Oracle Corp (ORCL) — Q4 2022 Earnings Call Transcript

Thanks, Ken, and good afternoon, everyone. We had a strong quarter, with total revenue growing 10% in constant currency, marking our highest organic growth since 2011, and exceeding my constant currency guidance by $240 million. Earnings also performed well, with EPS exceeding guidance by $0.20. Q4 clearly shows that our business is gaining momentum. A growing number of customers, many new to Oracle, are opting for our products and services as they recognize the advantages of Oracle technology. Our technology enhances customer modernization, efficiency, and productivity, which became evident during the pandemic. Consequently, these customers are becoming larger Oracle clients, with Fusion customers adopting OCI, OCI customers purchasing Fusion and NetSuite, and database clients transitioning to autonomous databases on OCI. Industry-specific clients are fully embracing Fusion. We are seeing real momentum. Looking ahead, despite macroeconomic factors, we anticipate significant growth in our cloud business revenue in fiscal year '23. We're also enthusiastic about completing the Cerner acquisition. Larry discussed our Oracle Health Strategy last week, and he will provide more details today, alongside some numerical insights. This past quarter, we faced a 5% currency headwind, considerably higher than the 2% to 3% from our last earnings call. As customary, I'll review our non-GAAP USD results using constant currency growth rates for a clearer picture of the business as we manage it. For Q4, our total cloud services and license support revenue amounted to $7.6 billion, an increase of 7% in constant currency, driven by Fusion, NetSuite, autonomous database, and Gen 2 OCI. Our total cloud revenues, which includes IaaS and SaaS, reached $2.5 billion, up 22% in constant currency. Application subscription revenues were $3.2 billion, up 9% in constant currency. Our strategic back-office cloud applications achieved an annualized revenue of $5.4 billion, growing 24% in constant currency this quarter, with Fusion ERP increasing 23% and NetSuite ERP 30%. Infrastructure subscription revenues were $4.4 billion, up 5% in constant currency. Our infrastructure cloud services now generate annualized revenue exceeding $3.2 billion, and when excluding legacy hosting services, grew by 49% with OCI consumption revenue increasing by 83%. Additionally, Cloud@Customer consumption revenue rose by 108%, and autonomous database revenues were up 29%. License revenues totaled $2.5 billion, reflecting a 25% growth in constant currency, mainly driven by database sales for major application SaaS companies. Consequently, our database business saw outstanding performance, with total database revenue rising by double digits. Overall, total revenue for the quarter reached $11.8 billion, an increase of 10% in constant currency. Operating expenses rose by 11% as we continue investing to meet the rising demand for our cloud services. For the quarter, the gross margin for cloud services and license support stood at 82%, with gross profit dollars increasing by 4%. The full-year growth of this gross profit was 4%, surpassing the 2% growth we experienced last year, and I'm confident it will rise significantly in FY '23. While we will keep investing in growth, we should benefit from economies of scale as our cloud business expands. Our underlying principle remains focused on growing non-GAAP EPS while boosting cloud revenue growth. Non-GAAP operating income was $5.6 billion, an 8% increase year-over-year, with an operating margin of 47%, which is once again higher than all our competitors. Even as we've aggressively invested in growth, we have maintained our financial discipline. The non-GAAP tax rate for the quarter was 10.1%, which is below our base tax rate of 19% due to benefits arising from the resolution of certain tax matters in Q4. EPS reached $1.54 in U.S. dollars, a 7% increase in constant currency, remaining unchanged in USD. GAAP EPS was $1.16, down 8% in constant currency and down 15% in USD. Turning to our full fiscal year results, total company revenues reached $42.4 billion, up 7% in constant currency, marking our highest annual growth rate in over a decade. Total applications revenue grew by 8%, compared to 5% last year, while total infrastructure revenue rose 7%, surpassing last year's growth of 2%. Our revenue growth clearly accelerated this year as our investments in cloud businesses are showing returns. Total cloud services and license support revenue for the year was $30.2 billion, an increase of 6%. Total cloud services rose by 22% to $10.8 billion. Non-GAAP EPS was $4.90, reflecting a 5% increase in USD and an 8% increase in constant currency. The operating margin for the full year was 46%, which is up 2% from pre-pandemic levels but down 1% from last year. Operating cash flow over the past 4 quarters totaled $9.5 billion, and free cash flow stood at $5 billion, with capital expenditures amounting to $4.5 billion during the year. For the quarter, operating cash flow was $4 billion, and free cash flow was $2.6 billion. At the end of the quarter, we held nearly $22 billion in cash and marketable securities, although this amount has decreased following the closure of the Cerner acquisition. Our short-term deferred revenue balance reached $8.4 billion, up slightly in constant currency. The remaining performance obligation balance is $46.6 billion, increasing by 17% in constant currency due to strong bookings, with approximately 57% expected to be recognized as revenue within the next 12 months. We are dedicated to returning value to our shareholders through technical innovation, strategic acquisitions, stock repurchases, careful use of debt, and dividends. This quarter, we bought back 8 million shares for a total of $600 million, and we paid out $3.5 billion in dividends over the past 12 months, with the Board declaring a quarterly dividend of $0.32 per share. Following the completion of the Cerner acquisition, which occurred after Q4, we took on about $15.8 billion in debt. However, we anticipate maintaining our investment-grade credit rating, which means we will focus on reducing our debt balance while continuing stock repurchases at current levels. I also believe that the dividend will remain unaffected. Once our debt levels decrease, we will reevaluate our share repurchase levels. Now, regarding guidance, we remain optimistic about our business momentum, even as we acknowledge the increasing macro uncertainty. Since discontinuing operations in Russia in March and making adjustments in the region, we have factored out roughly $100 million per quarter from guidance that we previously received from these customers. Considering all factors, I expect our cloud business, which grew by 22% this year, will organically grow over 30% in constant currency in FY '23. Cloud service and license support revenue will also see accelerated growth and could potentially achieve double-digit organic growth. As mentioned earlier, our core principle is to increase EPS while also accelerating cloud revenue growth. Given our confidence in organic revenue growth, we will continue to invest prudently back into the business, with visible returns in our performance. Revenue growth climbed from 2% in FY '21 to 7% this year, clearly reflecting strong demand for our cloud services, which we aim to capture. Consequently, I expect our CapEx spending to rise in FY '23 to meet this demand. We plan to add another 6 regions in fiscal 2023, in addition to the 38 cloud regions across 20 countries that we currently serve. I also want to discuss how we will manage Cerner, as it will influence their contribution to Oracle moving forward. We are actively building and implementing top-tier health care cloud capabilities, and Larry will elaborate further. This involves reviewing their entire product portfolio to identify opportunities for incorporating Oracle technology instead of third-party products, as well as migrating them to OCI. These initiatives will provide a more stable, secure, and innovative product portfolio for customers while relying less on third-party solutions. We are confident in our ability to grow Cerner's top and bottom lines at a rate exceeding their previous performance as these changes unfold. As for my guidance, I'll discuss Q1 on a non-GAAP basis. If currency exchange rates remain stable, we anticipate a 3% to 4% negative impact from currency on total revenue, possibly affecting EPS by around $0.05 to $0.06 in Q1. However, the actual currency impact may vary. Total revenues for Q1, including Cerner, are projected to grow between 20% to 22% in constant currency, and an estimated growth of 17% to 19% in USD based on today's exchange rates. Similar to previous acquisitions, we’ve exercised caution regarding the revenue contribution from Cerner to account for the transition. For Q1, total cloud revenue excluding Cerner is expected to grow between 25% to 28% in constant currency and between 22% to 25% in USD. For fiscal year 2023, total cloud revenue excluding Cerner is projected to exceed 30% growth in constant currency. Including Cerner, total cloud growth in Q1 is anticipated to be between 47% to 50% in constant currency, and 44% to 47% in USD. Non-GAAP EPS is expected to rise between 6% to 10%, ranging from $1.09 to $1.13 in constant currency, while expected to grow between 1% to 5%, ranging from $1.04 to $1.08 in USD. Cerner will contribute positively to earnings this year, including in Q1. My EPS guidance for Q1 is based on a tax rate of 19%, though one-time tax events may cause actual tax rates to differ in any given quarter. Now, I’ll hand it over to Larry for his comments.

Thank you, Safra. As Safra said, our plan is to accelerate cloud revenue growth, while continuing to grow earnings per share. First, let me provide some detail on how we plan to accelerate cloud revenue growth. It all starts with our two most important verticals: health care and financial services. In health care, we’re in the process of building a complete suite of applications for the entire health care ecosystem, starting with health care providers like hospitals and clinics. We’re modernizing Cerner’s clinical systems by adding capabilities like a voice user interface and applications like disease-specific AI models for cancer and other diseases. We’re including an IoT device network to improve patient diagnostics and monitoring. We’re adding administrative systems, including managing the incredibly complex contract workforce that hospitals have as doctors are not bolt-on employees nor are nurses. We are going to help with recruiting, scheduling, and paying those contract workers according to their contracts. Inventory at hospitals is enormously complicated. Inventories aren’t in a central location. You find inventory in nurse stations outside operating rooms, outside the intensive care unit. There’s inventory everywhere. Managing that inventory is very complicated. We’re adding RFID tags and maps on handheld phones to help people find what they’re looking for quickly. For payers, including insurance companies and governments, we’re automating payment authorization and billing systems. For pharmaceutical companies, we’re integrating our clinical trial system directly into the hospital clinical system, making clinical trials easier to start and faster to complete. We can do all of this and more because we’re building these health care applications using the latest most productive technologies in the cloud, namely, the Oracle Autonomous Database and the APEX low code programming language. Using these tools, security and reliability are built into the technology platform, not the application. In our financial services vertical, we’re working with major money center banks and leading logistics companies to automate B2B commerce from directly within the Oracle ERP Cloud. For example, when a hospital wants to buy an X-ray machine, that hospital simply enters a purchase request for the X-ray machine into their Oracle ERP procurement system. That procurement system then sends that order directly to the selling company’s Oracle ERP order management system and automatically originates a corresponding loan request from that hospital’s preferred bank. The company selling the X-ray machine uses their Oracle ERP order management system to check product availability and submit a shipping request to their preferred logistics provider to automatically quote a delivery date to the buyer. The entire B2B commerce process is automated within the Oracle Cloud. Purchasing, selling, loan origination, shipping, billing, and payments. Automating B2B commerce is yet another huge opportunity for Oracle. We already have over 30,000 Cloud ERP customers, including many of the world’s most important banks and leading logistics companies. Let’s take a moment to look at the progress we continue to make in our Oracle ERP Cloud, starting with health care. We’ve got a very strong position in health care with the providers, including Kaiser, Mayo Clinic, Cleveland Clinic, Mount Sinai, Northwell Health, Tenet, HCM Health, Highmark Health, Humana, Cigna, and many others. In Q4, we closed United Healthcare, a win over SAP. We won the NHS, the UK’s second major move to the Cloud. We won New South Wales Ministry of Health in Australia for ERP and SCM. We won WellSpan, a regional provider in Pennsylvania with eight hospitals. We won Abcam, a UK life sciences company, increasing their footprint in ERP and SCM. Going live in Q4 were the Cleveland Clinic with ERP and SCM, UC Health for ERP and SCM, Pfizer on enterprise performance management, UK Health went live, Atrium Health went live, all in Q4. In financial services, our other really big vertical, we had, as I said earlier, a very strong position with the money center banks with ERP. Bank of America uses Fusion applications. JPMorgan Chase uses Fusion applications. So does Santander, Bank of New York Mellon, HSBC, Lloyds, Macquarie, Credit Suisse, UBS, Credit Agricole, SMFB, TD Bank, Societe Generale, Vanguard, State Street. I can go on and on, but let me go to the results in Q4. In Q4, we won at Citibank a big ERP win against SAP. We won at Chubb. We won at PNC, the sixth largest bank in the United States. We won at SMBC, the largest Japanese-owned bank in the United States. We won Oversea China Banking Corp. We won Mizuho, the third largest bank in Japan. TIAA, Desjardins, Mitsui Sumitomo also in Japan. GMP, one of Mexico’s largest financial services companies. We have a very, very strong position in financial services. That’s one of the key groups of partners that we’re working to automate B2B commerce, along with the logistics companies. In retail, we won, well, we already had Kohl’s, Office Depot, Macy’s, Kroger’s, Albertson’s, Petco, McDonald’s, Chipotle, Tiffany, Sachs, Williams-Sonoma, Walmart, CVS, but in Q4, we added to that list. We added Lowe’s and Albertson’s and Sherwin-Williams and Abercrombie & Fitch. We had major go-lives at Macy’s, Next Doors, and the Co-op Stores, all in retail. In communications, where we’re already present at AT&T, Orange, MTN, Bharti Airtel, Rogers, Wind Tre, Telecom Italia, KPN, and SEC, we won Virgin Media. We had a major expansion at AT&T, an ERP SCM expansion. We won a major expansion ERP and EPM at Verizon. Very, very strong quarter in telecommunications with a huge go-live at KPN, the Dutch telecom company, in ERP and SCM. Service wins, we already have PwC, KPMG, Booz Allen, True Blue, Securitas, Waste Management, Skanska, McDermott-Jacobs. We won in Q4 BDO, Verisk Analytics and the Mudafalo Group. Go-lives in Q4 in services included Pricewaterhouse, Manpower Group, TriNet, and Republic Services. In the public sector, we had a major win at the State of Missouri, wall-to-wall at the State of Missouri, ERP, SCM, HCM. That was a win over Workday, SAP, and everybody else. We won at the Scottish Government. We won at the UK Home Office. We won a deal with the police department in the State of Victoria in Australia. We had major go-lives in the public sector in the City of St. Louis and Norfolk County, UK. In hospitality, where we already have Marriott, Hilton, Caesar’s, MGM, Lowes, Royal Caribbean and Park Hotels, we added Airbnb for ERP expansion, a win over Workday, and Intercontinental Hotels and Resorts. Logistics, again, this is our other big group of partners in our major effort to automate B2B commerce from within the Oracle ERP Cloud. We have a very strong position globally in logistics. Our customers include UPS, FedEx, DHL, Swift, Schneider, Union Pacific, Yellow. We added An Post, the postal service of Ireland. The go-lives included DHL, UPS, and Deutsche Post. In higher ed, where we’re already installed at Princeton, Cambridge, Julliard, Vanderbilt, UCLA, University of Chicago, Edenborough, Rutgers, Baylor, UCSD and lots and lots of others, we added the University of Maine, East Tennessee State, Villanova, and the State University of New York at Stony Brook. Other notable wins in the quarter, on high-tech, we won Teradata. We won a big win at Toyota Motor, an ERP win. At Denso, again, let’s see, what else we got. Berry Global, let’s see, AP Team was another ERP win in energies. Okay. So it was a very, very strong quarter. We’re very excited about our momentum in ERP and how we can expand ERP from what it was when it was an on-premise system to what it can be in terms of B2B commerce automation now that it’s a cloud system. With that, I’m going to turn it back to Safra.

Thank you very much and congratulations on the double-digit growth in the quarter. So Larry, your vision of a national health record database is very compelling. It would be a profound benefit to society. Just considering that several trillion dollars are spent on healthcare, what do you see as the size of the opportunity for Oracle and Cerner if you solve that particular problem?

The national health records database addresses two key issues. Firstly, it enables patients to ensure their caregivers have immediate access to their health records during emergencies, which significantly improves health outcomes. Secondly, it provides public health officials with better data regarding the health status of their populations. This access to information dramatically enhances healthcare and leads to considerable cost savings. For instance, when we dispatched a hospital ship to New York City, officials believed they were on the verge of running out of hospital beds, but they were mistaken. They lacked the necessary data to assess the situation accurately. It was evident that many public health officials were operating without crucial information during the pandemic. By offering this kind of data, we can save numerous lives and substantial amounts of money. The potential here is enormous, extending beyond just national implications to a global scale. In Western Europe, where healthcare budgets are significant, modern information systems that can save lives and reduce costs will be adopted quickly. This will undoubtedly become our largest business.

Congratulations on a really solid quarter. So Safra, you mentioned on the conference call that you guys are putting up this type of result even on the backdrop that's not the most stable kind of macro backdrop. And we're seeing a lot of other software companies seeing slipped deals, seeing issues with the consumer, Internet companies lowering their spend. You guys seem to be working through this very well. Can you give us some color into how you're doing it? Is it better execution? Is the Oracle value proposition going through more clearly? Can you help us understand where you're able to put up a bigger beat when a lot of guys are working with skinnier beat if at all during this period?

First of all, it's important to note that we are a very large company with hundreds of thousands of existing customers. Our products are compelling enough that many customers save money when they switch to OCI. During the pandemic, many customers recognized the necessity of modern systems, and those without them struggled to survive. Companies require a digital connection with their customers, employees, and suppliers, and we offer the kinds of products that fulfill those needs. When customers transition from Amazon to us, they often find that our services are superior and more cost-effective. Additionally, for Oracle workloads, our capabilities are unmatched. Our Fusion products are exceptional, and we have an extensive customer base that is too vast to mention in this call. Similarly, NetSuite is leading its industry and gaining tremendous momentum. It's worth noting that in light of the situation in Ukraine, we ceased charging our customers there while continuing to support them, and we also halted all operations in Russia. Our focus remains on addressing our customers' needs. The main challenge we face is meeting the high demand, but I’m pleased with how we managed our supply chain last quarter and am optimistic about further improvements. This will enhance our capacity to deliver to customers. We have significant momentum, many satisfied customers, and an increasing number of new customers making larger purchases. This creates a virtuous cycle, building confidence in our ability to deliver and the economic value we provide. We have always aimed to present a compelling financial offering, which I believe resonates with customers during these times.

Thanks very much for taking my questions and congrats on the great results. Larry, we picked up a meaningful uptick in the number of large enterprise agreements or ULAs that customers are doing with Oracle. And in particular, to satisfy their database needs, both on-premise and also in the cloud. Do you have any telemetry or other insights into customer behavior to see where they're deploying these licenses? And can you talk about why BYOL is so important to your strategy and the longevity of Oracle database? And maybe just for Safra as well, that license number was so strong. And in your prepared remarks, you mentioned license growth was led by database use in the cloud by major app cloud SaaS companies. Just wondering if there's any more color you can provide there.

Yes. Aside from Workday, most of the major application companies, including Salesforce.com, are significant users of Oracle’s database, which they license for their cloud services. Many SaaS companies utilize our database in the cloud, contributing to the strength of our licensing business. Our database license business remains very robust. We differentiate between on-premise licenses and those designed for cloud use. While some licenses are traditionally used on-premise, many new licenses we sell enable customers to run them in the cloud, whether it’s on our platform, other cloud services, or specifically in Salesforce's cloud. The Oracle database continues to be the leading database globally by a large margin and holds the top position in the cloud, particularly among the SaaS companies that rely on our database.

Congratulations on the strong quarter and the very positive commentary and guidance. I'd like to drill a little more on this question of people's concerns. With the increasing concerns of recession by many, can you tell me what you're seeing for the apps part of the business and more specifically for ERP? What I'm trying to understand is how will the shift in ERP to the cloud be impacted by any economic slowdown or won't it be? How should we think about that?

Well, I'm not sure I'd call it that. I'm sorry, Safra, please go ahead.

No. You go ahead, Larry. You go ahead.

I'm not sure I would label it as countercyclical, but cloud systems are considerably cheaper to run compared to on-premise systems. They provide much better data, help manage expenses more effectively, and their implementation costs are lower since you can pay for them over time. For instance, looking at NetSuite, which targets the lower end of the market, one might expect those businesses to be most impacted by the recession. However, it's not the larger firms like JPMorgan Chase that are pulling back; they continue to invest in new systems. In fact, smaller entrepreneur-led companies, which you might think would be struggling, actually generated our highest revenue and growth rate from NetSuite this past quarter. They are moving forward during the recession because they see significant benefits, which enables them to compete more effectively. We are not observing any slowdown in this area; rather, we see both our Fusion and NetSuite ERP businesses accelerating, despite the overall economic climate.

Yes, many people underestimate the high costs associated with operating large SAP systems. These systems require dedicated data centers and often need hundreds or even thousands of technicians to maintain them. They are outdated and cumbersome, while transitioning to Fusion ERP represents a completely different and more cost-effective approach. The expenses involved in making this shift are significantly lower. This observation applies to all on-premise systems, particularly the older SAP systems. Our cloud offering in this sector is truly unmatched. Our win rates continue to improve, and we are very optimistic about this trend, having secured many sales. Numerous implementations are still in progress, and we anticipate this will be reflected in our financial results, as our customers will end up spending less compared to their previous on-premise systems.

Last quarter, Safra, you expected organic revenue growth to reach double digits next fiscal year. And so congratulations on reaching that double-digit milestone this quarter. Now within today's results, two numbers really stood out to us. First was the upside to license revenue. And then second was your commentary about total database revenue growing in the double digits. So my question is, Safra, Larry, can you give us more color on what's driving that reacceleration in license revenue in particular? Even as cloud revenue inflected to its highest growth rate in more than four years, is this BYOL bringing the heat? Is this autonomous database getting big enough and growing fast enough to lift the overall number, et cetera? And is this the broad-based demand that you mentioned on the Q3 call? Or is this more big deal-driven?

It's a combination of factors. Large enterprises recognize that having an unlimited agreement for a certain period provides them with exceptional flexibility. Any large customer or database user who lacks an unlimited agreement is not maximizing their spending, as it allows for considerable adaptability. They can utilize on-premise solutions for as long as needed, transition to the cloud at a lower cost with Bring Your Own License (BYOL), and switch back and forth as required. These agreements are foundational to many operations. Moreover, our leading Java business complements this; customers can utilize Java on-premise extensively, and in the cloud, it's offered at no charge. This incentivizes them to transition their Java programs to the Oracle Cloud without additional costs. Both the database and Java integration are crucial for maintaining our robust license numbers. I've followed Oracle since the '80s and consistently hear about new products that might surpass Oracle. However, the Oracle database remains the gold standard. For businesses needing to manage extensive data securely, it stands out among all products. While some may explore alternatives as they scale, they often return to the Oracle database due to its unmatched technical capabilities. This becomes evident to customers, leading more of them to maintain or extend their unlimited agreements for both on-premise and cloud services. It's not just one or the other; it's both, and that's the optimal approach.

I want to highlight that the Oracle Autonomous Database stands out because it operates independently, eliminating the need for database administrators. Currently, the vast majority of databases we deploy in our cloud are autonomous, as hiring database administrators is costly for Oracle Corporation. This shift is more economical and positions the Autonomous Database as a countercyclical option. Transitioning from a traditional Oracle database to an autonomous one results in significant savings. Additionally, it's more secure and reliable, requiring no specialists to manage it. There's also a programming language called APEX, which is a low-code environment allowing us to use only 10% of the programmers typically needed if we were using our other language, Java. APEX is gaining traction within Oracle for application development. These trends show how leveraging modern technology can substantially lower labor costs, which will likely be advantageous in the upcoming years.

Thanks for taking the questions, and congrats on a good quarter. Safra, can you just give any additional color on the CapEx outlook for fiscal '23 relative to what we saw this year? And then just to clarify on the buyback, I just want to make sure I heard it correctly. Is the pace of buyback that we saw this last quarter still reasonable for the near term, even with the incremental debt from Cerner?

Sure, let me address the buyback first because I realize I may have been a bit lengthy at the end. This past quarter, we repurchased $600 million worth of shares, similar to the previous quarter. I plan to maintain that buyback amount for this quarter as well. Typically, I don't share future buyback figures, but compared to the $7 billion and about $8 billion we previously did, we won't reach those levels. The $600 million figure will likely hold for a few quarters until we assess our debt levels. It could be slightly higher, but that's my aim for now. Regarding capital expenditure, we've significantly increased our operational regions over the past 1.5 to 2 years, possibly even surpassing Amazon in that regard. We plan to build six more and expand our existing ones due to high demand. I anticipate that next year's CapEx will be somewhat higher than this year's, and I'll offer more detailed guidance as the year progresses. Given the strong demand for cloud services, I will continue to invest in capital expenditures, and I'm optimistic about improving our gross margins and operating margins significantly as we experience economies of scale.