MSC Q2 earnings release provides some unusual factoids

MSC Software, like most public companies, provides information in its quarterly earnings releases that leave analysts wondering why a particular nugget was worthy of inclusion. Since all information provided is fair game, following are a few additional conclusions that can be drawn from MSC’s Q2 release. Note that all companies do this and I am not picking on MSC – as often as possible, I’ll try to come up with similar “huh?” questions/comments on other software suppliers. MSC included in its Q2 earnings presentation a slide on the number of quota-carrying salesmen (yes, sexist. But that’s not the point). This slide (link no longer available sorry!) shows that MSC has had a relatively steady number of reps in each region, with 178 in total in Q2: 52 reps in the Americas; 71 in Asia and 55 in EMEA. Combining that with the stated revenue per region in Q2, we get to the fact that (since no information was given about channel sales which could render this analysis completely incorrect) American sales reps had an average Q2 2008 productivity of $387K; in Asia, $275K and in EMEA, $451K. Doing similar analyses for prior quarters leads to the following obvious questions (channel sales aside): How is a rep in EMEA almost twice as productive as one in Asia? How can the average productivity of a sales rep in the Americas have gone up over 20% from Q2 2007 to Q2 2008? (This could be answered by a big deal or two.) Annualized, these productivity rates strike me as quite good — but are they? How do they compare to other companies’? (I’ll research this one from other companies’ public data.) To MSC’s credit, one definite impression that this data leaves is that things are improving; productivity is up except in Europe where it’s flat sequentially. The company seems to be keeping the reps that produce, releasing those that don’t and hiring/expanding as the trends in each geo indicate – for example, ramping up in the hot Asian markets of India and China. Changing subjects, MSC also provided data on the success of its enterprise software products, showing the products’ growth as a proportion of total software sales. MSC does include the MD products in this grouping, so it’s not completely correct to call the “non-enterprise” products “engineering,” but still … From slide 18, one can also glean nuggets on the strength of MSC’s traditional engineering products by inverting the enterprise data. Enterprise sales have made up 21%, 18%, 20%, 27%, 28% and 33% of total software revenue each quarter since Q1 2007. By subtraction, then, one can get at the non-enterprise product revenue – 79%, 82% etc. of software revenue per quarter. The depressing conclusion is that this revenue source is in decline ($20 million in Q1 and Q2 2007, $17 million in Q3, $21 million in Q4 2007, $16 million in Q1 2008 and $14 million in Q2 2008.) Again, since MD revenue is classified as “enterprise”, these totals should not be read as an indication of the lack of demand for engineering products, but it does lead to further questions: Why is MSC classifying things this way? (The cynic says ‘to boost enterprise revenue’.) How much of this is due to MSC’s token model? What’s really happening with sales of MSC’s traditional powerhouse products: Nastran, Patran, Adams, etc.? And, finally, tying the two together: Are MSC’s sales reps incented to sell all products equally or to focus on enterprise at the cost of more traditional engineering solutions? If so, the success in the first data set would be a direct detriment to the second.