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Executives

Ken Bond - Investor Relations

Jeffrey E. Epstein - Chief Financial Officer, Executive Vice President

Safra A. Catz - President, Director

Lawrence J. Ellison - Chief Executive Officer, Director

Charles E. Phillips Jr. - President, Director

Analysts

John Difucci - J.P. Morgan

Sara Friar - Goldman Sachs

Adam Holt - Morgan Stanley

Heather Bellini - ISI

Joel Fishbein - Lazard Capital Markets

Kash Rangan - Merrill Lynch

Oracle (ORCL) F1Q10 Earnings Call September 16, 2009 5:00 PM ET

Operator

Good day, everyone and welcome to today's Oracle Corporation first quarter fiscal year 2010 conference call. Today’s conference is being recorded. At this time, I would like to introduce Ken Bond, Vice President of Investor Relations for Oracle. Please go ahead, sir.

Ken Bond

Thank you, Kristen and good afternoon everyone and welcome to Oracle's first quarter fiscal year 2010 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 holds, 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 publicly 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 Forms 10-K and 10-Q and any applicable amendments for a complete discussion of these factors and other risks that may cause 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 financial information, can be viewed and downloaded from our website at www.oracle.com/investor.

We’ll begin with a few prepared remarks but before we do take questions from the audience, we want to remind everybody that we will only be discussing Oracle’s Q1 of fiscal year 2010 results.

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

Jeffrey E. Epstein

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

First a note about foreign exchange rate movements -- in June, we told you that using then current exchange rates would reduce our Q1 revenue growth by 5 points compared to constant currency. During the first quarter, the U.S. strengthened again compared to last Q1, further reducing our international revenues, expenses, and profits when measured in U.S. dollars. As a result, currency movements reduced new license revenues by 3%, total revenues by 5%, net income by 4%, and earnings per share by 5% or $0.02 per share compared to Q1 of last year.

Now let’s review the income statement. In the first quarter, our new software license revenues were $1.0 billion, down 14% in constant currency and down 17% in U.S. dollars. The Americas declined 5%, EMEA was down 20%, and Asia declined 22%.

Technology new license revenues were $711 million, down 19% in constant currency and down 22% in U.S. dollars. The Americas declined 11%, EMEA was down 26% and Asia declined 22%.

Applications new license revenues were $317 million, unchanged from last year on a constant currency basis, and down 4% in U.S. dollars. The Americas grew by 6%, EMEA was up 3%, and Asia declined 23%.

Our software license updates and product support revenues were $3.1 billion, up 8% in constant currency and up 3% in U.S. dollars. These revenues are annual fees customers pay to receive updated versions of and enhancements to their existing products. Our services revenues were $909 million, down 18% in constant currency and down 22% in U.S. dollars.

Our total revenues were $5.1 billion, down 2% in constant currency and down 7% in U.S. dollars. Operating income was $2.3 billion, up 11% in constant currency and up 7% in U.S. dollars. Our non-GAAP operating margin grew by 570 basis points to 46% in U.S. dollars. This is the highest Q1 operating margin in Oracle's history as a public company and further demonstrates the success of our operating model.

Our tax rate was 28.0%, which is below our guidance of 29% due largely to lower than expected interest income, which is generally taxed in jurisdictions with higher rates.

Our Q1 non-GAAP earnings per share were $0.30, at the mid-point of our EPS guidance range of $0.29 to $0.31. This was up 8% in constant currency and up 3% in U.S. dollars. Our non-GAAP earnings per share would have been $0.02 higher had foreign exchange rates remained the same as they were in Q1 of last year.

In Q1, we repurchased 11.4 million shares at an average price of $21.24 per share for a total of $243 million. As we have previously discussed, the rate of our stock buy-back will fluctuate each quarter, taking into account alternative uses for our cash and our stock price.

Turning to the balance sheet, we have $20.6 billion in cash and investments. The increase resulted largely from the $4.5 billion debt offering completed early in the quarter and $3.7 billion of operating cash flow generated this quarter. Our days sales outstanding improved again this quarter from 54 days last year to 46 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 product mix and timing benefits.

We generated $8.5 billion in free cash flow during the last four quarters, growing 14% over the same period last year. This is the highest free cash flow result in Oracle history.

Now I’ll turn the call over to Safra.

Safra A. Catz

Thanks, Jeff. We are pleased with our Q1 results. By substantially improving operating margins, we were able to increase Q1 earning per share even though revenues decreased slightly. We had slower than usual growth in database middleware license revenue in Europe and APAC. This is a result of two factors -- a very tough year-over-year comparison and the impact of some of our software company resellers, most notably SAP, who is selling less database because its applications business is down 40%.

Oracle continues to grow faster than our competitors. In the quarter, we also increased GAAP and non-GAAP operating income by $209 million and $144 million respectively over last year’s first quarter and we delivered the highest Q1 non-GAAP operating margin in our history, 46%, substantially higher operating margins than our peers. I want you to understand that though keeping expenses in check is part of our margin story, the real contributor is that as license updates and product support are a larger percentage of the quarter as they were in this quarter, the operating margin percentage goes up. This is clear as our software license update and product support revenues, which were over $3.1 billion this quarter, continued to grow off their very large base. Our customer renewal rates and satisfaction levels continue at record highs.

The currency headwind was reduced significantly over Q4, though still reduced new software licenses and software license updates and product support growth rates by 3 and 5 percentage points respectively.

Now let me turn to guidance -- for the coming quarter, using current exchange rates, here will be 5% positive currency effect on the license growth rate and a 4% positive effect on total revenue growth rates, a positive 5% effect on net income growth rate, and a positive $0.02 per share effect on earnings. Now, we believe that the guidance I am giving today is realistic given our tough year-ago comparison as our license revenues continue to grow while the world economy struggles. Specifically, I want to remind you that last year in Q2, while the market environment was very poor, many of our competitors shrank significantly while we continued to grow.

Last year, our new licenses grew 5% in constant currency and software updates and product support grew 20% in constant currency. As a result, unlike our peers, we have a difficult comparison in Q2 this year while they have their easy ones.

I want to emphasize that our pipelines continue to grow and the close rates I am assuming are significantly more conservative than typical Q2 close rates. Now, my guidance today does not include any assumptions from our pending acquisition of Sun Microsystems. I have no additional information regarding the timing of the deal, as the closing of the transaction is conditioned on getting the necessary regulatory approval. We are still quite confident that we will increase operating income earnings by $1.5 billion in the first full year after the close of the merger. We will give much more detail after the merger closes.

In addition, Q2 we have extra interest expense amounting to a bit less than $0.01 per share for the quarter since we did a bond offering to pay for the transaction and it has not closed yet.

With that, our guidance for Q2 is as follows -- at current exchange rates, non-GAAP EPS is expected to be between $0.35 and $0.36, up from $0.34 last year and GAAP EPS for the second quarter is expected to be $0.26 to $0.27, up from $0.25 last year.

Total non-GAAP revenue is expected to range from positive 2% to negative 1% year over year at current exchange rates and negative 2 to negative 5 in constant currency.

Total GAAP revenue is expected to range from positive 3% to flat year over year at current exchange rates and negative 1 to negative 4% in constant currency.

New software license revenues and other are expected to range from negative 10 to flat at current exchange rates and negative 15 to negative 5 in constant currency.

This guidance assumes a tax rate of 28.5 for Q2 versus 28 in Q1 and this could turn out differently based on many factors. As you know, currencies are likely to fluctuate and as a result, the currency impact in Q2 could be different than our guidance assumes.

With that, I will turn it over to Larry.

Lawrence J. Ellison

Thank you, Safra. Everyone knows that last year, Oracle introduced its first hardware product, the Exadata database machine. Version 1 on Exadata was designed for data warehousing and our customer experience, and we have a lot of Exadata customers, our customer experience is that Exadata runs an Oracle data warehouse someplace between 10 and 50 times faster than the Oracle database running on a conventional computer from IBM, Hewlett-Packard, or somebody else, so that’s a huge difference. I mean, our very first hardware product delivered a minimum of 10 times speed-up in data warehousing applications all the way to a 50 times speed-up. And when we announced that product, and up until yesterday, Exadata version 1 was the world’s fastest machine for data warehousing. Yesterday Oracle and Sun introduced Exadata version 2, hardware by Sun; software by Oracle. Exadata version 2 is at least twice as fast as Exadata version 1 for data warehousing. Even more importantly, Exadata version 2 also runs OLTP or online transaction processing applications. There are only two classes of application for databases, OLTP and data warehousing. And Exadata does them both. No other database machine runs online transaction processing except Exadata.

The Oracle Sun announcement included faster CPUs by 80%, doubling the speed of our [inaudible] internal network; fast discs with double the capacity; plus most importantly, a memory hierarchy made up of 400 gigabytes of VRAM and 5 terabytes of flash storage, Sun flash fire technology, in a single Exadata cabinet.

Now, our OLTP performance when you compare it with the fastest OLTP machine out there, IBM’s fastest computer, two Exadata cabinets are as fast as IBM’s fastest computer at one less -- less than one quarter the price. So -- and eight Exadata cabinets are four times faster than IBM’s fastest OLTP machine. So take your pick -- either for the same dollars you can get four times the performance using Oracle Exadata versus IBM or for the -- or if you want to save the money for less than a quarter of the price, you can get the same performance as IBM’s fastest machine for OLTP.

In data warehousing, the advantage is even larger. In data warehousing, I mentioned earlier that Oracle Exadata version 2 is at least twice as fast as Exadata version 1, the previous world record holder for data warehousing performance. Oracle Exadata -- I should say Sun Oracle Exadata version 2 is five times faster than Teradata, five times faster than [N-Pisa], and 20 times faster than IBM’s fastest computer for data warehousing.

So we have spectacular data warehousing performance, world record level OLTP performance, all in the same computer. And unlike the earlier versions of Exadata, version 1 of Exadata, we have models starting as low as $100,000 and going all the way up into multi-million dollar systems. We are price competitive in terms of performance, we are price competitive in terms of disc capacity. Exadata version 2 simply stated is by far the fastest and most cost-effective machine in the world for both data warehousing and online transaction processing. We are very excited about the Sun Oracle partnership.

With that, I will turn it over to Charles.

Charles E. Phillips Jr.

Thanks, Larry. Larry mentioned some of the new technologies around Exadata. I think what we saw in the quarter were some of the growth in databases in terms of size that are driving the demand for that. Let me give you a few examples of customers we worked with in the quarter.

AC Neilsen, for instance, we deployed a 45-terabyte data [mart], they called it; Adidas, 13 terabytes; Australian Bureau of Statistics, 250 terabytes; and of course, some of our high-end ones that you have probably heard of in the past, AT&T, 250 terabytes; Yahoo!, 700 terabytes -- just gives you an idea of the size of the databases that are out there and how they are growing, and that’s driving the need for greater throughput.

We had some important new wins in the quarter as well, some end-to-end standardization decisions at [Metsui] Securities, Rent-a-Center, University of Kansas, and EMC.

In terms of new products in the database area, the key announcement a couple of weeks ago was Oracle Database 11G release 2. The reason that’s important, it introduces the concepts of server pools, which can dynamically assign resources to workloads, and more importantly an intelligent installer for [RATT], so it’s 40% fewer steps to install our clustering product. That’s a key add-on product, key option for us. It’s always been difficult to install and get up and running and now we’ve resolved that issue, that makes it applicable for a lot more customers.

In the middleware area, we announced in July the 11G version of our middleware suite. Why that’s important is that is the first full complete integration of the BEA products and so we had a big launch over 40 cities worldwide, 44 new ISPs have signed up 95 applications have been adopted. We trained over 2700 consultants on it, so we are continuing to roll that out as we speak. That’s important because it gives us a cross-selling opportunity into the BEA installed base. We landed those deals at Vanderbilt University, China Mobile Telecom, Scottish Government, [Aquatel], and Carnegie Mellon on that basis.

Moving on to some other key areas of middleware wins, Hyperion Enterprise performance management, we had a big win at Liz Claiborne. Business intelligence, Whetherford, and Pattison -- the reason I mention those is we are starting to get wins around our BI apps. What that means is not only do we have the BI platform but we have developed a series of applications that are dashboards around certain business processes and applications like supply chain analytics and those are driving wins on top of our applications and we get the BI platform as well.

In the application area, we actually did pretty well in the scheme of the entire market. Our main competitor was down 40% last quarter and if you look at how we did, our industry applications actually grew in double-digit and that’s not including the drag of supporting technology and middleware products.

Key wins in the quarter around ERP, [Cross] Fertilizers, replacement of an old ERP system; China Unicom; and CRM on-premise, good wins at Amway, [Green Mountain] Energy, Savings Bank of Russia.

Good quarter in CRM on-demand. We got selected for Hitachi data systems, McGraw-Hill [inaudible], and [inaudible] [Banking] Corporation.

Two quarters ago, Larry mentioned Siemens, which was a big win of 20,000 users and did an update call with them last week just to see how the rollout was going. That rollout was supposed to be over three-and-a-half years. As of last week, we already had 9,000 [inaudible] running ahead of schedule.

Key wins -- [Demantra], [JB Irving], Toshiba, that’s advanced [inaudible] and planning. At our retail GVU, we had a good win at Metro Cash and Carry, a very important win. Metro is the fourth-largest retailer in the world and they are based in Germany. It was head-to-head against SAP. They will be using our retail suite against an SAP back-end, so a very good proof point on how well we are doing in retail.

Additional wins at [Sun Rider] and Magazine Louisa, and Prima Veria project management, end-to-end decision at BG Group, financial services GVU, a good win at overseas Chinese Banking Corp -- they are one of the top three banks in Singapore and they are standardizing on our products for anti-money laundering.

In the communications area, we had a good win at Vodacom. That’s a Vodafone affiliate. We have signed a large ULA with Vodafone end-to-end over all of our applications, including a [inaudible] application last quarter and this is an affiliate taking advantage of that ULA.

[In our tax and utilities JVU], we won the largest utility in Russia and more important, we had a go live on the tax side for the first time in Kentucky for the [coal tax]. This is a new market, it’s important for other states and jurisdictions to see that. We are expecting a go live at the Dutch Tax Authority by the end of the year and that should break open that market, hopefully.

With that, I will turn it back over to Ken for questions.

Ken Bond

Thank you, Charles. Operator, we’d like to open the call for questions, please.

Question-and-Answer Session

Operator

(Operator Instructions) We will take our first question from John Difucci with J.P. Morgan.

John Difucci - J.P. Morgan

Thank you. It looks like things are a little bit lighter than you expected on the license line this quarter. Can you talk a little bit about the linearity in the quarter? Was it typical linearity? And then if you could, I know it’s early, only a couple of weeks into this quarter, but what the sort of momentum was from the last quarter into the first couple of weeks here?

Safra A. Catz

Sure. Basically the linearity was actually very typical. The biggest part of the lightness, as I said, was that our software ISVs, you know, we suffered as they sold less of their applications, they dragged less database with them. As far as Q2, I think we are pretty well-calibrated. I think we feel actually very good. I think it will be obviously a significantly better quarter than last quarter and you can see that in the guidance so I think we actually have some very good momentum starting the quarter, which is actually in many ways typical because it’s not the summer. So we are very -- we remain very upbeat.

John Difucci - J.P. Morgan

Thank you.

Operator

We’ll take our next question from Sara Friar with Goldman Sachs.

Sara Friar - Goldman Sachs

Safra, can I ask you on the sustainability of the margin improvement, clearly in an improving environment we should start to see license revenue as a percentage of total begin to increase again. Do you still think you can put up those types of year-over-year improvements as the environment improves and clearly the maintenance of the portion starts to go down?

Safra A. Catz

Well, there’s two things -- one is the maintenance as a portion in different quarters isn’t as dramatic. The maintenance base, which is existing customers who want the newest version of the software without having to re-buy the whole license again, you know, that base continues to grow period. So that’s obviously one piece.

The other thing is just the general leverage of our business and that is our regular -- you know, revenues do increase and faster than our expenses increase because it’s a business in which scale is a huge advantage. I mean, last year of course we increased 300 plus basis points over the year and though this quarter we increased 500 plus basis points, I wouldn’t expect that every quarter but we do expect margins to continue to improve year over year.

Operator

We’ll take our next question from Adam Holt with Morgan Stanley.

Adam Holt - Morgan Stanley

Great, thank you. You all have two significant releases on the middleware and the database side that have just hit the marketplace. Can you talk about what you think the potential revenue impact is? And then secondly, with the Sun deal getting pushed out a little bit, I don’t know how much you can say about this but what can you do over the next couple of quarters to continue to move the integration process down the field? Thanks.

Safra A. Catz

I don’t know who wants to cover that. I can cover the Sun piece. Obviously we continue to do integration planning. That’s what we are allowed to do and Sun historically was a very big partner of Oracle generally and so after the Exadata version 2 announcement yesterday is the perfect example of things we can do together at arm’s length which I think benefit our customers and both companies very well. So we get a better sense of the Sun business and we continue to be able to do what we can at arm’s length.

Lawrence J. Ellison

I’ll grab the one on the products. We had a new version of our middleware, which actually is the -- we bought a number of middleware companies, obviously, over the years and this new version of our middleware is the result of those teams that we acquired rewriting their applications, their middleware components, rather, so that all the components now work as completely integrated suites. And so all the technology we’ve acquired is now thoroughly integrated into a unified suite of middleware. And we think this gives us a huge advantage over our primary middleware competitor, which is IBM. And we’ve moved over the years from kind of an also-ran in middleware, where we were five, six, or seven, to the leader in middleware right now and we expect to grow our middleware share against IBM very, very rapidly due to the fact that we have a much better product than they do.

And the new release of our middleware really puts some distance between us and IBM on the technology front in middleware. We’ve always -- for a very long time we’ve had the best enterprise database in the world and 11R2 again increases our technology advantage over our primary competitor, which is IBM. And I expect we will continue to take share from IBM, especially as applications continue to move off of mainframe computers and on to open systems, large scale UNIX systems and Linux clusters. So we think we are well-positioned to compete effectively against IBM in the software infrastructure market.

Operator

We’ll take our next question from Heather Bellini with ISI.

Heather Bellini - ISI

Safra, I was wondering if you could talk a little bit about what you saw in Europe last quarter. I know August is always a tough quarter there but I was just wondering if you saw trends worsen as the quarter went on or are you starting to see as you exited the trends starting to improve a little bit? Thank you.

Safra A. Catz

Well, there’s a couple of things -- as you know, August, the summer in Europe is always not great, though last year we actually had a very, very good summer and so it made the comparison tough. We do actually start to see some of the economies in Europe improve a little bit in just our overall outlook and expectations, so -- but we still have some very tough comparisons but nothing is like the summer is in Europe, so -- and especially after last year where we had a very unusually robust summer, so we -- this will be an improvement. And we do actually see the economies little by little starting to lighten up, which is a good thing.

Operator

We’ll take our next question from Joel Fishbein with Lazard Capital.

Joel Fishbein - Lazard Capital Markets

A quick question on the apps side of the business -- you had a great quarter there, particularly looks like strength in the Americas. Could you just give us a little color on what’s going on there?

Charles E. Phillips

I think we are definitely taking share from SAP in the Americas and even in Europe, to some extent. They don’t have a vertical strategy that was up in strong double-digits, that drags along some of the other applications and infrastructure as well, and so I just think a lot of the things we’ve been telling you over the last year or so are now coming to fruition, a lot of the integrations we mentioned are shipping now, so they are not things we are just talking about. People can actually buy off-the-shelf integrations. CRM had a very good quarter, both on-premise and on-demand and so our expertise there continues to pay off.

Operator

We’ll take our final question from Kash Rangan with Merrill Lynch.

Kash Rangan - Merrill Lynch

Thank you very much. It looks like your commentary on guidance going into November quarter is quite positive. We are you starting to see some indicators turn here and there, so that’s a good thing. And also just as a note, SAP’s Q4 license revenue, they are usually up a lot, so I wish that you were able to get a slice of the database business in your November quarter but coming to the question part of my rant here, really want to drill into EMEA and Asia-Pac on the technology side. Maybe Safra or Charles or whoever, if you could comment on how tightly the pipeline has been scrubbed to come up with your forecast and to what degree do you think you are [inaudible] the forecast in those two segments, particularly as it relates to tech? And if you can just give us some comfort and color around that area, that would be great. That’s it for me, thanks.

Charles E. Phillips

Trust me, no one is sticking their neck out on the forecasts in any region right now, so I think the pipelines have been scrubbed and -- I mean, they are real deals and we will just have to see what the close rates turn out to be.

Safra A. Catz

Yeah, the pipelines are actually growing. I think the guys are a little bit timid in their expectation setting here with us, but the forecasts continue to grow, so -- which is great. So to the extent that they close even a reasonable percentage, we’ll be significantly better off.

Operator

And this will conclude today’s question-and-answer session. I would like to turn the conference back over to Mr. Bond for any additional remarks.

Ken Bond

Thank you, Kristen. 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 6663145. Also a webcast replay will be available through the close of market on September 23rd 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 with 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.

Operator

Thank you. This will conclude today’s conference and we thank you for your participation.

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