Oracle Corp shares fell 14 percent on Wednesday, a day after its results fell short of expectations, dragging down the tech sector as investors feared the rare miss was a sign corporate America may be pulling back on tech spending.
Troubles at the No. 3 software maker follow profit warnings from big tech names including Hewlett-Packard Co, Intel Corp and Texas Instruments Inc. The warnings were not limited to Silicon Valley, with U.S. industrial conglomerate Emerson Electric Co reporting a drop in orders for equipment used in big data centres.
With all the fear about Europe, and the fact that Oracle had beaten for the previous four quarters ... makes you take a step back, said Daniel Morgan, a portfolio manager at Synovus Securities in Atlanta. Is this a preliminary example of what we could expect in January from Microsoft and other players? It raises an eyebrow that things may not be as hunky dory as we've been led to believe in terms of IT spending.
Given that Oracle's results were for a quarter that ended in November, they could signal trouble at peers whose quarters end in December, such as SAP AG and Microsoft Corp, investors reasoned.
The majority of deals in the fourth quarter are traditionally closed in the last two weeks of the quarter, so the delay of Oracle's deals is a negative cross read for SAP, Silvia Quandt analyst Michael Busse said.
A slowing in tech spending would be a troubling sign for the U.S. economy, which has had few bright spots in recent years.
Since the technical end of the recession (in June 2009) we've been seeing double-digit growth in investment in technology. If Oracle is the canary in the coalmine, that would be something to worry about, said Michael Goodman, director of economic and public policy research at the University of Massachusetts at Dartmouth.
But the decline could also reflect corporate software users' reluctance to commit to major new investments at a time of uncertainty about the effects of Europe's debt crisis.
There's a lot of concern about what the immediate future holds, so this may just be customers putting off investments they want to make until they feel like they have a better handle on what the future looks like, Goodman said.
U.S. companies have been sending mixed signals about their spending plans for 2012. A survey released last week by the Business Roundtable found that 16 percent of CEOs of large U.S. companies planned to cut their capital spending over the next six months, up from 13 percent who planned to cut in the third quarter.
But other data released on Wednesday by the Equipment Leasing and Finance Association showed U.S. businesses signed up for $6.2 billion (3.9 billion pounds) in loans, leases and lines of credit to fund capital expenditures in November, a 38 percent increase from the month a year ago.
Oracle's stock fell $4.01 to $25.15, the lowest point since August, making it the sixth-biggest decliner on the Nasdaq early Wednesday afternoon.
Other big decliners in the sector including VMWare, down 11.3 percent to $75.65 in the steepest drop on the New York Stock Exchange; NetSuite, down 8.7 percent to $41.06; and SAP , whose U.S. listed-shares were down 7.6 percent at $51.41. The Standard & Poor's software and services industry group index fell 4 percent.
Emerson shares fell 6.3 percent to $46.54.
Emerson said that orders for network power equipment - including uninterruptible power supplies and cooling systems for data centres - fell by 5 to 10 percent in the three months ended November 30, citing factors including an uncertain economic outlook.
Overall, we have seen in the last 60 days ... a significant weakness in this whole electronics space, said Emerson Chief Executive David Farr. I don't see that changing for the time being.
NEW BUSINESS SLOWING DOWN
We have seen a dramatic deceleration in new business for Salesforce.com and slowing growth from Red Hat recently, J.P. Morgan Securities wrote in a note. This may be just the beginning of a long list of IT companies that struggle over the next quarter or more.
BofA Merrill Lynch, however, said Oracle was well positioned for the longer term.
The acquisition of Sun places Oracle as a datacenter player, providing a complete integrated stack of hardware and software, the brokerage wrote in a research note.
We expect Oracle to gain incremental revenue and cost synergies from the acquisition, resulting in higher EPS potential longer term.
Investors are watching Oracle's hardware division, which it added in 2010 with the acquisition of Sun Microsystems. Second-quarter hardware systems product revenue fell to $953 million, missing the $1.06 billion expected by analysts polled by StreetAccount.
(Reporting by Sayantani Ghosh in Bangalore, Maria Sheahan, Christoph Steitz and Marilyn Gerlach in Frankfurt and Nicola Leske and Nick Zieminski in New York, writing by Scott Malone)