Oracle Keeps a Lid on Capex as Customers Pay Up-Front
Forget all that chatter about AI killing us all. We’re back to looking at what really matters—the revenue! Oracle demonstrated on Thursday that demand for AI computing capacity remains pretty darn robust. Larry Ellison’s software and cloud firm reported 30% top-line growth for the quarter ending Aug. 31, a tad better than the company projected in June, sending its battered stock up 4.4% in after-hours trading.
The quarterly update demonstrated how much Oracle is benefiting from customers so desperate for capacity that they're paying up-front—what the company calls prepayments—for computing rental deals. Oracle brought in $11.4 billion in such customer prepayments in the quarter, doubling the amount of cash its operations generated. These payments help Oracle finance data center construction without dipping as much into its own pocket. While it spent $28.5 billion on capital expenditures in the August quarter, Oracle only burned $5 billion of its own money.
And prepayments aren’t the only way the company is keeping a lid on its own cash outlays. Some customers have bought their own AI chips and are bringing them to its data centers. Oracle is striking more such deals. Its executives said on Thursday night that most of an additional $30 billion of AI computing deals struck in the quarter involved customers prepaying or doing BYO AI chip deals.
(One of Oracle's big customers, OpenAI, demonstrated its urgent need for more computing capacity on Thursday when it suspended new sales of its $200 a month Pro subscription because it was having trouble meeting demand for its new Astra AI models.)
Both prepayments and BYO hardware deals are smart ways for Oracle to keep down its financing costs, although Oracle presumably doesn’t earn as much from them as it would for traditional rental arrangements. Still, that may not be a huge deal: Oracle co-CEO Clay Magouyrk said on Thursday that Nvidia chip rental deals renewed in the quarter had a 20% premium to previous contracts. That revelation echoed comments from other cloud executives about chip rental prices soaring, another sign of intense demand. (Having to make prepayments isn’t great for startups, as we showed here.)
Oracle stock has been crushed over the past year—it's down 53%—due to anxieties about the amount of debt it has to take on to fund its ambitious AI expansion plan. In July, S&P downgraded Oracle’s credit rating, citing its reliance on OpenAI as a customer and its hefty capex projections for this year. Oracle is also facing delays in some high-profile data center projects. (On that score, Magouyrk said on Thursday’s call that “all our eggs are not in a single basket,” meaning it has many other data center sites to lean on.)
Despite all those worries, Oracle is delivering, so far at least. Will investors begin to give the company the benefit of the doubt?