Oracle shares fell more than 12% after hours after the company reported increased spending on AI data centers and other equipment, an increase in spending that takes longer to translate into cloud revenue than investors want.
Cloud sales in the fiscal second quarter rose 34% to $7.98 billion, while revenue from the company’s closely watched infrastructure business rose 68% to $4.08 billion. Both figures are slightly below analyst estimates.
Known for its database software, Oracle has recently seen success in the competitive cloud computing market. It’s embarking on a massive data center buildout to power OpenAI’s AI work and also counts companies like TikTok and ByteDance’s Meta among its major cloud clients.
The remaining performance obligation, a measure of reserves, increased more than fivefold to $523 billion in the quarter ended Nov. 30, the company said in a statement Wednesday. Analysts on average estimated $519 billion, according to data compiled by Bloomberg.
Still, Wall Street has raised questions about the costs and time needed to develop AI infrastructure on such a scale. Oracle took on significant debt and committed to leasing several data centers.
“Oracle faces increasing scrutiny over debt-financed data center construction and concentration risks, amid questions about the outcome of uncertain AI spending,” said Jacob Bourne, an analyst at Emarketer. “This loss of income is likely to compound concerns. »
Investors want to see Oracle turn its biggest infrastructure spending into revenue as quickly as it has promised. Capital spending, which measures data center spending, was about $12 billion in the quarter, compared to $8.5 billion in the prior period. Analysts expected about $8.25 billion in capital spending during the quarter.
Oracle now expects capital spending to reach about $50 billion in the fiscal year ending May 2026, up $15 billion from its September forecast, executives said on a conference call after the earnings release.
“The vast majority of our capital investments are in revenue-generating equipment for our data centers and not land, buildings or power, which are covered by leases,” Chief Financial Officer Doug Kehring said on the call. “Oracle does not pay for these leases until the completed data centers and corresponding utilities are delivered to us.”
Annual revenue will amount to $67 billion, confirming the forecasts given by the company in October. “As a fundamental principle, we are committed to maintaining our investment grade credit rating,” Kehring added. Oracle’s cash burn increased during the quarter and its free cash flow reached a negative $10 billion. In total, the company has about $106 billion in debt, according to data compiled by Bloomberg.
The stock has lost about a third of its value since Sept. 10, when investor enthusiasm for Oracle’s cloud business propelled the company to a record high. “Oracle is very good at building and managing cost-effective, high-performance cloud data centers,” Clay Magouyrk, one of Oracle’s two CEOs, said in the release. “Because our data centers are highly automated, we can create and manage more of them. »
This is Oracle’s first earnings report since longtime CEO Safra Catz was replaced by Magouyrk and Mike Sicilia, who share the CEO role.
Part of the negative investor sentiment in recent weeks has to do with increased skepticism about the business prospects of OpenAI, which faces increased competition from companies like Alphabet’s Google, Evercore ISI analyst Kirk Materne wrote in a note ahead of the earnings release. Investors would like Oracle management to explain how it might adjust its spending plans if demand for OpenAI changes, he added.
For the quarter, total revenue increased 14% to $16.1 billion. The company’s cloud software applications business grew 11% to $3.9 billion. This is the first quarter in which Oracle’s cloud infrastructure unit generated more sales than the applications business.
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