Oracle Corp Japan

TSE:4716

Earnings Call Analysis

Oracle Japan Reports Robust Quarter, Eyes Higher Revenues

Oracle Japan's second quarter of fiscal year 2024 showed significant growth, with total revenue up by 8.9% to JPY 117.49 billion. The surge was led by a nearly 38% increase in cloud services revenue, which now constitutes roughly 20% of total company revenues. Record-high numbers were also seen in net income, with a 10.4% rise to JPY 26.665 billion. The company's guidance holds steady with an anticipated total revenue growth of 2% to 6%.

Executive Overview and Revenue Growth

During the earnings call, Oracle's Senior Vice President of JAPAC and CFO for Japan, S. Krishna Kumar, delivered an upbeat assessment of the company's performance, indicating that Oracle is operating business as usual despite any external assumptions or market volatility. The company reported a robust total revenue of JPY 117.49 billion, demonstrating a substantial growth rate of 8.9% year over year. This increase is primarily attributed to impressive growth in cloud revenues, which soared by almost 38%, now constituting nearly 20% of total company revenues.

Cloud Services and Segment Performance

Oracle experienced vigorous growth across all its cloud offerings. Notable segments included the ERP cloud and NetSuite, with infrastructure consumption revenues also demonstrating strong double-digit growth. The firm's Remaining Performance Obligation (RPO), indicative of a solid future revenue backlog, also saw significant growth. This forward-looking metric is a good omen for sustained revenue streams in the coming years.

Profitability and Guidance

Net income rose by 10.4% to a total of JPY 26.665 billion. Meanwhile, the company refrained from altering its revenue guidance, maintaining a conservative stance of 2% to 6% growth. The executive team indicated that they expect to possibly reach the high end of this guidance range, given the company's strong performance in the first half of the year, but deem it premature to revise forecasts at this juncture.

Operational Efficiency and Margin Expansion

Oracle attributed the significant growth in services and margin expansion to improved efficiency and experience in executing cloud implementations. As the company gathers more experience with cloud-based projects, which tend to be less complex and time-consuming than traditional on-premise implementations, margins have been seen to increase due to this operational streamlining.

Customer and Market Dynamics

The company highlighted notable collaborations underscoring Oracle's deep penetration into mission-critical sectors. Partnerships include Payroll, provider of payroll and outsourcing services; Ryobi Systems, working on government cloud solutions; and AIST, revamping its financial accounting system with Oracle's Cloud ERP. These relationships serve to underline Oracle's strategic importance and diverse presence in various industries.

Investor Concerns and Risks

Investor inquiries brought up topics such as royalty rates, outsourcing expenses, and corporate relations. The increase in royalty rates was linked to a fluctuating product mix, while outsourcing expenses saw a reduction due to lower corporate charges in the reported quarter. Regarding risks, seasonal effects were cited as influencing cloud service revenues, but expectations are for this impact to diminish as the cloud segment continues to expand, fostering steady quarterly growth.

Earnings Call Transcript 2024-Q2

[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]

[Interpreted]Thank you very much Nishio-san.Good afternoon, everyone, and welcome to Oracle Japan's Second Quarter and Fiscal Year 2024 Earnings Conference Call.We had an excellent quarter, which continues -- which is accelerated by the growth of our cloud services.Let me give you a few highlights. Oracle was named leader for the fifth time in 2023, Gartner Magic Quadrant for cloud ERP for product [ centric ] enterprises.And Oracle was also recognized as a leader for strategic cloud platform services and cloud infrastructure services.Similarly, in Japan, now our status has been established as one of the hyperscalers.We have become the enterprise technology vendor of choice, because we have products and services that help our customers drive cost efficiency and modernize their businesses.The customers recognize that they can get more value while paying less by moving to our cloud services.We had a lot of marquee cloud customers in various industries, especially financial industries, manufacturing and public sector.Now, I will be sharing some customer references that were released recently.First one is Payroll; Payroll is a provider of payroll and related outsourcing services and has been growing since it was founded in 1989, with 255 companies and 1 million users of its outsourced payroll services as of March 31, 2023.The company has newly implemented and began operating Oracle Exadata Cloud@Customer. A hybrid cloud solution of Oracle Cloud Infrastructure, as the database foundation for its payroll system.By installing Exadata Cloud@Customer hardware within the company's data center, an environment has been created that allows highly confidential data to be stored in-house, while providing high processing capacity with low latency.#2, Ryobi Systems. Ryobi Systems, a provider of information services for public medical and social security sectors as well as for private sector will collaborate with Oracle Japan on migration of local government systems to government cloud.The latest version of Ryobi Systems Community Health Management System for municipalities and insurers, Kenkou Quarte Version 8, will be compatible with Oracle Cloud Infrastructure, which has been adopted as government cloud.By adding OCI as an option for government cloud support for Kenkou Quarte, which is used by more than 700 municipalities nationwide. Both companies will strengthen their value offerings in the municipal domain.#3, the National Institute of Advanced Industrial Science and Technology, AIST. AIST will revamp its new financial accounting system with Oracle Fusion Cloud ERP.AIST's mission is to create innovation through social implementation of science and technology and to contribute to strengthening Japan's industrial competitiveness.The financial accounting system, which is the target of the restructuring, had its operations divided into several separate systems, which required restructuring, to screen inconsistencies and data integration.Therefore, it was decided to adopt Oracle Cloud ERP as the accounting system, using our cloud so that they can digitize the series of financial accounting related business processes.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 most mission-critical systems, applications and industries.Now let me move on to the numbers. Total revenue, JPY 117.49 billion are growing at 8.9% compared to the previous year, given the strong growth in our cloud revenues.Cloud services revenue was JPY 23.852 billion, up almost 38% and now represents almost 20% of our company's revenues.All our cloud offerings, including our ERP cloud, NetSuite, our infrastructure consumption revenues were all showing strong momentum with very high double-digit growth.Our remaining performance obligation, RPO is also growing strongly. Our RPO numbers show our strong backlog for the next couple of years.Net income was JPY 26.665 billion, up 10.4%. So total revenue and all the 3 margins indicate record highs in the second quarter, we hope to continue the momentum into the year. Thank you very much.I will turn it for questions.

[Yuki Nishio, executive]

[Interpreted]So first question is from Tsuruo san from Citigroup Securities. The first question is, what is your forecast for the second half in the on-premise to cloud -- for both on-premise and cloud?

[S.Krishna Kumar, executive]

I don't -- so we -- I only forecast on a total revenue basis. And I'm holding on to my guidance as of now, which is 2% to 6%. As you can see, our first half has shown strong momentum, and hopefully, we can finish somewhere around the high end of my guidance. But at this point in time, it is too early for me to change anything.[Foreign Language]

[Yuki Nishio, executive]

[Interpreted]A second question from Tsuruo san, can you explain the background of the significant growth in the services, the significant growth in profits in services?

[S.Krishna Kumar, executive]

There's no particular reason. I think we executed some of the projects, some of the more profitable projects in time and we are becoming more and more efficient with our execution of the projects, because as we gain experience, cloud implementations are easy to run, unlike the big on-premise implementation, which have long overruns, cloud implementations are more efficient. And for that reason, we see increasing margins in our services business.[Foreign Language]

[Yuki Nishio, executive]

[Interpreted]So the question from Kikuchi-san from SMBC Securities. So in terms of expenses for royalties, the royalty rates, it has gone up by 1.1 points compared to the second quarter of last year, and it has gone up by 0.7 points compared to the first quarter, and it is now 44%. Can you explain the reasons -- the elements, factors related to this?

[S.Krishna Kumar, executive]

Okay. Regarding the first question on breakdown of the cloud services revenue. As I mentioned in my opening comments, all of our cloud segments are growing strongly. ERP -- Cloud ERP, our flagship product, which is recognized by Gartner in the leadership quadrant, continues to make big inroads in the Japanese market.Our NetSuite continues to make inroad into segments where into the small and medium enterprise segment. That is where we focus the NetSuite product arm. That is also gaining momentum. OCI without having to even qualify it, OCI services are being accepted widely across all enterprises in Japan, also showing great momentum for us, which is very, very encouraging signs for the future. I cannot at this point in time, break down between the different cloud segments.[Foreign Language]Regarding the second question on the royalty rate, it's basically due to a change in product mix. We have different quality rates for our different products as the product changes, the royalty rates will go up and down. And on the outsourcing expense, basically, there are some fiscal recharges, which the corporate charges, which came in lower this quarter. That's the only reason.[Foreign Language]

[Unknown Speaker]

Sorry, sir. This is the interpreter. I'm sorry. I wasn't aware that there was an outsourcing related question. Can you repeat the answer or whether -- can you wait for a moment?

[S.Krishna Kumar, executive]

Yes. Do you want me to repeat it?

[Unknown Speaker]

No. Can you wait for a moment?[Foreign Language]So may I repeat the question. So the outsourcing expenses compared to the first quarter has gone down by approximately JPY 600 million. So what has gone down and what is your forecast for the second half of the year?

[S.Krishna Kumar, executive]

So as I said, we -- the outsourcing expense, there were lower charges from the corporate for the various services that we use. And so that's the reason why it went down. I've initially forecasted based on our existing run rates and sometimes those run rates don't hold, and we get sometimes higher or lower charges from the corporate. So it is a less predictable expense for me. But in the overall scheme of things, it's a marginal difference.[Foreign Language]

[Yuki Nishio, executive]

[Interpreted]The next question is from Watanabe-san from SMBC DC Asset Management. So there seems to be some criticism towards the IPO of the parent and subsidiary situation. What is the stance of the company? What is the stance of the organization?

[S.Krishna Kumar, executive]

I don't really -- as far as -- I don't really understand the context of the question, but as far as Oracle Japan and Oracle Corporation are concerned, we are both listed in different countries, different stock exchanges. We have been listed for 30 years and we've been functioning normally. We have a great working relationship with the parent, and we get the benefit of all the innovation that happens in the parent company. So there's -- I mean I don't read anything as far as Oracle is concerned, it's business as usual.[Foreign Language]

[Yuki Nishio, executive]

[Interpreted]Next is Mr. Segawa-san from Morgan Stanley. So the question is, the cloud service revenue has gone down on a quarterly basis, subsequently, it has gone down compared to Q1. So is that because there are some specific activities that went live -- there was a go live for some specific projects in Q1? And for the cloud service revenue from here on, do you expect to see an increase in both revenue and revenue -- sorry, revenue and are there any particular risks that you are concerned about?

[S.Krishna Kumar, executive]

Well, as far as the sequential number is concerned, it's more to do with some seasonality. And I think if you go back a year, Q1 to Q2 last year also was similar, and we continue to grow for the remaining quarters. I think that trend will continue. As our cloud services revenue grows and becomes even more substantial, some of these seasonality effects will go away and hopefully, then you would only see a sequential growth in every quarter.[Foreign Language]

[Yuki Nishio, executive]

[Foreign Language][Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]