CapEx vs. D&A: An Asset-Light Software Company

What even is CapEx at a software company?

Software companies don't buy factories or machinery, so it's tempting to assume their CapEx is close to zero. That's not quite right — CapEx still exists, it just comes from different sources than a manufacturer's PP&E line:

• Capitalized software development. Once a project moves from research into building features that will actually ship, accounting rules let the company capitalize that engineering cost instead of expensing it immediately. It becomes an intangible asset on the balance sheet, then amortizes over its useful life — that's the $30M in this case.
• Self-hosted infrastructure (if any). Servers, networking equipment, and data centers are CapEx if a company owns them. Most software companies avoid this by renting compute from a cloud provider instead — an operating expense, not CapEx — which is the single biggest reason software CapEx looks so much smaller than a manufacturer's.
• "Ordinary" CapEx. Laptops, office build-out, leasehold improvements. Small relative to revenue and common to almost any company, regardless of industry — rarely the focus of an interview question.

This case focuses on the first two, since that's where the real industry contrast with the manufacturer lives.

Same revenue and margin as the manufacturer, very different capital structure:

• Revenue: $1.2B; EBITDA margin: 22% (≈ $264M EBITDA) — identical to the manufacturer case, for direct comparison
• Owns almost no physical equipment — production runs on rented cloud infrastructure, which is an operating expense (already inside EBITDA), not CapEx
• Capitalizes $30M of internal-use software development this year, amortized straight-line over 3 years
• Existing software/intangible asset base generates ≈ $15M/year of run-rate amortization on top of that
• Tax rate: 25%