Ken Bond - IR Lawrence J. Ellison - Chairman and Chief Technology Officer Safra A. Catz - CEO Mark Hurd - CEO.
Richard Sherlund - Nomura Securities Raimo Lenschow - Barclays Capital Philip Winslow - Credit Suisse Joel Fishbein - BMO Capital Markets Jason Maynard – Wells Fargo Kash Rangan - Bank of America/Merrill Lynch Karl Keirstead - Deutsche Bank Brent Thill - UBS.
Welcome to Oracle's First Quarter Fiscal 2015 Earnings Call. As a reminder this call is being recorded for replay purposes. I'd like to now turn the call over to Ken Bond, Vice President of Investor Relations..
Thank you, Victoria. Good afternoon, everyone and welcome to Oracle's first quarter fiscal year 2015 earnings conference call. A copy of the press release and financial tables, which include the 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 Executive Chairman and Chief Technology Officer, Larry Ellison; CEO, Safra Catz; and CEO, 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 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-Q and 10-K 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 publicly release any revisions of these forward-looking statements in light of new information or future events. Before taking questions we will begin with a few prepared remarks. And with that I'd like to turn the call over to Safra..
Thanks Ken. I am going to focus on our non-GAAP results for Q1. I'll then review guidance for Q2, then turn the call over to Mark and Larry for their comments. Those of you who have followed us for a while know that Q1 is a seasonally smaller quarter which can mean more volatility in our results and that's what we saw this quarter.
Currency was a 1% tailwind to total revenues. Today my comments generally reflect constant dollar growth rates. Cloud revenue totaled $477 million, growing 29%. In that cloud, SaaS and PaaS were $339 million, up 31% from last year and up 4% sequentially. Cloud infrastructure as a service was $138 million up 25%.
Q1 results in the cloud were better than expected and with us now three times bigger than Workday, now that's not enough for us, as our goal is to be bigger than Salesforce and faster growing than Workday while growing cash flow and improving our already high levels of profitability.
New software license was $1.4 billion, down 2% from last year and software updates and product support was a record $4.7 billion, up 6%. Software and cloud revenue totaled $6.6 billion in Q1 growing 6%.
Customers have started to move from on-premise systems to the cloud but with so many on-premise customers and only 30% of our support-base in applications we haven't seen a reduction in software updates and product support renewal rates which continue at their usual high levels.
However as the movement to the cloud grows we expect this transition will affect our revenue to the positive. These customers will essentially replace their software support payments with a cloud subscription which will mean substantially more revenues to Oracle.
That is because not only will we be providing the most up to date software but we'll also be providing the hardware, the application management and complete operation. Of course we expect it as a customer pays more to Oracle this increase will be more than offset by a reduction in their cost of implementing and running their own systems.
And because we control nearly all of our own supply chain and benefit from enormous economies of scale we expect most customers converting their premise based software support payments to cloud subscription will be immediately accretive to operating income as well.
In the case of new or existing customers taking cloud subscriptions in lieu of buying new or additional software licenses there will be a short-term delay in revenue. But over the medium and long term we also expect more revenue and operating income as well as increased cash flow.
As for the details in this quarter, GAAP software and cloud results in the Americas grew 6% helped by a very strong performance from our North America application team and our global business unit. Thanks to the fantastic EMEA management team considering the geopolitical situation in Europe and Middle East, EMEA was up an astounding 7%.
Asia-Pac grew 2%. Engineered systems continue to grow and were over a third of hardware product revenue over the last 12 months. However hardware revenue in total was down 8% as other servers and storage revenues especially tape declined. Hardware system product revenue was down 14% while hardware system support was down 2%.
Consulting services, which I don't usually comment on because they're not as strategic to our business, also suffered from some execution issues in North America. Total revenue for the quarter was $8.6 billion, up 2% from last year. The quarter was not depended on any one large deal.
Our non-GAAP operating income was $3.8 billion, was 1% higher than last year and operating margin was 44.4% down just 22 basis points from last year because the sales shortfall in hardware in some hardware and consulting happened late in the quarter and did not allow us time to adjust our expense base in the quarter.
Free cash flow increased to a record $14.7 billion over the last four quarters to an all-time high of 6.5 -- and to an all-time high of $6.5 billion for the quarter, up 6% from Q1 last year. The non-GAAP tax rate for the quarter was 21.5%, EPS for the quarter grew 4% in US dollars and to $0.63 on a non-GAAP basis.
The GAAP tax rate was 19.7% due to some one-time events and the mix of earnings. On a GAAP basis EPS for the quarter was $0.48 in US dollars, up 2%. At quarter end deferred revenue was at a record $8.9 billion, up 5% from last year and we had nearly $52 billion in cash and marketable securities. Net of debt our cash position was $19 billion.
So both of these balances are roughly $5 billion lower now that we've closed the MICROS transaction. This quarter we repurchased nearly 49 million shares for a total of $2 billion.
Over the last 12 months we've repurchased more than 5% of the shares outstanding a year ago and paid out more than $2.1 billion in dividend as nearly 75% of our cash flow was returned to shareholders.
We recently increased our share buyback authorization by an additional $13 billion and we now have a total authorization of more than $15 billion available. The Board of Directors declared a quarterly dividend of $0.12 per share. As I move to guidance I need to make some comments first regarding MICROS, which we closed a few days ago.
Firstly we will not own it for the whole quarter. Secondly, and much more importantly, because our revenue recognition policies and our operating procedures are strict the contributions from MICROS will not be consistent with their historical run rate.
For example I am only expecting about $14 million in on-premise new license revenue for the quarter from MICROS. Also given recent currency movements we expect to see a currency headwind of 1% for cloud revenues, 2% for software and cloud revenue combined and 2% for both hardware and total revenue and that could very much change.
So taking all that into account SaaS and PaaS on a non-GAAP basis is expected to grow between 40% to 45% in constant currency, 39% to 44% in US dollars. On a GAAP basis SaaS and PaaS revenue is expected to grow 39% to $0.44 and 44% in constant currency and 38% to 43% in US dollars.
Cloud IaaS on a GAAP and non-GAAP basis is expected to grow 40% to 44% in constant currency and 39% to 43% in U.S. dollars. Software and cloud revenue on a GAAP and non-GAAP basis including SaaS, PaaS, IaaS, new software license and software support is expected to grow 5% to 8% in constant currency, 3% to 6% in U.S. dollars.
Hardware system revenues on a GAAP and non-GAAP basis which includes hardware system products and hardware system support is expected to be negative 8% to positive 2% in constant currency, negative 10% to 0% in U.S. dollars. Total revenue growth on a GAAP and non-GAAP basis is expected to range from 2% to 6% in constant currency, 0% to 4% in U.S.
dollars. Non-GAAP EPS is expected to be somewhere between $0.68 to $0.72 in constant currency, $0.66 and $0.70 in U.S. dollars. GAAP EPS is expected to be somewhere between $0.53 and $0.57 in constant currency and $0.51 and $0.55 in U.S. dollars.
This guidance assumes a GAAP tax rate of 22.5% and a non-GAAP tax rate of 23%, of course it may end up being different. As you've seen in the last few minutes we announced that Larry was elected Executive Chairman and appointed Chief Technology Officer; Mark and I have been appointed CEO.
Other than Mark and I reporting to the Board of Directors of which Larry will be Executive Chairman instead of to Larry directly no other reporting relationships will change at the company. In addition, I will no longer go by the CFO title. I will be the Principal Financial Officer for all regulatory purposes.
We will not be hiring a CFO and my teams will continue to report to me. With that I will turn it over to Larry for his comments..
Thank you, Safra. Next week at Oracle Open World we will be rolling out our new database cloud service with our new multi-tenant Database-as-a-Service offering. Our customers and ISVs can move any of their existing applications and databases to the Oracle Cloud with the push of a button.
With the push of a button your data is automatically compressed 10 to 1 and encrypted for secure and efficient transfer to the Cloud. With the push of a button your existing application automatically becomes a multi-tenant application and it's moved to the Oracle Cloud. No reprogramming is required.
Every single Oracle feature, even our latest high speed and memory processing is included in the Oracle Cloud Database Service. Hundreds of thousands of customers and ISVs have been waiting for exactly this. Database is our largest software business and database will be our largest cloud service business. Mark, over to you..
Yeah, listen before we take questions I thought I'd just give you seven or eight facts about our Cloud business in the core. First, bookings grew 54%, 3x last year’s growth rate. Fusion bookings, ERP, HCM and SFA all grew triple digits. Two, revenue grew 32% USD, 2x last year’s growth rate. Three, we got 500 new Cloud customers in the quarter.
Four, 170 of them were HCM customers. Based on what I heard Workday report they got something like 25. We got 60 Fusion HCM new customers in the quarter. Four, in CX, we had 290 new customers, 90 Fusion SFA and almost 200 marketing new customers in the quarter. Five, ERP we added 90 new customers in Fusion ERP and a like number in our EPM cloud.
And all I am taking about now is ERP cloud and EPM cloud. Fusion overall had triple digit bookings growth, triple digit revenue growth. We added nearly 200 net new Fusion customers and had many tens of go lives. And while the transition of the cloud is in the early stages we are already at a run rate of nearly $2 billion.
A couple of comments on hardware; we declined in SPARC in this quarter while we grew engineered systems double-digits. As Safra mentioned, engineered system now makes up a third of our hardware. While we're growing double digits our competitors are declining double digits. We shipped our 10,000th engineered system in Q1.
Lifetime bookings in hardware alone for engineered systems now exceed $3 billion. Hardware support margins are now approaching 70% as a testimony to the change in our overall hardware mix and the stickiness of this business. With that I'll turn it over to you all for questions..
Victoria we'll go to the Q&A portion of the call please..
(Operator Instructions). Your first question comes from the line of Rick Sherlund with Nomura Securities..
Thank you. My question is for Larry.
Larry, I wondered if you could address the issue of why the change in your role in the company and if you could clarify what the change might really be in terms of the working relationship and your responsibilities and daily activities in the business?.
Well, again Mark and Safra have done a spectacular job and I think they deserve the recognition of their new title. I'm going to continue to work with Thomas Kurian in software engineering and John Fowler in hardware engineering and Ed Screven and Mark and Safra as I have exactly in the past.
So I'm going to continue doing what I have been doing over the last several years, they're going to continue what they've been doing over the last several years. So they deserve the recognition. They deserve the CEO title and I'm happy that our management team continues forward as a team..
Next question please?.
Certainly, your next question comes from the line of Raimo Lenschow with Barclays Capital..
Hey, thank you. Mark and Safra congratulations to the new role.
Question from me, it's like if you look about into the quarter, I mean obviously there were expectations out and you were slightly weaker on the one hand side I see the transformation, I see very strong deferred number and a very strong cash number, but then I see the hardware basis, how do you think about the quarter and how in Q4 you thought it was better than we thought about it.
How do you think about Q1 now? Thank you..
Well again I like Safra's quote, we're focused on two things, becoming number one in the cloud. That means growing our cloud business rapidly. So you're seeing an acceleration in our growth rate. We are forecasting that we grow our cloud, our SaaS and PaaS cloud business this coming quarter between 40% and 45%.
So not only are we getting bigger in the cloud, our growth rate is going up. That's usually the opposite of what happens. So we are focused on becoming number one in the cloud being bigger than Salesforce in the cloud. And to do that we got to increase our growth rates and that's exactly what we're doing.
Now while we're doing that, we have one other key focus to continue to deliver record levels of cash flow and that's exactly what we're doing. So we're getting bigger in the cloud, our growth rate is increasing in the cloud.
Our cash flow is getting better we think it was a great Q1 and it's going to get even better in terms of our growth rates in the cloud. I thought you might mention in your question that the Chairman last quarter referenced a 50% bookings growth rate and we delivered 54%. And I'll make a ball prediction we'll do it again.
And that's exactly what we need again when we say we want to be number one in the cloud we have to deliver growth rates in that 50% range, and that's what we're shooting at and that's what we think we can achieve and by the way that isn't even including our new database service that we've rolled out this fall.
So that's going to add a multiplier to our growth rate in the cloud.
So we're getting triple digit growth rates, I mean almost, in our Fusion applications, our internally developed organically developed Fusion applications and now with the database in the cloud we think that's going to continue to amplify that growth rate and increase the size of our business and make us number one.
So if we can do that, we could have number one in the cloud, execute this transition we'll become the leader in the cloud and deliver record level cash flow. We think we're doing a pretty good job. .
Good, thank you. .
Your next question comes from the line of Phil Winslow with Credit Suisse..
Hi, congrats guys on the growth that you're seeing in the cloud first in terms of just the revenue and obviously the upside and deferred and along those lines I wonder if you could comment or just provide some more details and what you are seeing in the cloud versus on-premise on the application side? Mark you noted some pretty nice wins in terms of Fusion, HCM just wonder if you could provide some more detail and kind of comparing the trend on premise in the cloud?.
Yeah, so I mean first my prediction there of 50% to Larry's point was a SaaS prediction as opposed to an overall cloud prediction which frankly could be higher. On apps in the quarter, we grew apps in the quarter on premise. We had double-digit growth in North America on apps. So we had good growth on apps, license, plus what we did in SaaS.
So it was a really strong overall apps ecosystem quarter. Let me add that I believe this number is correct. We added more ERP customers in the cloud. This past quarter than Workday has had in the life of their company.
So how about that? So we are feeling really good about our ability to become the leader in ERP, we are the leader in mid-market and high end ERP in cloud, increase our leadership in marketing and defeated Workday in their core HCM business. So I think that context is what you're looking for. We had a strong ERP license quarter in North America.
We had a really strong SaaS ERP number in North America and to Larry's point if everything we've heard Workday talk about with their customers we got more in the quarter than they have in the lifetime of their company..
That's what I'd like to hear. Congrats guys..
Thank you. .
Your next question comes from the line of Joel Fishbein with BMO Capital..
Hi guys, I would like to get some color on the 12c database cycle, specifically the drivers and when we should expect it to impact numbers?.
Well again there are two key portions of the 12c database. One is the fact that it takes your existing applications and make them multi-tenant by virtue of running on the 12c version of the database.
And the second is it takes your existing applications and stores the data in memory and compress along our format therefore sometimes increase your analytic performance by a factor of 100. So those are the two big drivers on our 12c database but as you know it takes people a while to adopt these features.
But I think you're going to see the database business, option business accelerate through the remainder of this fiscal year and will continue on through the next fiscal year. So I think we are going to get strong results for the rest of this fiscal year and again it will continue on for at least another 12 months after that..
Yes, database options actually was in double digits and it is exactly as Larry said it is accelerating, it has accelerated. It is actually double more than double. So doing very, very well and in-memory is one of those options..
Is it where you had expected to be at this point in the cycle?.
I'd say slightly ahead of where we normally expected to be. Now we were optimistic about these two features. So we thought the adoption rates would be faster than historically we've experienced with new versions of the database and that's exactly what's happening.
But again the geometric progression, it's happening sooner but the big numbers are still one, two quarters away..
Great, thank you..
Next question please?.
Your next question comes from the line of Jason Maynard with Wells Fargo. .
Hey good afternoon guys. First congratulations on the changes in the roles but I do have to say Larry we're going to miss you on these calls and it's been quite a run..
You should be so lucky I am staying on the call..
All right..
So you're going to have to wait a little while longer before you get me off the call. I apologize to everyone for that..
Good news then, good we can still bother you then with our questions.
So with that I really had two questions, one maybe Mark you can tackle and then one for Safra but Mark on the hardware side, could you give us a little more color on let's say some of the shortfall that you saw and maybe break it down by geo or break it down by product line, just some color there? And then Safra Get down by GO or break it down by product line and just some color there.
And then Safra, just on your deferred revenue growth again maybe talk a little bit about the composition of the upside you saw in deferred revenue and whether that was maintenance, multi-year contracts on the SaaS booking side, just in general what was driving that for the business? Thanks..
So let me take deferred revenue because I always get that question when it goes down and so I am going to take it when it goes up also. It's the same answer, I know that's really [though] but the reality is that deferred revenue is almost entirely, but not entirely but almost entirely impacted by support which as I mentioned remains extremely strong.
Q1 as always an extremely -- it's seasonal it's everything I've ever told you in every one of the calls it's very, very strong. Yes some of it is SaaS but really the bulk of it and the growth in the business remains very, very strong, renewals remain very, very strong. And as a result deferred revenue remains strong and growing.
So it's a dominated because of the size of the business by the growth of increased support..
On hardware by the way to Safra's point, applications support revenue growth just for that -- add that in. Just so you make sure everybody is clear who has an opinion on that. In hardware we had tape decline we had SAM decline, we have a new SAM release that will come out shortly Open World. We grew in what we think of as ZFS.
So our NAS storage grew; engineered systems I mentioned grew double-digits. Now while I say SPARC declined within engineered systems, the SPARC super cluster actually had very strong growth.
So we had strong growth in engineered or we had double-digit growth in engineered systems, strong growth within that was SPARC super cluster, ZFS, NAS storage growth, tape decline, SPARC declined, that's hardware. .
Next question please?.
Your next question comes from the line of Kash Rangan with Bank of America/Merrill Lynch..
Hi, thank you very much for taking my question. Just want to drill into the tech side of the business. It looks like we’ve been waiting for the 12c product cycle.
Can you talk about if the weakness in tech licenses in the quarter was due to transition effect as you get into 12c training or if there was any execution pockets that you ran into? And also I think you were pretty optimistic and you continue to be optimistic about the demand for multi-tenant and in memory.
Could you compare that to how strong the RAC cycle was? Thank you. .
I'll take the first part, but I'd say on tech overall, I think tech overall was fine with the exception of one region which was North America.
So if you looked at all the numbers Safra gave you I think good clarity on our options business which was strong even in North America but Core Tech, North America was weak virtually around the rest of the world that was fine. So we had good performance roughly what we expected in the quarter in what I would call Core Tech.
As far as the adoption rate, we're seeing in-memory and multi-tenant it's actually being adopted at a faster rate than RAC. And I think RAC is a good comparison because RAC is absolutely a strategic feature for transaction processing where in-memory is a strategic feature for [inaudible].
And it's just that RAC actually takes -- is a little more difficult to implement. So I would say the adoption was therefore somewhat impacted from customers trying it out and getting used to it and getting people trained and then they would -- it would pan out on a few critical -- mission critical applications.
In-memory, it doesn't require a lot of training, as it literally is kind of push a button and it runs a lot faster. Therefore we're seeing somewhat of a faster adoption rate and I think you will see that in the next -- over the next several quarters. So should be at least as big as RAC and grow slight -- and have a slightly faster adoption rate. .
By the way Kash I should have taken the time to [inaudible] to our European team, Safra did that but I'll do it as well. In Core Tech in Europe we grew double-digits. So just to give you a context of the kind of performance we saw in Europe, it's truly outstanding. .
Let me add my voice to that as our Russian business kind of headed towards zero and they have all these other problems that you read about in the newspaper or on the web. And they still managed -- Loïc still managed to do a brilliant job over there and his team continues to execute very, very well in what we call difficult circumstances.
So we are thrilled about the work he is doing for us..
Thank you everybody..
Thank you..
Next question please?.
Your next question comes from the line of Karl Keirstead with Deutsche Bank..
Yeah, hi, thanks. My question is back to the leadership changes and in particular I’d love to learn a little bit more about how these changes might trickle down into the rest of the Oracle organization? Safra you touched a little bit on the CFO role and how I think you left a message that there’s really no significant change.
I wanted to ask Mark as you transition to your new role whether that would result in any change on the sales leadership and sales structure side as well?.
No..
Yeah, and Karl I just want to make sure we are very, very clear. There will actually be no changes, no significant changes right, just want to clarify, no changes whatsoever..
And Karl I don't want to be short but it’s just not in order -- and we were pretty [flat] in terms of the way we run the place and we want to keep it that way. So I want to stay closer to the action not get further away from the action. So to be direct the answer is no but I want to make sure you heard the rest of that..
Got it, okay, that’s very clear. Thank you..
Your final question comes from the line of Brent Thill with UBS..
Good afternoon. Maybe for each of you just touched on the business model transition to subscription, how long you expect this to take, to roll through the model? Larry, I know even in the database side there is some interesting opportunities as database-as-a-service could impact the old school model.
I am just curious how you look at this? And then for all of us on the line obviously you get to see the backlog number and you can look at the growth but we can’t actually see in the physical backlog and at some point would you look to something like Salesforce where they give you a backlog number every quarter as a reporting metric going forward?.
Again the way I look at is we are going to be doing more for our customers, exactly what Safra said earlier, we are going to be doing more for our customers than we did before.
So before we use to sell them software and they would have to provide their own datacenters and their own machines and their own labor and their own network to run all of that.
And now we are going to put a lot of that in our datacenter, we are going to buy the machines, we are going to provide both the skilled labor, whether you are buying the infrastructure-as-a-service, we will be maintaining the operating system and the virtual machine for you along with the hardware and storage, processing and storage.
If you buy platform we we'll also be maintaining the Oracle database and Java, the world’s most popular programming language and the world’s most popular database at our platform. We're going to be doing more for you. And as we do more for you, you are going to pay us more but the customer is going to spend less so, it’s a win-win.
We get economies of scale, we get specialization of labor, we are very good at running Oracle databases, we are very good at managing Java virtual machines. We are pretty good at running datacenters and we are great at running all of these applications.
Then that’s the third level, if you buy our ERP and our planning application then again we are doing -- we are your datacenter, we are your hardware company, we are your networking company, we are your storage company, we are all of those things.
So the promise is for Oracle to be a much larger and much more profitable and much more critical supplier to our customers, a much more strategic supplier to our customers, especially when we go to the next level of application which are the vertical applications which -- where we, in financial services for banks, for telecom companies, for retailers, for hotels and restaurant chains, all of those things.
It gives us an opportunity to give them a complete solution which is strategic to their business and has much higher value then selling technology components which what the industry has been doing historically. So we see this as a huge opportunity for Oracle Corporation to grow and expand our relevance into the next generation of computing.
There our business will be more profitable and we think we have all the assets to do that. I mean it’s very interesting that in ERP we overnight over one quarter sold more ERP systems in the cloud than Workday has done in the life of their company. We have a lot of assets. One of the things we lead with ERP is budgeting and planning EPM in the cloud.
Workday's answer to that is we don't have one of those. None of our competitors have one of those in the cloud. SAP, as far as I know, isn’t moving anything to the Cloud other than Ariba and SuccessFactors, by the way which I am [not] going to point out run on Oracle, both of them run on Oracle, not HANA, run on Oracle.
So Oracle is one of most the popular database in the cloud. So every generation of computing, computing gets bigger. And this is our chance to get bigger to become more important.
If we execute well and when Mark says he wants to stay close to the action, and when Safra says you got a laser light focus on two things, being number one in the cloud and delivering record levels of cash flow.
We are all focused on this unbelievable opportunity to be the one big company, the one big company with all the resources to make this transition to the cloud and become the leader in that next generation computing. It's an opportunity we are all focused on and we are not going to miss it..
Thank you, Larry. A telephonic replay of this conference call will be available for 24 hours. Dial-in information can be found in the press release issued early today. Please call the Investor Relations department if any follow-up questions in this call, we look forward to speaking with you. Thank you for joining us today.
With that I will turn call back to Victoria for closing..
Thank you. This concludes today’s conference call. You may now disconnect. Thank you for your participation..