Good day, everyone, and welcome to today's Oracle Corporation Quarterly 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, operator. Good afternoon, everyone, and welcome to Oracle's Q3 fiscal year 2011 earnings conference call. On the call today are President, Safra Katz President, Mark Hurd and Chief Financial Officer, Jeff Epstein. As a reminder, a reminder, today's discussion will include forward looking statements, including predictions, expectations, estimates or other information that might be considered forward looking. While these forward looking statements represent our current judgment on what the future holds, these statements are also subject to the risks and uncertainties that may cause actual results to differ materially from statements being made today.
Throughout today's discussion, we will attempt to present some important factors relating to our business, which may potentially affect these forward looking statements. We encourage you to review our most recent reports on Forms 10 ks and 10 Q and any applicable amendments for a complete discussion of these factors and other risks that may our future results or the market price of our stock. As a result, we caution you against placing undue reliance on these forward looking statements, which reflect our opinion only as of today. And as a reminder, we are not obligating ourselves to revise or publicly release any revision to these forward looking statements in light of new information or future events. 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.
Before taking questions from the audience, we'll begin with a few prepared remarks. And with that, I'd like to turn the call to Jeff Epstein.
Thank you, Ken. Good afternoon, everyone, and thank you for joining us. I will review our non GAAP financial results focusing on U. S. Dollar growth rates unless otherwise stated.
This quarter, foreign exchange rates resulted in a positive 2% currency effect to both new license revenue and total revenue. In short, Q3 was another excellent quarter for Oracle. In the Q3, new software license revenues were 2,200,000,000 dollars up 29 percent, well above our guidance range of 10% to 20% growth. The Americas grew 35 percent in U. S.
Dollars, EMEA was up 19% and Asia was up 32 underscore the strength and diversity of our business. And the quarter was not dependent on any unusually large deals. Technology new license revenues were 1.6 $1,000,000,000 up 27 percent as the Americas grew 40%, EMEA was up 11% and Asia was up 28%. Applications new license revenues were $639,000,000 up 34% from last year. The Americas grew 26%, EMEA was up 47% and Asia was up 45%.
Our software license updates and product support revenues were 3 point 8 hardware system products were $1,000,000,000 while revenues from hardware system support were $656,000,000 Our services revenues were $1,100,000,000 up 23% as we continue to manage this business to profitable margins. Our total revenues were $8,800,000,000 up 36% from last year. Our non GAAP operating income was $3,900,000,000 up 35 percent for the quarter. Our non GAAP tax rate for the 3rd quarter was 25.4%, which was below our guidance due primarily to the extension and catch up of United States research and development tax credits. Our Q3 non GAAP earnings per share were $0.54 above our EPS guidance range of $0.48 to $0.50 Earnings per share were up 40% from last year.
In Q3, we repurchased 7,900,000 shares at an average price of $31.54 per share for a total of $250,000,000 As we have previously the rate of our stock buyback will fluctuate each quarter, taking into account alternative uses for our cash and our stock price. Turning to the balance sheet, we have $24,300,000,000 in cash and investments. Our days sales outstanding improved again to 46 days compared to 47 days last year and is a testament to the quality of our receivables, the quality of our customers and the effectiveness of our collection efforts. Finally, we generated a record $9,500,000,000 in free cash flow and a record $9,900,000,000 in operating cash flow
results for Q3. I'll then review guidance for Q4 and turn the call over to Mark. As you can see, we had yet another excellent quarter. We just continue to execute extremely well. We easily exceeded the high point of our new license guidance.
We beat the high end of our total revenue guidance and we beat the high end of our EPS guidance by 0 point 04 38% earnings per share growth in Q1, 33% earnings per share growth in Q2 and now 40% earnings per share growth in Q3. And we've got Q4 still to come. So the real highlight of the quarter, of course, is our 29% growth in software license growth, which was strong in both technology applications and strong in every region of the world. You can really see our momentum in our apps business as we continue to take share from SAP. Applications grew 34% this quarter, period.
In addition to our strong top line performance overall, we also delivered very strong operating margins. Our operating margin for the quarter was 44%, just about the same as it was last year, except this year includes a full quarter with hardware business. This quarter we delivered 55% gross margins on our hardware business. This is a result of the fact that really under the covers of the hardware number, the sun products are growing and the non sun products that are resold that we resell are shrinking dramatically. In addition, we're selling a lot more of the Exadata, Exalogic line.
And remember that these systems are sold at good margins and also pull a lot of software with them like RAS, partitioning and storage management. Now as I told you a couple of quarters ago, we are really no longer able to identify the exact contribution Sun has made to our operating profit this year. But based on our results, we fully expect to exceed our goal of $1,500,000,000 in operating profit in the first full Sun based on the HP 3PAR multiple, it would have cost us nearly $140,000,000,000 Don't worry, we wouldn't do that. Now finally, let me mention on a more somber note, our sympathies for the ongoing plight of the people of Japan. We have, of course, instituted our dollar for charitable match.
And fortunately, all of our Japanese employees are safe and our building in Tokyo is essentially un damaged. And frankly, though it's too early to be definitive, we do not expect material impact in our Q4. As we have always said, we are committed to returning value to our shareholders through technical innovation, strategic acquisitions, stock repurchases and prudent use of debt and a dividend. So as you've heard, we did announce today a 20% increase to our quarterly dividend or $0.06 per share. And this would be the 3rd consecutive fiscal year over year increase in our dividend.
Now to the guidance. As you remember, we had a spectacular Q4 last year with new license of 15% in constant dollars and non GAAP EPS up 30% and GAAP EPS up 24%. So assuming exchange rates remain at current levels, which right now is a positive 5 point, so 5 percent currency effect on license growth and on total revenue growth, our guidance for Q4 is as follows. New software license revenue growth is expected to range from 9% to 19% at current exchange rates or 4% to 14% in constant currency. Hardware product revenue growth is expected to range from 6% to 12% at current exchange rates and 2% to 8% in constant currency.
Now that doesn't include the hardware to 13% at current exchange rates and 4% to 8% in constant currency. On a GAAP basis, we expect total revenue from 10% to 14% at current exchange rates and 5% to 9% in constant currency. Non GAAP EPS is expected to be $0.69 to 0 point 7 $0.60 last year and $0.65 to $0.69 in constant currency. GAAP EPS for the 4th quarter is expected to be 0 point current exchange rates up from $0.46 last year and $0.53 to $0.57 in constant currency. Now this guidance assumes a GAAP tax rate of 28.5% and a non GAAP tax rate of 28%.
Of course, it may end up being different. And in our documents, the lower rate we had this past quarter was the result of another number of things, but mostly the catch up from the R and D tax credit. There won't be any catch up in Q4. Now with that, I would usually turn this call over to Larry for his comments. However, he is sitting on a jury today on a trial that started 2 days ago.
So with that, I will turn it over to Mark for his comments.
Thanks, Sarah. I won't comment on the jury activity. And I also apologize for my voice. It's just the weather a bit out here. And listen, I've been doing this a long time.
Q3 was just a great quarter. Revenue earnings growth both up over 35%. Customers are energized by our product direction and frankly, we're just simply executing on all fronts. Our software business continues to grow faster than the market significantly. We saw strength across all regions, industries and product segments.
Engineered systems have fundamentally changed the game. The systems actually changed the entire value proposition of both hardware and software, which is why all our competitors are scrambling to react. Now in terms of what pays the bills around here, our top line 29% new software license growth stands out. That software number is broad based. Each constant dollar growth of 20% or higher.
If you look at our apps numbers, 34% growth off of 21% last year stands out. Going forward, Fusion, we're going to be the only applications vendor with a modern set of applications built on modern infrastructure. Last quarter, I talked about our industry focused business units, and I want to do it again. Telecom, retail, banking, insurance, energy all had great quarters. We are the only vendor with industry solutions across a wide range of industries.
For our customers, these applications are even more important than ERP and they position Oracle more strategically with customers. And of course, Exadata continues to sell itself. The price performance ratio Exadata is just off the charts. When you consider the performance increases obtainable with little unit and revenue growth of over 50% in Exadata and Exologic. As we head into Q4, we expect to see even higher growth.
The pipeline for Exologic is building very rapidly as well with customers building out their private clouds with both Exologic and Exadata. And yes, we're in the cloud, whether it's collaborating with Amazon so the customers can launch an entire Oracle software stack on EC2 or whether it's working directly with a very large federal law agency to build out a private cloud gain a 10x performance increase as they improve their mission and better protect the United States. Public or private, we're in the cloud. With Exelogic, we have the most high performance of other cloud offerings, XLogic is already shipping and requires no so called cloud services to get up and running. And we've added over 1500 sales resources in the last year.
With the strength of our product portfolio, we see opportunities out there and we think we can get them by hiring more sales resources. Again, let me close by saying our performance was broad based with solid organic growth, strength across all regions, industries and product segments, which together drew a spectacular quarter for Oracle. With that, I'll turn it back to Ken.
Thanks, Mark. Operator, we'll now prepare for the Q and A portion of the call, please.
Thank you very much. And we'll take our first question from Adam Holt from Morgan Stanley.
Terrific. Thank you and great quarter. I wanted to ask about the application business in particular. It looked like it inflected up in the quarter. And I wanted to understand, are you seeing update on Fusion if you could.
Thank you.
I'll start and then Safran can fill in. Listen, I think it was a strong quarter across the board, Adam. Europe apps was up a little less 50%, 47%, I think was the number, so simply huge. And I think when you compare that with competition, particularly knowing we're going against tough comps. So the position we gained was significant.
Now I don't want
to stick with Europe.
I mean, it was broad based across. We had strong growth in Asia, good solid growth in the Americas. And again, we got help from our industries as well. Our growth in the industry business units was again roughly in line with that Oracle. Fusion is coming online.
Fusion is coming online. Again, as we talked before, this is not a rip and replace. It's a today. So we're pretty excited about our position.
Yes. I mean, in answering your question, I'd say yes, and I think yes, which is it's all of the above, whether it's existing customers buying additional products that they hadn't bought from us before, let's say, they use the Business Suite, they buy Devansher, they buy 1 of the other product lines. So there's that. There's customers upgrading. Additional modules in preparation.
And it's folks getting set up to put themselves in a position to take fusion when they're ready. So it really is new projects and it's adding to existing projects. We did see turn up sometime last year and it continues. It's really the same dynamic we had for a while, which is customers just buying more and additional modules and etcetera.
Thank you very much.
And we'll go next to Brent Thill with UBS.
Thanks. Good afternoon. Safran, you mentioned Japan is showing no impact right now. I guess, one of the questions is just around the supply chain impact for the hardware business. If you could just comment on the hardware business itself?
And Mark, if you could also just give us a quick update on Exadata adoption trends in terms of what you're seeing quarter rack, half rack, full rack from your perspective?
Okay. Well, we've been working with our suppliers, our sub suppliers, etcetera. We've got so far, it's all fine, frankly, and good news in general. And we've got A, both supplies, inventories, etcetera. And we don't actually expect there to be a supply chain issue at all for us out of Japan.
On Exadata, best my voice will hold out here. First broad based, good number of quarter recs in the quarter, which we look at as very positive in terms of seeding the future. We did see some adoption of -8s in the quarter too, which was again very encouraging. We saw repeat buying, which was again very positive for us. We're now in over 80 countries with Exadata.
So we had a good broad new customer adoption, upgrade cycle, seeding of quarter racks. And again, as I think we've been very clear, the pipeline is up as
well. Thanks.
We'll go next to Phil Winslow with Credit Suisse.
Hi, guys. Great quarter as usual. Just wanted to dig in a little bit more on XState and Xologic. In the press release and the call you mentioned that they grew 50% quarter to quarter, which is pretty phenomenal, but now you're expecting an acceleration from that in fiscal Q4. What exactly is driving that?
Is this an increasing amount of competitive displacements? And then also, Mark, when you compare the initial ramp here of Exelogic to Exelogic data, what are you guys seeing and maybe what have you learned comparing the 2? Thanks.
On Exalogical, take that first ramp probably as encouraging as Exadata would be the way I would describe it. I think we probably learned a bit in terms of training and some things to get us started a little quicker. But that said, I think you're seeing the same kind of interest, excitement and adoption that you saw around Exadata. On Exadata, listen, I don't know how else to say this to you. It's just good stuff.
There's just no secret here. This stuff works. And when you show up to a customer, Phil, and say, listen, I got a big opportunity for you. You can consolidate lots of infrastructure, whether that's servers, whether that's storage, you can bring it together, you can a material change in performance. Again, I'm not talking about 10% better performance, 20%, I'm talking better than 2x.
I gave you an example of a law enforcement agency talking about 10x. I just want to say more, 10x. When you show up and tell somebody, I can do something with 10x better performance. And I can do it with our stack of capabilities. I've given you single accountability for service and support.
I can save you money while you do it. It's just an extremely powerful value proposition. So when you're going into customers that have long and you know our history with customers. We have customers that have long experience with Oracle. They know the quality of support that they get from Oracle.
And then you show up with this kind of value proposition, it makes for a pretty good meaning.
Great, guys. Thanks.
Thank you.
We'll take our next question from Kash Rangan with Merrill Lynch.
Hi. Thank you very much. I've got a bad throat too. I'll join you Mark there. One for Safra.
Safra, margins look pretty good, actually very good. They're almost to the point where you were for a peak in February quarter without hardware. So how much higher can margins go? And I guess as a part of that, how much leverage is there left in the hardware business that can drive the margins higher? And I have a follow-up for Marm.
Thanks.
Well, I think it's becoming clear that we're going to be able to ultimately bring the margins very close, if not even more than they ever were when we were just a software business. So we still think there's actually quite a bit of room to be honest with you. We're not quite at scale yet. We do still resell some third party hardware. And so we actually think there's it's going to continue to go up.
It will obviously be higher than last year's Q4. And ultimately, we don't actually see it topping out yet or even close. So I think we've got a few more quite a few more points to go. And we have a very clear line of sight how to get there. So things are going to continue to improve.
And I think they've already improved past where people thought they'd ever be. But I think we're going to get there and we're going to pass even that.
That's great. And Mark for you, the also the competition saying that in the era of big data relational databases are also the competition saying that in the era of big data relational databases are overkill. I just want you to respond to that set the record straight. And how does Oracle how is Oracle positioned in the era of big data? What are your opportunities, puts and takes broadly speaking?
Thanks. That's me.
Thanks, Jason. I mean, listen, our stuff works. So and it's out there today. And I think it's easy to make claims. I think it's easy to do all that kind of, but in the end, we're talking about some customers' most important things that they do, important things that they do, access to information and it's serious stuff and you show up with stuff that works, stuff that's available, stuff that can be accessible 24x7.
And that's the key to what we do. We don't have to show up with a federated set of companies to we have one stop shopping on our vertical integration. It is our stuff. It is tested. It is engineered together.
It shows up and performs and it gets supported. And I can tell you, while it may sound simple the way I described it, when you show up at a customer with that type of value proposition, it is differentiated, highly so. And that's what carries the day.
We'll take our next question from Jason Maynard with Wells Fargo.
Hi, guys. I got one for Mark and then a follow-up for Safra. First, Mark, you're 1 year into the Sun deal. So I'm curious, how's the honeymoon going, if you will? And what are you hearing from customers so far after a 12 months under Oracle?
Well, I'll tell you based on my time so far, I think clearly one thing and I mean this is no shot at Sun in the rearview mirror. But with Oracle, you've certainly taken one issue that did concern SUN customers, which was the viability of the entity. Was the company sustainable? Was the company going to be in a position? Because as you know, many of these customers make commitments and they look to be on this platform for years.
And so when they make those decisions, they want to know that the company is going to be there and be behind it. So point 1 is sustainability, I think very positive. 2nd, I think as Larry has been very clear, there's more investment going into the technology. There's more investment into Solaris. There's more investment into Spark.
And so from that perspective, the investment, I think, is extremely positive. 3rd, you get the leverage and the opportunity to now get optimized software with the hardware. You can see some technology at the base of Exadata, the base of Exalogic. And even as we try to do work with our M Series, you can see more opportunity. So, you combine that with the support capabilities of Oracle, I think what you hear from customers is much more confidence in the overall value proposition.
So I'd say positive. Listen, I don't want to make it sound like we don't have work to do. This is a company that had been through several years of turmoil. But when you net it together, I think the overall view is very positive, Jason.
Great. And for Saffir, first, thanks for not paying 3 par multiple for your acquisitions. We appreciate that.
You're welcome.
But you are kind of spoiling us a little bit here on the margin side and the hardware margins are continuing to move up. So I'm just curious what are the kind of the puts and takes within the hardware business that you're seeing? And what have you learned now that you've had that piece under your control in terms of how you go to market and what you focus on selling and getting rid of the 3rd party products. So what's the color there in that line?
Well, there really are a lot of moving parts. I mean, the first thing we needed to address was our supply chain, frankly, and getting it under control, which it really optimizing the size that we are and not being very broadly and widely distributed all over. So part of it is the cost, just the cost of the supply chain itself. Secondly, it's also what we sell. And it's very important.
The mix of business is important. I mean, it's always frankly, it's very easy to sell a couple of 100,000,000 more revenue in a quarter and decide not to make any money doing it. It's very easy. People will absolutely buy from you things that you are offering too cheaply. We're not in that business.
We really are in the value business. We're the business of selling things that are valuable to customers. And for them, they have to they really understand finally, just making sure that the way we go to market, we really are focusing on what customers care about and what's important to them and not a lot of kind of extraneous activities that though we spend a lot of money doing are not necessarily really meeting the needs of customers. So we continue to invest in the things customers care about, which frankly is R and D, support and high quality and some of the importance to our customers and that's really what we spend money on. And I think now actually in Q4, you'll finally start to see you'll a real growth pattern here for the business because though we still have some third party hardware that we are reselling, it's a much smaller percentage than it used to be.
And as that continues, as now we start to actually really grow the Sun intellectual property hardware platform, where margins will continue to improve.
All right. Thanks a lot. Great job.
Thank you.
And we have time for one more question. We'll take our last question from John DiFucci with JPMorgan.
Thank you. Actually, I just have two quick ones. The first one is really specific to Oracle. Software license has been better than expectations for the last several quarters. But this quarter, you put up software license that's much better than what seasonal trends have been.
And I'm talking seasonal trends if you back out foreign exchange and you back out acquisition effects.
And as you know, as Mark mentioned, software license is really the core
And from my calculations, you typically do when you back out foreign exchange and acquisitions, you do sort of flattish license revenue from 2nd to 3rd quarter. And this quarter was up close to 10%. I'm just wondering what do you owe that to? What's happening? What was different this quarter?
Is something happening in the environment? Or is it something is it more Oracle specific?
I would say from and Mark, please comment. We definitely have company specific momentum. The Oracle customer visit center is constantly packed. Customers are very interested in our new offerings. Customers are in a position to make investments and they're making them with us.
There's no question that we are becoming more important, more popular with our customers. I think we've really consistently delivered on our promises and they're buying more, whether they're buying software to go with Exadata or they're buying applications or they're buying they're making standardization decisions in the middle area. We're just seeing more and more repeat buying, increased buying. And I can't comment on the economy. We never do.
But we definitely have at least customer specific momentum really on all fronts, as Mark said, in what he spoke.
I have a hard time adding to that. I think, one, I would be very careful not to take any abstraction to the macro economy based on what we're doing. I think we have now a broader portfolio. And when you have customers who are generally happy and when you go in and then we have customers who believe in our technology and when you can show up with incremental opportunities for the customer to add to that portfolio, that's where that growth comes from. And we have the opportunity now to cross sell many things to the same customer.
And when you do that and you have a relationship with the customer and you deliver for the customer, you get more that, going back to get the best place to get the second order is the place you got the first. And I think that's what you see in Oracle today, an opportunity for us in many accounts and we saw it again in Q3. Customers that we saw in Q2 showed up again in Q3 with opportunities for us to do different things than we did in Q2. And to Zafra's point, we now show up with capabilities like Exadata, Exalogic, we can help a customer build out a private cloud, we can help a customer with their analytics solutions, their OLTP solutions, can help them with their vertically specific solutions in their industry, plus their software and application infrastructure. It gives us and when you add the hardware mix to it, we just have a lot of opportunities to cross sell.
Now I will say on the side of it, because of the portfolio, we are looking to add to our sales force. We are looking to add reps. And if you know a very any of
comment
on the to comment on the economy, but you do have a unique perspective given the mass and the success of Oracle. We continue to wonder about the macro backdrop in Europe. And macro backdrop against what looks to be the toughest comp so far this year. So can you comment on what you expect to see in this region going forward and how that affects very good
for us as a company. And at least, we very good for us as a company. And at least what we have people appear to want to buy. So, so far so good. We're optimistic.
We're always very conservative. We don't lose our head. But things have been going very, very well. Q4 is we had a fantastic Q4 last year. So we have a tough compare, but we remain extremely optimistic.
Okay. Thank you. Nice job. Thank you.
And this concludes the question and answer session. At this time, I would like to turn the conference back to Ken Bond for any additional or closing remarks.
Thank you, Anne. A telephonic replay of this call will be available for 24 hours. The replay number is 888-203-1112
or 719-457-0820
and the
pass 687. Please call the Investor Relations department with any follow-up questions from this call and we look forward to speaking with you. Thank you all for joining us today. And with that, I'll turn the call back to the operator for closing.
And this does conclude today's conference. We thank you for your participation.