We begin Management's Discussion and Analysis of Financial Condition and Results of Operations with an overview of our businesses and significant trends. This overview is followed by a summary of our critical accounting policies and estimates that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results. We then provide a more detailed analysis of our results of operations and financial condition.
Business Overview
Oracle provides products and services that address enterprise information technology (IT) environments. Our products and services include enterprise applications and infrastructure offerings that are delivered worldwide through a variety of flexible and interoperable IT deployment models. These models include on-premise deployments, cloud-based deployments, and hybrid deployments (an approach that combines both on-premise and cloud-based deployments). Accordingly, we offer choice and flexibility to our customers and facilitate the product, service and deployment combinations that best suit our customers' needs. Through our worldwide sales force and Oracle Partner Network, we sell to customers all over the world including businesses of many sizes, government agencies, educational institutions and resellers. We have three businesses: cloud and license; hardware; and services; each of which comprises a single operating segment. The descriptions set forth below as a part of this Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations and the information contained within Note 9 of Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report provide additional information related to our businesses and operating segments and align to how our chief operating decision makers (CODMs), which include our Chief Executive Officer and Chief Technology Officer, view our operating results and allocate resources.
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 endedMay 31, 2021 ; and the information presented below in Results of Operations as a part of this Item 2 of this Quarterly Report. Cloud and License Business Our cloud and license business, which represented 85% of our total revenues on a trailing 4-quarter basis, markets, sells and delivers a broad spectrum of enterprise applications and infrastructure technologies through our cloud and license offerings. Revenue streams included in our cloud and license business are:
• Cloud services and license support revenues, which include:
o license support revenues, which are earned by providing Oracle license
support services to customers that have elected to purchase support
services in connection with the purchase of Oracle applications and
infrastructure software licenses for use in cloud, on-premise and other
IT environments. Substantially all license support customers renew
their support contracts with us upon expiration in order to
continue to
benefit from technical support services and the periodic
issuance of
unspecified updates and enhancements, which current license support
customers are entitled to receive. License support contracts are
generally priced as a percentage of the net fees paid by the customer
to purchase a cloud license and/or on-premise license; are generally
billed in advance of the support services being performed; are
generally renewed at the customer's option; and are generally
recognized as revenues ratably over the contractual period that the
support services are provided, which is generally one year; and
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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 are
generally
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 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, which include revenues from
the licensing of our software products including Oracle Applications,
Oracle Database, Oracle Middleware and Java, among others, which our
customers deploy within cloud-based, on-premise and other IT environments.
Our cloud license and on-premise license transactions are generally
perpetual in nature and are generally recognized as revenues up front at
the point in time when the software is made available to the customer to
download and use. Revenues from usage-based royalty arrangements for
distinct cloud licenses and on-premise licenses are recognized at 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 and license support revenues relative to our cloud license and on-premise license revenues, hardware revenues and services revenues has increased and we expect this trend to continue. Cloud services and license support revenues represented 73% and 74% of our total revenues for the three and six months endedNovember 30, 2021 , respectively, and 72% and 73% for the three and six months endedNovember 30, 2020 , 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
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historical upward trend of our cloud and license business' revenues over the course of the four quarters within a particular fiscal year is primarily due to the addition of new cloud services and license support contracts to the customer contract base that we generally recognize as revenues ratably or based upon customer usage over the respective contractual terms and the renewal of existing customers' cloud services and license support contracts over the course of each fiscal year that we generally recognize as revenues in a similar manner; and the historical upward trend of our cloud license and on-premise license revenues, which we generally recognize at a point in time upon delivery; in each case over those four fiscal quarterly periods.
Hardware Business
Our hardware business, which represented 8% of our total revenues on a trailing 4-quarter basis, provides a broad selection of enterprise hardware products and hardware-related software products including Oracle Engineered Systems, servers, storage, industry-specific hardware offerings, operating systems, virtualization, management and other hardware-related software, and related hardware support. Each hardware product and its related software, such as an operating system or firmware, are highly interdependent and interrelated and are accounted for as a combined performance obligation. The revenues for this combined performance obligation are generally recognized at the point in time that the hardware product and its related software are delivered to the customer and ownership is transferred to the customer. We expect to make investments in research and development to improve existing hardware products and services and to develop new hardware products and services. The majority of our hardware products are sold through indirect channels, including independent distributors and value-added resellers. Our hardware support offerings provide customers with unspecified software updates for software components that are essential to the functionality of our hardware products and associated software products. Our hardware support offerings can also include product repairs, maintenance services and technical support services. Hardware support contracts are entered into and renewed at the option of the customer, are generally priced as a percentage of the net hardware products fees and are generally recognized as revenues ratably as the hardware support services are delivered over the contractual terms.
We generally expect our hardware business to have lower operating margins as a
percentage of revenues than our cloud and license business due to the
incremental costs we incur to produce and distribute these products and to
provide support services, including direct materials and labor costs.
Our quarterly hardware revenues are difficult to predict. Our hardware revenues, cost of hardware and hardware operating margins that we report are affected by many factors, including our manufacturing partners' abilities to timely manufacture or deliver a few large hardware transactions, with this factor becoming more pronounced in recent quarters due to global supply chain constraints for certain technology components; our strategy for and the position of our hardware products relative to competitor offerings; customer demand for competing offerings, including cloud infrastructure offerings; the strength of general economic and business conditions; governmental budgetary constraints; whether customers decide to purchase hardware support contracts at or in close proximity to the time of hardware product sale; the percentage of our hardware support contract customer base that renews its support contracts and the close association between hardware products, which have a finite life, and customer demand for related hardware support as hardware products age; customer decisions to either maintain or upgrade their existing hardware infrastructure to newly developed technologies that are available; and foreign currency rate fluctuations.
Services Business
Our services business, which represented 7% of our total revenues on a trailing
4-quarter basis, helps customers and partners maximize the performance of their
investments in Oracle applications and infrastructure 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. The pace of our acquisitions has slowed in recent years, 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, among others, before deciding to move forward with an acquisition.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance withU.S. generally accepted accounting principles (GAAP) as set forth in theFinancial Accounting Standards Board's Accounting Standards Codification (ASC), and we consider the various staff accounting bulletins and other applicable guidance issued by theSEC . GAAP, as set forth within the ASC, requires us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. To the extent that there are differences between these estimates, judgments or assumptions and actual results, our financial statements will be affected. The accounting policies that reflect our more significant estimates, judgments and assumptions and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include: • Revenue Recognition; • Business Combinations; •Goodwill and Intangible Assets-Impairment Assessments; • Accounting for Income Taxes; and • Legal and Other Contingencies. During the first half of fiscal 2022, there were no significant changes to our critical accounting policies and estimates. Management's Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for our fiscal year endedMay 31, 2021 provides a more complete discussion of our critical accounting policies and estimates.
Results of Operations
Presentation of Operating Segment Results and Other Financial Information
In our results of operations discussion below, we provide an overview of our
total consolidated revenues, total consolidated operating expenses and total
consolidated operating margin, all of which are presented on a GAAP basis. We
also present a GAAP-based discussion below for substantially all of the other
expense items as presented in our condensed consolidated statements of
operations that are not directly attributable to our three businesses.
In addition, we discuss below the results of each of our three businesses-cloud
and license, hardware and services-which are our operating segments as defined
pursuant to ASC 280, Segment Reporting. The financial reporting for our three
businesses that is presented below is presented in a manner that is consistent
with that used by our CODMs. Our operating segment presentation below reflects
revenues, direct costs and sales and marketing expenses that correspond to and
are directly attributable to each of our three businesses. We also
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utilize these inputs to calculate and present a segment margin for each of our
three businesses in the discussion below.
Consistent with our internal management reporting processes, the below operating segment presentation for the first half of fiscal 2021 is noted to include any revenues adjustments related to cloud services and license support contracts that would have otherwise been recorded by the acquired businesses as independent entities but were not recognized in our condensed consolidated statements of operations for the periods presented due to business combination accounting requirements. Refer to "Supplemental Disclosure Related to Certain Charges" below for additional discussion of these items and Note 9 of Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report for a reconciliation of the summations of our total operating segment revenues as presented in the discussion below to total revenues as presented per our condensed consolidated statements of operations for all periods presented. In addition, research and development expenses, general and administrative expenses, stock-based compensation expenses, amortization of intangible assets, certain other expense allocations, acquisition related and other expenses, restructuring expenses, interest expense, non-operating income or expenses, net and benefit from (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 9 of Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report for a reconciliation of the summations of total segment margin as presented in the discussion below to total (loss) income before income taxes as presented per our condensed consolidated statements of operations for all periods presented. We experienced COVID-19 related impacts to our businesses during each of the fiscal 2022 and 2021 periods presented. Certain of these historical impacts to our operating results are further discussed below. Any future impacts are currently unknown.
Separately, as described further below and in Note 11 of Notes to Condensed
Consolidated Financial Statements included elsewhere in this Quarterly Report,
we remitted and recorded
during the fiscal 2022 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 theU.S. Dollar against major international currencies. In order to provide a framework for assessing how our underlying businesses performed, excluding the effects of foreign currency rate fluctuations, we compare the percent change in the results from one period to another period in this Quarterly Report using constant currency disclosure. To present this information, current and comparative prior period results for entities reporting in currencies other thanU.S. Dollars are converted intoU.S. Dollars at constant exchange rates (i.e., the rates in effect onMay 31, 2021 , which was the last day of our prior fiscal year) rather than the actual exchange rates in effect during the respective periods. For example, if an entity reporting in Euros had revenues of1.0 million Euros from products sold onNovember 30, 2021 and 2020, our financial statements would reflect reported revenues of$1.12 million in the first half of fiscal 2022 (using 1.12 as the month-end average exchange rate for the period) and$1.17 million in the first half of fiscal 2021 (using 1.17 as the month-end average exchange rate for the period). The constant currency presentation, however, would translate the results for the first half of fiscal 2022 and 2021 using theMay 31, 2021 exchange rate and indicate, in this example, no change in revenues during the period. In each of the tables below, we present the percent change based on actual, unrounded results in reported currency and in constant currency. 28
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Total Revenues and Operating Expenses
Three Months Ended November 30, Six Months Ended November 30,
Percent Change Percent Change
(Dollars in millions) 2021 Actual Constant 2020 2021 Actual Constant 2020
Total Revenues by Geography:
Americas $ 5,736 9% 9% $ 5,259 $ 11,056 7% 7% $ 10,327
EMEA(1) 2,953 4% 4% 2,852 5,737 3% 2% 5,590
Asia Pacific 1,671 -1% 1% 1,689 3,294 1% 2% 3,250
Total revenues 10,360 6% 6% 9,800 20,087 5% 4% 19,167
Total Operating Expenses 11,184 80% 79% 6,217 17,485 41% 40% 12,373
Total Operating (Loss) Margin $ (824 ) * * $ 3,583 $ 2,602 -62% -60% $ 6,794
Total Operating Margin % -8% 37% 13% 35%
% Revenues by Geography:
Americas 55% 54% 55% 54%
EMEA 29% 29% 29% 29%
Asia Pacific 16% 17% 16% 17%
Total Revenues by Business:
Cloud and license $ 8,791 7% 8% $ 8,204 $ 16,974 6% 5% $ 16,037
Hardware 767 -9% -8% 844 1,530 -8% -8% 1,658
Services 802 7% 7% 752 1,583 8% 7% 1,472
Total revenues $ 10,360 6% 6% $ 9,800 $ 20,087 5% 4% $ 19,167
% Revenues by Business:
Cloud and license 85% 83% 84% 83%
Hardware 7% 9% 8% 9%
Services 8% 8% 8% 8%
(1) Comprised of
* Not meaningful Excluding the effects of foreign currency rate fluctuations, our total revenues increased in the fiscal 2022 periods presented, relative to the corresponding prior year periods, due to growth in our cloud and license business' revenues and services business' revenues, which were partially offset by a decline in our hardware business' revenues. The constant currency increases in our cloud and license business' revenues during the fiscal 2022 periods presented, relative to the corresponding prior year periods, were attributable to growth in our cloud services and license support revenues and cloud license and on-premise license revenues as customers purchased our applications and infrastructure technologies via cloud and license deployment models and renewed their related cloud contracts and license support contracts to continue to gain access to the latest versions of our technologies and to receive support services. The constant currency increases in our services business' revenues during the fiscal 2022 periods presented, relative to the corresponding prior year periods, were attributable to an increase in revenues for each of our primary services offerings. The constant currency decreases in our hardware business' revenues during the fiscal 2022 periods presented, relative to the corresponding prior year periods, were due to the emphasis we placed on the marketing and sale of our growing cloud-based infrastructure technologies and the de-emphasis of our sales and marketing efforts for certain of our non-strategic hardware products and related support services. All three of our businesses' revenues were adversely impacted during each of the first half of fiscal 2022 and 2021 due to the effects of the COVID-19 pandemic. While we expect these effects to be temporary, the impacts of COVID-19 for future periods are unknown. In constant currency, theAmericas region contributed 76% and 80%, respectively, the EMEA region contributed 21% and 12%, respectively, and theAsia Pacific region contributed 3% and 8%, respectively, to the total revenues growth during the second quarter and the first half of fiscal 2022, respectively, in each case relative to the corresponding prior year periods. 29
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Excluding the effects of foreign currency rate fluctuations, our total operating expenses increased during the fiscal 2022 periods presented, relative to the corresponding prior year periods, substantially due to certain litigation related charges recorded to acquisition related and other expenses during the fiscal 2022 periods presented and as further described below and in Note 11 of Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report; higher cloud services and license support expenses, which increased primarily due to higher infrastructure investments that were made to support the increase in our cloud and license business' revenues; higher services expenses, which increased primarily due to higher employee related and external contractor expenses; and higher sales and marketing expenses and research and development expenses, both of which increased primarily due to higher employee related expenses. These constant currency expense increases were partially offset by lower hardware products and support costs and a related decrease in hardware sales and marketing costs, both of which aligned to lower hardware revenues, lower amortization of intangible assets, lower general and administrative expenses and lower restructuring expenses during the fiscal 2022 periods presented. In addition, during the second quarter and first half of fiscal 2022, we recorded$125 million and$250 million of gains on operating asset sales, respectively, which were allocated as a benefit to most of our operating expense lines as presented per our condensed consolidated statements of operations during these periods. During all periods presented, we curtailed a number of variable expenditures across all of our lines of businesses and functions including employee travel expenses and certain marketing 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. During the fiscal 2022 periods presented, certain litigation related charges as further described below and in Note 11 of Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report contributed to our constant currency operating loss during the second quarter of fiscal 2022 and reduced our constant currency operating margin during the first half of fiscal 2022, in each case relative to the corresponding prior year periods. The unfavorable impact of the litigation related charges to our fiscal 2022 operating results was partially offset by higher total margin generated by our operating segments and the aforementioned gains from operating asset sales 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 (loss)
income:
Three Months Ended Six Months Ended
November 30, November 30,
(in millions) 2021 2020 2021 2020
Cloud services and license support deferred
revenues(1) $ - $ - $ - $ 1
Amortization of intangible assets(2) 299 345 603 690
Acquisition related and other(3) 4,667 76 4,687 95
Restructuring(4) 32 96 70 270
Stock-based compensation, operating
segments(5) 192 133 344 249
Stock-based compensation, R&D and G&A(5) 489 355 882 667
Income tax effects(6) (1,052 ) (212 ) (1,473 ) (548 )
$ 4,627 $ 793 $ 5,113 $ 1,424
(1) Due to business combination accounting rules that were applicable to
acquisitions closed prior to fiscal 2022, we have estimated the fair values
of the cloud services and license support contracts assumed and did not
recognize the cloud services and license support revenue amounts presented in
the above table 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.
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(2) Represents the amortization of intangible assets, substantially all of which
were acquired in connection with our acquisitions. As of
estimated future amortization related to intangible assets was as follows (in
millions):
Remainder of fiscal 2022 $ 534
Fiscal 2023 716
Fiscal 2024 473
Fiscal 2025 124
Fiscal 2026 24
Fiscal 2027 6
Thereafter 4
Total intangible assets, net $ 1,881
(3) Acquisition related and other expenses substantially consisted of certain
litigation related charges during the fiscal 2022 periods presented as
further described in Note 11 of Notes to Condensed Consolidated Financial
Statements included elsewhere in this Quarterly Report. We consider the
litigation related charges that are included in this line item to be outside
our ordinary course of business based on the following considerations: (i)
the unprecedented nature of the litigation related charges including the
nature and size of the damages awarded; (ii) the dissimilarity of this
litigation and related charges to recurring litigation of which we are a
party in our normal business course for which any and all such charges are
included in our GAAP operating results and are not separately quantified and
disclosed within this line item or any other line in the table presented
above; (iii) the complexity of the case; (iv) the counterparty involved; and
(v) our expectation that litigation related charges of this nature will not
recur in future periods; amongst other factors. For all periods presented,
acquisition related and other expenses also consisted of personnel related
costs for transitional and certain other employees, certain business
combination adjustments including certain adjustments after the measurement
period has ended, and certain other operating items, net.
(4) Restructuring expenses during the fiscal 2022 periods presented primarily
related to employee severance in connection with our Fiscal 2022 Oracle
Restructuring Plan (2022 Restructuring Plan). Restructuring expenses during
the fiscal 2021 periods presented primarily related to employee severance in
connection with our Fiscal 2019 Oracle Restructuring Plan (2019 Restructuring
Plan). Additional information regarding certain of our restructuring plans is
provided in management’s discussion below under “Restructuring Expenses,” in
Note 5 of Notes to Condensed Consolidated Financial Statements included
elsewhere in this Quarterly Report and in Note 8 of Notes to Consolidated
Financial Statements included in our Annual Report on Form 10-K for the
fiscal year ended
(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 Six Months Ended
November 30, November 30,
2021 2020 2021 2020
Cloud services and license support $ 50 $ 36 $ 90 $ 66
Hardware 4 3 7 6
Services 18 14 32 26
Sales and marketing 120 80 215 151
Stock-based compensation, operating segments 192 133 344 249
Research and development 423 314 767 590
General and administrative 66 41 115 77
Total stock-based compensation $ 681 $ 488 $ 1,226 $ 916
(6) 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. For the second quarter and
first half of fiscal 2021, the applicable jurisdictional tax rates applied to
our income before income taxes after excluding the tax effects of items
within the table above such as for stock-based compensation, amortization of
intangible assets, restructuring, and certain acquisition related and other
items resulted in effective tax rates of 18.7% and 18.9%, respectively,
instead of 17.8% and 15.7%, respectively, which represented our effective tax
rates as derived per our condensed consolidated statements of operations.
Cloud and License Business
Our cloud and license business engages in the sale and marketing of our
applications and infrastructure technologies that are delivered through various
deployment models and include: Oracle license support offerings; Oracle Cloud
Services offerings; and Oracle cloud license and on-premise license offerings.
License support revenues are typically generated through the sale of
applications and infrastructure license support contracts related to cloud
licenses and on-premise licenses; are purchased by our customers at their
option; and are generally recognized as revenues ratably over the contractual
term, which is generally one year. Our cloud services
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deliver applications and infrastructure technologies on a subscription basis via
cloud-based deployment models that we develop, provide unspecified updates and
enhancements for, deploy, host, manage and support. Revenues for our cloud
services are generally recognized over the contractual term, which is generally
one to three years, or in the case of usage model contracts, as the cloud
services are consumed. Cloud license and on-premise license revenues represent
fees earned from granting customers licenses, generally on a perpetual basis, to
use our database and middleware and our applications software products within
cloud and on-premise IT environments and are generally recognized up front at
the point in time when the software is made available to the customer to
download and use. We continue to place significant emphasis, both domestically
and internationally, on direct sales through our own sales force. We also
continue to market certain of our offerings through indirect channels. Costs
associated with our cloud and license business are included in cloud services
and license support expenses, and sales and marketing expenses. These costs are
largely personnel and infrastructure related including the cost of providing our
cloud services and license support offerings, salaries and commissions earned by
our sales force for the sale of our cloud and license offerings, and marketing
program costs.
Three Months Ended November 30, Six Months Ended November 30,
Percent Change Percent Change
(Dollars in millions) 2021 Actual Constant 2020 2021 Actual Constant 2020(1)
Cloud and License Revenues:
Americas $ 4,994 11% 11% $ 4,494 $ 9,575 9% 8% $ 8,815
EMEA 2,458 4% 5% 2,369 4,755 2% 1% 4,662
Asia Pacific 1,339 0% 2% 1,341 2,644 3% 4% 2,561
Total revenues 8,791 7% 8% 8,204 16,974 6% 5% 16,038
Expenses:
Cloud services and license
support(2) 1,184 17% 18% 1,008 2,337 19% 18% 1,966
Sales and marketing(2) 1,696 5% 5% 1,620 3,322 2% 2% 3,253
Total expenses(2) 2,880 10% 10% 2,628 5,659 8% 8% 5,219
Total Margin $ 5,911 6% 7% $ 5,576 $ 11,315 5% 4% $ 10,819
Total Margin % 67% 68% 67% 67%
% Revenues by Geography:
Americas 57% 55% 56% 55%
EMEA 28% 29% 28% 29%
Asia Pacific 15% 16% 16% 16%
Revenues by Offerings:
Cloud services and license
support(1) $ 7,554 6% 6% $ 7,112 $ 14,925 6% 6% $ 14,060
Cloud license and on-premise
license 1,237 13% 16% 1,092 2,049 4% 4% 1,978
Total revenues(1) $ 8,791 7% 8% $ 8,204 $ 16,974 6% 5% $ 16,038
Cloud Services and License
Support Revenues by
Ecosystem:
Applications cloud services
and license support $ 3,149 9% 8% $ 2,901 $ 6,190 8% 7% $ 5,718
Infrastructure cloud
services and license support 4,405 5% 5% 4,211 8,735 5% 4% 8,342
Total cloud services and
license support revenues $ 7,554 6% 6% $ 7,112 $ 14,925 6% 6% $ 14,060
(1) Revenues presented for the first half of fiscal 2021 included cloud services
and license support revenue adjustments related to certain cloud services and
license support contracts that would have otherwise been recorded as revenues
by the acquired businesses as independent entities but were not recognized in
our GAAP-based condensed consolidated statements of operations for the
periods presented due to business combination accounting rules that were
applicable to acquisitions closed prior to fiscal 2022. Such revenue
adjustments were included in our operating segment results for the first half
of fiscal 2021 for purposes of reporting to and review by our CODMs. See
“Presentation of Operating Segment Results and Other Financial Information”
above for additional information.
(2) Excludes stock-based compensation and certain expense allocations. Also
excludes amortization of intangible assets and certain other GAAP-based
expenses, which were not allocated to our operating segment results for
purposes of reporting to and review by our CODMs, as further described under
“Presentation of Operating Segment Results and Other Financial Information”
above.
Excluding the effects of foreign currency rate fluctuations, our cloud and
license business' total revenues increased in the fiscal 2022 periods presented,
relative to the corresponding prior year periods, due to growth in our cloud
services and license support revenues and growth in our cloud license and
on-premise license revenues as customers purchased our applications and
infrastructure technologies via cloud and license deployment models
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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. The growth in our cloud and license business' revenues was adversely impacted during each of the fiscal 2022 and 2021 periods presented due to the COVID-19 pandemic, and the impacts of COVID-19 for future periods are unknown. In constant currency, theAmericas region contributed 77% and 82%, respectively, the EMEA region contributed 18% and 6%, respectively, and theAsia Pacific region contributed 5% and 12%, respectively, to the revenues growth for this business during the second quarter and the first half of fiscal 2022, respectively. In constant currency, our total cloud and license business' expenses increased in the fiscal 2022 periods presented, relative to the corresponding prior year periods, due to higher cloud services and license support expenses which were primarily attributable to higher technology infrastructure expenses and higher employee related expenses due to higher headcount to support the increase in our cloud and license business' revenues; and higher sales and marketing expenses, primarily due to higher employee related expenses from higher headcount. These constant currency expense increases were partially offset by an allocation of gains 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 to accelerate during fiscal 2022 as we increase our existing data center capacity and establish data centers in new geographic locations in order to meet current and expected customer demand. Excluding the effects of currency rate fluctuations, our cloud and license business' total margin increased during the fiscal 2022 periods presented, relative to the corresponding prior year periods, due to the increase in total revenues for this business. In constant currency, total margin as a percentage of revenues for this segment was flat in the second quarter of fiscal 2022 and decreased slightly during the first half of fiscal 2022, each in comparison to the corresponding prior year periods, due to expenses growth.
Hardware Business
Our hardware business' revenues are generated from the sales of our Oracle
Engineered Systems, server, storage, and industry-specific hardware offerings.
The hardware product and related software, such as an operating system or
firmware, are highly interdependent and interrelated and are accounted for as a
combined performance obligation. The revenues for this combined performance
obligation are generally recognized at the point in time that the hardware
product is delivered to the customer and ownership is transferred to the
customer. Our hardware business also earns revenues from the sale of hardware
support contracts purchased by our customers at their option and that are
generally recognized as revenues ratably as the hardware support services are
delivered over the contractual term, which is generally one year. The majority
of our hardware products are sold through indirect channels such as independent
distributors and value-added resellers and we also market and sell our hardware
products through our direct sales force. Operating expenses associated with our
hardware business include the cost of hardware products, which consists of
expenses for materials and labor used to produce these products by our internal
manufacturing operations or by third-party manufacturers, warranty and related
expenses and the impact of periodic changes in inventory valuation, including
the impact of inventory determined to be excess and obsolete; the cost of
materials used to repair customer products; the cost of labor and infrastructure
to provide support services; and sales and marketing expenses, which are largely
personnel related and include variable compensation earned by our sales force
for the sales of our hardware offerings.
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Three Months Ended November 30 , Six Months Ended November 30 ,
Percent Change Percent Change
(Dollars in millions) 2021 Actual Constant 2020 2021 Actual Constant 2020 Hardware Revenues: Americas$ 368 -12% -12%$ 419 $ 740 -11% -11%$ 828 EMEA 228 -5% -4% 241 460 0% 0% 461 Asia Pacific 171 -7% -6% 184 330 -10% -10% 369 Total revenues 767 -9% -8% 844 1,530 -8% -8% 1,658 Expenses: Hardware products and support(1) 221 -6% -6% 236 459 -3% -4% 475 Sales and marketing(1) 88 -6% -6% 94 177 -8% -8% 192 Total expenses(1) 309 -6% -6% 330 636 -5% -5% 667 Total Margin$ 458 -11% -10%$ 514 $ 894 -10% -10%$ 991 Total Margin % 60% 61% 58% 60% % Revenues by Geography: Americas 48% 50% 48% 50% EMEA 30% 28% 30% 28% Asia Pacific 22% 22% 22% 22%
(1) Excludes stock-based compensation and certain expense allocations. Also
excludes amortization of intangible assets and certain other GAAPbased
expenses, which were not allocated to our operating segment results for
purposes of reporting to and review by our CODMs, as further described under
“Presentation of Operating Segment Results and Other Financial Information”
above.
Our constant currency hardware revenues declined in the fiscal 2022 periods
presented, relative to the corresponding prior year periods, primarily due to
our continued emphasis on the marketing and sale of our growing cloud-based
infrastructure technologies and the de-emphasis of our sales and marketing
efforts for certain of our non-strategic hardware products and related support
services, the net impact of 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 each of the fiscal 2022 and 2021 periods presented due
to the impacts of the COVID-19 pandemic, including global supply chain shortages
for technology components that resulted in certain manufacturing delays, and any
such prospective impacts are unknown. Geographically, we experienced constant
currency revenue declines in all regions during the fiscal 2022 periods
presented.
Excluding the effects of currency rate fluctuations, total hardware expenses
decreased in the fiscal 2022 periods presented, relative to the corresponding
prior year periods, primarily due to lower hardware product expenses, lower
hardware support costs and lower sales and marketing costs, all of which aligned
to lower hardware revenues.
In constant currency, our hardware business' total margin and total margin as a
percentage of revenues decreased during the fiscal 2022 periods presented,
relative to the corresponding prior year periods, due to lower total revenues
for this business.
Services Business
We offer services to customers and partners to help maximize the performance of
their investments in Oracle applications and infrastructure technologies.
Services revenues are generally recognized over time as the services are
performed. The cost of providing our services consists primarily of personnel
related expenses, technology infrastructure expenditures, facilities expenses
and external contractor expenses.
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Three Months Ended November 30, Six Months Ended November 30,
Percent Change Percent Change
(Dollars in millions) 2021 Actual Constant 2020 2021 Actual Constant 2020
Services Revenues:
Americas $ 374 8% 8% $ 347 $ 741 8% 8% $ 686
EMEA 267 11% 11% 241 522 12% 11% 466
Asia Pacific 161 -2% 0% 164 320 0% 1% 320
Total revenues 802 7% 7% 752 1,583 8% 7% 1,472
Total Expenses(1) 631 6% 6% 595 1,240 5% 4% 1,180
Total Margin $ 171 9% 10% $ 157 $ 343 18% 18% $ 292
Total Margin % 21% 21% 22% 20%
% Revenues by Geography:
Americas 47% 46% 47% 46%
EMEA 33% 32% 33% 32%
Asia Pacific 20% 22% 20% 22%
(1) Excludes stock-based compensation and certain allocations. Also excludes
certain other GAAP-based expenses, which were not allocated to our operating
segment results for purposes of reporting to and review by our CODMs, as
further described under “Presentation of Operating Segment Results and Other
Financial Information” above.
Excluding the effects of currency rate fluctuations, our total services revenues increased in the fiscal 2022 periods presented, relative to the corresponding prior year periods, due to revenue increases in each of our primary services offerings. Our services business revenues were adversely affected during the fiscal 2022 and 2021 periods presented by the impacts of COVID-19, including the impacts of consulting project delays due to customer resource constraints and in-person meeting restrictions imposed by certain jurisdictions, among others, and any such prospective impacts are unknown. In constant currency, theAmericas region contributed 49% of our services revenues growth for each of the fiscal 2022 periods presented, while the EMEA region contributed 50% and 48%, respectively, and theAsia Pacific region contributed 1% and 3%, respectively, to the revenues growth for this business during the second quarter and the first half of fiscal 2022, respectively. In constant currency, total services expenses increased during the fiscal 2022 periods presented, relative to the corresponding prior year periods, primarily due to higher employee related expenses and higher external contractor expenses. In constant currency, our services business' total margin and total margin as a percentage of revenues increased during the fiscal 2022 periods presented, relative to the corresponding prior year periods, due to higher total revenues for this business. Research and Development Expenses: Research and development expenses consist primarily of personnel related expenditures. We intend to continue to invest significantly in our research and development efforts because, in our judgment, they are essential to maintaining our competitive position. Three Months Ended November 30, Six Months Ended November 30, Percent Change Percent Change (Dollars in millions) 2021 Actual Constant 2020 2021 Actual Constant 2020 Research and development(1)$ 1,331 3% 3%$ 1,287 $ 2,671 3% 2%$ 2,600 Stock-based compensation 423 35% 35% 314 767 30% 30% 590 Total expenses$ 1,754 10% 9%$ 1,601 $ 3,438 8% 7%$ 3,190 % of Total Revenues 17% 16% 17% 17%
(1) Excluding stock-based compensation
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Table of Contents On a constant currency basis, total research and development expenses increased during the fiscal 2022 periods presented, relative to the corresponding prior year periods, primarily due to higher employee related expenses due to increased headcount and higher stock-based compensation expenses. The constant currency expense increases during the fiscal 2022 periods presented were partially offset by an allocation of gains from fiscal 2022 operating asset sales as described above.
General and Administrative Expenses: General and administrative expenses
primarily consist of personnel related expenditures for IT, finance, legal and
human resources support functions.
Three Months Ended November 30, Six Months Ended November 30,
Percent Change Percent Change
(Dollars in millions) 2021 Actual Constant 2020 2021 Actual Constant 2020
General and administrative(1) $ 253 -10% -10% $ 283 $ 503 -7% -8% $ 542
Stock-based compensation 66 58% 58% 41 115 49% 49% 77
Total expenses $ 319 -2% -2% $ 324 $ 618 0% -1% $ 619
% 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 decreased slightly during the fiscal 2022 periods
presented, relative to the corresponding prior year periods, primarily due to an
allocation of gains from fiscal 2022 operating asset sales as described above,
partially offset by higher stock-based compensation expenses.
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 November 30, Six Months Ended November 30,
Percent Change Percent Change
(Dollars in millions) 2021 Actual Constant 2020 2021 Actual Constant 2020
Developed technology $ 125 -21% -21% $ 158 $ 252 -20% -20% $ 316
Cloud services and license
support agreements and
related relationships 153 -7% -6% 165 308 -6% -6% 329
Other 21 -6% -5% 22 43 -6% -6% 45
Total amortization of
intangible assets $ 299 -13% -13% $ 345 $ 603 -13% -13% $ 690
Amortization of intangible assets decreased during the fiscal 2022 periods
presented, relative to the corresponding prior year periods, due to a reduction
in expenses associated with certain of our intangible assets that became fully
amortized, partially offset by a smaller amount of additional amortization from
intangible assets that we acquired in connection with our recent acquisitions.
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Acquisition Related and Other Expenses: Acquisition related and other expenses
substantially consisted of certain litigation related charges that we generally
do not expect to recur during the fiscal 2022 periods presented as further
described in Note 11 of Notes to Condensed Consolidated Financial Statements
included elsewhere in this Quarterly Report. For all periods presented,
acquisition related and other expenses also consisted 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) 2021 Actual
Constant 2020 2021 Actual Constant 2020
Transitional and other employee related costs
102%
Business combination adjustments, net
1 * * - 4 * * 1 Litigation related charges and other, net 4,664 *
* 75 4,679 * * 91
Total acquisition related and other expenses
* *$ 76 $ 4,687 * *$ 95 * Not meaningful On a constant currency basis, acquisition related and other expenses increased during the fiscal 2022 periods presented, relative to the corresponding prior year periods, primarily due to certain litigation related charges that we generally do not expect to recur as further described in Note 11 of Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report. Restructuring Expenses: Restructuring expenses resulted from the execution of management approved restructuring plans that were generally developed to improve our cost structure and/or operations, often in conjunction with our acquisition integration strategies and/or other strategic initiatives. Restructuring expenses consist of employee severance costs and other contract termination costs to improve our cost structure prospectively. For additional information regarding our restructuring plans, see Note 5 of Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report and Note 8 of Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year endedMay 31, 2021 . Three Months Ended November 30, Six Months Ended November 30, Percent Change Percent Change (Dollars in millions) 2021 Actual Constant 2020 2021 Actual Constant 2020 Restructuring expenses$ 32 -67% -67%$ 96
Restructuring expenses in the fiscal 2022 periods presented primarily related to
our 2022 Restructuring Plan. Restructuring expenses in the fiscal 2021 periods
presented primarily related to our 2019 Restructuring Plan, which is
substantially complete. Our management approved, committed to and initiated the
2022 Restructuring Plan and the 2019 Restructuring Plan in order to restructure
and further improve efficiencies in our operations. We may incur additional
restructuring expenses in future periods due to the initiation of new
restructuring plans or from changes in estimated costs associated with existing
restructuring plans.
The majority of the initiatives undertaken by our 2022 Restructuring Plan were
effected to implement our continued emphasis in developing, marketing and
selling our cloud-based offerings. These initiatives primarily impacted certain
of our sales and marketing and research and development operations. 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 our secondgeneration cloud infrastructure.
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Interest Expense:
Three Months Ended November 30, Six Months Ended November 30,
Percent Change Percent Change
(Dollars in millions) 2021 Actual Constant 2020 2021 Actual Constant 2020
Interest expense $ 679 13% 13% $ 600 $ 1,384 14% 14% $ 1,214
Interest expense increased during the fiscal 2022 periods presented, relative to
the corresponding prior year periods, primarily due to higher average borrowings
resulting from our issuance of $15.0 billion of senior notes in March 2021 ,
partially offset by lower interest expense that resulted from $5.8 billion of
scheduled repayments made during the first half of fiscal 2022.
Non-Operating Income (Expenses), net: Non-operating income (expenses), net
consists primarily of interest income, net foreign currency exchange losses, the
noncontrolling interests in the net profits of our majority-owned subsidiaries
(primarily Oracle Financial Services Software Limited and Oracle Corporation
Japan ) and net other income and expenses, including net realized gains and
losses related to all of our investments, net unrealized gains and losses
related to the small portion of our investment portfolio related to our deferred
compensation plan, net unrealized gains and losses related to equity securities
and non-service net periodic pension income and losses.
Three Months Ended November 30, Six Months Ended November 30,
Percent Change Percent Change
(Dollars in millions) 2021 Actual Constant 2020 2021 Actual Constant 2020
Interest income $ 21 -23% -21% $ 27 $ 40 -30% -30% $ 58
Foreign currency losses, net (46 ) 179% 192% (16 ) (81 ) 21% 18% (66 )
Noncontrolling interests in
income (42 ) -2% -2% (43 ) (89 ) 11% 11% (81 )
Other, net 74 251% 270% 21 96 25% 29% 76
Total non-operating income
(expenses), net $ 7 * * $ (11 ) $ (34 ) 158% 97% $ (13 )
* Not meaningful
Fiscal Second Quarter 2022 Compared to Fiscal Second Quarter 2021: In constant
currency, we recorded non-operating income, net during the second quarter of
fiscal 2022 in comparison to non-operating expenses, net that we incurred during
the second quarter of fiscal 2021. Non-operating income, net during the second
quarter of fiscal 2022 was primarily due to higher other income, net, which was
primarily attributable to higher unrealized gains on certain marketable equity
securities investments and was partially reduced by higher losses associated
with equity investments for which we follow the equity method of accounting, in
each case during the second quarter of fiscal 2022 in comparison to the
corresponding prior year period. This increase in other income, net during the
second quarter of fiscal 2022 was partially offset by lower interest income and
higher foreign currency losses, net during this period.
First Half of Fiscal 2022 Compared to First Half of Fiscal 2021: Our
non-operating expenses, net increased in the first half of fiscal 2022 compared
to the first half of fiscal 2021 primarily due to lower interest income amounts
and higher foreign currency losses, net that we recognized during the first half
of fiscal 2022. These increases in our non-operating expenses, net were
partially offset by higher other income, net as described above.
Benefit from (Provision for) 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. Our benefit from (provision for) income taxes varied from that computed
at the U.S. federal statutory income tax rate for the periods presented
primarily due to earnings in foreign operations, state taxes, the U.S. research
and development tax credit, settlements with tax authorities, the tax effects of
stock-based compensation, the Foreign Derived Intangible Income deduction and
the tax effect of Global Intangible Low-Taxed Income. 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) 2021 Actual Constant 2020 2021 Actual Constant 2020
Benefit from (provision for)
income taxes $ 249 * * $ (530 ) $ 25 * * $ (874 )
Effective tax (benefit)
expense rate (16.6% ) 17.8% (2.1% ) 15.7%
* Not meaningful
Provision for income taxes decreased during the fiscal 2022 periods presented,
due primarily to tax implications of lower income before provision that, in each
case, were primarily attributable to certain litigation related charges as
further described in Note 11 of Notes to Condensed Consolidated Financial
Statements included elsewhere in this Quarterly Report and, to a much lesser
extent, an increase in tax benefits recognized on stock-based compensation
during the fiscal 2022 periods. These decreases to our fiscal 2022 income taxes
relative to the corresponding prior year periods were partially offset by the
absence of favorable unrecognized tax benefits due to settlements with tax
authorities and other events that we realized in the fiscal 2021 periods
presented.
Liquidity and Capital Resources
November 30, May 31,
(Dollars in millions) 2021 Change 2021
Working capital $ 12,197
-61%
Cash, cash equivalents and marketable securities
Working capital: The decrease in working capital as ofNovember 30, 2021 in comparison toMay 31, 2021 was primarily due to$15.0 billion of cash used for repurchases of our common stock,$4.7 billion of cash paid for certain litigation related items that we generally do not expect to recur,$2.5 billion of long-term senior notes that were reclassified to current liabilities, cash used to pay dividends to our stockholders and cash used for capital expenditures during the first half of fiscal 2022. These unfavorable impacts were partially offset by the favorable impacts to our net current assets resulting from our net income, net cash proceeds of$318 million associated with the sale of certain operating assets, and cash proceeds from stock option exercises, all of which occurred during the first half of fiscal 2022. 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, 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 atNovember 30, 2021 in comparison toMay 31, 2021 was primarily due to$15.0 billion of settled repurchases of our common stock,$5.8 billion of debt repayments,$4.7 billion of cash paid for certain litigation related items that we generally do not expect to recur, payments of cash dividends to our stockholders and cash used for capital expenditures. These cash outflows during the first half of fiscal 2022 were partially offset by certain cash inflows generated by our normal business operations, from the sales of certain operating assets, and from stock option exercises during the first half of fiscal 2022. Six Months Ended November 30, (Dollars in millions) 2021 Change 2020 Net cash provided by operating activities$ 1,709 -77%$ 7,341 Net cash provided by (used for) investing activities$ 9,949 *$ (5,803 ) Net cash used for financing activities$ (23,521 ) 113%$ (11,047 ) * Not meaningful Cash flows from operating activities: Our largest source of operating cash flows is cash collections from our customers following the purchase and renewal of their license support agreements. Payments from customers for these license support agreements are generally received near the beginning of the contracts' terms, which are generally one year in length. Over the course of a fiscal year, we also have historically generated cash from the sales of new licenses, cloud services, hardware offerings and other services. Our primary uses of cash from 39
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operating activities are typically for employee related expenditures, material
and manufacturing costs related to the production of our hardware products,
taxes, interest payments and leased facilities.
Net cash provided by operating activities decreased during the first half of fiscal 2022, relative to the corresponding prior year period, primarily due to lower net income that was primarily the result of cash payments made in connection with certain litigation related charges that we generally do not expect to recur and certain other cash unfavorable working capital changes, net, in each case during the first half of fiscal 2022 relative to the first half of fiscal 2021. Cash flows from investing activities: The changes in cash flows from investing activities primarily relate to the timing of our purchases, maturities and sales of our investments in marketable securities, and investments in capital and other assets, including certain intangible assets, to support our growth. Net cash provided by investing activities was$9.9 billion during the first half of fiscal 2022 compared to$5.8 billion of net cash used for investing activities during the first half of fiscal 2021. The increase in net cash provided by investing activities was primarily due to an increase in cash proceeds from sales and maturities of marketable securities and other investments and a decrease in the cash used for the purchases of marketable securities and other investments, partially offset by an increase in cash used for capital expenditures, in each case during the first half of fiscal 2022 relative to the first half of fiscal 2021. Cash flows from financing activities: The changes in cash flows from financing activities primarily relate to borrowings and repayments related to our debt instruments, stock repurchases, dividend payments and net proceeds related to employee stock programs. Net cash used for financing activities increased during the first half of fiscal 2022 compared to the first half of fiscal 2021 primarily due to higher stock repurchases, higher debt repayments, higher payments of dividends and higher net cash used for our employee stock program, in each case during the first half of fiscal 2022 in comparison to the first half of fiscal 2021. Free cash flow: To supplement our statements of cash flows presented on a GAAP basis, we use non-GAAP measures of cash flows on a trailing 4-quarter basis to analyze cash flows generated from our operations. We believe that free cash flow is also useful as one of the bases for comparing our performance with our competitors. The presentation of non-GAAP free cash flow is not meant to be considered in isolation or as an alternative to net income as an indicator of our performance, or as an alternative to cash flows from operating activities as a measure of liquidity. We calculate free cash flow as follows: Trailing 4-Quarters Ended November 30, (Dollars in millions) 2021 Change 2020 Net cash provided by operating activities$ 10,255 -27%$ 13,967 Capital expenditures (3,118 ) 70% (1,833 ) Free cash flow$ 7,137 -41%$ 12,134 Net income$ 10,262 $ 10,380 Free cash flow as percent of net income 70% 117% Recent Financing Activities: Common Stock Repurchase Program: Our Board of Directors has approved a program for us to repurchase shares of our common stock. OnDecember 9, 2021 , we announced that our Board of Directors approved an expansion of our stock repurchase program by an additional$10.0 billion . As ofNovember 30, 2021 , approximately$648 million remained available for stock repurchases pursuant to our stock repurchase program. Our stock repurchase authorization does not have an expiration date and the pace of our repurchase activity will depend on factors such as our working capital needs, our cash requirements for acquisitions and dividend payments, our debt repayment obligations or repurchases of our debt, our stock price, and economic and market conditions. Our stock repurchases may be effected from time to time through open market purchases or pursuant to a Rule 10b5-1 plan. Our stock repurchase program may be accelerated, suspended, delayed or discontinued at any time. 40
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Table of Contents Contractual Obligations: During the first half of fiscal 2022, there were no significant changes to our estimates of future payments under our fixed contractual obligations and commitments as presented in Part II, Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for our fiscal year endedMay 31, 2021 . 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.
Restricted Stock-Based Awards and Stock Options
Our stock-based compensation program is a key component of the compensation
package we provide to attract and retain certain of our talented employees and
align their interests with the interests of existing stockholders.
We recognize that restricted stock-based awards and stock options dilute existing stockholders and have sought to control the number of stock-based awards granted while providing competitive compensation packages. Consistent with these dual goals, our cumulative potential dilution sinceJune 1, 2018 has been a weighted-average annualized rate of 0.9% per year. The potential dilution percentage is calculated as the average annualized new restricted stock-based awards and stock options granted and assumed, net of restricted stock-based awards and stock options forfeited by employees leaving the company, divided by the weighted-average outstanding shares during the calculation period. This maximum potential dilution will only result if all restricted stock-based awards vest and all stock options are exercised. Of the outstanding stock options atNovember 30, 2021 , 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, 2021 , the maximum potential dilution from all outstanding restricted stock-based awards and unexercised stock options, regardless of when granted and regardless of whether vested or unvested, was 8.4%.
Recent Accounting Pronouncements
For information with respect to recent accounting pronouncements, if any, and the impact of these pronouncements on our consolidated financial statements, if any, see Note 1 of Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report.
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