甲骨文 (ORCL) 2019 Q2 法說會逐字稿

Welcome to Oracle's Second Quarter 2019 Earnings Conference Call.

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

Thank you, Victoria. Good afternoon, everyone, and welcome to Oracle Second Quarter Fiscal Year 2019 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 those 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 any 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'll first go over Q2 before moving on to guidance. I'll then turn the call over to Mark and then Larry, for their comments. Let me start by summarizing that Q2 was another solid quarter. Constant currency revenue growth was slightly above the high end of my guidance and constant currency earnings per share was $0.02 above the high end of my guidance. As in prior quarters, I'll review our non-GAAP results using constant dollar growth rate unless I state otherwise.

Total cloud services and license support revenues for the quarter were $6.6 billion, up 5% in constant currency. This accounted for nearly 70% of the total company revenues and most of it is recurring revenues. GAAP applications' total revenues were $2.8 billion, up 7%; and GAAP platform and infrastructure total revenues were $5 billion, up 1%. Mark will go over more detailed revenue and bookings numbers in a moment. The gross margin for cloud services and license support was 86%, essentially the same as last year with continuing improvement in SaaS gross margins, stability in software support gross margin and continued investment in Oracle Cloud Infrastructure.

As we continue to scale and grow our cloud business, I expect our gross margins will ultimately go higher. Total revenues for the quarter were $9.6 billion, up 2% from last year. Non-GAAP operating income was $4.1 billion, unchanged from last year, and the operating margin was 43%, the same as last year. The non-GAAP tax rate for the quarter was 18.6%, slightly below our base rate of 20% and non-GAAP EPS was $0.80 in U.S. dollars and up 19% in constant currency. The GAAP tax rate was $15.9 billion -- 15.9%, and GAAP EPS was $0.61 in U.S. dollars, up 22% in constant currency.

Operating cash flow over the last 4 quarters was $15.2 billion. Q2 operating cash flow was, in fact, negatively impacted by our first installment payment over $600 million on the onetime transition tax related to the U.S. Tax Cuts and Jobs Act of 2017. Over the last 4 quarters, capital expenditures were $1.5 billion and free cash flow was $13.8 billion, up 10% in U.S. dollars.

We now have more than $49 billion in cash and marketable securities. The short-term deferred revenue balance is $8.2 billion and that's up 6% in constant currency. The remaining performance obligations or what we'll refer to as contract backlog will be in the 10-Q and is now $30.1 billion, of which approximately 62% will be recognized as revenue over the next 12 months. We remain committed to returning value to shareholders through acquisitions, internal investments and a return of capital with stock repurchases and dividends. This quarter, we repurchased 203 million shares for a total of $10 billion. Over the last 12 months, we have repurchased 602 million shares and reduced the absolute shares outstanding by over 12%. The Board of Directors, again, declared a quarterly dividend of $0.19 per share.

Turning to currency. I expect the strengthening U.S. dollar will increase the currency headwind to 4% for Q3 and a $0.03 headwind to earnings per share. So for Q3, my guidance is, total revenues are expected to grow 2% to 4% in constant currency. I continue to expect the revenue growth will be higher, and we remain committed to delivering a higher constant currency growth rate for all of fiscal 2019 when compared to last fiscal year. You may remember that last year's Q3 EPS included some onetime events, which I called out at the time, which helped by about $0.03 last year. In addition, my EPS guidance assumes a base tax rate of 20%, which is nearly 4 points higher than last year because last year's tax rate was a catch-up quarter for the new tax law. Certainly, onetime tax events could cause actual tax rates for Q3 to vary from the base rate. But I expect that in normalizing for these onetime events, our tax rate will average around 20% for fiscal year 2019.

Okay. With all that, for this quarter, non-GAAP EPS in constant currency is expected to grow between 7% to 9% and be between $0.86 and $0.88; and non-GAAP EPS for Q3 in USD, in U.S. dollars, is expected to grow between 3% to 5% and be between $0.83 and $0.85. And while my double-digit constant currency EPS growth guidance for fiscal year '19 has not been a specific number, I can tell you that internally I have, in fact, raised my fiscal year '19 constant currency EPS growth rate estimates. And with that, I'll turn it over to Mark for his comments.

Thank you, Safra. Solid quarter for us from top to bottom. Total revenue was up 2% in constant currency with cloud services and license support up 5%, and of course, EPS up 19%. It's the seventh consecutive quarters we've had reported double-digit EPS growth. Apps had a spectacular quarter. We had great momentum, growing 7% for the overall ecosystem, over $11 billion in trailing 12 months and 91% of that is now recurring revenue. We continue to grow revenue faster than the market, and we have an enormous opportunity ahead of us, particularly in ERP as well as HCM. To Safra's point about the numbers, let me give you some numbers about our SaaS business. Overall ERP and HCM now have annualized SaaS revenue of $2.6 billion, up mid-20s percent. Fusion apps revenue growth was 34%. Fusion ERP revenue growth was 44%, all organically. NetSuite ERP revenue grew 25%. Vertical revenue and applications grew 35%; annualized revenue now of $800 million.

In terms of SaaS bookings, I want to try and give you some context. Now, of course, as I talk about bookings this did not show up in any way, shape or form in our revenue. ERP and HCM's booking growth rate has accelerated the last 4 quarters and now is in the high 30s. In addition, we saw our largest movement of the installed base customers to ERP cloud with almost roughly 200 customers moving in the quarter. All of that, of course, shows up in bookings and not revenue. In addition, SaaS net bookings -- let me try to say this carefully, SaaS net bookings, which factor in our nonrenewals, were the highest ever in the company's history for a non-Q4, and up in the high 30s percent.

Our tech ecosystem GAAP -- tech ecosystem was $21 billion on a trailing 12-month basis and Q2 was a 1% growth with database new license support revenues up low single digits. Larry's going to talk quite a bit more about Autonomous Database. We are seeing more than 1,000 trial activations per month currently between data warehouse in transactional basis and this number continues to ramp.

Now we also had our Cloud at Customer solution, which has been one of our exciting offerings, revenue up triple digits, booking up in the low 40 percentage.

Now I'm going to mention a few customer names that I thought I'd explain some of the wins in the quarter that are behind some of the apps numbers I described. In general, I'm going to talk about some back office wins and a few full suite wins. One win was at MGM. This is MGM Resorts, the hospitality company. ERP, or really our full suite including supply chain, that actually replaced a product called Infinium, which is part of a blizzard of brands inside N4.

We had a very large win at a large distribution company whose name I can't mention, but it was a complete suite win. ERP, HCM -- by the way, this is a theme I'm going to tell you about, how when we win ERP, it is now increasingly that we connect HCM to that win. People want the same UI, user interface, the same workflow, et cetera, and so ERP has a tremendous effect on pulling HCM through. Another exciting win we had was at Johnson Controls. Johnson Controls was, again, a suite win where we sold them service cloud -- both our service cloud and our field service solution, and really to one of their divisions, also, ERP in their Tyco division, very exciting win for us.

Hormel, food processor, great win for us. ERP -- our full suite of ERP, inclusive of HCM, very exciting. A company called Securitas. You probably may see them performing security in many major facilities around the country, but again, a full suite win there.

Helzberg Diamonds. Again, a full suite win there as well. Indiana University Health Center. This is, again, another -- this actually was a Lawson, if you've heard of the Lawson product, we replaced there with ERP, EPM, really our full suite in addition to -- into HCM. So I won't go through all the color with all these, but let me just read off some more names for you, just so you get some context for it. Littlewoods, a retailer; Samsonite; VeriFone; Department of the Environment in Australia, Land and Water, really significant win for us there; the European operation of Toyota, very significant win for us in ERP; Marvell Semiconductor. I'm going to run out of minutes here. Dana Corporation, very nice win for us; DHL in Italy; Gilead Sciences; Ithaca College. And I'm going to stop. I know because it just keeps going, but this was a, as I've told you, the biggest net bookings we've had in our history non-Q4 and the stuff I -- that's by the way, a booking statement and they're supported by these quality wins.

So last thing I wanted to do was, before I close, is just talk to you about a survey that came out from IDC. And I've talked to IDC about it and I have to read this literally. So I have to read it to you in its entirety to make sure that I get the message that they want across. So I'm going to do it and let me start with open quotes, this is from IDC, "In the SaaS view survey, IDC released in October of 2018, where it surveyed 276 HCM SaaS customers on their experience with SaaS HCM vendors, including Oracle, Workday and SAP SuccessFactors. Oracle SaaS HCM is the highest rated among the 3 vendors in most scoring categories, including vendor satisfaction, likelihood to recommend vendor to a colleague, data security, trusted brand, lower TCO, value for the price paid, ease of use, superior features functionality, ease of implementation, customer support service, product innovation and geographical reach." The reason I wanted to read that to you is instead of that coming from me and my opinion, this comes from an independent analyst community and I wanted to make sure I share that with you.

Let me just close to say, it was a solid quarter again with 19% EPS growth and 10% free cash flow growth. The strength of our bookings growth along with climbing renewal rates, gives me confidence that our cloud apps business is only, only going to strengthen from here. If I'm not being clear, this is perhaps the best apps quarter we've had just in terms of bookings -- breadth of bookings across the portfolio and the visibility that gives us into the revenue backlog.

Looking forward, we still expect full year revenue growth will be higher than last year and EPS will grow double digits for the year. And with that, I'm going to turn it over for Larry for his comments.

Thank you, Mark. Oracle has 2 strategic products that will determine the future of our company: Cloud ERP and the Autonomous Database. Virtually every technology analyst organization agrees, Gartner, Forrester, IDC and the rest. Please read the published reports that Oracle has developed the world's most advanced ERP technology. Featuring an easy-to-use voice interface and machine learning based artificial intelligence to automate many formerly manual ERP processes. But more than being simply the technology leader in ERP applications, the analysts also confirm that Oracle has translated that technology leadership into market leadership in cloud ERP with nearly 6,000 Fusion ERP customers plus more than 16,000 NetSuite customers and we are adding about 1,000 new cloud ERP customers every quarter. Technology analysts also agree that Oracle's new Autonomous Database gives Oracle the largest technology lead we have ever enjoyed over our database competitors since we entered the database market almost 4 decades ago. As we pair our new Autonomous Database with our new Generation 2 Cloud infrastructure, we expect not only to hold onto our 50% database market share, we expect to increase it. That means millions of Oracle databases will move to the Oracle Cloud. Those are the 2 strategic initiatives that we are focused on. One, continue to expand our market leadership in cloud ERP, which should make us the world's largest cloud application company. And two, maintain our database technology leadership and migrate our 50% database market share through the Oracle Cloud. We're optimistic about our ability to deliver on these 2 strategic initiatives and our ability to be the leader in these 2 key market segments. With that, I'll turn it back over to Safra.

Okay. So I think we're ready for questions.

We're now ready for Q&A, Victoria.

(Operator Instructions) Our first question comes from the line of Mark Moerdler with Bernstein Research.

SaaS ERP is the largest growth driver within SaaS and we believe within your total apps business, but there are so many moving parts that it's not obvious in the reported results. Can you give us a sense of when you expect that SaaS ERP will be large enough and growing fast enough to start to visibly improve year-over-year revenue growth first in SaaS and then in overall apps? And then as a quick follow-up, can you give us any color on the timing of conversions from book to revenue, has it improved or not?

The answer to both questions is no. No, no, so -- first, I'm kidding. I'm kidding, Mark. So it's holiday season. I thought it's time for some festive commentary. First, I think -- first of all, it is happening. So when you look at first and breaking these into pieces, the NetSuite performance has been spectacular, it's just one piece of it. When we bought the NetSuite, NetSuite was growing 15-ish sort of percent. And I sort of said this as color on our call, their bookings starting -- if you went into Q3 of last year, Q4 was spectacular, Q1 was strong again. They had another very strong bookings quarter again in Q2 and their revenue growth is now gone up to 25-ish percent in the quarter. So that is, obviously, significant for us in terms of their scale and now their growth rate. I really have -- I don't want to say higher expectations, but I continue to have high expectations that they'll continue that momentum that we've seen, meaning increased growth rates. The Fusion growth rate in ERP is even higher than NetSuite's. And I hope by the quality of the wins I described to you, you'd get a flavor for the popularity of that solution now in the marketplace. So when you combine the 2 together, our target is that we could see hundreds, if not -- and I just want to be careful, wavy line here, Mark, we can get into close to $1 billion worth of growth next year out of those 2 solutions. I'm not giving you that's the number. I'm telling you it's that sort of opportunity for us in scale. But to add to it, the thing that I tried to make sure was clear on the wins we're describing is, the pull when we sell ERP, the ability for us to pull other solutions with it is doing nothing but growing particularly as [a right stage.] Does that answer your question?

Helps to point me in the right direction.

Okay. Next question, please.

Our next question comes from the line of Brad Zelnick with Crédit Suisse.

Larry, I think we all appreciate how sticky Oracle database is given it stores some of the most valuable information in the world, but the competitive noise in the market just keeps getting louder and louder. What's your latest thinking on the competitive dynamics for database?

Okay. Well, there is the wonderful Gartner report that ranks the technology -- the Oracle database technology, Oracle is ranked with a huge #1 lead by Gartner. A distant second is Microsoft. A distant third is IBM, and a ridiculously distant fourth is Amazon, who's making all the noise. We think we -- we have a huge technology leadership in database over Amazon. What Amazon did is they got their databases, and by the way, Amazon Aurora is just my SQL, open source. And Amazon Redshift is also just a borrowed open source system. These are very old systems that Amazon took open source databases and gave them an Amazon name and put them on the Amazon Cloud. Now the beauty of what Amazon did is they put them in Amazon Cloud and they made them available on the cloud. They did that long before we made the Oracle database available on the cloud. But in terms of technology, there is no way that someone can move -- a normal person would move from an Oracle database to an Amazon database. It's just incredibly expensive and complicated. And you got to be willing to give up tons of reliability, tons of security, tons of performance to go ahead and do it. But we have a huge technology advantage. Again, don't believe me, read the Gartner report. We've never had -- the Oracle Autonomous Database has the biggest technology lead we've ever had in the database world from a technology standpoint. The problem is, we have to deliver that Autonomous Database on first-class cloud infrastructure to be successful in the cloud business. We need more than just a great database. We have the best database, but we also need first-class infrastructure to run that database on. And we now finally, have that with our Generation 2 Cloud. And I think you'll see the combination of the Oracle Autonomous Database and the Generation 2 Cloud. You'll see rapid migration of Oracle from on-premise to the Oracle Public Cloud and to the Oracle Cloud at Customer. So we think we're -- as I said in my opening remarks, we think we're not only going to hold onto our 50% share, we're going to expand it. Nobody, save maybe -- Jeff Bezos gave the command, "I want to get off the Oracle database," and they've been working on this for a few years to try to get off the Oracle database and get onto the Amazon databases. It's taken Amazon, who's dedicated to doing this several years and they're not there yet. Why? Nobody else is going to go through that forced march to go on to the Amazon database, if amazon can't even get there without this kind of effort. We're confident we hold on to our...

Our next question comes from the line of John DiFucci with Jefferies.

Listen, my question is sort of a follow-up to Brad's. And Larry, and I think it's more for Mark and maybe Larry, too. We understand your focus on moving your 50% relational database market share to the Oracle Cloud, but that's going to take time for your customers to get there. And until then, they're likely considered by for on-premise deployments. This quarter, platform and infrastructure grew 1% constant currency. Realize there's headwinds in there from, like, the middleware business and probably some other things, but more interested in the database, as you say Larry, that's one of the strategic products that has to be successful here. Can you give us some more color on the database in this quarter especially for the options? And the 2 that standout for me are multi-tenancy and then memory, but I know there's others that are associated with the Autonomous Database. I mean, these are 2, but others that are really specifically there. And I guess, when will we see those tailwinds from whatever middleware and whatever else is causing them to subside in that part of the business?

Larry will start and then I can follow-up with some numbers for you, John.

Okay. The autonomous -- the database options grew about 4% in the quarter. And we've never had a quarter that I know of where the database business has not grown -- the database license business has not grown. The issue has been, when will we get our cloud infrastructure solid enough to host our database and the answer is, we did that several months ago -- less than a year ago. Less than a year ago, we got the infrastructure in shape, OCI, the Generation 2 of our infrastructure is now there. We're now running thousands of Oracle Autonomous Database trials that our customers look at this. And customers can migrate from on-premise to the Autonomous Database very, very quickly. It is not a technology upgrade. It's just an update, just move your data, drop a few indexes and you're there. You can do it very quickly. So we expect that the uptake next fiscal year, we're going to get enough business for the Oracle database in the Oracle Public Cloud to move the needle, kind of the answer to the question. When does ERP actually move the needle? When does the ERP get around the $1 billion growth rate? And Mark said, we've got a shot at doing that next year. We have a shot at doing the same thing, moving the needle the same distance with Autonomous Database next year.

By the way, John, just a couple of points to add to Larry's point. We haven't had a quarter where database license and our support business didn't ever grow. So -- and the options, just to follow up, a little bit of color, the autonomous options actually grew the fastest of the group of options. So again, while the trials are what I said, when you have thousands of trials and they're growing monthly, which is, again, to Larry's point, about next year's impact on revenue, the options are a pretty good precursor to that, that you're seeing those options like Active Data Guard, multi-tenant, et cetera, that are really driving the options growth that Larry described.

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

Just wanted to follow up on, Larry, your last comment there about the Autonomous Database. I mean, obviously, the transactional database just came out in August and the data warehousing one earlier this year, but what has the feedback has been from customers? Sort of why is the interest level growing? Is it cost? Is it the availability, et cetera? Maybe just some more color on sort of what you're hearing from clients now that the 2 options have been live out there. And then just to your point there about sort of the adoption life cycle, wondering if you can step us through that, like, what are the key milestones you think sort of customers need to see to then start hitting sort of the inflection point on adoption?

Okay. I'll say that the thing I thought would drive the autonomous usage was reduction of labor cost, more -- you eliminate human labor, you lower cost. You eliminate human labor, you lower errors. What has really been driving it is productivity. They've been able to get -- we've had customers that literally got their databases up and running in 15 minutes. And that -- existing customers, existing DBAs put another system in 15 minutes, whereas a normal time to put something like that up was 15 days. So the fact that the existing teams of DBAs, our primary customers can make themself as dramatically more productive, get 10x more done in the same time period than they could prior to the Autonomous Database has been the thing that has been most shocking to our customers. And it's the thing that's driving -- that we think is actually going to drive the migration more so than, if you will, closing data centers and reducing labor cost.

Our next question comes from the line of Sarah Hindlian with Macquarie.

This is a question for Safra and Mark. It's obviously a very turbulent market out there. So I'd kind of appreciate it if you could both tell us a little bit about what you're hearing from customers when you meet with them. What are they telling you about how they see the world in light of all the volatility that's going on?

Well, many of our customers, especially those moving to SaaS and moving to the cloud are looking for ways to increase productivity, to spend a lot less money running their back offices and to get real business insight from the technology, and there is an immense amount of excitement around it, frankly. In fact, a number of our customers that may use one of our cloud products are now moving to our other cloud products without even doing a full RFP and competitive analysis because they've been so satisfied with our products. In fact, just today I got a call from a very well-known company and they've already picked our ERP and were so happy they're just going to roll out HCM and supply chain management now next. So there is a lot of enthusiasm around our products as a general matter, regardless of the economy, our products save them money. So it gives them more money to invest in other things and that's what, obviously, I focus on with them.

I'd say, listen, Sarah, most of our customers want to focus on their business, focus on growing their business. They want to focus on their customers and what they do to make money. I think IT and I know you all know this, but most of what's going on in business IT today is most of the big budgets are spent on maintenance, keeping the existing applications, the existing infrastructure just running, very little innovation. The chance here with the products we have is now to change basically their paradigm, to shift their IT budgets to our R&D budgets and this is very attractive to our customers. The transfer of the work from them to us and while they do it to use the line Larry always uses, which is they have to be willing to spend less as they do that and then they get all this innovations sort of at the same time. So the fact -- and this has now become something that we don't have to evangelize to Safra's point. It's sort of becoming more mainstream in every dialogue. I mean, this last week I was in the Midwest, saw tens of customers. And I would tell you, it's one of the first trips where I didn't spend evangelizing much. I spent more time really talking about what we could do, meaning the maturation of the market now is, as a normal course of business, how can we help save money, get more innovation at the same time. And by the way, I'll just add to Larry's point, while he talked about great advantages, customers do want to get out of data centers, they do want to get out of servers, they do want to get out of infrastructure, they typically don't help our customers advance their business. So when you can do all this for them and you can help them save money and drive innovation, this is a big deal out in the market and this is what our customers are talking about.

Our next question comes from the line of Raimo Lenschow with Barclays.

Can I -- given that the comps are getting easier on the apps ecosystem for the second half, so there is almost kind of the room for accelerating further. Can you double click again on that ERP NetSuite strength? I mean, you have 16,000 customers, but in theory, a big market and you are reaccelerating it. Can you double click on what's working there and how big that could get over time?

Well, sort of everything. So just to be clear on NetSuite, there's 3 -- and I've been through this before, but at the risk of going over it again, there are 3 core tenets as we bought NetSuite that we really focused on. One was, we believe they were underserved in terms of the amount of sales resource they had in the marketplace. We've increased that dramatically, both domestically and make sure I'm clear to you. Remember, a lot of the growth we've had in NetSuite isn't just international, it's domestic. They've had a tremendous run in The United States of America, just simply getting them more customers. And we've also expanded their resource internationally and we've grown internationally. So just more sales resource has been part of it. Second, we've increased their R&D to get to more countries. So we've released 19.1, we're now in -- I'm sorry, 18.1 and 18.2. We're now covering more and more countries than we were before. So we have more sales people with more product available in more locations. Third, we're very focused on industries. So when we say industries, we don't mean something like just retail. We actually go into micro segments into the marketplace like campus bookstores and say, we're going to really get features for that discreet micro segments. So those 3 fundamentals of more sales resource, more countries, more micro segments, those are the 3 key fundamentals that we've driven. By the way, we follow a lot of that same formula with Fusion, which is really sort of the same formula that we drive there. NetSuite has just done a great job, that team has done a great job. And if I haven't been effusive enough about it, I'm thrilled with their performance and what they've done and their future.

Our final question comes from the line of Michael Turits with Raymond James.

If Autonomous Database does as well as you expect, what's the impact of that on Infrastructure as a Service? Is there a feedback there?

Well -- okay. Yes, Autonomous Database and -- Exadata services and Autonomous Database we think will be between 1/3 and 1/2 of Infrastructure. So obviously, it's going to drive infrastructure. It is the driving force in infrastructure. We think moving the -- in fact, if we did nothing but run Oracle applications in the Oracle Public Cloud and Oracle ISV applications, so all we did was move Turner over and all these other guys over and all of these existing Oracle applications, we'd be more than 10x bigger than Amazon. If that's all we did. But we -- of course, we're ambitious to do more than that. We have the big SaaS business as well, but the Oracle database will drive the infrastructure business. It will be between around 50% of that business and maybe more.

Okay. I think that's it for us. Let me just say one other thing to the extent that Autonomous Database does very well. Also, you can imagine that our margins on PaaS, IaaS they just go through the roof. So the more of our infrastructure that is -- is that not only are the revenues up, but the margins really skyrocket.

Okay. Thanks, Safra. 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 question on this call. We look forward to speaking with you. Thanks for joining us today. And with that, I'll turn the call back to Victoria for closing.

Thank you for joining today's Oracle's Second Quarter 2019 Earnings Conference Call. We appreciate your participation. You may now disconnect.