Oracle Corporation (ORCL) Q4 2010 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the Oracle Corporation fourth quarter fiscal year 2010 conference call. As a reminder, 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, operator. Good afternoon, everyone, and welcome to Oracle’s fourth quarter and fiscal year 2010 earnings conference call. I am Ken Bond, Vice President, Investor Relations. And with us on the call today are Chief Executive Officer Larry Ellison; President Safra Catz; President Charles Phillips; and Chief Financial Officer Jeff Epstein. As a reminder, today’s discussion will include forward-looking statements including predictions, expectations, estimates or other information that might be considered forward-looking. While these forward-looking statements represent our current judgment of what the future holds, these statements are also subject to risks and uncertainties that may cause actual results to differ materially from statement being made today. Throughout today’s discussion we will attempt to present some important factors relating to our business, which may potentially affect those forward-looking statements. We encourage you to review our most recent reports on Forms 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. As a result, we caution you against placing undue reliance on these forward-looking statements, which reflect our opinion only as of today. As a reminder, we are not obligating ourselves to revise or publicly release any revisions to these forward-looking statements in light of new information or future events. A copy of the press release and financial tables, which includes a GAAP to non-GAAP reconciliation and other supplementary financial information can be viewed and downloaded from our Investor Relations website. We’ll begin the call with a few prepared remarks before taking questions from the audience. And with that, I would like to turn the call over to Jeff Epstein for his opening remarks. Jeff?

Thank you, Ken. Good afternoon, everyone, and thank you for joining us. I will review our non-GAAP financial results focusing on U.S. dollar growth rates unless otherwise stated. This quarter, foreign exchange rates were not much of a factor in our overall results compared to our guidance of a 3% benefit to new license revenue and a 4% benefit to total revenue. Even with the currency tailwind being less than anticipated we were at the high end of our guidance range for total revenue and we beat our guidance ranges for new license revenue and EPS with record earnings per share this quarter. On a constant dollar basis, we beat our guidance ranges for new license revenue, total revenue and earnings per share. In short, Q4 was an excellent quarter for Oracle. In the fourth quarter, new software license revenues were $3.1 billion, up 14%. The Americas grew 28%, EMEA was down 3% in U.S. dollars, and up 4% in constant dollars. And Asia was up 15%. Our results continue to underscore the strength, balance and diversity of our business and the quarter was not dependent on usually large deals. Technology new license revenues were $2.3 billion, up 18% as the Americas grew 34%, EMEA was down 1% in U.S. dollars and up 6% in constant dollars and Asia was up 19%. Applications new license revenues were $855 million, up 6% from last year. The Americas grew 16%, EMEA was down 7%, and Asia was up 2%. Our software license updates and product support revenues were $3.5 billion, up 13% from last year. Customer support attachment and renewal rates continue at near record levels. Revenues from our hardware systems products were $1.2 billion, while revenues from hardware system support were $688 million. Our services revenues were $1.1 billion, up 4%…

Thanks, Jeff. I will briefly comment on our non-GAAP results for Q4. I will then review guidance for Q1 and turn the call over to Larry. Obviously, we are very pleased with our Q4 results and with our outstanding performance throughout the year. Our business is extremely healthy with substantial strength in database, middlewares, apps, and hardware. Our tech business, highlighted by database was spectacular this quarter, with growth of 18%, including 34% growth in the Americas. Our applications business was also strong with 5% growth over the last 12 months on a constant dollar basis versus a negative 24% for SAP for our most recent quarter. Sun hardware systems revenue came in well, taking into account the fact that we’ve already ended Sun's reselling of other companies’ products, which had historically accounted for hundreds of millions of dollars a year in sales. This quarter, we saw sales growth for Sun hardware products. In addition, our estimate for the Sun business contribution to operating income comes in at over $400 million for our first full quarter after the merger. This compares to the loss in Sun’s quarter ending June of last year when Sun was an independent company. Now, to get to that number, we’ve done some allocations for the quarter and because a lot of our back office and software R&D and software sales operations have already been integrated with Oracle’s pre-merger team, now in the coming quarter some of the expense estimates may really be too difficult to make, but we will break out the revenues and the segregated expenses whenever possible for the remainder of this year. Clearly, we continue to expect Sun’s contribution to meet or exceed $1.5 billion for non-GAAP operating income in fiscal 2011 and $2 billion in fiscal ’12. We’ve also made excellent…

Thank you, Safra. When we introduced the Exadata database machine, it really was focused on datawarehousing and our primary competitors were companies like Teradata and Netezza. When we introduced Version 2 of our Exadata database machine in partnership with Sun and then we bought Sun, we really focused not simply on datawarehousing performance, but also on online transaction processing. And our current version of the Sun Exadata database machine substantially outperforms IBM’s fastest computer in both datawarehousing and transaction processing. As a result, in our previous quarter in Q4 some of IBM’s largest customers began buying Exadata machines rather than big IBM servers. And the 2011 Exadata pipeline continues to grow and is now approaching $1 billion, making Exadata the fastest growing new product in Oracle’s history. Now, back to Q4. Again, I said the competition has really shifted from companies like Teradata and Netezza to big IBM machines and the Q4 results bore that out. We beat IBM 30 times in Q4. We beat Teradata nine times in Q4, and we beat Netezza seven times in Q4. And we sold the Exadata machine into some of IBM’s largest and bluest accounts, including Bank of America, Carrefour the second largest retailer in the world behind Wal-Mart and Thomson Reuters. I will turn it over to Charles who will give you a broader picture of how our other products did in Q4. Charles? Charles?

Thanks, Larry. We really had good team work across all the account execs by product family. It was really a good quarter and as you can see North and Latin America were strong results. They’ve exceeded plan as they have all year long. EMEA in particular did a great job of delivering results against some tough comparisons especially in the context of the change in the UK government, financial instability in Greece and Spain, while integrating acquisitions. So with all those headwinds, they delivered good results. And Japan saw a rebound from a rough start to the beginning of the year. What I am seeing in the field right now, we have many more touch points with our accounts. So our visibility and understanding of customer requirements has significantly improved. And right now almost any decision they make in the data center could potentially involve Oracle now. So, we have deployed a cadre of technical advisors that we call client architects that essentially act as dedicated CTOs for our larger customers who want to stay tightly aligned with Oracle’s strategy. These client architects are more in demand as we become more important to our customers. They advise the CIOs on how to invest and shape their architectures in concert with Oracle’s investments. We are improving the attach rate on deals to drag along multiple products up and down the stack and which continues to get better as the products get more integrated. We also saw our partners, in particular the systems integrators and even some of the hardware companies make a concerted effort to reinvigorate their partnerships post the Sun acquisition, which may be counter-intuitive, but I think they’d see the momentum in the market and want to align themselves accordingly. It’s also reflected in the amount of companies signing…

Operator, I think we’ll be ready to begin the questions now.

(Operator instructions) And we’ll take our first question from Heather Bellini with ISI Group. Heather Bellini – ISI Group: Good afternoon, everybody. Safra, I was wondering if you could share with us your views on Europe and what you are seeing with sales cycles in that region now versus say a few months ago and I guess in particular your view on whether or not you are starting to see this impact deal signings? Thanks.

Well, that’s really a question for Charles. I mean we actually were very, very strong in Europe. By the way, they had a pretty tough compare actually because they had a reasonably good Q4 last year and so far we are actually off to a very good start, but there is no question that the U.K. government and a number of our big customers have been impacted by different things in Europe. But we have so many products and we have such diversity in our European base and – that things have been going very well for us so far. Charles, you want to comment on that?

No, that just sums it up. Heather Bellini – ISI Group: Thank you.

Next question.

We’ll go next to Adam Holt with Morgan Stanley. Adam Holt – Morgan Stanley: The operating margins were obviously terrific in the quarter. You beat consensus by over $400 million. Safra, I believe you talked about the gross margins in the hardware business. Where else did you see the key contributors to the margin upside in the quarter and as we look at the next year, do you feel like we’ve reset at a higher level, heading into fiscal ’11?

Well, of course, you know, you all have become accustomed to the fact that we sell a lot more software, but we don’t increase our cost structure very, very much. Sun and our own business generated a lot of new software sales. I mean so that on its face ignoring the hardware would lead to higher – to improved operating margin. And then we have the hardware business, which is clearly – we are making it at the gross margin line, we are making it at the operating expense line, we are making it all around. But this is a scale business. And the more we grow in scale, our software business frankly does, more we grow in scale as a hardware business our operating margins will improve. You just need to look at our history for the past few years and it shows up sort of all around, hardware and software business. Adam Holt – Morgan Stanley: Terrific. Thank you.

We’ll go next to John DiFucci with JPMorgan. John DiFucci – JPMorgan: Safra, you’ve been very clear about focusing on profits as it pertains to Sun and actually as it pertains to any business, but looking forward into this business, as – on the hardware top line, can you give us a little more general guidance on how we should be thinking about it going forward. I mean coming into this quarter, obviously end of your fiscal year and it was close to what Sun’s fiscal year would have been and perhaps may be the hardware business looked pretty good and perhaps there could have been some pent up demand too to show that. But I am just wondering if we – should we, given the guidance for next quarter and looking forward, if we should be just may be not too aggressive on the top line for the hardware business going forward?

Well, there is no question we need to get some sort of a base line for the hardware business, but you need to understand that we are also selling differentiated products with a lot of new differentiated products, both out and coming out. And Exadata is one of those types of products. So, obviously, I am not going to recommend you get ahead of my guidance, that is the reason I am giving you guidance. It’s what we actually think we are going to do. But we will need a year to understand the amount of seasonality that there is in the hardware business. We don’t have full visibility and as I did mention, we are not – we are no longer reselling other – some products that were other people’s products, which Sun sold for hundreds of millions of dollars a year. And so that has to be – we need a year without that for you to get a base line. But in general, we feel that – we already see it. Customers are buying a lot of hardware now. They are very, very loyal to the technology that they love. And now that they know that it has a future and that we are investing an enormous amount in continuing these lines, and in enhancing them, they are much more comfortable making those investments again. So, you can see sequentially we are not projecting a very large decline, which in our software business we usually are between Q4 and Q1 because we have some hardware specific momentum we are very upbeat about. But we will need a year to understand pipelines and conversion rates, et cetera, and see how we come out as well as to be able to measure some of these new products and how they are taking off. John DiFucci – JPMorgan: Thanks. If I might, just a quick follow-up for Larry to that in the hardware business. The Exadata product both OLAP and OLTP solutions and people are used to buying analytics in an appliance fashion or in appliance form function. I am just curious, how much are you starting to see customers get as far as their comfort level of buying transaction processing solutions and in buying Exadata?

Well, I think as long as we can demonstrate – the Exadata version 2 is a relatively new product, as long as we can demonstrate in benchmarks that were a lot faster than IBM’s fastest computer, the appliance is particularly attractive in OLTP because since OLTP is mission critical and all these pieces fit together, our architecture is not only faster than IBM’s, it’s much more reliable. Exadata has a fault-tolerant architecture. There is no single point of failure, which is much more important in OLTP than it is in datawarehousing. So we are faster and more reliable. Now we have to – people are skeptical about any new product. They buy a couple of machines and they test them and then they put them into production and if we are successful then they start making standardization decisions that I think the combination of much better performance and the fact that it’s appliance where all the pieces fit together, engineered to fit together and tested together and the fact that it’s a fault tolerant architecture gives us a huge advantage over IBM in the OLTP space. So, again each customer will take their time in trying it and then make a decision, but we are making really good progress. I also want to add on to what Safra said, she forecast hardware at $1 billion for Q1. The guidance is the guidance. However, you should know our plan is to dramatically grow the Sun sales organization, and strongly grow the Sun business. Your earlier question, are we just focused on profitability, we are focused on growing the Sun business and growing it rapidly. We are being very conservative in our guidance, as we should be. But we are adding a lot of sales people. May be Charles can – comment on just how quickly – it takes them a while to get productive but may be Charles can comment on just how quickly we are adding distribution capacity to the Sun’s sales organization so we can grow that business.

Yes, as you probably know, we made a big public announcement that we are hiring and so that generated a lot of momentum. What I have been impressed with is the quality of people who are coming because they are excited about the differentiated message they see, what Sun is doing, they see Exadata, they see the investment that we are making, so the quality of senior people who want to come here from our competitors has surprised me and we are starting [ph] them up as we speak and now that the quarter is over with, we have a little more time to focus on it. We are ramping up, but the pipeline is there and people to hire.

Yes, we are going to more than double the Sun sales force. John DiFucci – JPMorgan: Okay, thanks.

Okay. John DiFucci – JPMorgan: Thanks, that’s very helpful. Nice job.

Thank you.

Next question please?

We’ll go next to Sarah Friar with Goldman Sachs. Sarah Friar – Goldman Sachs: Terrific. Thanks for taking my questions. Just first on Sun maintenance, or it feels as if you still have a lot of low-hanging fruit, now that you've got a quarter under your belt, what are you seeing in terms of trends in pricing and maintenance and then attach rates? And then I have a very quick followup after this, if I may.

Sara, you have kind of a funny line, so we couldn't quite hear you, but you are asking about Sun’s support – support on – ? Sarah Friar – Goldman Sachs: Yes, exactly, Sun maintenance, so what you are seeing in terms of pricing ability and then attach rates, which I think we are quite weak, before you took on Sun.

Yes, we – well, we announced new pricing, which was very, very well received. Gartner wrote an excellent report on it and customers have sort of adopted it very much. It’s considered extremely competitive. A lot of customers that had not been on support from Sun have come to Sun, have come back to Sun. And the attach rates are increasing. So, there is definitely value to Sun’s support for hardware and software and customers are recognizing that and attach rates are increasing. And we are starting to increase even further. Sarah Friar – Goldman Sachs: Great. And then if I could, a followup, just very big picture. You are clearly one of the big tech bellwethers. Your views on the environment hold a lot of weight. Are you seeing any change on the margin, not even just Europe specific but just on the margin in terms of customers’ willingness to spend today versus a month ago, versus may be two months ago, because clearly the market is saying that they are very concerned right now.

You know, for us as I said before, it’s very hard for us to parse the line, to make a line between Oracle’s company-specific momentum and the overall market. Our customers are very, very sort of happy right now and they are showing that by investing in more and more of our products. This is sort of a consistent message. We got the exact same question a quarter ago and a quarter ago. And there is no question that the quarter started off very well for us already. And I think that we are not economists here, we just sell software and hardware. So far, our customers are making very significant investments and there are a lot of customers looking at our products right now, very, very seriously and making buying decisions literally as we speak. So, I don’t know if anybody else wants to take a stab at the economy question, but things are going well here guys, which I think is clearly obvious. Sarah Friar – Goldman Sachs: Okay. Well, the perspective is great. Thank you.

We’ll take our next question from Joel Fishbein with Lazard Capital Markets. Joel Fishbein – Lazard Capital Markets: Hi, can you please give us some more color around the change or the elimination of the Sun channel and how that has impacted or the impact it’s having on the operating margin line?

Well, yes, let me correct that. We didn’t eliminate the Sun channel at all, that’s not exactly what we are doing. What we said was over time there would be a gradual shift to a more direct mix of business that Oracle normally sees. So pre-Sun anywhere from 40% to 43% normally in a given quarter of our business goes through indirect channel. So we’ve had a strong channel for many, many years. It’s important to our business. Sun was much, much higher than that. For large customers, we want to service them directly. So there will be a shift toward our number over time, but nothing dramatic in one quarter. Nothing to disrupt the flow of business. So that shift has started, but again it will take some time.

And regarding the margins, obviously this will lead to actually higher revenues for the company and because of our really massive scale it will actually also lead – revenues will increase a lot, expenses will not increase as much, which means that overall operating margins will improve consistent with really the leverage and the mass scale we have here. Joel Fishbein – Lazard Capital Markets: So, the takeaway is that it really wasn’t an impact in this quarter because it’s too early to impact, is that the way to look at it – ?

That’s fair.

Correct. Those partners are adding value and we want – the ones that are adding value, we want to continue to work with for many years. Joel Fishbein – Lazard Capital Markets: Thank you.

We’ll take our last question from Phil Winslow with Credit Suisse. Phil Winslow – Credit Suisse: Yes, great quarter. I have just a question on the database and middleware line.

Phil, we can't hear you. Phil Winslow – Credit Suisse: Can you guys hear me now?

Not really.

Phil? Phil Winslow – Credit Suisse: Can you guys hear me now?

Sorry, Phil.

Thanks.

Phil, we are not getting a connection. We’ll try back next time. Operator, we can close out the call please.

And that will conclude the question-and-answer session. I would now like to turn it back over to Ken Bond for any additional or closing remarks.

Thank you, operator. The telephonic replay of this conference call will be available for 24 hours. The replay number is 888-203-1112 or 719-457-0820, and the passcode is 8533249. Also the webcast, the replay will be available through the close of market on July 1st and can be found on the Investor Relations website. Please call the Investor Relations department for any questions from this call and we look forward to speaking to you. Thank you all for joining us on today’s conference call. And with that I will turn the call back to the operator for closing.

And again, that will conclude today’s call. We do appreciate everyone’s participation.