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Oracle (ORCL) surged by 15% after-hours on Monday, fueled by a strong performance in Q3 FY24 (ending in February 2024).
The company's cloud strategy took center stage, with new large contracts and optimistic commentary around future demand fueled by AI.
If you remember, Oracle became TikTok’s cloud provider in 2020 for US users. With the risk of a TikTok ban in America, we’ll look at the potential revenue impact.
Let’s unpack the quarter.
Today at a glance:
Oracle’s Q3 FY24.
Recent development.
Key quotes from the call.
What to watch looking forward.
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1. Oracle Q3 FY24
Oracle has been at the forefront of enterprise software and cloud solutions with a broad array of services:
☁️ Cloud Suite: Oracle's cloud applications and services, from data management to infrastructure, are designed for seamless integration and high scalability.
📊 Data Analytics: With advanced analytics, Oracle transforms complex data into actionable insights, supporting strategic decisions.
🌐 Autonomous Database: Oracle automates routine database maintenance tasks, reducing complexity and risk for higher security and reliability.
🔗 ERP & Integrated Solutions: Oracle modernizes business processes with its ERP platform (Enterprise Resource Planning) to improve operational efficiencies, and integrated solutions to streamline complex business functions.
Key metrics:
Let's define a few terms:
RPO (Remaining Performance Obligations): Future revenue from existing contracts signed. RPO grew +29% Y/Y to $80 billion, with 43% expected to be recognized as revenue within a year. It was a massive jump from $65 billion in Q2 FY23, implying excellent visibility and accelerating growth.
Cloud services: Oracle's cloud revenue is the growth engine of the company. It grew +25% Y/Y to $5.1 billion.
IaaS (Cloud Infrastructure) grew +49% Y/Y to $1.8 billion.
SaaS (Cloud Application) grew 14% Y/Y to $3.3 billion.
Fusion Cloud ERP grew +18% Y/Y to $0.8 billion
NetSuite Cloud ERP grew +21% Y/Y to $0.8 billion.
Application subscription: The back-office SaaS applications reached an annualized run rate of $7.4 billion, up +18% Y/Y.
Income statement:
Here is the bird’s-eye view of the income statement.
Revenue grew +7% year-over-year to $13.3 billion (in-line).
☁️ Cloud services & license support grew +12% Y/Y to $10.0 billion.
Cloud services grew +25% Y/Y to $5.1 billion.
License support grew +1% Y/Y to $4.9 billion.
🌐 Cloud license & on-prem declined 2% Y/Y to $1.3 billion.
🖥️ Hardware declined 7% Y/Y to $0.8 billion.
💼 Services declined 5% Y/Y to $1.3 billion.
Gross margin was 71% (-1pp Y/Y).
Operating margin was 28% (+2pp Y/Y).
Non-GAAP EPS $1.41 ($0.03 beat).
Cash flow:
Operating cash flow was $5.5 billion (+28% Y/Y).
Balance sheet:
Cash and cash equivalent: $9.9 billion.
Long-term debt: $88.0 billion.
Q4 FY24 Guidance:
Revenue +4% to +6% Y/Y.
Cloud revenue, excluding Cerner, +22% to +24% Y/Y.
So what to make of all this?
Cerner Cloud migration: Oracle acquired Cerner in June 2022 for $28 billion. It’s a leading provider of electronic health records (EHR) and other healthcare IT solutions used by hospitals and health systems. Cerner alone represented $0.7 billion of Cloud revenue in Q3 FY24. Management expects to drive more profit from Cerner over time.
Gen2 Cloud Infrastructure soars: Their next-generation cloud infrastructure (OCI Gen2) witnessed impressive hypergrowth of 52%, highlighting strong customer adoption.
Healthy profitability: Cloud has a higher gross margin profile, which should lead to gross margin expansion over time. Operating income grew faster than revenue, showing efficiency gains.
Capex will increase significantly: Oracle is investing in big data centers, leading to Capex growing to $10 billion in FY25 (from ~$7 billion in FY24).
A weak balance sheet: Relative to cash-rich big tech, Oracle has a nearly $80 billion net debt position on its balance sheet. The company generated $18 billion in cash from operations in the past 12 months, so it’s not a significant area of concern. However, the company has less leeway if it wants to make a large acquisition (more on this in a second).
Expansion of Cloud Services: Expect continued emphasis on the cloud services offerings, including the upcoming launch of the Ambulatory Clinic Cloud Application Suite for Cerner customers.
2. Recent developments
☁️ Cloud and AI Focus
Management recently highlighted several customer success stories showcasing the growing adoption of OCI (Oracle Cloud Infrastructure) across different segments:
Cloud Natives customers: These large Enterprises bring their own platform layers. They seek high price performance and integrated security and privacy. They include companies like Zoom, Uber, and TikTok’s parent, ByteDance.
AI/ML customers: These organizations have significantly invested in infrastructure for AI/ML model training and inferencing. They choose OCI for its key differentiation, compute performance, and networking design.
Generative AI customers: They choose OCI for control, data security, privacy, and governance. Oracle partnered with Cohere to provide generative AI services across the full stack.
Larry Ellison is particularly bullish about Autonomous Database as a critical differentiator for OCI. He explained on the call:
“Autonomous Database is a unique piece of technology and there is nothing like it in the world, and maybe the most interesting thing, no one else is working on anything like that. No one else even trying to duplicate the Autonomous Database. So, we think it will become a very successful product in every cloud.”
I would be remiss not to mention the importance of the partnership with Microsoft. This collaboration extends beyond data center co-location. It’s a strategic alliance catering to the multi-cloud trend.
Oracle's database services are now available on Microsoft Azure, providing customers greater flexibility and choice. This partnership has the potential to be mutually beneficial, with Oracle expanding its reach and Microsoft strengthening its cloud offerings. Ellison added on the call:
“We're building 20 data centers from Microsoft and Azure. They just ordered three more data centers this quarter.”
3. Key quotes from the earnings call
CEO Safra Catz on OCI (Oracle Cloud Infrastructure):
“OCI has emerged as the largest driver of our overall revenue acceleration growing much, much faster than our cloud competitors. Customers have figured out that by moving to OCI they can really get more while paying less, but it's not just the cost that matters to our customers.“
Catz believes this growth is driven by:
Price Performance.
Full-stack technology for mission-critical workloads.
AI capabilities focused on business outcomes.
Deployment flexibility.
Multi-cloud offerings.
“Excluding Legacy Hosting Services, OCI Gen2 infrastructure cloud services revenue grew 52% with an annualized revenue of $6.7 billion. OCI consumption revenue was up 63%.”
This is where TikTok’s revenue is recognized, and I suspect TikTok is an essential component of this growth.
On partnerships:
“We expect to have some very nice joint announcements with NVIDIA next week.“
Remember, next week is NVIDIA’s GTC (GPU Technology Conference). Some analysts have already dubbed it the “AI Woodstock.”
On deployment optionality:
“We now have 68 customer-facing cloud regions live with 47 public cloud regions around the world and another eight being built. 12 of these public-cloud regions interconnect with Azure and more locations with Microsoft are coming online soon.
We also have 11 dedicated region slots and 13 more planned. Several national security regions in EU sovereign regions live with increasing demand for more of each. And finally, we already have two Alloy cloud regions live with five more planned where Oracle Partners become cloud providers offering customized cloud services alongside Oracle Cloud.“
Oracle has a growing global network of public cloud regions. In addition, Oracle Alloy is a unique offering that empowers Oracle's partners to become cloud providers themselves. These partners can leverage Oracle's cloud infrastructure (including pre-integrated hardware and software) within their own data centers.
On the outlook:
“As our supply constraints ease, revenue growth rates will accelerate higher as our capacity expands and we get into fiscal year '25. I remain firmly committed to our FY26 financial goals for revenue, operating margin, and EPS growth. However, some of these goals might prove to be too conservative given our momentum.“
Management previously shared a goal of $65 billion in annual revenue for FY26 (ending in May 2026), representing a 24% growth compared to the trailing 12 months.
Chairman and CTO Larry Ellison on AI:
“Oracle signed another big Generation 2 cloud infrastructure contract with NVIDIA in Q3. Oracle's Gen2 AI infrastructure business is booming. That's become pretty clear to everybody. But in addition to selling infrastructure for training AI large language models, Oracle is also completely re-engineering its industry-specific applications to take full advantage of generative Artificial Intelligence.”
Ellison provided an example in healthcare, where a digital assistant can listen to a doctor’s consultation to generate prescriptions, orders, or notes automatically.
On winning deals by country
“We think all of the cloud companies in Japan are going to adopt OCI. Plus a lot of big companies, the big car companies in Japan. […] We're beginning to win business per country for sovereign cloud, where the national government and the state governments are moving to that Oracle OCI region.”
Japan came up several times during the Q&A. The idea of sovereign AI has been discussed a lot by Jensen Huang during NVIDIA’s recent call, with local data centers built around the world. And it appears Oracle is a critical customer in this area.
4. What to watch looking forward
📱 TikTok’s potential ban
On Wednesday, the US House of Representatives voted for ByteDance to sell its US operation of TikTok or potentially face a ban. President Biden said he would sign the bill if it reaches its desk, but it still faces an uphill climb in the US Senate.
To avoid a ban, ByteDance would need to arrange a sale within six months. It wouldn’t be the first Chinese-owned social app to face a forced sale. Dating app Grindr was sold to a group of private investors for $600 million.
Due to its size and existing technology partnership, Oracle would naturally be in the mix of potential TikTok buyers. However, Oracle doesn’t have the cash needed for a deal like this. In addition, there could be regulatory hurdles, and the Chinese government could block the sale, leading to an outright ban.
So, how could this impact Oracle’s revenue?
According to Bernstein, Alibaba (BABA) lost $1.2 billion in revenue from ByteDance when the company lost TikTok’s international workloads in 2021. Of course, TikTok is much bigger today than in 2021, reaching over 170 million American users in 2024, compared to 100 million in 2020. As a result, TikTok could represent a $2 billion annual run rate for Oracle today.
☁️ Cloud Infrastructure market share
Oracle is still far behind AWS, Azure, and GCP in the Cloud Infrastructure market, but it’s growing much faster. If OCI can maintain this growth, it could gain significant market share.
FY26 Guidance
Updates on the FY26 revenue guidance will be Wall Street’s focal point in the coming quarters. It might be only a matter of time before management has to reflect the RPO upside in their mid-term projections.
Again, TikTok could become a revenue headwind, challenging the outlook. However, management’s confidence in the near term and the RPO surge this quarter suggest that Oracle might achieve its FY26 target, even without ByteDance as a customer.
That’s it for today!
Stay healthy and invest on!
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Disclosure: I am long AMZN, GOOG, and NVIDIA in the App Economy Portfolio. I share my ratings (BUY, SELL, or HOLD) with App Economy Portfolio members.
Author's Note (Bertrand here 👋🏼): The views and opinions expressed in this newsletter are solely my own and should not be considered financial advice or any other organization's views.