I’m updating market models for 2010 and beyond and got to wondering: How long will it take the PLM vendor group to return to 2007, pre-recession, revenue levels? (Comparisons with 2008 are easier but won’t work, since many of the vendors started feeling the slowdown in late 2008). If we look only at Dassault Systèmes and PTC, we’ll see that they had a combined drop of 31% (about $280 million) in new license revenue in 2009:
Now let’s say that all $280 million of that lost new license revenue would have led to maintenance payments at a rate of 20% of the new license fee. That means that 2010 revenue will (in aggregate) be lower by $56 million, 2011 will be lower by $56 million, and so on — it’s revenue that’s lost forever and can only be partially recouped when a new license is sold to a maintenance-paying customer.
But maintenance revenue was also hit over the same period, as DS’s and PTC’s customers cut back on their staffs and software expenditures, letting maintenance payments lapse:
The effect here is harder to measure because of the many different licensing models in use. DS hasn’t said explicitly, but it’s likely that its maintenance category held up so well because many of SIMULIA products are sold via “rental” agreements, as are CATIA, ENOVIA and DELMIA to some key large customers and because of the added cost to resume maintenance once it has lapsed. But one could typically expect a rise in new license revenue in 2007 to translate into maintenance growth in 2008, and from 2008 into 2009 — and that clearly didn’t happen.
Sticking purely to the traditional new license/maintenance scheme, most vendors claim an 85% or greater “attach rate” (that is, customers that sign on for maintenance). To create a simple example then, for any period in the future, 85% of the new license revenue multiplies by the maintenance rate should be the maintenance revenue. Factor in an additional 85% every year to deal with attrition and the lost new license revenue becomes a real problem. In other words:
year 1: 50 new licenses are sold at $1000 each. New license revenue = $50,000. Maintenance = $0.
year 2: 85% of customers pay maintenance at 20%. New license revenue = $0. Maintenance = $8500.
year 3: 85% of customers renew maintenance. New license revenue = $0. Maintenance = $7225.
year 4: 85% of customers renew maintenance. New license revenue = $0. Maintenance = $6141.
year 5: 85% of customers renew maintenance. New license revenue = $0. Maintenance = $5220.
and so on.
Realistically, the further out from the initial purchase, the smaller the proportion of customers who pay for maintenance — but still, at this rate, the “annuity” is worth half of its original value in year 6 and less than a quarter by year 10.
This “compound interest” effect means that a new license not sold in 2009 will have a long-lasting ripple effect.
So when will the PLM vendors’ revenue return to 2007 level? When they can sell enough new licenses to make up for the cumulative deficit in maintenance. Given current growth projections from the major vendors, that would appear to be sometime in 2011 or possibly even 2012. But expect the publicly-traded suppliers to make acquisitions before then, as their shareholders demand growth to bolster share prices.
Now do the math for your company: what does the lost revenue mean for your future? And, perhaps more important: what are you doing to recover?
Limitations: Data for DS is reported in Euros; I used today’s interbank rate of EU 0.726 to $1 to convert to US Dollars. PTC reports on a fiscal year that ends September 30; I used that data rather than calendarizing. Only PTC and DS were included because they report publicly and did not make large acquisitions since 2007. And apologies for the not-great tables; this software doesn’t do them.