甲骨文 (ORCL) 2009 Q3 法說會逐字稿

Good day, everyone, and welcome to today's Oracle Corporation quarterly conference call.

Today's conference is being recorded.

At this time, I'd like to introduce Mr.

Roy Lobo, Head of Investor Relations at Oracle.

Please go ahead, sir.

Thank you, operator.

Good afternoon, everyone, and welcome to Oracle's third quarter fiscal year 2009 earnings conference call.

With me on the call are Oracle's Chief Executive Officer, Larry Ellison, Oracle's President, Safra Catz, Oracle's President, Charles Phillips, and Oracle's Executive Vice-President and Chief Financial Officer, Jeff Epstein.

We'll begin with few prepared remarks and take questions if the audience.

Let me begin by reminding everyone that today's discussion may include predictions, expectations, estimates or other information that might be considered forward-looking.

While these forward-looking statements represent our current judgment on what the future holds, they are subject to risks and uncertainties that may cause actual results to differ materially.

You're cautioned not to place any reliance on these forward-looking statements, which reflect our opinion only as of the day of this presentation.

Please keep in mind that we are not obligating ourselves to revise or publicly release the results of any revision of the forward-looking statements in light of new information or future events.

Throughout today's discussion, we will attempt to present some important factors relating to our business that may affect our predictions.

You should also review our most recent Form 10-K and 10-Q for a complete discussion of these factors and other risks that may affect our future results or the market price of our stock.

A PDF copy of our press release and the financial tables, which include a GAAP to non-GAAP reconciliation can be viewed and downloaded on the Oracle Investor Relations website at Oracle.com/investor.

You can also access these supplemental financial tables on Oracle.com/investor.

So with that, I would like to turn the call over to Jeff Epstein for his opening comments.

Thank you, Roy, good afternoon, everyone, and thank you for joining us.

I will review our non-GAAP financial results, focusing on constant currency growth rates unless otherwise stated.

First, a note about foreign exchange rate movements.

In December we told you that using then current exchange rates would reduce our Q3 growth rate by 8 percentage points compared to constant currency.

During the third quarter, the US dollar strengthened again, further reducing our international revenues, expenses and profits, when measured in US dollars.

As a result, currency movements reduced new license revenues by 9%, total revenues by 10%, net income by 12%, and earnings per share by 13%, or $0.05 per share, compared to Q3 of last year.

Now, let's review the income statement.

In the third quarter, our new software license revenues were $1.5 billion, up 3% in constant currency, and down 6% in US dollars.

EMEA grew 12%, Asia grew 1%, and the Americas were down 4%.

Technology new license revenues were $1.1 billion, up 6% in constant currency, and down 4% in US dollars.

EMEA grew 15%, Asia grew 1% and the Americas were down 1%.

Our BEA products, which have now been technically integrated with Oracle's Fusion Middleware, packaged into unified suites, and are sold off the same price list, accounted for $140 million of Q3 license revenues, based on our internal allocations, which are consistent with previous quarters.

Applications new license revenues were $396 million, down 4% of constant currency and down 12% in US dollars.

EMEA grew 2%, Asia fell 2% and the Americas were down 8%.

Our software license updates and product support revenues were $3 billion, up 21%, in constant currency.

And up 12% in US dollars.

These revenues are annual fees the customers pay to receive updated versions of and enhancements to their existing products, without having to buy the software again.

On a trailing four quarter basis, our software license updates and product support revenues totalled $11.8 billion, up 18% over the prior comparable period.

Our services revenues were $1 billion, up 2% in constant currency and down 8% in US dollars.

Our total revenues were $5.5 billion, up 12% in constant currency, which was above the high end of our constant currency guidance range of 8 to 11% ,and up 2% in US dollars.

Operating income was $2.6 billion, up 26% in constant currency, and up 15% in US dollars.

Our non-GAAP operating margin grew by 510 basis points to 46.4% in US dollars.

This is the highest Q3 operating margin in Oracle's history as a public company, and further demonstrates the success of our operating model.

Our tax rate was 26.6%, which is lower than our guidance of 28.5%, due largely to a one-time benefit from a recent state tax law change.

In Q3, we repurchased 86 million shares at an average price of $16.82 per share, for a total of $1.4 billion.

As we have previously stated the rate of our stock buy-back will fluctuate each quarter, taking into account alternative uses for our cash and our stock price.

Our non-GAAP earnings per share were $0.35, above the high end of our EPS guidance range of $0.31 to $0.33.

This was up 29% in constant currency and up 16% in US dollars.

Our non-GAAP earnings per share would have been $0.05 higher, had foreign exchange rates remained the same as they were in Q3 of last year.

Turning to the balance sheet, we have $11.3 billion in cash and investments.

Our days sales outstanding improved again this quarter, from 54 days last year to 49 days this year, a testament to the quality of our receivables, the quality of our customers, and the effectiveness of our collection efforts, as well as from foreign exchange and product mix benefits.

We generated a record $8.0 billion in free cash flow, over the last four quarters, growing 14% over the same period last year.

Now, I'll turn the call over to Safra.

Thanks, Jeff.

Well, clearly we're extremely pleased with our spectacular Q3 results.

We hit the midpoint of our new license guidance, we beat the high end of our total revenue guidance, and we beat the high end of EPS guidance by a full $0.02 and delivered the highest Q3 operating margins in our history, substantially higher operating margins than our peers, and we grew faster than SAP in every region around the world, clearly taking market share.

Our license updates and product support revenues, which hit $3 billion this quarter are growing nicely this quarter, off a large base.

And customer renewal rates and satisfaction levels continue at record highs.

This quarter clearly demonstrates the strength of our diversified portfolio of products, the breadth of our enormous customer base and the strength of our operating model.

Once again, the only negative story for the quarter was currency, as it was in Q2, and as it will be again in Q4.

To give you a flavor for the region, since Q4 of last year, currencies in the major European countries have depreciated about 20%.

Currencies in Latin America have depreciated 30%.

And currencies in Asia, except for Japan, had depreciated about 30%.

For the coming quarter, assuming that exchange rates remain at current rates, there will be a 12% negative currency effect on license growth rate, a 12% negative effect on total revenue growth rates, a negative 16% effect on net income growth rates, and a negative $0.07 per share effect on earnings per share.

So now let me turn to guidance.

And we believe the guidance we're giving today is realistic given the continuing strengthening of the US dollar, and a very tough Q4 comparison from last year, but I do want to emphasize that our pipelines continue to be strong and the close rates that I'm assuming are more conservative than typical Q4 close rates.

[Some of these dates] may end up being appropriate.

With that, our guidance for Q4 is as follows: New software license revenues are expected to range from negative 5 to negative 15% in constant currency.

So adding the negative 12, from currency, that's a negative 17 to negative 27 at current exchange rates.

Total revenue on GAAP and non-GAAP basis is expected to range from plus-2 to minus three-3 in constant currency and and minus 10 to minus 14 at current exchange rates.

Non-GAAP EPS is expected to be $0.49 to $0.53 in constant currency, up from $0.47 last year, and from $0.42 to $0.46, assuming the current exchange rate.

GAAP EPS for the fourth quarter is expected to be $0.41 to $0.45 at current exchange rates and $0.34 to $0.38 assuming -- excuse me -- at constant currency and $0.34 to $0.38 assuming current exchange rates.

Now our guidance assumes a tax rate of 28% for Q4, versus 30.8 in Q4 of last year.

Now, I want to be clear.

The midpoint of our Q4 EPS guidance puts us at $0.44 or [$1.42] (corrected by Company) for the year.

But you need to remember the impact of currency not only for the quarter, but for the whole year.

Currency impacted earnings negatively by $0.01 in Q1, $0.04 in Q2, $0.05 in Q3, and, as I said, my guidance assumes $0.07 in Q4, if the dollar stays at these rates.

So forgetting the economy, if you merely adjust for the strengthening of the dollar, and use the midpoint of my Q4 guidance, we would be over [$1.58] (corrected by Company) for the year.

As we have always said, we are committed to returning value to our shareholders through technical innovations, strategic acquisitions, stock repurchases, prudent use of debt, and now a dividend.

And though we cannot control the stock market, one benefit we can give our stockholders is a cash dividend, so today we're announcing Oracle's first ever quarterly dividend of $0.05 per share.

We generated $8 billion in free cash flow over the past 12 months and we're running the business at record margins.

We are extremely confident in our financial strength, our operating model, our competitive position, and our execution capabilities.

And as a result, when many others are reducing and eliminating dividends, we're putting one in place.

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

Thanks, Safra.

I'm just going to re emphasize a few things that already been said.

First of all, but for currency, we actually sold more new licenses in Q3 of this year than in Q3 of last year.

Now, and that is in the face of a worldwide global recession, great reductions in capital spending, what has been described as tough times for the tech industry, in terms of new license sales, our new license sales actually grew year-over-year when measured in constant dollars.

That is a remarkable achievement and we're very proud of our -- the quality of our products and the quality of our field to deliver such result.

But for currency, our earnings per share would have been 29% growth, year-over-year.

That is in the face of a worldwide recession, weak global economy, we are still able to grow our earnings ahead of our plan, which does not anticipate a global recession or a weak economy.

Our target growth rates are 20% per year, and we delivered 29% in the constant dollars.

By the way, even when you do count currency, the twin head-winds of a weak global economy and a strengthening dollar, we still managed to grow earnings per share at 16%.

That is a remarkable achievement, and we're very, very proud of that.

So that's looking back.

Now, looking forward I think the most exciting new product we've had in many, many years, is our Exadata database server.

We've planned to grow using a combination of innovation and acquisitions.

And our fastest growing business right now, fastest growing large business right now is our Fusion Middleware business and that really is a combination of innovation and acquisition, the BEA acquisition being the largest and the most visible in growing our Fusion Middleware business.

Exadata is 100% innovation on top of our very large and very strong database business.

And the early results have been remarkable.

Charles will go into a lot of detail but I'll just throw a couple of numbers out there.

One of our customers and Charles will describe this customer again, you will hear all this twice, one of our customers saw a 28 times performance improvement over an existing Oracle database.

Another customer saw a monthly aggregation drop from 4.5 hours to just to three minutes.

When compared to Teradata, when compared to Teradata, a competitive database machine that's been in the market for a very long time, another customer saw that we were six times faster than their existing Teradata application when using Exadata versus Teradata.

Another customer saw a batch process fall from eight hours to 30 minutes.

Charles will go into more detail on this.

He'll repeat those numbers because I think they're both mentioning twice.

Charles?

Thanks, Larry.

I want to do start off with a few comments about the field performance.

I think the field was very proactive and did a good job adjusting to the current environment, just some of the things we have been doing.

I think we anticipated extra layers of approvals, given the tight controls on spending, and we negotiated that quite well.

We've refreshed the subtle messages around cost reduction and consolidation and the elimination of costly customization.

We are more focused on end applications and add-on options to add value to existing deployments.

This includes things like [Adule] demand transparency log, sourcing applications, EPM , which is Hyperion, and DIM, and the good news about all of that is that we can sell that into the SAP install base as well, so we can add value to existing deployment.

We're getting people to upgrade to the latest releases of our applications, that sets the stage for us to upsell to recent add-on modules and we've been selling into existing demand, not ahead of it, so customers don't have excessive license head room at the moment.

On the consulting side, we project the consulting REM projects to keep utilization in margins high by load balancing with contractors and innovators instead of hiring for future products ahead of the deal.

So now just a few comments by area.

On databases, as Larry mentioned, we're very excited about how the HP Oracle database machine is performing, the increases have just been stunning and so we're getting great feedback from my customers and the pipeline is the largest build I've ever seen in terms of a new product.

The numbers are stunning.

The major European retailer who reduced batch processing time from eight hours to 30 minutes did not believe the process had completed.

And that's actually another stunt.

So as Larry mentioned, this is a reminder that is internally developed technology in the midst of all the discussion of acquisitions, people forget we're spending $3 billion a year on research and development and this is why we do it.

Database deals to highlight.

Bank of America, despite what is going on in the financial services, did a very large deal with us to purchase many components across the tech stat, and because they wanted to lower their cost and consolidate around our database and our middleware stack, and so it was a good deal for us.

Campus-wide license for RAC and database at New York University, two notable ones.

More important, upcoming, a new release of the database 11g release 2 should happen in Q1, the key feature enhancement there is enhancement to where application clusters are at.

So just to remind you, RAC is our most popular database option that we sell around database.

And it is the underlying technology for grid computing.

We have been focused on advanced users because of the complexity of clustering technology, at least historically.

Change in this has significant ease of use enhancements and this will make grid computing accessible to a much broader market.

Basically this is grid computing for the masses.

Moving on to middleware, middleware continues to do extremely well.

We have still have all of the momentum you have become accustomed to.

I think one of the changes recently is just how much the system integrators are now helping us.

We now have trained over 33,000 consultants in 50 countries.

It is a great way to expand our selling capacity without increasing our cost.

Some recent partner deployments of our middleware, Accenture at JPMorgan Chase, CSC at Wells Fargo, Deloitte at the University of North Carolina, IBM Global Services at Navistar.

We also have a major new release of our entire middleware suite this quarter, using Middleware 11G and this is the major integration we've been talking about, integration of all of the BEA products, common metadata, upgraded components, makes it a lot more competitive.

Recent wins on the platform, Smucker's, Weight Watchers at the application server level, San Diego County, Verizon, Enterprise Performance Management, the Hyperion product, the Gap, Home Depot, Dolby Laboratories, Federal Reserve Board, CVS Pharmacies.

And our BI product, Select Smart, Pella, Florida A & M input our custom service.

Good wins in content management at the University of Arkansas and Identity and Access Management at Standard Life and Liberty University.

Lots more we could mention.

Just wanted to give you a sample.

Lastly on applications, we had a new release of application integration architecture, version 2.3 in January.

Just to remind you, this are integrations between Oracle applications, built completely on standard middleware.

The standard off the shelf integration has turned into a good differentiator to us, since customers want to avoid costly hardware and custom integrations that always break on upgrades.

So we use this innovation platform for our own products but we also extend into third party products where it makes sense.

A couple of examples, Lexis Nexis purchased AIA for communications and media, they use that to surround our high-volume on line billing engine.

And integrate in legacy applications as well.

Fosters Group purchased Oracle Fusion Middleware and AIA foundation pack to integrate JD Edwards and Siebel, along with third party applications, on and on.

People like the fact we're taking responsibility for the integrations.

Couple notable wins across the applications portfolio, ERP, Hitachi Global, Federal Express, CRM, PNC, Affiliated Computer Services, Telecom Italia, Demantra, Sara Lee and Leggett and Platt local transportation management, Ingersoll-Rand and Sears in retail, Belk Financial Services, CBU, Federal Home Loan Bank of Pittsburgh, HDFC Bank in India.

And in Communications, CBU, add-on deal to KPM, which is one of our largest wall-to-wall deployments.

Insurance GBU, Great American Insurance Company, utilities, Seattle, City Life, and Northeast Utilities.

So, finally on CRM on demand, our ongoing battle with Salesforce.com continues.

We beat them at Ministaff, Eden Contractors, Scottish Widows, which is part of Lloyd's TSB group, Cummins Engine, and we replaced them, a thousand seats they had in place at Carlson Wagonlit.

So with that, I'll turn it back over

Thank you, Charles.

With that, we'll open up the line for questions.

Ladies and gentlemen , the question-and-answer session will be conducted electronically.

(Operator Instructions).

We'll go first to Heather

Good afternoon, everybody.

I guess two questions for you Safra.

The first one would be, I was wondering if you could give us an idea of how you saw the quarter progress, if you saw more hesitancy to sign deals in the month of February, versus January, or do you think we've seen some signs of stabilization in term of deal-signings?

I guess what I'm trying to take from that, Adobe made comments last night on their call, last five or six weeks they've seen more stability in their channel business.

I was wondering if you could give us some color there.

The second thing is, it looks like you're getting awfully close to that 50% operating margin goal you set five or six years ago.

And I'm just wondering if you can give us a sense of what's the limit there.

I mean, is this something that we can continue to see and that once you get to 50 there is going to be another goal on the horizon that you're just going to see this continue to progress as you layer on the maintenance revenue?

Thank you.

Sure, Heather, so as far as how the quarter played out for us, we were actually on track the whole quarter.

Every month looks sort of on track, and there was -- there was no more of an issue earlier on.

So, as you know, we do a lot of our business at the end, and nothing about that was different.

But we did end up with a good close, but we were actually on track every single quarter.

Our business might be a little bit lumpier, more hockey-stick than Adobe's, and it might be something they might see and we wouldn't.

As far as the 50% rate, you know that that is very much dominated by the mix of business, dependent on our large install base of customers who already have bought our product and are interested in buying the upgrade rights every year, and as that base continues to grow, it is a percentage of our total revenues, you will see the margins continue to improve.

So is 50 better than 50% in the cards then, at some point?

Well, you just need a spread sheet, enough years in it, I think we're definitely -- we're up -- well, obviously 500 basis points this quarter.

300, et cetera, in the previous quarter.

So we are on track to do over 50 ultimately, sure.

Great.

Thank you.

We'll take our next question from Adam Holt with Morgan Stanley.

Good afternoon, and congratulations.

First question is on maintenance revenue, looks like you had a nice sequential increase in maintenance revenue, there has obviously been a lot of focus on this line.

Our work suggests your pricing has been holding in pretty well in what is obviously a difficult environment.

Can you tell us what you saw on the pricing front, renewal front and some of the mechanics around maintenance revenue.

Secondly, I also had a question on the OpEx side.

You're obviously doing a terrific job on margins.

Your head count is sort of slowing on a sequential basis, still growing year on year, what are your plans for head count growth going forward?

Thanks.

There was nothing special about the upgrade in product support business.

It continues to grow because everyone of these new licensed customers, is very overwhelming, a high percentage will renew next year so.

This year the maintenance will be product updates and support number, simply from previous years, so same customers continuing to renew.

There was nothing unusual in the pricing one way or the other.

And so there's really no news whatsoever on that line.

As far as head count, the head count numbers are often very dependent on what we do with acquisitions.

We are always very careful with how many folks we hire.

The big ramp-ups in head count have generally come in with acquisitions.

So we really can't comment as far as what will happen in the future.

It is very dependent on what will as far as a big move, on acquisitions.

We haven't had a very large acquisition the past couple of quarters, so there's not the big bump.

Terrific.

Thank you.

And we'll take our next question from Sarah Friar with Goldman-Sachs.

Terrific.

Thanks a lot.

And good quarter, guys.

Just a question on the growth in EMEA, and even in Asia PAC, which is just very noticeable given the back drop we're in.

As you think about the different geos and how they perform in the quarter, and as you look forward, is US just a precursor of what is going to come in those geos, or is there something specific for Oracle in those geos, either that you have more shares to take or low hanging fruit in the BRIC economies that would continue to make them look better than what you're seeing in the US.

The economic impact was clearly more severe in the US, but having said that, there are some things going on in some of the other countries that maybe made a difference.

We had management teams in Asia PAC and that's working out quite well.

Japan is another story.

But X Japan is working out well.

And the new energy, that is actually happening.

In EMEA we have the same thing.

We have management teams that was planned and natural but I think some of the changes he made there are having immediate impact there as well.

I think we adjusted all that in the forecast, the economies as we see them unfolding and hopefully as things throughout the quarter, some of the deals that we've been counting on, close early in the quarter.

There are other large ones out there we have to see what happens.

Sure.

And if I may, just a quick follow-up, similar what the leading indicator is saying.

I look at your database in the US, constant currency, it actually dipped down negative one and trailing off from how strong it's been.

I would think the database is still an area that could continue to see growth and it feels like an inevitability in life.

How do you think about the ability to keep growing that business even given everything that we're seeing out there in the economy?

Well, the middle ware business I think we're gaining significant share.

We have such a lead on the competition and we have a new release coming out.

So I think that is a growth area and that's been helping us get through a tough time period.

And all the new BEA customers we can up-sell.

I expect that to continue.

Database is a more mature market.

No getting around that.

Differentiation, over the competition is so great, if there is a demand we tend to get it.

I would say infrastructure is easier in a tough environment and new product-driven areas like applications are somewhat tougher.

That's reflected in the results.

Okay.

Great.

Thanks for the color.

We'll take our next question from Brent Thill with Citi.

Thanks, good afternoon.

Safra, you mentioned you're assuming slightly more conservative close rates for Q4.

Can you just give us a sense of that conservativeness in your guidance in key metrics would be helpful?

Well, in general, we try to use -- Q4 -- first of all, Q4 has a dynamic all its own, frankly.

And closure rates are always very high in Q4.

So what I tried to use is a closure rate more similar to Q3 or Q2, just because we want to, we can't see into the future.

We had a - another spectacular quarter.

So, we have no idea what's going to be happening in the future.

So in trying to use our best judgment, both using a bottoms-up and a top-down analysis, to just kind of see if the numbers make sense, we came out this time with a more conservative closure rate.

Really just probably in an abundance of caution as to, you know, what's going to happen next in the economy.

But there is nothing special.

I often end up using a lower closure rate because I just don't know and the actuals usually come out higher than that.

Okay.

And, Charles, just on the database, the options seem to be a popular choice.

Can you give us a sense of what you've been seeing in this environment with the add-on of some of these database options, how important it it has been to fuel that line item.

Certainly a significant part of the growth around database.

The options are leading and I think our challenge is to make sure we focus on better, have more specialization around some of the options, have a higher tax rate when we do a database deal, make sure we offer the options at the same time.

The opportunity around the options has gotten a lot more focus.

That is what has been happening and we forecast at that level, not overall database but forecasting the major options in the major regions.

Thank you.

We'll take our next question from Kash Rangan with Merrill Lynch.

Hi.

Thank you very much.

Larry, looks like you've declared this earnings growth goal.

You had one five years back and you actually outperformed it pretty significantly.

I wonder as a management team how you think about the next 12 months ahead.

Are you still targeting earnings growth rate?

I know it is a challenging currency environment, if you strip out the currency, those look impressive.

But the currency is a head wind, as you've quantified, Safra, over the last few quarters.

How do you think about our reported basis of what the earnings growth profile of the company -- how you managing that for the down-turn?

That's my question, thanks.

Well, again, it is very difficult for us to predict, you know, currency rates, I mean, no one would have predicted a Euro, $1.68.

And or the sudden decline of Euro.

We're not really in the business of predicting exchange rates.

We'll leave that to George Soros and people who do that for a living.

We try to manage our business, using constant dollars, and try to sell more software this year, than the previous year, on a constant-dollar basis.

And on that constant-dollar basis, I think we can continue growing our earnings at our targeted 20% share, as you know, we almost hit it in the face of huge currency head winds.

We did 16% unreported but 29% EPS growth in constant.

And I think, you know, that's a terrific achievement in the face of this recession.

I think we're managing our way through this recession very, very well, but currency is just too unpredictable.

It fluctuates suddenly, and it is not something that we really try to manage for -- we don't do a lot of currency -- with currency hedging and things like that we're not going to do that.

We're going to try to run our business within the recession, deliver good growth within the recession, make appropriate acquisitions, invest in appropriate innovation, and target a constant dollar EPS growth rate of 20%.

And currencies are going to do what currencies are going to do.

Right.

And Safra, any commentary at all on ELA trends renewals and anything you have been noticing.

I know you don't quantify, but trend-wise qualitatively can you talk to it?

Thanks.

It's still healthy for a business.

I would say on average globally maybe the deal sizes are a little bit less than they were in past years, but that's probably a good thing in this environment for predictability.

There's some large deals out there we're not counting on those.

The average deal size that we see has probably come down a little bit.

But there is plenty of individual opportunities out there.

Great, thank you very much.

Next question, operator?

We'll take our next question from John DiFucci with JPMorgan.

Thank you.

I guess for Safra, or Charles, I mean, a lot of people look at Oracle as a gauge for the software industry and whether you are or not is debatable, lot of opinions there, but just wondering what you're seeing versus the competitors.

We all know the macroenvironment is tough out there.

It is for you too.

I think your apps results were better than anyone would have guessed and your largest competitor was probably down 15% and their most recent quarter on organic constant currency basis where you put up numbers on organic constant currency basis.

It looks like it down about four.

Can you comment on that?

I think SAP is more reliant on mega deals than we are, their install base, and the thing that we used to get criticized for having a lot of applications, it's a pretty good thing right now, we have lots of ways to sell not only into our own install base but the SAP install base, around their customers as well.

So we have lots of ways to get to the number.

All the edge applications, all the on demand applications, and we know their customers since they're running on our infrastructure and they don't know ours.

Even when you look at your apps business, as far as its growth rate has improved in each of the last three quarters, Charles, you said even in this environment.

I guess your database is doing better than apps as far as the growth rate, but it is surprising to see that continued growth, improvement quarter-over-quarter.

Keep in mind I don't have any industry applications.

We have vertical applications that are less penetrated than ERP and less competition.

That is part of the growth and they don't have anything there, that I know of.

They don't have significant CRM business, they don't have a CRM on demand business.

We have a much broader portfolio, as Charles pointed out, we have a much broader portfolio of applications.

Our applications are much more modern.

Let me add, that around the end of this year, we're going to be start delivering maybe next generation Fusion applications which we've been investing very heavily in over the years and SAP is not doing that either.

So I think we're going to be able to continue to take market share from them for years to come, because of the breadth of our portfolio, the investment in new applications again, currently things like CRM on demand, and the future, our Fusion applications, which are all on demand ready, or cloud computing ready, if you prefer.

And SAP is not making those investments.

Okay.

Thanks, Charles, if I might just one quick -- Charles and Larry -- just one quick follow-up.

Charles, you mentioned Q1 RAC you will come out with a new version that will address ease of use.

You talk a little bit about options.

Specifically on RAC, because that one is one that, as you know, has been a great one for you over the last several years.

Can you talk a little bit about the penetration today of about the opportunity there, what is left.

Even subjectively without even specific numbers, if you can.

A small percentage of our install base, it is high valued product and significant revenue but it is a small percentage of the individual customers that are out there and it makes sense for medium and small customers as well if it can be made easy to use and that's exactly what we've done.

Okay.

Great.

Thank you.

Operator , we have time for one

And that question comes from Peter Goldmacher, with Cowen & Company.

Great, thanks.

Safra, I wanted to ask you a quick question about head count.

I notice your head count is relatively flat for the quarter, but all of your operating expense line items were down absolutely.

How does that happen?

Where are you getting the costs from?

Peter, it's currency.

You know that.

It's got to be.

We pay those folks, they're all over the planet.

We end up paying them less.

We pay them the same .

They get their same paycheck but they get it in reals or in rupees or whatever.

That is all that is going on.

Nothing going on,

Following up on DiFucci's question on competition.

Are you seeing anyone that's competing remarkably differently?

I'll tell you, any one of us can tell you, we feel like we are winning an awful lot.

We are winning in other people's install bases, we are winning what may be in many cases we shouldn't be winning.

We're competing very effectively against our competitors.

I don't know.

Larry, do we see anything different?

I think as Charles pointed out the magic number, we invest $3 billion in R&D.

We think we have a better database machine than Teradata.

We're competing very successfully against sales force.com.

We're doing better in applications in every region and taking share against SAP.

In database we're doing extremely well against Microsoft, taking share from Microsoft and IBM.

So I think we're competing more effectively across the board in all of our product areas, and that's the explanation for Q3.

And the reason for optimism going forward.

Right.

Thanks.

Operator?

And that is our final question.

At this time I'd like to turn the call back over to Mr.

Lobo.

Thank you, everyone, for participating in today's call.

The telephone replay will be available for 24 hours.

The replay number is 719-457-0820.

With a pass code of 3475782.

You can access the web cast replay on Oracle on Investor Relations website, the webcast replay will be available through the close of market on March 23rd.

With that, thank you, and I'll turn the call back to the operator for closing.

Ladies and gentlemen, this does conclude today's conference call.

We appreciate your participation.

You may disconnect at this time.