Oracle Corp (ORCL) — Q3 2025 Earnings Call Transcript

Thank you, Abby. Good afternoon, everyone, and welcome to Oracle's third 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. 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. 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 against 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 risk 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 any questions, we will 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. As you can see, this was our strongest booking quarter ever by a huge margin as we added $48 billion to our backlog. Our RPO balance is now $130 billion, up from $97 billion last quarter and up from $80 billion last year. That's a growth of 63% year-over-year, and this does not include any contracts with Project Stargate. The RPO figure is the leading indicator of demand for our cloud services, while our live data center count and power capacity is the leading indicator of the conversion of RPO to revenue. Speaking of data centers, we marked a milestone this quarter as we crossed into triple digits with our 101st cloud region coming online. It's just a matter of time before we have more cloud regions than all of our competitors combined, reflecting the strategic advantage of our Gen 2 architecture, which offers our customers the most flexibility. From a delivery standpoint, the growth of our power capacity under contract is even higher than the growth in the number of data centers, and we expect that our available power capacity will double this calendar year and triple by the end of next fiscal year. As we bring more capacity online, our revenues will clearly accelerate. What we are seeing in the market is that we are the destination of choice for both AI training and inferencing. This is due to the fact that our Gen 2 cloud is faster and therefore, cheaper than our competitors and also due to our ultra high-speed networking engineering that we started decades ago and that is now highly relevant for AI. Taken together we have numerous structural engineering advantages that distinguish OCI from our competitors. And as Larry will discuss in more detail, Beyond that, because of the momentum OCI is enjoying, customers are looking at us for many more workloads. Now shifting to Q3 results. I'll discuss our financials using constant currency growth rate, as this is how we manage the business. Total cloud revenue for SaaS and IaaS increased by 25% to $6.2 billion, with SaaS revenue of $3.6 billion in the quarter, up 10%, and IaaS revenue of $2.7 billion, up 51% on top of the 49% growth reported last year. It's important to note that the exit of our advertising business last year lowered total cloud revenue growth by 2% this quarter. Total cloud services and license support revenue for the quarter was $11 billion, up 12%, driven by OCI, our strategic cloud applications, and cloud database services. Infrastructure subscription revenues, which include license support, reached $6.2 billion, up 18%. Record-level AI demand drove Oracle Cloud Infrastructure revenue up 51% in Q3, and grew by 54% when excluding our legacy hosting, both significantly outpacing our hyperscaler competitors. Our infrastructure cloud services now have an annualized revenue of $10.6 billion. OCI consumption revenue rose by 57%, as demand continues to exceed supply. We anticipate that the component delays that have hindered cloud capacity expansion this year will ease in Q1 FY '26. Growth in the AI segment of our infrastructure business was remarkable, with GPU consumption revenue now nearly 3.5 times last year's figure. Cloud database services, which grew by 28%, now have an annualized revenue of $2.3 billion, with autonomous database consumption revenue up 42% following last year's 32% growth. We are seeing acceleration as we grow larger. As on-premise databases transition to the cloud through various options, we expect cloud database revenues to be a key growth driver alongside OCI and strategic SaaS. We currently operate in 18 cloud regions with database services through our partners and plan to expand to another 40 with Azure, Google, and AWS. Database subscription revenues, including license support, increased by 6%. Application subscription revenues, which also include product support, were $4.8 billion, up 6%. Our strategic back-office SaaS applications have achieved an annualized revenue of $8.6 billion, up 8%. Software license revenues decreased by 8% to $1.1 billion. Overall, total revenues for the quarter reached $14.1 billion, up 8% from last year. Now turning to gross profit and operating income, the gross profit from cloud services and license support increased by 10% in Q3. We maintain focus on operating expense discipline, which continues to grow at a slower rate than revenue, a trend I expect will persist. Q3 operating income rose by 9%, and the operating margin was 44%, slightly up from last year. The non-GAAP tax rate for the quarter was 19.9%, higher than my 19% guidance, impacting EPS by $0.02. Additionally, the EPS currency headwind was $0.04 more than anticipated due to a strengthening currency. The non-GAAP EPS was $1.47, up 4% in USD and up 7% in constant currency. The GAAP EPS was $1.02, up 20% in USD and up 25% in constant currency. At the end of the quarter, we had $17.8 billion in cash and marketable securities. The short-term deferred revenue balance was $9 billion, up 3%, and operating cash flow for Q3 was $5.9 billion, slightly above our $5.9 billion in CapEx, as we front-loaded some purchases in anticipation of strong demand reflected in our RPO growth and pipeline. I expect fiscal year 2025 CapEx to be a little more than double last year's, around $16 billion. As always, we are careful to pace and align our CapEx investments with booking trends. On a trailing 12-month basis, operating cash flow rose by 14% to $20.7 billion, and free cash flow was $5.8 billion. As noted, remaining performance obligations or RPO stand at $130 billion, up 63% in constant currency, reflecting a trend of customers seeking larger and longer contracts, recognizing how Oracle Cloud services positively impact their businesses. Additionally, our cloud RPO grew over 90% and now constitutes more than 80% of total RPO, with approximately 31% expected to be recognized as revenue in the next 12 months. We remain committed to returning value to our shareholders through technical innovation, acquisitions, repurchases, prudent debt usage, and dividends. This quarter, we repurchased nearly 1 million shares for a total of $150 million, and over the last 10 years, we've reduced shares outstanding by more than a third at an average price of $54 per share. Furthermore, we've paid out dividends totaling $4.4 billion over the last 12 months, and the Board of Directors has increased the quarterly dividend by 25% from $0.40 to $0.50 per share. Before I move to Q4 guidance, I want to comment on the financial acceleration we expect in the coming years. We now have a clear trajectory for future revenue growth. We are confident that total cloud infrastructure revenue for fiscal year 2025 will grow faster than last year's 50%, with even greater growth anticipated for fiscal year 2026. Our confidence in achieving our $66 billion revenue target for FY '26 is stronger than ever, indicating around a 15% growth rate. More importantly, I expect that our fiscal year '27 growth rate will be around 20%, surpassing my previous guidance. Now, regarding my guidance for Q4, which I will present on a non-GAAP basis assuming current exchange rates remain stable. Currency fluctuations may negatively impact EPS by $0.01 to $0.02 and have a 1% negative effect on revenue. However, it's important to emphasize constant currency figures. Total revenues are projected to grow by 9% to 11% in constant currency and by 8% to 10% in USD at current exchange rates. Total cloud revenue is expected to grow by 24% to 28% in constant currency. Non-GAAP EPS is anticipated to grow between 0% to 2%, ranging from $1.62 to $1.66 in constant currency, while the USD projection for non-GAAP EPS is expected to fluctuate between negative 1% to positive 1%, ranging from $1.61 to $1.65. I should note that my Q4 EPS guidance is negatively impacted by $0.03 due to recognized losses from an investment in another company. Finally, my EPS guidance for Q4 is based on a tax rate of 19%. However, as observed this quarter, one-time tax events may cause actual rates to vary. Lastly, it’s noteworthy that we are reporting earnings just 10 days after the quarter's end, aided by our use of Fusion, allowing us to file our quarterly and annual financial statements faster than any other company in the S&P 500. Now, I will turn it over to Larry for his comments.

Thank you, Safra. Well, as Safra pointed out, some of our existing businesses, AI training and multi-cloud database are experiencing hyper growth. We are in the process of building a gigantic 64,000 GPU, liquid-cooled NVIDIA GB 200 cluster for AI training. Our multi-cloud business at Amazon, Google, and Microsoft grew 200% in the last three months alone. But in addition to these rapidly growing existing businesses, new customers and new businesses are migrating to the Oracle Cloud at an unprecedented rate. In Q3, we signed a multibillion-dollar contract with AMD to build a cluster of 30,000 of their latest MI355x GPUs, and all four of the leading cloud security companies: CrowdStrike, Cyber Reason, Newfold Digital, and Palo Alto, all decided to move to the Oracle Cloud. But perhaps most importantly, Oracle has developed a new product called the AI data platform that enables our huge installed base of database customers to use the latest AI models from OpenAI xAI and Meta to analyze all of the data they have stored in their millions of existing Oracle databases. By using Oracle version 23 AI's vector capabilities, customers can automatically put all of their existing data into the vector format that is understood by AI models. This allows those AI models to learn, understand, and analyze every aspect of your company or government agency, instantly unlocking the value in your data while keeping your data private and secure. This AI inferencing will be another great, large new business for Oracle. Back to you, Ken.

Thank you, Larry. Abby, please poll the audience for questions. Thank you.

Great. Thanks so much for taking the question. And congrats on just remarkable booking strength. Larry, I'm hoping you can expand more on Stargate because this is just a massive scale American first venture with Oracle joined by undisputed AI leaders like OpenAI and NVIDIA, and they chose you over several other choices in the market. What is Oracle's unique value add here? What can Oracle do that others can't? Thanks.

Well, I think it's actually very simple. The capability we have is to build these huge AI clusters with technology that actually runs faster and more economically than our competitors. So it really is a technology advantage we have over them. If you run faster and you pay by the hour, you cost less. So that technology advantage translates to an economic advantage, which allows us to win a lot of these huge deals. And it is not just the Stargate deal, which is in our future, by the way. We got to over $130 billion in RPO without any transactions from Stargate. So again, Stargate looks to be the biggest AI training project out there. We expect that will allow us to grow our RPO even higher in the coming quarters. And we do expect Stargate to be our first large Stargate contract fairly soon.

Great. Larry, if I could maybe just sneak in a very quick one for Safra. When Stargate does hit, as it is a related party, is there anything that you can share with us as to how we should expect it might flow through the financials? Thanks again.

Well, it won’t flow through us in any unique way. They will place contracts with us, and they'll come right through. So I'll be explaining it to you once it's fully laid out, but it's not going to make your work harder. We are going to be very, very clear on how the contracts come through us. It won't be as much of a change as you think; it's just going to be even larger numbers.

Well, thank you again.

Safra and Larry, congrats on a strong bookings quarter. I wanted to drill into the growth under current around OCI, especially in light of such a huge RPO number that didn't even include Stargate. In some quarters, we hear about particular demand for AI contracts; certainly seems to be a lot of favorable developments going on there. But other times, we hear about emerging adoption in multi-cloud and database on hyperscalers, and we can hear about strength in dedicated as well with sovereign clouds and alloy. I guess as you look at Q3 bookings and pipeline trends, can you give us a sense as to how demand is unfolding across those three different environments and how you feel about the growth durability and really the infrastructure capacity serviceability of each of these vectors.

Everything is progressing well across the board. In terms of multi-cloud, I shared some impressive numbers. Compared to last year, our revenue has increased more than tenfold since we began generating revenue. We've already got 18 live environments and anticipate 40 more coming online soon, which is fantastic. Our OCI public cloud is performing exceptionally well, and the cloud-to-customer initiative is also thriving. We're rolling out several components, including sovereign clouds and disconnected clouds, and we're beginning to see significant capacity being utilized. Bookings are strong and are converting into revenue. Overall, we're operating at full capacity. We welcome customers who approach us directly with their database needs, as well as those who come through our partners like Azure, AWS, and GCP. In either case, they receive the same outstanding service.

Customers can now access our database everywhere. They can install an Oracle Cloud region on their premises or get Oracle through Azure, Google, or AWS. Additionally, they receive excellent Oracle services from OCI. Our Oracle database is increasingly capable and stores a significant portion of the world's valuable data. It has the largest installed base of databases globally, with most still on-premises, but we are seeing a shift toward cloud migration. A major factor driving this migration is the autonomous version of the database and the AI data platform. This platform enables users to utilize their existing data with leading AI models like Grok, ChatGPT, and LLaMa, turning it into insights, actions, and agents while maintaining data privacy. This capability addresses a gap for companies and government agencies, which typically have valuable data not available on the Internet. Oracle Database 23 AI allows models to learn from your data, delivering insights and actions while keeping your information private without the need for external sharing.

Fantastic. Thank you.

Hi, thank you guys. And echoing the congratulations for a truly unbelievable bookings number. I guess maybe, Larry could you opine on the current kind of state of the AI training versus inferencing opportunity. You have potentially investors worried about diminishing returns to training. Even some of your hyperscaler peers seemingly walking back on some of their CapEx commitments. What are you seeing out there with respect to training versus inference, both in the incremental bookings that you're adding into the pipeline? And maybe just how Oracle is differentiated on the inferencing side versus both hyperscalers and Neo clubs, particularly with this AI data platform product that you just announced?

Our training business is expanding rapidly, as demonstrated by our RPO. However, it’s not solely AI training that has contributed to this growth; AI inferencing plays a crucial role as well. Consider the vast number of Oracle databases that contain data essential for training AI models. These models derive their usefulness from familiarity with specific data related to your products, customers, service requests, and financial details. Thus, it’s critical to provide this data to AI models within those databases. We are still at the beginning of this journey. On top of the Oracle databases, we have developed numerous agents integrated into our applications, enhancing and automating them. Customers also need to implement similar strategies when developing software within their organizations, including AI agents. To achieve this, they need to train AI models on their data housed in Oracle databases. We streamline this process: with the new version of Oracle Database 23, which features AI with vector capabilities, you can easily convert your data into a vector format recognized by AI models. This unique capability sets us apart. As a result, you can efficiently train AI models on your data for inferencing and for developing agents, all with Oracle Database. We believe that inferencing presents a more significant opportunity than AI training. There are millions of Oracle databases worldwide, and the data within them will be instrumental in training AI models and creating agents and applications. While we don’t have a handful of large contracts for training due to the limited number of organizations working on frontier models, we do have hundreds of thousands of customers who will utilize and train AI models on their private data, leading to the deployment of agents and applications. This represents a much larger market opportunity for us compared to AI training.

Super helpful. And maybe just Safra, how to think about RPO trends and trending over the course of the next few quarters in light of that?

I think there are going to be lumpiness as you can see, but we actually expect some extremely significant numbers coming within the next few months also. So there's just a lot of demand folks there is a lot of demand where people want to lock in and schedule into our cloud. So we're going to see increases in RPO. But remember, our remaining performance obligation, we also burned down some of it through the quarter as capacity goes online, but I expect that number to be extremely large. This is enormous, but I expect it actually to continue to be very large amazingly.

Thank you. You mentioned being operational in 33 cloud regions, with an additional 40 planned for Azure.

No, 18 multi-cloud.

I understand. I realize I was getting ahead of myself. I apologize for that. You mentioned that you have another 40 planned with Azure, AWS, and Google. This quarter, we observed a significant increase in discussions between partners and large enterprises regarding the Oracle database, regardless of the hyperscaler; these conversations seem to be happening on a large scale, although the deals are not finalized yet. One of the limiting factors in discussions with partners is that these global enterprises require a global solution. Regarding those 40 deployments, will they be implemented over the next year, or is there a different timeline for that?

We are not in full control of the timeline, but everyone is eager to expedite the process because the revenue flows through our partner or host, who then pays us. They are highly motivated to speed things up, as delays are holding up their revenue until they can deploy it. Progress has been swift and has recently accelerated. There is significant competition among the three major hyperscalers to secure these workloads before their rivals do. So, things are advancing rapidly. There is substantial demand, but we don’t always control the available capacity. However, they are very motivated to move forward, as when customers transition, they often bring a considerable amount of additional workload into their cloud, frequently directly into OCI as well. We are also competing as a fourth option at the same time. I don’t have the precise dates, but I believe someone in my organization does. We expect a lot more deployments shortly, and demand remains extremely high.

I believe I can assist with this. Every company needs a primary and a backup data center in North America, as well as a primary and a backup data center in Europe, usually in Western Europe. Additionally, many require primary and backup facilities in Asia. This totals six data centers. Once we establish a primary and backup setup in North America, Europe, and Asia for, let's say, Google, we'll be ready to proceed. Most obstacles will be cleared. However, we also need to focus on building relationships with Japanese national companies and multinationals. Furthermore, we must consider the Japanese domestic market, the German domestic market, and others. By the time we reach a target of 40, which is roughly 12 months from now, as Safra mentioned, we cannot control everything since AWS needs to supply the space because our OCI data centers are being integrated within AWS, Google, and Azure. Yet, we anticipate this will grow rapidly, and we believe we will fulfill most customer needs for primary and backup solutions worldwide, especially in the months ahead. After that, it will be about adding capacity in each country.

Thanks very much for taking the question. I'll add my congrats on the RPO and booking strength this quarter. Larry, you mentioned some of the agents you've been building out on top of your application platform earlier. I was just wondering, are you now starting to see the demand for those technologies or those functionality that agents are bringing starting to have an impact on your strategic SaaS business? And perhaps the pace of conversions from any legacy on-prem systems that still might be out there? Thanks.

Our primary advantage in the healthcare sector is the quality of our AI agents. We have numerous AI agents dedicated to healthcare. For instance, we record consultations between doctors and patients, capturing all prescriptions, orders, and notes automatically. Prior to the patient's meeting, we provide the doctor with a summary of the patient’s latest lab tests and vital signs. Once the doctor concludes the meeting and issues orders and prescriptions, we automatically update the electronic health records, alleviating significant work from the physician, as they no longer need to input this information manually. Our system interfaces primarily through voice, leveraging AI throughout. Additionally, we are developing another AI agent that aids hospitals in obtaining permission to prescribe costly treatments or perform surgeries, which typically requires prior authorization from insurance providers. This process is usually done manually via phone, involving the insurer analyzing the patient's electronic health records. Our AI agents interpret insurance policies and electronic health records to determine and automate authorization for reimbursable drugs and surgeries, transforming this process into an entirely electronic one. This innovation has the potential to save billions in healthcare costs and significantly influences hospitals' decisions to adopt our system over competing solutions. The financial impact stems from our ability to sell comprehensive healthcare systems that incorporate numerous AI agents, ultimately improving patient outcomes and reducing costs for governments and payers.

And the name applies to our Fusion applications which have a sense of embedded agents, whether it's in supply chain, financials, HCM. We have literally dozens of agents already embedded in our applications, unlike our competitors who are talking about it, we actually have them already built and deployed.

I can add one more point. Our applications will primarily be AI agents, and they will evolve into interconnected AI agents. Consequently, it will be challenging to distinguish how much revenue comes from AI agents compared to the rest of the applications. All of our applications are transitioning to become AI agents.

Safra, if I could just ask a really quick follow-up. Is this the tipping point for any customer that hasn't moved to the cloud to have to get there now to get this functionality? Talking to some partners, it feels like anybody that's been holding out is now ready to go because they can't get any of this functionality if they're still on-prem.

Yes. I mean this is the motivator, the ability to have your system do so much of your work. As I was signing off with my finance and audit committee and talking with my Chief Accounting Officer, they have the entire description of the balance sheet issue, all the different balance sheet parts all done because of our products. That is such a time saver and so much incredible productivity and insight that you're disadvantaged if you do not use this. And that's why I know every quarter, I mention again, we're announcing. Of course, it's Monday. I couldn't announce Sunday or a Saturday, or of course, Friday, something you do only if you have bad news. I mean, I had to announce the 10th. And imagine so much of the work that my teams do is enabled because of these advanced technologies. And it is your way to get there. Ultimately, everyone is going to come to it, and it should be motivating them because it is such a massive not only productivity improvement, and as a result, lower cost, but it also gives you incredible insight into your business. It’s really amazing.

Thank you very much for taking my question. And really, congratulations on how incredibly well this is being executed. We know Oracle spends less on CapEx per dollar of IaaS pass revenue than your larger hyperscale cloud provider peers. But how should we understand why CapEx is lower? And how should we think about the trajectory of CapEx given the strength of RPO and especially the strength of OCI and OCI AI? Thank you.

Sure, I can address that. We begin by building our data centers smaller than our competitors and then expand based on demand. Constructing these data centers can be very costly, particularly if they are not at least half full. Therefore, we prefer to start small and increase our capacity as needed, which enhances our utilization. Additionally, we have a high level of standardization and automation within our cloud, which improves our margins; although this won't be reflected in our CapEx, it will show up in our operating profit. Ultimately, the ability to start smaller and expand with demand influences our CapEx and overall margins, while our significant automation reduces labor costs significantly. More importantly, with reduced reliance on human labor, we experience fewer errors and disturbances, increasing our reliability and security within our data centers.

Thank you, Safra. Thank you, Larry. Thank you, Mark. A telephonic replay of this conference call will be available for 24 hours on our Investor Relations website. Thank you for joining us today. And with that, I'll now turn the call back to Abby for closing.