甲骨文 (ORCL) 2018 Q1 法說會逐字稿

Welcome to Oracle's First Quarter 2018 Earnings Conference Call.

Now I'd like to turn today's call over to Ken Bond, Senior Vice President.

Please go ahead, sir.

Thank you, Holly.

Good afternoon, everyone, and welcome to Oracle's First Quarter Fiscal Year 2018 Earnings Conference Call.

A copy of the press release and financial table, 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 being 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 future results or the market price of our stock.

And 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.

And 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 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 had another good quarter.

Customer adoption of our cloud products and services continue to be very, very strong, and our on-premise business remains very resilient.

The result was that total revenue were at the high end of my guidance, and earnings per share beat my guidance by $0.01.

Today, I'm going to do what I always do, which is use constant dollar growth rates on this call, so we can have some measure of consistency across the quarters as well as to reflect how we measure the business.

The effects of currency movements in Q1 were a little better than expected with a 1% tailwind to total revenue.

Total cloud and software revenue were $7.4 billion, up 8% in constant currency and 9% in U.S. dollars.

GAAP applications total revenue were $2.6 billion, up 17%, and GAAP platform and infrastructure total revenue were $4.7 billion, up 3%.

Cloud SaaS revenue for the quarter were $1.1 billion, up 61% (sic) [62%] from last year.

Cloud PaaS and IaaS revenue for the quarter were $403 million, up 28% from last year.

As our SaaS business continues to scale and grow dramatically, the gross margin has expanded.

The gross margin for SaaS in the quarter was 67%, up from 59% last Q1.

We expect to see further improvement in FY '18 and remain committed to our goal of 80% SaaS gross margins, possibly as soon as sometime in FY '19.

The gross margin for PaaS and IaaS was 44%, down 58% -- down from 58% last quarter as our geographic build-out goes forward in response to demand but ahead of the bulk of new revenue recognition.

When we are at scale, I expect to see major improvement in PaaS and IaaS gross margin.

Total cloud revenues in the quarter were $1.5 billion, up 51% from last year.

Total on-premise software revenues were $5.9 billion, up 1% from last year, reflecting continued high attach of software support and renewal rates that reflect the stability of our installed base of on-premise customers.

Hardware revenues were $943 million, down 6%, and services revenue were $860 million, up 5%.

Total revenue for the company were $9.2 billion, up 6% (sic) [7%] from last year.

Non-GAAP operating income was $3.8 billion, up 10% (sic) [11%] from last year, and it's been a while since we last reported double-digit operating income growth as we undertook the cloud transformation that affected our income statement, trading upfront -- on upfront revenue recognition of on-premise license revenue for recurring subscription cloud revenue.

With cloud now a larger and more predictable share of the revenue mix, I expect that we'll see additional strong operating income growth.

The operating margin was 41%, which was up from 39% last year.

The non-GAAP tax rate for the quarter was at 25%, which was over 1 point higher than my guidance, negatively impacting EPS by $0.01 or so, and EPS was still up 12% in USD and 11% in CD to $0.62.

The GAAP tax rate was 14.5%, and GAAP EPS was up 19% to $0.52 in U.S. dollars.

Operating cash flow over the last 4 quarters was $14.8 billion, up 8%, and free cash flow over the last 4 quarters was $12.6 billion.

Capital expenditures for the quarter were $473 million.

I expect that cloud CapEx spending will be driven by our ARR growth and the PaaS, IaaS build-out that I mentioned earlier.

Obviously, should we see higher-than-expected ARR growth, we'd expect to see higher CapEx investments as well.

We now have nearly $67 billion in cash and marketable securities, but net of our debt, our cash position is about $13.6 billion.

The short-term deferred revenue balance is $10.3 billion, up 9% in U.S. dollars.

As we've said before, we're committed to returning value to our shareholders through technical innovation, strategic acquisitions, stock repurchases, prudent use of debt and a dividend.

This quarter, we repurchased 10.2 million shares for a total of nearly $500 million.

We're currently planning on bringing that rate up significantly for Q2.

Over the last 12 months, we've repurchased 46.6 million shares for a total of $2 billion, and we also paid out dividends of $2.8 billion.

The Oracle Board of Directors again declared a quarterly dividend of $0.19 per share.

Now to the guidance.

And I'm going to give you guidance for Q2, and my guidance is on a non-GAAP basis and in constant currency.

However, there has been some currency movement, and assuming current exchange rates remain the same as they are now, currency could be as much as 3% positive on total revenue and $0.02 positive on EPS.

So here we go, Q2.

Cloud revenues -- remember, these are constant currency numbers, so you're going to be adjusting them for U.S. dollars.

Cloud revenues, including SaaS, PaaS and IaaS, are expected to grow 39% to 43%.

Total revenue growth is expected to range from 2% to 4%.

Non-GAAP EPS in constant currency is expected to be somewhere between $0.64 and $0.68, up from $0.61 last Q2.

That puts the USD number in the range between $0.66 and $0.70 at today's exchange rates.

This assumes a non-GAAP tax rate somewhere between 23.5% and 25.5%.

Of course, as usual, tax rate could end up being different as it was this quarter.

With that, I'll turn it over to Mark for his comments.

Thanks, Safra.

It's a strong quarter for Oracle across virtually every metric that we track.

In USD, total revenue was up 7%.

Operating income was up 11% and EPS up 12%.

In cloud bookings, it was a strong quarter.

Overall growth was above 40%.

That was an acceleration from our growth rate last year.

By the way, all numbers are in CD unless I say otherwise.

Cloud revenue up 51% now at a $6 billion annual run rate.

80% of our TTM, trailing 12-month, software and cloud revenue is now recurring.

Now I'm going to give you some SaaS revenue numbers by pillar.

We're up 61%, as Safra said, accelerating from 55% growth last year.

ERP was up 90% organically.

Overall ERP is now over $1.3 billion annualized run rate.

Fusion HCM, up 109%, more than double the growth rate of Workday.

[CX,] all of our category sales, marketing and service were up double digits organically.

Data as a service was up 53%.

The business is now over $0.5 billion annualized run rate.

Our verticals are up 20% on a compare, by the way, of 115% growth last year.

And as good as all these SaaS numbers are, our application ecosystem -- let me go through again what that is.

That's our on-premise license, on-premise support and SaaS -- was together up 17%.

When you look at any industry growth metric of the applications industry, you'll find numbers like 1%, 2%, 3% in the marketplace.

The market share gains we have are astounding.

In PaaS infrastructure, our revenue was up 28%.

Business analytics were up 130%, data integration up 221%.

Our database ecosystem, including the same metrics I described earlier, Database as a Service, on-premise support, on-premise license, was up 3% in USD in line with industry market growth.

Storage and compute industry as a service were both up triple digits.

Cloud deferred revenue was up 53%.

So as I described, it was a solid quarter for us on top line growth of 7% USD in 12 -- in revenue and 12% EPS growth in USD.

A couple of predictions.

I expect Q2 cloud booking growth to be strong or stronger than our Q1 growth rate.

Our cloud bookings were executing well on a very big and growing pipeline.

We expect the cloud FY '18 full year cloud booking growth to be quite strong.

Revenue growth now at an annualized rate of $6 billion or growth rate of 51%, and we are the fastest growing cloud company at scale.

I do want to read off to you a few logos of wins we had in the quarter just to give you some context for some of the companies that we're selling product to, and I'll just mention a few.

But in HCM, this is HCM Cloud SaaS: 7-Eleven, Aon, [Aries] Group, Baptist Health of South Florida, Cantor Fitzgerald, China State Construction Engineering Corporation, Cook County, [eBolt], Habitat for Humanity, Liberty Mutual Insurance, state of Nebraska, SUPERVALU, the Southern Company, an unnamed large financial services firm in New York.

That's also different from the large unnamed financial services firm we sold to in Q4.

Just a few ERP names: Advance Auto Parts, ADEO, Coach, Eurostar International, GlaxoSmithKline, Grupo Bimbo, Hilton, Honda Motor, Modine Manufacturing, Nestlé, Tata Communications, United States Steel, World Fuel Services Corp.

I could go on.

With that, I'll turn it over to Larry.

Thank you, Mark.

On October 1 at Oracle OpenWorld, we'll announce the next generation of the Oracle Database.

When we deliver it by the end of this calendar year, Oracle will become the world's first fully autonomous database.

Based on machine learning, this new version of Oracle is totally automated self-driving system that does not require a human being either to manage the database or tune the database.

Using artificial intelligence to eliminate most sources of human error enables Oracle to deliver unprecedented reliability in the cloud.

We will be authoring public cloud SLAs, service level agreements, for the Oracle Database that guarantee 99.995% systems availability time.

99.995% availability means less than 30 minutes of planned or unplanned downtime per year.

To achieve that level of reliability, Oracle has to automatically tune, patch and upgrade itself while the system is running.

AWS can't do any of this stuff.

But perhaps the most interesting aspect of autonomous systems like self-driving cars and our new self-driving database are the economics that surround total automation.

Self-driving cars eliminate the labor cost of driving plus the high cost associated with human driving errors.

Self-driving database eliminates the labor cost of tuning, managing and upgrading the database, thus, avoiding all of the costly downtime associated with human error.

Self-driving taxis are much cheaper to operate than taxis with human drivers.

Running Oracle's autonomous database is much, much cheaper than running traditional human-driven databases like Amazon's Redshift.

Customers moving from Amazon's Redshift to Oracle's autonomous databases can expect to cut their cost in half or more, and Oracle will be providing SLAs that guarantee those cost savings to customers that move.

Thank you, Larry.

Holly, we could now queue up the group for the Q&A portion of the call.

(Operator Instructions) Our first question is going to come from the line of Sarah Hindlian, Macquarie.

The on-premise business is definitely doing better.

But we're obviously seeing and hearing more about very large marquee customer wins across your cloud portfolio, and now your apps business is actually growing 17% constant currency, which implies you're taking market share.

So I'm wondering what you're seeing in terms of momentum in that cloud portfolio and where you see that heading and if there's really any benefit coming in from these large reference customers.

Sure, yes.

I mean, I -- first of all, I -- one thing you said about implying we're taking market share, I just want to make sure it's clear.

We are.

So it's -- and that's why I've been trying to give this number over a longer period of time that the apps marketplace is growing low single digits, and obviously, we've been out and doing this for a long period of time in terms of growing at this rate.

But there's no question, to your point, that when we can come out with references like we have publicly with Bank of America, AT&T and others, it makes the next opportunity easy when you can reference customers at that level.

So I think, again -- and we said this before, but it probably bears saying again that just sort of every aspect of selling in the cloud, I think the company holistically is getting better at.

We're better -- our products are better.

Our sales force is better.

Our ability to implement is better.

Our ability to do all of these things has just continued to improve quarter by quarter by quarter, and it manifests itself in the type of results we're talking about this afternoon.

Yes.

I'll just add.

If you look at the growth rate of our applications business in the cloud in excess of 60% and you compare that to either Workday or Salesforce, the 2 other major players -- application players in the cloud, they're not even close.

So we're much bigger than Workday in applications, and we're growing faster, must be taking share.

And they're our primary competitor in both HCM and ERP.

Salesforce has been at it for, I don't know, 15, 16, 17, 18 years.

They've been at it for a very, very long time, but we sell more new applications customers than they do every year.

In fact, let me be clear.

We sell double, double what Salesforce sells in absolute dollars.

We did it last year, and we'll do more than that this year.

And we're growing -- and we're catching them very, very fast.

So to just reinforce what Mark said, we are taking share.

We're taking share across the entire applications ecosystem, and we're taking share from our cloud, primary cloud customers -- cloud competitors as well.

Sorry, just to add that -- sorry to elongate the answer, but we're going to talk more about this at Financial Analyst Day after Oracle OpenWorld concludes.

But again, our support business and applications, when we do move a customer from our support business to our cloud business, we've now done several of these, and we get materially more revenue.

We talked about this before, but it bears saying again because we sort of stopped talking about it.

We get at least 3x more revenue on a like-for-like basis when a customer moves from on-premise support to our cloud.

And we've really just, just begun to move that user base.

Most of what's in our application cloud growth that Larry just talked about is new logos.

Our next question will come from the line of Kash Rangan, Bank of America.

One question for Mark and Larry, one for Safra.

Mark and Larry, can you talk about the new disclosure that came out, 8-K?

You talked about some really ambitious plans for your SaaS business at $10 billion in revenue, PaaS and IaaS at $10 billion as well.

Can you talk about what kind of time frame are you likely to achieve this?

And how much of this is from acquisitions versus organic?

And question for you Safra.

If you're able to achieve these ambitious targets laid out, how should we think about the margin structure of the company?

That's it for me.

Kash, let me just jump in here and say that we also have an $80 a share stock price target.

That's part of the comp plan.

We also have a target that says we'll be double the market cap of IBM, double the market cap of SAP.

I mean, there are a lot of targets here.

In terms of margin, we have a cloud margin target that, I think, is 80%.

So actually, we're well on our way to achieving in SaaS cloud margin target.

So we expect the margins in our businesses to go up, the stock price to go up for us to distance ourselves from our, if you will, our legacy competitors and join the ranks of the new generation of tech companies like as Microsoft has done and smaller companies like Salesforce and Workday.

That's where we position ourselves.

So we think these are stretch targets.

And it will take several years to achieve them, but we think we are well on our way.

We obviously believe they are achievable, but it will require sustaining the kind of performance we've delivered over the last several quarters.

And acquisitions, Larry, in this forecast, are they material or is it all (inaudible)?

I would -- who would you -- who -- there's no one left to buy.

It's not like there are a lot of obvious -- as we focus on the cloud, there aren't a bunch of obvious targets we can go out and buy.

So we're seeing our best growth in technology that we've developed internally.

Our Fusion ERP, Fusion HCM, which is the mid-market and the high-end of ERP and the mid-market and high end of HCM, these are all internally developed systems.

They're -- HCM and ERP, I think, blended rate is growing triple digits.

The size of these markets are enormous, and we think we'll be able to ride that horse, pursue that organic growth and meet our targets.

So I think it's going to primarily come from internally developed technologies, the growth of those technologies and us gaining dramatic amounts of share and applications in the cloud and with our new autonomous database also and Platform as a Service and Infrastructure as a Service.

We have to get all cylinders firing, but the bulk of our technologies that will determine our success, things like our Database and our Fusion Applications suite, all organically internally developed.

Our next question is going to come from the line of Brad Zelnick with Crédit Suisse.

Really nice quarter, guys, especially for Q1.

I've got a question for Mark and a quick follow-up for Safra.

Mark, the apps ecosystem is off to a really strong start with 17% growth in the quarter.

But with comps getting tougher in the back half of the year as you lap NetSuite, do you still feel that the apps ecosystem can achieve your double-digit growth goal for the full year?

Yes, yes.

I think that I said this, I think at the beginning -- towards the end of last fiscal year that I believe we'd grow roughly double digits in our applications ecosystem, and this Q1 probably -- did nothing more than reinforce my belief.

This is what we -- as good as it was, it's what we thought would happen, and I believe you will see that for the full year.

Our pipeline shows it.

Everything else we've got shows it.

This will happen.

And just for Safra, Safra, mapping cloud ARR to revenue has been fairly straightforward for SaaS but less so for PaaS and IaaS.

Is there any color you can give us just to help understand the revenue trajectory for PaaS and IaaS?

Yes.

We're actually holding over 10 more points on the PaaS, IaaS right now because we've had a lot of orders, and we are deploying them.

And we'll only start recognizing them as they deploy, first of all, all of our cloud customer to -- a very large amount of it is -- hasn't been fully out deployed.

So you're going to start seeing these match up a lot more as we go ahead and deploy and get those up and running and live.

I don't know, Mark, you want to add anything?

Yes.

No, it's exactly right what Safra said.

We just -- I have good news.

Good news is we have a large unprovisioned backlog.

And so we will get that provisioned, and you will start to see that fold into our Q2 and Q3 numbers as we get that provisioned.

So the good news is we've just got a lot of PaaS to go provision.

And I wish we got it all provisioned in Q1, but we didn't.

So that's really the work that's being done.

Our next question will come from the line of Adam Holt with MoffettNathanson.

My question is on the cloud business and how that relates to the strengths on-premise.

You were obviously very strong, both applications and infrastructure on-premise in the quarter.

Do you think that the hardening of your cloud infrastructure and the strength in your cloud applications business is actually starting to have a positive impact on on-premise revenue?

And how do you think that dynamic plays out going forward?

Well, the applications business and the cloud business -- applications business and the tech business transitions from on-prem to cloud are very different.

As we move our application customers from on-prem to cloud, we're asking them to migrate from the E-Business Suite to Fusion.

As they move from our HR, we're asking them migrate from Oracle HR or PeopleSoft HR to Fusion HR in the cloud.

So they're really changing applications.

In the case of our technology business, where you're running the Oracle Database on-prem, we're just asking you to look to move your data into our cloud.

There really is no technology transition at all.

So you really can't look at these transitions as being similar things.

The interesting thing, it's very different than, let's say, Microsoft.

Microsoft, they took their existing Microsoft Office customers and moved them to the cloud, so you suddenly can save documents in the cloud, Word documents or Excel documents.

You move them to the cloud.

That's what's meant by Office 365.

That's very close to our Database business, where we're just beginning to move them to the cloud.

That's just taking existing applications.

Actually, the new version of our database, as I mentioned, is greatly enhanced in the cloud and there's real motives to move it from on-prem into the cloud.

You get lots and lots of benefits, but it's not a technology change.

In our apps transition, you actually move to a whole new technology stack.

It looks like almost moving to a new vendor if you will.

You move from Oracle E-Business Suite or PeopleSoft Financials or JD Edwards, all of these on-prem customers that we have -- this on-prem business we have, and you move to Fusion Financial.

That was a -- that required a new implementation, retraining your people, and we did that.

But we -- that transition, as Mark just said, is just beginning.

Most of our Fusion ERP customers, our Fusion HCM customers are new logos.

And we don't expect, when people move from their database from on-prem in the cloud, we don't expect support to go away.

We expect them just to bring their licenses into our cloud.

And you're paying support.

You have the license.

You own the license.

Now you run it in our cloud, and you pay us additionally for running in our cloud just like when you move the Oracle Database in the Amazon Cloud, you pay them additionally.

So it is simply lifting up your existing license.

Therefore, you keep paying support.

You keep paying support, and you add on to that.

You -- Infrastructure as a Service or Platform as a Service fees associated with running it in our cloud.

So we think that's a much easier transition for us than the transition we're making on the apps side of the business.

And look how well the transition on the apps side of the business is going.

And our next question will come from the line of Kirk Materne with Evercore.

Mark, obviously, a lot of momentum in ERP right now.

I was wondering, when you look at where the market is today, if you think we're getting closer to more of a tipping point in terms of larger customers setting up to make decisions on moving their ERP systems to the cloud over the next 12 to 18 months.

And when you talk to customers, what are some of the reasons or, I guess, feedback you're getting that gives you confidence in terms of taking market share in this cycle if we're about to go into one?

Obviously, we're getting a lot of -- we have strong growth.

We had another acceleration just in terms of logos.

We had acceleration of ERP logos this Q1 versus last Q1.

So we had more closures in terms of numbers of accounts, and we have bigger companies looking.

So it's significant to the point of your question.

We also have more modules coming online.

So if you look at what we've got in ERP now, we have more localizations across more geographies, and we now have our full suite of ERP, supply chain, procurement, manufacturing, now budgeting, planning all available.

So it's the full suite now across almost all of our geographies.

What -- to Larry's point, I think it's worth stating a lot of our ERP customers now are new logos, lots of new financials customers and lots of companies that, to be very blunt with you, Kirk, we would never have sold to 5 or 6 years ago, companies that are really named -- when you come to Oracle OpenWorld, you'll see another string of customers who never had an Oracle application before until they bought Oracle Financials in the cloud.

So it's that.

Then, in addition to that, I think what really helps us is the fact that we are the only suite provider.

So the fact that now a company, instead of having a bunch of point solutions, can have a suite of applications and the opportunity for us to now bring HCM and ERP together to a customer gives us an incredible advantage across basically all of our customers.

So you see now in the names I wrote -- I read off to you lots of what I would call high-end mid-market, low-end enterprise customers that are really the common persona of who we sell to, most of them new logos.

I think you'll see that continue as we go forward.

The best news I can give you is that as we start to bring our larger customers over, Oracle will get materially more revenue as we move that support because we do everything for them.

We do the hardware.

We do the operating system.

We do -- it's our data center.

We do really everything for them, and we get the extra revenue as a result of that.

Our next question will come from the line of Phil Winslow with Wells Fargo.

I just wanted to focus on the platform and infrastructure side in particular.

And as you look over -- the overall numbers, you're still putting up very healthy growth rates here, both obviously in the cloud with the PaaS offering but also on-premise.

Mark or Safra, wondered if you can double click on just what you're seeing on on-premise side even as that PaaS is ramping that's keeping that business growing.

And then a question to Larry.

Obviously, we're excited to hear about the new features of -- coming at OpenWorld.

But when you think about the Oracle PaaS offering versus other Infrastructure as a Service plus DBMS out there, why is it that the Oracle Cloud can lower costs more than these competitors and therefore, make it -- gain share there?

Okay, they're pointing to me.

I guess, they want me to go first.

The reason we can lower costs is we just automate more.

There's a big difference between -- what Amazon basically does, what they pioneered was this notion of we will rent you based on what you use, compute and storage, and you can kind of bring whatever -- and they offer a couple of databases.

They offer Aurora, which is MySQL, their version of MySQL.

And they offer Redshift, which is another -- their version of an Open Source database.

They had made some changes to it.

It's no longer Open Source.

It's from Amazon for queries and OLTP.

But these are technologies that are not automated.

These are, if you will, old-fashioned technologies in a newfangled cloud data center and available for rental.

So it's kind of an interesting new business model, but their database technologies are not very advanced at all.

They just picked them up out of Open Source.

And our database, our -- the new latest -- especially the latest generation of our database, totally automates everything.

So you don't -- you push a button, load your data and you're done.

You don't have lots of tuning parameters and lots of things to set up like you do with Amazon.

Amazon requires a lot of labor to set up an online transaction processing system based on Aurora.

That's a lot of labor.

It's MySQL.

It's kind of our -- it's code that we maintain.

We know it very, very well.

Very different than Oracle.

You press a button, load your data, run your analytics.

It tunes itself.

It backs itself up.

It patches itself.

It never goes down.

And it's much, much, much faster.

Now I keep saying it's much, much, much faster and then someone will say, "Well, we don't need that speed." Well, let me translate.

If it's much, much, much faster, in other words, if it does in 1 hour what Redshift does in 10 hours, it's 1/10 the cost of running at Amazon because we charge the same amount per hour.

So we take out the labor cost.

And because we're -- we consume less CPU and we compress the data and we consume less storage, it's much -- we're much more frugal about using compute and storage resources, and we eliminate the labor cost and the associate -- the cost associated with human error.

So there is -- we're not even trying to do the same thing as Amazon.

To your other question, Phil, listen, I think there's a strong interest across the board.

I mean, listen, we've got obviously new features that come with Release 12.

You know about all those with multi-tenant within memory, et cetera.

Obviously, our security options are very important given the world that we live in today.

We have a desire for many of our customers to get out of all of this work, to get out of patching, to look at modernizing their infrastructure.

You may have heard what AT&T talked about.

They'll also be at Oracle OpenWorld, and you'll hear a lot more directly from them.

But the need to not just consolidate, not just get the new features to modernize those applications but to get out of all this work.

To the point Larry's describing about now the fact that I can't deal with the amount of time it takes to patch all these hybrid environments that I've got, now somebody, i.e.

Oracle is going to do that for me.

[You're not going to] modernize the database.

You're not going to give me all these features, but you're [not] going to take all that work off my shoulders.

So there's a tremendous amount of this.

Now to Larry's other point, remember, most of our customers, I'll stick with somebody like AT&T, they have over 10,000 Oracle databases in that company, 10,000.

So you're going to have a handful of those big ones move to the cloud.

There's still going to be quite a few of those that stay on-premise for a period of time.

So that work is just a lot of work for us to help.

And this is the beginning of a whole string of customers that are going to go through this process to modernize those database environments.

Our next question will come from the line of John DiFucci, Jefferies.

I have a quick -- just a very quick question on the guidance and then if I could ask another question.

Just a clarification.

You said total revenue could see, I think, a 3% benefit on top of the 2% to 4% guidance you gave for total revenue, right?

I think -- and I know the math is really easy here, but I just want to make sure that implies, I believe, a 5% to 7% reported revenue growth if you get that 3% FX effect.

Is that right by doing that math?

So for USD, I'm going to go through the entire thing in USD for you guys because I -- you're not the only note.

In fact, you're not the only note.

You're not the only note.

So I'm going to go through it.

For total cloud, 41% to 45%.

Okay.

It really comes out like 4.5% to 6.5%, but I'm going to say 4% to 6% and -- in total revenue and then EPS, $0.66 to $0.70, making EPS growth somewhere between 7% and 13%, okay?

So that may help.

Okay?

Yes, that's very helpful.

But I'm the only note you need to read, but that's okay.

Just kidding.

Yes, they're all like, "Could you do it for me?" And it's a fair question because there are a bunch of rounding.

It's 5% to 7%, 4% to 6%.

It's somewhere in the middle there, so I'm always being conservative.

So I'll say 4% to 6% on this call for you, but you know me.

Okay.

Was there another question for somebody else, John?

Yes, just a quick one.

It's great to see the model work in the SaaS business with scale driving leverage here.

And I know you're going to -- you say we're also going to get leverage in the PaaS and Infrastructure as a Service business with scale.

Again, I know there's a lot of variables here.

But can you help us when we're looking out about when we might see this happen, when we might see this turn, either the timing next year, the year after or even the scale when the business hits approximately what scale?

Okay.

So it's a little bit complicated because there is a mix between IaaS and PaaS.

PaaS, in particular, is extremely, extremely, extremely profitable, and -- however, there's really a question of when the revenues get recognized and how much investing I have to do and how we line those up.

So we are, just like you saw in SaaS, I know that, at the time, it seemed absolutely impossible that we would have the kind of margins we now have in SaaS.

It seemed impossible, and yet they came.

And now we're closing in on the 80 so much so that I actually went ahead and gave you sometime next year for that hitting.

PaaS and IaaS are very much, at least at this point, in the expansion period.

We expect this to be a very large business, though we remain very conscious of the margins.

And so we're trying not to invest too much ahead of revenue recognition.

But as you see in this quarter alone, we have a lot that has yet to be deployed, fully deployed, even though it's fully provisioned, even though the equipment is all bought and being capitalized.

So this is really -- I can't give you an exact time because we're going to be very much monitoring demand and reacting to that.

And for us, it's much more important that we expand quickly, of course, mindful of margin dollars, sometimes not as mindful necessarily of any inter-quarter margin percentages.

So I don't know if you want to add anything to that.

Yes.

No, I think there's no -- John, there's no mystery to this, right?

This is just like the SaaS business.

You have to build out some initial infrastructure to get started.

You have to build it, and unfortunately, you have to put it online before you can sell it.

And that's what this is.

There's a start-up cost to getting in these businesses.

We're past that in SaaS.

We're deployed in now virtually all of the critical geographies, and we now have scale in most of the critical geographies.

And so you see it just show up in the margin rate as it has.

We're going through that same process in infrastructure.

The great news for us now, we know how this works.

We know how to get it done.

We know how to measure it.

We know how to get from here to there, and so you'll see the same results.

So it's just a factor of timing, scale and bookings and to Safra's last point, the ability then for us to get a provision so we can then recognize the revenue.

So this is going to happen, John.

That all makes sense.

But should we expect that we might need more scale?

I mean, would it develop similarly to how SaaS did?

Or would we expect to hit certain margins, we'd have to get even greater scale in this business?

No, I don't think there's any material difference in the context of scale.

There's the same fundamental.

That's what I was trying to go through.

You've got a start-up cost.

You got to get a data center.

You've got unused capacity to get started.

And then the increments of capacity to bookings comes at a very attractive margin rate.

So think of it as you have a baseline of X and then I get a booking.

And then I have a little bit of capacity per booking so to speak.

It's not exactly how it works but for the sake of your analytics it's how it works.

And we know what that increment of capacity is for that booking.

And then it's just a question of scale from there.

So you take the unused space, and then for each booking, you get so few -- a couple of few cents on the dollar that you have to add for internal capacity and then just becomes the time it takes to get to scale.

That's it.

And our final question for today will come from the line of Raimo Lenschow, Barclays.

Maybe in anticipation of the Analyst Day, just a slightly more broader question.

Larry, you started to use kind of AI to kind of come up with the autonomous database.

Can you talk a little bit about like what more or how you kind of see this whole thing evolving?

Because there's obviously a lot of noise, a lot of hype around it.

Some of the other competitors have used -- come up with fancy names here.

How do you guys see this play out for you guys?

Well, we're using machine learning all over the place, so I mean, everything from at the very highest level to in our HR systems, our recruiting systems to look at a bunch of candidates and kind of inspect the data of people that this company has hired that had been very successful and people who have been less successful.

So we can actually start to bucket the candidates.

This group -- these 200 people, you're looking at hiring, and the 50 over here look very much like the 50 people that you hired over the last 5 years that have been enormously successful for the company.

And that's a matter of machine learning -- using machine learning to just look at the profiles of individuals a company's hired over a period of time and make recommendations of who -- how to prioritize candidates that they're looking at making offers to.

All the way from that level to our new security systems, which are going in now, where we're doing log inspection, where we're looking at people.

And the logs we look at, unlike anybody else, we are in the applications business.

We are in the database business, and we're in the cloud infrastructure business looking at network logs and operating system logs and storage hardware logs.

We're also looking at database logs.

We're looking at people trying to log on to application systems and the passwords they're using.

We have all of these logs, and we're processing all of these logs in our cloud to, for example, looking -- trying to find people who are going to attack a database and steal passwords and steal data.

And we think we do this better than anybody because we look at more data.

We look at application data.

In other words, we suddenly know that your CFO's in the Ukraine trying to log on 50,000 times in the middle of the night.

Maybe your CFO is not vacationing in the Ukraine, and that's not her.

And there could be a problem.

Someone's trying to break in.

We look at that level of data all the way down to IP addresses that are strange IP addresses, trying to figure out (inaudible) we look at strange SQL [terms].

Anyway, we do much -- we look at 10x more log information than someone like a Splunk, who is inspecting IP addresses but not log-in information.

So we get a much better picture of all the activity of what's going on inside your data center and use machine learning to inspect this vast amount of data and see if someone's in the reconnaissance phase of -- prior to an attack, where we can shut them off while they're just looking around before they actually attack anything and start stealing passwords and start stealing data.

Again, that's also all machine learning.

We're offering that technology, again, in OpenWorld.

We're offering the customers can shift their logs from their data center and into our cloud.

And we'll do all of that security reconnaissance and security work for them.

And the more of this information we have, the better equipped we are to find malware.

You find malware showing up in, let's say, Germany, and we know what it looks like.

And suddenly, we have worldwide alerts because worldwide alerts that -- to recognize that malware if it should show up in California or at a -- and as we know, there's a lot of -- security is getting more and more important these days.

The events at Equifax -- very unfortunate events at Equifax is not going to be an isolated incident.

You're going to see more and more things like this.

You saw it at the government Office of Personnel Management, which was disastrous for our intelligence community.

We've got to do a better job.

We got to do a better job of securing not only our cloud but our customers' data centers, getting all of that log data, using machine learning to -- and basically, what is a cyber war that's going to be ongoing for a long, long time.

So everything from helping companies using AI to help companies hire the right people to helping data centers, both private data centers and public data centers, protect against intrusions.

It's an important new technology, and it's at the center of what we're doing with database automation, security and our application.

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We look forward to speaking with you.

Thank you for joining us today.

With that, I'll turn it back to Holly for closing.

Thank you.

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