The newest software maker on the block looks pretty tough, at least from Wall Street.
MSC.Software Corp., now headquartered in Santa Ana, has seen its shares surge 110% this year, defying a downturn in technology stocks that has taken a toll on Costa Mesa-based FileNET Corp. and other local software makers.
MSC, which started moving here a few weeks ago from Los Angeles, counted a market value of more than $200 million as of late last week.
“The momentum is helping us,” said Frank Perna, chief executive of the engineering software maker. “The fact that we have the envy of the world today doesn’t hurt.”
After stagnating for the past few years, MSC’s shares opened 2001 at 7 and were trading around 16 last week. By comparison, shares of FileNET,OC’s largest software maker,are off 33% for the year.
Not bad for a company whose software looks considerably less sexy next to the business software FileNET makes. MSC develops applications that help manufacturers design products. Though the company had relatively modest revenue of $178 million last year, it counts Boeing Co., Eastman Kodak Co., Fender Musical Instruments Corp. and Lockheed Martin Corp. among its 5,000 customers.
Companies use MSC’s software to test their products under real world situations,a strategy that can trim the cost of product development.
“We reduce the amount of time it takes for these companies to bring their products to market,” Perna said. “And that keeps them coming back for more business.”
A telling statistic: At least 70% of the company’s customers come back for more business, MSC executives claim, and that gives them a solid base for growing revenue.
Customers pay a pretty penny for additional services related to each product MSC sells, such as installing the software and showing customers how to use it. And the sales of extra services have generated an increasing chunk of the company’s total revenue, growing from 29% in 1998 to 39% in 2000.
“That’s where one of the most unbelievable opportunities exists,” Perna said. “Many of our customers are not able to unleash the power of our software. The reason we have the upper hand in this is we are the leaders in this space.”
In the first quarter, MSC saw its net income jump 36% to $1.4 million, while revenue increased 13.5% to $44.7 million. For the second quarter, analysts expect MSC to earn 19 cents a share, up from 14 cents a year ago, according to First Call/Thomson Financial.
But while MSC is making more money off its complex products, the company has its risks. With sales to aerospace and automotive companies accounting for 57% of revenue, a downturn in both of those cyclical markets could sack MSC’s bottom line.
On top of that, MSC’s customers don’t make decisions on software all that often, making it imperative for MSC to win business when customers are looking to buy. Meanwhile, with more than half of the company’s sales coming from overseas, currency fluctuations can be an issue.
MSC’s management is addressing those challenges in a traditional software company manner: acquire your way out of it. In the past three years, MSC has picked up five companies, closing the most recent one last month when it acquired Cypress-based Advanced Enterprise Solutions Inc. That move effectively doubled MSC’s sales force and gave it more outlets to sell its products.
“The (Advanced Enterprise) acquisition was a match made in heaven,” Perna said.
The company’s recent diet also has included MARC Analysis Research Corp., Universal Analytics Inc., Computerized Structural Analysis and Research Corp. and Knowledge Revolution Inc.
“We have done these acquisitions quickly,” Perna said. “We have a crackerjack management team that is good at that kind of thing. We have had a track record in doing it in a very efficient fashion, and we’re not afraid to do it. And we’re looking for more.”
MSC executives declined to comment on how many acquisitions the company plans to make this year, but indicated they were looking at the medical, educational and consumer markets for more opportunities.
“One of the primary factors I look at is whether we can integrate the company efficiently,” Perna said. “I look for products and channels that help us serve burgeoning markets. If I can buy a company that will get us into position faster, that’s a good return on investment.”
MSC also has struck deals with other computer-aided design software makers to increase its appeal to potential customers. Last month, MSC closed a deal with France’s Dassault Systemes SA under which MSC plans to sell Dassault products along with its own non-competing products.
“This was a very important strategic relationship,” Perna said.
MSC originally had planned to occupy the first seven floors of its new building at the Twin Towers developed by Santa Ana-based Nexus Development Corp. But the company shifted gears after deciding to consolidate its Costa Mesa facility and to acquire Advanced Enterprise. MSC now occupies the whole nine-story building.
“We were given a choice by the developer,” said MSC spokeswoman Joanne Keates. “They said they were ready to sublease the extra space and we decided we wanted to lease it.”
The company still is looking for people and could be expanding in the next year, according to Perna.
“This is a fast-moving industry and we’re filling out with 1,200 people,” he said. “We’re always looking for good people.” n
