On Tuesday, Oracle Corporation (NASDAQ:ORCL) said its rapidly expanding AI data center business is already profitable, though heavy construction and expansion costs are temporarily weighing on overall margins.
AI Data Centers Already Generating Strong Margins
During the company’s fiscal third-quarter earnings call, Oracle Co-CEO Clay Magouyrk said the company’s AI infrastructure is delivering healthy returns even as the tech giant aggressively builds new capacity.
Magouyrk told analysts that Oracle expects gross margins of 30% to 40% for AI accelerators, a forecast the company has previously shared.
He added that Oracle continues to improve efficiency in running AI data centers, lowering costs tied to networking, hardware and power as it scales operations.
Adjacent Cloud Services Boost Profitability
Magouyrk noted that AI workloads do not rely solely on accelerators. Customers also purchase a range of supporting cloud services, including compute, storage, security and networking.
Those additional services typically represent 10% to 20% of overall spending and many carry higher margins.
“There is a lot of general-purpose compute. There is a lot of, whether it be high-performance or large-scale blob storage. There is load balancing. There are identity and security products,” Magouyrk said.
Adding, “When you factor that in, which has higher margins depending on the mix of services, overall profitability continues to improve.”
He also highlighted Oracle’s rapidly growing multicloud database business, which carries margins in the 60% to 80% range and further strengthens the profitability profile of the company’s cloud infrastructure.
Construction Boom Temporarily Weighing On Margins
According to Magouyrk, the main factor limiting even stronger profits is the company’s aggressive data center expansion.
Oracle is building multiple facilities simultaneously to keep up with soaring AI demand, meaning some costs are incurred before capacity becomes operational.
“That capacity, when we deliver it, is all already contracted for at a very profitable rate,” Magouyrk said. The reason profitability isn’t even higher right now is simply because the company has so much under construction at one time.
As those projects come online, Magouyrk said Oracle expects profitability from its AI infrastructure business to continue rising.
Oracle Q3 Earnings Beat As Cloud Revenue Jumps 44%
Oracle reported third-quarter revenue of $17.19 billion, topping analyst expectations of $16.91 billion, according to Benzinga Pro.
Adjusted earnings rose 21% year over year to $1.79 per share, also surpassing estimates of $1.71 per share.
Overall revenue increased 22% from a year earlier, driven by a 44% surge in cloud revenue, while software revenue edged up 3%.
Price Action: On Tuesday, Oracle shares closed down 1.43% at $149.40. It surged 8.70% to $162.40 in after-hours trading following the company’s earnings report, according to Benzinga Pro.
According to Benzinga Edge Stock Rankings, Oracle shares are currently trending lower across the short, medium and long-term timeframes, with the stock’s Value score placing it in the 15th percentile.
Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.
Photo: Tada Images / Shutterstock
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