ORCL
#Thanks, <UNK>
Good afternoon, everyone
I’m going to focus on our non-GAAP results for Q2. I’ll then review guidance for Q3 and turn the call over to Larry and <UNK> for their comments
As you can see, we had another excellent quarter
Customer adoption of our Cloud products and services continues to be very strong and what we have called our on-premise business remains robust
Bottom line, our transition to the Cloud is going well
Despite the currency benefit being less than my guidance, total revenue was more than the high end of my guidance range and earnings per share was at the high-end even at a higher tax rate than expected
Cloud SaaS revenue for the quarter were $1.1 billion, up 47% from last year
Fusion Cloud revenue was up 56% for the quarter
Cloud PaaS and IaaS revenue for the quarter was $398 million, up 20% from last year
But just as a reminder, part of the Cloud PaaS and IaaS business is our legacy hosting services which don’t share the same high growth characteristics as PaaS and next-gen IaaS services
This portion of PaaS/IaaS saw growth of 46% in CD and 49% in USD, while the traditional hosting services, which we are de-focusing, were down nearly 10%
As traditional hosting services become a smaller part of total PaaS and IaaS, the underlying growth of PaaS and next-gen IaaS will be more visible
I want to also take a moment to review the announcements we made in October of bring your own licenses, what we call BYOL and autonomous database
Unlike the applications business where customers move to SaaS subscriptions, stop buying upfront licenses and shelve application support, BYOL customers can leverage their years of investment in Oracle database and technology software and bring those licenses to the Oracle cloud infrastructure instead of cancelling their licenses and support and moving to rent new licenses
With BYOL, we are seeing a strong increase in our technology installed base as customers renew their unlimited license agreement, invest in more licenses and options and renew support
Because BYOL is now available and customers better understand their transition options to move to the Oracle Cloud, technology new software license revenue is dramatically improving from the declines we were seeing previously
We expect this trend to continue as we roll out Autonomous Database as customers license the options and technology they need
We expect to continue to take share in database
Now, total cloud and software revenues were $7.8 billion, up 7% in constant currency and up 9% in U.S
dollars
In fact, we’ve consistently overachieved our software and cloud revenue forecast the last seven quarters
I focus on these numbers, which we refer to as the ecosystem revenues, because that is where all of our software assets come together and you can start to see the powerful dynamics of the business, especially with our BYOL model
Total cloud revenues in the quarter were $1.5 billion, up 39% from last year
Total on-premise software revenues were $6.3 billion, up 1% from last year, reflecting stable software license and continued high attach of software support and renewal rates that reflect the stability of our installed base of customers
GAAP application total revenues which is new licenses and support and SaaS, were $2.7 billion, up 13% and GAAP platform and infrastructure total revenues, which includes new license and support and PaaS and IaaS, were $5.1 billion, up 4%
As for cloud margins, our SaaS business continues to scale and grow and the gross margin has expanded to 66% up from 59% last Q2. We expect to see further improvement in FY 2018 and we remain committed to our goal of 80% SaaS gross margins
The gross margin of PaaS and IaaS was 40%, down from 44% last quarter as our geographic buildout goes forward in response to demand but ahead of the bulk of new revenue recognition
When we are at scale, I expect to see major improvement in PaaS and IaaS gross margin
Hardware revenues were $940 million, down 9%, and service revenues were $856 million, essentially unchanged in constant currency
Total non-GAAP revenue for the company were $9.6 billion, up 4% from last year and 6% in U.S
dollars
Non-GAAP operating income was $4.2 billion, up 8% from last year, 10% in U.S
dollars
The operating margin was 44%, which was up from 42% last year
The operating margins have now increased year over year for five consecutive quarters and while I can’t promise this will happen every quarter, I do expect that operating margins will continue to expand
The non-GAAP tax rate for the quarter was slightly higher than expected at 25.2%
As a result, EPS was $0.01 less at $0.70 a share in U.S
dollars, up 14% in U.S
dollars, 12% in CD
The GAAP tax rate was 22.1% and GAAP EPS was $0.52. Operating cash flow over the last four quarters was $14.6 billion, up 2%, and free cash flow over the last four quarters was $12.5 billion
Capital expenditures for the quarter were $599 million
I expect the cloud CapEx spending would be driven by our ARR growth and the PaaS/IaaS buildout that I mentioned earlier
Obviously, should we see higher than expected ARR growth, we’d expect to see higher CapEx investments as well
Now we have more than $71 billion in cash and marketable securities but net of debt our cash position is $10.9 billion
The short-term deferred revenue balance is $8.1 billion, up 6% in constant currency
This quarter we repurchased nearly 41 million shares for a total of $2 billion
Over the last 12 months we’ve repurchased 74.5 million shares for a total of $3.5 billion
We also paid out dividends of nearly $3 billion
The Board of Directors increased the authorization for share repurchases by $12 billion and again declared a quarterly dividend of $0.19 per share
Now to the guidance for Q3. My guidance is on a non-GAAP basis and in constant currency
However, there has been some currency movement and assuming current exchange rates remain the same as they are now, currency could be as much as 3% positive on total revenue or $0.03 positive on EPS
So, for Q3 in constant currency, Cloud revenue including SaaS, PaaS and IaaS are expected to grow 21% to 25%
Total revenues is expected to range from 2% to 4%
Non-GAAP EPS in constant currency is expected to be somewhere between $0.68 and $0.70. That puts the USD earnings per share at $0.71, and $0.73. This assumes a non-GAAP tax rate somewhere around 24%
Of course with the current and very real possibility of tax reform, the Q3 tax rate could easily end up being very different especially to the extent that there is repatriation
With that, I will turn over to <UNK> for his comments
Well, I think our capital expenditures will be very similar to last year
As I mentioned to you last year, we spent about $1 billion in kind of CapEx associated with the cloud
We spent about $1 billion in our real estate expansion
And the way that CapEx works really is there’s a certain amount when we open data centers, and that cost quite a bit to just get started
And then the buildout is a little bit less because there’s abasing starting block
So I think we -– and what happens is you start to get really major economies of scale as you – once your setup is basically set up, straight and ready to go
So I see it like last year
A lot of growth, about half of it is in real estate which I don’t expect to continue necessarily as much on that side
So no, no deceleration, just trying to get some economies of scale as we build out
We’ve got some plans but nothing
Now the revenues are coming in so that’s why we’re having the improvements in margins
Yes, absolutely
So it’s not only BYOL
It’s also in preparation for Autonomous Database
So understand that to get the benefit of Autonomous Database in the Oracle cloud, you bring your own license, but you may also, you will also need depending on which service you need, you’re going to need some of the options in addition
And also, as you bring your own database licenses, you’re going to want to have app server licenses and middleware licenses in order to work with your database
So all of that, that BYOL is a fundamental change and is significantly different from how SaaS works
And that’s what I try to explain
In SaaS, you are now doing a SaaS subscription, you’re no longer using your license
You don’t need to buy more licenses, and you shelve your support
With BYOL, you buy additional licenses, you bring them to our cloud and you continue to pay support
And that is going to be very significant going forward
And it’s already, you already see it in this quarter already
And we announced it in OpenWorld
The mechanics are not automatic, so let’s actually set this up
What has clearly happened, and I could already see this even at OpenWorld in talking to customers, they now understand that they will want to have more licenses
So as their unlimited agreements are starting to expire, they could have historically pick up
I’m going to rent all my licenses going forward, there’s no point in owning them, they would’ve certify those licenses and stopped buying additional and renewing unlimited agreements
So what they’ve now seen is there pathway with BYOL gives them complete flexibility of when they are ready to move to the cloud, but that there’s a benefit in owning your licenses and buying more and renewing support
So customers moved to the cloud when it makes sense for them
Autonomous Database, which is coming out in a little while here, that’s going to be an enormous driver for customers to actually move there important workloads to the cloud
You understand? The two are related, but not the same
Larry, I don’t if you want to
So there are a few things going on here
Remember, when you bring your own license to Oracle IaaS, the service you purchase is more expensive than the basic IaaS because you get all of the autonomous – all of the capability you wouldn’t otherwise get, first of all
But you cannot divorce the margin of just IaaS without remembering that both licenses are being purchased, and support is continuously paid
That’s why you heard me say, maybe you heard me say, the so-called on-premise license, because it’s actually now that we’ve launched BYOL, it is actually a misnomer because the customer – it’s currently categorized on our income statement as on-premise software and support, for that matter
Those are called on premise, but there’s nothing on premise about them
You can bring them to the cloud
So you have to understand how much money in that pool because with SaaS on the applications side, remember, we don’t sell you a new license, you no longer renew your support, and you start renting SaaS licenses and the service all bundled together
So in this case, to the extent that - and, by the way, I just want to be clear, customers have the option if they don’t want to bring their own license, to buy, to rent licenses through PaaS
That’s also available to them
But financially for both them and us, it actually works out best if they bring those licenses and those with unlimited agreements can bring an unlimited amount of licenses to our cloud as well as continue to use whatever they’ve got still on premise at their own state while continuing to pay support and buying additional licenses
So the math is more complete and very profitable for both us and the customer
Well, to the extent that repatriation is part of the final bill, and to the extent that whatever is the rate for the cash that we bring back, either what we actually have or the deemed repatriation, that will make available to us under $60 billion, depending on the tax of cash that we can use for whatever would be available for us
We haven’t made any decisions about how we would use it
I believe that it is mandatory repatriation
So, a tax will be due on all cash outside the United States for all of those companies, and I believe we’d need to book it, or at least book an estimate for it in the quarter that the tax law changes
That will make our tax rate look sort of strange, but, of course, I’ll disclose the amounts and all that
I’m not sure that the final rate has been set, and, whether it will actually stay in the bill
So, we hope it does
We hope they do move to a territorial system
It will make us more competitive, and we look forward to that
For your first question, yes, I think that operating income is going to grow faster than revenue because we get economies of scale, we have margin improvement, and the business is growing
And when it grows, we get economies of scale that allow us to grow income, operating income faster than revenues
And I’m quite sure of that
I think you should not confuse bookings with revenue, and PaaS and IaaS forecast looks good
I’m not giving you – I’m not breaking them down for you, but I expect them to be positive and consistent with what you would have seen
And just as a reminder, the PaaS/IaaS includes a piece that is not growing and a piece that is growing
The piece that’s not growing is like 200 something, 240 – I can’t remember
No question because the PaaS/IaaS that we care about, the one we’re focused on is growing 40 something percent
