In the overall high tech sector, what do the broad Q1 2003 financial results tell us about the status of the three-year technology slide that began with the March 2000 NASDAQ meltdown? Despite the current ~9 percent unemployment rate in places like Silicon Valley, there are some fresh business statistics from Q1 2003 that provide optimists with hope for an eventual high tech turnaround. US Government Commerce Department figures show a Q1 2003 up-tick of 15 percent in business purchases of computers and software. Earnings for 60 tech companies in the S&P 500 Index are up 16% in Q1 2003 vs. Q1 2002, according to Thomson First Call.
However, gloom still grips many high tech companies. The gains mentioned above are from just a few companies, analysts speculate. Modest improvements here and there still leave the vast majority of high tech companies in the doldrums, because the protracted market slide has been so severe.
Indeed, Oracle Corp. Chairman & CEO Larry Ellison has been quoted as saying that the software industry will never again be as strong as it was in the late 90's. Others are more sanguine, since software spending is almost half of every dollar spent on technology these days. Most observers believe, however, that a high tech recovery will follow any general economic recovery, which probably means (notwithstanding promised "stimulus packages" from the White House) that the real high tech rebound and more high tech jobs are 12 to 24 months away.
Is the picture in the MCAD portion of high tech any better?
To gain a better understanding of what this means for the MCAD sector, let's take a closer look at some of the top players in this category. MCADcafe.com currently tracks the financial performance of eight (8) public companies in the Mechanical CAD market. Four of these companies (Autodesk, Dassault Systemes, PTC and EDS PLM Solutions) represent approximately 85 percent of the total revenue in this grouping, and each of these four companies offers a wide array of software and services products across the entire design to manufacturing space.
The remaining four public companies (ANSYS, Moldflow, MSC.Software and Tecnomatix) offer specialized software/services products in specific MCAD niches and together they create the remaining 15 percent of the total group-of-8's revenue. Indeed, these latter four companies frequently partner with the initial four to provide end- customers with broader solution suites.
The combined worldwide total annual revenue of these eight companies is nearly $4 billion, not an insignificant sum. But it is, in fact, less than 3 percent of the $150 billion spent annually on all types of software. So why study MCAD companies at all? The key to MCAD's importance lies in the leverage its users apply to create the everyday durable goods with which we are all familiar: automobiles, trucks, military gear & weapons, appliances, farm & construction equipment, aircraft & aerospace vehicles, etc. In short, MCAD is arguably responsible for enabling today's manufacturing industries, which are the centerpieces of creating real productivity and wealth in every modern economy.
Understanding the comparative MCAD revenue content of various vendors is not merely academic. For example, it helps observers better understand the likely future competitive MCAD strength of each vendor relative to its peers in such areas as amount of money available for R&D, for potential new acquisitions, for financial stability to weather economic cycles, and for other key business factors.
In comparing financial performances of the four largest MCAD companies tracked by MCADcafe.com, it's
instructive to account for the actual MCAD content of each.
For example, the revenues of Dassault and PTC could arguably be considered 100% MCAD in nature, whereas Autodesk's total revenue is only partially made up from its business in MCAD. Some Autodesk revenue (~15%) stems from its Discreet segment, which provides systems and software for creating and animating imagery. Even in the remaining 85% of Autodesk's total revenue, derived from its Design Solutions Segment, is divided among solutions for Manufacturing, GIS, the building industry, and the platform technology group. Only the solutions of the Manufacturing Group, (Inventor, AutoCAD Mechanical, Mechanical Desktop, Streamline, Point A, etc.) might be thought of as "pure" MCAD revenue.
EDS' MCAD revenues are created by EDS PLM Solutions, the mid-2001 union of SDRC and UGS. While EDS PLM Solutions represents less than five percent of EDS' total revenues ($21.5 billion in 2002), EDS PLM Solutions annual revenues are right there at similar levels as the world's other MCAD revenue leaders Dassault and PTC.
For purposes of our discussion, we'll consider the revenues from the remaining four public companies (ANSYS, Moldflow, MSC.Software and Tecnomatix) to be 100% MCAD.
So how did the eight MCAD Companies do in calendar 2002?
In an industry striving for double-digit compounded annual growth rates (CAGR), clearly 2002 was not kind to most of these companies (see Figure 1). Indeed, anything better than "flat with 2001 revenues" might be viewed as a minor 2002 victory. MSC.Software was the only company with more than double-digit percent growth in 2002, driven primarily through it acquisitions, but the company's 2002 net income was way off from 2001.
As shown in Figure 1, only three of the eight companies improved their net income performances in 2002, with Dassault Systemes leading the pack with $142 million. Notably, ANSYS continued its steady multi-year growth of both revenues and net income, apparently unperturbed by the harsh economic times.
|% of 2001||
|EDS PLM (est.)||935||*|
Figure 1 – Eight public MCAD Companies' Yearly Financial Performances2
1 The revenues for the Design Solutions Segment of Autodesk, which contains Manufacturing Solutions' MCAD revenue, increased 6% in 2002 vs. 2001.
2 For companies whose fiscal years did not end on December 31, 2002, the four quarters' results prior to the last reported quarter, were used here.
* EDS PLM was formed in mid-2001. Speculation is that total EDS PLM revenues in 2002 (~$935 million) are considerably less than the combined UGS/SDRC revenues would have been for all of 2001.
Another key parameter that observers use to compare companies, is the ratio of market capitalization to ttm (trailing twelve month) revenues, which provides some insight into how the stock market values the "qualities" of the company and its financial performance.
How did the MCAD companies in our group-of-8 fare recently in this category (see Figure 2)?
Figure 2 – Eight public MCAD Companies' Yearly Price/Sales Ratios2
How about the most recent quarterly performances of our group-of-8?
Alas, for the four largest MCAD companies, their latest quarters' results revealed that their concerns are not yet over, if one compares the latest year-over-year quarterly results for revenue (see Figure 3). Quarterly revenue for the four is down year over year anywhere between five percent and twenty-three percent. On the other hand, the four smaller companies would appear to be either holding their own in their latest quarters (Moldflow & Tecnomatix) or even prospering (ANSYS & MSC.Software).
Relative to earnings per share (EPS), PTC revenues are still not overcoming costs, EDS (the parent of EDS PLM Solutions) has slipped into negative earnings territory, Moldflow also slipped into red ink territory, and Tecnomatix is not yet back in the black. Autodesk, Dassault Systemes and ANSYS are all in the black, and MSC.Software returned to black ink.
|Last QTR of
|Last QTR's % of
|EDS PLM (5-7-03)||201||NR||227||87%|
|Figure 3 – Eight public MCAD Companies' Latest Qtrly Financial Performances2 Company Forecasts|
A further indication that the MCAD turnaround is not yet near can be gleaned from some of the comments paraphrased from recent company news releases as these companies contemplated their futures:
Q1 Fiscal 2004: "Net revenues for the first quarter of fiscal 2004 (closing April
30, 2004) are expected to be in the range of $205 million to $210 million."
Full Year Fiscal 2004: "Net revenues for fiscal 2004 are expected to be in the
range of $875 million to $900 million." (Note: single digit % growth).
-- Autodesk News Release, February 25, 2003
"We are targeting single digit % revenue growth in 2003, similar to that of 2002."
-- Dassault News Release, April 24, 2003
"We expect next quarter's revenue to be level with last quarter's."
-- PTC News Release, April 16, 2003
"We are forecasting a low- to mid-single digit percent growth in organic revenue for 2003 because of continued weakness in technology spending and the general economy, and assuming no increased geopolitical risks emerge."
-- EDS News Release, February 6, 2003
"EDS' priorities remain cash flow, earnings and growth, in that order. EDS is in the process of a comprehensive strategic and operating review, and, as a result, is not in a position to provide guidance for the second half of 2003."
-- EDS News Release, May 7, 2003
"Despite continued macroeconomic challenges and a tenuous global environmento?=we remain optimistic about our business prospects over the long term; however, in the near term we will we will continue to operate our business conservativelyo?="
-- ANSYS News Release, April 30, 2003
"We expect the current quarter to end (two months from now) with revenues somewhere between 95 percent to 101 percent of the previous quarter, and earnings to be somewhere between a slight loss and breakeven".
-- Moldflow News Release, April 24, 2003
"We expect revenues for next quarter to be in the range of 100 percent to 106 percent of last quarter, with dramatically improved EPS." For all of 2003, revenues should be up 10 percent."
-- MSC.Software News Release, April 23, 2003
"We expect to achieve  revenue growth of approximately 5 to 10 percent over 2002, with improved profitability."
-- Tecnomatix News Release April 30, 2003
However, some MCAD companies may be poised to thrive sooner than others. So stay tuned. We'll be looking at these companies and more in the weeks and months ahead.
Comments? Feedback? Tell us what you think about this topic or if you have additional information you'd like to share on this subject! Submit your comments to: Email Contact.
About the Author
Since 1996, Dr. Russ Henke has served as president of HENKE ASSOCIATES, a San Francisco Bay Area high tech business & management consulting firm. During his corporate career, Henke has been on "both sides" of MCAD and EDA, as a user and as a vendor. He's a veteran corporate executive from Cincinnati Milacron, SDRC, Schlumberger, Gould Electronics, Mentor Graphics, and others. Further information on HENKE ASSOCIATES is available at http://www.henkeassociates.net.
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-- Russ Henke, MCADCafe.com Contributing Editor.