Nea Annual report, page-6

Legal Expense

In very loose numbers, NEA's legal bill for the EagleView litigation is going to end up being circa $10 million, and let us say EagleView's costs are similar. Costs could be awarded against either party, which means NEA is refunded its costs, or NEA ends up paying EagleView's costs too. At the profit breakeven point, where NEA now is, $20m that can swing between the litigating parties makes a difference. At worst, an unfavourable court decision may set NEA back a year to reach the point where it makes an NPAT.

R&D Expense

R&D as an expense will always be high, IMO, because that is the nature of tech businesses. If you Google "Esri R&D expense", you will read "We spend more than 30% of our annual revenue on R&D. That's how much we believe in advancing and shaping the future of geographic information systems (GIS)."

Sales expense

Without knowing how NEA remunerates sales, I cannot comment on the topic. I was involved in a very sticky service bureau business (effectively Saas), so sticky, that we did not have term contracts. Customers merely agreed to pay the rates for the reports we produced from the customers' input data -- no use no charge. Over many years, I cannot recall any of our 100+ customer discontinuing our service in favour of a competitor. I can remember two losses - one business was acquired and merged into a large company, and the other shrunk to be so small that a part-time clerk could handle the work mamually. We had sales staff, but they merely introduced new clients to the service, and because no customer commitment tied the customer to us, getting new customers required little effort, and so the sales team required little selling skill, and they got half the commission paid to those who sold more demanding services. Nobody was paid commission to retain customers.

NEA has contracts that expire, it may well incentivise sales people to re-sign customers on contract expiry, and in a sticky business, this may not be necessary. Money expensed to acquire new clients in a sticky business with a low marginal cost is always money well spent.

Administration Expense

Administration expense is very high. There is something amiss there, IMO – probably Management culture. NEA has effectively made a loss since it floated a dozen years ago.