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Edited Transcript of ORCL earnings conference call or presentation 19-Jun-19 9:00pm GMT

Q4 2019 Oracle Corp Earnings Call

REDWOOD CITY Jun 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Oracle Corp earnings conference call or presentation Wednesday, June 19, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ken Bond

Oracle Corporation - SVP of IR

* Lawrence J. Ellison

Oracle Corporation - Co-Founder, Chairman & CTO

* Mark Vincent Hurd

Oracle Corporation - CEO & Director

* Safra Ada Catz

Oracle Corporation - CEO & Director

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Conference Call Participants

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* Brad Alan Zelnick

Crédit Suisse AG, Research Division - MD

* Heather Anne Bellini

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

* John Stephen DiFucci

Jefferies LLC, Research Division - Equity 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

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Presentation

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Operator [1]

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Welcome to Oracle's Fourth Quarter 2019 Earnings Conference Call. Now I'd like to turn today's call over to Ken Bond, Senior Vice President, Investor Relations. Sir, I hand the floor to you.

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

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Thank you, Holly. Good afternoon, everyone, and welcome to Oracle's Fourth Quarter and Fiscal Year 2019 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 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 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'd like to turn the call over to Safra.

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

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Thanks, Ken. Good afternoon, everyone. As you can see, we had a terrific quarter with total revenue growth 1 point above the high end of my guidance and earnings per share $0.07 above the high end of my U.S. dollar guidance. I'll first go over Q4 and recap fiscal year 2019 before moving on to my guidance. I'll then turn the call over to Larry and Mark for their comments.

As in prior quarters, I'll review our non-GAAP results using constant dollar growth rates unless I say otherwise. Now the effects of currency movements in Q4 were largely as expected, maybe a smidge more incremental headwind than expected, but that was not a full percentage more. Anyway, total Cloud Services and License Support revenues for the quarter were $6.8 billion, up 3%, while Cloud License and On-Premise License revenues were $2.5 billion, up 15%. In particular, technology license growth was up 19%, making it abundantly clear that customers are investing in the Oracle platform. The key database options necessary to run the Oracle Autonomous Database service grew 21%. I cannot stress enough the stability and growth of our base of customers quarter-after-quarter.

Our customers are maintaining and expanding their Oracle environment. And in our BYOL, Bring Your Own License model, they have the portability to use their licenses on-premise, in the cloud or via hybrid environment. This popularity is largely because our products are capable of doing things others just can't do, whether it's security, performance or scalability, and in our cloud, autonomous capabilities. As our customers adopt our technologies, whether via licenses or cloud services, our overall customer base is growing and that growth is starting to accelerate.

In addition, the recent interconnect agreement with Microsoft will only help accelerate the transition from on-premise database to the Autonomous Database service.

Now to the numbers. The gross margin for Cloud Services and License Support was 86%. And as we continue to scale and grow, I expect this will go even higher. Total revenues for the quarter were $11.1 billion, up 4% from last year. Non-GAAP operating income was $5.3 billion, up 7% from last year. And the operating margin was 47%, which was up from 46% last year. The non-GAAP tax rate for the quarter was at 16.4%, slightly below our base tax rate of 20% as a result of some discrete items. And EPS was $1.16 in U.S. dollars and up 27% in constant currency and 23% in USD.

The GAAP tax rate was 3.3%, also a result of some discrete items. And GAAP EPS was $1.07 in U.S. dollars and up 41% in constant currency, 36% in U.S. dollars.

Now moving on to recap the full fiscal year. Total Cloud Services and License Support revenue was $26.7 billion, growing 4%. Total company revenues for the year was $39.5 billion, growing 3% compared to 2% total revenue growth in FY '18. Non-GAAP EPS was USD 3.52, up 19% in constant currency, up 16% in U.S. dollars, driven by operating income growth, share repurchases and lower tax rate. This is mirrored in our operating margin percentage for the full year, which was up slightly to 44% this year.

As a reminder, our best ever full year operating margin was 47%, and I expect we will surpass that in the coming years as our total revenue growth accelerates and we benefit from greater scale in our business.

Operating cash flow over the last 4 quarters was $14.6 billion, lower than last year, only because, as you will see at the bottom of our cash flow statement in the 10-K, FY '19 cash tax payments were $1.3 billion higher this year, including the $610 million installment towards the transition tax in Q2 and nearly $540 million in higher tax payments in Q4.

Capital expenditures for the year were $1.7 billion. And free cash flow over the last 4 quarters was $12.9 billion. We now have approximately $38 billion in cash and marketable securities. The short-term deferred revenue balance is $8.4 billion, up 3% in constant currency.

As we've said before, we're committed to returning value to our shareholders through technical innovation, strategic acquisitions, stock repurchases, prudent use of debt and a dividend. This quarter, we repurchased 112 million shares for a total of $6 billion. Over the last 12 months, we have repurchased 734 million shares for a total of $36 billion. Over the last 5 years, we have reduced the shares outstanding by almost 25% with nearly 60% of the total reduction this past year in FY '19.

In addition, we've paid out dividends of $2.9 billion over the last 12 months and the Board of Directors again declared a quarterly dividend of $0.24 per share.

Now to the guidance. My guidance today is a non-GAAP basis and in constant currency. Assuming the current exchange rates remain the same as they are now, currency should have about a 1% negative effect on total revenues and about $0.01 negative effect on EPS. So for Q1, total revenues are expected to grow between 1% to 3% in constant currency. And assuming a 1% currency headwind, total revenues are expected to grow between 0% and 2% in USD.

Non-GAAP EPS in constant currency is expected to grow between 14% to 16% and be between $0.81 and $0.83 in constant currency. And assuming the $0.01 headwind, non-GAAP EPS in USD is expected to grow between 12% and 14% and be between $0.80 and $0.82 in USD.

Now this past year, we grew 3%. And for fiscal year 2020, I expect total revenue will grow faster than last year constant currency, of course, and that we will once again report double-digit EPS growth. Total CapEx for fiscal year '20 is expected to be about $2.2 billion, but it could move a little depending on our bookings. My EPS guidance for Q1 and fiscal year '20 assumes our base rate of 20%. However, onetime tax events could cause actual tax rates for any given quarter to vary from our base, both higher or lower. But I expect that in normalizing for these onetime tax events, our tax rate will average around 20% for fiscal year 2020.

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

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Mark Vincent Hurd, Oracle Corporation - CEO & Director [4]

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Thanks, Safra. Really we just had a solid quarter from top to bottom. Total revenue was up 4% in constant currency with Cloud License and Support up 3% and EPS up 27% in constant currency.

In apps, we had a great momentum. We grew 6% for the year. We're now at $11.5 billion in trailing 12 months' revenue, 92% of that recurs. We continue to grow revenue faster than market. And we have just an enormous opportunity in front of us in ERP and HCM, and I'll talk to that in a second.

In SaaS revenue and bookings, let me just give you a few stats to give you some context of what happened. Overall ERP and HCM annualized SaaS revenue is now $2.9 billion or call it $3 billion, and it was up in the high 20s. Fusion apps revenue was plus 36% in Q4 and up 32% for the full year. Fusion HCM was up 25% in Q4, solid growth with nice wins that I'll discuss again in a second. Fusion ERP revenue was up 44% and also up 44% for the full year.

NetSuite ERP was up 28% in Q4 as the strong momentum continues. They had strong bookings in the quarter. And I remind you that last Q4, they had 72% growth in bookings. In addition, there was a plus 30% growth in bookings this Q4. And that's what drove this revenue growth. And when we acquired NetSuite, we had roughly 15% growth rates, and those have darn near doubled now since the acquisition.

In our verticals, revenue was up 19% and 32% for the year. In our Data as a Service, just to give you some further context within our SaaS business, our challenges related to the broader privacy issues continued and revenue was down 15%.

Now I'm going to give you an IDC quote that I have to read as-is, so I can't improvise. But let me give you the quotes, the words and then the close quotes. "Per IDC's latest annual market share results, Oracle gained the most market share globally out of all enterprise applications SaaS vendors 3 years running, in calendar year '16, '17 and '18." And I can't improvise on that quote, although I'd like to. So anyway, we just have strong momentum in the app space. I'll talk to you about some of the wins in a second.

In our infrastructure ecosystem, the GapTech ecosystem was $21.1 billion on a trailing 12 months' basis and Q4 was up 7% with database up mid-single digits, driven by mid-teens database license growth. And let me repeat that, mid-teens database license growth.

Autonomous Database, and I'm telling you, while the numbers helped us in Q4, they were still small. But the -- if you extrapolate them, they are relatively -- not relatively, they are very significant. More than 5,000 new trials were added in Q4 alone. We've got a great pull-through business with 40% of our Q4 wins, so 40% of the time we win on Autonomous Database, we pull through analytics.

We're adding many new customers. So of all the customers we're adding with Autonomous Database, and you might think we're replacing just our base, which by the way we'd be glad to do, about 20% of our customers are just brand new to Oracle. They were not an Oracle Database customer when they bought the Autonomous Database. And new workloads are 40%, meaning that I'm an Oracle Database customer, but I'm putting a different workload on the Autonomous Database than I had on the Oracle Database. So we have both new and existing customers doing both.

Now to Safra's point, and she hit it briefly, I want to hit it just a little harder. In the key database options that you need to run autonomous, so these being rack and multi-tenant and Active Data Guard if you want the SLA, our license growth was up 21%. So what do you think the market is growing, 2, 3, 3.4, whatever number you think from your favorite analyst, this was a huge share gain customer for us -- or share gain quarter for us in database. It was a solid quarter. We exceeded our revenue target and saw 27% EPS growth. Our bookings growth climbed with our renewal rates, meaning our continuing renewal rates of existing customers gives us confidence that our cloud apps business will also just continue to strengthen from here.

Now I thought I'd give you just a couple of key wins we had during the quarter. And I'm going to try and give you a little more color of the typical size of the companies we're selling to. I might even try and give you a little bit about who we replaced in the deal and give you some rhythm, so you get a feel for all of this. Some of our key wins, and I'll focus on some back office wins, Argo Insurance (sic) [Group], about a $2 billion company; Coronado Curragh, a mining company in Australia, $2.3 billion company. Diebold Nixdorf, that's an interesting one, because I used to compete with them when I was at NCR. Diebold bought Nixdorf. And Diebold was an EBS customer. Nixdorf was an SAP customer. They combined the 2, and they will be going to Oracle Cloud ERP. The whole Diebold Nixdorf will run on Oracle Cloud ERP.

NG, out of Brazil, about $1.3 billion, they bought ERP supply chain and procurement, fantastic win for us. And they were running on TOTVS, a Brazilian ERP company. And so they are net new to Oracle. Exterion, which is a $1 billion company, bought our whole -- really our whole ERP suite, ERP planning, supply chain, procurement. They did it against a background of basically having a little bit of everything. They had a little bit of EBS, a little bit of SAP and a little bit of Microsoft and replaced it all with the Oracle Cloud.

Now this company you may never have heard of, Helmerich & Payne, the reason I've heard of them is their stock symbol on The New York Stock Exchange was HP. And for years, I wanted their stock symbol. And they are about a $1.6 billion company. And while I never got the stock symbol from them, we have replaced Epicor with Oracle Cloud ERP at Helmerich & Payne.

So anyway, that would just give you some idea on that. Ferguson, which is one of the largest plumbing wholesale and distribution companies, they're a $21 billion company. They bought ERP, EPM, supply chain, procurement, just a tremendous, tremendous win for us and very looking to partner with them. Santander in the U.S., another tremendous win for us. Wright Medical, which was very competitive. Emerson Electric, Rutgers University, which has deployed not only all of our financials and ERP, but are deploying our new student scheduling system, which deals with all of commissions and -- not commissions, but grants and discounting, very difficult stuff to deal with in higher ed. So a very key win for us in the quarter.

A great HCM win at Waste Management. Waste Management is a $13 billion company in Houston. This is HCM, payroll, talent, some amount of ERP. Tiffany, I'm sure all of you bought something from Tiffany for some important occasion, Tiffany will be running on our HCM location.

Okay. I'm getting a sign to stop here, but it was a very good quarter in terms of just quality logos. And I think what I was -- let me just try to do one -- maybe a couple of other things for you just to give you some flavor. So we get asked this in Q&A a lot.

I'm just reading down the list. And of what I'm looking at is about 150 on my page, I'd say 120 bought more than one module from us. And if I read the competitors or the incumbents that got replaced, they start SAP, EBS, EBS, TOTVS, Microsoft, Epicor, Epicor, Infor, Lawson, Infinium, Microsoft, EBS, I mean, I could go on and on. But that will give you a flavor that we're getting as many, and I didn't do this accounting exactly, but as many of our logos from outside of the traditional Oracle user base as we are from the Oracle user base.

With that, I'll turn it over to Larry.

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Lawrence J. Ellison, Oracle Corporation - Co-Founder, Chairman & CTO [5]

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Thank you, Mark. As Mark said, in Q4, we saw a surge in database license sales. We also saw very rapid growth in sales of those database options required to run our Autonomous Database. We continue to gain overall database market share as we migrate our database users to the cloud.

In the quarter, we added over 5,000 new Autonomous Database trials in our Gen 2 public cloud. Our new Gen 2 Cloud infrastructure offers customers a compelling array of advanced technology features, including our self-driving database that automatically encrypts all your data, backs itself up, tunes itself, upgrades itself and automatically patches itself when a security threat is detected. It does all of this autonomously, while running without the need for any human intervention and without the need for any downtime. No other cloud infrastructure provides anything close to these autonomous features.

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Ken Bond, Oracle Corporation - SVP of IR [6]

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Thank you, Larry. Holly, if we can start with the Q&A portion of the call please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Michael Turits, Raymond James.

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Michael Turits, Raymond James & Associates, Inc., Research Division - MD of Equity Research & Infrastructure Software Analyst [2]

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Strong quarter in a lot of ways, and database obviously stood out. But I'd like to ask about the recent Azure partnership. In general, your strategy has been to make sure that on-premise Oracle workloads move to Oracle Cloud. Does this Azure partnership represent an opening to Oracle workloads running on other clouds? Or is it more directed at just getting Azure services integrated with Oracle Cloud workloads?

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Lawrence J. Ellison, Oracle Corporation - Co-Founder, Chairman & CTO [3]

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It really is -- most customers have Microsoft technology and Oracle technology. So they might have a Microsoft analytics suite and their data in an Oracle database. And we want to make it as easy as possible for you to run those Microsoft analytics in Azure, accessing the Oracle Database in the Oracle Public Cloud. And we built these high-speed interfaces and make -- we made -- we glued the technologies together, but we also have unified the customer experience. So the customers -- it feels to the customer, like they're working in one cloud, but they have 2 suites of products and technologies they have access to and they can interconnect those things. But no, the Oracle Database is still running in the Oracle Cloud and the Microsoft analytic technology is running in the Microsoft cloud. They are just talking to each other at high speed and highly reliable.

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Ken Bond, Oracle Corporation - SVP of IR [4]

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Thank you. Next question, please.

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Operator [5]

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Our next question will come from the line of Mark Moerdler, Bernstein Research.

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Mark L. Moerdler, Sanford C. Bernstein & Co., LLC., Research Division - Senior Research Analyst [6]

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Congrats on the strong quarter. I'd like to focus my question on the database business and especially Autonomous Database. Mark, Safra, thanks for the data you gave on autonomous on the call, but can you give us some more color on how we should think about the database biz revenue going forward? Is autonomous adoption hitting the stride, so we can visibly see it in license revenue on a quarter-by-quarter basis? And what's this impact going forward on cloud (inaudible) ?

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Lawrence J. Ellison, Oracle Corporation - Co-Founder, Chairman & CTO [7]

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Okay. Let me give you what I think is maybe the most interesting thing we can say about this. We have 2 ways of forecasting our Autonomous Database business. One is the traditional way, where the field comes out with quarterly forecasts, we put together annual plans. And that's in fact what we relied upon for years in terms of giving you guidance. But now that we're in the cloud business, we have some interesting additional data, not around field sales, if you will, bookings for selling our cloud services and our technology, but rather we have real data about consumption inside of our cloud. And we started collecting the consumption data, because to add capacity to the cloud -- Safra said, depending on bookings, we might have to spend more money. Let me be a little bit more precise. It's not even bookings that drive it. Bookings that lead to increased consumption triggers our just-in-time provisioning of our hardware into our public clouds. And right now, we're getting signals from our usage in our Gen 2 Cloud that is signaling much faster Autonomous Database growth than we're seeing from our sales forecast. It's just kind of interesting, but encouraging.

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Operator [8]

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And our next question is going to come from the line of Brad Zelnick, Crédit Suisse.

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Brad Alan Zelnick, Crédit Suisse AG, Research Division - MD [9]

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It's great seeing the business accelerating like this. My question is for Larry. Larry, it's so nice to see the early success in Autonomous Database and demand for database options. But as we think about the long-term prospects of the database business, in years past, a lot of your success was tied to the ISV ecosystem, and it would seem the future is increasingly about embracing software developers. First, would you agree with that statement? And how do you see Oracle attracting developers to your database and OCI more broadly?

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Lawrence J. Ellison, Oracle Corporation - Co-Founder, Chairman & CTO [10]

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Well, I think you're saying the same thing. Why is it attractive to -- why is it good to attract developers, because developers write applications and the most important applications are ISV applications, which are used across the board. So I don't think anything has changed at all. Developers were always, if you will, the foundation of our business. We have over 1 million developers in our ecosystem already. And most ISVs, most of the current ISVs in the cloud use the Oracle Database. I mean, everything the Salesforce.com runs pretty much is running on the Oracle Database. Everything that SAP acquired to run in the cloud runs on the Oracle Database. Now I know SAP said they're going to move to HANA, but they said that 6 years ago, haven't quite gotten there yet. Anyway, the -- we go after developers -- and in fact, yesterday, we were putting the finishing touches of a program we're going to be announcing to developers at Oracle OpenWorld, which is basically free services to developers, forever, if you will. So developers and college entrepreneurs can -- this is free service. We'll be able to provide this free service that will let developers to start on the Oracle Cloud, build their applications and graduate from being maybe a solo entrepreneur some place in a dorm in MIT to eventually being an entrepreneur starting a company and then becoming an ISV. That's the cycle we want to sign up people early, and we have all sorts of cloud programs we're putting in place to be able to do that.

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Ken Bond, Oracle Corporation - SVP of IR [11]

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Thank you. Next question please.

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Operator [12]

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Our next question will come from the line of John DiFucci, Jefferies.

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John Stephen DiFucci, Jefferies LLC, Research Division - Equity Analyst [13]

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I'm going to follow up with another database. I know apps was good too, but I can't help myself, have been waiting for this. Maybe...

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Lawrence J. Ellison, Oracle Corporation - Co-Founder, Chairman & CTO [14]

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Us too. We've been working for this for a long time, and it's great to see it's just begin to show up in the numbers.

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John Stephen DiFucci, Jefferies LLC, Research Division - Equity Analyst [15]

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It is. And the timing is kind of odd, Larry, because many infrastructure companies this quarter have struggled lately. And as you probably know, the logical conclusion from the investment community was that we'd see some relative weakness out of Oracle. But your constant currency infrastructure growth was better than it's been in -- I mean since you've been doing this, like over the last -- I went back looking back to fiscal '16. And in this quarter, the constant currency growth was better than it's been since -- over that time period.

I guess, Larry, you mentioned the options, and that's something we've been sort of waiting for and looking for. I guess, can you give a little more detail on that? And then maybe even more generally, maybe Mark, if you can give us some detail on comments on the general broad-based infrastructure IT demand out there? We're not -- we don't just cover Oracle, right? We're just trying to figure out what's going on out there.

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

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Okay. So let me -- there are 2 options that I think Mark mentioned them that are absolutely required to use Autonomous Database. One is the multi-tenancy option. This is the one where you can take an existing application, it could be an ISV, you could take an existing application that was never built to be multi-tenant, you move it to the Oracle Database, you don't change a thing and you suddenly have a multi-tenant database. So that's one thing that's required for Autonomous Database. The other thing is this real application clustering. Real application clustering refers to the fact that we use multiple computers to run every database instances. So in case one of those computers should fail, there's -- our systems are fault tolerant, they keep running. So the Autonomous Database never breaks. Let me say that again, never breaks.

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Operator [17]

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Ladies and gentlemen, stand by. And our next question is going to come from the line of Heather Bellini, Goldman Sachs.

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Ken Bond, Oracle Corporation - SVP of IR [18]

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Heather, can you hold on for a moment. Heather, can you hear me okay? I apologize everybody. Larry, what'd you like to do? Would you like to continue on or...

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Lawrence J. Ellison, Oracle Corporation - Co-Founder, Chairman & CTO [19]

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Yes. I would like to answer the question.

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Safra Ada Catz, Oracle Corporation - CEO & Director [20]

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John, did you get any of Larry's answers?

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Ken Bond, Oracle Corporation - SVP of IR [21]

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John we'll get you back on the line and we'll kind of figure out -- apologies for these logistics.

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Lawrence J. Ellison, Oracle Corporation - Co-Founder, Chairman & CTO [22]

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We were talking about the options. So let me -- I'm sorry. And I'll cycle back and repeat my answer. So the answer, there are 2 options required for Autonomous Database. One is the multi-tenancy option, and that allows, let's say, an existing ISV to take an application that was never meant for the cloud, move it to our Autonomous Database with the multi-tenancy option, and suddenly, without changing their application, their application becomes a multi-tenant cloud application. That's one key feature and we've seen sales of that skyrocket. The other key feature of Autonomous Database that's required to use Autonomous Database is this feature called rack. Rack is the ability to use multiple computers to run a single application or a single database instance.

So in case one of those computers should fail, we tolerate that failure and the application keeps running, because we have multiple computers. You might have one. You might have 2, 3, 4. But you lose 1 or 2, you still have 2, 3, 4 left, whatever you -- however you configure the system. We will only configure Autonomous Database with multiple computers. Autonomous Database never fails. You must have the rack option to ensure that. Rack options are growing more rapidly than you would expect, being driven again by consumption of the Autonomous Database. So we're seeing very, very rapid adoption. In fact, it's -- and another thing -- to add a little color to this, initial transaction, a lot of our existing customers might come on with a very small project, let's say, a $30,000 ARR project. And within 60, 90, 120 days, that becomes $120,000 project. And after another few months, it becomes $0.5 million project. So we're really optimistic about this business. And the optimism -- and I'm just back to what I said earlier, the optimism was not in Safra's guidance, which is based on sales forecast. The thing that I find fascinating are the consumption data curves, which shows our consumption rate growing much faster than the fields currently anticipating. To me, that's just wonderfully encouraging, and hopefully, this is the beginning of the trend. We'll find out soon.

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Ken Bond, Oracle Corporation - SVP of IR [23]

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Okay, Holly, if we could now move ...

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Lawrence J. Ellison, Oracle Corporation - Co-Founder, Chairman & CTO [24]

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I think Mark had a follow on. Didn't you have a question for Mark as well?

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John Stephen DiFucci, Jefferies LLC, Research Division - Equity Analyst [25]

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I did. Just a general demand. Can you hear me?

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Mark Vincent Hurd, Oracle Corporation - CEO & Director [26]

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Yes. We can hear you, John.

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John Stephen DiFucci, Jefferies LLC, Research Division - Equity Analyst [27]

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Okay. Yes. It was just -- we're seeing a lot of funky stuff out there for infrastructure software. And I'm just wondering -- I mean you guys just have a broad customer base. Just like wondering what you're seeing in general? Are you seeing any -- I mean your business was strong, but there's a lot of companies that have struggled recently. Are you seeing anything, any changes out there for infrastructure demand in general beyond Oracle even?

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Mark Vincent Hurd, Oracle Corporation - CEO & Director [28]

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Yes. I mean we have new hot products. I mean that's the difference. I think that again, I won't speak to everybody, but when you go out with the Autonomous Database, Larry talked about a lot of different factors, but from a business perspective, we very rarely had a product that we can go talk to somebody at a senior level and say how would you like to get more secure, save money and get better performance all at the same time.

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Lawrence J. Ellison, Oracle Corporation - Co-Founder, Chairman & CTO [29]

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How would you like to outsource the security detection and patchings responsibilities to somebody who does this for a living, so you never have to read the name of your company above the fold on the front page talking about how much data you just lost. All right. So we expect -- yes, I'm going to let Mark talk. I'm sorry.

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Mark Vincent Hurd, Oracle Corporation - CEO & Director [30]

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Well, this is a really simple message. This is different from saying, we've got a new partitioning. It's just a very different approach for us. And so we've got new products. You know about the strengths, John, you mentioned in cloud apps. And we benefit from a set of competitors that are in different stages of maturation, most of which are weak. And we've got great products and what we are just now bringing out in Autonomous Database. And so I think that's a bit different just in terms of the various product cycle that we're in versus what other people might be in.

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Lawrence J. Ellison, Oracle Corporation - Co-Founder, Chairman & CTO [31]

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Yes. Let me then close with -- I couldn't agree more with Mark. Our really good hot new products like Autonomous Database, Fusion, cloud application suite, NetSuite are selling really well. In fact, they are accelerating. They're doing extremely well. Quite frankly, we have some other product lines that we're quite naturally downsizing like some of the acquired Sun hardware, there are some older on-premise software products that aren't really doing well. Mark mentioned data cloud because of all the privacy issues. So yes, there are some of our businesses that are not, if you will, hot. But the good news is the hot businesses are now bigger than the not-so-hot businesses and that's determining our future.

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Mark Vincent Hurd, Oracle Corporation - CEO & Director [32]

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By the way, what Larry said is right, I think it's worth noting. Our SPARC business declined 24%, 25% this quarter. Our NetSuite business grew, as we described, in the high 20s. And they don't cancel out. NetSuite is now bigger. But when we look at the aggregate growth rate of the company, it's made up of negative 25s and plus 27s, like what I just described. And so it does create the phenomenon that Larry described.

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Lawrence J. Ellison, Oracle Corporation - Co-Founder, Chairman & CTO [33]

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Again, it looked like -- and I swear this will be the last part of the answer to your question. The -- it does look like the top line is moving up modestly. But underneath that, there is really a lot of activity. You have these very -- these modern businesses like Autonomous Database, Fusion, NetSuite growing very rapidly, taking share, clear #1s in the overall marketplace. (inaudible) is dominant #1 in cloud ERP. And you have these other businesses that are melting away and we just don't care. We're focused on our star products, and our star products are now driving our top line higher.

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Operator [34]

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And our next question will come from Heather Bellini, Goldman Sachs.

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Heather Anne Bellini, Goldman Sachs Group Inc., Research Division - MD & Analyst [35]

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Okay. So I guess, I should spend a little bit of time on the app segment, given everyone has been focusing on the infrastructure segment so far. It obviously looks like that was another strong quarter there. I was wondering, Mark, if you could share with us in terms of how the SaaS business is performing, if you could look out next year -- I mean, you had tougher comps in the fiscal year that just ended, right, as the anniversary of NetSuite went on. When you think about the type of acceleration we can see, can you walk us through kind of the puts and takes in terms of the types of acceleration we might be able to see in that business? And also I wanted to ask you, I mean, SAP is going through where they are trying to get customers to replatform. How much of an opportunity is that for you to go and potentially win back some of those customers or to win some of those customers for the first time? So wondering kind of the competitive environment, I guess, between Workday and SAP and how you're seeing that play out given some of the announcements from SAP?

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Mark Vincent Hurd, Oracle Corporation - CEO & Director [36]

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Okay. Well, that question would take me like an hour to get.

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Heather Anne Bellini, Goldman Sachs Group Inc., Research Division - MD & Analyst [37]

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How about the abridged version?

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Mark Vincent Hurd, Oracle Corporation - CEO & Director [38]

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The abridged version. I think, to your point, SAP is forcing all their customers to a new platform by beginning of 2025. That forces all their customers to move and all the changes, not just the changes they've just made, but all the changes they made to the code have to be remade to the code. And what that means is they have to roll up a big new bill to move to this thing Larry called earlier, HANA. And it's a big damn bill. And so the poor CIO or CFO, whoever this guy is, has to show up to the Board and says to the Board of Directors, we've got a $500 million bill to move to HANA. And you all on the phone are smart. My guess is the Board members says something clever like what's HANA. And the guy goes, well, it's a platform. And the guy goes, well, what's a platform? And he goes, well, it's a new thing we run our ERP on. The guy goes, oh, okay. And it costs $500 million? And the guy goes, oh, yes. And he goes what do we get for it? And he goes, well, we get some new plumbing and we get some new this. I just think that meeting goes very badly. And somewhere in the meeting, the customer goes who else have you talked to? Do we have an alternative? Could we not do it? Could we go with somebody else?

So yes, I mean, I think it's an incredibly interesting strategy on their part to put all their customers at play. Do we get calls from customers that we haven't been called or talked to in 20 years? The answer is yes. And is it because -- and remember, Heather, you know this that when we sold to customers 15 years ago, they never really talked to SAP after that and vice versa, because you're expected to stay with these ERP systems forever. So yes, some percent of their base will move as a result of just this, because it's a lot of money for not getting much, real simple. And the rest of the...

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Heather Anne Bellini, Goldman Sachs Group Inc., Research Division - MD & Analyst [39]

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Anything on Workday?

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Mark Vincent Hurd, Oracle Corporation - CEO & Director [40]

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I thing Workday does -- again, my sense of Workday is they do a decent job in upmarket HCM where they can divorce the HCM buyer from the ERP buyer. When the ERP buyer and the HCM buyer are aligned and combined, they're really in a position with no chance, because they don't have much of a financials product. And I know they hyped it and they talk about it and all that, but at the end of the day, they're just not competitive. So for us, the market really is for us to keep moving ahead. It's a lot -- I don't know what our market share must be in cloud financials now, but it must be plus 90%, 92%, 93%, 94%. So yes, do I think we can accelerate? I think the greatest story you can see here is the NetSuite story that we doubled the rate. And if I didn't say enough things about NetSuite, because I'm sure the NetSuite team is listening. Let me say, NetSuite, NetSuite, NetSuite. They have just done a fabulous job and they are doing a fabulous job not just growing internationally, but growing domestically. A lot of this performance in NetSuite is just pure U.S. domestic performance, more salespeople, more industries, micro industries that we build for, better execution. And so between NetSuite and Fusion, we've just had a really good run. I won't tell you everything is perfect, which is really good news. With these numbers, we can do better. We can do better. And I think we're just getting our stride. So I feel very good about it, Heather.

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Safra Ada Catz, Oracle Corporation - CEO & Director [41]

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And as Fusion becomes a higher percentage, Fusion ERP is growing so quickly and it becomes a bigger percentage, it just kind of overwhelms everything else.

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Lawrence J. Ellison, Oracle Corporation - Co-Founder, Chairman & CTO [42]

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Yes that's the mix change. I mean that's what you're seeing really in this quarter is the beginning of the fact that our hot rapidly growing products are now bigger than some of those products, again, like Sun SPARC that are in decline. And we kind of cross -- those 2 curves have crossed one another. Fusion is an international product in a lot of countries. And now we've moved NetSuite to a lot of countries. And quite frankly, we haven't really started to get the benefit of that just yet. So that's going to kick in this fiscal year and that will have a big impact.

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Operator [43]

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Our next question is going to come from the line of Phil Winslow, Wells Fargo.

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Philip Alan Winslow, Wells Fargo Securities, LLC, Research Division - Senior Analyst [44]

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Congrats on a great finish to the year. A lot of time has been spent on platform and applications. I wanted to focus on infrastructure and hope you can give us an update on just what you're seeing on the Oracle Cloud Infrastructure too. What's the feedback from customers? How do we think about sort of where we are in the adoption life cycle? And then one question I get from investors is how should we think about OCI 2 relative to the announcement with Microsoft, if there is any sort of impact there?

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Lawrence J. Ellison, Oracle Corporation - Co-Founder, Chairman & CTO [45]

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Well, OCI 2, we have 2 infrastructure products. We had what we now call OCI Classic, which really is frozen and we're moving all of our customers -- almost moved all of our customers to our Gen 2 Cloud. Our Gen 2 Cloud is dramatically better, I think, not only than our Gen 1 Cloud, but other people's, the existing clouds. We have -- without going through a lot on this, we have an architecture where we have 2 separate computers in each computer that you rent, if you will. And we have the Intel computer that you rent and then we have another processor with separate memory that has all of our cloud control code. So that's very different than Amazon or Google or Azure as an architecture. That's true with every single computer in our Gen 2 Cloud is really 2 computers, the one that the customer uses and another one that we use to manage the cloud and encrypt the data and encapsulate the messaging and virtualize the messaging and do all of that. The -- it's impossible for a cloud customer to get at our code and hack it. And it's also impossible for our programmers to look at our customers' data. So we did this. We redid our architecture, because we decided that existing architectures, infrastructure architectures had just too many vulnerabilities. And so we bit the bullet, said, okay, we're going to freeze OCI Classic, we're going to invest in Gen 2 that gives us this much more secure, much more reliable platform. And in fact, it'll be much faster. It's also much faster. We have much faster networking, I'm not going into all of that. But this is a huge differentiator between us and everybody else. And customers are beginning to see that. They are beginning to understand the architectural differences. A lot of the world security agencies are now coming to us and saying, hey, this looks really good, we're going to go with this, not Amazon or somebody else because of these architectural distinctions. Also, a bunch of people are running high-performance workloads on our cloud. We have a much fancier network. We have RDMA capability built into our network that the other guys don't have. That's because we redid that. We didn't have it in Gen 1, we have it in Gen 2. It allows us to run large machine learning workloads, rendering, simulations, all sorts of high-performance computing way better than our competitors. So there are a bunch of applications we just do better and people are beginning to notice and they are beginning to move and buy.

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Operator [46]

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And our final question for today comes from Raimo Lenschow, Barclays.

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Raimo Lenschow, Barclays Bank PLC, Research Division - MD & Analyst [47]

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I wanted to go back to NetSuite strength, Mark, and you talked already a lot about it in terms of geographic and going deep into industry. But I just wanted to see like how sustainable is that? So where are we in that innings in terms of going against certain countries or going against certain industries? Like is that kind of where the initial investment is coming through now and then we are done? Or are we on the beginning of a journey here?

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Mark Vincent Hurd, Oracle Corporation - CEO & Director [48]

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First, Raimo, I think one thing that I'll add to Larry's Gen 2 point is customers love Gen 2. And it's got a great thing, it works really well. It's reliable. It scales. We're hiring people in our engineering group, continuing to expand. And so just to add to Phil's point, I mean, it is very well received by our sales force, our field and it's been fantastic. On NetSuite, yes, we're just at the beginning. To Larry's point, we really haven't seen the acceleration internationally that we've seen domestically. So we are adding salespeople internationally. We've done that. We've got some more to do. So there is growth there. We are adding more countries. There is more to do there. And we are adding what we call sweet success, which is where we take an industry -- not even an industry, a micro industry. So instead of taking retail, we would take retail bookstores and campus bookstores and universities, and we would refine the solution for campus bookstores and then put a consulting offer around it that we would deliver, so it's a complete one-stop shop for the customer. And we're continuing to build those out. So we've increased R&D yet again to do more of those, increased our sales force yet again to get after more customers. And our expectation is that we continue to drive significant growth in NetSuite.

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Ken Bond, Oracle Corporation - SVP of IR [49]

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Okay. Thank you, Mark. 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 the call. We look forward to speaking with you. Thank you for joining today.

With that, I'll turn the call back to Holly for closing.

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Operator [50]

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Thank you, and thank you for joining today's Oracle Fourth Quarter 2019 Earnings Conference Call. We appreciate your participation. You may now disconnect.