|Shares Out. (in M):||4,115||P/E||17.0||15.8|
|Market Cap (in $M):||184,502||P/FCF||20.8||17.9|
|Net Debt (in $M):||-6,157||EBIT||11,243||13,293|
SAP has, however, been surpassed in CRM by upstart software as a service (SaaS) company, Salesforce.com. Salesforce was founded by Marc Benioff, a former Oracle employee and protégé of Larry Ellison. Salesforce’s stratospheric rise over the last decade or so is a classic case study in technological disruption. Both SAP and Oracle shared a time-tested model for selling on-premise applications: customers purchase an upfront licence fee, followed by an ongoing annual maintenance fee of c.20% of the initial licence cost. Salesforce opted for an entirely different model. It delivered its CRM applications as a service over the internet and eliminated expensive upfront licence fees. This shifted the cost of CRM from capex to opex – customers would continue to have use of Salesforce’s software so long as they paid their ongoing subscription.
Using this SaaS model, commonly referred to as the “public cloud” approach, Salesforce unseated the industry incumbents and took pole position in overall CRM market share. In the process, Salesforce became a $60bn market cap company, albeit with a formidable 300+x trailing P/E multiple.
In the meantime, Oracle’s top line has remained broadly flat since 2012 as the company has worked on its own public cloud strategy. Alongside currency headwinds, management cites the switch from the front-loaded, capex business model to the subscription-based, opex model as a key reason for the slowdown in revenue growth. Management teams are, of course, often proficient at explaining away less than flattering financial numbers. Accordingly, we have closely tested the switch-over effect of Oracle’s new cloud-based business in our modelling. The substance of the effect is best illustrated by a simple table:
The loss of the upfront licence fee payment in year one is felt for nearly four years, which goes some way to explaining Oracle’s multi-year sales slowdown. The above logic applies to both the database and the applications side of Oracle’s business. In the example given, the on-premises licence that produces $20 of revenue annually can be said to have an “installed base value” of $100. In our modelling, we have also considered the simulated “installed base value” of Oracle’s cloud customer base, i.e. the equivalent value that the cloud subscriptions would represent if they were treated as licensed products. Interestingly, this modelling exercise indicates organic growth in Oracle’s installed base value of 6-7% during the last four years (after adjusting for currency effects and the impact of acquisitions), in line with the average growth of the business over the last 15 years. In spite of scepticism from the market, we believe Oracle’s underlying business continues to grow.
Transition from on premise to cloud.