Oracle Corp.’s cloud services revenue fell for a second consecutive quarter, hitting a sharper speed bump on Monday just as the company plans to make a potentially risky move by adding a large number of data centers.
The software giant said in its conference call with analysts that it is currently building 100 new data centers, in addition to expanding its 66 current data centers, because there is “billions of dollars more in contracted demand than we can currently supply.”
“We think we can build many of these data centers very quickly,” says Oracle ORCL,
co-founder and vice chairman Larry Ellison, adding that the demand for more data centers isn’t just about running generative AI. “There is a huge, pent-up demand for cloud databases. There is huge demand for sovereign cloud abroad, where governments have not been able to move their workloads. Many of these are government Oracle workloads.”
But Oracle’s ambitious move comes as the company sees a further slowdown in its cloud revenues. In that unit, which includes both infrastructure-as-a-service and software-as-a-service, Oracle said revenue grew 25% to $4.8 billion, a slowdown from 30% growth in the first quarter and a decline from the 54% growth in the first quarter. the fiscal fourth quarter. That doesn’t include Cerner’s healthcare business.
Oracle predicts that cloud growth in the next quarter, excluding Cerner, will accelerate slightly to a growth rate between 26% and 28%.
One analyst asked about the potential impact on Oracle’s margins given the startup costs and increased capital expenditures, and the expected downtime before revenue from new data center additions begins. But both Ellison and Oracle CEO Safra Catz praised the company’s ability to quickly ramp up its data centers, which have many autonomous functions.
“We have a very different model than our legacy data centers or our competitors’ data centers,” Ellison said. “We can execute these things, we can get them to market relatively quickly, and we can execute them very cheaply and efficiently.”
Investors seemed disappointed by the slowing growth of Oracle’s cloud business, and were likely nervous about the big boost in its data center plans. The stock fell 9% in after-hours trading. However, executives insisted that if Oracle had had more capacity this quarter, there would have been “hundreds of millions of dollars more” in revenue the company could have recognized.
Additionally, Oracle’s acquisition of Cerner in healthcare has negatively impacted revenue growth and is expected to continue to do so for the remainder of the fiscal year. Catz said the economy will start to grow next fiscal year. “We expect Cerner to be a growth story,” she said.
So even as Oracle has managed to solidify its position as the fourth largest cloud services provider, investors will remain nervous about spending just as growth slows. The law of large numbers is also catching up with the software giant, as it sees a slowdown in growth that other cloud rivals have also experienced. But investors will expect the company to fill those data centers as quickly as they say they can, so the onus falls on Oracle.