Oracle Corp (ORCL) — Q1 2018 Earnings Call Transcript

Thank you, Holly. Good afternoon, everyone, and welcome to Oracle’s first quarter fiscal year 2018 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 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 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’d like to turn the call over to Safra.

Thanks, Ken. Good afternoon, everyone. I’m going to focus on our non-GAAP results for Q1. I’ll then review guidance for Q2, and turn the call over to Larry and Mark for their comments. As you can see, we had another good quarter. Customer adoption of our Cloud products and services continues to be very, very strong, and our on-premise business remains very resilient. The result was that total revenue was at the high end of my guidance, and earnings per share beat my guidance by $0.01. Today, I’m going to do what I always do, which is use constant dollar growth rates on this call, so we can have some measure of consistency across the quarters, as well as to reflect how we measure the business. The effects of currency movements in Q1 were a little better than expected with a 1% tailwind to total revenue. Total Cloud and software revenue were $7.4 billion, up 8% in constant currency and 9% in U.S. dollars. GAAP applications total revenue was $2.6 billion, up 17%, and GAAP platform and infrastructure total revenue were $4.7 billion, up 3%. Cloud SaaS revenue for the quarter was $1.1 billion, up 61% from last year. Cloud PaaS and IaaS revenue for the quarter was $403 million, up 28% from last year. As our SaaS business continues to scale and grow dramatically, the gross margin has expanded. The gross margin for SaaS in the quarter was 67%, up from 59% last Q1. We expect to see further improvement in FY 2018 and remain committed to our goal of 80% SaaS gross margins, possibly as soon as sometime in FY 2019. The gross margin for PaaS and IaaS was 44%, down from 58% last quarter as our geographic build-out goes forward in response to demand, but ahead of the bulk of the revenue recognition. When we are at scale, I expect to see major improvement in PaaS and IaaS gross margins. Total Cloud revenues in the quarter were $1.5 billion, up 51% from last year. Total on-premise software revenues were $5.9 billion, up 1% from last year, reflecting continued high attach of software support and renewal rates that reflect the stability of our installed base of on-premise customers. Hardware revenues were $943 million, down 6%, and services revenue was $860 million, up 5%. Total revenue for the company was $9.2 billion, up 6% from last year. Non-GAAP operating income was $3.8 billion, up 10% from last year, and it’s been a while since we last reported double-digit operating income growth as we undertook the Cloud transformation that affected our income statement, trading upfront revenue recognition of on-premise license revenue for recurring subscription Cloud revenue. With Cloud now in larger and more predictable share of the revenue mix, I expect that we will see additional strong operating income growth. The operating margin was 41%, which was up from 39% last year. The non-GAAP tax rate for the quarter was 25%, which was over a point higher than my guidance, negatively impacting EPS by $0.01 or so, and EPS was still up 12% in USD and 11% in constant dollars to $0.62. The GAAP tax rate was 14.5%, and GAAP EPS was up 19% to $0.52 in U.S. dollars. Operating cash flow over the last four quarters was $14.8 billion, up 8%; and free cash flow over the last four quarters was $12.6 billion. Capital expenditures for the quarter were $473 million. I expect that Cloud CapEx spending will be driven by our ARR growth and the PaaS, IaaS build-out that I mentioned earlier. Obviously, should we see higher than expected ARR growth, we would expect to see higher CapEx investments as well. We now have nearly $67 billion in cash and marketable securities, but net of our debt, our cash position is about $13.6 billion. The short-term deferred revenue balance is $10.3 billion, up 9% in U.S. dollars. As we’ve said before, we’re committed to returning value to our shareholders through technical innovation, strategic acquisition, stock repurchases, prudent use of debt, and a dividend. This quarter we repurchased 10.2 million shares for a total of nearly $500 million. We are currently planning on bringing that rate up significantly for Q2. Over the last 12 months, we’ve repurchased 46.6 million shares for a total of $2 billion. And we also paid out dividends of $2.8 billion. The Oracle Board of Directors again declared a quarterly dividend of $0.19 per share. Now to the guidance, and I’m going to give you guidance for Q2, and my guidance is on a non-GAAP basis and in constant currency. However, there has been some currency movements, and assuming current exchange rates remain the same as they are now, currency could be as much as 3% positive on total revenue and $0.02 positive on EPS. So here we go, Q2, Cloud revenues, remember these are constant currency numbers, so you are going to be adjusting them for U.S. dollars. Cloud revenues, including SaaS, PaaS, and IaaS, are expected to grow 39% to 43%. Total revenue growth is expected to range from 2% to 4%. Non-GAAP EPS in constant currency is expected to be somewhere between $0.64 and $0.68, up from $0.61 last Q2. That puts the USD number in the range between $0.66 and $0.70 at today's exchange rate. This assumes a non-GAAP tax rate somewhere between 23.5 and 25.5; of course, as usual, the tax rate could end up being different as it was this quarter. With that, I’ll turn it over to Mark for his comments.

Thanks, Safra. Oracle had a strong quarter, showing growth across nearly all metrics we track. Our total revenue increased by 7% in USD, operating income rose by 11%, and EPS grew by 12%. Cloud bookings performed exceptionally well with overall growth surpassing 40%, which is an improvement over last year's growth rate. All figures are presented in constant dollars unless stated otherwise. Revenue jumped 51%, reaching a $6 billion annual run rate. Currently, 80% of our software and Cloud revenue from the past twelve months is recurring. Now, I'll share some specific SaaS revenue figures. We saw a 61% increase, as mentioned by Safra, which accelerated from last year's 55% growth. ERP grew organically by 90%, and overall ERP is now over a $1.3 billion annualized run rate. Fusion HCM experienced a 109% increase, outpacing Workday's growth. Our sales in marketing and service categories also achieved double-digit organic growth. Data as a service rose by 53%, now exceeding a $0.5 billion annualized run rate. Our vertical markets grew by 20%, compared to the impressive 115% growth last year. Despite these strong SaaS numbers, our application ecosystem—which includes on-premise licenses, on-premise support, and SaaS—grew by 17%. When looking at any growth metric for applications across industries, our market share gains are impressive. PaaS infrastructure revenue grew by 28%, business analytics surged by 130%, and data integration skyrocketed by 221%. Our database ecosystem, which encompasses the same metrics mentioned earlier, saw a 3% growth in USD, consistent with industry market growth. The origin compute industry as a service also experienced triple-digit growth. Cloud deferred revenue increased by 53%. Overall, it was a solid quarter with a top-line growth of 7% in USD and a 12% EPS growth in USD. Looking ahead, I predict Q2 cloud booking growth will be strong, potentially even stronger than our Q1 growth rate. We are performing well with a substantial and expanding pipeline. We anticipate significant cloud booking growth for FY 2018. Currently, our annualized revenue growth stands at $6 billion, reflecting a 51% growth rate, making us the fastest-growing Cloud Company at scale. I'd like to highlight some of the logos and wins we achieved this quarter to provide context about the companies where we are selling our products. In HCM Cloud SaaS, we secured clients such as 711, Aon, and the Baptist Health of South Florida, among others. For ERP, notable names include Advance Auto Parts, Hilton, and Nestle, to name a few. With that, I'll turn it over to Larry.

Thank you, Mark. On October 1 at Oracle OpenWorld, we'll announce the next generation of the Oracle database. When we deliver it by the end of this calendar year, Oracle will become the world's first fully autonomous database. Based on machine learning, this new version of Oracle is a totally automated self-driving system that does not require a human being either to manage the database or tune the database. Using artificial intelligence to eliminate most sources of human error enables Oracle to deliver unprecedented reliability in the Cloud. We will be offering public Cloud SLAs, service level agreements for the Oracle database that guarantee 99.995% systems availability time. 99.995% availability means less than 30 minutes of planned or unplanned downtime per year. To achieve that level of reliability, Oracle has to automatically tune, patch, and upgrade itself while the system is running. AWS can't do any of this stuff, but perhaps the most interesting aspect of autonomous systems like self-driving cars is that our new self-driving database also has economic advantages that surround total automation. Self-driving cars eliminate the labor cost of driving, plus the high costs associated with human driving errors. The self-driving database eliminates the labor cost of tuning, managing, and upgrading the database, plus avoiding all of the costly downtime associated with human error. Self-driving taxis are much cheaper to operate than taxis with human drivers. Running Oracle's autonomous database is much, much cheaper than running traditional human-driven databases like Amazon's Redshift. Customers moving from Amazon's Redshift to Oracle's autonomous databases can expect to cut their costs in half or more, and Oracle will be providing SLAs that guarantee those cost savings to customers that move.

Thank you, Larry. Holly, we could now queue up the group for the Q&A portion of the call.

All right, great, thank you very much. Thanks for taking my questions and congrats on the quarter. The on-premise business is definitely doing better, but we are obviously seeing and hearing more about very large marquee customer wins across your Cloud portfolio, and now your app business is actually growing 17%, constant currency, which implies you're taking market share, so I’m wondering what you’re seeing in terms of momentum in that Cloud portfolio and where do you see that heading and if there’s really any benefit coming in from these large reference customers.

Sure. First of all, one thing you said about implying we're taking market share, I just want to make sure it is clear we are. So it’s - and that’s why I have been trying to give this number over a longer period of time that the apps marketplace is growing low single digits, and obviously, we have been up and doing this for a long period of time in terms of growing at this rate, but there is no question to your point that when you can come out with references like we have publicly with Bank of America, AT&T, and others, it makes the next opportunity easier when you can reference customers at that level. So, I think again and we have said this before, but probably better saying again that every aspect of selling in the Cloud is getting better. We’re better, our products are better, our sales force is better, our ability to implement is better, and our ability to do all of these things is just continued to improve quarter by quarter by quarter and manifest itself in the type of results we’re talking about this afternoon.

Yeah, I will just add. If you look at the growth rate of our applications business in the Cloud, in excess of 60%, and you compare that to either Workday or Salesforce, the two other major players - application players in the Cloud, they are not even close. So we’re much bigger than Workday in applications and we’re growing faster; we must be taking share. And then our primary competitor in both HCM and ERP, Salesforce, has been at it for 15, 16, 17, 18 years. They’ve been at it for a very, very long time, but we sell more new applications to customers than they do every year, and that may be clear. We sell double what Salesforce sells in absolute dollars. We did it last year, and we will do more than that this year, and we are growing, and we're catching them very, very fast. So, to just reinforce what Mark said, we are taking share. We’re taking share across the entire applications ecosystem, and we’re taking share from our Cloud primary competitors as well.

Sorry, just to add, sorry to elongate the answer, but we're going to talk more about this at Financial Analyst Day after Oracle OpenWorld concludes. But again, our support business and applications, when we do move a customer from our support business to our Cloud business we’ve now done several of these and we get materially more revenue. We talked about this before, but it bears saying again because we sort of stopped talking about it, we get at least three times more revenue on a like-for-like basis when a customer moves from on-premise support to our Cloud, and we really just have begun to move that user base. Most of what’s in our application Cloud growth that Larry just talked about is new logos.

Next question please.

Hi, congratulations. One question for Mark and maybe one for Safra. Mark, can you talk about the new disclosure that came out in 8-K where you talked about some really ambitious plans for your SaaS business at $10 billion in revenue, PaaS and IaaS at $10 billion as well? Can you talk about what kind of timeframe you are likely to achieve this, and how much of this is from acquisitions versus organic? And a question for you, Safra, if you're able to achieve these ambitious targets laid out, how should we think about the margin structure of the company? That's it from me. Thank you.

Kash, let me just jump in here and say that we also have an $80 share of stock price target that’s part of the comp plan. We also have a target that says we will be double the market cap of IBM, double the market cap of SAP. I mean there are a lot of targets here. In terms of margin, we have a Cloud margin target that I think is 80%. So, actually we are well on our way to achieving in SaaS - SaaS Cloud margin target, so we expect the margins in our businesses to go up, the stock price to go up for us to distance ourselves from our, if you will, our legacy competitors and join the ranks of the new generation of the Tech companies like, as Microsoft has done, and smaller companies like Salesforce and Workday. That's where we position ourselves. So we think these are stretched targets and it will take several years to achieve them, but we think we are well on our way. We obviously believe they are achievable, but it will require sustaining the kind of performance we have delivered over the last several quarters.

And acquisitions, Larry, in this forecast, are they material or is it all organic?

There is no one left to buy. It’s not like there are a lot of obvious, as we focus on the Cloud, there are a bunch of obvious targets we can go out and buy. So, we’re seeing our best growth in technology that we have developed internally, our Fusion ERP, Fusion HCM which is the midmarket and the high end of the ERP and middle market and high-end of HCM. These are all internally developed systems. They are - HCM and ERP, I think our blended rate is growing triple digits. The size of these markets is enormous and we think we will be able to ride that horse, pursue that organic growth, and meet our targets. So, I think it’s going to primarily come from internally developed technologies, the growth of those technologies, and us gaining dramatic amounts of share and applications in the Cloud, and with our new autonomous database also in Platform-as-a-Service and Infrastructure-as-a-Service. We have to get all cylinders firing, but the bulk of our technologies will determine our success. Things like our database and our fusion applications were all organically developed.

Great, thanks very much and really nice quarter, guys, especially for Q1. I have got a question for Mark and a quick follow-up for Safra. Mark, the apps ecosystem is off to a really strong start with 17% growth in the quarter, but with comps getting tougher in the back half of the year as you lap NetSuite, do you still feel that the apps ecosystem can achieve your double-digit growth goal for the full year?

Yes. I think that I've said this at the beginning - towards the end of last fiscal year, that I believe we can grow roughly double digits in our applications ecosystem, and this Q1 did nothing more than reinforce my belief. This is what we - as good as it was, it is what we thought would happen, and I believe you will see that for the full year. Our pipeline shows that everything else we have got shows that this will happen.

Great, thanks and just for Safra, Safra, mapping Cloud ARR to revenue has been fairly straightforward for SaaS, but less so for PaaS and IaaS. Is there any color you can give us just to help understand the revenue trajectory for PaaS and IaaS? Thanks very much.

We’re actually holding over 10 more points on the PaaS IaaS right now because we’ve had a lot of orders and we are deploying them, and we will only start recognizing them as they deploy. First of all, all of our Cloud customers is a very large amount of it, it hasn't been fully deployed. So you are going to start seeing these match up a lot more as we go ahead and deploying get those up and running and alive. I don’t know, Mark, you want to add anything or…

Yes, it is exactly right what Safra said. I have good news, the good news is we have a large on-provision backlog, and so we will get that provision and you will start to see that fold into our Q2 and Q3 numbers as we get that provision. So the good news is we’ve just got a lot of PaaS to go provision and I wish we got it all provisioned in Q1, but we didn't. So that’s really the work that has been done.

Next question please.

Hi everyone. It’s good to be back on an Oracle call and to see you all executing so well. My question is on the Cloud business and how that relates to the strengths on premise. We are obviously very strong in both applications and infrastructure on premise in the quarter. Do you think that the hardening of your Cloud infrastructure and the strength in your Cloud applications business is actually starting to have a positive impact on on-premise revenue and how do you think that dynamic plays out going forward?

Well, the applications business and the Cloud business, the applications business and the tech business transitions from on-prem to Cloud are very different. As we move our application customers from on-prem to Cloud we’re asking them to migrate from the e-business suite to Fusion. As they move from our HR, we are asking them to migrate from Oracle HR or PeopleSoft HR to Fusion HR in the Cloud. So they are really changing applications. In the case of our technology business, where you are running the Oracle database on-prem, we're just asking you to lift or move your data into our Cloud. There really is no technology transition at all. So you really cannot look at these transitions as being similar. The interesting thing - on a very different, let's say Microsoft, Microsoft took their existing Microsoft Office customers and moved them to the cloud, so you can save documents in the Cloud, where documents are filled documents, you move them to the Cloud. That’s what’s meant by Office 365. That's very close to our database business, where we are just beginning to move them to the cloud by just taking existing applications. Actually, the new version of our database, as I mentioned, is greatly enhanced in the Cloud, and there is real motive to move it from on-prem into the Cloud here. Lots and lots of benefits, but it’s not a technology change. In our apps transition, you actually move to a whole new technology stack. It looks like almost moving to a new vendor, if you will. You move from Oracle E-Business Suite or PeopleSoft Financials and JD Edwards, all of these on-prem customers that we have is on-prem business. We have, and you move to the Fusion Financials. That required a new implementation retraining your people, and we did that, but that transition, as Mark just said, is just beginning. Most of our Fusion ERP customers, our Fusion HCM customers are new logos, and we don't expect when people move their database from on-prem in the Cloud, we don't expect support to go away. We expect them to just bring their licenses into our Cloud. You’re paying for support, you have the license, you own the license, and now you run it in our Cloud and you pay us additionally for running our Cloud just like you move the Oracle data business in the Amazon while you pay them additionally. So, it is simply lifting up your existing license, therefore you keep paying for support. You keep paying for support, and you add on to that. Infrastructure-as-a-service and platform-as-a-service fees associated with running it in our Cloud. So we think that’s a much easier transition for us than the transition we’re making on the app side of the business. And look how well the transition on the outside of the business is going.

Thank you very much and I will add my congrats on the quarter. Mark, obviously a lot of momentum in the ERP right now. I was wondering, when you look at where the market is today, if you think we’re getting closer to more of a tipping point in terms of larger customers setting up to make decisions on moving their ERP systems to Cloud over the next 12 to 18 months, and when you talk to customers, what are some of the reasons or feedback you are getting that gives you confidence in terms of taking market share in this cycle if we are about to go into one? Thanks.

Yeah, whilst you were getting a lot of - we had strong growth, we had another acceleration in terms of logos. We had acceleration of ERP logos this Q1 versus last Q1, so we had more closures in terms of number of accounts, and we had bigger companies looking. So it’s significant to the point of your question. We also have more modules coming online. So, if you look at what we have got an ERP now, we have more localizations across more geographies, and we now have a full suite of the ERP supply chain, procurement, manufacturing, now budget and planning all available. So it’s the full suite now across almost all of our geographies. To Larry's point, I think it’s worth stating, a lot of our ERP customers, now our new logos. Lots of new financials customers and lots of companies that would have never sold to 5 or 6 years ago, companies that are really named, but when you come to Oracle OpenWorld you will see another string of customers who never had an Oracle application before until they bought Oracle financials in the Cloud. So it’s that. Then in addition to that, I think what really helps us is the fact that we are the only suite provider. So the fact that now a company, instead of having a bunch of point solutions, can have a suite of applications and the opportunity for us to now bring HCM and ERP together to a customer gives us an incredible advantage across basically all of our customers. So you see now, and the names I read off to you, lots of what I recall high-end, midmarket, low-end enterprise customers that are really the common persona of who we sell to, most of them new logos. I think you will see that continue as we go forward. The best news I can give you is that as we start to bring our larger customers over, Oracle will get materially more revenue as we move that support because we do everything for them. We do the hardware, we do the operating system, we do our data center, we do really everything for them, and we get the extra revenue as a result of that.

Hi, thanks guys and congrats on a great start to the year. I just wanted to focus on the platform and infrastructure side in particular, and as you look over the overall numbers, you are still putting up very healthy growth rates here, both obviously in the Cloud with the PaaS offering, but also on-premise. Mark or Safra, why don't you just double-click on just what you are seeing on the on-premise side, even as that PaaS is ramping that’s keeping that business growing? And a question to Larry, obviously we’re excited to hear about the new features coming at OpenWorld, but when you think about the Oracle PaaS offering versus other infrastructure services plus DBMS out there, why is it that the Oracle Cloud can lower costs more than these competitors and therefore make it gain share there?

Okay, they are pointing to me, I guess they want me to go first. The reason we can lower costs is we just automate more. There is a big difference between what Amazon basically does, what they pioneered was this notion of, we will rank you based on what you use, compute and storage, and you can kind of bring whatever - and they offer a couple of databases, they offer Aurora, which is MySQL, their version of MySQL, and they offer Redshift, which is another - their version of an open-source database. They have made some changes to it, it is no longer open source. It's from Amazon for queries and OLTP. But these are technologies that are not automated. These are if you will old-fashioned technologies and a newfangled Cloud data center. So it’s kind of an interesting new business model, but their database technologies are not very advanced at all. They have just picked them up at Open Source. And our database, our - especially the latest generation of the database totally automates everything. So you don't - you push a button, load your data, and you’re done. You don't have lots of tuning parameters and lots of things to set up like you do with Amazon. Amazon requires a lot of labor to set up an online transaction processing system based on Aurora. That’s a lot of labor; it is MySQL, it is a code that we maintain. We know it very, very well, very different than Oracle. You press a button, load your data, run your analytics. It tunes itself; it backs itself up; it patches itself; it never goes down, and it’s much, much faster. Like you are saying, it’s much, much, much faster, and then someone will say, we don't need that speed. Let me translate. If it’s much, much, much faster and if it does in an hour what Redshift does in 10 hours, it is one-tenth of the cost of running at Amazon because we charge the same amount for Aurora. So we take out the labor cost, and because we consume less CPU, and we compress the data, and we consume less storage, we are much more frugal about using compute and storage resources, and we eliminate the labor cost and the associated costs associated with human error. So we are not even trying to do the same thing as Amazon.

To your other question, Phil, listen, I think there is a strong interest across the board. I mean listen, we have obviously new features that come with release 12. You know that all those with multitenant within memory, et cetera, obviously our security options are very important given the world that we live in today. We have a desire for many of our customers to get out of all this work, to get out of patching, to look at modernizing their infrastructure. You may have heard what AT&T talked about; there will also be an Oracle OpenWorld, and you will hear a lot more directly from them. But the need to not just consolidate, not just get the new features to modernize those applications, but to get out of all this work to the point that Larry has described, you know about now the fact that I can’t deal with the amount of time it takes to patch all these hybrid environments that I have got. Now somebody - Oracle is going to do that for me, and then we are going to modernize the database, and now they are going to give me all these features, but you're not going to take all that work off my shoulders. So there’s a tremendous amount of this. Now to Larry's other point, remember most of our customers stick with somebody like AT&T. They have over 10,000 Oracle databases in that company, 10,000. So you're going to have a handful of those big ones move to the Cloud. There is still going to be up quite a few of those that stay on-premise for a period of time. So that work is just a lot of work for us to help, and this is the beginning of a whole string of customers. They are going to go through this process to modernize those database environments.

Next question please.

Thank you. Thanks. I have - Safra, I have a quick, just a very quick question on the guidance, and then if I could ask another question, just a clarification, you said total revenue could see, I think, a 3% benefit on top of the 2% to 4% guidance you gave for total revenue, right? I think I know the math is real easy here, but I just want to make sure that implies, I believe a 5% to 7% reported revenue growth if you get that 3% FX effect? Is that right by doing that math?

For USD, I’m going to go through the entire thing in USD for you guys because you’re not the only one. In fact, you're not the only one. So, I’m going to go through it. For total Cloud 41% to 45%.

Okay.

It really comes out like 4.5 to 6.5, but I’m going to say 4% to 6% and in total revenue and then EPS $0.66 to $0.70 and making EPS growth somewhere between 7% and 13%. Okay.

Okay. That’s very helpful. But I'm the only note you need to read. But that’s okay.

Yes, they are all like. And it’s a fair question because there are a bunch of rounding; it is 5 to 7, 4 to 6, it’s somewhere in the middle there, so I am always being conservative so I will say 4 to 6 on this call for you, but you know me. Okay. Was there another question?

Yes, just a quick one; it is great to see the model work in the SaaS business with scale driving leverage here, and I know you’re going to say, we’re also going to hit leverage in the PaaS and infrastructure as a service business or scale. Again, I know there is a lot of variables here, but can you help us when we’re looking at when we might see this happen, when we might see this turn either the timing in next year or the year after or even the scale when the business hits approximately what scale?

Okay. So it’s a little bit complicated because there is a mix between IaaS and PaaS. PaaS in particular is extremely, extremely, extremely profitable, and however there’s really a question of when the revenues get recognized and how much investing I have to do and how we line those up. So we are just like you signed SaaS, I know that it’s a time, it seemed absolutely impossible that we would have the kind of margins we now have in SaaS. It seemed impossible and yet they came, and now we’re closing in on hitting, so much so that I actually went ahead and gave you some time next year for that hitting. PaaS and IaaS are very much at least at this point in the expansion period. We expect this to be a very large business that we remain very conscious of the margins, and so we’re trying not to invest too much ahead of revenue recognition, but as you see in this quarter alone, we have a lot that has yet to be deployed, fully deployed even though it’s fully provisioned even though the equipment is all bought and being capitalized. So this is really, I can’t give you an exact time because we’re going to be very much monitoring demand and reacting to that. And for us, it is much more important that we expand quickly, of course mindful of margin dollars. Sometimes not as mindful necessarily of any intra-quarter margin percentages. So, I don't know if you want to add anything to that.

I think there is no mystery to this, right. This is just like the SaaS business; you have to build out some initial infrastructure to get started. You have to build it, and unfortunately, you have to put it online before you can sell it, and that’s what this is. There is a start-up cost to getting in these businesses. We are PaaS that in SaaS. We are deployed in now virtually all of the critical geographies and we now have scale in most of the critical geographies. And so you see it just show up in the margin rate as it has. We’re going through that same process in infrastructure. The great news for us now, we know how this works. We know how to get it done, we know to measure it, we know how to get from here to there, and so you will see the same results. So it’s just a factor of time and scale in bookings in Safra's last point, the ability then for us to get a provision so we can then recognize the revenue. So this is going to happen, John.

Okay, thank you. That all makes sense, but should we expect that we might need more scale? I mean would it develop similarly to how PaaS SaaS did, or would we expect to hit certain margins we would have to get even greater scale in this business?

No. I don't think there’s any material difference in the context of scale. There is the same fundamental that’s what I was trying to go through. You’ve got to start-up costs, you got to get a data center, you got unused capacity to get started, and then the increments of capacity to bookings comes at a very attractive margin rate. So think of it, you have a baseline of acts. And then I get, and then I have a little bit of capacity per booking so to speak. It’s not exactly how it works, but for the sake of your analytics how it works, and we know what that increment of capacity is for that booking, and then it is just a question of scale from there. So you take the unused space and then for each booking, you get a couple of few cents on the dollar that you have to add internal capacity, and it just becomes the time it takes to get to scale. That's it.

Great, very helpful. Thanks.

Thank you. Maybe in anticipation of the Analyst Day, so I would like to give a more broader question. Larry, you started to use kind of, AI to come up with the autonomous database. Can you talk a little bit about how you see this whole thing evolving? Because there's obviously a lot of noise, a lot of hype around it. Some of the other competitors of your have come up with fancy names here, how do you guys see this play out for you guys? Thank you.

We are using machine learning all over the place. I mean everything from the very highest level to - in our HR systems, our recruiting systems to look at a bunch of candidates. And it is kind of inspect the data of people that this company has hired that have been very successful and people have been less successful. So we can actually start to bucket the candidates. You know, this group, you have got 200 people you are looking at hiring; 50 over here look very much like the 50 people that you hired over the last five years that have been enormously successful for the company. And that’s the matter machine learning, using machine learning to just look at the profiles of individuals, companies hired over a period of time and make recommendations of how to prioritize candidates that they’re looking at making offers to. All the way from that level to our new security systems, which are going in now, where we are doing a log inspection, where we’re looking at people and the logs we look at unlike anybody else. We are in the applications business, we are in the database business, and we’re in the Cloud infrastructure business looking at network logs and operating system logs, and storage hardware logs. We’re also looking at database logs, and we’re looking at people trying to log on to application systems and the passwords they are reducing. We have all of these logs. And we are processing all of these logs in our Cloud to, for example, try to find people who are going to attack a database and steal passwords and steal data. And we think we do this better than anybody because we look at more data. We look at application data; in other words, we certainly know that your CFO is in the Ukraine trying to log on 50,000 times in the middle of the night. Maybe your CFO is not vacationing in Ukraine and that’s not her, and there could be a problem someone is trying to break in. We look at that level of data all the way down to IP addresses. There are strange IP addresses trying to figure out; we look at strange SQL terms. Anyway, we do - we look at 10 times more log information than someone like Splunk, who has been inspecting IP addresses, but not log-in information. So, we get a much better picture of all the activity of what’s going on inside your data center and use machine learning to inspect this vast amount of data and see if someone is in their reconnaissance base prior to an attack where we can shut them off while they are just looking around before they actually attack anything and then start stealing passwords and start stealing data. Again, that’s also all machine learning. We’re offering that technology again; in OpenWorld we’re offering, the customers can ship their logs from their data center and into our Cloud, and we will do all of that security reconnaissance and security work for them. And the more of this information we have, the better equipped we are to find malware. You find malware showing up, let’s say, Germany, and we know what it looks like and suddenly we have worldwide alerts. Because we - worldwide alerts to recognize that the malware that should show up in California or at a - and as we know, there is a lot of securities getting more and more important these days. The events at Equifax, very unfortunate. Events at Equifax is not going to be an isolated incident. You are going to see more and more things like this. You saw at the government's office of personal management, which was disastrous for our intelligence community. We’ve got to do a better job, we got to do a better job of securing not only our Cloud, but our customer's data centers getting all of that log data using machine learning to, and basically what is a cyber war that’s going to be ongoing for a long, long time. So everything from helping companies using AI to help companies hire the right people to helping data centers, both private data centers and public data centers protect against intrusions. It’s an important new technology and it’s the center of what we are doing with database automation, security, and our applications.

Alright. Thank you, Larry.

A telephonic replay of this conference call will be available for 24 hours. Dial-in information can be found in the press release issued earlier today. Please call the investor relations department with any follow-up questions from this call. We look forward to speaking with you. Thank you for joining us today. With that, I’ll turn it back to Holly for closing.