Ken Bond Safra Ada Catz - President, Chief Financial Officer and Director Mark V. Hurd - President and Director.

John S. DiFucci - JP Morgan Chase & Co, Research Division Raimo Lenschow - Barclays Capital, Research Division Joel P.

Fishbein - Lazard Capital Markets LLC, Research Division Brent Thill - UBS Investment Bank, Research Division Jason Maynard - Wells Fargo Securities, LLC, Research Division Heather Bellini - Goldman Sachs Group Inc., Research Division Richard G. Sherlund - Nomura Securities Co. Ltd., Research Division Walter H.

Pritchard - Citigroup Inc, Research Division Kash G. Rangan - BofA Merrill Lynch, Research Division.

Good day, everyone, and welcome to today's Oracle Corporation Quarterly Conference Call. Today's conference is being recorded. At this time, I would like to introduce Ken Bond, Vice President of Investor Relations, Oracle. Please go ahead, sir..

Thank you, Brian. Good afternoon, everyone, and welcome to Oracle's First Quarter Fiscal Year 2014 Earnings Conference Call. A copy of the press release and financial table, which includes a GAAP to non-GAAP reconciliation and other supplemental financial information, can be viewed and downloaded from our Investor Relations website.

On the call today are President and Chief Financial Officer, Safra Catz; and President, Mark Hurd. 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 amendment 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 the results or publicly release any revisions to 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. I'm going to focus on our non-GAAP results for Q1. I'll then review guidance for Q2 and turn the call over to Mark for his comments. Larry isn't with us today because he is at an important race for the America's Cup.

I want to start by letting you know that currency in Q1 gave us a 2% headwind for new software license and total revenue, which was more than my guidance last quarter. So today, my comments on the quarter will generally reflect constant dollar growth rates. Q1 for us was really solid overall and quite strong in the Americas.

We're especially pleased with our software results, as total software revenues were $6.1 billion, up 8% from last year. Software updates and product support revenues were more than half of the total company revenue at nearly $4.4 billion, up 8% from last year.

Attach rates and renewal rates remain at their usual high levels, and software updates and product support continue to power earnings and cash flow. New software license revenues were $1.7 billion, up 6% from last year. Looking at GAAP results by region, we saw excellent results in the Americas with growth of 15%.

That's growth upon a previous year, so that's really very strong. Asia-Pac saw solid growth of 5%, while EMEA declined 5%. There were some interesting product details that I think bode well for the future. Exadata Software was up over 15%; GoldenGate in-memory software was up 30%; BI Technology and Foundation Suite were up around 10%.

Also strong was retailing, CRM sales and applications in North America generally. The quarter wasn't dependent on any one large deal, anything like that, it was just a very solid quarter. Hardware systems product revenue was $669 million, as older products like the older M-series and Netra saw significant declines.

Storage was more a mixed story with TAPE down a bit, SAN down significantly, while network attached storage was up. The Engineered Systems customer base continues to expand nicely. Exadata bookings look very good. Revenues from Exalytics, SuperCluster and the Oracle Database Appliance all grew over 100%.

For the company, total revenue for the quarter was $8.4 billion, up 4% from last year. Our non-GAAP operating income was $3.7 billion, which was 6% higher than last year, and operating margin expanded to 45%. We still believe there remains ample leverage in the business model. The non-GAAP tax rate for the quarter was 21.8%.

EPS for the quarter grew 12% in U.S. dollars to $0.59 on a non-GAAP basis. The GAAP tax rate was 7-point -- was 17.7%, which was lower than my guidance for last quarter due to some onetime event and the mix of earnings. On a GAAP basis, EPS for the quarter was $0.47 in U.S. dollars, which was up 14%.

Free cash flow increased to a record $14.2 billion over the last 4 quarters and to an all-time high of $6.1 billion for Q1, up 11% from last year. We're now on the cusp of generating more free cash flow than IBM. Just 5 years ago, we generated roughly half the level of IBM's free cash flow over 4 quarters.

We now have over $39 billion in cash and marketable securities. Net of debt, our cash position is $15 billion. As we've said before, we are committed to returning the value to our shareholders through earnings growth, share repurchases and the dividend. This quarter we repurchased 92.8 million shares for a total of $3 billion.

Over the last 12 months, we've repurchased nearly 335 million shares for a total of $10.9 billion, paid out dividends of nearly $1.7 billion for a total that is nearly 90% of our free cash flow. And the Board of Directors declared a quarterly dividend of $0.12 per share.

Now, to the guidance, and I want to remind you that last Q2, new license in cloud revenue increased 18% in constant currency. So this will be a very, very tough comparison. And though our pipelines and potential transactions for the quarter look really very exciting, our sales leaders remain very careful about what they are forecasting to us.

So new software license and cloud subscription revenue growth is expected to range from negative 4 to positive 6 in constant currency and negative 6 to positive 4 in reported dollars. Hardware product revenue is expected to range from negative 9% to positive 1% in constant dollars and negative 11% to negative 1% in reported dollars.

As a result, total revenue growth on both GAAP and non-GAAP basis is expected to range from 1% to 4% in constant dollars and negative 1 to positive 2 in U.S. dollars. Non-GAAP EPS is expected to be somewhere between $0.65 and $0.70 in constant dollars, $0.64 to $0.69 in reported dollars.

GAAP EPS is expected to be $0.51 to $0.56 in constant dollars, and $0.50 to $0.55 in reported dollars. I want to remind you that last year, we had the benefit of a $145 million acquisition-related benefit for the Pillar earnout, so excluding that benefit, GAAP EPS last year would have been $0.51.

This guidance assumes a tax rate of 23.5% and a non-GAAP tax rate of 24%. Of course, it may end up being very different. With that, I'll turn it over to Mark for his comments..

LinkedIn, AT&T, Facebook, Electronics Arts, Thomson Reuters, New York Stock Exchange, Tesco, Deutsche Telekom. I could just go on. It's going to be a great set of people from the industry, as well as customers, a very large attendee base. And we will make some significant product announcements at the event as well.

We'll be introducing Oracle 12c in-memory database. We'll be talking about it being able to deliver 100x faster application performance using our new architectural approach. We'll talking about -- we'll be talking about existing Oracle apps that can now run in the Oracle Database functionality without change when using this in-memory capability.

We'll have some releases in cloud. We'll talk about we'll have some releases in HCM and talent management, we'll talk about database as a service, Java as a service that will be available to our customers. So there'll be a whole slew of product announcements there that Larry will be talking about Sunday night and will continue on through the week.

So we're excited about the upcoming activities at Oracle OpenWorld. With that, I'll turn it back to Ken, and we'll take whatever questions you've got..

Brian, we'll go to the Q&A now if you're ready..

And we'll now take our first question from John DiFucci with JPMorgan..

Mark, you mentioned the strength in database and it's reflected in license. But it's also, I think, reflected in margins this quarter. And you mentioned, and I would think it's really too early for 12c to be having much of an impact on the numbers anyway. You mentioned Options, Enterprise Manager.

I guess the question is why the strength right now in database, and how does this business look as we look forward at the core database with Options?.

The interesting thing, John, first is we not only had good growth in database but we also had good growth in database in the U.S. So it was very strong. It's exactly what you described. First, it was broad-based across the regions even with a strong showing in the U.S. And it was really the options.

And again, as you start dealing with some of the issues you see in the market, take for example something as simple as the data growth that you all hear in the industry. 30%, 40% data growth that our customers talk about.

The ability for us to compress that data is a tremendous opportunity and it's an option that you can get advanced compression, you can get it with Exadata that dramatically changes our customers' total cost of ownership. So we had good growth really across regions, particularly strong in the U.S., particularly strong in Options.

GoldenGate was very strong, we had good growth in RAC, Active Data, in-memory caching. Security was -- I mentioned this, I think, last quarter too, we had very strong growth again in security. And these are turning to be material businesses, John.

And I think this is not really the beginning -- I would not call any of this really any significant impact from 12c. This is really just the core database and the options around the core database..

You mentioned Exadata. So that sounds like sort of that Exadata pulls along some of these options too, and that's having an effect here..

Well, it's all part -- yes, it's all part of one story, John, in the context of we've got so much database out there and you see the drive more performance, more security, drive more compression. You can get a lot of it with the database. It's a product; you can get even more of it when you buy Exadata. And so it's a strong value prop, John..

And if I might just one quick one for Safra. Safra, the guidance you gave is a little bit below where the Street is right now. You mentioned you talked about exciting pipelines I think the words that you used.

But you also talked about manage - the salespeople or manage -- sales managers being, I don't know what word you used, but it sounded like being prudent. I guess, if you -- in the past, you sometimes gauged what that guidance is.

Do you think that, that is something -- the guidance you've given, is it similar to the conservatism that is prudent that you normally give? Is it a little more conservative or less, or if you can comment on that?.

Well, as I always say to you all, I read the same newspapers or read the websites that you all do, and there's a lot of news out there, whether it's coming out from our own government or from Europe. And that influences what we put at the backdrop for our forecast. And today was a big news day in both directions.

And so we're just trying to -- I think everybody's just trying to stay a little bit to have a little bit of room, and we could do significantly better. But we still -- even though our pipelines are big, we still have to close all those deals. And I just can't assume that we will. So try to just be reasonable about it, be conservative about it.

But I just need to take into account a lot of different inputs. And I think we -- that's where the guidance range is..

[Operator Instructions] And we'll now take our next question from Raimo Lenschow..

I just had a topic around you guys had a conference call with salesforce a few weeks ago that focused on joining the different clouds. A few minutes ago, we had a call from 2 cloud vendors that want to work closer together going forward.

Can you talk maybe a little bit about this new environment of vendors having to preintegrate their core products? And also maybe go on a little bit about Fusion, and it's a more complete solution than what others has.

How is that done and how does that fit into the new world here?.

Yes, Raimo, so first of all, I think that what you're seeing is that in fact, customers want systems that are integrated. And that I think works to our advantage.

And it's significantly easier obviously to have very integrated and very seamless integration when you own all the products as we do for those customers that have mixed environments, especially the large installed base of one of our competitors. The big benefit, of course, in working with us is that it's all based on our technology.

I think it gets significantly harder when you're talking about almost random companies who are trying to make the experience seamless when their systems are so very, very different, the definitions, the underlying platforms are very, very different.

For us, we view this as a huge benefit towards us, and we think it's actually powering the strength of Fusion and the interest in Fusion as -- because Fusion actually has a second piece to it, which is it integrates; not only all of our applications work together in Fusion, but they also work with all of your existing Oracle applications in a way that if you -- and Fusion itself can be deployed, some on-premise if you like, and some in the cloud.

And back and forth, in fact. So what you're seeing is customers wanting more choice but better integration, and we're really the only ones who have all the products and the depth and an ability to deliver it in the cloud, in the public cloud, in a private cloud behind their firewall or in our -- or on-premise, which is truly about customer choice..

And our next question from Joel Fishbein..

Mark, a quick question. As I was going through the numbers, it looked like hardware support's up 5% against hardware that's down 13%.

Can you give me some -- or give us some more color on what's going on there?.

Yes, I mean I said, Joel, it's, we've -- I talked about this in the past. I think that if you look historically when the hardware business was not part of Oracle, the attach of service to a unit, so you sell a unit and then you sell service with it. Historically, pre-Oracle, that was a very, very low number.

And we realigned our business so that as we sort of shifted to these very high Oracle content products, we now attach support all the time. And as a result, the growth of support is not symmetrical with the product growth rate.

And so what we do is having support now growing materially faster as we catch up to what I would argue would be industry norms in terms of the way you attach support to a product. And it's causing -- I understand your point. It doesn't look right that hardware support is growing now 5%.

I might add our margins have improved dramatically with the growth rate. But it is because that we now have high Oracle content products, and we are attaching support to those products regularly when we sell them. And that is causing our hardware support to grow in a way that doesn't align directly to the hardware price.

Now, I can tell it to you the other way, Joel, once we start growing the top line in hardware, that will even be a further catalyst to our hardware support.

And because much of that cost in hardware is support, it's sort of a baseline set of costs to be in the business, things like parts depots and spare parts, you'll actually be in a position where you can make even more margin.

So it's really, Joel, just us going back to the fundamentals of running a good hardware support business, and it starts with attaching the service and the support to the product when you sell it, which is what we've done..

And we'll take our next question from Brent Thill..

My question is on the general demand environment. And, Safra, I think you made a comment that you believe you could do significantly better. Overall, tax spending seems to be pretty positive yet your guidance, and we certainly respect the tough comp, is really for no license growth.

So from your perspective, what are the key enablers for you to get back to what I would assume you would perceive to be more healthy growth in the license side? What key building blocks do you have to fill in from here?.

We just have to execute and we have to avoid any kind of economic deterioration or things like that. Some of those things are out of our control. You just have to execute. We have to have another quarter just like this one, just straight execution, follow a straight line. I think we have an opportunity to do significantly better.

But so we just want to move forward. It really does come down for this next quarter to being an extremely difficult comp..

I'd probably put a little different view on your comments. One, listen, to Safra's point, we read all of our peer groups' results. And to be very blunt, they're not very good. So depending on who you're talking about, most of their numbers are negative. So when you say there's a robust expending environment, I'm not sure whose numbers you're reading.

So that's sort of point one. When you look at scale technology companies, there's some pretty significant headwinds out there when you certainly look in July through the June readouts. So when you look at this quarter, I would argue we, again, gained a lot of share just based on the results we just gave you.

So I think what we're telling you out there is we see what's out there. We're trying to be prudent and thoughtful in the guidance we give. I don't think it's as much about the tough comp. I mean, tough comp is part of it. There's also a couple points of currency that are involved in the number that guided you to, to 0 as well.

So that would be my view of it..

And we'll take our next question from Jason Maynard..

I want to talk a little bit more about the hardware business. And Mark, if you could maybe give us a little bit of a drill-down into what's going on with the M and the T, and how you expect that to play out. Talk a little bit about what's going on with kind of the legacy products.

And the last question would be are you still comfortable with seeing some growth this year in the overall hardware business, just on the product side?.

Sure, thanks. Jason, I think we'll see -- we'll have some growth in hardware this year. I would say your question, which was primarily about the SPARC line. T was okay in the quarter, M was not. So as you know, in sort of Q4-ish timeframe, mid-Q4, we released a new set of M products we're pretty excited about.

We've got a big installed base that we can move. It takes time to get those products certified and tested in customers' environments, but that's what happened in the numbers. We had the strong Exadata unit growth that both Safra and I described. We had very good results in several regions in our storage, if you will, our NAS storage business.

TAPE was unexciting as it has been for a period of time, and the real issue was again in the M part of the SPARC line. That's really the story in hardware..

And we'll take our next question from Heather Bellini..

I wanted to follow up, Mark, a little bit on the response you gave to Brent just talking about the competitive environment.

I was just wondering specifically if you could share with us kind of who -- what companies in particular kind of are you benchmarking yourself against or who are you benchmarking yourself against? And kind of how would you -- how do you kind of keep score versus those guys, if you will?.

Workday and HR and salesforce and sales automation. We still view them as competitors. Now, I could go down a slew of others in various product groups, but those would be the big ones that I would describe to you, Heather..

And we'll take our next question from Rich Sherlund..

Mark, the headcount, you're up about 9% in Americas year-over-year and you're up about 3% in the rest of the world. You showed good license growth in the Americas. I'm sort of curious what's behind the headcount growth in Americas versus the rest of the world.

Are you ramping sales headcount, or what's happening there?.

Yes, it is nothing more than the run rate that comes. So imagine as we talked over the several quarters, there is not a big bump sequentially per se as it is just the run rate of the hiring. As I've said before, we were quicker to hire in Europe, which is what really has helped us in Europe.

While Europe was not fantastic for us in Q1, over the past several quarters they've gained a lot of share in Europe, and one of the reasons for that has been the fact that they've simply been in more deals. They've been in front of more customers.

We were slower to ramp in the U.S., although to your point with your numbers, we have begun to, and that shows up in the run rate that turns into this year-over-year comp rate. And it is shown up by the fact that when you look at our U.S. numbers over the past couple of quarters, we are beginning to see some of that same effect that we saw in Europe..

And we'll take our next question from Walter Pritchard..

Mark, I'm wondering if you talk about -- you did have a better performance it seems like from a sales execution perspective in Q1. I'm wondering if you could talk about what changes you've made in the sales organization with executions in the fiscal '14, in the early months of that..

We really made no changes in fiscal '14. So as we said last year, we made changes over a year ago. And one of our objectives going into '14 was to make a minimal amount of changes. We -- before we went into 2014, we had all our territories deployed, our quotas deployed.

We really looked to change almost 0 territories and keep the territories the same as they were the year before. We kept our specialization the same as the year before. So as a result, we wound up really ready to go in the very early part of the quarter.

And I think we talked about this in the last conference call, but it was a big thing for us to have our quotas deployed and our territories defined. Everybody knew their boss very early in June, and you could see it had in the end some effect for us. So there really were not many changes in the sales force.

And it's also shown up -- and frankly our attrition is down, which is helpful as well because we have performers. And when you have to have attrition, you have to change a territory when someone attrits and the fact that the attrition down is helpful to us in that respect as well..

And we'll now take our last question from Kash Rangan..

Mark and Safra, could you talk about -- it's been a couple of years since you finished up Taleo and RightNow, and I wonder if you could give us your thoughts on how you view the growth opportunities with these 2 product lines albeit they're niche-y one, but they are still important, if you get it.

But also I think the one story that is not told is the vertical-specific application. There is a bit of a myopic focus on HR and CRM, which I completely get, but you guys have been historically very strong in vertical application.

So I'm curious to get your thoughts on how -- do you see growth opportunities in verticals and how are they doing in general..

RightNow has done very well for us. When you look at the overall market position to the earlier question, today, we're really #1 in service automation. We haven't talked about Alcoa, but we're really #1 in marketing automation.

So when you look at what's gone and when you look at the Web commerce space, our products like ATG and Decca, we're #1 in commerce server and the overall customer experience space. And when you line those up, we have a very powerful offering in that whole customer experience -- broader customer experience area.

So right now, what's strong in the quarter, I would argue we grew in RightNow in the quarter against a very tough comp. Our toughest comp in RightNow in the quarter was Q1 and we had growth in Q1, and we were very encouraged by that. Particularly, Kash, the growth globally. We've had good global traction with RightNow.

Taleo had a good quarter, very good growth in Taleo in the quarter, so we were excited about that as well. And they are both market leaders, leading recruiting app, and again, leading service automation app. Verticals, we told the story many times. I mean, we've had a tremendous run in retail.

We really -- I hate to use the term rolled up the retail industry, but we're in the process of really going retailer to retailer to retailer with merchandising, planning, our point-of-sale capabilities and being able to really be the, we think, the leader in the retail applications marketplace.

We made investments over the past couple of quarters in additional products and communications industry for our acquisitions at Tekelec and Acme Packet. And the collection now, we have a collection of billing assets, and those assets make us a leader now in the communications industry as well.

We're doing the same thing in utilities, we're doing the same thing in banking, the same thing in health care. So it is a critical strategy for us. And the great news is when we win in these industries, all of Oracle wins. I mean, we win at the database layer, we win at the middleware layer, we win the hardware layer.

So it's a very key strategy for us, and we've made investments in those areas, as that's both from an acquisition perspective and with more distribution as well..

Thank you, Mark. In closing, a telephonic replay of this conference call will be available for 24 hours. Dial-in information can be found in the press release issued earlier today. Please call the Investor Relations department with any follow-up questions from this call, and we look forward to speaking with you. Thank you for joining us today.

With that, I'll turn it back to the operator for closing comments..

And ladies and gentlemen, that concludes today's conference call. We thank you for your participation..