Will Wall Street Stomach Oracle’s Costly AI Transformation?

Oracle foresaw a looming SaaSpocalypse and decided to transform into an AI infrastructure company. It just didn’t divine how expensive the transition would be.

In its fourth-quarter earnings call on Wednesday, the company said its capital expenditures continue to balloon and revealed plans to raise another $40 billion through debt and equity financing in the current fiscal year to fund the pivot, nearly matching the $43 billion in debt it already raised last year. Shares of the company are down 9% in pre-market trading this morning.

The good news? There’s plenty of demand waiting on the other side of its massive investments.

BYOC

The company posted revenue of nearly $19.2 billion, up 21% year-over-year and edging out Wall Street’s expectations. The uptick comes even as sales for its legacy software unit fell 2% — not great, though not exactly SaaSpocalyptic, either. Meanwhile, Oracle Cloud Infrastructure (OCI), a.k.a. its mission-critical AI cloud infrastructure unit, saw revenue explode 93% year-over-year to $5.8 billion.

Even better news for Oracle is that there are no signs that demand is slowing down. The company said it expects OCI to account for three-quarters of its total revenue by 2030, and said that its remaining performance obligations (RPO), a backlog of future orders, now sits at $638 billion, up $85 billion from just the previous quarter. 

A deeper look under the hood reveals some shrewd financial maneuvering amid the big spending, and experts told The Daily Upside that the growth is enough to justify the additional debt:

• For instance, most of the RPO increases in the past two quarters were from prepaid agreements with customers, Oracle said Wednesday, adding that many customers are opting for the company’s “Bring Your Own Chips” strategy, reducing the costs for Oracle’s data center buildout.
• “Oracle doesn’t have the luxury of frivolous or unbridled capex spending without fiscal discipline,” Scott Bickley, Advisory Fellow at Info-Tech Research Group, told The Daily Upside. “If the funding dries up and everything slows down, they’ve already got a flywheel generating revenue, so that they can buffer that debt overhang themselves.”

Much Obliged: The RPO figure does come with one caveat: more than half of it stems from OpenAI, whose CFO has reportedly expressed concerns over its ability to pay for future compute commitments as it continues to find itself squeezed by Google’s AI Overview search results on the low end and Anthropic’s super-powered models on the high end. “I think [Oracle’s OpenAI exposure] has to give one pause,” Bickley said. “I think OpenAI is the Achilles heel, not just for Oracle, but for all of the hyperscalers and all the way up to Nvidia.” On the other hand, the non-OpenAI half of $638 billion is still $319 billion, representing years of revenue growth.