Welcome to Oracle's Second Quarter 2021 Earnings Conference Call. Now I'd like to turn today's call over to Ken Bohn, Senior Vice President.
Thank you, Erica, and good afternoon, everyone, and welcome to Oracle's Q2 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 conference call as well as many others which have purchased Oracle Cloud Services or went live on Oracle Cloud recently will also be 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.
Throughout today's discussion, we will present some important factors relating to our business, which may potentially affect those forward looking statements. 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,
As a result, we caution you against placing undue reliance on these forward looking statements
and we encourage you to review our most recent reports, including our 10 Q and 10 ks and any applicable amendments for a complete discussion of these factors and other risks that may affect our future results or the market price of stock. 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 we'll take your questions. However, I want to remind everybody, we will not be making any comments regarding TikTok. And with that, I'll turn the call over to Safra.
Hello, I can't hear anything.
Saffron, are you on mute?
Yes, I'm here. Sorry. Okay. Thanks, Ken, and good afternoon, everyone. As you can see, we had another excellent quarter.
As usual, I'll review our non GAAP results using constant dollar growth rates unless I say otherwise. I first want to highlight that since our own migration to Fusion ERP, we've continued to close our books faster and faster. This quarter, we are reporting our results for our entire global operations 10 days after the end of the fiscal quarter. In fact, using Fusion ERP, we submit our 10 ks and 10 Q filings faster than any other company in the S and P 500, in fact, 21 days faster than the average. Understanding our business performance sooner is an advantage that we enjoy by using Fusion ERP, and it's one our Fusion customers are rapidly beginning to appreciate.
On to the quarter. So this quarter, revenue was $40,000,000 above the midpoint of guidance and EPS beat the high end of guidance by $0.04 The impact of currency movement was in line with guidance, meaning that our outperformance reflects both continuing execution on the sales side and disciplined management of our operations. Operating income grew 12%, our best result in 8 years. Our total cloud services and license support revenues for the quarter were $7,100,000,000 up 4% from last year. Over the last 4 years, we have doubled the percentage of revenue that is being derived from our cloud That is what's driving our recurring revenue as a percentage of total revenue higher and higher, now reaching 73% of total company revenue.
We anticipate this trend to continue as cloud services continue to grow. GAAP application subscription revenues were $2,900,000,000 up 5%, with strategic back office applications up 26%, including Fusion ERP, which was up 33%, NetSuite ERP up 20% and Fusion HCM up 24%. Also, retention rates for strategic back office cloud applications, which are already high, continue to go even higher. GAAP infrastructure subscription revenues were $4,200,000,000 up 3%, with database subscription revenue up 5%. Consumption revenue was up 64% for Autonomous Database and up 139 percent for OCI, our cloud Gen 2.
License revenues were 1,100,000,000 dollars down 5%. So all in, total revenues for the quarter were $9,800,000,000 up 2% in USD, up 1% in constant currency. As usual, we've continued to be disciplined in our spending with operating expenses down 7% this quarter. Non GAAP operating income was $4,600,000,000 up 12 percent from last year. Obviously, we're delighted with this result as we're continuing to see operating income become a bigger part of our EPS growth.
I continue to have a very high level of confidence that our revenue growth will accelerate as our cloud business continues to become a much bigger portion of total revenue. The operating margin percentage was 47%, up more than 4.50 basis points from 42% last year, and as I said, our best results since 2012. The non GAAP tax rate for the quarter was 18.7%, slightly below our base tax rate of 20% as a result of some discrete items. EPS was $1.06 up 19% and up 17% in constant currency, despite interest income being $120,000,000 lower than last year and interest expense being $135,000,000 and GA and GAAP EPS was $0.80 in U. S.
Dollars, up 16% and up 13% in constant currency. Operating cash flow over the last 4 quarters was $14,000,000,000 with capital expenditures of $1,800,000,000 and free cash flow in excess of $12,100,000,000 over the same period. Q2 operating flow was $1,400,000,000 compared to $500,000,000 last year with collections especially strong this quarter from a bigger book of business and to a lesser extent delayed payments received from customers affected by the pandemic. We now have nearly $39,000,000,000 in cash and marketable securities. The short term deferred revenue balance is unchanged at $8,100,000,000 However, the short term gross deferred revenue grew 6% in U.
S. Dollars. The difference between the two growth rates is due entirely to timing differences in customer payments. As we've said before, we're committed to returning value to our shareholders through technical innovation, strategic acquisitions, stock repurchases, prudent use of debt and a dividend. This quarter, we repurchased more than 68,000,000 shares for a total of $4,000,000,000 Over the last 12 months, we have repurchased 3 38,000,000 shares for a total of $18,200,000,000 Over the last 10 years, we have reduced the shares outstanding by nearly 42%.
In addition, we've paid out dividends of nearly $3,000,000,000 over the last 12 months and the Board of Directors again declared a quarterly dividend of $0.24 Now to the guidance. Again, my guidance today is on a non GAAP basis and in constant currency. Percent positive impact on total revenue, maybe even a little bit more like 1.5 ish and potentially a $0.03 positive effect on EPS for Q3. Total revenues are expected to grow from 1% to 3% in constant currency and are expected to grow between 2% to 4% in USD. Non GAAP EPS in constant currency is expected to grow 10% to 14% and be between $1.06 $1.10 in constant currency.
And non GAAP EPS in USD is expected to grow between 13% 17% and be between 1.09 dollars and $1.13 in USD. My EPS guidance for Q3 assumes our base tax rate of 20%. But however, as you can see, one time tax events could cause actual rates for any given quarter to vary. But I expect that in normalizing for these one time tax events, our tax rate will average this year at 20% or so. And with that, I'll turn it over to Larry for his comments.
Thank you, Safra. We just completed a great quarter, but the quarter would have been even better if we would have had more and we would have had more revenue growth if we had not been capacity constrained in OCI during Q2. There was more demand than we had supply. To remedy this capacity shortfall, we are adding OCI capacity and building new OCI data centers as fast as we can. We are now up to 29 regional data centers around the world more than AWS.
OCI added customers and grew revenue at a rate well in excess of 100% year over year in Q2. The Oracle Autonomous Database was up over 60%. We also introduced several new OCI managed services during the quarter. The most interesting of these new OCI managed services is for the the accelerator called the HeatWave. MySQL plus HeatWave processes queries 100 of times faster seriously, 100 of times faster than the current version of MySQL by itself and other MySQL compatible databases such as Amazon's Aurora.
MySQL plus HeatWave is so much faster, so much easier to use and less expensive than Postgres, Redshift, Snowflake or any other database available on Amazon AWS. The amazing thing about HeatWave is that you don't have to move your data out of MySQL and build a separate data warehouse to get the huge performance gains. You simply take any existing MySQL or Aurora database, run that exact same database on the new MySQL version that includes HeatWave and immediately your queries run hundreds of times faster. You don't have to change a single line of code. It can't get any easier to use than that.
Now I'd like to change subjects and talk about our multi $1,000,000,000 application businesses in the cloud. Fusion EPS Fusion ERP grew 33% in Q2 to over 7,500 customers. Next week grew 21% to over 24,000 customers. Have the top rated ERP products on both Gartner and IDC. There is no large scale enterprise application business in the cloud that's growing as fast as we are.
In the coming months, our cloud ERP market leadership will become even more obvious when we announce that several major large scale SAP ERP customers are leaving SAP and moving to our Fusion ERP cloud. Oracle is the clear market leader in cloud ERP. Finally, I'd like to talk about our all new cloud based National Electronic Health Record System and Health Management Application Suite that Oracle built in response to the COVID-nineteen pandemic. This system has already been used to register more than half a 1000000 people for clinical trials run-in the United States for COVID-nineteen vaccines and therapeutics such as monoclonal antibodies. Last month in partnership with the Tony Blair Institute, we used this same exact national electronic health record system to manage the distribution of yellow fever vaccine in Africa.
70,000 people in Ghana were vaccinated during the 1st week of the program. We're very proud of that. We are currently in discussions with dozens of countries around the world to adopt Oracle's new National Electronic Health Record System, to modernize their national public health infrastructure, thus enabling efficient COVID-nineteen vaccine management, therapeutic monitoring and diagnostic testing. Normally at this point, I begin to read a list of notable new customers that we acquired during the quarter. But our new more efficient practice will be to provide you with a list of those customers attached to our detailed financial quarterly numbers.
Submercifully, you will be able to read the list for yourself and no longer will you have to endure me reading it to you. So with that, I'll turn it back over to Ken.
Thank you, Larry. Eric, if we could queue up or start up the Q and A. And just a reminder, no questions on TikTok. Thank you.
Our first question comes from Heather Bellini with Goldman
Sachs. Safra, I wanted to go back to your comments from June. On your Q4 call, when you talked about what was going on under the hood of your constant currency revenue growth. And you mentioned that the growing businesses were growing at a 30% CAGR, the declining businesses at about a double digit decline and the stable ones were up 1% to 2%. I'm just wondering, taking a look today
and kind of
how you're thinking about the future, how is the pandemic changing these growth rates, if at all, especially as OCI and things like CloudCustomer become even bigger areas of focus for customers?
So the pandemic affects us in some ways negatively, in some ways positively, simply because of our size and the breadth of our customer base, it affects them differently. And so obviously, our hospitality customers have had a very difficult time of it in the main. Some of our retail customers have done horribly, some have done very, very well. What has become very clear to our customers is that those that are digitally forward and that can work also under with a lot of automation using digital tools, using our technology, using the cloud, they are faring far, far better. And as a result, we see change occurring and you can see it in our ERP SaaS numbers, in our HCM numbers, NetSuite numbers.
You can just see that those numbers continue to do very, very well. And then of course, our Gen 2 cloud, whether it's compute, where many of our customers are using way more than they expected to. And as Larry said, just blowing out our internal forecast such that we will need a few more weeks to really catch up with our demand, while we're also expanding globally simultaneously. So we actually believe that this is remains very consistent. Obviously, there was uncertainty before because of the pandemic.
At this point, I think it's very clear that our business is accelerating. Our stable businesses remain stable. And our shrinking businesses, whether it's non strategic hardware or other things, those continue to get smaller. But generally, the overall revenue number will be showing acceleration even in this pandemic. And I almost feel badly saying, maybe it helped ultimately because many of our customers have realized the importance of using technology to deal with their customers, their employees, their suppliers.
Our next question comes from Brad Zelnick with Credit
Suisse.
Larry, I've got maybe a bigger question bigger picture question for you. I know you appreciate there are generational aspects to IT. We're most often the winner in the last generation isn't the winner in the next. But under your leadership and vision and Safra's operational discipline, Oracle has been an industry leader for over 4 decades by thinking strategically about the future. And today, we hear amazing feedback on Oracle's latest innovations, the actual underlying technology like OCI and Autonomous.
And by that alone, it would seem the future is bright for Oracle, but we've also seen in the past where the best technology doesn't always win. What gives you confidence that Oracle can remain successful and appeal to a younger generation, many who think cloud first and want to move really, really fast?
All right. Well, let me start in 2 areas. I've always said there are 2 key aspects of Oracle's future. 1 is the autonomous database, which is a cloud only product. It works with cloud and cloud at customer.
So it is certainly cloud first. It is the only database that really does both transaction processing and query processing. So query processing, we're much faster than Snowflake, the market's darling. And in transaction processing, we're much faster than anybody. So we have a single unified database that is fully autonomous.
It never goes down. It matches itself. Nobody else is making claims anything like that. So we have a vast leadership in plus we have by far the largest installed base. And our database business continues to grow.
Some of our other businesses, our middleware businesses have declined, but our database business continues to grow throughout the move to the cloud. So we're very confident we're going to hold on to our database franchise. We're convinced that I mean, they really don't have any strong competition. And you can see there's not a lot of strong competition from Amazon because what's going on with Snowflake, if you're curious what's happening with Snowflake, Snowflake is a decent product, it's a good product, I think and it's just killing Redshift over at Amazon. So it's doing extremely well.
But it doesn't remotely compare to Oracle Autonomous Database. It doesn't do transactions at all. And in fact, inquiry processing is not even close to assessed as the Oracle database. So we're but it's much better than what Amazon has. And when it's competing inside of AWS, it does very well.
It will kill Redshift. Redshift is not very good. So we think we have a huge lead in database. And but no one's trying to do what we're doing. I mean, none of this stuff patches itself.
None of this stuff never goes down. That's true of the okay, that's holding on to our database franchise. The next thing is ERP. SAP forgot to move their ERP system to the cloud. They just built they decided instead to go compete with Oracle with HANA.
They don't have a cloud product. We have if you look at Gartner and SAP, SAP asked to be moved off the Gartner list because SAP was in the lower left hand corner. They're not even considered a cloud system by Gartner SAP for ERP. So we are we have dominant we have over 30,000 customers in the cloud running our cloud ERP systems. Who's 2nd, Workday with a few 100?
I mean, it's not close. And that's the largest applications business. That's the largest application business on premise and it will be the largest applications business in the cloud. And we're the overwhelming technology and market leader. So I think those 2 linchpins, the Autonomous Database and the Oracle ERP in the cloud secure our future.
Now add to that OCI, which is new for us, we've never been a platform company. Linux is a platform in the old on premise days, Linux was platform. Windows was the most famous platform. There was HP UX and IBM had its own operating system. There were a lot of platforms.
We were never in that business. We were portable and ran on lots of different platforms. Now we have our own platform for the first time. And our platform is competing very well against AWS and Microsoft. And we think we have way better technology on our platform than the other guys.
And we're winning lots and lots of customers to our platform. That's an all new initiative for us to go into the platform business. So again, we were moving from number 2 to number 1 in cloud applications. Again, we have the fastest growing cloud large scale cloud applications business on the planet. Who has a multibillion dollar cloud business that's growing at 33%.
I mean, maybe there's somebody I don't know who it is. Who has anything like autonomous database technology? And who has a cloud platform that's being picked by some of the most sophisticated technology companies on earth over AWS and Microsoft. So I guess those are the 3 pieces, OCI, Autonomous Database and Fusion ERP in the cloud that gives me confidence that we're going to get our fair share of the new generation of cloud applications and infrastructure. Excellent.
Thank you
so much. No, thank you, Larry.
Our next question comes from Mark Modler with Bernstein Research.
Thank you very much and congrats on the quarter. Larry, following up on the last questions, if you don't mind. Given that the world is going to start to vaccinate and we would expect that IT focus could be more on premise in the cloud than work from home. I'd like to get a better understanding of what you're seeing and what you're expecting for autonomous database running in the cloud and cloud at customer. When do you think we see that big inflection we've been hoping for that that could drive revenue acceleration?
Yes. So again, the interesting thing about cloud to customer, I'll tell you the change in our business model. So you've got to remember, when we sign a huge cloud to customer deal and we deliver a bunch of Exadata to a customer, we recognized, let's see how much revenue, nothing versus selling a bunch of Exadata. So what's happened, Ian, remember we're going from selling Exadata machines to delivering them for free and then charging if you will rental or usage on the machines as we go from selling hardware to selling Exadata cloud to customer. So our accounting model, you say, well, wow, Oracle's revenue is flat.
Well, flat maybe not so bad. Actually, it's growing somewhat. But keep in mind, where we used to get paid for exited machines right away, we now deliver them to clouded customer and we have to wait to get those monthly revenues over a 4 year period. So what you're seeing is this change in model and cloud to customer is already doing pretty well. It's just there's a huge lag.
There's hysteresis from the time you there's a lag from the time we start selling a bunch of these things until all the revenue starts coming in. So that's what's going on right now where it's already a very successful product. We're selling a lot of them. Our sales are accelerating, but there's this time lag between sales and the revenue very different than selling a database license or selling an Exadata machine. As we move to the new model, it's a more profitable model long term, but it doesn't have the instantaneous impact.
So there's this timeline. And that's what you're saying. You.
Our next question is from Michael Turits with KeyBanc.
Hey, guys. Good evening and congrats on the quarter. Larry, you talked a lot about ERP and that's been a lot of where the messaging has been around Fusion apps. But this has been a really strong year even during COVID around front office. Can you talk a little bit about your CX business and whether or not you could see acceleration there and particularly how some of your AI capabilities are playing into that if they are?
Yes. Well, they are actually because we're making actually I've been directly involved with a major push in CX and we've come out with several new CX products. One of which is our product and references system, where we have a product references database that we sell and we have an AI engine that sits on top of it. And what it does, it tells it interfaces to our sales automation system. And it tells customers or it tells salespeople what product they should be selling this particular customer next.
It's got a recommendations engine. And it will tell and it will also tell the salesperson what are the best references. What are the best references when you're selling customer A Fusion ERP? And then it will actually go out and find those references and prepare a micro a website, a micro site for that prospect to go to. So we are enhancing our sales automation, which heretofore sales automation really has not been about automating sales.
Sales automation, which was pioneered by salesforce.com, sales automation is all about opportunity management and forecasting. Our new sales automation is all about giving sales people tools, enabling them to sell more. It automatically generates proposals. It automatically generates reference lists. It automatically generates It automatically generates reference lists.
It automatically generates micro sites. It automatically generates recommendations of what the salesperson should be selling to this customer next, what module. So these are the kind of products, what we call automated lead generation and qualification built into the sale the selling system, the product and then references system. We also have another new product that's coming out in CX, which we think is very important, which is the ability to launch an advertising campaign from a computer console without going through ad agencies. The Discenter mediates the ad business so that you can again target let's say we're selling fusion ERP to an oil company, a large oil company and we want to advertise to people in that oil company, the decision makers, the CEO, the CFO, people in accounting, all of that.
We can then launch an ad campaign targeting those people and with references for Fusion ERP. So rather than when they log on to look at Google News, rather than them seeing ads for Nike shoes where they were recently browsing the website, they're going to see ads for Oracle Fusion ERP. So we have an ad system. So we're doing a bunch of them. No one is doing this but us.
We're the only one that's doing this ability to target people and launch ads from a console. We're the other ones that I mean, people do it on the consumer side, but not on the B2B side. We're doing that on the B2B side. We're the only ones that are using the recommendation engine the way that we are not only to recommend what to sell next, but who the best references are and actually preparing the microsite for the prospect to examine those references. So I think CX is a huge opportunity for us.
The fact that we have CX linked to our ERP, we have front office linked to our ERP, we're linked to our HCM system is a huge advantage that we have front office, we have HCM, we have back office, we link it all together. It's much more valuable when you have all the front office and back office data in a single database. It allows you to do the kind of innovative things we're doing in the front office. So again, that's you're going to see a major improvement in our portfolio in the front office over the coming months.
Great. Thanks, Larry.
Our final question comes from Raimo Lenschow with Barclays.
Hey, thanks for squeezing me in and congrats from me as well. You guys have been very good and disciplined. So you wouldn't kind of build data centers just for the sake of building data centers. So if I look at the momentum here, like 13 new this year, 29 now, going up to 38 in a few months. Can you talk a little bit about what you're seeing there?
What's driving that momentum because that's super impressive? Thank you.
Larry, do you want to take it?
Sorry, you
want Well, let me just Go ahead. You go ahead, Larry. Go ahead.
All right. We're just seeing demand for our products all over the world. Our data we're going to 1 data center, an OCI data center that runs not only all of our technology, like autonomous database and our high performance computing all of that stuff. But it runs all of our applications as well. So we're seeing demand for these products all over the world.
And we are going into more countries. We've decided our strategy is because we have a large existing business, we have a large existing installed base, we believe we just have to get into more countries than someone than Amazon, let's say, because we have to serve those countries where we have a large installed base like Indonesia, let's say, which is a very big country, but a lot of people don't have data centers in Indonesia. Israel, I mean, very important to get data centers in Israel.
Some of the cloud companies have been late to get there. We think that's a very
important marketplace. So we think but we've been trying not to build ahead of demand. And we were doing a pretty good job actually until this last quarter where demand was actually turned out to exceed our ambitions, where our plan for growth, though it's a very ambitious plan, still on the demand side, we have some large customers that just wanted more capacity than we could supply. And that bit us in Q2. Hopefully, it will be out of as Safa said, we're probably a month or 2 away from correcting that and getting ahead of that curve.
But we just see right now there's more demand than we can supply. So we're going as I say, what are we doing? We're going as fast as we possibly can.
Yes. Let me just add a couple of things. One is, we have upped our capital spending plans because the demand is so strong that we've increased it by probably this next quarter, probably be 50% higher than this last one, just to keep everything going and growing. I also want to point out that some of our customers do not want to go into a big public data center, but for different reasons, regulatory reasons or others, one has cloud a customer. And that's very important that we are able to offer that.
And in addition, some of them have extremely large requirements and are basically a private region. Those aren't in the numbers you were mentioning as far as data center build outs, but that's another area where we are expanding and consumption is increasing at very, very large rates. So we're very busy here just keeping up with demand.
Perfect. Thank you. Congrats.
Thank you. Thank you. Thank you, Safra. 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. We look forward to speaking with you. Appreciate you joining us today. And with that, I'll turn the call back to Erica for closing.
Thank you for joining today's Oracle's Q2 2021 earnings conference call. We appreciate your participation. You may now disconnect.