Oracle: AI has bolstered its public image, but who will underpin its underlying fundamentals?

After U.S. stock market closed on the morning of September 11, Oracle, the leader among new cloud vendors, released its financial results for the first quarter of fiscal year 2027 ending at the end of August. Overall, its performance was strong in the high-growth segments while the underperforming segments remained sluggish. The most eye-catching OCI business delivered robust growth, with revenue continuing to accelerate sharply, and the corresponding Capex also rose significantly; meanwhile, the traditional business still posted weak growth, its gross margin was under notable pressure, and relevant problems have not been improved. The details are as follows:

1. Core business - OCI accelerated beyond expectations: The most critical OCI business recorded revenue of nearly 7.4 billion USD this quarter, with its year-on-year growth rate hitting a new high of 121%, compared with 93% in the previous quarter, which clearly outpaced the market consensus expectation of around 115%. From the perspective of sequential net increment, the figure reached 1.4 billion USD this quarter, far exceeding the 700-800 million USD recorded in previous quarters. Therefore, in the AI cloud leasing sector that the market is most concerned about, the performance of this quarter is quite impressive.

The main underlying driver is that the scale of computing power launched online this quarter accelerated significantly to 0.85GW, while the total figure for the whole last fiscal year was only around 1.2GW. However, Dolphin Analyst noticed that the company's original guidance was more aggressive, which targeted 1GW.

Combined, the launched computing power scale is slightly lower than the guidance, but the revenue realization is indeed stronger than expected, which implies that the market's previous estimate of revenue contribution per GW was relatively low. In this case, the recent widespread price increase in cloud leasing should also bring positive benefits to the company.

In contrast, the SaaS business under the cloud segment still recorded weak growth, with its year-on-year growth rate of 9.9% this quarter slightly slowing down from the previous quarter. Although the reduced favorable impact of exchange rate is a factor, it indicates that the strong growth of the AI cloud business has barely driven the company's traditional SaaS-oriented business. Combined with market research feedback, there may even be a crowding-out effect.

2. Capex rose sharply, net cash outflow remained: Corresponding to the sharp acceleration of computing power launch and OCI revenue, it is conceivable that Capex expenditure this quarter will also rise significantly, reaching a staggering figure of around 28.5 billion USD, which is nearly 3/4 higher than the already considerable base in the previous quarter, and nearly 50% higher than the company's total revenue.

In addition, according to disclosure, about 40% of the Capex this quarter is covered by customers' advance payments, and the actual amount that the company needs to bear on its own is about 18 billion USD, which has significantly helped ease the company's cash flow pressure. Even so, free cash flow is still deeply negative, close to -5.4 billion USD.

3. Completed 20 billion USD equity issuance, financing is not a major problem at present: Corresponding to the high Capex, the next question is where the funds come from. According to the company's previous statement, a total of 40 billion USD of financing will be carried out in fiscal year 2027, of which debt financing and equity financing each account for half. And within this quarter, the company has completed 20 billion USD of equity financing, which is more than the Capex amount the company bears on its own this quarter.

Since the financing of this quarter is undertaken by equity, the relative debt pressure has decreased, both net debt and interest expenditure have decreased sequentially. Specifically, net debt decreased by nearly 10% quarter-on-quarter to about 88.2 billion USD, while interest expenditure remained flat at about 1.4 billion USD.

Therefore, with the help of customers' advance payments, the company's own financing pressure has indeed been reduced. However, under the current pace of computing power construction and investment, the company's cash on hand of about 36 billion USD plus the subsequent 20 billion USD of debt financing may still be relatively tight, and it is not excluded that the actual debt financing will be more than planned.

4. Backlog of orders grew steadily: As of this quarter, the company's remaining performance obligation (RPO) reached 664 billion USD, with a sequential increase of 2.6 billion USD. In addition, the company also specifically stated that the new orders obtained this quarter will not affect the previously formulated financing plan.

5. Gross margin continued to decline sharply: Linked in sequence, due to the stronger-than-expected robust growth of OCI, its revenue proportion continued to rise, and the company's overall gross margin and cloud business gross margin both continued to drop significantly, underperforming expectations.

The more concerned gross margin of the cloud & software segment was less than 63%, dropping significantly by more than 6 percentage points quarter-on-quarter, marking the largest decline in history. The company did not show the trend that the gross margins of traditional cloud giants and new cloud players such as CoreWeave have bottomed out and stabilized, or even moved higher recently.

However, since the gross margin caliber includes multiple segments such as the traditional software segment, OCA segment, AI cloud leasing business, and traditional OCI business, the apparent decline in gross margin may be more of a structural change caused by the sharp increase in the proportion of AI cloud leasing revenue, and does not necessarily mean that the gross margin of AI cloud leasing itself is still deteriorating, which requires further observation.

But it is certain that with the rise of Capex, the company's depreciation expenditure is climbing rapidly, with a year-on-year increase of 134% this quarter, accounting for more than 16% of total revenue, up significantly from 12% in the previous quarter. In any case, AI cloud leasing has made the company's business model more asset-heavy, and it is no doubt that the overall profit margin has become lower.

6. Non-cloud business remains weak: As mentioned earlier, apart from the strong growth of OCI business, the SaaS business under the cloud segment performed poorly in growth, and the traditional software business, which still accounts for nearly 30% of total revenue, also saw no growth improvement. This quarter, revenue shrank by about 3% year-on-year, further deteriorating from the -2% in the previous quarter.

Combined with market research, part of the reason may be that customers are gradually replacing traditional software licenses with SaaS services.

In addition, although hardware sales have accelerated considerably, its absolute volume and proportion are too low (less than 5%) to be almost negligible.

7. Strong momentum drives overall growth, all indicators accelerated comprehensively

Overall, although the traditional business is still weak, driven by the strong OCI business with triple-digit growth, the company's overall revenue growth rate continues to rise, reaching nearly 30% this quarter, up a full 9 percentage points sequentially.

However, due to the sharp drop in gross margin, the overall gross profit increased by less than 16% year-on-year, underperforming market expectations. But in terms of trend, compared with the single-digit gross profit growth that has lasted for many years, there is also a considerable acceleration.

Therefore, although it can be said that the profit quality of OCI business is not high, driven by the extremely high revenue growth, the strong momentum still helps the company's overall performance growth (whether from the perspective of revenue or profit) gain an obvious accelerating trend.

In addition, since the new OCI business currently mainly serves a small number of large customers, there is less demand for Opex expenditure including customer acquisition costs. This quarter, operating Opex decreased by about 7% year-on-year, coupled with higher one-off restructuring expenditure in the same period of last year, the overall Opex this quarter decreased by more than 15% year-on-year.

Under the obvious operating leverage where revenue growth accelerated while Opex decreased, the operating profit margin instead rose by nearly 3 percentage points sequentially, and operating profit increased by as high as 57% year-on-year. The operating profit growth rate after excluding non-recurring factors also reached nearly 31%.

8. Overview of core performance information

Dolphin Research Viewpoints:

1. The quarterly business performance is solid: At the current stage, the market's core short-to-medium term concerns about Oracle actually lie in only two points: a. The company's execution - whether the speed and pace of building and launching computing power are smooth, that is, whether the acceleration of OCI revenue is smooth, and whether the backlog of orders exceeding 600 billion USD can be converted into actual revenue as soon as possible.

Relatively speaking, the market is less concerned about whether more new orders can be signed. After all, more orders also mean more Capex, more liabilities, greater execution risks and uncertainties on the current basis.

b. Corresponding to the construction pace of computing power, whether the company can obtain corresponding funds in a timely manner (and preferably at a lower cost) to support its Capex and computing power construction.

In contrast, as the market is no longer so worried about the potential ROI of AI Capex and the potential profit margin of computing power leasing, it is believed that as long as the data center can be built, there is no need to worry too much about the payback problem (at least for now).

Corresponding to the above issues, the answer given by this performance report is relatively favorable:

a. The pace of computing power construction and revenue conversion is solid. First of all, OCI revenue accelerated sharply and significantly exceeded expectations. Although the scale of launched computing power was slightly lower than the previous guidance, the trend is clearly accelerating (1.2GW for the whole of last year, 0.85GW for this single quarter).

b. With customers' advance payments covering about 40% of the total Capex, the company's own financing pressure has indeed been significantly reduced. At the same time, the equity financing was successfully completed, the suppression on the stock price was lifted, and the cash on hand rose sequentially. At present, financing is not a major problem.

However, Dolphin Analyst still reminds that <