The Wall Street Journal had a great article yesterday on the apparent hoarding of cash by America’s public companies. According to the piece, “in the second quarter, the 500 largest nonfinancial U.S. firms, by total assets, held about $994 billion in cash and short term investments, or 9.8% of their assets… that is up from $846 billion, or 7.9% of assets, a year earlier.” Of the 500, 248 have reported Q3 results; “their cash increased to 11.1% of assets, from 10.1% in the second quarter.” Looking only at the tech sector, the Journal found that IT companies had, at each Q2, about 9% of assets in cash in 1989 (or $25 billion), 17% in 1999 and 27% ($280 billion) in 2009. The article goes on to say that companies are holding on to cash, even reducing dividends paid to shareholders, as a reaction to the credit crunch of a year ago when it was often difficult and expensive to borrow money. Tech companies often have higher cash positions “because they are riskier and have less access to capital markets.”
But “tech sector” and “IT companies” covers a lot of territory, from Google to eBay to SAP and PLM companies. How do engineering software companies stack up against the norm and what can we infer from this?
The engineering software space has consolidated a lot in the last 10 years, so finding a statistically meaningful sample isn’t as easy as it sounds. I tracked Q2 data from 2000 onwards for ANSYS, Autodesk, Dassault Systèmes, Moldflow, MSC Software, SDRC and Unigraphics/UGS (all while they were publicly-traded).
It seems that engineering software companies have been quite conservative all along: 23% of assets were cash in 2000, trending upwards to a high of 38% in 2008 but then dropping to 28% in Q2 2009, likely as the rapid decline in new license sales limited their ability to add cash. Too, the sample size had shrunk dramatically by 2009, with Autodesk, PTC and DS weighing heavily on the overall result. Over the same period the proportion of cash plus short-term assets as a portion of total assets remained more consistent, at between 32% in 2000 and 39% in 2008 — but down to 33% in 2009.
What does it mean? It could well be that, as the Journal postulated, engineering software companies have a harder time gaining access to credit than does a more traditional enterprise and so need to keep cash easily available. But I think the cash positions are more attributable to the consolidation we’ve been seeing: companies need to move quickly when they see an opportunity to grow by acquisition — ready cash allows almost instant action.
As for Q3, only PTC and DS have reported so far. PTC has had roughly 17%-19% of assets in cash and equivalents for the last two years, down from a recent high of about 25%. DS has a much higher portion of cash, at a steady 36% for the last two years — but that’s about to be drawn down in DS’s purchase of IBM PLM. We’ll see what ANSYS and Autodesk report on Thursday and November 17, respectively.
Bottom line: Software companies don’t have the types of assets a lot of other companies need to conduct business (think factories or tankers) and are usually immensely profitable businesses that plow money back into R&D, acquisitions or stock buybacks. Cash allows that to happen quickly which may lead to a lower price and doesn’t expose the company to interest rate risks. And that’s all good.