Oracle Corporation (NYSE:ORCL) Q4 2023 Earnings Call Transcript

Oracle Corporation (NYSE:ORCL) Q4 2023 Earnings Call Transcript June 12, 2023

Oracle Corporation beats earnings expectations. Reported EPS is $1.67, expectations were $1.58.

Operator: Good day everyone and welcome to the Oracle Fourth Quarter and Fiscal Year 2023 Earnings Call. Today’s call is being recorded. I would now like to turn the conference over to Ken Bond. Please go ahead.

Ken Bond: Thank you, Lisa. Good afternoon, everyone, and welcome to Oracle’s fourth quarter and 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. On the call today are Chairman and Chief Technology Officer, Larry Ellison; and Chief Executive Officer, Safra Catz. As a reminder, today’s discussion will include forward-looking statements, including predictions, expectations, estimates or other information that might be cause actual results to differ from what we are talking about today.

Throughout today’s discussion we will present some important factors relating to our business which may potentially affect these forward-looking statements. These forward-looking statements are also subject to risks and uncertainties that may cause actual results to differ materially from statements 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.

Safra Catz: Thanks, Ken, and good afternoon, everyone. As you can see, Q4 was another fantastic quarter and the end of a great year. But before I get to the numbers, I’d like to go over our journey to get here. Three years ago, I shared with you that our own business transformation had reached a crossover point as our fast growing businesses had eclipsed the size of our declining businesses. And as a result, this would inevitably drive revenue growth acceleration going forward. Now, I don’t blame you for not believing me at the time. Fiscal year 2020 growth was zero. Well, as you can see, this has played out with organic revenue growth accelerating significantly. And that’s despite the closure of our nearly half a billion dollar Russia business.

Since fiscal year 2020, our strategic back office SaaS business has more than doubled in size. And consumption of our Gen 2 cloud infrastructure service is now seven times larger. And while competitors have seen their growth rates drop precipitously over the last year, our cloud infrastructure growth rate has essentially doubled from last year to 77% this quarter and with Gen 2 OCI growth even higher. And we’re far from done. In fact, I just told my team, I think we’re at about the middle of the beginning. Looking ahead, I see even more growth opportunities that should help power future growth acceleration in the future. We remain committed to the fiscal year 2026 targets that we shared with you last fall at our financial analyst meeting. And our exploding AI demand leaves us significant upside.

Our momentum has been driven by two fundamental differences from our competition. One, highly differentiated technology. And two, a much better customer experience. Firstly, our cloud applications are very popular with a growing base of customers in part because we are the most modern, comprehensive, and innovative set of apps across back office, CX, and industry applications. We implemented AI machine learning capabilities years before anyone was talking about it. And it helps our customers run their businesses every day. To complete the picture, we can serve customers of any size around the world from small businesses on NetSuite to global enterprise on Fusion in all industries. Having the best cloud application technology has helped us grow the business to $11 billion in SaaS revenue while expanding gross margins.

On the infrastructure side, we’re seeing more and more media articles reporting on the unique capabilities of OCI and our database technologies. Larry will explain our unique differentiation in a moment. But the result is that customers are choosing to run on Oracle infrastructure for all their requirements, be they new services like AI training or services we’re known for, like database and Java. To complement the technology, we’ve changed our culture such that we are totally focused on our customers’ success. That partnership spirit starts with engineering as we work hand-in-hand with companies as they try out our technology and continues all the way through their success with us. There’s no question that this close partnership with our customers has led to our success.

As part of that, we’ve also created an organization called Customer Success Services, or CSS. This group ensures that customers get the most value from their Oracle purchases, from planning to activation to implementation to support to anything else they need to succeed. We think this unique approach, which customers already tell us they love, ultimately drives overall customer satisfaction, and that results in higher renewal rates, expansion rates, and referencing. Now, I’ll turn to Q4. As always, I’ll discuss financials using constant currency growth rates, and also provide a full picture. I’m going to share with you results, including and some excluding Cerner, so that you have it all. Total cloud revenues, SaaS plus IaaS, was $4.4 billion, up 55%, with IaaS revenue of $1.4 billion, up 77%, and SaaS revenue of $3 billion, up 47%.

Excluding Cerner, total cloud revenue, SaaS plus IaaS, was up more than 33%, at $3.8 billion. Total cloud services and license support revenue for the quarter was $9.4 billion, up 25%, driven again by our strategic cloud applications, autonomous database, and our Gen 2 OCI. Application subscription revenues, which include product support, were $4.4 billion, up 37%. Application-specific revenues, including support, but excluding Cerner, were $3.4 billion, up 11%. SaaS cloud revenue, again, excluding Cerner, was $2.4 billion, was up 17%. Our strategic back office SaaS applications now have an annualized revenue of $6.6 billion, and grew 24%, including Fusion ERP, up 28%, and NetSuite ERP, up 24%. Together, our strategic back office businesses are now larger and have grown faster than our local competitor for four straight years.

Infrastructure subscription revenues, which also include support, were $5 billion, up 15%. As mentioned already, infrastructure cloud services revenue was up 77%, excluding legacy hosting services. Infrastructure cloud services revenue grew 89%, with an annualized revenue of $5.2 billion, including OCI consumption revenue, which was up 112%. Cloud at customer consumption revenue was up 60%, and autonomous database was up 47%. Database subscription revenues, which include database support, were up 6%, highlighted by cloud database services, which were up 41%. As on-premise databases migrate to the cloud and cloud at customer, we expect these cloud database services will be a third leg of revenue growth and revenue growth acceleration, alongside back office SaaS and Gen2 OCI cloud services.

Software license revenues were $2.2 billion, down 14%, following the 25% growth we saw a year ago in Q4. So, all-in total revenues for the quarter, including Cerner’s revenue contribution of $1.5 billion, were $13.8 billion, up 18%. Shifting to margins, the gross margin percentage for cloud services and license support was 78%, as a result of the mix between support and cloud. Last year, Oracle license support revenues, with its mid-90s gross margins, represented about 62% of cloud services and license support revenue, and now it’s down to 53%. But this is happening because our cloud services are growing much, much faster than license support, even as license support continues to grow. Most importantly, gross profit dollars of cloud services and license support grew 19% with Cerner, 10% excluding Cerner in Q4.

Additionally, I would note that IaaS gross margins improved substantially from last year, and I expect IaaS gross margins will continue to improve. While we have continued to build data center capacity, we’ve also seen our margins go higher as these new cloud regions fill up. Non-GAAP operating income was $6.2 billion, up 12% from last year. The operating margin was 44% as we continued to integrate Cerner. As we drive Cerner profitability to Oracle standards 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 percentages. The non-GAAP tax rate for the quarter was 9.2%, and the non-GAAP EPS was $1.47 in U.S. dollars, up 8% in USD, 10% in constant currency.

The GAAP EPS was $1.19. For the full fiscal year, total company revenue was $50 billion, up 22%. And excluding revenue, total revenue grew 7%. Total application subscriptions were 35%, and 10%, excluding Cerner, compared to 8% last year. And total infrastructure grew 10%, compared with 5% growth last year. Clearly, our revenue growth continued to accelerate again this year as investments into our cloud businesses are paying off. Total cloud services and license support revenue was $35.3 billion, up 21%. Total cloud services by itself were up 50%, to $15.9 billion. And excluding Cerner, total cloud services were up 29%, to $13.6 billion. And with revenue growth acceleration in both strategic back office cloud applications, which were up 27% for the year, and cloud infrastructure services, which were up 63% for the year.

Non-GAAP EPS was $5.12 in USD, up 4% in USD, and up 10% in constant currency. The full year operating margin percentage was 42%. At quarter end, we had nearly $10.2 billion in cash and marketable securities. And the short-term deferred revenue balance was $9 billion, up 9%. Operating cash flow for the quarter was up 42%, at $5.6 billion. While free cash flow was up 46%, at $3.7 billion. Now over the last four quarters, operating cash flow was $17.2 billion, up 80% from last year, as we’re now seeing cash flow benefits from our cloud transformation. With capital expenditures of $8.7 billion this year, free cash flow was $8.5 billion, up from $5 billion last year. And I expect that we will see very good results in our fiscal 24 free cash flow.

The remaining performance obligation, or RPO balance, is $67.9 billion, up 47% in constant currency, due to strong cloud bookings as well as Cerner. I would also note that organic RPO was 15% in constant currency, as a result of our customers burning through their commitments at a heightened rate. I expect that you’ll see this number run up as customers reload and new customers sign up. Approximately 49% of total RPO is expected to be recognized as revenue over the next 12 months. CapEx was $1.9 billion in Q4 and $8.7 billion for fiscal year 2023, as we continue to build capacity for existing bookings and our customers’ growing needs. Our investment strategy for adding capacity remains to build many, many identical cloud regions. Our starting point is smaller, which allows us to go where competitors cannot.

And this continues to be an advantage for us. Given the demand we have and see in our pipeline, I’ve increased our CapEx projection and I now expect the fiscal 2024 will be similar to this year’s CapEx. I also expect our Gen 2 OCI business will have another excellent year of revenue growth as existing centers fill up and new centers come online. As always, we remain careful to pace our investments appropriately and in line with booking trends, which is why our gross margins are up in our cloud. We now have 42 public cloud regions around the world with another 7 being built. 12 of these public regions interconnect with Microsoft Azure, giving customers true multi-cloud capabilities. We have many, many clouded customer implementations, 10 dedicated regions, and 9 more planned.

And lastly, we have 9 national security regions live with immense demand for more. As we’ve said before, we’re committed to returning value to our shareholders through technical innovations, strategic acquisitions, stock repurchases, prudent use of debt, and a dividend. This year, this fiscal year, we repurchased 17 million shares for a total of $1.3 billion. In addition, we paid out dividends of $3.7 billion over the last 12 months as the Board of Directors declared a quarterly dividend of $0.40 per share. Now to guidance. And as I’ve said before, our fundamental principle is to grow EPS while substantially increasing cloud revenue growth. Let me turn to my guidance for Q1, which I’ll review on a non-GAAP basis like everything else. If currency exchange rates remain as they are now, currency should have a 0 to 1% positive effect on total revenue and a $0.01 positive effect on EPS in Q1.

However, actual currency impact may be different. Total revenues for Q1, including Cerner, are expected to grow from 7% to 9% in constant currency and are expected to grow from 8% to 10% in USD at today’s exchange rate. Additional upside depends on how fast we can put out even more capacity to our customers. Total cloud revenue, again, excluding Cerner, is expected to grow from 28% to 30% in constant currency and 29% to 31% in USD. Non-GAAP EPS is expected to grow between 8% to 12% and be between $1.11 and $1.15 in constant currency. Non-GAAP EPS is expected to grow between 9% to 13% and be between $1.12 and $1.16 in USD. My EPS guidance assumes a base tax rate of 19.5. However, as you see nearly every quarter, one-time tax events could cause actual tax rates to vary.

Now, before I finish, let me also give you some initial thoughts on fiscal year 2024. As I described, and Larry will elaborate in depth, we are seeing unprecedented demand for our cloud services and especially our AI services. As a result, I expect cloud revenue, excluding Cerner, will continue growing at at least similar rates to what we experienced in fiscal 2023, even though our base is much bigger and may be higher. As our high-growth cloud revenues are becoming a larger, larger portion of total revenue, we are seeing an acceleration of our total revenue growth. I expect this trend will continue in fiscal 2024. And of course, we also expect to deliver a higher non-GAAP operating margin percentage this coming year as well. Okay. Before I hand off to Larry, I want to take a moment to thank our customers for making fiscal year 2023 such an enormous success.

You’ve been wonderful partners, and we thank you for your trust in us. And I want to thank our employees for being focused on advancing our customers’ missions so spectacularly. Some of you are new, and many of you have been with us for years, in fact, even decades. And I think you all see that our best days are, in fact, ahead of us. Thank you for your loyalty and for your incredibly hard work. And thank you, Larry, our CTO, our Chairman, and our founder for leading with brilliance, determination, and vision, and allowing us to all be part of this incredible journey, which is just getting started. So thanks, Larry. And with that, I’ll turn it over to you for your comments.

Larry Ellison: Thank you, Safra. The hardware and software in Oracle’s Gen2 Cloud is fundamentally different than other hyperscalers’ clouds. The CPUs and GPUs we rent to customers are interconnected using an ultra-high-performance RDMA network, plus a dedicated set of cloud-controlled computers that manage security and data privacy. Oracle’s unique set of hardware and software building blocks enable our Gen2 Cloud to deliver much higher performance than any of our cloud competitors. And in the cloud, since you pay by the minute, if you run twice as fast, and we do, you pay half as much. What is especially interesting in today’s world is that all of Oracle’s cloud data centers have a high-bandwidth, low-latency RDMA network that is perfectly optimized for building the large-scale GPU clusters that are used to train generative large-language models.

NVIDIA themselves are doing AI development in the Oracle Gen2 Cloud. And we are partnering with NVIDIA to build the world’s largest high-performance computer, an AI computer, with 16,000 GPUs. The extreme high performance and related cost savings of running generative AI workloads in our Gen2 Cloud has made Oracle the number one choice among cutting-edge AI development companies, including Mosaic ML, Adept AI, Fouhear [Ph], Modal Labs, Character, HyperReal, SliceX, Vector Space Bio, Falconry, Respeacher, Altair, InfoWorld, 12 Labs, Layton Space, plus many, many others. In the aggregate, our generative AI cloud customers have recently signed contracts to purchase more than $2 billion of capacity in Oracle’s Gen2 Cloud. One last thing. In partnership with Cohere Oracle is launching a generative AI cloud service for enterprise customers.

This new service protects the privacy of our enterprise customers’ training data, enabling those customers to safely use their own private data to train their own private specialized large language models. Oracle’s application development teams were early adopters of this new AI cloud service. We used our own private data to improve and extend the training of existing Cohere large language models. This supplementary training resulted in two new specialized large language models, one for medical professionals and one for first responders. Specialized large language models will be instrumental in helping highly trained professionals use their precious time more efficiently. As I said, Cohere and Oracle are working together to make it very, very easy for enterprise customers to train their own specialized large language models while protecting the privacy of their training data.

Over the next few years, lots of companies are going to train their own specialized large language models. Our partner, Cohere, is also using the Oracle Gen2 Cloud for training their own large language models. In health care alone, specialized large language models will speed the discovery of new life-saving drugs, improve the quality of patient care, and increase access to health care by lowering costs. A technology revolution is dawning. Back to you, Safra.

Safra Catz: I think we’re going to take some questions. Ken?

Ken Bond: Yes, thank you, Safra. Thank you, Larry. Lisa, if we could please prepare the audience for Q&A.

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Q&A Session

Operator: Thank you. [Operator Instructions] We’ll take our first question from John DiFucci with Guggenheim.

John DiFucci: Thank you. My question’s for, I think, mainly for Safra, but maybe Larry has some thoughts, too. It’s somewhat surprising to see the acceleration across all your cloud businesses when others, whether it’s the other hyperscalers or even other cloud-based vendors, are seeing just the opposite effects in this environment today, in today’s environment. And that’s important. We get the better performance at a lower price. That makes a lot of sense, at least in, I’ve been around quite a while, I guess. And usually, in tough environments, we see people just freeze. But that’s not what’s happening here. So the question, in addition to what I just said, better performance at lower price, why? Is there anything else, outside of like Oracle, even, that would show your cloud business accelerating when other pretty good companies are doing just the opposite?

Safra Catz: Let me take a start at it. And Larry, you add in here. First of all, the fact that OCI is just growing and accelerating is because customers want to spend less. And they also need to do more. They need to stay competitive. They need to stay agile. And so our technology, whether it’s our applications, which allow them to spend a lot less and make better decisions running their business, so that’s very, very natural. So our Fusion, and there’s just so many things about Fusion that are so compelling. It costs less, it just helps them run their business. But then you go to OCI, where some of these customers are coming from our competitors. And as Larry said, imagine, Larry talked about the workload being twice as fast on OCI.

But imagine it’s 10 times as fast, or 100 times faster, or as is common in some cases, 1,000 times faster. So imagine what that bill looks like. So we have compelling technology at a much lower price. And that’s without a doubt causing our customers to move to us more quickly. I don’t know, Larry, if you want to add into that.

Larry Ellison: Well, I’m just going to be a little more specific, because Safra says, I said, if we run twice as fast, we cost twice as much. No, we cost half as much, half as much. We run twice as fast, we cost half as much. But sometimes we do run a lot more than twice as fast. And we cost a lot less than half as much. We announced a new database, a new version of MySQL with a fast query processor called HeatWave. And we have customers moving from Amazon Aurora, where they’re experiencing 1,000 times speedup, versus Aurora, we’re 1,000 times faster in query processing than Amazon’s version of MySQL. It’s an open source database that we added a fast query processor to. We’re much, much cheaper. And that’s one example. In a lot of cases, it’s much more than two to one.

We can build GPUs that other people can’t build because we have a fast network. We use this very fast RDMA network, and we started with that. In our Gen2 cloud, we had nothing but our entire network was a super-fast network, which means most of the applications, most of the things you run in the Oracle cloud are going to be much faster than our competitors’ clouds because they don’t use that kind of network. So we have huge cost advantages, huge cost advantages across a broad portfolio of applications. Let me throw in one thing. It cost one-tenth, one-tenth to implement Fusion ERP versus SAP’s new ERP system with HANA. So the cost of implementing our applications are dramatically lower than our competitors. So we have a lot of people moving from AWS to our cloud for infrastructure services, a lot of people continuing to move from SAP to Fusion.