Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  
TRANSCRIPT SPONSOR
Cornerstone OnDemand Logo

Oracle Corporation (NYSE:ORCL)

Q3 2006 Earnings Conference Call

March 20th 2006, 5:00 PM EST

Executives

Krista Bessinger - Vice President, Investor Relations

Larry Ellison - Chief Executive Officer

Charles Phillips - President

Safra Catz - President and Chief Financial Officer

Analysts

Tim Klasell - Thomas Weisel

Adam Holt - JP Morgan

John DiFucci - Bear Stearns

Robert Schwartz - Jefferies & Co

Steve Mahedy - Banc of America

Peter Goldmacher - SG Cowen

Heather Bellini - UBS

Jason Maynard - Credit Suisse First Boston

Kevin Buttigieg - AG Edwards

Israel Hernandez - Lehman Brothers

David Hilal - Friedman, Billings & Ramsey - Analyst

Presentation

Operator

Good afternoon and welcome to today's Oracle Corporation third quarter conference call. Just a reminder, today's call is being recorded. I would like to turn the conference over to the Vice President of Investor Relations for Oracle, Krista Bessinger. Please go ahead, ma'am.

Krista Bessinger

Good afternoon, everyone and welcome to Oracle's third quarter fiscal year 2006 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'd 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 statements 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're 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 under the heading, factors that may affect our future results or the market price of our stock. A PDF copy of our press release and financial tables can be viewed and downloaded on the Oracle investor relations website at www.oracle.com/investor. Thank you, and I'll now turn the call over to Safra for opening comments.

TRANSCRIPT SPONSOR

Cornerstone OnDemand Logo

Want to understand the future of software?

Cornerstone OnDemand is the leading provider of hosted software solutions for learning management, employee performance management, and succession planning.

We offer over 30,000 online training titles and integrated tools for compliance and analytics to help companies maximize workforce productivity and achieve organizational excellence.

Learn about OnDemand talent management and our industry leading products for large enterprises, small businesses, offices and K12. Or view our list of featured clients, and contact us for more information.

To sponsor a Seeking Alpha transcript click here.

Safra Catz

Thanks, Krista. Good afternoon, everyone and thanks for joining us on today's call. I'm going to focus on the non-GAAP results for Q3, then I'll review the guidance for Q4 and turn the call over to Larry and Charles. As I review today's results, I want you to keep in mind that currency negatively impacted our Q3 revenue growth rate by four points.

New software license revenue was strong for the quarter, up 16% year-over-year with revenue at $1.1 billion, which is in line with our previous guidance. Applications came in very strong across the board, generating license revenue of $269 million, up 77%. This compares to 18% growth in SAP's most recent quarter. Siebel contributed about $22 million in apps license in the quarter, also exceeding our expectations. So even excluding Siebel, our apps growth was very strong, coming in at $247 million, up 63% year-over-year. In you Europe, our apps growth was 119% and in the Americas, our apps growth was 61%.

Database and middleware license revenues were up 5% year-over-year, but that's 9% in constant currency. Revenues were driven by strength in the Americas, up 16% and middleware, up 24%. This, of course, growing faster than BEA.

So to sum it up, our new license business basically showed that our apps are growing faster than SAP, middleware faster than BEA and we continue to take database share from IBM.

Software license renewal revenue also remained very strong, up 15% year-over-year. This revenue, now 50% of our total revenue, is very stable, has a very high margin, and recurs. Our renewal rates remain at an all-time high. We continue to drive increased margins and leverage as we grow. In fact, we think we can grow market share and profitability simultaneously.

Q3 income from operations grew 19% to a $1.4 billion, resulting in operating margins of 39%, an increase from 38% a year ago. We also grew EPS by 21% to 19% on a non-GAAP basis, coming in $0.01 above our previous guidance. Our cash flows remained strong and we continue to expect to generate cash at a rate of at least $1 billion per quarter.

As for Q4, our guidance remains basically unchanged from our February 9th call. While we feel good about our prospects heading into our seasonally strongest quarter, Q4, we are up against some pretty tough comparisons. Last year, new software license revenues were up 23% in Q4 and total revenues up 32%. Those numbers are now in our base, which will make the comparisons more difficult, though we are off to a very good start.

Currency was also working in our favor a year ago by about three points and we're including a negative two percentage point impact this year.

New software license revenues for Q4 are expected to be up 8% to 18% year-over-year. That's slightly up from my February 9th guidance of 7% to 17%. We do expect some contribution from Siebel, though we're trying to stay conservative until we have more experience with the close rates.

Total software revenue that we're looking for is, again, 10% to 15%, the same as the February 9th call. Total revenue up 10% to 14%, same as our call earlier. Net income up 4% to 11%. Earnings per share of $0.26 to $0.28. Those are our non-GAAP guidance at this point, those are all basically the same as the February 9th call.

For GAAP, again, new license revenue up 8% to 18%, that's up from 7% to 17%. Again, all the other numbers are exactly the same as our previous quarter, which is total software 14% to 19%; total revenue, 13% to 17% growth; net income, 12% to 22% growth; EPS percentage, 10% to 19% and a GAAP EPS of 21% to 23%.

This guidance, by the way, assumes that income tax rates stay at the 29% we have now. It also, as I mentioned, assumes the two points of negative currency, but again that may change, depending on what the ultimate rates are.

Finally, note that our Q4 GAAP and non-GAAP guidance does not include the FAS-123-R expense of about $0.03 to $0.04 for the full year. So if we were to adopt it, which we are still currently planning on doing, but we won't have completed our work on that until Q4, that would have an impact of $0.03 to $0.04.

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

Larry Ellison

Thank you, Safra. I want to take a couple of minutes to talk about probably the most important innovation our database team has delivered over the last several years, maybe the most important innovation since we came up with great computing: that is, Secure Enterprise Search.

Everyone knows about search; it's what Google does. Let’s say you search Intel, and find all the latest articles in the newspaper about Intel. If you have Google Desktop Search on your computer, it will go out and find any spreadsheets you have on Intel or any e-mail messages with Intel in the subject. That is all very useful.

What it will not do is go in to your sales automation systems and find all of the open opportunities that your salesmen are working with Intel. It won't go you’re your service system and find every time Intel called up with an issue about your software. It won't go into your accounting system and find every invoice you ever sent Intel and tell you whether they pay on time or not.

Oracle Secure Enterprise Search is everything. It really does give you that 360-degree review of the customer promised by CRM. Every touch point, every meeting you had with Intel referenced in your calendar, every e-mail note sent to you by Intel, that you sent Intel or about Intel, it returns. Every Microsoft Word document, every purchase request, every time you bought something from Intel; every time Intel bought something from you. All of your contacts, your sales people, and the purchase orders are formatted properly using the relevant application, purchasing application. The service requests are formatted properly. We are using the relevant service application.

So if you're authorized to see the data -- and that's the key thing, that's what we do that's unique -- we actually have all of the security of the Oracle database to use to filter that information to make sure that you only see the information about Intel that you are authorized to see: only those e-mails you're authorized to see, only those purchase requests you're authorized to see, only those invoices you're authorized to see.

It searches all of the application data stored in an Oracle database or a non-Oracle database; it searches all of your Microsoft Word files or any other kind of file; e-mail documents -- everything. Every touch point. It's a comprehensive search. It's never been done before and we think everyone will want it.

The last thing I'll say about it is that you can get it up and running in your organization very, very quickly. You can install Oracle Secure Enterprise Search within literally a few days, and be doing useful work. Searching all the different databases your company maintains, all the different Exchange files and all the different Microsoft Word files, get all of that running very, very quickly and give the people who need the information to get the job done, giving them that information in a timely and comprehensive fashion.

No one's ever done it before. We think there's a huge market, we're excited to be going into this market. We think it's going to help drive database growth for years to come. With that, I'll turn it over to Charles.

Charles Phillips

Thanks, Larry. I just wanted to highlight a few announcements and key developments in the quarter. As Larry mentioned on the database side, Secure Enterprise Search was the most exciting announcement and the field is certainly pumped up about that one. RAC, partitioning and enterprise management have been important options to us over the years. A lot of you have been tracking the growth in those options. I would consider Secure Enterprise Search in that same category of potentially very strong add-on revenue for us in our install base.

Fusion middleware continues to be rated the best-selling middleware suite in units and the fastest-growing middleware suite in revenue and units. We're up 22% on a trailing 12-month basis versus 6% for BEA. The latest quarter, we were up 24% as compared to 4% for IBM WebSphere. We've made a lot our developer tools free. If you adjust for that and back out development tool revenue, our middleware products grew 37% in the quarter.

What's driving the growth? New products. In the quarter we introduced Oracle Application Server 10G release 3 and J Developer 10G release 3. As you know, we're still standard in hot pluggable. That's a lot more important than it may sound like. That means we can co-exist with any application in any other standard middleware.

Our standards are implemented and not just a stated direction, so customers view standards as a way of retaining choice which is something most other vendors are afraid of. We've embraced this open concept and we're getting rewarded for it.

In the area of security, our security and identity management revenue increased 93% in the quarter. We have a strong security suite now. If you remember, we acquired a couple of companies: OctetString, Oblix and Thor Technologies. They've all been integrated into the Oracle Identity and Access Management Suite. Since we've done that, we've had more than 10,000 developer downloads. We have a dedicated sales force and a strong list of third party vendors building extensions on top of our security products. Some key security wins in the quarter, Bechtel, MTA Long Island Railroad, Orient Overseas Container Line, Phoenix Technologies, and Volkswagen.

In the applications area, we were up 77% compared to 18% for SAP. Some key customer wins to mention, France Telecom, Motorola, VeriSign, Fidelity Information Services, Cap Gemini, Legg Mason. We continue our momentum in the retail industry after buying Retek. We won Sears Roebuck, Dress Barn, Duty Free, Tesco and the GAP.

There were probably two big events for applications in the quarter I wanted to highlight. The first one was we announced that we were halfway to Fusion applications. What we did was host an event with about 30,000 people on the web, 1,500 people in attendance. We gave substantial technical detail on the products, demonstrations, showed off the user interface. I think the bottom line is we were much further along than people anticipated and that helped us with customers in the quarter.

The second development was basically closing the Siebel deal. I think that really pushed us over the top in many accounts in terms of being a strategic applications supplier.

From my perspective on the Q4 outlook, I think we're entering with a lot of product momentum. The first few days of the quarter we had a $15-million plus deal close, hopefully more of those to come. That's always nice to start off like that. Our forecast assumes a conversion rate of the pipeline that is lower than what we actually realized for Q4 in 2005 and in 2004. With that, I'll turn it over to questions.

Question-and-Answer Session

Operator

(Operator Instructions) We'll take our first question from Tim Klasell with Thomas Weisel.

Tim Klasell - Thomas Weisel

Good afternoon, everybody. First question, the strength in Europe with the applications wasn't matched with the database. Can you give us a flavor of what you see going on there? Do you expect the database to begin to get closer to the apps revenue growth?

Charles Phillips

I would say we had some tough comparisons, but also you have to look at currency rates. Europe's taking a huge currency hit right now, about 9 percentage points or so. I think if you look at last year, three out of the four quarters we had double-digit growth, nice double-digit growth in database so the comparisons are tough and we have the double whammy on currency. Some of that starts to go away after the next quarter. We feel good about the pipeline, these new products like Secure and Enterprise Search are going to help going forward.

On the applications side of it, if you remember about three quarters ago we started to talk about the specialization of the sales force in Europe. They came a little later than the U.S. That transition is starting to pay off now. Initially you lose some sales reps who don't want to specialize in applications, they choose database, so we had to hire. Then the people who do want to sell applications get better accounts and more territory. That's starting to pay off, they're just executing a lot better. Lastly, I just think we're more strategic in the applications area to all customers. Siebel really pushed us over the top, as I said earlier.

Tim Klasell - Thomas Weisel

Good, and a quick follow on. There's a lot of rumblings in the open source community about some of the moves that Oracle has been making. Can you give us sort of a high level of anything change with your view of how you're going to approach the open source community?

Larry Ellison

I think we look at everything very closely. We bought Sleepycat recently, Sleepycat software and their Berkeley DB product is the most broadly deployed open source database in the world. We thought it was a very attractive business for us. We thought it complemented what we do. So we went out and bought open source. Open source doesn't mean free.

Tim Klasell - Thomas Weisel

Will there be any other moves into, let's say, the applications server or any other open source arenas?

Larry Ellison

We're constantly looking at all sorts of companies and applications, middleware and database, and some of those companies are open source.

Tim Klasell - Thomas Weisel

Okay, very good. Thank you.

Operator

We'll now hear from Adam Holt with JP Morgan.

Adam Holt - JP Morgan

Good afternoon. I was hoping you could first give us more detail on the technology side, maybe some of the growth rates for areas like RAC, partitioning, Enterprise Manager, and then also core database?

Safra Catz

Sure. For RAC in constant dollars, the growth was 14%, Enterprise Manager was 32%. Partitioning was 12%. Database was sort of a mix. The overall database number year-over-year was -- well, it depends for what. I don't have an actual -- .

Larry Ellison

The aggregate database number was 5% in the press release.

Safra Catz

Yes.

Adam Holt - JP Morgan

Okay. Maybe give us a sense for where you feel you are in terms of the penetration on 10G at this point, how attach rates are tracking, and where you think database can grow over the next three to four quarters as you really get into the bell curve of the adoption cycle?

Larry Ellison

Our database targets in constant currency -- keep in mind, our constant currency growth for database business was 9%. Our targets are in the low double-digits for long-term growth and low double-digits for database, so we don't really think we were that far off. We think Secure Enterprise Search might be a real catalyst over the next 24 months for more rapid growth than we'd otherwise experience. Other than Secure Enterprise Search, we're fairly confident we can deliver double-digit growth in database for several years to come.

Charles Phillips

I still think we have another wave of growth coming because it takes the ISV's two or three years to import and the same thing for customers, they have applications that are tied to specific versions and it takes them a while to move their applications over. That's been taking place over the last couple of years and so that growth, I think, is ahead of us.

Adam Holt - JP Morgan

Just one last question on Siebel. Obviously a good number in the quarter. Does that change your thinking about the previous guidance you gave for contribution for Q4? Thanks.

Larry Ellison

I think Safra mentioned, we have a good 30 days experience with Siebel in terms of close rates, and we'd like to get another quarter under our belt before we get more aggressive than we've already been.

Safra Catz

We're pretty much in the same place on the guidance. A month doesn't make a trend so we just want to have, as Larry said, a little bit more experience. It could be anywhere from $40 million up. We are just not sure yet.

Adam Holt - JP Morgan

Great, thank you.

Operator

Thank you. Moving on to Bear Stearns, John DiFucci.

John DiFucci - Bear Stearns

Hi, a question for Safra. Safra, the cash flow looks very strong this quarter, at least stronger than we were looking for. Were there any one-time impacts from the Siebel acquisition? Were there a lot of collections or anything like that?

Safra Catz

No, I think overall, little by little we actually are improving our collections and breaking down our backlog overall with our maintenance base. We've continued to actually bill customers more and more on time and collect the money more on time. Nothing in particular occurred, nothing unusual. Just business remains strong, people are paying us.

John DiFucci - Bear Stearns

Okay. Just a quick follow-up to Adam's question on the database market. Larry, you point out that constant currency growth is 9%. Actually that was the whole growth rate for the database market, for your database business on a constant currency basis for all of last year.

This year we're looking more at numbers that are, at least for the year, that are more like world GDP growth rates. Given the size of that market, you said you think you can do double-digit growth and you do have some things like RAC that's really seem to be a differentiator. But this year the numbers just don't seem to pan out for us to sort of expect that going forward.

Larry Ellison

Well, the database market's based on innovations. Those innovations have largely come from us. So we're the only one with RAC and now we're the only one with Secure Enterprise Search. So I think our ability to grow is a combination of the overall movement of data that's not in databases into databases; the movement of data off of IBM mainframes and on to open systems -- We benefit from both of those -- the overall growth in the market; and finally our ability to come up with innovative, new, interesting and valuable products like Secure Enterprise Search. We think Secure Enterprise Search, for example, will help our growth rates for several years to come.

John DiFucci - Bear Stearns

Can you give us any detail on the penetration rate for RAC at this point? We have some estimates, I'm just curious if you can give us -- ?

Larry Ellison

I'd say we're past the early adopter phase, but we're still very, very early on in terms of it being rolled out broadly. I think you'll see RAC adopted at about the same rate relational database was adopted. A full adoption is people go from a single host computer running their application to a grid of computers running their application as a standard configuration. The migration to relational database took about 20 years from conventional. I think the migration off of individual machines on to grids will, overall, take about 20 years when everyone -- virtually every new application -- is running on a grid. We're still fairly early in that cycle. But it's a geometric progression, so I'm very optimistic that RAC will continue to grow.

John DiFucci - Bear Stearns

Okay, thanks a lot.

Operator

Moving onto Robert Schwartz with Jefferies & Company.

Robert Schwartz - Jefferies & Co

Thanks so much. You mentioned, Charles, that you were assuming a lower close rate than you have historically. I'm wondering if that's motivated by what you're seeing in the field and maybe you could also talk about pricing in the database market and how well it's holding up?

Larry Ellison

I think what Charles meant by that -- let me jump in here -- not that we're assuming a slower close rate. What Charles said is our pipelines are strong and our forecasts are conservative based on slower close rates than we actually achieved before. I'll let Charles explain it.

Charles Phillips

Very well said. That's what I meant to say.

Larry Ellison

That's exactly what you did say.

Robert Schwartz - Jefferies & Co

Sounds like the right follow-on answer.

Larry Ellison

We are not forecasting lower close rates. We're just letting you know there is some built-in conservatism to our forecast.

Robert Schwartz - Jefferies & Co

What about pricing in the database market in particular?

Larry Ellison

I think we win the vast, vast majority of competitive database deals. We don't win based on price, we win based on the fact that Oracle is the only database that supports great computing. The only fault tolerant database. That we deliver more performance, scalability and security than other products. The database has been coming down in price every year since we've been in this business. It is getting less and less expensive, but we've been able to make it up in volume. Nothing unusual has happened in pricing for a long time.

Robert Schwartz - Jefferies & Co

Okay. Maybe Safra, if you could help me here on the pro services, I thought in the past that you broke out the part that was database versus applications or technology versus applications.

Larry Ellison

Never.

Robert Schwartz - Jefferies & Co

Never?

Larry Ellison

On professional services, no, never. In fact, it's very difficult to say professional services.

Safra Catz

We used to make an estimate but as we try to do that now, it just gets more and more difficult because some of the work is one way or another. So what we do break out for you now is just the licenses and the license renewals.

Robert Schwartz - Jefferies & Co

Okay. Thank you very much.

Operator

We'll now hear from Steve Mahedy with Banc of America.

Steve Mahedy - Banc of America

Thanks, first question would be on operating margins. They were up nicely year-over-year and we're heading into traditionally a quarter where we see peak operating margins. Now, what's left to do on the synergy side given some of the acquisitions? Is there still some modest improvement there? Maybe just an update on status?

Safra Catz

Sure, this quarter and the next quarter even after that, there will still be some synergies that we'll be getting back from the acquisitions. In different countries your ability to reorganize and reduce staff is limited. So we've really owned Siebel for a month and so there's still some more to go there on the cost reduction side.

Larry Ellison

Let me add to that. The margin improvement you're seeing -- well, I think every year we become a little bit better operator and a little bit more efficient. We find something, we find a team that we can move to India that we hadn't moved to India before and all this other stuff, but the biggest thing that's affecting our margin growth has nothing to do with that.

Oracle's margins grow every single year -- year after year after year -- because our business is being reshaped. What I mean by that, an increasing percentage of our overall business is subscription renewals. As Safra pointed out in her opening remarks, that business is now over half of our total revenue. And that business has a 90-plus% margin built into it.

As a larger and larger percentage of our business is on subscription renewals, there's nothing we can do to prevent that, just about. As a larger and larger percentage of our business becomes subscription renewals, our margins just have to get better, quarter after quarter, year after year.

That's why I have said in the past a few times, I understand people like to focus on new license revenue, which I think is completely appropriate for young companies, a five-year-old company or a 10-year-old company when they don't have a large installed base. But, in fact, the shape of the business and where the profits of the business largely come from these subscribers, existing customers, who then renew their support and renew their license to receive updates and improvements to those programs. That's why our margins continue to grow. It is not cost-cutting. It is not cost-cutting, it is a fundamental and continual reshaping of the business.

Steve Mahedy - Banc of America

Okay, great. Quick follow-up question would be in regard to the cash flow which remains strong, and general balance sheet. Now that it looks like you're digesting some of the more significant acquisitions and perhaps the ones in the future might be of a lower scale, how do you think about the capital structure and the opportunity to go out and buy back more shares? I know you talked about what you're going to buy back, vis-a-vis the Siebel shares, but how else do you think about the opportunity for buyback going forward?

Larry Ellison

I think it depends on a lot of things. We're constantly reviewing our uses of capital and what would provide the greatest return for shareholders. If a buyback looks like it's the best way to use our capital, we'll increase the size of our buyback. If we have the opportunity to make a particularly strategic and financially advantageous acquisition, we'll use the capital there.

So again, every time we look at an acquisition, clearly we have to look at what that acquisition's going to cost versus what if we use that money, that same cash to buy back our stock. So we're constantly evaluating any acquisition versus stock buyback.

Steve Mahedy - Banc of America

Okay. Thank you.

Operator

Thank you. Moving onto Peter Goldmacher with Cowen & Co.

Peter Goldmacher - SG Cowen

Larry, just wanted to ask you a quick question on Enterprise Search. I know before you guys have had a lot of search distributed among the various applications. I'd love a little bit more detail on how you organize the search, what are the necessary database preconditions for search to be effective, and how do you all think of search relative to the gains you're trying to make in business intelligence?

Larry Ellison

Well, search is really kind of interesting. Let's say your company has 300 separate databases and 100 exchange servers, and an uncountable number of Microsoft file servers. What we do is we set up a completely separate Oracle database. One Oracle database that goes out with crawlers. Very Google-like, but it's not crawling the World Wide Web, it's crawling all of your databases. It's crawling all of your files. It's crawling all of your exchange servers. Those crawlers then index all of that information inside of your enterprise and put those indices into an Oracle database.

Then, you simply ask the question, find me everything about Intel. We have all of the links to all of the different databases, all of the different files, all of the different exchange servers, then we filter that through our security systems. The interesting thing about this is we don't really go out and tamper with all those installed systems you have out there, we're just adding a separate database, a new database, which indices all the other databases and file systems that you have. It's the way it works. That's why we can put it in in a few days and it starts delivering a return on it's investment literally before we can invoice you.

Peter Goldmacher - SG Cowen

If you run a simple query, how do you keep it in context? It would seem like this -- is there some potential linkage with your BI offerings?

Larry Ellison

No, no. Again, it's very Google-ish except for the fact that we deal with the security problem. What Google does, they just have a bunch of servers with indices that allow you to find everything to do with Chicago Cubs. They will find all the websites, all the different information linked to the Chicago Cubs. And that's stored in the Google database, even though all of the data about the Cubs is stored God only knows where, in servers all over the world.

Secure Enterprise Search is a database of indices and security profiles.

Peter Goldmacher - SG Cowen

Okay. As far as the context? Getting a search in context?

Larry Ellison

We have a lot of very cool things because we've been in the search business for 25 years. So in terms of relevancy, in terms of weighting the searches, clearly in terms of security filters, we think we give you very high quality query results when you're using Secure Enterprise Search.

Peter Goldmacher - SG Cowen

Okay. Let me just ask one quick totally different question. Do you guys ever disclose headcount in Oracle India?

Larry Ellison

I guess the answer's no.

Peter Goldmacher - SG Cowen

Do you want to start today?

Safra Catz

We have it here somewhere.

Larry Ellison

We have 8,600 and we're going to 10,000.

Safra Catz

We've got 8,600.

Larry Ellison

8,600 people in India.

Peter Goldmacher - SG Cowen

Going to 10,000 by when?

Safra Catz

Over time.

Peter Goldmacher - SG Cowen

Okay, thanks.

Charles Phillips

One day.

Larry Ellison

Eventually. Maybe even more.

Peter Goldmacher - SG Cowen

Thank you.

Operator

Thank you, moving on to Heather Bellini with UBS.

Heather Bellini - UBS

Hi, thank you, I just had a couple follow-up questions. I was wondering in particular, you upped your license forecast in early February as part of the Siebel update call. I was wondering if deal closings came in as expected on the database side post that call or if you saw some sort of change in the market? Then I had two follow-ups.

Safra Catz

I'm sorry, you --

Larry Ellison

After the update.

Heather Bellini - UBS

After the update call in early February, was there -- ?

Larry Ellison

Was there any change in pattern -- ?

Safra Catz

We raised it as it was and it came in sort of where we expected.

Heather Bellini - UBS

Right, no, but did you see any change in close rates after that either way, better or worse or they came in as expected?

Charles Phillips

Just as expected, no change.

Heather Bellini - UBS

Okay. Then two other follow-ups. One on an organic basis, Safra, if you could give us an idea of what type of applications license growth we should expect to see over the next 12 months? Charles, on sales accelerators planned for Q4, since that is something that always comes up this time of year and kind of makes its way through the market, if you could give us an update on how your sales force is going to be compensated in Q4. Thank you.

Safra Catz

We don't, as you may remember, we don't actually give guidance by product over any time period and never have. So Charles, you're on.

Charles Phillips

There's no change on accelerators, we have the same plan the last couple of years. Once you cover your salary it accelerates to a higher rate. If they're selling enough to do that, that's fine.

Heather Bellini - UBS

Okay. I guess, Safra, my question was do you think that on a apps basis, maybe if I ask it a different way, is 10 to 12% type apps growth or 10% to 15% narrowing the gap with SAP on an organic basis something you guys think is achievable?

Safra Catz

Yes, we expect to do better than that, but that's all we're going to say.

Heather Bellini - UBS

Okay, great. Thank you.

Operator

Moving on to Jason Maynard with Credit Suisse.

Jason Maynard - Credit Suisse First Boston

Good afternoon, everybody. Deferred revenue actually came in higher than what we were forecasting. Could you give us color on what you saw in terms of either maintenance bookings or some of the stuff that Larry's talking about with these all-you-can-eat enterprise agreements?

Safra Catz

Well, mostly it was really as a result of the PeopleSoft support numbers that are now in the base and everything. So that's, I think, what you're seeing. You may remember that when you buy a software company, you have to do this, what we call a haircut so that impacts that number, because you have to haircut it to fair value. So what we're going to have is now you'll see the same thing with Siebel. So it's really increase from support revenues now that the haircut is almost flowed completely out of the calculation. Then you'll see a little bit again with Siebel, which will drop out again in almost a year.

Jason Maynard - Credit Suisse First Boston

We'd already factored in the deferred maintenance revenue add-back. But it looked like maybe was the renewal rate stronger than you expected or anything there? The number still is a little better than we had forecast.

Safra Catz

Renewal rates have been extremely strong. We had a backlog of things that we are just continuing to catch up on. We just have so many customers, we are renewing them as quickly as we can and we continue to just renew them at extremely high rates. Really all-time high rates, significantly higher than, as you know, than PeopleSoft had themselves and higher than we've ever had.

Jason Maynard - Credit Suisse First Boston

Are there any plans, as you look out to next year, for perhaps raising the maintenance rates? Siebel and PeopleSoft were obviously significantly lower than what Oracle has typically charged.

Safra Catz

Nothing special. Nothing special.

Jason Maynard - Credit Suisse First Boston

Okay. That's all I had, thank you.

Operator

Thank you. From A.G. Edwards we will hear from Kevin Buttigieg.

Kevin Buttigieg - AG Edwards

Thank you. Questions for Safra. I was wondering if you could give the percentage of license revenues that came from March deals?

Safra Catz

You know what, I usually have that. I stopped actually giving that out. Do you have it off the top of your head?

Krista Bessinger

39%.

Kevin Buttigieg - AG Edwards

Great, thank you. And then just a question with regards to acquisitions. Obviously you've talked about 15% to 20% EPS growth from both organic and inorganic sources. And now for fiscal year '06 you're on track to do about 20% this year after having spent about $4 billion net of cash on acquisitions. Now you said that you have no major acquisitions planned and obviously there aren't that many large software companies out there left. Going forward, should we think about several acquisitions in total that would aggregate around $3 billion to $4 billion for you to achieve a 20% EPS growth rate?

Larry Ellison

I said just a short two years ago, we expected over the next five years to grow EPS about 20% a year, made up of approximately 50% organic growth over that five-year period and 5% growth by acquisition. The first year we way overshot our target and had 28% EPS growth. And this year, as you say, is close enough is around the 20% amount.

There are several things we can do that influences our EPS growth. A lot of them have been mentioned, you mentioned acquisitions. The fundamental reshaping of our business as a larger and larger percentage of our business is in subscription renewals, it dramatically increases our margins. We can become a more efficient operator, which is another way to improve our margins. We can do stock buybacks. There are any number and a better variety of acquisitions that we constantly look at. So we're not ready to move off that forecast. We have a number of tools in the kits that we can use to achieve those goals.

Kevin Buttigieg - AG Edwards

Okay. And then finally, for Chuck, I was wondering if you could provide some more color on the $50 million deal that you had closed in the first quarter? I imagine that would be both a mix of applications and database, but if you could provide some more color on that, I'd appreciate it.

Charles Phillips

No more color, that's pretty black and white, that's it.

Kevin Buttigieg - AG Edwards

Okay. Thanks.

Larry Ellison

$50 million deals is around $50 million.

Kevin Buttigieg - AG Edwards

Thank you.

Operator

Thank you. Moving on to Israel Hernandez with Lehman Brothers.

Israel Hernandez - Lehman Brothers

Good afternoon, everyone. What percentage of the applications license revenue is coming from expansion from within the existing customer base, as opposed to head-to-head competitive situations where there's no current incumbent? Just trying to get a sense for how Oracle's doing vis-a-vis SAP and some of the other competitors now that it has a much greater expanded applications portfolio.

Charles Phillips

I think that's hard to get at because a lot of customers have products with multiple vendor, so how do you classify them? I don't think we have that number that precisely anywhere.

Safra Catz

No. I know just story-wise as to what we talk about, North America feels they win two out of three, something like that, against SAP here in North America. And just in general, our win rates continue to go up. Again, I can't tie that to the financials, that's just our internal analysis.

Israel Hernandez - Lehman Brothers

All right, thank you.

Krista Bessinger

I think we have time just for one more question.

Operator

Our final question will come from David Hilal with Friedman, Billings, Ramsey.

David Hilal - Friedman, Billings & Ramsey

Great. Two questions. First, the Enterprise Search product, how are you going to price that? I think RAC and some of the other options were fairly high price, how is this going to be priced?

Larry Ellison

It is about the same price as a database plus RAC. I think it's attractively priced and I think the most interesting thing is it's one of those rare database products that you can actually try for a couple of weeks, figure out if you like it or not and then buy it afterwards. So we're hoping we get a very rapid penetration of Secure Enterprise Search versus any of our other options.

It really is quite different in the respect that most of our technologies when we sell them, if you buy SAP, it takes you two years to implement SAP. We are building a custom application, it might take you a year to build a custom application. There's a long time period before you actually get a payback from the investment in technology. This is the rare case where you actually can try it, very cheap to try. The benefits are obvious. We think we have rapid penetration, we deliver the product. The product is priced attractively, it's about the price of the database, plus the price of RAC. If you want to run RAC with Secure Enterprise Search, then you have to pay for RAC also, but the option's roughly the price of RAC.

David Hilal - Friedman, Billings & Ramsey

My last question, you guys broke out Siebel. I know you're not in the habit of breaking out PeopleSoft, but if we're just trying to get at the organic app growth number in the quarter, can you ballpark it or range it for us?

Larry Ellison

Keep in mind we owned Peoplesoft last year.

David Hilal - Friedman, Billings & Ramsey

But you didn't have PeopleSoft for all three months of the quarter last year.

Larry Ellison

We only had them for two of the three months.

Safra Catz

The Oracle apps, which we generally don't break out, but I will break it out for you. Oracle apps alone year-over-year was up 31%. So just Oracle apps business alone.

David Hilal - Friedman, Billings & Ramsey

Fantastic, thank you.

Operator

That's all the time we have for questions, I'll turn it back over to our speakers for any additional or closing comments.

Krista Bessinger

Great. Thanks everyone for participating in today's call. A replay is going to be available for 24 hours. And that replay number is (719) 457-0820 with passcode 6854537. You can also access the webcast replay on the Oracle investor relations website and the replay will be available through the close of market on March 27th. Thanks and with that, I'll turn it back to the operator to close.

Operator

Thank you. That does conclude today's conference call. We thank you for your participation. You may now disconnect.

TRANSCRIPT SPONSOR

Cornerstone OnDemand Logo

Want to understand the future of software?

Cornerstone OnDemand is the leading provider of hosted software solutions for learning management, employee performance management, and succession planning.

We offer over 30,000 online training titles and integrated tools for compliance and analytics to help companies maximize workforce productivity and achieve organizational excellence.

Learn about OnDemand talent management and our industry leading products for large enterprises, small businesses, offices and K12. Or view our list of featured clients, and contact us for more information.

To sponsor a Seeking Alpha transcript click here.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Oracle Corporation F3Q06 (Qtr Ending Feb 28, 2006) Earnings Conference Call Transcript (ORCL)
This Transcript
All Transcripts