Oracle's first-quarter earnings report on Thursday afternoon will be another milestone in its multiyear transformation from a legacy software company to a cloud giant. The company's financials are also being transformed in the process, and the stock has become a proxy for OpenAI.

Before the artificial-intelligence investment boom, Oracle was a mature software company that grew slowly, but also kicked off a lot of free cash flow that became shareholder cash return through dividends and share repurchases, halving the share count in the process.

Now, the company has a cloud infrastructure business that rents out AI servers over the internet. Wall Street expects sales from that business to grow by 112% in the first quarter to $7.1 billion. The rest of the company is only projected to expand at a 4% pace, so cloud infrastructure is becoming a bigger part of the company every quarter. Only 18% of sales in fiscal year 2025, the segment is expected to produce 60% of revenue next year, and keep growing from there.

Overall, sales are seen growing by 28% to $19.1 billion, with adjusted earnings per share of $1.74, up from $1.47 last year. Earnings are growing less quickly than sales because cloud infrastructure profit margins are lower than that of software.

Whereas companywide gross margins were around 75% a few years ago, they are expected at 62% for the first quarter, with continued declines in the future. The company is partially making up for it with operating expense efficiency, and operating margins have suffered less erosion.

In the process, Oracle has transformed its balance sheets and cash flow statements. Capital expenditures are rising dramatically, expected at $92 billion this fiscal year, up from $56 billion last year. In fiscal year 2024, the company only spent $6.9 billion on capex. In the process, free cash flow has gone negative, and share buybacks ended. The share count is rising.

Analysts don't expect free cash flow until 2030. To fund these investments, Oracle added $37 billion in long-term debt last year, and will probably need to borrow more in the future.

The expected fast growth of cloud infrastructure is predicated on Oracle's giant multiyear backlog, which sat at $638 billion when the company reported its fourth quarter three months ago. But almost half of that comes from a single cloud infrastructure contract with OpenAI and, to some extent, Oracle stock has become a proxy for sentiment on the fast-growing AI start-up, which may go public soon.

This depressed Oracle's stock over the summer, as enthusiasm for OpenAI faded with the fast rise in the sales of its main competitor, Anthropic. Moreover, both companies are seeing pricing pressure from much less expensive AI models, and OpenAI lowered prices across its GPT-5.6 family of models in July and August. But September saw another shift in OpenAI sentiment, and Oracle stock is up 8.4% this month.

Though the OpenAI partnership remains the most important for Oracle, its non-OpenAI backlog more than doubled over nine months, so it is lessening its dependence on that one contract.