Oracle Corporation

Good afternoon. My name is Emma, and I will be your conference operator today. At this time, I would like to welcome everyone to the Oracle Corporation's third quarter 2023 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press the star one. Thank you. Ken Vaughn, Senior VP of Investor Relations, you may begin your conference.

Thank you, Emma. Good afternoon, everyone, and welcome to Oracle's third 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 the Investor Relations website. On the call today are Chairman and Chief Technology Officer Larry Ellison and CEO Safra Katz. As a reminder, today's discussion will include forward-looking statements, including predictions, expectations, estimates, or other information that might be considered forward-looking. Throughout today's discussion, we will present some important factors relating to our business, which may potentially affect these forward-looking statements. These forward-looking statements are also subject to risks and uncertainties that may cause actual results to differ materially from statements being made today. As a result, we caution you 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 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 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. Q3 represented another great quarter with continued momentum on the top and bottom lines. But before I get to the numbers, I want to share with you a few thoughts that explain what's behind our continued financial success. First, our cloud offerings drive operational efficiency. In fact, one of our competitors recently coined the term the Oracle Playbook, which I absolutely love because the Oracle Playbook is all about doing more while spending less. As you all know, we started this ourselves over 20 years ago and have kept it up over all these years, resulting in the highest margins in the software business for decades. Using our own products and services enables us to increase our investments for growth while also growing profitability, including through acquisition, as well as during our move to the cloud. We are constantly talking with our customers about leveraging Oracle technology to accelerate their speed to market and reduce costs, all the while improving the experience they deliver to their customers. The combination of Oracle's infrastructure and apps, which is unique in the cloud market, increases the intensity of business transformation Cloud is no longer about just renting commodity white boxes. It's about velocity and value. We have become the enterprise technology vendor of choice because we have products and services that help our customers drive cost efficiencies and modernize their businesses. Second, while AI has been dominating the recent news cycle. The truth is that our Fusion and infrastructure customers have been using AI as an integral part of their business for some time. Oracle Fusion with embedded AI enables customers to close their books in days, not weeks. Oracle AI provides more relevant sales leads, Oracle AI increases infrastructure performance and security with no human intervention. And customers using OCI get AI as a service to help drive their own business transformation. Given our scale and our information advantage across industries and technologies, we are constantly training our applications to do more for our customers, whether it's further automating processes, providing critical and timely recommendations, offering insight, sorry, or flagging potential issues. That's real enterprise AI. It's what customers are looking for. It's designed into everything we do, and that's what our customers get when they use our platform. And on our Gen2 OCI platform, the architecture and unique network capability has fast become the platform of choice for many AI companies because OCI runs workloads faster. And time is money in the cloud. So coming to us saves our customers money. Third, customers are putting Oracle's comprehensive set of technologies to work in new and powerful ways to accelerate their businesses. The Uber win was notable because we have yet another example of an industry transforming company concluding that Oracle's cloud performance and security exceeds that of our competitors and at a price point that represents a sustainable long-term partnership. Uber will use more of our technology to drive value in their own business, and you're going to see a rising list of these types of strategic wins pile up in the quarters to come. Finally, before I move to the numbers, and hopefully no one missed this fact, that we're announcing our earnings nine days after the close of the quarter, and we expect to file the Q right away. We continue to set the standard in operating efficiency, which helps customers see what's possible when they're working with us. Okay, now to the Q3 results. As always, I'll discuss them using constant currency growth rates to provide a full picture, both organically and otherwise. I'm going to go over the revenue results, including Cerner, and then some revenue results excluding Cerner. Total cloud revenue, that's SaaS plus IaaS, including Cerner, was $4.1 billion, up 48% in constant currencies. with IaaS revenue of $1.2 billion, up 57%, and SaaS revenue of $2.9 billion, up 44%. Now, excluding Cerner, total cloud revenue was up 28% in constant currency at $3.5 billion. Total cloud services and licensed support revenue for the quarter, including Cerner, was 8.9 billion, up 20% in constant currency, driven again by our strategic cloud applications, autonomous database, and our Gen 2 OCI. Application subscription revenues, which includes support, were 4.2 billion and up 33% in constant currency. Infrastructure subscription revenues, also including support, were 4.8 billion, up 10% in constant currency. Application subscription revenues, including support, but excluding Cerner, were 3.4 billion, up 8% in constant currency. SaaS cloud revenue, again, excluding Cerner, was 2.3 billion and was up 16%. Our strategic back office SaaS applications now have an annualized revenue of $6.2 billion and grew 25% in constant currency, including Fusion ERP up again 28% and NetSuite ERP up 26% this quarter. As mentioned already, Infrastructure cloud services revenue was up 57% in constant currency. And when you exclude our legacy hosting services, infrastructure cloud services revenue grew 65%, with an annualized revenue of $4.4 billion, including OCI consumption revenue, which was up 86%, clouded customer consumption revenue up 73%, and autonomous database up 50%. Database subscription revenues, which include database support, were up 3% in constant currency, highlighted by cloud database services, which were up 40%. Database subscription revenue is largely made up of on-premise database support, but as these databases migrate from on-premise to the cloud and clouded customer, we expect these cloud database services will be the third leg of revenue growth alongside back-office SaaS and Gen2 OCI cloud services. Software license revenue, including Cerner, were $1.3 billion, up 4% in constant currency. So all in, total revenues for the quarter were $12.4 billion, up 21% in constant currency. Excluding Cerner's contribution of $1.5 billion, organic revenue was up 7% in constant currency. As a reminder, we no longer operate in Russia, causing organic revenue growth to be negatively affected by 1% of growth over last year. Shifting to margins, the gross 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 gross margins represented about 63% of cloud services and licensed support revenue. Now, because our cloud services are growing so fast, it's down to 55%. Additionally, I would note that IaaS growth margins improved substantially from last year, and I expect IaaS growth margins will continue to improve. While we have continued to build data center capacity, we've also seen our margins go higher as these new cloud regions fill up. Most importantly, gross profit dollars of cloud services and licensed support grew 13% with Cerner and 6% excluding Cerner. Non-GAAP operating income was $5.2 billion, up 11% from last year. The operating margin, including Cerner, was 42% as we continue to integrate Cerner in the quarter. As we drive Cerner profitability to Oracle standards, 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 percentages. For example, while we have only owned Cerner for three quarters, we have already improved its operating margin by over five percentage points compared to before the acquisition. And by the way, I actually expect this year, FY 2023, the one we are closing out in one more quarter, will be the trough year for operating margins and percentages as our margin improvement initiatives play out. The non-GAAP tax rate for the quarter was 18.4%, and the non-GAAP EPS was $1.22 in U.S. dollars, up 8% in USD, up 13% in constant currency. Gap EPS was 68 cents in US dollars. At quarter end, we had nearly 8.8 billion in cash and marketable securities. The short-term deferred revenue balance was 8.6 billion, up 14% in constant currency. Over the last four quarters operating cash flow was 15.5 billion and free cash flow was 7.3 billion with capital expenditures of 8.2 billion. Operating cash flow for the quarter was up 11% at 4.3 billion. The remaining performance obligation or RPO balance is 62.3 billion. up 66% in constant currency due to strong cloud bookings, as well as Cerner, which Larry will discuss in a moment. I would also note that the organic RPO growth rate was 26% in constant currency. Approximately 48% of total RPO is expected to be recognized as revenue over the next 12 months. CapEx this quarter was 2.6 billion as we continue to build capacity for existing bookings and our customers' growing needs. Given the demand you see reflected in the RPO, as well as what we see in our pipeline, I expect that our CapEx investment will be about where it is right now for the foreseeable future. As always, we remain careful to pace our investments appropriately and in line with booking trends. We now have 41 public cloud regions around the world with another eight being built. In addition, 12 of these public cloud regions interconnect with Azure, giving customers true multi-cloud capabilities. We have many clouded customer implementations 10 dedicated regions, and another nine national security regions with increasing demand for more. As we've said before, 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 1.8 million shares for a total of $150 million. In addition, we paid out dividends of $863 million in the quarter, and the board of directors increased the quarterly dividend 25% from 32 to 40 cents per share. Our financial strategy remains focused on growing non-GAAP operating and pre-tax income while substantially increasing cloud revenue growth. And given increasing customer interest in our cloud technologies, we will continue to prudently invest to meet this demand. As a reminder, because now we're going to talk about Q4, last Q4, we had a spectacular increase double-digit revenue growth rate, highlighted by 25% constant currency growth in software license. With our continued migration to the cloud, we expect that we will continue to win big deals that are more subscription-driven than license-driven. These big subscription wins add to the backlog and are recognized over time rather than upfront. That is exactly what we want to see as our cloud business continues to see excellent growth. So now let me turn to my guidance for Q4, which I'll provide on a non-GAAP basis. Now, assuming that currency exchange rates remain the same as they are now, currency would have a 2% negative effect on total revenue and at least 3% negative. plus negative effect on EPS in Q4. But as I say, every quarter, the actual currency impact may be very different by quarter end. Okay, here we go. Total revenues for Q4, including Cerner, are expected to grow from 17 to 19% in constant currency, and thus are expected to grow 15 to 17 in USD. Total cloud growth, including Cerner, is expected to grow from 51 to 53% in constant currency, 49 to 51 in USD. I expect total cloud growth for Q4, excluding Cerner, will be above 30% in constant currency. I expect growth in operating profit to be double digits. As you all know, my non-GAAP tax rate guidance is typically 20.5. However, our tax rates over the last two years in Q4 have averaged around 11%, and I anticipate that in Q4, the most likely outcome is a non-GAAP tax rate of around 14.5%. And we've used this rate in determining our EPS guidance for Q4. Now, mind you, that's comparing it to 11 or 10.5, I think, last year. Regardless, like past quarters, the actual tax rate for Q4 could be higher or lower and affect our actual EPS. With that, non-GAAP EPS is expected to grow between 3% and 5%. and be between $1.59 and $1.63 in constant currency. Non-GAAP EPS is expected to grow between 1% and 3% and be between $1.56 and $1.60 in USD. What have I got here? Anyway, as I've said before, Cerner will be accretive to earnings this year. including Q4. And with that, I'll turn it over to Larry for his comments.