Oracle Corp

NYSE:ORCL

Earnings Call Transcript 2021-Q4

[Operator]

Welcome to Oracle’s Fourth Quarter 2021 Earnings Conference Call. Now, I’d like to turn today’s call over to Ken Bond, Senior Vice President.

[Ken Bond, SVP]

Thank you, Erica. Good afternoon, everyone, and welcome to Oracle’s fourth quarter and 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 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 from placing undue reliance on these you from placing undue reliance on these forward-looking statements and encouraging 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 the questions, we’ll begin with a few prepared remarks. And with that, I’ll turn the call over to Safra.

[Safra Catz, CEO]

Thanks, Ken, and good afternoon, everyone. We are again reporting earnings earlier than last year. And with Fusion ERP, we are now filing our quarterly and annual financial statements faster than any other company in the S&P 500. This is possible because of the highly automated and machine learning-enabled system that helps us complete the accounting of financial transactions much more quickly.

As you can see, we had a fantastic quarter with revenue nearly $200 million above my guidance. Q4 is really a story of every product, every region and every metric exceeding expectations. The credit for the excellent full year results in the quarter goes to our global team of employees who supported our customers without interruption this past year. We were successful by continuing to deliver best-in-class products and services, both infrastructure and applications to help our customers in their digital transformation, many who’ve reinvented themselves in real time because of the pandemic.

Now, the growth rates we are reporting today are entirely organic, reflecting true [Technical Difficulty] related growth across our product portfolio. Total cloud services and license support revenue for the quarter was $7.4 billion, up 8% in U.S. dollars, 4% in constant currency, driven by Fusion, Autonomous Database and our Gen2 OCI. Application subscription revenues were $3 billion, up 11% in U.S. dollars and 7% in constant currency.

Our strategic back-office cloud applications now have an annualized revenue of $4.4 billion and grew 32% in constant currency for the quarter, including Fusion ERP, which was up 42%. NetSuite ERP, up 22%; and Fusion HCM, up 30%. Our back-office cloud application revenue is not only bigger than our nearest competitor, but also growing more than twice as fast.

Infrastructure subscription revenues were $4.3 billion, up 6% in USD, up 2% in constant currency. Infrastructure cloud services now have an annualized revenue of more than $2.3 billion. OCI consumption revenue, which was up 103% in constant currency; Autonomous Database, up 56%; and cloud and customer revenues, up 50%.

Database subscription revenues, including database support and database cloud services, were up 8% in USD, 4% in constant currency. Customers are adopting OCI because of its unique focus on performance and security at the most competitive price. The highly differentiated Autonomous Database, which is available there and the flexibility of deploying Oracle Cloud, both in our own data center, what we call public cloud, or behind our customers’ firewall, Cloud@Customer.

License revenues were $2.1 billion, up 9% in USD, 5% in constant currency. So, all-in, total revenues for the quarter were $11.2 billion, up 8% in USD, 4% in constant currency. Operating expenses were up 6% in constant currency this quarter as we made significant investments in our cloud business. And while you can see some of the ROI in FY21’s revenue growth, we expect the most of the return will be realized in FY22 and beyond.

Non-GAAP operating income was $5.4 billion, up 6% in USD and the operating margin was 49%. The non-GAAP tax rate for the quarter was 10.7% and below our base tax rate of 20% as a result of some discrete items that hit in the quarter. EPS was $1.54, up 29% in USD, and up 22% in constant currency. By the way, GAAP EPS was $1.37, up 39% in USD, 31% in constant currency.

Now, for the full fiscal year, total cloud services and license support revenue was $28.7 billion, up 5% in USD, up 3% in constant currency. Total Company revenues for the year were $40.5 billion, up 4%, USD, 2% in constant currency. FY21 recurring cloud services and license support revenue as a percentage of total revenue now represents 71% of total company revenue, up from 70% last year and we anticipate this trend to continue as cloud services grow and accelerate. Non-GAAP EPS for the year was $4.67, up 21% in USD, up 18% in constant currency, marking the fourth consecutive year of double-digit earnings growth.

The full year operating margin percentage was 47%, actually, our best result in seven years and up 245 basis points from 44% last year. Operating cash flows over the last four quarters was a record $15.9 billion, up 21% in USD. Our free cash flow was also a record, $13.8 billion, up 19% in USD with capital expenditures of $2.1 billion during the year.

For the quarter -- back to the quarter, operating cash flow was $4.8 billion, up 34% in USD, and free cash flow was $4.1 billion, up 30% from last year. As an aside, free cash flow would have been about 30 -- $300 million lower as some CapEx targeted for Q4 was actually spent in the last two weeks, so in early June. We now have more than $46 billion in cash and marketable securities. The short-term deferred revenue balance was $8.8 billion, up 10% in USD, 5% in constant currency. The remaining performance obligation, or RPO balance is $41.3 billion, up 8% in constant currency due to strong bookings. Approximately 60% is expected to be recognized as revenue over the next 12 months.

As you’ve heard me say many times before, we are committed to returning value to our shareholders through technical innovation, strategic acquisitions, stock repurchases, prudent use of debt and the dividend. This quarter, we repurchased 107 million shares for a total of $8 billion. Over the last 12 months, we repurchased 329 million shares for a total of $21 billion. Over the last 10 years, we have reduced the shares outstanding by more than 44%. In addition, we paid out dividends of $3.1 billion over the last 12 months. And the Board of Directors declared a quarterly dividend of $0.32 per share.

Now to the guidance. Let me first start with my confidence in the continuation of our revenue growth acceleration for fiscal year 2022.

As I’ve said many times over the last two years, our overall revenue growth is continuing to accelerate as our fast-growing cloud business becomes a larger portion of our total revenue. I see total revenue for fiscal 2022 growing faster than fiscal ‘21 with constant currency revenue growth somewhere in mid-single digits. Given our increasing confidence in revenue growth and our unique and differentiated position in the market, we are going to invest back in the business at a greater rate, so we can further accelerate the top line.

We also see cloud as being fundamentally a more profitable business compared to on-premise. And as everyone knows, our annual non-GAAP margins of 47%, and that’s what we run the business at, are, in fact, the highest non-GAAP margins of all of our competitors. And we believe that now is the right time to increase our investment to capture market share. As such, we expect to roughly double our cloud CapEx spend in FY 2022 to nearly $4 billion. We are confident that the increased return in the cloud business more than justify this increased investment and our margins will expand over time.

Let me now turn to my guidance for Q1. I’ll review this on a non-GAAP basis and assuming currency exchange rates remain the same as they are now. Currency should be about 2% to 3% positive on total revenue and $0.03 positive on EPS in Q1. However, currency fluctuates and the actual impact could be different.

Total revenues for Q1 are expected to grow from 3% to 5% in USD and are expected to grow 1% to 3% in constant currency. Cloud service and license support revenue growth for Q1 will be about the same as Q4 at 4% in constant currency and then climb through the year. As a result of the increased investment in the quarter, non-GAAP EPS in USD is expected to grow between 2% and 6% and be between $0.94 and $0.98 in USD. Non-GAAP EPS growth in constant currency is expected to be anywhere from negative to positive 2 and be between $0.91 and $0.95 in constant currency. Now, my EPS guidance assumes a base tax rate of 19%. However, onetime events could cause actual rates for any given quarter to vary, but I expect that normalizing for these onetime events, our tax rate will average around 19% or so.

Finally, we want to thank our employees around the world for working so hard and staying focused on our customers and partners during the pandemic. And we also want to send particular thanks and warmest wishes to our employees in COVID hotspots who’ve been hit particularly hard in [Technical Difficulty] and with whom we have been working very hard to support them, including providing vaccination. We just want to thank all of you and congratulate you all on a successful year and year-end. You’ve all been remarkable. So, thank you.

And with that, I’ll turn it over to Larry for his comments.

[Larry Ellison, Chairman and CTO]

Thanks, Safra, and great job. Your team delivered a spectacular Q4.

Clearly, our strategy to develop cloud applications with cloud infrastructure is now beginning to drive top line revenue growth to go along with years of consistent double-digit earnings per share growth. Our strategy is as easy to explain as it is technically challenging to implement. That’s a good thing. If it wasn’t hard to do, others would be able to do it.

Our strategy and applications depends on Oracle becoming the world’s largest provider of cloud ERP systems. Then, building upon that strong ERP foundation, we’re going to expand into manufacturing, CRM and industry-specific applications. We are successfully executing this strategy. Oracle Fusion and NetSuite are now the world’s two most popular cloud ERP systems. SAP, the leader in on-premise ERP, never rewrote their ERP system for the cloud. This has caused hundreds of customers to abandon SAP and migrate to Oracle Fusion ERP. That’s already happened. But over the coming months, several more major banks and utilities and a lot of other companies will complete their Oracle Fusion implementation projects and go live on Fusion ERP. Oracle is taking massive amounts of share away from SAP ERP. It’s crucial to our future.

While our Fusion and NetSuite [Technical Difficulty] have long been growing, we have also developed a complete new generation of cloud application suites. Our new manufacturing systems fully support and manage automated robotic factories. No one else does that. Our new cloud CRM applications help you sell more by fully automated internet advertising, lead generation and qualification. Nobody else does that. And we’re launching cloud application suites for 2 new industries, health care, and state and local government. Our health care initiative is an outgrowth of the national public health management systems that we built to manage the COVID-19 vaccine clinical trials and vaccine distribution in the United States and in other countries around the world.

In summary, our cloud application portfolio is more complete than other apps vendors and better integrated because almost all of our applications were developed internally, not acquired. Our infrastructure strategy depends on AI technology, specifically, neural networks and machine learning that we use to develop second generation autonomous cloud services, such as the Oracle Autonomous Database, the Oracle Autonomous Linux operating system and an array of autonomous cybersecurity defense bots that automatically identify and neutralize cyber attacks. All of Oracle’s cloud applications then run within the defensive perimeter of Oracle’s autonomous cloud infrastructure, the most reliable and secure platform in the world. And that’s increasingly important in a world plagued by cyber warfare, data theft and ransomware.

Oracle’s Autonomous Database and other autonomous services eliminate human labor. No human labor means no human error or opportunity for human mischief. Autonomy makes computer systems and cars much safer and more reliable. The Oracle Autonomous Database offers 99.995% availability. That means only a few minutes of downtime a year. And we have zero downtime security patching and upgrades, available today for infrastructure and very soon available for all of our applications.

Economics is also important. OCI has, by far, the best cost performance of any infrastructure hyperscaler. That’s why so many service providers, like Zoom, have chosen to expand into OCI. OCI’s cost performance is continuously getting better. Our new version of MySQL, the world’s most popular open-source database, just got between 10 and 100 times faster. And when you charge by the minute, every minute you don’t use is money saved.

Our new ARM microprocessors from technology partner Ampere delivers much better compute cost performance than either Intel or AMD, and by far, the lowest energy usage of any server microprocessor in the world. So, our latest infrastructure technologies are Good for our applications, good for your budget, good for the health of the planet and very good for Oracle’s future.

Back to you, Safra.

[Ken Bond, SVP]

Thank you, Larry. Erica, if you could please now prepare the audience to poll for questions.

[Operator]

[Operator Instructions] Our first question comes from Mark Moerdler with Bernstein Research.

[Mark Moerdler, Bernstein Research]

Thank you. And congratulations on the -- to the team on a clean, nice quarter. I’d like to try to get some more color on the drivers of the success of the Oracle Cloud ERP solution. Can you give us some more sense of how much of Oracle Fusion ERP is from new Oracle ERP customers? How much is international versus the U.S.? How much is large enterprise? Where is the sweet spot? Any color you can give to get a sense of what’s really driving the growth, and how much of that is new to versus existing customers would be very helpful.

[Larry Ellison, Chairman and CTO]

Yes. This is Larry. There are more new customers than upgrades from on-premise ERP with Oracle Fusion. So, it’s probably about 60-40, in the 60s, it’s probably not quite 2 to 1 new customers, but most of the -- a majority of the business is coming from new customers. We’re also upgrading our installed base of the E-Business Suite and PeopleSoft and JD Edwards to Fusion. But again, more revenue is coming from new customers, [Technical Difficulty] customers, [Technical Difficulty] customers, people like that, they’re coming from our on-premise installed base. So, that’s really the trend. And we think that trend is actually going to accelerate in favor of new customers because the SAP migration phenomena is relatively recent in the last 12 months -- over the last two years, but it’s really accelerating now in the last 12 months. So, we think that’s going to hold.

So, another way to look at it is it’s a very -- as people migrate to Oracle Fusion ERP and smaller companies migrate to NetSuite ERP, these are both enormous businesses. Fusion ERP, I mean, certainly much bigger than $10 billion -- and NetSuite is bigger than $10 billion, Fusion is probably bigger than $20 billion as these businesses mature.

[Safra Catz, CEO]

Yes. And as far as where it’s happening, I have to tell you, it is so broad-based. It is a worldwide phenomenon for us. Our Fusion, NetSuite are just chugging along. It was an incredible, incredible Q4, and Q1 looks enormous. So, imagine, bookings are way up. And there’s just a lot of success. We have so many customers that have gone live. So, we have references from some of the largest companies in the world to really small or medium-sized companies that it’s pretty consistent, almost any prospect can find many companies just like it already being incredibly successful. And I think that, frankly, the pandemic taught many of our prospects and customers that moving quickly is really required these days. I think that folks used to think moving quickly is risky. I think, they really saw that they had to move to much more modern, flexible, digital businesses, and that we are the [Technical Difficulty] destination for them for the back-office without a doubt.

[Larry Ellison, Chairman and CTO]

I’d like to add one thing. We almost never lose a competitive ERP deal in the cloud, virtually never.

[Operator]

And our next question is from Keith Weiss with Morgan Stanley.

[Keith Weiss, Morgan Stanley]

Excellent. Thank you, guys, for taking the question. And congratulations on another year of 20% -- or year 20% plus earnings growth. And frankly, nice to see the stock starting to reflect the durability of earnings growth you guys have seen over the past couple of years. So, it’s nice to see that.

I wanted to dig in a little bit on the infrastructure side of the equation, in particular, OCI. Another quarter of, I think you said, 103% growth in OCI consumption. Can you dig in a little bit on sort of what are the workloads that are being done on OCI? Is this just all Oracle Database workloads? There is a lot of those out there that just run so well on OCI, or is there a broader perspective of the big workloads that guys are bringing over, not looking for commentary on any specific customer, but just broadly, what do you see in this space? Where do you guys do well? Where do you win with OCI?

[Larry Ellison, Chairman and CTO]

Okay. I mean, it’s really easy to remember. About half of it’s database, half of it’s everything else. So, I mean everything else -- I mean, the database, you understand. They’re lifting and shifting existing database workloads and developing new Oracle Database workloads on OCI. The other thing varies from things like Zoom who have moved over, but also in simulations. And we’re very, very good at running simulation software. So, almost -- so a large number of car companies have moved all of their past simulations to the Oracle Cloud because we do it faster and cheaper than any other cloud.

So, we have actually a pretty balanced portfolio right now where we have the Oracle Database contributing to half of the workloads running on -- running in OCI and the other half is a variety of new customers doing new applications, not database related.

[Safra Catz, CEO]

Keith, thank you. First of all, thank you for [Technical Difficulty]. The reality is that any customer that is really focused on performance, security, like Larry mentioned and cost, which happens to show up in many, many workloads. One of the areas we’re doing particularly well are ISVs who are obviously experts at running their workloads. They’re in the business. And they are coming to us extensively because they’re really studying the benefits that we bring them. And of course, as I mentioned and as we never stop mentioning, security with what’s going on these days. You really have to be in a cloud that is basically obsessed with security while still giving you incredible performance at lower cost.

I mean, once we are given a try, what happens is the workload comes, one workload comes, and it’s usually followed by many others. And so, it’s -- we’ve got a lot of momentum, let’s say.

[Larry Ellison, Chairman and CTO]

And I want to emphasize one thing, I said it, but I want to say it again, is there are new Oracle workloads being developed, especially in the area of genomics where there have been a number of new databases moved to Oracle and OCI that track things, like the genetic variants of COVID-19? But, there are a number of these things. And you’ll see a whole series of announcements coming out where we’ve moved aggressively into health care, and one of the big new applications for our database is just -- is tracking the genomics of pathogens. And those databases are being developed right on Oracle Autonomous Database from scratch.

[Operator]

Our next question comes from Derrick Wood with Cowen & Company.

[Derrick Wood, Cowen & Company]

Great. Thanks for taking my questions. And congrats as well on a strong quarter. I’ve got one for Safra and one for Larry. Safra, in the past, you’ve talked about the potential revenue opportunity for the app space, if you were to migrate everybody to SaaS. So, I wanted to ask about the database side and in particular, Exadata. Can you give us a sense of what the revenue potential or uplift could be if you shifted all Exadata customers to Cloud@Customer? And how you feel about the strength of those motions heading into the new fiscal year?

And then, for Larry, I mean, as you guys push to drive adoption of Autonomous Database, should we think of Cloud@Customer being the biggest vehicle for adoption, or what routes to market do you see working best?

[Safra Catz, CEO]

Okay. Let me get it started, and then Larry can finish. So, Derrick, I’m glad you asked because when customers move from running their own dozen or 100 Exadatas, when it’s time for a refresh or a new set, we prefer that they go to Cloud@Customer and -- or have a dedicated region. However, just so that you know since you all focus on the numbers, you have to understand that when we sell hardware, regular way, we recognize all that revenue once it’s delivered, all that hardware is delivered. But, when we install Cloud@Customer, Exadata Cloud@Customer or dedicated region, we don’t recognize that revenue upfront. And so, -- and you don’t even see that that is all happening right now in our income statement and yet we’re still growing.

So, as a general matter, first of all, it is much -- even though we believe we make around 3 times, maybe more, in revenue in the case of Cloud@Customer versus selling -- just selling the hardware can be anywhere from 3 to 5 times, the customer actually ends up spending less because we manage their entire estate. We update their databases, et cetera, depending on what services they’re using, and they get the benefit of always having capacity, always having the most up-to-date system, the most secure system and patched and fully managed by us. So, though, ultimately, they give us significantly more money 3 to 5 times as much, in fact, they end up spending much less to maintain that estate. So, for -- it’s kind of a win-win because we’re much more efficient, fully automated and save them the immense amount of labor it takes to run these very critical production systems.

Okay. I guess, Larry’s question, what was it again, Derrick?

[Derrick Wood, Cowen & Company]

It was around Autonomous Database and what’s kind of the route to market to drive adoption, is Cloud@Customer really the biggest vehicle, or are there other routes that are working well too?

[Larry Ellison, Chairman and CTO]

Well, the Autonomous Database only runs in the cloud. It does not run on-premise. It doesn’t run on -- even at the Exadata appliance. It runs on [Technical Difficulty] or public cloud. So right now, the public cloud is the most popular route for Autonomous Database and Cloud@Customer is becoming more popular as people scale up, so. But right now, the most popular way to use Autonomous Database is in the OCI public cloud.

[Operator]

Our next question is from Kirk Materne with Evercore ISI.

[Kirk Materne, Evercore ISI]

Thanks very much. And thanks for taking the question. I was wondering, Safra, could you just talk about sort of the performance in Europe this quarter? It looks like it bounced back nicely. And I guess, along those same lines, can you just talk about cloud adoption on certain [Technical Difficulty] just maybe what you’re seeing in the -- I assume you guys are probably leading the charge. But what you’re seeing in other regions just following maybe close behind it? Thanks.

[Safra Catz, CEO]

Sure. So, first of all, I have two new leaders in Europe, Middle East, Africa. I have a very refreshed and new and really successful management team in Europe. And they are pretty much firing on all cylinders. It is extremely broad throughout Europe, Middle East, all of EMEA. [Technical Difficulty] tell you incredible strength worldwide. Latin America doing phenomenally; Japan doing phenomenally; as a result, JPAC doing very, very well; and of course, led by North America. I have to tell you, it’s been an amazing year. It was a phenomenal quarter, but truly an amazing year worldwide. And I’m more than satisfied. I am delighted by the results of the team. And for me, this was my first full year with the field. So, I really applaud the team for doing a spectacular job worldwide.

[Operator]

Our final question comes from Raimo Lenschow with Barclays.

[Raimo Lenschow, Barclays]

Hey. Thanks for squeezing me in. Safra, the one thing that was interesting that we didn’t really talk that much about is your RPO and RPO growth. Can you talk about it again? Because like the growth there is actually even better than I see on the revenue line. And that, to me, suggests that this wasn’t just Q4. It looks like things are coming together broad-based in the coming quarters as well. Thank you.

[Safra Catz, CEO]

Yes, Raimo, you are so right. Q4, but really, it’s just coming together all around, the RPO. I’m glad [Technical Difficulty] really, really strong bookings are -- were truly enormous. Obviously, they don’t show up in the income statement right away, but they -- the future is just so positive. And you might have heard me, I was hinting to that in my comments. And one of the reasons we’re so comfortable leaning into our investment because we really want to make sure we’ve got the capacity to take on the enormous amount of bookings that are flying in and that both were [Technical Difficulty] during the year and are going on line, and so, will be recognized over this next year and beyond. But, there is just an enormous backlog for us of customers that are going live and that will start consuming and we’re very optimistic. So, thank you so much for asking, and I’m glad you noticed that.

[Raimo Lenschow, Barclays]

Thank you. Okay. Congrats.

[Ken Bond, SVP]

Thank you, Safra. If there are any questions coming out of this call, please feel free to call the Investor Relations hotline. Otherwise, I’ll turn the call back to Erica for closing.

[Operator]

Thank you for joining today’s Oracle’s fourth quarter 2021 earnings conference call. We appreciate your participation. You may now disconnect.