Schnitger Corporation

More on ANSYS and MSC Q2 — are we at the bottom of the U? W?

MSC Software and ANSYS filed quarterly reports with the SEC on Friday, so we now have more information about each company’s Q2. Recall that MSC didn’t hold a conference call for analysts because of the pending acquisition by Symphony Technology Group; ANSYS did hold a call but the audio cut out periodically, so I needed to check my notes against the 10Q.

First, an editorial comment: I don’t own shares in any PLM company (it could be perceived as coloring my comments) and I clearly don’t understand investor behavior. Neither ANSYS nor MSC announced what could under any other circumstances be called “good” results — both saw revenue declines in many business segments — yet their share prices actually increased. I suppose the rise is due to the fact that both companies said that results were not worse than anticipated and that costs were being managed to keep pace with revenue, but it’s still appalling that investors would reward results this weak.

Anyway. MSC’s 10Q provided the following additional information:

• “As a result of the transition to sell enterprise software products, our license revenues have declined as a percentage of total revenues. Accordingly, maintenance fees have been our largest source of revenue. For the six months ended June 30, 2008 and 2009, maintenance revenue represented 55% and 60% of total revenue, respectively.” That’s both good (recurring revenue usually means stability) and bad (recurring revenue comes after initial sales).
• Q2 revenue declined 20% “primarily due to the global economic downturn … and its impact on our key customers in the automotive, aerospace and manufacturing industries. Excluding the effect of changes in foreign currency rates, total revenue for the three months ended June 30, 2009 decreased 17%.”
• Software revenue decreased 29% in Q2 2009 from the prior year, due to “our key customers carefully reevaluating all levels of expenditures during these times of economic weakness and uncertainty.”
• Maintenance revenue was down 11% in Q2, 8% in constant currencies. Of this decline, $1.5 million was due to “lower customers’ reinstatement of previously expired maintenance.”
• The 15% decline in revenue in EMEA was “due to lower sales of our engineering and MD products in the manufacturing and automotive industries, partially offset by increased sales in the aerospace industry.” Asia proved a mixed picture, with “lower sales of engineering and MD products to key Japanese and Korean customers in all our key industries… This decrease was partially offset by higher revenue from sales of MD and enterprise solutions to key customers in China.”
• There are currently four shareholder class action suits in play about the proposed Symphony acquisition, all filed in early- to mid-July. Nothing much seems to have happened but MSC intends to “defend any claims raised in these lawsuits vigorously/”

Now to ANSYS:
• Ansoft revenue did indeed decline from a year ago, and is not meeting ANSYS’ expectations. According to the filing, Ansoft derives much of its revenue from perpetual license sales (large upfront payment then much smaller, periodic maintenance payments) which are hardest hit in this economy. As a result, “at the time of the acquisition, the Company expected that the Ansoft acquisition would be accretive to non-GAAP earnings within the first twelve months post-acquisition. However, the Ansoft acquisition has been dilutive through June 2009.” That means it’s not profitable for ANSYS and leads to questions about the $850 million ANSYS paid for the business a year ago. CEO Jim Cashman said on the earnings call with analysts that ANSYS is still excited by the Ansoft opportunity and cites the blurring of mechanical and electronic systems in new product development as leading to ultimate growth and profitability for the Ansoft business.
• ANSYS thinks 2009 will be tough for its core business: it now sees “a reduction in the revenue growth rate of the non-Ansoft operations as compared to recent historical periods, particularly with respect to perpetual license revenue.” In Q2, the core business was up 8%.
• The high-end business was more resilient, as evidenced by a stable ASP; at the mid- and low-end, the ASP declined slightly as “routine tasks proved to be more price-sensitive” according to CEO Cashman on the earnings call.
• The geos were all flat to down on an organic basis (North America, down 5%; General International, flat, Europe down 8%). ANSYS reports increased interest in CAE in the energy sector, heavy equipment and in advanced research among automotive companies (more energy-efficient vehicles, alternative fuels, etc.).

Neither company sees a rosy end to 2009. Cashman did say that things were not worsening, which echoes the sentiments offered by PTC and Dassault last week. We’ll see what Autodesk has to say on Thursday, but it’s possible that we’ve hit bottom. Wouldn’t that be nice?

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