Highlights From ORCL's Q4 Conference Call: Highest Operating Margin in History, Guides Above for Q1 EPS

June 24, 2009 12:57 PM EDT

Last night, Oracle (Nasdaq: ORCL) reported Q4 EPS of $0.46, 2 cents better than the analyst estimate of $0.44. Revenue for the quarter was $6.9 billion, versus the consensus of $6.47 billion. Shares are up 9% today, and about $2 below the 52-wk high.

Highlights From ORCL's Q4 Conference Call:

• (CFO) First, a note about foreign exchange rate movements. In March, we told you that using then-current exchange rates would reduce our Q4 revenue growth by 12 points compared to constant currency. Even though the U.S. dollar weakened for March, the U.S. dollar strengthened compared to Q4 of last year, reducing our international revenues, expenses, and profits when measured in U.S.
  dollars. As a result, currency movements reduced new license revenues by 9%, total revenues by 8%, net income by 11%, and earnings per share by 10% or $0.05 per share compared to Q4 of last year.
  
• In Q4, our new software license revenues were $2.7 billion, down 4% in constant currency and down 13% in U.S. dollars. EMEA grew 2%, Asia grew 3%, and the Americas were down 12%. Technology new license revenues were $1.9 billion, down 1% in constant currency and down 10% in U.S. dollars. EMEA grew 1%, Asia grew 5%, and the Americas were down 6%.
  
• Application new license revenues were $805 million, down 11% in constant currency and down 19% in U.S. dollars. EMEA grew 5%, Asia fell 4%, and the Americas were down 22%. Our software license update and product support revenues were $3.1 billion, up 17% in constant currency and up 7% in U.S. dollars.
  
• Our total revenues were $6.9 billion, up 3% in constant currency, which is above the high end of our constant currency guidance range of plus 2% to minus 3%, and down 5% in U.S. dollars.
  
• Our tax rate was 31.3%, which is higher than our guidance of 28% due largely to a one-time expense from a recent federal tax ruling involving Xilinx and the allocation of stock option expense deductions.
  
• In Q4, we repurchased 14.0 million shares at an average price of $17.85 per share, for a total of $250 million. And for the full year, we repurchased 226 million shares at an average price of $17.53 per share, for a total of nearly $4 billion.
  
• Our full-year results for fiscal 2009 include New software license revenues were $7.1 billion, up 1% at constant currency and down 5% in U.S. dollars. EMEA grew 6%, Asia grew 7%, and the Americas were down 4%. Technology new license revenues were $5.1 billion, up 7% in constant currency and flat in U.S. dollars. Applications new license revenues were $2 billion - $2.0 billion - down 10% in constant currency and down 16% in U.S. dollars. Software license updates and product support revenues totaled $12.0 billion, up 19% in constant currency and up 14% in U.S. dollars. Our total revenues were $23.5 billion, up 10% in constant currency and up 4% in U.S. dollars.
  
• We have $12.6 billion in cash and investments. Our days sales outstanding improved again this quarter from 63 days last year to 58 days this year, a testament to the quality of our receivables, the quality of our customers, and the effectiveness of our collection efforts, as well as from foreign exchange and product mix benefits.
  
• (President) We beat the high end of our total revenue guidance, and we delivered the highest Q4 operating margin in our history, crossing the 50% mark for the first time.
  
• Our software license updates and product support revenues grew 17% in constant currency off an enormous base, as our customer renewal rates and satisfaction levels continue at record highs.
  
• My guidance today does not include any assumptions from our pending acquisition of Sun Microsystems, and though we do expect to close Sun during the quarter, this timing is subject to getting all the necessary approvals. For the coming quarter, assuming that exchange rates remain at current rates, there will be a 4% negative currency effect on license growth rates, a 5% negative effect on total revenue growth rates, a negative 6% effect on growth rates, and a negative $0.02 per share effect on earnings per share.
  
• With that, our guidance for Q1 is as follows. New software license revenues are expected to range from negative 10 to 0% in constant currency and negative 14 to negative 4% at current exchange rates. Total revenue on a GAAP basis is expected to range from 1% to 4% year over year in constant
  currency, negative 4 to negative 1% in current exchange rates. Total revenue on a non-GAAP basis is expected to range from 0 to 2% in constant currency and negative 5% to negative 3% at current exchange rates.
  
• For Q1, Non-GAAP EPS is expected to be between 0.31 to $0.33 in constant currency and 0.29 to $0.31 given current exchange rates. GAAP EPS for the first quarter is expected to be 0.23 to $0.24 in constant currency and $0.21 to $0.22 assuming current exchange rates. (Consensus is $0.30)
  
• (CEO, Ellison) Exadata continues to grow and win competitive deals in the marketplace against our
  three primary competitors. It's turning out that Teradata (NYSE: TDC) is our number one competitor in terms of facing them in the marketplace. Netezza (NYSE: NZ) and IBM (NYSE: IBM) are kind of tied for second. And it's typically IBM DB2 on mainframes that we're fighting with.
  
• We're very successful in a couple of different smartphone manufacturers. Another smartphone manufacturer in Canada - in this case Research in Motion (Nasdaq: RIMM) - tested our database machine and bought it in the marketplace, again discovering after trying it and benchmarking it that it was dramatically faster than their existing environment and faster than any of the other database machines that they experimented with.
  
• (President) In the database area, we had some key wins as usual with 7-Eleven, who purchased Database Vault; University of Illinois; Baker Hughes (NYSE: BHI), underneath SAP (NYSE: SAP); the State University of New York, SUNY; China Telecom; State Street standardized on us for all their mission-critical applications; and Lockheed Martin (NYSE: LMT).
  
• Middleware has been the star all year long, and we hope that to continue. We're rolling out a major new release next week called Fusion Middleware 11g. We'll launch that in Washington, D.C., and eight other cities around the world, and then we'll follow on with a tour in 107 cities.
  
• We have about 5,000 who have certified on our Middleware. We added 43 in the quarter and 100 new applications.
  
• Other customers include Adidas, TD AMERITRADE (Nasdaq: AMTD), Credit Suisse (NYSE: CS), and Intuit (NYSE: INTU). We had some BEA customers who previously were BEA customers who expanded into other parts of the Fusion Middleware suite. That includes Costco (Nasdaq: COST), Comcast (Nasdaq: CMCSK), and Ericsson (Nasdaq: ERIC.
  
• Financial services GBU had a strong quarter despite the environment, strong double-digit growth. They're finding healthy banks around the world, outside of the U.S., and diversifying geographically.
  
• So CRM OnDemand was a very good story all year long. We added more subscribers in Q4 than we did all last year.
  
• (Q&A) Understanding that your fourth quarter had some unique attributes, did you see any signals in the quarter that would suggest that you saw stability in either any end markets or any particular verticals? And maybe talk a little bit about what the assumptions are underpinning the guide for the Q1 with respect to any kind of improvement. And then, I guess more longer term, as we think about a recovery scenario, where would you expect to see the first signs of reacceleration across your product lines? (A) Charles, why don't you take the first half of that and maybe I'll talk about the guidance. (A)Yeah, the verticals for Q4 had strong double-digit growth. So that's been helping us obviously getting new design wins in vertical applications. And then the drag factor when - we get that when we often get some of the ERP, usually CRM, and certainly we get the tech stack underneath that. So that's been an important differentiator for us that SAP simply doesn't have. And in the few areas where they tried to go in the verticals, like banking as I described, it didn't quite work out, and we have their partners coming to us now. (A) In regard to the guidance, I have to tell you that our pipelines continue to grow really very well. I think that what - we definitely saw that our customers are realizing that business does have to continue and go forward. Now as you know, we ourselves have so much sort of company-specific momentum that we've been able to push through the economic situation rather well, and I have to tell you that I still see the pipelines growing rather significantly. And so in this case I used really unusually conservative - very conservative - close rates for Q1 to just keep a level of conservatism in our fiscal Q1. It is Q1. It is always a tricky quarter, and we have a very difficult comparison as to Q1 of last year. So that's what we used - underpinning for the guidance.
  
• On the margins, you set yourself a target way back when of 50% type margins, and clearly this quarter you tipped over even that high bar. As you look forward into next fiscal year, is there still an ability to see margin expansion from here, or as the economy hopefully begins to recover, is there any reason to say that you'd start to reinvest a little in the business and maybe stop some of this big march forward on the operating margin side? (A) The reality is that the margin story really has to do with the fact that we have enormous installed base of customers that renews their agreements with us every year, and the bigger that number becomes, that's really the main issue. We continue to invest aggressively at Oracle. We're up to $3 billion a year in R&D alone, really outshining all of our competitors, and we continue to invest. We are not a cost-cutting story for the margins. We really are a profitability story as a result of having just such a large installed base of existing customers. And as that installed base grows, which obviously it continues to grow year after year, the operating margins will continue to go up. Obviously the Sun acquisition will change the margin story for a while, but it will improve also over time.
  
• And I know you're not going to talk about acquisitions that haven't closed yet. But Virtual Iron - I don't think that's closed yet, but is that an opportunity to even work more closely on trying to, I guess, press the technology of the BEA product that you mentioned? But I mean, I can even envision even putting a database on there with no operating system or no operating system as we know it. And it just seems like it's another opportunity for Oracle through internal development to sort of change the landscape out there. (A - Lawrence J. Ellison, Chief Executive Officer): We are looking at that. In fact we have the Oracle database running directly on a VM with no intermediate operating system. So that's actually up and running. So it's an opportunity to continue to improve our performance. Our goal, as you know, is to deliver a complete stack from the virtual machine to the operating system. We've been involved in the VM, with Xen and Xen derivatives, with the Linux OS, obviously the Oracle database, Middleware, and applications. So our intent is to provide a complete and integrated stack and then be able to tune up and down. And of course with the Sun acquisition, after you get down into the hardware, where Exadata's really our first experiment in that area, and it's going very well.
  
• You guys typically have a sales force reorg in the first quarter. Can you provide any color on sort of the size and timing of that, any differences this year than past years? (A) We've tried to get out of those big-bang reorgs, so we hadn't really done that in several years. We make small tweaks throughout the year and small changes in quotas each year, but we're not doing any wholesale reorg as we go into this fiscal year.
  
• And then just over in the federal government, we've heard about the potential for some federal government budget slush as we get to the end of the calendar third quarter. I know that's a relatively small vertical given the size of Oracle now. But is that something you're expecting to see much of a benefit from as we kind of move through August and then obviously as you move into the fiscal second
  quarter? (A) Well, our government business has done well. I don't know f I'd call it budget slush, but they do have money, and it's been doing well the last couple quarters. I would expect that to continue given the environment.

Oracle Corporation, an enterprise software company, engages in the development, manufacture, distribution, servicing, and marketing of database, middleware, and application software worldwide.

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