Oracle Cloud in Hypergrowth $ORCL
I was recently surprised to see that Oracle's Cloud Infrastructure offering is accelerating its revenue growth at a fairly large scale (approaching $4B annual run rate). For the past several years, we have neatly defined the hyperscalers as the Big Three of AWS, Azure and GCP. This has been convenient for investors and analysts alike, as we have only had to track activities within these three. Analysis of independent software infrastructure and security providers could consider each company's product offerings in relation to similar offerings from the Big Three hyperscalers.

Of course, there are other cloud infrastructure providers, like IBM, Alibaba and Tencent, but those have either been country-specific (China) or growing more slowly than the Big Three. Oracle offers a cloud infrastructure platform as well, which has been largely flying under the radar. They entered the market much later than the other players, officially launching in 2018. Because of that, their share of the cloud infrastructure services market was just 2% as of Q2 2022. This ranks them 8th out of the 8 largest providers. However, Oracle Cloud Infrastructure (OCI) is growing faster than most of the other providers and stands a good chance of moving up the ranks. Over time, this could change the dynamic of the Big Three and give investors another hyperscaler to track.

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Oracle's recent quarterly report (Q1 FY2023, August 31 end) on September 12th provided some deeper insight into their growth. Total revenue for the quarter was $11.4B, up 18% in USD and 23% in constant currency. This beat their prior guidance by $200M. Pretty good, but not hypergrowth. Additionally, a portion of this comes from their acquisition of Cerner. The hypergrowth is coming from their Oracle Cloud Infrastructure (OCI) business, which mirrors the services of the hyperscalers, providing compute, storage, networking and security.

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OCI revenue was $900M in the latest quarter, up 52% y/y in USD and 58% in constant currency. This is purely organic growth, without the contribution of the Cerner acquisition. Excluding their legacy hosting services, infrastructure cloud services grew by 70% y/y, with annualized revenue of $3.2B. This includes OCI consumption revenue, which was up 103%. In the prior quarter (Q4 FY2022), infrastructure cloud services (excluding legacy hosting) grew 49% and OCI consumption revenue was up 83% y/y. This means that the Oracle Cloud offering is actually accelerating growth, and at a relatively large scale. They also expect this growth to continue, as the company invested $1.7B in CapEx for the quarter. A large portion of that is being applied to build out additional data centers, because management expects OCI growth to remain above 50%.

"We expect to be growing in the 50% range for cloud services. And that means we're going to have to be adding a lot of data center capacity and opening a lot of new data centers, and we're doing that. I personally have been talking to some of Amazon's most famous brands that are running at AWS. And the AWS bill is getting very large, and they can save a huge amount of money by moving to OCI. And we, I expect next quarter, will be announcing some brands, some companies moving off of Amazon to OCI that will shock you. I'll stop there." (Larry Ellison, Oracle CTO, Q1 FY2023 Earnings Call)

OCI growth rates were far above the growth rates for the Big Three hyperscalers. In Q2, Azure grew the fastest, hitting 46% in constant currency. GCP grew by 36% and AWS by 33%. The hyperscalers are expanding off of a much larger quarterly revenue base, though, ranging from $6.3B for GCP to $19.7B for AWS in Q2. That means GCP is about 7x larger than OCI and AWS is nearly 22x. However, if Oracle continues to grow their next-gen cloud infrastructure business at rates well above 50%, they will start to close that gap.

One advantage for Oracle of launching later than the incumbents is that they had the opportunity to design their cloud to address some of the deficiencies of the first cloud infrastructure movement. Oracle claims this provides their platform with better architecture, performance and ease of use. To reflect this, they dubbed their platform as a "Generation 2 Cloud". OCI’s physical and virtual network design maximizes performance and security, and enables the fast provisioning and on-demand consumption of more than 100 cloud services.

"Maybe you'd expect that because we're the newest and thus, the smallest, but our growth rates are increasing as we get bigger. Our second-generation cloud launched after our competitors' first-generation cloud, and so we've been able to architect it more performantly, more securely, and more sustainably. As a result, as more companies test our cloud, they discover how much better it is on price, security, performance and sustainability. In addition, we now have cloud regions in more countries and cities than AWS and Azure, giving our customers more choices for their sovereign data." (Safra Catz, Oracle CEO, Q1 FY2023 Earnings Call)

Oracle Cloud gained recognition in April 2020, when they became the cloud provider for Zoom. Zoom claimed that they explored multiple platforms, and chose Oracle due to its performance, scalability, reliability and security. Later that year, OCI became the U.S. infrastructure provider for TikTok in order to keep U.S. consumer data within an American company's infrastructure. in June 2022, TikTok disclosed that 100% of U.S. user traffic is being routed to OCI. In parallel to these wins, OCI has added thousands more customers. They have expanded their footprint to 40 regions spread across 22 countries. As part of the prepared remarks in their recent earnings call, Oracle leadership claimed to have more data centers than AWS or Azure.

Besides Zoom and TikTok, they have enticed many major enterprises to move their infrastructure onto OCI. The list includes Vodaphone, Toyota, Mazda, 7-Eleven and FedEx. Toyota shifted their high-performance computing workloads to OCI to improve car design and development efficiency, at a lower cost. Oracle Cloud Infrastructure offers the industry’s first, and only, public cloud with bare metal HPC computing.

Oracle is positioning their cloud region deployments such that they have redundancy within each country. This allows customers to meet data sovereignty requirements, while also providing true disaster recovery. OCI currently has at least two cloud regions in 9 countries and the EU. They claim to be adding new regions more than twice the rate of other cloud infrastructure providers.

While Oracle competes against the other hyperscalers for enterprise cloud infrastructure spend, OCI is also partnering with each hyperscaler in different ways to allow shared customers to make use of some of the unique capabilities of Oracle's database products. Oracle Cloud Infrastructure provides superior cloud services for many workloads and optimizes multi-cloud operations, especially with Microsoft Azure.

Oracle and Microsoft have a strategic partnership that enables joint customers to run workloads across the two clouds. This partnership provides a low-latency, cross-cloud interconnect between OCI and Azure in 11 regions, federated identity for joint customers to deploy applications across both clouds and a collaborative support model. Customers can run full stack applications in a multi-cloud configuration while maintaining high-performance connectivity without requiring re-architecture. They can also migrate existing applications or develop cloud native applications that use a mix of OCI and Azure services.

OCI provides a consistent experience in every region, both in terms of performance and cost. Customers can stay within their original budget and forecast cloud spending accurately, regardless of where they deploy applications. In addition, OCI provides a series of controls for customers to limit resource access, manage budget, tune down underused resources and forecast spending. Comparing standard compute instance pricing in different geographies on AWS and on Oracle Cloud Infrastructure, AWS has higher prices outside of the US. As an example, the same compute is 56% less expensive in AWS US East than in AWS Brazil. Oracle Cloud Infrastructure offers consistent pricing regardless of location.

Industry analyst Gartner has been tracking the progress of OCI's IaaS and PaaS capabilities over the past 3 years. Gartner maintains a set of solution criteria for cloud integrated IaaS and PaaS that defines 270 capabilities desired by enterprises for production workloads. All capabilities can be objectively rated as being sufficient or not in a binary fashion. Since 2019, OCI has made significant progress in Gartner's assessment, improving from an overall solution score of 38 out of 100 in 2019 to 78 out of 100 in 2021. OCI now has 90% of the capabilities expected for a modern cloud, up from 45% two years ago.

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Gartner does point out that OCI is ideally suited for enterprises that have a large investment in Oracle database products, as those are optimized to run on OCI versus other hyperscalers. However, Oracle is building out their capabilities to support a broader set of workloads as well.

"Consequently, Gartner now recommends that cloud architects consider OCI not only for cloud environments that are anchored by workloads that use Oracle technologies, but also for tightly integrated OCI-hosted applications, and potential use for non-Oracle workloads." (Gartner Report, February 2022)

As Oracle grows their share of the cloud infrastructure market, investors will want to watch a few trends:

  • Popular independent infrastructure software and service providers may start providing integrations with or hosting on OCI. This would include solutions for observability, CI/CD, CPaaS, VPN/Zero Trust, content delivery, authentication and other third-party services. For most of these, Oracle has developed their own solution, or is hosting an open source version. It will be interesting to see if Oracle starts to "open up" these services to the independent providers as they grow, or remain closed.
  • Like the hyperscalers, OCI has a Marketplace, but it generally consists of Oracle's own services, legacy offerings or those of smaller providers. Notably absent are modern, publicly traded software and security infrastructure providers. For example, the security category includes offerings from Fortinet, Palo Alto, Microsoft, McAfee, Imperva, Cisco and CheckPoint, but not Crowdstrike, Zscaler, SentinelOne, Cloudflare, Okta, Splunk or Datadog.
  • For the database segment, Oracle will likely only support their database products, at least in the near term. These include Oracle Autonomous Database, MySQL HeatWave and their NoSQL database. Popular independent data service providers like Snowflake, MongoDB, Databricks and Elastic do not have cloud offerings on OCI.

Of course, investors could also consider taking a position in ORCL itself. The stock has held up relatively well this year, down 24% YTD, versus 28% for MSFT and 35% for CSCO. With their accelerating growth in cloud infrastructure offerings, favorable operating margins and a valuation multiple of 4 P/S, the stock may generate upside going forward if momentum continues and Oracle ascends into the ranks of the other hyperscalers.
Rihard Jarc's avatar
Great point and overview. I just wonder how much of OCI revenue growth came from TikTok, would love that breakdown of top 5 customers.