Oracle Corp., Q2 2010 Earnings Call, Dec-17-2009 - NYSE:ORCL

NYSE:ORCL

During the Oracle Corp.'s Q2 2010 Earnings Call on December 17, 2009, Ken Bond, Vice President of Investor Relations, provided the following statements:

1. Introduction:

   • Thanked the operator and welcomed everyone to the Oracle's Second Quarter Fiscal Year 2010 Earnings Conference Call.
   • Introduced himself as the Vice President of Investor Relations and the executives present on the call: Larry Ellison (Chief Executive Officer), Safra Catz (President), Charles Phillips (President), and Jeff Epstein (Chief Financial Officer).

2. Forward-Looking Statements Disclaimer:

   • Reminded listeners that the discussion would include forward-looking statements, including predictions, expectations, estimates, or other information that might be considered forward-looking.
   • Noted that these statements are subject to risks and uncertainties that may cause actual results to differ materially from the statements being made.
   • Mentioned that important factors relating to the business that may potentially affect these forward-looking statements would be presented during the discussion.
   • Encouraged listeners to review Oracle's most recent reports on Forms 10-K and 10-Q for a complete discussion of these factors and other risks.

3. Non-GAAP Statements and Reconciliation:

   • Stated that a copy of the press release and financial tables, including a GAAP to non-GAAP reconciliation and other supplemental financial information, could be viewed and downloaded from the company's website at www.oracle.com/investor.

4. Opening Remarks:

   • Announced that he would be turning the call over to Jeff Epstein for his opening remarks.

5. Closing Statement:

   • Provided information about the telephonic replay of the conference call, including the replay number and passcode.

   • Noted that a webcast replay would be available through the close of market on December 28 and could be found on the company's website at www.oracle.com/investors.

   • Invited participants to call the Investor Relations department with any follow-up questions from the call.

   • Thanked everyone for joining the conference call and turned the call back to the operator for closing.

During the Oracle Corp.'s Q2 2010 Earnings Call on December 17, 2009, Lawrence J. Ellison, Co-Founder, Chairman & CTO, provided insights on the company's strategy regarding the pending acquisition of Sun Microsystems and the direction Oracle plans to take with Sun's assets. Here’s a detailed summary of his remarks:

Lawrence J. Ellison’s Remarks:

1. Strategy with Sun Microsystems:

   • Avoiding Low Margin Business: Oracle recognizes that Sun is unlikely to compete effectively in the high volume, low-margin business of selling Intel servers with Windows or Linux. Oracle plans to avoid this market, leaving it to companies like Dell and HP.
   • Focus on High-Value, High-Performance Market:
     • SPARC Solaris M9000: Oracle intends to focus on high-end, high-performance Symmetric Multiprocessing (SMP) machines such as the SPARC Solaris M9000. Oracle is enhancing these machines with features like Solaris's new splash/cache capability, which significantly boosts Oracle database performance.
     • Private Clouds: Oracle will build clusters of industry-standard and SPARC machines, referred to as private clouds. These will leverage Oracle's software, including its operating systems (Solaris and Oracle Enterprise Linux), virtualization capabilities, and integrated networking and storage solutions.

2. Differentiation from Competitors:

   • Oracle aims to differentiate its offerings from those of IBM, HP, and Dell by delivering complete private cloud solutions, including processing, storage, and networking, integrated with Oracle/Sun software. This differentiation is expected to enable Oracle to compete effectively and achieve high margins, contributing to the projected $1.5 billion in additional profit in the first full fiscal year of owning Sun.

3. Exadata and Future Direction:

   • Exadata Growth: Oracle believes the Exadata business will be significant, with potential revenues in the billions of dollars annually, not including maintenance. The timeline for reaching this level of revenue is uncertain.
   • Component vs. Systems Sales: Historically, Oracle has sold components to customers who then hired system integrators to assemble them. Going forward, Oracle plans to sell complete systems like Exadata, which includes processors, networking, storage, storage software, database software, and the Oracle Enterprise Linux operating system.
   • Cloud Edition of Solaris: Oracle intends to release a cloud edition of Solaris that will manage a cluster of computers sold as a unit, reducing the need for customer-side system integration.
   • Future of the Computer Industry: Oracle envisions a future where large customers purchase complete systems rather than individual components, and Oracle plans to align its business strategy with this vision.

4. Fusion Applications:

   • Componentized Approach: Oracle has designed its Fusion Applications as components with a service-oriented architecture. This design allows for the sale of individual components like order orchestration, which can integrate with existing SAP, Oracle, JD Edwards, and PeopleSoft systems.
   • Sales Strategy: Oracle does not plan to pursue a rip-and-replace sales strategy with Fusion Applications. Instead, it will offer point solutions that integrate with existing systems, allowing customers to adopt Fusion components incrementally over time.

These remarks provide insight into Oracle's strategic direction and its approach to leveraging the acquisition of Sun Microsystems to strengthen its position in the technology market.

During the Oracle Corporation's Q2 fiscal year 2010 earnings call, Jeffrey Emanuel Epstein, who was then the Chief Financial Officer and Executive Vice President, provided the following information:

• Opening Remarks: Epstein began by thanking Ken Bond and providing an overview of the company's non-GAAP financial results, focusing primarily on constant currency growth rates.

• Foreign Exchange Impact: He noted that foreign exchange rate movements had a significant impact on the company's financial performance. Specifically, the weakening of the US dollar compared to the previous year's second quarter increased international revenues, expenses, and profits when measured in US dollars. This resulted in a 7% increase in new license revenues, a 5% increase in total revenues, a 7% increase in net income, and a 7% or $0.02 per share increase in earnings per share (EPS) compared to Q2 of the previous year.

• New Software License Revenues: Epstein reported that new software license revenues were $1.7 billion, which represented a 5% decrease in constant currency and a 2% increase in US dollars. The Americas saw a 1% growth, while EMEA experienced an 11% decline and Asia declined by 8%.

• Technology New License Revenues: He stated that technology new license revenues were $1.2 billion, down 5% in constant currency and up 1% in US dollars. The Americas grew by 2%, EMEA declined by 10%, and Asia declined by 10%.

• Applications New License Revenues: Epstein mentioned that applications new license revenues were $478 million, down 3% in constant currency and up 2% in US dollars. The Americas grew by 1%, EMEA declined by 14%, and Asia grew by 2%.

• Software License Updates and Product Support Revenues: He highlighted that these revenues were $3.3 billion, up 7% in constant currency and 11% in US dollars. These revenues represent annual fees paid by customers to receive updates and enhancements to their existing products.

• Services Revenues: Epstein reported that services revenues were $958 million, down 19% in constant currency and 15% in US dollars.

• Total Revenues: He stated that total revenues were $5.9 billion, down 2% in constant currency and up 3% in US dollars.

• Operating Income: Epstein mentioned that operating income was $2.9 billion, up 3% in constant currency and 9% in US dollars. The non-GAAP operating margin grew by 280 basis points to 49% in US dollars, marking the highest Q2 operating margin in Oracle's history as a public company.

• Tax Rate and EPS: He reported that the tax rate for Q2 was 27.4%. The Q2 non-GAAP earnings per share (EPS) were $0.39, which was $0.03 above the high end of the EPS guidance range of $0.35 to $0.36. This represented an 8% increase in constant currency and a 15% increase in US dollars. He also noted that the non-GAAP EPS would have been $0.02 lower if foreign exchange rates had remained the same as in Q2 of the previous year.

• Stock Repurchase: Epstein mentioned that in Q2, the company repurchased 11.6 million shares at an average price of $21.65 per share for a total of $253 million. He explained that the rate of stock buyback would fluctuate each quarter based on alternative uses for cash and the stock price.

• Balance Sheet and Cash Flow: He provided details about the company's balance sheet, noting that it held $20.8 billion in cash and investments, including funds set aside for the completion of the Sun Microsystems transaction. Additionally, he mentioned that the company's days sales outstanding (DSO) had improved from 52 days in the previous year to 47 days, reflecting the quality of its receivables and collection efforts. Oracle generated $8.4 billion in free cash flow during the last four quarters, representing an 11% increase over the same period in the previous year.

• Guidance for Q3: Epstein provided guidance for the upcoming quarter (Q3), assuming that exchange rates remained at current levels. He expected a positive currency effect of almost 8% on license growth rates and almost 7% on total revenue growth rates. For Q3, the guidance included:

  • New software license revenue growth ranging from -1% to +9% at current exchange rates and -8% to +2% in constant currency.
  • Total revenue growth on a non-GAAP basis ranging from +3% to +6% at current exchange rates and -3% to 0% in constant currency.
  • Non-GAAP EPS expected to be $0.36 to $0.38 assuming current exchange rates, up from $0.35 in the previous year, and $0.33 to $0.35 in constant currency.
  • GAAP EPS expected to be $0.26 to $0.28 using current exchange rates and $0.23 to $0.25 assuming constant currency.
  • A non-GAAP tax rate of 28% for Q3, compared to 26.6% in Q3 of the previous year.

Epstein concluded his remarks by turning the call over to Safra Catz for her comments.

Safra Ada Catz, the CEO and Director of Oracle, provided the following comments during the Q2 fiscal year 2010 earnings call:

1. Financial Performance:

   • Oracle had another excellent quarter despite strong competition from the previous year.
   • Oracle exceeded the high point of its new license guidance, beat the high-end of its total revenue guidance, and beat the high-end of its EPS guidance by $0.03.
   • Oracle delivered the highest Q2 operating margins in its history as a public company.

2. Market Share:

   • Oracle is growing faster than SAP in every region globally, taking market share as SAP experiences difficulties.

3. Acquisition of Sun Microsystems:

   • Oracle expects full and unconditional clearance from the European Commission in January.
   • She thanked customers for their support during the process, specifically mentioning companies like the U.K. Atomic Weapons Establishment, Ericsson, Vodafone, BBVA, and others.
   • Oracle expects Sun Microsystems to contribute $1.5 billion in non-GAAP operating income in the first full fiscal year of ownership.
   • Detailed guidance regarding the Sun acquisition will be shared after the transaction closes.

4. Guidance for Q3:

   • Safra provided guidance for Q3, including expected ranges for new software license revenue growth, total revenue growth, and EPS.
   • She emphasized that pipelines continue to be strong and that the close rates she assumed were more conservative than typical Q3 close rates.
   • She noted the positive currency effects on license and total revenue growth rates.

5. Company Performance:

   • Oracle generated $8.7 billion in operating cash flow over the last 12 months and is running the business at record margins.
   • The board declared a dividend of $0.05 per share.

6. Closing Remarks:

   • Oracle looks forward to the completion of the Sun acquisition in January.

During the Oracle Corp.'s Q2 2010 Earnings Call on December 17, 2009, Charles Edward Phillips, then President and Director of Oracle, provided the following insights and commentary:

1. Acknowledged the Sales Organization: Phillips began by acknowledging the hard work of the sales organization, particularly in light of the challenging economic conditions where customers are holding onto their dollars more tightly.

2. Product Area Updates:

   • Database:
     • Exadata: Exadata experienced significant growth, nearly tripling sequentially. There is a growing pipeline, and initial customers are returning to purchase additional systems.
     • Oracle Database Vault: Oracle released a new version of Oracle Database Vault, which separates administrative rights from security rights in the database. It is now certified for SAP, opening up a significant market opportunity.
   • Middleware:
     • Oracle won against Microsoft SharePoint in its WebCenter product at the Bank of the World in India and McGill University.
   • Storage Platform:
     • The National Australia Bank standardized on Oracle's storage suite.
   • Business Intelligence:
     • CIBC bank selected Oracle over Cognos.
   • Enterprise Performance Management (EPM):
     • Wins at Constellation Brands and Kimberley-Clark.
   • Identity Management:
     • California Employment Development Department chose Oracle’s Identity Management platform to integrate state unemployment and disability insurance systems.
   • Applications:
     • Release 2.5 of AIA (Application Integration Architecture) included 10 new cross-industry process integration packs and six new industry-specific ones.
   • ERP:
     • Win at Pennsylvania State System of Higher Education with PeopleSoft Student Administration.
   • CRM:
     • Wins at Woolworths, Capital One Services, and Cummins.
   • Value Chain Planning:
     • Wins at Land O’Lakes, Ingersoll Rand, and Garden Restaurants.
   • Retail Merchandising:
     • Installation at Reitmans.
   • Project Management:
     • General Electric Oil and Gas selected Primavera as its standard project management platform.
   • New Market Entry:
     • Oracle acquired Sophoi, which provides digital rights management, allowing Oracle to enter the market for tracking and billing intellectual property rights online. Wins at LexisNexis and Aircel were mentioned.

3. Insurance Sector:

   • Marsh selected Oracle for a new policy administration system.
   • ParAccel chose Oracle Argus Safety for managing safety and pharmacovigilance processes.

4. Pipeline Growth and Deal Linearity:

   • Phillips noted that the quarter was not back-end loaded, indicating a more consistent deal flow throughout the quarter.
   • The current quarter started off in good shape, with some deals spilling over from the previous quarter, indicating a stronger start to the new quarter.
   • The pipeline is growing in each region, and the tone of forecast calls is more positive than three months prior.

These comments highlight the various product successes, competitive wins, and market trends observed during the quarter, providing insight into Oracle's business performance and strategic focus.