Oracle 2006 Annual Report Download - page 29

Table of Contents
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
We are the world’s largest enterprise software company. We are organized into two businesses, software and
services, which are further divided into five operating segments. Each of these operating segments has unique
characteristics and faces different opportunities and challenges. Although we report our actual results in
United States dollars, we conduct a significant number of transactions in currencies other than United States
dollars. Therefore, we present constant currency information to provide a framework for assessing how our
underlying business performed excluding the effect of foreign currency rate fluctuations. An overview of our
five operating segments follows.
Software Business
Our software business is comprised of two operating segments: (1) new software license revenues and
(2) software license updates and product support revenues. We expect that our software business revenues
will continue to increase, which should allow us to improve margins and profits and continue to make
investments in research and development.
New Software Licenses: We license our database and middleware as well as our applications software to
businesses of many sizes, government agencies, educational institutions and resellers. The growth in new
software license revenues is affected by the strength of general economic and business conditions,
governmental budgetary constraints, the competitive position of our software products and acquisitions. The
new software license business is also characterized by long sales cycles. The timing of a few large software
license transactions can substantially affect our quarterly new software license revenues. Since our new
software license revenues in a particular quarter can be difficult to predict as a result of the timing of a few
large software license transactions, we believe that analysis of new software revenues on a trailing 4-quarter
period provides more visibility into the underlying fundamental performance of our software revenues than
analysis of quarterly revenues. New software license revenues represented 33% of our total revenues in fiscal
2007. Our new software license margins have been affected by the amortization of intangible assets
associated with companies we have acquired.
Competition in the software business is intense. Our goal is to maintain a first or second position in each of
our software product categories and certain industry segments as well as to grow our software revenues faster
than our competitors. We believe that the features and functionality of our software products are as strong as
they have ever been. We have focused on lowering the total cost of ownership of our software products by
improving integration, decreasing installation times, lowering administration costs and improving the ease of
use. Reducing the total cost of ownership of our products provides our customers with a higher return on their
investment, which we believe will create more demand for our products and services and provide us with a
competitive advantage. We have also continued to focus on improving the overall quality of our software
products and service levels. We believe this will lead to higher customer satisfaction and loyalty and help us
achieve our goal of becoming our customers’ leading technology advisor.
Software License Updates and Product Support: Customers that purchase software license updates and
product support are granted rights to unspecified product upgrades and maintenance releases issued during the
support period, as well as technical support assistance. In fiscal 2007, we also introduced Oracle Unbreakable
Linux Support, which provides enterprise level support for the Linux operating system. Substantially all of
our customers renew their software license updates and product support contracts annually. The growth of
software license updates and product support revenues is influenced by three factors: (1) the support contract
base of companies acquired, (2) the renewal rate of the support contract base and (3) the amount of new
support contracts sold in connection with the sale of new software licenses.
Software license updates and product support revenues, which represent approximately 46% of our total
revenues in fiscal 2007, are our highest margin business unit. Support margins during fiscal 2007 were 90%,
and accounted for 76% of our total margins over the same respective period. We believe that software license
updates and product support revenues and margins will continue to grow for the following reasons:
• Acquisitions over the past three years have significantly increased our support contract base, as well as
the portfolio of products available to be licensed.
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Source: ORACLE CORP, 10-K, June 29, 2007 Powered by Morningstar® Document Research℠