Oracle 2011 Annual Report Download - page 41

fluctuations. In addition, our operating margins for our hardware systems products segment have been and will
be affected by the amortization of intangible assets associated with our acquisition of Sun and by business
combination accounting rules that required us to record acquired inventories from Sun at fair value, which
resulted in an unfavorable impact to our expenses and operating margins as we sold these inventories to
customers during fiscal 2010.
We have limited experience in predicting our quarterly hardware systems products revenues. The timing of
customer orders and delays in our ability to timely manufacture or deliver a few large transactions could
substantially affect the amount of hardware systems products revenues, expenses and operating margins that we
report.
Hardware Systems Support: Customers that purchase our hardware systems products may also elect to
purchase our hardware systems support offerings. Our hardware systems support offerings provide customers
with software updates for the software components that are essential to the functionality of our server and storage
products, such as Oracle Solaris, and can include product repairs, maintenance services, and technical support
services. Typically, our hardware systems support contract arrangements are invoiced to the customer at the
beginning of the support period and are one year in duration. The growth of our hardware systems support
revenues is influenced by a number of factors, including the volume of purchases of hardware products, the mix
of hardware products purchased, and the percentage of our hardware systems support contract customer base that
renews its support contracts. All of these factors are heavily influenced by our customers’ decisions to either
maintain or upgrade their existing hardware systems’ infrastructure to newly developed technologies that are
available.
Our hardware systems support margins have been and will be affected by fair value adjustments relating to
hardware systems support obligations assumed through, and by the amortization of intangible assets resulting
from, our acquisition of Sun. As required by business combination accounting rules, we recorded adjustments to
reduce our hardware systems support revenues for contracts assumed from our acquisition of Sun to their
estimated fair values as of the acquisition date by an aggregate of $148 million and $128 million for fiscal 2011
and 2010, respectively. These amounts would have been recorded as hardware systems support revenues by Sun
as a standalone entity. To the extent underlying hardware systems support contracts are renewed with us
following an acquisition, we will recognize the revenues for the full values of the hardware systems support
contracts over the support periods.
Services Business
Our services business consists of consulting, Cloud Services and education. As a result of our acquisition of Sun,
we expanded and enhanced our customer base and services offerings, which we believe will increase our
revenues and expenses in comparison to recent periods. Our services business, which represented 13%, 14% and
19% of our total revenues in fiscal 2011, 2010 and 2009, respectively, has significantly lower margins than our
software business and what we have recently achieved from our hardware business. The proportion of our
services revenues relative to our total revenues in fiscal 2011 and 2010 was affected by our entry into the
hardware systems business as a result of our acquisition of Sun.
Consulting: Our consulting line of business primarily provides services to customers in business and IT
strategy alignment, enterprise architecture planning and design, initial product implementation and integration,
and ongoing product enhancements and upgrades. The amount of consulting revenues recognized tends to lag the
amount of our software and hardware systems products revenues by several quarters since consulting services, if
purchased, are typically segmentable from the products with which they relate and are performed after the
customer’s purchase of the products. Our consulting revenues are dependent upon general economic conditions
and the level of our product revenues, in particular the new software license sales of our application products. To
the extent we are able to grow our products revenues, in particular our software application product revenues, we
would also generally expect to be able to eventually grow our consulting revenues.
Cloud Services: Our Cloud Services segment, which was formerly named On Demand, includes certain of our
Oracle Cloud Services offerings and technology, and Advanced Customer Services. As a result of our acquisition
of Sun, we increased the volume and breadth of our Cloud Services offerings. Oracle Cloud Services are
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