Since being sold by Electronic Data Systems Corp. to a group of white-glove private investors in May of 2004, UGS Corp. (Plano TX) has worked tirelessly to overcome the perception that it is little more than a debt-laden collection of acquired CAD/CAM systems that individually serve the engineering needs of large aerospace and automotive companies. What a difference two years makes.
At its second annual Analysts & Media Forum in New York, the PLM vendor detailed its post-EDS business strategy, which has delivered accelerating revenue and profit growth. CEO and chairman Tony Affuso kicked off the confab by reciting the company's fiscal 2005 achievements: Record revenues of $1.15 billion, up 18% from the prior year; EBIDTA of $241 million; 70 enterprise contracts (44 of which originated in non-traditional markets such as CPG and retail); a mid-market product and technology alliance with Microsoft; and an evolving digital manufacturing initiative, compliments of its Tecnomatix acquisition.
Profitable growth was fueled by wins over primary competitors Dassault Systemes (15 deals including Bell Helicopter, Ford Motor Co., Nissan Motor Corp., and Red Bull) and PTC (22 contracts including Caterpillar Inc., Samsung, and Target). "We enable customers to transform innovation for growth," Affuso effused.
The momentum carried over into the first quarter of 2006 as pre-tax earnings reached $48 million on a revenue spike of 8%, to $273 million (the company's eleventh consecutive quarter of year-over-year revenue growth), Affuso noted. And the good news is expected to continue for the foreseeable future, he projected. Revenue from UGS's "nine-digit win" at Nissan is expected to kick in during the fourth quarter, complementing a diversification strategy that the company is banking on to further accelerate growth.
The upbeat financials have UGS on an IPO track, Affuso said, although SEC regulations prohibited him from being specific. "We're keeping our head down working towards it," he said.
The company, moreover, has put surplus cash to good purposes, not only increasing R&D spending to 20% of revenue but systematically reducing its long-term debt to $1 billion-plus as of April 30. Toward that end, UGS recently completed a debt refinancing package in which it sold $300 million in payment-in-kind, floating-rate notes that can be redeemed by preferred shareholders in the event of an IPO.
Analysts liked what they heard at the forum. Joe Barkai, a PLM analyst at IDC's Manufacturing Insights, says UGS has made a lot of progress in the very necessary science of tying together its various design and PLM tools with unified workflows on a single backbone. He notes, however, that it still has its work cut out conveying the critical business process efficiencies that PLM software can deliver using consistent product naming conventions.
A year ago, UGS was preoccupied by algorithmic superiority -- "my 3D is better than your 3D," as Barkai describes it. UGS needs to focus even more on business process virtue, he continues, helping customers build globally extended, collaborative design teams. "They are more process driven," he says, noting the company's progress in a short time frame. "I like their execution."