Oracle's mixed earnings fail to dispel AI fears, and the stock falls

By Christine Ji

While the company beat EPS estimates and increased its AI deal pipeline, concerns over its financing strategy remain

On Wednesday's earnings call, Oracle's management emphasized the company's commitment to retaining its investment-grade credit rating.

An upbeat second-quarter earnings report from Oracle wasn't enough to shake off the artificial-intelligence jitters that have crept into the stock.

Oracle (ORCL) cleared the bar set by Wall Street on the most anticipated metric: remaining performance obligations, or the value of future contracts that have yet to be recognized as revenue. The software and cloud-computing company's RPO was $523 billion for the December quarter, blowing past FactSet analyst consensus estimates of $502 billion and marking a 438% year-over-year increase in U.S. dollars.

Contributing to the growth were new contracts from Meta Platforms (META) and Nvidia (NVDA), Oracle said in a statement, indicating that the company is diversifying away from key customer OpenAI.

Although Oracle management emphasized the company's financial health on its earnings call Wednesday afternoon, shares sank 11.6% in after-hours trading, as concerns about its financing strategy persisted. To turn its RPO into revenue, the company will need to spend billions of dollars in the coming years building AI infrastructure, a move that analysts anticipate will result in a significant debt load.

CFO Doug Kehring said on the call that Oracle has access to public and private debt-financing options as well as leasing, allowing the company to "borrow substantially less than most people are modeling." Customers can also bring their own chips, reducing the amount of capital expenditures on Oracle's end, he noted, adding that Oracle is "committed to maintaining our investment-grade debt rating."

Oracle reported revenue of $16.1 billion for the December quarter, falling slightly short of consensus analyst estimates for $16.2 billion. That marks a 13% increase year over year, or 14% in U.S. dollars. Total cloud revenue rose 33% in constant currency, to $8 billion.

On the earnings call, Kehring shared that total cloud revenue is expected to grow from 37% to 41% in constant currency, or from 40% to 44% in U.S. dollars, for the current quarter. Total revenues are expected to grow from 16% to 18% in constant currency, or 19% to 21% in U.S. dollars.

Adjusted earnings came out to $2.26 a share, soaring past estimates for $1.64. The boost was primarily due to the closing of Oracle's sale of its interest in chip-design company Ampere Computing to SoftBank Group (JP:9984) (SFTBY), which resulted in a $2.7 billion pretax gain, according to the company's press release.

Oracle wowed investors last quarter when it reported $455 billion in contracted AI revenue, and its stock enjoyed a record-breaking surge to $328.33 a share in September. However, Oracle's relationship to OpenAI and its funding strategy have dampened investor enthusiasm. The concern has been especially apparent in Oracle's credit default swaps, as the cost of insurance on Oracle's bonds has sharply diverged from the broader investment-grade Credit Default Swap Index in recent weeks.

Read: Oracle is the canary in the coal mine for Big Tech's debt-fueled AI spending spree

Contributing further to the depressed investor sentiment could be Oracle's capital expenditures for the second quarter, which came out to $12 billion - rising from $8.5 billion in the previous quarter and exceeding analyst expectations for $8.4 billion. On the earnings call, management raised capex projections for fiscal 2026 by $15 billion, to $50 billion.

-Christine Ji

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12-10-25 2022ET