ORACLE CORP 10-Q

Item 2. Management’s Discussion and Analysis o f Financial Condition and Results of Operations 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 estimates that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results. We then provide a more detailed analysis of our results of operations and financial condition. Business Overview Oracle provides products and services that address enterprise information technology (IT) environments. Our products and services include enterprise applications and infrastructure offerings that are delivered worldwide through a variety of flexible and interoperable IT deployment models. These models include on-premise, cloud-based and hybrid deployments (an approach that combines both on-premise and cloud-based deployments). Accordingly, we offer choice and flexibility to our customers and facilitate the product, service and deployment combinations that best suit our customers’ needs. Through our worldwide sales force and Oracle Partner Network, we sell to customers all over the world including businesses of many sizes, government agencies, educational institutions and resellers. We have three businesses: cloud and license; hardware; and services; each of which comprises a single operating segment. The descriptions set forth below as a part of this Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations and the information contained within Note 9 of Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report provide additional information related to our businesses and operating segments and align to how our chief operating decision makers (CODMs), which are our Chief Executive Officer and Chief Technology Officer, view our operating results and allocate resources. Cloud and License Business Our cloud and license business, which represented 84% of our total revenues on a trailing 4-quarter basis, markets, sells and delivers a broad spectrum of enterprise applications and infrastructure technologies through our cloud and license offerings. Revenue streams included in our cloud and license business are: • Cloud services and license support revenues, which include: o cloud services revenues, which are earned by providing customers access to Oracle Cloud applications and infrastructure technologies via cloud-based deployment models that Oracle develops, provides unspecified updates and enhancements for, deploys, hosts, manages and supports and that customers access by entering into a subscription agreement with us for a stated period. Oracle SaaS and OCI (collectively Oracle Cloud Services) arrangements are generally billed in advance of the cloud services being delivered; generally have durations of one to three years; are generally renewed at the customer’s option; and are generally recognized as revenues ratably over the contractual period of the cloud contract or, in the case of usage model contracts, as the cloud services are consumed over time; and o license support revenues, which are earned by providing Oracle license support services to customers that have elected to purchase support services in connection with the purchase of Oracle applications and infrastructure software licenses for use in cloud, on-premise and other IT environments. Substantially all license support customers renew their support contracts with us upon expiration in order to continue to benefit from technical support services and the periodic issuance of unspecified updates and enhancements, which current license support customers are entitled to receive. License support contracts are generally priced as a percentage of the net fees paid by the customer to purchase a cloud license and/or on-premise license; are generally billed in advance of the support services being performed; are generally renewed at the customer’s option; and are generally recognized as revenues ratably over the contractual period that the support services are provided, which is generally one year. • Cloud license and on-premise license revenues, which include revenues from the licensing of our software products including Oracle Applications, Oracle Database, Oracle Middleware and Java, among others, which our customers deploy within cloud-based, on-premise or other IT environments. Our cloud license and on-premise license transactions are generally perpetual in nature and are generally recognized as revenues up 22 Table of Contents front at the point in time when the software is made available to the customer to download and use. Revenues from usage-based royalty arrangements for distinct cloud licenses and on-premise licenses are recognized at the point in time when the software end user usage occurs. The timing of a few large license transactions can substantially affect our quarterly license revenues due to the point-in-time nature of revenue recognition for license transactions, which is different than the typical revenue recognition pattern for our cloud services and license support revenues in which revenues are recognized over time. Cloud license and on-premise license customers have the option to purchase and renew license support contracts, as further described above. Providing choice and flexibility to our customers as to when and how they deploy Oracle applications and infrastructure technologies are important elements of our corporate strategy. In recent periods, customer demand for our applications and infrastructure technologies delivered through our Oracle Cloud Services has increased. To address customer demand and enable customer choice, we have introduced certain programs for customers to pivot their applications and infrastructure software licenses and the related license support to the Oracle Cloud for new deployments and to migrate to and expand with the Oracle Cloud for their existing workloads. The proportion of our cloud services revenues relative to our total revenues has increased and we expect this trend to continue. Cloud services revenues represented 38% and 37% of our total revenues for the three and nine months ended February 29, 2024, respectively, and 33% and 32% of our total revenues for the three and nine months ended February 28, 2023, respectively. Our cloud and license business’ revenue growth is affected by many factors, including the strength of general economic and business conditions; governmental budgetary constraints; the strategy for and competitive position of our offerings; customer satisfaction with our offerings; the continued renewal of our cloud services and license support customer contracts by the customer contract base; substantially all customers continuing to purchase license support contracts in connection with their license purchases; the pricing of license support contracts sold in connection with the sales of licenses; the pricing, amounts and volumes of licenses and cloud services sold; our ability to manage Oracle Cloud capacity requirements to meet existing and prospective customer demand; and foreign currency rate fluctuations. On a constant currency basis, we expect that our total cloud and license revenues generally will continue to increase due to: • expected growth in our cloud services; and • continued demand for our cloud license and on-premise license and license support offerings. We believe these factors should contribute to future growth in our cloud and license business’ total revenues, which should enable us to continue to make investments in research and development and our cloud operations to develop, improve, increase the capacity of and expand the geographic footprint of our cloud and license products and services. Our cloud and license business’ margin has historically trended upward over the course of the four quarters within a particular fiscal year due to the historical upward trend of our cloud and license business’ revenues over those quarterly periods and because the majority of our costs for this business are generally fixed in the short term. The historical upward trend of our cloud and license business’ revenues over the course of the four quarters within a particular fiscal year is primarily due to the addition of new cloud services and license support contracts to the customer contract base that we generally recognize as revenues ratably or based upon customer usage over the respective contractual terms and the renewal of existing customers’ cloud services and license support contracts over the course of each fiscal year that we generally recognize as revenues in a similar manner; and the historical upward trend of our cloud license and on-premise license revenues, which we generally recognize at a point in time upon delivery; in each case over those four fiscal quarterly periods. Hardware Business Our hardware business, which represented 6% of our total revenues on a trailing 4-quarter basis, provides a broad selection of enterprise hardware products and hardware-related software products including Oracle Engineered Systems, servers, storage, industry-specific hardware offerings, operating systems, virtualization, management and other hardware-related software and related hardware support. Each hardware product and its related software, 23 Table of Contents such as an operating system or firmware, are highly interdependent and interrelated and are accounted for as a combined performance obligation. The revenues for this combined performance obligation are generally recognized at the point in time that the hardware product and its related software are delivered to the customer and ownership is transferred to the customer. We expect to make investments in research and development to improve existing hardware products and services and to develop new hardware products and services. The majority of our hardware products are sold through indirect channels, including independent distributors and value-added resellers. Our hardware support offerings provide customers with unspecified software updates for software components that are essential to the functionality of our hardware products and associated software products. Our hardware support offerings can also include product repairs, maintenance services and technical support services. Hardware support contracts are entered into and renewed at the option of the customer, are generally priced as a percentage of the net hardware products fees and are generally recognized as revenues ratably as the hardware support services are delivered over the contractual terms. We generally expect our hardware business to have lower operating margins as a percentage of revenues than our cloud and license business due to the incremental costs we incur to produce and distribute these products and to provide support services, including direct materials and labor costs. Our quarterly hardware revenues are difficult to predict. Our hardware revenues, cost of hardware and hardware operating margins that we report are affected by many factors, including our manufacturing partners’ abilities to timely manufacture or deliver a few large hardware transactions; 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 10% of our total revenues on a trailing 4-quarter basis, helps customers and partners maximize the performance of their investments in Oracle applications and infrastructure technologies. We believe that our services are differentiated based on our focus on Oracle technologies, extensive experience, broad sets of intellectual property and best practices. Our services offerings include consulting services and advanced customer services. Our services business has lower margins than our cloud and license and hardware businesses. Our services revenues are affected by many factors including our strategy for, and the competitive position of, our services; customer demand for our cloud and license and hardware offerings and the related services that we may market and sell in connection with these offerings; general economic conditions; governmental budgetary constraints; personnel reductions in our customers’ IT departments; tighter controls over customer discretionary spending; and foreign currency rate fluctuations. 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. We acquired certain companies and technologies during the first nine months of fiscal 2024 and full year fiscal 2023, including Cerner Corporation (Cerner). Refer to Note 2 of Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report for additional information related to our acquisition of Cerner and our other recent acquisitions. As compelling opportunities become available, we may acquire companies, products, services and technologies in furtherance of our corporate strategy. We believe that we can fund our future acquisitions with our internally available cash, cash equivalents and marketable securities balances, cash generated from operations, additional borrowings or from the issuance of additional securities. We estimate the financial impact of any potential acquisition with regard to earnings, operating margin, cash flows and return on invested capital targets, among others, before deciding to move forward with an acquisition. 24 Table of Contents Investment in Ampere Computing Holdings LLC From time to time since 2017, we have made investments in Ampere Computing Holdings LLC (Ampere), a related party entity, in the form of equity and convertible debt instruments. The total carrying value of our investments in Ampere as of February 29, 2024 after accounting for losses under the equity method of accounting was $1.4 billion. We currently expect Ampere to continue to generate net losses in future periods but we remain confident in the long-term potential of Ampere’s server chips. Our equity investments in Ampere represent an ownership interest of approximately 29% as of February 29, 2024. We also own convertible debt investments in Ampere which, under the terms of an agreement with Ampere and other co-investors, as amended on March 5, 2024, will mature in June 2026 and are convertible into equity securities at the holder’s option under certain circumstances. During the three months ended February 29, 2024, we invested an additional $125 million in convertible debt instruments issued by Ampere. In accordance with the terms of an agreement with other co-investors, as amended on March 5, 2024, we are also a counterparty to certain put (exercisable by a co-investor) and call (exercisable by Oracle) options at prices of approximately $400 million to $1.5 billion, respectively, to acquire additional equity interests in Ampere from our co-investors through January 2027. If either of such options is exercised by us or our co-investors, we would obtain control of Ampere and consolidate its results with our results of operations. Critical Accounting 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 Accounting Standards Codification (ASC), and we consider various staff accounting bulletins and other applicable guidance issued by the U.S. Securities and Exchange Commission (the 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 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 nine months of fiscal 2024, there were no significant changes to our critical accounting estimates. Refer to “Critical Accounting Policies and Estimates” under 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 the fiscal year ended May 31, 2023 for a more complete discussion of our critical accounting estimates. Results of Operations Presentation of Operating Segment Results and Other Financial Information In our results of operations discussion below, we provide an overview of our total consolidated revenues, total consolidated operating expenses and total consolidated operating margin, all of which are presented on a GAAP basis. We also present a GAAP-based discussion below for substantially all of the other expense items as presented in our condensed consolidated statements of operations that are not directly attributable to our three businesses. In addition, we discuss below the results of each of our three businesses—cloud and license, hardware and services—which are our operating segments as defined pursuant to ASC 280, Segment Reporting . The financial reporting for 25 Table of Contents our three businesses that is presented below is presented in a manner that is consistent with that used by our CODMs. Our operating segment presentation below reflects revenues, direct costs and sales and marketing expenses that correspond to and are directly attributable to each of our three businesses. We also utilize these inputs to calculate and present a segment margin for each of our three businesses in the discussion below. Consistent with our internal management reporting processes, research and development expenses, general and administrative expenses, stock-based compensation expenses, amortization of intangible assets, certain other expense allocations, acquisition related and other expenses, restructuring expenses, interest expense, non-operating expenses, net and provision for income taxes are not attributed to our three operating segments because our management does not view the performance of our three businesses including such items and/or it is impracticable to do so. Refer to “Supplemental Disclosure Related to Certain Charges” below for additional discussion of certain of these items and Note 9 of Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report for a reconciliation of the summations of total segment margin as presented in the discussion below to total income before income taxes as presented per our condensed consolidated statements of operations for all periods presented. Constant Currency Presentation Our international operations have provided and are expected to continue to provide a significant portion of each of our businesses’ revenues and expenses. As a result, each of our businesses’ revenues and expenses and our total revenues and expenses will continue to be affected by changes in the U.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. 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, 2023, 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 February 29, 2024 and February 28, 2023, our financial statements would reflect reported revenues of $1.08 million in the first nine months of fiscal 2024 (using 1.08 as the month-end average exchange rate for the period) and $1.05 million in the first nine months of fiscal 2023 (using 1.05 as the month-end average exchange rate for the period). The constant currency presentation, however, would translate the results for each of the first nine months of fiscal 2024 and 2023 using the May 31, 2023 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. 26 Table of Contents Total Revenues and Operating Expenses Three Months Ended Nine Months Ended February 29, Percent Change February 28, February 29, Percent Change February 28, (Dollars in millions) 2024 Actual Constant 2023 2024 Actual Constant 2023 Total Revenues by Geography : Americas $ 8,270 8% 7% $ 7,671 $ 24,177 7% 6% $ 22,649 EMEA (1) 3,316 8% 6% 3,067 9,491 10% 6% 8,653 Asia Pacific 1,694 2% 6% 1,660 5,006 4% 7% 4,816 Total revenues 13,280 7% 7% 12,398 38,674 7% 6% 36,118 Total Operating Expenses 9,530 4% 4% 9,138 28,007 3% 3% 27,165 Total Operating Margin $ 3,750 15% 15% $ 3,260 $ 10,667 19% 17% $ 8,953 Total Operating Margin % 28% 26% 28% 25% % Revenues by Geography : Americas 62% 62% 62% 63% EMEA 25% 25% 25% 24% Asia Pacific 13% 13% 13% 13% Total Revenues by Business : Cloud and license $ 11,219 10% 10% $ 10,211 $ 32,392 10% 9% $ 29,565 Hardware 754 -7% -7% 811 2,224 -8% -9% 2,424 Services 1,307 -5% -5% 1,376 4,058 -2% -2% 4,129 Total revenues $ 13,280 7% 7% $ 12,398 $ 38,674 7% 6% $ 36,118 % Revenues by Business : Cloud and license 84% 82% 83% 82% Hardware 6% 7% 6% 7% Services 10% 11% 11% 11% (1) Comprised of Europe, the Middle East and Africa Excluding the effects of foreign currency rate fluctuations, our total revenues increased in the fiscal 2024 periods presented, relative to the corresponding prior year periods, due to growth in our cloud and license business’ revenues, which were partially offset by a decline in our hardware business’ and services business’ revenues. The constant currency revenues increase in our cloud and license business in the fiscal 2024 periods presented, relative to the corresponding prior year periods, was attributable to growth in our cloud services and license support revenues as customers purchased our applications and infrastructure technologies via cloud and license deployment models and also renewed their related cloud contracts and license support contracts to continue to gain access to the latest versions of our technologies and to receive support services, partially offset by a decrease in our cloud license and on-premise license revenues. In our hardware business, the decrease in revenues in the fiscal 2024 periods presented was due to the emphasis we placed on the marketing and sale of our growing cloud-based infrastructure technologies and strategic hardware offerings and the de-emphasis of our sales and marketing efforts for certain of our non-strategic hardware products and related support services. In our services business, the constant currency decrease in revenues in the fiscal 2024 periods presented was attributable to a decrease in revenues from each of our primary services offerings. In constant currency, the Americas region contributed 67% and 63%, the EMEA region contributed 21% and 23% and the Asia Pacific region contributed 12% and 14% of the constant currency total revenue growth during the third quarter and first nine months of fiscal 2024, respectively. 27 Table of Contents Excluding the effects of foreign currency rate fluctuations, our total operating expenses increased in the fiscal 2024 periods presented, relative to the corresponding prior year periods, due to higher cloud services and license support expenses, which were primarily due to higher infrastructure investments that were made to support the increase in our cloud and license business’ revenues; higher research and development expenses, which were primarily due to higher employee related expenses; and higher acquisition related and other expenses, which were primarily due to certain asset impairment charges. These increases in operating expenses were partially offset by lower hardware expenses in line with lower hardware revenues; lower sales and marketing expenses, which were primarily due to lower employee related expenses; lower expenses for amortization of intangible assets as certain of our assets were fully amortized; and lower general and administrative expenses. During the third quarter of fiscal 2024, the constant currency decrease in services expenses partially offset the increase in total operating expenses, while the constant currency increase in restructuring expenses contributed to higher total operating expenses. In constant currency, services expenses contributed to higher total operating expenses and lower restructuring expenses partially offset the increases in total operating expenses during the first nine months of fiscal 2024. In constant currency, our total operating margin and total operating margin as a percentage of revenues increased in the fiscal 2024 periods presented, relative to the corresponding prior year periods, due to higher 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 and expenses related to acquisitions and certain other expense and income items that affected our GAAP net income: Three Months Ended Nine Months Ended (in millions) February 29, 2024 February 28, 2023 February 29, 2024 February 28, 2023 Amortization of intangible assets (1) $ 749 $ 886 $ 2,267 $ 2,712 Acquisition related and other (2) 155 37 214 140 Restructuring (3) 90 78 311 359 Stock-based compensation, operating segments (4) 368 316 1,014 864 Stock-based compensation, R&D and G&A (4) 680 608 1,913 1,719 Income tax effects (5) (461 ) (439 ) (1,939 ) (1,457 ) $ 1,581 $ 1,486 $ 3,780 $ 4,337 (1) Represents the amortization of intangible assets, substantially all of which were acquired in connection with our acquisitions. As of February 29, 2024, estimated future amortization related to intangible assets was as follows (in millions): Remainder of fiscal 2024 $ 739 Fiscal 2025 2,303 Fiscal 2026 1,639 Fiscal 2027 672 Fiscal 2028 635 Fiscal 2029 561 Thereafter 1,080 Total intangible assets, net $ 7,629 (2) Acquisition related and other expenses consist of personnel related costs for transitional and certain other employees, certain business combination adjustments including certain adjustments after the measurement period has ended and certain other operating items, net. (3) Restructuring expenses in the fiscal 2024 periods presented primarily related to employee severance in connection with the Fiscal 2024 Oracle Restructuring Plan (2024 Restructuring Plan). Restructuring expenses in the fiscal 2023 periods presented primarily related to employee severance in connection with the Fiscal 2022 Oracle Restructuring Plan (2022 Restructuring Plan). Additional information regarding certain of our restructuring plans is provided in management’s discussion below under “Restructuring Expenses,” in Note 5 of Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report and in Note 8 of Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended May 31, 2023. 28 Table of Contents (4) Stock-based compensation was included in the following operating expense line items of our condensed consolidated statements of operations (in millions): Three Months Ended Nine Months Ended February 29, 2024 February 28, 2023 February 29, 2024 February 28, 2023 Cloud services and license support $ 138 $ 114 $ 386 $ 319 Hardware 6 5 17 13 Services 45 39 123 99 Sales and marketing 179 158 488 433 Stock-based compensation, operating segments 368 316 1,014 864 Research and development 584 517 1,642 1,448 General and administrative 96 91 271 271 Total stock-based compensation $ 1,048 $ 924 $ 2,927 $ 2,583 (5) For all periods presented, the applicable jurisdictional tax rates applied to our income before income taxes after excluding the tax effects of items within the table above such as for stock-based compensation, amortization of intangible assets, restructuring, and certain acquisition related and other items, and after excluding the net deferred tax effects associated with a previously recorded income tax benefit that resulted from a partial realignment of our legal entity structure. These adjustments resulted in effective tax rates of 18.9% and 18.8%, instead of 16.2% and 8.0%, respectively, for the third quarter and first nine months of fiscal 2024 and 18.4% and 19.4%, instead of 14.5% and 13.8%, respectively, for the third quarter and first nine months of fiscal 2023, which in each case represented our effective tax rates as derived per our condensed consolidated statements of operations. Cloud and License Business Our cloud and license business engages in the sale and marketing of our applications and infrastructure technologies that are delivered through various deployment models and include: Oracle license support offerings; Oracle Cloud Services offerings; and Oracle cloud license and on-premise license offerings. License support revenues are typically generated through the sale of applications and infrastructure software license support contracts related to cloud licenses and on-premise licenses; are purchased by our customers at their option; and are generally recognized as revenues ratably over the contractual term, which is generally one year. Our cloud services deliver applications and infrastructure technologies on a subscription basis via cloud-based deployment models that we develop, provide unspecified updates and enhancements for, deploy, host, manage and support. Revenues for our cloud services are generally recognized ratably 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. 29 Table of Contents Three Months Ended Nine Months Ended February 29, Percent Change February 28, February 29, Percent Change February 28, (Dollars in millions) 2024 Actual Constant 2023 2024 Actual Constant 2023 Cloud and License Revenues : Americas $ 7,102 12% 11% $ 6,368 $ 20,537 10% 10% $ 18,662 EMEA 2,738 9% 7% 2,503 7,815 11% 7% 7,037 Asia Pacific 1,379 3% 7% 1,340 4,040 5% 7% 3,866 Total revenues 11,219 10% 10% 10,211 32,392 10% 9% 29,565 Expenses : Cloud services and license support (1) 2,288 24% 24% 1,842 6,433 24% 23% 5,209 Sales and marketing (1) 1,758 -6% -7% 1,874 5,339 -7% -8% 5,738 Total expenses (1) 4,046 9% 8% 3,716 11,772 8% 7% 10,947 Total Margin $ 7,173 10% 10% $ 6,495 $ 20,620 11% 10% $ 18,618 Total Margin % 64% 64% 64% 63% % Revenues by Geography : Americas 63% 62% 63% 63% EMEA 25% 25% 24% 24% Asia Pacific 12% 13% 13% 13% Revenues by Offerings : Cloud services $ 5,054 25% 24% $ 4,053 $ 14,464 26% 25% $ 11,445 License support 4,909 1% 1% 4,870 14,685 1% 0% 14,493 Cloud license and on-premise license 1,256 -3% -3% 1,288 3,243 -11% -11% 3,627 Total revenues $ 11,219 10% 10% $ 10,211 $ 32,392 10% 9% $ 29,565 Cloud Services and License Support Revenues by Ecosystem : Applications cloud services and license support $ 4,584 10% 10% $ 4,166 $ 13,529 10% 10% $ 12,262 Infrastructure cloud services and license support 5,379 13% 13% 4,757 15,620 14% 13% 13,676 Total cloud services and license support revenues $ 9,963 12% 11% $ 8,923 $ 29,149 12% 11% $ 25,938 (1) Excludes stock-based compensation and certain expense allocations. Also excludes amortization of intangible assets and certain other GAAP-based expenses, which were not allocated to our operating segment results for purposes of reporting to and review by our CODMs, as further described under “Presentation of Operating Segment Results and Other Financial Information” above. Excluding the effects of foreign currency rate fluctuations, our cloud and license business’ total revenues increased in the fiscal 2024 periods presented, relative to the corresponding prior year periods, due to growth in our cloud services and license support revenues as customers purchased our applications and infrastructure technologies via cloud and license deployment models and renewed their related cloud contracts and license support contracts to continue to gain access to the latest versions of our technologies and to receive support services for which we delivered such cloud and support services during the periods presented. The growth in our cloud services and license support revenues was partially offset by a decrease in our cloud license and on-premise license revenues. In constant currency, the Americas region contributed 72% and 69%, the EMEA region contributed 18% and 20% and the Asia Pacific region contributed 10% and 11% of the constant currency revenue growth for this business during the third quarter and first nine months of fiscal 2024, respectively. In constant currency, our total cloud and license business’ expenses increased in the fiscal 2024 periods presented, relative to the corresponding prior year periods, primarily due to higher technology infrastructure expenses to support the increase in our cloud and license business’ revenues. These constant currency expense increases were partially offset by lower sales and marketing expenses, which decreased primarily due to lower employee related expenses due to lower headcount. Our cloud services and license support expenses have grown in recent periods, and we expect this growth to continue during fiscal 2024 as we increase our existing data center capacity and establish data centers in new geographic locations in order to meet current and expected customer demand. Excluding the effects of currency rate fluctuations, our cloud and license business’ total margin increased in the fiscal 2024 periods presented, relative to the corresponding prior year periods, due to increases in total revenues for this business. In constant currency, total margin as a percentage of revenues remained flat in the third quarter of fiscal 30 Table of Contents 2024 and increased in the first nine months of fiscal 2024, due to increases in total revenues, in each case relative to the corresponding prior year period. Hardware Business Our hardware business’ revenues are generated from the sales of our Oracle Engineered Systems, server, storage and industry-specific hardware offerings. The hardware product and related software, such as an operating system or firmware, are highly interdependent and interrelated and are accounted for as a combined performance obligation. The revenues for this combined performance obligation are generally recognized at the point in time that the hardware product is delivered to the customer and ownership is transferred to the customer. Our hardware business also earns revenues from the sale of hardware support contracts purchased by our customers at their option and that are generally recognized as revenues ratably as the hardware support services are delivered over the contractual term, which is generally one year. The majority of our hardware products are sold through indirect channels such as independent distributors and value-added resellers and we also market and sell our hardware products through our direct sales force. Operating expenses associated with our hardware business include the cost of hardware products, which consists of expenses for materials and labor used to produce these products by our internal manufacturing operations or by third-party manufacturers, warranty and related expenses and the impact of periodic changes in inventory valuation, including the impact of inventory determined to be excess and obsolete; the cost of materials used to repair customer products with eligible support contracts; the cost of labor and infrastructure to provide support services; and sales and marketing expenses, which are largely personnel related and include variable compensation earned by our sales force for the sales of our hardware offerings. Three Months Ended Nine Months Ended February 29, Percent Change February 28, February 29, Percent Change February 28, (Dollars in millions) 2024 Actual Constant 2023 2024 Actual Constant 2023 Hardware Revenues : Americas $ 360 -9% -9% $ 394 $ 1,074 -14% -15% $ 1,248 EMEA 242 -3% -5% 251 676 -4% -7% 704 Asia Pacific 152 -9% -5% 166 474 0% 2% 472 Total revenues 754 -7% -7% 811 2,224 -8% -9% 2,424 Expenses : Hardware products and support (1) 208 -12% -12% 236 623 -18% -19% 758 Sales and marketing (1) 72 -11% -11% 81 220 -10% -10% 243 Total expenses (1) 280 -12% -12% 317 843 -16% -17% 1,001 Total Margin $ 474 -4% -4% $ 494 $ 1,381 -3% -4% $ 1,423 Total Margin % 63% 61% 62% 59% % Revenues by Geography : Americas 48% 49% 48% 52% EMEA 32% 31% 31% 29% Asia Pacific 20% 20% 21% 19% (1) Excludes stock-based compensation and certain expense allocations. Also excludes amortization of intangible assets and certain other GAAP-based expenses, which were not allocated to our operating segment results for purposes of reporting to and review by our CODMs, as further described under “Presentation of Operating Segment Results and Other Financial Information” above. Our constant currency hardware revenues decreased in the fiscal 2024 periods presented, relative to the corresponding prior year periods, primarily due to our continued emphasis on the marketing and sale of our cloud-based infrastructure technologies and strategic hardware offerings and the de-emphasis of our sales and marketing efforts for certain of our non-strategic hardware products, which resulted in reduced sales volumes of certain of our hardware product lines and also impacted the volume of hardware support contracts sold in recent periods. Geographically, we experienced constant currency revenue declines in all regions in the fiscal 2024 periods presented, except for a constant currency revenue increase in the Asia Pacific region in the first nine months of fiscal 2024. 31 Table of Contents Excluding the effects of currency rate fluctuations, total hardware expenses decreased in the fiscal 2024 periods presented, relative to the corresponding prior year periods, primarily due to lower hardware product expenses and lower sales and marketing costs, all of which aligned to lower hardware revenues. In constant currency, our hardware business’ total margin decreased in the fiscal 2024 periods presented due to lower total revenues for this business and total margin as a percentage of revenues increased in the fiscal 2024 periods presented due to lower total expenses for this business, in each case relative to the corresponding prior year period. Services Business Our services offerings are designed to help maximize the performance of customer investments in Oracle applications and infrastructure technologies and include our consulting services and advanced customer services offerings. Services revenues are generally recognized over time as the services are performed. The cost of providing our services consists primarily of personnel related expenses, technology infrastructure expenditures, facilities expenses and external contractor expenses. Three Months Ended Nine Months Ended February 29, Percent Change February 28, February 29, Percent Change February 28, (Dollars in millions) 2024 Actual Constant 2023 2024 Actual Constant 2023 Services Revenues : Americas $ 808 -11% -11% $ 909 $ 2,566 -6% -7% $ 2,739 EMEA 336 7% 5% 313 1,000 10% 6% 912 Asia Pacific 163 6% 11% 154 492 3% 5% 478 Total revenues 1,307 -5% -5% 1,376 4,058 -2% -2% 4,129 Total Expenses (1) 1,120 -2% -3% 1,147 3,431 5% 4% 3,265 Total Margin $ 187 -18% -18% $ 229 $ 627 -27% -28% $ 864 Total Margin % 14% 17% 15% 21% % Revenues by Geography : Americas 62% 66% 63% 66% EMEA 26% 23% 25% 22% Asia Pacific 12% 11% 12% 12% (1) Excludes stock-based compensation and certain allocations. Also excludes certain other GAAP-based expenses, which were not allocated to our operating segment results for purposes of reporting to and review by our CODMs, as further described under “Presentation of Operating Segment Results and Other Financial Information” above. Excluding the effects of currency rate fluctuations, our total services revenues decreased in the fiscal 2024 periods presented, relative to the corresponding prior year periods, due to a decrease in revenues in each of our primary services offerings. Constant currency decreases in services revenues in the Americas region were partially offset by constant currency increases in services revenues in the EMEA and the Asia Pacific regions in the fiscal 2024 periods presented. In constant currency, total services expenses decreased in the third quarter of fiscal 2024, primarily due to a decrease in employee related expenses and external contractor expenses, and increased in the first nine months of fiscal 2024, primarily due to an increase in employee related expenses and bad debt expenses, partially offset by a decrease in external contractor expenses, in each case relative to the corresponding prior year period. In constant currency, our services business’ total margin and total margin as a percentage of revenues decreased in the fiscal 2024 periods presented due to lower total revenues for this business, and in the first nine months of fiscal 2024, also due to an increase in expenses, in each case relative to the corresponding prior year period. 32 Table of Contents 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 Nine Months Ended February 29, Percent Change February 28, February 29, Percent Change February 28, (Dollars in millions) 2024 Actual Constant 2023 2024 Actual Constant 2023 Research and development (1) $ 1,664 2% 2% $ 1,629 $ 5,047 2% 2% $ 4,949 Stock-based compensation 584 13% 13% 517 1,642 13% 13% 1,448 Total expenses $ 2,248 5% 5% $ 2,146 $ 6,689 5% 4% $ 6,397 % of Total Revenues 17% 17% 17% 18% (1) Excluding stock-based compensation On a constant currency basis, total research and development expenses increased in the fiscal 2024 periods presented, relative to the corresponding prior year periods, primarily due to higher employee related expenses, including higher stock-based compensation expenses. 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 Nine Months Ended February 29, Percent Change February 28, February 29, Percent Change February 28, (Dollars in millions) 2024 Actual Constant 2023 2024 Actual Constant 2023 General and administrative (1) $ 281 -10% -10% $ 311 $ 875 -4% -5% $ 908 Stock-based compensation 96 6% 6% 91 271 0% 0% 271 Total expenses $ 377 -6% -7% $ 402 $ 1,146 -3% -4% $ 1,179 % of Total Revenues 3% 3% 3% 3% (1) Excluding stock-based compensation Excluding the effects of currency rate fluctuations, our total general and administrative expenses decreased in the fiscal 2024 periods presented, relative to the corresponding prior year periods, primarily due to lower professional fees and lower external contractors cost. 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. Refer to Note 4 of Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report for additional information regarding our intangible assets and related amortization. Three Months Ended Nine Months Ended February 29, Percent Change February 28, February 29, Percent Change February 28, (Dollars in millions) 2024 Actual Constant 2023 2024 Actual Constant 2023 Developed technology $ 170 -2% -2% $ 173 $ 507 -18% -18% $ 621 Cloud services and license support agreements and related relationships 253 -34% -34% 386 781 -31% -31% 1,135 Cloud license and on-premise license agreements and related relationships 117 0% 0% 117 350 2% 2% 342 Other 209 -1% -1% 210 629 2% 2% 614 Total amortization of intangible assets $ 749 -15% -15% $ 886 $ 2,267 -16% -16% $ 2,712 Amortization of intangible assets decreased in the fiscal 2024 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. 33 Table of Contents Acquisition Related and Other Expenses : Acquisition related and other expenses consist of personnel related costs for transitional and certain other employees, certain business combination adjustments, including adjustments after the measurement period has ended, and certain other operating items, net. Three Months Ended Nine Months Ended February 29, Percent Change February 28, February 29, Percent Change February 28, (Dollars in millions) 2024 Actual Constant 2023 2024 Actual Constant 2023 Transitional and other employee related costs $ 5 -69% -69% $ 15 $ 17 -69% -69% $ 52 Business combination adjustments, net 4 142% 142% 2 17 80% 78% 10 Other, net 146 611% 611% 20 180 132% 130% 78 Total acquisition related and other expenses $ 155 317% 317% $ 37 $ 214 53% 52% $ 140 On a constant currency basis, acquisition related and other expenses increased in the fiscal 2024 periods presented, relative to the corresponding prior year periods, due to higher other expenses primarily related to certain asset impairment charges and higher expenses for business combination adjustments, partially offset by lower transitional and other employee related costs. Restructuring Expenses : Restructuring expenses resulted from the execution of management-approved restructuring plans that were generally developed to improve our cost structure and/or operations, often in conjunction with our acquisition integration strategies and/or other strategic initiatives. Restructuring expenses consist of employee severance costs, contract termination costs and certain other exit costs to improve our cost structure prospectively. For additional information regarding our restructuring plans, see Note 5 of Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report and Note 8 of Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended May 31, 2023. Three Months Ended Nine Months Ended February 29, Percent Change February 28, February 29, Percent Change February 28, (Dollars in millions) 2024 Actual Constant 2023 2024 Actual Constant 2023 Restructuring expenses $ 90 15% 14% $ 78 $ 311 -13% -14% $ 359 Restructuring expenses in the fiscal 2024 periods presented primarily related to the 2024 Restructuring Plan. Restructuring expenses in the fiscal 2023 periods presented primarily related to the 2022 Restructuring Plan, which is substantially complete. Our management approved, committed to and initiated the 2024 Restructuring Plan and the 2022 Restructuring Plan in order to restructure and further improve efficiencies in our operations. We may incur additional restructuring expenses in future periods due to the initiation of new restructuring plans or from changes in estimated costs associated with existing restructuring plans. The majority of the initiatives undertaken by the 2024 Restructuring Plan were effected to implement our continued emphasis in developing, marketing, selling and delivering our cloud-based offerings. Certain of the cost savings realized pursuant to the 2024 Restructuring Plan initiatives were offset by investments in resources and geographies that we believe better address the development, marketing, sale and delivery of our cloud‑based offerings, including investments in the development and delivery of our second‑generation cloud infrastructure. Interest Expense : Three Months Ended Nine Months Ended February 29, Percent Change February 28, February 29, Percent Change February 28, (Dollars in millions) 2024 Actual Constant 2023 2024 Actual Constant 2023 Interest expense $ 876 -3% -3% $ 908 $ 2,636 3% 3% $ 2,550 34 Table of Contents Fiscal Third Quarter 2024 Compared to Fiscal Third Quarter 2023 : Interest expense decreased in the third quarter of fiscal 2024, relative to the corresponding prior year period, primarily due to $1.3 billion and $3.5 billion of scheduled repayments made during the second half of fiscal 2023 and the first nine months of fiscal 2024, respectively, and the repayment of borrowings pursuant to a $15.7 billion delayed draw term loan credit agreement (Bridge Credit Agreement) in fiscal 2023. The decrease in interest expense was partially offset by higher average borrowings resulting from our issuance of $5.3 billion of senior notes in the third quarter of fiscal 2023. First Nine Months Fiscal 2024 Compared to First Nine Months Fiscal 2023 : Interest expense increased in the first nine months of fiscal 2024, relative to the corresponding prior year period, primarily due to higher average borrowings resulting from our issuance of $12.3 billion of senior notes and $5.6 billion of borrowings pursuant to a term loan credit agreement in fiscal 2023 and higher average commercial paper outstanding in the first nine months of fiscal 2024. The increase in interest expense was partially offset by lower interest expense that resulted from $3.8 billion and $3.5 billion of scheduled repayments made during fiscal 2023 and the first nine months of fiscal 2024, respectively, and the repayment of borrowings pursuant to the Bridge Credit Agreement during fiscal 2023. Non-Operating Expenses, net : Non-operating expenses, net consists primarily of interest income, net foreign currency exchange losses, the noncontrolling interests in the net profits of our majority-owned subsidiaries (primarily Oracle Financial Services Software Limited and Oracle Corporation Japan), net losses related to equity investments, including losses attributable to equity method investments (primarily Ampere) and net other income and expenses, including net unrealized gains and losses from our investment portfolio related to our deferred compensation plan and non-service net periodic pension income and losses. Three Months Ended Nine Months Ended February 29, Percent Change February 28, February 29, Percent Change February 28, (Dollars in millions) 2024 Actual Constant 2023 2024 Actual Constant 2023 Interest income $ 111 22% 23% $ 90 $ 380 110% 112% $ 180 Foreign currency losses, net (59 ) 6% 6% (55 ) (172 ) -5% -8% (181 ) Noncontrolling interests in income (51 ) 24% 24% (41 ) (130 ) 8% 8% (120 ) Losses from equity investments, net (94 ) -24% -25% (122 ) (290 ) 17% 16% (249 ) Other income (expenses), net 84 * * (6 ) 140 * * (16 ) Total non-operating expenses, net $ (9 ) -94% -93% $ (134 ) $ (72 ) -81% -82% $ (386 ) * Not meaningful Our non-operating expenses, net decreased in the fiscal 2024 periods presented, relative to the corresponding prior year periods, primarily due to higher interest income due to a combination of higher average interest-bearing balances and higher average interest rates that were applicable to such balances; and higher other income, net, which was primarily attributable to unrealized investment gains associated with certain marketable equity securities that we held for employee benefit plans, and for which an equal and offsetting amount was recorded to our operating expenses during the same periods. Losses from equity investments were lower during the third quarter of fiscal 2024, contributing to lower non-operating expenses, net, and were higher for the first nine months of fiscal 2024, partially offsetting the decrease in non-operating expenses, net, in each case relative to the corresponding prior year period. Provision for Income Taxes : Our effective income tax rates for each of the periods presented were the result of the mix of income earned in various tax jurisdictions that apply a broad range of income tax rates. Refer to Note 8 of Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report for a discussion regarding the differences between the effective income tax rates as presented for the periods below and the U.S. federal statutory income tax rates that were in effect during these periods. 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. 35 Table of Contents Three Months Ended Nine Months Ended February 29, Percent Change February 28, February 29, Percent Change February 28, (Dollars in millions) 2024 Actual Constant 2023 2024 Actual Constant 2023 Provision for income taxes $ 464 44% 44% $ 322 $ 636 -24% -25% $ 833 Effective tax rate 16.2% 14.5% 8.0% 13.8% Fiscal Third Quarter 2024 Compared to Fiscal Third Quarter 2023 : Provision for income taxes increased in the third quarter of fiscal 2024, relative to the corresponding prior year period, primarily due to changes in unrecognized tax benefits, higher income before provision for income taxes and an unfavorable jurisdictional mix of earnings, partially offset by the realization of a one-time tax attribute. First Nine Months Fiscal 2024 Compared to First Nine Months Fiscal 2023 : Provision for income taxes decreased in the first nine months of fiscal 2024, relative to the corresponding prior year period, primarily due to an increase in tax benefits related to stock-based compensation, the realization of a one-time tax attribute and the revaluation of net deferred tax assets due to a change in tax rate, partially offset by the combination of higher income before provision for income taxes, an unfavorable jurisdictional mix of earnings and changes in unrecognized tax benefits. Liquidity and Capital Resources (Dollars in millions) February 29, 2024 Change May 31, 2023 Working capital $ (3,822 ) 83% $ (2,086 ) Cash, cash equivalents and marketable securities $ 9,904 -3% $ 10,187 Working capital : The decrease in working capital as of February 29, 2024 in comparison to May 31, 2023 was primarily due to $4.0 billion of long-term senior notes that were reclassified to current liabilities, cash used to pay dividends to our stockholders, cash used for capital expenditures, cash used for purchases of non-marketable investments, net cash used for our employee stock programs and cash used for repurchases of our common stock during the first nine months of fiscal 2024. These unfavorable impacts were partially offset by favorable impacts to our net current assets resulting from net income during the first nine months of fiscal 2024. Our working capital may be impacted by some or all of the aforementioned factors in future periods, the amounts and timing of which are variable. Cash, cash equivalents and marketable securities : Cash and cash equivalents primarily consist of deposits held at major banks, money market funds and other securities with original maturities of 90 days or less. Marketable securities consist of time deposits, marketable equity securities and certain other securities. The decrease in cash, cash equivalents and marketable securities at February 29, 2024 in comparison to May 31, 2023 was primarily due to $3.5 billion of repayment of senior notes due July 2023 and September 2023, cash used for capital expenditures and purchases of non-marketable investments, payments of cash dividends to our stockholders, net cash used for our employee stock programs and repurchases of our common stock. This decrease was partially offset by cash inflows from our operations and our issuances of commercial paper notes, net of repayments, during the first nine months of fiscal 2024. Our cash and cash equivalents may be impacted by some or all of the aforementioned factors in future periods, the amounts and timing of which are variable. Nine Months Ended (Dollars in millions) February 29, 2024 Change February 28, 2023 Net cash provided by operating activities $ 12,592 9% $ 11,518 Net cash used for investing activities $ (4,594 ) -87% $ (34,872 ) Net cash (used for) provided by financing activities $ (8,280 ) * $ 10,350 * Not meaningful 36 Table of Contents 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 and cloud services agreements. Customers for these license support and cloud services agreements are generally billed in advance of services being provided. Over the course of a fiscal year, we also have historically generated cash from the sales of new licenses, hardware offerings and other services. Our primary uses of cash from operating activities are typically for employee related expenditures, material and manufacturing costs related to the production of our hardware products, taxes, interest payments and leased facilities. Net cash provided by operating activities increased during the first nine months of fiscal 2024, relative to the corresponding prior year period, primarily due to higher net income, partially offset by certain cash unfavorable working capital changes, net. Cash flows from investing activities : The changes in cash flows from investing activities primarily relate to our acquisitions, the timing of our purchases, maturities and sales of our investments in marketable securities and other instruments and investments in capital and other assets, including certain intangible assets, to support our growth. Net cash used for investing activities decreased during the first nine months of fiscal 2024, relative to the corresponding prior year period, primarily due to the decrease in cash used for acquisitions, net of cash acquired and lower capital expenditures. 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 was $8.3 billion during the first nine months of fiscal 2024 compared to the net cash provided by financing activities of $10.4 billion in the first nine months of fiscal 2023. The increase in net cash used for financing activities was primarily due to the absence of the cash proceeds from borrowings, net of repayments pursuant to the Bridge Credit Agreement, lower net proceeds from issuances and repayments of commercial paper notes, higher net cash used for our employee stock programs and higher dividend payments, partially offset by lower maturities of senior notes and lower stock repurchases, in each case during the first nine months of fiscal 2024 relative to the first nine months of fiscal 2023. 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 (Dollars in millions) February 29, 2024 Change February 28, 2023 Net cash provided by operating activities $ 18,239 18% $ 15,503 Capital expenditures (5,981 ) -27% (8,205 ) Free cash flow $ 12,258 68% $ 7,298 Net income $ 10,642 $ 8,373 Net cash provided by operating activities as a percent of net income 171% 185% Free cash flow as percent of net income 115% 87% 37 Table of Contents Contractual Obligations : During the first nine months of fiscal 2024, 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 the fiscal year ended May 31, 2023, other than an increase in our operating lease commitments to $18.8 billion and an increase in our unconditional purchase obligations to $4.4 billion as of February 29, 2024. Our operating lease commitments, which are primarily for data centers, are generally expected to commence between the remainder of fiscal 2024 and fiscal 2027 and for terms of nine to fifteen years. Our unconditional purchase obligations are primarily related to capital expenditures for our data centers and a significant majority of these obligations are expected to be settled within the next twelve months. We have not recorded these lease commitments on our Condensed Consolidated Balance Sheets as of February 29, 2024. Refer to Note 10 of Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended May 31, 2023 for more information about our lease commitments. We believe that our current cash, cash equivalents and marketable securities balances, cash generated from operations, and our borrowing arrangements will be sufficient to meet our working capital, capital expenditures and contractual obligations 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. 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 recognize that stock-based awards 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 since June 1, 2020 has been an annualized rate of 1.6% per year. The potential dilution percentage is calculated as the average annualized new stock-based awards granted and assumed, net of 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-based awards vest and, if applicable, are exercised. Of the outstanding stock options at February 29, 2024, 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 partially 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. At February 29, 2024, the maximum potential dilution from all outstanding stock-based awards, regardless of when granted and regardless of whether vested or unvested, was 7.2%. 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. Item 3. Quantitative and Qualitat ive Disclosures About Market Risk There were no significant changes to our quantitative and qualitative disclosures about market risk during the first nine months of fiscal 2024. Please refer to Part II, Item 7A Quantitative and Qualitative Disclosures about Market Risk included in our Annual Report on Form 10-K for the fiscal year ended May 31, 2023 for a more complete discussion of the market risks we encounter. 38 Table of Contents