Oracle Corporation

Welcome to Oracle's first quarter 2022 earnings conference call. Now I'd like to turn the call over to Ken Bond, Senior Vice President.

Thank you, Erica. Good afternoon, everyone, and welcome to Oracle's first quarter fiscal year 2022 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 the Investor Relations website following this call. 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 a complete discussion of these factors and other risks that may affect our future results or the market price of our stock. And finally, we're 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 a great quarter as total revenue was $100 million above the midpoint of my constant currency guidance. without performance coming from all parts of our business. EPS was also very strong and was $0.08 above the midpoint of my constant currency guidance. As the dollar strengthened from when I gave guidance, and it strengthened significantly, we didn't get the benefit we would have gotten had it stayed at the same level throughout the quarter. Now, from here on, I'll review our non-GAAP results using constant dollar growth rates, unless I say otherwise. So total cloud services and license support revenues for the quarter were $7.4 billion, up 6% in USD, up 5% in constant currency, and accounted for 76% of total company revenue. Total cloud revenues are now at an annualized revenue of $10 billion, with an accelerating growth rate that we expect will exit the fiscal year in the mid-20s. GAAP application subscription revenues were $3 billion, up 7%, with Fusion Apps up 26% in USD and 24% in constant currency. Our strategic back office applications grew 25% in constant currency, including Fusion ERP, up 30%, and NetSuite ERP, up 26%. GAP infrastructure subscription revenues were 4.3 billion, up 3%. And excluding legacy hosting services, infrastructure cloud services grew in the mid 30s, and we saw triple digit booking growth this quarter. So I expect the infrastructure revenue growth will ramp higher through the fiscal year. OCI consumption revenue, which includes autonomous database, was up 80% in constant currency, and clouded customer revenue was up 44%. Database subscription revenues, including database support and database cloud services, were up 6% in USD, up 5% in constant currency, and that's up from 4% last quarter. License revenues were $813 million, down 8% after a tough compare from last year's Q1. So all in, total revenues for the quarter were $9.7 billion, up 4% in USD, up 2% in constant currency. Operating expenses were up 3% this quarter. The gross margin for cloud services and license support was 84%, and the gross profit dollars grew 2%. I expect the full-year growth in gross profit dollars for cloud services and licensed support will be similar to last year. Non-GAAP operating income was $4.3 billion, up 2% from last year, and the operating margin was 45%. The non-GAAP tax rate for the quarter was 18%, slightly below our base tax rate of 19%, and earnings per share with $1.03 in U.S. dollars up 11% in USD and up 9% in constant currency. As a result of some discrete items, the GAAP tax rate was 8.4% and GAAP EPS was 86 cents in U.S. dollars, which was up 19% in U.S. dollars and up 16% in constant currency. Operating cash flow for the last four quarters was $15.3 billion, up 17% in USD, and our free cash flow over the same period was $12.6 billion, up 9% in USD, with capital expenditures of $2.8 billion. Also over the same period, CapEx for Q1 alone was $1.1 billion. We now have more than $39 billion in cash and marketable securities. The short-term deferred revenue balance is $10 billion, up 1% from a year ago due to timing differences in customer payments, but with gross deferred revenue up 5% in constant currency. The remaining performance obligation or RPO, our balance is $38.7 billion, up 10% in constant currency due to strong bookings. Approximately 60% is expected to be recognized as revenue over the next 12 months. As we've said many times before, we're committed to returning value to our shareholders through technical innovation and strategic acquisitions, stock repurchases, prudent use of debt, and a dividend. This quarter, we repurchased 94 million shares for a total of $8 billion. And over the last 10 years, we have reduced the shares outstanding by 46%, and an average price that's about half the current share price. In addition, we paid out dividends of 3.3%. $2 billion over the last 12 months, and the board of directors declared a quarterly dividend of $0.32 per share. Now to guidance, what you're all waiting for. I remain highly confident that fiscal year 22 revenue growth will accelerate because our fast-growing cloud businesses are becoming a larger portion of our total revenue. I see total revenue growth for fiscal year 2022, which is the one we're in, somewhere in the mid-single digits in constant currency and accelerating. Cloud is fundamentally a more profitable business compared to on-premise, and as we look ahead to next year, we expect company operating margins will be the same or better than pre-pandemic levels. Let me now turn to my guidance for Q2. And I'll review this on a non-GAAP basis. Assuming currency exchange rates remain the same as they are now, currency should have a very minor positive effect on total revenue and EPS in Q2. Total revenue for Q2 are expected to grow between 3% to 5% in both USD and constant currency. Cloud service and license support revenue for Q2 are expected to grow more than 5% in both USD and constant currency and then climb higher through the second half of the fiscal year. Non-GAAP EPS for Q2 is expected to grow between 2% and 6% in both USD and constant currency and be between $1.09 and $1.13. My EPS guidance for Q2 assumes a base rate of 19%. However, one-time tax events could cause actual tax rates for any given quarter to vary both up and down. But I expect that in normalizing for these one-time tax events, our non-GAAP tax rate will average around 19% or so. And with that, I'll turn it over to Larry for his comments.

Thank you, Sasha. Oracle's cloud business infrastructure plus applications has rapidly grown to $10 billion a year. Oracle and NetSuite were pioneers in cloud applications. Oracle and NetSuite being the very first cloud company of any kind. Several years later, Amazon launched. the very first cloud infrastructure company. Oracle Fusion ERP has over 8,000 cloud customers. NetSuite ERP has over 28,000 cloud applications customers. Oracle is the overwhelming market leader in the global cloud ERP market. Oracle Cloud ERP is currently used by many of the largest, most complex Companies on Earth. This past quarter in Q1, a company I couldn't name until now, a major portion of Bank of America went live on Oracle Fusion ERP, consolidating ledgers in 33 separate countries into one global cloud ledger. Also in Q1, another huge bank, Macquarie, the largest investment bank in Australia, went live with Oracle Fusion ERP. Also in Q1, Vanguard, the largest global mutual fund provider, went live with Oracle Fusion ERP. That's just in Q1. Oracle Fusion is building a very strong position in the world's largest financial services company. HSBC, Bank New York Mellon, JPMorgan Chase, they are all live on Oracle's Fusion applications. We have started working with our strategic partners in banking to develop a new generation of cloud B2B financing and payment systems. There are things you can do in the cloud you could never do on-premise. There are opportunities in the cloud if you are the largest ERP supplier. There are opportunities to go into new businesses, like financing and payments, with banking partners that would have been impossible with the old on-premise systems, and those are opportunities we are aggressively pursuing with the world's money center banks. Banking and healthcare will be Oracle's two largest verticals. going forward. Speaking of healthcare, Humana was an important Fusion ERP win in Q1. In the infrastructure part of our cloud business, we continue to innovate in several technical areas. We have made great progress and we are now on our way into the big four global hyperscalers And I'll give you a list of those in case you don't know. There are Amazon, Microsoft, Oracle, and Google. Note the order. I was not the one who sorted that list. Oracle has come a long way in the cloud infrastructure business. Our technology is getting really good and very competitive. And, of course, we continue to deliver breakthrough innovations in areas where we have long been strongest, like databases. The Oracle database remains unrivaled in running the world's biggest and most critical systems. And our other database, the open source system MySQL, is now on a new generation. And it now includes an ultra high performance in memory query processor called heatwave. Plus a new set of management tools called the autopilot. Amazon's version of MySQL again, MySQL is an open source database, anyone can have it. Amazon took a version of MySQL renamed it Aurora, and put it up in AWS. Now, The open source version of MySQL, the old version of MySQL, pre-HeatWave, is very, very slow at query processing. In fact, the way you use Aurora, typically in Amazon over the years, is you do your transaction processing in Aurora, also known as MySQL. And then when you do your query processing, you moved your data out of Amazon's MySQL called Aurora and put into a thing called RedShift. a data warehouse system from Amazon. Recently, Snowflake has come up with a data warehouse that runs at AWS. And Snowflake is competing quite quite effectively against Redshift. Because Snowflake runs on multiple clouds. And Snowflake like Redshift is way faster at queries than the old MySQL or Aurora. Okay, So Oracle on News introduces this new version of MySQL, this new generation of MySQL that we eat with. And the customer reaction has been stupendous, simply for the reason that over and over again, they measure Oracle's MySQL to be 100 times faster than Amazon's Aurora for query processing. Now, this was actually not unexpected. The old MySQL, which is Aurora, that's what Aurora is, the old MySQL, it's terrible for query processing. What was unexpected is that Oracle MySQL proved to be more than 10 times faster than Amazon Redshift or Snowflake for query processing. So suddenly there's one database that you can do transaction, one open source database, you can do transaction processing on, MySQL with HeatWave. And that same database, MySQL with HeatWave, is the fastest place to run your queries. So you don't need to move your data into Redshift or Snowflake anymore just to do queries. This has excited so many customers that they asked us over and over again, we made it available this quarter, Oracle's MySQL with HeatWave is available at the Oracle public cloud, but they asked if we would make it available on other public clouds. And we thought, you know, if that's what our customers want, that's what we're going to do. So we plan to make Oracle MySQL with HeatWave available on other public clouds in addition to the Oracle public cloud and compete aggressively where we have huge technical advantages over Amazon Aurora, Amazon Redshift, And perhaps most interestingly, huge technical advantages, performance and cost over Snowflake. I'll turn it back to Safra.

Thanks, Larry. Ken, I think we're ready to take questions.

Yes, absolutely. Erica, if you could please prepare the audience for questions, please.

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 with Barclays.

Thank you, and congrats from me as well, and especially on the RPO disclosure and growth there. My question is around Fusion and NetSuite. We obviously are in a somewhat recovery scenario, and I'm looking at your professional services as well, which is kind of very strong there. Can you talk a little bit about what you're seeing there in terms of people wanting to do, now that they're coming out of the pandemic, more around digital transformation, and hence you had actually an extra boost on demand despite what you saw already beforehand? Or how do we have to think about the dynamic there? Thank you.

Ramo, maybe I'll start and then Larry can add in. I think that one of the things that's become incredibly obvious during this pandemic is that companies that have closer digital relationships with their customers, their employees, and their suppliers are doing much better than those that don't. and the work from home and all the data that capabilities, whether it's mobile or otherwise, once you have that implemented, your ability to adapt to changing business situations is so much better if you've moved to the cloud. And also, capabilities that you may need can be supplied by a vendor like ourselves where, for example, as we've discussed, we rolled out health and safety to our HCM customers so they could better work with their employees and monitor and advise them regarding COVID. And there's no question that digital transformation is the top goal of companies, and those companies that had been delaying or moving slowly have brand new urgency on it. And, of course, because we are ranked, and I think it's our third year in a row, in the top right-hand quadrant on Gartner, really with no one even close to us, we are the number one choice for moving to Fusion ERP. and other back office applications. So for us, I have to say that there's just incredible, incredible momentum and commitment from prospects and customers and for companies who have been on premise either with our products or historically with SAP where they just can't continue like they did.

Yeah, I'll add your question about services. We have pretty much made the migration away from on-premise implementations, where all of our staff is focused on cloud implementations. And during that transition, every time we go through one of these transitions, it looks like something isn't growing, or worse yet, something is shrinking. Well, in this case, the on-premise stuff went down until it almost went away. And basically, all of the implementation services you see for applications are cloud implementations. We've now made the migration, and that should just grow steadily as demand for those systems increases. We really don't have a lot of competition. That's the understatement of the year in cloud ERP. I'd love to know who the competitors are. SAP doesn't have a product. You know, we're in a competition with SAP right now, and we've just found out we're a vendor of choice. And their big thing was, well, SAP doesn't have a cloud product. They have hosting. They're willing to put a custom computer in Amazon and just build a specialized version for the customer. That's not the cloud. We update our applications every three months, the entire fleet. of 8,000 Fusion customers are updated every three months. The entire fleet of 28,000 NetSuite customers are updated every six months. You get SAP, they install it, and then they probably will update it again five years from now. It's an on-premise system. They don't have a cloud system. We're winning every deal against them, every one. And we're taking a lot of their customers away. Okay, thank you.

Our next question comes from Mark Modler with Stanford Bernstein.

Thank you very much for taking my questions, and congratulations on the size and strength of the IAS plus SAS cloud. OCI Gen 2 passed. Google GCP and the Gartner IAS passed feature functionality ranking this month. Let me ask, is the functionality checkbox enough to capture markets or do you believe that customers fundamentally view OCI different than AWS, Azure, and GCP, and why? Thanks.

Well, I think the big question was, I think the big issue that remains open about Oracle, I would say it probably still remains open about Oracle, is can Oracle compete with database against Amazon? It's an interesting question. Because Amazon doesn't really have it. Well, Amazon has like 13 separate databases. We do everything in a single database. We don't think an application should talk to five or six separate databases. We think it's a very risky security architecture. But the question is, Amazon's the big leader in cloud. We're the big leader in databases. If forced to choose, will they pick the Amazon cloud and a database other than the Oracle database? Or are they willing to move to migrate their Oracle applications to the Oracle cloud to get all the security and performance advantages of the Oracle database? That's been the big question out there. And was our cloud good enough to compete with Amazon and Google and Microsoft? And I think we have answered those questions. It's not only good enough to compete, in many cases it's much better for security, for performance, for reliability, for cost, we're cheaper. In fact, one of the reasons we have such a big ISB business and so many people have left Amazon and come to the Oracle Cloud was because we cost less. So we have significant cost advantages. And I think this is another big step to proving that the Oracle Cloud is part of the big four. It's not a big three, it's a big four. I'm not including the Chinese players because they're regional, not global. I'm counting the Gartner sequence, and the Gartner sequence is Amazon, Microsoft, Oracle, Google. And if we're in the big four, and virtually every important database application on Earth runs, I mean, not everyone, but the vast majority, run on the Oracle database. If those migrate to the Oracle Cloud, we have a very, very large business. And we're seeing people moving more and more things to the Oracle Cloud now, and this Gartner report will just help move that along quite nicely.

Thank you. I appreciate it.

But, by the way, it's not just a Gartner report. If they come and look and they run, if they do a comparison, a straight-up comparison, us, Google, us, Amazon, they test the application in both places, we win all of those. It's when they don't come and look that we have a problem.

Thank you, Larry. Erica, next question, please.

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

Great. Thanks for taking my question. Safra, nice job at accelerating recurring revenue growth while still growing operating income in Q1. Last quarter, you had alluded to the fiscal 22 being more of an investment year for you guys. Can you just remind us how you're thinking about balancing top line growth versus operating income growth or operating margins for the fiscal year? and maybe touch on where you want to be adding more investments to help with accelerating growth, either from a geo perspective or a product go-to-market standpoint?

Well, you and your colleagues have been following Oracle for a long time, and you know that when we talk about investing, we still focus on increasing profitability. Okay, we're not like many of these other companies that when they invest, they lose money or they don't make more money. We will make more money this year while investing and accelerating than we did before. So that's our expectation is we don't have to pick. We've never believed we have to pick because we have differentiated products. that are very high value. You know how we run the company. We don't waste money. We spend it on things that bring returns, and we're very careful about that. But we have so much demand worldwide right now for really our cloud product lines pretty much across the board. whether it's our database services, our clouded customer, our OCI Gen 2, our fusion products. It's just such a great time that even though we're going to invest more, we will make more. And so we just don't think you have to pick one or the other. It's just a matter of this is an important time for us to invest. but we're going to make more money.

Yeah, I'd like to just second that with an example in the past, recent history, where when we bought NetSuite, we considered NetSuite strategic. We thought that this was a company that should be growing even faster than it was independently as a part of Oracle. And so we made a number of investments in NetSuite, and we've seen their growth. NetSuite's gotten bigger, obviously, but their growth rate has increased. And we've invested, but we've made more money, and we're growing faster in NetSuite. So I think that's the model that Zafra likes to implement. And it seems to be working pretty well at NetSuite. We don't see why it would be any different in a larger business like the Oracle Public Cloud.

Understood. Thanks for the color. Next question, please.

Our next question comes from with Evercore ISI.

Thanks very much, and thanks for letting me ask the question. Larry, can you sort of double-click on OCI? And specifically, I was curious what you're seeing with some of your early OCI customers in terms of net expansion, meaning how are those customers growing with you in terms of either net workloads or new infrastructure services? And within those customers, do you feel like you're taking wallet share or versus some of the other public vendors, just to give us a sense on how those might act as a proxy for others.

Thanks. Absolutely. We have corporate customers that have been with us for a while that are expanding. Maybe the most interesting thing about this are the ISVs, because the ISVs, I mean, they're in the cloud business. I mean, that's their whole business. They run IT. You know, their primary expense is running their cloud operations. And when a number of those companies move from Amazon to Oracle, I mean, I can give you a bunch of examples, then, you know, they really take a close look at the economics of what they're doing, the reliability of the system. Zoom is a famous example. But there are a bunch of other ISV examples of companies that have moved from Amazon to to Oracle. That is really very encouraging, but we're seeing it now in our corporate customers as well. They move a workload. That works. They wait. They move two or three more workloads. That's continuing. We think, again, this Gartner report is one more step in the right direction in terms of encouraging our corporate customers to move even more workloads and accelerate the rate. But have we seen a pattern? Yes, we move a workload with per customer move a second workload, a third workload. Once they understand it works smoothly, and the economics are advantageous. Well, they just move more workloads on a continuous basis. And that's what we're experiencing. Thank you.

Next question, please.

Our next question is from Michael Turretts with KeyBank.

Hey, Larry and Safra. I wanted to ask about clouded customer. I think you mentioned Safra is growing 40%. So what tailwinds and if there are any headwinds is clouded customer seeing? And is that now able to start driving sustainable database acceleration beyond the acceleration that you saw this quarter?

Yeah, I mean, one of the things I didn't mention was that consumption at cloud and customer is up over 150%. So you need to understand that once cloud and customers, they take a while to set up. And then once they start getting set up, because, you know, it's a little bit more complicated. We follow a very, very special security model. And what we do is it's really a land and expand model. The customer brings in some workloads, and then they realize how incredible it is. And it runs their database workloads. It runs their other workloads so quickly, so cost-effectively, that it just builds in momentum. The thing that, as I said, it takes a while to actually land and get it all set up, but now it's gotten to be a good size, and then it's just accelerating for us. And so that's really where we're at. It is a global product. It is completely differentiated, and it is very profitable for us. And it fits the need of our customers. Because remember, their Oracle workloads in particular really, really run amazingly. But also, those are their most important workloads often. And those have to be perfect. And that's really, they have to be secure. They have to be performant. They have to be always up. And they have to... be economical for them, and it's just a perfect match for what they need.

Okay, thanks, Safran. Next question, please.

Our final question comes from Mark Murphy with J.P. Morgan.

Yes, thank you very much. So you seem to have pivoted your CapEx approach a bit from, just-in-time purchases to carrying a bit of a capacity buffer so that you can deploy all these OCI wins. I'm just curious, Safra, does it take a quarter or two and then you have enough of a buffer there? Or do you see such a pipeline for OCI demand that this CapEx rise perhaps could last a while longer, which might be good news for future revenue growths?

Well, I don't like to be caught short. That's for sure. And so I want to make sure I have enough. But we do have enormous demand, frankly. So this is what I always call a high-class problem. But we try to make sure that we manage it very, very carefully. I thought it was worth it to take on quite a bit more inventory. But it is getting used up very quickly all the time. And we stay very, very focused on being able to deliver to our customers the demand. But we have such accelerating demand that we have to stay vigilant to make sure we've got what we need, where we need it, and in the quantities that we need it.

Thank you very much.

Thank you. Ken, we can't hear you.

Thank you. 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 the operator for closing.

Thank you for joining today's Oracle first quarter 2022 earnings conference call. We appreciate your participation. You may now disconnect.