Oracle - Earnings Call - Q1 2012

Transcript

Speaker 4

Please stand by. We're about to begin. Good day, everyone, and welcome to today's Oracle Corporation Quarterly Conference. Today's call is being recorded. At this time, I'd like to introduce Ken Bond, Vice President of Investor Relations at Oracle. Please go ahead.

Speaker 1

Thank you, Anthony. Good afternoon, everyone, and welcome to Oracle's first quarter and fiscal year 2012 earnings conference call. A copy of the press release and financial tables, which includes a GAAP to non-GAAP reconciliation and other supplemental financial information, can be viewed and downloaded from our Investor Relations website. On the call today are Chief Executive Officer Larry Ellison, President and CFO Safra Catz, and President Mark Hurd. As a reminder, today's discussion will include forward-looking statements, including predictions, expectations, estimates, or other information that might be considered forward-looking. Throughout today's discussion, we will attempt to present some important factors relating to our business, which may potentially affect these forward-looking statements. While these forward-looking statements represent our current judgment, these statements are also subject to risks and uncertainties that may cause actual results to differ materially from statements being made today.

As a result, we caution you against placing undue reliance on these forward-looking statements. We encourage you to review our most recent reports on Forms 10-K and 10-Q and any applicable amendments for a complete discussion of these factors and other risks that may affect our future results or the market price of our stock. Finally, we are not obligating ourselves to revise our results or publicly release any revisions to these forward-looking statements in light of new information or future events. Before taking questions from the audience, we'll begin with a few prepared remarks. With that, I'd like to turn the call over to Safra.

Speaker 2

Thanks, Ken. I'm going to focus on our non-GAAP results for Q1. I'll then review guidance for Q2 and turn the call over to Larry and Mark for their comments. As you can see, we delivered another great quarter as we executed well throughout the quarter, including late July and August. Our Q1 results against our June guidance make clear that we continue to have a lot of company-specific momentum. Obviously, we're pleased with the results. New software license revenue was up 17% to $1.5 billion, building off exceptional growth of 25% in Q1 of last year. We continue to see broad-based geographic and product momentum as technology new license revenues were up 14% to $1.1 billion, and applications grew 23% this quarter to $428 million, with Europe particularly strong. Geographically, the quarter was balanced with new license growing 10% in the Americas, 20% in APAC, and 25% in EMEA.

The quarter was also not dependent on any large deals. Software license update and product support revenues were up 16% to $4 billion. Support cash and renewal rates continue at the usual high levels. Hardware systems revenue was $1 billion for the quarter. This quarter, hardware gross margins were 54%, significantly higher than the 48% last year, as we continue to shift the product mix to more profitable products and engineered systems, and as we continue to improve our supply chain efficiency. Total revenues for the quarter were $8.4 billion, up 11% from last year. We match this top-line momentum with business discipline, and we're extremely pleased with our non-GAAP operating income of $3.6 billion, 21% higher than last year, as our operating margin expanded to 42% from 39% last year.

We still believe there remains ample leverage in our business model, and we could be back at our pre-Sun operating margins quite quickly. The non-GAAP tax rate for the quarter was 26.5%. EPS for the quarter grew 14% to $0.48 on a non-GAAP basis. I'll tell you that, really, being able to put up these top-line and bottom-line results, given our size, once again demonstrates the real strength of our product line, the loyalty of our customer base, and the strength of the operating model. We have the products in the market that customers want to buy, and OpenWorld, which starts next month, will only make this even more obvious. Operating cash flow increased to a record $12.8 billion over the last four quarters, with operating cash flow increasing this quarter to $5.4 billion, up $1.6 billion from $3.8 billion in Q1 of last year.

Free cash flow grew 46% to a record $12.3 billion over the last four quarters. We now have nearly $32 billion in cash and marketable securities. As we said, we are committed to returning value to our shareholders through technical innovations, strategic acquisitions, stock repurchases, prudent use of debt, and a dividend, and will continue to be opportunistic. This quarter, we repurchased 27.5 million shares, and the Board of Directors declared our quarterly dividend of $0.06 per share. Now to the guidance. As many of you remember, we had a great second quarter last year with new license up 21% on a non-GAAP basis and up 33% on a GAAP basis, and GAAP EPS up 27%. Let me just say that again. New license was up 21%, non-GAAP EPS was up 33%, and GAAP EPS was up 27%. Those are pretty tough comparisons.

We do not expect much else from currency because, at this point, it looks like only 1% if it stays where it is. New software license revenue growth is expected to range from 6% to 16% in growth. Hardware product revenue growth is expected to range from flat to negative 5%. However, we do expect gross margins and profitability of our overall hardware business to improve during the quarter as we continue to move away from selling low-margin commodity servers and focus on selling engineered systems like Exadata, Exalogic, and SPARC Solaris systems. Total revenue growth on a non-GAAP basis is expected to range from 4% to 8%. On a GAAP basis, we expect total revenue growth of 5% to 9%. Non-GAAP EPS is expected to be somewhere between $0.56 and $0.58, up from $0.51 last year. GAAP EPS is expected to be $0.44 to $0.46.

This guidance assumes a GAAP and non-GAAP tax rate of 27%. Of course, it may end up being different. With that, I turn it over to Larry for his comments.

Speaker 5

Thank you, Safra. In Q1, the transition away from selling low-margin commodity servers to selling high-margin engineered systems increased both the gross margins and the overall profitability of our hardware business. In Q2, we will accelerate that trend when we introduce four brand new engineered systems products. Each of these new engineered systems optimally combines Oracle software, Oracle silicon, and Oracle hardware to deliver extreme high performance, fault-tolerant high reliability, and improved ease of use. The largest of these new engineered systems is the fault-tolerant SPARC SuperCluster, featuring our new SPARC T4 microprocessor that runs up to five times faster than the T3 microprocessor it replaces, our new feature-rich Solaris 11 operating system, and the ultra-high-performance Exadata flash disk storage system. The SPARC SuperCluster runs the Oracle Database applications faster and less expensively than anything available from IBM.

Thus, we expect that many customers in our large SPARC Solaris installed base will be upgrading to SPARC SuperClusters. Mark, it's all yours.

Speaker 6

Thanks, Larry. Just a few points on the quarter. You heard about 17% growth. That comes on top of 25% last year. It was primarily organic, broad-based across tech and apps, both growing double digits. Performance across geographies was balanced. One number worth noting is apps in Europe was up over 60%, 6-0%. Second, Exadata and Exalogic. Unit growth was nearly triple digit growth based across industries and geographies. We sold systems to more than 150 unique customers, of which 100 were new Exadata or Exalogic. Third, our industry-focused solutions are increasing in relevance to customers, and that shows up in our 17% growth. Our industry-focused solutions again grew faster than Oracle did in license growth. Again, good health from the industry-focused solutions. Fourth, I want to make sure this point is clear. In addition to Exadata and Exalogic growth, our SPARC server products grew this quarter.

We had growth in the core SPARC product line. Our strategy around high intellectual property, high attach, high margin solutions that include Exadata, Exalogic, and the SPARC server products is working. You're also beginning to see that show up in these industry market share figures that show us gaining share. Last, we are continuing to hire. We added 350 people to the sales organization in Q1. With that, I'll turn it back over to Ken for your questions.

Speaker 1

Thanks, Mark. Anthony, I think we can proceed now to the Q&A portion of the call.

Speaker 4

Thank you so much. Ladies and gentlemen, if you do have a question for today's speakers, please press star one on your telephone keypad. Again, that is star one on your telephone. If you are joining us by speakerphone, please ensure the mute function has been turned off to allow your signal to reach our equipment. We'll take our first question from Adam Holt with Morgan Stanley.

Speaker 0

Terrific. Thank you. My question, I guess, is for Mark on the hardware business. It's a two-part question. First, where do you think you are in turning this business around? What gives you confidence in the forward look there? Secondly, along that line, how conservative do you think the hardware guidance is for the second quarter? Thank you.

Speaker 6

I thought Adam will get into a lot of conservatism or optimism. The guidance is the guidance, I think. Second point, I think we're really not as focused, to be very frank, on the hardware growth rate as we are on the point that I just made of growing the right things in the product line, the things that are attributable to long-term profitability, long-term positioning with the customer, long-term positioning in the data center. I'll try to give you an example. If you take that core server product line that we grew in the quarter, a SPARC server product line, if you took an M-series product, just imagine, Adam, that we sold $100 million worth of M-series products. These are rough numbers. My guess over five years, our profitability on that is roughly $100 million when you include the attach and the support and the service.

Just the same, if we sold $100 million of x86 with no intellectual property, my guess our profitability would be less than a fifth of that. I only bring that up to give you the polarization of the impact of intellectual property, the alignment of that intellectual property to a solution, the alignment of that to support the ability for us to do things for the customer and the eventual profitability for the company. What we're focused on are the solutions like what Larry described are coming out: Exadata, Exalogic, the core SPARC product line. That's where we're focused. In that context, I think we are turning around the business. I think you are seeing some of the momentum. If you see the market share charts, they tend to show you the facts that we are gaining share in that core part of the product line.

Speaker 0

Terrific. Thank you.

Speaker 6

Thank you.

Speaker 0

Let me add a little bit to that, just so we're really clear. I don't care if our commodity x86 business goes to zero. We don't make any money selling those things. We have no interest in selling other people's IP. Commodity x86 includes Intel IP, Microsoft IP. We don't make money selling that. You know, Sun sold that stuff, and we are phasing out that business. We have no interest in it whatsoever. We have interest in selling systems that include our IP. That's how we're going to drive the profitability of our overall hardware business. Eventually, I think it's actually in fairly short order, our engineered systems are growing at such a high rate that the overall hardware business top line will grow also.

What's really important is to continuously grow our margins in the hardware business and our profitability in the hardware business so we can meet Safra's goal, which is getting back to our pre-Sun acquisitions' overall profit margins. Next question.

Speaker 4

We'll take our next question from Heather Blaney with Goldman Sachs.

Speaker 7

Hi. Thank you. This is a question for Larry. I was just wondering if you could walk us through the big data opportunity that everyone's been talking about, how you see Oracle participating in this trend, and also how you see it impacting Oracle's core database franchise.

Speaker 5

Hadoop and all of the associated utilities with Hadoop, which is used—I use the term big data for all of that—is going to be one of the feeder systems to the Oracle database. We have announced interfaces that allow you to take your Hadoop systems and connect them to Oracle systems so you can load your Hadoop data into Oracle. We think it's going to increase the usage of Oracle. Furthermore, I mentioned we're going to come up with four new engineered systems, one of which is about SPARC SuperCluster. We're also going to have a big data engineered system that we're going to introduce at Oracle Open World. We think as more and more data gets computerized, a lot of that data finds its way into an Oracle database and allows our database business to grow at an accelerated rate.

Speaker 7

Great, thank you.

Speaker 4

Our next question will come from John Stephen DiFucci with JPMorgan.

Speaker 0

Thank you. My question is for Safra. It's a macro question. Safra, we've spoken to you for a while now about Europe. Though you've acknowledged sort of general macro weakness in the region, the same kind of stuff we read in the paper about, you continue to put up better results than we would expect. That's especially relative to others, and actually especially this quarter. I guess, can you talk a bit about what you're seeing in Europe more specifically and what might be implied in guidance for the region?

Speaker 2

Our bottom line is that I think we're being successful where other folks are being less successful because our products are so compelling. We had many, many orders in Europe really across the board for our product lines because either engineered systems or our other products are extremely compelling value propositions. It gives the customers an opportunity to be much more efficient. We were strong in really all the sectors that you may be reading about are struggling, both in Europe and in the United States. Our government business is still very good. Our financial services business is very good. Our European banking business remains very good. I think we have a lot of company-specific momentum across the board. That's really all I ever speak to is our own company. Mark, why don't you add some additional details?

Speaker 6

Listen, I think Safra's point is right. I mean, I thought we had just a solid quarter in Europe. We did not see any anomaly that was unique across any other region that we had. We had some really cool business that showed up in Europe too. We had a great, we had Deutsche Post with Exadata, Exalogic. We had some great apps to disk wins in Europe in the quarter. I gave you the applications growth number at 60%. I would be cautious, to Safra's point, that this is not maybe macro, but maybe more Oracle specific. We've got a great team over there. To add to it, we're hiring in Europe right now. We are adding to our sales force in Europe right now. We think there is more market to cover, and there's more opportunity to go get.

I guess I'd say another way, maybe a bit of a plug, I'm very proud of those guys. They're doing a very good job. They're gaining share. Their Exadata quarter was, frankly, very impressive as well.

Speaker 0

Mark, just a quick follow-up to a point you made. You said the industry-focused solutions were really strong this quarter, and apps were really strong in Europe. Even though it was a relatively easy comp, it still looked like a really good number. Is that at least partially due to industry vertical apps?

Speaker 6

It was all the above. I would not leap to that conclusion, John. I think that, think of it as broad-based again, very good quarter in core apps as well. If you looked at CRM, it was a very good quarter in Europe. Europe really just had a good quarter all the way around. When I went through Exadata, very strong quarter, good Exalogic quarter, good horizontal apps quarter, good vertical apps quarter. We had a couple of apps to disk wins I described a little while ago. That means end-to-end Oracle stack that we bring to the customers. I wouldn't leap that it was any one thing. The best news I can tell you about Europe, broad-based.

Speaker 0

Great. Thanks.

Speaker 4

We'll hear next from Phil Winslow with Credit Suisse.

Speaker 3

Hi, guys. Thanks. Another great quarter. Just focusing back on that applications line in particular, I believe it was up 19% year over year in constant currency, which is pretty fantastic just given the environment. I do believe that this is largely organic. What is really driving that, especially kind of relative to your competitors? Larry, just specifically the Fusion Applications, just wondering if you could give us an update there, some of the feedback that you're receiving, and maybe just help kind of the Wall Street community here compare sort of the Fusion architecture with some of the more legacy ones you see out there from your competitors. Thanks.

Speaker 5

As you know, we've been working on Fusion Applications for almost six years now, and we have about 200 customers using Fusion Applications. Before the end of this calendar year, we're going to have general availability on Fusion. We have a number of wins against not only SAP using Fusion, but some of the newer competitors like Workday using Fusion, where people have compared our user interface to their user interface, our SaaS offering to their SaaS offering, our cloud infrastructure to their cloud infrastructure. We think it's very important that we're out in the market now, not only with our traditional applications, which we'll continue to support for years to come, but also an all-new generation of Fusion Applications, something that SAP, our largest applications competitor, doesn't have. We think that gives us a huge advantage going forward. Mark, do you want to add to that?

Speaker 6

Yeah, sure I would. I think to Larry's point, one, we had a very good quarter across what you would think of as a traditional application base. I'm staring at a lot of numbers, and none of them stand out. They're all good. They're all growth numbers. It's pretty broad-based across ERP and EPM and CRM and so forth, as well as the vertical application. I think what you'd have to add to Larry's point is we're the only company now with a series of traditional apps, but also bringing online our SaaS cloud apps. We are in the market aggressively with HCM today. We released that in Q4. We have teams dedicated to growing our cloud business. We are doing the same thing now in CRM. You will see us very aggressively in the market, focused on those two segments as we move into Q2.

Speaker 3

All right. Thanks, guys.

Speaker 1

Next question, please.

Speaker 4

Our next question comes from Brent Thill with UBS.

Speaker 0

Thanks. Two quick questions, one for Larry and Mark, just around the database business. There's been a lot of focus on unstructured data. Maybe it's a tie into Heather's question around kind of the next leg of growth for the database business, how you think about that and where you're positioned around the move towards unstructured. For Safra, just a lot of questions around financial and federal exposure. I don't know if you can give us a sense of what the exposure is. If you don't give us specific numbers, if you could just kind of give us a ballpark, because there's certainly a lot of attention on those two particular segments.

Speaker 5

OK. Oracle has always stored both structured and unstructured data. This is really nothing new. We are constantly adding features to our database to support the storage and the searching of unstructured as well as structured data. Autonomy was a shock to us. We looked at the price and thought it was absurdly high. We had no interest in making the Autonomy acquisition. We think we're much better off with a couple of smaller acquisitions and to continue to innovate in that area so that the unstructured data and the structured data both find their way into an Oracle database where it's secure, it's scalable, it runs on Exadata. We think we really don't want to have two separate databases. It's kind of an Autonomy-like unstructured database and an Oracle structured database. We think that data should be integrated with a single database technology.

That's always been our strategy for Oracle. It started as a relational database, then we added objects, then we added text, and then we've added a variety of other things, like video and audio, to the Oracle database. We think that should be unified, and that's how we're approaching the problem. Mark?

Speaker 6

Yeah, I'd just add to it that, again, as you can see, our database business grew in the quarter materially. It was a very nice performance across our options, across editions. It was just strong. I think the fact that you've got not only unstructured data, not only do you have big data, you're going to have several billion people now running around the planet with computers in their hands trying to get information out of databases. Jeez, we think that's good news for the people that have databases like us because it's going to be a lot of people trying to get information simultaneously looking for performance. I think when you look over the next several years, the database is going to continue to grow.

The Affiliate Drive database performance with capabilities like Exadata and SPARC SuperCluster, as Larry Ellison talked about earlier, aren't going to become as much a novelty as they are a requirement for all the people that are going to be paying and trying to get an opportunity to get at this data. Database businesses perform well in the quarter. Gosh, we feel well positioned for all the secular trends that are going on in the world today.

Speaker 2

Regarding the sectors in which we're big, luckily for us, we're sort of big in every segment. Telecommunications providers, governments, both federal, state, and local, banking, I would say, to be honest with you, that we don't have nearly the exposure that U.S. banking. I think there still remains an enormous opportunity in the banking sector for much more Oracle than there is now. Historically, they are a much more mainframe-focused segment. We actually have opportunity because we run much, much faster. We're much, much cheaper to operate. Over time, I think that remains an opportunity. I don't view it at all as exposure. I think it explains, by the way, why even with the sector under pressure, we continue to grow so much because our products are just better. We're a very good fit, and we continue to do well in all these segments.

Speaker 6

I'd add to it too that when you look at the play with the Exa line, it is every bit as much a consolidation play. When you think of an industry like financial services, Exadata delivers performance, and it also delivers economies. The opportunity for us to go into a bank and deliver, and the ability for the bank to dial on the continuum, how much performance do you want and how much cost do you want to reduce? We have customers in banking where I think, to Safra's point, we have tremendous opportunity to go into those banks and have them consolidate Oracle on Oracle and either gain performance or actually save money simultaneously. That's a very attractive value proposition in this kind of economy, and it's opportunity for us.

Speaker 0

Thank you.

Speaker 1

Next question.

Speaker 4

Our next question comes from Jason Maynard with Wells Fargo.

Speaker 0

Hey, good afternoon, guys. I want to maybe go back to the hardware business. If you could maybe put a little context or framing around where you think you're at in the transformation to selling engineered systems, maybe talk about it on customer adoption, and also just in terms of your organizational capacity and shifting more to engineered systems from some of the legacy Sun hardware products.

Speaker 5

I mean, I'll tackle that. I think certainly next fiscal year, we would expect our overall hardware business to have top-line growth. No question about it. The transition right now is we've got our Exa line almost doubled in the quarter in Q1. Our overall SPARC line was up. Our end servers, our x86 commodity line was down. Sun had a practice of selling x86s at very, very low margins. We reward our salespeople based on margin. We don't make money selling low-margin commodity x86 boxes, and our salespeople don't make any money selling them. Therefore, we're de-emphasizing that business. That business is shrinking. However, our profitable businesses in servers, the Exa line and the SPARC line, are growing. Also, in storage, our ZFS system is growing. Our Pillar system is growing. The Exadata storage system is growing. Our disk storage systems are also growing, the ones with our IP.

However, we also sell third-party disks without our IP at very low margins. Those are still in the system. We expect those low-margin storage systems to also decline because, again, we pay our salespeople based on margin, and there is very low margin on those products. We don't care about selling those products because we don't make any money. I think your question is, when will we sell? When will that be out of the system and us pretty much only be selling servers and storage with our IP? I think that will be next fiscal year. You'll see top-line growth in the hardware business. This fiscal year, you'll see continued improvement in gross margin and continued improvement in profitability in our overall hardware business, even though the commodity business will be gradually shrinking every quarter. I don't know if that answered your question.

Speaker 0

Nope, that was it. Thank you.

Speaker 4

Our last question comes from Kash Rangan from Merrill Lynch.

Speaker 0

Hi. Thank you very much for taking my question. One for Larry, one for Mark. Larry, I remember about a year back, we asked you about big data on this conference call. Just a follow-up to that, you have two new systems or four new engineered systems that you're going to be launching. One of them caught my attention, the big data engineered system. I think you mentioned Exadata flash-based system. I'm curious if we should think about the market that you're going after as being still core RDBMS, or are you trying to go after other alternative approaches to the core RDBMS market? I have a follow-up question for Mark. Thank you.

Speaker 5

OK. Let me be clear on RDBMS. Oracle hasn't been just an RDBMS for about 20 years. I don't know how many people on the call are my age, probably no one. A long time ago, after relational databases came out, there was a next-generation database that were called object databases. Everyone talked about object databases are going to replace relational databases. What actually happened is that object database capabilities got integrated into the Oracle database. Oracle is not just a relational database. It can be a relational and object database. There were these things called text databases for text search. Those were separate databases. Oracle then incorporated text search and text capability into the Oracle database. There were these things called XML databases and separate XML databases. Oracle integrated XML capability into it. Now people are talking a lot about unstructured data and things like autonomy.

Oracle's strategy has always been to integrate additional types of data into the Oracle database. A lot of this unstructured data, whether it's video or audio, images, all of those, we think the transition continues. We started with relational, then objects, then text, then XML, now a lot of different types of unstructured data types all going into the Oracle database. Finally, big data or the searching of large amounts of data using Hadoop. After Hadoop finishes filtering the data, the place you want to put that data is an Oracle database. That's what a lot of our customers are doing. We are exploiting the trend, the big data technology and the big data trend, if you prefer, by building a Hadoop appliance that attaches to the Oracle Exadata database or any Oracle database, for that matter.

You don't have to buy our Hadoop appliance if you can use whatever servers you want running Hadoop. We provide the interface between Hadoop and the Oracle database. The idea is all of your data should be you should be able to put all of your data, regardless of data type, into the Oracle database where it can be stored securely and reliably and you can search it and get answers to your questions very quickly.

Speaker 0

Yeah, it's a great historical perspective. Thanks, Larry. Mark, I think on the last quarter conference call or on the press release, you said that you hope to triple the install base of Exadata in the fiscal year. I'm just wondering if you still feel that you're tracking towards it. Go ahead. That's it for me. Thank you.

Speaker 6

That's what we're going to do. We think we've got a pipeline and a product line that puts us in position to get that done. I think, to Larry's point, we're also adding a lot more products to the lineup. When you look at what we're going to release in a couple of weeks at Oracle Open World, some of which you've heard about today, tomorrow you'll see us release an engineered system that combines more Oracle IP together to serve yet another part of the market. We just feel very good about our momentum in the broader engineered systems line and certainly specifically in the Exa line. That's what we're trying to get done.

Speaker 0

Thank you.

Speaker 4

At this point, I'd like to turn the conference back over to today's speakers for any additional or closing remarks.

Speaker 1

Thank you, operator. A telephonic replay of this conference call will be available for 24 hours. Dial-in information can be found in the press release, which was issued earlier today. Please call the Investor Relations Department with any follow-up questions from this call. We look forward to speaking with you. Thank you all for joining us in today's conference call. I'd like to turn the call back to the operator for closing.

Speaker 4

Thank you. Once again, this does conclude today's conference. We thank you all for your participation.