Edited Transcript of Oracle Corp (NYSE:ORCL)Q1 2015 Oracle Corp Earnings Call Presentation
Company: Oracle Corp (NYSE:ORCL)
Event Name: Q1 2015 Results Earnings Conference Call
Date: September 18, 2014 5:00 PM ET
Welcome to Oracle’s First Quarter Fiscal 2015 Earnings Call. As a reminder, this call is being recorded for replay purposes. I’d like to now turn the call over to Ken Bond, Vice President of Investor Relations.
Ken Bond – Investor Relations
Thank you, Victoria. Good afternoon, everyone and welcome to Oracle’s first quarter fiscal year 2015 earnings conference call. A copy of the press release and financial tables, which include the GAAP to non-GAAP reconciliation and other supplemental financial information can be viewed and downloaded from our Investor Relations website.
On the call today are Executive Chairman and Chief Technology Officer, Larry Ellison; CEO, Safra Catz; and CEO, Mark Hurd. 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 statements made today. As a result, we caution you against placing undue reliance on these forward-looking statements and we encourage you to review our most recent reports, including our 10-Q and 10-K 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 publicly release any revisions of these forward-looking statements in light of new information or future events.
Before taking questions we will begin with a few prepared remarks. And with that, I’d like to turn the call over to Safra.
Safra Catz – Chief Executive Officer
Thanks, Ken. I am going to focus on our non-GAAP results for Q1. I’ll then review guidance for Q2, then turn the call over to Mark and Larry for their comments. Those of you who have followed us for a while know that Q1 is a seasonally smaller quarter which can mean more volatility in our results and that’s what we saw this quarter.
Currency was a 1% tailwind to total revenues. Today my comments generally reflect constant dollar growth rates. Cloud revenue totaled $477 million, growing 29%. In that, cloud SaaS and PaaS were $339 million, up 31% from last year and up 4% sequentially. Cloud infrastructure as a service was $138 million, up 25%. Q1 results in the cloud were better than expected. And with us now three times bigger than Workday, now that’s not enough for us, as our goal is to be bigger than Salesforce and faster growing than Workday while growing cash flow and improving our already high levels of profitability.
New software license was $1.4 billion, down 2% from last year and software updates and product support was a record $4.7 billion, up 6%. Software and cloud revenue totaled $6.6 billion in Q1 growing 6%. Customers have started to move from on-premise systems to the cloud but with so many on-premise customers and only 30% of our support base in applications, we haven’t seen a reduction in software updates and product support renewal rates which continue at their usual high levels.
However as the movement to the cloud grows, we expect this transition will affect our revenue to the positive. These customers will essentially replace their software support payments with a cloud subscription which will mean substantially more revenues to Oracle. That is because not only will we be providing the most up-to-date software but we’ll also be providing the hardware, the application management and complete operation. Of course we expect it as a customer pays more to Oracle, this increase will be more than offset by a reduction in their cost of implementing and running their own systems.
And because we control nearly all of our own supply chain and benefit from enormous economies of scale, we expect most customers converting their premise based software support payments to cloud subscription will be immediately accretive to operating income as well.
In the case of new or existing customers, taking cloud subscriptions in lieu of buying new or additional software licenses, there will be a short-term delay in revenue. But over the medium and long term we also expect more revenue and operating income as well as increased cash flow.
As for the details in this quarter, GAAP software and cloud results in the Americas grew 6% helped by a very strong performance from our North America application team and our global business unit. Thanks to the fantastic EMEA management team, considering the geopolitical situation in Europe and Middle East, EMEA was up an astounding 7%. Asia-Pac grew 2%.
Engineered systems continued to grow and were over a third of hardware product revenue over the last 12 months. However hardware revenue in total was down 8% as other servers and storage revenues, especially tape declined. Hardware system product revenue was down 14% while hardware system support was down 2%.
Consulting services, which I don’t usually comment on because they’re not as strategic to our business, also suffered from some execution issues in North America. Total revenue for the quarter was $8.6 billion, up 2% from last year. The quarter was not dependent on any one large deal. Our non-GAAP operating income was $3.8 billion, was 1% higher than last year and operating margin was 44.4%, down just 22 basis points from last year because the sales shortfall in hardware — in some hardware — and consulting happened late in the quarter and did not allow us time to adjust our expense base in the quarter.
Free cash flow increased to a record $14.7 billion over the last four quarters to an all-time high of 6.5 — and to an all-time high of $6.5 billion for the quarter, up 6% from Q1 last year. The non-GAAP tax rate for the quarter was 21.5%, EPS for the quarter grew 4% in US dollars and to $0.63 on a non-GAAP basis.
The GAAP tax rate was 19.7% due to some one-time events and the mix of earnings. On a GAAP basis EPS for the quarter was $0.48 in US dollars, up 2%. At quarter end, deferred revenue was at a record $8.9 billion, up 5% from last year and we had nearly $52 billion in cash and marketable securities.
Net of debt, our cash position was $19 billion. So both of these balances are roughly $5 billion lower now that we’ve closed the MICROS transaction. This quarter we repurchased nearly 49 million shares for a total of $2 billion. Over the last 12 months we’ve repurchased more than 5% of the shares outstanding a year ago and paid out more than $2.1 billion in dividend as nearly 75% of our cash flow was returned to shareholders.
We recently increased our share buyback authorization by an additional $13 billion and we now have a total authorization of more than $15 billion available. The Board of Directors declared a quarterly dividend of $0.12 per share.
As I move to guidance, I need to make some comments first regarding MICROS, which we closed a few days ago. Firstly, we will not own it for the whole quarter. Secondly, and much more importantly, because our revenue recognition policies and our operating procedures are strict, the contributions from MICROS will not be consistent with their historical run rate. For example, I am only expecting about $14 million in on-premise new license revenue for the quarter from MICROS.
Also given recent currency movements we expect to see a currency headwind of 1% for cloud revenues, 2% for software and cloud revenue combined and 2% for both hardware and total revenue and that could very much change.
So taking all that into account, SaaS and PaaS on a non-GAAP basis is expected to grow between 40% to 45% in constant currency, 39% to 44% in US dollars. On a GAAP basis, SaaS and PaaS revenue is expected to grow 39% to $0.44 and 44% in constant currency and 38% to 43% in US dollars.
Cloud IaaS on a GAAP and non-GAAP basis is expected to grow 40% to 44% in constant currency and 39% to 43% in U.S. dollars. Software and cloud revenue on a GAAP and non-GAAP basis, including SaaS, PaaS, IaaS, new software license and software support, is expected to grow 5% to 8% in constant currency, 3% to 6% in U.S. dollars. Hardware system revenues on a GAAP and non-GAAP basis, which includes hardware system products and hardware system support, is expected to be negative 8% to positive 2% in constant currency, negative 10% to 0% in U.S. dollars.
Total revenue growth on a GAAP and non-GAAP basis is expected to range from 2% to 6% in constant currency, 0% to 4% in U.S. dollars. Non-GAAP EPS is expected to be somewhere between $0.68 to $0.72 in constant currency, $0.66 and $0.70 in U.S. dollars. GAAP EPS is expected to be somewhere between $0.53 and $0.57 in constant currency and $0.51 and $0.55 in U.S. dollars. This guidance assumes a GAAP tax rate of 22.5% and a non-GAAP tax rate of 23%. Of course, it may end up being different.