Oracle Corp., Q3 2010 Earnings Call, Mar-25-2010 - NYSE:ORCL

NYSE:ORCL

Ken Bond, Vice President of Investor Relations at Oracle, made the following statements during the Q3 2010 Earnings Call:

1. Introduction:

   • Thanked the operator and welcomed everyone to the call.
   • Introduced himself as the Vice President, Investor Relations.
   • Mentioned that Chief Executive Officer Larry Ellison, President Safra Catz, President Charles Phillips, and Chief Financial Officer Jeff Epstein were also on the call.

2. Forward-Looking Statements Disclaimer:

   • Reminded listeners that the discussion would include forward-looking statements, including predictions, expectations, and other information.
   • Stated that while these forward-looking statements represent the company's current judgment, they are subject to risks and uncertainties that may cause actual results to differ materially.
   • Noted that throughout the discussion, they would present important factors relating to the business that may potentially affect the forward-looking statements.
   • Encouraged listeners to review the company's most recent reports on Forms 10-K and 10-Q and any applicable amendments for a complete discussion of these factors and other risks affecting future results or the market price of the stock.
   • Cautioned against placing undue reliance on these forward-looking statements, which reflect the company's opinion only as of the date of the call.

3. Guidance and Revision Policy:

   • Clarified that the company is not obligating itself to revise or publicly release the results of any revision of these forward-looking statements in light of new information or future results.

4. Website Information:

   • Noted that a copy of the press release and financial table, which includes a GAAP to non-GAAP reconciliation and other supplemental financial information, can be viewed and downloaded from the company's website at www.oracle.com/investor.

5. Call Agenda:

   • Indicated that they would begin the call with a few prepared remarks before taking questions from the audience.
   • Turned the call over to Jeff Epstein for his opening remarks.

6. Closing Remarks:

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

   • Mentioned that a webcast replay would be available until the close of the market on April 1, 2010, and could be found on the company's website at www.oracle.com/investor.

   • Invited listeners to contact the Investor Relations department with any follow-up questions.

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

During the Oracle Corp.'s Q3 2010 Earnings Call, Lawrence J. Ellison, Co-Founder, Chairman & CTO, provided insights on the company’s strategy in markets where Oracle is not currently the market leader, specifically high-end servers and business applications.

Here is a detailed summary of his remarks:

High-End Servers

• Oracle aims to challenge IBM in the high-end server market.
• Oracle has begun assembling clusters of Sun hardware running Oracle’s Database and Middleware software, interconnected by a modern InfiniBand network.
• Oracle's Exadata system, when benchmarked against IBM's pSeries machines, often beats them by a factor of 10 due to its clustered architecture, which allows for better scalability and performance.
• Oracle leverages new technologies like InfiniBand, Flash, and large-scale memory to deliver superior performance at a lower cost.
• Oracle's architecture is fault-tolerant, with no single point of failure, making it more reliable.
• Oracle believes its approach can challenge IBM in the high-end server market with better performance, lower cost, and greater reliability.

Business Applications

• Oracle aims to challenge SAP in business applications.
• SAP relies on a proprietary technology called ABAP (Advanced Business Application Programming), which is 25 years old and central to SAP’s architecture.
• Oracle's strategy is centered around Java and a modern service-oriented architecture.
• Oracle will deliver its Fusion Applications during the calendar year, which have been rewritten in Java and feature a modern service-oriented architecture.
• Oracle believes that once Fusion Applications are delivered, it will be well-positioned to challenge SAP for the number one spot in business applications.
• Oracle emphasizes industry functionality in its applications, targeting specific industries like telecom, retail, insurance, and banking.
• Oracle's Fusion Applications are designed to run on-premises, integrated with Oracle hardware, and on the cloud, providing flexibility for customers.

Additional Remarks

• Oracle sees SAP as vulnerable and believes it has an excellent chance of becoming the number one provider in business applications.
• Oracle's strategy includes having better industry focus and more modern technology underlying its functionality, which it believes will give it a competitive edge over SAP.

These insights provide a comprehensive overview of Oracle's strategic direction in these key markets.

During the Oracle Corp.'s Q3 2010 Earnings Call, Jeffrey Emanuel Epstein, the Former Chief Financial Officer and Executive Vice President, provided the following comments:

1. Opening Remarks:

   • Thanked Ken Bond and welcomed everyone to the call.
   • Commented on foreign exchange rate movements, noting that the actual currency benefit was less than anticipated guidance by approximately 2% for both new license revenue and total revenue.

2. Financial Results:

   • Highlighted that despite less currency tailwind than anticipated, Oracle was able to drive solid results, beating new license revenue guidance, total revenue guidance, and achieving record Q3 earnings per share.
   • Stated that new software license revenues were $1.7 billion, including $46 million from Sun, with a 13% increase and a 10% increase excluding Sun.
   • Mentioned that the Americas grew 22%, EMEA was up 3%, and Asia was up 12%.
   • Technology new license revenues were $1.2 billion, up 11%, with the Americas growing 20%, EMEA up 2%, and Asia up 9%.
   • Applications new license revenues were $477 million, up 21% from the previous year, with the Americas growing 26%, EMEA up 7%, and Asia up 29%.
   • Software license updates and product support revenues were $3.3 billion, including $25 million from Sun, up 12% from the previous year.
   • Revenues from hardware systems products were $273 million, and revenues from hardware systems support were $224 million.
   • Services revenues were $931 million, down 9% as the business continued to be managed for profitable margins.
   • Total revenues were $6.5 billion, including $596 million from Sun, up 18% and up 7% excluding Sun.

3. Operating Income and Margins:

   • Non-GAAP operating income was $2.9 billion, up 13%.
   • The non-GAAP operating margin for the quarter was 45%.
   • The tax rate for the third quarter was 25.9%, with some one-time benefits to the tax rate.

4. Earnings per Share:

   • Q3 non-GAAP earnings per share were $0.38, at the high end of the guidance range of $0.36 to $0.38, up 9% from the previous year.
   • Included a $0.01 loss related to the devaluation of the Venezuelan currency.

5. Stock Buyback Program:

   • In Q3, Oracle repurchased 10.3 million shares at an average price of $24.28 per share for a total of $250 million.
   • Noted that the rate of stock buyback would fluctuate each quarter based on alternative uses for cash and the stock price.

6. Balance Sheet and Cash Flow:

   • Oracle had $17.5 billion in cash and investments.

   • Days sales outstanding, excluding Sun, improved to 47 days compared to 49 days the previous year.

   • Generated $8.0 billion in free cash flow during the last four quarters.

Safra Ada Catz, the CEO & Director of Oracle, made several key points during the Q3 2010 Earnings Call:

1. Financial Results Excluding Sun:

   • Oracle exceeded the high point of its new license guidance with 10% growth in software licenses excluding Sun.
   • This growth demonstrates substantial strength in the Database, Middleware, and Applications business.
   • Oracle also beat the high end of its total revenue guidance, with consistent strength in Update and Support renewals.
   • Application business results were strong, growing 21% while SAP continued to shrink at a double-digit pace.

2. Operating Margins:

   • Oracle delivered very strong operating margins.
   • With Sun included, the operating margin was 45%, which is higher than peers including IBM.
   • Oracle’s operating margin remains higher than SAP’s target, despite now selling hardware.

3. Sun Acquisition:

   • Sun’s revenues for February were $596 million, which was better than expected.
   • Oracle believes the Sun acquisition is off to a strong start.
   • Oracle expects Sun to contribute $1.5 billion in non-GAAP operating income in fiscal year 2011 and $2 billion in fiscal year 2012.
   • Oracle is implementing a more profit-aware model for the Sun business, ending or modifying loss-making product resale arrangements.
   • Sales teams are now compensated on margin, not just revenue, changing the sales mix from commodity systems to value-added systems.

4. Q4 Guidance:

   • Safra emphasized that the guidance given is conservative.
   • New software license revenue growth is expected to range from 3% to 13%.
   • Hardware product revenues are expected to range from $1.2 billion to $1.3 billion.
   • Total revenue growth on a non-GAAP basis is expected to range from 36% to 41%.
   • Non-GAAP EPS is expected to be $0.52 to $0.56.
   • GAAP EPS for the fourth quarter is expected to be $0.37 to $0.41.

5. Pipeline Strength:

   • Safra noted that pipelines are very strong in both software and hardware.
   • The close rates for software are more conservative than typical Q4 close rates.

6. Profit Model Changes:

   • Oracle will no longer sell products at a loss, unlike Sun’s previous practices.
   • Oracle is changing the sales mix from commodity systems to value-added systems.

7. Board Dividend Declaration:

   • The Board declared a dividend of $0.05 per share.

These points highlight Oracle’s financial performance, strategic direction, and outlook for the future, including the successful integration of Sun Microsystems and the company’s expectations for continued growth and profitability.

During the Oracle Corp. Q3 2010 Earnings Call, Charles Edward Phillips, the then-President and Director, provided several insights and updates. Here’s a detailed summary of his comments:

Integration of Sun Representatives

• The organization did a great job integrating Sun representatives quickly.
• Territories, accounts, and compensation plans were assigned within days and weeks.
• Representatives quickly got back in front of customers, which was a key factor in the quarter.
• All customer data has been converted over to Oracle systems.
• Pipeline and forecasting processes have been standardized.

Customer Engagement

• Customers are intrigued by Oracle's strategy.
• An example is a CIO Summit in Atlanta that attracted over 175 CIOs, 85% of whom traveled to attend, and 91% were first-time attendees.
• Competitors’ customers are coming to hear what Oracle has to say.
• Oracle plans to leverage this interest by holding more events, including four more CIO summits, a CFO summit, and a CSO summit in the next three months.

Product Area Updates

Database

• Exadata: Pipeline continues to grow significantly, with multiple orders and multiple machines in a single order.
• Key Wins:
  • Live Technologies: Unlimited License Agreement (ULA) for Database, Middleware, and Apps.
  • Turkcell: ULA for Database, Middleware, including Exadata, ERP, and CRM.
  • Buenos Aires City Government: Migration to Oracle Database 11g from Informix, achieving an 80% improvement in performance.
  • Linux Wins: Victoria University, Telkom SA, Reuters, and GE Security.

Middleware

• Achieved 90,000 customers, not including 20,000 apps customers running Middleware with Oracle apps.
• Upgrade cycle from 11g is proceeding as expected, with customers taking about 4-8 months to upgrade.
• 18 key Independent Software Vendor (ISV) partners standardized on Oracle Middleware components.
• Key customer wins:
  • Cox Communications
  • U.S. Department of Transportation: Selected Oracle over WebCenter for a portal.
  • Kaiser Permanente: Chose Oracle for BI over Cognos.

Applications

• Shift in customer perception from considering SAP a safe choice to being more open to Oracle.
• SAP lacks new offerings, focusing primarily on general ledger.
• Key Wins Over SAP:
  • IBCO (United Arab Emirates)
  • D&A’s Distribution
  • NBN Co. (Australia): National broadband network project.
  • Genuine Parts
  • Nomura Holdings
  • PeopleSoft wins:
    • Carlyle Group
    • Alberta Health Services
    • UBS
    • Bank of America
    • Department of Energy
  • CRM On Demand wins against Salesforce:
    • General Motors
    • SAIC
    • Broadcom
    • Merck
    • Avis
    • Starbucks
  • Solid rebound in Retail and Communications GBUs.
  • Financial Services wins:
    • Central Bank of UAE
    • Union Bank of Jordan
    • National Australia Bank
  • Enterprise Taxation product win:
    • State of Nevada: Unemployment insurance system.

Hardware

• Sun Ray: Win with a branch of the armed services for a highly secure and multilevel security solution.
• 1&1 Internet: Six M9000 SPARC Enterprise servers.
• MTN Group (Nigeria): 21 countries, 90 million subscribers; Sun SPARC Enterprise T5000s.
• Top 10 U.S. bank replaced Tandem and HP with Sun servers.
• Major financial services company replaced EMC with Oracle solid-state disk and hybrid arrays.
• Large U.S. federal agency selected an M8000 to support 5 million pages of handwritten census data.

Closing Remarks

• Excited about the pipeline and what's happening.

• Many more opportunities and wins on the horizon.