Oracle Corporation's current financial leverage is quite high, with a net debt to EBITDA ratio of about 4 times, while its debt to equity ratio is as high as 500%. It can be said that if unsuccessful, it will lead to dire consequences.
The following are the key points of Oracle's Q2 earnings report:
Key financial data:
Remaining performance obligations: Oracle's remaining performance obligations increased by 438% year-over-year, reaching $523 billion, exceeding analysts' average expectations of $519 billion.
Revenue: Oracle's total revenue for Q2 grew by 14% year-over-year in USD and by 13% year-over-year at constant currency, reaching $16.1 billion, below analysts' expectations of $16.21 billion.
Operating Profit: Oracle's GAAP operating profit for the second fiscal quarter was $4.7 billion, and non-GAAP operating profit was $6.7 billion, a year-on-year increase of 10% in dollar terms and an 8% increase in constant currency terms.
Net Profit: Oracle's GAAP net profit for the second fiscal quarter was $6.1 billion. Non-GAAP net profit was $6.6 billion, a year-on-year increase of 57% in dollar terms and a 54% increase in constant currency terms.
Earnings Per Share: Oracle's GAAP earnings per share for the second fiscal quarter was $2.10, a year-on-year increase of 91% in dollar terms and an 86% increase in constant currency terms. Non-GAAP earnings per share was $2.26, a year-on-year increase of 54% in dollar terms and a 51% increase in constant currency terms.
Free Cash Flow: Oracle's free cash flow (FCF) for the second fiscal quarter was -$10 billion.
Cloud Business Data:
Cloud Business: Oracle's cloud business revenue (IaaS plus SaaS) for the second fiscal quarter was $8 billion, a year-on-year increase of 34% in dollar terms and 33% in constant currency terms, falling short of analysts' expectations of $8.04 billion.
1. Cloud Infrastructure: Revenue from cloud infrastructure (IaaS) for the second fiscal quarter was $4.1 billion, a year-on-year increase of 68% in dollar terms and a 66% increase in constant currency terms, which fell short of analysts' expectations.
2. Cloud Applications: Revenue from cloud applications (SaaS) for the second fiscal quarter was $3.9 billion, a year-on-year increase of 11% in dollar terms and a 11% increase in constant currency terms; Fusion Cloud ERP (SaaS) revenue was $1.1 billion, a year-on-year increase of 18% in dollar terms and 17% in constant currency terms; NetSuite Cloud ERP (SaaS) revenue was $1 billion, a year-on-year increase of 13% in dollar terms and 13% in constant currency terms.
Whether revenue explosion can be achieved is in doubt
Oracle started with database software and has recently made progress in the highly competitive cloud computing market. The company is significantly building data centers to provide computing power support for technology companies like OpenAI.
Oracle stated in a statement released on Wednesday that the company has secured new cloud computing commitments from Meta Platforms, NVIDIA, and other companies. The 'Remaining Performance Obligation' (RPO), which measures the scale of orders, surged to $523 billion in the quarter, more than five times the year-on-year increase, with analysts' average expectation being $519 billion.
However, Wall Street remains skeptical about the costs and timelines required for building AI infrastructure at such a large scale. Investors are pressuring Oracle to demonstrate its ability to achieve the previously expected revenue explosion through the large-scale construction of AI data centers.
In September, Oracle announced that its backlog had surged to $455 billion, a news that previously drove the stock price up and briefly made co-founder Larry Ellison the richest person in the world. However, the market then began to worry about the level of risk Oracle was taking on during its expansion, and the stock price continued to decline.
Massive borrowing, increasing annual capital expenditure by $15 billion
Oracle has borrowed a significant amount of debt and committed to leasing multiple data center sites. The company recently issued approximately $18 billion in new investment-grade bonds, with total outstanding debt exceeding $100 billion, making it the largest in terms of debt among all major tech companies with investment-grade ratings.
According to Morgan Stanley credit analysts' forecasts, Oracle's 'adjusted debt' (including lease liabilities and financial debt) could more than double to about $300 billion by 2028.
The media reported that investors hope to see Oracle quickly translate the increase in infrastructure spending into revenue, as previously promised. The capital expenditure for data center investments was approximately $12 billion in the quarter, up from $8.5 billion in the previous quarter. Analysts had previously estimated capital expenditures for the quarter to be $8.25 billion.
Oracle's CFO Doug Kehring stated on a conference call: Most of our capital expenditure is used for data center equipment that directly generates revenue, rather than for land, buildings, or power facilities, which are generally resolved through leasing. Oracle does not need to pay for these leases until the data centers and associated utilities are delivered to us. Kehring also confirmed that the company's annual revenue would reach $67 billion, reiterating the guidance provided by Oracle in October. He added: As a fundamental principle, we expect and are committed to maintaining an investment-grade debt rating.
Additionally, Oracle expects revenue for the third fiscal quarter to grow by 19%-21%, with cloud growth of 40%-44%, while maintaining the annual sales expectation for fiscal year 2026 at $67 billion.
Ellison: Adhering to a 'chip neutrality' strategy
As part of a data center project named 'Stargate', OpenAI has agreed to purchase $300 billion worth of computing power from Oracle over approximately five years. Oracle executives stated in October that the company has also signed new infrastructure contracts totaling $65 billion with four different customers, excluding OpenAI.
Oracle executives stated that even if the business from OpenAI does not fully materialize, the computing power being built will also be supported by other customers' demand.
This year, Oracle sold its stake in semiconductor company Ampere Computing. In a statement accompanying the earnings report, Ellison stated that the company would adhere to a 'chip neutrality' strategy.
He stated that Oracle will continue to purchase NVIDIA chips, but 'we must be prepared to deploy any chips that customers wish to use. AI technology will change significantly over the next few years, and we must remain flexible to adapt to these changes.'
Evercore ISI analyst Kirk Materne wrote in a report prior to the earnings release that some negative sentiment from investors recently stemmed from deepening market skepticism about the outlook for OpenAI's business. OpenAI is facing fiercer competition from companies such as Google's parent company, Alphabet. He added that investors hope Oracle's management can explain how the company will adjust its spending plans if demand from OpenAI changes.