Message Font: Serif | Sans-Serif
 
UnThreaded | Threaded | Whole Thread (2) | Ignore Thread Prev | Next
Author: TMFTwitty Big funky green star, 20000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 549  
Subject: Subscription Software Is Sweet Date: 4/5/2004 3:23 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
http://www.fool.com/News/mft/2004/mft04040514.htm?ref=btp

Subscription Software Is Sweet

By Ben McClure
April 5, 2004

We heard it back in the 1990s: The software industry will move from selling one-off licenses to subscription licenses. Now, with software sales down, we're hearing the same mantra again in 2004, and Fools should listen up.


The reasoning is simple: In a maturing industry, selling licenses through a subscription model bolsters vendors' revenues. Paying a monthly fee to use software is cheaper and less risky than buying software outright and hiring staff to support it. So, in harder times it's easier for corporate customers to swallow the subscription model. At the same time, vendors spend less on high-cost salespeople and invest more in serving customers with call centers and technical support. Those higher revenues and lower costs go straight to the bottom line.


Of course, investors will like the smoother, more predictable earnings profile that the model offers. The customer pays for licenses over time, and the software vendor recognizes revenues over the life of the contract. Software is no longer akin to a big piece of capital equipment, purchased at a high cost for long-term use. Instead, it becomes like a basic service, used and paid for every day. The subscription model levels out peaks and valleys in income and cash flow that hit software valuations.


Just look at its impact on Wind River Systems (Nasdaq: WIND). For the maker of software systems for communications, automotive, and other devices, subscriptions are a saving grace. Wind River's total revenue fell by almost 9% in the fourth quarter. But subscription revenues jumped from $1.3 million to $6.8 million, keeping Wind River Systems from slipping into the red for the quarter.


For companies that sell products based on "open source" software, subscription-based support is the natural way to go because those companies cannot depend on proprietary licensing for revenue and must rely on support services. Linux open source specialist Red Hat's (Nasdaq: RHAT) fourth-quarter revenue growth came mostly by way of subscription sales, which jumped 79% over the prior year's fourth quarter.


Sun Microsystems(Nasdaq: SUNW), struggling to keep revenues and earnings up, has overhauled its software strategy for more subscriptions. Sun says it will charge customers a per-user fee for some of its software, eliminating complex pricing that applied to hundreds of different products.


Another stock benefiting from subscription sales is Synopsys (Nasdaq: SNPS). The company makes software that enables microchip makers to design complex integrated circuits. Now into its third year of subscription sales, Synopsys has lowered its prices by 15%. More than 80% of the company's bookings now come from subscriptions. With the chip business finally coming out of a painful cyclical slump, Synopsys is well-positioned to squeeze more profits via its well-formed subscription sales model.


Market research group IDC projects that about half of software vendors will move from a one-off license payment system to a subscription-based model in the next 12 months. But don't get too carried away. For the time being, the old model will probably remain the norm. Heavy hitters like Microsoft (Nasdaq: MSFT) and Oracle (Nasdaq: ORCL), while they pay lip service to the subscription model, have big interests in maintaining the status quo.


Discuss the subscription software model and its benefits with other Fools on the Red Hat discussion board.


Fool contributor Ben McClure hails from the Great White North. He doesn't own any shares of companies mentioned here.

Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post  
UnThreaded | Threaded | Whole Thread (2) | Ignore Thread Prev | Next

Announcements

Pencils of Promise - Back to School Drive
"Pencils of Promise works with communities across the globe to build schools and create programs that provide education opportunities for children."
Managing Your Wealth
Our own TMFHockeypop from Rule Your Retirement fame on the TV show Managing Your Wealth.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Post of the Day:
Macro Economics

Smuggling Rice and Garlic
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
Community Home
Speak Your Mind, Start Your Blog, Rate Your Stocks

Community Team Fools - who are those TMF's?
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and "#1 Media Company to Work For" (BusinessInsider 2011)! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.
Advertisement