ORACLE CORPORATION 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 15 of Notes to Consolidated Financial Statements included elsewhere in this Annual 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.
Impacts of the COVID-19 Pandemic on Oracle's Business
For a discussion of the impacts on and risks to our business from COVID-19, please refer to "Impacts of the COVID-19 Pandemic on Oracle's Business" included in Item 1 Business in this Annual Report, the risks included in Item 1A Risk Factors in this Annual Report and the information presented below in Results of Operations in this Item 7. Cloud and License Business Our cloud and license line of business, which represented 83% of our total revenues in each of fiscal 2020 and 2019, 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 thesupport 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
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arrangements are generally billed in advance of the cloud services beingperformed; 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.
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.
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Hardware Business
Our hardware business, which represented 9% of our total revenues in each of fiscal 2020 and 2019, provides a broad selection of hardware products and hardware-related software products including Oracle Engineered Systems, servers, storage, industry-specific hardware offerings, 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 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 in each of
fiscal 2020 and 2019, 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
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
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Notes to Consolidated Financial Statements included elsewhere in this Annual 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 flows and return on invested capital targets before deciding to move forward with an acquisition.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance withU.S. generally accepted accounting principles (GAAP) as set forth in theFinancial Accounting Standards Board's (FASB) Accounting Standards Codification (ASC), and we consider the various staff accounting bulletins and other applicable guidance issued by theSEC . 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. Our senior management has reviewed our critical accounting policies and related disclosures with theFinance and Audit Committee of the Board of Directors. Note 1 of Notes to Consolidated Financial Statements included elsewhere in this Annual Report includes additional information about our critical and other accounting policies.
Revenue Recognition
The most critical judgments required in applying Topic 606 and our revenue recognition policy relate to the determination of distinct performance obligations and the evaluation of the standalone selling price (SSP) for each performance obligation.
Many of our customer contracts include multiple performance obligations.
Judgment is required in determining whether each performance obligation within a
customer contract is distinct. Oracle products and services generally do not
require a significant amount of integration or interdependency. Therefore,
multiple products and services contained within a customer contract are
generally considered to be distinct and are not combined for revenue recognition
purposes. We allocate the transaction price for each customer contract to each
performance obligation based on the relative SSP (the determination of SSP is
discussed below) for each performance obligation within each contract. We
recognize the amount of transaction price allocated to each performance
obligation within a customer contract as revenue as each performance obligation
is delivered.
We use historical sales transaction data and judgment, among other factors, in
determining the SSP for products and services. For substantially all performance
obligations except cloud licenses and on-premise licenses, we are able to
establish the SSP based on the observable prices of products or services sold
separately in comparable circumstances to similar customers. We typically
establish an SSP range for our products and services, which is reassessed on a
periodic basis or when facts and circumstances change. SSP for our products and
services can
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Table of Contents Index to Financial Statements evolve over time due to changes in our pricing practices that are influenced by intense competition, changes in demand for our products and services, and economic factors, among others. Our cloud licenses and on-premise licenses have not historically been sold on a standalone basis, as substantially all customers elect to purchase license support contracts at the time of a license purchase. License support contracts are generally priced as a percentage of the net fees paid by the customer to access the license. We are unable to establish the SSP for our cloud licenses and on-premise licenses based on observable prices given the same products are sold for a broad range of amounts (that is, the selling price is highly variable) and a representative SSP is not discernible from past transactions or other observable evidence. As a result, the SSP for a cloud license and an on-premise license included in a contract with multiple performance obligations is determined by applying a residual approach whereby all other performance obligations within a contract are first allocated a portion of the transaction price based upon their respective SSPs, with any residual amount of transaction price allocated to cloud license and on-premise license revenues. Business Combinations We apply the provisions of ASC 805, Business Combinations, in accounting for our acquisitions. ASC 805 requires that we evaluate whether a transaction pertains to an acquisition of assets, or to an acquisition of a business. A business is defined as an integrated set of assets and activities that is capable of being conducted and managed for the purpose of providing a return to investors. Asset acquisitions are accounted for by allocating the cost of the acquisition to the individual assets and liabilities assumed on a relative fair value basis; whereas the acquisition of a business requires us to recognize separately from goodwill the assets acquired and the liabilities assumed at the acquisition date fair values.Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date as well as any contingent consideration, where applicable, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the business acquisition date, we record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of a business acquisition's measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of operations. Accounting for business combinations requires our management to make significant estimates and assumptions, especially at the acquisition date, including our estimates for intangible assets, contractual obligations assumed, pre-acquisition contingencies and any contingent consideration, where applicable. Although we believe that the assumptions and estimates we have made in the past have been reasonable and appropriate, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results. For a given business acquisition, we may identify certain pre-acquisition contingencies as of the acquisition date and may extend our review and evaluation of these pre-acquisition contingencies throughout the measurement period in order to obtain sufficient information to assess whether we include these contingencies as a part of the fair value estimates of assets acquired and liabilities assumed and, if so, to determine their estimated amounts. If we cannot reasonably determine the fair value of a non-income tax related pre-acquisition contingency by the end of the measurement period, which is generally the case given the nature of such matters, we will recognize an asset or a liability for such pre-acquisition contingency if: (1) it is probable that an asset existed or a liability had been incurred at the acquisition date and (2) the amount of the asset or liability can be reasonably estimated. Subsequent to the measurement period or final determination of the net asset values for the business combination, changes in our estimates of such contingencies will affect earnings and could have a material effect on our results of operations and financial position.
In addition, uncertain tax positions and tax related valuation allowances assumed in a business combination are initially estimated as of the acquisition date. We reevaluate these items quarterly based upon facts and
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Table of Contents Index to Financial Statements circumstances that existed as of the acquisition date with any adjustments to our preliminary estimates being recorded to goodwill if identified within the measurement period. Subsequent to the measurement period or our final determination of the tax allowance's or contingency's estimated value, whichever comes first, changes to these uncertain tax positions and tax related valuation allowances will affect our provision for income taxes in our consolidated statement of operations and could have a material impact on our results of operations and financial position.
We review goodwill for impairment annually and whenever events or changes in
circumstances indicate its carrying value may not be recoverable. We make
certain judgments and assumptions to determine our reporting units and in
allocating shared assets and liabilities to determine the carrying values for
each of our reporting units.
Judgment in the assessment of qualitative factors of impairment include cost
factors; financial performance; legal, regulatory, contractual, political,
business, and other factors; entity specific factors; industry and market
considerations, macroeconomic conditions, and other relevant events and factors
affecting the reporting unit. To the extent we determine that it is more likely
than not that the fair value of the reporting unit is less than its carrying
value, a quantitative test is then performed.
Performing a quantitative goodwill impairment test includes the determination of
the fair value of a reporting unit and involves significant estimates and
assumptions. These estimates and assumptions include, among others, revenue
growth rates and operating margins used to calculate projected future cash
flows, risk-adjusted discount rates, future economic and market conditions, and
the determination of appropriate market comparables.
We make judgments about the recoverability of purchased finite lived intangible
assets whenever events or changes in circumstances indicate that impairment may
exist. In such situations, we are required to evaluate whether the net book
values of our finite lived intangible assets are recoverable. We determine
whether finite lived intangible assets are recoverable based upon the forecasted
future cash flows that are expected to be generated by the lowest level
associated asset grouping. Assumptions and estimates about future values and
remaining useful lives of our intangible assets are complex and subjective and
include, among others, forecasted undiscounted cash flows to be generated by
certain asset groupings. These assumptions and estimates can be affected by a
variety of factors, including external factors such as industry and economic
trends and internal factors such as changes in our business strategy and our
internal forecasts.
Accounting for Income Taxes
Judgment is required in determining our worldwide income tax provision. In the
ordinary course of a global business, there are many transactions and
calculations where the ultimate tax outcome is uncertain. Some of these
uncertainties arise as a consequence of revenue sharing and cost reimbursement
arrangements among related entities, the process of identifying items of
revenues and expenses that qualify for preferential tax treatment, and the
segregation of foreign and domestic earnings and expenses to avoid double
taxation. Although we believe that our estimates are reasonable, the final tax
outcome of these matters could be different from that which is reflected in our
historical income tax provisions and accruals. Such differences could have a
material effect on our income tax provision and net income in the period in
which such determination is made.
We record a valuation allowance to reduce our deferred tax assets to the amount
that is more likely than not to be realized. In order for us to realize our
deferred tax assets, we must be able to generate sufficient taxable income in
those jurisdictions where the deferred tax assets are located. We consider
future growth, forecasted earnings, future taxable income, the mix of earnings
in the jurisdictions in which we operate, historical earnings, taxable income in
prior years, if carryback is permitted under the law, and prudent and feasible
tax planning strategies in determining the need for a valuation allowance. In
the event we were to determine that we would not be able to realize all or part
of our net deferred tax assets in the future, an adjustment to the deferred tax
assets valuation allowance would be charged to earnings in the period in which
we make such a determination, or goodwill would be adjusted at our final
determination of the valuation allowance related to an acquisition within the
measurement period. If we later determine that it is more likely than not that
the net deferred tax assets would be
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Table of Contents Index to Financial Statements realized, we would reverse the applicable portion of the previously provided valuation allowance as an adjustment to our provision for income taxes at such time. We calculate our current and deferred tax provision based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed during the subsequent year. Adjustments based on filed returns are generally recorded in the period when the tax returns are filed and the global tax implications are known, which can materially impact our effective tax rate. The amount of income tax we pay is subject to ongoing audits by federal, state and foreign tax authorities, which often result in proposed assessments. Our estimate of the potential outcome for any uncertain tax issue may require certain judgments. A description of our accounting policies associated with tax related contingencies assumed as a part of a business combination is provided under "Business Combinations" above. For those tax related contingencies that are not a part of a business combination, we account for these uncertain tax issues pursuant to ASC 740, Income Taxes, which contains a two-step approach to recognizing and measuring uncertain tax positions taken or expected to be taken in a tax return. The first step is to determine if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained in an 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. Although we believe that we have adequately reserved for our uncertain tax positions, no assurance can be given with respect to the final outcome of these matters. We adjust reserves for our uncertain tax positions due to changing facts and circumstances, such as the closing of a tax audit, judicial rulings, and refinement of estimates or realization of earnings or deductions that differ from our estimates. To the extent that the final outcome of these matters is different than the amounts recorded, such differences generally will impact our provision for income taxes in the period in which such a determination is made. Our provisions for income taxes include the impact of reserve provisions and changes to reserves that are considered appropriate and also include the related interest and penalties.
Legal and Other Contingencies
We are currently involved in various claims and legal proceedings. Quarterly, we review the status of each significant matter and assess our potential financial exposure. A description of our accounting policies associated with contingencies assumed as a part of a business combination is provided under "Business Combinations" above. For legal and other contingencies that are not a part of a business combination, we accrue a liability for an estimated loss if the potential loss from any claim or legal proceeding is considered probable, and the amount can be reasonably estimated. Significant judgment is required in both the determination of probability and the determination as to whether the amount of an exposure is reasonably estimable. Because of uncertainties related to these matters, accruals are based only on the best information available at the time the accruals are made. As additional information becomes available, we reassess the potential liability related to our pending claims and litigation and may revise our estimates. Such revisions in the estimates of the potential liabilities could have a material impact on our results of operations and financial position.
Results of Operations
Presentation of Operating Segment Results and Other Financial Information
In our fiscal 2020 compared to fiscal 2019 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 consolidated
statements of operations that are not directly attributable to our three
businesses.
In addition, we discuss below the fiscal 2020 compared to fiscal 2019 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
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Table of Contents Index to Financial Statements consistent with that used by our CODMs. Our operating segment presentation below reflects revenues, direct costs and sales and marketing expenses that correspond to and are directly attributable to each of our three businesses. We also utilize these inputs to calculate and present a segment margin for each business in the discussion below. Consistent with our internal management reporting processes, the below operating segment presentation 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 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 15 of Notes to Consolidated Financial Statements included elsewhere in this Annual 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 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 15 of Notes to Consolidated Financial Statements included elsewhere in this Annual Report for a reconciliation of the summations of total segment margin as presented in the discussion below to total income before provision of income taxes as presented per our consolidated statements of operations for all periods presented. A discussion regarding our financial condition and results of operations for fiscal 2019 compared to fiscal 2018 can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year endedMay 31, 2019 , as filed with theSEC onJune 21, 2019 , which is available free of charge on theSEC's website at www.sec.gov and on our Investor Relations website at www.oracle.com/investor.
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 theU.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 Annual Report using constant currency disclosure. To present this information, current and comparative prior period results for entities reporting in currencies other thanU.S. Dollars are converted intoU.S. Dollars at constant exchange rates (i.e., the rates in effect onMay 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 of1.0 million Euros from products sold onMay 31, 2020 and 2019, our financial statements would reflect reported revenues of$1.10 million in fiscal 2020 (using 1.10 as the month-end average exchange rate for the period) and$1.11 million in fiscal 2019 (using 1.11 as the month-end average exchange rate for the period). The constant currency presentation, however, would translate the fiscal 2020 results using the fiscal 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. 44
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Total Revenues and Operating Expenses
Year Ended May 31,
Percent Change
(Dollars in millions) 2020 Actual Constant 2019
Total Revenues by Geography:
Americas $ 21,563 -1% -1% $ 21,856
EMEA(1) 11,035 -2% 1% 11,270
Asia Pacific 6,470 1% 3% 6,380
Total revenues 39,068 -1% 0% 39,506
Total Operating Expenses 25,172 -3% -2% 25,971
Total Operating Margin $ 13,896 3% 4% $ 13,535
Total Operating Margin % 36% 34%
% Revenues by Geography:
Americas 55% 55%
EMEA 28% 29%
Asia Pacific 17% 16%
Total Revenues by Business:
Cloud and license $ 32,519 0% 1% $ 32,562
Hardware 3,443 -7% -6% 3,704
Services 3,106 -4% -3% 3,240
Total revenues $ 39,068 -1% 0% $ 39,506
% Revenues by Business:
Cloud and license 83% 83%
Hardware 9% 9%
Services 8% 8%
(1) Comprised of
Excluding the effects of currency rate fluctuations, our total revenues were flat in fiscal 2020. The constant currency increase in our cloud and license business' revenues during fiscal 2020 was offset by decreases in our hardware business' revenues and services business' revenues. The constant currency increase in our cloud and license business' revenues during fiscal 2020 relative to fiscal 2019 was 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 contracts and license support contracts to continue to gain access to our latest technologies and support services. The constant currency decrease in our hardware business' revenues during fiscal 2020 relative to fiscal 2019 was 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. The constant currency decrease in our services business' revenues during fiscal 2020 relative to fiscal 2019 was attributable to declines in our consulting revenues and education revenues. Due to the effects of the COVID-19 pandemic, all three of our businesses' revenues were adversely impacted during the fourth quarter of fiscal 2020 and some of these effects may continue into fiscal 2021. While we expect these effects to be temporary, the impacts of COVID-19 for fiscal 2021 and future periods are unknown. On a constant currency basis, fiscal 2020 total revenues growth in the EMEA andAsia Pacific regions were partially offset by a decline in theAmericas region. Excluding the effects of currency rate fluctuations, our total operating expenses decreased during fiscal 2020 relative to fiscal 2019 primarily due to lower expenses for substantially all of our operating expense categories other than cloud services and license support expenses, which increased primarily due to headcount and infrastructure investments that were made to support the increase in our cloud and license business' revenues; and research and development expenses, which increased primarily due to higher stock-based compensation expenses. We curtailed a number of variable expenditures in our fourth quarter of fiscal 2020 including marketing 45
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expenses and employee travel expenses in response to COVID-19. We expect certain of these expenses to normalize in future periods provided global economic conditions improve.
In constant currency, our total operating margin and total operating margin as a percentage of total revenues increased in fiscal 2020 due to the decline in our total expenses.
Supplemental Disclosure Related to Certain Charges
To supplement our 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 and expenses related to acquisitions and certain other expense and income items that affected our GAAP net income:
Year Ended May 31,
(in millions) 2020 2019
Cloud services and license support deferred revenues(1)
20
Amortization of intangible assets(2) 1,586
1,689
Acquisition related and other(3)(5) 56
44
Restructuring(4) 250
443
Stock-based compensation, operating segments(5) 436
518
Stock-based compensation, R&D and G&A(5) 1,154 1,135
Income tax effects(6) (939 ) (1,406 )
Income tax reform(7) - (389 )
$ 2,547 $ 2,054 (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
estimated future amortization related to intangible assets was as follows (in
millions):
Fiscal 2021 $ 1,351
Fiscal 2022 1,102
Fiscal 2023 679
Fiscal 2024 445
Fiscal 2025 126
Thereafter 35
Total intangible assets, net $ 3,738 (3) Acquisition related and other expenses primarily consist of personnel related
costs for transitional and certain other employees, certain business
combination adjustments including certain adjustments after the measurement
period has ended and certain other operating items, net.
(4) Restructuring expenses during fiscal 2020 and 2019 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 the discussion below under
"Restructuring Expenses" and in Note 8 of Notes to Consolidated Financial
Statements included elsewhere in this Annual Report.
46
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Table of Contents Index to Financial Statements
(5) Stock-based compensation was included in the following operating expense line
items of our consolidated statements of operations (in millions):
Year Ended May 31,
2020 2019
Cloud services and license support $ 110 $ 99
Hardware 11 10
Services 54 49
Sales and marketing 261 360
Stock-based compensation, operating segments 436 518
Research and development 1,035 963
General and administrative 119 172
Total stock-based compensation $ 1,590 $ 1,653 (6) For fiscal 2020 and 2019, the applicable jurisdictional tax rates applied to
our income before provision for income taxes after excluding the tax 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, for fiscal 2019, after excluding a tax
benefit arising from the increase of a deferred tax asset associated with a
partial realignment of our legal structure and a tax benefit as described in
footnote (7) below, resulted in effective tax rates of 18.4% and 18.5% in
fiscal 2020 and 2019, respectively, instead of 16.0% and 9.7%, respectively,
which represented our effective tax rates as derived per our consolidated
statements of operations.
(7) The fiscal 2019 income tax reform adjustment presented in the table above was
due to an adjustment made pursuant to
(
(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 and marketing of our
applications and infrastructure technologies that are delivered through various
deployment models and include: Oracle license support offerings; Oracle Cloud
Services offerings; and Oracle 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. Revenues for
our cloud services 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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Index to Financial Statements
Year Ended May 31,
Percent Change
(Dollars in millions) 2020 Actual Constant 2019
Cloud and License Revenues:
Americas(1) $ 18,314 -1% 0% $ 18,410
EMEA(1) 9,058 -1% 1% 9,168
Asia Pacific(1) 5,151 3% 4% 5,004
Total revenues(1) 32,523 0% 1% 32,582
Expenses:
Cloud services and license
support(2) 3,803 6% 7% 3,597
Sales and marketing(2) 7,159 -3% -2% 7,398
Total expenses(2) 10,962 0% 1% 10,995
Total Margin $ 21,561 0% 1% $ 21,587
Total Margin % 66% 66%
% Revenues by Geography:
Americas 56% 57%
EMEA 28% 28%
Asia Pacific 16% 15%
Revenues by Offerings:
Cloud services and license
support(1) $ 27,396 3% 4% $ 26,727
Cloud license and on-premise
license 5,127 -12% -11% 5,855
Total revenues(1) $ 32,523 0% 1% $ 32,582
Cloud Services and License Support
Revenues by Ecosystem:
Applications cloud services and
license support(1) $ 11,019 4% 5% $ 10,572
Infrastructure cloud services and
license support(1) 16,377 1% 3% 16,155
Total cloud services and license support revenues(1)$ 27,396 3% 4%$ 26,727
(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 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 expense 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, our cloud and license business' total revenues increased in fiscal 2020 relative to fiscal 2019 due to growth in our cloud services and license support revenues, which was primarily due to increased customer purchases and renewals of cloud-based services and license support contracts in recent periods for which we delivered such services during fiscal 2020. Our cloud and license business' revenues were adversely impacted during the fourth quarter of fiscal 2020 due to the COVID-19 pandemic, in particular our cloud license and on-premise license revenues. In constant currency, theAmericas , EMEA andAsia Pacific regions contributed 8%, 34% and 58%, respectively, of the constant currency revenue growth for this business in fiscal 2020. In constant currency, our total cloud and license business' expenses increased in fiscal 2020 compared to fiscal 2019 due to higher cloud services and license support expenses during fiscal 2020, which were primarily attributable to higher employee related expenses and higher technology infrastructure expenses to support the increase in our cloud and license business' revenues. These constant currency expense increases were partially offset by lower sales and marketing expenses, which were primarily due to our curtailment of variable expenditures in our fourth quarter of fiscal 2020, including reduced marketing expenses and employee travel expenses, in response to COVID-19. 48
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Table of Contents Index to Financial Statements Excluding the effects of currency rate fluctuations, our cloud and license business' total margin increased in fiscal 2020 compared to fiscal 2019 due to the fiscal 2020 increases in revenues for this business, while total fiscal 2020 margins as a percentage of revenues remained flat.
Hardware Business
Our hardware business' revenues are generated from the sales of our Oracle
Engineered Systems, server, storage, and industry-specific hardware offerings.
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.
Year Ended May 31,
Percent Change
(Dollars in millions) 2020 Actual Constant 2019
Hardware Revenues:
Americas $ 1,758 -7% -6% $ 1,889
EMEA 998 -8% -5% 1,082
Asia Pacific 687 -6% -5% 733
Total revenues 3,443 -7% -6% 3,704
Expenses:
Hardware products and support(1) 1,084 -18% -17% 1,327
Sales and marketing(1) 456 -12% -11% 520
Total expenses(1) 1,540 -17% -15% 1,847
Total Margin $ 1,903 2% 4% $ 1,857
Total Margin % 55% 50%
% Revenues by Geography:
Americas 51% 51%
EMEA 29% 29%
Asia Pacific 20% 20%
(1) Excludes stock-based compensation and certain expense allocations. Also
excludes amortization of intangible assets and certain other GAAP-based
expenses, which were not allocated to our operating segment results for
purposes of reporting to and review by our CODMs, as further described under
"Presentation of Operating Segments and Other Financial Information" above.
Excluding the effects of currency rate fluctuations, total hardware revenues
decreased in fiscal 2020 relative to fiscal 2019 due to lower hardware products
revenues and lower hardware support revenues. The decreases in hardware products
and hardware support revenues in fiscal 2020 relative to fiscal 2019 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. Our hardware business'
revenues were also adversely impacted during the fourth quarter of fiscal 2020
due to the economic effects caused by COVID-19. These unfavorable
49--------------------------------------------------------------------------------
Table of Contents Index to Financial Statements impacts to our fiscal 2020 hardware revenues were partially offset by increased hardware revenues related to certain of our strategic hardware offerings, namely our Oracle Exadata offerings. Excluding the effects of currency rate fluctuations, total hardware expenses decreased in fiscal 2020 compared to fiscal 2019 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 in fiscal 2020 compared to fiscal 2019 primarily due to lower hardware expenses.
Services Business
We offer services to customers and partners to help 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.
Year Ended May 31,
Percent Change
(Dollars in millions) 2020 Actual Constant 2019
Services Revenues:
Americas $ 1,496 -5% -4% $ 1,576
EMEA 979 -4% -1% 1,021
Asia Pacific 631 -2% -1% 643
Total revenues 3,106 -4% -3% 3,240
Total Expenses(1) 2,656 -2% 0% 2,703
Total Margin $ 450 -16% -15% $ 537
Total Margin % 14% 17%
% Revenues by Geography:
Americas 48% 49%
EMEA 32% 31%
Asia Pacific 20% 20%
(1) Excludes stock-based compensation and certain allocations. Also excludes
certain other GAAP-based expenses, which were not allocated to our operating
segment results for purposes of reporting to and review by our CODMs, as
further described under "Presentation of Operating Segments and Other
Financial Information" above.
Excluding the effects of currency rate fluctuations, our total services revenues
decreased in fiscal 2020 relative to fiscal 2019 primarily due to declines in
our consulting services and education services revenues. Our services business
revenues were also adversely impacted during the fourth quarter of fiscal 2020
due to the impacts of COVID-19, including the impacts of consulting project
delays due to customer resource constraints and jurisdictional restrictions
imposed with respect to in-person meetings. In addition, we incurred lower
billable travel expenses and lower billable sub-contractor expenses for which we
were to be reimbursed by our customers, which reduced the amount of revenues and
expenses we reported for this business during fiscal 2020.
In constant currency, total services expenses were flat in fiscal 2020 compared
to fiscal 2019 as lower expenses incurred for travel and sub-contractors as
described above and lower expenses related to the delivery of our education
services were offset by higher employee related expenses associated with our
consulting offerings during fiscal 2020.
In constant currency, total margin and total margin as a percentage of total
services revenues decreased during fiscal 2020 relative to fiscal 2019 due to
the decrease in total revenues for this business.
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.
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Index to Financial Statements
Year Ended May 31,
Percent Change
(Dollars in millions) 2020 Actual Constant 2019
Research and development(1) $ 5,032 -1% 0% $ 5,063
Stock-based compensation 1,035 7% 7% 963
Total expenses $ 6,067 1% 1% $ 6,026
% of Total Revenues 15% 15%
(1) Excluding stock-based compensation
On a constant currency basis, total research and development expenses increased in fiscal 2020 compared to fiscal 2019 primarily due to an increase in stock-based compensation expenses, modestly higher employee salary expenses, and higher infrastructure expenses during fiscal 2020 that were partially offset by lower variable compensation expenses and lower travel expenses due to the impacts of COVID-19.
General and Administrative Expenses: General and administrative expenses primarily consist of personnel related expenditures for IT, finance, legal and human resources support functions.
Year Ended May 31,
Percent Change
(Dollars in millions) 2020 Actual Constant 2019
General and administrative(1) $ 1,062 -3% -1% $ 1,093
Stock-based compensation 119 -31% -31% 172
Total expenses $ 1,181 -7% -6% $ 1,265
% of Total Revenues 3% 3%
(1) Excluding stock-based compensation
Excluding the effects of currency rate fluctuations, total general and
administrative expenses decreased in fiscal 2020 compared to fiscal 2019
primarily due to lower stock-based compensation expenses, lower professional
services fees, lower variable compensation expenses, and lower travel expenses
due to the impacts of COVID-19. These decreases were partially offset by
modestly higher fiscal 2020 employee salary expenses in constant currency.
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 6 of Notes to
Consolidated Financial Statements included elsewhere in this Annual Report has
additional information regarding our intangible assets and related amortization.
Year Ended May 31,
Percent Change
(Dollars in millions) 2020 Actual Constant 2019
Developed technology $ 789 -8% -8% $ 857
Cloud services and license support
agreements and related relationships 676 -5% -5% 712
Other 121 2% 2%
120
Total amortization of intangible assets
Amortization of intangible assets decreased in fiscal 2020 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, certain business combination adjustments including adjustments after
the measurement period has ended and certain other operating items, net.
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Index to Financial Statements
Year Ended May 31,
Percent Change
(Dollars in millions) 2020 Actual Constant 2019
Transitional and other employee related costs
$ 49 Business combination adjustments, net (7 ) -67% -71% (21 ) Other, net 51 227% 228%
16
Total acquisition related and other expenses
$ 44 On a constant currency basis, acquisition related and other expenses increased during fiscal 2020 due to higher other expenses, net including 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 fiscal 2019 we recorded certain business combination related adjustments that benefited our expenses during this period. These increases to our fiscal 2020 expenses growth were partially offset by lower fiscal 2020 transitional employee related costs. 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 8 of Notes to Consolidated Financial Statements included elsewhere in this Annual Report. Year Ended May 31, Percent Change (Dollars in millions) 2020 Actual Constant 2019 Restructuring expenses$ 250 -44% -42%$ 443 Restructuring expenses in fiscal 2020 and 2019 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. We may incur additional restructuring expenses in future periods due to the initiation of new restructuring plans or from changes in estimated costs associated with existing restructuring plans. 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 sales and marketing and research and development operations. Cost savings that are expected to be realized pursuant to our 2019 Restructuring Plan initiatives may be offset by investments in resources and geographies that best address the development, marketing and sale of our cloudbased offerings including investments in our secondgeneration cloud infrastructure. Interest Expense: Year Ended May 31, Percent Change (Dollars in millions) 2020 Actual Constant 2019 Interest expense$ 1,995 -4% -4%$ 2,082 Interest expense decreased in fiscal 2020 compared to fiscal 2019 primarily due to the maturities and repayments of$4.5 billion of senior notes during fiscal 2020 and$2.0 billion of senior notes during fiscal 2019. This decrease in interest expense during fiscal 2020 was partially offset by additional interest expense incurred related to our issuance of$20.0 billion of senior notes inApril 2020 . 52
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Table of Contents Index to Financial Statements Non-Operating Income, net: Non-operating income, net consists primarily of interest income, net foreign currency exchange gains (losses), the noncontrolling interests in the net profits of our majority-owned subsidiaries (primarily Oracle Financial Services Software Limited andOracle Corporation Japan ) and net other income (losses), including net realized gains and losses related to all of our investments, net unrealized gains and losses related to the small portion of our investment portfolio related to our deferred compensation plan, net unrealized gains and losses related to certain equity securities and non-service net periodic pension income (losses). Year Ended May 31, Percent Change (Dollars in millions) 2020 Actual Constant 2019 Interest income$ 527 -52% -51%$ 1,092 Foreign currency losses, net (185 ) 67% 69% (111 )
Noncontrolling interests in income (164 ) 8% 8% (152 ) Other, net
(16 ) 13% 25% (14 )
Total non-operating income, net
On a constant currency basis, our non-operating income, net decreased in fiscal 2020 compared to fiscal 2019 primarily due to lower interest income in fiscal 2020, 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 fiscal 2020, and also due to higher fiscal 2020 foreign currency losses. Provision for Income Taxes: Our effective income 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. Refer to Note 14 of Notes to Consolidated Financial Statements included elsewhere in this Annual Report for a discussion regarding the differences between the effective income tax rates as presented for the periods below and theU.S. federal statutory income tax rates that were in effect during these periods. 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. Year Ended May 31, Percent Change (Dollars in millions) 2020 Actual Constant 2019 Provision for income taxes$ 1,928 63% 66%$ 1,185 Effective tax rate 16.0% 9.7% Provision for income taxes increased in fiscal 2020 relative to fiscal 2019 primarily due to the absence in fiscal 2020 of tax benefits we recorded in fiscal 2019 attributable to changes in estimates related to our adoption of the Tax Act, as recorded pursuant toSAB 118, and the increase of a deferred tax asset associated with the partial realignment of our legal structure.
Liquidity and Capital Resources
As of May 31,
(Dollars in millions) 2020 Change 2019
Working capital $ 34,940 26% $ 27,756
Cash, cash equivalents and marketable securities
53
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Table of Contents Index to Financial Statements Working capital: The increase in working capital as ofMay 31, 2020 in comparison toMay 31, 2019 was primarily due to our issuance of$20.0 billion of long-term senior notes inApril 2020 (refer to Recent Financing Activities below for additional information), the favorable impacts to our net current assets resulting from our net income during fiscal 2020 and cash proceeds from stock option exercises. These favorable working capital movements were partially offset by 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 fiscal 2020, and the prospective recognition of current operating lease liabilities associated with our adoption of Topic 842 as ofJune 1, 2019 . 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 increase in cash, cash equivalents and marketable securities atMay 31, 2020 in comparison toMay 31, 2019 was primarily due to our issuance of$20.0 billion of long-term senior notes inApril 2020 , cash inflows generated by our operations and cash inflows from stock option exercises during fiscal 2020. These cash inflows were partially offset by certain cash outflows, primarily$19.2 billion used for repurchases of our common stock, the repayment of$4.5 billion of borrowings, payments of cash dividends to our stockholders and cash used for capital expenditures. The amount of cash, cash equivalents and marketable securities that we report inU.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 (AOCL) in our consolidated balance sheets and is also presented as a line item in our consolidated statements of comprehensive income included elsewhere in this Annual Report). As theU.S. Dollar generally strengthened against certain major international currencies during fiscal 2020, the amount of cash, cash equivalents and marketable securities that we reported inU.S. Dollars for these subsidiaries decreased on a net basis as ofMay 31, 2020 relative to what we would have reported using constant currency rates from theMay 31, 2019 balance sheet date. Year Ended May 31, (Dollars in millions) 2020 Change 2019
Net cash provided by operating activities
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 during fiscal 2020 compared
to fiscal 2019 primarily due to lower net income and certain cash unfavorable
changes in the timing of payments received from customers during the fourth
quarter of fiscal 2020, which we believe were attributable to the unfavorable
global economic effects that resulted from COVID-19. We expect to collect
substantially all of these delayed customer payments in future periods.
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.
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Table of Contents Index to Financial Statements Net cash provided by investing activities decreased during fiscal 2020 primarily due to a fiscal 2020 decrease in proceeds from the maturities and sales of marketable securities and other investments and a fiscal 2020 increase in the purchase of marketable securities and other investments, in each case relative to fiscal 2019. 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 during fiscal 2020 decreased compared to fiscal 2019 primarily due to a decrease in our stock repurchases for which we used$19.2 billion in fiscal 2020 in comparison to$36.1 billion in fiscal 2019; and our fiscal 2020 issuance of$20.0 billion of senior notes (none in fiscal 2019). 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: Year Ended May 31, (Dollars in millions) 2020 Change 2019
Net cash provided by operating activities
(1,564 ) -6% (1,660 )
Free cash flow $ 11,575 -10% $ 12,891
Net income $ 10,135 $ 11,083
Free cash flow as percent of net income 114% 116%
Long-Term Customer Financing: We offer certain of our customers the option to
acquire licenses, cloud services, hardware and services offerings through
separate long-term payment contracts. We generally sell these contracts that we
have financed for our customers on a non-recourse basis to financial
institutions within 90 days of the contracts' dates of execution. We generally
record the transfers of amounts due from customers to financial institutions as
sales of financing receivables because we are considered to have surrendered
control of these financing receivables. We financed $1.0 billion in each of
fiscal 2020 and 2019 and $1.5 billion in fiscal 2018 or approximately 19%, 17%
and 25%, respectively, of our cloud license and on-premise license revenues in
fiscal 2020, 2019 and 2018, respectively.
Recent Financing Activities:
Cash Dividends: In fiscal 2020, we declared and paid cash dividends of$0.96 per share that totaled$3.1 billion . InJune 2020 , our Board of Directors declared a quarterly cash dividend of$0.24 per share of our outstanding common stock payable onJuly 28, 2020 to stockholders of record as of the close of business onJuly 15, 2020 . Future declarations of dividends and the establishment of future record and payment dates are subject to the final determination of our Board of Directors.
Senior Notes: In
•$3.50 billion of 2.50% senior notes dueApril 2025 ; •$2.25 billion of 2.80% senior notes dueApril 2027 ; •$3.25 billion of 2.95% senior notes dueApril 2030 ; •$3.00 billion of 3.60% senior notes dueApril 2040 ; •$4.50 billion of 3.60% senior notes dueApril 2050 ; and 55
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Table of Contents Index to Financial Statements •$3.50 billion of 3.85% senior notes dueApril 2060 . We issued the senior notes for general corporate purposes, which may include stock repurchases, payment of cash dividends on our common stock, repayment of indebtedness and future acquisitions. Additionally, in fiscal 2020, we repaid$4.5 billion of senior notes pursuant to their terms. Additional details regarding our senior notes are included in Note 7 of Notes to Consolidated Financial Statements included elsewhere in this Annual Report. Common Stock Repurchase Program: Our Board of Directors has approved a program for us to repurchase shares of our common stock. OnSeptember 11, 2019 andMarch 12, 2020 , we announced that our Board of Directors approved expansions of our stock repurchase program collectively totaling$30.0 billion . As ofMay 31, 2020 , approximately$16.6 billion remained available for stock repurchases pursuant to our stock repurchase program. We repurchased 361.0 million shares for$19.2 billion , 733.8 million shares for$36.0 billion , and 238.0 million shares for$11.5 billion in fiscal 2020, 2019 and 2018, respectively. Our stock repurchase authorization does not have an expiration date and the pace of our repurchase activity will depend on factors such as our working capital needs, our cash requirements for acquisitions and dividend payments, our debt repayment obligations or repurchases of our debt, our stock price, and economic and market conditions. Our stock repurchases may be effected from time to time through open market purchases and pursuant to a Rule 10b5-1 plan. Our stock repurchase program may be accelerated, suspended, delayed or discontinued at any time. Contractual Obligations: The contractual obligations presented in the table below represent our estimates of future payments under our fixed contractual obligations and commitments. Changes in our business needs, cancellation provisions, changing interest rates and other factors may result in actual payments differing from these estimates. We cannot provide certainty regarding the timing and amounts of payments. We have presented below a summary of the most significant assumptions used in preparing this information within the context of our consolidated financial position, results of operations and cash flows. The following is a summary of our material contractual obligations as ofMay 31, 2020 : Year Ending May 31, (in millions) Total 2021 2022 2023 2024 2025 Thereafter Principal payments on borrowings(1)$ 72,115 $ 2,631 $ 8,250 $ 3,750 $ 3,500 $ 10,000 $ 43,984 Interest payments on borrowings(1) 37,664 2,431 2,291 2,150 2,038 1,926 26,828 Operating leases(2) 2,315 616 519 350 252 192 386 Tax obligations(3) 6,046 576 576 576 1,080 1,440 1,798 Purchase obligations and other(4) 1,263 881 66 30 27 23 236 Total contractual obligations$ 119,403 $ 7,135 $ 11,702 $ 6,856 $ 6,897 $ 13,581 $ 73,232
(1) Represents the principal balances and interest payments to be paid in
connection with our senior notes and other borrowings outstanding as of
May 31, 2020 after considering:
• certain interest rate swap agreements for certain series of senior notes
that have the economic effect of modifying the fixed-interest obligations
associated with these senior notes so that they effectively became variable
pursuant to a LIBOR-based index. Interest payments on these senior notes
have been presented in the table above after consideration of these fixed
to variable interest rate swap agreements based upon the interest rates
applicable as of
• certain cross-currency swap agreements for our €1.25 billion 2.25% senior
notes due
fixed-rate, Euro-denominated debt, including annual interest payments and
the payment of principal at maturity, to a fixed-rate,
Dollar-denominated debt with a fixed annual interest rate. Principal and
interest payments for these senior notes were calculated and presented in
the table above based on the terms of these cross-currency swap agreements;
and
• certain cross-currency interest rate swap agreements for our €750 million
3.125% senior notes due
converting our fixed-rate, Euro-denominated debt, including annual interest
payments and the payment of principal at maturity, to a variable-rate,
Dollar-denominated debt. Principal and interest payments for these senior
notes were calculated and presented in the table above based on the terms
of these cross-currency interest rate swap agreements as of
and the interest payments are subject to change in future periods.
Refer to Notes 7 and 10 of Notes to Consolidated Financial Statements included
elsewhere in this Annual Report for additional information related to our notes
payable and other borrowings and related derivative agreements.
(2) Represents operating lease liabilities for facilities, data centers, and
vehicles.
(3) Represents the future cash payments related to the transition tax payable
incurred as a result of 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 .
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(4) Primarily represents amounts associated with agreements that are enforceable
and legally binding; terms include: fixed or minimum quantities to be
purchased; fixed, minimum or variable price provisions; and the approximate
timing of the payment. We utilize several external manufacturers to
manufacture sub-assemblies for our hardware products and to perform final
assembly and testing of finished hardware products. We also obtain individual
hardware components for our products from a variety of individual suppliers
based on projected demand information. Such purchase commitments are based on
our forecasted component and manufacturing requirements and typically provide
for fulfillment within agreed upon lead-times and/or commercially standard
lead-times for the particular part or product and have been included in the
amount presented in the above contractual obligations table. Routine
arrangements for other materials and goods that are not related to our
external manufacturers and certain other suppliers and that are entered into
in the ordinary course of business are not included in the amounts presented
above, as they are generally entered into in order to secure pricing or other
negotiated terms and are difficult to quantify in a meaningful way.
As ofMay 31, 2020 , we had$8.4 billion of gross unrecognized income tax benefits, including related interest and penalties, recorded on our consolidated balance sheet, and all such obligations have been excluded from the contractual obligations table above due to the uncertainty as to when they might be settled or released with the relevant tax authorities, although we believe it is reasonably possible that certain of these liabilities could be settled or released during fiscal 2021. We are involved in claims and legal proceedings. All such claims and obligations have been excluded from the contractual obligations table above due to the uncertainty of claims and legal proceedings and associated estimates and assumptions, all of which are inherently unpredictable and many aspects of which are out of our control. Notes 14 and 17 of Notes to Consolidated Financial Statements included elsewhere in this Annual Report includes additional information regarding these contingencies. 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.
Selected Quarterly Financial Data
The following tables set forth selected unaudited quarterly information for our
last eight fiscal quarters. We believe that all necessary adjustments, which
consisted only of normal recurring adjustments, have been included in the
amounts stated below to present fairly the results of such periods when read in
conjunction with the consolidated financial statements and related notes
included elsewhere in this Annual Report. The sum of the quarterly financial
information may vary from annual data due to rounding. Refer to "Seasonality and
Cyclicality" in Item 1 and "Business Overview" in Item 7 included elsewhere
within this Annual Report for additional information regarding the seasonality
of our revenues, expenses and margins and the impacts of COVID-19 on our
business during fiscal 2020.
Fiscal 2020 Quarter Ended (Unaudited)
(in millions, except per share amounts) August 31 November 30 February 29 May 31 Revenues$ 9,218 $ 9,614 $ 9,796 $ 10,440 Gross profit$ 7,261 $ 7,566 $ 7,832 $ 8,471 Operating income$ 2,877 $ 3,183 $ 3,528 $ 4,309 Net income$ 2,137 $ 2,311 $ 2,571 $ 3,116 Earnings per share-basic$ 0.64 $ 0.71 $ 0.81 $ 1.01 Earnings per share-diluted$ 0.63 $ 0.69 $ 0.79 $ 0.99 57
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Fiscal 2019 Quarter Ended(Unaudited)
(in millions, except per share amounts) August 31 November 30 February 28 May 31 Revenues$ 9,193 $ 9,562 $ 9,614 $ 11,136 Gross profit$ 7,240 $ 7,561 $ 7,638 $ 9,073 Operating income$ 2,778 $ 3,101 $ 3,399 $ 4,257 Net income$ 2,265 $ 2,333 $ 2,745 $ 3,740 Earnings per share-basic$ 0.58 $ 0.63 $ 0.78 $ 1.10 Earnings per share-diluted$ 0.57 $ 0.61 $ 0.76 $ 1.07
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 sinceJune 1, 2017 has been a weighted-average annualized rate of 1.5% 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 stock options are exercised. Of the outstanding stock options atMay 31, 2020 , which generally have a ten-year exercise period, substantially all have exercise prices lower 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 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. As ofMay 31, 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 and including stock options where the strike price is higher than the market price as of such date, was 9.0%. During fiscal 2020, the Compensation Committee of the Board of Directors reviewed and approved the annual organization-wide stock-based award grants to selected employees; all stock-based award grants to senior officers; and any individual grant of restricted stock units of 62,500 or greater. The annual organization-wide stock-based award grants to selected employees are generally approved by the Compensation Committee during the ten business day period following the second trading day after the announcement of our fiscal fourth quarter earnings report. However, we currently do not expect that the annual grant for fiscal 2021 will be approved during this time period. Each member of a separate executive officer committee, referred to as the Plan Committee, was allocated a fiscal 2020 equity budget that could be used throughout the fiscal year to grant equity within his or her organization, subject to certain limitations established by the Compensation Committee. 58
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Restricted stock-based award and stock option activity from
Restricted stock-based awards and stock options outstanding at
395
Restricted stock-based awards and stock options granted
231
Restricted stock-based awards vested and issued and stock options exercised
(286 )
Forfeitures, cancellations and other, net
(63 )
Restricted stock-based awards and stock options outstanding at
277
Weighted-average annualized restricted stock-based awards and stock options granted and assumed, net of forfeitures and cancellations
56
Weighted-average annualized stock repurchases (444 ) Shares outstanding atMay 31, 2020
3,067
Basic weighted-average shares outstanding from
3,655
Restricted stock-based awards and stock options outstanding as a
percent of shares outstanding at
9.0%
Total restricted stock-based awards and in the money stock options
outstanding (based on the closing price of our common stock on the
last trading day of fiscal 2020) as a percent of shares outstanding at
9.0%
Weighted-average annualized restricted stock-based awards and stock
options granted and assumed, net of forfeitures and cancellations and
before stock repurchases, as a percent of weighted-average shares
outstanding from
1.5%
Weighted-average annualized restricted stock-based awards and stock
options granted and assumed, net of forfeitures and cancellations and
after stock repurchases, as a percent of weighted-average shares
outstanding from
-10.6%
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 Consolidated Financial Statements included elsewhere in this Annual Report.
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