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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  

For the quarterly period ended February 28, 2017

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: 001-35992

 

 

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
(Address of principal executive offices)   (Zip Code)

(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  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on 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  ☒    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    ☒    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  ☒

The number of shares of registrant’s common stock outstanding as of March 13, 2017 was: 4,114,684,000.

 

 

 


Table of Contents

ORACLE CORPORATION

FORM 10-Q QUARTERLY REPORT

 

 

TABLE OF CONTENTS

 

        Page  

PART I.

  FINANCIAL INFORMATION  

Item 1.

  Financial Statements (Unaudited)     3  
  Condensed Consolidated Balance Sheets as of February 28, 2017 and May 31, 2016     3  
 

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended February 28, 2017 and February 29, 2016

    4  
 

Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended February 28, 2017 and February 29, 2016

    5  
 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended February  28, 2017 and February 29, 2016

    6  
  Notes to Condensed Consolidated Financial Statements     7  

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations     28  

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk     51  

Item 4.

  Controls and Procedures     52  

PART II.

  OTHER INFORMATION  

Item 1.

  Legal Proceedings     53  

Item 1A.

  Risk Factors     53  

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds     53  

Item 5.

 

Other Information

    53  

Item 6.

  Exhibits     54  
  Signatures     55  


Table of Contents

Cautionary Note on Forward-Looking Statements

For purposes of this Quarterly Report, the terms “Oracle,” “we,” “us” and “our” refer to Oracle Corporation and its consolidated subsidiaries. This Quarterly Report on Form 10-Q contains statements that are not historical in nature, are predictive in nature, or that depend upon or refer to future events or conditions or otherwise contain forward-looking statements within the meaning of Section 21 of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. These include, among other things, statements regarding:

 

   

our expectation that we will continue to acquire companies, products, services and technologies to further our corporate strategy;

 

   

our belief that our acquisitions should allow us to grow and continue to make investments in research and development;

 

   

our expectation that the total revenues of our cloud and on-premise software business on a constant currency basis generally will continue to increase due to demand for our on-premise software products and software license updates and product support offerings, expected growth from our cloud software as a service (SaaS), platform as a service (PaaS) and infrastructure as a service (IaaS) offerings, and contributions from acquisitions;

 

   

our belief that our Oracle Cloud IaaS offerings complement our cloud SaaS and PaaS offerings and allow us to offer customers additional opportunities to access Oracle technologies through the Oracle Cloud;

 

   

our expectation that we will continue to place significant strategic emphasis on growing our SaaS, PaaS and IaaS offerings, which will affect the growth of our cloud SaaS, PaaS and IaaS revenues and our new software license revenues and the related expenses;

 

   

our intention that we will renew our cloud SaaS, PaaS and IaaS contracts when they are eligible for renewal;

 

   

our belief that software license updates and product support revenues and margins will grow;

 

   

our expectation that our hardware business will have lower operating margins as a percentage of revenues than our cloud and on-premise software business;

 

   

our expectation that we will continue to make significant investments in research and development and related product opportunities, including those related to hardware products and services, and our belief that research and development efforts are essential to maintaining our competitive position;

 

   

our international operations providing a significant portion of our total revenues and expenses;

 

   

the sufficiency of our sources of funding for working capital, capital expenditures, contractual obligations, acquisitions, dividends, stock repurchases, debt repayments and other matters;

 

   

our belief that we have adequately provided under U.S. generally accepted accounting principles for outcomes related to our tax audits and that the final outcome of our tax related examinations, agreements or judicial proceedings will not have a material effect on our results of operations, and our belief that our net deferred tax assets will be realized in the foreseeable future;

 

   

our estimates and projections regarding potential future goodwill impairment losses;

 

   

our belief that the outcome of certain legal proceedings and claims to which we are a party will not, individually or in the aggregate, result in losses that are materially in excess of amounts already recognized, if any;

 

   

the possibility that certain legal proceedings to which we are a party could have a material impact to our future cash flows and results of operations;

 

   

our expectations regarding the timing and amount of expenses relating to the Fiscal 2017 Oracle Restructuring Plan and the improved efficiencies in our operations that such plan will create;

 

1


Table of Contents
   

the timing and amount of our stock repurchases;

 

   

our expectations regarding the impact of recent accounting pronouncements on our consolidated financial statements;

 

   

our expectation that to the extent customers renew support contracts or cloud SaaS, PaaS and IaaS contracts from companies that we have acquired, we will recognize revenues for the full contracts’ values over the respective renewal periods;

 

   

our ability to predict quarterly hardware revenues;

 

   

the timing of customer orders and delays in our ability to manufacture or deliver a few large transactions substantially affecting the amount of hardware products revenues, expenses and operating margins that we will report;

as well as other statements regarding our future operations, financial condition and prospects, and business strategies. Forward-looking statements may be preceded by, followed by or include the words “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “strives,” “estimates,” “will,” “should,” “is designed to” and similar expressions. We claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 for all forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are subject to risks, uncertainties and assumptions about our business that could affect our future results and could cause those results or other outcomes to differ materially from those expressed or implied in the forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in “Risk Factors” included in documents we file from time to time with the U.S. Securities and Exchange Commission (the SEC), including our Annual Report on Form 10-K for our fiscal year ended May 31, 2016 and our other Quarterly Reports on Form 10-Q filed by us in our fiscal year 2017, which runs from June 1, 2016 to May 31, 2017.

We have no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or risks, except to the extent required by applicable securities laws. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements. New information, future events or risks could cause the forward-looking events we discuss in this Quarterly Report not to occur. You should not place undue reliance on these forward-looking statements, which reflect our expectations only as of the date of this Quarterly Report.

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements (Unaudited)

ORACLE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

As of February 28, 2017 and May 31, 2016

(Unaudited)

 

(in millions, except per share data)

   February 28,
        2017         
    May 31,
        2016         
 
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 19,748     $ 20,152  

Marketable securities

     39,604       35,973  

Trade receivables, net of allowances for doubtful accounts of $300 and $327 as of February 28, 2017 and May 31, 2016, respectively

     3,721       5,385  

Inventories

     391       212  

Prepaid expenses and other current assets

     2,547       2,591  
  

 

 

   

 

 

 

Total current assets

     66,011       64,313  
  

 

 

   

 

 

 

Non-current assets:

    

Property, plant and equipment, net

     5,070       4,000  

Intangible assets, net

     7,788       4,943  

Goodwill, net

     42,504       34,590  

Deferred tax assets

     918       1,291  

Other assets

     3,091       3,043  
  

 

 

   

 

 

 

Total non-current assets

     59,371       47,867  
  

 

 

   

 

 

 

Total assets

   $ 125,382     $ 112,180  
  

 

 

   

 

 

 
LIABILITIES AND EQUITY     

Current liabilities:

    

Notes payable and other borrowings, current

   $ 3,498     $ 3,750  

Accounts payable

     481       504  

Accrued compensation and related benefits

     1,516       1,966  

Deferred revenues

     7,388       7,655  

Other current liabilities

     2,907       3,333  
  

 

 

   

 

 

 

Total current liabilities

     15,790       17,208  
  

 

 

   

 

 

 

Non-current liabilities:

    

Notes payable and other borrowings, non-current

     50,469       40,105  

Income taxes payable

     5,162       4,908  

Other non-current liabilities

     2,938       2,169  
  

 

 

   

 

 

 

Total non-current liabilities

     58,569       47,182  
  

 

 

   

 

 

 

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: 4,115 shares and 4,131 shares as of February 28, 2017 and May 31, 2016, respectively

     25,970       24,217  

Retained earnings

     25,576       23,888  

Accumulated other comprehensive loss

     (931     (816
  

 

 

   

 

 

 

Total Oracle Corporation stockholders’ equity

     50,615       47,289  

Noncontrolling interests

     408       501  
  

 

 

   

 

 

 

Total equity

     51,023       47,790  
  

 

 

   

 

 

 

Total liabilities and equity

   $ 125,382     $ 112,180  
  

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

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Table of Contents

ORACLE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three and Nine Months Ended February 28, 2017 and February 29, 2016

(Unaudited)

 

     Three Months Ended     Nine Months Ended  

(in millions, except per share data)

   February 28,
    2017    
    February 29,
    2016    
    February 28,
    2017    
    February 29,
    2016    
 

Revenues:

        

Cloud software as a service and platform as a service

   $ 1,011     $ 583     $ 2,686     $ 1,517  

Cloud infrastructure as a service

     178       152       525       477  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cloud revenues

     1,189       735       3,211       1,994  
  

 

 

   

 

 

   

 

 

   

 

 

 

New software licenses

     1,414       1,680       3,792       4,509  

Software license updates and product support

     4,762       4,669       14,331       14,048  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total on-premise software revenues

     6,176       6,349       18,123       18,557  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cloud and on-premise software revenues

     7,365       7,084       21,334       20,551  
  

 

 

   

 

 

   

 

 

   

 

 

 

Hardware products

     520       604       1,478       1,746  

Hardware support

     508       531       1,559       1,639  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total hardware revenues

     1,028       1,135       3,037       3,385  

Total services revenues

     812       793       2,464       2,517  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     9,205       9,012       26,835       26,453  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Sales and marketing(1)

     2,004       1,903       5,883       5,578  

Cloud software as a service and platform as a service(1)

     380       292       1,060       847  

Cloud infrastructure as a service(1)

     125       88       333       268  

Software license updates and product support(1)

     270       293       786       877  

Hardware products(1)

     290       338       775       967  

Hardware support(1)

     147       171       439       526  

Services(1)

     680       657       2,073       2,058  

Research and development

     1,521       1,419       4,551       4,253  

General and administrative

     241       290       859       832  

Amortization of intangible assets

     397       408       1,010       1,283  

Acquisition related and other

     30       11       84       35  

Restructuring

     161       115       346       293  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     6,246       5,985       18,199       17,817  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     2,959       3,027       8,636       8,636  

Interest expense

     (450     (360     (1,317     (1,105

Non-operating income, net

     189       65       437       179  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

     2,698       2,732       7,756       7,710  

Provision for income taxes

     459       590       1,653       1,623  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 2,239     $ 2,142     $ 6,103     $ 6,087  
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share:

        

Basic

   $ 0.55     $ 0.51     $ 1.49     $ 1.43  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.53     $ 0.50     $ 1.45     $ 1.41  
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding:

        

Basic

     4,107       4,182       4,110       4,246  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     4,204       4,256       4,207       4,328  
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends declared per common share

   $ 0.15     $ 0.15     $ 0.45     $ 0.45  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Exclusive of amortization of intangible assets, which is shown separately.

See notes to condensed consolidated financial statements.

 

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Table of Contents

ORACLE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the Three and Nine Months Ended February 28, 2017 and February 29, 2016

(Unaudited)

 

    Three Months Ended     Nine Months Ended  

(in millions)

  February 28,
2017
    February 29,
2016
    February 28,
2017
    February 29,
2016
 

Net income

  $ 2,239     $ 2,142     $ 6,103     $ 6,087  

Other comprehensive income (loss), net of tax:

       

Net foreign currency translation gains (losses)

    32       142       (39     9  

Net unrealized gains on defined benefit plans

    9       5       16       25  

Net unrealized gains (losses) on marketable securities

    96       69       (117     (47

Net unrealized gains (losses) on cash flow hedges

    4       (23     25       (37
 

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss), net

    141       193       (115     (50
 

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

  $ 2,380     $ 2,335     $ 5,988     $ 6,037  
 

 

 

   

 

 

   

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

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ORACLE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Months Ended February 28, 2017 and February 29, 2016

(Unaudited)

 

    Nine Months Ended  

(in millions)

  February 28,
2017
    February 29,
2016
 

Cash flows from operating activities:

   

Net income

  $ 6,103     $ 6,087  

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

   

Depreciation

    722       643  

Amortization of intangible assets

    1,010       1,283  

Deferred income taxes

    111       (143

Stock-based compensation

    1,017       768  

Tax benefits on the vesting of restricted stock-based awards and exercise of stock options

    378       188  

Other, net

    96       116  

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

   

Decrease in trade receivables, net

    1,673       1,746  

(Increase) decrease in inventories

    (178     87  

Decrease in prepaid expenses and other assets

    308       95  

Decrease in accounts payable and other liabilities

    (862     (890

Decrease in income taxes payable

    (388     (112

(Decrease) increase in deferred revenues

    (330     24  
 

 

 

   

 

 

 

Net cash provided by operating activities

    9,660       9,892  
 

 

 

   

 

 

 

Cash flows from investing activities:

   

Purchases of marketable securities and other investments

    (15,571     (21,549

Proceeds from maturities and sales of marketable securities and other investments

    11,825       18,845  

Acquisitions, net of cash acquired

    (10,406     (313

Capital expenditures

    (1,496     (1,009
 

 

 

   

 

 

 

Net cash used for investing activities

    (15,648     (4,026
 

 

 

   

 

 

 

Cash flows from financing activities:

   

Payments for repurchases of common stock

    (3,067     (8,467

Proceeds from issuances of common stock

    1,309       802  

Shares repurchased for tax withholdings upon vesting of restricted stock-based awards

    (237     (82

Payments of dividends to stockholders

    (1,844     (1,918

Proceeds from borrowings, net of issuance costs

    13,932        

Repayments of borrowings

    (4,094     (2,000

Distributions to noncontrolling interests

    (200     (85
 

 

 

   

 

 

 

Net cash provided by (used for) financing activities

    5,799       (11,750
 

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

    (215     (249
 

 

 

   

 

 

 

Net decrease in cash and cash equivalents

    (404     (6,133

Cash and cash equivalents at beginning of period

    20,152       21,716  
 

 

 

   

 

 

 

Cash and cash equivalents at end of period

  $ 19,748     $ 15,583  
 

 

 

   

 

 

 

Non-cash investing and financing transactions:

   

Fair values of restricted stock-based awards and stock options assumed in connection with acquisitions

  $ 90     $  

(Decrease) increase in unsettled repurchases of common stock

  $ (69   $ 3  

Increase (decrease) in unsettled investment purchases

  $ 5     $ (148

See notes to condensed consolidated financial statements.

 

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

February 28, 2017

(Unaudited)

 

1. BASIS OF PRESENTATION AND RECENT ACCOUNTING PRONOUNCEMENTS

Basis of Presentation

We have prepared the condensed consolidated financial statements included herein 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 (GAAP) have been condensed or omitted pursuant to such rules and regulations. However, we believe that the disclosures herein 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, 2016.

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, 2017. Certain prior year balances have been reclassified to conform to the current year presentation. Such reclassifications did not affect total revenues, operating income or net income.

During the first nine months of fiscal 2017, we adopted Accounting Standards Update (ASU) 2016-09, CompensationStock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). As required by ASU 2016-09, excess tax benefits recognized on stock-based compensation expense are reflected in the condensed consolidated statements of operations as a component of the provision for income taxes on a prospective basis. As required by ASU 2016-09, excess tax benefits recognized on stock-based compensation expense are classified as an operating activity in our condensed consolidated statements of cash flows and we have applied this provision on a retrospective basis. For the nine months ended February 29, 2016, net cash provided by operating activities increased by $61 million with a corresponding offset to net cash used for financing activities. Finally, ASU 2016-09 allows for the option to account for forfeitures as they occur, rather than estimating expected forfeitures over the course of a vesting period. We have elected to account for forfeitures as they occur and the net cumulative effect of this change was recognized as a $9 million increase to additional paid in capital, a $3 million increase to deferred tax assets and a $6 million reduction to retained earnings as of June 1, 2016.

In addition, in fiscal 2017, we also adopted the following Accounting Standards Updates, none of which had a material impact to our reported financial position or results of operations and cash flows:

 

   

ASU 2016-17, Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control;

 

   

ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash; and

 

   

ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.

There have been no other significant changes in our reported financial position or results of operations and cash flows as a result of our adoption of new accounting pronouncements or changes to our significant accounting policies that were disclosed in our Annual Report on Form 10-K for the fiscal year ended May 31, 2016.

 

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

February 28, 2017

(Unaudited)

 

Cash, Cash Equivalents and Restricted Cash

Restricted cash that was included within cash and cash equivalents as presented within our condensed consolidated balance sheets as of February 28, 2017 and May 31, 2016 and our condensed consolidated statements of cash flows for the nine months ended February 28, 2017 and February 29, 2016 was nominal.

Acquisition Related and Other Expenses

Acquisition related and other expenses consist of personnel related costs and stock-based compensation for transitional and certain other employees, integration related professional services, certain business combination adjustments including certain adjustments after the measurement period has ended and certain other operating items, net.

 

     Three Months Ended      Nine Months Ended  

(in millions)

   February 28,
2017
    February 29,
2016
     February 28,
2017
    February 29,
2016
 

Transitional and other employee related costs

   $ 15     $ 8      $ 31     $ 40  

Stock-based compensation

     22              33       3  

Professional fees and other, net

     (2     1        26       10  

Business combination adjustments, net

     (5     2        (6     (18
  

 

 

   

 

 

    

 

 

   

 

 

 

Total acquisition related and other expenses

   $ 30     $ 11      $ 84     $ 35  
  

 

 

   

 

 

    

 

 

   

 

 

 

Included in acquisition related and other expenses during the nine months ended February 29, 2016 is an acquisition related benefit of $19 million.

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 (primarily 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     Nine Months Ended  

(in millions)

   February 28,
2017
    February 29,
2016
    February 28,
2017
    February 29,
2016
 

Interest income

   $ 197     $ 141     $ 578     $ 382  

Foreign currency losses, net

     (20     (15     (102     (68

Noncontrolling interests in income

     (20     (36     (95     (95

Other income (loss), net

     32       (25     56       (40
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-operating income, net

   $ 189     $ 65     $ 437     $ 179  
  

 

 

   

 

 

   

 

 

   

 

 

 

Sales of Financing Receivables

We offer certain of our customers the option to acquire our software products, hardware products and services offerings through separate long-term payment contracts. We generally sell these contracts that we have financed for our customers on a non-recourse basis to financial institutions within 90 days of the contracts’ dates of execution. We record the transfers of amounts due from customers to financial institutions as sales of financing receivables because we are considered to have surrendered control of these financing receivables. Financing

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

February 28, 2017

(Unaudited)

 

receivables sold to financial institutions were $296 million and $1.3 billion for the three and nine months ended February 28, 2017, respectively, and $304 million and $1.5 billion for the three and nine months ended February 29, 2016, respectively.

Recent Accounting Pronouncements

Goodwill Impairment:    In January 2017, the Financial Accounting Standards Board (FASB) issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (ASU 2017-04), which eliminates step two from the goodwill impairment test. Under the amendments in ASU 2017-04, an entity should recognize an impairment charge for the amount by which the carrying amount of a reporting unit exceeds its fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for us in our first quarter of fiscal 2021 on a prospective basis, and earlier adoption is permitted for goodwill impairment tests performed on testing dates after January 1, 2017. We are currently evaluating the impact of our pending adoption of ASU 2017-04 on our consolidated financial statements.

Business Combinations:    In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (ASU 2017-01), which provides guidance for evaluating whether certain transactions are to be accounted for as an acquisition (or disposal) of either a business or an asset. ASU 2017-01 is effective for us in our first quarter of fiscal 2019 on a prospective basis, and earlier adoption is permitted for transactions occurring subsequent to the issuance of ASU 2017-01 and not reported in the financial statements. We are currently evaluating the impact of our pending adoption of ASU 2017-01 on our consolidated financial statements.

Income Taxes:    In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (ASU 2016-16), which changes the timing of when certain intercompany transactions are recognized within the provision for income taxes. ASU 2016-16 is effective for us in our first quarter of fiscal 2019 on a modified retrospective basis, and earlier adoption is permitted. We are currently evaluating the impact of our pending adoption of ASU 2016-16 on our consolidated financial statements.

Financial Instruments:    In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13), which requires measurement and recognition of expected credit losses for financial assets held. ASU 2016-13 is effective for us in our first quarter of fiscal 2021, and earlier adoption is permitted beginning in the first quarter of fiscal 2020. We are currently evaluating the impact of our pending adoption of ASU 2016-13 on our consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01), which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. ASU 2016-01 is effective for us in our first quarter of fiscal 2019, and earlier adoption is not permitted except for certain provisions. We currently do not expect that our pending adoption of ASU 2016-01 will have a material effect on our consolidated financial statements.

Leases:    In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (ASU 2016-02). ASU 2016-02 requires companies to generally recognize on the balance sheet operating and financing lease liabilities and corresponding right-of-use assets. ASU 2016-02 is effective for us in our first quarter of fiscal 2020 on a modified retrospective basis, and earlier adoption is permitted. We are currently evaluating the impact of our pending adoption of ASU 2016-02 on our consolidated financial statements, and we currently expect that most of our operating lease commitments will be subject to the new standard and recognized as operating lease liabilities

 

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

February 28, 2017

(Unaudited)

 

and right-of-use assets upon our adoption of ASU 2016-02, which will increase our total assets and total liabilities that we report relative to such amounts prior to adoption.

Revenue Recognition:    In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers: Topic 606 and issued subsequent amendments to the initial guidance in August 2015, March 2016, April 2016, May 2016 and December 2016 within ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20, respectively (ASU 2014-09, ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20, respectively, and collectively Topic 606). Topic 606 supersedes nearly all existing revenue recognition guidance under GAAP. The core principle of Topic 606 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. Topic 606 defines a five-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than are required under existing GAAP, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation, among others. Topic 606 also provides guidance on the recognition of costs related to obtaining customer contracts. Topic 606 is effective for us as of either our first quarter of fiscal 2018 or our first quarter of fiscal 2019 using either of two methods: (1) retrospective application of Topic 606 to each prior reporting period presented with the option to elect certain practical expedients as defined within Topic 606 or (2) retrospective application of Topic 606 with the cumulative effect of initially applying Topic 606 recognized at the date of initial application and providing certain additional disclosures as defined per Topic 606. Preliminarily, we plan to adopt Topic 606 in the first quarter of fiscal 2019 pursuant to the aforementioned adoption method (1) and we do not believe there will be a material impact to our revenues upon adoption. We are continuing to evaluate the impact to our revenues related to our pending adoption of Topic 606 and our preliminary assessments are subject to change. We are also continuing to evaluate the provisions of Topic 606 related to costs for obtaining customer contracts.

 

2. ACQUISITIONS

Acquisition of NetSuite Inc., a Related Party

On July 28, 2016, we entered into an Agreement and Plan of Merger (Merger Agreement) with NetSuite Inc. (NetSuite), a provider of cloud-based enterprise resource planning (ERP) software and related applications and, as described further below, a related party to Oracle.

Pursuant to the Merger Agreement, we commenced a tender offer on August 18, 2016 to purchase all of the issued and outstanding shares of NetSuite common stock (NetSuite Shares) at a purchase price of $109.00 per share, net to the seller in cash, without interest thereon, based upon the terms and subject to the conditions set forth in the Offer to Purchase dated August 18, 2016, and in the related Letter of Transmittal. On November 7, 2016, pursuant to the terms of the tender offer and applicable Delaware law, we accepted and paid for the substantial majority of outstanding NetSuite Shares and effectuated the merger of NetSuite with and into a wholly-owned subsidiary of Oracle and NetSuite became an indirect, wholly-owned subsidiary of Oracle. Pursuant to the Merger Agreement, NetSuite Shares that remained outstanding and were not acquired by us were converted into, and cancelled in exchange for, the right to receive $109.00 per share in cash. The unvested equity awards to acquire NetSuite Shares that were outstanding immediately prior to the conclusion of the merger were converted into equity awards denominated in shares of Oracle common stock based on formulas contained in the Merger Agreement. We acquired NetSuite to, among other things, expand our cloud software as a service offerings with a complementary set of cloud ERP and related cloud software applications for customers. We have included the financial results of NetSuite in our consolidated financial statements from the date of acquisition.

Lawrence J. Ellison, Oracle’s Chairman of the Board and Chief Technology Officer and Oracle’s largest stockholder, is an affiliate of NetSuite’s largest stockholder, NetSuite Restricted Holdings LLC (a single member

 

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

February 28, 2017

(Unaudited)

 

LLC investment entity whose interests are beneficially owned by a trust controlled by Mr. Ellison), which owned approximately 40% of the issued and outstanding NetSuite Shares immediately prior to the conclusion of the merger. Oracle’s Board of Directors appointed a Special Committee (comprised solely of directors who are independent of the management of Oracle, Mr. Ellison, his family members and any affiliated entities, and NetSuite) to which it delegated the full and exclusive power, authority and discretion of the Board to evaluate, assess, and approve the NetSuite transaction on its behalf. The Special Committee engaged its own independent legal counsel and its own independent financial advisor to advise it on the transaction. The financial advisor provided the Special Committee with a fairness opinion in connection with the transaction. After extensive deliberations, the Special Committee concluded that the transaction terms were fair to Oracle and the transaction was in the best interests of Oracle and its stockholders. The Special Committee unanimously approved the transaction on behalf of Oracle and the Board.

The total preliminary purchase price for NetSuite was approximately $9.1 billion, which consisted of approximately $9.0 billion in cash and $78 million for the fair values of restricted stock-based awards and stock options assumed. Pursuant to our business combinations accounting policy, we estimated the preliminary fair values of net tangible and intangible assets acquired, and the excess of the consideration transferred over the aggregate of such fair values was recorded as goodwill. The preliminary fair values of net tangible assets and intangible assets acquired were based on preliminary valuations, and our estimates and assumptions are subject to change within the measurement period (up to one year from the acquisition date). The primary areas that remain preliminary relate to the fair values of intangible assets acquired, certain tangible assets and liabilities acquired, certain legal matters, income and non-income based taxes and residual goodwill. We expect to continue to obtain information to assist us in determining the fair values of the net assets acquired during the measurement period. The following table summarizes the estimated preliminary fair values of net tangible liabilities and intangible assets acquired from NetSuite:

 

(in millions)

 

Cash and cash equivalents

   $ 481  

Trade receivables, net

     32  

Other assets

     111  

Intangible assets

     3,157  

Goodwill

     6,713  

Accounts payable and other liabilities

     (132

Deferred revenues

     (163

Debt

     (342

Deferred tax liabilities, net

     (777
  

 

 

 

Total

   $         9,080  
  

 

 

 

We do not expect the goodwill recognized as a part of the NetSuite acquisition to be deductible for income tax purposes.

Other Fiscal 2017 and Fiscal 2016 Acquisitions

During the first nine months of fiscal 2017, we acquired certain companies and purchased certain technology and development assets primarily to expand our products and services offerings. These acquisitions were not individually or in the aggregate significant. We have included the financial results of the acquired companies in our consolidated financial statements from their respective acquisition dates, and the results from each of these companies were not individually material to our consolidated financial statements. In the aggregate, the total preliminary purchase price for these acquisitions was approximately $2.1 billion, which consisted of

 

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

February 28, 2017

(Unaudited)

 

approximately $2.1 billion in cash and $12 million for the fair values of restricted stock-based awards and stock options assumed. We preliminarily recorded $196 million of net tangible assets and $698 million of identifiable intangible assets, based on their estimated fair values, and $1.2 billion of residual goodwill.

The preliminary fair value estimates for the assets acquired and liabilities assumed for our acquisitions completed during the first nine months of fiscal 2017 were based upon preliminary calculations and valuations, and our estimates and assumptions for these acquisitions are subject to change as we obtain additional information during the respective measurement periods (up to one year from the respective acquisition dates). The primary areas of those preliminary estimates that are not yet finalized relate to certain tangible assets and liabilities acquired, identifiable intangible assets, certain legal matters, income and non-income based taxes and residual goodwill.

We also have entered into certain non-material agreements to acquire certain companies and expect these proposed acquisitions to close during the fourth quarter of fiscal 2017.

During fiscal 2016, we acquired certain companies and purchased certain technology and development assets primarily to expand our products and services offerings. These acquisitions were not significant individually or in the aggregate.

Unaudited Pro Forma Financial Information

The unaudited pro forma financial information in the table below summarizes the combined results of operations for Oracle, NetSuite and certain other companies that we acquired since the beginning of fiscal 2016 that were considered relevant for the purposes of unaudited pro forma financial information disclosure as if the companies were combined as of the beginning of fiscal 2016. The unaudited pro forma financial information for all periods presented included the business combination accounting effects resulting from these acquisitions, including amortization charges from acquired intangible assets (certain of which are preliminary), stock-based compensation charges for unvested restricted stock-based awards and stock options assumed, if any, and the related tax effects as though the aforementioned companies were combined as of the beginning of fiscal 2016. The unaudited pro forma financial information as presented below is for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisitions had taken place at the beginning of fiscal 2016.

The unaudited pro forma financial information for the three and nine months ended February 28, 2017 combined the historical results of Oracle for the three and nine months ended February 28, 2017, the historical results of NetSuite for the six month period ended September 30, 2016 (adjusted due to differences in reporting periods and considering the date we acquired NetSuite) and the historical results of certain other companies that we acquired since the beginning of fiscal 2017 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.

 

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

February 28, 2017

(Unaudited)

 

The unaudited pro forma financial information for the three and nine months ended February 29, 2016 combined the historical results of Oracle for the three and nine month periods ended February 29, 2016, the historical results of NetSuite for the three and nine months ended December 31, 2015 (adjusted due to differences in reporting periods) and the historical results of certain other companies that we acquired since the beginning of fiscal 2016 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:

 

     Three Months Ended      Nine Months Ended  

(in millions, except per share data)

   February 28,
2017
     February 29,
2016
     February 28,
2017
     February 29,
2016
 

Total revenues

   $ 9,221      $ 9,306      $ 27,313      $ 27,295  

Net income

   $ 2,228      $ 1,932      $ 5,797      $ 5,454  

Basic earnings per share

   $ 0.54      $ 0.46      $ 1.41      $ 1.28  

Diluted earnings per share

   $ 0.53      $ 0.45      $ 1.38      $ 1.26  

 

3. FAIR VALUE MEASUREMENTS

We perform fair value measurements in accordance with FASB Accounting Standards Codification (ASC) 820, Fair Value Measurement. 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 their fair values, we consider the principal or most advantageous market in which we would transact and consider assumptions that market participants would use when pricing the assets or liabilities, 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 a 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 values of the assets or liabilities.

 

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

February 28, 2017

(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 (Level 1 and Level 2 inputs are defined above):

 

    February 28, 2017     May 31, 2016  
    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:

           

Corporate debt securities and other

  $ 235     $ 38,205     $   38,440     $ 393     $ 35,095     $   35,488  

Commercial paper debt securities

          4,327       4,327             2,155       2,155  

Money market funds

    2,002             2,002       3,750             3,750  

Derivative financial instruments

          23       23             122       122  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 2,237     $ 42,555     $ 44,792     $ 4,143     $ 37,372     $ 41,515  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

           

Derivative financial instruments

  $     $ 262     $ 262     $     $ 218     $ 218  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Our marketable securities investments consist of Tier 1 commercial paper debt securities, corporate debt securities and certain other securities. As of February 28, 2017 and May 31, 2016, approximately 43% and 28%, respectively, of our marketable securities investments mature within one year and 57% and 72%, respectively, mature within one to six years. Our valuation techniques used to measure the fair values of our marketable securities that were classified as Level 1 in the table above were derived from quoted market prices and active markets for these instruments that exist. Our valuation techniques used to measure the fair values of Level 2 instruments listed in the table above, the counterparties to which have high credit ratings, were derived from the following: non-binding market consensus prices that were 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 including LIBOR-based yield curves, among others.

Based on the trading prices of our $54.0 billion and $40.1 billion of borrowings, which consisted primarily of senior notes and the related fair value hedges that were outstanding as of February 28, 2017 and May 31, 2016, respectively, the estimated fair values of senior notes and the related fair value hedges issued by Oracle using Level 2 inputs at February 28, 2017 and May 31, 2016 were $55.8 billion and $43.2 billion, respectively.

 

4. INVENTORIES

Inventories consisted of the following:

 

(in millions)

   February 28,
        2017         
     May 31,
        2016         
 

Raw materials

   $ 244      $ 95  

Work-in-process

     46        31  

Finished goods

     101        86  
  

 

 

    

 

 

 

Total

   $ 391      $ 212  
  

 

 

    

 

 

 

 

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

February 28, 2017

(Unaudited)

 

5. INTANGIBLE ASSETS AND GOODWILL

The changes in intangible assets for fiscal 2017 and the net book value of intangible assets as of February 28, 2017 and May 31, 2016 were as follows:

 

    Intangible Assets, Gross     Accumulated Amortization     Intangible Assets, Net    

Weighted
Average

Useful

Life(1)

(in millions)

  May 31,
     2016     
    Additions     February 28,
     2017     
    May 31,
2016
      Expense       February 28,
     2017     
    May 31,
2016
    February 28,
2017
   

Developed technology

  $ 3,661     $ 1,645     $ 5,306     $ (1,876   $ (462   $ (2,338   $ 1,785     $ 2,968     7 years

SaaS, PaaS and IaaS agreements and related relationships

    2,034       2,084       4,118       (704     (251     (955     1,330       3,163     10 years

Software support agreements and related relationships

    2,419             2,419       (1,287     (94     (1,381     1,132       1,038    

Other

    3,452       126       3,578       (2,756     (203     (2,959     696       619     9 years
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total intangible assets, net

  $ 11,566     $ 3,855     $ 15,421     $ (6,623   $ (1,010   $ (7,633   $ 4,943     $ 7,788     9 years
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

(1) 

Represents weighted-average useful lives of intangible assets acquired during fiscal 2017.

Total amortization expense related to our intangible assets was $397 million and $1.0 billion, respectively, for the three and nine months ended February 28, 2017, respectively, and $408 million and $1.3 billion for the three and nine months ended February 29, 2016, respectively. As of February 28, 2017, estimated future amortization expenses related to intangible assets were as follows (in millions):

 

Remainder of fiscal 2017

   $ 402  

Fiscal 2018

     1,362  

Fiscal 2019

     1,248  

Fiscal 2020

     1,058  

Fiscal 2021

     883  

Fiscal 2022

     779  

Thereafter

     2,056  
  

 

 

 

Total intangible assets, net

   $     7,788  
  

 

 

 

The changes in the carrying amounts of goodwill, net, which is generally not deductible for tax purposes, for our operating segments for the nine months ended February 28, 2017 were as follows:

 

(in millions)

  Cloud
Software and
On-Premise
Software
    Software
License
Updates and
Product
    Support     
    Hardware
    Support    
     Consulting      Other,  net(2)     Total
Goodwill,
net
 

Balances as of May 31, 2016

  $ 15,747     $ 14,439     $ 2,367     $ 1,759     $ 278     $     34,590  

Goodwill from acquisitions

    863                         7,072       7,935  

Goodwill adjustments, net(1)

    (287     (1           (1     268       (21
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances as of February 28, 2017

  $ 16,323     $ 14,438     $ 2,367     $ 1,758     $ 7,618     $ 42,504  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Pursuant to our business combinations accounting policy, we recorded goodwill adjustments for the effects on goodwill of changes to net assets acquired during the period that such a change is identified, provided that any such change is within the measurement period (up to one year from the date of the acquisition).

 

(2) 

Represents goodwill allocated to our other operating segments and, as of February 28, 2017, approximately $6.7 billion of NetSuite goodwill that will be allocated based upon the finalization of purchase accounting valuations.

 

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

February 28, 2017

(Unaudited)

 

6. NOTES PAYABLE AND OTHER BORROWINGS

Senior Notes

In July 2016, we issued $14.0 billion, par value, of fixed-rate senior notes comprised of the following as of February 28, 2017:

 

            February 28, 2017  

(Dollars in millions)

   Date of
Issuance
         Amount         Effective Interest
Rate
 

$4,250, 1.90%, due September 2021

     July 2016      $ 4,250       1.94

$2,500, 2.40%, due September 2023

     July 2016        2,500       2.40

$3,000, 2.65%, due July 2026

     July 2016        3,000       2.69

$1,250, 3.85%, due July 2036

     July 2016        1,250       3.85

$3,000, 4.00%, due July 2046

     July 2016        3,000       4.00
     

 

 

   

Total fixed rate senior notes

      $ 14,000    
     

 

 

   

Unamortized discount/issuance costs

        (63  
     

 

 

   

Total fixed rate senior notes, net

      $ 13,937    
     

 

 

   

We issued the senior notes for general corporate purposes, which may include stock repurchases, payment of cash dividends on our common stock and repayment of indebtedness and future acquisitions. The interest is payable semi-annually. We may redeem some or all of the senior notes of each series prior to their maturity, subject to certain restrictions, and the payment of an applicable make-whole premium in certain instances.

The senior notes rank pari passu with any other existing and future unsecured and unsubordinated indebtedness of Oracle Corporation. All existing and future indebtedness and liabilities of the subsidiaries of Oracle Corporation are or will be effectively senior to the senior notes. We were in compliance with all debt-related covenants at February 28, 2017.

Other Fiscal 2017 Borrowings Activities

In connection with our acquisition of NetSuite in the second quarter of fiscal 2017 (see Note 2 above), we assumed $310 million par value of legacy NetSuite convertible notes (NetSuite Debt), which had a fair value of $342 million as of the acquisition date. Our acquisition of NetSuite triggered (a) the right of holders of the NetSuite Debt to convert their debt holdings into an amount payable in cash, at any time through December 22, 2016, based upon conversion formulas that are contained within the NetSuite Debt indenture and (b) the obligation of NetSuite to offer to repurchase the NetSuite Debt from each holder at a purchase price equal to par, plus accrued and unpaid interest, which offer expired on December 21, 2016. In December 2016, we repurchased and settled for cash substantially all of the NetSuite Debt.

In the second quarter of fiscal 2017, we assumed $113 million of debt that bears interest at 3.53% and matures in August 2025 in connection with our acquisition of certain land and buildings.

In May 2016, we borrowed $3.8 billion pursuant to three revolving credit agreements with JPMorgan Chase Bank, N.A., as initial lender and administrative agent (the 2016 Credit Agreements). In June 2016, we repaid the $3.8 billion and the 2016 Credit Agreements expired pursuant to their terms.

There have been no other significant changes in our notes payable or other borrowing arrangements that were disclosed in our Annual Report on Form 10-K for the fiscal year ended May 31, 2016.

 

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

February 28, 2017

(Unaudited)

 

7. RESTRUCTURING ACTIVITIES

Fiscal 2017 Oracle Restructuring Plan

During the first quarter of fiscal 2017, our management approved, committed to and initiated plans to restructure and further improve efficiencies in our operations due to our recent acquisitions and certain other operational activities (2017 Restructuring Plan). Our management subsequently supplemented the 2017 Restructuring Plan in the third quarter of fiscal 2017 to reflect additional actions that we expect to take. The total estimated restructuring costs associated with the 2017 Restructuring Plan are up to $615 million and will be recorded to the restructuring expense line item within our condensed consolidated statements of operations as they are incurred. We recorded $363 million of restructuring expenses in connection with the 2017 Restructuring Plan in the first nine months of fiscal 2017 and we expect to incur the majority of the estimated remaining $252 million through the end of fiscal 2018. Any changes to the estimates of executing the 2017 Restructuring Plan will be reflected in our future results of operations.

Summary of All Plans

 

(in millions)

   Accrued 
May  31,
2016(2)
    Nine Months Ended February 28, 2017     Accrued
February  28,
2017(2)
    Total
Costs
 Accrued 
to Date
    Total
Expected
Program
Costs
 
    Initial
Costs(3)
        Adj. to  
Cost(4)
    Cash
Payments
    Others(5)        

Fiscal 2017 Oracle Restructuring Plan(1)

               

Cloud software and on-premise software

  $     $ 106     $ (4   $ (57   $ 1     $ 46     $ 102     $ 151  

Software license updates and product support

          23             (12     4       15       23       31  

Hardware business

          67       (3     (37     (1     26       64       161  

Services business

          44             (23           21       44       76  

Other

          130             (69           61       130       196  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Fiscal 2017 Oracle Restructuring Plan

  $     $ 370     $ (7   $ (198   $ 4     $ 169     $ 363     $ 615  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other restructuring plans(6)

  $ 283     $ 8     $ (25   $ (153   $ (16   $ 97      
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

Total restructuring plans

  $ 283     $ 378     $ (32   $ (351   $ (12   $ 266      
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

(1) 

Restructuring costs recorded for individual line items primarily related to employee severance costs.

 

(2) 

The balances at February 28, 2017 and May 31, 2016 included $247 million and $255 million, respectively, recorded in other current liabilities, and $19 million and $28 million, respectively, recorded in other non-current liabilities.

 

(3) 

Costs recorded for the respective restructuring plans during the current period presented.

 

(4) 

All plan adjustments were changes in estimates whereby increases and decreases in costs were generally recorded to operating expenses in the period of adjustments.

 

(5) 

Represents foreign currency translation and certain other adjustments.

 

(6) 

Other restructuring plans presented in the table above included condensed information for other Oracle based plans (primarily the Fiscal 2015 Oracle Restructuring Plan) and other plans associated with certain of our acquisitions whereby we continued to make cash outlays to settle obligations under these plans during the period presented but for which the periodic impact to our condensed consolidated statements of operations was not significant.

 

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

February 28, 2017

(Unaudited)

 

8. DEFERRED REVENUES

Deferred revenues consisted of the following:

 

(in millions)

   February 28,
        2017         
     May 31,
        2016         
 

Software license updates and product support

   $ 5,163      $ 5,864  

Cloud SaaS, PaaS and IaaS

     1,169        705  

Hardware support and other

     595        675  

Services

     366        339  

New software licenses

     95        72  
  

 

 

    

 

 

 

Deferred revenues, current

     7,388        7,655  

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

     560        536  
  

 

 

    

 

 

 

Total deferred revenues

   $ 7,948      $ 8,191  
  

 

 

    

 

 

 

Deferred software license updates and product support revenues and deferred hardware support revenues represent customer payments made in advance for support contracts that are typically billed on a per annum basis in advance with corresponding revenues being recognized ratably over the support periods. Deferred cloud software as a service (SaaS), platform as a service (PaaS) and infrastructure as a service (IaaS) revenues generally resulted from customer payments made in advance for our cloud-based offerings that are recognized over the corresponding contractual term. Deferred services revenues include prepayments for our services business and revenues for these services are generally recognized as the services are performed. Deferred new software licenses revenues typically resulted from customer payments that related to undelivered products or specified enhancements, customer specific acceptance provisions, time-based license arrangements and software license transactions that cannot be separated from undelivered consulting or other services.

In connection with our acquisitions, we have estimated the fair values of the cloud SaaS and PaaS, software license updates and product support, and hardware support obligations, among others, assumed from our acquired companies. We generally have estimated the fair values of these obligations assumed using a cost build-up approach. The cost build-up approach determines fair value by estimating the costs related 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 these acquired obligations. These aforementioned fair value adjustments recorded for obligations assumed from our acquisitions reduced the cloud SaaS and PaaS, software license updates and product support and hardware support deferred revenues balances that we recorded as liabilities from these acquisitions and also reduced the resulting revenues that we recognized or will recognize over the terms of the acquired obligations during the post-combination periods.

 

9. DERIVATIVE FINANCIAL INSTRUMENTS

We held certain derivative and non-derivative instruments that were accounted for pursuant to ASC 815, Derivatives and Hedging (ASC 815) and that were utilized in a consistent manner as of February 28, 2017, May 31, 2016 and February 29, 2016 and during the three and nine months ended February 28, 2017 and February 29, 2016. These instruments include:

 

   

interest rate swap agreements, which are used to protect us against changes in the fair values of certain of our fixed-rate borrowings due to benchmark interest rate movements and are accounted for as fair value hedges;

 

   

cross-currency swap agreements, which are used to manage foreign currency exchange risk by converting certain of our fixed-rate Euro-denominated borrowings to fixed-rate U.S. Dollar denominated debt and are accounted for as cash flow hedges; and

 

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

February 28, 2017

(Unaudited)

 

   

foreign currency borrowings, which are used to reduce the volatility in stockholders’ equity caused by the changes in the foreign currency exchange rates of the Euro with respect to the U.S. Dollar and are accounted for as net investment hedges.

We also held certain foreign currency contracts that were not designated as hedges pursuant to ASC 815. The notional amounts of such forward contracts we held to purchase U.S. Dollars in exchange for other major international currencies were $2.3 billion and $2.7 billion, respectively, and the notional amount of forward contracts we held to sell U.S. Dollars in exchange for other major international currencies were $2.0 billion and $2.0 billion, respectively. The fair values of our outstanding foreign currency forward contracts were nominal as of February 28, 2017 and May 31, 2016. Included in our non-operating income, net were $74 million and $53 million of net losses related to these forward contracts for the three and nine months ended February 28, 2017, respectively and $93 million and $163 million of net gains for the three and nine months ended February 29, 2016, respectively.

See Note 11 of Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended May 31, 2016 for additional information regarding the purpose, accounting and classification of our derivative and non-derivative instruments. None of our derivative instruments are used for trading purposes. The effects of derivative and non-derivative instruments designated as hedges on certain of our consolidated financial statements were as follows as of or for each of the respective periods presented below (amounts presented exclude any income tax effects):

Fair Values of Derivative and Non-Derivative Instruments Designated as Hedges in Condensed Consolidated Balance Sheets

 

        Fair Value  

(in millions)

 

Balance Sheet Location

  February 28,
        2017         
    May 31,
        2016         
 

Interest rate swap agreements designated as fair value hedges

 

Other assets

  $ 23     $ 122  
   

 

 

   

 

 

 

Cross-currency swap agreements designated as cash flow hedges

 

Other non-current liabilities

  $ (262   $ (218
   

 

 

   

 

 

 

Foreign currency borrowings designated as net investment hedge

 

Notes payable, non-current

  $ (951   $ (991
   

 

 

   

 

 

 

Effects of Derivative and Non-Derivative Instruments Designated as Hedges on Income and Other Comprehensive Income (OCI) or Loss (OCL)

 

    Amount of Gain (Loss) Recognized in
Accumulated OCI or OCL  (Effective Portion)
    Location and Amount of Gain (Loss) Reclassified from
Accumulated  OCI or OCL into Income (Effective Portion)
 
    Three Months Ended     Nine Months Ended         Three Months Ended     Nine Months Ended  

(in millions)

  February 28,
2017
    February 29,
2016
    February 28,
2017
    February 29,
2016
        February 28,
2017
    February 29,
2016
    February 28,
2017
    February 29,
2016
 

Cross-currency swap agreements designated as cash flow hedges

  $ 6     $ 29     $ (44   $ (16   Non-operating income, net   $ 2     $ 52     $ (69   $ 21  
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

Foreign currency borrowings designated as net investment hedge

  $ (1   $ (31   $ 42     $ (13   Not applicable   $     $     $     $  
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

 

    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
 
        Three Months Ended     Nine Months Ended         Three Months Ended     Nine Months Ended  

(in millions)

      February 28,
2017
    February 29,
2016    
    February 28,
2017    
    February 29,
2016    
        February 28,
2017    
    February 29,
2016    
    February 28,
2017    
    February 29,
2016
 

Interest rate swap agreements designated as fair value hedges

  Interest
expense
  $ (31   $ 76     $ (99   $ 90     Interest
expense
  $ 31     $ (76   $ 99     $ (90
   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

 

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

February 28, 2017

(Unaudited)

 

10. STOCKHOLDERS’ EQUITY

Common Stock Repurchases

Our Board of Directors has approved a program for us to repurchase shares of our common stock. As of February 28, 2017, approximately $5.8 billion remained available for stock repurchases pursuant to our stock repurchase program. We repurchased 74.6 million shares for $3.0 billion during the nine months ended February 28, 2017 (including 0.6 million shares for $25 million that were repurchased but not settled) and 222.7 million shares for $8.4 billion during the nine months ended February 29, 2016 under the stock repurchase program.

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 repurchases 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 nine months ended February 28, 2017, our Board of Directors declared cash dividends of $0.45 per share of our outstanding common stock, which we paid during the same period.

In March 2017, our Board of Directors declared a quarterly cash dividend of $0.19 per share of our outstanding common stock, an increase of $0.04 per share over the prior period dividend. The dividend is payable on April 26, 2017 to stockholders of record as of the close of business on April 12, 2017. 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 Valuations of Stock Awards

During the first nine months of fiscal 2017, we issued 52 million restricted stock-based awards (consisting of 50 million service-based restricted stock units (RSUs) and 2 million performance-based restricted stock units (PSUs)) and 21 million stock options. Substantially all of the awards were issued as a part of our annual stock-based award process or in connection with our acquisitions and are subject to service-based vesting restrictions, with the PSUs also having performance-based vesting restrictions, that are of a similar nature to those described in Note 14 of Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended May 31, 2016. Approximately 7 million of the 21 million stock options granted during the first nine months of fiscal 2017 were to our Chief Executive Officers and Chief Technology Officer and had contractual lives of five years versus the ten year contractual lives for most of the other stock options granted. Our fiscal 2017 stock-based award issuances were partially offset by forfeitures and cancellations of 10 million shares during the first nine months of fiscal 2017.

 

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

February 28, 2017

(Unaudited)

 

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

 

     Three Months Ended      Nine Months Ended  

(in millions)

   February 28,
2017
     February 29,
2016
     February 28,
2017
     February 29,
2016
 

Sales and marketing

   $ 96      $ 57      $ 228      $ 163  

Cloud software as a service and platform as a service

     6        4        17        13  

Cloud infrastructure as a service

     1        1        3        3  

Software license updates and product support

     6        6        18        18  

Hardware products

     2        1        6        4  

Hardware support

     1        1        3        4  

Services

     14        7        31        22  

Research and development

     191        154        574        452  

General and administrative

     32        29        104        86  

Acquisition related and other

     22               33        3  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $ 371      $ 260      $ 1,017      $ 768  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

11. 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 certain earnings considered as indefinitely reinvested in foreign operations, state taxes, the U.S. research and development tax credit, changes in unrecognized tax benefits due to settlements with tax authorities and other events, and the U.S. domestic production activity deduction. In addition, beginning in fiscal 2017, the provision for income taxes also differs from the tax computed at the U.S. federal statutory tax rate due to the tax effects of stock-based compensation. Our effective tax rate was 17.0% and 21.3% for the three and nine months ended February 28, 2017, respectively, and 21.6% and 21.0% for the three and nine months ended February 29, 2016, respectively.

Our net deferred tax assets were $134 million and $1.1 billion as of February 28, 2017 and May 31, 2016, respectively. We believe that it is more likely than not that the net deferred tax assets will be realized in the foreseeable future. Realization of our net deferred tax assets is dependent upon our generation of sufficient taxable income in future years in appropriate tax jurisdictions to obtain benefit from the reversal of temporary differences, net operating loss carryforwards and tax credit carryforwards. The amount of net deferred tax assets considered realizable is subject to adjustment in future periods if estimates of future taxable income change.

Domestically, U.S. federal and state taxing authorities are currently examining income tax returns of Oracle and various acquired entities for years through fiscal 2015. Our U.S. federal income tax returns have been examined for all years prior to fiscal 2007, and we are no longer subject to audit for those periods. Our U.S. state income tax returns, with some exceptions, have been examined for all years prior to fiscal 2004, 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 our 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 1997.

We believe that we have adequately provided under GAAP for outcomes related to our tax audits. However, there can be no assurances as to the possible outcomes or any related financial statement effect thereof. On July 27, 2015, in Altera Corp. v. Commissioner, the U.S. Tax Court issued an opinion related to the treatment of

 

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

February 28, 2017

(Unaudited)

 

stock-based compensation expense in an intercompany cost-sharing arrangement. A final decision has yet to be issued by the Tax Court due to other outstanding issues related to the case. At this time, the U.S. Department of the Treasury has not withdrawn the requirement to include stock-based compensation from its regulations. We have reviewed this case and its impact on Oracle and concluded that no adjustment to the consolidated financial statements is appropriate at this time. We will continue to monitor ongoing developments and potential impacts to our consolidated financial statements.

We are under audit by the IRS and various other domestic and foreign tax authorities with regards to income tax and indirect tax matters and are involved in various challenges and litigation in a number of countries, including, in particular, India, Brazil, and Korea, where the amounts under controversy are significant. In some, although not all, cases, we have reserved for potential adjustments to our provision for income taxes and accrual of indirect taxes that may result from examinations by, or any negotiated agreements with, these tax authorities or final outcomes in judicial proceedings, and we believe that the final outcome of these examinations, agreements or judicial proceedings will not have a material effect on our results of operations. If events occur which indicate payment of these amounts is unnecessary, the reversal of the liabilities would result in the recognition of benefits in the period we determine the liabilities are no longer necessary. If our estimates of the federal, state, and foreign income tax liabilities and indirect tax liabilities are less than the ultimate assessment, it could result in a further charge to expense.

 

12. 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 makers are our Chief Executive Officers. We are organized geographically and by line of business. While our Chief Executive Officers evaluate 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 three businesses—cloud and on-premise software, hardware and services—which are further divided into certain operating segments. Our cloud and on-premise software business is comprised of three operating segments: (1) cloud software and on-premise software, which includes our cloud SaaS and PaaS offerings, (2) cloud infrastructure as a service and (3) software license updates and product support. Our hardware business is comprised of two operating segments: (1) hardware products and (2) hardware support. All other operating segments are combined under our services business.

Our cloud software and on-premise software line of business markets, sells and delivers a broad spectrum of application and platform technologies through our SaaS and PaaS offerings, which are certain of our applications and platforms software delivered via a cloud-based information technology (IT) environment that we host, manage and support, and through the licensing of our software products including Oracle Applications, Oracle Database, Oracle Fusion Middleware and Java, among others.

The cloud IaaS line of business includes Oracle Cloud IaaS offerings, which provide infrastructure cloud services that are enterprise-grade, hosted and supported within the Oracle Cloud to perform elastic compute, storage and networking services on a subscription basis; and Oracle Managed Cloud Services, which are comprehensive software and hardware management and maintenance services for customer IT infrastructure for a fee for a stated term that are hosted at our Oracle data center facilities, select partner data centers or physically on-premise at customer facilities.

The software license updates and product support line of business generates revenues through the sale of software support contracts related to new software licenses purchased by our customers. The software license updates and product support line of business provides our on-premise software customers with rights to software product upgrades and maintenance releases, patches released, internet access to technical content, as well as internet and telephone access to technical support personnel during the support period.

 

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

February 28, 2017

(Unaudited)

 

The hardware products line of business provides Oracle Engineered Systems, servers, storage, networking, industry-specific hardware, virtualization software, operating systems including the Oracle Solaris Operating System and management software to support diverse IT environments, including cloud computing environments.

Our hardware support line of business provides customers with software updates for the software components that are essential to the functionality of our hardware products, such as Oracle Solaris and certain other software, and can include product repairs, maintenance services and technical support services.

Our services business is comprised of the remainder of our operating segments and offers consulting, advanced customer support services and education services. Our consulting line of business primarily provides services to customers in business and IT strategy alignment, enterprise architecture planning and design, initial product implementation and integration and ongoing product enhancements and upgrades. Advanced customer support services provides on-premise and remote support services to our customers to enable increased performance and higher availability of their Oracle products and services and also include certain other services. Education services provide training to customers, partners and employees as a part of our mission of accelerating the adoption and use of our cloud, on-premise software and hardware offerings.

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

 

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

February 28, 2017

(Unaudited)

 

The following table presents summary results for each of our three businesses and for the operating segments of our cloud and on-premise software and hardware businesses:

 

    Three Months Ended     Nine Months Ended  

(in millions)

  February 28,
2017
    February 29,
2016
    February 28,
2017
    February 29,
2016
 

Cloud software and on-premise software:

       

Revenues(1)

  $ 2,494     $ 2,265     $ 6,598     $ 6,030  

Cloud software as a service and platform as a service expenses

    369       284       1,026       822  

Sales, marketing and distribution expenses

    1,666       1,574       4,873       4,569  
 

 

 

   

 

 

   

 

 

   

 

 

 

Margin(2)

  $ 459     $ 407     $ 699     $ 639  

Cloud infrastructure as a service:

       

Revenues

  $ 178     $ 152     $ 525     $ 477  

Cloud infrastructure as a service expenses

    122       84       323       256  

Sales, marketing and distribution expenses

    14       17       46       54  
 

 

 

   

 

 

   

 

 

   

 

 

 

Margin(2)

  $ 42     $ 51     $ 156     $ 167  

Software license updates and product support:

       

Revenues(1)

  $ 4,762     $ 4,669     $ 14,332     $ 14,049  

Software license updates and product support expenses

    253       276       733       823  
 

 

 

   

 

 

   

 

 

   

 

 

 

Margin(2)

  $ 4,509     $ 4,393     $ 13,599     $ 13,226  

Total cloud and on-premise software business:

       

Revenues(1)

  $ 7,434     $ 7,086     $ 21,455     $ 20,556  

Expenses

    2,424       2,235       7,001       6,524  
 

 

 

   

 

 

   

 

 

   

 

 

 

Margin(2)

  $ 5,010     $ 4,851     $ 14,454     $ 14,032  

Hardware products:

       

Revenues

  $ 520     $ 604     $ 1,478     $ 1,746  

Hardware products expenses

    288       337       769       963  

Sales, marketing and distribution expenses

    195       202       597       625  
 

 

 

   

 

 

   

 

 

   

 

 

 

Margin(2)

  $ 37     $ 65     $ 112     $ 158  

Hardware support:

       

Revenues(1)

  $ 508     $ 531     $ 1,560     $ 1,640  

Hardware support expenses

    140       165       420       504  
 

 

 

   

 

 

   

 

 

   

 

 

 

Margin(2)

  $ 368     $ 366     $ 1,140     $ 1,136  

Total hardware business:

       

Revenues(1)

  $ 1,028     $ 1,135     $ 3,038     $ 3,386  

Expenses

    623       704       1,786       2,092  
 

 

 

   

 

 

   

 

 

   

 

 

 

Margin(2)

  $ 405     $ 431     $ 1,252     $ 1,294  

Total services business:

       

Revenues

  $ 812     $ 793     $ 2,464     $ 2,519  

Services expenses

    645       630       1,978       1,976  
 

 

 

   

 

 

   

 

 

   

 

 

 

Margin(2)

  $ 167     $ 163     $ 486     $ 543  

Totals:

       

Revenues(1)

  $ 9,274     $ 9,014     $ 26,957     $ 26,461  

Expenses

    3,692       3,569       10,765       10,592  
 

 

 

   

 

 

   

 

 

   

 

 

 

Margin(2)

  $ 5,582     $ 5,445     $ 16,192     $ 15,869  
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Cloud software and on-premise software, software license updates and product support and hardware support revenues for management reporting included revenues related to cloud SaaS and PaaS, software support and hardware support contracts, respectively, that would have otherwise been recorded by the acquired businesses as independent entities but were not recognized in our condensed consolidated statements of operations for the periods presented. See Note 8 for an explanation of these adjustments and the table below for a reconciliation of our total operating segment revenues to our total revenues as reported in our condensed consolidated statements of operations.

 

(2) 

The margins reported reflect only the direct controllable costs of each line of business and do not include allocations of product development, corporate, general and administrative and IT expenses. Additionally, the margins reported do not reflect amortization of intangible assets, acquisition related and other expenses, restructuring expenses, stock-based compensation, interest expense or certain other non-operating income, net. Certain fiscal 2016 balances have been reclassified to conform to the current year presentation. Such reclassifications did not affect consolidated revenues or operating income.

 

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

February 28, 2017

(Unaudited)

 

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

 

     Three Months Ended     Nine Months Ended  

(in millions)

   February 28,
2017
    February 29,
2016
    February 28,
2017
    February 29,
2016
 

Total revenues for operating segments

   $ 9,274     $ 9,014     $ 26,957     $ 26,461  

Cloud software as a service and platform as a service revenues(1)

     (69     (2     (120     (6

Software license updates and product support revenues(1)

                 (1     (1

Hardware support revenues(1)

                 (1     (1
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

   $ 9,205     $ 9,012     $ 26,835     $ 26,453  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total margin for operating segments

   $ 5,582     $ 5,445     $ 16,192     $ 15,869  

Cloud software as a service and platform as a service revenues(1)

     (69     (2     (120     (6

Software license updates and product support revenues(1)

                 (1     (1

Hardware support revenues(1)

                 (1     (1

Research and development

     (1,285     (1,219     (3,835     (3,652

Corporate, general and administrative and information technology expenses

     (332     (403     (1,175     (1,197

Amortization of intangible assets

     (397     (408     (1,010     (1,283

Acquisition related and other

     (30     (11     (84     (35

Restructuring

     (161     (115     (346     (293

Stock-based compensation

     (349     (260     (984     (765

Interest expense

     (450     (360     (1,317     (1,105

Non-operating income, net

     189       65       437       179  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

   $ 2,698     $ 2,732     $ 7,756     $ 7,710  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Cloud SaaS and PaaS revenues, software license updates and product support revenues and hardware support revenues for management reporting included revenues that would have otherwise been recorded by our acquired businesses as independent entities but were not recognized in our condensed consolidated statements of operations for the periods presented due to business combination accounting requirements.

 

13. 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 restricted stock-based awards, stock options, and shares issuable under the employee stock purchase plan using the treasury stock method. The following table sets forth the computation of basic and diluted earnings per share:

 

     Three Months Ended      Nine Months Ended  

(in millions, except per share data)

   February 28,
2017
     February 29,
2016
     February 28,
2017
     February 29,
2016
 

Net income

   $ 2,239      $ 2,142      $ 6,103      $ 6,087  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding

     4,107        4,182        4,110        4,246  

Dilutive effect of employee stock plans

     97        74        97        82  
  

 

 

    

 

 

    

 

 

    

 

 

 

Dilutive weighted average common shares outstanding

     4,204        4,256        4,207        4,328  
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per share

   $ 0.55      $ 0.51      $ 1.49      $ 1.43  

Diluted earnings per share

   $ 0.53      $ 0.50      $ 1.45      $ 1.41  

Shares subject to anti-dilutive restricted stock-based awards and stock options excluded from calculation(1)

     76        67        75        62  

 

(1) 

These weighted shares relate to anti-dilutive restricted stock-based awards and stock options as calculated using the treasury stock method and could be dilutive in the future.

 

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

February 28, 2017

(Unaudited)

 

14. LEGAL PROCEEDINGS

Hewlett-Packard Company Litigation

On June 15, 2011, Hewlett-Packard Company, now Hewlett Packard Enterprise Company (HP), filed a complaint in the California Superior Court, County of Santa Clara against Oracle Corporation alleging numerous causes of action including breach of contract, breach of the covenant of good faith and fair dealing, defamation, intentional interference with prospective economic advantage, and violation of the California Unfair Business Practices Act. The complaint alleged that when Oracle announced on March 22 and 23, 2011 that it would no longer develop future versions of its software to run on HP’s Itanium-based servers, it breached a settlement agreement signed on September 20, 2010 between HP and Mark Hurd (the Hurd Settlement Agreement), who is our Chief Executive Officer and was both HP’s former chief executive officer and chairman of HP’s board of directors. HP sought a judicial declaration of the parties’ rights and obligations under the Hurd Settlement Agreement and other equitable and monetary relief.

Oracle answered the complaint and filed a cross-complaint, which was amended on December 2, 2011. The amended cross-complaint alleged claims including violation of the Lanham Act. Oracle alleged that HP had secretly agreed to pay Intel to continue to develop and manufacture the Itanium microprocessor, and had misrepresented to customers that the Itanium microprocessor had a long roadmap, among other claims. Oracle sought equitable rescission of the Hurd Settlement Agreement, and other equitable and monetary relief.

The court bifurcated the trial and tried HP’s causes of action for declaratory relief and promissory estoppel without a jury in June 2012. The court issued a final statement of decision on August 28, 2012, finding that the Hurd Settlement Agreement required Oracle to continue to develop certain of its software products for use on HP’s Itanium-based servers and to port such products at no cost to HP for as long as HP sells those servers (the Phase One Ruling). A jury trial began on May 23, 2016. On June 30, 2016, the jury returned a verdict in favor of HP on its claims for breach of contract and breach of the implied covenant of good faith and fair dealing and against Oracle on its claim for violation of the Lanham Act (the Phase Two Jury Verdict). The jury awarded HP damages in the amount of $3.0 billion, and HP is entitled to post-judgment interest on this award. On August 30, 2016, the court denied HP’s motion for pre-judgment interest. Judgment was entered on October 20, 2016. Oracle posted certain court-mandated surety bonds with the court in order to proceed with its motion for a new trial and entered into related indemnification agreements with each of the surety bond issuing companies. Oracle filed a motion for a new trial on November 14, 2016, which was denied.

Oracle filed its notice of appeal on January 17, 2017, specifying that it was appealing the trial court’s Phase One Ruling and Phase Two Jury Verdict. On February 2, 2017, HP filed a notice of appeal of the trial court’s denial of pre-judgment interest. No amounts have been paid or recorded to our results of operations either prior to or subsequent to the Phase One Ruling or Phase Two Jury Verdict. We continue to believe that we have meritorious defenses against HP’s claims, and we intend to present these defenses to the appellate court. Among the arguments we expect to make on appeal are the following: the trial court misapplied fundamental principles of contract law and misinterpreted the Hurd Settlement Agreement, including by disregarding the context of the Hurd Settlement Agreement and the evidence of the parties’ mutual intentions; that HP’s breach of contract claim should fail as a matter of law because HP does not claim and did not prove that Oracle failed to deliver any software under the trial court’s interpretation of the contract; that awarding HP both damages for breach of the Hurd Settlement Agreement and specific performance of that agreement constitutes an improper double recovery; and that the damages award is excessive, unsupported by the evidence, and contrary to law. We cannot currently estimate a reasonably possible range of loss for this action due to the complexities and uncertainty surrounding the appeal process and the nature of the claims. Litigation is inherently unpredictable, and the outcome of the appeal process related to this action is uncertain. It is possible that the resolution of this action could have a material impact to our future cash flows and results of operations.

 

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

February 28, 2017

(Unaudited)

 

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 matters, individually or in the aggregate, will result in losses that are materially in excess of amounts already recognized, if any.

 

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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 businesses, key operating 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.

Business Overview

Oracle Corporation provides products and services that address all aspects of corporate information technology (IT) environments—application, platform and infrastructure. Our Oracle Cloud offerings provide a comprehensive and fully integrated stack of application, platform, compute, storage, and networking services in all three primary layers of the cloud: Software as a Service (SaaS), Platform as a Service (PaaS) and Infrastructure as a Service (IaaS). Our on-premise offerings include Oracle database and middleware software, application software, hardware (Oracle Engineered Systems, servers, storage, networking and industry-specific products), and related support and services. We provide our cloud and on-premise offerings to customers worldwide via deployment models that best suit their needs.

Our comprehensive and fully integrated stack of SaaS, PaaS and IaaS offerings integrate the software, hardware and services on the customers’ behalf in IT environments that we deploy, support and manage for the customer. Our integrated Oracle Cloud offerings are designed to be rapidly deployable to enable customers shorter time to innovation; easily maintainable to reduce integration and testing work; connectable among differing deployment models to enable interchangeability and extendibility between cloud and on-premise IT environments; compatible to easily move workloads between on-premise IT environments and the Oracle Cloud; cost-effective by requiring lower upfront customer investment; and secure, standards-based and reliable. We are a leader in the core technologies of cloud IT environments, including database and middleware software as well as enterprise applications, virtualization, clustering, large-scale systems management and related infrastructure. Our products and services are the building blocks of our Oracle Cloud services, our partners’ cloud services and our customers’ cloud IT environments.

In addition to providing a broad spectrum of cloud offerings, we develop and sell our products and services to our customers worldwide for use in their global data centers and on-premise IT environments. An important element of our corporate strategy is to continue our investments in, and innovation with respect to, our products and services that we offer through our cloud and on-premise software, hardware and services businesses. We have a deep understanding as to how all components within IT environments—application, platform and infrastructure—interact and function with one another. We focus our development efforts on improving the performance, security, operation and integration of these differing technologies to make them more cost-effective and easier to deploy, manage and maintain for our customers and to improve their computing performance relative to our competitors. After the initial purchase of Oracle products and services, our customers can continue to take advantage of our research and development investments and deep IT expertise by purchasing and renewing Oracle support offerings, which may include product enhancements that we periodically deliver to our software products, among others, and by renewing their SaaS, PaaS and IaaS contracts with us.

As customers deploy with the Oracle Cloud, many are adopting a hybrid IT model whereby certain of their IT resources are deployed and managed through the Oracle Cloud, while other of their IT resources are deployed and managed on-premise, and both sets of resources can be managed as one. We focus the engineering of our products and services to best connect these different deployment models to enable flexibility, ease, agility, compatibility, extensibility and seamlessness.

Our selective and active acquisition program is another important element of our corporate strategy. We believe that our acquisitions enhance the products and services that we can offer to customers, expand our customer base, provide greater scale to accelerate innovation, grow our revenues and earnings, and increase stockholder value. In recent years, we have invested billions of dollars to acquire a number of companies, products, services and technologies that add to, are complementary to, or have otherwise enhanced our existing offerings. During the second quarter of fiscal 2017, we acquired NetSuite Inc. (NetSuite), which contributed to the growth in our cloud

 

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SaaS and PaaS revenues, among others, from the date of acquisition. Note 2 of Notes to Condensed Consolidated Financial Statements, included elsewhere in this Quarterly Report, provides additional information related to our acquisition of NetSuite. We expect to continue to acquire companies, products, services and technologies to further our corporate strategy.

We have three businesses that deliver our application, platform and infrastructure technologies: cloud and on-premise software, hardware and services. These businesses can be further divided into certain operating segments (Note 12 of Notes to Condensed Consolidated Financial Statements, included elsewhere in this Quarterly Report, provides additional information related to our operating segments). Each of our businesses and operating segments has unique characteristics and faces different opportunities and challenges. An overview of our three businesses and related operating segments follows.

Cloud and On-Premise Software Business

Our cloud and on-premise software business, which represented 80% of our total revenues on a trailing 4-quarter basis, is comprised of three operating segments: (1) cloud software and on-premise software, (2) cloud IaaS and (3) software license updates and product support. On a constant currency basis, we expect that our cloud and on-premise software business’ total revenues generally will continue to increase due to demand for our on-premise software products and software license updates and product support offerings, including the high percentage of customers that renew their software license updates and product support contracts, expected growth from our cloud SaaS, PaaS and IaaS offerings, and contributions from our acquisitions, which should allow us to grow and continue to make investments in research and development.

Cloud Software and On-Premise Software:    Our cloud software and on-premise software line of business markets, sells and delivers a broad spectrum of application and platform technologies through our SaaS and PaaS offerings, which are certain of our software applications and platforms that are delivered via a cloud-based IT environment that we host, manage and support. Our cloud software and on-premise software line of business also licenses our software products including Oracle Applications, Oracle Database, Oracle Fusion Middleware and Java, among others, for on-premise and other IT environments.

We believe that the comprehensiveness and breadth of our SaaS, PaaS and on-premise software offerings provide greater benefit to our customers and differentiates us from many of our competitors that offer more limited or specialized software offerings. Our SaaS and PaaS offerings are designed to be interoperable with one another, thereby limiting the integration and tuning of multiple cloud applications from multiple vendors. Our SaaS and PaaS offerings are designed to deliver secure data isolation and flexible upgrades, self-service access controls for users, a Service-Oriented Architecture (SOA) for integration with on-premise systems, and a high performance, high availability infrastructure based on our infrastructure technologies including our Oracle Engineered Systems. Our on-premise software offerings are substantially designed to operate on both single server and clustered server configurations for cloud or on-premise IT environments, and to support a choice of operating systems including Oracle Solaris, Oracle Linux, Microsoft Windows and third party UNIX products, among others. Our commitment to industry standards results in software offerings that work in customer environments with Oracle or non-Oracle hardware or software components and that can be adapted to meet specific industry or business needs. We focus the engineering of our products and services to best connect cloud and on-premise deployment models to enable flexibility, ease, agility, compatibility, extensibility and seamlessness. All of these approaches are designed to support customer choice and reduce customer risk. Our customers include businesses of many sizes, government agencies, educational institutions and resellers. We market and sell our cloud software and on-premise software offerings to these customers with a sales force positioned to offer the combinations that best fit customer needs. We enable customers to evolve and transform to substantially any IT environment at whatever pace is most appropriate for them.

Our SaaS and PaaS revenues and new software licenses revenues are affected by the strength of general economic and business conditions, governmental budgetary constraints, the strategy for and competitive position of our software offerings, our acquisitions, our ability to deliver and renew our SaaS and PaaS contracts with our existing customers and foreign currency rate fluctuations. In recent periods, we have placed significant strategic emphasis on growing our cloud SaaS and PaaS revenues, which has affected the growth of our cloud SaaS and

 

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PaaS revenues and our new software licenses revenues and the related expenses. We expect these trends will continue. Our SaaS and PaaS arrangements are generally one to three years in duration and we strive to renew these contracts when they are eligible for renewal. The substantial majority of our new software license transactions are characterized by long sales cycles and the timing of a few large software license transactions can substantially affect our quarterly new software licenses revenues.

Cloud software and on-premise software revenues represented 27% of our total revenues on a trailing 4-quarter basis. Our cloud software and on-premise software segment’s margin has 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 licenses revenues over those quarterly periods and because the majority of our costs for this segment are predominantly fixed in the short term. As discussed further below under “Supplemental Disclosure Related to Certain Charges,” our cloud software and on-premise software segment’s margin has been and will continue to be affected by the fair value adjustments relating to the cloud SaaS and PaaS obligations that we assumed in our business combinations and by the amortization of intangible assets associated with companies and technologies that we have acquired.

Cloud Infrastructure as a Service:    Our cloud IaaS segment, which represented 2% of our total revenues on a trailing 4-quarter basis, provides Oracle Cloud IaaS offerings, which are infrastructure cloud services that are enterprise-grade, hosted and supported within the Oracle Cloud to perform elastic compute, storage and networking services on a subscription basis. Our cloud IaaS segment also offers Oracle Managed Cloud Services, which are comprehensive software and hardware management and maintenance services for customer IT infrastructure for a fee for a stated term that are hosted at our Oracle data center facilities, select partner data centers or physically on-premise at customer facilities. We believe that our Oracle Cloud IaaS offerings complement our SaaS and PaaS offerings and allow us to offer customers additional opportunities to access Oracle technologies through the Oracle Cloud to meet their IT needs.

Software License Updates and Product Support:    Software license updates and product support revenues are generated through the sale of software support contracts relating to on-premise new software licenses purchased by our customers. Customers that purchase software license updates and product support are granted rights to unspecified product upgrades and maintenance releases and patches released during the term of the support period, as well as technical support assistance. Our software license updates and product support contracts are generally one year in duration. Substantially all of our on-premise software license 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 four factors: (1) the percentage of our software support contract customer base that renews its software support contracts; (2) the amount of new software support contracts sold in connection with the sale of new software licenses; (3) the amount of new software license revenues sold; and (4) the amount of software support contracts assumed from companies we have acquired.

Our software license updates and product support segment, which represented 51% of our total revenues on a trailing 4-quarter basis, is our highest margin business unit. Our software support margins over the trailing 4-quarters were 93% and accounted for 87% of our total margins over the same period. Over the longer term, we believe that software license updates and product support revenues and margins will grow for the following reasons:

 

   

substantially all new software licenses transactions result in the sale of software license updates and product support contracts, which add to our software support contract base;

 

   

substantially all of our on-premise new software license customers, including customers from acquired companies, renew their software support contracts when eligible for renewal; and

 

   

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

Hardware Business

Our hardware business is comprised of two operating segments: (1) hardware products and (2) hardware support. Our hardware business represented 12% of our total revenues on a trailing 4-quarter basis. We expect our

 

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hardware business to have lower operating margins as a percentage of revenues than our cloud and on-premise software business due to the incremental costs we incur to produce and distribute these products and to provide support services, including direct materials and labor costs. We expect to make investments in research and development to improve existing hardware products and services and to develop new hardware products and services.

Hardware Products:    We provide a broad selection of hardware and related services, including Oracle Engineered Systems, servers, storage, networking, workstations and related devices, industry-specific hardware, virtualization software, operating systems, and management software to support diverse IT environments, including cloud computing environments. We engineer our hardware products with virtualization and management capabilities to enable the rapid deployment and efficient management of cloud and on-premise IT infrastructures. Our hardware products support many of the world’s largest cloud infrastructures, including the Oracle Cloud.

Our hardware products are designed to be easier to deploy, manage and maintain for our customers and to improve computing performance relative to our competitors’ offerings. We design our hardware products to seamlessly connect cloud and on-premise IT environments to further enable interoperability, interchangeability and extendibility and to work in customer environments that may include other Oracle or non-Oracle hardware or software components. Our flexible and open approach provides Oracle customers with a broad range of choices in how they deploy our hardware products, which we believe is a priority for our customers.

Oracle Engineered Systems are core to our hardware offerings and are important elements of our data center and cloud computing offerings including the Oracle Cloud. These pre-integrated products are designed to integrate multiple Oracle technology components to work together to deliver improved performance, availability, security and operational efficiency relative to our competitors’ products; to be upgraded effectively and efficiently; and to simplify maintenance cycles by providing a single solution for software patching. Oracle Engineered Systems are tested before they are shipped to customers and delivered ready-to-run, enabling customers to shorten deployment time to production. We offer certain of our Oracle Engineered Systems technologies through flexible deployment options including as a cloud service and for on-premise IT environments.

We offer a wide range of server products using our SPARC microprocessor. Our SPARC servers run the Oracle Solaris operating system and are designed to be differentiated by their reliability, security and scalability. Our mid-size and large servers are designed to offer better performance and lower total cost of ownership than competitive UNIX systems for business critical applications, for customers having more computationally intensive needs, and as platforms for building cloud computing IT environments. Our SPARC servers are also a core component of the Oracle SuperCluster, one of our Oracle Engineered Systems.

We also offer enterprise x86 servers. These x86 servers are based on microprocessors from Intel Corporation and are compatible with Oracle Solaris, Oracle Linux, Microsoft Windows and other operating systems. Our x86 servers are also a core component of many of our Oracle Engineered Systems including the Oracle Exadata Database Machine, Oracle Exalogic Elastic Cloud, Oracle Exalytics In-Memory Machine and the Oracle Big Data Appliance.

Our storage products are engineered for the cloud and designed to securely store, manage, protect, archive, backup and recover customers’ mission critical data assets. Our storage products consist of disk, flash, tape, virtual tape and hardware-related software including file systems software, back-up and archive software, hierarchical storage management software and networking for mainframe and heterogeneous systems environments. We also offer certain of our storage offerings as a cloud service.

Our networking and data center fabric products, including Oracle Virtual Networking, and Oracle InfiniBand and Ethernet technologies, are used with our server and storage products and are integrated into our management tools to help enterprise customers improve infrastructure performance, reduce cost and complexity and simplify storage and server connectivity.

We offer hardware products and services designed for certain specific industries. Our point-of-sale hardware offerings include point-of-sale terminals and related hardware that are designed for managing businesses within the food and beverage, hotel and retail industries, among others. Our hardware products and services for

 

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communications networks include network signaling, policy control and subscriber data management solutions, and session border control technology, among others.

The majority of our hardware products are sold through indirect channels, including independent distributors and value-added resellers.

To produce our hardware products, we rely on both our internal manufacturing operations as well as third party manufacturing partners. Our internal manufacturing operations consist primarily of materials procurement, assembly, testing and quality control of our Oracle Engineered Systems and certain of our enterprise and data center servers and storage products. For all other manufacturing, we generally rely on third party manufacturing partners to produce our hardware-related components and hardware products and we may involve our internal manufacturing operations in the final assembly, testing and quality control processes for these components and products. We distribute most of our hardware products either from our facilities or partner facilities. We strive to reduce costs by simplifying our manufacturing processes through increased standardization of components across product types and a “build-to-order” manufacturing process in which products generally are built only after customers have placed firm orders.

Our hardware products revenues, cost of hardware products and hardware operating margins that we report are affected by our strategy for and the competitive position of our hardware products, the strength of general economic and business conditions, governmental budgetary constraints, certain of our acquisitions and foreign currency rate fluctuations.

Our quarterly hardware products revenues are difficult to predict. The timing of customer orders and delays in our ability to timely manufacture or deliver a few large hardware transactions, among other factors, could substantially affect the amount of hardware products revenues, expenses and operating margins that we report.

Hardware Support:    Our hardware support offerings provide customers with software updates for software components that are essential to the functionality of our hardware products, such as Oracle Solaris and certain other software products, and can include product repairs, maintenance services and technical support services. Typically, our hardware support contract arrangements are priced as a percentage of the net hardware products fees, are invoiced to the customer at the beginning of the support period and are one year in duration. We continue to evolve hardware support processes that are intended to proactively identify and solve quality issues and to increase the amount of new and renewed hardware support contracts sold in connection with the sales of our hardware products. Our hardware support revenues that we report are influenced by a number of factors, including the volume of purchases of hardware products, the pricing and mix of hardware products purchased, whether customers decide to purchase hardware support contracts at or in close proximity to the time of hardware product sale, the percentage of our hardware support contract customer base that renews its support contracts and our acquisitions. Substantially all of these factors are heavily influenced by our customers’ decisions to either maintain or upgrade their existing hardware infrastructure to newly developed technologies that are available.

Services Business

Our services business, which represented 8% of our total revenues on a trailing 4-quarter basis, is comprised of the remainder of our operating segments. Our services business has lower margins than our cloud and on-premise software and hardware businesses. Our services revenues are impacted by our strategy for and the competitive position of our services, certain of our acquisitions, general economic conditions, governmental budgetary constraints, personnel reductions in our customers’ IT departments, tighter controls over discretionary spending, our strategic emphasis on growing our cloud revenues and the growth in our software and hardware offerings. Our services business’ offerings include:

 

   

consulting services that are designed to help our customers and global system integrator partners more successfully architect and deploy our offerings, including IT strategy alignment, enterprise architecture planning and design, initial cloud and software implementation and integration, and ongoing software enhancements and upgrades. We utilize a global, blended delivery model to optimize value for our customers and partners, consisting of on-premise consultants from local geographies, industry specialists and consultants from our global delivery and solution centers;

 

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advanced customer support services, which are provided on-premise and remotely to our customers to enable increased performance and higher availability of their Oracle products and services and also include certain other services; and

 

   

education services for Oracle products and services, including training and certification programs that are offered to customers, partners and employees through a variety of formats, including instructor-led classes at our education centers, live virtual training, self-paced online training, private events and custom training.

Acquisitions

Our selective and 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.

We have acquired certain companies and technologies during the fiscal 2017 and 2016 periods presented in this Quarterly Report, including NetSuite. Note 2 of Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report provides additional information related to our recent acquisitions.

We believe that our acquisition program strengthens our competitive position, enhances the products and services that we can offer to customers, 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 in furtherance of our corporate strategy.

We believe that we can fund our pending and future acquisitions with our internally available cash, cash equivalents and marketable securities, cash generated from operations, 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) as set forth in the Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC), and we consider the various staff accounting bulletins and other applicable guidance issued by the U.S. Securities and Exchange Commission. GAAP, as set forth within the ASC, 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 that there are 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:

 

   

Revenue Recognition;

 

   

Business Combinations;

 

   

Goodwill and Intangible Assets—Impairment Assessments;

 

   

Accounting for Income Taxes; and

 

   

Legal and Other Contingencies.

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 our critical accounting policies and related disclosures with the Finance and Audit Committee of the Board of Directors.

 

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During the first nine months of fiscal 2017, there were no significant changes to our critical accounting policies and estimates. 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, 2016 provides a more complete discussion of our critical accounting policies and estimates.

Results of Operations

Impact of Acquisitions

The comparability of our operating results in the third quarter and first nine months of fiscal 2017 compared to the same periods of fiscal 2016 was impacted by our recent acquisitions. In our discussion of changes in our results of operations from the third quarter and first nine months of fiscal 2017 compared to the same periods of fiscal 2016, we may qualitatively disclose the impact of our acquired products and services for the one-year period subsequent to the acquisition date to the growth in certain of our operating segments’ revenues where such qualitative discussions would be meaningful for an understanding of the factors that influenced the changes in our results of operations. When material, we may also provide quantitative disclosures related to such acquired products and services. Expense contributions from our recent acquisitions for each of the respective period comparisons may not be separately identifiable due to the integration of these businesses and operating segments into our existing operations, and/or were insignificant to our results of operations during the periods presented.

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

 

   

any qualitative and quantitative disclosures cannot specifically address or quantify the substantial effects attributable to changes in business strategies, including our sales force integration efforts. We believe that if our acquired companies had operated independently and sales forces had not been integrated, the relative mix of products and services sold would have been different; and

 

   

although substantially all of our on-premise software license customers, including customers from acquired companies, renew their software license updates and product support contracts when the contracts are eligible for renewal, and we strive to renew cloud SaaS and PaaS contracts and hardware support contracts, the amounts shown as cloud SaaS and PaaS deferred revenues, software license updates and product support deferred revenues, and hardware 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 renewals to the extent customers do not renew.

For purposes of presentation of amortization of intangible assets within our condensed consolidated statements of operations included elsewhere in this Quarterly Report, we present a single line item within operating expenses and provide appropriate supplemental footnote disclosure. With respect to the presentation and discussion of our segments’ results for the periods presented, we have assigned the amortization of our intangible assets to the lines of business to which such amortization pertains and also have provided a discussion and presentation of comparative movements for such intangible amortization amounts in totality.

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 technology industry. In each fiscal year, our total revenues and operating margins are typically highest in our fourth fiscal quarter and lowest in our first fiscal quarter. The operating margins of our businesses, in particular, our cloud software and on-premise software segment, are generally affected by seasonal factors in a similar manner as our revenues as certain expenses within our cost structure are relatively fixed in the short term.

Constant Currency Presentation

Our international operations have provided and are expected to continue to provide a significant portion of each of our segments’ revenues and expenses. As a result, each segment’s revenues and expenses and our total

 

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revenues 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 effects of foreign currency rate 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, 2016, 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 Euros had revenues of 1.0 million Euros from products sold on February 28, 2017 and February 29, 2016, our financial statements would reflect reported revenues of $1.06 million in the first nine months of fiscal 2017 (using 1.06 as the month-end average exchange rate for the period) and $1.10 million in the first nine months of fiscal 2016 (using 1.10 as the month-end average exchange rate for the period). The constant currency presentation, however, would translate the results for the three and nine months ended February 28, 2017 and February 29, 2016 using the May 31, 2016 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     Nine Months Ended  
    February 28,
    2017    
    Percent Change     February 29,
    2016    
    February 28,
  2017  
    Percent Change     February 29,
    2016    
 

(Dollars in millions)

      Actual       Constant           Actual       Constant    

Total Revenues by Geography:

               

Americas

  $ 5,219       6%       5%     $ 4,942     $ 14,971       2%       2%     $ 14,620  

EMEA(1)

    2,558       -4%       1%       2,661       7,529       -3%       2%       7,761  

Asia Pacific(2)

    1,428       1%       0%       1,409       4,335       6%       3%       4,072  
 

 

 

       

 

 

   

 

 

       

 

 

 

Total revenues

    9,205       2%       3%       9,012       26,835       1%       2%       26,453  

Total Operating Expenses

    6,246       4%       5%       5,985       18,199       2%       3%       17,817  
 

 

 

       

 

 

   

 

 

       

 

 

 

Total Operating Margin

  $ 2,959       -2%       -1%     $ 3,027     $ 8,636       0%       1%     $ 8,636  
 

 

 

       

 

 

   

 

 

       

 

 

 

Total Operating Margin %

    32%           34%       32%           33%  

% Revenues by Geography:

               

Americas

    57%           55%       56%           55%  

EMEA

    27%           29%       28%           29%  

Asia Pacific

    16%           16%       16%           16%  

Total Revenues by Business:

               

Cloud and on-premise software

  $ 7,365       4%       5%     $ 7,084     $ 21,334       4%       5%     $ 20,551  

Hardware

    1,028       -9%       -9%       1,135       3,037       -10%       -9%       3,385  

Services

    812       2%       3%       793       2,464       -2%       -1%       2,517  
 

 

 

       

 

 

   

 

 

       

 

 

 

Total revenues

  $ 9,205       2%       3%     $ 9,012     $ 26,835       1%       2%     $ 26,453  
 

 

 

       

 

 

   

 

 

       

 

 

 

% Revenues by Business:

               

Cloud and on-premise software

    80%           78%       80%           78%  

Hardware

    11%           13%       11%           13%  

Services

    9%           9%       9%           9%  

 

(1) 

Comprised of Europe, the Middle East and Africa

 

(2) 

The Asia Pacific region includes Japan

Fiscal Third Quarter 2017 Compared to Fiscal Third Quarter 2016:    Excluding the effects of foreign currency rate variations, our total revenues increased in the third quarter of fiscal 2017 due to growth in our cloud and on-premise software revenues and services revenues, partially offset by a decrease in our hardware business’ revenues. The constant currency increase in our cloud and on-premise software revenues during the third quarter of fiscal 2017 was attributable to growth in our SaaS, PaaS and IaaS revenues, growth in our software license updates and product support revenues, and revenue contributions from our recent acquisitions and was partially offset by decreases in our new software licenses revenues. The constant currency increase in our services

 

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business’ revenues during the third quarter of fiscal 2017 was primarily due to revenue contributions from our recent acquisitions. The constant currency decrease in our hardware business’ revenues during the third quarter of fiscal 2017 was due to a reduction in our hardware products revenues and hardware support revenues. In constant currency, the Americas region contributed 91%, the EMEA region contributed 8% and the Asia Pacific region contributed 1% to the growth in our total revenues during the third quarter of fiscal 2017.

Excluding the effects of foreign currency rate variations, our total operating expenses increased during the third quarter of fiscal 2017 relative to the prior year period. In constant currency, we incurred higher sales and marketing and research and development expenses during the third quarter of fiscal 2017 due primarily to increased headcount, and higher cloud SaaS, PaaS and IaaS expenses resulting primarily from increased headcount and infrastructure expenses to support the increase in our cloud SaaS, PaaS and IaaS revenues. These constant currency expense increases in the third quarter of fiscal 2017 were partially offset by lower hardware products expenses due to a decline in hardware products revenues, lower software support and hardware support costs due primarily to lower headcount, and lower general and administrative expenses due primarily to lower professional fees, each in the third quarter of fiscal 2017 compared to the prior year period.

In constant currency, our total operating margin and total operating margin as a percentage of revenues declined slightly during the third quarter of fiscal 2017 due to our total expenses growing at a faster rate than our total revenues.

First Nine Months Fiscal 2017 Compared to First Nine Months Fiscal 2016:    Excluding the effects of currency rate variations, our total revenues increased in the first nine months of fiscal 2017 due to growth in our cloud and on-premise software revenues, which was attributable to similar reasons as those noted above, and was partially offset by decreases in our hardware business’ and services business’ revenues. In constant currency, the Americas region contributed 56%, the EMEA region contributed 22% and the Asia Pacific region contributed 22% to the growth in our total revenues during the first nine months of fiscal 2017.

Excluding the effects of currency rate variations, our total operating expenses increased during the first nine months of fiscal 2017 primarily due to constant currency expense increases in sales and marketing, research and development, and cloud SaaS, PaaS and IaaS expenses, all generally for similar reasons as noted above. These constant currency expense increases during the first nine months of fiscal 2017 were partially offset by lower hardware products expenses, lower software support expenses, and lower hardware support expenses, all generally for similar reasons as noted above, and lower intangible asset amortization due to certain of our intangible assets that became fully amortized primarily in our software license updates and product support segment.

In constant currency, our total operating margin and total operating margin as a percentage of revenues increased slightly during the first nine months of fiscal 2017 due to the constant currency increase in our total revenues.

Supplemental Disclosure Related to Certain Charges

To supplement our consolidated financial information, we believe that 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.

 

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Our operating results reported pursuant to GAAP included the following business combination accounting adjustments and expenses related to acquisitions, as well as certain other expense and income items that (increased) reduced our GAAP net income:

 

    Three Months Ended     Nine Months Ended  

(in millions)

  February 28,
2017
    February 29,
2016
    February 28,
2017
    February 29,
2016
 

Cloud software as a service and platform as a service deferred revenues(1)

  $ 69     $ 2     $ 120     $ 6  

Software license updates and product support deferred revenues(1)

                1       1  

Hardware support deferred revenues(1)

                1       1  

Acquired deferred sales commissions amortization(2)

    (21           (29      

Amortization of intangible assets(3)

    397       408       1,010       1,283  

Acquisition related and other(4)(6)

    30       11       84       35  

Restructuring(5)

    161       115       346       293  

Stock-based compensation(6)

    349       260       984       765  

Income tax effects(7)

    (336     (207     (823     (658
 

 

 

   

 

 

   

 

 

   

 

 

 
  $ 649     $ 589     $ 1,694     $ 1,726  
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

In connection with our acquisitions, we have estimated the fair values of the cloud SaaS and PaaS subscriptions, software support and hardware support obligations assumed. Due to our application of business combination accounting rules, we did not recognize the cloud SaaS and PaaS, software license updates and product support and hardware support revenue amounts as presented in the above table that would have otherwise been recorded by the acquired businesses as independent entities upon delivery of the contractual obligations. To the extent customers to which these contractual obligations pertain renew these contracts with us, we expect to recognize revenues for the full contracts’ values over the respective contracts’ renewal periods.

 

(2) 

Certain acquired companies capitalized sales commissions associated with subscription agreements and amortized these amounts over the related contractual terms. Business combination accounting rules generally require us to eliminate these capitalized sales commissions balances as of the acquisition date and our post-combination GAAP sales and marketing expenses generally do not reflect the amortization of these deferred sales commissions balances. This adjustment is intended to include, and thus reflect, the full amount of amortization related to such balances as though the acquired companies operated independently in the periods presented.

 

(3) 

Represents the amortization of intangible assets, substantially all of which were acquired in connection with our acquisitions. As of February 28, 2017, estimated future amortization expenses related to intangible assets were as follows (in millions):

 

Remainder of fiscal 2017

   $ 402  

Fiscal 2018

     1,362  

Fiscal 2019

     1,248  

Fiscal 2020

     1,058  

Fiscal 2021

     883  

Fiscal 2022

     779  

Thereafter

     2,056  
  

 

 

 

Total intangible assets, net

   $     7,788  
  

 

 

 

 

(4) 

Acquisition related and other expenses primarily consist of personnel related costs and stock-based compensation expenses for transitional and certain other employees, integration related professional services, certain business combination adjustments including certain adjustments after the measurement period has ended and certain other operating items, net.

 

(5) 

Restructuring expenses during the first nine months of fiscal 2017 primarily related to employee severance in connection with our Fiscal 2017 Oracle Restructuring Plan (2017 Restructuring Plan). Restructuring expenses during the first nine months of fiscal 2016 primarily related to costs incurred pursuant to our 2015 Oracle Restructuring Plan (2015 Restructuring Plan). Additional information regarding certain of our restructuring plans is provided in Note 7 of Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report and in Note 9 of Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended May 31, 2016.

 

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(6) 

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

 

     Three Months Ended      Nine Months Ended  
     February 28,
2017
     February 29,
2016
     February 28,
2017
     February 29,
2016
 

Sales and marketing

   $ 96      $ 57      $ 228      $ 163  

Cloud software as a service and platform as a service

     6        4        17        13  

Cloud infrastructure as a service

     1        1        3        3  

Software license updates and product support

     6        6        18        18  

Hardware products

     2        1        6        4  

Hardware support

     1        1        3        4  

Services

     14        7        31        22  

Research and development

     191        154        574        452  

General and administrative

     32        29        104        86  
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

   $ 349      $ 260      $ 984      $ 765  

Acquisition related and other

     22               33        3  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $ 371      $ 260      $ 1,017      $ 768  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(7) 

The income tax effects presented 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 for the third quarter and first nine months of fiscal 2017 were calculated based on the applicable jurisdictional tax rates applied to the items within the table above and resulted in effective tax rates of 21.6% and 24.1%, respectively, instead of 17.0% and 21.3%, respectively, which represented our effective tax rates as derived per our condensed consolidated statements of operations, primarily due to the net tax effects of acquisition related items, including the tax effects of amortization of intangible assets and the net tax effects of stock-based compensation. Income tax effects for the third quarter and first nine months of fiscal 2016 were calculated reflecting effective tax rates of 22.6% for both fiscal 2016 periods presented, instead of 21.6% and 21.0%, respectively, which represented our effective tax rates as derived per our condensed consolidated statements of operations, primarily due to the net tax effects of acquisition related items, including the tax effects of amortization of intangible assets.

Cloud and On-Premise Software Business

Our cloud and on-premise software business consists of our cloud software and on-premise software segment, our cloud IaaS segment and our software license updates and product support segment.

Cloud Software and On-Premise Software:    Our cloud software and on-premise software segment engages in the sale, marketing and delivery of our cloud software offerings, including our cloud SaaS and PaaS offerings, and the licensing of our software for on-premise IT environments. Our cloud SaaS and PaaS offerings grant customers access to a broad range of our application and platform software technologies on a subscription basis in a secure, standards-based, cloud computing environment that generally includes access, hosting, infrastructure management, the use of software updates, and support. New software licenses revenues represent fees earned from granting customers licenses to use our database and middleware and our application software products within on-premise IT environments. 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. Costs associated with our cloud software and on-premise software segment are included in sales and marketing expenses, cloud SaaS and PaaS expenses and amortization of intangible assets. These costs are largely personnel related and include commissions earned by our sales force for the sale of our software offerings, marketing program costs, the cost of providing our cloud SaaS and PaaS offerings and the amortization of intangible assets including developed technology, customer contracts and customer relationship intangibles.

 

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    Three Months Ended     Nine Months Ended  
    February 28,
2017
    Percent Change     February 29,
2016
    February 28,
2017
    Percent Change     February 29,
2016
 

(Dollars in millions)

    Actual     Constant         Actual     Constant    

Cloud Software and On-Premise Software Revenues:

               

Americas

  $ 1,418       19%       19%     $ 1,189     $ 3,641       12%       12%     $ 3,262  

EMEA

    616       -5%       0%       645       1,646       0%       5%       1,651  

Asia Pacific

    391       -9%       -10%       429       1,191       7%       4%       1,113  
 

 

 

       

 

 

   

 

 

       

 

 

 

Total revenues

    2,425       7%       8%       2,263       6,478       7%       8%       6,026  

Expenses:

               

Cloud software as a service and platform as a service(1)

    374       30%       31%       288       1,043       25%       27%       834  

Sales and marketing(1)

    1,693       4%       5%       1,620       4,989       6%       7%       4,712  

Stock-based compensation

    98       73%       73%       57       229       39%       39%       165  

Amortization of intangible assets(2)

    290       43%       43%       204       713       13%       13%       634  
 

 

 

       

 

 

   

 

 

       

 

 

 

Total expenses

    2,455       13%       14%       2,169       6,974       10%       11%       6,345  
 

 

 

       

 

 

   

 

 

       

 

 

 

Total Margin

  $ (30     -131%       -118%     $ 94     $ (496     56%       62%     $ (319
 

 

 

       

 

 

   

 

 

       

 

 

 

Total Margin %

    -1%           4%       -8%           -5%  

% Revenues by Geography:

               

Americas

    58%           53%       57%           54%  

EMEA

    25%           28%       25%           27%  

Asia Pacific

    17%           19%       18%           19%  

Revenues by Software Offerings:

               

Cloud software as a service and platform as a service

  $ 1,011       73%       74%     $ 583     $ 2,686       77%       79%     $ 1,517  

New software licenses

    1,414       -16%       -15%       1,680       3,792       -16%       -15%       4,509  
 

 

 

       

 

 

   

 

 

       

 

 

 

Total cloud software and on-premise software revenues

  $ 2,425       7%       8%     $ 2,263     $ 6,478       7%       8%     $ 6,026  
 

 

 

       

 

 

   

 

 

       

 

 

 

% Revenues by Software Offerings:

               

Cloud software as a service and platform as a service

    42%           26%       41%           25%  

New software licenses

    58%           74%       59%           75%  

 

(1) 

Excluding stock-based compensation

 

(2) 

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

Excluding the effects of currency rate fluctuations, total revenues from our cloud software and on-premise software segment increased by 8 percentage points in each of the third quarter and first nine months of fiscal 2017, respectively, relative to the corresponding prior year periods due to growth in our cloud SaaS and PaaS revenues and revenue contributions from our recent acquisitions, including our acquisition of NetSuite, and were partially offset by decreases in our new software licenses revenues. The increases in our cloud SaaS and PaaS revenues and decreases in our new software licenses revenues during the fiscal 2017 periods presented were primarily due to the continued strategic emphasis placed on selling, marketing and growing our cloud software offerings and we expect these revenue trends will continue. During the third quarter of fiscal 2017, constant currency revenues growth in the Americas region was partially offset by a revenues decline in the Asia Pacific region. During the first nine months of fiscal 2017, the Americas, EMEA and Asia Pacific regions contributed constant currency regional growth of 76%, 15% and 9%, respectively.

As a result of our acquisitions, we recorded adjustments to reduce assumed cloud SaaS and PaaS obligations to their estimated fair values as of the acquisition dates. Due to our application of business combination accounting rules, cloud SaaS and PaaS revenues in the amounts of $69 million and $2 million for the third quarter of fiscal 2017 and 2016, respectively, and $120 million and $6 million for the first nine months of fiscal 2017 and 2016, respectively, were not recognized during the aforementioned periods and would have been otherwise reported as revenues by our acquired businesses as independent entities.

In reported currency, new software licenses revenues earned from transactions of $3 million or greater decreased by 1% and 7% in the third quarter and first nine months of fiscal 2017, respectively, and represented 30% and 26% of our new software licenses revenues in the third quarter and first nine months of fiscal 2017, respectively, in comparison to 25% and 24% in the third quarter and first nine months of fiscal 2016, respectively.

In constant currency, total cloud software and on-premise software expenses increased in the fiscal 2017 periods presented primarily due to higher employee related expenses from increased headcount, higher cloud SaaS and PaaS expenses from increased headcount and infrastructure expenses that were incurred to support the related cloud SaaS and PaaS revenues increases, higher stock-based compensation, and higher amortization of intangible assets due to our recent acquisitions, primarily our acquisition of NetSuite.

 

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Excluding the effects of currency rate fluctuations, our cloud software and on-premise software segment’s total margin and total margin as a percentage of revenues decreased in the fiscal 2017 periods presented as our total expenses grew at a faster rate than our total revenues for this segment.

Cloud Infrastructure as a Service:    Our cloud IaaS segment includes Oracle Cloud IaaS and Oracle Managed Cloud Services offerings. Oracle Cloud IaaS provides infrastructure cloud services that are enterprise-grade, hosted and supported within the Oracle Cloud to perform elastic compute, storage and networking services on a subscription basis. Oracle Managed Cloud Services are comprehensive software and hardware management and maintenance services for customer IT infrastructure for a fee for a stated term that are hosted at our Oracle data center facilities, select partner data centers or physically on-premise at customer facilities. Our cloud IaaS segment’s expenses consist primarily of personnel related expenditures, technology infrastructure expenditures and facilities costs. Operating expenses associated with our IaaS offerings also include sales and marketing expenses, which are largely personnel related, and amortization of intangible assets. For the fiscal 2016 periods presented, our cloud IaaS segment’s revenues and expenses were substantially attributable to our Oracle Managed Cloud Services offerings.

 

    Three Months Ended     Nine Months Ended  
    February  28,
2017
    Percent Change     February  29,
2016
    February  28,
2017
    Percent Change     February  29,
2016
 

(Dollars in millions)

    Actual     Constant         Actual     Constant    

Cloud Infrastructure as a Service Revenues:

               

Americas

  $ 131       16%       16%     $ 113     $ 382       9%       10%     $ 349  

EMEA

    36       19%       30%       30       106       5%       17%       100  

Asia Pacific

    11       24%       21%       9       37       36%       30%       28  
 

 

 

       

 

 

   

 

 

       

 

 

 

Total revenues

    178       17%       19%       152       525       10%       13%       477  

Expenses:

               

Cloud infrastructure as a service(1)

    124       43%       45%       87       330       25%       26%       265  

Sales and marketing(1)

    15       -15%       -14%       17       48       -13%       -11%       55  

Stock-based compensation

    1       -5%       -5%       1       4       8%       8%       3  

Amortization of intangible assets(2)

    1       -22%       -22%       1       7       67%       67%       4  
 

 

 

       

 

 

   

 

 

       

 

 

 

Total expenses

    141       32%       34%       106       389       19%       20%       327  
 

 

 

       

 

 

   

 

 

       

 

 

 

Total Margin

  $ 37       -18%       -15%     $ 46     $ 136       -9%       -5%     $ 150  
 

 

 

       

 

 

   

 

 

       

 

 

 

Total Margin %

    21%           30%       26%           31%  

% Revenues by Geography:

               

Americas

    73%           74%       73%           73%  

EMEA

    20%           20%       20%           21%  

Asia Pacific

    7%           6%       7%           6%  

 

(1) 

Excluding stock-based compensation

 

(2) 

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

Excluding the effects of unfavorable currency rate fluctuations, our total cloud IaaS segment revenues increased in the fiscal 2017 periods presented due primarily to growth in our Oracle Cloud IaaS offerings. Excluding the effects of currency rate fluctuations, the Americas region contributed 62% and 59%, respectively, the EMEA region contributed 31% and 27%, respectively, and the Asia Pacific region contributed 7% and 14%, respectively, to the increases in our total cloud IaaS segment revenues during the third quarter and first nine months of fiscal 2017, respectively.

On a constant currency basis, our cloud IaaS segment’s total expenses increased during the fiscal 2017 periods presented primarily due to higher technology infrastructure expenses to support the increase in our cloud IaaS revenues.

Excluding the effects of currency rate fluctuations, total margin and total margin as a percentage of total revenues decreased during the fiscal 2017 periods presented as total expenses increased at a faster rate than our total revenues for this segment.

 

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