Oracle (NYSE:ORCL) F3Q10 Earnings Call March 25, 2010 5:00 PM ET
Ken Bond - Investor Relations
Jeffrey E. Epstein - Chief Financial Officer, Executive Vice President
Safra A. Catz - President, Director
Lawrence J. Ellison - Chief Executive Officer, Director
Charles E. Phillips Jr. - President, Director
Adam Holt - Morgan Stanley
John Difucci - J.P. Morgan
Sara Friar - Goldman Sachs
Bill Winslow – Credit Suisse
Heather Bellini - ISI
Kash Rangan - Merrill Lynch
Brent Thill – UBS
Welcome to today's Oracle Corporation quarterly conference call. Today’s call is being recorded. At this time, I would like to introduce Ken Bond, Vice President of Investor Relations. Please go ahead, sir.
Thank you. Good afternoon everyone and welcome to Oracle's third quarter fiscal year 2010 earnings conference call. I am Ken Bond, Vice President Investor Relations and with us on the call today are Chief Executive Officer, Larry Ellison; President, Safra Catz; President, Charles Phillips and Chief Financial Officer, Jeff Epstein.
As a reminder, today’s discussion will include forward-looking statements including predictions, expectations, estimates or other information that might be considered forward-looking. While these forward-looking statements represent our current judgment on what the future holds, these statements are also subject to risks and uncertainties that may cause actual results to differ materially from statements being made today.
Throughout today's discussion we will attempt to present some important factors relating to our business which may potentially affect these forward-looking statements. We would encourage you to review our most recent reports on forms 10-K and 10-Q and any applicable amendments for a complete discussion of these factors and other risks that may affect our future results or the market price of our stock. As a result we caution you against placing undue reliance on these forward-looking statements which reflect our opinion only as of today and as a reminder, we are not obligating ourselves to revise or publicly release the results of any revisions of these forward-looking statements in light of new information or future results.
A copy of the press release and financial tables, which includes a GAAP to non-GAAP reconciliation and other supplemental financial information, can be viewed and downloaded from our website at www.oracle.com/investor.
We will begin the call with a few prepared remarks before taking questions from the audience. With that I would like to turn the call over to Jeff Epstein for his opening remarks. Jeff?
Thank you, Ken. Good afternoon, everyone and thank you for joining us. I will review our non-GAAP financial results focusing on U.S. dollar growth rates unless otherwise stated.
First, a comment about foreign exchange rate movements. Excluding Sun the actual currency benefit we saw this quarter was less than our guidance by approximately 2% for both new license revenue and total revenue. However, even with currency tailwinds being less than anticipated we were able to drive solid results this quarter as we beat our new license revenue guidance, beat our total revenue guidance and were at the high end of the EPS range with record Q3 earnings per share. Q3 was a solid quarter.
Before reviewing our income statement I would like to remind everyone that our guidance from last quarter excluded Sun. In discussing revenue I will provide revenue results as reported and for some key growth rates I will exclude Sun revenue to align the results to our guidance from last quarter.
In the third quarter our new software license revenues were $1.7 billion including $46 million from Sun. New software license revenues were up 13% and up 10% excluding Sun. This 10% growth beat the high end of our guidance range, calling for 9% growth. The Americas grew 22%. EMEA was up 3% and Asia was up 12%.
Our results continue to underscore the strength, balance and diversity of our business and the quarter was not dependent on any unusually large deals. Technology new license revenues were $1.2 billion up 11% as the Americas grew 20%, EMEA was up 2% and Asia was up 9%. Applications new license revenues were $477 million, up 21% from last year. The Americas grew 26%. EMEA was up 7% and Asia was up 29%.
Our software license update and product support revenues were $3.3 billion including $25 million from Sun and up 12% from last year. Customer support attachment and renewal rates continue at near record levels. Revenues from our hardware systems products were $273 million while revenues from hardware systems support were $224 million. Our services revenues were $931 million, down 9% as we continue to manage this business to profitable margins.
Our total revenues were $6.5 billion including $596 million from Sun. Total revenues for the quarter were up 18% and up 7% excluding Sun. Total revenues excluding Sun were at the high end of our guidance range even without the full benefit of currency tailwinds included in our guidance.
With Sun results now being included in our financial statements, non-GAAP operating income was $2.9 billion, up 13%. The non-GAAP operating margin for the quarter was 45%. Our tax rate for the third quarter was 25.9% as we saw some one-time benefits to our tax rate. Our Q3 non-GAAP earnings per share were $0.38, at the high end of our Oracle only EPS guidance range of $0.36 to $0.38. Earnings per share were up 9% from last year and include a $0.01 loss related to the devaluation of the Venezuelan currency.
In Q3 we repurchased 10.3 million shares at an average price of $24.28 per share for a total of $250 million. As we have previously discussed the rate of our stock buybacks will fluctuate each quarter taking into account alternative uses for our cash and our stock price.
Turning to the balance sheet we have $17.5 billion in cash and investments. The day sales outstanding excluding Sun improved again to 47 days as compared to 49 days last year. Finally, we generated $8.0 billion in free cash flow during the last four quarters.
Now I will turn the call over to Safra.
Thanks Jeff. As you can all see we had another fantastic quarter. I would like to first address our performance excluding Sun as this relates directly to the guidance we provided last quarter and then I will highlight a few points related to Sun.
For starters, as Jeff mentioned we exceeded the high point of our new license guidance with 10% growth in software licenses excluding Sun. This clearly shows substantial strength in the database, Middleware and applications business. We also beat the high end of our total revenue guidance with consistent strength in our update and support renewals. Results for our application business were nothing short of stunning. We grew 21% while SAP continued to shrink at a double digit pace. Our applications business is doing very well in all regions and in all verticals and it is truly no wonder SAP is so unhappy.
In addition to our strong top line performance we delivered very strong operating margins. With Sun included our operating margin was 45%, substantially higher than our peers including IBM. Our operating margin remains much higher than SAP’s targets and we are now selling hardware. Regarding Sun, as you all know the transaction closed at the end of January so our Q3 results for Sun reflect a one-month period of February which would have been in the middle of their Q3.
Sun’s revenues for February were $596 million which was far better than we expected and clearly demonstrates to us that customers are responding well to the acquisition. We believe the Oracle/Sun integration is off to a very strong start. We are moving forward quickly to implement the operational changes we described for you on January 27th and we continue to expect Sun to contribute $1.5 billion in non-GAAP operating income in fiscal year 2011 and $2 billion in fiscal year 2012.
Now before I turn to guidance let me just remind everyone our plans for the Sun business are based on a more profit aware model. We will no longer be selling products at a loss as Sun did. As we promised in January we have already ended or modified arrangements where Sun resold other company’s products at a loss. Just this change will immediately mean more profit on lower revenue.
Second, we are now compensating our sales teams on margin not just revenue. That has an effect of changing the sales mix from commodity systems where Sun lost money to value added systems where Sun’s differentiation is clear to our customers. These two changes will baseline our hardware revenues and profitability at a level from which it will start to grow significantly next year.
Now let me turn to guidance which will include Sun. We believe the guidance I am giving today is conservative. I want to emphasize our pipelines are strong in both software and hardware and the close rates I am using for software are more conservative than typical Q4 close rates for software.
For the coming quarter assuming the exchange rates remain at current levels we expect there to be almost 3% positive currency effect on license growth rates and almost 4% effect on total revenue growth rate.
With that our guidance for Q4 is as follows: New software license revenue growth is expected to range from 3-13% at current exchange rates and flat to up 10% in constant currency. Hardware product revenues are expected to range from $1.2 billion to $1.3 billion at current exchange rates and actually at constant currency. These numbers exclude hardware support revenues. These are just the hardware product revenues.
Total revenue growth on a non-GAAP basis is expected to range from 36% to 41% at current exchange rates and 32% to 37% in constant currency. On a GAAP basis we expected total revenue growth from 35-40% at current exchange rates and 31% to 36% in constant currency. Non-GAAP EPS is expected to be $0.52 to $0.56 assuming current exchange rates, up from $0.46 last year and from $0.50 to $0.54 in constant currency. GAAP EPS for the fourth quarter is expected to be $0.37 to $0.41 using current exchange rates and $0.35 to $0.39 assuming constant currency.
This guidance assumes a GAAP to non-GAAP tax rate of 28% for Q4 but may end up lower. Lastly, the board again declared a dividend of $0.05 per share. With that I will turn it over to Larry for his comments.
Thank you Safra. I thought I would review our strategy in two markets where we are not currently the market leader. The first market is high end servers where IBM is our primary competitor and the other is business applications where SAP is our primary competitor.
Let me start with servers. Since we acquired Sun we have embarked on putting together clusters of some hardware running with our database and Middleware software. That is, we have a collection of some machines interconnected by a modern antenna band network talking to storage also connected to the servers using a modern antenna band network. Exadata is the best example of this clustered architecture where we have collections of machines, storage and networks all built together with the software [in tune] for the software.
What we have been able to do with Exadata and there will be other clusters like Exadata coming out for Middleware applications pretty much all the software that we sell. It is not uncommon for an Exadata benchmark to be going up against a big IBM P-series machine to beat them by a factor of ten because they just don’t have a clustered architecture. They have stuck with kind of an old fashioned SMP architecture for transaction processing. We are taking advantage of new technologies. Not just [inaudible] by the way but Flash, very large scale integrated memories and you will see all of that has allowed us to deliver stunning performance using if you will commodity parts.
Not only do we run much faster than the IBM P-series but also our architecture gives clusters around multiple servers, multiple pieces of storage [inaudible] there is no single point of sale here so it is much more reliable while delivering this fantastic performance. Finally it is much lower in cost because the components themselves if you will are from a lot of these components; disk drives, memory and processors which we assemble with our software. So we again think we can challenge IBM on the high end of the server market with better performance, lower cost and much more reliability.
In applications SAP is the leader. But their technology that they use for their applications is a proprietary technology, a German programming language called ABAP where later this year, and that is a 25 year old technology that is still the center of their architecture and strategy for applications going forward is ABAP. The center of our strategy going forward is Java and a modern service oriented architecture.
During this calendar year we will deliver our Fusion applications. We have been working on them for awhile and we have written in Java all of our accounting software, all of our supply chain software, all of our HR software, our sales automation, service automation software has all been rewritten in Java with a modern service related architecture. We are going to go compete with SAP’s 25 year old technology. The interesting thing is we are competing quite well against SAP now. We think once we deliver Fusion we are going to be well positioned to challenge for the number one slot.
One of the important things about our Fusion applications is they are designed not simply to run on premise which of course they do but they are also on-demand or if you prefer cloud ready. So we will be delivering those applications both by selling the software directly, the old way of doing it which is still the most popular way by the way, we will be selling the Fusion applications integrated with our hardware, our servers and our storage and our networks and we will be selling it on the cloud. All modern service oriented 21st century stuff competing against SAP. We think SAP is vulnerable and we can take them on in a variety of industries.
The other thing we are doing that SAP is not doing is we are emphasizing industry functionality. It is not just technology where we are competing with SAP. We are also competing with them in functionality. We think we have much more functionality to a telco, a phone company, a large scale retail operation, insurance, banking and industry specific applications for a variety of industries. Healthcare. I could go on. Our strategy is to have much better industry focus than SAP in terms of functionality and a much more modern technology underlying all of that functionality.
Again, it is a company we think is vulnerable and we think we have an excellent chance of becoming number one in applications. With that I will turn it over to Charles.
Charles Phillips, Jr.
Thanks Larry. [The Sun] organization has done a great job integrating the Sun reps quickly. They executed very well as you can see. Within days and at most weeks we had the accounts, territories and cost plans all assigned. Reps quickly got back in front of customers and that was a key factor in the quarter and they stayed focused and built pipelines and did a great job all the way around the world.
All the customer data has been converted over to Oracle Systems and pipeline and forecasting processes have been standardized. On the customer side I would say customers, I think the best word is they are “intrigued” with our strategy. A good example is we had a CIO summit yesterday in Atlanta. We were expecting about 125 CIO’s we invited. We got over 175. 85% of them traveled to get there from surrounding states and 91% of them were first time attendees to this type of event.
So we are getting our competitor’s customers to come and hear what we have to say. They just want to know what is happening. I think they sense there is some sort of transformation in the industry that is possible based on what we are doing. They want to know exactly what we are planning. We are going to do a lot more of that. We are just getting started. We have four more CIO summits and CFO summits in the next three months so we are getting our frequent flyer miles in but we need to take advantage of this while it is there because we can get an audience with almost anyone right now.
That is wind at our back in that respect. By product area I am going to start off with database. Exadata as we have been talking about in recent quarters the pipeline continues to grow significantly and what is changing now is we are getting multiple orders and multiple machines on a single order and about 40% of our customers purchased multiple systems in the past quarter. I think Exadata is also generally partially responsible for generating a lot of the interest in our strategy because it is a good example of what can happen when you synchronize innovation across hardware and software which is hard to do in this industry.
Key database wins include [Live Technologies] that was a ULA for database Middleware apps kind of wall in wall Oracle. I told him I would mention him because he negotiated the deal at a Suns basketball deal on a Friday night and still got it done. Turk Cell, which was a telecom in the Middle East. I mention them because this is another ULA for database Middleware including Exadata ERP and CRM. They have been also a good customer on the com side of this. So they are as close to a telco in a box strategy that we are embarking on as you can get. They pretty much do everything on Oracle now.
Then Buenos Aires City Government. I mention them because they migrated to the Oracle database for the first time. They were [inaudible] customers. So I would just kind of like to remind people there are still legacy databases out there like [Informants and Side Base] and DB2 that we get customers from every quarter. Buenos Aires City Government said they are getting an 80% improvement in performance. They are running that on Oracle unbreakable Linux. We had some good Linux wins in the quarter including Victoria University, Telecom SA, [Reuters] and GE Security.
Switching to Middleware I would like to kind of remind people the scale we have achieved in Middleware with 90,000 customers now. That is not including the 20,000 apps customers that run Middleware with our apps. So that is going very well. The upgrade cycle from 11G…I talked about the 11G launch for the last couple of quarters. On average it is taking customers about 4-8 months so that upgrade cycle is continuing as we expected. Actually a little better than the last cycle. There are many customers who already are live on the product.
There are some components that are yet to ship as part of 11G. Over the next 12 months they will be coming out. The ones that are scheduled are business process management, Tuxedo, Enterprise Content Management, Imaging and Process Management and Oracle BI Enterprise Edition. That will generate more upgrades and more uptake of related components.
Also, in past calls I have talked about how important it was to get ISV’s to support our Middleware stack. That is driving adoption as well. So in this past Q3 we had 18 key IT partners [some] of their components on Middleware to standardize that included the North America Landmark Graphics, SunGard, Intuit, Cerner and EMEA IFS and LHS. So we have a partner technical services organization that is part of development and they have trained over 11,000 consultants globally and developers on 11G in the last 9 months. So that is a key part of getting that adoption and we are starting to see the benefit of that now.
Key customer wins are Cox Communications, U.S. Department of Transportation selected us over Web Center to build a portal for their hazardous materials information system. Kaiser Permanente chose us for BI over Cognos and in the EPM area we had wins with Carlisle Group and Herbal Life in [inaudible] management standardized in the University of Texas.
In the applications area Larry mentioned our competition with SAP. I am certainly seeing a shift there where we were seeing two years ago SAP was considered the safe choice even if the technology was a little bit old and complex to implement and all that. That seems to be changing as customers appear to be more nervous about their technology and strategic directions and they are more open to discussing things with Oracle. Even SAP customers and their largest customers so that is a change we are seeing.
Secondly, they don’t have anything new to talk about. It is the same product, the same technology and basically they are focused on general ledger. The industry is moving broader than that including industry applications and entire systems. So here are some key wins over SAP in the quarter. [IBCO] a large privately health food and beverage company in the United Arab Emirates. D&H Distribution, one of the nations meeting technology distributors.
A real important one at NBN Co., and this is a new company and we don’t get these often. The government of Australia had a national initiative to build a national broadband network from scratch. This is a mandate by the government. It will be the single largest nation building infrastructure project in Australian history. The Chief Operating Officer selected Oracle who said [inaudible] headquarters two weeks ago and he wants to go wall to wall Oracle and he selected us over SAP.
We beat them at [Genuine Parks] and their holdings. A good quarter with PeopleSoft. PeopleSoft beat them at Carlisle Group, Alberta Health Services, UBS, Bank of America, Department of Energy and there are many more here. Too many to list.
CRM on demand we had key wins against Sales Force at General Motors, FAIC, Broadcom, Merck, Avis and Starbucks. Important wins for CRM on premise at U.S. Immigration and Northwestern Mutual. The vertical applications grew well. They actually grew faster than the overall apps number and we saw a rebound in the retail GDU and a big win in communications GDU. Had wins three each against Amdocs, Converse and [Vergence] rebuilding in the quarter. Financial services had wins at Central Bank of UAE, Union Bank of Jordan and National Australia Bank.
An important win at Enterprise Taxation products. We had the state of Nevada select us for unemployment insurance. The way these deals work they take one tax at a time and if we do this one well which we plan to do there will be other taxes that they will migrate to the platform and we will charge for them as well.
On the hardware side of it we are going to start to talk about that as well on these calls. We had a good win with Sun Ray. This is their thin client with one of the branches of the Armed Services which I cannot name but they contracted to deploy high secure, multi-level security solutions with the thin client device. This is just beginning. This is going to be scattered across a distributed Federal network. They have a planned growth across other Command in the architecture over time.
We had a win at One on One Internet, the world’s number one web hosting company based in Germany. That was six M9000’s spark enterprise servers. Mtm Group in Nigeria has 21 countries and 90 million subscribers. A big telco with Sun spark servers and enterprise T-5000’s. Then we had a top ten U.S. bank that has replaced Tandem and HP. That was a replacement there. We had a major financial services company that liked our solid state disk and hyper [to raised]. We replaced EMC there. We actually moved EMV from the supplier list when they saw the performance.
We had a lot of good wins on the service side, and more on the way with the pipeline seems to be there. Lastly I will mention a large U.S. federal agency which you can probably guess that has an M8000 and that will support five million pages of handwritten census data that is currently being collected and is probably in your mailbox right now and converted into digital format using OCR from Sun Servers.
With that we are pretty excited about the pipeline and what is happening as you can see. There are lots more out there. I will turn it back over.
Thank you Charles. Operator, we will take our first question please.
Question and Answer Session
(Operator Instructions) The first question comes from the line of Adam Holt - Morgan Stanley.
Adam Holt - Morgan Stanley
You mentioned you are ahead of schedule in terms of the execution on Sun. I was hoping maybe you could drill down a bit on where you think you are actually ahead of plan. Now that you are a little bit deeper into the integration where do you see some of the upside opportunities? In particular, what do you think you can do with maintenance revenue in the Sun base?
I think really we are ahead on sort of all fronts operationally. Both our business practices are being adopted really as of day one and just operationally the way we work with our customers has already changed. As you know we have moved to a build to order model versus a build to stock model. We are not encouraging stocking in general even with our resellers such that customers can order exactly the box they want and that way we can optimize for the time it takes them exactly that box. That obviously also reduces any kind of obsolescence or inventory issues for us. That is really in place now for awhile and really moving along very, very quickly.
The regular contractual terms, etc. and the way we are working with our partners many of them recognize that the old model really didn’t work for either them or for customers and surely not for Sun and are very, very open to readjusting those and many of those have already been completely adjusted; faster than I originally expected.
As far as maintenance or product support, it turns out that many of our customers are really in need of a higher quality of support that really only Sun can give them in the Sun/Oracle combination and they are really looking to support, that is both hardware and software integrated more and more. So we are really moving ahead both technically and operationally to be able to deliver a more integrated support model for them. We do expect that customers will be, are very happy to purchase their support directly from Sun and not from others simply because the level of support and engineering support they need really can best, if not only be done by us at Oracle. We expect that to be very significant financially ultimately and that should start in the quarter.
Let me add one thing to that. As Safra said our buckets and processes are now in place. I think one of the more important ones that is in place is we look at margin on every transaction and if the margin is not attractive or worse yet negative which is often the case, by the way, in some of the bids we had in flight for high performance computing centers that we chose not to bid those. We said early on we would not engage in transactions where we lost money. We got out of businesses where we lose money. Again we look at it transaction by transaction. We do look at the long-term and how important is the customer. We might lose a little bit of money on the first sale but some of these huge high performance computing transactions add to our revenue but detract from our profits and we have a process now that identifies those and we walk away from them.
The next question comes from the line of John Difucci - J.P. Morgan.
John Difucci - J.P. Morgan
I want to make sure my math is right here. You said that the Oracle only software license grew about 10% constant currency and it sounds like you had about 5% foreign exchange benefit so you get about 5% constant currency growth from the Oracle only software license. That was versus the minus 8 to plus 2. I just want to make sure I got that right. Is that correct?
It is 10% as reported so you need to take away I think it was five points of currency and license so it would be five points of constant currency.
John Difucci - J.P. Morgan
On the guidance you said that in [extremes] the lower close rates than you typically see in the fourth quarter. I am curious were the close rates you experienced in the third quarter lower than you typically see? We were hearing sort of mixed messages out there about the macro economy. It still doesn’t seem like it is very easy out there but curious what kind of close rates did you see in the third quarter?
Actually in Q3 we were really flat to last year’s close rates. We actually are seeing some pretty optimistic customers. Our pipeline is very big and the close rates I am using really are conservative and they are particularly conservative because as you know Q4 at Oracle is always a very big quarter and because the reps are all motivated to close as much as they can for their comp plan. So I just thought we might as well go with a reasonably conservative close rate but a potentially realistic one. We are actually quite optimistic about our customer’s appetites for our products. I am not going to comment on the whole economy. I don’t know the whole economy but we do find a lot of enthusiasm with our customers and deals do look like they are very good size in general.
The next question comes from the line of Sara Friar - Goldman Sachs.
Sara Friar - Goldman Sachs
Thanks for splitting out the revenue impact. I know you didn’t give the exact cost breakout but could you give us some sense of whether to cost of Sun ended up ahead of revenue just to give us a view of how to think about the full quarter that is coming up when we will see Sun from both a revenue and a cost perspective?
Actually the reason we didn’t give you a breakout is we really merged these companies fast. We just closed those and any kind of breakout would be really an allocation of a lot of different things. I will tell you the best way for you to judge what is going to happen is both to use our guidance and also to really look at what Q4 was. This Q3 if you think about it, it was February. By the time everybody knew where the water fountain was it was half way through February. So there is no way to extrapolate from this Q3 anywhere. Breaking it out is really not possible. You know us. We start integrating right away. Everybody is an Oracle employee as much as possible.
Obviously selling hardware has lower gross margins than selling software regardless. There is no way to compare it. Our expenses are not a big number in comparison to our revenues so operating margins at least for awhile will be lower and you can figure that out from the guidance. Expenses grow quickly. But our revenues are growing quickly also and we will be able to really better extrapolate after you see Q4 frankly.
Sara Friar - Goldman Sachs
If I could ask a more product related question around Exadata, the goal there is it to replace kind of current data warehousing implementation or how do you go beyond the big data warehousing implementation into kind of a more broad deployment in someone’s IT environment?
Charles Phillips, Jr.
Stage I or version one of Exadata was really aimed at teradata and [inaudible] and really the specialist data companies that focused on building custom hardware designed to tackle large scale data warehouse. That was Exadata version one. Exadata version two handles not only data warehouses but also handles transaction processing. We added a lot of Flash memory into it and we are going to have new Exadata models. I don’t want to preannounce anything. We are going to get better and better at very large scale transaction processing.
Our intent is that the Exadata line challenge the biggest IBM P-series machines and beat them badly in performance, reliability and cost. We think we can do that in transaction processing we are twice as fast and in data warehousing we are ten times as fast. So twice as fast as IBM’s biggest, best box and again at a dramatically lower price. The answer is all database applications ultimately are best served when they run on an Exadata machine. Everything.
The next question comes from the line of Bill Winslow – Credit Suisse.
Bill Winslow – Credit Suisse
You all reported pretty impressive return to growth in the application license revenue line. I am wondering if you could give us more of a sense of what you believe is driving that? Is it the core ERP, CRM, HCN applications? What are we seeing at apps? Is there anything across geographies you see different in the app space?
I am going to answer and then let Charles add to that. One is I think our vertical strategy is working extremely well. We are winning large deals in retail, large deals in banking and large deals in telecommunications. That is driving a lot of ERP and CRM applications with them. We are doing well in pharma. There are bunch of industries. Healthcare in general. There are a bunch of industries where we are very, very strong and we have applications that SAP simply does not have.
One of our strategies was to beat SAP in CRM which we do and then beat SAP in industry specific vertical applications. For example, a telecommunications company has applications where you call up AT&T and you turn on your iPhone and you want to turn on interactive TV. Well that is provisioning software. When you provision an application in a lot of telco’s, when you provision an applications that is the Oracle software that is compartmentally turning on those services for you. SAP has nothing like that.
When you receive your bill that is an Oracle application that is sending you the bill. SAP has nothing like that. When you deposit money in your savings account that is an Oracle banking application that keeps track. SAP doesn’t have that. I can go on and on in a variety of industries where we have industry functionality that they don’t have. That gives us opportunities that are simply not available to them. We also sell these applications a piece at a time rather than a big rip and replace strategy. So when people aren’t doing big ERP buys or by the way ERP is a rather mature market. We think we are competing very well in ERP. It is a mature market and SAP is to some degree saturated. SAP is not a diversified company in terms of their application suite. They don’t have a lot of what you are calling edge applications. They don’t have a lot of industry specific applications. Their technology is fraying around the edges.
Some of it is our good execution I think and some of it is problems at SAP. We were up 26% in ERP. I suspect that is a lot better than what SAP is seeing. So we are taking advantage and our strategy I think is working. We are taking advantage of their weakness. And we think we are going to get stronger while they get weaker. I am sorry to go on for so long but their strategy right now is to try to sell ERP to customers with less than 100 employees. That is their new strategy. Business by design which has been I guess three years late. By the way, if it is successful you can’t make a lot of money selling ERP to companies with less than 100 people.
We think that is a strategy that goes nowhere. It is a different technology than they currently sell. It is a different sales force. It is a different customer than they currently sell to. We think it is a massive distraction for them. Our strategy is not to find all new customers. But to sell more to existing customers. Sell industry specific apps to existing customers. Sell technology upgrades to existing customers. We think they have made a fundamental strategic mistake. We think they have lost their way and if they don’t want to be number one we sure do.
The next question comes from the line of Heather Bellini – ISI.
Heather Bellini - ISI
I just have a question in terms of you shrinking the Sun footprint which you have spent some time discussing in the prepared remarks. I am trying to get a sense for have we seen the biggest rationalization of the product line at this point or are you going to see further partnerships like the Hitachi deal that still hasn’t kind of worked their way out of the rest yet? I guess I am trying to get a sense for the pace of the business going forward.
First of all I want to make sure you understand that the Sun product line continues in its current form. There is no cutting back on the Sun product line beyond where we are at. Those products are actually expanding. We have some incredible products coming up. The focus of Oracle and the Oracle/Sun combination is on reselling our intellectual property. So if you understand that then you realize in most places, there are certain areas in which obviously we have components from third parties in our equipment and all that but the real value is in our intellectual property and the way we bring it all together, etc.
That is the focus of the company. We do resell some other folks’ products. We are still winding down the resale of the Hitachi storage servers. Obviously we are very focused on our customers and for those there will be a very steady wind down period. We are managing those together with Hitachi who has been a very long partner of Oracle and Sun and things are going very well there. The big focus of selling other people’s storage servers, that focus is really going to be going onto some of our own products that we talked about already.
That is already in place. There are a few other reselling of other people’s software and things like that and as you know that is not what we focus on here at Oracle. So most of it is already disappearing outside of our sales. Again, don’t extrapolate anything from the month of February. Really, we will start to look at this more carefully and really spend some time to get a sense of what our business looks like after Q4.
Let me add just a little bit to that. We didn’t add much value selling Hitachi systems and we added no value making them money. So Hitachi is a fine product and Hitachi should sell it. Anyone who wants to sell it should sell it. Not us. We don’t make any money selling that. What do we make money selling? Our own storage. We have the NFS supplies ultimately the Sun 7000. We have our own storage server. Sun used to resell Veritas backup. Terrific product. We make them money reselling that product but we add no value so we are out of that business. The Sun businesses however we are expanding. We are expanding on the 7000. We are expanding on high performance, high end servers. Sun we are expanding and investing in Solaris and Java. The Sun IP and the Sun products we are expanding in. Where Sun was specifically a distributor of someone else’s intellectual property and lost money doing it we are out of that business.
The next question comes from the line of Kash Rangan - Merrill Lynch.
Kash Rangan - Merrill Lynch
On the Sun channel transition from indirect to direct, how are you managing through the transition? Secondly, how is Fusion turning back in terms of code readiness, data customer feedback and what is going to be the actual breadth of the product? Is it going to be all the products under the current umbrella or is it going to be a subset?
I will let Charles answer the direct and indirect question or Safra. Let me first answer how does Fusion look. One thing we did not do, we did not make the mistake of trying to get this thing out early. Were we late with Fusion? Yes, we were late. I would much rather be late than deliver a product that isn’t extremely high quality.
Customers have been looking at Fusion. We have a number of large customers lined up to take the product this calendar year. We are again, we have put years and years of effort we have put into writing all of this in Java. Modern architecture. Modern orchestration. I could go on and on. This is 21st century technology. It is really the only application suite. Even SalesForce.com was a late 20th century technology. We think we are going to have huge competitive advantage. Customers like it very much because of the fact it can [inaudible] so they can start to use things to link the different web services together. It isn’t a rip and replace strategy. They can take parts of it at a time and gradually adopt Fusion.
It has a modern web 2.0 user interface. It is low cost to deploy because everything is written…it is one technology stack. Java technology stack on our Fusion Middleware. The customers that have seen it see huge value in the built in business intelligence to VI is not an add on to Fusion. VI is built into Fusion. The application you install at your site is the same as the application you run on a cloud; our cloud or someone else’s.
So it has generated a huge amount of enthusiasm. Customers are preparing their own adoption strategies, plans and schedules. It is all going to happen the second half of this year. Charles on the direct versus indirect?
Charles Phillips, Jr.
In the Oracle business pre-Sun we ran about 40% and that fluctuates very little quarter to quarter. It has been pretty consistent for a long time. Sun was definitely higher than that. They ran about 65%. We will be shifting that to more direct strategy especially among the largest customers. We think they want and deserve direct relationship with Oracle. That is the best way we can provide the level of service we are anticipating. So incrementally starting this quarter we will be more direct. We want the partners to find new business and not show up in the same accounts all the time. So they get sales calls as we call them and shift away from fulfillment and expand the market. So we are going to direct them into the market and into areas where we don’t have good coverage.
We are hiring pretty aggressively right now on the high end to make sure we have top 1,000 accounts serviced directly by Oracle reps and by Oracle support and we are also shifting the comp model to pay on a net, in other words Sun paid on gross. So the reps were indifferent whether a partner sold it or we sold it. We have always paid on net, in other words what we get after we pay the partner. That tends to shift things pretty quickly. The partners know that. The reps know that. We have discussed this with them. They know the strategy and so that will start to happen this quarter.
The next question comes from the line of Brent Thill – UBS.
Brent Thill – UBS
The Americas business did a great job outpacing Europe. Can you give us a sense in terms of what you are looking at for a recovery in Europe in the second half? Do you expect this to be slower or snap back at a similar pace we saw in the Americas?
Charles Phillips, Jr.
Europe tends to be more slow both in the downturn and the recovery. So they held up a little longer. You will recall that business there even with the U.S. was turning down we kept clicking along in Europe for 2-3 more quarters. So it does tend to take more time and more decentralized and a little slower but the pipelines are growing there so we expect gradual improvement in EMEA as well.
Brent Thill – UBS
You mentioned ULA a number of times. I am curious if you see the environment stabilizing or are you seeing more customers coming back to ULA? If you could tie that into the apps business. Are you starting to see some of these broader deployments rather than just kind of piece mail decisions that are being made in division? Is that perhaps driving the better than expected growth in apps?
Charles Phillips, Jr.
That is helping. We are also seeing ULA’s across multiple product categories. That includes Middleware and apps on the same deal. We have learned how to structure those. The other area is in Europe where uptake on ULA’s wasn’t as quick again because it is so decentralized. We are starting to see them get their act together and see the benefits of doing it all on one contract. So the ULA’s are picking up internationally as well.
With that we will conclude the question and answer session. I will turn things back over to management.
Thank you operator. A telephonic replay of this conference call will be available for 24 hours. The replay number is 888-203-1112 or 719-457-0820 and the pass code is 7845753. Also a webcast replay will be available through the close of market on April 1. It can be found on our website at www.oracle.com/investor. Please call the Investor Relations Department with any follow-up questions from this call and we look forward to speaking with you. Thank you all for joining us on today’s conference call. With that I will turn the call back to the operator for closing.
Thank you very much. Once again ladies and gentlemen that will conclude today’s call. Thank you very much for joining us. Have a good day.
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