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Oracle Corporation (NYSE:ORCL)

Q4 2009 Earnings Call

June 23, 2009 5:00 pm ET

Executives

Ken Bond – VP IR

Jeff Epstein – CFO

Safra Catz – Co-President

Larry Ellison – CEO

Charles Phillips – Co-President

Analysts

Adam Holt - Morgan Stanley

Sarah Friar - Goldman Sachs

John DiFucci - JPMorgan

Brent Thill - Citigroup

Brendan Barnicle - Pacific Crest

Kash Rangan - Merrill Lynch

Operator

Good day everyone and welcome to today's Oracle Corporation quarterly conference call. At this time, I would like to introduce Mr. Ken Bond, Vice President of Investor Relations for Oracle; please go ahead sir.

Ken Bond

Good afternoon everyone and welcome to Oracle's fourth quarter and fiscal year 2009 earnings conference call. I’m 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 Executive Vice President 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 on what the future may hold, these statements are also subject to risks and uncertainties that may cause actual results to differ materially from statements being made today.

Throughout today's discussion we will attempt to present some important factors relating to our business which may potentially effect these forward-looking statements, as a result we caution you against placing undue reliance on these forward-looking statements which reflect our opinion only as of today.

And as a reminder we are not obligating ourselves to revise or publically release the results of any revisions of these forward-looking statements in light of new information or future events. We would encourage you to review our most recent reports on Form 10-K and Form 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.

A copy of the press release and financial tables, which includes a GAAP to non-GAAP reconciliation, and other supplemental information can be viewed and downloaded from our website at www.oracle.com/investor.

We’ll begin with a few prepared remarks before taking questions from the audience. In today’s conference call we will only be discussing Oracle’s Q4 and fiscal 2009 results.

With that I would like to turn the call over to Jeff Epstein for his opening comments.

Jeff Epstein

Thank you Ken and welcome to Oracle. Good afternoon everyone and thank you for joining us. I will review our non-GAAP financial results for the fourth quarter, focusing on constant currency growth rates unless otherwise stated.

First a note about foreign exchange rate movements, in March we told you that using then current exchange rates would reduce our Q4 revenue growth by 12 points compared to constant currency. Even though the US dollar weakened from March, the US dollar strengthened compared to Q4 of last year reducing our international revenues, expenses, and profits when measured in US dollars.

As a result currency movements reduced new license revenues by 9%, total revenues by 8%, net income by 11%, and earnings per share by 10% or $0.05 per share compared to Q4 of last year. Now let’s review the income statement, in the fourth quarter our new software license revenues were $2.7 billion, down 4% in constant currency and down 13% in US dollars.

EMEA grew 2%, Asia grew 3%, and the Americas were down 12%. Technology new license revenues were $1.9 billion, down 1% in constant currency and down 10% in US dollars. EMEA grew 1%, Asia grew 5%, and the Americas were down 6%.

Our BEA products, which have now been technically integrated with Oracle’s Fusion Middleware, packaged into unified suites and are sold off the same price list, accounted for $201 million of our Q4 new license revenues based on our internal allocations which are consistent with previous quarters.

Applications new license revenues were $805 million, down 11% in constant currency and down 19% in US dollars. EMEA grew 5%, Asia fell 4%, and the Americas were down 22%. Our software license updates and product support revenues were $3.1 billion, up 17% in constant currency and up 7% in US dollars.

These revenues are annual fees that customers pay to receive updated versions of and enhancements to their existing products. Our services revenues were $1.1 billion, down 7% in constant currency and down 16% in US dollars.

Our total revenues were $6.9 billion, up 3% in constant currency which is above the high end of our constant currency guidance range of plus 2% to minus 3% and down 5% in US dollars.

Operating income was $3.5 billion, up 9% in constant currency and down 1% in US dollars. Our non-GAAP operating margin grew by 240 basis points to 51% in US dollars. This is the highest operating margin in Oracle’s history as a public company and further demonstrates the success of our operating model.

Our tax rate was 31.3% which is higher then our guidance of 28% due largely to a one-time expense from a recent federal tax ruling involving Xilinx and the allocation of stock option expense deductions. Our Q4 non-GAAP earnings per share were $0.46, at the high end of our EPS guidance range of $0.42 to $0.46.

This was up 9% in constant currency and down 1% in US dollars. Our non-GAAP earnings per share would have been $0.05 higher had foreign exchange rates remained the same as they were in Q4 of last year.

In Q4 we repurchased 14.0 million shares at an average price of $17.85 per share for a total of $250 million. And for the full year we repurchased 226 million shares at an average price of $17.53 per share for a total of nearly $4 billion.

As we have previously stated the rate of our stock buyback will fluctuate each quarter taking into account alternative uses for our cash and our stock price. Now turning to our full year results for fiscal 2009, new software license revenues were $7.1 billion, up 1% in constant currency and down 5% in US dollars.

EMEA grew 6%, Asia grew 7%, and the Americas were down 4%. Technology new license revenues were $5.1 billion, up 7% in constant currency and flat in US dollars. Applications new license revenues were $2.0 billion, down 10% in constant currency and down 16% in US dollars.

Software license updates and product support revenues totaled $12.0 billion, up 19% in constant currency and up 14% in US dollars. Our total revenues were $23.5 billion, up 10% in constant currency and up 4% in US dollars.

Operating income was $10.9 billion, up 19% in constant currency and up 12% in US dollars. Our non-GAAP operating margin grew by 350 basis points to 46% in US dollars. Our fiscal 2009 non-GAAP earnings per share were $1.44, up 19% in constant currency and up 11% in US dollars.

Our non-GAAP earnings per share would have been $0.11 higher had foreign exchange rates remained the same as they were last year.

Turning to the balance sheet we have $12.6 billion in cash and investments. Our days sales outstanding improved again this quarter from 63 days last year to 58 days this year, a testament to the quality of our receivables, the quality of our customers, and the effectiveness of our collection efforts, as well as from foreign exchange and product mix benefits.

We generated $7.7 billion in free cash flow during fiscal 2009 growing 8% in US dollars over the same period last year. Now I’ll turn the call over to Safra.

Safra Catz

Thanks Jeff, well we’re obviously pleased with our Q4 results and with our exceptional performance throughout the year. In constant dollars we beat the top end of our new license guidance, we beat the high end of our total revenue guidance, and we delivered the highest Q4 operating margin in our history crossing the 50% mark for the first time.

Once again we grew margins and revenues substantially faster then our peers. We grew faster then SAP in every region around the world including its home base of Europe where our applications business grew 5% in constant currency versus negative 27% for SAP’s most recent quarter.

Our software license updates and product support revenues grew 17% in constant currency, up an enormous [inaudible] as our customer renewal rates and satisfaction levels continue at record highs. Even though the dollar strengthened a bit towards the end of the quarter it still resulted in a nine point currency headwind for new license compared to a seven point tailwind last year which is a 16 point shift year over year as the result of currency and [inaudible] the story for us.

This fiscal year clearly demonstrates the strength of our diversified portfolio of enterprise software products, the breadth, and loyalty of our huge customer base, and the strength of our operating results. The fact is we have a lot of company specific momentum.

We really executed well throughout the year and exceeded our own expectations quarter after quarter and of course we surpassed 50% margins and we announced our first dividend so its been a great year.

Now let me turn to guidance, now my guidance today does not include any assumptions from our pending acquisition of Sun Microsystems and though we do expect to close Sun during the quarter, the timing is subject to getting all the necessary approvals.

For the coming quarter [inaudible] exchange rates remain at current rates, there will be a 4% negative currency effect on license growth rates, a 5% negative effect on total revenue growth rates, a negative 6% effect on [inaudible] growth rates, and a negative $0.02 per share effect on earnings per share.

We believe that the guidance I’m giving today is realistic given the continuing impact of currency and the very soft Q1 comparison from last year, but I do want to note that our pipelines continue to grow and the close rates we are using are conservative.

With that our guidance for Q1 is as follows: new software license revenues are expected to range from negative 10% to zero percent in constant currency and negative 14% to negative 4% at current exchange rates. Total revenue on a GAAP basis is expected to range from 1% to 4% year over year in constant currency, negative 4% to negative 1% in current exchange rates.

Total revenue on a non-GAAP basis is expected to range from zero to 2% in constant currency and negative 5% to negative 3% at current exchange rates. The non-GAAP EPS is expected to be between $0.31 to $0.33 in constant currency and from $.029 to $0.31 in the current exchange rates.

GAAP EPS for the first quarter is expected to be between $0.23 to $0.24 in constant currency and $0.21 to $0.22 at the current exchange rates. Now this guidance assumes a tax rate of 29% for Q1 versus 26% in Q1 last year.

With that I’ll turn it over to Larry for his comments.

Larry Ellison

Thank you Safra, I’m going to talk about Exadata, again I said last quarter that Exadata is shaping up to be our most exciting and successful new product introduction in Oracle’s 30 year history and last quarter Exadata continues to grow and win competitive deals in the marketplace against our three primarily competitors.

Its turning out that Teradata is our number one competitor in terms of facing them in the marketplace, Natisa and IBM are kind of tied for second. And its typically IBM DB Tool on mainframes that we’re fighting with.

We’re very successful in a couple of different SmartPhone manufacturers, a well-known California SmartPhone and computer manufacturer actually bought two of our systems and their comments are to our database machines and that was against Natisa and their comment was, it ran about 100 times faster in some cases then their standard Oracle environment.

That’s very exciting. Another SmartPhone manufacturer in Canada, in this case Research in Motion, tested our database machine and bought it. In the marketplace again discovering after trying it, benchmarking it, that it was dramatically faster then their existing environment and faster then any of the other database machines that they experiment with.

Amtrak bought two full systems, they are a large East Coast Insurance Company, one of Teradata’s largest customers bought the Exadata machine. Thomson Reuters, a large and committed DB2 mainframe customer is, they’re moving some of their applications off the IBM mainframe and DB2 onto Exadata.

The largest Teradata customer in Japan, a relatively new telephone company in Japan and they’re the biggest Teradata customer in Japan and they benchmarked Exadata and found it to be dramatically faster then Teradata and they are moving their applications from Teradata onto Exadata.

We have been successful in Korea throughout Asia Pacific, Barclays Capital in the UK, another very large Teradata customer is buying Exadata. A number of banks in Western Europe, in Germany, again they are also buying Exadata machines. It was just a great quarter for Exadata, a product that is relatively new to the marketplace that is persuading people to move from their existing environments because Exadata is faster and the hardware costs less.

With that I’ll turn it over to Charles.

Charles Phillips

Thanks Larry, the Oracle field did a great job of staying focused during the quarter and not getting too distracted with all the noise on the economy and I’m proud of the great teamwork. We’ve pulled together multi product fields across multiple business units to leverage our unique product breadth through diversity by product, by industry and by geography is clearly helping us.

Its clear that cost pressures and increasing complexity are all catalysts right now causing customers to adopt pre integrated products and move away from [B-spoke] environments. So given that direction, we’re in a very good position and our pipelines are growing faster then our reported revenue.

We have been working hard to stay close to customers and we’re becoming a lot more important to those customers as our product line grows. So the Sun acquisition is a continuation of that strategy and we’ve had very positive response from lots of customers because they know we’ll make it all work together at the factory and we’ll lower their cost and if Exadata is any indication of what can happen when you optimize hardware and software together, they’re pretty excited.

So let me make a few comments by product line, in the database area we had some key wins as usual with 7-Eleven, who purchased database vault, University of Illinois, Baker Hughes, [underneath] SAP, the state University of New York, Sunni, China Telecom, State Street standardized [inaudible] for all their mission critical applications, and Lockheed Martin.

We continue to report record benchmarks as well, I won’t go through them all, but currently we hold the top five-benchmark positions in the TPCC price performance category so we haven’t forgotten about that at all.

Moving on to Middleware, Middleware has been the star all year long and we hope that to continue. We are rolling out a major new release next week called Fusion Middleware 11G. We’ll launch that in Washington, DC and eight other cities around the world and then we’ll follow-on with a tour in 107 cities.

It’s a long list of features I won’t go through right now. We’re also getting lots of support from partners in our Middleware. So if you look at systems integrators, we have about 35,000 consultants that are trained in 50 countries, another 5,000 just in Q4 alone. The same thing with ISVs, we have about 5,000 who have certified on our Middleware, we added 43 in the quarter, and 100 new applications.

So some examples of good wins in the quarter, Wells Fargo, they had started down a path with open source on the application server. They switched to web logic and several other products, we ended up signing a ULA with them during the quarter. They liked the integration and the performance we could deliver.

Other customers include adidas, TD Ameritrade, Credit Suisse, and Intuit. We had some BEA customers who previously were BEA customers who expanded into other parts of the Fusion Middleware suite, that includes Costco, Comcast, and Erickson. We had some key IBM accounts that used to be web sphere customers who we’ve now penetrated including Visa and State of South Dakota.

On the BI side we had some good wins against Cognos and SAP, American Express, Southwest Airlines, [CVC], Capital One, and Norfolk Southern. And then in EPM which is the Hyperion product line, we had good wins at Wal-Mart, [inaudible] and Kroger.

Switching to the applications business, if you look at our applications integration architecture, we shipped three new process integration packs in the quarter, that’s totaling 20 pips as we call them. Customers see the value of the standard space integration and the more we ship the more integrated the product line becomes.

We’re also seeing good upgrade trends so if you look at e-business suite version 12, we now have about 26% of our customers who have already upgraded. So some key wins in the quarter, Votophone, they chose Oracle to consolidate and standardize its IT infrastructure across Europe. So they’ve adopted an Oracle first strategy for all their new applications replacing competitive products over time.

This is a very good model for other European companies who tend to be more decentralized and we’re encouraged by this important win. EBay, [Lazy Boy], Gap, other additional European wins in the quarter.

On supply chain we had wins at Johnson & Johnson, Virgin Media, APL Logistics, all against SAP. In retail we won Perry Ellis, that was an important win where we had point of sale applications in 55 stores. We got the [inaudible]. They’ll be adding more stores over time and are hosting customers as they did this past quarter at their original store in New York City. They had some 20 international customers. They had to show them what they’re doing.

Financial services TBU had a strong quarter despite the environment, strong double-digit growth. They’re finding healthy banks around the world outside of the US and diversifying geographically. For instance National Bank of Egypt which is responsible for about 24% of the Egyptian banking market, they won that in the quarter.

That brings to having about 70% of the Egyptian banking market. Also important in the quarter Oracle and Censure intend to jointly develop, market and sell a new bank in a box solution based on Oracle’s Siebel, Flexcube, and Fusion Middleware products. This is a big win for us and you remember [inaudible] went with SAP in bank about five years ago and pretty much got nowhere with that so they’re back to Oracle now. We’re encouraged by that win.

Finally in tax and utilities CBU, up over 20% in the quarter, some important wins at Dayton Power and Light, San Diego Gas and Electric, and we also had good [cerium] on demand wins. So [cerium] on demand was a very good story all year long. We added more subscribers in [inaudible] then we did all last year. Good wins at [Nedapp], McAfee where we replaced Salesforce.com, also replaced [DV2] there by the way, Land Of Lakes and Konica.

Linux, we had some good wins at [TIAA-Cref], Rent A Center and US Met. So with that I’ll turn it back over.

We are now ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Adam Holt - Morgan Stanley

Adam Holt - Morgan Stanley

Understanding that your fourth quarter had some unique attributes, did you see any signals in the quarter that would suggest that you saw stability in either any end markets or any particular verticals and maybe talk a little bit about what the assumptions are underpinning the guide for the Q1 with respect to any kind of improvement and then I guess more longer-term as we think about a recovery scenario, where would you expect to see the first signs of reacceleration across your product lines.

Charles Phillips

The verticals for Q4 has strong double-digit growth so that’s been helping us obviously getting new design wins in vertical applications and then the drag factor, when we get that win we often get some of the ERP, usually [PRAM] and certainly we get the tech stack underneath that. So that’s been an important differentiator for us that SAP simply doesn’t have.

And the few areas where they try to go in the verticals like banking as I described, it didn’t quite work out and we have their partners coming to us now.

Safra Catz

In regard to the guidance I’ll have to tell you that our pipelines continue to grow really very well. I think that what we definitely saw that our customers are realizing that business does have to continue and go forward. Now as you know, we ourselves have so much sort of company specific momentum that we’ve been able to push through the economic situation rather well and I have to tell you that I still see the pipelines growing rather significantly.

And so in this case I used really unusually conservative, very conservative close rates for Q1 to just keep a level of conservatism in our fiscal Q1. It is Q1, it is always a tricky quarter and we have a very different comparison as to Q1 of last year. So that’s what we used underpinning for the guidance.

Operator

Your next question comes from the line of Sarah Friar - Goldman Sachs

Sarah Friar - Goldman Sachs

On the margins, you set yourself that target way back when of 50% tight margins and clearly this quarter you tipped over even that high bar, as you look forward into next fiscal year is there still an ability to see margin expansion from here or as the economy hopefully begins to recover is there any reason to say that you’d start to reinvest a little in the business and maybe stop some of this big march forward on the operating margin side.

Safra Catz

The reality is that the margin story really has to do with the fact that we have enormous installed base of customers that renew their agreements with us every year and the bigger that number becomes, that’s really the main issue. We continue to invest aggressively at Oracle. We’re up to $3 billion a year in R&D alone, really outshining all of our competitors and we continue to invest.

We are not a cost-cutting story for the margins. We really are a profitability story as the result of having just such a large installed base of existing customers and as that install based grows which obviously it continued to grow year after year, the operating margins will continue to go up.

Obviously the Sun acquisition will change the margin story for a while, but it will improve also over time.

Sarah Friar - Goldman Sachs

On EMEA, EMEA definitely came in much stronger then I think any of us would have expected and we’ve been viewing that as much more of a lagging economy versus the US, is that different for you when you think about maybe shared gains that you’re seeing there, or is your expectation that EMEA is still in slowdown mode and maybe the US starts to pick up, and it’s a balance.

Charles Phillips

It shifts around by quarter and obviously we were pleased with EMEA’s performance. Having said that I am a little bit encouraged by the pipeline growth in the US and so it just seems like our mix of products and industry and geography, somehow we get there every quarter and we’re encouraged by what we’re seeing.

Sarah Friar - Goldman Sachs

So you’re not particularly worried that EMEA is maybe slowing more so and that its just a lag on what you saw this quarter.

Charles Phillips

It isn’t going to happen obviously and its not, I don’t want to mislead you, its tough out there but nonetheless we had a great team on the ground and executed well in EMEA and so I do think we were different from everyone else over there.

Operator

Your next question comes from the line of John DiFucci - JPMorgan

John DiFucci - JPMorgan

You talked a lot about Exadata and I just wanted to sort of clarify that all of those deals you were talking about were actual sales or most of them were sales or are they still sort of in the pilot stage at this time and then on the product side and on the development of new products, there’s a couple out there that we had heard about along the way but and I think they actually have the opportunity to sort of change the landscape out there, and I was just wondering if you can just bring us up to speed on both automated storage management, which is a database option, but also before you bought BEA they had a product called Web Logic for virtual addition, which worked right on a hypervisor, and you didn’t need, there was no need for an OS throughout the whole stack which I thought was really interesting. We really haven’t heard a whole lot about that in a while if you can just comment on those.

Larry Ellison

To start, ASM is actually an integral part of Exadata so we use the automated storage management feature which is an option on the convectional database is a standard feature. It is always turned on with Exadata. By the way every customer I mentioned and alluded to were actual sales. Now some of these because the Exadata product is so new, quite often will install in kind of in a try and buy situation.

But I can’t think of a case where we installed the machine that they didn’t buy. So we’re winning these benchmarks. Sometimes we’re beating Teradata. I think in my quote, I said we’ve beat Teradata on one of the queries by 20 to one. So we think it’s a brand new technology, we think we’re a lot faster then the competition. The benchmarks are proving out with real customer data, we’re proving to be much faster then the competition every single deal I mentioned were cases where the customer bought the system.

There are obviously there are other evaluations going on and we expect the Exadata sales to accelerate. In terms of the BEA product you mentioned where they’re JVM, their java virtual machine is running directly on the hypervisor, on the virtual without the overhead of an operating system, that gives us 10% or 15% performance improvement.

Well that’s nice, that’s important and we go for every single percent we can find, that’s very different from the Exadata database machine when we were looking for 10, 20, 50, even 100 times performance improvement by going to radical new technology. Many more CPUs, huge numbers of [infiniband] connections thrown at the problem. Large memory caches and you’ll see us continue to advance Exadata with flash memory and other things.

We’re looking for order of magnitude improvements versus a few percent here and there.

John DiFucci - JPMorgan

I know you’re not going to talk about acquisitions that haven’t closed yet, but Virtual Iron, I don’t think that’s closed yet but is that an opportunity that even works more closely on trying to I guess press the technology of the BEA product that you mentioned but I can even envision even putting it to the database on there with no operating system or no operating system as we know it, and it just seems like its another opportunity for Oracle through internal development to sort of change the landscape out there.

Larry Ellison

We are looking at that, in fact we have the Oracle database running directly on a VM with no intermediate operating system so that’s actually up and running. So its an opportunity to continue to improve our performance. Our goal as you know is to deliver a complete stack from the virtual machine to the operating system. We’ve been involved with VM, with Zen and Zen derivatives, with the Linux LS, obviously the Oracle database Middleware and applications.

So, are intended to provide a complete and integrated stack and then be able to tune up and down and of course with the Sun acquisition, actually get down into the hardware. Exadata is really is really our first experiment in that area and its going very well.

Operator

Your next question comes from the line of Brent Thill - Citigroup

Brent Thill - Citigroup

You mentioned your pipeline is growing faster then reported revenue, was that a pickup in Q4 or did you see a similar trend throughout the year on the pipeline and if you could just tie that into do you think the worst is now behind us and now you’re seeing the environment now slowly improving.

Charles Phillips

Its hard to call the environment, I don’t want to go on a limb and do that but I will say that conversations back in let’s say January, February, people couldn’t focus. They were so worried about the economic news even if they had budgets, they just didn’t feel good about spending money back then.

And so it didn’t feel that way any more, the sense of panic and just being frozen, deer in the headlights feeling. But nonetheless everybody is still under cost pressures going forward. The pipelines did improve. They’ve been growing all year long but they grew a little bit more in the last 90 days.

That might be an indication of people getting back to work but its hard to call.

Brent Thill - Citigroup

So you’re close rates were a little bit better then you anticipated.

Charles Phillips

I’m not sure better then we anticipated, slightly better I would say.

Safra Catz

Yes, they were. A little better then I guided for.

Brent Thill - Citigroup

And just a quick follow-up, on the on demand business, you’re now three quarters of a billion dollar business, can you just outline your long-term goals for the business.

Larry Ellison

We think we can be very competitive against Salesforce.com in sales on demand. We think with virtually every time we compete with them on large deals with large customers, we win and in some cases we even replace them. So we think we can be the number one supplier of on demand software in that particular space.

And then of course we’re going into other spaces as well with our Fusion applications which we haven’t talked about yet which come out I guess, we are code complete on Fusion applications. We’ll be announcing them later this year. Customers are trying them out and we’ll start delivering next year.

All of our Fusion applications are on demand ready. They are designed to be not only on premise but ground up design to be a [inaudible] service. So we see all of our application software, not just on Salesforce automation but all of our application software going forward being sold in two ways.

Both on demand, software as a service and on premise with the same code base and we think we can be the number one applications company, the number one on premise application company and the number one on demand application company. That’s our goal.

Operator

Your next question comes from the line of Brendan Barnicle - Pacific Crest

Brendan Barnicle - Pacific Crest

You guys typically have a sales force reorg in the first quarter, can you provide any color on sort of the size and timing of that, any difference this year then past years.

Charles Phillips

We’ve tried to get out of those big bang reorgs, so we haven’t really done that in several years. We make small tweaks throughout the year and small changes in quotas each year, but we’re not doing any wholesale reorg as we go into this fiscal year.

Brendan Barnicle - Pacific Crest

And then just over in the federal government, we’ve heard about the potential for some federal government budget flush as we get to the end of the calendar third quarter, I know that’s a relatively small vertical given the size of Oracle now, but is that something you’re expecting to see much of a benefit from as we kind of move through August and then obviously as you move into the fiscal second quarter.

Charles Phillips

Well our government business has done well, I don’t know if I’d call it budget flush but they do have money and its been doing well the last couple of quarters. I would expect that to continue given the environment.

Operator

Your next question comes from the line of Kash Rangan - Merrill Lynch

Kash Rangan - Merrill Lynch

If I could get your take on how the customer environment feels like, would you say that budgets are starting to free up as you get into the second half of the year after having gone through some turbulent times in the first half of the year.

Charles Phillips

I talked to a group of CIO’s on this just last week, its difficult to say. I would they didn’t spend as aggressively in the first half because they were kind of in a wait and see mode. They have budgets. They may have not been what they originally wanted a year ago what they expected in December, but they have budgets and its going to be more backend loaded if they chose to spend.

So most of them sounded like they wanted to start moving ahead the second half of the year but we’ll see what they do.

Kash Rangan - Merrill Lynch

And also I think you mentioned on premise and on demand model of delivering the Fusion applications, its actually very interesting. Does it open up another subscription type of a business model in your P&L, should we think about a different way in which the applications license revenues will be reported going forward that you’ll have a license stream and a subscription revenue stream going forward.

Larry Ellison

Yes, again I think, again our subscription or our on demand application business is much smaller then our on premise application but its growing faster. So I think you’ll see a very gradual shift over a period of a decade. Keep in mind that the largest on demand software company in the world is Salesforce.com and they’re only a billion dollars.

And we’re probably the second largest on demand software company but that on demand portion or software as a service portion is still significantly smaller then our on premise business. But we expect the on demand to grow somewhat faster then the on premise business and so we’ll have the mixture.

Kash Rangan - Merrill Lynch

So if I read it correctly, it is going to be ERP supply chain [cerium] for everything, HR, everything on demand, delivered as a multi [inaudible] service from your data sectors to add to the subscription model, right.

Larry Ellison

Absolutely but its not necessarily. The interesting thing is its not necessarily from our data center. We have three models. One is, we have on premise where you run it. We have on demand in our data center. I should say on premise in your data center where you run it. We have on demand in our data center where we run it. But then there is an on demand in your data center where we run it. So the computer is actually on your floor, behind your firewall, attached to your very fast local area network but we provide all the services.

And we think that’s where the real value is and we think that’s the interesting model. It’s a model that Salesforce.com does not offer. It’s a single tenancy on demand model, with a computer on your data center, highly secure, highly performance, but we provide all of the upgrade services and we administer the applications.

That’s proven to be a significant differentiator between us and Salesforce and what is allowing us to win virtually every large-scale deal.

Kash Rangan - Merrill Lynch

That’s sounds like you’re getting into cloud computing then.

Larry Ellison

A little bit.

Operator

There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

Ken Bond

A 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 4357919. Also a webcast replay will be available through the close of market on June 30, and can be found on our website at www.oracle.com/investor.

Please call the Investor Relations department with any follow-up questions from this call and we look forward to speaking to you. Thank you all for joining us on today’s conference call.

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Source: Oracle Corporation F4Q09 (Qtr End 05/31/09) Earnings Call Transcript
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