Oracle Corp., Q1 2007 Earnings Call, Sep-19-2006 - NYSE:ORCL

NYSE:ORCL

Safra Catz provided a comprehensive overview of Oracle's first quarter fiscal year 2007 performance and offered guidance for the second quarter. Here are the details of her comments:

Opening Remarks

• Focused on non-GAAP results for Q1.
• Reviewed guidance for Q2 and handed over the call to Larry Ellison and Charles Phillips afterward.

Q1 Performance

• Oracle had a very strong quarter with outstanding performance across all product lines and geographies.
• New software license revenue, including i-flex, was $804 million, up 28% year-over-year, exceeding guidance of 18% to 25%.
• Technology license revenues were up 15% year-over-year, with 19% growth in the Americas, 12% in EMEA, and 12% in APAC.
• Database revenue was up 10% year-over-year, and middleware license revenues were up 56%.
• Applications license revenue was $228 million, up 80% year-over-year, marking the third consecutive quarter of greater than 75% growth.
• Organic application license revenue growth, excluding i-flex, Siebel, and Portal, reached $186 million, up 47% year-over-year.
• Product updates and support revenue crossed the $2 billion mark, up 23% on a non-GAAP basis, with renewal rates remaining above 95%.

Profitability and Share Buyback

• Income from operations grew 29% to $1.3 billion, resulting in operating margins of 36%, up 1% from the previous year.
• Non-GAAP EPS grew 24% to $0.18, $0.02 above previous guidance and well above the stated goal of 20% average EPS growth through fiscal year 2009.
• Oracle bought back 67 million shares at an average price of $14.96, spending $1 billion, and intended to continue buying back approximately $1 billion per quarter through the remainder of the fiscal year.

Cash Flows

• Operating cash flows for the trailing 12 months increased by $1.1 billion to $4.7 billion, while free cash flow increased 32%.

Guidance for Q2

• New software license revenues expected to be up 15% to 20% year-over-year.
• Total software revenues expected to be up 19% to 21% on a non-GAAP basis (21% to 23% on a GAAP basis).
• Total revenue for Q2 expected to be up 22% to 24% year-over-year on a non-GAAP basis (24% to 26% on a GAAP basis).
• Non-GAAP net income growth expected to be 13% to 17%, with GAAP net income growth of 10% to 14%.
• Non-GAAP EPS for Q2 expected to be $0.22 (compared to $0.19 last year), and GAAP EPS expected to be $0.17 (up from $0.15 last year).

Tax Rate and Currency Impact

• Assumed an annual effective income tax rate of 30%, up from 28.9% the previous year.
• If current exchange rates hold steady for the entire quarter, there would be three points of positive currency impact for Q2 numbers, but currency fluctuations could change this impact.

Stock Compensation Expense

• GAAP guidance for Q2 currently assumes stock compensation expense of about $50 million, with the full-year stock compensation expense expected to be between $0.02 to $0.03.

Krista Bessinger, Vice President of Investor Relations for Oracle, made the following remarks during the Oracle Corporation Q1 fiscal year 2007 earnings conference call:

1. Opening Remarks:

   • She thanked the operator and welcomed everyone to the call.
   • Introduced the executives present on the call: Larry Ellison (Chief Executive Officer), Charles Phillips (President), and Safra Catz (President and Chief Financial Officer).

2. Logistics for the Call:

   • Mentioned that due to the logistical challenges of having executives in different locations, the Q&A session would be limited.
   • Noted that the next major investor event would be the financial analyst day on October 26 in San Francisco, coinciding with Oracle Open World.

3. Safe Harbor Statement:

   • Reminded listeners that the call may include forward-looking statements that are subject to risks and uncertainties.
   • Advised caution against placing undue reliance on these statements and noted that Oracle is not obligated to update these statements.
   • Mentioned that important factors affecting the business and predictions would be presented during the call and referred listeners to the most recent Form 10-K and Form 10-Q for a more complete discussion of risks.

4. Review of Financial Information:

   • Directed listeners to the Oracle investor relations website for a PDF copy of the press release and financial tables, including a GAAP to non-GAAP reconciliation.

5. Transition to Safra Catz:

   • Passed the call over to Safra Catz for her opening comments.

6. Closing Remarks:

   • Thanked everyone for participating in the call.

   • Provided details for a telephone replay of the call, including the replay number and passcode.

   • Mentioned that a webcast replay would be available on the investor relations website through the close of market on September 26th.

During the Oracle Corporation's Q1 fiscal year 2007 earnings call, Larry Ellison, the CEO at the time, provided insights into the company's strategy and competitive positioning, particularly against SAP in the applications business. Here’s a detailed summary of his comments:

Larry Ellison's Comments

Overview of Competitive Strategy Against SAP

• Focus on Next Generation SOA Applications: Larry emphasized the importance of Service-Oriented Architecture (SOA) applications and identified two key success factors:
  • Foundation of Standards-Based Middleware
  • Industry-Specific Knowledge and Products

Middleware Strategy

• Historical Approach:

  • Historically, successful application companies built their own proprietary middleware and tools.
  • Examples: SAP built ABAP, Oracle built Forms, PeopleSoft had PeopleTools, etc.

• Oracle’s Middleware Approach:

  • Oracle’s Fusion Middleware is based on Java and other open standards.
  • Oracle’s J-Developer is a standards-based Java development tool.
  • Oracle’s middleware strategy contrasts sharply with SAP’s NetWeaver, which is based on ABAP, SAP’s proprietary language.

• Oracle’s Middleware Advantage:

  • Oracle has a large, mature middleware business ($1 billion).
  • SAP’s NetWeaver is relatively new and incomplete.
  • SAP lacks full Business Process Execution Language (BPEL), limited Business Intelligence (BI), and virtually no Identity Management and Security Management capabilities.

• Timing and Delivery:

  • Oracle has spent two years enhancing its middleware for SOA applications.
  • SAP will take years to build the necessary middleware for their SOA applications, and they need to replace ABAP with a modern standards-based language like Java.
  • SAP is approximately two years behind Oracle’s schedule for delivering SOA applications (2010 vs. 2008).

Industry-Specific Knowledge and Products

• SAP’s Shortcomings:

  • SAP has good industry knowledge in some sectors (e.g., oil and gas) but lacks specific knowledge in most other industries.
  • SAP tried to acquire Retec for retail industry knowledge.

• Oracle’s Acquisition Strategy:

  • Oracle’s acquisitions have moved the company ahead of SAP in several industries (banking, telecommunications, retail, etc.).
  • Oracle will continue to acquire industry knowledge and products.
  • SAP needs to adopt a similar strategy or risk becoming less competitive in various industries.

• SAP’s Response:

  • SAP’s CEO, Henning Kagermann, is considering a more aggressive acquisition strategy to address slowing organic growth.

Market Share Gains

• Current Share Gains:

  • SAP’s growth in the most recent quarter was 8%.
  • Oracle’s growth in the last two quarters was over 80%.
  • It is unlikely that Oracle’s rate of gain will accelerate, but it will stay very high.

• Middleware Presence:

  • Oracle middleware is more prevalent in SAP shops than NetWeaver.
  • Oracle will continue to gain share even in SAP shops.

• Future Outlook:

  • Oracle believes SAP will have to abandon ABAP and adopt a standards-based middleware.
  • Oracle will continue to target other industries and gain market share quarter after quarter and year after year.

Middleware Adoption and Wallet Share

• Early Stages of Middleware Adoption:

  • Larry acknowledged that the adoption of service-oriented architecture is in its early stages.
  • Oracle’s middleware business is growing faster than BEA or IBM.

• Integrated Technology Suite:

  • Oracle offers a unique integrated suite of database, middleware, and applications that are modern and standards-based.
  • Oracle has been investing in its next-generation technology suite (database, middleware) for some time.

• Opportunity with Fusion Applications:

  • Oracle’s Fusion Applications will come out in 2008, providing an opportunity to get ahead of SAP, which plans to release its next application version in 2010.
  • Oracle will have two years to market modern, standards-based SOA applications while SAP rewrites its applications.

• Industry-Specific Applications:

  • Oracle will continue to acquire industry-specific applications and knowledge as part of its ongoing acquisition strategy.

  • If SAP sticks to its current strategy, Oracle expects its share gains to continue and possibly accelerate.

During the Oracle Corporation's Q1 fiscal year 2007 earnings conference call, Charles Phillips, then President of Oracle, provided several insights and updates on the company's performance and strategies. Below is a detailed summary of his comments:

Charles Phillips' Comments

Sales Force Execution

• Q1 Start: Charles noted that the quarter started off well and finished strong.
• Territory and Comp Plan Changes: There were fewer changes to territories and compensation plans this year, which helped reduce disruptions and improve sales force execution.

Fusion Middleware

• Customer Base: Oracle's Fusion Middleware now serves 30,000 customers.
• Growth Rate: It remains the world's fastest-growing middleware suite.
• Hot Pluggable Strategy:
  • Components are highly standardized and best-of-breed, enabling Oracle to sell into environments dominated by competitors.
  • Oracle can initially sell one or two best-of-breed products and expand the relationship over time.
• Innovation:
  • 82% of customers are on the latest two releases of the product, indicating significant upgrades and value.
  • Third-party distribution has grown, with 5,000 ISVs (Independent Software Vendors), 4,500 VARs (Value-Added Resellers), and increasing support from systems integrators.
  • Oracle has opened a joint global innovation center with Accenture on the Oracle campus.
  • EDS and HP Services have established programs based on Fusion Middleware.
• Recent Wins:
  • Major go-lives include Disney, IKON, Dell, Rabobank, and Vodafone, all standardizing on Oracle's middleware suite.
• Awards and Patents:
  • Oracle has won 150 independent awards and holds 275 patents for Fusion Middleware.

Database Options

• Content DB and Records DB:
  • Manages unstructured content and enables enterprise-wide document retention policies.
  • Addresses compliance requirements for managing data.
• Database Vault:
  • Allows separation of administrative roles from data access roles, enhancing security.
• Audit Vault:
  • Provides a consolidated repository of all database log changes for secure audit trails.
• Secure Search:
  • Search engine for private enterprise data, expected to ramp up in a few quarters.

Applications

• Wins Over SAP:
  • Counted 88 head-to-head wins over SAP in the quarter, validated by Oracle.
  • Notable wins include Alltel Corporation, Walt Disney World, Lockheed Martin, Duke Energy, Electrolux, and U.S. Steel.
• Industry Applications:
  • Industry applications accounted for about 20% of deals signed in the quarter.
  • Strategic win with Wal-Mart in retail, and win-backs from SAP at sales.
• Cross-Selling:
  • Increasing the attach rate of Oracle applications and technology products through better cross-selling across the organization.
• Communications:
  • Immediate synergies from the Portal acquisition, including the use of Oracle's technology portfolio.
• Mid-Market Focus:
  • Signing up resellers by vertical to target the mid-market, similar to the strategy used for database and Fusion Middleware businesses.
  • Use of "Accelerators" for quick configuration tailored to the mid-market.
• Small Business Customers:
  • Already has 90,000 small business customers, planning to further penetrate this market with branding and packaging.
• Up-Sell Campaigns:
  • Opportunities to leverage the installed base of 235,000 customers.
  • Investment in building models and normalizing customer data across acquisitions.
  • Analytical models for next likely purchase analysis to identify highly qualified opportunities globally.

Upcoming Events

• OpenWorld:

  • Scheduled for October 22-26.

  • Paid registrations are up over 100%.

  • Expected to have over 40,000 attendees.