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May 12, 2003
Commentary: MCAD Industry View - Is the Turnaround Near?
Please note that contributed articles, blog entries, and comments posted on MCADcafe.com are the views and opinion of the author and do not necessarily represent the views and opinions of the management and staff of Internet Business Systems and its subsidiary web-sites.
Russ Henke - Contributing Editor


by Russ Henke - Contributing Editor
Each MCAD Weekly Review delivers to its readers news concerning the latest developments in the MCAD industry, MCAD product and company news, featured downloads, customer wins, and coming events, along with a selection of other articles that we feel you might find interesting. Brought to you by MCADCafe.com. If we miss a story or subject that you feel deserves to be included, or you just want to suggest a future topic, please contact us! Questions? Feedback? Click here. Thank you!

Is there a high tech turnaround ahead? In particular, what does the landscape look like
for the MCAD sector? One industry observer offers his thoughts on the subject


In the overall high tech sector, what do the broad Q1 2003 financial results tell us about
the status of the three-year technology slide that began with the March 2000 NASDAQ
meltdown? Despite the current ~9 percent unemployment rate in places like Silicon
Valley, there are some fresh business statistics from Q1 2003 that provide optimists with
hope for an eventual high tech turnaround. US Government Commerce Department
figures show a Q1 2003 up-tick of 15 percent in business purchases of computers and
software. Earnings for 60 tech companies in the S&P 500 Index are up 16% in Q1 2003
vs. Q1 2002, according to Thomson First Call.


However, gloom still grips many high tech companies. The gains mentioned above are
from just a few companies, analysts speculate. Modest improvements here and there still
leave the vast majority of high tech companies in the doldrums, because the protracted
market slide has been so severe.


Indeed, Oracle Corp. Chairman & CEO Larry Ellison has been quoted as saying that the
software industry will never again be as strong as it was in the late 90's. Others are more
sanguine, since software spending is almost half of every dollar spent on technology
these days. Most observers believe, however, that a high tech recovery will follow any
general economic recovery, which probably means (notwithstanding promised "stimulus
packages" from the White House) that the real high tech rebound and more high tech jobs
are 12 to 24 months away.


Is the picture in the MCAD portion of high tech any better?


To gain a better understanding of what this means for the MCAD sector, let's take a
closer look at some of the top players in this category.
MCADcafe.com currently tracks
the financial performance of eight (8) public companies in the Mechanical CAD market.
Four of these companies (Autodesk, Dassault Systemes, PTC and EDS PLM Solutions)
represent approximately 85 percent of the total revenue in this grouping, and each of
these four companies offers a wide array of software and services products across the
entire design to manufacturing space.


The remaining four public companies (ANSYS, Moldflow, MSC.Software and
Tecnomatix) offer specialized software/services products in specific MCAD niches and
together they create the remaining 15 percent of the total group-of-8's revenue. Indeed,
these latter four companies frequently partner with the initial four to provide end-
customers with broader solution suites.


The combined worldwide total annual revenue of these eight companies is nearly $4
billion, not an insignificant sum. But it is, in fact, less than 3 percent of the $150 billion
spent annually on all types of software. So why study MCAD companies at all? The key
to MCAD's 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 today's manufacturing industries, which are
the centerpieces of creating real productivity and wealth in every modern economy.


Understanding the comparative MCAD revenue content of various vendors is not merely
academic. For example, it helps observers better understand the likely future competitive
MCAD strength of each vendor relative to its peers in such areas as amount of money
available for R&D, for potential new acquisitions, for financial stability to weather
economic cycles, and for other key business factors.


In comparing financial performances of the four largest MCAD companies tracked by MCADcafe.com, it's
instructive to account for the actual MCAD content of each.


For example, the revenues of Dassault and PTC could arguably be considered 100% MCAD in nature,
whereas Autodesk's total revenue is only partially made up from its business in MCAD. Some Autodesk
revenue (~15%) stems from its Discreet segment, which provides systems and software for creating and
animating imagery. Even in the remaining 85% of Autodesk's total revenue, derived from its Design
Solutions Segment, is divided among solutions for Manufacturing, GIS, the building industry, and the platform technology group. Only the solutions of the Manufacturing Group, (Inventor, AutoCAD Mechanical, Mechanical Desktop, Streamline, Point A, etc.) might be thought of as "pure" MCAD revenue.


EDS' MCAD revenues are created by EDS PLM Solutions, the mid-2001 union of SDRC and UGS. While
EDS PLM Solutions represents less than five percent of EDS' total revenues ($21.5 billion in 2002), EDS
PLM Solutions annual revenues are right there at similar levels as the world's other MCAD revenue leaders
Dassault and PTC.


For purposes of our discussion, we'll consider the revenues from the remaining four public companies
(ANSYS, Moldflow, MSC.Software and Tecnomatix) to be 100% MCAD.


So how did the eight MCAD Companies do in calendar 2002?


In an industry striving for double-digit compounded annual growth rates (CAGR), clearly
2002 was not kind to most of these companies (see Figure 1). Indeed, anything better
than "flat with 2001 revenues" might be viewed as a minor 2002 victory. MSC.Software
was the only company with more than double-digit percent growth in 2002, driven
primarily through it acquisitions, but the company's 2002 net income was way off from
2001.


As shown in Figure 1, only three of the eight companies improved their net income
performances in 2002, with Dassault Systemes leading the pack with $142 million.
Notably, ANSYS continued its steady multi-year growth of both revenues and net
income, apparently unperturbed by the harsh economic times.


Company
Total 2002

Revenue

($ million)
% of 2001
Total 2002

Net Income

($ millions)
Total 2001

Net Income

($ millions)

Autodesk
825
87%1
32
90
Dassault
869
104%
142
100
PTC
718
72%
(99)
(33)
EDS (total)
21502
102%
1116
1363
EDS PLM (est.)
935
*
 
 
ANSYS
91
107%
19
14
Moldflow
35
101%
1
2
MSC.Software
344
146%
(51)
10
Tecnomatix
82
94%
(3)
(14)

Figure 1 – Eight public MCAD Companies' Yearly Financial Performances2

1 The revenues for the Design Solutions Segment of Autodesk, which contains Manufacturing Solutions'
MCAD revenue, increased 6% in 2002 vs. 2001.


2 For companies whose fiscal years did not end on December 31, 2002, the four quarters' results prior to the
last reported quarter, were used here.


* EDS PLM was formed in mid-2001. Speculation is that total EDS PLM revenues in 2002 (~$935
million) are considerably less than the combined UGS/SDRC revenues would have been for all of 2001.


Price/Sales Ratio


Another key parameter that observers use to compare companies, is the ratio of market
capitalization to ttm (trailing twelve month) revenues, which provides some insight
into how the stock market values the "qualities" of the company and its financial
performance.


How did the MCAD companies in our group-of-8 fare recently in this category (see
Figure 2)?


Company
Price/Sales Ratio
Autodesk
2.16
Dassault
3.98
PTC
1.19
EDS
0.43
EDS PLM
NR
ANSYS
4.64
Moldflow
2.28
MSC.Software
0.51
Tecnomatix
0.91

Figure 2 – Eight public MCAD Companies' Yearly Price/Sales Ratios2

How about the most recent quarterly performances of our group-of-8?


Alas, for the four largest MCAD companies, their latest quarters' results revealed that
their concerns are not yet over, if one compares the latest year-over-year quarterly results
for revenue (see Figure 3). Quarterly revenue for the four is down year over year anywhere between five percent and twenty-three percent. On the other hand, the four smaller companies would appear
to be either holding their own in their latest quarters (Moldflow & Tecnomatix) or even
prospering (ANSYS & MSC.Software).


Relative to earnings per share (EPS), PTC revenues are still not overcoming costs, EDS (the parent of EDS PLM Solutions) has slipped into negative earnings territory,
Moldflow also slipped into red ink territory, and Tecnomatix is not yet back in the black.
Autodesk, Dassault Systemes and ANSYS are all in the black, and MSC.Software returned
to black ink.


Company Last QTR

Revenue

($ millions)
Last QTR

EPS
Last QTR of

Previous Year

Revenue

($ millions)
Last QTR's % of

Previous Year's

Revenue

($ millions)

Autodesk 195 + 254 77%
Dassault 190 + 205 93%
PTC 171 -- 180 95%
EDS (5-7-03) 5370 -- 5265 102%
EDS PLM (5-7-03) 201 NR 227 87%
ANSYS 24.6 + 21.3 115%
Moldflow 9.5 -- 9.5 100%
MSC.Software 85.1 + 66.5 128%
Tecnomatix 20.6 -- 20.4 101%
Figure 3 – Eight public MCAD Companies' Latest Qtrly Financial Performances2 Company Forecasts

A further indication that the MCAD turnaround is not yet near can be gleaned from some
of the comments paraphrased from recent company news releases as these companies
contemplated their futures:
Q1 Fiscal 2004: "Net revenues for the first quarter of fiscal 2004 (closing April
30, 2004) are expected to be in the range of $205 million to $210 million."
Full Year Fiscal 2004: "Net revenues for fiscal 2004 are expected to be in the
range of $875 million to $900 million." (Note: single digit % growth).

-- Autodesk News Release, February 25, 2003


"We are targeting single digit % revenue growth in 2003, similar to that of 2002."

-- Dassault News Release, April 24, 2003


"We expect next quarter's revenue to be level with last quarter's."

-- PTC News Release, April 16, 2003


"We are forecasting a low- to mid-single digit percent growth in organic revenue
for 2003 because of continued weakness in technology spending and the general
economy, and assuming no increased geopolitical risks emerge."

-- EDS News Release, February 6, 2003


"EDS' priorities remain cash flow, earnings and growth, in that order. EDS is in
the process of a comprehensive strategic and operating review, and, as a result, is
not in a position to provide guidance for the second half of 2003."

-- EDS News Release, May 7, 2003


"Despite continued macroeconomic challenges and a tenuous global
environmento?=we remain optimistic about our business prospects over the long
term; however, in the near term we will we will continue to operate our business
conservativelyo?="

-- ANSYS News Release, April 30, 2003


"We expect the current quarter to end (two months from now) with revenues
somewhere between 95 percent to 101 percent of the previous quarter, and
earnings to be somewhere between a slight loss and breakeven".

-- Moldflow News Release, April 24, 2003


"We expect revenues for next quarter to be in the range of 100 percent to 106
percent of last quarter, with dramatically improved EPS." For all of 2003,
revenues should be up 10 percent."

-- MSC.Software News Release, April 23, 2003


"We expect to achieve [2003] revenue growth of approximately 5 to 10 percent
over 2002, with improved profitability."

-- Tecnomatix News Release April 30, 2003
Based on what has been documented in the foregoing paragraphs, it would be very
difficult to assert that a major MCAD turnaround is "near". Of course, it all depends on
what the definition of the word "near" is! It would definitely seem that "near" does not
mean "during calendar 2003". All things being equal, and if a high tech rebound does
follow a general economic recovery, "near" most likely means mid-2004 for an important
MCAD recovery, at the soonest, before significant annual revenue growth rates start
returning to MCAD public companies in general.


However, some MCAD companies may be poised to thrive sooner than others. So stay
tuned. We'll be looking at these companies and more in the weeks and months ahead.


Comments? Feedback? Tell us what you think about this topic or if you have additional
information you'd like to share on this subject! Submit your comments to:
Email Contact.


About the Author

Since 1996, Dr. Russ Henke has served as president of HENKE ASSOCIATES, a San
Francisco Bay Area high tech business & management consulting firm. During his
corporate career, Henke has been on "both sides" of MCAD and EDA, as a user and as
a vendor. He's a veteran corporate executive from Cincinnati Milacron, SDRC,
Schlumberger, Gould Electronics, Mentor Graphics, and others. Further information on
HENKE ASSOCIATES is available at
http://www.henkeassociates.net.


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    2003 International Forum on DFMA June 17-18, 2003. Newport, RI. Sponsored by Boothroyd Dewhurst, Inc. The International Forum on DFMA is the foremost conference worldwide on early design analysis methodologies and implementation. Conference papers will discuss specific product development programs and examine cost reductions and efficiency gains at some of the world.s leading manufacturing companies, such as Raytheon, Hewlett-Packard Company, Harley-Davidson Motor Company, and Visteon Corporation, among others.


    CIMdata PLM Conference June 23-25, 2003. Detroit, MI. "Unleashing the Value of Your Intellectual Assets." At PLMconference2003, attendees will be provided with a total view of the PLM picture including an industry vision, available opportunities, strategies for solution selection and implementation, roadmaps to move forward, pitfalls to avoid, and direction to help maximize the value and benefits of their investment.


    The Emerging Technologies Conference 2003 September 24-25, 2003. Kresge Auditorium, MIT Campus, Cambridge, MA. The Emerging Technologies Conference at MIT will focus on the technologies that are poised to make a dramatic impact on our world.
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    -- Russ Henke, MCADCafe.com Contributing Editor.