10-Q 1 d548579d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

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

For the quarterly period ended February 28, 2018

or

 

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

For the transition period from                  to                 

Commission File Number: 001-35992

 

 

Oracle Corporation

(Exact name of registrant as specified in its charter)

 

Delaware   54-2185193

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

500 Oracle Parkway

Redwood City, California

  94065
(Address of principal executive offices)   (Zip Code)

(650) 506-7000

(Registrant’s telephone number, including area code)

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

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

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

 

Large accelerated filer    ☒    Accelerated filer    ☐
Non-accelerated filer    ☐    Smaller reporting company    ☐
(Do not check if a smaller reporting company)   
Emerging growth company    ☐   

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ☐

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

The number of shares of registrant’s common stock outstanding as of March 15, 2018 was: 4,082,313,000.

 

 

 

 


Table of Contents

ORACLE CORPORATION

FORM 10-Q QUARTERLY REPORT

 

 

TABLE OF CONTENTS

 

        Page  

PART I.

  FINANCIAL INFORMATION  

Item 1.

  Financial Statements (Unaudited)     3  
  Condensed Consolidated Balance Sheets as of February 28, 2018 and May 31, 2017     3  
 

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended February 28, 2018 and 2017

    4  
 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended February 28, 2018 and 2017

    5  
 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended February  28, 2018 and 2017

    6  
  Notes to Condensed Consolidated Financial Statements     7  

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations     26  

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk     46  

Item 4.

  Controls and Procedures     46  

PART II.

  OTHER INFORMATION  

Item 1.

  Legal Proceedings     48  

Item 1A.

  Risk Factors     48  

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds     48  

Item 6.

 

Exhibits

    49  
  Signatures     50  


Table of Contents

Cautionary Note on Forward-Looking Statements

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

 

   

our expectations regarding the impacts of the U.S. 2017 Tax Cuts and Jobs Act on our tax position and ability to access and use cash and other balances held by certain of our foreign subsidiaries;

 

   

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

 

   

our belief 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;

 

   

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

 

   

our expectation that we will continue to place significant strategic emphasis on growing our cloud SaaS and cloud PaaS and IaaS offerings, which has affected the growth of our new software license revenues and hardware revenues and to a lesser extent, has also affected the growth of our software license updates and product support revenues;

 

   

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

 

   

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

 

   

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

 

   

our expectation that our international operations will continue to provide a significant portion of our total revenues and expenses;

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

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the timing and amount of our stock repurchases, including our expectation that the levels of our future stock repurchase activity may be modified in comparison to past periods in order to use available cash for other purposes;

 

   

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

 

   

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

 

   

our ability to predict quarterly hardware revenues;

as well as other statements regarding our future operations, financial condition and prospects, and business strategies. Forward-looking statements may be preceded by, followed by or include the words “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “strives,” “estimates,” “will,” “should,” “is designed to” and similar expressions. We claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 for all forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are subject to risks, uncertainties and assumptions about our business that could affect our future results and could cause those results or other outcomes to differ materially from those expressed or implied in the forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in “Risk Factors” included in documents we file from time to time with the U.S. Securities and Exchange Commission (the SEC), including our Annual Report on Form 10-K for our fiscal year ended May 31, 2017 and our other Quarterly Reports on Form 10-Q filed by us in our fiscal year 2018, which runs from June 1, 2017 to May 31, 2018.

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

 

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PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements (Unaudited)

ORACLE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

As of February 28, 2018 and May 31, 2017

(Unaudited)

 

(in millions, except per share data)

   February 28,
        2018         
    May 31,
        2017         
 
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 19,487     $ 21,784  

Marketable securities

     50,968       44,294  

Trade receivables, net of allowances for doubtful accounts of $365 and $319 as of February 28, 2018 and May 31, 2017, respectively

     3,902       5,300  

Inventories

     496       300  

Prepaid expenses and other current assets

     2,879       2,837  
  

 

 

   

 

 

 

Total current assets

     77,732       74,515  
  

 

 

   

 

 

 

Non-current assets:

    

Property, plant and equipment, net

     5,904       5,315  

Intangible assets, net

     6,400       7,679  

Goodwill, net

     42,965       43,045  

Deferred tax assets

     1,815       1,143  

Other non-current assets

     3,385       3,294  
  

 

 

   

 

 

 

Total non-current assets

     60,469       60,476  
  

 

 

   

 

 

 

Total assets

   $ 138,201     $ 134,991  
  

 

 

   

 

 

 
LIABILITIES AND EQUITY     

Current liabilities:

    

Notes payable and other borrowings, current

   $ 4,491     $ 9,797  

Accounts payable

     603       599  

Accrued compensation and related benefits

     1,498       1,966  

Deferred revenues

     8,003       8,233  

Other current liabilities

     3,373       3,583  
  

 

 

   

 

 

 

Total current liabilities

     17,968       24,178  
  

 

 

   

 

 

 

Non-current liabilities:

    

Notes payable and other borrowings, non-current

     56,224       48,112  

Income taxes payable

     13,296       5,681  

Other non-current liabilities

     2,441       2,774  
  

 

 

   

 

 

 

Total non-current liabilities

     71,961       56,567  
  

 

 

   

 

 

 

Commitments and contingencies

    

Oracle Corporation stockholders’ equity:

    

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

            

Common stock, $0.01 par value and additional paid in capital—authorized: 11,000 shares; outstanding: 4,093 shares and 4,137 shares as of February 28, 2018 and May 31, 2017, respectively

     29,048       27,065  

Retained earnings

     20,037       27,598  

Accumulated other comprehensive loss

     (1,296     (803
  

 

 

   

 

 

 

Total Oracle Corporation stockholders’ equity

     47,789       53,860  

Noncontrolling interests

     483       386  
  

 

 

   

 

 

 

Total equity

     48,272       54,246  
  

 

 

   

 

 

 

Total liabilities and equity

   $ 138,201     $ 134,991  
  

 

 

   

 

 

 

 

 

See notes to condensed consolidated financial statements.

 

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ORACLE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three and Nine Months Ended February 28, 2018 and 2017

(Unaudited)

 

     Three Months  Ended
February 28,
     Nine Months  Ended
February 28,
 

(in millions, except per share data)

         2018              2017              2018              2017      

Revenues:

           

Cloud software as a service

   $ 1,151      $ 865      $ 3,340      $ 2,247  

Cloud platform as a service and infrastructure as a service

     415        324        1,212        964  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total cloud revenues

     1,566        1,189        4,552        3,211  
  

 

 

    

 

 

    

 

 

    

 

 

 

New software licenses

     1,388        1,414        3,706        3,792  

Software license updates and product support

     5,027        4,762        14,932        14,331  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total on-premise software revenues

     6,415        6,176        18,638        18,123  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total cloud and on-premise software revenues

     7,981        7,365        23,190        21,334  
  

 

 

    

 

 

    

 

 

    

 

 

 

Hardware revenues

     994        1,028        2,878        3,037  

Services revenues

     796        812        2,511        2,464  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

     9,771        9,205        28,579        26,835  
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating expenses:

           

Cloud software as a service(1)

     398        330        1,168        930  

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

     275        175        743        463  

Software license updates and product support(1)

     223        270        738        786  

Hardware(1)

     394        437        1,119        1,214  

Services(1)

     712        680        2,134        2,073  

Sales and marketing(1)

     2,033        2,004        6,106        5,883  

Research and development

     1,498        1,521        4,547        4,551  

General and administrative

     340        241        982        859  

Amortization of intangible assets

     394        397        1,205        1,010  

Acquisition related and other

     3        30        32        84  

Restructuring

     91        161        506        346  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses

     6,361        6,246        19,280        18,199  
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income

     3,410        2,959        9,299        8,636  
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest expense

     (533      (450      (1,477      (1,317

Non-operating income, net

     423        189        929        437  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before provision for income taxes

     3,300        2,698        8,751        7,756  
  

 

 

    

 

 

    

 

 

    

 

 

 

Provision for income taxes

     7,324        459        8,333        1,653  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss)

   $ (4,024    $ 2,239      $ 418      $ 6,103  
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings (loss) per share:

           

Basic

   $ (0.98    $ 0.55      $ 0.10      $ 1.49  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

   $ (0.98    $ 0.53      $ 0.10      $ 1.45  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding:

           

Basic

     4,122        4,107        4,146        4,110  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

     4,122        4,204        4,268        4,207  
  

 

 

    

 

 

    

 

 

    

 

 

 

Dividends declared per common share

   $ 0.19      $ 0.15      $ 0.57      $ 0.45  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

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

 

 

 

See notes to condensed consolidated financial statements.

 

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ORACLE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

For the Three and Nine Months Ended February 28, 2018 and 2017

(Unaudited)

 

     Three Months  Ended
February 28,
     Nine Months  Ended
February 28,
 

(in millions)

         2018              2017              2018              2017      

Net income (loss)

   $ (4,024    $ 2,239      $ 418      $ 6,103  

Other comprehensive income (loss), net of tax:

           

Net foreign currency translation gains (losses)

     31        32        29        (39

Net unrealized gains on defined benefit plans

     8        9        26        16  

Net unrealized gains (losses) on marketable securities

     (439      96        (567      (117

Net unrealized gains on cash flow hedges

     6        4        19        25  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other comprehensive income (loss), net

     (394      141        (493      (115
  

 

 

    

 

 

    

 

 

    

 

 

 

Comprehensive income (loss)

   $ (4,418    $ 2,380      $ (75    $ 5,988  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

 

See notes to condensed consolidated financial statements.

 

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ORACLE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Months Ended February 28, 2018 and 2017

(Unaudited)

 

    Nine Months Ended
February 28,
 

(in millions)

  2018     2017  

Cash flows from operating activities:

   

Net income

  $ 418     $ 6,103  

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

   

Depreciation

    878       722  

Amortization of intangible assets

    1,205       1,010  

Deferred income taxes

    (613     111  

Stock-based compensation

    1,211       1,017  

Other, net

    (63     96  

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

   

Decrease in trade receivables, net

    1,484       1,673  

Increase in inventories

    (195     (178

Decrease in prepaid expenses and other assets

    76       308  

Decrease in accounts payable and other liabilities

    (606     (862

Increase (decrease) in income taxes payable

    7,444       (10

Decrease in deferred revenues

    (513     (330
 

 

 

   

 

 

 

Net cash provided by operating activities

    10,726       9,660  
 

 

 

   

 

 

 

Cash flows from investing activities:

   

Purchases of marketable securities and other investments

    (24,496     (15,571

Proceeds from maturities and sales of marketable securities and other investments

    17,069       11,825  

Acquisitions, net of cash acquired

          (10,406

Capital expenditures

    (1,358     (1,496
 

 

 

   

 

 

 

Net cash used for investing activities

    (8,785     (15,648
 

 

 

   

 

 

 

Cash flows from financing activities:

   

Payments for repurchases of common stock

    (6,421     (3,067

Proceeds from issuances of common stock

    2,116       1,309  

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

    (467     (237

Payments of dividends to stockholders

    (2,362     (1,844

Proceeds from borrowings, net of issuance costs

    9,945       13,932  

Repayments of borrowings

    (7,300     (4,094

Distributions to noncontrolling interests

    (34     (200
 

 

 

   

 

 

 

Net cash (used for) provided by financing activities

    (4,523     5,799  
 

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

    285       (215
 

 

 

   

 

 

 

Net decrease in cash and cash equivalents

    (2,297     (404

Cash and cash equivalents at beginning of period

    21,784       20,152  
 

 

 

   

 

 

 

Cash and cash equivalents at end of period

  $ 19,487     $ 19,748  
 

 

 

   

 

 

 

Non-cash investing and financing transactions:

   

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

  $     $ 90  

Change in unsettled repurchases of common stock

  $ 80     $ (69

Change in unsettled investment purchases

  $ (299   $ 5  

 

 

 

 

See notes to condensed consolidated financial statements.

 

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

February 28, 2018

(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’s presentation. Such reclassifications did not affect total revenues, operating income or net income (loss).

During the first nine months of fiscal 2018, we adopted Accounting Standards Update (ASU) 2017-04, Intangibles—Goodwill 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.

Impacts of the U.S. 2017 Tax Cuts and Jobs Act

The comparability of our operating results in the third quarter and first nine months of fiscal 2018 compared to the corresponding prior year periods, and of our consolidated balance sheets as of February 28, 2018 relative to May 31, 2017, was impacted by the U.S. 2017 Tax Cuts and Jobs Act (the Act), which was signed into law on December 22, 2017. Effective January 1, 2018, the Act reduces the U.S. federal corporate tax rate from 35% to 21%; creates a quasi-territorial tax system that a) generally allows, among other provisions, companies to repatriate certain foreign source earnings without incurring additional U.S. income tax for such earnings generated after December 31, 2017 and b) generally requires companies to pay a one-time transition tax on certain foreign subsidiary earnings generated prior to December 31, 2017 that, in substantial part, were previously tax deferred; creates new taxes on certain foreign sourced earnings; limits deductibility of certain future compensation arrangements to certain highly compensated employees; and provides tax incentives for the exportation of U.S. products to foreign jurisdictions and for the purchase of qualifying capital equipment, among other provisions.

Because we have a May 31 fiscal year end, our fiscal 2018 blended U.S. federal statutory tax rate will be approximately 29%.

During the third quarter and first nine months of fiscal 2018, our provision for income taxes increased and affected our net income (loss), primarily as a result of the following items related to the enactment of the Act:

 

   

a $7.6 billion expense related to the application of the one-time transition tax to certain foreign subsidiary earnings that were generated prior to December 31, 2017, which expense was substantially recorded to non-current income taxes payable in our consolidated balance sheet and which corresponds to the amount we currently expect to periodically settle over an eight year period as provided by the Act;

partially offset by:

 

   

a $744 million benefit related to the remeasurement of our net deferred tax liabilities based on the rates at which they are expected to reverse in the future; and

 

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

February 28, 2018

(Unaudited)

 

   

the net favorable impacts of the Act on our tax profile and effective tax rate beginning on January 1, 2018, which we generally expect will continue into future periods.

The net expense related to the enactment of the Act has been accounted for during the third quarter and first nine months of fiscal 2018 based on provisional estimates pursuant to the SEC Staff Accounting Bulletin No. 118. Subsequent adjustments, if any, will be accounted for in the period such adjustments are identified. The provisional estimates incorporate, among other factors, assumptions made based on interpretations of the Act and existing tax laws, and a range of historical and forecasted financial and tax-specific facts and information, including, without limitation, the amount of cash and other specified assets anticipated to be held by the Company’s foreign subsidiaries on relevant dates and estimates of deferred tax balances during interim periods pending finalization of those balances.

Cash, Cash Equivalents and Restricted Cash

Restricted cash that was included within cash and cash equivalents as presented within our condensed consolidated balance sheets as of February 28, 2018 and May 31, 2017 and our condensed consolidated statements of cash flows for the nine months ended February 28, 2018 and 2017 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
February 28,
    Nine Months  Ended
February 28,
 

(in millions)

   2018     2017     2018     2017  

Transitional and other employee related costs

   $ 9     $ 15     $ 32     $ 31  

Stock-based compensation

           22       1       33  

Professional fees and other, net

     (8     (2     (1     26  

Business combination adjustments, net

     2       (5           (6
  

 

 

   

 

 

   

 

 

   

 

 

 

Total acquisition related and other expenses

   $ 3     $ 30     $ 32     $ 84  
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-Operating Income, net

Non-operating income, net consists primarily of interest income, net foreign currency exchange 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, 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
February 28,
    Nine Months  Ended
February 28,
 

(in millions)

   2018     2017     2018     2017  

Interest income

   $ 313     $ 197     $ 849     $ 578  

Foreign currency losses, net

     (35     (20     (46     (102

Noncontrolling interests in income

     (37     (20     (111     (95

Other income, net

     182       32       237       56  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-operating income, net

   $ 423     $ 189     $ 929     $ 437  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

February 28, 2018

(Unaudited)

 

Sales of Financing Receivables

We offer certain of our customers the option to acquire our software products, hardware products and services offerings through separate long-term payment contracts. We generally sell these contracts that we have financed for our customers on a non-recourse basis to financial institutions within 90 days of the contracts’ dates of execution. We record the transfers of amounts due from customers to financial institutions as sales of financing receivables because we are considered to have surrendered control of these financing receivables. Financing receivables sold to financial institutions were $360 million and $1.3 billion for the three and nine months ended February 28, 2018, respectively, and $296 million and $1.3 billion for the three and nine months ended February 28, 2017, respectively.

Recent Accounting Pronouncements

Comprehensive Income:    In February 2018, the Financial Accounting Standards Board (FASB) issued ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (ASU 2018-02), which allows companies to reclassify stranded tax effects resulting from the Act, from accumulated other comprehensive income to retained earnings. The guidance also requires certain new disclosures regardless of the election. ASU 2018-02 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 2018-02 on our consolidated financial statements.

Derivatives and Hedging:    In August 2017, the 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, Compensation—Retirement 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.

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

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

 

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

February 28, 2018

(Unaudited)

 

Leases:    In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) and issued subsequent amendments to the initial guidance in September 2017 within ASU 2017-13 (collectively, Topic 842). Topic 842 requires companies to generally recognize on the balance sheet operating and financing lease liabilities and corresponding right-of-use assets. Topic 842 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 Topic 842 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 Topic 842, 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, May 2017, September 2017 and November 2017 within ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-12, ASU 2016-20, ASU 2017-10, ASU 2017-13 and ASU 2017-14, respectively (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, it is possible that 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.

 

2.

ACQUISITIONS

Fiscal 2018 Proposed Acquisitions

During the first nine months of fiscal 2018, we entered into certain non-material agreements to acquire certain companies and expect these proposed acquisitions to close during the fourth quarter of fiscal 2018.

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

 

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

February 28, 2018

(Unaudited)

 

LLC investment entity whose interests are beneficially owned by a trust controlled by Mr. Ellison), which owned approximately 40% of the issued and outstanding NetSuite Shares immediately prior to the conclusion of the merger.

The total 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 $763 million of net tangible liabilities. Goodwill generated from our acquisition of NetSuite was primarily attributable to synergies expected to arise after the acquisition. 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 cloud-based 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. The total of the purchase prices, certain of which were preliminary, 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. As of February 28, 2018, we recorded $243 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 related to our fiscal 2017 acquisitions. Certain amounts included in these totals were preliminary and subject to change during the respective measurement periods (up to one year from the respective acquisition dates) as we obtain additional information for the preliminary fair value estimates of the assets acquired and liabilities assumed. The primary areas of those preliminary estimates that are not yet finalized related 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 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 and nine months ended February 28, 2018 presented the historical results of Oracle for the three and nine months ended February 28, 2018 as we did not complete any material acquisitions during the first nine months of fiscal 2018.

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

 

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

February 28, 2018

(Unaudited)

 

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
February 28,
     Nine Months Ended
February 28,
 

(in millions, except per share data)

         2018             2017              2018              2017      

Total revenues

   $ 9,771     $ 9,241      $   28,579      $   27,366  

Net income (loss)

   $ (4,024   $ 2,220      $ 418      $ 5,772  

Basic earnings (loss) per share

   $ (0.98   $ 0.54      $ 0.10      $ 1.40  

Diluted earnings (loss) per share

   $ (0.98   $ 0.53      $ 0.10      $ 1.37  

 

3.

FAIR VALUE MEASUREMENTS

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

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

 

   

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

 

   

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

 

   

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

 

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

February 28, 2018

(Unaudited)

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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

 

    February 28, 2018     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

  $ 755     $ 47,268     $   48,023     $ 580     $ 41,038     $   41,618  

Commercial paper debt securities

          4,487       4,487             5,053       5,053  

Money market funds

    5,775             5,775       3,302             3,302  

Derivative financial instruments

                            40       40  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 6,530     $ 51,755     $ 58,285     $ 3,882     $ 46,131     $ 50,013  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

           

Derivative financial instruments

  $     $ 84     $ 84     $     $ 191     $ 191  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Our marketable securities investments consist of Tier 1 commercial paper debt securities, corporate debt securities and certain other securities. As of February 28, 2018 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 $60.9 billion and $54.0 billion of senior notes and the related fair value hedges that were outstanding as of February 28, 2018 and May 31, 2017, respectively, the estimated fair values of the senior notes and the related fair value hedges using Level 2 inputs at February 28, 2018 and May 31, 2017 were $62.0 billion and $56.5 billion, respectively.

 

4.

INVENTORIES

Inventories consisted of the following:

 

(in millions)

   February 28,
         2018        
     May 31,
         2017        
 

Raw materials

   $ 328      $ 186  

Work-in-process

     36        42  

Finished goods

     132        72  
  

 

 

    

 

 

 

Total inventories

   $ 496      $ 300  
  

 

 

    

 

 

 

 

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Table of Contents

ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

February 28, 2018

(Unaudited)

 

5.

INTANGIBLE ASSETS AND GOODWILL

The changes in intangible assets for fiscal 2018 and the net book value of intangible assets as of February 28, 2018 and May 31, 2017 were as follows:

 

    Intangible Assets, Gross     Accumulated Amortization     Intangible Assets, Net  

(Dollars in millions)

   

May 31,

     2017     

 

 

   
Additions &
Adjustments, net
 
 
   

February 28,

     2018     

 

 

   

May 31,

     2017     

 

 

     Expense       

February 28,

     2018     

 

 

   

May 31,

     2017     

 

 

   

February 28,

2018

 

 

Developed technology

  $ 5,397     $ (214   $ 5,183     $ (2,295   $ (562   $ (2,857   $ 3,102     $ 2,326  

SaaS, PaaS and IaaS agreements and related relationships

    4,105       122       4,227       (1,089     (450     (1,539     3,016       2,688  

Software support agreements and related relationships

    1,565             1,565       (559     (93     (652     1,006       913  

Other

    1,998       18       2,016       (1,443     (100     (1,543     555       473  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total intangible assets, net

  $ 13,065     $ (74   $ 12,991     $ (5,386   $ (1,205   $ (6,591   $ 7,679     $ 6,400  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total amortization expense related to our intangible assets was $394 million and $1.2 billion for the three and nine months ended February 28, 2018, respectively, and $397 million and $1.0 billion for the three and nine months ended February 28, 2017, respectively. As of February 28, 2018, estimated future amortization expenses related to intangible assets were as follows (in millions):

 

Remainder of fiscal 2018

   $ 387  

Fiscal 2019

     1,411  

Fiscal 2020

     1,210  

Fiscal 2021

     1,023  

Fiscal 2022

     918  

Fiscal 2023

     567  

Thereafter

     884  
  

 

 

 

Total intangible assets, net

   $     6,400  
  

 

 

 

The changes in the carrying amounts of goodwill, net, which is generally not deductible for tax purposes, for our operating segments for the nine months ended February 28, 2018 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)

    (80                 (80
 

 

 

   

 

 

   

 

 

   

 

 

 

Balances as of February 28, 2018

  $ 38,711     $ 2,367     $ 1,887     $ 42,965  
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(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).

 

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

February 28, 2018

(Unaudited)

 

6.

NOTES PAYABLE AND OTHER BORROWINGS

Senior Notes

In November 2017, we issued $10.0 billion, par value, of fixed-rate senior notes comprised of the following as of February 28, 2018:

 

            February 28, 2018  

(Dollars in millions)

   Date of
Issuance
         Amount         Effective  Interest
Rate
 

$1,250, 2.625%, due February 2023

     November 2017      $ 1,250       2.637%  

$2,000, 2.95%, due November 2024

     November 2017        2,000       2.975%  

$2,750, 3.25%, due November 2027

     November 2017        2,750       3.263%  

$1,750, 3.80%, due November 2037

     November 2017        1,750       3.827%  

$2,250, 4.00%, due November 2047

     November 2017        2,250       4.027%  
     

 

 

   

Total fixed rate senior notes

      $ 10,000    
     

 

 

   

Unamortized discount/issuance costs

        (55  
     

 

 

   

Total fixed rate senior notes, net

      $ 9,945    
     

 

 

   

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

The senior notes rank pari passu with any other existing and future unsecured and unsubordinated indebtedness of Oracle Corporation. All existing and future indebtedness and liabilities of the subsidiaries of Oracle Corporation are or will be effectively senior to the senior notes. We were in compliance with all debt-related covenants at February 28, 2018.

There have been no other significant changes in our notes payable or other borrowing arrangements that were disclosed in our Annual Report on Form 10-K for the fiscal year ended May 31, 2017.

 

7.

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 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 $516 million of restructuring expenses in connection with the 2017 Restructuring Plan in the first nine months of fiscal 2018 and we expect to incur the majority of the estimated remaining $112 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.

 

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

February 28, 2018

(Unaudited)

 

Summary of All Plans

 

     Accrued 
May  31,
2017(2)
    Nine Months Ended February 28, 2018     Accrued
February  28,
2018(2)
    Total
Costs
 Accrued 
to Date
    Total
Expected
Program
Costs
 

(in millions)

    Initial
Costs(3)
        Adj. to  
Cost(4)
    Cash
Payments
    Others(5)        

Fiscal 2017 Oracle Restructuring Plan(1)

               

Cloud and on-premise software

  $ 85     $ 111     $ (8   $ (129   $ 6     $ 65     $ 281     $ 300  

Hardware

    31       146       (7     (89     4       85       227       241  

Services

    25       40       (3     (45     2       19       95       130  

Other

    44       230       7       (159     (4     118       399       443  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Fiscal 2017 Oracle Restructuring Plan

  $ 185     $ 527     $ (11   $ (422   $ 8     $ 287     $ 1,002     $ 1,114  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other restructuring plans(6)

  $ 79     $ 1     $ (11   $ (30   $ 5     $ 44      
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

Total restructuring plans

  $ 264     $ 528     $ (22   $ (452   $ 13     $ 331      
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

(1) 

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

 

(2) 

The balances at February 28, 2018 and May 31, 2017 included $298 million and $242 million, respectively, recorded in other current liabilities, and $33 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.

 

8.

DEFERRED REVENUES

Deferred revenues consisted of the following:

 

(in millions)

   February 28,
         2018        
     May 31,
         2017        
 

Software license updates and product support

   $ 5,562      $ 5,952  

Cloud SaaS, PaaS and IaaS

     1,348        1,192  

Hardware

     590        640  

Services

     439        382  

New software licenses

     64        67  
  

 

 

    

 

 

 

Deferred revenues, current

     8,003        8,233  
  

 

 

    

 

 

 

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

     607        602  
  

 

 

    

 

 

 

Total deferred revenues

   $ 8,610      $ 8,835  
  

 

 

    

 

 

 

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.

 

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

February 28, 2018

(Unaudited)

 

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, software license updates and product support, and hardware deferred revenues balances that we recorded as liabilities from these acquisitions and also reduced the resulting revenues that we recognized or will recognize over the terms of the acquired obligations during the post-combination periods.

 

9.

DERIVATIVE FINANCIAL INSTRUMENTS

We held certain derivative and non-derivative instruments that were accounted for pursuant to ASC 815, Derivatives and Hedging (ASC 815) and that were utilized in a consistent manner as of February 28, 2018 and May 31, 2017 and during the three and nine months ended February 28, 2018 and 2017. 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 February 28, 2018 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 $4.5 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 $1.6 billion and $1.4 billion, respectively. The fair values of our outstanding foreign currency forward contracts were nominal as of February 28, 2018 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.

 

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

February 28, 2018

(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 with the exception of the fair value hedge related to our $1.5 billion of senior notes due January 2019, which as of February 28, 2018 is classified within other current liabilities. 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

   February 28,
         2018        
    May 31,
         2017        
 

Interest rate swap agreements designated as fair value hedges

 

Other current liabilities

   $ (7   $  
    

 

 

   

 

 

 

Interest rate swap agreements designated as fair value hedges

 

Other non-current (liabilities) assets

   $ (47   $ 40  
    

 

 

   

 

 

 

Cross-currency swap agreements designated as cash flow hedges

 

Other non-current liabilities

   $ (30   $ (191
    

 

 

   

 

 

 

Foreign currency borrowings designated as net investment hedge

 

Notes payable, non-current

   $ (1,079   $ (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
February 28,
    Nine Months  Ended
February 28,
        Three Months  Ended
February 28,
    Nine Months  Ended
February 28,
 

(in millions)

  2018     2017     2018     2017         2018     2017     2018     2017  

Cross-currency swap agreements designated as cash flow hedges

  $ 57     $ 6     $ 161     $ (44   Non-operating income (expense), net   $ 51     $ 2     $ 142     $ (69
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

Foreign currency borrowings designated as net investment hedge

  $ (31   $ (1   $ (85   $ 42     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
February 28,
    Nine Months  Ended
February 28,
        Three Months  Ended
February 28,
    Nine Months  Ended
February 28,
 

(in millions)

          2018             2017             2018             2017                 2018             2017             2018             2017      

Interest rate swap agreements designated as fair value hedges

  Interest expense   $ (47   $ (31   $ (94   $ (99   Interest expense   $ 47     $ 31     $ 94     $ 99  
   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

 

10.

STOCKHOLDERS’ EQUITY

Common Stock Repurchases

Our Board of Directors has approved a program for us to repurchase shares of our common stock. During the first nine months of fiscal 2018, our Board of Directors approved expansions of our stock repurchase program totaling $24.0 billion. As of February 28, 2018, approximately $22.8 billion remained available for stock repurchases pursuant to our stock repurchase program. We repurchased 131.6 million shares for $6.5 billion during the nine months ended February 28, 2018 (including 2.1 million shares for $105 million that were repurchased but not settled) and 74.6 million shares for $3.0 billion during the nine months ended February 28, 2017 under the stock repurchase program.

 

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

February 28, 2018

(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 nine months ended February 28, 2018, our Board of Directors declared cash dividends of $0.57 per share of our outstanding common stock, which we paid during the same period.

In March 2018, our Board of Directors declared a quarterly cash dividend of $0.19 per share of our outstanding common stock. The dividend is payable on May 1, 2018 to stockholders of record as of the close of business on April 17, 2018. 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 nine months of fiscal 2018, we issued 41 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 16 million shares during the first nine months of fiscal 2018.

The RSUs and SOs that were granted during the nine months ended February 28, 2018 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 the last of the two metrics for a particular tranche is attained. The seventh vesting tranche requires attainment of 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.

 

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

February 28, 2018

(Unaudited)

 

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

 

     Three Months  Ended
February 28,
     Nine Months  Ended
February 28,
 

(in millions)

   2018      2017      2018      2017  

Cloud SaaS

   $ 11      $ 6      $ 31      $ 17  

Cloud PaaS and IaaS

     3        1        7        3  

Software license updates and product support

     7        6        20        18  

Hardware

     2        3        8        9  

Services

     13        14        41        31  

Sales and marketing

     87        96        275        228  

Research and development

     221        191        693        574  

General and administrative

     45        32        135        104  

Acquisition related and other

            22        1        33  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $     389      $     371      $  1,211      $  1,017  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

11.

INCOME TAXES

Our effective tax rates for each of the periods presented are the result of the mix of income earned in various tax jurisdictions that apply a broad range of income tax rates. In the third quarter of fiscal 2018 the Act was signed into law. The more significant provisions of the Act as applicable to us are described in Note 1 above under “Impacts of the U.S. 2017 Tax Cuts and Jobs Act”. Our provision for income taxes for the fiscal 2018 periods presented varied from the 21% U.S. statutory rate imposed by the Act due primarily to the January 1, 2018 effective date of the Act, the impacts of the Act upon adoption, 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. Prior to the January 1, 2018 effective date of the Act, our provision for income taxes historically differed from the tax computed at the previous 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. Our effective tax rates were 222.0% and 95.2% for the three and nine months ended February 28, 2018, respectively, and 17.0% and 21.3% for the three and nine months ended February 28, 2017, respectively.

Our net deferred tax assets were $1.6 billion and $683 million as of February 28, 2018 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.

 

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

February 28, 2018

(Unaudited)

 

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.

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.

 

12.

SEGMENT INFORMATION

ASC 280, Segment Reporting, establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision makers (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 company’s performance and allocating company resources.

We have three businesses—cloud and on-premise software, hardware and services—each 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 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

 

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

February 28, 2018

(Unaudited)

 

others, for cloud 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 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 year’s presentation):

 

     Three Months Ended
February 28,
     Nine Months Ended
February 28,
 

(in millions)

     2018          2017          2018          2017    

Cloud and on-premise software:

           

Revenues(1)

   $ 7,986      $ 7,434      $ 23,229      $ 21,455  

Cloud SaaS, PaaS and IaaS expenses

     649        491        1,844        1,349  

Software license updates and product support expenses

     206        253        686        733  

Sales and marketing expenses

     1,736        1,680        5,196        4,909  
  

 

 

    

 

 

    

 

 

    

 

 

 

Margin(2)

   $ 5,395      $ 5,010      $ 15,503      $ 14,464  
  

 

 

    

 

 

    

 

 

    

 

 

 

Hardware:

           

Revenues(1)

   $ 994      $ 1,028      $ 2,878      $ 3,038  

Hardware products and support expenses

     388        428        1,097        1,189  

Sales and marketing expenses

     153        195        479        597  
  

 

 

    

 

 

    

 

 

    

 

 

 

Margin(2)

   $ 453      $ 405      $ 1,302      $ 1,252  
  

 

 

    

 

 

    

 

 

    

 

 

 

Services:

           

Revenues

   $ 796      $ 812      $ 2,511      $ 2,464  

Services expenses

     676        645        2,023        1,978  
  

 

 

    

 

 

    

 

 

    

 

 

 

Margin(2)

   $ 120      $ 167      $ 488      $ 486  
  

 

 

    

 

 

    

 

 

    

 

 

 

Totals:

           

Revenues(1)

   $ 9,776      $ 9,274      $ 28,618      $ 26,957  

Expenses

     3,808        3,692        11,325        10,755  
  

 

 

    

 

 

    

 

 

    

 

 

 

Margin(2)

   $ 5,968      $ 5,582      $ 17,293      $ 16,202  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Cloud and on-premise software and hardware revenues for management reporting included revenues related to cloud, on-premise software and hardware 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 8 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, net. 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.

 

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

February 28, 2018

(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
February 28,
    Nine Months Ended
February 28,
 

(in millions)

     2018         2017         2018         2017    

Total revenues for operating segments

   $ 9,776     $ 9,274     $ 28,618     $ 26,957  

Cloud and on-premise software revenues(1)

     (5     (69     (39     (121

Hardware revenues(1)

                       (1
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

   $ 9,771     $ 9,205     $ 28,579     $ 26,835  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total margin for operating segments

   $   5,968     $   5,582     $ 17,293     $ 16,202  

Cloud and on-premise software revenues(1)

     (5     (69     (39     (121

Hardware revenues(1)

                       (1

Research and development

     (1,498     (1,521     (4,547     (4,551

General and administrative

     (340     (241     (982     (859

Amortization of intangible assets

     (394     (397     (1,205     (1,010

Acquisition related and other

     (3     (30     (32     (84

Restructuring

     (91     (161     (506     (346

Stock-based compensation for operating segments

     (123     (126     (382     (306

Expense allocations and other, net

     (104     (78     (301     (288

Interest expense

     (533     (450     (1,477     (1,317

Non-operating income, net

     423       189       929       437  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

   $ 3,300     $ 2,698     $ 8,751     $ 7,756  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Cloud and on-premise software revenues and hardware revenues for management reporting included revenues related to cloud, on-premise software and hardware 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 8 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.

 

13.

EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share is computed by dividing net income (loss) for the period by the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per share is computed by dividing net income (loss) 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 as applicable pursuant to the treasury stock method. The following table sets forth the computation of basic and diluted earnings (loss) per share:

 

     Three Months Ended
February 28,
     Nine Months Ended
February 28,
 

(in millions, except per share data)

     2018         2017          2018          2017    

Net income (loss)

   $ (4,024   $ 2,239      $ 418      $ 6,103  
  

 

 

   

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding

     4,122       4,107        4,146        4,110  

Dilutive effect of employee stock plans

           97        122        97  
  

 

 

   

 

 

    

 

 

    

 

 

 

Dilutive weighted average common shares outstanding

     4,122       4,204        4,268        4,207  
  

 

 

   

 

 

    

 

 

    

 

 

 

Basic earnings (loss) per share

   $ (0.98   $ 0.55      $ 0.10      $ 1.49  

Diluted earnings (loss) per share

   $ (0.98   $ 0.53      $ 0.10      $ 1.45  

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

     190       76        60        75  

 

(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.

 

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

February 28, 2018

(Unaudited)

 

14.

LEGAL PROCEEDINGS

Hewlett-Packard Company Litigation

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

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

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

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

 

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

February 28, 2018

(Unaudited)

 

Derivative Litigation

On May 3, 2017, a stockholder derivative lawsuit was filed in the Court of Chancery of the State of Delaware. The derivative suit is brought by an alleged stockholder of Oracle, purportedly on Oracle’s behalf, against Oracle, our Chairman of the Board of Directors and Chief Technology Officer in his capacities as a director, officer and an alleged controlling stockholder, one of our Chief Executive Officers (who is also a director), three other directors, and Oracle as a nominal defendant. Plaintiff alleges that the defendants breached their fiduciary duties by causing Oracle to agree to purchase NetSuite Inc. (NetSuite) at an excessive price. Plaintiff seeks declaratory relief, an order rescinding or reforming the NetSuite transaction, unspecified monetary damages (including interest), attorneys’ fees and costs, and disgorgement of various unspecified profits, fees, compensation, and benefits. On July 19, 2017, defendants moved to dismiss this complaint.

On July 18, 2017, a second stockholder derivative lawsuit was filed in the Court of Chancery of the State of Delaware, brought by another alleged stockholder of Oracle, purportedly on Oracle’s behalf. The suit is brought against all current members and one former member of our Board of Directors, and Oracle as a nominal defendant. Plaintiff alleges that the defendants breached their fiduciary duties by causing Oracle to agree to purchase NetSuite at an excessive price. Plaintiff seeks declaratory relief, unspecified monetary damages (including interest), and attorneys’ fees and costs.

On August 9, 2017, the court consolidated the two derivative cases, and vacated the scheduling order relating to defendants’ motion to dismiss the first case. In a September 7, 2017 order, the court appointed plaintiff’s counsel in the second case as lead plaintiffs’ counsel and designated the July 18, 2017 complaint as the operative complaint. The defendants filed a motion to dismiss on October 27, 2017, and the plaintiffs filed an opposition on December 15, 2017. The defendants filed their reply on January 9, 2018, and the court heard oral argument on January 25, 2018. On March 19, 2018, the court denied this motion. The court ordered supplemental briefing on the issue whether all of the defendants, except for our Chief Technology Officer and one of our Chief Executive Officers, should be dismissed from this case.

While Oracle continues to evaluate these claims, we do not believe this litigation will have a material impact on our financial position or results of operations.

Other Litigation

We are party to various other legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business, including proceedings and claims that relate to acquisitions we have completed or to companies we have acquired or are attempting to acquire. While the outcome of these matters cannot be predicted with certainty, we do not believe that the outcome of any of these matters, individually or in the aggregate, will result in losses that are materially in excess of amounts already recognized, if any.

 

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

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

Business Overview

Oracle Corporation provides products and services that address all aspects of corporate information technology (IT) environments—applications, platform and infrastructure. Our applications, platform and infrastructure offerings are delivered to customers worldwide through a variety of flexible and interoperable IT deployment models including cloud based, on-premise or hybrid, which enable customer choice and flexibility. We market and sell our offerings globally to businesses of many sizes, government agencies, educational institutions and resellers with a sales force positioned to offer the combinations that best meet customer 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). We also offer 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.

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 cloud-based IT environments and other 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 electing to purchase and renew Oracle support offerings for their software and hardware 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 though they are 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 customer’s on-premise IT environment to meet data sovereignty, data residency, data protection and regulatory business policy requirements, among others, while benefiting from the many advantages of a cloud service.

 

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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 address 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 periods’ results presented below were recast to conform to the current periods’ presentation. In addition to the discussion below, Note 12 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 year’s presentation.

Cloud and On-Premise Software Business

Our cloud and on-premise software line of business, which represented 81% 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 a duration of 12 to 36 months 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 cloud-based and other IT environments. Our new software license transactions are generally perpetual in nature and are generally recognized when unrestricted access to the software license is granted provided all other revenue recognition criteria are met. 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 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.

 

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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% of our total consolidated revenues during each of the third quarter and first nine months of fiscal 2018, and 13% and 12% of our total consolidated revenues during the third quarter and first nine months of fiscal 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 and the percentage of customers that purchase software support contracts in connection with their purchase of a new software license; (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 Oracle’s 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 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 10% 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.

 

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

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (GAAP) as set forth in the Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC), and we consider the various staff accounting bulletins and other applicable guidance issued by the U.S. Securities and Exchange Commission (SEC). GAAP, as set forth within the ASC, requires us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. To the extent that there are differences between these estimates, judgments or assumptions and actual results, our financial statements will be affected. The accounting policies that reflect our more significant estimates, judgments and assumptions and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include:

 

   

Revenue Recognition;

 

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Business Combinations;

 

   

Goodwill and Intangible Assets—Impairment Assessments;

 

   

Accounting for Income Taxes; and

 

   

Legal and Other Contingencies.

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

During the first nine months of fiscal 2018, there were no significant changes to our critical accounting policies and estimates. Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for our fiscal year ended May 31, 2017 provides a more complete discussion of our critical accounting policies and estimates.

Results of Operations

Impacts of the U.S. 2017 Tax Cuts and Jobs Act

The comparability of our operating results in the third quarter and first nine months of fiscal 2018 compared to the corresponding prior year periods was impacted by the U.S. 2017 Tax Cuts and Jobs Act (the Act), which was signed into law on December 22, 2017. Effective January 1, 2018, the Act reduces the U.S. federal corporate tax rate from 35% to 21%; creates a quasi-territorial tax system that a) generally allows, among other provisions, companies to repatriate certain foreign source earnings without incurring additional U.S. income tax for such earnings generated after December 31, 2017 and b) generally requires companies to pay a one-time transition tax on certain foreign subsidiary earnings generated prior to December 31, 2017 that, in substantial part, were previously tax deferred; creates new taxes on certain foreign sourced earnings; limits deductibility of certain future compensation arrangements to certain highly compensated employees; and provides tax incentives for the exportation of U.S. products to foreign jurisdictions and for the purchase of qualifying capital equipment; among other provisions.

Because we have a May 31 fiscal year end, our fiscal 2018 blended U.S. federal statutory tax rate will be approximately 29%.

During the third quarter and first nine months of fiscal 2018, our provision for income taxes increased and affected our net income (loss), primarily as a result of the following items related to the enactment of the Act:

 

   

a $7.6 billion expense related to the application of the one-time transition tax to certain foreign subsidiary earnings that were generated prior to December 31, 2017, which expense was substantially recorded to non-current income taxes payable in our consolidated balance sheet and which corresponds to the amount we currently expect to periodically settle over an eight year period as provided by the Act;

partially offset by:

 

   

a $744 million benefit related to the remeasurement of our net deferred tax liabilities based on the rates at which they are expected to reverse in the future; and

 

   

the net favorable impacts of the Act on our tax profile and effective tax rate beginning on January 1, 2018, which we generally expect will continue into future periods.

We expect the enactment of the Act to generally provide greater flexibility for us to access and utilize our cash, cash equivalent and marketable securities balances held by certain of our foreign subsidiaries as of January 1, 2018, as well as for prospective assets generated by these foreign subsidiaries’ future earnings and profits. We believe we have sufficient cash, cash equivalent and marketable securities balances, as well as access to other capital resources, if required, to settle the $7.6 billion one-time transition tax described above.

 

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The net expense related to the enactment of the Act has been accounted for during the third quarter and first nine months of fiscal 2018 based on provisional estimates pursuant to the SEC Staff Accounting Bulletin No. 118. Subsequent adjustments, if any, will be accounted for in the period such adjustments are identified. The provisional estimates incorporate, among other factors, assumptions made based on interpretations of the Act and existing tax laws, and a range of historical and forecasted financial and tax-specific facts and information, including, without limitation, the amount of cash and other specified assets anticipated to be held by the Company’s foreign subsidiaries on relevant dates and estimates of deferred tax balances during interim periods pending finalization of those balances.

Impacts of Acquisitions

The comparability of our operating results in the third quarter and first nine months of fiscal 2018 compared to the same periods 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 third quarter and first nine months of fiscal 2018 compared to the same periods 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 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 and hardware support contracts, the amounts shown as cloud and on-premise software deferred revenues and hardware 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, 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.

 

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In addition, we discuss below the results of each our three businesses—cloud and on-premise software, hardware and services—which 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 and hardware support 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 12 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 three operating segments because our management does not view the performance of our three 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 12 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 February 28, 2018 and 2017, our financial statements would reflect reported revenues of $1.23 million in the first nine months of fiscal 2018 (using 1.23 as the month-end average exchange rate for the period) and $1.06 million in the first nine months of fiscal 2017 (using 1.06 as the month-end average exchange rate for the period). The constant currency presentation, however, would translate the results for the three and nine months ended February 28, 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.

 

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Total Revenues and Operating Expenses

 

    Three Months Ended February 28,     Nine Months Ended February 28,  
          Percent Change                  Percent Change         

(Dollars in millions)

      2018           Actual       Constant          2017               2018           Actual       Constant            2017      

Total Revenues by Geography:

                 

Americas

  $ 5,339       2%       2%      $ 5,219     $ 15,817       6%       5%      $ 14,971  

EMEA(1)

    2,887       13%       2%        2,558       8,228       9%       3%        7,529  

Asia Pacific(2)

    1,545       8%       3%        1,428       4,534       5%       3%        4,335  
 

 

 

        

 

 

   

 

 

        

 

 

 

Total revenues

    9,771       6%       2%        9,205       28,579       6%       4%        26,835  

Total Operating Expenses

    6,361       2%       -1%        6,246       19,280       6%       4%        18,199  
 

 

 

        

 

 

   

 

 

        

 

 

 

Total Operating Margin

  $ 3,410       15%       9%      $ 2,959     $ 9,299       8%       4%      $ 8,636  
 

 

 

        

 

 

   

 

 

        

 

 

 

Total Operating Margin %

    35%            32%       32%            32%  

% Revenues by Geography:

                 

Americas

    55%            57%       55%            56%  

EMEA

    29%            27%       29%            28%  

Asia Pacific

    16%            16%       16%            16%  

Total Revenues by Business:

                 

Cloud and on-premise software

  $ 7,981       8%       4%      $ 7,365     $ 23,190       9%       6%      $ 21,334  

Hardware

    994       -3%       -7%        1,028       2,878       -5%       -7%        3,037  

Services

    796       -2%       -6%        812       2,511       2%       0%        2,464  
 

 

 

        

 

 

   

 

 

        

 

 

 

Total revenues

  $ 9,771       6%       2%      $ 9,205     $ 28,579       6%       4%      $ 26,835  
 

 

 

        

 

 

   

 

 

        

 

 

 

% Revenues by Business:

                 

Cloud and on-premise software

    82%            80%       81%            80%  

Hardware

    10%            11%       10%            11%  

Services

    8%            9%       9%            9%  

 

(1) 

Comprised of Europe, the Middle East and Africa

 

(2) 

The Asia Pacific region includes Japan

Fiscal Third Quarter 2018 Compared to Fiscal Third Quarter 2017:    Excluding the effects of favorable foreign currency rate variations of 4 percentage points, our total revenues increased in the third quarter of fiscal 2018 primarily due to growth in our cloud and on-premise software revenues, partially offset by decreases in our hardware and services revenues. The constant currency increases in our cloud and on-premise software revenues during the third 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. The constant currency decrease in our hardware revenues during the third 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. The constant currency decrease in our services revenues during the third quarter of fiscal 2018 was attributable to declines in services revenues across all of our major services categories. In constant currency, the Americas, EMEA and Asia Pacific regions contributed 52%, 28% and 20%, respectively, to the growth in our third quarter of fiscal 2018 total revenues.

Excluding the effects of unfavorable foreign currency rate variations of 3 percentage points, our total operating expenses decreased during the third quarter of fiscal 2018 primarily due to lower hardware products costs and a related decrease in sales and marketing costs, both of which aligned to lower hardware revenues; lower software license updates and product support expenses related primarily to a reduction in certain jurisdictional specific statutory obligation expenses; lower research and development expenses primarily related to lower employee expenses; and a decrease in restructuring expenses. These constant currency expense decreases were partially offset by higher expenses during the third quarter of fiscal 2018 related to higher cloud SaaS expenses and cloud PaaS and IaaS expenses resulting primarily from increased headcount and infrastructure expenses to support the increases in our cloud SaaS revenues and cloud PaaS and IaaS revenues; and higher general and administrative expenses that were primarily related to higher professional fees that were legal related.

 

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In constant currency, our total operating margin and operating margin as a percentage of total revenues increased during the third quarter of fiscal 2018 as our total revenues grew while our total expenses declined.

First Nine Months Fiscal 2018 Compared to First Nine Months Fiscal 2017:    Excluding the effects of foreign currency rate variations, our total revenues increased in the first nine months of fiscal 2018 due to similar reasons as those noted above for the increase in our total revenues for the third quarter of fiscal 2018.

Excluding the effects of foreign currency rate variations, our total operating expenses increased during the first nine months of fiscal 2018 primarily due to higher cloud SaaS and cloud PaaS and IaaS expenses due to similar reasons as noted above; higher sales and marketing expenses; increased stock–based compensation expenses; increased restructuring 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 were partially offset by constant currency expense decreases during the first nine months of fiscal 2018 related to lower constant currency hardware expenses and lower constant currency software license updates and product support expenses, primarily due to similar reasons as noted above.

In constant currency, our total operating margin increased during the first nine months of fiscal 2018 due to the increase in our total revenues and operating margin as a percentage of total revenues remained flat.

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, expenses related to acquisitions, and certain other expense, and income items that affected our GAAP net income (loss):

 

     Three Months Ended
February 28,
    Nine Months Ended
February 28,
 

(in millions)

       2018             2017             2018             2017      

Cloud and on-premise software deferred revenues(1)

   $ 5     $ 69     $ 39     $ 121  

Hardware deferred revenues(1)

                       1  

Acquired deferred sales commissions amortization(2)

     (3     (21     (20     (29

Amortization of intangible assets(3)

     394       397       1,205       1,010  

Acquisition related and other(4)(6)

     3       30       32       84  

Restructuring(5)

     91       161       506       346  

Stock-based compensation, operating segments(6)

     123       126       382       306  

Stock-based compensation, R&D and G&A(6)

     266       223       828       678  

Income tax effects(7)

     (220     (336     (1,105     (823

Income tax reform(8)

     6,871             6,871        
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 7,530     $ 649     $ 8,738     $ 1,694  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

In connection with our acquisitions, we have estimated the fair values of the cloud SaaS and cloud PaaS and IaaS subscription and hardware obligations assumed. Due to our application of business combination accounting rules, we did not recognize the cloud SaaS and cloud PaaS and IaaS, and hardware 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.

 

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(3) 

Represents the amortization of intangible assets, substantially all of which were acquired in connection with our acquisitions. As of February 28, 2018, estimated future amortization related to intangible assets was as follows (in millions):

 

Remainder of fiscal 2018

   $ 387  

Fiscal 2019

     1,411  

Fiscal 2020

     1,210  

Fiscal 2021

     1,023  

Fiscal 2022

     918  

Fiscal 2023

     567  

Thereafter

     884  
  

 

 

 

Total intangible assets, net

   $     6,400  
  

 

 

 

 

(4) 

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

 

(5) 

Restructuring expenses during the first nine months of fiscal 2018 and fiscal 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 7 of Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report, and in Note 9 of Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended May 31, 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
February 28,
     Nine Months Ended
February 28,
 
         2018              2017              2018              2017      

Cloud SaaS

   $ 11      $ 6      $ 31      $ 17  

Cloud PaaS and IaaS

     3        1        7        3  

Software license updates and product support

     7        6        20        18  

Hardware

     2        3        8        9  

Services

     13        14        41        31  

Sales and marketing

     87        96        275        228  
  

 

 

    

 

 

    

 

 

    

 

 

 

Stock-based compensation, operating segments

     123        126        382        306  
  

 

 

    

 

 

    

 

 

    

 

 

 

Research and development

     221        191        693        574  

General and administrative

     45        32        135        104  

Acquisition related and other

            22        1        33  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $ 389      $ 371      $ 1,211      $ 1,017  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

  

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 generally upon termination of the employees pursuant to the terms of those stock options and restricted stock-based awards.

 

(7) 

For the third quarter and first nine months of fiscal 2018, the applicable jurisdictional tax rates applied to our income before provision for income taxes after adjusting for the effects of items within the table above, excluding income tax reform (see footnote (8) below), resulted in effective tax rates of 16.1% and 21.9%, respectively, instead of 222.0% and 95.2%, respectively, which represented our effective tax rates as derived per our condensed consolidated statements of operations, primarily due to the exclusion of stock-based compensation expense and acquisition related items, including the tax effects of amortization of intangible assets. The income tax effects presented for the third quarter and first nine months of fiscal 2017 were calculated reflecting effective tax rates of 21.6% and 24.1%, respectively, instead of 17.0% and 21.3%, respectively, which represented our effective tax rates as derived per our condensed consolidated statements of operations, primarily due to the net tax effects of acquisition related items, including the tax effects of amortization of intangible assets, and the net tax effects of stock-based compensation.

 

(8) 

The income tax reform adjustments for the fiscal 2018 periods presented in the table above were due to the our enactment of the Act (refer to “Impacts of the U.S. 2017 Tax Cuts and Jobs Act” above for additional discussion), which increased our GAAP provision for income taxes during these fiscal 2018 periods.

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 cloud-based and other IT environments with the option to purchase software license updates and product support contracts. Our cloud SaaS and cloud PaaS

 

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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 cloud 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 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, and IaaS offerings 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.

 

    Three Months Ended February 28,     Nine Months Ended February 28,  
          Percent Change                 Percent Change        

(Dollars in millions)

      2018           Actual       Constant         2017             2018           Actual       Constant         2017      

Cloud and On-Premise Software Revenues:

               

Americas(1)

  $ 4,487       3%       3%     $ 4,349     $ 13,181       7%       7%     $ 12,277  

EMEA(1)

    2,312       15%       4%       2,019       6,592       11%       4%       5,931  

Asia Pacific(1)

    1,187       11%       6%       1,066       3,456       6%       5%       3,247  
 

 

 

       

 

 

   

 

 

       

 

 

 

Total revenues(1)

    7,986       7%       3%       7,434       23,229       8%       6%       21,455  

Expenses:

               

Cloud SaaS, PaaS and IaaS(2)

    649       32%       29%       491       1,844       37%       35%       1,349  

Software license updates and product support(2)

    206       -18%       -21%       253       686       -6%       -8%       733  

Sales and marketing(2)

    1,736       3%       -1%       1,680       5,196       6%       3%       4,909  
 

 

 

       

 

 

   

 

 

       

 

 

 

Total expenses(2)

    2,591       7%       3%       2,424       7,726       10%       8%       6,991  
 

 

 

       

 

 

   

 

 

       

 

 

 

Total Margin

  $ 5,395       8%       4%     $ 5,010     $ 15,503       7%       5%     $ 14,464  
 

 

 

       

 

 

   

 

 

       

 

 

 

Total Margin %

    68%           67%       67%           67%  

% Revenues by Geography:

               

Americas

    56%           59%       57%           57%  

EMEA

    29%           27%       28%           28%  

Asia Pacific

    15%           14%       15%           15%  

Revenues by Offerings:

               

Cloud software as a service(1)

  $ 1,155       24%       21%     $ 934     $ 3,373       42%       41%     $ 2,367  

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

    416       28%       24%       324       1,218       26%       24%       964  

New software licenses

    1,388       -2%       -6%       1,414       3,706       -2%       -5%       3,792  

Software license updates and product support(1)

    5,027       6%       1%       4,762       14,932       4%       2%       14,332  
 

 

 

       

 

 

   

 

 

       

 

 

 

Total cloud and on-premise software revenues(1)

  $ 7,986       7%       3%     $ 7,434     $ 23,229       8%       6%     $ 21,455  
 

 

 

       

 

 

   

 

 

       

 

 

 

% Revenues by Offerings:

               

Cloud software as a service(1)

    15%           13%       15%           11%  

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

    5%           4%       5%           4%  

New software licenses

    17%           19%       16%           18%  

Software license updates and product support(1)

    63%           64%       64%           67%  

 

(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 third quarter and first nine months of fiscal 2018, relative to the corresponding prior

 

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year periods, 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. The increases in our constant currency cloud SaaS and cloud PaaS and IaaS revenues during the fiscal 2018 periods presented 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 increases in constant currency software license updates and product support revenues during the fiscal 2018 periods presented were 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. The Americas region contributed 48% and 68%, respectively, the EMEA region contributed 28% and 21%, respectively, and the Asia Pacific region contributed 24% and 11%, respectively, of the constant currency revenues growth for this business during the third quarter and first nine months of fiscal 2018, respectively.

In constant currency, total cloud and on-premise software expenses increased in the fiscal 2018 periods presented relative to the corresponding prior year periods 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 primarily resulting from increased headcount. These constant currency expense increases were partially offset by a decrease in software license updates and product support expenses during the fiscal 2018 periods presented, which were primarily related to a reduction in certain jurisdictional specific statutory obligation expenses.

Excluding the effects of currency rate fluctuations, our cloud and on-premise software segment’s total margin increased during the fiscal 2018 periods presented relative to the corresponding prior year periods primarily due to the increases in revenues during the fiscal 2018 periods presented. In constant currency, total margin as a percentage of revenues increased in the third quarter of fiscal 2018 primarily due to the increase in revenues, and was flat in the first nine months of fiscal 2018.

 

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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 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 hardware support 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 February 28,     Nine Months Ended February 28,  
        Percent Change                 Percent Change        

(Dollars in millions)

      2018           Actual       Constant         2017             2018           Actual       Constant         2017      

Hardware Revenues:

               

Americas(1)

  $ 472       -8%       -8%     $ 511     $ 1,440       -7%       -7%     $ 1,548  

EMEA(1)

    324       8%       -1%       300       868       0%       -6%       869  

Asia Pacific(1)

    198       -9%       -14%       217       570       -8%       -10%       621  
 

 

 

       

 

 

   

 

 

       

 

 

 

Total revenues(1)

    994       -3%       -7%       1,028       2,878       -5%       -7%       3,038  

Expenses:

               

Hardware products and support(2)

    388       -10%       -14%       428       1,097       -8%       -10%       1,189  

Sales and marketing(2)

    153       -20%       -24%       195       479       -20%       -22%       597  
 

 

 

       

 

 

   

 

 

       

 

 

 

Total expenses(2)

    541       -13%       -17%       623       1,576       -12%       -14%       1,786  
 

 

 

       

 

 

   

 

 

       

 

 

 

Total Margin

  $ 453       12%       7%     $ 405     $ 1,302       4%       2%     $ 1,252  
 

 

 

       

 

 

   

 

 

       

 

 

 

Total Margin %

    46%           39%       45%           41%  

% Revenues by Geography:

               

Americas

    47%           50%       50%           51%  

EMEA

    33%           29%       30%           29%  

Asia Pacific

    20%           21%       20%           20%  

 

(1) 

Includes hardware revenue adjustments related to certain hardware 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 Segments and Other Financial Information” above.

Excluding the effects of currency rate fluctuations, total hardware revenues decreased in the third quarter and first nine months of fiscal 2018, relative to the corresponding prior year periods, due to our continued emphasis on the development, marketing and sale of our cloud-based infrastructure technologies, which resulted in reduced sales volumes of certain of our hardware product lines and also impacted the volume of customers that purchased hardware support contracts during the fiscal 2018 periods.

Excluding the effects of currency rate fluctuations, total hardware expenses decreased in the fiscal 2018 periods presented, relative to the fiscal 2017 periods presented, due primarily to lower hardware products costs and lower employee related expenses, which aligned to lower hardware revenues.

 

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In constant currency, total margin and total margin as a percentage of revenues for our hardware segment increased during the fiscal 2018 periods presented, relative to the corresponding prior year periods, as expenses decreased at a rate faster than our revenues for this business.

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 February 28,      Nine Months Ended February 28,  
            Percent Change                    Percent Change         

(Dollars in millions)

       2018            Actual        Constant          2017              2018            Actual        Constant          2017      

Services Revenues:

                       

Americas

   $ 385        -10%        -10%      $ 428      $ 1,226        -3%        -4%      $ 1,268  

EMEA

     250        5%        -6%        239        770        6%        -1%        729  

Asia Pacific

     161        11%        6%        145        515        10%        9%        467  
  

 

 

          

 

 

    

 

 

          

 

 

 

Total revenues

     796        -2%        -6%        812        2,511        2%        0%        2,464  

Total Expenses(1)

     676        5%        0%        645        2,023        2%        0%        1,978  
  

 

 

          

 

 

    

 

 

          

 

 

 

Total Margin

   $ 120        -28%        -30%      $ 167      $ 488        0%        -1%      $ 486  
  

 

 

          

 

 

    

 

 

          

 

 

 

Total Margin %

     15%              21%        19%              20%  

% Revenues by Geography:

                       

Americas

     49%              53%        49%              51%  

EMEA

     31%              29%        30%              30%  

Asia Pacific

     20%              18%        21%              19%  

 

(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.

Fiscal Third Quarter 2018 Compared to Fiscal Third Quarter 2017:    Excluding the effects of currency rate fluctuations, our total services revenues decreased during the third quarter of fiscal 2018 due to revenue declines in our consulting, advanced customer services and education revenues. Constant currency decreases in our services revenues in the Americas and EMEA regions were partially offset by a constant currency services revenues increase in the Asia Pacific region.

Total services expenses were flat in constant currency in the third quarter of fiscal 2018 relative to the corresponding prior year period. In constant currency, total margin and total margin as a percentage of total services revenues decreased during the third quarter of fiscal 2018, primarily due to the decrease in revenues for this business.

First Nine Months Fiscal 2018 Compared to First Nine Months Fiscal 2017:    Excluding the effects of currency rate fluctuations, our total services revenues were flat in the first nine months of fiscal 2018. Constant currency increases in our services revenues primarily from our recent acquisitions were offset by decreases in other services revenues, primarily in the Americas and EMEA regions.

In constant currency, total services expenses were flat during the first nine months of fiscal 2018, while total margin and total margin as a percentage of revenues declined slightly.

 

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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 February 28,     Nine Months Ended February 28,  
          Percent Change                 Percent Change        

(Dollars in millions)

      2018           Actual       Constant         2017             2018           Actual       Constant         2017      

Research and development(1)

  $ 1,277       -4%       -6%     $ 1,330     $ 3,854       -3%       -4%     $ 3,977  

Stock-based compensation

    221       16%       16%       191       693       21%       21%       574  
 

 

 

       

 

 

   

 

 

       

 

 

 

Total expenses

  $ 1,498       -2%       -3%     $ 1,521     $ 4,547       0%       -1%     $ 4,551  
 

 

 

       

 

 

   

 

 

       

 

 

 

% of Total Revenues

    15%           17%       16%           17%  

 

(1) 

Excluding stock-based compensation

On a constant currency basis, total research and development expenses decreased during the third quarter and first nine months of fiscal 2018, each relative to the corresponding prior year periods, primarily due to lower fiscal 2018 employee related expenses related to lower headcount resulting from the restructuring of certain of our research and development operations during the fiscal 2018 periods presented. These fiscal 2018 cost savings were partially offset by investments in the development of our cloud-based offerings and by higher stock-based compensation during the fiscal 2018 periods relative to the corresponding prior year periods.

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 February 28,     Nine Months Ended February 28,  
          Percent Change                 Percent Change        

(Dollars in millions)

      2018           Actual       Constant       2017             2018           Actual       Constant         2017      

General and administrative(1)

  $ 295       41%       37%     $ 209     $ 847       12%       10%     $ 755  

Stock-based compensation

    45       41%       41%       32       135       30%       30%