Close your eyes for a minute and journey back to the year 1993. Bill Clinton is unpacking his bags at the White House, “Whoomp! (There it is)” is busting out of boom-boxes everywhere, and White Ford Broncos are famous only for their highly questionable safety record.

More importantly, the technology 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 revenues double and their earnings more than quadruple. The sky is the limit.

Flash forward 19 years to 2012, and the landscape is remarkably different. While Oracle and its old-guard peers are still tremendously successful, they’re mature companies and receive correspondingly low valuation multiples and very little hype. Supplanting Oracle as the darling of the B2B software world is, a Client Relationship Manager delivered as SaaS. Salesforce’s revenues are approximately the same as Oracles in 1993 after 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.

But there are plenty of differences between the two companies, and those differences tell the story of two distinct eras in B2B software. Below is a table comparing the ORCL’s 1993 10-k to CRM’s from 2011:

Sources: and Oracle

What’s Different:

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 revenues than are Salesforce’s. While Oracle does make a considerable profit on their Services and Consulting, this business unit is much less scalable than their software offering and therefore 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 revenues 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. Despite the profitability gap and identical top-line growth, CRM is valued 50% higher than ORCL after adjusting for inflation. They both fetch high multiples, but salesforce’s are astronomical. Part of this can be explained by what’s being called a valuation bubble in cloud computing and SaaS, but part of it is also legitimate given the different business models. Because salesforce’s revenues come almost entirely 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 earnings faster in the future than will ORCL. Again, we’ll have to see if this difference actually materializes, but it does make logical sense.

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