Welcome to Oracle's First Quarter Fiscal 2015 Earnings Call. As a reminder, this call is being recorded for replay purposes. I'd like to now turn the call over to Ken Bond, Vice President of Investor Relations.
Thank you, Victoria. Good afternoon, everyone, and welcome to Oracle's Q1 fiscal year 2015 earnings conference call. A copy of the press release and financial tables, which includes 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 Executive Chairman and Chief Technology Officer, Larry Ellison CEO, Sabra Katz and CEO, 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. These forward looking statements are also subject to risks and uncertainties that may cause actual results to differ materially from statements 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 Q and 10 ks 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. And finally, we are not obligating ourselves to revise our results or publicly release any revision
of these forward looking statements in
light of new information or future events. Before taking questions, we'll begin with a few prepared remarks. And with that, I'd like to turn the call over to Sabra.
Thanks, Ken. I'm going to focus on our non GAAP results for Q1. I'll then review guidance for Q2, then turn the call over to Mark and Larry for their comments. Those of you who have followed us for a while know that Q1 is a seasonally smaller quarter, which can mean more volatility in our results, and that's what we saw this quarter. Currency was a 1% tailwind to total revenues.
Today, my comments generally reflect constant dollar growth rates. Cloud revenue totaled $477,000,000 growing 29%. In that, cloud SaaS and PaaS were $339,000,000 up 31% from year and up 4% sequentially. Cloud Infrastructure as a Service was $138,000,000 up 25%. Q1 results in the cloud were better than expected and with us now 3 times bigger than Workday.
Now that's not enough for us as our goal is to be bigger than sales force and faster growing than Workday, while growing cash flow and improving our already high levels of profitability. New software license was $1,400,000,000 down 2% from last year, and software updates and product support was a record $4,700,000,000 up 6%. Software and cloud revenue totaled $6,600,000,000 in Q1, growing 6%. Customers have started to move from on premise systems to the cloud, but with so many on premise customers and only 30% of our support base in applications, we haven't seen a reduction in software updates and product support renewal rate, which continue at their usual high levels. However, as the movement to the cloud growth, we expect this transition will affect our revenue to the positive.
These customers will essentially replace their software support payments with a cloud subscription, which will mean substantially more revenue to Oracle. That is because not only will we be providing the most up to date software, but we'll also be providing the hardware, the application management and complete operations. Of course, we expect that as the customer pays more to Oracle, this increase will be more than offset by a reduction in their costs of implementing and running their own systems. And because we control nearly all of our own supply chain and benefit from enormous economies of scale, we expect most customers converting their premise based software support payments to cloud subscriptions will be immediately accretive to operating income as well. In the case of new or existing customers taking cloud subscriptions in lieu of buying new or additional software licenses, there will be a short term delay in revenue.
But over the medium and long term, we also expect more revenue and operating income as well as increased cash flow. As for the details in this quarter, GAAP software and cloud results in the Americas grew 6%, helped by a very strong performance from our North America application team and our global business unit. Thanks to the fantastic EMEA management team, considering the geopolitical situations in Europe and the Middle East, EMEA was up an astounding 7%. Asia Pac grew 2%. Engineered Systems continue to grow and were over a third of hardware product revenue over the last 12 months.
However, hardware revenue in total was down 8% as other servers and storage revenues, especially tape declined. Hardware system product revenue was down 14%, while hardware system support was down 2%. Consulting services, which I don't usually comment on because they are not as strategic to our business, also suffered from some execution issues in North America. Total revenue for the quarter was $8,600,000,000 up 2% from last year. The quarter was not dependent on any one large deal.
Our non GAAP operating income was $3,800,000,000 was 1% higher than last year and operating margin was 44.4%, down just 22 basis points from last year because the sales shortfall in hardware in some hardware and consulting happened late in the quarter and did not allow us time to adjust our expense base in the quarter. Free cash flow increased to a record $14,700,000,000 over the last 4 quarters to an all time high of $6,500,000,000 for the quarter, up 6% from Q1 last year. The non GAAP tax rate for the quarter was 21.5%. EPS for the quarter grew 4% in U. S.
Dollars and to $0.62 on a non GAAP basis. The GAAP tax rate was 19.7 due to some one time events and the mix of earnings. On a GAAP basis, EPS for the quarter was $0.48 in U. S. Dollars, up 2%.
At quarter end, deferred revenue was at a record $8,900,000,000 up 5% from last year, and we had nearly $52,000,000,000 in cash and marketable securities. Net of debt, our cash position was $19,000,000,000 dollars So both of these balances are roughly $5,000,000,000 lower now that we've closed the Micros transaction. This quarter, we repurchased nearly 49,000,000 shares for a total of $2,000,000,000 Over the last 12 months, we've repurchased more than 5% of the shares outstanding a year ago and paid out more than $2,100,000,000 in dividend as nearly 75 percent of our cash flow was returned to shareholders. We recently increased our share buyback authorization by an additional $13,000,000,000 and we now have a total authorization of more than $15,000,000,000 available. The Board of Directors declared a quarterly dividend of $0.12 per share.
As I move to guidance, I need to make some comments first regarding Micro, which we closed a few days ago. First, we will not own it for the whole quarter. Secondly, and much more importantly, because our revenue recognition policies and our operating procedures are strict, the contributions for Micro will not be consistent with their historical run rate. For example, I am only expecting about $14,000,000 in on premise new license revenue for the quarter for Micro. Also, given recent currency movements, we expect to see a currency headwind of 1% for cloud revenues, 2% for software and cloud revenue combined and 2% for both hardware and total revenue.
And that could very much change. So taking all that into account, SaaS and PaaS on a non GAAP basis is expected to grow between 40% to 45% in constant currency, dollars 39 to $44. On a GAAP basis, SaaS and PaaS revenue is expected to grow 39% to $0.44 in constant currency and 38% to 43% in U. S. Dollars.
Cloud IAS on a GAAP and non GAAP basis is expected to grow 40 percent to 44% in constant currency and $39 to $43 Software and cloud revenue on a GAAP and non GAAP basis, including SaaS, PaaS, IAS new software license and software support is expected to grow 5% to 8% in constant currency, 3% to 6% in U. S. Dollars. Hardware system revenues on a GAAP and non GAAP basis, which includes hardware system products and hardware system support, is expected to be negative 8% to positive 2% in constant currency, negative 10% to 0% in U. S.
Dollars. Total revenue growth on a GAAP and non GAAP basis is expected to range from 2% to 6% in constant currency, 0% to 4% in U. S. Dollars. Non GAAP EPS is expected to be somewhere between $0.68 to $0.72 in constant currency, dollars 0.66 $0.70 in U.
S. Dollars. GAAP EPS is expected to be somewhere between $0.53 and 0 point 5 $7 in constant currency and $0.55 $0.51 and $0.55 in U. S. Dollars.
This guidance assumes a GAAP tax rate of 22.5% and a non GAAP tax rate of 23%. Of course, it may end up being different. As you've seen in the last few minutes, we announced that Larry was elected Executive Chairman and appointed Chief Technology Officer. Mark and I have been appointed CEO. Other than Mark and I reporting to the Board of Directors, of which Larry will be Executive Chairman instead of into Larry directly, no other reporting relationships will change at the company.
In addition, though I will no longer go by the CFO title, I will be the Principal Financial Officer for all regulatory purposes. We will not be hiring a CFO and my teams will continue to report to me. With that, I will turn it over to Larry for his comments.
Thank you, Taro. Next week at Oracle Open World, we will be rolling out our new database cloud service. With our new multi tenant database as a service offering, our customers and ISVs can move any of their existing applications and databases to the Oracle Cloud with the push of a button. With the push of a button, your data is automatically compressed 10:one and encrypted for secure and efficient transfer to the cloud. With the push of a button, your existing application automatically becomes a multi tenant application and is moved to the Oracle Cloud.
No reprogramming is required. Every single Oracle feature, even our latest high speed and memory processing is included in the Oracle Cloud database service. 100 of thousands of customers and ISVs have been waiting for exactly this. Database is our largest software business and database will be our largest cloud service business. Mark, over to you.
Yes. Listen, before we take questions, I thought I'd just give you 7 or 8 facts about our cloud business in the quarter. First, bookings grew 54%, 3x last year's growth rate. Fusion bookings, ERP, HCM and SFA all grew triple digits. 2, revenue grew 32 percent USD, 2x last year's growth rate.
3, we got 500 new cloud customers in the quarter. 4, 170 of them were HCM customers. Based on what I heard Workday report, they got something like 25. We got 60 Fusion HCM new customers in the quarter. 4, in CX we had 290 new customers, 90 including 90 Fusion SFA and almost 200 marketing new customers in the quarter.
5, ERP, we added 90 new customers in Fusion ERP and a like number in our EPM Cloud. And all I'm talking about now here is ERP Cloud and EPM Cloud. Fusion overall had triple digit bookings growth, triple digit revenue growth. We added nearly 200 net new Fusion customers and had many tens of go lives. And while the transition of the cloud is in the early stages, we're already at a run rate of nearly $2,000,000,000 A couple of comments on hardware.
We declined in Spark this quarter, while we grew Engineered Systems double digits. As Safra mentioned Engineered Systems now makes up a third of our hardware. While we're growing double digits, our competitors are declining double digits. We shipped our 10,000th Engineered System in Q1. Lifetime bookings in hardware alone for engineered systems now exceed $3,000,000,000 Hardware support margins are now approaching 70% as a testimony to the change in our overall hardware mix and the stickiness of this business.
And with that, I'll turn it over to you all for questions.
Acharya, we'll go to the Q and A portion of the call please.
Certainly. Your first question comes from the line of Rick Schierland with Nomura Securities.
Thank you. Question is for Larry. Larry, I wonder if you could address the issue of why the change in your role in the company? And if you could clarify what the change might really be in terms of the working relationship and your responsibilities and the spectacular job and I think deserve the recognition
of their new title. Well, again, Mark and Safra have done a spectacular job and I think deserve the recognition of their new titles. I'm going to continue to work with Thomas Kurian in software engineering and John Fowler in Hardware Engineering and Ed Skreven and Mark and Sakhra as I have exactly in the past. So I'm going to continue doing what I've been doing over the last several years. They're going to continue what they've been doing over the last several years.
So they deserve the recognition. They deserve the CEO title and I'm happy that our management team continues forward as a team.
Next question please.
Certainly. Your next question comes from the line of Raimo Lenschow with Barclays Capital.
Hey, thank you, Mark and Safra. Congratulations to the new role. Question for me is like, if you look about into the quarter, I mean, obviously, there were expectations out and you were slightly weaker. On the one hand side, I see the transformation, I see a very strong deferred number and a very strong cash number, but then I see the hardware business. How do you think about the quarter and how in Q4, you thought it was better than we thought about it.
How do you think about Q1 now? Thank you.
Well, again, I like Safra's quote. We're focused on 2 things, becoming number 1 in the cloud, that means growing our cloud business rapidly. So you're seeing an acceleration in our growth rate. We are forecasting that we grow our cloud, our SaaS and PaaS cloud business this coming quarter between 40% 45%. So not only are we getting bigger in the cloud, our growth rate is going up.
That's usually the opposite of what happens. So, we're focused on becoming number 1 in the cloud being bigger than sales force in the cloud. And to do that, we've got to increase our growth rate and that's exactly what we're doing. Now while we're doing that, we have one other key focus to continue to deliver record levels of cash flow and that's exactly what we're doing. So we're getting bigger in the cloud.
Our growth rate is increasing in the cloud. Our cash flow is getting better. We think it was a great Q1 and it's going to get even better in terms of our growth rates in the cloud.
I thought you might mention in your question that the Chairman last quarter referenced a 50% bookings growth rate
and we delivered 54%. And I'll make a bold prediction, we'll do it again. And that's exactly what we need. Again, when we say we want to be number 1 in the cloud, we have to deliver growth rates in that 50% range. And that's what we're shooting at and that's what we think we can achieve.
And by the way, that isn't even including our new database that we rolled out this fall. So that's going to add a multiplier to our growth rate in the cloud. So, we're getting triple digit growth rates. I mean, almost in our fusion applications are internally developed organic organically developed Fusion applications and now with the database in the cloud. We think that's going to continue to amplify that growth rate and increase the size of our business and make us number 1.
So, if we can do that, we become number 1 in the cloud, execute this transition, we'll become the leader in the cloud and deliver record level cash flow. We think we're doing a pretty good job. Good.
Thank you.
Your next question comes from the line of Bill Winslow with Credit Suisse.
Hi. Congrats guys on the growth that you're seeing in the cloud both in terms of just the revenue and obviously the upside in deferred. And along those lines, I wonder if you could comment or just provide some more details on what you're seeing in the cloud versus on premise on the application side. Mark, you noted some pretty nice wins in terms of Fusion HCM. Just wondering if you could provide some more detail and kind of compare and contrast to on premise and the cloud?
Yes, Phil. I mean, first, my prediction there of 50% to Larry's point was a SaaS prediction as opposed to an overall cloud prediction, which frankly could be higher. On apps in the quarter, we grew apps in the quarter on premise. We had double digit growth in North America on apps. So we had good growth on apps, license plus what we did in SaaS.
So it was a really strong overall apps ecosystem quarter. Let me add
that I believe this number is correct. We added more ERP customers in the cloud this past quarter than Workday has had in the life of their company. Correct. So, how about that? Yes.
So, we are feeling really good about our ability to become the leader in ERP. We are the leader in mid market and high end ERP in the cloud. Increase our leadership in marketing and defeat Workday in their core HCM business.
So I think that context is what you're looking for. We had a strong ERP license quarter in North America. We had a really strong SaaS ERP number in North America. And to Larry's point, if everything we've heard Workday talk about with our customers, we got more in the quarter than they have in the lifetime of their company.
That's what I'd like to hear. Congrats, guys.
Thank you.
Your next question comes from the line of Joel Fishbein with BMO Capital.
Hi, guys. And I would like to get some color on the 12C database cycle, specifically the drivers and when we should expect it to impact numbers?
Well, again, there are 2 key portions of the 12C database. 1 is the fact that it takes your existing applications and make them multi tenant by virtue of running on the 12C version of the database. And the second is, it takes your existing applications and stores the data in memory and compressed columnar format, therefore, sometimes increasing your analytic performance by a factor of 100. So those are the 2 big drivers on our 12C database. But as you know, it takes people a while to adopt these features.
But I think you're going to see the database business, option business accelerate through the remainder of this fiscal year and will continue on through the next fiscal year. So I think we're going to get strong results for the rest of this fiscal year. And again, it will continue on for at least another 12 months after that.
Yes. Database options actually was in double digits and is exactly as Larry said, it is accelerating. It has accelerated. It has actually doubled, more than doubled. So doing very, very well and In Memory is one of those options.
Is it where you would expect it to be at this point in the cycle?
Yes, I'd say it's slightly ahead of where we would normally expect it to be. Now we were optimistic about these two features. So we thought the adoption rate would be faster than historically we've experienced with new versions of the database. And that's exactly what's happening. But again, it's a geometric progression.
It's happening sooner, but the big numbers are still 1, 2 quarters away.
Great. Thank you.
Next question, please.
Your next question comes from the line of Jason Maynard with Wells Fargo.
Hey, good afternoon, guys. Well, first, congratulations on the changes in the roles, but I do have to say, Larry, we're going to miss you on these calls and it's been quite a run.
You should be so lucky, I'm staying on the call.
So you're going to have
to wait a little while longer before you get me off the call. I apologize to everyone for that.
Good news then. Good. We can still bother you then with our questions. So with that, I really had 2 questions. 1, maybe Mark you can tackle and then one for Safra.
But on Mark on
the hardware side, could you give us
a little more color on, let's say, some of the shortfall that you saw and maybe break it down by geo or break it down by product line and just some color there? And then Safra, just on your deferred revenue growth, again maybe talk a little bit about the composition of the upside you saw in deferred revenue and whether that was maintenance, multiyear contracts on the SaaS booking side? Just in general, what was driving that for the business? Thanks.
Sure. Let me take deferred revenue because I always get that question when it goes down. And so I'm going to take it when it goes up also. It's the same answer. I know that's really dull.
But the reality is that deferred revenue is almost entirely but not entirely, but almost entirely impacted by support, which as I mentioned remains extremely strong. Q1 is always an extremely it's seasonal. It's everything I've ever told you in every one of the calls. It's very, very strong. Yes, some of it is SaaS, but really the bulk of it and the growth is the business remains very, very strong.
Renewals remain very, very strong. And as a result, deferred revenue remains strong and growing. So, it's dominated because of the sizes of the business by the growth of increased support. On hardware, by
the way, to Safra's point, applications support revenue growth. Just thought I'd add that in. Oh, yes. Just so you make sure everybody clear who has an opinion on that. In hardware, we had tape decline.
We had SAN decline. We have a new SAN release that will come out shortly, Open World. We grew in what you would think of the ZFS. So our NAS storage grew. Engineered systems, I mentioned, grew double digits.
Now while I say Spark declined within Engineered Systems, the Spark Supercluster actually had very strong growth. So we had strong growth in Engineered over a double digit growth in Engineered Systems, strong growth within that with Spark Supercluster, ZFS, NAS storage growth, tape declined, Spark declined. That's hardware.
Next question please.
Your next question comes from the line of Kash Rangan with Bank of America Merrill Lynch.
Hi. Thank you very much for taking my question. I just want to drill into the tech side of the business. It looks like we've been waiting for the 12C product cycle. Can you talk about if the weakness in tech licenses in the quarter was due to transition effect as you get into 12C training or if there was any execution pockets that you ran into?
And also, I think you were pretty optimistic and you continue to be optimistic about the demand for multi tenant and in memory. Could you compare that to how strong the RAC cycle was? Thank you.
I'll take the first part. But I'd say on tech overall, I think tech overall was fine with the exception of one region, which was North America. So, if you looked at all the numbers Safra gave you, I think we're clear in our options business, which was strong even in North America, but core tech North America was weak virtually around the rest of the world that was fine. So, we had good performance, roughly what we expected in the quarter in what I would call core tech.
As far as the adoption rate, we're seeing in memory and multi tenant is actually being adopted at a faster rate than RAC. And I think RAC is a good comparison because RAC is absolutely a strategic feature for transaction processing where in memory is the strategic feature for query processing. And it's just that RAC actually takes is a little more difficult to implement. So I'd say the adoption was therefore somewhat impacted from customers trying it out and getting used to it and getting people trained and then they would it would pan out beyond a few critical mission critical applications. In memory, it doesn't require a lot of training.
It literally is kind of a push a button and it runs a lot faster. Therefore, we're seeing somewhat of a faster adoption rate. And I think you'll see that over the next several quarters. So, it should be at least as big as rack and grow slightly and have a slightly faster adoption rate.
By the way, Kash, I should have taken the time to done a shout out to our European team. Safra did that, but I do it as well. In core tech in Europe, we grew double digits. So just to give you a context of the kind of performance we saw in Europe, it's truly, truly outstanding. Let me add my voice to that.
As our Russian business kind of headed towards 0 and they
had all these other problems that you read about in the newspaper or on the web. And they still managed Louik still managed to do a brilliant job over there and his team continues to execute very, very well in what we would call difficult circumstances. So we're thrilled about the work he's doing for us.
Thank you, everybody.
Thank you. Next question, please.
Your next question comes from the line of Karl Keirstead with Deutsche Bank.
Yes, hi, thanks. My question is back to the leadership changes. And in particular, I'd love to learn a little bit more about how these changes might trickle down into the rest of the Oracle organization. Safra, you touched a little bit on the CFO role and how I think you left a message that really no significant change. I wanted to ask Mark as you transition to your new role whether that would result in any change on the sales leadership and sales structure side as well?
No.
Yes. And Carl, I just want to make sure we are very, very clear. There will actually be no changes, okay? Not no significant changes. I just want to clarify, no changes whatsoever.
And Carl, I don't want to
be short, but it's just not in our in my view, we're pretty flat and in terms of the way we run the place and we want to keep it that way. So I want to stay closer to the action not get farther away from the action. So to be direct, the answer is no, but I want to make sure you heard the rest of that.
Got it. Okay. That's very clear. Thank you.
Your final question comes from the line of Brent Thill with UBS.
Good afternoon. Maybe for each of you just to touch on the business model transition to subscription. How long do you expect this to take to roll through the model? Larry, I know even in the database side there's some interesting opportunities as database as a service could impact the old school model. I'm just curious how you look at this?
And then for all of us on the line, obviously, you get to see the backlog number and you can look at the growth, but we can't actually see the physical backlog. And at some point, would you look to something like Salesforce where they give you a backlog number every quarter as a reporting metric going forward?
Again, the way I look at it is we're going to be doing more for our customers, exactly what Sapra said earlier. We're going to be doing more for our customers than we did before. So before we used to sell them software and they would have to provide their own data centers and their own machines and their own labor and their own network to run all of that. And now we're going to put a lot of that in our data center. We're going to buy the machines.
We're going to provide the skilled labor, whether you're buying infrastructure as a service, we'll be maintaining the operating system and the virtual machine for you along with the hardware
and storage
processing and storage. If you buy platform, we'll also be maintaining the Oracle database and Java, world's most popular programming language and the world's most popular database. That's our platform. We're going to be doing more for you. And as we do more for you, you're going to pay us more, but the customer is going to spend less.
So it's a win win. We get economies of scale. We get specialization of labor. We're very good at running Oracle databases. We're very good at managing Java Virtual Machines.
We're pretty good at running data centers and we're great at running all of these applications. And then that's the 3rd level. If you buy our ERP and our planning applications, then again, we're doing we're your data center, we're your hardware company, we're your networking company, we're your storage company, we're all of those things. So, the promise is for Oracle to be a much larger and much more profitable and much more critical supplier to our customers, a much more strategic supplier to our customers, especially when you go to the next level of application, which are the vertical applications, where we in financial services, for banks, for telephone companies, for retailers, for hotels and restaurant chains, all of those things. It gives us an opportunity to give them a complete solution, which is strategic to their business and has much higher value than selling technology components, which is what the industry has been doing historically.
So, we see this as a huge opportunity for Oracle Corporation to grow and expand our relevance into the next generation of computing, grow our business to be more profitable. And we think we have all the assets to do that. I mean, it's very interesting that in ERP, we overnight over 1 quarter sold more ERP systems in the cloud than Workday has done in the life of their company. We have a lot of assets. One of the things we lead with, with ERP is budgeting and planning, EPM in the cloud.
Workday's answer to that is, we don't have one of those. None of our competitors have one of those in the cloud. SAP, as far as I know, isn't moving anything to the cloud other than Ariba and SuccessFactors. By the way, which I'm going to point out run on Oracle. Both of them run on Oracle, not annum, run on Oracle.
So Oracle is always the most popular database in the cloud. So, every generation of computing, computing gets bigger. And this is our chance to get bigger, to become more important. If we execute well and when Mark says he wants to stay close to the action and when Safra says you got a laser like focus on 2 things, being number 1 in the cloud and delivering record levels of cash flow. We are all focused on this unbelievable opportunity to be the 1 big company, the one big company with all the resources to make this transition to the cloud and become the leader in that next generation of computing.
It's an opportunity we're all focused on and we're not going to miss it.
Thank you, Larry. 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 with any follow-up questions from this call and we look forward to speaking with you. Thank you for joining us today.
With that, I'll turn the call back to Victoria for closing.
Thank you. This concludes today's conference call. You may now disconnect. Thank you for your participation.