Oracle Management Discusses Q1 2014 Results - Earnings Call Transcript

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Oracle (ORCL) Q1 2014 Earnings Call September 18, 2013 5:00 PM ET

Executives

Ken Bond

Safra Ada Catz - President, Chief Financial Officer and Director

Mark V. Hurd - President and Director

Analysts

John S. DiFucci - JP Morgan Chase & Co, Research Division

Raimo Lenschow - Barclays Capital, Research Division

Joel P. Fishbein - Lazard Capital Markets LLC, Research Division

Brent Thill - UBS Investment Bank, Research Division

Jason Maynard - Wells Fargo Securities, LLC, Research Division

Heather Bellini - Goldman Sachs Group Inc., Research Division

Richard G. Sherlund - Nomura Securities Co. Ltd., Research Division

Walter H. Pritchard - Citigroup Inc, Research Division

Kash G. Rangan - BofA Merrill Lynch, Research Division

Operator

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.

Ken Bond

Thank you, Brian. Good afternoon, everyone, and welcome to Oracle's First Quarter Fiscal Year 2014 Earnings Conference Call. A copy of the press release and financial table, 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 President and Chief Financial Officer, 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 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 amendment 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 the 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'd like to turn the call over to Safra.

Safra Ada Catz

Thanks, Ken. I'm going to focus on our non-GAAP results for Q1. I'll then review guidance for Q2 and turn the call over to Mark for his comments. Larry isn't with us today because he is at an important race for the America's Cup.

I want to start by letting you know that currency in Q1 gave us a 2% headwind for new software license and total revenue, which was more than my guidance last quarter. So today, my comments on the quarter will generally reflect constant dollar growth rates.

Q1 for us was really solid overall and quite strong in the Americas. We're especially pleased with our software results, as total software revenues were $6.1 billion, up 8% from last year. Software updates and product support revenues were more than half of the total company revenue at nearly $4.4 billion, up 8% from last year. Attach rates and renewal rates remain at their usual high levels, and software updates and product support continue to power earnings and cash flow. New software license revenues were $1.7 billion, up 6% from last year. Looking at GAAP results by region, we saw excellent results in the Americas with growth of 15%. That's growth upon a previous year, so that's really very strong. Asia-Pac saw solid growth of 5%, while EMEA declined 5%.

There were some interesting product details that I think bode well for the future. Exadata Software was up over 15%; GoldenGate in-memory software was up 30%; BI Technology and Foundation Suite were up around 10%. Also strong was retailing, CRM sales and applications in North America generally. The quarter wasn't dependent on any one large deal, anything like that, it was just a very solid quarter. Hardware systems product revenue was $669 million, as older products like the older M-series and Netra saw significant declines.

Storage was more a mixed story with TAPE down a bit, SAN down significantly, while network attached storage was up.

The Engineered Systems customer base continues to expand nicely. Exadata bookings look very good. Revenues from Exalytics, SuperCluster and the Oracle Database Appliance all grew over 100%.

For the company, total revenue for the quarter was $8.4 billion, up 4% from last year. Our non-GAAP operating income was $3.7 billion, which was 6% higher than last year, and operating margin expanded to 45%. We still believe there remains ample leverage in the business model.

The non-GAAP tax rate for the quarter was 21.8%. EPS for the quarter grew 12% in U.S. dollars to $0.59 on a non-GAAP basis. The GAAP tax rate was 7-point -- was 17.7%, which was lower than my guidance for last quarter due to some onetime event and the mix of earnings.

On a GAAP basis, EPS for the quarter was $0.47 in U.S. dollars, which was up 14%. Free cash flow increased to a record $14.2 billion over the last 4 quarters and to an all-time high of $6.1 billion for Q1, up 11% from last year. We're now on the cusp of generating more free cash flow than IBM. Just 5 years ago, we generated roughly half the level of IBM's free cash flow over 4 quarters.

We now have over $39 billion in cash and marketable securities. Net of debt, our cash position is $15 billion. As we've said before, we are committed to returning the value to our shareholders through earnings growth, share repurchases and the dividend. This quarter we repurchased 92.8 million shares for a total of $3 billion. Over the last 12 months, we've repurchased nearly 335 million shares for a total of $10.9 billion, paid out dividends of nearly $1.7 billion for a total that is nearly 90% of our free cash flow. And the Board of Directors declared a quarterly dividend of $0.12 per share.

Now, to the guidance, and I want to remind you that last Q2, new license in cloud revenue increased 18% in constant currency. So this will be a very, very tough comparison. And though our pipelines and potential transactions for the quarter look really very exciting, our sales leaders remain very careful about what they are forecasting to us.

So new software license and cloud subscription revenue growth is expected to range from negative 4 to positive 6 in constant currency and negative 6 to positive 4 in reported dollars. Hardware product revenue is expected to range from negative 9% to positive 1% in constant dollars and negative 11% to negative 1% in reported dollars. As a result, total revenue growth on both GAAP and non-GAAP basis is expected to range from 1% to 4% in constant dollars and negative 1 to positive 2 in U.S. dollars.

Non-GAAP EPS is expected to be somewhere between $0.65 and $0.70 in constant dollars, $0.64 to $0.69 in reported dollars. GAAP EPS is expected to be $0.51 to $0.56 in constant dollars, and $0.50 to $0.55 in reported dollars. I want to remind you that last year, we had the benefit of a $145 million acquisition-related benefit for the Pillar earnout, so excluding that benefit, GAAP EPS last year would have been $0.51. This guidance assumes a tax rate of 23.5% and a non-GAAP tax rate of 24%. Of course, it may end up being very different.

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

Mark V. Hurd

Yes. Thanks, Safra. Just a couple of things to add. Our new license executed really as we expected. The Americas had a solid quarter, as Safra mentioned. 15% growth, with both the U.S. and Latin America growing double digits and Asia-Pac came back strong with growth of 5%.

Database continues to be very strong, double-digit growth again this quarter. Now, while customer activity on 12c was excellent, it really is the traditional products. Database Options, Enterprise Manager that drove this double-digit growth. And we've seen that trend in the last 3 of the last -- or 3 of the last 4 quarters.

And cloud right now had a strong quarter. It's really started to hit stride, with great wins at A&A, LinkedIn, SIRIUS XM Radio, Telus, Barclays Bank, and we're also really excited about our Sales Automation Release 7. Not only will the entire Oracle sales force run on Release 7, but we're very excited to bring this to market.

In HCM, our Taleo product had a very strong quarter with key wins at Honeywell, Emerson, Humana, Xilinx and DIRECTV. And last quarter, we teased you a little bit with announcements we've made, and then we made them in June. We announced the deal with Microsoft enabling customers to run Java in the Oracle Database on the user cloud. And we'd also be partnering with NetSuite on HCM. And lastly, we announced a comprehensive partnership with salesforce where they've chosen to power their cloud with the Oracle 12c database and Exadata amongst Oracle -- other Oracle products. We expect others to follow suit.

Moving to Engineered Systems, we have great wins at Eton, Telecom Italia, China Mobile, SunGard, Ingersoll Rand and Hitachi. In the last 2 quarters, we have shipped almost 2,000 systems. And this quarter, we saw great unit growth north of 60% as we shipped nearly 800 systems. Nearly 40% of Exadata Systems were sold to new customers, and we expect to grow our business with these customers over time. We're gaining a material amount of unit market share. Exalytics, SPARC SuperCluster, the Oracle Database Appliance all had growth in excess of 100%.

Lastly, our sales org in terms of salespeople is up. We're making investments in productivity to make them sell more. We're growing faster than our key competitors, and our attrition is down from historical levels and down significantly from last year.

Now with that, I thought I'd make a couple of comments about Oracle OpenWorld, which is next week. We plan to have roughly 60,000 people at the event in San Francisco from 145 countries. We expect to have 2 million attendees online. So this is going to be the biggest one yet. We've got a great lineup of speakers. We've got EMC, Dell, Michael Epps [ph] will be there. We've got Fujitsu, Deloitte, Intel there. We've got customers: LinkedIn, AT&T, Facebook, Electronics Arts, Thomson Reuters, New York Stock Exchange, Tesco, Deutsche Telekom. I could just go on. It's going to be a great set of people from the industry, as well as customers, a very large attendee base. And we will make some significant product announcements at the event as well. We'll be introducing Oracle 12c in-memory database. We'll be talking about it being able to deliver 100x faster application performance using our new architectural approach. We'll talking about -- we'll be talking about existing Oracle apps that can now run in the Oracle Database functionality without change when using this in-memory capability. We'll have some releases in cloud. We'll talk about we'll have some releases in HCM and talent management, we'll talk about database as a service, Java as a service that will be available to our customers. So there'll be a whole slew of product announcements there that Larry will be talking about Sunday night and will continue on through the week. So we're excited about the upcoming activities at Oracle OpenWorld.

With that, I'll turn it back to Ken, and we'll take whatever questions you've got.

Ken Bond

Brian, we'll go to the Q&A now if you're ready.

Earnings Call Part 2:

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