Good day, everyone, and welcome to today's Oracle Corporation Quarterly Conference Call. Today's conference is being recorded. At this time, I would like to introduce Ken Bond, Vice President of Investor Relations, Oracle. Please go ahead, sir.
Thank you, Elizabeth, and good afternoon, everyone, and welcome to Oracle's 3rd quarter fiscal year 2013 earnings conference call. A copy of the press release and financial tables, which includes a GAAP to non GAAP reconciliation and other financial information can be viewed and downloaded from our Investor Relations website. On the call today are Chief Executive Officer, Larry Ellison President and CFO, Safra Katz and President, 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 ks and 10 Q 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 revisions to these forward looking statements in light of new information or future events. Before turning to questions, we'll begin with a few prepared remarks. And with that, I'd like to turn the call over to Safra.
Thanks, Ken. I'm going to focus on our non GAAP results for Q3. I'll then review the guidance for Q4 and turn the call over to Mark and Larry for their comments. While our overall business remains very healthy and we saw excellent pipeline growth, we're not at all pleased with our revenue growth this quarter. Though it didn't help that our quarter ended on the same day as the sequester deadline, what we really saw is the lack of urgency we sometimes see in the sales force as Q3 deals fall into Q4.
Since we've been adding literally thousands of new sales reps around the world, the problem was largely sales execution, especially with the new reps as they ran out of runway in Q3. As expected, many of the pushed out deals have already closed. Our product portfolio is as strong as it has ever been, and we won more than our fair share of deals. Our discussions with customers continue to be elevated to the most strategic level. There is a lot of enthusiasm around our leadership in software, engineered systems and our real world approach to a mixed public private cloud deployment.
Looking forward, we're encouraged by the tremendous pipeline growth, but clearly, we have work to do in training new reps on managing the sales process and the establish and the importance of establishing a quarterly rhythm with their deals. As such, I'll be conservative in my Q4 guidance even though Q4 is the quarter the sales force is in fact geared to. Now to the numbers in Q3. Currency movements reduced new license revenue growth by 2% and total revenues by 1% and net income by 2% and earnings per share by approximately a penny, and I will focus on constant currency growth rates, unless I say otherwise. This quarter, new software license revenue was 2,300,000,000 dollars flat in constant currency, down 2% in U.
S. Dollars. Cloud revenue was 238,000,000 dollars On a GAAP basis, in constant currencies, the Americas were down 1%, APAC was up 1% and EMEA was up 1%. Software license update and product support revenues were $4,300,000,000 up 8% from last year and were nearly half of total revenue. Support attach and renewal rates continue at their usual high levels, actually at the highest levels for Q3 in the last 5 years.
Hardware system products revenue was $671,000,000 and while engineered systems again showed excellent growth, we continue to work through a product transition with the high end Spark server line. Clearly, our customers know the new products are coming out next week and have held off buying the older M. We expect that the launch next week of the new M line will help that. Total revenue for the quarter was 9,000,000,000 flat in constant currency and down 1% in U. S.
Dollars. Operating expenses were flat in constant currency, and our non GAAP operating margin expanded to a Q3 record of 47%, up from 46% last year even though we substantially increased headcount. As revenues grow and we continue to manage our business with discipline, we still believe that there remains a lot of leverage in our business model. The non GAAP tax rate for the quarter was 21% and the GAAP tax rate was 19%. Both were favorably affected in this quarter by the retroactive extension of the R and D tax credit, though we did take a $65,000,000 write down of our Venezuela cash balance as the boulevard's official rate changed.
EPS for the quarter grew 5% in U. S. Dollars to 0.65 dollars on a non GAAP basis and would have been approximately $0.01 higher but for the negative impact of currency on revenues. GAAP EPS for the quarter was $0.52 up 6% in U. S.
Dollars would have been $0.53 up 8% but for the impact of currency. Operating cash flow increased to $13,700,000,000 over the last 4 quarters, up from $13,500,000,000 last year and free cash flow grew to $13,000,000,000 over the last four quarters, both are record results for Q3. We now have nearly 33 $400,000,000 in cash and marketable securities. And as we said before, we remain committed to returning that value to our shareholders through technical innovation, acquisitions, stock repurchases, dividends and the prudent use of debt. In this quarter, we repurchased 61,500,000 shares for a total of $2,100,000,000
in the
quarter. So over the last 12 months, we have repurchased nearly 350,000,000 shares for a total value of $10,600,000,000 Now to the guidance. So for Q4, new software license and cloud subscription revenue growth is expected to range from 1% to 11% in constant currency and in reported dollars. Hardware product revenue growth is expected to range from a negative 22% to a negative 12% in constant dollars, negative $0.23 to negative $0.13 in reported dollars. As a result, total revenue growth on a GAAP and non GAAP basis is expected to range from negative 1 to positive 4 in constant dollars and U.
S. Dollars. Non GAAP EPS is expected to be somewhere between $0.85 $0.91 both U. S. Dollars and in constant dollars, up from $0.82 last year.
And GAAP EPS is expected to be somewhere between $0.72 to $0.78 in both U. S. And constant dollars. I've gone ahead and assumed a GAAP tax rate of 23% and non GAAP tax rate of 24%. Of course, it may end up being different.
With that, I'll turn it over to Mark for his comments.
Yes. Thanks, Safra. I'll just make a couple of quick comments before I turn it over to Larry. We've added over 4,000 people to the Oracle sales force in the last 18 months. We significantly expanded our customer coverage.
We've seen material growth in our pipeline, but Q3 conversion rates were below what we expected, while our actual win rate went up. Moving to Engineered Systems, our record quarter for us with more than 800 units sold in Q3. That's the best unit quarter ever. We've now sold more than 5,000 engineered systems to date. In the 1st full quarter for Exadata X3, we sold over 400 systems.
The pipe is up materially and conversion rates are up. The 1 eighth rack systems in particular sold extremely well causing the ASP to be down slightly, but these entry level systems are just beginning as we expect to grow our business with these customers over the long term. Better news, our Exadata has carried over to the other engineered systems, which were more than 800 engineered systems sold this quarter. Xlogic, Big Data Plants, the Oracle Database Plants, all 30 saw 30% sequential unit growth. We had another solid quarter in our verticals, which have grown faster than software license in all of the last four quarters.
We had great growth in cloud, CRM and HCM, WinZip, Travelocity, Walt Disney World, Kaiser Foundation, Office Depot, Match.com, Deutsche Bahn, CGI Group, Southwest Airlines, Dow Chemical, Union Bank, Renault, National Instruments and lender processing servers. It's a lot of names, took me a long time to read it, but I wanted to give you a flavor for the quality and aims and the quantity of wins we had in the quarter that's driving our annual recurring revenue up nicely. In other hardware, as Sanford mentioned, the T Series continue to be our best performing server product, but the M Series lagged. ZFS storage saw double digit growth for the quarter, which is the 7th straight quarter. We've been able to materially grow our sales force and our R and D, while overall operating expenses were essentially flat from last year, and I think that's a testimony to our expense management and discipline.
Safra mentioned software support, which grew 8% in CD renewal rates, as she mentioned, at a 5 year high for Q3, and by the way, virtually no expense growth in our software support business as we recorded those results. With that, I'll turn it over to Larry. Thank you, Mark. Next week, we'll start deliveries of our next generation of servers built using our new Spark T5 microprocessor, the world's fastest microprocessor. Next week, we'll publish 17 world record benchmarks, including a TPC benchmark showing that the SPARC T5 is the fastest processor in the world for database and the Spec J Enterprise benchmark showing the Spark T5 is the fastest processor in the world for Java Middleware.
Our new T5 servers have up to 8 processors and are more than twice as fast as the T4 systems they replace. Even more important, our new M5 server, which has up to 32 processors and runs the Oracle database over 10 times faster than the similarly priced old M9000 server it replaces. With the delivery of the M5 server next week, Oracle will have finished upgrading every server in the Spark product line dating from the time we acquired Sun. Thank you, Larry. Operator, we're now ready for the questions, please.
Thank you. We'll take our first question from John DiFucci with JPMorgan. Please go ahead.
Thank you. Mark and Safra, I'd like you to address sort of a high level question because I know I'm going to be asked this a lot tomorrow. The softness this quarter was surprisingly broad based across both software and hardware and it looks like across all regions. We appreciate your willingness to kind of look internally for the cause and answers here. But given the breadth of the relative weakness, it really begs the question whether something bigger is at work here.
I mean, how much might macro forces have come into play here or even perhaps the sales approach or strategy versus the execution of that strategy? I mean, in fairness, you're still relatively early in the sales count expansion. But at this point, are there any thoughts of perhaps looking at things a little differently? I'll take it. No.
I think we feel again, I think let's let me just go through what I think Sanford said and I'll sort of elaborate a bit on that. We feel great about both our strategy and our product line. So, point 12, we have no doubt, no question about that whatsoever. 2nd, to your point, we have increased the sales force dramatically and we feel great about our coverage. And that really shows up first in the pipeline performance that we got.
Our pipeline is up significantly. We don't give you a number because frankly, I don't want you to give me a comparison every quarter with the pipe, but it is up materially. The issue for us is simply conversion. And well, listen, you can come up and anybody can come up with all kinds of factors. There's always something going on around the world at any given time.
And for us, we feel good about our ability to execute through it. And in this case, as I said, it really was just the conversion rate against the context of a materially higher pipeline.
Yes. So on covering sort of 1 through 3 of the issues, we don't think at all it's the products, because the pipeline is fantastic and our win rates are excellent. And so we feel very, very good about that worldwide. As far as being the economy, there's no really new news on the economy. As I mentioned, it doesn't help that the sequester deadline is on the last day of our quarter.
And so that has a little bit of an impact here in North America, but not necessarily anywhere else. The economy has been as it is in Europe for a while. So there's no real new news. And then finally, on sales execution, why we think that's it is frankly because it's playing out exactly that way as deals kind of flop over right into Q4. And so especially with the newest folks, they're really geared to their annual target and they're a little less urgency about Q3.
For you who have covered Oracle for so, so long and for some of us who've been here a long time, it was very Q3 and now it's extremely Q4 around here. And that is something we're kind of used to except when there are acquisitions sometimes you don't see it as much because of the new companies that what they bring and they change the seasonality a bit. But ultimately, Q3 is very similar to Q2, and then Q4 is the big quarter. Everybody's aimed at Q4, and it really feels like that around here right now.
Okay. Okay. Thanks a lot. Thanks, John.
We'll take the next question from Brent Thill with UBS.
Thanks. A question for Larry on the hardware business. Q4 was set to be an inflection point and appears that has been pushed out. What's your sense on the turnaround? And if you could just contrast on the access side versus the other side of the hardware business maybe some more metrics of what you're seeing?
Thank you. Okay. Sure. Well, the oldest product in our product line was the M9000, the large scale M systems, which we hadn't refreshed for several years. And we saw a very, very substantial and continuous decline in that business.
It wasn't helped by people who are aware that we're going to go through a product transition in Q4. So that didn't help us in Q3. And then now we've got to go through this product transition in Q4 where we're announcing the new M5, the new T5. And we think people are might take a couple of months to evaluate these systems before they verify that our claims are correct. The T5 is more than twice as fast as the T4 it replaces, much better price performance.
And the amazingly, the M5 is more than 10 times faster than the M9000 it replaces. So, we think Q4 will be better Q4 will be better than Q3 as far as the hardware is concerned. But I think we expect the turnaround really to begin in Q1 not in Q4 because we have this large introduction of new systems. I think the other thing that Mark alluded to that was that we announced some lower end Exadata systems in our engineered space. And people have been beginning new customers are beginning with the smaller systems as opposed now that they're available as opposed to 8 rack rev and quarter racks.
And that's somewhat lowered our ASP this past Q3. I think we work our way through that over the next two quarters. And again, I think Q1, you're going to see a big turnaround and next year will be a big growth year for our entire hardware business, the SmartLine and all of the engineered business. Brent, I'd just add a couple of comments on the engineered systems line, so you have more clarity on the 8th rack. This is actually good news even though it lowers ASP because we delivered a lot more technology and a lot more performance.
And as I mentioned, our unit counts were at a record level in Q3 and we had the opportunity to upgrade those machines over the long run. So the fact that we've seen our pipeline is up, our unit levels are up. And so I think to Larry's point, this puts us in a really strong position as we get into Q1 of next year on the Engineered Systems side as well. Great. Thank you.
We'll take the next question from Phil Winslow with Credit Suisse. Please go ahead.
Hi. Thanks guys. Just have a question on the software business. I know you guys don't break out database and middleware and you have tech versus applications anymore. But wondering if you could just give us a sense of what you saw this quarter in terms of the performance between those 2 old segments and then just what you're seeing in the pipeline?
And then also just one follow-up for Larry, specifically to Oracle Fusion applications. There's been some debate out there about what your win rates are with Oracle Fusion Outs versus some competitors. And as Oracle Fusion Applications are they more modern, less modern than competitors? Just provide us an update of where we stand there, that would be great.
So basically, database and apps moved together in the quarter. So there's no special news there one way or the other. And I think the second question is for you.
It was actually over to Larry on the Fusion side. Yes. I think one of the things we've done is we've become very, very focused on not just Fusion applications, but all of our cloud applications. So we really a lot of the new headcount, a lot of the changes in organization in the field have been based on focusing on the cloud, increasing our win rate in the cloud, having specialization around HCM, having specialization around service with our right now product, specialization around sales with our Fusion sales product as we go against our secular competitors Workday and Salesforce dotcom and the others. So I think as we're in the Q3, we saw very good growth.
We saw very, very good growth in the cloud. That was not the issue. It's just that our cloud and when I talk about the cloud, I'm talking very specifically about the SaaS portion of the cloud. We're in all aspects of the cloud. We're in infrastructure, we're in platform and we're in SaaS.
So with the number we can give you a $1,000,000,000 number that's a $1,000,000,000 pure SaaS number. And that's growing very, very nicely. The problem is it's still a relatively small business with a very, very high growth rate. We are focusing on that and we're getting a very good result there against the competition. Our win rates are going up versus Q2.
The growth is excellent. But we think we deployed a lot of resource on that to get those win rates and get that focus. But the business is still relatively small compared to our overall 40,000,000,000 dollars ARPU. Got it. Thanks guys.
Next question please.
We'll go next to Heather Bellini with Goldman Sachs.
Great. Thank you. This question is for Mark. Mark, you and Zafar both highlighted sales execution as the reason for the shortfall this quarter after posting a strong 2Q. I'm just wondering if you could give us a sense of how long you think the transition looks like.
Is it 1 quarter or 2 quarters? And as a follow-up, what does the ramp look like as execution improves? Thank you.
Well, I'll just say we expect it to be within the context of Q4. So we saw many of the deals that we described are closed. So we expect it to be relatively quick. On the ramp and I think Heather what you mean is the ramp of the sales people that turn into pipeline and turn into growth. And if it's not, I'm sorry, but that's the question I'm going to answer.
Yes, yes, yes. No, that's it. Exactly.
Okay. All right. So I think it really is just about the speed of getting our conversion continuing to climb. So our pipeline is behaving. I wouldn't say linear to the hires, but in the way you would expect to.
You would expect a timeframe for a new hire to come on board, get trained, get assimilated, get engaged with their management. And I would say the pipeline is behaving roughly as you would expect relative to the ramp of those sales resources. So when you hear Safran and I talk about the pipeline, we measure it very closely and we see it there. So it's just a question of how we convert and I won't go into the role of predicting revenue several quarters other than to tell you that we have a lot more coverage and we have a pipeline that's growing substantively.
Thank you.
Next question please.
We'll go next to Kash Rangan with Merrill Lynch.
Hi. Thank you very much. Looking forward to the magic of May quarter. But as it pertains to this quarter, Mark, I'm just curious when you ended up the November quarter, could there have been a chance that we saw some business being pulled in potentially as people, customers were somewhat leery of this fiscal cliff, all bunch of extraneous concerns that might have actually caused some deals to get done a little bit earlier than expected, which obviously benefited your November quarter. I'm just curious to see if you think that could be an attribution to what happened in the February quarter.
And also just wondering if you have any thoughts on how to think about the growth rate of Engineered Systems. I think you've it as being 70%, 80%, maybe even potentially doubling. I just wanted to see how we are tracking towards that goal for this year. Thank you very much. I think the answer to your first question is, sure.
I mean, there's potential of deals going that were in Q2 was better. Some deals go to Q4. I mean, I think there's all kinds of things you get to. What we do know is we've got a lot of deals in the pipeline, and we're in good shape on those deals. And I mentioned in the context of I think the better way to look at it, Kash, is that we don't just measure the pipe.
There's 2 different ways to measure a pipe when it concludes. 1 is the conversion rate, meaning the aggregate pipe and how it converts to orders. The second way to look at it is the win rate in the context of the deals that do get decided in truckload. And our win rate went up in the context of the conversion rate going down. So it's an important thing to measure because some of it's our activity in the time the decision gets made.
In Engineered Systems, unit count was great. As you heard Larry and I both mentioned, we had an ASP decline not because of unit count, but because of the average selling price and the movement to conversions or to a 1eight rack, which actually brings the average selling price down. Unit count, I think we're roughly in line with the numbers that you described today. Next question please.
Our next question comes from Jason Maynard with Wells Fargo.
Hey, good afternoon guys. I'm going to tackle this maybe from a different angle. Can you maybe talk a little bit about what you're seeing in terms of customer adoption of Fusion? What are you seeing in terms of uptake at least within the installed base, upgrades, number of go lives? How is that trending across verticals and product lines?
And how does that bake into your equation for closure rates in the next couple of quarters and getting confidence with new customers to buy these full broad suite of apps? Thank you. I mean, it's a great question. And it's interesting that we monitor this very, very closely. In HCM alone, we have 30 customers going live in the next 6 weeks.
And that's a very, very important thing. And that's extremely important as our reference base increases. These are relatively new businesses for us. So our reference base is greatly expanded in HCM. And that's one of our main focused areas, like services, like sales.
So, we're very our win rates against Workday are going up. As Mark pointed out, we follow our secular competitors very closely. We look at every competitive deal. We measure our win rates. And those win rates against Workday are going up.
And we think we're we actually have a new and improved UI coming out for all of our cloud applications. So it's being applied. It sounded a bit. We're changing. It's a change in our middleware platform.
So it automatically that UI suddenly appears than in all of our cloud products. So we've improved the UI. So we have a lot more references coming on. The technology continues to advance. The UI is making a giant step forward.
So we are encouraged their ability to compete and win in the marketplace is getting better every month. Great. Next question please.
We'll go next to Raimo Lenschow with Barclays.
Hey, thanks for taking my question. I wanted to go look a little bit beyond the quarter. What we saw this quarter is obviously in Q3 the announcement of the acquisition of Acme Pack. To get you deeper into the telco plumbing, can you talk a little bit about your motivation and strategy for this vertical? Thanks.
Yes. I think what we have a very, very significant presence in billing systems, in provisioning systems in the telco space. And what we'd like to become is a more or one of the most strategic suppliers of telcos overall, which involves broadening our footprint of what we supply them. So you're going to see us through our own engineering, our through innovation and acquisitions, greatly broaden our footprint as our ambition is to be the primary technology provider to the telecommunications industry. So, that's an area where we've been very successful in certain parts of it.
And we think we can expand that business by again adding to the footprint. And you're going to see us adopt a similar strategy in retail and in Financial Services. Combination of innovation and acquisitions to broaden our footprint to become more and more strategic to telecommunication companies, more and more strategic to retailers, more and more strategic to banks as we can solve more of the problem. It's really I'm really glad you asked that question because when we announced the acquisition, it was during our quiet period. And most of the people that wrote about it, wrote about it as a horizontal networking acquisition and what we were doing was exactly what Larry described.
Phone companies have 2 networks or 2 sets of IT systems, those that manage the business and those that manage the network. And this was an opportunity for us to get into that network side of the business and if you will, open up an entirely new opportunity for us strategically inside the phone companies and leverage our existing go to market, our existing assets and our existing relationships. So we look at this as just a fantastic acquisition to build on our assets that exist already in CGB CGB being our communications GPU. Perfect. Thank you.
Our final question will come from Brendan Barnicle with Pacific Crest Securities.
Thanks so much. Safra, you mentioned that maintenance attach rates were at the best levels in Q3 that you've seen in 5 years. What do you think is driving that attach? And what are you seeing in terms of pricing and competition around maintenance? Thanks a lot.
Well, as a general matter, really, the only place to get the updates for your products in addition to the product support, is from Oracle. And so as a general matter, customers know that the value they're getting from the licenses that they bought often years ago is when they upgrade and when they get all the new features. And there's quite a lot of interest in making sure folks are staying current, especially as they're looking at their data centers, etcetera. And as a result, I think we've just continued to offer them fantastic value and we are the place for them to get the updates that they need.
Operator?
And ladies and gentlemen, that is all the time we have for questions. I'd like to turn the call back over to today's presenters for any additional or closing remarks.
Thank you, Elizabeth. 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