10-Q 1 orcl-10q_20180831.htm 10-Q orcl-10q_20180831.htm

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 August 31, 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 every Interactive Data File required to be submitted 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 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   ☐

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 September 13, 2018 was: 3,787,960,000.

 

 

 


Table of Contents

 

ORACLE CORPORATION 

FORM 10-Q QUARTERLY REPORT

 

TABLE OF CONTENTS

 

 

 

 

 

Page

 

 

 

 

 

PART I.

 

FINANCIAL INFORMATION

 

3

 

 

 

 

 

Item 1.

 

Financial Statements (Unaudited)

 

3

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of August 31, 2018 and May 31, 2018

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations for the Three Months Ended August 31, 2018 and 2017

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended August 31, 2018 and 2017

 

5

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended August 31, 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

 

31

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

47

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

48

 

 

 

 

 

PART II.

 

OTHER INFORMATION

 

49

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

49

 

 

 

 

 

Item 1A.

 

Risk Factors

 

49

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

49

 

 

 

 

 

Item 6.

 

Exhibits

 

50

 

 

 

 

 

 

 

Signatures

 

51

 

 

 

 


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 effects of the U.S. Tax Cuts and Jobs Act of 2017 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 license revenues generally will continue to increase due to expected growth in our cloud services and our license support offerings, continued demand for our cloud license and on-premise license offerings, and contributions from acquisitions;

 

our belief that our Oracle Cloud Platform and Infrastructure offerings are large opportunities for us to expand our cloud and license business;

 

our expectation that we will continue to place significant strategic emphasis on growing our cloud offerings;

 

our expectation that we and our customers will renew our cloud software-as-a-service (SaaS) and cloud platform-as-a-service (PaaS) and infrastructure-as-a-service (IaaS) contracts and hardware contracts when they are eligible for renewal, and our expectation that substantially all of our customers renew their license support contracts annually;

 

our expectation that our hardware business will have lower operating margins as a percentage of revenues than our cloud and license business;

 

our expectation that we will continue to make significant investments in research and development and related product opportunities, 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;

 

our expectation that we will continue paying cash dividends;

 

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;

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our expectations regarding the timing and amount of expenses relating to the Fiscal 2019 Oracle Restructuring Plan and the improved efficiencies in our operations that such plan will create;

 

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 expectation that seasonal trends will continue in the future;

 

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

 

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

 

our ability to predict quarterly hardware revenues;

 

the percentage of remaining performance obligations that we expect to recognize as revenues over the next 12 months;

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, 2018 and our other Quarterly Reports on Form 10-Q to be filed by us in our fiscal year 2019, which runs from June 1, 2018 to May 31, 2019.

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

2


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PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements (Unaudited)

ORACLE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

As of August 31, 2018 and May 31, 2018

(Unaudited)

 

(in millions, except per share data)

 

August 31,

2018

 

 

May 31,

2018

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

18,455

 

 

$

21,620

 

Marketable securities

 

 

41,639

 

 

 

45,641

 

Trade receivables, net of allowances for doubtful accounts of $348 and $370

   as of August 31, 2018 and May 31, 2018, respectively

 

 

3,729

 

 

 

5,136

 

Prepaid expenses and other current assets

 

 

3,186

 

 

 

3,762

 

Total current assets

 

 

67,009

 

 

 

76,159

 

Non-current assets:

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

5,918

 

 

 

5,897

 

Intangible assets, net

 

 

6,295

 

 

 

6,670

 

Goodwill, net

 

 

43,702

 

 

 

43,755

 

Deferred tax assets

 

 

1,433

 

 

 

1,395

 

Other non-current assets

 

 

4,001

 

 

 

3,975

 

Total non-current assets

 

 

61,349

 

 

 

61,692

 

Total assets

 

$

128,358

 

 

$

137,851

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Notes payable and other borrowings, current

 

$

3,743

 

 

$

4,491

 

Accounts payable

 

 

527

 

 

 

529

 

Accrued compensation and related benefits

 

 

1,421

 

 

 

1,806

 

Deferred revenues

 

 

10,349

 

 

 

8,341

 

Other current liabilities

 

 

3,522

 

 

 

3,957

 

Total current liabilities

 

 

19,562

 

 

 

19,124

 

Non-current liabilities:

 

 

 

 

 

 

 

 

Notes payable and other borrowings, non-current

 

 

54,386

 

 

 

56,128

 

Income taxes payable

 

 

13,513

 

 

 

13,429

 

Other non-current liabilities

 

 

2,333

 

 

 

2,297

 

Total non-current liabilities

 

 

70,232

 

 

 

71,854

 

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: 3,811 shares and 3,997 shares as of

    August 31, 2018 and May 31, 2018, respectively

 

 

27,811

 

 

 

28,950

 

Retained earnings

 

 

12,022

 

 

 

19,111

 

Accumulated other comprehensive loss

 

 

(1,766

)

 

 

(1,689

)

Total Oracle Corporation stockholders’ equity

 

 

38,067

 

 

 

46,372

 

Noncontrolling interests

 

 

497

 

 

 

501

 

Total equity

 

 

38,564

 

 

 

46,873

 

Total liabilities and equity

 

$

128,358

 

 

$

137,851

 

 

 

See notes to condensed consolidated financial statements.

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ORACLE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three Months Ended August 31, 2018 and 2017

(Unaudited)

 

 

 

Three Months Ended

August 31,

 

(in millions, except per share data)

 

2018

 

 

2017

 

Revenues:

 

 

 

 

 

 

 

 

Cloud services and license support

 

$

6,609

 

 

$

6,407

 

Cloud license and on-premise license

 

 

867

 

 

 

894

 

Hardware

 

 

904

 

 

 

943

 

Services

 

 

813

 

 

 

860

 

Total revenues

 

 

9,193

 

 

 

9,104

 

Operating expenses:

 

 

 

 

 

 

 

 

Cloud services and license support(1)

 

 

913

 

 

 

857

 

Hardware(1)

 

 

326

 

 

 

372

 

Services(1)

 

 

714

 

 

 

699

 

Sales and marketing(1)

 

 

2,039

 

 

 

1,989

 

Research and development

 

 

1,564

 

 

 

1,572

 

General and administrative

 

 

321

 

 

 

319

 

Amortization of intangible assets

 

 

434

 

 

 

411

 

Acquisition related and other

 

 

14

 

 

 

12

 

Restructuring

 

 

90

 

 

 

124

 

Total operating expenses

 

 

6,415

 

 

 

6,355

 

Operating income

 

 

2,778

 

 

 

2,749

 

Interest expense

 

 

(529

)

 

 

(469

)

Non-operating income, net

 

 

291

 

 

 

220

 

Income before provision for income taxes

 

 

2,540

 

 

 

2,500

 

Provision for income taxes

 

 

275

 

 

 

356

 

Net income

 

$

2,265

 

 

$

2,144

 

Earnings per share:

 

 

 

 

 

 

 

 

Basic

 

$

0.58

 

 

$

0.52

 

Diluted

 

$

0.57

 

 

$

0.50

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

3,904

 

 

 

4,156

 

Diluted

 

 

3,999

 

 

 

4,284

 

Dividends declared per common share

 

$

0.19

 

 

$

0.19

 

 

 

(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

For the Three Months Ended August 31, 2018 and 2017

(Unaudited)

 

 

 

Three Months Ended

August 31,

 

(in millions)

 

2018

 

 

2017

 

Net income

 

$

2,265

 

 

$

2,144

 

Other comprehensive (loss) income, net of tax:

 

 

 

 

 

 

 

 

Net foreign currency translation (losses) gains

 

 

(61

)

 

 

50

 

Net unrealized gains on defined benefit plans

 

 

6

 

 

 

7

 

Net unrealized gains on marketable securities

 

 

4

 

 

 

64

 

Net unrealized losses on cash flow hedges

 

 

(26

)

 

 

(22

)

Total other comprehensive (loss) income, net

 

 

(77

)

 

 

99

 

Comprehensive income

 

$

2,188

 

 

$

2,243

 

 

 

 

 

 

 

See notes to condensed consolidated financial statements.

 

 

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ORACLE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three Months Ended August 31, 2018 and 2017

(Unaudited)

 

 

 

Three Months Ended

August 31,

 

(in millions)

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

2,265

 

 

$

2,144

 

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

 

 

 

 

 

 

 

 

Depreciation

 

 

286

 

 

 

285

 

Amortization of intangible assets

 

 

434

 

 

 

411

 

Deferred income taxes

 

 

(112

)

 

 

141

 

Stock-based compensation

 

 

436

 

 

 

403

 

Other, net

 

 

52

 

 

 

48

 

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

 

 

 

 

 

 

 

 

Decrease in trade receivables, net

 

 

1,390

 

 

 

1,804

 

Decrease in prepaid expenses and other assets

 

 

309

 

 

 

246

 

Decrease in accounts payable and other liabilities

 

 

(561

)

 

 

(770

)

Increase in income taxes payable

 

 

10

 

 

 

32

 

Increase in deferred revenues

 

 

2,213

 

 

 

1,822

 

Net cash provided by operating activities

 

 

6,722

 

 

 

6,566

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of marketable securities and other investments

 

 

(739

)

 

 

(7,671

)

Proceeds from maturities and sales of marketable securities and other investments

 

 

4,704

 

 

 

6,326

 

Acquisitions, net of cash acquired

 

 

(50

)

 

 

 

Capital expenditures

 

 

(383

)

 

 

(473

)

Net cash provided by (used for) investing activities

 

 

3,532

 

 

 

(1,818

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Payments for repurchases of common stock

 

 

(9,967

)

 

 

(502

)

Proceeds from issuances of common stock

 

 

291

 

 

 

1,014

 

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

 

 

(379

)

 

 

(331

)

Payments of dividends to stockholders

 

 

(742

)

 

 

(788

)

Repayments of borrowings

 

 

(2,500

)

 

 

(4,800

)

Distributions to noncontrolling interests

 

 

(36

)

 

 

(34

)

Net cash used for financing activities

 

 

(13,333

)

 

 

(5,441

)

Effect of exchange rate changes on cash and cash equivalents

 

 

(86

)

 

 

230

 

Net decrease in cash and cash equivalents

 

 

(3,165

)

 

 

(463

)

Cash and cash equivalents at beginning of period

 

 

21,620

 

 

 

21,784

 

Cash and cash equivalents at end of period

 

$

18,455

 

 

$

21,321

 

Non-cash investing and financing transactions:

 

 

 

 

 

 

 

 

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

 

$

8

 

 

$

 

Change in unsettled repurchases of common stock

 

$

33

 

 

$

(2

)

Change in unsettled investment purchases

 

$

 

 

$

(138

)

 

 

 

 

 

 

 

 

 

 

See notes to condensed consolidated financial statements.

 

 

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

August 31, 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, 2018.

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, 2019.

During the first quarter of fiscal 2019, we adopted the following Accounting Standards Updates:

 

Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers: Topic 606 and subsequent amendments to the initial guidance: 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 (collectively, Topic 606), utilizing the full retrospective method of transition whereby the results and related disclosures for the comparative fiscal 2018 period presented in this Form 10-Q were recast to be presented as if Topic 606 had been in effect during such fiscal 2018 period. Refer to the Revenue Recognition and Deferred Sales Commission sections below for accounting policy updates upon our adoption of Topic 606.

 

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. We early adopted this new standard on June 1, 2018 using the modified retrospective method, which requires us to account for ASU 2017-12 as of the date of adoption with any retrospective adjustments applicable to prior periods included as a cumulative-effect adjustment to accumulated other comprehensive loss and retained earnings. The adoption of ASU 2017-12 did not have a material impact on our condensed consolidated financial statements. As a result of the adoption of ASU 2017-12, we have elected to modify certain of our hedge documentation to exclude the fair value of certain components of the related hedging instrument in our assessment of hedge effectiveness. Refer to Note 7 for additional explanations of the impact of adoption.  

 

ASU 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the presentation of Net Periodic Pension Costs and Net Periodic Postretirement Benefit Costs (ASU 2017-07), which provides guidance on the capitalization, presentation and disclosure of net benefit costs related to postretirement benefit plans. We adopted ASU 2017-07 on a full retrospective basis, which resulted in the retrospective reclassification of $13 million of non-service net periodic pension cost for the three months ended August 31, 2017 from line items within operating expenses into non-operating income, net.

 

ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (ASU 2016-16), which requires entities to recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. We adopted ASU 2016-16 on a modified retrospective basis through a cumulative-effect adjustment that resulted in a $110 million decrease in prepaid assets with the corresponding offset to retained earnings.

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

August 31, 2018

(Unaudited)

 

 

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. Upon adoption of ASU 2016-01, we have elected to measure the investments we hold in certain non-marketable equity securities in which we do not have a controlling interest or significant influence that have no readily determinable fair values at cost, less impairment, adjusted for observable price changes from orderly transactions for identical or similar investments of the same issuer. We adopted the guidance prospectively effective June 1, 2018, and there was no impact to our condensed consolidated financial statements.

The impacts of adopting Topic 606 and ASU 2017-07 for select historical condensed consolidated statement of operations line items were as follows:

 

 

 

Three Months Ended August 31, 2017

 

(in millions, except per share data)

 

As Previously Reported

 

 

Adjustments

 

 

As Adjusted

 

Total revenues

 

$

9,187

 

 

$

(83

)

 

$

9,104

 

Total operating expenses

 

$

6,366

 

 

$

(11

)

 

$

6,355

 

Non-operating income, net

 

$

233

 

 

$

(13

)

 

$

220

 

Provision for income taxes

 

$

375

 

 

$

(19

)

 

$

356

 

Net income

 

$

2,210

 

 

$

(66

)

 

$

2,144

 

Basic earnings per share

 

$

0.53

 

 

$

(0.01

)

 

$

0.52

 

Diluted earnings per share

 

$

0.52

 

 

$

(0.02

)

 

$

0.50

 

 

The impact of adopting Topic 606 for select historical condensed consolidated balance sheet line items was as follows:

 

 

 

As of May 31, 2018

 

(in millions, except per share data)

 

As Previously Reported

 

 

Adjustments

 

 

As Adjusted

 

Trade receivables, net of allowances for doubtful accounts

 

$

5,279

 

 

$

(143

)

 

$

5,136

 

Prepaid expenses and other current assets

 

$

3,424

 

 

$

338

 

 

$

3,762

 

Deferred tax assets

 

$

1,491

 

 

$

(96

)

 

$

1,395

 

Other non-current assets

 

$

3,487

 

 

$

488

 

 

$

3,975

 

Deferred revenues

 

$

8,429

 

 

$

(88

)

 

$

8,341

 

Income taxes payable, non-current

 

$

13,422

 

 

$

7

 

 

$

13,429

 

Other non-current liabilities

 

$

2,295

 

 

$

2

 

 

$

2,297

 

Total equity

 

$

46,224

 

 

$

649

 

 

$

46,873

 

 

There have been no other significant changes in our reported financial position or results of operations and cash flows as a result of the adoption of new accounting pronouncements. Except for the updates to our revenue recognition and deferred sales commission policies noted below, there have been no changes to our significant accounting policies that were disclosed in our Annual Report on Form 10-K for the fiscal year ended May 31, 2018 that have had a significant impact on our condensed consolidated financial statements or notes thereto as of and for the three months ended August 31, 2018.

  

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

August 31, 2018

(Unaudited)

 

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

The comparability of our operating results in the first quarter of fiscal 2019 compared to the corresponding prior year period was impacted by the U.S. Tax Cuts and Jobs Act of 2017 (the Tax Act), which was effective for us starting in our third quarter of fiscal 2018. Information regarding our adoption and prospective impacts of the Tax Act on our tax and liquidity profile is included in our Annual Report on Form 10-K for our fiscal year ended May 31, 2018.  The net expense related to the enactment of the Tax Act has been accounted for during fiscal 2019 based on provisional estimates pursuant to SEC Staff Accounting Bulletin No. 118 (SAB 118). Subsequent adjustments, if any, related to our enactment of the Tax Act 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 Tax Act and existing tax laws and a range of historical financial and tax-specific facts and information, including among other items, the amount of cash and other specified assets and liabilities of the company and its foreign subsidiaries on relevant dates and estimates of deferred tax balances pending finalization of those balances.

Additionally, we are continuing to evaluate the accounting policy election required with regard to the Tax Act’s Global Intangible Low-Taxed Income (GILTI) provision. The Financial Accounting Standards Board (FASB) allows companies to adopt a policy election to account for GILTI under one of two methods: (i) account for GILTI as a component of tax expense in the period in which a company is subject to the rules (the period cost method), or (ii) account for GILTI in a company’s measurement of deferred taxes (the deferred method).  As of August 31, 2018, we have accounted for GILTI in accordance with the period cost method.  We have not finalized our policy election, and expect to do so after completion of our analysis of the GILTI provisions within the measurement period in accordance with SAB 118.

Revenue Recognition

Our sources of revenues include:

 

cloud and license revenues, which include the sale of: cloud services and license support; and cloud licenses and on-premise licenses, which represent licenses purchased by customers for use in both cloud and on-premise IT environments;

 

hardware revenues, which include the sale of hardware products including Oracle Engineered Systems, servers, and storage products, and industry-specific hardware; and hardware support revenues; and

 

services revenues, which are earned from providing cloud-, license- and hardware-related services including consulting, advanced customer support and education services.

License support revenues are typically generated through the sale of license support contracts related to cloud license and on-premise licenses purchased by our customers at their option. License support contracts provide customers with rights to unspecified software product upgrades, maintenance releases and patches released during the term of the support period and include internet access to technical content, as well as internet and telephone access to technical support personnel. License support contracts are generally priced as a percentage of the net cloud license and on-premise license fees. Substantially all of our customers renew their license support contracts annually.

Cloud services revenues include revenues from Oracle Cloud Software-as-a-Service (SaaS), Platform-as-a-Service (PaaS) and Infrastructure-as-a-Service (IaaS) offerings (collectively, Oracle Cloud Services), which deliver applications, platform and infrastructure technologies, respectively, via cloud-based deployment models that we develop functionality for, provide unspecified updates and enhancements for, 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

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

August 31, 2018

(Unaudited)

 

management, maintenance and security services for customer cloud-based, on-premise or other IT infrastructure for a fee for a stated term.

Cloud license and on-premise license revenues primarily represent amounts earned from granting customers licenses to use our database, middleware, application and industry-specific software products which our customers use for cloud-based, on-premise and other IT environments. The vast majority of our cloud license and on-premise license arrangements include license support contracts, which are entered into at the customer’s option.

Revenues from the sale of hardware products represent amounts earned primarily from the sale of our Oracle Engineered Systems, computer servers, storage, and industry-specific hardware. Our hardware support offerings generally provide customers with software updates for the software components that are essential to the functionality of the hardware products purchased and can also include product repairs, maintenance services and technical support services. Hardware support contracts are generally priced as a percentage of the net hardware products fees.

Our consulting services are offered as standalone arrangements or as a part of arrangements to customers buying other products and services. Our advanced customer support services are offered as standalone arrangements or as a part of arrangements to customers buying other products and services. We offer these advanced customer support services to Oracle customers to enable increased performance and higher availability of their products and services. Education services include instructor-led, media-based and internet-based training in the use of our cloud, software and hardware products.

Topic 606 is a single standard for revenue recognition that applies to all of our cloud, software, hardware and services arrangements and generally requires revenues to be recognized upon the transfer of control of promised goods or services provided to our customers, reflecting the amount of consideration we expect to receive for those goods or services.  Pursuant to Topic 606, revenues are recognized upon the application of the following steps:

 

identification of the contract, or contracts, with a customer;

 

 

identification of the performance obligations in the contract;

 

 

determination of the transaction price;

 

 

allocation of the transaction price to the performance obligations in the contract; and

 

 

recognition of revenues when, or as, the contractual performance obligations are satisfied.

The timing of revenue recognition may differ from the timing of invoicing our customers. We record an unbilled receivable which is included within accounts receivable on our condensed consolidated balance sheets, when revenue is recognized prior to invoicing. We record deferred revenues on our condensed consolidated balance sheets when revenues are recognized subsequent to cash collection for an invoice. Our standard payment terms are generally net 30 days but may vary. Invoices for cloud license and on-premise licenses and hardware products are generally issued when the license is made available for customer use or upon delivery to the customer of the hardware product. Invoices for license support and hardware support contracts are generally invoiced annually in advance. Cloud SaaS, PaaS and IaaS contracts are generally invoiced annually, quarterly or monthly in advance. Services are generally invoiced in advance or as the services are performed. Most contracts that contain a financing component are contracts financed through our financing division. The transaction price for a contract that is financed through our financing division is adjusted to reflect the time value of money and interest revenue is recorded as a component of non-operating income, net within our condensed consolidated statements of operations based on market rates in the country in which the transaction is being financed.  

Our revenue arrangements generally include standard warranty or service level provisions that our arrangements will perform and operate in all material respects as defined in the respective agreements, the financial impacts of

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

August 31, 2018

(Unaudited)

 

which have historically been and are expected to continue to be insignificant. Our arrangements generally do not include a general right of return relative to the delivered products or services. We recognize revenues net of any taxes collected from customers, which are subsequently remitted to governmental authorities.

Revenue Recognition for Cloud Services

Revenues from cloud services provided on a subscription basis are generally recognized ratably over the contractual period that the services are delivered, beginning on the date our service is made available to our customers. We recognize revenue ratably because the customer receives and consumes the benefits of the cloud services evenly throughout the contract period. Revenues from cloud services provided on a consumption basis, such as metered services, are generally recognized based on the utilization of the services by the customer.

Revenue Recognition for License Support and Hardware Support

Oracle’s primary performance obligations with respect to license support contracts and hardware support contracts are to provide customers with technical support as needed and unspecified software product upgrades, maintenance releases and patches during the term of the support period when they are available. Oracle is obligated to make the license and hardware support services available continuously throughout the contract period. Therefore, revenues for license support contracts and hardware support contracts are generally recognized ratably over the contractual periods that the support services are provided.  

Revenue Recognition for Cloud License and On-Premise License

Revenues from distinct cloud license and on-premise license performance obligations are generally recognized upfront at the point in time when the software is made available to the customer to download and use. Revenues from usage-based royalty arrangements for distinct cloud licenses and on-premise licenses are recognized at the point in time when the software end user usage occurs. For usage-based royalty arrangements with a fixed minimum guarantee amount, the minimum amount is generally recognized upfront when the software is made available to the royalty customer.

Revenue Recognition for Hardware Products

The hardware product and related software, such as an operating system or firmware, are highly interdependent and interrelated and are accounted for as a combined performance obligation. The revenues for this combined performance obligation are generally recognized at the point in time that the hardware product is delivered to the customer and ownership is transferred to the customer.

Revenue Recognition for Services

Services revenues are generally recognized over time as the services are performed. Revenues for fixed price services are generally recognized over time applying input methods to estimate progress to completion. Revenues for consumption based services are generally recognized as the services are performed.

Allocation of the Transaction Price for Contracts that have Multiple Performance Obligations

Many of our contracts include multiple performance obligations. Judgment is required in determining whether each performance obligation is distinct. Oracle products and services generally do not require a significant amount of integration or interdependency.  We allocate the transaction price for each contract to each performance obligation based on the relative standalone selling price (SSP) for each performance obligation within each contract.

We use judgment in determining the SSP for products and services. For substantially all performance obligations except cloud licenses and on-premise licenses, we are able to establish SSP based on the observable prices of

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

August 31, 2018

(Unaudited)

 

products or services sold separately in comparable circumstances to similar customers. We typically establish a standalone selling price range for our products and services which is reassessed on a periodic basis or when facts and circumstances change. Our cloud licenses and on-premise licenses have not historically been sold on a standalone basis as substantially all customers elect to purchase license support contracts at the time of a cloud license and on-premise license purchase. License support contracts are generally priced as a percentage of the net fees paid by the customer to access the license. We are unable to establish SSP for our cloud licenses and on-premise licenses based on observable prices given the same products are sold for a broad range of amounts (that is, the selling price is highly variable) and a representative SSP is not discernible from past transactions or other observable evidence. As a result, the SSP for a cloud license and an on-premise license included in a contract with multiple performance obligations is determined by applying a residual approach whereby all performance obligations within a contract are first allocated a portion of the transaction price based upon their respective SSPs with any residual amount of transaction price allocated to cloud license and on-premise license revenues.

Deferred Sales Commissions

We defer sales commissions earned by our sales force that are considered to be incremental and recoverable costs of obtaining a cloud, license support and hardware support contract. Initial sales commissions for the majority of these aforementioned contracts are generally deferred and amortized on a straight-line basis over a period of benefit that we estimate to be four to five years. We determine the period of benefit by taking into consideration the historical and expected durations of our customer contracts, the expected useful lives of our technologies, and other factors. Sales commissions for renewal contracts relating to our cloud-based arrangements are generally deferred and then amortized on a straight-line basis over the related contractual renewal period, which is generally one to three years. Amortization of deferred sales commissions is included as a component of sales and marketing expenses in our condensed consolidated statements of operations. Total capitalized costs to obtain a contract and related balances were not material as of or during each of the three months ended August 31, 2018 and 2017.

Contract Balances and Remaining Performance Obligations from Contracts with Customers

Trade receivables, net of allowance for doubtful accounts, and deferred revenues are reported net of related uncollected deferred revenues in our condensed consolidated balance sheets as of August 31, 2018 and May 31, 2018. Trade receivables and contract liabilities (which represent deferred revenues) from contracts with customers were $3.7 billion and $11.0 billion, respectively, as of August 31, 2018 and $5.1 billion and $9.0 billion, respectively, as of May 31, 2018.  

The amount of revenues recognized in our first quarter of fiscal 2019 that were included in the opening deferred revenues balance as of May 31, 2018 was approximately $3.5 billion. Revenues recognized from performance obligations satisfied in prior periods were immaterial during each of the three months ended August 31, 2018 and 2017. Impairment losses recognized on our receivables were immaterial in each of the three months ended August 31, 2018 and 2017.  

Remaining performance obligations represent contracted revenues that had not yet been recognized, and include deferred revenues, invoices that have been issued to customers but were uncollected and have not been recognized as revenues, and amounts that will be invoiced and recognized as revenues in future periods. The volumes and amounts of customer contracts that we book and total revenues that we recognize are impacted by a variety of seasonal factors.  In each fiscal year, the amounts and volumes of contracting activity and our total revenues are typically highest in our fourth fiscal quarter and lowest in our first fiscal quarter.  These seasonal impacts influence how our remaining performance obligations change over time. As of August 31, 2018, our remaining performance obligations were $31.3 billion, approximately 64% of which we expect to recognize as revenues over the next 12 months and the remainder thereafter.

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

August 31, 2018

(Unaudited)

 

Refer to Note 10 for our discussion of revenue disaggregation.

Cash, Cash Equivalents and Restricted Cash

Restricted cash that was included within cash and cash equivalents as presented within our condensed consolidated balance sheets as of August 31, 2018 and May 31, 2018 and our condensed consolidated statements of cash flows for the three months ended August 31, 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

August 31,

 

(in millions)

 

2018

 

 

2017

 

Transitional and other employee related costs

 

$

14

 

 

$

9

 

Stock-based compensation

 

 

 

 

 

1

 

Professional fees and other, net

 

 

2

 

 

 

3

 

Business combination adjustments, net

 

 

(2

)

 

 

(1

)

Total acquisition related and other expenses

 

$

14

 

 

$

12

 

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 Corporation Japan) and net other income, including net realized gains and losses related to all of our investments, net unrealized gains and losses related to the small portion of our investment portfolio related to our deferred compensation plan, and non-service net periodic pension income (losses).

 

 

 

Three Months Ended

August 31,

 

(in millions)

 

2018

 

 

2017

 

Interest income

 

$

348

 

 

$

257

 

Foreign currency losses, net

 

 

(34

)

 

 

(4

)

Noncontrolling interests in income

 

 

(39

)

 

 

(46

)

Other income, net

 

 

16

 

 

 

13

 

Total non-operating income, net

 

$

291

 

 

$

220

 

 

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 $822 million and $818 million for the three months ended August 31, 2018 and 2017, respectively.

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

August 31, 2018

(Unaudited)

 

Recent Accounting Pronouncements

Internal-use Software:  In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract  (ASU 2018-15), which clarifies the accounting for implementation costs in cloud computing arrangements. ASU 2018-15 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 2018-15 on our consolidated financial statements.

Retirement Benefits:  In August 2018, the FASB issued ASU 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Topic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans (ASU 2018-14), which modifies the disclosure requirements for defined benefit pension plans and other postretirement plans. ASU 2018-14 is effective for us in the first quarter of fiscal 2021, and earlier adoption is permitted. We are currently evaluating the impact of our pending adoption of ASU 2018-14 on our consolidated financial statements.

Fair Value Measurement:  In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13), which modifies the disclosure requirements on fair value measurements. ASU 2018-13 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 2018-13 on our consolidated financial statements.

Stock-based Compensation:  In June 2018, the FASB issued ASU 2018-07 Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (ASU 2018-07), which simplifies the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees, with certain exceptions. ASU 2018-07 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 2018-07 on our consolidated financial statements.

Comprehensive Income:  In February 2018, the 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 Tax 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.

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.

Leases:  In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) and subsequent amendments to the initial guidance: ASU 2017-13, ASU 2018-10 and ASU 2018-11 (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, 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.

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

August 31, 2018

(Unaudited)

 

 

2.

ACQUISITIONS

Acquisition of Aconex Limited

On March 28, 2018, we completed our acquisition of Aconex Limited (Aconex), a provider of cloud-based collaboration software for construction projects. We have included the financial results of Aconex in our condensed consolidated financial statements from the date of acquisition. These results were not individually material to our condensed consolidated financial statements. The total preliminary purchase price for Aconex was approximately $1.2 billion, which consisted of approximately $1.2 billion in cash and $7 million for the fair values of stock options and restricted stock-based awards assumed. In connection with the Aconex acquisition, we have preliminarily recorded $16 million of net tangible liabilities and $377 million of identifiable intangible assets based on their estimated fair values, and $863 million of residual goodwill. Goodwill generated from our acquisition of Aconex was primarily attributable to synergies expected to arise after the acquisition and is not expected to be tax deductible.

Other Fiscal 2019 and 2018 Acquisitions

During the first quarter of fiscal 2019 and the full fiscal year of 2018, we acquired certain other companies and purchased certain technology and development assets primarily to expand our products and services offerings. These acquisitions were not significant individually or in the aggregate.

Unaudited Pro Forma Financial Information

The unaudited pro forma financial information in the table below summarizes the combined results of operations for Oracle, Aconex and certain other companies that we acquired since the beginning of fiscal 2018 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 2018. 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 2018. 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 2018.

The unaudited pro forma financial information for the three months ended August 31, 2018 presented the historical results of Oracle as we did not complete any material acquisitions during the first three months of fiscal 2019.

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

August 31, 2018

(Unaudited)

 

The unaudited pro forma financial information for the three months ended August 31, 2017 combined the historical results of Oracle for the three months ended August 31, 2017 and the historical results of Aconex for the six month period ended December 31, 2017 (adjusted due to differences in reporting periods and considering the date we acquired Aconex) and certain other companies that we acquired since the beginning of fiscal 2018 based upon their respective previous reporting periods and the dates these companies were acquired by us, and the effects of the pro forma adjustments listed above. The unaudited pro forma financial information was as follows:

 

 

 

Three Months Ended

August 31,

 

(in millions, except per share data)

 

2018

 

 

2017

 

Total revenues

 

$

9,193

 

 

$

9,146

 

Net income

 

$

2,265

 

 

$

2,119

 

Basic earnings per share

 

$

0.58

 

 

$

0.51

 

Diluted earnings per share

 

$

0.57

 

 

$

0.49

 

 

 

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)

August 31, 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):

 

 

 

August 31, 2018

 

 

May 31, 2018

 

 

 

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

 

$

148

 

 

$

41,419

 

 

$

41,567

 

 

$

223

 

 

$

44,079

 

 

$

44,302

 

Commercial paper debt securities

 

 

 

 

 

1,538

 

 

 

1,538

 

 

 

 

 

 

1,647

 

 

 

1,647

 

Money market funds

 

 

3,400

 

 

 

 

 

 

3,400

 

 

 

6,500

 

 

 

 

 

 

6,500

 

Derivative financial instruments

 

 

 

 

 

16

 

 

 

16

 

 

 

 

 

 

29

 

 

 

29

 

Total assets

 

$

3,548

 

 

$

42,973

 

 

$

46,521

 

 

$

6,723

 

 

$

45,755

 

 

$

52,478

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

$

 

 

$

170

 

 

$

170

 

 

$

 

 

$

158

 

 

$

158

 

 

We classify our marketable securities as available-for-sale debt securities at the time of purchase and reevaluate such classification as of each balance sheet date. Our marketable securities investments consist of Tier 1 commercial paper debt securities, corporate debt securities and certain other securities. Marketable securities on the condensed consolidated balance sheets include securities with original maturities at the time of purchase greater than three months and the remainder of the securities is included in cash and cash equivalents. As of August 31, 2018 and May 31, 2018, approximately 23% and 26%, respectively, of our marketable securities investments mature within one year and 77% and 74%, respectively, mature within one to five 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 $58.0 billion of senior notes and the related fair value hedges that we had outstanding as of each of August 31, 2018 and May 31, 2018, the estimated fair values of the senior notes and the related fair value hedges using Level 2 inputs at August 31, 2018 and May 31, 2018 were $58.7 billion and $59.0 billion, respectively.

 

 

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

August 31, 2018

(Unaudited)

 

4.

INTANGIBLE ASSETS AND GOODWILL

The changes in intangible assets for fiscal 2019 and the net book value of intangible assets as of August 31, 2018 and May 31, 2018 were as follows:

 

 

 

Intangible Assets, Gross

 

 

Accumulated Amortization

 

 

Intangible Assets, Net

 

(Dollars in millions)

 

May 31,

2018

 

 

Additions &

Adjustments, net(1)

 

 

August 31,

2018

 

 

May 31,

2018

 

 

Expense

 

 

August 31,

2018

 

 

May 31,

2018

 

 

August 31,

2018

 

Developed technology

 

$

5,309

 

 

$

91

 

 

$

5,400

 

 

$

(2,814

)

 

$

(212

)

 

$

(3,026

)

 

$

2,495

 

 

$

2,374

 

Cloud services and license support

   agreements and related relationships

 

 

5,999

 

 

 

(29

)

 

 

5,970

 

 

 

(2,285

)

 

 

(192

)

 

 

(2,477

)

 

 

3,714

 

 

 

3,493

 

Other

 

 

1,622

 

 

 

(3

)

 

 

1,619

 

 

 

(1,161

)

 

 

(30

)

 

 

(1,191

)

 

 

461

 

 

 

428

 

Total intangible assets, net

 

$

12,930

 

 

$

59

 

 

$

12,989

 

 

$

(6,260

)

 

$

(434

)

 

$

(6,694

)

 

$

6,670

 

 

$

6,295

 

 

(1)

Amounts also include any changes in intangible asset balances for the periods presented that resulted from foreign currency translations.

Total amortization expense related to our intangible assets was $434 million and $411 million for the three months ended August 31, 2018 and 2017, respectively. As of August 31, 2018, estimated future amortization expenses related to intangible assets were as follows (in millions):

 

Remainder of fiscal 2019

 

$

1,190

 

Fiscal 2020

 

 

1,419

 

Fiscal 2021

 

 

1,198

 

Fiscal 2022

 

 

982

 

Fiscal 2023

 

 

629

 

Fiscal 2024

 

 

388

 

Thereafter

 

 

489

 

Total intangible assets, net

 

$

6,295

 

 

The changes in the carrying amounts of goodwill, net, which is generally not deductible for tax purposes, for our operating segments for the three months ended August 31, 2018 were as follows:

 

(in millions)

 

Cloud and License

 

 

Hardware

 

 

Services

 

 

Total Goodwill, net

 

Balances as of May 31, 2018

 

$

39,600

 

 

$

2,367

 

 

$

1,788

 

 

$

43,755

 

Goodwill adjustments, net(1)

 

 

(47

)

 

 

 

 

 

(6

)

 

 

(53

)

Balances as of August 31, 2018

 

$

39,553

 

 

$

2,367

 

 

$

1,782

 

 

$

43,702

 

 

(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). Amounts also include any changes in goodwill balances for the period presented that resulted from foreign currency translations.

 

18


Table of Contents

 

ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

August 31, 2018

(Unaudited)

 

5.

RESTRUCTURING ACTIVITIES

Fiscal 2019 Oracle Restructuring Plan

During the first quarter of fiscal 2019, 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 (2019 Restructuring Plan). The total estimated restructuring costs associated with the 2019 Restructuring Plan are up to $432 million and will be recorded to the restructuring expense line item within our condensed consolidated statements of operations as they are incurred. We recorded $107 million of restructuring expenses in connection with the 2019 Restructuring Plan in the first three months of fiscal 2019 and we expect to incur the majority of the estimated remaining $325 million through the end of fiscal 2020. Any changes to the estimates of executing the 2019 Restructuring Plan will be reflected in our future results of operations.

Summary of All Plans

 

 

 

Accrued

May 31,

2018(2)

 

 

Three Months Ended August 31, 2018

 

 

Accrued

August 31,

2018(2)

 

 

Total

Costs

Accrued

to Date

 

 

Total

Expected

Program

Costs

 

(in millions)

 

 

 

Initial

Costs(3)

 

 

Adj. to

Cost(4)

 

 

Cash

Payments

 

 

Others(5)

 

 

 

 

 

 

 

2019 Restructuring Plan(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cloud and license

 

$

 

 

$

58

 

 

$

 

 

$

(21

)

 

$

 

 

$

37

 

 

$

58

 

 

$

230

 

Hardware

 

 

 

 

 

22

 

 

 

 

 

 

(14

)

 

 

 

 

 

8

 

 

 

22

 

 

 

66

 

Services