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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.
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| Graph 1 - US Gross Domestic Product |
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) |
|||||
| Company | Last
QTR Earnings |
Prev
QTR Earnings |
Last
vs Prev QTR |
Comparable
QTR Prior Year |
Last QTR vs.
Comparable 2002 QTR |
| ANSYS | $5.361 | $4.500 | 19.1% | $4.802 | 11.6% |
| Autodesk | $32.600 | $7.500 | 334.7% | $11.760 | 177.2% |
| Dassault (€) | € 27.000 | € 28.200 | -4.3% | Ueuro; 22.000 | 22.7% |
| Dassault ($) | $30.000 | $32.148 | -6.7% | $22.000 | 36.4% |
| EDS (total) | $0.600 | $138.000 | -99.6% | $86.000 | -99.3% |
| EDS PLM (est.) | Earnings for PLM Solutions are not reported by EDS | ||||
| ESI Group (€) | Earnings Not Offered | ||||
| ESI Group ($) | ... | ... | ... | ... | ... |
| Moldflow | $0.417 | $0.250 | 66.8% | $0.015 | 2680% |
| MSC.Software | $0.095 | ($27.800) | 100.3% | ($5.798) | 101% |
| PTC | ($37.900) | ($33.800) | -12.1% | ($41.773) | 9.3% |
| Tecnomatix | ($4.600) | $0.171 | Poorer | ($0.171) | Poorer |
| Total | $25.973 | ($17.031) | Better! | ($9.165) | Better! |
|
Figure 2 -- Nine Public MCAD Companies' Latest Quarterly Earnings Performances
(Millions; U.S. $ except as indicated) | |||||
Four of the seven companies reporting earnings did somewhat better sequentially this quarter, while three did worse, as seen in Figure 2. Thanks to Autodesk's and MSC's improvements, the totals went from slightly red to slightly black for the seven companies reporting earnings quarter over quarter. Still, total sector profits of 3.7% on sales is not so hot.
Details for each company's recent quarterly revenues and earnings are provided below:
ANSYS reported results for the quarter that exceeded analysts' expectations for the 24th straight quarter. Total revenue was $28.0M, as compared to $21.7M (+29%) in the third quarter of 2002 but only up 1.3% from the previous quarter. ANSYS reported net income for the third quarter of $5.4M, or $0.33 diluted earnings per share. This compares to $4.8M (+11.6%) in 3Q02 and $4.5M (+19%) the previous quarter.
Comparison with last year's financial results is difficult due to the acquisition of CFX in February 2003 for $22M in cash. ANSYS pointed out that it incurred an $885K charge in the quarter due to an accounting adjustment for acquired deferred revenue. Product and personnel from the CFX acquisition also contributed to increased expenses. For example, CFX has a higher direct sales component. Of course, CFX products and service also contributed to increased revenue. Prior to being acquired CFX had been averaging revenue of $4.75M a quarter as reported for the fiscal year ending March 31, 2002. During the Q&A portion of quarterly conference call, ANSYS said that CFX contributed ~$5M in revenue for the quarter. This means that ANSYS core revenue growth without CFX would have been around 5% in the quarter.
ANSYS President and CEO, Jim Cashman, commenting on the current quarter's solid business performance, said, "The third quarter was a very positive quarter for us on a number of important initiatives. We continued to make tremendous strides in integrating our recently acquired CFX product line, which contributed to our ability to post record third quarter revenue and earnings results. Additionally, we made important progress in advancing our leadership in technology, which we believe has been a key driver to both the continued penetration into our extensive installed base, as well as our ability to expand into new markets."
During the quarter ANSYS announced a $5M deal with Siemens. The three-year contract includes more than 200 seats of ANSYS software as well as seats from the ANSYS ICEM CFD Product Suite and services. At the end of October, ANSYS announced the release of ANSYS 8.0, its CAE simulation software platform.
On August 22nd Autodesk reported for the quarterly period ending July 31. "We are pleased with the company's performance," said Carol Bartz, Autodesk chairman and CEO. "As we said last quarter, the AutoCAD 2004 family of products is the strongest in the company's history and our customers continue to affirm this. The strength of our offerings is demonstrated by increased upgrade revenues and subscriptions momentum during the quarter. As a result, the percentage of users who have upgraded has never been higher at this point in a cycle." Revenue was flat both sequentially and year over year. Growth rate in the high teens by Europe compensated for revenue drops (~9%) in the Americas and in Asia. Revenue for Manufacturing Solutions (Inventor, Mechanical Desktop) was $29M, down versus $30M the previous quarter and $34M the previous year. There was a more than a 400% improvement in Autodesk's Net Income and EPS; however, this was mostly due to a one-time tax-benefit. On a Pro forma basis net income would actually have dropped year over year from $14.5M to $12.5M.
Dassault Systemes (DS) reported a small sequential drop in revenue and earnings (3% to 4%) but considerable growth in net income and earnings of about 25% year-over-year due to a 3 percentage-point improvement in operating margin. DS is the only major MCAD vendor reporting in Euros. This masks the strong performance in Americas (+8% sequentially and +14% YTD) and in Asia (+17% sequentially and +8% YTD) in local currencies. When reported in terms of constant currency total revenue was up 7% Year over year. Per Thibault de Tersant, Vice President and CFO "Software revenue growth was in-line with our expectations, increasing 9% in constant currencies. .. earnings were solid, coming in ahead of our expectations. Services, however, did not meet our expectations, resulting in total revenue approximately EUR4 million lower than our objective when adjusted for actual currency rates." During the quarter the French Government sold their remaining 16% equity share so that company's free float is now 48%. Also DS invested ~$2M in newly formed Gehry Technologies (GT), who will deliver a suite of products dedicated to the building industries and will sell and service IBM/DS' PLM software. Frank Gehry is the world famous architect who designed the just opened Walt Disney Concert Hall in Los Angeles.
EDS (the whole company) reported that third quarter revenue rose 6% to $5.24 billion. EDS reported a net loss of $600K, essentially breakeven on a per share basis. During the same period a year ago, EDS had a pro forma profit of $86 million, or 18 cents a share, on sales of $5.33 billion. The company plans to cut 2,500 on top of the 2,700 job cuts announced last quarter for a total of ~4% of employees to save between $330 million and $360 million by the end of 2004. "We continue to implement our comprehensive transformation plan, covering all aspects of the business," said EDS Chairman and CEO Mike Jordan. "As a result, we are much better positioned to compete effectively for business in our pipeline. We also have streamlined our sales process, focusing the company's resources on its most strategic contract opportunities, where we are seeing an improved win rate."
On October 27th EDS announced the financial implications of adopting FASB accounting rule EITF 00-21 (Revenue Arrangements with Multiple Deliverables) retroactively to Jan. 1, 2003. The action resulted in a one-time, non-cash $2.24 billion cumulative accounting adjustment. An after-tax earnings impact of $1.42 billion, or $2.92 per share, is reflected in EDS' revised results for the first quarter of 2003. This rule primarily affects EDS contracts that involve up-front information technology (IT) system construction and ongoing processing and maintenance services, where the timing of billings is usually not consistent with the timing of costs.
Since the EDS PLM Solutions unit accounts for only 4% of EDS's business, EDS usually provides little financial information. On a constant currency basis revenue for the quarter was $212M, up 7.6% year over year and 3.4% sequentially. Operating profit was $33M, up 10%. If the EITF rule had been in effect last year, operating profit would have risen by 53%, according to EDS.
ESI Group reported on Sept 11 for the period ending July 31. Revenue was down nearly 8% sequentially mostly due to a drop in license revenue. However, total revenue was up almost 24% year over year due principally to growth in services and other revenue. At constant exchange rates, ESI Group's H1-2003 sales were up 29%. At constant exchange rates and excluding acquisitions, organic growth was 4%. The company provided no information on earnings. "Despite a persistently depressed economic environment and the negative impact of exchange rates, particularly in Asia, first semester sales rose sharply, mainly due to the good performance of the recently acquired companies. Sales growth was driven by a high proportion of repeat licenses, the successful deployment of the most recent 2G solutions and a significant increase in new business. Performance of the recently acquired units was further boosted by synergies within the group."
Roland Thomas, Moldflow's president and CEO said, "We are pleased to report results for the first fiscal quarter of 2004 that are in line with our expectations for the quarter and which reflect the improving long-term business conditions in many of our markets and the trends we have noted over the last several quarters. Our operating results are particularly gratifying as they reflect continued growth in product revenues on a year-over-year basis, both in absolute terms and on a constant currency basis. In addition, we achieved meaningful growth in earnings." This is the second consecutive quarter of double digit year over year growth. While small in dollar amount ($417K), net income shot up 67% compared to the previous quarter and by a factor of 28 relative to last year. Moldflow is unusual in the MCAD space in that Asia accounted for 40% of its business. On a geographical basis the Americas was the bright spot growing 20% sequentially and 40% year over year. The vast majority (79%) of revenue comes from the Design Solution versus 21% form Manufacturing Solutions. The latter tend to be characterized by a few large sales, which causes large quarterly revenue swings for that segment.
MSC.Software reported modest revenue growth both sequentially (2.9%) and year over year (.9%). "The third quarter results are a confirmation that the refocused MSC.Software strategy is gaining momentum and turning opportunity into revenue," said Frank Perna, chairman and CEO of MSC.Software. Net income improved enormously from the previous quarter wherein MSC.Software had taken a $25.4M charge for restructuring and impairment as a result of its decision to exit the Systems Business. That business was based largely upon the company acquisition of AES in July 2001 for ~$132M including $20M cash and $20M in promissory notes. The Systems Business had been generating around $20M/quarter of low margin business.
PTC reported results for 4Q and F2003. "We were pleased with our execution this quarter, as we met our revenue targets while implementing an aggressive cost reduction program," said C. Richard Harrison, president and chief executive officer. "In the fourth quarter, we achieved a sequential improvement in total license revenue, strong Windchill sales, and continued success in the adoption of Pro/ENGINEER Wildfire by our installed base." Note: 25% of the Pro/E installed base has migrated to Wildfire. On a sequential basis license revenues were up slightly while maintenance and service revenues were down slightly. However, year over year license revenue dropped 23% and total revenue by 13.5%. The largest decline (27%) was in North America. European revenue was flat but declined 11% in terms of constant currency. Windchill, particularly Windchill Link solutions, had strong performance during the quarter, up roughly 10% both sequentially and year over year, but Design Solutions continued its slide dropping 6% sequentially and 20% year over year. Net loss for the quarter was $37.9M and for the fiscal year $98.3M. According to Mr. Harrison the largest contributing factor was the number and size of major deals: In the quarter there were 10 deals greater than $1M for total of $18M versus 12 deals for total for $32M in 4Q02. On the positive side PTC Toyota Motor Corporation signed a joint research and development agreement to expand the solutions available to powertrain product and process designers. A D. H. Brown analyst estimates the contract at $10M. Toyota was PTC's largest customer in F2003. Also in the quarter US Dept of Energy Nuclear Weapons Complex (NWC) signed a $10M contract to upgrade Pro/E and replace some SolidWorks. One more negative item, the U.S. District Court for the District of Massachusetts issued a ruling rejecting PTC's request to dismiss RAND Worldwide's over US$100 million lawsuit on October 31.
For Q3 Tecnomatix reported revenues of $20.3M, slightly up sequentially and year over year. The loss for the quarter was $4.681M versus net income of $171K the previous quarter and net loss of $171K the year before. The loss is almost totally due to charges such as in-process R&D write associated with USDATA acquisition near the end of the quarter. "The third quarter was a productive quarter for Tecnomatix. During this quarter, which is typically a seasonally slow one, we maintained financial stability, reported a positive cash flow, booked a steady stream of new and repeat orders, and continued to execute on the initiatives that will drive our growth and profitability," said Harel Beit-On, chairman and chief executive officer of Tecnomatix Technologies. "During the quarter, we completed the acquisition of substantially all the assets and liabilities of USDATA corporation, as scheduled. We moved swiftly to integrate all USDATA processes into our existing operations and strengthened the USDATA team with some of Tecnomatix's senior executives. In addition, the USDATA products have been re-branded as Tecnomatix FactoryLink and Tecnomatix Xfactory. … We believe that this acquisition will contribute to our profitability in the first half of 2004.
Graph 2 -- MCAD Quarterly Revenue Trend (above) and Relative Market Share (below)
The flat revenue performances of the covered MCAD vendors is revealed in the top frame of Graph 2, with PTC's decline clearly visible. The bottom frame of Graph 2 depicts the relative market share dominance of the top four vendors Autodesk, Dassault, EDS PLM and PTC. Note that PTC remains a formidable player despite its revenue reductions of recent quarters.
Details for each company's forecasts for future performance are provided below:
Maria Shields, ANSYS CFO, commented "We feel comfortable with the consensus estimate of $0.44 EPS for the next quarter." CEO Jim Cashman added "With regard to the outlook for the remainder of 2003, we maintain our guidance for adjusted year's revenue in the $114M to $115M range and exceeding our earnings commitment from the beginning of the year. Long term outlook stays solid. We see some positive signs but are still cautious as to how quickly any recover will manifest itself. .. Looking forward we envision top line growth for 2004 in the 9% to 11% range and EPS between $1.66 and $1.67."
Autodesk projects net revenues for the third quarter of fiscal 2004 to be in the range of $216M to $221M. Earnings per diluted share for the third quarter of fiscal year 2004 are expected to be in the range of $0.13 to $0.16. Consistent with previous guidance, earnings per diluted share for fiscal year 2004 are expected to be in the range of $0.50 to $0.60. Net revenues for fiscal 2004 are expected to be in the range of $875M to $885M. This compares with estimates in May for revenue in the range $875M to $900M. Resellers are expecting an uptick when Autodesk stops offering technical support and upgrade option for Autodesk 2000 on January 15th. In October Autodesk signed a deal with Microsoft to integrate its engineering data management solution (Vault) with Microsoft's Business Solutions.
Dassault Systemes projects revenue for 4Q2003 to be €225M, which is flat year over year but is up 8% in terms of constant currency. For 2003 the projected growth has been lowered from 7% to between 5% and 6% in terms of constant currency, reflecting lower service revenue. Looking ahead to 2004 Thibault de Tersant commented "we are providing our preliminary views at this time. Our revenue growth objective is about 6% to 7% in constant currencies. Taking an assumed U.S. dollar to Euro exchange rate of $1.20 per EUR1.00, therefore, leads to a reported revenue growth objective of approximately 4 to 5%. At this point in time, our financial objectives assume a continuation of the current business environment into 2004."
EDS (the whole company): "We remain on track to meet our guidance for the second half of the year, including estimated pro forma earnings of about 70 cents per share on a POC basis - or 17 cents per share on an EITF 00-21 basis1," said Bob Swan, executive vice president and CFO.
On October 13th EDS announced it was considering an Initial Public Offering or private offering of a minority stake in its PLM Solutions subsidiary as a strategic alternative for the business. "A minority IPO or private offering in PLM Solutions would enable EDS to leverage the value of this key asset," said Michael Jordan, EDS chairman and CEO. "By operating as a software company in a growing space, PLM Solutions will be able to focus solely on the PLM market, while in turn supporting EDS' sharpened focus on our core business." Tony Affuso, president and CEO of EDS PLM Solutions added "We expect this alternative would enable PLM Solutions to be more agile in the market, make decisions more quickly and more effectively leverage our roots as an independent software company on behalf of our customers. At the same time, PLM Solutions would continue to be able to leverage the support and IT services expertise of EDS. It's a win-win scenario we are looking forward to."
It may not be realistic to assume that a company will possess more agility and flexibility when its actions come under the microscope of the financial community. Also EDS may be reluctant to share consulting opportunities with other system integrators. A more likely explanation for this possible sale is to raise cash. EDS has had some cash flow problems due to their upfront costs in major outsourcing deals such as the contract with US Navy and Marine Corps for an end-to-end IT infrastructure. Revenue and cash flow had also been impacted by bankruptcies of two major customers: Worldcom and US Airways. At the end of 2002 EDS had $1.6B in cash and equivalents. In June 2003 EDS raised $1.7B through the sale of senior notes and convertible senior notes.
Background: At the end of August 2001 EDS acquired SDRC for $940M and in September 2001 EDS purchased the outstanding shares of Unigraphics for $174M (implies a market cap of nearly $1.5B). In 2001 Unigraphics had $752M in revenue but would have had $1B in revenue if the acquisition of SDRC had occurred at the beginning of the year. Unigraphics revenue grew for a while thanks to the acquisition but has slid in recent quarters and is down about 20% from the combined pre-acquisition revenues of the individual firms.
ESI Group gave no guidance for follow-on quarters. As part of the strategic partnership executed on July 8 with the EASi, ESI Group acquired the intellectual property rights to EASi's CAE software. This cash acquisition was consolidated effective August 1, 2003. EASi is a Tier-1 supplier to many of the largest automotive companies. EASi license revenue was ~$2M in 2002 with half in the US. Alain de Rouvray said "The performance of this first semester confirms that the group is on track and continues to strengthen its competitiveness, both commercially and technologically. The business plan has shifted into a higher gear, as reflected by major partnerships with such groups as Renault and Dassault Systhmes. We expect our products to gain further market share as we continue to reinforce our strategic position in the emerging business of integrating CAE and simulation software."
Moldflow is calling for 10% to 15% year-over-year revenue growth between $9.8M to $10.3M and EPS of $.01 to $.03. They expect expenses to be higher due to annual salary adjustments on October 1 plus costs for new releases. Among the new releases will be an English version of the production monitoring software from the French firm Ctntrole Processus Industriels (CPI) acquired in January.
MSC.Software forecasts revenue for continuing operations in the fourth quarter to be in the range $65M to $70M, which represents nearly 10% growth sequentially but less than the $72.4M achieved in 4Q2002. Revenue for the year would lie between $248M and $253M versus $248M in 2002. The projected EPS in Q4 is between $0.05 and $0.07. For 2004 MSC.Software is forecasting revenues between $260M and $280M with EPS between $0.35 and $0.40. "My recent interaction with customers and staff at our conference has reconfirmed my enthusiasm that we will continue to succeed in this tough market and will perform even better when the economy turns around. The breadth and depth of our software and services product portfolio uniquely positions us in the market, and we are confident we can continue this momentum into the fourth quarter and into 2004," according to CEO Frank Perna
According to PTC's press release: "PTC 's revenue forecast for the first quarter of fiscal 2004 is between $150M and $160M. Additionally, PTC's cost reduction program is on track, and we expect to incur a restructuring charge of $20M to $25M in the first quarter. Net loss per share is expected to be between $0.09 and $0.13." PTC is targeting $120M in annualized cost reduction in F2004, specifically quarterly operating expenses of $160M in 1QF04 and $150M by end of F04. The projected headcount at the end of F2004 is to 3,000 versus 3,500 at the end of F2003. PTC will be eliminating direct sales in low profit and non-strategic geographical regions and have greater reliance on VARs. VARs contributed 27% of revenue or $9.2M in last quarter. On October 20 PTC announced a new Channel Advantage Reseller program. For the first time, certified partners can now also sell Windchill PDMLink and Windchill ProjectLink. PTC will also be using offshore resource in India and Israel for maintenance programming and services.
Oren Steinberg, chief financial officer and executive vice president of Tecnomatix Technologies said, "Our focus in the fourth quarter will remain on increasing sales, maintaining our cost controls, and overseeing a smooth integration of USDATA activities. Going forward, we expect sequential revenue growth of 5-10% in the fourth quarter 2003 with similar profitability. In 2004, we expect to see revenue growth of 10-15% year over year with improved profitability."
Additional comments on the forecasts above
For 4Q2003 Dassault is forecasting revenue of €225M, a growth of 28% over last quarter. The total is the same as the fourth quarters in 2001 and 2002. Still, it's real stretch for 4Q2003. Moldflow is a distant second in terms of forecast percentage growth with 10.5%. PTC prediction of a revenue drop of 8.7% is the most pessimistic.
The most significant industry "event" was that EDS announced it was considering an Initial Public Offering or private offering of a minority stake in its EDS PLM Solutions subsidiary as a strategic alternative for the business.
The only acquisition-related action during the quarter was Tecnomatix's finalizing its acquisition of substantially all of USDATA's assets, including the FactoryLink and Xfactory shop floor and execution system products.
During the third quarter and the subsequent 5 weeks before this Commentary went to press, MCAD vendors introduced many products and product releases; a partial list follows. Autodesk introduced Vault for engineering group data management and promptly signed a deal with Microsoft to integrate Vault with Microsoft's Business Solutions. Similarly, EDS created TeamCenter Community, a collaboration environment based on Microsoft Windows SharePoint Services. EDS released NX Nastran based upon a licensing agreement with MSC.Software driven by a settlement with the FTC. EDS claims to have sold 5,000 seats in 8 weeks. MSC.Software released Nastran 2004 and Adams 2003. ANSYS introduced ANSYS 8.0. Dassault and IBM announced the release of Version 5 Release 12 of their PLM portfolio, comprised of CATIA, ENOVI and SMARTEAM. Concurrently, Dassault Systhmes announced V5R12 of DELMI for the engineering of lean manufacturing processes. SolidWorks, a Dassault subsidiary, introduced SolidWorks 2004. ESI Group and EASi announced a strategic partnership in software integration and engineering services. PTC announced Channel Advantage Reseller program which allows channel partners for the first time to sell Windchill Solutions.
Stock Prices for the last three months and YTD
Technical stocks generally follow the "tech-heavy" NASDAQ index. The market basket of MCAD stocks covered in these MCAD Commentaries remarkably outperformed the NASDAQ 31.1% versus 22.1% from Jan 2 to Aug 1, as can be observed in Figure 3 below. However, the basket trailed the NASDAQ by 0.5% during the last three months.
All these stocks are way up as of Halloween 2003, relative to the beginning of the year, but their basket total has outpaced the NASDAQ by only 2.6 percentage points during that 10 month period. The only stocks to drop by more than a percentage point in either period were MSC.Software after announcing the closing of its Systems Business, and EDS after restating earnings.
Dassault and ANSYS stocks rose spectacularly, in the neighborhood of 80% so far this calendar year, compared to 44.5% for NASDAQ. All other stocks rose less than the NASDAQ percentage.
| Company | Symbol | 2-Jan | 1-Aug | %7 mo | 31-Oct | %3 mo | YTD % |
| Ansys | ANSS | 20.25 | 33.72 | 66.5% | 35.64 | 5.7% | 76.0% |
| Autodesk | ADSK | 14.6 | 15 | 2.7% | 19.31 | 28.7% | 32.3% |
| Dassault | DASTY | 22.82 | 34.41 | 50.8% | 42.10 | 22.3% | 84.5% |
| EDS | EDS | 18.99 | 22.29 | 17.4% | 21.45 | -3.8% | 13.0% |
| ESI Group | ESIG | 10.00 | 13.20 | 31.9% | 13.87 | 5.1% | 38.7% |
| MSC.Software | MNS | 8.18 | 7.4 | -9.5% | 10.30 | 39.2% | 25.9% |
| Moldflow | MFLO | 7.28 | 9.8 | 34.6% | 10.00 | 2.0% | 37.4% |
| PTC | PMTC | 2.19 | 3.1 | 41.6% | 3.07 | -1.0% | 40.2% |
| Tecnomatix | TCNO | 8.47 | 8.98 | 6.0% | 10.11 | 12.6% | 19.4% |
| Total | 112.78 | 147.90 | 31.1% | 165.86 | 12.1% | 47.1% | |
| Nine Public MCAD Companies' Stock Prices | |||||||
| Stock Exchange | Symbol | 2-Jan | 1-Aug | %7 mo | 31-Oct | %3 mo | YTD % |
| Dow Jones | DJIA | 8.607 | 9,154 | 6.0% | 9,801 | 7.1% | 13.9% |
| NASDAQ | Nasdaq | 1,337 | 1,716 | 22.1% | 1,932 | 12.6% | 44.5% |
| Std & Poors | S&P | 909 | 980 | 7.2% | 1,050 | 7.1% | 15.5% |
| Closing Averages of three exchange indices | |||||||
Conclusions from this November 2003 MCAD Commentary
Despite the preliminary report of 7.2% US GDP performance in Q3 2003, there is little in the covered MCAD companies' trailing revenue and earnings performance data, little in their recent total market basket stock price performance, and little in their forecasted financial guidance for the rest of 2003 and beyond, to suggest that a major MCAD Industry turnaround (e.g. widespread double-digit revenue growth) is any closer in November 2003 than it appeared in either August 2003 or in May 2003. Of course, a couple specific vendors will likely outpace their rivals as in the last three quarters.
While the real gross domestic product increase in the third quarter of 2003 was the broadest based gain in the US economy in 3 years, many forecasters expect the effects of both the personal tax cuts and real estate re-financings to wane as time passes. Several predict that growth will drop back to around a 4 percent annual rate at best for the remainder of this year and in 2004, a pace some economists fear might not be fast enough to produce many new jobs. If the pace falls below 4%, new job creation may continue in the doldrums.
For example, according to the Wall Street Journal: "While the economy certainly won't keep up with the third quarter's blistering pace in the months ahead, most economists believe the quarter marks a distinctive shift into a more robust expansion that could stretch to next year's presidential election". "We are not going to see 7% growth again but we could well see over 4% over the course of the next year" said Richard Berner, an economist with Morgan Stanley.
What about jobs? A separate report showed initial claims for unemployment benefits falling by 5,000 to 386,000 just last week, the fourth straight week the number has remained below 400,000. But the same report showed that continuing claims for benefits, which had been declining, jumped by 60,000 to 3.57 million.
US Department of Labor reported that the number of unemployed persons, 9.0 million, was virtually unchanged in September, and the unemployment rate was 6.1 percent, the same as in August. October nudged down to an even 6%. These figures do not include long term unemployed who have stopped actively seeking work and those formerly unemployed who may have taken temporary or lower paying jobs. Some fear that many jobs may be permanently lost by a shift to offshore resources.
Moreover, recent job growth may just be a another blip, just like briefly occurred in 2002. In a November 2003 report from Challenger, Gray & Christmas, US employers in October 2003 were planning layoffs over the next few months of 171,874, the highest figure in 12 months (Reuters, November 4, 2003).
During the dot.com boom, many high tech companies complained about the lack of available technical resources within the US borders. H1-B visas permitted US employers to hire foreign professionals on temporary assignments of up to six years. In response to pressure from high tech companies the number of allowable H1-B visas rose from 65,000 to 195,000. With the recession the number of H1-B visas issued to workers in the technology industry in the United States dropped nearly 75 per cent from 2001 to 2002, according to a new Department of Homeland Security report. The US is now about to diminish the number of allowable H1-B visas back to the 65,000 level. While this action will reduce the number of foreign nationals competing for jobs inside the US, it will increase the talent pool available overseas.
According to industry figures, more than 500,000 technology jobs were lost from mid-2001 to mid-2003. Many of these were due to a contraction of the tech sector after the dot-com bubble burst. Andrew S. Grove, Intel co-founder and chairman, has said "the software and technology service businesses are under siege by countries taking advantage of cheap labor costs and strong incentives for new financial investment." The cost of achieving high-speed communication plummeted. "As a result," Grove said, "The engineer sitting 6,000 miles away might as well be in the next cubicle." The Gartner Group, a market research firm, estimates that 10 percent of jobs at US information technology vendors will move offshore by next year. And only 40 per cent of those who have lost jobs are likely to be retrained and re-deployed by their firms. Throughout all US companies, Forrester Research predicts the loss of roughly 3.3 million jobs by 2015.
Offshore outsourcing is not without issues including potential loss of Intellectual Property assets, impact on morale and productivity of remaining US workers, and difficulty of managing remote operations in different cultures. There are also political and economic consequences for the US as a whole. What happens if the US winds up losing its technological edge? Will the US tax base be further gutted as well-compensated US technology professionals lose their jobs? "Outsourcing solely to lower costs because one's competition is doing it" displays a lack of imagination.
What will be the impact on MCAD vendors, if large numbers of mechanical engineering and design jobs move overseas? What price can be commanded for MCAD products, when end users offshore are being a paid a third the salary of US and European engineers? Will CAD vendors themselves look to capitalize on lower cost software talent overseas? In July PTC signed a 39 month outsourcing software development deal with ITC Infotech worth an estimated $54M.
It is often alleged that American industry can get along with fewer employees because of the "miracle of productivity improvement". Before we glibly adopt that belief, we'd better keep in mind the denominator behind the statistics: hours actually worked. The US Bureau of Labor Statistics data assumes high-tech white collar workers put in a 40 hour week. But in a February 2003 survey by InfoWorld, fully 89% of such workers put in many more hours per week than 40, with no commensurate compensation, thus driving up the "productivity statistics" artificially. As Doug Henwood puts it in his new book, "This is a pungent reminder of the difference between the capitalist's definition of productivity (the expansion of profit), and the engineer's (the minimization of inputs, which would include unpaid hours)." (Page 67, After The New Economy, Doug Henwood, The New Press, New York, NY 10013, (c) 2003).
Other Progress since August?
OK, so the positive news about the Q3 GDP spurt, about the improved YTD stock market performances, and about enhanced corporate profits - none of these has yet translated into much job relief for the nearly three million US unemployed since 2001 began, especially in the manufacturing sector. But at least progress has occurred during these last three months on all the other issues that were hanging heavy over us in early August, right? For example, now that another quarter has elapsed since the president's May 1st declaration of "Mission Accomplished in IRAQ", surely the IRAQI people with UN help have now resumed control of virtually all of their country. No doubt this means that other countries are of course now supplying troops, and the US troops have begun coming home in large numbers. Hello? What's that you say? Violent attacks in IRAQ against the US troops have increased since August? Deaths and injuries have increased on all sides? As of November 5, the number of US troop fatalities in IRAQ is 384, 245 since May 1? Six more in a November 6 helicopter crash? US troop morale is down? US troops there are having their tours of duty extended? Another 100,000 US-based soldiers have just been alerted to get ready for duty in IRAQ? There are no more troops for in sight for IRAQ from the UN or individually from other countries? Turkey's offer of 10,000 troops was turned down on November 5 by the US-installed ruling council in Baghdad? C'est impossible! Sigh.
Well, surely international outsiders will pony up some significant financial support at least, so we weary taxpayers in the US won't have to foot the whole cost! Come again? Other countries have committed only about $25 billion in total to help? And what? The US Congress just approved another $87 billion to support the war for another year on top of the $79 billion already spent by the US? Man! Well, at least the deep tax cuts of 2001-2003 have been rolled back some to pay the bills in IRAQ, so our national deficit doesn't balloon. Say again? Tax cuts have not been touched? The federal deficit this year alone will be somewhere between $374 billion and $500 billion, when as recently as 2000 we had a surplus of $236 billion? Holy Toledo! Hey, at least the Weapons of Mass Destruction have been found in IRAQ by now, and the pre-war ties between Saddam and Al-Qaeda have been unequivocally proved. No? Neither? Say it isn't so! Well, at the very bare bones we have the satisfaction that both Saddam and Osama are now behind bars! What's that again? Both are still on the loose? You don't mean it! Well, this is distressing!
But with all that money being spent by Washington, at least the states in deep financial trouble here at home will get federal money to offset their own budget deficits, to improve crumbling infrastructure and to pay for homeland security, etc. Heck, Gray Davis might even get back the $9 billion that was illegally fleeced from California during the 2001-2002 power crisis! What did you say? No federal money for the states? And saywhat? Gray Davis has been replaced? But…but… Well, at least there will be more federal money for soldiers and veteran benefits, given their sacrifices. What? Such benefits as basic pay, combat pay, health care and the death gratuity are actually being cut? Incredible! Well, certainly corporate fraud has been severely punished and new regulations enforced, right? What's that about a corporate toga party in Sardinia? The Veep still collecting money from Halliburton, itself a winner of several recent no bid contracts for IRAQ? A new mutual funds scandal? Oh my! Women's rights to choose? Gun control? A Prescription Drug Bill? The environment? Don't even ask!
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MCADCafé.com currently tracks the financial performance of multiple public companies in the Mechanical CAD market. Eight (8) companies were chosen for the author's May 8, 2003 Commentary. 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.
For the author's August 11th Commentary in MCADCafi.com a ninth company, the ESI Group, was added. All nine were again studied here in November for comparison purposes. The combined worldwide total annual revenue of these 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 MCADCafé.com, it's instructive to account for the actual MCAD content of each. For example, the revenues of Dassault and PTC can 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 consider the revenues from the remaining public companies (ANSYS, ESI Group, Moldflow, MSC.Software and Tecnomatix) to be 100% MCAD. |
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About the Authors
Since 1996, Dr. Russ Henke has been president of HENKE ASSOCIATES, a San Francisco Bay Area high-tech business & management consulting firm. During his corporate career, Henke operated 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 Applicon, Gould Electronics, ATP, and Mentor Graphics. Henke is a Fellow of the Society of Manufacturing Engineers (SME) and currently serves on the SME International Board of Directors. He is also a member of the IEEE and a Fellow of ASME International. An affiliate of the HENKE ASSOCIATES team since 2001, LA-based Dr. John R. (Jack) Horgan co-authored this article. Jack's career included Applicon, Aries Technology, CADAM, MicroCadam and IBM. Further information on HENKE ASSOCIATES is available at http://www.henkeassociates.net.