MCAD Industry View -- What did the Last Quarter Bring?

commentary
by Dr. Russ Henke & Dr. Jack Horgan, Henke Associates

In a May 8, 2003 Commentary published in MCADCafé.com, then-recent yearly and quarterly financial performances of eight (8) public Mechanical Computer Aided Design (MCAD) companies were analyzed and compared. Expectations of future financial performances of these same MCAD entities were documented. The conclusions in May? A gloomy economic outlook still gripped most high-tech companies and, in terms of major revenue growth, a significant MCAD turnaround was predicted to be unlikely during 2003.

The sequel Commentary of August 11, 2003 was only slightly more optimistic. While several of the covered MCAD companies had made important moves in the 2nd quarter to strengthen themselves for the future (such as acquisitions and/or enhanced product releases), there was little in their trailing financial performance data, little in their summer guidance for the rest of 2003, and little in the then-extant economic & political Weltschmerz globally to suggest that a major MCAD Industry turnaround (e.g. widespread double-digit revenue growth) was any closer in August 2003 than it was in May 2003.

November 2003 - three months later -- how prescient were those predictions? What's the outlook today for the rest of 2003 and beyond? Two industry observers offer their thoughts on the subject.



Preface

In early August 2003, several scattered signs offered hope for a general economic improvement during the second half of 2003, even for high-tech. For example, the US Commerce Department had reported on August 4 that American Factory Orders for June 2003 had risen 1.7%. Business purchases of equipment & software were up 7.5% in the April-June 2003 quarter (4.5% for the 1H 2003), the best showing in several years, according to Moody's Investors Service. During the same second quarter, US GDP growth was estimated at 2.4% annually, nearly double the rates in the previous two quarters (Q2's GDP growth figure was later revised up to an even more robust 3.3%). Good news ahead all around, eh? Not so fast!

To succinctly characterize what actually happened to the general US economy in the July-September quarter, the authors of this Commentary have chosen the following headline from the November 1, 2003 San Francisco Chronicle, page B1:

"ChevronTexaco Thrives - High summer gas prices mean fat profit, but layoffs are ahead"

This one example tells you all you need to know about the Q3 US economy as a whole! Chevron's Q3 profits were up $2.9 billion (that's a "b") from Q3 2002 on a 17% increase in Q3 revenue. Total 12-month profits were $6.38 billion. Meanwhile, two thousand more Chevron jobs were to be cut!

To be sure, other positive signs from Q3 abound. From Graph 1 below, one sees that real gross domestic product increased at a seasonally adjusted annual rate of 7.2 percent in the third quarter of 2003, according to advance estimates released by the US Bureau of Economic Analysis, the best quarterly performance since early 1984. Investment in houses leaped at a 20.4% rate, up from the previous quarter's paltry 6.6% rate. Overall business investment increased 11.1%, up from 7.3% the previous quarter, the fastest rate since the first quarter of 2000. Purchases of equipment and software climbed even faster at 15.4% rate. American Factory Orders even rose 0.5% in September, according to an AP report on November 5, 2003 (by Jeannine Aversa).

Alas, very little of this good news was reflected in net job creation in Q3. Nearly three million jobs have been lost in the US in the past 3 years through July 2003. The Labor Department reported on August 1, 2003, that 486,000 U.S. jobs had vanished in all categories just since January 2003. While jobs have been added at an average rate of 95,000 per month in the August - October 2003 period, according to preliminary reports, it would take nearly 3 years at this rate to return to employment levels of early 2001. Indeed, the 95,000 jobs per month figure falls far short of the 175,000 to 200,000 jobs per month growth rate needed to restore healthy employment levels. Most economists agree that GDP must rise to 4%+ or more over many quarters, before sustainable jobs growth begins to occur.

Graph 1 - US Gross Domestic Product
Job loss in manufacturing sector, where MCAD "lives", continues with the loss of another 24,000 in October, according to an AP report on November 7 (Leigh Strope). US manufacturing payrolls have contracted every month since July 2000. These MCAD Commentaries have asserted that the key to the MCAD Industry's economic importance lies in the leverage its users apply to create the everyday durable goods with which we are all familiar: automobiles, trucks, military gear & weapons, appliances, farm & construction equipment, aircraft & aerospace vehicles, etc.

In short, MCAD is arguably responsible for enabling almost all of today's manufacturing industries, which are the centerpieces of creating real productivity and wealth in every modern economy. The jobs' erosion implies a smaller manufacturing base for MCAD to enable, at least in the US. In the sequel, we'll examine just how the selected public Mechanical Computer Aided Design (MCAD) companies faired in this environment during Q3 2003.

MCAD Vendors

How did MCAD vendors perform during the Q3 2003 period? We visit below the recent progress of the same group-of-nine MCAD vendors covered in August. For the third quarter of 2003 the group's combined revenue was flat relative to the previous quarter and up only a modest 3% year-over-year (see Figure 1). The third quarter has been traditionally viewed as seasonally difficult due to summer vacations, particularly in Europe. Six of the nine companies had lower revenue that the previous sequential quarter. Only PTC declined from the comparable Q3 quarter last year, but fully 5 of the remaining 8 shown no or only single digit growth. This is of course not a stellar overall record during a 7.2% GDP quarter in the US.

Company Last
QTR
Revenue
(2003)
Prev
QTR
Revenue
(2003)
Last
vs
Prev
QTR
Comparable
2002 QTR
Revenue
Last vs
Comparable
2002 QTR
ANSYS 27.95 27.6 1.3% 21.7 28.8%
Autodesk 211.7 210.7 0.5% 211.4 0.1%
Dassault (€) € 176 € 181 -2.8% € 176 0.0%
Dassault ($) 197 207 -4.8 172 14.5%
EDS (total) 5,239 5,520 -5.1% 5,410 -3.2%
EDS (PLM) 212 205 3.4% 197 7.6%
ESI Group (€) € 10.1 € 11.0 -7.8% € 8.3 22.8%
ESI Group ($) 11.4 12.5 -8.8% 8.1 40.7%
Moldflow 9.5 9.9 -4.0% 8.3 14.5%
MSC.Software 62.1 60.4 2.8% 61.6 0.8%
PTC 163.7 165 -0.8% 188.6 -13.2%
Tecnomatix 20.3 20.2 0.5% 20.1 1.0%
Total 916 918 -0.3% 889 3.0%
Figure 1 - Nine Public MCAD Companies' Latest Quarterly Revenue Performances
(Millions; U.S. $ except as indicated)


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