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Why Did Oracle’s Software Segment Decline in Fiscal 4Q16?

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Nov. 20 2020, Updated 3:31 p.m. ET

Oracle’s Software segment performance declines

In our recent Oracle (ORCL) series, we discussed its fiscal 4Q16 results, the impact of the US dollar on its performance, and growth in the cloud.

Let’s look at Oracle’s Software segment performance in fiscal 2016. The Software segment includes new software licenses, software license updates, and product support. In fiscal 4Q16, this segment’s revenue fell by 3% to ~$7.6 billion. In 2016, it declined by 5% to ~$26.1 billion.

However, in constant currency terms, its growth was flat. The Software segment contributed 70% toward overall revenues. Moreover, higher margins are associated with the segment, which is shrinking. As a result, a decline in this segment’s revenue is a concern.

Although Oracle’s fiscal 4Q16 and fiscal 2016 results were all about the cloud, the Software segment’s importance in the company’s overall growth cannot be ignored.

Also, the cloud space is highly competitive. Amazon (AMZN), Microsoft (MSFT), IBM (IBM), and Google (GOOGL) (GOOG) collectively grew by 93% and accounted for more than half of the overall cloud space in 1Q16.

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Oracle’s new software license revenue falls

Within the Software segment, Oracle’s new software licenses, which provide a better picture of revenue growth, continued to fall in fiscal 4Q16. They fell by 12% to ~$2.8 billion. On a constant currency basis, this was a 10% decline.

New license sales hold special importance on an industry level, as they’re considered a barometer for customer demand for their databases and other business applications. Past deals have helped software license update and product support revenue grow by 3% to ~$4.8 billion.

Investors who wish to gain exposure to Oracle could consider investing in the Technology Select Sector SPDR ETF (XLK). While XLK invests ~3% of its holdings in Oracle, it also has an exposure of 31% to application software.

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