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Oracle Tumbles as Sales and Profit Miss Amid Cloud Competition

Oracle Corp. (ORCL) reported sales and profit that missed analysts’ estimates as corporate customers transitioning to Web-based programs bought less hardware and software. The shares fell the most since 2011.

Fiscal third-quarter profit excluding some items was 65 cents a share on adjusted sales of $8.97 billion, the company said in a statement yesterday. That compares with analysts’ average projection for profit of 66 cents on sales of $9.37 billion, according to data compiled by Bloomberg.

Chief Executive Officer Larry Ellison is being stymied by customers switching to Internet-based cloud systems, curbing their reliance on Oracle’s servers, databases and related programs. The shift in corporate computing habits caused Oracle’s sales of hardware and new software tools to fall more than expected, according to Brendan Barnicle, an analyst at Pacific Crest Securities LLC in Portland, Oregon.

“Everything missed -- that’s not good,” Barnicle, who recommends buying the shares, said in an interview. “As customers move to the cloud, you get a lot of the functionality consolidated up in the cloud and so you need less hardware and less databases and middleware.”

Oracle fell 9.7 percent to $32.30 at the close in New York, for the biggest decline since December 2011. The stock has dropped 3.1 percent this year, compared with an 8.4 percent gain for the Standard & Poor’s 500 Index.

Sales Slump

Net income for the quarter, which ended in February, was little changed at $2.5 billion, or 52 cents a share, compared with $2.5 billion, or 49 cents, a year earlier.

New software license and subscription sales -- a closely watched indicator of future revenue -- fell 1.8 percent to $2.33 billion. Raimo Lenschow, an analyst at Barclays Capital Inc., had predicted new license sales of $2.55 billion.

Hardware revenue -- including servers and storage gained in the 2010 acquisition of Sun Microsystems, declined 23 percent to $671 million. Jason Maynard, an analyst at Wells Fargo Securities, had projected sales of $783 million.

For the current quarter, Oracle forecast profit excluding some items of 85 cents to 91 cents a share, compared with analysts’ average projection of 88 cents. Adjusted revenue will be $10.8 billion to $11.4 billion in the fiscal fourth quarter, Chief Financial Officer Safra Catz said on a conference call. Analysts are predicting revenue of $11.5 billion.

Revenue Shortfall

Catz said revenue fell last quarter because some large contracts were delayed. Many of those have already been signed in the current quarter, she said.

As a result, the dip in revenue will probably be short- lived, according to Brent Thill, an analyst at UBS AG.

“I’ve followed this company for a decade and historically when they have a miss it’s a great time to buy,” said Thill. “Don’t call one quarter a trend. You don’t have too many multiquarter misses from Oracle.”

Still, hardware continues to be a negative. That business has fallen short of expectations or only managed to meet the lowest estimates in nine of the last 10 quarters, Thill said. For the current quarter, hardware product revenue will decline 13 percent to 23 percent, Oracle forecast.

Oracle’s applications business is also taking a hit from rival vendors who sell their programs as cloud services, such as such as Salesforce.com Inc. (CRM) and Workday Inc. (WDAY) as it tries to bolster sales with new versions of Fusion programs for financial reporting, human resources and customer management.

Cloud Services

“The big guys still have a hammerlock on their installed base, but that gets a little bit weaker every quarter,” said Peter Goldmacher, an analyst at Cowen & Co. in San Francisco. He has a neutral rating on the shares.

Ellison told analysts cloud-services revenue is growing yet remains small compared to the rest of Oracle’s business. The company is also doing better in head-to-head competition with Workday, he said.

To help retain a core base of corporate customers that are switching from installed software to tools rented over the Internet, Redwood City, California-based Oracle last year bought cloud-software companies Taleo Corp. and RightNow Technologies Inc.

Oracle is competing with SAP, Microsoft Corp. and a growing number of startups for a larger share of the cloud-software market as customers replace aging software and servers with updated, Web-based products.

Later this year, Oracle plans to release a new version of its 12c database software for running Web-based applications.

Acquisition Growth

Oracle will continue to seek acquisitions, Ellison said. The company wants to boost, either by itself or through acquisition, sales to sectors like banking, retail and telecommunications, he said.

Since the middle of last decade, Oracle has spent more than $50 billion on more than 80 deals, fueling an expansion in sales and earnings. In February, the company said it agreed to buy Acme Packet Inc. for $2.1 billion, gaining networking hardware and software.

“A lot of their growth in recent quarters has come from acquisitions,” Andrew Bartels, an analyst at Forrester Research Inc., said in an interview.

To contact the reporters on this story: Aaron Ricadela in San Francisco at aricadela@bloomberg.net; Dina Bass in Seattle at dbass2@bloomberg.net

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

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