CAD Manager's Newsletter #106 (May 13, 2004)

12 May, 2004 By: Robert Green

In the last issue of the CAD Manager?s Newsletter, I showed you how to check out a publicly traded CAD company?s financials so you can gauge its economic health. I also made the case for why you should care about analyzing your CAD vendor?s financial situation?because your job may depend on it!

In this issue, I?ll continue our discussion of the CAD industry?s finances and give you additional insight into some interesting market factors that I believe will affect the CAD industry in the not-so-distant future.

When you look up the CAD/technology stock indexes I gave you in the last issue, you?ll see that the general market trend for technology stocks is up. This is good news for most companies (and their investors) and is certainly better than stock values dropping! Generally speaking, stock values rise when revenues go up, and the CAD market is no exception. It is no accident that Autodesk stock has risen dramatically as its income has increased or that PTC?s stock has risen on its return to profitability. Now that software spending is back up from historical lows in 2002 and 2003, should we really be surprised that companies are doing better?

So in an economic environment where most companies are doing better, how should you evaluate a company whose stock value is declining? When all economic indicators are up, the things that force stock values down are bad sales, bad management, or both. I recommend extreme caution in dealing with any company that has a dropping stock value over the last two business quarters.

The pessimist in me feels compelled to say, however, that just because a company?s stock is up now doesn?t mean it will stay that way. Just look back four years to see how irrationally rising stock values in the Internet sector plummeted and sent companies that seemed like a sure thing only months before into bankruptcy. Stock values indicate how well a company?s products are selling at the present time and whether institutional brokerage firms investors believe that the prosperity will continue. From my past experience, stock values provide an accurate barometer of a company for no more than 6 months into the future. Looking back at a five-year chart of the company?s stock provides more of a basis to judge how well a company has been managed and therefore how stable it may be in the future.

Everything I?ve discussed so far has to do with public companies that are traded via major U.S. stock markets such as NYSE or NASDAQ. There are companies that don?t follow the NYSE/NASDAQ model?for example, multinational companies that have multiple classifications of stock in various world markets (Dassault comes to mind) or small companies that are privately held (Bentley comes to mind here). These cloaked or private companies can be very tricky to analyze because they either have no reporting requirements (the private ones) or they can move their capital through a wide range of subsidiaries in various currency markets (multinational) to the extent that you can?t really tell how they?re doing.

In these cases, some good old-fashioned detective work can be useful. I offer the following suggestions:

Go to the company Web site and investigate the press relations section. Browse through news releases for any sales figures or financial information. Generally speaking, if a company is doing well, it will brag about it in press communications. No news is typically not good news, so if you can?t find any good news or indications of financial health at a company?s Web site, you should be somewhat concerned. Another useful tip is to keep a wary eye out for too much marketing hype in news releases. A company that tells you about every little software sale yet releases no financial data is highly suspect.

Look for strong industry relationships. For example, if a privately held company that provides specialty tooling software has industry certifications with major players like Autodesk, Solidworks, and PTC, you can feel better about its ability to play in big markets. On the other hand, if a company has no industry alliances, no compatibility with other software platforms, and no ability to brag about its success, you should be very concerned about its future (and yours if you recommend the software)!

When in doubt, ask! If you can?t find the information you?re looking for, call the company. Simply say you?re hesitant to do business with them if they can?t provide some solid data on how they?re doing. Though this approach won?t work with a multinational firm like Dassault, it works very well with smaller companies that want to work to earn your business.

With today?s generally good economic conditions and pent-up demand for software upgrades, should we be surprised that CAD software sales look good? My read on today?s market is that things look good precisely because things have been bad for a while. Conversely, now that companies are upgrading their software, does this mean that things will slow down again once this upgrade activity recedes?

Another big question to ponder is the introduction of subscription-based software upgrades for lower-priced CAD applications like AutoCAD. Though high-end mechanical software has been subscription-based for years, it remains to be seen whether the vast majority of CAD consumers will write a check for upgrades every year. Software companies love subscription models because it guarantees a certain annual revenue and therefore a more predictable stock valuation over time.

I believe that analyzing the above variables is key to determining how the CAD software industry will perform in the next 3 to 5 years. I?ll go out on a limb and make some recommendations about how you can track a company and predict how it might perform in the future:

The subscription trap: If a company relies on annual software subscription revenues, it will do well only as long as it provides software upgrades that are solid, easy to implement, and welcomed by customers. Users will abandon software that doesn?t meet their needs even if that software is an industry standard like AutoCAD. Once a company starts to sit back, count its money, and slack off on delivering good software, you can bet it?ll suffer.

Innovation: In a technology market like CAD, those companies that innovate the most and provide the most creative solutions to existing problems will garner attention. The key is to make sure that those companies that innovate the most can also make a financial go of it. Those companies that can actually sell their software and provide security factors such as industry compatibility will be the dominant companies in the next few years.

Support channel: Any CAD software companies that enter the market will be judged based on not only their products but on how well they can support their products. When businesses purchase software that costs thousands of dollars per seat, they expect to be able to get in touch with somebody who can help them. Support may be fee based or Internet based, but it will have to exist. I believe that there will be a resurgence of interest in quality product support in the coming years, and that companies who provide that support will do well in the long term.

I hope that this series has helped you understand that CAD software companies have to play by the same rules that any other business does and that you can check up on them using a variety of free Internet resources! I also hope you understand that doing business with a suspect company could spell doom for your career. Qualifying the vendors you do business with is a key part of the technical and financial aspects of the CAD manager?s job.

Why not resolve to check out the software companies you do business with, or plan to do business with, and see how they measure up using your new financial skills? I promise that you?ll never get fired because you did your homework.