Oracle Corporation (ORCL) Q3 2012 Earnings Report, Transcript and Summary

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, Amber. Good afternoon, everyone, and welcome to Oracle's Third Quarter Fiscal Year 2012 Earnings Conference Call. A copy of the press release and financial tables, which include a GAAP to non-GAAP reconciliation, and other supplemental financial information can be viewed and downloaded from our Investor Relations website. On the call today are Chief Executive Officer, Larry Ellison; President and CFO, Safra Catz; and President, 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 those forward-looking statements. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from statements 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 revisions to these forward-looking statements in light of new information or future events. Before taking questions, we'll begin with a few prepared remarks. And with that, I'll turn the call over to Safra.

Thanks, Ken. Well, as you can see, we had a very solid quarter, as new software license revenue was up 7%, $2.4 billion, and that's really on top of the enormous 29% increase last year. As I said last quarter, all we really needed to do was focus on our execution and that we did. We exceeded our forecast for new license guidance, we met our forecast for total revenue and we beat the high end of our EPS guidance. Technology new license revenues were $1.7 billion, up 10% in constant currency, 9% in U.S. dollars. Applications were $658 million, up 3% in constant currency and U.S. dollars. As you recall, we saw 34% growth in apps last year and 21% the year before that. So we're very pleased as we're just starting to see the early benefits of Fusion apps, and we've just closed on RightNow and we’ll close on Taleo in April. Our license revenue for applications is now 66% higher than it was just 3 years ago as compared to SAP, which is about 32% higher. Geographically, results were very good, as we saw double-digit license growth in the Americas and Asia Pacific, with new license growth of 11% in constant currency and U.S. dollars for the Americas and 11% in JPAC in constant currency, 13% in U.S. dollars. EMEA, not surprisingly given the environment, was essentially flat. But don't forget that a year ago, EMEA reported 19% new license revenue and 47% growth in applications. Once again, the quarter wasn't dependent on any large deals. Software license update and product support revenues were $4.1 billion, up 8%. Supported cash rates and software renewal rates continue at the usual very high levels. Hardware systems revenue was $869 million for the quarter, due to the continued reduction in…

Okay, thanks, Safra. In this current quarter, in Q4, after a long period of testing with hundreds of early adopter customers, Oracle cloud platform and applications will be generally available to all customers in Q4. The Oracle cloud includes database and Java platform services, as well as Fusion CRM, HCM and financial cloud applications, all for a simply monthly rental fee. We named our cloud the Oracle Secure Cloud because we believe that we've addressed our customers' most serious concern about cloud computing, namely security. The computers that are connected to Oracle Secure Cloud run on multiple -- run in multiple Oracle data centers, and optionally, on computers connected to the Oracle Secure Cloud but installed in the customer's data center behind that customer's secure firewalls. This is especially important to large customers who want the simplicity and convenience of cloud computing but are unwilling to accept the security risks inherent in multi-tenant public Internet clouds. Salesforce.com does not offer this kind of security in their cloud. This is a key advantage for us going forward. But by far our biggest application competitor is SAP, not salesforce.com. And SAP does not even offer CRM, HCM and financial applications in the cloud to their large customers. And applications sold to big businesses are the bulk of SAP's revenue. So if you're a large customer that wants to run financial applications in the cloud, SAP does not have a product for you, but we do. Six years ago, we made the decision to write Fusion CRM, HCM and financial applications for the cloud. It will take years for SAP to catch up. In the meantime, the growing popularity of cloud computing gives us a great opportunity to replace SAP as the #1 applications company in the world. On to you, Mark.

I just have a couple of quick comments before I turn it back to Ken. I notice from [ph] Exadata recorded for us triple-digit growth. Seven of 8 quarters now with growth over 100% and the one we didn't was 95. Great Exadata wins at Sony and GT and Samsung. Exalogic bookings quadrupled from last year. Our newest product Exalytics has the fastest ramp of any engineered system that we've released. It went GA late in the quarter. It may very well be the strongest value proposition that Oracle has released yet, and we are not seeing competition anywhere. Going into Q4, we have a record pipeline for engineered systems and we expect that we will materially surpass all past booking records, and that our bookings for the year will be roughly in line with our original forecast. We talked a little bit about the cloud and Safra mentioned right now closing the quarter. She also mentioned we expect to close Taleo in April. Once closed, our existing SaaS business will exit the year at nearly a $1 billion run rate. By the way, it's a similar number to our planned exit for the year for engineered systems hardware. Software support was up sequentially and up annually as attach to renewal rates remain very strong. Hardware support attach rates continue to improve from pre-acquisition levels and we expect to see these go higher over time. Lastly, we added another 1,000 sales and presale people this quarter, and we did this while bringing operating margins back to record levels. Simply put, we are shifting our headcount mix to people who work on developing or selling great technology. We have great products and with the additional sales resources, we're going to drive more organic growth. With that, I'll turn it back to Ken.

Thanks, Mark. Amber, we'll start the Q&A session, please.

[Operator Instructions] We'll go first to Jason Maynard with Wells Fargo.

So the bounce-back in your Q3 results, it definitely makes it look like Q2 was, if you will, just a bad game and perhaps not necessarily a sign of other issues. But there's definitely still some investor question though about things like HANA replacing the transactional database, how does Oracle capture share of big data growth, the shift to cloud. So my question specifically what do you think changed from Q2 to Q3 and do you think any of these perceived threats are actually hurting your business and how do you assess the potential opportunity to grow Oracle revenue?

I'll just talk on the first part of your question. It's clear by these numbers that Q2 was actually an aberration. In fact, as you see sequential growth between Q2 and Q3 is the highest it's been in years, and which would be a sign that something was off frankly in Q2. Because Q2 and Q3 are usually very, very similar growth, similar quarters that sequentially I think new license was up by 16%. So it really does show that what we told you last quarter and that the quarter itself was truly an aberration. We feel very good about really all our product lines and maybe Mark and Larry, you'd like to just comment specifically on competitive situations and otherwise.

Okay, let me start. Two things, you mentioned HANA and you mentioned the cloud and I’m going to just talk about SAP in general. SAP has yet -- again, 6 years ago, we made the decision to rewrite our ERP and CRM suite for the cloud. We made that decision 6 years ago. We called it Fusion. SAP called it Confusion. We think it was the right decision 6 years ago and as cloud computing has grown in popularity, grown in popularity, grown in popularity, we think about thank God that we're sitting here with a complete ERP, CRM, HCM suite of applications, rewritten from scratch, ground-up rewritten from scratch for the cloud and SAP has yet to start. SAP hasn't even started. So if you want to buy financials for the cloud, you can buy it -- and if you're a large company, you can't buy it from SAP, you can buy it from Oracle. We think that's a very big deal. But if you're looking for a complete suite in the cloud, you can get that from Oracle. You can't get that from SAP. That's our core business. Their core business is not the database business, HANA. So let's go into HANA. So SAP decided not to focus on applications but instead, they said, "Hey, let's go compete with Oracle in the database business and let's build this HANA in-memory system." Now the last time SAP decided to compete with us in technology, core technology, they had this thing called NetWeaver and I'm reading all the same questions about NetWeaver that I'm now getting about HANA. My God, SAP is going in the Middleware business, they're a great company, great technology. This NetWeaver thing sounds fantastic. And at the time, Oracle was not a leader in Middleware. The…

I don't have anything to report. Bringing torp [ph] back for a second, I think we have -- listen, we've been looking out in the market. We hear all the rhetoric and the noise and so I don't want to make it sound like we're in denial that there's stuff out there, people talking. My only problem with it, Jason, is I just can't find them. I just can't find them. I can't find buyers. I had one report -- listen, I mean, you know this. We've got a very large field organization. So I asked them, send me all the data on real competitive deals and I'm going to stay up all night reading them. The good thing is I got to bed on time. So listen, I'm not trying to tell you -- we're very vigilant. I don't want to say we dismiss it. But right now for us, products that we've got and I meant what I said earlier. Exalytics is going into a market as we see it with very little competition. We have hundreds of Exalytics sales. We can't -- and again Exalytics is the competitor with HANA, the HANA appliance. And one of the nice things about Exalytics is you plug it in and your existing Hyperion EPM system runs faster. Your existing Oracle BI runs faster. With HANA, one of the problems is you plug in HANA and then you start to write programs, because it's not compatible with anything. Exalytics is. That's one huge advantage. But forget the huge advantage. Let's say you write a custom program for Exalytics and a custom program for HANA. Well, I believe we will run dramatically faster. We should -- I mean we've been working on this in-memory database technology for more than a decade. They just brought this thing out of the lab. How can -- we don't think it's a serious threat to us at all. One thing I would say, Jason, so we probably talked about this enough but I would say I do like is the fact that they're talking about engineered systems and the fact that it's going to play, I believe, a bigger and bigger role in core computing in IT. And IBM too. I think you see them coming out saying the same thing. I think what happens when you take a leadership position as we've had and I've talked about this before, it reminds me of when I was at Teradata years ago, we had an architecture that was different from everybody, one of the best things that happened to us was IBM coming out with an architecture very similar to ours, if you will, validating the approach that we're bringing to market. Very similar here to have these companies, these big companies now come to market say, "Yes, we have engineered systems, too." I guess, great, it validates the market for what we've already brought to market and continue to improve and enhance.

One last comment on HANA just to emphasize. HANA does not compete with the Oracle Database. I know on their roadmaps, they say that eventually HANA will compete with the Oracle Database. They'll never make it that far down the road because what HANA does right now it competes with Exalytics. It's an in-memory query accelerator is what it is and it competes with Exalytics and it cannot -- it will not successfully compete with Exalytics and it will never even begin to compete with the Oracle Database. I don't want to spend time now explaining all the recovery issues, all the security issues, how difficult it would be for us, for them, for anybody to take this in-memory technology and make it a legitimate competitor to any database, let alone the Oracle Database.

We'll go next to Adam Holt with Morgan Stanley.

My question, I think, is for Mark. It has to do with the changes on the sales organization. If my numbers are right, you grew your sales headcount by about 17% net in the first half and also made some tweaks to the selling plans. Another 1,000 this quarter. Could you maybe give us your thoughts on the philosophy around the growth and changes in the sales organization and where you think you are in terms of ramping your capacity?

Well, I think we've done a lot of it. So to be very frank, we set a plan in motion to accelerate our hiring. As you've seen, we try to do it within the context of a very disciplined expense structure. See, our expenses for the quarter are roughly flat within the context of the sizing, increased sizing in our salesforce. As we said last quarter, we were up 1,700. This is additive to that. Now just to be clear, this is salespeople and the presale people that support them. So it's a combination of both. But we have some more hiring to do but I would say we've been very successful in getting done what we've done and also, we believe we've brought in quality people. We are a very attractive destination to hire to, and we have taken advantage of that. So again strategically, we're adding more salespeople but we're also adding more specialized salespeople. They’re salespeople very focused on the products that they represent, they're experts at the products they represent and we're going to take advantage of that. And now force a -- push higher productivity out of those people that we've hired. So we think we have a lot of gas in the tank to drive organic growth given the hiring we've done.

And we'll go next to Kash Rangan with Merrill Lynch.

We hear a lot of big data as an industry trend. I just wanted to get to the engineered systems marketing. You talked about Exalogic quadrupling the bookings on a year-over-year basis. I'm wondering if you could give us some color on how Exadata is doing at this point in time. It sounds like I think you sound pretty excited about Exalytics. And just wondering how we should think about the ramp for Exalytics. What kind of a pipeline do you have and what is the initial uptake looking like within your OBIEE customer base for the Exalytics product?

Okay, I appreciate the -- it sounded like almost a 9-part question. I'll do my best, Kash, to try to get at it and I tried to say this. I think around here, we're just really excited about Exalytics. The Exalytics product was GA-ed a couple of weeks before the end of the quarter? A couple of weeks before the end of the quarter, we got it out. Frankly, we started to sell it, frankly, just pre-GA, we had so much interest in it and we had very strong bookings in that last 10-day period. We're off and running in the U.S. We're off and running in Europe. We're ramping up now in Asia. We're aligning that to our BI salesforce as Larry described, the ability for us to take existing Oracle BI applications and they just run. So compared to this other thing that was talked about earlier where you buy it and then you start programming on it, this is a completely different value proposition than the thing that was being asked about earlier. Exalogic has ramped. It quadrupled as I described in my comments earlier. It is having tremendous success in that SOA area, as well as with our applications and the ability for it to now plug in Oracle applications, in some cases run 4x and 5x faster than you were running Oracle applications before you deployed Exalogic into that architecture. Exadata has continued to ramp and again, we saw another one of these gains where we doubled and as I talked about over the last several quarters, we've done that continually every quarter. I expect a very, very strong Exadata quarter in Q4 as well.

So Mark, Exadata doubled on a year-over-year basis?

Yes.

We'll go next to Philip Winslow with Crédit Suisse. Philip Winslow - Crédit Suisse AG, Research Division: Just 2 quick questions. First, to Safra and Mark, the Applications business in the U.S. really bounced back very strongly this quarter and performed quite well internationally given what you mentioned being just tough comps year-over-year. What's driving that sustained growth in applications and could you just also comment on just the early feedback you're getting on Fusion apps? And then just a second one to Larry, some of your competitors are making a pretty big deal about just "pure object-oriented development," and how they believe this not only puts Oracle Fusion apps but also I think Oracle Database at a disadvantage. In fact, some have gone so far as to say that there's no need for a database anymore. So could you just give us your perspective on this, too?

Okay, well, for us, nothing particular on applications for next quarter. We are still -- remain very bullish. We think we're going to be very good. I think you'll be very happy by the end of Q4. On the software side, of course, we have -- it's our seasonally very, very strong quarter and we had extremely high database -- applications growth last Q4. So we have a very tough compare with 22% in applications last year in Q4 in recorded growth rates. But we're very bullish about applications in Q4 for us. Very.

Before Larry gets into the other question, I would say in Fusion, we are ramping HCM now. HCM has been in the market. We have references, we've got our salespeople trained, deployed. We're aggressively at the HCM market. Mentioned the acquisition of RightNow, which is now fully integrated into Oracle. We have released our sales product within CRM. We're ramping that similarly to what we did HCM probably 4 to 5 months ago, and we are starting to win a material amount of the deals in HCM. I would say we're very encouraged by our progress in HCM over the last 3 or 4 months. So very good progress to report there.

Okay, the question is object-oriented programming and does object-oriented programming eliminate the need for a database? Well, object-oriented programming has gone on very, very long time. It was invented kind of at Xerox PARC with the alto, so it was invented in the late '70s, early 1980s. This is 30 years later and there are still databases. Fusion Applications is written in 100% Java and HTML 5. I would say that's consistent and it runs on the Oracle Database. Salesforce.com, Java and the Oracle Database; NetSuite, Java and the Oracle Database; Taleo, Java and the Oracle Database. RightNow, for their large customers, it's all the Oracle Database. The only cloud company I know, the only cloud company I know that decided to forego having a database, thinks that database technology isn't necessary anymore, the only one on the planet that I know of is Workday. And so Workday doesn't use a database. They use their own technology. Let me tell you one thing. It's very hard to write reports, ad hoc reports, queries and certain things on an underlying object database. Again, I don't want to go into all of the details but -- by the way, the Oracle Database has full support for object-oriented programming. The Oracle Database ceased being a pure relational database many, many years ago. We're an object database, we're an XML database, we support all different kinds of media. And all different types, we support video. We support freetax [ph], unstructured data, as well as structured data, objects as well as relations. We support all sorts of different data types. But the fact that Workday built its own database is I think one of the 2 fundamental mistakes that they made. The other fundamental mistake is their UI is all Flash. It's all Flash UI,…

We'll go next to John DiFucci with JPMorgan. John S. DiFucci - JP Morgan Chase & Co, Research Division: Mark, I have a question, a follow-up to Kash's question. We're actually -- we continue to -- I have a part 11 to Kash's 10-part question. We continue to hear of improved traction in the field for Exadata specifically and actually, we're hearing some early excitement around Exalytics and even some T4 traction. But obviously, the bleed off of the commodity hardware continues and this more than is offsetting the traction of the other products on the top line. I guess the question is when are we going to see this reverse? I realize the timing has been difficult to predict this but when does the commodity hardware business stabilize? And then I just have a quick follow-up to that when you're done.

I'm going to repeat what I said and interrupt Mark, and say that next year, our overall Hardware business will be a growth story. That Exalogic, Exadata, Exalytics will have scaled to the point where it's big enough and a rapid growth to more than offset the decline in some of the commodity lines like the x86 line. That we just don't care about. What we care about is where we enrich the hardware with our own IP, namely software, silicon. T4 is doing very well and it's doing extremely well. And we're about to refresh the rest of the SPARC line. And I think when we do that, we're going to be in much better shape. And that's going to happen around the end of this calendar year, refreshing the entire -- the remainder of the high end of the SPARC line. Also, we've stopped reselling OSI logic disks. We don't care about that. And that's in decline. Instead, we're selling our own ZFS technology. And we sold over 1,000 ZFS systems this last quarter, up I think from 200 a year ago for 5x. And now it's a small number, but it's very, very important and this competes directly with NetApp. We bought a company called Pillar and their sales are up. This is -- and we get a new Pillar -- so we intend to be competitive in storage with our own IP. We intend to be competitive in servers with our own IP. Next fiscal year, our hardware business should be a growth story. It will be. Safra will see to it that it will be.

I think, John, you got the story right, the way you described it. I'll just add to Larry's point. I'd add ZFS and we've got a franchise tape business that we're focused on. But we're refreshing the SPARC line. The good news is the T4 is superb. The bad news is the price performance of the T4 is so superb that it's a very attractive value proposition that actually brings lower revenue in per unit. But it's an exciting product that's really new and fresh into the SPARC base. So it's a very positive thing from that perspective. So yes, I think we've got good traction on the XO products. We'll be focused on our original forecast as I described earlier on the XO side and next year is a growth story for us. John S. DiFucci - JP Morgan Chase & Co, Research Division: If I could just clarify because, Larry, I think you said at the end of this calendar year or after, that's when you'll start to see growth. But you said next fiscal year. So for the year, we'll see growth, we'll actually start to see on a quarterly basis at the end of the calendar year or thereabouts, we'll start to see that turn to growth?

No, I think we hope it to get there before that. That would be the second quarter. So we hope we get there before that. But for the next fiscal year, I mean there are no guarantees but we're pretty confident, next fiscal year this is a growth story. And by the way, it's a top line growth story, which means it's a pretty spectacular bottom line growth story. John S. DiFucci - JP Morgan Chase & Co, Research Division: Got it, got it. And then if I might, just -- Mark, just to clarify, you made a statement during your prepared remarks -- this is the question. Mark, you said engineered systems bookings will be in line with original forecast. Just so there's no confusion around that, can you clarify what that means as far as original forecast for engineered systems bookings?

Sure. We talked about getting to the billion-dollar run rate. We will do that. Certainly be right around there. We talked aspirationally about the ability to triple the sales and I actually said that was an aspirational goal. We'll be in the ballpark. We still got a shot, we got Q4 and we're still on track to try to get that done. So again, I know we had some discussion in the last call where there were people showing up with various numbers. We have not changed our view of this from the beginning. Our view has been this is an exciting story and unfortunately around here, we've gotten used to it and I think sometimes we forget just how exciting it is to have products like this in your product line to grow like this. So we still got a shot to make that aspirational goal for the year and we're going to drive hard in Q4 to get that done.

We'll go next to Brent Thill with UBS.

A question for Larry on the applications business/cloud. The Street has some concerns that you're in the transition from the old to new and as it relates to Fusion Apps, how do you think about reaching the tipping point in reference-ability? I think you have roughly 70,000 application customers. In the last update, we heard you mention a couple hundred customers are deploying. Can you just give us your view and I had a quick follow-up for Safra.

Well again, the nice thing about Fusion Applications, it's not a rip-and-replace story. So you can deploy parts of the Fusion suite and in concert with the applications you own in the premise [indiscernible] the E-Business Suite. You can connect that to our salesforce automation suite or you can connect that to our HCM suite in the cloud. So it's not a matter of you having to take out everything you currently have and replace it with cloud computing. You can do this gradually. And that's what we see our customers doing, in fact. A lot of the customers that are running in Fusion Applications today in production also have a lot of our on-premise applications. So we think we can manage this transition gracefully because the technology allows for that graceful transition, the gradual introduction of cloud applications, displacing a portion of E-Business Suite and another portion of the E-Business Suite. And in 3, 4, 5 steps, you can get entirely into the cloud if that's what you want to do. I mean so there are customers who are quite happy with the on-premise stuff. But we will be offering the full complement of Fusion Applications to all of our customers in Q4 and we expect adoption broadly in our base. But this could be a multistep process, especially for these large customers.

Okay, and real quick just for Safra, on the Q4 license guide, the Street's original reaction was it felt fairly conservative. Is that just because of tough comps or is there something else that you're seeing that's giving you some reservation?

No, I lived through Q3 with you all -- Q2, sorry, Q2 with you all and I didn't enjoy that. So I'm looking at close rates and just liking Q3 a lot more than I liked Q2, and I'd like to like Q4. So I'm not seeing anything negative or otherwise. I am guiding to a number that I think is in that range using somewhat conservative close rates for Q4, okay? Do you understand me?

We'll go next to Brendan Barnicle with Pacific Crest Securities.

There was a nice re-acceleration in technology licenses during the quarter, returning to 10% constant currency growth for the first time this fiscal year. Anything in particular driving that re-acceleration and how sustainable do you think it is going forward?

The Exadata, Exalogic, Exalytics is required not only by the hardware but there are software components as well. And one of the things we love about this business, engineered systems, is not only does it put us in the high margin hardware business, it also makes our software even more competitive than it was before. So we're seeing -- it's helping accelerate our Database business. It's getting very, very interesting to look at our BI business and how Exalytics is going to help our BI business, how Exalogic helps our Middleware business and our Application business. So there are great synergies with our engineered systems. Again, we talk about it enabling us to be very competitive in the Hardware business. That is true. It's also making us more competitive in the Software business, especially technology.

That does concludes today's question-and-answer session. At this time, I would like to turn the conference back over to Ken Bond for any additional or closing remarks.

Thank you, operator. A telephonic replay of this conference call will be available for 24 hours. Dial-in information can be found in the press release issued earlier today. Please call the Investor Relations department with any follow-up questions from this call and we look forward to speaking with you. Thank you all for joining us on today's conference call and with that, I'll turn the call back to the operator for closing.

Thank you, that does conclude our conference. You may now disconnect.