Oracle 2Q26 Earnings Update: A clean beat the market refused to pay for; Maintain HOLD

Key Points

• Cash flow quality is the real issue — Record US$23bn operating cash flow was roughly two-thirds deferred-revenue build from prepayments, leaving underlying generation near US$7.7bn against US$28.5bn capex and negative US$5.4bn FCF.
• Record beat, no reward — Revenue of US$19.3bn (+30% YoY) and non-GAAP EPS of US$1.92 beat consensus, yet the stock gave up an 8.5% intraday gain to close ~1% lower.
• OCI is the only engine — Cloud infrastructure revenue rose 121% YoY to US$7.4bn and total cloud now exceeds 60% of group revenue, while software licences (-3%), services (+5%) and hardware left the non-cloud base marginally smaller.
• Backlog is huge but long-dated — RPO of US$664bn (+US$209bn YoY) converts slowly: we estimate under 15% lands within 12 months and more than half only after three years.
• Funding profile constrains the case — A US$125bn debt stack, interest expense up 55% YoY and a US$20bn ATM equity issuance at a sub-hyperscaler credit rating keep us at HOLD.

The rest of the business segments are draggers

AI has lifted the company’s largest business segment, OCI, but with the other business segments remaining lacklustre, Oracle’s revenue is becoming increasingly concentrated in OCI. Software licences and support fell 3%, services grew 5%, and hardware grew 15%. Combined, the non-cloud businesses shrank marginally.

This matters more than it may appear: Oracle’s cloud growth is not being funded by an eroding maintenance annuity, meaning the shift in revenue mix is additive rather than substitutive.

SaaS is the quiet disappointment. Fusion and NetSuite generated US$4.2bn in revenue, up 10% YoY, representing a slight deceleration and growth below the enterprise-applications peer group. Management highlighted customer wins, including Uber, Stanford, Mitsubishi UFJ, Johnson Controls, Saudi National Bank and Petronas, to reassure investors, but this did little to offset the relatively slow headline growth. Management also highlighted increasing customer usage of AI capabilities embedded within Fusion, including more than 150 million utilisation events and over 3.5 million AI agents executed in production environments.

However, the usage has yet to translate into comparable revenue growth. For a business positioned as a durable, high-margin offset to infrastructure cyclicality, 10% growth is underwhelming.

The software licence division declined 15% YoY, but we believe this largely reflects customers migrating database workloads to OCI or Fusion, thereby terminating their traditional support contracts. This is consistent with management’s emphasis on its MultiCloud strategy. Oracle Database running inside AWS, Azure and GCP grew 353% YoY. These customers would historically have purchased a perpetual licence plus support; that revenue is now consumption-based and recognised within IaaS. The dollar does not disappear — it simply moves between reporting lines, and usually comes back larger.

Table 1: Key Financial Metrics

What overshadowed the strong results – The cash flow quality

Oracle generated US$23bn of operating cash flow in the quarter (+184% YoY), a record flattered by customer prepayments. It spent US$28.5bn on capex, up from US$8.5bn in the year-ago quarter and the highest quarterly spending on record. Free cash flow was negative US$5.4bn.

Management guided FY27 gross capex of US$90–95bn, with net cash capex capped at “no more than US$70bn” after customer contributions. Our read is that, if the company follows through on its capex guidance, we could see an improvement in free cash flow over the coming quarters.

Total debt now stands at US$125bn, with little change from the previous quarter, although quarterly interest expense increased 55% YoY to US$1.4bn. Oracle carries a lower credit rating than the hyperscalers it competes with, meaning incremental debt is more expensive for Oracle than for Microsoft, Amazon or Alphabet.

But this does not mean the company has stopped financing its expansion. Oracle completed a US$20bn at-the-market share sale during the quarter, providing the funding needed to support its capex spending.

Something worth highlighting behind the FCF figures. About two-thirds of the record operating cash flow came from an increase in deferred revenue, driven by customer prepayments. Total deferred revenue doubled in a single quarter. While this provides cash upfront, it relates to revenue that will only be recognised in the future and should not be interpreted as evidence of OCI’s underlying monetisation ability. As such, the sharp increase in operating cash flow is somewhat misleading — stripping out the deferred revenue build, underlying operating cash generation was roughly US$7.7bn.

The risk is that this practice effectively pulls forward future cash flows; it does not make Oracle more capable of generating cash than its hyperscaler peers. Conversely, if bookings decelerate while data centre delivery continues to ramp up, operating cash flow could be hit from both directions simultaneously: prepayment inflows would shrink while the deferred revenue unwind begins.

Figure 2: FCF projections

Guidance highlighted margin risk

Next quarter revenue was guided at +30% to +34% YoY, with cloud growth finally showing signs of deceleration (65%-71%). Next quarter EPS guidance at the midpoint ($1.88) is below the Q1 actual — the sequential margin drag from datacentre ramp.

Execution risk fading, macro risk rising; Maintain HOLD

Oracle's 2Q26 was operationally its strongest quarter on record. Growth is now overwhelmingly OCI-driven, while SaaS decelerating and the non-cloud businesses are broadly flat.

The economics of that growth are being reshaped by prepay and bring-your-own-hardware contracts that dilute gross margin. The quality of the cash flow, not the scale of the backlog, is the swing factor from here.

Free cash flow should improve in the coming quarter, helped by the continued build in customer prepayments and by net cash capex being capped at no more than US$70bn after customer contributions. That improvement, however, does not change our view on cash flow quality.

Layered on top is the financing profile: Oracle must still absorb a US$125.3bn debt stack, interest expense up 55% YoY and the dilution from its US$20bn equity issuance in a higher-rate environment. We therefore maintain HOLD despite an upside potential of 27.6%.

We would revisit the rating if Oracle converts its backlog into revenue while stabilising gross margins and generating sustainable free cash flow after normalising for prepayments, or if the valuation offers a wider margin of safety.

Declaration:

This research report was prepared with the assistance of artificial intelligence (AI) tools. iFAST Financial Pte Ltd does not rely exclusively on AI for content generation; the content of this report – including all investment theses, ratings, price targets and conclusions – has been independently reviewed and verified by the research analyst(s) to ensure accuracy and professional integrity.

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.