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Oracle stock plummets 29 percent

The database company's stock drops 30 percent after its second-quarter earnings fell short of expectations, hit by sluggish sales in Asia.

    Oracle (ORCL) shares hit a free-fall today, dropping 29 percent after the company's second-quarter earnings fell short of expectations.

    Oracle also broke a new record on Nasdaq for the most actively traded issue. Nearly 172 million shares traded hands at the market's close, beating the previous record set by Comparator on Related story: Stock plunge spurs new strategy May 6, 1996, with 152 million shares trading hands.

    The No. 1 database maker's stock dropped to a close of 22-15/16, down 9-7/16 from yesterday. During the day, Oracle's share price dipped as low as 22-3/8.

    The stock decline follows a report by Oracle yesterday that earnings for the second fiscal quarter fell far short of even the company's CEO's expectations in its key areas, server and applications sales. Oracle attributed the lackluster performance to economic turmoil in Asia and the company's ongoing adjustment to its new sales strategy.

    In addition, Oracle was hit today with a number of downgrades by analysts: Bear Stearns and PaineWebber lowered their ratings on shares of Oracle to "neutral" from "buy;" while Morgan Stanley and Lehman Brothers cut their ratings on the stock to "neutral" from "strong buy." Additionally, Goldman Sachs downgraded its near-term rating on Oracle to "accumulate" from "buy."

    Nasdaq's top ten one-day volume stocks
    Company Volume
    (million)
    Date
    Oracle
    (ORCL)
    171.85 12/9/97
    Comparator Systems
    (delisted)
    152.05 5/6/96
    Intel
    (INTC)
    68.33 1/17/96
    WorldCom
    (WCOM)
    67.88 10/1/97
    Intel
    (INTC)
    66.26 10/15/97
    MCI Communications
    (MCIC)
    64.18 8/21/97
    MCI Communications
    (MCIC)
    62.92 10/1/97
    Applied Materials
    (AMAT)
    61.31 10/24/97
    Intel
    (INTC)
    57.40 5/30/97
    Intel
    (INTC)
    55.96 7/19/95
    Source: Nasdaq

    The relational database and software company reported net income of $187 million, or 19 cents per share, for the quarter ended November 30, compared with net income of $179 million, or 18 cents per share, reported for the same period last year. Analysts had expected the company to report profits of 23 cents per share, according to First Call's consensus of analyst estimates. Oracle's revenues increased 23 percent, to $1.61 billion, up from $1.31 billion for the same period last year.

    The results marked the second consecutive quarter during which the company's database sales fell short of expectations.

    "Clearly, we were disappointed with the results this quarter," Jeffrey Henley, Oracle's CFO, said in a statement. "The economic situation in Asia-Pacific clearly had a significant impact."

    Oracle cited the strong dollar in the turbulent Asian-Pacific markets as the primary factor in the weak results. However, as Jim Pickrel, an analyst from Hambrecht and Quist, pointed out, "Asia is historically only 15 percent of Oracle's total business." Pickrel said that Oracle's sluggish growth in database and applications sales should be its main focus of concern, rather than the Asian currency crisis.

    According to Pickrel, Oracle's applications sales grew only 7 percent, far below the 50 percent growth expected, and database sales grew only 3 percent over last year, instead of the expected 20 percent.

    The database industry in general has previously pointed to a slowdown sales, leaving companies like Oracle to rely more heavily on other sources of revenue. For Oracle, this has meant hitching on to applications sales and services.

    Analysts said the strategy is right for the company, but that its implementation has been poor.

    "[Oracle's] main problem is execution of sales. They have no applications visionary at their company," said Esther Schreiber, an analyst with Credit Suisse First Boston. "Applications are the types of sales that are made to a company's CEO or boardroom, whereas database sales are made to the MIS person."

    Schreiber and other analysts say Oracle's main problem with its new strategy has been its failure to make a quick transition toward applications in its sales structure.

    "All indications are their applications business is sound. You see big sales being closed by their competitors, like SAP and PeopleSoft, so I think Oracle has a good opportunity there," said James Moore, an analyst with BT Alex Brown. "It's just that they need to execute on their sales structure."

    Seventy percent of Oracle's licensing sales are generated from databases, and the remainder from applications. Moore said Oracle would like to see the ratio rise to 50 percent in the long term.

    "But whenever a company reworks its sales structure, it usually takes at least two quarters to see the results of the efforts, so I think by the fourth quarter Oracle will have these issues resolved," Moore said.

    After database sales posted a sluggish 6 percent growth rate last quarter, Oracle CEO Larry Ellison predicted that the company's second-, third-, and fourth-quarter earnings would outpace the sluggishness of its first quarter. Not only did the promised growth not materialize this quarter, but it probably will be pushed back for another two quarters, Pickrel said.

    Pickrel added that he was surprised Oracle was so far off analysts' expectations, but said he too believes it is because the company's transition is simply taking longer than expected.