We begin Management's Discussion and Analysis of Financial Condition and Results of Operations with an overview of our businesses and significant trends. This overview is followed by a summary of our critical accounting policies and estimates that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results. We then provide a more detailed analysis of our results of operations and financial condition.
Business Overview
Oracle provides products and services that address enterprise information technology (IT) environments. Our products and services include applications and infrastructure offerings that are delivered worldwide through a variety of flexible and interoperable IT deployment models. These models include onpremise deployments, cloudbased deployments, and hybrid deployments (an approach that combines both on-premise and cloudbased deployment) such as our Oracle Cloud at Customer offering (an instance of Oracle Cloud in a customer's own data center). Accordingly, we offer choice and flexibility to our customers and facilitate the product, service and deployment combinations that best suit our customers' needs. Through our worldwide sales force and Oracle Partner Network, we sell to customers all over the world including businesses of many sizes, government agencies, educational institutions and resellers. We have three businesses: cloud and license; hardware; and services; each of which comprises a single operating segment. The descriptions set forth below as a part of Management's Discussion and Analysis of Financial Condition and Results of Operations and the information contained within Note 10 of Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report provide additional information related to our businesses and operating segments and align to how our chief operating decision makers (CODMs), which include our Chief Executive Officer and Chief Technology Officer, view our operating results and allocate resources.
Cloud and License Business
Our cloud and license line of business, which represented 83% of our total revenues on a trailing 4-quarter basis, markets, sells and delivers a broad spectrum of applications and infrastructure technologies through our cloud and license offerings.
Cloud services and license support revenues include:
• license support revenues, which are earned by providing Oracle license
support services to customers that have elected to purchase support
services in connection with the purchase of Oracle applications and
infrastructure software licenses for use in cloud, on-premise and other IT
environments. Substantially all license support customers renew their
support contracts with us upon expiration in order to continue to benefit
from technical support services and the periodic issuance of unspecified
updates and enhancements, which current license support customers are entitled to receive. License support contracts are generally priced as a percentage of the net fees paid by the customer to purchase a cloud license and/or on-premise license; are generally billed in advance of the
support services being performed; are generally renewed at the customer's
option; and are generally recognized as revenues ratably over the contractual period that the support services are provided, which is generally one year; and
• cloud services revenues, which provide customers access to Oracle Cloud
applications and infrastructure technologies via cloud-based deployment
models that Oracle develops, provides unspecified updates and enhancements
for, hosts, manages and supports and that customers access by entering
into a subscription agreement with us for a stated period. The majority of
our Oracle Cloud Services arrangements are generally billed in advance of
the cloud services being performed; have durations of one to three years;
are generally renewed at the customer's option; and are generally
recognized as revenues ratably over the contractual period of the cloud
contract or, in the case of usage model contracts, as the cloud services
are consumed over time. 27
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Cloud license and on-premise license revenues include revenues from the licensing of our software products including Oracle Applications, Oracle Database, Oracle Middleware and Java, among others, which our customers deploy within cloudbased, onpremise and other IT environments. Our cloud license and onpremise license transactions are generally perpetual in nature and are generally recognized up front at the point in time when the software is made available to the customer to download and use. Revenues from usagebased royalty arrangements for distinct cloud licenses and on-premise licenses are recognized at the point in time when the software end user usage occurs. The timing of a few large license transactions can substantially affect our quarterly license revenues due to the point in time nature of revenue recognition for license transactions, which is different than the typical revenue recognition pattern for our cloud services and license support revenues in which revenues are generally recognized ratably over the contractual terms. Cloud license and on-premise license customers have the option to purchase and renew license support contracts, as described above. Providing choice and flexibility to our customers as to when and how they deploy our applications and infrastructure technologies are important elements of our corporate strategy. In recent periods, customer demand for our applications and infrastructure technologies delivered through our Oracle Cloud Services has increased. To address customer demand and enable customer choice, we have introduced certain programs for customers to pivot their applications and infrastructure licenses and the related license support to the Oracle Cloud for new deployments and to migrate to and expand with the Oracle Cloud for their existing workloads. We expect these trends to continue. Our cloud and license business' revenue growth is affected by many factors, including the strength of general economic and business conditions; governmental budgetary constraints; the strategy for and competitive position of our offerings; the continued renewal of our cloud services and license support customer contracts by the customer contract base; substantially all customers continuing to purchase license support contracts in connection with their license purchases; the pricing of license support contracts sold in connection with the sales of licenses; the pricing, amounts and volumes of licenses and cloud services sold; and foreign currency rate fluctuations.
On a constant currency basis, we expect that our total cloud and license revenues generally will continue to increase due to:
• expected growth in our cloud services and license support offerings; and
• continued demand for our cloud license and on-premise license offerings.
We believe these factors should contribute to future growth in our cloud and license business' revenues, which should enable us to continue to make investments in research and development to develop and improve our cloud and license products and services. Our cloud and license business' margin has historically trended upward over the course of the four quarters within a particular fiscal year due to the historical upward trend of our cloud and license business' revenues over those quarterly periods and because the majority of our costs for this business are generally fixed in the short term. The historical upward trend of our cloud and license business' revenues over the course of the four quarters within a particular fiscal year is primarily due to the addition of new cloud services and license support contracts to the customer contract base that we generally recognize as revenues ratably; the renewal of existing customers' cloud services and license support contracts over the course of each fiscal year that we generally recognize as revenues ratably; and the historical upward trend of our cloud license and on-premise license revenues, which we generally recognize at a point in time upon delivery; over those four quarterly periods.
Hardware Business
Our hardware business, which represented 9% of our total revenues on a trailing 4-quarter basis, provides a broad selection of hardware products and hardware-related software products, including Oracle Engineered Systems, servers, storage, industry-specific hardware, operating systems, virtualization, management and other hardware related software, and related hardware support. Each hardware product and its related software, such as an operating system or firmware, are highly interdependent and interrelated and are accounted for as a combined performance obligation. The revenues for this combined performance obligation are generally recognized at the point in time that the hardware product and its related software are delivered to the customer and ownership is transferred to the customer. We expect to make investments in research and development to improve existing 28
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hardware products and services and to develop new hardware products and services. The majority of our hardware products are sold through indirect channels, including independent distributors and value-added resellers. Our hardware support offerings provide customers with unspecified software updates for software components that are essential to the functionality of our hardware products and associated software products such as Oracle Solaris. Our hardware support offerings can also include product repairs, maintenance services and technical support services. Hardware support contracts are entered into and renewed at the option of the customer, are generally priced as a percentage of the net hardware products fees and are generally recognized as revenues ratably as the hardware support services are delivered over the contractual terms.
We generally expect our hardware business to have lower operating margins as a percentage of revenues than our cloud and license business due to the incremental costs we incur to produce and distribute these products and to provide support services, including direct materials and labor costs.
Our quarterly hardware revenues are difficult to predict. Our hardware revenues, cost of hardware and hardware operating margins that we report are affected by many factors, including our ability to timely manufacture or deliver a few large hardware transactions; our strategy for and the position of our hardware products relative to competitor offerings; customer demand for competing offerings, including cloud infrastructure offerings; the strength of general economic and business conditions; governmental budgetary constraints; whether customers decide to purchase hardware support contracts at or in close proximity to the time of hardware product sale; the percentage of our hardware support contract customer base that renews its support contracts and the close association between hardware products, which have a finite life, and customer demand for related hardware support as hardware products age; customer decisions to either maintain or upgrade their existing hardware infrastructure to newly developed technologies that are available; and foreign currency rate fluctuations.
Services Business
Our services business, which represented 8% of our total revenues on a trailing 4-quarter basis, helps customers and partners maximize the performance of their investments in Oracle applications and infrastructure technologies. We believe that our services are differentiated based on our focus on Oracle technologies, extensive experience, broad sets of intellectual property and best practices. Our services offerings include consulting services, advanced customer support services and education services. Our services business has lower margins than our cloud and license and hardware businesses. Our services revenues are affected by many factors including, our strategy for, and the competitive position of, our services; customer demand for our cloud and license and hardware offerings and the associated services for these offerings; general economic conditions; governmental budgetary constraints; personnel reductions in our customers' IT departments; and tighter controls over customer discretionary spending. Acquisitions
Our selective and active acquisition program is another important element of our corporate strategy. Historically, we have invested billions of dollars to acquire a number of complementary companies, products, services and technologies.
As compelling opportunities become available, we may acquire companies, products, services and technologies in furtherance of our corporate strategy. Note 2 of Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report provides additional information related to our recent acquisitions. We believe that we can fund our future acquisitions with our internally available cash, cash equivalents and marketable securities, cash generated from operations, additional borrowings or from the issuance of additional securities. We estimate the financial impact of any potential acquisition with regard to earnings, operating margin, cash flow and return on invested capital targets before deciding to move forward with an acquisition. 29
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Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance withU.S. generally accepted accounting principles (GAAP) as set forth in theFinancial Accounting Standards Board's (FASB) Accounting Standards Codification (ASC), and we consider the various staff accounting bulletins and other applicable guidance issued by theSEC . GAAP, as set forth within the ASC, requires us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. To the extent that there are differences between these estimates, judgments or assumptions and actual results, our financial statements will be affected. The accounting policies that reflect our more significant estimates, judgments and assumptions and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include: • Revenue Recognition; • Business Combinations; •Goodwill and Intangible Assets-Impairment Assessments; • Accounting for Income Taxes; and • Legal and Other Contingencies. During the first half of fiscal 2020, there were no significant changes to our critical accounting policies and estimates. Management's Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for our fiscal year endedMay 31, 2019 provides a more complete discussion of our critical accounting policies and estimates.
Results of Operations
Presentation of Operating Segment Results and Other Financial Information
In our results of operations discussion below, we provide an overview of our total consolidated revenues, total consolidated expenses and total consolidated operating margin, all of which are presented on a GAAP basis. We also present a GAAP-based discussion below for substantially all of the other expense items as presented in our condensed consolidated statements of operations that are not directly attributable to our three businesses. In addition, we discuss below the results of each our three businesses-cloud and license, hardware and services-which are our operating segments as defined pursuant to ASC 280, Segment Reporting. The financial reporting for our three businesses that is presented below is presented in a manner that is consistent with that used by our CODMs. Our operating segment presentation below reflects revenues, direct costs and sales and marketing expenses that correspond to and are directly attributable to each of our three businesses. We also utilize these inputs to calculate and present a segment margin for each business in the discussion below. Consistent with our internal management reporting processes, the below operating segment presentation is noted to include any revenues adjustments related to cloud services and license support contracts that would have otherwise been recorded by the acquired businesses as independent entities but were not recognized in our condensed consolidated statements of operations for the periods presented due to business combination accounting requirements. Refer to "Supplemental Disclosure Related to Certain Charges" below for additional discussion of these items and Note 10 of Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report for a reconciliation of the summations of our total operating segment revenues as presented in the discussion below to total revenues as presented per our condensed consolidated statements of operations for all periods presented. In addition, research and development expenses, general and administrative expenses, stock-based compensation expenses, amortization of intangible assets, certain other expense allocations, acquisition related and other expenses, restructuring expenses, interest expense, non-operating income, net and provision for income taxes are not attributed to our three operating segments because our management does not view the performance of our 30
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three businesses including such items and/or it is impractical to do so. Refer to "Supplemental Disclosure Related to Certain Charges" below for additional discussion of certain of these items and Note 10 of Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report for a reconciliation of the summations of total segment margin as presented in the discussion below to total income before provision for income taxes as presented per our condensed consolidated statements of operations for all periods presented.
Constant Currency Presentation
Our international operations have provided and are expected to continue to provide a significant portion of each of our businesses' revenues and expenses. As a result, each businesses' revenues and expenses and our total revenues and expenses will continue to be affected by changes in theU.S. Dollar against major international currencies. In order to provide a framework for assessing how our underlying businesses performed, excluding the effects of foreign currency rate fluctuations, we compare the percent change in the results from one period to another period in this Quarterly Report using constant currency disclosure. To present this information, current and comparative prior period results for entities reporting in currencies other thanU.S. Dollars are converted intoU.S. Dollars at constant exchange rates (i.e., the rates in effect onMay 31, 2019 , which was the last day of our prior fiscal year) rather than the actual exchange rates in effect during the respective periods. For example, if an entity reporting in Euros had revenues of1.0 million Euros from products sold onNovember 30, 2019 and 2018, our financial statements would reflect reported revenues of$1.10 million in the first half of fiscal 2020 (using 1.10 as the month-end average exchange rate for the period) and$1.13 million in the first half of fiscal 2019 (using 1.13 as the month-end average exchange rate for the period). The constant currency presentation, however, would translate the results for the first half of fiscal 2020 and 2019 using theMay 31, 2019 exchange rate and indicate, in this example, no change in revenues during the period. In each of the tables below, we present the percent change based on actual, unrounded results in reported currency and in constant currency.
Total Revenues and Operating Expenses
Three Months Ended November 30, Six Months Ended November 30, Percent Change Percent Change (Dollars in millions) 2019 Actual Constant 2018 2019 Actual Constant 2018 Total Revenues by Geography: Americas$ 5,304 1% 1%$ 5,243 $ 10,454 0% 1%$ 10,404 EMEA(1) 2,695 -3% -1% 2,782 5,248 -2% 1% 5,358 Asia Pacific 1,615 5% 5% 1,537 3,130 5% 5% 2,993 Total revenues 9,614 1% 1% 9,562 18,832 0% 1% 18,755 Total Operating Expenses 6,431 0% 0% 6,461 12,772 -1% 0% 12,877 Total Operating Margin$ 3,183 3% 4%$ 3,101 $ 6,060 3% 5%$ 5,878 Total Operating Margin % 33% 32% 32% 31% % Revenues by Geography: Americas 55% 55% 55% 55% EMEA 28% 29% 28% 29% Asia Pacific 17% 16% 17% 16% Total Revenues by Business: Cloud and license$ 7,937 1% 2%$ 7,854 $ 15,553 1% 3%$ 15,329 Hardware 871 -2% -1% 891 1,686 -6% -5% 1,796 Services 806 -1% 0% 817 1,593 -2% -1% 1,630 Total revenues$ 9,614 1% 1%$ 9,562 $ 18,832 0% 1%$ 18,755 % Revenues by Business: Cloud and license 83% 82% 83% 82% Hardware 9% 9% 9% 9% Services 8% 9% 8% 9%
(1) Comprised of
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Excluding the effects of currency rate fluctuations, our total revenues increased in the fiscal 2020 periods presented relative to the corresponding prior year periods, due to growth in our cloud and license business' revenues, which were partially offset by decreases in our hardware revenues and services revenues. The constant currency increases in our cloud and license revenues during the fiscal 2020 periods presented were attributable to growth in our cloud services and license support revenues as customers purchased our applications and infrastructure technologies via cloud deployment models and license deployment models and renewed their related cloud and license support contracts to continue to gain access to our latest technology and support services. The constant currency decreases in our hardware revenues during the fiscal 2020 periods presented were due to reductions in our hardware products revenues and hardware support revenues primarily due to the emphasis we placed on the marketing and sale of our cloud-based infrastructure technologies, which resulted in reduced sales volumes of certain of our hardware product lines and also impacted the volume of customers that purchased hardware support contracts. The constant currency decreases in our services revenues during the fiscal 2020 periods were primarily attributable to decreases in our education services revenues, partially offset by increases in our consulting revenues and advanced customer services revenues. In constant currency, total revenue growth in theAmericas andAsia Pacific regions was partially offset by a decline in revenues in the EMEA region during the second quarter of fiscal 2020. In constant currency, theAmericas , EMEA andAsia Pacific regions contributed 28%, 15% and 57%, respectively, to the growth in our total revenues during the first half of fiscal 2020. Excluding the effects of currency rate fluctuations, our total operating expenses were flat in the fiscal 2020 periods presented relative to the corresponding prior year periods. We incurred higher constant currency cloud services and license support expenses and higher constant currency cloud and license related sales and marketing expenses, both of which resulted primarily from increased headcount and infrastructure expenses to support the increases in our cloud and license business' revenues; higher constant currency services expenses; and higher constant currency research and development expenses; in each case during the fiscal 2020 periods presented relative to the corresponding prior year periods. These constant currency expense increases were partially offset by certain expense decreases during the fiscal 2020 periods presented relative to the corresponding prior year periods, primarily lower hardware products costs and a related decrease in hardware sales and marketing costs, both of which aligned to lower hardware revenues; lower restructuring expenses; and lower amortization of intangible assets.
In constant currency, our total operating margin and operating margin as a percentage of total revenues increased slightly during the fiscal 2020 periods presented due to the constant currency increases in our total revenues.
Supplemental Disclosure Related to Certain Charges
To supplement our condensed consolidated financial information, we believe that the following information is helpful to an overall understanding of our past financial performance and prospects for the future. Our operating results reported pursuant to GAAP included the following business combination accounting adjustments, expenses related to acquisitions, certain other expenses, and certain income items that affected our GAAP net income: Three Months Ended Six Months Ended November 30, November 30, (in millions) 2019 2018 2019 2018 Cloud services and license support deferred revenues(1)$ 1 $ 5 $ 3 $ 13 Amortization of intangible assets(2) 407 424 821 858 Acquisition related and other(3)(5) 12 18 37 32 Restructuring(4) 42 143 120 233 Stock-based compensation, operating segments(5) 84 131 220 266 Stock-based compensation, R&D and G&A(5) 313 265 623 566 Income tax effects(6) (189 ) (258 ) (528 ) (503 ) Income tax reform(7) - - - (153 )$ 670 $ 728 $ 1,296 $ 1,312 32
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(1) In connection with our acquisitions, we have estimated the fair values of the
cloud services and license support contracts assumed. Due to our application
of business combination accounting rules, we did not recognize the cloud
services and license support revenue amounts as presented in the above table
that would have otherwise been recorded by the acquired businesses as
independent entities upon delivery of the contractual obligations. To the
extent customers for which these contractual obligations pertain renew these
contracts with us, we expect to recognize revenues for the full contracts'
values over the respective contracts' renewal periods.
(2) Represents the amortization of intangible assets, substantially all of which
were acquired in connection with our acquisitions. As of
estimated future amortization related to intangible assets was as follows (in millions): Remainder of fiscal 2020$ 766 Fiscal 2021 1,347 Fiscal 2022 1,098 Fiscal 2023 675 Fiscal 2024 445 Fiscal 2025 126 Thereafter 35 Total intangible assets, net$ 4,492
(3) Acquisition related and other expenses primarily consist of personnel related
costs for transitional and certain other employees, integration related
professional services, certain business combination adjustments including
certain adjustments after the measurement period has ended and certain other
operating items, net.
(4) Restructuring expenses during the first half of fiscal 2020 and 2019 both
primarily related to employee severance in connection with our Fiscal 2019
Oracle Restructuring Plan (2019 Restructuring Plan). Additional information
regarding certain of our restructuring plans is provided in management's
discussion below under "Restructuring Expenses", in Note 5 of Notes to
Condensed Consolidated Financial Statements included elsewhere in this
Quarterly Report, and in Note 8 of Notes to Consolidated Financial Statements
included in our Annual Report on Form 10-K for the fiscal year ended
2019.
(5) Stock-based compensation was included in the following operating expense line
items of our condensed consolidated statements of operations (in millions): Three Months Ended Six Months Ended November 30, November 30, 2019 2018 2019 2018 Cloud services and license support$ 30 $
24$ 61 $ 48 Hardware 3 2 6 5 Services 14 12 28 25 Sales and marketing 37 93 125 188 Stock-based compensation, operating segments 84 131 220 266 Research and development 272 222 543 479 General and administrative 41 43 80 87 Total stock-based compensation$ 397 $ 396 $ 843 $ 832
(6) For the second quarter and first half of fiscal 2020, the applicable
jurisdictional tax rates applied to our income before provision for income
taxes after adjusting for the effects of items within the table above, such
as for stock-based compensation, amortization of intangible assets,
restructuring, and certain other acquisition related items, resulted in an
effective tax rate of 18.8% and 19.3%, respectively, instead of 17.7% and
16.0%, respectively, as derived per our condensed consolidated statements of
operations. For the second quarter and first half of fiscal 2019, the
applicable jurisdictional tax rates applied to our income before provision
for income taxes after adjusting for the effects of items within the table
above, such as for stock-based compensation, amortization of intangible
assets, restructuring, and certain other acquisition related items, and after
excluding the effects of income tax reform (see footnote (7) below), resulted
in an effective tax rate of 18.6% and 18.8%, respectively, instead of 15.9%
and 13.5%, respectively, which represented our effective tax rates as derived
per our condensed consolidated statements of operations.
(7) The income tax reform adjustment presented in the table above was due to an
income tax expense adjustment made pursuant to
No. 118 (
enactment of the
significant provisions of the Tax Act as applicable to us are described in our Annual Report on Form 10-K for the fiscal year endedMay 31, 2019 .
Cloud and License Business
Our cloud and license business engages in the sale, marketing and delivery of our applications and infrastructure technologies through various deployment models, including license support offerings; Oracle Cloud Services offerings; and cloud license and on-premise license offerings. License support revenues are typically generated through the sale of license support contracts related to cloud licenses and on-premise licenses, are purchased by our customers at their option and are generally recognized as revenues ratably over the contractual term, which is generally one year. Our cloud services deliver applications and infrastructure technologies on a subscription basis 33
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via cloud-based deployment models that we develop, provide unspecified updates and enhancements for, host, manage and support, and revenues are generally recognized over the contractual term, which is generally one to three years, or in the case of usage model contracts, as the cloud services are consumed. Cloud license and on-premise license revenues represent fees earned from granting customers licenses, generally on a perpetual basis, to use our database and middleware and our applications software products within cloud and on-premise IT environments and are generally recognized up front at the point in time when the software is made available to the customer to download and use. We continue to place significant emphasis, both domestically and internationally, on direct sales through our own sales force. We also continue to market certain of our offerings through indirect channels. Costs associated with our cloud and license business are included in cloud services and license support expenses, and sales and marketing expenses. These costs are largely personnel and infrastructure related including the cost of providing our cloud services and license support offerings, salaries and commissions earned by our sales force for the sale of our cloud and license offerings, and marketing program costs. Three Months Ended November 30, Six Months Ended November 30, Percent Change Percent Change (Dollars in millions) 2019 Actual Constant 2018 2019 Actual Constant 2018 Cloud and License Revenues: Americas(1)$ 4,470 2% 2%$ 4,395 $ 8,827 2% 2%$ 8,687 EMEA(1) 2,200 -3% 0% 2,262 4,270 -1% 2% 4,325 Asia Pacific(1) 1,268 6% 6% 1,202 2,459 6% 6% 2,330 Total revenues(1) 7,938 1% 2% 7,859 15,556 1% 2% 15,342 Expenses: Cloud services and license support(2) 970 6% 7% 912 1,901 7% 8% 1,779 Sales and marketing(2) 1,856 1% 2% 1,834 3,612 1% 2% 3,577 Total expenses(2) 2,826 3% 4% 2,746 5,513 3% 4% 5,356 Total Margin$ 5,112 0% 1%$ 5,113 $ 10,043 1% 2%$ 9,986 Total Margin % 64% 65% 65% 65% % Revenues by Geography: Americas 56% 56% 57% 57% EMEA 28% 29% 27% 28% Asia Pacific 16% 15% 16% 15% Revenues by Offerings: Cloud services and license support(1)$ 6,812 3% 3%$ 6,642 $ 13,619 3% 4%$ 13,259 Cloud license and on-premise license 1,126 -7% -7% 1,217 1,937 -7% -6% 2,083 Total revenues(1)$ 7,938 1% 2%$ 7,859 $ 15,556 1% 2%$ 15,342 Revenues by Ecosystem: Applications revenues(1)$ 2,910 3% 4%$ 2,812 $ 5,733 3% 4%$ 5,581 Infrastructure revenues(1) 5,028 0% 1% 5,047 9,823 1% 2% 9,761 Total revenues(1)$ 7,938 1% 2%$ 7,859 $ 15,556 1% 2%$ 15,342
(1) Includes cloud services and license support revenue adjustments related to
certain cloud services and license support contracts that would have
otherwise been recorded as revenues by the acquired businesses as independent
entities but were not recognized in our GAAP-based condensed consolidated
statements of operations for the periods presented due to business
combination accounting requirements. Such revenue adjustments were included
in our operating segment results for purposes of reporting to and review by
our CODMs. See "Presentation of Operating Segment Results and Other Financial
Information" above for additional information.
(2) Excludes stock-based compensation and certain allocations. Also excludes
amortization of intangible assets and certain other GAAP-based expenses,
which were not allocated to our operating segment results for purposes of
reporting to and review by our CODMs, as further described under
"Presentation of Operating Segment Results and Other Financial Information"
above. 34
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Excluding the effects of currency rate fluctuations, total revenues from our cloud and license business increased in the fiscal 2020 periods presented, relative to the corresponding prior year periods, due to growth in our cloud services and license support revenues, which was primarily due to increased customer purchases of and renewals of cloud-based services and license support contracts in recent periods for which we delivered such services during the fiscal 2020 periods presented. In constant currency, our total applications revenues and our total infrastructure revenues each grew during the fiscal 2020 periods presented, each relative to the corresponding prior year periods, as customers continued to deploy our applications technologies and infrastructure technologies through a wide array of different deployment models that we offer to enable customer choice. In constant currency, theAmericas andAsia Pacific regions contributed to our cloud and license business' revenue growth, while the EMEA region was flat, during the second quarter of fiscal 2020. In constant currency, theAmericas , EMEA andAsia Pacific regions contributed 44%, 17% and 39%, respectively, of the constant currency revenue growth for this business during the first half of fiscal 2020. In constant currency, total cloud and license expenses increased in the fiscal 2020 periods presented, relative to the corresponding prior year periods, due to higher cloud services and license support expenses and higher sales and marketing expenses, each of which increased during the fiscal 2020 periods presented primarily due to higher employee related expenses from higher headcount, and also due to higher technology infrastructure expenses. Excluding the effects of currency rate fluctuations, our cloud and license business' total margins increased during the fiscal 2020 periods presented, relative to the corresponding prior year periods, primarily due to the fiscal 2020 increases in revenues for this business, while total fiscal 2020 margins as a percentage of revenues remained flat in constant currency.
Hardware Business
Our hardware business' revenues are generated from the sales of our Oracle Engineered Systems, server, storage, and industry-specific hardware. The hardware product and related software, such as an operating system or firmware, are highly interdependent and interrelated and are accounted for as a combined performance obligation. The revenues for this combined performance obligation are generally recognized at the point in time that the hardware product is delivered to the customer and ownership is transferred to the customer. Our hardware business also earns revenues from the sale of hardware support contracts purchased by our customers at their option and are generally recognized as revenues ratably as the hardware support services are delivered over the contractual term, which is generally one year. The majority of our hardware products are sold through indirect channels such as independent distributors and value-added resellers and we also market and sell our hardware products through our direct sales force. Operating expenses associated with our hardware business include the cost of hardware products, which consists of expenses for materials and labor used to produce these products by our internal manufacturing operations or by third-party manufacturers, warranty expenses and the impact of periodic changes in inventory valuation, including the impact of inventory determined to be excess and obsolete; the cost of materials used to repair customer products; the cost of labor and infrastructure to provide support services; and sales and marketing expenses, which are largely personnel related and include variable compensation earned by our sales force for the sales of our hardware offerings. 35
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Table of Contents Three Months EndedNovember 30 , Six Months EndedNovember 30 , Percent Change Percent Change
(Dollars in millions) 2019 Actual Constant 2018 2019 Actual Constant 2018 Hardware Revenues: Americas$ 447 -3% -3%$ 461 $ 850 -8% -8%$ 927 EMEA 242 -6% -4% 257 485 -6% -4% 518 Asia Pacific 182 6% 6% 173 351 0% 1% 351 Total revenues 871 -2% -1% 891 1,686 -6% -5% 1,796 Expenses: Hardware products and support(1) 277 -15% -14% 325 541 -16% -15% 642 Sales and marketing(1) 114 -4% -3% 118 231 -10% -9% 257 Total expenses(1) 391 -12% -11% 443 772 -14% -13% 899 Total Margin$ 480 7% 8%$ 448 $ 914 2% 3%$ 897 Total Margin % 55% 50% 54% 50% % Revenues by Geography: Americas 51% 52% 50% 51% EMEA 28% 29% 29% 29% Asia Pacific 21% 19% 21% 20%
(1) Excludes stock-based compensation and certain allocations. Also excludes
amortization of intangible assets and certain other GAAPbased expenses,
which were not allocated to our operating segment results for purposes of
reporting to and review by our CODMs, as further described under
"Presentation of Operating Segments and Other Financial Information" above.
Excluding the effects of currency rate fluctuations, total hardware revenues decreased in the fiscal 2020 periods presented, relative to the corresponding prior year periods, due to lower hardware products revenues and lower hardware support revenues. The decreases in hardware products and hardware support revenues in the fiscal 2020 periods presented, relative to the corresponding fiscal 2019 periods presented, were primarily attributable to our continued emphasis on the marketing and sale of our cloud-based infrastructure technologies, which resulted in reduced sales volumes of certain of our hardware product lines and also impacted the volume of hardware support contracts sold in recent periods. Constant currency decreases in revenue growth in theAmericas and EMEA regions were partially offset by constant currency increases in revenue growth in theAsia Pacific region during the fiscal 2020 periods presented. Excluding the effects of currency rate fluctuations, total hardware expenses decreased in the fiscal 2020 periods presented, relative to the corresponding prior year periods, primarily due to lower hardware products expenses, lower hardware support costs, and lower sales and marketing expenses, all of which aligned to lower hardware revenues. In constant currency, total margin and total margin as a percentage of revenues for our hardware business increased during the fiscal 2020 periods presented, relative to the corresponding prior year periods, primarily due to lower expenses.
Services Business
We offer services to customers and partners to help to maximize the performance of their investments in Oracle applications and infrastructure technologies. Services revenues are generally recognized over time as the services are performed. The cost of providing our services consists primarily of personnel related expenses, technology infrastructure expenditures, facilities expenses and external contractor expenses. 36
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Table of Contents Three Months EndedNovember 30 , Six Months EndedNovember 30 , Percent Change Percent Change
(Dollars in millions) 2019 Actual Constant 2018
2019 Actual Constant 2018 Services Revenues: Americas$ 388 -1% -1%$ 393 $ 779 -3% -3%$ 803 EMEA 253 -3% -1% 262 494 -4% -1% 515 Asia Pacific 165 2% 2% 162 320 3% 3% 312 Total revenues 806 -1% 0% 817 1,593 -2% -1% 1,630 Total Expenses(1) 700 3% 5% 677 1,365 1% 2% 1,353 Total Margin$ 106 -24% -24%$ 140 $ 228 -17% -17%$ 277 Total Margin % 13% 17% 14% 17% % Revenues by Geography: Americas 48% 48% 49% 49% EMEA 32% 32% 31% 32% Asia Pacific 20% 20% 20% 19%
(1) Excludes stock-based compensation and certain allocations. Also excludes
certain other GAAP-based expenses, which were not allocated to our operating
segment results for purposes of reporting to and review by our CODMs, as further described under "Presentation of Operating Segments and Other Financial Information" above. Excluding the effects of currency rate fluctuations, our total services revenues decreased during the fiscal 2020 periods presented, relative to the corresponding prior year periods, primarily due to decreases in our education services revenues, partially offset by increases in consulting revenues and advanced customer services revenues. Constant currency decreases in revenue growth in theAmericas and EMEA regions were partially offset by constant currency increases in revenue growth in theAsia Pacific region during the fiscal 2020 periods presented.
In constant currency, total services expenses increased in the fiscal 2020 periods presented, relative to the corresponding prior year periods, primarily due to an increase in headcount and related expenses associated with our consulting offerings during the fiscal 2020 periods presented.
In constant currency, total margin and total margin as a percentage of total services revenues decreased during the fiscal 2020 periods presented, relative to the corresponding prior year periods, primarily due to the revenue declines and expense increases for this business in the fiscal 2020 periods presented. Research and Development Expenses: Research and development expenses consist primarily of personnel related expenditures. We intend to continue to invest significantly in our research and development efforts because, in our judgment, they are essential to maintaining our competitive position. Three Months Ended November 30, Six Months Ended November 30, Percent Change Percent Change (Dollars in millions) 2019 Actual Constant 2018 2019 Actual Constant 2018 Research and development(1)$ 1,259 0% 1%$ 1,253 $ 2,545 -1% 0%$ 2,560 Stock-based compensation 272 23% 23% 222 543 14% 14% 479 Total expenses$ 1,531 4% 4%$ 1,475 $ 3,088 2% 2%$ 3,039 % of Total Revenues 16% 15% 16% 16%
(1) Excluding stock-based compensation
On a constant currency basis, total research and development expenses increased during the fiscal 2020 periods presented, relative to the corresponding prior year periods, primarily due to higher fiscal 2020 stock-based compensation expenses. 37
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General and Administrative Expenses: General and administrative expenses primarily consist of personnel related expenditures for IT, finance, legal and human resources support functions.
Three Months Ended November 30, Six Months Ended November 30, Percent Change Percent Change (Dollars in millions) 2019 Actual Constant 2018 2019 Actual Constant 2018 General and administrative(1)$ 282 10% 11%$ 256 $ 535 1% 1%$ 532 Stock-based compensation 41 -3% -3% 43 80 -8% -8% 87 Total expenses$ 323 8% 9%$ 299 $ 615 -1% 0%$ 619 % of Total Revenues 3% 3% 3% 3%
(1) Excluding stock-based compensation
Fiscal Second Quarter 2020 Compared to Fiscal Second Quarter 2019: On a constant currency basis, total general and administrative expenses increased during the second quarter of fiscal 2020 relative to the corresponding prior year period primarily due to higher employee related expenses and professional fees. First Half Fiscal 2020 Compared to First Half Fiscal 2019: On a constant currency basis, total general and administrative expenses were flat during the first half of fiscal 2020 relative to the corresponding prior year period. Higher constant currency employee related expenses during the first half of fiscal 2020 were offset by a$29 million litigation related benefit that we do not expect to recur that was recorded during the same period. Amortization of Intangible Assets: Substantially all of our intangible assets were acquired through our business combinations. We amortize our intangible assets over, and monitor the appropriateness of, the estimated useful lives of these assets. We also periodically review these intangible assets for potential impairment based upon relevant facts and circumstances. Note 4 of Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report has additional information regarding our intangible assets and related amortization. Three Months EndedNovember 30 , Six Months EndedNovember 30 , Percent Change Percent Change
(Dollars in millions) 2019 Actual Constant 2018
2019 Actual Constant 2018 Developed technology$ 204 -4% -4%$ 212 $ 415 -2% -2%$ 424 Cloud services and license support agreements and related relationships 171 -7% -7% 184 342 -9% -9% 376 Other 32 14% 14% 28 64 10% 10% 58 Total amortization of intangible assets$ 407 -4% -4%$ 424 $ 821 -4% -4%$ 858 Amortization of intangible assets decreased during the fiscal 2020 periods presented, relative to the corresponding prior year periods, due to a reduction in expenses associated with certain of our intangible assets that became fully amortized, partially offset by additional amortization from intangible assets that we acquired in connection with our recent acquisitions. Acquisition Related and Other Expenses: Acquisition related and other expenses primarily consist of personnel related costs for transitional and certain other employees, integration related professional services, certain business combination adjustments, including adjustments after the measurement period has ended and certain other operating items, net. Three Months Ended November 30, Six Months Ended November 30, Percent Change Percent Change (Dollars in millions) 2019 Actual
Constant 2018 2019 Actual Constant 2018
Transitional and other employee related costs
-73% -73%$ 11 $ 7 -71% -71%$ 25 Business combination adjustments, net (4 ) -224% -224% 3 2 100% 100% 1 Other, net 13 204% 205% 4 28 331% 331% 6 Total acquisition related and other expenses$ 12 -33% -32%$ 18 $ 37 16% 16%$ 32 38
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Fiscal Second Quarter 2020 Compared to Fiscal Second Quarter 2019: On a constant currency basis, acquisition related and other expenses decreased in the second quarter of fiscal 2020, relative to the corresponding prior year period, primarily due to lower transitional employee related costs and certain favorable business combination related adjustments that were recorded in the second quarter of fiscal 2020. These constant currency expense reductions during the second quarter of fiscal 2020 were partially offset by higher asset impairment costs incurred during the second quarter of fiscal 2020, as further described below. First Half Fiscal 2020 Compared to First Half Fiscal 2019: On a constant currency basis, acquisition related and other expenses increased in the first half of fiscal 2020, relative to the corresponding prior year period, due to higher other expenses, net, which was primarily attributable to higher asset impairment costs related to certain right of use assets and other assets that were abandoned in connection with plans to improve our cost structure and operations prospectively. These constant currency expense increases were partially offset by lower transitional employee related costs during the first half of fiscal 2020, as described above. Restructuring Expenses: Restructuring expenses resulted from the execution of management approved restructuring plans that were generally developed to improve our cost structure and/or operations, often in conjunction with our acquisition integration strategies. Restructuring expenses consist of employee severance costs and other contract termination costs to improve our cost structure prospectively. Prior to fiscal 2020, restructuring expenses also included charges for duplicate facilities. For additional information regarding our restructuring plans, see Note 5 of Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report and Note 8 of Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year endedMay 31, 2019 . Three Months EndedNovember 30 , Six Months EndedNovember 30 , Percent Change Percent Change
(Dollars in millions) 2019 Actual Constant 2018
2019 Actual Constant 2018 Restructuring expenses$ 42 -71% -70%$ 143 $ 120 -48% -47%$ 233 Restructuring expenses in the fiscal 2020 and 2019 periods presented primarily related to our 2019 Restructuring Plan. Our management approved, committed to and initiated the 2019 Restructuring Plan in order to restructure and further improve efficiencies in our operations. The total estimated restructuring costs associated with the 2019 Restructuring Plan are up to$626 million , of which approximately$25 million were remaining as ofNovember 30, 2019 , and will be recorded to the restructuring expense line item within our condensed consolidated statements of operations as they are incurred through an expected end date of fiscal 2020. Our estimated costs are subject to change in future periods. The majority of the initiatives undertaken by our 2019 Restructuring Plan were effected to implement our continued emphasis in developing, marketing and selling our cloud-based offerings. These initiatives impacted certain of our sales and marketing and research and development operations. Cost savings that are expected to be realized pursuant to our 2019 Restructuring Plan initiatives are primarily expected to be offset by investments in resources and geographies that best address the development, marketing and sale of our cloudbased offerings including investments in our secondgeneration cloud infrastructure. Interest Expense: Three Months Ended November 30, Six Months Ended November 30, Percent Change Percent Change
(Dollars in millions) 2019 Actual Constant 2018
2019 Actual Constant 2018 Interest expense$ 465 -10% -10%$ 519 $ 959 -8% -8%$ 1,048 Interest expense decreased due to lower average borrowings during the fiscal 2020 periods presented, relative to the corresponding prior year periods, primarily due to the maturities and repayments of$4.5 billion of senior notes during the fiscal 2020 periods presented and$2.0 billion of senior notes during fiscal 2019. 39
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Table of Contents Non-Operating Income, net: Non-operating income, net consists primarily of interest income, net foreign currency exchange gains (losses), the noncontrolling interests in the net profits of our majority-owned subsidiaries (primarily Oracle Financial Services Software Limited andOracle Corporation Japan ) and net other income (losses), including net realized gains and losses related to all of our investments, net unrealized gains and losses related to the small portion of our investment portfolio related to our deferred compensation plan, net unrealized gains and losses related to certain equity securities and non-service net periodic pension income (losses). Three Months EndedNovember 30 , Six Months EndedNovember 30 , Percent Change Percent Change
(Dollars in millions) 2019 Actual Constant 2018
2019 Actual Constant 2018 Interest income$ 145 -51% -51%$ 296 $ 335 -48% -48%$ 644 Foreign currency losses, net (26 ) 16% 18% (22 ) (80 ) 45% 46% (55 ) Noncontrolling interests in income (46 ) 45% 45% (32 ) (87 ) 22% 22% (71 ) Other income (loss), net 19 138% 138% (50 ) 23 169% 168% (34 ) Total non-operating income, net$ 92 -52% -52%$ 192 $ 191 -60% -60%$ 484 On a constant currency basis, our non-operating income, net decreased during the fiscal 2020 periods presented, relative to the corresponding prior year periods, primarily due to lower interest income in the fiscal 2020 periods presented, which was primarily attributable to lower average cash, cash equivalent and marketable securities balances during the fiscal 2020 periods presented. These decreases during the fiscal 2020 periods presented were partially offset by higher other income, net, during the fiscal 2020 periods presented, which was primarily attributable to changes in market values associated with certain marketable equity securities that we held for certain employee benefit plans and classified as trading, and for which an equal and offsetting amount was recorded to our operating expenses in the same periods. Provision for Income Taxes: Our effective tax rates for each of the periods presented were the result of the mix of income earned in various tax jurisdictions that apply a broad range of income tax rates. Our provision for income taxes varied from the tax computed at theU.S. federal statutory income tax rate for the periods presented primarily due to earnings in foreign operations, state taxes, theU.S. research and development tax credit, settlements with tax authorities, the tax effects of stock-based compensation, the Foreign Derived Intangible Income deduction and the tax effect of Global Intangible Low-Taxed Income. Our effective tax rate in the first half of fiscal 2019 was also affected by an adjustment made pursuant toSAB 118 related to the enactment of the Tax Act, for which the more significant provisions of the Tax Act as applicable to us are described in our Annual Report on Form 10-K for the fiscal year endedMay 31, 2019 . Future effective tax rates could be adversely affected by an unfavorable shift of earnings weighted to jurisdictions with higher tax rates, by unfavorable changes in tax laws and regulations, by adverse rulings in tax related litigation, or by shortfalls in stock-based compensation realized by employees relative to stock-based compensation that was recorded for book purposes, among others. Three Months Ended November 30, Six Months Ended November 30, Percent Change Percent Change
(Dollars in millions) 2019 Actual Constant 2018
2019 Actual Constant 2018 Provision for income taxes$ 499 13% 13%$ 441 $ 844 18% 17%$ 716 Effective tax rate 17.7% 15.9% 16.0% 13.5% Fiscal Second Quarter 2020 Compared to Fiscal Second Quarter 2019: Provision for income taxes increased in the second quarter of fiscal 2020, relative to the corresponding prior year period, primarily due to lower excess tax benefits recognized on stock-based compensation expenses during the second quarter of fiscal 2020. First Half Fiscal 2020 Compared to First Half Fiscal 2019: Provision for income taxes increased in the first half of fiscal 2020, relative to the corresponding prior year period, primarily due to the absence of the net favorable impact of a change in estimate related to our adoption of the Tax Act, as recorded pursuant toSAB 118, in the first half of fiscal 2019. 40
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Liquidity and Capital Resources
November 30, May 31, (Dollars in millions) 2019 Change 2019 Working capital$ 19,948
-28%
Working capital: The decrease in working capital as ofNovember 30, 2019 in comparison toMay 31, 2019 was primarily due to cash used for repurchases of our common stock, the reclassification of$1.0 billion of long-term senior notes as a current liability, cash used to pay dividends to our stockholders during the first half of fiscal 2020, and the prospective recognition of current operating lease liabilities associated with our adoption of Topic 842 as ofJune 1, 2019 . These unfavorable impacts were partially offset by the favorable effects to our net current assets resulting from our net income during the first half of fiscal 2020 and, to a lesser extent, proceeds from stock option exercises. Our working capital may be impacted by some or all of the aforementioned factors in future periods, the amounts and timing of which are variable. Cash, cash equivalents and marketable securities: Cash and cash equivalents primarily consist of deposits held at major banks, Tier-1 commercial paper and other securities with original maturities of 90 days or less. Marketable securities consist of corporate debt securities and certain other securities. The decrease in cash, cash equivalents and marketable securities atNovember 30, 2019 in comparison toMay 31, 2019 was primarily due to$10.0 billion of repurchases of our common stock, the repayments of$4.5 billion of borrowings, payments of cash dividends to our stockholders and cash used for capital expenditures. These cash outflows during the first half of fiscal 2020 were partially offset by certain cash inflows, primarily cash inflows generated by our operations and cash inflows from stock option exercises during the first half of fiscal 2020. The amount of cash, cash equivalents and marketable securities that we report inU.S. Dollars for a significant portion of the cash, cash equivalents and marketable securities balances held by our foreign subsidiaries is subject to translation adjustments caused by changes in foreign currency exchange rates as of the end of each respective reporting period (the offset to which is substantially recorded to accumulated other comprehensive loss in our condensed consolidated balance sheets and is also presented as a line item in our condensed consolidated statements of comprehensive income included elsewhere in this Quarterly Report). As theU.S. Dollar generally strengthened against certain major international currencies on a net basis during the first half of fiscal 2020, the amount of cash, cash equivalents and marketable securities that we reported inU.S. Dollars for these subsidiaries decreased on a net basis as ofNovember 30, 2019 relative to what we would have reported using constant currency rates from theMay 31, 2019 balance sheet date. Six Months Ended November 30, (Dollars in millions) 2019 Change 2018 Net cash provided by operating activities$ 6,513 -10%$ 7,268 Net cash provided by investing activities$ 13,619 150%$ 5,452 Net cash used for financing activities$ (16,096 ) -31%$ (23,356 ) Cash flows from operating activities: Our largest source of operating cash flows is cash collections from our customers following the purchase and renewal of their license support agreements. Payments from customers for these support agreements are generally received near the beginning of the contracts' terms, which are generally one year in length. Over the course of a fiscal year, we also have historically generated cash from the sales of new licenses, cloud services, hardware offerings and other services. Our primary uses of cash from operating activities are for employee related expenditures, material and manufacturing costs related to the production of our hardware products, taxes, interest payments and leased facilities. Net cash provided by operating activities decreased in the first half of fiscal 2020, relative to the corresponding prior year period, due primarily to lower net income and certain cash unfavorable changes in working capital balances during the first half of fiscal 2020, in each case relative to the corresponding prior year period. Cash flows from investing activities: The changes in cash flows from investing activities primarily relate to the timing of our purchases, maturities and sales of our investments in marketable securities, and investments in capital and other assets, including certain intangible assets, to support our growth. 41
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Net cash provided by investing activities increased during the first half of fiscal 2020, primarily due to an increase in the sales and maturities of, and a decrease in the purchases of, marketable securities and other investments during the first half of fiscal 2020 relative to the corresponding prior year period. Cash flows from financing activities: The changes in cash flows from financing activities primarily relate to borrowings and repayments related to our debt instruments, stock repurchases, dividend payments and net proceeds related to employee stock programs. Net cash used for financing activities in the first half of fiscal 2020 decreased compared to the first half of fiscal 2019 primarily due to decreased stock repurchases as we repurchased$10.0 billion of common stock in the first half of fiscal 2020 compared to$20.0 billion in the first half of fiscal 2019. This cash favorable variance to our financing activities during the first half of fiscal 2020 was partially offset by increased debt repayments made during the first half of fiscal 2020 relative to the corresponding prior year period. Free cash flow: To supplement our statements of cash flows presented on a GAAP basis, we use non-GAAP measures of cash flows on a trailing 4-quarter basis to analyze cash flows generated from our operations. We believe that free cash flow is also useful as one of the bases for comparing our performance with our competitors. The presentation of non-GAAP free cash flow is not meant to be considered in isolation or as an alternative to net income as an indicator of our performance, or as an alternative to cash flows from operating activities as a measure of liquidity. We calculate free cash flow as follows: Trailing 4-Quarters Ended November 30, (Dollars in millions) 2019 Change 2018 Net cash provided by operating activities$ 13,796 -9%$ 15,238 Capital expenditures (1,591 ) 8% (1,468 ) Free cash flow$ 12,205 -11%$ 13,770 Net income$ 10,933 $ 3,827 Free cash flow as percent of net income 112% 360% Long-Term Customer Financing: We offer certain of our customers the option to acquire licenses, cloud services, hardware and other services offerings through separate long-term payment contracts. We generally sell these contracts that we have financed for our customers on a non-recourse basis to financial institutions within 90 days of the contracts' dates of execution. We generally record the transfers of amounts due from customers to financial institutions as sales of financing receivables because we are considered to have surrendered control of these financing receivables. We financed$330 million and$247 million , respectively, or approximately 17% and 12%, respectively, of our cloud license and on-premise license revenues in the first half of fiscal 2020 and 2019, respectively. Contractual Obligations: During the first half of fiscal 2020, there were no significant changes to our estimates of future payments under our fixed contractual obligations and commitments as presented in Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for our fiscal year endedMay 31, 2019 . We believe that our current cash, cash equivalents and marketable securities and cash generated from operations will be sufficient to meet our working capital, capital expenditures and contractual obligation requirements. In addition, we believe that we could fund our future acquisitions, dividend payments and repurchases of common stock or debt with our internally available cash, cash equivalents and marketable securities, cash generated from operations, additional borrowings or from the issuance of additional securities.
Off-Balance Sheet Arrangements: We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
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Restricted Stock-Based Awards and Stock Options
Our stock-based compensation program is a key component of the compensation package we provide to attract and retain certain of our talented employees and align their interests with the interests of existing stockholders.
We recognize that restricted stock-based awards and stock options dilute existing stockholders and have sought to control the number of stock-based awards granted while providing competitive compensation packages. Consistent with these dual goals, our cumulative potential dilution sinceJune 1, 2016 has been a weighted-average annualized rate of 1.5% per year. The potential dilution percentage is calculated as the average annualized new restricted stock-based awards and stock options granted and assumed, net of restricted stock-based awards and stock options forfeited by employees leaving the company, divided by the weighted-average outstanding shares during the calculation period. This maximum potential dilution will only result if all restricted stock-based awards vest and all stock options are exercised. Of the outstanding stock options atNovember 30, 2019 , which generally have a ten-year exercise period, substantially all have exercise prices lower than the market price of our common stock on such date. In recent years, our stock repurchase program has more than offset the dilutive effect of our stock-based compensation program. However, we may modify the levels of our stock repurchases in the future depending on a number of factors, including the amount of cash we have available for acquisitions, to pay dividends, to repay or repurchase indebtedness or for other purposes. AtNovember 30, 2019 , the maximum potential dilution from all outstanding restricted stock-based awards and unexercised stock options, regardless of when granted and regardless of whether vested or unvested, was 9.5%.
Recent Accounting Pronouncements
For information with respect to recent accounting pronouncements, if any, and the impact of these pronouncements on our consolidated financial statements, if any, see Note 1 of Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report.
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