On the morning of September 11, after the U.S. stock market closed, Oracle, a leader in the new cloud sector, announced its financial results for the first quarter of FY27 ending in late August. Overall, performance was a mix of strong and weak areas. The OCI business, which garnered the most attention, experienced robust growth, with revenue accelerating significantly and corresponding Capex also rising sharply. In contrast, traditional business growth remained sluggish, with significant pressure on gross margins and other issues showing no improvement. Details are as follows:

1. Core Business—OCI Accelerates Beyond Expectations: The critical OCI business reported revenue of nearly $7.4 billion this quarter, with year-over-year growth reaching a new high of 121%, compared to 93% in the previous quarter, significantly outperforming the market consensus expectation of around 115%. From a sequential net increase perspective, this quarter saw a rise of $1.4 billion, far exceeding the approximately $700-800 million in previous quarters. Thus, in AI cloud leasing—the market's primary focus—performance was quite impressive this quarter.

The main driver was a significant acceleration in the scale of computing power deployed this quarter, reaching 0.85GW, compared to just around 1.2GW for the entire previous fiscal year. However, Dolphin Research noted that the company's original guidance was more aggressive, targeting 1GW.

Combining these factors, the deployed computing power slightly underperformed guidance, but revenue release exceeded expectations, implying that the market's previous estimates for revenue per GW were low. Consequently, recent widespread price increases in cloud leasing should also benefit the company.

In contrast, growth in SaaS-type businesses under the cloud segment remained sluggish, with a 9.9% year-over-year increase this quarter, slightly slower than the previous quarter's growth. Although currency exchange benefits played a role in mitigating the impact, it indicates that the strong growth in AI cloud business has had almost no positive effect on driving the company's traditional SaaS-oriented business. Market research feedback suggests there might even be a crowding-out effect.

2. Capex Surges, Cash Flow Remains Negative: Corresponding to the significant acceleration in computing power deployment and OCI revenue, it was expected that Capex spending would also rise sharply this quarter, reaching an astonishing approximately $28.5 billion, an increase of nearly three-quarters from the already high previous quarter, exceeding the company's total revenue by nearly 50%.

Additionally, it was disclosed that about 40% of this quarter's Capex was covered by customer prepayments, with the actual amount borne by the company itself being around $18 billion, significantly reducing cash flow pressure. Nevertheless, free cash flow remained deeply negative, approaching -$5.4 billion.

3. $20 Billion Equity Offering Completed, Financing Concerns Alleviated: The next question, given the high Capex, is where the funds will come from. According to the company's previous statements, it plans to raise a total of $40 billion in FY27, with debt and equity financing each accounting for half. In this quarter, the company completed $20 billion in equity financing, exceeding the Capex amount borne by the company this quarter.

Since this quarter's financing was equity-based, debt pressure decreased relatively, with net debt and interest expenses both declining quarter-over-quarter. Specifically, net debt decreased by nearly 10% to approximately $88.2 billion, while interest expenses remained flat at around $1.4 billion.

Thus, with the help of customer prepayments, the company's financing pressure has indeed eased. However, given the current pace of computing power construction and investment, the approximately $36 billion in cash on hand plus the subsequent $20 billion in debt financing may still be tight, and it is possible that actual debt financing could exceed plans.

4. Backlog Grows Steadily: As of this quarter, the company's remaining performance obligations (RPO) reached $664 billion, an increase of $26 billion quarter-over-quarter. Additionally, the company specifically stated that new orders obtained this quarter would not affect previously established financing plans.

5. Gross Margin Continues to Decline Sharply: Due to the OCI business's unexpectedly strong growth, its revenue share continued to rise, leading to a significant decline in both the company's overall gross margin and cloud business gross margin this quarter, falling short of expectations.

The more closely watched gross margin for the cloud & software segment was below 63%, a significant quarter-over-quarter decline of over 6 percentage points, marking a record high decline (drop). The company did not demonstrate the trend seen recently among traditional cloud giants and new cloud players like CoreWeave, where gross margins have bottomed out and even started to rise.

However, since this gross margin metric includes multiple segments such as traditional software, OCA, AI cloud leasing, and traditional OCI businesses, the apparent decline in gross margin may be more due to structural changes caused by a significant increase in the revenue share of AI cloud leasing, rather than a continued deterioration in the gross margin of AI cloud leasing itself, requiring further observation.

What is certain is that with the rise in Capex, the company's depreciation expenses are climbing rapidly, increasing by 134% year-over-year this quarter, accounting for over 16% of total revenue, a significant increase from 12% in the previous quarter. Regardless, AI cloud leasing has undoubtedly made the company's business model heavier and its overall profit margins lower.

6. Non-Cloud Business Remains Sluggish: As mentioned earlier, apart from the strong growth in the OCI business, the SaaS business within the cloud segment did not perform well, and the traditional software business, which still accounts for nearly 30% of total revenue, also saw weak growth. Revenue contracted by about 3% year-over-year this quarter, worse than the -2% in the previous quarter.

Market research suggests that part of the reason may be that customers are gradually replacing traditional software licenses with SaaS services.

Additionally, although hardware sales accelerated significantly, their absolute volume and share were too low (less than 5%), making them almost negligible.

7. Robust Growth Across All Indicators: Overall, despite the continued weakness in traditional businesses, the strong pull from the triple-digit growth in the OCI business drove the company's overall revenue growth to continue rising, reaching nearly 30% this quarter, a full 9 percentage points higher quarter-over-quarter.

However, due to the significant decline in gross margin, overall gross profit grew by less than 16% year-over-year, falling short of market expectations. Nevertheless, this represents a considerable acceleration compared to the single-digit gross profit growth that has persisted for years.

Therefore, although it can be said that the OCI business has low profit quality, its extremely high revenue growth has still helped drive a clear acceleration in the company's overall performance growth (from both revenue and profit perspectives).

Furthermore, since the current OCI incremental business primarily serves a few large customers, there is less demand for Opex spending, including customer acquisition costs. This quarter, operating Opex decreased by about 7% year-over-year, and with higher one-time restructuring expenses in the same period last year, overall Opex declined by over 15% year-over-year.

With accelerating revenue growth and declining Opex, operating profit margin actually improved by nearly 3 percentage points quarter-over-quarter, with operating profit growing by a remarkable 57% year-over-year. Operating profit growth, excluding non-operating factors, also reached nearly 31%.

8. Overview of Key Financial Information:

Dolphin Research View:

1. Strong Quarterly Performance: Recently, the market's core focus on Oracle in the short to medium term has actually centered on two points: a. The company's execution—whether the speed and pace of building and deploying computing power are smooth, i.e., whether OCI revenue can accelerate and convert the over $600 billion in orders on hand into actual revenue as soon as possible.

There is relatively less concern about securing more orders, as additional orders would mean more Capex, more responsibilities, greater execution risks, and uncertainties on the current basis.

b. Whether the company can promptly (and preferably at a low cost) secure corresponding funds to support its Capex and computing power construction, given the pace of computing power deployment.

Relatively, since the market is no longer as worried about the potential ROI of AI Capex and the potential profit margins of computing power leasing, it is believed that as long as data centers can be built, there is little need to worry about recovering costs (at least for now).

In response to the above questions, the answers provided by this quarter's results are relatively favorable:

a. The pace of computing power construction and revenue conversion is good. First, OCI revenue accelerated significantly and exceeded expectations. Although the scale of deployed computing power was slightly lower than previous guidance, the trend is still clearly accelerating (1.2GW for the entire previous year versus 0.85GW this quarter).

b. With customer prepayments covering about 40% of overall Capex, the company's financing pressure has indeed eased significantly. Additionally, the successful completion of equity financing has lifted pressure on the stock price, with cash on hand increasing quarter-over-quarter. Currently, financing does not seem to be a major issue.

However, Dolphin Research cautions that with $36 billion in cash on hand plus the subsequent $20 billion in debt financing, compared to the planned $52 billion in Capex that the company needs to bear itself in the remaining three quarters of the year, funds are not overly abundant (although the company's operating cash flow can also provide some funds).

c. Of course, issues like continued weak growth in traditional businesses and declining gross margins have not disappeared. However, as mentioned earlier, as long as the OCI business, which is the market's core focus, grows strongly, these flaws can be overlooked.

2. Guidance Indicates Continued Acceleration: For next quarter's guidance, the median expected total revenue growth rate is 32%, continuing to accelerate by 2 percentage points quarter-over-quarter but largely meeting expectations. More notably, the median expected growth rate for cloud business next quarter is as high as 68%, accelerating significantly by 8 percentage points quarter-over-quarter, clearly exceeding market expectations.

Combining these factors, it is still likely that the strong performance of OCI is being somewhat offset by weakness in other traditional businesses. In contrast, profit guidance is weaker due to high investments, with expected diluted EPS declining by about 15% year-over-year next quarter, slightly below expectations.

The full-year guidance remains largely unchanged, with a revenue target of $90 billion but increased confidence. Profit guidance has been slightly raised, with diluted EPS increased from $8.05 to $8.1.

3. Investment Logic: Since market concerns about the ROI of AI Capex have eased, and multiple sources indicate that demand for cloud leasing exceeds supply with generally rising leasing prices, and given that previously announced results from traditional cloud giants and other new cloud players showed strong and generally better-than-expected growth, it can be said that the entire cloud computing sector, including the company, is in a relatively favorable market environment.

Based on this quarter's performance and next quarter's guidance, the company is expected to experience an accelerated period of computing power construction and revenue recognition in FY27, with OCI revenue growth continuing to rise, driving overall revenue and profit upward. In other words, from the perspective of performance metrics like revenue and profit, support for the stock price should become increasingly evident.

However, from an valuation and narrative perspective, there may be more risks and volatility. On the one hand, although the company's recent financing has been completed smoothly, as mentioned earlier, actual Capex and financing needs may exceed plans. Additionally, with recent sustained increases in U.S. Treasury yields and seemingly high financing demand from both the government and numerous tech companies, it is not overly optimistic whether the company's future financing will remain smooth or whether financing costs will rise.

At the same time, competition among large models is intensifying, with the gap between leading closed-source models and numerous open-source models narrowing, making the prospects for all model providers, including leading ones, increasingly unclear and to some extent Trapped in a price war (embroiled in a price war), eroding profitability. For Oracle, which is highly tied to OpenAI as its sole model provider, this reduces visibility into its long-term performance.

In addition, recent research indicates that due in part to the decline in Token prices, the growth rate of ARR for large models seems to be showing signs of 'peaking and then declining,' and discussions within the market about whether computing power construction is excessive have also increased once again.

On the whole, the company's fundamental performance is likely to improve in the short to medium term, but the long-term logic and visibility may not necessarily improve or remain stable, and whether valuations can rise is debatable.

4. Since the company's performance depends more on its long-term performance in FY28-30, short-term performance changes have little impact on valuations. At the same time, the company's adjustments to its full-year FY27 guidance are limited, so we have not made significant adjustments to our valuations this time.

If one believes that the company can deliver on its long-term performance guidance, given the recent positive sentiment in the cloud sector and the company's decent performance this time, there may be some room for upward movement in the short term.

However, this optimism seems to be reaching its end. In terms of long-term logic, traditional cloud giants like AWS and Google have the advantage of full-stack technology and self-developed chips, allowing them to excel in energy efficiency.

At the same time, their larger and more diverse customer base and cloud business scale also give them the qualification to occupy a portion of the benefits as model distribution channel providers, regardless of how the market for large models ultimately evolves (as long as it is not monopolized by a few closed-source players). This provides cloud giants with stronger long-term certainty.

While new clouds like Oracle cannot be denied to have greater momentum and room for performance growth, they almost lack unique differentiated competitive advantages, and their necessity and positioning in the industrial chain are not strong, resulting in relatively low long-term certainty. Therefore, they are more suitable as short- to medium-term trading targets, rather than being worth holding long-term like traditional cloud giants, capable of weathering fluctuations brought about by narratives and technological evolution.

Appendix: Oracle Business & Revenue Classification Introduction

Currently, in Oracle's financial disclosures, its business and revenue are divided into four major segments: Cloud, Software, Hardware, and Services. Specifically:

a. Cloud Business: It can be subdivided into two business lines: IaaS-type OCI (Oracle Cloud Infra) and SaaS-type OCA (Oracle Cloud Application). OCA mainly includes SaaS-based general management tools such as ERP/CRM/ERP and some vertical industry tools. OCI mainly includes the company's distinctive database services and computing power leasing business.

b. Software: This refers to traditional software businesses deployed and managed by customers themselves, which was originally the segment with the largest revenue proportion for the company but has been surpassed by the cloud segment. It can be divided into two main parts—one-time software license sales revenue (Software License) and accompanying ongoing service support revenue (Software Support), such as providing usage support and daily updates and maintenance.

c. Hardware: Similar to the software business, it also includes one-time hardware and sales revenue such as servers, as well as accompanying hardware maintenance & support revenue, accounting for the smallest proportion of revenue.

d. Services: Other service businesses outside the aforementioned software and hardware businesses, including consulting services or other customized services, accounting for a high single-digit percentage of revenue in recent years.

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