甲骨文 (ORCL) 2010 Q3 法說會逐字稿

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

Today's call is being recorded.

And at this time, I would like to introduce Ken Bond, Vice President of Investor Relations.

Please go ahead, sir.

Thank you, Kevin.

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

I'm Ken Bond, Vice President, Investor Relations.

And with us on the call today are Chief Executive Officer, Larry Ellison, and President, Safra Catz, President, Charles Phillips, and 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 encourage you to review our most recent report 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.

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 results.

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 the call with a few prepared remarks, before taking questions from the audience.

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

Jeff?

Thank you, Ken.

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

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

But first, a comment about foreign exchange rate movements.

Excluding Sun, the actual currency benefit we saw this quarter was less than our guidance by approximately 2%, for both new license revenue and total revenue.

However, even with currency tail wind being less than anticipated, we were able to drive solid results this quarter, as we beat our new license revenue guidance, beat our total revenue guidance, and we're at the high end of the EPS range with record Q3 earnings per share.

Q3 was a solid quarter.

Before reviewing our income statement, I would like to remind everyone that our guidance last quarter excluded Sun.

In discussing revenue, I will provide revenue results as reported, and for some key growth rates, I will exclude Sun revenue to align the results to our guidance from the last quarter.

In the third quarter, our new software license revenues were $1.7 billion, including $46 million from Sun.

New software license revenues were up 13%, and up 10% excluding Sun.

This 10% growth beat the high end of our guidance range calling for 9% growth.

The Americas grew 22%, EMEA was up 3%, and Asia was up 12%.

Our results continue to underscore the strength, balance and diversity of our business, and the quarter was not dependent on any large deals.

Tecnology new license revenues were $1.2 billion, up 11% as the Americas grew 20%, EMEA was up 2%, and Asia was up 9%.

Applications new license revenues were $477 million, up 21% from last year.

The Americas grew 26%, EMEA was up 7%, and Asia was up 29%.

Our software license updates and product support revenues were $3.3 billion, including $25 million from Sun, and up 12% from last year.

Customer support attachment and renewal rates continue at near record levels.

Revenues from our hardware systems products were $273 million, while revenues from hardware systems support were $224 million.

Our services revenues were $931 million, down 9%, as we continue to manage this business to profitable margins.

Total revenues were $6.5 billion, including $596 million from Sun.

Total revenues for the quarter were up 18%, and up 7% excluding Sun.

Total revenues, excluding Sun were at the high end of our guidance range, even without the full benefit of currency tail wind including in our guidance.

With Sun results now being included in our financial statements, non-GAAP operating income was $2.9 billion, up 13%.

The non-GAAP operating margin for the quarter was 45%.

Our tax rate for the third quarter was 25.9%, as we saw some one-time benefits to our tax rate.

Our Q3 non-GAAP earnings per share were $0.38 cents, at the high end of our Oracle-only EPS guidance range of $0.36 to $0.38.

Earnings per share were up 9% from last year, and include a $0.01 loss related to the devaluation of the Venezuelan currency.

In Q3, we repurchased 10.3 million shares at an average price of $24.28 per share for a total of $250 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 $17.5 billion in cash and investments.

The days sales outstanding, excluding Sun improved again to 47 days, as compared to 49 days of last year.

Finally, we generated $8.0 billion in free cash flow during the last four quarters.

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

Thanks, Jeff.

As you can all see, we had another fantastic quarter.

I'd like to first address our performance, excluding Sun, as this relates directly to the guidance we provided last quarter.

And then I'll highlight a few points related to Sun.

For starters, as Jeff mentioned we exceeded the high point of our new license guidance, with 10% growth in software licenses, excluding Sun.

This clearly shows substantial strength in the data base, middleware, and applications business.

We also beat the high end of our total revenue guidance, with consistent strength in our update and support renewals.

Results for our application business, were nothing short of stunning.

We grew 21%, while SAP continues to shrink at a double digit pace.

Our applications business is doing very well in all regions, and in all verticals, and it is really no wonder SAP is so unhappy.

In addition to our strong top-line performance, we delivered very strong operating margins.

With Sun included, our operating margin was 45%, substantially higher than our peers, including IBM.

Our operating margin remains much higher than SAP's target, and we are now selling hardware.

Regarding Sun, as you all know, the transaction closed at the end of January.

So our Q3 results for Sun reflect a one-month period, February, which would have been in the middle of their Q3.

Since revenues for February were $596 million, which was far better than we expected, and clearly demonstrates to us that customers are responding well to the acquisition.

We believe the Oracle Sun integration is off to a very strong start.

We are moving forward quickly to implement the operational changes we described for you on January 27th.

And we continue to expect Sun to contribute $1.5 billion in non-GAAP operating income in fiscal year 2011, and $2 billion in fiscal year 2012.

Now before I turn to guidance, let me just remind everyone that our plans for the Sun business are based on a more profit-aware model.

We will no longer be selling products at a loss, as Sun did.

As we promised in January, we've already ended or modified arrangements where Sun resold other company's products at a loss.

Just this change will immediately mean more profit, on lower revenues.

Second, we're now compensating our sales teams on margin, not just revenue.

That has the effect of changing the sales mix from commodity systems where Sun lost money, to value-added systems where Sun's differentiation is clear to our customers.

These two changes will baseline our hardware revenues and profitability at a level from which they will start to grow significantly next year.

Now let me turn to guidance, which will include Sun.

We believe that the guidance I am giving today is conservative.

I want to emphasize that our pipelines are very strong, in both software and hardware, and the close rates I am using for software are more conservative than typical Q4 close rates for software.

For the coming quarter, assuming the exchange rates remain at current levels, we expect there to be almost 3% positive currency effect on license growth rates, and almost 4% effect on total revenue growth rates.

With that, our guidance for Q4 is as follows.

New software license revenue growth is expected to range from 3% to 13% up, at current exchange rates, and flat to up 10% in constant currency.

Hardware product revenues are expected to range from $1.2 billion to $1.3 billion at current exchange rates, and actually at constant currency.

Now these numbers exclude hardware support revenues.

These are just the hardware product revenues.

Total revenue growth on a non-GAAP basis is expected to range from 36% to 41% at current exchange rates, and 32% to 37% in constant currency.

On a GAAP basis, we expect total revenue growth from 35% to 40% at current exchange rates, and 31% to 36% in constant currency.

Non-GAAP EPS is expected to be $0.52 to $0.56, assuming current exchange rates, up from $0.46 last year, and from $0.50 to $0.54 in constant currency.

Now GAAP EPS for the fourth quarter is expected to be $0.37 to $0.41 using current exchange rates, and $0.35 to $0.39 assuming constant currency.

This guidance assumes a GAAP and non-GAAP tax rate of 28% for Q4, but may end up lower.

Lastly, the Board again declared a dividend of $0.05 per share.

With that, I will turn it over the Larry for his comments.

Thank you, Safra.

I thought I would review our strategy in few markets, where we are not currently the market leader.

The first market is high-end servers where IBM is our primary competitor.

And the other is, business applications where SAP is our primary competitor.

Let me start with servers, since we acquired Sun , we have embarked on putting together clusters of Sun hardware running with our data base and middleware software.

That is, we have a collection of Sun machines, interconnected by a modern InfiniBand network, talking to storage, also connected to the servers, using a modern InfiniBand network.

Activated, the best example of this clustered architecture, where we have collections of machines, storage, and network, all built together with this software, in tune for the software.

What we have been able to do with Exadata.

And there will be other machines like or clusters like Exadata coming out for middleware applications, pretty much all the software that we sell.

It is not uncommon for an Exadata benchmark, when going up against a big IBM pSeries machine to beat them by a factor of 10.

Because they just don't have a clustered architecture, they're stuck with kind of an old-fashioned SMP architecture for transaction processing.

So we're taking advantage of new technologies, not just InfiniBand by the way, but Flash -- very large scale memory -- integrated memories.

You will see all of that has allowed as to deliver stunning performance using -- if you will, commodity parts.

And not only do we run much faster than the IBM pSeries, but also our architecture is clustered -- there are multiple servers, multiple piece of storage.

It's (inaudible), there is no single point of failure, so much more reliable while delivering, while delivering this fantastic performance.

And finally it is much lower in cost, because the components themselves if you will are commodities.

The components that we -- the disk drives and memory and processors which we assemble with our software.

So again we think -- we can challenge IBM on the high end of the server market.

Better performance, lower cost and much more reliability.

And in applications -- SAP is the leader.

But their technology -- that they use for their applications is a proprietary technology, a German programming language called ABAP, where later this year -- and that is a 25-year-old technology.

But it is still the center of their architecture and strategy for applications going forward is ABAP.

The center of our strategy going forward is Java, and a modern service-oriented architecture.

And during this calendar year, we will deliver our Fusion applications.

We have been working on them for a while, but we have rewritten -- and written in Java, all of our accounting software, all of our supply chain software, all of our HR software, our sales automation, our service automation -- it's all been rewritten in Java with a modern service oriented architecture.

And we're going to go compete with SAP's 25 year old technology.

The interesting thing is we're competing quite well against SAP now.

We think once we deliver Fusion, we're going to be well-positioned to challenge for the number one slot.

One of the important things about our Fusion applications is they are designed not simply to run on premise, which of course they do.

But they're all on-demand or if you prefer, cloud-ready.

So we'll be delivering those applications, both by selling the software directly -- kind of the old way of doing it, which is still the most popular way, by the way.

We'll be selling the Fusion applications integrated with our hardware, our servers, and our storage and our networks.

We'll be selling it on the cloud, all modern service-orientated 21st century stuff, competing against SAP.

We think SAP is vulnerable.

And we can take them on in a variety of industries.

The other thing that we're doing, that SAP is not doing, is we're emphasizing industry functionality.

So it is not just technology where we are competing with SAP, we're also competing with them in functionality.

So we think we have much more functionality for intelligent -- for a telco, a phone company, a large-scale retail operation, in insurance and in banking.

We have industry-specific applications for a variety of industries.

Health care, I could go on.

So our strategy is to have much better industry focus than SAP, in terms of functionality, and a much more modern technology underlying all of that functionality.

Again it is a company that we think is vulnerable, and we think we have an excellent chance of becoming number one in applications.

With that, I'll turn it over

Thanks, Larry.

This whole organization I thought, did a great job integrating the Sun's reps quickly.

They executed very well as you can see within days, and at most weeks we have the accounts and territories and comp plans all assigned, reps quickly got back in front of customers, and that was a key factor in the quarter.

And they stayed focused and built pipelines, a great job all the way around the world.

All the customer data has been converted over to Oracle systems, and pipeline and forecasting processes have been standardized.

On the customer side, I would say customers, I think the best word is, intrigued with our strategy.

And a good example of that is, we had a CIO summit yesterday in Atlanta, it was a day and a half actually.

We were expecting about 125 CIO's we invited, we got over 175, 85% of them traveled to get there from surrounding states, and 91% of them were first time attendees to this type of event.

So again, our competitor's customers to come and hear what we have to say, they just want to know what is happening.

And I think they sense there is some sort of transformation in the industry that is possible, based on what we are doing.

And they want to know exactly what were planning.

So we are going to do a lot more of that.

We're just getting started.

We have four more CIO Summits, and a CFO Summit, and a CSO Summit in the next three months, so get my frequent flier miles in.

But we need to take advantage of this, while it's there, because we can get an audience with almost anyone right now.

So that's ones that are back in that respect.

By product area, let me start off with database, Exadata as we have been talking about in recent quarters, the pipeline continues to grow significantly.

And what is changing now, is we're getting multiple orders, multiple machines, and more.

And about 40% of our customers purchase multiple systems in the past quarter.

I think Exadata has also been generally been responsible, partially responsible for generating a lot of interest in our strategy, because it is a good example of what can happen when you synchronize innovation across hardware and software, which is hard to do in this industry.

Key database wins, includes Life Technologies -- that was a ULA for a database middleware apps kind of wall-to-wall Oracle -- and I told him I would mention him, because he negotiated the deal at his son's basketball game on a Friday night and still got it done.

Turkcell, which was -- a telco in the Middle East, I mentioned them because this is another ULA for database middleware including Exadata ERP and CRM.

They have been a good customer on the com side of it, so they are as close to a telco in a box strategy, that we're embarking on, as you can get.

They pretty much do everything on Oracle now,.

And then Buenos Aires City Government.

and I mention them because they migrated to Oracle Database 11g for their first time.

They were [Enforma] customers.

So I just kind of like the remind people, there is still a lot of legacy databases out there like [Enforma] and Sybase, and DB2 that we get customers from every quarter.

And Buenos Aires City Government is saying they are getting 80% improvement and performance.

They're running that on Oracle Unbreakable Linux.

we had some good Linux wins in the quarter, including Victoria University, Telcom SA, Reuters and GE Security.

Switching to middleware, I just kind of like to remind people of the skill that we have achieved in middleware with 90,000 customers now.

And that is not including the 20,000 apps customers that run our middleware with our apps.

And so that is going very well.

The upgrade cycle from 11g, I've talked about the 11g launch for the last couple of quarters.

On average, it is taking customers about four to eight months.

So that upgrade cycle is continuing as we expected, actually a little better than the last cycle.

And there are many customers who all rely on the product.

There are some components that are yet to ship as part of the 11g over the next 12 months.

They will be coming out, the ones that are scheduled are Business Process Management, Tuxedo Enterprise Content Management, Imaging and Process Management, Oracle BI Enterprise Edition.

That will generate more upgrades and uptake of related components.

Also in past calls, I talked about how important it was to get ISV's to support our middleware stack.

That is driving adoption as well, so in the past Q3, we had 18 key IT partners select components, they are major components of our middleware, to standardize on, that included the North America Landmark Graphics, SunGard, Intuit, Cerner and EMEA IFS and LHS.

So we have a partner technical services organization that is part of development.

And they've trained over 11,000 consultants globally, and developer on 11g in the last nine months.

And so that is a key part of getting that adoption, we are starting to see the benefit of that now.

Key customer wins are Cox Communications, US Department of Transportation selected us over Web Center to build a portal for their hazardous materials information system.

Kaiser Permanente chose us for BI over Cognos.

And in the EPM area, we had wins with Carlisle Group and Herbal Life, in data (inaudible) management standardized in the University of Texas In the applications area, Larry mentioned our competition with SAP.

I'm certainly seeing a shift there, where I would say two years ago SAP was considered a safe choice even if the technology was a little old and complex to implement and all that.

But that seems to be changed, as customers appear more nervous about their technology and strategic directions, and are more open to discussing things with Oracle, even the SAP customers, some of the largest customers.

So that is a change that we're seeing.

And secondly ,they don't have anything new to talk about.

It is the same product, same technology, and basically they're focused on the general ledger.

And the industry is moving broader than that, to include industry applications, and entire systems.

So here is some key wins over SAP in the quarter.

Tibco, a large privately health food and beverage company in the United Arab Emirates, D&H Distribution, one of the nation's leading technology distributors.A real important one at NBN Co., and this is a new company, and we don't get these often.

But the government of Australia has a national initiative to build a national broadband network from scratch.

This is a mandate by the government.

It will be the single largest nation-building infrastructure project in Australian history.

The chief operating officer selected Oracle, who was just actually at headquarters two weeks ago.

And he wants to go wall-to-wall Oracle, and he selected us over SAP.

We beat them at Genuine Parts, and a number of holdings.

We had a good quarter with PeopleSoft.

PeopleSoft beat them at Carlisle Group, Alberta Health Services, UBS, Bank of America, Department of Energy, and Ahold and there are many more here.

Too many to list.

CRM OnDemand, we had key wins against Salesforce at General Motors, SAIC, Broadcom, Merck, Avis and Starbucks.

And then important wins for CRM On Premise at US Immigration and Northwestern Mutual.

They actually grew faster than the overall apps number.

And we had a stellar rebound in the retail GBU, and a big win in Ahold.

And communications GBU had wins, three each against Amdocs, Converse and Convergence rebuilding in the quarter.

Financial services had wins at Central Bank of UAE, Union Bank of Jordan, and National Australia Bank.

And an important one in enterprise taxation product, had the State of Nevada select us for unemployment insurance.

And the way these deals work, they take one tax at a time.

And if we do this one well, which we plan to do, there will be other taxes that migrate to the platform, and we charge for those as well.

On the hardware side of this, I guess we have to start talking about that as well in these calls.

We had a good win with Sun Ray.

This is their thin client, with one of the branches of the armed services which I can't name, but they contracted to deploy a highly secure multi-level security solution with our thin client device.

And this is just the beginning.

And this is going to be scheduled across a distributed federal network.

And they have a planning growth across other commands in the architecture over time.

We had a win in 1on1 internet, the world's number one web hosting company based in Germany, and that was six M9000 SPARC Enterprise servers.

MTN Group in Nigeria, has 21 countries and 90 million subscribers, and big telco Sun SPARC servers enterprise T5000, And then we had a top 10 US.

bank that has replaced Tandem and HP, that was a replacement there.

We had a major financial services company that liked our solid state disk and hyper arrays.

We replaced EMC, in fact, we moved EMC from their supplier list when they saw the performance.

So we had a lot of good wins like that on the server side of it, more on the way, the pipeline seems to be there.

And lastly, I'll mention a large US federal agency which you can probably guess, that selected an M8000.

And that one will support 5 million pages of handwritten census data that is currently being collected, probably in your mail box right now, converted into digital format using those CRs, running on Sun servers.

So with that we're pretty excited about the pipeline, and what's happening which you can see.

Lots more out there.

I'll turn it back over.

Thank you, Charles.

Operator, we'll take our first question please.

(Operator Instructions).

We have our first question from Adam Holt at Morgan Stanley

You mentioned that you're ahead of schedule in terms of execution on Sun.

I was hoping maybe you could drill down a little bit on where you think you're actually ahead of plan.

And now that you're a little bit deeper in the integration, where do you see some of the upside opportunities, in particular, what do you think you can do with maintenance revenue in the Sun base?

Thanks.

Well I think that really we're ahead on sort of all fronts operationally.

Both our business practices are being adopted, really as of day one.

And just operationally, the way we work with our customers has already changed.

As you know we've moved to a -- build-to-order model versus stock model.

And we're not encouraging stocking in general, even with our resellers, but the customers can order exactly the box they want.

And that way, we can optimize for the time it takes to get them exactly that box.

And that obviously also reduces any kind of obsolescence -- or inventory issues for us.

That is really in place now for a while, and really moving along very, very quickly.

The -- regular contractual terms, etc., the way we're working with our partners, many of them recognize that the old model didn't work for either them or for customers.

And surely not for Sun, and are very, very open to readjusting those, and many of those have already been completely adjusted, faster than I originally expected.

As far as maintenance or product support, it turns out that many of our customers are really in need of higher quality of support that really only Sun can give them, in the Sun-Oracle combination.

And they are really looking to support, that is both hardware and software integrated, more and more.

And so we're really moving ahead, both technical and operationally, to be able to deliver a more integrated support model for them.

And we do expect that customers are very happy to -- to purchase their support directly from Sun.

And not from others simply, because the level of support and engineering support that they need, really can best -- if not only be done by us at Oracle.

So you know we expect that to be very significant financially, ultimately.

And that is just started of course.

Terrific, thank you.

Let me add one thing to that.

Our business processes are now in place.

I think one of the more important ones that is in place is we look at margins in every transaction.

And if the margin is not attractive, or worse yet, negative -- and which is often the case by the way -- and some of the bids we had in flight, for high performance computing centers, that we just walked -- that we just chose not to bid those.

So we said early on, we would not -- we would not engage in transactions where we lost money.

We are going to get out of those businesses where we lose money.

And again, we look at it transaction by transaction.

We do look at the long-term.

And how the importance of the customer we might lose a little bit of money on a first sale.

But some of these huge high performing computing transactions add to our revenue, but detract from our profits.

And our process now, identifies those, and we walk away from them.

Terrific thank you.

Our next question will come from at John DiFucci at JPMorgan.

Thank you.

Just a question, I just want to make sure my math is right here.

You said that the Oracle only software license grew at about 10% constant currency.

And it sounds like you had about 5% of a foreign exchange benefit.

So you get about 5% constant currency growth from the Oracle only software license.

And that was versus the minus 8 to plus 2 -- just wanted to make sure that I got that right.

Is that correct, Safra, or Jeff?

Well it is 10% as reported.

So you need to take away -- I think it was 5 points of currency and license, so it would be 5 points of straight constant currency.

Okay, great.

And then on the guidance, Safra, you said that it seemed lower close rates than you typically see in the fourth quarter.

I am just curious, were the close rates you experienced in the third quarter lower than you typically see?

I mean we were hearing sort of mixed messages out there about the macro economy.

It still doesn't seem like it is very easy out there.

But just curious, what sort of close rates did you see in the third quarter?

Actually we were flat -- in Q3 we were really flat to last year's close rates.

We actually are seeing some pretty optimistic customers.

Our pipeline is very big.

And -- the close rates I'm using, really are conservative.

And -- and they're particularly conservative, because as you know Q4 at Oracle is always a very big quarter.

And because the reps -- are all motivated to close as much as they can for their comp plans.

So I -- I just thought we might as well just go with a -- reasonably conservative close rate, but it's a realistic one, a potentially realistic one.

We actually are quite optimistic about our customer's appetite for our products.

I am not going to comment on the whole economy, I don't know the whole economy.

But we do find a lot of enthusiasm with our customers, and deals do -- look like they're very good size in general.

Okay, great, thanks, and nice job on the quarter.

Thank you.

Next up is Sarah Friar at Goldman Sachs.

Terrific.

Thanks so much for taking my questions.

Two for you.

Just on Sun, thanks for splitting out the revenue impact.

I know you didn't give the exact cost breakout, but can you just give us a sense on whether the cost for Sun ended up more ahead of revenue, just to give us a view of how we think about the full quarter that's coming up, from both the revenue and cost perspective?

Actually Sarah the reason we didn't give you a breakout is because we really merged these companies fast.

I mean we just closed them -- any kind of breakout would really be an allocation of a lot of different things.

So I tell you the best way for you to judge what is going to happen, is both to use our guidance and also to really look at what Q4 was.

This Q3, if you think about it, it was a February -- by the time everybody knew where the -- you know water fountain was, it was half way through February, you would think.

So -- there is -- there is no way to from the Q3, breaking out is really not possible.

Because we started integrating right away -- everybody is an Oracle employee as much as possible.

So obviously selling hardware has lower gross margins than selling software regardless.

There is just no way to compare it.

So our expenses are -- are not a big number in comparison to our revenues.

So -- operating margins at least for a while will be lower, and you can figure that out from the guidance.

So expenses grow.

Quickly.

But -- our revenues -- are growing quickly also.

And you will be able to really better extrapolate after you see Q4 frankly.

Got it.

The Gold Air -- is it to replace kind of current data warehousing implementations?

Or how do you go beyond kind of big data warehousing implementations into kind of a more broad deployment in some of the IT environments?

Okay, well stage one of the version one of Exadata was really aimed at Teradata, and Netezza -- and really the specialists data companies that focused on building custom hardware designed to tackle large-scale data warehouses.

And that was Exadata version one.

Exadata version two, handles not only data warehouses but also handles transaction processing.

We added a lot of flash memory into it.

And we are going to have new Exadata models, and I don't want to pre-announce anything, but we're going to get better and better at very large scale transaction processing.

Our intent is that the Exadata line, challenged the biggest IBM pSeries machines, and beats them badly in performance, reliability, and cost.

And we think -- and we think we can do that where -- in transaction processing where we're twice as fast , and in data warehousing, we're 10 times as fast.

Those are our goals, to be twice as fast as IBM's biggest, best box, and again, at a dramatically lower price.

And because our architecture is [inaudible] -- the answer is all data base applications ultimately are better served when they run on an Exadata

Great, thank you very much.

Moving on now to Phil Winslow at Credit Suisse.

Hi guys, congratulations on the quarter.

You all reported pretty impressive return to growth and applications licensing revenue lines.

Just wonder if you could give us a sense of what you believe is driving that?

Is the core ERP, CRM HCM applications, or what are we seeing in edge apps?

And is there anything across geographies that you see different in the app space?

Thanks.

I am going to answer that, and then I'll let Charles add to that.

One is -- I think we -- our vertical strategy is working extremely well.

We are winning large deals in retail, large deals in banking, and large deals in telecommunications.

And that is dragging a lot of ERP and CRM applications with them.

We are doing well in pharma.

There are bunch of industries -- healthcare in general.

There are a bunch of industries where we are very, very strong, and we have applications that SAP simply does not have.

So one of our strategies was to beat SAP in CRM, which we do.

And then beat SAP in industries specifically vertical applications.

For example, a telecommunication company has applications to provision -- you call up AT&T, and you turn up your iPhone and want to turn on your interactive TV.

Well, that provisioning software -- when you provision an application -- and in a lot of telcos -- that is the Oracle software that is automatically turning on those services for you.

SAP has nothing like that.

And when you receive your bill, that is an Oracle application that is sending you that bill.

SAP has nothing like that.

When you deposit money in your savings account, that is an Oracle application that keeps track -- that literally an Oracle banking application that keeps track.

SAP doesn't have that.

And I can go on and on, in a variety of industries where we have the industry functionality, that they don't have.

So that gives us opportunities that are simply not available to them.

We also -- we sell these applications a piece at a time, rather than a rip and replace strategy, when people are not doing big ERP buys.

By the way ERP is a rather mature market.

We think we're competing very well in ERP.

But it is a mature market.

And SAP is to some degree saturated.

And SAP is not -- diversified company in terms of their application suites.

They don't have a lot of what you call, edge applications.

And they don't have a lot of industry specific applications.

And they --their technology is fraying around the edges.

And finally, some of it is our good execution I think, and some of it is problems at SAP We were -- sending me -- we were up 26% in CRM.

ERP.

I'm sorry, couldn't read this line.

We're up 26% in ERP.

I suspect that is -- a lot better than what SAP is seeing.

So we're taking advantage of our strategy that we think is working.

We're taking advantage of their weakness.

And we think we're going to get stronger, while they get weaker.

I'm sorry going on for so long.

But let me say their strategy right now, is to try to sell ERP to customers of less than 100 employees.

That is our new strategy.

Business by design, which I guess is three years late.

And by the way if it is successful you can't make a lot of money selling -- selling ERP to companies with less than 100 people.

So we think that is a strategy that goes nowhere.

It is a different technology than they currently sell.

It's a different sales force.

It is different customers than they currently sell to.

We think it is a massive distraction for them.

Where our strategy is not to find all new customers, but to sell more to existing customers.

So to sell industry specific apps to existing customers.

Sell technology upgrades to existing customers.

We think they have made a fundamental strategic mistake.

We think they have lost their way, and if they don't want to be number one, we sure do.

Great, thanks guys.

All right we have a question now from Heather Bellini.

Hi, great.

Can you guys hear me okay?

Yes.

Great, congratulations on the quarter, great performance.

Safra, I just had a question in terms of you guys shrinking the Sun footprint, which you spent some time discussing in your prepared remarks.

I'm trying to get a sense for, have we seen the biggest rationalization of the product line at this point?

Or are you going to see further partnerships of the Hitachi type that haven't worked their way out of the revenue equation yet?

I guess I'm trying to get a sense of the pace of the business going forward.

Sure, first of all I want to make sure that you understand the Sun product line continues in it's current form.

So there is no cutting back on the Sun product line beyond where we're at.

Those products are actually expanding.

We have got some incredible products coming up.

I mean the focus of Oracle and the Oracle-Sun combination is on reselling our intellectual property.

So if you understand that, then you realize that in most places there are certain areas in which obviously we -- we have components from third parties in our equipment and all that.

But the real value is in our property the way we bring it altogether, et cetera.

That is the focus of the Company.

Now we do resell some other folks' product, we do still are winding down the resale of the Hitachi storage servers.

Obviously, we're very focused on our customers, and for those there will be a steady wind-down period.

And we're managing those together with HItachi -- is a very long-term partner with Oracle and Sun.

And things are going very well there.

But the big focus of selling other people's -- those storage servers, that focus is really going to be going on to some of our own products that we have talked about already.

So that is already in place.

There are a few other reselling other people's software, and things like that.

And as you know Heather, that is not what we focus on here at Oracle.

So most of it is already disappearing outside our sales.

But again, don't extrapolate from a month of February.

Really, we'll start to look at this more carefully, and really spend some time.

You're going to get a sense of what our business looks like -- to -- after Q4.

Let me adjust a little bit to that.

Which is we didn't add much value selling Hitachi systems, we added no value, and we made no money.

So Hitachi, by the way, it is a fine product, and anyone who wants to sell it, should sell it.

Not us, we don't make any money selling that.

What do we make money selling, our own storage.

And we have the NFS, ZFS storage appliance, also known as the Sun 7000.

So we have our own storage server.

Sun used to resell Veritas backup.

Terrific product.

We make no money reselling that product, we add no value.

So we're out of that business.

The Sun businesses, however, we're expanding.

We're expanding on the 7000.

We're expanding on high-performance, high-end servers.

So the Sun IP, we're expanding and investing in Solaris and Java.

So the Sun IP and the Sun products we're expanding them.

Where Sun was simply a distributer of somebody else's property and lost money doing it, we're out of that business.

Great, that is what I needed.

Thank you.

Moving on now to a question from Kash Rangan at Merrill Lynch.

Hi, thank you very much.

One on the Sun channel transition from -- how are you guys managing through the transition from indirect to direct, how are you guys managing through the transition.

And also secondly, a favorite question for you, Larry, how is Fusion turning out to be in terms of code readiness, beta customer feedback, and what is going to be the actual birth of the product when it comes out.

Is it going to be all of the products under the current umbrella, or is it going to be a subset?

That's it for me.

Thanks.

I am going to let Charles -- to answer the field, the direct to indirect question or Safra,but let's throw that to Charles.

But let me first answer, how does Fusion look?

Well one thing we did not do.

We did not make the mistake of trying to rush -- get this thing out early.

Were we late with Fusion?

Yes, we were late.

I would much rather be late, than deliver a product that is not extremely high quality.

The --

Stand by, we'll mute that line on our end.

Okay thank you.

All the players okay?

So -- yes -- so the -- so customers have been looking at fusion, customers -- we had a number of large customers lined up to take the product this calendar -- this calendar year.

We are again -- we put -- this is years and years of effort that we put into writing all of this in Java.

Modern architecture, I can go on and on.

But this 21st century technology.

It is really the only application suite.

Even Salesforce.com was kind of late 20th century technology.

So we think we're going to have huge competitive advantage.

Customers like it very much because of its -- because of its -- the fact that it is so -- they can use -- start to use some of the buzz words.

They can use -- to link the different applications and the different web services together.

It isn't a rip and replace strategy.

They can take parts of it at a time, and gradually adopt Fusion.

It has a modern Web 2.0 user interface.

It is low cost to deploy because everything is written -- it'sone technology stack -- Java technology stack all on our Fusion middleware-- the customers that have seen it, see huge value in the built-in business intelligence.

So BI is not an add-on to Fusion, BI is built into fusion.

The application that you -- you install at your site is -- the same as the application you run on a cloud.

Our cloud, or someone else's.

So -- it is generated a huge amount of enthusiasm, customers are creating their own adoption strategies, plan and schedules.

And it is all going to happen the second half of this year.

Charles, on the direct versus the indirect?

So in the Oracle, base Oracle business pre-Sun, we run about 40% indirect -- flux rates actually very little, quarter to quarter it has been pretty consistent for a long time.

Sun was definitely higher than that.

They ran about 65%.

We will be shifting that to a more direct strategy, especially among the largest customers.

We think they want and deserve the relationship with Oracle.

That is the best way we can provide the level of service.

So incrementally starting this quarter, we will be more direct.

We want the partners to find new business, and not show up in the same accounts with us all the time.

So three or four legged sales calls, as we call them, and shift away from fulfillment and expand the markets.

So we're going to direct them into the mid-markets where we don't have good coverage.

We're hiring pretty aggressively right now on the high end, to make sure we have our top 1000 accounts serviced directly by Oracle reps and by Oracle support.

And we're also shifting the comp model to pay on net, where Sun paid on gross, so the reps were indifferent to whether their partners sold it, or we sold it.

And we have always paid on net, which is what we get after we pay the partner, and that tends to shift things pretty quickly.

The partners know that, the (inaudible) know that.

We have discussed this with them, they know the strategy, and so that will start to happen this quarter.

We'll take a question now from Brent Thill at UBS.

Thanks, the Americas business did a great job and outpaced Europe.

Can you give us a sense in terms of what you're looking at for a recovering Europe in the second half?

Do you expect this to be slower or snap back similar to the pace that we saw in the Americas, and I had a follow-up for Charles.

I guess I'll take a stab at it.

Europe tends to be more slowly both in the downturn and recovery, so they held up longer if you recall that the business there, even when the US was turning down, we kept clicking on in Europe for two or three more quarters.

So it does tend to take more time, but pipelines are growing there, so we expect gradual improvement in EMEA as well.

Okay, and Charles, you mentioned ULA's a number of times, I am just curious as you see the environment stabilizing, are you seeing more customers coming back to ULA's, and if you could just tie that in the applications business.

Are you starting to see some of these broader deployments rather than just kind of piecemeal decisions that are being made in divisions, is that perhaps driving the better than expected growth and applications?

That is helping.

We're also seeing ULA's across multiple product categories, and that includes middleware, (inaudible) and apps on the same deal.

And we've learned how to structure those.

And the other area in Europe, where it wasn't -- the uptake on ULA's wasn't as quick again, because they were so decentralized, but we're starting to them get their act together, and see the benefits of doing it all in one contract.

So the ULA's are picking up internationally as well.

Thanks.

And with, that we will conclude the question and answer session.

I'll turn things back over to management at this time

Thank you, operator.

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Thank you.

Once again, ladies and gentlemen, that will conclude today's call.

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