Steven D'Aprano <[EMAIL PROTECTED]> wrote: ... > >> Apart from Microsoft, and possibly Quark (makers of Quark Express desktop > >> packaging software), and perhaps a few console game developers, is there > >> any company making a profit on software sales? > > > > I believe Oracle is doing fine (and they appear to be trying to buy up > > most everybody else -- other companies which used to make profits from > > software sales before they got gobbled up). I think SAP and Adobe > > aren't doing badly, either, but I haven't checked up on them in a while. > > My understanding is that both Oracle and SAP make most of their money > through consulting and customization rather than licencing or sales. I
Have you checked their quarterly statements recently? What I read about Oracle (look for ORCL on Google, go to SEC filings, quarterly statement; sorry, but the URL comes out way mangled this way...) is that their software business is 79% of their revenues (on a 4-quarters-trainling basis) and "our highest margin business" with a forecast to "continually improve margins and profits"; while "Our services business consists of consulting", "21% of our total revenues on a trailing 4-quarter basis, has significantly lower margins than our software business" (further broken down into Consulting, On Demand, and Education). Of course for all I know they might be playing some accounting tricks, but I don't see why they should. SAP is a bit harder to fathom for the typical US investor since they officially report under Handelsgesetzbuch rules, but they've long been voluntarily offering a US GAAP report side by side; you can study their reports at http://www.sap.com/company/investor/reports/index.epx , though (at least for somebody most used to reading typical SEC filings of US companies) it's not quite as immediate to read those for details, partly because of US$ vs EUR exchange rate issues. Nevertheless, it would appear that in SAP's case both statements are correct; they DO make profits on software sales, and even more in ancillary service business driven by those sales. "Software revenues were €590 million for the third quarter of 2005", up 19% or 20% year over year depending on currency used; "Total revenues for third quarter of 2005 were €2.01 billion", up 12% or 13%. They don't distinguish operating margins between their software and service business, though I don't see why their margins structure should be substantially different from Oracle's -- higher in software, lower in services. Anyway, they make almost 1/3 of their revenue (probably more than 1/3 of their profits, though that's just an educated guess) from software, with (right now) faster growth, and more than that from services, though currently with lower growth rates. The assumed difference in operating margins is, I believe, why they show software revenues separately: software, potentially, can have wider operating margins than services, as it can ``scale'' -- you could sell licenses for just the same bits over and over with just modest customer acquisition costs, driving operating margins skywards, while in services you're basically reselling some professionals' time at a markup... a hefty markup, sure, but margins just can't be as stellar as they could be in software sales if it all worked right (higher acquisition costs, &c). > don't know anyone who has bought a SAP solution that didn't spend an awful > lot of money having it customized -- and unless I'm very mistaken, you > don't own the customizations you pay for. I have acquaintances in Italy who make great consulting income helping SAP customers implement their purchases -- but they do so as freelance consultants, not as SAP employees (many of them USED to work for SAP, then figured out they could keep that "hefty markup" to themselves). Do not assume that SAP can capture all or even most of the ancillary services their software generates demands for, even though their 2 billion euro total revenues shows they're doing pretty well in that field (I believe the situation is even more extreme for Oracle, with way more business going to independent consultants in that sector). > Adobe, I'm not sure -- I suspect their biggest source of income is > royalties on Postscript for laser printers, but I could be wrong. I don't > even know anyone who uses Pagemaker any more -- it seems to have been > almost completely overshadowed by Quark Xpress. Even if Pagemaker is not an earner any more, and maybe Framemaker neither, aren't you forgetting Acrobat, Photoshop (probably the biggest earner), Premiere, After Effects, Encore, Audition, Illustrator, InDesign, GoLive, InCopy...? Not to mention Flash, Dreamweaver, Coldfusion, Freehand, Director... (Adobe DOES own Macromedia, you know; the acquisition was over a month ago). Anyway, looking for ADBE and their latest quarterly report (before the Macromedia acquisition), they claim 98% of their revenues come from product sales and only 2% from services and support. OEM Postscript is just 4% of that, down from 5% on the same quarter last year, while "Creative Professional" is 42%, up from 37% (this segment does include Photoshop, they say, though I don't see why that shouldn't be in the "Digital Imaging and Video" sector instead -- ah well, no matter). Judging from this, it appears to me that your evaluation of Adobe's income is completely off-base -- "royalties on Postscript for laser printers" are a blip on the bottom line, and of decreasing importance; their many off-the-shelf products oriented to "creative professionals" are increasingly coming to dominate their bottom line (with secondary help from Imaging, Video, Intelligent Documents), and with the acquisition of Macromedia one can only expect "more of the same". Their "cost of revenues" (salaries and all) is TINY, about 4-5% of their total revenues. This translates to operating margins to die for, as is typical of software sales... almost every incoming dollar is margin!-) They then do plough back 19-20% into R&D, of course -- some products may be at the cash cow stage, but most are actively developed, with a bazillion variations on each, and no doubt they're developing for the future. > > I'd be surprised if there weren't many relative minnows that I didn't > > think of, beyond the few "obvious" big fishes above listed. > > Yes, there are a few -- Quickbooks and MYOB, although arguably their main > income comes from subscription/upgrades rather than sales. But still, Subcriptions _are_ sales, by all standards of accounting and common sense. If the subscription is subject to cancelling and partial refund, as for magazines, you recognize the income gradually during the subscription period, but I don't think even that is a consideration for software subscriptions, normally prepaid and nonrefundable. > consider the sheer size of the software industry, and the fact that apart > from the 800lb gorilla of Microsoft, almost nobody can make a profit from > selling software. I have spent considerable time researching and writing up this post about just three well-known players for which financials are easily available -- not a problem for ORCL or ADBE, since, while I don't currently have either in my stock portfolio I'm not adverse to potentially having a fling on them, so keeping an eye out on them is something I need to do anyway, though I'll admit SAP proved a tad more frustrating;-). I'm not going to spend unbounded amounts of time researching minnows I'm not going to invest in anyway -- as a typical amateur investor, I play mostly on blue chips and indices. But I hope even this limited survey helps you see that your visibility on the SW market is seriously distorted -- just think of your connecting ADBE to old, dated products such as postscript licensing to OEMs and Pagemaker, sunset/cashcows products accounting for a tiny and declining portion of their income, and not even THINKING of the blockbusters, Photoshop et all, that make up their present and their future... of thinking that Oracle's profits are mostly from consulting, when that's 1/5 of their income and with LOWER margins than the software that's 4/5ths...! So, if I may summarize into a piece of advice: *don't short the SW-sales sector*, you could really be taken to the cleaners. Your perceptions of even the major players in the sector are clearly wrong, and appear to be based on extremely poor research, or even at times no research at all. I'm not saying that software sales have a bright mid-long term future, but when you're talking about the present and short term future, it's demonstrable that your perception of the market sector is way wrong; so I earnestly advise you to NOT put your money where your mouth is, lest you end up losing a large fraction of that money. Alex -- http://mail.python.org/mailman/listinfo/python-list
