Oracle Falls Most Since 2002 After Missing Profit Estimates

Oracle Falls Most Since 2002 After Missing Profit Estimates
Larry Ellison, chief executive officer of Oracle Corp., speaks during the Oracle OpenWorld 2011 conference in San Francisco. Photographer: Tony Avelar/Bloomberg

Oracle Corp. dropped the most in more than nine years, dragging down other software makers, after it reported quarterly sales and profit that missed analysts’ estimates in a sign companies are spending less on programs that help them manage operations.

The second-largest software maker said profit before some costs in the fiscal second quarter ended Nov. 30 was 54 cents a share, on revenue excluding certain items of $8.81 billion, according to a statement yesterday. Analysts had projected profit of 57 cents on sales of $9.23 billion, the average of estimates compiled by Bloomberg.

Oracle and other business-software companies are taking longer to close deals as companies gird for slow economic growth in the U.S. and the possibility of a recession in Europe next year, said Rick Sherlund, an analyst at Nomura Holdings Inc. New software licenses, an indicator of future revenue, rose less than Sherlund projected, and sales of hardware acquired through the Sun Microsystems deal fell more than expected.

“The economy got a little harder for them,” Pat Walravens, an analyst at JMP Securities in San Francisco, said in an interview on Bloomberg Television’s “Bloomberg West.”

“In that situation you need to manage your sales force a little more carefully. They were not doing that this quarter.” Walravens has a “market outperform” rating on Oracle shares.

Share Price Drop

The stock tumbled 12 percent to $25.77 at the close in New York, the biggest intraday drop since March 2002. Oracle shares have declined 18 percent this year. The company, based in Redwood City, California, also said it will buy back as much as $5 billion in shares.

Rival SAP AG, the biggest German software maker, dropped 6.3 percent to $52.24 in New York. Inc. slipped 5.1 percent to $99.03.

Fortinet Inc. fell 6.1 percent to $20.05. Citrix Systems Inc. declined 7.8 percent to $58.46. Software maker VMware Inc. dropped 9.9 percent to $76.85.

Oracle’s weakness also weighed on CommVault Systems Inc., the Oceanport, New Jersey-based maker of software that helps companies store and manage data. CommVault tumbled 13 percent to $40.39.

Oracle’s sales excluding certain items in the current quarter, which ends in February, will increase 1 percent to 5 percent from a year earlier, co-President Safra Catz said on a conference call yesterday. On average, analysts were predicting sales growth of 7.4 percent to $9.46 billion. Profit before some costs will be 55 cents to 58 cents a share, compared with analysts’ average 59-cent estimate.

Hardware Declines

In the second quarter, new software license sales rose 2.5 percent to $2.05 billion, compared with the $2.28 billion Sherlund estimated in a Dec. 15 research note.

Sales of hardware obtained in last year’s $7.4 billion acquisition of Sun Microsystems declined to $953 million, missing the $1.06 billion in revenue estimated by Sherlund, who is based in New York and has a “buy” rating on the shares.

Net income in the second quarter rose 17 percent to $2.19 billion, or 43 cents a share, Oracle said in the statement.

In the third quarter, software license sales will be unchanged to 10 percent higher, and hardware sales will decline 5 percent to 15 percent, Catz said.

“This is indicative of some pullback in general enterprise IT spending,” said Josh Olson, an analyst at Edward Jones & Co. in Des Peres, Missouri. Technology spending next year could be constrained among European companies, government customers and banks, said Olson, who rates Oracle shares “buy.” “They’re going to feel the brunt of that.”

Contract Slowdown

Customers are adding more layers of management approval for technology purchases, including some chief executive officers getting involved, Catz said yesterday. That’s slowing down the closing of contracts, she said. In response, Oracle has added new “deal management” procedures to monitor signings and make sure the necessary approvals are in place.

“We’ll have a much more normal next quarter,” she said.

The effect of the declining value of the euro against the dollar also is hurting sales. Excluding the effect of currency fluctuations, revenue this quarter would increase 3 percent to 7 percent, Catz said.

Jason Maynard, an analyst at Wells Fargo Securities, said in a Dec. 19 report that corporate spending on hardware and software may fall 8 percent in the first quarter, a steeper drop than the average 7.3 percent decline during the quarter in the past 10 years.

Oracle Acquisitions

To help blunt the impact of a possible slowdown in software sales growth, Oracle CEO Larry Ellison has snapped up more than 70 companies in a $40 billion buying spree to add programs that help large corporations manage human resources and operations. The company has been using the acquisitions to build up its cloud business, meant to appeal to customers that are seeking to save money by letting them access computing power over the Internet.

On Oct. 24, Oracle said it would buy online customer-service software company RightNow Technologies Inc. for $1.5 billion. Earlier that month, the company unveiled its Public Cloud service, which will run its database software and more than 100 new applications called Fusion in its data centers for customers.

Oracle, the largest database-software maker, is using the Sun acquisition to develop computer servers -- including high-end Exadata and Exalogic machines -- that run its database and applications. Still, its lower-priced systems using Intel Corp. chips are losing ground to competitors.

The company’s share of the worldwide server market declined to 6 percent in the third quarter, from 6.5 percent a year earlier, while Dell Inc. gained, market researcher IDC said.

Ellison told analysts on yesterday’s call that Oracle’s hardware business could expand by the fiscal fourth quarter, which ends in May. Sales of Exadata, Exalogic and other high-end systems could reach $1 billion annually by the end of the fiscal year.

“Then we plan to double those sales again next fiscal year,” he said.


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