MSC Software posted good results today, with total revenue up 11% from last year to $63.7
million. Revenue from large deals was up significantly, as both the size of the average large
deal and the number of large deals increased markedly. MSC reports that a year ago the
company signed 79 deals worth an average of $194K; this last quarter this grew to 100 deals
worth $228K — a revenue jump of close to 50% driven by adoption of the company’s
enterprise message.

Probably of greatest interest to investors was the dramatic improvement in net income to
$2.3 million (from $62 thousand in Q3 2007) due in part to the cost-cutting measures
instituted during the second quarter. MSC expects gross margins to be relatively stable in
the near-term, but said that it will continue to monitor its expense structure given economic
realities faced by its customers.

The high point of the earnings news was, once again, maintenance revenue, which was up
9% over the year-ago quarter to $31.6 million. For the year, maintenance is up 12%, driven
by a continued high renewal rate and growth in the installed base.

Software revenue was up 8% to $21.5 million, due to favorable exchange rates. For the year,
software revenue declined 2% as lower engineering tool sales were only partially offset by
growth in the MD and enterprise solutions.

MSC broke out software revenue by product category, showing a gradual change in the mix
as sales of "engineering apps" declined as a proportion of total software revenue. But the
real key is dollars. Using MSC’s percentages and reported software revenue for each period,
it would appear that enterprise software revenue has grown nearly 50% from $3.2 million in
Q1 2007 to $4.5 million in Q3 2008. Engineering apps + MD has gone up and down, likely
because so many IT budgets flush in Q4. Averaging it out, it appears that non-enterprise
sales are down about $2.5 million over the seven quarter period.

MSC may have given some clues about why this decline is likely not such a bad thing. The
company established indirect sales in 3 countries (Brazil, Malaysia and Australia) —
meaning less revenue to MSC now but more sales capacity in those countries leading to
ultimately more recurring revenue as new customers buy maintenance. Too, the rate of
attrition is slowing, likely as customers understand how the MD products fit into the overall
engineering software map and ramp up buys. Finally, Japan is characterized by MSC as a
"tools" market, which means that the economic slowdown there disproportionately affects
these product. We’ll see what Q4 brings — an uptick in the MD + engineering apps total
would be nice but may be hard to come by as manufacturers struggle to determine what
they can and cannot afford right now.

All in all, cautious optimism seems warranted. Wall Street certainly thought so, sending the
stock price up almost 7%.