B2B Software Time Machine

More importantly, the innovation industry is exploding. Historically low-tech businesses around the globe are seeing the writing on the wall and entering the information age in droves. Oracle is at the center of this process. Between 1992 and 1994, their earnings double and their revenues more than quadruple. The sky is the limit.

Flash forward 19 years to 2012, and the landscape is remarkably different. During Oracle and its old-guard peers are however tremendously successful, they're mature companies and receive mutatis mutandis low valuation multiples and very little hype. Supplanting Oracle as the darling of the B2B software world is salesforce.com, a Client Relationship Manager delivered as SaaS. Salesforce's earnings are roughly the same as Oracles in 1993 afterwards adjusting for inflation, it has identical 28% revenue growth, and like Oracle, it spends aggressively on Sales and Marketing to capture the growing B2B market in which it operates.

1. License vs. Service breakdown. Salesforce's SaaS delivery model enables it to provide remote support and training much more efficiently than Oracle, which has to support an army of consultants to on-board and maintain its accounts. As a result, service expenses for ORCL are about a four times higher as a percentage of earnings than are Salesforce's. During Oracle does make a considerable profit on their Services and Consulting, this business unit is much less scalable than their software offering and to sum up much less valuable. This is a huge advantage for salesforce versus its early-nineties counterpart.

2. Software-related expenses. As a percentage of revenue, salesforce spends twice as much on R&D and cost of licenses as Oracle does, including developer payroll, which more than makes up for their savings on services. The SaaS business model isn't a free lunch. It opens salesforce up to furious competition from upstart CRMs that wouldn't have the scale to compete in the early 90's. To stay ahead of the game, salesforce has to innovate constantly, and pays dearly to do so. It remains to be seen how this spending will pay off.

3. Oracle is much leaner and more profitable. Distinct from R&D and Sales & Marketing, salesforce has about double the General & Administrative budget as a percentage of earnings than does its counterpart. I see two possible explanations for this. One is that the higher valuation awarded to CRM gives them a pass with investors to maintain a more bloated corporate budget. Alternatively, the spending could be necessary to attract top technical talent in a hot Silicon Valley job market. Either way, it's most of the difference between Oracle's $98m in net income and salesforce's $11m loss.

4. There's a huge valuation chasm. In spite of the profitability gap and identical top-line growth, CRM is valued 50% higher than ORCL afterwards adjusting for inflation. They both fetch high multiples, nevertheless salesforce's are astronomical. Part of this can be explained by what's being called a valuation bubble in cloud computing and SaaS, yet part of it is as well legitimate given the different business models. Because salesforce's earnings come almost absolutely from their software, an incremental dollar in revenue comes at much less cost than an incremental dollar to Oracle, which has to deploy significant consulting resources to support their software. This translates to higher operating leverage for CRM, which in plain English means they'll grow revenues faster henceforth than will ORCL. Again, we'll have to see if this difference to tell the truth materializes, nevertheless it does make logical sense.

Business 2 Community is an independent online community focused on sharing the latest news surrounding Social Media, Marketing, Branding, Public Relations & much more. Every day we feature the thought leadership of our open community of bloggers and aim to provide a balanced view of the business landscape based on industry news, trends and real-life experiences.