Regrouping MSC Slumps as Software Rivals Rally
By ANDREW SIMONS
Orange County software makers are among the big winners on Wall Street this year. But not Santa Ana’s MSC.Software Corp.
After rebounding from a severe dip last fall, MSC’s shares have traded in a narrow range this year, up about 7%. The maker of industrial design software counted a market value of $250 million last week.
MSC is OC’s second largest software maker by sales after Costa Mesa’s FileNet Corp., whose stock has nearly doubled this year.
While MSC pales compared to FileNet, a maker of data management software, it also lags French rival Dassault Systemes SA. The company’s U.S. traded shares are up nearly 40% for the year. Ansys Inc., another competitor based in Pennsylvania, also is up nearly 40% since January.
It’s been a tough year of restructuring and earnings surprises for MSC. Analysts and company officials are clear on why MSC shareholders have missed out on the recent runup in stocks.
“Clearly they need to be able to meet or exceed analyst expectations more than once before missing them again,” said Herb Tinger, an analyst with Advest Inc., a Hartford, Conn.-based investment bank and money manager. “Over the past 18 months, they’ve tended to miss every other quarter.”
MSC’s take?
“We understand that,” spokeswoman Joanne Keates said.
The company has taken steps to curb its volatility, Keates said.
This summer, MSC stopped reselling computers that run its software in a move praised by analysts. While convenient for customers, reselling computers tends to suck up resources and doesn’t contribute much to profits.
MSC laid off about 100 workers in the move. The company employs about 400 people in Santa Ana.
“Most of our volatility stemmed from the hardware business,” Keates said. “We had some quarters where that business was $24 million (in sales). We had some quarters where that was $12 million. Our software and services business is much more easily predictable.”
MSC’s second-quarter sales, minus the hardware business, were $60 million.
Analysts say they are looking for MSC to beat estimates in the third quarter. They forecast MSC to report profits of 3 cents a share, or about $900,000, for the quarter. That’s up from 1 cent a share a year earlier.
“I’ve set the bar low enough for them to meet the number,” analyst Tinger said. “I’ve got pretty modest growth expectations in the fourth quarter.”
MSC recently refinanced its debt with low-interest convertible debt, which pays interest and matures at a certain date. The debt also can be turned into stock when MSC’s shares reach a certain price.
“It’s a concern from a dilution standpoint,” Tinger said.
Another concern for analysts: MSC’s administrative costs, which some view as higher than they should be. During MSC’s second-quarter conference call, Morgan Stanley analyst Richard Glass asked the company why selling and administrative expenses were 41% of revenue.
“I’m wondering why we haven’t taken more extreme measures on the cost side,” Glass asked MSC officers. “Your SG & A; structure is totally out of whack.”
MSC officials said the costs were in line for a company such as theirs, which sells much of its product directly to users such as Boeing Co., Eastman Kodak Co. and Lockheed Martin Corp. The company has offices around the world.
“Their expense structure has been a concern,” Tinger said.
MSC has one big issue behind it. Last year, the company settled a dispute with the Federal Trade Commission over two 1999 acquisitions.
In 2001, the commission challenged MSC’s buys of Universal Analytics Inc. and Computerized Structural Analysis & Research Corp. Regulators said the deals gave MSC a monopoly over advanced versions of Nastran, a computer language that powers part of the company’s software. The technology helps engineers design and test planes, autos and industrial gear.
MSC initially said it planned to fight regulators on the issue. But then the battle started impacting profits. In mid-2002, MSC agreed to an initial settlement and signed a formal truce in November last year. As part of the settlement, MSC was forced to divest its most advanced versions of Nastran.
The company’s shares lost half of their value last October on word of the settlement and an earnings warning.
