Oracle's performance was below expectations, with capital expenditures approximately $15 billion higher than anticipated, plunging over 10% in after-hours trading | Earnings Report Insights

Oracle announced its second-quarter earnings after the market on Wednesday, showing that the company's revenue and cloud business fell short of analyst expectations, with a quarterly free cash flow (FCF) of -$10 billion. It is expected that annual capital expenditures will exceed previous estimates by about $15 billion. The company's stock price plummeted more than 10% in after-hours trading.

Here are the key points from Oracle's second-quarter financial report:

Key Financial Data:

Remaining Performance Obligations: Oracle's remaining performance obligations for the second quarter increased by 438% year-over-year to $523 billion, exceeding the average analyst expectation of $519 billion.

Revenue: Oracle's total revenue for the second quarter grew by 14% year-over-year in USD and by 13% year-over-year at constant currency, reaching $16.1 billion, which was below the analyst expectation of $16.21 billion.

Operating Income: Oracle's GAAP operating income for the second quarter was $4.7 billion, and non-GAAP operating income was $6.7 billion, growing by 10% year-over-year in USD and by 8% year-over-year at constant currency.

Net Income: Oracle's GAAP net income for the second quarter was $6.1 billion. Non-GAAP net income was $6.6 billion, growing by 57% year-over-year in USD and by 54% year-over-year at constant currency.

Earnings Per Share: Oracle's GAAP earnings per share for the second quarter was $2.10, growing by 91% year-over-year in USD and by 86% year-over-year at constant currency. Non-GAAP earnings per share was $2.26, growing by 54% year-over-year in USD and by 51% year-over-year at constant currency.

Free Cash Flow: Oracle's free cash flow (FCF) for the second quarter was -$10 billion.

Cloud Business Data:

Cloud Business: Oracle's cloud business revenue (IaaS plus SaaS) for the second quarter was $8 billion, growing by 34% year-over-year in USD and by 33% year-over-year at constant currency, which was below the analyst expectation of $8.04 billion.

• Cloud Infrastructure: The second quarter cloud infrastructure (IaaS) revenue was $4.1 billion, growing by 68% year-over-year in USD and by 66% year-over-year at constant currency, which was below analyst expectations.
• Cloud Applications: The second quarter cloud applications (SaaS) revenue was $3.9 billion, growing by 11% year-over-year in USD and by 11% year-over-year at constant currency; Fusion Cloud ERP (SaaS) revenue was $1.1 billion, growing by 18% year-over-year in USD and by 17% year-over-year at constant currency; NetSuite Cloud ERP (SaaS) revenue was $1 billion, growing by 13% year-over-year in USD and by 13% year-over-year at constant currency.

Due to the disappointing performance, Oracle's stock price fell more than 10% in after-hours trading. Since September 10, Oracle's stock price has cumulatively dropped by about one-third. At that time, investor enthusiasm for its cloud business drove the company's stock price to an all-time high

Doubts About Achieving Revenue Explosion

Oracle started with database software and has recently made progress in the fiercely competitive cloud computing market. The company is building data centers on a large scale to provide computing power support for technology companies such as OpenAI.

In a statement released on Wednesday, Oracle announced that it has secured new cloud computing commitments from Meta Platforms, NVIDIA, and other companies. The "Remaining Performance Obligation" (RPO), which measures order size, surged to $523 billion in the quarter, more than five times year-on-year, while analysts had an average expectation of $519 billion.

However, Wall Street remains skeptical about the costs and timelines required to build AI infrastructure on such a large scale, with investors pressuring Oracle to prove its ability to achieve the previously expected revenue explosion through large-scale construction of AI data centers.

In September, Oracle announced that its backlog had surged to $455 billion, a news that had driven the stock price up significantly and briefly made co-founder Larry Ellison the richest person in the world. However, concerns began to arise about the level of risk Oracle was taking on during its expansion, leading to a continuous decline in stock price.

RBC Capital Markets analyst Rishi Jaluria stated:

"Ultimately, the question is, 'How will Oracle raise this funding?' Building a backlog is one thing, but whether it can truly convert these orders into revenue will reflect the company's ability to meet demand."

Massive Borrowing, Increasing Annual Capital Expenditure by $15 Billion

Oracle has taken on 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, bringing its total outstanding debt to over $100 billion, making it the largest in terms of debt among all large 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 by 2028, reaching approximately $300 billion.

Emarketer analyst Jacob Bourne stated:

"Against the backdrop of uncertainty in AI spending prospects, Oracle is facing increasing scrutiny due to its debt-driven data center expansion and customer concentration risks. This revenue miss may exacerbate already cautious investor concerns about its collaboration with OpenAI and aggressive AI spending strategy."

Media reports indicate that investors hope to see Oracle quickly convert the increased infrastructure spending into revenue, as previously promised. Capital expenditure for data center investments in the quarter was approximately $12 billion, up from $8.5 billion in the previous quarter. Analysts had previously expected capital expenditure for the quarter to be $8.25 billion Oracle executives stated during the earnings call that the company currently expects capital expenditures to reach approximately $50 billion in the fiscal year ending November 2026, an increase of $15 billion from the expectations given in September.

Oracle Chief Financial Officer Doug Kehring said on the call:

“The vast majority of our capital expenditures are used for data center equipment that directly generates revenue, rather than for land, buildings, or power facilities, which are generally addressed through leasing. Oracle does not need to pay for these leases until the data centers and supporting utilities are delivered to us.”

Kehring also confirmed that the company's annual revenue will reach $67 billion, reiterating the performance guidance Oracle provided in October.

He added:

“As a fundamental principle, we expect and are committed to maintaining an investment-grade debt rating.”

Additionally, Oracle expects third-quarter revenue 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 the "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 clients, excluding OpenAI.

Oracle executives indicated that even if the business from OpenAI does not fully materialize, the computing power being built by the company will be supported by demand from other clients.

This year, Oracle sold its stake in semiconductor company Ampere Computing. In a statement accompanying the earnings release, Ellison stated that the company will adhere to a "chip neutrality" strategy.

He noted that Oracle will continue to procure chips from NVIDIA, but “we must be prepared to deploy any chips that customers wish to use. Over the next few years, AI technology will undergo many changes, and we must remain flexible to respond to these changes.”

Evercore ISI analyst Kirk Materne wrote in a report prior to the earnings release that some recent negative sentiment from investors stems from deepening skepticism about the business prospects of OpenAI. OpenAI is facing more intense competition from companies like Google under Alphabet. He added that investors hope Oracle's management can explain how the company will adjust its spending plans if demand from OpenAI changes