Oracle Corp (ORCL) — Q4 2021 Earnings Call Transcript

Thank you, Erica. Good afternoon, everyone, and welcome to Oracle’s fourth quarter and fiscal year 2021 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. Additionally, a list of many customers who purchased Oracle Cloud Services or went live on Oracle Cloud recently will be available from our Investor Relations website as well. 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 these forward-looking statements. These forward-looking statements are also subject to risks and uncertainties that may cause actual results to differ materially from the statements being made today. As a result, we caution you from placing undue reliance on these forward-looking statements and 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 these forward-looking statements in light of new information or future events. Before taking the questions, we’ll begin with a few prepared remarks. And with that, I’ll turn the call over to Safra.

Thanks, Ken, and good afternoon, everyone. We are reporting earnings earlier than last year again. With Fusion ERP, our quarterly and annual financial statements are now being filed faster than any other company in the S&P 500. This speed is attributed to our highly automated, machine learning-enabled system that streamlines the accounting of financial transactions. We had a fantastic quarter, with revenue nearly $200 million above my guidance. Q4 was characterized by every product, every region, and every metric exceeding expectations. Our global team of employees is credited for the excellent full year results, having supported our customers without interruption this past year. We succeeded by continuously delivering best-in-class products and services, including infrastructure and applications, aiding our customers in their digital transformation, many of whom adapted swiftly due to the pandemic. The growth rates we’re reporting today are entirely organic, demonstrating real technological growth across our product portfolio. The total cloud services and license support revenue for the quarter reached $7.4 billion, increasing by 8% in U.S. dollars and 4% in constant currency, driven by Fusion, Autonomous Database, and our Gen2 OCI. Application subscription revenues hit $3 billion, rising by 11% in U.S. dollars and 7% in constant currency. Our strategic back-office cloud applications now have an annualized revenue of $4.4 billion with a constant currency growth of 32% for the quarter, including Fusion ERP at 42% growth, NetSuite ERP at 22%, and Fusion HCM at 30%. Our back-office cloud application revenue is not only larger than our nearest competitor but also growing more than twice as fast. Infrastructure subscription revenues stood at $4.3 billion, showing an increase of 6% in USD and 2% in constant currency. Infrastructure cloud services now exceed $2.3 billion in annualized revenue. OCI consumption revenue surged by 103% in constant currency, with Autonomous Database up by 56% and cloud customer revenues up by 50%. Database subscription revenues, which include database support and cloud services, increased by 8% in USD and 4% in constant currency. Customers are choosing OCI for its exceptional performance and security at the most competitive prices. The distinct Autonomous Database and the flexibility of deploying Oracle Cloud, either in our data center, known as public cloud or behind our customers’ firewall with Cloud@Customer, are significant advantages. License revenues amounted to $2.1 billion, which is a 9% increase in USD and a 5% increase in constant currency. Consequently, total revenues for the quarter reached $11.2 billion, up by 8% in USD and 4% in constant currency. Operating expenses rose by 6% in constant currency this quarter, reflecting our substantial investments in the cloud business. Although some of the ROI is visible in FY21’s revenue growth, we anticipate most of the returns will manifest in FY’22 and beyond. Our non-GAAP operating income was $5.4 billion, marking a 6% increase in USD, with an operating margin of 49%. The non-GAAP tax rate for the quarter was 10.7%, below our standard tax rate of 20%, due to certain discrete items affecting the quarter. EPS reached $1.54, which is a 29% increase in USD and a 22% increase in constant currency. The GAAP EPS was $1.37, growing by 39% in USD and 31% in constant currency. For the full fiscal year, total cloud services and license support revenue reached $28.7 billion, up by 5% in USD and 3% in constant currency. Total company revenues for the year stood at $40.5 billion, increasing by 4% in USD and 2% in constant currency. FY’21 recurring cloud services and license support revenue now comprises 71% of total company revenue, up from 70% last year, and we expect this trend to continue as cloud services grow and accelerate. Non-GAAP EPS for the year was $4.67, reflecting a 21% increase in USD and an 18% increase in constant currency, marking our fourth consecutive year of double-digit earnings growth. The full-year operating margin percentage was 47%, our best result in seven years, up 245 basis points from 44% last year. Operating cash flows over the past four quarters totaled a record $15.9 billion, up 21% in USD. Our free cash flow also set a record at $13.8 billion, up 19% in USD, alongside capital expenditures totaling $2.1 billion for the year. Looking back at the quarter, operating cash flow reached $4.8 billion, climbing 34% in USD, with free cash flow at $4.1 billion, up 30% from last year. It’s worth noting that free cash flow would have been approximately $300 million lower since some capital expenditures planned for Q4 were actually realized in the early part of June. We currently have over $46 billion in cash and marketable securities. The short-term deferred revenue balance was $8.8 billion, up 10% in USD and 5% in constant currency. The remaining performance obligation, or RPO balance, stands at $41.3 billion, an 8% rise in constant currency due to strong bookings, with approximately 60% expected to be recognized as revenue in the next 12 months. As I have often mentioned, we are dedicated to providing value to our shareholders through technical innovation, strategic acquisitions, stock repurchases, prudent use of debt, and dividends. During this quarter, we repurchased 107 million shares for a total of $8 billion. Over the past 12 months, we repurchased 329 million shares, amounting to $21 billion, and over the last decade, we have reduced outstanding shares by more than 44%. Additionally, we paid dividends of $3.1 billion in the last 12 months, and our Board of Directors declared a quarterly dividend of $0.32 per share. Now, regarding our guidance, I want to express my confidence in the continued acceleration of our revenue growth for fiscal year 2022. As I’ve stated repeatedly over the past two years, our overall revenue growth is on the rise as our rapidly expanding cloud business becomes a larger fraction of our total revenue. I anticipate total revenue for fiscal 2022 to grow faster than in fiscal 2021, with constant currency revenue growth in the mid-single digits. Given our growing confidence in revenue growth and our unique position in the market, we plan to increase our investments to further boost the top line. Cloud is fundamentally a more profitable business compared to on-premise, and our annual non-GAAP margin of 47%, which is our operational level, represents the highest non-GAAP margins among all of our competitors. We believe now is the right time to amplify our investments to capture more market share. Consequently, we expect to approximately double our cloud capital expenditures in FY 2022 to nearly $4 billion, confident that this increased investment in the cloud more than justifies the expected returns, while our margins are projected to expand over time. Now, I’ll share my guidance for Q1, reviewing it on a non-GAAP basis, assuming current currency exchange rates remain consistent. Currency fluctuations should contribute about 2% to 3% to total revenue and provide $0.03 in EPS for Q1; however, these fluctuations may differ in reality. Total revenues for Q1 are expected to grow between 3% and 5% in USD, and between 1% and 3% in constant currency. The growth for cloud service and license support revenue in Q1 is projected to align with Q4 at 4% in constant currency, with growth expected to accelerate throughout the year. Due to increased investments during the quarter, non-GAAP EPS in USD is anticipated to grow between 2% and 6%, estimated to be between $0.94 and $0.98. Non-GAAP EPS growth in constant currency could range from negative to positive 2, anticipated to be between $0.91 and $0.95. My EPS guidance assumes a base tax rate of 19%, though onetime events might cause variations in any given quarter; I expect, when normalizing for these events, our tax rate will average around 19%. Finally, I would like to thank our employees globally for their hard work and dedication to our customers and partners throughout the pandemic. A special thank you to our employees in COVID hotspots who have been significantly affected, and with whom we have been actively providing support, including vaccinations. We appreciate all of you and congratulate you on a successful year-end. Thank you. I will now turn it over to Larry for his comments.

Thanks, Safra, and great job. Your team delivered a spectacular Q4. Clearly, our strategy to develop cloud applications with cloud infrastructure is now beginning to drive top line revenue growth to go along with years of consistent double-digit earnings per share growth. Our strategy is as easy to explain as it is technically challenging to implement. That’s a good thing. If it wasn’t hard to do, others would be able to do it. Our strategy and applications depend on Oracle becoming the world’s largest provider of cloud ERP systems. Then, building upon that strong ERP foundation, we’re going to expand into manufacturing, CRM, and industry-specific applications. We are successfully executing this strategy. Oracle Fusion and NetSuite are now the world’s two most popular cloud ERP systems. SAP, the leader in on-premise ERP, never rewrote their ERP system for the cloud. This has caused hundreds of customers to abandon SAP and migrate to Oracle Fusion ERP. That’s already happened. But over the coming months, several more major banks, utilities, and a lot of other companies will complete their Oracle Fusion implementation projects and go live on Fusion ERP. Oracle is taking massive amounts of share away from SAP ERP. It’s crucial to our future. While our Fusion and NetSuite businesses have long been growing, we have also developed a complete new generation of cloud application suites. Our new manufacturing systems fully support and manage automated robotic factories. No one else does that. Our new cloud CRM applications help you sell more by fully automated internet advertising, lead generation, and qualification. Nobody else does that. And we’re launching cloud application suites for two new industries: healthcare and state and local government. Our healthcare initiative is an outgrowth of the national public health management systems that we built to manage the COVID-19 vaccine clinical trials and vaccine distribution in the United States and in other countries around the world. In summary, our cloud application portfolio is more complete than other apps vendors and better integrated because almost all of our applications were developed internally, not acquired. Our infrastructure strategy depends on AI technology, specifically, neural networks and machine learning that we use to develop second-generation autonomous cloud services, such as the Oracle Autonomous Database, the Oracle Autonomous Linux operating system, and an array of autonomous cybersecurity defense bots that automatically identify and neutralize cyber attacks. All of Oracle’s cloud applications then run within the defensive perimeter of Oracle’s autonomous cloud infrastructure, the most reliable and secure platform in the world. And that’s increasingly important in a world plagued by cyber warfare, data theft, and ransomware. Oracle’s Autonomous Database and other autonomous services eliminate human labor. No human labor means no human error or opportunity for human mischief. Autonomy makes computer systems and cars much safer and more reliable. The Oracle Autonomous Database offers 99.995% availability. That means only a few minutes of downtime a year. And we have zero downtime security patching and upgrades, available today for infrastructure and very soon available for all of our applications. Economics is also important. OCI has, by far, the best cost performance of any infrastructure hyperscaler. That’s why so many service providers, like Zoom, have chosen to expand into OCI. OCI’s cost performance is continuously getting better. Our new version of MySQL, the world’s most popular open-source database, just got between 10 and 100 times faster. And when you charge by the minute, every minute you don’t use is money saved. Our new ARM microprocessors from technology partner Ampere deliver much better compute cost performance than either Intel or AMD, and by far, the lowest energy usage of any server microprocessor in the world. So, our latest infrastructure technologies are good for our applications, good for your budget, good for the health of the planet, and very good for Oracle’s future. Back to you, Safra.

Thank you, Larry. Erica, if you could please now prepare the audience to poll for questions.

Thank you. And congratulations to the team on a clean, nice quarter. I’d like to try to get some more color on the drivers of the success of the Oracle Cloud ERP solution. Can you give us some more detail on how much of Oracle Fusion ERP is from new Oracle ERP customers? How much is international versus the U.S.? How much is large enterprise? Where is the sweet spot? Any color you can give to get a sense of what’s really driving the growth and how much of that is new versus existing customers would be very helpful.

Yes, this is Larry. There are more new customers than upgrades from on-premise ERP with Oracle Fusion. It’s likely around 60-40; it’s not exactly two to one new customers, but most of the business is coming from them. We are also upgrading our existing E-Business Suite, PeopleSoft, and JD Edwards customers to Fusion. However, again, more revenue is derived from new customers, who are mainly from our on-premise installed base. That’s the prevailing trend. We believe this trend will accelerate in favor of new customers due to the recent SAP migration phenomenon, which has picked up considerably in the past 12 months. We anticipate this will continue. Another perspective to consider is that as companies transition to Oracle Fusion ERP and smaller firms move to NetSuite ERP, both represent substantial markets. Fusion ERP is certainly much larger than $10 billion, and NetSuite is also over $10 billion, with Fusion likely exceeding $20 billion as these markets develop.

Yes. As far as where it’s happening, I have to tell you, it is so broad-based. It is a worldwide phenomenon for us. Our Fusion and NetSuite are just chugging along. It was an incredible Q4, and Q1 looks enormous. So imagine, bookings are way up, and there’s just a lot of success. We have so many customers that have gone live. So, we have references from some of the largest companies in the world to really small or medium-sized companies that it’s pretty consistent; almost any prospect can find many companies just like it already being incredibly successful. And I think that, frankly, the pandemic taught many of our prospects and customers that moving quickly is really required these days. I think that folks used to think moving quickly is risky. I think, they really saw that they had to move to much more modern, flexible, digital businesses, and that we are the ideal destination for them for the back-office without a doubt.

I’d like to add one thing. We almost never lose a competitive ERP deal in the cloud, virtually never.

Thank you all for your questions, and congratulations on achieving over 20% earnings growth this year. It's encouraging to see the stock value beginning to reflect the consistent earnings growth you've experienced over the past couple of years. I would like to focus on the infrastructure aspect, specifically regarding OCI. You mentioned a remarkable 103% growth in OCI consumption for this quarter. Could you elaborate on the types of workloads being executed on OCI? Are they predominantly Oracle Database workloads, which are known to perform exceptionally well on OCI, or is there a wider range of significant workloads being migrated? I'm not seeking information about any particular customer, but rather an overview of how you are performing in this area and where you find success with OCI.

It's quite straightforward to keep in mind. Approximately half of the workloads are related to the database, while the other half encompasses various applications. Regarding the database, it's clear that customers are either migrating their existing workloads or creating new Oracle Database workloads on OCI. The other applications range from companies like Zoom that have transitioned over, to simulation software, where we excel. A significant number of automotive companies have shifted all their PaaS simulations to the Oracle Cloud because we offer faster and more cost-effective solutions compared to other clouds. Currently, we have a well-balanced portfolio with the Oracle database accounting for half of the workloads on OCI, while the other half consists of new customers working on different applications that are not related to databases.

Thank you, Keith. I appreciate your question. The fact is that any customer focused on performance, security, and cost, particularly in various workloads, is finding success with us, especially independent software vendors who are experts in managing their workloads. They understand the value we provide and are increasingly turning to us. Additionally, in light of current events, security is paramount; you need a cloud that prioritizes security while also delivering exceptional performance at a lower cost. Once we are given the opportunity, the initial workload usually leads to many more. We have significant momentum.

I want to emphasize something I mentioned earlier, which is that new Oracle workloads are being developed, particularly in the field of genomics. Several new databases have been transitioned to Oracle and OCI to track genetic variants of COVID-19. You will see numerous announcements about our significant moves into health care. One of the key new applications for our database involves tracking the genomics of pathogens, and these databases are being created from the ground up using Oracle Autonomous Database.

Great. Thanks for taking my questions. And congrats as well on a strong quarter. I’ve got one for Safra and one for Larry. Safra, in the past, you’ve talked about the potential revenue opportunity for the app space, if you were to migrate everybody to SaaS. So, I wanted to ask about the database side and in particular, Exadata. Can you give us a sense of what the revenue potential or uplift could be if you shifted all Exadata customers to Cloud@Customer? And how you feel about the strength of those motions heading into the new fiscal year? And then, for Larry, I mean, as you guys push to drive adoption of Autonomous Database, should we think of Cloud@Customer being the biggest vehicle for adoption, or what routes to market do you see working best?

Okay. Let me start, and then Larry can finish. Derrick, I’m glad you asked because when customers transition from managing their own Exadata systems, we prefer they switch to Cloud@Customer or have a dedicated region. It's important to note that when we sell hardware, we recognize that revenue upon delivery. However, with Cloud@Customer or a dedicated region, we don’t recognize that revenue upfront. Despite this, our growth continues, which isn’t immediately reflected in our income statement. Generally speaking, while we generate significantly more revenue from Cloud@Customer compared to just selling hardware, customers actually spend less overall because we manage their entire system. We handle database updates and other services they choose, ensuring they always have available capacity and the most current, secure system, all managed by us. So, while they invest three to five times more with us, their maintenance costs decrease significantly. It’s a win-win situation as we operate more efficiently, automate processes, and relieve them of the substantial labor needed to manage these crucial production systems.

Well, the Autonomous Database only runs in the cloud. It does not run on-premise. It doesn’t run on even at the Exadata appliance. It runs on the cloud public cloud. So right now, the public cloud is the most popular route for Autonomous Database and Cloud@Customer is becoming more popular as people scale up. So, but right now, the most popular way to use Autonomous Database is in the OCI public cloud.

Thank you very much for the opportunity to ask a question. Safra, could you provide insight into the performance in Europe this quarter? It seems to have recovered well. Additionally, could you discuss cloud adoption in certain markets and what you’re observing in the regions following your lead? Thank you.

Sure. So, first of all, I have two new leaders in Europe, Middle East, Africa. I have a very refreshed and new and really successful management team in Europe. And they are pretty much firing on all cylinders. It is extremely broad throughout Europe, Middle East, all of EMEA. The strength is incredible worldwide; Latin America doing phenomenally; Japan doing phenomenally; as a result, JPAC doing very, very well; and of course, led by North America. I have to tell you, it’s been an amazing year. It was a phenomenal quarter, but truly an amazing year worldwide. And I’m more than satisfied. I am delighted by the results of the team. And for me, this was my first full year with the field. So, I really applaud the team for doing a spectacular job worldwide.

Hey. Thanks for squeezing me in. Safra, the one thing that was interesting that we didn’t really talk that much about is your RPO and RPO growth. Can you talk about it again? Because like the growth there is actually even better than I see on the revenue line. And that, to me, suggests that this wasn’t just Q4. It looks like things are coming together broad-based in the coming quarters as well. Thank you.

Yes, Raimo, you are so right. Q4, but really, it’s just coming together all around, the RPO. I’m glad you noticed that. Really, really strong bookings were truly enormous. Obviously, they don’t show up in the income statement right away, but the future is just so positive. And you might have heard me; I was hinting at that in my comments. And one of the reasons we’re so comfortable leaning into our investment because we really want to make sure we’ve got the capacity to take on the enormous amount of bookings that are flying in and that both were generated during the year and are going online, and so will be recognized over this next year and beyond. But, there is just an enormous backlog for us of customers that are going live and that will start consuming and we’re very optimistic. So, thank you so much for asking, and I’m glad you noticed that.

Thank you, Safra. If there are any questions coming out of this call, please feel free to call the Investor Relations hotline. Otherwise, I’ll turn the call back to Erica for closing.