Oracle Spent More on Data Centers Than It Earned; Stock Rose 7%

Oracle closed Thursday in New York at $152.94, down 5.38%.

Five minutes after the bell the results landed. Revenue and profit both beat, cloud infrastructure revenue more than doubled, and the stock rose more than 6% in after-hours trading.

At the time of writing it was quoted at $162.30. It had closed the previous day at $161.63.

What the market paid for an earnings beat: 67 cents.

The Numbers Were Genuinely Good

Revenue came in at $19.3 billion, up 30%. Consensus was $19.13 billion.

Adjusted earnings were $1.92 a share against an expected $1.74.

The real move was in cloud infrastructure. That line reached $7.4 billion and grew 121%; in the prior quarter it grew 93%.

Software licenses and support — the business Oracle was built on four decades ago — came in at $5.5 billion and shrank 3%.

Oracle now makes more money renting computers than selling software.

Seven and a Half Years of Booked Work

The backlog — remaining performance obligations, the accounting term for signed but undelivered work — reached $664 billion. A year earlier it stood at $455 billion.

The company's guidance for this fiscal year is at least $90 billion of revenue.

At that pace, the work already on the books would take seven and a half years to deliver.

Only one of the five lines is shrinking, and it is the one that made the company's name.

A Promise and an Invoice

A backlog is a promise of revenue.

Capital spending is an invoice.

The gap in timing between the two explains this entire report. The backlog grows the day a customer signs; the building, the chips and the grid connection that will serve that customer are paid for months before any revenue is recognized.

Debt closes the gap. Total borrowings stood at $125.3 billion at quarter end, $117.7 billion of it long term.

The Backlog Grew; Its Growth Rate Fell

Here is the part that does not fit the story.

The backlog was $553 billion at the end of March. It reached $638 billion in June — an increase of $85 billion. At the end of August it was $664 billion, an increase of $26 billion.

The backlog is still growing. Its growth rate fell to a third of what it was.

That alone is not deterioration; a $638 billion base is already high, and a single enormous contract can change a quarter completely. But the number that carried the stock over the past year was not the size of the backlog. It was the speed at which it grew.

Yields Hit a High the Same Day

On the day the results landed, the 10-year Treasury yield rose 11.4 basis points to 4.954%, its highest in a year. The 30-year yield reached 5.367%.

Brent crude rose 3.6% the same day to $105.37. The major indexes closed lower for a fourth straight session, with the Nasdaq 100 fund down 1.01%.

Oracle's 5.38% loss during the session cannot be pinned on the results — they had not been released yet, and the whole market was falling. The stock fell harder than the index. That is all that can be said.

But the rising yield is not a technical footnote for this company either. Its existing debt is largely fixed-rate; a higher yield does not reprice the old borrowing, it makes the new borrowing more expensive.

The stock is down 34% year to date. Its 52-week range runs from $114.50 to $345.72.

What Is Left

There is nothing false in the story Oracle tells. The demand is real, the backlog is real, the revenue growth is real.

The argument is not about whether the story is true. It is about how it is financed. The number to check next quarter is not how fast revenue grew, but where the quarterly backlog increase goes from $26 billion.

This piece draws on Oracle's first-quarter results release of September 10, the income statement and cash flow lines published with it, after-hours price data, and reporting on Treasury yields, crude oil and index levels for the September 10 session. Consensus figures are broker compilations, not company statements. After-hours prices are provisional and can change in the following session.