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Oracle's Successive Layoffs to Generate Funds for AI Infrastructure Buildout Carry Execution Risk, RBC Says

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Oracle's Successive Layoffs to Generate Funds for AI Infrastructure Buildout Carry Execution Risk, RBC Says

Oracle (ORCL) is using cost savings from workforce reduction to fund its artificial intelligence infrastructure, though successive cuts pose execution risk, especially for cloud apps, RBC Capital Markets said in a note e-mailed Friday.

In April, Forbes reported that the cloud computing company terminated thousands of employees across the US, India, Canada, Mexico and Uruguay. Oracle is preparing a new round of job cuts to curb payroll expenses while funding billions in AI infrastructure debt, Business Insider reported last month, citing an internal document.

"With a substantial April (reduction-in-force) already executed and another potentially in the works, Oracle is increasingly funding its AI buildout through headcount reductions," RBC analyst Rishi Jaluria said in a note to clients. "While cost reallocation is more (return on invested capital)-friendly than incremental debt or equity, successive cuts carry execution risk, particularly for cloud apps."

The company didn't respond to' request for comment sent Friday regarding the Business Insider report.

Oracle is scheduled to report its fiscal first-quarter results Thursday. RBC projects adjusted earnings at $1.65 a share on revenue of $19.10 billion. Analysts surveyed by FactSet expect $1.74 and $19.13 billion, respectively.

Oracle Cloud Infrastructure demand is surging, as remaining performance obligations, or RPO, hit $638 billion in the fourth quarter, but investor sentiment hinges on whether capacity expansion can keep pace with demand, according to the note. RPOs are future commitments arising from contractual relationships.

"Questions remain around OpenAI's competitive positioning and implications for Oracle as its primary infrastructure partner," Jaluria said. However, generative AI chatbot ChatGPT maker OpenAI's latest model cycle is "encouraging" for its market positioning among large language model providers, the analyst wrote.

"Stepping back, we maintain a cautious stance heading into (Oracle's latest) print," Jaluria said.

RBC maintained its sector perform rating on the company's stock with a $190 price target.

Oracle shares were up 2.3% in Friday afternoon trade. The stock has dropped 19% so far this year.

In July, the company secured a 10-year enterprise software contract worth about $7 billion with the US Department of Defense.

Late last month, Workday (WDAY) delivered a second-quarter beat and raised the low end of its full-year subscription revenue outlook. Workday competes with Oracle in the enterprise cloud software market.

Price: $157.64, Change: $+3.60, Percent Change: +2.34%

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