Oracle Corp (ORCL) — Q2 2025 Earnings Call Transcript

Thank you for your patience, and welcome to the Oracle Corporation Second Quarter Fiscal Year 2025 Earnings Conference Call. I would like to now hand it over to Ken Bond, Head of Investor Relations. Please proceed. Thank you, Rob, and good afternoon, everyone, and welcome to Oracle's second quarter fiscal year 2025 earnings conference call. A copy of the press release and financial tables, which includes a GAAP to non-GAAP reconciliation and other supplemental financial information can be viewed and downloaded from our Investor Relations website. Additionally, a list of many customers who purchased Oracle Cloud Services or went live on Oracle Cloud recently will be available from our Investor Relations website as well. On the call today are Chairman and Chief Technology Officer, Larry Ellison; and Chief Executive Officer, Safra Catz. As a reminder, today's discussion will include forward-looking statements, including predictions, expectations, estimates, or other information that might be considered forward-looking. Throughout today's discussion, we will present some important factors relating to our business, which may potentially affect these forward-looking statements. And these forward-looking statements are also subject to risks and uncertainties that may cause actual results to differ materially from 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 for a complete discussion of these factors and other risks that may affect our future results or the market price of our stock. And 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'll begin with a few prepared remarks. And with that, I'd like to turn the call over to Safra.

Thanks, Ken, and good afternoon, everyone. Q2 was another excellent quarter with total revenue at the high end of my constant currency guidance, and EPS was actually $0.01 above the high end. These results are being driven by the fact that our largest revenue component, cloud services and license support, now represents 77% of total revenue and is also our fastest-growing line item, which in turn is driving the acceleration of overall revenue growth. We expect cloud revenue to reach $25 billion this fiscal year. This is happening for several reasons. First, our cloud is faster and less expensive than other clouds. We remain the preferred cloud for AI workloads as well as for non-GPU cloud infrastructure services. In addition, our ability to deploy our cloud in many sizes gives our customers flexibility, and our multi-cloud agreements with Microsoft, Google, and AWS provide customers more choice in how they can migrate their Oracle databases to the cloud. And our strategic SaaS applications continue to grow rapidly. And we are also seeing more of our industry-based cloud applications come online, which immediately contribute to revenue growth. You can see all of this in the momentum in the acceleration of our cloud growth and the 50% growth of our $97 billion RPO number, remaining performance obligation. And today, we're telling you again that revenue growth will accelerate further in the coming quarters. Turning to Q2, and I want to remind you that our quarter ended on Saturday a week ago, and here we are announcing our results, and that's only possible because we use Oracle Fusion. Now as for the numbers, we saw all segments exceeding our internal forecast. Now as the dollar strengthened in the quarter, the 1% currency benefit for total revenue and the $0.02 to $0.03 benefit for EPS that were present in my August guidance retreated with total revenue and EPS in Q2 essentially unaffected by currency movement. As usual, as I go over things today, I'll be discussing our financials using constant currency growth rate as this is how we manage the business. So here it goes. Total cloud revenue, that's SaaS and IaaS, was up 24% at $5.9 billion with SaaS revenue of $3.5 billion, up 10%, and IaaS revenue of $2.4 billion, up 52%, on top of the 50% growth reported last year. As a reminder, we exited the advertising business last quarter, which had the effect of lowering the total cloud revenue growth by 2% this quarter. Total cloud services and license support for the quarter was $10.8 billion, up 12%, driven again by OCI, our strategic cloud application, and autonomous database. Infrastructure subscription revenues, which includes license support were $6 billion, up 17%. Record-level AI demand drove Oracle Cloud Infrastructure revenue up 52%. But excluding legacy hosting infrastructure, cloud services revenue was up 55%. Our infrastructure cloud services now have an annualized revenue of $9.7 billion. OCI consumption revenue was up 58% as demand continues to outstrip supply. Growth in the AI segment of our infrastructure business was extraordinary. GPU consumption was up 336% in the quarter. And we delivered the world's largest and fastest AI supercomputer, scaling up to 65,000 NVIDIA H200 GPUs. Cloud database services, which were up 28% and now have an annualized revenue of $2.2 billion. As on-premise databases migrate to the cloud on OCI, either directly or through our database-at-cloud services with Azure, Google, and AWS, we expect the cloud database revenues collectively will be the third leg of revenue growth alongside OCI and strategic SaaS. We are currently live in 17 cloud regions with database-at-cloud services and have another 35 planned with Azure, Google, and AWS. Database subscription services, which includes database license support, were up 5%. Application subscription revenue, which includes product support, were $4.8 billion and up 7%. Our strategic back-office SaaS applications now have annualized revenue of $8.4 billion and were up 18%. Software license revenues were up 3% to $1.2 billion, including Java, which saw excellent growth. So, all in, total revenues for the quarter were $14.1 billion, up 9% from last year. Now shifting to gross profit and operating income. The gross profit dollars of cloud services and license support grew 9% in Q2. As our cloud businesses continue to scale, the gross margins of both cloud applications and cloud infrastructure have each been trending higher. We continue to display expense discipline, which, of course, we're known for, especially with R&D, sales and marketing, and G&A expenses, which collectively continue to grow slower than revenue, a trend that I expect to continue. The Q2 operating income grew 10% and the operating margin was 43%, up 60 basis points from last year. The non-GAAP tax rate for the quarter was actually 20.1%, which is higher than my 19% guidance. Even as the higher tax rate lowered EPS by $0.02, we still hit the high end of my constant currency guidance. Actually, we did better. The non-GAAP EPS was $1.47 in U.S. dollars, up 10% in USD and 10% in constant currency. The GAAP EPS was $1.10 in USD, and that's up 24% in USD and 23% in constant currency. At quarter end, we had $11.3 billion in cash and marketable securities. The short-term deferred revenue balance was $9.4 billion, up 8%. With CapEx at $4 billion for the quarter, free cash flow was negative $2.7 billion and operating cash flow was positive $1.3 billion. Given the demand that you see in our RPO numbers and the additional demand we see in our pipeline, I expect fiscal year 2025 CapEx will be double what it was in fiscal year FY '24. As always, we remain careful to pace and align our CapEx investments appropriately and in line with booking trends. On a trailing 12-month basis, operating cash flow was up 19% at $20.3 billion and free cash flow was $9.5 billion. Our remaining performance obligation or RPO, is now at $97.3 billion, up 50% in constant currency and reflects the growing trend of customers wanting larger and longer contracts as they see firsthand how Oracle Cloud Services are benefiting their businesses. Further, our cloud RPO grew nearly 80% and now represents nearly three-fourths of total RPO. Approximately 39% of the total RPO is expected to be recognized as revenue over the next 12 months, and we continue to see the growth of current RPO accelerate. We have now about 98 cloud regions live and many, many more to follow. That we have more cloud regions than any of the other hyperscalers reflects the strategic advantage of our Gen 2 architecture. We can start a new cloud region with a handful of racks and then scale up with customer demand. Additionally, our data centers are highly automated and identical in features and function varying only in scale. This size and flexibility and deployment optionality of our cloud regions continue to be a significant advantage for us. As we've said before, we're committed to returning value to our shareholders through technical innovation, acquisitions, stock repurchases, prudent use of debt, and a dividend. This quarter, we repurchased nearly 1 million shares for a total of $150 million. In addition, we paid out dividends of $4.4 billion over the last 12 months. And the Board of Directors again declared a quarterly dividend of $0.40 per share. Before I dive into specific Q3 guidance, I'd like to share some overarching thoughts about the financial benefits I expect we will see over the coming quarters and years. To start, we continue to see excellent demand for our cloud services, which you see in our RPO growth. And while this growth is stellar, our pipeline is actually growing even faster, and our win rates are growing higher with the recent win at Meta being a prime example of why we expect that our RPO balance will climb again in Q3. Meta was not booked in the Q2 quarter, only in Q3. In fiscal year 2024, we signed some big deals and many have begun to generate revenue. We expect that those will continue to ramp higher in the second half and be a key contributor to revenue growth acceleration this year and next. For fiscal year 2025, we remain very confident and committed to full year total revenue growth growing double-digit and full year total Cloud Infrastructure growing faster than the 50% reported last year. Okay. Let me now turn to guidance, which I'll review on a non-GAAP basis. In terms of currency, we've seen a dramatic shift due to significant strengthening of the U.S. dollar. To put this in perspective, Q2, we expected currency to have a $0.03 positive effect on EPS. For Q3, assuming exchange rates remain the same as they are now, currency should have a $0.03 negative effect on EPS and a 2% negative effect on revenue. However, as the dollar strengthened, it may not hold out the whole quarter and may be different. All right, total revenue are expected to grow from 9% to 11% in constant currency and are expected to grow from 7% to 9% in USD at today's exchange rate. Total cloud revenue is expected to grow from 25% to 27% in constant currency and is expected to grow from 23% to 25% in USD. Non-GAAP EPS is expected to grow between 7% to 9% and be between $1.50 and $1.54 in constant currency. Non-GAAP EPS is expected to grow between 4% to 6% and be between $1.47 and $1.41 in USD. I should mention, that my Q3 EPS guidance is negatively impacted by $0.05 due to an investment loss in another company that we are a partial owner of. Lastly, my EPS guidance for Q3 assumes base tax rate of 19%. However, like in Q2, one-time tax events and other things can cause actual tax rates to vary. And with that, I'll turn it over to Larry for his comments.

Thank you, Safra. Oracle Cloud Infrastructure trains several of the world's most important generative AI models. Our major AI customers include OpenAI, xAI, Nvidia, Cohere, and most recently, Meta with their large-scale Llama models. Oracle continues to win large AI training workloads because we're faster and less expensive than the other infrastructure clouds. And we just extended our AI performance advantage by delivering the largest and fastest AI supercomputer in the world, scaling up to 65,000 Nvidia H200 GPUs. The Oracle Cloud trains dozens of AI models and embeds hundreds of AI agents in cloud applications. Oracle's AI agents automate drug design, image and genomic analysis for cancer diagnostics, audio updates to electronic health records for patient care, satellite image analysis to predict and improve agricultural output, fraud and money laundering detection, dual-factor biometric computer log-ins, and real-time video weapons detection in schools. Furthermore, the vector capabilities of the new AI version of our database, Oracle 23ai, enables our customers to easily use their existing data in their existing databases to augment and specialize the training of industry-standard generative AI models like ChatGPT, Grok, and Llama. The Oracle Cloud and the Oracle 23ai vector database makes it easy for our customers to build their own AI agents and use their own data to reap the benefits of the AI revolution. Oracle is training AI models and developing AI agents that will improve the rate of scientific discovery and economic development and corporate growth throughout the world. The scale of this opportunity is unimaginable. As Safra said, this fiscal year, total Oracle Cloud revenue should top $25 billion. And this is just the beginning of the beginning. Back to you.

Thank you, Larry. Rob, if you could please poll the audience for questions.

Thank you very much for taking my question and congratulations on the quarter. I'd like to gain better insight into OCI. OCI is designed differently from its larger peers, deliverable in just 10 and shortly 3 racks of servers. Can you explain how the architectural difference impacts how you build and deliver OCI racks and how it will impact how many data center regions you could have compared to your peers? And then how might this affect your CapEx growth over the next five years?

All our data centers utilize the same type of racks, making them completely modular. To establish a region, we require six racks, which is the smallest configuration we can create. Our racks start at under 50 kilowatts, while our basic smaller data centers operate at 50 kilowatts. The largest data center we are constructing has a capacity of 1.6 gigawatts. This represents a broad range, from 50 megawatts to 1.6 gigawatts. The racks are largely uniform, facilitating easy and cost-effective manufacturing, as our inventory is streamlined due to this standardization. Every cloud region provides all our services, unlike some competitors that distribute their services unevenly across different regions. This uniformity allows for easier automation as all our racks and services are identical. We have a single suite of automation tools that functions across all 100 of our current regions. Thanks to the high level of automation, we can manage not just a handful of regions but potentially hundreds or even thousands, given that individual customers can acquire entire Oracle regions that operate like a dedicated data center, even though they are full Oracle Cloud regions. We are witnessing strong sales in this area. This approach enables us to tap into markets that our competitors cannot access, offering us a substantial edge through standardization, automation, and versatility across different data center sizes.

On the CapEx side, we have the ability to start with smaller footprints, unlike our competitors who need to launch with large ones. This allows us to tailor our capital expenditure to our revenue since we can begin small and scale up as demand arises. This approach minimizes the time spent on unutilized centers, contributing to the profitability of our cloud offerings.

It's extremely helpful. I really do appreciate it. Thank you.

Thanks for taking my question. It's impressive to see OCI growth 52% and even database-as-a-service up 28%. So as you execute on your multi-cloud strategy, can you provide some color on the database migration to cloud or even database-as-a-service traction? And what are you hearing from customers as they prepare to migrate on-prem database to cloud? And how should we think about the contribution to revenue going forward?

Well…

You go ahead, Larry, and then I'll finish. You go ahead.

Let me begin by saying that our cloud database services now have an annualized revenue of $2.2 billion, which represents a 28% growth. This growth is primarily from Oracle Cloud Infrastructure, and it doesn't include databases from AWS, Azure, or Google. We've also seen our run rate climb from zero to over 100 million, and it is expected to reach hundreds of millions in the future. We are just at the beginning of opening cloud regions, with 17 already operational and many more on the way. The migration of databases to the cloud is still in its early stages. Additionally, our Cloud@Customer and Alloy partners are playing a significant role in this growth. There's a substantial pipeline of customers looking to migrate their databases to the cloud, many of whom prefer dedicated regions for regulatory or sovereignty reasons—this is an offering unique to us, unlike any of our competitors. Yes, Microsoft is the only partner with a contract older than a year. Google is more recent, and AWS is even newer than Google. We are at the very start of multi-cloud. As Safra mentioned, it is expected to exceed $100 million in its first year. The first year begins with AWS, as we now have all three partners. It will develop into a multibillion-dollar business, combining AWS, Google, Azure, and various Cloud@Customer and dedicated regions. We anticipate having hundreds of these regions. There is strong demand from large banks and telecommunications companies that want us to build multiple data centers within their dedicated facilities. They will operate the Oracle Cloud in these dedicated regions. Ultimately, we expect to have hundreds of these, and it is clear that this will grow into a substantial, rapidly expanding multibillion-dollar business for us.

That's great color. Thanks, Larry and Safra.

Ken, I think I misspoke. Could you actually say the line correctly that I was supposed to say about guidance?

Sure, absolutely. Non-GAAP EPS is expected to grow between 4% to 6% and be between $1.47 and $1.51 in U.S. dollars. Thank you.

Sorry, I don't know what I said exactly, but that is correct. Thanks.

Great. Thank you. And congrats on the continued acceleration at scale. Larry, as Oracle leads with larger and larger GPU clusters, there's healthy industry debate around scaling laws with Elon Musk allegedly pushing the envelope of what's possible. I'm curious to hear your perspective as to whether there's diminishing returns on the amount of compute thrown at model training and Oracle's ongoing leadership in AI infrastructure and GPU superclusters.

There are two key aspects to speeding up training. First, it's about building larger GPU clusters with faster GPUs. Second, Oracle is focusing on developing networks that can quickly transfer large amounts of data to those GPU clusters. As these clusters grow larger and faster, the network must be capable of handling the increased data flow efficiently. If the GPU clusters have to wait for data, it leads to inefficiency, especially if you’re paying for those minutes while the data is unavailable. This results in scaling, economic, and performance issues. Oracle sets itself apart in its data centers by heavily investing in network infrastructure, including switch software and various network hardware to expedite data transfer. We believe that as GPU clusters expand and improve, the key to maintaining performance will be the ability to move data quickly, and we're making significant investments in that area to retain our competitive edge. As our networks become faster, AI training will also accelerate. If no one enhances networking speeds, a bottleneck could occur, but we're actively working to prevent that from happening.

Thank you.

Thank you. Can I shift gears a bit and discuss the SaaS segment of the business? If you examine your growth rates, we're in a later stage of the cycle where typically there's less focus on back office systems. However, you are demonstrating solid growth figures and outpacing your competitors. Could you elaborate on what is contributing to this success? Thank you.

I actually disagree with the idea that businesses aren't paying attention to their back office systems. There is significant pressure for companies to enhance efficiency, especially given the intense competition across almost all industries currently. When companies evaluate our offerings, I'm constantly pointing out that it's only day nine since the end of our quarter, which includes three weekend days, highlighting how operational efficiency can be achieved. Many executives approach me, expressing the need to improve efficiencies while spending less. We see a substantial pipeline of customers who recognize that they can simplify and automate their operations to reduce costs, allowing for investment in differentiating factors. Additionally, there is strong interest in leveraging data for AI and our systems support this; we have numerous AI agents available to help companies operate more cost-effectively and serve their customers better. The interest in these solutions is considerable, and Oracle stands out in terms of the capability and data we can provide. This is genuinely an exciting period for both back office and front office systems, as our front office solutions also leverage many of our capabilities. Overall, it's a fantastic time, and while our booking trends haven’t yet reflected in revenues since we implement them first, we have noticed a significant increase in bookings, accelerating notably compared to last year.

Great. Thank you.

Yes, thanks very much, and congrats on the results. Safra, you talked a little bit about the pipeline strength at the end of your prepared comments. Can you just talk about your line of sight in terms of capacity coming online, so that you all can recognize some of the revenue that's associated with the demand that you're seeing specifically around on the OCI side? Thanks.

Yes, the second half of this year, which we're currently in, is going to see a significant amount of capacity become available that we've been anticipating and working on. We expect this will translate into increased revenues. Everything is accelerating further. Additionally, we anticipate our Remaining Performance Obligations (RPO) to start increasing from its current level, which is already up 50% year-over-year. We expect this number to make a significant jump in this quarter and towards the end of the year. While the capacity that is coming online for our customers will reduce some of our RPO, we also expect to secure several large contracts, which will contribute to a rise in our RPO as well.

Thank you. Safra, you've demonstrated that Oracle is focused on profitable business rather than unprofitable ventures. It's been some time since we've discussed this, but you mentioned earlier that OCI's gross margins have been consistently improving. Previously, you provided a number indicating that OCI's gross margins were in the low 30s. Can you provide an update on this, especially considering the significant growth you're experiencing?

We are continuing to see benefits in OCI, resulting in an improvement in our gross margin percentage. Some may believe that our GPU or OCI base infrastructure business is not as profitable, but our margins in that area keep getting better due to several factors Larry highlighted. For instance, our cloud operations are entirely automated and well-structured. As a core software company, we constantly optimize our software capabilities, providing us significant leverage. Our operating margins in OCI have also improved, and overall, everything is getting better with scale even while we are investing. It just keeps getting better.

That's great to hear and we continue to watch closely. So thank you.

Thank you, John. A telephonic replay of this conference call will be available for 24 hours on our Investor Relations website. Thank you for joining us on the call today. With that, I'll turn the call back to Rob for closing.