Oracle reported financial results for its fiscal third quarter, revealing surprising weakness in new software license revenue and larger-than-expected declines in hardware revenue. Although prolonged weakness in new license growth may indicate that smaller competitors are encroaching onto Oracle’s turf, the company’s core markets are not being disrupted.

On the software side, revenue from new licenses fell 1.8% versus last year, while software update and support revenue grew 7.1%. This particular revenue item provides strong evidence of Oracle’s wide economic moat. Software update and support revenue represents more than 45% of company revenue and 80% of overall profits.

From a financial perspective, evaluating the company’s performance in hardware is more challenging. Revenue declines in the company’s commodity-based x86 servers continue, affecting overall growth in the near term but having no economic impact to our valuation. The company’s engineered systems products (Exadata, Exalogic, and Exalytics) continue to rapidly acquire new customers, seemingly validating the integrated hardware and software strategy Oracle has pursued.

However, given the hefty price the company paid in acquiring Sun and its hardware portfolio, analysts are reluctant to give that acquisition an exemplary grade. Lastly, management said it plans to further expand its sales organization. Although the company based the poor revenue performance on its rapid increase in sales representatives, the pipeline for new deals justifies new personnel. The company is expected to continue prudently focusing on profitability, and the volatility in results has provided an attractive entry point for new investors.


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