Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations

We begin Management's Discussion and Analysis of Financial Condition and Results of
Operations with an overview of our businesses, key operating segments and significant trends. This overview is followed by a summary of our critical accounting policies and estimates that we believe are important to understanding the assumptions and
judgments incorporated in our reported financial results. We then provide a more detailed analysis of our results of operations and financial condition.

Business Overview

Oracle Corporation provides products and services that address all
aspects of corporate information technology (IT) environments-application, platform and infrastructure. Our Oracle Cloud offerings provide a comprehensive and fully integrated stack of application, platform, compute and storage services in all
three primary layers of the cloud: Software as a Service (SaaS), Platform as a Service (PaaS) and Infrastructure as a Service (IaaS). Our on-premise offerings include Oracle database and middleware software, application software, hardware (Oracle
Engineered Systems, servers, storage, networking and industry-specific products), and related support and services. We provide our cloud and on-premise offerings to over 400,000 worldwide customers via deployment models that best suit their needs.

Our comprehensive and fully integrated stack of SaaS, PaaS and IaaS offerings integrate the software, hardware and services on the
customers' behalf in IT environments that we deploy, support and manage for the customer. Our integrated Oracle Cloud offerings are designed to be rapidly deployable to enable customers shorter time to innovation; easily maintainable to reduce
integration and testing work; connectable among differing deployment models to enable interchangeability and extendibility between cloud and on-premise IT environments; compatible to easily move workloads between on-premise IT environments and the
Oracle Cloud; cost-effective by requiring lower upfront customer investment; and secure, standards-based and reliable. We are a leader in the core technologies of cloud IT environments, including database and middleware software as well as
enterprise applications, virtualization, clustering, large-scale systems management and related infrastructure. Our products and services are the building blocks of our Oracle Cloud services, our partners' cloud services and our customers'
cloud IT environments.

In addition to providing a broad spectrum of cloud offerings, we develop and sell our products and services to our
customers worldwide for use in their global data centers and on-premise IT environments. An important element of our corporate strategy is to continue our investments in, and innovation with respect to, our products and services that we offer
through our cloud and on-premise software, hardware and services businesses. We have a deep understanding as to how all components within IT environments-application, platform and infrastructure-interact and function with one another. We
focus our development efforts on improving the performance, security, operation and integration of these differing technologies to make them more cost-effective and easier to deploy, manage and maintain for our customers and to improve their
computing performance relative to our competitors. After the initial purchase of Oracle products and services, our customers can continue to take advantage of our research and development investments and deep IT expertise by purchasing and renewing
Oracle support offerings, which may include product enhancements that we periodically deliver to our Oracle E-Business Suite, Siebel, PeopleSoft and JD Edwards application software products, among others, or by renewing their SaaS, PaaS and IaaS
contracts with us.

As customers deploy with the Oracle Cloud, many are adopting a hybrid IT model whereby certain of their IT resources are
deployed and managed through the Oracle Cloud, while other of their IT resources are deployed and managed on-premise, and both sets of resources can be managed as one. We focus the engineering of our products and services to best connect these
different deployment models to enable flexibility, ease, agility, compatibility, extensibility and seamlessness.

A selective and active
acquisition program is another important element of our corporate strategy. We believe our acquisitions enhance the products and services that we can offer to customers, expand our customer base, provide greater scale to accelerate innovation, grow
our revenues and earnings, and increase stockholder value. In recent years, we have invested billions of dollars to acquire a number of companies, products, services and

technologies that add to, are complementary to, or have otherwise enhanced our existing offerings. We expect to continue to acquire companies, products, services and technologies to further our
corporate strategy.

We have three businesses that deliver our application, platform and infrastructure technologies: cloud and on-premise
software, hardware and services. These businesses can be further divided into certain operating segments (Note 16 of Notes to Consolidated Financial Statements, included elsewhere in this Annual Report, provides additional information related to our
operating segments). Each of our businesses and operating segments has unique characteristics and faces different opportunities and challenges. Although we report our actual results in U.S. Dollars, we conduct a significant number of transactions in
currencies other than U.S. Dollars. Therefore, we present constant currency information to provide a framework for assessing how our underlying businesses performed excluding the effects of foreign currency rate fluctuations. An overview of our
three businesses and related operating segments follows.

Cloud and On-Premise Software Business

Our cloud and on-premise software business, which represented 78%, 77% and 76% of our total revenues in fiscal 2016, 2015 and 2014, respectively, is
comprised of three operating segments: (1) cloud software and on-premise software, (2) cloud IaaS and (3) software license updates and product support. On a constant currency basis, we expect that our cloud and on-premise software business'
total revenues generally will continue to increase due to continued demand for our software products, expected growth in our cloud and software license updates and product support offerings, including the high percentage of customers that renew
their software license updates and product support contracts, and contributions from our acquisitions, which should allow us to grow and continue to make investments in research and development.

Cloud Software and On-Premise Software: Our cloud software and on-premise software line of business markets, sells
and delivers a broad spectrum of application and platform technologies through our SaaS and PaaS offerings, which are certain of our software applications and platforms that are delivered via a cloud-based IT environment that we host, manage and
support, and through the licensing of our software products including Oracle Applications, Oracle Database, Oracle Fusion Middleware and Java, among others.

We believe the comprehensiveness and breadth of our SaaS, PaaS and on-premise software offerings provides greater benefit to our customers and differentiates us from many of our competitors that offer
more limited or specialized software offerings. Our SaaS and PaaS offerings are designed to be interoperable with one another, thereby limiting the integration and tuning of multiple cloud applications from multiple vendors. Our SaaS and PaaS
offerings are designed to deliver secure data isolation and flexible upgrades, self-service access controls for users, a Service-Oriented Architecture (SOA) for integration with on-premise systems, and a high performance, high availability
infrastructure based on our infrastructure technologies including Oracle Engineered Systems. Our on-premise software offerings are substantially designed to operate on both single server and clustered server configurations for cloud or on-premise IT
environments, and to support a choice of operating systems including Oracle Solaris, Oracle Linux, Microsoft Windows and third-party UNIX products, among others. Our commitment to industry standards results in software offerings that work in
customer environments with Oracle or non-Oracle hardware or software components and that can be adapted to meet specific industry or business needs. We focus the engineering of our products and services to best connect cloud and on-premise
deployment models to enable flexibility, ease, agility, compatibility, extensibility and seamlessness. All of these approaches are designed to support customer choice and reduce customer risk. Our customers include businesses of many sizes,
government agencies, educational institutions and resellers. We market and sell our software offerings to these customers with a sales force positioned to offer the combinations that best fit customer needs. We enable customers to evolve and
transform to substantially any IT environment at whatever pace is most appropriate for them.

Our SaaS and PaaS revenues and new software
licenses revenues are affected by the strength of general economic and business conditions, governmental budgetary constraints, the strategy for and competitive position of our software offerings, our acquisitions, our ability to deliver and renew
our SaaS and PaaS contracts with our existing customers and foreign currency rate fluctuations. In recent periods, we have placed significant strategic emphasis on growing our cloud SaaS and PaaS revenues, which has affected the growth of our cloud
SaaS and

PaaS revenues and our new software licenses revenues and the related expenses. We expect these trends will continue. Our SaaS and PaaS arrangements are generally one to three years in duration
and we strive to renew these contracts when they are eligible for renewal. The substantial majority of our new software license transactions are characterized by long sales cycles and the timing of a few large software license transactions can
substantially affect our quarterly new software licenses revenues.

Cloud software and on-premise software revenues represented 25%, 26% and
28% of our total revenues in fiscal 2016, 2015 and 2014, respectively. Our cloud software and on-premise software segment's margin has 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 licenses revenues over those quarterly periods and because the majority of our costs for this segment are predominantly fixed in the short term. As discussed further below under "Supplemental
Disclosure Related to Certain Charges," our cloud software and on-premise software segment's margin has been and will continue to be affected by the fair value adjustments relating to the cloud SaaS and PaaS obligations that we assumed in
our business combinations and by the amortization of intangible assets associated with companies and technologies that we have acquired.

Cloud Infrastructure as a Service: Our cloud IaaS segment, which represented 2% of our total revenues in each of
fiscal 2016 and 2015, and 1% of our total revenues in fiscal 2014, provides infrastructure cloud services that are enterprise-grade, hosted and supported within the Oracle Cloud to perform elastic compute, storage and networking services on a
subscription basis. Our cloud IaaS segment also offers Oracle Managed Cloud Services, which are comprehensive software and hardware management and maintenance services for customer IT infrastructure for a fee for a stated term that are hosted at our
Oracle data center facilities, select partner data centers or physically on-premise at customer facilities.

Software License Updates and
Product Support: Software license updates and product support revenues are generated through the sale of software support contracts relating to on-premise new software licenses purchased by our customers. Customers
that purchase software license updates and product support are granted rights to unspecified product upgrades and maintenance releases and patches released during the term of the support period, as well as technical support assistance. Our software
license updates and product support contracts are generally one year in duration. Substantially all of our on-premise software license 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 software support contract customer base that renews its software support contracts, (2) the amount of new software support contracts
sold in connection with the sale of new software licenses and (3) the amount of software support contracts assumed from companies we have acquired.

Software license updates and product support revenues, which represented 51%, 49% and 47% of our total revenues in fiscal 2016, 2015 and 2014, respectively, is our highest margin business unit. Our
software support margins during fiscal 2016 were 91% and accounted for 86% of our total margins over the same period. Our software license updates and product support margins have been affected by fair value adjustments relating to software support
obligations assumed in business combinations and by the amortization of intangible assets, both of which are discussed further below under "Supplemental Disclosure Related to Certain Charges." 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 on-premise new software license customers, including customers from acquired companies, renew their software 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 software support contract base. Even if new software licenses revenues growth was flat, software license updates and product support revenues would continue to grow in comparison to the corresponding prior year periods
assuming contract renewal and cancellation rates and foreign currency rates remained relatively constant, since substantially all new software licenses transactions result in the sale of software license updates and product support contracts, which
add to our software support contract base; and

42

•

our acquisitions have increased our software support contract base, as well as the portfolio of products available to be licensed and supported.

Hardware Business

Our hardware business is comprised of two operating segments: (1) hardware products and (2) hardware support. Our hardware business represented 13% of our total revenues in fiscal 2016, and 14% of our
total revenues in each of fiscal 2015 and 2014. We expect our hardware business to have lower operating margins as a percentage of revenues than our cloud and on-premise software business due to the incremental costs we incur to produce and
distribute these products and to provide support services, including direct materials and labor costs. We expect to make investments in research and development to improve existing hardware products and services and to develop new hardware products
and services.

Hardware Products: We provide a broad selection of hardware and related services, including
Oracle Engineered Systems, servers, storage, networking, workstations and related devices, industry-specific hardware, virtualization software, operating systems, and management software to support diverse IT environments, including cloud computing
environments. We engineer our hardware products with virtualization and management capabilities to enable the rapid deployment and efficient management of cloud and on-premise IT infrastructures. Our hardware products support many of the
world's largest cloud infrastructures, including the Oracle Cloud.

Our hardware products are designed to be easier to deploy, manage and
maintain for our customers and to improve computing performance relative to our competitors' offerings. We design our hardware products to seamlessly connect cloud and on-premise IT environments to further enable interoperability,
interchangeability and extendibility and to work in customer environments that may include other Oracle or non-Oracle hardware or software components. Our flexible and open approach provides Oracle customers with a broad range of choices in how they
deploy our hardware products, which we believe is a priority for our customers.

Oracle Engineered Systems are core to our hardware offerings
and are important elements of our data center and cloud computing offerings including the Oracle Cloud. These pre-integrated products are designed to integrate multiple Oracle technology components to work together to deliver improved performance,
availability, security and operational efficiency relative to our competitors' products; to be upgraded effectively and efficiently; and to simplify maintenance cycles by providing a single solution for software patching. Oracle Engineered
Systems are tested before they are shipped to customers and delivered ready-to-run, enabling customers to shorten deployment time to production. We offer certain of our Oracle Engineered Systems technologies through flexible deployment options
including as a cloud service and for on-premise IT environments.

We offer a wide range of server products using our SPARC microprocessor. Our
SPARC servers run the Oracle Solaris operating system and are designed to be differentiated by their reliability, security, and scalability. Our mid-size and large servers are designed to offer better performance and lower total cost of ownership
than competitive UNIX systems for business critical applications, for customers having more computationally intensive needs, and as platforms for building cloud computing IT environments. Our SPARC servers are also a core component of the Oracle
SuperCluster, one of our Oracle Engineered Systems.

We also offer enterprise x86 servers. These x86 servers are based on microprocessors from
Intel Corporation and are compatible with Oracle Solaris, Oracle Linux, Microsoft Windows and other operating systems. Our x86 servers are also a core component of many of our Oracle Engineered Systems including the Oracle Exadata Database Machine,
Oracle Exalogic Elastic Cloud, Oracle Exalytics In-Memory Machine and the Oracle Big Data Appliance.

Our storage products are engineered for
the cloud and designed to securely store, manage, protect, archive, backup and recover customers' mission critical data assets. Our storage products consist of disk, flash, tape, virtual tape and hardware-related software including file systems
software, back-up and archive software, hierarchical storage management software and networking for mainframe and heterogeneous systems environments. We also offer certain of our storage offerings as a cloud service.

43

Our networking and data center fabric products, including Oracle Virtual Networking, and Oracle InfiniBand
and Ethernet technologies, are used with our server and storage products and are integrated into our management tools to help enterprise customers improve infrastructure performance, reduce cost and complexity and simplify storage and server
connectivity.

We offer hardware products and services designed for certain specific industries. Our point-of-sale hardware offerings include
point-of-sale terminals and related hardware that are designed for managing businesses within the food and beverage, hotel and retail industries, among others. Our hardware products and services for communications networks include network signaling,
policy control and subscriber data management solutions, and session border control technology, among others.

The majority of our hardware
products are sold through indirect channels, including independent distributors and value-added resellers.

To produce our hardware products,
we rely on both our internal manufacturing operations as well as third-party manufacturing partners. Our internal manufacturing operations consist primarily of materials procurement, assembly, testing and quality control of our Oracle Engineered
Systems and certain of our enterprise and data center servers and storage products. For all other manufacturing, we generally rely on third-party manufacturing partners to produce our hardware-related components and hardware products and we may
involve our internal manufacturing operations in the final assembly, testing and quality control processes for these components and products. We distribute most of our hardware products either from our facilities or partner facilities. We strive to
reduce costs by simplifying our manufacturing processes through increased standardization of components across product types and a "build-to-order" manufacturing process in which products generally are built only after customers have
placed firm orders.

Our hardware products revenues, cost of hardware products and hardware operating margins that we report are affected by
our strategy for and the competitive position of our hardware products, the strength of general economic and business conditions, governmental budgetary constraints, certain of our acquisitions and foreign currency rate fluctuations. In addition,
our operating margins for our hardware products segment have been and will be affected by the amortization of intangible assets.

Our quarterly
hardware products revenues are difficult to predict. The timing of customer orders and delays in our ability to timely manufacture or deliver a few large hardware transactions, among other factors, could substantially affect the amount of hardware
products revenues, expenses and operating margins that we report.

Hardware Support: Our hardware support
offerings provide customers with software updates for software components that are essential to the functionality of our hardware products, such as Oracle Solaris and certain other software products, and can include product repairs, maintenance
services and technical support services. Typically, our hardware support contract arrangements are priced as a percentage of the net hardware products fees, are invoiced to the customer at the beginning of the support period and are one year in
duration. We continue to evolve hardware support processes that are intended to proactively identify and solve quality issues and to increase the amount of new and renewed hardware support contracts sold in connection with the sales of our hardware
products. Our hardware support revenues that we report are influenced by a number of factors, including the volume of purchases of hardware products, the pricing and mix of hardware products purchased, whether customers decide to purchase hardware
support contracts at or in close proximity to the time of hardware product sale, the percentage of our hardware support contract customer base that renews its support contracts and our acquisitions. Substantially all of these factors are heavily
influenced by our customers' decisions to either maintain or upgrade their existing hardware infrastructure to newly developed technologies that are available.

Our hardware support margins have been and will be affected by certain of our acquisitions and related accounting, including fair value adjustments relating to hardware support obligations assumed and by
the amortization of intangible assets, both of which are discussed further below under "Supplemental Disclosure Related to Certain Charges."

44

Services Business

Our services business, which represented 9% of our total revenues in each of fiscal 2016 and 2015, respectively, and 10% of our total revenues in fiscal 2014, is comprised of the remainder of our
operating segments. Our services business has lower margins than our cloud and on-premise software and hardware businesses. Our services revenues are impacted by our strategy for and the competitive position of our services, certain of our
acquisitions, general economic conditions, governmental budgetary constraints, personnel reductions in our customers' IT departments, tighter controls over discretionary spending, our strategic emphasis on growing our cloud revenues and the
growth in our software and hardware offerings. Our services business' offerings include:

•

consulting services that are designed to help our customers and global system integrator partners more successfully architect and deploy our offerings,
including IT strategy alignment, enterprise architecture planning and design, initial software implementation and integration, and ongoing software enhancements and upgrades. We utilize a global, blended delivery model to optimize value for our
customers and partners, consisting of on-premise consultants from local geographies, industry specialists and consultants from our global delivery and solution centers;

•

advanced customer support services, which are provided on-premise and remotely to our customers to enable increased performance and higher availability
of their Oracle products and services and also include certain other services; and

•

education services for Oracle products and services, including training and certification programs that are offered to customers, partners and
employees through a variety of formats, including instructor-led classes at our education centers, live virtual training, self-paced online training, private events and custom training.

Acquisitions

A selective
and active acquisition program is another important element of our corporate strategy. In recent years, we have invested billions of dollars to acquire a number of complementary companies, products, services and technologies, including MICROS
Systems, Inc. (MICROS) in fiscal 2015.

We believe our acquisition program strengthens our competitive position, enhances the products and
services that we can offer to customers, expands our customer base, provides greater scale to accelerate innovation, grows our revenues and earnings and increases stockholder value. We expect to continue to acquire companies, products, services and
technologies in furtherance of our corporate strategy. Note 2 of Notes to Consolidated Financial Statements included elsewhere in this Annual Report provides additional information related to our recent acquisitions.

We believe that we can fund our future acquisitions with our internally available cash, cash equivalents and marketable securities, cash generated from
operations, additional borrowings or from the issuance of additional securities. We estimate the financial impact of any potential acquisition with regard to earnings, operating margin, cash flow and return on invested capital targets before
deciding to move forward with an acquisition.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (GAAP) as set forth in the Financial
Accounting Standards Board's (FASB) Accounting Standards Codification (ASC), and we consider the various staff accounting bulletins and other applicable guidance issued by the U.S. Securities and Exchange Commission. GAAP, as set forth within
the ASC, requires us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments
and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods
presented. To the extent that there are differences between these estimates, judgments or assumptions and actual results, our financial statements will be affected. The accounting policies that reflect our

45

more significant estimates, judgments and assumptions and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include:

•

Revenue Recognition;

•

Business Combinations;

•

Goodwill and Intangible Assets-Impairment Assessments;

•

Accounting for Income Taxes; and

•

Legal and Other Contingencies.

In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management's judgment in its application. There are also areas in which
management's judgment in selecting among available alternatives would not produce a materially different result. Our senior management has reviewed our critical accounting policies and related disclosures with the Finance and Audit Committee of
the Board of Directors.

Revenue Recognition

Our sources of revenues include:

•

cloud and on-premise software revenues, which include the sale of: new software licenses, which generally grant to customers a perpetual right to use
our database, middleware, applications and industry-specific software products; cloud SaaS and PaaS offerings, which grant customers access to a broad range of our software and related support offerings on a subscription basis in a secure,
standards-based cloud computing environment; cloud IaaS offerings, which grant customers access to infrastructure cloud services to perform elastic compute, storage and networking services, and also provide management services for software and
hardware and related IT infrastructure, both generally on a subscription basis; and software license updates and product support offerings (described further below);

•

hardware revenues, which include the sale of hardware products including Oracle Engineered Systems, computer servers, storage products, networking and
data center fabric products, and industry-specific hardware; and hardware support revenues (described further below); and

•

services revenues, which are earned from providing software and hardware related services including consulting, advanced customer support and education
services.

Revenues generally are recognized net of any taxes collected from customers and subsequently remitted to
governmental authorities.

Revenue Recognition for Software Products and Software Related Services (Software Elements)

New software licenses revenues primarily represent fees earned from granting customers licenses to use our database, middleware, application and
industry-specific software products and exclude cloud SaaS and PaaS revenues and revenues derived from software license updates, which are included in software license updates and product support revenues. The basis for our new software licenses
revenue recognition is substantially governed by the accounting guidance contained in ASC 985-605, Software-Revenue Recognition. We exercise judgment and use estimates in connection with the determination of the amount of software and
software related services revenues to be recognized in each accounting period.

For software license arrangements that do not require
significant modification or customization of the underlying software, we recognize new software licenses revenues when: (1) we enter into a legally binding arrangement with a customer for the license of software; (2) we deliver the products; (3) the
sale price is fixed or determinable and free of contingencies or significant uncertainties; and (4) collection is probable. Revenues that are not recognized at the time of sale because the foregoing conditions are not met, are recognized when those
conditions are subsequently met.

46

Substantially all of our software license arrangements do not include acceptance provisions. However, if
acceptance provisions exist as part of public policy (for example, in agreements with government entities where acceptance periods are required by law, or within previously executed terms and conditions that are referenced in the current agreement
and are short-term in nature), we generally recognize revenues upon delivery provided the acceptance terms are perfunctory and all other revenue recognition criteria have been met. If acceptance provisions are not perfunctory (for example,
acceptance provisions that are long-term in nature or are not included as standard terms of an arrangement), revenues are recognized upon the earlier of receipt of written customer acceptance or expiration of the acceptance period.

The vast majority of our software license arrangements include software license updates and product support contracts, which are entered into at the
customer's option, and the related fees are recognized ratably over the term of the arrangement, typically one year. Software license updates provide customers with rights to unspecified software product upgrades, maintenance releases and
patches released during the term of the support period. Product support includes internet access to technical content, as well as internet and telephone access to technical support personnel. Software license updates and product support contracts
are generally priced as a percentage of the net new software licenses fees and are generally invoiced in full at the beginning of the support term. Substantially all of our customers renew their software license updates and product support contracts
annually.

Revenue Recognition for Multiple-Element Arrangements-Software Products and Software Related Services (Software
Arrangements)

We often enter into arrangements with customers that purchase both software related products and software related services
from us at the same time, or within close proximity of one another (referred to as software related multiple-element arrangements). Such software related multiple-element arrangements include the sale of our software products, software license
updates and product support contracts and other software related services whereby software license delivery is followed by the subsequent or contemporaneous delivery of the other elements. For those software related multiple-element arrangements, we
have applied the residual method to determine the amount of new software license revenues to be recognized pursuant to ASC 985-605. Under the residual method, if fair value exists for undelivered elements in a multiple-element arrangement, such fair
value of the undelivered elements is deferred with the remaining portion of the arrangement consideration generally recognized upon delivery of the software license. We allocate the fair value of each element of a software related multiple-element
arrangement based upon its fair value as determined by our vendor-specific objective evidence (VSOE-described further below), with any remaining amount allocated to the software license.

Revenue Recognition for Cloud SaaS, PaaS and IaaS Offerings, Hardware Products, Hardware Support and Related Services (Non-software Elements)

Our revenue recognition policy for non-software deliverables including cloud SaaS, PaaS and IaaS offerings, hardware products, support and related
services is based upon the accounting guidance contained in ASC 605-25, Revenue Recognition, Multiple-Element Arrangements, and we exercise judgment and use estimates in connection with the determination of the amount of cloud SaaS,
PaaS and IaaS revenues, hardware products revenues, support and related services revenues to be recognized in each accounting period.

Revenues
from the sales of our non-software elements are recognized when: (1) persuasive evidence of an arrangement exists; (2) we deliver the products and passage of the title to the buyer occurs; (3) the sale price is fixed or determinable; and (4)
collection is reasonably assured. Revenues that are not recognized at the time of sale because the foregoing conditions are not met are recognized when those conditions are subsequently met. When applicable, we reduce revenues for estimated returns
or certain other incentive programs where we have the ability to sufficiently estimate the effects of these items. Where an arrangement is subject to acceptance criteria and the acceptance provisions are not perfunctory (for example, acceptance
provisions that are long-term in nature or are not included as standard terms of an arrangement), revenues are recognized upon the earlier of receipt of written customer acceptance or expiration of the acceptance period.

47

Our cloud SaaS and PaaS offerings generally provide customers access to certain of our software within a
cloud-based IT environment that we manage, host and support and offer to customers on a subscription basis. Revenues for our cloud SaaS and PaaS offerings are generally recognized ratably over the contract term commencing with the date the service
is made available to customers and all other revenue recognition criteria have been satisfied.

Our cloud IaaS offerings provide infrastructure
cloud services and also include deployment and management offerings for software and hardware and related IT infrastructure. Our cloud IaaS offerings are generally sold on a subscription basis and revenues for these cloud IaaS offerings are
generally recognized ratably over the contract term commencing with the date the service is made available to customers and all other revenue recognition criteria have been satisfied.

Revenues from the sale of hardware products represent amounts earned primarily from the sale of our Oracle Engineered Systems, computer servers, storage, networking and industry-specific hardware and are
recognized upon the delivery of the hardware product to the customer provided all other revenue recognition criteria have been satisfied.

Our
hardware support offerings generally provide customers with software updates for the software components that are essential to the functionality of our hardware products and can also include product repairs, maintenance services and technical
support services. Hardware support contracts are generally priced as a percentage of the net hardware products fees. Hardware support contracts are entered into at the customer's option and are recognized ratably over the contractual term of
the arrangements, which is typically one year, provided all other revenue recognition criteria have been satisfied.

Revenue Recognition
for Multiple-Element Arrangements-Cloud SaaS, PaaS and IaaS Offerings, Hardware Products, Hardware Support and Related Services (Non-software Arrangements)

We enter into arrangements with customers that purchase non-software related products and services from us at the same time, or within close proximity of one another (referred to as non-software
multiple-element arrangements). Each element within a non-software multiple-element arrangement is accounted for as a separate unit of accounting provided the following criteria are met: the delivered products or services have value to the customer
on a standalone basis; and for an arrangement that includes a general right of return relative to the delivered products or services, delivery or performance of the undelivered product or service is considered probable and is substantially
controlled by us. We consider a deliverable to have standalone value if the product or service is sold separately by us or another vendor or could be resold by the customer. Further, our revenue arrangements generally do not include a general right
of return relative to the delivered products. Where the aforementioned criteria for a separate unit of accounting are not met, the deliverable is combined with the undelivered element(s) and treated as a single unit of accounting for the purposes of
allocation of the arrangement consideration and revenue recognition. For those units of accounting that include more than one deliverable but are treated as a single unit of accounting, we generally recognize revenues over the contractual period of
the arrangement, or in the case of our cloud offerings, we generally recognize revenues over the contractual term of the cloud software subscription. For the purposes of revenue classification of the elements that are accounted for as a single unit
of accounting, we allocate revenue to the respective revenue line items within our consolidated statements of operations based on a rational and consistent methodology utilizing our best estimate of relative selling prices of such
elements.

For our non-software multiple-element arrangements, we allocate revenue to each element based on a selling price hierarchy at the
arrangement's inception. The selling price for each element is based upon the following selling price hierarchy: VSOE if available, third-party evidence (TPE) if VSOE is not available, or estimated selling price (ESP) if neither VSOE nor TPE
are available (a description as to how we determine VSOE, TPE and ESP is provided below). If a tangible hardware product includes software, we determine whether the tangible hardware product and the software work together to deliver the
product's essential functionality and, if so, the entire product is treated as a non-software deliverable. The total arrangement consideration is allocated to each separate unit of accounting for each of the non-software deliverables using the
relative selling prices of each unit based on the aforementioned selling price hierarchy. We limit the amount of revenue recognized for delivered elements to an amount that is not contingent upon future delivery of additional products or services or
meeting of any specified performance conditions.

48

When possible, we establish VSOE of selling price for deliverables in software and non-software
multiple-element arrangements using the price charged for a deliverable when sold separately and for software license updates and product support and hardware support, based on the renewal rates offered to customers. TPE is established by evaluating
similar and interchangeable competitor products or services in standalone arrangements with similarly situated customers. If we are unable to determine the selling price because VSOE or TPE does not exist, we determine ESP for the purposes of
allocating the arrangement by reviewing historical transactions, including transactions whereby the deliverable was sold on a standalone basis and considering several other external and internal factors including, but not limited to, pricing
practices including discounting, margin objectives, competition, contractually stated prices, the geographies in which we offer our products and services, the type of customer (i.e., distributor, value-added reseller, government agency and direct
end user, among others) and the stage of the product lifecycle. The determination of ESP is made through consultation with and approval by our management, taking into consideration our pricing model and go-to-market strategy. As our, or our
competitors', pricing and go-to-market strategies evolve, we may modify our pricing practices in the future, which could result in changes to our determination of VSOE, TPE and ESP. As a result, our future revenue recognition for
multiple-element arrangements could differ materially from our results in the current period. Selling prices are analyzed on an annual basis or more frequently if we experience significant changes in our selling prices.

Revenue Recognition Policies Applicable to both Software and Non-software Elements

Revenue Recognition for Multiple-Element Arrangements-Arrangements with Software and Non-software Elements

We also enter into multiple-element arrangements that may include a combination of our various software related and non-software related products and services offerings including new software licenses,
software license updates and product support, cloud SaaS, PaaS and IaaS offerings, hardware products, hardware support, consulting, advanced customer support services and education. In such arrangements, we first allocate the total arrangement
consideration based on the relative selling prices of the software group of elements as a whole and to the non-software elements. We then further allocate consideration within the software group to the respective elements within that group following
the guidance in ASC 985-605 and our policies as described above. After the arrangement consideration has been allocated to the elements, we account for each respective element in the arrangement as described above.

Other Revenue Recognition Policies Applicable to Software and Non-software Elements

Many of our software arrangements include consulting implementation services sold separately under consulting engagement contracts and are included as a part of our services business. Consulting revenues
from these arrangements are generally accounted for separately from new software licenses revenues because the arrangements qualify as services transactions as defined in ASC 985-605. The more significant factors considered in determining whether
the revenues should be accounted for separately include the nature of services (i.e., consideration of whether the services are essential to the functionality of the licensed product), degree of risk, availability of services from other vendors,
timing of payments and impact of milestones or acceptance criteria on the realizability of the software license fee. Revenues for consulting services are generally recognized as the services are performed. If there is a significant uncertainty about
the project completion or receipt of payment for the consulting services, revenues are deferred until the uncertainty is sufficiently resolved. We estimate the proportional performance on contracts with fixed or "not to exceed" fees on a
monthly basis utilizing hours incurred to date as a percentage of total estimated hours to complete the project. If we do not have a sufficient basis to measure progress towards completion, revenues are recognized when we receive final acceptance
from the customer that the services have been completed. When total cost estimates exceed revenues, we accrue for the estimated losses immediately using cost estimates that are based upon an average fully burdened daily rate applicable to the
consulting organization delivering the services. The complexity of the estimation process and factors relating to the assumptions, risks and uncertainties inherent with the application of the proportional performance method of accounting affects the
amounts of revenues and related expenses reported in our consolidated financial statements. A number of internal and external factors can affect our estimates, including labor rates, utilization and efficiency variances and specification and testing
requirement changes.

49

Our advanced customer support services are offered as standalone arrangements or as a part of arrangements
to customers buying other software and non-software products and services. We offer these advanced support services, both on-premise and remote, to Oracle customers to enable increased performance and higher availability of their products and
services. Depending upon the nature of the arrangement, revenues from these services are recognized as the services are performed or ratably over the term of the service period, which is generally one year or less.

Education revenues are also a part of our services business and include instructor-led, media-based and internet-based training in the use of our software
and hardware products. Education revenues are recognized as the classes or other education offerings are delivered.

If an arrangement contains
multiple elements and does not qualify for separate accounting for the product and service transactions, then new software licenses revenues and/or hardware products revenues, including the costs of hardware products, are generally recognized
together with the services based on contract accounting using either the percentage-of-completion or completed-contract method. For the purposes of revenue classification of the elements that are accounted for as a single unit of accounting, we
allocate revenues to software and non-software elements based on a rational and consistent methodology utilizing our best estimate of the relative selling price of such elements.

We also evaluate arrangements with governmental entities containing "fiscal funding" or "termination for convenience" provisions, when such provisions are required by law, to determine
the probability of possible cancellation. We consider multiple factors, including the history with the customer in similar transactions, the "essential use" of the software or hardware products and the planning, budgeting and approval
processes undertaken by the governmental entity. If we determine upon execution of these arrangements that the likelihood of cancellation is remote, we then recognize revenues once all of the criteria described above have been met. If such a
determination cannot be made, revenues are recognized upon the earlier of cash receipt or approval of the applicable funding provision by the governmental entity.

We assess whether fees are fixed or determinable at the time of sale and recognize revenues if all other revenue recognition requirements are met. Our standard payment terms are net 30 days. However,
payment terms may vary based on the country in which the agreement is executed. We evaluate non-standard payment terms based on whether we have successful collection history on comparable arrangements (based upon similarity of customers, products,
and license economics) and, if so, generally conclude such payment terms are fixed and determinable and thereby satisfy the required criteria for revenue recognition.

While most of our arrangements for sales within our businesses include short-term payment terms, we have a standard practice of providing long-term financing to creditworthy customers primarily through
our financing division. Since fiscal 1989, when our financing division was formed, we have established a history of collection, without concessions, on these receivables with payment terms that generally extend up to five years from the contract
date. Provided all other revenue recognition criteria have been met, we recognize new software licenses revenues and hardware products revenues for these arrangements upon delivery, net of any payment discounts from financing transactions. We have
generally sold receivables financed through our financing division on a non-recourse basis to third-party financing institutions within 90 days of the contracts' dates of execution and we classify the proceeds from these sales as cash flows
from operating activities in our consolidated statements of cash flows. We account for the sales of these receivables as "true sales" as defined in ASC 860, Transfers and Servicing, as we are considered to have surrendered control
of these financing receivables.

Our customers include several of our suppliers and, occasionally, we have purchased goods or services for our
operations from these vendors at or about the same time that we have sold our products to these same companies (Concurrent Transactions). Software license agreements, sales of hardware or sales of services that occur within a three-month time period
from the date we have purchased goods or services from that same customer are reviewed for appropriate accounting treatment and disclosure. When we acquire goods or services from a customer, we negotiate the purchase separately from any sales
transaction, at terms we consider to be at arm's length and settle the purchase in cash. We recognize revenues from Concurrent Transactions if all of our revenue recognition criteria are met and the goods and services acquired are necessary for
our current operations.

50

Business Combinations

We apply the provisions of ASC 805, Business Combinations, in accounting for our acquisitions. It requires us to recognize separately from goodwill the assets acquired and the liabilities assumed
at the acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While we use our
best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date as well as any contingent consideration, where applicable, our estimates are inherently uncertain and subject to refinement. As a
result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement
period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of operations.

Accounting for business combinations requires our management to make significant estimates and assumptions, especially at the acquisition date, including
our estimates for intangible assets, contractual obligations assumed, pre-acquisition contingencies and contingent consideration, where applicable. Although we believe the assumptions and estimates we have made in the past have been reasonable and
appropriate, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain.

Examples of critical estimates in valuing certain of the intangible assets we have acquired include but are not limited to:

•

future expected cash flows from software license sales, cloud SaaS, PaaS and IaaS contracts, hardware product sales, support agreements, consulting
contracts, other customer contracts, acquired developed technologies and patents;

•

expected costs to develop the in-process research and development into commercially viable products and estimated cash flows from the projects when
completed;

•

the acquired company's brand and competitive position, as well as assumptions about the period of time the acquired brand will continue to be used
in the combined company's product portfolio; and

•

discount rates.

Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.

We estimate the fair values of our cloud SaaS and PaaS, software license updates and product support, and hardware support obligations assumed. The
estimated fair values of these performance obligations are determined utilizing a cost build-up approach. The cost build-up approach determines fair value by estimating the costs related to fulfilling the obligations plus a normal profit margin. The
estimated costs to fulfill the obligations are based on the historical direct costs related to providing the services including the correction of any errors in the products acquired. The sum of these costs and operating profit approximates, in
theory, the amount that we would be required to pay a third party to assume the performance obligations. We do not include any costs associated with selling efforts or research and development or the related fulfillment margins on these costs.
Profit associated with any selling efforts is excluded because the acquired entities would have concluded those selling efforts on the performance obligations prior to the acquisition date. We also do not include the estimated research and
development costs in our fair value determinations, as these costs are not deemed to represent a legal obligation at the time of acquisition. As a result of our fair value estimates for these obligations, we did not recognize certain cloud SaaS and
PaaS, software license updates and product support and hardware support revenue amounts that would have been otherwise recorded by the acquired businesses as independent entities upon delivery of the contractual obligations (refer to
"Supplemental Disclosure Related to Certain Charges" below for further discussion). Historically, substantially all of our customers, including customers from acquired companies, renew their software license updates and product support
contracts when the contracts are eligible for renewal, and we strive to renew cloud SaaS and PaaS contracts and hardware support contracts. To the extent

51

customers to which these contractual obligations pertain renew these contracts with us, we expect to recognize revenues for the full contracts' values over the respective contracts'
renewal periods.

In connection with a business combination or other strategic initiative, we may estimate costs associated with restructuring
plans committed to by our management. Restructuring costs are typically comprised of employee severance costs, costs of consolidating duplicate facilities and contract termination costs. Restructuring expenses are based upon plans that have been
committed to by our management, but may be refined in subsequent periods. We account for costs to exit or restructure certain activities of an acquired company separately from the business combination pursuant to ASC 420, Exit or Disposal Cost
Obligations. A liability for costs associated with an exit or disposal activity is recognized and measured at its fair value in our consolidated statement of operations in the period in which the liability is incurred. When estimating the fair
value of facility restructuring activities, assumptions are applied regarding estimated sub-lease payments to be received, which can differ materially from actual results. This may require us to revise our initial estimates which may materially
affect our results of operations and financial position in the period the revision is made.

For a given acquisition, we may identify certain
pre-acquisition contingencies as of the acquisition date and may extend our review and evaluation of these pre-acquisition contingencies throughout the measurement period in order to obtain sufficient information to assess whether we include these
contingencies as a part of the fair value estimates of assets acquired and liabilities assumed and, if so, to determine their estimated amounts.

If we cannot reasonably determine the fair value of a pre-acquisition contingency (non-income tax related) by the end of the measurement period, which is
generally the case given the nature of such matters, we will recognize an asset or a liability for such pre-acquisition contingency if: (1) it is probable that an asset existed or a liability had been incurred at the acquisition date and (2) the
amount of the asset or liability can be reasonably estimated. Subsequent to the measurement period, changes in our estimates of such contingencies will affect earnings and could have a material effect on our results of operations and financial
position.

In addition, uncertain tax positions and tax related valuation allowances assumed in connection with a business combination are
initially estimated as of the acquisition date. We reevaluate these items quarterly based upon facts and circumstances that existed as of the acquisition date with any adjustments to our preliminary estimates being recorded to goodwill if identified
within the measurement period. Subsequent to the measurement period or our final determination of the tax allowance's or contingency's estimated value, whichever comes first, changes to these uncertain tax positions and tax related
valuation allowances will affect our provision for income taxes in our consolidated statement of operations and could have a material impact on our results of operations and financial position.

Goodwill and Intangible Assets-Impairment Assessments

We review goodwill for impairment annually and whenever events or changes in circumstances indicate its carrying value may not be recoverable in accordance with ASC 350, Intangibles-Goodwill and
Other. According to ASC 350, we can opt to perform a qualitative assessment to test a reporting unit's goodwill for impairment or we can directly perform the two-step impairment test. Based on our qualitative assessment, if we determine
that the fair value of a reporting unit is more likely than not (i.e., a likelihood of more than 50 percent) to be less than its carrying amount, the two-step impairment test prescribed by ASC 350 will be performed. In the first step, we compare the
fair value of each reporting unit to its carrying value. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not considered impaired and we are not required to perform further
testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then we must perform the second step of the impairment test in order to determine the implied fair value of the reporting
unit's goodwill. If the carrying value of a reporting unit's goodwill exceeds its implied fair value, then we would record an impairment loss equal to the difference.

Determining the fair value of a reporting unit involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates and operating margins used to
calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions and the determination of appropriate market comparables. We base our fair value estimates on assumptions we believe to be reasonable

52

but that are inherently uncertain. Actual future results may differ from those estimates. In addition, we make certain judgments and assumptions in allocating shared assets and liabilities to
determine the carrying values for each of our reporting units.

Our most recent annual goodwill impairment analysis, which was performed on
March 1, 2016, did not result in a goodwill impairment charge, nor did we recognize an impairment charge in fiscal 2014. In fiscal 2015, we recognized an impairment charge of $186 million in our hardware products reporting unit (refer to Note 7 of
Notes to Consolidated Financial Statements included elsewhere in this Annual Report for additional information).

Other than our consulting
reporting unit, all of our other reporting units had fair values that substantially exceeded their carrying values based on our most recent annual goodwill impairment review. Our consulting reporting unit had $1.8 billion of goodwill on March 1,
2016, and experienced revenue and operating margin declines in fiscal 2016. As of our most recent annual goodwill impairment review, our consulting reporting unit's fair value was 11% in excess of its carrying value. We estimate that should our
consulting reporting unit's projected margins and related cash flows unfavorably deviate from our projections by 20% or more each year, our consulting reporting unit likely would incur a goodwill impairment loss.

We make judgments about the recoverability of purchased finite lived intangible assets whenever events or changes in circumstances indicate that an
impairment may exist. Each period we evaluate the estimated remaining useful lives of purchased intangible assets and whether events or changes in circumstances warrant a revision to the remaining periods of amortization. Recoverability of finite
lived intangible assets is measured by comparison of the carrying amount of the asset to the future undiscounted cash flows the asset is expected to generate. We review indefinite lived intangible assets for impairment annually and whenever events
or changes in circumstances indicate the carrying value may not be recoverable. Recoverability of indefinite lived intangible assets is measured by comparison of the carrying amount of the asset to its fair value. If the asset is considered to be
impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset.

Assumptions and estimates about future values and remaining useful lives of our intangible assets are complex and subjective. They can be affected by a
variety of factors, including external factors such as industry and economic trends and internal factors such as changes in our business strategy and our internal forecasts. Although we believe the historical assumptions and estimates we have made
are reasonable and appropriate, different assumptions and estimates could materially impact our reported financial results. We did not recognize any intangible asset impairment charges in fiscal 2016, 2015 or 2014.

Accounting for Income Taxes

Significant judgment is required in determining our worldwide income tax provision. In the ordinary course of a global business, there are many
transactions and calculations where the ultimate tax outcome is uncertain. Some of these uncertainties arise as a consequence of revenue sharing and cost reimbursement arrangements among related entities, the process of identifying items of revenues
and expenses that qualify for preferential tax treatment and segregation of foreign and domestic earnings and expenses to avoid double taxation. Although we believe that our estimates are reasonable, the final tax outcome of these matters could be
different from that which is reflected in our historical income tax provisions and accruals. Such differences could have a material effect on our income tax provision and net income in the period in which such determination is made.

Our effective tax rate includes the impact of certain undistributed foreign earnings for which no U.S. taxes have been provided because such earnings are
planned to be indefinitely reinvested outside the United States. Remittances of foreign earnings to the United States are planned based on projected cash flow, working capital and investment needs of our foreign and domestic operations. Based on
these assumptions, we estimate the amount that will be distributed to the United States and provide U.S. federal taxes on these amounts. Material changes in our estimates as to how much of our foreign earnings will be distributed to the United
States or tax legislation that limits or restricts the amount of undistributed foreign earnings that we consider indefinitely reinvested outside the United States could materially impact our income tax provision and effective tax rate.

53

We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not
to be realized. In order for us to realize our deferred tax assets, we must be able to generate sufficient taxable income in those jurisdictions where the deferred tax assets are located. We consider future growth, forecasted earnings, future
taxable income, the mix of earnings in the jurisdictions in which we operate, historical earnings, taxable income in prior years, if carryback is permitted under the law and prudent and feasible tax planning strategies in determining the need for a
valuation allowance. In the event we were to determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the deferred tax assets valuation allowance would be charged to earnings in the
period in which we make such a determination, or goodwill would be adjusted at our final determination of the valuation allowance related to an acquisition within the measurement period. If we later determine that it is more likely than not that the
net deferred tax assets would be realized, we would reverse the applicable portion of the previously provided valuation allowance as an adjustment to earnings at such time.

We calculate our current and deferred tax provision based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed during the subsequent year.
Adjustments based on filed returns are generally recorded in the period when the tax returns are filed and the global tax implications are known, which can materially impact our effective tax rate.

The amount of income tax we pay is subject to ongoing audits by federal, state and foreign tax authorities, which often result in proposed assessments.
Our estimate of the potential outcome for any uncertain tax issue is highly judgmental. A description of our accounting policies associated with tax related contingencies assumed as a part of a business combination is provided under "Business
Combinations" above. For those tax related contingencies that are not a part of a business combination, we account for these uncertain tax issues pursuant to ASC 740, Income Taxes, which contains a two-step approach to recognizing and
measuring uncertain tax positions taken or expected to be taken in a tax return. The first step is to determine if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained in an audit,
including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. Although we believe that we have
adequately reserved for our uncertain tax positions, no assurance can be given with respect to the final outcome of these matters. We adjust reserves for our uncertain tax positions due to changing facts and circumstances, such as the closing of a
tax audit, judicial rulings, and refinement of estimates or realization of earnings or deductions that differ from our estimates. To the extent that the final outcome of these matters is different than the amounts recorded, such differences
generally will impact our provision for income taxes in the period in which such a determination is made. Our provisions for income taxes include the impact of reserve provisions and changes to reserves that are considered appropriate and also
include the related interest and penalties.

In addition, as a part of our accounting for business combinations, intangible assets are
recognized at fair values and goodwill is measured as the excess of consideration transferred over the net estimated fair values of assets acquired. Impairment charges associated with goodwill are generally not tax deductible and will result in an
increased effective income tax rate in the period that any impairment is recorded. Amortization expenses associated with acquired intangible assets are generally not tax deductible pursuant to our existing tax structure; however, deferred taxes have
been recorded for non-deductible amortization expenses as a part of the accounting for business combinations. We have taken into account the allocation of these identified intangibles among different taxing jurisdictions, including those with
nominal or zero percent tax rates, in establishing the related deferred tax liabilities.

Legal and Other Contingencies

We are currently involved in various claims and legal proceedings. Quarterly, we review the status of each significant matter and
assess our potential financial exposure. A description of our accounting policies associated with contingencies assumed as a part of a business combination is provided under "Business Combinations" above. For legal and other contingencies
that are not a part of a business combination, we accrue a liability for an estimated loss if the potential loss from any claim or legal proceeding is considered probable, and the amount can be reasonably estimated. Significant judgment is required
in both the determination of probability and the determination as to whether the amount of an exposure is reasonably estimable. Because of uncertainties related to these matters, accruals are based only on the best information available at the time
the accruals are made. As

54

additional information becomes available, we reassess the potential liability related to our pending claims and litigation and may revise our estimates. Such revisions in the estimates of the
potential liabilities could have a material impact on our results of operations and financial position.

Results of Operations

Impact of Acquisitions

The comparability of our operating results in fiscal 2016 compared to fiscal 2015 and in fiscal 2015 compared to fiscal 2014 was impacted by our recent acquisitions. In our discussion of changes in our
results of operations from fiscal 2016 compared to fiscal 2015 and fiscal 2015 compared to fiscal 2014, we may qualitatively disclose the impact of our acquired products and services (for the one-year period subsequent to the acquisition date) to
the growth in certain of our operating segments' revenues where such qualitative discussions would be meaningful for an understanding of the factors that influenced the changes in our results of operations. When material, we may also provide
quantitative disclosures related to such acquired products and services. Expenses for each of the respective period comparisons generally were not separately identifiable due to the integration of these businesses and operating segments into our
existing operations, and/or were insignificant to our results of operations during the periods presented.

We caution readers that, while pre-
and post-acquisition comparisons, as well as any quantified amounts themselves, may provide indications of general trends, any acquisition information that we provide has inherent limitations for the following reasons:

•

any qualitative and quantitative disclosures cannot specifically address or quantify the substantial effects attributable to changes in business
strategies, including our sales force integration efforts. We believe that if our acquired companies had operated independently and sales forces had not been integrated, the relative mix of products and services sold would have been different; and

•

although substantially all of our on-premise software license customers, including customers from acquired companies, renew their software license
updates and product support contracts when the contracts are eligible for renewal, and we strive to renew cloud SaaS and PaaS contracts and hardware support contracts, the amounts shown as cloud SaaS and PaaS deferred revenues, software license
updates and product support deferred revenues, and hardware support deferred revenues in our "Supplemental Disclosure Related to Certain Charges" (presented below) are not necessarily indicative of revenue improvements we will achieve upon
contract renewals to the extent customers do not renew.

Constant Currency Presentation

Our international operations have provided and are expected to continue to provide a significant portion of each of our segments' revenues and
expenses. As a result, each segment's revenues and expenses and our total revenues and expenses will continue to be affected by changes in the U.S. Dollar against major international currencies. In order to provide a framework for assessing how
our underlying businesses performed excluding the effects of foreign currency fluctuations, we compare the percent change in the results from one period to another period in this Annual Report using constant currency disclosure. To present this
information, current and comparative prior period results for entities reporting in currencies other than U.S. Dollars are converted into U.S. Dollars at constant exchange rates (i.e., the rates in effect on May 31, 2015, which was the last day of
our prior fiscal year) rather than the actual exchange rates in effect during the respective periods. For example, if an entity reporting in Euros had revenues of 1.0 million Euros from products sold on May 31, 2016 and 2015, our financial
statements would reflect reported revenues of $1.12 million in fiscal 2016 (using 1.12 as the month-end average exchange rate for the period) and $1.08 million in fiscal 2015 (using 1.08 as the month-end average exchange rate for the period). The
constant currency presentation, however, would translate the fiscal 2016 results using the fiscal 2015 exchange rate and indicate, in this example, no change in revenues during the period. In each of the tables below, we present the percent change
based on actual, unrounded results in reported currency and in constant currency.

55

Total Revenues and Operating Expenses

Year Ended May 31,

Percent Change

Percent Change

(Dollars in millions)

2016

Actual

Constant

2015

Actual

Constant

2014

Total Revenues by Geography:

Americas

$
20,466

-3%

0%

$
21,107

4%

6%

$
20,323

EMEA(1)

10,881

-4%

3%

11,380

-5%

4%

11,946

Asia Pacific(2)

5,700

-1%

7%

5,739

-4%

1%

6,006

Total revenues

37,047

-3%

2%

38,226

0%

4%

38,275

Total Operating Expenses

24,443

0%

4%

24,355

4%

7%

23,516

Total Operating Margin

$
12,604

-9%

-2%

$
13,871

-6%

0%

$
14,759

Total Operating Margin %

34%

36%

39%

% Revenues by Geography:

Americas

55%

55%

53%

EMEA

29%

30%

31%

Asia Pacific

16%

15%

16%

Total Revenues by Business:

Cloud and on-premise software

$
28,990

-2%

3%

$
29,475

1%

5%

$
29,199

Hardware

4,668

-10%

-5%

5,205

-3%

2%

5,372

Services

3,389

-4%

2%

3,546

-4%

0%

3,704

Total revenues

$
37,047

-3%

2%

$
38,226

0%

4%

$
38,275

% Revenues by Business:

Cloud and on-premise software

78%

77%

76%

Hardware

13%

14%

14%

Services

9%

9%

10%

(1)
Comprised of Europe, the Middle East and Africa

(2)
The Asia Pacific region includes Japan

Fiscal 2016 Compared to Fiscal 2015: Our results of operations for fiscal 2016 compared to fiscal 2015 were significantly impacted by movements in international
currencies relative to the U.S. Dollar, which decreased our total revenues by 5 percentage points, total operating expenses by 4 percentage points and total operating margin by 7 percentage points.

Excluding the effects of unfavorable currency rate fluctuations, our total revenues increased in fiscal 2016 due to constant currency growth in our cloud
and on-premise software business revenues and services business revenues. The constant currency growth in our cloud and on-premise software business revenues during fiscal 2016 was attributable to growth in our software license updates and product
support revenues, growth in our SaaS, PaaS and IaaS revenues, and revenue contributions from our recent acquisitions and was partially offset by fiscal 2016 decreases in our new software licenses revenues. The constant currency growth in our
services business revenues was primarily attributable to our recent acquisitions. These constant currency increases in our revenues during fiscal 2016 were partially offset by constant currency decreases in our hardware business revenues. In
constant currency, the EMEA region and the Asia Pacific region contributed approximately equal amounts to our fiscal 2016 total revenues growth and the Americas was flat.

Excluding the effects of favorable currency rate fluctuations, our total operating expenses increased during fiscal 2016 primarily due to increased sales and marketing and research and development
expenses resulting primarily from increased headcount, increased cloud SaaS, PaaS and IaaS expenses resulting from increased headcount and infrastructure expenses to support the increase in our cloud SaaS, PaaS and IaaS revenues, higher
restructuring expenses that were recorded pursuant to the Fiscal 2015 Oracle Restructuring Plan (2015 Restructuring Plan; see Note 9 of Notes to Consolidated Financial Statements included elsewhere in this Annual Report), and higher general and
administrative expenses due to higher headcount and higher professional services fees, primarily legal related fees. These constant currency expense increases were partially offset by fiscal 2016 reductions in expenses associated with certain of our
intangible assets that became fully amortized during fiscal 2016 and lower acquisition related and other expenses, which primarily was attributable to higher expenses during fiscal 2015 as a result of a goodwill impairment loss of $186 million (see
Note 7 of Notes to Consolidated Financial Statements included elsewhere in this Annual Report for additional information).

56

Excluding the effects of unfavorable foreign currency rate fluctuations, our total operating margin and
total operating margin as a percentage of revenues decreased in fiscal 2016 as our total expenses increased at a faster rate than our total revenues.

Fiscal 2015 Compared to Fiscal 2014: Our results of operations for fiscal 2015 compared to fiscal 2014 were significantly impacted by movements in international
currencies relative to the U.S. Dollar, which decreased our total revenues by 4 percentage points, total operating expenses by 3 percentage points and total operating income by 6 percentage points.

Excluding the effects of unfavorable currency variations, our total revenues increased in fiscal 2015 due to revenue increases in our cloud and on-premise
software and hardware businesses. The constant currency growth in our cloud and on-premise software revenues was attributable to similar reasons as noted above. The constant currency growth in our hardware business was attributable to growth in our
hardware support revenues, which were primarily attributable to revenue contributions from our acquisitions. Excluding the effects of currency rate fluctuations, the Americas region contributed 69%, the EMEA region contributed 28% and the Asia
Pacific region contributed 3% to the growth in our total revenues during fiscal 2015.

Excluding the effects of favorable currency variations,
our total operating expenses increased during fiscal 2015 due to expense increases across all of our lines of business, the largest of which were due to increased sales and marketing and research and development expenses resulting primarily from
increased headcount, increased cloud SaaS and PaaS expenses to support the increase in our cloud SaaS and PaaS revenues, and increased acquisition related and other expenses that was primarily attributable to the goodwill impairment charge as noted
above.

Excluding the effects of unfavorable foreign currency rate fluctuations, our fiscal 2015 operating margin was flat in comparison to the
prior year, while our operating margin as a percentage of revenues decreased in fiscal 2015 as our total operating expenses increased at a faster rate than our total revenues.

Supplemental Disclosure Related to Certain Charges

To supplement our consolidated
financial information, we believe the following information is helpful to an overall understanding of our past financial performance and prospects for the future. You should review the introduction under "Impact of Acquisitions" (above)
for a discussion of the inherent limitations in comparing pre- and post-acquisition information.

Our operating results included the following
business combination accounting adjustments and expenses related to acquisitions, as well as certain other expense and income items:

Year Ended May 31,

(in millions)

2016

2015

2014

Cloud software as a service and platform as a service deferred revenues(1)

$
7

$
12

$
17

Software license updates and product support deferred revenues(1)

2

11

3

Hardware support deferred revenues(1)

1

4

11

Amortization of intangible assets(2)

1,638

2,149

2,300

Acquisition related and other(3)(5)

42

211

41

Restructuring(4)

458

207

183

Stock-based compensation(5)

1,034

928

795

Income tax effects(6)

(846
)

(971
)

(1,091
)

$
2,336

$
2,551

$
2,259

(1)
In connection with our acquisitions, we have estimated the fair values of the cloud SaaS and PaaS subscriptions, software support and hardware support
obligations assumed. Due to our application of business combination accounting rules, we did not recognize the cloud SaaS and PaaS, software license updates and product support and hardware support revenue amounts as presented in the above table
that would have otherwise been recorded by the acquired businesses as independent entities upon delivery of the contractual obligations. To the extent customers to which these contractual obligations pertain renew these contracts with us, we expect
to recognize revenues for the full contracts' values over the respective contracts' renewal periods.

57

(2)
Represents the amortization of intangible assets, substantially all of which were acquired in connection with our acquisitions. As of May 31, 2016,
estimated future amortization expenses related to intangible assets were as follows (in millions):

Fiscal 2017

$
1,026

Fiscal 2018

878

Fiscal 2019

770

Fiscal 2020

621

Fiscal 2021

476

Thereafter

1,172

Total intangible assets, net

$
4,943

(3)
Acquisition related and other expenses primarily consist of personnel related costs for transitional and certain other employees, stock-based
compensation expenses, integration related professional services, certain business combination adjustments including certain adjustments after the measurement period has ended and certain other operating items, net. Included in acquisition related
and other expenses for fiscal 2015 was a goodwill impairment loss of $186 million (see Note 7 of Notes to Consolidated Financial Statements included elsewhere in this Annual Report).

(4)
Restructuring expenses during fiscal 2016 primarily related to employee severance in connection with our 2015 Restructuring Plan. Restructuring
expenses during fiscal 2015 primarily related to costs incurred pursuant to our 2015 Restructuring Plan and our Fiscal 2013 Oracle Restructuring Plan (2013 Restructuring Plan). Restructuring expenses during fiscal 2014 primarily related to costs
incurred pursuant to our 2013 Restructuring Plan. Additional information regarding certain of our restructuring plans is provided in Note 9 of Notes to Consolidated Financial Statements included elsewhere in this Annual Report.

(5)
Stock-based compensation was included in the following operating expense line items of our consolidated statements of operations (in millions):

Year Ended May 31,

2016

2015

2014

Sales and marketing

$
220

$
180

$
165

Cloud software as a service and platform as a service

17

10

8

Cloud infrastructure as a service

4

5

4

Software license updates and product support

23

21

22

Hardware products

7

6

5

Hardware support

5

6

6

Services

29

30

29

Research and development

609

522

385

General and administrative

120

148

171

Subtotal

1,034

928

795

Acquisition related and other

3

5

10

Total stock-based compensation

$
1,037

$
933

$
805

Stock-based compensation included in acquisition related and other expenses resulted from unvested stock options and restricted stock-based awards assumed from
acquisitions whose vesting was accelerated upon termination of the employees pursuant to the terms of those stock options and restricted stock-based awards.

(6)
The income tax effects presented were calculated as if the above described charges were not included in our results of operations for each of the
respective periods presented. Income tax effects for fiscal 2016, 2015 and 2014 were calculated based on the applicable jurisdictional tax rates applied to the items within the table above and resulted in effective tax rates of 23.2%, 23.6% and
22.5%, respectively, instead of 22.2%, 22.6% and 20.1%, respectively, which represented our effective tax rates as derived per our consolidated statements of operations, primarily due to the net tax effects of acquisition related items, including
the tax effects of amortization of intangible assets.

Cloud and On-Premise Software Business

Our cloud and on-premise software business consists of our cloud software and on-premise software segment, our cloud IaaS segment and our software license
updates and product support segment.

Cloud Software and On-Premise Software: Our cloud software and
on-premise software segment engages in the sale, marketing and delivery of our cloud software offerings, including our cloud SaaS and PaaS offerings, and the licensing of our software for on-premise IT environments. Our cloud SaaS and PaaS offerings
grant customers access to a broad range of our application and platform software technologies on a subscription basis in a secure, standards-based, cloud computing environment that generally includes access, hosting, infrastructure

58

management, the use of software updates, and support. New software licenses revenues represent fees earned from granting customers licenses to use our database and middleware and our application
software products within on-premise IT environments. We continue to place significant emphasis, both domestically and internationally, on direct sales through our own sales force. We also continue to market our products through indirect channels.
Costs associated with our cloud software and on-premise software segment are included in sales and marketing expenses, cloud SaaS and PaaS expenses and amortization of intangible assets. These costs are largely personnel related and include
commissions earned by our sales force for the sale of our software offerings, marketing program costs, the cost of providing our cloud SaaS and PaaS offerings and amortization of intangible assets.

Year Ended May 31,

Percent Change

Percent Change

(Dollars in millions)

2016

Actual

Constant

2015

Actual

Constant

2014

Cloud Software and On-Premise Software Revenues:

Americas

$
5,204

-9%

-7%

$
5,742

4%

6%

$
5,544

EMEA

2,629

-3%

3%

2,715

-16%

-8%

3,249

Asia Pacific

1,650

6%

12%

1,563

-10%

-5%

1,744

Total revenues

9,483

-5%

-1%

10,020

-5%

0%

10,537

Expenses:

Cloud software as a service and platform as a
service(1)

1,135

49%

53%

763

71%

76%

447

Sales and marketing(1)

6,690

3%

9%

6,474

2%

6%

6,350

Stock-based compensation

223

24%

24%

179

8%

8%

166

Amortization of intangible assets(2)

826

-18%

-18%

1,008

3%

3%

977

Total expenses

8,874

5%

10%

8,424

6%

10%

7,940

Total Margin

$
609

-62%

-59%

$
1,596

-39%

-31%

$
2,597

Total Margin %

6%

16%

25%

% Revenues by Geography:

Americas

55%

57%

53%

EMEA

28%

27%

31%

Asia Pacific

17%

16%

16%

Revenues by Software Offerings:

Cloud software as a service and platform as a service

$
2,207

49%

52%

$
1,485

32%

35%

$
1,121

New software licenses

7,276

-15%

-11%

8,535

-9%

-4%

9,416

Total cloud software and on-premise software revenues

$
9,483

-5%

-1%

$
10,020

-5%

0%

$
10,537

% Revenues by Software Offerings:

Cloud software as a service and platform as a service

23%

15%

11%

New software licenses

77%

85%

89%

(1)
Excluding stock-based compensation

(2)
Included as a component of 'Amortization of Intangible Assets' in our consolidated statements of operations

Fiscal 2016 Compared to Fiscal 2015: Excluding the effects of unfavorable currency rate fluctuations of 4 percentage
points, total revenues from our cloud software and on-premise software segment decreased by 1 percentage point during fiscal 2016 due to a reduction in new software licenses revenues, partially offset by an increase in cloud SaaS and PaaS revenues
and incremental revenue contributions from our recent acquisitions. The increase in our cloud SaaS and PaaS revenues and decrease in our new software licenses revenues during fiscal 2016 were primarily due to the strategic emphasis placed on
selling, marketing and growing our cloud software offerings and we expect these revenue trends will continue. In constant currency, fiscal 2016 revenue declines in the Americas region were partially offset by revenues growth in the EMEA and Asia
Pacific regions.

In reported currency, new software licenses revenues earned from transactions of $3 million or greater decreased by 24% in
fiscal 2016 and represented 28% of our new software licenses revenues in fiscal 2016 in comparison to 31% in fiscal 2015.

59

Excluding the effects of favorable currency rate fluctuations of 5 percentage points, total cloud software
and on-premise software expenses increased during fiscal 2016 primarily due to higher employee related expenses from increased headcount and higher cloud SaaS and PaaS expenses incurred to support the related revenues increase. These fiscal 2016
constant currency expense increases were partially offset by a reduction in expenses associated with certain of our intangible assets that became fully amortized.

Excluding the effects of unfavorable currency rate fluctuations, our cloud software and on-premise software segment's total margin and total margin as a percentage of revenues decreased in fiscal
2016 due primarily to growth in our total expenses for this operating segment.

Fiscal 2015 Compared to Fiscal
2014: Excluding the effects of unfavorable currency rate fluctuations, cloud software and on-premise software revenues were flat during fiscal 2015 as growth in our cloud SaaS and PaaS revenues and contributions from
our acquisitions were offset by a decline in our new software licenses revenues. Similar to the fiscal 2016 trend noted above, the increase in our cloud SaaS and PaaS revenues and decrease in our new software licenses revenues during fiscal 2015
were primarily due to the strategic emphasis placed on selling, marketing and growing our cloud software offerings. In constant currency, fiscal 2015 revenue growth in the Americas region was offset by revenue declines in the EMEA and Asia Pacific
regions.

In reported currency, new software licenses revenues earned from transactions of $3 million or greater decreased by 15% in fiscal
2015 and represented 31% of our new software licenses revenues in fiscal 2015 in comparison to 33% in fiscal 2014.

Excluding the effects of
favorable currency rate fluctuations, total cloud software and on-premise software expenses increased in fiscal 2015 primarily due to higher employee related expenses from increased headcount, higher variable compensation expenses, and higher cloud
SaaS and PaaS expenses incurred to support the related revenues increase.

Excluding the effects of unfavorable currency rate fluctuations, our
cloud software and on-premise software segment's total margin and total margin as a percentage of revenues decreased in fiscal 2015 due primarily to the growth in our total expenses during fiscal 2015 for this operating segment.

Cloud Infrastructure as a Service: Our cloud IaaS segment provides infrastructure cloud services that are
enterprise-grade, hosted and supported within the Oracle Cloud to perform elastic compute, storage and networking services on a subscription basis. Our cloud IaaS segment also offers Oracle Managed Cloud Services, which are comprehensive software
and hardware management and maintenance services for customer IT infrastructure for a fee for a stated term that are hosted at our Oracle data center facilities, select partner data centers or physically on-premise at customer facilities. Cloud IaaS
expenses consist primarily of personnel related expenditures, technology infrastructure expenditures and facilities costs. Operating expenses associated with our IaaS offerings also include sales and marketing expenses, which are largely personnel
related, and amortization of intangible assets. For all periods presented, our cloud IaaS segment's revenues and expenses were substantially attributable to our Oracle Managed Cloud Services offerings.

60

Year Ended May 31,

Percent Change

Percent Change

(Dollars in millions)

2016

Actual

Constant

2015

Actual

Constant

2014

Cloud Infrastructure as a Service Revenues:

Americas

$
470

6%

9%

$
444

33%

35%

$
335

EMEA

139

7%

14%

129

37%

41%

94

Asia Pacific

37

7%

21%

35

28%

39%

27

Total revenues

646

6%

11%

608

33%

36%

456

Expenses:

Cloud infrastructure as a service(1)

362

6%

10%

339

12%

14%

304

Sales and marketing(1)

76

-16%

-14%

90

46%

50%

61

Stock-based compensation

5

-2%

-2%

5

27%

27%

4

Amortization of intangible assets(2)

5

34%

34%

4

Total expenses

448

2%

5%

438

19%

21%

369

Total Margin

$
198

17%

24%

$
170

97%

103%

$
87

Total Margin %

31%

28%

19%

% Revenues by Geography:

Americas

73%

73%

73%

EMEA

21%

21%

21%

Asia Pacific

6%

6%

6%

(1)
Excluding stock-based compensation

(2)
Included as a component of 'Amortization of Intangible Assets' in our consolidated statements of operations

Not meaningful

Fiscal 2016 Compared to Fiscal 2015: Excluding the effects of unfavorable currency rate fluctuations of
5 percentage points, total cloud IaaS revenues increased during fiscal 2016 due to growth in our Oracle Managed Cloud Services offerings and incremental revenue contributions from our recent acquisitions. Excluding the effects of currency rate
fluctuations, the Americas region contributed 62%, the EMEA region contributed 27% and the Asia Pacific region contributed 11% to the increase in cloud IaaS revenues during fiscal 2016.

On a constant currency basis, total cloud IaaS expenses increased during fiscal 2016 primarily due to increased infrastructure expenses to support our increase in cloud IaaS revenues.

Excluding the effects of unfavorable currency exchange variances, total margin and margin as a percentage of revenues increased in fiscal 2016 as total
revenues increased at a faster rate than our total expenses for this operating segment.

Fiscal 2015 Compared to Fiscal
2014: On a constant currency basis, total cloud IaaS revenues increased during fiscal 2015 primarily due to contributions from our acquisitions. Excluding the effects of currency rate fluctuations, the Americas region
contributed 70%, the EMEA region contributed 24% and the Asia Pacific region contributed 6% to the increase in cloud IaaS revenues during fiscal 2015.

On a constant currency basis, total cloud IaaS expenses increased in fiscal 2015 primarily due to increased employee related expenses associated with increased headcount and increased infrastructure
expenses to support our increase in IaaS revenues.

Excluding the effects of unfavorable currency exchange variances, total margin and margin
as a percentage of revenues increased in fiscal 2015 as total revenues increased at a faster rate than our total expenses for this operating segment.

Software License Updates and Product Support: Software license updates and product support revenues are typically generated through the sale of software support
contracts related to on-premise new software licenses purchased by our customers. Our software license updates and product support offerings include software license updates, which grant on-premise software customers rights to unspecified product
upgrades and maintenance releases and patches released during the support period, and product support including internet access to

61

technical content as well as internet and telephone access to technical support personnel in our global support centers. Expenses associated with our software license updates and product support
line of business include the cost of providing the support services, largely personnel related expenses, and the amortization of our intangible assets associated with software support contracts and customer relationships obtained from acquisitions.

Year Ended May 31,

Percent Change

Percent Change

(Dollars in millions)

2016

Actual

Constant

2015

Actual

Constant

2014

Software License Updates and Product Support Revenues:

Americas

$
10,672

2%

5%

$
10,418

6%

7%

$
9,858

EMEA

5,703

-4%

5%

5,920

0%

9%

5,906

Asia Pacific

2,486

-1%

7%

2,509

3%

8%

2,442

Total revenues

18,861

0%

5%

18,847

4%

8%

18,206

Expenses:

Software license updates and product support(1)

1,123

-5%

1%

1,178

3%

8%

1,140

Stock-based compensation

23

11%

11%

21

-7%

-7%

22

Amortization of intangible assets(2)

504

-32%

-32%

741

-7%

-7%

801

Total expenses

1,650

-15%

-12%

1,940

-1%

2%

1,963

Total Margin

$
17,211

2%

7%

$
16,907

4%

9%

$
16,243

Total Margin %

91%

90%

89%

% Revenues by Geography:

Americas

57%

55%

54%

EMEA

30%

32%

33%

Asia Pacific

13%

13%

13%

(1)
Excluding stock-based compensation

(2)
Included as a component of 'Amortization of Intangible Assets' in our consolidated statements of operations

Fiscal 2016 Compared to Fiscal 2015: Excluding the effects of unfavorable currency rate fluctuations of 5 percentage
points, software license updates and product support revenues increased during fiscal 2016 as a result of substantially all customers electing to purchase software support contracts in conjunction with their new software licenses purchased during
the trailing 4-quarter period, and due to the renewal of substantially all of the software support customer base eligible for renewal during the trailing 4-quarter period and incremental revenues from our recent acquisitions. Excluding the effects
of currency rate fluctuations, the Americas region contributed 56%, the EMEA region contributed 26% and the Asia Pacific region contributed 18% to the increase in software license updates and product support revenues during fiscal 2016.

Excluding the effects of favorable foreign currency rate fluctuations of 3 percentage points, total software license updates and product support expenses
decreased during fiscal 2016 primarily due to a reduction in expenses associated with certain of our intangible assets that became fully amortized.

In constant currency, total margin and margin as a percentage of revenues increased in fiscal 2016 due to the growth in total revenues and the decrease in total expenses for this segment.

Fiscal 2015 Compared to Fiscal 2014: Excluding the effects of unfavorable currency rate fluctuations of 4 percentage
points, software license updates and product support revenues increased during fiscal 2015 relative to fiscal 2014 due to similar reasons as noted above for the fiscal 2016 increase. Excluding the effects of currency rate fluctuations, the Americas
region contributed 50%, the EMEA region contributed 36% and the Asia Pacific region contributed 14% to the increase in software license updates and product support revenues during fiscal 2015.

Excluding the effects of favorable foreign currency rate fluctuations of 3 percentage points, total software license updates and product support expenses increased during fiscal 2015 due to higher
employee related expenses and facilities costs associated with increased headcount that was primarily attributable to acquisitions, and also due to

62

higher bad debt expenses. These fiscal 2015 expense increases were partially offset by fiscal 2015 expense decreases related to lower statutory obligation expenses in the jurisdictions in which
we operate and lower amortization of intangible assets.

In constant currency, total margin and margin as a percentage of revenues for this
segment increased in fiscal 2015 as our total revenues increased at a faster rate than our total expenses for this segment.

Hardware
Business

Our hardware business consists of our hardware products segment and hardware support segment.

Hardware Products: Hardware products revenues are primarily generated from the sales of our Oracle Engineered
Systems, computer server, storage, networking, workstations and related devices and industry-specific hardware products. We market and sell our hardware products through our direct sales force and indirect channels such as independent distributors
and value-added resellers. Operating expenses associated with our hardware products include the cost of hardware products, which consists of expenses for materials and labor used to produce these products by our internal manufacturing operations or
by third-party manufacturers, warranty expenses and the impact of periodic changes in inventory valuation, including the impact of inventory determined to be excess and obsolete. Operating expenses associated with our hardware products also include
sales and marketing expenses, which are largely personnel related and include variable compensation earned by our sales force for the sales of our hardware products, and amortization of intangible assets.

Year Ended May 31,

Percent Change

Percent Change

(Dollars in millions)

2016

Actual

Constant

2015

Actual

Constant

2014

Hardware Products Revenues:

Americas

$
1,241

-17%

-13%

$
1,492

-1%

1%

$
1,507

EMEA

721

-10%

-1%

797

-5%

7%

834

Asia Pacific

509

-5%

1%

536

-16%

-12%

635

Total revenues

2,471

-13%

-7%

2,825

-5%

0%

2,976

Expenses:

Hardware products(1)

1,364

-7%

-1%

1,465

-3%

3%

1,516

Sales and marketing(1)

898

-1%

6%

911

-8%

-3%

991

Stock-based compensation

20

17%

17%

17

47%

47%

12

Amortization of intangible assets(2)

149

-33%

-33%

223

-19%

-19%

274

Total expenses

2,431

-7%

-1%

2,616

-6%

-1%

2,793

Total Margin

$
40

-81%

-80%

$
209

14%

19%

$
183

Total Margin %

2%

7%

6%

% Revenues by Geography:

Americas

50%

53%

51%

EMEA

29%

28%

28%

Asia Pacific

21%

19%

21%

(1)
Excluding stock-based compensation

(2)
Included as a component of 'Amortization of Intangible Assets' in our consolidated statements of operations

63

Fiscal 2016 Compared to Fiscal 2015: Excluding the effects of
unfavorable currency rate fluctuations of 6 percentage points, total hardware products revenues decreased during fiscal 2016 due to reductions in sales volumes of certain of our product lines, including lower margin products. This decrease was
partially offset by incremental revenues during the first quarter of fiscal 2016 from our recently acquired companies, primarily MICROS. On a constant currency basis, fiscal 2016 total hardware products revenues declines in the Americas and EMEA
regions were partially offset by slight growth in the Asia Pacific region.

Excluding the effects of favorable currency rate fluctuations of 6
percentage points, total hardware products expenses decreased in fiscal 2016 due to lower hardware products costs associated with lower hardware products revenues, and due to a reduction in expenses associated with certain of our intangible assets
that became fully amortized.

In constant currency, total margin and total margin as a percentage of revenues decreased in fiscal 2016 for this
segment due to the decrease in our total revenues.

Fiscal 2015 Compared to Fiscal 2014: Excluding the
effects of unfavorable currency rate fluctuations, total hardware products revenues were flat in fiscal 2015 as revenues from acquired companies, including MICROS, and increases in hardware revenues attributable to our Oracle Engineered Systems
products were offset by reductions in the sales volumes of certain of our other hardware product offerings. On a constant currency basis, revenue increases in the Americas and EMEA regions were offset by revenue declines in the Asia Pacific region
during fiscal 2015.

Excluding the effects of favorable currency rate fluctuations, total hardware products expenses decreased in fiscal 2015
primarily due to lower bad debt expenses and a reduction in amortization of intangible assets. These fiscal 2015 expense decreases were partially offset by higher fiscal 2015 employee related expenses due to increased headcount from our acquisitions
and higher direct product costs that were primarily attributable to acquired products revenues.

In constant currency, total margin and margin
as a percentage of revenues increased in fiscal 2015 due to the decrease in total expenses for this segment.

Hardware
Support: Our hardware support offerings provide customers with software updates for software components that are essential to the functionality of our hardware products, such as Oracle Solaris and certain other
software products, and can include product repairs, maintenance services and technical support services. Expenses associated with our hardware support operating segment include the cost of materials used to repair customer products, the cost of
providing support services, largely personnel related expenses, and the amortization of our intangible assets primarily associated with hardware support contracts and customer relationships obtained from our acquisitions.

64

Year Ended May 31,

Percent Change

Percent Change

(Dollars in millions)

2016

Actual

Constant

2015

Actual

Constant

2014

Hardware Support Revenues:

Americas

$
1,163

-7%

-4%

$
1,245

1%

3%

$
1,229

EMEA

656

-9%

-1%

722

-2%

6%

738

Asia Pacific

378

-9%

-1%

413

-4%

1%

429

Total revenues

2,197

-8%

-3%

2,380

-1%

4%

2,396

Expenses:

Hardware support(1)

688

-15%

-10%

810

-2%

2%

830

Stock-based compensation

5

-17%

-17%

6

3%

3%

6

Amortization of intangible assets(2)

146

-8%

-8%

158

-32%

-32%

231

Total expenses

839

-14%

-10%

974

-9%

-6%

1,067

Total Margin

$
1,358

-3%

3%

$
1,406

6%

11%

$
1,329

Total Margin %

62%

59%

55%

% Revenues by Geography:

Americas

53%

52%

51%

EMEA

30%

30%

31%

Asia Pacific

17%

18%

18%

(1)
Excluding stock-based compensation

(2)
Included as a component of 'Amortization of Intangible Assets' in our consolidated statements of operations

Fiscal 2016 Compared to Fiscal 2015: Excluding the effects of unfavorable currency rate fluctuations of 5 percentage
points, hardware support revenues decreased in fiscal 2016 due to reductions in sales volumes of certain of our hardware product lines for which we offer hardware support. This decrease was partially offset by incremental revenues during the first
quarter of fiscal 2016 that were primarily related to our acquisition of MICROS. On a constant currency basis, the decrease in total hardware support revenues was attributable to revenue declines in all regions during fiscal 2016.

Excluding the effects of favorable currency rate fluctuations of 4 percentage points, total hardware support expenses decreased in fiscal 2016 primarily
due to reductions in employee related and other expenses from reduced headcount and reduced external contractor costs as we integrated MICROS into our operations, due to a decrease in bad debt expenses, and due to a reduction in expenses associated
with certain of our intangible assets that became fully amortized during fiscal 2016.

In constant currency, total hardware support margin and
margin as a percentage of total revenues increased in fiscal 2016 due to the total expense reductions for this segment.

Fiscal 2015
Compared to Fiscal 2014: Excluding the effects of unfavorable currency rate fluctuations, hardware support revenues increased in fiscal 2015 primarily due to incremental revenues from acquired companies, primarily
MICROS. The Americas region contributed 42%, the EMEA region contributed 52% and the Asia Pacific region contributed 6% to the increase in hardware support revenues during fiscal 2015.

In constant currency, total hardware support expenses decreased in fiscal 2015 primarily due to reduced service delivery costs due to operational initiatives and a decrease in amortization of intangible
assets, partially offset by higher employee related expenses resulting from increased headcount from our acquisitions, higher external contractor expenses and higher bad debt expenses.

In constant currency, total hardware support margin and margin as a percentage of total revenues increased in fiscal 2015 due to the increase in total revenues and decrease in total expenses for this
operating segment.

65

Services Business

Our services business consists of consulting, advanced customer support services and education services. Consulting revenues are earned by providing services to customers in business and IT strategy
alignment, enterprise architecture planning and design, initial software implementation and integration, and ongoing software enhancements and upgrades. Advanced customer support services are provided on-premise and remotely to our customers to
enable increased performance and higher availability of their Oracle products and services and also include certain other services. Education revenues are earned by providing instructor-led, live virtual training, self-paced online training, private
events and custom training in the use of our cloud, on-premise software and hardware offerings. The cost of providing our services consists primarily of personnel related expenses, technology infrastructure expenditures, facilities expenses and
external contractor expenses.

Year Ended May 31,

Percent Change

Percent Change

(Dollars in millions)

2016

Actual

Constant

2015

Actual

Constant

2014

Services Revenues:

Americas

$
1,716

-3%

1%

$
1,766

-5%

-2%

$
1,850

EMEA

1,033

-6%

2%

1,097

-2%

6%

1,125

Asia Pacific

640

-6%

1%

683

-6%

-1%

729

Total revenues

3,389

-4%

2%

3,546

-4%

0%

3,704

Expenses:

Services(1)

2,722

-6%

0%

2,899

-1%

4%

2,925

Stock-based compensation

29

-6%

-6%

30

2%

2%

29

Amortization of intangible assets(2)

8

-47%

-47%

15

-12%

-12%

17

Total expenses

2,759

-6%

-1%

2,944

-1%

4%

2,971

Total Margin

$
630

5%

12%

$
602

-18%

-13%

$
733

Total Margin %

19%

17%

20%

% Revenues by Geography:

Americas

51%

50%

50%

EMEA

30%

31%

30%

Asia Pacific

19%

19%

20%

(1)
Excluding stock-based compensation

(2)
Included as a component of 'Amortization of Intangible Assets' in our consolidated statements of operations

Fiscal 2016 Compared to Fiscal 2015: Excluding the effects of unfavorable currency rate fluctuations of 6 percentage
points, our total services revenues increased during fiscal 2016 due primarily to revenue increases in our advanced customer support segment of which the majority of the growth was attributable to our recent acquisitions. In constant currency, the
Americas contributed 44%, EMEA contributed 44% and Asia Pacific contributed 12% to the fiscal 2016 growth in our total services revenues.

Excluding the effects of favorable currency rate fluctuations of 5 percentage points, our total services expenses declined slightly in fiscal 2016 due to
reduced expenses in our consulting and education segments, which were partially offset by modest expense growth in our advanced customer services segment primarily due to our recent acquisitions.

In constant currency, total services margin and total margin as a percentage of total services revenues increased in fiscal 2016 due to the increase in
total revenues and decrease in total expenses.

66

Fiscal 2015 Compared to Fiscal 2014: Excluding the effects of
unfavorable currency rate fluctuations, our total services revenues were flat in fiscal 2015 as incremental revenues from acquired companies, including MICROS, and an increase in fiscal 2015 advanced customer services revenues were offset by
declines in our fiscal 2015 consulting and education revenues. In constant currency, revenues growth in the EMEA region was offset by revenue declines in the Americas and Asia Pacific regions during fiscal 2015.

Excluding the effects of favorable currency rate fluctuations, our total services expenses increased during fiscal 2015 due to higher employee related
expenses resulting from increased headcount from our acquisitions and were partially offset by lower variable compensation and lower external contractor costs.

In constant currency, total margin and margin as a percentage of total revenues decreased in fiscal 2015 due to the increase in total expenses for this business.

Research and Development Expenses: Research and development expenses consist primarily of personnel related
expenditures. We intend to continue to invest significantly in our research and development efforts because, in our judgment, they are essential to maintaining our competitive position.

Year Ended May 31,

Percent Change

Percent Change

(Dollars in millions)

2016

Actual

Constant

2015

Actual

Constant

2014

Research and development(1)

$
5,178

4%

5%

$
5,002

5%

6%

$
4,766

Stock-based compensation

609

17%

17%

522

36%

36%

385

Total expenses

$
5,787

5%

7%

$
5,524

7%

8%

$
5,151

% of Total Revenues

16%

14%

13%

(1)
Excluding stock-based compensation

On a constant currency basis, total research and development expenses increased during fiscal 2016 and fiscal 2015, each relative to the corresponding prior fiscal year, primarily due to increased
employee related expenses resulting from increased headcount, including additional headcount from our acquisitions, and also due to increased infrastructure expenses.

General and Administrative Expenses: General and administrative expenses primarily consist of personnel related expenditures for IT, finance, legal and human resources
support functions.

Year Ended May 31,

Percent Change

Percent Change

(Dollars in millions)

2016

Actual

Constant

2015

Actual

Constant

2014

General and administrative(1)

$
1,035

11%

16%

$
929

7%

10%

$
867

Stock-based compensation

120

-19%

-19%

148

-14%

-14%

171

Total expenses

$
1,155

7%

11%

$
1,077

4%

7%

$
1,038

% of Total Revenues

3%

3%

3%

(1)
Excluding stock-based compensation

On a constant currency basis, total general and administrative expenses increased during fiscal 2016 and fiscal 2015, each relative to the corresponding prior fiscal year, due to higher employee related
expenses resulting from increased headcount and due to higher professional services expenses, primarily legal related expenses.

Amortization of Intangible Assets: Substantially all of our intangible assets are acquired through our business
combinations. We amortize our intangible assets over, and monitor the appropriateness of, the estimated useful lives of these assets. We also periodically review these intangible assets for potential impairment based upon relevant facts and
circumstances. Note 7 of Notes to Consolidated Financial Statements included elsewhere in this Annual Report has additional information regarding our intangible assets and related amortization.

67

Year Ended May 31,

Percent Change

Percent Change

(Dollars in millions)

2016

Actual

Constant

2015

Actual

Constant

2014

Software support agreements and related relationships

$
358

-33%

-33%

$
531

-7%

-7%

$
571

Hardware support agreements and related relationships

145

1%

1%

144

1%

1%

143

Developed technology

559

-20%

-20%

700

-1%

-1%

706

Core technology

89

-51%

-51%

182

-43%

-43%

318

Customer relationships and contract backlog

217

-30%

-30%

312

-7%

-7%

334

SaaS, PaaS and IaaS agreements and related relationships and other

212

4%

4%

203

35%

35%

150

Trademarks

58

-25%

-25%

77

-1%

-1%

78

Total amortization of intangible assets

$
1,638

-24%

-24%

$
2,149

-7%

-7%

$
2,300

Amortization of intangible assets decreased during fiscal 2016 and fiscal 2015, each relative to the corresponding prior
fiscal year, due to a reduction in expenses associated with certain of our intangible assets that became fully amortized. These decreases were partially offset by additional amortization from intangible assets associated with recently
completed acquisitions. Note 7 of Notes to Consolidated Financial Statements included elsewhere in this Annual Report has additional information regarding our intangible assets and related amortization.

Acquisition Related and Other Expenses: Acquisition related and other expenses consist of personnel related costs for
transitional and certain other employees, stock-based compensation expenses, integration related professional services, certain business combination adjustments including certain adjustments after the measurement period has ended and certain other
operating items, net. Stock-based compensation expenses included in acquisition related and other expenses resulted from unvested stock options and restricted stock-based awards assumed from acquisitions whereby vesting was accelerated upon
termination of the employees pursuant to the original terms of those stock options and restricted stock-based awards.

Year Ended May 31,

Percent Change

Percent Change

(Dollars in millions)

2016

Actual

Constant

2015

Actual

Constant

2014

Transitional and other employee related costs

$
45

-20%

-19%

$
57

112%

120%

$
27

Stock-based compensation

3

-43%

-43%

5

-48%

-48%

10

Professional fees and other, net

10

128%

128%

(35
)

274%

279%

20

Business combination adjustments, net

(16
)

-109%

-109%

184

1,235%

1,239%

(16
)

Total acquisition related and other expenses

$
42

-80%

-80%

$
211

412%

411%

$
41

Acquisition related and other expenses decreased in fiscal 2016 and increased in fiscal 2015, each relative to the
corresponding prior fiscal year, primarily due to a $186 million goodwill impairment loss recorded during fiscal 2015. We also recorded an acquisition related benefit of $19 million and a litigation related benefit of $53 million in fiscal 2016 and
2015, respectively, which reduced our expenses in those periods.

Restructuring Expenses: Restructuring
expenses resulted from the execution of management approved restructuring plans that were generally developed to improve our cost structure and/or operations, often in conjunction with our acquisition integration strategies. Restructuring expenses
consist of employee severance costs and may also include charges for duplicate facilities and other contract termination costs to improve our cost structure prospectively. For additional information regarding our restructuring plans, see Note 9 of
Notes to Consolidated Financial Statements included elsewhere in this Annual Report.

Year Ended May 31,

Percent Change

Percent Change

(Dollars in millions)

2016

Actual

Constant

2015

Actual

Constant

2014

Restructuring expenses

$
458

121%

145%

$
207

14%

22%

$
183

68

Restructuring expenses in fiscal 2016 primarily related to our 2015 Restructuring Plan. Restructuring
expenses in fiscal 2015 primarily related to our 2015 Restructuring Plan and our 2013 Restructuring Plan. Restructuring expenses in fiscal 2014 primarily related to our 2013 Restructuring Plan. Actions pursuant to the aforementioned plans were
substantially complete as of May 31, 2016. We may incur restructuring expenses in future periods due to the initiation of new restructuring plans or from changes in estimated costs associated with legacy restructuring plans.

Interest Expense:

Year Ended May 31,

Percent Change

Percent Change

(Dollars in millions)

2016

Actual

Constant

2015

Actual

Constant

2014

Interest expense

$
1,467

28%

28%

$
1,143

25%

25%

$
914

Fiscal 2016 Compared to Fiscal 2015: Interest expense increased in fiscal 2016
primarily due to higher average borrowings resulting from our issuance of $10.0 billion of senior notes in May 2015. We also issued $10.0 billion of senior notes in July 2014, which also contributed to additional interest expense during fiscal 2016
relative to fiscal 2015. These increases in interest expense during fiscal 2016 were partially offset by reductions in interest expense resulting from the maturity and repayment of $2.0 billion of senior notes in January 2016. Interest expense was
also reduced in fiscal 2016 by the maturity and repayment of $1.5 billion of senior notes and the related fixed to variable interest rate swap agreements in July 2014. See Recent Financing Activities below and Note 8 of Notes to Consolidated
Financial Statements included elsewhere in this Annual Report for additional information regarding our borrowings.

Fiscal 2015 Compared
to Fiscal 2014: Interest expense increased in fiscal 2015 primarily due to higher average borrowings resulting from our issuance of $10.0 billion of senior notes in May 2015 and $10.0 billion of senior notes in July
2014. The increase in interest expense in fiscal 2015 was partially offset by a reduction in interest expense during fiscal 2015 resulting from the maturity and repayment of $1.5 billion of senior notes and the related fixed to variable interest
rate swap agreements in July 2014.

Non-Operating Income (Expense), net: Non-operating income (expense),
net consists primarily of interest income, net foreign currency exchange gains (losses), the noncontrolling interests in the net profits of our majority-owned subsidiaries (primarily Oracle Financial Services Software Limited and Oracle Japan) and
net other income (losses), including net realized gains and losses related to all of our investments and net unrealized gains and losses related to the small portion of our investment portfolio that we classify as trading.

Year Ended May 31,

Percent Change

Percent Change

(Dollars in millions)

2016

Actual

Constant

2015

Actual

Constant

2014

Interest income

$
538

54%

59%

$
349

33%

33%

$
263

Foreign currency losses, net

(110
)

-30%

-37%

(157
)

-58%

-59%

(375
)

Noncontrolling interests in income

(116
)

2%

2%

(113
)

15%

15%

(98
)

Other (loss) income, net

(7
)

126%

126%

27

-60%

-60%

69

Total non-operating income (expense), net

$
305

188%

221%

$
106

175%

187%

$
(141
)

Fiscal 2016 Compared to Fiscal 2015: On a constant currency basis, our non-operating
income, net for fiscal 2016 increased due to higher interest income resulting from higher interest rates and higher cash, cash equivalent and short-term investment balances and due to lower net foreign currency losses.

Fiscal 2015 Compared to Fiscal 2014: On a constant currency basis, our non-operating income, net in fiscal 2015
increased due to lower net foreign currency losses and due to higher interest income resulting from higher cash, cash equivalent and short-term investment balances. Included in foreign currency losses, net in fiscal 2015 and 2014 were remeasurement
losses of $23 million and $213 million, respectively, related to our Venezuelan subsidiary. Note 1 of Notes to Consolidated Financial Statements included elsewhere in this Annual Report contains additional information regarding the foreign currency
remeasurement losses we incurred in all periods related to our Venezuelan subsidiary.

69

Provision for Income Taxes: Our effective tax rate in all periods is
the result of the mix of income earned in various tax jurisdictions that apply a broad range of income tax rates. The provision for income taxes differs from the tax computed at the U.S. federal statutory income tax rate due primarily to certain
earnings considered as indefinitely reinvested in foreign operations, state taxes, the U.S. research and development tax credit, settlements with tax authorities and the U.S. domestic production activity deduction. Future effective tax rates could
be adversely affected if earnings are lower than anticipated in countries where we have lower statutory tax rates, by unfavorable changes in tax laws and regulations or by adverse rulings in tax related litigation.

Year Ended May 31,

Percent Change

Percent Change

(Dollars in millions)

2016

Actual

Constant

2015

Actual

Constant

2014

Provision for income taxes

$
2,541

-12%

-5%

$
2,896

5%

13%

$
2,749

Effective tax rate

22.2%

22.6%

20.1%

Fiscal 2016 Compared to Fiscal 2015: Provision for income taxes in fiscal 2016
decreased, relative to the provision for income taxes in fiscal 2015, due in substantial part to lower net income before provision for income taxes during fiscal 2016, settlements with certain tax authorities, and the retroactive extension of the
U.S. research and development tax credit, which collectively were partially offset by unfavorable changes in the jurisdictional mix of our earnings during fiscal 2016.

Fiscal 2015 Compared to Fiscal 2014: Provision for income taxes in fiscal 2015 increased, relative to the provision for income taxes in fiscal 2014, due in substantial
part to an unfavorable change in the jurisdictional mix of our fiscal 2015 earnings, and due to the effects of acquisition related settlements with tax authorities in fiscal 2014 that were not present in fiscal 2015, which together were partially
offset by lower fiscal 2015 income before provision for income taxes.

Liquidity and Capital Resources

As of May 31,

(Dollars in millions)

2016

Change

2015

Change

2014

Working capital

$
47,105

-2%

$
47,892

42%

$
33,739

Cash, cash equivalents and marketable securities

$
56,125

3%

$
54,368

40%

$
38,819

Working capital: The decrease in working capital as of May 31, 2016 in comparison to
May 31, 2015 was primarily due to $10.4 billion of cash used for repurchases of our common stock, $2.5 billion of cash used to pay dividends to our stockholders and $1.2 billion of cash used for capital expenditures. These unfavorable working
capital movements were partially offset by the favorable impacts to our net current assets resulting from our net income during fiscal 2016 and cash proceeds from fiscal 2016 stock option exercises.

The increase in working capital as of May 31, 2015 in comparison to May 31, 2014 was primarily due to our issuance of $20.0 billion of long-term senior
notes during fiscal 2015, the favorable impact to our net current assets resulting from our net income during fiscal 2015 and, to a lesser extent, cash proceeds from stock option exercises. These working capital increases were partially offset by
$6.2 billion of net cash used for our acquisitions of MICROS and others, $8.1 billion of cash used for repurchases of our common stock, the reclassification of $2.0 billion of senior notes that were due in January 2016 from long-term to current, and
$2.3 billion of cash used to pay dividends to our stockholders, all of which occurred during fiscal 2015.

Our working capital may be impacted
by some or all of the aforementioned factors in future periods, the amounts and timing of which are variable.

70

Cash, cash equivalents and marketable securities: Cash and cash
equivalents primarily consist of deposits held at major banks, Tier-1 commercial paper and other securities with original maturities of 90 days or less. Marketable securities consist of Tier-1 commercial paper debt securities, corporate debt
securities and certain other securities. The increase in cash, cash equivalents and marketable securities at May 31, 2016 in comparison to May 31, 2015 was primarily due to cash inflows generated by our operations during fiscal 2016, $1.8 billion of
net cash inflows from fiscal 2016 debt issuances, net of debt repayments, and cash inflows from fiscal 2016 stock option exercises. These fiscal 2016 cash inflows were partially offset by fiscal 2016 cash outflows of $10.4 billion for repurchases of
our common stock, $2.5 billion for the fiscal 2016 payment of cash dividends to our stockholders, and $1.2 billion for fiscal 2016 capital expenditures. Cash, cash equivalents and marketable securities included $48.2 billion held by our foreign
subsidiaries as of May 31, 2016. We consider $42.6 billion of our undistributed earnings as indefinitely reinvested in our foreign operations outside the United States. These undistributed earnings would be subject to U.S. income tax if repatriated
to the United States. Assuming a full utilization of the foreign tax credits, the potential deferred tax liability associated with these undistributed earnings would be approximately $13.3 billion as of May 31, 2016 should the amounts be repatriated
to the United States. The amount of cash, cash equivalents and marketable securities that we report in U.S. Dollars for a significant portion of the cash, cash equivalents and marketable securities balances held by our foreign subsidiaries is
subject to translation adjustments caused by changes in foreign currency exchange rates as of the end of each respective reporting period (the offset to which is substantially recorded to accumulated other comprehensive loss in our consolidated
balance sheets and is also presented as a line item in our consolidated statements of comprehensive income included elsewhere in this Annual Report). As the U.S. Dollar generally strengthened against certain major international currencies during
fiscal 2016, the amount of cash, cash equivalents and marketable securities that we reported in U.S. Dollars for these subsidiaries decreased on a net basis as of May 31, 2016 relative to what we would have reported using constant currency rates
from our May 31, 2015 balance sheet date.

The increase in cash, cash equivalents and marketable securities at May 31, 2015 in comparison to
May 31, 2014 was due to an increase in cash generated from our fiscal 2015 operating activities, our issuance of $20.0 billion of senior notes in fiscal 2015, and to a lesser extent, cash proceeds from fiscal 2015 stock option exercises. These
fiscal 2015 cash inflows were partially offset by fiscal 2015 cash outflows of $6.2 billion of net cash paid for our acquisitions of MICROS and others, $8.1 billion of fiscal 2015 repurchases of our common stock, the repayment of $1.5 billion of
senior notes and $2.3 billion used for the payment of fiscal 2015 cash dividends to our stockholders. Additionally, our reported cash, cash equivalents and marketable securities balances as of May 31, 2015 decreased on a net basis in comparison to
May 31, 2014 as the U.S. Dollar generally strengthened in comparison to most major international currencies during fiscal 2015.

Days sales
outstanding, which we calculate by dividing period end accounts receivable by average daily sales for the quarter, was 46 days at May 31, 2016 compared with 47 days at May 31, 2015. The days sales outstanding calculation excludes the impact of any
revenue adjustments resulting from business combinations that reduced our acquired cloud SaaS and PaaS obligations, software license updates and product support obligations and hardware support obligations to fair value.

Year Ended May 31,

(Dollars in millions)

2016

Change

2015

Change

2014

Net cash provided by operating activities

$
13,561

-5%

$
14,336

-4%

$
14,921

Net cash used for investing activities

$
(5,154
)

-73%

$
(19,047
)

153%

$
(7,539
)

Net cash (used for) provided by financing activities

$
(9,856
)

200%

$
9,850

342%

$
(4,068
)

Cash flows from operating activities: Our largest source of operating cash flows is
cash collections from our customers following the purchase and renewal of their software license updates and product support agreements. Payments from customers for these support agreements are generally received near the beginning of the
contracts' terms, which are generally one year in length. Over the course of a fiscal year, we also have historically generated cash from the sales of new software licenses, cloud SaaS and PaaS offerings, hardware products, hardware support
arrangements, and services. Our primary uses of cash from operating activities are for employee related expenditures, material and manufacturing costs related to the production of our hardware products, taxes and leased facilities.

71

Net cash provided by operating activities decreased in fiscal 2016 and 2015 primarily due to the cash
unfavorable effects of lower net income and the related unfavorable currency rate fluctuations on our net income in each fiscal year relative to the corresponding prior year period.

Cash flows from investing activities: The changes in cash flows from investing activities primarily relate to our acquisitions, the timing of our purchases, maturities
and sales of our investments in marketable debt securities and investments in capital and other assets, including certain intangible assets, to support our growth.

Fiscal 2016 Compared to Fiscal 2015: Net cash used for investing activities decreased in fiscal 2016 relative to fiscal 2015 primarily due to a decrease in net cash used to
purchase marketable securities (net of proceeds received from sales and maturities) and a decrease in cash used for acquisitions, net of cash acquired.

Fiscal 2015 Compared to Fiscal 2014: Net cash used for investing activities increased in fiscal 2015 relative to fiscal 2014 primarily due to an increase in cash used for
acquisitions, net of cash acquired, and an increase in net cash used to purchase marketable securities (net of proceeds received from sales and maturities).

Cash flows from financing activities: The changes in cash flows from financing activities primarily relate to borrowings and repayments related to our debt instruments
as well as stock repurchases, dividend payments and net proceeds related to employee stock programs.

Fiscal 2016 Compared to Fiscal
2015: We used net cash for financing activities of $9.9 billion during fiscal 2016 in comparison to net cash provided by financing activities of $9.9 billion during fiscal 2015. Cash used in financing activities during
fiscal 2016 was primarily due to cash outflows of $10.4 billion for fiscal 2016 common stock repurchases and $2.5 billion for fiscal 2016 dividend payments, partially offset by $1.8 billion of cash inflows from fiscal 2016 debt issuances, net of
repayments. Cash provided by financing activities of $9.9 billion during fiscal 2015 was primarily due to $18.3 billion of net cash inflows from fiscal 2015 debt issuances, net of repayments, partially offset by $8.1 billion of cash used for fiscal
2015 common stock repurchases and $2.3 billion of cash used for fiscal 2015 dividend payments.

Fiscal 2015 Compared to Fiscal
2014: Net cash provided by financing activities in fiscal 2015 increased in comparison to net cash used by financing activities in fiscal 2014 primarily due to a net increase in borrowings in fiscal 2015 as well as lower
stock repurchase activity during fiscal 2015. These favorable impacts to our financing cash flows during fiscal 2015 were partially offset by the repayment of $1.5 billion of borrowings pursuant to senior notes maturities during fiscal 2015 (no
repayments during fiscal 2014).

Free cash flow: To supplement our statements of cash flows presented on a
GAAP basis, we use non-GAAP measures of cash flows on a trailing 4-quarter basis to analyze cash flows generated from our operations. We believe free cash flow is also useful as one of the bases for comparing our performance with our competitors.
The presentation of non-GAAP free cash flow is not meant to be considered in isolation or as an alternative to net income as an indicator of our performance, or as an alternative to cash flows from operating activities as a measure of liquidity. We
calculate free cash flow as follows:

Year Ended May 31,

(Dollars in millions)

2016

Change

2015

Change

2014

Net cash provided by operating activities

$
13,561

-5%

$
14,336

-4%

$
14,921

Capital expenditures

(1,189
)

-15%

(1,391
)

140%

(580
)

Free cash flow

$
12,372

-4%

$
12,945

-10%

$
14,341

Net income

$
8,901

$
9,938

$
10,955

Free cash flow as percent of net income

139%

130%

131%

72

Long-Term Customer Financing: We offer certain of our customers the
option to acquire our software products, hardware products and services offerings through separate long-term payment contracts. We generally sell these contracts that we have financed for our customers on a non-recourse basis to financial
institutions within 90 days of the contracts' dates of execution. We generally record the transfers of amounts due from customers to financial institutions as sales of financing receivables because we are considered to have surrendered control
of these financing receivables. We financed $1.2 billion in fiscal 2016, and $1.6 billion in each of fiscal 2015 and 2014, or approximately 16%, 19% and 17%, respectively, of our new software licenses revenues in fiscal 2016, 2015 and 2014. We
financed $159 million, $172 million and $168 million of our hardware products revenues in fiscal 2016, 2015 and 2014, respectively, or approximately 6% in each of fiscal 2016, 2015 and 2014 of our hardware products revenues.

Recent Financing Activities:

Revolving Credit Agreement: In May 2016, we entered into three revolving credit agreements with JPMorgan Chase Bank, N.A.,
as initial lender and administrative agent (the 2016 Credit Agreements) and borrowed $3.8 billion pursuant to these agreements. The 2016 Credit Agreements provided us with short-term borrowings for working capital and other general corporate
purposes. Interest for the 2016 Credit Agreements is based on either (1) a LIBOR-based formula or (2) the Base Rate formula, each as set forth in the 2016 Credit Agreements. The borrowings are due and payable on June 27, 2016, which is the
termination date of the 2016 Credit Agreements. Additional details regarding the 2016 Credit Agreements are included in Note 8 of Notes to Consolidated Financial Statements included elsewhere in this Annual Report.

Senior Notes: In January 2016, our $2.0 billion 5.25% senior notes due January 2016 matured and were repaid.

Cash Dividends: In fiscal 2016, we declared and paid cash dividends of $0.60 per share that totaled $2.5 billion. In June
2016, our Board of Directors declared a quarterly cash dividend of $0.15 per share of our outstanding common stock payable on July 27, 2016 to stockholders of record as of the close of business on July 6, 2016. Future declarations of dividends and
the establishment of future record and payment dates are subject to the final determination of our Board of Directors.

Common Stock
Repurchases: Our Board of Directors has approved a program for us to repurchase shares of our common stock. On March 15, 2016, we announced that our Board of Directors approved an expansion of our stock repurchase program
by an additional $10.0 billion. As of May 31, 2016, approximately $8.8 billion remained available for stock repurchases pursuant to our stock repurchase program. We repurchased 271.9 million shares for $10.4 billion, 193.7 million shares for $8.1
billion, and 280.4 million shares for $9.8 billion in fiscal 2016, 2015 and 2014, respectively. Our stock repurchase authorization does not have an expiration date and the pace of our repurchase activity will depend on factors such as our working
capital needs, our cash requirements for acquisitions and dividend payments, our debt repayment obligations (described further below) or repurchases of our debt, our stock price, and economic and market conditions. Our stock repurchases may be
effected from time to time through open market purchases or pursuant to a Rule 10b5-1 plan. Our stock repurchase program may be accelerated, suspended, delayed or discontinued at any time.

73

Contractual Obligations: The contractual obligations presented in the
table below represent our estimates of future payments under fixed contractual obligations and commitments. Changes in our business needs, cancellation provisions, changing interest rates and other factors may result in actual payments differing
from these estimates. We cannot provide certainty regarding the timing and amounts of payments. We have presented below a summary of the most significant assumptions used in preparing this information within the context of our consolidated financial
position, results of operations and cash flows. The following is a summary of certain of our contractual obligations as of May 31, 2016:

Year Ending May 31,

(Dollars in millions)

Total

2017

2018

2019

2020

2021

Thereafter

Principal payments on borrowings(1)

$
44,241

$
3,750

$
6,000

$
2,000

$
4,500

$
2,655

$
25,336

Interest payments on borrowings(1)

19,756

1,337

1,315

1,154

1,083

1,010

13,857

Operating leases(2)

1,238

328

273

211

152

110

164

Purchase obligations and other(3)

894

574

153

91

68

8

Total contractual obligations

$
66,129

$
5,989

$
7,741

$
3,456

$
5,803

$
3,783

$
39,357

(1)
Represents the principal balances and interest payments to be paid in connection with our senior notes and other borrowings outstanding as of May 31,
2016 after considering:

•

certain interest rate swap agreements for certain series of senior notes that have the economic effect of modifying the fixed-interest obligations
associated with these senior notes so that they effectively became variable pursuant to a LIBOR-based index. Interest payments on these senior notes have been presented in the table above after consideration of these fixed to variable interest rate
swap agreements and are subject to change in future periods;

•

interest payments on our floating-rate senior notes that are based upon the interest rates applicable to the senior notes as of May 31, 2016 and are
subject to change in future periods; and

•

certain cross-currency swap agreements for a series of our Euro denominated senior notes that have the economic effect of converting our fixed-rate,
Euro-denominated debt, including annual interest payments and the payment of principal at maturity, to a fixed-rate, U.S. Dollar-denominated debt with a fixed annual interest rate. Principal and interest payments for these senior notes were
calculated and presented in the table above based on the terms of these cross-currency swap agreements. Principal and interest payments for our other Euro-denominated senior notes presented in the contractual obligations table above were estimated
using foreign currency exchange rates as of May 31, 2016 and are subject to change in future periods.

Refer to Note 8 of Notes to Consolidated Financial Statements included elsewhere in this Annual Report for additional information related to our notes payable and other
borrowings and related derivative agreements.

(2)
Primarily represents leases of facilities and includes future minimum rent payments for facilities that we have vacated pursuant to our restructuring
and merger integration activities. We have approximately $54 million in facility obligations, net of estimated sublease income, for certain vacated locations in accrued restructuring on our consolidated balance sheet at May 31, 2016.

(3)
Primarily represents amounts associated with agreements that are enforceable and legally binding and specify terms, including: fixed or minimum
quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the payment. We utilize several external manufacturers to manufacture sub-assemblies for our hardware products and to perform final assembly and
testing of finished hardware products. We also obtain individual hardware components for our products from a variety of individual suppliers based on projected demand information. Such purchase commitments are based on our forecasted component and
manufacturing requirements and typically provide for fulfillment within agreed upon lead-times and/or commercially standard lead-times for the particular part or product and have been included in the amount presented in the above contractual
obligations table. Routine arrangements for other materials and goods that are not related to our external manufacturers and certain other suppliers and that are entered into in the ordinary course of business are not included in the amounts
presented above, as they are generally entered into in order to secure pricing or other negotiated terms and are difficult to quantify in a meaningful way.

In June 2016, we acquired certain companies to expand our cloud industry solutions offerings. These acquisitions were not individually significant. In the aggregate, the estimated total preliminary
purchase price was $1.3 billion.

As of May 31, 2016, we had $5.3 billion of gross unrecognized income tax benefits, including related interest
and penalties, recorded on our consolidated balance sheet, and all such obligations have been excluded from the contractual obligations table above due to the uncertainty as to when they might be settled. We cannot make a reasonably reliable
estimate of the period in which the remainder of our unrecognized income tax benefits will be settled or released with the relevant tax authorities, although we believe it is reasonably possible that certain of these liabilities could be settled or
released during fiscal 2017.

74

We believe that our current cash, cash equivalents and marketable securities and cash generated from
operations will be sufficient to meet our working capital, capital expenditures and contractual obligation requirements. In addition, we believe that we could fund any future acquisitions, dividend payments and repurchases of common stock or debt
with our internally available cash, cash equivalents and marketable securities, cash generated from operations, additional borrowings or from the issuance of additional securities.

Off-Balance Sheet Arrangements: We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our
financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Selected Quarterly Financial Data

Quarterly revenues, expenses and operating income have
historically been affected by a variety of seasonal factors, including the structure of sales force incentive compensation plans. In addition, our European operations generally provide lower revenues in our first fiscal quarter because of the
reduced economic activity in Europe during the summer. These seasonal factors are common in the technology industry. These factors have caused a decrease in our first quarter revenues as compared to revenues in the immediately preceding fourth
quarter, which historically has been our highest revenue quarter within a particular fiscal year. Similarly, the operating income of our business is affected by seasonal factors in a similar manner as our revenues (in particular, our cloud software
and on-premise software segment) as certain expenses within our cost structure are relatively fixed in the short term. We expect these trends to continue in fiscal 2017.

The following tables set forth selected unaudited quarterly information for our last eight fiscal quarters. We believe that all necessary adjustments, which consisted only of normal recurring adjustments,
have been included in the amounts stated below to present fairly the results of such periods when read in conjunction with the consolidated financial statements and related notes included elsewhere in this Annual Report. The sum of the quarterly
financial information may vary from annual data due to rounding.

Fiscal 2016 Quarter Ended (Unaudited)

(in millions, except per share amounts)

August 31

November 30

February 29

May 31

Revenues

$
8,448

$
8,993

$
9,012

$
10,594

Gross profit

$
6,561

$
7,105

$
7,139

$
8,640

Operating income

$
2,654

$
2,955

$
3,027

$
3,968

Net income

$
1,747

$
2,197

$
2,142

$
2,814

Earnings per share-basic

$
0.40

$
0.52

$
0.51

$
0.68

Earnings per share-diluted

$
0.40

$
0.51

$
0.50

$
0.66

Fiscal 2015 Quarter Ended (Unaudited)

(in millions, except per share amounts)

August 31

November 30

February 28

May 31

Revenues

$
8,596

$
9,598

$
9,327

$
10,706

Gross profit

$
6,878

$
7,657

$
7,394

$
8,611

Operating income

$
2,963

$
3,542

$
3,383

$
3,982

Net income

$
2,184

$
2,502

$
2,495

$
2,758

Earnings per share-basic

$
0.49

$
0.57

$
0.57

$
0.63

Earnings per share-diluted

$
0.48

$
0.56

$
0.56

$
0.62

Restricted Stock-Based Awards and Stock Options

Our stock-based compensation program is a key component of the compensation package we provide to attract and retain certain of our talented employees and align their interests with the interests of
existing stockholders.

75

We recognize that restricted stock-based awards and stock options dilute existing stockholders and have
sought to control the number of stock-based awards granted while providing competitive compensation packages. Consistent with these dual goals, our cumulative potential dilution since June 1, 2013 has been a weighted-average annualized rate of 1.6%
per year. The potential dilution percentage is calculated as the average annualized new restricted stock-based awards or stock options granted and assumed, net of restricted stock-based awards and stock options forfeited by employees leaving the
company, divided by the weighted-average outstanding shares during the calculation period. This maximum potential dilution will only result if all restricted stock-based awards vest and stock options are exercised. Of the outstanding stock options
at May 31, 2016, which generally have a ten-year exercise period, 13.3% have exercise prices higher than the market price of our common stock on such date. In recent years, our stock repurchase program has more than offset the dilutive effect of our
stock-based compensation program; however, we may reduce the level of our stock repurchases in the future, as we may use our available cash for acquisitions, to pay dividends, to repay or repurchase indebtedness or for other purposes. At May 31,
2016, the maximum potential dilution from all outstanding restricted stock-based awards and unexercised stock options, regardless of when granted and regardless of whether vested or unvested and including stock options where the strike price is
higher than the market price as of such date, was 10.3%.

The Compensation Committee of the Board of Directors reviews and approves the
organization-wide stock-based award grants to selected employees, all stock-based award grants to executive officers and any individual grant of stock-based awards in excess of 100,000 stock option equivalent shares. A separate Plan Committee, which
is an executive officer committee, approves individual stock-based award grants of up to 100,000 stock option equivalent shares to non-executive officers and employees. Restricted stock-based award and stock option activity from June
1, 2013 through May 31, 2016 is summarized as follows (shares in millions):

Restricted stock-based awards and stock options outstanding at May 31, 2013

448

Restricted stock-based awards and stock options granted

252

Restricted stock-based awards and stock options assumed

12

Restricted stock-based awards vested and stock options exercised

(226
)

Forfeitures, cancellations and other, net

(59
)

Restricted stock-based awards and stock options outstanding at May 31, 2016

427

Weighted-average annualized restricted stock-based awards and stock options granted and assumed, net of forfeitures and
cancellations

68

Weighted-average annualized stock repurchases

(249
)

Shares outstanding at May 31, 2016

4,131

Basic weighted-average shares outstanding from June 1, 2013 through May 31, 2016

4,384

Restricted stock-based awards and stock options outstanding as a percent of shares outstanding at May 31,
2016

10.3%

Total restricted stock-based awards and in the money stock options outstanding (based on the closing price of our common stock on
the last trading day of fiscal 2016) as a percent of shares outstanding at May 31, 2016

9.1%

Weighted-average annualized restricted stock-based awards and stock options granted and assumed, net of forfeitures and
cancellations and before stock repurchases, as a percent of weighted-average shares outstanding from June 1, 2013 through May 31, 2016

1.6%

Weighted-average annualized restricted stock-based awards and stock options granted and assumed, net of forfeitures and
cancellations and after stock repurchases, as a percent of weighted-average shares outstanding from June 1, 2013 through May 31, 2016

-4.1%

Our Compensation Committee approves the annual organization-wide stock-based award grants to certain employees. These
annual stock-based award grants are generally made during the ten business day period following the second trading day after the announcement of our fiscal fourth quarter earnings report.

76

Recent Accounting Pronouncements

For information with respect to recent accounting pronouncements and the impact of these pronouncements on our consolidated financial statements, see Note 1 of Notes to Consolidated Financial Statements
included elsewhere in this Annual Report.