Good day, everyone. 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 for Oracle. Please go ahead.
Thank you, Robert. Good afternoon, everyone. Welcome to Oracle's second quarter fiscal year 2013 earnings conference call. A copy of the press release and financial tables, which include 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 Chief Executive Officer, Larry Ellison; President and CFO, Safra Catz; 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. We encourage you to review our most recent reports, including our 10-K 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. 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 taking questions, we'll begin with a few prepared remarks. With that, I'd like to turn the call over to Safra.
Hey, thanks, Ken. I'm going to focus on our non-GAAP results for Q2. I'll review guidance for Q3 and turn the call over to Mark and Larry for their comments. As all of you can see, we had a really excellent quarter. We exceeded the high end of our guidance for new software license and cloud software subscriptions. We were at the high end of the range for total revenue. We beat the high end of our guidance for earnings per share. During the second quarter, currency movements reduced new license revenue growth by 1%. They reduced total revenues actually by 2%, net income by 1%, and earnings per share by a penny compared to Q2 of last year. I'll focus on constant currency growth rates unless I say otherwise. Okay, now to the numbers.
New software license and cloud revenues were up 18%, including cloud revenue of $230 million for the quarter. We continue to see broad-based strength and balance with double-digit growth in all regions. The Americas were up 22%, APAC was up 13%, EMEA was up 12%. We also saw strength and balance across our software products as database, middleware, and applications all saw double-digit growth. Software license update and product support revenues were $4.3 billion, up 8% from last year, and were nearly half of total revenue. Support attach and renewal rates continue at their usual high levels. Hardware system products revenue was $734 million. Engineered systems continued to show excellent growth. For the company, total revenue for the quarter was $9.1 billion, up 5% from last year in constant currency. Operating expenses were flat with last year, non-GAAP operating income was up 10% from last year.
Our non-GAAP operating margin expanded to 47% from 45% last year. As revenues continue to grow and we 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 23.5%, better than guidance. EPS for the quarter grew 18% in US dollars to $0.64 on a non-GAAP basis. Without the negative impact of currency, our non-GAAP earnings per share would've been $0.65, up 19%. The GAAP tax rate was 21.3%. EPS for the quarter was $0.53 in US dollars and would've been $0.54, up 26%, but for the impact of currency. Operating cash flow increased to $13.5 billion over the last four quarters, up from $13.1 billion last year, free cash flow grew to $12.8 billion over the last four quarters. Both are record results for Q2.
We now have nearly $34 billion in cash and marketable securities. As we've said before, we remain committed to returning value to our shareholders through our technical innovation, acquisitions, stock repurchases, prudent use of debt at dividend. This quarter, we repurchased 96.1 million shares for a total of $3 billion in the quarter. Over the last 12 months, we've repurchased nearly 350 million shares for a total value of $10.2 billion. Earlier this month, the board declared an accelerated dividend of $0.18 per share for the second, third, and fourth quarters, which will be paid out in December. To the guidance. New software license and cloud subscription revenue growth is expected to range from 4%-14% in constant currency and 3%-13% in reported dollars.
Hardware product revenue growth is expected to range from a negative 10% to flat in constant and reported dollars.
As a result, total revenue growth on a GAAP and non-GAAP basis is expected to range from 2%-6% in constant dollars, 1%-5% in U.S. dollars. Non-GAAP EPS is expected to be somewhere between $0.64 and $0.68 in both U.S. dollars and constant dollars, up from $0.62 last year. GAAP EPS is expected to be between $0.51 and $0.55 in U.S. and constant dollars. This guidance assumes a GAAP tax rate of 24% and a non-GAAP tax rate of 24.5%. Of course, it may end up being a bit different. With that, I'll turn it over to Mark for his comments.
Thanks, Safra Catz. Just a couple quick comments before I give it to Larry. We had a great quarter in software with new licensing cloud subscriptions growth of 18% in constant currency. It was better than we expected, with double-digit growth in every region, as well as database, middleware, and apps, in particular, which grew more than 30%. In the cloud, we had key wins in both CRM and HCM, including Abercrombie & Fitch, Emirates Air, Expedia, Macy's, T. Rowe Price, United Airlines, U.S. Bancorp, Whirlpool, and Xerox. A lot of names as we continue to see strong customer acceptance. Our pipeline is growing, our sales teams are ramping, and you should plan for us to continue to invest into and to grow the cloud business. Moving to engineered systems, it was another strong Exa quarter with over 70% sequential growth in unit bookings.
We sold more than 700 engineered systems this quarter. Great Exadata wins at China Mobile, Facebook, Samsung, Time Warner Cable, and great Exalogic wins at Chevron, Vodafone, and Walmart. We had a very nice Exa win at Westpac in Australia. I mention this because they're moving off Db2 on the mainframe, along with EMC storage, to Oracle on Exadata and Exalogic at very significant savings. Exalytics had its best quarter to date as unit bookings nearly doubled sequentially. Wins at Activision, City of Chicago, Deloitte & Touche, and WellPoint. We continue to see strong growth as SPARC T-series accelerate. I mentioned last quarter it was the hottest-selling Unix box in the industry, and it grew faster than it did in the previous quarter. ZFS storage also saw double-digit growth.
We had a tremendous quarter in our verticals with growth of over 60%, with even better results in financial services, telecom, and retail. This comes after a strong Q4 and a strong Q1. We've invested headcount in our verticals, and we're seeing that show up in significant pipeline growth. Finally, our quota-carrying sales force, net of attrition, has grown more than 3,000 people over the last six quarters. For those of you who care about efficiency, and we actually do, we've been able to do this while our operating expenses were essentially flat from last year. Our people are in the market, they're growing pipeline, and you'll begin to see it in our strong organic growth this quarter. With that, I'll turn it over to Larry.
Thanks, Mark. Our $7.5 billion purchase of Sun has already proven to be the most strategic and profitable acquisition Oracle has ever made. Java, the world's most popular programming language, was a key software asset we acquired when we bought Sun. Today, our Java business is booming, growing over 34% this past quarter. Sun hardware technology has enabled us to become a leader in the highly profitable engineered systems segment of the hardware business. The rapid growth of highly differentiated products like Exadata and the SPARC T4 have consistently, quarter after quarter, improved the profitability of our overall hardware business. Selling systems loaded with Oracle intellectual property, along with de-emphasizing the selling of low-margin, undifferentiated products like commodity X86 servers and LSI disk storage systems, products that contain no Oracle intellectual property. Those two things have reshaped and downsized our hardware business while making that business much more profitable.
Now that our hardware business is making a substantial contribution to Oracle's record levels of profitability, we are just about finished with the downsizing phase and the transformation of that business. We're about to start growing our hardware business. In Q3, we'll be turning the corner, and in Q4, we expect top-line growth to go along with continually improving margins.
Thank you, Larry. Robert, we'll go to the Q&A portion of the call now.
Very good. If anyone would like to ask a question, you may do so by pressing star, followed by the number one on your telephone keypad at this time. Please make sure that your mute function is turned off to allow your signal to reach our equipment. If you have already prompted, we ask that you please press star one again at this time. We will take our first question from Adam Holt of Morgan Stanley.
Thanks very much. Congratulations on a terrific quarter. My question's about Fusion. I was hoping I could drill in a little bit to what you're seeing there. Specifically, what are you seeing from customer adoption? What modules and services are customers aggregating around? How are deal sizes tracking? What are some of the details you can give us about where you think you are in the Fusion cycle? Thank you.
Okay. Well, we're seeing rapid growth in Fusion across the board in CRM and in HCM. We're at the stage where we're winning the majority of deals and competes against Workday. Probably the outstanding, and most rapidly growing part of our Fusion suite, which you know is ERP, CRM, and HCM, the most complete suite of cloud applications available from any supplier. We're beating Workday. I'll turn it over to Mark with specific examples. We're beating them in North America, and we're almost shutting them out in Europe. It's very exciting. We also are getting good wins against Salesforce with our Fusion sales automation product. Mark?
Yeah, to Larry's comments on, let's stay on HCM. We've got the advantage in most of the international markets to be the first mover. We're in those markets before anybody. Our product is quite advanced, and our wins, to Larry's point, internationally are just tremendous. I won't go into any customer names. We've given you some in the past in Europe, but very rapid there. Right now, acquisition has been very significant. Again, remember, a lot of right now was U.S.-based. We've now been capable, or we've now taken it global. Our wins globally have been significant. Same thing in CRM with sales automation. Our product is advancing. I read you some of the wins in the quarter. It's been a rapid growth phase for us, and as I mentioned in my script, we're investing into it with more headcount.
Our headcount now is growing in every region, and we have a strong belief that more headcount with a great product like what we've got means more growth.
Of course, as you know, we have more than 100 modules of Fusion. We've got products in really most of the pillars are doing very well, and we've got customers implementing them right now.
Terrific. Thank you.
We will go next to John DiFucci of JPMorgan.
Thank you. My question's for Mark. Mark, it looks like Europe put up solid results this quarter. It was against the first relatively easy comp in a while, but nevertheless, double-digit growth doesn't really fit with what we continue to generally hear about the region. Can you talk a little bit about what happened in the region and how sustainable those kinds of results are?
I don't mean to be trite, I think the only ones around that aren't surprised about Europe is us. We started investing, frankly, into Europe, in headcount in Europe, over a year ago. It may seem counter to what most people, the conventional wisdom is, we decided to grow our headcount, as we've talked about globally. I mentioned the amount of scale we've got in headcount. We made a decision in Europe, and we hired up early. A lot of that headcount has now been in place four and five quarters, three, four, and five quarters. We've seen pipeline result as a result of that. As a result, we have gained share. Our apps growth in Europe was extremely impressive this quarter. We gained share over SAP, and you've seen it happen multiple times. We have a very strong organization in Europe.
I mentioned about the success of HCM in Europe and the quick start we've gotten over there. We have a strong group there. I'm not going to tell you that we don't see the conversion rates. We see the pressure on the conversion rates, we're in more deals than we've been before, we see us in a position now where we are gaining significant share.
Okay, great. If I might, just a quick follow-up for Safra. Question on cash flow. Second quarter is seasonally a low cash flow quarter, the results this quarter were less than we had modeled. If you could just comment on that.
You have to look back actually at both Q4 and Q1. We had really excellent cash flows as the result of collections were very high. In fact, they were significantly higher than earnings. While we collected a lot, this quarter is just a little bit lower. In addition, we had, gee, $400-plus million in tax payments, which impacts it. That's really all there is.
Okay, great. That's actually the delta between the $400 million delta between what we were looking for and what you did. Thanks very much.
Sure.
Next question, please. We will go next to Kash Rangan of Merrill Lynch.
Hi, thank you very much. Happy holidays to the Oracle executive team. Mark, you made some comments regarding the sequential unit growth rate in Exadata, 70% sequential growth, and a few other things that were discussed. Does this mean that you're tracking well towards the 100% goal that you outlined earlier for Engineered Systems and also the $1 billion-dollar run rate, or any puts and takes there? I guess one question for you, Safra, the fiscal plus, any comments there with respect to customer behavior as we go into February quarter? That's it for me. Thank you.
Well, thanks, Kash. Happy holidays to you, too. I would tell you from an aspirational perspective, we're changing nothing. Our objective is to double the Engineered Systems business. In various quarters, we may be above that or slightly below it, but generally speaking, that's the trajectory we're on, and you're going to see us keep pushing on that. With that, I'll turn it over to Safra.
Well, as you can see in our numbers, folks wanted to spend their budgets, continue to want to spend their budgets. We are having an absolutely wonderful December so far. With what's going on in Washington, I don't know who would be necessarily influencing today, but I can tell you our customers have been spending money with us, even here in December.
That's good to hear, Safra. Hope the debate continues in Washington, we actively sell software. Thanks again. Bye.
Bye, Kash.
We will go next. Next question from Jason Maynard of Wells Fargo.
Hey, guys. Good afternoon and congratulations. I had a question about sales performance and productivity. There obviously were a lot of questions the last quarter or so about changes to the sales force and sales headcount ramping, and now for two quarters in a row, new software licenses done probably better than most on the street have expected. I'm curious, Mark, just to get your characterization in terms of productivity ramping for those net new hires, and how are you feeling about the back half of the year and delivering, if you will, as you get into, obviously, your bigger Q4. Thank you.
Without making too many forward-looking statements, we're talking about Q2 and Q3 forecast. In general, I think, Jason, we feel great. We're a very attractive company in terms of attracting talent. The first question is, do I think the people we're hiring are great people? We think we're getting the best people in the industry, point one. Point two, we think we're very capable and doing a good job assimilating those people. As you know, to your productivity ramp, that's a big deal, how we train them, how we prepare them, how we get them oriented, in terms of getting them ready to sell and to beat competition. As we talked before, we've lined up our sales force. We line them up against our secular competitors. We specialize them. We train them to be experts in their products. As you know, that takes time.
We generally plan on a 12-month ramp time for salespeople to come in and frankly, not to be very productive. If they are productive, frankly, that's gravy for us. We've seen ramps at, I would say, the speeds we expected or faster. As a result, in some regions, I mentioned one in Europe, I would say we have some other regions in the country that actually moved a little bit faster in hiring, and you see those show up in the pipelines, and you see it in the results that we're showing. We feel great about the talent we're attracting. We feel great about the assimilation process, and I've got news for you, Jason. We're actually still hiring.
We plan to hire more because as we specialize the sales force, it actually creates a need for us to have more people. We're hiring in our verticals, we're hiring in cloud, we're hiring in every single region. Again, I'll put out this call. Those of you that have talented people that are looking for a great company to join, please send us their resume because we're looking for great folks.
Yeah, we're also hiring in BI. I'll give you a whole list.
It's true. Listen, just to give you Larry mentions BI. We've gone in some regions where we've more than doubled our headcount. By the way, to be clear, that's in the cost structure we just gave you. We've done some work to get some other things a little bit more efficient as we've done it, but we've really ramped up. In our view, this is how you grow. When you have great products, you get great people out there representing the products in the industry.
Well, let me just say that I think Mark and his team in the field have done an extraordinary job of ramping the sales force without increasing sales expense. We've dramatically improved the tooth to tail ratio of our field sales organization, and that is, we've added salespeople and sales consultants, while downsizing some of the groups whose job was to help. We specialized our sales force, increased the size of our sales force, added sales consultants, added salespeople, and kept expenses pretty close to flat. We have a lot more firepower right now in terms of our distribution organization, and we're going to keep doing that for at least the next 18 months. Again, we're going to do it very conservatively. We're going to add the capacity without adding the expense.
All right, great. Thank you very much. I appreciate it.
Good. We will go next to Heather Bellini of Goldman Sachs.
Great. Thank you very much. I'm just wondering, Mark, given all the enhancements you made with the release of Fusion, can you share with us the type of attach rates you're seeing of the add-ons that are not included in the maintenance payments people are making? Secondly, I guess given the success you're seeing in the cloud subscription revenue line, how should we think about this in terms of the software license update growth rate going forward, if at all, in terms of the impact it could have? Thank you.
Okay. First, a lot of questions there, Heather. I think first, in terms of module attach, these are very early days, right? Module attach, in our view, is a long-term strategy. The fact that we would sell recruiting in HCM and then sell succession planning, maybe that even leads to core HR. Our attach rate, we look at it over a number of years. For example, in the quarter, we had some very significant logos, I read only a few of them, where we closed a module. Frankly, as soon as we close a module, we have a proposal for another one, another one, et cetera. It's a core part of our strategy in terms of attach, and I say that in terms of attach of module to module.
Your question about subscription rate, I think your point was, I think you were trying to tell me how should you think about the growth of it. Frankly, there's a couple of different dynamics to it, I'm going to let Safra decide how we're going to talk to you about that, because it's a combination of new annual recurring revenue.
Right
that we measure very closely.
Then we measure renewal rates very closely. They're frankly two separate metrics, then there's a third metric, which is the expansion of an existing customer. You've got both, I've got the customer, I'm going to expand them. That's one opportunity. The second, I'm just going to renew the customer I've got, then third, a net new logo. The combination of those three create annual revenue. That's how I'd say we think about it.
Okay. Heather, I think what you're trying to get to is whether our software update number is going to slow down as people maybe convert from on-premise to cloud. I think at this point where we are is that you actually have to understand the scale of these things. As a general matter, folks who are already on-premise will buy some SaaS modules as add-ons. To the extent that they are converting from one to the other, the first thing is, as a general matter, we always get more money, first. Secondly, I want to just remind you that our support number, the thing we call software license and updates and product support, is $4.2 billion. In fact, after the point number, the $260 million.
Right
That's actually bigger than our SaaS number. Let's say it's just not going to have a material impact. Our renewal rates remain extremely high, it took us 30 years to get to $4.2 billion. As customers convert, theoretically, it might not grow as quickly, but at this point, we've got a long way to go. I would stay extremely bullish on our high renewal rates and expect that number to grow, and our SaaS number grow simultaneously at much higher percentages because it's a smaller base.
Thank you.
Next question, please.
We will take our next question from Brendan Barnicle of Pacific Crest Securities.
Thanks so much. Safra, from your comments, it sounded like you guys are seeing a year-end budget flush, which is pretty encouraging. Were you noticing any changes in pricing or the pricing environment?
No, things are going very, very well, obviously. Things are going well. Folks want to close deals. Folks want to close deals in November. They want to continue to close deals now in December. It's good. So far, so good. No negative impact on pricing. Pricing remains very good for us all around. Remember, we have the deepest, broadest product line in the industry. Really, no one has everything we have. As a result, customers, when they come and buy from us, they often buy many things, and as a result, I think they're happy with their pricing, and we're happy with their purchases.
Next question, please.
We will take our next question from Mark Murphy of Piper Jaffray.
Yes, thank you very much. From what you've described, it sounds like the database business is performing well, and that there's really been no letup there. The 12c product cycle is coming here soon, and we've heard it described as a very big leap forward. I'm just wondering, how should we think about the impact of 12c, of that product cycle, in terms of what it means both for the industry and also for your database revenue growth?
I think the big component of 12c is the fact that it's the first database really designed for the cloud. In other words, we've moved the multi-tenancy feature out of the application and down into the database layer, which gives people much better capability, much better security. We think a lot of companies like salesforce.com or NetSuite, who are our customers, will want to take advantage of Oracle 12c. It'll make their businesses much more efficient. It'll make their customers much more secure and much more reliable. They'll get better performance and so on. We think it will greatly enhance our own cloud offering. We think it's very attractive to our customers who are putting in their own private clouds. Our enterprise customers are installing private clouds rather than doing more traditional database implementations in their data centers.
The key component or the key feature of Oracle 12c is the fact that it moves multi-tenancy down into the database layer. We think it will help our cloud business. It'll help all of the cloud companies that depend on the Oracle database, it'll be very attractive to our enterprise customers. I think it will drive growth. It will drive growth of the Oracle database for the next several years.
I wouldn't model anything short-term into it because as you know, our customers who are paying for license updates and product support are entitled to the product as part of that. Over time, they upgrade to it over multiple years. Because of the additional features, we do think that it makes us even more competitive, and we actually expect to continue to gain market share as we have for the past 20 years.
Just on the quarter, too, on the database business, we had good, solid growth in every region.
Yeah.
We did it across not just the core database, but also our options. We've had a release of Enterprise Manager
That's had quite a positive impact too. We've had solid growth in Enterprise Manager. When you look across every region and you look across each of the three core elements of our database business, we had strong growth in the quarter.
Thank you very much.
We will take our final question today from Brad Reback of Stifel Nicolaus.
Great. Thanks a lot. Mark, you mentioned during the prepared remarks that verticals were up about 60% year-over-year. Could you give us some color around that? Is that a function of just the increased coverage, product set, taking market share? Thanks.
Yes. Listen, we've put a lot of effort into our verticals. We're a strong believer as a team in this strategy, that when we actually solve a customer's problem, their business problem, those are discussions we're having at the CEO level. The implication it has strategically for us as well as the customer is huge. Not only do we get the opportunity to get that growth in the vertical business that you're describing, but the pull it has across our entire product line is material. I think in addition, we've invested a lot of R&D. We've made some acquisitions. We feel great about our position in communications, our position in retail. Our performance in retail has been outstanding, just outstanding. The implications had across our entire product line has been profound in terms of just the growth that it's driven.
We've made big investments in financial services, big investments, not just in product, but also in scaling out our sales force. Those three are very big industries in terms of just the total spent. Financial services is probably the biggest, when you take manufacturing about from being sort of segmented into multiple industries. Those three have been very big for us. We've made investments in utilities, which we saw growth in utilities again in the quarter. We've seen growth in healthcare, in the quarter as well. I would say overall, just to finish it, we've invested in growth. Our pipelines are up, and not only we feel good about the quarter, we're optimistic about the verticals as we go forward as well.
Thanks.
That does conclude today's question and answer session. I'll now turn the call back to Ken Bond for closing remarks.
Thank you, operator. 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, and we look forward to speaking with you. Thank you for joining us today. With that, we'll close the call, operator.
Thank you. This does conclude today's conference call. Once again, we would like to thank everyone for your participation, and have a wonderful day.