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Oracle Corp. headquarters. (Paul Sakuma/Associated Press)
Oracle Corp. headquarters. (Paul Sakuma/Associated Press)

At the Bell

Question mark hangs over Oracle's hardware division Add to ...

Prominent on the short list of large U.S. companies reporting results this week is Oracle Corp., an important bellwether for the U.S. economy in general and for the technology sector in particular. Shares of Microsoft Corp., Hewlett-Packard Co., IBM Corp. and other tech players often feel the draft of Oracle’s results.

The Redwood City, Calif.-based company is scheduled to deliver fiscal first-quarter numbers on Tuesday after the markets close, and expectations are for solid growth despite a slowdown in technology spending by businesses during the quarter.

Oracle, the world’s second largest software company, saw its shares fall 23 per cent following disappointing fourth-quarter results in June. Sales from the company’s new hardware division failed to satisfy investor expectations, but the firm did manage to deliver year-over-year revenue growth of 13 per cent and a 36-per-cent rise in profit.

Sentiment has improved dramatically, however, in recent days, with the stock price rising 12 per cent last week alone.

Investors are especially eager to check in on the performance of Oracle’s recently acquired hardware business, the main culprit behind June’s unsatisfactory results.

Oracle entered the sector through its $7.4-billion (U.S.) acquisition of Sun Microsystems in January, moving into closer competition with Hewlett-Packard, IBM and Cisco Systems Inc. Analysts and investors are still struggling to get a handle on what to expect from the hardware unit.

For their part, Oracle executives have said a recent decline in hardware sales is part of a strategy to rid the unit of unprofitable business, which includes selling low-cost servers and third-party products. If that is the case, investors may not see the numbers swing upward as fast as they had hoped.

Meanwhile, evidence suggests information-technology spending cooled over the summer as fears of another recession gripped companies. That has some analysts cautioning that Oracle will hit the low end of its guidance.

But the company is partially insulated from market downturns thanks to its large amount of recurring business. Software licence updates and product support accounted for 42 per cent of Oracle’s $35.6-billion of revenue in the fiscal year ended May 31.

Management also has a good track record of maximizing profitability by reining in expenses. In June, the company said it had cut general and administrative costs by 13 per cent in the last quarter.

Last week, Derrick Wood, of Susquehanna Financial Group LLP, raised his rating of the shares to “positive” from “neutral,” saying fears of a slowdown in the tech sector look overdone. He has a price target on the stock of $34.

If the shares are oversold, they could get a lift simply from Oracle meeting its targets this week. Analysts expect share profit of 47 cents on revenue of $8.4-billion, according to a consensus survey by Bloomberg. That would represent an increase of 12 per cent and 10 per cent, respectively, over a year earlier.

Oracle shares trade at 11.4 times estimated future earnings, compared with multiples of 11.9 for Germany’s SAP AG, 11.5 for IBM, 8.6 for Microsoft and a whopping 236 for Salesforce.com. About 80 per cent of analysts following Oracle rate the shares a buy.

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