As Oracle continues to ramp up spending on its restructuring efforts, it is trying to manage its costs as it invests billions of dollars in growing artificial intelligence market. The company now anticipates the expenses from its restructuring plan will be around $2.8 billion in fiscal 2026, some $700 million greater than previously forecast. The increased cost is due to severance and contract termination costs and the restructuring of portions of the business as Oracle adjusts to the rise in the influence of AI.
The move is poised to be a key development for Oracle. As the need for infrastructure that can support artificial intelligence-based applications is growing rapidly, the company is attempting to build its cloud computing moat. Developing AI demands vast computing power, particularly dedicated chips, and extensive data center facilities, which presents significant opportunities for cloud service providers. Meeting this demand, however, demands significant investment, which can strain businesses’ finances.
The higher restructuring estimate was revealed in a post-August quarter regulatory filing by Oracle. Some of the changes are related to the application of AI in business operations, as technology becomes more integral to automating or reorganizing processes that used to rely more on human effort. For Oracle, it is about balancing restructuring costs with the need to invest heavily in those areas where it believes it can grow in the future.
The company is getting a difficult response from investors. Oracle’s recent results have shown that its cloud services are in high demand, especially those related to artificial intelligence. Investors are still worried about the scale of the company’s investment on its infrastructure and the speed of the investment’s return in the form of sustainable cash flow.
In the latest results Oracle can be seen to be reflecting that tension in its share price. The stock rose as much as 7.8% on the day following the company’s announcement of a $26 billion rise in its revenue backlog. The backlog’s size was reassuring to investors, as it indicated continued strong demand for Oracle’s cloud and AI services. But the sunny outlook was fleeting in this trading day, and the stock ended about 2 percent down.
The turnaround was a sign of one of Oracle’s key points regarding its AI strategy. While there is good future demand, investors also need to see that the company can turn that demand into sustainable cash flow. Constructing data centers, as well as purchasing the computing power required for supporting AI services, can be a massive investment that takes a long time to pay back.
The total revenue backlog at Oracle is now about $664 billion, giving Oracle a significant pipeline of future business. It is expected that about half of that will be sold in the next 36 months, according to Oracle. The company also said that not all the new business will need Oracle to pay for all the infrastructure needs.
A big help for Oracle to manage its capital needs is the use of customer prepayments. In certain deployments, users pay for the infrastructure that is required to support their traffic. In some instances customers are also supplying their own chips to Oracle, which is also limiting the direct hardware investment required from Oracle.
This would provide Oracle with more flexibility in growing its cloud network. It also shows the current state of the economics of the AI cloud market. But demand is rapidly rising, and cloud providers can’t just add as much capacity as they want without factoring in the cost of servers, chips, data centers, electricity and more infrastructure. It can therefore be important to share some of those costs with the customers.
Oracle’s first quarter numbers helped with some more optimism. The company reported better than anticipated revenue and earnings, and its backlog continued to grow, indicating solid progress with its cloud strategy. The surge in profitability, however, has helped the share price bounce back from a less than stellar performance period, though spending and cash flow worries have not been eliminated.
However, Oracle’s stock has been very weak this year. The stock was down nearly 23% for the year at Friday’s close, while the S&P 500 was up nearly 12%. The gap would indicate the uncertainty of Oracle’s change. Investors are wondering if the company’s massive AI bet will finally pay off to the tune of their huge investments.
Particularly significant is that Oracle has not begun with the same strengths as newer companies that are mostly developed around cloud computing. While its legacy software business is still very much part of its business model, the tech industry is evolving rapidly as AI finds more and more ways to be woven into enterprise software and business workflows. So Oracle needs to spend money on the future, but not jeopardize the profits of the present.
This worry is why Morningstar analyst Luke Yang gave Oracle a “B” rating on his financial outlook.
But Morningstar analyst Luke Yang doesn’t expect Oracle’s cash flow situation to change anytime soon, despite the company requesting that customers help provide the technical hardware to ease its cash flow pressures.
The company’s growing cloud business also will likely take a long time to get to a scale that will allow it to invest continuously in infrastructure without consistently positive cash flow, he added.
It will take years before (cloud) revenue becomes substantial enough to allow for ongoing growth in capacity and positive cash flow.
It’s a significant period of time to consider when assessing Oracle’s AI aspirations. While a large backlog might give a business visibility into future revenue, not all revenue commitments equate to instant profits or cash. The company will still have to construct and maintain infrastructure to provide those services, as well as keep shipping costs manageable and cover other costs.
