Vendor Feels the Heat in Hot Product Lifecycle Management Market

Background

Market dynamics, such as globalization, outsourcing, and emerging web collaboration technologies and practices, are driving prospects and investors alike to take a closer look at the product lifecycle management (PLM) market and vendor landscape. The PLM market is currently held in high esteem by the analyst community, with projections of double digit growth over the foreseeable future. ARC Group recently predicted that the worldwide market for PLM software and services is expected to grow at a compounded annual growth rate of 11.5 percent over the next five years. AMR Research is somewhat more bullish, estimating the growth rate for the PLM market in the 14 percent range, while IDC is predicting strong growth in the 15 percent range. Growth in the PLM market is coming from various sectors, including the aerospace and defense, automotive, consumer products, electronics, and even the apparel and retail segments, which have not been traditional sectors for PLM growth. Likewise, strong economic and geographic influences are stimulating the PLM market, with significant growth opportunities cited for Brazil, Japan, China, India, and, to a lesser degree, Latin America.

Some Examples of PLM Vendor Success

Given the analyst community's rosy outlook for the PLM market, it is not surprising that most individual vendors' performances are in line with these high expectations. For example, in its fiscal year (FY)2006 first quarter financial report, Parametric Technology Corporation (PTC) reported 25 percent license growth, year-over-year, along with a 14 percent total revenue growth figure for the same period. Similarly, UGS Corp. recently reported the following financial highlights for calendar year 2005.

• Total revenue increased to $1.15 billion (USD). This amounts to 18 percent growth over the same period a year earlier, as the company saw an increase in total revenue in each geographic region.
  
  
• Software revenue growth, which includes license and maintenance revenues, increased 21 percent over the same period a year earlier.

One reason for these companies' recent success may be that both PTC and UGS are strong advocates of the global product development (GPD) phenomenon. GPD entails providing enterprises with the tools and technology to design and build products anywhere, with global teams and direct supplier and partner involvement. GPD's message of increasing return on investment (ROI) by reducing time-to-market resonates with enterprises as they continue their search for cost reduction while increasing process efficiencies and product superiority.

PTC and UGS are not the only vendors in the PLM market experiencing growth. The PLM market's vitality can also be seen in the investments and performance of enterprise resource planning (ERP) vendors. SAP, Oracle, and SSA Global are all committed to their individual PLM product solutions, investing heavily in product suite enhancements and vertical capabilities, as well as in extensions for product collaboration and GPD. It is estimated that sales of PLM products and services by these ERP vendors are on the rise, in line with the double digit analyst projections for FY2006 and beyond.

MatrixOne Underperforming Among Its Peers

However, not all PLM vendors are currently riding the wave of PLM market growth and profitability. A case in point is MatrixOne, which is one of the exceptions in this high performing market, where enterprises looking to enhance and diversify their product development and new product introduction capabilities are eager to deploy vendor products and services. As recently as the third fiscal quarter of 2005, MatrixOne was actually part of this bellwether performance period for PLM vendors, demonstrating strong sales growth. But now, the situation has changed dramatically.

Like most companies nowadays, MatrixOne is more aware than formerly of Securities and Exchange Commission (SEC) scrutiny. Thus, the software vendor elected to re-examine and restate certain filings to comply with NASDAQ requirements for continued listing on the NASDAQ Market. In early February 2006, MatrixOne reported its financial results for its second quarter of FY2006, which were lacklustre, to say the least. MatrixOne's total revenues were $33.8 million (USD), compared to $35.8 million (USD) for the same period last year. The vendor had a net income loss of $1.9 million (USD), compared to a net income gain of $0.5 million (USD) in the same period last year. These revenue figures include deferred revenues subsequent to the financial restatement, which cost the company over $1 million (USD) in legal and accounting fees. These performance figures are in stark contrast to its performance in FY2005, when MatrixOne's total revenues grew by 13 percent, with a noteworthy increase in license sales of 22 percent.

Reasons for Trailing Performance Unclear

Despite the patently obvious drop in MatrixOne's revenues, the reasons for the vendor's trailing performance are unclear. At MatrixOne's global customer conference last fall, there was considerable talk of accelerating ROI, a theme which is often discussed among PLM software market participants. Elements for cross-organizational transformation, including product development issue identification, measurable metrics, and streamlining of the internal and external execution process toward product development, were stressed. These are also common and commendable themes among other PLM vendors. Moreover, these were not just empty words, as MatrixOne can boast that its marketing message is backed by its business value assessments and deployment performance, with an on-time performance for PLM projects of over 90 percent. Overall, MatrixOne's market messaging and market potential within its installed base are on target with industry expectations, and are not perceived as a growth impeding issue.

As for the company's product suite, Matrix10 PLM appears to provide a strong foundation with complementary applications to meet the rigorous needs of an enterprise wanting robust PLM capabilities. Supporting this view is the fact that Gartner, in its latest magic quadrant for PLM (September 2005), spotted MatrixOne in the visionaries quadrant, in close proximity to Agile and SAP, and in the middle of the pack in terms of its ability-to-execute (Dassault Systemes/IBM, UGS, and PTC are viewed as the leaders in the ability-to-execute category). This positioning is in line with MatrixOne's perceived PLM capabilities. It is, moreover, a strong vote of confidence in MatrixOne's ability to enhance the product suite to meet future requirements. In this regard, the company continues to invest in its products at a clip comparable to its competitors. However, financial performance and product capabilities are not always a hand-in-hand affair; in this case, the PLM product suite is more than adequate to garner profitable growth, but this has for some reason been a challenge for MatrixOne of late.

Summary

There is little question that the PLM market is hot. In fact, some people have questioned why the market is not experiencing even greater growth than the 12 percent to 15 percent projected by the analyst community. But like most hot markets, not all the participants are reaping the rewards. MatrixOne has finally put its months of anxiety over the financial restatement behind them, but a small grey cloud still lingers. Can the existing management team regroup and rebound, or will doubt about the company's past financial performance linger? With MatrixOne's deep product suite and its a considerable stable of clients, including Bosch, BAE Systems, GAP, General Electric, Honda, Johnson Controls, Nokia, Nortel, Porsche, Proctor and Gamble, Trane, and Toshiba, it would be too easy to blame the company's recent lacklustre performance on the elongated financial restatement period. The argument that cross-organizational transformation causes prospective clients to postpone embracing a PLM project is also a convenient explanation, but the real reason for MatrixOne's underperformance remains unclear. MatrixOne's senior management needs to focus on the challenge of reassuring its installed base and future prospects of the highest level of financial propriety. However, the recent announcement of Dassault Systemes' proposed acquisition of MatrixOne means that the challenges mentioned here will, with time, likely devolve on to a new senior management regime (watch for Technology Evaluation Centers Inc's follow-up article on this acquisition). Any prospective buyer of PLM software should consider MatrixOne, and ensure that a future working relationship with the vendor is founded on a solid basis of trust and financial responsibility.