News Column

ORACLE CORP - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

June 26, 2014

We begin Management's Discussion and Analysis of Financial Condition and Results of Operations with an overview of our key operating business segments 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 We are the world's largest provider of enterprise software and a leading provider of computer hardware products and services that are engineered to work together in the cloud and in the data center. Our offerings include Oracle database and middleware software, application software, cloud infrastructure, hardware systems-including computer server, storage and networking products-and related services. We develop and maintain our products and services to be enterprise-grade, reliable, secure and interoperable while offering customers a choice in deployment models that best meet their information technology (IT) needs. Our customers can subscribe to use many Oracle software and hardware products through our Oracle Cloud offerings, or purchase our software and hardware products and related services to build their own internal clouds or on-premise IT environments. Cloud computing IT environments, including those offered through our Oracle Cloud Software-as-a-Service (SaaS), Platform-as-a-Service (PaaS) and Infrastructure-as-a-Service offerings, are designed to be attractive and cost-effective options for our customers as we integrate the software and hardware on the customers' behalf in IT environments that we deploy, support and manage on the customers' behalf. We are a leader in the core technologies of cloud computing, including database and middleware software as well as web-based applications, virtualization, clustering, large-scale systems management and related infrastructure. Our products and services are the building blocks of our own cloud services, our partners' cloud services and our customers' cloud IT environments. An important element of our corporate strategy is to deliver reliable, secure and scalable products and services that are built upon industry standards and are engineered to work both together or independently, regardless of the deployment model selected. We believe that our investments in, and continued innovation with respect to, our software and cloud, hardware, and services businesses are the foundation of our long-term strategic plans. In fiscal 2014, 2013, and 2012 we invested $5.2 billion, $4.9 billion and $4.5 billion, respectively, in research and development to enhance our existing portfolio of products and services and to develop new products and services. We have expanded our enterprise-grade cloud computing offerings through our continued investments in research and development and through targeted acquisitions in order to broaden our Oracle Cloud offerings. For example, our Oracle Cloud Software-as-a-Service offerings, including our sales, marketing, customer service, financials, project management, human capital and talent management cloud solutions, among others, enable us to provide IT functionality that customers can use to manage critical business functions in a rapidly deployable delivery model with lower upfront customer investment. Certain of our enterprise-grade cloud computing offerings include infrastructure based upon our Oracle Engineered Systems, including our Oracle Exadata Database Machine, Oracle Exalogic Elastic Cloud and Oracle SuperCluster products, among others. We designed our Oracle Engineered Systems to combine certain of our hardware and software offerings to increase computing performance relative to our competitors' products, creating cost efficiencies, time savings and operational cost advantages for our customers. Our Oracle Engineered Systems provide the core infrastructure for our own on-premise IT data centers and those of our customers, and for cloud IT environments, including our own Oracle Cloud services, our partners' cloud services and our customers' cloud environments. We also continue to demonstrate our commitment to customer choice through ongoing enhancements to our Oracle E-Business Suite, Siebel, PeopleSoft and JD Edwards application software products and services, amongst others. We believe that an active acquisition program is another important element of our corporate strategy as it enhances the products and services that we can offer to customers, expands our customer base, provides greater scale to accelerate innovation, grows our revenues and earnings and increases stockholder value. In recent years, we have invested billions of dollars to acquire a number of companies, products, services and technologies that add to, are complementary to, or have otherwise enhanced our existing offerings. We expect to continue to acquire companies, products, services and technologies to further our corporate strategy. 35



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We are organized into three businesses-software and cloud, hardware systems and services-which are further divided into certain operating segments. Each of our businesses and operating segments has unique characteristics and faces different opportunities and challenges. Although we report our actual results in U.S. Dollars, we conduct a significant number of transactions in currencies other than U.S. Dollars. Therefore, we present constant currency information to provide a framework for assessing how our underlying businesses performed excluding the effects of foreign currency rate fluctuations. Our cloud infrastructure-as-a-service segment was established during our fiscal quarter ended May 31, 2014. Our fiscal 2014 results, and historical results for fiscal 2013 and 2012, reflect this new segment structure and will continue prospectively in our future filings. See Note 16 of Notes to Consolidated Financial Statements, included elsewhere in this Annual Report, for additional information related to our operating segments. An overview of our three businesses and related operating segments follows.



Software and Cloud Business

Our software and cloud business, which represented 76%, 75% and 72% of our total revenues in fiscal 2014, 2013 and 2012, respectively, is comprised of three operating segments: (1) new software licenses and cloud software subscriptions, (2) cloud infrastructure-as-a-service and (3) software license updates and product support. On a constant currency basis, we expect that our software and cloud business' total revenues generally will continue to increase due to continued demand for our software products and subscription offerings, our software license updates and product support offerings, including the high percentage of customers that renew their software license updates and product support contracts, and our acquisitions, which should allow us to grow our profits and continue to make investments in research and development. New Software Licenses and Cloud Software Subscriptions: We license our database and middleware, as well as our application software, and provide access to a broad range of our software through Oracle Cloud Software-as-a-Service (SaaS) and Oracle Cloud Platform-as-a-Service (PaaS) offerings (SaaS and PaaS collectively are referred to as cloud software subscriptions). Our software offerings are substantially built on a standards-based, integrated architecture that is designed to help customers reduce the cost and complexity of their IT infrastructure. Our software offerings are substantially designed to operate on both single server and clustered server configurations for cloud or on-premise IT environments, and to support a choice of operating systems including Oracle Solaris, Oracle Linux, Microsoft Windows and third party UNIX products, among others. Our customers include businesses of many sizes, government agencies, educational institutions and resellers. We market and sell our software products and services to these customers with a sales force positioned to offer the combinations that best fit their needs. We enable customers to evolve and transform to substantially any IT environment at whatever pace is most appropriate for them. The growth in our new software licenses and our SaaS and PaaS revenues that we report is affected by the strength of general economic and business conditions, governmental budgetary constraints, the competitive position of our software offerings, our acquisitions and foreign currency fluctuations. The substantial majority of our new software licenses transactions are characterized by long sales cycles and the timing of a few large software license transactions can substantially affect our quarterly new software licenses revenues. New software licenses and cloud software subscriptions revenues represented 28% of our total revenues in each of fiscal 2014 and 2013 and 27% in fiscal 2012. Our cloud software subscriptions contracts, which consist of SaaS and PaaS arrangements, are generally one to three years in duration and we strive to renew these contracts when they are eligible for renewal. Our new software licenses and cloud software subscriptions segment's 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 new software licenses revenues over those quarterly periods and because the majority of our costs for this segment are predominantly fixed in the short-term. However, our new software licenses and cloud software subscriptions segment's margin has been and will continue to be affected by the fair value adjustments relating to the cloud software subscriptions obligations that we assumed in our business combinations (described further below) and by the amortization of intangible assets associated with companies and technologies that we have acquired. For certain of our acquired businesses, we recorded adjustments to reduce the cloud SaaS and PaaS obligations to their estimated fair values at the acquisition dates. As a result, as required by business combination accounting rules, we did not recognize cloud SaaS and PaaS revenues related to acquired contracts that would have been otherwise recorded by the acquired businesses as independent entities in the amounts of $17 million, $45 million 36



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and $22 million in fiscal 2014, 2013 and 2012, respectively. To the extent underlying cloud SaaS and PaaS contracts are renewed with us following an acquisition, we will recognize the revenues for the full values of these contracts over their respective contractual periods.

Cloud Infrastructure-as-a-Service: Our cloud infrastructure-as-a-service offerings (IaaS), which represented 1% of our total revenues in each of fiscal 2014 and 2013 and 2% in fiscal 2012, provide deployment and management offerings for our software and hardware and related IT infrastructure including virtual machine instances that are subscription-based and designed for computing and reliable and secure object storage; Oracle Engineered Systems hardware and related support that are deployed in our customers' data centers for a monthly fee; and comprehensive software and hardware management and maintenance services arrangements for customer IT infrastructure for a stated term that is hosted at our data center facilities, select partner data centers or physically on-premise at customer facilities. Software License Updates and Product Support: Customers that purchase software license updates and product support are granted rights to unspecified product upgrades and maintenance releases and patches released during the term of the support period, as well as technical support assistance. Our software license updates and product support contracts are generally one year in duration and substantially all of our customers renew their software license updates and product support contracts annually. The growth of software license updates and product support revenues is primarily influenced by three factors: (1) the percentage of our software support contract customer base that renews its software support contracts, (2) the amount of new software support contracts sold in connection with the sale of new software licenses and (3) the amount of software support contracts assumed from companies we have acquired. Software license updates and product support revenues, which represented 47%, 46% and 43% of our total revenues in fiscal 2014, 2013 and 2012, respectively, is our highest margin business unit. Our software support margins during fiscal 2014 were 89% and accounted for 77% of our total margins over the same period. Our software license updates and product support margins have been affected by fair value adjustments relating to software support obligations assumed in business combinations (described further below) and by amortization of intangible assets. However, over the longer term, we believe that software license updates and product support revenues and margins will grow for the following reasons:



substantially all of our customers, including customers from acquired

companies, renew their software support contracts when eligible for renewal;



substantially all of our customers purchase software license updates and

product support contracts when they buy new software licenses, resulting in

a further increase in our software support contract base. Even if new

software licenses revenues growth was flat, software license updates and

product support revenues would continue to grow in comparison to the

corresponding prior year periods assuming contract renewal and cancellation

rates and foreign currency rates remained relatively constant since

substantially all new software licenses transactions result in the sale of

software license updates and product support contracts, which add to our

software support contract base; and



our acquisitions have increased our software support contract base, as well

as the portfolio of products available to be licensed and supported.

We recorded adjustments to reduce software support obligations assumed in business combinations to their estimated fair values at the acquisition dates. As a result, as required by business combination accounting rules, we did not recognize software license updates and product support revenues related to software support contracts that would have been otherwise recorded by the acquired businesses as independent entities in the amounts of $3 million, $14 million and $48 million in fiscal 2014, 2013 and 2012, respectively. To the extent underlying software support contracts are renewed with us following an acquisition, we will recognize the revenues for the full values of the software support contracts over the respective support periods, the majority of which are one year. Hardware Systems Business Our hardware systems business is comprised of two operating segments: (1) hardware systems products and (2) hardware systems support. Our hardware business represented 14% of our total revenues in each of fiscal 2014 and 2013 and 17% in fiscal 2012. We expect our hardware business to have lower operating margins as a 37



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percentage of revenues than our software and cloud 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. We expect to make investments in research and development to improve existing hardware products and services and to develop new hardware products and services. Hardware Systems Products: We provide a broad selection of hardware systems and related services including servers, storage, networking, virtualization software, operating systems, and management software to support diverse IT environments, including cloud computing environments. We engineer our hardware systems with virtualization and management capabilities to enable the rapid deployment and efficient management of cloud and on-premise IT infrastructures. Our hardware products support many of the world's largest cloud infrastructures, including the Oracle Cloud. Our hardware products and services are designed to work in customer environments that may include other Oracle or non-Oracle hardware or software components. This flexible and open approach provides Oracle's customers with a broad range of choices in deploying hardware systems, which we believe is a priority for our customers. Our hardware products and services also help to meet customers' demands to manage growing amounts of data and business requirements to meet increasing compliance and regulatory demands and to reduce energy, space and operational costs. We have also engineered our hardware systems products to create performance and operational cost advantages for customers when our hardware and software products are combined as Oracle Engineered Systems. We offer a wide range of server systems using our SPARC microprocessor. Our SPARC servers run the Oracle Solaris operating system and are designed to be differentiated by their reliability, security, and scalability. Our mid-size and large servers are designed to offer greater performance and lower total cost of ownership than mainframe systems for business critical applications, for customers having more computationally intensive needs, and as platforms for building cloud computing IT environments. Our SPARC servers are also a core component of the Oracle SuperCluster, one of our Oracle Engineered Systems. We also offer enterprise x86 servers. These x86 servers are based on microprocessor platforms from Intel Corporation and are compatible with Oracle Solaris, Oracle Linux, Microsoft Windows and other operating systems. Our x86 servers are also a core component of many of our Oracle Engineered Systems including Oracle Exadata Database Machine, Oracle Exalogic Elastic Cloud, Oracle Exalytics In-Memory Machine and the Oracle Big Data Appliance. Our storage products are designed to securely manage, protect, archive and restore customers' mission critical data assets and consist of tape, disk, flash and hardware-related software including file systems software, back-up and archive software and storage management software and networking for mainframe and open systems environments. Our networking and data center fabric products, including Oracle Virtual Networking, and Oracle InfiniBand and Ethernet technologies, are used with our server and storage products and are integrated into our management tools to help enterprise customers improve infrastructure performance, reduce cost and complexity and simplify storage and server connectivity. We also offer hardware and software products and services for communications networks including network signaling, policy control and subscriber data management solutions, and session border control technology, amongst others.



The majority of our hardware systems products are sold through indirect channels, including independent distributors and value added resellers.

To produce our hardware products, we rely on both our internal manufacturing operations as well as third party manufacturing partners. Our internal manufacturing operations consist primarily of materials procurement, assembly, testing and quality control of our Oracle Engineered Systems and certain of our enterprise and data center servers and storage systems. For all other manufacturing, we generally rely on third party manufacturing partners to produce our hardware related components and hardware products and we may involve our internal manufacturing operations in the final assembly, testing and quality control processes for these components and products. We distribute most of our hardware products either from our facilities or partner facilities. We strive to reduce costs by simplifying our manufacturing processes through increased standardization of components across product types and a "build-to-order" manufacturing process in which products generally are built only after customers have placed firm orders. 38



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Our hardware systems products revenues, cost of hardware systems products and hardware systems operating margins that we report are affected by our strategy for and the competitive position of our hardware systems products, the strength of general economic and business conditions, governmental budgetary constraints, certain of our acquisitions and foreign currency rate fluctuations. In addition, our operating margins for our hardware systems products segment have been and will be affected by the amortization of intangible assets. Our quarterly hardware systems products revenues are difficult to predict. The timing of customer orders and delays in our ability to timely manufacture or deliver a few large hardware transactions could substantially affect the amount of hardware systems products revenues, expenses and operating margins that we report. Hardware Systems Support: Our hardware systems support offerings provide customers with software updates for software components that are essential to the functionality of our server, storage and networking products, such as Oracle Solaris and certain other software products, and can include product repairs, maintenance services and technical support services. Typically, our hardware systems support contract arrangements are invoiced to the customer at the beginning of the support period and are one year in duration. We continue to evolve hardware systems support processes that are intended to proactively identify and solve quality issues and to increase the amount of new and renewed hardware systems support contracts sold in connection with the sales of our hardware systems products. Our hardware systems support revenues that we report are influenced by a number of factors, including the volume of purchases of hardware products, the mix of hardware products purchased, whether customers decide to purchase hardware systems support contracts at or in close proximity to the time of hardware product sale, the percentage of our hardware systems support contract customer base that renews its support contracts and our acquisitions. Substantially all of these factors are heavily influenced by our customers' decisions to either maintain or upgrade their existing hardware systems' infrastructure to newly developed technologies that are available. Our hardware systems support margins have been and will be affected by certain of our acquisitions and related accounting, including fair value adjustments relating to hardware systems support obligations assumed, and by the amortization of intangible assets. As required by business combination accounting rules, we recorded adjustments to reduce our hardware systems support revenues for contracts assumed from our acquisitions to their estimated fair values. These amounts would have been recorded as hardware systems support revenues by the acquired businesses as independent entities in the amounts of $11 million, $14 million and $30 million for fiscal 2014, 2013 and 2012, respectively. To the extent underlying hardware systems support contracts are renewed with us following an acquisition, we will recognize the revenues for the full values of the hardware systems support contracts over the respective support periods.



Services Business

Our services business, which represented 10% of our total revenues in fiscal 2014 and 11% in each of fiscal 2013 and 2012, is comprised of the remainder of our operating segments. Our services business has lower margins than our software and cloud and hardware businesses. Our services revenues are impacted by certain of our acquisitions, general economic conditions, governmental budgetary constraints, personnel reductions in our customers' IT departments, tighter controls over discretionary spending and the growth in our software and hardware systems products revenues. Our services business' offerings include:



consulting services that are designed to help our customers and global

system integrator partners more successfully architect and deploy our

products including IT strategy alignment, enterprise architecture planning

and design, initial product implementation and integration, and ongoing

product enhancements and upgrades. We utilize a global, blended delivery

model to optimize value for our customers and partners, consisting of on-premise consultants from local geographies, industry specialists and consultants from our global delivery and solution centers;



advanced customer support services, which are provided on-premise and

remotely to our customers to enable increased performance and higher

availability of their Oracle products and services; and



education services for Oracle products and services, including training and

certification programs that are offered to customers, partners and

employees through a variety of formats, including instructor-led classes at

our education centers, live virtual training, self-paced online training,

private events and custom training. 39



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Acquisitions

An active acquisition program is another important element of our corporate strategy. In recent years, we have invested billions of dollars to acquire a number of complementary companies, products, services and technologies including Responsys, Inc. (Responsys) and Tekelec Global, Inc. (Tekelec) in fiscal 2014, and Acme Packet, Inc. (Acme Packet) in fiscal 2013, amongst others. On June 22, 2014, we entered into an Agreement and Plan of Merger (Merger Agreement) with MICROS Systems, Inc. (MICROS), a provider of integrated software, hardware and services solutions to the hospitality and retail industries. Pursuant to the Merger Agreement, we will commence a tender offer for the outstanding shares and shares generally representing vested equity incentive awards of MICROS (collectively, MICROS Shares). MICROS shareholders will have the right to tender their MICROS Shares to Oracle in exchange for $68.00 per share in cash upon consummation of the tender offer. The tender offer will commence no later than ten business days from June 22, 2014. After completion of the tender offer and subject to certain limited conditions, MICROS will merge with and into a wholly-owned subsidiary of Oracle. In addition, unvested equity awards to acquire MICROS common stock that are outstanding immediately prior to the conclusion of the merger will generally be converted into equity awards denominated in shares of our common stock based on formulas contained in the Merger Agreement. The estimated total purchase price for MICROS is approximately $5.3 billion. This transaction is conditioned upon (i) at least a majority of the MICROS Shares being validly tendered to Oracle, (ii) regulatory clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, (iii) the applicable merger control laws of the European Commission and other jurisdictions, and (iv) certain other customary closing conditions. We believe our acquisition program strengthens our competitive position, enhances the products and services that we can offer to customers, expands our customer base, provides greater scale to accelerate innovation, grows our revenues and earnings and increases stockholder value. We expect to continue to acquire companies, products, services and technologies in furtherance of our corporate strategy. Note 2 of Notes to Consolidated Financial Statements included elsewhere in this Annual Report provides additional information related to our pending and recent acquisitions. We believe we can fund our pending and 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 flow and return on invested capital targets before deciding to move forward with an acquisition.



Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (GAAP) as set forth in the Financial Accounting Standards Board's (FASB) Accounting Standards Codification (ASC) and consider the various staff accounting bulletins and other applicable guidance issued by the United States Securities and Exchange Commission (SEC). 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 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 the following: Revenue Recognition Business Combinations Goodwill and Intangible Assets-Impairment Assessments Accounting for Income Taxes Legal and Other Contingencies Stock-Based Compensation 40



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In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management's judgment in its application. There are also areas in which management's judgment in selecting among available alternatives would not produce a materially different result. Our senior management has reviewed our critical accounting policies and related disclosures with the Finance and Audit Committee of the Board of Directors.



Revenue Recognition

Our sources of revenues include: (1) software and cloud revenues, including new software licenses revenues earned from granting licenses to use our software products; cloud SaaS and PaaS revenues generated from fees for granting customers access to a broad range of our software and related support offerings on a subscription basis in a secure, standards-based cloud computing environment; cloud IaaS revenues generated from fees for deployment and management offerings for our software and hardware and related IT infrastructure generally on a subscription basis; and software license updates and product support revenues; (2) hardware systems revenues, which include the sale of hardware systems products including computer servers, storage products, networking and data center fabric products, and hardware systems support revenues; and (3) services, which includes software and hardware related services including consulting, advanced customer support and education revenues. Revenues generally are recognized net of any taxes collected from customers and subsequently remitted to governmental authorities.



Revenue Recognition for Software Products and Software Related Services (Software Elements)

New software licenses revenues primarily represent fees earned from granting customers licenses to use our database, middleware and application software and exclude cloud SaaS and PaaS revenues and revenues derived from software license updates, which are included in software license updates and product support revenues. The basis for our new software licenses revenue recognition is substantially governed by the accounting guidance contained in ASC 985-605, Software-Revenue Recognition. We exercise judgment and use estimates in connection with the determination of the amount of software and software related services revenues to be recognized in each accounting period. For software license arrangements that do not require significant modification or customization of the underlying software, we recognize new software licenses revenues when: (1) we enter into a legally binding arrangement with a customer for the license of software; (2) we deliver the products; (3) the sale price is fixed or determinable and free of contingencies or significant uncertainties; and (4) collection is probable. Revenues that are not recognized at the time of sale because the foregoing conditions are not met, are recognized when those conditions are subsequently met. Substantially all of our software license arrangements do not include acceptance provisions. However, if acceptance provisions exist as part of public policy, for example, in agreements with government entities where acceptance periods are required by law, or within previously executed terms and conditions that are referenced in the current agreement and are short-term in nature, we generally recognize revenues upon delivery provided the acceptance terms are perfunctory and all other revenue recognition criteria have been met. If acceptance provisions are not perfunctory (for example, acceptance provisions that are long-term in nature or are not included as standard terms of an arrangement), revenues are recognized upon the earlier of receipt of written customer acceptance or expiration of the acceptance period. The vast majority of our software license arrangements include software license updates and product support contracts, which are entered into at the customer's option and are recognized ratably over the term of the arrangement, typically one year. Software license updates provide customers with rights to unspecified software product upgrades, maintenance releases and patches released during the term of the support period. Product support includes internet access to technical content, as well as internet and telephone access to technical support personnel. Software license updates and product support contracts are generally priced as a percentage of the net new software licenses fees. Substantially all of our customers renew their software license updates and product support contracts annually.



Revenue Recognition for Multiple-Element Arrangements-Software Products and Software Related Services (Software Arrangements)

We often enter into arrangements with customers that purchase both software related products and software related services from us at the same time, or within close proximity of one another (referred to as software related multiple-element arrangements). Such software related multiple-element arrangements include the sale of our software products, software license updates and product support contracts and other software related services whereby software license delivery is followed by the subsequent or contemporaneous delivery of the other elements. For those software related multiple-element arrangements, we have applied the residual method to

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determine the amount of new software license revenues to be recognized pursuant to ASC 985-605. Under the residual method, if fair value exists for undelivered elements in a multiple-element arrangement, such fair value of the undelivered elements is deferred with the remaining portion of the arrangement consideration generally recognized upon delivery of the software license. We allocate the fair value of each element of a software related multiple-element arrangement based upon its fair value as determined by our vendor specific objective evidence (VSOE-described further below), with any remaining amount allocated to the software license.



Revenue Recognition for Cloud SaaS, PaaS and IaaS Offerings, Hardware Systems Products, Hardware Systems Support and Related Services (Nonsoftware Elements)

Our revenue recognition policy for nonsoftware deliverables including cloud SaaS, PaaS and IaaS offerings, hardware systems products and hardware systems related services is based upon the accounting guidance contained in ASC 605-25, Revenue Recognition, Multiple-Element Arrangements, and we exercise judgment and use estimates in connection with the determination of the amount of cloud SaaS, PaaS and IaaS revenues, hardware systems products revenues and hardware related services revenues to be recognized in each accounting period. Revenues from the sales of our nonsoftware elements are recognized when: (1) persuasive evidence of an arrangement exists; (2) we deliver the products and passage of the title to the buyer occurs; (3) the sale price is fixed or determinable; and (4) collection is reasonably assured. Revenues that are not recognized at the time of sale because the foregoing conditions are not met are recognized when those conditions are subsequently met. When applicable, we reduce revenues for estimated returns or certain other incentive programs where we have the ability to sufficiently estimate the effects of these items. Where an arrangement is subject to acceptance criteria and the acceptance provisions are not perfunctory (for example, acceptance provisions that are long-term in nature or are not included as standard terms of an arrangement), revenues are recognized upon the earlier of receipt of written customer acceptance or expiration of the acceptance period. Our cloud SaaS and PaaS offerings generally provide customers access to certain of our software within a cloud-based IT environment that we manage and offer to customers on a subscription basis. Revenues for our cloud SaaS and PaaS offerings are generally recognized ratably over the contract term commencing with the date our service is made available to customers and all other revenue recognition criteria have been satisfied. Our cloud IaaS offerings provide deployment and management offerings for our software and hardware and related IT infrastructure including comprehensive software and hardware management and maintenance services arrangements for customer IT infrastructure for a stated term that is hosted at our data center facilities, select partner data centers or physically on-premise at customer facilities generally for a term-based fee; and virtual machine instances that are subscription-based and designed for computing and reliable and secure object storage. Revenues for these cloud IaaS offerings are generally recognized ratably over the contract term commencing with the date the service is made available to customers and all other revenue recognition criteria have been satisfied. Our cloud IaaS offerings also include our Oracle Engineered Systems hardware and related support that are deployed on-premise in our customers' data centers for a monthly fee and provide for the purchase of additional capacity on demand. Our revenue recognition policy for these on-premise offerings is in accordance with ASC 605 and ASC 840, Leases, and substantially all of these offerings are accounted for as operating leases as our contracts are structured so that the term of the arrangement is less than 75% of the economic life of the equipment and the present value of the minimum fixed payments are less than 90% of the fair market value of the equipment at the inception of the arrangement. Our evaluation of useful life is based on our historical product development cycles and our historical customer hardware upgrade cycles. Capacity on demand is a contingent payment and is therefore excluded from our assessment of the net present value of fixed payments. Revenue for capacity on demand is recognized in the period our customers access additional capacity provided all other revenue recognition criteria have been met. Revenues from the sale of hardware systems products represent amounts earned primarily from the sale of computer servers, storage, and networking products, including the sales of our Oracle Engineered Systems. Our hardware systems support offerings generally provide customers with software updates for the software components that are essential to the functionality of our server and storage products and can also include product repairs, maintenance services and technical support services. Hardware systems support contracts are generally priced as a percentage of the net hardware systems products fees. Hardware systems support contracts are entered 42



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into at the customer's option and are recognized ratably over the contractual term of the arrangements, which are typically one year.

Revenue Recognition for Multiple-Element Arrangements-Cloud SaaS, PaaS and IaaS Offerings, Hardware Systems Products, Hardware Systems Support and Related Services (Nonsoftware Arrangements)

We enter into arrangements with customers that purchase both nonsoftware related products and services from us at the same time, or within close proximity of one another (referred to as nonsoftware multiple-element arrangements). Each element within a nonsoftware multiple-element arrangement is accounted for as a separate unit of accounting provided the following criteria are met: the delivered products or services have value to the customer on a standalone basis; and for an arrangement that includes a general right of return relative to the delivered products or services, delivery or performance of the undelivered product or service is considered probable and is substantially controlled by us. We consider a deliverable to have standalone value if the product or service is sold separately by us or another vendor or could be resold by the customer. Further, our revenue arrangements generally do not include a general right of return relative to the delivered products. Where the aforementioned criteria for a separate unit of accounting are not met, the deliverable is combined with the undelivered element(s) and treated as a single unit of accounting for the purposes of allocation of the arrangement consideration and revenue recognition. For those units of accounting that include more than one deliverable but are treated as a single unit of accounting, we generally recognize revenues over the delivery period or in the case of our cloud offerings, generally over the estimated customer relationship period. For the purposes of revenue classification of the elements that are accounted for as a single unit of accounting, we allocate revenue to the respective revenue line items within our consolidated statements of operations based on a rational and consistent methodology utilizing our best estimate of relative selling prices of such elements. For our nonsoftware multiple-element arrangements, we allocate revenue to each element based on a selling price hierarchy at the arrangement's inception. The selling price for each element is based upon the following selling price hierarchy: VSOE if available, third party evidence (TPE) if VSOE is not available, or estimated selling price (ESP) if neither VSOE nor TPE are available (a description as to how we determine VSOE, TPE and ESP is provided below). If a tangible hardware systems product includes software, we determine whether the tangible hardware systems product and the software work together to deliver the product's essential functionality and, if so, the entire product is treated as a nonsoftware deliverable. The total arrangement consideration is allocated to each separate unit of accounting for each of the nonsoftware deliverables using the relative selling prices of each unit based on the aforementioned selling price hierarchy. We limit the amount of revenue recognized for delivered elements to an amount that is not contingent upon future delivery of additional products or services or meeting of any specified performance conditions. When possible, we establish VSOE of selling price for deliverables in software and nonsoftware multiple-element arrangements using the price charged for a deliverable when sold separately and for software license updates and product support and hardware systems support, based on the renewal rates offered to customers. TPE is established by evaluating similar and interchangeable competitor products or services in standalone arrangements with similarly situated customers. If we are unable to determine the selling price because VSOE or TPE does not exist, we determine ESP for the purposes of allocating the arrangement by reviewing historical transactions, including transactions whereby the deliverable was sold on a standalone basis and considering several other external and internal factors including, but not limited to, pricing practices including discounting, margin objectives, competition, contractually stated prices, the geographies in which we offer our products and services, the type of customer (i.e., distributor, value added reseller, government agency and direct end user, among others) and the stage of the product lifecycle. The determination of ESP is made through consultation with and approval by our management, taking into consideration our pricing model and go-to-market strategy. As our, or our competitors', pricing and go-to-market strategies evolve, we may modify our pricing practices in the future, which could result in changes to our determination of VSOE, TPE and ESP. As a result, our future revenue recognition for multiple-element arrangements could differ materially from our results in the current period. Selling prices are analyzed on an annual basis or more frequently if we experience significant changes in our selling prices. 43



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Revenue Recognition Policies Applicable to both Software and Nonsoftware Elements

Revenue Recognition for Multiple-Element Arrangements-Arrangements with Software and Nonsoftware Elements

We also enter into multiple-element arrangements that may include a combination of our various software related and nonsoftware related products and services offerings including new software licenses, software license updates and product support, cloud SaaS, PaaS and IaaS offerings, hardware systems products, hardware systems support, consulting, advanced customer support services and education. In such arrangements, we first allocate the total arrangement consideration based on the relative selling prices of the software group of elements as a whole and to the nonsoftware elements. We then further allocate consideration within the software group to the respective elements within that group following the guidance in ASC 985-605 and our policies as described above. After the arrangement consideration has been allocated to the elements, we account for each respective element in the arrangement as described above.



Other Revenue Recognition Policies Applicable to Software and Nonsoftware Elements

Many of our software arrangements include consulting implementation services sold separately under consulting engagement contracts and are included as a part of our services business. Consulting revenues from these arrangements are generally accounted for separately from new software licenses revenues because the arrangements qualify as services transactions as defined in ASC 985-605. The more significant factors considered in determining whether the revenues should be accounted for separately include the nature of services (i.e., consideration of whether the services are essential to the functionality of the licensed product), degree of risk, availability of services from other vendors, timing of payments and impact of milestones or acceptance criteria on the realizability of the software license fee. Revenues for consulting services are generally recognized as the services are performed. If there is a significant uncertainty about the project completion or receipt of payment for the consulting services, revenues are deferred until the uncertainty is sufficiently resolved. We estimate the proportional performance on contracts with fixed or "not to exceed" fees on a monthly basis utilizing hours incurred to date as a percentage of total estimated hours to complete the project. If we do not have a sufficient basis to measure progress towards completion, revenues are recognized when we receive final acceptance from the customer that the services have been completed. When total cost estimates exceed revenues, we accrue for the estimated losses immediately using cost estimates that are based upon an average fully burdened daily rate applicable to the consulting organization delivering the services. The complexity of the estimation process and factors relating to the assumptions, risks and uncertainties inherent with the application of the proportional performance method of accounting affects the amounts of revenues and related expenses reported in our consolidated financial statements. A number of internal and external factors can affect our estimates, including labor rates, utilization and efficiency variances and specification and testing requirement changes. Our advanced customer support services are offered as standalone arrangements or as a part of arrangements to customers buying other software and non-software products and services. We offer these advanced support services, both on-premise and remote, to Oracle customers to enable increased performance and higher availability of their products and services. Depending upon the nature of the arrangement, revenues from these services are recognized as the services are performed or ratably over the term of the service period, which is generally one year or less.



Education revenues are also a part of our services business and include instructor-led, media-based and internet-based training in the use of our software and hardware products. Education revenues are recognized as the classes or other education offerings are delivered.

If an arrangement contains multiple elements and does not qualify for separate accounting for the product and service transactions, then new software licenses revenues and/or hardware systems products revenues, including the costs of hardware systems products, are generally recognized together with the services based on contract accounting using either the percentage-of-completion or completed-contract method. Contract accounting is applied to any bundled software and cloud, hardware systems and services arrangements: (1) that include milestones or customer specific acceptance criteria that may affect collection of the software license or hardware systems product fees; (2) where consulting services include significant modification or customization of the software or hardware systems product or are of a specialized nature and generally performed only by Oracle; 44



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(3) where significant consulting services are provided for in the software license contract or hardware systems product contract without additional charge or are substantially discounted; or (4) where the software license or hardware systems product payment is tied to the performance of consulting services. For the purposes of revenue classification of the elements that are accounted for as a single unit of accounting, we allocate revenues to software and nonsoftware elements based on a rational and consistent methodology utilizing our best estimate of the relative selling price of such elements. We also evaluate arrangements with governmental entities containing "fiscal funding" or "termination for convenience" provisions, when such provisions are required by law, to determine the probability of possible cancellation. We consider multiple factors, including the history with the customer in similar transactions, the "essential use" of the software or hardware systems products and the planning, budgeting and approval processes undertaken by the governmental entity. If we determine upon execution of these arrangements that the likelihood of cancellation is remote, we then recognize revenues once all of the criteria described above have been met. If such a determination cannot be made, revenues are recognized upon the earlier of cash receipt or approval of the applicable funding provision by the governmental entity. We assess whether fees are fixed or determinable at the time of sale and recognize revenues if all other revenue recognition requirements are met. Our standard payment terms are net 30 days. However, payment terms may vary based on the country in which the agreement is executed. Payments that are due within six months are generally deemed to be fixed or determinable based on our successful collection history on such arrangements, and thereby satisfy the required criteria for revenue recognition. While most of our arrangements for sales within our businesses include short-term payment terms, we have a standard practice of providing long-term financing to creditworthy customers primarily through our financing division. Since fiscal 1989, when our financing division was formed, we have established a history of collection, without concessions, on these receivables with payment terms that generally extend up to five years from the contract date. Provided all other revenue recognition criteria have been met, we recognize new software licenses revenues and hardware systems products revenues for these arrangements upon delivery, net of any payment discounts from financing transactions. We have generally sold receivables financed through our financing division on a non-recourse basis to third party financing institutions within 90 days of the contracts' dates of execution and we classify the proceeds from these sales as cash flows from operating activities in our consolidated statements of cash flows. We account for the sales of these receivables as "true sales" as defined in ASC 860, Transfers and Servicing, as we are considered to have surrendered control of these financing receivables. In addition, we enter into arrangements with leasing companies for the sale of our hardware systems products. These leasing companies, in turn, lease our products to end-users. The leasing companies generally have no recourse to us in the event of default by the end-user and we recognize revenue upon delivery, if all other revenue recognition criteria have been met. Our customers include several of our suppliers and occasionally, we have purchased goods or services for our operations from these vendors at or about the same time that we have sold our products to these same companies (Concurrent Transactions). Software license agreements or sales of hardware systems that occur within a three-month time period from the date we have purchased goods or services from that same customer are reviewed for appropriate accounting treatment and disclosure. When we acquire goods or services from a customer, we negotiate the purchase separately from any sales transaction, at terms we consider to be at arm's length and settle the purchase in cash. We recognize revenues from Concurrent Transactions if all of our revenue recognition criteria are met and the goods and services acquired are necessary for our current operations.



Business Combinations

We apply the provisions of ASC 805, Business Combinations, in the accounting for our acquisitions. It requires us to recognize separately from goodwill the assets acquired and the liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date as well as contingent consideration, where applicable, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets 45



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acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of operations. Accounting for business combinations requires our management to make significant estimates and assumptions, especially at the acquisition date including our estimates for intangible assets, contractual obligations assumed, restructuring liabilities, pre-acquisition contingencies and contingent consideration, where applicable. Although we believe the assumptions and estimates we have made in the past have been reasonable and appropriate, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain.



Examples of critical estimates in valuing certain of the intangible assets we have acquired include but are not limited to:

future expected cash flows from software license sales, cloud SaaS and PaaS

contracts, hardware systems product sales, support agreements, consulting

contracts, other customer contracts, acquired developed technologies and

patents; expected costs to develop the in-process research and development into



commercially viable products and estimated cash flows from the projects

when completed; the acquired company's brand and competitive position, as well as



assumptions about the period of time the acquired brand will continue to be

used in the combined company's product portfolio; and discount rates.



Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.

We estimate the fair values of our cloud SaaS and PaaS (collectively, cloud software subscriptions), software license updates and product support, and hardware systems support obligations assumed. The estimated fair values of these performance obligations are determined utilizing a cost build-up approach. The cost build-up approach determines fair value by estimating the costs related to fulfilling the obligations plus a normal profit margin. The estimated costs to fulfill the obligations are based on the historical direct costs related to providing the services including the correction of any errors in the products acquired. The sum of these costs and operating profit approximates, in theory, the amount that we would be required to pay a third party to assume the performance obligations. We do not include any costs associated with selling efforts or research and development or the related fulfillment margins on these costs. Profit associated with any selling efforts is excluded because the acquired entities would have concluded those selling efforts on the performance obligations prior to the acquisition date. We also do not include the estimated research and development costs in our fair value determinations, as these costs are not deemed to represent a legal obligation at the time of acquisition. As a result, we did not recognize cloud SaaS and PaaS revenues related to cloud SaaS and PaaS contracts in the amounts of $17 million, $45 million and $22 million that would have been otherwise recorded by the acquired businesses as independent entities in fiscal 2014, 2013 and 2012, respectively. We did not recognize software license updates and product support revenues related to support contracts in the amounts of $3 million, $14 million and $48 million that would have been otherwise recorded by the acquired businesses as independent entities in fiscal 2014, 2013 and 2012, respectively. In addition, we did not recognize hardware systems support revenues related to hardware systems support contracts that would have otherwise been recorded by the acquired businesses as independent entities in the amounts of $11 million, $14 million and $30 million for fiscal 2014, 2013 and 2012, respectively. Historically, substantially all of our customers, including customers from acquired companies, renew their software license updates and product support contracts when the contracts are eligible for renewal and we strive to renew cloud SaaS and PaaS and hardware systems support contracts. To the extent cloud SaaS and PaaS, software support or hardware systems support contracts are renewed, we will recognize the revenues for the full values of the contracts over the contracts' periods, which are generally one year in duration. In connection with a business combination or other strategic initiative, we may estimate costs associated with restructuring plans committed to by our management. Restructuring costs are typically comprised of employee severance costs, costs of consolidating duplicate facilities and contract termination costs. Restructuring expenses are based upon plans that have been committed to by our management, but may be refined in subsequent periods. 46



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We account for costs to exit or restructure certain activities of an acquired company separately from the business combination pursuant to ASC 420, Exit or Disposal Cost Obligations. A liability for costs associated with an exit or disposal activity is recognized and measured at its fair value in our consolidated statement of operations in the period in which the liability is incurred. When estimating the fair value of facility restructuring activities, assumptions are applied regarding estimated sub-lease payments to be received, which can differ materially from actual results. This may require us to revise our initial estimates which may materially affect our results of operations and financial position in the period the revision is made. For a given acquisition, we may identify certain pre-acquisition contingencies as of the acquisition date and may extend our review and evaluation of these pre-acquisition contingencies throughout the measurement period in order to obtain sufficient information to assess whether we include these contingencies as a part of the fair value estimates of assets acquired and liabilities assumed and, if so, to determine their estimated amounts. If we cannot reasonably determine the fair value of a pre-acquisition contingency (non-income tax related) by the end of the measurement period, which is generally the case given the nature of such matters, we will recognize an asset or a liability for such pre-acquisition contingency if: (i) it is probable that an asset existed or a liability had been incurred at the acquisition date and (ii) the amount of the asset or liability can be reasonably estimated. Subsequent to the measurement period, changes in our estimates of such contingencies will affect earnings and could have a material effect on our results of operations and financial position. In addition, uncertain tax positions and tax related valuation allowances assumed in connection with a business combination are initially estimated as of the acquisition date. We reevaluate these items quarterly based upon facts and circumstances that existed as of the acquisition date with any adjustments to our preliminary estimates being recorded to goodwill if identified within the measurement period. Subsequent to the measurement period or our final determination of the tax allowance's or contingency's estimated value, whichever comes first, changes to these uncertain tax positions and tax related valuation allowances will affect our provision for income taxes in our consolidated statement of operations and could have a material impact on our results of operations and financial position.



Goodwill and Intangible Assets-Impairment Assessments

We review goodwill for impairment annually and whenever events or changes in circumstances indicate its carrying value may not be recoverable in accordance with ASC 350, Intangibles-Goodwill and Other. According to ASC 350, we can opt to perform a qualitative assessment to test a reporting unit's goodwill for impairment or we can directly perform the two step impairment test. Based on our qualitative assessment, if we determine that the fair value of a reporting unit is more likely than not (i.e., a likelihood of more than 50 percent) to be less than its carrying amount, the two step impairment test will be performed. In the first step, we compare the fair value of each reporting unit to its carrying value. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not considered impaired and we are not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then we must perform the second step of the impairment test in order to determine the implied fair value of the reporting unit's goodwill. If the carrying value of a reporting unit's goodwill exceeds its implied fair value, then we would record an impairment loss equal to the difference. Determining the fair value of a reporting unit involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions and determination of appropriate market comparables. We base our fair value estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. Actual future results may differ from those estimates. In addition, we make certain judgments and assumptions in allocating shared assets and liabilities to determine the carrying values for each of our reporting units. Our most recent annual goodwill impairment analysis, which was performed on March 1, 2014, did not result in a goodwill impairment charge, nor did we record any goodwill impairment in fiscal 2013 or 2012. Our consulting and hardware systems products reporting units have experienced revenues and operating margin declines in fiscal 2014 as compared to prior years. As a result, our consulting and hardware systems products reporting units may be at greater risk for goodwill impairment than our other reporting units if our actual results for these reporting units differ from our projections. 47



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We make judgments about the recoverability of purchased finite lived intangible assets whenever events or changes in circumstances indicate that an impairment may exist. Each period we evaluate the estimated remaining useful lives of purchased intangible assets and whether events or changes in circumstances warrant a revision to the remaining periods of amortization. Recoverability of finite lived intangible assets is measured by comparison of the carrying amount of the asset to the future undiscounted cash flows the asset is expected to generate. We review indefinite lived intangible assets for impairment annually and whenever events or changes in circumstances indicate the carrying value may not be recoverable. Recoverability of indefinite lived intangible assets is measured by comparison of the carrying amount of the asset to its fair value. If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset. Assumptions and estimates about future values and remaining useful lives of our intangible and other long-lived assets are complex and subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends and internal factors such as changes in our business strategy and our internal forecasts. Although we believe the historical assumptions and estimates we have made are reasonable and appropriate, different assumptions and estimates could materially impact our reported financial results. We did not recognize any intangible asset impairment charges in fiscal 2014, 2013 or 2012. Accounting for Income Taxes Significant judgment is required in determining our worldwide income tax provision. In the ordinary course of a global business, there are many transactions and calculations where the ultimate tax outcome is uncertain. Some of these uncertainties arise as a consequence of revenue sharing and cost reimbursement arrangements among related entities, the process of identifying items of revenues and expenses that qualify for preferential tax treatment and segregation of foreign and domestic earnings and expenses to avoid double taxation. Although we believe that our estimates are reasonable, the final tax outcome of these matters could be different from that which is reflected in our historical income tax provisions and accruals. Such differences could have a material effect on our income tax provision and net income in the period in which such determination is made. Our effective tax rate includes the impact of certain undistributed foreign earnings for which no U.S. taxes have been provided because such earnings are planned to be indefinitely reinvested outside the United States. Remittances of foreign earnings to the United States are planned based on projected cash flow, working capital and investment needs of our foreign and domestic operations. Based on these assumptions, we estimate the amount that will be distributed to the United States and provide U.S. federal taxes on these amounts. Material changes in our estimates as to how much of our foreign earnings will be distributed to the United States or tax legislation that limits or restricts the amount of undistributed foreign earnings that we consider indefinitely reinvested outside the United States could materially impact our income tax provision and effective tax rate. We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. In order for us to realize our deferred tax assets, we must be able to generate sufficient taxable income in those jurisdictions where the deferred tax assets are located. We consider future growth, forecasted earnings, future taxable income, the mix of earnings in the jurisdictions in which we operate, historical earnings, taxable income in prior years, if carryback is permitted under the law and prudent and feasible tax planning strategies in determining the need for a valuation allowance. In the event we were to determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the deferred tax assets valuation allowance would be charged to earnings in the period in which we make such a determination, or goodwill would be adjusted at our final determination of the valuation allowance related to an acquisition within the measurement period. If we later determine that it is more likely than not that the net deferred tax assets would be realized, we would reverse the applicable portion of the previously provided valuation allowance as an adjustment to earnings at such time. We calculate our current and deferred tax provision based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed during the subsequent year. Adjustments based on filed returns are generally recorded in the period when the tax returns are filed and the global tax implications are known, which can materially impact our effective tax rate. The amount of income tax we pay is subject to ongoing audits by federal, state and foreign tax authorities, which often result in proposed assessments. Our estimate of the potential outcome for any uncertain tax issue is highly 48



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judgmental. A description of our accounting policies associated with tax related contingencies assumed as a part of a business combination is provided under "Business Combinations" above. For those tax related contingencies that are not a part of a business combination, we account for these uncertain tax issues pursuant to ASC 740, Income Taxes, which contains a two-step approach to recognizing and measuring uncertain tax positions taken or expected to be taken in a tax return. The first step is to determine if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained in an audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. Although we believe we have adequately reserved for our uncertain tax positions, no assurance can be given with respect to the final outcome of these matters. We adjust reserves for our uncertain tax positions due to changing facts and circumstances, such as the closing of a tax audit, judicial rulings, and refinement of estimates or realization of earnings or deductions that differ from our estimates. To the extent that the final outcome of these matters is different than the amounts recorded, such differences generally will impact our provision for income taxes in the period in which such a determination is made. Our provisions for income taxes include the impact of reserve provisions and changes to reserves that are considered appropriate and also include the related interest and penalties. In addition, as a part of our accounting for business combinations, intangible assets are recognized at fair values and goodwill is measured as the excess of consideration transferred over the net estimated fair values of assets acquired. Impairment charges associated with goodwill are generally not tax deductible and will result in an increased effective income tax rate in the period that any impairment is recorded. Amortization expenses associated with acquired intangible assets are generally not tax deductible pursuant to our existing tax structure; however, deferred taxes have been recorded for non-deductible amortization expenses as a part of the accounting for business combinations. We have taken into account the allocation of these identified intangibles among different taxing jurisdictions, including those with nominal or zero percent tax rates, in establishing the related deferred tax liabilities.



Legal and Other Contingencies

We are currently involved in various claims and legal proceedings. Quarterly, we review the status of each significant matter and assess our potential financial exposure. A description of our accounting policies associated with contingencies assumed as a part of a business combination is provided under "Business Combinations" above. For legal and other contingencies that are not a part of a business combination, we accrue a liability for an estimated loss if the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated. Significant judgment is required in both the determination of probability and the determination as to whether the amount of an exposure is reasonably estimable. Because of uncertainties related to these matters, accruals are based only on the best information available at the time the accruals are made. As additional information becomes available, we reassess the potential liability related to our pending claims and litigation and may revise our estimates. Such revisions in the estimates of the potential liabilities could have a material impact on our results of operations and financial position.



Stock-Based Compensation

We account for share-based payments to employees, including grants of employee stock options, restricted stock-based awards and purchases under employee stock purchase plans, in accordance with ASC 718, Compensation-Stock Compensation, which requires that share-based payments (to the extent they are compensatory) be recognized in our consolidated statements of operations based on their fair values. We recognize stock-based compensation expense on a straight-line basis over the service period of the award, which is generally four years. We are required to estimate the stock awards that we ultimately expect to vest and to reduce stock-based compensation expense for the effects of estimated forfeitures of awards over the expense recognition period. Although we estimate the rate of future forfeitures based upon historical experience, actual forfeitures in the future may differ. To the extent our actual forfeitures are different than our estimates, we record a true-up for the difference in the period that the awards vest and such true-ups could materially affect our operating results. Additionally, we also consider on a quarterly basis whether there have been any significant changes in facts and circumstances that would affect our expected forfeiture rate. 49



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We estimate the fair values of employee stock options using a Black-Scholes-Merton valuation model. The fair value of an award is affected by our stock price on the date of grant as well as other assumptions including the estimated volatility of our stock price over the term of the awards and the estimated period of time that we expect employees to hold their stock options. The risk-free interest rate assumption we use is based upon U.S. treasury interest rates appropriate for the expected life of the awards. We use the implied volatility of publicly traded options in our stock in order to estimate future stock price trends as we believe that implied volatility is more representative of future stock price trends than historical volatility. In order to determine the estimated period of time that we expect employees to hold their stock options, we have used historical rates of employee groups by seniority of job classification. Our expected dividend rate is based upon an annualized dividend yield based on the per share dividend declared by our Board of Directors. The aforementioned inputs entered into the option valuation model we use to fair value our stock awards are subjective estimates and changes to these estimates will cause the fair values of our stock awards and related stock-based compensation expense that we record to vary. We record deferred tax assets for stock-based compensation awards that result in deductions on our income tax returns, based on the amount of stock-based compensation recognized and the fair values attributable to the vested portion of stock awards assumed in connection with a business combination, at the statutory tax rate in the jurisdiction in which we will receive a tax deduction. Because the deferred tax assets we record are based upon the stock-based compensation expenses in a particular jurisdiction, the aforementioned inputs that affect the fair values of our stock awards may also indirectly affect our income tax expense. In addition, differences between the deferred tax assets recognized for financial reporting purposes and the actual tax deduction reported on our income tax returns are recorded in additional paid-in capital. If the tax deduction is less than the deferred tax asset, the calculated shortfall reduces our pool of excess tax benefits. If the pool of excess tax benefits is reduced to zero, then subsequent shortfalls would increase our income tax expense. To the extent we change the terms of our employee stock-based compensation programs, experience market volatility in the pricing of our common stock that increases the implied volatility calculation of publicly traded options in our stock, refine different assumptions in future periods such as forfeiture rates that differ from our current estimates, or assume stock awards from acquired companies that are different in nature than our stock award arrangements, among other potential impacts, the stock-based compensation expense that we record in future periods and the tax benefits that we realize may differ significantly from what we have recorded in previous reporting periods.



Results of Operations

Impact of Acquisitions

The comparability of our operating results in fiscal 2014 compared to fiscal 2013 is impacted by our acquisitions, primarily our acquisitions of Responsys in the third quarter of fiscal 2014, Tekelec in the first quarter of fiscal 2014 and Acme Packet in the fourth quarter of fiscal 2013. The comparability of our operating results in fiscal 2013 compared to fiscal 2012 is impacted by our acquisitions, primarily our acquisitions of Acme Packet in the fourth quarter of fiscal 2013, Taleo Corporation (Taleo) in the fourth quarter of fiscal 2012 and RightNow Technologies, Inc. (RightNow) during the third quarter of fiscal 2012. In our discussion of changes in our results of operations from fiscal 2014 compared to fiscal 2013 and fiscal 2013 compared to fiscal 2012, we may qualitatively disclose the impacts of our acquired products (for the one year period subsequent to the acquisition date) to the growth in our new software licenses revenues, cloud SaaS and PaaS revenues, software license updates and product support revenues, hardware systems products revenues and hardware systems support revenues where such qualitative discussions would be meaningful for an understanding of the factors that influenced the changes in our results of operations. When material, we may also provide quantitative disclosures related to such acquired products. The contributions of our acquisitions to our other businesses and operating segments' revenues and to the expense contributions for substantially all of our businesses and operating segments in each of the respective period comparisons are not provided as they either were not separately identifiable due to the integration of these businesses and operating segments into our existing operations and/or were insignificant to our results of operations during the periods presented. 50



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We caution readers that, while pre- and post-acquisition comparisons, as well as any quantified amounts themselves, may provide indications of general trends, the acquisition information that we provide has inherent limitations for the following reasons:



any qualitative and quantitative disclosures cannot specifically address or

quantify the substantial effects attributable to changes in business

strategies, including our sales force integration efforts. We believe that

if our acquired companies had operated independently and sales forces had

not been integrated, the relative mix of products sold would have been different; and



although substantially all of our customers, including customers from

acquired companies, renew their software license updates and product

support contracts when the contracts are eligible for renewal and we strive

to renew cloud SaaS and PaaS contracts and hardware systems support contracts, the amounts shown as cloud software-as-a-service and platform-as-a-service deferred revenues, software license updates and



product support deferred revenues, and hardware systems support deferred

revenues in our supplemental disclosure related to certain charges

(presented below) are not necessarily indicative of revenue improvements we

will achieve upon contract renewals to the extent customers do not renew.

Constant Currency Presentation

Our international operations have provided and will continue to provide a significant portion of our total revenues and expenses. As a result, total revenues and expenses will continue to be affected by changes in the U.S. Dollar against major international currencies. In order to provide a framework for assessing how our underlying businesses performed excluding the effect of foreign currency fluctuations, we compare the percent change in the results from one period to another period in this Annual Report using constant currency disclosure. To present this information, current and comparative prior period results for entities reporting in currencies other than U.S. Dollars are converted into U.S. Dollars at constant exchange rates (i.e., the rates in effect on May 31, 2013, 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 of 1.0 million Euros from products sold on May 31, 2014 and 2013, our financial statements would reflect reported revenues of $1.36 million in fiscal 2014 (using 1.36 as the month-end average exchange rate for the period) and $1.29 million in fiscal 2013 (using 1.29 as the month-end average exchange rate for the period). The constant currency presentation would translate the fiscal 2014 results using the fiscal 2013 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. 51



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Total Revenues and Operating Expenses

Year Ended May 31, Percent Change Percent Change (Dollars in millions) 2014 Actual Constant 2013 Actual Constant 2012 Total Revenues by Geography: Americas $ 20,323 3% 4% $ 19,719 3% 3% $ 19,236 EMEA(1) 11,946 7% 4% 11,158 -3% 0% 11,561 Asia Pacific(2) 6,006 -5% 2% 6,303 0% 3% 6,324 Total revenues 38,275 3% 4% 37,180 0% 2% 37,121 Total Operating Expenses 23,516 5% 6% 22,496 -4% -2% 23,415 Total Operating Margin $ 14,759 1% 1% $ 14,684 7% 10% $ 13,706 Total Operating Margin % 39% 39% 37% % Revenues by Geography: Americas 53% 53% 52% EMEA 31% 30% 31% Asia Pacific 16% 17% 17% Total Revenues by Business: Software and Cloud $ 29,199 5% 5% $ 27,920 5% 7% $ 26,560 Hardware Systems 5,372 0% 2% 5,346 -15% -13% 6,302 Services 3,704 -5% -4% 3,914 -8% -6% 4,259 Total revenues $ 38,275 3% 4% $ 37,180 0% 2% $ 37,121 % Revenues by Business: Software and Cloud 76% 75% 72% Hardware Systems 14% 14% 17% Services 10% 11% 11% (1) Comprised of Europe, the Middle East and Africa (2) Asia Pacific includes Japan Fiscal 2014 Compared to Fiscal 2013: On a constant currency basis, our total revenues increased in fiscal 2014 by 4 percentage points due to increases in our software and cloud business revenues and our hardware business revenues, partially offset by a decrease in our services business revenues. The constant currency growth in our software and cloud business was substantially attributable to growth in our software license updates and product support revenues and, to a lesser extent, our cloud software-as-a-service (SaaS) and platform-as-a-service (PaaS) revenues due to incremental revenues from our acquisitions. The constant currency revenues growth in our hardware business was due to an increase in our hardware systems support revenues due substantially to incremental revenues from our acquisitions and due to increases in our hardware revenues attributable to our Oracle Engineered Systems, partially offset by revenue decreases attributable to reductions in the sales volumes of certain of our legacy hardware product lines, including lower margin products. On a constant currency basis, the Americas contributed 61%, EMEA contributed 30% and Asia Pacific contributed 9% to our total revenues growth during fiscal 2014. Total constant currency operating expenses increased during fiscal 2014 primarily due to an increase in sales and marketing and research and development expenses resulting from increased headcount, higher sales-based variable compensation expenses due to revenues growth, and an increase in cloud SaaS and PaaS costs resulting from additional expenses incurred to support the increases in our cloud SaaS and PaaS revenues. These expense increases in fiscal 2014 were partially offset by lower constant currency expenses from our hardware systems support and services segments due to decreased headcount, lower restructuring expenses, and lower intangible assets amortization. In fiscal 2013, we recognized a $387 million acquisition related benefit (see Note 2 of Notes to Consolidated Financial Statements included elsewhere in this Annual Report for additional information) and a $306 million benefit relating to certain litigation (see Note 18 of Notes to Consolidated Financial Statements included elsewhere in this Annual Report for additional information), both of which decreased our acquisition related and other expenses during this period. Excluding the effect of foreign currency rate fluctuations, our operating margin increased during fiscal 2014 due to our revenues growth, while our operating margin as a percentage of revenues was flat. 52



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Fiscal 2013 Compared to Fiscal 2012: Excluding the effect of foreign currency rate fluctuations, our total revenues increased in fiscal 2013 due to an increase in our software and cloud business revenues. This constant currency increase was partially offset by reductions in our hardware systems and services business' revenues. On a constant currency basis, the Americas region contributed 77% and the Asia Pacific region contributed 23% to our growth in total revenues during fiscal 2013. Excluding the effect of foreign currency rate fluctuations, total operating expenses decreased in fiscal 2013 primarily due to a $387 million acquisition related benefit and a $306 million benefit related to certain litigation (both as noted above), lower hardware systems products costs associated with lower hardware systems products revenues, and certain other operating expense decreases in most of our other lines of business primarily due to lower variable compensation expenses, lower external contractor expenses and lower amortization of intangible assets. In constant currency, these total expense decreases during fiscal 2013 were partially offset by higher salary and benefit expenses due primarily to additional sales and marketing and research and development headcount added during fiscal 2013. Excluding the effect of foreign currency rate fluctuations, our total operating margin and our total operating margin as a percentage of total revenues increased during fiscal 2013 due to the increase in our total revenues and the decrease in our total operating expenses.



Supplemental Disclosure Related to Certain Charges

To supplement our consolidated financial information, we believe the following information is helpful to an overall understanding of our past financial performance and prospects for the future. You should review the introduction under "Impact of Acquisitions" (above) for a discussion of the inherent limitations in comparing pre- and post-acquisition information.



Our operating results included the following business combination accounting adjustments and expenses related to acquisitions, as well as certain other significant expense and income items:

Year Ended May 31, (in millions) 2014 2013 2012 Cloud software-as-a-service and platform-as-a-service deferred revenues(1) $ 17$ 45$ 22 Software license updates and product support deferred revenues(1) 3 14 48 Hardware systems support deferred revenues(1) 11 14 30 Amortization of intangible assets(2) 2,300 2,385 2,430 Acquisition related and other(3)(5) 41 (604 ) 56 Restructuring(4) 183 352 295 Stock-based compensation(5) 795 722 626 Income tax effects(6) (1,091 ) (896 ) (967 ) $ 2,259$ 2,032$ 2,540 (1) In connection with our acquisitions, we have estimated the fair values of the cloud SaaS and PaaS, software support and hardware systems support obligations assumed. Due to our application of business combination



accounting rules, we did not recognize cloud SaaS and PaaS revenues related

to contracts that would have otherwise been recorded by the acquired

businesses as independent entities in the amounts of $17 million, $45

million and $22 million in fiscal 2014, 2013 and 2012, respectively. We also

did not recognize software license updates and product support revenues

related to software support contracts that would have otherwise been

recorded by the acquired businesses as independent entities in the amounts

of $3 million, $14 million and $48 million in fiscal 2014, 2013 and 2012,

respectively. In addition, we did not recognize hardware systems support

revenues related to hardware systems support contracts that would have

otherwise been recorded by the acquired businesses as independent entities

in the amounts of $11 million, $14 million and $30 million in fiscal 2014,

2013 and 2012, respectively.



Approximately $3 million of estimated cloud SaaS and PaaS revenues related to

contracts assumed will not be recognized during fiscal 2015 that would have

otherwise been recognized as revenues by the acquired businesses as

independent entities due to the application of the aforementioned business

combination accounting rules. Approximately $2 million of estimated hardware

systems support revenues related to hardware systems support contracts assumed

will not be recognized during fiscal 2015 that would have otherwise been

recognized by certain acquired companies as independent entities due to the

application of the aforementioned business combination accounting rules. To

the extent customers renew these contracts with us, we expect to recognize

revenues for the full contracts' values over the respective contracts' renewal

periods. 53



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Table of Contents (2) Represents the amortization of intangible assets substantially all of which

were acquired in connection with our acquisitions. As of May 31, 2014,

estimated future amortization expenses related to intangible assets were as follows (in millions): Fiscal 2015 $ 1,934 Fiscal 2016 1,337 Fiscal 2017 741 Fiscal 2018 607 Fiscal 2019 508 Thereafter 980 Total intangible assets subject to amortization 6,107 In-process research and development 30 Total intangible assets, net $ 6,137



(3) Acquisition related and other expenses primarily consist of personnel

related costs for transitional and certain other employees, stock-based

compensation expenses, integration related professional services, certain

business combination adjustments including certain adjustments after the measurement period has ended and certain other operating items, net. In fiscal 2013, acquisition related and other expenses included a benefit of $306 million related to certain litigation (see Note 18 of Notes to



Consolidated Financial Statements included elsewhere in this Annual Report

for additional information), and a net benefit of $387 million due to a

change in the fair value of contingent consideration payable in connection

with an acquisition (see Note 2 of Notes to Consolidated Financial Statements included elsewhere in this Annual Report for additional information). (4) The significant majority of restructuring expenses during fiscal 2014 and



2013 related to employee severance and facility exit costs in connection

with our Fiscal 2013 Oracle Restructuring Plan (the 2013 Restructuring

Plan). Restructuring expenses during fiscal 2012 primarily related to costs

incurred pursuant to our Sun Restructuring Plan. Additional information

regarding certain of our restructuring plans is provided in Note 9 of Notes

to Consolidated Financial Statements included elsewhere in this Annual Report.



(5) Stock-based compensation was included in the following operating expense

line items of our consolidated statements of operations (in millions): Year Ended May 31, 2014 2013 2012 Sales and marketing $ 165$ 137$ 115 Cloud software-as-a-service and platform-as-a-service 8 10 7 Cloud infrastructure-as-a-service 4 8 6 Software license updates and product support 22 20 18 Hardware systems products 5 3 1 Hardware systems support 6 5 5 Services 29 23 17 Research and development 385 352 295 General and administrative 171 164 162 Subtotal 795 722 626 Acquisition related and other 10 33 33 Total stock-based compensation $ 805$ 755$ 659



Stock-based compensation included in acquisition related and other expenses

resulted from unvested stock options and restricted stock-based awards assumed

from acquisitions whose vesting was accelerated upon termination of the employees pursuant to the terms of those stock options and restricted stock-based awards.



(6) The income tax effects presented were calculated as if the above described

charges were not included in our results of operations for each of the

respective periods presented. Income tax effects for fiscal 2014 and 2013

were calculated based on the applicable jurisdictional tax rates applied to

the items within the table above and resulted in effective tax rates of

22.5% and 23.0%, respectively, instead of 20.1% and 21.4%, respectively,

which represented our effective tax rates as derived per our consolidated

statement of operations, primarily due to the net tax effects of acquisition

related items, including the tax effects of amortization of intangible assets. Income tax effects for fiscal 2012 were calculated reflecting an effective tax rate of 24.0%, instead of 23.0% which represented our



effective tax rate as derived per our consolidated statement of operations,

due to the disproportionate rate impact of certain discrete items, income

tax effects related to our acquired tax exposures, and differences in jurisdictional tax rates and related tax benefits attributable to our restructuring expenses in the period.



Software and Cloud Business

Our software and cloud business consists of our new software licenses and cloud software subscriptions segment, our cloud infrastructure-as-a-service segment and our software license updates and product support segment.



New Software Licenses and Cloud Software Subscriptions: New software licenses revenues represent fees earned from granting customers licenses to use our database and middleware and our application software

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products. Cloud software subscriptions include revenues from our cloud software-as-a-service and platform-as-a-service offerings, which grant customers access to a broad range of our software offerings on a subscription basis in a secure, standards-based, cloud computing environment that includes access, hosting, infrastructure management, the use of software updates, and support. We continue to place significant emphasis, both domestically and internationally, on direct sales through our own sales force. We also continue to market our products through indirect channels. Costs associated with our new software licenses and cloud software subscriptions segment are included in sales and marketing expenses, cloud software-as-a-service and platform-as-a-service expenses and amortization of intangible assets. These costs are largely personnel related and include commissions earned by our sales force for the sale of our software offerings, marketing program costs, the cost of providing our cloud software-as-a-service and platform-as-a-service offerings and amortization of intangible assets. Year Ended May 31, Percent Change Percent Change (Dollars in millions) 2014 Actual Constant 2013 Actual Constant 2012 New Software Licenses and Cloud Software Subscriptions Revenues: Americas $ 5,544 1% 3% $ 5,465 7% 8% $ 5,107 EMEA 3,249 10% 6% 2,959 3% 5% 2,884 Asia Pacific 1,744 -8% -2% 1,897 -1% 3% 1,915 Total revenues 10,537 2% 3% 10,321 4% 6% 9,906 Expenses: Cloud software-as-a-service and platform-as-a-service(1) 447 41% 42% 317 58% 58% 202 Sales and marketing(1) 6,350 7% 8% 5,935 4% 6% 5,697 Stock-based compensation 166 17% 17% 142 19% 19% 120 Amortization of intangible assets(2) 977 -1% -1% 986 20% 20% 822 Total expenses 7,940 8% 8% 7,380 8% 10% 6,841 Total Margin $ 2,597 -12% -11% $ 2,941 -4% -3% $ 3,065 Total Margin % 25% 28% 31% % Revenues by Geography: Americas 53% 53% 52% EMEA 31% 29% 29% Asia Pacific 16% 18% 19% Revenues by Software Offerings: New software licenses $ 9,416 0% 1% $ 9,411 0% 1% $ 9,451 Cloud software-as-a-service and platform-as-a-service 1,121 23% 24% 910 100% 100% 455 Total new software licenses and cloud software subscriptions revenues $ 10,537 2% 3% $ 10,321 4% 6% $ 9,906 % Revenues by Software Offerings: New software licenses 89% 91% 95% Cloud software-as-a-service and platform-as-a-service 11% 9% 5% (1) Excluding stock-based compensation (2) Included as a component of 'Amortization of Intangible Assets' in our consolidated statements of operations Fiscal 2014 Compared to Fiscal 2013: Excluding the effect of unfavorable currency rate fluctuations, total new software licenses and cloud software subscriptions revenues increased by 3% during fiscal 2014 primarily due to incremental revenues from our cloud SaaS and PaaS offerings resulting from our recent acquisitions. In constant currency, total new software licenses and cloud software subscriptions revenues growth in the Americas and EMEA region was partially offset by a decline in revenues in the Asia Pacific region.



In constant currency, our new software license revenues increased by 1% in fiscal 2014 and our SaaS and PaaS revenues increased by 24% in fiscal 2014, both primarily due to incremental revenues from our recent acquisitions.

As a result of our acquisitions, we recorded adjustments to reduce assumed cloud SaaS and PaaS obligations to their estimated fair values at the acquisition dates. Due to our application of business combination accounting rules, cloud SaaS and PaaS revenues in the amounts of $17 million, $45 million and $22 million that would have been otherwise recorded by our acquired businesses as independent entities were not recognized in fiscal 2014, 55



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2013 and 2012, respectively. To the extent underlying cloud SaaS and PaaS contracts are renewed with us following an acquisition, we will recognize the revenues for the full values of the cloud SaaS and PaaS contracts over the respective contractual periods.

In reported currency, new software licenses revenues earned from transactions of $3 million or greater increased by 3% in fiscal 2014 and represented 33% of our new software licenses revenues in fiscal 2014 in comparison to 32% in fiscal 2013. Excluding the effect of favorable currency rate fluctuations, total new software licenses and cloud software subscriptions expenses increased in fiscal 2014 primarily due to higher employee related expenses from increased headcount, higher variable compensation expenses due to revenues growth, and higher cloud SaaS and PaaS expenses resulting from costs incurred to support the related revenue increases.



Excluding the effect of unfavorable currency rate fluctuations, total new software licenses and cloud software subscriptions margin and margin as a percentage of revenues decreased in fiscal 2014 as our total expenses increased at a faster rate than our total revenues for this operating segment.

Fiscal 2013 Compared to Fiscal 2012: Excluding the effect of foreign currency rate fluctuations, total new software licenses and cloud software subscriptions revenues increased during fiscal 2013 due to growth across all regions and incremental revenues from our acquisitions. On a constant currency basis, the Americas contributed 69%, EMEA contributed 23% and Asia Pacific contributed 8% to the increase in new software licenses and cloud software subscriptions revenues during fiscal 2013. In constant currency, our new software licenses revenues increased by 1% and our cloud SaaS and PaaS revenues increased by 100% in fiscal 2013 primarily due to incremental revenues from our acquisitions. As described above, the amount of new software licenses and cloud software subscriptions revenues that we recognized in fiscal 2013 and fiscal 2012 were affected by business combination accounting rules. In reported currency, new software licenses revenues earned from transactions of $3 million or greater increased by 11% in fiscal 2013 and represented 32% of our total new software licenses revenues in fiscal 2013 in comparison to 29% in fiscal 2012. Excluding the effect of currency rate fluctuations, total new software licenses and cloud software subscriptions expenses increased in fiscal 2013 primarily due to higher employee related expenses and stock-based compensation from increased headcount, and higher intangible asset amortization, partially offset by a decrease in certain legal costs.



Excluding the effect of unfavorable currency rate fluctuations, total new software licenses and cloud software subscriptions margin and margin as a percentage of revenues decreased in fiscal 2013 as our total expenses increased at a faster rate than our total revenues for this operating segment.

Cloud Infrastructure-as-a-Service: Our cloud infrastructure-as-a-service segment provides deployment and management offerings for our software and hardware and related IT infrastructure including virtual machine instances that are subscription-based and designed for computing and reliable and secure object storage; Oracle Engineered Systems hardware and related support that are deployed in our customers' data centers for a monthly fee; and comprehensive software and hardware management and maintenance services for customer IT infrastructure for a fee for a stated term that is hosted at our data center facilities, select partner data centers or physically on-premise at customer facilities. Cloud infrastructure-as-a-service expenses consist primarily of personnel related expenditures, technology infrastructure expenditures and facilities costs. For all periods presented, our cloud-infrastructure-as-a-service segment's revenues and expenses were substantially attributable to our IT infrastructure management, maintenance and hosting services offerings. 56



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Table of Contents Year Ended May 31, Percent Change Percent Change (Dollars in millions) 2014 Actual Constant 2013 Actual Constant 2012 Cloud Infastructure-as-a-Service: Americas $ 335 -6% -5% $ 355 5% 6% $ 337 EMEA 94 32% 27% 72 -6% -1% 76 Asia Pacific 27 -12% 3% 30 -1% 4% 31 Total revenues 456 0% 1% 457 3% 5% 444 Expenses: Cloud infastructure-as-a-service(1) 304 3% 5% 296 5% 8% 283 Sales and marketing(1) 61 0% 1% 61 -15% -14% 72 Stock-based compensation 4 -52% -52% 8 28% 28% 6 Total expenses 369 1% 3% 365 1% 4% 361 Total Margin $ 87 -6% -9% $ 92 10% 8% $ 83 Total Margin % 19% 20% 19% % Revenues by Geography: Americas 73% 77% 76% EMEA 21% 16% 17% Asia Pacific 6% 7% 7%



(1) Excluding stock-based compensation

Fiscal 2014 Compared to Fiscal 2013: On a constant currency basis, total cloud IaaS revenues increased slightly in fiscal 2014 primarily due to incremental revenues from the recent introduction of our on-premise Oracle Engineered Systems subscription offerings. In constant currency, total cloud IaaS revenues growth in the EMEA and Asia Pacific regions were partially offset by a decline in revenues in the Americas region. On a constant currency basis, total cloud IaaS expenses increased during fiscal 2014 primarily due to increased employee related expenses associated with increased headcount, which reduced the total margin and margin as a percentage of revenues for this segment. Fiscal 2013 Compared to Fiscal 2012: On a constant currency basis, total cloud IaaS revenues increased in fiscal 2013 primarily due to growth in our infrastructure management, maintenance and hosting services offerings. In constant currency, total cloud IaaS revenues growth in the Americas and Asia Pacific regions were partially offset by a decline in revenues in the EMEA region. On a constant currency basis, total cloud IaaS expenses increased during fiscal 2013 primarily due to increased employee related expenses associated with increased headcount. Total margin and margin as a percentage of revenues increased during fiscal 2013 as our total revenues increased at a faster rate than our total expenses for this segment. Software License Updates and Product Support: Software license updates grant customers rights to unspecified software product upgrades and maintenance releases and patches released during the support period. Product support includes internet access to technical content as well as internet and telephone access to technical support personnel in our global support centers. Expenses associated with our software license updates and product support line of business include the cost of providing the support services, largely personnel related expenses, and the amortization of our intangible assets associated with software support contracts and customer relationships obtained from acquisitions. 57



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Table of Contents Year Ended May 31, Percent Change Percent Change (Dollars in millions) 2014 Actual Constant 2013 Actual Constant 2012 Software License Updates and Product Support Revenues: Americas $ 9,858 6% 7% $ 9,322 7% 8% $ 8,672 EMEA 5,906 10% 7% 5,363 3% 7% 5,194 Asia Pacific 2,442 -1% 8% 2,457 5% 9% 2,344 Total revenues 18,206 6% 7% 17,142 6% 8% 16,210 Expenses: Software license updates and product support(1) 1,140 -1% 0% 1,155 -4% -2% 1,208 Stock-based compensation 22 10% 10% 20 12% 12% 18 Amortization of intangible assets(2) 801 -4% -4% 836 -3% -3% 863 Total expenses 1,963 -2% -1% 2,011 -4% -2% 2,089 Total Margin $ 16,243 7% 8% $ 15,131 7% 10% $ 14,121 Total Margin % 89% 88% 87% % Revenues by Geography: Americas 54% 55% 54% EMEA 33% 31% 32% Asia Pacific 13% 14% 14%



(1) Excluding stock-based compensation

(2) Included as a component of 'Amortization of Intangible Assets' in our

consolidated statements of operations

Fiscal 2014 Compared to Fiscal 2013: Excluding the effect of unfavorable currency rate fluctuations, software license updates and product support revenues increased by 7% in fiscal 2014 as a result of new software licenses sold with substantially all of these customers electing to purchase software support contracts during the trailing 4-quarter period, and the renewal of substantially all of the software support customer base eligible for renewal during the trailing 4-quarter period. Excluding the effect of currency rate fluctuations, the Americas contributed 55%, EMEA contributed 30% and Asia Pacific contributed 15% to the increase in software license updates and product support revenues. As a result of our acquisitions, we recorded adjustments to reduce assumed software support obligations to their estimated fair values at the acquisition dates. Due to our application of business combination accounting rules, software license updates and product support revenues related to software support contracts in the amounts of $3 million, $14 million and $48 million that would have been otherwise recorded by our acquired businesses as independent entities were not recognized in fiscal 2014, 2013 and 2012, respectively. Historically, substantially all of our customers, including customers from acquired companies, renew their software support contracts when such contracts are eligible for renewal. To the extent these underlying support contracts are renewed, we will recognize the revenues for the full values of these contracts over the support periods, the substantial majority of which are one year in duration. Excluding the effect of favorable foreign currency rate fluctuations, total software license updates and product support expenses during fiscal 2014 decreased slightly due to a modest decrease in headcount and a decrease in amortization of intangible assets. Margin and margin as a percentage of revenues increased during fiscal 2014 as our total revenues for this segment increased while our total expenses slightly decreased. Fiscal 2013 Compared to Fiscal 2012: Excluding the effect of currency rate fluctuations, software license updates and product support revenues increased in fiscal 2013 for similar reasons as those noted above for our fiscal 2014 revenues increase and due to incremental revenues from recent acquisitions. Excluding the effect of currency rate fluctuations, the Americas contributed 56%, EMEA contributed 29% and Asia Pacific contributed 15% to the increase in software license updates and product support revenues.



As described above, the amounts of software license updates and product support revenues that we recognized in fiscal 2013 and fiscal 2012 were affected by business combination accounting rules.

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Excluding the effect of favorable foreign currency rate fluctuations, total software license updates and product support expenses decreased in fiscal 2013 primarily due to lower amortization of intangible assets, a reduction in certain non-income based taxes, lower bad debt expenses, and lower variable compensation expenses.



Excluding the effect of currency rate fluctuations, total software license updates and product support margin and margin as a percentage of revenues increased in fiscal 2013 as our total revenues for this segment increased while our total expenses decreased.

Hardware Systems Business

Our hardware systems business consists of our hardware systems products segment and hardware systems support segment.

Hardware Systems Products: Hardware systems products revenues are primarily generated from the sales of our computer server, storage and networking products, including sales of our Oracle Engineered Systems. We market and sell our hardware systems products through our direct sales force and indirect channels such as independent distributors and value added resellers. Operating expenses associated with our hardware systems products include the cost of hardware systems products, which consists of expenses for materials and labor used to produce these products by our internal manufacturing operations or by third party manufacturers, warranty expenses and the impact of periodic changes in inventory valuation, including the impact of inventory determined to be excess and obsolete. Operating expenses associated with our hardware systems products also include sales and marketing expenses, which are largely personnel related and include variable compensation earned by our sales force for the sales of our hardware products, and amortization of intangible assets. Year Ended May 31, Percent Change Percent Change (Dollars in millions) 2014 Actual Constant 2013 Actual Constant 2012 Hardware Systems Products Revenues: Americas $ 1,507 1% 2% $ 1,495 -20% -20% $ 1,880 EMEA 834 -1% -3% 842 -26% -23% 1,140 Asia Pacific 635 -9% -5% 696 -14% -12% 807 Total revenues 2,976 -2% -1% 3,033 -21% -19% 3,827 Expenses: Hardware systems products(1) 1,516 1% 3% 1,498 -19% -17% 1,842 Sales and marketing(1) 991 7% 7% 929 -16% -14% 1,106 Stock-based compensation 12 49% 49% 8 211% 211% 3 Amortization of intangible assets(2) 274 -16% -16% 327 -17% -17% 393 Total expenses 2,793 1% 2% 2,762 -17% -16% 3,344 Total Margin $ 183 -33% -30% $ 271 -44% -42% $ 483 Total Margin % 6% 9% 13% % Revenues by Geography: Americas 51% 49% 49% EMEA 28% 28% 30% Asia Pacific 21% 23% 21%



(1) Excluding stock-based compensation

(2) Included as a component of 'Amortization of Intangible Assets' in our

consolidated statements of operations

Fiscal 2014 Compared to Fiscal 2013: Excluding the effect of currency rate fluctuations, total hardware systems products revenues modestly decreased in fiscal 2014. The decrease in revenues during fiscal 2014, which was attributable to reductions in the sales volumes of certain of our legacy product lines, including lower margin 59



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products, was partially offset by incremental revenues from our recently acquired companies and increases in hardware revenues attributable to our sales of Oracle Engineered Systems.

In constant currency, total hardware systems products operating expenses increased in fiscal 2014 primarily due to an increase in employee related expenses due primarily to an increase in sales and marketing headcount, partially offset by a decrease in amortization of intangible assets.

Excluding the effect of currency rate fluctuations, total margin and margin as a percentage of revenues decreased in fiscal 2014 due to a decrease in our total revenues and increase in our total expenses for this segment. Fiscal 2013 Compared to Fiscal 2012: On a constant currency basis, hardware systems products revenues decreased in fiscal 2013 primarily due to reductions in the sales volumes of certain of our legacy product lines, including lower margin products. These revenue decreases were partially offset by increases in hardware revenues attributable to our Oracle Engineered Systems. On a constant currency basis, total hardware systems products operating expenses declined in fiscal 2013 primarily due to a reduction in hardware systems products costs associated with lower hardware revenues, a decrease in employee related expenses due to decreased hardware systems sales headcount, and lower intangible asset amortization. Excluding the effect of currency rate fluctuations, total hardware systems products margin and margin as a percentage of revenues decreased in fiscal 2013 as our total revenues for this segment decreased at a faster rate than our total expenses. Hardware Systems Support: Our hardware systems support offerings provide customers with software updates for software components that are essential to the functionality of our server, storage and networking products, such as Oracle Solaris and certain other software products, and can include product repairs, maintenance services and technical support services. Expenses associated with our hardware systems support operating segment include the cost of materials used to repair customer products, the cost of providing support services, largely personnel related expenses, and the amortization of our intangible assets associated with hardware systems support contracts and customer relationships obtained from our acquisitions. Year Ended May 31, Percent Change Percent Change (Dollars in millions) 2014 Actual Constant 2013 Actual Constant 2012 Hardware Systems Support Revenues: Americas $ 1,229 11% 12% $ 1,109 -4% -4% $ 1,157 EMEA 738 -2% -4% 752 -14% -10% 870 Asia Pacific 429 -5% 2% 452 1% 4% 448 Total revenues 2,396 4% 5% 2,313 -7% -4% 2,475 Expenses: Hardware systems support(1) 830 -6% -5% 885 -15% -13% 1,041 Stock-based compensation 6 26% 26% 5 -3% -3% 5 Amortization of intangible assets(2) 231 8% 8% 213 -30% -30% 305 Total expenses 1,067 -3% -3% 1,103 -18% -17% 1,351 Total Margin $ 1,329 10% 12% $ 1,210 8% 11% $ 1,124 Total Margin % 55% 52% 45% % Revenues by Geography: Americas 51% 48% 47% EMEA 31% 32% 35% Asia Pacific 18% 20% 18%



(1) Excluding stock-based compensation

(2) Included as a component of 'Amortization of Intangible Assets' in our

consolidated statements of operations

Fiscal 2014 Compared to Fiscal 2013: Excluding the impact of unfavorable currency rate fluctuations, hardware systems support revenues increased in fiscal 2014 primarily due to incremental revenues from our

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recent acquisitions. These hardware support revenues increases were partially offset by certain hardware support revenues decreases that were generally caused by the reductions in sales volumes of certain of our legacy hardware systems product lines for which we offer hardware systems support. In constant currency, hardware systems support revenues growth in the Americas and Asia Pacific region was partially offset by a decline in revenues in the EMEA region. As a result of our acquisitions, we recorded adjustments to reduce assumed hardware systems support obligations to their estimated fair values at the acquisition dates. Due to our application of business combination accounting rules, hardware systems support revenues related to hardware systems support contracts in the amounts of $11 million, $14 million and $30 million that would have been otherwise reported by our acquired businesses as independent entities were not recognized in fiscal 2014, 2013 and 2012, respectively. To the extent these underlying hardware systems support contracts are renewed, we will recognize the revenues for the full values of these contracts over the future support periods. Total hardware systems support expenses decreased in fiscal 2014 primarily due to a reduction in employee related expenses attributable to decreased headcount and reduced service delivery costs due to operational initiatives, partially offset by an increase in amortization of intangible assets. Excluding the effect of currency rate fluctuations, total hardware systems support margin and margin as a percentage of total revenues increased in fiscal 2014 as our total revenues for this segment increased while our total expenses for this segment decreased. Fiscal 2013 Compared to Fiscal 2012: Excluding the impact of currency rate fluctuations, hardware systems support revenues decreased in fiscal 2013 primarily due to reductions in sales volumes of certain of our legacy hardware systems product lines for which we offer hardware systems support. As described above, the amounts of hardware systems support revenues that we recognized in fiscal 2013 and fiscal 2012 were affected by business combination accounting rules.



Excluding the effect of currency rate fluctuations, total hardware systems support expenses decreased in fiscal 2013 primarily due to a reduction in employee related expenses attributable to decreased headcount, reduced service delivery costs due to operational initiatives, lower bad debt expenses, and lower amortization of intangible assets.

Excluding the effect of currency rate fluctuations, total hardware systems support margin and margin as a percentage of total revenues increased in fiscal 2013 due to the reduction in our total hardware systems support expenses.

Services Business

Our services business consists of consulting, advanced customer support services and education services. Consulting revenues are earned by providing services to customers in business and IT strategy alignment, enterprise architecture planning and design, initial product implementation and integration, and ongoing product enhancements and upgrades. Advanced customer support services are provided on-premise and remotely to our customers to enable increased performance and higher availability of their Oracle products and services. Education revenues are earned by providing instructor-led, media-based, internet-based and custom training in the use of our software and hardware offerings. The cost of providing our services consists primarily of personnel related expenses, technology infrastructure expenditures, facilities expenses and external contractor expenses. 61



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Year Ended May 31,

Percent Change Percent Change (Dollars in millions) 2014 Actual Constant 2013 Actual Constant 2012 Services Revenues: Americas $ 1,850 -6% -5% $ 1,973 -5% -4% $ 2,083 EMEA 1,125 -4% -7% 1,170 -16% -13% 1,397 Asia Pacific 729 -5% 2% 771 -1% 4% 779 Total revenues 3,704 -5% -4% 3,914 -8% -6% 4,259 Expenses: Services(1) 2,925 -7% -6% 3,159 -6% -4% 3,365 Stock-based compensation 29 25% 25% 23 39% 39% 17 Amortization of intangible assets(2) 17 -26% -26% 23 -52% -52% 47 Total expenses 2,971 -7% -6% 3,205 -7% -4% 3,429 Total Margin $ 733 3% 5% $ 709 -15% -12% $ 830 Total Margin % 20% 18% 19% % Revenues by Geography: Americas 50% 50% 49% EMEA 30% 30% 33% Asia Pacific 20% 20% 18%



(1) Excluding stock-based compensation

(2) Included as a component of 'Amortization of Intangible Assets' in our

consolidated statements of operations

Fiscal 2014 Compared to Fiscal 2013: Excluding the effect of currency rate fluctuations, our total services revenues decreased in fiscal 2014 due to revenue decreases in each of our services segments. The largest services revenues decrease was to our consulting segment's revenues.

Excluding the effect of currency rate fluctuations, our total services expenses decreased during fiscal 2014 primarily due to expense decreases in our consulting services segment due to decreased headcount, lower external contractor costs, lower intangible asset amortization, and a decrease in certain other operating expenses, net.



In constant currency, total services margin and total margin as a percentage of total services revenues increased during fiscal 2014 due to our expense reductions for this business.

Fiscal 2013 Compared to Fiscal 2012: Excluding the effect of currency rate fluctuations, our total services revenues decreased in fiscal 2013 due to revenue decreases in each of our services segments. The largest services revenues decrease in fiscal 2013 was to our consulting segment's revenues.

Excluding the effect of currency rate fluctuations, total services expenses decreased during fiscal 2013 primarily due to expense decreases across all of our services segments, which consisted primarily of decreases in external contractor costs, lower variable compensation expenses, and lower intangible asset amortization.



In constant currency, total services margin and total margin as a percentage of total services revenues decreased during fiscal 2013 as our total services revenues declined at a faster rate than our total services expenses.

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. 62



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(Dollars in millions) 2014 Actual Constant 2013 Actual Constant 2012 Research and development(1) $ 4,766 6% 7% $ 4,498 6% 8% $ 4,228 Stock-based compensation 385 9% 9% 352 19% 19% 295 Total expenses $ 5,151 6% 7% $ 4,850 7% 8% $ 4,523 % of Total Revenues 13% 13% 12%



(1) Excluding stock-based compensation

On a constant currency basis, total research and development expenses increased during fiscal 2014 and 2013, each relative to the respective prior year period, primarily due to increases in employee related expenses from increased headcount, partially offset by lower variable compensation expenses.



General and Administrative Expenses: General and administrative expenses primarily consist of personnel related expenditures for information technology, finance, legal and human resources support functions.

Year Ended May 31, Percent Change Percent Change (Dollars in millions) 2014 Actual Constant



2013 Actual Constant 2012 General and administrative(1) $ 867 -4%

-3% $ 908 -6% -4% $ 964 Stock-based compensation 171 4% 4% 164 2% 2% 162 Total expenses $ 1,038 -3% -2% $ 1,072 -5% -3% $ 1,126 % of Total Revenues 3% 3% 3%



(1) Excluding stock-based compensation

On a constant currency basis, total general and administrative expenses decreased during fiscal 2014 and 2013, each relative to the respective prior year period, primarily due to lower professional fees, variable compensation expenses and certain other operating expenses, net, partially offset by slightly higher salaries and benefits expenses due to an increase in headcount.



Amortization of Intangible Assets:

Year Ended May 31, Percent Change Percent Change (Dollars in millions) 2014 Actual Constant 2013 Actual Constant 2012 Software support agreements and related relationships $ 571 -2% -2% $ 582 -1% -1% $ 585 Hardware systems support agreements and related relationships 143 18% 18% 121 2% 2% 119 Developed technology 706 -15% -15% 826 -11% -11% 923 Core technology 318 -3% -3% 329 -2% -2% 337 Customer relationships and contract backlog 334 -5% -5% 350 -5% -5% 370 SaaS and PaaS agreements and related relationships and other 150 33% 33% 113 242% 242% 33 Trademarks 78 22% 22% 64 2% 2% 63 Total amortization of intangible assets $ 2,300 -4% -4% $ 2,385 -2% -2% $ 2,430 Fiscal 2014 Compared to Fiscal 2013: Amortization of intangible assets decreased during fiscal 2014 as certain of our intangible assets pertaining to our legacy acquisitions became fully amortized. These decreases were partially offset by additional amortization from intangible assets that we acquired in connection with our recent acquisitions, including our acquisitions of Responsys and Tekelec in fiscal 2014 and Acme Packet in fiscal 2013, among others. Note 7 of Notes to Consolidated Financial Statements included elsewhere in this Annual Report has additional information regarding our intangible assets and related amortization. 63



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Fiscal 2013 Compared to Fiscal 2012: Amortization of intangible assets decreased during fiscal 2013 as certain of our intangible assets pertaining to our legacy acquisitions became fully amortized. These decreases were partially offset by additional amortization from intangible assets that we acquired in connection with our recent acquisitions, including our acquisitions of Acme Packet in fiscal 2013, and RightNow and Taleo in fiscal 2012, among others. Acquisition Related and Other Expenses: Acquisition related and other expenses consist of personnel related costs for transitional and certain other employees, stock-based compensation expenses, integration related professional services, certain business combination adjustments including certain adjustments after the measurement period has ended and certain other operating items, net. Stock-based compensation expenses included in acquisition related and other expenses resulted from unvested stock options and restricted stock-based awards assumed from acquisitions whereby vesting was accelerated upon termination of the employees pursuant to the original terms of those stock options and restricted stock-based awards. Year Ended May 31, Percent Change Percent Change (Dollars in millions) 2014 Actual



Constant 2013 Actual Constant 2012 Transitional and other employee related costs $ 27

1% 2% $ 27 6% 9% $ 25 Stock-based compensation 10 -69% -69% 33 1% 1% 33 Professional fees and other, net 20 107%



107% (276 ) -2,314% -2,216% 13 Business combination adjustments, net

(16 ) 96% 96% (388 ) -2,543% -2,426% (15 ) Total acquisition related and other expenses $ 41 107%



107% $ (604 ) -1,183% -1,200% $ 56

Fiscal 2014 Compared to Fiscal 2013: On a constant currency basis, the increase in our acquisition related and other expenses in fiscal 2014 was primarily due to certain benefits that we recorded during fiscal 2013, which reduced our expenses during this period. We recorded a net benefit of $387 million during fiscal 2013 related to the change in fair value of contingent consideration payable in connection with an acquisition (see Note 2 of Notes to Consolidated Financial Statements included elsewhere in this Annual Report). We also recorded a $306 million benefit in fiscal 2013 to professional fees and other, net related to certain litigation (see Note 18 of Notes to Consolidated Financial Statements included elsewhere in this Annual Report). Fiscal 2013 Compared to Fiscal 2012: On a constant currency basis, the decrease in our acquisition related and other expenses in fiscal 2013 was primarily due to the aforementioned benefits described above. Restructuring expenses: Restructuring expenses result from the execution of management approved restructuring plans that were generally developed to improve our cost structure and/or operations, often in conjunction with our acquisition integration strategies. Restructuring expenses consist of employee severance costs and may also include charges for duplicate facilities and other contract termination costs to improve our cost structure prospectively. For additional information regarding our restructuring plans, see Note 9 of Notes to Consolidated Financial Statements included elsewhere in this Annual Report. Year Ended May 31, Percent Change Percent Change (Dollars in millions) 2014 Actual Constant 2013 Actual Constant 2012 Restructuring expenses $ 183 -48% -49% $ 352 19% 23% $ 295 Restructuring expenses in fiscal 2014 and 2013 primarily related to our 2013 Restructuring Plan, which our management approved, committed to and initiated in order to restructure and further improve efficiencies in our operations. We amended the 2013 Restructuring Plan in the third quarter of fiscal 2013 and in the first quarter of fiscal 2014 to reflect additional actions that we expect to take to improve efficiencies in our operations. The total estimated restructuring costs associated with the 2013 Restructuring Plan are $705 million and will be recorded to the restructuring expense line item within our consolidated statements of operations as they are incurred. The total estimated remaining restructuring costs associated with the 2013 Restructuring Plan were approximately 64



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$206 million as of May 31, 2014. The majority of the remaining costs are expected to be incurred through the end of fiscal 2015. Our estimated costs may be subject to change in future periods.

Restructuring expenses in fiscal 2012 primarily related to our Sun Restructuring Plan, which our management approved, committed to and initiated in order to better align our cost structure as a result of our acquisition of Sun.

Interest Expense: Year Ended May 31, Percent Change Percent Change (Dollars in millions) 2014 Actual Constant

2013 Actual Constant 2012 Interest expense $ 914 15% 15% $ 797 4% 4% $ 766 Fiscal 2014 Compared to Fiscal 2013: Interest expense increased in fiscal 2014 primarily due to higher average borrowings resulting from our issuance of $3.0 billion and 2.0 billion of senior notes in July 2013 and our issuance of $5.0 billion of senior notes in October 2012, partially offset by a reduction in interest expense resulting from the maturity and repayment of $1.25 billion of senior notes in April 2013 (see Recent Financing Activities below and Note 8 of Notes to Consolidated Financial Statements included elsewhere in this Annual Report for additional information). Fiscal 2013 Compared to Fiscal 2012: Interest expense increased in fiscal 2013 due to higher average borrowings resulting from our issuance of $5.0 billion of senior notes in October 2012, partially offset by the maturity and repayment of $1.25 billion of senior notes in April 2013. Non-Operating (Expense) Income, net: Non-operating (expense) income, net consists primarily of interest income, net foreign currency exchange gains (losses), the noncontrolling interests in the net profits of our majority-owned subsidiaries (Oracle Financial Services Software Limited and Oracle Japan) and net other income (losses) including net realized gains and losses related to all of our investments and net unrealized gains and losses related to the small portion of our investment portfolio that we classify as trading. Year Ended May 31, Percent Change Percent Change (Dollars in millions) 2014



Actual Constant 2013 Actual Constant 2012 Interest income

$ 263 10% 17% $ 237 3% 7% $ 231 Foreign currency losses, net (375 ) 131% 127% (162 ) 54% 51% (105 ) Noncontrolling interests in income (98 ) -12% -12% (112 ) -6% -4% (119 ) Other income, net 69 44% 44% 48 220% 225% 15 Total non-operating (expense) income, net $ (141 ) 1,343% 1,749% $ 11 -49% 4% $ 22 Fiscal 2014 Compared to Fiscal 2013: We recorded non-operating expense, net in fiscal 2014 in comparison to non-operating income, net in fiscal 2013 primarily due to an increase in foreign currency losses, net that were incurred in fiscal 2014 including foreign currency remeasurement losses of $213 million that related to the remeasurement of certain assets and liabilities of our Venezuelan subsidiary. The Venezuelan economy has been determined to be "highly inflationary" in accordance with ASC 830, Foreign Currency Matters. As a result, we report all net monetary assets related to our Venezuelan subsidiary in U.S. Dollars with the associated impacts of periodic changes of Bolivar Fuerte ("VEF") to U.S. Dollar exchange rates in our statements of operations for each respective reporting period. During fiscal 2014, the Venezuelan government issued new exchange agreements that allowed for certain foreign currency transactions, which previously were subject to Venezuela's official Bolivar Fuerte ("VEF") to U.S. Dollar exchange rate (the "Official Rate"), to be subject to conversion at rates established at the Venezuelan government's auction-based exchange rate programs, the Complementary System for Foreign Currency Administration ("SICAD") rates. These SICAD rates were lower than the Official Rate that we had used historically to report the VEF based transactions and net monetary assets of our 65



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Venezuelan subsidiary. To determine which of the various VEF rates to use during fiscal 2014, we evaluated our individual facts and circumstances taking into consideration our legal ability to convert VEF at or to settle VEF based transactions using the SICAD rates, amongst other factors. We concluded that using the SICAD rates was the most appropriate for our reporting of our Venezuelan subsidiary's VEF based transactions and net monetary assets in U.S. Dollars, which resulted in the $213 million of fiscal 2014 remeasurement losses referenced above. Future devaluations of the Venezuelan currency are not expected to have a significant impact on our consolidated financial statements. As a large portion of our consolidated operations are international, we could experience additional foreign currency volatility and incur additional remeasurement losses in the future, the amounts and timing of which are unknown. Fiscal 2013 Compared to Fiscal 2012: On a constant currency basis, our non-operating income, net decreased in fiscal 2013 primarily due to an increase in foreign currency transaction losses, net, that included a foreign currency loss relating to our Venezuelan subsidiary's operations. During our third quarter of fiscal 2013, the Venezuelan government devalued its currency and we recognized a $64 million foreign currency loss as a result of the remeasurement of certain assets and liabilities of our Venezuelan subsidiary. This decrease in non-operating income, net was partially offset by an increase in other income, net during fiscal 2013, which was primarily due to gains from our marketable securities that we designated as trading that were held to support our deferred compensation plan obligations. Provision for Income Taxes: Our effective tax rate in all periods is the result of the mix of income earned in various tax jurisdictions that apply a broad range of income tax rates. The provision for income taxes differs from the tax computed at the U.S. federal statutory income tax rate due primarily to earnings considered as indefinitely reinvested in foreign operations, state taxes, the U.S. research and development tax credit and the U.S. domestic production activity deduction. Future effective tax rates could be adversely affected if earnings are lower than anticipated in countries where we have lower statutory tax rates, by unfavorable changes in tax laws and regulations or by adverse rulings in tax related litigation. Year Ended May 31, Percent Change Percent Change

(Dollars in millions) 2014 Actual Constant 2013 Actual Constant 2012 Provision for income taxes $ 2,749 -7% -6% $ 2,973 0% 3% $ 2,981 Effective tax rate 20.1% 21.4% 23.0% Fiscal 2014 Compared to Fiscal 2013: Provision for income taxes in fiscal 2014 decreased, relative to the provision for income taxes in fiscal 2013, due to a tax favorable change in the jurisdictional mix of our earnings and the effects of acquisition related settlements with tax authorities during fiscal 2014. Fiscal 2013 Compared to Fiscal 2012: Provision for income taxes in fiscal 2013 decreased slightly due to acquisition related items, the retroactive extension of the U.S. research and development credit, offset by higher income before provision for income taxes.



Liquidity and Capital Resources

As of May 31, (Dollars in millions) 2014 Change 2013 Change 2012 Working capital $ 33,749 17% $ 28,820 17% $ 24,635 Cash, cash equivalents and marketable securities $ 38,819 20% $ 32,216 5% $ 30,676 Working capital: The increase in working capital as of May 31, 2014 in comparison to May 31, 2013 was primarily due to our issuance of 2.0 billion and $3.0 billion of long-term senior notes in July 2013, the favorable impact to our net current assets resulting from our net income during fiscal 2014, and, to a lesser extent, cash proceeds from stock option exercises. These working capital increases were partially offset by the reclassification of $1.5 billion of senior notes due July 2014 from long-term to current, cash used for repurchases of our common stock (we used $9.8 billion of cash for common stock repurchases during fiscal 2014), cash used to pay dividends to our stockholders, and cash used for acquisitions, all of which occurred during fiscal 2014. Our working capital 66



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may be impacted by some of the aforementioned factors in future periods, the amounts and timing of which are variable.

The increase in working capital as of May 31, 2013 in comparison to May 31, 2012 was primarily due to our issuance of $5.0 billion of senior notes in October 2012, the favorable impact to our net current assets resulting from our net income during fiscal 2013, and, to a lesser extent, cash proceeds from stock option exercises. This increase was partially offset by cash used for repurchases of our common stock (we used $11.0 billion of cash for common stock repurchases during fiscal 2013), cash used to pay dividends to our stockholders, and cash used for acquisitions. Cash, cash equivalents and marketable securities: Cash and cash equivalents primarily consist of deposits held at major banks, Tier-1 commercial paper and other securities with original maturities of 90 days or less. Marketable securities primarily consist of time deposits held at major banks, Tier-1 commercial paper, corporate notes, and certain other securities. The increase in cash, cash equivalents and marketable securities at May 31, 2014 in comparison to May 31, 2013 was due to an increase in cash generated from our operating activities, our issuance of 2.0 billion and $3.0 billion of senior notes in July 2013, and to a lesser extent, cash proceeds from stock option exercises. These increases were partially offset by $9.8 billion of repurchases of our common stock, $3.5 billion of net cash paid for acquisitions and $2.2 billion used for the payment of cash dividends to our stockholders. Cash, cash equivalents and marketable securities included $35.2 billion held by our foreign subsidiaries as of May 31, 2014. We consider $32.4 billion of our undistributed earnings as indefinitely reinvested in our foreign operations outside the United States. These undistributed earnings would be subject to U.S. income tax if repatriated to the United States. Assuming a full utilization of the foreign tax credits, the potential deferred tax liability associated with these undistributed earnings would be approximately $10.0 billion as of May 31, 2014 should the amounts be repatriated to the United States. The amount of cash, cash equivalents and marketable securities that we report in U.S. Dollars for a significant portion of the cash held by our foreign subsidiaries is subject to translation adjustments caused by changes in foreign currency exchange rates as of the end of each respective reporting period (the offset to which is substantially recorded to accumulated other comprehensive loss in our consolidated balance sheets and is also presented as a line item in our consolidated statements of comprehensive income included elsewhere in this Annual Report). As the U.S. Dollar modestly strengthened against certain major international currencies during fiscal 2014, the amount of cash, cash equivalents and marketable securities that we reported in U.S. Dollars for these subsidiaries decreased on a net basis as of May 31, 2014 relative to what we would have reported using constant currency rates from our May 31, 2013 balance sheet date. The increase in cash, cash equivalents and marketable securities at May 31, 2013 in comparison to May 31, 2012 was due to an increase in cash generated from our operating activities, our issuance of $5.0 billion of senior notes in October 2012, and to a lesser extent, cash proceeds from fiscal 2013 stock option exercises. This increase was partially offset by $11.0 billion of repurchases of our common stock, $3.3 billion of net cash paid for acquisitions, the repayments of $1.7 billion of short-term borrowings pursuant to our expired revolving credit facilities, the repayment of $1.25 billion of senior notes which matured in April 2013, and the payment of cash dividends to our stockholders. Additionally, our reported cash, cash equivalents and marketable securities balances as of May 31, 2013 decreased in comparison to May 31, 2012 due to the general strengthening of the U.S. Dollar in comparison to certain major international currencies during fiscal 2013. Days sales outstanding, which was calculated by dividing period end accounts receivable by average daily sales for the quarter, was 48 days at May 31, 2014 compared with 50 days at May 31, 2013. The days sales outstanding calculation excluded the impact of revenue adjustments resulting from business combinations that reduced our acquired cloud SaaS and PaaS obligations, software license updates and product support obligations and hardware systems support obligations to fair value. Year Ended May 31, (Dollars in millions) 2014 Change 2013 Change 2012 Net cash provided by operating activities $ 14,921 5% $ 14,224 3% $ 13,743 Net cash used for investing activities $ (7,539 ) 27% $ (5,956 ) -29% $ (8,381 ) Net cash used for financing activities $ (4,068 ) -52% $ (8,500 ) 39% $ (6,099 ) 67



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Cash flows from operating activities: Our largest source of operating cash flows is cash collections from our customers following the purchase and renewal of their software license updates and product support agreements. Payments from customers for these support agreements are generally received near the beginning of the contracts' terms, which are generally one year in length. We also generate significant cash from new software licenses sales and sales of hardware systems support arrangements, and to a lesser extent, sales of services, hardware systems products, and cloud SaaS and PaaS offerings. Our primary uses of cash from operating activities are for employee related expenditures, material and manufacturing costs related to the production of our hardware systems products, taxes and leased facilities. Fiscal 2014 Compared to Fiscal 2013: Net cash provided by operating activities increased in fiscal 2014 in comparison to fiscal 2013 primarily due to the following: the fiscal 2013 non-recurring impacts of a reduction of contingent consideration payable in connection with an acquisition of $387 million (see Note 2 of Notes to Consolidated Financial Statements included elsewhere in this Annual Report for additional information) and the impact of a $306 million non-current receivable related to certain litigation (see Note 14 of Notes to Consolidated Financial Statements included elsewhere in this Annual Report for additional information), both of which increased our net income in fiscal 2013 without the corresponding cash flow benefits. These items did not recur during fiscal 2014. Fiscal 2013 Compared to Fiscal 2012: Net cash provided by operating activities increased in fiscal 2013 in comparison to fiscal 2012 primarily due to cash favorable impacts of increased net income adjusted for amortization of intangible assets, stock-based compensation and depreciation during fiscal 2013 in comparison to fiscal 2012. Cash flows from investing activities: The changes in cash flows from investing activities primarily relate to acquisitions and the timing of purchases, maturities and sales of our investments in marketable debt securities. We also use cash to invest in capital and other assets, including certain intangible assets, to support our growth. Fiscal 2014 Compared to Fiscal 2013: Net cash used for investing activities increased in fiscal 2014 due to an increase in net cash used to purchase marketable securities (net of proceeds received from sales and maturities) and an increase in cash used for acquisitions, net of cash acquired, in each case during fiscal 2014 in comparison to fiscal 2013. Fiscal 2013 Compared to Fiscal 2012: Net cash used for investing activities decreased in fiscal 2013 primarily due to a decrease in net cash used to purchase marketable securities (net of proceeds received from sales and maturities) and a decrease in cash used for acquisitions, net of cash acquired, in each case during fiscal 2013 in comparison to fiscal 2012. Cash flows from financing activities: The changes in cash flows from financing activities primarily relate to borrowings and repayments related to our debt instruments as well as stock repurchases, dividend payments and proceeds from stock option exercises. Fiscal 2014 Compared to Fiscal 2013: Net cash used for financing activities in fiscal 2014 decreased in comparison to fiscal 2013 primarily due to the repayment of $3.0 billion of borrowings pursuant to senior notes maturities and certain expired revolving credit facilities in fiscal 2013 (no repayments during fiscal 2014), a net increase in borrowings during fiscal 2014 (we issued 2.0 billion and $3.0 billion of senior notes during fiscal 2014 in comparison to $5.0 billion of senior notes issued during fiscal 2013), lower stock repurchase activity during fiscal 2014 and higher proceeds from stock option exercises during fiscal 2014. These fiscal 2014 cash favorable variances were partially offset by an increase in payments of cash dividends to stockholders in fiscal 2014 in comparison to fiscal 2013. Fiscal 2013 Compared to Fiscal 2012: Net cash used for financing activities in fiscal 2013 increased in comparison to fiscal 2012 primarily due to an increase in our common stock repurchases (we used $11.0 billion of cash for common stock repurchases during fiscal 2013 in comparison to $5.9 billion in fiscal 2012) and an increase in repayments of borrowings (we repaid $3.0 billion of borrowings pursuant to senior notes maturities and certain expired revolving credit facilities in fiscal 2013 in comparison to the repayments of $1.4 billion of short-term borrowings from expired revolving credit facilities, and legacy convertible notes assumed from RightNow in fiscal 2012), partially offset by our issuance of $5.0 billion of senior notes in October 2012, an increase in proceeds from stock option exercises and certain other financing activity cash flow increases, net. 68



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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 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 flows as follows: Year Ended May 31, (Dollars in millions) 2014 Change 2013 Change 2012 Net cash provided by operating activities $ 14,921 5% $ 14,224 3% $ 13,743 Capital expenditures(1) (580 ) -11% (650 ) 0% (648 ) Free cash flow $ 14,341 6% $ 13,574 4% $ 13,095 Net income $ 10,955$ 10,925$ 9,981 Free cash flow as percent of net income 131% 124% 131%



(1) Derived from capital expenditures as reported in cash flows from investing

activities as per our consolidated statements of cash flows presented in accordance with U.S. GAAP. Long-Term Customer Financing: We offer certain of our customers the option to acquire our software products, hardware systems products and services offerings through separate long-term payment contracts. We generally sell these contracts that we have financed for our customers on a non-recourse basis to financial institutions within 90 days of the contracts' dates of execution. We record the transfers of amounts due from customers to financial institutions as sales of financial assets because we are considered to have surrendered control of these financial assets. We financed $1.6 billion, $1.8 billion and $1.6 billion, respectively, or approximately 17%, 19% and 17%, respectively, of our new software licenses revenues in fiscal 2014, 2013 and 2012, and $168 million, $161 million and $134 million, respectively, or approximately 6%, 5%, and 3%, respectively, of our hardware systems products revenues in fiscal 2014, 2013 and 2012.



Recent Financing Activities:

Senior Notes: As of May 31, 2014, we had $24.2 billion of senior notes outstanding ($18.5 billion outstanding as of May 31, 2013). In July 2013, we issued 2.0 billion ($2.7 billion as of May 31, 2014) of fixed rate senior notes comprised of 1.25 billion of 2.25% notes due January 2021 (2021 Notes) and 750 million of 3.125% notes due July 2025 (2025 Notes, and together with the 2021 Notes, the Euro Notes). The Euro Notes are registered and trade on the New York Stock Exchange. We are accounting for the 2025 Notes as a net investment hedge of our investments in certain of our international subsidiaries that use the Euro as their functional currency in order to reduce the volatility in stockholders' equity caused by the changes in foreign currency exchange rates of the Euro with respect to the U.S. Dollar pursuant to ASC 815, Derivatives and Hedging (ASC 815). In July 2013, we also issued $3.0 billion of senior notes comprised of $500 million of floating rate notes due January 2019 (2019 Floating Rate Notes), $1.5 billion of 2.375% notes due January 2019 (2019 Notes) and $1.0 billion of 3.625% notes due July 2023 (2023 Notes, and together with the Floating Rate Notes and 2019 Notes, the U.S. Dollar Notes). We issued the Euro Notes and the U.S. Dollar Notes for general corporate purposes, which may include stock repurchases, payment of cash dividends on our common stock and future acquisitions. Additional details regarding the Euro Notes, the U.S. Dollar Notes, and the related hedge accounting are included in Note 8 and Note 11 of Notes to Consolidated Financial Statements, included elsewhere in this Annual Report. Interest Rate Swap Agreements: In July 2013, we entered into certain interest rate swap agreements that have the economic effect of modifying the fixed interest obligations associated with our 2019 Notes so that the interest payable on these notes effectively became variable based on LIBOR. As of May 31, 2014, our 2019 Notes had an effective interest rate of 0.88% after considering the effects of the aforementioned interest rate swap arrangements. We are accounting for these interest rate swap agreements as fair value hedges pursuant to ASC 815. Additional details regarding our senior notes and related interest rate swap agreements are included in Note 8 and Note 11 of Notes to Consolidated Financial Statements, included elsewhere in this Annual Report. 69



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Cross Currency Swap Agreements: In July 2013, in connection with the issuance of the 2021 Notes, we entered into certain cross-currency swap agreements to manage the related foreign currency exchange risk by effectively converting the fixed-rate, Euro denominated 2021 Notes, including the annual interest payments and the payment of principal at maturity, to fixed-rate, U.S. Dollar denominated debt. The economic effect of the swap agreements was to eliminate the uncertainty of the cash flows in U.S. Dollars associated with the 2021 Notes by fixing the principal amount of the 2021 Notes at $1.6 billion with an annual interest rate of 3.53%. We have designated these cross-currency swap agreements as qualifying hedging instruments and are accounting for these as cash flow hedges pursuant to ASC 815. Additional details regarding our senior notes and related cross-currency swap agreements are included in Note 8 and Note 11 of Notes to Consolidated Financial Statements, included elsewhere in this Annual Report. Cash Dividends: In fiscal 2014, we declared and paid cash dividends of $0.48 per share that totaled $2.2 billion. In June 2014, our Board of Directors declared a quarterly cash dividend of $0.12 per share of outstanding common stock payable on July 30, 2014 to stockholders of record as of the close of business on July 9, 2014. Future declarations of dividends and the establishment of future record and payment dates are subject to the final determination of our Board of Directors. Common Stock Repurchases: Our Board of Directors has approved a program for us to repurchase shares of our common stock. On June 20, 2013, we announced that our Board of Directors approved an expansion of our stock repurchase program by an additional $12.0 billion. As of May 31, 2014, approximately $4.3 billion remained available for stock repurchases under the stock repurchase program. We repurchased 280.4 million shares for $9.8 billion, 346.1 million shares for $11.0 billion, and 207.3 million shares for $6.0 billion in fiscal 2014, 2013 and 2012, respectively. 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 (described further below), 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. Contractual Obligations: The contractual obligations presented in the table below represent our estimates of future payments under fixed contractual obligations and commitments. Changes in our business needs, cancellation provisions, changing interest rates and other factors may result in actual payments differing from these estimates. We cannot provide certainty regarding the timing and amounts of payments. We have presented below a summary of the most significant assumptions used in preparing this information within the context of our consolidated financial position, results of operations and cash flows. The following is a summary of certain of our contractual obligations as of May 31, 2014: 70



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2017 2018 2019 Thereafter Principal payments on borrowings(1) $ 24,120$ 1,500$ 2,000 $ - $ 5,000$ 2,000$ 13,620 Interest payments on borrowings(1) 10,390

883 873 768 752 592 6,522 Operating leases(2) 1,398 373 304 230 168 120 203 Purchase obligations and other(3) 510 469 28 12 1 - -



Total contractual obligations $ 36,418$ 3,225$ 3,205$ 1,010$ 5,921$ 2,712$ 20,345

(1) Our total borrowings consisted of the following as of May 31, 2014 (dollars in millions): Amount



3.75% senior notes due July 2014, net of fair value adjustment of $8 $

1,508

5.25% senior notes due January 2016, net of discount of $2



1,998

1.20% senior notes due October 2017, net of discount of $3



2,497

5.75% senior notes due April 2018



2,500

Floating rate senior notes due January 2019



500

2.375% senior notes due January 2019, net of fair value adjustment of $15 and discount of $5

1,510

5.00% senior notes due July 2019, net of discount of $3



1,747

3.875% senior notes due July 2020, net of discount of $1



999

2.25% senior notes due January 2021, net of discount of $9



1,691

2.50% senior notes due October 2022, net of discount of $2



2,498

3.625% senior notes due July 2023, net of discount of $8



992

3.125% senior notes due July 2025, net of discount of $3



1,017

6.50% senior notes due April 2038, net of discount of $2



1,248

6.125% senior notes due July 2039, net of discount of $7



1,243

5.375% senior notes due July 2040, net of discount of $23 2,227 Total borrowings $ 24,175 We have entered into certain interest rate swap agreements related to our 3.75% senior notes due July 2014 (2014 Notes) and our 2019 Notes that have the economic effect of modifying the fixed interest obligations associated with these senior notes so that the interest obligations effectively became variable pursuant to a LIBOR-based index. Interest payments on the 2014 Notes and 2019 Notes presented in the contractual obligations table above have been estimated using interest rates of 1.29% and 0.88%, respectively, which represented our effective interest rates for these senior notes as of May 31, 2014 after consideration of these fixed to variable interest rate swap agreements, and are subject to change in future periods. The changes in fair values of our debt associated with the interest rate risks that we are hedging pursuant to these agreements were included in notes payable and other current borrowings for the 2014 Notes and notes payable and other non-current borrowings for the 2019 Notes in our consolidated balance sheet and have been included in the above table of total borrowings as of May 31, 2014.



Our floating rate senior notes due January 2019 bore interest at a rate of 0.81% as of May 31, 2014 and interest payments on these notes presented in the contractual obligations table above have been estimated using this rate.

The 2021 Notes and the 2025 Notes are denominated in Euro. In connection with the issuance of the 2021 Notes, we entered into certain cross-currency swap agreements that have the economic effect of converting our fixed rate, Euro denominated debt, including annual interest payments and the payment of principal at maturity, to a fixed rate, U.S. Dollar denominated debt of $1.6 billion with a fixed annual interest rate of 3.53%. Principal and interest payments for the 2021 Notes presented in the contractual obligations table above were calculated based on the terms of the aforementioned cross-currency swap agreements. Principal and interest payments for the 2025 Notes presented in the contractual obligations table above were estimated using foreign currency exchange rates as of May 31, 2014.



(2) Primarily represents leases of facilities and includes future minimum rent

payments for facilities that we have vacated pursuant to our restructuring

and merger integration activities. We have approximately $112 million in

facility obligations, net of estimated sublease income, for certain vacated

locations in accrued restructuring in our consolidated balance sheet at May 31, 2014. (3) Primarily represents amounts associated with agreements that are



enforceable, legally binding and specify terms, including: fixed or minimum

quantities to be purchased; fixed, minimum or variable price provisions; and

the approximate timing of the payment. We utilize several external

manufacturers to manufacture sub-assemblies for our hardware products and to

perform final assembly and testing of finished hardware products. We also

obtain individual hardware components for our products from a variety of

individual suppliers based on projected demand information. Such purchase

commitments are based on our forecasted component and manufacturing

requirements and typically provide for fulfillment within agreed upon

lead-times and/or commercially standard lead-times for the particular part

or product and have been included in the amount presented in the above

contractual obligations table. Routine arrangements for other materials and

goods that are not related to our external manufacturers and certain other

suppliers and that are entered into in the ordinary course of business are

not included in the amounts presented above as they are generally entered

into in order to secure pricing or other negotiated terms and are difficult

to quantify in a meaningful way. 71



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On June 22, 2014, we entered into an Agreement and Plan of Merger (Merger Agreement) with MICROS Systems, Inc. (MICROS), a provider of integrated software, hardware and services solutions to the hospitality and retail industries. Pursuant to the Merger Agreement, we will commence a tender offer for the outstanding shares and shares generally representing vested equity incentive awards of MICROS (collectively, MICROS Shares). MICROS shareholders will have the right to tender their MICROS Shares to Oracle in exchange for $68.00 per share in cash upon consummation of the tender offer. The tender offer will commence no later than ten business days from June 22, 2014. After completion of the tender offer and subject to certain limited conditions, MICROS will merge with and into a wholly-owned subsidiary of Oracle. In addition, unvested equity awards to acquire MICROS common stock that are outstanding immediately prior to the conclusion of the merger will generally be converted into equity awards denominated in shares of our common stock based on formulas contained in the Merger Agreement. The estimated total purchase price for MICROS is approximately $5.3 billion. This transaction is conditioned upon (i) at least a majority of the MICROS Shares being validly tendered to Oracle, (ii) regulatory clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, (iii) the applicable merger control laws of the European Commission and other jurisdictions, and (iv) certain other customary closing conditions. We also have entered into certain other agreements to acquire other companies and expect these proposed acquisitions to close during the first quarter of fiscal 2015. We intend to finance our proposed acquisitions through a combination of our internally available cash, our cash generated from operations, our existing available debt capacity, additional borrowings, or from the issuance of additional securities. As of May 31, 2014, we had $4.5 billion of gross unrecognized income tax benefits, including related interest and penalties, recorded on our consolidated balance sheet and all such obligations have been excluded from the table above due to the uncertainty as to when they might be settled. We cannot make a reasonably reliable estimate of the period in which the remainder of our unrecognized income tax benefits will be settled or released with the relevant tax authorities, although we believe it is reasonably possible that certain of these liabilities could be settled or released during fiscal 2015. 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 we could fund any future acquisitions, dividend payments and repurchases of common stock or debt with our internally available cash, cash equivalents and marketable securities, cash generated from operations, additional borrowings or from the issuance of additional securities.



Off-Balance Sheet Arrangements: We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

Selected Quarterly Financial Data

Quarterly revenues, expenses and operating income have historically been affected by a variety of seasonal factors, including sales force incentive compensation plans. In addition, our European operations generally provide lower revenues in our first fiscal quarter because of the reduced economic activity in Europe during the summer. These seasonal factors are common in the high technology industry. These factors have caused a decrease in our first quarter revenues as compared to revenues in the immediately preceding fourth quarter, which historically has been our highest revenue quarter within a particular fiscal year. Similarly, the operating income of our business is affected by seasonal factors in a consistent manner as our revenues (in particular, our new software licenses and cloud software subscriptions segment) as certain expenses within our cost structure are relatively fixed in the short-term. We expect these trends to continue in fiscal 2015. 72



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The following tables set forth selected unaudited quarterly information for our last eight fiscal quarters. We believe that all necessary adjustments, which consisted only of normal recurring adjustments, have been included in the amounts stated below to present fairly the results of such periods when read in conjunction with the consolidated financial statements and related notes included elsewhere in this Annual Report. The sum of the quarterly financial information may vary from the annual data due to rounding. Fiscal 2014 Quarter Ended (Unaudited) (in millions, except per share amounts) August 31 November 30 February 28 May 31 Revenues $ 8,372 $ 9,275 $ 9,307$ 11,320 Gross profit $ 6,607 $ 7,420 $ 7,490$ 9,340 Operating income $ 2,873 $ 3,410 $ 3,567$ 4,909 Net income $ 2,191 $ 2,553 $ 2,565$ 3,646 Earnings per share-basic $ 0.48 $ 0.56 $ 0.57$ 0.81 Earnings per share-diluted $ 0.47 $ 0.56 $ 0.56$ 0.80 Fiscal 2013 Quarter Ended (Unaudited) (in millions, except per share amounts) August 31 November 30 February 28 May 31 Revenues $ 8,181 $ 9,094 $ 8,958$ 10,947 Gross profit $ 6,305 $ 7,200 $ 7,122$ 8,984 Operating income $ 2,879 $ 3,471 $ 3,334$ 5,000 Net income $ 2,034 $ 2,581 $ 2,504$ 3,807 Earnings per share-basic $ 0.42 $ 0.54 $ 0.53$ 0.81 Earnings per share-diluted $ 0.41 $ 0.53 $ 0.52$ 0.80



Stock Options and Restricted Stock-Based Awards

Our stock-based compensation program is a key component of the compensation package we provide to attract and retain certain of our talented employees and align their interests with the interests of existing stockholders. We historically have granted only stock options to our employees and any restricted stock-based awards outstanding were assumed as a result of our acquisitions. We recognize that stock options and restricted stock-based awards dilute existing stockholders and have sought to control the number of stock options and restricted stock-based awards granted while providing competitive compensation packages. Consistent with these dual goals, our cumulative potential dilution since June 1, 2011 has been a weighted average annualized rate of 2.3% per year. The potential dilution percentage is calculated as the average annualized new stock options or restricted stock-based awards granted and assumed, net of stock options and restricted stock-based awards forfeited by employees leaving the company, divided by the weighted average outstanding shares during the calculation period. This maximum potential dilution will only result if all stock options are exercised and restricted stock-based awards vest. Of the outstanding stock options at May 31, 2014, which generally have a 10-year exercise period, less than 1.0% have exercise prices higher than the current market price of our common stock. In recent years, our stock repurchase program has more than offset the dilutive effect of our stock-based compensation program; however, we may reduce the level of our stock repurchases in the future as we may use our available cash for acquisitions, to pay dividends, to repay or repurchase indebtedness or for other purposes. At May 31, 2014, the maximum potential dilution from all outstanding and unexercised stock options and restricted stock-based awards, regardless of when granted and regardless of whether vested or unvested and including stock options where the strike price is higher than the current market price, was 10.4%. 73



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The Compensation Committee of the Board of Directors reviews and approves the organization-wide stock option grants to selected employees, all stock option grants to executive officers and any individual stock option grants in excess of 100,000 shares. A separate Plan Committee, which is an executive officer committee, approves individual stock option grants of up to 100,000 shares to non-executive officers and employees. Stock option and restricted stock-based award activity from June 1, 2011 through May 31, 2014 is summarized as follows (shares in millions):



Stock options and restricted stock-based awards outstanding at May 31, 2011

356

Stock options granted



362

Stock options and restricted stock-based awards assumed



28

Stock options exercised and restricted stock-based awards vested (219 ) Forfeitures, cancellations and other, net



(64 )

Stock options and restricted stock-based awards outstanding at May 31, 2014

463

Weighted average annualized stock options and restricted stock-based awards granted and assumed, net of forfeitures and cancellations

109

Weighted average annualized stock repurchases (278 ) Shares outstanding at May 31, 2014



4,464

Basic weighted average shares outstanding from June 1, 2011 through May 31, 2014

4,771

Stock options and restricted stock-based awards outstanding as a percent of shares outstanding at May 31, 2014

10.4%

In the money stock options and total restricted stock-based awards outstanding (based on the closing price of our common stock on the last trading day of our fiscal period presented) as a percent of shares outstanding at May 31, 2014

10.3%

Weighted average annualized stock options and restricted stock-based awards granted and assumed, net of forfeitures and cancellations and before stock repurchases, as a percent of weighted average shares outstanding from June 1, 2011 through May 31, 2014

2.3%

Weighted average annualized stock options and restricted stock-based awards granted and assumed, net of forfeitures and cancellations and after stock repurchases, as a percent of weighted average shares outstanding from June 1, 2011 through May 31, 2014

-3.5%

Our Compensation Committee approves the annual organization-wide option grants to certain employees. These annual option grants were historically made during the ten business day period following the second trading day after the announcement of our fiscal fourth quarter earnings report.



Recent Accounting Pronouncements

For information with respect to recent accounting pronouncements and the impact of these pronouncements on our consolidated financial statements, see Note 1 of Notes to Consolidated Financial Statements included elsewhere in this Annual Report.


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