Oracle Corp Japan

TSE:4716

Earnings Call Analysis

Strong Q1 Performance Sets Up Positive Outlook for FY 2025

In Q1 FY 2025, Oracle Japan saw significant revenue growth of 11.4%, reaching JPY 63.915 billion. Cloud services revenue rose by 9.2%, accounting for 22% of total revenue. Operating income grew by 20.2%, while net income increased by 19.4%. Key drivers included high demand in the cloud and license business. The company maintains a revenue growth guidance of 5% to 9% and expects EPS to be between JPY 445 and JPY 460 for FY 2025. Oracle Japan highlighted successful customer projects, such as Hitachi Construction Machinery and Wakayama City, emphasizing robust adoption of their cloud services【4:0†source】【4:1†source】【4:2†source】【4:3†source】.

A Banner Quarter for Oracle Japan

Oracle Japan's Q1 Fiscal Year 2025 earnings call revealed a strong performance across its key business segments. Revenue for the quarter reached JPY 63.915 billion, marking an 11.4% increase compared to the previous year. This growth was driven by robust cloud services and on-premise license demand. The company's efforts to solidify its position as a premier cloud vendor in Japan, particularly through Oracle Cloud Infrastructure (OCI) and Oracle Fusion applications, have paid off significantly.

Unveiling Cloud Success Stories

Oracle showcased several marquee cloud customers that exemplify its market penetration. For instance, Hitachi Construction Machinery successfully migrated its mission-critical system to Oracle Cloud, cutting IT infrastructure costs by around 20%. Wakayama City migrated its resident information system to Oracle Cloud, underlining the public sector's trust in Oracle’s solutions. Yashima Denki and Pocketalk Corporation also adopted Oracle's cloud solutions to enhance business operations and support growth initiatives.

Strong Financial Performance

Oracle Japan’s cloud services revenue rose to JPY 13.915 billion, a 9.2% growth year-over-year, now making up 22% of the company's total revenue. Other financial highlights include a 20.2% increase in operating income to JPY 22.194 billion and a 19.4% rise in net income to JPY 15.374 billion. Additionally, infrastructure consumption revenues posted strong momentum, with double-digit growth in Remaining Performance Obligations (RPO).

Steady Outlook Amid Seasonal Variations

Executives acknowledged a slight deceleration in cloud services growth, attributing it to seasonal factors expected to normalize in subsequent quarters. They anticipate growth to pick up in Q2 and accelerate further in Q3 and Q4. The company maintained its full-year guidance, projecting revenue growth between 5% and 9% and EPS in the range of JPY 445 to JPY 460.

Cost Management and Operating Efficiency

Oracle Japan continues to focus on cost management and efficiency improvements. The company saw slightly lower outsourcing expenses this quarter due to favorable exchange rates. Moreover, operating margins improved significantly, with an expectation to maintain these levels in the low to mid-30s percentage range over the fiscal year. The consistent financial discipline points to a stable outlook for continued profitability.

Positive Surprises and Demand Dynamics

Unplanned demand for on-premise licenses provided a pleasant upside for Oracle Japan, contributing to the strong quarterly results. While there were some large deals, the growth was primarily driven by consistent demand across various industries. This broad-based demand pattern underscores the diverse applicability of Oracle's solutions across different market segments.

Earnings Call Transcript 2025-Q1

[Yuki Nishio, executive]

[Foreign Language]

Now I'd like to turn this call over to KK, Senior Vice President, JAPAC and Japan CFO.

[S.Krishna Kumar, executive]

Thank you, Nishio-san. Good afternoon, everyone, and welcome to Oracle Japan's First Quarter Fiscal Year 2025 Earnings Conference Call. We just had Oracle Cloud World in Las Vegas 2 weeks ago, which is Oracle's largest celebration of customers and partners. Oracle Corporation announced a lot of references and new technologies, including our OCI database, applications, analytics, multi-cloud strategy, GPUs and generative AI. We have many recordings available on our website if in case you want to view it.

[Foreign Language]

We had another excellent performance this Q1. The demand is substantial for our cloud business and on-premise license, which has led to an acceleration in revenue growth.

[Foreign Language]

We have clearly become -- recognized as a robust cloud vendor. We continue to expand our customer base for OCI and Fusion even in the Japanese market, which is known to be lagging behind in adoption of cloud computing.

[Foreign Language]

We had a lot of marquee cloud customers in various industries. So let me give you a few examples.

[Foreign Language]

Number one, Hitachi Construction Machinery. Hitachi Construction Machinery develops, manufactures, sells and rents hydraulic excavators, reloaders, road equipment, et cetera, with more than 400,000 units of construction equipment in operation worldwide.

[Foreign Language]

With Oracle Cloud VMware solution and Oracle Accelerator Database service, they were able to quickly and reliably migrate their mission-critical system of 500 virtual servers and 100 databases to the cloud, reducing cost of IT infrastructure and strengthening IT infrastructure.

[Foreign Language]

It also helped them reduce their Infrastructure cost by about 20%.

[Foreign Language]

Number two, Wakayama City. Wakayama City is moving forward with a full-fledged local government information system standardization. Initiative started in 2023 and is considering how to operate a standard compliance system suitable for government cloud.

[Foreign Language]

Among the mission-critical systems operated by Wakayama City that are subject to unification and standardization, the resident information system has been migrated using Oracle Cloud infrastructure, a cloud service selected as government cloud. The migration has started.

[Foreign Language]

Number three, Yashima Denki Co., Ltd. Yashima Denki is an engineering company that sells products and provide system design, installation and maintenance services utilizing its core technologies in electrical control systems, power supply systems and air conditioning systems.

[Foreign Language]

They have selected Oracle Fusion Cloud Application suite to strengthen their ability to respond to business transformation and changes in the market environment, which will be used for sales and quotation, supply chain, accounting, project and business management.

[Foreign Language]

Number four, Pocketalk Corporation. Pocketalk develops translators and software services that provide real-time translation in more than 80 languages and operates in Japan, United States and the Netherlands.

[Foreign Language]

The challenge for them was to build a system that could handle IPO and future business expansion and to conduct audits quickly to ensure data integrity. To solve these issues, they selected NetSuite as their new ERP system.

[Foreign Language]

This was just to give you a sense of the broad outreach in the market that we have with our different products and services and to underline Oracle's presence in the most mission-critical systems, applications and industries.

[Foreign Language]

Now let me quickly give you a summary of the numbers. Total revenue at JPY 63.915 billion grew 11.4% compared to previous year given a strong growth in our cloud and license revenue.

[Foreign Language]

Cloud services revenue was JPY 13.915 billion, up 9.2% and now represents 22% of the total company revenues.

[Foreign Language]

Infrastructure consumption revenues showed a very strong momentum, which includes autonomous database, and also, our RPO grew double digits this quarter.

[Foreign Language]

Operating income was JPY 22.194 billion, increasing 20.2%.

[Foreign Language]

Net income was JPY 15.374 billion, up 19.4%.

[Foreign Language]

Total revenue and all 3 margins indicated record high as the first quarter.

[Foreign Language]

Q1 continues to show strong cloud demand, a strong license business, and we hope to continue the momentum into fiscal year 2025.

[Foreign Language]

For the time being, I am maintaining my guidance for fiscal year '25 for revenue at 5% to 9% and for EPS at JPY 445 to JPY 460.

[Foreign Language]

Thank you very much, and I will turn it back for questions.

[Yuki Nishio, executive]

[Foreign Language] The first series of questions came from Tanaka-san of Morgan Stanley MUFG Securities. The first question is that the on-premise license is doing well. And are there any particular sector or industries, which showed more strength? Were there any major deals? And what is your prospect in coming quarters?

[S.Krishna Kumar, executive]

So as you can see, our on-premise license revenue actually grew very strong this quarter. The demand was general all around. We did not have a significant large deal. There were some large deals, but we didn't have -- it was not on the back of 1 large deal or 2 large deals.

[Foreign Language]

So overall, we saw demand from -- consistent demand across industries. So I cannot pick and point out to demand coming from any single or a particular set of industries.

[Foreign Language]

And the second question was?

[Foreign Language]

[Yuki Nishio, executive]

The second question, also from Tanaka-san, is that the growth rate of the cloud services is now at 9%, it seems a bit decelerating. What are the reasons? And do you think that this number will go back to the double digit in the future?

[S.Krishna Kumar, executive]

There is a certain seasonality issue that plays into Q1 every year, which will normalize from here on. So I expect the growth to return back to normal in Q2, and I also expect acceleration in Q3 and Q4 for cloud revenues.

[Foreign Language]

[Yuki Nishio, executive]

So the third question from Tanaka-san. You used to disclose the COGS number and as well as the SG&A growth and the decline. And could you give us some breakdown of those?

[S.Krishna Kumar, executive]

So let me just broadly answer this question. I think there was a lot of duplication in the information that we used to disclose before. So we have streamlined the disclosure. And in terms of breakdown of cost of sales and SG&A expense, I think we are doing reasonably okay. There is no cause for concern, and it's like business as usual as of now.

[Foreign Language]

You can also see that our gross margins are slightly higher this quarter, and I expect the gross margin to maintain at the same percentage, which is what I have been maintaining for several years. We are trying to be as efficient as possible as a company. We are cutting costs where we think we can gain more efficiencies, and we are investing into the future -- we continue to invest into the future.

[Foreign Language]

Thank you very much.

[Foreign Language]

[Operator]

[Foreign Language]

[Yuki Nishio, executive]

And we also have 3 questions from Tsuruo-san of Citigroup. First question is that Q1 results in comparison to the internal expectations, how much upside did you have in terms of revenue and also the income or profit?

[S.Krishna Kumar, executive]

So -- sorry, can you repeat that question?

[Yuki Nishio, executive]

Yes. What was the upside in comparison to the internal expectation for the Q1 revenue and profit?

[S.Krishna Kumar, executive]

We did with -- so I -- we definitely had a very strong license demand that came in the quarter, which was not completely in our internal estimate. So there were some positive surprises for on-premise license, and that helped us turn a very strong quarter.

[Foreign Language]

[Yuki Nishio, executive]

There were questions on the on-premise and cloud from Tsuruo-san, but those were the overlap from the previous question. So we are skipping them.

And another question from Tsuruo-San is that our operating margin improved significantly year-on-year, so what is the prospect for the full year?

[S.Krishna Kumar, executive]

Again, as I've always maintained, I think for the near term, we will have our operating margin in the -- slightly less than mid-30s or in the early 30s. That trend will continue. There will be some quarters where we'll be seeing slightly higher margins, there'll be other quarters that we will probably see some lower margins. I'd like to look at my business on a 12-month basis.

Our cost models have not changed. Our royalty models have not changed. So we will continue to deliver consistent operating margins through the next few periods as well.

[Foreign Language]

[Yuki Nishio, executive]

So there were questions from Kikuchi-san of SMBC Nikko, but those were the questions already answered.

And a question from Watanabe-san of Mitsubishi Sumitomo DS Asset Management is the reasons behind the lower outsourcing expenses. Since the business is growing, I thought that it would -- the outsourcing expense also would increase, but what is the reason for lower outsourcing expense?

[S.Krishna Kumar, executive]

Primarily this quarter, primarily because of slightly favorable exchange rates we saw a lower outsourcing expense. And frankly, these are things which are not in my control. As I said, we will continue to maintain operational -- we will continue to work on operational efficiencies. We will continue to deliver expected gross margins that you have been seeing in the past. I think it will continue for the near term, at least.

[Foreign Language]

[Yuki Nishio, executive]

Question from Ueno-san of Daiwa Securities. The question on the on-premise was overlapping, so we are skipping that.

So another question from Ueno-san is that, was there any replacement demand because of the price increase of the VMware?

[S.Krishna Kumar, executive]

Not really. It's got nothing to do with VMware. It's Oracle database. People want to buy Oracle Database to run their mission-critical systems. And sometimes we have a spurt in demand, so this has nothing to do with VMware.

[Foreign Language]

[Yuki Nishio, executive]

We are still waiting for other questions.

[Foreign Language]

Yes, we did receive 1 question from Tsuruo-san of Citigroup Securities. So if we can maintain the gross profit margin at Q1 level, then your full-year earnings will improve. What is your view on that?

[S.Krishna Kumar, executive]

It's -- we have done a modeling based on what we see for the full year. So hopefully, we can end up at the high end of my estimates. And you're right, if we continue to operate at the same level of margins, we can improve it. But it's very early for me to comment on that.

[Foreign Language]

[Yuki Nishio, executive]

Another question from Tsuruo-san. Could you tell us the percentage of the dollar-based expenses in the operating expenses? And what is the impact of the ForEx fluctuation?

[S.Krishna Kumar, executive]

I don't have the exact percentages. A lot of our outsourcing expense are dollar-based. Other than that, everything else is Yen-based. So there is some impact, but not like of very high impact of the dollar exchange rate.

[Foreign Language]

[Yuki Nishio, executive]

A question from Watanabe-san of Mitsubishi Sumitomo DS Asset Management. We hear that there were several major projects or deals in license sales. What was the total amount? And we also heard from the distributors -- one of the distributors that there was a JPY 3 billion level renewal deal for 3 years for megabank. It was ULA. So aside from that, what were the other major deals?

[S.Krishna Kumar, executive]

I don't know what you heard from who. I really cannot comment on somebody telling you something and all that. I have already told you that we had a very good license quarter. There was general all-around demand. There were some large deals. There were a mix of large, small, medium deals. We just had a consistent quarter that's all.

[Foreign Language]