(Bloomberg) — Oracle Corp. reported better-than-expected orders and announced a partnership deal with a tech rival, bolstering Chairman Larry Ellison’s efforts to redefine the company as a major contender in the cloud-computing business.
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The company, best known for its database software, is focusing on expanding its cloud-infrastructure division, which rents computing power and storage, to compete with Amazon.com Inc., Microsoft Corp. and Alphabet Inc.'s Google. Though the division accounts for just a tiny percentage of total sales, investors see it as a big bet on Oracle's future growth.
Oracle shares rose 8.9% in New York premarket trading on Wednesday, and if that rally continues, it could send the stock to an all-time high.
“Over the past two quarters, Oracle has closed its largest sales deals in history, driven by massive demand for training AI large-scale language models on Oracle Cloud,” CEO Safra Catz said in a statement on Tuesday.
Catz said that strong demand for artificial intelligence workloads would drive revenue growth by double digits in the current financial year to May 2025. Growth should accelerate throughout the year as the cloud division's “capacity starts to catch up with demand,” he added.
Oracle also announced a new deal to make its eponymous database available on Google's cloud infrastructure. A similar deal with Microsoft to be announced later in 2023 “will accelerate the growth of our cloud database,” Ellison said in a separate statement.
OpenAI, which has received billions of dollars in funding from Microsoft, will use Austin-based Oracle's cloud infrastructure for “additional capacity,” the companies said in a statement. Oracle's cloud has been a success for generative AI startups, which count Reka, MosaicML and Elon Musk's xAI among its clients. Artificial intelligence techniques require massive amounts of computing power to function.
“The world's largest cloud companies and the world's most successful and proven AI companies choose to use Oracle's cloud services and data centers,” Ellison said on a conference call after the company released its fourth-quarter earnings.
The company's shares rose to a high of $135.28 in premarket trading on Wednesday after closing at $123.88 in New York. The company's shares have risen nearly 18% this year.
“Undeniable” momentum
Oracle's cloud infrastructure momentum is “undeniable, and the OpenAI announcement creates another positive data point in AI,” Evercore ISI analyst Kirk Materne wrote.
Demand for running AI workloads in Oracle's cloud computing data centers “could catapult the company into the fourth-largest cloud provider,” Bloomberg Intelligence analyst Anurag Rana said.
Catz said on the conference call that the cloud infrastructure division is expected to grow more than 50% this fiscal year.
Oracle said its total remaining performance obligations, a measure of future contractual revenue, rose 44% to $98 billion in the period ended May 31, well above the average forecast of $73.9 billion.
The company said in a statement that revenue from its cloud division, which rents computing power and storage, rose 42 percent to $2 billion, compared with analysts' average estimate of $1.97 billion, according to data compiled by Bloomberg.
Total revenue rose 3.3 percent to $14.3 billion, versus the average estimate of $14.6 billion. Excluding certain items, earnings were $1.63 per share, compared with the $1.65 analysts had expected.
Software Stagnation
Disappointing recent results from peers including Salesforce.com Inc. and Workday Co. have raised investor fears that technology budgets are shifting away from application software and toward artificial intelligence tools.Revenue from Oracle's cloud applications business, which includes its Fusion app for corporate finance, rose 10% to $3.3 billion, slowing from the roughly 14% growth the division has seen in recent quarters and below analyst expectations.
The new partnership could accelerate growth for Oracle's cloud infrastructure business, helping to offset a slowdown in applications, Rana wrote in a note after the earnings release.
Oracle's performance has been impacted by its healthcare division, which includes the electronic medical records business Cerner, which it acquired for $28 billion in June 2022. The company is currently focused on moving its legacy software business to the cloud, even as it faces obstacles including customer loss and the renegotiation of major federal contracts.
Catz said on the conference call that Cerner had lowered its revenue growth forecast by 2% for fiscal 2024. But the company will not disclose Cerner's financial performance on future earnings calls, saying it is “currently operating in growth mode.”
Catz also said Oracle would exit its advertising business, which generated just $300 million in revenue in the fiscal year that ended May 31.
(Pre-market stock updates)
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