Oracle's Cloud Efforts Receive A Much-Needed Validation

On Tuesday, Oracle Corporation ORCL posted its fiscal fourth-quarter earnings that were below estimates. But, known for its database software, Oracle went all in to expand its cloud infrastructure unit to compete with Amazon.com Inc AMZN, Microsoft Corporation MSFT and Alphabet Inc GOOGGOOGL. Therefore, to shift the focus away from weaker than anticipated financials, management emphasized new partnership with Microsoft, OpenAI and Google Cloud, along with discussing the growth avenue created by the AI hype. Oracle CTO Larry Ellison also noted that Oracle's cloud infrastructure and data centers are also being used by Nvidia Corporation NVDA and xAI, an AI company founded by Tesla Inc TSLA CEO, Elon Musk.

Fiscal Fourth Quarter Highlights

For the quarter ended on May 31st, total revenue grew 3.3% to $14.29 billion, which was below LSEG’s estimate of $14.55 billion. Cloud infrastructure alone brought in $2 billion, as renting of computing power and storage increased 42%. Although it remains much smaller compared to Microsoft Azure and Amazon Web Service, Oracle’s cloud unit is growing faster. The cloud services and license support segment grew 9%, generating revenue of $10.23 billion. Cloud and on-premises licenses business contracted 15% as it brought in revenue of $1.84 billion.

Adjusted profit was $1.63 per share, also short of LSEG’s estimate of $1.65. Net income amounted to $3.14 billion, or $1.11 per share.

Partnership with Microsoft, OpenAI and Google Cloud show undeniable cloud momentum

The aim of the partnership with Microsoft and Open AI is to extend Azure Al to Oracle Cloud Infrastructure (OCI) in order to provide additional capacity for OpenAl. Oracle also unveiled a new agreement to make its namesake database available on Google’s cloud infrastructure. As of November, organizations will be able to freely deploy workloads in Google and Oracle cloud data center regions without data-transfer charges. Along with a similar deal with Microsoft which was announced in September last year, these partnerships are expected to turbocharge Oracle’s cloud database growth.

Outlook Shaped By The AI Hype 

For the fiscal first quarter, Oracle guided for earnings in the range between $1.31 and $1.35 per share, with revenue growing between 5% and 7%.

Oracle CEO Safra Catz expects the current momentum to continue with pipeline growing even faster than bookings, with fiscal 2025 cloud infrastructure services growing even faster compared to the just-ended fiscal 2024.

For the current fiscal year ending in May 2025, Catz expects revenue to grow in double digits, fueled by strong demand for AI workloads, adding that each successive quarter should grow faster than the previous one due to built up capacity to meet demand.  

Shifting focus away from weak Q4 financials. 

Meanwhile, Oracle will be exiting its advertising business, which generated only $300 million in the fiscal year that ended on May 31st. Overall, Oracle reported weak results but its booking growth on AI demand has been evaluated as impressive by analysts, along with cloud infrastructure deals with Microsoft and Google that are a good sign, with over 30 AI sales contracts in the fourth quarter worth more than $12.5 billion in bookings. But given the expectations for increased capital spending on top of the weaker than expected results, Jefferies analysts noted some concerns that Oracle's short-term AI gains may only take it so far. With Google and Microsoft being the likely long-term AI winners, Oracle could be in for merely short-time benefits as the above partnerships won’t last forever. 

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