☁️ Oracle : The 4th Hyperscaler?
AI tailwinds boost Oracle and Adobe, but challenges loom
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Two cloud titans reported this week: Oracle and Adobe.
☁️ Will Oracle Cloud Infrastructure (OCI) become the 4th hyperscaler? OCI may not yet rival the big three (AWS, Azure, GCP), but like d'Artagnan joining the musketeers, it’s riding the AI wave and catching up. Oracle's Infrastructure-as-a-Service segment surged 52% to $2.4 billion in the November quarter. OCI has leapfrogged Salesforce and IBM in just a year and is now outpacing Snowflake. Alibaba Cloud is next in line (growing only 7% Y/Y in the September quarter to $4.2 billion). However, this rapid growth comes at a cost—Oracle's Capex is set to double in FY25 to support AI demand.
🎨 Meanwhile, Adobe Firefly and new generative AI features present opportunities and challenges for the software giant. While its Q4 results were strong, cautious FY25 guidance has raised concerns about Adobe’s ability to fully monetize its AI investments and fend off intensifying competition in creative workflows.
Let’s get to the insights from these two reports.
Today at a glance:
Oracle Q2 FY25
Adobe Q4 FY24.
1. Oracle Q2 FY25
Key metrics:
RPO (Remaining Performance Obligations) represents future revenue from existing contracts signed. RPO grew 50% Y/Y, and Cloud RPO grew by nearly 80%, illustrating strong momentum. There was a slight decline sequentially from $99 billion in Q1 to $97 billion in Q2. 39% will be recognized as revenue in the next 12 months.
Cloud services revenue was up 24% Y/Y to $5.9 billion:
IaaS (Cloud Infrastructure) focuses on providing compute, storage, and networking services. It grew +52% Y/Y to $2.4 billion (accelerating from +45% Y/Y in Q1), driven by increased adoption of OCI for high-performance workloads and multi-cloud deployments.
SaaS (Cloud Application) focuses on delivering Oracle's suite of enterprise applications via the cloud. It grew +10% Y/Y to $3.5 billion (stable), driven by demand for cloud-based ERP, HCM, and CRM solutions.
Fusion Cloud ERP grew +18% Y/Y to $0.9 billion.
NetSuite Cloud ERP grew +19% Y/Y to $0.9 billion.
Income statement:
Revenue grew +9% Y/Y to $14.1 billion ($20 million miss).
☁️ Cloud services & license support grew +12% Y/Y to $10.8 billion.
Cloud services grew +24% Y/Y to $5.9 billion.
License support was flat Y/Y at $4.9 billion.
🌐 Cloud license & on-prem grew 1% Y/Y to $1.2 billion.
🖥️ Hardware declined by 4% Y/Y to $0.7 billion.
💼 Services dropped by 3% Y/Y to $1.3 billion.
Gross margin was 71% (flat Y/Y).
Operating margin was 30% (+2pp Y/Y).
Non-GAAP EPS $1.47 ($0.01 miss).
Cash flow:
Operating cash flow (TTM) was $20.3 billion (+19% Y/Y).
Balance sheet:
Cash and cash equivalent: $11.3 billion.
Debt: $88.6 billion.
Q3 FY25 Guidance:
Revenue to grow by 7% to 9% Y/Y (10% expected).
Cloud revenue to grow by 25% to 27% Y/Y, another acceleration.
So what to make of all this?
Cloud infrastructure momentum continues: Oracle’s focus on AI workloads is paying off, with top clients like Meta, Uber, and TikTok. GPU consumption surged 336%, driven by AI training demand, and Oracle unveiled the world's largest AI supercomputer with 65,000 NVIDIA H200 GPUs. However, a potential TikTok ban in the US could be a headwind (likely close to $2 billion in annual revenue).
Missed expectations but sustained growth: Revenue and adjusted earnings missed expectations, partly due to slower SaaS growth. Total cloud revenue of $5.9 billion narrowly missed the $6 billion forecast. As a result, shares dipped after the report but remain up nearly 70% year-to-date. Such a rally was probably not on many investors’ bingo cards.
Capex surges to support AI demand: Oracle invested $4 billion in capital expenditures this quarter—up sharply from less than $7 billion for all of FY24. Management expects Capex to double in FY25 to meet AI-driven demand, resulting in negative free cash flow ($2.7 billion used) for the quarter. These investments align with broader industry trends but may strain the balance sheet.
Expanding partnerships: Oracle's multi-cloud strategy is cementing its relevance with partnerships like Meta, which uses OCI for AI workloads, and collaborations with AWS, Azure, and Google Cloud. These alliances allow OCI to interconnect seamlessly with other platforms. It enables customers to run workloads across multiple clouds while benefiting from low-latency network links. This approach helps Oracle compete while broadening its reach.
A challenging balance sheet: Oracle's nearly $80 billion net debt position, though supported by $20 billion in annual operating cash flow, limits flexibility for acquisitions or aggressive growth investments. Rising Capex demands could further constrain its options.
Bullish long-term outlook: Management forecasts total cloud revenue to exceed $25 billion in FY25. Analysts remain optimistic about Oracle's ability to capitalize on AI demand, noting its competitive positioning in multi-cloud ecosystems and generative AI workloads. In this article, we explained why Larry Ellison sees data centers grow 10X.
While Oracle scales AI infrastructure in the cloud, Adobe is leveraging AI to transform creative workflows and drive subscription growth.
2. Adobe Q4 FY24
Adobe finished its fiscal year 2024 (which ended in November) with 95% of its revenue from subscriptions.
Key metrics:
RPO (Remaining Performance Obligations) grew +16% Y/Y to $20.0 billion (an acceleration from +15% Y/Y in Q3).
ARR (Annual Recurring Revenue) is the total yearly value of subscription revenue. Along with RPO, it is a leading indicator of growth.
Creative ARR grew +10% to $13.9 billion.
Document Cloud ARR grew +23% to $3.5 billion.
Income statement:
Revenue is divided into three main segments:
Digital Media (74% of overall revenue).
Creative Cloud (59%), including Adobe Express.
Document Cloud (15%), including Adobe Acrobat.
Digital Experience (25% of overall revenue), data insights and audiences, content and commerce, customer journeys, and marketing workflows.
Publishing and Advertising (1% of overall revenue).
Revenue grew +11% Y/Y to $5.6 billion ($70 million beat).
Digital Media grew +12% Y/Y to $4.1 billion.
Digital Experience grew +10% Y/Y to $1.4 billion.
Publishing & Advertising was flat below $0.1 billion.
Gross margin was 89% (+2pp Y/Y).
Operating margin was 35% (flat Y/Y).
Non-GAAP EPS grew +13% Y/Y to $4.81 ($0.14 beat).
Cash flow:
Operating cash flow in FY24 was $8.1 billion (37% margin, -1pp Y/Y).
Balance sheet:
Cash and cash equivalent and short-term investments: $7.9 billion.
Long-term debt: $5.6 billion.
FY25 Guidance:
Revenue to grow +9% Y/Y to ~$23.5 billion ($23.8 billion expected).
Digital Media ARR +11% Y/Y.
Non-GAAP EPS ~$20.35 (vs. $20.53 expected).
So what to make of all this?
Solid Q4 performance but cautious FY25 outlook: Adobe beat Q4 revenue and earnings expectations, with Digital Media ARR growing 14% to $17.3 billion and RPO accelerating. However, FY25 guidance fell short due to foreign exchange headwinds and lingering uncertainty over AI monetization, leaving investors cautious.
AI Assistant boosts Document Cloud adoption: AI Assistant has significantly enhanced productivity in Adobe Acrobat and Reader, driving broader adoption. Document Cloud ARR grew +23% Y/Y to $3.5 billion, contributing to the segment's +17% Y/Y revenue growth. Monthly active users grew +25% to 650 million, demonstrating strong user engagement.
Firefly adoption is strong, but monetization lags: Firefly AI models have seen over 16 billion generations, integrated across flagship products like Photoshop and Lightroom. Despite high engagement, monetizing generative AI remains a challenge. Higher-priced Firefly tiers, including video AI models, are set to launch in early 2025 but have yet to prove their revenue impact.
Video AI rollout lags competitors: Adobe's cautious rollout of its video AI tool contrasts with OpenAI's Sora, which is already publicly available. While Adobe focuses on safety and deep integration, the slower timeline raises questions about its competitiveness in the AI-generated video space. Beyond OpenAI, startups like Runway AI and Stability AI are redefining the creative tools market, challenging Adobe's leadership.
New pricing tiers aim to unlock value: Adobe's move to introduce tiered pricing based on gen AI usage and features with Firefly Services and GenStudio (available since mid-October) could unlock additional revenue opportunities, particularly in enterprise markets. However, execution will be key to balancing adoption and monetization.
Market sentiment remains cautious. Despite strong financials, Adobe’s stock dropped 14% after the earnings report and is down YTD, underperforming software peers like Salesforce. Concerns over competition and the timeline for AI monetization weigh on sentiment, though analysts remain optimistic about Adobe’s ability to capture enterprise spending as its tools mature.
Oracle and Adobe exemplify how AI is reshaping industries, from powering cloud infrastructure to redefining creative workflows. OCI's rapid growth benefits from the rising demand for AI training capabilities. At the same time, Adobe’s AI-powered tools like Firefly show the potential of gen AI to drive engagement and innovation.
Both face challenges. Oracle must balance aggressive Capex spending with its substantial debt, while Adobe navigates increased competitive pressure and a cautious timeline for AI monetization. Yet their strategic moves reinforce AI’s central role in shaping the future of enterprise software. The choice is clear: adapt and innovate, or risk being left behind.
That's it for today!
Stay healthy and invest on!
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Disclosure: I own ADBE, AMZN, CRM, GOOG, META, SNOW, and PLTR 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.