When you have a long history following a particular company, sometimes the devil is in the details. In Oracle's case, there are a few rules of thumb to measuring how THEY (meaning Larry, Safra and Chuck) felt about the quarter:
1) How long is the call? -- I've found that when they keep their prepared remarks to a minimum, it usually means they've done quite well and are legitimately confident in the outlook. Lengthier diatribes meant to sway public opinion or spin things generally have the opposite impact.
2) How much does Larry let Chuck and Safra talk? -- The number of times Larry Ellison interrupts his Co-Presidents is inversely proportional to the strength of the results
3) How direct are they? -- The cleaner the Q, the less shucking and jiving goes on during Q&A. Less chatter about secondary and tertiary metrics and more head on talk about the metrics we care about (i.e., revenues, market share, cash flow, earnings per share).
By those measures, Oracle is executing well. The prepared remarks were short, the rhetoric was kept to a minimum (with a few notable exceptions we'll discuss in a moment), and Larry let Safra and Chuck talk uninterrupted in most cases.
You can find the full results HERE, but the headline numbers were:
- New software licenses -- $2.48 billion (17% growth, 13% constant currency)
- Applications -- $726mm (13% growth, 10% c.c.)
- Database and middleware -- $1.76 billion (18% growth, 15% c.c.)
- Software license updates and support -- $2.27 billion (21%, 17% c.c.)
- Applications -- $832mm (23%, 19% c.c.)
- Database and middleware -- $1.44 billion (20%, 17% c.c.)
- Services -- $1.08 billion (26%, 20% c.c.)
- Consulting -- $819mm (30% growth, 24% c.c.)
- On Demand -- $151mm (16% growth, 12% c.c.)
- Education -- $105mm (10% growth, 6% c.c.)
- Total revenues -- $5.83 billion (20%, 16% c.c.)
- Operating margins -- 46% (Non GAAP), 39% (GAAP)
- EPS -- $0.37 (Non GAAP), $0.31 (GAAP)
- Operating cash flow (Trailing 4Qs) -- $5.5 billion
- Free cash flow (Trailing 4Qs) -- $5.2 billion
Applications vs. Database/Middleware
The infrastructure stack was clearly the star this quarter. Overall applications revenues at 13% YOY showed a share deceleration from recent quarters, and were more in line with industry rates than we've seen of late. Backing out the approximate $25mm contribution from Hyperion in the quarter (60% of $43mm), growth was approximately 11.5-12% on an apples to apples basis. Meanwhile database and middleware growth of 18% was the best result this fiscal year and was even more impressive when you consider the tough compare (Oracle dbase/middleware grew 18% last Q4, as well).
Q1 Guidance Sets the Bar High
Q1 guidance was nothing short of aggressive.
- New software license revenues up 20%-30% YOY [implies $960mm-$1.05B]
- Total revenues up 19%-21% on a GAAP basis [implies $4.27B-$4.35B]
- EPS of $0.21 [Non GAAP] vs. $0.18 last year
Although Oracle didn't provide guidance for the full year, it recommitted to "continued operating margin improvement" and reiterated its goal of growing EPS at least 20% per annum. Just reading through the numbers doesn't convey the confidence Larry, Safra and Chuck articulated on the call. As is often the case, the sell-side analysts gave the trio plenty of opportunities to hedge their bets and clearly they were in no mood. Take a look at a sampling of the bravado from the conference call:
Oracle Q4'07 Conference Call Transcript (Seeking Alpha)
Heather Bellini - UBS
Hi. Good afternoon, everybody. I was just wondering, Safra, if you could talk
a little bit about the size of the pipeline entering Q1 versus prior Q1 and last
year in particular, the guidance is obviously very good. And was also wondering,
if you could touch on your thoughts for how we should think about operating
margins in fiscal year '08 and what the company is focused on in terms of
margins. Thank you.
Safra Catz
Sure Heather, nice way to put three questions in one, but we will go with
that. The reality is high pipelines look fantastic frankly for Q1, going into Q1
it will be obviously exciting. It could be our largest Q1 ever, as you can see
by our guidance, we feel that we are really going on all cylinders and the
forecast is very, very, very significant. So, we feel very good about it. Well,
we wouldn't have come up with this kind of guidance, frankly. [note: emphasis is mine]
...So, I think that the reality is the pipelines look extremely good. We took a
brush through them and assumed lower closing rates than we usually use, and we
still came up with this guidance.
The good news is Oracle left no room for interpretation. The bad news is Oracle left no room for interpretation. They are calling for a record Q1 and citing overflowing pipelines as the driver. When you explicitly say you assumed lower than normal close rates and still came up with record guidance, you leave yourself absolutely no room for a shortfall. Investor reaction to anything short of a meet or beat next Q will be severe, in my opinion.
The M&A Train Continues to Chug Along
Lest anyone worried Oracle was thinking about slowing down its pace of acquisitions, they clearly intend to keep the train chugging along.
Brent Thill - Citigroup
And just a quick follow-up Larry? 30 acquisitions over the last three years,
five in just Q4, can you just talk in a very high level in terms of your pace?
Do you expect it to slow or continue?
Larry Ellison
I expect that the pace to continue.
On Demand Rhetoric a Chink in the Q4 Armor
What would an Oracle call be without some controversy? In this case, it came when Oracle started talking about the On Demand business. There had been widespread speculation that Oracle would take this opportunity to build spin and momentum about its CRM On Demand business relative to Salesforce.com and other SaaS players. Try as they might, their chatter rang hollow. Consider:
- Chuck Phillips hailed a "274% increase in website traffic to our CRM On Demand home page." When you have to lead your touts with an undefined increase in PAGE VIEWS, there's not a lot of momentum in the business.
- They cited 74% growth in CRM On Demand revenues in the Q, and said that "bookings were even stronger." Again, this is misleading because On Demand revenues in their entirety were $151mm, up 12% in constant currency. For CRM On Demand to have enjoyed 74% growth, we're talking about a SMALL number; a rounding error for Oracle AND relative to what SfDC is doing quarterly.
- Chuck indicated that the user interface isn't going to "drive deals in the enterprise anymore." I wasn't aware that SfDC built a $500mm business based on how pretty its UI was, but if you say so Chuck.
- According to Phillips, "there are certain laws that speak to data privacy and where the data can reside,
how it can be commingled and they are very nervous about that", and Larry indicated fear of "data privacy issues" was causing problems for "multi-tenant" vendors. Seriously folks? Have we gone back in time five years? There are inevitably going to be companies that are apprehensive about a shared database schema, but there are clearly as many if not more that are absolutely fine with this. And pretending as though security issues aren't addressed by SfDC and other SaaS platforms borders on the ridiculous.
All in all, Oracle has either signaled to everyone that 2008 is starting with momentum across all of its businesses, OR, they are setting themselves up to disappoint the Street in a big way. One of the cruel fates of the perpetual license-based software business is that the revenue bar resets every Q so Oracle better be telling the truth about their assumed close rates and pipeline; there's no margin for error. On the flip side, if they do deliver on their guidance, it's going to be that much harder for the skeptics to ask whether Oracle's industry consolidation strategy was the wrong one.
Related Posts:
Note: This is not a
recommendation to buy or sell Oracle or any other security, but is
merely a personal analysis to foster discussion for informational
purposes only. At the time of
this writing, I and/or funds I maintain discretionary control over,
maintained long equity positions in CRM and MSFT but did not
maintain a position (long or short) in ORCL or SAP.
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'Tis the season and that means giving as well as getting; and so I'm sure Marc Benioff, a former Oracle acolyte, would like to say thanks today, too. You see, the lofty valuation afforded NetSuite today had a halo effect on shares of salesforce.com (CRM); as investors no doubt looked upon the relative size, profitability and cash flow generation of CRM and bid the shares up in sympathy. CRM finished the day at $65 (up 8%) at a new 52-week high.
