Oracle Corp. is facing a slowdown in its cloud-services revenue for the second consecutive quarter, which is becoming a concern as the company plans to add a significant number of data centers to its infrastructure. In an earnings conference call with analysts, Oracle revealed that it is currently constructing 100 new data centers, in addition to expanding its existing 66 data centers. This move is primarily driven by the fact that the company has “billions of dollars more in contracted demand than we currently can supply.”
Larry Ellison, co-founder and Vice Chairman of Oracle, expressed confidence in their ability to construct these data centers swiftly. He emphasized that the demand for more data centers goes beyond the need for running generative AI and includes a significant demand for sovereign cloud services among governments who have not been able to relocate their workloads. He specifically mentioned government Oracle workloads as being part of this demand.
However, Oracle’s ambitious expansion plans come amidst a decline in its cloud revenue growth. The company reported that its cloud revenue, which includes both infrastructure-as-a-service and software-as-a-service, grew by 25% to $4.8 billion. This marks a deceleration from the 30% growth seen in the previous quarter and a significant drop from the 54% growth achieved in the fiscal fourth quarter. It’s important to note that these figures exclude the revenue generated by Oracle’s Cerner healthcare business.
Despite the slowdown, Oracle forecasts a slight reacceleration in cloud growth for the next quarter, excluding Cerner. The company expects a growth rate of between 26% and 28%, indicating potential improvements in their cloud-services revenue.
Overall, Oracle’s expansion plans are driven by the growing demand for data centers globally. However, the challenges they face in maintaining their cloud revenue growth will be crucial to monitor as they navigate this risky move.
Oracle’s Data Centers: A Different Model
Despite the slowing growth in Oracle’s cloud business, the company remains confident in its ability to start up data centers quickly. The autonomous features of these data centers allow for efficient and inexpensive operations. However, investors were disappointed with the cloud business’s performance and concerned about the company’s aggressive data-center plans, resulting in a 9% drop in shares during after-hours trading.
Oracle executives assert that if they had more capacity this quarter, they could have recognized “hundreds of millions of dollars more” in revenue. The Cerner healthcare acquisition has also hindered revenue growth, but it is expected to improve next fiscal year and become a growth story for the company.
While Oracle has established itself as the fourth cloud-services provider, investors remain apprehensive about its spending habits as growth slows down. The law of large numbers is starting to impact the company, similar to other cloud rivals experiencing growth deceleration. Nonetheless, investors anticipate Oracle to quickly fill up their data centers as promised, placing the responsibility on the company’s shoulders.