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In the first MCAD Industry Commentary published May 2003 in MCADCafé.com, then-recent yearly and quarterly financial performances of a selected group of public Mechanical Computer Aided Design (MCAD) companies were analyzed and compared. Expectations of future financial performances of these same MCAD entities were documented. The May 2003 Commentary was followed by three quarterly updates in MCADCafé.com, one for each subsequent calendar quarter of 2003. URL's on all past articles are available. The entities covered are ANSYS, Autodesk, Dassault Systèmes, UGS PLM, ESI Group, Moldflow, MSC.Software, PTC and Tecnomatix. The current article in the sequel recounts the financial performances for the first quarter of calendar 2004. Revision June 7, 2004: When this quarterly MCAD Commentary was originally published, an error was made in the conversion factor from euros to dollars in a small number of calculations: the factor used was inadvertently inverted. This caused the revenues, earnings and relative market share to be understated in the original version for Dassault Systèmes, a vendor that reports in euros. We apologize for any inconvenience this might have caused. The information published below is now believed to be correct to the best of our knowledge. Preface What a difference a quarter makes! 91 little days! Economic improvements in US Gross Domestic Product (GDP) during the 2H of 2003 have finally been joined by significant net job creation numbers during Q1 of 2004! At last, the lethargy of the long "jobless economic recovery" is beginning to yield some signs of life! While the US GDP had a spectacular 2003 third quarter with 8.2% growth and a lower but still positive 2003 fourth quarter with 4% growth, new job creation was still fairly elusive. But in addition to tens of thousands of new jobs, Q1 2004 also produced another 4.2% GDP growth figure (5% was expected) and a productivity increase of 3.5%. Even the Manufacturing Sector, which had endured declines for 42 consecutive months well into Q1 2004, added 21,000 jobs in April 2004. So, are we finally out of the woods? Not so fast, partner! Readers of these Commentaries know better. But we'll get to that later. First we'll review the major MCAD financial story of Q1 2004 and then see how our Group of Nine (G9) MCAD vendors performed among all the economic news items mentioned in the foregoing. Major MCAD Financial News Item during the First Quarter of 2004 On March 14, 2004, a private equity group of Bain Capital, Silver Lake Partners and Warburg Pincus announced it had reached a definitive agreement with EDS to purchase UGS PLM Solutions, EDS' product lifecycle management subsidiary, for $2.05 billion in cash. The transaction, in which each private equity firm is an equal investor, represents the largest private equity investment ever made in a technology company. "This agreement validates UGS PLM Solutions' strategy and leadership, while positioning the company for continued growth," said Tony Affuso, president and CEO of UGS PLM Solutions. "Most importantly, the transaction further strengthens our industry-leading client care model. We are delighted to have the opportunity to partner with investors who have significant software experience and a growth-oriented long term approach to building value." "We look for these types of opportunities -- to invest in market leading businesses that create sustainable value. And, from its established position of global strength in the core design and engineering software market, UGS PLM Solutions is at the forefront of innovative software vendors that are creating real business value," said Joseph P. Landy, co-president of Warburg Pincus. For EDS' part, CFO Bob Swan commented "This transaction is part of the strategic plan we outlined last year to focus on our core information technology and business process outsourcing businesses. The divestiture significantly enhances our competitive position while strengthening our balance sheet." This acquisition was originally reported in MCADCafé.com through a Jeff Rowe editorial, EDS Selling UGS PLM Solutions. The MCAD Commentary authors' thoughts on this major development follow. In the past, there has been considerable consolidation among major high-end MCAD vendors, usually taking place at the time in the form of an industry leader acquiring a struggling older company. Examples of this include Dassault: CADAM & Matradatavision; PTC: ComputerVision; SDRC: Sherpa; and UGS: Applicon & Intergraph; just to name several. The ultimate business strategy in most cases was to migrate the customers of the acquired company to a main product line by leveraging business and technology knowledge stemming from the acquisition. MCAE companies tended to broaden their product offerings through acquisitions. Examples include MSC: MDI, MARC, UAI and CSAR; Ansys: CFX, ICEM CFD and CADOE; and Moldflow: American MSI, CPI and CMOLD. Some companies have used acquisitions to enter new fields within the overall "PLM tent". Examples include Dassault: Delmia; PTC: Mechanica (CAE): and SDRC: CAMAX (CAM). All these acquisitions followed the traditional general rationale for acquisitions as described in "EDA Vendor Strategies for Acquisitions", an editorial in EDACafe.com by one of the MCAD Commentary authors. All of the acquirers described in the above paragraphs were players within the MCAD community. However, the latest EDS/UGS acquisitions traveled a different path. In the late-80's, EDS was still a subsidiary of GM and had responsibility for re-engineering GM's CAD operations. Soon after EDS selected CADAM and Unigraphics as strategic software suppliers, IBM purchased CADAM. EDS responded by acquiring Unigraphics from McDonnell Douglas in 1991. EDS split off from GM in 1996. The company took ~15% of UGS public in 1998. In 2001 EDS acquired SDRC for ~$950 million in cash and took private the portion of UGS in public hands for $170 million. The resulting subsidiary EDS PLM Solutions translated into a market cap of $1.13 billion. The merger of SDRC and UGS into EDS PLM Solutions was a combination of two companies of nearly equally size with considerable product overlap and totally different architectures. EDS PLM Solutions quickly re-branded the non-core CAD products as Teamcenter while retaining the familiar Unigraphics (UGS) and I-DEAS (SDRC) CAD brands. EDS PLM Solutions then spent several years trying to bring the two independent product lines together in a single framework called NX. Last year, EDS PLM Solutions was re-named to UGS PLM Solutions prior to its divestiture from EDS. EDS sold UGS PLM Solutions because EDS developed a significant cash bind as well as the desire to divest itself of a division outside its primary focus. EDS may have been able to raise more cash if they had taken UGS PLM Solutions public. After all, the market capitalizations of other leading MCAD vendors are approximately as follows: Dassault Systèmes at $4.6 billion, Autodesk at $4 billion and Parametric Technology at $1.26 billion. However, the IPO route would have taken much longer and probably would have required significant continuing involvement of EDS, whereas the private sale was quick and clean. In recent years, EDS itself has been a very large provider of many types of services to UGS PLM Solutions customers, not just CAX services. Much of this revenue has been recorded in EDS business units other than as UGS PLM Solutions' revenue. The question is whether the newly-independent UGS will be able to recruit other system integrators and EDS competitors going forward, such as Accenture and Cap Gemini Ernst & Young ala Agile and MatrixOne? EDS is already entrenched in many of the larger UGS accounts. Further, EDS has considerable experience in supporting UGS products. This makes EDS a formidable competitor for any UGS related services business. EDS may continue to promote UGS products or become more software vendor neutral; time will tell. Some have said that the independent UGS PLM Solutions will now have greater flexibility and the ability to act more quickly. Will the new investors and future public shareholders really be more tolerant than EDS management became? Unlike EDS, it is not immediately evident that the new investors in UGS PLM Solutions can bring many product or customer synergies to bear. Little of the $2 billion will likely find its way into the coffers of UGS PLM Solutions. Are current investors likely to pony up more cash for operating expenses? Eventually, investors can only recoup the bulk of their large cash investment though a sale or IPO. The latter is the most likely path. On April 29, 2004, UGS PLM Solutions announced it will sell $550 million equivalent of senior subordinated notes due in 2012. Proceeds from the sale will help finance the $2.05 billion purchase of the company by BSW Holdings. Additional proceeds for the sale will come from a new senior secured credit facility and a cash equity investment by the buyout firms. MCAD Vendors' Performances in the First Quarter of 2004 We visit below the recent progress of the same group-of-nine MCAD (CAD & CAE) vendors covered in earlier MCAD Commentaries, starting with Table 1. For the first quarter of 2004 the group-of-nine's combined (total) revenue (measured in $US) was flat relative to traditionally strong fourth quarter of 2003, but it was up over 20% from the same period a year ago. Autodesk, Moldflow and ANSYS had particularly strong year-over-year performances. Autodesk and Moldflow also led in sequential quarterly performances. ESI Group had a very strong seasonal quarter in Q1 2004. Dassault reports in euros (€). Dassault revenues were down in Q1 2004 from its typically strong year-ending quarter, but its revenues were up a modest 4% in euros (€) year-over-year. Reported in $US, Dassault Q1 2004 revenues are up over 21% from the year ago quarter.
(Millions; U.S. $ except as indicated)  Figure 1 -- Quarterly Revenue of MCAD Vendors
(Millions; U.S. $)
 Figure 2 -- Relative Vendor Sizes by Revenue
Figure 1 graphically shows the trend of each vendor's reported revenues for the three quarters listed in Table 1. While all the vendors in this Commentary are part of the MCAD industry, they simultaneously overlap and complement one another. In some cases one vendor OEMs or sells the product of another. Hence the graph in Figure 2 shows relative size by revenue rather than by market share percentage. The vendors also have different business models according to which various percentages of end user sales are reported as revenues.
(ESI Group does not report quarterly earnings) Table 2 reveals that the combined group-of-nine sported improved total earnings both sequentially and year-over-year in Q1 2004. Much of the sequential and year-over-year Q1 2004 improvements in the total, is because of earnings improvements by Autodesk and PTC. Vendor by Vendor Performances in the 2004 First Quarter On May 4, 2004, ANSYS, Inc reported its results for the first quarter of 2004. Total revenues of $31.3 million were down sequentially almost 6% but up 27% from the same period in 2003. Some of the improvement year-over-year were due to the contribution of CFX acquired in late February 2003. License revenue in Q1 2004 was down 9% sequentially but up 31% from last year. Service and Maintenance revenue was down 2% from the previous quarter but up 23% over last year. Relative to last year, North America was up 21%, Europe 37% (29% constant currency) and International up 22% (20%). The currency exchange rate contributed ~$900K to the top line and $0.02 to net income. Net income was $7.1 million, down a tad from $7.2 million the previous quarter but up 150% from the $4.2 million in the same quarter in 2003. ANSYS made a point of explaining the adverse impact of purchasing accounting adjustments related to the CFX acquisition that amounted to a few hundred thousand dollars on the revenue side but a negative $0.04 on diluted EPS. Less emphasis was given to the fact that CFX had been generating ~$5 million in revenue per quarter. ANSYS President and CEO, Jim Cashman, commenting on the Company's first quarter results, said, "We are pleased by our overall financial performance in the first quarter and are especially encouraged that we were able to accelerate the closure of sales. This sales success, combined with the strength of our business model, directly contributed to first quarter results exceeding our earlier estimates. Our continued ability to deliver solid operating results illustrates that we are committed to our long-term mission of being the global innovator of engineering simulation and technologies." On February 26, 2004, Autodesk reported its results for the fourth quarter and the year for F2004, the period ending January 31, 2004. Autodesk reported fourth quarter revenue of $295 million, a 26% rise sequentially and a whopping 51% year-over-year.
The Manufacturing segment is the Inventor product line, while the Platform segment covers AutoCAD and AutoCADL product lines that sell to mechanical, architectural, GIS and EDA industries. Net income for the quarter was $58 million, compared with $6.4 million a year earlier and $26.2 in the prior quarter. The improvement was due mostly to a combination of increased revenue and increased margin. This quarter earnings included the positive effect of a tax benefit of $7 million from the successful completion of an IRS audit of a previous year, and a $3 million restructuring charge. Last year the earnings included both a $7 million restructuring charge and the positive effect of a tax benefit of $4 million from closure of a prior year tax audit. "I am pleased with the company's outstanding performance during the quarter," said Carol Bartz, Autodesk chairman and CEO. "We saw strong growth across all divisions and all markets. Today's results clearly demonstrate that our strategies are working, our product offering has never been better and, most importantly, our customers are satisfied." During the quarter, the company retired its AutoCAD 2000-based products. Upgrade revenues increased 160 percent over the fourth quarter of fiscal 2003, to $100 million. In addition to strong growth in upgrade revenues, revenues from new seats grew 17 percent over the fourth quarter of fiscal 2003. During the quarter, Inventor achieved a milestone reaching a total installed base of 258,463 licenses sold-102,371 commercial and 156,092 educational licenses. Autodesk boasted of having done this in half the time that SolidWorks did. Of course Solidworks was a rawboned startup without an installed base, distribution network, market presence, etc. Also Autodesk shipped Inventor to its AutoCAD Mechanical customers. In January, Solidworks announced they had sold 300,000 seats cumulatively. Autodesk has been heavily promoting its Subscription program since its introduction in 2001. Subscribers receive the latest product releases, incremental product enhancements, personalized web support direct from Autodesk technical experts and self-paced- training. The program offers a single annual billing and simplified license management. Multi-year contracts have also been added. Pricing was set to compare favorably with purchasing a product, paying for maintenance and purchasing an upgrade. Since the introduction upgrade fees have been increased and some products (Inventor Professional, Revit, Building Series and Civil Series) are now available only through subscription. Autodesk benefits from smoother and more predictable revenue flows. Subscription revenues increased 52 percent over the same quarter of the prior year, to $33 million. Subscription bookings increased 44 percent over the fourth quarter of fiscal 2003. With the help of outside consultants, Autodesk has been very focused on improving margins. Despite a solid performance in its third quarter, the company almost immediately announced a workforce reduction of between 550 and 650 employees. The estimated restructuring charge was $37 million. The company set a target operating margin range of 18 to 20 percent on an annual basis. In the fourth quarter operating margins improved 19 percentage points over the fourth quarter of fiscal 2003 to 20 percent on a GAAP basis. On April 29, 2004, Dassault Systèmes (DS) reported its results for the first quarter (in euros). Total revenue was €176 million, up 4% year-over-year but down nearly 23% from the seasonally strong fourth quarter of 2003. Software revenue was up 2.6% from last year but down 24% from the previous quarter. On a product segment basis year-over-year and sequentially, PDM revenue was up 15% and down 44%, respectively. Process excluding PDM was up 1.7% and down 22% and Design (SolidWorks) was up 6.9% and down 3.3%, respectively. Net income was €28.2 million, up 26% from the prior year but down 51% from the previous quarter. As mentioned, DS reports its financial results in euros. As a worldwide company, DS does significant business in both US and Asian currencies, as well as in euros. If one simply converts all figures to $US, DS Q1 2004 revenue is up 21.5% year-over-year and down nearly 19% from the prior sequential quarter. "The first quarter was a period of very solid performance for Dassault Systèmes. Our financial results exceeded our objectives, with revenue, operating margin and earnings per share coming in higher than targeted. These results are mainly attributable to our better than anticipated performance in Europe. We continued to benefit from our diversification strategy, as illustrated by the good growth of our PDM business. SolidWorks also had a good start to the year, with revenue increasing 25% in U.S. dollars during the first quarter. We are raising our revenue and earnings growth objectives for 2004 to reflect the fact that our first quarter came in above our objectives," commented Bernard Charles, President and Chief Executive Officer of Dassault Systèmes. During the first quarter DS entered into a strategic partnership with Boeing for the development of the 7E7 and other future projects. Boeing's focus is on achieving a 50 percent reduction in total costs versus the 777, significantly shortening the manufacturing cycle, and reducing operating fuel requirements by 20 percent On April 16, 2004, DS announced a partnership with Schneider Electric. DS has introduced a new product line, DELMIA AUTOMATION, focused on control engineering that will automatically generate certified code that will control and monitor a line in production. Schneider Electric through a new company, Dextus, will sell DELMIA Solutions, and develop Consulting and Services for the Automation and Production Engineering (production process planning, production assembly processes, and factory simulation) markets. On April 15, 2004, RAND and DS announced plans to form a joint venture, RAND Americas, to focus on increasing sales of DS PLM software in North America. According to this agreement:
RAND Worldwide will transfer up to 55 of its employees to Rand Americas. Brian Semkiw, CEO of RAND Worldwide, will now be CEO of Rand Americas. DS will pay Cdn $11 million DS will reschedule RAND Worldwide loan payments. RAND has had considerable financial difficulty. It lost $50 million on revenues of $182 million in 2003, down from $243 million in 2002. DS has already invested $25 million in RAND. The signing of RAND, who had been the Master VAR for PTC, was considered a coup at the time. In May 2003 RAND filed suit against PTC, alleging breach of distribution and reseller agreements. PTC has since countersued. DS has also had problems with other North American IBM business partners (BPs). Several years ago, there were four major IBM BPs, namely InCat, MatraDatavision, L&H Consultants and AES. InCat is still going strong but sells competing CAD systems and has a significant engineering service business. IBM acquired MatraDatavision. L&H Consultants was acquired and largely given back by Cenit, the leading German BP. AES was acquired by MSC.Software who closed down much of the operation a year later. On March 11, 2004. ESI-Group reported the results for its fourth quarter ending January 31, 2004. Total revenue was €18.3 million, up 7% year over year and up dramatically 93% sequentially due to seasonality. Most of the revenue, 81%, was license revenue which was up 8.8% and 137% respectively. 79% of total revenue is generated outside of France. Europe accounted for 50%, Asia/Pacific for 34% and America for 16%. Figures for net income were not given. For the first half of F2003 ESI Group lost €2.4 million. The major acquisitions made in 2002 and 2003 accounted for 15% of the ESI-Group's revenue growth and took part in the strengthening of the Group's position on the American market. However, taking into account the impact of software acquisition costs write-offs and the slight delay in expected sales, could create an operating loss in 2003/4, though the EBITDA would remain positive. On December 17, 2003, the ESI Group acquired the intellectual property rights of EASi's CAE software and its flagship product, EASi-Crash. This follows the establishment of a strategic partnership between the two firms in software integration and engineering services last summer. On January 28, 2004, the ESI-Group announced the acquisition of software products and associated personnel from CFD Research Firm (CFDRC) as well as a long-term agreement for collaborative development. Alain de Rouvray, Chairman and CEO of ESI Group, said: "Highlights of the year included an excellent stability of the installed base, a highly recurrent license revenue (88%), a return to positive organic growth at constant exchange rate (+3% versus -4% in FY2002) and a satisfactory performance of recent acquisitions. What makes revenue growth especially significant is that it is supported by increased activity and the gradual adoption of 2G/3G solutions at OEMs and Tier 1 suppliers. In fact, overall sales were mainly affected by slowing growth at the services arm, particularly in the United States, where research projects turned out to be less significant than expected. This overshadowed the excellent results for the installed base (excluding acquisitions) in Asia and a relatively stable performance in Europe." On March 26, 2004, ESI Group announced that it is set to merge ESI Group with ESI Software in order to simplify its administrative, legal and accounting organization with the purpose of optimizing flow and staff management. On April 22, 2004, Moldflow Corporation reported its results for the third quarter of F2004. Revenues were $13.3 million, an increase of 25% sequentially and 40% year-over-year (30% in terms of constant currency). On a regional basis, revenue in the Americas represented 39% of Moldflow's total revenue for the third quarter of fiscal 2004, while revenue in the Asia/Pacific and Europe regions represented 31% and 30% of total revenue, respectively. In total, 111 new customers were added during the quarter. Net income was $509K, a slight drop from $595K in the previous quarter but a reverse of the loss of $584K a year ago. On January 26, 2004, Moldflow acquired American MSI, a leading U.S. manufacturer of hot runner control systems, for $7.3 million in cash and 349,288 shares of Moldflow's common stock. For calendar year 2003, American MSI had revenue of approximately $9 million. American MSI sells their products through a combination of over 60 distributors and representatives managed by five direct regional managers. Moldflow product revenue was $7.6 million, up 48% sequentially and 65% year-over-year. Manufacturing Solutions (including $2.2 million from sales of AMSI) contributed 42% of product revenue compared to 14% in the same quarter of the prior year. Design Analysis accounted for 59% of product revenue and 73% of total revenue. Service revenue was $5.7 million for the quarter, up 17% from the same quarter in fiscal 2003 and up 4% from the preceding quarter. Year over year the Americas were up 115%, Europe was up 19% and Asia Pacific was up 11%. On a sequential basis the Americas were up 123%, Asia Pacific up 25% and Europe down 19%. American MSI (which is U.S. only) contributed $2.2 million in revenue and $470K in operating profit. Currency issues had a 10% impact year-over-year and 2% impact sequentially on revenue, and a counterbalancing 9% impact on expenses. Roland Thomas, president and chief executive officer of Moldflow said, "We continue to see positive economic trends across the Asia Pacific and Europe regions, with the beginning of improvement in the Americas. Further, this quarter we completed the acquisition of one of the market leading providers of hot runner process control systems, American MSI Corporation. With this acquisition, we can now deliver solutions that optimize the production processes at each of the critical control points that directly affect the quality and cost of manufacture for injection molded plastic parts today. With the acquisition of American MSI and the integration of its sales and distribution capabilities, we believe the time is appropriate to begin to establish separate business units along the lines of our Design Analysis and Manufacturing Solutions product lines." On April 28, 2004, MSC.Software Corporation reported its results for the first quarter. Revenue was $68.1 million, down nearly 2% sequentially but up 11% year over year. Software license revenue of $40.6 million was down 3.7% and up 10%, respectively. Software maintenance revenue was $14.9 million, up 15%, and service revenue was $12.5 million, up 9%. America's contribution of 29% of total revenue was down 15%, Europe's 37% contribution was up 30% (13% in local currency) and AP's 34% contribution was up 31% (10% in local currency). Income from continuing operations for the first quarter was $2.8 million compared to $1.8 million in the first quarter last year. Total net income was $2.8 million versus $1.1 million. The quarter's net income included a one time contribution of ~$1.5 million due to an earn-out from a debt related to the AES acquisition. In late February MSC.Software acquired assets of SOFY Technologies Corporation, provider of software tools for the generation and visualization of CAE models used by manufacturing companies worldwide. Assets included all intellectual property and personnel related to the development and implementation of the SOFY, RADE, VRADE and SPRINT product lines. Terms of the acquisition were not disclosed. "The MSC.Software team around the world remains very focused on executing the plan for profitable revenue growth and the 11% topline growth in the first quarter speaks very loudly to their combined efforts," said Frank Perna, chairman and CEO, MSC.Software. He added, "While revenue results for Asia-Pacific and Europe were quite strong, we continue to work very hard to overcome the difficult enterprise software environment in the Americas. The combination of pricing pressures and a generally difficult environment for software purchases has contributed to a decline in our revenue in the Americas. However, we have seen an encouraging trend from both new sales of MasterKey token licenses as well incremental investments in more tokens from existing customers and we feel that this positions us well for growth in our software business for the long term." The Company has delayed the filing of its Form 10-K pending an independent review by outside counsel of certain claims made regarding information relating to the accounting for stock options of a departing employee of a foreign subsidiary. The initial phases of this review have been completed, and as soon as possible after this review is completed, MSC.Software will file its Form 10-K. The company's Form 10-Q for the period ended March 31, 2004 will not be filed until the Form 10-K for the year ended December 31, 2003 is filed. On April 21, 2004, PTC announced its results for its second quarter of fiscal 2004. Total revenue was $165 million, up 5% compared with $157 million in the previous quarter and down 4% from $171 million for the same period last year. License revenue was up 17% sequentially but down 8% year-over-year. MCAD license revenue was up 28% sequentially but down 5% year-over-year. Total MCAD revenue accounted for 75% of total revenue. In the quarter 4,000 MCAD seats were sold at an as-sold-price (ASP) of $9,600. There were 574 new customers and 10 deals greater than $1 million. In the quarter 7,000 seats of Windchill were sold at an ASP of $1,650. There were 84 new customers. Revenue from existing customers accounted for 89% of the total in each segment. While the number of seats of Windchill has approached the number of MCAD seats, the number of Windchill customers is only 3% of the number of MCAD customers.
An estimated 52% of existing Pro/E customers have migrated to Pro/ Engineer Wildfire during its first year of availability. PTC recently announced availability of Wildfire 2.0. On the PDM side, Windchill Link license revenue grew 32% sequentially and accounted for 56% of Windchill license revenue. Revenue in North America, 33% of total, was down 3% sequentially and 19% year-over-year. Revenues from other geographies (in US$) were up. Revenue from Asia was up 18%. Five of the top 10 deals in the quarter were in Japan. In constant dollars Europe was down 9% and Asia down 2% year-over-year. Licenses from VARs contributed $14.2 million, a 6% sequential increase. VARs have only recently been able to sell Windchill. Only about 10% out of 250 VARS are currently selling Windchill. They generated roughly $1 million in the quarter. Net income for the quarter was $3.2 million compared to a net loss of $15.2 million a year ago and compared to a net loss of $26.5 million in the prior quarter. This quarter includes restructuring charge of $16.7 million as well as a one-time benefit to cost of service of $5 million. There was a $21.6 million restructuring charge in the prior quarter. The operating margin was 15%. The long range goal is to reach 20% to 25% range over 3 years. "Our second quarter results demonstrate substantial progress in the execution of our business strategy," said C. Richard Harrison, president and chief executive officer. "Midway through fiscal 2004, we are ahead of schedule on our two most important financial goals for the year: returning to profitability and achieving sequential revenue growth. With an improving customer spending environment and almost all of our restructuring activities behind us, we are well positioned to deliver additional earnings growth in the second half of the year." On April 28, 2004, Tecnomatix Technology Ltd. announced its results for the first quarter. Revenues were $24 million, down 5.3% sequentially but up 16% year-over-year. Net income for the quarter was $328K, up considerably from a loss of $4.4 million in the previous quarter and up from a loss of $1.5 million last year. Last year loss included a $1.5 million restructuring charge and higher cost of software goods despite lower revenue. North America with 35% of the revenue grew 31%, Europe with 48% grew 5% and Far East with 17% grew 23%. The Mechanical Division accounted for $20.5 million in revenue up 26%, while the Electronic Division contributed $3.4 million down 21% year over year. Stock Prices Table 5 provides quarter-over-quarter and year-over-year of quarter-ending stock prices of the covered vendors.
As shown in Table 5 and Table 6, the combined stock prices for the MCAD vendors out performed the major stock indices in terms of year over year growth and matched the slight decline from last quarter. Combined, they were seventeen percentage points higher than the tech-heavy NASDAQ. AutoDesk, PTC and Tecnomatix stock valueations grew by over 100%. EDS and MSC.Software substantially under performed the market indices at ~13% growth.
 Vendor-by-Vendor Future Guidance Based on the results of the first quarter and assumptions relating to currently-anticipated investments and expenditures for the remainder of the year, Ansys currently projects EPS in the range of $1.61 - $1.65 for 2004. Adjusted diluted earnings per share will be in the range of $1.76 - $1.80 up from previously forecasted adjusted EPS in the range of $1.69 - $1.70. CEO Jim Cashman added, "While our first quarter performance enables us to become more optimistic about our prospects for 2004, we remain committed to a long- term focus and the importance of continued investment in our global sales and marketing infrastructure, expansion of the depth and breadth of our product and service offerings and the strengthening of the business infrastructure to support our growth initiatives." In summarizing the first quarter and the Company's expectations for the balance of 2004, Mr. Cashman said, "We believe that our product offerings and financial position have never been stronger. However, we still have a number of challenges ahead of us. The second and third quarters have traditionally been the most difficult and we do not envision that changing in the near future. In light of this, we will continue to concentrate our energy on providing solutions for total product innovation through simulation and continuing to improve our sales productivity." Autodesk expects net revenues for the first quarter of fiscal 2005 to be in the range of $240 million to $250 million. This would be a 16% increase compared with $211 million for the first quarter in F2004. Earnings per diluted share for the first quarter of fiscal year 2005 are expected to be in the range of $0.12 to $0.17 on a GAAP basis and $0.16 to $0.21 on a pro forma basis. These earnings would compare to $0.07 for both GAAP and pro forma earnings in 1QF04. The company remains committed to achieving its target 18 to 20 percent operating margins for subsequent annual periods beginning in fiscal year 2006. The company should be helped in achieving these targets with the planed retirement of AutoCAD 2000i during the year, just as retirement of AutoCAD 2000 in January 2004 helped drive F2004 revenue. "We are very optimistic about the coming year," said Bartz. "Our product line up has never been better. We have significant new releases of all major products coming at the same time or earlier than they were released last year, beginning with the new release of our AutoCAD 2005 family of products next month. In addition, we plan to introduce several significant new products, including Civil 3D for our Infrastructure customers, and new Linux-based releases for our Media customers. We have just begun our restructuring efforts and are firmly committed to improving profitability. We are on track to perform and execute. As a result, I have never been more enthusiastic heading into a new fiscal year." Dassault (DS) is revising upward its revenue forecast for 2004 to reflect higher activity in Q1 and its new joint venture with RAND. The new objective is to grow revenue by ~8% and EPS to between 12% and 13%, both stated in constant currencies. DS is assuming an exchange rate of $US125 per €. This translates into revenue of €785 million or 4% growth. For the second quarter the objective is to grow revenues at 2% to 5% in constant currencies or €180 million to €185 million. EDS/UGS gave no guidance. ESI Group gave no guidance. Alain de Rouvray, CEO of ESI Group, said: "We have significantly strengthened our position at several OEMS and Tier 1 suppliers, particularly in the automotive industry. This confirms the relevance of our strategy and raises our visibility at other car manufacturers that will allow us to benefit from a prescription effect with other Tier 1s and their suppliers. Moreover, our recent acquisitions position us in new sectors, such as the biotechnologies and the microelectromechanics (MEMs) industries, where tests are particularly costly and delicate and the physical part is hard to check. Lastly, this year we expect to start marketing the first CAAV5 solutions developed in partnership with Dassault Systèmes. All these factors are part of the strengthening of ESI Group's leadership and its utmost role in the adoption of PLM solutions." Based on current visibility, Moldflow expects revenue for the fourth fiscal quarter of 2004 to be between $14.1 million and $14.7 million ~45% growth. This includes an expected ~$3.2 million from AMSI. For the same period, earnings per diluted share are expected to be in the range of $0.07 to $0.11. Based on these anticipated fourth fiscal quarter results, Moldflow expects revenues for the full 2004 fiscal year to be in the range of $47.5 million to $48.2 million, with earnings per diluted share to be in the range of $0.21 to $0.25. This compares to $36.6 million in F2003, a 30% increase. "As we look ahead to our fourth fiscal quarter and the upcoming fiscal year, we are optimistic that economic growth in our end-user markets will continue and result in our customers making strategic investments to increase productivity and profitability, which will result in continued growth for our business. We believe that the integration of the American MSI solutions into our product offering, the additions we have made to our Design Analysis Solutions this year, and a refocused business leaves us well positioned to seek out growth opportunities in our global market." Based on current visibility, MSC.Software expects second quarter revenue to be in the range of $65 million to $70 million and earnings to be in the range of $0.06 to $0.08 per diluted share. The Company expects revenue for FY 2004 to be in the range of $260 million to $280 million and earnings to be in the range of $0.35 to $0.45 per diluted share. PTC's revenue forecast for its third quarter of fiscal 2004 is between $160 million and $170 million. PTC expects to complete its cost reduction plan during the third quarter, and as a result, will incur a restructuring charge of approximately $5 million for the quarter. Total operating expense, including this restructuring charge, is expected to be approximately $150 million. The Company expects earnings per share on a GAAP basis to be between $0.02 and $0.06. The financial goals for the year are operating profit in each quarter minus restructuring charges, quarterly net profit by Q4, sequential revenue growth and year over year revenue growth in 2H F2004. Oren Steinberg, chief financial officer and executive vice president of Tecnomatix Technologies said, "We continue to make steady progress in improving our financial performance and creating value for our shareholders. Based on our current plans and visibility, we expect to achieve revenue growth of approximately 15% for the full year 2004 over 2003, with improved profitability on a quarterly basis." In response to a question, the firm said it expects 15% growth year over year in each quarter. Table 7 provides a summary of the numerical forecasts that are available.
Conclusions from the 2004 First Quarter's Numbers The year-over-year quarterly improvement of over 14% in Q1 2004 for the Group-of-Nine MCAD vendors is not unimpressive. After all, the Group squeezed out only a meager 1.6% combined revenue growth in 2003 over 2002. Better yet was the Group's year-over-year earnings improvement of nearly 80% in Q1 2004, far better than the Group's 34% earnings improvement in 2003 over 2002. The Q1 2004 earnings results probably help drive the Group's combined year-over-year equity prices at a pace greater than that of the Nasdaq. Nevertheless, the relative performances of individual vendors in the Group still vary widely and much work remains to be done. And as the change of ownership of UGS PLM Solutions shows, the MCAD industry is nothing if not dynamic. Macroeconomics & Geopolitics To better understand the recent worldwide and national environments in which the MCAD Industry is operating, let's review recent changes in the state of macroeconomics and geopolitics. To be sure, recent months have produced some welcome relief on the job creation front in the US, after three years of disastrous job losses. Indeed, March 2004 recorded 337,000 new jobs according to the US Labor Department. Even though April's result was lower than the March figure by some 50,000 jobs (a slight worry), job growth has averaged 217,000 a month during the January to April 2004 period. As Chart 1 below shows, nonfarm payrolls are up 1.1 million since August 2003. But Chart 1 below also shows that we still have another 1.5 million jobs to recover, just to get back to the level of January 2001. While getting back to that starting line would be refreshing, say by the end of 2004, we must not forget that just to keep up with US population growth during those same four years, the country needed to add 225,000 new jobs each and every month for those same 48 months. So the "jobs hole" we're in now is actually something like 12.4 million jobs compared to four years earlier! Is it possible to add 225,000 jobs every month? Yes, that was the average number of jobs added during the 96 months between January of 1993 and December of 2000. The unemployment rate, 5.6 percent, and the number of unemployed persons, 8.2 million, were essentially unchanged in April 2004. The unemployment rate has been either 5.6 or 5.7 percent since December 2003. The number of people unemployed for 27 weeks or longer declined by 188,000 to 1.8 million in April. But long-term unemployed persons account for 22.1 percent of the total 8.2 million unemployed. The share of the unemployed who have been jobless for more than six months has now remained at or above 20% for 19 consecutive months, a new and dubious record. And lest we forget during the euphoria of the recent uptick in job creation, the US jobs data also include millions of Americans who now "have jobs" but who are "underemployed", working at lower-paying jobs for which they are overqualified or working part-time because they can't find full-time work. For those fortunate folks who do have jobs, wage and salary income, adjusted for inflation, has risen only 0.6% since 2001. US Manufacturing jobs have been hard hit in these past three years, dropping 7.8% since the 2001 recession - a decline more than three times larger than the 2.2% dip during the two years following the 1990-91 recession, according to a comprehensive new study released on May 6, 2004 by The Conference Board. Yet employers have extracted enough increased productivity from remaining workers to see shipments from factories increase 3.8% in March 2004 alone. Indeed, US industrial manufacturers expect to reduce their overall workforce by 1.9% over the next 12 months, according to the Q1 2004 PricewaterhouseCoopers Manufacturing Barometer (reported April 28, 2004 in MCADCafé.com).  Of course, these days Americans, and the peoples Americans affect around the world, have a few other things to worry about. There remain plenty of dark clouds hanging over us all. First but probably least important, the stock market averages have not followed the recent upticks in jobs. On May 10, 2004, all three of Wall Street's main market gauges fell more than 1 percent to new lows for the year, and the Dow Jones industrial average (DJIA) fell below 10,000 for the first time since mid-December 2003. The Nasdaq composite index fell below 1900. Through May 10, the DJIA was off 4.4 percent for the year while the Nasdaq was down 5.4 percent. More importantly, during the first four months of 2004, the federal deficit continued its inexorable growth. The US government's total national debt eclipsed $7 trillion as of February 17, 2004, with huge yearly budget deficits forecast for years to come (well over $500,000,000,000 this year alone). The pattern over the last 27+ years shown in Chart 2 is revealing (Source: US Department of Treasury, Bureau of Public Debt):  Chart 2 - U.S. Federal Budget Deficit by Year
The Bush Administration is already back at the public trough for another $25 billion for the war in IRAQ to supplement the $87 billion it extracted from the hapless US taxpayers last Fall. Everyone knows that this extra $25 billion for the war in IRAQ won't be enough even for this year. Indeed, there are some sobering and scary facts set out in the May 9, 2004 article by James Sterngold, Chronicle Staff Writer of the San Francisco Chronicle, "War tab swamps Bush's estimate: Spending projection: $150 billion by 2005". Some key paragraphs follow. "With troop commitments growing, the cost of the war in Iraq could top $150 billion through the next fiscal year - as much as three times what the White House had originally estimated. And, according to congressional researchers and outside budget experts, the war and continuing occupation could total $300 billion over the next decade, making this one of the costliest military campaigns in modern times. The Pentagon says its monthly costs for Operation Iraqi Freedom shot up from $2.7 billion in November to nearly $7 billion in January, the last month for which it has provided figures. Since then, the number of troops has jumped by 20,000 to 135,000, and the bloody insurgency has grown. Both Democratic and Republican lawmakers have started to express deep concern over the costs and the way in which the Bush administration is choosing to cover them. They contend that the White House has been relying on budgeting stratagems to conceal the overall expense, at least until after the election in November. By contrast, Operation Desert Storm, begun in 1991 after Saddam Hussein's armies invaded Kuwait, cost about $84 billion, adjusted for inflation, according to the Center for Strategic and Budgetary Assessments, a nonpartisan Washington think tank. But because the United States was part of a broad coalition of wealthy countries, including Britain, France, Germany, Japan and Saudi Arabia, about 90 percent of those costs were paid for by America's allies. In this fiscal year, the Defense Department's regular budget totals about $401 billion, and the White House has requested $423 billion for fiscal 2005, which begins Oct. 1. All the costs of military operations in Iraq and Afghanistan are over and above those amounts. Also, neither the regular defense budgets nor the supplemental budgets include the costs of reconstruction." Gee, do you think the deficit this year will only be $500,000,000,000? Meanwhile, the whole situation in IRAQ has deteriorated badly over the last four months. The number of US soldiers deaths and injuries is escalating, with April 2004 the bloodiest month by far in the entire 13 months-to-date of this ill-advised, pre-emptive war. Of course, Americans are not supposed to see pictures of flag-draped solders' coffins. And as if the US aggression itself was not enough, now we all must endure the widespread evidence of US inflicted torture cases (complete with photos and videos) in the Abu Grahib prison in IRAQ. "Even some of the most vociferous enthusiasts of Mr. Bush's plan to make Iraq the cornerstone of a freer, more democratic Middle East are now conceding privately that their early optimism has been shattered." Said David Sanger in the New York Times on May 10, 2004. "If Mr. Bush has a strategy for undoing that damage beyond the television appearances he made on two Arab networks last week, White House officials freely admit they cannot describe it." "I'm not sure such a strategy is possible," one senior White House official said late last week. "The facts are simply not with us." According to a report published late Monday May 10, 2004 by ALEXANDER G. HIGGINS, Associated Press Writer, abuse of Iraqi prisoners by American soldiers was widespread and routine - contrary to President Bush's contention that the mistreatment "was the wrongdoing of a few." According to coalition intelligence officers cited in a Red Cross report disclosed Monday May 10, US officers mistreated inmates at the notorious Abu Ghraib prison by keeping them naked in totally dark, empty cells. Red Cross delegates saw US military intelligence officers mistreating prisoners under interrogation at Abu Ghraib and collected allegations of abuse at more than 10 other detention facilities, including the military intelligence section at Camp Cropper at Baghdad International Airport and the Tikrit holding area, according to the report. The 24-page document cites abuses - some "tantamount to torture" - including brutality, hooding, humiliation and threats of "imminent execution." The report went on, "Since June 2003 over a hundred 'high value detainees' have been held for nearly 23 hours a day in strict solitary confinement in small concrete cells devoid of daylight. Their continued internment several months after their arrest in strict solitary confinement constituted a serious violation of the third and fourth Geneva Conventions." The Red Cross has emphasized that its report was only a summary of its repeated attempts in person and in writing from March to November 2003 to get US officials to stop abuses. Those earlier interventions by the Red Cross far preceded the Pentagon's decision to investigate after a low-ranking US soldier stepped forward in January 2004. On May 11, 2004, Maj. Gen. Antonio Taguba testified before the Senate Armed Services Committee. Taguba is the Army general who first investigated prisoner abuse in Iraqi prisons. According to a May 11 AP article by PAULINE JELINEK, entitled, "Taguba Cites Mismanagement in Iraq Abuse", Taguba told Congress that the mistreatment resulted from faulty leadership, a "lack of discipline, no training whatsoever and no supervision" of the troops. Taguba also left open the possibility that members of the Central Intelligence Agency as well as armed forces personnel and civilian contractors were culpable in the abusive treatment of prisoners at the Abu Ghraib prison."A few soldiers and civilians conspired to abuse and conduct egregious acts of violence against detainees and other civilians outside the bounds of international laws and the Geneva Convention," Taguba testified. While Saddam Hussein was captured months ago (with zero beneficial effects to either the US or IRAQ), WMD have not been found. An NBC-Wall Street Journal Poll reported on May 6, 2004 reveals that the majority of US voters now say the removal of Saddam Hussein was not worth the cost financially or in casualties caused by the war. Outside IRAQ, other world hot spots threaten to consume more U.S. soldiers and forces are stretched thin. US soldiers' tours are being extended well past the promised lengths of service. US and NATO casualties in Afghanistan also continue. Meanwhile, the poppy plant explosion (can you say, "Heroin"?) also continues in Afghanistan. Nuclear proliferation once more raises its ugly head. Former national allies are now political foes of the U.S., and NATO and the UN are the weaker for it. Bin Laden remains at large, and Al Qaeda terrorist attack warnings are frequent domestic occurrences, with actual terrorist attacks a reality elsewhere. With only a few exceptions, corporate fraud remains unpunished. Cyber-attacks on the Internet are increasing. US utility prices are now much higher due to illegal price manipulation by power market brokers, yet consumers are stuck with the bill. Natural gas prices are rising once more. The price of crude oil is the highest it's been in 13 years! Gasoline prices in the US are at record levels. Milk prices are going way up. Now Alan Greenspan is threatening to raise interest rates because of impending inflation. Meanwhile, over 40 million people in the US have no health insurance. In the meantime, outsourcing of US jobs to foreign countries continues, often with the blessing of the Administration and corporate executives. US House of Representatives Democratic Leader Nancy Pelosi reported on April 27, 2004, "The Republican leadership in the House refuses to schedule a vote on the bipartisan Crane-Rangel manufacturing bill, which would lower taxes for American manufacturers and keep good paying jobs in the United States. Democrats have launched a discharge petition to force a vote on this bill." In a separate action on April 28, 2004, the Administration rejected a petition from US manufacturers that China's fixed currency is a violation of global trading rules. Meanwhile the "No Child Left Behind" education program has been under-funded by $27 billion. Evidence now exists that the US has begun to lose its worldwide dominance in critical areas of science and innovation, according to federal and private experts (See the May 6, 2004 article in the New York Times by William J. Broad, "US Is Losing Its Dominance in the Sciences"). "The rest of the world is catching up", according to John E. Jankowski, a senior analyst at the NSF. See Chart 3 below for just one set of data.  Chart 3 - Articles Published
While US federal deficits have ballooned to unprecedented levels, dozens of states across the country also face budget deficits correctable only by regional services' cuts and higher local taxes. New best-selling books with incontrovertible evidence abound from Bob Woodward, Richard Clarke, John Dean and Paul O'Neill, revealing countless Administration failures, and the outpouring of the current 9/11 Commission, are similarly disturbing. Overall, economic enervation & geopolitical uncertainty continue to reign. ####
Comments? Feedback? Tell us what you think about this topic, or share any additional information you may have on the subject! Submit your comments to: MCADCafe Editor. About the Authors Since 1996, Dr. Russell F. 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 industry 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 served 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 executive positions at Applicon, Aries Technology, CADAM, MicroCadam and a stint at IBM. Among his other current assignments, Jack became the Managing Editor of EDACafe Weekly as of March 1, 2004. Since May 2003 the authors have now published a total of fourteen (14) articles on MCAD, PLM, EDA and Electronics IP on IBSystems' MCADCafé and EDACafé. Further information on HENKE ASSOCIATES, and URL's for past Commentaries, are available at http://www.henkeassociates.net. |
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