Oracle Corp Japan

TSE:4716

Earnings Call Analysis

Oracle Japan Details Robust Q3 FY2024

In Q3 FY2024, Oracle Japan's revenue grew by 8.4% to JPY 176,883 million, propelled by a notable 36.3% increase in cloud services revenue now accounting for 20% of total revenues. Operating and net incomes both rose by 9.7%, with marquee cloud customers across a range of industries. The transition to Oracle Cloud Infrastructure is highlighted through successful partnerships with HID, Ono Pharmaceutical, and Daiwa Institute of Research, underscoring cost and performance benefits. Despite a decline in employee headcount by 3.9%, operational efficiency has led to revenue growth and margin expansion. Looking forward, Oracle Japan will continue to hire for growth sectors and align with market salary trends.

Oracle Japan's Strong Performance Amidst Cloud Adoption

Oracle Japan, under the backdrop of accelerated cloud adoption, reported a compelling performance in the third quarter of fiscal year 2024. The narrative of this earnings call centers around the company's successful transition to a cloud-based business model. Oracle Japan's cloud business has emerged as a potent growth driver, marking an impressive revenue upswing. This shift reiterates the company's position as the preferred enterprise technology cloud vendor, buoyed by meaningful cost efficiencies and modernization opportunities realized by customers transitioning to Oracle's cloud services.

Noteworthy Cloud Engagements Highlighting Diverse Industry Impact

The call underscored Oracle Japan's significant market outreach with several high-profile cloud customers across industries such as financial services, manufacturing, and the public sector. Examples include HID's collaboration with Oracle Cloud Infrastructure (OCI) to provide cloud-nativized administrative systems, which are anticipated to offer cost and performance benefits. Ono Pharmaceutical's utilization of Oracle's Clinical Trial Management System aims to enhance trial success prediction and efficiency. Lastly, Daiwa Institute of Research's implementation of Oracle Autonomous Data Warehouse led to cost reductions and performance improvements, further validating Oracle's importance in critical systems and applications.

Financial Highlights Reflecting Growth and Margin Expansion

Oracle Japan's financial metrics highlight an upward trajectory with total revenue for nine months reaching JPY 176,883 million, which is an 8.4% increase year-over-year. Much of this growth is attributed to a 36.3% surge in cloud services revenue, constituting 20% of the company's revenues. The cloud business, including Fusion ERP Cloud and NetSuite, saw robust growth rates and a notable momentum in infrastructure consumption revenues, notably within autonomous databases. Operating income grew by 9.7% to JPY 57,706 million, with net income also up by 9.7% at JPY 40,181 million. These figures, according to the call, indicate record highs for the third quarter.

Oracle Japan's Efficiency Focus and Anticipated Hiring

Addressing an inquiry on headcount reduction, Oracle Japan emphasized its emphasis on efficiency, indicating the company's strategic realignment of resources to optimize costs. Despite a minor reduction in headcount over 12 months, revenue growth persisted at nearly 6% in the prior year and around 8% for the nine months in consideration. The executive conveyed that margin expansion resulted due to such efficiencies and assured stakeholders of continued hiring in growth-oriented business segments.

Market-Aligned Compensation and Strategic Use of Cash

Oracle Japan's management addressed concerns regarding the general wage increment trend in Japan, reaffirming the company's commitment to performance-based rewards and market alignment in terms of salaries. When discussing capital deployment, it was highlighted that excess cash is prudently managed, often lent to the parent company yielding better interest than local options, with the flexibility for retrieval as needed for dividends or acquisitions, a practice described as business as usual.

Service Business Hurdles and RPO Growth Ambiguity

An increase in service business revenue juxtaposed with declining profit was explained as a timing issue related to cloud project deliveries and revenue recognition, not indicative of underlying business health. Additionally, the call did not detail the growth rate of Remaining Performance Obligations (RPO) or the specifics of Fusion ERP, NetSuite, and strategic SaaS growth in the third quarter, deferring such revelations to the next securities report.

Earnings Call Transcript 2024-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]

Okay. Thank you, Nishio-San. First of all, let me apologize. I have a bad throat. But I'll try and be as clear as possible.Okay. Good afternoon, everyone, and welcome to Oracle Japan's Third Quarter and Fiscal Year 2024 -- Third Quarter Fiscal Year 2024 Earnings Call. Our Cloud business has been a driver of accelerating revenue growth, and we had another excellent performance this Q3.We have become the enterprise technology cloud vendor of choice because our customers have recognized our products and services, bring out their cost efficiencies and modernize their businesses. Also, they figured out that they can get more while paying less by moving to our cloud services. We had a lot of marquee cloud customers in various industries, especially financial services, manufacturing, public sector, et cetera.Let me give you a few examples. HID. HID has over 40 years of experience in providing services to municipalities and offer a comprehensive administrative system that include resident record and welfare-related operations, which are subject to standardization by local authorities.As the digital agency emphasizes the need for CloudSMART and system modernization, the 2 companies will work together to provide new initiatives and cost-effective services, including cloud-nativization in HID's general administration system in collaboration with Oracle Cloud Infrastructure.In particular, HID evaluates that OCI is suitable for municipalities and private services as it is expected to offer significant cost and performance advantages over other companies' services.The second example is Ono Pharmaceutical. Ono Pharma is transforming the management of global clinical trials with a focus on efficiency and data-driven decision-making. The aim is to improve the prediction of potential risks and probability of trial success by utilizing Oracle's Clinical Trial Management System.Example Number 3, Daiwa Institute of Research. Daiwa Institute of Research provides high-quality, reliable system services that strongly support IT strategies and underpin business fundamentals of each company as the systems lead for Daiwa Securities Group companies. DIR has revamped the order and order analysis infrastructure for global markets divisions of the group company, Daiwa Securities Company Limited, with Oracle Autonomous Data Warehouse provided by OCI.Multi-cloud and hybrid-cloud environments can increase operational complexity and load costs, but by selecting Oracle Autonomous Data Warehouse as the analysis infrastructure, high performance is achieved at a low cost and database changes, patches, resource changes were -- the cost of these were reduced significantly by the autonomous functionality.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.Okay. Now let me give you a brief overview of the numbers. Total revenue for 9 months at JPY 176,883 million, growing at 8.4% compared to the previous year, driven by our strong growth in cloud revenue. Cloud services revenue was JPY 35,578 million, up 36.3%, and now represents 20% of the company's revenues.Growth rates in our Fusion ERP Cloud and NetSuite were also very strong. Infrastructure consumption revenues showed a strong momentum, which includes autonomous database.Operating income was JPY 57,706 million, increasing at 9.7%. Net income at JPY 40,181 million, up also 9.7%. Total revenue and all 3 margins indicated record high in the third quarter. We hope to continue the momentum into the rest of the year. Thank you very much.

[Operator]

[Foreign Language]

[Yuki Nishio, executive]

[Interpreted] So the first question is from Ueno-San of Daiwa Securities.From third quarter end of last fiscal year, the number of head counts have come down by 3.9%. Will this pace continue?

[S.Krishna Kumar, executive]

As I've said before, we are a very efficiency-driven company. We look at our costs very closely and carefully, we monitor our costs. The -- we have been trying to reorganize and put the right resources in the right functions. And what you see as a result is minor reduction over a period of 12 months, which I would not read much into it.If you look at our revenues, we actually grew almost very close to 6% last year. For the 9 months so far, we have grown about 8% with all the efficiencies that we have gained. That is why you see margin expansion in our business.And just one more -- just one more thing to add. We will continue to hire into our growth businesses as we go into the future. So we will not stop looking for the right resources for the businesses where we want people to be.

[Operator]

[Foreign Language]

[Yuki Nishio, executive]

[Interpreted] And so second question from Ueno-San is also related to headcount or payroll cost.Japanese companies are actively increasing their salaries. But do you expect salary increase per head count at Oracle?

[S.Krishna Kumar, executive]

We -- as I said, we are a performance-driven company. We reward performances. We look for the right resources. And over time, yes, we will also align with the market. So if the market in general is going up, obviously, we cannot stay behind. We like to pay the right level of salaries to our employees.

[Operator]

[Foreign Language]

[Yuki Nishio, executive]

[Interpreted] Next question is from Kikuchi-San of SMBC Nikko Securities.If you could explain about the increase in lending to your current company and also the outlook going forward, and also how you will be using cash?

[S.Krishna Kumar, executive]

This -- it's not different from what we have done in the past. Whenever we have excess cash, we look for safer avenues to put our money, safe avenues to put our money. One of the safe avenues is with the parent company, and we get interest rates which are better than the market in Japan. And so we use that opportunity to park our money.As and when we require, we would recall it, whether it's for dividend or whether it's for any acquisitions that we may make in the future, et cetera, et cetera. So depending on our need, we recall the money. So it's kind of business as usual.

[Operator]

[Foreign Language]

[Yuki Nishio, executive]

[Interpreted] The next question is from Watanabe-San of Sumitomo Mitsui DS Asset Management.The Service business in third quarter experienced increase in revenue, but profit came down. So -- and the profit decline was bigger than the revenue increase. So if you could explain the background, that would be helpful.

[S.Krishna Kumar, executive]

So again, it's more like a timing issue. We have been hiring into our consulting, our services businesses, because there's a lot of cloud projects that we need to deliver on. Some of the hiring converts into revenue, and there is a time lag. There's also a time lag in different projects when we recognize revenue. So it's more like a timing issue than anything else.

[Operator]

[Foreign Language]

[Yuki Nishio, executive]

[Interpreted] The next question is from Noda-San of CLSA Securities. Noda-San wants to know the increased rate, the growth rate of RPO in the third quarter? That is the first question.And the second question is the growth rate of Fusion ERP, NetSuite and strategic SaaS in the third quarter.

[S.Krishna Kumar, executive]

So we do not disclose the -- so you will -- we will disclose the RPO numbers when we file our securities report next quarter. And so you will have to wait till that time. The -- as far as the -- again, we are experiencing significant growth rate in our Applications business and our Technology Cloud business. At this point in time, I don't split those growth rates specifically.

[Operator]

[Foreign Language]