Oracle sells businesses the software their processes run on and, for some years now, the computing capacity that software can run on. The old model grants a perpetual licence to the database, the middleware or the applications, collects at once, and sells a renewable annual support contract priced as a percentage of the licence; the filing states that substantially all support customers renew on expiration. The new model is cloud in two forms — applications sold on one- to five-year subscriptions and infrastructure sold on consumption or committed multi-year contracts — where revenue arrives over time and the cost arrives first, as data centres to be built or leased.
The business in one page
There are three operating segments — cloud and software, hardware, services — and four revenue lines. Cloud is $33,989 million, 50.5% of revenue, and overtook software for the first time; within it cloud infrastructure grows 76.9% to $18,101 million while software licences fall 8.9% and software support grows 1.4%. The Americas are 66.0% of revenue and the United States alone 59.1%. At year end the group employed approximately 141,000 full-time people, and US long-lived assets had gone from $45,439 million to $102,717 in a single year.
What we think matters
- A recurring base that does not move
- Operating margin held while the mix worsened
- A $638 billion contracted backlog
- Free cash flow negative by $23,686 million
- $273 billion of commitments off the balance sheet
- Incremental return on capital of 4.1% against a 10.1% ROIC
How Oracle makes money
Competitive advantage
The cost of replacing the enterprise database and applications is readable in the support numbers: $19,804 million of support revenue growing 1.4% while new licences fall 8.9% describes a customer who no longer buys but does not leave.
Computing capacity is not yet an advantage but an investment: 181 data centre locations, substantially all leased, and $260 billion of further lease commitments not on the balance sheet.
The filing is explicit about the weak point: lease terms, renewal options and pricing adjustments typically do not align with the duration and pricing of customer contracts, and capacity may not be re-leased on acceptable terms, if at all.
On concentration it says two things that must be read together: no single customer reached 10% of total revenues in any of the three years, while in certain OCI offerings it is more concentrated among a number of large customers. The second is not quantified.
Pricing power
No prices or rate cards are published, so pricing power has to be read from margin: cloud and software 69.9% against 78.8% two years earlier, hardware 71.9%, services 20.7%, total 65.8% against 71.4%.
All of the group's margin compression comes from cloud and software, where direct costs grew 52.1% against segment revenue up 18.9%; management attributes the increase to $5.7 billion of higher infrastructure expense in constant currency.
It is a mix problem rather than a price problem: every licence dollar that becomes a cloud dollar brings an infrastructure cost that did not exist before.
What the filing documents is not the ability to raise prices but the ability not to lose customers.
Growth transparency
Growth is entirely organic. Goodwill moved $54 million, attributed wholly to currency translation, so there was no business combination; Note 5 shows $313 million of gross intangible additions, $287 million of it developed technology.
In the opposite direction, SoftBank acquired the whole of Ampere Computing Holdings on 25 November 2025: Oracle received $4.3 billion of cash and booked a $2.7 billion realised gain below the operating line.
The filing does not show cash paid for acquisitions net of cash acquired. The MD&A bounds it: $864 million of the $2,039 million investing line was purchases of non-current investments, leaving at most $1,175 million for securities and acquisitions together.
Scalability
Scale exists but sits in two lines: sales and marketing from 15.1% to 12.4% of revenue, research and development from 17.2% to 15.3% — 4.6 points released in a year.
The operating margin moves 0.2 points: gross margin takes away 4.70, sales and marketing give back 2.70, research and development 1.93, general expenses 0.39 and intangible amortisation 1.54, while restructuring takes away 2.08.
Below the direct cost line there is no room to manoeuvre: infrastructure cost grows three times faster than the revenue it serves, and the $39,973 million of construction in progress is not yet depreciating.
The model scales well on discretionary spending, which is finite, and badly on the cost of producing cloud, which has only just begun.
Catalysts identified in the filing
- $638 billion of remaining obligations against $138 billion a year earlier
12% expected within twelve months, about $76.6 billion against FY2026 revenue of $67.4 billion, and a further 34% between month 13 and month 36. It is contract already signed: the variable is not demand but the ability to deliver and the solvency of the counterparties.
- $39,973 million of capacity under construction, not yet productive
Construction in progress is 32.6% of gross historical cost and generates no revenue yet. Its entry into service is the mechanism through which remaining obligations become revenue — and also the mechanism through which depreciation arrives, worth about a third of current operating income at a six-year life.
- $940 million of intangible amortisation leaving the income statement
The charge falls from $1,671 million to $731 in FY2027, then $694 and $620. That is 1.4 points of operating margin on FY2026 revenue with nothing changing in the business.
- A restructuring plan almost complete
The FY2026 plan contemplates total costs of up to $2,103 million, of which $1,804 already accrued: less than a sixth remains. If the savings are real, the charge leaves the income statement while the savings stay.
- $6.3 billion of buyback authorisation and a $20 billion equity programme, both unused
Two opposite levers, both available and neither used in FY2026: $93 million of repurchases in the whole year and no shares sold under the at-the-market programme established on 2 February 2026. Which one is pulled will say more than any statement about how management judges its own price.
Financial analysis
Figures for 3 fiscal years, taken from the Key Metrics tables of each annual report. When a later filing restates a figure, we use the figure reported for that year's own filing.
Key metrics
| Metric | FY2024 | FY2025 | FY2026 |
|---|---|---|---|
| Revenue | $53.0B | $57.4B | $67.4B |
| Gross margin | 71.4% | 70.5% | 65.8% |
| Operating margin | 29.0% | 30.8% | 30.6% |
| Net margin (GAAP) | 19.8% | 21.7% | 25.4% |
| Operating cash flow | $18.7B | $20.8B | $32.0B |
| Capex | $6.87B | $21.2B | $55.7B |
| Free cash flow | $11.8B | -$0.39B | -$23.7B |
| Stock-based compensation | $3.97B | $4.67B | $4.81B |
| Dividends + buybacks | $5.59B | $5.34B | $5.88B |
| Net cash | – | -$84.3B | -$105.3B |
| Total debt | – | $95.5B | $137.2B |
| Shareholders’ equity | $9.24B | $21.0B | $43.1B |
| Effective tax rate | 10.9% | 12.1% | 12.6% |
| ROIC (effective tax) | – | 13.1% | 10.1% |
Key risks
The main weaknesses and risks identified in the latest annual report, in the order the report presents them.
- Free cash flow negative by $23,686 million
Operating cash flow of $31,977 million against capital expenditure of $55,663. It is the measure the company itself publishes, it was already negative by $394 million in FY2025, and the filing states capital expenditure will keep growing in FY2027.
- $273 billion of commitments off the balance sheet
$260 billion of data centre leases with terms of fifteen to nineteen years, commencing between FY2027 and FY2029, plus $13.3 billion of unconditional purchase obligations at the close and $19 billion entered after year end: $292 billion in all, more than four times annual revenue. The filing states that lease terms and pricing typically do not align with customer contracts and that it may be unable to re-lease the capacity on acceptable terms, if at all.
- Incremental return on capital of 4.1% against a 10.1% ROIC
NOPAT of $18,010 million on invested capital of $178,594, against 13.1% in FY2025. The incremental figure is 4.1% on $59.9 billion of additional capital, the reinvestment rate is 234.5% of NOPAT, and the bonds issued in the year pay up to 6.85%.
- Net income grows 37.3% but half the increase is one disposal
The $2,700 million gain on the Ampere disposal, about $2,360 net of tax, against a $4,644 million rise in net income; the stock-based compensation tax benefit is worth another $2,062 million. Normalised for both, income is $12,665 million, 74.1% of the reported figure. Without the Ampere gain, growth stops at 18.4%.
- 14.4% of operating cash flow is customers' money
$4,592 million of prepayments with a significant financing component, a line worth zero in both prior years. Without it the cash deficit would be $28,278 million. Tangible equity attributable to common is negative by $27,936 million and cash net of debt is negative by $36.57 a share.
Open questions the filing does not answer
- How much of the $638 billion of remaining obligations is owed by how many customers? The filing attributes the increase to "certain significant cloud contracts" without saying how many there are or what they weigh.
- What capacity do the $260 billion of lease commitments correspond to, and which customer contracts do they match in duration?
- What is the utilisation rate of data centre capacity already in service? The filing does not provide it in any form.
- What is the balance of deferred sales commissions, included without breakdown in other current and other non-current assets, which together bound it at $16,031 million?
- Why does the allowance for credit losses fall 2.7% while gross receivables grow 19.9%, and what effect did that reduction have on the income statement?
- What is inside the roughly $7.6 billion of other non-current liabilities that the filing attributes neither to finance leases, nor to deferred compensation plans, nor to the restructuring accrual?
- What is the reasonably possible range of loss on the securities class action filed in February 2026? The filing neither states it nor states that it cannot be estimated.
- What is the headroom on the goodwill impairment test performed on 1 March 2026? The outcome is disclosed, the margin is not.
The numbers describe two companies superimposed. The first sells licences and support, is worth about a third of revenue, does not grow, and carries a margin built over thirty years. The second sells computing capacity, grows 77%, and to grow has required $55.7 billion of investment in a year, $43 billion of new bonds and $273 billion of multi-year commitments that do not appear on the balance sheet. The income statement is the first company's; the cash flow statement and the balance sheet are the second's.
At $225.78 and 2,880,471,000 shares the market capitalises the common stock alone at $650,353 million, 38.3 times income available to common and 9.66 times revenue. Enterprise value, with debt at carrying value and preferred at liquidation preference, is $760,701 million, 36.9 times operating income: the operating return to a buyer of the whole company is 2.71%, while the bonds that same company issued in February pay 6.70% and 6.85% on the long maturities. Oracle's debt yields two and a half times Oracle's equity, before tax and before growth.
The thesis holds under two conditions, both written in the filing. The $638 billion of remaining performance obligations must become revenue at the pace indicated and with counterparties that pay — 12% within twelve months is $76.6 billion, more than a full year of sales, and the remaining 88% depends on multi-year commitments from customers the filing calls concentrated and in some cases highly leveraged. And the return on new capital must recover: the incremental figure is 4.1% on $59.9 billion of additional capital, and at that level reinvesting 234.5% of NOPAT consumes value rather than creating it. At this price there is no margin of safety in the balance sheet: tangible equity attributable to common is negative by $27,936 million, minus $9.70 a share.
Strengths
- A recurring base that does not move
Cloud and software support are $53,793 million, 79.9% of revenue, up 5.5 points of share in two years. Software support alone is $19,804 million, 29.4% of the total, and grows 1.4% while new licences fall 8.9%: a base that renews almost in full while new sales decline.
- Operating margin held while the mix worsened
Gross margin lost 4.7 points in a year and operating margin only 0.2. Sales and marketing fell 3.7% in absolute terms against revenue up 17.3%, research and development grew 4.2%, and intangible amortisation fell 27.6% — 4.6 points of revenue released by two discretionary lines alone.
- A $638 billion contracted backlog
Remaining performance obligations are 9.5 times annual revenue against 2.4 times a year earlier, with 12% expected as revenue within twelve months, about $76.6 billion, and a further 34% between month 13 and month 36.
- Cloud infrastructure grows 76.9%
From $10,234 million to $18,101, overtaking cloud applications for the first time among the years in the filing and contributing 84% of constant-currency cloud growth.
- No internal control weakness and a stable auditor
Clean opinion on internal control from both management and Ernst & Young, auditor since 2002. No restatements, no change of auditor, one critical audit matter (uncertain tax positions), related-party revenue at 0.06% of the total.
Last year’s watch-list, checked against this filing
| What we flagged | What happened | Result |
|---|---|---|
| FY2024 restructuring plan, substantially complete by 31 May 2025 | Complete; $432 million charged in FY2024 and $314 in FY2025 | DONE - as stated |
| FY2026 restructuring plan: total costs of up to $2,103 million | $1,804 million accrued to date, $1,838 through the income statement in the year | ON TRACK - $299 million still to be incurred |
| Term Loan Credit Agreement 2: 1.25% quarterly amortisation to June 2026 | Balance from $5,419 million to $5,137, that is $282 against the $281 prescribed | DONE - paid to the million |
| €750 million 3.125% notes due July 2025 | Repaid in full upon maturity in July 2025 | DONE - repaid as scheduled |
| $6.0 billion revolving facility maturing March 2027 | Replaced on 6 March 2026 by a $10.0 billion facility maturing March 2031, undrawn | IMPROVED - enlarged and extended |
| Covenant on EBITDA / net interest expense at or above 3.0 | In compliance with all debt-related covenants at 31 May 2026 | MET |
| Repurchase programme: $6.3 billion available, no expiry | $93 million used in FY2026, no activity in the final quarter | UNUSED - no stated target to compare |
| $20 billion at-the-market equity programme established 2 February 2026 | No shares sold under the programme | UNUSED - still available in full |
| Common dividend of $1.70 per share in FY2025 | $2.00 in FY2026, plus $0.50 quarterly declared in June 2026 | RAISED - +17.6% |
What to watch in the next filing
- Share of remaining performance obligations expected within twelve months. Below 10%, from 12% today, contracts are lengthening and revenue is moving further away.
- Depreciation and amortisation as a share of revenue. Above 18%, from 13.8% today, the capacity under construction has entered service and the operating margin is paying for it.
- Interest expense as a share of operating income. Above 28%, from 22.3% today, the cost of debt is growing faster than the income it funds.
- Gross margin of the cloud and software segment. Below 65%, from 69.9% today, the shift to infrastructure is eroding the licence economics faster than discretionary spending can offset.
- Allowance for credit losses as a share of gross receivables. Below 4.0%, from 4.96% today, the company is recognising less credit risk exactly while the filing flags leveraged customers.
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