Oracle’s Cloud Growth; Debate Around AI Risks

SPEAKER_1 (0:02)

Bloomberg Audio Studios, Podcasts, Radio, News. Bloomberg Tech is live from the heart of Silicon Valley with Ed Ludlow in San Francisco.

Ed Ludlow (0:22)

This is Bloomberg Tech. Coming up, Oracle's latest results help ease concerns around its massive AI infrastructure buildout, plus the debate around AI's societal risks grow louder, with the Pentagon's Emile Michael now pushing back against those fears. And we'll discuss that debate as well as the data center buildout backlash and much more, with the CEO of venture capital firm Eclipse, Lior Susan. Let's get right to Oracle. It's our main technology and earning story, and actually the stock right now completely flat. After the open, it hit a session high of more than 8 percent, then went to negative territory. I want to go through some of the big numbers. Cloud infrastructure in the quarter, $7.4 billion, a gain of 121 percent year on year. The backlog, as measured by RPO, $664 billion. But CapEx in that quarter that they reported, $28.5 billion. Was that the focus? They raised the full year outlook for both revenue and adjusted EPS. Let's get to Bloomberg's Brody Ford, who leads our coverage of Oracle. What's going on?

Brody Ford (1:18)

Seeing the share price gain ease this morning, I would think it has to be the big spending in the quarter.

SPEAKER_1 (1:24)

That's the capex number.

Brody Ford (1:26)

The capex in the quarter came in higher than expected, and the margins went down because cloud infrastructure is a much less profitable business than their traditional database business. But overall, it was a very clean quarter. It pretty much showed that they are delivering the capacity they promised. Revenue is ramping up. In general, these were the figures you wanted to see if you're an investor.

Ed Ludlow (1:47)

I'm going to get through some of the numbers, and then we'll put the numbers to one side. And that is debt on the balance sheet is $120 billion. Cash is about $36 billion. So in a leverage context, they're at 34X, which I don't know, negative free cash flow is better than expected in the quarter, right?

Brody Ford (2:01)

It's funny, right? I mean, negative free cash flow doesn't sound good, but it wasn't as negative as people expect.

Ed Ludlow (2:06)

Yes, not as bad as expected.

Let's put the numbers to one side. What is the story for Oracle? They're trying to build data centers fast and get capacity online. Is it as simple as that?

Brody Ford (2:17)

Yeah, they're trying to transition from a traditional software business to an AI data center for developer. And the question is, is that a good business to be in? And they've become a big kind of focus on this question of, you know, is it worth going negative free cash flow for a couple of years based on a couple of huge AI contracts? And so folks are watching each quarter very closely for any tidbits on that.

Ed Ludlow (2:40)

I spoke to Sam Altman, the Open AI CEO, last week when ASTRA was released. And it was very interesting to see Oracle disclose that one of the data central sites that they have online was very key to the training of ASTRA. What did they say?

Brody Ford (2:53)

Very interesting. Yeah, their flagship data center with Open AI out in West Texas, they said that-

Ed Ludlow (2:58)

This is Abilene?

Brody Ford (2:59)

In Abilene, right. They said that Open AI's newest model was trained there. And it just shows that providing the infrastructure here, you know, some might deride it as a commodity business, but it's essential to some of the big AI labs.

Ed Ludlow (3:13)

Let's end on the full year outlook. So they're saying at least $90 billion of revenue, adjusted EPS, $8.10, which, you know, that's a bit of a hike. But how much of this will focus on the conversion of what the remaining performance obligation backlog into revenue? How closely does the street look at that?

Brody Ford (3:33)

Yeah, the big question is how quick can you turn that RPO into revenue, especially in light of some of the data center pushback that you mentioned? They've had a couple of big sites with some tough headlines around NIMBYism, local pushback. It's recurrent question is, is that going to delay projects?

Ed Ludlow (3:48)

Bloomberg's Brodie Ford, who's had a very busy week in the technology earnings context. We're going to stay with Oracle. Joining us now is Stefan Sluinsky, BNP Parabag Global Head of Software Research. He hasn't outperformed on the stock, but actually lowered his price target from $290 to $248.

Let's start there, Stefan. Why maintain the call but lower the price target?