Oracle Corp (ORCL) Q1 2027 Earnings Call Transcript

Good day, everyone, and welcome to the Oracle Corporation first quarter fiscal year 2027 earnings call. Just a reminder that this call is being recorded. If you have a question today, please press star one on your telephone keypad. Please limit yourself to one question. I would now like to hand the conference over to Mr. Ken Bond, Head of Investor Relations. Please go ahead, sir.

Thank you, Miriam. Good afternoon, everyone, and welcome to Oracle's first quarter fiscal year 2027 earnings conference call. On the call today are Chief Executive Officer Mike Cecilia, Chief Executive Officer Clay McGurk, and Chief Financial Officer Hilary Maxson. A copy of the press release, including financial results, tables, and supplemental financial metrics and guidance is now available on our Investor Relations website. Also available on our website is the slide deck that will be used in this call and a gap to non-gap reconciliation. As a reminder, today's discussion will include forward-looking statements, and we will discuss some important factors relating to our business. These forward-looking statements are also subject to risks and uncertainties that may cause actual results to differ materially from the statements being made today. As a result, we caution you from placing undue reliance on these forward-looking statements and we encourage you to review our most recent reports including our 10k and 10q and any applicable amendments and finally we are not obligating ourselves to revise our results or at least forward looking statements in light of new information or future events before taking questions we'll begin with a few prepared remarks and with that i'll turn the call over to hillary thanks ken hi everyone great to be here with you all today and like ken said um you can follow along with our remarks in the earnings slide deck on our website and via the webcast.

If I had to describe this quarter in one word, I think it would be acceleration, as we're seeing an acceleration in execution across the company, translating into our top and bottom line results. Q1 was another record quarter, driven by strength in both our cloud infrastructure and cloud apps businesses. Total revenue was a record $19.3 billion, up 30% year-over-year in U.S. dollars. And for the first time, Q1 total revenue grew sequentially, an important sign of our continued progress in building scaled infrastructure. Historically, a record Q4 was followed by a lighter Q1. But as we accelerate across the full technology stack, from infrastructure to database to software, that's no longer the case. Cloud infrastructure revenue for Q1 was $7.4 billion, up 121%, reflecting strong execution as we brought record levels of new megawatt capacity online, supported by a continued strong demand environment for compute and our database services. Cloud apps were up 10%, with Fusion and our industry apps tracking well above that, and Mike and Clay will give more details on those businesses in just a moment. Our non-GAAP operating income increased 31% in U.S. dollars to $8.2 billion, driven by strong revenue progression, boosted by operating leverage. Our gross margin did decline, as expected, driven by impacts from ramping up our data centers and the acceleration of infrastructure revenue. However, this was offset in the quarter by lower operating costs and strong operating leverage tied to simplification and efficiency actions. Net-net, our operating margin, remained around flat for the quarter at 42% on a non-GAAP basis. This all translated to a strong increase in our non-GAAP EPS of plus 30% in U.S. dollars, reaching $1.92 for the quarter. The last point I'll make on our financial highlights is that our remaining performance obligations, or RPO, increased $26 billion from Q4. There are two things happening here. First, we continued to grow our RPO during the quarter to support future revenues. And the vast majority of those new contracts were via prepay or bring your own hardware or similar mechanic, so won't require incremental capital from Oracle. Also, that new RPO won't impact our CapEx or revenues until fiscal 28 or beyond. Second, we started to see a strong conversion of our RPO into revenues this quarter, driving our cloud infrastructure results. We've added a few slides here where you can see that strong inflection point in our RPO converting into revenues and operating profits. First, in cloud infrastructure revenues, I already mentioned the plus 121% growth for this quarter, and that's after a Q4 of plus 93%. And we'd expect acceleration to continue in the remainder of fiscal 27 as we convert more RPO into revenues. We now expect around half of our RPO to convert into sales over the next 36 months. Next, not surprisingly, you can see the acceleration in our total company revenues, here shown on a trailing 12-month basis, driving growth in Q1 to five points higher than our Q4 as cloud infrastructure accelerates and becomes a larger and larger contributor. Lastly, our growth in operating income, also on a trailing 12-month basis, shows a similar strong acceleration from 16% to 21% between Q4 and Q1. Now to our balance sheet and cash flows. We drove record cash flow from operations of $23 billion in Q1, again reflecting our strong execution against a backdrop of strong demand, as well as collection of customer prepayments. Our CapEx for the quarter was $28 billion, leading to negative free cash flow of $5 billion. And our net cash CapEx, so net of prepayments, was $18 billion for the quarter. To note, our CapEx will not be linear throughout the year. We continue to anticipate $90 to $95 billion in CapEx for the full year, with not more than $70 billion in net cash CapEx. Lastly, we're quite pleased to announce that we completed our previously disclosed $20 billion at-the-market equity issuance in entirety during the Q1. With that, let me turn the call over to Mike and then Clay to get into more details on our cloud apps and infrastructure businesses.

Thanks, Hilary. I'll start with some additional color on the applications business. We continue to see the power of application suites in the minds of our customers. They are investing in trusted, complete solutions that now seamlessly blend agents and applications together to run their businesses. The introduction of AI is an accelerator, not a replacement for packaged applications. As such, our decades of experience and expertise running business processes across every industry in every geography for organizations of any size gives us the understanding of how to help them succeed. Before AI came along, application suites had already proven their effectiveness. Companies had been able to increase their profit margins because end-to-end automation was standardized and efficient business processes proved to be much more effective than one-off custom solutions. But that did require organizations to follow workflows and processes as designed in the system, something that many struggle to achieve consistently across functions, teams, and regions. AI changes this dynamic. Rather than asking every employee to navigate and execute a process exactly as the system expects, AI agents can perform tasks using the organization's established workflows and business rules. Employees then shift to overseeing agents, resolving exceptions, and applying human judgment where it matters most. By combining applied AI with decades of sophisticated business rules, regulatory compliance, security models, data models, and customer configurations, we enable customers to continuously realize AI's value. while keeping their data secure and their operational guardrails intact. This allows organizations to harness the power of our application suites more easily than ever before. We are incredibly confident in the potential for this new paradigm to deliver much more rapid ROI for our customers. At AI World in October, we will unveil a new agentic AI accelerator poised to redefine how customers deploy Oracle applications faster, simpler, and at a dramatically lower cost. Working alongside Oracle and customer teams, AI agents will automate and orchestrate implementation at an unprecedented scale, compressing SaaS deployments from years to months and months to weeks. It's really the power of these things together that reinforce my belief that the growth of our applications business is only going up from here. In Q1, we had a strong quarter in many of our SaaS offerings driven by the demand environment that I just described. In total, our SaaS business grew 10%, with Fusion growing at 14%. Our Oracle Health business continued to accelerate. And although we don't specifically call it out, our industry applications grew at greater than 20% in Q1. As I mentioned last quarter, NetSuite saw some slower decision cycles last fiscal year, and therefore the growth is a little lower than the rest. But we have an exciting new product generally available that I'll speak about in just a bit. Now, a few customer call-outs from a much longer list in the quarter. Uber Technologies, Stanford University, and Mitsubishi UFG Bank in Japan all went live and or accelerated their usage of Fusion. Pye Barker Fire and Safety chose Oracle's complete application suite from industry apps to Fusion, including Fusion agentic applications. Johnson Controls, the Saudi National Bank, Guidewell Mutual Holding Corporation, a health solutions company serving more than 45 million people, and Petronas, Malaysia's national energy company, each added fusion agentic applications this quarter to drive better And let me share just a few stats around our embedded AI usage and progress in the quarter. Customers use our embedded AI capabilities more than 150 million times during the quarter, with usage growing 42% sequentially. Our AI agents executed more than 3.5 million times in production during the quarter, nearly doubling quarter over quarter. Customers have over 2,300 AI agents in production, and that's up 90% quarter over quarter. Overall, AI production usage across Fusion alone consumed 900 billion tokens during the quarter. I think it's fair to say that customers are using our AI built into our Fusion applications and our application stack every day. Now, turning to NetSuite, we're announcing the general availability of our new AI-powered offering called NetSuite Next. This presents an agentic experience that is simpler, more powerful, and it's infused with AI across the workflows that customers rely on every day. It's easier to adopt, it's more productive from day one, and it's more valuable as customers grow. Additionally, the NetSuite AI connector service, which lets customers securely connect their NetSuite data to leading AI assistants of their choice, including JetGPT and Claude, is already one of the fastest adopted capabilities in the entire history of NetSuite, with more than 10,000 customers already using it. Personal care company EverymanJack estimates that the service alone will save $350,000 annually and nearly 5,000 hours of work. This month at our Oracle Health and Life Sciences customer event, we will debut our all-new Magentic Care Management System alongside a world-class lineup of external speakers. More than EHR, this system connects clinical research and care delivery, reduces the burden of records management for patients, and enables providers to practice at the top of their license with AI as a user interface. There are few AI missions that matter more, helping deliver better care while freeing providers to focus on what matters most, their patients, not computer systems. The proof points around Oracle's AI offerings are definitive, and we remain confident in the opportunity ahead. And with that, I'll turn it over to Clay.

All right. Thanks, Mike. OCI continues to grow quickly by delivering the capacity our customers need. We delivered 850 megawatts of AI capacity, containing more than 300,000 GPUs to customers since the end of Q4. Delivery in Q1 is almost three times what we delivered in all of Q4, and 73% of the total capacity we delivered last fiscal year. This reflects years of investment in every aspect of infrastructure, from data center design, through supply chain and manufacturing to installation and operations. Customer demand continues to support this investment. We closed more than $30 billion of additional AI contracts in Q1 without requiring additional capital from Oracle. Our ability to operate a large multi-tenant fleet remains a significant advantage. GPU utilization remains extremely high at 97.9% in Q1. GPU longevity and value continue to impress. Of all the GPUs that came up for renewal in Q1, that capacity was renewed or resold at a 20% premium to prior contracts. The majority of those GPUs are four years or older. We see a long, useful life with increasing value for the AI capacity we're deploying. Abilene continues to deliver at an extraordinary pace. We delivered 131,000 GPUs there in Q1, 1.9 times the volume delivered in Q4. Six of the eight campus buildings, representing 618 megawatts and 75% of total capacity, have now been delivered to the customer. Customer acceptance has compressed to only 24 hours, showing that the systems arrive ready for customer workloads. The recently released GPT-6 Astra was trained at our site in Abilene. Shackleford is our next gigawatt scale campus and is progressing well. NVIDIA VeriRubin systems are performing better than expected across hardware quality, manufacturing yield, and performance. We will deliver our first VeriRubin systems to customers in Q2. Our database cloud business is also growing quickly. Multi-cloud database revenue grew 353% year-over-year, and multi-cloud customers grew 180% year-over-year. We completed our planned Azure and AWS regional footprint expansion, reaching 70 multi-cloud database regions and 119 availability zones. This gives customers a consistent way to run Oracle AI Database next to their applications and data in the cloud they choose. We also made Oracle Interconnect for AWS generally available. With this launch, OCI now has private, high-speed connections to all hyperscalers with no data transfer charges. That makes it easier for customers to build distributed applications and migrate workloads across clouds. The pace of AI innovation is increasing across the ecosystem. We expanded our open AI relationship to offer open AI API access, chat GPT for work, and codecs through Oracle Marketplace, including GPT-6 Astra. We are bringing Gemini models to Oracle's enterprise applications, and we released new Grok reasoning, multimodal, and text-to-speech models. We also continue to expand the open-source model catalog, including new models from NVIDIA, Quinn, Google, DeepSeq, and others. We announced a multi-year partnership with Continuum to offer its Helios quantum computer through OCI. Helios will operate in a U.S.-based OCI AI data center, enabling hybrid quantum and AI workloads for enterprise, research, and AI customers. Oracle APEX 26.1 brings these infrastructure, database, and model capabilities together for application developers. Apex already runs more than 2 million active applications, with thousands more added every day. Apex Lang is a new technology that represents an Apex application as structured, human-readable application definitions that can be stored in source control, validated, and governed. AI coding agents generate and modify those definitions, while the Apex engine continues to provide the security, reliability, and operational controls required for enterprise applications. Developers gain the speed of generative development without the downsides of difficult-to-maintain opaque application code. We are taking the same approach with the Oracle AI Data Platform. AI Data Platform is now integrated with Codex and Cloud Code, allowing developers to work with AI Data Platform data, knowledge, and capabilities from the coding environments they already prefer. We are also adding advanced MLOps capabilities and working with early launch customers on business knowledge models, semantic region engine, and deep insight agents. These capabilities ground AI in the meaning of an enterprise with context, semantics, and governance. They also bring AI-driven analysis into Fusion Data Intelligence and Oracle Analytics Cloud, where many customers already manage their most important business data. Taken together, Q1 shows how the pieces reinforce one another. We are delivering data center and GPU capacity at a pace that would have seemed impossible only a year ago. Customers are signing new contracts, renewing capacity at higher prices, and keeping the fleet almost fully utilized. We are placing Oracle AI database in every major cloud and making more proprietary and open models available on OCI. We are then connecting those models to enterprise data, applications, and developer workflows. That combination is why demand continues to grow and why we remain confident in the long-term value of the technology we are building. And with that, I'll hand it back to Hillary.

Thanks, Clay. I'll finish with our guidance for Q2 2027 and the full year. In Q2, we would expect growth in total revenues of between 30 and 34% in U.S. dollars. Of that, we'd expect growth in cloud revenues in U.S. dollars of between 65 and 71%. In non-GAAP EPS, we expect between $1.85 and $1.93, up between 21% and 25% in U.S. dollars, and that excludes the gains from Ampere we booked in Q2 of last year. For the full year, reflecting the strong execution and acceleration you see in our Q1, we're upgrading our guidance to at least $90 billion in total revenues. That's a year-over-year increase of plus 34% and to $8.10 for our non-GAAP EPS. Lastly, a small note from my side to please make sure to mark your calendars for our investor day coming up in October. With that, I'll turn the call back to Ken for the Q&A.

Thank you. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. Please limit yourself to one question. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster.

Your first question comes from the line of Brad Zelnick of Deutsche Bank. your line is open please go ahead great thank you very much and first off ken knowing that this is your last earnings call i just wanted to congratulate you on your retirement you know for nearly two decades you've been the face of oracle to the investment community and you've done so reliably and with such high integrity and i know you'll you'll very much be missed thank you um you're welcome as for my question i fully expect oracle will continue to be among a small handful of market leaders for AI infrastructure. And you've told us that fiscal 27 and 28 are peak CapEx years. But at the same time, others in the market are spending hundreds of billions of dollars on capacity with seemingly no end in sight. How should we think about Oracle possibly slowing down spending beyond the next two years if others aren't? And is there a scenario where we could see even higher peaks beyond fiscal 28? What will guide your investment? And then related to that, given the current state of the backlog as it stands today, when should we expect to see the company return to generating positive free cash flow?

Thanks, Brett. I think there's like four questions in there, so I'm going to answer the parts that I want to answer, and then I'll make Hillary do the hard work. So, look, I think you've heard us talking about, you know, for the past several quarters, we're constantly finding interesting ways to fund the business. And one of the mechanisms that we have to fund our business is obviously that we go out and we spend our own capital. But we've invested very heavily in relationships with different suppliers and vendors, invented new business models, including bring your own hardware, all of which have different ways of spreading out that capital. And so I think that we have to separate out in our minds what Oracle spends as CapEx directly, uncouple that directly from how we think about how the business can grow. Because from our perspective, I think we see ways that we see ways that clearly, you know, capital is still required to do this work, but it doesn't all have to flow from Oracle side. It doesn't have to be Oracle CapEx. So I don't see it as a limitation to the growth of our business. I think it just represents the continued evolution of the business model that we're developing as kind of this AI expansion continues. And Hillary, do you want to talk about some of the other answers?

Yeah, sure. So the other question I think you asked was about free cash flow. We haven't given a particular time frame on that yet, and we don't expect to give that What I would say, though, is that each of these projects that we're doing by nature is a strong free cash flow generating project. So as soon as they ramp up very shortly thereafter, they're delivering a free cash flow conversion ratio of something like 100% to post-tax EBITDA. So in fact, the business by nature is somewhat quote self-funding at some point in terms of throwing off a lot of free cash flow. So we haven't given the timeframe on that, but you'll see as we continue to ramp over the next quarters what that could look like. Again, we expect it to be a reasonably quick timeframe past the big ramp up that we have going on today. The only decision there, and you pointed it out, would be about more growth CapEx. And that is something that we want to continue to deploy at the right levels to grow the business.

Thank you so much. Look forward to seeing everybody out at AI World.

Your next question comes from the line of Sidi Panigrai with Mizuho. Your line is open. Please go ahead.

Great. Thank you. And Ken, I also echo my congratulations and best wishes on your retirement. It will certainly be missed. And going back to the question, there's been a lot of speculation about, you know, potential data center delays in New Mexico and Wisconsin. But you delivered on your Q1 target and now is enraging full year 27 revenue guide to now at least 90 billion. So can you give us an update on where both sites actually stand today? And is there any risk to the delivery timeline for those data centers that could pose a risk to your 27 revenue expectation? And as you continue to grow RPO, how comfortable do you feel in your ability to secure and bring capacity online to support that growth going forward? Thank you.

Yeah, thanks. Thanks, Citi. OK, so I'll answer the specific pieces of that, but I think it's important to have some context before we go forward. You know, New Mexico and Wisconsin are very important large sites for us, but I think it's important to have some context. You know, we talk about these sites kind of as being around a gigawatt apiece. We just delivered 850 megawatts in Q1. And what that means is that, and as you can see, neither Shackelford nor New Mexico or Wisconsin or Michigan were delivered in Q1. So we have a large, diverse, broad set of data center developments going on throughout the U.S. and around the world to deliver capacity to customers. Now, some of these sites, like New Mexico and Wisconsin, obviously garner a lot of attention. There's a lot of discussion about them. But I think it's important people realize that all of our eggs are not in a single basket. The next thing I would make sure everybody understands is that when these large sites are built, they don't all come online at once. Let's say that you have a gigawatt site. It doesn't. And it's supposed to start delivering, let's say, in in January of a year. It's not like in January you get a gigawatt of capacity. It's phased over many quarters. um so uh it's not as though if you have a delay compared to a plan in one site that you have some massive thing that hits in a single quarter uh so and then the other thing i would say is is anyone that's been in the business of doing construction or large-scale infrastructure development uh if if they if their plan relies on a hundred percent achievement of every one of their deliverables We have a term for that. It's called a bad plan. And so we try real hard not to make bad plans. So we obviously know the difficulty and the complexity of what we're doing. And we don't assume 100% of everything is going to work all the time. And we have backup options for those things, as well as, you know, we don't count that everything is going to get done exactly on time all the time. So now, moving specifically to the question around New Mexico and Wisconsin. New Mexico is an interesting location. We're making very good progress in terms of construction. Data centers is definitely on track. We're going through the process of acquiring our air permit. And, you know, we've got the technology that we'll be deploying there is Bloom fuel cells, which is by far the most environmentally friendly way that we can do on-site power generation. has extremely low water consumption, has extremely low emissions compared to really any other way to kind of do on-site generation. And so we're very confident that as we continue through this process, we'll work with the local regulators and community citizens in Doña Ana County and with everybody else in New Mexico. But we're just going through the process. And I don't think that's rare for large projects like this one. In Wisconsin, we're not doing on-site generation. We're really working with our partners across the board to design and deliver that energy capability through the grid. But again, working through the process, these are complex projects. And again, in Wisconsin, data center delivery is actually very much on track and going well. Working with the Public Service Commission and ATC and WeEnergies, We're constantly evolving different aspects of the energy design and delivery plan, but we feel very confident in both of those sites. To the question about impact on FY27 revenue, neither of these sites will have any impact into our FY, you know, our previously stated FY27 revenue or earnings guidance. So I would say is, you know, we have some sites that are ahead of schedule, some sites that are more difficult than others. We work through all of them, and we have a plan in place both in terms of risk management as well as, you know, we take that into account and we do our forecasting for how we go about setting expectations for ourselves and then communicating those expectations for you. Oh, and then the last question of like, okay, well, how do we feel about bringing on, you know, more capacity online? I think we feel very excited about it, both in the, you know, obviously the environment continually changes. It used to be that constraints were GPUs and fabs, then constraints moved to power generation, there's data center constraints, but the world's a big place. There's a lot of demand for this capacity, and we're pursuing all the different avenues to bring that capacity online.

So we remain very excited and very confident in our ability to keep meeting both current RPO as well as the future RPO growth that we are expecting to see. that's great color thanks for clarifying all those points your next question comes from the line of ramo lenschau of barclays your line is open please go ahead thank you uh first of all all the best for ken and thank you for the team for making ken's last quarter like such a great quarter uh my question is again on the data center side um obviously there's a lot of talk about component price increases, et cetera. Clay, can you talk a little bit about how your pricing is evolving between contract pricing, spot pricing? And you gave us a framework on gross margins last year. Is that still holding? How should we think about that in this ongoing dynamic on component pricing? Thank you.

Sure. But definitely prices in a world where demand exceeds supply, typically Typically, prices don't go down. They do go up. And so, you know, I think the net effect is that obviously things cost more, but then we have to charge more money for them so that we get compensated. And we're doing that across all of these different businesses. No, we don't expect this to have an impact on our gross margins. So I think the previous guidance that we've given you there is still remains true. I will say is that, you know, as I mentioned in my prepared remarks, I think there's a lot of people have been very concerned about, you know, what is the useful life of the different hardware assets? What is the useful, what is the demand going to be for data centers and the power capabilities that come with it? You know, I've been in the infrastructure business for, you know, pretty much all of my professional career. I've been doing it now for 12 years at Oracle, one invariant that has been true so far is that the demand for server-side computing in data centers has only gone up. And it turns out so far that everything we see about the AI use case is the same way, but only more so, right? The fact that when we go out and we have capacity up for renewal, that we actually can achieve higher prices to the order of 20%. All of those are very positive signs for both the continued demand, the growth, and then the profitability of this business.

Thank you.

Your next question comes from the line of Mark Modler of Bernstein. Your line is open. Please go ahead.

Thank you very much for taking my question. Ken, we're going to be sorry to see you go, but I'm sure you have an amazing bucket list ahead of trips and things to do. So I'd like to focus in on the RPO. Can you give us more details on the drivers of the growth of RPO that is not requiring additional CAPEX to prepaid and bring your own chips? Is this AI labs and semiconductor companies or is that sovereign? In fact, we've not discussed Sovereign Cloud in a while, and we haven't discussed Sovereign AI at all. Can you explain how that side of OCI is going and how that will impact CapEx and margins?

So let me make sure we clarify one thing first, and then I'll dive into the pieces. I didn't say, and I don't think myself nor Hillary said that it doesn't require additional CapEx. We said it doesn't require additional cash from Oracle, right? Right. So, you know, at the I'm not an accountant, but I get to play one on TV sometimes. But the intention of what we're trying to say is that while there clearly are capital expenditures, it does not require Oracle to go out and find additional cash to do it. Now, the question becomes, well, how do you do that? Well, we have a variety of different models. Sometimes it's working with our suppliers through different financing arrangements that allows us to pay for the capacity. as the customers pay us. That's one mechanism. Another mechanism is that a customer says, hi, I'd like to pay for the hardware, but use your operational ability and your cloud infrastructure technology assets and your data center to go out and actually turn that into an AI cluster. It's a different option. A third option is that the customer has been able to raise money. Maybe it's a startup, maybe it's an established company and says, hi, I would like to pay you up front you know as a prepayment and in return that doesn't require you to front the cash to go out and spend spend those uh your dollars on that capital expenditure so we have different models for achieving that goal um in terms of the types of customers and and where we see that demand it's really broad-based right uh it doesn't matter if it's a startup or uh you know the the most valuable investment grade companies um there's an understanding of this model right now that But, you know, the access to capital and different ways of funding it are a constraint and the industry adapts to allocate that the most efficient way possible. Now, specific to your sovereign cloud question, look, our, you know, our alloy business is doing well. We've got a lot of partners in Japan. We've got great partners in the Middle East. We've got partners that are both going after the commercial business in a more sovereign way, as well as kind of more government-focused sovereign cloud. That continues to expand broadly. We're seeing lots of demand. And also, it's actually tied to AI as well, because many of those customers, we offer GPU capabilities for those customers, and they deploy that for those own sovereign workloads. Obviously, we also have a very large and very rapidly growing general purpose cloud business that we don't talk about quite as much, but that is growing rapidly and has great growth rates, great margins, and does require some capital, but not as much as these giant AI Thank you.

Your next question comes from the line of John DeFucci of Guggenheim Securities. Your line is open. Please go ahead.

Thank you for taking my question. I'm going to make a quick comment here, too. I've covered Oracle for almost three decades, and I think, Ken, you've been there for close to two. In this business, it's always nice to develop professional friendships, but it's even nicer when they become personal friends, which is what I count you as. And importantly, I've learned a lot from you. So I just want to say thank you. But as far as what Ramos said, I'm glad, team, you had a good quarter, but not so much for Kent. For me, because you're my best idea, and it's all about me. So I think my question here is for Hillary. Hillary, gross margins came down meaningfully this quarter, but you had so much capacity coming online this quarter. I assume that before that, there were a lot of expenses associated with those deals coming online. but they didn't have much revenue yet. Nevertheless, it was a big drop in gross margins. And it's something that we all on this call talk a lot about when we're talking to investors. But as you pointed out, operating margin was flat, flat-ish up a little bit year over year. I know operating margin is the North Star because that's closest to the bottom line profit and eventual cash flow. But how should we think about gross margins going forward in addition to operating margins, that whole ecosystem?

Sure. So for me, gross margin, obviously an important thing to follow both internally and externally, because particularly, actually in both of the business models or all three of the business models that we have, it's really a health indicator of the business. Are you, you know, can you price? Are you pricing at the right level? Are you able to manage your input costs? So gross margin to me is always an important indicator, probably even more important internally for us to double check. And I think investors obviously want to double check. It's something that will change very quickly, for example, if we don't have the right pricing model. When we talk about driving value, though, and driving value for the business, for me, operating margin is probably the ultimate point that we want to follow. So gross margin, like you mentioned at the moment, there's a number of things going on. We have both the ramp up and data centers. Plus, we have an adjustment across the two business models that we have in the business. Software being a much higher gross margin business, but with higher R&D and sales costs below gross margin. Infrastructure being a lower gross margin business. And we've talked about that and we gave the numbers. Clay has given the expectations for quite a bit of that business. Not database, obviously, but the more AI infrastructure and cloud side. But that business by nature has much lower R&D and sales associated with it, at least in a company like Oracle, where we can effectively gain from all of the R&D that's already been done and being done across the rest of the company. So really how to watch how we're going to drive value out of the business over time. I think operating margin is really the key metric that we would look at. Again, not forgetting about gross margin, something to look at, but operating margin being very, very important tied to value.

Thank you. That's clear. And that's what we'll focus on. But how should we just so, because most people, I think the street typically overestimates what your gross margins are going to be and they underestimate what the impact is going to be to operating margins. So it should, I don't know if you're prepared to say like, Should gross margins continue to go down now from here, or should they be steady around these levels for the rest of this year? How should we think of that?

Yeah, so we'd mentioned already, I mentioned in the Q4 that we would expect a step down in gross margins this year. You can see the EPS guidance that we give, though, so you can see what we might expect in terms of operating margin. Over the next couple of years, as we finish the ramp up, you can reasonably expect that gross margin would flatten, I would say. But we haven't given any particular guidance today. We'll speak more about some of this stuff on the upcoming Investor Day, though, in October.

Great. And thanks for all the detail tonight. This is really helpful. Thank you.

Your next question comes from the line of Brent Thill with Jeffries. Your line is open. Please go ahead.

Mike, good to see double-digit growth in SaaS. Maybe if you can walk through what you're seeing over the next couple of years. I think there's been this fear of the SaaS business across the industry taking a hit because of AI, but it seems like that's not your view. Give us your perspective on what you're seeing in terms of keeping sustainable double-digit growth.

Yeah, sure. Well, thanks for the question. Here's how I think about our SaaS business, and I'm going to take the liberty of broadening it a little bit because I think there are a couple key adjacent things that are very important in SaaS. First is we have a highly differentiated offering in that we have end-to-end suites that automate complete industries, healthcare, retail, telecommunications, construction. There's a whole list of these industries where we have horizontal applications, vertical applications, and, you know, if you look at our two very big categories in the quarter, both Fusion and Industries are industry applications growing very nicely. The fact that customers can get them as a complete suite and a complete package has been a differentiator for Oracle for years now. And now you layer in AI embedded into those workflows, you know, adding AI as a service as part of the regular application updates that our customers are getting. And we think, Brent, it's a really nice way for customers to get value from AI or ROI from embedded AI very, very quickly without having to bolt anything on as a sidecar. Now, the next layer is our Fusion Agentic AI Studio, which allows customers and or partners to build their own AI agents right inside the same platform. That's not a different platform. It's not a different control plane. It is the same control plane and the same platform that our applications are running on, which means that Agentex Studio, which allows customers to build their own agents or partners, gets all of the same quarterly updates, gets all of the same security patching, and is available as a complete service to our customers. And you're allowing customers to position AI as a UI on top of a very complex set of business rules, on top of a on top of a highly differentiated security model and, of course, data models that have evolved for years and years. So you put the horizontal suite, so the horizontal applications, the vertical applications, the agentic studio together, and we think that's very compelling. But if that's not enough, the next piece that we're, as I mentioned, that we're unveiling is AI-assisted GoLives. You know, these are, in many cases, we're taking on very hard work and helping our customers solve very mission-critical industry-specific problems. And sometimes those go-lives can take a long time. They're complex. There's data migrations. Well, AI has given us a tremendous ability to accelerate those go-lives. And we have some proof points for the tooling that we've rolled out to date, and we'll roll out a bunch more of it at AI World. But we've seen, for example, complicated GoLives in our healthcare applications that were in the high double-digit months coming down to single months for GoLives. In our NetSuite applications, we've seen early customers leveraging these AI tools coming down from double-digit months down to single-digit weeks in order to be able to go live in production. So we think that does two things. Number one, it helps us it helps customers rather get to value from AI more quickly than ever and certainly at a lower cost. And number two, in some of these very complex industries, there's ramps associated with these with these go lives. And it allows us to unlock the ramp and recognize revenue more quickly than we may have what we have in the sort of manual implement implementation piece. But I think the other piece that's quite important is, as we mentioned in the press release, is, again, part of the same platform that we're running our applications on, the AI data platform, which automates the creation of enterprise ontology. So while we are very honored to serve our customers with a very widespread and very large suite of applications, there are other applications as well. And being able to take those applications that our customers are running, create an enterprise ontology as an automated service, and then layer those AI agentic studios on top of that. You know, when you put all that together, right, I just don't think that anybody else in the market is delivering all of that as a cloud service, certainly not in highly regulated industries, certainly not at the scale that we are. And then one other thing I'll mention about our SaaS business is that our SaaS business is also a wonderful lead generation business for our IaaS business. Our SaaS customers are also buying OCI. They also have other workloads, non-Oracle workloads, that they're more than happy to leverage OCI. They get a very good test of the performance and scalability of OCI as a SaaS customer because they are inherently an OCI consumer at that point as well. So we think about it as really the SaaS business being part of our overall solution set that we're delivering to customers. We continue to invest in that solution set. We continue to make it easier to go live and add more and more tooling to allow customers to configure and leverage AI. So for all those reasons, we're quite optimistic on the future of our applications business.

Thanks, Mike.

Your final question comes from the line of Kirk Matern with Evercore ISI. Your line is open. Please go ahead.

Yeah, thanks very much. Ken still has an analyst day to get through, so I'll wait and say congrats to him in person in a month or so. But, Mike, you mentioned the AI data platform. You guys put it in your press release, so I just want to double-click on that. It seems like an important way in allowing customers to deploy agents against their proprietary data. Can you just help us understand the business model around that?

Does it drive incremental consumption of Oracle Database, OCI, or do you see that being sort of a standalone software revenue opportunity? i was just curious you know kind of how we should think about that playing into the financials over time thanks yeah i i think i think you you sort of clicked on the answer really to the business model is is all the above i mean you know certainly we we can run this uh in a model where we're consuming 100 of you know non-oracle work this is by no means specific to the oracle database for the oracle applications the ai data platform is agnostic and able to pull in and and automate the the ontologies from any data source in fact we have hundreds of data sources that's uh we're doing this automation for today. So, you know, whether it's just pure consumption of AI data platform, whether it's used in concert with our applications, or whether it's used in, you know, in concert with OCI, we're more focused on allowing the customer to make the best choice or the partner to make the best choice that suits them. So I think it really helps all of our business. I would say also, you know, that the Oracle database still remains the most, you know, probably the most coveted custodian of mission-critical data in the world. And certainly as we're able to automate ontologies and have the Oracle database as one of the primary feeds, at least for the mission-critical data group, that also helps us unlock our ever-growing multi-cloud database as well, where certainly customers would like to take those on-premises versions of the Oracle database and very easily move them to the cloud. As we continue to invest in making that available in every cloud, in every region, we think the AI data platform will help drive that growth as well.

I know you guys have a huge services ecosystem, but will you guys be putting forward-deployed engineers around that to try to help customers understand some of the opportunities, things they can expose perhaps they haven't been able to expose before with the database? Is there a go-to-market angle to it, too?

Yeah, absolutely. And we are already investing in deploying forward-deployed engineers at our customers. That's true for the iData platform. It's also true for our Fusion Digentic Studio. as we see them really as a combination platform running on a single control plane in OCI. So, yes, no doubt that service offering, we think, is necessary. I actually think will help get the customers live as quickly as we possible can. And as I said, we're measuring some of the successes now in weeks, which in heavily regulated industries you really would not have dreamed of maybe even a year ago.

Thank you, Mike. All right. For next quarter, we expect our Q2 fiscal year 27 earnings results will be announced on December 14th of 27, 26, excuse me. Any change to the date will be publicly announced. A telephonic replay of this conference call will be available for 24 hours on our investor relations website. Thank you for joining us today. And with that, I'll turn the call back to Miriam for closing.

Thank you. This concludes today's conference. We would like to thank you all for your participation today. You may now disconnect.