Oracle Corporation (ORCL) Q1 2026 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

The earnings call indicates strong growth in cloud applications and infrastructure, with significant revenue increases in key areas like autonomous databases and multi-cloud solutions. Despite a slight dip in total software revenue and negative free cash flow due to high CapEx, the optimistic revenue and EPS guidance, coupled with strategic AI advancements, suggest positive stock movement. The Q&A highlights unique advantages in AI and enterprise applications, reinforcing a positive outlook. However, lack of specific ROI details on CapEx and some unclear management responses prevent a stronger positive rating.

Key Financial Performance

Remaining Performance Obligations (RPO) $455 billion, up 359% year-over-year. Reasons: Significant cloud contracts with major AI companies like OpenAI, xAI, Meta, NVIDIA, and AMD.

Cloud RPO Nearly 500% growth year-over-year, on top of 83% growth last year. Reasons: Increased demand for cloud services.

Total Cloud Revenue $7.2 billion, up 27% year-over-year. Reasons: Growth in both Apps and Infrastructure.

Cloud Infrastructure Revenue $3.3 billion, up 54% year-over-year, on top of 46% growth last year. Reasons: High demand and OCI consumption revenue growth of 57%.

Cloud Database Services Revenue $2.8 billion annualized, up 32% year-over-year. Reasons: Increased adoption of cloud database services.

Autonomous Database Revenue Up 43% year-over-year, on top of 26% growth last year. Reasons: Growing demand for autonomous database solutions.

Multi-cloud Database Revenue Grew 1,529% year-over-year. Reasons: Expansion of OCI regions embedded in AWS, Azure, and GCP.

Cloud Application Revenue $3.8 billion, up 10% year-over-year. Reasons: Increased adoption of cloud applications.

Strategic Back-office Application Revenue $2.4 billion, up 16% year-over-year. Reasons: Growth in industry-specific cloud applications.

Total Software Revenue $5.7 billion, down 2% year-over-year. Reasons: Not explicitly mentioned.

Total Revenue $14.9 billion, up 11% year-over-year, higher than the 8% growth reported last year. Reasons: Overall growth in cloud and software services.

Operating Income $6.2 billion, up 7% year-over-year. Reasons: Efficiency improvements and adoption of AI internally.

Non-GAAP EPS $1.47, impacted by a higher non-GAAP tax rate of 20.5% (up from 19%), causing a $0.03 reduction.

Operating Cash Flow (Last 4 Quarters) $21.5 billion, up 13% year-over-year. Reasons: Not explicitly mentioned.

Free Cash Flow (Last 4 Quarters) Negative $5.9 billion, with $27.4 billion in CapEx. Reasons: High capital expenditures for data center expansion.

Operating Cash Flow (Q1) $8.1 billion. Reasons: Not explicitly mentioned.

Free Cash Flow (Q1) Negative $362 million, with $8.5 billion in CapEx. Reasons: High capital expenditures for data center expansion.

Cash and Marketable Securities $11 billion at quarter end. Reasons: Not explicitly mentioned.

Short-term Deferred Revenue Balance $12 billion, up 5% year-over-year. Reasons: Not explicitly mentioned.

Share Repurchase 440,000 shares repurchased for $95 million. Reasons: Not explicitly mentioned.

Dividends Paid (Last 12 Months) $5 billion. Reasons: Not explicitly mentioned.

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Operating Highlights

AI Workloads: Oracle has become the go-to place for AI workloads, signing significant cloud contracts with companies like OpenAI, xAI, Meta, NVIDIA, and AMD.

AI Database: Oracle introduced a new AI database that allows data to be vectorized, enabling it to be understood by AI models and directly connected to advanced AI reasoning models like ChatGPT, Gemini, Grok, and Llama.

Cloud Infrastructure Growth: Cloud infrastructure revenue grew 54% to $3.3 billion, with OCI consumption revenue up 57%. Multi-cloud database revenue grew 1,529%.

AI Market Positioning: Oracle is aggressively pursuing both the AI training and inferencing markets, leveraging its position as the largest custodian of high-value private enterprise data.

Revenue Growth: Total cloud revenue grew 27% to $7.2 billion, with total revenues for the quarter at $14.9 billion, up 11% from last year.

Operational Efficiency: Oracle is adopting AI internally to improve operational efficiency, expecting mid-teen growth in operating income this year.

CapEx Investments: Oracle plans to invest $35 billion in fiscal year 2026, primarily for revenue-generating equipment in data centers.

AI Strategy: Oracle is focusing on AI inferencing, which it predicts will be a larger market than AI training, and aims to integrate enterprise data with advanced AI models for transformative applications.

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Risk or Challenges

Demand outstripping supply for OCI consumption: The demand for Oracle Cloud Infrastructure (OCI) consumption revenue is growing faster than the supply, which could lead to potential delays in meeting customer needs and impact customer satisfaction.

High CapEx investments: Oracle's fiscal year 2026 CapEx is expected to reach $35 billion, primarily for revenue-generating equipment in data centers. This high level of investment could strain cash flow and financial flexibility if revenue growth does not materialize as expected.

Negative free cash flow: Oracle reported a negative free cash flow of $362 million for Q1, driven by high CapEx of $8.5 billion. Sustained negative free cash flow could impact the company's ability to fund operations and strategic initiatives.

Tax rate variability: The non-GAAP tax rate for Q1 was higher than expected, causing a $0.03 reduction in EPS. Variability in tax rates could lead to unpredictable impacts on earnings.

Competitive pressures in AI and cloud markets: Oracle faces intense competition in the AI and cloud markets, which could impact its ability to maintain or grow market share and profitability.

Execution risks in AI and cloud strategies: Oracle's aggressive pursuit of AI and cloud markets, including the development of AI databases and vectorization capabilities, carries execution risks. Failure to deliver on these initiatives could impact customer trust and revenue growth.

Currency exchange rate impacts: Fluctuations in currency exchange rates could affect Oracle's revenue and earnings, as seen in the Q1 results where currency had a positive impact on EPS and revenue.

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Guidance & Outlook

Fiscal Year 2026 CapEx: Expected to be around $35 billion, with the majority allocated to revenue-generating equipment for data centers.

Cloud Infrastructure Revenue Growth: Expected to grow 77% to $18 billion in fiscal year 2026, with projections to increase to $32 billion, $73 billion, $114 billion, and $144 billion over the following four years.

Total Revenue Growth for Fiscal Year 2026: Expected to grow 16% in constant currency.

Q2 Revenue Growth: Expected to grow 12% to 14% in constant currency and 14% to 16% in U.S. dollars.

Q2 Cloud Revenue Growth: Expected to grow 32% to 36% in constant currency and 33% to 37% in U.S. dollars.

Q2 Non-GAAP EPS Growth: Expected to grow 8% to 10% in constant currency, with EPS between $1.58 and $1.62. In U.S. dollars, EPS is expected to grow 10% to 12%, ranging from $1.61 to $1.65.

AI and Cloud Expansion: Oracle plans to deliver 37 additional multi-cloud data centers, bringing the total to 71, to support AI and cloud infrastructure growth.

AI Market Positioning: Oracle is aggressively pursuing both AI training and inferencing markets, leveraging its position as the largest custodian of high-value private enterprise data.

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Shareholder Return Plan

Dividends paid over the last 12 months: $5 billion

Quarterly dividend declared: $0.50 per share

Shares repurchased this quarter: 440,000 shares

Total cost of share repurchase this quarter: $95 million

Shares reduced over the last 10 years: 1/3 at an average price of $55

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Key Q&A

Q:What is driving Oracle's impressive forecasts beyond AI training?

A:Oracle is seeing a huge demand for inferencing capacity, which is larger than the training market. Oracle has developed a unique value proposition by combining enterprise data with publicly available data securely, enabling advanced AI applications. Oracle's database has been fundamentally changed to support vectorized data, making it compatible with large language models. Oracle also offers a full stack of infrastructure, database, and applications, providing customers with flexibility and choice.

Q:What are Oracle's advantages in the enterprise applications market?

A:Oracle has substantial advantages as both an infrastructure and application company. They are using AI application generators to build better and more efficient applications. Oracle offers suites of applications that are engineered to fit together, solving larger portions of customer problems and reducing the need for system integration across multiple vendors. Oracle's size and ability to integrate ERP, CRM, and other applications provide a competitive edge.

Q:How is Oracle managing the infrastructure build-out to support new RPO contracts?

A:Oracle does not own property or buildings but engineers its equipment optimized for the Oracle Cloud. The company deploys equipment just in time to generate revenue quickly, making the process asset-light. Oracle expects CapEx to be around $35 billion for the fiscal year, with the potential for slight increases if more capacity is needed. Oracle's approach ensures profitability while offering competitive pricing to customers.

Q:How does Oracle differentiate its AI training business to avoid commoditization?

A:Oracle's networks move data very quickly, providing performance advantages in GPU superclusters. Faster data movement translates to cost efficiency for customers, as they pay by the hour. Oracle's unique technology and infrastructure create a differentiated moat in the AI training business.

Q:What is the potential impact of the Oracle AI database on the enterprise inferencing market?

A:The Oracle AI database enables enterprises to securely use AI on their private data combined with publicly available data. Oracle has bundled its database with various large language models, making it easy for customers to use AI for inferencing. This capability is expected to drive significant demand and encourage enterprises to move their databases to the cloud, either in public or private configurations.

Q:Review of Unclear Management Responses

A:Management avoided providing specific details on the ROI of the $35 billion CapEx spend, only stating that it is monitored closely and tied to revenue generation. Additionally, while they highlighted the advantages of their AI database and infrastructure, they did not provide concrete timelines or quantitative metrics for adoption and impact.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

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The earnings call reveals strong financial performance, particularly in cloud revenue growth and optimistic future guidance, which are positive indicators for stock price. However, concerns about supply chain, economic factors, and CapEx risks temper the outlook. The shareholder return plan, with stable dividends and share repurchases, supports a positive sentiment. The Q&A section highlights strong demand and strategic positioning in AI and cloud, bolstering confidence despite some management vagueness. Overall, the positive factors outweigh the negatives, suggesting a likely stock price increase in the 2% to 8% range.

ORCL Report

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