U.S. markets closed

Edited Transcript of ORCL earnings conference call or presentation 12-Mar-20 9:00pm GMT

Q3 2020 Oracle Corp Earnings Call

REDWOOD CITY Mar 18, 2020 (Thomson StreetEvents) -- Edited Transcript of Oracle Corp earnings conference call or presentation Thursday, March 12, 2020 at 9:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Ken Bond

Oracle Corporation - SVP of IR

* Lawrence J. Ellison

Oracle Corporation - Co-Founder, Chairman & CTO

* Safra Ada Catz

Oracle Corporation - CEO & Director

================================================================================

Conference Call Participants

================================================================================

* Brad Alan Zelnick

Crédit Suisse AG, Research Division - MD

* Heather Anne Bellini

Goldman Sachs Group Inc., Research Division - MD & Analyst

* Mark L. Moerdler

Sanford C. Bernstein & Co., LLC., Research Division - Senior Research Analyst

* Michael Turits

Raymond James & Associates, Inc., Research Division - MD of Equity Research & Infrastructure Software Analyst

* Philip Alan Winslow

Wells Fargo Securities, LLC, Research Division - Senior Analyst

* Raimo Lenschow

Barclays Bank PLC, Research Division - MD & Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Welcome to Oracle's Third Quarter 2020 Earnings Conference Call. Now I'd like to turn the call over to Ken Bond, Senior Vice President. Sir?

--------------------------------------------------------------------------------

Ken Bond, Oracle Corporation - SVP of IR [2]

--------------------------------------------------------------------------------

Thank you. Good afternoon, everyone, and welcome to Oracle's Third Quarter Fiscal Year 2020 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 our Chairman and Chief Technology Officer, Larry Ellison; and CEO, Safra Catz.

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 of 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, Oracle Corporation - CEO & Director [3]

--------------------------------------------------------------------------------

Thanks, Ken. As usual, I'll review our non-GAAP results using constant dollar growth rates unless I state otherwise.

As you can see, we had an excellent quarter in Q3 with total revenue growth of 3% in constant currency and EPS of $0.97 in U.S. dollars. Both revenue and EPS were above the midpoint of my guidance even though we saw a strengthening U.S. dollar, which resulted in a negative headwind to total revenue.

It was really a remarkable quarter with a lot of product and customer momentum in both applications and infrastructure. The quarter demonstrated the acceleration of revenue that I've been forecasting. Our Cloud Services and License Support business, basically our subscription business, which includes SaaS, IaaS and software updates, powered our revenue growth. Those subscription revenues for the quarter were $6.9 billion, up 5%, and accounted for nearly 71% of total company revenues, up from 69% last year. License revenues were $1.2 billion, the same as last year.

We are seeing a lot of momentum across our applications portfolio, with GAAP application subscription revenues at $2.8 billion, up 7%. Fusion apps were up 32%, Fusion ERP was up 38% and Fusion HCM was up 27%. NetSuite ERP was up 26%. Vertical SaaS was up single -- high single digits, and data cloud was up low single digits. GAAP infrastructure subscription revenues were $4.1 billion, up 4% with total database revenue up 5%, highlighted by BYOL and Autonomous Database revenues both up over 150% but off a small base.

As you can see, we've replaced ecosystem revenues with subscription revenues, which will make it easier for you to see the revenue growth rate of the largest part of our business more clearly. You'll still be able to determine the growth rates for our entire software ecosystem by combining subscription and license revenues.

Our cloud renewal rates continue to go up. The gross margin for Cloud Services and License Support was 86%, up 1% from last quarter. Both SaaS and IaaS gross margins were up more than 1% from both last quarter and last year. As we continue to get to scale, I expect our cloud gross margins will increase further, driving an acceleration in our gross profit growth.

Total revenues for the quarter were $9.8 billion, up 3% from last year. Non-GAAP operating income was $4.4 billion, up 3% from last year. The operating margin was 44%, essentially unchanged from last year. The non-GAAP tax rate for the quarter was at 19.1%, slightly below our base tax rate of 20%. EPS was $0.97 in U.S. dollars, up 12% in constant currency and 11% in USD. The GAAP tax rate was 16.4% and GAAP EPS was $0.79 in USD, up 5% in constant currency, 4% in USD. Operating cash flow over the last 4 quarters was $13.9 billion. Capital expenditures were $1.5 billion and free cash flow was $12.4 billion. We now have approximately $26 billion in cash and marketable securities, and the short-term net deferred revenue balance is $7.8 billion, down 1% in constant currency due to timing differences in customer payments. Gross deferred revenue was up over 1% in constant currency and would have been up over 3%, if not for the ASC 606 transition changes.

Now we remain committed to returning value to our shareholders through technical innovation, strategic acquisitions, stock repurchases, prudent use of debt and the dividend. This quarter, we repurchased 73.5 million shares for a total of $4 billion. And over the last 12 months, we have repurchased 366 million shares for a total of $20 billion. And over the last 5 years, we have reduced the shares outstanding by nearly 28%. The Board again declared a quarterly dividend of $0.24 per share. The Board of Directors also authorized an additional $15 billion for the repurchase of Oracle shares.

Now before turning to guidance, I need to say a few words about the impact of the COVID-19 virus. Over the last few weeks, we've observed the growing public concern. We're largely conducting business as usual with some modifications such as using video conferencing and asking our employees to postpone nonessential travel. Likewise, we're seeing other companies take precautionary actions. It's not yet clear what the effect that the virus will have on our customers and suppliers and, as a result, what the impact will be on our business in Q4.

So with that backdrop, let me share with you my thinking on the modeling for Q4. The subscription part of our business, cloud and product update, will continue to grow, and we expect minimal impact from the virus in the quarter, given that much of the subscription revenue is already contracted. Last year, the subscription business was 61% of the quarter. Consistent with the trends over the last year, I expect it to be a larger percentage of Q4 this year.

In meeting with my executive team, we reviewed the enormous pipeline of transactional business for Q4. As you know, Q4 is typically a seasonally large quarter for software licenses and, to a lesser extent, hardware. Given the uncertainty in the current business climate, I am going to provide a much wider range in my estimate for total revenue.

My guidance today is on a non-GAAP basis and in constant currency. Assuming current exchange rates remain the same as they are now, currency should have no significant effect on revenues or EPS. Now of course, that may change, but that's what it is right now. So for Q4, total subscription revenues are expected to range between 3% to 5% in both constant currency and U.S. dollars. Total revenues are expected to range between negative 2% to positive 2% in both constant currency and U.S. dollars. Non-GAAP EPS is expected to grow between 3% to 9% and be between $1.20 and $1.28 in both constant currency and USD. Total CapEx for FY '20 is expected to be around $2 billion but it could vary.

My EPS guidance for Q4 and the FY '20 assumes a base tax rate of 20%. However, onetime tax events could cause actual tax rates for any given quarter to vary from our base tax rate. But I expect that in normalizing for these onetime tax events, our tax rate will average around 20% for fiscal year 2020.

Now in June, assuming the global economic situation has stabilized, I will share with you the basis for my optimism around our revenue growth acceleration for fiscal year 2021. It will be based on the ever-growing portion of our revenue attributable to our faster-growing subscription business. You saw a bit of it in Q3, and it would have been even more obvious but for the early impact of the virus.

And with that, I'll turn it over to Larry for his comments.

--------------------------------------------------------------------------------

Lawrence J. Ellison, Oracle Corporation - Co-Founder, Chairman & CTO [4]

--------------------------------------------------------------------------------

Thank you, Safra. There are 2 key product areas that will determine Oracle's future, cloud ERP applications and Autonomous Database infrastructure. Being #1 in both of these 2 giant market segments will enable the success of our other application and infrastructure products in adjacent market segments. We expect the cloud ERP market segment to be 2 to 3x larger than the prior on-premise ERP software market. We already have a huge lead in the cloud ERP market with over 7,000 Fusion ERP customers and 21,000 NetSuite ERP customers.

Our primary ERP competitors are struggling. SAP never rewrote their ERP applications for the cloud. And today, many of SAP's largest customers are actively working with us to migrate from SAP to Fusion ERP in the cloud. Workday, the other competitor, is seeing very little success in cloud ERP. Workday's ERP market share is tiny compared to ours. What's even more interesting is Workday's lack of success in cloud ERP is also creating opportunities for Oracle in cloud HCM. HCM increasingly is being purchased as a part of an ERP Cloud application suite. As a result, Oracle now has more HCM customers than Workday, and Fusion HCM revenue is growing faster than Workday.

And we're beginning to see the same integrated suite strategy drive our sales of CX, customer experience, applications in sales, service and marketing. I want to highlight a couple of our multi-pillar wins because these sales demonstrate the power of having an integrated cloud application suite like Fusion. First one, Johnson Controls. They signed a $15 million annual recurring deal that included ERP, Oracle Fusion Cloud ERP, enterprise performance management, supply chain management and CX for marketing, Fusion Marketing, Fusion Service, Fusion Sales, e-commerce and Configure, Price, Quote.

Skanska similarly bought Fusion ERP, Fusion EPM and Fusion HCM -- Fusion Supply Chain and HCM in the cloud. So we're seeing a lot of multi-pillar deals where they buy most of or all of the Fusion suite. We had a lot of ERP and EPM wins in the cloud. We won Unisys, ERP, EPM, SCM and CX. We -- S&P Global bought ERP. United Services Automobile Association bought ERP. RECO bought ERP. SCL Health bought both ERP and HCM. Adecco bought ERP. The Institute of Electrical and Electronics Engineering bought ERP and HCM. United Airlines bought ERP. Snap bought ERP. CDK Global bought both ERP and SCM.

We had a number of SCMs -- a number of supply chain wins in the quarter. Big one was Dow Chemical, bought Fusion Supply Chain. National Oilwell's bought Fusion Supply Chain. RECO bought Supply Chain in addition to ERP. Unisys bought Supply Chain. Citrus World bought Supply Chain. ConAgra, Supply Chain. UC Health bought Supply Chain. National Convenience Distributors bought Supply Chain and so did Total S.A. buy Supply Chain. As I said, selling the suite has enabled us to sell a lot more HCM as a part of the suite.

CSX bought HCM. UC Health bought HCM, along with Supply Chain, ERP and EPM. Nemours bought ERP and Supply Chain and replaced their Workday HCM with Oracle Fusion HCM. Molina Healthcare bought HCM. Sensium Technologies bought HCM. Ford Motor Company dramatically expanded their Oracle Fusion HCM Cloud implementation, as did Kaiser Health, another big expansion of their -- Kaiser's Fusion HCM Cloud implementation. Keurig Dr Pepper bought our CX products, marketing, Fusion Sales, Fusion service. IKEA expanded dramatically their implementation of Fusion service. Micro Focus bought Fusion Marketing, Fusion service, Fusion Sales and Fusion e-commerce. Banco de Chile bought Fusion Marketing and Fusion Service.

Comcast bought Fusion Sales. Cargill bought Fusion Marketing. Thermo Fisher bought Configure, Price, Quote. Motorola bought Configure, Price, Quote. And [Participia] bought Fusion Marketing, Fusion Sales and Fusion e-commerce. Okay, that's the application part of our business.

I'm going to spend -- I'm going to give you a little more detail about our infrastructure business being driven by our database business. Our Autonomous -- our new Autonomous Database. Oracle has long been the market share leader in the database business. This quarter, our overall database business, both cloud and on-premise, grew 5%, with our cloud database business growing in triple digits. We have an enormous technology advantage with our Autonomous Database. And we expect our database growth rates to accelerate from that 5% number we experienced this past quarter as customers transition from legacy databases to the Autonomous Database in the cloud.

I'm going to give you quite a bit of detail on a number of these wins that we think are strategic and very important to give you a sense of how much momentum our infrastructure business is beginning to pick up. Nomura in Japan made a $20 million commitment to the Oracle Cloud. They are moving their production systems handling mission-critical transactions to the Oracle Cloud. These are the applications that service a number of large-scale financial institutions. It's a very big commitment from Nomura.

Fiserv similarly made an $8 million commitment to move their payments applications into Oracle's Gen2 infrastructure. They'll be using both our public cloud and our Cloud at Customer. This allows Fiserv to gain tremendous ongoing cost savings as they benchmark our cloud versus the clouds from competitors. WorkForce Software is the SaaS -- made a $4 million commitment. They're moving their SaaS application to the Oracle Gen2 public cloud. Their application helps customers digitally manage time and labor. They will move out of their own data centers to the Oracle Gen2 public cloud because after a good deal of testing, they got better performance from the Oracle public cloud, better security and a huge reduction in cost for them.

Gap has made a $6 million annual commitment to the Oracle Cloud. They're moving their retail applications. Their most critical workloads will move into the Oracle public cloud. And they will leverage our new interconnect with Microsoft Azure and the Azure public cloud. Manhattan Associates is moving their warehouse and asset management system, their SaaS application into our cloud, and they're expanding that business. T-Mobile is moving into our Gen2 public cloud for their mission-critical Lendlease application to manage financing mobile device sales for both T-Mobile and now Sprint.

This one is really interesting. Depository Trust Clearing Corporation (sic) [Depository Trust & Clearing Corporation] 98% of all global trades go through -- global trades through any accredited brokerage firm, settle and clear using Depository Trust & Clearing Corporation's repository trading system. DTCC is migrating their multi-terabyte Amazon AWS Redshift system out of Amazon and into our public cloud using the Oracle Autonomous Database. They're also moving their analytics from Amazon to the Oracle Analytics suite.

Sonoco, international provider of diversified consumer packaging products, is migrating their e-business suite, their product life cycle management, integration, analytics, all of that to our public cloud. National Bank of Canada is migrating all of their Oracle databases running on IBM pSeries to Oracle's Generation 2 Cloud at Customer.

Norfolk Southern has decided to move their entitle warehousing environment away from Teradata and away from Microsoft SQL Server to the Oracle database in our Gen2 public cloud. They will also use the Oracle Analytics Cloud for visualization. I just wanted again to give you some ideas of the big wins that we're getting. And with customers moving away from Microsoft SQL Server, away from AWS, away from Workday and into using our -- into our cloud using both our applications and our infrastructure. It has been a very exciting quarter for us. We had some huge wins.

And with that, I'll turn it back to Safra (sic) [Ken].

--------------------------------------------------------------------------------

Ken Bond, Oracle Corporation - SVP of IR [5]

--------------------------------------------------------------------------------

Thank you, Larry. Operator, if we could please queue up the audience for questions, please?

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from Heather Bellini with Goldman Sachs.

--------------------------------------------------------------------------------

Heather Anne Bellini, Goldman Sachs Group Inc., Research Division - MD & Analyst [2]

--------------------------------------------------------------------------------

I was just wondering, Safra, Larry, if you could talk a little bit about the rebound that you mentioned that you can start seeing show up in the numbers, in particular, around your database business. I know in Q1, you called out a little bit of dislocation, and it looks like things are starting to progress in the direction that you've been telling us about. But is there anything you could share with us to kind of give us more detail about what exactly you think is driving this? Is it things like OCI, for example, as well? And then how -- Safra, you mentioned that you might be able to share with us in May when you get a little more stability in the picture from a macro perspective kind of how you see this progressing, but any high-level thoughts you would be comfortable sharing with us now about kind of the acceleration that you're seeing in terms of how we should think about it going forward?

--------------------------------------------------------------------------------

Safra Ada Catz, Oracle Corporation - CEO & Director [3]

--------------------------------------------------------------------------------

Okay. So I will start and then, Larry, you can add what you'd like. Obviously, the power of having great products is what overwhelms everything. And the momentum we have with Autonomous Database and the more and more success, all of these projects start as small projects and expand very dramatically. Our average consumption rate is just increasing dramatically, and it's the result of Autonomous Database being incredibly powerful and very, very popular with our customers.

In addition, the database itself, database license, the technology business, which I had mentioned earlier in the year, we had a little reorg in North America, a few things like that. That is really chugging. In fact, it probably would have been even better but for this coronavirus showing up at the end of the quarter. Basically, the last week in February, market was down a lot, and so I expected but for this coronavirus for Q4 to be really impressive. By assuming that we have some stability in the economy globally, I will be sharing with you the fact that it's a bigger and bigger number. That consumption revenue is going way, way up. And that this entire subscription side of the business, the infrastructure subscription side of the business is just getting bigger and grows and grows. So overall, good products, good services lead to success for our customers and then adoption takes care of itself. I don't know, Larry, if you want to add anything to that.

--------------------------------------------------------------------------------

Lawrence J. Ellison, Oracle Corporation - Co-Founder, Chairman & CTO [4]

--------------------------------------------------------------------------------

Yes. I want to amplify on what Safra means by great products. So Autonomous Database really is a unique product. There is no human labor. Therefore, there's no human error. So it's a combination of -- Autonomous Database costs a lot less to run because human beings don't do the driving. The Autonomous Database drives itself. So there's no labor associated with running the Autonomous Database. And if there's no human labor, humans can't make mistakes that cause security vulnerabilities. That's one big thing.

But another big thing that people may not know about Autonomous Database, it is both serverless and elastic. What I mean by that is when your application isn't running on the Oracle public cloud, you don't pay for any CPUs. You got no CPUs dedicated to you. When your application isn't running, you're not paying for servers. That is not true of Amazon's databases. If you have Redshift, you pay for the Redshift processors. If you have their MySQL implementation, you pay for those processors. We're not only serverless, we're instantaneously elastic. So if you suddenly need to go from 2 servers or 2 cores to 20 cores. We do that instantaneously while the database is still running. And then when you don't -- no longer need the 20 cores, we automatically go back to the 2.

So it literally is the promise of the cloud. It's serverless when it's not running, and it's fully elastic so you only pay for what you use. What this has translated to is people benchmark us. They actually bring an application to Oracle and they bring an application to AWS. They are shock to find that we are much, much less expensive than AWS even though we're more secure and we're faster. And once they discover that, once they do a trial and they do a comparison and they discover that, they're picking us. And some of the interesting ones that are picking us are some of the SaaS application providers, and that's their business. Their business is to run applications. And they try all of the different clouds. And we are the most secure cloud, the highest-performing cloud, but maybe most importantly, the most economical cloud. So we're winning more and more business, and we expect this trend to continue.

--------------------------------------------------------------------------------

Operator [5]

--------------------------------------------------------------------------------

And our next question is from the line of Brad Zelnick with Crédit Suisse. Brad?

--------------------------------------------------------------------------------

Brad Alan Zelnick, Crédit Suisse AG, Research Division - MD [6]

--------------------------------------------------------------------------------

Larry or Safra, I just wanted to ask a question about the hardware business, which I know isn't typically in focus for most investors, but I know many customers have been anxiously anticipating the availability of Autonomous Database to be supported on Cloud at Customer. So my question is, can you give us any sort of update on the impact that supply constraints might be having on the hardware business? And in any way, can that impact the availability of Autonomous to be shipping on Cloud at Customer?

--------------------------------------------------------------------------------

Safra Ada Catz, Oracle Corporation - CEO & Director [7]

--------------------------------------------------------------------------------

So there was a little bit of an impact actually in Q3 as certain components were in short supply. And so in fact, once again, Q3 would have been even higher but for some shortages in components to our suppliers and to our suppliers' suppliers as a result of the coronavirus in China. I think that we're trying to work through all of that, and we'll see what the availability is in Q4. We think we -- some impact may continue, but my guidance on this does include our ability to deliver some but not all of what we could possibly sell in Q4.

--------------------------------------------------------------------------------

Lawrence J. Ellison, Oracle Corporation - Co-Founder, Chairman & CTO [8]

--------------------------------------------------------------------------------

Yes. I'd like to comment as well. Our Exadata cloud -- database Cloud at Customer product is actually made up of the same components as conventional servers. Therefore, we can reallocate the parts away from the conventional servers into the Exadata machines. So -- and the Exadata machines are much higher value because they have a much larger software component to them when we sell them, and the Exadata machines are Gen2 Cloud at Customer. So I think you'll see us -- if we have to do some reallocation away from plain old commodity servers into our Exadata machines, and thereby, if there is a shortfall, it should be in the lower -- the less expensive commodity servers, less profitable commodity servers and the high-value, high-margin Cloud at Customer servers, we're going to do -- work very, very hard to meet all of those orders.

--------------------------------------------------------------------------------

Operator [9]

--------------------------------------------------------------------------------

And our next question is from the line of Phil Winslow from Wells Fargo.

--------------------------------------------------------------------------------

Philip Alan Winslow, Wells Fargo Securities, LLC, Research Division - Senior Analyst [10]

--------------------------------------------------------------------------------

Congrats on a great Q3. I just wanted to focus in on the apps business. Obviously, Safra, you called out the acceleration there but also some pretty strong growth rates, ERP Cloud, 38%, HCM Cloud Fusion, 27%. So 2 questions here. First, what's actually driving this growth? Is this your existing customers flipping over from on-premise to the cloud? Or is it net new customers to Oracle? And I guess a question for Larry, too. What are you hearing about sort of why customers are choosing you? Or how much is the breadth of your ERP suite impact that buying decision?

--------------------------------------------------------------------------------

Safra Ada Catz, Oracle Corporation - CEO & Director [11]

--------------------------------------------------------------------------------

So let me just say -- sorry. First of all, let me just answer your exact question, which is, yes, yes, yes, yes. Is it new customers? Yes. Is it upgrading customers from e-business suite? Yes. Is it taking customers from our biggest competitors? Yes. Is it replacing out some of our SaaS competitors? Yes. It is all those things. All right. Now I'll let Larry talk. Go ahead.

--------------------------------------------------------------------------------

Lawrence J. Ellison, Oracle Corporation - Co-Founder, Chairman & CTO [12]

--------------------------------------------------------------------------------

Yes. Well, again, this is back to the maturity of our product, the combination of we think we have the best technology. Our products are built on top of our database, which is faster and more secure than other databases, so we think our applications inherit those capabilities. But our applications are also built on top of technologies like our voice digital assistant. So we have -- so when we do a demonstration against Workday, and Workday has long claimed to have a better UI than Oracle, and they'll show their computer interface. And we'll say, "I don't think they have a better UI," and you just talk to your smartphone and you get your reports and you do your transactions by talking -- by saying Oracle and not Alexa, you say, "Oracle, how many vacation days do I have? Oracle, I'd like to schedule a 1-week vacation starting August 17."

And so we make our applications much more accessible with a much more modern user interface, taking away -- showing the technology difference between us and a company like Workday. The biggest advantage we have against Workday and SAP, I would argue, is that our applications are built on top of our infrastructure. SAP doesn't have an infrastructure cloud. Workday doesn't have an infrastructure cloud. Workday doesn't have a digital -- a voice digital assistant. Workday doesn't have an autonomous database. Workday doesn't have integrated machine learning to detect fraud and to detect security intrusions. They don't have those technologies. Our applications inherit all of those advantages, and it allows us to compete very effectively against them from demonstration to deployment.

And finally, we have this very, very broad suite where it's going to be very difficult for a company like Workday to build out everything from CX to HCM to ERP and supply chain and manufacturing. So it's very difficult for a small company to do that. And it's very difficult finally for SAP to do that because they haven't started yet. They haven't started writing for the cloud. So we're winning everywhere in applications. We have a suite. We have the most modern technology. We have the best security and the best performance. We're doing very well, very, very well against all of our application -- competitors in the back office and HCM and ERP. And we're making some progress against Salesforce though they are a -- but they're a very formidable competitor in the front office. That's a different competitive dynamic.

--------------------------------------------------------------------------------

Operator [13]

--------------------------------------------------------------------------------

And our next question is from the line of Raimo Lenschow with Barclays Capital.

--------------------------------------------------------------------------------

Raimo Lenschow, Barclays Bank PLC, Research Division - MD & Analyst [14]

--------------------------------------------------------------------------------

Can you talk a little bit, like we're obviously in uncertain times but you guys have been in uncertain times before. So can you maybe contrast a little bit Oracle today with its recurring revenue stream whether there's -- where we were in 2008, where this -- and where we were in 2001? And then also talk a little bit about what you see on renewals around the database but also the cloud.

--------------------------------------------------------------------------------

Safra Ada Catz, Oracle Corporation - CEO & Director [15]

--------------------------------------------------------------------------------

Yes. So as I pointed out in my opening remarks, the percentage of our revenue that is recurring, which is generally the support business and our cloud business, which is -- just continues year after year building off a growing base is a very, very large percentage. This past quarter in Q3, it was 71% of the quarter. By the way, in Q1, it will be a very large percentage because there isn't a big chunk. And in this next quarter is the quarter that it is historically, Q4, it's historically the lowest as a percentage because our transactional business is the biggest. Last year, it was 61%. Assuming it does, at least what this quarter did, and I expect it to be actually a little bit more, it would be about 63% at a minimum because this was 2 points. I expect it to actually be more.

So we have much less variability in -- especially like I remember 2001 when the Internet bubble imploded. That was just a totally different world. At that point, our license revenue was a very large percentage of our business. And at that point, it dropped very significantly because it had been, some would say, inflated or very high during the Internet bubble because of those kind of companies. Our business now is strategic and central to the operations of our customers, whether it's our SaaS products on which they run their businesses or it's the infrastructure and the database. The database is very strong, and it remains strong. Our tech business is very strong. And now that we've gotten everything sort of organized correctly in the past few months, it's really starting to show the power of our business.

--------------------------------------------------------------------------------

Lawrence J. Ellison, Oracle Corporation - Co-Founder, Chairman & CTO [16]

--------------------------------------------------------------------------------

Yes. I'd like to add a couple of comments. One is just to reiterate what Safra said, our business is much -- is not a onetime license business very much anymore. This past quarter, 71% of the business that we had in the quarter was contracted before the quarter began. So these are just ongoing subscriptions. That's very close to accurate.

The other comment is -- we've got all this recurring business. The other comment is our business model has changed radically in that we used to have lots and lots of small offices spread all over the place. And we've gone away from those small offices spread all over the place to a hub model, where we have a big office in Austin, Texas, big office in California. We have these hubs, and we do digital selling. We do digital support. We're communicating with you across the Internet. We do demonstrations where we're not necessarily there. We're just -- we're demonstrating our products to you, selling our products to you. We're doing implementation consulting out of India. We're doing implementation consulting out of the Philippines where the people aren't going on site.

So our model, our business model, selling and services are more and more provided digitally. Our revenue model, more and more of it is subscription-based and reoccurring. So our business has changed radically from the time of the Internet bubble, from 2001, from 2008. It's a very different situation.

--------------------------------------------------------------------------------

Operator [17]

--------------------------------------------------------------------------------

And our next question is a line from Mark Moerdler from Sanford Bernstein.

--------------------------------------------------------------------------------

Mark L. Moerdler, Sanford C. Bernstein & Co., LLC., Research Division - Senior Research Analyst [18]

--------------------------------------------------------------------------------

Congratulations on the quarter. You increased your buyback authorization this quarter. How should we think about how you will use the buyback given the market downturn? Also, how should we think about your ability to support the dividend, expand the dividend, given the economic downturn? It seems to be a very positive statement you're making. I'd like to get whatever color you can on that.

--------------------------------------------------------------------------------

Safra Ada Catz, Oracle Corporation - CEO & Director [19]

--------------------------------------------------------------------------------

There's no question we can support our dividend with ease, okay? And any kind of increased dividend, we could support that. Also, I mean our business is very strong, as is obvious. It generates very large amounts of cash. We believe, as you can tell, I'm not going to comment on future buyback, but obviously, you can tell we have been buying back our stock. We think it's an incredible deal. It's basically gone on clearance sale in the past few days, and we think it's an enormous -- it's a fantastic investment. And it reduces the number of outstanding shares or otherwise known as partners we have to share our very good profits with.

So our business has hit an obvious inflection. I've mentioned that it would accelerate in the second half. I never would have imagined that we would have the kind of reaction worldwide by companies and governments. So I really -- I've done my best at modeling what Q4 will look like. To the extent that next year is -- that this stabilizes, I believe we will be just continuing on in our -- we've changed our model and it's becoming obvious. So I think our stock is obviously a bargain. It was a bargain before, and we are authorized to buy back, and we will let you know after we have done it.

--------------------------------------------------------------------------------

Operator [20]

--------------------------------------------------------------------------------

And our final question comes from Michael Turits with Raymond James.

--------------------------------------------------------------------------------

Michael Turits, Raymond James & Associates, Inc., Research Division - MD of Equity Research & Infrastructure Software Analyst [21]

--------------------------------------------------------------------------------

Nice to see strong results, particularly in a tough time. I want to come back to applications. Applications accelerated this quarter and Fusion apps continue to grow at high rates. Is there anything left in terms of headwinds that could keep you from seeing further acceleration in app subscription this year and next? And where do you think that growth rate could end up for this year?

--------------------------------------------------------------------------------

Safra Ada Catz, Oracle Corporation - CEO & Director [22]

--------------------------------------------------------------------------------

The business is fantastic, okay? It's obviously accelerating. The base of the business keeps growing. We are winning. We are winning constantly. The products are -- get stronger every quarter, and it really ultimately is well on its way. Larry, I'm sorry, I interrupted you.

--------------------------------------------------------------------------------

Lawrence J. Ellison, Oracle Corporation - Co-Founder, Chairman & CTO [23]

--------------------------------------------------------------------------------

No. I was going to say, in applications, the new news is, I mentioned it last quarter, that we are engaged with lots, more than 10 of SAP's very largest customers in terms of doing -- actually looking at taking a couple of divisions of these very large companies. And we're talking about American companies, Asian companies, German companies, large German companies that are giving us divisions to put Fusion into. And there is -- one company has given us multiple divisions because the question they're trying to answer is, "Can I replace all of SAP throughout my company with Fusion? And you're just doing one division in my company, it isn't enough. I need you to do multiple divisions within my company."

So we have lots of examples of that, believe it or not, with the most famous companies in the world. SAP -- it is astonishing to me that SAP's largest customers are now looking at moving away from SAP because SAP never moved to the cloud. They never rewrote their applications. Ask them a very simple question. Is that code the same code you had 35 years ago? SAP's programming language, by the way, SAP's -- they're still programming in a language called ABAP. It's their proprietary programming. We program in Java, but they program in ABAP. This is a 35-year-old technology. They never rewrote for the cloud. Their largest customers are aware of that. They are looking at us, and I have never seen -- except in the early days when we had the first commercial relational database and Oracle grew its franchise, which really created our brand, the Oracle brand, I've never seen an opportunity like this to take out the winner of the on-premise ERP wars. They beat us in the on-premise wars, and it looks like -- and they missed the cloud entirely. So the scale of this opportunity is enormous. We're getting real deals signed with their largest customers. We're implementing divisions and their largest customers will -- we have a -- by this summer, some huge SAP customers going live, live on Oracle Fusion applications that we'll be announcing this summer. It's not that we just started working with them, we started working with them 18 months ago. And we're taking their first division, it will be live this summer. So the scale of this opportunity is just enormous. And that's going to help drive our growth -- our applications growth higher than we ever dreamed it could be.

--------------------------------------------------------------------------------

Operator [24]

--------------------------------------------------------------------------------

And with that, I would like to turn the call back over to Ken Bond for any closing remarks.

--------------------------------------------------------------------------------

Ken Bond, Oracle Corporation - SVP of IR [25]

--------------------------------------------------------------------------------

Sure. Thank you. 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 for any follow-up questions from this call, and we look forward to speaking with you. With that, let me turn it back to the operator for closing.

--------------------------------------------------------------------------------

Operator [26]

--------------------------------------------------------------------------------

Thank you for joining today's Oracle's Third Quarter 2020 Earnings Conference Call. We appreciate your participation. You may now disconnect.