Oracle's AI bet pays off as cloud momentum helps drive a rosier forecast

By Hannah Pedone

The company saw its backlog grow even more in the latest quarter

Oracle posted its August-quarter earnings on Thursday afternoon.

Oracle lived up to high expectations on Thursday as the cloud and software giant tweaked its forecasts higher and sent an upbeat signal about future business.

The company adjusted its revenue forecast to call for "at least $90 billion," whereas the previous outlook was for $90 billion in revenue. Oracle also raised its forecast for adjusted EPS to $8.10, from a previous forecast of $8.05. Both targets are for its 2027 fiscal year, which ends in May.

Oracle impressed Wall Street with its remaining performance obligations, or the value of signed contracts not yet converted to revenue. The company reported total RPOs of $664 billion, above the $618 billion that analysts were anticipating and up 4% relative to the May quarter. Oracle attributed the growth in RPOs, which can be seen as a proxy for its backlog, to the fact that customer demand for the company's AI cloud training and inferencing services continues to grow faster than Oracle can meet it.

The company's stock (ORCL) climbed 4% in Thursday's after-hours action.

Oracle is spending up to support its business; for the August quarter, it reported $28.5 billion in capital expenditures, or money put toward things like data centers and hardware. That's well above the $19.23 billion that analysts were modeling.

Capital spending has been top of mind for Oracle investors as the company has taken on debt to help finance its artificial-intelligence buildout.

Co-CEO Clay Magouyrk said on Oracle's earnings call that the company is constantly finding "interesting ways to fund the business," beyond spending its own capital.

"We've invested very heavily in relationships with different suppliers and vendors, [and] invented new business models including bring-your-own-hardware, all of which have different ways of spreading out that capital," he said, referring to Oracle's model of allowing customers to put their own hardware inside its data centers.

Capital doesn't all have to come from Oracle and isn't "a limitation to the growth of our business," according to Magouyrk.

Oracle's revenue for the August quarter rose 30% to $19.3 billion, which the company attributed to its infrastructure business and trends like increased data-center capacity. That came in above the $19.14 billion that analysts tracked by FactSet were expecting.

Some analysts had predicted that Oracle's cloud segment, Oracle Cloud Infrastructure, would benefit from an increasingly competitive pricing environment due to high demand for computing power. For the August quarter, Oracle Cloud Infrastructure posted 62% growth, generating $11.6 billion in revenue from the segment. Analysts were expecting $11.5 billion in OCI revenue for the quarter.

The company also reported August-quarter adjusted earnings per share of $1.92, up 30% from a year before. Analysts were expecting $1.74 in EPS.

For the November quarter, Oracle expects revenue to grow between 30% and 34% from the prior-year period, while analysts tracked by FactSet were expecting 31.9% growth on average. The company also anticipates $1.85 and $1.93 in adjusted earnings per share, while the FactSet consensus called for $1.89.

See also: Building U.S. data centers is getting so expensive that AI companies are moving overseas

Co-CEO Mike Sicilia lauded Oracle's AI advances on the earnings call.

"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," he said.

-Hannah Pedone

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09-10-26 2019ET