Oracle Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
June 12, 2023

There are 5 speakers on the call.

Operator

Hey, everyone, and welcome to the Oracle 4th Quarter and Fiscal Year 2023 Earnings Call. Today's call is being recorded. I would now like to turn the conference over to Ken Bond. Please go ahead.

Speaker 1

Thank you, Lisa, and good afternoon, everyone, and welcome to Oracle's Q4 fiscal year 2023 earnings conference call. A copy of the press release and financial tables, which includes a GAAP to non GAAP reconciliation and other supplemental financial information can be viewed and downloaded from our Investor Relations website. Additionally, a list of many customers who purchased Oracle Cloud Services or went live on Oracle Cloud recently We'll be available from our Investor Relations website. On the call today are Chairman and Chief Technology Officer, Larry Ellison And Chief Executive Officer, Safra Katz. As a reminder, today's discussion will include forward looking statements, including predictions, Expectations, estimates or other information that might cause actual results to differ from what we're talking about today.

Speaker 1

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. As a result, we caution you against placing undue reliance on these forward looking statements and we encourage you to review our most recent reports, Including our 10 ks and our 10 Q and any applicable amendments for a complete discussion of these factors and other risks that may affect our future results or And finally, we are not obligating ourselves to revise our results or 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.

Operator

Thanks, Ken, and good afternoon, everyone. As you can see, Q4 was another fantastic quarter and the end of a great year. But before I get to the numbers, I'd like to go over our journey to get here. 3 years ago, I shared with you that our own business transformation had reached the crossover point as our fast growing businesses Had eclipsed the size of our declining businesses and as a result this would inevitably drive revenue growth acceleration going forward. Now I don't blame you for not believing me at the time, fiscal year 2020 growth With 0.

Operator

Well, as you can see, this has played out with organic revenue growth Accelerating significantly and that's despite the closure of our nearly $500,000,000 Russia business. Since fiscal year 2020, our strategic back office SaaS business has more than doubled in size And consumption of our Gen 2 cloud infrastructure service is now 7 times larger. And while competitors have seen their growth rates drop precipitously over the last year, Our cloud infrastructure growth rate has essentially doubled from last year to 77% this quarter And with Gen 2 OCI growth even higher and we're far from done. In fact, I just told my team, I think we're at about the middle of the beginning. Looking ahead, I see even more growth opportunities This should help power future growth acceleration in the future.

Operator

We remain committed to the fiscal year 2026 targets that we shared with you last fall at our Financial Analyst Meeting and our exploding AI demand Leaves us significant upside. Our momentum has been driven by 2 fundamental differences From our competition, 1, highly differentiated technology and 2, A much better customer experience. Firstly, our cloud applications are very popular With a growing base of customers in part because we are the most modern, comprehensive and innovative Set of apps across back office, CX and industry applications. We implemented AI machine learning capabilities Years before anyone was talking about it and it helps our customers run their businesses every day. To complete the picture, we can serve customers of any size around the world from small businesses on NetSuite To global enterprise on fusion in all industries, having the best cloud application technology Has helped us grow the business to $11,000,000,000 in SaaS revenue, while expanding gross margin.

Operator

On the infrastructure side, we're seeing more and more media articles reporting on the unique capabilities of OCI And our database technology. Larry will explain our unique differentiation in a moment, But the result is that customers are choosing to run on Oracle infrastructure for all their requirements, Be they new services like AI training or services we're known for like database and Java. To complement the technology, we've changed our culture such that we are totally focused on our customers' success. That partnership spirit starts with engineering as we work hand in hand with companies as they try out our technology And continues all the way through their success with us. There's no question that this close partnership with our customers Has led to our success.

Operator

As part of that, we've also created an organization called Customer Success Services or CSS. This group ensures that customers get the most value from their Oracle purchases, from planning to activation The implementation to support to anything else they need to succeed. We think this unique approach, Which customers already tell us they love, ultimately drives overall customer satisfaction and that results in higher renewal rates, Expansion rates and referencing. Now I'll turn to Q4. As always, I'll discuss financials Using constant currency growth rates and also provide a full picture, I'm going to share with you results including and some excluding Cerner, so that you have it all.

Operator

Total cloud revenues, SaaS plus IS was $4,400,000,000 up 55 percent With IS revenue of $1,400,000,000 up 77% and SaaS revenue of $3,000,000,000 up 47%. Excluding Cerner, total cloud revenue, SaaS plus IS was up more than 33% at 3,800,000,000 Total cloud services and license support revenue for the quarter was $9,400,000,000 Up 25%, driven again by our strategic cloud applications, autonomous database And our Gen 2 OCI. Application subscription revenues, which include product support were 4,400,000,000 Up 37%. Application specific revenues, including support, but excluding Cerner were 3,400,000,000 Up 11%. SaaS Cloud revenue, again excluding Cerner was 2,400,000,000 Was up 17%.

Operator

Our strategic back office SaaS applications now have an annualized revenue of 6 $600,000,000 and grew 24%, including Fusion ERP up 28% and NetSuite ERP up 24%. Together, our strategic back office businesses are now larger and have grown faster than our local competitor For 4 straight years, infrastructure subscription revenues, which also includes support We're $5,000,000,000 up 15%. As mentioned already, Infrastructure Cloud Services revenue was up 77%. Excluding legacy hosting services, infrastructure cloud services revenue grew 89% With an annualized revenue of $5,200,000,000 including OCI consumption revenue, which was up 112%, Cloud and customer consumption revenue was up 60% and autonomous database was up 47%. Database subscription revenues, which include database support, were up 6% highlighted by cloud database services, Which were up 41%.

Operator

As on premise databases migrate to the cloud and cloud customer, We expect these cloud database services will be a third leg of revenue growth And revenue growth acceleration alongside back office SaaS and Gen 2 OCI Cloud Services. Software license revenues were $2,200,000,000 down 14% following the 25% growth We saw a year ago in Q4. So all in, total revenues for the quarter, including Cerner's revenue contribution of $1,500,000,000 We're $13,800,000,000 up 18%. Shifting to margin, the gross margin percentage For cloud services and license support was 78% as a result of the mix between support and cloud. Last year, Oracle license support revenues with its mid-90s gross margins represented about 62% of cloud And now it's down to 53%.

Operator

But this is happening because our cloud Services are growing much, much faster than license support even as license support continues to grow. Most importantly, gross profit dollars of cloud services and license support grew 19% with Cerner, 10%, excluding Cerner in Q4. Additionally, I would note that IS gross margins improved Substantially from last year and I expect IS gross margins will continue to improve. We will while we have continued to build data center capacity, we've also seen our margins go higher As these new cloud regions fill up, non GAAP operating income was $6,200,000,000 Up 12% from last year, the operating margin was 44% as we continue to integrate Cerner. As we drive Cerner profitability to Oracle standards and continue to benefit from economies of scale in the cloud, We will not only continue to grow operating income, but we will also grow the operating margin percentages.

Operator

The non GAAP tax rate for the quarter was 9.2% and the non GAAP EPS was $1.47 in U. S. Dollars, up 8% in USD, 10% in constant currency. The GAAP EPS was 1.19 For the full fiscal year, total company revenue was $50,000,000,000 up 22% And excluding revenue, total revenue grew 7%. Total application subscriptions grew 35% And 10% excluding Cerner compared to 8% last year and total infrastructure grew 10% Compared with 5% growth last year, clearly our revenue growth continued to accelerate again this year As investments into our cloud businesses are paying off, total cloud services and license support revenue With $35,300,000,000 up 21%, total cloud services by itself were up 50% To $15,900,000,000 and excluding Cerner, total cloud services were up 29% to $13,600,000,000 And with revenue growth acceleration in both strategic back office cloud applications, which were up 27% for the year And cloud infrastructure services, which were up 63% for the year.

Operator

Non GAAP EPS was $5.12 in USD, up 4% in USD and up 10% in constant currency. The full year operating margin percentage was 42%. At quarter end, we had nearly $10,200,000,000 in cash and marketable securities and the short term deferred revenue balance was 9,000,000,000 Up 9%. Operating cash flow for the quarter was up 42% At $5,600,000,000 while free cash flow was up 46% at 3,700,000,000 Now over the last four quarters, operating cash flow was $17,200,000,000 Up 80% from last year as we're now seeing cash flow benefits from our cloud transformation. With capital expenditures of $8,700,000,000 this year, free cash flow was $8,500,000,000 Up from $5,000,000,000 last year and I expect that we will see very good results In our fiscal 24 free cash flow.

Operator

The remaining performance obligation or RPO balance is 67 $900,000,000 up 47 percent in constant currency due to strong cloud bookings as well At Cerner, I would also note that organic RPO was 15% in constant currency As a result of our customers burning through their commitments at a heightened rate, I expect that you'll see this number run up As customers reload and new customers sign up, approximately 49% of total RPO Is expected to be recognized as revenue over the next 12 months. CapEx It was $1,900,000,000 in Q4 $8,700,000,000 for fiscal year 2023 as we continue to build capacity for existing bookings Our investment strategy for adding capacity remains to build many, many identical Cloud Region. Our starting point is smaller, which allows us to go where competitors cannot And this continues to be an advantage for us. Given the demand we have and see in our pipeline, I've increased our CapEx Projection and I now expect the fiscal 2024 will be similar to this year's CapEx. I also expect our Gen 2 OCI business will have another excellent year of revenue growth As existing centers fill up and new centers come online, as always, we remain careful To pace our investments appropriately and in line with booking trends, which is why our gross margins are up in our cloud.

Operator

We now have 42 public cloud regions around the world with another 7 being built, 12 of these public regions interconnect with Microsoft Azure, giving customers true multi cloud capabilities. We have many, many cloud customer implementations, 10 dedicated regions and 9 more plans. And lastly, We have 9 national security regions live with immense demand for more. As we've said before, We're committed to returning value to our shareholders through technical innovations, strategic acquisitions, stock repurchases, prudent use of debt and the dividend. This year, this fiscal year, we repurchased 17,000,000 shares For a total of $1,300,000,000 in addition, we paid out dividends of $3,700,000,000 over the last 12 months As the Board of Directors declared a quarterly dividend of $0.40 per share.

Operator

Now to guidance. And as I've said before, our fundamental principle is to grow EPS while substantially increasing cloud revenue growth. Let me turn to my guidance for Q1, which I'll review on a non GAAP basis like everything else. If currency exchange rates remain as they are now, Currency should have a 0% to 1% positive effect on total revenue and a $0.01 positive effect on EPS in Q1. However, Actual currency impact may be different.

Operator

Total revenues for Q1, including Cerner, Are expected to grow from 7% to 9% in constant currency and are expected to grow from 8% to 10% In USD, at today's exchange rate, additional upside depends on how fast We can put out even more capacity to our customers. Total cloud revenue, again excluding Cerner, Is expected to grow from 28% to 30% in constant currency and $0.29 to $0.31 in USD. Non GAAP EPS is expected to grow between 8% to 12% and be between $1.11 Currency non GAAP EPS is expected to grow between 9% to 13% and be between $1.12 $1.16 in USD. My EPS guidance assumes a base tax rate of 19.5 However, as you see nearly every quarter, one time tax events could cause actual tax rates to vary. Now before I finish, let me also give you some initial thoughts on fiscal year 2024.

Operator

As I described and Larry will elaborate in-depth, We are seeing unprecedented demand for our cloud services and especially our AI services. As a result, I expect cloud revenue, excluding Cerner, will continue growing At at least similar rates to what we experienced in fiscal 2023, even though our base is much bigger And maybe higher. As our high growth cloud revenues are becoming a larger, larger portion of total revenue, We are seeing an acceleration of our total revenue growth. I expect this trend will continue in fiscal 2024 And of course, we also expect to deliver a higher non GAAP operating margin percentage this coming year as well. Okay.

Operator

Before I hand off to Larry, I want to take a moment to thank our customers for making fiscal year 2023 Such an enormous success. You've been wonderful partners and we thank you for your trust in us. And I want to thank our employees For being focused on advancing our customers' mission so spectacularly. Some of you are new And many of you have been with us for years, in fact, even decades. And I think you all see that our best days Are in fact ahead of us.

Operator

Thank you for your loyalty and for your incredibly hard work. And thank you, Larry, our CTO, our Chairman and our Founder for leading with brilliance, determination and vision And allowing us to all be part of this incredible journey, which is just getting started. So thanks, Larry. And with that, I'll turn it over to you for your comments.

Speaker 2

Thank you, Safra. The hardware and software in Oracle's Gen 2 cloud is fundamentally different than other hyperscalers' clouds. The CPUs and GPUs we rent to customers are interconnected using an ultra high performance RDMA Network, plus a dedicated set of cloud control computers that manage security and data privacy. Oracle's unique set of hardware and software building blocks enable our Gen 2 cloud to deliver much Higher performance than any of our cloud competitors. And in the cloud, Since you pay by the minute, if you run twice as fast, and we do, You pay half as much.

Speaker 2

What is especially interesting in today's world is that All of Oracle's cloud data centers have a high bandwidth, low latency RDMA network That is perfectly optimized for building the large scale GPU clusters That are used to train generative large language models. NVIDIA themselves are doing AI development in the Oracle Gen 2 Cloud. And we are partnering with NVIDIA To build the world's largest high performance computer, an AI computer With 16,000 GPUs, the extreme high performance and related cost savings Running generative AI workloads in our Gen 2 cloud has made Oracle the number one choice Among cutting edge AI development companies, including Mosaic ML, Adept AI, Cohere, Modal Labs, Character, HyperReal, Slicex, Vectorspace Bio, Falconry, Respeecher, Altair, InfoWorld, 12 Labs, Latent Space, Plus many, many others. In the aggregate, our generative AI cloud customers Have recently signed contracts to purchase more than $2,000,000,000 of capacity in Oracle's Gen 2 Cloud. One last thing.

Speaker 2

In partnership with Cohere, Oracle is launching a generative AI cloud service for enterprise customers. This new service protects the privacy of our enterprise customers' training data, Enabling those customers to safely use their own private data to train their own private Oracle's application development teams We're early adopters of this new AI cloud service. We used our own private data To improve and extend the training of existing CoHERE large language models. This supplementary training resulted in 2 new specialized large language models, one for medical professionals And one of our first responders. Specialized large language models will be instrumental In helping highly trained professionals use their precious time more efficiently.

Speaker 2

As I said, Cohere and Oracle are working together to make it very, very easy for enterprise customers To train their own specialized large language models, while protecting the privacy of their training data. Over the next few years, lots of companies are going to train their own specialized large language models. Our partner Cohere is also using the Oracle Gen 2 Cloud for training their own large language models. In healthcare alone, specialized large language models will speed the discovery of new life saving drugs, Improve the quality of patient care and increase access to healthcare by lowering costs. A technology revolution is dawning.

Speaker 2

Back to you, Safra.

Operator

I think we're going to take some questions. Ken?

Speaker 1

Yes. Thank you, Safra. Thank you, Larry. Lisa, if we could please prepare the audience for Q and A.

Operator

Thank We'll take our first question from John DiFucci with Guggenheim.

Speaker 3

Thank you. My question is first, I think, mainly for Safra, but maybe Larry has some thoughts too. It's somewhat surprising to see the acceleration across all your cloud businesses, when others whether it's the other hyperscalers or even other cloud based vendors Are seeing just the opposite effects in this environment today, in today's environment and that's important. We get the better performance At a lower price. That makes a lot of sense.

Speaker 3

But at least in I've been around quite a while, I guess. And usually in tough environments, we see people But that's not what's happening here. So the question, in addition to what I just said better performance at lower price, Why? Is there anything else outside of like Oracle even that would who would show your cloud business accelerating when other Pretty good companies are doing just the opposite.

Operator

Let me take a start at it and Larry you add in here. First of all, The OCI accelerates the fact that OCI is just growing and accelerating is because customers want to spend less And they also need to do more. They need to stay competitive. They need to stay agile. And so our technology, whether it's our applications, which allow them to spend a lot less And make better decisions running their business.

Operator

So that's very, very natural. So our Fusion, there's just so many things about Fusion That are so compelling, it costs less. It just helps them run their business. But then you go to OCI where some of these customers are coming from our competitors. And as Larry said, Imagine Larry talked about the workload being twice as fast on OCI, but imagine it's 10 times as fast Or 100 times faster or as is common in some cases, 1,000 times faster.

Operator

So imagine what that bill looks like. So we have compelling technology at a much lower price And that's without a doubt causing our customers to move to us more quickly. I don't know, Larry, if you want to add into that.

Speaker 2

Well, I'm just going to be a little more specific because Safra says, I said, what If we run twice as fast, we cost twice as much. No, we do cost half as much. We run twice as fast, we cost half as much. But sometimes we do run a lot more than twice as fast, and we cost a lot less than half as much. We announced a new database, a new version of MySQL with a fast query processor called HeatWave.

Speaker 2

And we have customers moving from Amazon Aurora, where they're experiencing a 1000 times speed up This is Aurora. We're a 1000 times faster in query processing than Amazon's version of MySQL. It's an open source database that we added a That's where your processor is. We're much, much cheaper. And that's one example.

Speaker 2

In a lot of cases, It's much more than 2:one. We can build GPUs that other people can't build because we have a fast network. We use this very fast RDMA network and we started with that. In our Gen 2 cloud, we had nothing but our entire network was a superfast network, Which means most of the applications, most of the things you run-in the Oracle Cloud are going to be much faster than our competitors' clouds because they don't use that kind of network. So we have huge cost advantages, huge cost advantages across a broad portfolio of applications.

Speaker 2

Let me throw in one thing. It costed 1 tenth to implement Fusion ERP versus SAP's new ERP system with HANA. So The cost of implementing our applications are dramatically lower than our competitors. So we have a lot of people moving to AWS Our plan for infrastructure services, a lot of people continuing to move from SAP to Fusion. We're seeing that migration And we're taking a lot of market share from our competitors.

Speaker 2

That's why we're doing better and they're not doing quite as well.

Speaker 3

Okay. Thank you and really

Speaker 2

nice job. Thanks.

Speaker 3

Thank you.

Operator

We'll take our next question from Brad Zelnick with Deutsche Bank.

Speaker 4

Great. Thank you so much And congrats on a strong finish to the year. Larry, Oracle is somewhat unique in being a leader in both infrastructure and applications. And when we look back, I don't know, maybe 5 years from now, how much of the generative AI opportunity will have been captured on the infrastructure side of your business Versus within apps. And I'm not just thinking strategic back office apps, I'm thinking front office, Cerner and all these verticals as well.

Speaker 2

Yes, absolutely. It's very hard to answer that question. A long time ago, I said the biggest difference between the biggest Strategic difference between Oracle's cloud and everyone else's cloud is actually not the RDMA network. That's a technical difference. The biggest strategic difference is that we do both we use our infrastructure And build applications with it.

Speaker 2

So we learn a lot about how we can improve our infrastructure by building lots of applications, enterprise On top of our infrastructure, so we have this continuous feedback loop. We're building applications, Obtaining insights, making improvements in our productivity. We have a new programming language. We are the We have Java and we love Java. We use it a lot for building applications.

Speaker 2

But we have this other low code Application development tool called Apex. And we're now building a lot of our applications in Apex. And our productivity gains are again a factor of 10. And We build the applications in 1 tenth the time or 1 tenth the amount of people or at 1 tenth the cost. But these are not typical low code applications.

Speaker 2

These are applications that can scale to millions of users and all over the world. So most low code applications are for small projects. We use them for Application we've rolled out globally. And we've made our underlying infrastructure, The Apex development environment, the underlying Apex database, which is the Oracle Autonomous Database, It has made our application developers dramatically more productive. It's one of the reasons why we bought Into the idea that we could rewrite a whole suite of medical applications In a very, very short period of time that we could redo Cerner very, very quickly because of these underlying tools.

Speaker 2

Let me close with one last thing. We're again, we use AI technology To make our database better, and it's an autonomous database. You don't need DBAs. It recovers itself. It updates itself.

Speaker 2

It adds more space. It really is a self driving database. We've used AI technology to do that. We've used AI technology throughout our cloud Well, our cloud is self healing. We repair bugs while the cloud is running.

Speaker 2

We have an autonomous Linux operating system It's different than all of the other Linuxes. You can patch it online. It patches itself online. It repairs itself online. So again, by being in those two businesses, applications and underlying infrastructure, We again use our infrastructure and make it better to make our applications better and we gain insights as what we need to do with our What we need to add to our infrastructure to make the applications better.

Speaker 2

So infrastructures make the applications better, applications make the infrastructure better. We're the only company with that continuous feedback loop. And I think it gives us a huge competitive advantage In technology, it's why we have technologies that other people don't have.

Speaker 4

Very helpful color. Thank you, Larry.

Operator

Take our next question from Sivi Konigari with Mizuho.

Speaker 3

Thank you, and congrats on a great quarter. I want to dig into the application part of the business, very impressive SaaS growth, especially In Fusion Apps and Cloud ERP in this macro environment, so what are you hearing from your customer in terms of migrating to the SaaS application and what's driving that? And also the Cloud World last year, you talked about the opportunity in combining Horizontal application with vertical offering. So how is that helping SaaS growth?

Operator

Okay. Well, I will tell you that there's no question And our secret weapon is the fact that we have vertical applications also. Many of our customers End up wanting to buy a vertical application and fusion together and it's Industry by industry, we will be posting online probably some of our wins for the quarter. But what you'll see Yes. When we have existing customers in a segment and a vertical application in that, We truly are without a doubt the most popular, whether it's healthcare with all of our existing customers, Whether they be Cerner customers, the fact that we have ERP and the ERP and HCM, SCM, all of our horizontal application, CS, as well as the vertical applications, It makes us very tough to beat.

Operator

And new healthcare wins are going to be listed many, many, many go live The same in financial services, retail, hospitalities, these whole segments end up Wanting to buy their entire solution from us. And that's some that really makes us also very sensitive To their needs as we can fill them much better. So that's been a big winner for us. And I will tell you that our customers also when they move from on premise, they realize that they're moving Into the 21st century with a much better system, but also a much lower cost system that also is kept current every 90 days, new capabilities become available. They'll never have to do that big implementation every 5 years like some of the older companies who say they're cloud, But aren't actually cloud, they're just hosted.

Operator

So our products are just so differentiated all around that We're just building momentum around the world.

Speaker 2

Let me just add one example to Safra's comments, Which I think are right on. But and there's an interesting example. We everyone knows we compete with Workday in HCM And HR, whatever. When we bought Cerner, we decided that we were going to take our HCM Our HR system and specialize it, add features specifically for the healthcare industry. It turns out managing a workforce in a hospital is very complex because the nurses might be Have private patients at home that they're seeing.

Speaker 2

They might work for 2 or 3 different hospitals. They might do some work in clinics as well. So scheduling these people who have multiple jobs, doctors They have teaching assignments in universities. They obviously, they travel and They also they have their own office hours. They have a private practice in addition to working at the hospital.

Speaker 2

Scheduling these professionals is very, very tricky. Recruiting the professionals is very, very tricky. Paying them when you're working 3 days a week, 1 week, 2 days the next week, 6 days the following week, paying them can be very complex. So we have had a major effort in our HCM system, the Oracle Fusion HCM system, And adding all the features that hospitals need to manage their professional staff. Now there's no way we would have done that unless we had a focus in the healthcare industry.

Speaker 2

So we not only have all the Cerner Healthcare apps for hospitals, we've specialized our ERP system For hospitals, we've specialized our HCM for managing the hospital workforce. We've done a bunch of things around the healthcare industry. We're one of the things we want to do is we're the largest provider of clinical trial software. We but the clinical the results of the clinical trial goes to a government regulator. And we're now working with the government regulators to develop the software that allows them to take the clinical trial output in digital form And get it through the regulatory process much faster at a much lower cost.

Speaker 2

So we're looking at the entire healthcare ecosystem I'm trying to automate both sides of the transaction. The pharmaceutical company that's designing the drug, The hospitals that are testing the drug and the regulators that are approving the drug should all be digitized, and we are well on our way to doing that because Of our investment in Cerner and now what has blossomed into an investment across the entire healthcare ecosystem.

Speaker 3

That's a perfect example. Thank you both for the color.

Operator

We'll take our next question from Raimo Lenschow with Barclays.

Speaker 3

Hey, thank you. Could I switch gear a little bit a question for Safra? Safar, we now have Surna in as part of Oracle. Where are we on the cost on the synergy Capture and cost takeout. And so are we do you see we are done there?

Speaker 3

Or are we kind of still at the beginning of the journey? Thank you and congrats from me as well.

Operator

Thank you. I actually feel like we're still at the beginning, if you want to know the truth. We wanted to Stabilize the operation. We definitely didn't want to risk breaking anything. You will be seeing some more Significant changes and we have legal entity combination imminently and that actually gives us a lot more flexibility Regarding the way we operate the business and we are just at the very beginning of it.

Operator

Their margins are nowhere close To the way we run our company and we are right at the I'd say we're At the beginning ish, sort of at the beginning of the middle at most. We've got a long way to go Just operationally, and we've got a lot of work going on, on the development side as We bring our technical capabilities into the product and move them into the Oracle Cloud. There are a lot of savings As we do that also.

Speaker 3

Okay, perfect. Thank you.

Operator

Thank you. We'll take our next question from Mark Moerdler with Bernstein Research.

Speaker 1

Thank you very much for taking my question. Congratulations on the quarter and frankly on the guidance. I'd like to get a better understanding about the underpinning of the OCI Gen 2 business. Specifically, Can you give us some color on the customer concentration, industry concentration, both in the existing customer base As well as the pipeline and how you think that's going to change over time? Thanks.

Operator

I don't know Larry, if you want to take a stab at it. The reality Our customers run from very small to very large. As a general matter, we are a small percentage of their IT costs when they get started And sometimes a small percentage of their cloud spending and as they try us out, they move larger Percentages of their business off of other clouds or from on premise. We're at the very beginning Of this movement, especially on the database side as more and more of our customers, Our big customers often have clouded customer or dedicated regions is sort of their ultimate goal for their most critical Database workloads, we're at the absolute beginning of that with most of our customers. With It's basically what we find is if you give us a chance, it is so much better, So much more cost effective, of course, so much more secure that customers very quickly realize How advantageous it is to move.

Operator

It's all industries. Many as you some of you know, Auto companies are doing their simulations with us. It's really it's across industries, across Sizes, it's very, very diversified. Larry, I don't know if you have additional comments.

Speaker 2

Yes. I'll just look, maybe the most interesting industry that's adopting the Oracle Cloud are people who are In the technology business. So the a lot of our customers are I mean, their business, I mean, Zoom in the early days of Oracle, it wasn't long ago we were talking about Zoom and very excited still very excited about Zoom. And they came to us, one of our earliest very, very large customers. And a lot of their business is just running an app, if you will, on the cloud.

Speaker 2

And a huge amount of their expense is running that application in the cloud and doing it efficiently. And where we're most obvious, I mean NVIDIA is an extraordinary company, but Coher is an extraordinary great company. But a lot of their expense is running AI training in the cloud. And when it's that much of your expense having If we're a lot faster, they do a lot of due diligence about the technology. And it became very apparent.

Speaker 2

A lot of the early adopters, if you will, and this is we're still in the early stages. A lot of the early adopters at scale of The Oracle Cloud, we're highly technical companies like a Zoom or an NVIDIA, and I can name a bunch of others, Or a highly technical industry like phone companies, telecommunication companies, where they see the advantages, Not only by the way, the performance and cost advantages, another thing that we're very proud of is we're because of our network, We're highly reliable. And because of the autonomy, we're highly reliable. If, for example, the Oracle Autonomous Database doesn't lose your data Because you can't make a pilot usually a lot of the data loss is caused by pilot error. Well, with the Oracle Autonomous Database, there are no drivers the driver is the system.

Speaker 2

It's a self driving database. So you can't make a human error that causes you to lose data. So it's very where a phone company has to be up 24 hours a day, where a bank Really is not supposed to lose your data. Where the a huge percentage of your expenses are your own cloud expenses And you're a technology company delivering technology services from somebody else's cloud. All in those areas is where we've seen And the less technical companies are now Beginning their journey of looking more closely at the Oracle Cloud.

Speaker 2

And when they do look closely, We compare it very favorably with the other clouds.

Speaker 1

That's very helpful. I really appreciate.

Operator

And we'll take the last question from Kirk Materne of Evercore ISI.

Speaker 1

Thanks very much. Just a quick one for Safra, if I could. Safra, obviously, a very strong free cash flow quarter. We've gotten some questions from investors wondering about the CapEx this quarter, where you saw some efficiencies, how you're able to keep CapEx Flat going into next year given the fact that you're going to seeing this great demand for OCI. Could you double click on that a little bit for us?

Speaker 1

Thanks.

Operator

Yes. I mean this past year was a big CapEx number as compared to usual and we put out a lot of Capacity, it is getting filled up and getting used up. And I think we're getting real economies. In addition, one of the things you don't realize is that our underlying infrastructure for example I'll give you one example. Our underlying infrastructure becomes more and more efficient.

Operator

Even under the best example actually is under Fusion. As we move to OCI, we are also moving to autonomous database serverless, Which again gives us added capacity. So we're constantly, constantly becoming more efficient. Our original landing was 12 racks. We're moving to 10 racks To have all the services, we're just continuing to sort of miniaturize our capabilities and it's giving us Enormous efficiencies and cost savings.

Operator

So staying the same as this year, Again, if it just becomes overwhelming, it may go higher. But I think we've got it very much in hand. We've laid out a lot and this past year. And I think if we stay where we're at, We're going to be able to fit a lot more workloads in within that envelope straightforwardly.

Speaker 1

Great. Thanks and congrats on the quarter. Thank you. Thank you, Safra. Thank you, Kirk.

Speaker 1

A telephonic replay of this conference All will be available for 24 hours on our Investor Relations website. Thank you for joining us on the call today. And with that, I'll turn the call back to Lisa for closing.

Operator

Thank you. And that does conclude today's presentation. Thank you for your participation and you may now disconnect.

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Earnings Conference Call
Oracle Q4 2023
00:00 / 00:00
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