Oracle Corp (ORCL) — Q2 2021 Earnings Call Transcript

Thank you, Erica, and good afternoon, everyone, and welcome to Oracle's Second Quarter Fiscal Year 2021 Earnings Conference Call. A copy of the press release and financial tables, which include a GAAP to non-GAAP reconciliation and other supplemental financial information, can be viewed and downloaded from our Investor Relations website. Additionally, a list of customers mentioned on this conference call, as well as many others who have purchased Oracle Cloud services or went live on Oracle Cloud recently, will also be available from the Investor Relations website. On the call today are Chairman and Chief Technology Officer, Larry Ellison; and CEO, Safra Catz. As a reminder, today's discussion will include forward-looking statements, including predictions, expectations, estimates, or other information that might be considered forward-looking. Throughout today's discussion, we will present some important factors relating to our business which may potentially affect those forward-looking statements. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those 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-Q and 10-K 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 these forward-looking statements in light of new information or future events. We'll begin with a few prepared remarks, and then we'll take your questions. However, I want to remind everybody we will not be making any comments regarding TikTok. And with that, I'll turn the call over to Safra.

Yes, I'm here. Sorry. Thanks, Ken, and good afternoon, everyone. As you can see, we had another excellent quarter. As usual, I'll review our non-GAAP results using constant dollar growth rates, unless I say otherwise. I first want to highlight that since our own migration to Fusion ERP, we've continued to close our books faster and faster. This quarter, we are reporting our results for our entire global operations 10 days after the end of the fiscal quarter. In fact, using Fusion ERP, we submitted our 10-K and 10-Q filings faster than any other company in the S&P 500, in fact, 21 days faster than the average. Understanding our business performance sooner is an advantage that we enjoy by using Fusion ERP, and it's one our Fusion customers are rapidly beginning to appreciate. On to the quarter. So this quarter, revenue was $40 million above the midpoint of guidance, and EPS beat the high end of guidance by $0.04. The impact of currency movement was in line with guidance, meaning that our outperformance reflects both continuing execution on the sales side and disciplined management of our operations. Operating income grew 12%, our best result in 8 years. Our total cloud services and license support revenues for the quarter were $7.1 billion, up 4% from last year. Over the last 4 years, we have doubled the percentage of revenue that is being derived from our cloud services. That is what's driving our recurring revenue as a percentage of total revenue higher and higher, now reaching 73% of total company revenue. We anticipate this trend to continue as cloud services continue to grow. GAAP application subscription revenues were $2.9 billion, up 5%, with strategic back-office applications up 26%, including Fusion ERP which was up 33%; NetSuite ERP up 20%, and Fusion HCM up 24%. Also, retention rates for strategic back-office cloud applications, which are already high, continued to go even higher. GAAP infrastructure subscription revenues were $4.2 billion, up 3% with database subscription revenue up 5%. Consumption revenue was up 64% for Autonomous Database and up 139% for OCI, our cloud Gen 2. License revenues were $1.1 billion, down 5%. So, all in, total revenues for the quarter were $9.8 billion, up 2% in USD, and up 1% in constant currency. As usual, we've continued to be disciplined in our spending with operating expenses down 7% this quarter. Non-GAAP operating income was $4.6 billion, up 12% from last year. Obviously, we're delighted with this result as we're continuing to see operating income become a bigger part of our EPS growth. I continue to have a very high level of confidence that our revenue growth will accelerate as our cloud business continues to become a much bigger portion of total revenue. The operating margin percentage was 47%, up more than 450 basis points from 42% last year, and as I said, our best result since 2012. The non-GAAP tax rate for the quarter was 18.7%, slightly below our base tax rate of 20% as a result of some discrete items. EPS was $1.06 in USD, up 19% and up 17% in constant currency despite interest income being $120 million lower than last year and interest expense being $135 million higher than last year. The GAAP tax rate was 17.8% as a result of some discrete items, and GAAP EPS was $0.80 in USD, up 16% and up 13% in constant currency. Operating cash flow over the last 4 quarters was $14 billion with capital expenditures of $1.8 billion and free cash flow in excess of $12.1 billion over the same period. Q2 operating cash flow was $1.4 billion compared to $0.5 billion last year, with collections especially strong this quarter from a bigger book of business and to a lesser extent delayed payments received from customers affected by the pandemic. We now have nearly $39 billion in cash and marketable securities. The short-term deferred revenue balance is unchanged at $8.1 billion. However, the short-term gross deferred revenue grew 6% in U.S. dollars. The difference between the two growth rates is due entirely to timing differences in customer payments. As we've said before, we are committed to returning value to our shareholders through technical innovation, strategic acquisitions, stock repurchases, prudent use of debt, and the dividend. This quarter, we repurchased more than 68 million shares for a total of $4 billion. Over the last 12 months, we have repurchased 338 million shares for a total of $18.2 billion. Over the last 10 years, we have reduced the shares outstanding by nearly 42%. In addition, we've paid out dividends of nearly $3 billion over the last 12 months, and the Board of Directors again declared a quarterly dividend of $0.24. Now to the guidance. Again, my guidance today is on a non-GAAP basis and in constant currency. Assuming the current exchange rates remain the same as they are now, currency should have a 1% positive impact on total revenue, maybe even a little more like 1.5%, and potentially a $0.03 positive effect on EPS for Q3. Total revenues are expected to grow from 1% to 3% in constant currency and are expected to grow between 2% to 4% in USD. Non-GAAP EPS in constant currency is expected to grow 10% to 14% and be between $1.06 and $1.10 in constant currency, and non-GAAP EPS in USD is expected to grow between 13% and 17% and be between $1.09 and $1.13 in USD. My EPS guidance for Q3 assumes our base tax rate of 20%, but however, as you can see, one-time tax events could cause actual rates for any given quarter to vary. But I expect that in normalizing for these one-time tax events, our tax rate will average this year at about 20%. And with that, I'll turn it over to Larry for his comments.

Thank you, Safra. We just completed a great quarter, but the quarter would have been even better if we had not been capacity constrained in OCI during Q2. There was more demand than we had supply. To remedy this capacity shortfall, we are adding OCI capacity and building new OCI data centers as fast as we can. We are now up to 29 regional data centers around the world, more than AWS. OCI added customers and grew revenue at a rate well in excess of 100% year-over-year in Q2. The Oracle Autonomous Database was up over 50%. We also introduced several new OCI managed services during the quarter. The most interesting of these new OCI managed services is for the popular open-source database, MySQL, featuring an all-new, Oracle-developed, massively parallel query accelerator called Heat Wave. MySQL plus Heat Wave processes queries hundreds of times faster than the current version of MySQL by itself and other MySQL-compatible databases, such as Amazon's Aurora. MySQL plus Heat Wave is so much faster, so much easier to use, and less expensive than PostgreSQL, Redshift, Snowflake, or any other database available on Amazon AWS. The amazing thing about Heat Wave is that you don't have to move your data out of MySQL and build a separate data warehouse to get the huge performance gains. You simply take any existing MySQL or Aurora database, run that exact same database on the new MySQL version that includes Heat Wave, and immediately, your queries run hundreds of times faster. You don't have to change a single line of code. It can't get any easier to use than that. Now I'd like to change subject and talk about our multibillion-dollar application businesses in the cloud. Fusion ERP grew 33% in Q2 to over 7,500 customers. NetSuite grew 21% to over 24,000 customers. We have the top-rated ERP products on both Gartner and IDC. There is no large-scale enterprise application business in the cloud that's growing as fast as we are. In the coming months, our cloud ERP market leadership will become even more obvious when we announce that several major large-scale SAP ERP customers are leaving SAP and moving to our Fusion ERP cloud. Oracle is the clear market leader in cloud ERP. Finally, I'd like to talk about our all-new, cloud-based national electronic health record system and health management application suite that Oracle built in response to the COVID-19 pandemic. This system has already been used to register more than 500,000 people for clinical trials run in the United States for COVID-19 vaccines and therapeutics, such as monoclonal antibodies. Last month, in partnership with the Tony Blair Institute, we used this same exact national electronic health record system to manage the distribution of yellow fever vaccine in Africa. Seven thousand people in Ghana were vaccinated during the first week of the program. We're very proud of that. We are currently in discussions with dozens of countries around the world to adopt Oracle's new national electronic health record system to modernize their national public health infrastructure, thus enabling efficient COVID-19 vaccine management, therapeutic monitoring, and diagnostic testing. Normally, at this point, I'd begin to read a list of notable new customers that we acquired during the quarter. However, our new more efficient track will be to provide you with a list of those customers attached to our detailed financial quarterly numbers, so you will be able to read the list for yourself and no longer will you have to endure me reading it to you. So with that, I'll turn it back over to Ken.

Thank you, Larry. Erica, if we could queue up, I'll start off the Q&A. And just a reminder no questions on TikTok. Thank you.

Safra, I wanted to go back to your comments from June. On your Q4 call, when you talked about what was going on under the hood of your constant currency revenue growth, you mentioned that the growing businesses were growing at a 30% CAGR, the declining businesses at about a double-digit decline and the stable ones were up 1% to 2%. I'm just wondering taking a look today and kind of how you're thinking about the future, how is the pandemic changing these growth rates, if at all, especially as OCI and things like Cloud Customer become even bigger areas of focus for customers?

So, the pandemic affects us in some ways negatively and in some ways positively. Simply because of our size and the breadth of our customer base, it affects them differently. Some of our hospitality customers have had a very difficult time, while some of our retail customers have done horribly, some have done very well. What has become very clear to our customers is that those that are digitally forward and can work under a lot of automation using digital tools, our technology, and the cloud are faring far better. As a result, we see changes occurring, and you can see it in our ERP SaaS numbers, our HCM numbers, NetSuite numbers; you can see that those numbers continue to do very well. As for our Gen 2 cloud, many of our customers are using more than they expected, and as Larry said, we've had to catch up with our demand while we're expanding globally simultaneously. This remains very consistent. Obviously, there was uncertainty before because of the pandemic. At this point, I think it's clear that our business is accelerating. Our stable businesses remain stable, and our shrinking businesses in non-strategic hardware continue to decline. Generally, the overall revenue number will be showing acceleration even in this pandemic, and I almost feel badly saying that maybe it helped ultimately because many of our customers have realized the importance of using technology to deal with their customers, their employees, and their suppliers.

Great. Thank you. And happy holidays to you and your families.

Thank you. You too, Heather.

Great. Congrats on a good quarter and strong guidance. Larry, I have a bigger question for you. I know you appreciate there are generational aspects to IT where most often, the winner in the last generation isn't the winner in the next. But under your leadership and vision and Safra's operational discipline, Oracle has been an industry leader for over four decades by thinking strategically about the future. Today, we hear amazing feedback on Oracle's latest innovations, such as OCI and Autonomous. By that alone, it seems the future is bright for Oracle, but we've also seen in the past that the best technology doesn't always win. What gives you confidence that Oracle can remain successful and appeal to the younger generation, many who think cloud-first and want to move really, really fast?

Let me start by highlighting two important aspects of Oracle's future. Firstly, the Autonomous Database is a cloud-only product that operates in the cloud and at customer sites, making it distinctly cloud-first. It is the only database that effectively combines transaction processing and query processing. In terms of query processing, we outperform Snowflake, which is currently popular in the market. Furthermore, we excel in transaction processing compared to anyone else. Our unified database is fully autonomous and does not experience downtime; it self-patches, a claim that no other vendor can make. We have a significant advantage in our database business, which continues to grow, despite some decline in other areas like middleware. We believe our lead in the database market is substantial with limited strong competition, particularly from Amazon due to Snowflake's situation. While Snowflake is a solid product, it does not compare to Oracle's Autonomous Database. The second important area is ERP. SAP has overlooked the transition of its ERP system to the cloud. In contrast, we have over 30,000 customers using our Cloud ERP systems, while Workday, the second player in this space, only has a few hundred customers. This gap is immense. Our applications business is the largest on-premise and is poised to be the largest in the cloud, making us the clear technology and market leader. These two cornerstones, the Autonomous Database and Oracle ERP in the cloud, solidify our future. Additionally, we have our own cloud platform, which is competing effectively against AWS and Microsoft. We believe our technology is superior on this platform, as we are transitioning from second place to first in cloud applications. We boast the fastest-growing multibillion-dollar cloud applications business globally. Our unique autonomous database technology and our cloud platform, chosen by numerous sophisticated technology companies over AWS and Microsoft, are strong indicators of our potential. Therefore, the combination of OCI, the Autonomous Database, and Fusion ERP in the cloud gives me confidence we will capture our fair share of the new wave of cloud applications and infrastructure.

Congrats on the quarter. Larry, following up on the last question, if you don't mind. Given that the world is going to start vaccinating, we would expect that IT focus could be more on on-premise in the cloud and work from home. I'd like to get a better understanding of what you're seeing and what your expectations are for Autonomous Database running in the cloud and Cloud at Customer. When do you think we see that big inflection we've been hoping for that could drive revenue acceleration?

Yes. So again, the interesting thing about Cloud at Customer, the change in our business model is that when we sign a huge Cloud at Customer deal and we deliver a bunch of Exadata to a customer, we recognize that the revenue is nothing versus selling a bunch of Exadata. There's a lag from the time we start selling these things until the revenue starts coming in. So that's what you're seeing right now: the change in model. Cloud at Customer is already doing pretty well; our sales are accelerating, but there's a time lag. So, you're seeing is this time lag. As we move to this new model, it's a more profitable model long-term, but it doesn't have the instantaneous impact.

Congrats on the quarter. Larry, you talked a lot about ERP, and that's been a lot of where the messaging has been around Fusion apps. But this has been a really strong year, even during COVID, around the front office. Can you talk a little bit about your CX business and whether or not you could see acceleration there, particularly how some of your AI capabilities are playing into that, if they are?

Yes. We are actually making a major push in CX. We've come out with several new CX products, one of which is our product references system where we have a product references database that we sell, and we have an AI engine that tells salespeople what product they should be selling this particular customer next. It will also tell the salesperson who the best references are when selling customer A Fusion ERP, and it will automatically prepare a micro-site for that prospect. It gives salespeople tools to enable them to sell more, generating proposals, reference lists, micro sites, and recommendations. We also have another new product coming out in CX that allows launching an advertising campaign from a computer console without going through ad agencies. We can target decision-makers in specific companies for advertising. So we're the only ones doing this on the B2B side. We think the CX is a huge opportunity for us, and our front office linked to ERP and HCM is a huge advantage, allowing us to do innovative things with the complete data set.

Congrats from me as well. You guys have been very good and disciplined. You wouldn't build data centers just for the sake of building data centers. If I look at the momentum here, like 14 new ones this year, going up to 29 now, and planning to go up to 38 in a few months, can you talk a little bit about what you're seeing there? What's driving that momentum because that's super impressive.

Larry, do you want to take it?

We're just seeing demand for our products all over the world. We're going into more countries than Amazon because we need to serve those countries where we have a large installed base. So we believe we have been building as fast as we can, but we've been trying not to build ahead of demand. We were doing a great job until this last quarter when demand exceeded our ambitions. We have large customers wanting more capacity than we could supply, and that bit us in Q2. Hopefully, it will be corrected soon and we will catch up with that curve. But we just see right now there's more demand than we can supply. So we're going as fast as we can.

Let me just add a couple of things. One is we have upped our capital spending plans because the demand is so strong. I also want to point out that some of our customers do not want to go into a big public data center for different reasons, including regulatory, so they want Cloud at Customer. Consumption is increasing at an enormous rate. So we're very busy keeping up with demand.

Thank you, Safra. 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, and we look forward to speaking with you. Appreciate you joining us today. With that, I'll turn the call back over to Erica for closing.