Commentary: MCAD Industry View - A May 2008 Update

Bill Weyand, CEO and Chairman of MSC.Software, said, "In the first quarter we saw a number of key customers move from initial pilot installations to global deployments of our enterprise solutions. It is clear that our customers see the competitive advantage and excellent ROI value in deploying MSC's enterprise solutions in their global enterprises and simulation enterprise solutions, which represented 28% of total software revenue in the first quarter."

On April 23, 2008 PTC reported financial results for its second quarter, the period ended March 29, 2008. Total revenue for the quarter was $258 million, an increase of 13% from the $228 million in the year ago quarter, and an almost 7% increase from the $241 million in the just prior quarter. License revenue was $72.9 million, accounting for over 28% of total revenue. This was an modest increase of 2.2% year-over-year, and an 8.5% increase sequentially. Maintenance revenue was $121 million (47% of total revenue), a 22.6% increase year-over-year, and a 6.3% increase sequentially. Service revenue was $63.8 million, or almost 25% of total revenue. This was an increase of nearly 18% from last year and increase of 6.2% from the prior quarter.

Reseller revenue was $61.6 million, accounting for 24% of total revenue. This was an increase of 26% year-over-year, and an increase of 4.9% sequentially. Direct sales revenue was $196 million, or 76% of total revenue, a rise of 9.5% from the prior year and a rise of 7.5% sequentially.

North American revenue accounted for 34% of total revenue in the quarter, European revenue for 41%, Japanese revenue for nearly 12% and revenue from the Pacific Rim for 13%.

In the quarter PTC sold 5,000 new seats of Pro/Engineer and 25,500 seats of Windchill. Cumulative seats of Pro/Engineer reached 377,200 and of Windchill 579,950.

Note: Readers may recall that on December 3, 2007 PTC announced it has completed its acquisition of CoCreate Software GmbH, a provider of product development solutions, for approximately $250 million net of cash acquired and excluding transaction fees. CoCreate had annual revenue around $80 million.

C. Richard Harrison, president and chief executive officer, commented, "We achieved 14% year-over-year non-GAAP revenue growth in the second quarter reflecting revenue contribution from the CoCreate Software business, which we acquired on November 30, 2007, strong continued license revenue growth in Europe, services and maintenance revenue growth in all geographies, as well as a favorable currency impact. As expected, the softness in license sales in North America continued. GAAP year-over-year revenue growth for the second fiscal quarter was 13%. Our non-GAAP revenue excludes the effect of purchase accounting on the acquired deferred maintenance revenue balance of CoCreate of approximately $1.7 million.”

MCAD Vendor Stock Performances

The combined stock prices of the covered MCAD vendors grew by 3.8% in absolute dollars from the same period last year, and grew by the same 3.8% in average price. On a sequential basis, the combined stock prices fell by 13.5% in absolute terms and by 10% in terms of average price. This compares unfavorably to a decrease of only 4.5% for the major stock indexes year-over-year and was equivalent to a decrease of 10.5% sequentially.

On a year-over-year basis ANSYS was the percentage growth stock price leader at 36%, with Moldflow in second place at 16% and with Dassault a distant third at almost 9%. Autodesk and PTC saw their stock prices fall around 16%. On a sequential basis, Moldflow at +8.3% was the only firm to experience a rise in stock price. Autodesk suffered the largest decline at almost -37%. ANSYS declined almost 17% and PTC declined just over 10%.

As the current recession in the US deepens, MCAD vendors may well continue to suffer stock market troubles, if not flatter revenues and earnings going forward. US economic data are not improving during Q2 2008.

In a new US corporate IT spending survey by ChangeWave Research in April 2008, 25% of the respondents said their company will spend less on software in coming months. This figure is 3 points higher than a study ChangeWave conducted in January and 11 points higher than one completed in October 2007, indicating a deepening trend.

Consumer prices increased a hefty 0.6% in April 2008, the US Labor Department said on May 15, 2008, if you take out seasonal adjustments. Of course, if one does not eat or drive (i.e. ignoring price increases in food and gas), April consumer prices increased only 0.2%. During the last 12 months, overall US consumer prices increased 3.9%. Food alone has risen 5.1%; gasoline has risen 20.7%.

The US government also reported that oil imported in April 2008 cost 67% more than oil imported a year earlier - but the trend in import prices is clear even if energy prices are ignored. For all non-petroleum imports, prices in April were up 6.2% from a year earlier. That is the fastest rate of gain in almost 20 years.

According to the May 16, 2008 Wall Street Journal, "US economic reports released May 15 are keeping recession worries afloat, showing continued weakness in the labor market and a struggling manufacturing sector." The US Federal Reserve announced on May 15 that "US industrial production plunged a sharp 0.7% in April 2008, as output of motor vehicles and parts plummeted 8.2%." US industrial production had risen 0.2% percent in March 2008, but also dropped 0.7% percent in February.

The Reuters/University of Michigan index of US consumer confidence dropped to 59.5 in May 2008 - the lowest level since June 1980.

The president of Alliance for Excellent Education, in a new book, “Raising the Grade: How High School Reform Can Save Our Youth and Our Nation”, stated the following: “We can't even keep our (US) kids in school. A third of them drop out. Half of those who remain go on to graduate without the skills for college or a decent job. International comparisons rank the United States a stunningly unimpressive eighteenth for high school graduation rates, a lackluster ranking of fifteenth for high school reading assessments among 15-year-olds in developed countries, and an embarrassing 25th for high school math.”

Seeing the USA in your Chevrolet over Memorial Day? Crude oil prices spiked to yet another trading high May 20, 2008 to $129.60 per barrel, closing at $129.07. At gas stations across the United States, the national average price for a gallon of regular gasoline touched $3.80 for the first time, $4.30 in CA. It was the 10th time in the last 12 New York Mercantile sessions that crude oil prices have hit trading or closing records, if not both. This trend may eventually bode well for the world's environment, but with average US wages flat with, or even lower than in 1999, the current trend in gasoline prices (and everything else) puts heavy economic pressure on US citizens.

Forecast Guidance from Individual MCAD Providers

Most of the G7 firms did not provide future financial guidance, perhaps because of the economic uncertainty mentioned above. The firms that did provide a forecast surprisingly expect on average a year-over-year quarterly revenue increase of 18.4% and a sequential increase of 2.8%. See Table 10. The year-over year projections of these firms are closely bunched around this number. (We note that the optimists are firms that have grown in part by acquisitions since last year - smart!).

Individual Company Guidance

As guidance ANSYS expects GAAP revenue for the next quarter to be in the range of $109 - $111 million compared to $109.5 million in the quarter just reported and compared to $92.2 million in the same quarter a year ago. For the fiscal year ending December 31, 2008 ANSYS expects revenue in the range of $448 - $452 million. Note: This ANSYS forecast does not yet include future results attributable to the acquisition of Ansoft Corporation.

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