Key points
- Microsoft reportedly won't renew an Oracle AI contract
- Oracle says demand for older GPUs remains strong
- Oracle's filing shows how long it expects servers to last
Microsoft (MSFT) is winding down an arrangement to rent AI computing capacity from Oracle (ORCL) after deciding not to renew the contract, Bloomberg reported on Nov. 6.
Microsoft has been turning off the capacity in recent months because it no longer met the company's evolving needs, the report said. The move raises a question for Oracle: how long will customers keep paying to use older AI hardware?
Oracle shares fell as low as $109.21 after the report, down 5.2% from the Nov. 5 close, then recovered to close at $116.10, up 0.8%. Microsoft shares closed at $530.61, down 1.0%.
The capacity used an older generation of chips from Nvidia (NVDA). The agreement, announced in 2023, was part of Microsoft's effort to secure computing power for an AI version of Bing. The full value of the deal couldn't be determined.
Microsoft declined to comment on the report. An Oracle spokesperson said demand for its AI infrastructure remains strong, including for earlier-generation graphics processing units, or GPUs.
The report described the move as part of a larger reassessment of billions of dollars in cloud partnerships. CNBC reported that two people said Microsoft opted not to renew a deal with Oracle, and that Microsoft is shrinking its roster of neocloud partners and hasn't decided which ones it will stop using. A Microsoft spokesperson said in a statement on those plans that the company regularly reviews these investments against customer demand. A day earlier, Microsoft was reported to have tightened oversight of projects at three neocloud providers.
Oracle says older GPUs are renewing at higher prices
Oracle made its case for older chips on its Sept. 10 earnings call. "Of all the GPUs that came up for renewal in Q1, that capacity was renewed or resold at a 20% premium to prior contracts," co-chief executive Clay Magouyrk said. "The majority of those GPUs are 4 years or older."
That quarter ended Aug. 31. Oracle's response to the report didn't say whether Microsoft's capacity was part of those renewals, or who will use it next. Both accounts can be true, since a premium on capacity that was renewed or resold doesn't show what happens to the specific capacity Microsoft is giving up. Oracle's latest quarterly filing doesn't mention Microsoft, so it doesn't show what the contract was worth. Oracle's contracted future revenue stood at $664 billion at Aug. 31.
Oracle generally assumes six years for servers
The length of a chip's useful life decides how quickly its cost reaches the income statement. A company spreads the cost of equipment across the years it expects to use it, so a shorter life means a larger expense each year.
Oracle's filing lists a gross balance of $77.8 billion for computer, network, machinery, and equipment at Aug. 31, before accumulated depreciation, up from $59.6 billion three months earlier. It gives that category a useful life of one to six years and says it's primarily servers and networking equipment with an estimated six-year life. The filing doesn't separately disclose the life or value of the GPUs Microsoft rented. Depreciation on Oracle's property and equipment rose to $3.2 billion in the quarter from $1.4 billion a year earlier.
Oracle's annual report lists this as a risk. It says the company typically depreciates these assets over their estimated useful lives, "which could be shortened should our cloud strategies change."
Microsoft's exit doesn't by itself show that the hardware has reached the end of its useful life. Whether Oracle can find another customer also matters for how long the equipment remains useful.
