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Oracle Falls After Reporting Unexpected Hardware Sales Drop

Oracle Corp. (ORCL) declined in late trading after an unexpected drop in hardware sales suggested the largest maker of database software may not be benefiting as much as predicted from its acquisition of Sun Microsystems Inc.

Sales of hardware declined 6 percent to $1.16 billion, Redwood City, California-based Oracle said in a statement today. The company had forecast in March an increase of 6 percent to 12 percent. Shares fell as much as 7.5 percent in extended trading.

Chief Executive Officer Larry Ellison has been trying to benefit from last year’s purchase of Sun as companies expand technology budgets and outfit data centers with servers and the databases needed to store digital information. Disappointment with the hardware results overshadowed a better-than-predicted performance in profit and sales of new software licenses.

“The hardware decline is likely the reason for the sell- off,” said Josh Olson, a Des Peres, Missouri-based analyst at Edward Jones & Co. “This is really the first full year-over- year compare for the hardware business, and it has started on the wrong foot.”

The stock fell as much as $2.45 to $30.01 in extended trading. It had climbed 26 cents to $32.46 at 4 p.m. in Nasdaq Stock Market trading, and gained 3.7 percent this year.

Photographer: Kim White/Bloomberg

Larry Ellison, chief executive officer of Oracle Corp., speaks at the Oracle Open World Conference in San Francisco, California. Close

Larry Ellison, chief executive officer of Oracle Corp., speaks at the Oracle Open World... Read More

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Photographer: Kim White/Bloomberg

Larry Ellison, chief executive officer of Oracle Corp., speaks at the Oracle Open World Conference in San Francisco, California.

Profit excluding certain costs was 75 cents a share in the quarter that ended May 31, exceeding the 71-cent average estimate of analysts surveyed by Bloomberg. Sales climbed 13 percent to $10.8 billion, meeting analysts’ predictions.

Sales Forecasts

Hardware sales may rebound in the current quarter, which ends in August, Oracle Chief Financial Officer Safra Catz said on a conference call. Sales of hardware products may range from a 5 percent increase to a 5 percent decline, Catz said.

New software license sales, a predictor of future sales, will rise 10 percent to 20 percent, she said. Profit excluding certain items will be 45 cents to 48 cents, compared with 46 cents projected by analysts, the company said.

Calculated on a basis that doesn’t comply with generally accepted accounting principles, revenue will increase 9 percent to 12 percent this quarter, Catz said. That implies sales of $8.27 billion to $8.5 billion, compared with $8.3 billion, the average estimate of analysts surveyed by Bloomberg.

New license sales, a predictor of revenue, gained 19 percent last quarter to $3.74 billion, at the high end of Oracle’s forecast. That compares with the 13.5 percent growth predicted by Jason Maynard, an analyst at Wells Fargo Securities, in a June 20 research note.

‘Right’ Growth

Ellison is using his purchase of Sun to add computers to the arsenal of programs he has amassed through more than $42 billion in acquisitions since 2005. Oracle has tailored its databases to run faster on new machines using Sun hardware.

The company also has aimed to improve the unit’s profit by discontinuing sales of less expensive products and emphasizing its high-performance Exadata and Exalogic computer servers. That may have contributed to the revenue decline, said Peter Goldmacher, an analyst at Cowen & Co. in San Francisco.

Oracle may also be grappling with growing pains related to the buying spree, Goldmacher said.

“The more they acquire and the further afield they get from their core competence, the harder it is to manage the business,” Goldmacher said.

Oracle co-president Mark Hurd told analysts Oracle is selling fewer servers at higher prices, and increasing the amount of support contracts and software sold with each system.

“There’s no question we want to grow the top line, but we want to grow the top line right,” he said.

Overpriced Targets

Ellison said during the conference call that Oracle is taking a pause from large acquisitions because many potential targets are overpriced.

“They’re by and large not attractively priced now and don’t make sense, so we’re not doing them,” he said. “Instead we can focus our energies on organic growth.” The company is expanding its sales staff and developing new products, he said.

At Oracle’s OpenWorld conference that begins Oct. 2 in San Francisco, the company plans to announce a computer system for analyzing data in a computer’s memory instead of on disc. Oracle also plans what it calls a “big-data accelerator,” a product that will use open-source Hadoop software to help companies handle large amounts of data from various sources, Ellison said.

Oracle’s sales growth is expected to taper off as year- earlier figures reflect the acquisition. Sales are projected to increase 8.8 percent to $39 billion in 2012 after surging 34 percent in 2011, according to a Bloomberg survey of analysts.

To contact the reporters on this story: Aaron Ricadela in San Francisco at aricadela@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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