Oracle expects AI boom through at least 2027

ORACLE on Tuesday predicted that the artificial intelligence (AI) data center boom will power its revenue above Wall Street estimates well into 2027, sending its shares up 8.3% in extended trading.

The results help to allay investor concerns that Oracle’s costly multi-billion dollar push into AI computing would not generate profits quickly enough. Oracle has made a dramatic turn toward building data centers for partners such as OpenAI and Meta, while at the same time enacting layoffs as it uses smaller engineering teams and AI coding tools to roll out new software for its longtime customer base of large businesses.

Remaining performance obligations (RPO), a key indicator of future contracted revenue, grew 325% from last year to $553 billion in the third quarter, ahead of the $540.37 billion estimate from four Visible Alpha analysts. Oracle had reported RPO of $523 billion in the previous quarter.

Most of the increase in RPO in the quarter is related to large-scale AI contracts where Oracle, which has borrowed heavily, “does not expect to have to raise any incremental funds,” the company said in a statement.

The company also raised its revenue forecast for fiscal 2027 to $90 billion, above analysts’ estimates of $86.6 billion, according to LSEG-compiled data.

“Oracle’s quarter is a beat and a stress test result for the AI trade,” said eMarketer analyst Jacob Bourne. “As the most debt-exposed major player in AI infrastructure, Oracle is the canary in the coal mine and this report suggests there’s underlying health in AI spending beyond the hype.”

On a conference call with investors, Clay Magouyrk, one of Oracle’s two CEOs, said that the company’s margins on its cloud business should improve over time. He reiterated the company’s previous guidance, saying that renting out AI chips from partners such as Nvidia would have margins of 30% to 40%.

But he said that 10% to 20% of customer spending with Oracle’s cloud unit would go toward other services, which could also include its database business that has 60% to 80% gross margins.

“When you combine all of these pieces together, the overall margin profile of (Oracle Cloud Infrastructure) continues to strengthen and grows rapidly,” Mr. Magouyrk said.

The company’s strategy to build out data centers is helping it capture a slice of the booming AI market. Oracle has been aggressively spending to expand its cloud infrastructure to support generative AI workloads, competing for customers against hyperscalers such as Amazon’s AWS and Microsoft’s Azure.

On the conference call, Oracle’s co-founder and executive chairman, Larry Ellison, also said that the wave of investor concern that AI coding tools would weaken demand for business software should not apply to Oracle, because the company is embracing those tools by using small teams of engineers to create new software-as-a-service (SaaS) products.

“Thank God we have these coding tools now that allow us to build a comprehensive set of software — agent-based software to automate a complete ecosystem like healthcare, or financial services,” Mr. Ellison said. “That’s why we think the ‘SaaS’-apocalypse applies to others but not to Oracle.”

The company reported total revenue of $17.19 billion for the third quarter ended Feb. 28, compared with analysts’ average estimate of $16.91 billion, according to LSEG data.

For its current fiscal fourth quarter, Oracle predicts adjusted profits between $1.96 and $2.00 in US dollars, above analysts’ estimates of $1.94 per share.

The company expects fiscal fourth-quarter revenue growth of 19% to 21% in US dollars, in line with analysts’ estimates of 20.2% growth to $19.12 billion. Similarly, Oracle forecast cloud revenue growth of 46% to 50% in US dollars, also in line with estimates of 48% growth to $9.98 billion. — Reuters