by Thomas Shipp, Head of Equity Research, LPL Research
Additional content provided by Tucker Beale, Analyst, Research.
The Oracle of RPO
Investors were positively surprised by Oracle’s (ORCL) earnings for the first quarter of fiscal 2026, released after the market closed on Tuesday, September 9; shares rose 36% the following day. However, it wasn’t the reported revenue or profit that shocked investors — both of those metrics missed analyst expectations. The excitement was due to the forward-looking guidance provided by the company in its Oracle Cloud Infrastructure segment, and specifically the 359% year-over-year increase in remaining performance obligations, aka RPO. No, that is not a typo. ORCL’s reported RPO was $455 billion, which is a staggering $356 billion increase compared to the prior year. But what is an RPO? In today’s blog, LPL Research digs into the metric that had most Wall Street analysts singing ORCL’s praises, and everyone else looking up just what exactly constitutes a remaining performance obligation.
Brief Accounting Lesson
Generally accepted accounting principles (GAAP) require public companies to report RPO (if applicable to the business) in the notes to their financial statements, and companies must follow the Financial Accounting Standards Board (FASB) rules set out in the Accounting Standards Codification (ASC) section 606, Revenue from Contracts with Customers. RPO refers to the total value of contracted products or services that a company is obligated to deliver but has not yet recognized as revenue on its financial statements. It encompasses both "unearned" revenue (already received but not yet earned) and "unbilled" revenue (not yet invoiced) from existing customer contracts and serves as a forward-looking metric to show future revenue potential. RPO is often broken out into near-term or current RPO, which will be recognized within one year, and non-current RPO, which will not be recognized within one year. This metric can be thought of as revenue backlog, which must follow explicit GAAP rules, including being based on executed contracts, making RPO more concrete than some non-GAAP metrics like “pipeline” or “bookings”. That said, contracts, especially long-term contracts with completion dates far into the future, can be amended/changed, and as such, RPO can change. Don’t believe us? Just ask any offshore rig owner / operator.
RPO Does Not Equal Revenue, or Return on Investment
Now that we have the basics of RPO from an accounting perspective, we can touch on how investors should, and shouldn’t, think about RPO. Returning to the ORCL earnings release, one key data point that investors did not get was the profit profile of the RPO. This is not a requirement of reporting RPO, and investors should always take an exuberant management team’s messaging on backlog / RPO with a grain of salt, especially when related to long-dated contracts far into the future.
Consider this hypothetical an investor may come across when analyzing RPO: a business is eager to grow their share of a given market and agrees to a multi-year contract starting two years in the future, with a total revenue value of $10 billion. The company’s services generally carry an operating margin of 25%, in line with competitors, but in this case the company will also need to purchase custom widgets to fulfill the customer’s contract that cost an incremental $2 billion (ie, 20% of total contract value) compared to standardized widgets. This brings the operating margin for the contracted revenue down to 5%, well below the company’s typical rate of return, and their cost of capital. Upon execution of the contract, the company issues a press release highlighting their multi-year contract with a large, well-known customer, that will add $10 billion to the company’s RPO, an increase that is larger than five times their prior year’s total revenue. The company does not have to report the below-market return profile of the new contract and has followed the guidelines of GAAP when it comes to RPO. This conduct is typically seen in cyclical, commodified businesses with high asset intensity, particularly during a downturn in the industry. There are several potential rationales for agreeing to a value destroying contract such as the hypothetical scenario laid out: it may be better to keep an asset working through a down-cycle; the mere winning of the contract may signal to competitors that the company is serious about growth; or perhaps there are executive compensation targets aligned to asset utilization / RPO additions. This is how a diligent analyst adds value to their investment process.
The takeaway here is that reported growth in backlog, or RPO, does not equal increased profitability or returns on capital. Investors must remain diligent, with a dose of healthy skepticism, when managements report massive upticks in RPO that is not to be recognized for many years into the future. Reported RPO is most useful for analysts modeling and forecasting revenue into the future, as well as understanding the market’s demand for a product or service into the future.
Conclusion
ORCL’s recent quarterly earnings report, including disclosure of a massive ramp up of RPO in its cloud infrastructure business, was by all accounts a coronation of sorts into the mega cap AI leaders club, if they weren’t already part of it. Setting aside the specifics of ORCL’s quarterly earnings release, we learned that remaining performance obligations, or RPO, is a GAAP approved measure with specific rules governing its reporting. RPO and contracts that add to it are not guaranteed and are not always near-term sources of revenue. Nor does the reporting of a large uptick in RPO tell us anything about the ROI on that revenue, when it is eventually realized.
LPL Research’s Strategic and Tactical Asset Allocation Committee (STAAC) remains neutral on the technology sector. While fundamentals are solid currently and technical analysis trends remain positive, sector concentration (~34% of the S&P 500) and elevated valuations (~30 times the consensus next 12 months EPS estimate) cause us to maintain our tactical neutral stance and wait for a better entry point before considering adding technology equities exposure beyond the market’s weight.
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