Oracle Q2: Despite Revenue Miss, Catz And Ellison Cite Growing OCI Demand

“We have to build 100 additional cloud data centers because there are billions of dollars more in contracted demand than we currently can supply,” Oracle CTO Larry Ellison said, referring to Oracle Cloud Infrastructure capacity. “Cloud infrastructure demand is huge and growing at an unprecedented rate.”

Oracle brought in less revenue during its most recent fiscal quarter than expected, with CEO Safra Catz blaming a tough comparison period year over year, along with challenges in building data centers fast enough to meet rising demand.

Catz told listeners on the database and cloud software and service vendor’s quarterly earnings call Monday that “hundreds of millions of dollars” more could have been recognized from Oracle Cloud Infrastructure (OCI) for the fiscal 2024 second quarter (ended Nov. 30) had the capacity been available.

“We have a lot of capacity coming online,” Catz said. “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.”

Oracle Q2 Earnings

In fact, Oracle, headquartered in Austin, Texas, decided against building “something small, which was available, which I could have recognized revenue right in the quarter,” Catz said. Oracle instead decided “to go much bigger and to wait until some larger capacity was going to 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.”

Larry Ellison, Oracle co-founder and chief technology officer, told listeners on the earnings call that Elon Musk’s xAI startup, a major Oracle cloud customer, sought more Nvidia GPUs for its Grok large language model (LLM).

“Boy, did they want a lot more GPUs than we gave them,” Ellison said. “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.”

“In the next few weeks,” Oracle will sign two contracts worth about $1 billion each, Ellison said, without identifying the clients. Oracle is also expanding 66 existing cloud data centers and building 100 more.

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

And due to Oracle’s automation technology in its data centers, “It doesn't cost us more to run 100 data centers than it costs us to run 10 in terms of DBAs [database administrators] or people running Oracle Autonomous Linux,” he said.

Oracle’s stock traded at about $105 a share after hours, down nearly 9 percent.

More Than GenAI Demand

OCI revenue grew 50 percent during the quarter. And it wasn’t a fluke, Ellison said.

“The backlog is growing astronomically,” he said. “The demand is extraordinary. We can build data centers relatively fast. And I expect the OCI growth rate to be over 50 percent for a few years.”

Ellison told listeners on the quarterly earnings call that generative artificial intelligence (GenAI) is just one factor fueling demand for Oracle products and services. He said clouds for nation-states and health care are also large revenue opportunities for the vendor.

Some potentially lucrative GenAI use cases Ellison mentioned include automatic doctors’ notes from patient sessions, automatic prescription generation and reminders for patients to take a prescription.

“That's the high value end of AI when you're preventing someone from being re-hospitalized, which has a huge cost in terms of human suffering and money,” Ellison said.

Customers buying services from other cloud vendors still seek to co-locate and connect clouds with Oracle Cloud data centers, he said.

In the next few months, Oracle will turn on 20 new cloud data centers co-located with and connected to Microsoft Azure. The centers will house more than 2,000 full racks of Exadata database machines, which serve tens of thousands of customers, he said.

“We can build these regions for large companies that … don't want their data commingled with anyone else's,” Ellison said. “They want a public cloud. They want full OCI. They want every part of OCI, but they don't want anyone else in their region. They want it to be theirs and theirs alone. We can do that. Nobody else can. … It wasn't us that decided 2,000 was the right number of Exadata machines to install in those 20 data centers. That was Microsoft. The demand is enormous.”

Catz said that target OCI gross margins are higher than pure-play cloud vendors, “who somehow don't end up making as much money in all of this,” she said.

“As we grow, our gross margin percentage goes up,” she said. “So yes, we make a lot of investments. And we'll be making a lot of investments. But our profitability continues to go up.”

Oracle Data Center Differentiators

As for that tough year-over-year comparison, cloud license and on-premises license revenues were $1.18 billion for the quarter, down 19 percent from $1.44 billion one year earlier, Catz said.

Without naming the other cloud vendors, the CEO said that Oracle starts small and adds more capacity, unlike other vendors who do full build-outs before generating revenue.

Ellison alleged that, compared to Amazon, Oracle Autonomous Database only charges customers “for what you use when you're using it” as opposed to allocating cores and processors.

“We only consume what you use, when you're using it – otherwise it goes to other customers,” Ellison said. “It's totally different. That allows us to have dramatically higher gross margins.”

Catz said that customers need to become more comfortable with the transition of database to cloud and multi-cloud environments.

“It is really still to come,” Catz said. “We're talking about tens of billions of dollars when it comes over. It's starting to come. But we haven't been in the place to receive it all en masse.”

When that comfort level comes, Oracle should greatly benefit, she said.

“The Oracle database is not a toy,” she said. “It's a mission-critical system. If it just disappeared at companies, the whole planet would come to a standstill. And so this is coming. And it’s just the beginning.”

The vendor spent $1.1 billion in the quarter as it built capacity. Catz predicts $8 billion in capital expenditures in the fiscal year, “meaning our second half capex will be considerably higher as we bring online more capacity,” she said.

Cerner Update

When asked for an update on Cerner, the health care systems company Oracle bought for $28 billion in 2022, Ellison said that about half of the Cerner Millennium electronic medical record (EMR) system customers will be in OCI by February.

Oracle is also at work rewriting a health data intelligence platform for public health providers and moving Cerner from a license model to a subscription model, he said.

At the end of Oracle’s current fiscal year, Cerner “will be a growth story,” Catz said

Q2 In Detail

Oracle brought in $12.94 billion in revenue during the quarter, up about 4 percent year over year ignoring foreign exchange rates, according to the vendor.

Cloud revenue brought in $4.8 billion during the quarter, up 24 percent year over year ignoring foreign exchange. Within this segment, infrastructure-as-a-service (IaaS) brought in 1.6 billion, up 50 percent. Cloud applications and software-as-a-service (SaaS) brought in $3.2 billion, up 14 percent.

Oracle’s Fusion Cloud and NetSuite Cloud enterprise resource planning (ERP) revenue brought in $800 million each for the quarter, each growing about 20 percent year over year, according to the company.

Cloud services and license support revenues reached $9.64 billion for the quarter, up 11 percent year over year.

Oracle’s total remaining performance obligations for the quarter were more than $65 billion, according to the vendor. Oracle’s cloud businesses are almost at a $20 billion annual revenue run rate.

Over the past 12 months, Oracle saw operating cash flow of $17 billion and free cash flow of $10.1 billion, according to the vendor.