Software Spectrum Announces Preliminary Fiscal Year Results; 14% Growth Yields Record $1 Billion in Sales; Exiting Professional Services Business

Business Wire, May 3, 2000

Business Editors

DALLAS--(BUSINESS WIRE)--May 3, 2000

Software Spectrum, Inc. (NASDAQ:SSPE) announced today that it expects to report after-tax income from continuing operations of between $9.3 million and $9.5 million, or $2.35 to $2.40 per diluted share, for the fiscal year ending April 30, 2000, excluding an anticipated nondeductible charge of $2.8 million to write off intangibles from overseas operations. This compares with income from continuing operations of approximately $11.4 million, or $2.67 per share, for the prior fiscal year. Revenues related to continuing operations for fiscal 2000 will be approximately $1.0 billion, compared with revenues related to continuing operations for fiscal 1999 of $887 million.

The anticipated decrease in income from continuing operations for fiscal 2000, excluding the nondeductible charge, is attributable to a decrease in support services operating income. As previously disclosed, in the first half of fiscal 1999, the company experienced unusually high operating results in support services as a result of a large, new contract to support a newly released product.

Software Spectrum also announced its intent to exit its professional services business through the sale or closure of consulting offices in North America, Europe and Asia/Pacific. The company has retained Southwest Securities, Inc. to assist it in the sale of the professional services business. The company plans to close its smaller sites within 30 days. As a result of this decision, future financial statements of the company will reflect the historical operations of the professional services business as discontinued operations. For the fiscal year ended April 30, 2000, the net loss from operations of discontinued professional services is anticipated to be $5.9 million, on revenues of $45 million.

The company will estimate a gain or loss on disposal that will include costs related to the closure or sale of the offices, anticipated net operating losses to be incurred through the date of disposition and any anticipated proceeds from resulting sales. If the result is a loss, this amount will be reported in its audited financial statements when released in July 2000.

"The decision to exit the professional services business at this time was driven primarily by the continuing losses from our smaller professional services offices and a sharp downturn in the demand for infrastructure services," said Judy Odom Sims, chairman and chief executive officer.

The company will record a $2.8 million charge to continuing operations to write off the remaining goodwill, as well as certain deferred tax assets, related to The Essentially Group, based in New Zealand and Australia. Software Spectrum acquired The Essentially Group four years ago, and the New Zealand portion of this operation has not performed to original expectations.

For the fourth quarter ended April 30, 2000, the company expects to report income from continuing operations of between $1.4 million and $1.6 million, or $0.36 to $0.41 per share, excluding the intangible charges. This compares with $2.9 million, or $0.70 per share, on the continuing operations one year ago.

"Software product revenues for the fourth quarter are expected to exceed the same quarter last year by 7%, which will result in growth of over 12% for the full year. However, we now expect fourth quarter gross margins to be lower than expected, producing segment operating income of approximately $10 million. We experienced an increase in larger, low margin deals and a slowdown in the broader software markets," said Sims. "It appears software sales slowed somewhat throughout the industry in the past quarter. We believe this trend will reverse as IT departments recover from the heightened spending attributable to Y2K and as publishers introduce new products."

"Support services was profitable in each of the final three quarters of the year but below our expectations for the fourth quarter," added Sims. "Our publisher partners have recently experienced a slowdown in call volumes, and in the fourth quarter we have been preparing for future increases in call volumes forecasted by our publisher partners. We remain confident in our prospects for profitable growth in the new fiscal year as we continue to expand our capacity and diversify our client base. We recently opened a new 36,000-square-foot facility in Spokane, Washington, and will open 75,000 square feet in the Dallas/Fort Worth area in order to accommodate the continued growth and expansion of support services."

The company anticipates the support services business will generate a year-over-year increase of approximately 40% in revenues for the fourth quarter, generating approximately $300,000 in segment operating income, compared with a $170,000 operating loss in the fourth quarter of 1999.

Software Spectrum plans to announce final results for the year ended April 30, 2000, on June 14, 2000.

Software Spectrum management will host a conference call on May 4 to discuss these preliminary results. Investors may access a replay of this call through the company's Web site.