Oracle's cash consumption and backlog of orders both exceeded expectations, and customers bear part

Oracle's quarterly earnings report analysis: Prepayments ease cash flow pressure, AI investment narrative turns to reality

On Thursday, Oracle disclosed to investors that its customers made $11.36 billion in advance in the first quarter for capital expenditures. Analysts pointed out that the data is a positive sign that although the company's huge spending in artificial intelligence has raised concerns about its cash consumption, its financial situation is becoming more solid.

The disclosure left Oracle's cash shortage lower than expected and the order backlog higher than expected, pushing its share price up 4% in after-hours trading.

Free cash flow performed better than expected

According to LSEG data, Oracle's free cash flow in the first quarter of this fiscal year was minus US$5.4 billion, much lower than analysts had previously forecast a US$9.56 billion gap. Although the loss was higher than the previous quarter, it was far less than the $11.48 billion free cash flow deficit reported in the third quarter of this fiscal year.

In terms of revenue, Oracle achieved a 30% increase to US$19.3 billion, exceeding market expectations of US$19.14 billion; adjusted earnings per share were US$1.92, also better than expectations of US$1.74.

Total capital expenditures for the quarter were US$28.5 billion. Oracle said about $11.36 billion of that was funded by advances from customers rather than using the company's own cash. Cloud infrastructure revenue achieved triple-digit growth, soaring 121% month-on-month to US$7.39 billion.

Residual performance obligations hit new highs, AI contract structure optimized

During the quarter, Oracle added more than $30 billion in new AI cloud contracts, raising its total remaining performance obligations to $664 billion, exceeding market expectations.

Hilary Maxson, Oracle's chief financial officer, said on an analyst conference call: "The vast majority of new contracts are reached through up-front payments, bring your own hardware or similar mechanisms, so no additional capital investment from Oracle is required."

Maxson pointed out that Oracle began to see an effective conversion of backlog orders into revenue this quarter, and it is expected that about half of the existing backlog orders will be converted into sales over the next 36 months.

Rebecca Wettemann, CEO of research firm Valoir, commented: "For Oracle and its customers, the AI ROI story is finally becoming real and believable." She added: "The strong results show that customers are voting with real money. Oracle needs to continue to emphasize that the growth in the backlog of orders is no longer just a story of working with OpenAI."

Market background and financial guidance

Previously, Oracle's share price experienced a period of turmoil. So far this year, the stock has fallen more than 21%, with a cumulative decline of nearly 25% since the June earnings report was released to the close of Thursday. In July this year, Standard & Poor's Global downgraded Oracle's credit rating, citing weak cash flow and increased business risks. Currently, Oracle has $125 billion in debt.

In the same year, Moody's listed Oracle and CoreWeave as the two with the most significant increase in credit risk among the six major AI infrastructure spending companies. Oracle is rated Baa2, has a negative outlook and is two levels above the junk rating.

In addition, investors have been closely watching reports of delays faced by Oracle's "Stargate" data center project due to labor, licensing and power supply issues.

Against this backdrop, Oracle maintained a full-year capital expenditure target of US$90 billion to US$95 billion, which is consistent with guidance provided by Chief Financial Officer Hillary Maxson during the June earnings call. In net cash terms, the plan calls for approximately $70 billion in expenditures for the current fiscal year, which is well above the $32 billion in operating cash flow Oracle generated during the current fiscal year.

At the same time, Oracle slightly raised its full-year adjusted earnings per share forecast from $8.05 to $8.10, slightly above analysts 'expectations of $8.07, and maintained its revenue target at $90 billion or above. Notably, a single five-year,$300 billion contract to supply services to OpenAI accounted for a large share of the backlog of orders.