Item 1.
|
Financial Statements (Unaudited)
|
ORACLE CORPORATION
CONDENSED CONSOLIDATED
BALANCE SHEETS
As of August 31, 2017 and May 31, 2017
(Unaudited)
|
|
|
|
|
|
|
|
|
(in millions, except per share data)
|
|
August 31,
2017
|
|
|
May 31,
2017
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
21,321
|
|
|
$
|
21,784
|
|
Marketable securities
|
|
|
45,576
|
|
|
|
44,294
|
|
Trade receivables, net of allowances for doubtful accounts of $336 and $319 as of August 31, 2017 and May 31, 2017,
respectively
|
|
|
3,591
|
|
|
|
5,300
|
|
Inventories
|
|
|
312
|
|
|
|
300
|
|
Prepaid expenses and other current assets
|
|
|
2,535
|
|
|
|
2,837
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
73,335
|
|
|
|
74,515
|
|
|
|
|
|
|
|
|
|
|
Non-current
assets:
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
5,586
|
|
|
|
5,315
|
|
Intangible assets, net
|
|
|
7,186
|
|
|
|
7,679
|
|
Goodwill, net
|
|
|
43,020
|
|
|
|
43,045
|
|
Deferred tax assets
|
|
|
1,181
|
|
|
|
1,143
|
|
Other assets
|
|
|
3,289
|
|
|
|
3,294
|
|
|
|
|
|
|
|
|
|
|
Total
non-current
assets
|
|
|
60,262
|
|
|
|
60,476
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
133,597
|
|
|
$
|
134,991
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Notes payable and other borrowings, current
|
|
$
|
4,998
|
|
|
$
|
9,797
|
|
Accounts payable
|
|
|
593
|
|
|
|
599
|
|
Accrued compensation and related benefits
|
|
|
1,517
|
|
|
|
1,966
|
|
Deferred revenues
|
|
|
10,269
|
|
|
|
8,233
|
|
Other current liabilities
|
|
|
2,849
|
|
|
|
3,583
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
20,226
|
|
|
|
24,178
|
|
|
|
|
|
|
|
|
|
|
Non-current
liabilities:
|
|
|
|
|
|
|
|
|
Notes payable and other borrowings,
non-current
|
|
|
48,293
|
|
|
|
48,112
|
|
Income taxes payable
|
|
|
5,891
|
|
|
|
5,681
|
|
Other
non-current
liabilities
|
|
|
2,821
|
|
|
|
2,774
|
|
|
|
|
|
|
|
|
|
|
Total
non-current
liabilities
|
|
|
57,005
|
|
|
|
56,567
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Oracle Corporation stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par valueauthorized: 1.0 shares; outstanding: none
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value and additional paid in capitalauthorized: 11,000 shares; outstanding: 4,171 shares and 4,137
shares as of August 31, 2017 and May 31, 2017, respectively
|
|
|
28,089
|
|
|
|
27,065
|
|
Retained earnings
|
|
|
28,586
|
|
|
|
27,598
|
|
Accumulated other comprehensive loss
|
|
|
(716
|
)
|
|
|
(803
|
)
|
|
|
|
|
|
|
|
|
|
Total Oracle Corporation stockholders equity
|
|
|
55,959
|
|
|
|
53,860
|
|
Noncontrolling interests
|
|
|
407
|
|
|
|
386
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
56,366
|
|
|
|
54,246
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
133,597
|
|
|
$
|
134,991
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
3
ORACLE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended August 31, 2017 and 2016
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
August 31,
|
|
(in millions, except per share data)
|
|
2017
|
|
|
2016
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Cloud software as a service
|
|
$
|
1,067
|
|
|
$
|
657
|
|
Cloud platform as a service and infrastructure as a service
|
|
|
400
|
|
|
|
312
|
|
|
|
|
|
|
|
|
|
|
Total cloud revenues
|
|
|
1,467
|
|
|
|
969
|
|
|
|
|
|
|
|
|
|
|
New software licenses
|
|
|
966
|
|
|
|
1,030
|
|
Software license updates and product support
|
|
|
4,951
|
|
|
|
4,792
|
|
|
|
|
|
|
|
|
|
|
Total
on-premise
software revenues
|
|
|
5,917
|
|
|
|
5,822
|
|
|
|
|
|
|
|
|
|
|
Total cloud and
on-premise
software revenues
|
|
|
7,384
|
|
|
|
6,791
|
|
|
|
|
|
|
|
|
|
|
Hardware revenues
|
|
|
943
|
|
|
|
996
|
|
Services revenues
|
|
|
860
|
|
|
|
808
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
9,187
|
|
|
|
8,595
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Cloud software as a service
(1)
|
|
|
374
|
|
|
|
283
|
|
Cloud platform as a service and infrastructure as a service
(1)
|
|
|
227
|
|
|
|
132
|
|
Software license updates and product support
(1)
|
|
|
257
|
|
|
|
275
|
|
Hardware
(1)
|
|
|
373
|
|
|
|
391
|
|
Services
(1)
|
|
|
702
|
|
|
|
695
|
|
Sales and marketing
(1)
|
|
|
1,992
|
|
|
|
1,919
|
|
Research and development
|
|
|
1,574
|
|
|
|
1,520
|
|
General and administrative
|
|
|
320
|
|
|
|
315
|
|
Amortization of intangible assets
|
|
|
411
|
|
|
|
311
|
|
Acquisition related and other
|
|
|
12
|
|
|
|
14
|
|
Restructuring
|
|
|
124
|
|
|
|
99
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
6,366
|
|
|
|
5,954
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
2,821
|
|
|
|
2,641
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(469
|
)
|
|
|
(416
|
)
|
Non-operating
income, net
|
|
|
233
|
|
|
|
148
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
2,585
|
|
|
|
2,373
|
|
Provision for income taxes
|
|
|
375
|
|
|
|
541
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,210
|
|
|
$
|
1,832
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.53
|
|
|
$
|
0.44
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.52
|
|
|
$
|
0.43
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
4,156
|
|
|
|
4,119
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
4,284
|
|
|
|
4,221
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share
|
|
$
|
0.19
|
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Exclusive of amortization of intangible assets, which is shown separately.
|
See notes to condensed consolidated financial statements.
4
ORACLE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Three Months Ended August 31, 2017 and 2016
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
August
31,
|
|
(in millions)
|
|
2017
|
|
|
2016
|
|
Net income
|
|
$
|
2,210
|
|
|
$
|
1,832
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
Net foreign currency translation gains
|
|
|
38
|
|
|
|
133
|
|
Net unrealized gains on defined benefit plans
|
|
|
7
|
|
|
|
5
|
|
Net unrealized gains on marketable securities
|
|
|
64
|
|
|
|
143
|
|
Net unrealized (losses) gains on cash flow hedges
|
|
|
(22
|
)
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income, net
|
|
|
87
|
|
|
|
283
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
2,297
|
|
|
$
|
2,115
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
5
ORACLE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended August 31, 2017 and 2016
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
August
31,
|
|
(in millions)
|
|
2017
|
|
|
2016
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,210
|
|
|
$
|
1,832
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
285
|
|
|
|
222
|
|
Amortization of intangible assets
|
|
|
411
|
|
|
|
311
|
|
Deferred income taxes
|
|
|
159
|
|
|
|
145
|
|
Stock-based compensation
|
|
|
403
|
|
|
|
319
|
|
Other, net
|
|
|
47
|
|
|
|
39
|
|
Changes in operating assets and liabilities, net of effects from acquisitions:
|
|
|
|
|
|
|
|
|
Decrease in trade receivables, net
|
|
|
1,752
|
|
|
|
1,993
|
|
Increase in inventories
|
|
|
(11
|
)
|
|
|
(75
|
)
|
Decrease in prepaid expenses and other assets
|
|
|
555
|
|
|
|
435
|
|
Decrease in accounts payable and other liabilities
|
|
|
(1,062
|
)
|
|
|
(1,013
|
)
|
Increase (decrease) in income taxes payable
|
|
|
32
|
|
|
|
(94
|
)
|
Increase in deferred revenues
|
|
|
1,785
|
|
|
|
1,761
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
6,566
|
|
|
|
5,875
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of marketable securities and other investments
|
|
|
(7,671
|
)
|
|
|
(5,513
|
)
|
Proceeds from maturities and sales of marketable securities and other investments
|
|
|
6,326
|
|
|
|
1,752
|
|
Acquisitions, net of cash acquired
|
|
|
|
|
|
|
(1,143
|
)
|
Capital expenditures
|
|
|
(473
|
)
|
|
|
(299
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used for investing activities
|
|
|
(1,818
|
)
|
|
|
(5,203
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Payments for repurchases of common stock
|
|
|
(502
|
)
|
|
|
(2,002
|
)
|
Proceeds from issuances of common stock
|
|
|
1,014
|
|
|
|
487
|
|
Shares repurchased for tax withholdings upon vesting of restricted stock-based awards
|
|
|
(331
|
)
|
|
|
(170
|
)
|
Payments of dividends to stockholders
|
|
|
(788
|
)
|
|
|
(618
|
)
|
Proceeds from borrowings, net of issuance costs
|
|
|
|
|
|
|
13,932
|
|
Repayments of borrowings
|
|
|
(4,800
|
)
|
|
|
(3,750
|
)
|
Distributions to noncontrolling interests
|
|
|
(34
|
)
|
|
|
(167
|
)
|
|
|
|
|
|
|
|
|
|
Net cash (used for) provided by financing activities
|
|
|
(5,441
|
)
|
|
|
7,712
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
230
|
|
|
|
78
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(463
|
)
|
|
|
8,462
|
|
Cash and cash equivalents at beginning of period
|
|
|
21,784
|
|
|
|
20,152
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
21,321
|
|
|
$
|
28,614
|
|
|
|
|
|
|
|
|
|
|
Non-cash
investing and financing transactions:
|
|
|
|
|
|
|
|
|
Fair values of restricted stock-based awards and stock options assumed in connection with acquisitions
|
|
$
|
|
|
|
$
|
6
|
|
Decrease in unsettled repurchases of common stock
|
|
$
|
(2
|
)
|
|
$
|
(3
|
)
|
Decrease in unsettled investment purchases
|
|
$
|
(138
|
)
|
|
$
|
(95
|
)
|
See notes to condensed consolidated financial statements.
6
ORACLE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
August 31, 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,
2017.
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, 2018. 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 three months of fiscal 2017, we adopted Accounting Standards Update (ASU)
2017-04,
IntangiblesGoodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
, which did not have a material impact to our reported financial position or results of operations. There have been no 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, 2017.
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
August 31, 2017 and May 31, 2017 and our condensed consolidated statements of cash flows for the three months ended August 31, 2017 and 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
August
31,
|
|
(in millions)
|
|
2017
|
|
|
2016
|
|
Transitional and other employee related costs
|
|
$
|
9
|
|
|
$
|
8
|
|
Stock-based compensation
|
|
|
1
|
|
|
|
|
|
Professional fees and other, net
|
|
|
3
|
|
|
|
5
|
|
Business combination adjustments, net
|
|
|
(1
|
)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
Total acquisition related and other expenses
|
|
$
|
12
|
|
|
$
|
14
|
|
|
|
|
|
|
|
|
|
|
7
ORACLE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
August 31, 2017
(Unaudited)
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
August
31,
|
|
(in millions)
|
|
2017
|
|
|
2016
|
|
Interest income
|
|
$
|
257
|
|
|
$
|
177
|
|
Foreign currency losses, net
|
|
|
(4
|
)
|
|
|
(13
|
)
|
Noncontrolling interests in income
|
|
|
(47
|
)
|
|
|
(35
|
)
|
Other income (loss), net
|
|
|
27
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
Total
non-operating
income, net
|
|
$
|
233
|
|
|
$
|
148
|
|
|
|
|
|
|
|
|
|
|
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. During the three months ended August 31, 2017 and 2016, $818 million and $898 million of financing
receivables were sold to financial institutions, respectively.
Recent Accounting Pronouncements
Derivatives and Hedging:
In August 2017, the Financial Accounting Standards Board (FASB) issued ASU
2017-12,
Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities
(ASU
2017-12),
which amends and simplifies existing guidance in
order to allow companies to more accurately present the economic effects of risk management activities in the financial statements. ASU
2017-12
is effective for us in the first quarter of fiscal 2020, and
earlier adoption is permitted. We are currently evaluating the impact of our pending adoption of ASU
2017-12
on our consolidated financial statements.
Retirement Benefits:
In March 2017, the FASB issued ASU
2017-07,
CompensationRetirement Benefits (Topic 715):
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
(ASU
2017-07),
which provides guidance on the capitalization, presentation and disclosure of net benefit
costs. ASU
2017-07
is effective for us in the first quarter of fiscal 2019. We are currently evaluating the impact of our pending adoption of ASU
2017-07
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.
8
ORACLE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
August 31, 2017
(Unaudited)
Financial Instruments:
In June 2016, the FASB issued ASU
2016-13,
Financial InstrumentsCredit 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 InstrumentsOverall (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. We currently expect that most of our operating lease commitments
will be subject to the new standard and recognized as operating lease liabilities 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, December 2016 and May 2017 within ASU
2015-14,
ASU 2016-08,
ASU
2016-10,
ASU
2016-12,
ASU
2016-20
and ASU
2017-10,
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 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. The accounting for the recognition of costs related to obtaining
customer contracts under Topic 606 is significantly different than our current capitalization policy. The adoption of Topic 606 will result in additional types of costs that will be capitalized. Additionally, all amounts capitalized will be
amortized over a period longer than our current policy. 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 and costs related to our pending adoption of Topic 606 and our preliminary assessments are subject to change.
9
ORACLE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
August 31, 2017
(Unaudited)
Fiscal 2017 Acquisition
of NetSuite Inc., a Related Party
On November 7, 2016, we completed our acquisition of NetSuite Inc. (NetSuite), a provider of
cloud-based enterprise resource planning (ERP) software and related applications and a related party to Oracle. 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.
Lawrence J. Ellison, Oracles Chairman of the Board and Chief Technology Officer and
Oracles largest stockholder, is an affiliate of NetSuites largest stockholder, NetSuite Restricted Holdings LLC (a single member 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.
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. In
allocating the purchase price based on estimated fair values, we recorded approximately $6.7 billion of goodwill, $3.2 billion of identifiable intangible assets and $816 million of net tangible liabilities. 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. See Note 2 of Notes to Consolidated Financial Statements included in our Annual Report on Form
10-K
for the fiscal year ended May 31, 2017 for additional information regarding our acquisition of NetSuite.
Other Fiscal 2017 Acquisitions
During 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 significant individually or in the aggregate. We have included the financial results of the acquired companies
in our condensed consolidated financial statements from their respective acquisition dates, and the results from each of these companies were not individually material to our condensed consolidated financial statements. In the aggregate, the total
preliminary purchase price for these acquisitions was approximately $3.0 billion, which consisted of approximately $3.0 billion in cash and $13 million for the fair values of restricted stock-based awards and stock options assumed. We
preliminarily recorded $241 million of net tangible assets and $948 million of identifiable intangible assets, based on their estimated fair values, and $1.8 billion of residual goodwill.
The preliminary fair value estimates for the assets acquired and liabilities assumed for our completed acquisitions 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.
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 2017 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 2017. The unaudited pro forma financial information for all periods
10
ORACLE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
August 31, 2017
(Unaudited)
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 2017. 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 2017.
The unaudited pro forma financial information for the three months ended August 31, 2017 includes only the historical
results of Oracle and is included below for comparative purposes only.
The unaudited pro forma financial information for the three months
ended August 31, 2016 combined the historical results of Oracle for the three months ended August 31, 2016, the historical results of NetSuite for the three months ended September 30, 2016 (due to differences in reporting periods) 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. The unaudited pro forma financial information was as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
August
31,
|
|
(in millions, except per share data)
|
|
2017
|
|
|
2016
|
|
Total revenues
|
|
$
|
9,187
|
|
|
$
|
8,856
|
|
Net income
|
|
$
|
2,210
|
|
|
$
|
1,666
|
|
Basic earnings per share
|
|
$
|
0.53
|
|
|
$
|
0.40
|
|
Diluted earnings per share
|
|
$
|
0.52
|
|
|
$
|
0.39
|
|
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 assets or a
liabilitys 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.
|
11
ORACLE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
August 31, 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2017
|
|
|
May 31, 2017
|
|
|
|
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
|
|
$
|
427
|
|
|
$
|
43,153
|
|
|
$
|
43,580
|
|
|
$
|
580
|
|
|
$
|
41,038
|
|
|
$
|
41,618
|
|
Commercial paper debt securities
|
|
|
|
|
|
|
4,210
|
|
|
|
4,210
|
|
|
|
|
|
|
|
5,053
|
|
|
|
5,053
|
|
Money market funds
|
|
|
1,502
|
|
|
|
|
|
|
|
1,502
|
|
|
|
3,302
|
|
|
|
|
|
|
|
3,302
|
|
Derivative financial instruments
|
|
|
|
|
|
|
40
|
|
|
|
40
|
|
|
|
|
|
|
|
40
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,929
|
|
|
$
|
47,403
|
|
|
$
|
49,332
|
|
|
$
|
3,882
|
|
|
$
|
46,131
|
|
|
$
|
50,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
|
$
|
|
|
|
$
|
106
|
|
|
$
|
106
|
|
|
$
|
|
|
|
$
|
191
|
|
|
$
|
191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our marketable securities investments consist of Tier 1 commercial paper debt securities, corporate debt securities and
certain other securities. As of August 31, 2017 and May 31, 2017, approximately 28% and 32%, respectively, of our marketable securities investments mature within one year and 72% and 68%, 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 the $53.1 billion and $54.0 billion of
senior notes and the related fair value hedges that were outstanding as of August 31, 2017 and May 31, 2017, respectively, the estimated fair values of the senior notes and the related fair value hedges using Level 2 inputs at
August 31, 2017 and May 31, 2017 were $55.9 billion and $56.5 billion, respectively.
Inventories consisted of the
following:
|
|
|
|
|
|
|
|
|
(in millions)
|
|
August
31,
2017
|
|
|
May 31,
2017
|
|
Raw materials
|
|
$
|
158
|
|
|
$
|
186
|
|
Work-in-process
|
|
|
34
|
|
|
|
42
|
|
Finished goods
|
|
|
120
|
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
$
|
312
|
|
|
$
|
300
|
|
|
|
|
|
|
|
|
|
|
12
ORACLE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
August 31, 2017
(Unaudited)
5.
|
INTANGIBLE ASSETS AND GOODWILL
|
The
changes in intangible assets for fiscal 2018 and the net book value of intangible assets as of August 31, 2017 and May 31, 2017 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible Assets, Gross
|
|
|
Accumulated Amortization
|
|
|
Intangible Assets, Net
|
|
(Dollars in millions)
|
|
May 31,
2017
|
|
|
Additions &
Adjustments, net
|
|
|
August
31,
2017
|
|
|
May 31,
2017
|
|
|
Expense
|
|
|
August
31,
2017
|
|
|
May 31,
2017
|
|
|
August 31,
2017
|
|
Developed technology
|
|
$
|
5,397
|
|
|
$
|
(214
|
)
|
|
$
|
5,183
|
|
|
$
|
(2,295
|
)
|
|
$
|
(190
|
)
|
|
$
|
(2,485
|
)
|
|
$
|
3,102
|
|
|
$
|
2,698
|
|
SaaS, PaaS and IaaS agreements and related relationships
|
|
|
4,105
|
|
|
|
114
|
|
|
|
4,219
|
|
|
|
(1,089
|
)
|
|
|
(151
|
)
|
|
|
(1,240
|
)
|
|
|
3,016
|
|
|
|
2,979
|
|
Software support agreements and related relationships
|
|
|
1,565
|
|
|
|
|
|
|
|
1,565
|
|
|
|
(559
|
)
|
|
|
(31
|
)
|
|
|
(590
|
)
|
|
|
1,006
|
|
|
|
975
|
|
Other
|
|
|
1,998
|
|
|
|
18
|
|
|
|
2,016
|
|
|
|
(1,443
|
)
|
|
|
(39
|
)
|
|
|
(1,482
|
)
|
|
|
555
|
|
|
|
534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets, net
|
|
$
|
13,065
|
|
|
$
|
(82
|
)
|
|
$
|
12,983
|
|
|
$
|
(5,386
|
)
|
|
$
|
(411
|
)
|
|
$
|
(5,797
|
)
|
|
$
|
7,679
|
|
|
$
|
7,186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortization expense related to our intangible assets was $411 million and $311 million for the three
months ended August 31, 2017 and 2016, respectively. As of August 31, 2017, estimated future amortization expenses related to intangible assets were as follows (in millions):
|
|
|
|
|
Remainder of fiscal 2018
|
|
$
|
1,179
|
|
Fiscal 2019
|
|
|
1,408
|
|
Fiscal 2020
|
|
|
1,207
|
|
Fiscal 2021
|
|
|
1,021
|
|
Fiscal 2022
|
|
|
918
|
|
Fiscal 2023
|
|
|
567
|
|
Thereafter
|
|
|
886
|
|
|
|
|
|
|
Total intangible assets, net
|
|
$
|
7,186
|
|
|
|
|
|
|
The changes in the carrying amounts of goodwill, net, which is generally not deductible for tax purposes, for our
operating segments for the three months ended August 31, 2017 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Cloud
and
On-Premise
Software
|
|
|
Hardware
|
|
|
Services
|
|
|
Total
Goodwill, net
|
|
Balances as of May 31, 2017
|
|
$
|
38,791
|
|
|
$
|
2,367
|
|
|
$
|
1,887
|
|
|
$
|
43,045
|
|
Goodwill adjustments, net
(1)
|
|
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of August 31, 2017
|
|
$
|
38,766
|
|
|
$
|
2,367
|
|
|
$
|
1,887
|
|
|
$
|
43,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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).
|
6.
|
RESTRUCTURING ACTIVITIES
|
Fiscal 2017
Oracle Restructuring Plan
During 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
13
ORACLE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
August 31, 2017
(Unaudited)
Restructuring Plan). In the first quarter of fiscal 2018, our management supplemented the 2017 Restructuring Plan to reflect additional actions that we expect to take. The total estimated
restructuring costs associated with the 2017 Restructuring Plan are up to $1.1 billion and will be recorded to the restructuring expense line item within our condensed consolidated statements of operations as they are incurred. We recorded
$124 million of restructuring expenses in connection with the 2017 Restructuring Plan in the first three months of fiscal 2018 and we expect to incur the majority of the estimated remaining $475 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,
2017
(2)
|
|
|
Three Months Ended August 31, 2017
|
|
|
Accrued
August
31,
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 and
on-premise
software
|
|
$
|
85
|
|
|
$
|
54
|
|
|
$
|
(2
|
)
|
|
$
|
(70
|
)
|
|
$
|
5
|
|
|
$
|
72
|
|
|
$
|
230
|
|
|
$
|
300
|
|
Hardware
|
|
|
31
|
|
|
|
28
|
|
|
|
(3
|
)
|
|
|
(26
|
)
|
|
|
2
|
|
|
|
32
|
|
|
|
113
|
|
|
|
241
|
|
Services
|
|
|
25
|
|
|
|
12
|
|
|
|
(1
|
)
|
|
|
(22
|
)
|
|
|
1
|
|
|
|
15
|
|
|
|
69
|
|
|
|
130
|
|
Other
|
|
|
44
|
|
|
|
41
|
|
|
|
(6
|
)
|
|
|
(23
|
)
|
|
|
|
|
|
|
56
|
|
|
|
197
|
|
|
|
413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fiscal 2017 Oracle Restructuring Plan
|
|
$
|
185
|
|
|
$
|
135
|
|
|
$
|
(12
|
)
|
|
$
|
(141
|
)
|
|
$
|
8
|
|
|
$
|
175
|
|
|
$
|
609
|
|
|
$
|
1,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other restructuring plans
(6)
|
|
$
|
79
|
|
|
$
|
1
|
|
|
$
|
|
|
|
$
|
(15
|
)
|
|
$
|
3
|
|
|
$
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring plans
|
|
$
|
264
|
|
|
$
|
136
|
|
|
$
|
(12
|
)
|
|
$
|
(156
|
)
|
|
$
|
11
|
|
|
$
|
243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Restructuring costs recorded for individual line items primarily related to employee severance costs.
|
(2)
|
The balances at August 31, 2017 and May 31, 2017 included $217 million and $242 million, respectively, recorded in other current
liabilities, and $26 million and $22 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 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.
|
Deferred revenues
consisted of the following:
|
|
|
|
|
|
|
|
|
(in millions)
|
|
August 31,
2017
|
|
|
May 31,
2017
|
|
Software license updates and product support
|
|
$
|
7,690
|
|
|
$
|
5,952
|
|
Cloud SaaS, PaaS and IaaS
|
|
|
1,397
|
|
|
|
1,192
|
|
Hardware
|
|
|
716
|
|
|
|
640
|
|
Services
|
|
|
407
|
|
|
|
382
|
|
New software licenses
|
|
|
59
|
|
|
|
67
|
|
|
|
|
|
|
|
|
|
|
Deferred revenues, current
|
|
|
10,269
|
|
|
|
8,233
|
|
Deferred revenues,
non-current
(in other
non-current
liabilities)
|
|
|
653
|
|
|
|
602
|
|
|
|
|
|
|
|
|
|
|
Total deferred revenues
|
|
$
|
10,922
|
|
|
$
|
8,835
|
|
|
|
|
|
|
|
|
|
|
14
ORACLE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
August 31, 2017
(Unaudited)
Deferred software license updates and product support revenues and deferred hardware revenues
substantially 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) and deferred cloud 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 relate 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, cloud PaaS and IaaS and software license
updates and product 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, cloud PaaS and IaaS and software license updates and product 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.
8.
|
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 August 31, 2017,
May 31, 2017 and August 31, 2016 and during the three months ended August 31, 2017 and 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
|
|
|
|
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. As of August 31, 2017 and May 31, 2017, the notional amounts of such forward contracts we held to purchase U.S. Dollars in exchange for other major
international currencies were $3.3 billion and $3.4 billion, respectively, and the notional amount of forward contracts we held to sell U.S. Dollars in exchange for other major international currencies were $1.2 billion and
$1.4 billion, respectively. The fair values of our outstanding foreign currency forward contracts were nominal as of August 31, 2017 and May 31, 2017. The cash flows related to these foreign currency contracts are classified as
operating activities. Net gains or losses related to these forward contracts are included in
non-operating
income, net.
15
ORACLE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
August 31, 2017
(Unaudited)
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, 2017 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 condensed 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 as of
|
|
(in millions)
|
|
Balance Sheet Location
|
|
August
31,
2017
|
|
|
May 31,
2017
|
|
Interest rate swap agreements designated as fair value hedges
|
|
Other assets
|
|
$
|
40
|
|
|
$
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
Cross-currency swap agreements designated as cash flow hedges
|
|
Other non-current liabilities
|
|
$
|
(106
|
)
|
|
$
|
(191
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency borrowings designated as net investment hedge
|
|
Notes payable,
non-current
|
|
$
|
(938
|
)
|
|
$
|
(980
|
)
|
|
|
|
|
|
|
|
|
|
|
|
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
August 31,
|
|
|
|
|
Three Months Ended
August
31,
|
|
(in millions)
|
|
2017
|
|
|
2016
|
|
|
|
|
2017
|
|
|
2016
|
|
Cross-currency swap agreements designated as cash flow hedges
|
|
$
|
85
|
|
|
$
|
3
|
|
|
Non-operating income (expense), net
|
|
$
|
107
|
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency borrowings designated as net investment hedge
|
|
$
|
(64
|
)
|
|
$
|
(1
|
)
|
|
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
August
31,
|
|
|
|
|
Three Months Ended
August
31,
|
|
(in millions)
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
2017
|
|
|
2016
|
|
Interest rate swap agreements designated as fair value hedges
|
|
Interest expense
|
|
$
|
|
|
|
$
|
9
|
|
|
Interest expense
|
|
$
|
|
|
|
$
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock Repurchases
Our Board of Directors has approved a program for us to repurchase shares of our common stock. As of August 31,
2017, approximately $4.8 billion remained available for stock repurchases pursuant to our stock repurchase program. We repurchased 10.2 million shares for $500 million during the three months ended August 31, 2017 (including
0.5 million shares for $23 million that were repurchased but not settled) and 49.3 million shares for $2.0 billion during the three months ended August 31, 2016 under the stock repurchase program.
16
ORACLE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
August 31, 2017
(Unaudited)
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 three months ended August 31, 2017, our Board of Directors declared cash dividends of $0.19 per share of our outstanding common stock, which we paid during the same period.
In September 2017, our Board of Directors declared a quarterly cash dividend of $0.19 per share of our outstanding common stock. The dividend is payable
on October 25, 2017 to stockholders of record as of the close of business on October 11, 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.
Fiscal 2018 Stock-Based Awards Activity, Valuation and Compensation Expense
During the first quarter of fiscal 2018, we issued 34 million restricted stock-based awards and 77 million stock options (consisting of
8 million service-based stock options (SOs) and 69 million performance-based and market- based stock options (PSOs)). Substantially all of the awards were issued as a part of our annual stock-based award process and are subject to
service-based vesting restrictions, with the PSOs primarily having performance-based and market-based vesting restrictions. Our fiscal 2018 stock-based awards issuances were partially offset by forfeitures and cancellations of 7 million shares
during the first quarter of fiscal 2018.
The RSUs and SOs that were granted during the three months ended August 31, 2017 have vesting
restrictions, valuations and contractual lives 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, 2017.
The fiscal 2018 PSOs granted consist of seven numerically equivalent vesting tranches that potentially
may vest. Each of six of the individual vesting tranches are governed by an all or nothing vesting schedule requiring the attainment of both a performance metric and a market capitalization metric, which may be achieved at any time, in
order for each individual tranche to fully vest during a five year performance period, assuming continued employment and service through the date the Compensation Committee of the Board of Directors certifies that last of the two metrics for a
particular tranche is attained. The seventh vesting tranche requires a market-based metric to be achieved at any time during a five year performance period and continued employment and service through the vesting date. The PSOs have contractual
lives of eight years in comparison to the ten year contractual lives for the fiscal 2018 SOs issued. We estimated the fair values of the PSOs using a Monte Carlo simulation approach with the following assumptions: risk-free interest rate of
2.14%, expected term of 7 years, expected volatility of 22.44% and dividend yield of 1.49%. Stock-based compensation expense is to be recognized for each of the six performance-based and market-based tranches once each vesting tranche becomes
probable of achievement over the longer of the estimated implicit service period for performance-metric achievement or derived service period for market-based metric achievement. We have preliminarily estimated service periods for those tranches
that have been deemed probable of achievement to be approximately three to five years. Stock-based compensation for the market-based tranche will be recognized using the derived service period for the market-based metric achievement, which we have
initially estimated to be approximately three years.
17
ORACLE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
August 31, 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
August
31,
|
|
(in millions)
|
|
2017
|
|
|
2016
|
|
Cloud SaaS
|
|
$
|
9
|
|
|
$
|
5
|
|
Cloud PaaS and IaaS
|
|
|
2
|
|
|
|
1
|
|
Software license updates and product support
|
|
|
7
|
|
|
|
6
|
|
Hardware
|
|
|
3
|
|
|
|
3
|
|
Services
|
|
|
14
|
|
|
|
8
|
|
Sales and marketing
|
|
|
89
|
|
|
|
63
|
|
Research and development
|
|
|
234
|
|
|
|
195
|
|
General and administrative
|
|
|
44
|
|
|
|
38
|
|
Acquisition related and other
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
$
|
403
|
|
|
$
|
319
|
|
|
|
|
|
|
|
|
|
|
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, the
tax effects of stock-based compensation and the U.S. domestic production activity deduction. Our effective tax rate was 14.5% and 22.8% for the three months ended August 31, 2017 and 2016, respectively.
Our net deferred tax assets were $693 million and $683 million as of August 31, 2017 and May 31, 2017, 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 2016. 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.
On July 27, 2015, in
Altera Corp. v. Commissioner
, the U.S. Tax Court issued an opinion related to the treatment of 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.
18
ORACLE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
August 31, 2017
(Unaudited)
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, Australia, Brazil, India, Korea, Spain and the United Kingdom, 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.
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.
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 (CODMs) are our Chief Executive Officers and Chief Technology Officer. We are organized by
line of business and geographically. While our CODMs 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. In recent
periods, customer demand has increased at a greater rate for cloud-based IT deployment models relative to
on-premise
IT deployment models. Our CODMs view the operating results of our three businesses and
allocate resources in a manner that is consistent with the changing market dynamics that we have experienced. As a result, in the fourth quarter of fiscal 2017, we updated our operating segments. The footnote information below presents the financial
information provided to our CODMs for their review and assists our CODMs with evaluating the Companys performance and allocating Company resources.
We have three businessescloud and
on-premise
software, hardware and serviceseach of which is comprised of a single operating segment.
Our cloud and
on-premise
software line of business markets, sells and delivers a broad spectrum of applications,
platform and infrastructure technologies through our cloud offerings and
on-premise
software offerings. Our Oracle Cloud SaaS and Cloud PaaS and IaaS offerings deliver certain of our applications, platform and
infrastructure technologies on a subscription basis via cloud-based deployment models that we host, manage and support. Our IaaS offerings also include Oracle Managed Cloud Services, which are designed to provide comprehensive software and hardware
management, maintenance and security services for
on-premise,
cloud-based or hybrid IT infrastructures. Our cloud and
on-premise
software business also licenses our
software products, generally on a perpetual basis, including Oracle Applications, Oracle Database, Oracle Fusion Middleware and Java, among others, for
on-premise
and other IT environments. Customers that
license our software have the option to purchase software license updates and product support contracts, which provide customers with rights to unspecified software product upgrades and maintenance releases, patch releases, internet access to
technical content, as well as internet and telephone access to technical support personnel during the support period.
Our hardware business
provides Oracle Engineered Systems, servers, storage, industry-specific hardware, virtualization software, operating systems including the Oracle Solaris Operating System and management
19
ORACLE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
August 31, 2017
(Unaudited)
software to support diverse IT environments. Our hardware business also includes hardware support, which provides customers with software updates for the software components that are essential to
the functionality of the hardware products, such as Oracle Solaris and certain other software, and can include product repairs, maintenance services and technical support services.
Our services business provides services to customers and partners to help maximize the performance of their investments in Oracle applications, platform and infrastructure technologies.
We do not track our assets for each business. Consequently, it is not practical to show assets by operating segment.
The following table presents summary results for each of our three businesses (fiscal 2017 results have been recast to conform to the current years
presentation):
|
|
|
|
|
|
|
|
|
|
|
Three
Months
Ended
August 31,
|
|
(in millions)
|
|
2017
|
|
|
2016
|
|
Cloud and
on-premise
software:
|
|
|
|
|
|
|
|
|
Revenues
(1)
|
|
$
|
7,409
|
|
|
$
|
6,809
|
|
Cloud SaaS, PaaS and IaaS expenses
|
|
|
580
|
|
|
|
401
|
|
Software license updates and product support expenses
|
|
|
240
|
|
|
|
257
|
|
Sales and marketing expenses
|
|
|
1,684
|
|
|
|
1,596
|
|
|
|
|
|
|
|
|
|
|
Margin
(2)
|
|
$
|
4,905
|
|
|
$
|
4,555
|
|
Hardware:
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
943
|
|
|
$
|
996
|
|
Hardware products and support expenses
|
|
|
366
|
|
|
|
381
|
|
Sales and marketing expenses
|
|
|
170
|
|
|
|
203
|
|
|
|
|
|
|
|
|
|
|
Margin
(2)
|
|
$
|
407
|
|
|
$
|
412
|
|
Services:
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
860
|
|
|
$
|
808
|
|
Services expenses
|
|
|
665
|
|
|
|
665
|
|
|
|
|
|
|
|
|
|
|
Margin
(2)
|
|
$
|
195
|
|
|
$
|
143
|
|
Totals:
|
|
|
|
|
|
|
|
|
Revenues
(1)
|
|
$
|
9,212
|
|
|
$
|
8,613
|
|
Expenses
|
|
|
3,705
|
|
|
|
3,503
|
|
|
|
|
|
|
|
|
|
|
Margin
(2)
|
|
$
|
5,507
|
|
|
$
|
5,110
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Cloud and
on-premise
software revenues for management reporting included revenues related to cloud and
on-premise
software obligations that would have otherwise been recorded by the acquired businesses as independent entities but were not recognized in our consolidated statements of operations for the periods
presented due to business combination accounting requirements. See Note 7 for an explanation of these adjustments and the table below for a reconciliation of our total operating segment revenues to our total consolidated revenues as reported in our
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, general
and administrative and certain other allocable expenses. Additionally, the margins reported above 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.
|
20
ORACLE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
August 31, 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
August
31,
|
|
(in millions)
|
|
2017
|
|
|
2016
|
|
Total revenues for operating segments
|
|
$
|
9,212
|
|
|
$
|
8,613
|
|
Cloud and
on-premise
software revenues
(1)
|
|
|
(25
|
)
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
9,187
|
|
|
$
|
8,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total margin for operating segments
|
|
$
|
5,507
|
|
|
$
|
5,110
|
|
Cloud and
on-premise
software revenues
(1)
|
|
|
(25
|
)
|
|
|
(18
|
)
|
Research and development
|
|
|
(1,574
|
)
|
|
|
(1,520
|
)
|
General and administrative
|
|
|
(320
|
)
|
|
|
(315
|
)
|
Amortization of intangible assets
|
|
|
(411
|
)
|
|
|
(311
|
)
|
Acquisition related and other
|
|
|
(12
|
)
|
|
|
(14
|
)
|
Restructuring
|
|
|
(124
|
)
|
|
|
(99
|
)
|
Stock-based compensation for operating segments
|
|
|
(124
|
)
|
|
|
(86
|
)
|
Expense allocations and other, net
|
|
|
(96
|
)
|
|
|
(106
|
)
|
Interest expense
|
|
|
(469
|
)
|
|
|
(416
|
)
|
Non-operating
income, net
|
|
|
233
|
|
|
|
148
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
$
|
2,585
|
|
|
$
|
2,373
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Cloud and
on-premise
software revenues for management reporting included revenues related to cloud and
on-premise
software obligations that would have otherwise been recorded by the acquired businesses as independent entities but were not recognized in our consolidated statements of operations for the periods
presented due to business combination accounting requirements. See Note 7 for an explanation of these adjustments and this table for a reconciliation of our total operating segment revenues to our total consolidated revenues as reported in our
consolidated statements of operations.
|
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
August
31,
|
|
(in millions, except per share data)
|
|
2017
|
|
|
2016
|
|
Net income
|
|
$
|
2,210
|
|
|
$
|
1,832
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
4,156
|
|
|
|
4,119
|
|
Dilutive effect of employee stock plans
|
|
|
128
|
|
|
|
102
|
|
|
|
|
|
|
|
|
|
|
Dilutive weighted average common shares outstanding
|
|
|
4,284
|
|
|
|
4,221
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.53
|
|
|
$
|
0.44
|
|
Diluted earnings per share
|
|
$
|
0.52
|
|
|
$
|
0.43
|
|
Shares subject to anti-dilutive restricted stock-based awards and stock options excluded from calculation
(1)
|
|
|
31
|
|
|
|
72
|
|
(1)
|
These weighted shares relate to anti-dilutive restricted service based stock-based awards and stock options (as calculated using the treasury stock
method) and contingently issuable shares under PSO and PSU arrangements. Such shares could be dilutive in the future.
|
21
ORACLE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
August 31, 2017
(Unaudited)
Item 2.
|
Managements Discussion and Analysis of Financial Condition and Results of Operations
|
We begin Managements Discussion and Analysis of Financial Condition and Results of Operations with an overview of our businesses 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) environmentsapplications, platform and infrastructure. Our products are delivered
to over 400,000 worldwide customers through a variety of flexible and interoperable IT deployment models including
on-premise,
cloud-based or hybrid that enable customer choice and that best meet customer IT
needs.
Our Oracle Cloud offerings provide a comprehensive and fully integrated stack of applications, 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
IT offerings include Oracle
Applications, Oracle Database and Oracle Fusion Middleware software, among others; hardware products including Oracle Engineered Systems, servers, storage and industry-specific products, among others; and related support and services. We provide our
cloud and
on-premise
offerings to businesses of many sizes, government agencies, educational institutions and resellers with a sales force positioned to offer the combinations that best suit customer needs.
Our comprehensive and fully integrated stack of Oracle Cloud 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 to be 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 applications, platform and infrastructure 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 applications, platform and infrastructure technologies interact and function with one another within IT environments. 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 benefit from our research and development efforts and deep IT expertise by purchasing and renewing Oracle support offerings for their
on-premise
deployments, which may include unspecified product enhancements that we periodically deliver to our products, and by renewing their cloud 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 instances are deployed using the Oracle Cloud,
while other of their IT instances are deployed using Oracle
on-premise
offerings, with both instances designed with capabilities to be managed as a single instance. Our Oracle Cloud at Customer program
provides another deployment option for customers to utilize the Oracle Cloud Machine and Oracle Database Exadata Cloud Machine to bring certain Oracle Cloud SaaS, PaaS and IaaS offerings to a customers
on-premise
IT environment to meet data sovereignty, data residency, data protection
24
and regulatory business policy requirements, among others, while benefiting from the many advantages of a cloud service.
A 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. We expect to continue to acquire companies, products, services and technologies to further our corporate strategy.
In recent periods, customer demand has increased at a greater rate for cloud-based IT deployment models relative to
on-premise
IT deployment models. To address this demand, we have increased our investments in and focus on the development, marketing and sale of our cloud-based applications, platform and infrastructure
technologies resulting in higher growth of our cloud SaaS and cloud PaaS and IaaS revenues as customer preferences have pivoted to the Oracle Cloud for new deployments and as customers migrate to and expand with the Oracle Cloud for their existing
on-premise
workloads. We expect these trends to continue. We believe that offering customers broad, comprehensive, flexible and interoperable deployment models for our applications, platform and infrastructure
technologies is important to our growth strategy and better addresses customer needs relative to our competitors, many of whom provide fewer offerings and more restrictive deployment models. We enable our customers to evolve and transform to
substantially any IT deployment model at whatever pace is most appropriate for them.
We have three businesses: cloud and
on-premise
software; hardware; and services; each of which comprises a single operating segment. Our chief operating decision makers (CODMs), which include our Chief Executive Officers and Chief Technology Officer,
view the operating results of our three businesses and allocate resources in a manner that is consistent with the changing market dynamics that we have experienced in recent periods. As a result, during the fourth quarter of fiscal 2017, we updated
our operating segments. The discussion and analysis of financial condition and results of operations presented below provides the current view that is utilized by our CODMs to evaluate performance and determine resource allocations and the prior
period results presented below were recast to conform to the current periods presentation. In addition to the discussion below, Note 11 of Notes to Condensed Consolidated Financial Statements, included elsewhere in this Quarterly Report,
provides additional information related to our businesses and operating segments, including the recasting of our segments financial information from prior periods to conform to the current years presentation.
Cloud and
On-Premise
Software Business
Our cloud and
on-premise
software line of business, which represented 80% of our total revenues on a trailing
4-quarter
basis, markets, sells and delivers a broad spectrum of applications, platform and infrastructure technologies through our cloud and
on-premise
software offerings.
Our Oracle Cloud SaaS, PaaS and IaaS offerings deliver applications, platform and infrastructure technologies via cloud-based deployment
models that we host, manage and support and that customers access by entering into a subscription agreement with us for a stated period. Our IaaS offerings also include Oracle Managed Cloud Services, which are designed to provide comprehensive
software and hardware management, maintenance and security services for
on-premise,
cloud-based, or hybrid IT infrastructure for a stated period. The majority of our SaaS, PaaS and IaaS arrangements have an
average duration of approximately three years and we strive to renew these contracts when they are eligible for renewal.
We offer customers
the ability to license our software products including Oracle Applications, Oracle Database, Oracle Fusion Middleware and Java, among others, for
on-premise
and other IT environments. Our new software license
transactions are generally perpetual in nature and the timing of a few large software license transactions can substantially affect our quarterly new software licenses revenues, which is different than the typical revenue recognition pattern for our
cloud-based offerings in which revenues are generally recognized ratably over the subscription period. New software license customers have the option to purchase software license updates and product support contracts, which grant 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
25
license updates and product support contracts are generally one year in duration and are generally billed in advance of the service being performed and are generally recognized as revenues as the
software support services are delivered.
Our cloud SaaS, cloud PaaS and IaaS 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 offerings, our acquisitions, our ability to deliver and renew our cloud 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 cloud PaaS and IaaS revenues, which represented 16% and 11% our total consolidated revenues during the first
quarter of fiscal 2018 and 2017, respectively. This emphasis has affected the growth of our new software licenses revenues and, to a lesser extent, has also affected the growth of our software license updates and product support revenues. We expect
these trends will continue with the mix of this business revenues continuing to shift toward cloud-based services.
Our software license
updates and product support revenues growth is primarily influenced by four factors: (1) the percentage of our software support contract customer base that renews its software support contracts; (2) the pricing of new software support
contracts sold in connection with the sale of new software licenses; (3) the pricing of new software licenses sold; and (4) the amount of software support contracts assumed from companies we have acquired. Substantially all of our
customers purchase software license updates and product support contracts when they acquire
on-premise
new software licenses and renew their software license updates and product support contracts when eligible
in order to benefit from Oracles research and development investments that are utilized as a part of unspecified periodic software updates that may be released and that customers with current software support contracts are entitled to.
On a constant currency basis, we expect that our total cloud and
on-premise
software revenues
generally will continue to increase due to:
|
|
|
expected growth in our cloud SaaS offerings and our cloud PaaS and IaaS offerings;
|
|
|
|
continued demand for our
on-premise
software products and related software support, including the high
percentage of customers that purchase and renew their software license updates and product support contracts; and
|
|
|
|
contributions from our acquisitions.
|
We believe all of these factors should contribute to future growth in our cloud and
on-premise
software revenues, which should enable us to continue to make
investments in research and development to develop and improve our cloud and
on-premise
software products and services.
Our cloud and
on-premise
software business 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 business are generally fixed in the short term.
Hardware Business
Our hardware business, which represented 11% of our total
revenues on a trailing
4-quarter
basis, provides a broad selection of hardware products and hardware-related software products including Oracle Engineered Systems, servers, storage, industry-specific hardware,
virtualization software, operating systems, and management software that are generally recognized as revenues upon delivery to the customer provided all other revenue recognition criteria are met, and also include related hardware support. We expect
to make investments in research and development to improve existing hardware products and services and to develop new hardware products and services. The majority of our hardware products are sold through indirect channels, including independent
distributors and value-added resellers. 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. Hardware support contracts are generally priced as a percentage of the net hardware products fees and are generally recognized as revenues as
the hardware support services are delivered.
26
We generally expect our 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.
Our quarterly hardware revenues are difficult to predict. Our hardware revenues, cost of hardware and hardware operating margins that we
report are affected by: our ability to timely manufacture or deliver a few large hardware transactions; our strategy for and the competitive position of our hardware products relative to competitor offerings; customer demand for competing offerings
such as PaaS and IaaS; the strength of general economic and business conditions; governmental budgetary constraints; 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 the close association between hardware products, which have a finite life, and customer demand for related hardware support as hardware products age;
customer decisions to either maintain or upgrade their existing hardware infrastructure to newly developed technologies that are available; certain of our acquisitions; and foreign currency rate fluctuations.
Services Business
Our
services business helps customers and partners maximize the performance of their investments in Oracle applications, platform and infrastructure technologies. We believe that our services are differentiated based on our focus on Oracle technologies,
extensive experience, and broad sets of intellectual property and best practices. Our services offerings include consulting services, advanced support services and education services and represented 9% of our total revenues on a trailing
4-quarter
basis. 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; customer demand for our cloud and
on-premise
software and hardware offerings and the associated services for these offerings; our strategic emphasis on growing our
cloud revenues; certain of our acquisitions; general economic conditions; governmental budgetary constraints; personnel reductions in our customers IT departments; and tighter controls over discretionary spending.
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, including
NetSuite Inc. in the second quarter of fiscal 2017.
We expect to continue to acquire companies, products, services and technologies in
furtherance of our corporate strategy. 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 we can fund any 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 Boards (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
27
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:
|
|
|
Goodwill and Intangible AssetsImpairment 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 managements judgment in its application. There are also areas in which
managements 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.
During the first quarter of fiscal 2018, there were no significant changes to our critical accounting policies and
estimates. Managements 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,
2017 provides a more complete discussion of our critical accounting policies and estimates.
Results of Operations
Impacts of Acquisitions
The
comparability of our operating results in the first quarter of fiscal 2018 compared to the same period of fiscal 2017 was impacted by our recent acquisitions, including our acquisition of NetSuite Inc. during the second quarter of fiscal 2017. In
our discussion of changes in our results of operations from the first quarter of fiscal 2018 compared to the same period of fiscal 2017, 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 businesses 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 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, PaaS and IaaS contracts, the amounts shown as cloud and
on-premise
software 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.
|
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,
28
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 and
on-premise
software business and hardware business, 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.
Presentation of Operating Segment Results and Other Financial Information
In our results of operations discussion below, we provide an overview of our total consolidated revenues, total consolidated expenses and total
consolidated operating margin, all of which are presented on a GAAP basis. We also present a GAAP-based discussion below for substantially all of the other expense items as presented in our condensed consolidated statement of operations that are not
directly attributable to our three businesses.
In addition, we discuss below the results of each our three businessescloud and
on-premise
software, hardware and serviceswhich are our operating segments as defined pursuant to ASC 280,
Segment Reporting
. The financial reporting for our three businesses that is presented below is
presented in a manner that is consistent with that used by our CODMs. Our operating segment presentation below reflects revenues, direct costs and sales and marketing expenses that correspond to and are directly attributable to each of our
three businesses. We also utilize these inputs to calculate and present a segment margin for each business in the discussion below.
Consistent
with our internal management reporting processes, the below operating segment presentation includes revenues adjustments related to cloud and
on-premise
software contracts that would have otherwise been
recorded by the acquired businesses as independent entities but were not recognized in our consolidated statements of operations for the periods presented due to business combination accounting requirements. Refer to Supplemental Disclosure
Related to Certain Charges below for additional discussion of these items and Note 11 of Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report for a reconciliation of the summations of our total
operating segment revenues as presented in the discussion below to total revenues as presented per our condensed consolidated statements of operations for all periods presented.
In addition, research and development expenses, general and administrative expenses, stock-based compensation expenses, amortization of intangible assets, certain other expense allocations, acquisition
related and other expenses, restructuring expenses, interest expense,
non-operating
income, net and provision for income taxes are not attributed to our operating segments because our management does not view
the performance of our businesses including such items and/or it is impractical to do so. Refer to Supplemental Disclosure Related to Certain Charges below for additional discussion of certain of these items and Note 11 of Notes to
Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report for a reconciliation of the summations of total segment margin as presented in the discussion below to total income before provision of income taxes as presented
per our condensed consolidated statements of operations for all periods presented.
Constant Currency Presentation
Our international operations have provided and are expected to continue to provide a significant portion of each of our businesses revenues and
expenses. As a result, each businesses revenues and expenses and our total 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,
2017, 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
August 31, 2017 and 2016, our financial statements would reflect reported revenues of $1.20 million in the first quarter of fiscal 2018 (using 1.20 as the
month-end
average exchange rate for the
period) and $1.11 million in the first quarter of fiscal 2017 (using 1.11 as the
month-end
average exchange rate for the period). The constant currency presentation, however, would translate the results
for the first quarter of fiscal 2018 and 2017 using the May 31, 2017 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.
29
Total Revenues and Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended August 31,
|
|
|
|
|
|
|
Percent Change
|
|
|
|
|
(Dollars in millions)
|
|
2017
|
|
|
Actual
|
|
|
Constant
|
|
|
2016
|
|
Total Revenues by Geography:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
5,173
|
|
|
|
7%
|
|
|
|
7%
|
|
|
$
|
4,817
|
|
EMEA
(1)
|
|
|
2,539
|
|
|
|
5%
|
|
|
|
2%
|
|
|
|
2,413
|
|
Asia Pacific
(2)
|
|
|
1,475
|
|
|
|
8%
|
|
|
|
8%
|
|
|
|
1,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
9,187
|
|
|
|
7%
|
|
|
|
6%
|
|
|
|
8,595
|
|
Total Operating Expenses
|
|
|
6,366
|
|
|
|
7%
|
|
|
|
6%
|
|
|
|
5,954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Margin
|
|
$
|
2,821
|
|
|
|
7%
|
|
|
|
6%
|
|
|
$
|
2,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Margin %
|
|
|
31%
|
|
|
|
|
|
|
|
|
|
|
|
31%
|
|
% Revenues by Geography:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
|
56%
|
|
|
|
|
|
|
|
|
|
|
|
56%
|
|
EMEA
|
|
|
28%
|
|
|
|
|
|
|
|
|
|
|
|
28%
|
|
Asia Pacific
|
|
|
16%
|
|
|
|
|
|
|
|
|
|
|
|
16%
|
|
Total Revenues by Business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cloud and
on-premise
software
|
|
$
|
7,384
|
|
|
|
9%
|
|
|
|
8%
|
|
|
$
|
6,791
|
|
Hardware
|
|
|
943
|
|
|
|
-5%
|
|
|
|
-6%
|
|
|
|
996
|
|
Services
|
|
|
860
|
|
|
|
6%
|
|
|
|
5%
|
|
|
|
808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
9,187
|
|
|
|
7%
|
|
|
|
6%
|
|
|
$
|
8,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Revenues by Business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cloud and
on-premise
software
|
|
|
81%
|
|
|
|
|
|
|
|
|
|
|
|
79%
|
|
Hardware
|
|
|
10%
|
|
|
|
|
|
|
|
|
|
|
|
12%
|
|
Services
|
|
|
9%
|
|
|
|
|
|
|
|
|
|
|
|
9%
|
|
(1)
|
Comprised of Europe, the Middle East and Africa
|
(2)
|
The Asia Pacific region includes Japan
|
Excluding the effects of foreign currency rate variations, our total revenues increased in the first quarter of fiscal 2018 due to growth in our cloud and
on-premise
software revenues and services revenues, partially offset by a decrease in our hardware revenues. The constant currency increase in our cloud and
on-premise
software revenues during the first quarter of fiscal 2018 was attributable to growth in our cloud SaaS and cloud 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 a decrease in our new software licenses revenues. The constant currency increase in our services revenues during the first quarter of fiscal 2018 was primarily attributable to our recent acquisitions. The
constant currency decrease in our hardware revenues during the first quarter of fiscal 2018 was due to reductions in our hardware products revenues and hardware support revenues as we continued to place emphasis on the development, marketing and
sale of our cloud-based infrastructure technologies. In constant currency, the Americas region contributed 67%, the EMEA region contributed 11% and the Asia Pacific region contributed 22% to the growth in our total revenues during the first quarter
of fiscal 2018.
Excluding the effects of foreign currency rate variations, our total operating expenses increased during the first quarter of
fiscal 2018 relative to the prior year period due to higher cloud SaaS and cloud PaaS and IaaS expenses resulting primarily from increased headcount and infrastructure expenses to support the increase in our cloud SaaS and cloud PaaS and IaaS
revenues; higher sales and marketing expenses, which were primarily attributable to increased headcount in our cloud and
on-premise
software business; increased stock-based compensation expenses; and higher
intangible asset amortization due to additional amortization from intangible assets that we acquired in connection with our acquisition of NetSuite and other recently acquired companies. These constant currency expense increases in the first quarter
of fiscal 2018 were partially offset by lower hardware product costs and lower employee related expenses for our hardware business due to lower hardware
30
revenues; and lower software support costs due primarily to lower headcount; each in the first quarter of fiscal 2018 relative to the corresponding prior year period.
In constant currency, our total operating margin increased during the first quarter of fiscal 2018, relative to the first quarter of fiscal 2017, due to
the increase in our total revenues, and our total operating margin as a percentage of total revenues for the first quarter of fiscal 2018 was flat as compared to the first quarter of fiscal 2017.
Supplemental Disclosure Related to Certain Charges
To supplement our condensed 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.
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) or reduced our GAAP net income:
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
August 31,
|
|
(in millions)
|
|
2017
|
|
|
2016
|
|
Cloud and
on-premise
software deferred revenues
(1)
|
|
$
|
25
|
|
|
$
|
18
|
|
Acquired deferred sales commissions
amortization
(2)
|
|
|
(11
|
)
|
|
|
|
|
Amortization of intangible assets
(3)
|
|
|
411
|
|
|
|
311
|
|
Acquisition related and other
(4)(6)
|
|
|
12
|
|
|
|
14
|
|
Restructuring
(5)
|
|
|
124
|
|
|
|
99
|
|
Stock-based compensation, operating
segments
(6)
|
|
|
124
|
|
|
|
86
|
|
Stock-based compensation, R&D and
G&A
(6)
|
|
|
278
|
|
|
|
233
|
|
Income tax effects
(7)
|
|
|
(512
|
)
|
|
|
(258
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
451
|
|
|
$
|
503
|
|
|
|
|
|
|
|
|
|
|
(1)
|
In connection with our acquisitions, we have estimated the fair values of the cloud SaaS and cloud PaaS and IaaS subscription obligations assumed. Due
to our application of business combination accounting rules, we did not recognize the cloud SaaS and cloud PaaS and IaaS, 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 for 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 acquired 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 acquired 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 August 31,
2017, estimated future amortization expenses related to intangible assets were as follows (in millions):
|
|
|
|
|
|
Remainder of fiscal 2018
|
|
$
|
1,179
|
|
Fiscal 2019
|
|
|
1,408
|
|
Fiscal 2020
|
|
|
1,207
|
|
Fiscal 2021
|
|
|
1,021
|
|
Fiscal 2022
|
|
|
918
|
|
Fiscal 2023
|
|
|
567
|
|
Thereafter
|
|
|
886
|
|
|
|
|
|
|
Total intangible assets, net
|
|
$
|
7,186
|
|
|
|
|
|
|
(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.
|
31
(5)
|
Restructuring expenses during the first quarter of fiscal 2018 and 2017 primarily related to employee severance in connection with our Fiscal 2017
Oracle Restructuring Plan (2017 Restructuring Plan). Additional information regarding certain of our restructuring plans is provided in the discussion below under Restructuring Expenses, Note 6 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,
2017.
|
(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
August 31,
|
|
|
|
2017
|
|
|
2016
|
|
Cloud SaaS
|
|
$
|
9
|
|
|
$
|
5
|
|
Cloud PaaS and IaaS
|
|
|
2
|
|
|
|
1
|
|
Software license updates and product support
|
|
|
7
|
|
|
|
6
|
|
Hardware
|
|
|
3
|
|
|
|
3
|
|
Services
|
|
|
14
|
|
|
|
8
|
|
Sales and marketing
|
|
|
89
|
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation, operating segments
|
|
|
124
|
|
|
|
86
|
|
Research and development
|
|
|
234
|
|
|
|
195
|
|
General and administrative
|
|
|
44
|
|
|
|
38
|
|
Acquisition related and other
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
$
|
403
|
|
|
$
|
319
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation included in acquisition related and other expenses resulted from unvested
stock options and restricted stock-based awards assumed from acquisitions whose vesting was accelerated upon termination of the employees pursuant to the terms of those stock options and restricted stock-based awards.
(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 first quarter of fiscal 2018 and 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 25.0%
and 25.5%, respectively, instead of 14.5% and 22.8%, respectively, which represented our effective tax rates as derived per our condensed consolidated statements of operations, primarily due to the net tax effects for stock-based compensation
expense and 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 engages in the sale, marketing and delivery of our cloud SaaS and cloud PaaS and IaaS offerings and the licensing of our software for
on-premise
and other IT environments with the option to purchase
software license updates and product support contracts. Our cloud SaaS and cloud PaaS and IaaS offerings are generally subscription based and generally recognized as revenues over the subscription period. New software licenses revenues represent
fees earned from granting customers licenses, generally on a perpetual basis, to use our database and middleware and our applications software products within
on-premise
and other IT environments and are
generally recognized when unrestricted access to the software license is granted provided all other revenue recognition criteria are met. Software license updates and product support revenues are typically generated through the sale of software
support contracts related to
on-premise
new software licenses purchased by our customers at their option and are generally recognized as revenues ratably over the contractual term. We continue to place
significant emphasis, both domestically and internationally, on direct sales through our own sales force. We also continue to market our offerings through indirect channels. Costs associated with our cloud and
on-premise
software business are included in cloud SaaS, PaaS and IaaS expenses, software license updates and product support expenses, and sales and marketing expenses. These costs are largely personnel and
infrastructure related including the cost of providing our cloud SaaS, PaaS, IaaS and software support offerings, salaries and commissions earned by our sales force for the sale of our cloud and software offerings, and marketing program costs.
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended August 31,
|
|
|
|
|
|
|
Percent Change
|
|
|
|
|
(Dollars in millions)
|
|
2017
|
|
|
Actual
|
|
|
Constant
|
|
|
2016
|
|
Cloud and
On-Premise
Software Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
(1)
|
|
$
|
4,277
|
|
|
|
10%
|
|
|
|
10%
|
|
|
$
|
3,895
|
|
EMEA
(1)
|
|
|
2,020
|
|
|
|
6%
|
|
|
|
3%
|
|
|
|
1,903
|
|
Asia Pacific
(1)
|
|
|
1,112
|
|
|
|
10%
|
|
|
|
10%
|
|
|
|
1,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
(1)
|
|
|
7,409
|
|
|
|
9%
|
|
|
|
8%
|
|
|
|
6,809
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cloud SaaS, PaaS and IaaS
(2)
|
|
|
580
|
|
|
|
45%
|
|
|
|
44%
|
|
|
|
401
|
|
Software license updates and product support
(2)
|
|
|
240
|
|
|
|
-6%
|
|
|
|
-7%
|
|
|
|
257
|
|
Sales and marketing
(2)
|
|
|
1,684
|
|
|
|
6%
|
|
|
|
4%
|
|
|
|
1,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
(2)
|
|
|
2,504
|
|
|
|
11%
|
|
|
|
10%
|
|
|
|
2,254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Margin
|
|
$
|
4,905
|
|
|
|
8%
|
|
|
|
7%
|
|
|
$
|
4,555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Margin %
|
|
|
66%
|
|
|
|
|
|
|
|
|
|
|
|
67%
|
|
% Revenues by Geography:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
|
58%
|
|
|
|
|
|
|
|
|
|
|
|
57%
|
|
EMEA
|
|
|
27%
|
|
|
|
|
|
|
|
|
|
|
|
28%
|
|
Asia Pacific
|
|
|
15%
|
|
|
|
|
|
|
|
|
|
|
|
15%
|
|
Revenues by Offerings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cloud software as a service
(1)
|
|
$
|
1,089
|
|
|
|
62%
|
|
|
|
61%
|
|
|
$
|
674
|
|
Cloud platform as a service and infrastructure as a service
(1)
|
|
|
403
|
|
|
|
29%
|
|
|
|
28%
|
|
|
|
312
|
|
New software licenses
|
|
|
966
|
|
|
|
-6%
|
|
|
|
-7%
|
|
|
|
1,030
|
|
Software license updates and product support
(1)
|
|
|
4,951
|
|
|
|
3%
|
|
|
|
2%
|
|
|
|
4,793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cloud and
on-premise
software revenues
(1)
|
|
$
|
7,409
|
|
|
|
9%
|
|
|
|
8%
|
|
|
$
|
6,809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Revenues by Offerings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cloud software as a service
(1)
|
|
|
15%
|
|
|
|
|
|
|
|
|
|
|
|
10%
|
|
Cloud platform as a service and infrastructure as a service
(1)
|
|
|
5%
|
|
|
|
|
|
|
|
|
|
|
|
5%
|
|
New software licenses
|
|
|
13%
|
|
|
|
|
|
|
|
|
|
|
|
15%
|
|
Software license updates and product support
(1)
|
|
|
67%
|
|
|
|
|
|
|
|
|
|
|
|
70%
|
|
(1)
|
Includes cloud and
on-premise
software revenue adjustments related to certain cloud and software support
contracts that would have otherwise been recorded as revenues by the acquired businesses as independent entities but were not recognized in our GAAP-based consolidated statements of operations for the periods presented due to business combination
accounting requirements. Such revenue adjustments were included in our operating segment results for purposes of reporting to and review by our CODMs. See Presentation of Operating Segment Results and Other Financial Information
above for additional information.
|
(2)
|
Excludes stock-based compensation and certain allocations. Also excludes amortization of intangible assets and certain other GAAP-based expenses, which
were not allocated to our operating segment results for purposes of reporting to and review by our CODMs, as further described under Presentation of Operating Segment Results and Other Financial Information above.
|
Excluding the effects of currency rate fluctuations, total revenues from our cloud and
on-premise
software business increased in the first quarter of fiscal 2018 relative to the corresponding prior year period due to growth in our cloud SaaS and cloud PaaS and IaaS revenues, growth in our
software license updates and product support revenues and revenue contributions from our recent acquisitions, including our acquisition of NetSuite. These increases in revenues during the first quarter of fiscal 2018 were partially offset by
decreases in our new software licenses revenues. The increases in our cloud SaaS and cloud PaaS and IaaS revenues and decreases in our new software licenses revenues during the first quarter of fiscal 2018 were primarily due to the continued
strategic emphasis we placed on selling, marketing and growing our cloud offerings and we expect these revenue trends will continue. The increase in our first quarter of fiscal 2018 software license updates and product support revenues was a result
of substantially all customers electing to purchase software support contracts in conjunction with their purchase of new software licenses, and due to the renewal of substantially all of the software support customer base eligible for renewal during
the trailing
4-quarter
period. During the first quarter
33
of fiscal 2018, the Americas, EMEA and Asia Pacific regions contributed constant currency regional growth of 70%, 11% and 19%, respectively.
In constant currency, total cloud and
on-premise
software expenses increased in the first quarter of fiscal 2018
primarily due to higher cloud SaaS, PaaS and IaaS expenses resulting primarily from increased headcount and technology infrastructure expenses that were incurred to support the related cloud SaaS and cloud PaaS and IaaS revenues increases; and
higher sales and marketing expenses resulting from increased headcount. These expense increases were partially offset by lower software license updates and product support expenses during the first quarter of fiscal 2018 due primarily to lower
employee related expenses resulting from lower headcount.
Excluding the effects of currency rate fluctuations, our cloud software and
on-premise
software segments total margin increased during the first quarter of fiscal 2018 due to the increase in revenues. In constant currency, total margin as a percentage of revenues decreased during the
first quarter of fiscal 2018 relative to the first quarter of fiscal 2017 as our total expenses grew at a faster rate than our total revenues for this business.
Hardware Business
Our hardware business revenues are generated from the sales of our
Oracle Engineered Systems, computer server, storage, and industry-specific hardware products for
on-premise
IT environments that are generally recognized as revenues upon delivery to the customer provided all
other revenue recognition criteria are met. Our hardware business also earns revenues from the sale of hardware support contracts purchased by our customers at their option and are generally recognized as revenues ratably as the services are
delivered over the contractual term. The majority of our hardware products are sold through indirect channels such as independent distributors and value-added resellers and we also market and sell our hardware products through our direct sales
force. Operating expenses associated with our hardware business include the cost of hardware products, which consists of expenses for materials and labor used to produce these products by our internal manufacturing operations or by third-party
manufacturers, warranty expenses and the impact of periodic changes in inventory valuation, including the impact of inventory determined to be excess and obsolete; the cost of materials used to repair customer products; the cost of labor and
infrastructure to provide support services; and sales and marketing expenses, which are largely personnel related and include variable compensation earned by our sales force for the sales of our hardware offerings.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended August 31,
|
|
|
|
|
|
|
Percent Change
|
|
|
|
|
(Dollars in millions)
|
|
2017
|
|
|
Actual
|
|
|
Constant
|
|
|
2016
|
|
Hardware Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
485
|
|
|
|
-8%
|
|
|
|
-8%
|
|
|
$
|
527
|
|
EMEA
|
|
|
271
|
|
|
|
-1%
|
|
|
|
-4%
|
|
|
|
274
|
|
Asia Pacific
|
|
|
187
|
|
|
|
-4%
|
|
|
|
-4%
|
|
|
|
195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
943
|
|
|
|
-5%
|
|
|
|
-6%
|
|
|
|
996
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hardware products and support
(1)
|
|
|
366
|
|
|
|
-4%
|
|
|
|
-5%
|
|
|
|
381
|
|
Sales and marketing
(1)
|
|
|
170
|
|
|
|
-15%
|
|
|
|
-16%
|
|
|
|
203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
(1)
|
|
|
536
|
|
|
|
-8%
|
|
|
|
-9%
|
|
|
|
584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Margin
|
|
$
|
407
|
|
|
|
-1%
|
|
|
|
-2%
|
|
|
$
|
412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Margin %
|
|
|
43%
|
|
|
|
|
|
|
|
|
|
|
|
41%
|
|
% Revenues by Geography:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
|
51%
|
|
|
|
|
|
|
|
|
|
|
|
53%
|
|
EMEA
|
|
|
29%
|
|
|
|
|
|
|
|
|
|
|
|
28%
|
|
Asia Pacific
|
|
|
20%
|
|
|
|
|
|
|
|
|
|
|
|
19%
|
|
(1)
|
Excludes stock-based compensation and certain allocations. Also excludes amortization of intangible assets and certain other GAAP-based expenses, which
were not allocated to our operating segment results for purposes of reporting to and review by our CODMs, as further described under Presentation of Operating Segments and Other Financial Information above.
|
34
Excluding the effects of currency rate fluctuations, total hardware revenues decreased in the first quarter
of fiscal 2018, relative to the first quarter of fiscal 2017, due to our continued emphasis on the development, marketing and sale of our cloud-based infrastructure technologies, which resulted in reduced sales volumes of most of our
on-premise
hardware product lines during the first quarter of fiscal 2018 and also impacted the volume of customers that purchase hardware support contracts.
Excluding the effects of currency rate fluctuations, total hardware products expenses decreased in the first quarter of fiscal 2018, relative to the first quarter of fiscal 2017, due primarily to lower
hardware products costs and lower employee related expenses, which aligned to lower hardware revenues.
In constant currency, total margin for
our hardware segment decreased on a constant currency basis in comparison to the corresponding prior year period primarily due to the decrease in our total revenues for this segment. In constant currency, total margin as a percentage of revenues
increased for our hardware segment in the first quarter of fiscal 2018 due to lower expenses.
Services Business
We offer services to customers and partners to help to maximize the performance of their investments in Oracle applications, platform and infrastructure
technologies. Services revenues are generally recognized as the services are performed. The cost of providing our services consists primarily of personnel related expenses, technology infrastructure expenditures, facilities expenses and external
contractor expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended August 31,
|
|
|
|
|
|
|
Percent Change
|
|
|
|
|
(Dollars in millions)
|
|
2017
|
|
|
Actual
|
|
|
Constant
|
|
|
2016
|
|
Services Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
435
|
|
|
|
5%
|
|
|
|
5%
|
|
|
$
|
413
|
|
EMEA
|
|
|
248
|
|
|
|
6%
|
|
|
|
3%
|
|
|
|
236
|
|
Asia Pacific
|
|
|
177
|
|
|
|
11%
|
|
|
|
12%
|
|
|
|
159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
860
|
|
|
|
6%
|
|
|
|
6%
|
|
|
|
808
|
|
Total Expenses
(1)
|
|
|
665
|
|
|
|
0%
|
|
|
|
-1%
|
|
|
|
665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Margin
|
|
$
|
195
|
|
|
|
37%
|
|
|
|
38%
|
|
|
$
|
143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Margin %
|
|
|
23%
|
|
|
|
|
|
|
|
|
|
|
|
18%
|
|
% Revenues by Geography:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
|
51%
|
|
|
|
|
|
|
|
|
|
|
|
51%
|
|
EMEA
|
|
|
29%
|
|
|
|
|
|
|
|
|
|
|
|
29%
|
|
Asia Pacific
|
|
|
20%
|
|
|
|
|
|
|
|
|
|
|
|
20%
|
|
(1)
|
Excludes stock-based compensation and certain allocations. Also excludes certain other GAAP-based expenses, which were not allocated to our operating
segment results for purposes of reporting to and review by our CODMs, as further described under Presentation of Operating Segments and Other Financial Information above.
|
Excluding the effects of currency rate fluctuations, our total services revenues increased in the first quarter of fiscal 2018 relative to the first
quarter of fiscal 2017 due to constant currency increases in our consulting revenues, which were primarily attributable to our recent acquisitions. During the first quarter of fiscal 2018, the Americas, EMEA and Asia Pacific regions contributed
constant currency regional growth of 37%, 17% and 46%, respectively.
In constant currency, total services expenses increased during the first
quarter of fiscal 2018 primarily due to an increase in headcount related expenses associated with our consulting offerings, primarily attributable to higher consulting expense contributions from our recent acquisitions. These constant currency
expense increases during the first quarter of fiscal 2018 were partially offset due to a $30 million charge recorded during the first quarter of fiscal 2017 which increased our expenses in the corresponding prior year period.
In constant currency, total services margin and total margin as a percentage of total services revenues increased in the first quarter of fiscal 2018,
relative to the first quarter of fiscal 2017, primarily due to the increase in
35
revenues in the first quarter of fiscal 2018 and the $30 million charge that was recorded during the first quarter of fiscal 2017.
Research and Development Expenses:
Research and development expenses consist primarily of personnel related expenditures. We intend to continue to invest significantly
in our research and development efforts because, in our judgment, they are essential to maintaining our competitive position.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended August 31,
|
|
|
|
|
|
|
Percent Change
|
|
|
|
|
(Dollars in millions)
|
|
2017
|
|
|
Actual
|
|
|
Constant
|
|
|
2016
|
|
Research and development
(1)
|
|
$
|
1,340
|
|
|
|
1%
|
|
|
|
0%
|
|
|
$
|
1,325
|
|
Stock-based compensation
|
|
|
234
|
|
|
|
20%
|
|
|
|
20%
|
|
|
|
195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
$
|
1,574
|
|
|
|
4%
|
|
|
|
3%
|
|
|
$
|
1,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Total Revenues
|
|
|
17%
|
|
|
|
|
|
|
|
|
|
|
|
17%
|
|
(1)
|
Excluding stock-based compensation
|
On a constant currency basis, total research and development expenses increased during the first quarter of fiscal 2018 relative to the corresponding prior year period primarily due to higher stock-based
compensation.
General and Administrative Expenses:
General and administrative expenses primarily consist
of personnel related expenditures for IT, finance, legal and human resources support functions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended August 31,
|
|
|
|
|
|
|
Percent Change
|
|
|
|
|
(Dollars in millions)
|
|
2017
|
|
|
Actual
|
|
|
Constant
|
|
|
2016
|
|
General and administrative
(1)
|
|
$
|
276
|
|
|
|
0%
|
|
|
|
-1%
|
|
|
$
|
277
|
|
Stock-based compensation
|
|
|
44
|
|
|
|
16%
|
|
|
|
16%
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
$
|
320
|
|
|
|
2%
|
|
|
|
1%
|
|
|
$
|
315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Total Revenues
|
|
|
3%
|
|
|
|
|
|
|
|
|
|
|
|
4%
|
|
(1)
|
Excluding stock-based compensation
|
On a constant currency basis, total general and administrative expenses increased during the first quarter of fiscal 2018 relative to the corresponding prior year period due primarily to increased
employee related expenses associated with higher headcount and higher stock-based compensation expenses, partially offset by lower professional services expenses that were primarily legal related.
Amortization of Intangible Assets:
Substantially all of our intangible assets are acquired through our business
combinations. We amortize our intangible assets over, and monitor the appropriateness of, the estimated useful lives of these assets. We also periodically review these intangible assets for potential impairment based upon relevant facts and
circumstances. Note 5 of Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report has additional information regarding our intangible assets and related amortization.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended August 31,
|
|
|
|
|
|
|
Percent Change
|
|
|
|
|
(Dollars in millions)
|
|
2017
|
|
|
Actual
|
|
|
Constant
|
|
|
2016
|
|
Developed technology
|
|
$
|
190
|
|
|
|
40%
|
|
|
|
40%
|
|
|
$
|
136
|
|
SaaS, PaaS and IaaS agreements and related relationships
|
|
|
151
|
|
|
|
140%
|
|
|
|
140%
|
|
|
|
63
|
|
Software support agreements and related relationships
|
|
|
31
|
|
|
|
-3%
|
|
|
|
-3%
|
|
|
|
32
|
|
Other
|
|
|
39
|
|
|
|
-51%
|
|
|
|
-51%
|
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortization of intangible assets
|
|
$
|
411
|
|
|
|
32%
|
|
|
|
32%
|
|
|
$
|
311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
Amortization of intangible assets increased during the first quarter of fiscal 2018 relative to the
corresponding prior year period due to additional amortization from intangible assets that we acquired in connection with our recent acquisitions, primarily our acquisition of NetSuite.
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, and certain business combination adjustments including certain adjustments after the measurement period has ended and certain other operating items, net. Stock-based compensation
expenses included in acquisition related and other expenses resulted from unvested restricted stock-based awards and stock options assumed from acquisitions whereby vesting was accelerated upon termination of the employees pursuant to the original
terms of those restricted stock-based awards and stock options.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended August 31,
|
|
|
|
|
|
|
Percent Change
|
|
|
|
|
(Dollars in millions)
|
|
2017
|
|
|
Actual
|
|
|
Constant
|
|
|
2016
|
|
Transitional and other employee related costs
|
|
$
|
9
|
|
|
|
15%
|
|
|
|
12%
|
|
|
$
|
8
|
|
Stock-based compensation
|
|
|
1
|
|
|
|
*
|
|
|
|
*
|
|
|
|
|
|
Professional fees and other, net
|
|
|
3
|
|
|
|
-33%
|
|
|
|
-33%
|
|
|
|
5
|
|
Business combination adjustments, net
|
|
|
(1
|
)
|
|
|
-256%
|
|
|
|
-239%
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total acquisition related and other expenses
|
|
$
|
12
|
|
|
|
-17%
|
|
|
|
-17%
|
|
|
$
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On a constant currency basis,
acquisition related and other expenses decreased in the first quarter of fiscal 2018 primarily due to lower professional fees and the favorable impacts of business combination adjustments.
Restructuring Expenses:
Restructuring expenses resulted from the execution of management approved restructuring plans that were generally developed to improve our cost
structure and/or operations, often in conjunction with our acquisition integration strategies. Restructuring expenses consist of employee severance costs and may also include charges for duplicate facilities and other contract termination costs to
improve our cost structure prospectively. For additional information regarding our restructuring plans, see Note 6 of Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report and Note 9 of Notes to
Consolidated Financial Statements included in our Annual Report on Form
10-K
for the fiscal year ended May 31, 2017.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended August 31,
|
|
|
|
|
|
|
Percent Change
|
|
|
|
|
(Dollars in millions)
|
|
2017
|
|
|
Actual
|
|
|
Constant
|
|
|
2016
|
|
Restructuring expenses
|
|
$
|
124
|
|
|
|
25%
|
|
|
|
22%
|
|
|
$
|
99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring expenses in the first quarter of fiscal 2018 and 2017 primarily related to our 2017 Restructuring Plan. Our
management approved, committed to and initiated the 2017 Restructuring Plan in order to restructure and further improve efficiencies in our operations. In the first quarter of fiscal 2018, our management supplemented the 2017 Restructuring Plan in
to reflect additional actions that we expect to take. The total estimated restructuring costs associated with the 2017 Restructuring Plan are up to $1.1 billion and will be recorded to the restructuring expense line item within our condensed
consolidated statements of operations as they are incurred. The total estimated remaining restructuring costs associated with the 2017 Restructuring Plan were approximately $475 million as of August 31, 2017 and the majority of the
remaining costs are expected to be incurred through the end of fiscal 2018. Our estimated costs are subject to change in future periods.
The
majority of the initiatives undertaken by our 2017 Restructuring Plan were effected to implement our continued move toward developing, marketing and selling our cloud-based offerings. These initiatives impacted certain of our sales and marketing and
research and development operations that supported our
on-premise
business. Cost savings that are expected to be realized pursuant to our 2017 Restructuring Plan initiatives are primarily expected to be offset
by investments in resources and geographies that best address the development, marketing and sale of our cloud-based offerings as customer preferences pivot to the Oracle Cloud.
37
Interest Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended August 31,
|
|
|
|
|
|
|
Percent Change
|
|
|
|
|
(Dollars in millions)
|
|
2017
|
|
|
Actual
|
|
|
Constant
|
|
|
2016
|
|
Interest expense
|
|
$
|
469
|
|
|
|
13%
|
|
|
|
13%
|
|
|
$
|
416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense increased in the first quarter of fiscal 2018, relative to the first quarter of fiscal 2017, primarily
due to higher average borrowings resulting from our issuance of $14.0 billion of senior notes in July 2016. This increase in interest expense during the first quarter of fiscal 2018 was partially offset by a reduction in interest expense
resulting from the maturity and repayment of $1.0 billion of floating rate senior notes in July 2017.
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 August 31,
|
|
|
|
|
|
|
Percent Change
|
|
|
|
|
(Dollars in millions)
|
|
2017
|
|
|
Actual
|
|
|
Constant
|
|
|
2016
|
|
Interest income
|
|
$
|
257
|
|
|
|
45%
|
|
|
|
45%
|
|
|
$
|
177
|
|
Foreign currency losses, net
|
|
|
(4
|
)
|
|
|
-65%
|
|
|
|
-70%
|
|
|
|
(13
|
)
|
Noncontrolling interests in income
|
|
|
(47
|
)
|
|
|
32%
|
|
|
|
32%
|
|
|
|
(35
|
)
|
Other income (loss), net
|
|
|
27
|
|
|
|
37%
|
|
|
|
37%
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
non-operating
income, net
|
|
$
|
233
|
|
|
|
57%
|
|
|
|
57%
|
|
|
$
|
148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On a constant currency basis, our
non-operating
income, net for the first quarter
of fiscal 2018 increased, relative to the first quarter of fiscal 2017, primarily due to higher interest income resulting from higher cash, cash equivalent and short-term investment balances and higher interest rates.
Provision for Income Taxes:
Our effective tax rate in all periods is the result of the mix of income earned in
various tax jurisdictions that apply a broad range of income tax rates. The provision for income taxes differs from the tax computed at the U.S. federal statutory income tax rate due primarily to certain earnings considered as indefinitely
reinvested in foreign operations, state taxes, the U.S. research and development tax credit, settlements with tax authorities, the tax effects of stock-based compensation and the U.S. domestic production activity deduction. Future effective tax
rates could be adversely affected by an unfavorable shift of earnings weighted to jurisdictions with higher tax rates, by unfavorable changes in tax laws and regulations, by adverse rulings in tax related litigation, or by shortfalls in stock-based
compensation realized by employees relative to stock-based compensation that was recorded for book purposes, among others.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended August 31,
|
|
|
|
|
|
|
Percent Change
|
|
|
|
|
(Dollars in millions)
|
|
2017
|
|
|
Actual
|
|
|
Constant
|
|
|
2016
|
|
Provision for income taxes
|
|
$
|
375
|
|
|
|
-31%
|
|
|
|
-31%
|
|
|
$
|
541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
14.5%
|
|
|
|
|
|
|
|
|
|
|
|
22.8%
|
|
Provision for income taxes in the first quarter of fiscal 2018 decreased, relative to the first quarter of fiscal 2017 in
substantial part to the favorable impact of excess tax benefits recognized on stock-based compensation expense and a favorable change in jurisdictional mix of our earnings recognized in the first quarter of fiscal 2018. This favorable impact was
partially offset by higher income before provision for income tax during the first quarter of fiscal 2018.
38
Liquidity and Capital Resources
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
August 31,
2017
|
|
|
Change
|
|
|
May 31,
2017
|
|
Working capital
|
|
$
|
53,109
|
|
|
|
6%
|
|
|
$
|
50,337
|
|
Cash, cash equivalents and marketable securities
|
|
$
|
66,897
|
|
|
|
1%
|
|
|
$
|
66,078
|
|
Working capital:
The increase in working capital as of August 31, 2017 in
comparison to May 31, 2017 was primarily due to the favorable impacts to our net current assets resulting from our net income during the first quarter of fiscal 2018 and proceeds from stock option exercises. These favorable working capital
movements were partially offset by cash used for repurchases of our common stock and cash used to pay dividends to our stockholders during the first quarter of fiscal 2018. Our working capital may be impacted by some or all of the aforementioned
factors in future periods, the amounts and timing of which are variable.
Cash, cash equivalents and marketable
securities:
Cash and cash equivalents primarily consist of deposits held at major banks,
Tier-1
commercial paper and other securities with original maturities of 90 days or less.
Marketable securities consist of
Tier-1
commercial paper debt securities, corporate debt securities and certain other securities. The increase in cash, cash equivalents and marketable securities at
August 31, 2017 in comparison to May 31, 2017 was primarily due to cash inflows generated by our operations and cash inflows from stock option exercises during the first quarter of fiscal 2018 and were partially offset by certain cash
outflows, primarily the repayment of $4.8 billion of borrowings, repurchases of our common stock, payments of cash dividends to our stockholders and cash used for capital expenditures. Cash, cash equivalents and marketable securities included
$58.3 billion held by our foreign subsidiaries as of August 31, 2017, a significant portion of which was generated from the earnings of these foreign subsidiaries that we consider as indefinitely reinvested in our foreign operations
outside the United States. These undistributed earnings that are considered as indefinitely reinvested overseas would be subject to U.S. income tax if repatriated to the United States. The amount of cash, cash equivalents and marketable securities
that we report in U.S. Dollars for a significant portion of the cash, cash equivalents and marketable securities balances held by our foreign subsidiaries is subject to translation adjustments caused by changes in foreign currency exchange rates as
of the end of each respective reporting period (the offset to which is substantially recorded to accumulated other comprehensive loss in our condensed consolidated balance sheets and is also presented as a line item in our condensed consolidated
statements of comprehensive income included elsewhere in this Quarterly Report). As the U.S. Dollar generally weakened against certain major international currencies during the first quarter fiscal 2018, the amount of cash, cash equivalents and
marketable securities that we reported in U.S. Dollars for these subsidiaries increased on a net basis as of August 31, 2017 relative to what we would have reported using constant currency rates from the May 31, 2017 balance sheet date.
Days sales outstanding, which we calculate by dividing period end accounts receivable by average daily sales for the quarter, was 35 days at
August 31, 2017 compared with 44 days at May 31, 2017. The days sales outstanding calculation excludes the impact of any revenue adjustments resulting from business combinations that reduced our acquired cloud and
on-premise
software obligations to fair value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended August 31,
|
|
(Dollars in millions)
|
|
2017
|
|
|
Change
|
|
|
2016
|
|
Net cash provided by operating activities
|
|
$
|
6,566
|
|
|
|
12%
|
|
|
$
|
5,875
|
|
Net cash used for investing activities
|
|
$
|
(1,818
|
)
|
|
|
-65%
|
|
|
$
|
(5,203
|
)
|
Net cash (used for) provided by financing activities
|
|
$
|
(5,441
|
)
|
|
|
171%
|
|
|
$
|
7,712
|
|
Cash flows from operating activities:
Our largest source of operating cash flows is
cash collections from our customers following the purchase and renewal of their software license updates and product support agreements. Payments from customers for these support agreements are generally received near the beginning of the
contracts terms, which are generally one year in length. Over the course of a fiscal year, we also have historically generated cash from the sales of new software licenses, cloud SaaS, PaaS and IaaS offerings, hardware offerings and services.
Our primary uses of cash from operating activities are for employee related expenditures, material and manufacturing costs related to the production of our hardware products, taxes and leased facilities.
39
Net cash provided by operating activities increased during the first quarter of fiscal 2018 due primarily to
higher net income during the first quarter of fiscal 2018 relative to the corresponding prior year period.
Cash flows from investing
activities:
The changes in cash flows from investing activities primarily relate to our acquisitions, the timing of our purchases, maturities and sales of our investments in marketable debt securities and investments
in capital and other assets, including certain intangible assets, to support our growth.
Net cash used for investing activities decreased in
the first quarter of fiscal 2018 relative to the first quarter of fiscal 2017 primarily due to a decrease in cash used to purchase marketable securities and other investments, net of proceeds received from sales and maturities and a decrease in cash
used for acquisitions, net of cash acquired.
Cash flows from financing activities:
The changes in cash
flows from financing activities primarily relate to borrowings and repayments related to our debt instruments as well as stock repurchases, dividend payments and net proceeds related to employee stock programs.
Net cash used in financing activities in the first quarter of fiscal 2018 was $5.4 billion in comparison to net cash provided by financing activities
of $7.7 billion during the first quarter of fiscal 2017. The change in financing activities cash flows in the first quarter of fiscal 2018 relative to the corresponding prior year period was primarily related to debt related cash flows for
which we had debt repayments of $4.8 billion in the first quarter of fiscal 2018 in comparison to $10.2 billion of cash inflows form borrowings, net of repayments, in the first quarter of fiscal 2017. These unfavorable financing cash flows
during the first quarter of fiscal 2018 relative to the corresponding prior year period were partially offset by higher cash inflows from stock option exercises and lower cash outflows related to stock repurchases, each during the first quarter of
fiscal 2018 relative to the corresponding prior year period.
Free cash flow:
To supplement our statements
of cash flows presented on a GAAP basis, we use
non-GAAP
measures of cash flows on a trailing
4-quarter
basis to analyze cash flows generated from our operations. We
believe that free cash flow is also useful as one of the bases for comparing our performance with our competitors. The presentation of
non-GAAP
free cash flow is not meant to be considered in isolation or as
an alternative to net income as an indicator of our performance, or as an alternative to cash flows from operating activities as a measure of liquidity. We calculate free cash flow as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trailing
4-Quarters
Ended August 31,
|
|
(Dollars in millions)
|
|
2017
|
|
|
Change
|
|
|
2016
|
|
Net cash provided by operating activities
|
|
$
|
14,817
|
|
|
|
8%
|
|
|
$
|
13,679
|
|
Capital expenditures
|
|
|
(2,195
|
)
|
|
|
111%
|
|
|
|
(1,042
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free cash flow
|
|
$
|
12,622
|
|
|
|
0%
|
|
|
$
|
12,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
9,713
|
|
|
|
|
|
|
$
|
8,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free cash flow as percent of net income
|
|
|
130%
|
|
|
|
|
|
|
|
141%
|
|
Long-Term Customer Financing:
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 generally 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. We financed $191 million and $107 million, respectively, or approximately 20% and 10%, respectively, of our new software licenses revenues in the first quarters of fiscal 2018 and 2017.
Contractual Obligations:
During the first quarter of fiscal 2018, there were no significant changes to
our estimates of future payments under our fixed contractual obligations and commitments as presented in Part II, Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on
Form
10-K
for our fiscal year ended May 31, 2017.
We believe that our current cash, cash
equivalents and marketable securities and cash generated from operations will be sufficient to meet our working capital, capital expenditures and contractual obligation requirements. In
40
addition, we believe that we could fund any future acquisitions, dividend payments and repurchases of common stock or debt with our internally available cash, cash equivalents and marketable
securities, cash generated from operations, additional borrowings or from the issuance of additional securities.
Off-Balance
Sheet Arrangements:
We do not have any
off-balance
sheet arrangements that have or are reasonably likely to have a current or future
effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Restricted Stock-Based Awards and Stock Options
Our stock-based compensation program is a key component of the compensation package we provide to attract and retain certain of our talented employees and align their interests with the interests of
existing stockholders.
We recognize that restricted stock-based awards and stock options dilute existing stockholders and have sought to
control the number of stock-based awards granted while providing competitive compensation packages. Consistent with these dual goals, our cumulative potential dilution since June 1, 2014 has been a weighted-average annualized rate of
1.2% per year. The potential dilution percentage is calculated as the average annualized new restricted stock-based awards or stock options granted and assumed, net of restricted stock-based awards and stock options forfeited by employees
leaving the company, divided by the weighted-average outstanding shares during the calculation period. This maximum potential dilution will only result if all restricted stock-based awards vest and all stock options are exercised. Of the outstanding
stock options at August 31, 2017, which generally have a
ten-year
exercise period, 14.9% have exercise prices higher than the market price of our common stock on such date. In recent years, our stock
repurchase program has more than offset the dilutive effect of our stock-based compensation program. However, we have recently reduced the level of our stock repurchases and we may modify the levels of our stock repurchases in the future depending
on a number of factors, including the amount of cash we have available for acquisitions, to pay dividends, to repay or repurchase indebtedness or for other purposes. At August 31, 2017, the maximum potential dilution from all outstanding
restricted stock-based awards and unexercised stock options, regardless of when granted and regardless of whether vested or unvested and including stock options where the strike price is higher than the market price as of such date, was 10.8%.
Recent Accounting Pronouncements
For information with respect to recent accounting pronouncements, if any, and the impact of these pronouncements on our consolidated financial statements, if any, see Note 1 of Notes to Condensed
Consolidated Financial Statements included elsewhere in this Quarterly Report.