Can Oracle's strong earnings reinvigorate the AI trade?

Oracle delivered a solid Q1 earnings report, beating both revenue and earnings expectations. Adjusted revenue for the quarter came in at $13.31 billion, up 6.9% year-over-year (y/y), narrowly surpassing analyst expectations of $13.26 billion. Adjusted EPS was $1.39, a healthy improvement from $1.19 y/y and above the consensus estimate of $1.33. This performance was supported by strong growth in its cloud services and license support revenue, which grew 10% y/y to $10.52 billion, meeting expectations. Oracle's ability to exceed expectations in both top and bottom lines highlighted its solid execution, particularly in its cloud offerings.

Shares of ORCL are breaking out to all-time highs following the news. The rally is sparking questions on whether the performance and outlook will help reinvigorate the beaten down AI names.

Digging deeper into key revenue categories, Oracle's cloud license and on-premise license revenue was a bright spot, growing by 7.5% y/y to $870 million, above the estimate of $731 million. However, hardware and service revenue showed weakness. Hardware revenue fell by 8.3% y/y to $655 million, missing estimates of $690.3 million, and service revenue declined 8.7% to $1.26 billion, below the consensus of $1.35 billion. Despite these declines, Oracle's core cloud and software segments continued to drive overall growth.

Oracle's cloud business remains central to its growth story, with cloud infrastructure revenue at $2.2 billion, in line with estimates. Cloud revenue, including Infrastructure as a Service (IaaS) and Software as a Service (SaaS), grew 21% in USD and 22% in constant currency, reaching $5.6 billion. The company’s strong performance in cloud services underscores its transition towards a cloud-first model. Oracle's multi-cloud partnerships, including a newly announced strategic alliance with Amazon Web Services (AWS), are seen as key drivers for its future cloud revenue growth.

Guidance for Q2 2024 was somewhat conservative, with Oracle projecting 7-9% revenue growth, compared to 8% growth in Q1. The company also provided a cloud growth forecast of 23-25%, only modestly above the 22% growth in Q1. However, management expressed confidence in achieving double-digit revenue growth for the full fiscal year 2025, supported by a strong contract backlog that is expected to contribute to accelerating growth throughout the year.

Oracle has been vocal about its ambitions in artificial intelligence (AI), with this quarter showing clear momentum in AI-driven bookings. The company noted strong demand for AI infrastructure, with 42 new GPU deals signed during the quarter, totaling $3 billion. This has contributed to its remaining performance obligations (RPO) reaching $99 billion, 75% of which is tied to its Oracle Cloud Infrastructure (OCI). The growth in AI-related bookings further reinforces Oracle’s positioning in the AI space as it continues to invest heavily in data centers and AI infrastructure.

Oracle Cloud Infrastructure (OCI) continues to be a major focus for the company. OCI grew by 45% y/y, driven by a combination of new multi-cloud partnerships and strong demand for AI infrastructure. The AWS partnership to host Oracle Database further expands its cloud ecosystem, complementing existing agreements with Microsoft Azure and Google Cloud. Management reiterated its target of over 50% OCI growth for the fiscal year, signaling confidence in the cloud platform’s ability to scale and drive long-term growth.

Overall, Oracle’s Q1 results reflect impressive execution, particularly in cloud services and AI infrastructure. The company’s strong guidance for fiscal 2025 and its accelerating cloud revenue provide a positive outlook for continued growth. With ongoing investments in data centers, strategic partnerships, and an expanding AI footprint, Oracle is positioning itself as a leader in cloud and AI services, which could help drive further revenue and margin expansion in the coming quarters.