Edgar Filing: ORACLE CORP

orcl-10q_20190228.htm

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended February 28, 2019

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

Commission File Number: 001-35992

Oracle Corporation

(Exact name of registrant as specified in its charter)

Delaware		54-2185193
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

500 Oracle Parkway Redwood City, California		94065
(Address of principal executive offices)		(Zip Code)

(650) 506-7000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☒		Accelerated filer ☐
Non-accelerated filer ☐		Smaller reporting company ☐
Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares of registrant’s common stock outstanding as of March 13, 2019 was: 3,417,654,000.

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ORACLE CORPORATION

FORM 10-Q QUARTERLY REPORT

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		Page

PART I.	FINANCIAL INFORMATION	3

Item 1.	Financial Statements (Unaudited)	3

	Condensed Consolidated Balance Sheets as of February 28, 2019 and May 31, 2018	3

	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended February 28, 2019 and 2018	4

	Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended February 28, 2019 and 2018	5

	Condensed Consolidated Statements of Equity for the Three and Nine Months Ended February 28, 2019 and 2018	6

	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended February 28, 2019 and 2018	7

	Notes to Condensed Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	50

Item 4.	Controls and Procedures	51

PART II.	OTHER INFORMATION	52

Item 1.	Legal Proceedings	52

Item 1A.	Risk Factors	52

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	52

Item 6.	Exhibits	53

	Signatures	54

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Cautionary Note on Forward-Looking Statements

For purposes of this Quarterly Report, the terms “Oracle,” “we,” “us” and “our” refer to Oracle Corporation and its consolidated subsidiaries. This Quarterly Report on Form 10-Q contains statements that are not historical in nature, are predictive in nature, or that depend upon or refer to future events or conditions or otherwise contain forward-looking statements within the meaning of Section 21 of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. These include, among other things, statements regarding:

•

our expectation that we will continue to acquire companies, products, services and technologies to further our corporate strategy;

•

our belief that our acquisitions enhance the products and services that we can offer to customers, expand our customer base, provide greater scale to accelerate innovation, grow our revenues and earnings, and increase stockholder value;

•

our expectation that, on a constant currency basis, our total cloud and license revenues generally will continue to increase due to expected growth in our cloud services and our license support offerings, continued demand for our cloud license and on-premise license offerings, and contributions from acquisitions;

•

our belief that our Oracle Cloud Infrastructure offerings are large opportunities for us to expand our cloud and license business;

•

our expectation that we will continue to place significant strategic emphasis on growing our cloud offerings;

•

our expectation that we and our customers will renew our cloud software-as-a-service (SaaS) and infrastructure-as-a-service (IaaS) contracts and hardware contracts when they are eligible for renewal, and our expectation that substantially all of our customers renew their license support contracts annually;

•

our expectation that our hardware business will have lower operating margins as a percentage of revenues than our cloud and license business;

•

our expectation that we will continue to make significant investments in research and development and related product opportunities, and our belief that research and development efforts are essential to maintaining our competitive position;

•

our expectation that our international operations will continue to provide a significant portion of our total revenues and expenses;

•

our expectation that we will continue paying cash dividends;

•

the sufficiency of our sources of funding for working capital, capital expenditures, contractual obligations, acquisitions, dividends, stock repurchases, debt repayments and other matters;

•

our belief that we have adequately provided under U.S. generally accepted accounting principles for outcomes related to our tax audits and that the final outcome of our tax related examinations, agreements or judicial proceedings will not have a material effect on our results of operations, and our belief that our net deferred tax assets will be realized in the foreseeable future;

•

our belief that the outcome of certain legal proceedings and claims to which we are a party will not, individually or in the aggregate, result in losses that are materially in excess of amounts already recognized, if any;

•

the possibility that certain legal proceedings to which we are a party could have a material impact on our future cash flows and results of operations;

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•

our expectations regarding the timing and amount of expenses relating to the Fiscal 2019 Oracle Restructuring Plan and the improved efficiencies in our operations that such plan will create;

•

the timing and amount of our stock repurchases, including our expectation that the levels of our future stock repurchase activity may be modified in comparison to past periods in order to use available cash for other purposes;

•

our expectation that seasonal trends will continue in the future;

•

our expectations regarding the impact of recent accounting pronouncements on our consolidated financial statements;

•

our expectation that, to the extent customers renew support contracts or cloud SaaS and IaaS contracts from companies that we have acquired, we will recognize revenues for the full contracts’ values over the respective renewal periods;

•

our ability to predict quarterly hardware revenues;

•

the percentage of remaining performance obligations that we expect to recognize as revenues over the next twelve months;

as well as other statements regarding our future operations, financial condition and prospects, and business strategies. Forward-looking statements may be preceded by, followed by or include the words “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “strives,” “estimates,” “will,” “should,” “is designed to” and similar expressions. We claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 for all forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are subject to risks, uncertainties and assumptions about our business that could affect our future results and could cause those results or other outcomes to differ materially from those expressed or implied in the forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in “Risk Factors” included in documents we file from time to time with the U.S. Securities and Exchange Commission (the SEC), including our Annual Report on Form 10-K for our fiscal year ended May 31, 2018 and our other Quarterly Reports on Form 10-Q filed by us in our fiscal 2019, which runs from June 1, 2018 to May 31, 2019.

We have no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or risks, except to the extent required by applicable securities laws. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements. New information, future events or risks could cause the forward-looking events we discuss in this Quarterly Report not to occur. You should not place undue reliance on these forward-looking statements, which reflect our expectations only as of the date of this Quarterly Report.

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PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements (Unaudited)

ORACLE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

As of February 28, 2019 and May 31, 2018

(Unaudited)

(in millions, except per share data)	February 28, 2019			May 31, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	14,720		$	21,620
Marketable securities		25,310			45,641
Trade receivables, net of allowances for doubtful accounts of $351 and $370 as of February 28, 2019 and May 31, 2018, respectively		3,993			5,136
Prepaid expenses and other current assets		3,594			3,762
Total current assets		47,617			76,159
Non-current assets:
Property, plant and equipment, net		6,197			5,897
Intangible assets, net		5,678			6,670
Goodwill, net		43,776			43,755
Deferred tax assets		2,033			1,395
Other non-current assets		4,137			3,975
Total non-current assets		61,821			61,692
Total assets	$	109,438		$	137,851
LIABILITIES AND EQUITY
Current liabilities:
Notes payable and other borrowings, current	$	4,487		$	4,491
Accounts payable		603			529
Accrued compensation and related benefits		1,258			1,806
Deferred revenues		8,007			8,341
Other current liabilities		3,631			3,957
Total current liabilities		17,986			19,124
Non-current liabilities:
Notes payable and other borrowings, non-current		51,672			56,128
Income taxes payable		13,208			13,429
Other non-current liabilities		2,334			2,297
Total non-current liabilities		67,214			71,854
Commitments and contingencies
Oracle Corporation stockholders’ equity:
Preferred stock, $0.01 par value—authorized: 1.0 shares; outstanding: none		—			—
Common stock, $0.01 par value and additional paid in capital—authorized: 11,000 shares; outstanding: 3,443 shares and 3,997 shares as of February 28, 2019 and May 31, 2018, respectively		26,732			28,950
(Accumulated deficit) retained earnings		(1,284	)		19,111
Accumulated other comprehensive loss		(1,734	)		(1,689	)
Total Oracle Corporation stockholders’ equity		23,714			46,372
Noncontrolling interests		524			501
Total equity		24,238			46,873
Total liabilities and equity	$	109,438		$	137,851

See notes to condensed consolidated financial statements.

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ORACLE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three and Nine Months Ended February 28, 2019 and 2018

(Unaudited)

	Three Months Ended February 28,						Nine Months Ended February 28,
(in millions, except per share data)	2019			2018			2019			2018
Revenues:
Cloud services and license support	$	6,662		$	6,587		$	19,908		$	19,454
Cloud license and on-premise license		1,251			1,299			3,334			3,525
Hardware		915			994			2,711			2,878
Services		786			796			2,416			2,512
Total revenues		9,614			9,676			28,369			28,369
Operating expenses:
Cloud services and license support⁽¹⁾		937			894			2,807			2,645
Hardware⁽¹⁾		339			393			998			1,116
Services⁽¹⁾		700			709			2,127			2,126
Sales and marketing⁽¹⁾		2,051			2,042			6,191			6,118
Research and development		1,426			1,496			4,464			4,541
General and administrative		316			339			935			977
Amortization of intangible assets		407			394			1,265			1,205
Acquisition related and other		(4	)		3			29			32
Restructuring		43			91			275			506
Total operating expenses		6,215			6,361			19,091			19,266
Operating income		3,399			3,315			9,278			9,103
Interest expense		(509	)		(533	)		(1,557	)		(1,477	)
Non-operating income, net		198			409			681			891
Income before provision for income taxes		3,088			3,191			8,402			8,517
Provision for income taxes		343			7,238			1,059			8,206
Net income (loss)	$	2,745		$	(4,047	)	$	7,343		$	311
Earnings (loss) per share:
Basic	$	0.78		$	(0.98	)	$	1.98		$	0.07
Diluted	$	0.76		$	(0.98	)	$	1.93		$	0.07
Weighted average common shares outstanding:
Basic		3,526			4,122			3,716			4,146
Diluted		3,617			4,122			3,811			4,268

⁽¹⁾	Exclusive of amortization of intangible assets, which is shown separately.

See notes to condensed consolidated financial statements.

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ORACLE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

For the Three and Nine Months Ended February 28, 2019 and 2018

(Unaudited)

	Three Months Ended February 28,						Nine Months Ended February 28,
(in millions)	2019			2018			2019			2018
Net income (loss)	$	2,745		$	(4,047	)	$	7,343		$	311
Other comprehensive income (loss), net of tax:
Net foreign currency translation gains (losses)		10			43			(148	)		51
Net unrealized gains on defined benefit plans		6			8			19			26
Net unrealized gains (losses) on marketable securities		233			(439	)		120			(567	)
Net unrealized (losses) gains on cash flow hedges		(18	)		6			(36	)		19
Total other comprehensive income (loss), net		231			(382	)		(45	)		(471	)
Comprehensive income (loss)	$	2,976		$	(4,429	)	$	7,298		$	(160	)

See notes to condensed consolidated financial statements.

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ORACLE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

For the Three and Nine Months Ended February 28, 2019 and 2018

(Unaudited)

	Three Months Ended February 28,						Nine Months Ended February 28,
(in millions, except per share data)	2019			2018			2019			2018
Common stock and additional paid in capital
Balance, beginning of period	$	27,430		$	28,474		$	28,950		$	27,065
Common stock issued		450			763			1,476			2,116
Stock-based compensation		427			389			1,259			1,211
Repurchase of common stock		(1,533	)		(548	)		(4,496	)		(884	)
Other, net		(42	)		(30	)		(457	)		(460	)
Balance, end of period	$	26,732		$	29,048		$	26,732		$	29,048
(Accumulated deficit) retained earnings
Balance, beginning of period	$	5,107		$	29,149		$	19,111		$	28,535
Cumulative-effect of accounting change		—			—			(110	)		—
Repurchase of common stock		(8,466	)		(3,452	)		(25,505	)		(5,617	)
Cash dividends declared		(670	)		(783	)		(2,126	)		(2,362	)
Net income (loss)		2,745			(4,047	)		7,343			311
Other, net		—			—			3			—
Balance, end of period	$	(1,284	)	$	20,867		$	(1,284	)	$	20,867
Other equity, net
Balance, beginning of period	$	(1,482	)	$	(513	)	$	(1,188	)	$	(470	)
Other comprehensive income (loss), net		231			(382	)		(45	)		(471	)
Other, net		41			51			23			97
Balance, end of period	$	(1,210	)	$	(844	)	$	(1,210	)	$	(844	)
Total stockholders' equity	$	24,238		$	49,071		$	24,238		$	49,071
Cash dividends declared per common share	$	0.19		$	0.19		$	0.57		$	0.57

See notes to condensed consolidated financial statements.

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ORACLE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Months Ended February 28, 2019 and 2018

(Unaudited)

	Nine Months Ended February 28,
(in millions)	2019			2018
Cash flows from operating activities:
Net income	$	7,343		$	311
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		900			878
Amortization of intangible assets		1,265			1,205
Deferred income taxes		(741	)		(740	)
Stock-based compensation		1,259			1,211
Other, net		144			(62	)
Changes in operating assets and liabilities, net of effects from acquisitions:
Decrease in trade receivables, net		1,106			1,633
Decrease (increase) in prepaid expenses and other assets		168			(105	)
Decrease in accounts payable and other liabilities		(647	)		(607	)
(Decrease) increase in income taxes payable		(410	)		7,444
Decrease in deferred revenues		(258	)		(442	)
Net cash provided by operating activities		10,129			10,726
Cash flows from investing activities:
Purchases of marketable securities and other investments		(1,310	)		(24,496	)
Proceeds from maturities of marketable securities and other investments		10,210			14,808
Proceeds from sales of marketable securities		11,328			2,261
Acquisitions, net of cash acquired		(330	)		—
Capital expenditures		(1,247	)		(1,358	)
Net cash provided by (used for) investing activities		18,651			(8,785	)
Cash flows from financing activities:
Payments for repurchases of common stock		(29,887	)		(6,421	)
Proceeds from issuances of common stock		1,468			2,116
Shares repurchased for tax withholdings upon vesting of restricted stock-based awards		(455	)		(467	)
Payments of dividends to stockholders		(2,126	)		(2,362	)
Proceeds from borrowings, net of issuance costs		—			9,945
Repayments of borrowings		(4,500	)		(7,300	)
Other, net		(95	)		(34	)
Net cash used for financing activities		(35,595	)		(4,523	)
Effect of exchange rate changes on cash and cash equivalents		(85	)		285
Net decrease in cash and cash equivalents		(6,900	)		(2,297	)
Cash and cash equivalents at beginning of period		21,620			21,784
Cash and cash equivalents at end of period	$	14,720		$	19,487
Non-cash investing and financing transactions:
Fair values of restricted stock-based awards and stock options assumed in connection with acquisitions	$	8		$	—
Change in unsettled repurchases of common stock	$	114		$	80
Change in unsettled investment purchases	$	—		$	(299	)
Change in unsettled investment sales	$	(168	)	$	—

See notes to condensed consolidated financial statements.

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

February 28, 2019

(Unaudited)

1.	BASIS OF PRESENTATION AND RECENT ACCOUNTING PRONOUNCEMENTS

Basis of Presentation

We have prepared the condensed consolidated financial statements included herein pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to such rules and regulations. However, we believe that the disclosures herein are adequate to ensure the information presented is not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended May 31, 2018.

We believe that all necessary adjustments, which consisted only of normal recurring items, have been included in the accompanying financial statements to present fairly the results of the interim periods. The results of operations for the interim periods presented are not necessarily indicative of the operating results to be expected for any subsequent interim period or for our fiscal year ending May 31, 2019.

During the first nine months of fiscal 2019, we adopted the following Accounting Standards Updates:

•

Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers: Topic 606 and subsequent amendments to the initial guidance: ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-12, ASU 2016-20, ASU 2017-10, ASU 2017-13 and ASU 2017-14 (collectively, Topic 606), utilizing the full retrospective method of transition whereby the results and related disclosures for the comparative fiscal 2018 periods presented in this Form 10-Q were recast to be presented as if Topic 606 had been in effect during such fiscal 2018 periods with any retrospective adjustments applicable prior to June 1, 2016 included as a cumulative-effect adjustment to accumulated other comprehensive loss and retained earnings. Refer to the Revenue Recognition and Deferred Sales Commission sections below for accounting policy updates upon our adoption of Topic 606.

•

ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (ASU 2017-12), which amends and simplifies existing guidance in order to allow companies to more accurately present the economic effects of risk management activities in the financial statements. We early adopted this new standard on June 1, 2018 using the modified retrospective method, which requires us to account for ASU 2017-12 as of the date of adoption with any retrospective adjustments applicable to prior periods included as a cumulative-effect adjustment to accumulated other comprehensive loss and retained earnings. The adoption of ASU 2017-12 did not have a material impact on our condensed consolidated financial statements as of the adoption date or for any of the periods presented. As a result of the adoption of ASU 2017-12, we have elected to modify certain of our hedge documentation to exclude the fair value of certain components of the related hedging instrument in our assessment of hedge effectiveness. See Note 7 for additional explanations of the impact of adoption.

•

ASU 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the presentation of Net Periodic Pension Costs and Net Periodic Postretirement Benefit Costs (ASU 2017-07), which provides guidance on the capitalization, presentation and disclosure of net benefit costs related to postretirement benefit plans. We adopted ASU 2017-07 on a full retrospective basis, which resulted in the retrospective reclassification of $14 million and $41 million of non-service net periodic pension cost for the three and nine months ended February 28, 2018, respectively, from line items within operating expenses into non-operating income, net.

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

February 28, 2019

(Unaudited)

•

ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (ASU 2016-16), which requires entities to recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. We adopted ASU 2016-16 on a modified retrospective basis through a cumulative-effect adjustment that resulted in a $110 million decrease in prepaid assets with the corresponding offset to retained earnings.

•

ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01), which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Upon adoption of ASU 2016-01, we have elected to measure the investments we hold in certain non-marketable equity securities in which we do not have a controlling interest or significant influence that have no readily determinable fair values at cost, less impairment, adjusted for observable price changes from orderly transactions for identical or similar investments of the same issuer. We adopted the guidance prospectively effective June 1, 2018, and there was no material impact to our condensed consolidated financial statements upon adoption or for any of the periods presented.

The impacts of adopting Topic 606 and ASU 2017-07 for select historical condensed consolidated statements of operations line items were as follows:

	Three Months Ended February 28, 2018									Nine Months Ended February 28, 2018
(in millions, except per share data)	As Previously Reported			Adjustments			As Adjusted			As Previously Reported		Adjustments			As Adjusted
Total revenues	$	9,771		$	(95	)	$	9,676		$	28,579	$	(210	)	$	28,369
Total operating expenses	$	6,361		$	—		$	6,361		$	19,280	$	(14	)	$	19,266
Non-operating income, net	$	423		$	(14	)	$	409		$	929	$	(38	)	$	891
Provision for income taxes	$	7,324		$	(86	)	$	7,238		$	8,333	$	(127	)	$	8,206
Net income (loss)	$	(4,024	)	$	(23	)	$	(4,047	)	$	418	$	(107	)	$	311
Basic earnings (loss) per share	$	(0.98	)	$	—		$	(0.98	)	$	0.10	$	(0.03	)	$	0.07
Diluted earnings (loss) per share	$	(0.98	)	$	—		$	(0.98	)	$	0.10	$	(0.03	)	$	0.07

The impact of adopting Topic 606 for select historical condensed consolidated balance sheet line items was as follows:

	As of May 31, 2018
(in millions, except per share data)	As Previously Reported		Adjustments			As Adjusted
Trade receivables, net of allowances for doubtful accounts	$	5,279	$	(143	)	$	5,136
Prepaid expenses and other current assets	$	3,424	$	338		$	3,762
Deferred tax assets	$	1,491	$	(96	)	$	1,395
Other non-current assets	$	3,487	$	488		$	3,975
Total current liabilities	$	19,195	$	(71	)	$	19,124
Total non-current liabilities	$	71,845	$	9		$	71,854
Total equity	$	46,224	$	649		$	46,873

There have been no other significant changes in our reported financial position or results of operations and cash flows as a result of the adoption of new accounting pronouncements. Except for the updates to our revenue recognition and deferred sales commission policies noted below, there have been no changes to our significant accounting policies that were disclosed in our Annual Report on Form 10-K for the fiscal year ended May 31, 2018 that have had a significant impact on our condensed consolidated financial statements or notes thereto as of and for the three and nine months ended February 28, 2019.

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

February 28, 2019

(Unaudited)

Impacts of the U.S. Tax Cuts and Jobs Act of 2017

The comparability of our operating results in the third quarter and first nine months of fiscal 2019 compared to the corresponding prior year periods was impacted by the U.S. Tax Cuts and Jobs Act of 2017 (the Tax Act), which was effective for us starting in our third quarter of fiscal 2018. Information regarding our adoption and prospective impacts of the Tax Act on our tax and liquidity profile is included in our Annual Report on Form 10-K for our fiscal year ended May 31, 2018. The net expense related to the enactment of the Tax Act has been accounted for during the third quarter and first nine months of fiscal 2018 based on provisional estimates pursuant to SEC Staff Accounting Bulletin No. 118 (SAB 118). In the third quarter of fiscal 2019, we completed our analysis of the impacts of the Tax Act. We recorded a tax benefit of $376 million and $529 million, respectively, during the three and nine months ended February 28, 2019, respectively, in accordance with SAB 118 related to adjustments in our estimates of the one-time transition tax on certain foreign subsidiary earnings. We also recorded a tax expense of $140 million during the fiscal 2019 periods presented in accordance with SAB 118 related to the remeasurement of our net deferred tax assets and liabilities.

Additionally, we completed our analysis of the accounting policy election required with regard to the Tax Act’s Global Intangible Low-Taxed Income (GILTI) provision. The Financial Accounting Standards Board (FASB) allows companies to adopt a policy election to account for GILTI under one of two methods: (i) account for GILTI as a component of tax expense in the period in which a company is subject to the rules (the period cost method), or (ii) account for GILTI in a company’s measurement of deferred taxes (the deferred method). We elected the deferred method, under which we recorded the income tax expense impact to our condensed consolidated financial statements during the third quarter of fiscal 2019.

Revenue Recognition

Our sources of revenues include:

•

cloud and license revenues, which include the sale of: cloud services and license support; and cloud licenses and on-premise licenses, which represent licenses purchased by customers for use in both cloud and on-premise IT environments;

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hardware revenues, which include the sale of hardware products including Oracle Engineered Systems, servers, and storage products, and industry-specific hardware; and hardware support revenues; and

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services revenues, which are earned from providing cloud-, license- and hardware-related services including consulting, advanced customer support and education services.

License support revenues are typically generated through the sale of license support contracts related to cloud license and on-premise licenses purchased by our customers at their option. License support contracts provide customers with rights to unspecified software product upgrades, maintenance releases and patches released during the term of the support period and include internet access to technical content, as well as internet and telephone access to technical support personnel. License support contracts are generally priced as a percentage of the net cloud license and on-premise license fees. Substantially all of our customers renew their license support contracts annually.

Cloud services revenues include revenues from Oracle Cloud Software-as-a-Service (SaaS) and Infrastructure-as-a-Service (IaaS) offerings (collectively, Oracle Cloud Services), which deliver applications and infrastructure technologies, respectively, via cloud-based deployment models that we develop functionality for, provide unspecified updates and enhancements for, host, manage and support and that customers access by entering into a subscription agreement with us for a stated period. Our IaaS offerings also include Oracle Managed Cloud Services, which are designed to provide comprehensive software and hardware management, maintenance and security services for customer cloud-based, on-premise or other IT infrastructure for a fee for a stated term.

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Cloud license and on-premise license revenues primarily represent amounts earned from granting customers licenses to use our database, middleware, application and industry-specific software products which our customers use for cloud-based, on-premise and other IT environments. The vast majority of our cloud license and on-premise license arrangements include license support contracts, which are entered into at the customer’s option.

Revenues from the sale of hardware products represent amounts earned primarily from the sale of our Oracle Engineered Systems, computer servers, storage, and industry-specific hardware. Our hardware support offerings generally provide customers with software updates for the software components that are essential to the functionality of the hardware products purchased and can also include product repairs, maintenance services and technical support services. Hardware support contracts are generally priced as a percentage of the net hardware products fees.

Our consulting services are offered as standalone arrangements or as a part of arrangements to customers buying other products and services. Our advanced customer support services are offered as standalone arrangements or as a part of arrangements to customers buying other products and services. We offer these advanced customer support services to Oracle customers to enable increased performance and higher availability of their products and services. Education services include instructor-led, media-based and internet-based training in the use of our cloud, software and hardware products.

Topic 606 is a single standard for revenue recognition that applies to all of our cloud, software, hardware and services arrangements and generally requires revenues to be recognized upon the transfer of control of promised goods or services provided to our customers, reflecting the amount of consideration we expect to receive for those goods or services. Pursuant to Topic 606, revenues are recognized upon the application of the following steps:

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identification of the contract, or contracts, with a customer;

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identification of the performance obligations in the contract;

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determination of the transaction price;

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allocation of the transaction price to the performance obligations in the contract; and

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recognition of revenues when, or as, the contractual performance obligations are satisfied.

The timing of revenue recognition may differ from the timing of invoicing to our customers. We record an unbilled receivable, which is included within accounts receivable on our condensed consolidated balance sheets, when revenue is recognized prior to invoicing. We record deferred revenues on our condensed consolidated balance sheets when revenues are recognized subsequent to cash collection for an invoice. Our standard payment terms are generally net 30 days but may vary. Invoices for cloud license and on-premise licenses and hardware products are generally issued when the license is made available for customer use or upon delivery to the customer of the hardware product. Invoices for license support and hardware support contracts are generally invoiced annually in advance. Cloud SaaS and IaaS contracts are generally invoiced annually, quarterly or monthly in advance. Services are generally invoiced in advance or as the services are performed. Most contracts that contain a financing component are contracts financed through our financing division. The transaction price for a contract that is financed through our financing division is adjusted to reflect the time value of money and interest revenue is recorded as a component of non-operating income, net within our condensed consolidated statements of operations based on market rates in the country in which the transaction is being financed.

Our revenue arrangements generally include standard warranty or service level provisions that our arrangements will perform and operate in all material respects as defined in the respective agreements, the financial impacts of which have historically been and are expected to continue to be insignificant. Our arrangements generally do not

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include a general right of return relative to the delivered products or services. We recognize revenues net of any taxes collected from customers, which are subsequently remitted to governmental authorities.

Revenue Recognition for Cloud Services

Revenues from cloud services provided on a subscription basis are generally recognized ratably over the contractual period that the services are delivered, beginning on the date our service is made available to our customers. We recognize revenue ratably because the customer receives and consumes the benefits of the cloud services throughout the contract period. Revenues from cloud services provided on a consumption basis, such as metered services, are generally recognized based on the utilization of the services by the customer.

Revenue Recognition for License Support and Hardware Support

Oracle’s primary performance obligations with respect to license support contracts and hardware support contracts are to provide customers with technical support as needed and unspecified software product upgrades, maintenance releases and patches during the term of the support period when they are available. Oracle is obligated to make the license and hardware support services available continuously throughout the contract period. Therefore, revenues for license support contracts and hardware support contracts are generally recognized ratably over the contractual periods that the support services are provided.

Revenue Recognition for Cloud License and On-Premise License

Revenues from distinct cloud license and on-premise license performance obligations are generally recognized upfront 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. For usage-based royalty arrangements with a fixed minimum guarantee amount, the minimum amount is generally recognized upfront when the software is made available to the royalty customer.

Revenue Recognition for Hardware Products

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.

Revenue Recognition for Services

Services revenues are generally recognized over time as the services are performed. Revenues for fixed price services are generally recognized over time applying input methods to estimate progress to completion. Revenues for consumption-based services are generally recognized as the services are performed.

Allocation of the Transaction Price for Contracts that have Multiple Performance Obligations

Many of our contracts include multiple performance obligations. Judgment is required in determining whether each performance obligation is distinct. Oracle products and services generally do not require a significant amount of integration or interdependency. We allocate the transaction price for each contract to each performance obligation based on the relative standalone selling price (SSP) for each performance obligation within each contract.

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We use judgment in determining the SSP for products and services. For substantially all performance obligations except cloud licenses and on-premise licenses, we are able to establish SSP based on the observable prices of products or services sold separately in comparable circumstances to similar customers. We typically establish a standalone selling price range for our products and services which is reassessed on a periodic basis or when facts and circumstances change. Our cloud licenses and on-premise licenses have not historically been sold on a standalone basis, as substantially all customers elect to purchase license support contracts at the time of a cloud license and on-premise license purchase. License support contracts are generally priced as a percentage of the net fees paid by the customer to access the license. We are unable to establish SSP for our cloud licenses and on-premise licenses based on observable prices given the same products are sold for a broad range of amounts (that is, the selling price is highly variable) and a representative SSP is not discernible from past transactions or other observable evidence. As a result, the SSP for a cloud license and an on-premise license included in a contract with multiple performance obligations is determined by applying a residual approach whereby all other performance obligations within a contract are first allocated a portion of the transaction price based upon their respective SSPs, with any residual amount of transaction price allocated to cloud license and on-premise license revenues.

Deferred Sales Commissions

We defer sales commissions earned by our sales force that are considered to be incremental and recoverable costs of obtaining a cloud, license support and hardware support contract. Initial sales commissions for the majority of these aforementioned contracts are generally deferred and amortized on a straight-line basis over a period of benefit that we estimate to be four to five years. We determine the period of benefit by taking into consideration the historical and expected durations of our customer contracts, the expected useful lives of our technologies, and other factors. Sales commissions for renewal contracts relating to our cloud-based arrangements are generally deferred and then amortized on a straight-line basis over the related contractual renewal period, which is generally one to three years. Amortization of deferred sales commissions is included as a component of sales and marketing expenses in our condensed consolidated statements of operations.

Remaining Performance Obligations from Contracts with Customers

Trade receivables, net of allowance for doubtful accounts, and deferred revenues are reported net of related uncollected deferred revenues in our condensed consolidated balance sheets as of February 28, 2019 and May 31, 2018.

The amount of revenues recognized during the nine months ended February 28, 2019 that were included in the opening deferred revenues balance as of May 31, 2018 was approximately $7.7 billion. Revenues recognized from performance obligations satisfied in prior periods were immaterial during each of the three and nine months ended February 28, 2019 and 2018. Impairment losses recognized on our receivables were immaterial in each of the three and nine months ended February 28, 2019 and 2018.

Remaining performance obligations represent contracted revenues that had not yet been recognized, and include deferred revenues; invoices that have been issued to customers but were uncollected and have not been recognized as revenues; and amounts that will be invoiced and recognized as revenues in future periods. The volumes and amounts of customer contracts that we book and total revenues that we recognize are impacted by a variety of seasonal factors. In each fiscal year, the amounts and volumes of contracting activity and our total revenues are typically highest in our fourth fiscal quarter and lowest in our first fiscal quarter. These seasonal impacts influence how our remaining performance obligations change over time. As of February 28, 2019, our remaining performance obligations were $31.5 billion, approximately 62% of which we expect to recognize as revenues over the next twelve months and the remainder thereafter.

Refer to Note 10 for our discussion of revenues disaggregation.

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Cash, Cash Equivalents and Restricted Cash

Restricted cash that was included within cash and cash equivalents as presented within our condensed consolidated balance sheets as of February 28, 2019 and May 31, 2018 and our condensed consolidated statements of cash flows for the nine months ended February 28, 2019 and 2018 was nominal.

Acquisition Related and Other Expenses

Acquisition related and other expenses consist of personnel related costs and stock-based compensation 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.

	Three Months Ended February 28,						Nine Months Ended February 28,
(in millions)	2019			2018			2019			2018
Transitional and other employee related costs	$	13		$	9		$	39		$	32
Stock-based compensation		—			—			—			1
Professional fees and other, net		3			(8	)		10			(1	)
Business combination adjustments, net		(20	)		2			(20	)		—
Total acquisition related and other expenses	$	(4	)	$	3		$	29		$	32

Non-Operating Income, net

Non-operating 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 Oracle Corporation Japan) and net other income, 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, and non-service net periodic pension income (losses).

Three Months Ended

February 28,

Nine Months Ended

February 28,

(in millions)

2019

2018