甲骨文 (ORCL) 2011 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 Oracle.

Please go ahead, sir.

Thank you, Melanie.

Good afternoon, everyone and welcome to Oracle's second quarter fiscal year 2011 earnings conference call.

With us on the call today are Chief Executive Officer Larry Ellison, President Safra Catz, President Mark Hurd 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 reports on Forms 10-K and 10-Q and any applicable Amendments for complete discussion of these factors and other risks that may cause actual future results to vary 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 any revisions to these forward-looking statements in light of new information or future events.

A copy of the press release and financial tables which includes a GAAP to non-GAAP reconciliation and other supplemental financial information can be viewed and downloaded from our Investor Relations website.

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

With that, I'd 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 rates unless otherwise stated.

This quarter, foreign exchange rates resulted in a negative 2% currency effect, to both new license revenue and total revenue.

In spite of this headwind, in both US dollars and constant dollars, we beat the high-end of our guidance range for new license revenue, total revenue, and earnings per share, with record earnings per share for the second quarter.

In short, Q2 was another excellent quarter for Oracle.

In the second quarter, new software license revenues were $2.0 billion, up 21%.

The Americas grew 32% in US dollars, EMEA was up 5% and Asia was up 21%.

With each region up double digits on a constant dollar basis, our results continue to underscore the strength and diversity of our business and the quarter was not dependent on any unusually large deals.

Technology new license revenues were $1.4 billion, up 21%, as the Americas grew 36%, EMEA was down 1% in US dollars but up 7% in constant dollars and Asia was up 27%.

Applications new license revenues were $579 million, up 21% from last year.

The Americas grew 26%, EMEA was up 23%, and Asia was down 1%.

Our software license update and product support revenues were $3.7 billion, up 12% from last year.

Customer support attach and renewal rates continue at the usual high levels.

Revenues from our hardware systems products were $1.1 billion, while revenues from hardware systems support were $686 million.

Our services revenues were $1.2 billion, up 24%, as we continued to manage this business to profitable margins.

Our total revenues were $8.6 billion, up 47% from last year.

Non-GAAP operating income was $3.8 billion, up 33%.

The non-GAAP operating margin was 44% for the quarter.

Our non-GAAP tax rate for the second quarter was 28.5%.

Our Q2 non-GAAP earnings per share were $0.51, $0.05 above the high-end of our EPS guidance range of $0.44 to $0.46.

Earnings per share were up 33% from last year.

In Q2, we repurchased 9.1 million shares at an average price of $27.35 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 $24.8 billion in cash and investments.

Our days sales outstanding improved again, to 46 days, compared to 47 days last year, and is a testament to the quality of our receivables, the quality of our customers, and the effectiveness of our collection efforts.

Finally, we generated $8.7 billion in free cash flow, and a record $9.1 billion in operating cash flow during the last four quarters.

Now I'll turn the call over to Safra.

Thanks, Jeff.

I'll comment on our non-GAAP results for Q2 and I'll then review the guidance for Q3 and turn the call over to Larry and Mark.

As you can see, we had another excellent quarter on top of a truly amazing Q1.

We, as Jeff mentioned, exceeded the high point of our new license guidance.

We beat the high-end of our total revenue guidance and we beat the high-end of our EPS guidance by $0.05.

Even excluding a payment for legal fees, we beat the high-end of our EPS guidance by $0.04.

The strength in the quarter was very broad-based as you can see with technology growing 23% and apps growing 22% in constant dollars and all geographies really reported double-digit growth for new license sales.

The Americas in particular reported spectacular results with 32% growth, highlighted by 36% growth in technology, with Fusion Middleware sales leading the way.

Europe was great as well with 31% apps growth.

You can really see our momentum in our applications results as we continue to take share from SAP.

Their most recent new license revenue is actually down 14% from two years ago, while ours has grown 23% over that same period.

Sun hardware system was within our guidance and this quarter we saw sales growth for Sun hardware products as well as higher gross margins which were 53% for the quarter.

In addition to our strong top line performance, we also delivered very strong operating margin.

With Sun included for the full quarter, our operating margin was 44%, substantially higher than our peers.

Actually, our margins are 1,500 basis points higher than SAP's operating margins, even though we are also selling hardware.

At this rate, we could be back at pre-Sun operating margins quite quickly.

Before I turn to guidance for the upcoming quarter, let me just remind everyone once again that our plans for the Sun business are based on more profit aware model.

Once we reach the one year anniversary, you will be able to see the hardware growth off a more meaningful baseline.

So with that, assuming exchange rates remain at current levels which, right now is a positive 1% currency effect on license growth and 1% positive on total revenue growth, our guidance for Q3 is as follows.

New software license revenue growth is expected to range from 10% to 20% at current exchange rates and 9% to 19% in constant currency.

Hardware products revenues are expected to be around $1.1 billion to $1.2 billion, and that does not include the hardware support revenue.

Total revenue growth on a non-GAAP basis is expected to range from 31% to 35% at current exchange rates and 30% to 34% in constant currency.

On a GAAP basis we expect total revenue from 32% to 36% at current exchange rates, 31% to 35% in constant currency.

Non-GAAP EPS is expected to be between $0.48 and $0.50 assuming current exchange rates, up from $0.38 last year and $0.48 to $0.50 in constant currency.

GAAP EPS for the third quarter is expected to be $0.34 to $0.36, assuming current exchange rates, and $0.34 to $0.36 in constant currency.

This guidance assumes a tax rate of 30.5%, and a non-GAAP tax rate of 29.5%.

Of course, it may end up being different.

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

Now, before I turn the call over to Larry, I want to congratulate him for driving his sailboat to a first place ranking overall for the year.

And with that, your turn, Larry.

Thank you, Safra.

Of course, the important thing around here is sailing, but right behind that is software and hardware.

And I'm going to talk about our strategy in our server business specifically.

Our goal is to become number one in the high-end server business for both online transaction processing and data warehousing, both of those segments.

We are not interested in the low margin, commodity segment of the server business.

We're focused on high-pend OLTP, high-end data warehousing where the margins are good and we can have a highly differentiated product.

Right now, our Sun servers numbers are right behind IBM and HP and high-end server business.

We think IBM's hardware and software technology is quite competitive while HP's big servers are slow, expensive and have little or no software value-add.

That makes HP extremely vulnerable to market share losses in the coming year.

Over the last year or so, we've introduced three new families of high-end servers -- Exadata, Exalogic and this past quarter SPARC Superclusters.

All these high-end servers are engineered to run our database and middleware software much faster than anything from either IBM or HP.

For example, this past quarter our new SPARC Supercluster technology ran the industry standard benchmark for online transaction processing called the TPC-C benchmark.

Our SPARC Superclusters ran that industry standard OLTP benchmark at 30 million transactions per minute, shattering IBM's old record which they set on their fastest Power 780 system, three of their fastest P7s at 10 million transactions per minute.

Let me make this clear.

Sun/Oracle, 30 million transactions per minute.

Three of those P7s, 10 million transactions per minute.

With HP's best-ever database performance a distant third at four million transactions per minute.

In data warehousing, it's not uncommon for our Exadata machine to be 10 times faster than the best of the competition.

And IBM's purchase of Netezza and EMC's purchase of Greenplum Technology is not likely to threaten Exadata sales for lots of reasons, but mainly because Exadata is much faster than either of those two technologies.

And both in the case of Exadata and in the case of Greenplum, the customer has to rewrite their application to run on those machines.

So, Exadata's pipeline actually continues to grow rapidly even though IBM bought Netezza and EMC launched Greenplum and the Exadata pipeline is now approaching $2 billion.

We expect overall that our new generation of Sun machines -- Exadata, Exalogic and SPARC Superclusters will enable us to win significant share in the high-end server market and put us into the number two position behind IBM very, very soon.

Then we'll fight it out with IBM for the number one spot.

And I'll turn it over to Mark.

Thanks, Larry.

I spent the last three months visiting with customers.

I started Oracle the week before Oracle OpenWorld and I just returned last week from Brazil from Oracle OpenWorld Latin America where we had 12,000 customers in attendance.

This week we had Oracle OpenWorld Beijing.

It's really taking place really as we speak where there are 13,000 customers attending.

In total, we've had nearly 60,000 customers at these three shows.

Q2 is a great quarter for us.

Because our customer base is very enthusiastic about the direction of Oracle's product portfolio.

Our earnings grew 33% this quarter and our margin performance made clear there's a ton of leverage in this business.

I want to focus on our opportunities to grow revenue significantly over the next couple of years.

You can see our top line momentum, 21% new software license revenue.

We had a great quarter across the board.

Technology and applications were more than 20%.

All geographies had double-digit growth with constant dollar and our industry-focused businesses were up triple digits.

The deal volume was spread across companies of all sizes and we had a very healthy number of customer wins in the public sector as well.

The strength in the quarter was very broad-based.

Our customers react to the fact that we're delivering game changing technologies that matter to our customers (inaudible).

Exadata and Exalogic are creating tremendous buzz in the industry and among our customers.

All of our competitors as Larry mentioned are reacting to us, (inaudible) partner their way into integrated systems.

We have 295,000 database customers that can run their Oracle work with magnitudes faster by deploying Exadata.

Exadata customers are experiencing an immediate performance increase, measured in multiples, not percentages.

Customers can gain 15 to 50 times the improvement with Exadata.

We are seeing a lot of enthusiasm that's beginning to build order backlog for Exalogic which will be available next quarter, both Intel and SPARC versions.

There are 150,000 middleware customers, many of them using our market-leading WebLogic app server.

All of them are prospects for Exalogic.

We made more announcements relating to Sun's core technologies, specifically Solaris and SPARC.

As an early indicator, we entered the quarter with a record hardware backlog.

Last, our industry focused businesses are creating strategic advantage for Oracle because no other large vendor is doing pre-packaged industry-specific solutions.

With that, I'll turn it back to Ken.

Thank you operator.

We'll now go to Q&A please.

Thank you.

(Operator Instructions) We'll take our first question from Brent Thill with UBS.

Thanks.

Question for Larry.

With Exadata, are you starting to see halo impact on adoption of the broader Oracle suite?

And you also mentioned the pipeline's quickly doubled to $2 billion.

Can you just give us a sense of how the close rates are doing?

Well, the close rates are definitely improving and I think you're going to see a significant jump in Exadata sales going from Q2 to Q3.

So we're watching -- this pipeline grew very, very rapidly and again, there's a lot of buzz and a lot of interest.

But because it's a new product, people were running a lot of benchmarks.

They were trying it.

They would buy a small machine first and we are beginning to see some significant revise and a lot more customers translating their interest into purchases.

I think that's -- and I think we're going to sell a lot more Exadata in Q3 than in Q2.

I think in terms of the halo effect, it's a general recognition now that when you buy these high-end servers, you usually buy them to run specific software and we believe that if we do a good job of engineering the software and the server at the same time, and make sure they work well together, we have a huge competitive advantage over HP and IBM.

Now, IBM does have a lot of software.

HP does not.

Again, as I emphasize that, that makes them particularly vulnerable.

But the notion of engineered systems, hardware and software that works together, I believe is going to dominate the high-end of the business.

By the way, it's already dominating the low end of the business because I suspect you use either an Apple iPhone, an iPad or an Android, where specifically in the case of iPad and iPhone, they're engineered to work together.

The Android, not so.

Youd decide which is delivering a better overall user experience between those two products on the low end.

Thank you.

We'll go next to Heather Bellini with ISI Group.

Hi.

Thank you.

Good afternoon, everybody.

I was wondering, you clearly have a lot of irons in the fire right now with Fusion apps coming up and Exadata success that you just mentioned.

I wanted to hone in on Exalogic for a second and I was wondering if you could share with us early feedback from customers and then specifically I was wondering how you would expect the product to ramp versus Exadata, given the success that product has had.

It would seem like it would help pave the way for potentially a faster uptake.

Thank you.

Heather, this is Mark.

I you said it right.

I think the Exadata experience actually benefits our Exalogic launch.

As I mentioned in my comments, we've got a very large Weblogic base and just to give you an idea of the opportunity here, we can go in with an Exalogic solution and actually -- anybody that's got more than a dozen licenses, decrease their cost while in some cases increasing their performance over 50%.

So we've matured the use case.

We think we know where its targets are as I mentioned and the Exadata experience is -- it's a big deal for us because it really prepares us to sell hardware and software that's engineered together so we're bullish on it.

To your point about multiple irons in the fire, we have a lot of talent here to manage the opportunity.

Thank you.

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

Thank you.

I wanted to drill a little bit on the technology business and in particular, Fusion Middleware.

You mentioned Safra in your comments as an area of strength in the US.

What do you think is driving that?

And specifically, can you touch on where you think you are in the 11g cycle and how important applications coming up next year are for people upgrading middleware now?

We've been in the Middleware business for a very, very long time and we entered that business with a combination of innovation and acquisitions.

Where we had made middleware acquisitions we weren't satisfied just to resell what we bought.

We actually rewrote a lot of what we bought, so we had a unified architecture where we have a single common [metadata] repository for all the components of our middleware whether this is [Solaris] suite or for that matter beyond the business intelligence.

It's all java based.

It's all rewritten.

It's a single integrated suite where you can buy a piece at a time, but all the pieces fit together.

You'll hear that theme over and over again.

With release 11 of our middleware, everything has now been rewritten.

All the pieces operate off a single metadata library.

It's a much better user experience because you can attach our entire middleware suite with a single file versus you take IBM WebSphere, where IBM WebSphere is literally dozens if not more than 100 separate products all with separate patching technologies.

So we think the fact that we have an integrated suite gives us a huge competitive advantage over IBM and we're winning share there very, very rapidly and we would expect the advantage we have in database, you will see over the next five years also move into middleware.

Great.

Thank you.

We'll go next to John DiFucci with JPMorgan.

Thanks.

This is a nice present for shareholders today.

I have a question in regards to Europe.

Europe was better than at least we thought it would be and I'm not sure if that's an Oracle thing or if that's just Europe maybe isn't as bad as it sounds like it can get.

But my question has more to do with the apps business and that was really strong.

Granted, it was a relatively easy comp but that was still a really strong number, especially when you look at your competitors there.

You've been gaining share against SAP and that's been showing up in the numbers over the last, I don't know, I guess it's a couple years even.

But this almost seems like it's an acceleration of that.

Is that actually happening now or are we seeing a pick-up in the general environment for app spending in Europe?

I'll start.

I mean, listen, first, I'm not an economist and I wouldn't want you to extrapolate anything about Europe other than we're doing well there.

I think when you look at Europe, it was broad-based when you looked at the app business across Europe it was not -- again, I want to re-emphasize, this was not singular to a deal.

It was not singular to a country.

It was pretty broad-based against the countries where we have been gaining share frankly over the last several years.

So when you meant the comment you guys -- just want to make sure it's clear, this has been a really steady progression as I've looked back at the history of (inaudible) apps in Europe it's been one quarter after another, a pretty steady beat, and I would say this was a continuation of that and again, across countries, across apps.

We had some very nice help from our industry GBUs in the quarter in Europe that helped as well.

Just re-emphasize what Mark said earlier in his prepared remarks, that we have a wonderful set of industry specific applications that will often lead, for instance, I fairly large deals in telecommunications, in banking, in retail and other places and that's really a unique value proposition vis-a-vis our primary competitor, SAP.

They don't have those industry specific applications.

That's helped us a lot to establish our self in a number of industries.

The other thing is, Fusion is right around the corner and our customers are seeing us deliver this new technology and I think it's making it very, very comfortable with not necessarily moving to Fusion right away, but continuing their investment in Oracle applications, that we are giving them a choice to, again, with vertical applications, with continued investment in the e-Business suite, PeopleSoft product and this whole next generation of java-based Fusion applications.

And again, the investment that we're making and that trifecta of technologies is again, creating a level of customer where our big customers are willing to continue to invest and in fact, increase their investment in Oracle applications.

Thank you.

We'll go next to Mark Murphy with Piper Jaffray.

Yes.

Thank you.

How frequently is an Exadata deployment resulting in the displacement of a competitor's products?

For instance, if you see a pre-existing storage footprint or backup technologies or commodity servers that are being unplugged and subsumed into the Exadata box.

Yes, sure, I'll give you the -- listen, this is the best I can give you because it's not always a perfect science.

But about 70%, 75% of the time we are displacing something.

25% to 30% of the time, this is a consolidation.

So you can think of it as a net new play.

I think to also add to it, to Larry's earlier points about Exadata, just so you get some context here, we've sold Exadata now in 50 countries.

We've also got about 30%, 35% of our customers have made a second purchase from us.

So you're beginning -- to Larry's point seeing repetition here, you're beginning to see breadth of distribution here.

You're seeing us displace companies here but also creating some new opportunities at the same time.

Back to Heather's point, we learned a lot about this so as we launch Exalogic, we feel we can take those learnings and accelerate our launch here.

Thank you.

We'll take our next question from Sarah Friar with Goldman Sachs.

Great.

Thanks so much for taking my question.

People have talked a lot here on the top line.

But the margin outperformance was also a real highlight.

Is that a level we can build from as we look forward here into February or is there anything non-repeatable or anything you would flag to make sure we don't get our expectations too far ahead of ourselves?

Yes, I mean, in general it's the business.

The only non-repeatable thing in there is the thing I mentioned during my comments which is we did get $120 million legal settlement for fees and that will not be repeating any time soon.

But as far as hardware margins or in general operating margins, obviously this is something we've done for many years and clearly, we're on a continued benefit, both from product mix and scale, which works to our benefit as we continue to grow.

Great.

That's good to see.

Could I ask one really quick follow-up on Exadata?

Sure.

Maybe it's too specific but in your pipeline could you give us a rough percentage of how much is data warehousing deployment versus more the pure consolidation you're talking about vis-a-vis HP and IBM?

Well, when you add vis-a-vis HP or IBM, that changes.

Roughly think of 60% of what we're doing right now is data warehousing.

I think there's a belief that most of it is.

We were starting to see a movement of Exadata into OLTP now.

So -- and I think that would be logical.

That's what you would expect.

And that's the trend we're seeing.

Okay.

Thank you.

We'll go next to Kash Rangan with Bank of America-Merrill Lynch.

Hi.

Thank you very much.

I was wondering if you could comment on what are the implications for the database license growth rate based on all the Exadata shipments that you booked for the last three quarters?

Looks like customers are just beginning to use some of the features of Exadata, using [all data] licenses.

Just wondering what is your visibility into the pipeline for database licenses as you look at Exadata shipments that you've been able to put through?

That's it from me.

Thanks.

Again, I think a couple quarters ago, someone noticed our technology license sales were accelerating nicely and one of the things we pointed to was Exadata.

So we think Exadata is going to be a nice turbo charger to our overall database license businesses as we take share from TeraData as we take share from -- some of the big IBM P7s, HP SuperDome.

So I think across the board, our database is going to get stronger along with Exadata.

And Larry, if I could ask you a follow-up.

You wrote about the topic of big data recently.

How is Oracle equipped to handle big data, terabyte-scale databases and data warehouses?

That's it for me.

Thanks.

Well, again, we think that one of the things that's very attractive about Exadata, it certainly scales to petabytes, as with our (inaudible) by the way, SPARC Supercluster.

Our excellent -- you put all of these things in perspective.

Exadata is an Oracle-specific database machine.

It runs the database incredible fast.

It includes obviously the servers, very, very fast network and (inaudible) specific storage.

Exalogic is really designed to run our middleware and very specifically modern middleware java incredibly fast.

And then our SPARC Supercluster, is our new generation of general purpose computing featuring SPARC, Solaris, it runs everything, database, middleware, all of your applications, all the stuff you've got running on existing SPARC servers you can migrate to Superclusters.

All of those machines are designed to scale up and be used, if you will, in gigantic clouds, whether they're private or public.

And they'll handle petabytes of data and do it -- by the way, handling petabytes of data is two-fold.

One is you have to have scalability.

The other is you have to have built-in fault tolerance.

When you're running one of these big clouds, you can't imagine how disappointed people get when the cloud stops working.

And all these people just can't get at their data.

So one thing that's common across Exadata, Exalogic and SPARC Supercluster, it's a fault tolerant parallel architecture.

So one component sales, Everything else keeps running.

That gives us not only scalability, which we -- and performance which we normally talk about but also gives us this third key element which is fault tolerance, which HP doesn't have and IBM doesn't have because they don't really have parallel architectures for online transaction processing.

I can't help but add to it, that it's also the cost of the scale that's a big benefit with Exadata.

You get in traditional data warehouses, the way you drive performance at traditional big petabyte warehouses is you throw a lot of technology at it.

So you string out all this data, lots of discs and then you put a lot of nodes against it trying to get to data.

The secret sauce in Exadata is bringing the smarts to the data as opposed to the data to the smarts and it changes.

That's why I make the comments about these 15X to 50X improvements.

These are huge because you can take it either in performance or you can take it in lower cost while you do everything Larry just said.

It's a game-changer.

Thank you very much.

We'll take our next question from Phil Winslow with Credit Suisse.

Hi, guys.

Great quarter.

Just wanted to focus back on the database business for a bit.

Obviously you continue to see good growth there in terms of software licenses.

What continues to drive that?

Database held it up very well in the downturn, and continues to grow nicely as the apps business also continues to reaccelerate.

Is it core database, is it add-ons?

What's the feedback you're hearing from customers?

Thanks.

We think our technology is getting faster and more reliable and more secure at a higher rate than our competitors' technology.

So we think the differentiation, the differentiation we have and scalability and performance and security and reliability and cost puts us in a much stronger position when we're competing with IBM at the high-end, and Microsoft in the low end.

In database, and in middleware and as far as applications, we think -- I mean, I'm not sure you want me to go into it here, but we think there are lots of reasons why we're continuing to gain share every quarter over the last few years against SAP.

And I outlined our three-way strategy, to have industry specific applications where in a lot of cases the telco is running pretty much only Oracle software.

And we're seeing some banks now making those commitments to Oracle software, up and down the stack.

SAP just doesn't have these applications.

Next is our commitment to protecting customer's investment in their existing Oracle technology, whether it's, PeopleSoft, Siebel, JD Edwards or the e-Business suite and then make this huge investment.

I think they're coming down very quickly in next calendar year, we're going to be talking a lot about Fusion how we've got this new generation of applications by the way that runs on premise and in the cloud, in the public cloud, as well as private clouds on premise, or public clouds.

Nobody has this.

I mean, SAP business by design runs just in the cloud.

SAP's traditional applications run just on premise.

Fusion runs both places.

You decide where you want to put this.

You can't do that with Salesforce.com.

You can't do that with Workday, a lot of these guys.

So we've got this brand-new, extremely modern java-based suite of applications called Fusion that runs in the cloud, runs on premise.

It's going to dramatically strengthen other position against our cloud-based competitors like Salesforce and Workday and our traditional competitor, SAP.

So we think you're just seeing the beginning of us gaining share in applications.

That's going to really take off next year.

Got it.

Thanks, guys.

That concludes our question-and-answer session for today.

I'd like to turn the conference back over to Mr.

Bond for any additional or closing remarks.

Thank you, operator.

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

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

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

That does conclude today's conference.

We thank you for your participation.