SOFTWARE—Educational Software Firm Learning to Grow Revenues

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It seems that nothing is getting in the way of the rapid growth of Encore Software Inc.

Last February, Encore Chief Executive Michael Bell woke up to the news that his warehouse in El Segundo was ablaze, and watched on television as the roof fell in, destroying close to $2 million in computer software and equipment.

“There were 100-foot flames coming from the logo,” he recalled. “There was a lot of prime cardboard inside. It made a heck of a fire.”

But it didn’t put a permanent dent in the company, which makes educational and entertainment CD-ROMs. Encore was already slated to move its inventory into another warehouse in Carson, and Bell quickly got an emergency loan.

“Monday was the fire, and on Friday of the same week we were shipping product,” he said. “It was pretty crude, but our vendors stepped in to help. We look back and derive a lot of pride from that. At the end of the day, it didn’t significantly hurt us.”

That seems to be an understatement. The 6-year-old company, which has a full-time payroll of 75 workers, plus anywhere from 50 to 150 temporary workers, is projecting revenues in excess of $36 million this year. That would be more than 60 percent higher than 1999 revenues of $22.5 million, itself a 30 percent jump from 1998 sales of $17 million. Bell predicts next year’s revenues will top $50 million. Moreover, he says, Encore has been profitable every year of its existence. Company officials, however, declined to reveal earnings figures.

“There’s no secret,” he said. “We’ve just executed well.”

The company got its start in 1994, when Bell, a former executive with Paramount Pictures’ interactive division, teamed up with partner Michael Wegmann. The two started their business in a Venice basement with a $25,000 investment by a Paramount executive. They began by bundling previously issued software titles, ones which were typically no longer at their sales peak. By getting non-exclusive rights from publishers and selling groups of game or educational titles together at a discount, Encore quickly established a niche.

“It was the K-Tel model,” Bell said, referring to the compilations of hit singles on CDs and audiotapes sold on television. “Our first product sold $1 million in the first few months.”

However, the business was cheap and easy to get into, and competition soon cut margins so thin that the two entrepreneurs decided to expand, although bundling remains a small part of Encore’s business. The company decided to develop educational software, and hit on a math preparatory product for grades 6 through 12. That product is Encore’s top seller; it and the company’s other tutorial titles retail for between $20 around $40.

“They found a good niche in the educational software market and they’ve been extremely successful at it,” said Brian Burke, vice president and general manager for the computer products division of Navarre Corp., a Midwest software distributor. “The big-box stores carry 1,500 to 2,000 titles at most, and there are 7,000 to 8,000 titles being released every year. Publishers need to distinguish themselves and Encore is doing that.”

The company has drawn praise for its partnerships, which include the exclusive software rights to products from the test-preparation chain Kaplan Inc. Encore wrested that contract away last year from Havas Interactive, a Torrance-based software publisher. Kaplan’s market share in the niche was slipping against competitor Princeton Review, but the company was originally skeptical as to whether Encore could help it out.

“I think they may have met with us to cross us off their list,” Bell said. “But they left Havas to go with us. Kaplan regained their market dominance. And Havas is literally 10 times our size.”

Encore has recently ventured into the Internet with its math.com site, which isn’t profitable yet but is drawing 500,000 unique visitors every month. Now, Encore also is broadening its market by entering the game console market, with a series of titles aimed at the Sega Dreamcast, Nintendo 64 and Sony PlayStation crowd.

To do that, the company recently took on its first outside financing, getting $7.5 million from Florida-based Raymond James Capital Inc. to help expand its console and Internet strategies.

“The first thing that impressed us was that the company’s been profitable from its inception,” said Raymond James Managing Director Gary Downing. “That’s unusual to find any business with that track record, let alone one in the software publishing business. The console business is a logical extension. They can expand without a lot of risk. They’re not developing new titles from scratch; they’re leveraging existing titles. There’s a whole convergence happening with DVDs, CD-ROMs and console platforms all coming together, and it makes sense to get into that market now.”

Of course, maintaining the kind of growth Encore has seen up until now may be hard, but Bell thinks it’s possible.

“Revenue gain has been rapid, but we have a strategy to keep going,” he said. Since the Raymond James deal, “the phone’s been ringing off the hook. We’ve been a total low-profile company. This has really allowed us to surface. I’m certain we can keep going.”

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