甲骨文 (ORCL) 2009 Q4 法說會逐字稿

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

Today's conference is being recorded.

At this time, I'd like to turn the conference over to Mr.

Ken Bond, Vice President of Investor Relations, Oracle.

Please go ahead, sir.

Thank you, operator.

Good afternoon, everyone.

Welcome to Oracle's fourth quarter and fiscal year 2009 earnings conference call.

I'm Ken Bond, Vice President Investor Relations; and with us on the call today are Chief Executive Officer, Larry Ellison; President Safra Catz; President Charles Phillips; and Executive Vice President and Chief Financial Officer Jeff Epstein.

As a reminder, today's discussion will include forward-looking statements including predictions, expectations, estimates and other information that might be considered forward-looking.

While these forward-looking statements represent our current judgment on what the future may hold, these statements are also subject to risks and uncertainties that may cause actual results to differ materially from statements being made today.

Throughout today's discussion we will attempt to present some important factors relating to our business which may potentially affect these forward-looking statements.

As a result, we caution you against placing undue reliance on these forward-looking statements which reflect our opinion only as of today.

And as a reminder we are not obligating ourselves to revise or publicly release the results of any revision of these forward-looking statements in light of new information or future events.

We would encourage you to review our most recent reports on Forms 10-K and 10-Q and any applicable amendments for a complete discussion of these factors and other risks that may affect our future results or the market price of our stock.

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 website at www.oracle.com/investor.

We'll begin with a few prepared remarks before taking questions from the audience.

In today's conference call we will only be discussing Oracle's Q4 and fiscal 2009 results.

With that I'd like to turn the call over to Jeff Epstein for his opening comments.

Jeff?

Thank you, Ken, and welcome to Oracle.

Good afternoon, everyone, and thank you for joining us.

I will review our non-GAAP financial results for the fourth quarter focusing on currency growth rate unless otherwise stated.

First a note about foreign exchange movement.

In March we told you that using then current exchange rates would reduce our Q4 revenue growth by 12 points compared to constant currency.

Even though the US dollar weakened for March the US dollar strengthened compared to Q4 of last year 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 8%, net income by 11%, and earnings per share by 10% or $0.05 per share compared to Q4 of last year.

Now let's review the income statement.

In the fourth quarter, our new software license revenues were $2.7 billion, down 4% in constant currency and down 13% in US dollars.

EMEA grew 2%, Asia grew 3% and the Americas were down 12%.

Technology new license revenues were $1.9 billion, down 1% of constant currency and down 10% in US dollars.

EMEA grew 1%, Asia grew 5%, and the Americas were down 6%.

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 $201 million of our Q4 new license revenues based on our internal allocations which are consistent with previous quarters.

Applications new license revenues were $805 million, down 11% in constant currency and down 19% in US dollars.

EMEA grew 5%, Asia fell 4% and the Americas were down 22%.

Our software license update and product support revenues were $3.1 billion, up 17% in constant currency and up 7% in US dollars.

These revenues are annual fees that customers pay to receive updated versions of and enhancements to their existing products.

Our services revenues were $1.1 billion, down 7% in constant currency and down 16% in US dollars.

Our total revenues were $6.9 billion, up 3% in constant currency which is above the high end of our constant currency guidance range of plus 2% to minus 3%.

And down 5% in US dollars.

Operating income was $3.5 billion, up 9% in constant currency and down 1% in US dollars.

Our non-GAAP operating margin grew by 240 basis points to 51% in US dollars.

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

Our tax rate was 31.3% which is higher than our guidance of 28% due largely to a one-time expense from a recent federal tax ruling involving Xylinx and the allocation of stock option expense deductions.

Our Q4 non-GAAP earnings per share were $0.46 at the high end of our EPS guidance range of $0.42 to $0.46.

This was up 9% in constant currency and down 1% 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 Q4 of last year.

In Q4, we repurchased 14.0 million shares at an average price of $17.85 per share for a total of $250 million.

And for the full year we repurchased 226 million shares at an average price of $17.53 per share for a total of nearly $4 billion.

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

Now turning to our full year results for fiscal 2009.

New software license revenues was $7.1 billion up 1% in constant currency and down 5% in US dollars.

EMEA grew 6%, Asia grew 7%, and the Americas were down 4%.

Technology new license revenues were $5.1 billion up 7% in constant currency and flat in US dollars.

Application new license revenues were $2 billion, $2.0 billion, down 10% in constant currency and down 10% -- down 16% in US dollars.

Software license updates and product support revenues totaled $12.0 billion up 19% in constant currency and up 14% in US dollars.

Our total revenues were $23.5 billion up 10% in constant currency and up 4% in US dollars.

Operating income was $10.9 billion, up 19% in constant currency and up 12% in US dollars.

Our non-GAAP operating margin grew by 350 basis points to 46% in US dollars.

Our fiscal 2009 non-GAAP earnings per share were $1.44, up 19% in constant currency and up 11% in US dollars.

Our non-GAAP earnings per share were have been $0.11 higher had foreign exchange rates remained the same as they were last year.

Turning to the balance sheet.

We have $12.6 billion in cash and investments.

Our days sale outstanding improved again this quarter from 63 days last year to 58 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 $7.7 billion in free cash flow during fiscal 2009 growing 8% in US dollars over the same period last year.

Now I'll turn the call over to Safra.

Thanks, Jeff.

We are obviously pleased with our Q4 results and with our exceptional performance throughout the year, in constant dollars we beat the top end of our new license guidance.

We beat the high end of our total revenue guidance and we delivered the highest Q4 operating mark in our history crossing the 50% mark for the first time.

Once again, we grew margins and revenues substantially faster than our peers.

We grew faster than SAP in every region around the world including its home base of Europe where our applications business grew 5% in constant currency versus negative 27% for SAPs most recent quarter.

Our software license updates and product support revenues grew 17% in constant currency, off an enormous base as our customer renewal rates and satisfaction levels continue at record highs.

Even though the dollar strengthened a bit towards the end of the quarter, it still resulted in a 9 point currency headwind for our new license compared to a 7 point tailwind last year.

This is a 16 point shift year-over-year as a result of currency and (inaudible) for us, this fiscal year clearly demonstrates the strength of our portfolio of enterprise software product, the breadth and loyalty of our huge customer base and the strength of our operating model.

The fact is we have a lot of Company specific momentum.

We really executed well throughout the year and exceeded our own expectations quarter after quarter and of course we surpassed the 6% margin and we announced our (inaudible - audio difficulties) it's been a great year.

Let me turn to guidance.

My guidance today does not include any assumption from our pending acquisition of Sun Microsystems, and though we do expect to close Sun during the quarter, this pending is subject to getting all the necessary approval.

For the coming quarter (inaudible) exchange rate remains at current rate.

There would be a 4% negative currency on license growth rate, a 5% negative effect on total revenue growth rate, a negative 6% effect (inaudible) and a negative $0.02 per share effect on earnings per share.

We believe that the guidance I'm giving today is realistic given the continuing impact of currency and the various Q1 comparison from last year but I do want to note that our pipeline continued to grow and the close rates we are using are conservative.

With that our guidance for Q1 is as follows.

New software license revenues expected to range from negative 10 to 0% in constant currency and negative 14 to negative 4% at current exchange rate.

Total revenue on a GAAP basis is expected to range from 1% to 4% year-over-year in constant currency, negative 4 to negative 1% in current exchange rate.

Total revenue on a non-GAAP basis is expected to range from 0 to 2% in constant currency and negative 5% to negative 3% at current exchange rate.

The non GAAP EPS is expected to be between $0.31 to $0.33 in constant currency and $0.29 to $0.31 in the current exchange rate.

GAAP EPS was for the first quarter is expected to be between $0.23 to $0.24 in constant currency and $0.21 to $0.22 assuming current exchange rate.

Now this guidance assumes a tax rate of 29% for Q1 versus 26% in Q1 last year.

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

Thank you, Safra.

I am going to talk about Exadata.

Again, I said last quarter that Exadata is shaping up to be our most exciting and successful new product introduction in Oracle's 30-year history, and last quarter Exadata continues to grow and win competitive deals in the marketplace against our three primary competitors.

It's turning out that Teradata is our number one competitor in terms of facing them in the marketplace, Netezza and IBM are kind of tied for second.

And typically IBM DB-2 on mainframes.

We are very successful in a couple of different smart phone manufacturers, a well known in California, smart phone and computer manufacturer actually bought two of our systems and their comments to our database machines, and that was against Netezza, and their comment was it ran about 100 times faster in some cases than their standard Oracle environment.

That's very exciting.

Another smart phone manufacturer in Canada, in this case Research in Motino tested our database machine and bought it.

In the marketplace again discovering after trying it and benchmarking it that it was dramatically faster than their existing environment and faster than any of the other database machines that they experimented with.

Amtrak bought two full systems.

Their largest insurance companies, one of Teradata's largest customers bought the Exadata machine.

Thomson/Reuters, a large committed DB2 main frame customer is -- they are moving some of their applications off the IBM main frame and DB2 on to Exadata.

The largest Teradata customer in Japan, a relatively new telephone company in Japan, and they are the biggest Teradata customer in Japan and they benchmarked Exadata and found it to be dramatically faster than Teradata and they are moving their application from Teradata on to Exadata.

We've been successful in Korea, throughout Asia Pacific, the (inaudible) capital in the UK.

another very large Teradata customer is buying Exadata.

A number of banks in Western Europe, in Germany, again they are also buying Exadata machines.

It's just a great quarter for Exadata, a product that is relatively new to the marketplace but it's persuading people to move from their existing environment because Exadata is faster and the hardware costs less.

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

Thanks, Larry.

The Oracle field did a great job of staying focused during the quarter and not getting too distracted with all the noise in the economy and I'm proud of the great team work.

We pulled together multi product fields across multiple business units to leverage our unique product brand.

Our diversity by product, by industry and by geography is clearly helping us.

It's clear that cost pressures and increasing complexity are all catalysts right now causing customers to adopt preintegrated products and move away from B-Spoke environments.

So given that direction, we are in a good position and our pipelines are growing faster than our reported revenue.

We've been working hard to stay close to customers and we are becoming a lot more important to those customers as our product line grows.

So the Sun acquisition is a continuation of that strategy and we've had very positive response from lots of customers and because they know we will make it all work together at the factory and will lower their cost and if Exadata is any indication of what can happen when you optimize hardware and software together, they are pretty excited.

So let me make a few comments by product line

In the database area we have key wins as usual with 711.

We purchased Database Vault the University of Illinois, Baker Hughes underneath SAP, the state university of New York, Sunni, China Telecom, State Street standardized on us for all their mission critical applications and Lockheed Martin.

We continue to report record benchmarks as well, I won't go through them all, but currently we hold the top five benchmark positions in the TPCC price performance category.

So we haven't forgotten about that at all.

Moving onto middleware.

Middleware has been the star all year long.

We hope that to continue.

We are rolling our a major new release next week called Fusion middleware 11g.

We'll launch that in Washington, D.C.

and eight other cities around the world and then we'll follow on with a tour at 107 cities.

It's a long list of features that I won't go through right now.

We are also getting lots of support from partners on our Middleware.

So if you look at systems integrators we have about 35,000 consultants that are trained in 50 countries.

Another 5,000 just in Q4 alone.

Same thing with ISVs we have about 5,000 who are certified on Middleware.

We added 43 in the quarter and 100 new applications.

So some examples of good wins in the quarter, Wells Fargo.

They have started on a path with Open Source on the application server.

They switched to WebLogic and several other products who ended up signing a yearly with them during the quarter.

They like the integration and the performance we can deliver.

Other customers include Adidas, TD Ameritrade, Credit Suisse and Intuit.

We have some BA customers who previously were BA customers who expanded into other parts of the Fusion middleware suite that includes Costco, Comcast and Ericsson.

We had some key IBM accounts that used to be WebSphere customers who we've now penetrated including Visa and the State of South Dakota.

On the BI side we had some good wins against Cognos and SAP, American Express, Southwest Airlines, QVC, Capital One and Norfolk Southern.

And then in EPM, which is the Hyperion product line we had good wins at Wal-Mart, Abbott Labs and Kroger.

Switching to the applications business, if you look at our applications integration architecture, we shipped three new process integration packets in the quarter.

That's totaling 20 PIPs as we call them.

Customers see the value of the standard space integration and the more we ship the more integrated the product line becomes.

We're also seeing good (inaudible) trends, so if you look at E Business Suite version 12, we now have about 26% of our customers who already upgraded.

So some key wins in the quarter.

VodaFone, they chose Oracle to consolidate and standardize its IT infrastructure across Europe.

So they've adopted a Oracle first strategy for all their new applications replacing competitive products over time.

This is a very good model for all the European companies who tend to be decentralized and were encouraged by this important win.

E-bay, Lazy Boy, Gap, other additional European wins in the quarter.

Our supply chain we had wins at Johnson and Johnson, Virgin Media, APL Logistics, Allogance SAP.

In retail we won Perry Ellis, that was an important win where we had point of sale applications in 55 stores.

We had the (inaudible) underneath that.

They will be adding more stores over time and they are hosting customers as they did this past quarter at their original stores in New York City.

They had some 20 international customers, they had to show them what they're doing.

Financial Services GBU had a strong quarter despite the environment, strong double digit growth.

They're finding healthy banks around the world outside of the US and diversifying geographically.

For instance National Bank of Egypt which is responsible for about 24% of the Egyptian banking market.

They won that in the quarter.

That brings us to having about 70% of the Egyptian banking market.

Also an important quarter, Oracle and Accenture intend to jointly develop, market and sell a new Bank in a Box solution based on Oracle, Siebel, TextCube and PC middleware products.

This is a big win for us.

If you remember, Accenture went with SAP in banking about five years ago and pretty much got nowhere with that so they are back to Oracle now.

We are encouraged by that win.

Finally in tax and utilities CBU, up over 20% in the quarter.

Some important wins at Dayton Power and Light, San Diego Gas and Electric and we also had a good CRM On Demand win.

So CRM On Demand was a very good story all year long.

We added more subscribers in Q4 than we did all last year.

Good wins at NetApp, McAfee, where we replaced Salesforce.com, also replaced DB2 there, by the way, Land of Lakes, and Conoco.

Linix, we had some good wins at TIAA-CREF, Rent-A-Center, and US Mint.

So with that I'll turn it back over.

Operator, we'll now take questions from the audience.

(Operator Instructions).

We'll go to Adam Holt with Morgan Stanley.

Understanding that your fourth quarter had some unique attributes, did you see any signals in the quarter that would suggest that you saw stability in any end markets or any particular verticals and maybe talk a little bit about what the assumptions are underpinning the guide for the Q1 with respect to any kind of improvement and then I guess more longer term, as we think about recovery scenario where would you expect to see the first signs of reacceleration across your product lines?

Why don't you take the first half of that and maybe I'll talk about the guidance.

The verticals for Q4 had strong double digit growth.

So that's been helping us obviously getting new design wins and vertical applications and then the drag factor, we get that when we often get some of the ERP, usually PRM and certainly and we'll get the text underneath that.

So that's been an important differentiator for us that SAP simply doesn't have.

In the few areas where they tried to go to verticals like banking I described, it didn't quite work out.

We have the partners coming to us now.

In regards to guidance, I'll have to tell you that our pipeline continue to grow really very well.

I think that what we definitely saw that our customers are realizing that business does have to continue and go forward.

Now, as you know, we have (inaudible) kept Company specific momentum that we've been able to push through the economic situation rather well, and I'd have to tell you that I still see the pipeline growing rather significantly.

So in this case I used unusually conservative close rate for Q1 to just keep a level of conservatism in our fiscal Q1.

It is Q1.

It is always a tricky quarter and we have a very difficult comparison as to Q1 of last year.

So that's where we use underpinning for the guidance.

Terrific.

Thank you.

Next is Sarah Friar with Goldman Sachs.

Thanks very much for taking my questions as well.

On the margins you set yourself a target way back when of 50% type margin and clearly this quarter you tipped over even that high bar.

As you look forward into next fiscal year, is there still an ability to see margin expansion from here, or as the economy hopefully begins to recover is there any reason to say that you start to reinvest a little in the business and maybe stop some of this big march forward on the operating margin side?

Sarah, the reality is that the margin story really has to do with the fact that we have enormous installed base of customers that renews their agreements with us every year and the bigger that number becomes, that's really the main issue.

We continue to invest aggressively at Oracle.

We are up to $3 billion a year in R&D alone, really outshining all of our competitors, and we continue to invest.

We are not a cost cutting story from margin.

We really are a profitability story as a result of having such a large installed base of existing customers and as that installed base grows which obviously continues to grow year after year, obviously operating margins will continue to go up.

Obviously the Sun acquisition will change the margin story for a while, but it will improve also over time.

Got it.

If I could just follow-up on Adam's question, on EMEA, EMEA definitely came in much stronger than I think any of us would have expected and we've been viewing that as much more of a lagging economy versus the US.

Is that different for you folks when you think about maybe share gains that you're seeing there or is your expectation that EMEA is still in slow down mode and maybe the US starts to pick up in the balance?

It shifts around by quarter and obviously we were pleased with EMEA's performance.

Having said that I am a little bit encouraged by the pipeline growth in the US.

So just seems like our mix of products and industry and geography, somehow we get there every quarter and we are encouraged by what we are seeing.

So you're not particularly worried that EMEA is maybe slowing more so and that it's just a lag on what you saw this quarter?

Anything can happen obviously and I don't want to mislead you.

It's tough out there but nonetheless we had a great team on the ground and executed well in EMEA and so I do think we were different from everyone else over there.

Great.

Thanks very much.

We'll go to John DiFucci with JPMorgan.

Larry you talked a lot about Exadata and I wanted to clarify that all of those deals you were talking about were actual sales or most of them are sales, are they still in the pilot phase at this time?

And then on the product side and on the development of new products, there is a couple out there that we had heard about along the way and I think they actually have the opportunity to sort of change the landscape out there and I was just wondering if you can just bring us up to speed on both automated storage management, which is a database option, but also before you bought BEA they had a product called WebLogic virtual edition which worked right on a hypervisor and there was no need for an OS throughout the whole stack which I thought it was really interesting.

We haven't heard about that in a while.

If you can just comment on those.

ASM is actually an integral part of Exadata.

We use the automated storage management feature which is an option on the conventional database is a standard feature.

It is always turned on with Exadata.

By the way, every customer I mentioned and alluded to were actual sales.

Now some of these, because the Exadata product is so new quite often will install it on a trial and buy situation but I can't think of a case where we installed a machine and they didn't buy.

So we are winning these benchmarks, sometimes we're beating Teradata, I think I put it that we beat Teradata on one of the queries by 20 to 1.

So we think -- it's a brand new technology.

We think we are a lot faster than the competition.

The benchmarks are proving out with real customer data.

We're proving to be much faster than the competition, every single deal I mentioned were cases where the customer bought the system.

There are obviously other evaluations going on and we've got a bit of the sales to accelerate.

In terms of the BEA product you mentioned, their JVM, their Java Virtual Machine is running directly on the hypervisor on the virtual -- without the overhead of an operating system.

That gives us 10 or 15% performance improvement.

Well, that's nice, that's important and we go for every single percent we can find.

That's a very different from the Exadata database machine when we were looking for 10, 20, 50, even 100 time performance improvement by going to radical new technology.

Much more -- many more, CPUs thrown at the problem, huge number of Infiniband connections thrown at the problem, large memory caches and you will see us continue to advance Exadata with flash memory and other things.

We are looking for order of magnitude improvement versus a few percent here and there.

Okay.

Thanks.

I know you are not going to talk about acquisitions that haven't closed yet but Virtual Ion, I don't think that's closed yet but is that an opportunity to even work more closely on trying to press the technology the BEA product that you mentioned?

I can even envision even putting a database on there with no operating system or no operating system as we know it and it seems like it's another opportunity for Oracle through internal development to sort of change the landscape out there.

We are looking at that.

In fact we have the Oracle database running directly on -- with no intermediate operating system.

So that's actually up and running, so it's an opportunity to continue to improve our performance.

Our goal as you know is to deliver a complete stack from the virtual machine to the operating system.

We've been involved with VM, with Zen an Zen derivatives, with the Linux OS, obviously the Oracle database, middleware and applications.

So our intent is to provide a complete and integrated stack and then be able to tune up and down and of course, with the Sun acquisition actually get down in to the hardware.

Where Exadata is really our first experiment in that area, it's going very well.

Thanks.

Next to Brent Thill, Citi.

Thanks.

Good afternoon.

Charles, you mentioned your pipeline is growing faster than reported revenues.

Was that a pick up in Q4, or did you see a similar trend throughout the year on the pipeline and if you can just tie that, do you think the worse is now behind us and now you are seeing the environment now slowly improving?

It's hard to call the environment.

I don't want to go on a limb and do that.

But I will say that conversations back in the January, February, people couldn't focus.

They were still worried about the economic news.

Even if they had budgets they just didn't feel good about spending money back then.

So it doesn't feel that way any more.

The sense of panic of just being frozen, deer in a headlights feeling.

But nonetheless everybody is still under cost pressures going forward.

The pipelines did improve.

They've been growing all year long but they've grown a little bit more in the last 90 days.

That might be an indication of people getting back to work but it's hard to call.

So your close rates were a little bit better than you anticipated?

Not sure if better than we anticipated.

Slightly better I would say.

Safra?

Yes.

They were.

They were better than I guided for.

A quick follow-up for Larry.

On the on demand business, you are now $0.75 billion business, can you just outline your long term goals for the business?

Well, we think we can be very competitive against salesforce.com in sales on demand.

We think virtually every time we compete with them on the large deal with large customers, we win.

And in some cases we even replace them.

So we think we can be the number one supplier of on demand software in that particular space.

And then of course we are going into other spaces as well.

Our fusion applications, which we haven't talked about yet, which came out -- we are code complete on fusion application.

We'll be announcing them later this year.

Customers are trying them out and we'll start delivering next year.

All of our fusion applications are on demand ready.

They are designed to be not only on premise but ground up designed to be a software to service.

So we see all of our application software not just Salesforce automation but all of our application software going forward being sold in two ways, both on demand software to service and on premise with the same code base and we think we can be the number one applications Company, the number one on premise application Company and the number one on demand application Company.

That's our goal.

Thank you.

We'll go next to Brendan Barnicle, Pacific Crest.

You guys typically have a salesforce reorg in the first quarter.

Can you provide any color on the size and timing of that, any difference between this year than last years?

We've tried to get out of those big bang reorgs so we haven't really done that in several years.

We make small tweaks throughout the year and small changes in quotas each year but we are not doing any wholesale reorg as we go into this fiscal year.

Terrific.

And then just over on the federal government, we heard about potential for some federal government budget slashes at the end of the calendar third quarter.

I know it's a relative small vertical besides Oracle now.

But is that something you are expecting to see much of the benefit from as (inaudible) fiscal second quarter?

Our government business has done well.

I don't know if I'd call it budget plus but they do have money, and it's been doing well the last couple of quarters.

I would expect that to continue given the environment.

Thanks a lot.

(Operator Instructions).

We'll ll go next to Kash Rangan with Merrill Lynch.

Thank you very much.

Charles, if I could get your take on how the customer environment feels like, would you say that budgets are starting to free up as you get into the second half of the year after having gone through some troubling times in the first half of the year?

And I have a follow-up as well.

I talked to a group of CIOs on this just last week, it's difficult to say.

I would say they didn't spend as aggressively in the first half because they were kind of in a wait and see mode.

They have budgets.

hey may not have been what they obviously wanted a year ago, what they expected in December, but they have budgets and it's going to be more back end loaded if they choose to spend.

So most of them sounded like they wanted to start moving ahead the second half of the year but we'll see what they do.

And also, Larry, I think you mentioned on premise and on demand more delivering the Fusion application.

That's actually very interesting.

Does it open up another subscription type of a business model in your P&L?

Should we think about a different way in which the application license revenue would be reported going forward that you have a license stream and a subscription revenue stream going forward?

Yes.

Again I think, again, our subscription on demand application business is much smaller than our on premise application business, but it's growing faster.

So I think you'll see a very gradual shift over a period of a decade.

Even if the largest on demand software company in the world, is Salesforce.com and they're only $1 billion and we are probably the second largest on demand software Company.

But that on demand portion or software to service portion is still significantly small than our on premise business.

But we expect the on demand to go somewhat faster than the on premise business and so I wanted to make sure.

It is going to be ERP, supply chain, CRM, procurement, everything, HR, everything on demand.

In other words, as a multi (inaudible) service from your data centers to add to the subscription model, right?

Absolutely.

But it's not necessarily.

The interesting thing is it's not necessarily from our data center.

We have three models.

One is, we have on premise where you run it.

We have on demand in our data center.

I should say on premise in your data center where you run.

We have on demand in our data center where we run it but then there's an on demand in your data center where we run it.

So the computer is actually on your floor behind your firewall, attached to your very fast local area network, but we provide all the services and we think that's where the real value is and we think that is the interesting model.

It's the model that Salesforce.com does not offer.

It's a single tendancy, on demand model with a computer on your data center, highly secure, highly performance, but we provide all the upgrade services and we administer the application.

That's proven to be a significant differentiator between us and Salesforce and it's what is allowing us to win every large deal we do against them.

Okay.

It sounds like you're getting into Cloud computing then?

Little bit.

Thanks.

Ladies and gentlemen, this concludes today's question-and-answer .

For closing remarks I'll turn the conference back to

Thank you operator.

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Thank you.

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

You may disconnect at this time.