MCAD Industry View – An August 2009 Update

Assuming that this transaction goes through as planned, MSC.Software will become privately held. The same thing happened some years ago to UGS PLM (Unigraphics); As mentioned previously, UGS PLM was ultimately acquired by Siemens AG in May 2007. Like UGS PLM when it was first taken private, it’s also entirely possible that STG may not publish any financial data regarding the acquired MSC.Software.

MSC.Software Corporation, formerly the MacNeal Schwendler Corporation, was founded in 1963. MSC was one of the original MCAE vendors, starting with NASTRAN. Accordingly, MSC was naturally included in the first of the authors’ MCAD Commentaries in May 2003, and MSC has been covered therein every quarter since that time.

Selected MSC.Software financials are presented in the chart below ( Figure 1). Since 1995, the firm enjoyed its largest revenue year at $296 million in 2005. Over the last 8 years MSC.Software has averaged only about $253 million/year in revenue, with minimal profitability and several years of actual losses. Indeed, as recently as 2008, the firm lost $21 million. This loss included restructuring charges of $3.3 million and impairment charges related to intangible assets of $10.0 million. There was also a net tax charge of $17.3 million, resulting primarily from establishing a valuation allowance totaling $22.9 million.

MSC.Software’s chief market rival is ANSYS. Over 5 years, ANSYS has built its annual revenue from $134 million in 2004 to $478 million in 2008, a rise of 255%, while generating consistent and considerable profit, due to excellent management and a combination of organic growth and acquisitions. During that five year period, ANSYS went from only 50% of the level of MSC.Software’s annual revenue, to achieving 188% of it last year.

So the financial performance potential of an STG-owned and operated MSC.Sofware would appear at first glance to be proven, using ANSYS as a model. In addition, STG has apparently enjoyed great successes with its other investments to date.

Nonetheless, MSC.Software faces stern competition going forward. ANSYS is formidable and it’s certainly not going away. Moreover, several leading MCAD vendors have also moved into the analysis (or MCAE) space in recent years. Recall that Autodesk purchased Moldflow in the spring of 2008 and Algor at the end of 2008. Dassault Systemes acquired ABAQUS, Inc. in the spring of 2005. In the aftermath of an FTC action against MSC.Software, UGS PLM (now Siemens) acquired a perpetual, worldwide, free of royalties, nonexclusive license of the software program MSC.NASTRAN v2001, and other assets related to the software. (Note that historically, NASTRAN has been MSC.Software’s primary product. There are also several other niche vendors that offer access to a version of NASTRAN).

Today, MSC.Software is no longer as dependent on NASTRAN as in the past. MSC now offers sophisticated tools to perform complex analyses (structural, thermal, vibration, …) of mechanical components and systems using technologies like finite element modeling and analysis (FEM/FEA), dynamics and computational fluid dynamics (CFD). Lately, MSC.Software has been focused on Simulation. The thesis is that by employing computer simulation rather than building and testing prototypes (or reducing their use), end products get to market faster and with less cost. The use of simulation also allows for more design alternatives to be studied which should yield even better end products.

MSC says that many of its familiar and previously-stand-alone software products (NASTRAN, Marc, Dytran, Adams & Easy 5) have more recently been integrated into a “single solver solution multi-discipline framework” and delivered through what MSC calls “MD Technologies” -- MD Nastran & MD Adams - enabling engineers a to more realistically and accurately simulate the interaction between multiple physics within a single environment. MSC’s MD is said to offer interactive, coupled analysis solutions for motion-structures, structures-thermal, motion-mechatronics, composites failure chaining, nonlinear implicit contact, and others.

One key target for such simulation software is the professional community of end user analysts. The aerospace and automotive market segments are major consumers of such products. Does the size and growth of this overall analyst market hold the promise of future success of MSC? Are the software tools offered by MSC unique and powerful enough in a crowded market of rivals?

In addition, some observers envision a day when the more numerous average engineers will routinely use simulation software tools, with only occasional guidance and monitoring by the fewer expert analysts. After all, more recent mechanical engineering graduates are far more computer literate than those of a decade or two ago. And the software tools today employ largely automatic model building programs and graphical presentation of analysis results. If the average engineer could routinely use such tools successfully, the total available MCAE market gets bigger in a hurry.

Still, many professional analysts are skeptical that the average engineer will ever possess sufficient expertise to properly construct simulation models, interpret results and make the proper design modifications. Also, analysts are often too busy with complex problems to be tutoring others on how to address relatively minor issues.

Referring to Figure 2 below, MSC.Software’s stock price relative to a year ago had tumbled around 50% at the time the potential STG acquisition was announced. MSC’s stock price curve (blue curve) has the same general shape as the technology-heavy NASDAQ curve (red curve), but the MSC stock losses were deeper.

The ongoing evolution of the MSC.Software/STG deal will indeed continue to be fascinating to observe.

The G6 MCAD Vendors' Financial Performances in Q2 2009

As will be seen in the following 1H 2009 MCAD G6 results, the devastating US (and subsequently worldwide) recession is still a giant burden on the covered MCAD software providers, although there appears to be a bottoming out of the 21-month-long downturn as we publish this August 2009 edition of the MCAD Industry Commentary.

As a group, Table 1 shows that the G6 MCAD vendors generated combined revenues of $1.26 billion in Q2 2009, a significant 21% drop from the $1.6 billion in the second quarter of 2008, but essentially flat when compared to the just prior quarter.

ANSYS was the only MCAD vendor to enjoy increased year-over-year revenue at +9.7%. The largest year-over-year percentage revenue decliner in US dollars was Autodesk at -33%, followed by MSC.Software and Dassault Systems at -20% and -17%, respectively. ESI Group and PTC endured only single digit year-over-year revenue percentage decreases.

On a sequential basis, the ESI Group suffered the largest Q1 to Q2 2009 drop by far at -38%. Autodesk and MSC.Software incurred revenue dips of a few percentage points. ANSYS and Dassault Systemes posted revenue gains in the neighborhood of 5%, while PTC’s sequential revenue was flat.

Figure 3 below provides a bar graph showing the revenue trend for each of the six covered vendors, for the periods mentioned in Table 1.

For the second quarter of 2009, Dassault Systemes barely nudged out Autodesk for the top spot of a Q2 US$ revenue-to-revenue comparison. PTC was a distant third at 18%. Note that the Autodesk figure contains considerable revenue from outside the MCAD arena -- in AEC and Media/Entertainment. Also, all three of the leaders have some form of third party distribution that complicates comparisons. See Figure 4.

Table 2 below reveals that the combined Q2 2009 earnings of five of the G6 MCAD vendors was $75 million, a precipitous drop of 63% from the $201 million in the second quarter of 2008. However, Q2 2009 did provide a sequential increase of 121% from the paltry $34 million combined earnings in the just previous 2009 quarter. Each of the G5 vendors that reported Q2 2009 net earnings was in the black (except MSC.Software). Every one of the reporting MCAD vendors suffered earnings decreases relative to the second quarter of 2008. Autodesk witnessed the steepest year-over-year earnings decline at -88%. Both PTC (-74%) and Dassault Systemes (-48%) also experienced significant earnings declines from the same quarter last year.

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Review Article
  • Back on Meds? October 06, 2009
    Reviewed by 'Maxim Ratiovich'
    Looks like the authors are back on their medication. No diatribes about the government or how they'd personally been abused by the financial markets!
    I suggest that this report is much more what people expect from an industry survey. Wondering what I am talking about? Read the previous few releases of this MCAD Industry View.
    Example from March '09:"The U.S. is now in its deepest economic slowdown since the 1930's. Bush 43 and his administration bequeathed monumental problems for President Obama and the rest of us to overcome. The downward spiral has tremendous momentum and it’ll be very hard to reverse.
    As a giant first step, President Obama and his fellow Democrats muscled a $787 billion Stimulus Bill through Congress in mid-February 2009U, despite nearly universal Republican opposition, and despite the fact that Republican policies (of deregulation, deficit spending, lower taxes, needless wars like IRAQ, etc.) were the very policies that got the economy in trouble in the first place. Worst of all, many Republican politicians have said that they are hoping that the now lawful Stimulus Bill fails, thereby hurting millions more Americans, just so that “the GOP might gain congressional seats in 2010.”

      One person of 2 found this review helpful.

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