InformationWeek Finds Long-Lost Enterprise Software 'Funny Money'

Includes: CRM, ORCL, RNOW, SAP
by: Dennis Byron

There is an article by Bob Evans running over on InformationWeek as of April 5 that illustrates the importance of enterprise-software investors ignoring technical journalism in making investment decisions. The headline - which Evans may not have written - is one of the almost weekly journalistic statements that enterprise software is dead.* The heart of the article - which of course Evans did write - ignores enterprise software market dynamics in many dimensions.

But because this is an investor site, I'll just stick with some plain old typical tech journalist misunderstanding about accounting. Evans asks (speaking of well-established GAAP/FASB-determined revenue recognition procedures):

"...are these various splits just funny-money accounting exercises...?"

They are not funny-money exercises but they are accounting exercises. Good accounting dictates that the revenue be broken out in that manner. The SEC sends you to jail if you don't do it. (Someone please explain that to the publicity hound congressperson, Henry Waxman, vis a vis AT&T (NYSE:T), Verizon (NYSE:VZ), John Deere, and so forth and their accounting for Obamacare's immediate impact on their bottom lines.)

In addition, Evans' article's breathless wonder about these accounting practices when it comes to Oracle (NASDAQ:ORCL) and by extension to SAP and other enterprise software suppliers is beyond a little odd. I'm thinking he might be purposefully trying to mislead readers except I don't know why or about what.

The revenue splits the articles talk about among software licenses, maintenance subscriptions, and professional services for companies that follow Oracle's former and SAP's still current business model are decades old. If you adopt that business model and are good at it, the only time license revenues exceed maintenance and services revenues is early in your existence.

Oracle adopted this business model in the early 1990s, about 10 years after its founding (when it was more of a professional services/integration firm). By midway through that decade (see Oracle's 1997 10-K; deduct its then systems-integration business revenues from the license line), Oracle's services revenues exceeded its license revenue. Evans' discovery of funny money isn't about something that just started happening recently as implied.

Also to the extent that software suppliers such as these market leaders adopt a Software as a Service (SaaS) delivery model, the trend to more revenue recognized as services is accelerated. I estimate that Oracle does at least a couple of hundred million in SaaS revenue accounted for in its OnDemand line on its income statements rather in its apparent software revenue lines. Now that is "funny money" but the joke is going to be on (NYSE:CRM), Rightnow (NASDAQ:RNOW) and the other ASP/SaaS/on-demand/cloud-computing suppliers that still don't know what they want to be when they grow up. Oracle may be close to overtaking them in their own niche.

But I am being unfair to CRM, RNOW and the rest. They do know what they want for an end game. They want to be acquired by Oracle or SAP.

*Other breathless Evans headlines include, "A New Era for Software," "(Software Vendors are) Fighting for Survival," "Have Oracle and SAP Hit Tipping Point..?," and so forth. Will you enterprise software guys please advertise more on his site so that he can move on to another subject?

Disclosure: no position in suppliers mentioned.