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 10 of Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report provide additional information related to our businesses and operating segments and align to how our chief operating decision makers (CODMs), which include our Chief Executive Officer and Chief Technology Officer, view our operating results and allocate resources.
Cloud and License Business
Our cloud and license business, which represented 83% 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 order tocontinue to
benefit from technical support services and the periodic issuance of
unspecified updates and enhancements, which current license support
customers are entitled to receive. License support contracts are
generally priced as a percentage of the net fees paid by the customer
to purchase a cloud license and/or on-premise license; are generally
billed in advance of the support services being performed; are
generally renewed at the customer's option; and are generally
recognized as revenues ratably over the contractual period that the
support services are provided, which is generally one year; and
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,
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which our customers deploy within cloud-based, on-premise and other IT
environments. Our cloud license and on-premise license transactions aregenerally 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 arerecognized 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 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 revenues relative to our total revenues has increased and we expect this trend to continue. Cloud services revenues represented 31% of our total revenues for each of the three and six months endedNovember 30, 2022 , respectively, and 26% of our total revenues for each of the three and six months endedNovember 30, 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.
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 7% 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
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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 10% of our total revenues on a trailing
4-quarter basis, helps customers and partners maximize the performance of their
investments in Oracle applications and infrastructure technologies. We believe
that our services are differentiated based on our focus on Oracle technologies,
extensive experience, broad sets of intellectual property and best practices.
Our services offerings include consulting services 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.
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Table of Contents 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. We have acquired certain companies and technologies during the first half of fiscal 2023 and full year fiscal 2022, including Cerner. Refer to Note 2 of Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report for additional information related to our acquisition of Cerner and our other recent acquisitions. We believe that we can fund our future acquisitions with our internally available cash, cash equivalents and marketable securities balances, 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, 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 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. During the first quarter of fiscal 2023, we completed an assessment of the useful lives of our servers and increased the estimated useful lives from four years to five years, effective at the beginning of fiscal 2023. Refer to Note 1 of Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report for more information. There were no other 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, 2022 provides a more complete discussion of our critical accounting policies and estimates. 30
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Table of Contents Results of Operations Impact of Acquisitions The comparability of our operating results in the second quarter and first half of fiscal 2023 compared to the same periods of fiscal 2022 was impacted by our recent acquisitions, including Cerner. In our discussion of changes in our results of operations from the second quarter and first half of fiscal 2023 compared to the same periods of fiscal 2022, we may qualitatively disclose the impact of our acquired products and services for the one-year period subsequent to the acquisition date to the growth in certain of our operating segments' revenues where such qualitative discussions would be meaningful for an understanding of the factors that influenced the changes in our results of operations. When material, we may also provide quantitative disclosures related to such acquired products and services. Expense contributions from our recent acquisitions for each of the respective period comparisons generally were not separately identifiable due to the integration of these businesses and operating segments into our existing operations, and/or were insignificant to our results of operations during the periods presented.
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, 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 or 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 impracticable to do so. Refer to "Supplemental Disclosure Related to Certain Charges" below for additional discussion of certain of these items and Note 10 of Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report for a reconciliation of the summations of total segment margin as presented in the discussion below to total income (loss) 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 2023 and 2022 periods presented. Certain of these historical impacts to our operating results are further discussed below. Any future impacts are currently unknown.
Separately, as described in Note 16 of Notes to Consolidated Financial
Statements included in our Annual Report on Form 10-K for the fiscal year ended
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 31
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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, 2022 , 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 onNovember 30, 2022 and 2021, our financial statements would reflect reported revenues of$1.04 million in the first half of fiscal 2023 (using 1.04 as the month-end average exchange rate for the period) and$1.12 million in the first half of fiscal 2022 (using 1.12 as the month-end average exchange rate for the period). The constant currency presentation, however, would translate the results for each of the first half of fiscal 2023 and 2022 using theMay 31, 2022 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 November 30 ,
Six Months Ended
Percent Change Percent Change
(Dollars in millions) 2022 Actual Constant 2021 2022 Actual Constant 2021
Total Revenues by Geography:
Americas $ 7,786 36% 36% $ 5,736 $ 14,978 35% 36% $ 11,056
EMEA(1) 2,895 -2% 9% 2,953 5,586 -3% 9% 5,737
Asia Pacific 1,594 -5% 10% 1,671 3,156 -4% 8% 3,294
Total revenues 12,275 18% 25% 10,360 23,720 18% 24% 20,087
Total Operating Expenses 9,204 -18% -15% 11,184 18,026 3% 6% 17,485
Total Operating Margin (Loss) $ 3,071 * * $ (824 ) $ 5,694 119% 159% $ 2,602
Total Operating Margin % 25% -8% 24% 13%
% Revenues by Geography:
Americas 63% 55% 63% 55%
EMEA 24% 29% 24% 29%
Asia Pacific 13% 16% 13% 16%
Total Revenues by Business:
Cloud and license $ 10,033 14% 20% $ 8,791 $ 19,354 14% 20% $ 16,974
Hardware 850 11% 16% 767 1,613 5% 11% 1,530
Services 1,392 74% 83% 802 2,753 74% 83% 1,583
Total revenues $ 12,275 18% 25% $ 10,360 $ 23,720 18% 24% $ 20,087
% Revenues by Business:
Cloud and license 82% 85% 82% 84%
Hardware 7% 7% 7% 8%
Services 11% 8% 11% 8%
(1) Comprised of
* Not meaningful Excluding the effects of foreign currency rate fluctuations, our total revenues increased across all of our three businesses during the fiscal 2023 periods presented, relative to the corresponding prior year periods, primarily due to revenue contributions from our acquisition of Cerner. Excluding the impact of our acquisition of Cerner, the constant currency revenues increase during the fiscal 2023 periods presented relative to the corresponding prior year periods in our cloud and license business was attributable 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 also 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. In our hardware business, the increase was primarily due to growth in our Oracle Exadata and certain other strategic hardware offerings and growth in certain of our nonstrategic hardware offerings. In our services business, the increase was attributable to an increase in revenues for each of our primary services offerings. In reported currency, Cerner contributed$1.5 billion and$3.0 billion to our total revenues during the second quarter and first half of fiscal 2023, respectively. In constant currency, theAmericas region contributed 84% and 85%, and theAsia Pacific region contributed 6% and 5% of the constant currency total 32
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revenue growth during the second quarter and first half of fiscal 2023, respectively, and the EMEA region contributed 10% of the constant currency total revenue growth during each of the fiscal 2023 periods presented.
Excluding the effects of foreign currency rate fluctuations, our total operating expenses decreased during the second quarter of fiscal 2023, relative to the corresponding prior year period, primarily due to the absence of the unfavorable impact of certain litigation related charges recorded to acquisition related and other expenses during the second quarter of fiscal 2022. These constant currency expense decreases were partially offset by additional operating expenses as a result of our acquisition of Cerner, including higher intangible assets amortization; higher cloud services and license support expenses, which were primarily due to higher employee related expenses due to higher headcount and infrastructure investments that were made to support the increase in our cloud and license business' revenues; higher hardware expenses, which were primarily due to higher hardware product cost; higher restructuring expenses; and higher expenses across other operating expense categories primarily due to higher employee related expenses. In addition, during the second quarter of fiscal 2022, we recorded a$125 million gain from an operating asset sale, which was allocated as a benefit to most of our operating expense lines as presented per our condensed consolidated statement of operations which reduced our total operating expenses during the same period. Excluding the effects of foreign currency rate fluctuations, our total operating expenses increased during the first half of fiscal 2023, relative to the corresponding prior year period, due to similar reasons as noted above for the fiscal 2023 quarterly increases. These constant currency expense increases were partially offset by certain litigation related charges as described above. Furthermore, during the first half of fiscal 2022, we recorded$250 million gains on operating asset sales, which was allocated as a benefit to most of our operating expense lines as presented per our condensed consolidated statement of operations which reduced our total operating expenses during the same period.
During each of the fiscal 2023 and 2022 periods presented, 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 and total operating margin as a percentage of revenues increased during the fiscal 2023 periods presented, relative to the corresponding prior year periods, primarily due to certain litigation related charges which increased our constant currency operating expenses during the fiscal 2022 periods presented.
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
(loss):
Three Months Ended Six Months Ended
November 30, November 30,
(in millions) 2022 2021 2022 2021
Amortization of intangible assets(1) $ 907 $ 299 $ 1,826 $ 603
Acquisition related and other(2) 62 4,667 103 4,687
Restructuring(3) 137 32 281 70
Stock-based compensation, operating segments(4) 304 192 548 344
Stock-based compensation, R&D and G&A(4) 605 489 1,111 882
Income tax effects(5) (444 ) (1,052 ) (1,018 ) (1,473 )
$ 1,571 $ 4,627 $ 2,851 $ 5,113 (1) 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):
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Table of Contents Remainder of fiscal 2023$ 1,755 Fiscal 2024 2,995 Fiscal 2025 2,283 Fiscal 2026 1,620 Fiscal 2027 664 Fiscal 2028 635 Thereafter 1,641 Total intangible assets, net$ 11,593
(2) For all periods presented, 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. During the fiscal 2022 periods presented, acquisition
related and other expenses also included certain litigation related charges.
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.
(3) Restructuring expenses during each of the fiscal 2023 and 2022 periods
presented primarily related to employee severance in connection with our
Fiscal 2022 Oracle Restructuring Plan (2022 Restructuring Plan). Additional
information regarding certain of our restructuring plans is provided in
management's discussion below under "Restructuring Expenses," in Note 6 of
Notes to Condensed Consolidated Financial Statements included elsewhere in
this Quarterly Report and in Note 8 of Notes to Consolidated FinancialStatements included in our Annual Report on Form 10-K for the fiscal year
ended
(4) Stock-based compensation was included in the following operating expense line
items of our condensed consolidated statements of operations (in millions):
Three Months Ended Six Months Ended
November 30, November 30,
2022 2021 2022 2021
Cloud services and license support $ 113 $ 50 $ 204 $ 90
Hardware 5 4 9 7
Services 35 18 60 32
Sales and marketing 151 120 275 215
Stock-based compensation, operating segments 304 192 548 344
Research and development 510 423 932 767
General and administrative 95 66 179 115
Total stock-based compensation $ 909 $ 681 $ 1,659 $ 1,226 (5) For the second quarter and first half of fiscal 2023, 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 20.4% and 19.9%, respectively, instead of
18.8% and 13.4%, respectively, which represented our effective tax rates as
derived per our condensed consolidated statements of operations. For the
second quarter and first half of fiscal 2022, the applicable jurisdictional
tax rates applied to our (loss) income before benefit from (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 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 19.2% and 18.6%,
respectively, instead of (16.6%) and (2.1%), respectively, which represented
our effective tax benefit 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
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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.
Three Months Ended November 30 ,
Six Months Ended
Percent Change Percent Change
(Dollars in millions) 2022 Actual Constant 2021 2022 Actual Constant 2021
Cloud and License Revenues:
Americas $ 6,407 28% 29% $ 4,994 $ 12,294 28% 29% $ 9,575
EMEA 2,350 -4% 7% 2,458 4,534 -5% 7% 4,755
Asia Pacific 1,276 -5% 10% 1,339 2,526 -4% 8% 2,644
Total revenues 10,033 14% 20% 8,791 19,354 14% 20% 16,974
Expenses:
Cloud services and license
support(1) 1,747 47% 53% 1,184 3,367 44% 49% 2,337
Sales and marketing(1) 1,934 14% 19% 1,696 3,864 16% 22% 3,322
Total expenses(1) 3,681 28% 33% 2,880 7,231 28% 33% 5,659
Total Margin $ 6,352 8% 14% $ 5,911 $ 12,123 7% 13% $ 11,315
Total Margin % 63% 67% 63% 67%
% Revenues by Geography:
Americas 64% 57% 64% 56%
EMEA 23% 28% 23% 28%
Asia Pacific 13% 15% 13% 16%
Revenues by Offerings:
Cloud services $ 3,813 43% 48% $ 2,667 $ 7,392 44% 49% $ 5,128
License support 4,785 -2% 4% 4,887 9,623 -2% 4% 9,797
Cloud license and on-premise
license 1,435 16% 23% 1,237 2,339 14% 21% 2,049
Total revenues $ 10,033 14% 20% $ 8,791 $ 19,354 14% 20% $ 16,974
Cloud Services and License
Support Revenues by
Ecosystem:
Applications cloud services
and license support $ 4,080 30% 35% $ 3,149 $ 8,096 31% 36% $ 6,190
Infrastructure cloud
services and license support 4,518 3% 9% 4,405 8,919 2% 8% 8,735
Total cloud services and
license support revenues $ 8,598 14% 20% $ 7,554 $ 17,015 14% 20% $ 14,925 (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 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 2023 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; and revenue contributions from our Cerner acquisition. In reported currency, Cerner contributed$942 million and$1.8 billion to our cloud and license business' revenues during the second quarter and first half of fiscal 2023, respectively. In constant currency, theAmericas region contributed 84% and 85%, and theAsia Pacific region contributed 7% and 6% of the constant currency revenue growth for this business during the 35
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second quarter and first half of fiscal 2023, respectively, and the EMEA region contributed 9% of the constant currency revenue growth for this business during each of the fiscal 2023 periods presented. In constant currency, our total cloud and license business' expenses increased in the fiscal 2023 periods presented, relative to the corresponding prior year periods, primarily due to higher employee related expenses due to higher headcount; higher technology infrastructure expenses to support the increase in our cloud and license business' revenues; additional operating expenses due to our Cerner acquisition; and an allocation of gains in the fiscal 2022 periods presented from fiscal 2022 operating asset sales as described above. Our cloud services and license support expenses have grown in recent periods, and we expect this growth to continue during fiscal 2023 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 2023 periods presented, relative to the corresponding prior year periods, due to increases in total revenues for this business. Total margin as a percentage of revenues for this business decreased during the fiscal 2023 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 with eligible support contracts; 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.
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Three Months Ended November 30 , Six Months Ended November 30 ,
Percent Change Percent Change(Dollars in millions) 2022 Actual Constant 2021 2022 Actual Constant 2021 Hardware Revenues: Americas$ 447 21% 22%$ 368 $ 854 15% 16%$ 740 EMEA 243 7% 15% 228 453 -2% 7% 460 Asia Pacific 160 -6% 6% 171 306 -7% 4% 330 Total revenues 850 11% 16% 767 1,613 5% 11% 1,530 Expenses: Hardware products and support(1) 279 26% 32% 221 522 14% 19% 459 Sales and marketing(1) 83 -5% 0% 88 162 -8% -3% 177 Total expenses(1) 362 17% 23% 309 684 7% 13% 636 Total Margin$ 488 7% 12%$ 458 $ 929 4% 10%$ 894 Total Margin % 57% 60% 58% 58% % Revenues by Geography: Americas 53% 48% 53% 48% EMEA 28% 30% 28% 30% Asia Pacific 19% 22% 19% 22%
(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 Segment Results and Other Financial Information"
above.
Our constant currency hardware revenues increased in the fiscal 2023 periods presented, relative to the corresponding prior year periods, primarily due to growth in our Oracle Exadata and certain other strategic hardware offerings and revenue contributions from our Cerner acquisition. In reported currency, Cerner contributed$41 million and$81 million to our hardware business' revenues during the second quarter and first half of fiscal 2023, respectively. Our hardware business' revenues were adversely impacted during each of the fiscal 2023 and 2022 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, and any such prospective impacts are unknown. In constant currency, theAmericas region contributed 65% and 73%, the EMEA region contributed 27% and 20%, and theAsia Pacific region contributed 8% and 7% to the revenue growth for this business during the second quarter and the first half of fiscal 2023, respectively. Excluding the effects of currency rate fluctuations, total hardware expenses increased in the fiscal 2023 periods presented, relative to the corresponding prior year periods, primarily due to higher hardware product cost driven by higher hardware product revenues and incremental hardware product cost from Cerner's hardware business. In constant currency, our hardware business' total margin increased in the fiscal 2023 periods presented, relative to the corresponding prior year periods, due to higher total revenues for this business. Total margin as a percentage of revenues in constant currency for this business decreased during the second quarter of fiscal 2023 due to expenses growth and remained flat during the first half of fiscal 2023, in each case relative to the corresponding prior year period.
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.
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Three Months Ended November 30, Six Months Ended November 30,
Percent Change Percent Change
(Dollars in millions) 2022 Actual Constant 2021 2022 Actual Constant 2021
Services Revenues:
Americas $ 932 149% 149% $ 374 $ 1,830 147% 147% $ 741
EMEA 302 13% 27% 267 599 15% 29% 522
Asia Pacific 158 -2% 12% 161 324 1% 14% 320
Total revenues 1,392 74% 83% 802 2,753 74% 83% 1,583
Total Expenses(1) 1,111 76% 86% 631 2,118 71% 80% 1,240
Total Margin $ 281 63% 73% $ 171 $ 635 85% 95% $ 343
Total Margin % 20% 21% 23% 22%
% Revenues by Geography:
Americas 67% 47% 66% 47%
EMEA 22% 33% 22% 33%
Asia Pacific 11% 20% 12% 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 Segment Results and Other
Financial Information" above.
Excluding the effects of currency rate fluctuations, our total services revenues increased in the fiscal 2023 periods presented, relative to the corresponding prior year periods, due to revenue contributions from our Cerner acquisition, and revenue increases in each of our primary services offerings. In reported currency, Cerner contributed$550 million and$1.1 billion , respectively, to our services business' revenues during the second quarter and first half of fiscal 2023, respectively. In constant currency, theAmericas region contributed 87% and 86%, and the EMEA region contributed 10% and 11% to the revenue growth for this business during the second quarter and the first half of fiscal 2023, respectively, and theAsia Pacific region contributed 3% to the revenue growth for this business during each of the fiscal 2023 periods presented. In constant currency, total services expenses increased during the fiscal 2023 periods presented, relative to the corresponding prior year periods, primarily due to additional operating expenses due to our acquisition of Cerner, and higher employee related expenses due to higher headcount. In constant currency, our services business' total margin increased during the fiscal 2023 periods presented, relative to the corresponding prior year periods, due to higher total revenues for this business during the fiscal 2023 periods presented, relative to the corresponding prior year periods. Total margin as a percentage of revenues in constant currency for this business decreased during the second quarter of fiscal 2023 due to expenses growth and increased during the first half of fiscal 2023 due to revenue growth, 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 EndedNovember 30 ,
Six Months Ended
Percent Change Percent Change
(Dollars in millions) 2022 Actual Constant 2021 2022 Actual Constant 2021
Research and development(1) $ 1,648 24% 28% $ 1,331 $ 3,319 24% 28% $ 2,671
Stock-based compensation 510 20% 20% 423 932 21% 21% 767
Total expenses $ 2,158 23% 26% $ 1,754 $ 4,251 24% 26% $ 3,438
% of Total Revenues 18% 17% 18% 17%
(1) Excluding stock-based compensation
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On a constant currency basis, total research and development expenses increased during the fiscal 2023 periods presented, relative to the corresponding prior year periods, primarily due to higher employee related expenses, including higher stock-based compensation and additional operating expenses due to our acquisition of Cerner. Furthermore, an allocation of gains from operating asset sales during the fiscal 2022 periods presented decreased our expenses during those periods, with no comparable transaction during the fiscal 2023 periods presented.
General and Administrative Expenses: General and administrative expenses primarily consist of personnel related expenditures for IT, finance, legal and human resources support functions.
Three Months Ended November 30 ,
Six Months Ended
Percent Change Percent Change
(Dollars in millions) 2022 Actual Constant 2021 2022 Actual Constant 2021
General and administrative(1) $ 271 7% 12% $ 253 $ 598 19% 24% $ 503
Stock-based compensation 95 46% 46% 66 179 56% 56% 115
Total expenses $ 366 15% 19% $ 319 $ 777 26% 30% $ 618
% 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 fiscal 2023 periods presented,
relative to the corresponding prior year periods, primarily due to additional
operating expenses due to our acquisition of Cerner and higher stock-based
compensation expenses. In addition, an allocation of gains from operating asset
sales during the fiscal 2022 periods presented decreased our expenses during
those periods, with no comparable transaction in the fiscal 2023 periods
presented.
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. Refer to Note 4 of Notes
to Condensed Consolidated Financial Statements included elsewhere in this
Quarterly Report for additional information regarding our intangible assets and
related amortization.
Three Months Ended November 30 ,
Six Months Ended
Percent Change Percent Change
(Dollars in millions) 2022 Actual Constant 2021 2022 Actual Constant 2021
Developed technology $ 215 73% 73% $ 125 $ 449 78% 78% $ 252
Cloud services and license
support agreements and
related relationships 364 138% 137% 153 749 143% 143% 308
Cloud license and on-premise
license agreements and
related relationships 117 * * 5 225 * * 10
Other 211 * * 16 403 * * 33
Total amortization of
intangible assets $ 907 203% 204% $ 299 $ 1,826 203% 204% $ 603
* Not meaningful
Amortization of intangible assets increased in the fiscal 2023 periods
presented, relative to the corresponding prior year periods, due to additional
amortization from intangible assets that we acquired in recent periods,
primarily from our acquisition of Cerner, partially offset by a reduction in
expenses associated with certain of our intangible assets that became fully
amortized.
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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 November 30, Six Months Ended November 30,
Percent Change Percent Change
(Dollars in millions) 2022 Actual
Constant 2021 2022 Actual Constant 2021
Transitional and other employee related costs
*
*
3 304% 311% 1 8 218% 223% 4
Other, net 38 -99% -99% 4,664 57 -99% -99% 4,679
Total acquisition related and other expenses
* Not meaningful On a constant currency basis, acquisition related and other expenses decreased during the fiscal 2023 periods presented, relative to the corresponding prior year periods, primarily due to the absence of unfavorable impact of certain litigation related charges recorded to acquisition related and other expenses during the fiscal 2022 periods presented that we generally do not expect to recur, partially offset by higher transitional employee related cost related to our acquisition of Cerner and certain facilities-related right-of-use assets that were abandoned in connection with plans to improve our cost structure and operations during the fiscal 2023 periods presented. 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, contract termination costs and certain other exit costs to improve our cost structure prospectively. For additional information regarding our restructuring plans, see Note 6 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 endedMay 31, 2022 . Three Months EndedNovember 30 ,
Six Months Ended
Percent Change Percent Change
(Dollars in millions) 2022 Actual Constant 2021 2022 Actual Constant 2021
Restructuring expenses $ 137 330% 376% $ 32 $ 281 301% 340% $ 70
Restructuring expenses in each of the fiscal 2023 and 2022 periods presented
primarily related to our 2022 Restructuring Plan. Our management approved,
committed to and initiated the 2022 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.
Interest Expense:
Three Months Ended November 30 ,
Six Months Ended
Percent Change Percent Change
(Dollars in millions) 2022 Actual Constant 2021 2022 Actual Constant 2021
Interest expense $ 856 26% 26% $ 679 $ 1,643 19% 19% $ 1,384
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Interest expense increased during the fiscal 2023 periods presented, relative to the corresponding prior year periods, primarily due to higher average borrowings during the first half of fiscal 2023 resulting from borrowings, net of partial repayment pursuant to a$15.7 billion delayed draw term loan credit agreement (Bridge Credit Agreement), a$5.6 billion term loan credit agreement (Term Loan Credit Agreement); the issuance of$7.0 billion senior notes inNovember 2022 ; and borrowings through commercial paper notes during the first half of fiscal 2023. The increase in interest expense was partially offset by lower interest expense that resulted from$8.3 billion and$2.5 billion of scheduled repayments made during fiscal 2022 and second quarter of fiscal 2023, respectively. Refer to Note 5 of Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report for additional information. Non-Operating (Expenses) Income, net: Non-operating (expenses) income, net consists primarily of interest income, net foreign currency exchange losses, the noncontrolling interests in the net profits of our majority-owned subsidiaries (primarilyOracle Financial Services Software Limited andOracle Corporation Japan ), net gains and losses related to equity investments including losses attributable to equity method investments and net other income and expenses, including net unrealized gains and losses from our investment portfolio related to our deferred compensation plan, and non-service net periodic pension income and losses. Three Months EndedNovember 30 ,
Six Months Ended
Percent Change Percent Change
(Dollars in millions) 2022 Actual Constant 2021 2022 Actual Constant 2021
Interest income $ 52 151% 162% $ 21 $ 90 124% 133% $ 40
Foreign currency losses, net (55 ) 18% 17% (46 ) (125 ) 55% 56% (81 )
Noncontrolling interests in
income (41 ) -4% -4% (42 ) (79 ) -12% -12% (89 )
(Losses) gains from equity
investments, net (40 ) * * 80 (126 ) * * 59
Other gains (losses), net 13 * * (6 ) (11 ) * * 37
Total non-operating
(expenses) income, net $ (71 ) * * $ 7 $ (251 ) 638% 658% $ (34 )
* Not meaningful
Fiscal Second Quarter 2023 Compared to Fiscal Second Quarter 2022: In constant
currency, we recorded non-operating expenses, net during the second quarter of
fiscal 2023 in comparison to non-operating income, net during the second quarter
of fiscal 2022. Non-operating expenses, net during the second quarter of fiscal
2023, in comparison to the second quarter of fiscal 2022, was primarily due to
higher foreign currency losses and higher net losses associated with equity
investments, partially offset by higher interest income and higher other income,
net, which was primarily attributable to higher unrealized investment gains
associated with certain marketable equity securities that we held for employee
benefit plans and for which an equal and offsetting amount was recorded to our
operating expenses during the same period, each in comparison to the
corresponding prior year period.
First Half of Fiscal 2023 Compared to First Half of Fiscal 2022: Our
non-operating expenses, net increased in the first half of fiscal 2023 compared
to the first half of fiscal 2022 primarily due to higher foreign currency
losses, higher net losses associated with equity investments and higher other
expense, net, which was primarily attributable to higher unrealized investment
losses associated with certain marketable equity securities that we held for
employee benefit plans as described above. The increase in non-operating
expenses, net was partially offset by higher interest income.
(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 and losses
earned in various tax jurisdictions that apply a broad range of income tax
rates. Refer to Note 9 of Notes to Condensed Consolidated Financial Statements
included elsewhere in this Quarterly Report for a discussion regarding the
differences between the effective income tax rates as presented for the periods
below and the U.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.
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Three Months Ended November 30, Six Months Ended November 30,
Percent Change Percent Change
(Dollars in millions) 2022 Actual Constant 2021 2022 Actual Constant 2021
(Provision for) benefit from
income taxes $ (403 ) * * $ 249 $ (511 ) * * $ 25
Effective tax expense
(benefit) rate 18.8% (16.6%) 13.4% (2.1%)
* Not meaningful
Provision for income taxes increased during the fiscal 2023 periods presented,
relative to the corresponding prior year periods, primarily due to higher income
before income taxes in the fiscal 2023 periods presented resulting from the
absence of certain litigation related charges we incurred in the fiscal 2022
periods presented. The increase was partially offset by the excess of the
benefit of amortization of Cerner intangible assets over a lesser increase in
taxes attributable to the combination of reduced tax benefits related to
stock-based compensation and increased tax expense from unrecognized tax
benefits due to settlements with tax authorities and other events, in each case
during the fiscal 2023 periods presented.
Liquidity and Capital Resources
November 30, May 31,
(Dollars in millions) 2022 Change 2022
Working capital $ (9,545 ) *
* Not meaningful Working capital: The decrease in working capital as ofNovember 30, 2022 in comparison toMay 31, 2022 was primarily due to$27.8 billion net cash used for our acquisition of Cerner,$1.6 billion of repayment of senior notes assumed from our acquisition of Cerner,$3.5 billion of long-term senior notes that were reclassified to current liabilities, cash used for repurchases of our common stock, cash used to pay dividends to our stockholders and cash used for capital expenditures during the first half of fiscal 2023. These unfavorable impacts were partially offset by cash proceeds from borrowings pursuant to the Term Loan Credit Agreement and the issuance of senior notes inNovember 2022 (refer to Note 5 of Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report for additional information), the favorable impacts to our net current assets resulting from net income and cash proceeds from stock option exercises. Our working capital may be impacted by some or all of the aforementioned factors in future periods, the amounts and timing of which are variable. Cash, cash equivalents and marketable securities: Cash and cash equivalents primarily consist of deposits held at major banks, money market funds and other securities with original maturities of 90 days or less. Marketable securities consist of time deposits, marketable equity securities and certain other securities. The decrease in cash, cash equivalents and marketable securities atNovember 30, 2022 in comparison toMay 31, 2022 was primarily due to the net cash outflows of$27.8 billion for our acquisition of Cerner,$1.6 billion of repayment of senior notes assumed from our acquisition of Cerner,$2.5 billion of repayment of senior notes dueOctober 2022 , repurchases of our common stock, payments of cash dividends to our stockholders and cash used for capital expenditures. These cash outflows during the first half of fiscal 2023 were partially offset by certain cash inflows, primarily due to cash inflows generated by borrowings, net of partial repayments pursuant to the Bridge Credit Agreement, the Term Loan Credit Agreement, the issuance of senior notes inNovember 2022 and the commercial paper program, cash inflows from our operations and stock option exercises during the first half of fiscal 2023. Six Months Ended November 30, (Dollars in millions) 2022 Change 2021 Net cash provided by operating activities$ 7,243 324%$ 1,709 Net cash (used for) provided by investing activities$ (32,094 ) *$ 9,949 Net cash provided by (used for) financing activities$ 10,455 *$ (23,521 ) * Not meaningful 42
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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 increased during the first half of fiscal 2023, relative to the corresponding prior year period, primarily due to certain litigation related charges recorded during the first half of fiscal 2022 that we generally do not expect to recur and certain cash favorable working capital changes, net in the first half of fiscal 2023, relative to the corresponding prior year period. Cash flows from investing activities: The changes in cash flows from investing activities primarily relate to our acquisitions, 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 used for investing activities increased during the first half of fiscal 2023 compared to net cash provided by investing activities during the first half of fiscal 2022 primarily due to the cash used for our acquisition of Cerner in the first half of fiscal 2023, an increase in cash used for capital expenditures and decrease in cash proceeds from sales and maturities of marketable securities and other investments, partially offset by a decrease in cash used for the purchases of marketable securities and other investments, in each case during the first half of fiscal 2023 relative to the first half of fiscal 2022. 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 provided by financing activities increased during the first half of fiscal 2023 compared to the net cash used for financing activities in the first half of fiscal 2022 primarily due to the cash proceeds from borrowings, net of partial repayments pursuant to the Bridge Credit Agreement, the Term Loan Credit Agreement, the issuance of senior notes inNovember 2022 and the commercial paper program; lower stock repurchases; lower maturities of senior notes and higher net cash from our employee stock program, in each case during the first half of fiscal 2023 in comparison to the first half of fiscal 2022. 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 November 30, (Dollars in millions) 2022 Change 2021 Net cash provided by operating activities$ 15,073 47%$ 10,255 Capital expenditures (6,678 ) 114% (3,118 ) Free cash flow$ 8,395 18%$ 7,137 Net income$ 8,797 $ 10,262 Free cash flow as percent of net income 95% 70% 43
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Recent Financing Activities:
Credit Agreements and Related Borrowings: OnJune 8, 2022 , we borrowed$15.7 billion under the Bridge Credit Agreement to partly finance our acquisition of Cerner. The amount is due and payable in full onMarch 7, 2023 unless settled earlier pursuant to the terms of the Bridge Credit Agreement. During the first half of fiscal 2023, we entered into and subsequently expanded the Term Loan Credit Agreement and borrowed a total of$4.7 billion under the Term Loan 1 Facility and$960 million under the Term Loan 2 Facility. We used the net proceeds of these borrowings to reduce the amount of indebtedness outstanding under the Bridge Credit Agreement. We will begin making quarterly repayments of amounts borrowed under both Term Loan Facilities inSeptember 2024 . Any remaining unpaid principal balance under the Term Loan 1 Facility will be fully due and payable onAugust 16, 2027 and any remaining unpaid principal balance under the Term Loan 2 Facility will be fully due and payable onAugust 16, 2025 , unless the termination date of one or both of the Term Loan Facilities is extended.
Senior Notes: In
•$1.0 billion of 5.80% senior notes dueNovember 2025 ; •$1.25 billion of 6.15% senior notes dueNovember 2029 ; •$2.25 billion of 6.25% senior notes dueNovember 2032 ; and •$2.5 billion of 6.90% senior notes dueNovember 2052 .
We used the net proceeds from the senior notes to reduce the amount of indebtedness outstanding under the Bridge Credit Agreement.
Cerner Senior Notes and Other Borrowings: We assumed
Commercial Paper Program: During the first half of fiscal 2023, our commercial paper program was increased to$6.0 billion . Our commercial paper program allows us to issue and sell unsecured short-term promissory notes pursuant to a private placement exemption from the registration requirements under federal and state securities laws pursuant to dealer agreements with various banks and an Issuing and Paying Agency Agreement withDeutsche Bank Trust Company Americas . There were$1.9 billion of outstanding commercial paper notes as ofNovember 30, 2022 (none outstanding as ofMay 31, 2022 ) that mature at various dates throughMarch 2023 . The effective interest rate, including issuance costs for the second quarter and first half of fiscal 2023 was 4.48%. We use the net proceeds from the issuance of commercial paper for general corporate purposes. Additional details regarding these activities above are included in Note 5 of Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report. Contractual Obligations: During the first half of fiscal 2023, 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, 2022 , other than the closure of our acquisition of Cerner onJune 8, 2022 , for which we borrowed$15.7 billion on the same day pursuant to the Bridge Credit Agreement. We also issued$7.0 billion of senior notes and borrowed a total of$5.6 billion pursuant to the Term Loan Credit Agreement. The net proceeds of both borrowings were used for partial repayment of borrowings under the Bridge Credit Agreement. We also issued$1.9 billion of commercial paper, net of repayments, during the first half of fiscal 2023. Additional details are included in the discussion above and in Note 5 of Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report. Further, our operating lease commitments, primarily for data centers, that are generally expected to commence between the remainder of fiscal 2023 and fiscal 2026 for terms of three to fifteen years increased to$7.1 billion as ofNovember 30, 2022 . We have not recorded these lease commitments on our Condensed Consolidated Balance Sheets as ofNovember 30, 2022 . Refer to Note 10 of Notes to Consolidated Financial Statements included in our 44
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Annual Report on Form 10-K for the fiscal year ended
We believe that our current cash, cash equivalents and marketable securities balances, cash generated from operations, and our$6.0 billion , five-year revolving credit agreement will be sufficient to meet our working capital, capital expenditures and contractual obligations 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.
Stock-Based Awards
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 stock-based awards 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, 2019 has been a weighted-average annualized rate of 1.3% per year. The potential dilution percentage is calculated as the average annualized new stock-based awards granted and assumed, net of stock-based awards 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 stock-based awards vest and, if applicable, are exercised. Of the outstanding stock options atNovember 30, 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. AtNovember 30, 2022 , the maximum potential dilution from all outstanding stock-based awards, regardless of when granted and regardless of whether vested or unvested, was 9.0%.
Recent Accounting Pronouncements
For information with respect to recent accounting pronouncements, if any, and the impact of these pronouncements on our consolidated financial statements, if any, see Note 1 of Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report. Item 3. Quantitative and Qualitative Disclosures About Market Risk There were no significant changes to our quantitative and qualitative disclosures about market risk during the first half of fiscal 2023. Please refer to Part II, Item 7A Quantitative and Qualitative Disclosures about Market Risk included in our Annual Report on Form 10-K for our fiscal year endedMay 31, 2022 for a more complete discussion of the market risks we encounter. Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures: Based on our management's evaluation (with the participation of our Principal Executive and Financial Officer), as of the end of the period covered by this Quarterly Report, our Principal Executive and Financial Officer has concluded that our "disclosure controls and procedures" (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective to provide reasonable assurance that the information required to be disclosed by us in our reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in theSEC's rules and forms and is accumulated and communicated to our management (including our Principal Executive and Financial Officer) as appropriate to allow timely decisions regarding required disclosure. Changes in Internal Control over Financial Reporting: As a result of our acquisition of Cerner onJune 8, 2022 , our internal control over financial reporting, subsequent to the date of acquisition, includes certain additional internal controls relating to Cerner. Except as described above, there were no changes in our internal control over financial 45
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reporting identified in connection with the evaluation required by paragraph (d)
of the Exchange Act Rules 13a-15 or 15d-15 that occurred during our last fiscal
quarter that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls: Our management, including our
Principal Executive and Financial Officer, believes that our disclosure controls
and procedures and internal control over financial reporting are designed to
provide reasonable assurance of achieving their objectives and are effective at
the reasonable assurance level. However, our management does not expect that our
disclosure controls and procedures or our internal control over financial
reporting will prevent all errors and all fraud. A control system, no matter how
well-conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design
of a control system must reflect the fact that there are resource constraints
and the benefits of controls must be considered relative to their costs. Because
of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud,
if any, have been detected. These inherent limitations include the realities
that judgments in decision making can be faulty and that breakdowns can occur
because of a simple error or mistake. Additionally, controls can be circumvented
by the individual acts of some persons, by collusion of two or more people or by
management override of the controls. The design of any system of controls also
is based in part upon certain assumptions about the likelihood of future events
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions; over time, controls may
become inadequate because of changes in conditions, or the degree of compliance
with policies or procedures may deteriorate. Because of the inherent limitations
in a cost-effective control system, misstatements due to error or fraud may
occur and not be detected.
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