Oracle Corporation

Please stand by. We're about to begin. Good afternoon, ladies and gentlemen. Welcome to the Oracle Q2 2023 earnings conference call. At this time, all participants are in a listen-only mode. And please be advised that this call is being recorded. After the speaker's prepared remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star 1 on your telephone keypad. And if you would like to withdraw your question, simply press star 1 again. And at this time, I'd like to turn the call over to Mr. Ken Bond, Head of Investor Relations at Oracle. Please go ahead.

Thank you, Beau. Good afternoon, everyone, and welcome to Oracle's second quarter fiscal year 2023 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 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 caution you against placing undue reliance on these forward-looking statements, and we encourage you to review our most recent reports, including our 10-K and 10-Q, and any applicable amendments for a complete discussion of these factors and other risks that may affect our future results or the market price of our stocks. 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 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. Well, simply put, we had an outstanding quarter. Total revenue for the quarter was more than $200 million above the high end of our guidance range. and grew 25% in constant currency. Even excluding Cerner, total revenue grew 9% in constant currency. That's higher than Q1 and on top of a revenue beat this time last year. The strength of the quarter is even more amazing given that the currency headwind was higher than what it was when I gave guidance with 6% for revenue and a nine and a half cent headwind for earnings per share. And yet, we still exceeded the high end of my USD guidance for both total revenue and earnings per share. And as you can see from the numbers, we continue to experience clear company specific and product specific momentum. The reasons are many, but it boils down to a few key points of differentiation. First, more and more customers are recognizing our second generation infrastructure cloud as being fundamentally better architected for higher performance, better security, and unmatched reliability. versus the older first-generation hyperscale cloud providers. Second, customers appreciate the flexibility of our service and business model that enables them to deploy our technologies where it serves them best, whether that be in the public cloud, in dedicated regions around the world, or in a true clouded customer implementation. And third, customers recognize the value of an end-to-end integrated stack of applications, both horizontal, like ERP and HCM and supply chain, and industry-specific applications that focus on their industries. And all of it is on our Gen 2 infrastructure, which is designed specifically perfectly for them as they move through. As customers increasingly look to better value out of their technology investments, many discover that Oracle is much better compared to other alternatives. Gartner formerly recognized OCI by moving us to visionary status in its cloud infrastructure and platform services report for the first time. In addition, last week we were awarded a JWCC award at the US Department of Defense as they also recognized our capabilities. As all of these differentiators come together and our business continues to accelerate, we expect organic growth for our fiscal year 2023 cloud revenues will be over 30% in constant currency. Now to the numbers. As always, I'll discuss our results using constant currency growth rate. To provide a full picture, both organically and otherwise, I'm going to go over the revenue results, including Cerner, and then some of the revenue results excluding Cerner, so you can see what's going on. Total cloud revenue, now that's SaaS and IaaS, including Cerner, with $3.8 billion, up 48% in constant currency, with IaaS revenue, $1.1 billion, up 59%, and SaaS revenue of $2.8 billion, up 45%. Now, excluding Cerner, total cloud revenue, SaaS plus IaaS, was up 27% in constant currency at $3.3 billion. Total cloud services and license support revenue for the quarter, including Cerner, was $8.6 billion, up 20% in constant currency, driven again by our strategic cloud applications, autonomous database, and of course, our Generation 2 OCI. Application subscription revenues, which include support, were $4.1 billion, up 35% in constant currency. Infrastructure subscription revenues, which also include support, were $4.5 billion, up 9% in constant currency. Application subscription revenues, including support, but excluding Cerner, were $3.3 billion, up 9% in constant currency. SaaS cloud revenue, again, excluding Cerner, was $2.2 billion and was up 16%. Now our strategic back office SaaS applications now have an annualized revenue of $5.9 billion and grew 26% in constant currency, including Fusion ERP up 28% and NetSuite ERP up 29%. As mentioned already, infrastructure cloud services revenue was up 59% in constant currency. Now, excluding legacy hosting services, infrastructure cloud services revenue grew 69%, with an annualized revenue of $3.8 billion, including OCI consumption revenue, which was up 88%, and cloud and customer consumption revenue up 83%, and autonomous database up 50%. Software license revenues, including Cerner, were $1.4 billion, up 23% in constant currency and up 9% without Cerner. What is increasingly resonating with customers is that in an environment where IT investments need to have a fast and tangible return on investment, only Oracle offers customers the flexibility to manage their technology estate so they can deploy incremental investments where it brings them the most immediate value. It also helps that the purchase of technology licenses from Oracle enables them to move to the cloud as they are ready, effectively providing an on-ramp to Oracle Cloud Services. So all in, total revenues for the quarter were $12.3 billion, up 25% in constant currency, excluding Cerner's revenue contribution of $1.5 billion. Organic revenue was up over 9% in constant currency. As a reminder, we no longer operate in Russia, causing total revenue growth to be negatively affected by over 1% of growth over last year. Shifting to margins, the growth margin for cloud services and licensed support was 79% as a result of the mix between support and cloud. Last year, Oracle licensed support revenue with its mid-90s growth margins represented about 65% of the total number of cloud services and licensed support revenue. Now, it's down to 53%, and this is happening because our cloud services are growing much, much faster than licensed support. By the way, licensed support grew 4% this year. Additionally, I would note that IaaS gross margins improved again this quarter, and I expect IS gross margins will continue to improve. In response to accelerating demand, we have continued to build data center capacity. We have seen that as those centers fill up, margins go up like they did this quarter. Most importantly, Gross profit dollars of cloud services and licensed support grew 13% with Cerner and 6% excluding Cerner in Q2. Non-GAAP operating income was $5.1 billion, up 12% from last year. Operating margin, including Cerner, was 41% as we continued to integrate Cerner in the quarter. As we drive Cerner profitability to Oracle levels and continue to benefit from economies of scale in the cloud, we will not only continue to grow operating income, but we will also grow the operating margin percentage. Further, I expect that this year will be the trough year for operating margin percentages. The non-GAAP tax rate for the quarter was 20.4. I think I guided to 20.5, so basically it worked out where we thought. And non-GAAP EPS was $1.21 in U.S. dollars, down 1% in USD, up 7% in constant currency. The GAAP EPS was 63 cents. At quarter end, we had nearly $7.4 billion in cash and marketable securities. The short-term deferred revenue balance was 8.7 billion, up 14% in constant currency. Over the last four quarters, operating cash flow was 15.1 billion, and free cash flow was 8.4 billion, with capital expenditures of 6.7 billion. In addition, we now have 40% public cloud regions around the world with another nine being built. In addition, 12 of these public regions interconnect with Azure, giving customers true multi-cloud capabilities. We also have many clouded customer implementations, dedicated regions, and another nine national security regions with increasing demand for more. as customers want to have their data protected in their country. We are careful to pace our investments appropriately, but need to continue to build to meet our accelerating demand. CapEx this quarter was $2.4 billion as we continue to invest in our cloud to meet this accelerating demand. With triple digit IaaS bookings growth the last couple of quarters, we now expect to spend about this amount per quarter for the next few quarters as we build capacity for our customers' needs. This level of spend, though, will not negatively impact our operating margins as we scale. When I talk about accelerating demand, That demand is reflected in the remaining performance obligation or RPO balance, which is now at $61.2 billion, up 68% in constant currency due to strong cloud bookings as well as to Cerner. I will also note that the organic RPO growth rate in constant currency accelerated to 28% in Q2, up from 22% last quarter. And approximately 48% of the total RPO is to be recognized as revenue over the next 12 months. Now, as we've said before, I know you're tired of me saying it, but I will, we're committed to returning value to our shareholders through technical innovations, strategic acquisitions, stock repurchases, prudent use of debt, and a dividend. This quarter, we repurchased 6.1 million shares for a total of $448 million. In addition, we paid out dividends of $863 million in the quarter, and the Board of Directors declared a quarterly dividend of $0.32 per share. Our fundamental principle is to grow non-GAAP EPS while substantially increasing cloud revenue growth, and given our increasing confidence, we will continue to prudently invest as there's strong demand for our cloud services. So now, let me turn to my guidance for Q3, which I'll provide on a non-GAAP basis. Using currency exchange rates as they are right now, currency should have a 4% negative effect on total revenue and at least a 6 cents negative effect on EPS in Q3. As I say, every quarter, the actual currency impact may be different by quarter end, but we've got to use the number, so we're using the number right now. Total revenues for Q3, including Cerner, are expected to grow from 21% to 23% in constant currency and are expected to grow from 17% to 19% in USD. Total cloud growth including Cerner is expected to grow from 46% to 50% in constant currency and 43% to 47% in USD. I expect the total cloud growth for the fiscal year excluding Cerner will be above 30% in constant currency. Non-GAAP EPS is expected to grow between 9% and 13% and be between $1.23 and $1.27 in constant currency. Again, due to currency headwinds, non-GAAP EPS is expected to grow between 4% and 8% and be between $1.17 and $1.21 in USD. And as I've said before, Cerner will be accretive to earnings this year, including in Q3. My EPS guidance for Q3 assumes our base tax rate of 20.5%, which is up from 19% last year. However, one-time tax events could cause actual tax rates for any given quarter to vary. And with that, I'll turn it over to Larry for his comments.