甲骨文 (ORCL) 2010 Q2 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 would like to introduce Ken Bond, Vice President of Investor Relations of Oracle.

Please go ahead, sir.

Thank you, Darren.

Good afternoon, everyone, and welcome to Oracle's second quarter fiscal-year 2010 earnings conference call.

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

As a reminder today's discussion will include forward-looking statements, including 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, 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.

We would encourage you to review our most-recent reports on Form 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.

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

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.

A copy of the press release and financial tables, which include 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 Q2 fiscal-year 2010 results.

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

Thank you, Ken.

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

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

First, a note about foreign exchange rate movements.

In September we told you that using then-current exchange rates would increase our Q2 revenue growth by four points compared to constant currency.

During the second quarter the US dollar weakened compared to last Q2, increasing our international revenues, expenses and profits when measured in US dollars.

As a result, currency movements increased new license revenues by 7%, total revenues by 5%, net income by 7%, and earnings per share by 7%, or $0.02 per share compared to Q2 of last year.

Now, let's review the income statement.

In the second quarter our new software license revenues were $1.7 billion, down 5% in constant currency and up 2% in US dollars.

The Americas grew 1%, EMEA was down 11% and Asia declined 8%.

Technology new license revenues were $1.2 billion, down 5% in constant currency and up 1% in US dollars.

The Americas grew 2%, EMEA was down 10% and Asia declined 10%.

Applications new license revenues were $478 million, down 3% from last year on a constant currency basis and up 2% in US dollars.

The Americas grew 1%, EMEA was down 14% and Asia was up 2%.

Our software license updates and product support revenues were $3.3 billion, up 7% in constant currency and up 11% in US dollars.

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

Our services revenues were $958 million, down 19% in constant currency and down 15% in US dollars.

Our total revenues were $5.9 billion, down 2% in constant currency and up 3% in US dollars.

Operating income was $2.9 billion, up 3% in constant currency and up 9% in US dollars.

Our non-GAAP operating margin grew by 280-basis points to 49% in US dollars.

This is the highest Q2 operating margin in Oracle's history as a public company and further demonstrates the success of our operating model.

Our tax rate for Q2 was 27.4%.

Our Q2 non-GAAP earnings per share were $0.39, $0.03 above the high end of our EPS guidance range of $0.35 to $0.36.

This was up 8% in constant currency and up 15% in US dollars.

Our non-GAAP earnings per share would have been $0.02 lower had foreign exchange rates remained the same as they were in Q2 of last year.

In Q2, we repurchased 11.6 million shares at an average price of $21.65 per share for a total of $253 million.

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

Turning to the balance sheet, we have $20.8 billion in cash and investments, including funds put aside to complete the Sun transaction once all necessary approvals have been obtained.

Our day sales outstanding improved again this quarter from 52 days last year to 47 days this year, a testament to the quality of our receivables, the quality of our customers, and the effectiveness of our collection efforts.

We generated $8.4 billion in free cash flow during the last four quarters, growing 11% over the same period last year.

This is the highest Q2 free cash flow results in Oracle history.

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

Thanks, Jeff.

As you can see, we had another excellent quarter and we delivered these results against a big Q2 last year.

We exceeded the high point of our new license guidance, we beat the high end of our total revenue guidance, we beat the high end of our EPS guidance by a full $0.03 and, of course, we delivered the highest Q2 operating margins in our history, substantially higher than all our peers.

The strengthen the quarter was very broad based across all product lines and as usual, the quarter was not dependent upon any unusually large deals.

Once again, we grew faster than SAP in every region around the world, clearly taking market share as they have essentially come apart at the seams.

Our applications business is growing while their's continues to shrink at a double-digit pace.

Let me turn for a moment to our acquisition of Sun Microsystems and though most of today's call is about Oracle standalone, I will make just a couple of comments about Sun.

As you heard earlier this week, we expect a full and unconditional clearance from the European Commission in January.

I want to thank all of our customers for the overwhelming support they have given us during this process.

I want to especially thank the hundreds of customers who shared their views with the European Commission and the many customers and user groups who volunteered to attend the oral hearing last week, and especially those who ultimately came to testify, including the UK Atomic Weapons Establishment, Ericsson, Vodafone, BBVA, Sabre Holdings, [Polyo], Carnegie Melon University, the UK Department of Health National Health Services and the independent and UK user groups.

In addition, I want to thank the over 60 United States senators who recognize the importance of this matter and the United States Department of Justice who shared their views with the European Commission.

Last but not least, I want to thank Oracle's and Sun's employees and especially the transaction teams, including our tireless advisors on the ground for getting this to a just result.

My guidance today does not include any assumptions from our pending acquisition of Sun Microsystems.

We do still expect that Sun will contribute $1.5 billion in non-GAAP operating income in our first full fiscal year of owning Sun.

After we close the transaction we will share our detailed guidance with you as soon as we can.

Now, let me turn to the guidance without Sun for now.

We believe the guidance I'm giving today is realistic.

I want to emphasize that our pipelines continue to be very strong and the close rates I'm assuming are more conservative than typical Q3 close rates.

For the coming quarter, assuming that exchange rates remain at current levels, we expect there to be an almost 8% positive currency effect on license growth rates and an almost 7% effect on total revenue growth rates but, of course, that is likely to change.

With that, our guidance for Q3 is as follows.

New software license revenue growth is expected to range from negative 1% to 9% at current exchange rates and negative 8% to 2% in constant currency.

Total revenue growth on a non-GAAP basis is expected to range from positive 3% to positive 6% at current exchange rates and negative 3% to flat in constant currency.

On a GAAP basis we expect total revenue from positive 4% to positive 7% at current exchange rates and negative 2% to positive 1% in constant currency.

Non-GAAP EPS is expected to be $0.36 to $0.38, assuming current exchange rates, up from $0.35 last year and from $0.33 to $0.35 in constant currency.

GAAP EPS for the third quarter is expected to be $0.26 to $0.28 using current exchange rates and $0.23 to $0.25 assuming constant currency.

This guidance assumes a non-GAAP tax rate of 28% for Q3 versus 26.6% in Q3 last year.

The GAAP tax rate is expected to be 29.3%.

The Board again declared a dividend of $0.05 per share.

We generated $8.7 billion in operating cash flow over the last 12 months and we are running the business at record margins.

We look forward to the completion of the Sun acquisition in January.

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

Thanks, Safra.

Just a few comments on customers, but first also wanted to recognize the field organization for doing a great job, all their regions and the GBUs and supporting organizations because customers are holding on to their dollars a little tighter these days as these deals are very complex and they don't happen without people really fighting for them, so these guys walk through walls and got a good result.

By product area, database, Exadata is on fire, nearly tripled sequentially.

The pipelines are growing week to week.

We're now having some of the initial customers come back and ask for multiple systems, which is always a good sign.

The main constraint we have now is just production capacity and the field is fighting for them in each region, so it's a red hot product and we expect that to continue to have momentum going forward.

Some key regular database wins in the quarter, [GMAX standardized] on Oracle database, US Airways, ULA for database, rack and partitioning.

We also had an important release in the quarter that I should mention.

A new release of Oracle Database Vault.

Options generally did well in the quarter.

I think this is important to Option because this is the product that separates administrative rights from security rights in the database and now it's been certified for SAP, so SAP support is now available and that's a big market and we expect that to do well.

In the area of Middleware we had some wins over Microsoft Sharepoint using our product WebCenter.

We won and beat them at Bank of Baroda in India and McGill University.

On our (inaudible) platform, National Australia Bank standardized on our Storage suite -- that was a win over TIPCO.

We had a little bit of an edge there since we're already rolling out FLEXCUBE, our core banking product, for integration.

After a 12-week proof-of-concept they selected us, as well.

Business Intelligence, CIBC Bank selected us over Cognos and Gilead Science used our Dashboards with JD Edwards that they already have installed, so we're seeing the uptake of DI Dashboards that are customized for our applications start to take off, as well.

In the area of EPM, good wins at Constellation Brands and Kimberly Clark.

Identity Management we had an interesting win at the California Employment and Development Department and they're going to use our Identity Management platform to identify constituencies that both take state unemployment and disability insurance and bring those agencies together using our IDM.

Applications, we had another release of AIA, our integration architecture platform.

That was released 2.5 with 10 new cross-industry process integration packs, or PIPs, and six new industry-specific PIPS, and now we have about 1,000 enterprise services and 100 enterprise objects and that integration between all of our applications was instrumental in winning at Agilisys and New York State Insurance Fund.

In ERP a good win at Pennsylvania State System of Higher Education across 14 individual universities.

We beat SAP there using PeopleSoft Student Administration.

In CRM had good wins at Woolworth, Capital One Services and Cummings.

Demantra Value Chain Planning we had good winnings at Land O'Lakes, Ingersoll Rand and Darden Restaurants.

Retail Merchandising was installed at Rightmans, and then General Electric Oil & Gas selected Primavera, our Project Management platform, as a standard.

We're also moving into a new market.

We recently bought a company called Sophoi, which has digital rights management to sell our communications.

The business unit has that product and was able to now deal and track for intellectual properties of content online, so we had a win at Lexis-Nexis based on that platform.

Kind of an incremental market they have to track digital rights and then bill for it.

They also wanted Aircel.

And then lastly, a couple wins to mention.

Marsh selected us as insurance for a new policy administration system and Parexel for Oracle Safety, to manage their safety and pharma due diligence process.

Those are my comments, thanks.

Larry?

Thank you, Charles.

Since we're getting closer to closing the Sun deal, I'm going to talk a little bit about our strategy with Sun going forward, what we're not going to do and what we are going to do.

One thing we recognize that Sun just really -- really does not now and it's never likely to have the volume to compete in the high-volume, low-margin business of just selling an Intel server with Windows on it, or Linux on it one at a time.

We think that high-volume, low-margin business is a good business as long as you have high volume, and that's something that Dell and HP isn't very good at and we're going to avoid that business.

Instead, we are pursuing the high-value, high-performance market; very large SMP machines like the SPARC Solaris M9000, which we will continue to enhance.

We're putting -- the Solaris has the new splash cash feature that allows the M9000 to run the Oracle database very, very, very fast.

But we'll not only be focused on SMP machines, which have been around for a long time, though we think the SMP machines are best-in-class.

we're also going to be building clusters of industry-standard machines and SPARC machines, and those clusters are now called private clouds, that's the more fashionable term for clusters.

And we're using our software -- our operating systems both Solaris and Oracle Enterprise Linux, our virtualization, the ability to dynamically allocate and deallocate resources, which is essential for cloud computing, as well as integrated networking and integrated storage to deliver a complete private cloud to our customers.

So customers will be able to buy high-end SMP machines, high performance, high value, or high-end private clouds with all of the pieces including processing of storage and networking, integrated together with Oracle/Sun software.

We think that will heavily differentiate our offerings with the offerings of IBM, HP, and Dell.

And we think we're going to be able to compete very effectively there and that will deliver high margins and will allow us to deliver that $1.5 billion of additional profit in our first full year of owning Sun.

With that, I guess we're ready to open it up for questions.

Operator, we'll take questions now, please.

Thank you.

(Operator Instructions).

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

Good afternoon and congratulations on the quarter.

Thank you.

My question is about the database business.

We saw a relatively-material sequential improvement in the growth rates.

Could you talk a little bit about the drivers of that improvement in the quarter and, in particular, touch on ELA renewals and also some of the recent product cycles, specifically the Middleware release and the impact of that release on the reaccelerating growth in the database business?

I'll make a few comments.

I think on the database business people had been putting off some of those ELA decisions and behind on (inaudible) with us on some of those contracts.

That happened during the downturn and now some of that's starting to come back.

I also think some of the initial work we did on 11g to get the ISVs on board, it takes a little while but that's kicking in, as well.

So we feel pretty good about the database business and obviously Exadata's helping drive some of that, as well.

Terrific, thank you.

And we'll go next to Sarah Friar with Goldman Sachs.

Terrific, thanks a lot.

Can you talk about linearity in the quarter, specifically did you see a recovery throughout the quarter and hence do you feel like you're entering this February quarter with an ongoing acceleration in spending?

And then just very briefly on Europe, could you talk a little bit about what the lag is to the US that you're seeing?

I'd say this quarter looks more typical as recent quarters, I guess, and wasn't anymore back-end loaded.

I think the other thing to note (inaudible) is the current quarter started off in pretty good shape.

We always have some deals that spill over but a little more pronounced this quarter, so just based on the last month or so it certainly feels better but it doesn't matter until we close it all at the end.

I'm sorry, what was your second question?

Just on Europe.

Seems like it's lagging the US by a quarter or two, is there any reason why it would lag by more or less than that based on what you're seeing over there right now?

That actually has always been the pattern, so they tend to turn down six months later and then takes another six months when the recovery happens, as well.

Things happen more slowly there.

Customers don't react quite as well, they aren't as centralized in their decision making so that doesn't surprise me at all.

Okay, great.

Thank you very much.

Next question?

We'll go next to John DiFucci with JPMorgan.

Thank you.

My question has to do with the macro environment.

You put up numbers here in this quarter that were obviously better than we anticipated and you, too, and also you gave guidance here that actually looks pretty good, better than I think we anticipated out there -- out here.

Just curious, is there truly a recovery happening in a meaningful way, or is Oracle -- I'm trying to get a gauge as to whether or not what's happening out there has more to do with Oracle's execution, which is, at least over the last several years, been head and shoulders above many of your competitors, or is this a rising tide that may be lifting all ships, at least in this quarter and into the near future?

Well, from where we sit it's very hard to tell.

Obviously, we are definitely seeing customers back buying and was extremely widespread.

No giant deals of any sort, but lots of very nice size transactions for every size of company, so we are really seeing a recovery.

Now, it is true that our execution -- our teams are doing very, very well, the products are very, very, very strong, and so I think what's happening is we are clearly winning at the expense of others, but we do also see the environment significantly improving.

Okay, so it sounds like it's a little bit of both.

Thank you.

We'll take our next question from Heather Bellini from ISI Group.

Hi, I had a follow up on John's question.

Just was wondering, you've been talking about how your pipeline's been getting bigger and bigger and after last quarter, I would imagine what you guys said the same thing.

I guess what I'm wondering is -- a little bit to John's question -- in terms of close rates are we starting to see close rates improve and the predictive CIOs willing to spend their budget improve, or is the upside this quarter the fact that after last quarter your pipeline was maybe a little bit bigger than you thought it was going to be and therefore you just hit your close rate target?

It's a little of both but we did better than the close rates I expected and -- but I still wanted to lean to a more conservative close rate for where we're at.

The economy is uneven maybe and we just can't tell what's going to happen going forward, so I continue to use a very low close rate and I expect us to be at least there.

But our pipelines are really growing and there's an enormous amount of heat around the Exadata products, which are also both database and storage software, so they're very -- there's really a lot of good news on the whole product line, which is one of the reasons the pipelines are as they are.

Charles, do you want to add anything to that?

Yes, the close rates normally in Q3 are a little bit less than Q2 so we planned accordingly, so we haven't assumed anything heroic and if we do better we do better.

But the pipelines are growing in each region and certainly the tone on the forecast calls is a little bit better than it was three months ago.

Great.

Thank you very much and congratulations.

Thank you.

We'll go next to Israel Hernandez with Barclays Capital.

Good afternoon, everyone, and congratulations.

A quick question on the vertical market performance.

Were there any particular stand outs during the quarter, did that vary at all by region, and are there any verticals that are seemingly lagging relative to the others?

I would say communications had a good quarter, what they normally do, and it's certainly producing a nice pipeline, I would say there's a good pipeline for financial services.

The banks stepped back for a while, but based on the pipeline that I've seen and what's already closing the first few weeks of the quarter even the banks seem to be coming back.

And so it's uneven because I would say retail probably had a tough time six months ago but their pipeline has come back, as well, and they closed the deal already in the first few weeks of this quarter for a fairly sizeable one.

So it certainly -- if that's any indication the first -- how the first few weeks are going they look better.

Okay, thank you.

We'll go next to Brent Thill with UBS.

Thanks, good afternoon.

The maintenance business snapped back pretty nice, you saw accelerating growth rates in the second quarter.

Can you just walk us through what you're thinking about for the second half for the maintenance business?

And if I could just ask Larry and Charles a question on Exadata.

I think you'd mentioned, Charles, that you're somewhat capacity constrained.

Can you give us a sense of just how big you think this business could be?

I know you're not going to give us exact numbers, but anyway you can shape this business, or more metrics that you think you'll give us going forward that'd be great.

Larry, I think that one's for you.

Okay.

Well, we think the Exadata business is going to be huge; by huge, billions of dollars a year in new system sales, not including the maintenance on those systems.

Now how long it takes us to get there remains to be seen.

But our overall view of the computer industry is we have been selling components to large customers and the components have been hiring system integrators to glue those components together into complete systems.

Our overall strategy right now going forward, as I mentioned earl -- in the preamble to your question, is to not to sell these individual industry standard components on their own but rather group them together into machines.

like Exadata, where we have processors, networking, storage, storage software, database software, our Oracle Enterprise Linux operating system, all as a complete database machine for both transaction processing and data warehousing.

We think that makes it much easier for the customer.

They don't have to do all of the system integration, they don't have to buy a bunch of parts and glue them together, but instead they buy the box, it's a high-margin product for us and a high-value purchase for them because they don't have to spend a lot of money on system integration.

We think that's the way customers are going to go forward as they build their data centers, not buying components but buying systems like Exadata.

And one of the big reasons we bought Sun is that we wanted to apply that same strategy to Middleware, to applications, to the operating system itself, but we're not going to sell operating systems just for an individual computer but we're going to sell the next generation of Solaris.

There's a cloud edition for Solaris, whereas it manages a group, a cloud, a cluster of these computers that we sell together as a unit.

That's highly differentiated.

High margin for us and no systems integration required for the customer.

How big is that business?

We think that's what the computer business is going to look like for large customers going forward, so we think that's billions and billions of dollars.

That is our business in the future.

Regarding your maintenance question, our software updates and support, obviously that is really our subscribers.

Those are our users and they're paying for both support and the right to receive without buying a new -- the new licenses our new products, and that's a number that's always going to go up because customers feel they're getting fantastic value for it.

And the second half of the year, frankly, there's no point in going into too much detail on any of the numbers because within the month, frankly, we'll be giving you new guidance that will include the software parts and, of course, the hardware parts from Sun Microsystems, so all of you are going to have to redo all of your models at this point.

But you should expect -- maintenance for us is really who our customers are and they're renewing at record rates because they're very satisfied with our products and we're advancing them just so quickly right now.

That's it.

Operator, if we could take one last question, please.

Certainly.

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

Hi, thank you very much.

Larry, it's good to hear you talking about cloud computing, way to go, but my question was really on Fusion applications slated for some time in 2010, please.

I know the management team talked and demoed the apps at the user conference, it looked really good.

I was wondering if you have given more thought to how the applications market landscape in the several years might be disrupted, or maybe it's not all that disrupted, How do you look at this applications industry over the next few years and what kind of [opportunities for this Fusion] applications open up for you?

Thanks.

Thanks, Kash.

I think the big thing for us is we designed Fusion application as components .

it's got a service-oriented architecture and it's componentized and things like order orchestration could be delivered to a customer.

I'll take my favorite example, Hewlett Packard, which has a lot of order -- it takes orders a lot of places in their company and we can coordinate those orders and then deliver them to the different fulfillment centers inside of Hewlett Packard.

So all of our Fusion apps are componentized and so it's not a rip-and-replace sales strategy that we have with Fusion.

We can go in and we can sell you a lot of point solutions, we can sell you a specific application, like order orchestration that integrates with your SAP -- or your existing SAP systems and your existing Oracle systems.

(inaudible) to JD Edwards systems, your additional PeopleSoft systems, so we can do a complete replacement over time and that's our plan but that's going to be a long period of time for a lone company.

We want them to start with some of the Fusion components, like order orchestration, like some of our interesting HR instead of Management systems.

We've got a long list of things, and they'll buy them a piece at a time but they're designed to be easily integrated with what they already have.

We think that's going to allow us to sell Fusion aggressively out of the box and increase our share as compared with SAP over time.

Okay, that's then end of my question -- my

Operator?

This does conclude the question-and-answer session.

We'll now turn the call over to Ken Bond for any additional or closing remarks.

Thank you.

A telephonic replay of this conference call will be available for 24 hours.

The replay number is 888-203-1112 or 719-457-0820 and the passcode is 7845753.

Also a webcast replay will be available through the close of market on December 28th and can be found on our website at www.oracle.com/investor.

Please call the investor relations department with any follow-up questions from this call and we look forward to speaking with you.

Thank you all for joining us today on today's conference call and with that I'll turn the call back to the operator for closing.

This does conclude today's conference.

We thank you for your participation.