Oracle Corp (ORCL) — Q1 2024 Earnings Call Transcript

Thank you, Lisa, and good afternoon, everyone, and welcome to Oracle's first quarter fiscal year 2024 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. On the call today are Chairman and Chief Technology Officer, Larry Ellison, and Chief Executive Officer, 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 statements made today. As a result, we caution you from 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. As you know, 22 years ago today was a traumatic day for our country. Like many of you, it feels like yesterday when the country lost nearly 3,000 souls. And we at Oracle, we lost 11 employees. I remember exactly where I was when the tragedy unfolded, and it is still so hard speaking about it even all these years later. Today, we honor and remember each one of the victims and heroes, and we hope that their memories are a blessing to all of us. Now, before I go to our Q1 numbers, I thought it would help to start with some of the things that are going on at Oracle that you'll be hearing about over the next couple of weeks. Next week, we have Oracle CloudWorld, which will showcase the latest innovations, including AI on OCI, the progress of Oracle Autonomous Database, our multi-cloud strategy, the use of Oracle Analytics throughout our portfolio to drive better decision-making, and the use of generative AI to differentiate Fusion, NetSuite, and our industry application. CloudWorld is our marquee event each year where current and prospective customers take time out of their busy calendars to join us in person and share their experiences. We know that there are no better spokespeople for our products and services than our existing customers. Our innovation results directly from our development teams interacting with customers to anticipate and build the next generation of products and services. Some of the customers you will hear from next week include NVIDIA, Uber, Ascension Health, Cohere, and many, many more. You'll also hear from our expanding set of strategic partners driving the Oracle ecosystem, including Amdocs, VMware, and Microsoft. Overall, it's remarkable the interest we are getting from the ISV community to work with Oracle. There are a lot of discussions going on, and you will see more announcements shortly. From a financial standpoint, we see this customer and partner ecosystem as a leading indicator of our income statement. I've been talking with you about our revenue acceleration for some time now. In Q1, our remaining performance obligations or RPO climbed to nearly $65 billion, with the portion excluding Cerner up 11%. We have now signed several deals for OCI greater than $1 billion in total value. In the first week of Q2, we booked an additional $1.5 billion in business, which isn't even included in the Q1 numbers. Approximately 49% of total RPO is expected to be recognized as revenue over the next 12 months. My point here is that customer momentum is continuing to build. This momentum is turning into bookings, and that gives me the confidence that our annual revenue growth will continue to accelerate moving forward. Now to the Q1 results, which I remind you I am announcing on day 11 only because day eight when we were ready was a Friday and I know none of you like that. So this quarter we saw a modest currency tailwind, but as always, I'll discuss our financials using constant currency growth rates. Clearly, Q1 was another great quarter with total revenue at the midpoint of guidance and earnings per share $0.02 above the high-end of guidance, with our cloud growth at 29%. Total cloud revenue, SaaS and IaaS, excluding Cerner, was $4 billion, up 29%. Now including Cerner, total cloud revenue was again up 29%, also at $4.6 billion, with our IaaS revenue at $1.5 billion, up 64%, and SaaS revenue of $3.1 billion, up 17%. Total cloud services and license support revenue for the quarter was $9.5 billion, up 12%, driven again by our strategic cloud applications, Autonomous Database, and our Gen2 OCI. Application subscription revenues, which include product support, were $4.5 billion, up 11%. Our strategic back-office SaaS applications now have annualized revenue of $6.9 billion, and they grew 20%. Infrastructure subscription revenues, which include license support, were $5.1 billion, up 14%. Infrastructure cloud services revenue was up 64%. Excluding legacy hosting services, Gen2 Infrastructure cloud services revenue grew 72% with an annualized revenue of $5.6 billion. OCI consumption revenue was up 91%. Exadata Cloud Services revenue was up 46%, and Autonomous Database was up 42%. Database subscription services, which include license support, were up 6%, highlighted by cloud database services which were up 44%. Very importantly, as on-premise databases migrate to the cloud, we expect these cloud database services will be the third leg of revenue growth alongside strategic SaaS and Gen2 OCI cloud services. Software license revenues were $0.8 billion, down 11% following an amazing Q1 last year of 19% growth, which made it a tough comparison this year. So in all, total revenue for the quarter was $12.4 billion, up 8% including Cerner and up 9% excluding Cerner. Shifting to margins. The gross margin for cloud services and license support was 78%, with IaaS gross margins improving substantially from last year. While we’ve continued to build data center capacity, we've also seen our IaaS margins go higher as these new cloud regions fill up. We monitor our expenses very carefully to ensure our gross margin percentages expand as we scale up. To this point, gross profit dollars of cloud services and license support grew 9% in Q1. Non-GAAP operating income was $5.1 billion, up 12% from last year. The operating margin was 41%, up from 39% last year. As we continue to benefit from economies of scale in the cloud and drive Cerner profitability to Oracle standards, we will not only continue to grow operating income, but we will also grow the operating margin percentage. The non-GAAP tax rate for the quarter was 18.8%, and non-GAAP EPS was $1.19 in US dollars, up 16% in USD, up 14% in constant currency. The GAAP EPS was $0.86 in USD. At quarter end, we had nearly $12.1 billion in cash and marketable securities. The short-term deferred revenue balance was $11.1 billion, up 5%. Operating cash flow for the first quarter was up 9% to $7 billion, while free cash flow was up 21% to $5.7 billion, and I expect that we will see a very good result in our free cash flow for the rest of the year. Over the last four quarters, operating cash flow was $17.7 billion, up 68%, and free cash flow was $9.5 billion, up 76%. Capital expenditures were $8.3 billion over the last four quarters, and we are clearly beginning to see the cash flow benefits stemming from our cloud transformation. CapEx was $1.3 billion in Q1 as we continue to build capacity for bookings and our customers’ growing needs. Given the demand we have and see in the pipeline, I expect that fiscal year 2024 CapEx will be similar to this past year's CapEx. As always, we remain careful to pace our investments appropriately and in line with booking trends, which is why our gross margins are up in our cloud business. We now have 64 cloud regions live with 44 public cloud regions around the world and another six being built. Twelve of these public cloud regions interconnect with Microsoft Azure. We also have nine dedicated regions live and 11 more planned, nine security regions, and 12 EU sovereign regions live with increasing demand for more of each. And of course, we have many cloud customer implementations. The cost advantages, sizing flexibility, and deployment optionality of our cloud regions continue to make us compelling in the marketplace to customers. As we've said many times before, we are committed to returning value to our shareholders through technical innovation, strategic acquisitions, stock repurchases, prudent use of debt, and dividends. This quarter, we repurchased 1.3 million shares for a total of $150 million. In addition, we paid out dividends of $3.9 billion over the last 12 months, and the Board of Directors declared a quarterly dividend of $0.40 per share. Now before I dive into Q2 guidance, I'd like to share some thoughts on what I see longer-term. Per my earlier remarks, we have a great line of sight into the trajectory of the business, given the bookings momentum. We are extremely confident about our revenue acceleration for the year, even though in any quarter there may be small fluctuations. Because we have far more demand than we can supply, our biggest challenge is building data centers as quickly as possible. In addition, we are in an accelerated transition of Cerner to the cloud. This transition is resulting in some near-term headwinds to the Cerner growth rate as customers move from license purchases, which are recognized upfront, to cloud subscriptions, which are recognized ratably. Again, excluding Cerner, I remain committed to accelerating our total revenue growth rate this fiscal year, as well as maintaining our current high cloud growth rate for the year. And as you will hear at our financial analyst meeting next week, we remain firmly committed to our fiscal '26 financial goals. Let me now turn to my guidance for Q2, which I'll review on a non-GAAP basis. If currency exchange rates remain the same as they are now, currency should have a 2% positive effect on total revenue and a $0.03 positive effect on EPS in Q2. However, the actual currency impact may be different. Here we go, total revenues, including Cerner, are expected to grow from 3% to 5% in constant currency and are expected to grow 5% to 7% in USD at today's rates. Total revenue excluding Cerner is expected to grow from 6% to 8% in constant currency and expected to grow 8% to 10% in USD. Total cloud revenue excluding Cerner is expected to grow from 27% to 29% in constant currency and is expected to grow 29% to 31% in USD. Non-GAAP EPS is expected to grow between 5% to 9% and be between $1.27 and $1.31 in constant currency. Non-GAAP EPS is expected to grow between 7% to 11% and be between $1.30 and $1.34 in USD. My EPS guidance for Q2 assumes a tax rate of 19%. However, one-time tax events could cause actual tax rates to vary. And with that, I'll turn it over to Larry for his comments.

Thank you, Safra. So, is generative AI the most important new computer technology ever? Maybe, and we are about to find out. Self-driving cars, computer-designed antiviral drugs, voice user interfaces. Generative AI is changing the automobile industry, the pharmaceutical industry, and how people communicate with their computers. Generative AI is changing everything. As of today, AI development companies have signed contracts to purchase more than $4 billion of AI training capacity in Oracle's Generation 2 cloud. That's twice as much AI training as we had booked at the end of the last Q4. I'm also very pleased to announce that Exai has signed the contract to do training in Oracle's Gen 2 Cloud. The largest AI technology companies and the leading AI startups continue to expand their business with Oracle for one simple reason: Oracle's RDMA interconnected NVIDIA superclusters train AI models at twice the speed and for much less than half the cost of other clouds. But growth in our AI cloud infrastructure business is not the only exciting news we have to report at Oracle. Our cloud applications business is doing quite well and it's about to get even better. In the current quarter, we expect our Cerner Health business to be awarded two large new contracts with a total value of over $1 billion. And I’m now able to announce that all nine utility companies owned by Berkshire Hathaway are in the process of replacing all their existing ERP systems and standardizing on Oracle's Fusion Cloud applications. Let me conclude with a few words about our database business and our upcoming announcement with Microsoft later this week. We will be substantially expanding our existing multi-cloud partnership with Microsoft by making it easier for Microsoft Azure customers to buy and use the latest Oracle cloud database technology in combination with Microsoft Azure cloud services. Satya and I will discuss the details of our expanding partnership at Microsoft headquarters in Redmond on the 14th. Please tune in, and thank you. Back to you, Safra.

Thanks, Larry. And maybe, Ken, we could start taking questions at this point.

Absolutely. Before we do that, Lisa, just one quick clarification, that we currently have two EU sovereign regions live with more to come. Lisa, please poll the audience for questions.

Great. Thanks very much, and congrats on the strong start to the year. Larry, I think it's fair to say that you understand the laws of data gravity better than anyone, and you have monetized this fundamental concept as well as anyone over the years. And I recently heard someone say, we are moving from a world of data gravity to one of AI gravity, and I'm not sure exactly what that means, or they even knew what that meant, but with AI and other use cases attracting more and more data to central clouds, with many vendors preaching data sharing instead of what used to be making multiple copies of things and keeping them synchronized, does AI plus cloud in any way break what we've always understood about data gravity? And what does that mean for Oracle?

You cannot build any AI models without large amounts of training data. Generative AI has highlighted that the main challenge in training these models is acquiring and processing vast data sets into your GPU supercluster. Training AI models requires significant data. For instance, OpenAI used the entire public Internet and Wikipedia to train ChatGPT 3.5. Specializing a model like ChatGPT 4.0 involves using specific training data, such as electronic health records, to assist doctors in diagnosing and treating conditions like cancer. We have partners working on ingesting substantial amounts of image data for their AI model training, as well as those incorporating electronic health records. AI relies heavily on accessing and processing large quantities of data. The transition towards AI does not lessen these data demands; if anything, it intensifies them. For ChatGPT 3.5, trillions of data elements were utilized and even more for ChatGPT 4.0, which includes image data for training in image recognition. This is beneficial for our database business, and Oracle's new Vector database will hold highly specialized training data, such as anonymized electronic health records, while still enabling the training of specialized models to enhance doctors' diagnostic capabilities and treatment recommendations for various diseases. We believe this will greatly benefit our business as we navigate the evolving information age, where the demand for data continues to grow stronger and more crucial.

Thank you so much for your perspective, Larry.

Thank you so much. So Larry, companies are starting to understand that OCI has a very fundamentally different architecture than anything else out there in the market because of the non-blocking, low-latency network design. I'm wondering if you think it's possible to actually pull further ahead through some of your other initiatives. For instance, the Azure Interconnect, it sounds like you're going to expand that. Having more regions, running a stronger database, providing greater isolation, just wondering if you think there is a possibility of extending the lead?

We are currently on our second generation of both data centers and cloud technology. While some may have perceived us as arriving late to the market, this transition was necessary as we moved away from a generation we were not satisfied with to one that addresses many issues that other cloud providers have yet to resolve. Our non-blocking, ultra-fast RDMA network benefits not only AI model training but also enhances various applications, including database performance. Our data centers are completely automated; they can configure and operate themselves, which significantly reduces labor costs. A key advantage of this automation is the reduction of human error, leading to enhanced security, as most security issues stem from human mistakes or misconduct. Since our data centers are identical, the uniformity allows for easier automation; they only differ in scale. We anticipate establishing more data centers than any other cloud provider and are even placing some at customer locations. For example, Nomura Research in Japan operates two dedicated regions and is expanding by building two more. They manage the Tokyo Stock Exchange, which is a unique accomplishment for a cloud provider. Our extreme reliability and security attributed to our automated infrastructure provide us with cost, performance, and security advantages, allowing us to grow significantly faster than other major competitors.

Thank you very much.

Thank you. Larry, you mentioned Berkshire and them moving over to Fusion. I just wanted to talk in more bigger picture on the back-office systems. Like, in the old days, back-office, you wouldn't touch in tougher times because they are big complex projects. But you guys are still growing this nicely with over 20%. What are you seeing there? And do you see a change in pipelines, change in customer interest of doing something there? Thank you.

The back-office in the cloud is significantly different from on-premise systems, and we hold a considerable advantage as the largest player in the market, with around 95% of live cloud ERP customers utilizing our solutions. We have a crucial partnership with JPMorgan Chase and plan to announce more collaborations within the financial sector at the upcoming CloudWorld, where we integrate various aspects of e-commerce, specifically B2B e-commerce, directly in the cloud. B2B e-commerce among Oracle Cloud clients involves one Oracle procurement system communicating with another Oracle order management system, facilitating transactions through their bank. This process is fully automated in the cloud. If JPMorgan Chase is your banking partner, they can manage the loan simultaneously with the purchase, consolidating e-commerce for B2B along with banking, shipping, and insurance. The industry has excelled at automating e-commerce for B2C, with Amazon and Walmart being prime examples, but we haven't achieved the same level of automation for B2B commerce because of its inherent complexity. In the cloud, we can connect all parties involved, such as shippers, insurance companies, manufacturers, and buyers, allowing us to automate the entire process within the Oracle Cloud. This entails seamless interaction between ERP systems, banks, and insurers, handling loan origination, shipping, and insurance. By transitioning to a modern cloud ERP system, our customers can operate more efficiently compared to traditional on-premise systems.

Okay. Thank you.

Thank you so much for taking my question. The top-of-mind questions I'm getting are related to AI in general, as you'd expect, and were specifically as it relates to Oracle, what the impact of AI will be on OCI Gen 2. Two related parts to the question. The first is the profitability of AI supercomputers and whether some clients try to tell me, it's low-calorie, empty-calorie revenue or can you maintain margins as this business grows? And the second part is about the Oracle ecosystem, and is it strong enough that its workloads transition from model training to inferencing and grounding? Could AI compute create a revenue air pocket, or is the ecosystem strong enough so you don't have that? Thank you.

You're continually training these models, and it's essential to incorporate new data, especially in fields like healthcare and law where new cases and research emerge constantly. For AI models to remain relevant, they must stay current. This means that training and inference occur simultaneously rather than being separate processes. As long as we can execute these tasks twice as quickly as our competitors, both in training and inference, we'll be able to operate at half the cost or better. We believe this gives us a strong competitive advantage in both areas. Additionally, running twice as fast in the cloud translates to significantly lower costs since billing is based on hourly usage. This performance edge represents a substantial cost benefit for us, and we expect it to remain stable for the foreseeable future, applying to both inference and training. Regarding GPUs, they are not inherently a low-margin business, especially for a fully automated cloud operation with very low expenses. In fact, our pricing for GPU training is often more profitable and, in some instances, lower than the training costs of other large cloud providers.

Thank you. That's very helpful.

Excellent. Thank you, guys, and thank you for taking the question. I wanted to drill in on Cerner, basically, the one-year anniversary of that acquisition. And maybe from Larry, get an update on where we are with modernizing that solution and modernizing that product? And basically then whether Cerner has kind of lived up to your expectations thus far? And then maybe for Safra, if we could dig into the expense synergy side of the equation. You guys have done a great job increasing margins on a year-on-year basis in this quarter; how much is left to go within Cerner and getting that margin profile to match the broader Oracle margin profile?

I will discuss our progress in transitioning the current Millennium's Cerner software to the new Millennium. We approached this by rewriting the software incrementally; it's not a complete overhaul at once. The process involves two phases with Cerner. First, we need to lift and shift the existing system and enhance its stability, which we've accomplished, while also migrating customers to the cloud, a process currently underway. This transition will provide improved performance, increased security, and new features will gradually become available. The next phase will involve replacing older features of the Cerner system with the new Millennium Cerner system, which is not being developed using Java as we typically do. Instead, we are utilizing generative AI for code generation through our application generator called APEX. We are generating code for the new Cerner system instead of manually writing it, and this process is progressing very well. One advantage of code generators is their consistency; once a mistake is corrected, that correction applies universally to all instances. So, the code generator is actively producing the new features for Cerner, and it's advancing smoothly. On the business front, we anticipate that the Cerner segment will continue to strengthen. As Safra pointed out, the previous Cerner model relied on selling licenses, which led to significant revenue being recognized in a single quarter. Our new cloud-based business model means we receive revenue from large Cerner contracts over time rather than all at once. This shift presents a slight revenue challenge, but overall, the Cerner business is performing exceptionally well.

And on the expense side, we still have a ways to go, but I think it will become more obvious to you next quarter the changes we've made, as they play out through the income statement more clearly. And so you'll have a better comparison, Q2 to Q2, which will be a full non-deal quarter for you to look at. But you know us, we are always looking to save as much as we can and to spend as little while still really transforming Cerner into a modern system in its entirety.

Let me just reinforce what Safra just said. We love to save money. One of the things we did with our data centers is we automated them. We saved labor costs, and we have better security and better reliability because we eliminated human error. With Cerner, the rewrite of Cerner, it's not armies of programmers that are going to be rewriting this. We are generating the new Millennium software using APEX. And that's also going to save us a lot of human labor and generate higher quality code, higher quality user interfaces, and better security all at once.

Helpful. Thank you, guys.

Thank you. My question is for Safra. Safra, if the organic constant currency cloud growth matches what you achieved last year and targets for this year at 29%, while license sales, although they faced a tough comparison, were somewhat weaker than market expectations. Additionally, we recognize that cloud revenue for the same amount of business booked will be significantly lower than the equivalent license revenue for the quarter. Does this indicate that we are experiencing stronger momentum towards the cloud this quarter compared to previous periods? Also, to clarify, given your guidance for the second quarter, you mentioned maintaining your long-term outlook. Safra, are you upholding your constant currency organic cloud guidance for the year?

Yes, okay. Let me start with yes. And as I want to remind you, of course, I want to remind you 29% of bigger numbers is more. Okay. So, you know, last year we were smaller, and this year we continue to plan on doing the 29%, maybe better. All of it is dependent on us getting our data centers filled up and built out as fast as possible. The level of demand we have is stunning. Stunning is the only word I can use, and I don't want to get overly exuberant simply because we do have to continue to build out our systems, etc. And so yes, a very strong momentum to the cloud, and again with the focus we told you. We are bringing our customers to the cloud, and that's going to have us focusing on growing that and stronger momentum there.

Okay, great. Very clear. Yes and yes. Got it. Thanks.

All right. Thank you, John, and thank you, Lisa. 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 the call back to Lisa for closing.