UGS Corp. logged its twelfth consecutive period of year-over-year growth in the recently closed second quarter, but comparatively, its performance lagged the prior period's results and was less robust than what several of its key product lifecycle management (PLM) competitors enjoyed during the same period.
For the quarter ended June 30, 2006, UGS (Plano, TX) posted $296.7 million in total revenue, a 4% rise from the year-earlier period. Software revenue (including license and maintenance sales) was the primary growth driver, increasing 5% to $221.2 million compared with the corresponding quarter of 2005.
Like it has been for many of its PLM competitors, UGS's revenue from cPDM software was a particular bright spot. For the quarter, cPDM software revenue (representing sales of Teamcenter software and not including digital manufacturing applications) jumped 18% over the same period in 2005.
In comparison, sales of its CAx (CAD/CAM/CAE) software were stalled in the low-single digits, growing only 3% year-over-year. Service revenue for the second fiscal 2006 quarter was another soft spot, inching up only slightly from $74.9 million in the year-ago quarter to $75.5 million this fiscal period.
While revenue growth was stuck in the single digits, UGS officials painted a rosier picture around EBITDA (earnings before interest, taxes, depreciation, and amortization). For the quarter, EDITDA was a healthy $69.2 million, an 80% boost compared to the $38.4 million in the 2005 second fiscal quarter.
At the same time, however, UGS posted a $6.4 million net loss for the quarter; this compares to a $22 million net loss logged in the year-ago period. (Read about the most recent financial results posted by UGS competitors Dassault and PTC.)
UGS President, CEO, and Chairman Tony Affuso acknowledged on a conference call yesterday with analysts that a 4% revenue gain for the quarter was "not good enough," but even so, he called the results solid and said that UGS was on track with its strategic plan for the future.
"Despite the weaknesses on our top line this quarter, the fundamentals of our business remain strong," Affuso said. "Our strategic plan is a work in progress. To ensure that we move to consistently higher numbers, we're reorganizing our sales organization, reorienting to more of a vertical focus, growing the mid-market channel, and establishing a system integrator ecosystem. We're on course for this transition."
Affuso played up UGS's growing success in mid-market PLM. He said the company has had strong, double-digit growth in its Velocity product line, which is targeted at mid-market companies. "It's one of the success stories of our strategic plan for the quarter," Affuso said, "and the fastest-growing segment in PLM."
To support the mid-market segment, UGS has embarked on an ambitious campaign to establish an indirect sales channel and court a new community of systems integrators. Earlier in the year, Affuso promised to increase its indirect sales channel capability by 50%, and yesterday he reiterated that UGS was "absolutely on track to that" and might, in fact, actually beat that estimate. UGS has already signed up 50 reseller companies this year, he said, and year-over-year growth from indirect channel revenue was up 30% this quarter.
Affuso attributed some of UGS's decline in services revenue to increased sales activity within the system integrator channel the PLM vendor is actively courting as part of its strategic plan. He said UGS signed up six additional systems integrator partners in the quarter and acknowledged that some of the service revenue is moving to them.
When quizzed by financial analysts on why UGS's service revenue for the quarter was lower than that of competitors such as PTC and Dassault, Affuso characterized this shift as a conscious decision by UGS to nurture the integrator channel. "We want to keep services around 25% of overall revenue," Affuso explained. "We want to be a software company and we haven't really been trying to grow services."
UGS is also trying to foster sales in new industry segments, including consumer packaged goods (CPG) and pharmaceuticals. Part of its ongoing sales reorganization and focus on a vertical strategy is a means of addressing that specific goal, and Affuso said the changes are paying off. While UGS's biggest market segment remains automotive (at 28% of total revenue), Affuso said he saw that vertical declining somewhat, with new markets like CPG, pharmaceuticals, and retail taking up the slack, climbing from 5% of sales to around 10% today.
UGS's sales reorganization, while necessary to target new vertical markets and to create efficiencies after its acquisition of digital manufacturing software maker Tecnomatix, is partly responsible for the company's disappointing showing this quarter, said Ken Amann, director of research for CIMdata Inc. (Ann Arbor, MI).
"This was certainly an off quarter, but I see it as a blip," Amann said. "It's taken them longer to sort out their sales organization than they thought it would and it's certainly impacted their sales momentum."
Going forward, Amann expects to see continued, healthy growth for UGS's cPDM offering. UGS's challenge, however, is to boost sales over the next couple of quarters on the CAD side, particularly around the NX offering, as well as in digital manufacturing software.
All in all, Amann said, he was not worried. If UGS has another off quarter, "then I'll be concerned," he said.