甲骨文 (ORCL) 2017 Q3 法說會逐字稿

Welcome to Oracle's third-quarter 2017 earnings conference call. Now I'd like to turn today's call over to Ken Bond, Senior Vice President. Ken?

Thank you, Holly. Good afternoon everyone, and welcome to Oracle's third-quarter FY17 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 Chairman and Chief Technology Officer, Larry Ellison, and CEOs Safra Catz and 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 present some important factors relating to our business which may potentially affect these forward-looking statements.

These forward-looking statements are also subject to risks and uncertainties that may cause actual results to differ materially from statements made today. As a result, we caution you against placing undue reliance on these forward-looking statements and we encourage you to review our most recent reports, including our 10-K and 10-Q and any applicable amendments, for a complete discussion of these factors and other risks that may affect our 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, we'll begin with a few prepared remarks. With that, I'd like to turn the call over to Safra.

Thanks, Ken. Good afternoon, everyone. I'm going to focus on our non-GAAP results for Q3. I'll then review guidance for Q4, and then I'll turn the call over to Mark and then Larry. Just so you all know, we are not all in the same place today so we may all answer at once; so just give us a chance.

Clearly we are delighted with our results, as software and cloud revenue was at the high end of my guidance, and earnings per share was $0.06 above the high end of my guidance. Our pivot to the cloud is now clearly in full swing.

We continue to see outside growth rates in our cloud business, especially when compared with our key competitors who are all seeing slowing growth; but more importantly, the increase in revenue from our cloud business has overtaken new software license declines on an annual basis. Next year I expect our cloud revenue will be larger than our new software license revenue.

The investments we've made to transition our business to the cloud have been important to ensure that Oracle remains a technology leader, and we are now beginning to see the benefits in our results. With cloud overtaking new software license revenue, we expect our business to once again exhibit the same pattern we delivered over the previous decade as a license business, that is growing revenue with disciplined cost management that results in EPS and cash flow that grow even faster. I expect EPS growth to ramp up throughout next year.

We continue to use constant dollar rates on our quarterly calls so that we can have some measure of consistency across the quarters, as well as to reflect how we measure the business. This quarter the effects of currency movements were largely in line with my guidance of 1% currency headwind for revenue and $0.01 negative impact to EPS.

Cloud SaaS and PaaS revenue for the quarter was $1.1 billion, up 86% from last year. You can also see the continued strength of our cloud business in the SaaS and PaaS billings and deferred revenue.

The gross deferred revenue balance is now over $2 billion, up 75% in US dollars, and SaaS and PaaS billings grew 111% in US dollars this quarter. We've put the billings numbers up on our website for you to see the detail.

When you add together cloud SaaS/PaaS revenues and new software license revenue together, we grew 11% in constant currency. This is a significant milestone in our transformation, where the combination of our cloud and new software license business added together are growing. As cloud becomes an even larger percentage of the total, the growth will only accelerate with earnings and cash flows following along.

As our SaaS/PaaS business continues to scale and grow dramatically, the gross margin continues to expand. The Q3 gross margin for SaaS and PaaS was 65%, up from 51% last year, and I expect it to be about the same -- in the same region in Q4. I expect that our total SaaS/PaaS gross margin will continue to trend toward 80% over time.

Cloud infrastructure as a service revenue was $178 million, up 19% from last year. The Q3 gross margin was 30% as we continue to make the necessary investments to scale out this business. As we make additional investments, the expenses hit immediately while the revenue is recognized over time so the gross margin in this part of the business could decline to roughly about 20% over the next few quarters, after which I expect gross margin will climb to more than 40% as the business scales.

Total cloud revenue in the quarter was approximately $1.3 billion, with the growth modestly accelerating to 72% in constant currency from last year. Total on-premise software revenues were $6.2 billion, with software updates and product support revenues at $4.8 billion, up 3% from last year.

Attach and renewal rates remained at their usual high levels as our installed base of customers continued to grow. In fact, they actually increased.

New software license revenues were nearly $1.4 billion, down 15%, reflecting the continued emphasis on and migration to cloud. Total hardware, including hardware support, was down 9%, with hardware system product revenue of $520 million and hardware support revenue of $508 million, again, reflecting our focus on the move to the cloud.

For the Company, total revenues for the quarter was $9.3 billion, up 4% from last year. Non-GAAP operating income was $3.9 billion, up 4% from last year, and the operating margin was 43%, up from 42% last year.

The non-GAAP tax rate for the quarter was 21.6%, as the rate was favorably impacted by some one-time benefits and some other factors, including favorable geographic mix this quarter. Non-GAAP earnings per share was $0.69, up from $0.64 and up 8% in constant currency. The GAAP tax rate was 17% and the GAAP EPS was $0.53, up from $0.50 last year.

Operating cash flow over the last four quarters was $13.5 billion, which is lower because of the rapid growth we are seeing as we transition to cloud, is having an impact on our working capital. Our operational metrics, like DSO and days payable, are stable so it's just largely an effect of growth on working capital and timing.

Capital expenditures for Q3 were $440 million, with about one-third of it from real estate while most of the rest was cloud build-out and internal use. Free cash flow over the last four quarters was $11.8 billion.

We now have approximately $59 billion in cash and marketable securities. Net of debt our cash position is approximately $5 billion. The short-term deferred revenue balance is [$7.4 billion], up 7% in constant currency.

This quarter we repurchased approximately 13 million shares for a total of $500 million. Over the last 12 months we have repurchased 124 million shares for a total of $5 billion and paid out dividends of $2.5 billion. The Board of Directors increased the quarterly dividend 27% from $0.15 to $0.19 per share.

Now let me go to the guidance. Because we expect to see continued volatility in exchange rates, we do also expect to see significant currency headwinds. I'm going to give you constant currency guidance, but if the current exchange rates as remain the same throughout the quarter as they are right now, we actually expect to see currency headwind of 2% on revenue and $0.02 negative impact on EPS. These currency headwinds are higher than last quarter, meaning that most of your Q4 estimates do not yet reflect the incremental revenue and EPS headwind of an additional negative impact of 1% and $0.01 to EPS.

All of my guidance today is on a non-GAAP basis. With that, my guidance is as follows. SaaS and PaaS revenue, including NetSuite, is expected to grow 69% to 73%, effectively raising my full-year guidance from 80% to 81% for the year.

We are beginning to see an increasing and favorable attach between our PaaS and IaaS orders, so I'm going to provide guidance on IaaS as well this quarter. IaaS is expected to grow 25% to 29%. Software and cloud revenue, including SaaS/PaaS and IaaS, new software license and software support is expected to grow 1% to 3%.

Total revenue is expected to grow from negative 1% to positive 2%. EPS is expected to be between $0.78 and $0.82 in constant currency.

Now, this assumes a non-GAAP tax rate of 23.5%, but of course the Q4 tax rate could end up being different. With that, I'm going to turn this over to Mark and then Larry follows him.

All right. Thanks, Safra. We thought Q3 would be strong going in, and as you can see it turned out to be just that. I'm going to give you a bunch of numbers here and try to give you a little more insight to the quarter.

First, in ARR we booked $545 million. Every number I'm going to give you was actually in CD, unless I say differently. $545 million, constant dollars $557 million. That's up 73% and the second best quarter we have ever had.

SaaS bookings were $322 million, and PaaS infrastructure bookings were $223 million. Cloud revenue was up 72% and were now at an annualized $5 billion run rate.

SaaS/PaaS revenue was up 86%. We're the fastest-growing scale cloud business in the world, and that is on top, that growth rate is on top of last year's 60%. In ERP we were up 280% organically, and with NetSuite ERP is now our largest pillar.

Fusion HCM was up 106%. That's more than 3 times the growth rate of Workday. CX was up 16%, with marketing and service both over $100 million in quarterly revenue.

Our verticals up were up were 109%, and also over $100 million in quarterly revenue. Database as a service was up 427%. Our database business, including all of our on-premise business, is now growing.

PaaS was up 375% year to date, with middleware cloud services up 300%. As Safra mentioned, SaaS/PaaS billings were up 111% in USD. SaaS/PaaS deferred revenue was up 75% in USD.

Now some customer metrics. 1,125 new SaaS customers in the quarter. 908 expansions. 210 customers who bought SaaS also bought PaaS.

CX, we had 480 new customers and 586 expansions. In HCM we had 206 new customers and 217 expansions. In ERP we had 564 new customers. That did not include NetSuite. We got 120 expansions.

50% of our new ERP customers never had Oracle ERP before they bought this quarter. Our active base of ERP customers is now approaching 3,700. 1,465 are live, 10 times Workday.

In total we now have 13,103 customers in our SaaS active base and 25,000 with NetSuite. Two-thirds of our new customer wins were for Fusion. 283 go-lives for Fusion. 2,444 customers are now live on Fusion.

We have 2,380 new PaaS customers in the quarter, and 2,586 new customers buying standalone infrastructure as a service. As a point of clarity, PaaS and infrastructure customers are counted for each service that they buy. Lastly, this was an excellent quarter. Bookings, billings in revenue were all extremely solid.

Now a few predictions. Q3 bookings growth was strong, as I mentioned 73%. We will book at least $2 billion in ARR this year. Q3 revenue growth was impressive at 72%, and with revenue now at an annualized run rate of $5 billion we're clearly the fastest growing cloud company at scale. With that, I'll turn it over to Larry.

Thank you, Mark. Let's see. Generation 2 of Oracle's infrastructure-as-a-service cloud now has the ability to run our customers' largest databases, something that is impossible to do using Amazon Web Services. Amazon can only run relatively small Oracle databases in their cloud.

Gen2 of Oracle IaaS also delivers ultra-high database performance, and solve tolerant reliability in the cloud. Many Oracle workloads now run 10 times faster in the Oracle cloud versus the Amazon cloud.

It also costs less to run Oracle workloads in the Oracle cloud than the Amazon cloud. As a result, some of our largest customers are negotiating huge infrastructure-as-a-service contracts to move all their databases to the Oracle cloud. You can expect some of those big deals to be announced in the coming weeks.

SaaS growth in the infrastructure-as-a-service business is new for us. We've done well in SaaS and in PaaS over the past few years.

This is the first time we've ever had a technology lead in infrastructure as a service. We are now in position to help our hundreds of thousands of database customers move millions of Oracle databases to our infrastructure-as-a-service cloud.

SaaS and PaaS are large, rapidly growing businesses for us. Together SaaS and PaaS grew 85% this past quarter, but soon infrastructure as a service will be growing even faster, and before long infrastructure as a service will become Oracle's largest cloud business.

In summary, all of Oracle's cloud businesses are growing rapidly and IaaS will be leading the way in the future. Thanks.

Thank you, Larry. Holly, if we could prepare the audience for the Q&A portion of the call now.

(Operator Instructions)

Kirk Materne, Evercore ISI.

Thanks very much, and congrats on a very nice third quarter. My question is for Mark. Mark, obviously a really nice quarter across the board but particularly from a cloud bookings perspective.

Can you talk about what changed, if anything, in the quarter versus the second quarter either in terms of the macro backdrop or better execution? Just relatedly would be interested in what you are seeing in the pipeline that gives you further confidence in that $2 billion ARR target. Thanks.

Kirk, I felt good about Q1 and I felt good about Q2, I feel good about Q3. I didn't feel any major change, it's just really the timing of when bookings closed. We had a very strong set of quality wins.

If you went into HCM, just to give you some idea, Kirk. We closed America Movil in the quarter, Cedar-Sinai's Medical Center, Ford, Emerson, Hilton, Hyundai Motor, Jefferies, Rogers Communications. We had a very strong set of logos in the quarter.

In ERP we closed Charter, and Club Corp, Cummins, Lufthansa, DISH Network. I could go on. I don't have time to tell you all of these deals, but we saw it going in. We felt it would happen. It did, and I think our team executed well.

I would say, Kirk, that there -- it wasn't geographically centered and it wasn't pillar centered. As I mentioned earlier, we had incredible growth in ERP, 280% organically.

We had 106% growth in HCM. We had strong growth in our sales automation business, and it wasn't a unique to one geography. We ended the quarter broad-based, cross-pillar, cross-geography.

In terms of going forward, our pipeline is big. I've said it before, I'll say it again. Our pipeline's growth, if you'd look at it year over year, resembles all of the growth rates you have heard in terms of what you've seen in terms of our bookings growth this quarter. I think our execution just continues to get better.

I will also add in the quarter that NetSuite's performance accelerated. From their last reported quarter in terms of bookings growth, their growth in the quarter, which for them was an odd thing because they are not used to having a December/January/February quarter, but when you compare it apples to apples they grew faster than their last reported quarter in terms of bookings as well. It was a very good quarter for us.

Great. Thanks very much.

Kash Rangan, Bank of America Merrill Lynch.

Hi. Thank you very much. Mark, you must be wearing a suit, and Larry maybe you are wearing a sweater because you are talking tech and Mark is talking application. I'm going to direct my applications question to Mark, if you don't mind.

Mark, can you talk about what's ahead for cloud SaaS? Obviously there's manufacturing, order entry, supply chain, those kind of things that could go to the cloud. How should we think about the cycle ahead in that regard? Thank you very much.

Well, in ERP, listen, there's a big change for us in ERP. This is not the world of two providers and us talking about upgrade cycles.

What's happened to us in ERP, and I go back to the fact that 50% of our customers in the quarter were just brand new to us. They never had bought ERP from us before.

What happened is our total available market has just become incredibly large. If you look at the persona of our customers that are in ERP cloud today, most of them, more than 50% of them today, were not an Oracle ERP customer before they bought from us.

I don't think, Kash, it's really more of a cycle. I think it's really more of just an inflection point for us in terms of we are now at a place where we have almost 4,000 customers in ERP SaaS. Many of our on-prem customers have not moved, and yet we are in a position where we can go get a whole set of customers that we never had access to before.

Midmarket customers, we can do that globally, and we can go now for customers that want to move to a SaaS application in the cloud and get all of those benefits. Frankly, our competitors user basis have all opened up to us.

I don't see it quite as a cycle as I see as a big change in the opportunity for us in terms of the total available market we can go after. Larry may have a comment or two he'd like to add as well.

No, again I couldn't agree with Mark more. Our ability now to service much smaller customers than we could service in the past is because the cloud allows you to deploy ERP at much, much lower costs. You don't have to build a data center, obviously you don't have to hire programmers, you don't have to hire a bunch of data operations people.

We do all that for you. Therefore the available market is at least double what it used to be. We're also beginning to see, as Mark said, SAP customers moving over their ERP, and some very, very large SAP customers looking very closely at our ERP systems. We expect to have some big wins in the SAP install base, again we could announce in the coming months.

Next question, please.

Raimo Lenschow, Barclays Capital.

Hey, thank you and congrats from me as well. I had a question around 12C. You had 12C now in the cloud for a good few months, and I saw last week that it's now available on premise.

Can you talk a little bit about the early feedback from customers you saw on release 2 in the cloud, and what does it mean now that it's available on premise? Obviously in the olden days that kind of spiked a little bit of an uptick in the database license growth. I'm just wondering how we have to think about it in the new cloud world. Thank you.

For one thing it's important to note that our cloud business, our license business for database is growing. So our on-prem database business continues to grow.

I'm not talking about support, I'm talking about new licenses. That business is growing and grew [the stock] in Q3. An awful lot of our customers are planning to move their database workloads to our cloud, but they are going to bring their own license; in other words, they own a bunch of Oracle licenses and they are just going to move those licenses to our infrastructure as a service.

We expect our database license business to continue to grow, to continue to respond as it has in the past. In other words, as cool new features become available like faster in-memory processing, the ability to take an existing single-tenant application and automatically turn it into a multi-tenant application could be very attractive to our customers and our ISVs.

They will buy more licenses. They may then, in turn, bring those licenses to the cloud. We expect our on premise, or better said, our database license business to continue to grow and reap and accelerate because of 12.2.

Perfect. Thank you.

Just as a follow-up, because I know what Larry meant, it's our database business grew support plus license plus database as a service. Those three categories together, our database business grew in the quarter. Next question.

Phil Winslow, Wells Fargo.

Hey, thanks guys, and congrats again on a great quarter. I really wanted to focus in, in particular on the PaaS line because obviously you guys put up a huge ARR quarter there.

Safra, you mentioned increasing attach of IaaS to PaaS, and part of our thesis has been since you rolled out the new data center 2.0 model on IaaS that increasing attach there would then drive acceleration in the PaaS business. The question to all three of you, I'll jump all, is what are you seeing since the announcement at Open World on the IaaS side and how is that impacting, how do you expect it to impact the PaaS business?

Phil, there are a lot of questions you had in one question there. The point we continue to try to indicate is that we've seen a continual connect of, first, PaaS to SaaS. We've had a bunch of SaaS customers who typically buy an application and now we're starting to get up into where we would see 20%, 25% connectivity when someone buys a SaaS application, they buy PaaS.

Part of what we're talking about with attach with infrastructure is it becomes a bit hard to differentiate in some cases what is a pure infrastructure and what is PaaS, because a customer now buys the computer, buys the computing, buys the storage, et cetera along with PaaS. You begin to get a blurring to a degree of the infrastructure business and the database business. But no question about it, we continue to see the attach rate continue to incline of PaaS to our SaaS business, which I think was at the core of your first question, Phil.

(Multiple speakers). For our database customers, when they come in they can order PaaS or they can bring their license to use IaaS. And as a general matter when they are running a database [close] they're probably got something else too, and so they're going to need some IaaS to actually run their application when they are not our SaaS application. We are seeing these together very often. I figure as we have now -- as we're moving to our more advanced IaaS from what we used to have, I thought I would break it our for you so you would see it.

Great. Thanks guys.

Next question please.

John DiFucci, Jefferies and Company.

Thank you. My question is for Safra. Safra, you previously talked about double-digit constant currency earnings growth for next year. You had meaningful out-performance this quarter and your guide was better than where the Street is.

You also mentioned in your prepared remarks about ETS ramping through next year. Just to clarify, do you expect to still achieve double-digit growth, and is that exiting the year it will be double-digit growth or are you talking about for the entire year?

I expect that when you look at the entire year it will be double-digit growth but it will start smaller and get bigger as we get through the year. Q1, I don't know right now, it's a little too early. We will talk again as to what I'm going to see. Things look nice, but we will talk again in June on Q1.

I think by the end of the year the only question is which quarter we switch right into double digits. It's a little too early to tell, but I expect to see it, John, for the year.

Okay, great. If I could, a quick follow-up and a related profitability note. The one thing in the results this quarter was cash flow actually declined from a year ago, I think, this quarter.

You mentioned in your prepared remarks, working capital and timing issues. Can you just provide a little more detail on what you mean by that?

There's really nothing in it. It's pretty much just timing of when we paid stuff and things like that. We will be filing our Q. Our plan is to file it on Friday. You can spend the weekend digging through it.

We dug through. There's nothing interesting going on whatsoever. We are growing, and it's really just timing of different working capital impacting accounts. Really, nothing in particular.

Okay, great. Looking forward to that weekend.

(Laughter) With the Oracle Q, yes.

Thanks, John. Next question, please.

Keith Weiss, Morgan Stanley.

Excellent. Thank you guys for taking my question, and nice quarter. Maybe one for Larry, just to clarify the positioning on infrastructure as a service. When we think about the Gen2 offering, is the positioning a platform for your customers to run Oracle workloads primarily, or is this more of a general purpose platform that you expect to go head-on with AWS and Azure for general purpose type workloads?

It's absolutely a general purpose workload because with the Oracle database as a backend we have no idea what that application might be. It could be a backing application, it could be a DNA base pair matching application.

There are millions, or tens of millions of Oracle applications running. They are going to have to move infrastructure as a service.

The back end will probably run the database in PaaS, but we have to have a completely generalized infrastructure-as-a-service offering. That's what we built, and we think we have performance and cost advantages with our new Gen2 over both Amazon and Azure.

Excellent. Thank you.

Sarah Hindlian, Macquarie.

Great. Thank you so much, and congratulations on the quarter. I would love, Safra, if you could give us an early indication or any potential impact you expect on the business model from FASB and ISB initiating new revenue recognition policies? Whatever you are seeing or thinking there that we should be starting to think about would be helpful.

Sure. For us it's no big deal, actually. It's really very much a non-event.

I do hear one of our competitors talking all sorts of stuff about it. No effect for us di minimus. Maybe they are trying to talk about something else, but in our case we're not actually early adopting but it doesn't make a difference, really.

Zero impact whatsoever on cash flows and no impact on what we disclose to you or any of the things that this other company is talking about. For us it's really nothing.

All right, thank you. That's very helpful.

Heather Bellini, Goldman Sachs.

Great. Thank you so much for taking the question. This one is actually for Larry. I was wondering if you could share with us, it does appear that the Company is coming to an inflection point in regards to your transition to the cloud. Given the results from today and your commentary about Q4 and the earnings growth for next year, how long do you think this could run?

We have a very, very large database business. We have hundreds of thousands of database customers and we have millions and millions of applications that run on the Oracle database. Most of those databases and most of those customers will move most of those databases and most of those workloads to the cloud.

We think our cloud will be -- right now we have a huge technology lead over both Amazon and Azure with our new Generation 2 infrastructure as a service. We can deliver ultra-high performance.

People have been buying these Exadata database machines that are getting used to running very large databases very, very fast. We can deliver comparable ultra-high performance at very, very low cost in our cloud. So we think, how long does it take to migrate several hundred thousand customers and several million databases to the Oracle cloud?

I think the rate of migration is going to accelerate over the years, but it's going to be at least a five-year run of very, very rapid growth as our database business begins to move. You've seen what it's like, our application business began to move to the cloud several years ago but that's a little bit different.

We built all new applications and they migrated from an old application, either an old SAP application or an old PeopleSoft application or an E-Business Suite, and they migrated to our new Fusion ERP suite. That's very different than simply lifting up an Oracle database workload and moving it over to Oracle.

The application goes to infrastructure as a service and the database goes to platform as a service. That's a faster process, but a much larger installed base. Again, my estimate is that business will move over -- the majority of it will move over the next five years, and that's going to give us enormous growth rates over that five-year period.

Thank you.

Thank you, operator.

I will turn the call over to Ken Bond for closing comments.

Thank you everybody, and thank you, Holly. A telephonic replay of this conference call will be available for 24 hours. Dial-in information can be found in the press release issued earlier today. Please call the Investor Relations Department with any follow-up questions from this call.

We look forward to speaking with you. With that, Holly, why don't I turn it back to you for closing?

Once again, we'd like to thank you for participating on today's conference call. You may now disconnect.