Tag Archives: finance

A financial checklist for vendors

As I have recently pointed out, the finances of your software vendor do matter.  Unfortunately, as an existing customer or potential buyer it can be quite difficult to look behind the numbers and find the relevant information. When it comes to financial numbers, many vendors are far from as open and transparent as they claim to be.

In an attempt to assist customers, I propose a challenge to all software vendors:

Publish the following numbers clearly on your website/blog:

1) Revenue and earnings (profit) and their growth over the last 3 years by:

  1. Total
  2. Licenses and product lines (% or absolute)
  3. Professional services  revenue (% or absolute)
  4. Support and Maintenance (% or absolute)

2) Ownership

  1. Who is the majority owner of the business (or is it public)?
  2. How long has the business been around and how long have the current owners owned it?
  3. How is the company's capital structured? I.e. is the business sufficiently funded?
  4. What finance has the company raised over the last 3 years?

3) Precautions in case of bankruptcy

  • Describe in narrative, e.g. use of escrow service or open sourcing old versions.

Some of this is already available in press releases and earnings announcements, but we hope vendors will help buyers by posting it in one place. We will then collect the links and create and maintain a free and publicly available spreadsheet with the financial information. We will do our best to convert currencies and take different methods and periods of accounting into account. This would enable buyers to use the data freely and engage in more informed conversations with their vendors.

In addition, we will rate the vendors giving them 1 point for each answer. With 9 questions, this means that even though the numbers might not all be satisfying, a truly open vendor will get 9 points.

The challenge is open to all software vendors, including open source and proprietary vendors. Here the ones we have written most extensively about, which I hope will participate: Day Software, Dynamicweb, Ektron, Episerver, eZ, FatWire, Google, IBM, Microsoft, SDL, Sitecore, Umbraco. I hope others will pitch in as well.

Thanks to Rory Bernard for suggesting this good idea and Kas Thomas for inspiration from his popular reality checklist for vendors.

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Why the finances of software vendors matter

color_graphI've regularly covered annual reports, earnings announcements and other financial news about software vendors. These commentaries tend to stir debate and I am frequently asked why I bother to look behind the numbers. Is it really important?

Many vendors, in particular privately-held US-based ones, don't publicly release audited numbers. Instead they carefully select a few positive numbers to share via a press release. An example of this is seemingly successful CMS-vendor Ektron, which claims to be open and transparent, but will tell you only that their sales grew 38%. If you are willing to sign a non-disclosure agreement, they'll share more details on profitability, but can a vendor really claim to be transparent when you need to sign a contract to get some fundamental numbers about the financial health of the vendor?

In my view financial numbers and annual reports are a great way to gain insights about a vendor. These are the numbers you should indeed care about:

  • Services revenue. A good example of this is FatWire, where your local key account manager might have told you that they are very committed to their partners, when in fact services bring in about 30% of the company's total revenue.
  • New license sales. If this is down, it will tell you that the vendor is having difficulty signing up new customers. This can be a sign that an acquisition is lurking around the corner, which is what happened to Vignette as they got acquired by Open Text.
  • Maintenance and support revenue. If this makes up a large part of revenue, it means that the vendor has many customers who keep using the product. If you can get hold of a renewal percentage or average customer lifetime, it will tell you something about how long the customers stay with the product.
  • A break-down of revenue by product will tell you which products are really strategic to the vendor. IBM and Google are examples of big vendors, to who far from all products are equally important. This might reveal which products are likely to become discontinued. This happened with Microsoft CMS
  • Cash is king. Look at the cashflow to find out whether the vendor might be facing survival problems or is sitting on a pile of cash.

After looking at a few vendors, you'll discover that the accounting models tend to differ hugely. Some will list licence sales straight away, while others will break it down and only list it partially over a given period. Some might also divide their revenue between a corporate entity and different geographic regions, e.g. CMS vendor Sitecore. Details like this obviously make it difficult to compare the numbers.

Finally, I would say that the past decade has showed that positive financial numbers by no means guarantee that your favourite vendor will not be acquired or that your favourite product will not be discontinued. 2009 saw quite a few acquisitions, most notably Adobe's acquisition of  Omniture and Opentext which bought Vignette. I'm sure we will see more in 2010. These might not impact customers in the short-term, but down the road, they always also have significant impact, e.g. with closed regional offices, a new partner strategy or a cut in engineering spending.

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