Oracle optimistic about cloud business growth

Oracle has been a laggard in the cloud service provider (CSP) race, but according to executives on the most recent earnings call, the company is poised for significant growth in cloud infrastructure services.

CEO Safra Catz told Wall Street analysts that one of Oracle’s greatest challenges is building data centers fast enough to meet rising demand, and that the company could have realized “hundreds of millions of dollars” more from its Oracle Cloud Infrastructure (OCI) service for the second fiscal quarter of 2024 (ended Nov. 30, 2023).

“We have a lot of capacity coming online,” Catz told the analysts. “We expect OCI to just grow astronomically, frankly. It is the ideal infrastructure for so much use. And, of course, also as more GPUs [graphics processing units] become available. And we can put those in. We have just, really, an unlimited amount of demand … We are not demand limited in any way right now.”

She went on to say that Oracle decided against building smaller facilities, which could have recognized revenue in the quarter, and decided “to go much bigger and to wait until some larger capacity” would be available. “We did not bring up as much capacity as we could have used this past quarter, because we had to make some audible calls on the field to decide how to allocate,” she said. “We had made some deployment choices.”

Oracle has put a concerted effort into promoting GPU technology and is heavily invested in the Nvidia H100 Hopper GPUs. One of its biggest customers is Elon Musk’s xAI startup, which offers the Grok large language model (LLM).

“Boy, did they want a lot more GPUs than we gave them,” said Larry Ellison, cofounder and CTO. “We gave them quite a few, but they wanted more. And we are in the process of getting them more. … We are doing our best to give our customers what we can this quarter, and then dramatically increase our ability to give them more and more capacity each succeeding quarter.”

Ellison said that Oracle has to build 100 additional cloud data centers because there are billions of dollars more in contracted demand than it can currently supply. “Cloud infrastructure demand is huge and growing at an unprecedented rate,” he said.

Ellison said Oracle expects the OCI growth rate to be over 50% for a few years. And yet OCI’s share of the worldwide CSP market remains at 2%, and all of Oracle’s investments “didn’t move the needle much over the last year,” said John Dinsdale, chief analyst and research director for Synergy Research Group, which tracks the CSP market. By comparison, the three market leaders in the last quarter are Amazon, with 32% of market share; Microsoft at 23%; and Google at 11%. Over the last four quarters, for every dollar that Oracle has invested in data centers, Google and Microsoft have each invested about $4 and Amazon even more, said Dinsdale.

Also, for the third consecutive quarter, Oracle’s capital expenditure has decreased rather than increased, Dinsdale said. “None of these metrics point to Oracle substantially closing the gap between itself and the big three cloud providers,” he said.

However, Ed Anderson, distinguished analyst and vice president with Gartner, struck a more optimistic tone. Gartner is doing a market share assessment for the cloud service providers, which should be out in the second quarter of the year. As of December 2022, Oracle had just 2.6% share, but Anderson said the signs are there for growth. “I don’t know what their share will be. But I anticipate that they will have a high growth rate and are likely to capture some market share, and to increase that number this year. We’re seeing increasing demand for Oracle Cloud infrastructure,” Anderson said.

Oracle has a few things in its favor, Anderson said. First, it has the most flexible pricing model among the CSPs, and for a lot of customers that makes OCI look like it’s less expensive, he said. Second, Oracle has its legacy in on-premises software as a hook for migrating customers to the cloud. “So, for companies that have a dependence or a preference for Oracle Database, to support whatever application, Oracle’s really the only place to get that advanced database technology, and particularly to get it at a price competitive point,” he said.

For the quarter, Oracle reported $12.94 billion in revenue, up about 4% year over year. Cloud revenue was $4.8 billion, up 24% year over year. Infrastructure-as-a-service (IaaS) brought in $1.6 billion, up 50% year-over-year, while cloud applications and software-as-a-service (SaaS) brought in $3.2 billion, up 14%. That puts Oracle’s cloud businesses at nearly a $20 billion-dollar annual revenue run rate, Catz said.