甲骨文 (ORCL) 2016 Q1 法說會逐字稿

Welcome to Oracle's first quarter 2016 earnings conference call.

As a reminder, this call is being recorded for replay purposes.

I'd like to now turn the call over to Ken Bond, Senior Vice President of Investor Relations.

Please go ahead, sir.

Thank you, Operator.

Good afternoon, everyone, and welcome to Oracle's first quarter FY16 earnings conference call.

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.

On the call today are Executive Chairman and Chief Technology Officer Larry Ellison and CEOs Safra Catz and Mark Hurd.

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

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

These forward-looking statements are also subject to risks and uncertainties that may cause actual results to differ materially from statements being made today.

As a result, we caution you against placing undue reliance on these forward-looking statements and we encourage you to review our most recent reports, including our 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.

And finally, we are not obligating ourselves to revise our results or publicly release any revision to these forward-looking statements in light of new information or future events.

Before taking questions, we'll begin with some prepared remarks.

And with that I'll turn the call over to Safra.

Safra?

Sorry about that.

Good afternoon, everyone.

Thanks, Ken.

I am actually off site today, so hopefully this phone will work out.

If you don't hear me, I may have to reconnect.

But I do have, obviously, Ken Bond on the call.

And Corey West, our Chief Accounting Officer is also, I think, in the room with Larry and Mark.

I'm going to focus today on our non-GAAP results for Q1.

I'll then review guidance for Q2 and I will actually give some guidance for the entire fiscal year.

And then I'll turn the call over to Mark and Larry for their comments.

As you know, we didn't provide US dollar guidance for Q1, given the high volatility in exchange rates we were seeing at the time.

As it happened, Q1 currency headwinds were actually 2% worse than we expected.

The currency impact for both total revenue and hardware revenue ended up being 9% and for software and cloud revenue was 8%.

Now we do get benefit on the expense side, but because many of our expenses are in the United States, we get a very small benefit; and of course, our expenses are significantly lower than our revenues and so our operating income was actually impacted by 12 points.

Earnings per share was $0.06 lower because of currency, $0.01 worse than we anticipated.

With currency still volatile, we will continue to use constant dollar growth rates on our quarterly calls, so we can have some measure of consistency and also share with you how we look at the business.

We've also changed the presentation of our income statement to better reflect how we look at the Company now that cloud has become a significant contributor to revenue.

Our software business is really two parts of one business, the On-Premise Software business, which is steady and growing modestly, and the Cloud business that is in a high growth phase.

We felt it made sense to show the components grouped together in our income statement to make it easier to see the progress we are making in the cloud.

The largest part is On-Premise software revenues, which is made up of new software licenses plus software license updates and product support.

On-Premise Software revenue was up 4% for the quarter, to $5.8 billion.

The largest component is software license updates and product support, which was up 8% for the quarter, to $4.7 billion, with attach and renewal rates running at their usual high levels.

We expect the On-Premise Software business to remain steady.

Over the full year, I expect we will see modest growth comprised of continued growth in software support revenue that offsets any declines in new software license.

Moving on to Cloud.

We start with SaaS and PaaS and then add infrastructure as a service to report total Cloud revenues, which were up 34%.

Within the Cloud business, we continue to see excellent momentum in SaaS and PaaS, with bookings growth of 165% this quarter on top of the 54% growth from Q1 of last year.

SaaS and PaaS revenue was $452 million, up 38% from last year.

The triple digit bookings growth that we have been experiencing will translate into significant acceleration in SaaS and PaaS revenue in the second half of the year.

You can also see the coming revenue acceleration of our Cloud business in the SaaS and PaaS billings and deferred revenue.

SaaS and PaaS billings grew 70% in US dollars this quarter, on top of the 100% growth last quarter.

Also, the gross deferred revenue balance is now nearly $1 billion and was up more than 100%.

We've put the billings numbers up on the website for you to see in detail.

Our significant success in Cloud bookings will not only help accelerate our revenue growth, but it will also benefit our margins and earnings over time.

Cloud revenue, as you know, is recognized ratably, while new license is recognized all up front.

This timing difference has the effect of lowering near term operating margins and earnings per share, but over time will increase both.

As our SaaS and PaaS bookings have continued to accelerate, capital expenditures for the quarter were higher compared to last year.

The bulk of them are largely complete and you can see this in the $150 million sequential decline in CapEx this quarter.

I expect CapEx for this year will be materially lower than last year, as we utilize the investments that we have already made.

We are well aware of the near term impact to gross margins that this build out cost has had on the Cloud business, and I think that Q4 of last year marks the bottom for SaaS and PaaS gross margins.

Q1 Cloud gross margins were up slightly on a sequential basis, and I think we'll see another modest improvement in Q2.

But as our Cloud business scales up, we expect SaaS and PaaS gross margins will be around 60% by Q4 and then 80% over the next two years.

The balance of our Cloud revenues come from Cloud Infrastructure as a Service, which was up 23% to $160 million.

The gross margin in this business was up sequentially to a record 45%.

While SaaS and PaaS revenue will see much higher growth rate, along with significantly higher gross margins, we expect Infrastructure as a Service revenues will grow at a single digit rate and maintain a steady margin profile over time.

As I mentioned, there are two parts to our software business that can be looked at separately, but should really be considered together.

The On-Premise Software business, which will grow modestly and serve as a tremendous base of loyal customers using our leading products.

The SaaS and PaaS revenues will grow rapidly and will quickly become a significant contributor to revenues and profits as we help those same customers transform their businesses over time.

In total, we will see growth in the total software business begin to increase this year, as cloud revenue grows as a percentage of the total software business.

Finally, total hardware revenues grew 6%, which included hardware products revenue of $570 million and hardware support revenue of $559 million.

Total revenue for the quarter was up 7% from last year, to $8.5 billion.

Non-GAAP operating income was $3.5 billion and the operating margin was 41%.

Sales and cloud investments, along with the integration of MICROS, each impacted operating margins negatively by about 1%.

The non-GAAP tax rate for the quarter was 25%, which was 3.5 points higher than last year.

The GAAP tax rate was 24.4%, which was 5 points higher than last year.

Non-GAAP EPS was $0.53 in US dollars and GAAP EPS was $0.40 in US dollars.

As I said earlier, both were $0.06 lower due to currency.

Free cash flow over the last four quarters was $11.8 billion.

We now have nearly $56 billion in cash and marketable securities.

Net of debt, our cash position is approximately $14 billion.

The short-term deferred revenue balance is $9.1 billion, up 10% in constant currency.

This quarter, we repurchased more than 75 million shares for a total of $3 billion, up from our FY15 run rate of $2 billion a quarter.

And given current market conditions, we expect to buy even more in Q2.

The Board of Directors also declared a quarterly dividend of $0.15.

Over the last 12 months, we've repurchased more than 220 million shares for a total of $9.1 billion and paid out dividends of $2.4 billion, for a total that is nearly 100% of free cash flow.

Now to the guidance.

As I mentioned, I'm going to give you guidance for Q2 and then for the whole year.

We feel very good about the progress of our cloud transition and clearly, customers are migrating to the Oracle Cloud.

Over time, we expect the Cloud will result in more revenue and profit for Oracle as we take share from legacy on-premise competitors, other cloud competitors who are limited to point solutions, and the labor suppliers who can't possibly offer what we have already built.

Of course, I am seeing many of the same financial news reports that all of you are about the whole world, and so I think it is still best to be prudent here.

Additionally, we expect to see continued volatility in exchange rates and significant currency headwinds.

I'm going to give you constant currency guidance, but if exchange rates remain the same as they are right now, we expect to see a currency headwind of about 6% on revenue and $0.05 on earnings per share.

But again, it could be significantly worse.

Maybe if we're lucky, it could be a little bit better.

All of my guidance today is on a non-GAAP basis and in constant currency.

So here it goes.

SaaS and PaaS revenue is expected to grow 36% to 40%.

Cloud IAS revenue is expected to grow 5% to 9%.

Total Cloud and On-Premise Software is expected to grow from zero to 2%.

Total revenue is expected to range from a negative 2 to a positive 1. Non-GAAP EPS in constant currency is expected to be somewhere between $0.63 and $0.66.

Now this assumes a non-GAAP tax rate of 25.5%.

Of course, if this quarter is any example, it may end up being different.

Looking further out, we expect to see a material acceleration in SaaS and PaaS revenue.

As a result, I'm providing full fiscal year guidance for some key items.

As before, my guidance on the full year is in constant currency.

SaaS and PaaS revenue is expected to grow around 50%.

On-Premise Software is expected to grow approximately 1%.

Total Cloud and On-Premise Software is expected to grow between 3% and 4%.

Finally, SaaS and PaaS gross margins are expected to materially improve in the second half and exit the year at around 60%.

With that, I'll turn it over to Larry and Mark for their comments.

Thank you, Safra.

This is Larry.

Over the last three years, we've been in the start-up phase of our Cloud business.

We've developed services at all four layers of the cloud, a complete set of enterprise SaaS applications, plus our database and middleware platform services, plus compute and storage infrastructure services, and an expanding set of data services.

We have deployed those Cloud services in 19 data centers and 14 countries around the world.

During this start-up phase of our Cloud business, we have increased our data center service delivery capacity from half a megawatt to 45 megawatts.

That's a 90x.

Not 90%, a 90 times increase in our data center capacity in three years.

We've installed over 40,000 physical devices, 100,000 virtual machines and over 8 petabytes of storage.

We now have in place the physical infrastructure to dramatically expand our cloud customer base.

We are entering the rapid growth, scale out phase of our Cloud business.

We're adding thousands of new SaaS, PaaS, IAS, and data customers to our existing data center.

With all that customer growth on top of our existing infrastructure, we expect that our Cloud margins will double from 40% to 80% over the next two years.

Mark, it's your turn to tell everybody about all those great customer adds we had during Q1.

Thanks.

By the process of elimination, this is Mark actually speaking.

So I thought I'd do two things, to Larry's point, tell you about some wins, but also give you some facts about the quarter.

Revenue grew 38% year-on-year, 8% quarter-on-quarter.

Billings grew 70%, again growing much faster than Salesforce and Workday.

Bookings were $191 million USD, 165% growth.

Like I always do, I want to tell you the number of customers we added.

We added 612 new SaaS customers in the quarter, brand new logos.

616 expanded their SaaS business with us in the quarter.

In HCM, it was 166 new customers, more than double what Workday added.

In CX, 280 customers.

In the ERP/EPM, it was 200 customers, double last year.

That is also more than Workday's lifetime sales.

We now have 1,350 customers in our install base.

More than 300 are already live, including 100 that went live in just Q1.

What's taken Workday eight quarter to do we did in one quarter.

We never see SAP.

PaaS, we added 800 new PaaS customers in the quarter.

2,500 in just two quarters.

Bookings over $65 million.

Now I think we have a shot in Q2 to book more PaaS than we actually did in Q4.

I think we have a shot.

That's how fast we see our pipeline growing in PaaS.

I'm going to wrap up and then I'm going to read you some news.

But I just want to connect a few dots between what Safra and Larry described on the Oracle SaaS PaaS Cloud.

We're currently at a $1.8 billion run rate in revenue.

If you include IAS, it's $2.4 billion.

We will book between $1.5 billion and $2 billion in SaaS PaaS ARR in the fiscal year.

Gross deferred revenue has grown from $475 million to nearly $1 billion in the year.

Billings are growing 70%, gross margins are headed to 80%.

SaaS PaaS will be a very large and very profitable business for Oracle.

Now in addition, I just want to give you some brands that we got in the quarter, just so you have a feeling for who all these people are that are buying solutions from us.

So first let me hit HCM.

A few wins.

Simick, they're an Australia fusion HCM.

We replaced Workday at Simick in the quarter.

Cypress Semiconductor, GDF Suez, Limited Brands, Nationwide Insurance, Restoration Hardware, Rutgers University.

We expanded our HCM clouds at Omnicare, the Navy, Wespac Bank.

In ERP/EPM, Athena Health, Chicago Sun-Times.

These are all new customers, by the way.

Fox Home Entertainment, US Department of Energy, Lending Club Corp, Lenovo, LG Electronics, Rutgers University.

By the way, you'll hear a few names twice, which is because they bought multiple pillars at the same time.

In Sales Service Cloud, Fox Home Entertainment, Royal Mail, Sally May, Sirius XM, Toshiba Medical, West Farms, expansions at Cigna, Motorola, Nikon, Polycom, Virgin Atlantic, Wespac.

In our Marketing Cloud, Aer Lingus, General Mills, Jeans West, Telstra, Verizon, expansions at Booz Allen Hamilton, Forever 21, National Instruments, NetApp, Pier 1 Imports, Public Broadcasting System, Taylor Made Golf Company, Time Inc.

I'm going to stop.

But I wanted to give you a flavor for not just the number of customers, but the quality of brands that are buying from us at the same time.

Ken, with that, let's take whatever questions anybody's got.

Great.

Thank you very much, Mark.

Operator, if you could please instruct the audience for questions.

(Operator Instructions)

And our first question will come from the line of Phil Winslow with Credit Suisse.

Hello.

Thanks, guys, and congrats on another great quarter in the Cloud, with that 70% billings growth.

And also, thank you for the commentary on gross margin there going forward.

That was really helpful.

Just wanted to double click on the Cloud for a little bit, SaaS and PaaS.

Mark, you gave us some commentary on the PaaS side for Q2.

And obviously, it sounds like that's ramping.

But if you focus in on the SaaS side, what trends are you seeing there, HCM versus financials, maybe trends on adoption you can see there in go live?

Any sort of color would be great.

Well, listen, I hate to compare our pillars, because individually they are all doing quite well.

So I don't want to compare them against each other.

But it's clear to me the ramp in ERP is extreme.

When you look at the number of customers we would be able to bring on board, remember, this is really our fifth quarter, really, in the business in the cloud.

When you think of 1,350 customers that are now under contract, I think, to Oracle -- Larry can do this better than I can -- but in roughly 23 years, 24 years, we're sort of already at, I don't know, 10% of the on-prem base that's now in the cloud, in terms of just sheer number of companies.

And our pipeline is just full.

So ERP, we're highly differentiated.

We're way ahead of whoever it is you think is number two.

And it's extreme.

And I think it's a combination, Phil, of what we've talked about before.

It's our products have done nothing but get better and better and better.

We're on now Release 10.

Release 11 is now coming out.

So our products have gotten better.

Our people, we've got more people.

They're better trained.

And we just have now a lot of go lives and a lot of references.

And that's true across each one of our pillars, Phil.

Yes.

I'd like to add a couple of things.

One is that the products that we have are being translated into more and more languages and updated for statutory compliance in more and more countries.

So there are more markets we can sell them into.

And we're adding supply chain and manufacturing with this release, and ERP.

So there's really nobody with as comprehensive a suite of enterprise software products.

And we're able to sell it internationally.

So we think we have a huge advantage.

I don't know who you consider the competitor in ERP.

Again, every quarter, if Workday is the competitor, every quarter we sell -- Q1 is our smallest quarter and we sold more deals in Q1 than Workday's sold ERP deals, and Workday has sold since their company began.

We do that every single quarter.

So our relative strength.

I think, as Mark said, I think all of our pillars are doing well.

But on a relative basis, whoever is number two in ERP, they're a long, long way behind.

And by the way, ERP is the largest segment of applications in the cloud.

That will be just like people, SAP was the leading on-premise application software vendor in the last generation of applications because they were number one in ERP.

The leading applications vendor in the cloud this generation will also be whoever wins the ERP war.

Phil, we've fallen into the trap that I didn't want to fall into is comparing pillars.

And you can tell how excited we are about ERP.

But frankly, if you were in our Marketing Cloud business, you would be really excited.

When you start running off the names that I run-off in Marketing Cloud, we are highly differentiated and we're winning.

We've done well in B2C.

We've done well in B2B.

You add what's now occurred in Service.

We're starting to see, again, significant service growth in our Service Cloud and our Sales Cloud, while again small and very different than ERP, up against a big competitor, our Service Cloud is showing very strong growth.

And so if you looked in each of our pillars, we've added on some really cool stuff here, just while I'm on a roll here.

We've added on a very cool Data as a Service business.

So our Data as a Service business, which come to us with our BlueKai acquisition and our Datalogix acquisition is now another component of our Marketing Cloud.

And that had tremendous performance in Q1.

So Phil, it's really a story across all of our pillars.

ERP is, of course, exciting, because, to Larry's point, it's the biggest pillar in terms of total available market and one that has a lot of pull.

It pulls a lot of HCM.

When we win in ERP, our connect rate of HCM to ERP is pretty high and growing.

But the success is broad based, and that's sort of the enthusiasm you hear keep coming from us as we talk about what we see happening across our SaaS business.

Next question, please.

Your next question will come from the line of Michael Turits with Raymond James.

Hello, guys.

I wanted to switch over from [MAPS] to database.

I wanted to ask you broadly, I know the 12c is being adopted Fast 11.

Can you give us an update on the adoption of multi-tenancy and in memory options?

And from a cloud perspective, how much traction are you getting with the SaaS providers?

And maybe we could say for database as a service, how is that working as part of the broader platform as a service offering?

Okay.

So we have never had -- any of our options for the database have an uptake of SaaS as we're seeing with multi-tenancy and in memory.

We've never experienced people that want to get these two particular features turned on.

And this is in our on-premise customer base.

As you know, most major SaaS companies run Oracle.

SAP runs Ariba on Oracle.

SAP runs SuccessFactors on Oracle.

SAP runs Concur on Oracle.

Net Suite runs on Oracle.

Salesforce runs on Oracle.

And all of them are able to deliver more efficiency in terms of query processing by turning on the memory feature.

All of them are able -- by more efficiency means they useless hardware and they deliver better performance, so they lower their internal cost and deliver a better performance.

All of them are much more efficient in the usage of hardware resource by turning on multi-tenancy.

Now these guys have multi-tenancy built into their application.

That doesn't mean they don't layer things.

So they have multi-tenancy at the application level, multi-tenancy at the database level, and then multi-tenancy at the operating system level, which is called DM.

All of those things kind of conspire together to more efficiently utilize your hardware to provide better recovery and security systems.

So we see the demand from traditional on-prem customers and the new generation of cloud customers for these two new options, unlike anything that's happened before.

Next question?

Go ahead, Michael.

Go ahead, Michael.

Yes, just to finish up, I was curious as to two things.

One is how is database as a service fitting in with your broader platform as a service offering?

And is there any slowing of database in expectation of Release 2 for 12c?

I don't think, as you know, if you buy the database now and you maintain support, you get all the subsequent versions.

So no, I don't think there is any slowing.

However, we are encouraging people to run all their dev tests, all their development and test in our cloud, as opposed to on-prem, which does imply a shift from database on-prem to our database service.

That's what we want them to do.

We think that lowers their cost and raises our revenue and profits.

We think it works very well for us.

So you really have to look at those two businesses added together.

And I think that's what Safra is saying in her presentation.

You can't look at database on-premise separately from PaaS as database as a service.

It's really the sum of those that have to grow.

The sum of those have to grow at the top line level and the sum of those have to grow in terms of profitability.

And we see the sum, and we see that happening right now.

So we think PaaS, yes, some people will elect to buy database as a service as opposed to running dev tests on-prem, but we think that's a good thing.

We think they get a more efficient service.

They spend less, we get more.

I think one thing, Michael, that I'd add to it is that from a customer's point of view, these decisions aren't necessarily binary, meaning that I'm going to run database as a service as opposed to database on premise.

What the major differentiation for Oracle that nobody else can do is that we can actually do this on premise for you and do it for you in the cloud, and we can do it at the exact same time.

We can deliver to you a capability in the cloud and we can deliver the exact same capability to you on premise and move those workloads back and fourth.

Whether that's database as a service, some dev test and then dev test in our cloud into your data center to run your production applications.

It's important to understand, this is a huge differentiator that only this Company can deliver.

We're not just cloud.

We have a fantastic hyper growth cloud with a on-prem capability that nobody else brings the two together like Oracle.

For example, we have Exadata as a Service that we're rolling out at Oracle Open World.

So we have Exadata as a Service in our cloud.

And we obviously sell Exadata machines to run on premise, the most modern way, the most cost effective way to run our database.

So you can run part of your database work load on-prem, on that Exadata platform, part of that database workload in our cloud on that Exadata platform.

And our management tool, when you're running your data center assets and our cloud assets, the person whose running that thinks that that's one pool of assets.

It's one set of management tools that allow you to run your Exadata and the Exadata that's in the cloud together, move data back and fourth, move workloads back and forth.

Co-existence of cloud and on-premise computing is going to be a decades long process, if not forever.

But during this long period of co-existence, we think it's very important to have absolute compatibility between on-prem and in the cloud.

And Mark points out our biggest differentiator in this business.

We have great on-premise technology with some of our fancy appliances, like Exadata big data appliance, Exalogic, I can go on and on, and we offer that same exact advanced technology in the cloud and we lace it together and make it look like one set of assets.

At the risk of over answering your question, I'm going to stop here.

By the time we get to Open World and Larry presents on Sunday night, we will have now fundamentally all of our software assets redone for the modern cloud.

So the ability to do what Larry said is not something that's five years away, four years away, three years away.

We can start delivering Exadata as a Service in these opportunities that Larry described now.

Thanks, Larry.

Thanks, Mark.

Next question, please.

Your next question will come from the line of Heather Bellini with Goldman Sachs.

Thank you so much.

This is a question for Mark.

I was just wondering if you could share with us, if you had to characterize [what] a name brand of the SaaS transition, if you could kind of help us think about that.

And also, when do you think we start to see -- I know you mentioned some commentary about momentum in PaaS -- but when do we see that become a material part of that SaaS/PaaS revenue line?

And then I guess the follow-up to that would just be you've touched, I think, on Phil's question about the SaaS competitive dynamics, but can you walk us through how you're thinking about the competitive environment for PaaS, as well?

Thank you.

Okay.

So that was one of those, let me give you a question in six parts type thing.

Exactly.

Heather, I'll try.

So in the baseball analogy, I don't know, top of the first.

We're in the very beginning stages.

It depends a little which pillar we're talking about.

Well, for SaaS first and then for PaaS.

Start with SaaS.

And I am talking about SaaS and I'm talking across each pillar.

The ERP opportunity has just started.

Now it happens that we're ramping incredibly fast.

I think if I'd have said five quarters ago and said -- hey, I think we'll have 1,350 customers signed up to run in our cloud in about four or five quarters, everybody - you should go seek some help, because it won't happen that fast.

It has.

That said, we are only now getting to the point, Heather, where we have all the references required, we've got our sales force scaled.

I think we are in -- and by the way, to Larry's point, I thought Larry made a great point.

We are releasing a lot of new products.

You may not come across that way, but with the next release we now release products that are localized for many, many more countries, markets that frankly we just weren't in, give it six months ago, in addition to the fact that in ERP we're releasing supply chain manufacturing now, so we can now go after manufacturers, as well.

I made a comment about what we've added now in Marketing, in terms of our data cloud that we've now supplemented our Marketing Cloud with.

We have new releases coming in Service Cloud.

So there's just a whole suite of products here.

So I would tell you, top of the first.

This is a multi-year, long, long game.

We just happen to be extremely well positioned as the only one who has a suite of products and the only one that has best of breed products that are in a suite that can then combine it, to your point, with a PaaS capability that allows you to extend those applications without destroying the upgradability of the application suite that you bought.

So it's a great mousetrap.

Our pipeline, a year ago at FAM, I made a statement about the size of our pipeline, probably nobody remembers it because it seems like a long time ago.

Think about since then, our pipeline in SaaS, this is our annualized pipeline, has more than doubled, more than doubled off of a really big number.

So now you've got a pipeline scales.

And the great thing is, I know nobody thought it at the time, you've seen it now come through the pipeline and turn into bookings.

And my expectations are very favorable, as I've indicated, about what SaaS bookings are going to look like for the rest of the year.

Next question, please.

Operator?

The next question will come from the line of Ross MacMillan with RBC Capital.

Thanks a lot.

Safra, I'd like to drill into your comments on Cloud gross margins and the expansion that you're expecting as we exit this year and look further out, pretty significant.

And I guess the question is, is that really just driven by revenue scale and is there a certain level of revenue scale in PaaS and SaaS that you need to achieve the target 80% in two years?

Thanks.

Well, it's actually going to hit, in many ways, in both revenue and expenses, because we have, as Larry explained, we have invested immense resources in building up our infrastructure.

and as I mentioned on the call, our capital expenditure numbers have been very, very large as compared to what we are used to historically.

And so we've put out those expenditures and we've started to amortize them; however, in the second half of this year, our capital expenditure numbers are going to be significantly lower, even significantly lower than even this quarter.

You'll see, I believe, at least another $100 million decline and then a continuing reduction.

And the reason that matters is because what you'll simultaneously be seeing is a massive amount of revenue which can finally be recognized.

That is going to start in true earnest in the second half of the year, in Q3 and Q4, while simultaneously we will not be adding capacity.

In fact, we will be spending less than we historically have spent on capital expenditures.

We'll be back to numbers that you would have looked at and seen in FY14.

So as expenses -- and in addition, you understand, it's not only capital expenditures, it's all sorts of staffing and labor and tools, et cetera, that have all been put in place.

And we will not have to add them, while the revenue is going to start flowing, both out of the balance sheet, which is extremely apparent -- and you will be able to look at it in detail in the Q filing that we should do either at the end of this week or at the beginning of next -- and in our new sales.

So that's what it is.

Revenue up, expenses stabilizing and actually going down.

Thank you, Safra.

Your next question will come from the line of Kash Rangan with Bank of America.

Hello.

Thanks for taking my question.

My question is for Safra.

Safra, how do you view the investment tradeoff between the license business and the cloud business?

Because I think that it's pretty apparent to us that one business has higher growth but lower margin.

And in part of your comments, it looks like CapEx is going to come down for the Cloud business.

So are we at the point where the license business has troughed and is not going to decline any more and the profit profile of the Cloud business will start to add on and that this year, in some senses, the trough in your operating profits.

A lot of the other software companies have been attempting to make this model transition, have been resetting their numbers because of the license business, by their own volition, is coming down, troughing, and then the cloud business starts to pick up.

So how should we look at Oracle in the context of this shift that's happening here?

Thank you very much.

Sure.

Well, first of all, the way we look at the on-premise business -- and I'm not sure that I'm entirely understanding your question -- but there's the new licenses and, of course, our massive installed base of license subscriptions.

We look at that as the on-premise business.

And that business is steady, growing slightly, very profitable, of course, because we are at scale.

We still make a lot of investments in that area.

However, you should be thinking about the cloud business as another way for us to offer that same software to our customers in a different way, where we are actually hosting the software and doing a lot more of the labor, and because we'll have economies of scale they could not possibly have as individual customers.

So really, it's all one business; however, more and more when we provide it as a cloud provider, we are providing the hardware, the software, the labor, all in a package.

And that gives us a is significantly larger amount of their wallet share.

Simultaneously, the customer is actually spending less overall, because we can supply this package in a very economical way.

But also, since all of it is our own differentiated intellectual property, we can do it at much higher margins.

And the more scale we get, the more profitable we will be.

We have been in a start-up mode in this whole area.

We've done it basically within our profit envelope; however, this extremely quick transition which you are truly seeing the pivot in this fiscal year, which is the reason we're breaking it out for you and really breaking our own rules of guidance, where we're actually giving you a full year guidance so you can see how we're coming out of it.

So Safra, I'll conclude this and take this to the financial implication, could this year be the trough in operating profits and then as a result of the nice investments, we start to see the operating income of the Company start to grow in the next fiscal year?

I believe it is, yes.

Yes, absolutely.

Oh, that's great.

Thank you.

That's it for me.

Next question, please.

Our next question will come from the line of Brent Thill with UBS.

Thanks.

Mark and Safra, I think your investors understand this transition to the cloud is going to take time.

But the ramp has definitely taken longer than some of the financial forecasts you've given in the last several quarters.

And now you're calling for a weaker first half but a better second half.

I guess just what's underpinning your confidence that this ramp is going to happen in the back half?

Frankly, it's not possible that it does not happen.

There is a lot of revenue on the balance sheet that will be recognized in the second half.

It cannot not be.

It is appropriate to do that, to the extent that in some cases customers have been through their promotion period and also we just have booked so many contracts that are ramping up and billing and starting to build, there really is -- it's not avoidable.

It is inevitable that Q2, that half two -- second half, is going to be very significant.

Brent, I'll just add to it.

First, we have the contracts.

Second, when you look at the balance sheet and see the $1 billion of deferred, you can just do the math.

So we have the contracts, and so it's just not, to Safra's point, it's not a guessing game.

Okay, and that's very helpful.

Just a follow-up on the license guide, Safra, for the full year.

You mentioned that will stabilize versus what you saw last year in terms of the decline.

What is giving you the confidence there that, that will stabilize versus what you saw last year?

Well, I have my forecasts.

I have my closure rates that I'm expecting.

Remember, it's not new license only.

It is a software -- it is our software installed base with extremely high renewal rates that continues.

When we sell new licenses in addition to our base, then we get additional growth.

Again, the only question is what level of decline we have in new license.

We're being conservative.

There's always risk that it won't be.

But again, new license is gotten to be a smaller percentage of that whole on-premise business.

And we're doing the same type of estimating that we do, do our best with all the data we have.

Great.

Thank you for the color.

Your next question will come from the line of Raimo Lenschow with Barclays.

Thanks for taking my question.

Safra, I wanted to stay on that point a little bit.

So if you look at the license number that we see at the moment, it was like last quarter was minus [10%], this quarter was minus [9%].

And obviously, there's the cloud transition going on which impacts you negatively.

Can you talk a little bit about other factors that might impact this.

And we all heard about the issues around China, et cetera.

So maybe talk a little bit about what you see in the different regions that might impact that growth number, as well.

Thank you.

Sure.

I mean, look, there's no question that internationally there is quite a lot of chaos, to say the least.

And the currency impact of countries that we have been doing very well is not helping.

Even though my Latin America team is executing out of the park in constant currency, the devaluation of the different currencies in LAD, for example, are very negatively affecting my US dollar results.

Obviously, there is quite a lot going on in Europe in different parts, and both that and currency.

I feel that Asia Pacific for us is actually stabilizing.

China is not a big country for us, historically, so that's less of an issue for us directly.

But the countries and businesses that are impacted by the China trade, like Australia, Canada, Brazil, those can be at risk.

So I'm not an economist.

These things are impacted by especially transactional business, like new hardware sales or new license sales, are impacted by these regional issues; but in general, on-premise software, which is dominated by software updates and product support, customers renew because that is software that is very important to them and is doing the most important work in their companies, governments, or non-profits.

And so that is obviously very, very steady for us and continues to do well.

But the transactional business is at the same potential risk; however, the cloud momentum is so strong that overall, we expect very significant growth.

And that is from contracts already in hand, in most cases.

Perfect.

Thank you.

And our final question today will come from the line of John DiFucci with Jefferies.

Thank you.

Safra, I'd like to better understand something I thought I understood, but it's how exactly your bookings of SaaS and PaaS convert to revenue.

For instance, bookings on PaaS and SaaS bookings last quarter were somewhere around $425 million.

And if you assume this was signed towards the end of the quarter, I'd expect Cloud revenue, SaaS and PaaS, to grow sequentially by about a quarter of this number, or by about $100 million.

But it only grew by a little more than $30 million.

And I'm just curious, is PaaS -- because it sounded like PaaS was a real big quarter last quarter -- is the revenue recognition like SaaS, where it's recognized immediately in the same amount over the three years of the contract, or is it recognized a little differently where it's recognized as the customer consumes the technology?

What am I missing here?

You're actually not missing anything.

You're exactly asking the right question.

And unfortunately, the answer is, it depends.

Because depending on what kind of agreement the customer signed, they may have signed a metered agreement, which means it will be recognized as they use it, however, it will expire after a certain time period if they don't use it.

When that is what we call metered.

On the other hand, to the extent that they have a subscription, then let's say one month's worth is recognized and then another month, whether they use it or not.

So SaaS is almost always a subscription.

PaaS can be either metered or a subscription, and so it is recognized differently.

And that's it.

That actually makes a ton of sense.

It's really helpful.

But just one quick question follow-up to that.

If it's a metered PaaS deal and it expires, at that time, given the contract terms, the customers -- do you recognize anything remaining on that contract at the time of expiration?

If it's expired, let's say they bought $100,000 metered, you could almost consider it a gift card, if they use it all on the first day, I book it all right then.

If they don't use it at all, I'd book it when it expired.

Perfect.

That's really helpful.

Thanks, Safra.

John, I'll just add, on SaaS just to make sure you understand what's happening as we get to Q3, because Safra talked about Q3 and Q4.

So when we entered the SaaS market, we had a series of promotions, meaning that you would get some time to install.

Our strategy was to give you an incentive when you bought that you had time to then implement, and that promotion had a certain amount of time associated with it.

Obviously, that was part of building up our reference base.

Secondly, as we built up our reference base, we actually shortened the promotions, so that actually it went down by half the period of time.

The two sets of promotions over the last couple of years, just by coincidence, coterminously end at the end of Q2.

So the percent of the bookings that were on those types of promotions both end at the end of Q2 of this fiscal year.

So that's why one of the reasons in SaaS why you will see a jump in revenue that also will not be explained by bookings.

So again, while you say I couldn't explain Q2 to bookings, you won't be able to explain exactly the alignment of the increase in revenue based on the bookings either, because underneath it is this promotion.

So there are multiple dimensions here.

There is this promotion dimension, there's the dimension that Safra described, which is about a percent of our PaaS is metered and a percent of our PaaS is subscription, so there's a couple of different ways you can consume the PaaS.

In addition to it, it takes a certain amount of time for us, in some cases.

I told you about a win, for example, last quarter at HSBC, a very large ERP in the Cloud win.

It will take us several months to fully provision that ERP for HSBC.

So it's those factors together that formulate the conversion of the bookings to revenue.

Just to be clear, Mark.

One more time, why we are so confident.

We have the contracts, we know the expiration of the promotions, we know exactly when the PaaS expires.

And in addition, you see all of that as it relates to the deferred on the balance sheet.

Great.

And just to be clear, Mark, once you start, you're really giving, in the SaaS examples you gave, it's still once it starts to be, you may delay the beginning, when you should begin to start recognizing the revenue, but it will be recognized as a subscription, so evenly over the term?

Yes, it's a very important tool, John.

Because instead of discounting, you actually renew against a higher rate and the promotion is basically a window by which you have time to get installed.

And it's a very important tool as you're building up a reference base, and that's what we've done.

Now the promotions over that period of time, call that a two- or three-year period of time, have declined and declined and declined.

So the amount of promotion that's available in our SaaS portfolio today is materially smaller than it was two years ago and materially smaller than it was a year ago.

And so what happens is these things, the confluence of events really come together in Q3, which is where you see this pop in our revenue.

And then from there, you'll begin to see a more ratable alignment of bookings to revenue, sort of save the one point about the PaaS consumptions that Safra was making.

Okay.

Great.

That's all really helpful.

Thanks, Mark.

Thank you, Mark.

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