Welcome to Oracle's Second Quarter 2022 Earnings Conference Call. Now, I'd like to turn the call over to Ken Bond, Senior Vice President..

Thank you, Erica. Good afternoon, everyone, and welcome to Oracle's second quarter fiscal year 2022 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 the Investor Relations website following this call. On the call today are Chairman and Chief Technology Officer, Larry Ellison; and CEO, Safra Catz.

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 would 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. I'm pleased to report another quarter of increasing revenue growth as the fastest-growing parts of the business continue to become a larger percentage of our business.

We had a fantastic quarter as total revenue grew 6% in constant currency, above the high-end of my guidance, with broad-based outperformance across the company. Q3 revenue growth looks like it will continue even higher, but let me save that for the guidance discussion.

Earnings were also strong, with non-GAAP EPS $0.09 above the high-end of my constant currency guidance. We achieved this outperformance despite the U.S.

dollar strengthening since I gave guidance, as we saw a currency headwind of nearly $100 million to revenue and $0.01 to EPS, so the USD results, which are excellent and above guidance are even stronger than they appear.

Before I go through the numbers, though, I wanted to comment on what we are seeing in the market that is driving our accelerating revenue growth.

As I've mentioned on previous calls, we have a highly differentiated strategy from our competitors where we are the only company able to offer the combination of applications and infrastructure in the cloud.

We have best-of-breed capabilities in both infrastructure and apps like HR and ERP, but also a highly differentiated set of industry-specific cloud SaaS applications and of course, our second-generation cloud with Autonomous Database are unique in their performance, security and dependability.

And because we have decades of experience in mission-critical systems, our customers can depend on us being up and available when they need us. Our unique capabilities are attracting customers, especially as they consider how to conduct their own digital transformation in the complex industries in which they compete.

They want us to know as much about their business as they do, whether it's telco, financial services, utilities, retail and many others and to partner with them to modernize. Once a company thinks beyond simple dev test and other rudimentary cloud workloads and move their technology focus to mission-critical projects, they invariably turn to Oracle.

Our focus on customer success is driving more references and new opportunities with both existing customers and with entirely new accounts.

And of course, we ourselves are an Oracle Fusion full suite user, and I'm sure it is not lost on any of you and it's not lost on our prospects and customers that we are announcing our results nine days after the quarter closed because of our systems and their embedded processes. Okay. Back to the numbers.

And from here on, I'll review our non-GAAP results using constant dollar growth rates, unless I say otherwise. So total cloud services and license support revenues for the quarter were $7.6 billion, up 6% in constant currency and accounted for 73% of total company revenue.

Total cloud revenues, when annualized are now $10.7 billion and grew 22%, with cloud bookings growing faster than our cloud revenue growth rate. And as a result, we expect cloud revenue will accelerate further and exit the fiscal year in the mid-20s, potentially higher.

GAAP application subscription revenues were $3.1 billion, up 8% organically in constant currency and our highest growth rate in four years. Fusion apps were up 30% with strategic back-office applications now having annualized revenue of $4.9 billion and growing 30%, including Fusion ERP up 35%, Fusion HCM up 25%, and NetSuite ERP up 28%.

GAAP infrastructure subscription revenues were $4.4 billion, up 5% and excluding legacy hosting services, infrastructure cloud services grew more than 50%. I expect the infrastructure revenue growth rate will continue to ramp higher through the fiscal year.

OCI consumption revenue, which includes Autonomous Database, was up 86% in constant currency and total Cloud at Customer revenue was up 45%. Database subscription revenues, including database support and database cloud services were up 3% in constant currency.

License revenues were $1.2 billion, up 16% amongst our very best quarters over the last 10 years and license growth was not dependent on any mega deals. We saw excellent performance in technology, our vertical businesses as well as North America and Latin American regions.

So all in, total revenues for the quarter were $10.4 billion, up 6% in constant currency. Operating expenses were up 6% this quarter. The gross margin for cloud services and license support was 84%, and gross profit dollars grew 5% in constant currency.

I expect the full-year growth in gross profit dollars for cloud services and license support will be similar to or better than last year. Non-GAAP operating income was $4.9 billion, up 7% from last year and the operating margin was 47%.

The non-GAAP tax rate for the quarter was 19.2%, slightly higher than our base rate of 19% and earnings per share was $1.21 in U.S. dollars, up 14% in U.S. dollars, up 15% in constant currency.

During the quarter, we recognized GAAP acquisition-related and other expenses totaling $4.7 billion, which substantially consisted of litigation-related charges that will not recur. They relate to a dispute that arose when we hired my former co-CEO in 2010. As a result of this one-time charge, GAAP net income was a negative $1.2 billion.

The GAAP tax rate was 16.6% due to some discrete items and the GAAP loss was $0.46 per share. Operating cash flow for the last four quarters was $10.3 billion, and our free cash flow over the same period was $7.1 billion. Both results were negatively affected by the litigation charges I mentioned.

Capital expenditures for the last four quarters were $3.1 billion, and CapEx for Q2 alone was $925 million and we are on track to invest $4 billion in CapEx this year. We now have nearly $23 billion in cash and marketable securities.

The short-term deferred revenue balance is nearly $8 billion, up slightly in constant currency from a year ago due to timing differences in customer payments with gross deferred revenue growing 5% in constant currency. The remaining performance obligation or RPO balance is $37.2 billion, up 11% in constant currency due to strong bookings.

Approximately 59% is expected to be recognized as revenue over the next 12 months. As we've said so many times before, we are committed to returning value to our shareholders through technical innovation, strategic acquisitions, stock repurchases, prudent use of debt and a dividend.

This quarter, we repurchased 77 million shares for a total of $7 billion. And over the last 10 years, we've reduced the shares outstanding by 47% at an average price that's about half the current share price. The Board of Directors increased the authorization for share repurchases by an additional $10 billion.

We've paid out dividends of $3.4 billion over the last 12 months, and the Board of Directors again declared a quarterly dividend of $0.32 per share. Now the guidance. I'm going to start by reiterating our expectation that full-year 2022 revenue growth will accelerate from 2021 for all the reasons we've already seen so far this year.

Given the strong performance in the first half, I now expect that we will see full-year total revenue finish solidly in the mid-single digits, led by cloud revenue growth exiting the year in the mid-20s.

Cloud is fundamentally a more profitable business compared to on-premise, and I expect that our operating margins this year will be the same or better than pre-pandemic levels of 44%. Let me now turn to my guidance for Q3, which I'll provide on a non-GAAP basis. The U.S. dollar strengthened dramatically in November. I know you all saw that.

And assuming currency exchange rates remain the same as they are now, which we have no idea if they will or not, I expect we will see a currency headwind of 3% for revenue and $0.05 for EPS in Q3. Total revenue for Q3 is expected to grow between 6% to 8% in constant currency and grow between 3% to 5% in USD.

Clearly, the midpoint of the range is 7%, and that is higher than the 6% we just reported in Q2 and higher than the 2% we reported in Q1. So everything is trending in the right direction. Cloud service and license support revenue for Q3 is expected to grow between 6% to 8% in constant currency and grow between 3% to 5% in USD.

Non-GAAP EPS for Q3 is expected to grow between 2% and 6% in constant currency and be between $1.19 and $1.23 in constant currency. Non-GAAP EPS for the quarter is expected to grow between negative 2 and positive 2 in USD and be between $1.14 and $1.18 in USD. My EPS guidance for Q3 assumes a base tax rate of 19%.

However, one-time tax events could cause actual tax rates for any given quarter to be higher or lower. But I expect that in normalizing for these one-time events, our non-GAAP tax rates will average around 19% or so. With that, I'll turn it over to Larry for his comments..

Mayo Clinic, the number one ranked hospital in the United States, [Tay Markel], Syneos Health and PPD. Again, I can go on and on, but again, we print those out for you, and you can read them at your leisure. Let me talk about one other industry before I give my closing remarks. That's logistics customers.

We've become very, very strong with logistics customers. FedEx was a key win from us, takeaway from SAP. UPS, we have UPS, DHL, FedEx, DP World, SS, TTS. I can go on and on. We have most of the big logistics companies around the world. And FedEx, which is – a lot of our companies aren't through rolling out Oracle Fusion ERP.

But FedEx, for example, is now live in 98 countries. We are winning in lots of other industries as well, but I wanted to highlight these three industries because they are essential to our plan to add major new capabilities to our cloud ERP system. Before I describe these capabilities, I have a confession to make. We are not – I don't believe it anyway.

We are not on our way to building a $20 billion cloud ERP business in five years. I think it's going to be a lot bigger than that. Let me explain why.

As more and more companies adopt and run Oracle Cloud ERP, I ask the question, what does a B2B procurement transaction look like? In other words, how does it work when one Oracle Cloud ERP system is talking to another Oracle Cloud ERP system and placing an order? We are working in concert with our banking and logistics partners to originate purchase financing, products shipped, delivery tracking, invoicing and payments right inside the two transacting Oracle Cloud ERP procurement systems.

Oracle Cloud ERP will soon bring an entirely new level of automation to B2B commerce, one that very much resembles the ease of doing business and efficiency of B2C e-commerce. This new ERP automation system, all these new capabilities will dramatically simplify our customers' procurement and supply chain processes.

And as such, it represents a huge new opportunity for Oracle to grow its cloud ERP ecosystems. Thank you. Back to Safra..

Thanks, Larry. I think Ken is going to take questions. So....

Yes.

Erica, if you could queue the audience, please?.

[Operator Instructions] Our first question comes from the line of Brad Zelnick with Deutsche Bank..

Great. Thank you so much and congrats on a great quarter with accelerating growth. Larry, you shared quite a bit with us, really, really helpful. But I wanted to ask you about OCI because we continue to hear great things from customers.

And I think people understand Oracle's cloud is hypersecure, highly automated, and there's real price performance advantage.

But as we think about your product road map and what it takes for Oracle to capture more than its fair share of the broader public cloud market, how much are you investing in breadth versus depth? Because we just see in this quarter alone, like the partnership with Airtel in India, Orange in West Africa, new regions in Singapore, UAE, France, and I'm probably missing some.

But clearly there's demand. Otherwise, I know Safra wouldn't be making these investments. But when a new competitor posts – Larry, when your main competitor posts over 200 services up the stack, how far should we expect to see you build up the stack competing on functionality versus continuing to go broad with what you already have? Thanks..

Well again, we have a bunch of things the other guys don't have. We have applications. So – but I know you want to talk about this. Yes, you want to talk about infrastructure. We think of those as two separate businesses, but of course, they're not. I mean everyone who is running Oracle ERP is building data warehouses on top of their ERP data.

They're mashing it up maybe with Salesforce data. They're doing all of these things. They're doing a combination of big application customers. Bank of America, for example, is doing a combination of running our apps and building bespoke apps around those.

So this is a huge opportunity for us that are other infrastructure customers, other infrastructure providers don't have.

We've often had the discussion, do we want to support 10 databases, or do we want to support 30 databases? And do we want to have every single service that let's say an Amazon has? And I think our view is we want to have some really good choices, but not every single choice on the menu.

We want to have all of the popular databases, but not some of the obscure databases. So we are not going to try to feature match every single thing they do. We will, however, have development environments they don't have at all.

So if you're building data warehouses on top of Fusion ERP or on top of Fusion HCM or on top of NetSuite, we have a whole set of tools that makes that easy for you over on the infrastructure side of our business. So we have some – we do – we have all the popular stuff around. I mean obviously, you have Kubernetes and the like.

And we have Postgres and the popular databases. We have MySQL, but our version of MySQL is much better than Amazon's version of MySQL. It's much faster. I mean more than 10x faster because of HeatWave. We have this Query Optimizer, they don't have at all.

So our idea is to look at the most popular products to have recommended development environments and recommended systems, and be able to do things they can't do at all. I think one other – let me mention one of these fundamental differences in our strategy versus their strategy. They are building a small number of very, very large data centers.

Our strategy is to build a large number of smaller, less expensive data centers. We think that improves reliability dramatically. We don't have this giant data center going down. It reduces the blast radius of what happens when things go down. Less goes down.

It allows us to go into sovereign nations in some smaller countries that they can't – never afford to put a data center in. And we could not put one, but two, a primary and a backup data center in sovereign countries that care about data sovereignty. We can put a complete cloud. I don't mean just database cloud.

I mean a complete cloud at a customer like NRI in Japan. And we did that with that – we put in a primary and a backup. So we can – if people want to run a cloud, if a large financial institution wants to run our cloud inside their firewall, inside their data center, we can do that.

And how will that cloud differ from the cloud that we run in the public? It won't differ at all. We can make that small enough, that we can fit it into their data center. Nobody else can do this.

So we think – and then let me close with a note that I'm going to paraphrase from a very large telecommunications company who uses our cloud and all the other three North American clouds, Google, Amazon and Microsoft. And the note basically said, the one thing we've noticed about Oracle, Oracle’s Cloud is that it never ever goes down.

We can't say that about any of the other clouds. We think this is a critical differentiator availability. Another critical differentiator is security, where we have – where the only way you can achieve security, I promise you this is true, is through autonomy.

If you have human beings deploying and tinkering with your systems, they can make mistakes that expose your data. The only way we've been able to solve that problem is to get human beings out of the equation. No human beings, no human error, no human malice. So we think we have a bunch of differentiators.

And we'll be able to compete very, very effectively with security, reliability, combination of apps and infrastructure autonomy and a bunch of other things the other guys just will not be able to do..

Larry, that's super helpful. Thank you, again and congrats..

I will not have an answer that long again, ever..

Brad, you're not going to believe this, I've got more to add to that answer. So first of all, you missed a few data centers, not the least of which is Israel, France and another one in Italy.

But the real answer is the fact that I'm sure you've seen Gartner's scorecard where we actually passed Google this year and are higher than where Microsoft, who's been in this longer than us, was a year ago.

But in addition, that scorecard doesn't even measure the capabilities we have in handling very large databases which, of course, we do uniquely of all the other hyperscalers. So it's all very interesting, but we have things in addition to applications in the infrastructure world that they cannot handle.

And that has just put us in an incredible position, and that's why customers are coming to us. All right, I will stop right there..

Thank you so much..

Our next question comes from Raimo Lenschow with Barclays Capital..

Hey. Thanks for taking my question, and congrats from me as well. I wanted to go back to ERP, and I apologize for that. But I remember when I used to work in the industry, Larry, the changing an ERP system was like volunteering for root canal treatment. Kind of, you kind of try to avoid it as much as possible.

But if I look at the numbers now, NetSuite had the strongest role I've seen for forever, I think. Fusion ERP is accelerating. So what's going on in the industry in terms of kind of like the pressure or the willingness to do it now? Thanks for that, and congrats again..

Yes, thank you very much. I think we spend a lot of time in automating our install. Installing the product, making it very easy to configure, having – I think our consulting infrastructure, the implementers around our products now are much more experienced. The products have gotten much better. The people have got more experienced.

The customers themselves have gotten more experienced. So the cost of putting one of these things in has dropped precipitously. The time it takes to put it in, obviously related to the cost has also dropped precipitously. There's just no comparison to the way it used to be to the way it is now.

Well, the way it used to be a customer bought his own unique computer configuration and added some modifications to the ERP system and installed it over a period of – I mean, it wasn't unusual back in the day for an SAP implementation to take five to seven years. I know it sounds crazy, but some of them cost billions, billions of dollars.

Now for a medium-sized company, six months is not unreasonable to get you live on – maybe not your entire business, but financials and procurement and a big chunk of your business, we can get live very, very quickly at a very, very low cost. So it's just a totally different world. And then the other thing I'm going to mention one more time.

Customers are not encouraged to go ahead and build their own extensions. If you need an extension, tell us what you need, and maybe we can schedule it in the next quarter or two in the upcoming releases. That's a fundamentally different model. It's so much less expensive to have us do it for nothing, than to try to do it yourself..

Perfect. Thank you..

Next question, please..

Our next question comes from Keith Weiss with Morgan Stanley..

Excellent. Thank you for taking the question, guys, and really impressive quarter. I think Brad had a really good point earlier that investors are more and more looking at sort of your CapEx intentions and looking at data center count, frankly, as a leading indicator of growth for Oracle. So I was hoping you could update us on that.

And maybe digging into that data center side, capacity expansion isn't just in data center expansion. You could expand within data centers as well.

Can you help us think about how we should think about overall capacity to deliver through both data center expansion and expanding those existing data centers to really capture all of these investments that you're making?.

I guess I'll take that. I'll get started with that. Well, first of all, the public database data centers are the ones that we announced that are up and running. Of course, we have many in the offing. We also have, as Larry talked about, a private region for certain customers.

But in addition, we've made very significant investment in government, especially United States government-focused data centers. And I'm sure you've seen that we've been invited to submit for the JWCC. We also have data centers at different levels of security for different government requirements in other countries.

And those, we don't generally announce, so you don't see those. What you do see is the fact that we have invested ahead of revenue and we invest when we see revenue potential. We have been rolling out on track. So we feel very good about it. We have just continued to make sure we have capacity for customers.

And some customers start in one data center, and when we open in their countries, they move to those. And that's working out for us. We have a lot of demand worldwide where you're going to see us make these investments, as I've guided for the whole year..

Okay. Super helpful. Thank you..

Our next question comes from Mark Moerdler with Sanford Bernstein..

Thank you very much. I'm going to follow-up on the discussion on OCI Gen 2. Oracle's dedicated regions seem to be reasonably unique offerings and a different spin on the hybrid cloud, which the largest hyperscale providers are not offering.

Can you explain how you're able to deliver this successfully with good margins, and why others cannot? And can you give us any sense of how large do you see that opportunity? Thanks..

Yes, I'll take a crack at that one. Well, everyone says we’re late to the party. So we saw what everyone else built. In fact, we built two versions of our cloud, right? We built Version 1, which we weren't very happy with and then we built our Gen 2 cloud.

And one of the things that we decided, as we had a chance to re-architect it, we were sensitive to – we needed special super high security zones for government. We need to build a lot of data centers. And the magic to building a lot of data centers is twofold. One is compressing the software to a smallish number of servers. But that's really not it.

It's really the art of being able to operate a lot of smaller data centers without people or with very few people. Think about what Elon Musk did with his satellite system. Why was he able to build a low earth orbiting satellite system, and nobody else? And a lot of other people have tried, but no one else could.

Because he figured it out – he built the software to manage thousands of satellites. No one else could do it. NASA couldn't do it. Other people couldn't do it. That's why they kind of failed in the past.

Our automation software for rolling out and managing a large number of data centers is very different software that you would build for managing a small number of super large data center where you had a lot of people. So we've relied much more heavily on automation to do this. And Safra knows all about it because it wasn't easy. It took us a while.

And we were worried a bit and we've made a bunch of commitments. And the only way we can meet all those commitments was to have fully automated lights-out data center, cloud data centers. And we – the team did a fantastic job prioritizing that automation.

And that automation software is what allows us to have a large number of data centers rather than a small number of large data centers. It's just a different – it's a different suite of software to do it, to manage it..

That makes a lot of sense..

Larry, I want to comment also on the private data centers that are truly a full cloud, but at customers. So that's just....

Yes, a lot of people talk about – they talk about – I think its hilarious. I hear people talk about hybrid cloud. So a hybrid cloud means there's someone's public cloud. And then whatever you have in your data center is the hybrid. This is ridiculous. That's not a cloud.

People say, well, that's the most common cloud there is, whatever you got plus some link to a public cloud. That is not a hybrid cloud. We offer identical hardware, the identical automation software. We'll put a region. It runs all of our apps, it runs all of our services, 100% of them. And we'll put it in your data center.

We can do that now because we can run that – we have the automation software to run that on your floor behind your firewall. We can build that. So it's true.

So our notion of a hybrid cloud is basically the same thing, but it's located on your data center floor behind your firewall with high-speed network interconnects where you're comfortable and feel safe, safer than if you were in the public cloud. That's the only hybridy thing about it. Otherwise, it's exactly the same thing.

You can move a workload from a public cloud into your private region and then back out of your private region back in the public cloud. They are identical in every way except for the security protection and some firewalls in your private data center. That's a real hybrid cloud. The other guys don't have it..

That makes a lot of sense. I really do appreciate it and congratulations on the strong quarter..

Thank you..

Our final question comes from Phil Winslow with Credit Suisse..

Hi, guys. Thanks for taking my question and congrats on a great quarter and outlook. In a quarter where a lot of numbers jumped out, I mean, the one that jumped out to me the most was the license growth year-over-year. I had to go back nine years to my model to find a quarter that was actually higher than this.

And obviously, when I think about license for Oracle, I was assuming its being driven by the database business. And then when you think about that….

By the way, I'm really glad you said that. That's what it is. I mean think about it. I mean Marc Benioff over at Salesforce.com, they run their business, their cloud business entirely on Oracle. Now people say, well, that's not cloud revenue. You just license that revenue. Well, it's the Oracle database running all of Salesforce's cloud.

And we don't count – and you're right, we don't count that as cloud revenue. We count that as license revenue. But is that a modern cloud application? I think so. But again, the license stuff is being driven by the use of our database in some very large clouds..

That's great. That partially answers one of my questions. But when you think about that license and your example of the – for example, like Salesforce together with just the cloud services and the acceleration you see there, I mean just that overall business seem to accelerate during Q2 here and even versus Q1.

And if we think about some of the other smaller competitors in the space, they've seen acceleration as well. So I guess what my question is there's seems to be something going on in the data world and the data infrastructure stack. And obviously when Oracle moves at your scale at these percentages, there definitely seems to be something going on.

So what is that? And how do you think about the sustainability of those drivers?.

Larry, it's either you or me. We're going to talk about data. I mean listen, this is not new news in that what is going on is getting insights from data, being able to capture large amounts of data, and analyzing it. And of course, that's coming and so much of it is in Oracle.

We're the ones who can handle high performance, high reliability requirements. And the Oracle database continues to grow. But in addition, we have the other technologies that are also doing very well. Java continues to be incredibly strong, and it's leading application development environment.

But remember, when people buy the Oracle database licenses, they can bring those to our cloud, and that's a very economical way to operate. And really, what's going on is huge amounts of data growing exponentially.

And when it's important data, especially data you want to use for analysis, for data warehousing, for transactions, you're going to pick Oracle in nine times out of 10. And so this is great for us. And of course, as more businesses just digitize, this just draws more of our technology..

Yes. And I would say that as SAP moves their applications to S/4HANA in the cloud and they do what I call hosting and they call cloud. The vast majority of those SAP databases do not run HANA. Way over 95% of them still run Oracle. It's a big business for us, even when it migrates to the cloud.

I mean Amazon has customers who have taken their Oracle database licenses, and they're running those Oracle database licenses in the cloud. So license does not mean on-premise, and license does not mean the cloud. It's a bit of a – it's a mixed bag, right? Some of that license revenue and most of the new license revenue is on its way to the cloud..

Great. Thank you, Larry..

A telephonic replay of this conference call will be available for 24 hours on the Investor Relations website. Thank you for joining us today. And with that, I'll turn the call back to Erica for closing..

Thank you for joining today's Oracle's second quarter 2022 earnings conference call. We appreciate your participation. You may now disconnect..