Oracle's (ORCL) CEO Mark Hurd on Q2 2017 Results - Earnings Call Transcript

Dec. 15, 2016 9:30 PM ETOracle Corporation (ORCL)2 Comments
SA Transcripts profile picture
SA Transcripts
132.64K Followers

Oracle Corporation (NYSE:ORCL) Q2 2017 Results Earnings Conference Call December 15, 2016 5:00 PM ET

Executives

Ken Bond - SVP

Safra Catz - CEO

Mark Hurd - CEO

Larry Ellison - Chairman and CTO

Analysts

John DiFucci - Jefferies

Mark Moerdler - Sanford Bernstein

Keith Weiss - Morgan Stanley

Kash Rangan - Bank of America Merrill Lynch

Ross MacMillan - RBC Capital Market

Sarah Hindland - Macquarie

Michael Turits - Raymond James

Raimo Lenschow - Barclays

Operator

Welcome to Oracle’s Second Quarter 2017 Earnings Conference Call.

Now, I’d like to turn today’s call over to Ken Bond, Senior Vice President. Please go ahead, sir.

Ken Bond

Thank you, Holly. Good afternoon, everyone, and welcome to Oracle’s second quarter fiscal year 2017 earnings conference call. A copy of the press release and financial tables, which include a GAAP to non-GAAP reconciliation and other supplemental financial information can be viewed and downloaded from our Investor Relations website. On the call today are Chairman and Chief Technology Officer, Larry Ellison; and CEOs, Safra Catz and Mark Hurd.

As a reminder, today’s discussion will include forward-looking statements, including predictions, expectations, estimates or other information that might be considered forward-looking. Throughout today’s discussion, we will present some important factors relating to our business, which may potentially affect these forward-looking statements. And these forward-looking statements are also subject to risks and uncertainties that may cause actual results to differ materially from statements being made today.

As a result, we caution you against placing undue reliance on these forward-looking statements and we encourage you to review our most recent reports, including our 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. Finally, we are not obligating ourselves to revise our results or publicly release any revisions to these forward-looking statements in light of new information or future events. Before taking questions, we’ll begin with few prepared remarks.

With that, I’d like to turn the call over to Safra.

Safra Catz

Thanks, Ken. Good afternoon, everyone. I’m going to focus on our non-GAAP results for the quarter, I’ll then review guidance for Q3, as well as give some direction on FY17 and turn the call over to Larry and Mark for their comments.

Clearly, we are pleased with our results as both total revenue and earnings per share exceeded the midpoint of my guidance. Our pivot to the cloud has been phenomenal. We continue to see accelerating growth rates in our cloud business, while our key competitors are slowing down, but more importantly, the increase in revenue from our cloud business is starting to overtake our new software license business decline. Our cloud revenue will be larger than our new software license revenue next fiscal year, when the transition will be largely complete. While the investments we’ve made to transition our business to the cloud have limited our ability to expand earnings per share near-term, they’ve been important to ensure that Oracle remains the technology leader. With cloud overtaking new software license revenue, we expect our business to once again exhibit the same pattern we delivered over the previous decade as a license business, increasing revenue that results an EPS and cash flow that grow even faster.

We continue to use constant dollar growth rates on our quarterly calls, so that we can have some measure of consistency across the quarters, as well as to reflect how we measure the business. This quarter, the effects of currency movement were more than what I had included in my guidance, mostly because of the strengthening U.S. dollar after recent elections in U.S. and Europe, resulting in currency headwind of 1% in total revenue, 2% in some revenue categories and one penny to EPS. The devaluation of the Egyptian currency last month also negatively impacted EPS by a second penny. None of this was in my guidance for the quarter.

Cloud, SaaS, and PaaS revenues for the quarter were $912 million, up 89% from last year. You can also see the continuing acceleration of our cloud business in the SaaS and PaaS billings and deferred revenue. The gross deferred revenue balance is now over $1.6 billion, up 51% in U.S. dollars; and SaaS and PaaS billings grew 39% in U.S. dollars this quarter. We’ve put the billings numbers up on our website for you to see the detail as usual.

When you add together cloud, SaaS and PaaS revenues, and new software license revenue, they grew 5% in constant currency. And by the way, Database as a Service and database new software license revenue together also grew. These are significant milestones in our transformation with the combination of our cloud and new software license businesses added together are growing.

As cloud becomes an even larger percentage of the total, the growth will only accelerate with earnings and cash flow following along. As our SaaS and PaaS business continues to scale and grow dramatically, the gross margin continues to expand. Q2 gross margin for SaaS and PaaS was 61%, up from 43% last year, and I expect to see further improvement in Q3 and Q4. And from there, we’ll be targeting 80%.

Cloud infrastructure as a service revenue was $175 million, up 9% from last year. The Q2 gross margin was 37%. Now, that’s lower than prior quarters as we are making the necessary investments to scale out this business. Now, I want to spend a moment explaining it to you, because you’re going to see some effects.

What’s happening with the infrastructure as a service gross margin is similar to what we experienced with the SaaS and PaaS gross margin, except that it’s off a much smaller revenue base and thus the margin impact is more at the beginning.

To refresh for everyone, when we invested in our SaaS, PaaS business in advance of the revenue scale out, the gross margin declined 16 percentage points before bottoming at 40%; it’s now up to 61%. And as I just mentioned, will climb to 80% over time. Similarly, I expect the infrastructure as a service gross margin will decline future over the next few quarters, as we make investments in the business to hit our expenses immediately while the revenue is recognized over time. But for modeling purposes, I would use 20% as a trough gross margin. Probably, it doesn’t need to go quite that low but just for modeling purposes you can aim there, after which I expect the gross margin will climb to nearly 40% as the business scales probably higher.

Total cloud revenue in the quarter was over $1 billion for the first time at nearly $1.1 billion, up 69% in constant currency from last year. Total on-premise software revenues were $6.1 billion with software updates and product support revenues at $4.8 billion, up 3% from last year.

Attach and renewal rates remained at their usual high levels, as our installed base of customers continues to grow. New software license revenues were slightly over $1.3 billion; now that is down 19%, reflecting the continued emphasis on and migration to cloud. Total hardware, including hardware support was down 9% with hardware systems product revenue of $497 million and hardware support revenue of $517 million.

Just so that you know, we are proactively evaluating our expense infrastructure needed to support the on-premise hardware business in light of on-premise hardware revenue declines and the new availability of IaaS for their customers. For the Company total revenues for the quarter were $9.1 billion, up 2% from last year.

Non-GAAP operating income was $3.8 billion, up 3% from last year and operating margin was 42%, up from 41% last year. The non-GAAP tax rate for the quarter was 25.5% considerably higher than last year’s 20.4%, which had been favorably impacted by some onetime benefits.

Now, in view of possible changes to the U.S. corporate tax system, normalization of our geographic earnings and other factors, the likelihood effect favorable impact to our tax rate over time is higher but obviously not certain. Non-GAAP earnings per share was $0.61 in U.S. dollars, the GAAP tax rate was 24.3%, the GAAP EPS was $0.48 in U.S. dollars.

Operating cash flow over the last four quarters was $14.2 billion. Capital expenditures for Q2 was $757 million with cloud CapEx accounting for approximately 40% of the total with the rest being real estate. Free cash flow over the last four quarters was $12.6 billion, up 10% from last year. We now have approximately $68 billion in cash and marketable securities. Net of debt, our cash position is approximately $4 billion. The short-term deferred revenue balance is $7.4 billion, up 8% in constant currency. This quarter, we purchased nearly 30 million shares for a total of $500 million, which is less than prior quarter, due obviously to the use of our cash for the acquisition of NetSuite. Over the last 12 months, we’ve repurchased 172 million shares for a total of $6.7 billion and we paid out dividends of $2.5 billion. And the Board of Directors again declared A quarterly dividend of $0.15 per share.

Now to the guidance. I am going to provide guidance for Q3, then some updated comments about the whole year.

Given recent currency movement, we expect to see continued volatility in exchange rates and significant currency headwind. Today again was a very significant day in currency with the dollar strengthening. I am going to give you constant currency guidance, but if current exchange rates remain just about where they are right now, we expect to see a currency headwind of at least 1% on revenue and at least $0.01 to EPS. All of my guidance today is on a non-GAAP basis. With that my guidance is as follows.

SaaS and PaaS revenues including NetSuite is expected to grow 82% to 86%. Software and cloud revenue including SaaS, PaaS and IaaS, new software license and software support is expected to grow 4% to 6%. Total revenue is expected to grow 3% to 5%. EPS is expected to be between $0.61 and $0.64 in constant currency. Now, this assumes a non-GAAP tax rate of 25.5%, which is considerably higher than the 22.6% reported last year. As a remainder, last year's tax rate was lower, mostly due to the catch-up of benefits related to the U.S. R&D tax credit. Of course, the Q3 tax rate could end up being different.

Over the full year FY17, I am raising the outlook for FY17 SaaS and PaaS revenue growth from 67% to 80% with NetSuite now added and continued strengthening in our SaaS and PaaS business. I continue to expect SaaS and PaaS gross margins will exit Q4 higher than the 61% reported today as our cloud business continues to grow dramatically. Lastly, I expect our total CapEx spend for the year will be in the range of about $2 billion with over half of it being due to non-cloud real estate investments that we made this year that we'll not be repeating next year.

With that I'll turn it over to Larry -- to Mark for his comments.

Mark Hurd

Thank you. As usual, I'm just going to you a lot [ph] of numbers here and try to give you some context on our quarter. Everything's year-on-year in CD, unless I say otherwise.

Cloud bookings for the quarter $377 million in USD. And Q2 was the best non-Q4 we have ever had. I'll make a prediction that Q3 has a chance to be our best ever quarter period. SaaS bookings were 270 in USD and positive to structure booking were 160 in USD.

Just let me give you some numbers by pillar as it relates to our SaaS, PaaS revenue. We were up 89%, more than 30% higher than Amazon, Salesforce or Workday. ERP had a 104% growth quarter-on-quarter, eighth consecutive quarter with sequential growth greater than 50%. HCM grew 131% again this quarter, that's four time the growth rate of Workday. CX, Customer Experience grew 15% organically, service was up 24%. Data as a Service up 71%. Database as a Service up 700% and already had a $100 million in quarterly revenue. PaaS was up 600% and overall SaaS, PaaS grew 89%. Saas, PaaS billings grew 39% in USD, Saas, PaaS deferred revenue 51% USD.

Now, just some customer metrics. IDC recently released their SaaS market share estimate. And Oracle is now the number one market share leader in Enterprise SaaS. In the quarter, we got almost 1,100 new SaaS customers and 1,082 to be exact, and have 810 expansions. In CX, we had 443 new customers, 517 expansions. In HCM, we had 224 new customers and 212 expansions. In ERP, we had 532 new customers and that does not include NetSuite; we had 91 expansions. Over half of the new ERP customers never had an Oracle app before they bought. Our active base now is 3,269 with 1,275 live, over 10X greater than Workday. In total, we now have almost 13,000 customers in our SaaS active base and 25,000 if you actually include NetSuite.

Fusion Cloud is now nearly two thirds of our new customer wins. This is a big deal for us because with 10 years actually writing this code and is now the bulk of our SaaS business. 348 go-lives, best quarter ever, 2,116 customers are now live on Fusion. We got 2,225 new platform customers in the quarter and our install base now sits at 12,168. We got 2,148 infrastructure customers; they are buying standalone infrastructure services. And together our install base of PaaS and infrastructure now sits at 21,219 customers. Now, as a point of clarification, PaaS and infrastructure customers are accounted for each service that they use.

Now, let me just give you the names of a few customers in the quarter. I'm going to go through just couple pillars. First in ERP, I'm giving you a list of ERP customers who purchased in the quarter: Canon, Deutsche Telekom, DICK'S Sporting Goods, FedEx, Ferguson, Hasbro, Hill-Rom, Koch Industries, Noble Energy, Ricoh, Skanska, Texas Instruments.

I’m going to give you a list of HCM customers in the quarter. Berkshire Hathaway, Cummins, Dubai Airport, Kaiser Foundation Hospitals, Netgear, ON Semiconductor, Siemens, Skanska, Sonic Automotive, Tesco, Hertz Corporation. It was a solid quarter for us.

And lastly, let me sort of describe where I think we are. We not only have strong revenue and billings as well, but our Q2 billings were solid at 39%; Q3 has a chance to be our best quarter ever. Q2 revenue was fantastic at 89% and we clearly crossed the revenue gap. We are clearly the fastest growing cloud company with scale.

With that, I’ll turn it over to Larry.

Larry Ellison

Thank you, Mark. Historically, I’d measured Oracle performance by comparing our technology and our market share to our two primary competitors, SAP and application, and IBM and infrastructure and database. That changes as we move to the cloud. In the cloud, we measure Oracle against salesforce.com and application, and Amazon Web Services and infrastructure and database.

Our cloud applications’ goal is to be the world largest and most profitable SaaS Company. We are growing our cloud business much faster than salesforce.com and we can beat them to the $10 billion mark, but it’s going to be close. IDC already recognizes Oracle as the number one in annual SaaS sales to large enterprise; salesforce.com is number two. We will book more than $2 billion in annual cloud sales this year, much more than salesforce.com. We are catching after them and we’re catching them very quickly. Our goal in infrastructure and database is to be number one running database workloads in the cloud on our infrastructure as a service.

The Oracle database has a huge technical and market share lead over the Amazon Web Services databases Azure and Redshift. But much more importantly, the Oracle cloud infrastructure as a service runs the oracle database workloads much faster, more reliantly and at a significantly lower cost than the Oracle database running at Amazon IaaS.

We are making a multiyear generational shift to the cloud and we’re well on our way to being number one in both cloud application and cloud database, and we are doing it with very little or no compromise to our earnings or our cash flow.

With that, I’ll open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question will come from the line of John DiFucci with Jefferies.

John DiFucci

Thank you. My question is to Mark. Mark, our field check this quarter led us to believe that cloud traction accelerated beyond what you had been doing which was pretty good, very good. And we thought this might have a negative effect on license, which sort of comes through in the increased decline in license. But with ARR growth of 30%, that doesn’t seem to be indicative of increasing cloud traction. Can you help us resolve this? I mean, what we’re hearing in the field and the numbers, what the numbers seem to indicate, is it simple as 30% ARR growth may not be the 42% last year, but it’s still pretty good off such a large number or there something else going on?

Mark Hurd

All right. Let me go into figures and the math to start with. Our pipeline is really big, our wins are pretty big or quite big as well. As I mentioned in my script and I may have gone over it too fast, we had a good quarter in ARR. So, these are the days when 30% growth -- gee, I wish it was higher, I like 30% growth. That said, we can do a lot better and what I said about Q3. So Q2, just to go back to that number is the best non-Q4 we have ever had in terms of bookings.

I think there is a chance, and I’ll repeat it again, Q3 is the best quarter we’ve ever had -- we could ever have period. That’s how good I feel about our pipeline, how good I feel about our position, deals that -- I don’t usually talk about deals we’ve won in early Q3, but that’s how strong our position is going into quarter. And my guess, John, is that’s why you hear what you hear from your field check, the deals we won. We may not have contracted it, put on a piece of paper, but we feel really strong about our position. Larry talked about the $2 billion for the full year. So that would be my response, John.

John DiFucci

And if I could, just to be clear, when you’re talking right now, you’re talking like there is a lot of terms, like ARR billings, bookings. And I’m going to stick with your ARR number, because that’s what you guys used when you first started talking about this. When you’re talking about this could be the best quarter ever, you’re talking about when you’ve traditionally called the ARR, which is new annual recurring revenue?

Mark Hurd

Yes, John, and you’re right. We are passing a lot of different numbers to you. I think we’re trying to be very transparent with all the deferred numbers and the billings and so forth. But the comment I may directly related to new and expansion ARR focus. And that is in the end a very good surrogate for how we will perform. So, I think the big number though back to it is the full year that we described. And so you may see some things in the quarter that go up or down, but the full year $2 billion number is where we sit.

John DiFucci

Great. That is very clear, very helpful. Thanks.

Mark Hurd

Thank you, John.

Operator

And our next question will come from the line of Mark Moerdler with Sanford Bernstein.

Mark Moerdler

Thank you. Can you provide us more details and insight into NetSuite, its impact on Q2 revenue, margins et cetera and its impact on quarter? I really appreciate. Thanks.

Safra Catz

Well, we got NetSuite in Q2 about, as I said -- I thought I said it; I didn’t mention, around November 7. So, we didn’t even have a full month. So it’s around 50 million. It’s basically a wash on all the other lines, as you know since we just got it. It’s revenue track is very similar to what it’s been doing, however if you know Net Suite doesn’t grow as fast as our cloud business grows, nor is it as profitable. So overtime we’re going to bring it to where we’re doing and we also hope to accelerate it actually, because our productline is so much broader including the EPM and things like that.

So this quarter I could refer to it as a wash, and as we own it overtime, we expect to be able to leverage it and -- but it doesn’t grow obviously as fast as our ERP business does.

Kash Rangan

Thanks, and if you could give us over time a little more color on that that would be great, I really appreciate it. Thank you.

Safra Catz

Okay, I will.

Operator

And our next question will come from the line of Keith Weiss with Morgan Stanley.

Keith Weiss

You mentioned during the conference call that database and Databases as service together grew again, I think this is second quarter you’ve made that comment. What one of the questions that I get a lot from client and I wanted to ask of you is, are we seeing the positive impacts of the 12C cycle? Is that already showing up in terms of options driving that number higher on the license side in, is Database as service offering -- the new 12C offering driving people to that cloud offering as well or is it still really early days in terms of that cycle and this is just core database growth if you will?

Mark Hurd

It’s really early days, and actually 12.2 is only available right now in our cloud in Database as a service, so it really isn’t available on premises yet. So our policy is cloud first and including the release of our latest technologies. So again we’re very, very early on in terms of the 12.2 cycle and it’s impacting our database license system.

Safra Catz

So really all of you are seeing just the strength of our database business. A very, very strong business generally because it is by far the best and we’ve been gaining market share now really for years and that just continues because it meets the needs of so many customers.

Keith Weiss

Got it. And if I may, just one follow up. Albeit early days, you gave us an update awhile ago on the options, and talking about some of these options being [indiscernible] as well as adopted options that you've received. Has that trend continued or do you continue to see strong adoption of some of those new options on 12C?

Ken Bond

I think people, I guess people using these options in the cloud, I think they are very excited about using the both in the cloud and on-premises and I think it’s going to have a positive impact of it, a very significant impact on both our database as a service and our [on-term] license business.

Operator

Our next question will come from the line of Kash Rangan with Bank of America Merrill Lynch.

Kash Rangan

One question for Safra and one for Mark that’s okay, question for you Safra, with respect to your cloud centers, one of the things we keep looking for is gross profit growth rate and you’ve been able to show that two quarters in a row [ph], I think for the first time we also saw op income growth rate. Are you still confident that on organic basis that you can continue to accelerate op income growth rate and if so, what will contribute to that and one quick one for Mark if I could, did you comment on what the accelerated buying experience program mean for the company’s growth rate future?

Safra Catz

Okay well obviously, I think what you’re starting to see, we’ve got a bunch of things going on, they’re all positive. We have revenue growth, we have operating income growth and I think you’re going to see that actually accelerate.

So as SaaS, and PaaS really takeoff this is going to show up and as I mentioned -- and as I want to make sure I reiterate from Financial Analyst Day once again, we are expecting double earnings growth in FY'18. So this is -- you’ll hear me say that many times and we are starting to see the upturn.

Larry Ellison

Kash, you didn’t ask me a question, I was the only one [multiple speakers].

Mark Hurd

I'm going to try and just say, there is huge economy to scale in this business. So as we scale that’s it's still important that we become number one in SaaS. There is just tremendous advantages of being number one, there is huge economies of scale. It contributes enormous to our profitability in the business both in SaaS, and being number one in data base in the cloud.

To your other questions, accelerated buying experience continues to progress. We launched it really less than the year ago, this is our third quarter really doing it. We’ve got about now 70% of our transactions, not necessarily our dollar volume going through. And our customers are just to be very frank, is very well received and is happier. It's just easier to do business and to get a contract with Oracle now than it’s ever been and it's great when customers are happier.

Our next target is really to focus around our overall experience in the cloud after the purchase. So ABE or Accelerated Buying Experience is really focused on the actual purchase and the contract. Our focus now is really after that contract and between the contracts signing and the renewal. And to that end on December 1, I announced a group inside Oracle, called the Oracle cloud global service and support group. And it really pulls together all the various organizations around the company that had touched our cloud customers and brings them together into an organizational unit, focused slowly on pleasing and delighting our customers and giving them the absolute best customer experience they can possibly ask for.

We want to become and define what the best cloud experience is in the industry for our customers. So think of that as the follow one to be accelerated buying experience that we’ve announced effective December 1.

Operator

And now our next question will come from the line of Ross MacMillan with RBC Capital Market.

Ross MacMillan

I had one for Safra then maybe one related for Larry. When you think about CapEx this year guided to 2 billion, a bit less than half on cloud. So that billion run rate, is that the right level of CapEx that we should be thinking about even beyond this year or will it grow as the total cloud grows?

And then related to that for Larry, is infrastructure as a service a necessity as opposed to platform as a service? If you are going to be able to migrate existing on-prem database workloads to the cloud? Thanks.

Safra Catz

So two things were happening as we grow in both IAS and PaaS, you do get, first an investment period and then you really have economies of scale which we should see. So it will not grow linearly at all. So it will grow as depending on how successful we are, but it's growing up front then it's going to slow down, get used and then grow as a smaller and smaller percentage. And that's what we are expecting as far as our capital expenditure this year we’re obviously very much front loaded, both some of our cloud investment and also our real estate investments, which will not be sort of the big chunk it is right -- as it was this year.

Larry Ellison

And the question about infrastructure as a service, is it effectual, the answer is yes, if you want to move existing database workloads to the cloud and minimize the changes customers have to make as they migrate, in other words, make it a graceful easy lift and shift. We can configure our cloud network from that spare network, we can configure other servers to match their capacity -- the capacity of their servers, configure storage, deliver exit data and service, do all of that with virtually no disruption to what they're doing.

As they press the button, move their database, move their workloads and it just runs pretty much like the way it ran. They don't have to re-task the application. They can just move it and it will just launch. Then we absolutely need an infrastructure as a service in combination with our platform as a service, we need both of them to do that gracefully. So it is an essential, we've been in this infrastructure as a business technology development phase for a long time.

We're rolling it out to our customers again early in days, but it's being very-very well received, of course the litmus test is, can we do it better than Amazon could, could our infrastructure -- big question, can Oracles' infrastructure as a service differentiate itself from Amazon. Can we do it more gracefully, more reliably, less expensively, more securely than Amazon can, and we think we can, and that's going to make us very-very competitive.

Operator

And our next question comes from the line of Sarah Hindland with Macquarie.

Sarah Hindland

Great, thank you so much for taking my question. Safra this one’s really for you, so one of the big things we get asked about and would love some help on is as more and more customers are pivoting to Oracle cloud, it still maintains its very high renewal rate on the maintenance stream and I'd love to know a little bit more about how we should be thinking about the maintenance, stuff that you can support longer time and the trajectory on that line? Even as new licenses are declining you're still selling licenses, so how should we be thinking about that longer time Safra?

And then a real quick second one for Mark around the hardware business, and we didn't spend a whole lot of time on that today I would also love to hear how you're thinking about that business longer term as well. Thank you guys.

Safra Catz

Okay, so you're right in that our renewal rates remain very high, however as you know we don't renew a 100% of our licensed updates and product support and as the new software license number gets smaller and smaller, it is true that at one point software support will flatten out and actually go down. That's a ways out so far and we actually don't have any indication of that because we continue to sell quite a lot of new software licenses.

However ultimately we would be -- it would be -- I know it’s hard to imagine a good outcome, but it will mean that we're getting extremely not large number in our SaaS, PaaS number, one that actually is dwarfing not only new software license, but new software license and any kind of decline in the software support network, such that the whole software network which is SaaS, PaaS, new software license and support is all going up and actually accelerating.

Mark Hurd

Before, I going to hardware business, our renewal rates in software for the quarter, we usually just tell you they are about the same. To be very exact, they actually went up. So our cancelation rates were down in the quarter. So we have a very strong renewal rate in our software business. Now that said, we are actually, in many cases trying to convert our customers to cloud. So just to be clear, that means for us more money, that means for us more margin.

So it is clearly our objective over time is to take the applications business to migrate our on-prem application customers to our cloud applications. I already mentioned our database customers on-prem to our infrastructure and platform. And we believe as you all very well, most of you at least very well know the math. That means for us a larger recurring revenue stream and as our margins continue decline, that means more earnings for us and we think a great experience for us customers, as well.

Hardware really more of what we talked about, sort of the reason we haven’t talked about it much, we had a very good engineered systems quarter again. Engineering systems grew and in both bookings and revenue in the quarter that ecosystem continues to be very successful, very profitable for us. There is a great job for us, we had declines and what we think of as our traditional server business and those declines offset the growth in engineered systems. So it's really the tale of two product lines, engineered systems growing, the traditional server product lines, declining.

Now this is a last quarter, this being Q2 that you will see the declines because of the acquired GBU products. So we brought the couple of micros, for example a couple of years ago, a year-and-a-half ago, it had a bunch of third party products that we actually stopped and that’s actually hurt the growth rate of the hardware line, that begins to -- and as we go Q3.

So those are sort of the three factors the third party products in our micros business, growth in engineered systems and decline in the traditional servers.

Operator

Our next question will come from the line of Michael Turits with Raymond James.

Michael Turits

This is a question that’s mostly for Safra and for Mark. New software licenses declined 19% constant currency. Does this mean that license declines could continue to steepen going forward and maybe I’ll answer the second part of my question at the same time, which is database as a business overall grew. So if you could talk to us about how database license did within license overall.

Safra Catz

So let me at least get started with that. No, I actually I’m not expecting next quarter for it to decline, even at the 19% range because the big decline has been in the application side as SaaS had really overtaken our app business. And as apps has gotten starting smaller, the base itself is not decline -- is small, that when it declines it has a smaller impact on our overall new software license.

Now ultimately at one point, you’ll see the same happening in database, but the reality is, you’re not seeing it in database at this time, because our installed base of usage continues to increase at all level on-premise and in the cloud simultaneously.

Larry Ellison

Once again, there will have to be an interruption, but I'll use this as a great opportunity to answer it anyway. So let me be clear. So if you convert, if you move from the Oracle business suite on-premise and then you take up Fusion ERP in the cloud and we encourage you to do that, right, and we want you to do that. You cancel your support for the Oracle ERP on-premise, what we call the e-business suite and you’re start paying as a monthly fees for Fusion. So even support, not only does new license go down, but even support go down as you make the shift and we want you to do because we make a lot more money in that way.

However in database, if you bring database to infrastructure as a service, you need to own the database license, you never cancel your database license and support. That goes on forever. So as people migrate let’s say you take the Oracle database to Oracle infrastructure as a service, you still your support and if you need more, you but more -- license more database. Let’s say you take the Oracle database to Amazon. Well, you need your Oracle database and we need more of it, you got to buy of it and license more of it and you have to keep paying support.

So they are very different businesses, their profile is vary very differently. So as Safra said, a lot of license decline is attributable to our applications business which is getting -- with the on-prem application business is getting smaller and smaller. The database business, license business looks as growing. So this are very -- these will reach -- both these businesses will react very differently in the cloud.

It’s not an unlikely outcome that our database license system goes on forever and the associated support goes on forever even though customers are running that database now not on their own computers, but on our infrastructures as a service or Amazon’s infrastructures as a service, or Azure’s infrastructure as a service. So you have to model these two businesses entirely differently.

Michael Turits

Thanks Larry, didn’t mean to leave you out.

Larry Ellison

I know you get -- I know I’m getting old. And this is complicated stuff and I realize you don’t want to wear me out during the call. So I appreciate your consideration.

Operator

And our final question will come from the line of Raimo Lenschow with Barclays.

Raimo Lenschow

Thanks for taking my question. And it's great to see your CTO so busy on the call. My question is actually for Mark. Mark, can you talk a little bit about what you see in the different regions? You talked about the products, but just wanted to hear how you see the regional performance. If I look at the numbers, Asia was very strong, U.S. and Europe moderated a little bit. Can you just talk what you see in terms of end amount there? And then Safra, did I understand, did I hear you correctly that you talked about double-digit EPS growth in 2018? Just wanted to clarify that.

Mark Hurd

Okay, by the way just to be clear to the CTO’s earlier point, as it relates to apps and applications business, we actually don’t compensate our sales people for applications on-premise, so just to be clear to connect these dots in terms of how we actually operationalized the company. Our sales people in the applications ecosystems sell FAS. So if they sell -- we have small swat teams in our, what we would call Oracle direct organization, that help our existing users by incremental seats if they need to, to their existing on-premise applications. So I only say that to you because, all of this is planful on our part, our objective is to move to SaaS to get as clear about our direction in SaaS and its resulted in this leadership position enterprise SaaS that we discussed that earlier. So this is all very planful on our part.

So your question about the regions. All of our regions, the region that had the toughest turn in the quarter was Latin America, and Latin America has been historically and still is one of our best regions in terms of our performance of our team, et cetera, but they are going through all of the things that you all know about, in Brazil, some of the issues that have cropped up now in Mexico.

But now at the same time as Latin America has had a little bit of tough cards, they are gaining significant market share in that market. So I -- while the numbers of Latin America are perhaps not as good as we all would love, or have been in the past, their relative performance compared to their peers is fantastic. So I am actually very proud of them in spite affected the absolute dollar value to state.

Save that, our Europe and North America region performed roughly as I would have expected, I continue to believe our European organization has done a tremendous job over the past several years, they in addition have done tremendous rule over to the cloud. Their absolute bookings on an overall basis just taking license and cloud combined grew, so very significant. I’m pleased with North America as well, they were roughly as we expected.

On the flip side, I would say Asia has been superb. I think Asia has done a nice turn around. It wasn’t a couple years ago, we have been in call and get questioned about some of the performance in Asia, we weren’t very happy with that, we made some changes and the performance in Asia on virtually every metric we see, talking about hardware, SaaS PaaS, infrastructure and license, has been very favorable. So I'm very pleased with the results in Asia.

Safra Catz

Yes sir, I wanted to just make sure, you did hear me right we are expecting to have double digit earnings growth next year.

Raimo Lenschow

I am looking forward to that.

Safra Catz

Okay.

Ken Bond

Okay. A telephonic replay of this conference call will be available for 24 hours, dial-in information can be found in the press release issued earlier today. Please call the investor relations department for any follow-up questions from this call. And we look forward to speaking with you. Thank you for joining us today. And with that I’ll turn the call back to the operator for closing. Happy Holidays.

Operator

Thank you for joining today's Oracle's second quarter 2017 earnings conference call. We do appreciate your participation. You may now disconnect.

Recommended For You

Comments (2)

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.