Oracle Falls Short On Revenue But AI Cloud Contracts Promise A Long-Term Growth Story

On Monday, Oracle Corporation ORCL fell short with its fiscal first quarter and revenue guidance. Shares went down 9% during extended trading. Although Oracle remains much smaller compared to Amazon AMZN, Microsoft Corporation MSFT and Google, Oracle touted contracts with AI development companies.

Fiscal First Quarter Highlights

For its fiscal first quarter that ended on August 31st, the database software maker reported revenue grew 9% to $12.45 billion, below LSEG’s consensus estimate of $12.47 billion. Net income rose to $2.42 billion (86 cents per share) which is a significant improvement from last year’s $1.55 billion (56 cents) per share. However, adjusted earnings per share $1.19 per share topped LSEG’s consensus estimate of $1.15 per share.

Revenue from cloud services and license support segment rose 13% YoY to $9.55 billion, topping the StreetAccount consensus of $9.44 billion. However, he cloud license and on-premises license segment posted $809 million in revenue that came short of StreetAccount’s consensus of $892.7 million. Hardware revenue declined 6% YoY to $714 million, below StreetAccount’s estimate of $739.6 million

Although a much smaller player in the Cloud arena compared to Amazon, Microsoft and Google, Oracle’s cloud infrastructure revenue grew 66%, but slowed down from prior quarter’s 76% as it amounted to $1.5 billion. Larry Ellison, Oracle chair and technology chief announced that Oracle signed contracts with AI development companies that will be purchasing more than $4 billion of capacity in its Gen2 Cloud, which is twice as much compared to end of prior, fiscal fourth, quarter. Moreover, Ellison revealed that xAI, the AI startup of Tesla Inc TSLA CEO Elon Musk, will be using Oracle’s cloud services. Ellison was part of the Tesla board since August last year and it had invested in Tesla shares. Tesla and SpaceX CEO launched his AI company with the goal of ‘understanding the true nature of the universe. The team behind xAI includes Tesla, Twitter, Microsoft, Google and Open AI alumni. Moreover, by taking AI to the next level and getting into the depths of ‘mathematics of deep learning’, Musk seems to be positioning xAI to compete with companies like OpenAI and Microsoft who are pursuing ChatGPT and even the mighty Google.

Softer Than Expected Guidance

For the fiscal second quarter, the Austin, Texas-based company called for adjusted net income of $1.30 to $1.34 per share with revenue growth between 5% and 7%.  This was below LSEG’s pool of analysts forecasts of $1.33 in adjusted earnings per share and revenue of $13.28 billion, which implies 8% revenue growth.

All in all, Oracle stock dived as the legacy tech company was expected to brighten the spotlight on the ‘under-the-radar AI group’ but management provided a soft outlook. Oracle’s transition into the cloud is expected to result in a multi-year growth story but it is resulting in some short-term headwinds as consumers move away from licensed purchases who are recognized upfront to cloud subscriptions. Compared to cloud titans such as Amazon, Microsoft and Google, Oracle was missing lofty expectations. 

DISCLAIMER: This content is for informational purposes only. It is not intended as investing advice.