Hi jakewk,
The costs for a software company typically are the cost of software
licenses, the cost of services and maintenance, sales and marketing
expense, research and development expense, and general and
administrative expense. The Cost of Goods Sold matches the cost of
software licenses for the purposes of a software company since that is
the actual "good" being sold.
Cost of software licenses is typically divided into the following
categories:
- Commissions paid to third parties in connection with joint marketing
and other related agreements;
- Royalty fees associated with third-party software;
- Costs related to user documentation; and
- Costs related to reproduction and delivery of software.
Typically, the costs related to user documentation and reproduction
and delivery of software are a very small percentage of sales since
burning CDs, hiring a few technical writers, and printing a manual are
not all that expensive, and many companies are abandoning printed
manuals and CDs altogether and are distributing their products via
Internet download. A software company I am familiar with averaged
costs of this type of 0.3% of software license revenues during a
two-year period before they started incurring royalty fees and
commissions paid to third parties.
The big number, which is potentially subject to wild swings, are the
commissions to third parties and royalty fees associated with
third-party software. This is where you really need to get a handle
on the fundamentals of the company's business model. Are there
third-party products presently in their product mix, and are these
expected to grow? Also, are they forming more partnerships with third
parties to sell their product or not? Are the number of partners
declining? For the company I referred to earlier, their commissions
paid to third parties and royalty fees went from 0% of sales to 10.3%
of sales over a five-year period. You can get some idea for the
likely trends of these things from a company's 10-Q and 10-K filings
where they discuss the number of joint marketing agreements they
typically have with software vendors and consulting firms, as well as
the fees the partners can generate from selling the firm's products.
Typical agreements are from 10% to 40% of the sales price as a
third-party commission.
To do a reasonable job of prediction, you have to look at who the firm
is partnered with now and how many partners they likely to acquire in
the future. If they are a large, well-established company, then there
probably isn't going to be an enormous amount of growth in the percent
of sales by third parties, whereas if they are a smaller firm without
a lot of partners that is generating a lot of buzz, then the amount of
third-party sales may grow considerably over a multiyear period.
As far as the third-party royalties go, one has to examine what other
products are embedded in the software, and how complete is the
solution? If the company offers a well-integrated suite of products,
and has good in-house research and development capabilities, then they
are less likely to need third-party products to complement their
offering. However, lots of companies use third-party middleware and
other niche products to round out their offerings and tie them
together. A look at the company's 10-K, along with press releases
from third parties and the company announcing relationships with the
company, can be useful at ferreting out the amount of third-party
products in a company's offerings. A company serving a particular
niche may also not require much one way of third-party products.
These would typically be very small companies, though, not the large
companies you asked about.
Deferred tax assets are typically composed of foreign tax credits,
deferred revenue, accrued liabilities, bad debt allowance, research
and development tax credits, and net operating losses. Foreign tax
credits should vary with the percentage of business done outside of
the United States. Deferred revenue is typically a percentage of
deferred revenue as a whole. Accrued liabilities should vary as a
percentage of overall expenses. Research and development tax credits
are a percentage of research and development expenditures. Net
operating losses are of course, the accumulation of net operating
losses, although consideration must be given as to whether or not the
company will turn to a profit to recapture these losses before they
expire (note that research and development tax credits can also
expire). Information about relevant expiration dates can be found in
a company's 10-K and 10-Q filings.
I hope you find the above information helpful to your financial
modeling.
Sincerely,
Wonko |
,
0 Comments
)