Although it recorded its thirteenth consecutive quarterly top-line increase, PLM vendor UGS Corp. said revenue growth slowed in the period due to a restructuring of its sales and marketing force. The company's net loss also widened in the period, due in part to an increase in debt service fees.
For the quarter ended September 30, UGS reported total revenues of $295.5 million, a 1.8% increase from the corresponding period in 2005. Year-over-year software revenue topped $223 million (including license and maintenance revenues), a tepid 1.6% year-over-year rise.
On a conference call this morning with financial analysts, UGS Chairman, CEO, and President Tony Affuso attributed the top-line softness to a retooling of the company's sales and marketing channels. He said UGS's sales force was at 60% of its required level, and that the company plans to continue hiring in Q4 and achieve necessary headcount by the end of the second quarter of next year.
Affuso also said that during the fourth quarter of this year and into the first two quarters of next year, UGS expects to get "back in stride" with growth.
The company's decision earlier this year to replace executives in key leadership positions in Germany and the Americas also contributed to the growth lag, Affuso said. Revenue was down 5% on a constant currency basis in the Americas and Europe combined, but up 11% in Asia in the third quarter, compared to the like period last year, he noted.
Despite the limited revenue growth, Affuso maintained that the UGS's performance remains in line with its strategic plan for the year, and said the company was able to pay down more of its debt than expected during the third quarter.
The debt pay-down, however, contributed to the deeper net loss. In the period, UGS's net loss was $7.4 million, compared with a deficit of $4.8 million in the year-earlier period. Interest expense and amortization of deferred financing fees increased to $27.6 million from $25.2 million year over year.
Operating income was $15.9 million, which includes the impact of acquisition-related intangible amortization costs of $38.5 million. This was down from the $19.3 million in operating income posted in the year-earlier period, which included acquisition-related amortization costs of $39.2 million.
UGS did manage to better its EBITDA, the measure of net income before interest expense, income taxes, depreciation, and amortization. The $69.1 million reported in the third quarter represented an 8.3% increase over the same period in 2005.
Sounding a positive note, Affuso pointed to 17 "mega deals" -- in excess of $1 million each -- that were landed in cPDM (collaborative product development management) and CAx (computer-aided engineering, design, and simulation software) in the third quarter. One of those deals, he said, involved an aerospace and defense company where UGS displaced the incumbent PLM vendor and beat out a major competitor for the win.
He also highlighted a win against PTC at Unilever, which will begin a Teamcenter implementation in the fourth quarter of this year.
In results mirroring earlier quarters, UGS's Teamcenter cPDM software revenue grew 6.4% in the third quarter compared with the same period in 2005, while CAx revenue was down 0.5% from the like period last year.
Doug Barnett, chief financial officer at UGS, said on the call that the company's software revenues were flat on a constant-currency basis and ended up as a "mixed performance," with a strong increase in the Asia Pacific region tempered by flat performance in Europe and the U.S.
PLM consulting and research firm CIMdata earlier this year forecast that cPDM would be the fastest-growing segment of the PLM market. cPDM expenditures are expected to increase at a 13.9% compound annual growth rate (CAGR) -- nearly twice as fast as other PLM sub-segments -- and will exceed $11.6 billion in 2010, the researcher said.
CIMdata estimates that the PLM market as a whole will grow at a CAGR of 7.7%, to approximately $26 billion by 2010.
UGS's license growth continued in the Tecnomatix digital manufacturing product line in the third quarter, through a contract with Ford Motor Co., officials said.
An example of a win in the mid-market space during the third quarter was Wanfeng Auto Holding Group, the largest aluminum alloy wheel producer in Asia, which selected UGS's Teamcenter Express software for its first cPDM system.
Officials said the Velocity product line experienced double-digit growth in the quarter, and expected "well over" 400 partners to be distributing the product in 2007.
Another highlight on the business side was the inking of a new reseller agreement with Microsoft, whereby UGS becomes the first PLM company authorized to sell Microsoft's SQL Server 2005 database software in conjunction with its PLM products. This is particularly significant because the agreement gives UGS full access to Microsoft's business partners, Affuso said.
Also on the business side, Affuso mentioned that at the end of the third quarter, UGS had already hit its goal of increasing channel partners by 50% by the end of 2006.
In the automotive space, despite a downturn in revenue from the "Big Three" automakers, UGS expects flat results in annual revenue this year, offset by continued growth in Asian markets.
Looking ahead, Affuso said a deal announced earlier this year with Nissan would start contributing results in the fourth quarter.
Affuso also said the "CAD pipeline looks good," for 2007, with version 5 of the NX digital product development software currently in beta testing. He concluded the call by mentioning an upcoming win for UGS in the retail space, which he said the company expects to announce in concert with its fourth-quarter earnings call later this fiscal year.