Joanne Keates – Vice President, Investor Relations
William Weyand – Chairman and Chief Executive Officer
Sam M. Auriemma – Chief Financial Officer
Ted Pawela – Senior Director of Enterprise Business Strategy
Dave Rush – Vice President, Industry Business Development
Tom Cully – Vice President, Sales Government & Defense
Frank Kovacs – Vice President, Global Business Partners & Alliances
Dr. Reza Sadeghi – Chief Technology Officer
MSC.Software Corporation (MSCS) Business Update Call June 3, 2008 5:00 PM ET
At this time I would like to welcome everyone to the Analyst Technology Event Conference Call. (Operator Instructions) Ms. Joanne Keates, you may begin your conference.
Good afternoon. Thanks for joining us for MSC’s Mid-Year Technology Update. We have a large group of MSC’s senior management team assembled for the event this afternoon. Slides to be used in conjunction with today’s presentation are available for download from our website at www.mscsoftware.com at the IR landing page. We will hold a Q&A session at logical stopping points in the agenda this afternoon. If you are participating by webcast or conference call and would like to ask a question, please e-mail me at firstname.lastname@example.org and we will see that your questions get answered. We’re trying to move quickly through a very information-packed agenda this afternoon. We will start with a corporate overview with Bill Weyand and Sam Auriemma. We will move into a market situational analysis of the aerospace, automotive, government, and partner business and challenges of MSC. We will also have Reza Sadeghi, our Chief Technology Officer, do a presentation around our Enterprise software product strategy. We will then conclude between the hours of 4:00 p.m. and 5:00 p.m. with a software demonstration.
Before we begin, let me review our Safe Harbor statement. Today’s presentation may contain forward-looking statements that involve risks and uncertainties. All forward-looking statements included in this webcast and conference call are based on information available to us at this time. These statements involve uncertainties which may cause our actual results to differ materially from those implied by the forward-looking statements. Important factors that may cause actual results to differ from expectations are discussed in Risk Factors in our quarterly 10-Qs and our 2007 Form 10-K filed with the SEC. We undertake no obligation to provide to update publicly any forward-looking statements for any reason or at any time.
At this point I would like to turn the presentation over to Bill Weyand. Bill Weyand is MSC Software’s CEO and Chairman. He has held that position since February 2005. He’s overseen our transition to enterprise simulation and he will give a brief corporate overview.
Thank you, Joanne. And again, good afternoon and welcome to all of those of you who are here at the MSC Solution Studio and to all of those who are dialing in to participate in our technology update.
At a very, very high level you all know that we have been on a journey evolving from simulation tools to building an open architecture Enterprise solution that drives great value for our customers and great value in return for MSC software.
The good news about MSC is we’re the leading provider of simulation software throughout the world. We have the number one grasp in terms of functionality and as you know we’ve very, very strong in auto and aero industries and our technology is deeply embedded in the engineering processes.
If you look at our 2007 revenue, aerospace continues to grow for us in a very big way. It was 38% of our revenue, automotive was 25%. We are focused on ten industries, not only our three primary industries, but growing in consumer products, electronics, packaging and so on.
If you look at these ten industries, some of the household names are obviously in aerospace is Boeing and EADS, and automotive, VW and Audi and Toyota. And you can go through each of the industries. But there are some new names here in terms of partners with MSC and partners that are clearly evolving from not only using our best-in-class engineering tools, but also embarking on the whole enterprise solution, albeit it may have started with pilot projects but if you look at Fincantieri, a shipbuilder, deploying SimEnterprise throughout its operation as well as Kimberly Clark doing that in household goods.
So our strategy entering 2008 is to position ourselves extremely strong in auto, aero, and manufacturing, and establish new model sites for our SimEnterprise solutions in our new industries, and as well as greatly enhance our channels business, partner business, which we’ll spend some time on today, as well, and concluding in a complimentary fashion to our direct sales force.
If you look at the evolution that has taken place in terms of CAE transitioning to an enterprise solution, it’s clearly being driven by the needs of the marketplace, as well as great value.
If you look at starting in 2000, some of the pioneers in using simulation really started to look at simulation-driven design and predictive analysis and simulation level models and methods development at the same time. If you look at today, it is that everything is evolving towards doing things on a global basis, open architecture, where you are going to the least-of-cost engineering operations and a lot of it is moving it from the OEM side of the ledger to the supply chain.
So the value proposition that we’ve been focused on delivering to our customers is how do we help them accelerate time to market, right to market, and quality to market. And so what we’ve been able to do with moving from point solutions to an enterprise value, is allowing our customers and helping our customers do simulation driven design, moving it more upfront in the process, therefore they’re doing less physical reiterates and more electronic reiterates.
So with our simulation-driven design we’re enabling product innovation, much faster and experienced optimization, doing multi-discipline simulation and true system-level design as greatly impacting time to market, right to market, as well as high-quality products. The real benefit for our customers is that it is greatly reducing their costs and greatly improving the performance of their products and improving their competitive positions. And part of the great advantage of our Release 3, which is this quarter, is that it is robust enough to really drive knowledge capture, reuse, and best practices and content management.
We delivering consistent and reliable results through the whole process and content management as well, as is evidenced by some of our recent customer press releases.
And last but not least, PLM is clearly going through a transition just like all of IT is going through a transition. It is evolving from proprietary architectures, stand-alone bases, to more open architecture, more integrated, and more clearly driven by the global dynamics of engineering, global dynamics of manufacturing.
This happens to be an IBM slide on PLM but I think it’s very appropriate for not only where we are but the evolution that’s taking place in all of IT and particularly in the field of space, and that is that the customers in the marketplace are looking for flexible business deeds and having a constant open architecture to move from accelerating innovation, not losing data between different kinds of parts and pieces and supplies, and then doing it in a broad, global fashion. So here’s IBM’s offering in terms of their SOI architecture, this is the architecture we began on the journey with many years ago and with Release 3 we were able to deliver not only an open, integrated solution, but very, very strong capability and robustness of function and innovation.
So if you look at MSC today in terms of our integrated solution stock, from our engineering product and engineering tools, to MD technology, to Enterprise, again, on this chart you will see at the base is all of our individual engineering tools, and this is an upgrade from engineering tools to MD solutions. And that’s all your traditional point solvers and moving from single-discipline to multi-discipline. And then building on top of that is SimDesigner, SimManager, and SimXpert, which are all new business opportunities for ourselves and our customers.
And the best news of all is that this is really a journey; we aren’t obsoleting an install base, the install base continues to use our Nastran and our Marc or Adams, etc., and/or they can upgrade to MD, which a lot of customers are, I’ll give you a flavor for are, and/or, depending upon the value proposition and the need for innovation with their company, they might continue to use our engineering tools but decide SimManager or SimXpert for what they’re doing is the best value proposition to accelerate product innovation.
So if you look at this as a common integrated architecture on the left side, all automated, and then, again, we’re the first in leaders to deliver simulation to the Enterprise and the Enterprise means from engineer to engineer, the procurements department, division to division, through the supply chain, worldwide, it’s driving significant value.
So if you look at the transition we’ve been going through, I know this has been a question by a lot of our shareholders and so we thought we’ve give you a straight-forward looking back to the last two years when we introduced SimEnterprise. What really is the process our customers go through and what is that cycle.
So if you look at a typical engineering product where a customer was moved from Nastran or Adams to MD, how is it they usually start and what is it they usually do? So looking back over the last two years, most of our customers start off with doing a pilot. A pilot helps them to determine proof of value, proof of concept. The MD is doing a simulation that is far more powerful and of benefit. So if you look at that stage, they are usually smaller orders, $100,000-$200,000, and that’s a six to twelve month cycle that they kick the tires and work with it and move it.
And then based upon the success of these pilots and proof of concepts, they would do basically what we would call the first phase deployment. And then after the first phase deployment, then they would go to global deployment. So we are seeing a track record that it’s about a 24-month process and as you can see, and this is, again, software and services, but the size of the orders at each stage obviously accelerates. And, again, I’ll show it to you a little bit later, but with the number of customers that have, today, done pilots and proof of concepts with an MD solutions, and now being at R3 release in terms of functionality, as evidenced by the Boeing announcement and R3 and so on, you will see, I think, a great acceleration of deployment of our multi-discipline environment.
And the same also exists on the SimEnterprise with SimManager and SimXpert. You know, again, doing a pilot, testing, kicking the tires, seeing what it solves, how do they utilize it, how do they use it within their own company as well as the supply chain, and then how they look at deployments.
So, if we’re looking at SimEnterprise today and the number of projects we’ve done, and we’ve done a lot of them, it’s that it’s also in a multi-year cycle, but probably a little bit longer, more up to 36 months. And so that’s also good news because once you build a partner base that is deploying it, then you’re going to see repeatable orders on a very consistent fashion. You can also see the dollars here in terms of Enterprise obviously are much larger in terms of when we get to major deployment. And again, the Boeing press release, which I will cover, again, is a new multi-year Enterprise agreement deploying the full SimEnterprise solution of not only the MD products but SimManager and SimXpert.
So that’s what we’re looking at as we go forward in terms of MD solutions and SimEnterprise and the revenue cycle as they deploy.
Talking about Boeing. Again, we announced this earlier this year and again positioning with our three releases and I’ll quote it one more time. The Boeing Company constantly strives to translate technical innovation into product innovation and business value. And they believe that deploying our SimEnterprise solutions will help drive that innovation as they deploy our technology.
And as some of you already know is that we’ve pioneered our earlier version of SimManagers, called CAE-Bench, with Boeing on the 787 where we actually wrote a lot of code and delivered their signature value. If you look at the SimManager in terms of our largest deployment in the world, with our new SimManager is the Audi in the press release about 30 or 45 days ago, but Audi has done a lot of its deployment, SimManager of the world, every engineer plus 200 suppliers are using SimManager. They have documented an increase in proof of the simulation in excess of 35% and they are doing the order of almost 1,000 simulations a day now and have about 190,000 simulations stored and they are doing about 90% of all of this in the supply chains. And of course, the way they are able to do it is because we have an Enterprise solution that drives it, drives a value. I would say the Audi is one of the major global automotive companies that’s really introducing very innovative and exciting new vehicles. So we’re very pleased with this success and this is tied in and around the release of R3.
So if you look at MSC today on this journey we’ve been on, and if you look at the information from VeriTech and other technology analysts in the PLM space, about a new emerging market called Enterprise Simulations. Well, as we finish 2007, we have hundreds of customers deploying MD and we have also another whole large group of customers that have been in testing and doing pilots with SimManager and SimXpert, and all of those will be driving into moving to a much higher position. So if you look at a traditional business cycle, or technology cycle, for projecting more and crossing the chasm, is that with the Audi success in deployment and with the Boeing success, we are really now just crossing the chasm from, again, people testing the technology and using it to major deployments through their corporations.
And so we see these two as the first major indications, again, based upon the R3 release and choosing broadness of functionality and capability, that we should see many more of those hundreds of customers that have been evaluating the technology moving from evaluation to generating significant value for their companies by not only deploying not only within themselves, but also through their supply chain. And again, SimEnterprise gives them that vehicle to deploy in great value through their supply chain.
And most of the session today, as you will notice, is a technology update, but I thought I would just kind of share where we think we are in terms of where we’re positioned and where we are today. We’re also pleased that a number of other companies have announced, “innovative Enterprise simulation.” We’re three years into it, three years ahead in terms of development and architecture and I think that that will be an important stage for us. We welcome their entry into the market and where more companies are promoting a new technology and driving a market, the market accelerates a lot faster.
So for summary of highlights before we turn it over to our key technology speakers, we believe that we are in the final stages of completing this transition, that in Q1 our SimEnterprise represented about 28% of our overall software in the quarter. We exceeded all of the pilot targets that we set for in 2007, meaning six of the twelve major auto, six of the twelve major aerospace, new industries moving into and evaluating our new solutions. And with R3 plus our focus on our channels expansion, we feel that R3 launch should drive more upgrades and further expansion, because if you look at the bottom tracks, no matter where you start with our solutions, it drives significant value and many of our customers have documented in excess of a 75% improvement in productivity by the use of that technology. That’s a real competitive advantage in their industries and their space.
So with that, Joanne, I’ll turn it over to Sam. He’ll just touch a little bit on some financial highlights.
Sam M. Auriemma
Thank you all for coming. As a reminder, this is a technical update on MSC, but as such I’m going to give you a little frame of reference on the financials, where we’ve been for the last couple of quarters, and then move on to the technical part of the presentation.
So, MSC is a typical software company. We have really three legs to our revenue stream, software revenue, maintenance revenue, and services. Software revenue is primarily on a paid up model. You do have some leases and some deferrals that impacted our revenues for the last four or five quarters. In 2007 and early 2008 it continued to be impacted by the strategy of the new products transition, discontinued products, and a couple of other items as the company began it’s move into and the transition in the business.
Maintenance revenue grew 15% in the first quarter. Our products still are very sticky. Customers see really good value in our maintenance revenue stream and the company generates renewal rates in excess of 90% on its maintenance stream.
Service revenue, typically time and materials and the services revenue piece has basically been defocused by the companies broad services business, where we do many things very focused, MSC-centric type service operations. We consolidate that on a world-wide basis now under Dave Jones. And it’s been one of the key drivers to our overall gross margin shift over the last couple of quarters.
At March 31, 2008, deferred revenue, we had good activity in the first quarter. It stood at $94.4 million and for the last five or six quarters that is a high for us. Mostly driven by the deferred maintenance stream, as customers continue to renew and continue to increase and enhance their investments in our product lines. Deferred revenue was up $13.8 million from the end of the year.
And a little bit about where we draw our product lines. The good news is MSC is fairly well-balanced. Many of you know we operate three distinct regions, each about equal size. Asia/Pac for 2007 was 31% of revenue, the Americas was 31% of revenue, and EMEA was 38% of revenue, so pretty well balanced across the globe.
And we operate basically in three key industries and three key verticals. Aero, auto space and manufacturing, so not an even dispersion but we will tend to buffer any kind of ups and downs in each of these regions with industries in each one of those regions. Every one of those regions presents opportunity and challenges for us.
So getting to the quick slide about where we’re out. I’ll have Joanne introduce the people in the individual spaces and some of the psychology folks. Thank you very much.
Thanks, Sam. So one of the tremendous assets, you know, at MSC, besides our technology leadership and our base is really our team. And that’s one of the things we really want to showcase today, is our team.
And I have asked, you know, Ted Pawela has worked closely with me for the last two weeks preparing for today’s presentation. Ted has spent more than 20 years in the simulation software space. He comes to us with previous positions being held at ANSYS, LMS and MARC and actually we acquired MARC in 1999 as our non-linear product. He has held a number of business and technical positions at MSC and right now is running our SimManger and enterprise simulation product business. So at this point I will turn it over to Ted.
Thanks, Joanne. So this section of the presentation is actually intended to give you an update on just an industry perspective. And one of the points here is that we understand our customers pretty well. Sam mentioned to you that we work a lot in aerospace, we’ve got a strong business segment there. Same in automotive. You will see in our government and defense sector it’s the same way. And now an emerging focus on addressing the other industries inside of manufacturing, emerging markets, and SMB channel space that we’re trying to accelerate in.
What we’re going to do with these is to hopefully set you up for what you’re going to see when we walk next door to do a demonstration. To understand what are the business drivers that motivate us to develop the software that we do, and then hopefully have a chance to show you what is unique about the MSC products and why that represents a real opportunity in the market space.
So now I’m going to tell you a little bit about how we see the aerospace industry changing and evolving as we go forward. The good news is that the aerospace industry in general is really in a strong economic upswing. So there’s probably no significant news here that you haven’t heard before.
The next thing is that we’re right in the middle of an upswing that applies to both military aircraft and commercial aircraft in the same sort of way. If we look, for example, just at the Department of Defense procurement budget, we see that over the next several years, over the next three years in particular, that continues to grow rather nicely, until we get into fiscal 2012. And that applies to all of the significant agencies, Army, Navy, Air Force, all of the ones that we work with.
With respect to commercial aircraft, if you look at the financial numbers, where you can look at the orders that are coming in terms of new aircraft being ordered by customers. And you see that we are just now starting the third year of an upswing that is scheduled to last out until 2010. So it’s a really nice position. The industry is in a really nice position. Our strength in that industry should be reflected in our business.
I want to talk for a moment now about what this means to our customers, because that’s how we are going to be actually successful, is supporting them. They’ve got some issues. Even though the industry itself is in an upswing, if they are going to be competitive and win on an individual corporate basis, they have got to deal with some work force issues that exist today.
One of the things you will notice if you look into any of the hiring spaces, you will find that aerospace, this is a list on the upper right of 11 or 12 aerospace companies, this is actually 11 or 12 from the top 20 hiring companies in skilled information workers today. So of the top 20, 11-12 of them are in the aerospace sector. So there is a shortage of skilled workers today.
The thing that we know is that the workers that are in place today in those industries are generally either very, very experienced and nearing retirement age, or they’re very inexperienced. The curve on the lower right, you can see here, the average age of engineers inside of the aerospace industry, and you will see that a lot of them are approaching retirement age, a lot of them are very green in terms of their expertise level and experience level.
The issue here is since that aircraft programs run for so long, we are going to lose many of those skilled workers and the knowledge that is in their heads, before those programs ever come to completion. So that’s a critical success factor that any aerospace company will tell you or tell us is a problem.
And, if you just look out into the recent news, you see that we have delays in the airbus a330 and we also have delays in the Boeing Dreamliner program. And, of course, the reasons for this are always debatable but one of the reasons that a lot of people believe is behind this is exactly this experience level. That there are many engineers working on this program who don’t have the experience. It takes them longer to do the same thing because they are going through a learning curve. So that’s a problem.
Another problem they have is that, from just a pure business perspective, it’s getting very complex to operate inside the aerospace industry. Almost every defense program that is in existence today is trying to do cost sharing. And they’re trying to do multi-company alliances. So what you are looking at is the individual government entities that are purchasing aircraft, for example, and purchasing them by themselves. JFS is a great example.
The same thing with respect to business partnerships. EADS works with Northrup Grumman. A North American and European team working together for a tanker deal. Presidential Helicopter, the same thing. So globalization at that level is a complexity. And on top of that, we’re finding that each of these companies are globalizing their engineering work force.
So you see that in more or less a right-to-play situation for each of them in emerging markets. If we want to win the commercial aircraft business in China or India, we have to have operations there. So this introduces complexities because we’ve got to get engineers coordinated with respect to engineering really complex systems and aircraft, even though they’re dispersed globally around the world.
On top of that, they’ve got to deal with the fact that the technology itself is getting more and more complex. We hear a lot about composites and certainly that’s something that we have to deal with. Propulsion technologies are another one, as well.
And just like in the automotive industry, we find that we’ve got more environmental concerns. More sort of green concerns going into that industry, whether it’s for noise concerns or omissions concerns, we’re having to engineer things we’ve never had to engineer before and look at things differently.
Same thing with safety. We actually see some of our customers considering putting airbags on like regional commercial jets to see what would happen if they had a water crash event, if there is something they could do to improve the safety. So they’re investigating new things all the time.
And we’ve heard for a long time about fly-by wire and we see when we look at the news today a lot of unmanned vehicles being deployed in military situations. These all represent new complexities, new technologies that a lot of companies haven’t had to deal with before so they’re on the learning curve.
And if that wasn’t enough, the last thing is competition is getting harder and harder. We’re talking about each of these companies trying to be successful. And, again, in the interest of showing you this, what is MSC going to do to respond. If we look at what’s happening in their industry, Boeing and Airbus are really fighting it out at the high end for these large, twin aisle aircraft.
And while they are doing that, they’ve got competition nipping at their heels, so to speak, from the companies that traditionally stayed in the smaller commercial jets. So now we see Bombardier and Embraer are actually competing in this single-aisle market. On top of that, the single-aisle market is really growing fast in China and India so you see new competitors who have some regional advantages actually starting to emerge in there.
So it’s a very trafficked space and the whole point of this graphic is just to say that there’s a lot of companies all really feeding on the same business. And if you’re in North America, especially, you’ve got to deal with the fact that you’ve got what I would call non-economic competitors. The governments of China and India are subsidizing companies within those countries to actually design, they are capturing the single-aisle market that’s really emerging for them right now.
The whole point is, this is getting really, really complicated. It’s getting a lot harder to deal with business factors, technology factors that are playing into this. So what’s the point? The point here is that our customers, when they come here to this solutions studio, from the aerospace industry, they all tell us the same thing. They say that simulation is going to play, needs to play, a critical role in their business. And today it only does to a certain extent. It doesn’t have the business impact that they want it to.
Well, we need to improve that. And how we need to improve that, again, these are factors that everyone of those customers come and tell us. They say, “I’ve got resources deployed all over the world in different facilities on different programs. I need to find a way to more effectively utilize the limited resources I have, especially the ones that actually have experience and are very knowledgeable. How do I get the most out of them, share them across programs and so forth?”
The other thing is, they’re all looking at that retiring work force, that near-retiring work force, and say, “How do I, before they leave, capture what’s in that head and make sure that the new crop of engineers that are coming in, how do I make sure that they have the benefit of that knowledge, and that I, as a corporation, get the return on the investment I’ve made in those people for so many years. I need to capture their knowledge and I need to be able to re-use that in a way, how do I make sure that I define, when I run a test simulation or a CFE simulation, that everything is done the right way and it’s the way that was designed by a guy with 30 years of experience.”
And really, this graphic that we see here on the right says that. Customers are saying, “I’ve got lots of data but it’s dispersed all over the place and what I need for you to help me do is to capture that data in the context that it was generated in and why it was created and what assumptions went into it. And I need to have, also, an understanding of what it means and if it’s any good, was it done the right way. And when I do that, you’re actually taking all of that stuff that I’ve got spread on engineers’ drives and turning it into logical properties. Help me with that.”
The other thing is that everybody says the key thing in terms of getting a lasting competitive edge is that they need to get better products than their competitors do, more innovative products. And there’s only one way to do that. Stefan Thomke from MIT had a book, it’s called Experimentation Matters, and the whole point, the whole premise of the book was the only way to get to new innovative products, unless you just get very lucky, is if you experiment a whole lot more.
And you’re never going to do that if you rely on physical prototypes. You’re never going to do that, frankly, if you rely on the point tools that we and everybody else in this space have given for the last 30-40 years. Something has to change, something has to be different.
And lastly, they say, “Look, I’ve also, when I’ve got to be in this competitive situation, I want to get the most acceptable big package that I can. But I can only do that without just making my risk unacceptable. You know, if I understand what I’m proposing and how it’s going to perform up front.”
And so the point of this, in explaining these challenges and talking about some challenges, we’ll just put them in the context of what MSC is doing. Why are we delivering the products that we run today. We said we wanted to improve the engineering utilization and that means share things more effectively. We need to get people working more collaboratively. This is exactly what we try to deliver with SimManager. That’s why we deliver that. We want to make information accessible to people who need it, when they need it, all the time, wherever they are. That’s the point. That’s why we deliver this. You’ll see this in the studio when we go next door.
We said we wanted to capture and reuse the knowledge asset. Those people who are nearing retirement age who have a high degree of expertise, how do we capture that? Well, we’re going to show you next door how SimXpert gives a next generation of templated processes that can be given from the experts to everybody else who is inside of the organization. And you can do it in a way that’s easy to deploy, easy to do, it doesn’t require the level of effort that it has in the past.
We want more aggressive bids while getting a better functional understanding of complex aircrafts, and cars, and satellites and submarines. These are very, very complex systems and that means that you have to look at the overall system performance in the context of every other substance. I can’t look at the noise and vibration performance of the vehicle without considering a change that I might make for that, how does that affect the crash performance. I have to always look at things in that way.
The point of MD, the point of re-engineering all of our simulation for structure analysis, for motion analysis, for fatigue, is the only thing that is putting us in this framework is to allow them to communicate with one another effectively, to share information and to look at performance from a system-level perspective. Once again, we’ll show you that next door and Dr. Sadeghi, our CTO, will tell you a lot more about MD.
And then lastly we said we wanted to enable innovation. And experiment more. The whole point of that is, if you’re going to experiment more, you need to get more people involved in the experimentation process. The handful of core analysts that we have in every industry are not enough to be able to do that effectively. And we need to put it into the hands of people who do it, who are involved very early in the design process. So taking this foundation of MD as a multi-discipline, of templates for simulation, making all this accessible and making data accessible to the manager and then finally exposing that to the design community in the form of executable templates that experts create for us. That’s why we created SimEnterprise. That’s why it’s so helpful, together it really makes sense for us.
So this is what we’re trying to accomplish, this is what we’ll show you today. And lastly, I’m just going to close again with just a little bit more information on Boeing. Bill showed you this slide so I don’t need to re-read it, but the point of this is to say that Boeing, like many other customers over the last few years, has come into this solutions studio and gotten a detailed growth map review from us on what we’re doing. They’ve walked next door and seen even deeper demonstrations than you’ll see today and ask questions.
And after they did that, they said that the business is spot on with respect to meeting the requirements they have for their business objectives. And why is it spot on? It’s because we’re talking to them and we’re listening to them and we’re creating our products, developing our products, to address the needs that they have. So what Boeing actually did is invest in not just an upgrade to their existing software, they’re investing into SimManager to govern all of their simulation processes, to automate those things, to distribute the information to their global organization.
They are investing SimXpert to literally having those experts that are nearing retirement age, to write templates now, before they leave so that there’s a legacy behind them. That new engineers are going to be able to come in and use consistently, repeatedly, and according to their best practices every day.
They are employing MD in order to understand when I do a CFT analysis, how does that affect the structure. I can’t understand that after the structural design is out, I have to look at these at the same time.
And finally they are also deploying, to their design communities and SimDesigner. This is a SimEnterprise sales deal, a SimEnterprise deployment to use all of those things in the context of their simulation.
Once again, we’ll let the proof be in the studio today. That’s what we want to accomplish with this.
So with that, I’m going to transition to Dave Rush to talk about our automotive business and I’ll introduce him while I switch presentations for him.
So Dave, like myself, has a very strong industry background. Dave has spent over 32 years in the automotive industry. Dave started that at Ford Motor Company and I think at Ford of Europe and actually worked on the program side of vehicle engineering. So not necessarily in the simulation side but really down in the trenches to understand the designing, release process and be a part of that, and worked on a number of vehicles there. He worked on the Ford Cargo truck, he worked on the original Ford Escort. Dave has worked on the F-series truck while he’s been at Ford as well. He left Ford at a certain point and this slide really highlights Dave’s background. It’s an impressive background and it highlights for you just how much he knows about his stuff.
So here’s where Dave’s background comes from. As I said, it started in Ford, at Ford in Europe working on the cargo truck and the Escort van, switched over to Nissan in South Africa. So you see he’s also got a global flavor to this experience. Worked on the Mazda program on Puzo, and again, mostly on the program side. In 1986 he came to North American and joined GM and worked on the Buick Riata, again, on the program side. He has worked on a number of other programs, he went back to Ford in the late 80s and into the 90s, worked on a number of vehicles you see here.
And then really where things get interesting, not that they weren’t before, but really interesting, is that Dave then moved over to be on more of a PLM-focused track inside of Ford. So now, having the background in the design side, he came over and looked at how CAD is used effectively and how they deploy that. And specifically how CAE was integrated into the PLM process there at Ford.
And you will notice also that he has worked on a number of interesting and sort of modern technologies like electric vehicles and alternate-fuel vehicles. And post his Ford term actually worked with the Department of Energy on programs like the Freedom car. So Dave has had a tremendous amount of experience in Lean and improving in product development process and in deploying CAE in the product development process and we are lucky enough to have Dave as our Vice President of Industry Development here. So, Dave, I will turn it over to you.
Thank you, Ted. Good afternoon everyone. Thanks for the introduction there. What I want to highlight here about what MSC is doing today is they’re bringing industry experts into their business to look at and sell industry products. So you can see there in the 90s I spent a lot of time in the early days of CDM. You know, we started off CAD and CAD was where it was at. CAD the master. This is where this was going to be industry-changing, this was going to solve all our problems.
And then after we were generating more and more CAD information, we then had to manage it, so we moved into that whole world of PDM and we started to talk about it in terms of life cycle management, the whole product life cycle management. So, you know, as you look back and you look at the industry plans today, that’s where we’ve been through the 90s, and the early 80s here. We’ve been getting the CAD going and getting the whole PDM side of the business working.
To a great extent, CAE was the poor stepchild left on the side but we also recognized, “Oh, yeah, those smart guys doing all this CAE analyses.” You talk to the engineering community, and I was one of them, doing these vehicles, we used to like messing around with prototypes. Lots of them. Like do version one, finish that, do version two, do that, move on and keep going until we ran out of time and had to get that vehicle to the market.
So, it was a great pleasure to come here to MSC at the point in time where this industry is because we’re at the point where we truly have to get smarter and get engineering done in a different way. These years looking at Lean you’ve seen these initiatives from the big aerospace, the big automotive, where they have followed the adoption of things that the likes of Toyota have done with their Lean production system, have the type of waste out of the engineering and the product development process.
So, if you take a situational look at the automotive industry, all of these things affect this industry. We’ve seen everyone looks in the waters of the Big Three. It’s been challenging, in a hundred years of developing vehicles, owning the space, and now they come along and there’s greater and greater pressures. There are graphics, baby boomers are getting older, change in the types of vehicles that they are using, where they are moving, you know, the baby boomers migrated to the sun belts in America for instance. All these things have a role and an effect on this industry. The movement of materials, greater movement in manufacturing in the low cost producers, India, China, etc.
So what I want to focus on and talk about is mainly what is happening in the technology area and how technology is affecting the product development process. The speed in getting innovative new vehicles to the market at a cost that more and more people can and want to afford.
Now, you know, this is the classic Five Forces proto model, right? You know, threats to new entrants. Not much. You need a lot of capital to get in the car business. And believe me, I do know, because I tried it once. It wasn’t a very smart move. You do need a lot of capital. Research and development, it just sucks more capital than we can think of, especially if this is a hardware-based R&D process. So you’ve got to be pretty effective there.
Now, when we say new entrants, please do not confuse that, where I say very low, with the bottom line that says intense rivalry among competitors. For a long time Europe, North America, the western markets, had been dominated by a few, 15-20 car makers. But there have always been car makers in India and car makers in China, we just weren’t paying much attention to them.
So what you’re seeing in the growth, from Chinese producers, Indian producers, I’m not classifying that as new entrants. They’ve always been around. They’re just going to be more competitive against the classical guys that have always had market dominance. The GMs, the Toyotas, the Fords. They’re going to get more pressure from the leading Indian and Chinese automakers. Especially as these guys start to get smarter and smarter about how they develop products.
So this is a quick snapshot. I didn’t want to bring up enough to graph. I know you guys love the data but I thought this was pretty relevant.
Price of the vehicles, first of all. If you look at the North American and European markets and people argue what the average normal price is, just take that as a rough snapshot. You know, vehicles float from $10,000 in America up to $300,000, but the average vehicle in this saturated market, about $28,000. In Europe, round about $20,000. And then we hear India, the one car, $2,500 target price to sell a highly technical vehicle in that market. It’s $7,500 to bring it to the States. This is not far-reaching really. It’s got four wheels, got four tires, all got bodies. All got decisive electronics on them.
If you look at the difference, a 10:1 ratio, it’s what the market is expecting to see in the emerging markets of China, the Asian growing countries like India, etc. and you realize that there is massive competition and pressures on the existing system.
And to add to that the legacy challenges that we’ve all seen with the Big Three, etc., you know, legacy health care costs, whatever the costs. $1,600 a vehicle, whatever it is. Pension costs. They are challenges these emerging manufacturers haven’t got. So there’s a price advantage that they’ve got right from the get-go. So they need to find their competitiveness established where? Development costs. Going to market, trying to build prototypes, the whole prototype game, and I’ll show you in a few minutes, is not sustainable in the future of business.
The cost of prototypes, not sustainable in future business. You can’t get to a $2,500 vehicle if you try to amortize 1,500 prototypes across whatever the volume is for that particular model. So very clearly. Oil price pressure. The price of the gasoline on the street. Europe’s already at a high price. We’re seeing it here. $4.00 a gallon. Where’s it going to stop? Is it going to stop at $5? Is it going to go to $10? I don’t think it’s going to go down.
So take a long look at this new car. This is a quick snapshot. You’ve got a couple of years here. Smallest car, 24%-25% increase. What’s happening to all the mid-range, large car, pick-ups, the SUVs. Markets all down. We saw a slight move here when people said, “Oh, better get out of these big gas-guzzling SUVs,” so they went to the mid-size and we saw that they got the small SUVs. Move forward one year, even they’re down, the small SUVs are down. The price of gasoline has gone up. So where is everyone going? They’re migrating to small cars. What does everyone in China want right now? Small cars. They want the cars for everybody. So, just a quick snapshot of where the industry is moving.
So this is a sort of classic. Maybe you said, “What’s the average time to develop a new product, get it to market?” I think if you surveyed the automotive makers, it’s about 36 months on average. Some a little bit more, some a little bit less. And a whole pod of researchers. Now what are they doing? Building prototypes, testing them, crashing them. Average program, $1 billion for a program, depending on the model complexity and the number of variance. What are we going to do? We’ve got to halve that and we have got to halve the time to market. The industry expects to get new product to the market in sort of 18-month cycles. 50% reduction in time and 50% reduction in the resources used, people, materials, etc. to develop new products. That is a big task.
So what can I do to get there? There’s not many options. For the areas that command new programs we need to get to 18 months. But to get there we’ve got to get these prototypes out and move to a virtual world. A virtual testing world, a virtual development world, and upfront CAE.
We’re seeing some off-shoring. We’re seeing some effects of moving the work force and skilled resources. Some say that the cost advantage for China to USA, for instance, is a 5:1. They’ll also say they’re not as experienced as some of the Western engineers, but they’re coming on very, very quickly. They’re gaining experience very quickly. So this movement of knowledge, and this retention of knowledge that Ted talked about happening in the aerospace, really it’s happening in every industry. And the practically design-educated engineers, how do we move their knowledge and get that so that the younger community and the engineers in more viable countries can have the experience to develop that the market expects?
The competition, as I said, comes from India and China, but if you don’t get good product to market then there is the additional cost of things like warranty and we’ve all seen that hit various car makers and various other industries. So you’ve got to get the right product to the market and it’s got to be such that you’re not going to get hit with a high warranty cost while it’s in service.
So, global market, about 50 million units a year, roughly, right now. And we see that is going to grow. Now, look at North America. Flat. Some say that it’s going to go down to 15 million units this year from 16 million-17 million year-over-year. Some say it’s going down to 13 million units. Practically it’s a saturated, mature market. Same thing in Europe. Where’s the growth opportunity? India, China.
Now, who’s been in the game? It’s the same players that have been there for a while and they go through their product development developing new products for these markets in a multi-phased prototype. Maybe four phases of prototypes for the life cycle of developing a new product. And as I said, taking an average of 36 months.
So what do you do? You introduce Enterprise simulation management. Virtual product development. You get there. How many times can I do that for every one prototype. And these new players, are they going to go out and start messing around with prototypes and follow the way classical car makers have always made and designed cars or are they going to do something different? My suggestion is you’re going to find they’re going to do things a lot differently.
Couple of cycles, you get through 2004, how many vehicles can we produce if we do this virtually? A lot. So this idea of throughput, these factories, become a lot more nimble in getting new product to the market so you can take a share. And I would suggest to you that the market will be dominated by those OEMs that are nimble enough to get efficient in their product development process to get that new product to those emerging markets, and deal with the migration of those saturated markets in transitioning from trucks and large gas-guzzling vehicles to smaller cars. You’re going to see that. Or hybrid vehicles, or whatever it is, but they’re going to be economic. And that means Enterprise simulation management.
With Internet and everything else and computerization, we’ve been in the Information Age for many years. And I really look at information differently from knowledge. Information is the data and everything. It’s not intelligent and it’s not managed in a certain way, it’s just lots and lots of information. And we can sit through it, but we need to make it more intelligent for us. If you look at the point solutions that we’ve had today, 40-50 years of point solutions, last 10 or 20 pretty dominant, pretty mature.
The technical solving solutions in themselves are becoming very, very sophisticated. Prototypes. We’ve got to get the prototypes. What does this really mean? From 2003-2008 here, everything has been on this road to move us towards Enterprise simulation. We haven’t forgotten or given up on our core technologies. They are a fundamental part of who we are. If we didn’t have the underlying solver technology, there is no way we would know how to move into this Enterprise space. They are a fundamental foundation to this new place where we have to be.
You can see that the early adopters that worked with us, the Audis of the world, you’ve seen the Boeings of the world. These have been very interactive with us in designing what this Enterprise solution space needs to look like in the future.
And now we’re at this breakout point where there is market adoption and we’re ready to go into a broader scale deployment where you’re going to see the followers start to pick up on what the early adopters have already been doing for the last eight to ten years.
They were talking about CADs sort of had its time and they are flattening out and just be every day. CAE’s time growing in the basic simulation market and [inaudible] growing. And people were talking about this PDM space and what this upsurge is in the last couple of years. Well what I suggest to you it is, it isn’t PDM upsurge, it’s actually simulation data and process upsurge. We’re moving and expanding from the old situation of where the traditional suppliers were into this new market here.
And that’s exactly where MSC has positioned themselves. We’re in the simulation content and product management space, we know it’s a necessity in order to be successful in the simulation space. And we are merging all that underlying technology that you found in the traditional cores Nastran, Adams, etc., they are foundational components of this architecture for this whole Enterprise simulation.
The core technologies themselves, this diagram here, we’re talking about, you know, a $2 billion market maybe, it’s actually on a breakout. What we’re really seeing is a conversion. It’s a multi-discipline from us. It’s not really about these cores anymore. They’re components of the more tightly integrated system. So you’ve seen multi-discipline, multi-physics, to the merging of implicit solving technology with the exquisite fluid with structures, rigid with flex, happening in the science technology. These are no small feats. As the technology stopped to merge these so you can truly do a virtual vehicle, put it on a virtual test track, and run it through virtual simulations.
You can’t do that if you decomponent the problem into smaller subsets of the problem. You get a breakdown of the components of the science and the physics. What this does now, the space we’re moving in, is simulating reality more realistically. No decomponenting the problem like we used to do.
So we have to manage the simulation. If you don’t do this you cannot have the confidence to trust getting rid of prototypes, whether they’re good or bad. This knowledge and these younger engineers, you have to take the younger engineers capability and you need to capture that bunch. That’s why you see a big push from us in templates. Templates is a way of capturing knowledge so it’s re-used. It’s a practice, it’s a method that I can execute. No small feat to make highly technical methods executable. But that’s what templates do. That’s what you’re seeing with SimXpert.
And the whole integration into a solver set and a modeling set so you can do more complex systems modeling, to do more realistic model builds and analyses. So you can truly have the confidence that you can get rid of those prototypes.
So in summary, we do have to change the product development paradigm. Prototype hardware testing, it’s always too late. I used to love messing around with prototypes. Great fun. Getting out on the test tracks, running them around, 100 mph, a lot of fun. All engineers love to do it. But, all the results, all the information we used to get, design has already shifted through three or four more versions, always too late. As my dad used to say it’s like bolting the stable door after the horse has bolted.
Simulation must lead CAD. Now this is pretty changing in our industry here. What we do today is we take geometry, we model or measure some other objects onto it so that we can use it in the solves. But we’ve got to add the CAD first. So as soon as you model something to the CAD, it’s fully constrained. It is what it is. So you haven’t got the chance to say, “Is it the best thing? Is it the best design?” You’ve fully constrained it. So what you have to do is iterate on that time and time again. And you constrain it for one attribute. Form, geometry. And you’ve got to go through all these others. Is it thermally right? Is it structurally right? Etc., etc. So we have to change that and move CAE up from it. And that is what MSC is doing.
So we must model a more realistic system using multi-discipline, multi-physics, and use that to define geometry. The geometry constraints. We have to use the simulation management tools to manage the work functions. SimManager. So then you can interact and exchange the functional design. Not intermingling hoping that you’re giving each other the right data or the right results, etc.
And this is what will drive robots and optimum design. I’m not saying it optimizes the idea of robot design, but this foundation is when you start seeing the outbreak of truly seeing many, many simulations run, early in a program or a project, so that you get the optimal design out front, but you can then issue a report in terms of CAD and other text bases.
And with that I will say thank you and hand you back to Ted Pawela.
I’m going to be introducing to you a gentleman by the name of Tom Cully. I, myself, have spent 12 years here at MSC and Tom makes me into a short-timer. Tom’s been at MSC for 22 years. He actually started his career in 1977 as he graduated with a civil engineering degree from Manhattan College. And Tom spent some time then, he spent his whole career in the CAE industry for that matter.
He initially worked in that as an analyst working in the industry, spent some time initially with us as a support engineer, and then he pretty quickly moved into a sales role because he found he was very good at talking about our products, articulating the value proposition around those. So since May of 1986 Tom has been an account manager.
He’s got one more unique distinction with respect to being an account manager at MSC. He happens to be MSC’s very first account manager. So you have a chance to talk today with one of the guys who’s the first one who had to deal with major accounts and has worked in this government industry sector for a long time.
One more thing that is very unique and very special about Tom as well. There’s probably plenty of things, but one that is interesting, hopefully to you, and that is that Tom’s lived with a quota for 22 years at MSC. And I’m sure he would be very happy to tell you that he has made this quota for the last 21 years of those 22 years. So he’s a very successful salesperson and has worked with some of our biggest accounts, United Technology, NASA. You’ll hear some of the other ones as we go forward here.
Good afternoon, and thank you for that introduction. I am going to talk about our government group. I will talk more from a sales perspective and talk a little about the technology that the government is using through MSC. As we talked about, I’ve been in a number of positions at MSC. I got the pleasure of starting the government group about 2 years ago and received a new contract with the government. We actually got our start back in 1963 with a contract from NASA Goddard which led to our flagship product, Nastran. And that led to our other products including Patran and Marc have been heavily funded by the government.
Our group has grown steadily over the last two years. We have made our numbers, as Ted has mentioned, and the build side showed government at 5%. If you look at the Americas numbers, we’re sitting at about 14% of the business. Our largest customer is NASA. We sell both software and services to the government. In fact, in this building we have a secure facility to address government secure work as is required.
In the government there is great deal of complexity. It’s paperwork and regulation so we actually use a company called the Immix Group, they manage our GSA schedule, it stands for Government Services Agency. In order to do business with the government effectively you need to have a GSA schedule that can turn orders around in weeks as opposed to sometimes years.
So how big is the federal government? Of course it is the biggest consumer of goods on the Earth. Those numbers really are in trillions, so about $2.7 trillion is the budget for 2009, which is coming up for approval. Defense eats up a little more than half of that. Just from a perspective point of view, NASA is only $7.6 billion of the total $2.7 trillion, DOE is $25 billion. Even Homeland Security doesn’t exceed $35 billion. So you can see there’s quite a bit of money being spent elsewhere in the government.
In some information on the IT spend, the defense agencies spend about $32 billion on IT. As you can imagine, Army, Air Force, Navy, eats up quite a bit of that number. DISA, which stands for the Department of Information Assistance Agency, they essentially manage the IT for the government, comes in fourth. You have to come out pretty far on their scale, we do some work with DARPA, which is the Defense Advanced Research Project Agency besides the name services which I’ll talk about in a little bit.
On the non-defense side, or what are called the civilian agencies, as you can see the top getters are Health and Human Resources, the Department of Homeland Security, and you would be out five or six agencies before you would hit Energy or NASA. We actually do some work even with NSF, which is out on the energy scale.
Our focus is the government group but we really define governmental differently. The actual agency, federal, state, local, and their support contractors, so my group doesn’t cover anything with the prime contractor except with Boeing, Northrup Grumman, Lockheed, General Dynamics, and I have a chart coming up on that shortly.
We have a short-term and a long-term focus. Long term is really three years in the government, that’s how long it takes to secure funding for particular programs. We have four sales reps really focusing on these six agencies. As I said, NASA is our largest customer. We are selling both our legacy tools, the engineering products, as well as our enterprise groups, our new products, to the government.
Some of our long-term strategies really focus on government programs such as light-tactical vehicle and the new tanker project, the Constellation project at NASA. But we also work with the government universities and industry groups to look at other aspects, particularly where we can get future development of our products. That’s the University of Illinois, DARPAR, and the Council on Competitiveness for high-performance computing.
This is a list of the top contractors that represent the Washington technology group. The highlighted companies are the ones that we service. There is some overlap so the first chart up on the left there is for DOD. The others are covered by our other verticals whether it be aerospace or manufacturing.
On the NASA side we actually do cover some Lockheed and Boeing with the USA contract down at NASA Kennedy, California Institute of Technology is really NASA GPO. I was actually up there this morning and will talk a little bit about that later.
And on the bottom is our DOE top accounts and most of them are really managing DOE labs. For example, Lockheed Martin manages [inaudible]. So you can see some of these companies are getting their real fair share of the government budget. Some of the top getters are getting $30 billion.
As far as MSC goes, our three top accounts are NASA, DOD, and DOE. I will talk a little more about NASA but essentially we have about 48% of our business in NASA. We have about 31% in DOD, and about 15% in DOE, and then the balance is in other areas of the government. In the case of DOD we do pretty much split the revenue across the three services. In the case of DOE it’s mostly on the nuclear side where we have our business. The energy side is in renewable energy such as Lean turbines as well as nuclear are being typically funded as we move forward.
On NASA we are installed in nine of the ten centers. There are a few more centers which are satellite centers such as Wallops Island. The only center we are not installed in is Stennis. That’s really a test facility. Our largest NASA component is NASA Langley located in Hampton, Virginia. I mentioned I was up at JPL up in Pasadena this morning talking to them about some of the programs and the use of our products.
If you’ve been following some of the Mars mission, they just landed the PH Lander and it will be sampling soil on Mars. And what’s interesting about that, the robotic arm that they are using was actually designed using MSC.Adams. In about a year the new Mars robot will be out. It’s the size of a Mini Cooper. It was also designed with MSC.Adams.
As far as trends go, this is an election year, I don’t think anybody can miss that. It also has two wars going on. But this year the budgets are somewhat uncertain, both in 2008 and 2009. Some good news is that the government is quite interested in growing and modeling and simulation. And government defines modeling and simulation, everything from the battle field to, oddly, procurement cycles. We get involved in modeling procurement, try to predict what the government is buying, whether it will actually be commissioned. And we’ll talk a little bit more about that.
Some of the key areas of M&S at NASA is on the Constellation Program, which is their Moon-to-Mars program. They are coming up with a new vehicle to replace the shuttle, if you’re not familiar with the Orion program. Again, this is really focused on multi-discipline integrated analysis and our MD Nastran product really claims well here.
On the DOD side it’s all about protecting the war fighter and areas of impact of blast and we’ll show you a few examples of that. And DOD is unique in that it has not been able to test nuclear weapons for many years now so everything is virtual. We are developing massive amounts of data and we are working with a number of labs to try to manage that data for them.
Some other trends, the government is very interested in high-performance computing. They have an interest in consumer high-performance computing and they would like to see the masses using it as opposed to one or two. So we are working with the University of Illinois, the Council on Competitiveness, and DAPAR to try and bring top software, like ours, up to the high-performance computing world where we are supporting many cores and many processes.
Some of you have been at the PTC Conference. They are a predominant player in our space. Particularly in NASA and Army. They have two initatives ICE and ACE to drive product innovation within those two agencies supporting Constellation and future combat systems.
As far as competition goes, it’s really no different in the government space. We see the same players. One important difference is we do compete with the government. They tend to make decisions of make versus buy and we’re always trying to educate them to prevent them from doing the make.
Frankly engineering is important so we don’t sell ROI to the government, it’s all about reducing risks and meeting mission requirements. And finally, one of the biggest pushes that we see coming up in the next few years is DOD is going to fund quite a bit of development in the area of nuclear engineering to nuclear energy to drive software modeling and simulation in that space.
Here’s three examples. This one comes from the U.S. Army Picatinny Arsenal up in New Jersey. So anyway, the situation here is the Army is trying to look at fatigue on the fore fighter as well as coming up with more accurate weapons so our software MSC.Adams has been instrumental in these types of analyses. This particular analysis comes from U.S. Army Tacom, if you’ve been following the war issues in Iraq, one of the biggest threats is mines buried below the surface, so we’ve been modeling that particular problem and as you can see the orange box is the soil, the explosion occurs, the forces end up under the vehicle, and the whole idea is to minimize those forces. So that’s why we are now delivering MRAPs vehicles to the war saying they are supposed to [inaudible] Hummers.
The last one I will show you is with the Navy. It comes out of the office of Naval Research, particularly with the problems in shipping lanes today. Underwater explosions have become quite prominent, or concerns about underwater explosions. So, again, the previous slide was an example of our new capability in Nastran and R3, Solution 700. Here is another example where we have fluid suction interaction with the structure here.
That’s my brief presentation on our government activity.
I would suggest to you that one of the common threads here is, Tom just showed you a couple of examples what a deep technology is able to multi-physics, multi-discipline for solutions to problems. Simulate a blast explosion that goes through soil and interactive structures. Be able to look at a submarine when you have an acoustic shockwave that goes through the water and actually impacts that submarine. These are, again, what I would call to be the sort of technical simulations where you have to have the core physics in place.
But you also heard, I think pretty consistently from each of us, there a lot of things related to how people use the simulation tools. Things that are more about process. And what’s interesting to me is that since about 2002 I have worked on the SimManager side. Bill showed you a slide that shows the progression in a typical deal for the Enterprise business and one of the things that I would suggest to you is that unlike those engineering problems with the engineering solutions and key technologies things, on the side of those process kind of things, that has been, historically, a little bit of a struggle. In 2002 I went to, every customer I go to today and when I talk to them about enterprise simulation, managing simulation content, they say, “That’s kind of interesting but I’m not really sure that’s a high priority today.” What is interesting, and you will see that some of the early customers, again, like Audi, maybe four or five years have been using enterprise format on that. If you look today and you can see Boeing as an example, and Boeing is taking it here, to deploy all of the enterprise simulation.
But things have changed. And from my perspective what’s really changed is when I talk to a customer today, everybody says, “Managing that date, managing the simulation process and things, that’s absolutely something I need to do.” So for me, a real fundamental shift in the industry, I think you’ll hear it from Frank as well.
Frank Kovacs is our Vice President of Business Partners and Global Alliances. Like Dave, like myself, like Tom, he has also got over 20 years inside this industry. So you see a lot of experience from the team.
Prior to MSC, Frank was at a company called Support Soft and he had their Vice President of Strategic Sales and Strategic Partners position. Before that he worked at Portal Software where he was Vice President in charge of Global Alliances, like he had an alliance here with IBM, served as General Manager with P&L responsibility for their business in Asia/Pacific, and also Frank has spent a tremendous amount of time working at EDS TLM solution and SDRC prior to that, working as a Vice President of Sales and Marketing and ran the Asia/Pacific business operation. So, Frank, I’m going to turn it over to you to talk about our business partners.
Well, you can blow anything up like Tom does. Tom Axley and I made sales calls at a couple of different laboratories and I remember asking the customer, “What is it that you do here?” He says, “We blow stuff up.” What a great job.
I’m going to talk to you about two different areas of my responsibility and the business that we drive here at MSC. The first is really the trend on small/medium business, some of the things we’re doing to address that market space, and what we think to be a tremendous opportunity for a growth engine in the company and in the business.
The second is really to talk a little bit about some of the recent announcements that, I know you wake up every day and read the press releases from our company, but for the redundancy I’m going to show them to you again anyway.
We just announced some capabilities in the R3 release which allow for interaction at all levels with PTC offerings of Windchill, their Wildfire technologies as well as some interactions we’re doing with some expert. I think that you’ve all been inundated with a lot of data around this particular growth market. The small/medium business, SMB market, for us, it varies by definition by vendor. So if you ask IBM their definition it is one definition, if you ask us ours, it’s slightly different.
In this case this is IDC information which focuses around the number of employees the company actually has. So how does that work? This is a very complex chart in that it has multiple axes but it says two significant things. One, it talks a little bit about the number of employees outside of the OEM market space. Today we know, and David I think covered a bit of this, there are more engineers in the supply chain than there are in the OEMs. The 60-70s is not the case. So it’s a fundamental shift in where the engineering is getting done.
The automotives are also putting the warranty responsibility and the liability back down the supply chain as well. What does that mean for MSC? The opportunity to grow the engineering prowess in the supply chain is a critical factor for them and a desire for them to purchase the technology, as well as to become proficient in using that technology.
The other thing that you see here, which I think is significant, is the amount of IT men, and whether we like it or not, we do follow IT spend. People do have to run these things on computers. So if they are spending, if they are evolving their platform, we tend to benefit from that as well. So we do track these numbers.
What you will also find is the granularity on where the particular expansion markets are occurring. A lot of effort is being placed by our company, a lot of effort by our peers, in the brick markets.
A couple of the industry analysts comments that you see, I would highlight, really, more importantly this focus on innovation, focus on innovation, and then of course, SMB being really a growth area, software is a service, MSC will lease MD on demand with IBM, that’s a service. We’ve got a couple of automotive spends in that market. We think it will accelerate in the SMB market this coming year. But it’s pretty unanimous that it’s a growth opportunity, it is the hot marketplace. We see it in our departments. We’re getting tremendous revenues from outsourced or off-shored engineering work in the [inaudible] market as well as in India, we’re seeing tremendous growth.
So the evolution continues in SMB. If we look at how it’s changed, really for MSC, we took a specific dedicated focus on our industry marketing specialties, automotive, aerospace, and manufacturing. And then a special focus on the SMB. We recruited over 150 total now partners around the world and now it’s about maturing those partners. As we segment the SMB market, we expand the portfolio of offerings that these partners now take to the marketplace.
It was our initial belief, like so many who followed the auto desk’s success in channel strategy, that it’s really just a low end product and is a commodity and it turns and magic will happen. You install the drive through a window, people pick it up, it just goes. Right? The reality is a little bit different. The great news for us is that the engineering requirements map more closely to our product offerings than they do to some of the others. So it’s very exciting for us. And it’s a great opportunity for growth.
And this year we continue to increase our focus on the two types of customers that we find in this segmented market. So we find less sophisticated market opportunities as well as some very high-end, more sophisticated market opportunities.
So what does this customer look like to us? What is a profile? Typically, the first reaction you have is they’re price sensitive. Why? Because they’re in the supply chain and everything is about cost. Right? The cost is going to get turned back into their parts. The same capabilities that the OEM has. I don’t want something incomplete, I don’t want something partial. And this actually goes very much to why we’re having success this year in this market.
One of the big factors is, “I don’t want the lesser, I don’t want partial; I want full, I want complete. I just want it easier to learn.” There’s been a big push for us to work on the products, the documentation, as well as the quick-start examples. They want application examples. You will hear from Dr. Sadeghi a little bit later, we produced a series of books, if you will, on MD examples. This accelerated some of the adoption, already, in the market, just being able to read about some of the new capabilities and what you can do with them.
Flexible licensing, our MasterKey technology, has paid off very well in this space. One of the things that the partners want to try to do is deliver this technology and then address all of the engineering concerns, not just a part of it. They want to be the partner who is the trusted advisor and handles the full job. So they don’t want piece parts of technology. The licensing we deliver allows them to move between the disciplines and not have to buy all of the technology at once, but can grow into the technology as their business allows them. So this is the piece on the flexible licensing.
Again, the compatibility with their OEMs. They want to be able to submit. If you take a Cosmos works or and Ansijet and you turn it back over to Boeing, what’s the first thing they say? “That’s very nice. Run that in Nastran. And give us the results.” Right? That’s the feedback you get from the OEMs. The trusted technologies in the solver base is what they trust. So you have to run it in those models. They don’t want alternative solutions that may give questionable results. They want the real deal, the real McCoy, if you will.
And again, trusted solutions to high-performance problems, I want a mesh-limit. What’s that about? So it’s not a real offering. So as we drive into the marketplace, one of the great successes we’ve been able to bring to the table, now here’s an example of a marketing event we just conducted with a business partner in Solush, we had over 50 attendees in the aerospace supply chain. Just attending this to hear about the aerospace offerings that we bring to the table. This is about MasterKey, this is about MSC engineering product, and the release of some Office from the Microsoft platform.
So in 2008, as we grow this business, you’ll look and see on the left side, our products suite and our offerings here, one of the very nice synergistic ways we’re growing this market is to mature the actual partners themselves. What we’ve seen is a great acceptance of the SimOffice and the MasterKey technology. What we’re seeing now is an accelerated adoption of the next step, moving into the SimXpert technology. Templating, if you will, their best practices and making them available.
I’m very happy to report the maturity level of our business partners has risen, we’re seeing tremendously larger orders from the partners. Bill has talked a little bit about that.
Okay, shifting gears. And moving on to the PTC alliance opportunity, we are a Platinum Level sponsor with PTC. We’ve been that way for years. We exchange technology for demonstration and integration purposes. You will see, actually, Windchill in our demonstration here. A little bit later we’ll be using them as a PLM back dominant in our demonstration.
In case you missed them, here are some of the other press releases. They announced something called ProductPoint. This is really a SharePoint-based open, if you will, environment for Windchill. We’re leveraging that, as well as this prodigy technology. Again, these are really, see PTC for the first time open up and make available interconnections to other technologies.
What we’ve achieved, we announced simultaneously in the same day, was the availability of the functionality which both not only makes available our advanced analysis capabilities to Wildfire users, but integrates our SimManager technology with the Windchill environment. So this brings a commercial, off-the-shelf application PROSTEP technology and integrates that with the Windchill environment. So you’ll see that, as well, as part of our demonstration today. It is very exciting for us.
Our efforts in this area are really to leverage what we believe to be an under-penetrated market. We believe that the market is aware that this is a good idea. We see them readily adopting a lot of our words, a lot of our methodology. We see that the opportunity is there to grow quicker. What we see in the PTC relationship is accelerated exposure to customers that are doing more global kinds of activities.
So I’ll show you in a moment an example of a customer, but there’s a complete range of solution offerings now, from piece parts all the way through to very sophisticated engineering, extending, if you will, the Pro/ENGINEER portfolio, what can I do with this product.
Seamless integration with the WildFire means that we had to actually do a native reader. So this product opens the model directly, we don’t go through a translator. It’s been a very, very nice and very synergistic kind of working relationship. Seamless integration through the Windchill PDM link. That’s the activity with PROSTEP that I talked about. And this is actually some survey results from solicitation of the [inaudible] market and where they’re headed.
From just an architecture kind of a diagram, a little bit of architecture. We talk about the SimXpert capabilities. You’ve heard about that and you will hear more about that as we go forward. This SimManager environment or layer for managing that information. And managing the interaction with the design environment. So what we’re announcing available is the SimDesigner for ProView edition. This is the template execution engine that runs inside of Wildfire, executes sophisticated analysis, if you will, and allows the user never to leave that environment. So it’s very, very powerful this way.
One of the highest value-added components is the ability to take best practice templates and make those available both in the design environment, as well as globally to the supply chain. So it’s very exciting for us.
We learned this through a lot of experiences. I think Ted referenced some of the customers on SimManager that have been successful. One of our highlighted success stories which you’ve seen a prior release on and just a quick update. They’re now in 29 countries, the overall reduction in their design cycle is 25% and it has saved in excess of $1.5 million just in the cost savings. And this is through this integrated environment that we’re talking about.
So the global market opportunity, what does it really mean, why do we care, why PTC? We think there’s a very nice synergy between the two companies. We see PTC as a PLM leader in their space. The recognize us as a CAD leader and it’s in our space in Enterprise simulation. Then you have a very strong hand in consumer electronics. We have a very strong set of capabilities in drop tests. Our recent acquisition of the SINDA technology, acquiring NAI, brings us some very nice cooling technology, some vintage thermal.
We actually have some interesting partner-related business efforts where we found joint partners are taking us in to oil and gas. We found joint partners taking us into the medical industry. It’s a very, very interesting kind of an evolution of our markets as we go forward. Okay?
That’s it for me and I turn it back to Ted. Thank you.
At this point we will give you a chance to ask questions. Also, if you need a break, you can take a quick break now. We have a Q&A scheduled for now, and I think this is scheduled for people in the room here. Joanne has offered to take questions via e-mail and she’s logged on.
Bill, referring back to your sales cycle life, in particular MD, if the MD solutions are in essence a productivity enhancement to the engineer, I can understand the sales cycle but why are the sales cycles to the global deployment that far?
Bob, as we are looking at the industry trends and we look at the customer base, it’s that they are driven by either programs of new automobiles, they are driven by programs of new aircraft, so they are deploying as they move forward on new initiatives. They obviously knew to do what they are doing on their daily operations but they are not able to disrupt that development cycle so it ends up being clearly phased programs that is driven by priorities to those companies and the schedules of those companies.
And looking in terms of new volume, they can’t just jump straight across to the end. They have to schedule it, where are we going to deploy this new MD. So they do target their progress. But they still have this whole user base to get up to steam as well. So there is a lot getting the stuff installed, they have to schedule it, they have to plan it, because internally they have to change their methods. This isn’t just, “Here’s a little application. Install this.” They have to change the way they do business. So there is a planning phase they’re all in the middle of. They have to do a whole shift in the way their analysts do the way they use the applications and software, so that’s what’s really taking a lot more time, is this internal of these companies changing their methods groups, it’s not just taking on software applications.
In terms of the same engineering products, the MD time line slide, and this information, what does it look like in terms of numbers of users, for example, when you go to a pilot in a first deployment. Can you characterize that a little better?
I will give you an example. If you look at [inaudible], specifically in automotive for instance, [inaudible] different departments. The program phase has people from these departments on the program executing it. They are design engineers, what is the impact saying. In the background on an annual process there are metrics processes. Safety experts applying best practices. What we are seeing is the methods people taking samples of this process, where we have shown them some solutions, and break through analysis.
With MD we can do break through analysis much more efficiently than the way we do it today. We do hundreds and hundreds in order to get what we need. So we find that the methods expert in that area [inaudible] six to twelve months. And then the planning people start looking at how they are going to deploy that across the program. And that really dictates how much is it. Are we going to do it on this European program, etc. So they’re really cherry picking at this point in time where they get their initial implementation. There’s been additional complexities in this. [inaudible] And we see it sort of on a six month phase and that’s just kicking the tires, and then after that we see very strategic deployment program by program. What’s good for us is they are trying to run all programs quicker with more efficient tools. So we should see, coming forward, more and more MDs because of the global efficiencies there have been in some of these new solutions.
When you’re going into a customer and you’re getting a pilot and they have got ten people that run a pilot program and then first deployment fifteen and ultimately goes to a hundred, or what’s the magnitude of the number of users?
I think one way that you can look at these three stages, or three metrics, is the metrics we’ve been given on a quarterly basis of orders over $100,000, orders over $500,000, orders over $1 million, and so if you’ve got lots of people that have done pilots, and we just said earlier and on this presentation that we have over 200 major customers using MD today, and now with R3 release, then the more orders we start reporting over $500,000 or over $1 million, we’ll see the stages with where they are at the point of expansion.
In regard to Q1, we had a number of MD orders over $500,000 and we had one MD order at $1 million. And this is the degree of deployment of MD Nastran, MD Adams, MD Pactran, etc.
It isn’t really just a license of license trends. If you think about doing more up front, once you go MD, you can do more up front. Now how much more are they prepared to do upfront, that will drive how much more licenses. They’re really just getting to grips with what MD can do for them. Robust design up front. So they have to determine how much more they want to do. We know they are going to want to do more. We are already gearing. We’ve got to drive this across the company. But we haven’t got the feel for just yet is how much more on the MD license, but it’s going to be existing, and as soon as they get to grips with what it’s doing for them, then we’re going to see the numbers run up.
Joanne suggested that we might want to, for the sake of time, leave the questions until later. And actually I think that we should get not just the business people but the technical side of things as well, to introduce the products to you.
Reza Sadeghi is the guy I’m going to introduce you to next. Reza is our Chief Technical Officer here at MSC. Before he was at MSC he was at Market Analysis Research Corporation. In fact, Reza was the guy who hired me away from them to come to MSC. So of course I have a high degree of respect for the guy who hired me.
But before he was at MARC, actually Reza, like the rest of us actually, spent a fair amount of time in the industry. He was at Goodrich Corporation and there he was responsible for a lot of methods development. And I know he did some advance materials work he doesn’t talk a lot about these day, but I remember very well speaking with him at Wright Patterson Air Force Base where I first met him. So Reza spent some time doing that.
He has also spent time teaching. He’s spent over ten years, actually, teaching at UCSC in the field of computational mechanics. It’s interesting, when you go to some conferences within this industry, if you go and you see a guy like John Halpern from LSCC, or you see a guy like Reza Sadeghi from MSC show up, you actually have engineers following him around with text books. Asking him to sign their text books. That’s one of the most interesting things I’ve ever seen in the engineering community. So Reza is one of those guys; he’s one of those, really, the preeminent thought leaders in the simulations base and we’re proud to have him here.
He spent time, not only with us, not only with us, but he works today on a number of government review boards for the Department of Energy and the Department of Defense. He has authored a lot of papers on the simulation space as well. He is really a thought leader in this space. And Reza is now going to take us to kind of a new technical level for us to talk about, the MSC products and how they map into the challenge of the industry.
Dr. Reza Sadeghi
Thank you. Lots of charts. Good charts. Great discussion. I am thrilled to be a part of the audience, actually. If you allow me I am going to take a few minutes and just walk you through a technology update.
What have we done? Why are we so excited? Why are some of our customers so excited? We actually have a bunch of them here, next door to you, who are getting their hands on R3, because they’ve seen the maturity of the product and they want to deploy. Answer the question, how many of them will it go. I don’t think we have seen any of these guys who are actually here from the major corporations in North American excited about a new opportunity [inaudible].
We have changed the footprint of what this technology can do, in two ways. We have integrated the core technology so we can simulate more accurately, more realistically. Today’s simulation challenge, what is it? It is the time for driving engineering excellence, it is a fact we are to end up growing a reliance on simulation, it is growing reliance on simulation, is growing, and more complex multi-discipline analysis is needed. It is not that we are doing the same things, we are introducing new methods of manufacturing, we are introducing new materials, and processing of material that requires new ways of analyzing and simulating and entire assessments.
So, addressing a joint discipline, not a job to be done. Understanding a discipline associated with simulation and how simulation can connects these disciplines together. So a non-integrated point full limitation. The industry is telling us, “You need to get past this point [inaudible].” How much value can you get out of a point division versus a real representation of the systems. Value simulations process efficiently.
So today we would be dealing with engineers doing all kinds of stuff with Nastran and Adams, it is an integrative process to go to a design meeting, and ask me, who is doing, let’s say, a stress analysis, “What happens if I want to change the stringer here?” The guy up there might say, “Well, I don’t know, what your changes are going to do to me. Let’s come back three weeks from now, we’ll go through our reiteration and then compare notes again.” And even then it’s quite manual because this system view is not present in his point division simulation. And we are trying to overcome that. It manifests itself in industry in different ways.
CAE has a great deal to do with it. And CAE has a lot to do with this. Meaning CAE can really remove a great deal of that cost from maintenance that these companies face. For recalls, for product [inaudible] whatever it is. So CAE can, the companies are realizing that there is a way to build and deliver products better than we have in the past. And it is not a luxury like, maybe, 10 or 15 years ago. It is a necessity. It can make or break a company. This can take you from the number one position to the number two position, and this will make the CEO of the company not sleep well because the profit margins are not there.
And the industry has no choice, it has got to reduce time. And they have got to produce a better product in a less amount of time. So improving the quality and reliability and the credibility of the solution to be there and enterprise-managed and automated processes and repeatability needs to come in.
It’s about reliability, it’s about efficiency, accuracy and productivity. If we just do the same thing we did last time except automated, we still may eliminate the physical prototype. So it’s really multi-actions investment by us for our customers. Accuracy, then automate, then efficiency and do it at the same time.
And engage more people in the process. If you just leave the analyst to be the five or six or ten in the community of product development it will not do the job. So we’ve got to expose the information more effectively than we’ve been exposing the information.
This is our portfolio of core technology, with a lot of partnerships that may not be shown here. But this is the core stuff. System level modeling, [inaudible] system modeling, exquisite dynamics. I think it was Tom who mentioned that they can’t really blow up nuclear bombs like they used to. This can actually help them do this. They cannot do underwater explosions and all scenarios that they wish. This product can help.
So what do we do? We say, “Well, we’re going to create in infrastructure called MD that will integrate these technologies into it,” and this was not a trivial undertaking. It has taken us five years. And Jay is not here or he would be smiling at me. I remember a few years ago Jay and I were at a conference and they said how many more years. I said give me a couple of more years and he smiled and said, “Good luck.”
But the good news is we really did get there. It was not a wish or a dream. We had a road map of where we wanted to go because frankly, our customers were inviting us. We are not doing this in some dark lab in the basement of this building, we are involving the customer, getting feedback. Not all of it is always positive, some of it is very fair criticism of what we’ve done and what we need to do.
So how do we make it acceptable and explosive? There’s a lot of designers, there’s a lot of analysts and there’s a lot of engineers that are not designers and analysts. That population is huge, engineers that are not designers and analysts. And they need concept, they need intelligence, they need knowledge. And SimManger is the product to do that. Others are catching up, learning that it is indeed the way to go. And you’re hearing announcements very similar to SimManager because they recognize you’ve got to serve that community.
So this common integration and automation between all of this core technology that can still exist for Joe engineer or Jane engineer that loves to use this product, they can still do that. And trust me, there’s a lot of organizations that will continue to do this, or parts of the organization that will do this, but how do they fix the time to market issue?
And this time to market issues is really about the integrated solution and architecture must be there, must be mature. It was mentioned by Frank Kovacs, if you’re running it in Platform A it doesn’t mean anything. You have to make sure that this is slowly backwards compatible. And the foundation, it is reusable today. It’s third-party-solver open. It was a necessity we needed to address. We can’t just integrate our stuff. We have got to leave it open for third-party integration. That forced us to go and be the pioneer, if you would, in this space. We are open, we do a lot of third-party integration into this.
This is, if you will, the backbone of the system, the Enterprise platform. You can see that the world does begin with the big boys, no question about it. PDM and our ability to integrate these types of third party laps into this, through ProStep, being able to connect to our backbone, that backbone brings us to SimManager, which you will see in the demonstration.
SimManager will be there, be used by an engineer, by a designer, by an analyst, to be there, run an already established process, or offer a process or a practice of the backbone of MD capabilities here to run these simulations. Not one, maybe hundreds of them because now we’re talking about multi-run, because the deterministic methods of optimizing can only get you so far because we’re talking about multi-disciplines. You can’t use the same numerical techniques for stress minimizations, for instance, as you would for, let’s say, control systems.
So all of this can be automated and you will see a demonstration of it very soon, as to how this backbone allows the existing PDM system to work with our SimManger system and bring in the pieces of the enterprise into this environment connected to that piece and gives you the back end of the engine behind to create the content that ultimately will be exposed back to the enterprise.
So drive best practices, sharing best practices rather than each inventing their own. One data point to share with you is one of our P customers, they gave the same analysis to 40 engineers. Close to 40 different answers. Not a good thing when you’re trying to claim robustness and that sort of stuff. Enable CAE collaboration, enabling CAE collaboration, adaptable and benefiting from existing investment, providing service transparency between these systems so we don’t really need to go parse this data ten times to parse this data ten times to talk to the enterprise have different types of engines running around the different version spectrum.
So, multi-level solutions, the MSC approach to go forward is, “Let’s not leave our customers behind.” We have a lot of happy customers in this space and we love them, we love that they’re growing with us. You’ve seen the numbers, something around 16%-20% growth in our base business. Make sure that the maintenance revenue continues. Make sure they’re happy. Make sure that this technology is exposed in MD, completely captured in MD. And R3 gets us really close to that. Make certain that SimXpert, the environment with this analyst will be offering templates, these re-usable templates, is indeed exposing all the MD capabilities. The designer having access to it and SimManager to manage the entire processes.
Now, this is a virtual product development, if you would, multi-level solution stack. Let’s go a little bit closer to this as to how it works and what each piece does.
So for the MD part, which is the reliable common foundation, the integrated MD accuracy, coupled multi-physics. This is a key word, coupled multi-physics. You have heard others talk about multi-physics in this space. Frankly, each discipline is a multi-physics discipline so if there is a new dimension on that physic, you see multiple attributes of the systems captured in each discipline that goes with it.
Now automation of the simulation process, leveraging expert best practice and simplifying design engineering and analysis. Simplifying the design engineering and analysis. The key is not to make it any more complex than it is. That is part of the design philosophy. And again, we are being invited by our customers not to declare a victory in every single area, but we are being driven by this principal. But baked in the process and there is a logarithmic cost factor associated that will take these costs down stream instead of up stream.
This is a core technology that continues to be improved and offered in our mass strategic MD system that wraps around it, coupling improves as a result of getting done with it, a discussion that really started in the 70s between linear and non-linear data and the nature of it, but recreated them in a broadened vision.
Motion structure. Why do we have motion structure? Why couldn’t that model predict reality. Our MD platform, [inaudible] what matters is getting the event. You want to watch that event, get a prototype that follows the event. Is that event predicting reality? That’s what MD’s doing. Thermal, mechanical, etc.
Common solving components is the key part to this. That’s where we can be agnostic and offer a common solution, a common view of the system. That’s why this new translation becomes a reality here, because we don’t believe we have a common data base that goes across, we don’t need a translator in the process between all this stuff that you may want to do. And this common deployment for the services.
People coming out of school are fairly familiar with Python tripping in the world of engineering. People like to use the SOA concept for optimization and be able to tie various elements of the production line to optimization. [inaudible] And then this exposure.
The intrinsic relation with automatic capture of the event. So here’s some instances you’re going to see during the demo, enabled with multiple work spaces. So I am an engineer that’s interested in structures, I get a work space coming at me that’s a structured work space, talks the language of a structural engineer, and motion. I am a person that wants to look at the global forces that interact with my system. I can go into the work space that’s motion, right click, and it’s language environment that comes at you and let’s you model in that environment, same with thermal, same with crash or safety related events.
Concurring model useability, native crash model. We have a single model that is a translation, all the advantages that you would expect from this modern enhanced environment. And I think it’s a revolutionary foundation. It does a lot of things and has become a big deal for this industry, particularly aerospace.
I was actually in Japan last week and one of the many car companies requested a significant amount of cross functionality for designing parts of the cars, [inaudible] mass production. Key word is mass production. Why? They shared with us their miles per gallon requirement. You cannot just perform magic, you’ve got to reduce the way that the vehicle goes through some of the shake requirements for the car. So a composite is coming through and they are saying you’ve got some capabilities that we can definitely now leverage and begin to look at these new processes that were virtually behind us. And then, so what?
System level simulation, it is more than process capture [inaudible] environment. Everybody in the world does what we call just a process capture. You go through a series of events, records that and plays it back. We do a lot more than that. Because best practice editors can edit it in this view. Then we go into advanced system management cube of it and then we get an integrated process automation. Each node in this point of the simulation are tied together to get to an evaluation of the design track. So there’s different levels of automation that we’re talking about rather than just a natural capability. And that is the strength and the power of SimXpert in this whole Enterprise suite of products that we’re taking to market.
In this world of SimXpert, we’ve got a dimension because of varied work spaces and they are working on one common set of true capability as well as a common database and all of these templates are now accessible to SimDesign for the design engineer to be able to leverage them and reuse them. All they have got to do is drop a new CAD in it for an iteration of the CAD design and the analysis.
Automated process management. Automating the process management. Somebody mentioned the Audi now getting 1,000 analyses a day. They’re actually charting much higher numbers. But they have confidence they can do this. This is a very capable system. And what is it? Is it they just want to create gobs of data? Not really. It is an information that needs to become knowledge and leads to driving engineering decisions. Engineering decisions are being made with two data points today. Two data points you can draw a curve, one you can’t. But is it true? What if you had another third point [inaudible]. They want to have multiple points, maybe ten points. Maybe you really get to the design of experiments on more simulation and a three-dimensional view of a design concept versus two points and a trend for what will happen if I change a variable versus what will happen if I change multiple variables.
Along those lines, BMW recently worked with us to create a vehicle representation with one [inaudible] equation. They said that once you get through a CAD you kind of lock it up. You’ve got shapes that have trim curves that define where it began and what the curvature is, basically what the shape is in its entirety. Now we’re going to come back and take that as an initial point. Let a mathematical engine come back and tell us what other design possibilities exist that satisfies one function. And not just one function, multiple functions. Multi-physical functions. And then tie that back to the CAD and assist the designer to see what is possible for a certain type of a response, defining the response in terms of optimization.
And all of this stuff I just said is a little complex for any one of us to do by hand. It’s more than any one script or template, it is a process. It is a process that starts by what they call design requirements. They rush to give you the exact numbers. Somewhere between 16,000 requirements at the beginning of a car design, depending on which company you are, what kind of car you’re building. So you can’t really do that by hand. It’s going to be a huge [inaudible]. How many of it do you want taken to this part of the analysis, this part of the analysis. I suggest you run your controls through it and generate your reports. Then go through a design review and modify some of those and repeat this again. So SimManager becomes [inaudible].
It’s really out of the box which means it’s not about building a system and then you’ve got to go assemble when you buy it. It does work out of the box. You can configure it, you can automate it, and you can customize it, but it does work out of the box.
Time is short so I’m just going to give you a couple of examples of what is happening with our R3. How great is it? This is just an aerospace example. The same model that they do but now can go on and begin to do additional processes. You can add to the model, to increase the fidelity of the model, confirm that the things you would have to do separately and not reach the concept. [inaudible]
I was actually in this space for many years and once we actually were on the plane, and they brought an Air Force plane and they choked the engine with a high pressure bird. There was no furtherance, just water. You get to a point where there was paper published between Boeing and GE highlighting what MD was able to do that they just cannot do [inaudible]. Because this is about public realistic analysis. What if the bird had a strong bone versus a weak bone? What if the bird had more feathers than less feathers? You can’t predict the osteoporosis of a bird.
This was never, ever optimized. This was a system that they built and it was never optimized. They never had the opportunity to mathematically optimize it. It’s safe, it’s over-designed, but the aircraft weighs more than it should. So they’re working on this sort of stuff going forward.
So I just want to say to you, we are driven. We are driven by our key customers to make this stuff work and they’re not giving us a whole lot of time so that’s the good and the bad news, at the same time. Same stuff in [inaudible] lots and lots of applications. Blade durability, rotor mechanisms, radar sweep transfer analysis, flight control object and safety, all being done on one common model. It’s the same model with different attributes, just different disciplines, interacting with each other.
A virtual test drive with smart drive capabilities that we have in MD. The most expensive part, the S500, had a recall because of brakes will wobble. You can’t test them, test the brake conditions, it goes around the track 30 times. On the 31st time did the brakes start to default. They can afford to do this virtually, but at some point the physical testing has to stop so the vehicles goes out the door.
Engine issues. I don’t have time to get into it but there’s one area that there really has not been a whole lot of work done and it’s the car engine area. The same analog exists in the electronics world. There are a couple of things we can do. I was in Japan, again, not too long ago and we met with this company. They’re using what they call smart materials but are running electricity through it but running the electricity by measuring it down to micro levels of voltage. It’s amazing, but that requires simulation. Because again, it’s very difficult to test at that level and be able to receive analysis and thermal analysis, etc.
This is a very large market opportunity for us, packaging of the stuff that we buy and throw away. Billions of dollars. But why is it we’re not getting that space? Because we are simulating something close to reality, but not reality. This industry is not big in the US but it’s huge in Asia/Pacific. Huge. And some other countries. This is not that vehicles but there’s another one and it looks like a 20-story building. They can’t weld it the way they welded it before, they use laser techniques and that requires simulation as well.
I know we’re out of time. I’m going to stop at this time.
At this point I think we should take a five minute break and we will conclude the audio portion of this presentation as well.
Thank you for joining us on the webcast.
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