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Oracle’s Cloud Infrastructure Business Faces Challenges Amid Increased Spending
Oracle, a leading technology company, has reported disappointing revenues from its cloud infrastructure business, which includes its data centers, with a total of $4.1 billion in the last quarter. This news has raised concerns among investors, particularly given the company’s increased reliance on debt to fuel its expansion. In contrast, Oracle’s Big Tech rivals, such as Amazon, Microsoft, and Google, have been able to reassure investors about their large capital investments by posting strong earnings from their cloud units.
The company’s net income rose to $6.1 billion in the quarter, thanks in part to a $2.7 billion pre-tax gain from the sale of semiconductor company Ampere to SoftBank. However, this increase in net income has not been enough to alleviate concerns about the company’s spending on data centers. Oracle added an additional 400 MW of data center capacity in the quarter, with construction on track at its large data center cluster in Abilene, Texas, which is being built for OpenAI.
Concerns About Debt and Reliance on Large Customers
Investors and analysts have raised concerns in recent months about the upfront spending required by Oracle to honor its AI infrastructure contracts. Moody’s flagged the company’s reliance on a small number of large customers, such as OpenAI, in September. Morgan Stanley forecasts that Oracle’s net debt will soar to about $290 billion by 2028, with the company selling $18 billion of bonds in September and in talks to raise $38 billion in debt financing through a number of US banks.
According to Brent Thill, an analyst at Jefferies, Oracle’s software business, which generated $5.9 billion in the quarter, provides some buffer amid accelerated spending. However, he notes that “the timing mismatch between upfront capex and delayed monetization creates near-term pressure.” Doug Kehring, principal financial officer, said the company is renting capacity from data center specialists to reduce its direct borrowing, with the debt to build the Abilene site raised by start-up Crusoe and investment group Blue Owl Capital.
Oracle’s Commitment to Maintaining Investment-Grade Debt Ratings
Kehring added that Oracle has signed a 15-year lease for the Abilene site and does not pay for these leases until the completed data centers are delivered to the company. He emphasized that Oracle is “committed to maintaining our investment-grade debt ratings.” Despite these assurances, concerns about the company’s debt and reliance on large customers persist, with some analysts warning that the company’s spending on data centers could put pressure on its finances in the near term.
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