ORACLE CORPORATION We begin Management's Discussion and Analysis of Financial Condition and Results of Operations with an overview of our businesses and significant trends. This overview is followed by a summary of our critical accounting policies and estimates that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results. We then provide a more detailed analysis of our results of operations and financial condition.
Business Overview
Oracle provides products and services that address enterprise information technology (IT) environments. Our products and services include applications and infrastructure offerings that are delivered worldwide through a variety of flexible and interoperable IT deployment models. These models include onpremise deployments, cloudbased deployments, and hybrid deployments (an approach that combines both on-premise and cloudbased deployment) such as our Oracle Cloud at Customer offering (an instance of Oracle Cloud in a customer's own data center). Accordingly, we offer choice and flexibility to our customers and facilitate the product, service and deployment combinations that best suit our customers' needs. Through our worldwide sales force and Oracle Partner Network, we sell to customers all over the world including businesses of many sizes, government agencies, educational institutions and resellers.
We have three businesses: cloud and license; hardware; and services; each of which comprises a single operating segment. The descriptions set forth below as a part of Management's Discussion and Analysis of Financial Condition and Results of Operations and the information contained within Note 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.
Statement by Oracle Regarding Proposal Submitted to United States Treasury
On
Impacts of the COVID-19 Pandemic on Oracle's Business
For a discussion of the impacts on and risks to our business from COVID-19,
please refer to "Impacts of the COVID-19 Pandemic on Oracle's Business" included
in Item 1 Business and certain risk factors included in Item 1A Risk Factors in
our Annual Report on Form 10-K for the fiscal year ended
Cloud and License Business
Our cloud and license line of business, which represented 83% of our total revenues on a trailing 4-quarter basis, markets, sells and delivers a broad spectrum of applications and infrastructure technologies through our cloud and license offerings.
Cloud services and license support revenues include:
• license support revenues, which are earned by providing Oracle license
support services to customers that have elected to purchase support
services in connection with the purchase of Oracle applications and
infrastructure software licenses for use in cloud, on-premise and other IT
environments. Substantially all license support customers renew their
support contracts with us upon expiration in order to continue to benefit
from technical support services and the periodic issuance of unspecified
updates and enhancements, which current license support customers are
entitled to receive. License support contracts are generally priced as a
percentage of the net fees paid by the customer to purchase a cloud
license and/or on-premise license; are generally billed in advance of the
support services being performed; are
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generally renewed at the customer's option; and are generally recognized
as revenues ratably over the contractual period that the support services
are provided, which is generally one year; and
• cloud services revenues, which provide customers access to Oracle Cloud
applications and infrastructure technologies via cloud-based deployment
models that Oracle develops, provides unspecified updates and enhancements
for, hosts, manages and supports and that customers access by entering
into a subscription agreement with us for a stated period. The majority of
our Oracle Cloud Services arrangements are generally billed in advance of
the cloud services being performed; have durations of one to three years;
are generally renewed at the customer's option; and are generally
recognized as revenues ratably over the contractual period of the cloud
contract or, in the case of usage model contracts, as the cloud services
are consumed over time.
Cloud license and on-premise license revenues include revenues from the licensing of our software products including Oracle Applications, Oracle Database, Oracle Middleware and Java, among others, which our customers deploy within cloudbased, onpremise and other IT environments. Our cloud license and onpremise license transactions are generally perpetual in nature and are generally recognized as revenues up front at the point in time when the software is made available to the customer to download and use. Revenues from usagebased royalty arrangements for distinct cloud licenses and on-premise licenses are recognized at the point in time when the software end user usage occurs. The timing of a few large license transactions can substantially affect our quarterly license revenues due to the point-in-time nature of revenue recognition for license transactions, which is different than the typical revenue recognition pattern for our cloud services and license support revenues in which revenues are generally recognized ratably over the contractual terms. Cloud license and on-premise license customers have the option to purchase and renew license support contracts, as further described above.
Providing choice and flexibility to our customers as to when and how they deploy our applications and infrastructure technologies are important elements of our corporate strategy. In recent periods, customer demand for our applications and infrastructure technologies delivered through our Oracle Cloud Services has increased. To address customer demand and enable customer choice, we have introduced certain programs for customers to pivot their applications and infrastructure licenses and the related license support to the Oracle Cloud for new deployments and to migrate to and expand with the Oracle Cloud for their existing workloads. We expect these trends to continue.
Our cloud and license business' revenue growth is affected by many factors, including the strength of general economic and business conditions; governmental budgetary constraints; the strategy for and competitive position of our offerings; the continued renewal of our cloud services and license support customer contracts by the customer contract base; substantially all customers continuing to purchase license support contracts in connection with their license purchases; the pricing of license support contracts sold in connection with the sales of licenses; the pricing, amounts and volumes of licenses and cloud services sold; and foreign currency rate fluctuations.
On a constant currency basis, we expect that our total cloud and license revenues generally will continue to increase due to:
• expected growth in our cloud services and license support offerings; and • continued demand for our cloud license and on-premise license offerings.
We believe these factors should contribute to future growth in our cloud and license business' total revenues, which should enable us to continue to make investments in research and development to develop and improve our cloud and license products and services.
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Our cloud and license business' margin has historically trended upward over the course of the four quarters within a particular fiscal year due to the historical upward trend of our cloud and license business' revenues over those quarterly periods and because the majority of our costs for this business are generally fixed in the short term. The historical upward trend of our cloud and license business' revenues over the course of the four quarters within a particular fiscal year is primarily due to the addition of new cloud services and license support contracts to the customer contract base that we generally recognize as revenues ratably; the renewal of existing customers' cloud services and license support contracts over the course of each fiscal year that we generally recognize as revenues ratably; and the historical upward trend of our cloud license and on-premise license revenues, which we generally recognize at a point in time upon delivery; in each case over those four quarterly periods.
Hardware Business
Our hardware business, which represented 9% of our total revenues on a trailing 4-quarter basis, provides a broad selection of hardware products and hardware-related software products, including Oracle Engineered Systems, servers, storage, industry-specific hardware offerings, operating systems, virtualization, management and other hardware related software, and related hardware support. Each hardware product and its related software, such as an operating system or firmware, are highly interdependent and interrelated and are accounted for as a combined performance obligation. The revenues for this combined performance obligation are generally recognized at the point in time that the hardware product and its related software are delivered to the customer and ownership is transferred to the customer. We expect to make investments in research and development to improve existing hardware products and services and to develop new hardware products and services. The majority of our hardware products are sold through indirect channels, including independent distributors and value-added resellers. Our hardware support offerings provide customers with unspecified software updates for software components that are essential to the functionality of our hardware products and associated software products such as Oracle Solaris. Our hardware support offerings can also include product repairs, maintenance services and technical support services. Hardware support contracts are entered into and renewed at the option of the customer, are generally priced as a percentage of the net hardware products fees and are generally recognized as revenues ratably as the hardware support services are delivered over the contractual terms.
We generally expect our hardware business to have lower operating margins as a percentage of revenues than our cloud and license business due to the incremental costs we incur to produce and distribute these products and to provide support services, including direct materials and labor costs.
Our quarterly hardware revenues are difficult to predict. Our hardware revenues, cost of hardware and hardware operating margins that we report are affected by many factors, including our ability to timely manufacture or deliver a few large hardware transactions; our strategy for and the position of our hardware products relative to competitor offerings; customer demand for competing offerings, including cloud infrastructure offerings; the strength of general economic and business conditions; governmental budgetary constraints; whether customers decide to purchase hardware support contracts at or in close proximity to the time of hardware product sale; the percentage of our hardware support contract customer base that renews its support contracts and the close association between hardware products, which have a finite life, and customer demand for related hardware support as hardware products age; customer decisions to either maintain or upgrade their existing hardware infrastructure to newly developed technologies that are available; and foreign currency rate fluctuations.
Services Business
Our services business, which represented 8% of our total revenues on a trailing 4-quarter basis, helps customers and partners maximize the performance of their investments in Oracle applications and infrastructure technologies. We believe that our services are differentiated based on our focus on Oracle technologies, extensive experience, broad sets of intellectual property and best practices. Our services offerings include consulting services, advanced customer services and education services. Our services business has lower margins than our cloud and license and hardware businesses. Our services revenues are affected by many factors including our strategy for, and the competitive position of, our services; customer demand for our cloud and license and hardware offerings and the associated services for these offerings; general economic conditions; governmental budgetary constraints; personnel reductions in our customers' IT departments; and tighter controls over customer discretionary spending.
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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. The pace of our acquisitions has slowed recently, but as compelling opportunities become available, we may acquire companies, products, services and technologies in furtherance of our corporate strategy. Note 2 of Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report provides additional information related to our recent acquisitions.
We believe that we can fund our future acquisitions with our internally available cash, cash equivalents and marketable securities, cash generated from operations, additional borrowings or from the issuance of additional securities. We estimate the financial impact of any potential acquisition with regard to earnings, operating margin, cash flows and return on invested capital targets before deciding to move forward with an acquisition.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with
• 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 2021, there were no significant changes to
our critical accounting policies and estimates. Management's Discussion and
Analysis of Financial Condition and Results of Operations contained in Part II,
Item 7 of our Annual Report on Form 10-K for our fiscal year ended
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 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.
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Consistent with our internal management reporting processes, the below operating segment presentation is noted to include any revenues adjustments related to cloud services and license support contracts that would have otherwise been recorded by the acquired businesses as independent entities but were not recognized in our condensed consolidated statements of operations for the periods presented due to business combination accounting requirements. Refer to "Supplemental Disclosure Related to Certain Charges" below for additional discussion of these items and Note 10 of Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report for a reconciliation of the summations of our total operating segment revenues as presented in the discussion below to total revenues as presented per our condensed consolidated statements of operations for all periods presented.
In addition, research and development expenses, general and administrative expenses, stock-based compensation expenses, amortization of intangible assets, certain other expense allocations, acquisition related and other expenses, restructuring expenses, interest expense, non-operating expenses or income, net and provision for income taxes are not attributed to our three operating segments because our management does not view the performance of our three businesses including such items and/or it is impractical to do so. Refer to "Supplemental Disclosure Related to Certain Charges" below for additional discussion of certain of these items and Note 10 of Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report for a reconciliation of the summations of total segment margin as presented in the discussion below to total income before provision for income taxes as presented per our condensed consolidated statements of operations for all periods presented.
Constant Currency Presentation
Our international operations have provided and are expected to continue to
provide a significant portion of each of our businesses' revenues and expenses.
As a result, each of our businesses' revenues and expenses and our total
revenues and expenses will continue to be affected by changes in the
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Total Revenues and Operating Expenses
Three Months Ended August 31,
Percent Change
(Dollars in millions) 2020 Actual Constant 2019
Total Revenues by Geography:
Americas $ 5,068 -2% 0% $ 5,150
EMEA(1) 2,738 7% 5% 2,553
Asia Pacific 1,561 3% 3% 1,515
Total revenues 9,367 2% 2% 9,218
Total Operating Expenses 6,156 -3% -3% 6,341
Total Operating Margin $ 3,211 12% 11% $ 2,877
Total Operating Margin % 34% 31%
% Revenues by Geography:
Americas 54% 56%
EMEA 29% 28%
Asia Pacific 17% 16%
Total Revenues by Business:
Cloud and license $ 7,833 3% 3% $ 7,617
Hardware 814 0% 0% 815
Services 720 -8% -8% 786
Total revenues $ 9,367 2% 2% $ 9,218
% Revenues by Business:
Cloud and license 83% 83%
Hardware 9% 9%
Services 8% 8%
(1) Comprised of
Excluding the effects of currency rate fluctuations, our total revenues
increased in the first quarter of fiscal 2021, relative to the first quarter of
fiscal 2020, due to growth in our cloud and license business' revenues, which
were partially offset by a decline in our services business' revenues, while our
hardware business' revenues remained flat. The constant currency increase in our
cloud and license business' revenues during the first quarter of fiscal 2021,
relative to the first quarter of fiscal 2020, was attributable to growth in our
cloud services and license support revenues as customers purchased our
applications and infrastructure technologies via cloud deployment models and
license deployment models and renewed their related cloud contracts and license
support contracts to continue to gain access to our latest technologies and
support services; and growth in cloud license and onpremise license revenues.
The constant currency decrease in our services business' revenues during the
first quarter of fiscal 2021, relative to the first quarter of fiscal 2020, was
attributable to declines in each of our primary services offerings. Due to the
effects of the COVID-19 pandemic, all three of our businesses' revenues were
adversely impacted during the first quarter of fiscal 2021 and some of these
effects may continue throughout fiscal 2021. While we expect these effects to be
temporary, the impacts of COVID-19 for the remainder of fiscal 2021 and future
periods are unknown. On a constant currency basis, the EMEA and
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Excluding the effects of currency rate fluctuations, our total operating expenses decreased during the first quarter of fiscal 2021, relative to the first quarter of fiscal 2020, primarily due to lower sales and marketing expenses, lower hardware expenses and lower services expenses, all of which were attributable to lower headcount and a reduction in certain variable expenditures as further described below. These constant currency expense decreases were partially offset by certain constant currency expense increases during the first quarter of fiscal 2021 including: higher cloud services and license support expenses, which increased primarily due to an increase in headcount and higher infrastructure investments that were made to support the increase in our cloud and license business' revenues; higher research and development expenses, which increased primarily due to higher employee related expenses resulting from increased headcount; and higher restructuring expenses, which increased due to actions taken during the first quarter of fiscal 2021 pursuant to the Fiscal 2019 Oracle Restructuring Plan (2019 Restructuring Plan). The 2019 Restructuring Plan is described further in Note 5 of Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report. During the first quarter of fiscal 2021, we curtailed a number of variable expenditures across all of our lines of businesses and functions including employee travel expenses and marketing expenses, among others, in response to COVID-19. We expect certain of these expenses to normalize in future periods provided global economic conditions improve.
In constant currency, our total operating margin and total operating margin as a percentage of total revenues increased in the first quarter of fiscal 2021 due to higher total revenues and lower total operating expenses.
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
August 31,
(in millions) 2020 2019
Cloud services and license support deferred revenues(1)
345 414
Acquisition related and other(3)(5) 19 25
Restructuring(4) 174 78
Stock-based compensation, operating segments(5) 116 136
Stock-based compensation, R&D and G&A(5) 312 310
Income tax effects(6) (336 ) (339 )
$ 631 $ 626 (1) In connection with our acquisitions, we have estimated the fair values of the
cloud services and license support contracts assumed. Due to our application
of business combination accounting rules, we did not recognize the cloud
services and license support revenue amounts as presented in the above table
that would have otherwise been recorded by the acquired businesses as
independent entities upon delivery of the contractual obligations. To the
extent customers for which these contractual obligations pertain renew these
contracts with us, we expect to recognize revenues for the full contracts'
values over the respective contracts' renewal periods.
(2) Represents the amortization of intangible assets, substantially all of which
were acquired in connection with our acquisitions. As of August 31, 2020
estimated future amortization related to intangible assets was as follows (in
millions):
Remainder of fiscal 2021 $ 1,012
Fiscal 2022 1,106
Fiscal 2023 682
Fiscal 2024 445
Fiscal 2025 126
Fiscal 2026 24
Thereafter 10
Total intangible assets, net $ 3,405
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(3) Acquisition related and other expenses primarily consist of personnel related
costs for transitional and certain other employees, integration related
professional services, certain business combination adjustments including
certain adjustments after the measurement period has ended and certain other
operating items, net.
(4) Restructuring expenses during the first quarter of fiscal 2021 and 2020
primarily related to employee severance in connection with our 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, 2020 .
(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
August 31,
2020 2019
Cloud services and license support $ 30 $ 31
Hardware 3 3
Services 12 14
Sales and marketing 71 88
Stock-based compensation, operating segments 116 136
Research and development 276 271
General and administrative 36 39
Total stock-based compensation $ 428 $ 446 (6) For the first quarter of fiscal 2021 and 2020, respectively, the applicable
jurisdictional tax rates applied to our income before provision for income
taxes after excluding the tax effects of items within the table above such as
for stock-based compensation, amortization of intangible assets,
restructuring, and certain other acquisition related items; resulted in
effective tax rates of 19.1% and 19.8%, respectively, instead of 13.3% and
13.9%, 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 license support contracts related to cloud licenses and on-premise licenses; are purchased by our customers at their option; and are generally recognized as revenues ratably over the contractual term, which is generally one year. Our cloud services deliver applications and infrastructure technologies on a subscription basis via cloud-based deployment models that we develop, provide unspecified updates and enhancements for, host, manage and support. Revenues for our cloud services are generally recognized over the contractual term, which is generally one to three years, or in the case of usage model contracts, as the cloud services are consumed. Cloud license and on-premise license revenues represent fees earned from granting customers licenses, generally on a perpetual basis, to use our database and middleware and our applications software products within cloud and on-premise IT environments and are generally recognized up front at the point in time when the software is made available to the customer to download and use. We continue to place significant emphasis, both domestically and internationally, on direct sales through our own sales force. We also continue to market certain of our offerings through indirect channels. Costs associated with our cloud and license business are included in cloud services and license support expenses, and sales and marketing expenses. These costs are largely personnel and infrastructure related including the cost of providing our cloud services and license support offerings, salaries and commissions earned by our sales force for the sale of our cloud and license offerings, and marketing program costs.
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Three Months Ended August 31,
Percent Change
(Dollars in millions) 2020 Actual Constant 2019
Cloud and License Revenues:
Americas(1) $ 4,321 -1% 0% $ 4,357
EMEA(1) 2,293 11% 8% 2,070
Asia Pacific(1) 1,220 2% 2% 1,192
Total revenues(1) 7,834 3% 3% 7,619
Expenses:
Cloud services and license support(2) 958 3% 3% 931
Sales and marketing(2) 1,633 -7% -7% 1,757
Total expenses(2) 2,591 -4% -3% 2,688
Total Margin $ 5,243 6% 6% $ 4,931
Total Margin % 67% 65%
% Revenues by Geography:
Americas 55% 57%
EMEA 29% 27%
Asia Pacific 16% 16%
Revenues by Offerings:
Cloud services and license support(1) $ 6,948 2% 2% $ 6,807
Cloud license and on-premise license 886 9% 8% 812
Total revenues(1) $ 7,834 3% 3% $ 7,619
Cloud Services and License Support
Revenues by Ecosystem:
Applications cloud services and license
support(1) $ 2,817 4% 4% $ 2,706
Infrastructure cloud services and
license support(1) 4,131 1% 1% 4,101
Total cloud services and license support
revenues(1) $ 6,948 2% 2% $ 6,807 (1) Includes cloud services and license support revenue adjustments related to
certain cloud services and license support contracts that would have
otherwise been recorded as revenues by the acquired businesses as independent
entities but were not recognized in our GAAP-based condensed consolidated
statements of operations for the periods presented due to business
combination accounting requirements. Such revenue adjustments were included
in our operating segment results for purposes of reporting to and review by
our CODMs. See "Presentation of Operating Segment Results and Other Financial
Information" above for additional information.
(2) Excludes stock-based compensation and certain expense allocations. Also
excludes amortization of intangible assets and certain other GAAP-based
expenses, which were not allocated to our operating segment results for
purposes of reporting to and review by our CODMs, as further described under
"Presentation of Operating Segment Results and Other Financial Information"
above.
Excluding the effects of currency rate fluctuations, our cloud and license
business' total revenues increased in the first quarter of fiscal 2021, relative
to the corresponding prior year period, due to growth in our cloud services and
license support revenues, which was primarily due to increased customer
purchases of and renewals of cloud-based services and license support contracts
in recent periods for which we delivered such services during the first quarter
of fiscal 2021; and due to growth in our cloud license and on-premise license
revenues. Our cloud and license business' revenues were adversely impacted
during the first quarter of fiscal 2021 due to the COVID-19 pandemic, and the
impacts of COVID-19 for the rest of fiscal 2021 and future periods are unknown.
In constant currency, the
In constant currency, our total cloud and license business' expenses decreased in the first quarter of fiscal 2021, relative to the corresponding prior year period, due to lower sales and marketing expenses, which decreased primarily due to lower employee related expenses attributable to lower headcount; and due to our curtailment of variable expenditures during the first quarter of fiscal 2021, including lower employee travel expenses and marketing expenses in response to COVID-19. These constant currency expense decreases were partially offset by higher cloud services and license support expenses during the first quarter of fiscal 2021, which were primarily attributable to higher employee related expenses and higher technology infrastructure expenses to support the increase in our cloud and license business' revenues.
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Excluding the effects of currency rate fluctuations, our cloud and license business' total margin and total margin as percentage of revenues increased during the first quarter of fiscal 2021, relative to the first quarter of fiscal 2020, due to the increase in total revenues and the decrease in total expenses for this business.
Hardware Business
Our hardware business' revenues are generated from the sales of our Oracle Engineered Systems, server, storage, and industry-specific hardware offerings. The hardware product and related software, such as an operating system or firmware, are highly interdependent and interrelated and are accounted for as a combined performance obligation. The revenues for this combined performance obligation are generally recognized at the point in time that the hardware product is delivered to the customer and ownership is transferred to the customer. Our hardware business also earns revenues from the sale of hardware support contracts purchased by our customers at their option and are generally recognized as revenues ratably as the hardware support services are delivered over the contractual term, which is generally one year. The majority of our hardware products are sold through indirect channels such as independent distributors and value-added resellers and we also market and sell our hardware products through our direct sales force. Operating expenses associated with our hardware business include the cost of hardware products, which consists of expenses for materials and labor used to produce these products by our internal manufacturing operations or by third-party manufacturers, warranty expenses and the impact of periodic changes in inventory valuation, including the impact of inventory determined to be excess and obsolete; the cost of materials used to repair customer products; the cost of labor and infrastructure to provide support services; and sales and marketing expenses, which are largely personnel related and include variable compensation earned by our sales force for the sales of our hardware offerings.
Three Months Ended August 31,
Percent Change
(Dollars in millions) 2020 Actual Constant 2019
Hardware Revenues:
Americas $ 409 1% 3% $ 404
EMEA 220 -9% -10% 243
Asia Pacific 185 10% 9% 168
Total revenues 814 0% 0% 815
Expenses:
Hardware products and support(1) 239 -9% -9% 264
Sales and marketing(1) 98 -17% -16% 117
Total expenses(1) 337 -12% -11% 381
Total Margin $ 477 10% 10% $ 434
Total Margin % 59% 53%
% Revenues by Geography:
Americas 50% 49%
EMEA 27% 30%
Asia Pacific 23% 21%
(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 Segments and Other Financial Information" above.
Excluding the effects of currency rate fluctuations, total hardware revenues remained flat in the first quarter of fiscal 2021. Constant currency hardware product revenue increases during the first quarter of fiscal 2021 that were primarily attributable to growth in our Oracle Exadata and certain other strategic hardware offerings were offset by a decline in hardware support revenues. During the first quarter of fiscal 2021, we continued the emphasis on the marketing and sale of our strategic hardware offerings and cloud-based infrastructure technologies and the de-emphasis of our sales and marketing efforts for certain of our non-strategic 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 first quarter of fiscal 2021 by the unfavorable economic effects caused by COVID-19.
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Excluding the effects of currency rate fluctuations, total hardware expenses decreased in the first quarter of fiscal 2021, relative to the first quarter of fiscal 2020, primarily due to lower hardware support costs and lower sales and marketing costs, both of which were primarily attributable to reduced headcount.
In constant currency, total margin and total margin as a percentage of revenues for our hardware business increased during the first quarter of fiscal 2021 due to a reduction in our total hardware expenses.
Services Business
We offer services to customers and partners to help to maximize the performance of their investments in Oracle applications and infrastructure technologies. Services revenues are generally recognized over time as the services are performed. The cost of providing our services consists primarily of personnel related expenses, technology infrastructure expenditures, facilities expenses and external contractor expenses.
Three Months Ended August 31,
Percent Change
(Dollars in millions) 2020 Actual Constant 2019
Services Revenues:
Americas $ 339 -13% -12% $ 391
EMEA 225 -6% -8% 240
Asia Pacific 156 0% -1% 155
Total revenues 720 -8% -8% 786
Total Expenses(1) 585 -12% -12% 665
Total Margin $ 135 10% 11% $ 121
Total Margin % 19% 16%
% Revenues by Geography:
Americas 47% 50%
EMEA 31% 31%
Asia Pacific 22% 19%
(1) Excludes stock-based compensation and certain allocations. Also excludes
certain other GAAP-based expenses, which were not allocated to our operating
segment results for purposes of reporting to and review by our CODMs, as
further described under "Presentation of Operating Segments and Other
Financial Information" above.
Excluding the effects of currency rate fluctuations, our total services revenues decreased during the first quarter of fiscal 2021, relative to the first quarter of fiscal 2020, due to revenue decreases in each of our primary services offerings. Our services business revenues were also adversely impacted during the first quarter of fiscal 2021 by the impacts of COVID-19, including the impacts of consulting project delays due to customer resource constraints and jurisdictional restrictions imposed with respect to in-person meetings. In addition, we incurred lower billable travel expenses and lower billable sub-contractor expenses for which we were to be reimbursed by our customers, which reduced the amount of revenues and expenses we reported for our services business during the first quarter of fiscal 2021.
In constant currency, total services expenses decreased during the first quarter of fiscal 2021, relative to the corresponding prior year period, primarily due to lower employee related costs caused by lower headcount and lower travel and sub-contractor expenses as described above.
In constant currency, total margin and total margin as a percentage of total services revenues increased during the first quarter of fiscal 2021, relative to the first quarter of fiscal 2020, primarily due to lower total expenses for this business.
Research and Development Expenses: Research and development expenses consist primarily of personnel related expenditures. We intend to continue to invest significantly in our research and development efforts because, in our judgment, they are essential to maintaining our competitive position.
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Three Months Ended August 31,
Percent Change
(Dollars in millions) 2020 Actual Constant 2019
Research and development(1) $ 1,313 2% 3% $ 1,286
Stock-based compensation 276 2% 2% 271
Total expenses $ 1,589 2% 3% $ 1,557
% of Total Revenues 17% 17%
(1) Excluding stock-based compensation
On a constant currency basis, total research and development expenses increased during the first quarter of fiscal 2021, relative to the first quarter of fiscal 2020, primarily due to higher employee related expenses resulting from increased headcount, partially offset by lower travel expenses due to the impacts of COVID-19.
General and Administrative Expenses: General and administrative expenses primarily consist of personnel related expenditures for IT, finance, legal and human resources support functions.
Three Months Ended August 31,
Percent Change
(Dollars in millions) 2020 Actual Constant 2019
General and administrative(1) $ 259 2% 4% $ 253
Stock-based compensation 36 -8% -8% 39
Total expenses $ 295 1% 2% $ 292
% of Total Revenues 3% 3%
(1) Excluding stock-based compensation
Excluding the effects of currency rate fluctuations, total general and
administrative expenses increased modestly in the first quarter of fiscal 2021
primarily due to a
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 August 31,
Percent Change
(Dollars in millions) 2020 Actual Constant 2019
Developed technology $ 158 -25% -25% $ 211
Cloud services and license support
agreements and related relationships 164 -4% -4% 171
Other 23 -30% -30% 32
Total amortization of intangible assets
Amortization of intangible assets decreased in the first quarter of fiscal 2021, relative to the first quarter of fiscal 2020, due to a reduction in expenses associated with certain of our intangible assets that became fully amortized, partially offset by additional amortization from intangible assets that we acquired in connection with our recent acquisitions.
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Acquisition Related and Other Expenses: Acquisition related and other expenses primarily consist of personnel related costs for transitional and certain other employees, certain business combination adjustments, including adjustments after the measurement period has ended, and certain other operating items, net.
Three Months Ended August 31,
Percent Change
(Dollars in millions) 2020 Actual Constant 2019
Transitional and other employee related costs $ 2 -50% -50% $ 4
Business combination adjustments, net 1 -67% -67% 3
Other, net 16 -11% -11% 18
Total acquisition related and other expenses $ 19 -23% -22% $ 25 On a constant currency basis, acquisition related and other expenses decreased in the first quarter of fiscal 2021, relative to the first quarter of fiscal 2020, primarily due to lower transitional and other employee related costs, lower business combination adjustments, and lower other expenses, net, which primarily related to certain right of use assets and other assets that were abandoned in connection with plans to improve our cost structure and operations during the 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. 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
Three Months Ended August 31,
Percent Change
(Dollars in millions) 2020 Actual Constant 2019
Restructuring expenses $ 174 123% 122% $ 78 Restructuring expenses in the first quarter of fiscal 2021 and 2020 primarily related to our 2019 Restructuring Plan. Our management approved, committed to and initiated the 2019 Restructuring Plan in order to restructure and further improve efficiencies in our operations. We may incur additional restructuring expenses in future periods due to the initiation of new restructuring plans or from changes in estimated costs associated with existing restructuring plans.
The majority of the initiatives undertaken by our 2019 Restructuring Plan were effected to implement our continued emphasis in developing, marketing and selling our cloud-based offerings. These initiatives impacted certain of our sales and marketing and research and development operations. Certain of the cost savings realized pursuant to our 2019 Restructuring Plan initiatives were offset by investments in resources and geographies that best address the development, marketing, sale and delivery of our cloudbased offerings including investments in our secondgeneration cloud infrastructure.
Interest Expense:
Three Months Ended August 31,
Percent Change
(Dollars in millions) 2020 Actual Constant 2019
Interest expense $ 614 24% 24% $ 494 Interest expense increased during the first quarter of fiscal 2021, relative to
the first quarter of fiscal 2020, primarily due to higher average borrowings
resulting from our issuance of
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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
(primarily Oracle Financial Services Software Limited and
Three Months Ended August 31,
Percent Change
(Dollars in millions) 2020 Actual Constant 2019
Interest income $ 31 -84% -84% $ 190
Foreign currency losses, net (50 ) -9% -13% (55 )
Noncontrolling interests in income (38 ) -6% -6% (40 )
Other, net 55 * * 4
Total non-operating (expenses) income, net
* Not meaningful
On a constant currency basis, non-operating expenses, net increased during the first quarter of fiscal 2021, relative to the first quarter of fiscal 2020, primarily due to reduced interest income in the first quarter of fiscal 2021, which was primarily caused by lower interest rates that were applicable to our cash, cash equivalent and marketable securities balances during the first quarter of fiscal 2021. This variance to our non-operating expenses, net during the first quarter of fiscal 2021 was partially offset by higher other income, net, during the first quarter of fiscal 2021, which was primarily attributable to changes in market values associated with certain marketable equity securities that we held for certain employee benefit plans and classified as trading, and for which an equal and offsetting amount was recorded to our operating expenses in the same period.
Provision for Income Taxes: Our effective income tax rates for each of the
periods presented were the result of the mix of income earned in various tax
jurisdictions that apply a broad range of income tax rates. Our provision for
income taxes varied from the tax computed at the
Three Months Ended August 31 ,
Percent Change
(Dollars in millions) 2020 Actual Constant 2019
Provision for income taxes
13.3% 13.9%
Provision for income taxes in the first quarter of fiscal 2021 was substantially consistent with that of the first quarter of fiscal 2020 as higher income before provision for income taxes was offset primarily by an increase in tax benefits related to stock-based compensation during the first quarter of fiscal 2021 relative to the first quarter of fiscal 2020.
Liquidity and Capital Resources
August 31, May 31,
(Dollars in millions) 2020 Change 2020
Working capital $ 31,191 -11% $ 34,940
Cash, cash equivalents and marketable securities
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Working capital: The decrease in working capital as of
Cash, cash equivalents and marketable securities: Cash and cash equivalents
primarily consist of deposits held at major banks, Tier-1 commercial paper and
other securities with original maturities of 90 days or less. Marketable
securities consist of corporate debt securities and certain other securities.
The decrease in cash, cash equivalents and marketable securities at
The amount of cash, cash equivalents and marketable securities that we report in
Three Months Ended August 31,
(Dollars in millions) 2020 Change 2019
Net cash provided by operating activities $ 5,953 -1% $ 6,000 Net cash (used for) provided by investing activities
$ (6,493 ) -17%$ (7,802 )
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 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 modestly during the first quarter of fiscal 2021, relative to the first quarter of fiscal 2020, primarily due to certain cash unfavorable changes in the timing of payments received from customers during the first quarter of fiscal 2021, which we believe were attributable to the unfavorable global economic effects that resulted from COVID-19. We expect to collect substantially all of these delayed customer payments in future periods.
Cash flows from investing activities: The changes in cash flows from investing activities primarily relate to the timing of our purchases, maturities and sales of our investments in marketable securities, and investments in capital and other assets, including certain intangible assets, to support our growth.
Net cash used for investing activities was
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marketable securities and other investments, in each case during the first quarter of fiscal 2021 relative to the first quarter of fiscal 2020.
Cash flows from financing activities: The changes in cash flows from financing activities primarily relate to borrowings and repayments related to our debt instruments, stock repurchases, dividend payments and net proceeds related to employee stock programs.
Net cash used for financing activities in the first quarter of fiscal 2021 decreased compared to the first quarter of fiscal 2020 primarily due to lower debt repayments and higher cash proceeds from stock option exercises in the first quarter 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 August 31,
(Dollars in millions) 2020 Change 2019
Net cash provided by operating activities $ 13,092 -5% $ 13,829
Capital expenditures (1,614 ) -3% (1,663 )
Free cash flow $ 11,478 -6% $ 12,166
Net income $ 10,249 $ 10,955
Free cash flow as percent of net income 112% 111%
Long-Term Customer Financing: We offer certain of our customers the option to
acquire licenses, cloud services, hardware and other services offerings through
separate long-term payment contracts. We generally sell these contracts that we
have financed for our customers on a non-recourse basis to financial
institutions within 90 days of the contracts' dates of execution. We generally
record the transfers of amounts due from customers to financial institutions as
sales of financing receivables because we are considered to have surrendered
control of these financing receivables. We financed
Contractual Obligations: During the first quarter of fiscal 2021, there were no
significant changes to our estimates of future payments under our fixed
contractual obligations and commitments as presented in Part II, Item 7
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in our Annual Report on Form 10-K for our fiscal year ended
We believe that our current cash, cash equivalents and marketable securities and cash generated from operations will be sufficient to meet our working capital, capital expenditures and contractual obligation requirements. In addition, we believe that we could fund our future acquisitions, dividend payments and repurchases of common stock or debt with our internally available cash, cash equivalents and marketable securities, cash generated from operations, additional borrowings or from the issuance of additional securities.
Off-Balance Sheet Arrangements: We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Restricted Stock-Based Awards and Stock Options
Our stock-based compensation program is a key component of the compensation package we provide to attract and retain certain of our talented employees and align their interests with the interests of existing stockholders.
We recognize that restricted stock-based awards and stock options dilute existing stockholders and have sought to control the number of stock-based awards granted while providing competitive compensation packages.
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Consistent with these dual goals, our cumulative potential dilution since
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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