Welcome to Oracle's Third Quarter 2021 Earnings Conference Call. Now I'd like to turn the call over to Ken Bond, Senior Vice President.
Thank you, Erica. Good afternoon, everyone, and welcome to Oracle's 3rd quarter Fiscal Year 2021 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. Additionally, a list of customers mentioned on this customer conference call as well as many others which have purchased Oracle Cloud Services or went live on Oracle Cloud recently will be also available from the Investor Relations website. On the call today are Chairman and Chief Technology Officer, Larry Ellison and CEO, Safra Katz.
As a reminder, today's discussion will include forward looking statements, including predictions, expectations, estimates or other information that might be considered forward looking. Forward looking statements are subject to risks and uncertainties that may cause actual results to differ materially from statements being 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 Ken 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 Company. And finally, we are not obligating ourselves to revise our results or these forward looking statements in light of new information or future events.
We'll begin with a few prepared remarks, and Then I'll turn the call over to Safra. Safra?
Thanks, Ken, and good afternoon, everyone. We are again reporting earnings 10 days after the end of the fiscal quarter, faster than any other company in the S and P 500. Fusion Cloud ERP enables us to understand our business performance sooner and with greater insight, We had a great quarter and executed well against our growth plan. Revenue was in line with our USD guidance, while EPS beat the midpoint of guidance by $0.05 Our total cloud services and license support revenue For the quarter, it was $7,300,000,000 up 5% in U. S.
Dollars, 2% in constant currency, driven by Fusion, autonomous database and our Gen 2 OCI cloud. Recurring revenue as a percentage of total revenue Now represents 72% of total company revenue, and we anticipate this trend to continue as cloud services Growe. Applications subscription revenues were $3,000,000,000 up 5% in U. S. Dollars, 3% in constant currency.
Our strategic back office cloud applications now have annualized revenue NetSuite ERP up 22% and Fusion HCM up 21%. Infrastructure subscription revenues were $4,300,000,000 up 4% in U. S. Dollars, up 2% Including OCI consumption revenue, which was up 123%, autonomous database was up Database subscription revenues, including database support and database cloud services We're up 6% in U. S.
Dollars and up 3% in constant currency. License revenues were $1,300,000,000 up 4% in U. S. Dollars and unchanged up 3% in U. S.
Dollars, up slightly in constant currency. Operating expenses were down this quarter Q3 operating margin was 47% in USD, up 300 basis points 20% in U. S. Dollars, up 16% in constant currency. GAAP EPS In the quarter, the GAAP income statement was impacted by a one time net tax benefit of approximately of $2,300,000,000 related to the transfer of certain assets between subsidiaries.
To facilitate comparison Operating cash flow over the last four quarters was 14,700,000,000 with capital expenditures of $1,900,000,000 and free cash flow in excess Ken. Up 23% and free cash flow was $3,300,000,000 up 26% from last year. We now have nearly $36,000,000,000 in cash and marketable securities. The short term deferred revenue balance The remaining performance obligation or RPO balance is 35,300,000,000 up 2% in constant currency versus last year. Approximately 61% is expected to be recognized as revenue over the next 12 months, through technical innovation, strategic acquisitions, stock repurchases, prudent use of debt and a dividend.
And this quarter, we repurchased more than 64,000,000 shares for a total of 4,000,000,000 In addition, the Board of Directors increased the quarterly dividend 33% from $0.24 to $0.32 per share. The Board of Directors also authorized an additional 20,000,000,000 for the repurchase of Oracle shares. As I mentioned last quarter, We experienced capacity constraints for OCI Cloud Services as customer workloads expanded dramatically. In addition, we continue to land many new customers, including ISVs, Kim. Q4, both OpEx and CapEx to prepare for this increase in cloud consumption and associated revenue Ken.
As such, we are going to target a 49% operating margin for Q4. This will enable us to continue to deliver double digit earnings growth once again in FY 'twenty two for the 5th year in a row. Now to the guidance. Again, My guidance today is on a non GAAP basis and assumes current exchange rates remain the same as they are now, Which is a 4% positive effect on total revenue and $0.07 positive effect on EPS of $0.08 to EPS due to rounding, but it's $0.07 However, actual currency impact Could be different, so here it goes. Total revenues are expected to grow from 5% to 7% in U.
S. Dollars and are expected to grow 1% to 3% in constant currency. Cloud service and license support As a result of the increased investment in the quarter, non GAAP EPS in USD is expected to grow 7% and be between $1.28 $1.32 in USD. Non GAAP EPS However, one time tax events could cause actual tax rates for any given quarter to vary, But I expect that in the normalizing for these one time tax events, our tax rate will average around 19% or so. And with that, I'll turn it over to Larry for his comments.
Thank you, Safra. 3 months ago, Bob Evans posted an article on the Cloud Wars website in which he quotes SAP CFO, Luka Muchic making the following statement at an Investors Conference and I quote, I have checked and we have not lost a single ERP customer to Oracle. Unquote. In other words, after personally checking, SAP's Chief Financial Officer could not find a single example Of an SAP ERP customer moving to Oracle Fusion ERP, not one. Perhaps he should have checked a little bit more carefully.
In Q3 alone, we signed contracts totaling 100 of 1,000,000 of dollars to migrate several very large SAP ERP customers to Oracle Fusion ERP. But this was not just a recent Q3 event. This has been going on for a couple of years. I'm now going to go and present a list of over 100 companies and government agencies That have already moved from SAP ERP to Fusion ERP or are currently in the process of doing so. I've divided the list of SAP customers who are moving to Oracle Fusion ERP into 2 distinct groups.
I want to be very precise here. The first group is moving their entire company to the Fusion ERP suite, including core financials, that's Oracle wall to wall. The second group has started deploying Fusion ERP applications, but has not yet put in the entire Okay. So let me go to start the list. TPS Company, an industrial manufacturer of railcars in North America, replaced out all of the SAP ERP with Oracle Fusion, management supply chain, HCM, everything with the Fusion Cloud, complete replacement of SAP ERP to Fusion ERP.
G4S Plc, a security services firm and that's the world's largest security company by revenue, Complete replacement of SAP R3 with Oracle ERP and Oracle HCM. First Solar, North America is the only remaining maker of solar panels in the United States, replaced SAP's S4HANA, Ariba, Concur, 3rd party apps, all of SAP ERP with Oracle Fusion ERP, Oracle Fusion EPM, Oracle Fusion HCM and Supply Chain Management. Transit Wireless, a North American Telco Completely replaced out SAP R3 with Oracle Fusion ERP and Oracle Fusion HCM. West Sussex County Council, Complete SAP replacement with Oracle ERP, Oracle HCM and Oracle EPM. ERP, you know, HCM, EPM is Oracle Enterprise Performance Management, complete walls of Oracle, Westchester County Council, no more SAP.
A concrete company in Mexico completely replaced SAP with Oracle ERP and supply chain. Niagara Bottling, a North American beverage manufacturer, private label bottled water, replaced SAP with Oracle ERP, supply chain, transportation management, etcetera. New Zealand and inland revenue, complete SAP Ken. University of the Andes in Latin America, the number one university in Columbia, Complete replacement of SAP for 10 years, replaced it with Oracle, ERP, HCM, EPM, supply chain, sales, everything. Bip and Drive, a travel and transportation company in EMEA, electronics whole payment provider for the roadways in Spain.
Again replaced was offered a free S4HANA upgrade instead chose Oracle FusionCloud, GE Grid Software, an industrial manufacturer, software for utilities and power transmissions, Complete SAP replacement with Oracle ERP Fusion Cloud. Poston, Let's see, the 2nd largest mail carrier in Germany. SAP complete replacement of RP replaced them with Oracle Ken. Birmingham City Council, complete SAP replacement using Oracle ERP, Oracle HCM. They're the biggest City Council in the UK.
Metro Pacific Tollways Corporation, a toll road developer in Asia, SAP replacement got rid of SAP and replaced it with Oracle ERP and Oracle EPM. Africa World Airways Replaced SAP with Oracle ERP, EPM, HCM, sales, service and marketing. The Telco, that's the Bahrain Telephone Company. They have been running The European Logistics and Applied Engineering Group, actually, they don't want their name specifically mentioned. They're the largest private company in Belgium and they completely replaced SAP R3 And they thought the cost of moving to S4HANA in the cloud was much too high and they instead went with Oracle Fusion ERP.
Tycal Logistica, a logistics company in Latin America FedEx had SAP ERP in some places and Oracle ERP in some places. They've replaced out all of the they're in the process of replacing out all of the SAP ERP and standardizing on Oracle Fusion, ERP and Supply Chain Management. Grupo Bimbo had SAP in some divisions and Oracle in other divisions. They're replacing out all of the SAP and standardizing Ken. On Oracle Fusion ERP and Supply Chain Management, Western Digital, complete replacement.
They had SAP, Western Digital had SAP at Sandisk, they had SAP at HGSP, replaced all of that out and have standardized an Oracle Fusion in the cloud Fusion ERP in the Cloud. VP World, they had SAP S4HANA, SAP HRR III, they eliminated all of that. By the way, they're an EMEA Marine Terminal Operator, they're located in EMEA, they're global. They replaced out all of their SAP and standardized an Oracle Fusion ERP in the cloud. Kohu.
They're a semiconductor test and handling equipment company in North America. They had a combination of Oracle ERP and SAP ERP, Replaced out all of the SAP ERP and are standardized on Oracle. This one's interesting. They don't want their name mentioned. Ken.
They're a huge European North American and European manufacturer of ATMs And they've replaced out all of SAP in the German subsidiary, well, actually throughout the world. And they standardized on Fusion, ERP, SDM and HCM. And they've added Oracle Performance Management Fusion Performance Management. Let's see. Another company whose name doesn't want to be mentioned, let's see, they're a Hi Tec manufacturer in North America.
They replaced out SAP R3, ERP, HCM and standardized an Oracle Fusion Oracle Fusion in the cloud. Albelli Group, they are a manufacturer of photo products In the UK, they're replacing SAP with, guess what, Fusion ERP. Console Energy, Utilities company in Pittsburgh replaced out SAP with Oracle Fusion in the cloud. Enbridge. Enbridge is oil and gas multinational based in Calgary, Canada, replaced out They're in LAD, they're an energy transmission system, the largest in Brazil with All across Brazil replaced SAP with Fusion ERP.
Good storage in Latin America, the self storage company in Brazil again Got rid of SAP put infusion ERP. FreeFlow Global, they are a media entertainment, Latin America's largest media entertainment company And that complete SAP replacement, they're a manufacturing pharmaceutical company in North America. They've moved away from SAP standardizing on Fusion in the cloud. Coriant, a healthcare company In EMEA, long term care nursing homes, 300,000 senior citizens across Western Europe replaced SAP with Oracle Fusion. NatWest Group includes NatWest, ABN AMRO, Royal Bank Scotland Ulster Bank and more.
They had a combination of Oracle ERP and SAP ERP. They're replacing out all of the SAP ERP and standardizing on Oracle Fusion in the cloud. Windtree, Wintry is a telecommunications company, the largest mobile operator in Italy. Again, completely replacing out SAP with Oracle Fusion, ERP, SEM and EPM. Okay.
Now I'm going to go on to the second And these are companies that have started putting in Oracle Fusion modules, But have yet they have not replaced core financials as yet. So they're buying our supply chain, they're buying our procurement, They're buying our transportation management, they're buying our global trade management, but they have not yet bought Oracle Financials. So I want to be very specific, So they are buying lots and lots of fusion products. GN Airlines, Apollo Tire, Achema, an adhesive solutions company in the UK, ARHU's Commune, They're a municipality in Central Denmark. Caesars Enterprise Services, give you an idea, they bought Procurement and Supply Chain, big hospitality company obviously in North America.
Sephate Danaher, Product Lifecycle Management. They're a healthcare company. Department of Education and Training In Australia, the DOS procurement, DHL was an SAP replacement in some So some countries are still running SAP, But the new implementations that are going in are in other countries, not in Germany as yet, and other countries FEMSA bought replaced all of SAP and some of their subsidiaries Ken and bought supply chain warehouse management, supply chain planning, ERP again and in some and some subsidiaries all of ERP including accounting procurement All of that. Fujitsu Services, a manufacturer in Japan, again, The parent is running SAP Financials, but sells it all over the world are moving to Oracle Fusion ERP. Keurig Doctor.
Ken. Again, that bought supply chain, Guardian bought All of financial services company in North America bought all of ERK. Honda bought supply bought still runs SAP Financials. Doug just recently bought Fusion Supply Chain, Fusion Transportation Management And it's moving from on premise to the cloud. In the tech, North American company, again, Jackson Life, Lakshmi Cement, I'm not going to read these faster now.
Juniper Networks, Lloyds Bank, Move Incorporated, Munich Re, the largest food company in the world, I just bought Oracle Performance Management, News America Marketing, Olam International, PG and E, Port St. Olathe, Republic Services, SAC Wireless and Nokia Company, Samsonite, Puma, Santander Bank, Steve, Thermo TruDor's okay, I'm going to stop right there I'll take up all of the time and you won't be able to ask separate questions. Okay. I don't want to do that. Okay.
All right. So again, the list is actually longer than the 100 plus companies. I did read over 100 companies, as I'm sure you painfully are aware of. This is actually longer than the 100 companies I've just read. Some of our most important wins The process of migrating from SAP ERP to Fusion ERP prefer not to be publicly named on this call for Obvious reasons, they don't want yes, even though they are often a reference for us, private reference where people are considering the same move, They don't want to be on their name on this call because they want to maintain the best possible relations with SAP Ken.
Even though they are in the process of transitioning away from SAP. All right. So I'd like to make one last point and then turn it back over to Safra. Specifically try to answer one key question. How come so many customers are moving from SAP ERP to Fusion ERP?
This has never happened before, a major migration between ERP vendors. Well, if you want to know the answer, Read the Gartner report comparing Oracle ERP to SAP ERP. Please don't take my word for it. Read the report. It's very short and it's to the point.
Gartner ranks And so Gartner ranks Oracle Fusion ERP far in front of all the other cloud ERP systems. Well, what's surprising is SAP isn't number 2. SAP isn't number 3. SAP isn't listed among the leaders. SAP is listed among the laggards.
Gartner, if you read the text, Gartner points out and I quote, SAP's own reference customers I'm going to read that again. SAP's own reference customers scored SAP in the lower half of Cloud ERP Vendors, SAP, The once dominant on premise ERP market leader is currently not competitive in the cloud ERP market. How could that have happened? Because SAP never rewrote their ERP system for the cloud. It's that same 30 year old code.
Thank you, Larry. Erica, if you could please pull the audience for questions.
Our first question comes from Michael Turits with KeyBanc Capital.
Great. Larry, thanks for all the color on ERP. I'd like to switch over to database. You've made meaningful improvements in both cloud of customer and OCI 2, which are both 1 of the 2 are required for ADB. So are those improvements enough that we're now starting to see the upgrades to ADB?
And are you able to monetize those upgrades To the point where we'll start to see database growth acceleration.
The answer is, I think there's No question, you're going to see a lot of database growth a lot of database acceleration starting next year, We're
a quarter away from,
but we'll be fine in Q4. Again, Autonomous Database is growing pretty rapidly. But We expect it really to explode next year and I really do mean very, very rapid growth next year. I'm not Really ready to disclose our plans as to why I think it's going to suddenly spike that, but We expect very, very rapid database growth next year.
Thanks, Larry.
Our next question comes from Mark Murphy with JPMorgan.
Yes. Thank you, Larry. This SAP replacement wave It feels like kind of a historic moment because that kind of activity, it's usually so rare and these logos are pretty large
But sometimes we're in the middle of an 18 month implementation and the customer doesn't want to mention. If I could mention them all, It would be it's front page news. I mean, it's a very big deal. Yes, I agree with you. It's an historic event.
It is I think a long time ago, I said there are 2 technologies that will drive Oracle's future. 1 is Autonomous Database and the other is ERP. We are again, reading the Gartner report, we are so dominant. Our product is so much better than anyone else's product in about. We expect to get a significant number, more than half of SAP's customers will get, Plus keeping our own, plus getting a lot of it from the smaller companies like Inpork and Lawson.
So Larry, the ones that we see which aren't too shabby, you mentioned DHL and Honda and Lloyds Bank. Is that a precursor to moving to Oracle core financials eventually? And I'm just wondering which of Oracle's strengths is really catalyzing that wave of replacements?
Okay. So there are 2 lists. The first half of the list that I read and there are about equal sized lists where people that are already moved from SAP Financials to Oracle Financials. The second list were people that had partially moved to Oracle, but still were running SAP Financials in some places. In In other words, we don't consider it a complete win until we replace out.
If we just sell procurement and supply chain Ken and Manufacturing and things like that, but they still run SAP Financials. We don't consider that a complete win. That's what we call our surround strategy. Once you start using our cloud products and compare that with SAP's on premise products, We think the vast majority of these companies that have started the journey will finish the journey and they'll want financials in the cloud Just like they have supply chain in the cloud and procurement in the cloud. So yes, we expect company we've already seen companies migrate off the second list.
They buy procurement, they buy supply chain and they say, okay, I like that. Now I'm going to buy financials. So yes, we expect all of those Excuse me, the vast majority of those customers to eventually standardize on Fusion Cloud ERP for everything. Thank you.
Our next question is from Mark Moerdler with Sanford Bernstein.
Thank you. Thank you very much for taking my question. Appreciate the additional color That Saffray you gave on the call. I'd like to turn to OCI Gen 2. We've been hearing about Ken.
To what extent has OCI security technology helped you in business with these companies? And is consumer Internet a big driver for OCI Gen 2? Also to
be clear, this is not
about TikTok, it's about all the other consumer Internet company opportunities. Thank you.
Yes. Well, I think there are 2 things that are interesting about OCI. 1, on the security front, one is We believe security should be always be turned on. In other words, there is no light switch, security on, security off. We have these things called max security zones in OCI where you cannot turn security off.
Max security is always turned on. It's a safe place to go inside of OCI. No one has anything like this, where security is always turned on. You cannot turn it off. You cannot open up a link, a network link that puts Your infrastructure and your data in jeopardy, that's one thing.
So security is always on. The second thing is autonomy is very interesting Because the Oracle Autonomous Database by the way, Oracle Autonomous Database is not the only autonomous product we have. We have autonomous Linux that is the Foundation of OCI, the foundation operating system inside of the OCI network. Oracle Autonomous Linux, Oracle Autonomous Database Has no human labor associated with it. Okay, so everybody says, well, that's a huge cost savings.
It is, but that's not the most important benefit. The most important benefit, if there's no human labor, there's no human error. If there's no human labor, there's no human mischief. There's no opportunity for an insider to corrupt the system. There's no opportunity for a user We do a better job of securing your data than any other cloud vendor.
We've seen that be the decisive feature in winning a lot of these deals with ISVs and end user customers. Appreciate. Thank you for the additional color.
Our next question comes from Phil Winslow with Wells Bargo.
Hi, thanks for taking my question. Congrats on a strong quarter. I just wanted to focus in on the license line that it was up 4% as Reported to be a flat constant currency off of what was actually the toughest comp for this fiscal year. I wonder if you could provide some context on sort of what is driving that, Particularly sort of relative to the strength that you're also seeing in the cloud side. Is this Oracle database?
Is this the add ons to the Oracle database? Any sort of more color there and then also in particular sort of in conjunction with the cloud, that'd be great.
Fair. Let me take that. So the Oracle database remains very strong. And what's good about the Oracle database is you can also bring your own license to the cloud. So it's both on premise and in the cloud can be used there and it remains very, very strong.
The installed base of the Oracle database continues to grow. And That is, of course, our central piece. Now in addition, Java on premise Invest in Java and Trust Java for their own applications. And in addition, our vertical applications, some of our Industry applications still require on premise license for the customers use. We also have cloud services in many of these verticals, but especially in telecommunications as many of the communications companies move to 5 gs.
We are a very central part of their transition to 5 gs doing incredibly well. Java doing very, very well and our vertical applications. And then pretty much everything
Our final question comes from Brad Zelnick with Credit Suisse.
Great. Thank you so much for taking the question and congrats as well on a great quarter. Larry, it's so great to hear every single one of those SAP wins, Especially since investors think of SAP's customer relationships as being so deep. So clearly, by displacing them in so many accounts, It speaks volumes to the quality of your product and trust that these companies place with Oracle. So my question is this, why now and why from Product perspective, you mentioned Gartner's take, but since Oracle has always competed on having better product, what have you been doing
So, well, we started 10 years ago to build Fusion Financials for the cloud to rewrite all We have people saw up ERP, JD Edwards ERP and of course Oracle E Business Suite. We had these 3 separate on premise ERP systems because and we decided a decade ago to rewrite all of that for the cloud. And SAP unbelievably, they just I mean and by the way, and we did a very good job. We started a decade ago And we did I think a very good job redoing a big job to say the least, redoing our ERP products for the cloud. That said, SAP chose not to rewrite Their ERP products, instead they made a bunch of acquisitions.
They bought Concur, they bought Ariba, they bought SuccessFactors, but they never And we made some acquisitions also by the way, Buck Taleo and other right now and other things. But we rewrote everything for the cloud. SAP instead re invented their own database called HANA and focused on This new database and never really rewrote their ERP code for the cloud. I mean, it's just an unbelievable error. They Worked on a new database and the thing we're competing with at so called S4HANA in the cloud is what SAP calls it, It's not a cloud product at all.
It is the 35 year old ABAP, this is written in a programming language called ABAP. Oracle Fusion is written entirely in Java, and it's been entirely rewritten Ken. Over the last decade, SAP stuff is literally 30 years old. It's the same stuff that they've always had that they now will host for you. So I would say we did a confident job rewriting for the cloud.
SAP just entirely missed the boat. So SAP really is more responsible for our leadership position than we are. Again, they never rewrote their application for the cloud. It's unbelievable And their customers are noticing. We offer a new release of our ERP system Every 90 days, we offer new features and functions.
That's how the cloud works. You're on the cloud, you get new features and functions, you're on this 90 day cadence. We give you more features and more capabilities every 90 days. SAP has nothing like that. It's not a cloud system.
It simply is okay. You can get the old you can get the SAP S4HANA and you can get it hosted by somebody, but they don't even have a cloud. They never built the cloud. That's what happened. Thank you, Larry.
It's amazing.
Thank you, Larry. A telephonic replay of this conference call will be available for the next 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.
And with that, I'll turn the call back to Erica for closing.
Thank you for joining today's Oracle's 3rd quarter 2021 Earnings Conference Call. We appreciate your participation. You may now disconnect.