Oracle Earnings Call Insights: Software Side Details and Cloud Offerings

Oracle Corporation (NASDAQ:ORCL) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

Software Side Details

Kash Rangan – Bank of America Merrill Lynch: Good to see the hardware product and the Fusion Reference do well, but on the software side typically Oracle has had very strong May quarter finish as we’ve always called it the magic of May quarter. I’m wondering if you could give us a little bit more color, Safra, Mark or Larry, on if you saw any slippage that was specific more so to the applications business, large ticket items, economically more sensitive if these deals are put on hold? How is the linearity shaping up in June? As you exited the quarter did you feel little bit better about how the trends were getting better? Because we’ve been hearing about software companies facing difficulties in the month of March and April. I’m just curious how things shaped up and how you exited the quarter. Sorry for the bunch of questions, but I really appreciate the color.

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Safra A. Catz – President and CFO: I don’t know which one of us should start. As I mentioned in my prepared remarks, we saw some weakness in specific regions, especially Asia Pacific, especially parts of Latin America, that were – that came up right at the end on us. That was extremely disappointing for us, because May is usually our very, very big and important month, and it’s our big quarter; it sort of (lazed out) where it did. We had a pretty good start actually in the other regions, but it’s just soon to tell on and that’s why my guidance is where it is.

Lawrence J. Ellison – CEO: Let me add. It was no specific product. I mean, when we saw weakness, we saw weakness in database, middleware, applications, in all of our software lines. So it was clearly an economic issue, not a product competitive issue. The products performed kind of as we expected. It’s just that they didn’t reach the feeling we thought we were going to reach in the quarter…

Mark Hurd – President: I’ll add a little bit of color too. I think we actually did pretty darn well in Europe. He actually felt quite good, considering all you read, you talk about when you read about software companies, you read a lot about the tech sector in Europe. And frankly, as we talked before, the sales force add we’ve done there has been material and it’s helped for us. We bank on conversion rates being down in Europe and frankly they weren’t down as much as we thought. We executed quite well. We did fine in the U.S. and, to Safra’s points, really it was for us Brazil and parts of Asia where we saw it. The rest of everything sort of behaved the way we expected over the course of the quarter, with half the exception of engineered systems to the good, which was better than expected going in, which led to the hardware performance that we described. On a number of transactions basis, some of it, to Larry’s point, really has to do with the transactions just getting a bit skinnier. If you looked at the number of transactions, you wouldn’t see that big a delta. A lot of it just had to do with the average size per transaction, which again indicates to us certainly a lot of economic issue out there.

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Kash Rangan – Bank of America Merrill Lynch: Safra, it does look like you feel a little bit better based on the guidance, which is a lot better than we would have expected for the upcoming August quarter for the licenses especially?

Safra A. Catz – President and CFO: Yeah, well, we saw things pushed off. I see them closing, but I do have to keep an eye on what my competitors are reporting and what’s going on. So it’s sort of all in there together and we feel good with where we’re guiding.

Cloud Offerings

Brent Thill – UBS: Mark, you’re adding tremendous sales capacity and you mentioned the unforced attrition is down. So, why do you think you’re not seeing the results in fall-through and license results? I certainly understand the comments you made about Asia-Pacific that it is a small percent of the overall revenue. And maybe if you could just expand on the ASP in Q3; I think you disclosed that that was down high-teens as it relates to deals over $3 million, and it seems like the larger deals are still seeing pressure. If you could just add a little more color that’d be helpful.

Lawrence J. Ellison – CEO: Yeah, let me just jump in, in front of Mark and give you kind of our view. We’ve been adding a lot of salespeople in the cloud. So, a lot of our additions in Europe and in North America is around our cloud offerings, which we’re seeing great growth. So, we think, as part of the transition of the cloud, the bulk of the sales adds are not in our traditional on-premises database business or on-premises application business. The bulk of the adds have been in our cloud businesses and we’ll continue to add. We’ve hired about 500 salespeople and sales consultants directly out of college this year. And virtually all of them will go to our cloud businesses and – about 10% of them will go to our Linux business, which is becoming very, very competitive with Red Hat. But it’s the new businesses that we’re in that is absorbing most, not all, but most of our sales adds.

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Mark Hurd – President: Yeah, so I think you got, Brent, everything Larry said, and then add to it that where we (have that) because we are still even with that add in the cloud net all in our traditional license area. So, although it’s not all of what we’ve added, to Larry’s points. But we have seen the benefits. I’ll tell you exactly. In Europe, we have seen bigger pipelines and we’ve seen the economic pressure on the conversion rate, and that growth you see in Europe is directly related to the fact that we’ve added our sales force. So, make no mistake about it. The growth in our pipeline that you see in Latin America when you see some of these issues in Brazil, this is what happens when you see an economic environment like this. You see the pipe go up, you see conversion go down. If you’re going to gain share, you’re going to have to be in more deals. So we are in more deals. Let me give you a second point. Historically, when these economies turn, you do not have enough time to rehire your distribution capability to take advantage of the change in the economy. If that pipe is not sitting there, when markets get better you lose out on that expansion. So this is actually – it’s counterintuitive, I know. This is the right time to be in a position with a broader capability. I’ll add to it. We’ve been very mindful of our expenses while we’ve done it. So when you look at our expense structure, we have taken money from other places and funded the majority of the sales force expansion. Now, to Larry’s point, some of this is now going into ARR, annual recurring revenue, which we’re seeing strong growth also pay us dividend as you go out over the next couple of years.

A Closer Look: Oracle Earnings Cheat Sheet>>