Oracle Corporation

Welcome to Oracle's fourth quarter 2020 earnings conference call. Now I'd like to turn today's call over to Ken Bond, Senior Vice President.

Thank you, Holly. Good afternoon, everyone, and welcome to Oracle's fourth quarter and fiscal year 2020 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. On the call today are Chairman and Chief Technology Officer Larry Ellison and CEO Safra Katz. 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 being 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 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 publicly release any revision of 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. I know that many of you listening to this call are still working under unusual circumstances because of the pandemic. A lot has happened since our March 12th earnings call when we were all still conducting business as usual. Within a couple of weeks, the mitigation response to COVID-19 reached levels that few could have imagined. Overall, we found ourselves working with our customers, and we believe we have weathered the pandemic well and we're pleased with our overall performance in the quarter. To start, we successfully transitioned our global workforce to working from home, and our employees rose to the occasion. They focused on their jobs. building technology, selling technology, and most importantly, helping our customers with some of the challenges that have come with this pandemic. Whether it was supporting systems for federal loan programs with partners or helping states get unemployment checks out or supporting the national Red Cross systems around the world handle the massive volume spike or helping HHS the CDC, and other health authorities around the world, or supporting over 100 clinical trials that were hurriedly stood up. We were there to help our customers, and I think we are much closer to them as a result. There are many, many, many more stories like this, and they all underscore how proud I am of our employees and customers as we're all actively engaged in the ongoing fight against COVID-19. In addition, we decided to provide training and certification on Oracle Cloud Infrastructure and Autonomous Database through Oracle University free of charge to all who wanted it. We saw a huge surge around the world in demand with hundreds of thousands of individuals across 150 countries being trained and certified on Oracle's latest technology. Now we entered Q4 with an enormous pipeline of transactional business. As the quarter progressed, we saw a drop off in deals, especially in industries most affected by the pandemic. As countries begin reopening their economies, many of these discussions have already resumed. Since these were not losses to competitors, we believe that most of this business will ultimately be booked. And while some customers have deferred projects, we're also rapidly building new pipeline with customers that are moving their on-premise workloads to the cloud. COVID-19 created challenges that forced companies to reconsider how they work in the cloud, including looking to us as an alternative to AWS and Azure. As we engaged with these customers, they found OCI was more performant than our competitors, more secure, less expensive, and easy to use, making OCI now a serious part of the infrastructure discussion. We are also seeing this on the application side of the business. As many customers entered the pandemic unprepared, and are now showing renewed interest in modern cloud applications with mobility, social, and machine learning built in. Moving to the numbers, I'll review our non-GAAP results using constant dollar rates. Unless I say otherwise, keep in mind for your USD model that the strengthening of the U.S. dollar in the quarter resulted in an unexpected currency headwind as there was a flight to quality, which is the U.S. dollar. The incremental currency headwind was more than $200 million to total revenue and two cents to earnings per share, both negatives. Total cloud services and license support revenues for the quarter were $6.8 billion, up 3% from last year, and accounted for 66% of total company revenue, up from 61% last year. GAAP application subscription revenues were $2.7 billion, up 3%, with Fusion Apps up 31%. Fusion ERP was up 35% and Fusion HCM was up 29%. NetSuite ERP was up 25% and Vertical SaaS was up 7%. GAAP infrastructure subscription revenues were 4.1 billion up 3%, with database subscription revenue up 6%, which is up from 5% last quarter. License revenues were $2 billion, down 21%, after being up 15% last Q4. All-in total revenues for the quarter were $10.4 billion, down 4%. As we saw the pandemic begin to take hold, we acted swiftly to lower our operating expenses by 8%. Non-GAAP operating income was $5.1 billion, down slightly from last year, and the operating margin was 49%, up 2% from last year. As a reminder, to take advantage of very favorable interest rates, We issued $20 billion in debt in the quarter, and the added interest expense, which lowered EPS by 3 cents, was not in my early March guidance. The non-GAAP tax rate for the quarter was 16.6, below our base tax rate of 20%, as a result of some discrete items. And EPS was $1.20 in U.S. dollars, up 3% in U.S. dollars, of 5% in constant currency. As I mentioned, currency had a negative 2 cent impact on EPS. The GAAP tax rate was 15.7, also a result of some discrete items, and GAAP EPS was 99 cents in U.S. dollars, down 8% in USD, and down 5% in constant currency. Now, for the full fiscal year, total cloud services and license support revenue was $27.4 billion, up 4%, and accounting for 70% of total company revenue, up from 68% last year. Total company revenue for the year was $39.1 billion, up slightly in constant currency. Non-GAAP EPS, was $3.85 in USD, up 9%, and up double digits for the third consecutive year at 11% in constant currency. The full year operating margin percentage was up slightly at 44%, and I expect we will see record margins in the coming years as our revenue growth accelerates and we benefit from greater scale in the cloud. Operating cash flow over the last four quarters was $13.1 billion. During Q4, we saw delays in customer payments due to the pandemic as some customers suffered financial hardships. We worked with those customers and we expect that these payments will be collected in full over the course of this fiscal year. Capital expenditures for the year were $1.6 billion and free cash flow over the last four quarters was $11.6 billion. We now have more than $43 billion in cash and marketable securities. The short-term deferred revenue balance is $8 billion. Now, that's down 3% in constant currency due to timing differences in customer payments, which were more pronounced this quarter because of COVID-19. But I want to remind you, gross deferred revenue was up 3% in constant currency. As we've said before, we're committed to returning value to our shareholders through technical innovation, strategic acquisitions, stock repurchases, prudent use of debt, and a dividend. This quarter, we repurchased nearly 107 million shares for a total of $5.2 billion. Over the last 12 months, we've repurchased 361 million shares for a total of $19.2 billion. Over the last 10 years, we have reduced the shares outstanding by nearly 40%. In addition, we have paid out dividends of 3.1 billion over the last 12 months, and the Board of Directors again declared a quarterly dividend of 24 cents per share. Now, before moving to guidance, I'd like to restate what I said on our Q2 and Q3 earnings call, which was that our business is expanding and our revenue is accelerating and our relationships with customers is broadening. But for the timing of the pandemic, we had every reason to believe that this momentum would have carried forward to Q4. And though delayed by a few months, we believe the pandemic has actually focused customers more clearly on the need for for the modern technology, which are uniquely at the core of Oracle's offerings. We are confident in our growth because our mix of business is becoming increasingly favorable. Our revenue is now clearly in one of three distinct groups, one growing, one stable, and one declining. What I see is that while overall revenue growth has averaged around 1% to 2% over the last few years, underneath the growing businesses have grown at a 30% compound annual growth rate. The declining businesses averaged almost double-digit declines, and our stable businesses were up 1% or 2%. We are now at a point where our growing businesses are now larger than our declining businesses. And this favorable shift will inevitably drive revenue acceleration going forward. Second, I believe our SaaS business momentum will increase as our very large installed base of application customers continue to move to the cloud. And as we take share from our on-premise competitors, SAP for one, that do not have a true SaaS offering. Our products are modern, secure, performant, mobile, and importantly, highly referenceable. As more of these ERP workloads move to the cloud, we believe that they will move to Oracle Fusion. Third, we have four decades' worth of Oracle database applications, which have only recently started to move to the cloud. These databases contain the most mission-critical and valuable information of our customers. Now, with autonomous database, they have a place to go where they get far better technology at a lower price. For those who care about security, performance, and cost, the autonomous database will be the standard that everyone else is measured against. The Autonomous Database runs on Oracle Cloud infrastructure in our public cloud and in a customer's own data center with Cloud at Customer. The Autonomous Database is without question our most significant database release and will absolutely drive revenue acceleration going forward as it grows. Lastly is the momentum in OCI that I've already mentioned. We're thrilled that once companies see our differentiated OCI technology, they become believers. This is evidenced by the fact that annualized consumption revenue for Gen 2 OCI grew over 140% in Q4. By the way, the ACR for autonomous database grew nearly 70% in Q4. These two are getting to be a large number. Across all these product categories, industry analysts are universally recognizing our technology innovation and leadership in the cloud. Pick your favorite independent publisher, whether it's Forrester, Gartner, or IDC, or any others, you will see Oracle in the upper right of every chart. In summary, it's the continuation of leading technologies, favorable mix shifts in our existing businesses, and higher growth rates from our growing businesses that give me the confidence that our revenue growth will accelerate this year. Now to the guidance. My guidance today is on a non-GAAP basis and in constant currency. Currency is extremely volatile, as you've all seen. And it is clear what happened in Q4. However, assuming current exchange rates remain the same as they are now, though I'm not projecting that, I'm just telling you, currency should have a negative 1% effect on total revenue and 1 cent negative effect on EPS in Q1. Total revenues are expected to grow from 0 to 2% in constant currency. And assuming a 1% currency headwind, total revenues are expected to grow from negative 1 to positive 1 in USD. Non-GAAP EPS in constant currency is expected to grow 5 to 9%, and between 85 and 89 cents in constant currency. And assuming a 1 cent headwind, non-GAAP EPS in USD is expected to grow between 4 and 8%. and be between 84 and 88 cents in USD. My EPS guidance for Q1 assumes a base tax rate of 20%. However, one-time tax events could cause actual tax rates for any given quarter to vary. But it's expected in normalizing for these one-time tax events, our tax rate will, in fact, average around 20%. Now, given the – I have taken into account as much as I can the uncertainty related to the pandemic. Now, I'm not going to be providing guidance for the entire fiscal year 2021, but as I said earlier, I have a high level of confidence that our revenue will accelerate as we move on past COVID-19. And with that, I'll turn it over to Larry for his comments.

Thank you, Sapra. This quarter we announced new customer relationships with Zoom and 8x8. They were great wins, but there were many others. And before I start listing the additional wins, I want to explain why we're winning. Oracle Cloud Infrastructure is the world's only second-generation autonomous cloud. Autonomous software technology, the Oracle Autonomous Database, Oracle Autonomous Linux, autonomy is the defining technology that separates our Gen 2 cloud from Amazon's, Microsoft's, and Google's Generation 1 cloud. Autonomous self-driving computer systems eliminate human labor and thus eliminate human error. There is nothing for humans to learn and nothing for humans to do. Eliminating human labor dramatically lowers the cost of running an autonomous system. Eliminating human error dramatically increases data security and system reliability. All of the big data losses at Amazon were caused by human error. There is no opportunity for any human error if your data is stored in an Oracle autonomous system. This is a very big deal. The Oracle Autonomous Database provisions itself, configures itself, encrypts the data itself, patches itself and updates itself, automatically scales itself up and down and continuously tunes itself as the database grows and user access patterns change. And it does all of those things while the system is running. There's no downtime required to patch. There's no downtime required to install a new version. There's no downtime required to double the number of processors that you're currently using or reduce the number of processors to half. It all happens while the system is running. Oracle Autonomous Linux is the world's only autonomous operating system. which provides 99.995% availability while maintaining itself with continuous security monitoring, continuous patching, and remediation while the system is running. Furthermore, soon, all the popular OCI services, compute, storage, etc., will be truly serverless and elastic. The other guys don't have this. The Oracle OCI will have elastic compute, elastic storage, all the popular things. We truly serverless elastic, scaling itself up and down automatically while you are running. So we keep the promise of the cloud where customers only pay for what you use. Quite often in other clouds, you have to reserve compute capacity. And even if you don't use it, you have to pay for it. That's not the case. That's less and less the case in the Oracle Autonomous Cloud. Okay, the Oracle Public Cloud now has 24 OCI Gen 2 regions live. Soon we will have more regions live than AWS, which is currently at a count of 25. We will this fiscal year add another 14 Gen 2 OCI regions, allowing more customers to run in a public cloud without compromising data locality or data sovereignty requirements. For customers wanting or needing to run their applications in their own data center, behind their own firewall, we uniquely offer Oracle Cloud at Customer, either for just the Oracle database or for all of our OCI cloud services, including our SaaS applications. None of the other cloud vendors have this kind of clouded customer offering. To summarize, Oracle's Gen2 autonomous, serverless, elastic cloud infrastructure delivers better performance, higher security at a much lower cost than AWS, Azure, or the Google Cloud. And that's why we won Zoom, and some of the other deals I'm about to tell you about. Okay, let's start with Zoom. Demand for Zoom services has increased almost 20 times since January. Zoom needed additional cloud capacity immediately. Within hours of the first Oracle deployment, OCI supported hundreds of thousands of simultaneous meeting participants. Usage has continued to ramp, where Oracle now supports millions of simultaneous meeting participants. Zoom selected OCI because of our advantages in price performance, scalability, reliability, and cloud security. Every day, our Zoom conferences move more than eight petabytes through the OCI network. That's an extraordinary amount of data. We've been able to scale and help Zoom scale as demand grows. Okay, another win in addition to Zoom, 8x8, a great example of our sales process. The customer began by moving some services to OCI for performance enhancements. 8x8 was very surprised by the extent of their performance gains by moving out of AWS, moving part of their system out of AWS and into OCI. They were so surprised by the performance gains they achieved and the cost savings they achieved that they decided to move all of their services out of AWS and into Oracle. Once OCI demonstrated much better performance at a much better price, that sealed the deal for 8x8 and its growing base of 20 million monthly active users. Another win, the Amani Information Technology and Communications Group, a three-year contract, They built a dedicated OCI Gen2 clouded customer data center in Oman, offering OCI services, OCI public cloud services, to all the different government agencies within Oman. This means they'll be able to have the full benefits of the public cloud, OCI Gen2 public cloud, again, without compromising their data locality or their data sovereignty requirements. Another win, Jefferies, the world's ninth largest investment firm, plans to move over 500 workloads to Oracle's Gen-G public cloud. Jefferies picked Oracle over both AWS and Azure. They are also using OCI to extend their Fusion HCM applications. Another win, General Authority of Civil Aviation in Saudi Arabia, clouded customer. In the customer's own words, the key factors that were considered when we chose Exadata Clouded Customer was cost reduction of approximately 50% while being in compliance with government requirements for data sovereignty. Additionally, with autonomous database on Exadata Clouded Customer, our team could save time and effort and focus on business innovation by leveraging its self-driving, self-securing, self-repairing characteristics of the Oracle Autonomous Database. Quest Diagnostics. Quest is the world leader in diagnostic testing, and they continue to invest in the Oracle Cloud to support the ongoing battle against the coronavirus pandemic. Quest expanded its current exudated cloud to customer environment so that the company could migrate its MyQuest portal in anticipation of dramatically increased COVID-19 antibody testing. Quest also upgraded its existing Exadata on-premises environment to the new Gen2 Exadata Clouded Customer to support both corporate and line of business business functions. Another win, Santander Bank. Santander is consolidating their databases on Oracle's Exadata Clouded Customer and adopting our autonomous database to support the bank's digital transformation. Another OCI win. TD Bank Group in Canada. TD Bank made a multi-year commitment to use Oracle's public cloud, including Oracle's Gen2 cloud infrastructure, along with Oracle SaaS, data integration, and autonomous data warehouse to move their financial reporting systems from an on-premise configuration to a public cloud deployment. Verizon Business Group, a four-year contract. Verizon has already moved over 25 mission and business critical workloads to the OCI Gen2 public cloud, serving its customers around the globe. These workloads process more than 200,000 plus IOPS, IOs per second, with 120 terabytes of data. Verizon uses the Oracle Cloud Infrastructure with Exadata Cloud Services including RAC and DataGuard and Verizon plans to dramatically increase its commitment to the Oracle public cloud and move more and more workloads over to Oracle. Another win, Cyber Reason, a four-year contract. Using the OCI public cloud to run its own SaaS platform to provide their customers with endpoint protection, response, and analytics as a service. Cyber Reason will be using Oracle's bare metal service plus the autonomous database to run their analytics. Another OCI win, a very large European auto manufacturer. This customer is looking for a highly elastic, high-performance compute environment in the cloud to reduce their capital cost and introduce deployment flexibility. They will run computational fluid dynamics to simulate car crashes in the OCI public cloud to support their car development, and they expect to scale up using many thousands of cores by the end of this year. Another win, SGS, formerly Society General, a three-year contract, moving multiple workloads to OCI Gen2 public cloud, including a 34,000-user e-business suite application, with the goal of lowering costs while improving security, reliability, and performance. This win has opened doors to the next phase of SGS transition to the public cloud, focused on pairing Microsoft Azure with Oracle's OCI Gen2 public cloud. Another win, Cinecor, three-year contract. They're migrating some of their production SaaS businesses to OCI, which enables them to shut down a number of their data centers. In May, they expanded their initial contract as they continued migrating existing and new SaaS environments to Oracle's cloud infrastructure. Cy1, a three-year contract. Cy1 is a Brazilian ISV that, again, has their own SaaS applications. After running on both AWS and the Oracle cloud, they found that Oracle's cloud gave their customers much better performance at a much lower cost. As a result, they are moving all of their workloads to the Oracle Cloud. Another one, another win for infrastructure, Manapuram Finance in India, a five-year contract. They decided to move entirely to the Oracle Public Cloud in our Mumbai Gen2 data center. with our newly launched hybrid Gen2, Hyderabad Gen2 data center as their disaster recovery site. And I'll stop with, and the last infrastructure win I'll talk about is Altair, a three-year contract, five times the size of their initial contract, and they're migrating more of their high-performance compute and commercial workloads to OCI. There are a lot more infrastructure deals in the fourth quarter. which was a spectacular quarter for OCI and infrastructure. But, you know, I don't have time to name them all. So right now I'm going to move on to cloud application wins. Currently, Oracle is the cloud ERP market and technology leader with over 7,100 Fusion ERP customers and nearly 22,000 NetSuite customers. We have taken a huge lead in the cloud ERP market because our largest competitor, SAP, never rewrote their ERP applications for the cloud. Gartner lists Fusion, Oracle Fusion, at the very top of their ERP ranking, with SAP in the lower half, listed with the lower half of competitors. This is a dramatic change from a few years ago. Workday has a cloud ERP system, but most of their successes come in HCM. And more and more customers these days are purchasing HCM as a part of an overall ERP purchase, an ERP decision. We've now seen our Fusion HCM growth rates as a result of the fact that HCM purchase decisions are now getting bundled with ERP purchase decisions. We've seen our HCM fusion growth rates surpass Workday's HCM growth rates. We are already by far the biggest cloud ERP player. And it looks like we're going to be able to leverage our advantage in ERP and our scale in ERP to also become the biggest cloud HCM player. Before I go on to the key ERP and HCM wins this quarter, I'd like to highlight a few Fusion customers that went live in Q4 during the pandemic. First was JP Morgan Chase. JP Morgan Chase in this past quarter went live in 100 countries with over 256,000 employees on Oracle Cloud HCM and recruiting. JP Morgan Chase has already moved over 2 million of their recruiting candidates to the new Oracle Cloud recruiting system. Maybe the most interesting one, Goldman Sachs. Goldman Sachs initially purchased Workday HCM, but their implementation was not successful. Thereafter, Goldman Sachs acquired Oracle Cloud HCM, and they went live a little over a month ago. It's interesting to note that both Gartner and Forrester Research rate Oracle HCM much higher than Workday. Don't believe me? Go look at the reports. They're online. Okay. So where we really distinguished ourselves, in addition to capabilities and all sorts of other things, was in customer satisfaction. Look at the Gartner report. Look at the Forrester report. Our customer sat rating is 5.0 right at the top. and Workday is right in the middle with 3.0 far behind us. Another company that went live during the pandemic was Mount Sinai Hospital and the ICANN School of Medicine. They went live with Oracle Cloud HCM amid the COVID-19 pandemic to support more than 26,000 frontline employees with more modern accessible tools that they could use at home. They replaced the 30-year-old HR and payroll system. All right. Those were go-lives that happened during the pandemic and I think are very interesting. Okay. We also added a lot of customers in ERP, in EPM, and in supply chain management. First one, KPM Netherlands bought Fusion ERP. They're going to start a complete back office transformation of nearly 2,000 applications going from multiple vendors ERP systems to Oracle Fusion ERP, standardizing an Oracle Fusion ERP. A large global networking company is leveraging Oracle's digital supply chain with a single data model to achieve end-to-end view of innovate to commercialize, manufacture to fulfill, and designed to recycle operations. Another large global insurance provider, where we beat Workday for an ERP replacement. Workday was the incumbent in HCM, but we were able to win the ERP deal, even though they were already there in HCM. The customer chose Oracle because of our accounting hub and our global capabilities. They also bought Fusion Procurement, and fusion project management. A large multinational conglomerate in Asia signed a $13 million ARR deal. We'll be rolling out ERP, supply chain management, HCM, to their over 200,000 employees and multiple subsidiaries worldwide in a wide-ranging program to modernize their corporate systems and remove tens of millions of dollars of operating costs. Another ERP win in the quarter was Westpac New Zealand. They'll be using Oracle Cloud ERP and Oracle Cloud EPM to reduce cost and complexity of their current environment while meeting local banking standards to operate independently from their parent in Australia. Okay, I'm going to stop doing ERP and supply chain wins. I'm going to move to HCM wins. Okay, first, we won Kroger. North America's largest grocery is replacing their SAP system with Fusion HCM. The key enablers that allowed us to win this deal were our capabilities around all of HCM can operate from the smartphone, AI, machine learning integrated into the application, chatbots integrated into HCM, and all of our modern SaaS applications and our Oracle voice digital assistant. You can do a lot of things, expense reporting, calling up reports, using a voice interface on your mobile phone makes a huge difference between us and our other cloud competitors is our Oracle voice digital assistant. Another HCM win was the Patronus in Malaysia. Once again, there we're replacing SAP with Fusion HCM, a very large US-managed healthcare company. They acquired Fusion HCM to replace 40 separate systems managing HR activities. These silos of disconnected data result in a loss of visibility of their most valuable resource, their enterprise workforce. Other significant HCM wins in the quarter were the United Nations, Norfolk County Council, the University of Texas MD Anderson Cancer Center. There are lots more, but I'm going to stop right here and turn it back over to Sapra.

Okay. Thank you, Larry.

If we could move to the Q&A portion of the call now.

All right. Ladies and gentlemen, if you'd like to ask a question, press star, then one on your telephone keypad. Our first question is going to come from the line of Brad Zelnick, Credit Suisse.

Thanks very much for taking my question. Larry, you talked about OCI quite a bit in your prepared remarks, but I don't think we can hear too much about the success you're having. In particular, the traction outside your typical customer base with wins like Zoom and 8x8 in the quarter, very impressive. Can you talk more about the impact that the pandemic might be having on your cloud infrastructure business and any change in your confidence level there based on what you're seeing?

Well, I think what we're seeing is now that some people are actually trying. The first group of people that are coming to OCI are people who are in the business of providing their application. I mean, it's great we have Verizon. We have end-user customers like Verizon, a very big success. They came to OCI. I think they tried a number of other clouds, and they found OCI is better. than other clouds. Zoom found that OCI was faster and cheaper, which makes a big deal in their business. They had to expand capacity, but they prefer paying less and getting more when they run on someone else's cloud. If your business is to build an application in the cloud and you're going to use someone else's cloud, we think OCI is where a lot of them are going to end up once they try our cloud. Not everyone believes, in fact, most people don't believe that Oracle has the fastest cloud and the lowest cost cloud. But when you come here and try it, that's exactly what you find out. And you're just seeing the beginning of that happening. And I think a bunch of people were shocked that Zoom picked Oracle. I think Zoom was shocked also. I think Zoom was shocked when they looked at the results after they moved their application to Oracle, and we were faster, much faster, and we were much less expensive, and we were more secure. So we think as people compare our cloud, our infrastructure, our second-generation infrastructure to AWS and Azure and the rest, they're going to pick our cloud. They just have to come look. as opposed to just assuming AWS is bigger, so they must be better. Azure is bigger, so they must be better. Once they look, we win. And I think as far as our end users are concerned, Verizon is a perfect example of someone who tried other clouds and then tried Oracle, found that Oracle could do a lot more for a lot less money than they could get done with AWS or Azure. We have a lot of customers. We've got to get them in. We've got to get them looking. We've got to get them trying our cloud and comparing that to the results of AWS. And we think we're going to get the lion's share of our database install base moving to our cloud. If I'm right, if that's right, our infrastructure cloud business is gigantic. We have hundreds of thousands of database customers, including all the largest companies and governments on the planet Earth.

Thank you very much, Larry.

Our next question is going to come from the line of Heather Bellini, Goldman Sachs.

Great. Thank you both very much for taking the question. I wanted to talk a little bit about the launch of cloud at customer Gen 2 that you mentioned with Autonomous Database and with the ability now – to be able to run autonomous on premise. Can you give us a sense for how you see this, you know, accelerating adoption of autonomous? And then I just was wondering, you know, when you factor in both now that it's available in the cloud, on OCI and on premise, how much of a tailwind, Zafra, is this factored into your view that you think that revenue growth could accelerate in fiscal year 21? Is this one of the biggest levers? to your estimations there. Thank you.

Let me just answer the end of that, and then, Larry, I think you should cover it in much more detail. I have not counted on that in my underlying assumptions, but I do believe that it is going to be incredibly successful. As our initial customers are using it, this is, I believe, a very, very important, very differentiating capability that only we have. Though I've not relied on it for the acceleration, I do believe that it will be an incredible tailwind for us, and not just this year. really for years to come. Anyway, Larry, why don't you comment on clouded customer and autonomous database?

Okay, so when we pivoted strongly to the cloud, we did a lot of database development for the public cloud. And the most conspicuous thing that came out of our development team was the autonomous database. But it only ran in a public cloud. And we had this huge installed base. We have this huge install base, hundreds of thousands of customers. Most of the world's valuable data is in an Oracle database. But that's sitting on premise. And the large bank wanted to use our latest technology, the Oracle Autonomous Database. The only place they could buy it was in the public cloud. They couldn't get it. They could not get it in their data center in clouded customer. We didn't have it. So for years, several years, our on-premise customers had no access to our latest database technology. Amazing. So now, after developing all of this for the public cloud and continuously improving the Oracle Autonomous Database, the Oracle Autonomous Transaction Processing System, the Oracle Autonomous Data Warehouse, we finally have gotten around to making it available to our on-premise customers via our clouded customer Exadata, Exadata clouded customer service offering. And so now all of our on-premise customers, big banks, big government agencies, smaller customers who want to upgrade their databases on-premise can now use clouded customer. And we make it very attractive for them to get access to the latest technology. We own, you know, there's no upfront capital cost. you know, to get this thing. It's just like buying public cloud except we put the database cloud, the clouded customer, in your data center in the form of a number of Exadata machines. And then we manage it for you across the network. It's attached to our public cloud and we manage it for you. Again, what's happened is for years our install-based on-premise customers had no access to our latest database technology. our best database technology, autonomous database, now all of a sudden they do. We think this is going to be a gigantic shift and a great product for us. We're very excited. And by the way, the other thing that's great about Gen 2 versus Gen 1 of Clouded Customer, Gen 2 Clouded Customer has been engineered to be amazingly easy to install and use. You kind of plug it in and it just works. We think it's an easy-to-use system. There's no capital up front to use this system. We think it's going to be attractive to all of our on-premise customers, large and small, and it will ease their transition from on-premise and into the public cloud during that long period of coexistence when you have your own data centers and you have a public cloud both operating together. We think it's going to be one of our biggest and hottest new products ever. Autonomous database, clouded customer.

Thank you. And our next question is going to come from the line of Sarah Hindley and Buller.

Great. Thank you, Larry and Safra, for taking my questions. And I'm really glad that everybody is safe and well. Definitely important right now. I'd like to pivot and focus on the applications business, especially, Safra, given your commentary earlier. around growing parts of the business getting larger than the shrinking parts. Can you elaborate a little bit on what trends you're seeing in application software? And perhaps in particular, I'm interested in knowing if you're seeing any accelerations in customer migrations from on-premise into your cloud. And just any color and insights would be greatly appreciated. Thank you so much.

Absolutely. We have a number of drivers in this business that basically is accelerating the adoption of our products. First of all, we have more and more referenceable customers, both small to very large, as you heard Larry talk about it. So we have many, many references, which makes it far easier to to convince new customers to go ahead and choose us. Secondly, we have a lot of success upgrading on-premise customers that use products that are on-premise with really no possible way to reach the cloud. And so we've been incredibly successful with the old Lawson base and all that. In addition, the e-business suite customers, which is a massive installed base, has only recently started to upgrade, and only about 6% of our installed base has upgraded to the cloud in absolute ERP. So though they've picked up, you know, pieces around financials, Now they're really starting, as they've built confidence, and especially as larger and larger customers have adopted Fusion ERP, many of them have just been waiting until they could do that. And one of the things, by the way, that was very important was the releases on the supply chain side of the business. Many of our customers are manufacturers. And they wanted to, they like having a suite. They wanted a full suite, of course, our financials and HCM. But in addition, they wanted a mature supply chain product. And now we have many references in supply chain, of course, including ourselves. And so the momentum has really increased. Now, part of that, by the way, is that once customers start with us, many of our customers, grow over time. So they'll start with some module and year over year, it is very common that they will grow their installation at least 20% with us. So we have a lot of different drivers to the relationship. So some adopt HCM, some take on more divisions, some roll in additional capabilities. And I'll tell you, this pandemic has actually been very, very interesting for some of them because they got one of the immediate benefits of being in the cloud, and that is for our HCM customers, we rolled out at no charge health and safety, which is a module in HCM. And in working with some partners, Many of our customers adopted it and to start using it so that they could better support their employees through this pandemic and so that they could assist them and help keep track of them and help them where necessary. Of course, nothing like that could have been possible on premise. And it's those kind of things where we can just roll out new capabilities, which is the big difference. between being on-premise but hosted like SAP and being actually in a software as a service model where new functionality can just be rolled out for you without you calling in a giant system integrator team to put it in. So we have a lot of momentum right now in this business.

Yeah, and I'd like to add what Zachary said. We rolled out the new module. That's something that Oracle made available in our cloud. But then our customers were able to access that new module at home. And the fact is all these cloud systems are accessible at home, obviously. They're accessible on your smartphone. So they're just much more accessible than the previous generation of technology. And that's made a huge difference that we're people are able to continue operating out of their homes. If you're an accountant and you're using an Oracle financial system, there's no reason to get in your car and drive to the office. You have the same exact tools sitting in your home office on your laptop computer.

Yeah, I mean, these capabilities are not only, you know, they're modern. They're mobile. You can get to them. But not only that, you can work with them by voice. totally modern UI, much more capable. I mean, it is literally night and day between 21st century technology, which came in incredibly handy during this pandemic, and the old 20th century stuff some of these customers are using. And that's why the moment they get started with us and build the confidence, they realize that this is very, very important technology. and critical for their success going forward. Thank you.

Thank you. That was very helpful. Thank you. And our last question for the day will come from the line of Mark Mordler, Sanford Bernstein.

Thank you, and I appreciate you have time to take my question. Sanford, my understanding was the company didn't furlough employees. They didn't lay anyone off. You treated your employees well. Your license sales were down a bit, and yet you beat big on margin. Can you give us some color on exactly what's driving such a big margin improvement? Thanks.

Well, I think you know that we have a very long history of being very careful about how we spend money. And during this pandemic, obviously, there were no people flying around. Only our essential workers. because only our essential employees that had to go in to somewhere did any kind of traveling at all. We had moved entirely to work from home, and so we didn't have T&E expenses. In addition, of course, our compensation expenses were down because of commissions. That's clear. And we really just tried to carefully... watch our spending while continuing to invest in our future. We're very, very optimistic about the strength of these products. I cannot say that enough. And as a result, we're also very optimistic about the capability of our field to kind of fan out and share this with our prospects. And so we want to make sure we have a very strong technical team in place and a very strong field. So we just did what are the reasonable, smart things to do. Everyone, the entire senior management team, Larry and I don't take the credit. It is really the credit of the entire management team that just got a lot more careful about extraneous spending, and we were able to bring this in.

I'd like to comment also. I'm going to add a little color to that. I totally agree with everything Safra said. I think we've always been actually pretty good about controlling our expenses, and this is another example where we executed very well there. just as important, maybe even more important, is the fact that our profitable businesses are getting bigger, while our less profitable businesses are getting smaller. So the mix, what Zach was talking about very early on in the call, we have some businesses that are in decline that we don't care much about. I mean, we don't care that the Spark servers are selling less than when we first bought Sun. You know, there are a bunch of businesses, we have storage systems, we have a number of businesses that are in decline, that were lower margin businesses, and we have a bunch of businesses that are on the rise, like Fusion HCM, like Fusion ERP, Fusion SCM, our infrastructure, you know, OCI Gen 2, autonomous databases. These are much higher profit margins So as some of our lower margin businesses get smaller and our higher margin businesses get bigger, it's really, you know, what's going on is a mix shift, a fundamental mix shift. And I think you should see margin expansion in good times and margin conservation in bad times. because of this mix change. I think the mix change is a very big deal and explains a lot of why, even though, if you look at Oracle by and large, over the last several years, someone will say, golly, I mean, their top line growth has not been very strong, but their bottom line growth has been spectacular. Well, they just must be cutting costs and cutting costs and cutting costs. That is not true. Our mix is changing. Our profitable businesses are getting bigger. Our less profitable businesses are getting smaller. That's allowing us to improve our profitability and hold on to our margins, even when the top line is challenged. I don't mean to take away anything from the team, which did a wonderful job of watching every penny and traveling. Obviously, we traveled less. We were in fewer hotels and all of those things. But it was really the combination of those two things, everything that Zafra outlined. in terms of how we managed our expenses, plus this mix change that had a big impact and allowed us to deliver an earnings beat in a very tough quarter. Thank you.

Thank you, Larry. A telephonic replay of this conference call will be available for 24 hours. Dial-in information can be found in the press release issued earlier today. Please call the Investor Relations Department with any follow-up questions from this call, and we look forward to speaking with you. Thank you again for joining us today. With that, I'll turn the call back to Holly for closing.

Thank you. Once again, we'd like to thank you for participating in today's Oracle Corker 4 2020 Earnings Conference call. You may now disconnect.