Oracle Corporation

Welcome to Oracle's fourth quarter 2021 earnings conference call. Now I'd like to turn today's call over to Ken Bond, Senior Vice President.

Thank you, Erica. Good afternoon, everyone, and welcome to Oracle's fourth quarter and fiscal year 2021 earnings conference call. A copy of the press release and financial tables, which includes a gap to non-gap reconciliation and other supplemental financial information can be viewed and downloaded from our investor relations website. Additionally, a list of many customers who purchased Oracle Cloud services or went live on Oracle Cloud recently will be available from our investor relations website as well. On the call today are Chairman and Chief Technology Officer Larry Ellison and CEO Safa Katz. As a reminder, today's discussion will include default-making statements, including predictions, expectations, estimates, or other information that might be considered forward-looking. Throughout today's discussion, we will present some important factors relating to our business, which may potentially affect these forward-looking statements. These forward-looking statements are also subject to risks and uncertainties that may cause actual results to differ materially from the statements being made today. As a result, we caution you in 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 these forward-looking statements in light of new information or future events. Before taking any questions, we'll begin with a few prepared remarks. And with that, I'll turn the call over to Safra.

Thanks, Ken. And good afternoon, everyone. We are again reporting earnings earlier than last year, and with Fusion ERP, we are now filing our quarterly and annual financial statements faster than any other company in the S&P 500. This is possible because of the highly automated and machine learning-enabled system that helps us complete the accounting of financial transactions much more quickly. As you can see, we had a fantastic quarter with revenue nearly $200 million above my guidance. Q4 is really a story of every product, every region, and every metric exceeding expectations. The credit for the excellent full-year results in the quarter goes to our global team of employees who supported our customers without interruption this past year. We were successful by continuing to deliver best-in-class products and services, both infrastructure and applications, to help our customers in their digital transformation. Many who reinvented themselves in real time because of the pandemic. Now, the growth rates we are reporting today are entirely organic, reflecting true non-position-related growth across our product portfolio. Total cloud services and life support revenue for the quarter was $7.4 billion, up 8% in U.S. dollars, 4% in constant currency, driven by fusion, Autonomous Database, and our Gen 2 OCI. Application subscription revenues were $3 billion, up 11% in U.S. dollars and 7% in constant currency. Our strategic back-office cloud applications now have an annualized revenue of $4.4 billion and grew 32% in constant currency for the quarter. including Fusion ERP, which was up 42%, NetSuite ERP up 22%, and Fusion HCM up 30%. Our back-office cloud application revenue is not only bigger than our nearest competitor, but also growing more than twice as fast. Infrastructure subscription revenues were $4.3 billion, up 6% in USD, up 2% in constant currency. Infrastructure cloud services now have an annualized revenue of more than $2.3 billion. OCI consumption revenue, which was up 8%. 103% in constant currency, autonomous database up 56%, and cloud and customer revenue up 50%. Database subscription revenues, including database support and database cloud services, were up 8% in USD, 4% in constant currency. Customers are adopting OCI because of its unique focus on performance and security at the most competitive price. the highly differentiated autonomous database, which was available there, and the flexibility of deploying Oracle Cloud both in our own data center, what we call public cloud, or behind our customer's firewall, cloud at customer. License revenues were $2 billion, up 9% in USD, 5% in constant currency USD. So all in, total revenues for the quarter were $11.2 billion, up 8% in USD, 4% in constant currency. Operating expenses were up 6% in constant currency this quarter as we made significant investments in our cloud business. And while you can see some of the ROI in FY21's revenue growth, we expect the most of the returns will be realized in FY22 and beyond. Non-GAAP operating income was $5.4 billion, up 6% in USD, and the operating margin was 49%. The non-GAAP tax rate for the quarter was 10.7 and below our base tax rate of 20 as a result of some discrete items that hit in the quarter. EPS was $1.54, up 29% in USD, and up 22% in constant currency. By the way, GAAP EPS was $1.37, up 39% in USD, 31% in constant currency. Now, for the full fiscal year, total cloud services and license support revenue was $28.7 billion, up 5% in USD, up 3% in constant currency. Total company revenues for the year were $40.5 billion, up 4% USD, 2% in constant currency. FY21 recurring cloud services and license support revenue as a percentage of total revenue now represents 71% of total company revenue, up from 70% last year, and we anticipate this trend to continue as cloud services grow and accelerate. Non-DAF EPS for the year was $4.67, up 21% in USD, up 18% in constant currency, marking the fourth consecutive year of double-digit earnings growth. The full-year operating margin percentage was 47%, actually our best results in seven years, and up 245 basis points from 44 last year. Operating cash flows over the last four quarters was a record $15.9 billion, up 21% in USD. Our free cash flows was also a record $13.8 billion, up 19% in USD, with capital expenditures of $2.1 billion during the year. For the quarter, operating cash flow was $4.8 billion, up 34% in USD, and free cash flow was $4.1 billion, up 30% from last year. as in the side, free cash flow would have been about $300 million lower as some capex targeted for Q4 was actually spent in the last two weeks, so in early June. We now have more than $46 billion in cash and marketable securities. The short-term deferred revenue balance was $8.8 billion, up 10% in U.S.C., 5% in constant currency. The remaining performance obligation or RPO balance is 41.3 billion, up 8% in constant currency due to strong bookings. Approximately 60% is expected to be recognized as revenue over the next 12 months. As you've heard me say many times before, we are committed to returning value to our shareholders through technical innovations, strategic acquisitions, stock repurchases, purchase of debt, and dividends. This quarter, we repurchased 107 million shares for a total of 8 billion. Over the last 12 months, we repurchased 329 million shares for a total of 21 billion. Over the last 10 years, we have reduced the shares outstanding by more than 44%. In addition, we paid out dividends of $3.1 billion over the last 12 months, and the Board of Directors declared a quarterly dividend of $0.32 per share. Now to the guidance. Let me first start with my confidence in the continuation of our revenue growth acceleration for fiscal year 2022. As I've said many times over the last two years, our overall revenue growth is continuing to accelerate as our fast-growing cloud business becomes a larger portion of our total revenue. I see total revenue for fiscal 2022 growing faster than fiscal 21 with constant currency revenue growth somewhere in mid-single digits. Given our increasing confidence in revenue growth and our unique and differentiated position in the market, we are going to invest back in the business at a greater rate so we can further accelerate the top line. We also see cloud as being fundamentally a more profitable business compared to on-premise, And as everyone knows, our annual non-GAAP margins of 47%, and that's what we run the business at, are in fact the highest non-GAAP margins of all of our competitors. And we believe that now is the right time to increase our investment to capture market share. As such, we expect to roughly double our cloud cap expense in FY 2022. to nearly 4 billion. We are confident that the increased return in the cloud business more than justifies this increased investment and our margins will expand over time. Let me now turn to my guidance for Q1. I'll review this on a non-GAAP basis and assuming currency exchange rates remain the same as they are now. Currency should be about 2% to 3% positive on total revenue and 3 cents positive on EPS in Q1. However, currency fluctuates and the actual impact could be different. Total revenues for Q1 are expected to grow from 3% to 5% in USD and are expected to grow 1% to 3% in constant currency. Cloud service and license support revenue growth for Q1 will be about the same as Q4 at 4% in constant currency and then climb through the year. As a result of the increased investment in the quarter, non-GAAP EPS in USD is expected to grow between 2% and 6% and go between $0.94 and $0.98. in usc non-gap eps growth in constant currency is expected to be anywhere from negative to positive two and be between nine percent 91 and 95 cents in constant currency now my eps guidance assumes a base tax rate of 19 percent however one-time events could cause actual rates For any given quarter to vary, but I expect to normalize into these one-time events, our tax rate will average around 19 or so. Finally, we want to thank our employees around the world for working so hard and staying focused on our customers and partners during the pandemic. And we also want to send particular thanks and warmest wishes to our employees in COVID hotspots who've been hit particularly hard. months and with whom we have been working very hard to support them, including providing vaccinations. We just want to thank all of you and congratulate you all on a successful year and year end. You have all been remarkable, so thank you. And with that, I'll turn it over to Larry for his comments.

Thanks, Tapa, and great job. Your team delivered a spectacular Q4. Clearly, our strategy to develop cloud applications with cloud infrastructure is now beginning to drive top-line revenue growth to go along with years of consistent double-digit earnings per share growth. Our strategy is as easy to explain as it is technically challenging to implement. That's a good thing. If it wasn't hard to do, others would be able to do it. Our strategy in applications depends on Oracle becoming the world's largest provider of cloud ERP systems. Then building upon that strong ERP foundation, we can expand into manufacturing, CRM, and industry-specific applications. We are successfully executing this strategy. Oracle Fusion and NetSuite are now the world's two most popular cloud ERP systems. SAP, the leader in on-premise ERP, never rewrote their ERP system for the cloud. This has caused hundreds of customers to abandon SAP and migrate to Oracle Fusion ERP. That's already happened. But over the coming months, Several more major banks and utilities and a lot of other companies will complete their Oracle Fusion implementation projects and go live on Fusion ERP. Oracle is taking massive amounts of share away from SAP ERP. It's crucial to our future. While our Fusion and NetSuite has long been growing, we have also developed a complete new generation of cloud application suites. Our new manufacturing systems fully support and manage automated robotic factories. No one else does that. Our new cloud CRM applications help you sell more by fully automating internet advertising, lead generation, and qualification. Nobody else does that. And we're launching cloud application suites for two new industries, healthcare and state and local government. Our healthcare initiative is an outgrowth of the national public health management systems that we built to manage the COVID-19 vaccine clinical trials and vaccine distribution in the United States and in other countries around the world. In summary, our cloud application portfolio is more complete than other app vendors and better integrated, because almost all of our applications were developed internally, not acquired. Our infrastructure strategy depends on AI technology, specifically neural networks and machine learning, that we use to develop second-generation autonomous cloud services, such as the Oracle Autonomous Database, the Oracle Autonomous Linux operating system, and an array of autonomous cybersecurity defense bots that automatically identify and neutralize cyber attacks. All of Oracle's cloud applications then run within the defensive perimeter of Oracle's autonomous cloud infrastructure, the most reliable and secure platform in the world. And that's increasingly important in a world plagued by cyber warfare, data theft, and ransomware. Oracle's Autonomous Database and other autonomous services eliminate human labor. No human labor means no human error or opportunity for human mischief. Economy makes computer systems and cars Much safer and more reliable. The Oracle Autonomous Database offers 99.995% availability. That means only a few minutes of downtime a year. And we have zero downtime security patching and upgrades. Available today for infrastructure and very soon available for all of our applications. Economics is also important. OCI has by far the best cost performance of any infrastructure hyperscaler. That's why so many service providers like Zoom have chosen to expand into OCI. OCI's cost performance is continuously getting better. Our new version of MySQL, the world's most popular open source database, just got between 10 and 100 times faster. And when you charge by the minute, every minute you don't use is money saved. Our new ARM microprocessors from technology partner Ampere delivers much better compute cost performance than either Intel or AMD, and by far the lowest energy usage of any server microprocessor in the world. So our latest infrastructure technologies are good for our applications, good for your budget, good for the health of the planet, and very good for Oracle's future. Back to you, Seth.

Thank you, Larry. Erica, if you could please now prepare the audience to poll for questions.

Ladies and gentlemen, to ask a question, please press star 1 on your telephone keypad. To withdraw your question, press the pound key. Our first question comes from Mark Modler with Bernstein Research.

Thank you, and congratulations to the team on a clean, nice quarter. I'd like to try to get some more color on the drivers of the success of the Oracle Cloud ERP solution. Can you give us some more sense of how much of Oracle Fusion ERP is from new Oracle ERP customers? How much is international versus the U.S.? ? How much is large enterprise? Where's the sweet spot? Any color you can give to get a sense of what's really driving the growth and how much of that is new versus existing customers would be very helpful.

Yeah, this is Larry. There are more new customers. than upgrades from on-premise ERP with Oracle Fusion. So it's probably about 60-40, or in the 60s, it's probably not quite two-to-one new customers, but a majority of the business is coming from new customers. We're also upgrading our install base of the e-business suite and PeopleSoft and J.D. Edwards to Fusion. But, again, more revenue is coming from new customers, customers, in-fore customers, people like that, than coming from our on-premise install base. So that's a really good trend. And we think that trend is actually going to accelerate in favor of new customers because the SAP migration phenomena is relatively recent in the last 12 months. Over the last two years, but it's really accelerating now in the last 12 months. So we think that's going to hold. So another way to look at it is people migrate to Oracle, Fusion, ERP, and smaller companies migrate to NetSuite ERP. These are both enormous businesses. Fusion ERP is certainly much bigger than $10 billion. And NetSuite is bigger than $10 billion. Fusion is probably bigger than $20 billion as these businesses mature.

Yeah, and as far as where it's happening, I have to tell you, it is so broad-based. It is a worldwide phenomena for us. Our, you know, Fusion, NetSuite are just chugging along. It was an incredible experience. an incredible Q4, and Q1 looks enormous. So imagine bookings are way up, and there's just a lot of success. We have so many customers that have gone live. So we have references from some of the largest companies in the world to really small or medium-sized companies that it's fantastic. pretty consistent almost any prospect can find many companies just like it already being incredibly successful and i think that frankly uh the pandemic taught many of our prospects and customers that moving quickly is really required these days I think that folks used to think moving quickly is risky. I think they really saw that they had to move to much more modern, flexible digital businesses and that we are the destination for them for the back office, without a doubt.

Thank you. That's very helpful. I really do appreciate it.

I'd like to add one thing. I'd like to add one thing. We almost never lose a competitive ERP deal in the cloud. Virtually never.

And our next question is from Keith Wise with Morgan Stanley.

Excellent. Thank you guys for taking the questions. And congratulations on another year of 20% plus earnings growth. And, frankly, nice to see the stock starting to reflect the durability of earnings growth you guys have seen over the past couple of years. So it's nice to see that. I wanted to dig in a little bit on the infrastructure side of the equation, in particular OCI. Another quarter of, I think you said, 103% growth in OCI consumption. Can you dig in a little bit on sort of what are the workloads that are being done on OCI? Is this just all Oracle database workloads? We know there's a lot of those out there that just run so well on OCI, or is there a broader perspective of the big workloads that guys are bringing over? Not looking for commentary on any specific customer, but just broadly, what do you see in this space? Where do you guys do well? Where do you win with OCI?

Okay, I mean, it's really easy to remember. About half of its database, half of it is everything else. So, on the everything else side, I mean, the database you understand. They're lifting and shifting existing database workloads and developing new Oracle database workloads on OCI. The other thing varies from things like Zoom, who have moved over, but also in simulations. And we're very, very good at running simulation software. So a large number of car companies have moved all of their craft simulations to the Oracle Cloud because we do it faster and cheaper than any other cloud. So... We have actually a pretty balanced portfolio right now where we have the Oracle database contributing to half of the workloads running in OCI, and the other half is a variety of new customers doing new applications, not database-related.

Yeah, and Keith, thank you. First of all, thank you for… The reality is that any customer that is really focused on performance, security, like Larry mentioned, and cost, which happens to show up in many, many workloads, one of the areas we're doing particularly well are ISVs, who are obviously experts at running their workloads. They're in the business, and they are coming to us extensively because they're really studying the benefits that we bring them. And, of course, as I mentioned, and as we never stop mentioning, security with what's going on these days. you really have to be in a cloud that is basically obsessed with security while still giving you incredible performance at lower costs. I mean, once we are given a try, what happens is a workload comes, one workload comes, and it's usually followed by many others. And so we've got a lot of momentum, let's say.

I want to emphasize one thing. I've said it, but I'm going to say it again. There are new Oracle workloads being developed, especially in the area of Jamil Mix. where there have been a number of new databases moved to Oracle and OCI that track things like the genetic variants of COVID-19. But there are a number of these things, and you'll see a whole series of announcements coming out where we've moved aggressively into healthcare, and one of the big new applications for our database is tracking the genomics of pathogens. And those databases are being developed right on Oracle Autonomous Database from scratch.

Outstanding. That's very clever, guys. Thank you.

Our next question comes from Derek Wood with Cowan & Company.

Great. Thanks for taking my questions, and congrats as well on a strong quarter. I've got one for Safra and one for Larry. Zafra, in the past, you've talked about the potential revenue opportunity for the app space if you were to migrate everybody to SaaS. But I wanted to ask about the database side and, in particular, Exadata. Can you give us a sense of what the revenue potential or uplift could be if you shifted all Exadata customers to clouded customer and how you feel about the strength of those motions heading into the new fiscal year? And then for Larry, as you guys push to drive adoption of autonomous database, should we think of clouded customer being the biggest vehicle for adoption, or what routes to market do you see working best?

Okay, let me get it started, and then Larry can finish. So, Derek, I'm glad you asked, because when customers move from running their own dozen or hundred Exadata's, When it's time for a refresh or a new set, we prefer that they go to cloud a customer or have a dedicated region. However, just so that you know, since you all focus on the numbers, you have to understand that when we sell hardware regular way, we recognize all that revenue once it's delivered, all that hardware is delivered. But when we install clouded customer, exudated clouded customer, or dedicated region, we don't recognize that revenue up front. And you don't even see that that is all happening right now in our income statement, and yet we're still growing. So as a general matter, first of all, it is much – even though – We believe we make around three times, maybe more, in revenue in the case of clouded customer versus just selling the hardware. It can be anywhere from three to five times. The customer actually ends up spending less because we manage revenue. their entire estate. We update their databases, et cetera, depending on what services they're using. And they get the benefit of always having capacity, always having the most up-to-date system, the most secure system, and patched and fully managed by us. So though ultimately they give us significantly more money, three to five times as much, In fact, they end up spending much less to maintain that estate. So it's kind of a win-win because we're, you know, much more efficient, fully automated, and saves them the immense amount of labor it takes to run these very critical production systems. Okay, I guess Larry's question, what was it again, Larry? Jack?

It was your autonomous database, and what kind of was the route to market to drive adoption? Is cloud a customer really the biggest vehicle, or are there other routes that are working well too?

Well, autonomous database only runs in the cloud. It does not run on chemists. It doesn't run on even the extra data appliance. It runs on customer or public cloud. So right now the public cloud is the most popular route for autonomous database, and clouded customer is becoming more popular as people scale up. But right now the most popular way to use autonomous database is in the OCI public cloud. Great, thank you.

Our next question is from Kirk Maturne with Evercore ISI.

Thanks very much, and thanks for taking the question. I was wondering, Stafford, could you just talk about sort of the performance in Europe this quarter? It looks like it bounced back nicely, and I guess along those same lines, can you just talk about cloud adoption on sort of a geographic basis, maybe what you're seeing? I assume the U.S. is probably leading the charge, but what you're seeing in other regions just following maybe close behind it?

Sure. So, first of all, I have two new leaders in Europe, Middle East, Africa. I have a very refreshed and new and really successful management team in Europe, and they are pretty much firing on all cylinders. It is extremely broad throughout Europe, Middle East, you know, all of the NIA. I have to tell you, incredible strength worldwide. Latin America doing phenomenally. Japan doing phenomenally. As a result, J-PAC doing very, very well. And, of course, led... by North America. I have to tell you, it's been an amazing year. It was a phenomenal quarter, but truly an amazing year worldwide. And I'm more than satisfied. I am delighted by the results of the team. And, you know, for me, this was my first full year with the field. So I, you know, I really applaud the team for doing a spectacular job worldwide.

Our final question comes from Arima Lindstrom with Barclays.

Hey, thanks for squeezing me in. The one thing that was interesting that we didn't really talk that much about is your RPO and RPO growth. Can you talk to that again? Because the growth there is actually even better than I see on the revenue line, and that to me suggests that this wasn't just Q4. It looks like things are coming together growth-based in the coming quarters as well. Thank you.

Yes, Ramu, you are so right. Q4, but really, it's just coming together all around. The RPO, I'm glad you – really, really strong bookings are – were truly enormous. Obviously, they don't show up in the income statement right away, but they – You know, the future is just so positive, and you might have heard me. I was hinting to that in my comments, and one of the reasons we're so comfortable leaning into our investment because we really want to make sure we've got the capacity to take on the enormous amount of bookings that are flying in and that both we're contracting this, during the year and are going online, and so will be recognized over this next year and beyond. But there is just an enormous backlog for us of customers that are going live and that will start consuming, and we're very optimistic. So thank you so much for asking, and I'm glad you noticed that.

Thank you. Okay, go ahead. Thank you, Safra. If there are any questions coming out of this call, please feel free to call the Investor Rations hotline. Otherwise, I'll turn the call back to Erica for closing.

Thank you for joining today's Oracle's fourth quarter 2021 earnings conference call. We appreciate your participation. You may now disconnect.