Oracle Corporation (ORCL) Q1 2012 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to today's Oracle Corporation Quarterly Conference. Today's call is being recorded. And now at this time, I'd like to introduce Ken Bond, Vice President of Investor Relations, Oracle. Please go ahead.

Thank you, Anthony, and good afternoon, everyone, and welcome to Oracle's First Quarter and Fiscal Year 2012 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. On the call today are Chief Executive Officer, Larry Ellison; President and CFO, 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 attempt to present some important factors relating to our business, which may potentially affect these forward-looking statements. While these forward-looking statements represent our current judgment, these 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 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. And finally, we are not obligating ourselves to revise our results or publicly release any revisions to these forward-looking statements in light of new information or future events. Before taking questions from the audience, 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 Larry and Mark for their comments. As you can see, we delivered another great quarter as we executed well throughout the quarter, including late July and August. Our Q1 results against our June guidance made clear that we continue to have a lot of company-specific momentum. Obviously, we're pleased with the results. New software license revenue was up 17% to $1.5 billion, building off exceptional growth of 25% in Q1 of last year. We continue to see broad-based geographic and product momentum as technology new license revenues were up 14% to $1.1 billion and applications grew 23% this quarter to $428 million with Europe particularly strong. Geographically, the quarter was balanced with new license growing 10% in the Americas, 20% in APAC and 25% in EMEA. The quarter was also not dependent on any large deals. Software license update and product support revenues were up 16% to $4 billion. Support attach and renewal rates continue at the usual high levels. Hardware systems revenue was $1 billion for the quarter. This quarter, hardware gross margins were 54%, significantly higher than the 48% last year as we continue to shift the product mix to more profitable products and engineered systems and as we continue to improve our supply chain efficiency. Total revenues for the quarter was $8.4 billion, up 11% from last year. We matched this top line momentum with business discipline, and we're extremely pleased with our non-GAAP operating income of $3.6 billion, 21% higher than last year as our operating margin expanded to 42% from 39% last year. We still believe there remains ample leverage in our business model, and we could be back at our…

Thank you, Safra. In Q1, the transition away from selling low-margin commodity servers to selling high-margin engineering systems increased both the gross margins and the overall profitability of our hardware business. In Q2, we will accelerate that trend when we introduce 4 brand-new engineered systems products. Each of these new engineered systems optimally combine Oracle software, Oracle silicon and Oracle hardware to deliver extreme high performance, fault-tolerant high reliability and improved ease of use. The largest of these new-engineered systems is the fault tolerant SPARC Supercluster, featuring our new SPARC T4 microprocessor that runs up to 5x faster than the T3 microprocessor it replaces. Our new feature-rich Solaris 11 operating system and the ultra high-performance Exadata Flash disk storage system. The SPARC Supercluster runs the Oracle Database applications faster and less expensively than anything available from IBM. Thus, we expect that many customers in our large SPARC Solaris installed base will be upgrading to SPARC Superclusters. Mark, it's all yours.

Well, thanks, Larry. Just a few points on the quarter. You heard about 17% growth. That comes on top of 25% last year. It was primarily organic broad-based across tech and apps, both growing double digits. Performance across geographies was balanced. One number worth noting is apps in Europe was up over 60%, 6-0 percent. Second, Exadata Exalogic. Unit growth was nearly triple digit, broad-based across industries and geographies, and we sold systems to more than 150 unique customers, of which 100 were new Exadata or Exalogic. Third, our industry-focused solutions are increasing in relevance to customers and that shows up in our 17% growth, but our industry-focused solutions again grew faster than Oracle did in license growth. So again, good help from the industry-focused solutions. Now fourth, I want to make sure this point is clear. In addition to Exadata and Exalogic growth, our SPARC server products grew this quarter. We had growth in the core SPARC product line. Our strategy around high-intellectual property, high-attach, high-margin solutions that include Exadata, Exalogic and the SPARC server products is working. You're also beginning to see that show up in these industry market share figures that show us gaining share. Last, we are continuing to hire. We added 350 people to the sales organization in Q1. And with that, I'll turn it back over to Ken for your questions

Okay. Thanks, Mark, Anthony. I think we can proceed now to the Q&A portion of the call.

[Operator Instructions] And I will take our first question from Adam Holt with Morgan Stanley.

My question, I guess, is for Mark on the hardware business. It's a 2-part question. First, where do you think you are in turning this business around? And what gives you confidence in the forward look there? And secondly and along that line, how conservative do you think the hardware guidance is for the second quarter?

Well, I probably, Adam, won't get into a lot of conservatism or optimism. The guidance is the guidance. I think second point, I think we're really not as focused, to be very frank, on the hardware growth rate as we are on the point that I just made of growing the right things in the product line. The things that are attributable to long-term profitability, long- term positioning with the customer, long-term positioning in the data center. And I'll try to give you an example. If you take that core server product line that we grew in the quarter, SPARC server product line, if you took an M-series product, just imagine, Adam, that we sold $100 million worth of M-series products. And these are rough numbers. My guess over 5 years, our profitability on that is roughly $100 million when you include the attach and the support and the service. Just the same, if we sold $100 million of x86 with no intellectual property, my guess our profitability would be less than 1/5 of that. And I only bring that up to give you the polarization of the impact of intellectual property, the alignment of that intellectual property to a solution, the alignment of that to support the ability for us to do things for the customer and the eventual profitability for the company. So what we're focused on are the solutions like what Larry described are coming out, Exadata, Exalogic, the core SPARC product line and that's where we're focused. And in that context, I think we are turning around the business. I think you are seeing some of the momentum. And if you see the market share charts, they tend to show you the facts that we are gaining share in that core part of the product line.

Let me add a little bit to that just so we're really clear. I don't care if our commodity x86 business goes to 0. We don't make any money selling those things. We have no interest in selling other people's IP. Commodity x86 includes Intel IP, Microsoft IP. We don't make money selling that. Sun sold that stuff, and we are phasing out that business. We have no interest in it whatsoever. We have interest in selling systems that include our IP. That's how we're going to drive the profitability of our overall hardware business, eventually. I think that's in fairly short order. Our engineered systems will be -- are growing at such a high rate that the overall hardware business top line will grow also. But what's really important is to continuously grow our margins in the hardware business and our profitability in the hardware business, so we can meet Safra's goal, which is getting back to our pre-Sun acquisition's overall profit margins. Next question?

We'll take our next question from Heather Bellini with Goldman Sachs.

This is a question for Larry. I was just wondering if you could walk us through the big data opportunity that everyone's been talking about, and how you see Oracle participating in this trend and also how you see it impacting Oracle's core database franchise.

Well, Hadoop and all of the associated utilities with Hadoop, which uses the term big data for all of that, is going to be one of the feeder systems to the Oracle Database. We have announced interfaces that allow you to take your Hadoop systems and connect them to Oracle systems so you can load your Hadoop data into Oracle. So we think it's going to increase the usage of Oracle. Furthermore, I mentioned we're going to come up with 4 new-engineered systems, one of which is SPARC Supercluster, and we're also going to have a big data engineered system that we're going to introduce at Oracle OpenWorld. So we think as more and more data gets computerized, a lot of that data finds its way into an Oracle Database and it allows our database business to grow at an accelerated rate.

Our next question will come from John DiFucci with JPMorgan. John S. DiFucci - JP Morgan Chase & Co, Research Division: My question's for Safra. It's a macro question. Safra, we've spoken to you for a while now about Europe. I know you've acknowledged sort of general macro weakness in the region, the same kind of stuff we read in the paper about. You continue to put up better results than we would expect. That’s especially relative to others and especially -- actually especially this quarter. I guess can you talk a bit about what you're seeing in Europe more specifically, and what might be implied in the guidance for the region?

Well, listen. Our bottom line is that I think we're being successful where other folks are being less successful because our products are so compelling. We had many, many orders in Europe for really sort of across the board for our product line because either engineered systems or our other products are extremely compelling value propositions, and it gives the customers an opportunity to be much more efficient. We were strong in really all the sectors that you may be reading about are struggling, both in Europe and in the United States. Our U.S. government business is still very good. Our financial services business is very good. Our European banking business remains very good. So I'll tell you, I think we have a lot of company-specific momentum across the board, and that's really all I ever speak to is our own company. Mark, why don't you add some additional detail?

I think Safra's point is right. I mean, I thought we had just a solid quarter in Europe. We did not see any anomaly that was unique across any other region that we had. We had some really cool business that showed up in Europe too. We had a great win at Deutsche Post with Exadata, Exalogic. We had some great Apps to Disk wins in Europe in the quarter. I gave you the applications growth number. It's 60%. I would be cautious to Safra's point that this is not maybe macro but may be more Oracle specific. We got a great team over there, and to add to it, we're hiring in Europe right now. We are adding to our sales force in Europe right now. We think there is more market to cover, and there's more opportunity to go get. I guess, I'd say it another way, maybe a bit of a plug. I'm very proud of those guys. They're doing a very good job. They are gaining share, and their Exadata quarter was, frankly, very impressive as well. John S. DiFucci - JP Morgan Chase & Co, Research Division: Mark, just a quick follow-up to a point you made. You said the industry-focused solutions were really strong this quarter, and apps were really strong in Europe. Even though it was a relatively easy comp, it still looked like a really good number. Is that at least partially due to industry vertical apps?

It's all of the above. I would not leap to that conclusion, John. I think that think of it as broad-based, again, a very good quarter in core apps as well. So if you looked at CRM, it was a very good quarter in Europe. Europe really just had a good quarter sort of all the way around. When I went through Exadata, very strong quarter. Good Exalogic quarter, good horizontal apps quarter, good vertical apps quarter. We had a couple of Apps to Disk wins I described a little while ago, so and that means end-to-end Oracle stack that we bring to the customers. So I wouldn't leap that it was any one thing. The best news I can tell you about Europe, broad-based.

We'll hear next from Phil Winslow with Crédit Suisse. Philip Winslow - Crédit Suisse AG, Research Division: Just focusing back on that applications line in particular. I believe it was up 19% year-over-year in constant currency, which is pretty fantastic just given the environment, and I do believe that this is largely organic. What is really driving that, especially kind of relative to your competitors? Then also, Larry, just specifically, the Fusion Applications, just wondering if you could give us an update there, some of the feedback that you're receiving. Maybe just help kind of the Wall Street community here compare sort of the Fusion architecture with some of the more legacy ones you see out of there from your competitors.

Well, as you know, we've been working on Fusion Apps for almost 6 years now, and we have about 200 customers using Fusion Apps. We're going -- before the end of this calendar year, we're going to have general availability on Fusion, and we have a number of wins against not only SAP using Fusion but some of the newer competitors like Workday using Fusion where people has compared our user interface to their user interface, our SaaS offering to their SaaS offering, our cloud infrastructure to their cloud infrastructure. So we think it's very important that we're out in the market now, not only with our traditional applications, which will continue to support for years to come, but also an all new generation of Fusion Applications, something that SAP, our largest applications competitor, doesn't have. We think that, that gives us a huge advantage going forward. Mark, do you want to add to that?

Sure, I will. I think to Larry's point, one, we had a very good quarter across when you would think of as the traditional application base. I'm staring at a lot of numbers and none of them stand out. They're all good. They're all growth numbers. And again, it's pretty broad-based across ERP and EPM and CRM and so forth as well as the vertical applications. I think when you have to add to Larry's point is we're the only company now with a series of traditional apps but also bringing online our SaaS cloud apps. We are in the market aggressively with HCM today. We released that in Q4. We have teams dedicated to growing our cloud business. We are doing the same thing now in CRM. You will see us very aggressively in the market focused on those 2 segments as we move into Q2.

Our next question comes from Brent Thill with UBS.

Two quick questions, one for Larry and Mark, just around the database business. There's been a lot of focus on unstructured data, and maybe it's a tie-in to Heather's question around kind of the next leg of growth for the database business, how you think about that and where you're positioned around the move towards unstructured. And for Safra, just a lot of questions around financial and federal exposure. I don't know if you can give us a sense of what the exposure is. And if you don't give us specific numbers, if you could just kind of give us a ballpark because there's certainly a lot of attention on those 2 particular segments.

Okay. Oracle has always stored both structured and unstructured data. This is really nothing new. We are constantly adding features to our database to support the storage and searching of unstructured as well as structured data. Economy was a shock to us. We looked at the price and thought it was absurdly high. We had no interest in making the economy acquisition. We think we're much better off with a couple of smaller acquisitions and to continue to innovate in that area, so that the unstructured data and the structured data both find their way into an Oracle Database, where it's secured, it's scalable, it runs on Exadata. We think we really don't want to have 2 separate databases kind of an autonomy-like unstructured database and an Oracle-structured database. We think that data should be integrated with a single database technology. That's always been our strategy for Oracle. And it started as a relational database then we added objects, then we added text and then we've added a variety of other things like video and audio to the Oracle Database. We think that should be unified and that's how we're approaching the problem. Mark?

Yes, just to add to it. Again, as you can see, our database business grew in the quarter materially. I mean it was a very nice performance across our options, across additions. It was just strong. And I think the fact that you've got not only unstructured data, not only do you have big data, you're going to have several billion people now running around the planet with computers in their hands trying to get information out of databases. And geez, we think that's good news for the people that have databases like us because it’s going to be a lot of people trying to get information simultaneously, looking for performance. I think when you look over the next several years, the database is going to continue to grow. The ability to direct database performance with capabilities like Exadata and Supercluster, as Larry talked about earlier, aren't going to become as much a novelty as they are a requirement for all the people that are going to be paying and trying to get an opportunity to get at this data. So database business performed well in the quarter, and gosh, we feel well positioned for all the secular trends that are going on in the world today.

Regarding the sectors in which we're big, luckily for us, we're sort of big in every segment. And telecommunications providers; government, both federal, state and local, et cetera; banking, I would say to be honest with you that we don't have nearly the exposure that banking -- I think there still remains an enormous opportunity in the banking sector for much more Oracle than there is now. Historically, they are a much more mainframe-focused segment, and we actually have opportunity because we run much, much faster. We're much, much cheaper to operate, and over time, I think that remains an opportunity. I don't view it at all as exposure. I think it explains, by the way, why even with the sector under pressure, we continue to grow so much because our products are just better. We're a very good fit, and we continue to do well in all these segments.

Yes, I'd add to it, too, that when you look at the play with the Exa line, it is every bit as much a consolidation play. So when you think of an industry like financial services, Exadata delivers performance and it also delivers economies. So the opportunity for us to go into a bank and deliver -- and the ability for the bank to dial on the continuum, how much performance do you want and how much cost do you want to reduce. So we have customers in banking where, I think to Safra's point, we have tremendous opportunity to go into those banks and have them consolidate Oracle on Oracle and either gain performance or actually save money simultaneously. That's a very attractive value proposition in this kind of economy, and it's opportunity for us.

Our next question comes from Jason Maynard with Wells Fargo.

I wonder if you could go back to the hardware business. And if you can maybe put a little context or framing around where you think you're at in the transformation to selling engineered systems and maybe talk about it on the customer adoption, and then also just in terms of your organizational capacity, shifting more from engineered -- or to engineered systems from some of the legacy Sun hardware products.

Well, I mean, I'll tackle that. I think certainly next fiscal year, we would expect our overall hardware business to have top line growth, no question about it. And the transition right now is we've got -- our Exa line almost doubled in the quarter in Q1. Our overall SPARC line was up on servers. Our x86 commodity line was down, and Sun had a practice of selling x86s at very, very low margins and we reward our salespeople based on margins. So we don't make money selling low-margin commodity x86 boxes, and our salespeople don't make any money selling them. And therefore, they're not -- we're deemphasizing that business. That business is shrinking. However, our profitable businesses in servers, the Exa line and the SPARC line, are growing. And also, in storage, our ZFS system is growing. Our Pillar system is growing. The Exadata storage system is growing. So our disk storage systems are all growing, the ones with our IP. However, we also sell third-party disks without our IP at very low margins. Those are still in the system. And we expect those low-margin storage systems to also decline because, again, we pay our salespeople based on margins and there is no margin. There is very low margin on those products. We don't care about selling those products because we don't make any money. I think your question is when will we sell -- when will that be out of the system. And us pretty much only be selling servers and storage with our IP, and I think that will be next fiscal year, you'll see top line growth in the hardware business. But this fiscal year, you'll see continued improvement in gross margin and continued improvement in profitability in our overall hardware business even though the commodity business will be gradually shrinking every quarter. I don't know if that answered your question.

And our last question comes from Kash Rangan from Merrill Lynch.

One for Larry, one for Mark. Larry, I remember about a year back, we asked you about big data on this conference call. And just to follow up to that, you have 2 new systems or 4 new engineered systems that you're going to be launching. One of them caught my attention, the big data engineered system. And also, I think you mentioned Exadata Flash-based system. I'm curious if we should think about the market that you're going after is being still core RDBMS. Or are you trying to go after other alternative approaches to the core RDBMS market? And I have a follow-up question for Mark.

Okay. Let me be clear on RDBMS. I mean, Oracle hasn't been just an RDBMS for about 20 years. We added -- I don't know how many people on the call are my age, probably no one. But a long time ago, after relational databases came out, there was a next-generation database that were called object databases. And everyone talked about, "Well, object databases are going to replace relational databases" And what actually happened is that object database capabilities got integrated into the Oracle Database. So Oracle seized just the relational database. It became a relational and object database. And then there were these things called text databases for text search, and those were separate databases. And Oracle then incorporated text search and text capability into the Oracle Database. And then there were these things called XML databases and separate XML databases. Then Oracle integrated XML capability into it. Now people are talking a lot about unstructured data and things like autonomy. Oracle's strategy has always been to integrate additional types of data into the Oracle Database. And a lot of this unstructured data, whether it's video or audio or images, all of those, we think the transition continues. We started with relational then objects then text then XML. Now a lot of different types of unstructured data types all going into the Oracle Database. Finally, big data or the searching of large amounts of data using Hadoop. After Hadoop finishes filtering the data, the place you want to put that data is an Oracle Database, and that's what a lot of our customers are doing. And we are exploiting the trend, the big data technology and the big data trend, if you prefer, by building a Hadoop appliance that attaches to the Oracle Exadata database or any Oracle Database for that matter. But you don't have to buy our Hadoop appliance if you can use whatever servers you want running Hadoop, and we provide the interface between Hadoop and the Oracle Database. The idea is all of your data should be -- you should be able to put all of your data regardless of data type into the Oracle Database where it can be stored securely and reliably. And you could search it and get answers to your questions very quickly.

That's a great historical perspective. Thanks, Larry. And, Mark, I think on the last quarter conference call or in the press release, you said that you hoped to triple the installed base of Exadata in the fiscal year. Just wondering if you still feel that you're tracking towards that goal.

That's what we're trying to do, and we think we've got a pipeline and a product line that puts us in position to get that done. And I think to Larry's point, we're also adding a lot more products to the lineup. When you look at what we're going to release in a couple weeks at Oracle OpenWorld, some of which you've heard about today. Tomorrow, you'll see us release an engineered system that combines more Oracle IP together to serve yet another part of the market. We just feel very good about our momentum in the broader engineered systems line and certainly specifically in the Exa line. So I guess, yes, that's what we're trying to get done.

And at this point, I'd like to turn the conference back over to today's speakers for any additional or closing remarks.

Thank you, operator. A telephonic replay of this conference call will be available for 24 hours. Dial-in information can be found on the press release, which was 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 all for joining us in today's conference call. And with that, I'd like to turn the call back to the operator for closing.

Thank you. Once again, this does conclude today's conference. We thank you all for your participation.