Oracle Corp (ORCL) — Q2 2023 Earnings Call Transcript

Thank you, Bo. Good afternoon, everyone, and welcome to Oracle’s Second Quarter Fiscal Year 2023 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 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 these forward-looking statements in light of new information or future events. Before taking questions, we’ll begin with a few prepared remarks. And with that, I’d like to turn the call over to Safra.

Thanks, Ken, and good afternoon, everyone. Simply put, we had an outstanding quarter. Total revenue for the quarter exceeded $200 million above the high end of our guidance range and grew 25% in constant currency. Even without Cerner, total revenue grew 9% in constant currency, outperforming Q1 and building on a revenue beat from this time last year. The strength of the quarter is even more impressive considering the currency headwind was greater than anticipated, with a 6% impact on revenue and a $0.095 effect on earnings per share. Despite this, we still surpassed the high end of my guidance for both total revenue and earnings per share. As you can see from the numbers, we continue to see noticeable momentum specific to our company and products. The reasons for this are numerous, but it all boils down to a few key differentiators. First, more customers are recognizing our second-generation infrastructure cloud as better architected for higher performance, improved security, and unmatched reliability compared to the older first-generation hyperscale cloud providers. Second, customers value the flexibility of our service and business model, allowing them to deploy our technologies wherever it best suits them, whether it's in the public cloud, in dedicated regions around the world, or in a true cloud customer implementation. Third, customers appreciate the value of an end-to-end integrated stack of applications, both horizontal, like ERP, HCM, and supply chain, as well as industry-specific applications tailored to their industries. All of this operates on our Gen 2 infrastructure, which is ideally suited for their needs. As customers increasingly seek better value from their technology investments, many are realizing that Oracle offers a superior alternative compared to other options. Gartner recognized OCI by moving us to Visionary status in its cloud infrastructure and platform services report for the first time. Additionally, we were awarded a JWCC by the U.S. Department of Defense, further acknowledging our capabilities. As these differentiators align and our business accelerates, we anticipate organic growth for our fiscal year 2023 cloud revenues to exceed 30% in constant currency. Now to the numbers. As always, I’ll discuss our results using the constant currency growth rate. To give a comprehensive picture, both organically and otherwise, I’ll cover the revenue results, including Cerner, followed by some results excluding Cerner for clarity. Total cloud revenue, including Cerner, reached $3.8 billion, up 48% in constant currency, with IaaS revenue at $1.1 billion, up 59%, and SaaS revenue at $2.8 billion, up 45%. Excluding Cerner, total cloud revenue, combining SaaS and IaaS, was $3.3 billion, reflecting a 27% increase in constant currency. Total cloud services and license support revenue for the quarter, including Cerner, was $8.6 billion, up 20% in constant currency, driven by our strategic cloud applications, autonomous database, and, of course, our Generation 2 OCI. Application subscription revenues, including support, totaled $4.1 billion, up 35% in constant currency. Infrastructure subscription revenues, which also include support, reached $4.5 billion, up 9% in constant currency. Application subscription revenues, including support but excluding Cerner, were $3.3 billion, up 9% in constant currency. SaaS cloud revenue, again excluding Cerner, was $2.2 billion, reflecting a 16% increase. Our strategic back-office SaaS applications now have an annualized revenue of $5.9 billion and have grown 26% in constant currency, including Fusion ERP at 28% and NetSuite ERP at 29%. As noted, infrastructure cloud services revenue increased by 59% in constant currency. When excluding legacy hosting services, infrastructure cloud services revenue rose 69%, with an annualized revenue of $3.8 billion, which included OCI consumption revenue growing by 88%, cloud and customer consumption revenue growing by 83%, and autonomous database revenue up by 50%. Software license revenues, including Cerner, were $1.4 billion, growing 23% in constant currency, and up 9% excluding Cerner. What resonates with customers is that in an environment where IT investments need to yield a fast and tangible return on investment, only Oracle provides the flexibility needed to manage their technology investments, allowing them to deploy incremental investments where they see immediate value. Additionally, purchasing technology licenses from Oracle allows customers to transition to the cloud at their own pace, effectively serving as a pathway to Oracle Cloud services. Total revenues for the quarter amounted to $12.3 billion, growing 25% in constant currency. Excluding Cerner’s contribution of $1.5 billion, organic revenue increased over 9% in constant currency. As a reminder, we no longer operate in Russia, which negatively impacted total revenue growth by over 1% compared to last year. Now moving to margins. The gross margin for cloud services and license support stood at 79% due to the mix between support and cloud. Last year, Oracle's license support revenue, which has mid-90s gross margins, represented about 65% of total cloud services and license support revenue. This figure has now decreased to 53% as our cloud services are experiencing much faster growth than license support, which only grew by 4% this year. Notably, IaaS gross margins improved again this quarter, and I anticipate they will continue to rise in response to the accelerating demand as we expand our data center capacity. We have observed that as these centers fill, margins increase, similar to what we experienced this quarter. Importantly, gross profit dollars from cloud services and license support grew by 13% with Cerner and 6% excluding Cerner in Q2. Non-GAAP operating income reached $5.1 billion, representing a 12% increase from last year. The operating margin, including Cerner, was 41% as we continue to integrate Cerner this quarter. As we enhance Cerner's profitability to Oracle levels and leverage economies of scale in the cloud, we expect both our operating income and operating margin percentage to continue to improve. I believe this year will represent the low point for operating margin percentages. The non-GAAP tax rate for the quarter was 20.4%, aligning closely with our guidance of 20.5%. Non-GAAP EPS was $1.21 in U.S. dollars, down 1% in USD, but up 7% in constant currency. The GAAP EPS was $0.63. At the end of the quarter, we had nearly $7.4 billion in cash and marketable securities. The short-term deferred revenue balance was $8.7 billion, up 14% in constant currency. Over the last four quarters, our operating cash flow was $15.1 billion, and free cash flow stood at $8.4 billion, with capital expenditures totaling $6.7 billion. Furthermore, we now operate 40 public cloud regions worldwide, with another 9 under construction. Additionally, 12 of these public regions interconnect with Azure, providing customers with true multi-cloud capabilities. We also have cloud customer implementations and dedicated regions in another 9 national security areas, with increasing demand as customers desire to protect their data within their own countries. While being prudent with our investments, we recognize the need to continue expanding to meet accelerating demand. This quarter, our CapEx was $2.4 billion as we invested in our cloud to accommodate this rising demand. With triple-digit IaaS bookings growth in recent quarters, we now plan to maintain similar spending levels per quarter in the upcoming months to build capacity for our customers' requirements. This level of expenditure will not adversely impact our operating margins as we scale. The accelerating demand is evidenced in our remaining performance obligation (RPO) balance, which is now at $61.2 billion, up 68% in constant currency, reflecting strong cloud bookings and contributions from Cerner. I want to note that the organic RPO growth rate in constant currency accelerated to 28% in Q2, up from 22% last quarter, with approximately 48% of the total RPO expected to be recognized as revenue within the next 12 months. As previously mentioned, and I know you've heard this from me before, we are committed to delivering value to our shareholders through technical innovation, strategic acquisitions, stock repurchases, prudent debt usage, and ongoing dividends. This quarter, we repurchased 6.1 million shares for a total of $448 million. Additionally, we paid out dividends of $863 million in the quarter, and the Board of Directors declared a quarterly dividend of $0.32 per share. Our guiding principle remains to grow non-GAAP EPS while substantially increasing cloud revenue growth. With our increasing confidence, we will continue to invest wisely given the strong demand for our cloud services. Now let's discuss my guidance for Q3 on a non-GAAP basis. Based on current currency exchange rates, we anticipate a 4% negative effect on total revenue and at least a $0.06 negative effect on EPS in Q3. As I mention each quarter, the actual impact of currency may vary by quarter-end, but we need a number, so we're using the current one. For Q3, total revenues, including Cerner, are expected to grow between 21% and 23% in constant currency and between 17% and 19% in USD. Total cloud growth, also including Cerner, is expected to range from 46% to 50% in constant currency and 43% to 47% in USD. I expect total cloud growth for the fiscal year, excluding Cerner, to surpass 30% in constant currency. Non-GAAP EPS is anticipated to grow between 9% and 13%, falling between $1.23 and $1.27 in constant currency. Due to currency headwinds, non-GAAP EPS is expected to grow between 4% and 8%, ranging between $1.17 and $1.21 in USD. Cerner will contribute positively to earnings this year, including in Q3. My EPS guidance for Q3 assumes our base tax rate of 20.5%, which is an increase from 19% last year, but one-time tax events may cause actual tax rates to vary for any given quarter. Now, I'll turn it over to Larry for his comments.

Thank you, Safra. I’ll start by discussing our customers and new contracts in infrastructure, followed by our wins and go-lives in applications. First, focusing on infrastructure, during Q2, we signed multiple customers to contracts over $1 billion. This addition to our backlog leads us to expect strong growth in our infrastructure business moving forward. We now serve 22,000 infrastructure customers across 55 regions, surpassing AWS, Microsoft, and others. Gartner has recognized us by placing us in the Visionary Quadrant for the first time. Let me highlight some key customers to give you a sense of our progress. Notable names include FedEx, Deutsche Bank, and the Tokyo Stock Exchange, where we uniquely manage a major stock exchange due to the reliability and security of our cloud. For instance, a notable quote from a major U.S. telecom company points out that Oracle Cloud doesn’t experience downtime, which is crucial for enterprise applications like a stock exchange. Other major customers include Fujitsu, Vodafone, Deutsche Telekom, and NVIDIA, who have all transitioned significant AI and machine learning workloads to Oracle Cloud, demonstrating our capability in this area. We have new database migrations this quarter with customers like United Airlines moving all flight operations to Oracle Exadata cloud, and Mitsui in Japan doing the same with their databases. This shift marks the beginning of a substantial transition as our database services move from on-premise to the Oracle Cloud. Companies like Penske Truck Leasing and HomeServe plc are also making the switch to our autonomous systems, which simplify database management. In addition, we’re excited about the success of our MySQL database, especially with the introduction of our new ultrafast query processor, HeatWave, which significantly enhances performance. Companies are taking advantage of this advancement, demonstrating a marked interest in migrating. Our collaboration with Microsoft Azure is thriving, with several companies effectively integrating applications between Azure and Oracle Cloud Infrastructure (OCI). We’re experiencing significant momentum in various sectors, with a notable focus on healthcare, where we serve numerous providers and payers. Our wins in Q2 include substantial contracts with Cigna, Emirates Health Services, and Cross Country Health Services. We also have multiple go-lives, including Tenet Health and Cleveland Clinic, which enhances our penetration in the healthcare market. In financial services, we maintain a strong customer base with key partners like Bank of America and JPMorgan Chase. We're advancing our offerings with new capabilities for automated loan origination between B2B commerce partners, positioning ourselves well in this space. Recent wins in financial services include M&T Bank and TD Bank, with go-lives at notable firms like BlackRock, ensuring we capture a larger share of the market. We continue to see significant growth and interest from a diverse array of industries, reinforcing the strength of our cloud services and their increasing adoption. I look forward to sharing more updates as our business evolves. Now, I’ll hand it back to Safra.

Thank you, Larry. Bo, if you could prepare the audience for Q&A. Appreciate it.

Great. Thanks very much for taking my question. And congrats on the solid results. Larry, Oracle has a rich history of being a price performance leader in just about everything it does. But technically speaking, why exactly does OCI have an inherent cost advantage? And how sustainable is that advantage? Thanks.

One of the most interesting aspects is that we have a significantly faster network than anyone else, and our network is fundamentally different from other cloud providers. We created an RDMA network, which was necessary because our Exadata machines and database connect a large number of computers. When you have a single database application, it can operate on one computer or across a cluster of multiple computers without a single point of failure. A unique feature of the Oracle database is that a single application can function across various computers. If one machine fails, the application continues running, making it fault tolerant, unlike other systems. To support this, we designed our network to be very fast when clustering multiple machines for a single database application. This RDMA network allows one computer to access the memory of another directly and swiftly, enabling seamless communication among computers as a group. We established this network for our entire cloud to run our Oracle real application cluster database effectively. However, the advantages of our hyper-fast network extend beyond just running the Oracle database. For instance, applications like car crash simulations have been observed to run significantly faster on Oracle, as well as larger applications in neural networks and machine learning workloads. Our network's speed also brings security and reliability benefits. Each of our computers is equipped with two networks: one for customer interconnections and another for our control network that runs our cloud control software, which is distinct and isolated from customer environments. This setup prevents any tampering with our cloud control software and ensures we cannot access customer data, a feature unique to Oracle. Overall, having two networks and an RDMA system enables us to operate much more efficiently and reliably than competitors, providing us with a fundamental advantage that is difficult for them to match unless they completely rebuild their cloud infrastructure.

Congrats on another strong quarter. And really two metrics jumped out to me this quarter. First was IaaS revenue accelerated at 59% from 58% and 39% in the prior two quarters. And organic ERP growth also accelerated to 28%, which is pretty phenomenal this quarter from 22% and 17% in the prior two quarters. Can you just give us sort of a breakdown of what’s driving this continued strength compared to some of your cloud competitors in the past in IaaS world that have experienced decelerating growth in recent months? Are there any workloads in particular that are driving the relative strength of OCI?

I don’t know, Larry, if you want to take it or I take it.

You can take it. Regarding the workloads, I want to highlight that AI and machine learning are experiencing significant growth at NVIDIA. They are transferring a large amount of work to the Oracle Cloud, along with several other companies. That's one aspect to consider. Of course, databases are also important, but I’ll allow Safra to address that in more detail.

We have a wide range of high-performance computing applications and many auto companies conducting their simulations on our platform. Additionally, we support Oracle workloads, autonomous databases, and various other tasks. Our growth is broad-based and accelerating, driven by the compelling features we offer, which customers often do not expect. It's important to note that in the cloud, time translates to money; therefore, higher performance leads to reduced costs across our offerings, whether they are Oracle workloads, computing, or storage. Our cloud services are increasingly preferred by national security clients, as we allow governments to maintain control over their data. We can establish data centers rapidly, and they tend to become operational quickly. Furthermore, in our applications business, we are consistently winning new deals. Our e-business suite, PeopleSoft, and JD Edwards customers are transitioning to us, while SAP clients are choosing our solutions over their previous providers. Overall, we are seeing success on multiple fronts.

Great. Well, it’s awesome to see everything that you’ve been talking about the past couple of years playing out. So keep up a great work.

Larry, to the answer to the first question, that’s actually something we’ve been thinking about. That’s going to help as we dig in to better understand the benefits of OCI. But it’s amazing to hear the core differentiation of RAC continues to drive differentiation even 20 years later. My question is actually for Safra. Safra, you mentioned your flexible business model in your prepared remarks and which is unique. BYOL, you were a pioneer in doing that. And license was surprisingly strong again. Can you talk in a little more detail about what’s really driving that license strength?

Contrary to common concerns, the Oracle database continues to be the largest portion of our licensing by a significant margin. The database remains robust because customers recognize the benefits of bringing their own licenses, allowing them to have coverage whether on-premise, in the cloud, or transitioning between the two. Overall, that is consistently a major figure. Additionally, we are seeing very strong growth rates in analytics and impressive growth in Java as well as in various industry applications. Specifically, with Cerner, we achieved a growth rate of 23% due to the inclusion of the Cerner license. Without Cerner, the growth stands at 9%. Even apart from Cerner, we are experiencing license growth following a remarkably strong growth rate last year. Technology remains the primary driver of our success, but we also have some industry applications and a small contribution from Cerner, all of which reflect a remarkably strong performance.

Okay. That makes sense. It sounds like a lot of things are working together here. Thank you. Thank you very much.

Absolutely.

Thank you very much for taking the question. I really appreciate the ability to ask the question, and congratulations on the quarter. Two related questions on Cerner. Safra, where are we on the Cerner integration process as well as taking out the cost? And where do you think you can drive those long-term costs over time? And Larry, we heard a lot of great features at Oracle World about Cerner and what you going to do in healthcare. It’d be interesting to hear what progress you’ve made recently. Thanks.

Sure. So Mark, we’ve owned Cerner for about five months. And I will tell you that they continue to do better than we had projected internally. So, we’re very, very happy. But we are still at the beginning. We don’t want to do anything that will damage the business. And of course, we’re very, very focused on those customers. But we are already having some level of savings. But ultimately, just so that you understand, our expectation is we will run them at typical Oracle margins. So, we’ve got quite a way to go. And I think over the next couple of quarters, you’ll see continued improvement as we’ve done some of our operational integration. And simultaneously, I think they continue to over perform for us. So, we are doing this in a very careful way. So, it’s not to put any issues for our customers and making sure they’re successful. On the technical side, Larry, that’s for you.

Yes. On the technical side, our goal is to build not only provider systems. Cerner primarily competed with EPIC by automating hospitals, and while we also aim to automate hospitals, clinics, and doctors’ offices, we are also focused on developing national public health systems. I mentioned Oxford Nanopore, which serves as an early warning system for detecting potential pandemic pathogens. These global public health systems are essential, and we are in discussions with countries, not just companies, to create and implement a global early warning system that allows us to identify emerging pathogens early enough to prevent pandemics. In the unfortunate event of another pandemic, we need access to real-time data about hospitalizations and vaccination rates so we can effectively manage resources. I anticipate that we will secure contracts with several countries to build these national systems, which are substantial in scale. As I noted in my press release, the scope of this healthcare opportunity is unprecedented, and it comes with significant responsibilities. We, as humanity, must improve our healthcare delivery compared to historical performance, and we cannot allow a repeat of the COVID-19 pandemic. There is a global urgency and commitment to developing a new generation of systems that not only prevent pandemics but also enhance our healthcare management. As far as I know, Oracle is the only company globally addressing this issue, and we are close to signing agreements with multiple countries to pursue this initiative.

Hey. Thanks for squeezing me in. One quick question. If you think about the global environment, usually, it’s not the time to look at or in the olden days, I remember when I was at PwC, it wasn’t the time to kind of look at your back office systems, but you’re kind of growing really nicely. NetSuite is actually kind of outgoing now Fusion a little bit. Can you talk a little bit about the drivers and what you’re seeing out there? Thank you.

Yes. Let me start that, and Larry can add if you want. So I want to remind you that we are global, right, which includes whether we’re in Europe and in the United States, but we’re also in the Gulf states and really in Asia, different parts, Latin America. And there are always companies that get to the point where their business, they cannot afford to keep using their older systems. They spend too much using them. They spend too much running them. And they are actually holding them back, and they know that. And I think one of the things many companies learned during COVID was those companies that did not get on some sort of a track to get a digital connection with their customers, employees, and suppliers that were at a huge disadvantage. And so that momentum continues. And it is possible that any individual country or location there could be some little slowdown here or there. And yet there are other countries and industries that are doing incredibly well and they view this as critical. When customers move to SaaS they end up spending less but also have much better capabilities to sell more to work with their employees and their suppliers, and of course, as I said, their customers. So that momentum has started, has started, and it just continues very, very strongly. And again, we are global. So, even when there are some issues in some regions, we’re in other regions that are doing phenomenally well right now.

Thank you, Safra. A telephonic replay of this conference call will be available for 24 hours on our Investor Relations website. Thank you for joining us today. And with that, I’ll turn it back to Bo to close the call.