Oracle Corporation (ORCL) Q1 2027 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the Oracle Corporation First quarter fiscal year 27 earnings call. Just a reminder that this call is being recorded. If you have a question today, please press 1 on your telephone keypad. Please limit yourself to 1 question. I would now like to hand the conference over to Mr. Ken Bond, head of investor relations. Please go ahead, sir.

Thank you, Maria, and good afternoon, everyone, and welcome to Oracle's first quarter fiscal year 2027 earnings conference call. On the call today are Chief Executive Officer, Mike Sicilia, Chief Executive Officer; Clayton Magouyrk and chief financial officer, Hilary Barbara Maxson. A copy of the press release including financial results tables and supplemental financial metrics and guidance is now available on our Investor Relations website. Also available on our website is the slide deck that will be used in this call and a GAAP to non GAAP reconciliation. As a reminder, today's discussion will include forward looking statements and we will discuss some important factors relating to our business. 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. 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 will begin with a few prepared remarks. And with that, I will turn the call over to Hillary.

Thanks, Ken. Hi, everyone. Great to be here with you all today. And like Ken said, you can follow along with our remarks in the earnings slide deck on our website and via the webcast. If I had to describe this quarter in 1 word, I think it would be acceleration as we are seeing an acceleration in execution across the company translating into our top and bottom line results. Q1 was another record quarter driven by strength in both our cloud infrastructure and cloud apps businesses. Total revenue was a record $19.3 billion, up 30% year over year in US dollars. And for the first time, Q1 total revenue grew sequentially, an important sign of our continued progress in building scaled infrastructure. Historically, a record Q4 was followed by a lighter Q1. But as we accelerate across the full technology stack, from infrastructure to database to software, that is no longer the case. Cloud infrastructure revenue for Q1 was $7.4 billion, up a 121%. Reflecting strong execution as we brought record levels of new megawatt capacity online supported by a continued strong demand environment for compute and our database services. Cloud apps were up 10% with Fusion and our industry apps tracking well above that, and Mike and Clayton will give more details on those businesses in just a moment. Our non-GAAP operating income increased 31% in US dollars to $8.2 billion, driven by strong revenue progression boosted by operating leverage. Our gross margin did decline as expected driven by impacts from ramping up our data centers and the acceleration of infrastructure revenue. However, this was offset in the quarter by lower operating costs and strong operating leverage tied to simplification and efficiency actions. Net, our operating margin remained around flat for the quarter at 42%, on a non-GAAP basis. This all translated to a strong increase in our non-GAAP EPS of +30% in US dollars reaching $1.92 for the quarter. The last point I will make on our financial highlights is that our remaining performance obligations or RPO increased $26 billion from Q4. There are 2 things happening here. First, we continued to grow our RPO during the quarter to support future revenues, and the vast majority of those new contracts were via prepay or bring your own hardware or a similar mechanic so will not require incremental capital from Oracle. Also, that new RPO will not impact our CapEx or revenues until fiscal 28 or beyond. Second, we started to see a strong conversion of our RPO into revenues this quarter driving our cloud infrastructure results. We have added a few slides here where you can see that strong inflection point in our RPO converting into revenue and operating profits. First, in cloud infrastructure revenues, I already mentioned the +121% growth for this quarter, and that is after a Q4 of +93%. And we would expect acceleration to continue in the remainder of fiscal 27 as we convert more RPO into revenues. We now expect around half of our RPO to convert into sales over the next 36 months. Next, not surprisingly, you can see the acceleration in our total company revenues here shown on a trailing 12-month basis, driving growth in Q1 to 5 points higher than our Q4 as cloud infrastructure accelerates and becomes a larger and larger contributor. Lastly, our growth in operating income, also on a trailing 12-month basis, shows a similar strong acceleration from 16% to 21% between Q4 and Q1. Now to our balance sheet and cash flows, We drove record cash flow from operations of $23 billion in Q1, again reflecting our strong execution against a backdrop of strong demand as well as collection of customer prepayments. Our CapEx for the quarter was $28 billion leading to negative free cash flow of $5 billion. And our net cash CapEx, so net of pre was $18 billion for the quarter. To note, our CapEx will not be linear throughout the year. We continue to anticipate $90 billion to $95 billion in CapEx for the full year with not more than $70 billion in net cash CapEx. Lastly, we are quite pleased to announce that we completed our previously disclosed $20 billion equity issuance in entirety during the Q1. With that, let me turn the call over to Mike and then Clayton to get into more on our cloud apps and infrastructure businesses.

Thanks, Hillary. I will start with some additional color on the applications business. Continue to see the power of application suites in the minds of our customers. They are investing in trusted complete solutions that now seamlessly blend agents and applications together to run their businesses. The introduction of AI is an accelerator, not a replacement for packaged applications. As such, our decades of experience and expertise running business processes across every industry in every geography for organizations of any size, gives us the understanding of how to help them succeed. Before AI came along, application suites had already proven their effect effectiveness. Companies had been able to increase their profit margins because end to end automation was standardized and efficient business processes proved to be much more effective than 1 off custom solutions. But that did require organizations to follow workflows and processes as designed in the system, something that many struggle to achieve consistently across functions, teams, and regions. AI changes this dynamic Rather than asking every employee to navigate and execute a process, exactly as the system expects, AI agents can perform tasks using the organization's established workflows and business rules. Employees then shift to overseeing agents, resolving exceptions, and applying human judgment where it matters most. 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. While keeping their data secure and their operational guardrails intact. This allows organizations to harness the power of our application suites more easily than ever before. We are incredibly confident in the potential for this new paradigm to deliver much more rapid ROI for our customers. At AI World in October, we will unveil a new agentic AI accelerator poised to redefine how customers deploy Oracle applications. Faster, simpler, and at a dramatically lower cost. Working alongside Oracle and customer teams, AI agents will automate and orchestrate implementation at an unprecedented scale. Compressing SaaS deployments from years to months and months to weeks. it is really the power of these things together that reinforce my belief that the growth of our applications business is only going up from here. In Q1, we had a strong quarter and many of our SaaS offerings driven by the demand environment that I just described. In total, our SaaS business grew 10% with Fusion growing at 14%. Our Oracle Health business continued to accelerate. And although we do not specifically call it out, our industry applications grew at greater than 20% in Q1. As I mentioned last quarter, NetSuite saw some slower decision cycles last fiscal year and therefore, the growth is a little lower than the rest, but we have an exciting new product generally available that I will speak about in just a bit. Now a few customer callouts from a much longer list in the quarter. Uber Technologies Stanford University, and Mitsubishi UFG Bank in Japan all went live and or accelerated their usage of fusion. Pye-Barker Fire and Safety chose Oracle's complete application suite from industry apps to Fusion. Including Fusion agentic applications. Johnson Controls, the Saudi National Bank, Guidewell Mutual Holding Corporation, a health solutions company serving more than 45 million people Petronas, Malaysia's national energy company, each added fusion agentic applications this quarter to drive better outcomes. So let me share just a few stats around our embedded AI usage and progress in the quarter. Customers use our embedded AI capabilities more than 150 million times during the quarter. With usage growing 42% sequentially. Our AI agents executed more than 3.5 million times in production during the quarter. Nearly doubling quarter over quarter. Customers have over 2.3 thousand AI agents in production and that is up 90%. Quarter over quarter. Overall, AI production usage across fusion alone consumed 900 billion tokens during the quarter. I think it is fair to say that customers are using our AI built into our Fusion applications and our application stack every day. Now turning to NetSuite, we are announcing the general availability of our new AI powered offering called NetSuite Next. This presents an agentic experience that is simpler, more powerful, and is infused with AI across the workflows that customers rely on every day. it is easier to adopt it is more productive from day 1. And it is more valuable as customers grow. Additionally, the NetSuite AI connector service, which lets customers securely connect their NetSuite data to leading AI assistants of their choice, including ChatGPT and Claude, is already 1 of the fastest adopted capabilities in the whole history of NetSuite with more than 10 thousand customers already using it. Personal care company Everyman Jack estimates that the service alone will save $350 thousand annually and nearly 5 thousand hours of work. This month at our Oracle Health and Life Sciences customer event, we will debut our all new Agentic care management system. Alongside a world class lineup of external speakers. More than the EHR, this system connects clinical research and care delivery reduces the burden of records management for patients and enables providers to practice the top of their license with AI as a user interface. There are few AI missions that matter more. Helping deliver better care while freeing providers to focus on what matters most. Their patients. Not computer systems. The proof points around AI's Oracle's AI offerings are definitive. And we remain confident the opportunity ahead. And with that, I will turn it over to Clayton.

Alright. Thanks, Mike. OCI continues to grow quickly. By delivering the capacity our customers need. We delivered 850 megawatts of AI capacity containing more than 3 thousand GPUs to customers since the end of Q4. Delivery in Q1 is almost 3x what we delivered in all of Q4, and 73% of the total capacity we delivered last fiscal year. This reflects years of investment in every aspect of infrastructure from data center design through supply chain and manufacturing to installation and operations. Customer demand continues to support this investment. We closed more than $30 billion of additional AI contracts in Q1 without requiring additional capital from Oracle. Our ability to operate a large multi tenant fleet remains a significant advantage. GPU utilization remains extremely high At 97.9% in Q1. GPU longevity and value continue to impress. Of all the GPUs that came up for renewal in Q1, that capacity was renewed or resold at a 20% premium to prior contracts. The majority of those GPUs are 4 years or older. We see a long useful life with increasing value for the AI capacity we are deploying. Abilene continues to deliver at an extraordinary pace. We delivered 131 thousand GPUs there in Q1, 1.9x the volume delivered in Q4. 6 of the 8 campus buildings, representing 618 megawatts and 75% of total capacity have now been delivered to the customer. Customer acceptance has compressed to only 24 hours, showing that the systems arrive ready for customer workloads. The recently released GPT-6 Astra was trained at our site in Abilene. Shackleford is our next gigawatt scale campus and is progressing well. NVIDIA Vera systems are performing better than expected across hardware quality, manufacturing yield, and performance. We will deliver our first Vera systems to customers in Q2. Our database cloud business is also growing quickly. Multi cloud database revenue grew 353% year over year, and multi cloud customers grew 180% year over year. We completed our planned Azure and AWS regional footprint expansion, reaching 70 multi-cloud database regions and 119 availability zones. This gives customers a consistent way to run Oracle AI database next to their applications and data in the cloud they choose. We also made Oracle interconnect for AWS generally available. With this launch, OCI now has private high speed connections to all hyperscalers with no data transfer charges. That makes it easier for customers to build distributed applications and migrate workloads across clouds. The pace of AI innovation is increasing across the ecosystem. We expanded our OpenAI relationship to offer OpenAI API access, ChatGPT for work, and codex through Oracle Marketplace. Including GPT-6 Astra. We are bringing Gemini models to Oracle's enterprise applications, and we released new Grok reasoning, multimodal, and text to speech models. We also continue to expand the open source model catalog including new models from NVIDIA, Llama, Google, DeepSeek, and others. We announced a multiyear partnership with Quantinuum to offer its Helios quantum computer through OCI, Helios will operate in a US based OCI AI data center, enabling hybrid quantum and AI workloads for enterprise research and AI customers. Oracle APEX 26.1 brings these infrastructure, database, and model capabilities together for application developers. APEX already runs more than 2 million active applications with thousands more added every day. APEX Laying is a new technology that represents an APEX application as structured, human readable application definitions that can be stored in source control, validated, and governed. AI coding agents generate and modify those definitions while the APEX Engine continues to provide the security, reliability, and operational controls required for enterprise applications. Developers gain the speed of generative development without the downsides of difficult to maintain opaque application code. We are taking the same approach with the Oracle AI data platform. AI Data Platform is now integrated with Codex and Claude Code, allowing developers to work with AI Data Platform data, knowledge, and capabilities from the coding environment they already prefer. We are also adding advanced MLOps capabilities and working with early launch customers on business knowledge models, semantic reasoning engine, and deep insight agents. These capabilities ground AI in the meaning of an enterprise with context, semantics, and governance. They also bring AI driven analysis into Data Fusion data intelligence and Oracle Analytics Cloud. Where many customers already manage their most important business data. Taken together, Q1 shows how the pieces reinforce 1 another. We are delivering data center and GPU capacity at a pace that would have seemed impossible only a year ago. Customers were signing new contracts. Renewing capacity at higher prices, and keeping the fleet almost fully utilized. We are placing Oracle AI database in every major cloud, and making more proprietary and open models available on OCI. We are then connecting those models to enterprise data, applications, and developer workflows. That combination is why demand continues to grow and why we remain confident in the long term value of the technology we are building. And with that, I will hand it back to Hillary.

Thanks, Clayton. I will finish with our guidance for Q2 27 and the full year. In Q2, we would expect growth in total revenues of between 30% to 34% in US dollars. Of that, we would expect growth in cloud revenues in US dollars of between 65% to 71%. In non-GAAP EPS, we expect between $1.85 and $1.93, up between 21% to 25% in US dollars and that excludes the gains from Ampere we booked in Q2 of last year. For the full year, reflecting the strong execution and acceleration you see in our Q1, we are upgrading our guidance to at least $90 billion in total revenues. that is a year over year increase of +34% and to $8.10 for our non-GAAP EPS. Lastly, a small note from my side to please make sure to mark your calendars for our investor day coming up in October. With that, I will turn the call back to Ken for the Q&A.

Thank you. If you would like to ask a question, please press *1 to raise your hand. To withdraw your question, press *1 again. Please limit yourself to 1 question. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Brad Zelnick of Deutsche Bank. Your line is open. Please go ahead.

Brent. Thank you very much. And first off, Ken, knowing that this is your last earnings call, I just wanted to congratulate you on your retirement. You know, for nearly 2 decades, been the face of Oracle to the investment community, and you have done so reliably with such high integrity. And I know you will very much be missed. Thank you. You are welcome. As for my question, I fully expect Oracle will continue to be among a small handful of market leaders for AI infrastructure. And you have told us fiscal 27 and 2028 are peak CapEx years. But at the same time, others in the market are spending hundreds of billions of dollars on capacity with seemingly no end in sight. How should we think about Oracle possibly slowing down spending beyond the next 2 years if others are not? And is there a scenario where we could see even higher peaks beyond fiscal 28? What will guide your investment And then related to that, given the current state of the backlog as it stands today, when should we expect to see the company return to generating positive free cash flow? Thanks.

Thanks, Brent. This is Clayton. I like I think I think the I think there is 4 questions in there. So I am going to answer the parts that I want to answer, and then I will make Hillary do the hard work. So look, I think you have heard us talking about, you know, for the past several quarters, we are constantly finding interesting ways to fund the business. And 1 of the mechanisms that we have to fund our business is obviously that we go out and we spend our own capital. But we have invested very heavily in relationships with different suppliers and vendors, invented new business models, including bring your own hardware all of which have different ways of spreading out that capital. And so I think that we have to separate out in our minds what Oracle spends as CapEx directly, you know, uncouple that directly from how we think about how the business can grow. Because from our perspective, I think we see ways that we see ways that clearly, you know, capital, is still required to do this work, but it does not all have to flow from, you know, Oracle side. It does not have to be Oracle CapEx. So I do not see it as a limitation to the growth of our business. I think it just you know, represents the continued evolution of the business model that we are developing as this AI expansion continues. Hillary, do you wanna talk about some of the other answers?

Yeah. Sure. The other question I think you asked was about free cash flow. We have not given a particular time frame on that. Yet, and we do not expect to give that today. What I would say though is that each of these projects that we are doing, by nature, is a strong free cash flow generating project. So as soon as they ramp up very shortly thereafter, they are delivering a free cash flow conversion ratio of something like 100% to post tax EBITDA. So in fact, the business by nature is somewhat quote self funding at some point in terms of throwing off a lot of free cash flow. So we have not given the time frame on that, but you know, you will see as we continue to ramp over the next quarters what that could look like. Again, we expect it to be a reasonably quick time frame. Past the big ramp up that we have going on today. The only decision there, and you pointed it out, would be about more growth CapEx, and that is something that we wanna continue to deploy at the right levels to grow the business. Thank you so much. Look forward to seeing everybody out at AI World.

Your next question comes from the line of Siti Panigrahi with Mizuho. Your line is open. Please go ahead.

Brent. Thank you. And, Ken, I also echo my congratulations and best wishes on your retirement. It will certainly be missed. And going back to the question, there is been a lot of speculation about you know, potential data center delays in New Mexico and Wisconsin. But you delivered on your Q1 target and now is raising your full year 2027 revenue guide to now at least $90 billion. So can you give us an update on where both sides actually stand today? And is there any risk to the delivery time line for those data center that could pose any pose a risk to your 2027 revenue expectation? And as you continue to grow RPO, how comfortable do you feel in your ability to secure and bring capacity online to support that growth going forward. Thank you.

Yeah. Thanks, Siti. Okay. So I will answer the specific, you know, pieces of that, but I think it is important to have some context before we go forward. You know, New Mexico and Wisconsin are very important large sites for us. But it is important to have some context, you know, We talk about these sites kind of as being around a gigawatt a piece. We just delivered 850 megawatts in Q1. And what that means is that and as you can see, neither Shackleford nor New Mexico or Wisconsin or Michigan were delivered in Q1. So we have a large, diverse, broad set of data center developments going on throughout The US and around the world to deliver capacity to customers. Customers. Now some of these sites, like New Mexico and Wisconsin, obviously, a lot of attention. there is a lot of discussion about them. But I think it is important people realize that all of our eggs are not in a single basket. Next thing I would sure everybody understands is that when these large sites are built, they do not all come online at once. Let's say that you have a gigawatt site, It does not it is supposed to start delivering, let's say, in, in January of a year. it is not like in January you get a gigawatt of capacity. it is phased over many quarters. So it is not as though if you have a delay compared to a plan in 1 site, that you have some massive thing that hits in a single quarter. So and then the other thing I would say is anyone that is been in the business of doing construction or large scale infrastructure development if they if their plan relies on 100% achievement of every 1 of their deliverables, We have a term for that. it is called a bad plan. And so we try real hard not to make bad plans. So we obviously know the difficulty and the complexity of what we are doing, and we do not assume 100% of everything is going to work all the time. And we have backup options for those things as well as you know, we do not we do not count that everything is gonna get done exactly on time all the time. So now moving specifically to the question around New Mexico and Wisconsin. New Mexico is a location. We are making very good progress, yeah, in terms of construction, data center is definitely on track. We are going through the process of acquiring our air permit. And, you know, we have got the technology that we will be deploying there is bloom fuel cells. Which is by far the most environmentally friendly way that we can do on-site power generation, has extremely low water consumption, has extremely low emissions compared to, really any other way to kinda do on-site generation. And so we are very confident that as we continue through this process, we will work with the local regulators and community citizens in Dona Ana County and with everybody else in New Mexico. But we are just going through the process. And I do not think that is rare for large projects like this 1. In Wisconsin, we are not doing on-site generation. We are really working with our partners across the across the board to design and deliver that energy capability through the grid. But, again, you know, working through the processes are complex projects. And again, in Wisconsin, data center delivery is actually very on track and going well. You know, working with the Public Service Commission and ATC and We Energies, we are constantly evolving different aspects of the energy design and delivery plan. But we feel very confident in both of those sites. To the question about impact on f y 2027 revenue, the neither of these sites will have any impact into our f y you know, our previously stated f y 2027 revenue or earnings guidance. So I would say is, you know, we have some sites that are ahead of schedule, some sites that are more difficult than others. We work through all of them. And, we have a plan in place both in terms of risk management as well and, you know, we take that into account when we do our forecasting. For how we go about setting expectations for ourselves and then communicating those expectations to you. Oh, and then the last piece. Okay. Hold on. And then last question of, like, okay. Well, how do we feel about bringing on, you know, more capacity online I think we feel very excited about it. Both in the you know, obviously, the environment continually changes. It used to be that the constraints were GPUs and fabs. Then constraints moved to power generation. there is data center constraints. But the world's a big place. there is a lot of demand for this and we are pursuing all the different avenues to bring that capacity online. So we remain very excited and very confident in our ability to keep meeting both current RPO as well as the future RPO growth that we are expecting to see. that is great color. Thanks for clarifying all those points.

Your next question comes from the line of Raimo Lenschow of Barclays. Your line is open. Please go ahead.

Thank you. First of all, all the best for Ken, and thank you in the for the team to for making Ken's last quarter like such a great quarter. My question is, again, on the data center side. Obviously, there is a lot of talk about component price increases, etcetera. Clayton, can you talk a little bit about like how your pricing is evolving between contract pricing, spot pricing? And you gave us a framework on gross margins last year. Is that still holding? How should we think about that in this ongoing dynamic on component pricing? Thank you.

Sure. But, definitely, prices in a world where demand exceeds supply, we typically, prices do not go down. They do go up. And so you know, I think the net effect is that obviously things cost more, but then we have to we have to charge more money for them so that we get compensated. And we are doing that across all of these different businesses. No. We do not we do not expect this to have an impact on our gross margins. So I think the previous guidance that we have given you there is still remains true. I will say is that, you know, as I mentioned in my prepared remarks, I think there is a lot of people have been very concerned about you know, what is the useful life of the different hardware assets? What is the useful what is the demand going to be for data centers and the power capabilities that come with it? You know, I have been in the infrastructure business for, you know, pretty much all of my professional career. I have been doing it now for 12 years at Oracle. 1 invariant that has been true so far is that the demand for server side computing and data centers has only gone up. And it turns out so far that everything we see about the AI, use case is the same way, but only more so. Right? The fact that we go out and we have capacity up for renewal, that we actually can achieve higher price to the tune of 20% All of those are very positive signs for the both the continued demand, the growth, and then the profitability of this business. Perfect. Thank you.

Your next question comes from the line of Mark Moerdler of Bernstein. Your line is open. Please go ahead.

Thank you very much for taking my question. Ken, we are going to be sorry to see you go, but I am sure you have an amazing bucket list of trips and things to do. So I would like to focus in on the RPO. Can you give us more details on the drivers of the growth of RPO that is not requiring additional CapEx, the prepaid and bring your own chips. Is this AI labs and semiconductor companies, or is it that sovereign? In fact, we have not discussed Sovereign Cloud in a while, and we have not discussed Sovereign AI at all. Can you explain how that side of OCI is going and how that will impact CapEx and margins? Thank you.

Sure. So let me make sure we clarify 1 thing first, and then I will I will dive into the pieces. I did not say and I do not I do not think myself nor Hillary said that it does not require additional CapEx. We said it does not require additional cash from Oracle. Right? So, you know, at the I not an accountant, but I get to play 1 on TV sometimes. But the intention of what we are trying to say is that while it there clearly are capital expenditures it does not require Oracle to go out and find additional cash to do it. Now the question becomes, well, how do you do that? Well, we have a variety of different models. Sometimes it is working with our suppliers through different financing arrangements that allows us to pay for the capacity as, the customers pay us. that is 1 mechanism. Mechanism is that a customer says, hi. I would like to pay for the hardware, but use your operational ability and your cloud infrastructure, technology assets, your data center to go out and actually turn that into an AI it is a different option. A 3rd option is that the customer has been able to raise money. Maybe it is a start up. Maybe it is an established company. And says, hi. I would like to pay you upfront, you know, as a as a prepayment. And in return, that does not require you to front the cash to go out and spend those your dollars on that capital expenditure. So we have different models for achieving that goal. In terms of the types of customers and where we see that demand, it is really broad based. Right? It does not matter if it is a startup or a, you know, the most valuable investment grade companies. there is an understanding of this model right now that know, that the access to capital and different ways of funding it are a constraint, and the industry adapts. To allocate that in the most efficient way possible. Now specific to your sovereign cloud question, look. Our, you know, our alloy business is doing well. We have got a lot of partners in Japan. We have got great partners in The Middle East. We have got, you know, partners that are both going after the commercial business in a more, you know, sovereign way as well as kind of more government focused sovereign cloud. That continues to expand broadly We are seeing lots of demand And, also, it is actually tied to AI as well. Because many of those customers we offer GPU capabilities for those customers, they deploy that for those own sovereign workloads. Obviously, we also have a very large and very rapidly growing general purpose cloud business that we do not talk about quite as much But that is growing rapidly and has, you know, great growth rates, great margins, and does require some capital, but not as much as these giant AI clusters. Thank you.

Your next question comes from the line of John DiFucci of Guggenheim Securities. Your line is open. Please go ahead.

Thank you for taking my question. Just a I am gonna make a quick comment here too. I have covered Oracle for almost 3 decades, and I think, Ken, you have been there for close to 2. In this business, it is always nice to develop professional friendships. But it is even nicer when they become personal friends, which is what I count you as. And importantly, I have learned a lot from you. So I just wanna say thank you. But as far as what Raimo said, I am glad, team, you had a good quarter, but not so much for Ken. For me, because you are my best idea, and that is it is all about me. So I think my question here is for Hillary. Hillary, gross margins came down. Meaningfully this quarter, but you had so much capacity coming online this quarter. I assume that, you know, before that, there were a lot of expenses associated with those deals coming online, but they did not have much revenue yet. Nevertheless, it was a big drop in gross margins, and it is something that we all on this call talk a lot about when we are talking to investors. But as you pointed out, operating margin was flat flattish, up a little bit year over year. I know operating margin's the North Star because that is closest to the bottom line profit and eventual cash flow. But how should we think about gross margins going forward in addition to operating margins, that whole ecosystem?

Sure. So for me, gross margin, obviously, an important thing to follow both internally and particularly actually, in both of the business models or all 3 of the business models that we have, it is really a health indicator of the business. Are you pat you know, can you price Are you pricing at the right level Are you able to manage your input costs? So gross margin to me is always an important indicator. Probably even more important internally for us to double check. And I think investors obviously wanna check. it is something that will change very quickly, for example, if we do not have the right pricing model. When we talk about driving value though and driving value for the business, for me, operating margin is probably the ultimate point that we wanna follow. So gross margin, like you mentioned, the moment, there is a number of things going on. We have both the ramp up in data centers, plus we have an adjustment across the 2 business models that we have in the business. Software being a much higher gross margin business, but with higher R&D and sales costs below gross margin. Infrastructure being a lower gross margin business, and we have talked about that and we gave the numbers. Clayton's given the expectations for quite a bit of that business. Not database, obviously, but the more AI infrastructure and cloud side. But that business by nature has much lower R&D and sales associated with it, at least in a company like Oracle where we can effectively gain from all of the R&D that is already been done and being done across the rest of the company. So really how to watch how we are gonna drive value out of the business over time, I think operating is really the key metric that we would look at. Again, not forgetting about margin, something to look at, but operating margin being very, very important tied to value. Thank you. that is clear. And that is where we will focus on. But how should we just so because most people I think the street typically overestimates what your gross margins are gonna be, and they underestimate what the impact is gonna be to operating margin. So it should I do not know if you are prepared to say, like, should gross margins continue to go down now from here, or should they be steady around these levels for the rest of this year? And how should we think of that? Yes. So we would mentioned already. I mentioned in the Q4 that we would expect a step down in gross margins this year. You can see the EPS guidance that we give though. So you can see what we might expect in terms of operating margin, Over the next couple of years, as we finish the ramp up, you can reasonably expect that gross margin would flatten, I would say. But we have not given any part particular guidance today. We will speak more about some of this stuff on the upcoming investor day though in October. Brent. And thanks for all the detail tonight. This is this is really helpful. Thank you.

Your next question comes from the line of Brent Thill with Jefferies. Your line is open. Please go ahead.

Mike, good to see double digit growth in SaaS. Maybe if you can walk through what you are seeing over the next couple of years. I think you know, there is been this fear of the SaaS business across the industry taking a hit because of AI that seems like that is not your view. Give us your perspective on what you are seeing in terms of keeping sustainable double digit growth.

Yes, sure. Well, thanks for the question. Here's what I think about our SaaS business, and I am gonna take the liberty of broadening it a little bit because I think there are a couple key adjacent, things that, are very important in SAS. First is we have a highly differentiated offering and that we have end to end suites that automate complete industries. Health care, retail, telecommunications, you know, construction. there is there is a whole list of these where we have horizontal applications, vertical applications, And, you know, if you look at our 2 very big categories in the quarter, both fusion and industries, our industry applications growing very nicely. The fact that customers can get them as a complete suite and a complete package has been a differentiator for Oracle for years now. And now you layer in AI embedded into those workflows. Adding AI as a service as part of the regular application of updates that our customers are getting And we think, Brendan, it is a really nice way for customers to get value from AI or ROI from a embedded AI very, very quickly without having to bolt anything on, on as a as a sidecar. Now the next layer is our AgenTic, our Fusion AgenTic AI studio, which allows customers and or partners to build their own AI agents inside right inside the same platform. that is not a that is not a different it is not a different control plane. It is it is the same control plane. And the same platform that our applications are running on, which means that AgenTix Studio allows customers to build their own agents or partners gets all of the same quarterly updates, gets all of the same security patching, and is available as a complete service to our customers. And you are allowing customers to position AI as a UI on top of a very complex set of business rules, on top of a highly differentiated security model, and of course, data models that have evolved for years and years. So but you put the horizontal suite so the horizontal applications, the vertical applications, the agentic studio together, and we think that is very compelling. But if that is not enough, the next piece that we are we are as I mentioned, that we are unveiling is AI assisted go lives. You know, these are in many cases, we are taking on very hard work and helping our customers solve very mission critical industry specific problems. Sometimes those go lives can take a long time. They are complex. there is data migrations. Well, AI has given us a tremendous ability to accelerate those go lives. And we have some proof points for the tooling that we have rolled out to date, and we will roll out a bunch more of it at AI World. But we have seen, like, for example, complicated go lives in our health care applications that were in the high double digit months coming down to single months for go lives. In our NetSuite applications, we have seen early customers leveraging these AI tools coming down from double digit months down to single digit weeks in order to be able to go live in production. So we think that does 2 things. Number 1, it helps us it helps customers rather get to value from AI more quickly than ever and certainly, at a lower cost. And number 2, in some of these very complex industries, there is ramps associated with these with these go lives, and it allows us to unlock the ramp and recognize revenue more quickly. Than we may have what you know, we have in the sort of manual implement implementation piece. But I think the other piece that is that is quite important is, as we mentioned in the press release, is, again, part of the same platform that we are running our applications on the AI data platform, which automates the creation of enterprise on top. Ontology. So while we are we are very honored to serve our customers with a very widespread and very large suite of applications There are other applications as well. And being able to take those applications that our customers are running create an enterprise ontology as an automated service, and then layer those AI agentic studios on top of that. You know, you put all that together, right, I just do not think that anybody else in the market is delivering all of that as a cloud service certainly not in highly regulated industries. Certainly not at the scale that we are. And then 1 other thing I will mention about our SaaS business is that our SaaS business are is also a wonderful lead generation business for our IaaS business. SaaS our SaaS customers are also buying OCI. They are they are also have other workloads, non Oracle workloads that they are they are more than happy to leverage OCI. Think they get a very good test of the performance scalability of OCI as a SaaS customer because they are in consumer at that point as well. So we think about it as really, you know, the SaaS business being part of our overall solution set that we are delivering to customers, we continue to invest in that solution set. We continue to make it easier to go live. And add more and more tooling to allow customers to configure and leverage AI. So for all those reasons, we are quite optimistic on the future of our applications business. Thanks, Mike.

Your final question comes from the line of Kirk Materne with Evercore ISI. Your line is open. Please go ahead.

Yeah. Thanks very much. Ken still has an analyst day to get through, So I will, I will wait and say congrats to him in person in a month or so. But Mike, you mentioned the AI data platform you guys put in your press release. So I just wanna double click on that. It seems like an important way in allowing customers deploy agents you know, against the proprietary data. Can you just help us understand the business model around that? Does it drive incremental consumption of Oracle database, OCI, or do you see that being sort of a standalone software-revenue opportunity? Was just curious how we should think about that playing into the financials over time. Thanks.

Yep. I think I think you clicked on the answer really to the business model is all the above. I mean, certainly, we can run this in a model where consuming 100% of, you know, non Oracle work. This is by no means specific to the Oracle database or Oracle applications. The AI data platform is agnostic. And able to pull in and automate the ontologies from any data source. We have hundreds of data sources that we are we are doing this automation for today. So you know, whether it is just pure consumption of AI data platform, whether it is using it with our applications, or whether it is used in, you know, in concert with OCI, we are more focused on allowing the customer to make the best choice or the partner to make the best choice that suits them. I think it really helps our business. I would say also that the Oracle database still remains the most probably the most coveted custodian of mission critical data in the world. And certainly, we are able to, to automate ontologies, and have the Oracle database as 1 of the primary feeds, at least for the mission critical data for that. It also helps us unlock our ever-growing multicloud database as well, where, you know, certainly customers would like to take those on premises versions of the Oracle database and very easily move them to the cloud. As we continue to invest in making that available in every cloud, in every region, we think the AI data platform will help drive that growth as well. I know you guys have a huge services ecosystem, but will you guys be putting forward-deployed engineers around that to try to help customers understand some of the, you know, opportunities, you know, things they can expose perhaps they have not been able to expose before with the Oracle database, which is-- is there a go to market angle to it too? Yep. Yeah. Absolutely. And we are already investing in deploying forward-deployed engineers at our customers. that is true for the AI data platform. it is also true for our Fusion AgenTic Studio as we see them really as a combination platform running on running on a single plane in OCI. So, yes, no doubt that is a service offering we think is necessary. I actually think it will help get customers live as quickly as we possibly can. As I said, measuring some of the successes now in weeks. Which in heavily regulated industries, you really would not have dreamed of. Maybe even a year ago. Thank you, Mike.

For next quarter, we expect our Q2 fiscal year 27 earnings results will be announced on 12/14/2027 2026, excuse me, Any change to the date will be publicly announced. A telephonic replay of this conference call will be available for 24 hours on our Relations website. Thank you for joining us today. And with that, I will turn the call back to Maria for closing.

Thank you. This concludes today's conference. We would like to thank you all for your participation today. You may now disconnect.