We believe Oracle should be trading at least 20% above today’s price after this impressive quarter.
For eighteen months the Oracle debate has been about a number nobody could audit. Remaining performance obligations went from $138 billion to $638 billion in four quarters, most of it AI infrastructure contracted for data centres that did not yet exist. On 10 September, reporting the quarter to 31 August 2026, Oracle showed the first quarter in which that backlog visibly turned into revenue — and the first in which it had to explain what turning it into revenue does to its margins and to its cash.
RPO ended the quarter at $664 billion — up $209 billion year on year and $26 billion on the quarter. Half of it converting within 36 months is roughly $110 billion a year of contracted revenue on top of the rest of the company, against total fiscal 2026 revenue of $67 billion.
That is the arithmetic behind the guide: having booked $19.3 billion in Q1, “at least $90 billion” implies about $70.7 billion over the remaining three quarters, 35% above the same three quarters of fiscal 2026.
And the full-year guide implies a very steep back half. $19.3B in Q1 against “at least $90B” leaves roughly $70.7B across three quarters — about $23.6B a quarter versus $19.3B just delivered.
| Guided on | FY2027 revenue |
|---|---|
| Investor Day, October 2025 | ~$85B |
| 10 March 2026 (FY3Q26 results) | $90B |
| 10 September 2026 (FY1Q27 results) | at least $90B |
Revenue of $19.3 billion, up 30%. Infrastructure is doing all of the work. Its growth rate has now accelerated for nine consecutive quarters and management said it expects the acceleration to continue through fiscal 2027. Inside the $7.4 billion, compute (CPU and GPU) was $6.5 billion, up 151%, and cloud database was $0.9 billion, up 26%, with the multi-cloud database business running on Azure, AWS and Google up 353%.
OCI operating metrics:
- 850 MW of AI capacity and >300,000 GPUs delivered since the end of Q4 — roughly 3x all of Q4 and 73% of everything delivered in all of last fiscal year.
- GPU utilization 97.9%, on a multi-tenant fleet Magouyrk called “a significant advantage.”
- Renewal pricing: capacity coming up for renewal in Q1 was renewed or resold at a 20% premium to prior contracts — and the majority of those GPUs are four years or older.
- Abilene: 131,000 GPUs in Q1 (1.9x Q4); 6 of 8 buildings, 618 MW, 75% of total capacity delivered; customer acceptance compressed to 24 hours; GPT-6 Astra was trained there.
- Shackelford is the next gigawatt-scale campus. NVIDIA Vera Rubin systems are “performing better than expected” on hardware quality, yield and performance; first customer deliveries in Q2.
Applications grew 10%: Fusion at 14%, industry applications including Oracle Health at 12%, and NetSuite at 6% after what management called slower decision cycles last year.
Revenue came in 0.8% above our number and above the top of Oracle’s own range. Cloud infrastructure was 4% above us; cloud applications were 4.4% below us, the second quarter running that SaaS has undershot our model, with NetSuite at 6% the line doing it. Licences fell faster than we expected — 15% down — while hardware and services came in better.
Gross margin declined on data center ramp costs and infrastructure mix. Gross margin fell to 60.0% from 67.3% a year ago and 65.2% last quarter — 730 basis points down in a year. The cost of cloud and software rose 77% on revenue growth of 30%, and the reason is a single line: depreciation was $3.2 billion, up 134%, and is now 16% of revenue against 9% a year ago. Every data centre that came online in the quarter started depreciating the day it was accepted.
Gross margin was exactly in line against our 60.1%, and the composition is instructive: the cloud and support gross margin was 62.7%, precisely our figure, because the growth in depreciation was what we had modelled; hardware gross margin came in below ours and services above.
Operating margin went the other way: GAAP operating income of $6.7 billion at 34.8%, 610 basis points higher. Roughly half a billion of the GAAP improvement is mechanical — amortisation of acquired intangibles halved to $202 million as the Cerner schedule runs off, and restructuring fell from $415 million to $94 million — but the rest is the expense base not growing.
We had a model for the quarter, and the two places it was wrong are the two things worth understanding.
The first real surprise was below gross profit. Total operating expenses fell 15% year-on-year, and the core lines — selling, R&D and administrative — fell 7%, driven by sales and marketing 12% lower. That is a reduction of almost a billion dollars in the expense line in a quarter revenue rose 30%, against a model that had those costs growing 14%. We think this was one of the main points of the quarter, and it was the point management chose to discuss on the call: the focus is operating margin, not gross margin.
Non-operating expense — mostly interest — came in worse than ours, but the beat on operating income carried straight through to net income, 65% above our estimate.
Operating expenses as a share of revenue, by quarter: From 33% to 24% in the last four quarters alone.
The three lines separately: sales and marketing 9.4% of revenue (down from 13,8% a year early), R&D 12.4% (from 16,7%), G&A 1.9% (from 2,5%). Its sums the 10pp in one year!
Oracle Cash Flow Analysis
The second surprise was the cash statement, and it cuts both ways. Operating cash flow of $23.1 billion is a record for the company and 163% above our estimate. Capital expenditure, at $28.5 billion, was $9 billion above what we expected. But there were also $11.4 billion of customer prepayments that we had not modelled at all — and that is exactly the point management made on the call about contracts where the customer, the supplier or a third-party financier carries the capital, so that the build “does not require” Oracle’s money. The prepayments proved it in the same quarter the capex overshoot showed why it matters.
Magouyrk separately said Oracle closed more than $30B of additional AI contracts in Q1 without requiring additional capital from Oracle. He then laid out three funding mechanics:
- Supplier financing — arrangements that let Oracle “pay for the capacity as the customers pay us.”
- Bring-your-own-hardware — the customer buys the GPUs; Oracle supplies data center, operations and cloud stack.
- Customer prepayment — a startup or established company that has raised capital pays upfront.
Demand for these structures, he said, is “broad-based” — “it doesn’t matter if it’s a startup or the most valuable investment-grade companies” — and he framed the reason plainly: “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.”
Cash from operations by quarter. $23.1 billion in FY1Q27 is a 119% operating cash margin — the $11 billion prepayments arrived ahead of the revenue.
. Full-year guidance is $90–95B with net cash CapEx not more than $70B, and Q1 was $28B. That leaves roughly $62–67B across three quarters — about $21B a quarter against a $28B Q1. “CapEx will not be linear” was said as a caution, but arithmetically Q1 was the front-loaded quarter, not a low base to build from.
Free cash flow by quarter. Five negative quarters in a row, summing up to $28,7 billion as of today.
One more way to read the cash
We track a maintenance free cash flow proxy — operating cash flow less depreciation, excluding the customer prepayments — on a trailing twelve-month basis. It reached $45.0 billion in FY1Q27, up 73% year on year. That is the cash the existing business throws off before growth capex; everything above it is the build-out, and everything the build-out needs beyond it is what the customers, the suppliers and the capital markets are supplying.
Operating cash flow less depreciation, trailing twelve months, excluding customer prepayments: $45.0 billion, up 73%. A proxy for cash generation after maintenance capex.
The balance sheet after the raise
The quarter closed the $20 billion at-the-market equity programme — $19.9 billion net, and a diluted share count of 3.0 billion, up 3% year on year.
Cash rose to $36.4 billion, debt fell $4.2 billion to $125.3 billion, and stockholders’ equity went from $43.1 billion to $67.2 billion in thirteen weeks. Net debt fell to $88 billion and net debt to EBITDA to 2.6 times, from 3.3 at the end of May — and entirely because of the equity.
Property, plant and equipment went from $100.0 billion to $127.8 billion in the same thirteen weeks. Interest expense was $1.4 billion, up 55%, and the mandatory convertible preferred issued in February now takes $81 million a quarter ahead of common shareholders.
Total debt, cash and net debt, with net debt to EBITDA. 4.6x after Cerner; 2.6x after the equity raise.
What the price is paying for
At $150,15, the last close, Oracle’s 3.0 billion diluted shares are worth about $450 billion, and the stock trades at roughly 18,5 times the $8.10 of earnings the company says it will make this fiscal year.
| FY2027 non-GAAP EPS | 16x | 18x | 20x | 22x | 25x |
|---|---|---|---|---|---|
| $8.10 (guided) | $130 | $146 | $162 | $178 | $203 |
On this year’s earnings the stock is not expensive for a company growing revenue 34%. The debate is fiscal 2028, and it is a debate about cash rather than earnings.
Our model, rebuilt after the print, has fiscal 2028 revenue of $133 billion — a little above Oracle’s own $130 billion target — and EBITDA of $73 billion, but free cash flow still negative, at about minus $38 billion, because capex stays near $96 billion.
On our numbers Oracle does not generate positive free cash flow until fiscal 2030, but we do not consider any more customer prepayment, which we believe will start to show off more frequently. Our fiscal 2027 revenue, at $86.6 billion, sits a notch below the guide; we will revisit it after Investor Day on 28 October.
Two things we need to weigh
1. The gross margin is now a depreciation schedule. Depreciation rose 134% in a year and PP&E rose 28% in a quarter, with another $90–95 billion of capex guided. That charge keeps rising for as long as the build-out does, whatever the revenue line does. The offsets management pointed to are real — 97.9% utilisation, renewals at 20% premiums, GPUs four years old still earning — but they amount to a bet that hardware can be re-let, at higher prices, for longer than its depreciation life assumes. The 60% gross margin is not a floor until the depreciation curve flattens, and management says that is a couple of years out.
2. Cash conversion is now the customers’ decision as much as Oracle’s. The $23 billion of operating cash flow was half prepayments. That is a strength — customers with the balance sheets to pay years in advance are the customers you want — and a dependency. A prepayment is a liability: current deferred revenue rose from $9.9 billion to $14.7 billion and other non-current liabilities from $16.2 billion to $28.2 billion in the quarter, and the words “significant financing component” mean Oracle will recognise interest cost on that money over the life of the contract. Oracle is, in effect, borrowing from its customers, at a cost, to build the capacity it will then sell them. Free cash flow was negative last year, will be negative this year on the company’s own capex guide, and is negative through fiscal 2029 in our model. None of this is a problem while the RPO converts and the customers’ own funding holds; all of it becomes one the quarter that stops.
What we are watching
- Cloud growth of 65–71% in Q2, and whether infrastructure accelerates for a tenth consecutive quarter. Management said it expects to.
- The expense line. Operating expenses at 24% of revenue after 33% a year ago. A ratchet, not a cushion: the next leg of operating margin has to come from gross margin stabilising, not from cutting further.
- Net cash capex against the $70 billion ceiling. $18 billion in Q1 with capex explicitly “not linear” through the year.
- The RPO mix. The share that is prepaid or bring-your-own-hardware, and how much of the $664 billion is one customer. Oracle does not disclose the concentration; the 10-Q may.
- Applications at 10%. Fusion at 14% is fine; NetSuite at 6% is the line the “SaaS is over” argument will point to, and the second quarter it has undershot our model.
- New Mexico and Wisconsin. An air permit for on-site fuel cells in one, grid delivery in the other. Management says neither touches the fiscal 2027 guide.
- Investor Day, 28 October, at AI World in Las Vegas. The fiscal 2028–2030 targets, the gross-margin framework, and any date for positive free cash flow. This was also Ken Bond’s last call after nearly two decades in investor relations; next results are on 14 December.
Thank you!
CoreValue Research Team
Sources: Oracle Form 8-K, Exhibit 99.1, accession 0001193125-26-387905, filed 10 September 2026; Q1 FY27 press release and earnings slides; Q1 FY27 earnings call, 10 September 2026; CoreValue Oracle model (3Q26 update) and the Oracle Initiation 2026 study. Charts: CoreValue Research from Oracle filings. Independent educational analysis; not investment advice. Oracle’s fiscal year ends 31 May; FY1Q27 is the quarter ended 31 August 2026.
