 2011. There can be no guarantee that such negotiations will result in an agreement. We concluded an additional bilateral agreement to cover the period from June 1, 2001 through January 25, 2008.

 

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

November 30, 2009

(Unaudited)

 

11. SEGMENT INFORMATION

ASC 280, Segment Reporting, establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision maker is our Chief Executive Officer. We are organized geographically and by line of business. While our Chief Executive Officer evaluates results in a number of different ways, the line of business management structure is the primary basis for which the allocation of resources and financial results are assessed. We have two businesses, software and services, which are further divided into five operating segments. Our software business is comprised of two operating segments: (1) new software licenses and (2) software license updates and product support. Our services business is comprised of three operating segments: (1) consulting, (2) On Demand and (3) education.

The new software licenses line of business is engaged in the licensing of database and middleware software as well as applications software. Database and middleware software includes database management software, application server software, business intelligence software, identification and access management software, content management software, portal and user interaction software, Service-Oriented Architecture and business process management software, data integration software and development tools. Applications software provides enterprise information that enables companies to manage their business cycles and provide intelligence in functional areas such as customer relationship management, financials, human resources, maintenance management, manufacturing, marketing, order fulfillment, product lifecycle management, enterprise project portfolio management, enterprise performance management, procurement, sales, services, enterprise resource planning and supply chain planning. The software license updates and product support line of business provides customers with rights to unspecified software product upgrades and maintenance releases, internet access to technical content, as well as internet and telephone access to technical support personnel during the support period. In addition, the software license updates and product support line of business offers customers Oracle Unbreakable Linux Support, which provides enterprise level support for the Linux operating system, and also offers support for Oracle VM server virtualization software.

The consulting line of business provides services to customers in business strategy and analysis, business process simplification, solutions integration and the implementation, enhancement and upgrade of our database, middleware and applications software. On Demand includes Oracle On Demand and Advanced Customer Services. Oracle On Demand provides multi-featured software and hardware management and maintenance services for customers that deploy our database, middleware and applications software at our data center facilities, select partner data centers or customer facilities. Advanced Customer Services consists of solution lifecycle management services, database and application management services, industry-specific solution support centers and remote and on-site expert services. The education line of business provides instructor-led, media-based and internet-based training in the use of our database, middleware and applications software.

We do not track our assets by operating segments. Consequently, it is not practical to show assets by operating segments results.

 

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

November 30, 2009

(Unaudited)

 

The following table presents a summary of our businesses’ and operating segments’ results:

 

     Three Months Ended
November 30,
   Six Months Ended
November 30,

(in millions)

       2009            2008        2009    2008

New software licenses:

           

Revenues(1)

   $ 1,649    $ 1,623    $ 2,676    $ 2,857

Sales and distribution expenses

     948      980      1,760      1,948
                           

Margin(2)

   $ 701    $ 643    $ 916    $ 909

Software license updates and product support:

           

Revenues(1)

   $ 3,261    $ 2,930    $ 6,387    $ 5,956

Cost of services

     243      240      451      504
                           

Margin(2)

   $ 3,018    $ 2,690    $ 5,936    $ 5,452

Total software business:

           

Revenues(1) 

   $ 4,910    $ 4,553    $ 9,063    $ 8,813

Expenses

     1,191      1,220      2,211      2,452
                           

Margin(2)

   $ 3,719    $ 3,333    $ 6,852    $ 6,361

Consulting:

           

Revenues(1)

   $ 689    $ 836    $ 1,348    $ 1,694

Cost of services

     595      684      1,165      1,440
                           

Margin(2)

   $ 94    $ 152    $ 183    $ 254

On Demand:

           

Revenues(1)

   $ 188    $ 189    $ 368    $ 384

Cost of services

     131      136      254      282
                           

Margin(2)

   $ 57    $ 53    $ 114    $ 102

Education:

           

Revenues(1)

   $ 85    $ 109    $ 155    $ 218

Cost of services

     59      74      115      153
                           

Margin(2)

   $ 26    $ 35    $ 40    $ 65

Total services business:

           

Revenues(1) 

   $ 962    $ 1,134    $ 1,871    $ 2,296

Cost of services

     785      894      1,534      1,875
                           

Margin(2)

   $ 177    $ 240    $ 337    $ 421

Totals:

           

Revenues(1)

   $ 5,872    $ 5,687    $       10,934    $       11,109

Expenses

     1,976      2,114      3,745      4,327
                           

Margin(2)

   $ 3,896    $ 3,573    $ 7,189    $ 6,782
                           

 

(1)

Operating segment revenues differ from the external reporting classifications due to certain software license products that are classified as service revenues for management reporting purposes. Additionally, software license updates and product support revenues for management reporting included $14 million and $80 million of revenues that we did not recognize in the accompanying condensed consolidated statements of operations for the three months ended November 30, 2009 and 2008, respectively, and $23 million and $171 million for the six months ended November 30, 2009 and 2008, respectively. See Note 7 for an explanation of these adjustments and the following table for a reconciliation of operating segment revenues to total revenues.

 

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

November 30, 2009

(Unaudited)

 

(2)

The margins reported reflect only the direct controllable costs of each line of business and do not include allocations of product development, information technology, marketing and partner programs, and corporate and general and administrative expenses incurred in support of the lines of business. Additionally, the margins do not reflect the amortization of intangible assets, acquisition related and other expenses, restructuring costs, or stock-based compensation.

The following table reconciles operating segment revenues to total revenues as well as operating segment margin to income before provision for income taxes:

 

     Three Months Ended
November 30,
    Six Months Ended
November 30,
 

(in millions)

       2009             2008           2009         2008    

Total revenues for reportable segments

   $ 5,872      $ 5,687      $ 10,934      $ 11,109   

Software license updates and product support revenues(1)

     (14     (80     (23     (171
                                

Total revenues

   $ 5,858      $ 5,607      $     10,911      $     10,938   
                                

Total margin for reportable segments

   $ 3,896      $ 3,573      $ 7,189      $ 6,782   

Software license updates and product support revenues(1)

     (14     (80     (23     (171

Product development and information technology expenses

     (747     (698     (1,462     (1,465

Marketing and partner program expenses

     (120     (116     (213     (210

Corporate and general and administrative expenses

     (162     (146     (324     (312

Amortization of intangible assets

     (436     (427     (867     (839

Acquisition related and other

     (10     (21     (16     (71

Restructuring

     (114     (17     (162     (31

Stock-based compensation

     (104     (89     (188     (175

Interest expense

     (188     (157     (368     (317

Non-operating income, net

     22        4        19        78   
                                

Income before provision for income taxes

   $ 2,023      $ 1,826      $ 3,585      $ 3,269   
                                

 

(1)

Software license updates and product support revenues for management reporting include $14 million and $80 million of revenues that we did not recognize in the accompanying condensed consolidated statements of operations for the three months ended November 30, 2009 and 2008, respectively and $23 million and $171 million for the six months ended November 30, 2009 and 2008, respectively. See Note 7 for an explanation of these adjustments and this table for a reconciliation of operating segment revenues to total revenues.

 

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

November 30, 2009

(Unaudited)

 

12. EARNINGS PER SHARE

Basic earnings per share is computed by dividing net income for the period by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income for the period by the weighted average number of common shares outstanding during the period, plus the dilutive effect of outstanding stock awards and shares issuable under the employee stock purchase plans using the treasury stock method. The following table sets forth the computation of basic and diluted earnings per share:

 

     Three Months Ended
November 30,
   Six Months Ended
November 30,

(in millions, except per share data)

       2009            2008        2009    2008

Net income

   $ 1,458    $ 1,296    $     2,582    $     2,373
                           

Weighted average common shares outstanding

     5,010      5,127      5,010      5,140

Dilutive effect of employee stock plans

     54      60      53      71
                           

Diluted weighted average common shares outstanding

     5,064      5,187      5,063      5,211
                           

Basic earnings per share

   $ 0.29    $ 0.25    $ 0.52    $ 0.46

Diluted earnings per share

   $ 0.29    $ 0.25    $ 0.51    $ 0.46

Shares subject to anti-dilutive stock options excluded from calculation(1)

     177      185      189      164

 

(1)

These weighted shares relate to anti-dilutive stock options as calculated using the treasury stock method (described above) and could be dilutive in the future.

 

13. LEGAL PROCEEDINGS

Securities Class Action

Stockholder class actions were filed in the United States District Court for the Northern District of California against us and our Chief Executive Officer on and after March 9, 2001. Between March 2002 and March 2003, the court dismissed plaintiffs’ consolidated complaint, first amended complaint and a revised second amended complaint. The last dismissal was with prejudice. On September 1, 2004, the United States Court of Appeals for the Ninth Circuit reversed the dismissal order and remanded the case for further proceedings. The revised second amended complaint named our Chief Executive Officer, our then Chief Financial Officer (who currently is Chairman of our Board of Directors) and a former Executive Vice President as defendants. This complaint was brought on behalf of purchasers of our stock during the period from December 14, 2000 through March 1, 2001. Plaintiffs alleged that the defendants made false and misleading statements about our actual and expected financial performance and the performance of certain of our applications products, while certain individual defendants were selling Oracle stock in violation of federal securities laws. Plaintiffs further alleged that certain individual defendants sold Oracle stock while in possession of material non-public information. Plaintiffs also allege that the defendants engaged in accounting violations. On July 26, 2007, defendants filed a motion for summary judgment, and plaintiffs filed a motion for partial summary judgment against all defendants and a motion for summary judgment against our Chief Executive Officer. On August 7, 2007, plaintiffs filed amended versions of these motions. On October 5, 2007, plaintiffs filed a motion seeking a default judgment against defendants or various other sanctions because of defendants’ alleged destruction of evidence. A hearing on all these motions was held on December 20, 2007. On April 7, 2008, the case was reassigned to a new judge. On June 27, 2008, the court ordered supplemental briefing on plaintiffs’ sanctions motion. On September 2, 2008, the court issued an order denying plaintiffs’ motion for partial summary judgment against all defendants. The order also denied in part and granted in part plaintiffs’ motion for sanctions. The court denied plaintiffs’ request that judgment be entered in plaintiffs’ favor due to the alleged destruction of evidence, and the court found that no sanctions were appropriate for several categories of evidence. The court found that sanctions in the form of

 

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

November 30, 2009

(Unaudited)

 

adverse inferences were appropriate for two categories of evidence: e-mails from our Chief Executive Officer’s account, and materials that had been created in connection with a book regarding our Chief Executive Officer. The court then denied defendants’ motion for summary judgment and plaintiffs’ motion for summary judgment against our Chief Executive Officer and directed the parties to revise and re-file these motions to clearly specify the precise contours of the adverse inferences that should be drawn, and to take these inferences into account with regard to the propriety of summary judgment. The court also directed the parties to address certain legal issues in the briefing.

On October 13, 2008, the parties participated in a court-ordered mediation, which did not result in a settlement. On October 20, 2008, defendants filed a motion for summary judgment, and plaintiffs filed a motion for summary judgment against our Chief Executive Officer. The parties also filed several motions challenging the admissibility of the testimony of various expert witnesses. Opposition briefs were filed on November 17, 2008, and reply briefs were filed on December 12, 2008. A hearing on all these motions was held on February 13, 2009.

On June 16, 2009, the court issued an order granting defendants’ motion for summary judgment and denying plaintiffs’ motion for summary judgment against our Chief Executive Officer, and it entered a judgment dismissing the entire case with prejudice. On July 14, 2009, plaintiffs filed a notice of appeal. Plaintiffs filed their opening appellate brief on November 30, 2009. Plaintiffs seek unspecified damages plus interest, attorneys’ fees and costs, and equitable and injunctive relief.

EpicRealm/Parallel Networks Intellectual Property Litigation

On June 30, 2006, we filed a declaratory judgment action against EpicRealm Licensing, LP (“EpicRealm”) in the United States District Court, District of Delaware, seeking a judicial declaration of noninfringement and invalidity of U.S. Patent Nos. 5,894,554 (the ‘554 Patent) and 6,415,335B1 (the ‘335 Patent). We filed the lawsuit following the resolution of an indemnification claim by one of our customers related to EpicRealm’s assertion of the ‘554 Patent and ‘335 Patent against the customer in a patent infringement case in the United States District Court for the Eastern District of Texas.

On April 13, 2007, EpicRealm filed an Answer and Counterclaim in which it: (1) denies our noninfringement and invalidity allegations; (2) alleges that we have willfully infringed, and are willfully infringing, the ‘554 Patent and ‘335 Patent; and (3) requests a permanent injunction, an award of unspecified money damages, interest, attorneys’ fees, and costs. On May 7, 2007, we filed an Answer to EpicRealm’s infringement counterclaim, denying EpicRealm’s infringement allegations and asserting affirmative defenses. In August 2007, the patents-in-suit were sold to Parallel Networks, LLC, which thereafter substituted in as the defendant in place of EpicRealm.

The parties have completed discovery and filed briefing on claim construction and summary judgment motions. A Markman hearing and oral argument on summary judgment motions were held October 3, 2008. A court-ordered mediation was held on October 8, 2008, which did not result in a settlement. On December 4, 2008, the court issued an order granting summary judgment that our Web Cache, Internet Application Server, and RAC Database do not infringe the patents. The court also denied our motion for summary judgment that the patents are invalid, and denied in part and granted in part Parallel Networks’s motion for summary judgment that certain prior art references do not invalidate the patents through anticipation. Trial was scheduled to begin on January 12, 2009, on issues of invalidity and inequitable conduct. On December 23, 2008, the parties reached an agreement allowing Parallel Networks to immediately appeal the court’s summary judgment order and preserving Oracle’s invalidity and inequitable conduct claims in the event that the matter is remanded for trial at a later time. On January 23, 2009, Parallel Networks filed a notice of appeal. After full briefing, the appellate court heard oral argument on December 10, 2009. The court has not yet issued a ruling. A court-ordered mediation was held on June 1, 2009, which did not result in a settlement. We will continue to pursue this action vigorously.

 

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

November 30, 2009

(Unaudited)

 

SAP Intellectual Property Litigation

On March 22, 2007, Oracle Corporation, Oracle USA, Inc. and Oracle International Corporation (collectively, Oracle) filed a complaint in the United States District Court for the Northern District of California against SAP AG, its wholly owned subsidiary, SAP America, Inc., and its wholly owned subsidiary, TomorrowNow, Inc., (collectively, the SAP Defendants) alleging violations of the Federal Computer Fraud and Abuse Act and the California Computer Data Access and Fraud Act, civil conspiracy, trespass, conversion, violation of the California Unfair Business Practices Act, and intentional and negligent interference with prospective economic advantage. Oracle alleged that SAP unlawfully accessed Oracle’s Customer Connection support website and improperly took and used Oracle’s intellectual property, including software code and knowledge management solutions. The complaint seeks unspecified damages and preliminary and permanent injunctive relief. On June 1, 2007, Oracle filed its First Amended Complaint, adding claims for infringement of the federal Copyright Act and breach of contract, and dropping the conversion and separately pled conspiracy claims. On July 2, 2007 the SAP Defendants’ filed their Answer and Affirmative Defenses, acknowledging that TomorrowNow had made some “inappropriate downloads” and otherwise denying the claims alleged in the First Amended Complaint. The parties are engaged in discovery and continue to negotiate a Preservation Order. At case management conferences held on February 12, 2008 and April 24, 2008, Oracle advised the Court that Oracle intended to file a Second Amended Complaint, based on new facts learned during the course of discovery.

On July 28, 2008, Oracle filed a Second Amended Complaint, which added additional allegations based on facts learned during discovery. Among the new allegations contained in the Second Amended Complaint, Oracle alleges that TomorrowNow’s business model relied on illegal copies of Oracle’s underlying software applications and that TomorrowNow used these copies as generic software environments that TomorrowNow then used to create fixes and updates, to service customers and to train employees. The Second Amended Complaint also alleges that these practices may have extended to other Oracle products, including Siebel products.

On October 8, 2008, Oracle filed a Third Amended Complaint pursuant to stipulation. The Third Amended Complaint made some changes relating to the Oracle plaintiff entities (removing Oracle Corporation and adding Oracle Systems Corporation, Oracle EMEA Ltd., and J.D. Edwards Europe Ltd.) but did not change the substantive allegations. On October 15, 2008, the SAP Defendants filed a motion to dismiss portions of the Third Amended Complaint, and after full briefing, the court heard oral argument on November 26, 2008. On December 15, 2008, the court issued an order granting in part and denying in part the motion. The court dismissed with prejudice the claims asserted by plaintiffs JD Edwards Europe Ltd. and Oracle Systems Corporation, and denied the motion in all other respects. The parties are in the process of concluding discovery.

On July 15, 2009, Oracle filed a motion for leave to file a Fourth Amended Complaint to add claims for infringement of Oracle’s Siebel software and database programs. The Court granted Oracle’s motion and Oracle filed its Fourth Amended Complaint on August 18, 2009. The SAP Defendants filed an Answer to Oracle’s Fourth Amended Complaint on August 26, 2009.

On August 26, 2009, the SAP Defendants filed an early motion for summary judgment directed to Oracle’s damages theory. After full briefing, the motion was heard on October 28, 2009. The court has not yet issued a ruling.

On June 11, 2009, the court entered a Stipulated Revised Case Management and Pretrial Order, pursuant to which the court set a new trial date of November 2010.

Other Litigation

We are party to various other legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business, including proceedings and claims that relate to acquisitions we have completed or to companies we have acquired or are attempting to acquire. While the outcome of these matters cannot be predicted with certainty, we do not believe that the outcome of any of these claims or any of the above mentioned legal matters will have a materially adverse effect on our consolidated financial position, results of operations or cash flows.

 

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Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

We begin Management’s Discussion and Analysis of Financial Condition and Results of Operations with an overview of our key operating business segments and significant trends. This overview is followed by a summary of our critical accounting policies and estimates that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results. We then provide a more detailed analysis of our results of operations and financial condition.

In addition to historical information, this Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties that could cause our actual results to differ materially. When used in this report, the words “will,” “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions are generally intended to identify forward-looking statements. You should not place undue reliance on these forward-looking statements, which reflect our opinions only as of the date of this Quarterly Report. We undertake no obligation to publicly release any revisions to the forward-looking statements after the date of this document. You should carefully review the risk factors described in other documents we file from time to time with the U.S. Securities and Exchange Commission (SEC), including our Annual Report on Form 10-K for our fiscal year ended May 31, 2009 and our other Quarterly Reports on Form 10-Q to be filed by us in our fiscal year 2010, which runs from June 1, 2009 to May 31, 2010.

Business Overview

We are the world’s largest enterprise software company. We develop, manufacture, market, distribute and service database and middleware software as well as applications software designed to help our customers manage and grow their business operations. We believe our internal, or organic, growth and continued innovation with respect to our software products and services offerings provide the foundation for our long-term strategic plan. We invest billions of dollars in research and development each year to enhance our existing portfolio of products and services and to develop new products, features and services. Our internally developed offerings have been enhanced by our acquisitions.

We are organized into two businesses, software and services, which are further divided into five operating segments. Each of these operating segments has unique characteristics and faces different opportunities and challenges. Although we report our actual results in U.S. Dollars, we conduct a significant number of transactions in currencies other than U.S. Dollars. Therefore, we present constant currency information to provide a framework for assessing how our underlying businesses performed excluding the effect of foreign currency rate fluctuations. An overview of our two businesses and five operating segments follows.

Software Business

Our software business, which represented 83% of our total revenues on a trailing 4-quarter basis, is comprised of two operating segments: (1) new software licenses and (2) software license updates and product support. On a constant currency basis we expect that our software business revenues generally will continue to increase due to continued demand for our products, including the high percentage of customers that renew their software license update and product support contracts, and due to our acquisitions, which should allow us to grow our profits and continue to make investments in research and development.

New Software Licenses:    We license our database and middleware as well as our applications software to businesses of many sizes, government agencies, educational institutions and resellers. The growth in new software license revenues that we report is affected by the strength of general economic and business conditions, governmental budgetary constraints, the competitive position of our software products, our acquisitions and foreign currency fluctuations. Our new software license business is also characterized by long sales cycles. The timing of a few large software license transactions can substantially affect our quarterly new software license revenues. Since our new software license revenues in a particular quarter can be difficult to predict as a result of the timing of a few large software license transactions, we believe that analysis of new software license revenues on a trailing 4-quarter period provides additional visibility into the underlying performance of our new software license business. New software license revenues represented 30% of our total revenues on a trailing 4-quarter basis. Our new software license segment’s margins have historically trended upward over the course of the four quarters within a particular fiscal year due to the historical upward trend of our new software license revenues

 

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over the corresponding quarterly periods and because our costs are predominantly fixed in the short term. However, our new software license segment’s margins have been, and will continue to be, affected by the amortization of intangible assets associated with companies that we have acquired.

Competition in the software business is intense. Our goal is to maintain a first or second position in each of our software product categories and certain industry segments as well as to grow our software revenues faster than our competitors. We believe that the features and functionality of our software products are as strong as they have ever been. We have focused on lowering the total cost of ownership of our software products by improving integration, decreasing installation times, lowering administration costs and improving the ease of use. In addition, our broad portfolio of product offerings (many of which have been acquired in recent years) helps us to offer customers the ability to gain efficiencies by consolidating their IT “software stack” with a single vendor, which reduces the number of disparate software vendors with which customers interact. Reducing the total cost of ownership of our products provides our customers with a higher return on their IT investments, which we believe creates more demand for our products and services and provides us with a competitive advantage. We have also continued to focus on improving the overall quality of our software products and service levels. We believe this will lead to higher customer satisfaction and loyalty and help us achieve our goal of becoming our customers’ leading technology advisor.

Software License Updates and Product Support:    Customers that purchase software license updates and product support are granted rights to unspecified product upgrades and maintenance releases issued during the support period, as well as technical support assistance. In addition, we offer Oracle Unbreakable Linux Support, which provides enterprise level support for the Linux operating system, and also offer support for our Oracle VM server virtualization software. Substantially all of our customers renew their software license updates and product support contracts annually. The growth of software license updates and product support revenues is primarily influenced by three factors: (1) the percentage of our support contract customer base that renews its support contracts, (2) the amount of new support contracts sold in connection with the sale of new software licenses, and (3) the amount of support contracts assumed from companies we have acquired.

Our software license updates and product support operating segment, which represented approximately 53% of our total revenues on a trailing 4-quarter basis, is our highest margin operating segment. Our software license updates and product support margins over the trailing 4-quarters were 85%, and accounted for 83% of our total margins over the same period. Our software license update and product support margins have been affected by fair value adjustments relating to support obligations assumed in our acquisitions (described further below) and by the amortization of intangible assets. However, over the longer term, we believe that software license updates and product support revenues and margins will grow for the following reasons:

 

   

substantially all of our customers, including customers from acquired companies, renew their support contracts when eligible for renewal;

 

   

substantially all of our customers purchase software license updates and product support contracts when they buy new software licenses, resulting in a further increase in our support contract base. Even if new software license revenues growth was flat or declined modestly, software license updates and product support revenues would most likely continue to grow in comparison to the corresponding prior year periods assuming renewal and cancellation rates and foreign currency rates remained relatively constant since substantially all new software license transactions add to our support contract base; and

 

   

our acquisitions have increased our support contract base, as well as the portfolio of products available to be licensed and supported.

We record adjustments to reduce support obligations assumed in business combinations to their estimated fair values at the acquisition dates. As a result, as required by business combination accounting rules, we did not recognize software license updates and product support revenues related to support contracts that would have been otherwise recorded by the acquired businesses as independent entities in the amount of $14 million and $80 million for the three months ended November 30, 2009 and 2008, respectively, and $23 million and $171 million for the six months ended November 30, 2009 and 2008, respectively. To the extent underlying support contracts are renewed with us following an acquisition, we will recognize the revenues for the full values of the support contracts over the support periods, which are generally one year in duration.

 

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Services Business

Our services business consists of our consulting, On Demand and education operating segments. Our services business, which represented 17% of our total revenues on a trailing 4-quarter basis, has significantly lower margins than our software business.

Consulting:    Our consulting line of business provides services to customers in business/IT strategy alignment; business process simplification; solution integration; and product implementation, enhancements, and upgrades of our database, middleware and applications software. The amount of consulting revenues recognized tends to lag new software license revenue recognition by several quarters since consulting services, if purchased, are typically performed after the purchase of new software licenses. Our consulting revenues are dependent upon general economic conditions and the level of new software license sales, particularly our application product sales. To the extent we are able to grow our new software license revenues, in particular our application product revenues, we would also generally expect to be able to eventually grow our consulting revenues.

On Demand:    Our On Demand operating segment includes Oracle On Demand and our Advanced Customer Services offerings. We believe that our On Demand offerings provide our customers flexibility in how they manage their IT environments and an additional opportunity to lower their total cost of ownership and can therefore provide us with a competitive advantage. Recently, we have maintained or grown the base of customers that have purchased certain of our On Demand services while managing our expenses to a consistent or lower level in comparison to the prior year periods. To the extent we are able to continue this trend, we would expect our On Demand revenues and margins to increase. We have made and plan to continue to make investments in our On Demand businesses to support current and future revenue growth, which historically have negatively impacted On Demand margins and could do so in the future.

Education:    The purpose of our education services is to further the adoption and usage of our software products by our customers and to create opportunities to grow our software revenues. Education revenues are impacted by general economic conditions, personnel reductions in our customers’ information technology departments, tighter controls over discretionary spending and greater use of outsourcing solutions. We believe the recent global economic environment has unfavorably affected customer demand for our education services in comparison to prior year periods, which has negatively impacted our revenues and margins.

Acquisitions

An active acquisition program is another important element of our corporate strategy. In recent years, we have invested billions of dollars to acquire a number of complementary companies, products, services and technologies.

On April 19, 2009, we entered into an Agreement and Plan of Merger (Merger Agreement) with Sun Microsystems, Inc. (Sun), a provider of enterprise computing systems, software and services. Pursuant to the Merger Agreement, our wholly owned subsidiary will merge with and into Sun and Sun will become a wholly owned subsidiary of Oracle. Upon the consummation of the merger, each share of Sun common stock will be converted into the right to receive $9.50 in cash. In addition, options to acquire Sun common stock, Sun restricted stock unit awards and other equity-based awards denominated in shares of Sun common stock outstanding immediately prior to the consummation of the merger will generally be converted into options, restricted stock unit awards or other equity-based awards, as the case may be, denominated in shares of Oracle common stock based on formulas contained in the Merger Agreement. The estimated total purchase price of Sun is approximately $7.4 billion. Completion of this transaction is subject to customary closing conditions, including regulatory clearance under the applicable antitrust laws of the European Commission and other jurisdictions. On November 9, 2009, we received a Statement of Objections from the European Commission relating to our proposed acquisition of Sun. A hearing to consider the Statement of Objections and Oracle’s response to the Statement of Objections was held on December 10-11, 2009.

 

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We believe our acquisition program supports our long-term strategic direction, strengthens our competitive position, expands our customer base, provides greater scale to accelerate innovation, grows our revenues and earnings, and increases stockholder value. We expect to continue to acquire companies, products, services and technologies. See Note 2 of Notes to Condensed Consolidated Financial Statements for additional information related to our recent acquisitions.

We believe we can fund our pending and future acquisitions with our internally available cash, cash equivalents and marketable securities, cash generated from operations, amounts available under our existing debt capacity, additional borrowings or from the issuance of additional securities. We estimate the financial impact of any potential acquisition with regard to earnings, operating margin, cash flow and return on invested capital targets before deciding to move forward with an acquisition.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (GAAP) and consider the various staff accounting bulletins and other applicable guidance issued by the SEC. In July 2009, the Financial Accounting Standards Board (FASB) issued the FASB Accounting Standards Codification (Codification), which we adopted in our second quarter of fiscal 2010. There were no changes to our consolidated financial statements and related disclosures contained in this Quarterly Report due to the implementation of the Codification, other than changes in reference in this Quarterly Report to the various authoritative accounting pronouncements contained within the Codification.

GAAP, as set forth within the Codification, requires us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. To the extent there are material differences between these estimates, judgments or assumptions and actual results, our financial statements will be affected. The accounting policies that reflect our more significant estimates, judgments and assumptions and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:

 

   

Revenue Recognition

 

   

Business Combinations

 

   

Goodwill and Intangible Assets—Impairment Assessments

 

   

Accounting for Income Taxes

 

   

Legal and Other Contingencies

 

   

Stock-Based Compensation

 

   

Allowances for Doubtful Accounts

In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application. There are also areas in which management’s judgment in selecting among available alternatives would not produce a materially different result. Our senior management has reviewed these critical accounting policies and related disclosures with the Finance and Audit Committee of the Board of Directors.

During the first half of fiscal 2010, we adopted certain new accounting pronouncements that affected our critical accounting policies and estimates, namely Accounting Standards Codification (ASC) 805, Business Combinations, which affected our Business Combinations and Accounting for Income Taxes policies. Please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for our fiscal year ended May 31, 2009 for a more complete discussion of our critical accounting policies and estimates for fiscal 2010. There were no other significant changes in our critical accounting policies and estimates in fiscal 2010 other than the aforementioned reference changes resulting from the Codification.

 

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Results of Operations

Impact of Acquisitions

The comparability of our operating results in the second quarter and first half of fiscal 2010 compared with the same periods in fiscal 2009 is impacted by our acquisitions.

In our discussion of changes in our results of operations from the second quarter and first half of fiscal 2010 compared to the corresponding periods in the prior year, we quantify the contribution of our acquired products (for acquisitions that were completed since the beginning of the second quarter of fiscal 2009) to the growth in new software license revenues and to the growth in software license updates and product support revenues. We also present supplemental disclosures related to certain charges. Although certain revenue and expense contributions from our acquisitions are quantifiable, we are unable to identify the following:

 

   

the contribution of the significant majority of our services revenues from acquired companies during the second quarter and first half of fiscal 2010 as the significant majority of these services had been fully integrated into our existing operations; and

 

   

the contribution of the significant majority of the expenses associated with acquired products and services during the second quarter and first half of fiscal 2010 as the significant majority of these expenses had been fully integrated into our existing operations.

We caution readers that, while pre- and post-acquisition comparisons as well as the quantified amounts themselves may provide indications of general trends, the information has inherent limitations for the following reasons:

 

   

the quantifications cannot address the substantial effects attributable to our sales force integration efforts, in particular the effect of having a single sales force offer similar products. We believe that if our sales forces had not been integrated, the relative mix of products sold would have been different;

 

   

our acquisitions in the periods presented did not result in our entry into a new line of business or product category—therefore, we provided multiple products with substantially similar features and functionality; and

 

   

although substantially all of our customers, including customers from acquired companies, renew their software license updates and product support contracts when the contracts are eligible for renewal, amounts shown as support deferred revenues in our supplemental disclosure related to certain charges (presented below) are not necessarily indicative of revenue improvements we will achieve upon contract renewal to the extent customers do not renew.

Seasonality

Our quarterly revenues have historically been affected by a variety of seasonal factors, including the structure of our sales force incentive compensation plans, which are common in the software industry. The operating margins of our businesses are affected by seasonal factors in a similar manner as our revenues (in particular, our new software licenses business) as certain expenses within our cost structure are relatively fixed in the short term.

Constant Currency Presentation

Our international operations have provided and will continue to provide a significant portion of our total revenues and expenses. As a result, total revenues and expenses including our non-operating income and expenses, will continue to be affected by changes in the U.S. Dollar against major international currencies. In order to provide a framework for assessing how our underlying businesses performed excluding the effect of foreign currency fluctuations, we compare the percent change in the results from one period to another period in this Quarterly Report using constant currency disclosure. To present this information, current and comparative prior period results for entities reporting in currencies other than U.S. Dollars are converted into U.S. Dollars at constant exchange rates (i.e. the rates in effect on May 31, 2009, which was the last day of our prior fiscal year) rather than the actual exchange rates in effect during the respective periods. For example, if an entity reporting in

 

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Euros had revenues of 1.0 million Euros from products sold on November 30, 2009 and November 30, 2008, our financial statements would reflect reported revenues of $1.50 million in the first half of fiscal 2010 (using 1.50 as the month-end average exchange rate for the period) and $1.30 million in the first half of fiscal 2009 (using 1.30 as the month-end average exchange rate for the period). The constant currency presentation would translate the results for the three and six months ended November 30, 2009 and 2008 using the May 31, 2009 exchange rate and indicate, in this example, no change in revenues during the period. In each of the tables below, we present the percent change based on actual, unrounded results in reported currency and in constant currency.

Total Revenues and Operating Expenses

 

    Three Months Ended November 30,   Six Months Ended November 30,
        Percent Change           Percent Change    

(Dollars in millions)

  2009   Actual   Constant   2008   2009   Actual   Constant   2008

Total Revenues by Geography:

               

Americas

  $ 2,979   3%   1%   $ 2,904   $ 5,650   1%   1%   $ 5,591

EMEA(1)

    1,976   5%   -2%     1,881     3,618   -3%   -2%     3,711

Asia Pacific(2)

    903   10%   -2%     822     1,643   0%   -5%     1,636
                               

Total revenues

    5,858   4%   0%     5,607     10,911   0%   -1%     10,938

Total Operating Expenses

    3,680   1%   -2%     3,632     6,993   -6%   -6%     7,442
                               

Total Operating Margin

  $ 2,178   10%   2%   $ 1,975   $ 3,918   12%   10%   $ 3,496
                               

Total Operating Margin %

    37%         35%     36%         32%

% Revenues by Geography:

               

Americas

    51%         52%     52%         51%

EMEA

    34%         34%     33%         34%

Asia Pacific

    15%         14%     15%         15%

Total Revenues by Business:

               

Software

  $ 4,900   9%   4%   $ 4,476   $ 9,045   5%   4%   $ 8,648

Services

    958   -15%   -19%     1,131     1,866   -19%   -18%     2,290
                               

Total revenues

  $     5,858   4%   0%   $     5,607   $   10,911   0%   -1%   $   10,938
                               

% Revenues by Business:

               

Software

    84%         80%     83%         79%

Services

    16%         20%     17%         21%

 

(1)

Comprised of Europe, the Middle East and Africa

 

(2)

Asia Pacific includes Japan

Fiscal Second Quarter 2010 Compared to Fiscal Second Quarter 2009:    Our operating results for the second quarter of fiscal 2010 were impacted by the weakening of the U.S. Dollar relative to other major international currencies. These favorable currency variances resulted in an increase to our total revenues of 4 percentage points during the second quarter of fiscal 2010. On a constant currency basis, growth in total revenues for the second quarter of fiscal 2010 was flat as compared to the prior year period as our growth in total software revenues was offset by a reduction in our total services revenues. Excluding the effect of currency rate fluctuations, our total software revenues increased by 4% due to a 9% increase in our software license updates and product support revenues, while our total services revenues decreased by 19%, which we believe was caused by weaker demand for IT services due to the deterioration in global economic conditions in recent quarters. Excluding the effect of currency rate fluctuations, total revenues in the Americas increased by 1%, while total revenues in the EMEA and Asia Pacific regions each decreased by 2%.

Total operating expenses were unfavorably affected by foreign currency rate fluctuations of 3 percentage points in the second quarter of fiscal 2010. Excluding the effect of currency rate fluctuations, the 2% decrease in total operating expenses in the second quarter of fiscal 2010 is due to reductions in salary and external contractor expenses primarily in our services business, decreased travel and entertainment expenses (including rebillable travel and entertainment expenses) and bad debt expenses across all of our operating segments. These decreases

 

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were partially offset by an increase in our variable compensation and benefits expenses across all of our operating segments and an increase in our restructuring expenses. The increase in our benefits expenses was primarily due to a current quarter increase in our deferred compensation plan liability, which was offset by a gain in our deferred compensation plan assets (see additional discussion under “Non-Operating Income, net” below).

Excluding the effects of favorable foreign currency variations of 8 percentage points, total operating margin and total operating margin as a percentage of total revenues increased during the second quarter of fiscal 2010 because our total operating expenses declined while our total revenues were flat in comparison to the prior year period.

First Half Fiscal 2010 Compared to First Half Fiscal 2009:    Excluding the effects of foreign currency rate fluctuations, total revenues decreased slightly in the first half of fiscal 2010 as growth in our total software revenues was offset by decreases in our total services revenues. Excluding the effect of currency rate fluctuations, our total software revenues increased by 4% due to a 10% increase in our software license updates and product support revenues, while our total services revenues decreased by 18%. Excluding the effect of currency rate fluctuations, total revenues in the Americas increased by 1%, while total revenues in the EMEA and Asia Pacific regions declined by 2% and 5%, respectively.

On a constant currency basis, the net decrease in operating expenses was generally consistent with the reasons noted above, with the exception of variable compensation expense reductions, which also contributed to the decrease in our total operating expenses in the first half of fiscal 2010. On a constant currency basis, operating margin and operating margin as a percentage of revenues in the first half of fiscal 2010 increased due to decreases in our operating expenses.

Supplemental Disclosure Related to Certain Charges

To supplement our consolidated financial information we believe the following information is helpful to an overall understanding of our past financial performance and prospects for the future. You should review the introduction under “Impact of Acquisitions” (above) for a discussion of the inherent limitations in comparing pre- and post-acquisition information.

Our operating results include the following business combination accounting adjustments and expenses related to acquisitions as well as certain other significant expense items:

 

     Three Months Ended
November 30,
    Six Months Ended
November 30,
 

(in millions)

   2009     2008     2009     2008  

Support deferred revenues(1)

   $ 14      $ 80      $ 23      $ 171   

Amortization of intangible assets(2)

     436        427        867        839   

Acquisition related and other(3)(5) 

     10        21        16        71   

Restructuring(4)

     114        17        162        31   

Stock-based compensation(5)

     104        89        188        175   

Income tax effects(6)

     (175     (184     (337     (353
                                
   $ 503      $ 450      $ 919      $ 934   
                                

 

(1)

In connection with purchase price allocations related to our acquisitions, we have estimated the fair values of the support obligations assumed. Due to our application of business combination accounting rules, we did not recognize software license updates and product support revenues related to support contracts that would have otherwise been recorded by the acquired businesses as independent entities, in the amounts of $14 million and $80 million for the three months ended November 30, 2009 and 2008, respectively, and $23 million and $171 million for the six months ended November 30, 2009 and 2008, respectively. Approximately $18 million and $14 million of estimated software license updates and product support revenues related to support contracts assumed will not be recognized during the remainder of fiscal 2010 and fiscal 2011, respectively, that would have otherwise been recognized by the acquired businesses as independent entities due to the application of these business combination accounting rules. To the extent customers renew these support contracts, we expect to recognize revenues for the full contract value over the support renewal period.

 

(2)

Represents the amortization of intangible assets acquired in connection with our acquisitions, primarily BEA Systems, Inc., Hyperion Solutions Corporation, Siebel Systems, Inc. and PeopleSoft, Inc. As of November 30, 2009, estimated

 

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future amortization expenses related to intangible assets, excluding the impact of additional intangible assets resulting from any subsequent acquisitions, such as from our proposed acquisition of Sun, were as follows (in millions):

 

Remainder of Fiscal 2010

   $         796

Fiscal 2011

     1,416

Fiscal 2012

     1,268

Fiscal 2013

     1,117

Fiscal 2014

     900

Fiscal 2015

     706

Thereafter

     381
      

Total

   $         6,584
      

 

(3)

Acquisition related and other expenses primarily consist of personnel related costs for transitional and certain other employees, stock-based compensation expenses, integration related professional services, certain business combination adjustments after the measurement period or purchase price allocation period has ended, and certain other operating expenses, net. As a result of our adoption of ASC 805, Business Combinations, as of the beginning of fiscal 2010, certain acquisition related and other expenses are now recorded as expenses in our statements of operations that had been historically included as a part of the consideration transferred and capitalized as a part of our accounting for acquisitions pursuant to previous accounting rules, primarily direct transaction costs such as professional services fees (see further discussion in “Critical Accounting Policies and Estimates” in Part II, Item 7 of our Annual Report on Form 10-K for our fiscal year ended May 31, 2009).

 

(4)

Restructuring expenses during the first half of fiscal 2010 relate primarily to Oracle employee severance and facility exit costs in connection with our Fiscal 2009 Oracle Restructuring Plan that was initiated in the third quarter of fiscal 2009, and amended in the first quarter of fiscal 2010. Restructuring expenses during the first half of fiscal 2009 relate to costs incurred pursuant to our Fiscal 2008 Oracle Restructuring Plan that was initiated in the second quarter of fiscal 2008. As a result of our fiscal 2010 adoption of ASC 805, Business Combinations, in connection with any acquisition that we close prospectively, we will record involuntary termination and other exit costs associated with the acquisition to restructuring expenses, which is a change in the required accounting in comparison to prior year periods (see further discussion in “Critical Accounting Policies and Estimates” in Part II, Item 7 of our Annual Report on Form 10-K for our fiscal year ended May 31, 2009).

 

(5)

Stock-based compensation is included in the following operating expense line items of our condensed consolidated statements of operations (in millions):

 

     Three Months Ended
November 30,
   Six Months Ended
November 30,
     2009    2008    2009    2008

Sales and marketing

   $ 20    $ 16    $ 36    $ 35

Software license updates and product support

     4      3      8      6

Cost of services

     3      3      6      6

Research and development

     44      45      76      82

General and administrative

     33      22      62      46
                           

Subtotal

     104      89      188      175

Acquisition related and other

          6           11
                           

Total stock-based compensation

   $ 104    $ 95    $ 188    $ 186
                           

Stock-based compensation included in acquisition related and other expenses resulted from unvested stock awards assumed from acquisitions whose vesting was accelerated upon termination of the employees pursuant to the terms of those stock awards.

 

(6)

The income tax effects presented in the table above were calculated as if the above described charges were not included in our results of operations for each of the respective periods presented. Income tax effects were calculated based on the applicable jurisdictional tax rates applied to the charges and resulted in an effective tax rate of 27.4% and 29.0% for the second quarter of fiscal 2010 and 2009, respectively, and 27.7% and 27.4% for the first half of fiscal 2010 and 2009, respectively. The differences in the income tax rates for the second quarter and first half of fiscal 2010, respectively, in comparison to the income tax rates derived per our condensed consolidated statements of operations were due to differences in jurisdictional tax rates and the related tax benefits attributable to our restructuring expenses in these periods.

 

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Software Business

Our software business consists of our new software licenses segment and software license updates and product support segment.

New Software Licenses:    New software license revenues represent fees earned from granting customers licenses to use our database and middleware as well as our application software products. We continue to place significant emphasis, both domestically and internationally, on direct sales through our own sales force. We also continue to market our products through indirect channels. Sales and marketing expenses are largely personnel related and include commissions earned by our sales force for the sale of our software products, and also include marketing program costs and amortization of intangible assets.

 

    Three Months Ended November 30,   Six Months Ended November 30,
        Percent Change           Percent Change    

(Dollars in millions)

  2009   Actual   Constant   2008   2009   Actual   Constant   2008

New Software License Revenues:

               

Americas

  $ 778   4%   1%   $ 751   $ 1,274   -1%   -1%   $ 1,286

EMEA

    548   -2%   -11%     557     862   -12%   -14%     978

Asia Pacific

    327   3%   -8%     318     545   -9%   -15%     599
                               

Total revenues

    1,653   2%   -5%     1,626     2,681   -6%   -9%     2,863

Expenses:

               

Sales and marketing(1)

    1,113   -1%   -6%     1,130     2,057   -7%   -8%     2,223

Stock-based compensation

    20   25%   25%     16     36   1%   1%     35

Amortization of intangible assets(2)

    208   3%   3%     201     413   4%   4%     394
                               

Total expense

    1,341   -1%   -4%     1,347     2,506   -6%   -6%     2,652
                               

Total Margin

  $ 312   12%   -7%   $ 279   $ 175   -16%   -40%   $ 211
                               

Total Margin %

    19%         17%     6%         7%

% Revenues by Geography:

               

Americas

    47%         46%     48%         45%

EMEA

    33%         34%     32%         34%

Asia Pacific

    20%         20%     20%         21%

Revenues by Product:

               

Database and middleware

  $ 1,163   1%   -6%   $ 1,146   $ 1,848   -10%   -12%   $ 2,034

Applications

    478   2%   -3%     469     795   -1%   -2%     799
                               

Total revenues by product

    1,641   2%   -5%     1,615     2,643   -6%   -9%     2,833

Other revenues

    12   10%   6%     11     38   28%   28%     30
                               

Total new software license revenues

  $   1,653   2%   -5%   $   1,626   $   2,681   -6%   -9%   $   2,863
                               

% Revenues by Product:

               

Database and middleware

    71%         71%     70%         72%

Applications

    29%         29%     30%         28%

 

(1)

Excluding stock-based compensation

 

(2)

Included as a component of ‘Amortization of Intangible Assets’ in our condensed consolidated statements of operations

Fiscal Second Quarter 2010 Compared to Fiscal Second Quarter 2009:    New software license revenues were favorably affected by foreign currency rate fluctuations of 7 percentage points in the second quarter of fiscal 2010. Excluding the effect of currency rate fluctuations, total new software license revenues decreased by 5% in the second quarter of fiscal 2010 due to decreases in the EMEA and Asia Pacific regions.

Excluding the effect of favorable currency rate fluctuations of 7 percentage points, database and middleware revenues declined 6% in the second quarter of fiscal 2010 and 5% over the trailing 4-quarters. The decline in our database and middleware revenues was affected by the high growth rates in our database and middleware

 

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revenues against which the results for the aforementioned periods are compared and weaker global economic conditions that we believe impacted or delayed customers’ purchasing decisions. In addition, our database and middleware products are sold with or are embedded in a number of other products developed and marketed by other vendors, including products from other software applications vendors, and our revenues earned from certain of these vendors decreased in the second quarter of fiscal 2010 as these vendors’ own revenues decreased. In reported currency, our recently acquired products contributed an incremental $30 million to our database and middleware revenues in the second quarter of fiscal 2010.

Excluding the effect of favorable currency rate fluctuations of 5 percentage points, applications new software license revenues decreased 3% in the second quarter of fiscal 2010 and 6% over the trailing 4-quarters due to weaker global economic conditions that we believe impacted or delayed customers’ purchasing decisions. In reported currency, our recently acquired products contributed an incremental $12 million to our applications revenues in the second quarter of fiscal 2010.

In reported currency, new software license revenues earned from transactions over $0.5 million increased by 11% in the second quarter of fiscal 2010 and represented 51% of our new software license revenues in the second quarter of fiscal 2010 in comparison to 47% in the second quarter of fiscal 2009.

Total sales and marketing expenses were unfavorably impacted by 3 percentage points of currency variations during the second quarter of fiscal 2010. Excluding the effect of currency rate fluctuations, total sales and marketing expenses decreased in the second quarter of fiscal 2010 primarily due to a decrease in salaries expenses resulting from headcount reductions, lower travel and entertainment expenses due to cost management initiatives and lower bad debt expenses resulting from improved cash collections.

Our new software license segment’s operating margin was impacted by 19 percentage points of favorable currency variations during the second quarter of fiscal 2010. Excluding the effects of currency rate fluctuations, total new software license margin and margin as a percentage of revenues decreased as our new software license revenues decreased while expenses related to amortization of intangible assets increased.

First Half Fiscal 2010 Compared to First Half Fiscal 2009:    Excluding the effect of favorable foreign currency rate fluctuations of 3 percentage points, total new software license revenues decreased by 9% in the first half of fiscal 2010 for similar reasons as noted above. In reported currency, recently acquired products contributed $36 million and $27 million to our database and middleware and applications revenues, respectively, in the first half of fiscal 2010. In reported currency, new software license revenues earned from transactions over $0.5 million decreased by 3% in the first half of fiscal 2010 and represented 48% of new software license revenues in the first half of fiscal 2010 in comparison to 46% in the first half of fiscal 2009.

Excluding the effect of foreign currency rate fluctuations, total sales and marketing expenses decreased due to lower variable compensation expenses in addition to the reasons noted above. Excluding the effect of foreign currency rate fluctuations, new software license margin and margin as a percentage of revenues decreased in the first half of fiscal 2010 as our new software license revenues decreased at a faster rate than our related expenses.

Software License Updates and Product Support:    Software license updates grant customers rights to unspecified software product upgrades and maintenance releases issued during the support period. Product support includes internet access to technical content as well as internet and telephone access to technical support personnel in our global support centers. Expenses associated with our software license updates and product support line of business include the cost of providing the support services, largely personnel related expenses, and the amortization of our intangible assets associated with software support contracts and customer relationships obtained from our acquisitions.

 

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    Three Months Ended November 30,   Six Months Ended November 30,
        Percent Change           Percent Change     

(Dollars in millions)

  2009   Actual   Constant   2008   2009   Actual    Constant    2008

Software License Updates and Product Support Revenues:

                 

Americas

  $ 1,734   10%   9%   $ 1,576   $ 3,429   9%    10%    $ 3,132

EMEA

    1,088   18%   11%     924     2,120   9%    12%      1,941

Asia Pacific

    425   21%   9%     350     815   15%    8%      712
                                 

Total revenues

    3,247   14%   9%     2,850     6,364   10%    10%      5,785

Expenses:

                 

Software license updates and product support(1)

    260   2%   -1%     254     482   -9%    -9%      533

Stock-based compensation

    4   36%   36%     3     8   22%    22%      6

Amortization of intangible assets(2)

    215   2%   2%     212     428   3%    3%      417
                                 

Total expenses

    479   2%   0%     469     918   -4%    -4%      956
                                 

Total Margin

  $   2,768   16%   11%   $   2,381   $   5,446   13%    13%    $   4,829
                                 

Total Margin %

    85%         84%     86%           84%

% Revenues by Geography:

                 

Americas

    53%         55%     54%           54%

EMEA

    34%         32%     33%           34%

Asia Pacific

    13%         13%     13%           12%

 

(1)

Excluding stock-based compensation

 

(2)

Included as a component of ‘Amortization of Intangible Assets’ in our condensed consolidated statements of operations

Fiscal Second Quarter 2010 Compared to Fiscal Second Quarter 2009:    The growth in our software license updates and product support revenues was favorably affected by foreign currency rate fluctuations of 5 percentage points in the second quarter of fiscal 2010. Excluding the effect of currency rate fluctuations, software license updates and product support revenues increased in the second quarter of fiscal 2010 as a result of new software licenses sold (with substantially all customers electing to purchase support contracts) during the trailing 4-quarter period, the renewal of substantially all of the customer base eligible for renewal in the current fiscal year and, to a lesser extent, incremental revenues from recent acquisitions. Excluding the effect of currency rate fluctuations, the Americas contributed 51%, EMEA contributed 37% and Asia Pacific contributed 12% to the increase in software license updates and product support revenues.

In reported currency, software license updates and product support revenues in the second quarter of fiscal 2010 include incremental revenues of $19 million from our recently acquired companies. As a result of our acquisitions, we recorded adjustments to reduce support obligations assumed to their estimated fair values at the acquisition dates. Due to our application of business combination accounting rules, software license updates and product support revenues related to support contracts in the amounts of $14 million and $80 million that would have been otherwise recorded by our acquired businesses as independent entities, were not recognized in the second quarter of fiscal 2010 and 2009, respectively. Historically, substantially all of our customers, including customers from acquired companies, renew their support contracts when such contracts are eligible for renewal. To the extent these underlying support contracts are renewed, we will recognize the revenues for the full value of these contracts over the support periods, the substantial majority of which are one year in duration.

Total software license updates and product support expenses were unfavorably impacted by 2 percentage points of currency variations during the second quarter of fiscal 2010. Excluding the effect of currency rate fluctuations, growth in software license updates and product support expenses was flat when compared to the prior year period’s expenses as decreases in bad debt expenses from improved collection efforts were offset by increases in salaries resulting from increased headcount and an increase in benefits expenses. A portion of the increase in our benefits expenses was attributable to an increase in our deferred compensation plan liability in the current year period, which was offset by a gain in our deferred compensation plan assets (refer to additional discussion under “Non-Operating Income, net” below).

 

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Excluding the effect of currency rate fluctuations, total software license updates and product support margin and margin as a percentage of revenues increased as our revenues grew while our expenses were flat.

First Half Fiscal 2010 Compared to First Half Fiscal 2009:    On a constant currency basis, the growth in our software license updates and product support revenues and expenses is primarily attributable to the same reasons as noted above. On a constant currency basis, the Americas contributed 52%, EMEA contributed 38% and Asia Pacific contributed 10% to the increase in software license updates and product support revenues. Software license updates and product support revenues in the first half of fiscal 2010 included incremental contributions of $44 million from recently acquired companies. Software license updates and product support revenues related to support contracts in the amounts of $23 million and $171 million that would have been otherwise recorded by our acquired businesses as independent entities, were not recognized in the first half of fiscal 2010 and 2009, respectively, due to business combination accounting rules.

On a constant currency basis, software license updates and product support expenses decreased for similar reasons as noted above. Total software license updates and product support margin and margin as a percentage of revenues increased as our revenues grew while our expenses decreased.

Services Business

Our services business consists of our consulting, On Demand and education segments.

Consulting:    Consulting revenues are earned by providing services to customers in the design, implementation, deployment and upgrade of our database and middleware software products as well as applications software products. The cost of providing consulting services consists primarily of employee and external contractor related expenditures.

 

    Three Months Ended November 30,   Six Months Ended November 30,
        Percent Change           Percent Change    

(Dollars in millions)

  2009   Actual   Constant   2008   2009   Actual   Constant   2008

Consulting Revenues:

               

Americas

  $ 335   -22%   -24%   $ 430   $ 695   -21%   -20%   $ 875

EMEA

    253   -16%   -22%     303     472   -21%   -20%     601

Asia Pacific

    104   -5%   -15%     109     188   -19%   -22%     232
                               

Total revenues

    692   -18%   -22%     842     1,355   -21%   -21%     1,708

Expenses:

               

Cost of services(1)

    628   -11%   -15%     708     1,221   -18%   -18%     1,491

Stock-based compensation

    2   1%   1%     2     4   6%   6%     3

Amortization of intangible assets(2)

    10   -9%   -9%     11     19   -9%   -9%     21
                               

Total expenses

    640   -11%   -15%     721     1,244   -18%   -17%     1,515
                               

Total Margin

  $ 52   -56%   -59%   $ 121   $ 111   -42%   -44%   $ 193
                               

Total Margin %

    8%         14%     8%         11%

% Revenues by Geography:

               

Americas

    48%         51%     51%         51%

EMEA

    37%         36%     35%         35%

Asia Pacific

    15%         13%     14%         14%

 

(1)

Excluding stock-based compensation

 

(2)

Included as a component of ‘Amortization of Intangible Assets’ in our condensed consolidated statements of operations

 

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Fiscal Second Quarter 2010 Compared to Fiscal Second Quarter 2009:    Consulting revenues were favorably affected by foreign currency rate fluctuations of 4 percentage points in the second quarter of fiscal 2010. Excluding the effect of currency rate fluctuations, we believe the decline in our consulting revenues was generally due to weaker demand resulting from the deterioration of global economic conditions over recent quarters.

Consulting expenses were unfavorably impacted by 4 percentage points of foreign currency rate variations during the second quarter of fiscal 2010. Excluding the effect of currency rate fluctuations, consulting expenses decreased during the second quarter due primarily to a reduction in employee expenses, including salaries, variable compensation and travel and entertainment, and external contractor related expenses.

On a constant currency basis, consulting margin and margin as a percentage of revenues decreased in the second quarter of fiscal 2010 as our revenues declined at a greater rate than our expenses.

First Half Fiscal 2010 Compared to First Half Fiscal 2009:    Excluding the effect of currency rate fluctuations, the decline in consulting revenues, expenses, margin and margin as a percentage of revenues was generally due to similar reasons as noted above.

On Demand:    Our On Demand segment includes our Oracle On Demand and Advanced Customer Services offerings. Oracle On Demand provides multi-featured software and hardware management, and maintenance services for our database and middleware as well as our applications software delivered either at our data center facilities, at select partner data centers, or at customer facilities. Advanced Customer Services consists of solution lifecycle management services, database and application management services, industry-specific solution support centers and remote and on-site expert services. The cost of providing On Demand services consists primarily of personnel related expenditures, technology infrastructure expenditures and facilities costs.

 

     Three Months Ended November 30,    Six Months Ended November 30,
          Percent Change              Percent Change     

(Dollars in millions)

   2009    Actual    Constant    2008    2009    Actual    Constant    2008

On Demand Revenues:

                       

Americas

   $ 99    -5%    -6%    $ 104    $ 190    -9%    -9%    $ 210

EMEA

     58    1%    -6%      58      116    -2%    0%      118

Asia Pacific

     31    14%    3%      27      62    11%    7%      56
                                       

Total revenues

     188    -1%    -4%      189      368    -4%    -4%      384

Expenses:

                       

Cost of services(1)

     138    -8%    -12%      151      266    -14%    -14%      310

Stock-based compensation

     1    33%    33%      1      2    16%    16%      2

Amortization of intangible assets(2)

     3    0%    0%      3      7    0%    0%      7
                                       

Total expenses

     142    -8%    -12%      155      275    -14%    -14%      319
                                       

Total Margin

   $ 46    34%    27%    $ 34    $ 93    43%    42%    $ 65
                                       

Total Margin %

     24%            18%      25%            17%

% Revenues by Geography:

                       

Americas

     53%            55%      52%            55%

EMEA

     30%            31%      31%            31%

Asia Pacific

     17%            14%      17%            14%

 

(1)

Excluding stock-based compensation

 

(2)

Included as a component of ‘Amortization of Intangible Assets’ in our condensed consolidated statements of operations

 

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Excluding the effects of currency rate fluctuations, On Demand revenues declined modestly in the fiscal 2010 periods. On a constant currency basis, On Demand expenses decreased primarily due to lower employee related expenses in the fiscal 2010 periods. On a constant currency basis, On Demand margins and margins as a percentage of revenues improved during the fiscal 2010 periods due to expense reductions.

Education:    Education revenues are earned by providing instructor-led, media-based and internet-based training in the use of our database and middleware software products as well as our applications software products. Education expenses primarily consist of personnel related expenditures, facilities and external contractor costs.

 

     Three Months Ended November 30,    Six Months Ended November 30,
          Percent Change              Percent Change     

(Dollars in millions)

   2009    Actual    Constant    2008    2009    Actual    Constant    2008

Education Revenues:

                       

Americas

   $ 33    -23%    -24%    $ 43    $ 62    -29%    -29%    $ 87

EMEA

     29    -27%    -32%      39      48    -35%    -34%      74

Asia Pacific

     16    -11%    -19%      18      33    -13%    -17%      37
                                       

Total revenues

     78    -22%    -26%      100      143    -28%    -28%      198

Expenses:

                       

Cost of services(1)

     63    -18%    -22%      77      121    -24%    -23%      159
                                       

Total Margin

   $ 15    -36%    -40%    $ 23    $ 22    -45%    -47%    $ 39
                                       

Total Margin %

     19%            23%      15%            20%

% Revenues by Geography:

                       

Americas

     42%            43%      43%            44%

EMEA

     37%            39%      34%            37%

Asia Pacific

     21%            18%      23%            19%

 

(1)

Excluding stock-based compensation

On a constant currency basis, education revenues decreased in the fiscal 2010 periods as we experienced weaker demand for our educational services that we believe was the result of weaker global economic conditions. On a constant currency basis, education expenses declined in the fiscal 2010 periods as we reduced our employee related and external contractor expenses. Education margin and margin as a percentage of revenues decreased in the fiscal 2010 periods due to a reduction in our revenues, which declined at a higher rate than our expense reductions.

Research and Development Expenses:    Research and development expenses consist primarily of personnel related expenditures. We intend to continue to invest significantly in our research and development efforts because, in our judgment, they are essential to maintaining our competitive position.

 

     Three Months Ended November 30,    Six Months Ended November 30,
          Percent Change              Percent Change     

(Dollars in millions)

   2009    Actual    Constant    2008    2009    Actual    Constant    2008

Research and development(1)

   $ 664    10%    8%    $ 606    $   1,292    1%    2%    $   1,278

Stock-based compensation

     44    -3%    -3%      45      76    -7%    -7%      82
                                       

Total expenses

   $ 708    9%    7%    $ 651    $ 1,368    1%    1%    $ 1,360
                                       

% of Total Revenues

     12%            12%      13%            12%

 

(1)

Excluding stock-based compensation

On a constant currency basis, total research and development expenses increased during the fiscal 2010 periods primarily due to increased variable compensation plan expenses and an increase in our benefits expenses resulting from an increase in deferred compensation plan obligations during the second quarter of fiscal 2010 (refer to additional discussion under “Non-Operating Income, net” below). These increases were partially offset by a reduction in travel and entertainment and external contractor expenses in the fiscal 2010 periods presented. Our research and development headcount and constant currency salary expenses were relatively consistent with prior year periods.

 

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General and Administrative Expenses:    General and administrative expenses primarily consist of personnel related expenditures for information technology, finance, legal and human resources support functions.

 

     Three Months Ended November 30,    Six Months Ended November 30,
          Percent Change              Percent Change     

(Dollars in millions)

   2009    Actual    Constant    2008    2009    Actual    Constant    2008

General and administrative(1)

   $ 150    -1%    -3%    $ 152    $ 321    -4%    -2%    $ 333

Stock-based compensation

     33    51%    51%      22      62    35%    35%      46
                                       

Total expenses

   $   183    5%    3%    $   174    $   383    1%    2%    $   379
                                       

% of Total Revenues

     3%            3%      4%            3%

 

(1)

Excluding stock-based compensation

Excluding the effect of currency rate fluctuations, total general and administrative expenses increased modestly during the fiscal 2010 periods as a result of higher stock-based compensation expenses resulting from higher fair values of our stock awards that were amortized and recognized as expense in the current year periods, which were partially offset by net decreases to certain other expenses. Our general and administrative headcount and constant currency salary expenses were relatively consistent with prior year periods.

Amortization of Intangible Assets:

 

    Three Months Ended November 30,   Six Months Ended November 30,
        Percent Change           Percent Change    

(Dollars in millions)

  2009   Actual   Constant   2008   2009   Actual   Constant   2008

Software support agreements and related relationships

  $   141   2%   2%   $ 138   $   280   3%   3%   $   272

Developed technology

    180   0%   0%     181     360   2%   2%     354

Core technology

    66   4%   4%     63     130   4%   4%     125

Customer relationships

    40   7%   7%     37     78   8%   8%     72

Trademarks

    9   18%   18%     8     19   19%   19%     16
                               

Total amortization of intangible assets

  $ 436   2%   2%   $   427   $ 867   3%   3%   $ 839
                               

Amortization of intangible assets increased in the fiscal 2010 periods presented above due to additional amortization from acquired intangibles for acquisitions that we consummated since the beginning of the second quarter of fiscal 2009. See Note 4 of Notes to Condensed Consolidated Financial Statements for additional information regarding our intangible assets (including weighted average useful lives) and related amortization.

Acquisition Related and Other Expenses:    Acquisition related and other expenses consist of personnel related costs for transitional and certain other employees, stock-based compensation expenses, integration related professional services, certain business combination adjustments after the measurement periods or purchase price allocation periods have ended, and certain other operating expenses, net. Stock-based compensation expenses included in acquisition related and other expenses resulted from unvested stock awards assumed from acquisitions whereby vesting was accelerated upon termination of the employees pursuant to the original terms of those stock awards. As a result of our adoption of the FASB’s revised accounting standard for business combinations as of the beginning of fiscal 2010, certain acquisition related and other expenses are now recorded as expenses in our statements of operations that had been historically included as a part of the consideration transferred and capitalized as a part of our accounting for acquisitions pursuant to previous accounting rules, primarily direct transaction costs such as professional services fees.

 

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    Three Months Ended November 30,   Six Months Ended November 30,
        Percent Change           Percent Change    

(Dollars in millions)

  2009   Actual   Constant   2008   2009   Actual   Constant   2008

Transitional and other employee related costs

  $ 2   -39%   -38%   $ 4   $ 5   -82%   -81%   $ 31

Stock-based compensation

      -100%   -100%     6       -100%   -100%     11

Professional fees and other, net

    4   -58%   -54%     10     7   -66%   -63%     19

Business combination adjustments

    4   163%   168%     1     4   -59%   -50%     10
                               

Total acquisition related and other expenses

  $ 10   -52%   -49%   $ 21   $   16   -77%   -75%   $   71
                               

On a constant currency basis, acquisition related and other expenses decreased in the fiscal 2010 periods due primarily to lower transitional employee and stock-based compensation expenses, which were higher in the prior year periods due to BEA related integration costs (we acquired BEA in the fourth quarter of fiscal 2008).

Restructuring expenses:    Restructuring expenses consist of employee severance costs and may also include charges for duplicate facilities and other contract termination costs to improve our cost structure prospectively. Beginning in fiscal 2010, our adoption of the FASB’s revised accounting standard for business combinations required that, in connection with any prospective acquisition, we record involuntary employee termination and other exit costs associated with such acquisition to restructuring expenses in our consolidated financial statements (see further discussion in “Critical Accounting Policies and Estimates” in Part II, Item 7 of our Annual Report on Form 10-K for our fiscal year ended May 31, 2009). For additional information regarding our Oracle-based and acquired company restructuring plans, please see Note 6 of Notes to Condensed Consolidated Financial Statements.

 

     Three Months Ended November 30,    Six Months Ended November 30,
       2009      Percent Change      2008        2009      Percent Change      2008  

(Dollars in millions)

        Actual        Constant              Actual        Constant     

Restructuring expenses

   $ 114    561%    504%    $ 17    $ 162    426%    414%    $ 31
                                       

Restructuring expenses in the fiscal 2010 periods consisted primarily of expenses associated with the Oracle Fiscal 2009 Restructuring Plan (2009 Plan), which our management approved, committed to and initiated in order to restructure and further improve efficiencies in our Oracle-based operations. We amended the 2009 Plan in the first quarter of fiscal 2010 to reflect additional actions that we expect to take over the course of fiscal 2010. The total estimated restructuring costs associated with the 2009 Plan are $453 million and will be recorded to the restructuring expense line item within our consolidated statements of operations as the costs are recognized. In the second quarter and first half of fiscal 2010, we recorded $114 million and $162 million of restructuring expenses in connection with the 2009 Plan, respectively. We expect to incur the majority of the approximately $206 million that is remaining under the 2009 Plan during the last two quarters of fiscal 2010. Our estimated costs may be subject to change in future periods. Restructuring expenses in the fiscal 2009 periods consisted primarily of expenses associated with our Oracle Fiscal 2008 Restructuring Plan, for which substantially all costs were incurred through fiscal 2009.

Interest Expense:

 

     Three Months Ended November 30,    Six Months Ended November 30,
       2009      Percent Change      2008        2009      Percent Change     

(Dollars in millions)

        Actual        Constant              Actual        Constant        2008  

Interest expense

   $ 188    20%    20%    $ 157    $ 368    16%    16%    $ 317
                                       

Interest expense increased in the fiscal 2010 periods due to higher average borrowings resulting from our issuance of $4.5 billion of senior notes in July 2009, and was partially offset by a reduction in interest expense associated with the maturity and repayment of $1.0 billion of senior notes and related variable to fixed interest rate swap agreement in May 2009.

 

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Non-Operating Income, net:    Non-operating income, net consists primarily of interest income, net foreign currency exchange gains (losses), the noncontrolling interests in the net profits of our majority-owned subsidiaries (Oracle Financial Services Software Limited and Oracle Japan), and net other income (losses), including net realized gains and losses related to all of our investments and net unrealized gains and losses related to the small portion of our investment portfolio that we classify as trading.

 

    Three Months Ended November 30,     Six Months Ended November 30,  
      2009       Percent Change     2008         2009       Percent Change     2008    

(Dollars in millions)

      Actual       Constant           Actual       Constant    

Interest income

  $ 30      -69%   -71%   $ 97      $ 65      -65%   -65%   $ 185   

Foreign currency losses, net

    (2   91%   95%     (22     (20   -67%   -42%     (12

Noncontrolling interests in income

    (16   18%   20%     (19     (40   -12%   -12%     (35

Other income (losses), net

    21      142%   142%     (48     30      163%   163%     (48
                                       

Total non-operating income, net

  $ 33      315%   264%   $ 8      $ 35      -62%   -60%   $ 90   
                                       

Fiscal Second Quarter 2010 Compared to Fiscal Second Quarter 2009:    On a constant currency basis, non-operating income, net increased in the second quarter of fiscal 2010 due to a reduction in foreign currency losses and an increase in other income, net that resulted primarily from favorable changes in the values of our marketable securities that we classify as trading and are held to support our deferred compensation plan obligations. These favorable variances in the values of our marketable securities offset the unfavorable variances in the obligations associated with our deferred compensation plan that are included in our operating expenses such that there is virtually no impact to our income before provision for income taxes during the second quarter of fiscal 2010 or any other period presented. The favorable variances to non-operating income, net caused by other income (losses), net were almost entirely offset by decreases in interest income resulting from a general decline in market interest rates that resulted in lower yields earned on our cash and marketable securities balances during the second quarter of fiscal 2010.

First Half Fiscal 2010 Compared to First Half Fiscal 2009:    On a constant currency basis, non-operating income, net decreased in the first half of fiscal 2010 due primarily to decreases in market yields that reduced our interest income. These decreases were partially offset by an increase in other income (losses), net resulting from favorable changes in asset values that support our deferred compensation plan obligations (described further above).

Provision for Income Taxes:    The effective tax rate in all periods is the result of the mix of income earned in various tax jurisdictions that apply a broad range of income tax rates. The provision for income taxes differs from the tax computed at the U.S. federal statutory income tax rate due primarily to state taxes and earnings considered as indefinitely reinvested in foreign operations. Future effective tax rates could be adversely affected if earnings are lower than anticipated in countries where we have lower statutory rates, by unfavorable changes in tax laws and regulations, or by adverse rulings in tax related litigation.

 

     Three Months Ended November 30,    Six Months Ended November 30,
       2009      Percent Change      2008        2009      Percent Change      2008  

(Dollars in millions)

        Actual        Constant              Actual        Constant     

Provision for income taxes

   $ 565    7%    -2%    $ 530    $ 1,003    12%    10%    $ 896
                                       

Effective tax rate

     27.9%            29.0%      28.0%            27.4%

On a constant currency basis, the provision for income taxes decreased during the second quarter of fiscal 2010 primarily due to transfer pricing adjustments and differences in the mix of earnings when compared with the prior year period. These decreases were partially offset by the impact of higher current period earnings before tax, along with the U.S. research and development tax credit expiration in the current year combined with the retroactive reinstated tax benefit reported in the prior year. On a constant currency basis, provision for income taxes in the first half of fiscal 2010 increased, substantially due to higher income before taxes.

 

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Liquidity and Capital Resources

 

(Dollars in millions)

   November 30,
2009
   Change    May 31,
2009

Working capital

   $ 16,701    77%    $ 9,432

Cash, cash equivalents and marketable securities

   $ 20,784    65%    $   12,624

Working capital:    The increase in working capital as of November 30, 2009 in comparison to May 31, 2009 was primarily due to our issuance of $4.5 billion of long-term, senior notes in July 2009 and the favorable impact to our net current assets resulting from our net income generated during the first half of fiscal 2010, partially offset by cash used for acquisitions, repurchases of our common stock and cash used to pay dividends to our stockholders. Our working capital may be impacted by some or all of the aforementioned factors in future periods, certain amounts and timing of which are variable.

Cash, cash equivalents and marketable securities:    Cash and cash equivalents primarily consist of deposits held at major banks, money market funds, Tier-1 commercial paper, U.S. Treasury obligations, U.S. government agency and government sponsored enterprise obligations, and other securities with original maturities of 90 days or less. Marketable securities primarily consist of time deposits held at major banks, Tier-1 commercial paper, corporate notes, U.S. Treasury obligations and U.S. government agency and government sponsored enterprise obligations. The increase in cash, cash equivalents and marketable securities at November 30, 2009 in comparison to May 31, 2009 was due to the issuance of $4.5 billion of senior notes in July 2009 and an increase in cash generated from our operating activities. Cash, cash equivalents and marketable securities include $14.7 billion held by our foreign subsidiaries as of November 30, 2009. The amount of cash, cash equivalents and marketable securities that we report in U.S. Dollars for a significant portion of the cash held by these subsidiaries is subject to translation adjustments caused by changes in foreign currency exchange rates as of the end of each respective reporting period (the offset to which is recorded to accumulated other comprehensive income in our consolidated balance sheet). As the U.S. Dollar weakened against most major international currencies during the first half of fiscal 2010, the amount of cash, cash equivalents and marketable securities that we reported in U.S. Dollars for these subsidiaries increased as of November 30, 2009 relative to what we would have reported using a constant currency rate as of May 31, 2009. Our increase in cash, cash equivalents and marketable securities balances were partially offset by cash used for acquisitions, the repurchases of our common stock, and the payment of cash dividends to our stockholders.

Days sales outstanding, which is calculated by dividing period end accounts receivable by average daily sales for the quarter, was 47 days at November 30, 2009 compared with 58 days at May 31, 2009. The days sales outstanding calculation excludes the adjustment that reduces our acquired software license updates and product support obligations to fair value. Our decline in days sales outstanding is primarily due to the collection, in our first half of fiscal 2010, of large license and support balances outstanding as of May 31, 2009.

 

     Six Months Ended November 30,  

(Dollars in millions)

       2009           Change          2008      

Cash provided by operating activities

   $     4,389      10%    $     3,990   

Cash used for investing activities

   $ (2,589   17%    $ (2,207

Cash provided by (used for) financing activities

   $ 3,843      299%    $ (1,928

Cash flows from operating activities:    Our largest source of operating cash flows is cash collections from our customers following the purchase and renewal of their software license updates and product support agreements. Payments from customers for software license updates and product support agreements are generally received near the beginning of the contracts’ terms, which are generally one year in length. We also generate significant cash from new software license sales and, to a lesser extent, services. Our primary uses of cash from operating activities are for personnel related expenditures as well as payments related to taxes and leased facilities.

Net cash provided by operating activities increased in the first half of fiscal 2010 primarily due to cash favorable working capital movements, including less cash used to settle lower accrued compensation liabilities and a reduction in cash used to pay income tax related liabilities during the first half of fiscal 2010 in comparison to the first half of fiscal 2009.

 

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Cash flows from invest