Oracle Corp Japan

TSE:4716

Earnings Call Transcript 2023-Q3

[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 Third Quarter Fiscal Year 2023 Earnings Conference Call. Our third quarter, our business -- in the third quarter, our business continuously progressed for both on-premise and Cloud services. We deployed our Cloud to different customers, especially Cloud infrastructure to modernize their mission-critical systems. We also signed a lot of marquee Cloud customers in various industries, especially manufacturing, retail and service industries and also in the public sector.

[Yuki Nishio, executive]

[Foreign Language]

[S.Krishna Kumar, executive]

I have said this before also, but our OCI is selected as government Cloud for the digital agency, and that increases our prospects in terms of generating a big pipeline for us for larger projects and stimulates our demand over the mid- to long term in the government sector.

[Yuki Nishio, executive]

[Foreign Language]

[S.Krishna Kumar, executive]

We continue to be the enterprise technology vendor of choice because we have products and services that help our customers drive cost efficiencies and modernize their businesses.

[Yuki Nishio, executive]

[Foreign Language]

[S.Krishna Kumar, executive]

A number of companies continue to implement Oracle Fusion Cloud ERP and EPM to help simplify and standardize financial planning and analysis, increased productivity, reduce costs and improve controls.

[Yuki Nishio, executive]

[Foreign Language]

[S.Krishna Kumar, executive]

Additionally, companies can drive accurate connected plants and leverage predictive intelligence, scenario modeling and built-in best practices to navigate uncertainty across their businesses.

[Yuki Nishio, executive]

[Foreign Language]

[S.Krishna Kumar, executive]

We will also be holding CloudWorld in Tokyo in April and as financial analysts, if you are interested to understand our technologies, you are welcome to join it.

[Yuki Nishio, executive]

[Foreign Language]

[S.Krishna Kumar, executive]

Now moving to the numbers. Our total revenue at JPY 163.226 billion is growing 6.3% for the 9 months ending February, sorry -- ending February 2023. And it's basically driven by a strong growth in our Cloud and license revenue.

[Yuki Nishio, executive]

[Foreign Language]

[S.Krishna Kumar, executive]

Cloud services and license support revenue was at JPY 105.100 billion grew at 6.1% and now represent 64.4% of total company revenues.

[Yuki Nishio, executive]

[Foreign Language]

[S.Krishna Kumar, executive]

Fusion ERP Cloud revenue was up 17%. NetSuite ERP Cloud revenue was up 26.5%.

[Yuki Nishio, executive]

[Foreign Language]

[S.Krishna Kumar, executive]

Income at JPY 52.610 billion increased 2%. Net income was up 2.3%.

[Yuki Nishio, executive]

[Foreign Language]

[S.Krishna Kumar, executive]

Total revenue and all 3 margins indicated a record high number in the third quarter. As I said in the last earning calls, we had a strong pipeline, and we could bounce back and overcome the effect of seasonality.

[Yuki Nishio, executive]

[Foreign Language]

[S.Krishna Kumar, executive]

Thank you very much, and I will open this up for questions.

[Yuki Nishio, executive]

[Foreign Language]

[Yuki Nishio, executive]

[Foreign Language] So the first question is from Kaneko-san of BofA Securities. Your revenue exceeded the guidance that was announced early in the fiscal year. Nevertheless, you have at -- the original plan is intact. You did not change it. Can you explain to me the reason why you did not change the range?

[S.Krishna Kumar, executive]

Thank you for the question. So we kept the guidance at the same level as I announced at the beginning of the year. Some of you may remember, Q4 was a very strong quarter last year. And so the compare that we have with Q4 is a little tough. Having said that, I do think that we should end up anywhere very close to the high end of the range that I have communicated, it could be more or less depending on how we are able to execute some of the larger transactions that are in the pipeline for the quarter. So to answer your question, I will not be changing my guidance.

[Yuki Nishio, executive]

[Foreign Language] So a second question from Kaneko-san is, were there any front-loading of large deals, large license deals in third quarter? So it was brought forward from future quarters?

[S.Krishna Kumar, executive]

Not really. I cannot pinpoint on specific transactions that came forward or moved back. This is a normal part of our business. Sometimes we are able to move deals forward. Other times, our deals slip to the next quarter to the future or next quarter. So it is normal course of business, nothing different that we saw in Q3.

[Yuki Nishio, executive]

[Foreign Language] So the third question from Kaneko-san is about the business rollout regarding the government Cloud. So lately, I believe that Japan Oracle is accelerating partnerships with local IT vendors. But I was wondering if the revenue contribution is coming up soon or not. Can you share with us how the business is ongoing?

[S.Krishna Kumar, executive]

We were always working with the local IT vendors in our business at Oracle in Japan. They have been a very integral and very important part of how we service this market. And so we continue -- we will continue forward with that partnership, whether it's government Cloud or otherwise. Even before the digital agency, a lot of transactions that we did -- that we do with government, we do have all of our local IT vendors involved in those transactions as well. So it's -- I would say it's business as usual.

[Yuki Nishio, executive]

[Foreign Language] Next question is to -- from Tsuruo-san of Citigroup. The first question is the price increase of Q3, how will it impact on your performance? And also what is your perspective of impact on Q4?

[S.Krishna Kumar, executive]

The price increase as like a lot of vendors in Japan was driven by the fact that the Japanese yen had depreciated quite a bit against the U.S. dollar. So we basically ended up normalizing that effect into our pricing. So as most of you know, we sell enterprise grade software to large enterprises who run their mission-critical systems on our software.

So to a large extent, our demand is kind of inelastic. These price changes do not really affect our demand or our pipeline. If a customer has to use Oracle to run mission-critical, he is still going to come and buy software from us. So we -- as you can see from our Q3 numbers, the demand is still there. We've had a great on-premise license quarter. And so it just continues, as usual, the customers and the partners have accepted the price change. They understand the realities of the market and we are just moving on with our business.

[Yuki Nishio, executive]

[Foreign Language] Next question is from Segawa-san of Morgan Stanley Securities. First question is, please give us a detailed update on the inquiries or the prospects by industry or by the size of companies.

[S.Krishna Kumar, executive]

As I normally say, we don't see any particular trend from specific industries. We are very strong in the financial services industry. We are strong for telecom -- in the telecom industry. We have very good partnerships with a lot of government consumers and manufacturing as well. So overall, our revenues really don't depend on any one particular segment of the market.

In general, I keep on saying this always, mission-critical systems are required by all industries across all spectrum. We'll enjoy demand from a certain industry in other quarters from other industries. So there is no bias or there is no dependency on a particular industry for Oracle.

[Yuki Nishio, executive]

[Foreign Language] The second question from Segawa-sanj. The number of head counts remain the same as previous year. So going forward, what is your plan regarding the number of headcount? Do you have any plans to increase or not? And also, if you have a specific plan, in order to realize that plan, do you -- is there a possibility for Oracle Japan to increase the base salary or the compensation?

[S.Krishna Kumar, executive]

So let me first answer on headcount. Headcount has been pretty stable over the last few quarters. That does not mean that people don't go in and out. So we continue to hire into our strategic businesses, and we look at the nonstrategic areas sometimes. And if people are exiting from there, we don't really backfill them.

So we are very, very consciously watching our costs, and we want to be the most efficiently managed companies. So that's kind of headcount. So we'll continue to make investments in the right areas. And as far as salary increase is concerned, we take a look at that every year. And depending on the market situation, depending on the status of salaries of our people, we continue to invest in our people. So that will not change.

[Yuki Nishio, executive]

[Foreign Language] So next question is from Kikuchi-san of SMBC Nikko Securities. It seems like royalty rate is rising somewhat. But is it correct to understand that there are no changes in the fee rate of products and services? Is it due to the change in the mix?

[S.Krishna Kumar, executive]

Thanks, Kikuchi-san. I think you understand my business more than I do. Yes, our royalty rates on specific products have not changed. But as the mix changes, the royalty rates keep going up or down. That's the only thing. But we have not changed specific rates for any products with the corporation.

[Yuki Nishio, executive]

[Foreign Language] Next question is from Tsuruo-san. It's actually a second question from Tsuruo-san. What has been the reaction of customers towards price increase? And has there been any changes regarding how you compete with the competitors in terms of price competition or any changes in the win rate of Oracle Japan?

[S.Krishna Kumar, executive]

I think I answered this question partially before. As I said, our customers -- our software for our customers, is not nice to have software. It is a need to have software. So which means that a lot of our demand is inelastic. Regarding customer reaction, no customer likes it when you increase prices. But the fact is that the industry understands the current situation with the Japanese currency. More than our end customers, I think we work a lot with our partners to tell them in advance about an impending price change. We work very closely with our partners so that they can soften the announcement into the market. So we did not get any adverse impact of the price changes, the market seemed to have accepted it very nicely.

[Yuki Nishio, executive]

[Foreign Language] So next question is from Tanaka-san of Mitsubishi Morgan Stanley. So I would suspect that there was a last-minute demand in second quarter, right before the price increase. But were there a rebound, meaning going down -- decrease in the demand after that.

[S.Krishna Kumar, executive]

I think it just -- so the customers -- because we were very good at communicating the impending price change with our partners and our customers, some customers who could foresee their demand, and we're sure about how much software they want did enter into contracts a little early in Q2. The others who could not do that in Q2, unfortunately, had to pay the higher price because they were not ready with their demand requirements in Q2. So again, it's a very normal thing in any business, so I won't read much into it.

[Yuki Nishio, executive]

[Foreign Language] Next question is from Tsuruo-san of Citigroup. In the earnings call of Oracle Corporation, it was mentioned that there is a strong demand for ChatGPT. So for Japan Oracle -- Oracle Japan, are there any related demands? Or do you foresee any upcoming demands?

[S.Krishna Kumar, executive]

ChatGPT basically has got nothing to do with us. And I cannot comment specifically on what happened on the H2 earnings call. But what I can say is that we have already built in a lot of artificial intelligence into our software products, whether it's our accounting software. For example, I'll give you a very basic example, you can teach the machine to do a lot of your account reconciliations without any human intervention. 98% of the job can be done by the machine. And this is a standard feature that is available in our financial products.

Similarly, we keep talking about autonomous database. Autonomous database is another artificial intelligence and machine learning product, which basically learns from what it gets. It learns from other deployments and does a lot of activities automatically for you. So to make long story short, artificial intelligence and machine learning is the thing for the future. And Oracle is heavily invested in being able to use these technologies for the benefit of our customers.

[Yuki Nishio, executive]

[Foreign Language] So next is from Ueno-san of Daiwa Securities. In your Q4, CloudWorld Tokyo will be held, will it impact your cost? And if so, by how much and how much cost will it incur?

[S.Krishna Kumar, executive]

It's not a material expense. It's not going to impact my P&L.

[Yuki Nishio, executive]

[Foreign Language] So I am skipping some of the overlapping questions. So for now, the final question is from Kikuchi-san of SMBC Nikko Securities. It is about license sales. If the license was sold in Q2 and delivered in Q3, did they -- did you apply the previous pricing? And if so, the last-minute demand, will that impact or has that impact on Q3 as well?

[S.Krishna Kumar, executive]

So firstly, the software sale does not happen in the way that you described. If it was hardware, what you're saying could raise some questions. As far as Oracle is concerned, software -- the moment you sign a contract, it's -- software gets delivered electronically. So the moment is -- there is a valid contract that is signed, you can actually go and recognize the revenue, and that's how we recognize our license revenue.

[Yuki Nishio, executive]

[Foreign Language]

[S.Krishna Kumar, executive]

Thank you very much, everyone. [Foreign Language]