A quarter that grew and consumed at the same time
Oracle closed its first fiscal quarter with total revenue of 19.3 billion dollars, up 30 per cent, and cloud infrastructure revenue of 7.4 billion dollars, up 121 per cent. Remaining performance obligations, the measure of work already contracted and not yet booked as revenue, reached 664 billion dollars, 209 billion dollars more than a year earlier, after more than 30 billion dollars of new artificial-intelligence cloud contracts were signed in the three months. Cloud applications grew 10 per cent over the same period and software revenue fell 3 per cent, so almost all of the growth sits in the infrastructure line.[1]
The cash statement shows what that growth cost. Operating cash flow reached 23 billion dollars, up 184 per cent, capital expenditure reached 28.5 billion dollars, and free cash flow for the quarter came in at negative 5 billion dollars. The physical form of the same number is more than 300,000 graphics processing units, close to triple the previous quarter, and 850 megawatts of additional datacentre capacity. The adjusted operating margin of 42 per cent describes the picture before the depreciation of that purchased capacity, which is spread over years, works through earnings.[1]
In August, looking at a company whose multi-year signings dwarfed the revenue it booked in the quarter, I argued that a signed amount converts to revenue across a schedule while the capacity that serves it is paid for up front. Oracle repeats the same arithmetic at a different scale: 664 billion dollars of contracted work against 19.3 billion dollars of quarterly revenue, and 28.5 billion dollars of capital spent before most of that work arrives.[1], [3]
Two software quarters, two different cash conversions
Adobe reported hours later with revenue of 6.76 billion dollars, up 13 per cent, and cash flows from operations of 2.52 billion dollars, its highest for a third quarter. Total annualised recurring revenue stood at 27.50 billion dollars, and annualised recurring revenue attached to its AI-first products grew more than 150 per cent over the year. The company repurchased about 9.5 million shares in the same three months.[2]
Both companies sell software and both grew revenue by double digits in the quarter, and the resemblance stops there. Adobe turned 2.52 billion dollars of its 6.76 billion dollars of revenue into operating cash and still had enough left to buy back stock. Oracle turned 19.3 billion dollars of revenue into 23 billion dollars of operating cash and then spent 28.5 billion dollars on the capacity its contracts require. One converts revenue into cash inside the period; the other converts cash into capacity that has to earn it back later.[1], [2]
The assumption carrying the model
Oracle said it expects at least 90 billion dollars of revenue and adjusted earnings of 8.10 dollars a share for the full fiscal year, and revenue growth of 30 per cent to 34 per cent in the second quarter. Those numbers rest on capacity already bought at 28.5 billion dollars in a single quarter. Move one assumption, how quickly the 664 billion dollars converts and at what margin once depreciation on that capacity runs through earnings, and the whole picture moves with it. The release discloses the contracted total and the capital outlay; it does not disclose the conversion schedule.[1]
There is a test that needs no model. If capital expenditure keeps running near 28.5 billion dollars a quarter while operating cash flow stays near 23 billion dollars, free cash flow stays negative and the contracted total keeps being funded from outside operations. The alternative reading could be that this quarter's 300,000 graphics processing units were a front-loaded delivery that does not repeat at the same pace, in which case the cash statement repairs itself with nothing changing in the order book. The next quarterly statement will show which one holds.[1]