The

Henry Fund
Henry B. Tippie School of Management
Jon Kerr [[email protected]]

Computer Aided Engineering Software

March 1, 2015
Industry Rating

Information Technology Sector

Market Weight

Investment Thesis

Top Companies by Market Cap (B)

Favorable US economic conditions as well as an expected increase in Autodesk (ADSK)
$13.98
global research and development spending have positioned the ANSYS (ANSS)
$7.74
computer aided engineering software industry for growth in 2015. Synopsys (SNPS)
$7.12
However, uncertainty in the overall global economy could drive down Cadence (CDNS)
$5.27
overseas revenues. As well, an increasing popularity in open-source PTC (PTC)
$3.99
CAE software could steal market share from competing companies in Mentor Graphics (MENT)
$2.91
the industry. Therefore, we recommend an industry rating of market

weight for the computer aided engineering software industry.
Peer Company Statistics


Price/Earnings (ntm)
23.1
Drivers of Thesis
PEG (ntm)
1.73

New pricing models and Cloud-based software as a service ROE
10.93%
could expand customer base. These new pricing models could appeal Net Profit Margin
14.17%
to small and medium sized businesses that previously couldnt afford Foreign Sales % of Rev
58.2%
the perpetual licenses.
R&D % of Rev
27.4%

The growth of the Internet of Things has made products more Revenue/Employee
$259K
complex which require companies to have CAE software to lower costs
(Yahoo Finance)
of design and speed time to market.

An increase in global research and development spending will
Peer Companies
Sector
drive sales in the CAE software market.
30

Risks to Thesis
25
26.5

Companies within the industry have overseas sales account for
23.1
a large percentage of revenue. Strengthening of the US economy and 20
21.1
of the US dollar will drive revenues from foreign sales down.
15
17.3

Open-source CAE software is becoming more popular because
14.2
of the lower over-all cost of ownership. Open-source software could 10
10.9
affect growth of the CAE software market.
5

P/E

Net Prot Margin

%

ROE

(Yahoo Finance)

12 Month Performance
S&P 500

25%

ANSYS

Synopsys

Autodesk

15%
5%
-5%
(Yahoo Finance)

-15%
M

Industry Description
The computer-aided engineering software
industry provides software that supports
engineering analysis tasks. The CAE
software performs tasks such as electronic
design, mechanical design, thermal analysis,
and fluid flow analysis. CAE software is used
in a variety of industries including, but not
limited to, automotive, electrical and
electronics, industrial machinery, aerospace
and defense, and consumer products.

Important disclosures appear on the last page of this report.

EXECUTIVE SUMMARY
The software industry as a whole is poised for growth this
year. Global software spending is expected to increase
6.2% in 2015.(16) The computer-aided engineering (CAE)
software industry is expected to out pace the entire
software industry with an 11.18% CAGR from 2012-2016.
(1)

New trends forming in the software industry could
potentially increase revenues for CAE software
companies. Customers are demanding new pricing
models, such as periodic payments and pay-as-you-go.
Another trend is the increase in cloud computing,
especially software as a service (SAAS). SAAS applications
and new pricing models will allow CAE software
companies to access a new customer base in the small
and medium sized business sector who previously
couldnt afford the large perpetual up-front license fees.
Spending within the CAE industry should increase this
year with global research and development spending
expected to increase at a 6.38% CAGR through 2018.(2)
Economic factors such as low unemployment rates and
low interest rates create a favorable environment for
growth within the industry. Low unemployment should
increase license revenue growth. Low interest rates
should increase acquisition activity thereby expanding
company portfolios. However, most companies in the
CAE industry have a high percentage of sales from
overseas. The strengthening of the US dollar could drive
revenues down due to the high percentage of foreign
sales. Also, an increasing threat of open-source CAE
software could affect growth in the market. For these
reasons, we recommend a market weight rating for the
application software industry in 2015.

INDUSTRY DESCRIPTION
The computer-aided engineering software industry
provides software that aids in engineering analysis tasks.
The CAE software performs tasks such as electronic
design, mechanical design, thermal analysis, and fluid
flow analysis. CAE software is used in a variety of
industries including, but not limited to, automotive,

electrical and electronics, industrial machinery, aerospace

and defense, consumer products, and bio-medical.
Growth of the CAE market is driven by many factors. One
major driver is the ever present need to reduce time-to-
market. CAE software helps speed up product
development thereby reducing time-to-market.
Companies in the CAE software industry can generate
revenue from a variety of activities. Traditionally, firms
have generated revenue from large, up-front perpetual
license fees. Companies have been creating new pricing
models to accommodate potential customers who
otherwise couldnt afford the perpetual license fees.
When new versions of software are released, the firms
can also charge for the upgrade. Another way firms
generate revenue is by charging for maintenance and
service and support.
Software is stored electronically and is not something
physical that you handle. Large supplies of raw materials
or huge manufacturing facilities are not needed.
Consequently, the cost of producing software is primarily
research and development. Therefore, the initial barriers
to entry into the market are relatively low. However, the
CAE software market is very specialized and companies
protect themselves through patents and intellectual
property. If a small company does have an innovative
product or idea, a larger firm will most likely acquire the
smaller company to expand their portfolio rather than
developing the idea through their own internal research
and development. (3)

INDUSTRY TRENDS
Cloud-based Software as a Service
Application software is seeing large growth in cloud-
based software as a service. The dominant companies
within the industry are making acquisitions to position
themselves within the cloud computing sub-industry.
While SAAS is a much smaller market than traditional
packaged software, $24 billion to $343 billion in 2012, the
projected growth rates for the SAAS segment are much
higher than the growth for traditional software. The
worldwide commercial, non-custom, application software

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is expected to grow at a compound annual growth rate

(CAGR) of 5.3% from 2012 to 2017. The SAAS market is
expected to grow at a 21% CAGR over the same period. (4)

models are using periodic payments. The new pricing

models will affect software developers revenue
recognition, cash flow, and financing. (5)

Internet of Things

Source: S&P Capital IQ (4)

SAAS has many benefits to traditional packaged software.

SAAS applications can be run on any computer or device,
any time and anywhere with an Internet connection.
SAAS applications are subscription based and offer lower
initial costs since there are no license fees. Also, the
SAAS provider manages the infrastructure so there are
lower costs for hardware, software and personnel for the
customer. Many firms in the application software
industry will implement a pure cloud-based solution for
customers. While others will implement a hybrid model,
mixing cloud services with in-house computing.

Alternative Pricing Models

Source: Statista (6)

More and more products are combining mechanical and

electrical parts with sensors, microprocessors, and
connectivity. These smart, connected products have
created the Internet of things (IoT) where devices can
transmit information offering greater reliability and new
functionality. The IoT is growing significantly as
consumers and industries are beginning to see he
benefits of connecting inert devices to the Internet. The
number of smart devices is expected to increase to
over 25 Billion by the year 2020. The worldwide market
for IoT devices is expected grow at a 20.7% CAGR from
$1.9 trillion in 2013 to $7.1 trillion in 2020. (7)

Customers are starting to quantify how software

contributes value to their organization by measuring
where, when, how much, and how well software is used.
Global R&D Spending Growth
Customers are focusing on the value software adds and
this is reducing their willingness to pay large, up-front
The global GDP is expected to increase at a 6.38% CAGR
license fees for software that supports low-value
from $77,609 billion in 2014 to $99,409 billion in 2018. (8)
processes or for software that is rarely used. As a result,
According to a Battelle research study, global research
software developers are creating alternative pricing and
and development spending as a percentage of GDP is
delivery models. In additions to the traditional up-front
1.80%.(2) This equates to global R&D expenditures
perpetual license fees, software vendors are offering
increasing from $1,397 billion in 2014 to $1,789 billion in
term licenses, which are valid for only a certain amount
2018. The automotive industry alone accounted for
of time. Another option is the previously discussed SAAS
16.2% of global R&D spending in 2014.(9) The R&D
pricing model where customers essentially rent the
spending for the automotive industry is expected to
software on a pay-as-you-go subscription plan. The new


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increase at a 6.23% CAGR from $66.8 million in 2014 to

$96 million in 2020. (10)
Over 80% of the global research and development
spending is in the United States, China, Japan, and all of
Europe. The United State R&D spending was expected to
increase from $450 billion in 2013 to $465 billion in 2014.
As a percent of global R&D spending, the Asia share
continues to increase, accounting for 37.0% in 2012 to
39.1% in 2014. Most of this growth is driven by China.
China and the U.S. are both expected to reach $600
billion in research and development spending by 2022.
By 2018, China is expected to surpass all of Europes R&D
spending. By 2022, China is expected to surpass U.S. R&D
spending. European gross expenditures on R&D have
remained relatively flat from 2012 to 2014 at $350 billion,
$349 billion, and $351 billion, respectively. This trend is
expected to continue for the European countries. (2)

Open-source Software

60.0
50.0
40.0
30.0
20.0
10.0
0.0

INDUSTRY COMPETITION
Companies in the CAE software industry are in a niche
market and offer specialized products and services. The
main way companies compete with one another is by
expanding their product capabilities through internal
research and development and by acquiring technologies
or other companies that complement their current
product portfolios.
The vast majority of costs and expenses from companies
within the industry are spent on research & development
and sales & marketing. Of the top competing companies,
R&D expenses average 28.48% of the overall company
expenses. (12) Not all of these expenses go into pure new
product development. Along with developing new
functionality and features, a significant portion of the
R&D cost is spent testing existing software on different
system architectures. However, the R&D expense could
give insight into future revenues. Within the top
companies of the industry, there is a strong correlation
between the percentage increase in R&D expense from
one period to the next and the percentage increase in
revenues during that same period.

Costs and Expenses of Compe`ng

Companies (2004 2014)

2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020

Revenue (in Billion USD

70.0

8.9
13.1
19.4
25.6
32.4
39.4
46.1
52.3
57.6
61.3
63.1
64.1
64.7

Projected Revenue of open source

so\ware from 2008-2020

open-source software movement. The Linux operating

system is an open-source software alternative to
Microsofts Windows. Revenues for the open-source
system infrastructure market are expected to increase at
a CAGR of 23% through 2017. Microsofts Windows
infrastructure is projected to rise only at a CAGR of 9.3%
through 2017. (11)

14%

Source: Statista (11)

22%

Cost of Sales
R&D

Open-source software is available free on the Internet.

Vendors charge fees for maintenance, support, and
customization. Because the software is free, the costs of
ownership are generally lower than traditional software
solutions. Linux has been the market leader for open
architecture software and it is giving momentum to the

36%

28%

Sales and
Markepng
Other

Source: Mergent Online (12)

Page 4

Companies within the industry must have large R&D

expenses due to product maturity and obsolescence.
When new computer hardware or new operating systems
are developed, many times software applications must be
updated so they function properly on the new platforms.
On average, sales and marketing expenses account for
35.81% of expenses for the top competing companies
within the industry. (12) Companies invest large amounts
in sales and marketing in order to create strong customer
bases. Having a strong customer base makes switching
costs very high. By constantly improving their products
and services through R&D and by establishing a strong
customer base, companies make it difficult for small
companies and start-ups to penetrate existing markets. A
constant presence of sales and marketing personnel also
discourages larger customers from switching to
competitors.
The software industry is a fast-paced industry and getting
products to market quickly is vital to a firms success.
Often times, obtaining a new software technology
through merger or acquisition is more attractive than
developing it organically through internal research and
development. Small companies that have developed an
innovative product are prime acquisition targets for
larger firms.

The number of mergers and acquisition in the software

industry is trending upwards the last few years. In 2014,
there were 1840 transactions worth approximately $120
Billion. (13)
Competing companies within the CAE software industry
have spent an average of 10.8% of revenue on
acquisitions from 2009 to 2014. This trend looks to
continue as companies have large amounts of cash and
are continually expanding their product offerings.

Peer Company Average % of

Revenue spent on Acquisi`ons
14.00%
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
2009

2010

2011

2012

2013

2014

Source: Mergent (12)

Peer Comparisons
FY 2014

Software Industry M&A

Sales
(M)

Market
Cap (B)

Autodesk

2,274

13,983

Synopsys Inc

2,057

Cadence
PTC
Mentor
Graphics
ANSYS

Net Profit
Margin

P/E
(ntm)

Debt/
Equity

10.06%

53.1

33.6%

7,123

12.59%

16.3

10.3%

1,581

5,268

10.05%

17.9

51.8%

1,357

3,996

11.81%

14.6

70.8%

1,156

2,912

13.28%

12.5

18.5%

936

7,740

27.21%

24.2

0.0%

Source: Mergent (12), Yahoo Finance (15)

Source: Berkery Noyes (13)

Of the competing companies in the computer aided

engineering software industry, Autodesk is the largest
with $2,274 million in sales in fiscal year 2014. Most
companies have a net profit margin between 10% and
14% except for ANSYS who consistently has had a net
profit margin above 25% since 2009. Most of the
companies have relatively normal P/E multiples when
compared to the technology industry as a whole.

Page 5

However, ANSYS has a higher than average P/E ratio of

24.2 and Autodesk leads this category with an extremely
high P/E ratio of 53.1. (12)

percentage of international sales will decrease revenues

when compared to peers. (12)

Marketing and Sales

Debt-to-Equity
This metric is excluding off balance sheet operating leases
from the debt calculation. ANSYS leads the peer group in
this category having no debt on its balance sheet.
Synopsys has a low debt to equity ratio of 10.3%. Within
this peer group, Cadence and PTC have high debt to
equity ratios of 51.8% and 70.8% respectfully. (15)

Research and Development

Research and development is an essential expense for
companies within the industry. Cadence leads this peer
group with 38% of its revenue going towards R&D in
2014. ANSYS and PTC lag the group with 17.6% (FY 2013)
and 16.7% of revenue, respectively, going towards
research and development. (12)

Deferred Revenue

International Sales

60.00%

Deferred Revenue as % of
Revenue
Ansys

50.00%

FY 2014 Interna`onal Sales

70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%

Sales and marketing will help generate new sales and

help keep existing customers. ANSYS does not break
apart Sales and Marketing expenses from total SG&A
expenses. Of the remaining competing companies,
Autodesk is consistently the leader in this category with
marketing and sales as a percent of revenue above 37%
from 2009 to 2014. Synopsys Inc. consistently has the
lowest marketing and sales as a percent of revenue
ranging from 24.6% to 22.0% from 2009 to 2014. While
the total amount spent on sales and marketing is
increasing each year, the amount spent as a percent of
revenue is decreasing for all peer companies. (12)

Cadence
40.00%
PTC
30.00%
Autodesk
20.00%

ANSYS Autodesk PTC

Mentor Cadence Synopsys

Graphics
Inc

10.00%

Synopsys
Inc

0.00%

Mentor
Graphics

2009 2010 2011 2012 2013 2014

Source: Mergent (12)

A large portion of all competing companies sales come

from over seas. All companies have international sales
greater than 50% of revenue. ANSYS leads the way in this
category, consistently having more than 66% of sales
coming from overseas from 2009 to 2013. Autodesk is a
close second having international sales ranging for 62% to
66% from 2009 to 2014. With the US economy
strengthening and the dollar getting stronger, a higher

Source: Mergent (12)

Deferred revenue is a good indication of future trends in

revenue for a company. If deferred revenue is growing at
a faster rate than overall sales, it generally indicates
future growth for the company. The amount of deferred
revenue varies considerably among the peer companies.
Mentor Graphics consistently has deferred revenue as a
percent of revenue of around 20%. Synopsys Inc. is

Page 6

consistently above 40% of deferred revenue as a percent

of revenue. Autodesk has a consistent upward trend of
increasing deferred revenue as a percent of revenue. (12)

spending, we would expect the CAE software industry to

have growth that has a positive correlation with the
growth in GDP.

Revenue/Employee

Interest rates have a negative impact on mergers and

acquisitions. Higher interest rates increase acquisition
costs, which lower the number of overall acquisitions.
We expect the 10-year Treasury Bond Yield to remain
around 2.30% for the next six months, increasing slightly
to around 3.10% over the next two years. These low
interest rates should help drive continued acquisitions.

Thousands of $

2014 Revenue generated per

employee
$400
$350
$300
$250
$200
$150
$100
$50
$0

$347

$299

$259

$222 $218 $211

Sales in the CAE software industry have a negative

correlation with the unemployment rate. As companies
higher more people, more software seat licenses will be
required which can help drive sales. We expect the
unemployment rate to continue to decline to 5.41% in
the next six months.

Unemployment Rate: Aged 15-64:

All Persons for the United States

Source: Mergent (12)

ECONOMIC OUTLOOK
Economic drivers for the computer aided engineering
software industry are GDP growth, unemployment rates,
interest rates, and strengthening of the U.S. dollar.
We expect a GDP growth rate of 3.40% over the next six
months. One of the four primary components of the GDP
is corporate spending. As corporations increase their

7.1
Percent

The peer companies vary considerably in size. Synopsys is

the largest with 9,436 employees in 2014. ANSYS is the
smallest with 2,700 employees. Ideally, a company wants
the highest revenue per employee as possible, as it
denotes higher productivity. Companies with consistent
levels of high revenue per employee usually indicate a
company with solid management. When computing the
amount of revenue generated per employee, ANSYS is
consistently the most efficient generating more than
$323,000 per employee each year from 2009 to 2014.
PTC, Synopsis, and Mentor Graphics were the least
efficient in 2014 generating $211,000, $218,000, and
$222,000 per employee. (12)

6.6
6.1
5.6
2013 Q4 2014 Q1 2014 Q2 2014 Q3 2014 Q4
Source: FRED database (14)

For U.S. companies that have significant overseas sales,

the strengthening of the U.S. dollar could have a negative
impact on earnings. In the next six months, we expect
the dollar to continue to strengthen against the Euro and
Yen. All the competing peer companies in the computer
aided engineering software industry receive more than
50% of their revenue from international sales. The
industry could see lower earnings if the dollar continues
to strengthen. (9)

Page 7

Exchange rates also affect merger and acquisition activity.

A strong currency makes it less expensive to acquire
foreign companies. The US dollar strengthening against
the Euro and Yen could help drive more acquisitions of
overseas companies by US corporations.

INVESTMENT POSITIVES

Cloud-based software as a service and alternative
pricing models could help CAE companies gain users and
sales from small and medium sized businesses. The new
pricing models could help the smaller companies
purchase the software when in the past they couldnt
afford the large up front perpetual licenses.

The Internet of Things could help drive sales in
the CAE software industry. The number of smart
devices is expected to increase to over 25 Billion by the
year 2020. (6) These devices are more complex than
traditional product and software simulation can help in
the design and testing of these devices.

Computer aided engineering software is an
essential component of research and development. The
expected increase in global research and development
spending should drive an increase in revenues for the CAE
industry.

INVESTMENT NEGATIVES

Companies within the industry have overseas
sales account for a large percentage of revenue.
Strengthening of the US dollar will drive revenues from
foreign sales down.

Open-source CAE software is becoming more
popular because of the lower over-all cost of ownership.
Open-source software could affect growth of the CAE
software market.

VALUATION
The software industry as a whole is poised for growth this
year. Global software spending is expected to increase
6.2% in 2015. (16) The CAE software industry is positioned
well for future growth as well. New pricing models will
give companies access to a new customer segment that

previously couldnt afford the traditional perpetual

licenses. As well, an increase in global R&D spending will
increase sales for the industry.
Companies positioned well within the CAE industry have
adapted to customer demands for different pricing
models. Well-positioned companies have continued to
expand their product offering through continued
research and development and thought mergers and
acquisitions.
Three companies that seem especially well positioned are
Autodesk, Synopsys, and ANSYS. Autodesk consistently
invests large amounts in marketing and sales and
research and development. In the last three years they
continued to expand their product offering through
acquisitions. They completed 23, 13, and 15 acquisitions
in 2012, 2013, and 2014, respectfully. Also, in the last
five years, Autodesk has a consistent upward trend of
increasing deferred revenue, which generally indicates
future growth. Autodesk may not be an attractive
investment since it trades at a very high P/E ratio of 53.1.
Synopsys is positioned well for the future. Of all the
peers in the group, they have the lowest percentage of
foreign sales. This makes them very attractive if the US
economy continues to outpace the global economy.
They consistently have deferred revenue as a percent of
revenue above 40%, with 49% in 2014. This indicates
future growth in revenues. They have a low debt to
equity ratio of 10.3%. They have high R&D expenses
when compared to their peers. In 2014, they had R&D
expenses at 34.9% of revenue. Only Cadence spends
more on R&D as a percent of revenue.
ANSYS is also positioned well for the future. They have
consistently been very efficient generating more than
$323,000 of revenue per employee for the last five years.
This is an indication of good management. Also, over the
last five years they have held large deferred revenues of
approximately 35% of revenue, which indicates they have
consistent growth. They also carry no debt on their
balance sheet. In 2014, they had a net profit margin of
27.2%, which is well above the peer companies within the
industry.

Page 8

KEYS TO MONITOR
The American economy is on an upswing while the global
economy is not. A common characteristic of CAE
software companies is the majority of revenues come
from foreign sales. The growing US economy and
strengthening of the dollar will decrease income from
foreign sales. The condition of the global economy
should be watched. If it continues struggle while the US
economy thrives, profitability of the CAE industry could
decline.

REFERENCES
1. TechNavio, April 2013
http://www.researchandmarkets.com/reports/252653
7/global_computeraided_engineering_market_20122
016
2. Battelle, December 2013
http://www.battelle.org/docs/tpp/2014_global_rd_fu
nding_forecast.pdf
3. Fisher Investments on Technology, pgs 74-79
4. S&P Capital IQ: April 2014, Industry Surveys,
Computers: Software
5. PricewaterhouseCoopers, Software Pricing Trends
http://www.pwc.com/en_us/us/technology-
innovation-center/assets/softwarepricing_x.pdf
6. Statista, Gartner 2013
http://www.statista.com.proxy.lib.uiowa.edu/statistic
s/370350/internet-of-things-installed-base-by-
category/
7. Forbes, 8/22/14, Internet of Things by the Numbers:
Market Estimates and Forecasts
http://www.forbes.com/sites/gilpress/2014/08/22/int
ernet-of-things-by-the-numbers-market-estimates-
and-forecasts/
8. William Blair: Equity Research: ANSYS Inc, 4/22/14
9. Statista, Bloomberg, Booz & Company, 2014
http://www.statista.com.proxy.lib.uiowa.edu/statistic
s/270233/percentage-of-global-rundd-spending-by-
industry/
10.
Statista: Projected global automotive research
and development expenses from 2012-2020
http://www.statista.com.proxy.lib.uiowa.edu/statistic
s/373853/global-automotive-research-and-
development-spending/
11.
Statista: Pierre Audoin Consultants, Projected
Revenue of open source software from 2008 to 2020

http://www.statista.com.proxy.lib.uiowa.edu/statistic
s/270805/projected-revenue-of-open-source-
software-since-2008/
12.
Mergent Online, Income Statements for [ADSK],
[ANSS], [SNPS], [CDNS], [PTC], [MENT]
13.
BerkeryNoyes, January 5, 2015, 2014 Full Year
Trends Report Software Industry
http://www.berkerynoyes.com/publication/trends/20
14Full/software.aspx
14.
Federal Reserve Bank of St. Louis Economic Data:
Unemployment Rate: Aged 15-64, All Persons for the
United States
http://research.stlouisfed.org/fred2/series/LRUN64TT
USQ156S#
15.
Yahoo Finance
http://finance.yahoo.com
16.
Statista: Gartner, Global software spending
forecast from 2008 to 2015
http://www.statista.com.proxy.lib.uiowa.edu/statistic
s/203289/global-software-spending-forecast/

IMPORTANT DISCLAIMER
Henry Fund reports are created by students enrolled in
the Applied Securities Management (Henry Fund)
program at the University of Iowas Tippie School of
Management. These reports are intended to provide
potential employers and other interested parties an
example of the analytical skills, investment knowledge,
and communication abilities of Henry Fund students.
Henry Fund analysts are not registered investment
advisors, brokers or officially licensed financial
professionals. The investment opinion contained in this
report does not represent an offer or solicitation to buy
or sell any of the aforementioned securities. Unless
otherwise noted, facts and figures included in this report
are from publicly available sources. This report is not a
complete compilation of data, and its accuracy is not
guaranteed. From time to time, the University of Iowa, its
faculty, staff, students, or the Henry Fund may hold a
financial interest in the companies mentioned in this
report.

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