Oracle Corporation

Welcome to Oracle's second 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 second 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 the statements being made today. As a result, we would caution you against placing undue reliance on these forward-looking statements, and we encourage you to review our most recent reports, including our 10-K and and 10Q 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'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. I'm pleased to report another quarter of increasing revenue growth as the fastest growing parts of the business continue to become a larger percentage of our business. We had a fantastic quarter as total revenue grew 6% in constant currency above the high end of my guidance with broad-based outperformance across the company. Q3 revenue growth looks like it will continue even higher. But let me save that for the guidance discussion. Earnings were also strong with non-GAAP EPS 9 cents above the high end of my constant currency guidance. We achieved this outperformance despite the U.S. dollar strengthening since I gave guidance as we saw a currency headwind of nearly 100 million to revenue and a cent to EPS. So the USD results which are excellent and above guidance are even stronger than they appear. Before I go through the numbers though, I wanted to comment on what we are seeing in the market that is driving our accelerating revenue growth. As I've mentioned on previous calls, we have a highly differentiated strategy from our competitors where we are the only company able to offer the combination of applications and infrastructure in the cloud. We have best-of-breed capabilities in both infrastructure and apps, like HR and ERP, but also a highly differentiated set of industry-specific cloud SaaS applications. And of course, our second-generation cloud with autonomous database are unique in their performance, security, and dependability aspects. And because we have decades of experience in mission-critical systems, our customers can depend on us being up and available when they need us. Our unique capabilities are attracting customers, especially as they consider how to conduct their own digital transformation in the complex industries in which they compete. They want us to know as much about their business as they do, whether it's telco, financial services, utilities, retail, and many others, and to partner with them to modernize. Once a company thinks beyond simple dev tests and other rudimentary cloud workloads and moves their technology focus to mission-critical projects, they invariably turn to Oracle. Our focus on customer success is driving more references and new opportunities with both existing customers and with entirely new accounts. And of course, we ourselves are an Oracle Fusion full suite user, and I'm sure it is not lost on any of you, and it's not lost on our prospects and customers that we are announcing our results nine days after the quarter closed because of our systems and their embedded processes. Okay, back to the numbers. And 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 $7.6 billion, up 6% in constant currency, and accounted for 73%. of total company revenue. Total cloud revenues when annualized are now 10.7 billion and grew 22% with cloud bookings growing faster than our cloud revenue growth rates. And as a result, we expect cloud revenue will accelerate further and exit the fiscal year in the mid-20s, potentially higher. Gap application subscription revenues were $3.1 billion, up 8% organically in constant currency, and our highest growth rate in four years. Fusion apps were up 30%, with strategic back-office applications now having annualized revenue of $4.9 billion and growing 30%, including Fusion ERP, up 35%. Fusion HCM, up 25%. And NetSuite ERP, up 28%. Gap infrastructure subscription revenue were $4.4 billion, up 5%. And excluding legacy hosting services, infrastructure cloud services grew more than 50%. I expect the infrastructure revenue growth rate will continue to ramp higher through the fiscal year. OCI consumption revenue, which includes autonomous database, was up 86% in constant currency, and total clouded customer revenue was up 45%. Database subscription revenues, including database support and database cloud services, were up 3% in constant currency. License revenues were $1.2 billion, up 16% amongst our very best quarters over the last 10 years. And license growth was not dependent on any mega deals. We saw excellent performance in technology, our vertical businesses, as well as North America and Latin American regions. So all in, total revenues for the quarter, were $10.4 billion, up 6% in constant currency. Operating expenses were up 6%. This quarter, the gross margin for cloud services and licensed support was 84%, and gross profit dollars grew 5% in constant currency. I expect the full year growth in gross profit dollars for cloud services and licensed support will be similar to or better than last year. Non-GAAP operating income was $4.9 billion, up 7% from last year, and the operating margin was 47%. The non-GAAP tax rate for the quarter was 19.2%, slightly higher than our base rate of 19%. and earnings per share was $1.21 in U.S. dollars, up 14% in U.S. dollars, up 15% in constant currency. During the quarter, we recognized GAAP acquisition-related and other expenses, totaling $4.7 billion, which substantially consisted of litigation-related charges that will not recur. They relate to a dispute that arose when we hired my former co-CEO in 2010. As a result of this one-time charge, GAAP net income was a negative 1.2 billion. The GAAP tax rate was 16.6% due to some discrete items, and the GAAP loss was 46 cents per share. Operating cash flow for the last four quarters was 10.3 billion, and our free cash flow over the same period was 7.1 billion. Both results were negatively affected by the litigation charges I mentioned. Capital expenditures for the last four quarters were 3.1 billion, and CapEx for Q2 alone was 925 million, and we're on track to invest 4 billion in CapEx this year. We now have nearly $23 billion in cash and marketable securities. The short-term deferred revenue balance is nearly $8 billion, up slightly in constant currency from a year ago due to timing differences in customer payments, with gross deferred revenue growing 5% in constant currency. The remaining performance obligation, or RPO balance, is $37.2 billion, up 11% in constant currency due to strong bookings. Approximately 59% is expected to be recognized as revenue over the next 12 months. As we've said so many times 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 77 million shares for a total of $7 billion. And over the last 10 years, we've reduced the shares outstanding by 47% at an average price that's about half the current share price. The Board of Directors increased the authorization for share repurchases by an additional 10 billion. We've paid out dividends of 3.4 billion over the last 12 months and the board of directors again declared a quarterly dividend of 32 cents per share. Now the guidance. I'm going to start by reiterating our expectation that full year 2022 revenue growth will accelerate from 2021 for all the reasons we've already seen so far this year. Given the strong performance in the first half, I now expect that we will see full-year total revenue finish solidly in the mid-single digits, led by cloud revenue growth exiting the year in the mid-20s. Cloud is fundamentally a more profitable business compared to on-premise, and I expect that our operating margins this year will be the same or better than pre-pandemic levels of 44%. Let me now turn to my guidance for Q3, which I'll provide on a non-GAAP basis. The U.S. dollar strengthened dramatically in November. I know you all saw that. and assuming currency exchange rates remain the same as they are now, which we have no idea if they will or not, I expect we will see a currency headwind of 3% for revenue and 5 cents for EPS in Q3. Total revenue for Q3 is expected to grow between 6% to 8% in constant currency and grow between 3% to 5% in USD. Clearly the midpoint of the range is 7% and that is higher than the 6% we just reported in Q2 and higher than the 2% we reported in Q1. So everything is trending in the right direction. Cloud service and license support revenue for Q3 is expected to grow between 6% to 8% in constant currency and grow between 3 to 5% in USD. Non-GAAP EPS for Q3 is expected to grow between 2 and 6% in constant currency and be between $1.19 and $1.23 in constant currency. Non-GAAP EPS for the quarter is expected to grow between negative 2 and positive 2 in USD and be between $1.14 and $1.18 in USD. My EPS guidance for Q3 assumes a base tax rate of 19%. However, one-time tax events could cause actual tax rates for any given quarter to be higher or lower. But I expected in normalizing for these one-time events, our non-GAAP tax rates will average around 19% or so. With that, I'll turn it over to Larry for his comments.

Thank you, Safra. I'm going to discuss Oracle's cloud ERP status and strategy. So how big is our on-premise ERP business today? I mean, a lot of the people, a lot of the companies like Microsoft did a great job of moving their entire Microsoft office installed base into the cloud to dramatically increase the size of their cloud business. Unfortunately, we didn't have the same option or opportunity. So I think you're going to find this interesting. So how big is our on-premise business today? Well, we had 7,500 customers in Oracle on-premise or ERP made up of eBusiness Suite, PeopleSoft, and JD Edwards. Only 1,000 of those 7,500 have moved to Fusion Cloud ERP. Now, we have not lost any of these customers to competitors. We expect all the remaining 6,500 to move to Fusion ERP, but it hasn't happened yet. That's all upside. That's all upside. And I think a lot of people don't really realize that. So now let's migrate over and look at How big is our cloud ERP business today? Well, right around the number is $5 billion a year revenue, and we have 8,500 Fusion customers. But remember, only 1,000 of those 8,500 came from our old on-premise business. 6,500, plenty to come. So 7,500 of these 8,500 customers We're not running Oracle ERP before we came out with our cloud product. Those are all new customers. Add to that the 28,000 new NetSuite customers. So Oracle has a total of 35,500 cloud ERP customers that are new to Oracle. Only 1,000 of our on-premise installed base has migrated so far. Let me repeat that. 35,500 net new Cloud ERP customers we got in the last few years, only 1,000 from our installed base. That's going to be coming to us later on. So how fast is Cloud ERP revenue growing about? So growing about 30% a year. And so let's look out five years and ask the question, you know, How big will we be in five years? And I think the number is going to be approaching $20 billion in cloud ERP where the majority of those customers are not people who are migrating, not customers that are migrating from Oracle's on-prem business, but they are migrating from other people's on-prem business, whether it's a small company like Infor, or a large company like SAP, or a variety of other companies. The vast majority of our cloud ERP customers are not coming from our installed base. They are coming from someone else's installed base. And again, 85% of them that we have are from someone else's installed base. So what are our margins in this five-year, let's say we are estimating $20 billion cloud ERP business? Well, at that scale, that's about an 85% margin in that business. And as Zafra pointed out earlier in her comments, the cloud business is inherently much more profitable and much more predictable than our old on-premise business. So we expect five years from now, and again, these are just estimates, but based on growth rates and the size of our current business, But we expect to have about 30,000, five years now, 30,000 Fusion customers, plus 100,000 next week customers, bringing in $20 billion at 85% margins. All right. So what's happening? I mean, how are we winning so many new customers? Where are they coming from? Who are we competing with? Well, really, we only have two significant competitors. The two significant competitors, SAP and Workday. I've said this before. SAP did not build a true cloud product, and I'm going to explain what a true cloud product is in just a minute. But SAP, because they didn't build a cloud product, they bought some edge products around the cloud, but they didn't actually rebuild their software for the cloud. That's the same old 35-year-old software they've been selling forever. Their goal is simply to hold on to their installed base, but they are losing customers to us. For example, this quarter, Petronas, a big oil and gas customer moved over. I gave a long presentation about us taking already a couple hundred pretty good-sized SAP customers. We're doing very well against SAP and continue to do it well, SAP, winning Petronas and others this quarter. Workday is very interesting because Workday does have a cloud product, and they've done quite well in HCM. But they have very few live, try to find, try to go out and find live Workday ERP customers. Try to find any. So we're winning almost everything in cloud ERP. We're beating Workday 100%. I don't know, 98% of the time we beat Workday. And we're taking customers from SAP's installed base. They're still holding on to more of their base than we're taking, but we're making inroads. So again, what's going on? Why are we winning? Well, we're winning because we have a true cloud product that is very, very feature-rich It has a very low cost of ownership, so it's enormously capable, and it's not expensive compared with the old on-premise systems. Our implementations, I mean, we've got implementations of medium-large companies that sometimes take six months. Now, don't get me wrong. Someone like Bank America took a few years. That was an SAP customer that we won, and that was just doing the Merrill Lynch division. It took a few years. And then hopefully we're going to continue to make progress at Bank America. So we have, in general, it's much faster and lower cost to implement our cloud product than it is to implement, let's say, SAP or even Workday, but a gigantic difference with SAP. Very easy to use. We have the user interface. There's two aspects. There's the computer interface that works on mobile phones and tablets and things like that. And then we have a voice digital assistant. You talk to our applications. You talk to all of our applications. You ask for reports. You ask questions. I think it's like Alexa for the enterprise. All our apps run on smartphones, tablets, desktops, every app. Not a handful of apps are mobile. Every single app runs on smartphones, tablets, desktops. Every single app has a voice interface. We have – and this is what I mean by a true cloud product. We deliver a new version of Oracle Cloud ERP to 100% of our customers, all 8,500 customers for Fusion every three months. That's right. They get a new version with hundreds or sometimes even thousands of new features. Every three months they get that. Now why is that important? Well, because our customers want, specifically in different industries, they don't all want the same new feature. Depending on the industry you're in, depending on your size, depending on the country you're in, your three most important new features you must have are different among a lot of different customers. So in the old days, with SAP, Customers built this themselves. They went out and hired Accenture or somebody else, IBM services when it was IBM services to build these features for them. Now the new model is don't customize your product. You don't have to. Give us your list of new features that you need and we'll build them and put them in the next release. And we can build them faster than you can. And you might have to wait three months or four months or five months before you get them in a new version. But you get them quickly. And we're the ones that build them. And they're part of the standard product. They're not some customization you have to maintain forever. So they're not expensive. In fact, they're free. They come with a product. This is radically different than what SAP offers in what they call their cloud product, which I say is not a true cloud product, because they don't have new versions every three months. They don't have new versions every three years in their so-called cloud product. You make all the same modifications you used to make by hiring people and customizing. That's not the new model. That's not how it works in a real cloud system. That's a fundamental – and every time they go in and modify the system, what if they make a mistake? What if they have a bug? That's going to make the system less reliable and more expensive, potentially slower. That doesn't happen with real cloud systems. We, the vendor, are responsible for enhancing it and enhancing it on a regular cadence and responding to their requirements and delivering things to them in months, not years. We're also on schedule to deliver some unprecedented new technology. It won't be long before when our customers upgrade, every three months they upgrade, and sometimes they're down for an hour or so, and we're on schedule to deliver zero downtime upgrades. So it won't be long now when our customers move to the new version. There will be no downtime. Nobody else has this. Nobody else is working on this. And soon all of our applications will be on the autonomous self-tuning maximum security database. I've said this before. What's the most important thing about the autonomous database? The money you save because there's no human labor? No, actually, the money you have to save because there's no human labor is good, but no human labor, no human errors, no security risks, no stolen data. Almost all of the, not all, but almost all of the data that's been hacked out of other clouds has been hacked because some human being made a mistake, left a port open, created a vulnerability. You can't do that with the Autonomous Database because human beings don't touch it. Just like a self-driving car is safer than a car driven by a human being, a self-driving database is much safer and more secure than a database that is managed by human beings who make mistakes. and cause problems. So I'll stop there and I'm going to slightly turn a little bit and describe what's going on in the marketplace from an industry perspective. Fusion ERP has been out for a while and we are beginning to roll up entire industries. We're adding the features for banking. I think on an earlier quarterly call, I said our two largest and most strategic industries going forward in ERP would be banking and healthcare. Maybe not just ERP, but for the company in total, would be banking and healthcare. And we're doing extremely well in those industries. Some of our live banking and financial services customers include JP Morgan, Bank America, New York Mellon, HSBC, State Street, NatWest, Santander, Macquarie. I can go on and on and on with a long list of banks all over the world. But also we have insurance customers, USAA, Nationwide, AAA, and again, a lot more. I'm not going to list everybody. In fact, we provide a printed list at the end of every quarter of all the new wins we had in the quarter. And we had a lot of new logos in banking and financial services in Q2. We won Barclays. That was another big bank that we won. First Bank Insurance, we won Ameritas, MoneyGram. And we had some major go-lives, huge go-lives at MetLife, Blackstone, and Assurance. We're doing very well in financial services and specifically banking. Healthcare, the other industry I identified as being strategic and on par with banking in terms of the importance to our future. So live healthcare customers include Kaiser, Cleveland Clinic, Providence St. Joe. I would say that we have a lot of healthcare wins around the world, but I'd say our healthcare wins are concentrated more in North America as compared with banking. New healthcare wins this quarter, Mayo Clinic, the number one ranked hospital in the United States, Highmark Health, Cineos Health, and PPD. Again, I can go on and on, but again, we print those out for you, and you can read them at your leisure. Let me talk about one other industry before I give my closing remarks, and that's logistics customers. We've become very, very strong with logistics customers. FedEx was a key win for us, take away from SAP, UPS. We have UPS, DHL, FedEx, DP World, SSTTS, I can go on and on. We have most of the big logistics companies around the world. And FedEx, which is – a lot of our companies aren't through rolling out Oracle, Fusion, ERP. But FedEx, for example, is now live in 98 countries. We're winning in lots of other industries as well, but I wanted to highlight these three industries. because they are essential to our plan to add major new capabilities to our cloud ERP system. Before I describe those capabilities, I have a confession to make. We are not, I don't believe anyway, we are not on our way to building a $20 billion cloud ERP business in five years. I think it's going to be a lot bigger than that. Let me explain why. As more and more companies adopt and run Oracle Cloud ERP, ask the question, what does a B2B procurement transaction look like? In other words, how does it work when one Oracle Cloud ERP system is talking to another Oracle Cloud ERP system and placing an order? We are working in concert with our banking and logistics partners to originate purchase financing, product shipping, delivery tracking, invoicing, and payments right inside the two transacting Oracle Cloud ERP procurement systems. Oracle Cloud ERP will soon bring an entirely new level of automation to B2B commerce, one that very much resembles the ease of doing business and efficiency of B2C e-commerce. This new ERP automation system, all these new capabilities, will dramatically simplify our customers' procurement, and supply chain processes. And as such, it represents a huge new opportunity for Oracle to grow its cloud ERP ecosystems. Thank you. Back to Safra.

Thanks, Larry. I think Ken is going to take questions.

Yep, Merica, if you could cue the audience, 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 the line of brad zelnick with deutsche bank great thank you so much and congrats on a great quarter with accelerating growth larry you shared quite a bit with us really really helpful but i wanted to ask you about oci because

We continue to hear great things from customers. And I think people understand Oracle's cloud is hyper secure, highly automated, and there's real price performance advantage. But as we think about your product roadmap and what it takes for Oracle to capture more than its fair share of the broader public cloud market, how much are you investing in breadth versus depth? Because we just see in this quarter alone, like the partnership with Airtel in India, Orange in West Africa, new regions in Singapore, UAE, France, and I'm probably missing some, but clearly there's demand. Otherwise I know Safra wouldn't be making these investments, but when your main competitor boasts over 200 services up the stack, how far should we expect to see you build up the stack competing on functionality versus continuing to go broad with what you already have? Thanks.

Well, uh, again, uh, We have a bunch of things the other guys don't have. We have applications. I know you want to talk about OCI. You want to talk about infrastructure. We think of those as two separate businesses, but of course they are not. Everyone who is running Oracle ERP is building data warehouses on top of their ERP data. They are mashing it up maybe with Salesforce data. They are doing all of these things. They are doing a combination. Our big application customers, Bank of America for example, is doing a combination of running our apps and building bespoke apps around those. So this is a huge opportunity for us that our other infrastructure providers don't have. We've often had the discussion, do we want to support 10 databases or do we want to support 30 databases? And do we want to have every single service that let's say an Amazon has? And I think our view is we want to have some really good choices, but not every single choice on the menu. We want to have all of the popular databases, but not some of the obscure databases. So we are not going to try to feature match every single thing they do. We will, however, have development environments they don't have at all. If you're building data warehouses on top of Fusion ERP or on top of Fusion HCM or on top of NetSuite, we have a whole set of tools that makes that easy for you over on the infrastructure side of our business. So we have all the popular stuff around. I mean, obviously, you have Kubernetes and the like. And we have Postgres and the popular databases. We have MySQL, but our version of MySQL is much better than Amazon's version of MySQL. It's much faster. I mean, more than 10 times faster because of HeatWave. We have this query optimizer they don't have at all. So our idea is to look at the most popular products, to have recommended development environments and recommended systems, and be able to do things they can't do at all. I think one other – let me mention one of the – fundamental differences in our strategy versus their strategy. They are building a small number of very, very large data centers. Our strategy is to build a large number of smaller, less expensive data centers. We think that improves reliability dramatically. We won't have this giant data center going down. It reduces the blast radius of what happens when things go down, less goes down. It allows us to go into sovereign nations, some smaller countries that they can never afford to put a data center in. And we cannot put one but two to a primary and a backup data center in sovereign countries that care about data sovereignty. We can put a complete cloud. I don't mean just database cloud. I mean a complete cloud at a customer like NRI in Japan. And we did that. In fact, we put in a primary and a backup. So if people want to run a cloud, if a large financial institution wants to run our cloud inside their firewall, inside their data center, we can do that. And how will that cloud differ from the cloud that we run in the public? It won't differ at all. We can make that small enough that we can fit it into their data center. Nobody else can do this. So we think we – and then let me close with, a note that I'm going to paraphrase from a very large telecommunications company who uses our cloud and all the other three North American clouds, Google, Amazon, and Microsoft. And the note basically said, the one thing we've noticed about Oracle's cloud is that it never, ever goes down. We can't say that about any of the other clouds. We think this is a critical differentiator, availability. Another critical differentiator is security where the only way you can achieve security, I promise you this is true, is through autonomy. If you have human beings deploying and tinkering with your systems, they can make mistakes that expose your data. The only way we've been able to solve that problem is to get human beings out of the equation. No human beings, no human error, no human malice. So we think we have a bunch of differentiators and we'll be able to compete very, very effectively with security, reliability, combination of apps and infrastructure, autonomy, and a bunch of other things the other guys just will not be able to do.

That's super helpful. Thank you again and congrats.

I will not have an answer that long again ever.

Brad, you're not going to believe this. I've got more to add to that answer. So first of all, you missed a few data centers, not the least of which is Israel, France, and another one in Italy. But the real answer is the fact that I'm sure you've seen Gartner's scorecards where we actually passed Google this year and are higher than where Microsoft, who's been in this longer than us, was a year ago. But in addition, that scorecard doesn't even measure the capabilities we have in handling very large databases, which of course we do uniquely of all the other hyperscalers. So it's all very interesting, but we have things in addition to applications, in the infrastructure world that they cannot handle. And that has just put us in an incredible position. And that's why customers are coming to us. All right, I will stop right there.

Thank you so much.

Our next question comes from Raina Linschow with Barclays Capital.

Hey, thanks for taking my question and the congrats from me as well. I wanted to go back to ERP, and I apologize for that, but I remember when I used to work in the industry, Larry, changing an ERP system was like volunteering for a root canal treatment. You kind of try to avoid it as much as possible. But if I look at the numbers now, NetSuite has the strongest role I've seen forever, I think. Fusion ERP is accelerating. So what's going on in the industry in terms of kind of like the pressure or the willingness to do it now. Thanks for that. And Cormac, again.

Yeah, thank you. Thank you very much. I think we spend a lot of time in automating, installing the product, making it very easy to configure. I think the consulting infrastructure, the implementers around our products now are much more experienced. The products have gotten much better. The people have gotten more experienced. The customers themselves have gotten more experienced. So the cost of putting one of these things in has dropped precipitously. The time it takes to put it in is obviously related to the cost. It's also dropped precipitously. There's just no comparison to the way it used to be, the way it is now. Well, the way it used to be, A customer bought his own unique computer configuration and added some modifications to the ERP system and installed it over a period of, I mean, it wasn't unusual back in the day for an SAP implementation to take five to seven years. I know it sounds crazy, but some of them, it cost billions, billions of dollars. Now, for a medium-sized company, six months is not unreasonable to get you live on a, maybe not your entire business, but financials, and procurement, and a big chunk of your business we can get live very, very quickly at a very, very low cost. So it's just a totally different world. And then that other thing I'm going to mention one more time. Customers are not encouraged to go ahead and build their own extensions. If you need an extension, tell us what you need, and maybe we can schedule it in the next quarter or two in the upcoming releases. That's a fundamentally different model. It's so much less expensive to have us do it for nothing than to try to do it yourself. Thank you. Next question, please.

Our next question comes from Keith Wise with Morgan Stanley.

Excellent. Thank you for taking the question, guys, and really impressive quarter. I think Brad had a really good point earlier that investors are more and more looking at sort of your CapEx intentions and looking at data center accounts, frankly, as a leading indicator of growth for Oracle. So I was hoping you'd update us on that and maybe digging into that data center side, capacity expansion isn't just in data center expansions. You could expand within data centers as well. Can you help us think about how we should think about overall capacity to deliver through both data center expansion and expanding those existing data centers to really capture all of these investments that you're making?

I guess I'll take that. I'll get started with that. Well, first of all, the public database data centers are the ones that we announced that are up and running. Of course, we have many in the offing. We also have, as Larry talked about, private regions. for certain customers. But in addition, we've made very significant investment in government, especially United States government-focused data centers. And I'm sure you've seen that we've been invited to submit for the JWCC. We also have data centers at different levels of security for different government requirements in other countries. and those we don't generally announce, so you don't see those. What you do see is the fact that we have invested ahead of revenue, and we invest when we see revenue potential. We have been rolling out on track, so we feel very good about it. We have just continued to make sure we have capacity for customers, and some customers start in one data center, and when we open in their country, they move to those, and that's working out for us. We have a lot of demand worldwide, and you're going to see us make these investments as I've guided for the whole year.

That's fantastic. Super helpful. Thank you.

Our next question comes from Mark Modler with Sanford Bernstein.

Thank you very much. I'm going to follow up on the discussion on OCI Gen2. Oracle's dedicated regions seem to be reasonably unique offerings and a different spin on the hybrid cloud, which the largest hyperscale providers are not offering. Can you explain how you're able to deliver this successfully and with good margins and why others cannot? And can you give us any sense of how large do you see that opportunity?

Thanks. Yeah, I'll take a crack at that one. Well, everyone says we're late to the party, so we saw what everyone else built. In fact, we built two versions of our cloud. We built version one, which we weren't very happy with, and then we built our Gen 2 cloud. And one of the things that we decided as we had a chance to re-architect it, we were sensitive to we needed super high security zones for government. We need to build a lot of data centers. And the magic to building a lot of data centers is twofold. One is compressing the software to a smallish number of servers, but that's really not it. It's really being able to operate a lot of smaller data centers without people or with very few people. Think about what Elon Musk did with his satellite system. Why was he able to build a low Earth orbiting satellite system and a lot of other people had tried but no one else could? Because he built the software to manage thousands of satellites. No one else could do it. NASA couldn't do it. Other people couldn't do it. That's why they kind of failed in the past. Our automation software for rolling out and managing a large number of data centers is very different software that you would build for managing a small number of super large data centers where you had a lot of people. So we've relied much more heavily on automation to do this, and Safra knows all about it because it wasn't easy. It took us a while. And we were worried about, you know, and we made a bunch of commitments, and the only way we could meet all those commitments was to have fully automated lights-out data centers, cloud data centers. And we, the team, did a fantastic job prioritizing that automation. And that automation software is what allows us to have a large number of data centers rather than a small number of large data centers. It's just a different thing. It's a different suite of software to do it, to manage it.

I wanted to comment also on the private data centers that are truly a full cloud but at customer.

Yeah, a lot of people talk about it. I think it's hilarious. I hear people talk about hybrid cloud. So a hybrid cloud means there's someone's public cloud and then whatever you have in your data center is the hybrid. This is ridiculous. That's not a cloud. People say, well, that's the most common cloud there is. Whatever you got plus some link to a public cloud. That is not a hybrid cloud. We offer the identical hardware, the identical automation software. We'll put a region. It runs all of our apps, runs all of our services, 100% of them. And we'll put it in your data center. We can do that now because... we can run that. We have the automation software to run that on your floor behind your firewall. We can build that. So it's true. So our notion of a hybrid cloud is basically the same thing, but it's located on your data center floor behind your firewall with high-speed network interconnects where you're comfortable and feel safe, safer than if you were in the public cloud. That's the only hybrid-y thing about it. Otherwise, it's exactly the same thing. You can move a workload from a public cloud into your private region and then back out of your private region back in the public cloud. They are identical in every way except for the security protections and firewalls in your private data center. That's a real hybrid cloud. The other guys don't have it.

That makes a lot of sense. I really do appreciate and congratulate on the strong quarter. Thank you.

Our final question comes from Phil Winslow with Credit Suisse.

Hi, thanks for taking my question. Congrats on a great quarter and outlook. In a quarter where a lot of numbers jumped out, the one that jumped out to me the most was the license growth year-over-year. I had to go back nine years in my model to find a quarter that was actually higher than this. Obviously, when I think about license for Oracle, I always assume it's being driven by the database business.

By the way, I'm really glad you said that. That's what it is. I mean, think about it. I mean, Mark Benioff over at Salesforce.com, they run their business, their cloud business entirely on Oracle. Now, people say, well, that's not cloud revenue. You just license that revenue. Well, it's the Oracle database running all of Salesforce's cloud. And you're right. We don't count that as cloud revenue. We count that as licensed revenue. But is that a modern cloud application? I think so. But again, the license stuff is being driven by the use of our database in some very large clouds.

That's great. That partially answers one of my questions. But when you think about that license and your example there, for example, like Salesforce together with just the cloud services and the acceleration you see there, I mean, just that overall business seemed to accelerate during Q2 here and even versus Q1. And if I think about some of the other smaller competitors in the space, they've seen acceleration as well. So I guess sort of my question is there seems to be something going on in the data world and the data infrastructure stack. And obviously when Oracle moves at your scale at these percentages, there definitely seems to be something going on. So what is that and how do you think about the sustainability of those drivers?

It's either you or me. We're going to talk about data. I mean, listen, this is not new news in that what is going on is getting insights from data, being able to capture large amounts of data and analyzing it. And, of course, that's coming, and so much of it is in Oracle. We're the ones who can handle high-performance, high-reliability requirements And the Oracle database continues to grow. But in addition, we have the other technologies that are also doing very well. Java continues to be incredibly strong in its leading application development environment. But remember, when people buy the Oracle database licenses, they can bring those to our cloud. And that's a very economical way to operate. And really what's going on is huge amounts of data growing exponentially. And when it's important data, especially data you want to use for analysis, for data warehousing, for transactions, you're going to pick Oracle nine times out of ten. And so this is great for us. And of course, as more businesses just digitize, this just draws more of our technology.

Yeah, and I'll say that SAP quote moves their applications to S4 HANA in the cloud and they do what I call hosting and they call cloud. The vast majority of those SAP databases do not run HANA. Way over 95% of them still run Oracle. It's a big business for us, even when it migrates to the cloud. I mean, Amazon has customers that have taken their Oracle database licenses, and they're running those Oracle database licenses in the cloud. So license does not mean on-premise, and license does not mean the cloud. It's a mixed bag, right? Some of that license revenue and most of the new license revenue is on its way to the cloud.

Great. Thank you, Larry.

A telephonic replay of this conference call will be available for 24 hours on the Investor Relations website. Thank you for joining us today. And with that, I'll turn the call back to Erica for closing.

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