Oracle's financials are messy due to heavy leverage and negative FCF, but fundamentals are improving as capex peaks and cash flow grows; sustainability depends on the OpenAI relationship.

simple slide just showing Oracle's overall revenue and revenue growth rate this quarter. Yes, it was basically sequentially flat revenue at 19.3 billion compared to 19.2 billion 3 months ago.

But notice the seasonality that is historically there for Oracle as a legacy software vendor from Q4 to its Q1 fiscal year from May to August uh has been erased. No more sequential downturn.

They had a sequential uptick. 30% year-over-year revenue growth.

The quarter-over-arter increase, while it doesn't appear impressive, is actually interesting. quick look at the balance sheet, which has been a big cause of concern for Oracle equity holders.

Oracle listening to what the market is saying and actually did some net repurchases of both short-term and long-term debt on balance.

And this is still a pretty leveraged business. 125 billion in debt offset by 37 billion in cash and equivalents. They finished off their 20 billion ATM, the appropriately named ATM programs at the market where they issue uh new stock onto the stock market in exchange for cash.

They did finish that 20 billion program this quarter.

The now two quarters in a row sequential decrease in debt is probably management's response to some of the turmoil going on and trying to assuage investor fears that they are not going to uh not intentionally obviously but not blow up their business by overleveraging the balance sheet.

The destination for all of that cash that they've been raising continues to be capital expenditures. Capex building data centers, filling those data centers up with GPUs, networking them together, a lot of that getting booked up by the relationship with Open AI.

Few years ago, we originally called out how a lot of Oracle's legacy software, a lot of the database software is another big migration happening to Oracle infrastructure. to facilitate all of that.

Oracle is not a data center company historically, not an infrastructure provider. They're playing catch-up on this front. And so you see there the 28 and a half billion capex this quarter, bigger than ever.

Huge year-over-year increase from 8.5 billion a year ago, the same quarter, and just 16.5 billion the prior quarter.

This is the start of fiscal 2027 for Oracle that will last through May 2027. this year and next is at least it's been hinted at by management is likely to be peak capex and then by next year this rate of increase should begin to taper off.

So yes, free cash flow was again negative this quarter. didn't show up on the balance sheet because of the conclusion of the the ATM program. Cash from operating activities also ramping up in pretty dramatic fashion from 14.6 billion last quarter to 23.1 billion this quarter is also good news, a good item to watch.

And management said as soon as they bring that data center capacity online, it's booked. So it immediately goes into use and the free cash flow uh payoff from that project is pretty immediate.

Our expectation is over the course of the next year we should see this flip. That would be my expectation. I would expect to see free cash flow begin to break even again this year based off of the hints that we've gotten from management especially on this last earnings call.

Capex to revenue and capex to operating cash flows. Obviously, not sustainable. Oracle management knows this. Everybody knows this. You can't have capex higher than revenue. Thus, the the greater the 1.0 capex torevenue ratio and certainly not higher capex than operating cash flow at 1.61.

But it would appear that the peak in these metrics maybe is behind us and we should see this also begin to taper off in tandem with the previous slide I showed you on on the cash from operating activities and capex.

It is that cloud infrastructure revenue. They're in the bottom left of their little chart. 7.4 billion, up 121% year-over-year.

And in the bottom middle, cloud applications, their SAS, that includes Oracle Healthcare that used to be Cerner that they acquired back in 2022. It is a much slower growth rate, but still up 10% year-over-year as the company continues to migrate more of those customers off of old licensing and into the cloud.

So, it is open AI that continues to drive the bulk of this business right now of that infrastructure, but there is a lot of legacy Oracle business that is going to make use of this as well. the apps, the database, and the reasons for customers to migrate those applications and their data over to the cloud continue to rise because of all this AI and the quick payoff, not just for Oracle infrastructure, but really for clients that they're getting from unlocking the value of that data with accelerated computing. The positive use case is most definitely there.

And the second slide where the growth is coming from within cloud infrastructure the database products there and multicloud databases. Oracle signed those deals with the other hyperscalers like Google cloud a couple of years ago and they are starting to see some significant growth there. 353% growth specifically from multicloud database

cloud applications are the sluggish part of this business. their ERP software, Fusion and uh Netswuite in total up high singledigit low teens and Oracle health the industry specific software up 12% year-over-year more migration to subscription to the cloud.

There's been talk about spinning some of this off. uh we've thought maybe at times that would be a good idea as well as maybe more specifically Cerner maybe maybe they spin that back out after making the acquisition

but given how they've been able to manage the balance sheet the last two quarters they finished the ATM program they have 37 billion in cash to burn through that should give them plenty of cash for the next three to four quarters as they build up lots of new infrastructure if they reach free cash flow, break even in the next year, like we're thinking they can and should.

Maybe these cloud software businesses should just stay put. They're profitable. They help pay the bills, keep the lights on at Oracle, help service the dividend, and maybe eventually go back to purchasing stock.

It is really a big giant mess. It would of course be preferable for Oracle to be buying back stock while the stock is down right now, not issuing stock and buying it back later when it's possibly at a much higher price.

But it's just kind of the reality of building an infrastructure business unfortunately.

So this is this one's a mess. Uh Oracle a hyperscaler slash kind of a neocloud. It's a small position in our portfolio uh along with some of the other leading NeoCloud businesses and we'll just see how it plays out.

We'll we'll leave it put for now. But we do see signs of things starting to improve and we can see signs that this business really actually can be sustainable dependent of course on the open AI relationship.