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 enterprise applications and infrastructure offerings that are delivered worldwide through a variety of flexible and interoperable IT deployment models. These models include on-premise deployments, cloud-based deployments, and hybrid deployments (an approach that combines both on-premise and cloud-based deployments). 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 this Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations and the information contained within Note 9 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.
Recent Global Events
InFebruary 2022 , Oracle announced that itsRussian Federation operations were suspended. Neither theRussian Federation norUkraine has composed or is expected to compose a material portion of Oracle's total consolidated revenues, net income, net assets, or workforce. We serve hundreds of thousands of customers globally across a broad geographic and industry base. We are profitable and generate a large amount of positive cash flow from our operations, and we do not believe the current posture of theRussia -Ukraine situation will jeopardize either of these characteristics of our business. Other impacts due to this rapidly evolving situation are currently unknown and could potentially subject our business to materially adverse consequences should the situation escalate beyond its current scope, including, among other potential impacts, the geographic proximity of the situation relative to the rest ofEurope , where a material portion of our business is carried out. For a more complete discussion of the risks we encounter in our business, please refer to Item 1A Risk Factors in our Annual Report on Form 10-K for the fiscal year endedMay 31, 2021 . In addition, 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 and certain risk factors included in Item 1A Risk Factors in our Annual Report on Form 10-K for the fiscal year endedMay 31, 2021 ; and the information presented below in Results of Operations as a part of this Item 2 of this Quarterly Report.
Cloud and License Business
Our cloud and license business, which represented 85% of our total revenues on a trailing 4-quarter basis, markets, sells and delivers a broad spectrum of enterprise applications and infrastructure technologies through our cloud and license offerings. Revenue streams included in our cloud and license business are:
• Cloud services and license support revenues, which include:
o 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
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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/oron-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
o 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, deploys, hosts, manages and supports and that
customers access by entering into a subscription agreement with us for
a stated period. Oracle Cloud Services arrangements aregenerally
billed in advance of the cloud services being performed; generally have
durations of one to three years; are generally renewed at the
customer's option; and are generally recognized as revenuesratably
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, which 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 cloud-based, on-premise and other IT environments.
Our cloud license and on-premise license transactions are generally
perpetual in nature and are generally recognized as revenues up front at
the point in time when the software is made available to the customer to
download and use. Revenues from usage-based royalty arrangements for
distinct cloud licenses and on-premise licenses are recognized at thepoint 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 over the contractual terms. Cloud
license and on-premise license customers have the option to purchase and
renew license support contracts, as further described above.
Providing choice and flexibility to our customers as to when and how they deploy Oracle 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. The proportion of our cloud services and license support revenues relative to our cloud license and on-premise license revenues, hardware revenues and services revenues has increased and we expect this trend to continue. Cloud services and license support revenues represented 73% and 74% of our total revenues for the three and nine months endedFebruary 28, 2022 , respectively, and 72% and 73% for the three and nine months endedFebruary 28, 2021 , respectively. 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; customer satisfaction with 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; our ability to manage Oracle Cloud capacity requirements to meet existing and prospective customer demand; 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.
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We believe these factors should contribute to future growth in our cloud and license business' total revenues, which should enable us to continue to make investments in research and development and our cloud operations to develop, improve, increase the capacity of and expand the geographic footprint of 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 or based upon customer usage over the respective contractual terms and the renewal of existing customers' cloud services and license support contracts over the course of each fiscal year that we generally recognize as revenues in a similar manner; 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 fiscal quarterly periods. Hardware Business Our hardware business, which represented 8% of our total revenues on a trailing 4-quarter basis, provides a broad selection of enterprise 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. 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 manufacturing partners' abilities to timely manufacture or deliver a few large hardware transactions with this factor becoming more pronounced in recent periods due to global supply chain constraints for certain technology components; 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 7% 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
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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 and advanced customer 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 related services that we may market and sell in connection with these offerings; general economic conditions; governmental budgetary constraints; personnel reductions in our customers' IT departments; tighter controls over customer discretionary spending; and foreign currency rate fluctuations.
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. As compelling opportunities become available, we may acquire companies, products, services and technologies in furtherance of our corporate strategy. OnDecember 20, 2021 , we entered into an Agreement and Plan of Merger with Cerner Corporation (Cerner), a provider of digital information systems used within hospitals and health systems that are designed to enable medical professionals to deliver better healthcare to individual patients and communities, for a preliminary estimated purchase price of approximately$28.5 billion . The transaction is subject to the consummation of a tender offer, the receipt of certain regulatory approvals and other customary closing conditions. The transaction is expected to close during calendar year 2022. Note 2 of Notes to Condensed Consolidated Financial Statements, included elsewhere in this Quarterly Report, provides additional information related to our proposed acquisition of Cerner and our other recent acquisitions. We believe that we can fund our proposed and future acquisitions with our internally available cash, cash equivalents and marketable securities balances, cash generated from operations, theMarch 2022 credit agreements (see Note 12 of Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report), 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, among others, 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 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. 29
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During the first nine months of fiscal 2022, 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 endedMay 31, 2021 provides a more complete discussion of our critical accounting policies and estimates.
Results of Operations
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 operating 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 of 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 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 of our three businesses in the discussion below. Consistent with our internal management reporting processes, the below operating segment presentation for the first nine months of fiscal 2021 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 fiscal 2021 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 9 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 the fiscal 2021 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 expenses, net and (provision for) benefit from 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 9 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 income taxes as presented per our condensed consolidated statements of operations for all periods presented. We experienced COVID-19 related impacts to our businesses during each of the fiscal 2022 and 2021 periods presented. Certain of these historical impacts to our operating results are further discussed below. Any future impacts are currently unknown.
Separately,
• as described further below and in Note 11 of Notes to Condensed
Consolidated Financial Statements included elsewhere in this Quarterly
Report, we remitted and recorded
related items during the first nine months of fiscal 2022; and
• as described further below and in Notes 1 and 14 of Notes to Consolidated
Financial Statements included in our Annual Report on Form 10-K for the
fiscal year ended May 31, 2021 , we recorded a $2.3 billion one-time net
deferred tax benefit during the third quarter and first nine months of
fiscal 2021 that related to a partial realignment of our legal entity
structure that resulted in the intra-group transfer of certain
intellectual property rights.
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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 of our 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 Quarterly 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, 2021 , 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 onFebruary 28, 2022 and 2021, our financial statements would reflect reported revenues of$1.11 million in the first nine months of fiscal 2022 (using 1.11 as the month-end average exchange rate for the period) and$1.21 million in the first nine months of fiscal 2021 (using 1.21 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 2022 and 2021 using theMay 31, 2021 exchange rate and indicate, in this example, no change in revenues during the period. In each of the tables below, we present the percent change based on actual, unrounded results in reported currency and in constant currency.
Total Revenues and Operating Expenses
Three Months Ended February 28 ,
Nine Months Ended
Percent Change Percent Change
(Dollars in millions) 2022 Actual Constant 2021 2022 Actual Constant 2021
Total Revenues by Geography:
Americas $ 5,849 8% 8% $ 5,424 $ 16,905 7% 7% $ 15,751
EMEA(1) 3,014 1% 7% 2,981 8,751 2% 4% 8,571
Asia Pacific 1,650 -2% 4% 1,680 4,944 0% 3% 4,930
Total revenues 10,513 4% 7% 10,085 30,600 5% 5% 29,252
Total Operating Expenses 6,691 8% 10% 6,207 24,176 30% 30% 18,580
Total Operating Margin $ 3,822 -1% 3% $ 3,878 $ 6,424 -40% -38% $ 10,672
Total Operating Margin % 36% 38% 21% 36%
% Revenues by Geography:
Americas 55% 54% 55% 54%
EMEA 29% 29% 29% 29%
Asia Pacific 16% 17% 16% 17%
Total Revenues by Business:
Cloud and license $ 8,926 5% 7% $ 8,528 $ 25,901 5% 6% $ 24,565
Hardware 798 -3% 1% 820 2,328 -6% -5% 2,478
Services 789 7% 11% 737 2,371 7% 8% 2,209
Total revenues $ 10,513 4% 7% $ 10,085 $ 30,600 5% 5% $ 29,252
% Revenues by Business:
Cloud and license 85% 85% 85% 84%
Hardware 8% 8% 7% 8%
Services 7% 7% 8% 8%
(1) Comprised of
Fiscal Third Quarter 2022 Compared to Fiscal Third Quarter 2021: Excluding the
effects of foreign currency rate fluctuations, our total revenues increased
during the third quarter of fiscal 2022, relative to the corresponding prior
year period, due to growth in our cloud and license business', hardware
business' and services business' revenues. The constant currency increase in our
cloud and license business' revenues during the third quarter of fiscal 2022 was
attributable to growth in our cloud services and license support revenues and
cloud license and on-premise license revenues as customers purchased our
applications and infrastructure technologies via cloud and license deployment
models and renewed their related cloud contracts and license support contracts
to continue to gain access to the latest versions of our technologies and to
receive support services. The constant currency increase in our hardware
business' revenues during the third quarter of fiscal 2022 was primarily
attributable to growth in our Oracle Exadata and certain other strategic
hardware offerings. The constant currency increase in our
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services business' revenues during the third quarter of fiscal 2022 was attributable to an increase in revenues for each of our primary services offerings. In constant currency, theAmericas , EMEA andAsia Pacific regions contributed 61%, 30% and 9%, respectively, to our total revenues growth during the third quarter of fiscal 2022. Excluding the effects of foreign currency rate fluctuations, our total operating expenses increased during the third quarter of fiscal 2022, relative to the corresponding prior year period, substantially due to: higher cloud services and license support expenses, which increased primarily due to higher employee related expenses and higher infrastructure expenses to support the increase in our cloud and license business' revenues; higher services expenses, which increased primarily due to higher employee related expenses and higher external contractor expenses; higher sales and marketing expenses, which increased due to higher employee related expenses and higher marketing expenses; and higher research and development expenses, which increased primarily due to higher employee related expenses. These constant currency expense increases were partially offset by lower amortization of intangible assets and lower restructuring expenses during the third quarter of fiscal 2022 relative to the corresponding prior year period. During the third quarter of fiscal 2022 and 2021, we curtailed certain variable expenditures including employee travel expenses, among others, primarily in response to COVID-19. We expect certain of these expenses may normalize in future periods provided global economic and health conditions improve. In constant currency, our total operating margin increased in the third quarter of fiscal 2022 due to higher revenues. Our total operating margin as a percentage of total revenues decreased in the third quarter of fiscal 2022 due to our operating expenses growth, which exceeded our total revenues growth. First Nine Months Fiscal 2022 Compared to First Nine Months Fiscal 2021: Excluding the effects of foreign currency rate fluctuations, our total revenues increased during the first nine months of fiscal 2022, relative to the corresponding prior year period, due to growth in our cloud and license business' revenues and services business' revenues for similar reasons as noted above for the fiscal 2022 quarterly increases. These constant currency revenue increases were partially offset by a decline in our hardware business' revenues during the first nine months of fiscal 2022. In constant currency, theAmericas , EMEA andAsia Pacific regions contributed 72%, 20% and 8%, respectively, to our total revenues growth during the first nine months of fiscal 2022. Excluding the effects of foreign currency rate fluctuations, our total operating expenses increased during the first nine months of fiscal 2022, relative to the corresponding prior year period, substantially due to certain litigation related charges recorded to acquisition related and other expenses as further described in Note 11 of Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report; and due to similar reasons as the fiscal 2022 quarterly increases noted above. These constant currency expense increases during the first nine months of fiscal 2022 were partially offset by lower amortization of intangible assets and lower restructuring expenses and by$250 million of gains from operating asset sales, which were allocated across most of our operating expense lines. As described above, we curtailed a number of variable expenditures during the fiscal 2022 and fiscal 2021 year to date periods in response to the COVID-19 pandemic and expect certain of these expenses may normalize in future periods. In constant currency, our operating margin and operating margin as a percentage of revenues decreased during the first nine months of fiscal 2022 due to the unfavorable impact of the litigation related charges referenced above. 32
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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 and expenses related to acquisitions and certain other expense and income items that affected our GAAP net income:
Three Months Ended Nine Months Ended
February 28, February 28,
(in millions) 2022 2021 2022 2021
Cloud services and license support deferred
revenues(1) $ - $ 1 $ - $ 2
Amortization of intangible assets(2) 279 347 882 1,037
Acquisition related and other(3) 20 13 4,707 107
Restructuring(4) 19 66 89 337
Stock-based compensation, operating
segments(5) 189 132 533 381
Stock-based compensation, R&D and G&A(5) 485 347 1,367 1,014
Income tax effects(6) (209 ) (2,442 ) (1,680 ) (2,990 )
$ 783 $ (1,536 ) $ 5,898 $ (112 ) (1) Due to business combination accounting rules that were applicable to
acquisitions closed prior to fiscal 2022, we have estimated the fair values
of the cloud services and license support contracts assumed and did not
recognize the cloud services and license support revenue amounts presented in
the above table for the fiscal 2021 periods presented 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):
Remainder of fiscal 2022 $ 267
Fiscal 2023 744
Fiscal 2024 501
Fiscal 2025 142
Fiscal 2026 24
Fiscal 2027 6
Thereafter 4
Total intangible assets, net $ 1,688 (3) For all periods presented, acquisition related and other expenses consisted
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. For
the nine months ended
expenses also included certain litigation related charges as further
described in Note 11 of Notes to Condensed Consolidated Financial Statements
included elsewhere in this Quarterly Report. We consider the litigation
related charges that are included in this line item to be outside our
ordinary course of business based on the following considerations: (i) the
unprecedented nature of the litigation related charges including the nature
and size of the damages awarded; (ii) the dissimilarity of this litigation
and related charges to recurring litigation of which we are a party in our
normal business course for which any and all such charges are included in our
GAAP operating results and are not separately quantified and disclosed within
this line item or any other line in the table presented above; (iii) the
complexity of the case; (iv) the counterparty involved; and (v) our
expectation that litigation related charges of this nature will not recur in
future periods; amongst other factors.
(4) Restructuring expenses during the fiscal 2022 periods presented primarily
related to employee severance in connection with our Fiscal 2022 Oracle
Restructuring Plan (2022 Restructuring Plan). Restructuring expenses during
the fiscal 2021 periods presented 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, 2021 .
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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 28, February 28,
2022 2021 2022 2021
Cloud services and license support $ 55 $ 33$ 145 $ 99 Hardware 4 2 11 8 Services 17 15 49 41 Sales and marketing 113 82 328 233 Stock-based compensation, operating segments 189 132 533 381 Research and development 421
307 1,188 897
General and administrative 64 40 179 117
Total stock-based compensation $ 674 $
479
(6) For the third quarter and first nine months of fiscal 2022 the applicable
jurisdictional tax rates applied to our income before 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 acquisition related and other items, and after excluding the net
deferred tax effects associated with a previously recorded income tax benefit
that resulted from a partial realignment of our legal entity structure,
resulted in effective tax rates of 19.0% and 18.8%, respectively, instead of
18.4% and 12.3%, respectively, which represented our effective tax rates as
derived per our condensed consolidated statements of operations. For the
third quarter and first nine months of fiscal 2021, the applicable
jurisdictional tax rates applied to our income before 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 after excluding a
billion net tax benefit arising from the increase of a deferred tax asset
associated with a partial realignment of our legal entity structure and any
related deferred tax expense resulted in effective tax rates of 16.7% and
18.1%, respectively, instead of (53.3%) and (9.8%), respectively, which
represented our effective tax rates as derived per our condensed consolidated
statements of operations.
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
applications and infrastructure 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,
deploy, 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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Three Months Ended February 28, Nine Months Ended February 28,
Percent Change Percent Change
(Dollars in millions) 2022 Actual Constant 2021 2022 Actual Constant 2021(1)
Cloud and License Revenues:
Americas $ 5,082 8% 8% $ 4,698 $ 14,657 8% 8% $ 13,513
EMEA 2,507 1% 7% 2,482 7,263 2% 3% 7,144
Asia Pacific 1,337 -1% 5% 1,349 3,981 2% 4% 3,910
Total revenues 8,926 5% 7% 8,529 25,901 5% 6% 24,567
Expenses:
Cloud services and license
support(2) 1,231 22% 24% 1,011 3,568 20% 20% 2,977
Sales and marketing(2) 1,760 4% 6% 1,694 5,083 3% 3% 4,947
Total expenses(2) 2,991 11% 13% 2,705 8,651 9% 10% 7,924
Total Margin $ 5,935 2% 5% $ 5,824 $ 17,250 4% 4% $ 16,643
Total Margin % 66% 68% 67% 68%
% Revenues by Geography:
Americas 57% 55% 57% 55%
EMEA 28% 29% 28% 29%
Asia Pacific 15% 16% 15% 16%
Revenues by Offerings:
Cloud services and license
support(1) $ 7,637 5% 8% $ 7,253 $ 22,562 6% 6% $ 21,313
Cloud license and on-premise
license 1,289 1% 4% 1,276 3,339 3% 4% 3,254
Total revenues(1) $ 8,926 5% 7% $ 8,529 $ 25,901 5% 6% $ 24,567
Cloud Services and License
Support Revenues by
Ecosystem:
Applications cloud services
and license support $ 3,187 8% 10% $ 2,952 $ 9,377 8% 8% $ 8,670
Infrastructure cloud
services and license support 4,450 3% 7% 4,301 13,185 4% 5% 12,643
Total cloud services and
license support revenues $ 7,637 5% 8% $ 7,253 $ 22,562 6% 6% $ 21,313 (1) Revenues presented for the fiscal 2021 periods presented included 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
rules that were applicable to acquisitions closed prior to fiscal 2022. Such
revenue adjustments were included in our operating segment results for the
fiscal 2021 periods presented 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 foreign currency rate fluctuations, our cloud and license business' total revenues increased in the fiscal 2022 periods presented, relative to the corresponding prior year periods, due to growth in our cloud services and license support revenues and growth in our cloud license and on-premise license revenues as customers purchased our applications and infrastructure technologies via cloud and license deployment models and renewed their related cloud contracts and license support contracts to continue to gain access to the latest versions of our technologies and to receive support for which we delivered such cloud and support services during the periods presented. In constant currency, theAmericas region contributed 63% and 74%, respectively, the EMEA region contributed 27% and 15%, respectively, and theAsia Pacific region contributed 10% and 11%, respectively, to the revenues growth for this business during the third quarter and the first nine months of fiscal 2022, respectively. In constant currency, our total cloud and license business' expenses increased in the fiscal 2022 periods presented, relative to the corresponding prior year periods, due to higher cloud services and license support expenses which were primarily attributable to higher employee related expenses due to higher headcount and higher technology infrastructure expenses to support the increase in our cloud and license business' revenues; and higher sales and marketing expenses, due to higher employee related expenses from higher headcount and higher marketing expenses. During the first nine months of fiscal 2022, we allocated a portion of the gains from the fiscal 2022 35
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operating asset sales as described above as benefits to our cloud and license
business' expenses. Our cloud services and license support expenses have grown
in recent periods and we expect this growth will continue to accelerate during
fiscal 2022 as we increase our existing data center capacity and establish data
centers in new geographic locations in order to meet current and expected
customer demand.
Excluding the effects of currency rate fluctuations, our cloud and license
business' total margin increased during the fiscal 2022 periods presented,
relative to the corresponding prior year periods, due to the increases in total
revenues for this business. In constant currency, total margin as a percentage
of revenues for this segment decreased slightly during the fiscal 2022 periods
presented, relative to the corresponding prior year periods, due to expenses
growth.
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 that 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 and related
expenses and the impact of periodic changes in inventory valuation, including
the impact of inventory determined to be excess and obsolete; the cost of
materials used to repair customer products; the cost of labor and infrastructure
to provide support services; and sales and marketing expenses, which are largely
personnel related and include variable compensation earned by our sales force
for the sales of our hardware offerings.
Three Months Ended February 28 ,
Nine Months Ended
Percent Change Percent Change
(Dollars in millions) 2022 Actual Constant 2021 2022 Actual Constant 2021
Hardware Revenues:
Americas $ 392 -1% 0% $ 395 $ 1,132 -7% -8% $ 1,223
EMEA 248 -3% 5% 256 708 -1% 2% 717
Asia Pacific 158 -7% -3% 169 488 -9% -8% 538
Total revenues 798 -3% 1% 820 2,328 -6% -5% 2,478
Expenses:
Hardware products and support(1) 237 6% 11% 223 696 0% 1% 698
Sales and marketing(1) 88 -8% -5% 95 265 -8% -7% 287
Total expenses(1) 325 2% 7% 318 961 -2% -1% 985
Total Margin $ 473 -6% -3% $ 502 $ 1,367 -8% -7% $ 1,493
Total Margin % 59% 61% 59% 60%
% Revenues by Geography:
Americas 49% 48% 49% 49%
EMEA 31% 31% 30% 29%
Asia Pacific 20% 21% 21% 22%
(1) Excludes stock-based compensation and certain expense 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 Segment Results and Other Financial Information"
above.
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Fiscal Third Quarter 2022 Compared to Fiscal Third Quarter 2021: Our constant currency hardware revenues increased in the third quarter of fiscal 2022, in comparison to the prior year period, primarily due to growth in our Oracle Exadata and certain other strategic hardware offerings, and were partially offset by revenue declines for certain of our nonstrategic hardware offerings. For additional information about certain of our nonstrategic hardware revenue declines, refer to the year to date discussion below. Our hardware business' revenues were adversely impacted during the fiscal 2022 and fiscal 2021 periods presented due to the impacts of the COVID-19 pandemic, including global supply chain shortages for technology components that resulted in certain manufacturing delays. Any such prospective impacts are unknown. During the third quarter of fiscal 2022, the constant currency revenues growth in the EMEA region was partially offset by a constant currency revenue decline in theAsia Pacific region. Excluding the effects of currency rate fluctuations, total hardware expenses increased in the third quarter of fiscal 2022 primarily due to higher hardware product expenses driven by higher hardware product revenues, partially offset by lower employee related expenses due to lower headcount. In constant currency, our hardware business' total margin and total margin as a percentage of revenues decreased during the third quarter of fiscal 2022 due to higher total expenses for this business. First Nine Months Fiscal 2022 Compared to First Nine Months Fiscal 2021: Our constant currency hardware revenues decreased in the first nine months of fiscal 2022, relative to the corresponding prior year period, primarily due to our continued emphasis on the marketing and sale of our cloud-based infrastructure technologies and strategic hardware offerings and the de-emphasis of our sales and marketing efforts for certain of our nonstrategic hardware products, 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 fiscal 2022 and fiscal 2021 periods due to similar reasons as those noted in the quarter to date discussion above. During the first nine months of fiscal 2022, our constant currency hardware revenues declined in theAmericas and theAsia Pacific regions, and was partially offset by hardware revenues growth in the EMEA region. Excluding the effects of currency rate fluctuations, total hardware expenses decreased in the first nine months of fiscal 2022, relative to the corresponding prior year period, primarily due to lower employee related expenses due to lower headcount, partially offset by an increase in hardware products costs. In constant currency, our hardware business' total margin and total margin as a percentage of revenues decreased during the first nine months of fiscal 2022, relative to the corresponding prior year period, due to lower total revenues for this business. Services Business Our services offerings are designed to help maximize the performance of customer investments in Oracle applications and infrastructure technologies and substantially include our consulting services and advanced customer services offerings. 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. 37
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Three Months Ended February 28, Nine Months Ended February 28,
Percent Change Percent Change
(Dollars in millions) 2022 Actual Constant 2021 2022 Actual Constant 2021
Services Revenues:
Americas $ 375 13% 14% $ 332 $ 1,116 10% 9% $ 1,018
EMEA 259 6% 13% 243 780 10% 11% 709
Asia Pacific 155 -4% 1% 162 475 -1% 1% 482
Total revenues 789 7% 11% 737 2,371 7% 8% 2,209
Total Expenses(1) 633 8% 11% 587 1,873 6% 7% 1,767
Total Margin $ 156 3% 8% $ 150 $ 498 13% 15% $ 442
Total Margin % 20% 20% 21% 20%
% Revenues by Geography:
Americas 47% 45% 47% 46%
EMEA 33% 33% 33% 32%
Asia Pacific 20% 22% 20% 22%
(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 Segment Results and Other
Financial Information" above.
Excluding the effects of currency rate fluctuations, our total services revenues increased in the fiscal 2022 periods presented, relative to the corresponding prior year periods, due to revenue increases in each of our primary services offerings. In constant currency, theAmericas region contributed 58% and 52%, respectively, the EMEA region contributed 40% and 45%, respectively, and theAsia Pacific region contributed 2% and 3%, respectively, to the revenues growth for this business during the third quarter and the first nine months of fiscal 2022, respectively, in each case relative to the corresponding prior year period. In constant currency, total services expenses increased during the fiscal 2022 periods presented, relative to the corresponding prior year periods, primarily due to higher employee related expenses due to higher headcount and higher external contractor expenses. In constant currency, our services business' total margin increased during the fiscal 2022 periods presented due to higher total revenues for this business. In constant currency, our total margin as a percentage of revenues was flat during the third quarter of fiscal 2022 and increased during the first nine months of fiscal 2022 due to higher revenues, in each case relative to the corresponding prior year period. 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 EndedFebruary 28 ,
Nine Months Ended
Percent Change Percent Change
(Dollars in millions) 2022 Actual Constant 2021 2022 Actual Constant 2021
Research and development(1) $ 1,395 6% 7% $ 1,314 $ 4,066 4% 4% $ 3,915
Stock-based compensation 421 37% 37% 307 1,188 33% 33% 897
Total expenses $ 1,816 12% 13% $ 1,621 $ 5,254 9% 9% $ 4,812
% of Total Revenues 17% 16% 17% 17%
(1) Excluding stock-based compensation
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On a constant currency basis, total research and development expenses increased during the fiscal 2022 periods presented, relative to the corresponding prior year periods, primarily due to higher employee related expenses due to increased headcount and higher stock-based compensation expenses. For the first nine months of fiscal 2022, these constant currency expense increases were partially offset by an allocation of gains from operating asset sales as described above.
General and Administrative Expenses: General and administrative expenses primarily consist of personnel related expenditures for IT, finance, legal and human resources support functions.
Three Months Ended February 28 ,
Nine Months Ended
Percent Change Percent Change
(Dollars in millions) 2022 Actual Constant 2021 2022 Actual Constant 2021
General and administrative(1) $ 271 -6% -5% $ 290 $ 774 -7% -7% $ 832
Stock-based compensation 64 59% 59% 40 179 52% 52% 117
Total expenses $ 335 2% 3% $ 330 $ 953 0% 0% $ 949
% of Total Revenues 3% 3% 3% 3%
(1) Excluding stock-based compensation
Excluding the effects of foreign currency rate fluctuations, total general and
administrative expenses increased during the third quarter of fiscal 2022 and
were flat during the first nine months of fiscal 2022, in each case relative to
the corresponding prior year period. Stock-based compensation expenses were
higher during the fiscal 2022 periods presented and were partially offset by
lower professional fees and legal charges in each of these periods. In addition,
an allocation of gains from operating asset sales, as described above, further
decreased general and administrative expenses during the first nine months of
fiscal 2022 relative to the corresponding prior year 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.
Three Months Ended February 28 ,
Nine Months Ended
Percent Change Percent Change
(Dollars in millions) 2022 Actual Constant 2021 2022 Actual Constant 2021
Developed technology $ 112 -30% -30% $ 161 $ 364 -24% -23% $ 477
Cloud services and license
support agreements and
related relationships 146 -11% -10% 164 455 -8% -7% 493
Other 21 -6% -6% 22 63 -6% -6% 67
Total amortization of
intangible assets $ 279 -20% -19% $ 347 $ 882 -15% -15% $ 1,037
Amortization of intangible assets decreased during the fiscal 2022 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 a smaller amount of additional amortization from
intangible assets that we acquired in connection with our recent acquisitions.
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Acquisition Related and Other Expenses: Acquisition related and other expenses
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.
Three Months Ended February 28, Nine Months Ended February 28,
Percent Change Percent Change
(Dollars in millions) 2022 Actual
Constant 2021 2022 Actual Constant 2021
Transitional and other employee related costs
162%
174%
5 117% 127% 2 8 110% 109% 3
Other, net 13 23%
29% 10 4,693 * * 100
Total acquisition related and other expenses
47% 54% $ 13 $ 4,707 * * $ 107
* Not meaningful
Fiscal Third Quarter 2022 Compared to Fiscal Third Quarter 2021: In constant
currency, acquisition related and other expenses increased during the third
quarter of fiscal 2022, relative to the corresponding prior year period,
primarily due to higher other expenses, net, which primarily related to certain
facilities-related right-of-use assets and certain other assets that were
abandoned in connection with plans to improve our cost structure and operations.
First Nine Months Fiscal 2022 Compared to First Nine Months Fiscal 2021: On a
constant currency basis, acquisition related and other expenses increased during
the first nine months of fiscal 2022, relative to the corresponding prior year
period, primarily due to $4.7 billion of litigation related charges that we
generally do not expect to recur as further described in Note 11 of Notes to
Condensed Consolidated Financial Statements included elsewhere in this Quarterly
Report.
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 and/or other strategic initiatives. Restructuring
expenses consist of employee severance costs and other contract termination
costs to improve our cost structure prospectively. 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, 2021 .
Three Months Ended February 28,
Nine Months Ended
Percent Change Percent Change
(Dollars in millions) 2022 Actual Constant 2021 2022 Actual Constant 2021
Restructuring expenses $ 19 -71% -70% $ 66 $ 89 -74% -73% $ 337
Restructuring expenses in the fiscal 2022 periods presented primarily related to
our 2022 Restructuring Plan. Restructuring expenses in the fiscal 2021 periods
presented primarily related to our 2019 Restructuring Plan, which is
substantially complete. Our management approved, committed to and initiated the
2022 Restructuring Plan and 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 2022 Restructuring Plan were
effected to implement our continued emphasis in developing, marketing, selling
and delivering our cloud-based offerings. Certain of the cost savings realized
pursuant to our 2022 Restructuring Plan initiatives were offset by investments
in resources and geographies that better address the development, marketing,
sale and delivery of our cloudbased offerings including investments in the
development and delivery of our secondgeneration cloud infrastructure.
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Interest Expense:
Three Months Ended February 28 ,
Nine Months Ended
Percent Change Percent Change
(Dollars in millions) 2022 Actual Constant 2021 2022 Actual Constant 2021
Interest expense $ 667 14% 14% $ 585 $ 2,051 14% 14% $ 1,799
Interest expense increased during the fiscal 2022 periods presented, relative to
the corresponding prior year periods, primarily due to higher average borrowings
resulting from our issuance of $15.0 billion of senior notes in March 2021 ,
partially offset by lower interest expense that resulted from $5.8 billion of
scheduled repayments made during the first nine months of fiscal 2022.
Non-Operating Expenses, net: Non-operating expenses, net consists primarily of
interest income, net foreign currency exchange losses, the noncontrolling
interests in the net profits of our majority-owned subsidiaries (primarily
Oracle Financial Services Software Limited and Oracle Corporation Japan ) and net
other income and expenses, 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 equity securities, losses
attributable to equity method investments, and non-service net periodic pension
income and losses.
Three Months Ended February 28,
Nine Months Ended
Percent Change Percent Change
(Dollars in millions) 2022 Actual Constant 2021 2022 Actual Constant 2021
Interest income $ 16 -28% -25% $ 23 $ 56 -30% -29% $ 80
Foreign currency losses, net (29 ) 60% 69% (18 ) (109 ) 29% 28% (84 )
Noncontrolling interests in
income (42 ) -10% -10% (46 ) (131 ) 3% 3% (127 )
Other, net (260 ) * * 24 (164 ) * * 101
Total non-operating
expenses, net $ (315 ) * * $ (17 ) $ (348 ) * * $ (30 )
* Not meaningful
On a constant currency basis, our non-operating expenses, net increased during
the fiscal 2022 periods presented, relative to the corresponding prior year
periods, primarily due to lower other income, net, which was primarily
attributable to $147 million and $30 million , respectively, of unrealized losses
incurred on certain marketable equity securities that we held during the third
quarter and first nine months of fiscal 2022, respectively, and due to higher
losses incurred on certain equity investments for which we follow the equity
method of accounting during both of the fiscal 2022 periods presented.
(Provision for) Benefit from 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. For the
three and nine months ended February 28, 2022 , our provision for income taxes
varied from the U.S. federal statutory income tax rate 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 (GILTI). For the three and nine months
ended February 28, 2021 , our benefit from income taxes varied from the U.S.
federal statutory income tax rate primarily due to a total net deferred tax
benefit of $2.3 billion that we recognized during the fiscal 2021 periods
presented as a result of a partial realignment of our legal entity structure
that resulted in the intra-group transfer of certain intellectual property
rights, 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 GILTI. 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.
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Three Months Ended February 28, Nine Months Ended February 28,
Percent Change Percent Change
(Dollars in millions) 2022 Actual Constant 2021 2022 Actual Constant 2021
(Provision for) benefit from
income taxes $ (521 ) * * $ 1,745 $ (497 ) * * $ 871
Effective tax expense
(benefit) rate 18.4% (53.3%) 12.3% (9.8%)
* Not meaningful
Fiscal Third Quarter 2022 Compared to Fiscal Third Quarter 2021: Provision for
income taxes increased during the third quarter of fiscal 2022, relative to the
corresponding prior year period, primarily due to the absence of a favorable
impact of a $2.3 billion net tax benefit arising from an increase in a net
deferred tax asset associated with a partial realignment of our legal entity
structure in the third quarter of fiscal 2021. To a much lesser extent,
provision for income taxes also increased during the third quarter of fiscal
2022 due to an unfavorable jurisdictional mix of earnings, partially offset by
the favorable impact associated with lower pre-tax income during the third
quarter of fiscal 2022.
First Nine Months Fiscal 2022 Compared to First Nine Months Fiscal 2021:
Provision for income taxes increased during the first nine months of fiscal
2022, relative to the corresponding prior year period, primarily due to the
absence of a favorable impact of a $2.3 billion net tax benefit as described
above, which reduced income taxes during the corresponding prior year period.
This unfavorable variance was partially offset by lower income taxes associated
with lower pre-tax income during the first nine months of fiscal 2022 that was
primarily attributable to certain litigation related charges as further
described in Note 11 of Notes to Condensed Consolidated Financial Statements
included elsewhere in this Quarterly Report.
Liquidity and Capital Resources
February 28, May 31,
(Dollars in millions) 2022 Change 2021
Working capital $ 10,842 -65%
Working capital: The decrease in working capital as ofFebruary 28, 2022 in comparison toMay 31, 2021 was primarily due to$15.7 billion of cash used for repurchases of our common stock,$4.7 billion of cash paid for certain litigation related items that we generally do not expect to recur,$3.7 billion of long-term senior notes that were reclassified to current liabilities, cash used to pay dividends to our stockholders and cash used for capital expenditures during the first nine months of fiscal 2022. These unfavorable impacts were partially offset by the favorable impacts to our net current assets resulting from our net income, net cash proceeds of$318 million associated with the sales of certain operating assets, and cash proceeds from stock option exercises, all of which occurred during the first nine months of fiscal 2022. Our working capital may be impacted by some 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, money market funds, 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 atFebruary 28, 2022 in comparison toMay 31, 2021 was primarily due to$15.7 billion of settled repurchases of our common stock,$5.8 billion of debt repayments,$4.7 billion of cash paid for certain litigation related items that we generally do not expect to recur, payments of cash dividends to our stockholders and cash used for capital expenditures. These cash outflows during the first nine months of fiscal 2022 were partially offset by certain cash inflows generated by our normal business operations, by the sales of certain operating assets, and by stock option exercises during the first nine months of fiscal 2022. 42
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Nine Months Ended February 28,
(Dollars in millions) 2022 Change 2021
Net cash provided by operating activities $ 5,554 -50% $ 11,045
Net cash provided by (used for) investing activities $ 12,381 * $ (9,187 )
Net cash used for financing activities $ (25,100 ) 46% $ (17,176 )
* Not meaningful
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 license
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 typically 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 the first nine months
of fiscal 2022, relative to the corresponding prior year period, primarily due
to lower net income that was primarily the result of cash payments made in
connection with certain litigation related charges that we generally do not
expect to recur and certain other cash unfavorable working capital changes, net,
in each case during the first nine months of fiscal 2022 relative to the first
nine months of fiscal 2021.
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 was $12.4 billion during the first
nine months of fiscal 2022 compared to $9.2 billion of net cash used for
investing activities during the first nine months of fiscal 2021. The increase
in net cash provided by investing activities was primarily due to a decrease in
the cash used for the purchases of marketable securities and other investments
and an increase in cash proceeds from sales and maturities of marketable
securities and other investments. These favorable cash variances were partially
offset by an increase in net cash used for capital expenditures and
acquisitions, in each case during the first nine months of fiscal 2022 relative
to the first nine months of fiscal 2021.
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 increased during the first nine months of
fiscal 2022 compared to the first nine months of fiscal 2021 primarily due to
higher debt repayments, higher stock repurchases, higher payments of dividends
and higher net cash used for our employee stock program, in each case during the
first nine months of fiscal 2022 in comparison to the first nine months of
fiscal 2021.
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 28,
(Dollars in millions) 2022 Change 2021
Net cash provided by operating activities $ 10,396 -29% $ 14,659
Capital expenditures (3,805 ) 106% (1,851 )
Free cash flow $ 6,591 -49% $ 12,808
Net income $ 7,560 $ 12,830
Free cash flow as percent of net income 87% 100%
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Table of Contents Recent Financing Activities: Credit Agreements: InMarch 2022 , we entered into a$6.0 billion , five-year revolving credit agreement and a$15.7 billion , 364-day delayed draw term loan credit agreement. Additional information is included in Note 12 of Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report. No amounts have been drawn pursuant to either of these agreements as of the date of this Quarterly Report. Common Stock Repurchase Program: Our Board of Directors has approved a program for us to repurchase shares of our common stock. OnDecember 9, 2021 , we announced that our Board of Directors approved an expansion of our stock repurchase program by an additional$10.0 billion . As ofFebruary 28, 2022 , approximately$10.0 billion remained available for stock repurchases pursuant to our stock repurchase program. 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: During the first nine months of fiscal 2022, 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 endedMay 31, 2021 other than our proposed acquisition of Cerner, for which additional details are included in Note 2 of Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report. We believe that our current cash, cash equivalents and marketable securities balances, cash generated from operations, and theMarch 2022 credit agreements will be sufficient to meet our working capital, capital expenditures and contractual obligations requirements, including our proposed acquisition of Cerner. 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.
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, 2018 has been a weighted-average annualized rate of 0.9% 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 atFebruary 28, 2022 , which generally have a ten-year exercise period, 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. AtFebruary 28, 2022 , 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 8.4%.
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.
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