Oracle's hardware slump

June 24, 2011: 12:27 PM ET
Oracle Databases

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A change in sales strategy is behind a drop-off in revenues, but Mark Hurd says it's all in service of more profit down the line.

FORTUNE -- Mark Hurd may have an impressive track record selling hardware for his former employer, Hewlett-Packard (HPQ). But that hasn't translated to immediate success at Oracle Corporation (ORCL), where Hurd now serves as president. The Redwood Shores, Calif.-based company's hardware business fell short of expectations in an otherwise strong quarter, announced earlier this week. The disappointing news sent Oracle shares down in late trading on Thursday.

According to Hurd, the reason for the decline in hardware product revenues is that Oracle is deliberately selling fewer systems at a higher price.

"Selling units that have no gross margin are easy to do," Hurd told investors on a conference call Thursday afternoon. Oracle's focus, Hurd added, is selling higher-margin machines.

While many analysts agreed that Oracle's hardware business is still evolving (and that overall, the company had a solid quarter), some expressed concern over its ability to successfully integrate last year's $7.4 billion acquisition of server maker Sun Microsystems.

"The fact is, despite Larry's [Ellison, the company's CEO] claim to triple the number of boxes Oracle will sell in FY12, the second hardware miss, a lack of revenue upside, and soft margins has shaken investor confidence in management's iron clad grip on the business," Peter Goldmacher, a senior research analyst with Cowen and Company, wrote in a recent note.

Another analyst, JMP Securities' Patrick Walravens, suggested the company may not be competing as well as expected in the lower-end server business partly because other hardware vendors can ship their products faster than Oracle. "We have also had other industry sources suggest to us that Oracle needs to do a better job of 'nurturing' the Sun business," Walravens wrote in a report published Friday morning.

To put things in perspective, Oracle did release some impressive numbers on Thursday. While hardware sales came in at $1.2 billion, down 6% compared with the same quarter a year earlier, overall net income rose 36% in the fourth quarter percent. Meanwhile, revenue climbed 13% to $10.8 billion (analysts had expected revenue of $10.75 billion). Not too shabby.

Of course, Oracle remains as bullish as ever on its hardware prospects--and on Hurd's ability to spin gold from Sun.

"We have Mark here," Safra Catz, Oracle's CFO, told investors on Thursday. "It's not like he doesn't know how to sell hardware. He'd probably sell $100 million of hardware in an afternoon here, and maybe folks would be happier, but we just would make less money. I just don't think that would really make anyone happy. We'd like to do it the better way."

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Michal Lev-Ram
Michal Lev-Ram
Writer, Fortune

Based in Silicon Valley, Michal Lev-Ram covers enterprise and mobile technologies for FORTUNE. Prior to joining FORTUNE, she wrote for CNNMoney, Fast Company, Popular Science and other business and technology publications. She was also a staff writer at Business 2.0 and holds a B.A. in journalism from San Francisco State University.

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