Oracle’s (ORCL) CEOs Safra Catz and Mark Hurd on Q3 2016 Results

Safra Catz

SaaS and PaaS revenue 585m

“I’m going to start with our SaaS and PaaS business, where we continue to see excellent momentum. Bookings grew 77% this quarter and that’s on top of the 129%, we reported last year. SaaS and PaaS revenue was $585 million, up 60% from last year.”

Move to cloud is generational shift in technology

“the move to cloud is a generational shift in technology that is the biggest and most important opportunity in our company’s history. We embarked on this transformation over 10 years ago, when we began rewriting all of our software to enable our customers to leverage our solutions as cloud solution. ”

In the move to the cloud they pay for the software and the hardware as a service

“You should think about it as if our customers move to the cloud, that means that they not only of course pay us for the software, but we also offer them a service where we own the hardware and we manage, and we do all the labor, and so even though they end up paying us more than they would have historically, just for a support license, a support fee, but they themselves are customers end up spending a lot left, in total because of the massive economies of scale we have in running the Oracle database for them. That they would not have on their own.”

Larry Ellison

Oracle now selling more SaaS and PaaS than Salesforce

“Oracle is now selling more new SaaS and PaaS annually recurring cloud revenue than any other company in the world including Salesforce.com. We are growing much faster than Salesforce.com more than twice as fast. Because we sell into a lot more SaaS and PaaS market than they do. We compete directly with Salesforce.com in every segment of the SaaS customer experience market including sales, service and market.”

Ken Bond

People want Oracle in the cloud because they already have a large investment in Oracle products

“people want Oracle in the cloud. People have a huge investment in Oracle products. I mean, people are coming after us, because we are by far the market leader in database. If you’re in the database business, the only when you can come after is us. So, of course, Amazon, they’re going to be in the database business too is coming after us, and of course Microsoft wants to be bigger in the database business, they have to come after us. We’re the biggest player. We see our customers, literally millions of applications and millions of users of those applications built on top of the Oracle database, wanting to move those applications into the cloud and we do that very well.”

If you want to move to another company’s database you have to rewrite the application, which gives us an advantage

“Let me add one more thing which is a lot of people over the years have come after us in database. The problem is if you want to move to SAP HANA, you have to rewrite your application. If you want to move to Amazon database, and they have a couple, you have to rewrite your application. That is just a huge barrier for our customers. Our customers want to run their existing applications faster and more securely in the cloud. They want to make an easy transition. We’re very comfortable we get depend our leading position in the database market.”

Currency headwinds ended up being higher than expected

“The currency headwinds ended up being higher than consensus estimates would reflect, with 8% to software and cloud revenue as well as the total company revenue, 9% for hardware revenue and $0.09 for earnings per share. Currencies continue to move significantly and remain unpredictable. So my comments today generally reflect constant dollar growth rate which is how we look at the business.’

SaaS and PaaS revenue is still second t Salesforce, but we will catch them and pass them. We have 10x more customers than Workday

“Our cloud SaaS and PaaS revenue is still second to Salesforce.com but we are growing much much faster than they are. So it won’t be long before we pass them. How and why is this happening? Our SaaS growth is due to the rapid acceptance of our new generation of Fusion application. We now have over 1000 Fusion ERP customers, around 10 times more than Workday. Mark said that once, I am going to say it twice. Around 10 times more than Workday.”

It’s between us and Workday in the cloud ERP market. SAP isn’t a factor

“Workday says they never see SAP in the cloud ERP market. That’s the one thing Oracle and Workday agree on. It’s between us, Oracle and Workday in the mid market and high end, the cloud ERP market and we are winning big time”

Number one market share in servers over 15k in the US

“when you look at the market share numbers, they sort of get to be staggering. We’ve taken over the – and this is not a question you asked but I am going to say it anyway. In the United States when you look at servers above $15000, the number one company in market share now is Oracle. I believe that will occur region by region by region because of the strength of not just our hardware product line but our software portfolio with it.”

It’s a declining market, but we’ll gain share because you can take workloads back and forth from the cloud

” I don’t think we are telling you that there isn’t a non-premise market. Please don’t take that message when we described. But I think the fact that you can take a workload from your on premise data center and now move it seamlessly to the cloud and back and forth to a data center gives us a tremendous advantage. The configuration we have in the cloud, the configuration we have on premise now can be identical. If they were to move workloads back and forth, use that on our hardware in your data center, use that on the very same hardware perhaps in the cloud. We are the only company in the industry that can do this. And so I think this bodes very well for our hardware business, granted in a declining market. But I believe Oracle will gain market share in the declining market.”

Currency headwind was 6-7%

“As you probably remember, I didn’t provide U.S. dollar guidance for Q3, given the unusually high volatility in exchange rates. The currency headwind ended up being 6% for software and cloud revenues as well as total revenue, 7% for total hardware revenue, and $0.06 a share – and $0.06 for earnings per share.”

Now bigger than Workday in cloud

“our Cloud results were much, much better than expected as we are clearly growing faster than Salesforce. We’re more than three times the size of Workday now. Software and Cloud revenues were $7.2 billion, up 7% from last year. Software updates and product support revenues drove nearly half of total company revenue at $4.7 billion, up 8% from last year. Attach and renewal rates remain at their usual high levels as our growing install base of customers continues to power earnings and cash flow. New software license revenue was $2 billion while we continued to enable our customers with their ongoing transition to Cloud.'”

A lot of cash

“We now have over $43 billion in cash and marketable securities. Net of debt, our cash position is approximately $11.5 billion.’

More ERP customers than Workday has acquired in their lifetime

“This quarter Oracle sold cloud ERP systems to 160 new customers. That’s more ERP customers than Workday has acquired in all the years they’ve been in the cloud business. Not one of our 160 cloud ERP deals was competitive with SAP. As Mark said, we just don’t see them in the market. By the end of this quarter, Oracle will have sold over 1,000 cloud ERP systems. We are on our way to building the largest ERP business in the cloud.”

We’re going to beat Salesforce this year, not in 2016

“On our last quarterly conference call, I predicted that in our fiscal year 2016 Oracle would likely sell more SaaS and PaaS new business than Salesforce.com. I was way too cautious and conservative. Our cloud business is growing a lot faster than even I expected. Our cloud bookings are now growing at over 100% per year, so I’d like to revise my prediction.

I now believe that Oracle will sell more new SaaS and PaaS business than Salesforce.com in this current calendar year, 2015. It’s going to be close, but I think we’re going to sell more in the cloud than they do this year. I suspect that might come as a big surprise to a lot of people out there. You won’t have to wait very long to find out who’s going to win this.”

We make it much easier to move to the cloud

“The use cases that are spurring adoption of Oracle, the Oracle database in the Cloud is the very simple fact you can take any workload, any database that you currently have running in your data center and move your database with the push of a button and move your application with the push of a button and run it in the Oracle Cloud. Nobody else can do that.”

SAP is just running their same old stuff

“you’ve got to understand one thing, this is the same old SAP. This is all written in ABAP. There’s 30-year-old code in S/4 business suite. There is nothing new about this. They’re simply hosting it on someone else’s computer.

I also can’t find a website where you log on and try it. Everyone else lets you log on – you know, let’s you log on, you go to a website if you want to buy our stuff, you want by SaaS, you want to buy PaaS, you go to the website, you get provisioned, and you go. Not so with SAP. This is 30-year-old code renamed S/4HANA. Now they did add a new user interface called Fiori to the old code but that’s all they did.”

We’ve built a better product than Workday

“In the context of HCM, I think with each subsequent release of HCM, whether it had been release 7, release 8, release 9, and now release 10, we have simply engineered now a better product than Workday”

We’ve seen the beginnings up uptake of 12c aided by emergence of private clouds

“we’ve seen a strong uptake of – well I shouldn’t say that. Let me say it another way. The beginnings of the uptake of 12c, I believe that also helps, and it also helps in the context of what we see as 12c and the emergence of private clouds that exist within our customers where you see many of these architectural moves to these engineered systems as well.”

We redid everything for the cloud 10 years ago

“We made a big announcement almost 10 years ago that we were rebuilding all of our applications for the cloud. Now, it wasn’t called the cloud 10 years ago, it was called SaaS. But we said that we were rebuilding everything on this thing called Fusion, and networks, were going to rebuild our middleware for the cloud, build our applications on top of our cloud middleware, and change our database for the cloud, make it multi-tenant, make it in-memory, do all of those things. We started a project 10 years ago to rewrite everything. When – Fusion ERP, every single line of code is brand-new. Fusion HCM, every single line of code is brand-new.”‘

Workday didn’t do it right, we did

“We think we put multi-tenancy at the right level of the stack in the database rather than multi-tenancy in the application which creates real security problems which I’m not going to go into. But we think we have a huge advantage over someone like Workday that doesn’t have a database. Workday kind of build their own little database. And that’s what you’re buying into when you buy Workday. We built our own little database. It’s called Oracle. Workday has its own programming technology. We haven’t, we used this programming technology called Java.”

These are some of the advantages of the cloud in memory capabilities:

“I think a lot of things that used to take a long time will take less time. So manufacturers will run MRP much faster than they used to. People that used to get reports overnight will get those reports instantaneously so they’ll have access to more information. I think there are some very interesting applications in terms of security for immediate detection of intrusion, being able to analyze the data so quickly we actually can do a better job in security, that’s one of the big things that we’ve been working on for some time. I think there are a lot of existing applications that you used to wait overnight for. You’ll get that data instantaneously, and then there’ll be a host of new applications.”

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

Larry Ellison transitions to chairman

“As you’ve seen in the last few minutes we announced that Larry was elected Executive Chairman and appointed Chief Technology Officer; Mark and I have been appointed CEO. Other than Mark and I reporting to the Board of Directors of which Larry will be Executive Chairman instead of to Larry directly no other reporting relationships will change at the company.”

Our goal is to beat salesforce in the cloud

“we’re focused on two things, becoming number one in the cloud. That means growing our cloud business rapidly. So you’re seeing an acceleration in our growth rate. We are forecasting that we grow our cloud, our SaaS and PaaS cloud business this coming quarter between 40% and 45%. So not only are we getting bigger in the cloud, our growth rate is going up. That’s usually the opposite of what happens. So we are focused on becoming number one in the cloud being bigger than Salesforce in the cloud. And to do that we got to increase our growth rates and that’s exactly what we’re doing.

Now while we’re doing that, we have one other key focus to continue to deliver record levels of cash flow and that’s exactly what we’re doing. So we’re getting bigger in the cloud, our growth rate is increasing in the cloud. Our cash flow is getting better we think it was a great Q1 and it’s going to get even better in terms of our growth rates in the cloud.”

Larry is staying on the call

“ou’re going to have to wait a little while longer before you get me off the call. I apologize to everyone for that.”

There wont be significant changes to the organization with the management changes

“Yeah, and Karl I just want to make sure we are very, very clear. There will actually be no changes, no significant changes right, just want to clarify, no changes whatsoever.”

The cloud just means doing more for our customers

“he way I look at is we are going to be doing more for our customers, exactly what Safra said earlier, we are going to be doing more for our customers than we did before. So before we use to sell them software and they would have to provide their own datacenters and their own machines and their own labor and their own network to run all of that.

And now we are going to put a lot of that in our datacenter, we are going to buy the machines, we are going to provide both the skilled labor, whether you are buying the infrastructure-as-a-service, we will be maintaining the operating system and the virtual machine for you along with the hardware and storage, processing and storage.”

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings.

Made changes to reporting to break out cloud revenue

“we’ve made some significant changes in our financial reporting and in our guidance to match our company’s fundamental transition. We’re now firmly into the transition to the cloud and we had previously disclosed our SaaS revenues in the 10-Ks and Qs. As the cloud revenue has become larger and more significant, we’ve gone ahead and disclosed some on the phase of our income statement.”

Why Oracle will win in cloud

“First, we have the most complete and modern portfolio of SaaS products in the cloud.”

“Second, all of those SaaS applications run on the world’s most powerful platform in the cloud, the Oracle in-memory, multi-tenant database and the world’s most popular programming language, Java.”

“Third, we have dramatically expanded, specialized and lined up our sales forces to sell SaaS and PaaS subscriptions against the new generation of cloud software competitors and it’s working.”

Going to beat Workday, Salesforce and SAP

“We are the only company that has a whole suite of cloud applications. We are salesforce.com’s primary competitor, Workday’s primary competitor. And in the cloud we’re many times the size of Workday, we’re bigger than SAP, and we are going to pass Salesforce in cloud.”

Products identified as quadrant leaders

“As industry analysts build their waves and quadrants they name cloud leaders in specific cloud areas and Oracle today is the leader across more cloud solutions than Salesforce, Workday and SAP combined.”

Sales force agnostic to selling license vs. subscription

“The sales force is motivated by their commissions. And we’ve made it commission neutral. In other words the sales force doesn’t really care if they sell a license or they sell a subscription. They get paid the same amount in either case.”

Competitors are all based on the Oracle database

“Most of the cloud companies are based on the Oracle database. We are, for example, this last Q4 we did a huge — a big deal with SAP was success factors is based entirely on Oracle. So people are using the Oracle database in the cloud. So we had a nice deal with them. We had a nice deal a year ago, nice deal with Salesforce.com, obviously net suite at abate. But virtually everybody with the exception of Workdays based on the Oracle database.”

In memory feature and multi-tenant feature are important

“we think these two features the in-memory feature and the multi-tenant feature really will allow us to deliver by far the best database experience in the cloud. And that should drive our database sales for the next few years.”

Multi tenancy important to get ISD community onto the cloud

“there are a lot of companies that want to get to the cloud. I mean I’m going just take out of thin air Cerner, who really don’t have multi-tenant products, but would like to get to the cloud. They’d be a perfect example of the company who runs on top or Oracle that would like to get to the cloud where the Oracle multi-tenant database gives them fast track to the cloud, and fast track of — very fast big data analytics with our in-memory options. So those two things I think will be instrumental get us moving our huge ISD community for the cloud on top of our platform.”

Every ISD runs on the Oracle database and wants to move to the cloud

“virtually every ISD runs on top of the Oracle database. Virtually all of these companies would like to be able to move their offerings to the cloud. We now enabled that. Our platform is just coming out this fall. This is a net new business for us going forward, moving all these ISDs into the cloud. We think this might be the biggest single — in an opportunity-rich world as we’re seeing our SaaS applications, the growth is accelerating.”

Multi-tenancy and in-memory are two fo the biggest parts of modern computing

“the in-memory piece allows you to offer big data analytics. And what you’re asking me, which is more important, big data analytics or multi-tenancy in the cloud, I think they’re both crucial to modern computing. These are two of the biggest, biggest parts of modern computing. People spend a lot of time talking about the cloud and getting to the cloud, getting your business to the cloud and modernizing it. And big data analytics, I mean they’re number one and number two in the conversation about technology these days in all of the meeting I’ve been.”

Software and platform as a service are high margin, but infrastructure is low margin

“the two parts of the cloud business that we’re focused on are SaaS, the applications and PaaS, the platform database and Java programming language. We think inherently those businesses are 40%-50% margin businesses. We think that’s not the case in Infrastructure-as-a-Service business. We think that’s a lower margin business, but we think we can run it profitably in association with our SaaS and PaaS businesses.”

Infrastructure is something we sell as convenience to customers. We are our own supply chain

“Where we’re really trying to grow the business, where we’re determined to be number one is in SaaS and PaaS. We’re in infrastructure of service as a convenience to our customers, who want to have one stop shopping and buy their applications platform and infrastructure at the same place. But we think collectively, those three businesses, as Safra said we’re our supply chain. So we buy electricity in buildings; everything else we make. And we think we can deliver the cloud services without compromising our margins whatsoever.”

A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

Revenue growth 6%

“For the company, total revenue for the quarter was $9.3 billion, up 6% from last year, non-GAAP operating income grew $188 million to $4.4 billion, up 6% over last year and the operating margin was 47% again.”

Customers want us to integrate hardware/software for them

“Our engineered systems business is growing rapidly for the same fundamental reasons that our cloud applications business is growing rapidly. In both cases, customers want us to integrate the hardware and software, and make it work together so they don’t have to.”

Re-organized for the cloud. SAP is not

“Eight years ago, we started to rewrite all of our applications for the cloud. Now those Fusion, ERP, HCM and CRM cloud applications are competing effectively with SaaS product specialist like Salesforce and Workday.

SAP has not yet begun to rewrite their ERP, HCM and CRM applications for the cloud. This gives the opportunity to become the leader in cloud applications and replace SAP as the leader in the overall applications in the market place.”

Growth in hardware is because engineered systems reach scale

“engineered systems have been growing rapidly for a long time. We keep talking about it. Now the problem couple of years ago was engineered systems was a small percentage of the total. Now engineered systems has grown up to be over 30% of the total. So it is — and soon it is going to be half of the total.”

No longer commodity hardware business

“The x86 commodity business which used to be a big business when we bought Sun has now shrunk to almost nothing. So our hardware business has gone through the transition where we got neither the commodity storage business, we got neither the commodity server business and replaced it with computing systems with a lot of our own intellectual property.”

Integrated solutions driving better performance at lower cost

“We replaced a system at the — in the world largest cloud company, you guys can figure out who that is. World largest cloud computing, we delivered an Exadata System to them.

They moved their application and got in live in three weeks and experienced 10 times better performance at a fraction of the cost. This is not uncommon. When we installed an Exadata Machine or a SPARC SuperCluster to have a very rapid implementation, delivered terrific performance and at a dramatically lower overall cost because all of the complexity of integration is done by us, not by them.”

Don’t just compete with server vendors

“we just don’t compete with the server vendors. We actually do a lot of other things than just compete with an IBM. We compete with EMC frankly when we get into those environments because we radically change our customer storage requirements.”

Salesforce making 12c central to its infrastructure

“I just recently got a note from Mark Benioff who is excited about bringing in Exadata and 12c and making in at the basis of salesforce.com’s cloud computing infrastructure that they put our application on. So we are seeing adopters with very, very high standards in terms of having to supply millions of users, reliably and cost effectively in the cloud. Talk about moving their entire business to 12c and Exadata. That’s just the tip of the iceberg of these hyperscale companies.”

Key to 12c is memory and multi-tenancy

“we think 12c will be the most rapidly adopted new release in many, many years for those two reasons, in memory and multi-tenancy features.”

Give customers the choice of service in cloud or on premise

“We will give customers a choice, but will offer those data analytics in the cloud, data analytics on premise”

Fusion being deployed in the cloud

“what you asked was the deployment of Fusion on premise versus cloud, I think that’s what you asked and it’s cloud, cloud, cloud. So let me say that one more time cloud, cloud, cloud, it’s generally where Fusion is deployed.”

Platform vs infrastructure as a service sales

“as we roll out platform-as-a-service and infrastructure-as-a-service, we will have specialist selling nothing but platform-as-a-service and nothing but infrastructure-as-a-service…we need specialist sales teams that are used to competing with Amazon, other specialist sales team that are used to competing with IBM pSeries. It’s a different sales, with different customer quite often. So we have, but we are lining up against all of our new competitors and making sure we have sales capacity as well as a competitive product.”

New technology enables huge databases

“The fact that our Exadata Machines have multiple periods of cashing, we now not only have DRAM and rotating storage, we have a lot of flash memory that we have to manage. It allows us to manage huge databases, multi-petabyte databases and deliver very high performance.”

Big data is a set of underlying technologies

“we think that Big Data is an underlying set of technologies. For batch, if you want a Big Data batch process, the open source product Hadoop is a very good product, if you’re doing batch processing. If you’re doing Big Data real-time processing *then we think the Oracle databases by far and away the best managed — best technology for managing real-time processing of Big Data.”

Example of big data in practice

“So our telecommunications billing systems which has to manage huge amount of transactions with millions and millions of customers, be able to figure out whether to cut-off a phone call when someone exceeds their bill and do all of that real-time. That’s real-time processing of huge amounts of data by a phone company those are the kind of applications we provide that almost no one else can provide.”

We’re supplying the arms to our cloud competitors, we can build the infrastructure more competitively

“We think with our engineered systems and our data compression technology, we can deliver the same storage and the same compute capacity of our competitors for a lot less money. I mean, that’s what we’re selling — we’re selling this technology to our customers, that’s our pitch. And we think we can build our own data centers just as efficiently and that’s why, I don’t think you’ll ever see our CapEx approach our infrastructure competitors in the cloud.”

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. The quotes are generally pieces of information that I find interesting or helpful to understanding the company, industry or economy and are not meant to provide summaries of the full content of the call. Other posts in this series can be found by clicking here. Full transcripts can be found at Seeking Alpha.

“Let me share a few facts about how we run our cloud. The cloud runs on our engineered systems. We have nearly 13,000 VM, 70 petabytes of storage in seven countries, more than 7.6 million users and 16.5 million or billion transactions per day.”

“In bookings, we sold over 1200 engineering systems in Q4 including more than 600 Exadata’s. Exalogic was up more than 50% sequentially and we sold more than 100 units of Exalytics in the quarter. For the year, we sold over 3000 Engineered Systems more than all the previous years combined.”

“The products performed kind of as we expected, it’s just that they didn’t reach the ceiling, we’ve got where we’re going to reach in the quarter.”

“the growth in our pipeline…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.”

“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 distribution capability.”

“We continue to see pressure in China as you read across most of the other tech companies described we saw that.”

“Next week, we will be announcing technology partnerships with the most important –the largest and most important SaaS companies and infrastructure companies in the cloud. And they will be using our technology, committing to our technology for years to come. That’s how important we are doing 12c. We think 12c will be the foundation of a modern cloud where you get multi-tenant applications with a high degree of security and a high degree of efficiency, you at least have to sacrifice one for the other.

Again, I would call them a startling series of announcement with companies like Saleforce.com, NetSuite, Microsoft all that happen next week will give you the details. These partnerships in the cloud I think will reshape the cloud and reshape the perception of Oracle Technology in the cloud. 12c in other words is the most important technology we’ve ever developed for this new generation of cloud security.”