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Why Did Oracle Spend $1 Billion in Capex in Fiscal 2Q17?

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Oracle’s capex for data centers

So far in this series, we’ve discussed Oracle’s (ORCL) fiscal 2Q17 earnings. As has been the case in the past few quarters, the cloud continued to remain dominant theme in 2Q17 earnings, too. Let’s see how Oracle, apart from acquisitions aims to strengthen its presence in cloud space.

In fiscal 2Q17, Oracle spent ~$1 billion to build up data centers to improve its position in IaaS and the overall cloud space, as evidenced by the company’s increased capital expenditure (or capex). Oracle’s capex rose 65% to ~1.1 billion in fiscal 2017.

In late 2015, Oracle’s management shared that it aims to increase its data center delivery capacity from 0.5 megawatts to 45 megawatts, a whopping 90x rise.

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Leading cloud players’ investments in cloud infrastructure

The above chart estimates that cloud data center traffic would increase at a CAGR[1. compound annual growth rate] of 30% through 2020, compared to a CAGR of 9% for traditional data center traffic.

By 2020, 92% of overall workloads are expected to be processed in cloud data centers. This explains the billion-dollar investments of the top players in the cloud space. Amazon, Microsoft, IBM, and Google collectively command more than half of the cloud space.

In November 2016, IBM (IBM) announced its plans to add four new cloud data centers integrated with cognitive intelligence in the United Kingdom (EWU). In early 2016, RBC Capital reported that Amazon (AMZN), Microsoft (MSFT), and Google (GOOG) collectively spent ~$26 billion in capex in 2015.

Google alone invested ~$10 billion to build its cloud operations in 2015. The majority of this capital went toward cloud and data centers. According to Data Center Knowledge, cloud service providers consistently say that spending on data centers forms the biggest portion of their budgets.

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