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Oracle's (ORCL) CEO Larry Ellison on Q4 2014 Results - Earnings Call Transcript

Oracle Corporation (ORCL) Q4 2014 Earnings Conference Call June 19, 2014 5:00 PM ET

Executives

Ken Bond - VP of Investor Relations

Larry Ellison - CEO

Safra Catz - President and CFO

Mark Hurd - President

Analysts

Brent Thill - UBS

Karl Keirstead - Deutsche Bank

Walter Pritchard - Citi

Kash Rangan - Bank of America/Merrill Lynch

Jason Maynard - Wells Fargo

Richard Sherlund - Nomura

Heather Bellini - Goldman Sachs

Joel Fishbein - BMO Capital Markets


Operator

Good day, ladies and gentlemen, and welcome to today's Oracle Corporation quarterly conference call. Today's conference is being recorded. And now I'd like to introduce Ken Bond, Vice President of Investor Relations, Oracle. Please go ahead, Mr. Bond.

Ken Bond

Thank you, Chelsea. Good afternoon, everyone, and welcome to Oracle's fourth quarter fiscal year 2014 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 Web site.

On the call today are Chief Executive Officer, Larry Ellison; President and CFO, Safra Catz; and President, Mark Hurd.

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

Throughout today's discussion, we will present some important factors relating to our business, which may potentially affect 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 from 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 factors 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 will begin with a few prepared remarks. And with that, I'll turn the call over to Safra.

Safra Catz

Thanks, Ken, and good afternoon, everyone. As you can see, we've made some significant changes in our financial reporting and in our guidance to match our company's fundamental transition. We're now firmly into the transition to the cloud and we had previously disclosed our SaaS revenues in the 10-Ks and Qs. As the cloud revenue has become larger and more significant, we've gone ahead and disclosed some on the phase of our income statement.

You may want to actually take out your income statement as we go through this, just so that you can follow me. What we previously reported as new software license and cloud subscription is now reported on two separate lines; new software license and another line for cloud Software-as-a-Service and Platform-as-a-Service, SaaS and PaaS.

At this time, the bulk of the revenue is Software-as-a-Service. Well, we expect Platform-as-a-Service to become very important as we do the full launch of Platform-as-a-Service this fall. Also, we previously reporting in service what we previously reported in services is now reported on two separate lines, cloud Infrastructure-as a-Service, IaaS and services.

We have some new software license SaaS and PaaS, IaaS and software license update and product support as a total called software and cloud revenue. Our services line now includes consulting, advanced customer support services and education. The expense lines were also broken out in more details, where appropriate.

So to start, I'm going to go over the Q4 results with our new detail, and then sum it up using our old disclosure for comparability to my previous guidance. Then I'll move on to the guidance for Q1. Generally, I'll be using non-GAAP measures in constant currency unless otherwise stated, but we'll point out GAAP numbers or U.S. dollar growth rate when the difference is important for comparability to last year.

So using our new reporting, software and cloud revenue totaled a record 8.9 billion in Q4, growing 4%. New software license was 3.8 billion flat in U.S. dollars, declining 1% in constant currency, while new software license application revenues were up 6%.

Cloud SaaS and PaaS were 327 million, growing 23%. Cloud Infrastructure-as-a-Service was 128 million, growing 13%. Software license updates and product support was 4.7 billion, growing 6% in constant currency and 7% in U.S. dollar. Software supported cash and renewal rate were strong as usual.

To most closely compare these numbers to my guidance last earnings call, new software license and cloud SaaS and PaaS added together were 4.1 billion, up 1% in constant currency and 2% in U.S. dollars. With our new presentation, you can see that our on-premise based software business, which is new software license and software license update and product support has steadily grown over time to 8.5 billion this quarter.

On top of that, we're building our SaaS, PaaS and IaaS cloud business, which grew nearly 20% and is already approaching a $2 billion run rate with 455 million in revenues this quarter. Hardware system revenue was nearly 1.5 billion growing 3% on a GAAP basis and 2% on a non-GAAP basis. Hardware products were 870 million, growing 3%, and hardware support was nearly 600 million, growing 2%.

Engineered systems had another good quarter with double-digit growth and represent 1/3rd of hardware product sales. In addition, we saw very strong growth in NAS storage in the quarter.

Hardware product gross margins were 49%, down about two points from last year as we continue to put more value in our products without raising prices that's grabbing significant market share as all our major competitors shrink. Keep in mind that as we've increased hardware supported tax rates, hardware support margin has steadily improved and total hardware systems margin are unchanged from last year at 66%.

For the company, total revenue for the quarter was 11.3 billion, up 3% from last year. Operating income was 5.8 billion, up 2% in constant currency, 3% in U.S. dollars, operating margin was 51%, same as last year. Unlike new software license transactions where we've recognized the revenue upfront, we've recognized the revenue from cloud software over time. In the short-term -- in the short run it delays revenue, but over the medium and long-term, we can expect more revenues as we do more of the work for our customers, while our customers can expect to pay substantially less than total with savings in the form of large reductions in the cost of implementing and running their own system.

Over time, this contributes to our business model, particularly given our differentiated product in each of SaaS, PaaS and IaaS.

As we get to the operating income line, I want to remind you that our GAAP operating income last year benefited from a $269 million reduction in the purchase price of an acquisition. This was entirely excluded from a non-GAAP purpose, but did show up in our GAAP -- in the GAAP numbers, which flow all the way through.

In addition, both on GAAP and non-GAAP results include another foreign currency loss this quarter, this time for $102 million from the devaluation of our Venezuela net assets, compared to the dollar. This of course was not included in my guidance last quarter.

Our net asset values in Venezuela have now devalued so much that it will not have any meaningful impact on our numbers going forward. Were it not for the Venezuela currency loss, EPS would have been $0.02 higher.

The non-GAAP tax rate for the quarter was 23%, the GAAP tax rate was 20.5. Non-GAAP earnings per share were $0.92, up from $0.87 last year. GAAP EPS for the quarter was $0.80, unchanged because last year our GAAP EPS was helped by the $0.04 reduction in the purchase price for the acquisition I just mentioned.

I want to make sure I said that correctly, so you understand what happened. We got a $0.04 benefit last year in our GAAP EPS. This year we obviously don't have that benefit, and without that benefit it would have been $0.76, not $0.80.

Operating cash flow increased 14.9 billion, and free cash flow grew to 14.3 billion over the last four quarters, both a record Q4 results. For the fiscal year 2014, total software and cloud revenues totaled a record 29.2 billion, growing 5% in constant currency. New software license was 9.4 billion, up 1%.

Cloud SaaS and PaaS were 1.1 billion, growing 20% non-GAAP and 24% GAAP. Cloud infrastructure to service was 456 million, growing 1%. Software support was 18.2 billion, growing 7%. Hardware system revenue was nearly 5.4 billion, growing 2%. Of that, hardware products were 3 billion, down 1% for the year, and hardware support was 2.4 billion, growing 5% for the year. Services revenue was 3.7 billion, declining 4% as a result of the continuing move of our consulting business to shorter, faster, cheaper engagements for our customers as they move to the cloud.

Total revenue grew 4% to a record $38.3 billion. Our non-GAAP operating margins for the full year was 47%. Earnings per share were $2.87, growing 8%. We've successfully grown the company's revenues and earnings through every transition whether it was many computer database to a complete suite of products, client server to Internet, commodity hardware to engineer systems and now on-premise to cloud. We're well on our way into our most recent transition.

We have nearly 39 billion in cash and marketable securities. Net of debt, our cash position is more than 14 billion. Deferred revenue now stands at 7.3 billion, up 2% from last year. In Q4, we repurchased more than 49 million shares for a total of $2 billion, and for the full year we repurchased nearly 281 million shares for a total of more than 9.8 billion, and the board of directors declared a quarterly dividend $0.12 per share between dividend and buyback. This year we returned nearly $12 billion or more than 80% of our free cash flow to our shareholders.

Now, let's move to the guidance. Software and cloud revenue on a GAAP and non-GAAP basis which includes new software license, software support, SaaS and PaaS and IaaS is expected to grow 6% to 8% in U.S. dollars, 5% to 7% in constant currency.

SaaS and PaaS, one of the line items on a non-GAAP basis is expected to grow 25% to 35% in U.S. dollars, 24% to 34% in constant currency. SaaS and PaaS on a GAAP basis is expected to grow 27% to 37% in U.S. dollars, 26% to 36% in constant currency.

Next, another one at the line, cloud IaaS on a GAAP and non-GAAP basis is expected to grow 10% to 20% in U.S. dollars and 9% to 19% in constant currency. Hardware system revenues on a GAAP and non-GAAP basis, which includes hardware systems products and hardware system support is expected to be between negative one and positive three or negative two to positive two in constant currency.

Total revenue on a GAAP and non-GAAP basis is expected to range from 4% to 6% in U.S. dollars and 3% to 5% in constant currency.

Non-GAAP EPS is expected to be somewhere between $0.62 and $0.66 in U.S. dollars, $0.61 and $0.65 in constant currency. GAAP EPS is expected to be somewhere between $0.49 and $0.53 in U.S. dollars and $0.48 to $0.52 in constant currency. Now, this guidance assumes a GAAP tax rate of 22% and a non-GAAP tax rate of 23.5%. Of course it may end up being different and with that I'll turn it over to Larry.

Larry Ellison

Thank you, Safra. Okay. Oracle is focused, focused like a laser on one goal over the next few years, becoming the number one company in cloud computing’s two most profitable segments, Software-as-a-Service, SaaS; and Platform-as-a-Service, PaaS. We expect to become number one for three reasons. First, we have the most complete and modern portfolio of SaaS products in the cloud. CRM sales, CRM service, marketing; in human capital management, we have core human resources, recruiting, talent management and payroll. In ERP we have accounting, procurement, supply chain, project management and more, the most comprehensive suite of products in the cloud by far.

Second, all of those SaaS applications run on the world's most powerful platform in the cloud, the Oracle in-memory, multi-tenant database and the world's most popular programming language, Java.

Third, we have dramatically expanded, specialized and lined up our sales forces to sell SaaS and PaaS subscriptions against the new generation of cloud software competitors and it’s working. As we enter our new fiscal year, we are already number two in overall SaaS subscription sale. In FY '15 our plan is to grow our SaaS bookings over 50%. That will allow us to close in on the number one spot.

We already have a huge lead over Workday in cloud ERP. We acquired 120 new cloud ERP customers in Q4 alone. In HCM, we are dominating Workday in Europe, and beating them in dozens of core HCM deals here in North America.

Walking you through some of the details of highlights regarding our cloud wins and our great Q4 quarter in the cloud - let me just actually start with hardware a little bit. We’re now roughly in the middle of transition in our hardware business, engineered systems strategy are now a significant part of our hardware, we’ve grown hardware for the second quarter in a row. The change in mix away from commodity hardware to high-value engineered systems that transform the business to an integrated engineered systems business that brings with it extremely attractive annuity. Let me give you some facts about hardware.

Engineered systems grew to record levels in Q4 while our competitors as Safra described are declining. We will ship our 10,000 engineered system in Q1; we’re at the scale. Our hardware support margins are now approaching to 70% and this business is sticky. SPARC super cluster bookings grew triple digits, Exalytics, Big Data Appliance and Oracle Database Appliance all grew double-digits.

Oracle has become the hardware company taking share, growing and doing it profitably. And as I said we are in the middle of the transition.

Now, I will talk about cloud. We are actually just starting this transition. We are the only company that has a whole suite of cloud applications. We are salesforce.com's primary competitor, Workday's primary competitor. And in the cloud we’re many times the size of Workday, we’re bigger than SAP, and we are going to pass Salesforce in cloud.

Let me run a few facts about our cloud. As industry analysts build their waves and quadrants they name cloud leaders in specific cloud areas and Oracle today is the leader across more cloud solutions than Salesforce, Workday and SAP combined. Cloud bookings grew 37% last year. Q4 was the best ever for bookings. Fusion cloud bookings growth was three times the overall growth rate. Fusion HCM, ERP and sales force automation revenue all grew triple-digits.

We added 870 cloud customers in Q4 including in HCM nearly 320 customers, with Fusion 110 HCM customers. If I take Workday's reported number of 75 new customers, we are adding customers at four to five times the pace of Workday. In customer experience we added 430 customers with 120 plus Fusion sales force automation wins. With BlueKai now on board along with Eloqua and Responsys, we are the clear number one in marketing automation with bookings growth of 200% this quarter.

In sales force automation, bookings grew more than 80% and revenue was up triple-digits. As Larry referenced we added 120 ERP cloud customers in the quarter, all Fusion. In just Q4 we added more ERP cloud customers than Workday's total customer base for financials. More than 70 customers go lives just this quarter with hundreds already live. We are about to deliver release 9 of Fusion this summer. With Fusion we have built the most attractive cloud solution in the industry. We have acquired the most attractive SaaS companies in the industry.

We are already number one or number two in every SaaS category and we won't stop until we are number one in every category. Just like hardware where we focused in engineered systems in software we are focused on the cloud. We are executing, we are winning and we are going to be number one. And with that I'll turn it over for questions.

Ken Bond

Before we go to questions, Chelsea, I want to call out that we understand that some of you may have difficulty hearing parts of Mark's comments. So we will continue to move forward with the call and we will try to address some of Mark's comments into the Q&A. Chelsea, if you could start the Q&A please.

Earnings Call Part 2: