Here’s the entire text of the prepared remarks from Oracle’s (ticker: ORCL) fiscal Q2 2006 conference call. The Q&A is here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.
Catherine Evans, Investor Relations Program Manager
Safra Catz, President, Chief Financial Officer and Director
Lawrence J. Ellison, Chief Executive Officer and Director
Charles E. Phillips, Jr., President, Director
Jason Maynard, CS First Boston, Analyst
Heather Bellini, UBS, Analyst
John DiFucci, Bear Stearns, Analyst
Adam Holt, J.P. Morgan, Analyst
Stephen Mahedy, Banc of America Securities, Analyst
Brendan Barnicle, Pacific Crest Securities, Analyst
Brent Thill, Prudential, Analyst
Andrew Brosseau, SG Cowen, Analyst
David Hilal, Friedman, Billings, Ramsey, Analyst
Please standby. 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 Catherine Evans, Investor Relations Program Manager. Please go ahead ma’am.
Catherine Evans - Investor Relations Program Manager
Thank you, operator. Good afternoon everyone and welcome to Oracle Corporation’s Second Quarter Fiscal Year 2006 Earnings Conference Call. With me on this call, our Oracle CEO Larry Ellison, Oracle President and Chief Financial Officer, Safra Catz and Oracle President, Charles Phillips. Their commentary will be followed by Q&A session. Before their comments, I would like to remind participant that our discussion maybe deemed to the felicitation materials in respect of the proposed business combination of Oracle and Siebel Systems Incorporated.
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In connection with the proposed transaction, a registration statement on Form S-4 was filed by Ozark Holding Incorporated with SEC on October 19, 2005. As amended, the registration number of 333/129139 containing a preliminary proxy statement perspective and other documents filed by Oracle and Siebel Systems.
Stock holders of Siebel Systems are encouraged to read the registration statement and any other relevant documents filed with SEC, including the proxy statement that is part of the registration statement because they contain important information about the proposed business combination. Any offered securities will only be made pursuant to a definitive proxy statement perspective. The final proxy statement perspective will be known to stock holders of Siebel Systems and investors and security holders will be able to obtain the documents free of charge of SEC website from Oracle Corporation at 500 Oracle Parkway, Redwood Shores, California 94065, Attention: Investor Relations, or from Siebel Systems Incorporated, 2207, Bridgepointe Parkway, San Mateo, California, 94404, Attention: Investor Relations.
Oracle, Siebel Systems and the respective Directors and Executive Officers and other members of management and Employees maybe deemed to participate in this felicitation of proxies and respect of the proposed transaction. Information regarding Oracle’s Directors and Executive Officers is available on Oracle’s proxy statement for 2005 annual meeting of stock holders, which we filed with SEC on August 30, 2005 and information regarding Siebel System’s Directors and Executive Officers is available on Siebel Systems proxy statement, Fourth 2005 Annual Meeting of Stock Holders, which we filed with SEC on April 29, 2005. Additional information regarding the interest of such potential participants will be included in the proxy statement perspective and other relevant documents filed with SEC when they become available.
Our discussion may include predictions, estimates and other information that maybe considered forward-looking. While these forward-looking statements represent our current judgment and what the future hold, they’re 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 today of this presentation. Please keep in mind, that we are not obligating ourselves to revive or publicly release the results of any revision to these forward-looking statements in light of new information or future events. We’re out today’s discussion, we will attempt to present some important factors relating to our business that may affect our prediction. You should also review our most recent Form 10-K and Form 10-Q for more complete discussion of these factors and other risks, particularly under the heading, “factors that may affect our future results or the market price of our stock". Thank you and I’ll turn the call over to Safra Catz.
Safra Catz, President, Chief Financial Officer and Director
Thanks Cathy. Good afternoon and thank you for joining us for our earnings call. Today I’m going to touch on a few non-GAAP financial highlights for the quarter, since that’s how you all cover us. But of course, we’ve attached the full financial schedule to the earnings release as well as a reconciliation of non-GAAP to GAAP. I encourage you to review the full financial schedules carefully. We’ve also included a constant dollar analysis in the schedules as we always do, to help put the quarter into context. The dollar strengthened substantially, moving nearly 5 points against us from the beginning of quarter. Now, as compared to Q2 last year, the year-over-year growth rates are impacted negatively by about 3 percentage points from the move in the currencies. After going through the financials, I’m going to offer a quick update on the status of Siebel and then discuss the guidance, and then I’ll turn to Larry, who is going to offer some perspective on the business, after which Charles will discuss some of the key customer wins, with particular focus on our industry and vertical application strategy.
Let me start with a few highlights which we’ve really believe define and differentiate our business. First, we grew EPS for the quarter by 16% to $0.19 per share. We remain on track to meet or exceed our goal of 20% earnings growth for the year, which means we continue to grow earnings substantially faster than the S&P 500. Now our operating margin, our operating income grew 17% to 1.4 billion. This was 21% in constant currency. And we’ve been able to maintain margins above 40% for this quarter even as we have considerably increased our investment in R&D.
Our Free Cash Flow continues to be extremely strong and is one of the defining elements of Oracle’s business model. Our trailing 12 months Free Cash Flow was 3.3 billion. As a percentage of revenue we generate substantially more cash than net income because we don’t recognize some revenues up front, but rateably over the year, as we do with license updates and support. Since we received the cash in advance our trailing 12 months Free Cash Flow with a 116% of net income. Led by very strong performance in North America, our total revenue for Q2 was 3.4 billion, a 23% increase over the same period last year, and we achieved this level of revenue growth even with a substantial drag from currency during the quarter
Now, I want to focus on subscription revenue which is comprised of our software license update and product support revenue. Every new license sale and acquisition adds to our subscriber base. What drives both our margins and our cash flow is the renewal of these agreements by our customers. We now have over 300,000 contracts that are renewed annually. The renewal rates are at an all time high, over 95%. This revenue for the quarter was 1.7 billion, a 33% increase over last year. On the trailing 12 month basis, subscription revenue was 6.5 billion, a growth rate of 36%. This high-margin subscription base now accounts for more than 48% of our total revenues. Now new license, new software license revenue grew 9% to 1.1 billion with North America growing at an impressive 23%. New software revenues grew 12% in constant currency and our trailing 12 month revenue growth rate was 15% compared to 11% the year before. Europe was down 7% as a result of tough comparisons, slowing economies in a number of large European countries, and the substantial strengthening of the dollar against the euro and the pound.
Our database new license revenue grew 5% in the quarter to 696 million led by 17% growth in North America. That would be 8% in constant dollars. On a trailing 12 month basis, database grew 9%. Now RAC growth, Real Application Clusters, an option to the database has accelerated rapidly during Q2 and was up 36% year-over-year. Enterprise manager, another database option, was up 41% year-over-year. Oracle 10g adoption has increased now to over 30% since the release of R2, that’s Release in July of 2005, that’s up 24%, that’s up from 24% adoption at the end of Q1
Fusion Middleware grew 8% for the quarter and grew 24% on a trailing 12 month basis. More than 76% of the largest 1,000 corporations now run our Middleware with more than 40% of our Middleware license revenues coming from partners, showing the strength in the adoption of our product. Lastly, application revenues grew 24% for the quarter to 266, again, led by 42% growth in North America. We also had a number of key applications wins right in SAP’s backyard which Charles will discuss
Let me make a couple of quick points about our applications business. As we approach the one year anniversary of our merger with PeopleSoft, and as we look forward to closing Siebel. First customers are renewing their subscriptions and buying more. As we predicted, the overwhelming majority of PeopleSoft customers are renewing their subscription services. In fact PeopleSoft renewal rates are higher than when PeopleSoft was a standalone company. In addition PeopleSoft customers are buying more from Oracle, more applications, more Middleware, and more Database. Secondly, our vertical strategy is working. Charles is going to discuss some industry vertical wins in detail. When it become clear is that with Oracle PeopleSoft ERP, with Fusion Middleware with our market leading Database platform. We’re the logical choice as a strategic solution provider for virtually any customer in an industry, one of many industries that we focus on. Third, applications contribute to profitability. Our applications business contributes substantially to our margin and cash flow story. Accounting for the marginal increase in support expenses, nearly a billion of PeopleSoft’s 1.3 billion subscription base will have dropped to the bottom line over the first 12 months after the close. At our scale, adding customers to our application business increases our overall profitability
Now, let me give you a quick update on Siebel. We received clearance from the Department of Justice last month and the first phase of our notification with the European commission expires on December 23rd and we’re optimistic we’ll clear Europe in that first phase. And number of smaller jurisdictions have also approved the deal so really we are in the process now of working with the SEC to complete the review of our registration statement, so that Siebel shareholders can vote on the merger. If all goes as currently planned, we should be able to complete the Siebel shareholder vote and close early in calendar 2006. Now, we have spent most of our time over the past few months planning for the integration and we believe we will complete all the major milestones of the Siebel integration even faster than we did with PeopleSoft.
Now let me talk about guidance for Q3. As most of you know, Oracle’s Q2 and Q3 are very similar. This year is no different, except the pipeline looks stronger right now and currency impact is about 2 points more negative. So the guidance I’m about to give you reflects the negative 5% currency impact that currently exists when comparing this year’s currency rates to those of last year. So with that in mind for Q3, we anticipate total revenues growing from 9% to 12% to 3.4 billion to 3.5 billion. Total software revenues growing 10% to 14%, for 2.7 billion to 2.8 billion. New license revenues growing 10% to 20% from 1 billion to a billion 1, and EPS of $0.19. Now I had planned on giving guidance for Q4 too, however with Siebel moving so quickly now, it appears that Q4 will include Siebel. So we are very far along in our Siebel planning and modeling, and should be really ready to give Q4 guidance with Siebel during Q3 immediately upon the close of the deal. I will now turn the call over to Lauren.
Lawrence J. Ellison, Chief Executive Officer and Director
About 18 months ago, we went to New York and presented a five year plan, and that five year plan called for earnings growth of 20%, EPS growth of 20% in each of the next five years. In the first year of the plan, FY’05, we actually earned 28%, or had EPS growth of 28% which was well ahead of plan, and this year, as Safra mentioned, we’re on target to meet our 20% earnings growth target. That makes us well ahead of plan, of that five year plan. We believe on to achieve our five year EPS growth plan, we have to become number one in several additional software segments beyond Database
We have long been number one in Database. We believe we have been gaining share over the last 18 months due to a key technological innovation known as Grid Computing. RAC sales are increasing rapidly which is showing that Grid is becoming very, very popular, as we’re moving from the early adoption phase to the mass adoption phase of Grid computing. Since neither Microsoft nor IBM can support Database grids, we think this differentiator will serve us well over the coming years and allow us to continue to gain share and strengthen our number one Database position. We also think we’ve moved into the number two position in the Java Middleware segment behind, in front of BEA but still behind IBM WebSphere. We think that’s very, very important, because we think we’re gaining share against not only BEA but also gaining share against WebSphere, and it’s very, very important for our future plans. And it’s essential that we continue to grow our Middleware share if we’re going to achieve our overall five year growth plan.
In our applications business, in the first year and a half of our five year plan we become number one in our applications in North America, clear and strong number one in applications in North America, number one in Human Resources globally, number one in COM globally, with the Siebel acquisition, number one in retail applications, number one in banking applications, number one in Telecom, and government, and several other industries. All of our acquisitions are designed to move us into the number one market position. Or a clear and strong number two division where we can challenge for number one over time. We believe the lion’s share of the profits go to the category leaders and our, we have seen our application and Middleware businesses become much more profitable over the last 18 months because those businesses are now much larger. We believe we can hit our 20% EPS growth targets by strengthening our number one position in Database, becoming number one in Middleware, and adding several more application categories and industries where we’re number one. Okay I will turn it over to Charles.
Charles E. Phillips, Jr., President, Director
Thanks Lawry. I just wanted to highlight a few strategic wins in the quarter and talk about our vertical strategy a bit. Some of the wins we had over SAP, some of the names are the Department of Agriculture, Pfizer, US Army, Iron Mountain, Englehard, MoneyGram, Kaiser Foundation, DuPont, Fidelity Investments, Bristol Myers, China Netcom, Chesapeake Energy Corp., and a few big wins in our install basis well Additional expansions like Agilent, Aramark Uniform Services, Convergys, Dana Corporation, Noble Energy and there are a lot more I could talk about. I wanted to give a couple of examples of the types of wins that we’re getting. So number one I wanted to highlight is the Russian Federal Treasury. This is an example of a very strategic win. As you know, one of our growth strategies is to expand to new geographies. So we beat SAP for a major contract with the automation of the Russian Federal Treasury. This is a multi-year project with a total value of $65 million 30,000 users, nothing from this deal has been recognized. The contract was a public tender supported by the World Economics Bank, and we’ll be automating about 89 regions across the Russian Federation. The reason this is strategic is the way it usually works is the finance function is the first to be automated in one of these new regions. Then the rest of the government normally follows. And then in these areas, the commercial sector follows the government. And so we think this is a kind of an indicator with, where that market is going over the next few years.
So I really want to talk about is Oracle Retail. We had some great wins in Retail, a lot of this is coming from our relationship and investment with Retek of course. So number one, I want to talk about Karstadt. This is a large German retailer, this is in Germany now, who is a design partner for SAP, in retail. And in the last quarter, they decided to switch and go with Oracle. This deep, industry domain expertise is what they were looking for and what we’ve discovered, if you have that, all the other things really don’t matter. And it’s a pattern that we’re seeing repeated, Benetton, also in Europe, Co Op, also in Europe, Ahold, all these are big wins, some of the ones from the US recently, The Limited, Circuit City. So right now if you look at the Fortune 100, there are 13 retailers, 12 of them are running Oracle retailer applications. So our licensed bookings have more than doubled for Retek since we bought them. An important thing to remember, however, is the revenue from these wins have not been recognized. We have been accruing these wins and we will recognize the majority of the revenue in future quarters
In addition, we’re really going after the SAP install base with this vertical strategy. What we’ve discovered, according the Gartner Group anyway, 94% of SAP customers are on old releases, some old release of R3. And right now they’re trying to get their customers to move to MySAP, My SAP. The problem is they are charging for that upgrade, and they are dropping support from some of the older releases. So we see an opportunity, so just to give you an example, we did a call blitz at APAC, Asia Pacific, cold calls to 965 customers. 18% said they were interested and wanted us to follow up about switching off of SAP and moving to Oracle applications, so it was a pretty productive day. So our sales reps are pretty pumped up. They see the opportunity, they have the confidence,
they know we can switch customers off.
Lastly I just wanted to touch on our Database business just for a second, because our transaction volume and user count is really accelerating. We have been expanding in our market by moving to the low end. So if you remember, about two years ago we introduced SE1, a low end product, 81% of the sales of that product are to companies with less than 500 employees, 59% are to new customers. In the quarter we introduced yet another product called Oracle Database XE, a free version of our Database. And what that’s done is vastly expand our user base. We had 30,000 downloads of our Database in September, once we introduced XE in November we had 130,000 downloads. So we’re attracting new users, and our last point here is the core Database license revenue was up in double digits in every region but EMEA which is not surprising given the economic issues and currency swing. So with that I will turn it back over to the operator.
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