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Oracle Corporation (NYSE:ORCL)

F3Q07 Earnings Call

March 20, 2007 5:00 pm ET

Executives

Krista Bessinger - Vice President, Investor Relations

Safra A. Catz - Co-President, Chief Financial Officer

Lawrence J. Ellison - Chief Executive Officer

Charles E. Phillips - Co-President

Analysts

Heather Bellini - UBS

Brent Thill - Citigroup

Jason Maynard - Credit Suisse

Kirk Materne - Banc of America

Adam Holt - JP Morgan

John DiFucci - Bear Stearns

Kash Rangan - Merrill Lynch

Israel Hernandez - Lehman Brothers

Presentation

Operator

Good day, everyone, and welcome to today’s Oracle Corporation quarterly conference call. Today’s conference is being recorded. At this time, I would like to introduce the Vice President of Investor Relations for Oracle, Ms. Krista Bessinger. Please go ahead, Madam.

Krista Bessinger

Thank you, Operator. Good afternoon, everyone. Welcome to Oracle's third quarter fiscal year 2007 earnings conference call. With me on this call are Oracle Chief Executive Officer, Larry Ellison; Oracle President, Charles Phillips; and Oracle President and Chief Financial Officer, Safra Catz.

As usual, our prepared remarks will be followed by Q&A. Before we begin, however, I would like to remind you that today’s discussion may include predictions, estimates or other information that might be considered forward-looking. While these forward-looking estimates represent our current judgment on what the future holds, they are subject to risks and uncertainties that could cause actual results to differ materially. You are cautioned not to place undue reliance on these forward-looking statements which reflect our opinions only as of the date of this presentation.

Please keep in mind that we are not obligating ourselves to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events.

Throughout today’s discussion, we will attempt to present some important factors relating to our business that may affect our predictions. You should also review our most recent Form 10-K and Form 10-Q for a more complete discussion of these factors and other risks that may affect our future results or the market price of our stock.

A PDF copy of our press release and financial tables, which include a GAAP to non-GAAP reconciliation, can be viewed and downloaded on the Oracle investor relations website at www.oracle.com/investor.

With that, I would like to turn the call over to Safra Catz for her opening comments.

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Safra A. Catz

Thanks, Krista. Good afternoon, everyone, and thanks for joining us. I am going to first focus on our non-GAAP results for the quarter and then review guidance for Q4. Then I will turn the call over to Larry and Charles.

As you can see, Oracle had a very strong quarter with outstanding performance across all product lines, all geographies. We had aggressive guidance going into the quarter and we exceeded on every metric.

New software license revenue was very strong, with revenue of $1.4 billion, up 27% year over year and exceeding our guidance range of 16% to 22%.

This is our fastest growing third quarter in more than five years with obvious market share gains across all product segments. The quarter was very broad-based in terms of deal size and was not dependent on any unusually large deals.

I know there are rumors of mega-deals in the quarter, a couple at over $100 million, and those rumors are simply not true. Even if you added up the top five deals in the quarter, you do not get to $100 million in new license revenue. You add the top 20, you do not get to $200 million.

Technology license revenues were outstanding across all geographies, up 17% year over year. We grew technology license revenue 15% in the Americas, 15% in EMEA, and 26% in APAC.

Applications were exceptionally strong as well, with license revenue of $423 million, up 57% year over year. Excluding i-flex, Portal, Metasoft, SPL and some other smaller acquisitions, our application new license number was $389 million, up 44%. Even though we have now owned Siebel for over a year, we got it mid-quarter last year so if you exclude Siebel entirely from both last year and this year, new license revenues were up 32%, still four times the reported growth rate of SAP.

Our applications license revenue was strong around the world and we grew application license revenue 69% year over year in the Americas, 29% in EMEA, 89% in APAC.

Turning to products updates and support, our revenue was up 21% on a non-GAAP basis to $2.1 billion and to grow at 21%, we actually had the highest renewal rate in our history.

Regarding margins, Oracle continues to grow market share and profitability simultaneously. Non-GAAP net income from operations actually grew 27% to $1.8 billion, resulting in operating margins of 39%, up modestly from a year ago despite over a half-point reduction from the consolidation of i-flex. Margins have now started to improve as we get to scale on some of the newer acquisitions and we expect margins to benefit from this scale over the next few quarters.

Last, we grew EPS by 31% to $0.25 on a non-GAAP basis, coming in $0.03 above our guidance and well above our stated goal of 20% average EPS growth. We have now completed 11 quarters of our five-year non-GAAP EPS growth plan of 20% per year and we are delivering earnings growth comfortably ahead of that target.

The tax rate this quarter was positively affected by the R&D tax credit, which was both retroactive and had a new calculation basis, as well as the change in the mix of profits between lower and higher tax jurisdictions, impacted mainly by the strength of the Euro.

In Q3, we bought back approximately 58 million shares at an average price of $17.34, spending about $1 billion.

Operating cash flow for the trailing 12 months increased $1.1 billion to $5 billion, while free cash flow increased 29%.

Now I am going to, if I can hold up, turn briefly to guidance and go from there. Because the Hyperion acquisition has not closed yet, today’s guidance for Q4 does not include Hyperion. In any event, given that we do not expect the acquisition to close before late April, we do not expect Hyperion will have much impact on the fourth quarter results and we will not be revising our guidance after the close until the Q4 announcement in June.

As you might expect, we feel very good about our prospects into our seasonally strongest quarter, and we feel good about our momentum and our competitive position and our ability to execute in the field with no distractions. That said, as you all know, last year Q4 2006 was a blockbuster quarter and we are up against some tough comparisons. Last year, new software license revenues were up a record 32% in Q4, with total revenues up 22%.

Our guidance is as follows: new software license revenues are expected to be up 5% to 15% year over year; total revenues expected to be up 10% to 14% year over year on a non-GAAP basis; on a GAAP basis, 11% to 15%; non-GAAP EPS is expected to be $0.34 as compared to $0.29 last year; GAAP EPS for the fourth quarter is expected to be $0.30, up from $0.24 last year.

Now, this guidance assumes that the annual effective income tax rate is 28.2%, down from 30.8% in Q4 last year. If current exchange rates hold steady for the entire quarter, that will result in 2 points of positive currency impact in Q4. As you know, currencies are likely to fluctuate and as a result, the currency impact in the quarter could be different than our guidance assumes.

Our Q4 GAAP guidance currently assumes stock option comp expense of approximately $50 million and we still continue to expect stock compensation to reduce diluted earnings per share in all of fiscal 2007 by $0.02 to $0.03, as we said in previous quarters.

With that, I will turn the call over to Larry for his comments.

Lawrence J. Ellison

Thank you, Safra. Let me start by saying -- I have some prepared remarks, but let me say I am very, very proud of this management team from top to bottom. The company has never been in as good a shape. We have never had a stronger suite of products. We have never had a better management team. We have never executed so well and I am very proud to be a part of that team.

Oracle's middleware new license business grew 82% in the third quarter. That is in stark contrast with BEA, which grew 8% in their most recent quarter, so we are growing ten times, more than ten times faster than BEA.

Over the trailing 12 months, Oracle's middleware business grew on average over 60%. Again, that is in contrast with BEA’s last year where they grew 12%, so that is five times over the last year, we are growing five times faster than BEA.

Oracle's middleware business is now larger than BEA’s middleware business, or larger than BEA. It took us a long time, over five years, to catch and pass BEA, but we did it. We did it with a combination of innovation and acquisitions and years and years of determination and endurance and again, I am very proud of what the middleware team has achieved, both in development and marketing and in sales.

We are in the early days of our Linux support business but we are off to a very solid start. Our support service, our Linux support service is up and running well. Dell, HP, and CDW are on board to resell Oracle enterprise Linux. We have already signed a number of support contracts, some for over $0.5 million. Oracle has displaced Red Hat at Yahoo! and numerous other customer sites as their Linux support supplier. That is extremely important and this is just the beginning.

We are not going to build the Linux business overnight but we will build it. We have the largest and best support organization in the world and we are determined to offer our Linux customers the best support for Linux in the world.

In the applications business, we are in the middle of a battle for market share with SAP. We like our strategy. SAP may be the world’s number one ERP company but ERP is a slow-growing, relatively mature business. SAP’s growth strategy is to expand into ERP for smaller, mid-sized companies with their new A1F product. I think that is SAP’s fourth product line. They have the product line that they bought for very, very small companies when they acquired [inaudible] company. They have R3, they have mySAP, and now they have A1F, so SAP’s strategy seems to be to have lots and lots of different ERP systems.

Our strategy, by the way, in contrast is with Fusion to have one ERP system, one suite that will be available on demand, that will be available for small and mid-sized companies all the way to the largest company, so a very different strategy.

But today, before Fusion, Oracle is a strong number two in ERP but very importantly, we are number one and increasing our market share in the fast-growing CRM market. CRM is extremely important because it is not a mature marketplace. It is growing much faster than ERP and we are gaining share.

In addition, we are expanding into industry-specific software markets. Our strategy is to sell industry-specific software to the same large and larger mid-sized companies, down to probably $100 million, that we are currently selling ERP and CRM to. We want to call on the same customers we are already calling on. It is very expensive to suddenly go in and call on very small companies.

In fact, very small companies, like Microsoft sells, is often done through a channel. While we have channels that go after the small-end of the mid-sized business and we have a product line in JD Edwards aimed at that, really our strategy for growth is to have these industry-specific software suites and sell them to the same customers. I think there is a very big distinction between what we are doing and what SAP is doing. We want to call on the same customers and sell them more value. We want to move up the value chain, go beyond ERP. ERP foundation, CRM on top of that, and the industry-specific software suite on top of that. We think that is very important we target specific industries.

Our strategy is already showing results. Our margins, as Safra mentioned earlier, are going up, not down. SAP has said that their expansion strategy requires sacrifice in margins. Well, we do not believe in sacrificing margins for growth. We think we can grow margins and grow the top line and grow share simultaneously, if we have the right strategy.

Our banking and retail software businesses both had very strong, very, very strong Q3s. I mentioned retail on the last conference call that we are expecting a very strong second-half from retail and boy did they deliver. It is absolutely spectacular.

We expect good things to come from our newer business, vertical business unit, the telecoms business unit and the utilities business unit, and the pipelines there are extremely strong. So we are very excited about these industry-specific software spaces.

We believe in competing not just in ERP but in CRM and industry-specific software. Given that strategy, we think we have a good chance to catch and pass SAP in the overall applications business.

We closed the gap and gained applications market share again this quarter. Oracle's application new license business grew 57% in Q3. SAP grew only 7% in their most recent quarter. 57% growth for Oracle, 7% growth for SAP.

Oracle grew its application new license business on average 61% over the last four quarters. SAP averaged only 10% growth over its last four quarters. So in the trailing 12 months, we are growing six times faster than SAP. SAP is still larger than Oracle in the applications business but we are gaining on them consistently and rapidly.

I will turn it over to Charles.

Charles E. Phillips

Thanks, Larry. We had an outstanding performance from our field organization around the world. Everybody did a great job, so just a couple of comments by product line.

In core database, the momentum there has partly been fueled by customers taking multiple options around the database, so an increasingly common deployment configuration around the database is with the trifecta of RAC, automatic storage management, and enterprise manager. RAC is the clustering of less expensive machines into grids, ASM for managing and positioning storage, EM to manage the entire environment.

We continue to expand our lead in core database performance as well. We set three new world record benchmarks in the quarter. We ranged from 41% to 206% faster than the competition on these benchmarks.

We also launched a new version of Enterprise Manager in the quarter, and that is a new star performer. It was up 46% in the quarter.

So as our product footprint grows within these accounts, these customers look to us as the logical provider of their management infrastructure on the presumption that we can provide a level of management for our own products that no third party can do, and that is true.

So two major enhancements with that release, we can manage more than Oracle now. We now manage other application servers and databases, networks and storage devices, and we can also proactively manage the entire Oracle stack, which means we can get in and make configuration changes based on the information collected.

Key customers in that area: Chicago Board Options Exchange, Korea Telecom, State of Tennessee in the quarter.

In middleware, we had a new release as well, 10g R3, over a thousand new features. That brings us up to 275 patents and we have won over 191 independent awards in the past 18 months for our middleware products. Our customers are soaking up these new features pretty quickly. Nearly 85% of our middleware customers own the latest two releases.

All of our application products have been certified with our middleware. I mentioned to you a couple of years ago that a key requirement that we had was to get ISVs on board and that would help us accelerate our growth. We have done that. We now have over 5,000 ISVs. We have critical mass. We added 48 new ones just in the last quarter. We now have 250 of the top 500 global ISVs certified on our middleware.

Key customers in the middleware this quarter: GE Plastics, replaced webMethods for deployment; content management, Air Canada and Reuters.

Business intelligence more than tripled in the quarter. We now have more products and more sales reps in our specialized sales force. We shipped a new release as well. We also were added to the Magic Quadrant from Gartner in business intelligence.

Finally, in the applications area, we have five new releases of our ERP applications announced on one day, so we are continuing to follow through on our applications unlimited commitment with new releases and new innovation.

In the industry areas, as Larry mentioned, retail had a blowout quarter, up over 90% in the quarter. Key wins, such as Abercrombie and Fitch, Michael’s, Home Depot Supply Chain. But we also did very well in communications. In fact, we have two telcos in Europe who are going end-to-end Oracle, which means billing, provisioning with Metasoft, Siebel customer care, PeopleSoft financials, field service and HR middleware and the Oracle database. We are the only company that could offer a telco in a box. We are going to replicate this in more industries.

So Q3 wins related to applications: Cisco, they purchased applications middleware database and many other areas of management tools over a multi-year period; Citrix Systems purchased CRM and our BI suite; Cummings purchased 42 modules across the entire ERP suite, a large win against SAP in the automotive sector, one of their key verticals; Subaru of America bought G-Log for purchase planning and freight settlement; Demantra, we won at Mattel Toys; and one fun win in the quarter was a company called [Wiles]. You may not have heard them, but they are based in Germany, a fairly large company in Germany about two blocks from SAP’s headquarters. This is a complete SAP replacement. They have been a customer since the R2 days. They also purchased mySAP ERP 2004 and deployed it in Germany and France. They liked our superior functionality, superior cost of ownership and our architecture and this is a complete replacement, so that was the fun win in the quarter.

With that, I will open it up for questions to Krista.

Krista Bessinger

That is great. We have a couple of minutes for some questions, so Operator, if you could go ahead and create the queue.

Question-and-Answer Session

Operator

(Operator Instructions)

We will take our first question from Heather Bellini with UBS.

Heather Bellini - UBS

Thank you and congratulations on a very good quarter. Safra, I was wondering if you could help us out with two questions. One, what do you think was behind the strength in new license sales this past quarter? How much of it do you think was related to changes in execution that you put in place post the November results?

The second thing would be many have been nervous about enterprise spending trends, given some of the missteps from some of the big software companies over the past few quarters. Can you give us your view on the macro environment right now? Thank you.

Safra A. Catz

Sure, and you know, Charles, you should add in on the first -- on either question, actually. The reality is that the anomaly is not this quarter at all. It is really last quarter, and as we told you, we had a blockbuster Q4 in ’06 and Q1 was again fantastic. Q2, I think you basically saw that we felt we had some execution issues out in the field, really focused mostly around North America. Charles and Keith put in place -- basically everyone is focusing back on what they need to be doing and they are really just back on track.

Today is not really the announcement of the anomaly. It was really last quarter when we talked about what went down in Q2. Charles, do you want to comment on that part?

Charles E. Phillips

Yes, and that is what we felt last quarter, what we said is that our destiny was in our control and the guys focused, did a great job and came through around the world, but North America especially.

Safra A. Catz

Then, as far as the macro situation, I have to tell you, Heather, we have so much momentum for so many reasons, as we have become so identified with a number of vertical industries. We are really the guy to talk to on a lot of these, and so so far for us, things look very good. They have looked good all quarter. They continue to look good. We are very, very upbeat here.

Obviously the macro economy could change and we could see something different but right now, we feel we have just an enormous amount of momentum even though we are going into a Q4 that is going be very hard to top that last year Q4.

Heather Bellini - UBS

Great. Thank you very much.

Operator

We’ll go next to Brent Thill with Citigroup.

Brent Thill - Citigroup

Thanks, good afternoon. The middleware business, up 82%, showed a very nice acceleration. Can you just give us a sense of what you are seeing particularly in that business? You mentioned the competitive wins against BEA, but what are the other key drivers? How sustainable do you think some of the trajectories of the growth rates you have been seeing the last couple of quarters are?

Lawrence J. Ellison

We decided a while ago to compete in the middleware business not by selling a lot of separate components but by selling an integrated suite. That was a very controversial decision when we made it at the time. We, like everybody else, had a lot of different components that make up a middleware suite.

In fact, IBM WebSphere, which is probably the leader in middleware -- you know, I think we are bigger than BEA but we are not bigger than IBM -- they sell lots and lots of separate components. If you look at the list of products that are underneath WebSphere, it is a long, long list of products that get added up and reported as the WebSphere total.

We thought the right strategy was to take all of our middleware components and have a modern integrated suite, all the pieces play together and all of them support industry standards. In terms of a portal, there are industry standards in the portal. BEA went out and bought Plumtree, which was a leading portal supplier but that product did not conform to industry standards. It was not a standards-based product.

We decided to focus on two things: all the pieces fit together, an integrated suite, and industry standards and we think that is playing very well. IBM’s long list of stuff, again, it is not really integrated. A lot of it is standards-based but the pieces do not play together.

We have a unique strategy in middleware. It is working very, very well. We think our middleware business will continue to grow very rapidly and at some time, I hope to be reporting we are twice as large as BEA in middleware. I think that is really going to happen.

Brent Thill - Citigroup

Great, thank you.

Operator

We’ll go next to Jason Maynard with Credit Suisse.

Jason Maynard - Credit Suisse

Hi, guys, and congratulations on the quarter. I have two questions for you. First, for Safra or Charles, on the Q4 guidance, since you did have that great showing last year, how would you describe your pipeline and close rate assumptions at this point compared to a year ago?

The second question is for Larry regarding vertical market apps. Given the success that you have had so far in retail and banking, does this entice you to go into other market segments outside of some of the areas that you have already identified?

Safra A. Catz

I will answer your first question, but obviously Charles can add in. Obviously pipelines are very big. We had a huge Q4 last year but obviously the pipelines this year are bigger, significantly bigger. We have assumed modestly lower close rates than we had last year, just always trying to be cautious even though the truth was last year’s close rates were not outrageously high or anything like that, or one or the other. The reality is pipelines are very, very big.

But pipelines do not tell the whole story and we are going to have to close just an enormous amount of business. North America alone, rounding around about $1 billion of new license sales just in the 50 states and Canada. That is a lot of new license revenue to sell but we are very, very upbeat. We have the pipeline supported and then some and we have used very reasonably conservative close rates.

Lawrence J. Ellison

Your second question, considering that our existing verticals are doing so well, are we tempted to do more? The answer is of course yes, with the explanation that we really tend to buy industry leaders, leading companies. When we bought i-flex, they are the number one company for automating retail, so we like to buy category leaders when we go into this business.

We think if the business -- what we learned from Jack Welch being number one in a market is a huge advantage. It is much easier to make money when you are number one than when you are number two or number three.

We want to get stronger in the industries where we are already strong and if we can enter new industries in the number one position and that opportunity affords itself, we will exploit that opportunity.

Jason Maynard - Credit Suisse

Great, thank you very much.

Operator

We’ll go next to Kirk Materne with Banc of America.

Kirk Materne - Banc of America

Thanks very much and congratulations on the quarter. My question would be for Charles or Larry. Charles, you talked a lot about the vertical apps having a lot to do with some of the success in that area. Could you just try to qualify that in terms of where you are having success? Is it up-selling? Are you getting customers to take on more apps, meaning are the ASPs trending higher in that group? Are you bringing on new customers that were not necessarily comfortable with dealing with some of the smaller vendors you acquired? Anymore color around that would be great.

Charles E. Phillips

Definitely the deal count is up in all the vertical areas, so as soon as we buy one of these companies, there is always a segment of the market that did not feel comfortable buying them or they could not do the localizations, importing to specific countries or support in certain geographies -- all that we make happen fairly quickly.

Then, we are also delivering some of the integration, so we promise to productize some of the integrations between billing, for instance, and telecommunications to Siebel, and those are shipping now.

So all those things certainly help, but you are right. The size of the deals are creeping up and the drag effect, once we win the industry application on middleware and database and portal, you name it all, we are starting to figure out how to optimize that process. That is why we are getting these telco-in-a-box type of deals, is that we are partnering together all of our sales forces around the areas where we need to for a particular customer and they are feeling like Oracle has pretty much everything they need.

We certainly have a transcending to the next level with a lot of these customers and it is just changing our relationship with them. We know more about them.

The second thing that is happening is we did a better job hiring over the last nine months and we just have more sales capacity. The right heads in the right place, and so with that in place with the right product line and the momentum that we have, people want to do business with a winner.

In contrast to three years ago when they had a lot of questions about our strategy, now they believe in it and are totally consistent with it and they are voting with their dollars. They like it.

Kirk Materne - Banc of America

Great. Thanks very much.

Operator

We’ll go next to Adam Holt with JP Morgan.

Adam Holt - JP Morgan

Good afternoon, and I also echo the congratulations. I have two quick questions. The first is on the applications business. You have said historically that given the large maintenance base, database product cycles are less important to license revenue. How would you talk about the number of recent applications releases that you had, either in terms of the impact on the quarter or what you think will be the impact going forward?

My second question is on the operating margin. Safra, do your comments about expansion, does that include the impact of Hyperion? How should we think about timing there? Thanks.

Lawrence J. Ellison

I will answer the first question, which was the releases, all the different application releases we just had. I think it was important in the sense that when we acquired PeopleSoft, we acquired Siebel, a lot of these customers did not get their application support from Oracle. They got it from PeopleSoft. They got it from Siebel. The commitments that were made were made by PeopleSoft and Siebel.

We made some commitments to these customers. We made commitments to the PeopleSoft customers to continue improving the PeopleSoft line of products and provide them the highest quality of support we were capable of providing, and we came out with a new PeopleSoft release, Release 9, and we have an extremely high renewal rate. The PeopleSoft base is actually higher than PeopleSoft had when they were a standalone company. The new release is going extremely well. The upgrade is very smooth, smoother than the upgrades for prior PeopleSoft releases when PeopleSoft was an independent company.

It is our job, really, as we acquire these customers along with these companies to demonstrate to those customers that the acquisition was a good thing, that the products will be improved at a faster rate, the quality of improvement will be better than before and the quality of support will have also improved, so that these customers are comfortable in dealing with Oracle and these customers are comfortable to continue buying things from Oracle.

In that sense, this is extremely -- these releases, these commitments that we made to improve JD Edwards, and I think it was the first new release for some of these JD Edwards products for a long, long time, and we think that community is very happy with the release. The PeopleSoft community is very happy with the release. The Siebel people and of course the e-business suite people are very happy that even though we are doing Fusion, we talked a lot about Fusion, it does not mean we are not going to continue to improve the existing product lines and keep all of those commitments and all of those promises that we made in the past.

I think that is why we had record level renewal rates that Safra referred to. If you look at our customer satisfaction surveys that we view constantly, they have never been as high as they are right now. That is really an important indicator for us in terms of buying, because most of the selling we do is into existing Oracle customers, so existing customers buying more. If they are not happy, if they do not trust us as a supplier, that is a very difficult road to go down. In fact, they are happy. They do trust us as a supplier. They are very comfortable.

Some of these customers where we acquired the company, they are very comfortable with working with us and they are buying more. As Charles said very colorfully, they are voting with their dollars and it showed in the quarter.

Safra, are you going to talk about the other part of the question?

Safra A. Catz

What was it?

Krista Bessinger

Operating margins and how Hyperion might impact them.

Safra A. Catz

You know, actually, the comment is actually a lot more global than just Hyperion. The reality is that we are not giving guidance including Hyperion right now, but as a general statement we bought a lot of smaller things that are not at scale, and that is one of the reasons that our margins have not been shooting up higher than they are now going, and that is because we have been -- we invest in them for a while before they are at scale and then the revenue comes in and then all the marginal revenue is very, very profitable.

Hyperion, we would also expect to improve margins once we are stabilized and probably much more quickly than some of these smaller things because it is already at scale. But it will to some extent depend on how much additional sales force coverage we want because we think we can be rewarded with increasing revenues and accelerating revenues.

But overall, we would expect Hyperion to improve margins rather quickly.

Adam Holt - JP Morgan

Terrific. Thank you.

Operator

We’ll go next to John DiFucci with Bear Stearns.

John DiFucci - Bear Stearns

A question for Safra on the guidance. Safra, given the license guidance, the midpoint of that, and considering that maintenance is very predictable and then given your total revenue guidance, it implies a lot less growth in what I would characterize as lower-margin services business. Am I thinking about that right?

Safra A. Catz

Well, you know, remember also that our numbers include quite a bit from i-flex, which is generally lower margins but they are growing rather quickly, and they continue to grow quickly within us and yet we still overcompensate with improving our margin.

Overall, our own consulting business is not growing very fast intentionally because that is not a business that we want to grow fast. We want to grow the license business as quickly as possible.

John DiFucci - Bear Stearns

Okay, thanks, and just a quick follow-up for Charles. As Safra said, Charles, across all the geographies and all the product areas, there was meaningful growth. One area though in particular in EMEA, on a constant currency basis, the database grew at about 6%, which is not bad growth but relative to the other regions and other product areas, it did not appear to keep up. Just curious, do you have any commentary on that? Is there anything -- just given that there are other companies in EMEA, just trying to figure out if you are seeing anything on a macro -- any macro issues in EMEA?

Charles E. Phillips

I can’t say it is a new macro issue. Obviously that is a tougher applications market than it is in the U.S. for us. However, we are optimistic about some of the localizations we are putting in place. The more localizations that you have, the more countries you can sell in and we are expanding pretty rapidly in some of the emerging markets, like Russia and the Middle East, which is growing pretty quickly.

So we do see the opportunity to accelerate the growth there on the applications business as these other emerging markets come on.

Safra A. Catz

You know, it is basically in line with the database growth, constant currency database growth over the last few years. It has moved around a little bit but it has been around 6% or so, a little higher. It depends oftentimes on the comparison quarter to quarter.

John DiFucci - Bear Stearns

Okay, thank you.

Operator

We’ll go next to Kash Rangan with Merrill Lynch.

Kash Rangan - Merrill Lynch

Thank you very much, nice quarter. A couple of questions; one, Safra, for you. Since you have anniversaried the acquisition and the 5% to 15% is more of a true apples-to-apples comp, should we think of that as being roughly your license growth expectation? Not to get you into guidance talk for Q1, but longer term if you didn’t do any acquisitions, is that the kind of license revenue growth expectation that we should be thinking about? I have a follow-up question.

Safra A. Catz

You know, Kash, it is really too hard to call the future. Things are changing very, very quickly. We built a lot of momentum in a number of sectors. Any particular quarter is really very much related to really the comparison from the year before and our level of conservatism at that time, when we look at the economy overall.

As we go into a number of these vertical markets, they are actually growing significantly faster and as they become a larger and larger percentage of our overall business, it will impact our growth rate.

In any particular quarter, it is probably not a good necessary metric to extrapolate from one point. As I mentioned, Q1 will right away have Hyperion in it, which obviously Q4 really will not be affected by Hyperion significantly.

Kash Rangan - Merrill Lynch

Also, just looking at the guidance again, you definitely outperformed in a pretty big way for the February quarter, so should we think of your what seems to be a conservative outlook for the May quarter as more of a function of the February quarter having come in at least significantly above people’s expectations? Is that why you are choosing to have a more conservative view of the May quarter? Or is it that you are really starting to look and plan beyond this and start to manage the upcoming Q1 and not get the numbers be too tough from a sequential basis going from the May quarter to the August quarter?

Lawrence J. Ellison

Let me comment. I think there are two things. One is we have a very tough comparison because we had a blowout -- I mean, any growth rate, as you know, is the comparison between two numbers. What we did in Q4 last year versus what we expect to do in Q4 this year. Last year we had an absolute blowout Q4 so it is a very tough comparison. That is number one.

As Safra said earlier, we are trying to be conservative.

Let me add a third thing, which is in terms of extrapolating this, does that mean that we are going to grow from 5% to 15% indefinitely if we don’t make acquisitions? The answer is I don’t think so because we have, if you analyze our business, we have a couple of slow-growing businesses, a very large database business, whose maintenance base is growing quite nicely and is extremely profitable, and a relatively slow-growing ERP business. Those are our two slower-growing businesses but they are both growing.

We have a very fast-growing middleware business that is getting larger and as it gets larger, it will move the needle more and more. We have a fast-growing CRM business and we have an astonishingly fast-growing suite of businesses in vertical applications.

As the relative weights of those five businesses change -- in other words, middleware gets to be larger and larger compared with database and it is faster growing, that is going to affect our overall growth rates.

I think you have to take all of those things into consideration and Q4 has to be looked at in isolation and not a point you want to extrapolate from. A very tough comparison and we are trying to be a little conservative with our forecast.

Safra A. Catz

Kash, I think you asked about whether we are trying to manage Q4 to have a good Q1, we don’t have that kind of power. When our customers want to buy, we sell to them. We don’t fool around, so anyone who would like to give us money for our software, we are taking it and open for business.

Krista Bessinger

I would like to announce we have time -- Kash, unless you have a follow-up, Operator, we have time for just one more question.

Kash Rangan - Merrill Lynch

I’m good, thanks.

Operator

We will take our last question from Israel Hernandez with Lehman Brothers.

Israel Hernandez - Lehman Brothers

Good afternoon. Congratulations to the team. A quick question on the health of the CRM business. Can you talk about -- you alluded to some market share gains regarding CRM. Can you talk about some of the momentum that you are seeing in the marketplace from a pipeline creation perspective? What have you seen from customers, given now that you have owned the business, Siebel, for about four quarters or so? Are you seeing a big increase in pipeline? Thanks.

Charles E. Phillips

The pipeline is growing globally, even in Europe. We are seeing that increase in the new additions, our CRM on-demand business, which is also growing very strongly in bookings. We will be talking about that I think at an event later this month, but that business has taken off as well. We can present a very unique proposition to a customer. A lot of them want a mixed environment, where maybe some regions or some business units, they want on-demand, other ones they want on premise. We can integrate it on the back-end for them. We are the only ones who can do that.

I think also the Siebel brand name is just magical with anything to do with CRM. People understand that in terms of best practices and leading thinking around customer processes, that was Siebel and we built on that.

I think even in SAP accounts, if they decide for their administrative applications, they tend to go with Siebel for CRM.

Israel Hernandez - Lehman Brothers

Thank you.

Operator

That concludes the question-and-answer session today. At this time, Ms. Bessinger, I would like to turn the conference back over to you for any additional or closing remarks.

Krista Bessinger

Great. Thank you, everyone, for participating in today’s call. A telephone replay will be available for 24 hours, and that replay number is 719-457-0820, with passcode 7473378. You can also access the webcast replay on the Oracle investor relations website and that replay will be available through the close of market on March 27th.

Thank you, and with that, I will turn it back to the operator to close.

Operator

Ladies and gentlemen, that does conclude today’s call. Thank you for your participation. You may now disconnect.

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