Oracle 2008 Annual Report Download - page 34

Table of Contents
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 also offer support for
our 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 percentage of our support contract customer base
that renews its support contracts, (2) the amount of new support contracts sold in connection with the sale of
new software licenses, and (3) the amount of support contracts assumed from companies we have acquired.
Software license updates and product support revenues, which represented 50%, 46% and 46% of our total
revenues in fiscal 2009, 2008 and 2007, respectively, is our highest margin business unit. Support margins
during fiscal 2009 were 84%, and accounted for 81% of our total margins over the same period. Our software
license update and product support margins have been affected by fair value adjustments relating to support
obligations assumed in business combinations (described further below) and by amortization of intangible
assets. However, over the longer term, we believe that software license updates and product support revenues
and margins will 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 in comparison to the corresponding prior year periods assuming renewal and
cancellation rates and foreign currency rates remained relatively constant since substantially all new
software license transactions add to our support contract base; and
• our acquisitions have increased our support contract base, as well as the portfolio of products available
to be licensed and supported.
We record adjustments to reduce support obligations assumed in business acquisitions to their estimated fair
values at the acquisition dates. As a result, as required by business combination accounting rules, we did not
recognize software license updates and product support revenues related to support contracts that would have
been otherwise recorded by the acquired businesses as independent entities in the amount of $243 million,
$179 million and $212 million in fiscal 2009, 2008 and 2007, respectively. To the extent underlying support
contracts are renewed with us following an acquisition, we will recognize the revenues for the full value of
the support contracts over the support periods, the majority of which are one year.
Services Business
Our services business consists of consulting, On Demand and education. Our services business, which
represented 19%, 20% and 21% of our total revenues in fiscal 2009, 2008 and 2007, respectively, has
significantly lower margins than our software business.
Consulting: Our consulting line of business provides services to customers in business/IT strategy
alignment; business process simplification; solution integration; and product implementation, enhancements,
and upgrades of our database, middleware and applications software. The amount of consulting revenues
recognized tends to lag software revenue recognition by several quarters since consulting services, if
purchased, are typically performed after the purchase of new software licenses. Our consulting revenues are
dependent upon general economic conditions and the level of new software license sales, particularly our
application product sales. To the extent we are able to grow our new software license revenues, in particular
our application product revenues, we would also generally expect to be able to grow our consulting revenues.
On Demand: On Demand includes Oracle On Demand and our Advanced Customer Services offerings. We
believe that our On Demand offerings provide our customers flexibility in how they manage their IT
environments and an additional opportunity to lower their total cost of ownership and can therefore provide us
with a competitive
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Source: ORACLE CORP, 10-K, June 29, 2009 Powered by Morningstar® Document Research℠