Technology

Disappointing Hardware Sales Hit Oracle Stock


An unexpected drop in hardware sales, following Oracle's bullish predictions in March, suggests lower-than-anticipated gains from the software giant's Sun acquisition

(Bloomberg) — Oracle Corp. dropped in late trading yesterday after reporting a decline in hardware sales, fueling concern the top maker of database software may not be benefiting as much as predicted from its Sun Microsystems Inc. acquisition.

Hardware sales declined 6 percent to $1.16 billion, Redwood City, California-based Oracle said in a statement yesterday. 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 bought Sun last year to capitalize on demand for the servers and databases used in data centers. While the hardware results may reflect Oracle's effort to pare less-profitable machines from the lineup, they were disappointing enough to overshadow better-than-predicted performance in profit and sales of new software licenses.

"This is really the first full year-over-year compare for the hardware business, and it has started on the wrong foot," said Josh Olson, an analyst at Edward Jones & Co. in Des Peres, Missouri.

Hardware gross margin, a measure of profitability, rose to 56 percent in the fourth quarter from 46 percent last year, a sign Oracle is making headway selling higher-margin machines.

Oracle is adding sales staff, preparing new computers for release this year and pitching hardware support contracts to boost sales of Sun machines, executives said on a conference call.

Oracle fell as much as $2.45 to $30.01 in late trading yesterday. It had climbed 26¢ to $32.46 on the Nasdaq Stock Market, and gained 3.7 percent this year before today.

Profit Tops Estimates

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

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¢ to 48¢, compared with 46¢ 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.

Exadata, Exalogic

New license sales 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.

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.

Overpriced Acquisitions

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.

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."

At Oracle's OpenWorld conference, which 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 a disk. 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.

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.

Ricadela is a reporter for Bloomberg News and Bloomberg Businessweek in San Francisco.

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