Oracle Corporation

Good afternoon. My name is Krista and I'll be your conference operator today. At this time, I would like to welcome everyone to the Oracle Corporation third quarter fiscal year 2024 earnings conference 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 that time, simply press star followed by the number one on your telephone keypad. And if you would like to withdraw your question, again, press star one. Thank you. I would now like to turn the conference over to Ken Bond, Senior Vice President, Investor Relations. Mr. Bond, you may begin your conference.

Thank you, Krista. Good afternoon, everyone, and welcome to Oracle's third quarter fiscal year 2024 earnings conference call. A copy of the press release and financial tables, which includes a GAAP to non-GAAP 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. On the call today are Chairman and Chief Technology Officer Larry Ellison and Chief Executive Officer 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 provide 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 10K and 10Q, and any applicable amendments for a complete discussion of these factors and other risks which 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. We had another excellent quarter with third quarter revenue coming in as expected and EPS two cents above the high end of my guidance range. Now, before I get into the results of the quarter, I wanted to touch on the strength of our infrastructure cloud business. OCI has emerged as the largest driver of our overall revenue acceleration. growing much, much faster than our cloud competitors. Customers have figured out that by moving to OCI, they can really get more while paying less. But it's not just the cost that matters to our customers. Beyond the superior price performance of OCI, customers are choosing Oracle and Oracle services for multiple reasons. We know better than anyone what it takes to run the full stack of technology that goes into mission critical workloads. I'm talking about running at enterprise scale with comprehensive security and unparalleled support. And that's from decades of experience running the world's most important workloads and optimizing clustering technology which is critical to artificial intelligence workloads and database services. Secondly, our AI capabilities are unique as they're built in to help customers drive business outcomes. This is more than integrating generative AI across our fusion and industry cloud applications and autonomous database, which we have done. It's also about enabling and refining these AIM-I models with the customer's own data to better understand and serve their operations without them losing control of their own data. Third, we provide deployment flexibility for customers based on how they want to run in the cloud. In addition to offering public cloud services, we remain the only vendor which also offers a dedicated and complete clouded customer, dedicated regions, sovereign clouds, and Alloy, our partner cloud. So customers don't have to compromise the services they receive while meeting their deployment needs. And finally, We provide multi-cloud offerings so customers can consume our cloud services in the public cloud of their choice. We offer Oracle Database at Azure with Microsoft, as well as MySQL HeatWave through multiple clouds, and you can expect more multi-cloud services to come. Now to Q3 results. which I'd like to point out I had the actual results on day five and signed off with my auditors days ago. So I'm just bragging a little bit, but I couldn't help it. I know a lot of CFOs are pretty jealous. As I mentioned earlier, total revenue came in at the midpoint of my constant currency guidance, and EPS was above the high end of guidance. as was the case when I gave guidance last quarter, currency had little effect in Q3. But I'll still discuss our results using constant currency growth rates in the few areas that the rates are slightly different. So here we go. Cloud revenue, that's SaaS and IaaS, excluding Cerner, was $4.4 billion, up 26%. Including Cerner, total cloud revenue was up 24% at $5.1 billion, with IaaS revenue of $1.8 billion, up 49%, and SaaS revenue of $3.3 billion, up 14%. This quarter marks the first time our total cloud revenue is more than our total license support revenue. So we have crossed over. Total cloud services and license support revenue for the quarter was 10 billion, up 11%, driven again by our strategic cloud applications, autonomous database, and OCI. Application subscription revenues, which includes product support, were $4.6 billion and up 10%. Our strategic back office SaaS applications now have annualized revenue of $7.4 billion, and we're up 18%. Infrastructure revenues, which includes license support, were $5.4 billion and up 13%. infrastructure cloud services revenue was up 49%. Excluding legacy hosting services, OCI Gen2 infrastructure cloud services revenue grew 52% with an annualized revenue of $6.7 billion. OCI consumption revenue was up 63%. Were it not for some continuing supply constraints, consumption growth would have been even higher. Database subscription revenue, which includes database license support, were up 5%, and highlighted by cloud database services, which were up 34%, and now have annualized revenue of $1.9 billion. Very importantly, as on-premise databases migrate to the cloud, we expect these cloud database services will be the third leg of revenue growth alongside strategic SaaS and OCI. Software license revenues were $1.3 billion, down 3%. So all in. Total revenues for the quarter were $13.3 billion, up 7% including Cerner and up 9% excluding Cerner. Now to margins. The gross margins for cloud services and licensed support was 77%. This is, as before, a result of the mix between support and cloud in which cloud is growing much faster than support. Support and SAS gross margin percentages are consistent with last year, while IaaS gross margins improved substantially year over year. While we continue to build data center capacity, overall gross margins will go higher as more of our cloud regions fill up. We monitor these expenses carefully to ensure gross margin percentages expand as we scale. And to that point, gross profit dollars of cloud services and license support grew 8% in Q3. Non-GAAP operating income was $5.8 billion, up 12%. from last year. Operating margin was 44%, up from 42% last year, as we continue to drive more efficiencies in our operating expenses, which continue to trend down as a percentage of revenue. Looking forward, as we continue to benefit from economies of scale in the cloud and drive Cerner profitability to Oracle standards, We will not only continue to grow operating income, but we will also expand the operating margin percentages. The non-GAAP tax rate for the quarter was very close to my guidance at 18.9%, and non-GAAP EPS was $1.41 in USD, up 16% in both USD and constant currency. GAAP EPS was $0.85. At the At quarter end, we had nearly $9.9 billion in cash in marketable securities, and short-term deferred revenue balance, and the short-term deferred revenue balance was $8.9 billion, up 4%. Over the last four quarters, operating cash flow was $18.2 billion, up 18%, and free cash flow was $12.3 billion, up 68%. Capital expenditures were $6 billion over the same time period as we continue to see cash flow benefit from our cloud transformation. Our remaining performance obligation, or RPO, is now over $8 billion, with the portion excluding Cerner up 41% in constant currency. We signed several large deals this quarter, and we have many more in the pipeline. Approximately 43% of our total RPO is expected to be recognized as revenue over the next 12 months, and this reflects the growing trend of customers wanting larger contracts as they see firsthand how Oracle Cloud Services are benefiting their businesses. And we expect to have some very nice joint announcements with NVIDIA next week. Now, while we spent $2.1 billion on CapEx this quarter, the $1.7 billion in the cash flow statement is slightly lower just due to the timing of payments. So the $2.1 billion is actually what we spent and will pay for. We are working as quickly as we can to get the cloud capacity built out, given the enormity of our backlog and pipeline. I expect the CapEx will be somewhere around $7 to $7.5 billion this fiscal year, meaning our Q4 CapEx should be considerably higher. To that point, we now have 68 customer facing cloud regions live with 47 public cloud regions around the world and another eight being built. 12 of these public cloud regions interconnect with Azure and more locations with Microsoft are coming online soon. We also have 11 dedicated regions live and 13 more planned, several national security regions and EU sovereign regions live with increasing demand for more of each. And finally, we already have two alloy cloud regions live with five more planned where Oracle partners become cloud providers offering customized cloud services alongside Oracle Cloud. And of course, we have also many, many, many cloud customer installations. As I mentioned earlier, the sizing, flexibility, and deployment optionality of our cloud regions continues to be an incredible advantage for us in the marketplace. And as we've said before, we're committed to returning value to our shareholders through technical innovation, acquisitions, stock repurchases, prudent use of debt, and a dividend. And this quarter, we repurchased 4 million shares for a total of 450 million. In addition, we paid out dividends of 4.4 billion over the last 12 months. And the board of directors declared a quarterly dividend of 40 cents per share today. Now, before I dive into Q4 guidance, I'd like to share some thoughts on what I see for the next 12 months or so. As demand for our cloud services continues getting stronger, our pipeline is growing even faster and our win rates are going higher as well. As our supply constraints ease, revenue growth rates will accelerate higher as our capacity expands and we get into fiscal year 25. I should also say that we continue to expect the FY24, of which we are now in the fourth quarter, total revenue excluding Cerner will accelerate from last year as it has for the past three years and will likely be significantly higher. in FY25. In addition, Cerner, which is a significant headwind this year, we expect to return to growth next year. And I remain firmly committed to our FY26 financial goals for revenue, operating margin, and EPS growth. However, some of these goals might prove to be too conservative given our momentum. Let me now turn to my guidance for Q4, which I'll review on a non-GAAP basis as always. And if currency exchange rates remain the same as they are now, currency should have little effect on total revenue and EPS. However, of course, actual currency impact may be different. So at least right now, All the numbers are the same for constant currency and USD. Total revenues, including Cerner, are expected to grow from 4% to 6%. Total revenue, excluding Cerner, are expected to grow 6% to 8%. Total cloud revenue, excluding Cerner, is expected to grow from 22 to 24% as more capacity comes online in Q4. The EPS growth rate will be affected by the compare as our Q4 tax rate last year was 9.2%, which I believe most of you have already accounted for in your models. and my EPS guidance for Q4 assumes a base tax rate of 19%. As always, one-time tax events could cause actual tax rates to vary from my guidance like they did last year. So with that, non-GAAP EPS is expected to be down 2% or too flat and be between $1.62 and $1.66. And with that, I'll turn it over to Larry for his comments.