Oracle Corp 2027 Q1 Earnings Call

Please go ahead, sir. Thank you, Miriam, and good afternoon, everyone, and welcome to Oracle's first quarter fiscal year 2027 earnings conference call.

On the call today are Chief Executive Officer Mike Sicilia, Chief Executive Officer Clay Magouyrk, and Chief Financial Officer Hilary Maxson. A copy of the press release, including financial results, tables, and supplemental financial metrics and guidance is now available on our investor relations website. Also available on our website is the slide deck that will be used in this call and a GAAP to non-GAAP reconciliation. As a reminder, today's discussion will include forward-looking statements, and we will discuss some important factors relating to our business. These forward-looking statements are also subject to risks and uncertainties that may cause actual results to differ materially from the statements being made today.

As a result, we caution you from placing undue reliance on these forward-looking statements, and we encourage you to review our most recent reports, including our 10-K and 10-Q, and any applicable amendments. Finally, we are not obligating ourselves to revise our results or these forward-looking statements in light of new information or future events. Before taking questions, we will begin with a few prepared remarks. With that, I will turn the call over to Hilary.

Thanks, Ken. Hi, everyone. Great to be here with you all today. Like Ken said, you can follow along with our remarks in the earnings slide deck on our website and via the webcast. If I had to describe this quarter in one word, I think it would be acceleration. As we are seeing an acceleration in execution across the company, translating into our top and bottom line results. Q1 was another record quarter, driven by strength in both our cloud infrastructure and cloud apps businesses. Total revenue was a record $19.3 billion, up 30% year-over-year in U.S. dollars. For the first time, Q1 total revenue grew sequentially, an important sign of our continued progress in building scaled infrastructure. Historically, a record Q4 was followed by a lighter Q1.

But as we accelerate across the full technology stack, from infrastructure to database to software, that is no longer the case. Cloud infrastructure revenue for Q1 was $7.4 billion, up 121%, reflecting strong execution as we brought record levels of new megawatt capacity online, supported by a continued strong demand environment for compute and our database services. Cloud apps were up 10% with Fusion and our industry apps tracking well above that, and Mike and Clay will give more details on those businesses in just a moment. Our non-GAAP operating income increased 31% in USD to $8.2 billion, driven by strong revenue progression boosted by operating leverage. Our gross margin did decline as expected, driven by impacts from ramping up our data centers and the acceleration of infrastructure revenue. However, this was offset in the quarter by lower operating costs and strong operating leverage tied to simplification and efficiency actions.

Net net, our operating margin remained around flat for the quarter at 42% on a non-GAAP basis. This all translated to a strong increase in our non-GAAP EPS of +30% in USD, reaching $1.92 for the quarter. The last point I will make on our financial highlights is that our remaining performance obligations, or RPO, increased $26 billion from Q4. There are two things happening here. First, we continued to grow our RPO during the quarter to support future revenues. The vast majority of those new contracts were via prepay or bring your own hardware or similar mechanic, so will not require incremental capital from Oracle. Also, that new RPO will not impact our CapEx or revenues until fiscal 2028 or beyond. Second, we started to see a strong conversion of our RPO into revenues this quarter, driving our cloud infrastructure results.

We have added a few slides here where you can see that strong inflection point in our RPO converting into revenues and operating profits. First, in cloud infrastructure revenues, I already mentioned the +121% growth for this quarter, and that is after a Q4 of +93%. We would expect acceleration to continue in the remainder of fiscal 2027 as we convert more RPO into revenues. We now expect around half of our RPO to convert into sales over the next 36 months. Next, not surprisingly, you can see the acceleration in our total company revenues, here shown on a trailing 12-month basis, driving growth in Q1 to five points higher than our Q4, as cloud infrastructure accelerates and becomes a larger and larger contributor. Lastly, our growth in operating income, also on a trailing 12-month basis, shows a similar strong acceleration from 16% to 21% between Q4 and Q1.

Now to our balance sheet and cash flows. We drove record cash flow from operations of $23 billion in Q1, again reflecting our strong execution against a backdrop of strong demand, as well as collection of customer prepayments. Our CapEx for the quarter was $28 billion, leading to negative free cash flow of $5 billion. Our net cash CapEx, so net of prepayments, was $18 billion for the quarter. To note, our CapEx will not be linear throughout the year. We continue to anticipate $90 billion-$95 billion in CapEx for the full year, with not more than $70 billion in net cash CapEx. Lastly, we are quite pleased to announce that we completed our previously disclosed $20 billion at-the-market equity issuance in entirety during the Q1.

With that, let me turn the call over to Mike and then Clay to get into more details on our cloud apps and infrastructure businesses.

Thanks, Hillary. I'll start with some additional color on the applications business. We continue to see the power of application suites in the minds of our customers. They are investing in trusted, complete solutions that now seamlessly blend agents and applications together to run their businesses. The introduction of AI is an accelerator, not a replacement, for packaged applications. As such, our decades of experience and expertise running business processes across every industry, in every geography, for organizations of any size, gives us the understanding of how to help them succeed. Before AI came along, application suites had already proven their effectiveness. Companies had been able to increase their profit margins because end-to-end automation with standardized and efficient business processes proved to be much more effective than one-off custom solutions.

But that did require organizations to follow workflows and processes as designed in the system, something that many struggle to achieve consistently across functions, teams, and regions. AI changes this dynamic. Rather than asking every employee to navigate and execute a process exactly as the system expects, AI agents can perform tasks using the organization's established workflows and business rules. Employees then shift to overseeing agents, resolving exceptions, and applying human judgment where it matters most. By combining applied AI with decades of sophisticated business rules, regulatory compliance, security models, data models, and customer configurations, we enable customers to continuously realize AI's value while keeping their data secure and their operational guardrails intact. This allows organizations to harness the power of our application suites more easily than ever before. We are incredibly confident in the potential for this new paradigm to deliver much more rapid ROI for our customers.

At AI World in October, we will unveil a new agentic AI accelerator poised to redefine how customers deploy Oracle applications faster, simpler, and at a dramatically lower cost. Working alongside Oracle and customer teams, AI agents will automate and orchestrate implementation at an unprecedented scale, compressing SaaS deployments from years to months, and months to weeks. It's really the power of these things together that reinforce my belief that the growth of our applications business is only going up from here. In Q1, we had a strong quarter in many of our SaaS offerings, driven by the demand environment that I just described. In total, our SaaS business grew 10%, with Fusion growing at 14%. Our Oracle Health business continued to accelerate, and although we don't specifically call it out, our industry applications grew at greater than 20% in Q1.

As I mentioned last quarter, NetSuite saw some slower decision cycles last fiscal year, and therefore, the growth is a little lower than the rest, but we have an exciting new product generally available that I will speak about in just a bit. Now, a few customer call-outs from a much longer list in the quarter. Uber Technologies, Stanford University, and Mitsubishi UFJ Bank in Japan all went live and/or accelerated their usage of Fusion. Pye-Barker Fire & Safety chose Oracle's complete application suite from industry apps to Fusion, including Fusion Agentic Applications. Johnson Controls, the Saudi National Bank, GuideWell Mutual Holding Corporation, a health solutions company serving more than 45 million people, and PETRONAS, Malaysia's national energy company, each added Fusion Agentic Applications this quarter to drive better outcomes. Let me share just a few stats around our embedded AI usage and progress in the quarter.