Ken Bond - VP, IR Safra Catz - President and CFO Mark Hurd - President Lawrence Ellison - CEO

John DiFucci - JP Morgan Brent Thill - UBS Phil Winslow - Credit Suisse Heather Bellini - Goldman Sachs Kash Rangan - Merrill Lynch Jason Maynard - Wells Fargo Raimo Lenschow - Barclays Brendan Barnicle - Pacific Crest Securities

Good day, everyone, and welcome to today's Oracle Corporation quarterly conference call. Today's conference is being recorded. At this time, I would like to introduce Ken Bond, Vice President of Investor Relations, Oracle. Please go ahead.

Thank you, operator. Good afternoon, everyone, and welcome to Oracle's third quarter fiscal year 2013 earnings conference call. A copy of the press release and financial tables, which include a GAAP to non-GAAP reconciliation and other financial information, can be viewed and downloaded from our Investor Relations website. On the call today are Chief Executive Officer Larry Ellison, President and CFO Safra Catz, President Mark Hurd. 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 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-K and 10-Q and any applicable amendments for a complete discussion of these factors and other risks that may affect our future results or 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 turning to questions, we'll begin with a few prepared remarks. And with that, I'd like to turn the call over to Safra.

Thanks, Ken. I’m going to focus on our non-GAAP results for Q3. I’ll then review the guidance for Q4 and turn the call over to Mark and Larry for their comments. While our overall business remains very healthy, and we saw excellent pipeline growth, we’re not at all pleased with our revenue growth this quarter. So it didn’t help that our quarter ended on the same day as the sequester deadline. What we really saw is the lack of urgency we sometimes see in the sales force as Q3 deals fall into Q4. Since we’ve been adding literally thousands of new sales reps around the world, the problem was largely sales execution, especially with the new reps, as they ran out of runway in Q3. As expected, many of the pushed out deals have already closed. Our product portfolio is as strong as it has ever been, and we won more than our fair share of deals. Our discussions with customers continue to be elevated to the most strategic level. There is a lot of enthusiasm around our leadership in software, engineered systems, and our real-world approach to mixed public-private cloud deployment. Looking forward, we’re encouraged by the tremendous pipeline growth, but clearly we have work to do in training new reps on managing the sales process and the importance of establishing a quarter rhythm with their deals. As such, I’ll be conservative in my Q4 guidance, even though Q4 is the quarter the sales force is in fact geared to. Now to the numbers in Q3. Currency movements reduced new license revenue growth by 2%, and total revenues by 1%, and net income by 2% and earnings per share by approximately $0.01. I will focus on constant currency growth rates, unless I say otherwise. This quarter, new software license revenue was $2.3 billion, flat in constant currency, down 2% in U.S. dollars. Cloud revenue was $238 million, or down 1%. APAC was up 1%, and EMEA was up 1%. Software license update and product support revenues were $4.3 billion, up 8% from last year, and were nearly half of total revenue. Support attach and renewal rates continue at their usual high level, actually at the highest levels for a Q3 in the last five years. Hardware system products revenue was $671 million, and while engineered systems again showed excellent growth, we continue to work through our product transition with the high-end SPARC server line. Clearly, our customers know the new products are coming out next week, and have held off buying the older Ms. We expect that the launch next week of the new M line will help that. Total revenue for the quarter was $9 billion, flat in constant currency and down 1% in U.S. dollars. Operating expenses were flat in constant currency, and our non-GAAP operating margin expanded to a Q3 record of 47%, up from 46% last year, even though we substantially increased headcount. As revenues grow, and we continue to manage our business with discipline, we still believe that there remains a lot of leverage in our business model. The non-GAAP tax rate for the quarter was 21%, and the GAAP tax rate was 19%. Both were favorably affected in the quarter by the retroactive extension of the R&D Tax Credit, though we did take a $65 million writedown of our Venezuela cash balance as the bolivar’s official rate changed. EPS for the quarter grew 5% in U.S. dollars to $0.65 on a non-GAAP basis, and would have been approximately $0.01 higher but for the negative impact of currency on revenues. GAAP EPS for the quarter was $0.52, up 6% in U.S. dollars. It would have been $0.53, up 8%, but for the impact of currency. Operating cash flow increased to $13.7 billion over the last four quarters, up from $13.5 billion last year, and free cash flow grew to $13 billion over the last four quarters. Both are record results for Q3. We now have nearly $33.4 billion in cash and marketable securities, and as we’ve said before, we remain committed to returning that value to our shareholders through technical innovation, acquisitions, stock repurchases, dividends, and the prudent use of debt. In this quarter, we repurchased 61.5 million shares for a total of $2.1 billion in the quarter. So over the last 12 months, we have repurchased nearly 350 million shares for a total value of $10.6 billion. Now to the guidance. So for Q4, new software license and cloud subscription revenue growth is expected to range from 1% to 11% in constant currency and in reported dollars. Hardware product revenue growth is expected to range from a negative 22% to a negative 12% in constant dollars, negative 23% to negative 13% in reported dollars. As a result, total revenue growth on a GAAP and non-GAAP basis is expected to range from negative 1% to positive 4% in constant dollars and U.S. dollars. Non-GAAP EPS is expected to be somewhere between $0.85 and $0.91, both U.S. dollars and in constant dollars, up from $0.82 last year, and GAAP EPS is expected to be somewhere between $0.72 to $0.78 in both U.S. and constant dollars. I’ve gone ahead and assumed a GAAP tax rate of 23% and a non-GAAP tax rate of 24%. Of course, it may end up being different. With that, I’ll turn it over to Mark for his comments. Mark Hurd : Thanks, Safra. I’ll just make a couple of quick comments and turn it over to Larry. We’ve added over 4,000 people to the Oracle sales force in the last 18 months. We’ve significantly expanded our customer coverage. We’ve seen material growth in our pipeline. But Q3 [conversion rates] were below what we expected, while our actual win rate went up. Moving to engineered systems, a record quarter for us, with more than 800 units sold in Q3. That’s the best unit quarter ever. We’ve now sold more than 5,000 engineered systems to date. In the first full quarter for Exadata X3, we sold over 400 systems. The pipe is up materially, and conversion rates are up. The one-eighth rack systems in particular sold extremely well, causing ASPs to be down slightly, but these entry-level systems are just the beginning, as we expect to grow our business with these customers over the long term. Better news, our Exadata has carried over to the other engineered system, which were more than 800 engineered systems sold this quarter. Exalogic, Big Data Appliance, Oracle Database Appliance, all three saw 30% sequential unit growth. We had another solid quarter of verticals, which have grown faster than software license in all of the last four quarters. We had great growth in Cloud, CRM, and ACM. Wins at Travelocity, Walt Disney World, Kaiser Foundation, Office Depot, Match.com, [Deutsche Bahn], CGI Group, Southwest Airlines, Dow Chemical, Union Bank, Renault, National Instruments, and Lender Processing Services. That’s a lot of names, took me a long time to read it, but I wanted to give you a flavor for the quality of names and the quantity of wins we had in the quarter that’s driving our annual recruiting revenue up nicely. In other hardware, as Safra mentioned, the T-Series continued to be our best-performing server product, but the M-Series lagged. ZFS Storage saw double digit growth for the quarter, which is the seventh straight quarter. We’ve been able to materially grow our sales force and our R&D while overall operating expenses were essentially flat from last year, and I think that’s a testimony to our expense management and discipline. Safra mentioned software support, which grew 8% [in CD] renewal rates, as she mentioned, at a five-year high for Q3, and by the way, with virtually no expense growth in our software support business as we recorded those results. With that, I’ll turn it over to Larry. Larry Ellison : Thank you, Mark. Next week, we’ll start deliveries of our next generation of servers, built using our new SPARC T5 microprocessor, the world’s fastest microprocessor. Next week, we’ll publish 17 world record benchmarks, including a TPC benchmark showing that the SPARC T5 is the fastest processor in the world for database. And the SPECjEnterprise benchmark, showing the SPARC T5, is the fastest processor in the world for Java middleware. Our new T5 servers have up to eight processors, and are more than twice as fast as the T4 systems that they replace. Even more important is our new M5 server, which has up to 32 processors and runs its Oracle Database over 10 times faster than the similarly priced old M9000 server it replaces. With the delivery of the M5 server next week, Oracle will finish upgrading every server in the SPARC product line dating from the time we acquired Sun.

Thank you, Larry. Operator, we’re now ready for the questions please.

[Operator instructions.] We’ll take our first question from John DiFucci with JP Morgan. Please go ahead. John DiFucci - JP Morgan: Mark and Safra, I’d like you to address sort of a high-level question, because I know I’m going to be asked this a lot tomorrow. The softness this quarter was surprisingly broad-based across both software and hardware, and it looks like across all regions. We appreciate your willingness to kind of look internally for the causes and answers here, but given the breadth of the relative weakness, it really begs the question whether something bigger is at work here. How much might macro forces have come into play here? Or even, perhaps, the sales approach or strategy versus the execution of that strategy. In fairness, you’re still relatively early in the sales count expansion, but at this point, are there any thoughts of perhaps looking at things a little differently? Mark Hurd : I’ll take it. Let me just go through what I think Safra said, and I’ll sort of elaborate a bit on that. We feel great about both our strategy and our product line. So point one and two, we have no doubt, no question about that whatsoever. Second, to your point, we have increased the sales force dramatically, and we feel great about our coverage. And that really shows up first in the pipeline performance that we’ve got. Our pipeline is up significantly. We don’t give you a number, because frankly I don’t want you to give me a comparison every quarter with the pipe. But it is up materially. The issue for us is simply conversion. Well, listen, anybody can come up with all kinds of factors. There’s always something going on around the world at any given time, and for us we feel good about our ability to execute through it. And in this case, as I said, it really was just the conversion rate against the context of a materially higher pipeline. Safra Catz : Covering sort of one through three of the issues, we don’t think at all it’s the products, because the pipeline’s fantastic, and our win rates are excellent, and so we feel very, very good about that worldwide. As far as being the economy, there’s no really new news on the economy. As I mentioned, it doesn’t help that the sequester deadline is on the last day of our quarter, and so that has a little bit of an impact here in North America, but not necessarily anywhere else. The economy has been as it is in Europe for a while. So there’s no real new news. And then finally, on sales execution, why we think that’s it, is frankly because it’s playing out exactly that way as deals kind of flop over right into Q4. And so especially with the newest folks, they’re really geared to their annual target and there’s a little less urgency about q3. For you, who have covered Oracle for so, so long, and for some of us who have been here a long time, it was very Q3, and now it’s extremely Q4 around here. And that is something we’re kind of used to, except when there are acquisitions, sometimes you don’t see it as much, because of the new companies and what they bring, and they change the seasonality a bit. But ultimately, Q3 is very similar to Q2, and then Q4 is the big quarter. Everybody’s aimed at Q4, and it really feels like that around here right now.

We’ll take the next question from Brent Thill with UBS. Brent Thill - UBS: Question for Larry on the hardware business. Q4 was set to be an inflection point, and it appears that has been pushed out. What’s your sense on the turnaround? And if you could just contrast on the Exa side versus the other side of the hardware business? Maybe some more metrics as to what you’re seeing? Larry Ellison : Well, the oldest product in our product line was the M9000, the large CLM systems, which we hadn’t refreshed for several years. And we saw very, very substantial and continuous decline in that business. It wasn’t helped by people who were aware that we were going to go through a product transition in Q4. So that didn’t help us in Q3, and now we’ve got to go through this product transition in Q4. We’re announcing the new M5, the new T5, and we think people might take a couple of months to evaluate these systems before they verify that our claims are correct. The T5 is more than twice as fast as the T4 it replaces, much better price performance. And amazingly, the M5 is more than 10 times faster than the M9000 it replaces. So we think Q4 will be better than Q3, as far as the hardware is concerned, but I think we expect the turnaround really to begin in Q1, not in Q4, because we have this large introduction of new systems. I think the other thing that Mark alluded to was that we announced some lower-end Exadata systems, in our engineered space, and new customers have been beginning with the smaller systems, now that they’re available, eighth rack rather than quarter racks. And that’s somewhat lowered our ASP this past [unintelligible]. I think we work our way through that over the next two quarters. Again, I think Q1 you’re going to see a big turnaround, and next year will be a big growth year for our entire hardware business. The front line and all of the engineered systems. Mark Hurd : I’d just add a couple of comments on the engineered systems line, so you have more clarity. On the eighth rack, this is actually good news, even though it lowers ASP, because we deliver a lot more technology and a lot more performance. And as I mentioned, our unit counts were at a record level in Q3. And we have the opportunity to upgrade those machines over the long run. So the fact that we’ve seen our pipeline is up, our unit levels are up, and so I think to Larry’s point, this puts us in a really strong position as we get into Q1 of next year on the engineered systems side as well.

We’ll take the next question from Phil Winslow with Credit Suisse. Please go ahead. Phil Winslow - Credit Suisse : Just had a question on the software business. I know you guys don’t break out database and middleware, and you have tech versus applications anymore, but I was wondering if you could just give a sense of what you saw this quarter in terms of the performance between those two old segments, and then just what you’re seeing in the pipeline. And then also, just one follow up for Larry, specifically to Oracle Fusion applications. There’s been some debate out there about what your win rates are with Oracle Fusion now it’s versus some competitors. Oracle Fusion applications, are they more modern, less modern, that competitors? Just provide us an update of where we stand there. Safra Catz : Basically, database and apps move together in the quarter. So there’s no special news there one way or the other. And the second question was for you. Larry Ellison : I think one of the things we’ve done is we’ve become very, very focused on not just Fusion applications, but all of our cloud applications. So a lot of the new headcount, a lot of the changes in the organization in the field have been based on focusing on the cloud, increasing our win rate in the cloud, having specialization around HCM, having specialization around service with our Right Now product, specialization around sales with our Fusion Sales product as we go against our [secular] competitors, Workday and Salesforce.com and the others. So I think in the third quarter we saw very good growth. We saw very, very good growth in the cloud. That was not the issue. When I talk about the cloud, I’m talking very specifically about the SaaS portion of the cloud. We’re in all aspects of the cloud. We’re in infrastructure, we’re in platform, and we’re in SaaS. But when we give you a billion dollar number, that’s a billion dollar pure SaaS number. And that’s growing very, very nicely. The problem is it’s still a relatively small business with a very, very high growth rate. We are focusing on that, and we’re getting a very good result there against the competition. Our win rates are going up versus Q2, the growth is excellent, but we think it would be [deploying] a lot of resources on that, to get those win rates, and get that focus, but the business is still relatively small compared to our overall $40 billion business.

We’ll go next to Heather Bellini with Goldman Sachs. Heather Bellini - Goldman Sachs : This question is for Mark. You and Safra both highlighted sales execution as the reason for the shortfall this quarter, after posting a strong Q2. I’m just wondering if you could give us a sense of how long you think the transition looks like. Is it one quarter or two quarters? And as a follow up, what does the ramp look like as execution improves? Mark Hurd : Well, I’ll just say we expect it to be within the context of Q4, so we saw many of the deals that we described are closed. So we expect it to be relatively quick. On the ramp, and I think, Heather, what you mean is the ramp of the sales people that turn into pipeline and turn into growth, and if it’s not I’m sorry, but that’s the question I’m going to answer. Heather Bellini - Goldman Sachs : Yeah, that’s it exactly. Mark Hurd : Okay. So I think it really is just about the speed of getting our conversion continuing to decline. So our pipeline is behaving. I wouldn’t say linear to the hires, but the way you would expect it to. You would expect a timeframe for a new hire to come onboard, get trained, get assimilated, get engaged with our management. And I would say the pipeline is behaving roughly as you would expect relative to the ramp of those sales resources. So when you hear Safra and I talk about the pipeline, we measure it very closely, and we see it there. So it’s just a question of how we convert, and I won’t go into the role of predicting revenue growth rates out several quarters, other than to tell you that we have a lot more coverage, and we have a pipeline that’s growing substantively.

We’ll go next to Kash Rangan with Merrill Lynch. Kash Rangan - Merrill Lynch : As it pertains to this quarter, Mark, I’m just curious, when you ended up the November quarter, could there have been a chance that we saw some business being pulled in, potentially, as customers were somewhat leery of this fiscal cliff, a whole bunch of extraneous concerns that might have actually caused some deals to get done a little bit earlier than expected, which obviously benefitted your November quarter. I’m just curious to see if you think that it could be an attribution to what happened in the February quarter. And also just wondering if you have any thoughts on how to think about the growth rate of engineered systems. I think you have characterized it as paying 70-80%, maybe potentially doubling. I just wanted to see how we are tracking toward that goal for this year. Mark Hurd : I think the answer to your first question is sure. There’s potential deals going that were in Q2. It was better. Some deals go to Q4. I mean, I think there’s all kinds of things you get to. What we do know is we’ve got a lot of deals in the pipeline. And we’re in good shape on those deals. And I mentioned, in the context, I think the better way to look at it is that we don’t just measure the pipe. There’s two different ways to measure a pipe when it concludes. One is the conversion rate, meaning the aggregate pipe and how it converts to orders. The second way to look at it is the win rate in the context of the deals that do get decided in [unintelligible]. And our win rate went up in the context of the conversion rates going down. So it’s an important thing to measure, because some of it’s our activity in the time that a decision gets made. And engineered systems, unit count was great, as you heard Larry and I both mention. We had an ASP decline, not because of unit count, but because of the average selling price and the movement to conversions or to a one-eighth rack, which actually brings the average selling price down. Unit count, I think we’re roughly in line with the numbers that we described today.

Our next question comes from Jason Maynard with Wells Fargo. Jason Maynard - Wells Fargo : I want to tackle this maybe from a different angle. Can you maybe talk a little bit about what you’re seeing in terms of customer adoption of Fusion? What are you seeing in terms of uptake, at least within the installed base, upgrades, number of go-lives? How’s that trending across verticals and product lines, and how does that bake into your equation for closure rates in the next couple quarters and getting confidence with new customers to buy this whole broad suite of apps? Larry Ellison : Great question, and it’s interesting, we monitor this very, very closely. In HCM alone, we have 30 customers going live in the next six weeks. And that’s very, very important. And that’s extremely important as our reference base increases. These are relatively new businesses for us. So our reference base is greatly expanded in HCM. And that’s one of our main focus areas. Like services, like sales is. So our win rates against Workday are going up, as Mark pointed out. We follow our secular competitors very closely. We look at every competitive deal. We measure our win rates. And those win rates against Workday are going up. We actually have a new and improved UI coming out for all of our cloud apps. It’s a change in our middleware platform, so automatically that UI suddenly appears in all of our cloud products. So we’ve improved the UI. So we have a lot more references coming on, the technology continues to advance. The UI is making a giant step forward, so we are encouraged that our ability to compete and win in the marketplace is getting better every month.

We’ll go next to Raimo Lenschow with Barclays. Raimo Lenschow - Barclays: I wanted to go look a little bit beyond the quarter, and what we saw this quarter was obviously, and Q3, the announcement of the acquisition of Acme Packet. That gets you deeper into the telco plumbing. Can you talk a little bit about your motivation and strategy for this vertical? Larry Ellison : We have a very, very significant presence in billing systems, in provisioning systems, in the telco space. And what we’d like to become is one of the most strategic suppliers to telcos overall, which involves broadening our footprint of what we supply them. So you’re going to see us, through our own engineering, through innovation and acquisitions, greatly broaden our footprint as our ambition is to be the primary technology provider to the telecommunications industry. So that’s an area where we’ve been very successful, in certain parts of it, and we think we can expand that business by adding to the footprint. And you’re going to see us adopt a similar strategy in retail and in financial services. Combination of innovation and acquisitions to broaden our footprint, become more and more strategic to telecommunications companies, more and more strategic to retailers, more and more strategic to the banks, as we can solve more of the problems. Mark Hurd : You know, I’m really glad you asked that question, because when we announced the acquisition it was during our quiet period, and most of the people that wrote about it wrote about it as a horizontal networking acquisition and what we were doing was exactly what Larry described. Phone companies have two networks, or two sets of IT systems, those that manage the business, and those that manage the network. And this was an opportunity for us to get into that network side of the business, if you will, open up an entirely new opportunity for us strategically inside the phone companies, and leverage our existing go-to-market, our existing assets, and our existing relationships. So we look at this as just a fantastic acquisition to build on our assets that exist already in CGB, CGB being our communications [unintelligible].

Our final question will come from Brendan Barnicle with Pacific Crest Securities. Brendan Barnicle - Pacific Crest Securities : Safra, you mentioned that maintenance attach rates were at the best levels in Q3 than you’ve seen in five years. What do you think is driving that attach, and what are you seeing in terms of pricing and competition around maintenance? Safra Catz : Well, as a general matter, really the only place to get the updates for your products, in addition to the product support, is from Oracle, and so as a general matter, customers know that the value they’re getting from the licenses that they bought often years ago is when they upgrade, and when they get all the new features. And there’s quite a lot of interest in making sure folks are staying current, especially as they’re looking at their data centers, etc. And as a result, I think we’ve just continued to offer them fantastic value and we are the place for them to get the updates that they need.

And ladies and gentlemen, that is all the time we have for questions. I’d like to turn the call back over to today’s presenters for any additional or closing remarks.

Thank you, operator. 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, and with that, we’ll close the call.