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Tickers in this Article: ORCL, IBM, CSCO
Software-maker Oracle Corp. (Nasdaq:ORCL) disappointed investors yesterday as sales of new software came in at the low end of expectations. Earnings came in strong, but the new software sales, a key indicator of future growth, made negative headlines and brought the shares down more than 8% in after-hours trading. The California-based company is still experiencing strong growth in a weakened market, which means the eager selling might be a little overblown. (For further reading, see our article Earnings: Quality Means Everything.)

The Positives

Oracle had a strong quarter in terms of earnings growth. The company reported a 30% hike in net earnings to $1.34 billion (26 cents per share) from $1.03 billion (20 cents per share). The earnings growth matched Wall Street consensus estimates and showed that the company is still growing strong, at least for now. Oracle noted its nimbleness compared to competitor IBM (NYSE:IBM) as President Charles Phillips stated triumphantly in the company's press release, "We continue to grow faster and take market share from IBM." However, these good times may not continue.

The Not-So-Positives
The reason the stock dropped so harshly - despite the very positive earnings growth - was the disappointment of the company's new software sales. Those sales grew at 16%, near the bottom of the 15-25% growth the company had projected only a few months ago in December 2007. Analysts were expecting Oracle to come closer to the midpoint of the range, so the 16% growth was a rather substantial disappointment. (Learn how companies forecast their earnings in our article Earnings Forecasts: A Primer.)

Oracle's growth number receives a lot of focus because it is a key indicator of the company's future returns. When Oracle signs on a new software business, customers also sign on to pay a 20% maintenance fee annually. On top of this Oracle gains more revenue when companies using these products add more users to the system with the addition of employees.

Even though the earnings look good during a troubled economy, it may be in large part due to the trailing revenues of previous sales. The 16% growth is more reflective of the troubles that Oracle is facing as its client companies attempt to reduce costs. These are the same concerns for the growth of companies like Cisco (Nasdaq:CSCO) that have seen businesses cut new technology purchases to cut costs.

Selling Overkill?
Despite some calls that we have already seen the bottom of this market decline, some people are still looking for any reason to sell. Granted, the important new software sales number was weaker than expected, but this is during a time in which the U.S. toying with a recession and people across the board are cutting back purchases. In a weak economic environment 16% growth in sales of anything is not weak in my eyes.

I think the market is incorrectly pricing these sales results like they are a long-term decline, but once the economy picks up Oracle will see its growth increase dramatically. I think the sell-off in the shares is providing a good entry point to carry Oracle long-term. As the economy recovers, this sell-off might end up looking like a blip in the radar. (To learn more, check out Recession-Proof Your Portfolio.)

The Bottom Line
Shares of Oracle dropped significantly as the key figure of new software sales came in lighter than expected. Despite this, earnings were solid. The 8% sell-off might be nothing more than a good entry point for a long-term holding investment. I think that as the U.S. economy recovers Oracle will be a good stock to own as companies return in force to buy new technologies.

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