Oracle (Minutes): What can make a $700 billion giant surge by 30%?

After the U.S. stock market closed today, $Oracle(ORCL.US) saw its stock price surge nearly 30% following the release of its earnings. For a giant company with a market capitalization of nearly $680 billion, such a significant single-day increase is the first since the internet bubble of 2000. It is understood that Oracle's quarterly performance alone is not particularly strong, with overall revenue and profit metrics slightly underperforming expectations.
However, the "explosive" aspect is that the company disclosed a year-on-year increase of 359% in Remaining Performance Obligations (RPO), reaching $455 billion, several times the usual size of just over $130 billion, far beyond even the most optimistic investors' expectations. Additionally, its revenue guidance for the cloud infrastructure (OCI) business has been raised from $18 billion in fiscal year 26 to $144 billion in fiscal year 30, reflecting rapid annual growth.

Since Dolphin Research has not yet covered the company, it is temporarily unable to provide a detailed commentary on Oracle's performance. However, Dolphin has compiled the company's communication during the post-earnings conference call for reference, to understand the reasons behind this "astonishing surge." Below is the compiled content of the conference call:

I. Review of Core Financial Report Information

1. Capital Expenditure

- Total expenditure over the past four quarters was $27.4 billion. The first quarter of the new fiscal year saw an expenditure of $8.5 billion, a year-on-year increase of 269%, far exceeding the market expectation of $5.7 billion. Strong visible demand has prompted the company to significantly raise its Capex budget. The fiscal year 26 overall Capex budget is expected to be $35 billion.

2. Cash Flow

- Over the past four quarters: Operating cash flow increased by 13% to $21.5 billion; free cash flow was negative $5.9 billion.

- First quarter: Operating cash flow was $8.1 billion; free cash flow was negative $362 million.

- At the end of the quarter: Holding $11 billion in cash and marketable securities; short-term deferred revenue balance was $12 billion, an increase of 5%.

It is evident that high Capex spending has led Oracle's cash flow to turn negative, and the company's funds are not high, indicating a significant financing need in the future.

3. Cloud Business Revenue Performance

- Total Cloud Revenue (including applications and infrastructure) grew by 27%, reaching $7.2 billion.

- Cloud Infrastructure Revenue (OCI) grew by 55% on top of last year's first-quarter growth of 46%, reaching $3.3 billion. Among them, OCI consumable revenue grew by 57%, and cloud database service revenue grew by 32%, with annualized revenue approaching $2.8 billion.

Autonomous Database revenue increased by 43% on top of last year's first-quarter growth of 26%.

Multi-Cloud database revenue (OCI regions embedded in AWS, Azure, and GCP) grew by 1,529% in the first quarter.

- Cloud Application Revenue was $3.8 billion, growing by 10%. Strategic back-office application revenue was $2.4 billion, growing by 16%.

4. Guidance

- Mid to Long-term Guidance:

Expecting to sign more customer orders with a scale of billions of dollars, RPO may grow to exceed $0.5 trillion. The significant RPO growth will substantially raise the forecast for the cloud infrastructure part of the financial plan.

OCI is expected to grow to $18 billion in this fiscal year, and then to $32 billion, $73 billion, $114 billion, and $144 billion in the following four years.

- Second Quarter Guidance:

Total revenue is expected to grow by 12% to 14% at constant exchange rates, and by 14% to 16% in USD terms;

Non-GAAP EPS growth guidance remains unchanged, growing by 8% to 10% at constant exchange rates, ranging from $1.58 to $1.62; USD growth of 10% to 12%, ranging from $1.61 to $1.65;

Total cloud revenue is expected to grow by 32% to 36% at constant exchange rates, and by 33% to 37% in USD terms.

- Fiscal Year 26 Guidance:

Expecting operating profit to achieve mid-double-digit growth this fiscal year, with higher growth in fiscal year 2027;

Confident in achieving 16% full-year total revenue growth at constant exchange rates for fiscal year 2026;

Expecting Oracle Cloud Infrastructure (OCI) to grow by 77% in fiscal year 26.

- Multi-Cloud Data Center Guidance:

Currently, 34 Multi-Cloud data centers have been launched within Azure, GCP, and AWS, with an additional 37 data centers to be delivered, totaling 71. These trends indicate higher revenue growth.

- Long-term Financial Goals: Long-term financial goals will be updated at the financial analyst meeting at Oracle AI World in Las Vegas in October.

II. Detailed Content of the Earnings Conference Call

2.1 Executive Statements of Core Information

1. AI Cloud Contracts

Oracle has become the preferred destination for AI workloads, having signed significant cloud contracts with well-known companies in the AI field such as OpenAI, xAI, Meta, NVIDIA, and AMD.

2. Oracle's AI Strategy and Core Advantages

- Oracle is actively pursuing the AI training market and the larger AI inference market.

- Oracle believes it is likely to win in the inference market because Oracle is the world's largest high-value private enterprise data host.

- AI Database Innovation: Launching a new AI database that supports data vectorization, enabling all data to be understood by AI models.

- Large Model Integration and Data Security: Customers can easily connect all their databases, the new Oracle AI database, and OCI cloud storage directly to the world's most advanced AI inference models (such as ChatGPT, Gemini, Grok, Llama).

- Customers can ask any question, and large language models will combine their private enterprise data with publicly available data for advanced reasoning, providing answers to important questions without compromising the security and confidentiality of private data.

- Oracle will be the first vendor to deliver and demonstrate this capability at next month's AI World to meet customer demand for "asking any question" since the launch of ChatGPT 3.5.

2.2 Q&A Session

Q: Besides AI training, what other factors are driving Oracle to achieve its remarkable performance forecasts?

A: Besides AI training, the huge demand for inference capabilities is a key driver, with a market size far exceeding the training market. Oracle's unique advantage lies in its secure and reliable database that connects all mainstream large language models (LLM), providing a ChatGPT-like experience by vectorizing data.

If we can combine public data with enterprise data and ensure that enterprise private data remains confidential when used by large models, we can achieve more valuable reasoning, such as "How do the latest tariffs or steel prices affect my quarterly financial performance, product delivery, revenue, or costs?" To support such reasoning needs, we have fundamentally restructured the Oracle database to support the vectorization of all data, which is a prerequisite for large models to understand data.

Additionally, as a full-stack provider of infrastructure, databases, and applications, Oracle can offer diverse deployment options such as public cloud and dedicated regions, fully meeting customer needs. As one of the world's largest data hosts, Oracle can maximize the use of inference capabilities.

Q: Besides the GPU business, what other cloud deployment advantages does Oracle have?

A: Besides GPU-related business, we have become the default cloud platform choice for many customers. Customers can choose to deploy some workloads on our public cloud or on competitors' public clouds, provided they use Oracle databases. Additionally, demand for "Dedicated Region" or "Cloud@Customer" models is rising.

We offer customers a wide range of choices, with few instances where we cannot meet customer needs. We also have a complete technology stack: infrastructure, AI model-compatible databases (which we believe is the most reasonable data storage method), and a growing range of application products. These layers work together to provide customers with synergies, offering overall value far beyond single-point deployments.

Q: In the current market environment, what is Oracle doing to maintain its competitive advantage and meet customer needs?

A: We are compressing all the features, characteristics, and security modules of the entire Oracle Cloud into three cabinets, called the "Butterfly" system, costing only $6 million, providing full-featured private cloud services (Cloud@Customer) at a price far below competitors. For example, large enterprises like Vodafone are purchasing private cloud regions to ensure data independence. Additionally, Oracle has the industry's most advanced AI application generator, with AI fully integrated into its next-generation applications, improving efficiency and creating better products than traditional manual construction, aiming to boost sales.

Q: How do you think AI will impact the industry's development direction? Will market share flow to companies that lack Oracle's database and full-stack advantages?

A: Oracle's dual advantage as an infrastructure and application company is key. We need to realize that applications must be generated automatically, rather than relying on a large workforce. Through the AI application generator, Oracle can efficiently build higher-quality applications.

Another advantage is scale. We do not sell discrete applications individually but sell complete application suites. We are much larger than Epic, Workday, and ServiceNow, able to provide a full set of systems like ERP and CRM, with all modules designed and highly integrated, making it easy for customers to deploy and reducing the complexity of cross-vendor system integration.

In AI inference, Oracle can utilize all customer data for Q&A, providing instant business insights, which is its unique competitive advantage. This comprehensive technology and application integration capability will position Oracle favorably in the market, rather than flowing to companies lacking such advantages.

Q: Regarding the capital expenditure and operating cost structure required for new contract services, and how should investors evaluate their return on investment and revenue growth?

A: This fiscal year's capital expenditure (Capex) is expected to be around $35 billion, possibly higher. If actual Capex is slightly higher, it represents more data center floor resources acquired, which is a positive signal.

Oracle adopts a "relatively light asset" strategy, focusing on unique technology, networking, storage, and system integration. Equipment is immediately put into use and handed over to customers upon receipt, quickly generating revenue, achieving synchronized growth of capital expenditure and revenue. Customer acceptance time has been reduced from months to one week.

Oracle also deploys 71 data centers in competitor clouds, only paying for equipment costs, ensuring high profit margins and customer appeal. This deployment capability has clear foresight, and expenditure can be made before capital expenditure generates revenue.

Q: Can Oracle AI database open up the general enterprise inference market, and what are its core advantages?

A: Oracle AI database will be able to open up the general enterprise inference market. Since large enterprises cannot share all data with third parties (such as OpenAI), they must maintain the security and privacy of private data. Oracle database, by vectorizing all data within the database and combining its sophisticated security model, can provide the latest and best inference models, allowing enterprises to safely query private data and obtain comprehensive answers. This unique combination is precisely what enterprises seek, and Oracle believes it has a huge advantage in meeting the market's demand for AI inference.

In fact, this will also become an important driver for the comprehensive cloudification of Oracle databases. Currently, Oracle databases dominate the enterprise market, and more will migrate to the cloud in the future, especially deploying Oracle AI databases. Large enterprise customers will choose dedicated regions or "Cloud@Customer" deployment methods to use any LLM through Oracle Cloud, truly achieving AI applications on their private data, a capability that did not exist before.

Q: How does Oracle establish a sufficient differentiation moat in the AI training business to ensure that this business does not become homogeneous? And if the training business slows down, how will Oracle continue to achieve strong profitability and free cash flow from it?

A: Oracle can achieve extremely fast data transmission through its network. If our data transmission speed is faster than other companies, and the GPU supercluster has performance advantages, then in hourly billing, Oracle's speed is twice that of competitors, and the cost is half, which constitutes a highly moat-worthy cost and performance advantage.

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