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Oracle 10-Q 2008 Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Commission file number:
000-51788
Oracle Corporation
500 Oracle Parkway
Redwood City, California 94065
(Address of principal executive
offices, including zip code)
(650) 506-7000
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. YES x NO o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer
or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated
filer” and “smaller reporting company” in
Rule 12b-2
of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). YES o NO x
The number of shares of registrant’s common stock
outstanding as of March 24, 2008 was: 5,151,525,269.
ORACLE
CORPORATION
FORM 10-Q
QUARTERLY REPORT
Table of Contents
PART I.
FINANCIAL INFORMATION
ORACLE
CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS As of February 29, 2008 and May 31, 2007 (Unaudited)
See notes to condensed consolidated financial statements.
Table of Contents
ORACLE
CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS For the Three and Nine Months Ended February 29, 2008 and February 28, 2007 (Unaudited)
See notes to condensed consolidated financial statements.
Table of Contents
ORACLE
CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the Nine Months Ended February 29, 2008 and February 28, 2007 (Unaudited)
See notes to condensed consolidated financial statements.
Table of Contents
February 29, 2008
(Unaudited)
We have prepared the condensed consolidated financial statements
included herein, without audit, pursuant to the rules and
regulations of the U.S. Securities and Exchange Commission
(SEC). Certain information and footnote disclosures normally
included in financial statements prepared in accordance with
U.S. generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations.
However, we believe that the disclosures are adequate to ensure
the information presented is not misleading. These unaudited
condensed consolidated financial statements should be read in
conjunction with the audited financial statements and the notes
thereto included in our Annual Report on
Form 10-K
for the fiscal year ended May 31, 2007.
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, 2008. Certain
prior period balances have been reclassified to conform to the
current period presentation. There have been no significant
changes in new accounting pronouncements or in our critical
accounting policies that were disclosed in our Annual Report on
Form 10-K
for the fiscal year ended May 31, 2007 other than the
impact of our adoption of Financial Accounting Standards Board
(FASB) Interpretation No. 48, Accounting for Uncertainty
in Income Taxes, an interpretation of FASB Statement
No. 109, which affected our Accounting for Income Taxes
policy (see Note 9).
Derivative Instruments and Hedging Activities
Disclosures: In March 2008, the FASB issued
Statement No. 161, Disclosures about Derivative
Instruments and Hedging Activities an amendment of FASB
Statement No. 133. Statement 161 requires
disclosures of how and why an entity uses derivative
instruments, how derivative instruments and related hedged items
are accounted for and how derivative instruments and related
hedged items affect an entity’s financial position,
financial performance, and cash flows. Statement 161 is
effective for fiscal years beginning after November 15,
2008, with early adoption permitted. We are currently evaluating
the impact of the pending adoption of Statement 161 on our
consolidated financial statements.
Business Combinations: In December 2007, the
FASB issued Statement No. 141 (revised 2007), Business
Combinations. The standard changes the accounting for
business combinations including the measurement of acquirer
shares issued in consideration for a business combination, the
recognition of contingent consideration, the accounting for
preacquisition gain and loss contingencies, the recognition of
capitalized in-process research and development, the accounting
for acquisition-related restructuring cost accruals, the
treatment of acquisition related transaction costs and the
recognition of changes in the acquirer’s income tax
valuation allowance. Statement 141(R) is effective for
fiscal years beginning after December 15, 2008, with early
adoption prohibited. We are currently evaluating the impact of
the pending adoption of Statement 141(R) on our
consolidated financial statements.
Accounting and Reporting of Noncontrolling
Interests: In December 2007, the FASB issued
Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB
No. 51. The standard changes the accounting for
noncontrolling (minority) interests in consolidated financial
statements including the requirements to classify noncontrolling
interests as a component of consolidated stockholders’
equity, and the elimination of “minority interest”
accounting in results of operations with earnings attributable
to noncontrolling interests reported as a part of consolidated
earnings. Additionally, Statement 160 revises the
accounting for both increases and decreases in a parent’s
controlling ownership interest. Statement 160 is effective for
fiscal years beginning after December 15, 2008, with early
adoption prohibited. We are currently evaluating the impact of
the pending adoption of Statement 160 on our consolidated
financial statements.
Fair Value Measurements: In September 2006,
the FASB issued Statement No. 157, Fair Value
Measurements. Statement 157 defines fair value, establishes
a framework for measuring fair value and expands fair value
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ORACLE
CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) February 29, 2008 (Unaudited)
measurement disclosures. Statement 157 is effective for
fiscal years beginning after November 15, 2007. In February
2008, the FASB issued FASB Staff Position
No. FAS 157-1,
Application of FASB Statement No. 157 to FASB Statement
No. 13 and Other Accounting Pronouncements That Address
Fair Value Measurements for Purposes of Lease Classification or
Measurement under Statement 13 and FASB Staff Position
No. FAS 157-2,
Effective Date of FASB Statement No. 157.
Collectively, the Staff Positions defer the effective date of
Statement No. 157 to fiscal years beginning after
November 15, 2008, for nonfinancial assets and nonfinancial
liabilities except for items that are recognized or disclosed at
fair value on a recurring basis at least annually, and amend the
scope of Statement 157. We are currently evaluating the
impact of the pending adoption of Statement 157 on our
consolidated financial statements.
Fair Value Option for Financial Assets and Financial
Liabilities: In February 2007, the FASB issued
Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities, including an amendment of FASB
Statement No. 115, which allows an entity the
irrevocable option to elect fair value for the initial and
subsequent measurement for certain financial assets and
liabilities on an
instrument-by-instrument
basis. Subsequent measurements for the financial assets and
liabilities an entity elects to record at fair value will be
recognized in earnings. Statement 159 also establishes
additional disclosure requirements. Statement 159 is
effective for fiscal years beginning after November 15,
2007, with early adoption permitted provided that the entity
also adopts Statement 157. We are currently evaluating the
impact of the potential adoption of Statement 159 on our
consolidated financial statements.
Accounting for Advanced Payments for Future Research and
Development: In June 2007, the FASB ratified
EITF 07-3,
Accounting for Nonrefundable Advance Payments for Goods or
Services Received for Use in Future Research and Development
Activities
(EITF 07-3).
EITF 07-3
requires that nonrefundable advance payments for goods or
services that will be used or rendered for future research and
development activities be deferred and capitalized and
recognized as an expense as the goods are delivered or the
related services are performed.
EITF 07-3
is effective, on a prospective basis, for fiscal years beginning
after December 15, 2007. The adoption of
EITF 07-3
will not have a material impact on our consolidated financial
statements.
We account for share-based payments to employees, including
grants of employee stock awards and purchases under employee
stock purchase plans in accordance with FASB Statement
No. 123 (revised 2004), Share-Based Payment, which
requires that share-based payments (to the extent they are
compensatory) be recognized in our consolidated statements of
operations based on their fair values. In addition, we have
applied the provisions of the SEC’s Staff Accounting
Bulletin No. 107 in our accounting for
Statement 123R.
As required by Statement 123R, we recognize stock-based
compensation expense for share-based payments issued or assumed
after June 1, 2006 that are expected to vest. For all
share-based payments granted or assumed beginning June 1,
2006, we recognize stock-based compensation expense on a
straight-line basis over the service period of the award, which
is generally four years. The fair value of the unvested portion
of share-based payments granted prior to June 1, 2006 is
recognized over the remaining service period using the
accelerated expense attribution method, net of estimated
forfeitures. In determining whether an award is expected to
vest, we use an estimated, forward-looking forfeiture rate based
upon our historical forfeiture rates. Stock-based compensation
expense recorded using an estimated forfeiture rate is updated
for actual forfeitures quarterly. We also consider, each
quarter, whether there have been any significant changes in
facts and circumstances that would affect our forfeiture rate.
The net effect of forfeiture adjustments based on actual results
was an increase to stock-based compensation expense of
approximately $8 million for the nine months ended
February 29, 2008 (nominal for all other periods presented).
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ORACLE
CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) February 29, 2008 (Unaudited)
Stock-based compensation is included in the following operating
expense line items of our condensed consolidated statements of
operations (in millions):
We estimate the fair value of our share-based payments using the
Black-Scholes-Merton option-pricing model, which was developed
for use in estimating the fair value of traded options that have
no vesting restrictions and are fully transferable. Option
valuation models, including the Black-Scholes-Merton
option-pricing model, require the input of assumptions,
including stock price volatility. Changes in the input
assumptions can materially affect the fair value estimates.
During the three and nine months ended February 29, 2008
and February 28, 2007, the fair value of stock awards was
estimated at the date of grant or date of plan assumption (for
awards assumed via acquisition) using the following weighted
average assumptions:
The expected life input is based on historical exercise patterns
and post-vesting termination behavior, the risk-free interest
rate input is based on United States Treasury instruments and
the volatility input is calculated from the implied volatility
of our longest-term, traded options. We do not currently pay
cash dividends on our common stock and do not anticipate doing
so in the foreseeable future.
On January 16, 2008, we entered into an Agreement and Plan
of Merger (Merger Agreement) with BEA Systems, Inc., a provider
of enterprise infrastructure software. Pursuant to the Merger
Agreement, our wholly owned subsidiary will merge with and into
BEA and BEA will become a wholly owned subsidiary of Oracle.
Upon the consummation of the merger, each share of BEA common
stock will be converted into the right to receive $19.375 in
cash. In addition, options to acquire BEA common stock, BEA
restricted stock unit awards, BEA restricted stock
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ORACLE
CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) February 29, 2008 (Unaudited)
awards and other equity-based awards denominated in shares of
BEA common stock outstanding immediately prior to the
consummation of the merger will generally be converted into
options, restricted stock unit awards, restricted stock awards
or other equity-based awards, as the case may be, denominated in
shares of Oracle common stock based on formulas contained in the
Merger Agreement. The estimated total purchase price of BEA is
approximately $8.6 billion.
The Merger Agreement contains certain termination rights for
both BEA and Oracle and further provides that, upon termination
of the Merger Agreement under certain circumstances,
(i) BEA may be obligated to pay Oracle a termination fee of
$250 million and (ii) Oracle may be obligated to pay
to BEA a termination fee of $500 million.
We expect that our proposed acquisition of BEA will close in our
fourth quarter of fiscal 2008, subject to BEA stockholder
approval, regulatory clearance by the European Commission and
other closing conditions. On March 26, 2008, BEA and Oracle
submitted a pre-merger notification filing to the European
Commission; the European Commission has set a provisional
deadline of April 30, 2008 for determining whether further
review of the proposed merger will be required. In addition, BEA
has scheduled a meeting of its stockholders on April 4,
2008 to vote upon the proposed merger.
We acquired Agile Software Corporation to expand our offering of
product life cycle management solutions on July 16, 2007 by
means of a merger of Agile with our wholly owned subsidiary. We
have included the financial results of Agile in our consolidated
financial results effective July 16, 2007.
The total purchase price for Agile was $492 million which
consisted of $471 million in cash paid to acquire the
outstanding common stock of Agile, $14 million for the fair
value of Agile options assumed and $7 million for
transaction costs. In allocating the purchase price based on
estimated fair values, we recorded approximately
$107 million of goodwill, $198 million of identifiable
intangible assets, $182 million of net tangible assets and
$5 million of in-process research and development. The
preliminary allocation of the purchase price was based upon a
preliminary valuation and our estimates and assumptions are
subject to change. The primary areas of the purchase price
allocation that are not yet finalized relate to certain legal
matters, income and non-income based taxes and residual goodwill.
On April 13, 2007, we acquired majority ownership of
Hyperion Solutions Corporation by means of a cash tender offer
and, subsequently, completed a merger of Hyperion with our
wholly owned subsidiary on April 19, 2007. We acquired
Hyperion to expand our offerings of enterprise performance
management and business intelligence software solutions.
The total purchase price for Hyperion was $3.2 billion
which consisted of $3,171 million in cash paid to acquire
the outstanding common stock of Hyperion, $51 million for
the fair value of Hyperion options assumed and restricted stock
awards exchanged and $27 million for acquisition related
transaction costs. In allocating the purchase price based on
estimated fair values, we recorded approximately
$1,660 million of goodwill, $1,460 million of
identifiable intangible assets, $73 million of net tangible
assets and $56 million of in-process research and
development. The preliminary allocation of the purchase price
was based upon a preliminary valuation and our estimates and
assumptions are subject to change. The primary areas of the
purchase price allocation that are not yet finalized relate to
certain restructuring liabilities, legal matters, income and
non-income based taxes and residual goodwill.
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ORACLE
CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) February 29, 2008 (Unaudited)
During fiscal 2007 and fiscal 2006, we acquired interests in and
increased our ownership of i-flex solutions limited (Bombay
Stock Exchange: IFLX.BO and National Stock Exchange of India:
IFLX.NS) to approximately 83% by means of share purchase
agreements, an open offer to acquire shares and open market
purchases. We acquired a majority ownership in
i-flex to
expand our offerings of software solutions and services to the
financial services industry.
Our cumulative investment in
i-flex as of
February 29, 2008 was approximately $2.1 billion,
which consisted of $2,039 million of cash paid for common
stock and $31 million in transaction costs and other
expenses. Our cumulative investment in
i-flex has
been allocated to
i-flex’s
net tangible and identifiable intangible assets based on their
estimated fair values as of the respective dates of acquisition
of the interests. The minority interest in the net assets of
i-flex has
been recorded at historical book values. In allocating the
purchase price, we recorded approximately $1.6 billion of
goodwill, $281 million of identifiable intangible assets,
$180 million of net tangible assets and $46 million of
in-process research and development.
During the first nine months of fiscal 2008 and during fiscal
year 2007, we acquired several other companies and purchased
certain technology and development assets. Our acquisitions
during the first nine months of fiscal 2008, excluding Agile,
were insignificant. Our fiscal year 2007 acquisitions, other
than Hyperion and
i-flex, had
a total preliminary purchase price of approximately
$1.3 billion, which included cash paid of
$1,258 million and the fair value of options assumed of
$46 million. We recorded approximately $595 million of
goodwill, $578 million of identifiable intangible assets,
$82 million of net tangible assets and $49 million of
in-process research and development associated with these other
fiscal 2007 acquisitions. We have included the effects of these
transactions in our results of operations prospectively from the
respective dates of the acquisitions. The preliminary purchase
price allocations for each of these acquisitions were based upon
a preliminary valuation and our estimates and assumptions for
certain of these acquisitions are subject to change. The primary
areas of the purchase price allocations that are not yet
finalized relate to identifiable intangible assets, certain
legal matters, income and non-income based taxes and residual
goodwill.
The unaudited financial information in the table below
summarizes the combined results of operations of Oracle, Agile,
Hyperion and other collectively significant companies acquired
during the first nine months of fiscal 2008 and during fiscal
year 2007, on a pro forma basis, as though the companies had
been combined as of the beginning of each of the periods
presented. The pro forma financial information is presented for
informational purposes only and is not indicative of the results
of operations that would have been achieved if the acquisitions
and any borrowings undertaken to finance these acquisitions had
taken place at the beginning of each of the periods presented.
The pro forma financial information for the periods presented
also includes the business combination accounting effect on
historical Agile, Hyperion and other collectively significant
companies’ support revenues, amortization charges from
acquired intangible assets, stock-based compensation charges for
unvested stock awards assumed, adjustments to interest expense
and related tax effects.
The impact of our acquisitions on our unaudited pro forma
financial information during the three months ended
February 29, 2008 was nominal and, therefore, we have only
presented our historical results for this period in the below
table. The unaudited pro forma financial information for the
nine months ended February 29, 2008 combines the historical
results of Oracle for the nine months ended February 29,
2008, the historical results of Agile for the period from
June 1, 2007 to July 15, 2007, and the business
combination accounting effects listed above. The unaudited pro
forma financial information for the three and nine months ended
February 28, 2007 combines the
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ORACLE
CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) February 29, 2008 (Unaudited)
historical results of Oracle for the three and nine months ended
February 28, 2007 and, due to differences in our reporting
periods, the historical results of Agile for the three and nine
months ended January 31, 2007, the historical results of
Hyperion for the three and nine months ended March 31,
2007, the historical results of other collectively significant
companies acquired based upon their respective previous
reporting periods and the dates that these companies were
acquired by us, and the business combination accounting effects
listed above.
Acquisition related and other expenses consist of in-process
research and development expenses, personnel related costs for
transitional employees, stock-based compensation expenses,
integration related professional services, certain business
combination contingency adjustments after the purchase price
allocation period has ended, and certain other operating
expenses (income), net. Stock-based compensation included in
acquisition related and other expenses resulted from unvested
options assumed from acquisitions whose vesting was accelerated
upon termination of the employees pursuant to the terms of those
options.
In December 2007, we sold certain of our land and buildings for
$153 million in cash. Concurrent with the sale, we leased
the property back from the buyer for a period of up to three
years. We have accounted for this transaction in accordance with
FASB Statement No. 28, Accounting for Sales with
Leasebacks, FASB Statement No. 66, Accounting for
Sales of Real Estate, and FASB Statement No. 98,
Accounting for Leases, et al. We deferred
$19 million of the gain on the sale representing the
present value of the operating lease commitment and recognized a
gain of approximately $57 million during the three and nine
months ended February 29, 2008. The deferred portion of the
gain will be recognized as a reduction of rent expense over the
operating lease term.
For the nine months ended February 28, 2007, acquisition
related and other expenses also included a benefit related to
the settlement of a lawsuit filed against PeopleSoft, Inc. on
behalf of the U.S. government. This lawsuit was filed in
October 2003, prior to our acquisition of PeopleSoft. The
lawsuit alleged PeopleSoft made defective pricing disclosures to
the U.S. General Services Administration. This lawsuit
represented a pre-acquisition contingency that we identified and
assumed in connection with the PeopleSoft acquisition. On
October 10, 2006, we agreed to pay the U.S. government
$98 million to settle this lawsuit. Business combination
accounting standards require that after the end of the purchase
price allocation period, any adjustment to amounts recorded that
relate to a pre-
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ORACLE
CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) February 29, 2008 (Unaudited)
acquisition contingency should be included as an element of net
income in the period of settlement, and not as an adjustment to
the original purchase price allocation. Since the purchase price
allocation period for PeopleSoft ended in the third quarter of
our fiscal year 2006, the favorable difference of
$52 million between the estimated exposure recorded for
this lawsuit during the purchase price allocation period and the
actual settlement amount has been included in our consolidated
statements of operations for the nine months ended
February 28, 2007.
Non-operating income, net consists primarily of interest income,
net foreign currency exchange gains, the minority owners’
share in the net profits of
i-flex and
Oracle Japan, and other income including gains related to our
marketable securities and other investments.
The changes in the carrying amount of goodwill, the majority of
which is not deductible for tax purposes, by operating segment
for the nine months ended February 29, 2008, were as
follows:
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ORACLE
CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) February 29, 2008 (Unaudited)
The changes in intangible assets for the nine months ended
February 29, 2008 and the net book value of intangible
assets at February 29, 2008 were as follows:
Total amortization expense related to our intangible assets was
$292 million and $867 million for the three and nine
months ended February 29, 2008, respectively, and
$222 million and $623 million for the three and nine
months ended February 28, 2007, respectively. As of
February 29, 2008, estimated future amortization expense
related to intangible assets, excluding the impact of additional
intangible assets arising through any subsequent acquisitions
such as BEA, is $317 million for the remainder of fiscal
2008, $1.2 billion in fiscal 2009, $1.0 billion in
fiscal 2010, $799 million in fiscal 2011, $660 million
in fiscal 2012, $306 million in fiscal 2013 and
$1.1 billion thereafter.
Deferred revenues consisted of the following:
Deferred software license updates and product support revenues
represent customer payments made in advance for annual support
contracts. Software license updates and product support are
typically billed on a per annum basis in advance and revenue is
recognized ratably over the support period. The deferred
software license updates and product support revenues are
typically highest at the end of our first fiscal quarter due to
the collection of cash from the large volume of service
contracts that are sold or renewed in the fiscal quarter ending
in May of each year due to the peak in sales surrounding our
fiscal year-end. Deferred service revenues include prepayments
for consulting, On Demand and education services. Revenue for
these services is recognized as the services are performed.
Deferred new software license revenues typically result from
undelivered products or specified enhancements, customer
specific acceptance provisions, software license transactions
that cannot be segmented from consulting services or certain
extended payment term arrangements.
In connection with purchase price allocations related to our
acquisitions, we have estimated the fair values of the support
obligations assumed. The estimated fair values of the support
obligations assumed were determined using a cost-build up
approach. The cost-build up approach determines fair value by
estimating the costs relating to fulfilling the obligations plus
a normal profit margin. The sum of the costs and operating
profit approximates, in
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ORACLE
CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) February 29, 2008 (Unaudited)
theory, the amount that we would be required to pay a third
party to assume the support obligations. These fair value
adjustments reduce the revenues recognized over the support
contract term of our acquired contracts and, as a result, we did
not recognize software license updates and product support
revenues related to support contracts assumed in business
acquisitions in the amount of $138 million and
$158 million, which would have been otherwise recorded by
the acquired entities, for the nine months ended
February 29, 2008 and February 28, 2007, respectively.
The effective tax rate in the periods presented is the result of
the mix of income earned in various tax jurisdictions that apply
a broad range of income tax rates. The provision for income
taxes differs from the tax computed at the U.S. federal
statutory income tax rate due primarily to state taxes and
earnings considered as indefinitely reinvested in foreign
operations. The effective tax rate was 28.6% and 28.8% for the
three and nine months ended February 29, 2008,
respectively, and 26.5% and 28.3% for the three and nine months
ended February 28, 2007, respectively.
On June 1, 2007, we adopted FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes, an
Interpretation of FASB Statement No. 109 (FIN 48).
FIN 48 contains a two-step approach to recognizing and
measuring uncertain tax positions accounted for in accordance
with FASB Statement No. 109, Accounting for Income
Taxes. The first step is to evaluate the tax position taken
or expected to be taken in a tax return by determining if the
weight of available evidence indicates that it is more likely
than not that, on evaluation of the technical merits, the tax
position will be sustained on audit, including resolution of any
related appeals or litigation processes. The second step is to
measure the tax benefit as the largest amount that is more than
50% likely to be realized upon ultimate settlement.
The total amount of gross unrecognized tax benefits as of
June 1, 2007 (the date of adoption of FIN 48) was
$1.3 billion. The adoption of FIN 48 resulted in an
increase to our retained earnings of $3 million. In
addition, as of the date of adoption, $612 million of
unrecognized benefits would affect our effective tax rate if
realized. We recognize interest and penalties related to
uncertain tax positions in our provision for income taxes line
of our consolidated statements of operations. The gross amount
of interest and penalties accrued as of the date of adoption was
$286 million.
Domestically, U.S. federal and state taxing authorities are
currently examining income tax returns of Oracle and various
acquired entities for years through fiscal 2006. Many issues are
at an advanced stage in the examination process, the most
significant of which include the deductibility of certain
royalty payments, issues related to certain capital gains and
losses, Foreign Sales Corporation/Extraterritorial Income
exemptions, stewardship deductions and foreign tax credits
taken. Other issues are related to years with expiring statutes
of limitation. With all of these domestic audit issues
considered in the aggregate, we believe it was reasonably
possible that, as of June 1, 2007, the unrecognized tax
benefits related to these audits could decrease (whether by
payment, release, or a combination of both) in the next
12 months by as much as $256 million
($225 million net of offsetting tax benefits). Our
U.S. federal and, with some exceptions, our state income
tax returns have been examined for all years prior to fiscal
2000, and we are no longer subject to audit for those periods.
Internationally, tax authorities for numerous
non-U.S. jurisdictions
are also examining returns affecting unrecognized tax benefits.
We believe it was reasonably possible that, as of June 1,
2007, the gross unrecognized tax benefits could decrease in the
next 12 months by as much as $73 million
($14 million net of offsetting tax benefits), related
primarily to a technical matter of corporate restructuring,
which would be affected by the possible passage of favorable
legislation. With some exceptions, we are generally no longer
subject to tax examinations in
non-U.S. jurisdictions
for years prior to fiscal 1998.
We believe that we have adequately provided for any reasonably
foreseeable outcomes related to our tax audits and that any
settlement will not have a material adverse effect on our
consolidated financial position or results of operations.
However, there can be no assurances as to the possible outcomes.
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ORACLE
CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) February 29, 2008 (Unaudited)
During the second quarter of fiscal 2008, our management
approved, committed to and initiated plans to restructure and
improve efficiencies in our Oracle-based operations as a result
of certain management and organizational changes and our recent
acquisitions. The total estimated restructuring costs (primarily
related to employee severance) associated with our Fiscal 2008
Oracle Restructuring Plan are $64 million and will be
recorded to the restructuring expense line item within our
consolidated statements of operations as they are recognized.
For the three and nine months ended February 29, 2008, we
recorded $8 million and $14 million, respectively in
restructuring expenses and expect to incur the majority of the
remaining $50 million over the course of calendar 2008. Any
changes to the estimates of executing the Fiscal 2008 Oracle
Restructuring Plan will be reflected in our future results of
operations.
During the fourth quarter of fiscal 2007, our management
approved and initiated plans to restructure certain operations
of pre-merger Hyperion to eliminate redundant costs, primarily
in general and administrative functions, resulting from the
acquisition of Hyperion and improve efficiencies in operations.
The cash restructuring charges recorded are based on
restructuring plans that have been committed to by our
management.
The total estimated restructuring costs associated with exiting
activities of Hyperion are $109 million, consisting
primarily of excess facilities obligations through fiscal 2019
as well as severance and other restructuring costs. These costs
were recognized as a liability assumed in the purchase business
combination and included in the allocation of the cost to
acquire Hyperion and, accordingly, have resulted in an increase
to goodwill. Our restructuring expenses may change as we execute
the approved plan. Future decreases to the estimates of
executing the Hyperion restructuring plan will be recorded as an
adjustment to goodwill indefinitely, whereas increases to the
estimates will be recorded as an adjustment to goodwill during
the purchase accounting allocation period and as an adjustment
to operating expenses thereafter.
During the third quarter of fiscal 2006, our management approved
and initiated plans to restructure certain operations of
pre-merger Siebel Systems, Inc. to eliminate redundant costs
resulting from the acquisition of Siebel and improve
efficiencies in operations. The cash restructuring charges
recorded were based on a restructuring plan that was committed
to by our management.
The total estimated restructuring costs associated with exiting
activities of Siebel were $577 million, consisting
primarily of excess facilities obligations through fiscal 2022
as well as severance and other restructuring costs. These costs
were recognized as a liability assumed in the purchase business
combination and included in the allocation of the cost to
acquire Siebel and, accordingly, have resulted in an increase to
goodwill. Our restructuring expenses may change as our
management executes the approved plan. Future decreases to the
estimates of executing the Siebel restructuring plan will be
recorded as an adjustment to goodwill indefinitely, whereas
increases to the estimates will be recorded as operating
expenses.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) February 29, 2008 (Unaudited)
Summary
of All Plans
In September 2007, we entered into two interest rate swap
agreements that have the economic effect of modifying the
variable interest obligations associated with our floating rate
senior notes due May 2009 and May 2010 so that the interest
payable on the senior notes effectively becomes fixed at a rate
of 4.62% and 4.59%, respectively. The critical terms of the
interest rate swap agreements and the senior notes that the swap
agreements pertain to match, including the notional amounts,
interest rate reset dates, maturity dates and underlying market
indices. The fair values of the interest rate swaps totaled an
unrealized loss of $43 million, net of tax effects, at
February 29, 2008. We are accounting for these swaps as
hedges pursuant to FASB Statement No. 133, Accounting
for Derivative Instruments and Hedging Activities. The
losses on these swaps are included in accumulated other
comprehensive
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) February 29, 2008 (Unaudited)
income and the corresponding fair value payable is included in
other long-term liabilities in our condensed consolidated
balance sheet.
Our Board of Directors has approved a program to repurchase
shares of our common stock to reduce the dilutive effect of our
stock option and stock purchase plans. In April 2007, our Board
of Directors expanded our repurchase program by
$4.0 billion and as of February 29, 2008,
$2.7 billion was available for share repurchases pursuant
to our stock repurchase program. We repurchased
73.2 million shares for $1.5 billion during the nine
months ended February 29, 2008 (including 1.3 million
shares for $26 million that were repurchased but not
settled) and 179.0 million shares for $3.0 billion
during the nine months ended February 28, 2007 (including
3.0 million shares for $51 million that were
repurchased but not settled) under the applicable repurchase
programs authorized.
Our stock repurchase authorization does not have an expiration
date and the pace of our repurchase activity will depend on
factors such as our working capital needs, our cash requirements
for acquisitions, our debt repayment obligations, 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.
Basic earnings per share is computed by dividing net income for
the period by the weighted average number of common shares
outstanding during the period. Diluted earnings per share is
computed by dividing net income for the period by the weighted
average number of common shares outstanding during the period,
plus the dilutive effect of outstanding stock awards and shares
issuable under the employee stock purchase plan using the
treasury stock method. The following table sets forth the
computation of basic and diluted earnings per share:
Comprehensive income includes the following, net of income tax
effects: foreign currency translation gains and losses, hedge
gains and losses that are reflected in stockholders’ equity
instead of net income, and unrealized gains
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ORACLE
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) February 29, 2008 (Unaudited)
and losses on marketable debt and equity securities. The
following table sets forth the calculation of comprehensive
income:
FASB Statement No. 131, Disclosures about Segments of an
Enterprise and Related Information, establishes standards
for reporting information about operating segments. Operating
segments are defined as components of an enterprise about which
separate financial information is available that is evaluated
regularly by the chief operating decision maker, or decision
making group, in deciding how to allocate resources and in
assessing performance. Our chief operating decision maker is our
Chief Executive Officer. We are organized geographically and by
line of business. While our Chief Executive Officer evaluates
results in a number of different ways, the line of business
management structure is the primary basis for which the
allocation of resources and financial results are assessed. We
have two businesses, software and services, which are further
divided into five operating segments. Our software business is
comprised of two operating segments: (1) new software
licenses and (2) software license updates and product
support. Our services business is comprised of three operating
segments: (1) consulting, (2) On Demand and
(3) education.
The new software license line of business is engaged in the
licensing of database and middleware software as well as
applications software. Database and middleware software includes
database management software, application server software,
identification management and access, analytics, development
tools and collaboration software. Applications software provides
enterprise information that enables companies to manage their
business cycles and provide intelligence in functional areas
such as financials, human resources, maintenance management,
manufacturing, marketing, order fulfillment, product lifecycle
management, procurement, projects, sales, services, enterprise
resource planning and supply chain planning. The software
license updates and product support line of business provides
customers with rights to unspecified software product upgrades
and maintenance releases, internet access to technical content,
as well as internet and telephone access to technical support
personnel during the support period. In addition, the software
license updates and product support line of business offers
customers Oracle Unbreakable Linux Support, which provides
enterprise level support for the Linux operating system, and
also offers support for Oracle VM server virtualization software.
The consulting line of business provides services to customers
in business strategy and analysis, business process
optimization, and the implementation, deployment and upgrade of
our database, middleware and applications software. On Demand
includes Oracle On Demand, CRM On Demand and Advanced Customer
Services. Oracle On Demand provides multi-featured software and
hardware management and maintenance services for customers that
deploy our database, middleware and applications software at
Oracle’s data center facilities or at a site of our
customer’s choosing. CRM On Demand is a service offering
that provides our customers with our Siebel CRM Software
functionality delivered via a hosted solution that we manage.
Advanced Customer Services consists of solution support centers,
business critical assistance, technical account management,
expert services, configuration and performance analysis,
personalized support and annual
on-site
technical services. The education line of
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ORACLE
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) February 29, 2008 (Unaudited)
business provides instructor led, media based and internet based
training in the use of our database, middleware and applications
software.
We do not track our assets by operating segments. Consequently,
it is not practical to show assets by operating segments.
The following table presents a summary of our businesses and
operating segments:
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ORACLE
CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) February 29, 2008 (Unaudited)
The following table reconciles operating segment revenues to
total revenues as well as operating segment margin to income
before provision for income taxes:
In June 2003, in response to our tender offer, PeopleSoft, Inc.
implemented what it referred to as the “customer assurance
program” (CAP). The CAP incorporated a provision in
PeopleSoft’s standard licensing arrangement that purports
to contractually burden Oracle, as a result of our acquisition
of PeopleSoft, with a contingent obligation to make payments to
PeopleSoft customers should we fail to take certain business
actions for a fixed period. PeopleSoft ceased using the CAP on
December 29, 2004, the date on which we acquired a
controlling interest in PeopleSoft. The payment obligation,
which typically expires four years from the date of the
contract, is fixed at an amount generally between two and five
times the license and first year support fees paid to PeopleSoft
in the applicable license transaction. PeopleSoft customers
retain rights to the licensed products whether or not the CAP
payments are triggered.
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ORACLE
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) February 29, 2008 (Unaudited)
The maximum potential penalty under the CAP, by version, as of
February 29, 2008 was as follows:
This purported obligation was not reflected as a liability on
PeopleSoft’s balance sheet as PeopleSoft concluded that it
could be triggered only following the consummation of an
acquisition. We have concluded that, as of the date of
acquisition, the penalty provisions under the CAP represented a
contingent liability of Oracle. The aggregate potential CAP
obligation as of February 29, 2008 was $2.3 billion.
Some of the CAP provisions have expired or have been removed
from these licensing arrangements. We expect the significant
majority of the remaining CAP provisions to expire by the end of
calendar 2008. We have not recorded a liability related to the
CAP, as we do not believe it is probable that our
post-acquisition activities related to the PeopleSoft and JD
Edwards product lines will trigger an obligation to make any
payment pursuant to the CAP. While no assurance can be given as
to the ultimate outcome of any litigation, we believe we would
also have substantial defenses with respect to the legality and
enforceability of the CAP contract provisions in response to any
claims seeking payment from us under the CAP terms.
Stockholder class actions were filed in the United States
District Court for the Northern District of California against
us and our Chief Executive Officer on and after March 9,
2001. Between March 2002 and March 2003, the court dismissed
plaintiffs’ consolidated complaint, first amended complaint
and a revised second amended complaint. The last dismissal was
with prejudice. On September 1, 2004, the United States
Court of Appeals for the Ninth Circuit reversed the dismissal
order and remanded the case for further proceedings. The revised
second amended complaint named our Chief Executive Officer, our
then Chief Financial Officer (who currently is Chairman of our
Board of Directors) and a former Executive Vice President as
defendants. This complaint was brought on behalf of purchasers
of our stock during the period from December 14, 2000
through March 1, 2001. Plaintiffs alleged that the
defendants made false and misleading statements about our actual
and expected financial performance and the performance of
certain of our applications products, while certain individual
defendants were selling Oracle stock in violation of federal
securities laws. Plaintiffs further alleged that certain
individual defendants sold Oracle stock while in possession of
material non-public information. Plaintiffs also allege that the
defendants engaged in accounting violations. On July 26,
2007, defendants filed a motion for summary judgment, and
plaintiffs filed a motion for partial summary judgment against
all defendants and a motion for summary judgment against our
Chief Executive Officer. On August 7, 2007, plaintiffs
filed amended versions of these motions. The parties’
summary judgment motions are fully briefed. On October 5,
2007, plaintiffs filed a motion seeking a default judgment
against defendants or various other sanctions because of
defendants’ alleged
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ORACLE
CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) February 29, 2008 (Unaudited)
destruction of evidence. This motion is fully briefed. A hearing
on all these motions was held on December 20, 2007. The
court had set a trial date of March 24, 2008. However, on
February 19, 2008, the court clerk issued a notice, stating
that the trial date had been vacated, and that the case would be
assigned to a new judge. The notice also stated that the current
judge planned to resolve the submitted summary judgment motions
prior to reassigning the case. Plaintiffs seek unspecified
damages plus interest, attorneys’ fees and costs, and
equitable and injunctive relief. We believe that we have
meritorious defenses against this action, and we will continue
to vigorously defend it.
On March 10, 2004, William Wollrab, on behalf of himself
and purportedly on behalf of a class of stockholders of Siebel,
filed a complaint in the United States District Court for the
Northern District of California against Siebel and certain of
its officers relating to predicted adoption rates of Siebel v7.0
and certain customer satisfaction surveys. This complaint was
consolidated and amended on August 27, 2004, with the
Policemen’s Annuity and Benefit Fund of Chicago being
appointed to serve as lead plaintiff. The consolidated complaint
also raised claims regarding Siebel’s business performance
in 2002. In October 2004, Siebel filed a motion to dismiss,
which was granted on January 28, 2005 with leave to amend.
Plaintiffs filed an amended complaint on March 1, 2005.
Plaintiffs sought unspecified damages plus interest,
attorneys’ fees and costs, and equitable and injunctive
relief. Siebel filed a motion to dismiss the amended complaint
on April 27, 2005, and on December 28, 2005, the Court
dismissed the case with prejudice. On January 17, 2006,
plaintiffs filed a notice of appeal, and on September 18,
2006, plaintiffs filed their opening appellate brief.
Defendants’ responsive brief was filed on December 15,
2006. Plaintiffs filed their reply brief on January 16,
2007. The court heard oral arguments on this appeal on
December 6, 2007, and on December 21, 2007, the
appellate court issued a decision affirming the trial
court’s dismissal of this action. Plaintiffs’ time to
seek reconsideration of the appellate court’s decision has
expired, and plaintiffs’ time to seek further appeal to the
United States Supreme Court has also expired. Thus, plaintiffs
can no longer pursue their claims in this action.
Mangosoft, Inc. and Mangosoft Corporation filed a patent
infringement action against us in the United States District
Court for the District of New Hampshire on November 22,
2002. Plaintiffs alleged that we are willfully infringing
U.S. Patent Nos. 6,148,377 (the ‘377 patent) and
5,918,229 (the ‘229 patent), which they claim to own.
Plaintiffs seek damages based on our license sales of the Real
Application Clusters database option, the 9i and 10g databases,
and the Application Server, and seek injunctive relief. We
denied infringement and asserted affirmative defenses and
counterclaimed against plaintiffs for declaratory judgment that
the ‘377 and ‘229 patents are invalid, unenforceable
and not infringed by us. On May 19, 2004, the court held a
claims construction (Markman) hearing, and on September 21,
2004, it issued a Markman order. On June 21, 2005,
plaintiffs withdrew their allegations of infringement of the
‘229 patent. Discovery closed on July 1, 2005. Summary
judgment motions were filed on August 25, 2005, and the
court held a hearing on these motions on October 17, 2005.
On March 14, 2006 the court ruled that Oracle’s Real
Application Clusters database option did not infringe the
‘377 patent.
Oracle’s counterclaims against Mangosoft, alleging that the
‘377 patent is invalid and unenforceable, were the
only claims that the Court left open for trial. On
April 21, 2006 Mangosoft filed a motion asking that
Mangosoft be allowed to appeal the noninfringement ruling
immediately to the Federal Circuit Court of Appeals and that
trial on Oracle’s counterclaims be stayed until that appeal
has been resolved. Oracle filed a brief opposing that motion on
May 8, 2006. On March 28, 2007, the Court issued an
order largely granting the relief sought by Mangosoft. The Court
dismissed Oracle’s counterclaims of invalidity and
inequitable conduct without prejudice and ordered the entry of
judgment of noninfringement consistent with its March 14,
2006 order on summary judgment. On March 29, 2007, the
Court entered Judgment in Oracle’s favor on the issue of
noninfringement and, on the same day, Mangosoft filed its notice
of appeal to the Federal Circuit stating that it was appealing
(1) the Court’s March 14,
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) February 29, 2008 (Unaudited)
2006 order on summary judgment, (2) the Court’s order
of March 28, 2007, (3) the Court’s claim
construction order of September 21, 2004, and (4) the
entry of judgment on March 29, 2007. Oracle has filed its
statement of costs in connection with the entry of judgment. On
May 21, 2007, the parties were notified that the matter was
selected for inclusion in the Federal Circuit’s mandatory
Appellate Mediation Program. A mediation was held on
June 20, 2007, but the matter was not resolved. Mangosoft
filed its opening appeal brief in the Federal Circuit on
August 6, 2007. Oracle filed its responsive brief on
November 16, 2007, and Mangosoft filed its reply brief on
January 8, 2008. The Federal Circuit heard oral argument in
the appeal on March 3, 2008. The court has not yet issued a
decision. We believe that we have meritorious defenses against
this action, and we will continue to vigorously defend it.
On March 22, 2007, Oracle Corporation, Oracle USA, Inc. and
Oracle International Corporation (collectively, Oracle) filed a
complaint in the United States District Court for the Northern
District of California against SAP AG, its wholly owned
subsidiary, SAP America, Inc., and its wholly owned subsidiary,
TomorrowNow, Inc., (collectively, the SAP Defendants) alleging
violations of the Federal Computer Fraud and Abuse Act and the
California Computer Data Access and Fraud Act, civil conspiracy,
trespass, conversion, violation of the California Unfair
Business Practices Act, and intentional and negligent
interference with prospective economic advantage. Oracle alleged
that SAP unlawfully accessed Oracle’s Customer Connection
support website and improperly took and used Oracle’s
intellectual property, including software code and knowledge
management solutions. The complaint seeks unspecified damages
and preliminary and permanent injunctive relief. On
April 10, 2007, Oracle filed a stipulation extending the
time for the SAP Defendants to respond to the complaint. On
June 1, 2007, Oracle filed its First Amended Complaint,
adding claims for infringement of the federal Copyright Act and
breach of contract, and dropping the conversion and separately
pled conspiracy claims. On July 2, 2007 the SAP
Defendants’ filed their Answer and Affirmative Defenses,
acknowledging that TomorrowNow had made some “inappropriate
downloads” and otherwise denying the claims alleged in the
First Amended Complaint. The parties are engaged in discovery
and continue to negotiate a Preservation Order. At a Case
Management Conference held on February 12, 2008, Oracle
advised the court that Oracle intends to file a Second Amended
Complaint, based on new facts learned during the course of
discovery. The next Case Management Conference is currently
scheduled for April 3, 2008.
We are party to various legal proceedings and claims, either
asserted or unasserted, which arise in the ordinary course of
business, including proceedings and claims that relate to
acquisitions we have completed or to companies we have acquired
or are attempting to acquire. While the outcome of these matters
cannot be predicted with certainty, we do not believe that the
outcome of any of these claims or any of the above mentioned
legal matters will have a materially adverse effect on our
consolidated financial position, results of operations or cash
flows.
In March 2008, we increased our commercial paper program to
$5.0 billion from $3.0 billion (the CP Program). The
dealer agreements with each of Banc of America Securities LLC,
JP Morgan Securities Inc., Lehman Brothers Inc., Merrill Lynch
Money Markets Inc. and Merrill Lynch Pierce, Fenner &
Smith Incorporated and the Issuing and Paying Agency Agreement
with JPMorgan Chase Bank, National Association, remain in effect
and were not changed. Under the CP Program, we may issue and
sell unsecured short-term promissory notes (Commercial Paper
Notes) pursuant to a private placement exemption from the
registration requirements under federal and state securities
laws. We did not issue any Commercial Paper Notes during the
three and nine months ended February 29, 2008 and
February 28, 2007, respectively, and did not have any
Commercial Paper Notes outstanding as of February 29, 2008.
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ORACLE
CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) February 29, 2008 (Unaudited)
364-Day
Revolving Credit Agreement
As of February 29, 2008, we had a $3.0 billion,
5-Year
revolving credit facility that expires in March 2011 with
Wachovia Bank, National Association (Wachovia); Bank of America,
N.A. and certain other lenders. No debt was outstanding pursuant
to this facility as of February 29, 2008 or May 31,
2007. This facility can be used to backstop any Commercial Paper
Notes that we may issue and for working capital and other
general corporate purposes.
In March 2008, we entered into a $2.0 billion,
364-Day
Revolving Credit Agreement with Wachovia, Bank of America, N.A.
and certain other lenders (2008 Credit Agreement). The 2008
Credit Agreement provides for an unsecured revolving credit
facility, which can also be used to backstop any Commercial
Paper Notes that we may issue and for working capital and other
general corporate purposes. Subject to certain conditions stated
in the 2008 Credit Agreement, we may borrow, prepay and
re-borrow amounts under the facility at any time during the term
of the 2008 Credit Agreement. Any amounts drawn pursuant to the
2008 Credit Agreement are due on March 17, 2009. Interest
is based on either (a) a LIBOR-based formula or (b) a
formula based on Wachovia’s prime rate or on the federal
funds effective rate. We may, upon the agreement of either then
existing lenders or of additional banks not currently party to
the 2008 Credit Agreement, extend the termination date of the
facility by an additional 364 days. The facility may be
extended in this manner up to two times in succession.
The 2008 Credit Agreement contains certain customary
representations and warranties, covenants and events of default,
including the requirement that our total net debt to total
capitalization ratio not exceed 45%. If any of the events of
default occur and are not cured within applicable grace periods
or waived, any unpaid amounts under the Credit Agreement may be
declared immediately due and payable and the commitments may be
terminated.
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We begin Management’s Discussion and Analysis of Financial
Condition and Results of Operations with an overview of our key
operating business segments and significant trends. This
overview is followed by a summary of our critical accounting
policies and estimates that we believe are important to
understanding the assumptions and judgments incorporated in our
reported financial results. We then provide a more detailed
analysis of our financial condition and results of operations.
In addition to historical information, this Quarterly Report on
Form 10-Q
contains forward-looking statements that involve risks and
uncertainties that could cause our actual results to differ
materially. When used in this report, the words
“expects,” “anticipates,”
“intends,” “plans,” “believes,”
“seeks,” “estimates” and similar expressions
are generally intended to identify forward-looking statements.
You should not place undue reliance on these forward-looking
statements, which reflect our opinions only as of the date of
this Quarterly Report. We undertake no obligation to publicly
release any revisions to the forward-looking statements after
the date of this document. You should carefully review the risk
factors described in other documents we file from time to time
with the U.S. Securities and Exchange Commission, including
our Annual Report on
Form 10-K
for our fiscal year ended May 31, 2007 and our other
Quarterly Reports on
Form 10-Q
filed by us in our fiscal year 2008, which runs from
June 1, 2007 to May 31, 2008.
We are the world’s largest enterprise software company. We
are organized into two businesses, software and services, which
are further divided into five operating segments. Each of these
operating segments has unique characteristics and faces
different opportunities and challenges. Although we report our
actual results in U.S. Dollars, we conduct a significant
number of transactions in currencies other than
U.S. Dollars. Therefore, we present constant currency
information to provide a framework for assessing how our
underlying business performed excluding the effect of foreign
currency rate fluctuations. An overview of our five operating
segments follows.
Software
Business
Our software business is comprised of two operating segments:
(1) new software licenses and (2) software license
updates and product support. We expect that our software
business revenues will continue to increase, which should allow
us to improve margins and profits and continue to make
investments in research and development.
New Software Licenses: We license our
database and middleware as well as our applications software to
businesses of many sizes, government agencies, educational
institutions and resellers. The growth in new software license
revenues is affected by the strength of general economic and
business conditions, governmental budgetary constraints, the
competitive position of our software products and our
acquisitions. The new software license business is also
characterized by long sales cycles. The timing of a few large
software license transactions can substantially affect our
quarterly new software license revenues. Since our new software
license revenues in a particular quarter can be difficult to
predict as a result of the timing of a few large software
license transactions, we believe that the analysis of new
software revenues on a trailing
4-quarter
period provides additional visibility into the underlying
performance of our new software license business. New software
license revenues represent 33% of our total revenues on a
trailing
4-quarter
basis. Our new software license margins have been and will
continue to be affected by the amortization of intangible assets
associated with companies we have acquired.
Competition in the software business is intense. Our goal is to
maintain a first or second position in each of our software
product categories and certain industry segments as well as to
grow our software revenues faster than our competitors. We
believe that the features and functionality of our software
products are as strong as they have ever been. We have focused
on lowering the total cost of ownership of our software products
by improving integration, decreasing installation times,
lowering administration costs and improving the ease of use.
Reducing the total cost of ownership of our products provides
our customers with a higher return on their investment, which we
believe will create more demand and provide us with a
competitive advantage. We have also continued to focus on
improving the overall quality of our software products and
service levels. We believe this will lead to higher customer
satisfaction and loyalty and help us achieve our goal of
becoming our customers’ leading technology advisor.
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Software License Updates and Product
Support: Customers that purchase software
license updates and product support are granted rights to
unspecified product upgrades and maintenance releases issued
during the support period, as well as technical support
assistance. In addition, we offer Oracle Unbreakable Linux
Support, which provides enterprise level support for the Linux
operating system and, in fiscal 2008, we introduced support for
Oracle VM server virtualization software. Substantially all of
our customers renew their software license updates and product
support contracts annually. The growth of software license
updates and product support revenues is primarily influenced by
three factors: (1) the renewal rate of the support contract
base, (2) the amount of new support contracts sold in
connection with the sale of new software licenses, and
(3) the support contract base assumed from companies we
have acquired.
Software license updates and product support revenues, which
represent approximately 46% of our total revenues on a trailing
4-quarter
basis, is our highest margin business unit. Support margins over
the trailing
4-quarters
were 84%, and account for 77% of our total margins over the same
respective period. We believe that software license updates and
product support revenues and margins will continue to grow for
the following reasons:
We record adjustments to reduce support obligations assumed in
business acquisitions to their estimated fair values at the
acquisition dates. As a result, as required by business
combination accounting rules, we did not recognize software
license updates and product support revenues related to support
contracts that would have been otherwise recorded by acquired
businesses as independent entities in the amount of
$22 million and $35 million for the three months ended
February 29, 2008 and February 28, 2007, respectively,
and $138 million and $158 million for the nine months
ended February 29, 2008 and February 28, 2007,
respectively. To the extent underlying support contracts are
renewed with us following an acquisition, we will recognize the
revenues for the full value of the support contracts over the
support periods, the majority of which are one year.
Services
Business
Our services business consists of consulting, On Demand and
education. Our services business, which represents 21% of our
total revenues on a trailing
4-quarter
basis, has significantly lower margins than our software
business.
Consulting: Consulting revenues have
increased due to an increase in application implementations
resulting from higher sales of new software applications over
the past year and our recent acquisitions. We expect consulting
revenues to continue to grow as consulting revenues tend to lag
software revenues by several quarters since consulting services,
if purchased, are typically performed after the purchase of new
software licenses and our new license growth rates have
generally increased over the last several quarters in comparison
to the corresponding prior year periods.
On Demand: On Demand includes our
Oracle On Demand, CRM On Demand, as well as Advanced Customer
Services offerings. We believe that our On Demand offerings
provide our customers flexibility in how they manage their
information technology environments and an additional
opportunity to lower their total costs of ownership and can
therefore provide us with a competitive advantage. We have made
and plan to continue to make investments in On Demand to support
current and future revenue growth, which has negatively impacted
On Demand margins and may continue to do so in the future.
Education: The purpose of our education
services is to further the adoption and usage of our software
products by our customers and to create opportunities to grow
our software revenues. Education revenues have been impacted
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by personnel reductions in our customers’ information
technology departments, tighter controls over discretionary
spending and greater use of outsourcing solutions. However,
education revenues and expenses have increased in recent periods
in comparison to the corresponding periods of the prior year as
a result of additional education offerings related to our
acquired products.
Acquisitions
An active acquisition program is an important element of our
corporate strategy. Over the past four fiscal years, we have
acquired PeopleSoft, Inc., a provider of enterprise applications
software products; Siebel Systems, Inc., a provider of customer
relationship management software; Hyperion Solutions
Corporation, a provider of enterprise performance management and
business intelligence software; and others. Typically, the
significant majority of our integration activities related to an
acquisition are substantially complete in the United States
within three to six months after the closing of the acquisition.
Integration activities for international operations,
particularly in Europe, generally take longer.
On January 16, 2008, we entered into an Agreement and Plan
of Merger (Merger Agreement) with BEA Systems, Inc., a provider
of enterprise infrastructure software. Pursuant to the Merger
Agreement, our wholly owned subsidiary will merge with and into
BEA and BEA will become a wholly owned subsidiary of Oracle.
Upon the consummation of the merger, each share of BEA common
stock will be converted into the right to receive $19.375 in
cash. In addition, options to acquire BEA common stock, BEA
restricted stock unit awards, BEA restricted stock awards and
other equity-based awards denominated in shares of BEA common
stock outstanding immediately prior to the consummation of the
merger will generally be converted into options, restricted
stock unit awards, restricted stock awards or other equity-based
awards, as the case may be, denominated in shares of Oracle
common stock based on formulas contained in the Merger
Agreement. The estimated total purchase price of BEA is
approximately $8.6 billion. We expect that the BEA
acquisition will close in our fourth quarter of fiscal 2008,
subject to BEA stockholder approval, regulatory clearance by the
European Commission and other closing conditions. On
March 26, 2008, BEA and Oracle submitted a pre-merger
notification filing to the European Commission; the European
Commission has set a provisional deadline of April 30, 2008
for determining whether further review of the proposed merger
will be required. In addition, BEA has scheduled a meeting of
its stockholders on April 4, 2008 to vote upon the proposed
merger.
We believe our acquisition program supports our long-term
strategic direction, strengthens our competitive position,
particularly in the applications marketplace, expands our
customer base and provides greater scale to increase our
investment in research and development to accelerate innovation,
grow our earnings and increase stockholder value. We expect to
continue to acquire companies, products, services and
technologies. See Note 4 to our condensed consolidated
financial statements for additional information related to our
recent and pending acquisitions.
We believe we can fund our pending and additional acquisitions,
with our internally available cash and marketable securities,
cash generated from operations, amounts available under our
existing debt capacity, additional borrowings or from the
issuance of additional securities. We estimate the financial
impact of any potential acquisition with regard to earnings,
operating margin, cash flow and return on invested capital
targets before deciding to move forward with an acquisition.
Our consolidated financial statements are prepared in accordance
with U.S. generally accepted accounting principles (GAAP).
These accounting principles require us to make certain
estimates, judgments and assumptions. We believe that the
estimates, judgments and assumptions upon which we rely are
reasonable based upon information available to us at the time
that these estimates, judgments and assumptions are made. These
estimates, judgments and assumptions can affect the reported
amounts of assets and liabilities as of the date of the
financial statements as well as the reported amounts of revenues
and expenses during the periods presented. To the extent there
are material differences between these estimates, judgments or
assumptions and actual results, our financial statements will be
affected. The accounting policies that reflect our more
significant estimates, judgments and assumptions and which we
believe are the most critical to aid in fully understanding and
evaluating our reported financial results include the following:
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In many cases, the accounting treatment of a particular
transaction is specifically dictated by GAAP and does not
require management’s judgment in its application. There are
also areas in which management’s judgment in selecting
among available alternatives would not produce a materially
different result. Our senior management has reviewed these
critical accounting policies and related disclosures with the
Finance and Audit Committee of the Board of Directors.
With the exception of the below paragraph that discusses the
impact of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, an Interpretation of FASB Statement
No. 109 (FIN 48) on our critical accounting
policy and estimates for accounting for income taxes, during the
first nine months of fiscal 2008 there were no significant
changes in our critical accounting policies and estimates.
Please refer to Management’s Discussion and Analysis of
Financial Condition and Results of Operations contained in
Part II, Item 7 of our Annual Report on
Form 10-K
for our fiscal year ended May 31, 2007 for a more complete
discussion of our critical accounting policies and estimates.
On June 1, 2007, we adopted FIN 48, which contains a
two-step approach to recognizing and measuring uncertain tax
positions accounted for in accordance with Statement 109,
Accounting for Income Taxes. The first step is to
evaluate the tax position taken or expected to be taken in a tax
return by determining if the weight of available evidence
indicates that it is more likely than not that the tax position
will be sustained on audit, including resolution of any related
appeals or litigation processes. The second step is to measure
the tax benefit as the largest amount that is more than 50%
likely to be realized upon ultimate settlement. During our first
quarter of fiscal 2008, we adjusted our policy in the accounting
for and presentation of uncertain tax positions in order to
comply with the interpretive guidance set forth in FIN 48.
The comparability of our operating results in the third quarter
and first nine months of fiscal 2008 compared with the same
periods in fiscal 2007 is impacted by our acquisitions,
principally our acquisition of Hyperion in the fourth quarter of
fiscal 2007.
In our discussion of changes in our results of operations for
the third quarter and first nine months of fiscal 2008 compared
to the corresponding periods in the prior year, we quantify the
contribution of our acquired products to the growth in new
software license revenues and the amount of revenues associated
with software license updates and product support and present
supplemental disclosure related to certain charges and gains
(including acquisition accounting and stock-based compensation)
where applicable. Although certain revenues were quantifiable,
we are unable to identify the following:
We caution readers that, while pre- and post-acquisition
comparisons as well as the quantified amounts themselves may
provide indications of general trends, the information has
inherent limitations for the following reasons:
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We compare the percent change in the results from one period to
another period in this quarterly report using constant currency
disclosure. We present constant currency information to provide
a framework for assessing how our underlying businesses
performed excluding the effect of foreign currency rate
fluctuations. 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 the exchange rate in effect on May 31,
2007, 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 29, 2008 and February 28, 2007, our financial
statements would reflect revenues of $1.51 million during
the first nine months of fiscal 2008 (using 1.51 as the exchange
rate) and $1.32 million during the first nine months of
fiscal 2007 (using 1.32 as the exchange rate). The constant
currency presentation would translate the results for the nine
months ended February 29, 2008 and February 28, 2007
using the May 31, 2007 exchange rate and indicate, in this
example, no change in revenues during the periods. In each of
the tables below, we present the percent change based on actual
results as reported and based on constant currency.
Total
Revenues and Operating Expenses
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Fiscal Third Quarter 2008 Compared to Fiscal Third Quarter
2007: Total revenues increased in the third
quarter of fiscal 2008 due to increased demand for our products
and services offerings and incremental revenues from our
acquisitions. The growth in our total revenues was positively
affected by foreign currency rate fluctuations of
6 percentage points in the third quarter of fiscal 2008 due
to the weakening of the United States dollar relative to other
major international currencies. Excluding the effect of currency
rate fluctuations, new software license revenues contributed 20%
to the growth in total revenues, software license updates and
product support revenues contributed 60% and services revenues
contributed 20%. Excluding the effect of currency rate
fluctuations, the Americas contributed 51% to the increase in
total revenues, EMEA contributed 35% and Asia Pacific
contributed 14%.
Operating expenses were adversely affected by foreign currency
rate fluctuations of 5 percentage points. Excluding the
effect of currency rate fluctuations, the increase in operating
expenses in the third quarter of fiscal 2008 was primarily due
to higher salary and employee benefits associated with increased
headcount levels (primarily resulting from our acquisitions of
Hyperion, Agile and other companies since the third quarter of
fiscal 2007), as well as higher commissions and bonuses
associated with both increased revenues and headcount levels. In
addition, operating expenses also increased in the third quarter
of fiscal 2008 due to higher amortization costs of intangible
assets resulting primarily from acquisitions that we completed
since the third quarter of fiscal 2007 and higher stock-based
compensation charges resulting primarily from a higher fair
value (caused primarily by our higher stock price) for stock
options that we granted during fiscal 2008. Our operating
expense growth during the third quarter of fiscal 2008 was
partially offset by a $42 million reduction in litigation
related expenses primarily related to the timing and settlement
of certain legal matters, lower in-process research and
development charges of $45 million and a $57 million
gain on property sale.
Operating margin as a percentage of total revenues increased
during the third quarter of fiscal 2008. The growth in our
operating margin in the third quarter of fiscal 2008 was
favorably affected by foreign currency rate fluctuations of
11 percentage points and the favorable impact of lower
litigation related expenses, lower in-process research and
development expenses and a gain on property sale (described
above).
International operations will continue to provide a significant
portion of our total revenues and expenses. As a result, total
revenues and expenses will continue to be affected by changes in
the relative strength of the U.S. Dollar against certain
major international currencies.
First Nine Months Fiscal 2008 Compared to First Nine
Months Fiscal 2007: Total revenues increased
in the first nine months of fiscal 2008 primarily due to the
same reasons as noted above. The growth in our total revenues
was positively affected by foreign currency rate fluctuations of
6 percentage points. Excluding the effect of currency rate
fluctuations, new software license revenues contributed 33% to
the growth in total revenues, software license updates and
product support revenues contributed 48% and services revenues
contributed 19%. Excluding the effect of currency rate
fluctuations, the Americas contributed 51% to the increase in
total revenues, EMEA contributed 35% and Asia Pacific
contributed 14%.
Operating expenses were adversely affected by foreign currency
rate fluctuations of 5 percentage points. Excluding the
effect of currency rate fluctuations, the increase in operating
expenses in the first nine months of fiscal 2008 was primarily
due to the same reasons as noted above, as well as additional
stock-based compensation charges recorded in the first quarter
of fiscal 2008 resulting from the acceleration of vesting of
certain acquired stock awards upon employee terminations
pursuant to the original terms of those awards. Our operating
expense growth during the first nine months of fiscal 2008 was
partially offset by lower in-process research and development
expenses of $87 million and a $57 million gain on
property sale.
Operating margin as a percentage of total revenues increased
during the first nine months of fiscal 2008. The growth in our
operating margin in the first nine months of fiscal 2008 was
favorably affected by foreign currency rate fluctuations of
8 percentage points. Our operating margin increased during
the first nine months of fiscal 2008 primarily due to the same
reasons as noted above.
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Supplemental
Disclosure Related to Certain Charges and Gains
To supplement our consolidated financial information, we believe
the following information is helpful to an overall understanding
of our past financial performance and prospects for the future.
Readers are directed to the introduction under “Results of
Operations” (above) for a discussion of the inherent
limitations in comparing pre- and post-acquisition information.
Our operating results include the following business combination
accounting entries and expenses related to acquisitions as well
as other significant expense and income items:
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Software
Software includes new software licenses and software license
updates and product support.
New Software Licenses: New software
license revenues represent fees earned from granting customers
licenses to use our database and middleware as well as our
application software products. We continue to place significant
emphasis, both domestically and internationally, on direct sales
through our own sales force. We also continue to market our
products through indirect channels.
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Fiscal Third Quarter 2008 Compared to Fiscal Third Quarter
2007: New software license revenues growth
was positively affected by foreign currency rate fluctuations of
7 percentage points in the third quarter of fiscal 2008.
Excluding the effect of currency rate fluctuations, new software
license revenues grew in all major product lines and
geographies. Our database and middleware products contributed
the substantial majority of our total new software license
revenues growth as a result of increased demand for our database
and middleware products and contributions from recently acquired
companies (as quantified below). Excluding the effect of
currency rate fluctuations, the Americas contributed 61%, EMEA
contributed 37% and Asia Pacific contributed 2% to the increase
in our total new software license revenues.
We believe that the trailing
4-quarter
growth rates provide additional visibility into the underlying
performance of our new software license business since large
transactions can cause significant swings in our quarterly
reported product revenue growth rates and are not predictive of
our future quarterly or annual growth rates.
Excluding the effect of currency rate fluctuations, database and
middleware revenues grew 12% in the third quarter of fiscal 2008
and 16% over the trailing
4-quarters
as a result of increased demand for our database and middleware
products as well as incremental revenues from acquired
companies. Hyperion products contributed $22 million,
Stellent products contributed $9 million and other recently
acquired products contributed $5 million to the total
database and middleware revenue growth in the third quarter of
fiscal 2008.
On a constant currency basis, applications revenues increased 2%
in the third quarter of fiscal 2008. Our growth rate in
applications revenues for the third quarter of fiscal 2008 was
affected by the high growth rate in our applications revenues
for the third quarter of fiscal 2007 against which our current
quarter’s applications revenues were compared. On a
constant currency basis, applications revenues increased 25%
over the trailing
4-quarters
due to continued strengthening of our competitive position in
the applications market as a result of our broad suite of
product offerings to a diverse customer base, improved product
features and functionality and incremental revenues from
acquired companies. Hyperion products contributed
$42 million, Agile products contributed $14 million,
and other recently acquired products contributed
$10 million to the growth in our applications revenues
during the third quarter of fiscal 2008.
New software license revenues earned from transactions over
$0.5 million grew by 25% in the third quarter of fiscal
2008 and increased from 41% of new software license revenues in
the third quarter of fiscal 2007 to 44% in the third quarter of
fiscal 2008.
Sales and marketing expenses were adversely impacted by
6 percentage points of unfavorable currency variations
during the third quarter of fiscal 2008. Excluding the effect of
currency rate fluctuations, sales and marketing expenses
increased in the third quarter of fiscal 2008 due to higher
salaries, benefits and travel expenses resulting from increased
headcount, higher commission expenses associated with both
increased revenues and headcount levels, and an increase in
marketing program expenses. These increases were partially
offset by a $42 million reduction in litigation related
expenses resulting primarily from the settlement of certain
legal matters during the third quarter of fiscal 2008.
Total new software license margin as a percentage of revenues
increased due to our revenue growth rate and favorable foreign
currency impacts, partially offset by higher growth rates in our
amortization of intangible assets expenses and stock-based
compensation expenses.
First Nine Months Fiscal 2008 Compared to First Nine
Months Fiscal 2007: New software license
revenues growth was positively affected by foreign currency rate
fluctuations of 7 percentage points. Excluding the effect
of currency rate fluctuations, the Americas contributed 55%,
EMEA contributed 33% and Asia Pacific contributed 12% to the
increase in new software license revenues.
On a constant currency basis, database and middleware revenues
grew 17% for similar reasons as noted above contributing 55% to
the growth in the new software license revenues in the first
nine months of fiscal 2008. Hyperion products contributed
$73 million, Stellent products contributed $37 million
and other recently acquired products contributed
$11 million to the total database and middleware revenue
growth in the first nine months of fiscal 2008.
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On a constant currency basis, applications revenues grew 34% and
contributed 45% to the growth in new software license revenues
in the first nine months of fiscal 2008 due to similar reasons
as noted above. The increase in our applications revenues in the
first nine months of fiscal 2008 was due to similar reasons as
noted above. Hyperion products contributed $142 million,
Agile products contributed $33 million, MetaSolv products
contributed $14 million, Portal products contributed
$9 million and other recently acquired products contributed
$22 million.
New software license revenues earned from transactions over
$0.5 million grew by 45% in the first nine months of fiscal
2008 and increased from 39% of new software license revenues in
the first nine months of fiscal 2007 to 44% in the first nine
months of fiscal 2008.
Sales and marketing expenses increased primarily due to the same
reasons as noted above. Total new software license margin as a
percentage of revenues increased as the growth rate of our
revenues exceeded the growth rate of our operating expenses, but
was partially offset by higher growth rates in our amortization
of intangible assets expenses and stock-based compensation
expenses.
Software License Updates and Product
Support: Software license updates grant
customers rights to unspecified software product upgrades and
maintenance releases issued during the support period. Product
support includes internet access to technical content as well as
internet and telephone access to technical support personnel in
our global support centers. Expenses associated with our
software license updates and product support line of business
include the cost of providing the support services, largely
personnel related expenses, and the amortization of our
intangible assets associated with software support and customer
relationships obtained from our acquisitions.
Fiscal Third Quarter 2008 Compared to Fiscal Third Quarter
2007: The growth in our software license
updates and product support revenues was positively affected by
foreign currency rate fluctuations of 7 percentage points
in the third quarter of fiscal 2008. Excluding the effect of
currency rate fluctuations, software license updates and product
support revenues increased in the third quarter of fiscal 2008
as a result of new software licenses sold during the trailing
4-quarter
period (in particular our fourth quarter of fiscal 2007, which
was our largest quarter), the renewal of substantially all of
the customer base eligible for renewal in the current fiscal
year and incremental revenues from the expansion of our customer
base from acquisitions. Excluding the effect of currency rate
fluctuations, the Americas contributed 56%, EMEA contributed 34%
and Asia Pacific contributed 10% to the increase in software
license updates and product support revenues.
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Software license updates and product support revenues in the
third quarter of fiscal 2008 include incremental revenues of
$87 million from Hyperion, $12 million from Stellent,
$11 million from Agile and $12 million from other
recently acquired companies. As a result of our acquisitions, we
recorded adjustments to reduce support obligations assumed to
their estimated fair value at the acquisition dates. Due to our
application of business combination accounting rules, software
license updates and product support revenues related to support
contracts in the amounts of $22 million and
$35 million that would have been otherwise recorded by our
acquired businesses as independent entities, were not recognized
in the third quarter of fiscal 2008 and 2007, respectively.
Historically, substantially all of our customers, including
customers from acquired companies, renew their support contracts
when such contracts are eligible for renewal. To the extent
these underlying support contracts are renewed, we will
recognize the revenues for the full value of these contracts
over the support periods, the substantial majority of which are
one year.
Software license updates and product support expenses were
adversely impacted by 5 percentage points of unfavorable
currency variations during the third quarter of fiscal 2008.
Excluding the effect of currency rate fluctuations, software
license updates and product support expenses increased due to
higher salary and benefits associated with increased headcount
to support the expansion of our customer base and higher
amortization expenses resulting from additional intangible
assets acquired since the third quarter of fiscal 2007. Total
software license updates and product support margin as a
percentage of revenues remained constant as the growth rate of
our revenues was offset by the higher growth rate of the
amortization of our intangible assets.
First Nine Months Fiscal 2008 Compared to First Nine
Months Fiscal 2007: The growth in our
software license updates and product support revenues and
expenses is primarily attributable to the same reasons as noted
above. Excluding the effect of currency rate fluctuations, the
Americas contributed 54%, EMEA contributed 34% and Asia Pacific
contributed 12% to the increase in software license updates and
product support revenues. Software license updates and product
support revenues in the first nine months of fiscal 2008
included incremental contributions from our recently acquired
companies of $207 million from Hyperion, $30 million
from Stellent, $25 million from MetaSolv, $22 million
from Agile and $39 million from other recently acquired
companies. Software license updates and product support revenues
related to support contracts in the amounts of $138 million
and $158 million that would have been otherwise recorded by
our acquired businesses as independent entities, were not
recognized in the first nine months of fiscal 2008 and 2007,
respectively.
Software license updates and product support expenses increased
primarily due to the same reasons as noted above. Total software
license updates and product support margin as a percentage of
revenues increased primarily due to favorable foreign currency
fluctuations.
Services
Services consist of consulting, On Demand and education.
Consulting: Consulting revenues are
earned by providing services to customers in the design,
implementation, deployment and upgrade of our database and
middleware as well as applications software products. The cost
of providing consulting services consists primarily of personnel
related expenditures.
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Fiscal Third Quarter 2008 Compared to Fiscal Third Quarter
2007: Consulting revenue growth was
positively affected by foreign currency rate fluctuations of
7 percentage points in the third quarter of fiscal 2008.
Excluding the effect of currency rate fluctuations, consulting
revenues increased during the third quarter of fiscal 2008
primarily due to an increase in application product
implementations associated with the sales of our application
software products and incremental revenues from our recent
acquisitions, primarily Hyperion. Excluding the effect of
currency rate fluctuations, the Americas contributed 21%, EMEA
contributed 35% and Asia Pacific contributed 44% to the increase
in consulting revenues.
Consulting expenses were adversely impacted by 7 percentage
points of unfavorable currency variations during the third
quarter of fiscal 2008. Excluding the effect of currency rate
fluctuations, consulting expenses increased during the third
quarter of fiscal 2008 as a result of higher personnel related
expenses attributed to higher headcount levels and third-party
contractor expenses that supported our increase in revenues and
included $21 million of constant currency expense growth
from i-flex. Total consulting margin increased due to the
increase in our revenues. However, consulting margin as a
percentage of revenues decreased as our expenses grew faster
than our revenues in the Americas and for i-flex, partially
offset by improved margins in EMEA and the remainder of the Asia
Pacific region.
First Nine Months Fiscal 2008 Compared to First Nine
Months Fiscal 2007: Consulting revenue growth
was positively affected by foreign currency rate fluctuations of
7 percentage points in the first nine months of fiscal
2008. Excluding the effect of currency rate fluctuations, the
growth in consulting revenues and expenses was generally due to
the same reasons as noted above. On a constant currency basis,
the Americas contributed 33% to the growth in consulting
revenues, EMEA contributed 37% and Asia Pacific contributed 30%.
Total consulting margin as a percentage of revenues remained
constant during the first nine months of fiscal 2008 as margin
improvements in the EMEA and Asia Pacific regions were offset by
expense growth in the Americas region and for
i-flex, and
by an increase in our amortization of intangible asset expenses.
On Demand: On Demand includes our
Oracle On Demand, CRM On Demand and Advanced Customer Services
offerings. Oracle On Demand provides multi-featured software and
hardware management, and maintenance
34
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services for our database and middleware as well as our
applications software at our data center facilities or at a site
of our customer’s choosing. CRM On Demand is a service
offering that provides our customers with our CRM software
functionality delivered via a hosted solution that we manage.
Advanced Customer Services consists of configuration and
performance analysis, personalized support and
on-site
technical services. The cost of providing On Demand services
consists primarily of personnel related expenditures, technology
infrastructure expenditures and facilities costs.
Fiscal Third Quarter 2008 Compared to Fiscal Third Quarter
2007: On Demand revenue growth was positively
affected by foreign currency rate fluctuations of
6 percentage points in the third quarter of fiscal 2008. On
Demand revenues increased due to an increase in each service
category’s subscription base as more customers engaged us
to provide additional technology outsourcing solutions. On a
constant currency basis, Oracle On Demand, Advanced Customer
Services, and CRM On Demand contributed 51%, 33% and 16%,
respectively, to the growth in On Demand revenues. Excluding the
effect of currency rate fluctuations, the Americas contributed
56%, EMEA contributed 32% and Asia Pacific contributed 12% to
the increase in On Demand revenues.
Excluding the effect of currency rate fluctuations, On Demand
expenses increased due to higher salaries, bonus and benefits
related expenditures associated with increased headcount, and
higher technology infrastructure related costs to support the
expansion of our customer base. These expense increases were
partially offset by a shift of certain U.S. based costs to
global support centers in lower cost countries. Total On Demand
margin as a percentage of revenues improved primarily as a
result of our Oracle On Demand business, which increased
revenues while managing operating expenses to a relatively
consistent level with the third quarter of fiscal 2007 and the
favorable impact of currency effects during the period. Our
Advanced Customer Services and CRM On Demand margin percentages
remained relatively constant with the third quarter of
fiscal 2007.
First Nine Months Fiscal 2008 Compared to First Nine
Months Fiscal 2007: On Demand revenue growth
was positively affected by foreign currency rate fluctuations of
5 percentage points in the first nine months of fiscal
2008. Excluding the effect of currency rate fluctuations, Oracle
On Demand, Advanced Customer Services and CRM On Demand
contributed 42%, 41% and 17%, respectively, to the growth in On
Demand revenues for similar
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reasons as noted above. Excluding the effect of currency rate
fluctuations, the Americas contributed 47% to the growth in On
Demand revenues, EMEA contributed 34% and Asia Pacific
contributed 19%. On Demand expenses and margin as a percentage
of revenues also generally increased due to the same reasons as
noted above.
Education: Education revenues are
earned by providing instructor led, media based and internet
based training in the use of our database and middleware as well
as applications software. Education expenses primarily consist
of personnel related expenditures, facilities and external
contractor costs.
Fiscal Third Quarter 2008 Compared to Fiscal Third Quarter
2007: Education revenue growth was positively
affected by foreign currency rate fluctuations of
7 percentage points in the third quarter of fiscal 2008.
Excluding the effect of currency rate fluctuations, education
revenues increased in the third quarter of fiscal 2008 due
primarily to an increase in customer training on the use of our
applications products, including recently acquired products.
Excluding the effect of currency rate fluctuations, the Americas
contributed 48%, EMEA contributed 25% and Asia Pacific
contributed 27% to the overall increase in education revenues.
Excluding the effect of currency rate fluctuations, education
expenses increased due to an increase in salaries attributable
to raises, higher commissions resulting from higher revenues,
and third party contractor and royalty fees associated with
increased revenues. Education margin as a percentage of revenues
remained constant.
First Nine Months Fiscal 2008 Compared to First Nine
Months Fiscal 2007: Excluding the effect of
currency rate fluctuations, the growth rates for both education
revenues and expenses were due generally to the same reasons as
noted above. Excluding the effect of currency rate fluctuations,
the Americas contributed 38% to the growth in education
revenues, EMEA contributed 40% and Asia Pacific contributed 22%.
Education margin increased slightly as revenue growth exceeded
expense growth.
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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.
Excluding the effect of currency rate fluctuations, research and
development expenses increased during our fiscal 2008 periods
presented above due to higher employee expenses associated with
higher headcount levels including higher stock-based
compensation expenses. Research and development headcount
increased by approximately 2,800 employees in comparison to
the third quarter of fiscal 2007. The increase in headcount was
the combined result of our recent acquisitions and our hiring of
additional resources to develop new functionality for our
existing products.
General and Administrative
Expenses: General and administrative expenses
primarily consist of personnel related expenditures for
information technology, finance, legal and human resources
support functions.
Excluding the effect of currency rate fluctuations, general and
administrative expenses increased during our fiscal 2008 periods
presented above as a result of higher personnel related costs
associated with increased headcount to support our expanding
operations and increased stock-based compensation expenses.
Amortization
of Intangible Assets Expenses:
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