Oracle 2007 Annual Report Download - page 31

Table of Contents
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 due to continued demand for our products and due to our acquisitions, 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. Our 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 license revenues on a trailing 4-quarter period (as provided in our quarterly reports on
Form 10-Q) provides additional visibility into the underlying performance of our new software license business. New
software license revenues represented 34%, 33% and 34% of our total revenues in fiscal 2008, 2007 and 2006,
respectively. Our new software license margins have been and will continue to be 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. In addition, our broad
portfolio of product offerings (many of which have been acquired over the past four fiscal years) helps us to offer
customers the ability to gain efficiencies by consolidating their IT “software stack” with a single vendor, which
reduces the number of disparate software vendors with which customers interact. Reducing the total cost of
ownership of our products provides our customers with a higher return on their IT investments, which we believe
creates more demand for our products and services and provides 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 addition, we offer Oracle Unbreakable Linux Support, which provides
enterprise level support for the Linux operating system and, in fiscal 2008, we introduced support for Oracle VM
server virtualization software. Substantially all of our customers renew their software license updates and product
support contracts annually. The growth of software license updates and product support revenues is primarily
influenced by three factors: (1) the renewal rate of the support contract base, (2) the amount of new support contracts
sold in connection with the sale of new software licenses, and (3) the support contract base assumed from companies
we have acquired.
Software license updates and product support revenues, which represented 46% of our total revenues in fiscal 2008,
2007 and 2006, is our highest margin business unit. Support margins during fiscal 2008 were 85%, and accounted for
76% of our total margins over the same period. We believe that software license updates and product support
revenues and margins will continue to grow for the following reasons:
• Substantially all of our customers, including customers from acquired companies, renew their support contracts
when eligible for renewal.
• Substantially all of our customers purchase license updates and product support contracts when they buy new
software licenses, resulting in a further increase in our support contract base. Even if new software license
revenue growth was flat, software license updates and product support revenues would continue to grow
assuming renewal and cancellation rates remained relatively constant since substantially all new software
license transactions add to our support contract base.
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Source: ORACLE CORP, 10-K, July 02, 2008 Powered by Morningstar® Document Research℠