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MarketScreener Homepage  >  Equities  >  Nyse  >  Oracle Corporation    ORCL

ORACLE CORPORATION

(ORCL)
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ORACLE : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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03/13/2020 | 03:26pm EDT
We begin Management's Discussion and Analysis of Financial Condition and Results
of Operations with an overview of our businesses and significant trends. This
overview is followed by a summary of our critical accounting policies and
estimates that we believe are important to understanding the assumptions and
judgments incorporated in our reported financial results. We then provide a more
detailed analysis of our results of operations and financial condition.

Business Overview


Oracle provides products and services that address enterprise information
technology (IT) environments. Our products and services include applications and
infrastructure offerings that are delivered worldwide through a variety of
flexible and interoperable IT deployment models. These models include on­premise
deployments, cloud­based deployments, and hybrid deployments (an approach that
combines both on-premise and cloud­based deployment) such as our Oracle Cloud at
Customer offering (an instance of Oracle Cloud in a customer's own data center).
Accordingly, we offer choice and flexibility to our customers and facilitate the
product, service and deployment combinations that best suit our customers'
needs. Through our worldwide sales force and Oracle Partner Network, we sell to
customers all over the world including businesses of many sizes, government
agencies, educational institutions and resellers.

We have three businesses: cloud and license; hardware; and services; each of
which comprises a single operating segment. The descriptions set forth below as
a part of Management's Discussion and Analysis of Financial Condition and
Results of Operations and the information contained within Note 10 of Notes to
Condensed Consolidated Financial Statements included elsewhere in this Quarterly
Report provide additional information related to our businesses and operating
segments and align to how our chief operating decision makers (CODMs), which
include our Chief Executive Officer and Chief Technology Officer, view our
operating results and allocate resources.

Cloud and License Business

Our cloud and license line of business, which represented 83% of our total revenues on a trailing 4-quarter basis, markets, sells and delivers a broad spectrum of applications and infrastructure technologies through our cloud and license offerings.

Cloud services and license support revenues include:

• license support revenues, which are earned by providing Oracle license

support services to customers that have elected to purchase support

services in connection with the purchase of Oracle applications and

infrastructure software licenses for use in cloud, on-premise and other IT

environments. Substantially all license support customers renew their

support contracts with us upon expiration in order to continue to benefit

from technical support services and the periodic issuance of unspecified

        updates and enhancements, which current license support customers are
        entitled to receive. License support contracts are generally priced as a
        percentage of the net fees paid by the customer to purchase a cloud
        license and/or on-premise license; are generally billed in advance of the

support services being performed; are generally renewed at the customer's

        option; and are generally recognized as revenues ratably over the
        contractual period that the support services are provided, which is
        generally one year; and

• cloud services revenues, which provide customers access to Oracle Cloud

applications and infrastructure technologies via cloud-based deployment

models that Oracle develops, provides unspecified updates and enhancements

for, hosts, manages and supports and that customers access by entering

into a subscription agreement with us for a stated period. The majority of

our Oracle Cloud Services arrangements are generally billed in advance of

the cloud services being performed; have durations of one to three years;

are generally renewed at the customer's option; and are generally

recognized as revenues ratably over the contractual period of the cloud

contract or, in the case of usage model contracts, as the cloud services

        are consumed over time.


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Cloud license and on-premise license revenues include revenues from the
licensing of our software products, including Oracle Applications, Oracle
Database, Oracle Middleware and Java, among others, which our customers deploy
within cloud­based, on­premise and other IT environments. Our cloud license and
on­premise license transactions are generally perpetual in nature and are
generally recognized up front at the point in time when the software is made
available to the customer to download and use. Revenues from usage­based royalty
arrangements for distinct cloud licenses and on-premise licenses are recognized
at the point in time when the software end user usage occurs. The timing of a
few large license transactions can substantially affect our quarterly license
revenues due to the point in time nature of revenue recognition for license
transactions, which is different than the typical revenue recognition pattern
for our cloud services and license support revenues in which revenues are
generally recognized ratably over the contractual terms. Cloud license and
on-premise license customers have the option to purchase and renew license
support contracts, as described above.

Providing choice and flexibility to our customers as to when and how they deploy
our applications and infrastructure technologies are important elements of our
corporate strategy. In recent periods, customer demand for our applications and
infrastructure technologies delivered through our Oracle Cloud Services has
increased. To address customer demand and enable customer choice, we have
introduced certain programs for customers to pivot their applications and
infrastructure licenses and the related license support to the Oracle Cloud for
new deployments and to migrate to and expand with the Oracle Cloud for their
existing workloads. We expect these trends to continue.

Our cloud and license business' revenue growth is affected by many factors,
including the strength of general economic and business conditions; governmental
budgetary constraints; the strategy for and competitive position of our
offerings; the continued renewal of our cloud services and license support
customer contracts by the customer contract base; substantially all customers
continuing to purchase license support contracts in connection with their
license purchases; the pricing of license support contracts sold in connection
with the sales of licenses; the pricing, amounts and volumes of licenses and
cloud services sold; and foreign currency rate fluctuations.

On a constant currency basis, we expect that our total cloud and license revenues generally will continue to increase due to:

• expected growth in our cloud services and license support offerings; and

• continued demand for our cloud license and on-premise license offerings.



We believe these factors should contribute to future growth in our cloud and
license business' revenues, which should enable us to continue to make
investments in research and development to develop and improve our cloud and
license products and services.

Our cloud and license business' margin has historically trended upward over the
course of the four quarters within a particular fiscal year due to the
historical upward trend of our cloud and license business' revenues over those
quarterly periods and because the majority of our costs for this business are
generally fixed in the short term. The historical upward trend of our cloud and
license business' revenues over the course of the four quarters within a
particular fiscal year is primarily due to the addition of new cloud services
and license support contracts to the customer contract base that we generally
recognize as revenues ratably; the renewal of existing customers' cloud services
and license support contracts over the course of each fiscal year that we
generally recognize as revenues ratably; and the historical upward trend of our
cloud license and on-premise license revenues, which we generally recognize at a
point in time upon delivery; in each case over those four quarterly periods.

Hardware Business


Our hardware business, which represented 9% of our total revenues on a trailing
4-quarter basis, provides a broad selection of hardware products and
hardware-related software products including Oracle Engineered Systems, servers,
storage, industry-specific hardware, operating systems, virtualization,
management and other hardware related software, and related hardware support.
Each hardware product and its related software, such as an operating system or
firmware, are highly interdependent and interrelated and are accounted for as a
combined performance obligation. The revenues for this combined performance
obligation are generally recognized at the point in time that the hardware
product and its related software are delivered to the customer and ownership is
transferred to the customer. We expect to make investments in research and
development to improve existing

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hardware products and services and to develop new hardware products and
services. The majority of our hardware products are sold through indirect
channels, including independent distributors and value-added resellers. Our
hardware support offerings provide customers with unspecified software updates
for software components that are essential to the functionality of our hardware
products and associated software products such as Oracle Solaris. Our hardware
support offerings can also include product repairs, maintenance services and
technical support services. Hardware support contracts are entered into and
renewed at the option of the customer, are generally priced as a percentage of
the net hardware products fees and are generally recognized as revenues ratably
as the hardware support services are delivered over the contractual terms.

We generally expect our hardware business to have lower operating margins as a percentage of revenues than our cloud and license business due to the incremental costs we incur to produce and distribute these products and to provide support services, including direct materials and labor costs.


Our quarterly hardware revenues are difficult to predict. Our hardware revenues,
cost of hardware and hardware operating margins that we report are affected by
many factors, including our ability to timely manufacture or deliver a few large
hardware transactions; our strategy for and the position of our hardware
products relative to competitor offerings; customer demand for competing
offerings, including cloud infrastructure offerings; the strength of general
economic and business conditions; governmental budgetary constraints; whether
customers decide to purchase hardware support contracts at or in close proximity
to the time of hardware product sale; the percentage of our hardware support
contract customer base that renews its support contracts and the close
association between hardware products, which have a finite life, and customer
demand for related hardware support as hardware products age; customer decisions
to either maintain or upgrade their existing hardware infrastructure to newly
developed technologies that are available; and foreign currency rate
fluctuations.

Services Business


Our services business, which represented 8% of our total revenues on a trailing
4-quarter basis, helps customers and partners maximize the performance of their
investments in Oracle applications and infrastructure technologies. We believe
that our services are differentiated based on our focus on Oracle technologies,
extensive experience, broad sets of intellectual property and best practices.
Our services offerings include consulting services, advanced customer support
services and education services. Our services business has lower margins than
our cloud and license and hardware businesses. Our services revenues are
affected by many factors including, our strategy for, and the competitive
position of, our services; customer demand for our cloud and license and
hardware offerings and the associated services for these offerings; general
economic conditions; governmental budgetary constraints; personnel reductions in
our customers' IT departments; and tighter controls over customer discretionary
spending.

Acquisitions

Our selective and active acquisition program is another important element of our
corporate strategy. Historically, we have invested billions of dollars to
acquire a number of complementary companies, products, services and
technologies. The pace of our acquisitions has slowed recently, but as
compelling opportunities become available, we may acquire companies, products,
services and technologies in furtherance of our corporate strategy. Note 2 of
Notes to Condensed Consolidated Financial Statements included elsewhere in this
Quarterly Report provides additional information related to our recent
acquisitions.

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

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Critical Accounting Policies and Estimates


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

  • Revenue Recognition;


  • Business Combinations;


  • Goodwill and Intangible Assets-Impairment Assessments;


  • Accounting for Income Taxes; and


  • Legal and Other Contingencies.


During the first nine months of fiscal 2020, there were no significant changes
to our critical accounting policies and estimates. Management's Discussion and
Analysis of Financial Condition and Results of Operations contained in Part II,
Item 7 of our Annual Report on Form 10-K for our fiscal year ended May 31, 2019
provides a more complete discussion of our critical accounting policies and
estimates.

Results of Operations

Impacts of COVID-19 to Oracle's Business


The impacts of the global emergence of Coronavirus disease (COVID-19) on our
business are currently unknown.  We are conducting business as usual with some
modifications to employee travel, employee work locations, and cancellation of
certain marketing events, among other modifications. We have observed other
companies taking precautionary and preemptive actions to address COVID-19 and
companies may take further actions that alter their normal business operations.
We will continue to actively monitor the situation and may take further actions
that alter our business operations as may be required by federal, state or local
authorities or that we determine are in the best interests of our employees,
customers, partners, suppliers and stockholders. It is not clear what the
potential effects any such alterations or modifications may have on our
business, including the effects on our customers and prospects, or on our
financial results for our fourth quarter of fiscal 2020, which is historically
our largest revenue quarter of our fiscal year, in particular with respect to
demand for transactional products such as cloud and on-premise licenses and
hardware and certain services that we generally recognize as revenues upon
delivery to customers.

Presentation of Operating Segment Results and Other Financial Information


In our results of operations discussion below, we provide an overview of our
total consolidated revenues, total consolidated expenses and total consolidated
operating margin, all of which are presented on a GAAP basis. We also present a
GAAP-based discussion below for substantially all of the other expense items as
presented in our condensed consolidated statements of operations that are not
directly attributable to our three businesses.

In addition, we discuss below the results of each our three businesses-cloud and
license, hardware and services-which are our operating segments as defined
pursuant to ASC 280, Segment Reporting. The financial reporting for our three
businesses that is presented below is presented in a manner that is consistent
with that used by our CODMs. Our operating segment presentation below reflects
revenues, direct costs and sales and marketing

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expenses that correspond to and are directly attributable to each of our three businesses. We also utilize these inputs to calculate and present a segment margin for each business in the discussion below.


Consistent with our internal management reporting processes, the below operating
segment presentation is noted to include any revenues adjustments related to
cloud services and license support contracts that would have otherwise been
recorded by the acquired businesses as independent entities but were not
recognized in our condensed consolidated statements of operations for the
periods presented due to business combination accounting requirements. Refer to
"Supplemental Disclosure Related to Certain Charges" below for additional
discussion of these items and Note 10 of Notes to Condensed Consolidated
Financial Statements included elsewhere in this Quarterly Report for a
reconciliation of the summations of our total operating segment revenues as
presented in the discussion below to total revenues as presented per our
condensed consolidated statements of operations for all periods presented.

In addition, research and development expenses, general and administrative
expenses, stock-based compensation expenses, amortization of intangible assets,
certain other expense allocations, acquisition related and other expenses,
restructuring expenses, interest expense, non-operating income, net and
provision for income taxes are not attributed to our three operating segments
because our management does not view the performance of our three businesses
including such items and/or it is impractical to do so. Refer to "Supplemental
Disclosure Related to Certain Charges" below for additional discussion of
certain of these items and Note 10 of Notes to Condensed Consolidated Financial
Statements included elsewhere in this Quarterly Report for a reconciliation of
the summations of total segment margin as presented in the discussion below to
total income before provision for income taxes as presented per our condensed
consolidated statements of operations for all periods presented.

Constant Currency Presentation


Our international operations have provided and are expected to continue to
provide a significant portion of each of our businesses' revenues and expenses.
As a result, each businesses' revenues and expenses and our total revenues and
expenses will continue to be affected by changes in the U.S. Dollar against
major international currencies. In order to provide a framework for assessing
how our underlying businesses performed, excluding the effects of foreign
currency rate fluctuations, we compare the percent change in the results from
one period to another period in this Quarterly Report using constant currency
disclosure. To present this information, current and comparative prior period
results for entities reporting in currencies other than U.S. Dollars are
converted into U.S. Dollars at constant exchange rates (i.e., the rates in
effect on May 31, 2019, 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, 2020 and February 28, 2019, our financial
statements would reflect reported revenues of $1.09 million in the first nine
months of fiscal 2020 (using 1.09 as the month-end average exchange rate for the
period) and $1.14 million in the first nine months of fiscal 2019 (using 1.14 as
the month-end average exchange rate for the period). The constant currency
presentation, however, would translate the results for the first nine months of
fiscal 2020 and 2019 using the May 31, 2019 exchange rate and indicate, in this
example, no change in revenues during either period. In each of the tables
below, we present the percent change based on actual, unrounded results in
reported currency and in constant currency.

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Total Revenues and Operating Expenses




                                         Three Months Ended                                       Nine Months Ended
                         February 29,       Percent Change     February 28,       February 29,       Percent Change      February 28,
(Dollars in millions)        2020          Actual   Constant       2019               2020          Actual   Constant        2019
Total Revenues by
Geography:
Americas                 $       5,363         2%         2%   $       5,266$       15,817         1%         1%   $       15,671
EMEA(1)                          2,835         2%         4%           2,781              8,083        -1%         2%            8,139
Asia Pacific                     1,598         2%         4%           1,567              4,729         4%         5%            4,559
Total revenues                   9,796         2%         3%           9,614             28,629         1%         2%           28,369
Total Operating
Expenses                         6,268         1%         2%           6,215             19,041         0%         1%           19,091
Total Operating Margin   $       3,528         4%         5%   $       3,399$        9,588         3%         5%   $        9,278
Total Operating Margin
%                                  36%                                   35%                33%                                    33%
% Revenues by
Geography:
Americas                           55%                                   55%                55%                                    55%
EMEA                               29%                                   29%                28%                                    29%
Asia Pacific                       16%                                   16%                17%                                    16%
Total Revenues by
Business:
Cloud and license        $       8,161         3%         4%   $       7,913$       23,715         2%         3%   $       23,242
Hardware                           857        -6%        -5%             915              2,542        -6%        -5%            2,711
Services                           778        -1%         0%             786              2,372        -2%        -1%            2,416
Total revenues           $       9,796         2%         3%   $       9,614$       28,629         1%         2%   $       28,369
% Revenues by
Business:
Cloud and license                  83%                                   82%                83%                                    82%
Hardware                            9%                                   10%                 9%                                    10%
Services                            8%                                    8%                 8%                                     8%



(1) Comprised of Europe, the Middle East and Africa





Excluding the effects of currency rate fluctuations, our total revenues
increased in the fiscal 2020 periods presented, relative to the corresponding
prior year periods, due to growth in our cloud and license business' revenues,
which were partially offset by decreases in our hardware revenues. The constant
currency increases in our cloud and license revenues during the fiscal 2020
periods presented were attributable to growth in our cloud services and license
support revenues as customers purchased our applications and infrastructure
technologies via cloud deployment models and license deployment models and
renewed their related cloud and license support contracts to continue to gain
access to our latest technology and support services. The constant currency
decreases in our hardware revenues during the fiscal 2020 periods presented were
due to reductions in our hardware products revenues and hardware support
revenues primarily due to the emphasis we placed on the marketing and sale of
our cloud-based infrastructure technologies, which resulted in reduced sales
volumes of certain of our hardware product lines and also impacted the volume of
customers that purchased hardware support contracts. In constant currency, the
Americas region contributed 41% and 35%, respectively, the EMEA region
contributed 39% and 27%, respectively, and the Asia Pacific region contributed
20% and 38%, respectively, to the growth in our total revenues during the third
quarter and first nine months of fiscal 2020, respectively.

Excluding the effects of currency rate fluctuations, our total operating
expenses increased in the fiscal 2020 periods presented, relative to the
corresponding prior year periods, primarily due to higher constant currency
cloud services and license support expenses resulting primarily from increased
headcount and infrastructure expenses to support the increases in our cloud and
license business' revenues; and higher research and development expenses; in
each case during the fiscal 2020 periods presented relative to the corresponding
prior year periods. These constant currency expense increases were partially
offset by certain expense decreases during the fiscal 2020 periods presented,
relative to the corresponding prior year periods, primarily lower hardware
products costs and a related decrease in hardware sales and marketing costs,
both of which aligned to lower hardware revenues; lower general and
administrative expenses due primarily to lower stock-based compensation
expenses; lower amortization of intangible assets; and during the first nine
months of fiscal 2020, lower restructuring expenses.

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In constant currency, our total operating margin and operating margin as a
percentage of total revenues increased slightly during the fiscal 2020 periods
presented due to the constant currency growth in our total revenues, which
exceeded our constant currency total operating expense growth during the same
periods.

Supplemental Disclosure Related to Certain Charges


To supplement our condensed consolidated financial information, we believe that
the following information is helpful to an overall understanding of our past
financial performance and prospects for the future.

Our operating results reported pursuant to GAAP included the following business
combination accounting adjustments, expenses related to acquisitions, certain
other expenses, and certain income items that affected our GAAP net income:



                                                      Three Months Ended                    Nine Months Ended
                                               February 29,        February 28,       February 29,      February 28,
(in millions)                                      2020                2019               2020              2019
Cloud services and license support deferred
revenues(1)                                    $           1       $           4     $            3     $          17
Amortization of intangible assets(2)                     400                 407              1,221             1,265
Acquisition related and other(3)(5)                        7                  (4 )               44                29
Restructuring(4)                                          60                  43                181               275
Stock-based compensation, operating
segments(5)                                              106                 129                325               396
Stock-based compensation, R&D and G&A(5)                 255                 298                879               863
Income tax effects(6)                                   (240 )              (230 )             (769 )            (733 )
Income tax reform(7)                                       -                (236 )                -              (389 )
                                               $         589       $         411     $        1,884$       1,723

(1) In connection with our acquisitions, we have estimated the fair values of the

cloud services and license support contracts assumed. Due to our application

of business combination accounting rules, we did not recognize the cloud

services and license support revenue amounts as presented in the above table

that would have otherwise been recorded by the acquired businesses as

independent entities upon delivery of the contractual obligations. To the

extent customers for which these contractual obligations pertain renew these

contracts with us, we expect to recognize revenues for the full contracts'

values over the respective contracts' renewal periods.

(2) Represents the amortization of intangible assets, substantially all of which

were acquired in connection with our acquisitions. As of February 29, 2020,

    estimated future amortization related to intangible assets was as follows (in
    millions):




  Remainder of fiscal 2020       $   366
  Fiscal 2021                      1,345
  Fiscal 2022                      1,097
  Fiscal 2023                        674
  Fiscal 2024                        445
  Fiscal 2025                        126
  Thereafter                          35
  Total intangible assets, net   $ 4,088

(3) Acquisition related and other expenses primarily consist of personnel related

costs for transitional and certain other employees, integration related

professional services, certain business combination adjustments including

certain adjustments after the measurement period has ended and certain other

operating items, net.

(4) Restructuring expenses during the first nine months of fiscal 2020 and 2019

both primarily related to employee severance in connection with our Fiscal

    2019 Oracle Restructuring Plan (2019 Restructuring Plan). Additional
    information regarding certain of our restructuring plans is provided in
    management's discussion below under "Restructuring Expenses", in Note 5 of
    Notes to Condensed Consolidated Financial Statements included elsewhere in
    this Quarterly Report, and in Note 8 of Notes to Consolidated Financial

Statements included in our Annual Report on Form 10-K for the fiscal year

    ended May 31, 2019.


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(5) Stock-based compensation was included in the following operating expense line

    items of our condensed consolidated statements of operations (in millions):




                                                          Three Months Ended                    Nine Months Ended
                                                   February 29,        February 28,       February 29,      February 28,
                                                       2020                2019               2020              2019
    Cloud services and license support             $          22       $          26     $           83     $          74
    Hardware                                                   3                   2                  8                 7
    Services                                                  14                  12                 42                37
    Sales and marketing                                       67                  89                192               278
    Stock-based compensation, operating segments             106                 129                325               396
    Research and development                                 238                 254                781               732
    General and administrative                                17                  44                 98               131
    Total stock-based compensation                 $         361       $         427     $        1,204$       1,259

(6) For the third quarter and first nine months of fiscal 2020, the applicable

jurisdictional tax rates applied to our income before provision for income

taxes after adjusting for the effects of items within the table above, such

as for stock-based compensation, amortization of intangible assets,

restructuring, and certain other acquisition related items, resulted in an

effective tax rate of 19.1% and 19.2%, respectively, instead of 16.4% and

16.1%, respectively, as derived per our condensed consolidated statements of

operations. For the third quarter and first nine months of fiscal 2019, the

applicable jurisdictional tax rates applied to our income before provision

for income taxes after adjusting for the effects of items within the table

above, such as for stock-based compensation, amortization of intangible

assets, restructuring, and certain other acquisition related items, and after

excluding the effects of income tax reform (see footnote (7) below), resulted

in an effective tax rate of 20.4% and 19.4%, respectively, instead of 11.1%

and 12.6%, respectively, which represented our effective tax rates as derived

per our condensed consolidated statements of operations.

(7) The income tax reform adjustment presented in the table above was due to an

income tax expense adjustment made pursuant to SEC Staff Accounting Bulletin

No. 118 (SAB 118) during the third quarter and first nine months of fiscal

2019, related to the enactment of the U.S. Tax Cuts and Jobs Act of 2017 (the

Tax Act). The more significant provisions of the Tax Act as applicable to us

are described in our Annual Report on Form 10-K for the fiscal year ended May

    31, 2019.


Cloud and License Business

Our cloud and license business engages in the sale, marketing and delivery of
our applications and infrastructure technologies through various deployment
models, including license support offerings; Oracle Cloud Services offerings;
and cloud license and on-premise license offerings. License support revenues are
typically generated through the sale of license support contracts related to
cloud licenses and on-premise licenses, are purchased by our customers at their
option and are generally recognized as revenues ratably over the contractual
term, which is generally one year. Our cloud services deliver applications and
infrastructure technologies on a subscription basis via cloud-based deployment
models that we develop, provide unspecified updates and enhancements for, host,
manage and support, and revenues are generally recognized over the contractual
term, which is generally one to three years, or in the case of usage model
contracts, as the cloud services are consumed. Cloud license and on-premise
license revenues represent fees earned from granting customers licenses,
generally on a perpetual basis, to use our database and middleware and our
applications software products within cloud and on-premise IT environments and
are generally recognized up front at the point in time when the software is made
available to the customer to download and use. We continue to place significant
emphasis, both domestically and internationally, on direct sales through our own
sales force. We also continue to market certain of our offerings through
indirect channels. Costs associated with our cloud and license business are
included in cloud services and license support expenses, and sales and marketing
expenses. These costs are largely personnel and infrastructure related including
the cost of providing our cloud services and license support offerings, salaries
and commissions earned by our sales force for the sale of our cloud and license
offerings, and marketing program costs.



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                                          Three Months Ended                                        Nine Months Ended
                          February 29,       Percent Change     February 28,       February 29,       Percent Change      February 28,
(Dollars in millions)         2020          Actual   Constant       2019               2020          Actual   Constant        2019
Cloud and License
Revenues:
Americas(1)               $       4,569         3%         3%   $       4,444$       13,396         2%         2%   $       13,133
EMEA(1)                           2,320         3%         5%           2,257              6,591         0%         3%            6,582
Asia Pacific(1)                   1,273         5%         7%           1,216              3,731         5%         6%            3,544
Total revenues(1)                 8,162         3%         4%           7,917             23,718         2%         3%           23,259
Expenses:
Cloud services and
license support(2)                  943         6%         7%             890              2,844         7%         8%            2,668
Sales and marketing(2)            1,816         2%         3%           1,780              5,428         1%         3%            5,357
Total expenses(2)                 2,759         3%         5%           2,670              8,272         3%         4%            8,025
Total Margin              $       5,403         3%         4%   $       5,247$       15,446         1%         2%   $       15,234
Total Margin %                      66%                                   66%                65%                                    65%
% Revenues by
Geography:
Americas                            56%                                   56%                56%                                    57%
EMEA                                28%                                   29%                28%                                    28%
Asia Pacific                        16%                                   15%                16%                                    15%
Revenues by Offerings:
Cloud services and
license support(1)        $       6,931         4%         5%   $       6,666$       20,549         3%         4%   $       19,925
Cloud license and
on-premise license                1,231        -2%         0%           1,251              3,169        -5%        -4%            3,334
Total revenues(1)         $       8,162         3%         4%   $       7,917$       23,718         2%         3%   $       23,259
Cloud Services and
License Support
Revenues by Ecosystem:
Applications cloud
services and license
support(1)                $       2,809         6%         7%   $       2,640$        8,268         5%         6%   $        7,854
Infrastructure cloud
services and license
support(1)                        4,122         2%         4%           4,026             12,281         2%         3%           12,071
Total cloud services
and license support
revenues(1)               $       6,931         4%         5%   $       6,666$       20,549         3%         4%   $       19,925

(1) Includes cloud services and license support revenue adjustments related to

certain cloud services and license support contracts that would have

otherwise been recorded as revenues by the acquired businesses as independent

entities but were not recognized in our GAAP-based condensed consolidated

statements of operations for the periods presented due to business

combination accounting requirements. Such revenue adjustments were included

in our operating segment results for purposes of reporting to and review by

our CODMs. See "Presentation of Operating Segment Results and Other Financial

Information" above for additional information.

(2) Excludes stock-based compensation and certain allocations. Also excludes

amortization of intangible assets and certain other GAAP-based expenses,

which were not allocated to our operating segment results for purposes of

reporting to and review by our CODMs, as further described under

"Presentation of Operating Segment Results and Other Financial Information"

above.



Excluding the effects of currency rate fluctuations, total revenues from our
cloud and license business increased in the fiscal 2020 periods presented,
relative to the corresponding prior year periods, due to growth in our cloud
services and license support revenues, which was primarily due to increased
customer purchases of and renewals of applications and infrastructure
cloud-based services and license support contracts in recent periods for which
we delivered such services during the fiscal 2020 periods presented. In constant
currency, the Americas region contributed 43% and 43%, respectively, the EMEA
region contributed 33% and 25%, respectively, and the Asia Pacific region
contributed 24% and 32%, respectively, to the revenue growth for this business
during the third quarter and the first nine months of fiscal 2020, respectively.

In constant currency, total cloud and license expenses increased in the fiscal
2020 periods presented, relative to the corresponding prior year periods, due to
higher sales and marketing expenses and higher cloud services and license
support expenses, each of which increased primarily due to higher employee
related expenses from higher headcount and due to higher technology
infrastructure expenses. Excluding the effects of currency rate fluctuations,
our cloud and license business' total margins increased during the fiscal 2020
periods presented,

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relative to the corresponding prior year periods, primarily due to the fiscal
2020 increases in revenues for this business, while total fiscal 2020 margins as
a percentage of revenues remained flat in constant currency.

Hardware Business


Our hardware business' revenues are generated from the sales of our Oracle
Engineered Systems, servers, storage, and industry-specific hardware. The
hardware product and related software, such as an operating system or firmware,
are highly interdependent and interrelated and are accounted for as a combined
performance obligation. The revenues for this combined performance obligation
are generally recognized at the point in time that the hardware product is
delivered to the customer and ownership is transferred to the customer. Our
hardware business also earns revenues from the sale of hardware support
contracts purchased by our customers at their option and are generally
recognized as revenues ratably as the hardware support services are delivered
over the contractual term, which is generally one year. The majority of our
hardware products are sold through indirect channels such as independent
distributors and value-added resellers and we also market and sell our hardware
products through our direct sales force. Operating expenses associated with our
hardware business include the cost of hardware products, which consists of
expenses for materials and labor used to produce these products by our internal
manufacturing operations or by third-party manufacturers, warranty expenses and
the impact of periodic changes in inventory valuation, including the impact of
inventory determined to be excess and obsolete; the cost of materials used to
repair customer products; the cost of labor and infrastructure to provide
support services; and sales and marketing expenses, which are largely personnel
related and include variable compensation earned by our sales force for the
sales of our hardware offerings.



                                          Three Months Ended                                       Nine Months Ended
                          February 29,       Percent Change     February

28, February 29, Percent Change February 28, (Dollars in millions) 2020 Actual Constant 2019

              2020          Actual   Constant       2019
Hardware Revenues:
Americas                  $         425        -6%        -6%   $         452     $       1,275        -8%        -7%   $       1,379
EMEA                                265        -5%        -2%             278               749        -6%        -3%             796
Asia Pacific                        167       -10%        -8%             185               518        -3%        -2%             536
Total revenues                      857        -6%        -5%             915             2,542        -6%        -5%           2,711
Expenses:
Hardware products and
support(1)                          262       -21%       -20%             331               803       -17%       -16%             973
Sales and marketing(1)              107       -13%       -12%             123               338       -11%       -10%             381
Total expenses(1)                   369       -19%       -17%             454             1,141       -16%       -14%           1,354
Total Margin              $         488         6%         7%   $         461     $       1,401         3%         4%   $       1,357
Total Margin %                      57%                                   50%               55%                                   50%
% Revenues by
Geography:
Americas                            50%                                   50%               50%                                   51%
EMEA                                31%                                   30%               30%                                   29%
Asia Pacific                        19%                                   20%               20%                                   20%



(1) Excludes stock-based compensation and certain allocations. Also excludes

amortization of intangible assets and certain other GAAP­based expenses,

which were not allocated to our operating segment results for purposes of

reporting to and review by our CODMs, as further described under

"Presentation of Operating Segments and Other Financial Information" above.



Excluding the effects of currency rate fluctuations, total hardware revenues
decreased in the fiscal 2020 periods presented, relative to the corresponding
prior year periods, due to lower hardware products revenues and lower hardware
support revenues. The decreases in hardware products and hardware support
revenues in the fiscal 2020 periods presented, relative to the corresponding
fiscal 2019 periods presented, were primarily attributable to our continued
emphasis on the marketing and sale of our cloud-based infrastructure
technologies, which resulted in reduced sales volumes of certain of our hardware
product lines and also impacted the volume of hardware support contracts sold in
recent periods. These fiscal 2020 hardware revenue decreases were partially
offset by increased hardware revenues related to certain of our strategic
hardware offerings, namely our Oracle Exadata offerings.

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Excluding the effects of currency rate fluctuations, total hardware expenses
decreased in the fiscal 2020 periods presented, relative to the corresponding
prior year periods, primarily due to lower hardware products expenses, lower
hardware support costs, and lower sales and marketing expenses, all of which
aligned to lower hardware revenues.

In constant currency, total margin and total margin as a percentage of revenues
for our hardware business increased during the fiscal 2020 periods presented,
relative to the corresponding prior year periods, primarily due to lower
hardware expenses.

Services Business


We offer services to customers and partners to help to maximize the performance
of their investments in Oracle applications and infrastructure technologies.
Services revenues are generally recognized over time as the services are
performed. The cost of providing our services consists primarily of personnel
related expenses, technology infrastructure expenditures, facilities expenses
and external contractor expenses.



                                           Three Months Ended                                       Nine Months Ended
                           February 29,       Percent Change     February 28,      February 29,       Percent Change     February 28,
(Dollars in millions)          2020          Actual   Constant       2019              2020          Actual   Constant       2019
Services Revenues:
Americas                   $         370        -1%         0%   $         374     $       1,150        -2%        -2%   $       1,177
EMEA                                 249         1%         4%             245               743        -2%         0%             760
Asia Pacific                         159        -5%        -4%             167               479         0%         1%             479
Total revenues                       778        -1%         0%             786             2,372        -2%        -1%           2,416
Total Expenses(1)                    660         0%         1%             662             2,025         1%         2%           2,015
Total Margin               $         118        -5%        -4%   $         124     $         347       -14%       -13%   $         401
Total Margin %                       15%                                   16%               15%                                   17%
% Revenues by Geography:
Americas                             48%                                   48%               49%                                   49%
EMEA                                 32%                                   31%               31%                                   31%
Asia Pacific                         20%                                   21%               20%                                   20%



(1) Excludes stock-based compensation and certain allocations. Also excludes

certain other GAAP-based expenses, which were not allocated to our operating

    segment results for purposes of reporting to and review by our CODMs, as
    further described under "Presentation of Operating Segments and Other
    Financial Information" above.


Fiscal Third Quarter 2020 Compared to Fiscal Third Quarter 2019: Excluding the
effects of currency rate fluctuations, our total services revenues were flat
during the third quarter of fiscal 2020. In constant currency, our consulting
revenues and advanced customer support revenues increased modestly during the
third quarter of fiscal 2020 and were offset by a decline in our education
services revenues. A constant currency increase in services revenues in the EMEA
region was partially offset by a constant currency decrease in services revenues
in the Asia Pacific region during the third quarter of fiscal 2020, while the
Americas was flat.

In constant currency, total services expenses increased slightly during the
third quarter of fiscal 2020, relative to the corresponding prior year period,
primarily due to an increase in employee related expenses associated with our
consulting offerings, which were partially offset by a decline in our education
services expenses. In constant currency, total margin and total margin as a
percentage of total services revenues decreased during the third quarter of
fiscal 2020, relative to the corresponding prior year period, due to increased
expenses for this business.

First Nine Months Fiscal 2020 Compared to First Nine Months Fiscal 2019:
Excluding the effects of currency rate fluctuations, our total services revenues
decreased slightly during the first nine months of fiscal 2020 primarily due to
a decrease in our education services revenues, partially offset by increases in
consulting revenues and advanced customer support revenues. Constant currency
decreases in services revenues in the Americas region were partially offset by
constant currency increases in services revenues in the Asia Pacific region
during the first nine months of fiscal 2020, while the EMEA region was flat.

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In constant currency, total services expenses increased, total margin decreased,
and total margin as a percentage of revenues decreased during the first nine
months of fiscal 2020, relative to the corresponding prior year period,
primarily due to similar reasons as noted above.

Research and Development Expenses:  Research and development expenses consist
primarily of personnel related expenditures. We intend to continue to invest
significantly in our research and development efforts because, in our judgment,
they are essential to maintaining our competitive position.



                                              Three Months Ended                                       Nine Months Ended
                              February 29,       Percent Change     February 28,      February 29,       Percent Change     February 28,
(Dollars in millions)             2020          Actual   Constant       2019              2020          Actual   Constant       2019
Research and development(1)   $       1,262         8%         8%   $       1,172$       3,807         2%         2%   $       3,732
Stock-based compensation                238        -6%        -6%             254               781         7%         7%             732
Total expenses                $       1,500         5%         5%   $       1,426$       4,588         3%         3%   $       4,464
% of Total Revenues                     15%                                   15%               16%                                   16%



(1) Excluding stock-based compensation



On a constant currency basis, total research and development expenses increased
during the fiscal 2020 periods presented, relative to the corresponding prior
year periods, primarily due to higher employee related expenses, primarily
higher variable compensation expenses, and increased infrastructure related
expenses during each of the fiscal 2020 periods presented.

General and Administrative Expenses: General and administrative expenses primarily consist of personnel related expenditures for IT, finance, legal and human resources support functions.



                                                Three Months Ended                                       Nine Months Ended
                                February 29,       Percent Change    

February 28, February 29, Percent Change February 28, (Dollars in millions)

               2020          Actual   Constant       2019              2020          Actual   Constant       2019

General and administrative(1) $ 271 0% 0% $

    272     $         805         0%         1%   $         804
Stock-based compensation                   17       -62%       -62%              44                98       -25%       -25%             131
Total expenses                  $         288        -9%        -8%   $         316     $         903        -3%        -3%   $         935
% of Total Revenues                        3%                                    3%                3%                                    3%



(1) Excluding stock-based compensation



On a constant currency basis, total general and administrative expenses
decreased during the fiscal 2020 periods presented, relative to the
corresponding prior year periods, primarily due to lower stock-based
compensation expenses, and lower professional fees in each of the fiscal 2020
periods presented. These decreases were partially offset by higher employee
related expenses during the fiscal 2020 periods presented. In addition, during
the first nine months of fiscal 2019, we recorded a $29 million litigation
related benefit that decreased our expenses during that period.

Amortization of Intangible Assets:  Substantially all of our intangible assets
were acquired through our business combinations. We amortize our intangible
assets over, and monitor the appropriateness of, the estimated useful lives of
these assets. We also periodically review these intangible assets for potential
impairment based upon relevant facts and circumstances. Note 4 of Notes to
Condensed Consolidated Financial Statements included elsewhere in this Quarterly
Report has additional information regarding our intangible assets and related
amortization.



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                                          Three Months Ended                                       Nine Months Ended
                          February 29,       Percent Change     February

28, February 29, Percent Change February 28, (Dollars in millions) 2020 Actual Constant 2019

              2020          Actual   Constant       2019
Developed technology      $         200        -8%        -8%   $         216     $         615        -4%        -4%   $         640
Cloud services and
license support
agreements and related
relationships                       169         4%         4%             163               511        -5%        -5%             539
Other                                31        14%        14%              28                95        12%        12%              86
Total amortization of
intangible assets         $         400        -2%        -2%   $         407     $       1,221        -3%        -3%   $       1,265




Amortization of intangible assets decreased during the fiscal 2020 periods
presented, relative to the corresponding prior year periods, due to a reduction
in expenses associated with certain of our intangible assets that became fully
amortized, partially offset by additional amortization from intangible assets
that we acquired in connection with our recent acquisitions.

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

                                          Three Months Ended                                       Nine Months Ended
                          February 29,       Percent Change     February 

28, February 29, Percent Change February 28, (Dollars in millions) 2020 Actual Constant 2019

2020 Actual Constant 2019 Transitional and other employee related costs $

            2       -87%       -87%   $          13     $           9       -77%       -77%   $          39
Business combination
adjustments, net                      2       112%       112%             (20 )               4       119%       119%             (20 )
Other, net                            3       -16%       -17%               3                31       224%       223%              10
Total acquisition
related and other
expenses                 $            7       297%       295%   $          (4 )   $          44        54%        55%   $          29


On a constant currency basis, acquisition related and other expenses increased
during the fiscal 2020 periods presented, relative to the corresponding prior
year periods, due to higher other expenses, net, which was primarily
attributable to higher asset impairment costs related to certain right of use
assets and other assets that were abandoned in connection with plans to improve
our cost structure and operations prospectively. In addition, during the fiscal
2019 periods presented, we recorded certain business combination related
adjustments that benefited our expenses during those periods. These unfavorable
impacts to our expenses in the fiscal 2020 periods presented were partially
offset by lower transitional employee related costs during the fiscal 2020
periods presented relative to the corresponding prior year periods.

Restructuring Expenses: Restructuring expenses resulted from the execution of
management approved restructuring plans that were generally developed to improve
our cost structure and/or operations, often in conjunction with our acquisition
integration strategies. Restructuring expenses consist of employee severance
costs and other contract termination costs to improve our cost structure
prospectively. Prior to fiscal 2020, restructuring expenses also included
charges for duplicate facilities. For additional information regarding our
restructuring plans, see Note 5 of Notes to Condensed Consolidated Financial
Statements included elsewhere in this Quarterly Report and Note 8 of Notes to
Consolidated Financial Statements included in our Annual Report on Form 10-K for
the fiscal year ended May 31, 2019.



                                          Three Months Ended                                       Nine Months Ended
                          February 29,       Percent Change     February

28, February 29, Percent Change February 28, (Dollars in millions) 2020 Actual Constant 2019

2020 Actual Constant 2019 Restructuring expenses $ 60 42% 47% $ 43 $ 181 -34% -33% $ 275



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Restructuring expenses in the fiscal 2020 and 2019 periods presented primarily
related to our 2019 Restructuring Plan. Our management approved, committed to
and initiated the 2019 Restructuring Plan in order to restructure and further
improve efficiencies in our operations. The total estimated restructuring costs
associated with the 2019 Restructuring Plan are up to $781 million, of which
approximately $119 million were remaining as of February 29, 2020, and will be
recorded to the restructuring expense line item within our condensed
consolidated statements of operations as they are incurred through an expected
end date of fiscal 2020. Our estimated costs and timing are subject to change in
future periods.

The majority of the initiatives undertaken by our 2019 Restructuring Plan were
effected to implement our continued emphasis in developing, marketing and
selling our cloud-based offerings. These initiatives impacted certain of our
cloud services and license support, sales and marketing, services and research
and development operations. Cost savings that are expected to be realized
pursuant to our 2019 Restructuring Plan initiatives are expected to be partially
offset by investments in resources and geographies that best address the
development, marketing, sale and support of our cloud-based offerings including
investments in our second-generation cloud infrastructure.

Interest Expense:



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

February 29, Percent Change February 28, (Dollars in millions) 2020 Actual Constant 2019

2020 Actual Constant 2019 Interest expense $ 456 -10% -10% $ 509 $ 1,416 -9% -9% $ 1,557





Interest expense decreased due to lower average borrowings during the fiscal
2020 periods presented, relative to the corresponding prior year periods,
primarily due to the maturities and repayments of $4.5 billion of senior notes
during the first nine months of fiscal 2020 and $2.0 billion of senior notes
during fiscal 2019.



Non-Operating Income, net:  Non-operating income, net consists primarily of
interest income, net foreign currency exchange gains (losses), the
noncontrolling interests in the net profits of our majority-owned subsidiaries
(primarily Oracle Financial Services Software Limited and Oracle Corporation
Japan) and net other income (losses), including net realized gains and losses
related to all of our investments, net unrealized gains and losses related to
the small portion of our investment portfolio related to our deferred
compensation plan, net unrealized gains and losses related to certain equity
securities and non-service net periodic pension income (losses).



                                          Three Months Ended                                        Nine Months Ended
                          February 29,       Percent Change     February

28, February 29, Percent Change February 28, (Dollars in millions) 2020 Actual Constant 2019

               2020          Actual   Constant        2019
Interest income           $         122       -50%       -50%   $         246     $          457       -49%       -49%   $          890
Foreign currency
losses, net                         (47 )     264%       300%             (13 )             (127 )      86%        93%              (68 )
Noncontrolling
interests in income                 (28 )     -19%       -19%             (35 )             (115 )       8%         8%             (106 )
Other loss, net                     (43 )        *          *               -                (20 )     -44%       -43%              (35 )
Total non-operating
income, net               $           4       -98%       -99%   $         198     $          195       -71%       -72%   $          681




* Not meaningful




On a constant currency basis, our non-operating income, net decreased during the
fiscal 2020 periods presented, relative to the corresponding prior year periods,
primarily due to lower interest income in the fiscal 2020 periods presented,
which was primarily attributable to lower average cash, cash equivalent and
marketable securities balances and, to a lesser extent, lower interest rates
on these balances during the fiscal 2020 periods presented, and due to higher
foreign currency losses in the fiscal 2020 periods presented.



Provision for Income Taxes:  Our effective tax rates for each of the periods
presented were the result of the mix of income earned in various tax
jurisdictions that apply a broad range of income tax rates. Our provision for
income taxes varied from the tax computed at the U.S. federal statutory income
tax rate for the periods presented primarily due to earnings in foreign
operations, state taxes, the U.S. research and development tax credit,
settlements with tax authorities, the tax effects of stock-based compensation,
the Foreign Derived Intangible Income deduction and the tax effect of Global
Intangible Low-Taxed Income. Our effective tax rate in the first nine months of
fiscal 2019 was also affected by an adjustment made pursuant to SAB 118 related
to the enactment of

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the Tax Act, for which the more significant provisions of the Tax Act as
applicable to us are described in our Annual Report on Form 10-K for the fiscal
year ended May 31, 2019. Future effective tax rates could be adversely affected
by an unfavorable shift of earnings weighted to jurisdictions with higher tax
rates, by unfavorable changes in tax laws and regulations, by adverse rulings in
tax related litigation, or by shortfalls in stock-based compensation realized by
employees relative to stock-based compensation that was recorded for book
purposes, among others.



                                             Three Months Ended                                       Nine Months Ended
                             February 29,       Percent Change     February 28,      February 29,       Percent Change     February 28,
(Dollars in millions)            2020          Actual   Constant       2019              2020          Actual   Constant       2019
Provision for income taxes   $         505        47%        47%   $         343     $       1,348        27%        27%   $       1,059
Effective tax rate                   16.4%                                 11.1%             16.1%                                 12.6%


Fiscal Third Quarter 2020 Compared to Fiscal Third Quarter 2019: Provision for
income taxes increased in the third quarter of fiscal 2020, relative to the
corresponding prior year period, primarily due to the absence of the net
favorable impact of a change in estimate related to our adoption of the Tax Act,
as recorded pursuant to SAB 118, in the third quarter of fiscal 2019. This
unfavorable variance to our provision for income taxes was partially offset by a
favorable jurisdictional mix of our earnings during the third quarter of fiscal
2020.

First Nine Months Fiscal 2020 Compared to First Nine Months Fiscal 2019:
Provision for income taxes increased in the first nine months of fiscal 2020,
relative to the corresponding prior year period, primarily due to the absence of
the net favorable impact of a change in estimate related to our adoption of the
Tax Act, as recorded pursuant to SAB 118, in the first nine months of fiscal
2019. This unfavorable variance to our provision for income taxes was partially
offset by higher excess tax benefits recognized on stock-based compensation
expense and a favorable jurisdictional mix of our earnings during the first nine
months of fiscal 2020.

Liquidity and Capital Resources



                                                    February 29,               May 31,
(Dollars in millions)                                   2020          Change     2019
Working capital                                    $       17,702

-36% $ 27,756 Cash, cash equivalents and marketable securities $ 25,858 -32% $ 37,827





Working capital:  The decrease in working capital as of February 29, 2020 in
comparison to May 31, 2019 was primarily due to cash used for repurchases of our
common stock, the reclassification of $1.0 billion and ?€1.25 billion of
long-term senior notes as current liabilities, cash used to pay dividends to our
stockholders during the first nine months of fiscal 2020, and the prospective
recognition of current operating lease liabilities associated with our adoption
of Topic 842 as of June 1, 2019. These unfavorable impacts were partially offset
by the favorable effects to our net current assets resulting from our net income
during the first nine months of fiscal 2020 and, to a lesser extent, proceeds
from stock option exercises. Our working capital may be impacted by some or all
of the aforementioned factors in future periods, the amounts and timing of which
are variable.

Cash, cash equivalents and marketable securities:  Cash and cash equivalents
primarily consist of deposits held at major banks, Tier-1 commercial paper and
other securities with original maturities of 90 days or less. Marketable
securities consist of corporate debt securities and certain other securities.
The decrease in cash, cash equivalents and marketable securities at February 29,
2020 in comparison to May 31, 2019 was primarily due to $13.9 billion of
repurchases of our common stock, the repayments of $4.5 billion of borrowings,
payments of cash dividends to our stockholders and cash used for capital
expenditures. These cash outflows during the first nine months of fiscal 2020
were partially offset by certain cash inflows, primarily cash inflows generated
by our operations and cash inflows from stock option exercises during the first
nine months of fiscal 2020.

The amount of cash, cash equivalents and marketable securities that we report in
U.S. Dollars for a significant portion of the cash, cash equivalents and
marketable securities balances held by our foreign subsidiaries is subject to
translation adjustments caused by changes in foreign currency exchange rates as
of the end of each respective reporting period (the offset to which is
substantially recorded to accumulated other comprehensive loss in our condensed
consolidated balance sheets and is also presented as a line item in our
condensed consolidated statements of comprehensive income included elsewhere in
this Quarterly Report). As the U.S. Dollar generally strengthened against
certain major international currencies on a net basis during the first nine
months of fiscal

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2020, the amount of cash, cash equivalents and marketable securities that we
reported in U.S. Dollars for these subsidiaries decreased on a net basis as of
February 29, 2020 relative to what we would have reported using constant
currency rates from the May 31, 2019 balance sheet date.



                                                        Nine Months Ended
                                             February 29,                February 28,
(Dollars in millions)                            2020          Change        2019

Net cash provided by operating activities $ 9,525 -6% $

10,129

Net cash provided by investing activities $ 14,099 -24% $

18,651

Net cash used for financing activities $ (20,265 ) -43% $

   (35,595 )




Cash flows from operating activities:  Our largest source of operating cash
flows is cash collections from our customers following the purchase and renewal
of their license support agreements. Payments from customers for these support
agreements are generally received near the beginning of the contracts' terms,
which are generally one year in length. Over the course of a fiscal year, we
also have historically generated cash from the sales of new licenses, cloud
services, hardware offerings and other services. Our primary uses of cash from
operating activities are for employee related expenditures, material and
manufacturing costs related to the production of our hardware products, taxes,
interest payments and leased facilities.

Net cash provided by operating activities decreased in the first nine months of
fiscal 2020, relative to the corresponding prior year period, due primarily to
lower net income and certain cash unfavorable changes in working capital
balances during the first nine months of fiscal 2020, in each case relative to
the corresponding prior year period.

Cash flows from investing activities:  The changes in cash flows from investing
activities primarily relate to the timing of our purchases, maturities and sales
of our investments in marketable securities, and investments in capital and
other assets, including certain intangible assets, to support our growth.

Net cash provided by investing activities decreased during the first nine months
of fiscal 2020, primarily due to a decrease in total proceeds from the sales and
maturities of marketable securities and other investments during the first nine
months of fiscal 2020, relative to the corresponding prior year period. This
cash unfavorable variance to our investing activities during the first nine
months of fiscal 2020 was partially offset by a decrease in the purchases of
marketable securities and other investments during the first nine months of
fiscal 2020 relative to the corresponding prior year period.

Cash flows from financing activities:  The changes in cash flows from financing
activities primarily relate to borrowings and repayments related to our debt
instruments, stock repurchases, dividend payments and net proceeds related to
employee stock programs.

Net cash used for financing activities in the first nine months of fiscal 2020
decreased compared to the first nine months of fiscal 2019 primarily due to
decreased stock repurchases as we used cash to repurchase $13.9 billion of
common stock in the first nine months of fiscal 2020 compared to $29.9 billion
in the first nine months of fiscal 2019.

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Free cash flow:  To supplement our statements of cash flows presented on a GAAP
basis, we use non-GAAP measures of cash flows on a trailing 4-quarter basis to
analyze cash flows generated from our operations. We believe that free cash flow
is also useful as one of the bases for comparing our performance with our
competitors. The presentation of non-GAAP free cash flow is not meant to be
considered in isolation or as an alternative to net income as an indicator of
our performance, or as an alternative to cash flows from operating activities as
a measure of liquidity. We calculate free cash flow as follows:



                                                    Trailing 4-Quarters Ended
                                             February 29,                February 28,
(Dollars in millions)                            2020          Change        2019

Net cash provided by operating activities $ 13,947 -6% $

    14,789
Capital expenditures                                (1,544 )      -5%           (1,625 )
Free cash flow                              $       12,403        -6%   $       13,164
Net income                                  $       10,759$       10,619
Free cash flow as percent of net income               115%                        124%




Long-Term Customer Financing:  We offer certain of our customers the option to
acquire licenses, cloud services, hardware and other services offerings through
separate long-term payment contracts. We generally sell these contracts that we
have financed for our customers on a non-recourse basis to financial
institutions within 90 days of the contracts' dates of execution. We generally
record the transfers of amounts due from customers to financial institutions as
sales of financing receivables because we are considered to have surrendered
control of these financing receivables. We financed $548 million and $451
million, respectively, or approximately 17% and 14%, respectively, of our cloud
license and on-premise license revenues in the first nine months of fiscal 2020
and 2019, respectively.

Contractual Obligations:  During the first nine months of fiscal 2020, there
were no significant changes to our estimates of future payments under our fixed
contractual obligations and commitments as presented in Part II, Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in our Annual Report on Form 10-K for our fiscal year ended
May 31, 2019.

We believe that our current cash, cash equivalents and marketable securities and
cash generated from operations will be sufficient to meet our working capital,
capital expenditures and contractual obligation requirements. In addition, we
believe that we could fund our future acquisitions, dividend payments and
repurchases of common stock or debt with our internally available cash, cash
equivalents and marketable securities, cash generated from operations,
additional borrowings or from the issuance of additional securities.

Off-Balance Sheet Arrangements: We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

Restricted Stock-Based Awards and Stock Options

Our stock-based compensation program is a key component of the compensation package we provide to attract and retain certain of our talented employees and align their interests with the interests of existing stockholders.


We recognize that restricted stock-based awards and stock options dilute
existing stockholders and have sought to control the number of stock-based
awards granted while providing competitive compensation packages. Consistent
with these dual goals, our cumulative potential dilution since June 1, 2016 has
been a weighted-average annualized rate of 1.4% per year. The potential dilution
percentage is calculated as the average annualized new restricted stock-based
awards and stock options granted and assumed, net of restricted stock-based
awards and stock options forfeited by employees leaving the company, divided by
the weighted-average outstanding shares during the calculation period. This
maximum potential dilution will only result if all restricted stock-based awards
vest and all stock options are exercised. Of the outstanding stock options at
February 29, 2020, which generally have a ten-year exercise period,
approximately 31% have exercise prices higher than the market price of our
common stock on such date. In recent years, our stock repurchase program has
more than offset the dilutive effect of our stock-based compensation program.
However, we may modify the levels of our stock repurchases in the

                                       43

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Table of Contents




future depending on a number of factors, including the amount of cash we have
available for acquisitions, to pay dividends, to repay or repurchase
indebtedness or for other purposes. At February 29, 2020, the maximum potential
dilution from all outstanding restricted stock-based awards and unexercised
stock options, regardless of when granted and regardless of whether vested or
unvested, was 9.0%.

Recent Accounting Pronouncements


For information with respect to recent accounting pronouncements, if any, and
the impact of these pronouncements on our consolidated financial statements, if
any, see Note 1 of Notes to Condensed Consolidated Financial Statements included
elsewhere in this Quarterly Report.

© Edgar Online, source Glimpses

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