Sep 11, 2020

Oracle Corp ORCL Q1 FY21 Earnings Call Transcript

Oracle Corp Q1 FY21 Earnings call
RevBlogTranscriptsTechnology TranscriptsOracle Corp ORCL Q1 FY21 Earnings Call Transcript

Oracle Corp (symbol ORCL) reported their Q1 FY21 earnings on September 10, 2020. The stock rose as much as 6% as the company topped estimates. Read the full transcript of the conference call here.

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Erica: (00:01)
Welcome to Oracle’s first quarter, 2021 earnings conference call. Now I’d like to turn today’s call over to Ken Bond, Senior Vice President.

Ken Bond: (00:13)
Thank you, Erica. Good afternoon, everyone. And welcome to Oracle’s first quarter fiscal year 2021 earnings conference call. A copy of the press release and financial tables, which includes a gap to non-gap reconciliation and other supplemental financial information, can be viewed and downloaded from our investor relations website. Additionally, a list of customers being mentioned on this conference call, which have purchased Oracle cloud services, or went live on Oracle cloud this quarter will also be available from our investor relations website.

Ken Bond: (00:43)
On the call today, our Chairman and Chief Technology Officer Larry Ellison and CEO Safra Catz. 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 being made today.

Ken Bond: (01:13)
As a result, we caution you from placing undue reliance on these forward looking statements and we encourage you to review our most recent reports, including our 10 K and 10 Q and any applicable amendments for complete discussion of these factors and other risks that may affect our future results for the market price of our stock. And finally, we are not obligating ourselves to revise our results or publicly release any revisions to these forward looking statements in light of new information or future events. Before taking questions, we’ll begin with a few prepared remarks. And with that, I’d like to turn the call over to Safra.

Safra Catz: (01:47)
Thanks Ken and good afternoon everyone. Before I start, I want to make sure you understand that we will be making no comments regarding the press reports about Tik Tok. So there’s no need to ask. So now to Oracle’s results. As you can see, we had a great quarter. As usual I’ll review our non-GAAP results using constant dollar growth rate, unless I say otherwise. This quarter, revenue was more than 150 million above the midpoint of guidance and EPS was [inaudible 00:02:21] above the mid [inaudible 00:00:02:23]. Currency helps a little, but this quarter was all about solid execution on the sales side and disciplined management of our operations as operating income grew 8%, our best results in three years. As I’ve said previously, and only briefly interrupted by COVID-19, our mix of business is increasingly favorable. What that means is that our growing businesses are growing faster and are now larger than our declining businesses.

Safra Catz: (02:57)
Our fusion fast momentum is very strong. We’re seeing the success of autonomous database, which will continue to get even better now that we have autonomous database available on cloud@customer. Our total cloud services and licensed support revenues for the quarter were 6.9 billion, up 2% from last year and accounted for 74% of total company revenue. Gap application subscription revenues were 2.8 billion, up 4%. But our fusion app were up 26% with fusion ERP up 33% and net suite ERP up 23%. Fusion HCM was up 22%. On our fusion retention rates, which are already high, continue to go up. Gap infrastructure subscription revenues were 4.1 billion, up 1%, but with database revenue of 3%. Autonomous database consumption revenue was up 64% and annualized consumption revenue for OCI was up 130%. Licensed revenues were 886 million, up 8%. So all in, total revenues for the quarter were 9.4 billion, up 2%. As usual, we have continued to be disciplined in our spending with operating expenses actually down 3% this quarter.

Safra Catz: (04:47)
Non-GAAP operating income was 4.2 billion, as I said, up 8% from last year and our best operating income growth in three years. Obviously we’re thrilled with this result and I expect the Q2 will be good as we’re beginning to see our operating income become a bigger part of our EPS growth. Operating margin was 45%, up nearly 300 basis points from 42% last year. The non-GAAP tax rate for the quarter was 19.1, slightly below our base tax rate of 20% as a result of some discrete items and EPS was 93 cents in US dollars, up 16% in US dollars, 14% in constant currency. And that is despite an interest expense being $120 million higher year over year for the quarter. The GAAP tax rate was 13.3%, also our results of some discrete items. And GAAP EPS was 72 cents in US dollars, up 16% and up 15% in constant currency. Operating cash flow over the last four quarters was 13.1 billion with capital expenditures of 1.6 billion and free cash flow of 11.5 billion over that same period.

Safra Catz: (06:18)
We now have more than $42 billion in cash and marketable securities. The short term deferred revenue balance is 9.9 billion, down 4% in constant currency from a year ago, due entirely to timing differences in customer payment. Growth deferred revenue was in fact up in constant currency and it was up 2%. As we’ve said before, we’re committed to returning value to our shareholders through technical innovation, strategic acquisitions, stock repurchases, [inaudible 00:06:54] of debt and the dividend. This quarter, we repurchased nearly 90 million shares for a total of five billion. Over the last 12 months, we’ve repurchased 361 million shares for a total of 19.2 billion. Over the last 10 years, we’ve reduced the shares outstanding by 40%. In addition, we’ve paid out dividends of $3 billion over the last 12 months and the board of directors, again, declared a quarterly dividend of 24 cents. Now, to the guidance. Again, my guidance today is on a non-GAAP basis and in constant currency.

Safra Catz: (07:39)
Currency though is extremely volatile as you can see in what happened in this quarter. And assuming current exchange rates remain the same as they are now, currency should have a slightly less than 1% positive impact on total revenue and potentially 2 cent positive income [inaudible 00:08:00] effect on EPS for Q2. So with that, total revenues are expected to grow between 1% to 3% in US dollars. And because we will have slightly under a 1% tailwind, so in constant currency that kind of rounds into zero to 2%, but probably at the higher side. Non-GAAP EPS in constant currency is expected to grow eight to 12%, between 96 cents and a dollar in constant currency.

Safra Catz: (08:39)
But again, that’s assuming the 2 cent tailwind. So non-GAAP EPS in USC is accepted to grow 10 to 14% and to be between 98 cents and $1.02 in US dollars. Now my EPS guidance for Q2 assumed our base tax rate is 20%. However, as you see, it’s usually a little below it, sometimes it’s a little above it. However, one time tax events could cause the actual tax rates for any given quarter to vary. But I expect in normalizing for these things, it’ll average to 20%. So that’s what I targeted in this guidance. And with that, I’ll turn it over to Larry for his comments.

Larry Ellison: (09:24)
Thanks, Safra. Let’s see, Oracle occupies a unique position in the cloud markets. Oracle is the only cloud vendor that competes in both the enterprise applications market, SaaS, and the infrastructure as a service market, iAS. Our competitors of SaaS are people like Salesforce and Workday. Our competitors in iAS are people like Microsoft and Amazon. They’re different markets. We’re the only one that spans these two markets. It’s a very interesting dynamic. I believe we have the best technology in the market today at both the applications layer and the infrastructure layer of the cloud.

Larry Ellison: (10:07)
While analysts have ranked Oracle cloud applications number one in both market share and customer satisfaction for some time, we’re number one in customer satisfaction in HCM, we’re number one in customer satisfaction in ERP, I can go on. But what’s interesting is that the same analysts are beginning to take notice of the technical quality and customer satisfaction associated with Oracle’s cloud infrastructure as a service business. I’d like to read an approved statement from IDC about their recently published survey. In the 2020 industry cloud path survey that IDC recently released, where it surveyed 935 iAS customers on their satisfaction with the top iAS-

Larry Ellison: (11:03)
On their satisfaction with top IS vendors, including Oracle, Amazon Web Services, Microsoft, IBM and Google, Oracle IS, OCI received the highest satisfaction score, and the biggest year over year score increase of all IS vendors. In addition, 86% of those surveys said they expect their spend on Oracle IS and OCI to increase in the future. I suspect this comes as a big surprise to many of you and many of our competitors, just as Zoom picking Oracle infrastructure surprised a lot of people in the recent past.

Larry Ellison: (11:59)
I know the biggest question for investors has been, “Can Oracle preserve its huge market-leading database franchise into this new cloud era?” Well, interesting question. Obviously, an extremely important question to me and everyone here at Oracle. But, if Oracle Cloud Infrastructure, OCI, is in fact as IDC describes it, the best IS platform in the market, the IS platform with the highest customer satisfaction. And that same IS, OCI is the foundation for the world’s only autonomous database. Where do you think the Oracle database, installed base is going to go?

Larry Ellison: (12:54)
What we’re beginning to see is that it’s just starting to migrate and it’s migrating to both the Oracle public cloud, the only place you could get the autonomous database, and Oracle Cloud at customer. Excuse me, the only other place you can get the Oracle autonomous database and Oracle Cloud Infrastructure all together. Customers are picking Oracle Cloud Infrastructure and the Oracle autonomous database for a few very basic and very obvious reasons. Much better security, much better reliability, much better performance and dramatically lower cost, much, much lower cost than the AWS.

Larry Ellison: (13:40)
And that’s why people are … And I’ll talk about we have people like 8×8, another video conferencing system, are moving entirely from AWS onto the Oracle Cloud. And in fact, that there’s not a major video conferencing company that isn’t talking to Oracle about moving to the Oracle Cloud. Zoom is a perfect example of why customers are choosing Oracle Cloud Infrastructure. We see the benefits of choosing OCI and Zoom’s results. Zoom’s recent earnings were stunning. Zoom may be the fastest company ever to have their company name become a verb.

Larry Ellison: (14:31)
At Oracle, we love to Zoom, as most of our employees continue to work from home. And we love the Zoom’s usage of Oracle Cloud Infrastructure services delivered triple digit revenue growth in sequential orders from Q4 last year to Q1 this year. OCI cloud data centers are opening all over the world at a record pace. We now have 26 OCI regions live around the world, edging out Amazon, AWS, which currently has 24 regions. And we’ll be adding at least another 10 regions in the next nine months. We’re not slowing down. We’re speeding up.

Larry Ellison: (15:18)
Oracle database clouded customer is functionally identical to the Oracle database in the public cloud. That’s why we’re seeing the migrations going both places. They’re going to database clouded customer, which is a unique Oracle offering, and they’re going directly into our public cloud. The price is the same in both cases. The database is fully server-less and elastic in both cases. You only pay for what you use in both cases. And there are no upfront fees in both cases. We are seeing very rapid adoption of Oracle database clouded customer among our very largest customers. And this is just the beginning.

Larry Ellison: (16:03)
In 2018, we delivered the world’s first autonomous database and the Oracle autonomous database is still the world’s only autonomous database. Then in 2019, we introduced the world’s first autonomous operating system. And today, Oracle autonomous Linux is still the world’s only autonomous operating system. Now in 2020, we’ve introduced Oracle autonomous data guard, which effectively eliminates site downtime. If the data center running your application goes down for any reason, autonomous data guard immediately switches and immediately and automatically switches that application over to another data center.

Larry Ellison: (16:51)
No human intervention is required to keep your application running without interruption. And no human labor is required to set up and configure autonomous data guard. If you use autonomous data guard, there’s nothing to learn and nothing to do. You just have to turn on a single switch. Only Oracle offers this autonomous reliability feature. Another unique OCI offering is our dedicated region, gen two cloud customers. Customers can now put our entire gen two public cloud behind their firewall in their data center, all of it. It’s not just the Oracle database behind your firewall, it’s every service that’s in our public cloud; compute, storage, fusion application.

Larry Ellison: (17:45)
Plus, the autonomous database, the autonomous Linux, the autonomous data guard, everything. And we manage it and maintain it for the customer. You get all the benefits of the cloud, but it’s in your data center behind your firewall. No one, not Amazon, not Microsoft, not Google, nobody, but Oracle can give customers a complete public cloud in their data center behind their firewall. Our strategic services are growing rapidly. Autonomous database revenue grew 64% in annualized consumption. Our gen two OCI consumption rate was 130%. We’re clearly growing faster than the market and we’re taking market share in the process. With that, I’ll turn it back over to Ken.

Ken: (18:44)
Thank you, Larry. [Erica 00:07:44], if you could please queue up the audience for questions. We’ll go to QA now.

Safra Catz: (18:50)
Ladies and gentlemen, to ask a question, press star one on your telephone keypad. To withdraw your question, press the pound key. Our first question comes from [Mark Murdler 00:19:00] with Bernstein Research.

Mark : (19:04)
Thank you. And congratulations on the strong quarter and especially on licensing margins. I’d like to ask about the guidance. While Q1 was strong, the economic destruction of COVID-19 is not yet over and yet your guiding a little strongly. Can you give us some more color on why you feel so confident? And specifically, are you modeling increased strength in database, SaaS, ERP, HCM? How big a factor is gen two clouded guidance? Any information would be appreciated. Thanks.

Safra Catz: (19:33)
Sure. Thanks to the questions. It’s really following the path that we were on before COVID really hit in March. And so, what is going on is very basically an extrapolation of what’s happening in the business. The things that are going very well and are growing and are getting larger and larger is everything associated with the cloud. And that so, does have implications on license because options grew not only … Database options grew not only double digits, but actually 20 something percent. And analytics also grew, because as you know, with Oracle licenses, we can bring them to our cloud.

Safra Catz: (20:25)
But in addition, exit data and some of our Oracle-specific hardware that’s very strategic, still continues to do well. But really, the big barn feeders are the fact that our SaaS business is large and growing quickly. And now OCI and our database cloud products/services are growing and they’re getting larger and larger. And so, because we’ve got annual consumption revenue growing over 100%, and this is now overwhelmed the fact that some of our businesses, I’ll give you an example, on-premise consulting. This business continues to get smaller.

Safra Catz: (21:15)
And so, it’s completely overwhelmed by the businesses that are growing faster and commitment to our database is incredibly strong, more and more of our customers want to bring their Oracle databases to the Oracle cloud. And then of course, you have the cases that Larry’s talked about where our Oracle Cloud Infrastructure, gen two, is just so good, and so much cheaper, and so performant and secure that more and more applications want to come to that. That’s really what’s going on. I’m not seeing into the future. I’m basically looking at what’s going on under the covers and it’s a very easy extrapolation.

Safra Catz: (22:02)
… and it’s a very easy extrapolation [inaudible 00:22:04] of our cloud businesses continue to grow.

Speaker 1: (22:12)
Excellent. Thank you.

Speaker 2: (22:15)
Next question, please.

Speaker 1: (22:17)
Thank you [inaudible 00:22:17].

Speaker 3: (22:17)
Our next question comes from Brad [Dizelnick 00:22:19] with Credit Suisse.

Brad Dizelnick: (22:22)
Great. Thanks so much for taking the question. [inaudible 00:22:25] my congrats to the company as well. I want to ask about Cloud@Customer. Clearly, there’s a lot of excitement for how it can enable very large customers to adopt autonomous database and have all the benefits of OCI behind the firewall. And I appreciate it’s only really become available in the last few months, but maybe for Larry, from a product-market fit perspective, can you explain why this is such a big deal, and for [Safra 00:22:51], are there any leading indicators you can point to? Maybe backlog or anything else to help us understand the leading demand for these products and… which I assume supports your confidence in the overall business accelerating. Thanks.

Larry Ellison: (23:04)
Yeah, yeah, I think I can explain it very clearly. So, we’ve been working on Oracle Autonomous Database for several years, as I mentioned in my preamble. We came up with Oracle Autonomous Database in 2018. But if you’re an on-premise user, there was no way to get access to the Oracle Autonomous Database until a couple of months ago. So the Oracle Autonomous Database was available in our public cloud, and has been for three years, and it keeps getting better and better. But if you’re a big on-premise customer, you didn’t have the late access to our latest and greatest database. It was a very strange situation for Oracle that our late technology was not available to the vast majority of our customers.

Larry Ellison: (23:50)
All of a sudden, with Cloud@Customer, at very low prices, you can get Oracle Autonomous Database and all the latest and greatest features we offer in the database, and have it delivered to your data center behind your firewall, and we think the growth here is going to be explosive.

Larry Ellison: (24:13)
We had a Version 1. Full disclosure, we had a Version 1 of this that was rather difficult to install and difficult to use. And Version 2 is kind of the extreme opposite. We learned a lot. And Version 2 is really a plug and play. It goes in very, very fast. And it’s very simple to use and incredibly reliable. And we expect this to be one of the great stories this fiscal year. We think this is going to be triple digit growth. Oracle Database Cloud@Customer.

Larry Ellison: (24:48)
And the other thing is it’s just going to preserve our database franchise. There’s two ways… People are going to make the choice to upgrade and move from their current version of Oracle to Autonomous Database, and once at Autonomous Database they’re not going anywhere.

Speaker 2: (25:09)
Great. Thank you. Next question, please?

Speaker 3: (25:12)
Our next question is from Heather [Vellini 00:25:14] with Goldman Sachs.

Heather Vellini: (25:17)
Thank you so much to the two of you. Safra, OCI had a great quarter, and obviously you’ve had really impressive growth with customers like [inaudible 00:25:27] that you’ve highlighted. Can you talk to us a little bit about the pipeline momentum you’re seeing with OCI as customers accelerate their migrations to the cloud?

Heather Vellini: (25:37)
And also, can you share with us what type of workloads and applications are seeing the most traction with it, or is it really broad based? Thank you.

Safra Catz: (25:46)
Okay. Let me start, but I know Larry’s going to want to say a few things about this. So first of all, you have to understand that our new [inaudible 00:25:54] customers are also on OCI, which means that all of the applications that they want to build themselves, all custom things, on the Oracle database, they’re going to be putting them on OCI also.

Safra Catz: (26:09)
In addition, just realize that many of our database customers stayed on premise waiting for us to have OCI Gen 2, which is powerful enough, secure enough, and scalable enough for their crown jewels. They literally waited.

Safra Catz: (26:31)
And I know, and I have visibility in, sort of, to the future, because often they want to do what we call BYOL, Bring Your Own License, but they often need option. And so I can see their intention, when they’re buying those options, to bring those database workloads.

Safra Catz: (26:51)
Now it is falling into the same categories that you’ve seen historically with us. The communication industry, the financial services industry. All of the industries that have very important high performance applications that run on Oracle, they’ve been waiting to put them at OCI.

Safra Catz: (27:15)
And so we see that. Now, some of them are putting it in the public cloud. Many of them, actually many more than I would have expected. And then others are doing Cloud@Customer. And this second generation of Cloud@Customer, now with Autonomous Database, is just so powerful for our customers. So we’re talking about app customers, database customers, custom applications, and then there are applications that otherwise just run at some of the competing cloud services, that when they do, just like Zoom did, 8×8, a whole bunch of others, that really use a lot of network, a lot of compute, may use a lot of storage, may have a lot of egress back and forth, taking data in and out, they realize that Oracle is both more [inaudible 00:28:10] and since you pay by the minute, the day, the hour, it’s much, much cheaper.

Safra Catz: (28:15)
So we compete at every level of the stack. And it’s really very, very, very broad based for us. I don’t know, Larry, if you want to talk about, add some more to that.

Larry Ellison: (28:30)
Yeah, I’ll add a little bit of color. When Safra says our customers waited for us, let me add a little more information. A lot of those customers actually tried to run Oracle at AWS. They tried. It just didn’t work very well.

Larry Ellison: (28:47)
So they decided maybe they should wait. So they did. So they did try. They looked around. They experimented. But the vast, vast, vast majority, it didn’t work very well.

Larry Ellison: (29:02)
We have an [inaudible 00:29:03] cloud service. Autonomous Database is not available any place but the Oracle Cloud. [inaudible 00:29:09] database service isn’t available any place but the Oracle Cloud. You’d expect us to be much better at Oracle applications than anybody else, and we are. And a significant percentage of enterprise applications. I don’t know, 40%, 30-40%, are Oracle applications. So that’s just a gigantic install based that we think is moving to Oracle… we’re starting to watch it move to the Oracle Cloud. So that’s one thing.

Larry Ellison: (29:39)
So they tried, didn’t work. So they’re coming to us. Next thing, a lot of our application customers… You know we’ve got well over 7,000 customers, fusion application customers, 7,000 fusion ERP customers. Now those customers are beginning to build data warehouses around their ERP data. Everyone does. And they’re building those data warehouses using Autonomous Database and Oracle Analytics. And the Oracle Cloud, using Oracle infrastructure services. The Oracle Analytic Cloud, it’s an Oracle infrastructure service. OCI [inaudible 00:30:21] service. The Autonomous Database, an OCI service. So our application customers, pretty much all of our medium and large application customers, will become, in the not too distant future, will become infrastructure customers.

Larry Ellison: (30:36)
Again, you’ve got to add them on to… These are people [inaudible 00:30:41] customers are going to become infrastructure customers. On premise database customers are going to become infrastructure customers, either in the form of Cloud@Customer, or public cloud.

Larry Ellison: (30:53)
Then there are the surprises, like Zoom, and 8×8, but there are more surprises like that. I think Zoom is a great example, because it proves that the Oracle Cloud is secure, reliable, high performance, and economical. They picked it, because it’s nothing to do with the Oracle Database. It has nothing [inaudible 00:31:17] customer. That was just purely an evaluation of our cloud versus Microsoft’s, versus Google’s, versus Amazon’s.

Larry Ellison: (31:26)
Another example of that is high performance computing. Car companies simulating crashes. Now why would anyone go to the Oracle Cloud to do high performance computing when you can go to Google? Or you can go to Microsoft? Or you can go to AWS? Well, because we’re much faster, therefore much… We’re much, much faster, and therefore they get their simulations done faster, but they’ve got to be willing to pay less.

Larry Ellison: (31:53)
Almost every car company… That’s too strong. Half the car companies around the world are now either using our high performance computing, or evaluating our high performance computing, because we benchmark so well against the competition. And this is all new business. Like the video conferencing business.

Larry Ellison: (32:15)
So the OCI Team did a spectacular job of building a second generation, learning from what Microsoft did, what Google did, what Amazon did, and then building the next generation. And it’s so good, we’re winning business everywhere. Again, and these are very early days. Gen 2 OCI is relatively new. And Gen 2 Cloud@Customer is even newer. And these are both fabulous products that I think are going to do extremely well over the next few years.

Speaker 2: (33:00)
[crosstalk 00:33:00] question please.

Speaker 3: (33:02)
Our next question comes from…

Larry Ellison: (33:03)
[crosstalk 00:33:00].

Erica: (33:03)
Our next question comes from [Rimo Linchow 00:00:03] with Barclays.

Rimo Linchow: (33:06)
Hey. Congrats from me, as well. Originally, I wanted to ask about the enterprise addition of TikTok. But you said I shouldn’t ask about TikTok, so a different question now.

Rimo Linchow: (33:16)
Could you maybe discuss … We talked about the strength in cloud, but the other thing that stood out this quarter was how much better you did, compared to your peers on the license side. You were up, where everyone was down quite significantly. And you touched on some of the drivers, but maybe you could double click on some of that again. Because that stands really out as something that we haven’t seen in industry. Thank you.

Larry Ellison: (33:45)
I’d like to comment on that. Because I think our license business is really misunderstood. They see license business, and they translate in their brain, “License means on premise.” That is not true for us. It may be true for everybody else, by the way. Probably is true for everybody else. But it’s not true for us.

Larry Ellison: (34:06)
We have this thing called bring your own license to the cloud. We encourage our customers to buy licenses, buy more licenses. And our pitch is, “You can run those licenses in your data center on premise. Or you can bring those licenses to the cloud, and get big discounts running database in the cloud.” So you cannot look at our growth and our database license business, and say, “That’s a revival of the old on-premise business.” That is not correct.

Larry Ellison: (34:45)
A lot of these people, when we see PULAs and ULAs, and these big contracts for database. The reason people are buying more licenses, a lot of them, not all of them, but a majority of them, is because they have the flexibility of bringing those licenses to our public cloud, Cloud@Customer, and getting big discounts, getting a benefit, getting better prices by doing that. And a lot of people are doing this. So, again, don’t translate license to mean not cloud. A lot of the license is in fact cloud, as well as on-prem.

Safra Catz: (35:24)
Right. It’s driven. In fact, it’s driven by their plan to move to the cloud. And that is very, very clear. Because they’re buying the specific option, which, as I said, the options number a very high percentage growth this quarter, because it’s really in preparation for their move to the cloud.

Safra Catz: (35:50)
But I will also tell you then, that that is available also in analytics, and in some of the other technology licenses. So analytics, very strong. The database options, extremely strong. Very much pointing in the direction of moving to the cloud.

Safra Catz: (36:14)
So that’s really what is driving it. It’s generally not going to be staying on premise. Some, of course, stays on premise. And some will stay on premise indefinitely. But many companies will be either hybrid, or will be Cloud@Customer, or, of course, in the public cloud. And that’s really what’s going on here. And it’s really quite clear.

Rimo Linchow: (36:40)
Perfect. Thank you. Very clear. Congrats again.

Safra Catz: (36:43)
Yep. Thank you.

Erica: (36:45)
Our next question comes from Derek Wood with Cowen and Company.

Derek Wood: (36:50)
Great. Thanks for taking my question, and congrats on a strong quarter. I wanted to ask about the hardware side of the business. This is the first quarter seen without negative growth in a long time. And to see you hitting 70% gross margin, pretty impressive, and far sooner than what we ever thought.

Derek Wood: (37:06)
So does this tell us that you’re mostly through bleeding off the commodity pieces, and that the majority of growth is driven by Exadata, and Cloud@Customer. And how should we generally think about the directional trends from here, both in terms of growth and margins?

Safra Catz: (37:22)
Yes. So the hardware growth is entirely dominated by our strategic hardware products, which is really most focused around Exadata. Revenue in Exadata was up 15%. Bookings in our strategic hardware, also up very, very high double digits. And we have actually an enormous Exadata backlog, really the largest … It’s actually more than double what it was last year.

Safra Catz: (37:57)
And the reality is that this segment is very, very strong. It has now gotten large enough. And the issue for us in Q4, as I mentioned, was really around supply chain. And that’s taking a while to resolve itself. But we’re able to make and shift a lot of Exadata. But we have an enormous backlog still behind that.

Safra Catz: (38:26)
And so that’s really what’s dominating. And, of course, what that points to is a commitment by our customers to Oracle. You don’t buy an Exadata to run anything but Oracle database application, databased systems. And that commitment to the Oracle platform has really shown up in this area.

Safra Catz: (38:54)
Cloud@Customer is not recognized upfront. Cloud@Customer is not recognized in the hardware line at all. In fact, it is recognized in the cloud line, when they go online and they consume cloud credit. So it doesn’t show up in that on-premise hardware line at all.

Derek Wood: (39:22)
Thank you.

Erica: (39:25)
Our final question comes from Phil Winslow with Wells Fargo.

Phil Winslow: (39:30)
Hi, thanks for taking my question, and congrats on a great start to the fiscal year. Just wanted to focus on applications. We haven’t really talked about that a lot on this call. Obviously, you gave out some really strong numbers with Fusion Cloud. With Safra, you talked about some of the puts and takes in the overall business. And I wonder if you could talk about those sort of applications specifically.

Safra Catz: (39:50)
Sure. I mean, really, when you think of our application business, you really have to think about Fusion, and especially Fusion ERP, HCM, our back office. You have to think about NetSuite. Those are the fastest growing segments. And you have to take into account that we have some other things in that business that are smaller, and some of them are from acquisitions. And that is the less strategic part of our business.

Safra Catz: (40:26)
And, as that gets smaller, sometimes replaced by Fusion, that’s why that business is really doing very, very well. Because everything’s Fusion, but Fusion ERP, HCM, this whole area, really growing quickly. I mean, what you see is many of our customers, both e-business suite, PeopleSoft, JD Edwards customers.

Safra Catz: (40:54)
But we also see a new phenomena, which is, historically, it would be hard to push a door of an SAP customer, an SAP on premise customer too. But now we find that many of those doors basically are already open for us. So, as the only provider of ERP in the cloud for large, medium large companies, the Fusion products are really taking off.

Safra Catz: (41:25)
And so we’ve been replacing not only our own products, and other companies, but we’ve made a significant foothold in SAP customers, simply because they’re really very frustrated with those vendors that they have installed on premise. So this business for us is an enormous opportunity. And it’s really just chugging on all cylinders, worldwide, in fact.

Phil Winslow: (41:54)
Great. Thanks a lot. Keep up the good work.

Larry Ellison: (41:57)
Okay. Thank you, Safra. Thank you, Phil. A telephonic replay of this conference call will be available for 24 hours. Dial in information can be found in the press release issued earlier today. Please call the Investor Relations Department with any follow up questions from this call. And we look forward to speaking with you. Thank you for joining us today. And, with that, I’ll turn the call back to Erica for closing.

Erica: (42:16)
Thank you for joining today’s Oracle’s First Quarter 2021 Earnings Conference Call. We appreciate your participation. You may now disconnect.