Oracle earnings: Good, but it could have been better.

Oracle published its results after the close of the US session on September 10. Management could have delivered results materially better than expectations, which the company needed given growing concerns about, among other things, its debt. The stock is up about 5 to 6% in premarket trading, but it is still below Thursday’s opening price because it fell as much as 5.3% ahead of the earnings release.

Earnings 

1. Revenue was only “decent” in the context of the company. It beat forecasts of about USD 19.05 billion, coming in at USD 19.34 billion. This represents 30% year over year growth.
2. EPS and profitability were much better. Non-GAAP earnings per share reached USD 1.92 versus expectations of about USD 1.73. This is an increase of around 24% year over year. It is worth noting that this result is not fully organic. Oracle’s effective tax rate fell from 20.5% to 16.9%.

However, more important than the standardized parts of the financial statements are the details. The items most interesting to investors are cloud and remaining performance obligations (RPO).

• The overall cloud segment grew by as much as 62%, which came in near the top end of management’s guidance. Total cloud revenue was USD 11.6 billion, more than half of the company’s revenue.
• The cloud infrastructure segment (OCI) grew a staggering 121% year over year. It is worth mentioning that this is an acceleration from 93% growth in the prior quarter.
• RPO increased to USD 664 billion, a few percent above consensus.

• A clear surprise, though with a moderate short term impact, was free cash flow, which came in at negative USD 5.4 billion versus expectations of nearly negative USD 9.5 billion.
  • This implies the company is improving spending discipline, cost control, and cash flow management.
• As expected, management addressed questions about investments in Abilene. On the call, they said that 6 of the 8 buildings have already been commissioned and 75% of the target capacity is in place. Total delivered data center capacity this quarter was 850 MW.

The hardest element to interpret is the cash flow statement.

• Oracle showed that 49% of operating cash flow came from customer prepayments. On the one hand, this may moderately ease concerns about credit risk, but it does not yet clearly show the company’s true burdens. The cash burn can only be estimated after the current investments are put into service.
• The most clearly positive signal from the call was the raised guidance. Annual EPS was increased by USD 0.05 to USD 8.10. Revenue is expected to be “at least” USD 90 billion.

Conclusion

The call showed a number of positive trends at the company, which nonetheless:

• Do not represent operational improvement and/or are not objective and representative.
• The positive surprise is the much smaller negative FCF. The key question remains whether the company can maintain this level or trend.
• The company can point to real progress in bringing investments online, but it provided a lack of qualitative or detailed data. Cloud revenue shows phenomenal growth, but it is currently difficult to assess its quality.
• The company’s backlog is huge, but we do not fully know customer concentration, customer quality, or the expected average timing of benefits from it.
• For now, the nearly “symptomless” benefits do not fully convince investors that the company’s position has truly changed.