Split
I had an interesting conversation with someone today about what a healthy split between product and services revenues should be for a software company. I had thought that a 70/30 product to services revenue number would be pretty good. This would mean that you are focused on the product and market and not allowing customers to completely drive your product strategy. He challenged me that a more typical split was on the order of 50/50 and that number was fairly typical and solid. So, I decided to do some research on it.
First, to get the exception to the rule out of the way, I looked at MSFT. The GAAP revenue numbers from the latest 10-K from MSFT can be found at http://biz.yahoo.com/e/030905/msft10-k.html
. I had guessed about a 90/10 product to services split before looking and that looks reasonably close. The only pure services revenue in their reporting is MSN and Business Solutions. Adding in the total of services embedded in the other line items (primarily support and consulting), I came up with a total of $2,840 million. The income split is even more dramatic with MSFT loosing money on their primary services divisions. Of course, MSFT is an exception and not indicative of the software market as a whole.Next I did a quick survey of a few companies to see what a more typical split would be in different segments. This showed that overall the product to services split is lower than I would have thought for "enterprise" software. The latest COGN 10-Q (http://biz.yahoo.com/e/030711/cogn10-q.html) has a split $57 million product license to $93 million in services. Even if this was a low license sales quarter for them, that is basically a 38/62 split which is lower than I would have thought. Hyperion exhibited almost the same ratio (http://biz.yahoo.com/e/030813/hysl10-k.html) of about a 40/60 split. A quick examination of Oracle and SAP (who's numbers were not as easy to disentangle), implied a similar ratio.
For people selling to smaller businesses and individuals, the split is more tilted to products. This is not surprising. Intuit has a 75/25 split according to their latest 10-K (http://biz.yahoo.com/e/030919/intu10-k.html). This ratio appears to have fallen from about 80/20 in 2001. Adobe claims an even more radical split with a 98/2 ratio (http://biz.yahoo.com/e/030411/adbe10-q.html). I looked at Symantec, but they didn't split it out in the abbreviated 10-Q.
Although this is by no means a comprehensive study of the issue, a 40/60 split seems common for enterprise software with companies that sell to a broader customer base of small business and individuals having a higher ratio. Not surprising, but interesting.