Controlling Operating Expenses the Road to Profitability in the Software
Industry

Highlights of Software Industry Financial Survey Released

September 27, 1994 (Washington, DC) - The differences in profitability of
large and small software publishers is driven by the difference in their
operating expense ratios, and not differences in gross margins. That is
the key finding of a study recently released by the Software Publishers
Association (SPA). Gross margins, measured as a percent of revenue, were
nearly identical for the largest and smallest companies - both were about
79%. However, for the smallest companies (annual revenues under $2
million), operating expenses as a percentage of revenues were about
half-again more than they were for the largest companies (over $100
million in annual revenues).

The study that provided these findings, the 1994 Software Industry
Financial Survey, is an annual survey conducted among SPA member
publishers. The Survey collected information on approximately 50 income
statement revenue and expense categories and balance sheet items from 35
public and 81 privately held SPA member companies. The information was
collected and tabulated by Management Foresight, a unit of Arthur Andersen
based in Schaumburg, IL. The information covered the last four fiscal
quarters ending March, 1994.

Among the highlights of the report are:

* Profitability, measured as median net profit before tax as a percent of
net revenue (NPBT), varied widely among revenue size classes. In general,
larger companies had higher NPBTs than did the smaller companies. Median
NPBT for publishers with annual revenues under $2 million was a loss of
13.7%, a slightly larger loss than the 10.4% reported in the 1993 study.
Median profitability for all five other revenue categories was positive,
ranging from 3.8% for the $2 to $5 million firms to 12.9% for the $30 to
$100 million firms.

* Median gross margins were in a fairly narrow range, from about 73 - 82%.
However, median operating expenses varied more widely. Median operating
expenses as a percentage of revenues were 94% for companies under $2
million in annual revenues. Four of the five other categories had median
operating expenses between 65% and 70%. The exception, companies between
$30 and $100 million, had median operating expenses of about 55%, which is
how that category achieved the highest NPBT of all six categories.

* The 1994 study was able to provide some insight into how software
publishers' profitability has changed over the past year. About 45 of the
companies reporting in 1994 also participated in the study in 1993. Median
gross margin was virtually unchanged between the 1993 and 1994 studies
among these companies. Research and development spending as a percent of
revenues were up about 2%, while median sales and marketing expenses and
median G&A expenses were down somewhat. Overall, median operating expenses
as a percent of revenues were up about 2%.

"We conduct this study to provide participating members with hard to obtain
financial data with which they can benchmark their companies." said David
Tremblay, SPA Research Director. "Knowledge of the financial operating
ratios of others in the industry can help the participants identify areas
in their companies that may be under- or over-funded relative to industry
norms. With the changes and consolidation going on in the industry, this
type of information can be critical to a publisher's financial success."

The Software Publishers Association is the principal trade association of
the PC software industry. Its 1,100 members represent the leading
publishers in the business, consumer, and education markets. The SPA has
offices in Washington, DC, and Paris, France. SPA press releases are
available on-line through CompuServe (GO:SPAFORUM), and from SPA's faxback
service at 800 637-6823 (Document Number 433).

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

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