In technology today, it’s important to keep the revenues coming in. It’s imperative to provide growth and shareholder value. But sometimes, it seems like there are always a few companies who can keep spending with abandon. This all while their bottom lines and other financials look horrendous.
Today, we’re going to go through a few examples of this to understand why companies might do this from a strategic standpoint.
Some tech companies can make everything look really good
For all the criticisms of Facebook Inc (NASDAQ:FB), at least it is making money. For a social network with over a billion users, it seems to have a reasonable headcount of about 4,900 employees. And with $219 million in net income, that amounts to around $44,693 in revenue per employee in the most recently reported quarter.
Source: Facebook Earnings Report
Thirty percent of Facebook Inc (NASDAQ:FB)’s revenue is now coming from mobile devices, which is good. According to the New York Times, prior to going public roughly a year ago, the company did not do any sort of mobile advertising at all. That means in one year, Facebook was able to go from $0 to roughly $486 million in revenue from one strategy. This shows that Facebook can operate as a nimble business, capable of monetizing the opportunities that are placed in front of it.
Some tech companies aren’t so nimble
Another technology company that has been public for about a year is Workday Inc (NYSE:WDAY). Unlike Facebook Inc (NASDAQ:FB), Workday is having a problem making money. In the most recent quarter, Workday lost $33 million dollars. With around 1,750 employees, that’s an $18,857 loss per person!
Why is there no backlash on Workday Inc (NYSE:WDAY) like there is for Facebook Inc (NASDAQ:FB)? It’s simple: The company has potential to upend the cloud HR software market. The promise of profits from enterprise customers is keeping it going. According to a survey of Oracle Corporation (NASDAQ:ORCL) partners, it is believed that Workday will someday be able to close the gap and be able to compete in the pricey tier of enterprise HR software.
Source: ZDNet
It’s amazing why people would buy the stock at all. Do they think it is somehow undervalued? How can a company like Workday Inc (NYSE:WDAY)survive doing business like this? Well, it’s not the only one behaving like this in the cloud market….
The force is with who?
salesforce.com, inc. (NYSE:CRM) spends over 65% of its revenue on sales, marketing and administration and only 12% on R&D. What kind of return is that bringing to its investors? Not a whole lot. The company has approximately 9,800 employees, which means last quarter its profit was a minus $27,551 per Salesforce worker.
Source: Google Finance
What’s astounding is how the company can continue to book great revenue numbers yet continue operating with losses. The company’s real problem comes from the number of acquisitions it is making, which is resulting in diminishing returns as integration troubles mount with salesforce.com, inc. (NYSE:CRM)’s core business. Here are six purchases the company made in the last 12 months alone:
Source: Wikipedia
A gorilla’s influence
If you have not already surmised, it is Oracle’s influence in the enterprise space that is causing these previous two companies to spend more money than they make. Oracle’s revenue has hovered around the $9 billion mark each quarter and it has a major incentive to chase down cloud opportunities that both Workday Inc (NYSE:WDAY) and salesforce.com, inc. (NYSE:CRM) are trying to monetize.
Source: Computer Weekly
Although Oracle Corporation (NASDAQ:ORCL) differentiates itself in the enterprise category by selling hardware, it derives 70% of revenue from software. That’s exactly the business its competition wants to be in. But unfortunately, Oracle’s R&D expenditures mean that both salesforce.com, inc. (NYSE:CRM) and Workday Inc (NYSE:WDAY)are constantly playing catch-up. In 2012 Oracle spent $4.5 billion on R&D. That’s more than the $3.3 billion in combined revenue that Workday and Salesforce pulled in during 2012.
It’s not smart to fight a gorilla
Many businesses realize that, in competition, battling a large incumbent is not a good idea unless you can do it with pure guile. Both Workday Inc (NYSE:WDAY) and salesforce.com, inc. (NYSE:CRM) are in what looks like a money-losing struggle with Oracle, a fierce competitor whose CEO, Larry Ellison, is seemingly fueled by an insatiable desire for revenues. That and a consistent $2 billion-plus profit quarter over quarter!
There is promise for the two smaller upstarts, but thinking outside of the box is going to be key. Thinking about making actual profit with said smarts would be helpful too.
It kind of makes you wonder if Workday or salesforce.com, inc. (NYSE:CRM) ever considered the idea of getting into the social networking business. If you’re consistently losing money like they are, Facebook Inc (NASDAQ:FB) looks like the fiscally responsible company that it actually is despite the criticisms.
The article When Tech Upstarts Battle Titans, Money Becomes a Major Issue originally appeared on Fool.com and is written by Daniel Cawrey.
Daniel Cawrey has no position in any stocks mentioned. Follow Daniel on Twitter @danielcawrey. The Motley Fool recommends Facebook and Salesforce.com. The Motley Fool owns shares of Facebook and Oracle. Daniel is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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