Oracle posts weak cloud sales, raising fear of delayed payoff

[NEW YORK] Oracle posted disappointing cloud revenue, suggesting it will take longer than expected for the company’s recent huge artificial intelligence (AI) bookings to pay off.

Fiscal second-quarter cloud sales increased 34 per cent to US$7.98 billion, while revenue in the company’s closely watched infrastructure business increased 68 per cent to US$4.1 billion. Both numbers fell just short of analysts estimates.

Remaining performance obligation, a measure of bookings, jumped to US$523 billion in the fiscal second quarter, which ended Nov 30, the company said on Wednesday (Dec 10). Analysts, on average, estimated US$519 billion, according to data compiled by Bloomberg.

Known for its database software, Oracle has recently found success in the competitive cloud computing market. It’s engaging in a massive data centre build-out to power AI work for OpenAI and also counts companies such as ByteDance’s TikTok and Meta Platforms as major cloud customers.

Still, Wall Street has raised doubts about the costs and timelines required to develop AI infrastructure at such a massive scale. Oracle has taken out significant sums of debt and committed to leasing multiple data centre sites.

Investors want to see Oracle turn its higher spending on new data centre infrastructure into revenue as quickly as it has promised. Capital expenditures, a metric of data centre spending, were about US$12 billion in the quarter, an increase from US$8.5 billion in the preceding period. In September, the company projected capital expenditures of US$35 billion for the fiscal year.

Analysts anticipated US$8.25 billion in capital spending in the quarter.

“Oracle is very good at building and running high-performance and cost-efficient cloud data centres,” Clay Magouyrk, one of Oracle’s two chief executive officers, said. “Because our data centres are highly automated, we can build and run more of them.”

The shares declined 5 per cent in extended trading after closing at US$223.27 in New York. The stock has lost about a third of its value since Sep 10, when investor enthusiasm about Oracle’s cloud business pushed the company to an all-time high.

This is Oracle’s first earnings report since longtime chief executive officer Safra Catz was succeeded by Magouyrk and Mike Sicilia, who are sharing the CEO post.

Part of the negative sentiment from investors in recent weeks is tied to increased scepticism about the business prospects of OpenAI, which is seeing more competition from companies such as Alphabet’s Google, wrote Kirk Materne, an analyst at Evercore ISI, in a note ahead of earnings. Investors would like to see Oracle management explain how they could adjust spending plans if demand from OpenAI changed, he added. BLOOMBERG