Oracle Corporation (NYSE:ORCL) Q2 2023 Earnings Call Transcript

Oracle Corporation (NYSE:ORCL) Q2 2023 Earnings Call Transcript December 12, 2022

Operator: Good afternoon, ladies and gentlemen. Welcome to the Oracle Q2 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. And please be advised that this call is being recorded. After the speakers’ prepared remarks, there will be a question-and-answer session. And at this time, I’d like to turn the call over to Mr. Ken Bond, Head of Investor Relations at Oracle. Please go ahead.

Ken Bond: Thank you, Bo. Good afternoon, everyone, and welcome to Oracle’s Second Quarter Fiscal Year 2023 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 many customers who purchased Oracle Cloud services or went live on Oracle Cloud recently will be available from our Investor Relations website as well. On the call today are Chairman and Chief Technology Officer, Larry Ellison; and CEO, Safra Catz. 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 the 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-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. And finally, we are not obligating ourselves to revise our results or these forward-looking statements in light of new information or future events.

Before taking questions, we’ll begin with a few prepared remarks. And with that, I’d like to turn the call over to Safra.

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Safra Catz: Thanks, Ken, and good afternoon, everyone. Well, simply put, we had an outstanding quarter. Total revenue for the quarter was more than $200 million above the high end of our guidance range and grew 25% in constant currency. Even excluding Cerner, total revenue grew 9% in constant currency that’s higher than Q1 and on top of a revenue beat this time last year. The strength of the quarter is even more amazing, given that the currency headwind was higher than what it was when I gave guidance with 6% for revenue and a $0.095 headwind for earnings per share. And yet, we still exceeded the high end of my USD guidance for both, total revenue and earnings per share. And as you can see from the numbers, we continue to experience clear company-specific and product-specific momentum.

The reasons are many, but it boils down to a few key points of differentiation. First, more and more customers are recognizing our second-generation infrastructure cloud as being fundamentally better architected for higher performance, better security and unmatched reliability versus the older first-generation hyperscale cloud providers. Second, customers appreciate the flexibility of our service and business model that enables them to deploy our technologies where it serves them best, whether that be in the public cloud, in dedicated regions around the world or in a true clouded customer implementation. And third, customers recognize the value of an end-to-end integrated stack of applications, both horizontal, like ERP and HCM and supply chain, and industry-specific applications that focus on their industries.

And all of it is on our Gen 2 infrastructure, which is designed perfectly for them as they move through. As customers increasingly look to better value out of their technology investments, many discover that Oracle is much better compared to other alternatives. Gartner formerly recognized OCI by moving us to Visionary status in its cloud infrastructure and platform services report for the first time. In addition, last week, we were awarded a JWCC award at the U.S. Department of Defense as they also recognized our capabilities. As all of these differentiators come together and our business continues to accelerate, we expect organic growth for our fiscal year 2023 cloud revenues will be over 30% in constant currency. Now to the numbers. As always, I’ll discuss our results using constant currency growth rate.

To provide a full picture, both organically and otherwise, I’m going to go over the revenue results, including Cerner, and then some of the revenue results excluding Cerner, so you can see what’s going on. Total cloud revenue, now that’s SaaS and IaaS, including Cerner, was $3.8 billion, up 48% in constant currency with IaaS revenue, $1.1 billion, up 59% and SaaS revenue of $2.8 billion, up 45%. Now, excluding Cerner, total cloud revenue, SaaS plus IaaS was up 27% in constant currency at $3.3 billion. Total cloud services and license support revenue for the quarter, including Cerner, was $8.6 billion, up 20% in constant currency, driven again by our strategic cloud applications, autonomous database and, of course, our Generation 2 OCI. Application subscription revenues, which include support, were $4.1 billion, up 35% in constant currency.

Infrastructure subscription revenues, which also include support, were $4.5 billion, up 9% in constant currency. Application subscription revenues, including support but excluding Cerner, were $3.3 billion, up 9% in constant currency. SaaS cloud revenue, again, excluding Cerner, was $2.2 billion and was up 16%. Now, our strategic back-office SaaS applications now have an annualized revenue of $5.9 billion and grew 26% in constant currency, including Fusion ERP, up 28% and NetSuite ERP, up 29%. As mentioned already, infrastructure cloud services revenue was up 59% in constant currency. Now excluding legacy hosting services, infrastructure cloud services revenue grew 69% with an annualized revenue of $3.8 billion, including OCI consumption revenue, which was up 88% and cloud and customer consumption revenue, up 83% and autonomous database up 50%.

Software license revenues, including Cerner, were $1.4 billion, up 23% in constant currency and up 9% without Cerner. What is increasingly resonating with customers is that in an environment where IT investments need to have a fast and tangible return on investment, only Oracle offers customers the flexibility to manage their technology estate, so they can deploy incremental investments where it brings them the most immediate value. It also helps that the purchase of technology licenses from Oracle enables them to move to the cloud as they are ready, effectively providing an on-ramp to Oracle Cloud services. So, all in, total revenues for the quarter were $12.3 billion, up 25% in constant currency. Excluding Cerner’s revenue contribution of $1.5 billion, organic revenue was up over 9% in constant currency.

As a reminder, we no longer operate in Russia, causing total revenue growth to be negatively affected by over 1% of growth over last year. Shifting to margins. The gross margin for cloud services and license support was 79% as a result of the mix between support and cloud. Last year, Oracle license support revenue with its mid-90s gross margins represented about 65% of the total number of cloud services and license support revenue. Now, it’s down to 53%, and this is happening because our cloud services are growing much, much faster than license support. By the way, license support grew 4% this year. Additionally, I would note that IaaS gross margins improved again this quarter, and I expect IaaS gross margins will continue to improve in response to accelerating demand we have continued to build data center capacity.

We have seen that as those centers fill up, margins go up like they did this quarter. Most importantly, gross profit dollars of cloud services and license support grew 13% with Cerner and 6%, excluding Cerner in Q2. Non-GAAP operating income was $5.1 billion, up 12% from last year. Operating margin, including Cerner, was 41% as we continue to integrate Cerner in the quarter. As we drive Cerner profitability to Oracle levels and continue to benefit from economies of scale in the cloud, we will not only continue to grow operating income, but we will also grow the operating margin percentage. Further, I expect that this year, will be the trough year for operating margin percentages. The non-GAAP tax rate for the quarter was 20.4. I think I guided to 20.5. So basically, it worked out where we thought.

And non-GAAP EPS was $1.21 in U.S. dollars, down 1% in USD, up 7% in constant currency. The GAAP EPS was $0.63. At quarter end, we had nearly $7.4 billion in cash and marketable securities. The short-term deferred revenue balance was $8.7 billion, up 14% in constant currency. Over the last four quarters, operating cash flow was $15.1 billion and free cash flow was $8.4 billion with capital expenditures of $6.7 billion. In addition, we now have 40 public cloud regions around the world with another 9 being built. In addition, 12 of these public regions interconnect with Azure, giving customers true multi-cloud capabilities. We also have many cloud customer implementations, dedicated regions in another 9 national security regions with increasing demand for more as customers want to have their data protected in their country.

We are careful to pace our investments appropriately, but need to continue to build to meet our accelerating demand. CapEx this quarter was $2.4 billion as we continued to invest in our cloud to meet this accelerating demand. With triple-digit IaaS bookings growth the last couple of quarters we now expect to spend about this amount per quarter for the next few quarters as we build capacity for our customers’ needs. This level of spend though will not negatively impact our operating margins as we scale. When I talk about accelerating demand, that demand is reflected in the remaining performance obligation or RPO balance, which is now at $61.2 billion, up 68% in constant currency due to strong cloud bookings as well as to Cerner. I will also note that the organic RPO growth rate in constant currency accelerated to 28% in Q2, up from 22% last quarter and approximately 48% of the total RPO is to be recognized as revenue over the next 12 months.

Now, as we’ve said before, I know you’re tired of me saying it, but I will, we are continuing — 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 6.1 million shares for a total of $448 million. In addition, we paid out dividends of $863 million in the quarter, and the Board of Directors declared a quarterly dividend of $0.32 per share. Our fundamental principle is to grow non-GAAP EPS while substantially increasing cloud revenue growth. And given our increasing confidence, we will continue to prudently invest as there is strong demand for our cloud services. So now, let me turn to my guidance for Q3, which I’ll provide on a non-GAAP basis.

Using currency exchange rates as they are right now, currency should have a 4% negative effect on total revenue and at least a $0.06 negative effect on EPS in Q3. As I say every quarter, the actual currency impact may be different by quarter end, but we’ve got to use a number, so we’re using the number right now. Total revenues for Q3, including Cerner, are expected to grow from 21% to 23% in constant currency and are expected to grow from 17% to 19% in USD. Total cloud growth, including Cerner, is expected to grow from 46% to 50% in constant currency and 43% to 47% in USD. I expect the total cloud growth for the fiscal year, excluding Cerner will be above 30% in constant currency. Non-GAAP EPS is expected to grow between 9% and 13% and be between $1.23 and $1.27 in constant currency.

Again, due to currency headwinds, non-GAAP EPS is expected to grow between 4% and 8% and be between $1.17 and $1.21 in USD. And as I’ve said before, Cerner will be accretive to earnings this year, including in Q3. My EPS guidance for Q3 assumes our base tax rate of 20.5%, which is up from 19% last year. However, onetime tax events could cause actual tax rates for any given quarter to vary. And with that, I’ll turn it over to Larry for his comments.

Larry Ellison: Thank you, Safra. Okay. I’m going to go over — primarily, I’m going to go over customers and new wins in infrastructure and then customers and wins and go-lives in applications. But I’m going to start with infrastructure. So, during Q2, we signed multiple customers to contracts exceeding $1 billion, infrastructure contracts exceeding $1 billion. Let me be clear, multiple customers signed contracts for $1 billion worth of infrastructure. So, given — that’s been added to our backlog, we expect our infrastructure business to continue to grow very, very strongly into the future. We now have 22,000 infrastructure customers. We have a total of 55 regions. That’s public regions plus national security regions and the other kinds of regions and that’s more than AWS or Microsoft or anybody, which may surprise some people.

Gartner, as Safra mentioned, moved us into the Visionary Quadrant for the first time. So, let me just start naming specific customers and give you a flavor. I’m going to name large customers, small customers. I’m going to focus a little bit on a bunch of international customers to let you know that our investment in data centers all over the world is really paying off. So, our customers include — big customers include, FedEx, Deutsche Bank, Tokyo Stock Exchange. Let me take a moment to emphasize Tokyo Stock Exchange. We’re the only ones running a major stock exchange. And this is — Tokyo is not the only one because our cloud is very secure and extremely reliable. It doesn’t go down. In fact, my favorite quote from a big phone company in the United States was the difference between Oracle’s Cloud and the other clouds are simply that Oracle Cloud doesn’t go down.

I think that’s a very important issue when you have enterprise applications like a stock exchange where you can’t ever go down. Fujitsu is another big customer; Vodafone that’s phone company has similar problems. If you’re a phone company, the phone system can’t go down. Vodafone, Deutsche Telekom, Enbridge; Kaiser, a huge health care company in the — primarily in the United States. NVIDIA has moved and a bunch of others have moved, lots of AI, artificial intelligence and machine learning workloads to the Oracle Cloud because it turns out we’re really good at that. We’re better than that than any of the other clouds, which may surprise some people. Schneider Electric, Telecom Italia, Verizon and lots, lots more. I’m not just going to list them all.

We publish a big list at oracle.com and every quarter, we add new customers to that. So, in the quarter, we added United Airlines — database wins in the quarter, United Airlines, migrating all flight operations to the Oracle Exadata cloud. Albertsons, again, moving to the Exadata cloud service database. Mitsui in Japan, again, moving their databases to Oracle. Again, this is the beginning of a very major, very large business for us as our database franchise moves primarily from on-premise into the Oracle Cloud. Persol Career, a big professional services company in Japan, migrating to — or moving their Oracle databases to the cloud. Unimed, LAD Healthcare, once again moving their databases to the Oracle Cloud. Penske Truck Leasing, doing using — moving to autonomous database.

HomeServe plc in the UK, government agency is moving the autonomous transaction processing system. So, they’re not just moving an existing Oracle database to the cloud, they’re upgrading from our on-premise Oracle database to our autonomous database, which is only available in the cloud. Iberia Express, a big telco, same thing moving to autonomous data warehouse. They just — the idea is the autonomous data warehouse makes database administration very simple. In fact, it’s entirely automated. There is no database administration. Delgado Auto Taxi, again, in APAC, a smaller company, again, moving their databases to autonomous system. MaxiTRANS, big transportation company in Australia, same thing, autonomous transaction processing. The Scroll, a big Japanese wholesale company, autonomous — moving to autonomous database.

Banco Safra, this is — by the way, this is not — our CEO does not own a bank. This is not an internal — she didn’t not buy our database. But there’s a big bank in Latin America called Banco Safra and they’re moving all their mission-critical apps to OCI, as is Bradesco, same thing. Yorkshire Building Society in the UK, again, autonomous data warehouse. And Nestlé, a food giant in EMEA is moving their analytics systems to autonomous data warehouse and that’s a huge customer. Okay. I mentioned a couple of calls ago that we have a new version of our MySQL open source database, and we added a new ultrafast query processor called HeatWave to MySQL and that’s doing extremely well. We have a number of companies doing that migration. Medallia, Infonow Credit Club.

It’s a long list of people that are moving to MySQL to take advantage of the fact that our query processor in our version of MySQL is 100 times faster. I really mean that. And we have all the benchmarks. We publish all the benchmarks, and we publish the source code of the benchmarks, so you can duplicate those results, 100 times faster than queries than the Amazon equivalent called Aurora; Aurora, Amazon’s version of MySQL. As Safra mentioned earlier, our partnership with Microsoft Azure is going extremely well. We have a number of companies running applications in Azure. And then Azure is connected to OCI, so the database is in OCI and the application is in Azure. The Belgium Railways is one. Honeywell in the United States, Petronas the big energy and utility company, Telecom Italia Mobile A , but that multi-cloud system is doing extremely well.

And we think that is the future of cloud. We think the future of cloud is not 4-walled gardens, AWS, Microsoft, Google and Oracle. We think those clouds are all going to interconnect. And then customers will pick the most appropriate service for their particular needs and mix and match between the clouds. Okay. A lot more — a major city in the southwest, which I’m not allowed to mention is literally migrating everything to OCI. Lambda, which is a big AI machine learning specialist company is moving the bulk of their workloads to OCI using NVIDIA GPUs and our fast — our very, very fast network to interconnect them. And this is a pattern. Lambda is doing that, Latent Space is doing that. NVIDIA themselves are doing that. So we’re seeing a lot of machine learning and artificial intelligence workloads moving from other clouds to OCI because we’re faster.

And again, in the cloud business faster — when you charge by the minute, faster means cheaper. Give me 1 second. Alexa, be quite. Sorry about that. I think Jeff Bezos did that. Okay. So, Minnesota State Colleges and Universities, National Institute of Health. These are all new cloud customers, new infrastructure cloud customers — again from very large to medium-sized companies are moving to OCI and lots of them. Twist Biosciences is moving healthcare — again, AI workloads to OCI using NVIDIA GPUs. AIA Life Insurance Company, a big financial services company, again, is moving to OCI and databases to OCI. In India, Uttar Pradesh Power Corporation, a giant utility, is moving all of their metering and billing applications to OCI. Win Win Intelligent Information Technology is moving their IoT platform from AWS to OCI, and they’re also using MySQL HeatWave.

Algar Telecom, Brazilian Stock Exchange, Claro, again, big media telco, moving to OCI; Ncell. Unimed Curitiba, a large health care company in Latin America moving to OCI; Vivo, again, moving to OCI. Banco de Chile, E-Banks another financial services company; Rabobank. DP World, the transportation and logistics company in the Middle East, Austin TranSit Partnership, a municipality in Texas they’re perfect — an interesting customer because they’ve been using Oracle ERP and EPM and our applications for a long time. Now they’re moving their infrastructure to OCI. Oman Telecommunications. A huge French telecommunication company, I’m not allowed to mention. They’re moving to OCI. Oxford Nanopore, a big — a gene sequencing company is moving from AWS to OCI where they are going to store gene sequencing, but not only just store gene sequences in OCI, they also do analytics to figure out if — what they’ve sequenced is a new version of COVID-19 or another pathogen, if the pathogen they’ve never seen before, extremely important application for world health.

Reed Exhibitions, Saudi Ministry of Media, Ecobank, financial services in EMEA, GlobeMed Limited, Morrisons, a big retail operation, again, all moving to on OCI. HDFC Bank and Waafi Bank, I’m going to stop there, but we published a long list, but there’s tremendous momentum, tremendous momentum and a large number of customers from all over the world, very large and medium-sized companies moving to OCI, and the business is growing very strongly, as Safra pointed out in the numbers. Okay. In the back — in applications, I’ll try to do this quickly. We’re just winning in the back office. We have 22,000 customers in infrastructure and the cloud. We have 11,000 Fusion ERP and HCM customers alone in applications, just Fusion customers. We have 11,000 now.

We have probably close to 30,000, 30,000 NetSuite customers on top of that. So, we have a lot of customers and applications. We’ve been in the Applications Cloud business for longer than we’ve been in the infrastructure cloud business. We’re extremely strong in healthcare, Cleveland Clinic, Mayo Clinic, Mount Sinai, Providence Saint Joseph, Adventist Health, Kaiser Permanente, National Health Service in the UK, long list of providers, that’s a partial list, are using Oracle ERP, supply chain and HCM applications. But it’s not just the clinical providers that are using our systems, the payers, the healthcare payers. So again, as we tackle healthcare with — in conjunction with our Cerner acquisition, we’re not just automating providers, we’re also automating payers.

We’re also automating pharmaceutical companies as they do clinical trials. We’re trying, to automate the entire ecosystem, not just a fraction of it. So I mentioned a list of providers and payers, UnitedHealthcare, Blue Cross Blue Shield, Humana, Highmark Health, Health Care Service Corporations, Independence Blue Cross, Bright Health, so payers as well as providers. We’re extremely strong in that. I mean, we — again, I’ll just leave it with extremely strong. Healthcare wins in the quarter in Q2, Cigna, a huge payer win; Emirates Health Services, big provider where we beat SAP; Cross Country Health Services where we beat Workday and SAP. Henry Schein is a provider of healthcare products for — and there — we won there. But again, it is the entire healthcare infrastructure that we are focusing on as we try to automate healthcare systems around the world.

Go-lives, go-lives in the quarter, Tenet Health, 65 hospitals, 235,000 employees, they went live on HR payroll and recruiting. Cleveland Clinic, is going live. I know it’s called Cleveland Clinic, but they also — they own hospitals all over the place. They’ve gone live in a bunch of regional hospitals in Florida. University of Chicago Medical Center has gone live. Baptist Health Care has gone live, 12 hospitals with 26,000 employees. Lakeview Center has gone live in the quarter. So, we’re just getting stronger and stronger in health care. And so, let me move on to financial services, our other — another industry that we deem very, very strategic and key to Oracle’s future is financial services, specifically banking. And we’re very, very strong there, Bank of — in terms of ERP, HCM, supply chain, our customers include Bank of America, JPMorgan Chase, Citigroup, Bank of New York Mellon, Vanguard, Santander, TD Bank in Canada, HSBC in the UK, UBS, Credit Agricole, Societe Generale, Credit Suisse, Sumitomo Mitsui.

It’s a partial list. We are extremely strong in the banking sector. And what you’re going to see in Oracle ERP with our strength in the banking sector is we will be offering loan origination for B2B commerce. One of the things we’re doing with the new version of Oracle ERP is if you’re a customer that’s buying something and you have Oracle ERP, and we — and you are a company that’s selling something and you have Oracle ERP, the way that B2B transaction will occur, it will be entirely automated within the cloud. So you’ll submit a purchase order, the buying ERP system will submit a purchase order to the selling ERP system. And if you need to borrow money, we will originate a loan with one of our banking partners. If the product has to be shipped, we will schedule the shipping and track the shipment with one of our logistic partners.

And our ambition here is to completely automate B2B commerce between buying and selling companies that are running Oracle Cloud ERP and manage all of the financing and insurance and logistics associated with that transaction. We do a really good job, I think, of automating B2C transactions. Amazon does that extremely well. Walmart does that extremely well. But we don’t do a great job of automating B2B transactions. And that’s what Oracle’s ambition is to do that. And we’re in a great position because we are so strong in cloud ERP. So, it’s an Oracle system that’s — an Oracle procurement system on one end of that transaction. It’s an Oracle order management system on the other end of that transaction. We have very strong partners in finance, insurance and logistics so we can completely automate the entire transaction, where B2B transactions begin to look like B2C transactions.

They’re fully end-to-end automated. And that’s a huge new business for us and our partners. Okay. Let’s see. Financial Services wins in the quarter. We’ve added M&T Bank, TD Bank, Daiwa Securities — Farmers Insurance. Nexi, which is where we replaced SAP at Nexi, it’s an Italian bank. We replaced SAP at TD Bank. Let’s see what else. Financial services go lives. AmTrust, BlackRock, a big go live. They are — they have $10 trillion of managed assets. Oracle now has 9 of the top 10 asset management firms, running on the Oracle Cloud ERP. FirstRand Bank, a bunch of other banks. I don’t want to take up all the time. So, I’m going to stop there. We have a lot more data on our website that will tell you — that will enumerate still more customers that we acquired in this very strong second quarter and that went live in the second quarter.

With that, I’m going to turn it back over to Safra.

Ken Bond: Thank you, Larry. Bo, if you could prepare the audience for Q&A. Appreciate it.

Q&A Session

Operator: We’ll take our first question today from Brad Zelnick of Deutsche Bank.

Brad Zelnick: Great. Thanks very much for taking my question. And congrats on the solid results. Larry, Oracle has a rich history of being a price performance leader in just about everything it does. But technically speaking, why exactly does OCI have an inherent cost advantage? And how sustainable is that advantage? Thanks.

Larry Ellison: Well, maybe the most interesting thing is we have a much faster network than anybody else. We have a fundamentally different network than any of the other cloud providers. We have what’s called an RDMA network that we had to build because our Exadata machines and our database — actually glued together a lot of computers. And when you had a single database application, that could run on one computer or it could run on a cluster of computers, the 2 computers, 4 computers, 8 computers, whatever, so that there was no single point of failure. One of the beauties of the Oracle database, one of the big differences between the Oracle database and other databases is that the Oracle database, a single application could run on multiple computers.

If one of those computers would fail, the application would keep running. It was fall tolerant. It would tolerate a failure of a machine. Other people don’t have that. But in order to do that, we had to make our network, if we’re going to have a cluster of 4 machines running a single database app, we have to make that network between those 4 machines very fast. And that’s called an RDMA network. It means that one computer can immediately access the memory of another computer without going through an interrupt. It’s a very fast way to interconnect computers and have them act as a group. We built that for our entire cloud, so we can run our database, our Oracle real application cluster database on any of the computers in our cloud. Now because we’ve built this hyper-fast network, it turns out it has more utility than just running the Oracle database.

So, if you’re running a cluster of computers doing a simulation, a car crash simulation, that was one of the first applications people noticed, ran much faster on Oracle. Now, a much bigger application they noticed ran much faster on Oracle was on neural networks and machine learning workloads run much faster on Oracle. So, because our network is just intrinsically much faster and — by the way, also there are security and reliability advantages to go along with that. So, our network configured. We actually have — all of our computers actually have two networks. I’m not going to go into all the details. But our computers are fundamentally different than any other cloud company. We have two networks, one of which is on the Internet — I’d say, one of which interconnects all of our customers’ computers.

And the other, which is our — if you will, our control network where our — and computers that run our cloud control software, which is isolated from the customer software. So, the customer can’t tamper with our cloud control software. They can’t get control of it. And we can’t see the customers’ data. That is unique to Oracle. But the — because we have the two networks and because one of the networks is RDMA, we just run much, much faster, much more reliably than they do. And it’s a fundamental advantage that they can’t compete with unless they rebuild their cloud from scratch.

Operator: We’ll take that question now from Phil Winslow of Credit Suisse.