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Oracle (ORCL +11%) came into this report having gapped lower in each of its two previous earnings reports. Investors were understandably nervous, as we were, heading into Oracle's Q3 (Feb) earnings report last night. However, the stock is up sharply following earnings. The headline numbers did not jump off the page with just a decent EPS beat, in-line revs and in-line EPS guidance for Q4 (May).

• We think the stock reaction is due to a combination of the numbers being better-than-feared, a robust RPO (Remaining Performance Obligations) result and some positive commentary on the call. The RPO metric really stood out. It grew 29% yr/yr to an all-time record of $80 bln, which also was up sharply from Q2's $65+ bln number. Oracle explained that some large new cloud infrastructure contracts signed in Q3 drove RPO higher.
• Importantly, Oracle expects to continue receiving large contracts reserving cloud infrastructure capacity because the demand for its Gen2 AI infrastructure substantially exceeds supply. And that is despite the fact that Oracle is opening new datacenters and expanding existing cloud datacenters very rapidly. Oracle expects that 43% of its current $80 bln of RPO will be recognized as revenue over the next four quarters. Oracle also expects its Gen2 Cloud Infrastructure business will remain in a hypergrowth phase (+53% in Q3) for the foreseeable future.
• While the Q4 guidance was decent but not great, we think investors are gravitating to some bullish longer term guidance comments. Oracle said that, as demand for its cloud services continues getting stronger, its pipeline is growing even faster and its win rates are going higher as well. As its supply constraints ease, Oracle expects revenue growth rates will accelerate as capacity expands in FY25. In addition, Cerner has been a significant headwind in FY24, but Oracle expects a return to growth in FY25. And what maybe caught our attention most was Oracle saying that its previously stated goals for FY26 might prove to be too conservative given its current momentum.
• Non-GAAP operating margin is a metric we like to track. In Q3, it grew to 44% from 42% a year ago and 43% in Q2. As Oracle continues to drive more efficiencies, operating expenses continue to trend down as a percentage of revenue. Oracle expects to continue to expand margins as it continues to benefit from economies of scale in the cloud and drives Cerner profitability to Oracle standards.

After two gap downs in Q1 and Q2, investors are clearly relieved to see Oracle's Q3 results. The numbers did not blow us away, but the robust RPO metric and some comments on the call about FY25-26 were really positive. Investors seem to be focusing on that. Oracle's Gen2 AI infrastructure business is booming and it sounds like that will be a huge tailwind for the foreseeable future. The stock has been in the doldrums, trading mostly sideways since June 2023. However, this report has propelled ORCL to a new 52-week high and hopefully a sustained break above this recent trading range.