Like most of the major PLM players, UGS Corp. continues to ride the growth wave in this category, announcing strong third-quarter financial performance and marking its ninth consecutive quarter of year-over-year growth.
For the quarter ended September 30, the Plano, TX, company logged $290.2 million in total revenue, a 23.4% increase over the same period a year ago. On an organic basis, excluding revenue from acquisitions like that of Tecnomatix Technologies Inc., UGS' sales increased 14.7%, a growth rate still comfortably above AMR Research Inc.'s estimated industry average of between 12% and 14%. (Click here to see PTC's recent financial results and here to see Dassault's recent results.)
Operating income on a Generally Accepted Accounting Practice (GAAP) basis for the quarter was $19.3 million, a 153.9% year-over-year increase, which includes the impact of acquisition-related intangible amortization costs of $39.2 million. Interest and amortization of deferred financing fees, as well as other undefined expense items, however, caused a pre-tax third-quarter loss of $6.7 million, slightly better than the $7 million deficit reported in the like period of 2004. A tax benefit improved the quarterly net loss to $4.8 million -- comparable to the red ink reported in the corresponding quarter last year.
UGS executives pointed to strong sales of cPDM products -- centered around its Teamcenter line -- as one of the major contributors to the steady growth. "Following the quarter where we marked our one-year anniversary of operating independently, we continue to see a steady stream of cPDM growth and enterprise contracts," said Tony Affuso, UGS chairman, CEO, and president, in comments published in a press release regarding the financial results.
Revenue growth in the cPDM space was 73.8% year-over-year, including acquisitions, or 45.9% without acquisitions, officials said. Total revenue for its CAx or computer-aided design products was not nearly as robust, growing only 1% year over year.
While UGS declined to provide specific guidance for next quarter or for fiscal year 2006, officials were optimistic about the company's foray into the SMB market with the Velocity Series. This preconfigured portfolio of product design, analysis and data management tools includes Teamcenter Express, a mid-market cPDM solution; Solid Edge Version 18, a CAD offering with integrated cPDM capabilities; and FEMAP 9.1, the latest version of UGS' computer-aided engineering finite modeling tool.
Affuso said the mid-market is underserved by the current crop of targeted PLM solutions and would be the fastest growing segment for PLM. "There are competitors out there with point solutions, but we're bringing integrated capabilities to the field, and resellers are interested in that, particularly those serving the market with ERP or other enterprise applications," said Affuso during an earnings conference call with Wall Street analysts.
Currently, UGS has about 250 partners signed up to resell the Velocity Series to SMBs, and the company has promised to increase that capacity by 50% by the end of 2006. Affuso said to expect Velocity Series sales to start impacting the UGS pipeline in the first half of 2006.
In the nearer term, the company pointed to growing momentum in sales of UGS cPDM solutions into new markets, including apparel, retail, pharmaceuticals, and medical products. With the launch this quarter of Version 4 of NX, the company's CAD tool, UGS also anticipates invigorated sales in that category during the next few quarters as companies that have been holding on to the older I-deas tool set finally make the transition to the new NX platform.
UGS' new mid-market business model, its focus on non-traditional markets and its ability to leverage an existing CAx base for new PLM sales is fueling the double-digit performance and giving the company an edge over other PLM providers, analysts told Managing Automation. "They're growing faster than most," said Jim Brown, vice president of global product innovation & engineering research for Aberdeen Group (Boston). "They've got solutions that cover multiple aspects of the product lifecycle ... and they have an advantage having a trusted relationship with the engineering department. When you're an existing vendor, you're able to sell additional solutions more easily than trying to put your foot in the door the first time."
The challenge for UGS, like other PLM vendors, is to break out of that engineering base and sell the platform to other functional areas. They've also got to figure out a way to grow their NX base, where sales have been relatively flat the last few quarters, noted Ken Amann, director of research for CIMdata Inc. (Ann Arbor, MI).
In customer milestones for the quarter, UGS announced that MTU Aero Engines GmbH, Germany's leading aircraft engine manufacturer, will standardize on the UGS NX suite as part of a $1.2 million contract extension, adding 85 seats of NX to replace its existing CAD program. Renishaw, a leading supplier of metrology and spectroscopy products, signed a deal to license the Tecnomatix digital manufacturing software, and General Motors Co. extended its PLM agreement with UGS to leverage the Open Manufacturing Backbone to enhance collaboration at the plant floor level.
When questioned by analysts about UGS' plans to remain private, Affuso said there was still work to be done, but that an IPO is still likely to be in the cards. "We're still working on the things that need to happen before you do an IPO -- things like Sarbanes Oxley, building an internal reporting structure, and building out the channel for the Velocity Series," Affuso said. "We are continuing to evaluate the market opportunity for an IPO, but we haven't put the timing together yet."