Commentary: MCAD Industry View - A March 2007 Update

On a geographic basis, America accounted for 27% of total revenue, EMEA 44% and Asia Pacific 29%. In the quarter there were 77 deals of more than $100K. In the previous three quarters, the average number of such deals was only 47.

Net income for the quarter was $11.2 million, more than double the $5.2 million in the same quarter a year ago. Note that the 2006 fourth quarter included a tax benefit totaling $11.0 million that was generated primarily by the release of valuation allowances on deferred tax assets.

On January 19, 2007, the firm announced that it will streamline its global operations by reducing its current workforce by approximately 85 people. Severance costs and other one-time charges will total between $6 and $8 million. At the time, CEO Bill Weyand said, "Along with our new global business partners, we feel that MSC is well positioned to efficiently and profitably execute our 2007 plan."

Bill Weyand also said, on February 27, "We saw good traction with our enterprise simulation products in the fourth quarter, which will result in renewed software license growth opportunities in 2007. In addition, by leveraging our relationships with key global partners like IBM and Microsoft, we have positioned MSC to deliver sustained revenue growth both from our established engineering products as well as with our new family of enterprise simulation solutions. Along side our key channel partners including INCAT in Europe and the Americas, and ISID in Japan, we have a significant new revenue opportunity with our SimOffice channel product. Fiscal 2006 was a year of both significant accomplishments and important challenges for MSC. We completed the accounting restatement begun in 2004, we became current with all financial filings with the SEC, we successfully divested two non-core business activities and we began trading on NASDAQ, while at the same time completely revamping our product portfolio with a series of significant new product launches that positioned MSC to deliver enterprise simulation solutions."

On January 24, 2007 PTC reported financial results for its first quarter of fiscal 2007, the period ended December 30, 2006. Total revenue was $221.7 million, up 15% from the same period last year. Total license revenue for the first quarter of 2007 was $66.6 million, accounting for 30% of total revenue, up 14% from the same period last year. Service revenue was $221 million, accounting for 70% of total revenue, up nearly 16% from last year.

Net income for the quarter was $15.2 million, compared to $7.5 million in the year-ago period.

Desktop Solutions total revenue was $144.3 million, accounting for 57% of total revenue. Year-over-year revenue growth of 14% was driven by license revenue growth of 20%, training and consulting service revenue growth of 15%, and maintenance revenue growth of 11%. License revenue included revenue attributable to the recently acquired Mathcad and IsoDraw products, which were acquired in the third quarter of fiscal 2006 and first quarter of fiscal 2007, respectively. On a sequential basis, Desktop revenue was down 9.5%.

Enterprise Solutions revenue was $77.4 million accounting for 33% of total revenue. The 14% year-over-year growth was driven by training and consulting service revenue growth of 27%, maintenance revenue growth of 18%, and license revenue growth of 4%. License revenue growth was impacted by a significant customer transaction in the first quarter of fiscal 2006. On a sequential basis, Enterprise revenue was down 10.1%.

Total revenue from the reseller channel was $47.3 million, up 20%.

North American revenue was $86 million, accounting for 39% of total; European revenue was $83 million, accounting for 37% of total revenue; and Asia Pacific revenue was $52 million, accounting for 24% of total revenue. NA revenue was up 14% year-over-year, European revenue up 37% year-over-year and AP revenue up 24% year-over-year. On a sequential basis, North America was down 25%, Europe up 12% and AP down 6.4%.

C. Richard Harrison, president and chief executive officer, said, "We are off to a great start in fiscal 2007 with revenue and earnings growth above our targets. We continue to deliver strong financial results because we are driving customer satisfaction with our highly differentiated offerings. We have brought together the world's leading solutions for engineering calculations, CAD/CAM/CAE, content and process management, and technical publications to drive competitive advantage for our customers."

“As a result, we have increased confidence in our business outlook and we are raising our revenue and earnings per share targets for fiscal 2007. Additionally, we have established new long-term financial goals to achieve $1.5 billion in revenue and 22% non-GAAP operating margins by 2010. This reflects about 15% annual revenue growth, which should primarily come from organic revenue. We plan to continue to drive operating margin growth through a combination of productivity improvements in our distribution and service delivery models, as well as by leveraging top-line growth."

On February 22, 2007 UGS Corporation reported the results for the fourth quarter and for the year, the periods ended December 31, 2006. Total revenue for the quarter was $353 million, an increase of nearly 8% from the $326 million in the fourth quarter of 2005, and almost a 19% increase form the $297 million in the previous quarter. License revenue was $128 million, up 12% year-over-year and up 49% sequentially. License revenue accounted for 36% of total revenue. Maintenance revenue was $143 million, an increase of 6% year-over-year and an increase of 5.6% sequentially. Software revenue, the sum of license and maintenance revenue, was up 9% year-over-year and over 22% sequentially. Services revenue was $82 million, a rise of 5% from the prior year and 8.4% sequentially.

License revenue for all product portfolios grew: Collaborative Product Development Management (cPDM) license revenue increased 22%, digital manufacturing license revenue increased 28% and UGS Velocity Series portfolio license revenue increased 30% over the same period a year earlier. CAX license revenue increased 2% over the same period a year earlier.

Revenue from Americas accounted for 39% of total revenue, revenue from EMEA accounted for 42% of total revenue and revenue from Asia accounted for 19% of total revenue.

Because of the income tax impact of currency fluctuations on intercompany debt in one of the company's foreign subsidiaries, the company is restating its earnings for 2004 and 2005 by increasing its deferred income tax expense by a currently estimated amount of US$12.0 million in both 2004 and 2005.

IBM and UGS recently announced a new agreement to support the cPDM requirements of small- to medium-sized businesses (SMBs) on a global basis. IBM and UGS will jointly market Teamcenter Express software and services to SMB customers in six countries: the U.S., Canada, France, Germany, Japan and China.

Tony Affuso, chairman, CEO and president of UGS, said, “We are pleased with our strong performance in the quarter and that execution of our strategic plan delivered solid earnings and top-line organic revenue growth as planned, with 12% license revenue growth in the quarter. Our vision continues to be supported by customers who are market leaders and invest in UGS PLM to further their global innovation networks. We look forward to more growth in 2007 driven by our world-class product portfolio to be enhanced with major releases of Teamcenter and NX.”

MCAD Vendor Stock Performances

Despite good earnings, the combined stock prices of the MCAD vendors declined 2.6% in absolute dollars and 1.0% in average price over the fourth quarter of 2005. This compares to an average increase of 13% for the major stock indexes over the same period. PTC was the clear year-over-year growth leader at 18%. ANSYS at almost 2% growth was a distant second. The other MCAD vendors had stock price declines compared to the same quarter a year ago. On a sequential basis Moldflow and Autodesk led the pack at over 16%. PTC had a slight sequential increase in stock price. The other firms saw stock prices declines. MSC.Software brought up the rear with declines of 10.4% year-over-year and 15% sequentially.

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