Oracle shares are falling sharply this Thursday (11), a day after announcing disappointing revenues and a $15 billion increase in planned spending this year on data centers serving artificial intelligence groups.
Shares fell more than 14% on the NYSE, the New York Stock Exchange.
Oracle reported revenue of $16.1 billion last quarter, up 14% from a year earlier but below analyst estimates. At the same time, capital spending forecasts for this fiscal year have been increased by more than 40 percent, to $50 billion. Disbursements, mainly for data center construction, reached $12 billion in the quarter, above expectations of $8.4 billion.
Long-term debt, including operating leases, increased to US$116.3 billion, an increase of 44% from the previous year.
The company has embarked on an aggressive campaign to catch up with cloud service giants – such as Google, Amazon and Microsoft – in the race to provide the vast amounts of computing power that AI groups including OpenAI and Anthropic need to train and run their models.
Clay Magouyrk, Oracle’s co-CEO, said cloud contracts “will quickly add revenue and margin to our infrastructure business,” defending the vast investments.
However, the company said it expects full-year revenue to remain unchanged from its previous forecast of $67 billion. It hopes to generate $4 billion in additional revenue in the next fiscal year.
Total reserves for future earnings, called remaining performance obligations, rose 15% to $523 billion in the three months ended at the end of November, supported by the deals with Meta and Nvidia.
Initially, investors welcomed Oracle’s move into AI. The stock soared after its latest results in September, when it revealed it had added more than $300 billion in reserves, mainly from data center contracts with OpenAI.
But the stock has since lost its gains as investors worry about the large sums Oracle will have to borrow and spend on infrastructure for the creator of ChatGPT – and concerns about the startup’s ability to pay for those contracts in the years to come. OpenAI has agreements to spend $1.4 trillion over the next eight years on computing power.
Debt investors have also become disillusioned with the company.
The spread on Oracle’s credit default swaps, which represents the cost of buying protection against Oracle’s bonds, widened Thursday to an all-time high of 139 basis points. Credit default swaps pay off if a company defaults on its bonds, and higher spreads indicate greater demand for protection.
Oracle’s competitors such as Amazon, Microsoft and Google have helped reassure investors about their large capital expenditures, posting strong profits from their vast cloud units.
But last quarter, Oracle’s cloud infrastructure business, which includes data centers, reported a worse-than-expected revenue of $4.1 billion. Ellison’s company is also relying more on debt to fuel its expansion.
Net income rose to $6.1 billion in the quarter, driven by a $2.7 billion pretax gain from the sale of semiconductor company Ampere to SoftBank.
The company added another 400 MW of data center capacity during the quarter, Magouyrk told investors. Construction is well underway at its large data center cluster in Abilene, Texas, which is being built for OpenAI, he added.
Magouyrk, who took over from Safra Catz in September, said there would be strong demand from other customers for Oracle’s data centers if OpenAI did not use the full contracted amount.
“We have a customer base with high demand, so whenever we find ourselves with capacity that is not being used, it is quickly allocated,” he said.
Co-founded by Ellison as an enterprise software provider, Oracle has been slow to move into cloud computing. The billionaire remains president and its largest shareholder.
Investors and analysts have raised concerns in recent months about the upfront spending required by Oracle to fulfill its AI infrastructure contracts. Moody’s in September highlighted the company’s reliance on a small number of large customers, such as OpenAI.
Morgan Stanley projects Oracle’s net debt will reach about $290 billion by 2028. The company sold $18 billion in bonds in September and is in talks to raise $38 billion in debt financing from several U.S. banks.
Jefferies analyst Brent Thill said Oracle’s software business, which generated $5.9 billion in the quarter, provided some protection amid accelerating spending. “But the time lag between initial investments and late monetization creates short-term pressure.”
Doug Kehring, chief financial officer, said the company was leasing capacity from data center specialists to reduce its direct borrowing, while some customers could buy their own chips, helping to reduce Oracle’s upfront costs.
The debt needed to build the Abilene site was taken on by startup Crusoe and investment group Blue Owl Capital, and Oracle signed a 15-year lease for the site.
“Oracle does not pay these leases until the completed data centers are delivered to us,” Kehring said, adding that the company is “committed to maintaining an investment grade debt rating.”
Alex Haissl, an analyst at Rothschild & Co Redburn, said the company’s results provided “no clear guidance” on how its data center expansion would be financed. “Management’s idea that customers could ‘bring their own chips’ to ease the cash flow burden does not address the economic weakness of GPU leasing,” he said.
“Without owning the data centers or chips, Oracle is effectively being paid to assume the risk of the lease term,” he added.
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