Oracle Corp (ORCL) — Q3 2024 Earnings Call Transcript

Thank you, Krista. Good afternoon, everyone, and welcome to Oracle's third quarter fiscal year 2024 earnings conference call. A copy of the press release and financial tables, which include a GAAP to non-GAAP reconciliation and other supplemental financial information, can be viewed and downloaded from our investor relations website. Additionally, a list of 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, we have our 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 provide 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 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, which may affect our future results or the market price of our stock. 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. We had another excellent quarter with third-quarter revenue coming in as expected and EPS $0.02 above the high end of my guidance range. Now, before I get into the results of the quarter, I wanted to touch on the strength of our infrastructure cloud business. OCI has emerged as the largest driver of our overall revenue acceleration, growing much faster than our cloud competitors. Customers have figured out that by moving to OCI, they can really get more while paying less. But it's not just the cost that matters to our customers. Beyond the superior price performance of OCI, customers are choosing Oracle and Oracle services for multiple reasons. First, we know better than anyone what it takes to run the full stack of technology that goes into mission-critical workloads. I'm talking about running at enterprise scale with comprehensive security and unparalleled support, and that's from decades of experience running the world's most important workloads and optimizing clustering technology, which is critical to artificial intelligence workloads and database services. Secondly, our AI capabilities are unique as they're built-in to help customers drive business outcomes. This is more than integrating generative AI across our Fusion and Industry Cloud applications and autonomous database, which we have done. It's also about enabling and refining these AI models with the customer's own data to better understand and serve their operations without them losing control of their own data. Third, we provide deployment flexibility for customers based on how they want to run in the cloud. In addition to offering public cloud services, we remain the only vendor that also offers a dedicated and complete cloud for customers, dedicated regions, sovereign clouds, and Alloy, our partner cloud, so customers don't have to compromise the services they receive while meeting their deployment needs. Finally, we provide multi-cloud offerings so customers can consume our cloud services in the public cloud of their choice. We offer Oracle database at Azure with Microsoft, as well as MySQL HeatWave through multiple clouds, and you can expect more multi-cloud services to come. Now, to Q3 results, which I'd like to point out I had the actual results on day five and signed off with my auditors days ago. So I'm just bragging a little bit, but I couldn't help it; I know a lot of CFOs are pretty jealous. Total revenue came in at the midpoint of my constant-currency guidance, and EPS was above the high end of guidance. As was the case when I gave guidance last quarter, currency had little effect in Q3. But I'll still discuss our results using constant currency growth rates in the few areas that the rates are slightly different. Cloud revenue, that's SaaS and IaaS excluding Cerner, was $4.4 billion, up 26%. Including Cerner, total cloud revenue was up 24% at $5.1 billion with IaaS revenue of $1.8 billion, up 49%, and SaaS revenue of $3.3 billion, up 14%. This quarter marks the first time our total cloud revenue is more than our total license support revenue. Total cloud services and license support revenue for the quarter was $10 billion, up 11% driven again by our Strategic Cloud Applications, Autonomous Database, and OCI. Application subscription revenues, which include product support, were $4.6 billion and up 10%. Our strategic back-office SaaS applications now have an annualized revenue of $7.4 billion and were up 18%. Infrastructure revenues, which include license support, were $5.4 billion and up 13%. Infrastructure cloud services revenue was up 49%. Excluding Legacy Hosting Services, OCI Gen2 infrastructure cloud services revenue grew 52% with an annualized revenue of $6.7 billion. OCI consumption revenue was up 63%. Where if not for some continuing supply constraints, consumption growth would have been even higher. Database subscription revenues, which include database license support, were up 5%, highlighted by cloud database services, which were up 34% and now has annualized revenue of $1.9 billion. 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 OCI. Software license revenues were $1.3 billion, down 3%. All in, total revenues for the quarter were $13.3 billion, up 7% including Cerner and up 9% excluding Cerner. Now to margins: the gross margins for Cloud Services and License Support was 77%. This is, as before, a result of the mix between support and cloud, in which cloud is growing much faster than support. Support and SaaS gross margin percentages are consistent with last year, while IaaS gross margins improved substantially year-over-year. While we continue to build data center capacity, overall gross margins will go higher as more of our cloud regions fill up. We monitor these expenses carefully to ensure gross margin percentages expand as we scale. And to that point, gross profit dollars of Cloud Services and License Support grew 8% in Q3. Non-GAAP operating income was $5.8 billion, up 12% from last year. Operating margin was 44%, up from 42% last year as we continue to drive more efficiencies in our operating expenses, which continue to trend down as a percentage of revenue. Looking forward, 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 expand the operating margin percentages. The non-GAAP tax rate for the quarter was very close to my guidance at 18.9%, and non-GAAP EPS was $1.41 in USD, up 16% in both USD and constant currency. GAAP EPS was $0.85. At quarter-end, we had nearly $9.9 billion in cash and marketable securities, and short-term deferred revenue balance was $8.9 billion, up 4%. Over the last four quarters, operating cash flow was $18.2 billion, up 18%, and free cash flow was $12.3 billion, up 68%. Capital expenditures were $6 billion over the same time period as we continue to see cash-flow benefits from our cloud transformation. Our remaining performance obligation or RPO is now over $8 billion with the portion excluding Cerner up 41% in constant currency. We signed several large deals this quarter, and we have many more in the pipeline. Approximately 43% of our total RPO is expected to be recognized as revenue over the next 12 months. This reflects the growing trend of customers wanting larger contracts as they see firsthand how Oracle Cloud Services are benefiting their businesses. We expect to have some very nice joint announcements with NVIDIA next week. While we spent $2.1 billion on CapEx this quarter, the $1.7 billion in the cash-flow statements is slightly lower, just due to the timing of payments. So the $2.1 billion is actually what we spent and will pay for. We are working as quickly as we can to get the cloud capacity built out, given the enormity of our backlog and pipeline. I expect the CapEx will be somewhere around $7 billion to $7.5 billion this fiscal year, meaning our Q4 CapEx should be considerably higher. To that point, we now have 68 customer-facing cloud regions live with 47 public cloud regions around the world and another eight being built. Twelve of these public-cloud regions interconnect with Azure, and more locations with Microsoft are coming online soon. We also have 11 dedicated region slots and 13 more planned. Several national security regions in EU sovereign regions are live with increasing demand for more of each. Also, we have many cloud customer installations. As I mentioned earlier, the sizing, flexibility, and deployment optionality of our cloud regions is a tremendous advantage for us in the marketplace. As we've said before, we're committed to returning value to our shareholders through technical innovation, acquisitions, stock repurchases, prudent use of debt, and a dividend. This quarter, we repurchased 4 million shares for a total of $450 million. Additionally, we paid out dividends of $4.4 billion over the last 12 months. The Board of Directors declared a quarterly dividend of $0.40 per share today. Now, before I dive into Q4 guidance, I'd like to share some thoughts on what I see for the next 12 months or so. As demand for our Cloud Services continues to get stronger, our pipeline is growing even faster, and our win rates are going higher as well. As our supply constraints ease, revenue growth rates will accelerate higher as our capacity expands and we get into fiscal year '25. I should also say that we continue to expect FY '24, of which we are now in the fourth quarter, total revenue excluding Cerner will accelerate from last year as it has for the past three years and will likely be significantly higher in FY '25. Additionally, we expect Cerner, which is a significant headwind this year, to return to growth next year. I remain firmly committed to our FY '26 financial goals for revenue, operating margin, and EPS growth. However, some of these goals might prove to be too conservative given our momentum. Let me now turn to my guidance for Q4, which I'll review on a non-GAAP basis as always. If currency exchange rates remain the same as they are now, currency should have little effect on total revenue and EPS. However, actual currency impact may differ. At least right now, all the numbers are the same for constant currency and USD. Total revenues, including Cerner, are expected to grow from 4% to 6%. Total revenue excluding Cerner is expected to grow 6% to 8%. The total cloud revenue excluding Cerner is expected to grow from 22% to 24% as more capacity comes online in Q4. The EPS growth rate will be affected by the comparison as our Q4 tax rate last year was 9.2%, which I believe most of you have already accounted for in your models. My EPS guidance for Q4 assumes a base tax rate of 19%. As always, one-time tax events could cause actual tax rates to vary from my guidance as stated last year. Non-GAAP EPS is expected to be down 2% or flat and be between $1.62 and $1.66. With that, I'll turn it over to Larry for his comments.

Thank you, Safra. Well, Oracle signed another big Generation 2 cloud infrastructure contract with NVIDIA in Q3. Oracle's Gen2 AI infrastructure business is booming; that's become pretty clear to everybody. In addition to selling infrastructure for training AI large language models, Oracle is also completely re-engineering its industry-specific applications to take full advantage of generative Artificial Intelligence. The best example of this is in Healthcare, where Oracle did not just add a bit of AI around the edges of the existing applications. Instead, we developed completely new applications using our Apex Application Generator and our Autonomous Database. These all-new applications use generative AI throughout. The best example is in Healthcare where our new Ambulatory Clinic System is being delivered to customers this Q4. This completely new application features a voice interface called the Clinical Digital Assistant. The Clinical Digital Assistant listens to a doctor's consultations with a patient and automatically generates prescriptions, doctor's orders, and doctor's notes, then automatically updates the patient's electronic health records. The Clinical Digital Assistant's voice interface makes our new healthcare systems dramatically easier to use and saves hours of doctors' precious time every day, which now can be spent with patients rather than typing into a computer. The delivery of our new AI-centric healthcare cloud applications, including the Ambulatory Clinic System, the Clinical Digital Assistant, and the Health Data Intelligence System will enable the rapid modernization of our customers' healthcare systems and transform Oracle Health and Cerner into a high-growth business for years to come. Ken, back to you.

We don't hear you, Ken.

Thank you, Larry. Sorry about that. Krista, if you could please poll the audience for questions and if we can proceed from there? Thank you.

Thank you. Safra, the infrastructure as a service growth of 49% implies a Herculean increase in new business coming online, new ARR the way we model it anyway, something I just thought you wouldn't be able to do this quarter given how much you had to do. Though we've realized we don't know the timing of when deals come online. Last quarter you said you were going to reallocate resources to focus on some of these very large OCI deals to get them implemented earlier so you start to get revenue earlier. Is that what happened this quarter? Is that what we're seeing, or is that still to come?

Honestly, John, that is still to come. So, this is just pretty much our regular way business. That's what you're seeing. We have enormous amounts of demand. I tried to make that clear last quarter. We have more capacity coming online, but we have tried to focus on much larger chunks of data center capacities and electricity, and all of that is yet to come. This is really our regular way business and our customers are just growing, and a whole bunch of new customers too. I think there are many, many customers who have come on and that haven't gotten capacity yet. We've got at least 40 new AI bookings that are over $1 billion that haven't come online yet.

Okay, let me add that Oracle has been building data centers at a record level and a lot of people, I think, are aware that we can build fairly small data centers to get started when we want to. The unique thing about Oracle's data centers is they're all identical except for scale. We do not have custom data centers; they all have all the Oracle services. They are all complete. One of the unusual things about them is that they are all completely automated. They come up on their own and they kind of run themselves. I mean, look, we do have a bunch of people working on these data centers, but they are extremely highly automated. Our operating system is Autonomous Linux. Our database is the Oracle Autonomous Database. Our new HeatWave database, Microsoft - MySQL HeatWave, it's highly automated. Therefore, every time we build a data center, it's like the data center we've built before except for one thing: scale. We can go very small; we can get a full cloud data center with all the services in any number of racks. But this is what I want to point out. We're also building the largest data centers in the world that we know of. We're building an AI data center in the United States where you could park eight Boeing 747s nose-to-tail in that one data center. So, we are building large numbers of data centers, and some of those data centers are smaller, but some of those data centers are the largest AI data centers in the world. So, we're bringing on enormous amounts of capacity over the next 24 months because the demand is so high; we need to do that to satisfy our existing set of customers. To give you an idea, one more thing: we're building 20 data centers from Microsoft and Azure. They just ordered three more data centers this quarter. They're adding to that already. There are other multi-cloud agreements that are being signed, a number of multi-cloud agreements in Japan where computer manufacturers in Japan are adopting our cloud and will be reselling our cloud as partners. We think NRI is already doing that, but there are a number of other companies that will be doing that. We're seeing an overwhelming demand for data centers from people who want to buy Alloy and then resell our cloud services with their proprietary cloud services on top of it. Some of our largest customers around the world want their own Oracle region. They don't want to share a public cloud; they want a dedicated cloud region for that bank, technology company, or telecom company. They are building their own data centers which are - yes, they are all identical. We're able to automate and run those with not a lot of additional labor costs. It's a huge advantage for us.

Well, thank you, Larry and Safra. What you put up this quarter in Infrastructure as a Service just looks pretty impressive. But it sounds like there's a lot more to come. Thank you for taking my question.

John, my last comment will be: the growth in RPO is what's to come. RPO is obviously growing faster than revenue because we can't meet the demand. That's the measure of demand; the $80 billion RPO is quite an acceleration of demand. Demand is not slowing down; it's actually increasing quite a bit.

Thank you, John. Next question, please.

Hi, thank you, and congrats from me as well. I wanted to talk a little bit about Cerner. In the announcements, you talked about that most of Cerner now is running out of your OCI. Well, first of all, let a very quick turnaround here, so well done. What are the implications for that both in terms of running efficiency but also innovation on the platform? Thank you.

Well, two things. One is we save a huge amount of money moving them into our standard data center. Our OCI costs are much lower than the cost of the Cerner dedicated data center in Kansas City. Also, the big thing that we're excited about is OCI is highly secure; it's got a highly secure perimeter. Therefore, those applications are much less vulnerable to ransomware or other kinds of attacks than if they were in a different kind of data center. We're very happy that these are now secured. The third thing is now that they're in our cloud, we're able to update those applications on our regular three months cadence. So, we're able to modernize those customers that are in the cloud on a regular basis and start delivering our brand new applications that completely rewrite the Cerner application. First for ambulatory clinics and then eventually for acute-care hospitals. The ambulatory clinics system is coming out this quarter, and we're able to automatically deliver that system to existing customers. It's not a reimplementation; it's literally an update to what they've already got running on the Oracle Cloud. Even though it's an all-new application, I'm not going to see much technical detail, but it uses the same underlying data schema. We can literally bring up the new application without the customer having to go through any implementation process. We can do it just as an update, like when we ship a new version of Fusion to an existing Fusion customer. We can now ship an all-new version of the Cerner application to a Cerner customer in OCI. So it allows us to modernize the Cerner base very quickly while keeping them safe from ransomware.

Perfect. Thank you.

Your next question comes from the line of Ben Reitzes from Melius Research. Please go ahead.

Yes, thanks. It's a pleasure to be speaking with you this afternoon. Larry and Safra, can you talk about CapEx? Your guidance implies almost a doubling of CapEx in the fourth quarter. What kind of trajectory is needed for the next fiscal year given this RPO growth? What kind of uptick is needed? And Larry, if you don't mind, what - if you can give some color on GPU availability and how that plays in versus data center requirements in terms of that spending? Thanks so much.

For fiscal year '25, we're looking at about $10 billion in CapEx because it also involves not only some big centers but also expansions of existing centers. So we've already got some areas that we will be filling out. So at least preliminarily, we're looking at $10 billion for next year. It's not too complicated to figure out the math here. I'm looking at somewhere between $7 billion and $7.5 billion for the full year. I would include for Q3 the one we just announced. I would add in the amount we haven't paid yet as the CapEx number for this quarter. Okay? Then I guess that would be and then Larry gets the second question. But anyway, so $2.1 billion for this quarter, and you've got Q1 and Q2, and I'm going to be somewhere between $7 billion and $7.5 billion for the full year, which is actually a little bit lower than I thought. But we were able to do pretty well. You know how we spend very carefully.

Great, thanks. And Larry, the amount that - how is the GPU availability in terms of hitting your goals and vis-a-vis other bottlenecks that could be out there?

Can I take at least part of this?

Oh, yes, sure.

The GPU we are good. We are actually very good in our GPU access and capability. Building the computers, it's much more about making sure we've got the power on that.

Yes.

Thank you.

As Safra says, we have a great relationship with NVIDIA. They're a customer of ours as well as us being a customer of theirs, and we work very closely together. So, that's going pretty well. Building these data centers at the scale of some of these is breathtaking. Again, the one we're building in Salt Lake—you can park eight 747s nose-to-tail. We can provide a video of this thing under construction, but it's hard. I mean, it's breathtaking. So, there is a tremendous amount of demand. The data centers take longer to build, and we'd like that said—we are getting very good at building them quickly and getting the power and the communication links in. We're doing that faster than we have ever done in the past. The thing is, once we deliver the hardware, it comes up very quickly because the process of bringing up the hardware is now automated. It is very different than it used to be. So, we're able to bring additional capacity online very quickly if we have the electric power and the communication lines. The long pole in the tent is actually building the structure, connecting the electricity, and connecting the communication lines.

Thanks, Larry. Appreciate it. Congrats on OCI growth.

Your next question comes from the line of Derrick Wood from TD Cowen. Please go ahead.

Great, thank you. Larry, just within the last few months, you guys have enabled Oracle Database and OCI to be run on top of Azure, which seems like a fairly significant development. Can you talk about what the customer reception has been around this announcement? How do you think it could change the arc of new investments on the Oracle Database platform? What does this mean for potentially unlocking a stronger adoption cycle for Autonomous Database?

I think it is the key to unlocking a stronger adoption cycle for moving Oracle in general to the cloud and specifically the migration to Autonomous Database. We expect the multi-cloud initiatives to continue to expand. We're seeing it expand in Japan, but we expect it to expand amongst other hyperscalers to adopt a similar multi-cloud approach where we built OCI regions inside of their existing cloud infrastructure. We think the world—the era of walled gardens is coming to an end, where it used to be okay; I'm going to move all my stuff to AWS, trying to move all my stuff to Azure. What customers really want is the ability to use multiple clouds and for those multiple clouds to talk to one another. In the era of the Internet and now cloud computing, it’s really called Cloud Computing. It's not called a bunch of separate clouds. We expect that multi-cloud to become the norm and Oracle to be available everywhere. We believe that will preserve our franchise and database where we've been the number-one database in the IT ecosystem for a very long time. We think that's going to preserve that franchise and expand it because the Autonomous Database is a unique piece of technology, and there is nothing like it in the world. No one else is working on anything like that; no one else is even trying to duplicate the Autonomous Database. We think it will be a very successful product in every cloud.

Thanks, Larry.

Your next question comes from the line of Kirk Materne from Evercore ISI. Please go ahead.

Yes, thanks very much for taking the questions and congrats on incredible bookings this quarter. Larry, I was wondering if you could just talk a little bit about the interest level on Alloy in international markets where there might be a premium on data sovereignty and maybe how that's impacting the growth opportunity for OCI when we look out towards the balance of calendar '24? Thanks.

I think Japan is maybe the most interesting market where we had early success with NRI. They run the Tokyo Stock Exchange. NRI has just a couple of Oracle Cloud regions which they resell in the financial services community inside of Japan. One of their applications is a major stock exchange, the Tokyo Stock Exchange. Think about how many clouds run stock exchanges—that would be ours. It's got to be highly secure; it can never go down; it's going to have extremely high transaction rates. We can do that. The success of NRI has caused other computer companies in Japan to become very interested in reselling our cloud. We also have the ability that they can add some of their own technology to our cloud, so our cloud is open. You can plug in other things to the cloud. Imagine a big computer company in Japan adopting the Oracle Cloud, reselling Autonomous Database, reselling all of our technologies because we only make one kind of cloud; they are all the same and have all the services. Then that company can add their own services for their customers. We think all of the cloud companies in Japan are going to adopt OCI. Plus a lot of big companies—the big car companies in Japan—will want their own, the phone companies in Japan will also want their own, the technology companies in Japan will want their own Oracle regions. They are sovereign, highly secure, and cost-effective. We think this allows us to enter a variety of new markets. Every government is going to want a sovereign cloud and a dedicated region for that government. We see new countries; for the first time, we're beginning to win business with countries for sovereign cloud where the national government and the state governments are moving to that Oracle OCI region. We see that time and time again, and we're negotiating sovereign regions with the national government.

Just to make sure you have all the numbers between Alloy and dedicated regions, we've got 13 live, 18 under construction, and we've signed five new ones just this past quarter. For us, they're just—there's a list we're going through and trying to get them all because they are such a unique capability and in high demand.

Let me just add one last thing. Microsoft does not compete for this business. AWS does not compete for this business. Google does not compete for this business. We're the only ones in this business.

Thank you, all.

Our final question today comes from Brad Zelnick from Deutsche Bank. Please go ahead.

Thanks very much for taking my question. Larry, my question actually follows on your answer to Kirk's question because I think it's so important. In talking to one of your GSI partners, we heard about a global public sector solution that they referred to as government in a box where Oracle, in partnership with likes Starlink, the Tony Blair Project, is building solutions on top of OCI including absence check and even Cerner. So, literally run the entire country's digital operations. Hoping you can add even a little bit more color about what you're doing here and how big an opportunity it is because it just seems like it's such a powerful example of the entire Oracle Cloud Stack coming together in a meaningful way.

It is really, really interesting. We've gone into the National Government and State Government applications in a very, very big way. To give you an idea—a glimpse of what we're doing. We can't deliver these cloud regions to medium-sized countries. For example, Serbia is standardizing on Oracle Cloud regions for their National Government. We're automating their healthcare, and people know that we're in the healthcare business. What they might not know is that in cooperation with Starlink, we're able to deliver an Internet service for the entire country and the rural parts, by the way; we can deliver inexpensive Internet using Starlink and our sovereign cloud regions to backhaul the Internet traffic. We can bring every school in Serbia online with Internet connectivity—even if they're rural; it doesn't matter. Every school, every hospital, as is true of Rwanda and Kenya, can do it very cost-effectively. One of the applications we have for agriculture allows us to create a national map showing each farm's agricultural output—what they're growing and how to increase their agricultural output. We're doing this in concert with Elon Musk and SpaceX to do this mapping, utilizing AI to assist planning their agricultural output and logistics. It's next-generation applications that are very attractive. We handle procurement, accounting, human resources, and recruiting for the government; we do all of those applications. But some of the newer applications, regarding food security, ensures that all the schools receive adequate Internet connectivity and that rural hospitals are modernized. These next-generation applications are groundbreaking. I'll tell you one other crazy thing that we do: if you want to join the EU, it took Serbia eight years to harmonize their laws to be able to join the EU. Albania is facing the same thing, but with generative AI, we can read the entire corpus of Albanian laws and harmonize them with the EU potentially in 18 months to two years instead of the eight years it took Serbia. So, there are all sorts of interesting new AI applications out there that you've probably never heard of before, or at least I hadn’t heard of them before until this last 12 months. We're now in the process of delivering them.

Really amazing stuff. Larry, thank you, and congrats. Safra, really great to see the firm reiteration of your fiscal '26 targets. Thanks so much for taking my question.

Thank you.

Thank you, Brad. 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 Krista for closing.