2023-12-19 12:33:03 ET
Oracle Corporation Japan (OCLCF)
Q2 2024 Results Conference Call
December 19, 2023 02:30 AM ET
Company Participants
Yuki Nishio - Director, Investor Relations
Krishna Kumar - SVP, JAPAC and CFO
Conference Call Participants
Mitsunobu Tsuruo - Citigroup Global Markets Japan
Satoru Kikuchi - SMBC Securities
Hiroto Segawa - Morgan Stanley
Presentation
[Call Starts Abruptly] Now I would like to turn this call over to KK, Senior Vice President, JAPAC and the Japan CFO.
Krishna Kumar
Thank you very much, Nishio-san. Good afternoon, everyone. And welcome to Oracle Japan's Second Quarter and Fiscal Year 2024 Earnings Conference Call. We had an excellent quarter, which is accelerated by the growth of our cloud services. Let me give you a few highlights. Oracle was named leader for the fifth time in 2023 Gartner Magic Quadrant for cloud ERP for product centric enterprises, and Oracle was also recognized as a leader for strategic cloud platform services and cloud infrastructure services. Similarly, in Japan, now our status has been established as one of the hyperscalers. We have become the enterprise technology vendor of choice, because we have products and services that help our customers drive cost efficiency and modernize their businesses. The customers recognize that they can get more value while paying less by moving to our cloud services. We had a lot of marquee cloud customers in various industries, especially financial industries, manufacturing and public sector.
Now I will be sharing some customer references that were released recently. First one is Payroll. Payroll is a provider of payroll at related outsourcing services and has been growing since it was founded in 1989 with 255 companies and million users of its outsourced payroll services as of March 31, 2023. The company has newly implemented and began operating Oracle Exadata Cloud@Customer, a hybrid cloud solution of Oracle Cloud infrastructure as the database foundation for its payroll system. By installing Exadata Cloud@Customer hardware within the company's data center an environment has been created that allows highly confidential data to be stored in-house, while providing high processing capacity with low latency. In addition, the availability of managed database provided on OCI has reduced the operational and management burden. Number two, Ryobi Systems. Ryobi Systems, a provider of information services for public, medical and social security sectors, as well as for private sector, will collaborate with Oracle Japan on migration of local government systems to government cloud. The latest version of Ryobi Systems community health management system for municipalities and insurers [Kemco] [Indiscernible] version 8 will be compatible with Oracle Cloud infrastructure, which has been adopted as government cloud. By adding OCI as an option for government cloud support for [Indiscernible], which is used by more than 700 municipalities nationwide, both companies will strengthen their value offerings in the municipal domain.
Number three, the National Institute of Advanced Industrial Science and Technology, AIST. AIST will revamp its new financial accounting system with Oracle Fusion Cloud ERP. AIST's mission is to create innovation through social implementation of science and technology and to contribute to strengthening Japan's industrial competitiveness. The financial accounting system, which is the target of the restructuring, had its operations divided into several separate systems, which required restructuring to screen inconsistencies and data integration. Therefore, it was decided to adopt Oracle Cloud ERP as the accounting system using our cloud, so that they can digitize the series of financial accounting related business processes. This was just to give you a sense of the broad outreach in the market that we have with our different products and services, and to underline Oracle's presence in most mission critical systems, applications and industries. Now let me move on to the numbers. Total revenue JPY117.419 billion growing at 8.9% compared to the previous year given strong growth in our cloud revenues. Cloud services revenue was JPY23.852 billion, up almost 38% and now represents almost 20% of our company's revenues. All our cloud offerings, including our ERP cloud, NetSuite, our infrastructure consumption revenues were all showing strong momentum with very high double digit growth. Our remaining performance obligation RPO is also growing strongly. Our RPO numbers show our strong backlog for the next couple of years. Net income was JPY26.665 billion, up 10.4%. So total revenue and all the three margins indicate record highs in the second quarter. We hope to continue the momentum into the year. Thank you very much. I will [Indiscernible] it for questions.
Question-and-Answer Session
Operator
[Operator Instructions] So first question is from Tsuruo-san from Citigroup Securities. The first question is, what is your forecast for the second half in the on-premise to cloud for both on-premise and cloud?
Krishna Kumar
I don't -- so we -- I only forecast on a total revenue basis. And I'm holding on to my guidance as of now, which is 2% to 6%. As you can see, our first half has shown strong momentum and hopefully, we can finish somewhere around the high end of my guidance. But at this point in time, it is too early for me to change anything.
Operator
Second question from Tsuruo-san. Can you explain the background of the significant growth in the services, the significant growth in profits in services?
Krishna Kumar
There is no particular reason. I think we executed some of the projects, some of the more profitable projects in time and we are becoming more and more efficient with our execution of the projects, because as we gain experience cloud implementations are easy to run. And unlike the big on-premise implementation, which have long overruns, cloud implementations are more efficient. And for that reason we see increasing margins in our services business.
Operator
So the question from Kikuchi-san from SMBC Securities. So in terms of expenses for royalties, the royalty rates, it has gone up by 1.1 points compared to the second quarter of last year, and it has gone up by 0.7 points compared to the first quarter and it is now 44%. Can you explain the reasons, the elements, factors related to this?
Krishna Kumar
Regarding the first question on breakdown of the cloud services revenue. As I mentioned in my opening comments, all of our cloud segments are growing strongly. ERP, cloud ERP, our flagship product, which is recognized by Gartner in the leadership quadrant continues to make a big inroads in the Japanese market. NetSuite continues to make inroad into segments where -- into the small and medium enterprise segment that is where we focus the NetSuite product on that is also gaining momentum. OCI, without having to even qualify it, OCI services are being accepted widely across all enterprises in Japan, also showing great momentum for us, which is very, very encouraging signs for the future. I cannot, at this point in time, break down between the different cloud segments. Regarding the second question on the royalty rate, it’s basically due to a change in product mix. We have different royalty rates for our different products. As the product mix changes, the royalty rates will go up and down. And on the outsourcing expense, basically, there are some fiscal recharges, which -- the corporate charges which came in lower this quarter, that's the only reason.
Operator
Sir, this is the interpreter. I wasn't aware that, there was an outsourcing related question. Can you repeat the answer or whether -- can you wait for a moment?
Krishna Kumar
You want me to repeat it?
Operator
No. Can you wait for a moment? So may I repeat the question? So the outsourcing expenses compared to the first quarter has gone down by approximately JPY600 million. So what has gone down and what is your forecast for the second half of the year?
Krishna Kumar
So as I said, the outsourcing expense, there were lower charges from the corporate for the various services that we use. And so that's the reason why it went down. We usually forecast it based on our existing run rates and sometimes those run rates don't hold and we get sometimes higher or lower charges from the corporate. So it is a less predictable expense for me. But in the overall scheme of things, it's a marginal difference.
Operator
The next question is from [Watanabe-san] from [SMB DS] Asset Management. So there seems to be some criticism towards the IPO of the parent subsidiary situation. What is the stance of your -- of the company, what is the sense of the organization?
Krishna Kumar
I don't really -- as far as -- I don't really understand the context of the question, but as far as Oracle Japan and Oracle Corporation are concerned, we are both listed in different countries, different stock exchanges. We have been listed for 30 years. And we've been functioning normally, we have a great working relationship with the parent, and we get the benefit of all the innovation that happens in the parent company. So there is -- I mean, -- I don't read anything -- as far as Oracle is concerned, it's business as usual.
Operator
Next is Segawa-san from Morgan Stanley. So the question is, the cloud service revenue has gone down on a quarterly basis, substantially it has gone down compared to Q1. So is that because there were some specific activities that went live or there was a go live for some specific projects in Q1? And for the cloud service revenue, from here on, do you expect to see an increase in revenue and are there any particular risks that you are concerned about?
Krishna Kumar
As far as the sequential number is concerned, it's more to do with some seasonality. And if you go back a year, Q1 to Q2 last year also was similar and we continue to grow for the remaining quarters. I think that trend will continue. As our cloud services revenue grows and becomes even more substantial, some of these seasonality effects will go away, and hopefully then you would only see sequential growth in every quarter.
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Oracle Corporation Japan (OCLCF) Q2 2024 Earnings Call Transcript