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No Growth for Oracle’s On-Premise Software Segment in Fiscal 2Q16

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Oracle’s on-premise software failed to report growth in fiscal 2Q16

So far in the series, we’ve looked at Oracle’s (ORCL) recently announced fiscal 2Q16 results. Now let’s see how the company’s software and licenses performed in fiscal 2Q16. The segment contributed a little more than 70% of Oracle’s overall revenues. Total segment sales fell 7% on a YoY (year-over-year) basis to $6.4 billion. However, on a constant currency basis, the revenues were flat.

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Oracle’s shift to cloud continued to hurt its on-premise segment

In Oracle’s on-premise segment, new software license sales fell 18% to $1.7 billion. Software license updates and product support revenue fell 2% to $4.7 billion. However, on a constant currency basis, Oracle’s software updates and product support revenue grew 5%.

New licenses sales hold particular importance on an industry level, as they’re considered a barometer for customer demand for databases and other business applications.

As the revenue figures in the above graph show, the continued double-digit decline in new software license sales offset growth in the company’s software updates and product support revenue. Oracle’s software updates and product support revenue contributed more than 70% toward overall on-premise software license sales in fiscal 2Q16.

Oracle’s on-premise software is a mature business that provides steady revenue due to its client stickiness. The company’s cloud business, on the other hand, is a high-growth business in which the company is aggressively trying to find a foothold.

Amazon (AMZN) leads the overall cloud space, whereas Salesforce (CRM) dominates the PaaS (Platform as a Service) and SaaS (Software as a Service) space. IBM (IBM) is a leader in the hybrid cloud space.

As Oracle’s cloud subscription revenue continues to gain traction, it’s likely to cause Oracle’s legacy on-premise software business to decline.

You can consider investing in the PowerShares QQQ Trust, Series 1 (QQQ) to gain exposure to Oracle. QQQ has an exposure of 27.6% to application software and invests ~3.1% of its holdings in Oracle.

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