CAD Manager's Newsletter #105 (April 22, 2004)

21 Apr, 2004 By: Robert Green

The next two issues of the CAD Manager's Newsletter will examine the CAD industry's overall financial health and how that financial health translates into future software. I realize that many CAD managers' eyes are now glazing over as they think, "Why should I care about this?" Though you may think that being a CAD manager has nothing to do with understanding the software industry's trials and travails, I'm convinced that you should care. I'll now take a few moments to make my case.

WHY YOU SHOULD CARE
Let's imagine for a moment that your company made the choice to move to a fictitious new mechanical CAD system that I'll call CoolCAD, for lack of a better title. Let's further imagine that after a year of inputting all your data into CoolCAD's proprietary CCD file format, CoolCAD Inc. goes belly up. Now you've got a dead CAD system. You not only have to purchase something new, but you also have to re-input all your data. Do you think somebody in accounting might question why nobody noticed CoolCAD's imminent demise? Do you think that somebody might get fired over such a monumental blunder? Let me assure you that the above scenario has played out for all sorts of companies over the last 25 years and that many people have, in fact, been fired as a result.

Here's a more pointed question: Do you think the CAD manager in the above scenario should have done some research into CoolCAD's financial state before he or she allowed the company to move forward with the purchase?

BECOMING FINANCIALLY AWARE
I've observed that over the last 5 years or so, identifying what CAD software products to implement has become more and more the CAD manager's responsibility. In these circumstances, it becomes the CAD manager's duty to evaluate both the technical and financial ramifications of the software he or she recommends. And make no mistake, if you recommend a certain software product that is dropped, goes out of business, or is sold to a competitor and experiences an uncertain future, you'll be held accountable.

So the question now becomes: How do you evaluate the financial health (or lack thereof) of a CAD company?

FINANCIAL BAROMETERS
A successful analysis of any company includes, at minimum, the following components:

1. A long-term evaluation of company stock

2. A long-term evaluation of sales and revenue

3. An overall analysis of the CAD tech sector in which CAD companies operate.

4. A projection of how well the company can be expected to perform in the near term.

It turns out that obtaining information on items 1 through 3 is relatively straightforward, at least for publicly traded companies, but item 4 requires some interpretation and personal experience.

LONG-TERM STOCK EVALUATION
To research a company's stock history, look no further than BigCharts. It's loaded with data and is free of charge. I always look at the five-year charts when evaluating technology companies simply to get an idea of which way the company is headed. You can also use the All Data option to look at the entire history of the company. These charts can tell you a lot if you read between the lines.

For example: Go to BigCharts and look at the five-year chart for AutoCAD's developer Autodesk (ticker symbol ADSK) and note a cyclic behavior with a generally upward trend, indicating a company that is moving up in value.

Another example: Contrast Autodesk's chart with that of Pro/ENGINEER developer PTC (ticker symbol PMTC). Though you still notice cyclic variations (as with Autodesk), you also see some very steep drops resulting in radically lower stock values.

So if you want to find out why a company really went up or down in stock value, the stock charts give you a very good idea of the dates on which these events transpired. You can now use the approximate dates to do some research on what is happening with the company and what caused the stock's value to change.

SALES PERFORMANCE
Frequently, big moves in company stock values are a function of sales performance. So how do you find out how much money a company is really taking in? I've found the free Morningstar service to be one of the best compiled news source listings for publicly traded stocks on the net. Just go to Morningstar and key in the ticker symbol for the company you're checking on (like ADSK or PMTC) and click the Financial Statements link on the report page. Before you know it, you see year's worth of sales data for the company as well as how profitable it is. Now you can actually gauge whether a company is on the way up or down, or whether it's going broke.

Once you've mastered the art of using Bigcharts and Morning Star, you'll never trust company press releases again! Of course, checking old charts and financial data isn't going to tell you how the company might do next year, but you'll certainly be able to gauge how the company's management team has handled the company in the recent past.

A few rhetorical questions: Would you feel more comfortable buying software from a company with growing sales or shrinking sales? Would you rather buy software from a company that's making a profit or losing money? When you view purchasing decisions from this vantage point, you'll start to understand how your company's management views large purchases!

INDUSTRY INDEXES
Sometimes well-managed companies with great products experience bad business cycles. The software industry as a whole has weathered some pretty tough times in the past few years with stock prices and sales mostly down until just recently. The question becomes: How do you know if a software company is just suffering from bad economic conditions or if they are genuinely failing as a business?

The only way I know to answer this question is to use a software index to keep tabs on a variety of companies as a basis for comparison. For CAD/CAM companies, the CNET index is a good barometer. It includes all the big CAD companies in its average. Another good industry barometer is the Dow Jones Software index, which can be accessed through the Dow Jones Web site.

Keeping up with stock values and industry indexes does take some time, but a monthly or even quarterly examination of the major CAD players can yield eye-opening results.

WRAPPING UP
You should now be able to find out how the CAD companies you do business with are doing in the market and whether their future looks bright or bleak. At the very least, you should be able to spot a CAD company that is on its last legs.

In the next issue of the CAD Manager's Newsletter. I'll analyze some current business trends in the CAD industry and what that may mean for the health of the industry and some key players. I'll also throw in a few more hints you can use to evaluate smaller, niche software companies. Until then.