Controlling G&A Costs Is Key to Profitability

Operating Expenses the Difference Between High-Profit and Low-Profit
Software Publishers According to New SPA Study

October 4, 1993 (Washington, DC)- Small software publishers spend three
times as much of their net revenues on general and administrative costs as
do large firms according to a study by the Software Publishers
Association. The difference in general and administrative expense is one
of the primary factors causing the difference in profitability of the
groups.

In a recent study of software publisher profitability conducted by the
Software Publishers Association (SPA), median G&A of the smallest
publishers was 25% of net revenues, while it was only 8% of net revenues
for the largest. Profitability for the same groups, measured as median net
profit before taxes as a percent of net revenue, was 12% for the largest
publishers, but was a 10% loss for the smallest.

"The study shows that regardless of company size," said David Tremblay,
SPAIs Research Director, "controlling operating expenses, particularly
G&A, is what separates high and low profit performers."

The SPA recently released the results of its 1993 Software Industry
Financial Survey. The Survey collected information on approximately 40
categories of income statement revenues and expenses from 24 public and 57
private SPA member companies. The information was collected and tabulated
for the SPA by Management Foresight, a unit of Arthur Andersen based in
Schaumburg, IL The information collected covered the last four fiscal
quarters ending March, 1993 The report contains median expenditures
relative to net sales, which are grouped and tabulated by the revenue size
of the participating companies and by profitability quartiles

Among the highlights of the report are

* Profitability, measured as net profit before tax as a percent of net
revenue (NPBT), varied among the revenue size classes. Median NPBT for
publishers with revenues under $2 million was a loss of 10 4%, while the
median publisher in the $2 to $5 million range operated at about
break-even Median NPBT for three of the other four revenue categories was
11% to 13%

* Within operating expense categories, median total research and
development expenses clustered around 15% of net revenues, and ranged from
10% to 17% Median total sales and marketing expenses clustered around 37%,
with a range of 30% to 40% of net revenues Among the three components of
operating expenses, only general and administrative expenses varied in
relation to company size. The smallest companies, with under $2 million in
sales, had median G&A expense of 25% The medians steadily decreased as the
size of the company increased until, for publishers with over $100 million
in revenues, median G&A was only 8%

* There has been much discussion of industry profitability recently, and
how it has changed and will change This study was able to provide some
insights into that discussion About half of the participants in this
year's study also participated in the SPA's 1992 study The report compared
these publishers' median results in 1992 and 1993 NPBT in the group
declined from 10 7% in 1992 to 7.5% in 1993, largely due to a jump in
median sales and marketing expenses from 33.3% to 37.0% of net revenues

* The report also provides some insight on personnel productivity
differences among the companies The analysis divided companies into four
groups (quartiles) based on their Net Profit Before Taxes as a percent of
net revenues (NPBT), The 25% of publishers with the highest NPBT, which
comprise the high quartile, were called high profit publishers Compared
with the overall median publisher, the median high profit publisher had a
higher gross margin per employee, and a higher net contribution per
employee They also paid their average employee better than did the median
participating company.

"The SPA conducts this study to provide members with hard to obtain
information which they can use to benchmark their companies," said SPA
Research Director David Tremblay "While the primary use is for
participants' benchmarking, it can also be used to provide some insights
on the state of the industry While the net profit before taxes is down
somewhat from 1992, the study shows that publishers can still do well The
key seems to be expense control--keeping operating expenses low relative
to net revenues."

The detailed report for this study is available only to SPA members
companies that participated in the survey and was mailed- to participants
the week of September 20.

The Software Publishers Association is the principal trade association of
the PC software industry Its 1,000 members represent the leading
publishers in the business, consumer, and education markets The SPA has
offices in Washington, DC, and Paris, France.

Software Publishers Association
1730 M St, Northwest, Suite 700, Washington, D.C. 20036
202-452-1600,  Fax: 202-223-8756

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