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. In most cases these are 10-Ks and equivalents, supplemented by expert analysis of the numbers.

Operating Income (OI) is a derivative metric designed to measure how efficiently a company runs it operations. It is calculated by subtracting EBIT (Earnings Before Interest and Taxes) from revenue.  The numbers are most  valuable when comparing companies of a similar type or peer group, something the Benchmark 53 is designed to do.

OI is frequently used by investment analysts to evaluate a company’s operating performance without regard to interest expenses or tax rates, two variables that can vary widely from company to company and even within industry sectors.

It is also important to note that some industries have higher labor or materials costs than others.  In the case of software, labor costs are almost without exception the single highest operating cost. This is why comparing operating income or operating margins is generally most meaningful among companies within the same industry, and the definition of a “high” or “low” ratio should be made within this context.

It is quite possible for OI numbers to be negative. The most common reasons are:

  • A company is generating high levels of sales and marketing expenses as it attempts to build marketshare and dominant position vis a vis its competition.
  • Unexpected expenses, such as a product recall, need to purchase new equipment, or rapidly expand a product development effort, hit your bottom line.
  • Your business model undergoes rapid disruption.
  • You overhire.

It’s always important to remember that in SaaS and mobile, your available cash reserves may greatly exceed your recognizable revenue. Thus poor OI numbers over a year or even two may not be as significant as they appear. However, if the continue over time, you’re burning cash. But even this is not necessarily a harbinger of doom if you can rely on public markets to replenish your business operations (think Amazon). But only a handful of companies are that lucky. Normally, investor impatience lowers the hammer on management and your business well before almost a quarter of a century goes by.

Softletter subscribers will note the strong correlation between OI and OIE. If you’re not profitable on an overall basis, the efficiency of your workforce cannot make up for this.

Operating Income Benchmark 53

Big Four OI 2015 OI 2014 Rev 2015  Rev 2014 Ratio 15 Ratio 14 Avg.
Microsoft  $18,161,000,000  $27,759,000,000  $93,580,000,000  $86,833,000,000 19% 32% 26%
Google  $19,360,000,000  $16,496,000,000  $74,989,000,000  $66,001,000,000 26% 25% 25%
Apple  $71,230,000,000  $52,503,000,000  $33,715,000,000  $182,795,000,000 30% 29% 30%
Oracle  $3,871,000,000  $14,759,000,000  $38,226,000,000  $38,275,000,000 36% 39% 37%
Median 28% 30% 28%
SaaS Sales and Marketing
Constant Contact  TBU*  $19,801,000  $TBU*  $331,678,0000 6% 3%
Marketo  $(68,452,000)  $(55,610,000)  $209,869,000  $149,954,000 -33% -37% -35%
Netsuite  $(115,665,000)  $(83,331,000)  $741,149,000  $556,284,000 -16% -15% -15%
Salesforce  $(145,633,000)  $(286,074,000)  $5,373,586,000  $4,071,003,000 -3% -7% -5%
HubSpot  $(46,474,000)  $(48,609,000)  $181,943,000  $115,876,000 -26% -42% -34%
Cvent  $ (16,498,000)  $(23,100,000)  $187,716,000  $142,245,000 -9% -16% -13%
LivePerson  $(10,428,000)  $(5,167,000)  $239,012,000  $209,931,000 -4% -2% -3%
 *To be updated Median -7% -12% -9%
SaaS Enterprise
Workday  $(215,702,000)  $(153,282,000)  $787,860,000  $468,938,000 -27% -33% -30%
Zendesk  $(82,985,000)  $(66,145,000)  $208,768,000  $127,049,000 -40% -52% -46%
Veeva  $69,966,000  $39,304,000  $313,222,000  $210,151,000 22% 19% 21%
Demandware  $(42,665,000)  $(27,792,000)  $237,279,000  $160,533,000 -18% -17% -18%
ServiceNow  $(166,365,000)  $(151,835,000)  $1,005,480,000  $682,563,000 -17% -22% -19%
Benefit Focus  $(54,274,000)  $(58,903,000)  $185,143,000  $137,420,000 -29% -43% -36%
LogMeIn  $16,049,000  $(1,926,000)  $271,600,000  $221,956,000 6% -1% 3%
Median -17% -20% -19%
SaaS B2C Verticals
Angie’s List  $13,258,000  $(10,362,000)  $344,125,000  $315,011,000 4% -3% 0%
Wix  $(48,635,000)  $(55,644,000)  $203,518,000  $141,841,000 -24% -39% -32%
Pandora  $(169,991,000)  $(30,128,000)  $1,164,043,000  $920,802,000 -15% -3% -9%
Blackbaud  $46,712,000  $46,364,000  $637,940,000  $564,421,000 7% 8% 8%
Qualsys  $24,806,000  $9,247,000  $164,284,000  $133,579,000 15% 7% 11%
Realpage  $(11,615,000)  $(15,503,000)  $468,520,000  $404,551,000 -2% -4% -3%
Callidus  $(11,655,000)  $(13,547,000)  $173,087,000  $136,618,000 -7% -10% -8%
Median 2% 2% 2%
Mobile B2B
Millenia Media  $(33,891,000)  $(148,750,000)  $406,691,000  $296,164,000 -8% -50% -29%
Medl  $0  $(2,193,905)  $0  $2,805,632  NA -78% -39%
Glu Mobile  $(6,301,000)  $2,065,000  $249,900,000  $223,146,000 -3% 1% -1%
Turbine  $(23,737,000)  $(15,524,000)  $28,252,000  $24,404,000 -84% -64% -74%
Perion  $(66,021,000)  $55,295,000  $220,950,000  $388,731,000 -30% 14% -8%
Intellicheck  $(5,480,209)  $(7,645,169)  $7,014,665  $6,613,000 -78% -116% -97%
NQ Mobile  $(33,891,000)  $(80,955,000)  $406,691,000  $332,324,000 -8% -24% -16%
Median -54% -44% -45%
Mobile B2C
King Digital  $0 $811,877,000  $0  $2,260,241,000  NA 36% 18%
Fitbit  $348,198,000  $157,929,000  $1,857,998,000  $745,433,000 19% 21% 20%
Electronic Arts  $94,800,000  $33,000,000  $4,515,000,000  $3,575,000,000 2% 1% 2%
Zynga  $(146,056,000)  $(244,741,000)  $764,717,000  $690,410,000 -19% -35% -27%
Majesco  $(3,926,000)  $(13,333,000)  $6,693,000  $34,368,000 -59% -39% -49%
Yelp  $(21,324,000)  $11,059,000  $549,711,000  $ 377,536,000 -4% 3% 0%
Renren  $(105,306,000)  $(159,394,000)  $41,111,000  $46,668,000 -256% -342% -299%
Median -39% -37% -38%
Social Networking
LinkedIn  $(150,942,000)  $36,135,000  $2,990,911,000  $2,218,767,000 -5% 2% -2%
Facebook  $6,225,000,000  $4,994,000,000  $17,928,000,000  $12,466,000,000 35% 40% 37%
Twitter  $(450,036,000)  $(538,866,000)  $2,218,032,000  $1,403,002,000 -20% -38% -29%
Groupon  $(79,777,000)  $30,701,000  $3,119,516,000  $3,042,123,000 -3% 1% -1%
MeetMe  $ 7,994,566  $(3,146,405)  $56,903,773  $44,817,436 14% -7% 4%
Jive*  TBU TBU TBU TBU TBU TBU TBU
Sina  $12,222,000  $(40,914,000)  $743,535,000  $621,705,000 2% -7% -2%
 To be updated Median 1% -7% -2%
On Premise
Microfocus  $147,236,000  $155,720,000  $834,500,000  $433,100,000 18% 36% 27%
Autodesk  $120,700,000  $284,800,000  $2,512,200,000  $2,273,900,000 5% 13% 9%
Red Hat  $249,994,000  $232,289,000  $1,789,489,000  $1,534,615,000 14% 15% 15%
Progress  $14,754,000  $80,740,000  $377,554,000  $332,533,000 4% 24% 14%
Symantec  $154,000,000  $144,000,000  $3,956,000,000  $4,183,000,000 4% 3% 4%
Nuance  $54,900,000  $(21,400,000)  $1,931,136,000  $1,923,500,000 3% -1% 1%
Ansys  $353,679,000  $347,450,000  $942,753,000  $936,021,000 38% 37% 37%
Median 4% 14% 9%

Softletter OI 2017 Benchmark 53 Analysis

When looking at OI, there are several standouts, many of them negative.  Let’s start with the The Big Four. While Microsoft’s numbers are solidly postive, 10 years ago the firm’s OI numbers ranged Microsof between 25% to 30%. Of course, 10 years ago Microsoft was still at the pinnacle of its power and profitability. Today, the company’s failure to understand and properly manage the rise of SaaS and mobile has put the firm in catchup mode in both of these high growth sectors.

SaaS Sales and Marketing provides some excellent examples of how the drive for growth (and achieving it) can impact OI.  Both Marketo and HubSpot are attempting to drive growth by extensive, sales, marketing, and hiring. Both are also driving revenue into their coffers, allowing them to fund their aggressive programs, and as public companies, they can tap into the markets.  Nonetheless, OIs of 35% and 34% are very high. It will be interesting to see what next 10-K releases show.

In  SaaS Enterprise, Zendesk’s two year OI negative average of 465 is simply not good. Help desk software is not a particularly sexy market and we don’t think this number is sustainable over time.  Of course, SaaS Enterprise remains a tough segement in which to compete.

Social Networking presents the familiar picture of Facebook flourishing while the rest of the sector sucks 10-K lemons. To no one’s great surprise, Twitter’s numbers are aren’t good, but they did succeed in improving the OI burn from 38% to 20%. That’s real progress and may indicate that the company’s strategy of monetizing its real time event capabilities is starting to bear fruit.

Progress’ numbers in On Premise are interesting. It’s OI numbers shrank from 25% to 4%, a very significant decrease. The company is another on-premise firm that miscalculated how fast SaaS and mobile would eat their core businesses. Progress has been busily recasting itself as a SaaS services provider and its Telerik mobile application development platform has been a decided bright spot in an otherwise fairly gloomy product portfolio.

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