Operating Income 2016, The Softletter Benchmark 53 (Softletter subscriber-access only)

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About the Softletter Benchmark 53

We have completely revamped our Benchmark 50, now the Benchmark 53, to reflect the profound changes the software industry has undergone over the last several years. The profiled are now broken into eight segments that provide a representative overview of industry trends and performance.

The Softletter Benchmark 53 are all publicly-held companies and most of our basic business metrics are derived from documents these companies are legally required to provide to investors. When we believe circumstances warrant it, we do adjust these numbers to reflect financial reality.

Please note that in June we will update these numbers to include the 2015 filings. The reason for not posting these numbers before is that a) a significant number of companies revise their initial 10-Ks soon after their release and b) because of fiscal year considerations, some 10-Ks are not available at the end of the calendar year.

Operating Income (OI) is a rubber hits the road metric that measures a company’s underlying profitability. When calculating OI, Operating income takes a company’s gross income (revenue minus COGS) and subtracts other operating expenses such as office supplies, heating and air conditioning, and electricity. It also does incorporate investments in other companies, taxes, and non-recurring expenses such as lawsuits. OI is represented as a percentage of sales revenues. It is quite possible for a company to show positive OI numbers and yet not be technically profitable (Hollywood accounting), though favorable numbers over time are a powerful indicator of a company that’s succeeding in its underlying business model.

A point to note is that if you love the color red, OI is your metric! Negative numbers are common in contested segments, particularly in SaaS, where companies turn to public markets to fund war chests for long-term plays to achieve market dominance. There’s recently been a fair amount of criticism aimed at this strategy (see Softletter editor Rick Chapman’s review of Disrupted by Dan Lyons), but shareholders in firms such as Salesforce.com, which has never been profitable since it went public, have made out handsomely (if you bought and held onto your original shares.)

Operating Income, The Softletter Benchmark 53

Operating Income Analysis

When analyzing standouts in OI, several factors things immediately stand out. One is that SaaS Sales and Marketing and SaaS Enterprise are bloody places to be in terms of profitability. Enterprise markets are big and relatively expensive to market to. The SaaS model does not relieve a firm of the need to create and maintain a direct sales force, sales cycles are slower, and enterprise-sized firms expect you to market towards them. By contrast, SaaS verticals firms have to be much more careful about how they spend their pennies. Wix is a standout in this category in the negative sense; its market, online website authoring for SMBs and individuals is under constant pressure from WordPress and platforms such as Weebly.

Sales and Marketing is likewise a tough sector. Sales and marketing automation firms believe in sales and marketing, as our previous S&M analysis demonstrates. HubSpot, recently at the center of controversy due to Dan Lyons new book, Disrupted, is spending heavily in an attempt to grow, eschewing profitability in a quest for market dominance, following the same strategy as Salesforce.com and NetSuite, two other firms SaaS luminaries who have never been profitable.

In Social Marketing, Facebook continues to impress. The company’s strategy of “appropriating” the social networks of its hundreds of millions of users (these days, perhaps 3% to 5% of a social network sees your posts unless you pay to reach the rest)  has paid off handsomely; Twitter, by contrast, has 300M users but no strong monetization model. Twitter’s ostensible value is its ability to serve as a real-time news ticker for the planet and a feed which reaches only 5% of it loses most of its value. Twitter has yet to figure a way out of the low revenue box their model places them into.

As usual, On Premise is a sunny, placid place with U.K. Microfocus a performance standout.

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