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 significant 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) needs. 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 8 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 85% of our total revenues on a trailing 4-quarter basis, markets, sells and delivers a broad spectrum of enterprise applications and infrastructure technologies through our cloud and license offerings. Revenue streams included in our cloud and license business are: • Cloud services and license support revenues, which include: o 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 Cloud Applications and Oracle Cloud Infrastructure (collectively Oracle Cloud Services) arrangements generally: are billed in advance of the cloud services being delivered; have durations of one to four years; are renewed at the customer’s option; and are 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; billed in advance of the support services being performed; renewed at the customer’s option; and 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 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 22 Table of Contents 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 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 42% of our total revenues for each of the three- and six-month periods ended November 30, 2024, and 37% of our total revenues for each of the three- and six-month periods ended November 30, 2023. 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 offerings; 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 5% of our total revenues on a trailing 4-quarter basis, provides a broad selection of enterprise hardware products and hardware-related software products including Oracle Engineered Systems, servers, storage, industry-specific hardware offerings, operating systems, virtualization, management and other hardware-related software and related hardware support. Each hardware product and its related software, such as an operating system or firmware, are highly interdependent and interrelated and are accounted for as a combined performance obligation. The revenues for this combined performance obligation are generally recognized 23 Table of Contents 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 continue 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. 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, after accounting for losses under the equity method of accounting, was $1.5 billion as of November 30, 2024. 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 November 30, 2024. We also own convertible debt investments in Ampere which, under the terms of an agreement with Ampere and other co-investors, will mature in June 2026 and are convertible into equity securities at the holder’s option under certain circumstances. During the six months ended November 30, 2024, we invested an aggregate of $135 million in convertible debt instruments issued by Ampere. In accordance with the terms of an agreement with other co-investors, we are also a counterparty to certain put (exercisable by a co-investor) and call (exercisable by Oracle) options at prices of approximately $450 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), which requires us to make certain estimates, judgments and assumptions that can affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosure. Critical accounting estimates are those estimates that involve a significant level of estimation uncertainty and have had, or are reasonably likely to have, a material impact on our financial condition or results of operations. 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. To the extent that there are differences between these estimates, judgments or assumptions and actual results, our financial statements will be affected. We have critical accounting estimates in the areas of business combinations, income taxes and non-marketable investments. During the first quarter of fiscal 2025, we completed an assessment of the useful lives of our servers and increased the estimated useful lives from five years to six years, effective at the beginning of fiscal 2025. Refer to Note 1 of Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report for more information. There were no other significant changes to our critical accounting estimates. Refer to “Critical Accounting 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, 2024 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 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 income (expenses), net and provision for income taxes are not attributed to our three operating segments 25 Table of Contents 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 8 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, 2024, 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 November 30, 2024 and 2023, our financial statements would reflect reported revenues of $1.06 million in the first half of fiscal 2025 (using 1.06 as the applicable average exchange rate for the period) and $1.10 million in the first half of fiscal 2024 (using 1.10 as the applicable average exchange rate for the period). The constant currency presentation, however, would translate the results for each of the first half of fiscal 2025 and 2024 using the May 31, 2024 exchange rate and indicate, in this example, no change in revenues between the periods compared. 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) 2024 Actual Constant 2023 2024 Actual Constant 2023 Total Revenues by Geography : Americas $ 8,933 11% 11% $ 8,067 $ 17,305 9% 9% $ 15,907 EMEA (1) 3,381 7% 5% 3,170 6,609 7% 6% 6,175 Asia Pacific 1,745 2% 2% 1,704 3,452 4% 5% 3,312 Total revenues 14,059 9% 9% 12,941 27,366 8% 8% 25,394 Total Operating Expenses 9,839 6% 6% 9,319 19,155 4% 4% 18,476 Total Operating Margin $ 4,220 17% 16% $ 3,622 $ 8,211 19% 19% $ 6,918 Total Operating Margin % 30% 28% 30% 27% % Revenues by Geography : Americas 64% 62% 63% 63% EMEA 24% 25% 24% 24% Asia Pacific 12% 13% 13% 13% Total Revenues by Business : Cloud and license $ 12,001 11% 11% $ 10,817 $ 23,389 10% 11% $ 21,173 Hardware 728 -4% -3% 756 1,383 -6% -5% 1,470 Services 1,330 -3% -3% 1,368 2,594 -6% -5% 2,751 Total revenues $ 14,059 9% 9% $ 12,941 $ 27,366 8% 8% $ 25,394 % Revenues by Business : Cloud and license 86% 83% 86% 83% Hardware 5% 6% 5% 6% Services 9% 11% 9% 11% (1) Comprised of Europe, the Middle East and Africa Total revenues increased by $1.1 billion and $2.0 billion in reported currency in the second quarter and the first half of fiscal 2025, respectively, relative to the corresponding prior year periods, due to a $1.2 billion and a $2.2 billion increase in cloud and license revenues, partially offset by a $28 million and an $87 million decrease in hardware 26 Table of Contents revenues and a $38 million and a $157 million decrease in services revenues, in each case during the second quarter and the first half of fiscal 2025, respectively, relative to the corresponding prior year periods. Excluding the unfavorable effects of foreign currency rate fluctuations of less than 1% in the second quarter of fiscal 2025 and 1% in the first half of fiscal 2025, the increase in our cloud and license business revenues was primarily due to growth in our cloud services revenues as customers purchased our applications and infrastructure technologies and also renewed their related cloud contracts to continue to gain access to the latest versions of our technologies. In constant currency, applications cloud services and license support contributed 25% and 28% and infrastructure cloud services and license support contributed 75% and 72% of the growth in cloud services and license support revenues, in each case in the second quarter and the first half of fiscal 2025, respectively. In our hardware business, the constant currency decrease in revenues in the fiscal 2025 periods presented was due to the emphasis we placed on the marketing and sale of our growing cloud-based infrastructure technologies. In our services business, the constant currency decrease in revenues in the fiscal 2025 periods presented was attributable to a decrease in revenues from each of our primary services offerings. The Americas region contributed 82% and 74%, the EMEA region contributed 15% and 18% and the Asia Pacific region contributed 3% and 8% to the constant currency total revenue growth during the second quarter and the first half of fiscal 2025, respectively. Total GAAP operating expenses increased by $520 million and $679 million in reported currency in the second quarter and the first half of fiscal 2025, respectively, relative to the corresponding prior year periods. The increase in GAAP operating expenses in reported currency was primarily due to a $472 million and an $892 million increase in cloud services and license support expenses primarily due to higher infrastructure expenses and higher employee related expenses, including higher expenses relating to stock-based compensation, that were incurred to support the growth in our cloud services revenues; a $245 million and a $335 million increase in research and development expenses primarily due to higher employee related expenses, including higher stock-based compensation expenses; and a $97 million and a $108 million increase in sales and marketing expenses, in each case during the second quarter and the first half of fiscal 2025, respectively, relative to the corresponding prior year periods. These increases in GAAP operating expenses in reported currency were partially offset by a $164 million and a $303 million decrease in expenses for the amortization of intangible assets as certain of our assets were fully amortized; an $86 million and a $151 million decrease in services expenses primarily due to lower bad debt expenses and lower external contractor expenses; and a $41 million and a $99 million decrease in hardware expenses due to lower hardware product and support costs, in each case during the second quarter and the first half of fiscal 2025, respectively, relative to the corresponding prior year periods. A $65 million decrease in restructuring expenses, relative to the corresponding prior year period, further offset the increase in operating expenses in the first half of fiscal 2025. In constant currency, our total operating margin and total operating margin as a percentage of revenues increased in the fiscal 2025 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 expenses, including stock-based compensation, that affected our GAAP net income: Three Months Ended November 30, Six Months Ended November 30, (in millions) 2024 2023 2024 2023 Amortization of intangible assets (1) $ 591 $ 755 $ 1,215 $ 1,518 Acquisition related and other (2) 31 47 44 58 Restructuring (3) 84 83 157 222 Stock-based compensation, operating segments (4) 414 362 765 646 Stock-based compensation, R&D and G&A (4) 756 667 1,411 1,232 Income tax effects (5) (820 ) (655 ) (1,500 ) (1,478 ) $ 1,056 $ 1,259 $ 2,092 $ 2,198 27 Table of Contents (1) Represents the amortization of intangible assets, all of which were acquired in connection with our acquisitions. As of November 30, 2024, estimated future amortization related to intangible assets was as follows (in millions): Remainder of fiscal 2025 $ 1,092 Fiscal 2026 1,639 Fiscal 2027 672 Fiscal 2028 635 Fiscal 2029 561 Fiscal 2030 522 Thereafter 558 Total intangible assets, net $ 5,679 (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 each of the fiscal 2025 and 2024 periods presented primarily related to employee severance in connection with the Fiscal 2024 Oracle Restructuring Plan (2024 Restructuring Plan). Additional information regarding certain of our restructuring plans is provided in management’s discussion below under “Restructuring Expenses,” in Note 4 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, 2024. (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 November 30, Six Months Ended November 30, 2024 2023 2024 2023 Cloud services and license support $ 158 $ 137 $ 299 $ 248 Hardware 8 6 14 11 Services 53 45 96 78 Sales and marketing 195 174 356 309 Stock-based compensation, operating segments 414 362 765 646 Research and development 657 573 1,226 1,057 General and administrative 99 94 185 175 Total stock-based compensation $ 1,170 $ 1,029 $ 2,176 $ 1,878 (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 20.1% and 19.5%, instead of 7.1% and 7.3%, respectively, for the second quarter and the first half of fiscal 2025 and 18.8% for each of the second quarter and the first half of fiscal 2024, instead of 8.0% and 3.4%, respectively, for the second quarter and the first half of fiscal 2024, 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 Cloud Services offerings; Oracle cloud license and on-premise license offerings; and Oracle license support offerings. 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 four 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. 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. 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 28 Table of Contents license business are included in cloud services and license support expenses and sales and marketing expenses. These costs are largely personnel and infrastructure related and include 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) 2024 Actual Constant 2023 2024 Actual Constant 2023 Cloud and License Revenues : Americas $ 7,773 14% 14% $ 6,839 $ 15,089 12% 13% $ 13,435 EMEA 2,815 8% 6% 2,604 5,502 8% 7% 5,077 Asia Pacific 1,413 3% 3% 1,374 2,798 5% 6% 2,661 Total revenues 12,001 11% 11% 10,817 23,389 10% 11% 21,173 Expenses : Cloud services and license support (1) 2,555 21% 21% 2,105 4,977 20% 20% 4,145 Sales and marketing (1) 1,888 5% 5% 1,797 3,659 2% 3% 3,582 Total expenses (1) 4,443 14% 14% 3,902 8,636 12% 12% 7,727 Total Margin $ 7,558 9% 9% $ 6,915 $ 14,753 10% 10% $ 13,446 Total Margin % 63% 64% 63% 64% % Revenues by Geography : Americas 65% 63% 64% 63% EMEA 23% 24% 24% 24% Asia Pacific 12% 13% 12% 13% Revenues by Offerings : Cloud services $ 5,937 24% 24% $ 4,775 $ 11,559 23% 23% $ 9,410 License support 4,869 0% 0% 4,864 9,765 0% 0% 9,776 Cloud license and on-premise license 1,195 1% 3% 1,178 2,065 4% 5% 1,987 Total revenues $ 12,001 11% 11% $ 10,817 $ 23,389 10% 11% $ 21,173 Cloud Services and License Support Revenues by Ecosystem : Applications cloud services and license support $ 4,784 7% 7% $ 4,474 $ 9,552 7% 7% $ 8,945 Infrastructure cloud services and license support 6,022 17% 17% 5,165 11,772 15% 16% 10,241 Total cloud services and license support revenues $ 10,806 12% 12% $ 9,639 $ 21,324 11% 11% $ 19,186 (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 cloud and license business’ total revenues increased by $1.2 billion and $2.2 billion in reported currency in the second quarter and the first half of fiscal 2025, respectively, relative to the corresponding prior year periods, primarily due to a $1.2 billion and a $2.1 billion increase in cloud services revenues as customers purchased our applications and infrastructure technologies and renewed their related cloud contracts to continue to gain access to the latest versions of our technologies for which we delivered such cloud services during the periods presented. In constant currency, applications cloud services and license support contributed 25% and 28% and infrastructure cloud services and license support contributed 75% and 72% of the growth in cloud services and license support revenues in the second quarter and the first half of fiscal 2025, respectively. The Americas region contributed 83% and 77%, the EMEA region contributed 14% and 16% and the Asia Pacific region contributed 3% and 7% to the constant currency revenue growth for this business during the second quarter and the first half of fiscal 2025, respectively. Total cloud and license business’ expenses increased by $541 million and $909 million in reported currency in the second quarter and the first half of fiscal 2025, respectively, relative to the corresponding prior year periods. Excluding the favorable effects of currency rate fluctuations of less than 1% in each of the second quarter and the first half of fiscal 2025, the increase in expenses was primarily due to a $307 million and a $561 million increase in infrastructure expenses, a $108 million and a $184 million increase in employee related expenses for employees engaged in cloud services delivery and a $93 million and a $92 million increase in sales and marketing expenses, in 29 Table of Contents each case in the second quarter and the first half of fiscal 2025, respectively, relative to the corresponding prior year periods, to support the increase in our cloud services revenues. Our cloud services and license support expenses have grown in recent periods, and we expect this trend to continue during fiscal 2025 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 2025 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 decreased in the fiscal 2025 periods presented, relative to the corresponding prior year periods, due to an increase in total expenses for this business. 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 November 30, Six Months Ended November 30, Percent Change Percent Change (Dollars in millions) 2024 Actual Constant 2023 2024 Actual Constant 2023 Hardware Revenues : Americas $ 350 -4% -3% $ 364 $ 639 -11% -10% $ 713 EMEA 222 -2% -2% 225 435 0% 0% 434 Asia Pacific 156 -6% -6% 167 309 -4% -3% 323 Total revenues 728 -4% -3% 756 1,383 -6% -5% 1,470 Expenses : Hardware products and support (1) 161 -21% -20% 204 313 -25% -24% 415 Sales and marketing (1) 69 -11% -11% 78 135 -9% -9% 148 Total expenses (1) 230 -18% -18% 282 448 -20% -20% 563 Total Margin $ 498 5% 5% $ 474 $ 935 3% 4% $ 907 Total Margin % 68% 63% 68% 62% % Revenues by Geography : Americas 48% 48% 46% 48% EMEA 31% 30% 32% 30% Asia Pacific 21% 22% 22% 22% (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. Total hardware revenues decreased by $28 million and $87 million in reported currency in the second quarter and the first half of fiscal 2025, respectively, relative to the corresponding prior year periods. Excluding the unfavorable 30 Table of Contents impact of currency rate fluctuation of 1% in each of the second quarter and the first half of fiscal 2025, the decrease in hardware revenues was primarily due 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. Geographically, we experienced constant currency hardware revenue declines in all regions in the fiscal 2025 periods presented, relative to the corresponding prior year periods. Total hardware expenses decreased by $52 million and $115 million in reported currency in the second quarter and the first half of fiscal 2025, respectively, relative to the corresponding prior year periods. Excluding the favorable currency rate fluctuations effect of less than 1% in each of the second quarter and the first half of fiscal 2025, the constant currency decrease in hardware expenses aligned with lower hardware revenues and was due to a $41 million and a $99 million decrease in hardware product and support costs and an $8 million and a $13 million decrease in sales and marketing expenses, in each case during the second quarter and the first half of fiscal 2025, respectively, relative to the corresponding prior year periods. In constant currency, our hardware business’ total margin and total margin as a percentage of revenues increased in the fiscal 2025 periods presented, relative to the corresponding prior year periods, due to lower total expenses for this business. 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 November 30, Six Months Ended November 30, Percent Change Percent Change (Dollars in millions) 2024 Actual Constant 2023 2024 Actual Constant 2023 Services Revenues : Americas $ 810 -6% -6% $ 864 $ 1,577 -10% -10% $ 1,759 EMEA 344 1% 0% 341 672 1% 0% 664 Asia Pacific 176 8% 8% 163 345 5% 6% 328 Total revenues 1,330 -3% -3% 1,368 2,594 -6% -5% 2,751 Total Expenses (1) 1,080 -7% -7% 1,166 2,145 -7% -7% 2,311 Total Margin $ 250 24% 23% $ 202 $ 449 2% 2% $ 440 Total Margin % 19% 15% 17% 16% % Revenues by Geography : Americas 61% 63% 61% 64% EMEA 26% 25% 26% 24% Asia Pacific 13% 12% 13% 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. Total services revenues decreased by $38 million and $157 million in reported currency in the second quarter and the first half of fiscal 2025, respectively, relative to the corresponding prior year periods. Excluding the effects of unfavorable currency rate fluctuations of less than 1% in the second quarter of fiscal 2025 and 1% in the first half of fiscal 2025, the decrease in total services revenues was due to a decrease in revenues in each of our primary services offerings, relative to the corresponding prior year periods. The constant currency decrease in services revenues in the Americas and the EMEA regions was partially offset by a constant currency increase in services revenues in the Asia Pacific region in the second quarter of fiscal 2025, while a constant currency decrease in services revenues in the Americas region was partially offset by a constant currency increase in services revenues in the EMEA and the Asia Pacific regions in the first half of fiscal 2025. 31 Table of Contents Total services expenses decreased by $86 million and $166 million in reported currency in the second quarter and the first half of fiscal 2025, respectively, relative to the corresponding prior year periods. Excluding the favorable effects of currency rate fluctuations of less than 1% in each of the second quarter and the first half of fiscal 2025, the decrease in services expenses was primarily due to a decrease in bad debt expenses of $56 million and $33 million and a decrease in external contractor expenses of $41 million and $105 million, in each case in the second quarter and the first half of fiscal 2025, respectively, relative to the corresponding prior year periods. The constant currency decrease in services expenses for the second quarter of fiscal 2025 was partially offset by an increase in employee related expenses of $25 million. In constant currency, our services business’ total margin and total margin as a percentage of revenues increased in the fiscal 2025 periods presented, relative to the corresponding prior year periods, due to lower total expenses for this business. Research and Development Expenses : Research and development expenses consist primarily of personnel related expenditures. We intend to continue to invest significantly in our research and development efforts because, in our judgment, they are essential to maintaining our competitive position. Three Months Ended November 30, Six Months Ended November 30, Percent Change Percent Change (Dollars in millions) 2024 Actual Constant 2023 2024 Actual Constant 2023 Research and development (1) $ 1,814 10% 10% $ 1,653 $ 3,551 5% 5% $ 3,385 Stock-based compensation 657 15% 15% 573 1,226 16% 16% 1,057 Total expenses $ 2,471 11% 11% $ 2,226 $ 4,777 8% 8% $ 4,442 % of Total Revenues 18% 17% 18% 17% (1) Excluding stock-based compensation Total research and development expenses increased by $245 million and $335 million in reported currency in the second quarter and the first half of fiscal 2025, respectively, 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 November 30, Six Months Ended November 30, Percent Change Percent Change (Dollars in millions) 2024 Actual Constant 2023 2024 Actual Constant 2023 General and administrative (1) $ 288 2% 2% $ 281 $ 560 -6% -5% $ 594 Stock-based compensation 99 5% 5% 94 185 6% 6% 175 Total expenses $ 387 3% 3% $ 375 $ 745 -3% -3% $ 769 % of Total Revenues 3% 3% 3% 3% (1) Excluding stock-based compensation Fiscal Second Quarter 2025 Compared to Fiscal Second Quarter 2024 : Total general and administrative expenses increased by $12 million in reported currency in the second quarter of fiscal 2025, relative to the corresponding prior year period, primarily due to an increase in employee related expenses, including higher stock-based compensation expenses. First Half of Fiscal 2025 Compared to First Half of Fiscal 2024 : Total general and administrative expenses decreased by $24 million in reported currency in the first half of fiscal 2025, relative to the corresponding prior year period, primarily due to a decrease in facilities and related expenses, partially offset by an increase in employee related expenses, including higher stock-based compensation expenses. Amortization of Intangible Assets : Substantially all of our intangible assets were acquired through our business combinations. We amortize our intangible assets over, and monitor the appropriateness of, the estimated useful lives of these assets. We also periodically review these intangible assets for potential impairment based upon relevant facts and circumstances. Refer to Note 6 of Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended May 31, 2024 for additional information regarding our intangible assets and related amortization. 32 Table of Contents Three Months Ended November 30, Six Months Ended November 30, Percent Change Percent Change (Dollars in millions) 2024 Actual Constant 2023 2024 Actual Constant 2023 Developed technology $ 163 -4% -4% $ 169 $ 328 -3% -3% $ 337 Cloud services and license support agreements and related relationships 192 -26% -26% 259 403 -24% -24% 528 Cloud license and on-premise license agreements and related relationships 116 -1% -1% 117 231 -1% -1% 233 Other 120 -43% -43% 210 253 -40% -40% 420 Total amortization of intangible assets $ 591 -22% -22% $ 755 $ 1,215 -20% -20% $ 1,518 Amortization of intangible assets decreased by $164 million and $303 million in reported currency in the second quarter and the first half of fiscal 2025, respectively, relative to the corresponding prior year periods, due to a reduction in expenses associated with certain of our intangible assets that became fully amortized. 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 November 30, Six Months Ended November 30, Percent Change Percent Change (Dollars in millions) 2024 Actual Constant 2023 2024 Actual Constant 2023 Transitional and other employee related costs $ 1 -86% -86% $ 6 $ 3 -76% -76% $ 12 Business combination adjustments, net (1 ) * * 12 (5 ) * * 13 Other, net 31 5% 6% 29 46 36% 37% 33 Total acquisition related and other expenses $ 31 -34% -33% $ 47 $ 44 -25% -25% $ 58 * Not meaningful Acquisition related and other expenses decreased by $16 million and $14 million in reported currency in the second quarter and the first half of fiscal 2025, respectively, relative to the corresponding prior year periods. The decrease in the second quarter of fiscal 2025 and the first half of fiscal 2025 was due to a $13 million and an $18 million decrease, respectively, in business combination adjustments, net and a $5 million and a $9 million decrease, respectively, in transitional and other employee related costs, partially offset by a $2 million and a $13 million increase, respectively, in other expenses primarily related to certain asset impairment charges, in each case relative to the corresponding prior year period. 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 4 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, 2024. Three Months Ended November 30, Six Months Ended November 30, Percent Change Percent Change (Dollars in millions) 2024 Actual Constant 2023 2024 Actual Constant 2023 Restructuring expenses $ 84 0% 1% $ 83 $ 157 -29% -29% $ 222 33 Table of Contents Restructuring expenses in each of the fiscal 2025 and 2024 periods presented primarily related to the 2024 Restructuring Plan. Our management approved, committed to and initiated the 2024 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 November 30, Six Months Ended November 30, Percent Change Percent Change (Dollars in millions) 2024 Actual Constant 2023 2024 Actual Constant 2023 Interest expense $ 866 -3% -3% $ 888 $ 1,708 -3% -3% $ 1,760 Interest expense decreased in the fiscal 2025 periods presented, relative to the corresponding prior year periods, primarily due to $4.0 billion and $3.5 billion of scheduled repayments of senior notes made during the first half of fiscal 2025 and full year of fiscal 2024, respectively, partially offset by higher interest expense that resulted from the issuance of $6.3 billion of senior notes in September 2024. Refer to Note 3 of Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report for additional information. Non-Operating Income (Expenses), net : Non-operating income (expenses), net consists primarily of interest income, net foreign currency exchange losses, the noncontrolling interests in the net profits of our majority-owned subsidiaries (primarily Oracle Financial Services Software Limited and Oracle Corporation Japan), 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 November 30, Six Months Ended November 30, Percent Change Percent Change (Dollars in millions) 2024 Actual Constant 2023 2024 Actual Constant 2023 Interest income $ 149 12% 12% $ 133 $ 283 5% 5% $ 269 Foreign currency losses, net (9 ) -72% -76% (32 ) (59 ) -48% -50% (113 ) Noncontrolling interests in income (47 ) 14% 14% (41 ) (90 ) 15% 15% (78 ) Losses from equity investments, net (108 ) 36% 36% (79 ) (177 ) -10% -10% (197 ) Other income, net 51 1019% 1049% 5 100 79% 79% 56 Total non-operating income (expenses), net $ 36 * * $ (14 ) $ 57 * * $ (63 ) * Not meaningful Non-operating income, net was $36 million and $57 million in reported currency in the second quarter and the first half of fiscal 2025, respectively, in comparison to non-operating expenses, net of $14 million and $63 million in reported currency in the second quarter and the first half of fiscal 2024, respectively. Non-operating income, net increased in the second quarter and the first half of fiscal 2025 primarily due to higher other income, net, of $46 million and $44 million, respectively, 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 period, a decrease in foreign currency losses of $23 million and $54 million, respectively, and an increase in interest income of $16 million and $14 million, respectively, in each case relative to the corresponding prior year period. Losses from equity investments increased by $29 million in the second quarter of fiscal 2025 and decreased by $20 million for the first half of fiscal 2025, in each case relative to the corresponding prior year period. 34 Table of Contents Provision for Income Taxes : Our effective income tax rates for each of the periods presented were the result of the mix of income earned and losses incurred in various tax jurisdictions that apply a broad range of income tax rates. Refer to Note 7 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. Three Months Ended November 30, Six Months Ended November 30, Percent Change Percent Change (Dollars in millions) 2024 Actual Constant 2023 2024 Actual Constant 2023 Provision for income taxes $ 239 11% 10% $ 217 $ 480 179% 181% $ 172 Effective tax rate 7.1% 8.0% 7.3% 3.4% Fiscal Second Quarter 2025 Compared to Fiscal Second Quarter 2024 : Provision for income taxes increased during the second quarter of fiscal 2025, relative to the second quarter of fiscal 2024, primarily due to the absence of the revaluation benefit of net deferred tax assets due to a change in tax rate of $105 million and the realization of a one-time tax attribute of $49 million, an unfavorable jurisdictional mix of earnings of $99 million and a higher income before provision for income taxes of $53 million, partially offset by an increase in tax benefits related to stock-based compensation of $295 million. First Half of Fiscal 2025 Compared to First Half of Fiscal 2024 : Provision for income taxes increased during the first half of fiscal 2025, relative to the first half of fiscal 2024, primarily due to an unfavorable jurisdictional mix of earnings of $314 million, the absence of the revaluation benefit of net deferred tax assets due to a change in tax rate of $105 million and the realization of a one-time tax attribute of $49 million, partially offset by tax benefits related to stock-based compensation of $168 million and $53 million of tax benefits associated with settlements with taxing authorities and other events. Liquidity and Capital Resources (Dollars in millions) November 30, 2024 Change May 31, 2024 Working capital $ (5,549 ) -38% $ (8,990 ) Cash, cash equivalents and marketable securities $ 11,311 6% $ 10,661 Working capital : The increase in working capital as of November 30, 2024 in comparison to May 31, 2024 was primarily due to favorable impacts to our net current assets resulting from net income during the first half of fiscal 2025 and proceeds from the issuance of senior notes in September 2024, net of issuance costs, of $6.2 billion (refer to Note 3 of Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report for additional information), partially offset by $6.3 billion of cash used for capital expenditures, $2.2 billion of cash used to pay dividends to our stockholders, €750 million and $1.0 billion of long-term senior notes that were reclassified to current liabilities, $591 million of net cash used for our employee stock programs, $300 million of cash used for repurchases of our common stock and $137 million of cash used for purchases, net of sales and maturities of non-marketable investments during the first half of fiscal 2025. 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 with original maturities at the time of purchase greater than 90 days. The increase in cash, cash equivalents and marketable securities as of November 30, 2024 in comparison to May 31, 2024 was primarily due to cash inflows from our operations during the first half of fiscal 2025 and proceeds from the issuance of senior notes in September 2024, net of issuance costs, of $6.2 billion. This increase was partially offset by $6.3 billion of cash used for capital expenditures, $4.5 billion of cash used for scheduled repayments of borrowings and commercial paper notes, $2.2 billion of cash used to pay dividends to our stockholders, $591 million of net cash used for our employee stock programs, $300 million of cash 35 Table of Contents used for repurchases of our common stock and $137 million of cash used for purchases, net of sales and maturities of non-marketable investments during the first half of fiscal 2025. 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. Six Months Ended November 30, (Dollars in millions) 2024 Change 2023 Net cash provided by operating activities $ 8,731 23% $ 7,117 Net cash used for investing activities $ (6,553 ) 133% $ (2,811 ) Net cash used for financing activities $ (1,647 ) -72% $ (5,817 ) 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 cloud services and license support agreements. Customers for these cloud services and license support agreements are generally billed in advance of services being provided. Over the course of a fiscal year, we also generate 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 by $1.6 billion in the first half of fiscal 2025, relative to the first half of fiscal 2024, primarily due to higher net income adjusted for certain non-cash charges, 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, purchases, maturities and sales of our investments in marketable securities and other instruments and investments in capital assets primarily to support the growth in our cloud and license business. Net cash used for investing activities increased by $3.7 billion in the first half of fiscal 2025, relative to the first half of fiscal 2024, primarily due to the increase in 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 decreased by $4.2 billion in the first half of fiscal 2025, relative to the first half of fiscal 2024, primarily due to proceeds from the issuance of senior notes in September 2024, net of issuance costs, of $6.2 billion, lower net cash used for our employee stock programs of $716 million and lower net cash used for repurchases of common stock of $300 million, partially offset by higher repayments of commercial paper notes of $2.1 billion, net of issuances, higher scheduled repayments of borrowings of $570 million and higher net cash used for other activities of $338 million, in each case in the first half of fiscal 2025 relative to the first half of fiscal 2024. Further, during the first half of fiscal 2025, we refinanced our Term Loan Credit Agreement (defined below), which resulted in no net impact on financing cash flows for the periods reported. 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 that of 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) 2024 Change 2023 Net cash provided by operating activities $ 20,287 19% $ 17,039 Capital expenditures (10,745 ) 55% (6,935 ) Free cash flow $ 9,542 -6% $ 10,104 Net income $ 11,624 $ 10,137 Net cash provided by operating activities as a percent of net income 175% 168% Free cash flow as percent of net income 82% 100% 36 Table of Contents Recent Financing Activities : Term Loan Credit Agreements : On June 10, 2024, we terminated our term loan credit agreement that we entered into in fiscal 2023 and repaid the principal amount outstanding together with interest accrued up to the date of repayment. Simultaneously, we borrowed up to the maximum commitment amount of $5.6 billion pursuant to a term loan credit agreement (Term Loan Credit Agreement) executed on the same date. Any remaining unpaid principal balance under the Term Loan Credit Agreement will become fully due and payable on August 16, 2027, unless the termination date of Term Loan Credit Agreement is extended. Refer to Note 7 of Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended May 31, 2024 for additional details about our borrowings. Senior Notes : In September 2024, we issued $6.3 billion of senior notes comprised of the following: • $1.5 billion of 4.20% senior notes due September 2029; • $1.75 billion of 4.70% senior notes due September 2034; • $1.75 billion of 5.375% senior notes due September 2054; and • $1.25 billion of 5.50% senior notes due September 2064. We issued the senior notes to repay all or a portion of $2.0 billion of senior notes due November 2024, $3.5 billion of senior notes due April 2025 and $2.5 billion of senior notes due May 2025 and to pay accrued interest and any related premiums, fees and expenses in connection therewith; to repay all or a portion of commercial paper notes outstanding; and to use any remaining net proceeds from the borrowing for general corporate purposes, which may include stock repurchases, payment of cash dividend on our common stock, repayment of other indebtedness and future acquisitions. Refer to Note 3 of Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report for additional information. Contractual Obligations : During the first half of fiscal 2025, 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, 2024, other than an increase in our operating lease commitments to $36.7 billion as of November 30, 2024. Our operating lease commitments, which are primarily for data centers, are generally expected to commence between the remainder of fiscal 2025 and fiscal 2027 and for terms of nine to fifteen years. We have not recorded these lease commitments on our Condensed Consolidated Balance Sheets as of November 30, 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, 2024 for more information about our lease commitments. Additionally, as discussed above, we issued $6.3 billion of senior notes in September 2024 with various maturity dates. 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, 2021 has been an annualized rate of 1.8% 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 37 Table of Contents applicable, are exercised. Of the outstanding stock options as of November 30, 2024, which generally have a ten-year exercise period, all have exercise prices lower than the market price of our common stock on such date. In recent years, our stock repurchase program has substantially 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. As of November 30, 2024, the maximum potential dilution from all outstanding stock-based awards, regardless of when granted and regardless of whether vested or unvested, was 6.1%. Recent Accounting Pronouncements For information with respect to recent accounting pronouncements, and the impact of these pronouncements on our consolidated financial statements, see Note 1 of Notes to Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report. 38 Table of Contents 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 half of fiscal 2025. 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, 2024 for a more complete discussion of the market risks we encounter.