Oracle 2009 Annual Report Download - page 38

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The growth in new software license revenues that we report is affected by the strength of general economic and business conditions, governmental budgetary
constraints, the competitive position of our software products, our acquisitions and foreign currency fluctuations. The substantial majority of 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 28%,
31% and 34% of our total revenues in fiscal 2010, 2009 and 2008, respectively. The proportion of our new software license revenues relative to our total
revenues in fiscal 2010 was affected by our entry into the hardware systems business as a result of our acquisition of Sun. Our new software license segment’s
margins have historically trended upward over the course of the four quarters within a particular fiscal year due to the historical upward trend of our new
software license revenues over those quarterly periods and because the majority of our costs for this segment are predominantly fixed in the short term. However,
our new software license segment’s margins have been and will continue to be affected by the amortization of intangible assets associated with companies that
we have acquired, including Sun.
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. 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 49%, 50% and 46% of our total revenues in fiscal 2010, 2009 and 2008, respectively,
is our highest margin business unit. The proportion of our software license updates and product support revenues relative to our total revenues in fiscal 2010 was
affected by our entry into the hardware systems business as a result of our acquisition of Sun. Support margins during fiscal 2010 were 85% and accounted for
80% of our total margins. 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 software 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 revenues 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 result in the sale of software license updates and
product support contracts, which 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 combinations 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 $86 million, $243 million and $179 million in fiscal
2010, 2009 and 2008, 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.
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Source: ORACLE CORP, 10-K, July 01, 2010 Powered by Morningstar® Document Research℠