Filed with the SEC from May 8 to May 14:
MSC Software (MSCS)
Elliott Associates has communicated to MSC its belief that the company should consider exploring strategic alternatives, including a possible sale. Elliott said that it reserves the right to further discuss or meet with the company's management, board, potential acquirers, financing sources or other shareholders and may formulate plans or proposals regarding the company. Elliott currently owns about 4.13 million shares (9.2%).
We are a leader in the development, marketing and support of simulation software and related services. For 45 years, our simulation technologies have allowed manufacturing companies around the world to validate how their designs will behave in their intended environment. Engineers use our simulation software to construct computer models of products, components, systems and assemblies and to simulate performance conditions and to predict physical responses to certain variables such as stress, motion and temperature. These capabilities can allow our customers to optimize product designs, improve product quality and reliability, comply with regulatory and safety guidelines, reduce product development costs and shorten the timeline in bringing new products to market.
We also provide a broad range of strategic consulting services that help our customers implement simulation solutions across the enterprise and improve the integration and performance of their product development process, which can lower the total cost of ownership of their technology investments.
We serve customers in various industries, including aerospace, automotive, defense, heavy machinery, electronics, consumer products, biomedical, shipbuilding and rail as well as in universities and research. Advances in computer technology have made simulation cost effective for companies that manufacture products.
Our goal is to provide our customers with leading edge simulation technologies that will integrate design and engineering processes across the enterprise to enable innovative product design and efficient product development. We seek to be an industry leader in each of the product categories in which we compete and to expand into new and emerging markets within the product lifecycle management (â€śPLMâ€ť) industry.
The PLM industry serves four significant product development segments: conception of the product, design of the product, manufacture of the product, and maintenance of the product. These product lifecycle segments utilize various digital technologies and software tools, often referred to as PLM tools, including mechanical computer-aided design (â€śCADâ€ť), computer-aided engineering (â€śCAEâ€ť), computer-aided manufacturing (â€śCAMâ€ť), and product data management (â€śPDMâ€ť) and related services.
As a key component of CAE, simulation software enables engineers to prototype, simulate, test and iterate scenarios in a virtual environment. This simulation environment allows engineers to migrate to â€śdesign-analyze-confirmâ€ť processes, which creates a more flexible, efficient and cost-effective solution for product development. As a result, companies obtain a competitive advantage through innovation, manufacturing efficiency, speed to market, and lower development costs.
Enterprise simulation platforms including our software and services, can be used in conjunction with PLM tools throughout the entire product lifecycle. Enterprise simulation solutions integrate multi-disciplinary simulation technologies within the enterprise during all phases of the product development process. As a result, designers, analysts, program managers and others on the product development team gain greater, more accurate, and more timely insight into product behavior, thus providing a strategic advantage in achieving business objectives. Using multi-discipline simulation during product development allows engineers to design, build, and test using many simulation technologies simultaneously, providing both time and cost savings.
According to industry research firm CIMdata, CAE software and services spending are estimated to exceed $2 billion in 2008. Spending on PLM software and services totaled nearly $20.1 billion in 2006 a year-over-year increase of 10.7%. Approximately 9.1% of PLM investments came from CAE in 2006. CIMdata expects that CAE will be one of the rapidly growing segments within the PLM sector over the next five years, and forecasts that this market segment will exceed $2.6 billion in 2011, with a compound annual growth rate of approximately 7.5%. No assurance can be given, however that these forecasts can be realized or increase our revenues.
Our Competitive Strengths and Growth Strategy
We currently support four product categories through our portfolio of simulation software products and solutions. We consider our portfolio of simulation software to be one of the broadest and most widely used within the CAE segment of the engineering software market. We believe our simulation software is the de-facto standard within the aerospace and automotive industries, capable of being utilized on various computer platforms ranging from large mainframes to basic laptops.
We believe our SimEnterprise and multi-discipline (â€śMDâ€ť) products can transform the industry from offering point simulation tools to providing enterprise-integrated simulation solutions. We believe this transformation will enable designers, analysts, managers and the supply chain to integrate simulation throughout the design process in an open systems framework using service oriented architecture. With thousands of global accounts among diverse industries, including aerospace, automotive, machinery, electronics, equipment and consumer products, we believe we have a unique competitive advantage in leveraging new product releases and related professional services to existing and new customers and in penetrating new markets.
We intend to provide superior technology and functional breadth of simulation solutions by collaborating with customers to deliver state of the art enterprise simulation software and solutions. We will continue to evaluate our business model, including our product mix and positioning, marketing strategies and sales channels, to maximize our market opportunities and to improve our operating results.
Our goal for growth is to expand our position in the simulation software market by further penetrating our installed base, by adding new customers from the supply chains in our existing industries, including the aerospace and automotive markets, and by expanding with new customers in new markets such as biomedical and consumer products.
We market our simulation software products in four main product lines. Our engineering product line includes software to model and simulate the performance characteristics of a wide variety of complex mechanical conditions. Within this product line we include our core engineering tools including, MSC.Nastran, Patran, Adams and Marc. Our MD solutions product line enables manufacturers to perform interoperable, multi-disciplinary analyses on ever-more complex products and assemblies in parallel. Within this product line we include MD Nastran, and MD Adams. Our SimEnterprise product line integrates simulation workflows and data within the extended enterprise while enhancing the way engineering teams collaborate, access and work with standard simulation processes. Within this product line we include SimXpert, SimManager Enterprise, and SimDesigner Enterprise. Our channel products line enables companies of any size to realize the many benefits of early, accurate design validation using simulation software. Within this product line we include SimOffice .
MSC Nastran. MSC Nastran was derived from NASTRAN, an open-source computer program, originally developed for the NASA space program and owned by the United States Government. We have upgraded MSC Nastran the past 45 years resulting in substantially greater capabilities and scope. MSC Nastran is a powerful, general purpose finite element analysis solution for small to complex assemblies. As a proven and standard tool in the field of structural analysis, MSC Nastran provides a wide range of analysis capabilities, including linear static, displacement, strain, stress, vibration, heat transfer and more. MSC Nastran is the leading program for engineering analysis worldwide based on capability, functionality, international acceptance and number of installations, and is recognized as the de facto standard in high-end analysis within the automotive and aerospace industries.
Patran. Patran is an interactive finite element modeling, analysis data integration, analysis simulation, and visualization solution. All of the functions of Patran may be integrated, automated and tailored to the userâ€™s specific requirements using a powerful programming command language.
Adams. Adams is the market-leading system-level motion simulation. Adams is used to perform dynamic simulations of complete systems and subsystems, such as vehicle suspensions and engines, and to evaluate functional attributes like vehicle handling, vibration behavior and durability.
Marc. Marc simulates complex nonlinear physical behavior such as material contact conditions resulting in material failure under extreme stress. Marc is used in areas where materials, such as rubber, plastics or metal forming undergo large deformations and for many other applications.
In addition to these core engineering tools, MSCâ€™s broad software portfolio consists of widely used simulation software in automotive, aerospace, and other key industries. Software applications such as Dytran, Easy5, SOFY, MSC.Actran, and MSC Fatigue deliver capabilities which integrate with, or extend the capabilities of, the four primary engineering products . Recent acquisitions have increased the breadth of functionality of our portfolio and our market opportunities, including products with new capabilities such as computational fluid dynamics (â€śCFDâ€ť) and thermal analysis.
MD (Multi-Discipline) Solutions
MD Nastran. MD Nastran extends and improves MSC.Nastranâ€™s interaction across more comprehensive simulation domains to accurately model real life scenarios. Optimized for multi-discipline analysis, MD Nastran accelerates time-to-market by enabling customers to simultaneously perform linear, implicit nonlinear and explicit nonlinear analysis, all within a scalable simulation platform based on a common data model.
MD Adams. MD Adams extends multi-discipline simulation solutions to system-level motion and loads analysis. MD Adams allows customers to perform motion analysis and structures analysis with MD Nastran seamlessly, thus accelerating the multi-discipline simulation process.
MSC SimXpert. SimXpert is an advanced multi-discipline workspace CAE environment that provides comprehensive depth and functionality to perform system level simulations faster and to allow companies to build, share, and execute best practices for simulation standardization throughout the enterprise. SimXpertâ€™s highly-integrated advanced workspaces include Structures, Motion, Thermal, and Crash that are all powered by MD solutions. Using SimXpert, companies can gain productivity improvements through the use of expert templates, enterprise automation, a multi-discipline common data model, and native CAD interoperability.
MSC SimDesigner Enterprise . SimDesigner is a CAD-embedded simulation solution that allows design engineers to streamline the task of building and testing virtual prototypes by simulating stress, motion, and heat transfer within their preferred CAD environment. SimDesignerâ€™s workbenches seamlessly embed our multi-discipline simulation solutions into the CAD environment. SimXpert templates can be executed by SimDesigner users in the native CAD interface, thus providing a significantly new level of ease of use and up-front simulation.
MSC SimManager Enterprise . SimManager is an enterprise environment that manages and automates simulation processes, manages all associated data and data history, and increases efficiency and innovation by delivering product performance knowledge integrated to the product development cycle. SimManager improves quality by ensuring best-practice simulation processes and full traceability of input parameters, and increases productivity by greatly reducing the number of manual tasks required. SimManager is designed to integrate with SimXpert and SimDesigner, which enables the users to collaborate on simulation projects.
We also offer our engineering tools and enterprise simulation products to certain customer accounts using channel partners. Our SimOffice product is offered exclusively as a channel product. SimOffice is a powerful, easy-to-use simulation application that enables engineers to verify designs in the Microsoft Windows desktop environment. SimOffice interfaces with the tools engineers already employ such as CAD systems, Microsoft Excel, and other productivity applications. As the worldâ€™s first Microsoft Vista-ready simulation software, SimOffice also provides built-in connectivity to Microsoft SharePoint and Groove for information management and real-time collaboration.
Product Maintenance and Customer Support
Our software products are generally sold with one year of maintenance that entitles the customer to unspecified software upgrades, enhancements and technical post-contract support. Maintenance and support services are provided online, through our technical support web site, by telephone and electronic mailing and access to technical personnel located in call centers and by support personnel in various locations throughout the Americas, EMEA and Asia Pacific.
Customers have the option of renewing their maintenance agreements each year for an annual fee, which has typically approximated 20% of the license price. For fiscal years 2005, 2006 and 2007, maintenance fees represented approximately 36.4%, 44.3% and 50.9%, respectively, of our total revenues.
We believe that effective support of our customers and products during the license term is a substantial factor in product acceptance and subsequent new product sales. We believe our installed base is a competitive advantage and intend to continue to provide customer support and product upgrades to assure a continuing high level of customer satisfaction. In fiscal year 2005, 2006 and 2007, we experienced a high customer maintenance renewal rate.
Our professional services include consulting, training and onsite support services.
Consulting services consist of implementation services, including funded development, process consulting, and simulation services, as more fully described below.
Implementation Services . Implementation services consist of installation, configuration and integration of MSC products into the customersâ€™ technology environment. Any technology must communicate and access other services in a customer environment to function. IT components such as databases, directory services, file systems, and other systems such as Product Data Management systems require configuration and integration for MSC products to communicate. Tasks belonging to these categories are considered implementation services.
Process Consulting . The process consulting role consists of the analysis of a customerâ€™s CAE and Product Development Process and developing and configuring products from MSC and other vendors to be consistent with the customerâ€™s process. In some instances, this includes the use of MSC products to capture specific customer processes into a data structure internal to the MSC products called â€śtemplates.â€ť In other instances, this often involves the creation of complex user interfaces that are independent but loosely coupled to the MSC product suite.
Simulation Services . Simulation services are defined as the application of engineering knowledge and industry experience with the MSC software tools to customersâ€™ simulation requirements. In this role, MSC engineers work on behalf of the customer and, using MSCâ€™s and other software tools, perform analysis of the customerâ€™s product. The work product of this effort is in the form of predicted (by computer simulation) engineering performance data (e.g. stress levels, temperatures, deflections, etc.) that are summarized numerically and graphically in engineering reports.
Post Deployment Support Services . Post deployment support is provided on custom software implementations. Tasks include providing support for scheduled releases of custom code that incorporate the latest releases of supported software utilized in the custom solution, performing routine bug fixes and tracking the status of bug/enhancements requests and answering application related questions from the customer.
Terms of the projects are set forth in the individual arrangements with each customer, including services to be provided, amounts to be charged, and other terms of the engagement. Consulting and training services are not included in software license fees, but are generally provided on either a time and materials or fixed fees basis.
Our training and onsite support services help our customers get the most out of their MSC products. We have developed educational tools designed to train users of our products as an extension of our software business. Training seminars are conducted in local languages on a frequent basis at our offices worldwide, and at client sites. We also provide personnel dedicated to onsite support for our installed software.
Research and Development
We dedicate significant resources to the development and enhancement of new and existing simulation software products as well as to new product research and development. Our development activities have historically involved developing new products to address new simulation market opportunities, adding new capabilities to our suite of simulation software, or converting those programs for use on new computer platforms. These activities are intended to drive and maintain market leadership as well as to prevent technological obsolescence. In 2005, 2006 and 2007, our research and development expenditures totaled $47.3 million, $43.2 million and $51.1 million, respectively. In 2008, we expect to spend approximately $56.0 million in research and development.
Sales and Marketing
We market and sell our products and services in North America and Latin America (â€śthe Americasâ€ť), Europe, the Middle East and Africa (â€śEMEAâ€ť), and Asia Pacific through a dedicated sales force, as well as through third parties, including agents and value added resellers. In 2005, 2006 and 2007, our operations outside of the Americas generated approximately 70.4%, 70.8% and 69.5%, respectively, of our total revenue.
We market our products by advertising in trade publications, participating in industry trade shows, conferences and exhibits, conducting training seminars and working with our strategic partners.
Historically, our software products were used primarily by the simulation experts supporting the design phase of product development. Accordingly, we targeted our marketing efforts on the product design engineers and analysts. With the addition of our MD and Enterprise solutions, our marketing efforts were expanded to target the senior management of engineering and IT departments in order to communicate a value proposition that encompasses the enterprise lifecycle of a customerâ€™s product.
In general, we provide two types of licensing alternatives for the use of our software productsâ€”an annual non-cancelable lease license and a perpetual (paid-up) license. We also offer MSC MasterKey, a token-based licensing model, enabling customers to access our engineering products from a single, flexible license; and Enterprise Advantage, a license unit model enabling customers to access our MD and Enterprise solutions software from a scalable enterprise license. With both annual and paid-up software licenses, the license fee is set at a fixed rate and the customer is invoiced at the time of sale. All software licenses are sold with maintenance, which entitles the customer to receive unspecified upgrades, enhancements and technical post-contract support. Maintenance fees typically approximate 20% of software license fees, and maintenance agreements are generally for one year.
Our products are generally sold in local currencies. Pricing of products licensed in EMEA through our European subsidiaries are generally denominated in Euros or other local currencies. Products licensed in Asia Pacific through our Asia Pacific subsidiaries are generally denominated in Japanese Yen or other local currencies.
Sales and Support Offices
We have sales and client support offices at our worldwide headquarters in Santa Ana, California, and in over 50 other locations throughout the Americas, EMEA and Asia Pacific. Our products are marketed, distributed and supported outside of the United States through a network of foreign subsidiary offices, including a European subsidiary headquartered in Munich, Germany, and an Asia Pacific subsidiary headquartered in Tokyo, Japan. Product support and training are also available in many of our locations.
Our customer base consists of thousands of companies, which operate across many industry sectors and geographies. Our customers include industry leaders in the automotive, aerospace, defense and heavy machinery industries. No single customer accounted for more than 10% of our revenue in 2005, 2006, or 2007.
We have long-standing relationships with many of our customers, and the average tenure of our top 10 customers is more than 20 years. Our major end-user customers, based upon 2007 revenue, include: Airbus, Audi AG, Bayerische Motoren Werke AG, Boeing, Ford, Honda, Lockheed Martin, Nissan Motor (NML), Northrop Grumman and Toyota.
We generally deliver our software products within 30 days after acceptance of an order and execution of a software license agreement. We do not believe that our backlog of software arrangements at any particular point in time is material or would be indicative of future sales. Backlog for our consulting services is currently not material.
We have experienced and expect to continue to experience seasonality in sales of our software products. These seasonal trends materially affect our operating results. Billings in our quarter ended December 31 are typically higher relative to other quarters because many customers make purchase decisions based on their calendar year-end budgeting and spending patterns.
Intellectual Property Rights
We regard our software as proprietary and rely on a combination of trade secret, copyright and trademark laws, license agreements, nondisclosure and other contractual provisions and technical measures to protect our proprietary rights in our products. We distribute our software products under software license agreements that grant customers non-exclusive licenses for the use of our products, which are generally nontransferable. Use of the licensed software is restricted to designated computers at specified sites, unless the customer obtains a license offering other access to the software. Software and hardware security measures are also employed to prevent unauthorized use of our software, and the licensed software is subject to terms and conditions prohibiting unauthorized reproduction and export of the software.
MSC, ADAMS, DYTRAN, EASY5, MARC, MENTAT, MSC NASTRAN, MVISION, PATRAN, SIMDESIGNER, SIMMANAGER, SIMOFFICE and SIMXPERT are some of our trademarks. NASTRAN is a registered trademark of NASA. MSC NASTRAN is an enhanced proprietary version of NASTRAN. Many of our trademarks have also been registered in the US and foreign countries.
In addition, we maintain federal statutory copyright protection with respect to our software programs and products and have copyrights on documentation and manuals related to these programs.
The CAD, CAE, and broader PLM markets are intensely competitive and characterized by rapidly changing technology and evolving standards. We expect competition to increase both from existing competitors and new market entrants. We believe that the principal competitive factors affecting the software business include ability to solve customer problems, quality, functionality, performance, ease of use and, to a lesser extent, price. In our services business, we believe that the principal competitive factor is expertise.
With respect to our software business, the Companyâ€™s primary competitors include:
Altair Engineering, Inc.
Siemens / UGS.
In our services business, we compete with in-house information technology personnel and third party consulting groups.
Although we believe we currently compete effectively with respect to these factors, we may not be able to maintain our competitive position against current and potential competitors, who may have greater financial, technical, marketing and other resources than we do. It is also possible that partnerships among competitors may emerge and acquire market share or that competition will increase as a result of industry consolidation. Increased competition could result in price reductions, reduced profitability and loss of market share, any of which could materially adversely affect our business, operating results or financial conditions.
As of December 31, 2007, we employed 1,116 persons, of whom 395 were in sales, marketing and field support, 478 in technical activities, and 243 in administration. None of our U.S. employees are represented by a labor union. Certain foreign jurisdictions have workers councils that typically represent workers on matters generally affecting terms of employment. We have never experienced any work stoppages and believe our relations with employees are good. Reliance upon employees in other countries may increase risks associated with government instability or regulation unfavorable to foreign-owned companies that could negatively impact our operations in the future.
Recruiting and retaining highly skilled employees, especially software developers and engineers, is highly competitive. We believe our growth and future success is dependent on our ability to attract, retain and motivate highly skilled employees.
Mr. Weyand has served as Chairman of the Board and Chief Executive Officer (Principal Executive Officer) since February 2005. From January to June 2003, Mr. Weyand served as the Chief Executive Officer of Pavilion Technologies, an enterprise neural network software company for advanced process control. From June 2003 until November 2007, Mr. Weyand served as Vice Chairman of Pavilion Technologies. From 1997 to 2001, Mr. Weyand served as the Chairman and Chief Executive Officer of Structural Dynamics Research Corporation (â€śSDRCâ€ť), a product lifecycle management software company which was acquired by Electronic Data Systems Corporation in 2001.
Mr. Wienkoop was hired in August 2005 as our President and Chief Operating Officer. Prior to joining us, Mr. Wienkoop served as President and Chief Operating Officer of BDNA Corporation, a software solution provider of IT asset management and governance from July 2004 to August 2005, and President and Chief Operating Officer at Portal Software, Inc., a software solution provider of billing and revenue management solutions for telecommunications from 2001 to 2004. From 2000 to 2001 Mr. Wienkoop served as President and Chief Operating Officer of SDRC.
Mr. Auriemma was hired in April 2007 as our Executive Vice President and Chief Financial Officer (Principal Financial Officer). Prior to joining the Company, from September 2000 to January 2007, Mr. Auriemma was Executive Vice President and Chief Financial Officer of FileNet Corporation, a provider of enterprise content management software that was acquired in October 2006 by IBM Corporation.
Mr. Mongelluzzo was hired in March 2005 as Senior Vice President, Business Administration, General Counsel and Secretary, and subsequently promoted to Executive Vice President, Business Administration, Legal Affairs and Secretary. Prior to joining us, Mr. Mongelluzzo served as of counsel for Vorys, Sater, Seymour and Pease LLP law firm from 2002 to 2005. From 1986 to 2001, Mr. Mongelluzzo was employed by SDRC where he served in many roles, most recently as Senior Vice President, General Counsel, and Secretary.
Mr. Gorrell was hired in November 2007 as our Senior Vice President, Human Resources. Prior to joining us, from February 2006 to April 2007, he served as Corporate Director, Human Resources of ITT Corporation, a supplier of advanced technology products. From January 2003 to January 2006, Mr. Gorrell served as Vice President, Electronic Components and Director of Human Resources for ITT Electronic Components of ITT Corporation. From May 2002 through January 2003, he served as Senior Vice President of Human Resources for NWP Services Corporation, a company that provides a range of billing and customer care solutions.
Compensation Discussion and Analysis
The Compensation Committee. The Compensation Committee reviews and approves the compensation of our executives, including the executive officers listed in the Summary Compensation Table below (who are referred to in this proxy statement as the â€śnamed executive officersâ€ť). Currently, the Compensation Committee is comprised of Ashfaq A. Munshi, Chairman, along with George N. Riordan, Randolph H. Brinkley and Robert A. Schriesheim. Each member of the Compensation Committee during 2007 was independent (as determined under NASDAQ listing standards) during the period in which he served. Mr. Jabbar served as Chairman of the Compensation Committee and Mr. Stevens served as a member of the Compensation Committee until their resignations from the Board in January 2007.
The Compensation Committee operates under a charter which defines the Committeeâ€™s role and responsibilities. The charter provides that the Companyâ€™s compensation policies should be designed to provide overall competitive pay and benefits, create proper incentives to enhance the value of the Company, and reward superior performance. Our compensation policies are designed to allow us to recruit and retain superior talent and enhance our value by creating a significant and direct relationship between pay and performance.
During 2007, the Compensation Committee:
Hired independent compensation consultants to advise on executive compensation issues and long-term incentive grant programs;
Approved grants of equity awards to our executives and other employees;
Approved base salary increases for our executives;
Approved a separation agreement for Mr. Laskey, our former Chief Financial Officer;
Approved the terms of employment, including equity grants, for Mr. Auriemma and Mr. Gorrell who were both hired by the Company during 2007;
Determined that no cash bonuses were to be paid to executives during the calendar year 2007;
Approved and implemented bonus plans for calendar year 2007; and
Approved equity awards in conjunction with acquisitions by the Company.
Compensation Consultants. The Compensation Committee has the authority by its charter to engage the services of outside consultants, and as in prior years, early in 2007 the Committee engaged Pearl Meyer & Partners to analyze our executive and senior management compensation.
Management Assistance to the Compensation Committee. Management provides the Compensation Committee members with materials in advance of meetings and works with the Compensation Committee to establish meeting agendas. As it determines to be appropriate, the Committee meets with the CEO, the Senior Vice President of Human Resources, in-house legal counsel and other Company officers.
The Compensation Committee makes all final compensation decisions regarding our CEO, the other executive officers and certain other high ranking employees. To assist in its deliberations, the CEO provides the Compensation Committee an evaluation of and compensation recommendations for the other executive officers and other employees (including each material element of their compensation), but does not participate in deliberations on his own compensation.
Compensation Philosophy and Objectives. We strive for total executive compensation at levels that motivate our executive officers to achieve long-term strategic business objectives and allow us to attract and retain talented management. We believe that a combination of fixed and variable compensation allows us to attract and retain executives while rewarding executives for achieving specific results that lead to increased stockholder value. Our long-term compensation, which consists of various equity awards, aligns the interests of our executives with our stockholders and rewards and motivates our executives to perform over a longer period of time. We further believe that supplemental benefits and perquisites which reward executives without regard to performance should be reasonable under the circumstances and that some level of supplemental benefits are appropriate for high ranking executives and are necessary to remain competitive. Past compensation or amounts payable from prior compensation are considered by the Committee when setting new elements and levels of compensation and when considering raises and equity grants.
During 2007, the variable components of our compensation program focused primarily on earnings and license revenue growth, taking into account the divestiture of certain software products and timing of revenue recognition when entering into service commitments in conjunction with software license transactions. These determinations were not made solely on a GAAP basis. The Committee considered orders which were entered into in 2007 but for which the Company anticipates recognizing revenue in subsequent periods in determining vesting of Performance Stock Unit Awards (â€śPSUsâ€ť) and in making special performance bonus awards for 2007.
Elements of Compensation. Our executive compensation program consists of the following elements:
Fixed-base salary is the foundation of our executive compensation program. A fixed-base salary provides our executives with steady regular payments in return for services provided to the Company. In determining and reviewing base salaries, we consider the executiveâ€™s experience, performance and scope of responsibilities, as well as competitive salary practices.
Salaries paid to our executive officers are reviewed annually and adjustments are made based on several factors, including the Company budget, individual contributions, tenure, and comparable Company data.
Performance-Based Annual Bonus:
The annual bonus program provides our executive officers and management an opportunity to earn a cash bonus based on satisfaction of certain performance-based criteria for the fiscal year as determined by the Compensation Committee. Performance goals under the annual plan are tied to measures of revenue, operating performance or specific tangible business goals. The Compensation Committee believes that the annual bonus program provides the executive officers and management with financial motivation to meet these performance targets.
While salary and annual bonus reward short-term performance, we believe that the executive team and management should be provided financial incentives to increase Company performance over the long term. We believe that equity compensation is the most effective means to link the interests of our stockholders and our executive officers and management. In 2007 we granted both stock options and Restricted Stock Units (â€śRSUsâ€ť) as the form of equity awards for our executives and other top performing employees through our annual grant. In addition, based on the Companyâ€™s performance during the second half of 2007, specifically expense reduction and an increase in revenue, as compared to the first six months of the year, in February 2008, the Compensation Committee approved special bonuses to all executive officers, as well as a substantial number of other employees, which were paid in RSUs that vested 30 days following the grant date.
Supplemental Benefits and Perquisites:
While we generally provide few supplemental benefits and perquisites, we maintain certain programs for the benefit of our executive officers and other high ranking managers, including car allowance, supplemental retirement benefits and an executive medical program.
Executive Compensation Practices and Benchmarking. We design our executive compensation program in accordance with our goal to attract, motivate and retain our executives. When setting compensation, the Compensation Committee considers various factors, including range of responsibilities, expertise, experience, and the recommendations of the CEO and Senior V.P. of Human Resources (except in the case of their own compensation). The pay levels of our executives compared against those of their counterparts at our peer group companies is often referred to as â€śbenchmarking.â€ť
We believe that benchmarking provides a starting point to determine appropriate compensation for our executive officers, although benchmarking is not a replacement for an analysis of each officerâ€™s total pay and its various components. It does, however, provide guidance on where we stand on our objective to attract and retain talented management, and our relative ability to do so.
As in prior years, in 2007, the Compensation Committee used Pearl Meyer & Partners to benchmark the total compensation payable to our executives and other members of senior management. The Company benchmarks each material element of compensation (base salary, bonus and equity-based awards) against other companies in a similar peer group, all based on available survey data as analyzed by Pearl Meyer & Partners. Our
peer group in 2007 was comprised of software companies of comparable size, and included Ansys, Inc., Aspen Technology, Inc., Epicor Software Corp., i2 Technologies, Inc., JDA Software Group, Inc., Lawson Software, Inc., Magma Design Automation, Manhattan Associates, Inc., MapInfo Corp, Mentor Graphics Corp, MicroStrategy, Inc., QAD, Inc., and SPSS, Inc. (collectively, the â€śPeer Groupâ€ť). The median revenue of the Peer Group was approximately $280 million and the median market capitalization was $790 million. As of December 31, 2007, our annual revenue was approximately $260 million and our market capitalization was approximately $603 million.
(A) Salary. We target executive base salaries at the 55 th percentile of the Peer Group because the Compensation Committee believes this represents the threshold of a competitive salary. Our executivesâ€™ salaries are reviewed annually by the Compensation Committee. Salary increases are based on an evaluation of the individualâ€™s performance and level of pay as compared against the Peer Group. Merit increases have historically taken place in February or March and have been retroactive to the beginning of the year. However, to mitigate the expense of raises for the full 2007 calendar year, our employees, including our executive officers, did not receive pay increases until July 2007, at which time we granted the following base salary increase; Mr. Wienkoop received a $14,800 increase and Mr. Mongelluzzo received a $10,000 increase. These raises were not retroactive to the beginning of the year. Further, while our annual bonus award is tied to performance criteria and is by its nature variable, we have not in the past, and do not intend in the future, to decrease an executiveâ€™s base salary based on performance.
(B) Bonus. In 2007, we maintained a cash bonus plan for executive officers based on Company revenue and operating profit each weighted equally. The target bonus percentages for executives are determined through comparisons to the Peer Group. The Compensation Committee has discretion in individual circumstances to adjust any bonus payable to executives and senior management to a lower or higher number based on its subjective analysis of the individual executiveâ€™s performance, and the Committee has used this discretion in the past to adjust bonuses both up and down.
We did not meet the established threshold in either of these two categories under the 2007 bonus plan, and as a result no cash bonuses were paid under the 2007 bonus program. However, because the Company had a strong performance during the second half of 2007, particularly in the fourth quarter, the Compensation Committee approved the payment of a special discretionary non-cash bonus to eligible employees, including our executive officers, in an amount equal to 25% of target bonus to recognize performance during the second half of the year and to motivate future efforts. This bonus was paid in RSUs that vested on March 18, 2008, 30 days following the award.
(C) Equity Awards. The Company provides its long-term compensation through equity grants. In September 2006, our stockholders approved our 2006 Performance Incentive Plan, which provided considerable flexibility to grant equity awards.
The Compensation Committee worked to determine appropriate equity awards for our executives, senior management and high-performance employees. In June 2007, the Compensation Committee approved option award grants to our key employees, and in July, approved option award grants to Messrs. Auriemma, Mongelluzzo and Wienkoop. Mr. Weyand had received an equity grant in February 2007 in conjunction with his new employment agreement. The awards were made for retention purposes as well as to motivate performance and to better align the interests of our executives and key employees with stockholder interests. The awards were comparable in size to prior year grants, but were in the form of options in contrast to RSUs and PSUs in order to meet the Committeeâ€™s objectives to provide a mix of equity awards.
(D) Perquisites. Each executive officer receives a car allowance and participates in the Company Executive Medical Plan which effectively maintains health insurance at substantially reduced cost for participants. In addition, each executive officer participates in the Companyâ€™s Supplemental Retirement and Deferred Compensation Plan which provides a mechanism for additional retirement savings and along with the Company match to the MSC Deferred Contribution Plan (the Company 401(k) plan). Together these plans provide a level of retirement benefits comparable to the benefits that were available under the Company Profit Sharing Plan that was discontinued in 2004. We maintain no pension plan for our executive officers. In 2007, we paid $134,529 to Mr. Wienkoop to cover taxes incurred by Mr. Wienkoop for relocation expenses paid by the Company in 2006. We believe that these benefits, while important to attracting and retaining our executives and for the Company to remain competitive in the marketplace are modest in the totality of the compensation.
We also provide vacation benefits to our executives and other employees. In March 2008, the Company stopped accruing paid vacation time for our executive officers as well as for its Vice Presidents residing in the United States and correspondingly paid them for all accrued vacation time as of February 29, 2008.
Employment, Severance and Change in Control Benefits. We believe that severance protections, particularly in the context of a change in control transaction, can play a valuable role in attracting and retaining key executive officers, are an important part of an executiveâ€™s compensation and are consistent with competitive practices. Accordingly, we provide such protections for our named executive officers and other executive officers. In the case of Mr. Weyand, these benefits are provided under his employment agreement. In the case of Messrs. Wienkoop, Mongelluzzo, Auriemma and Gorrell, these benefits are provided under change in control agreements. The Compensation Committee annually reviews the benefits provided under our change in control agreements to make sure they are still appropriate.
As described in more detail under â€śEmployment Agreements, Termination of Employment and Change in Control Agreementsâ€ť below, Mr. Weyand is entitled to severance benefits in the event of a termination of employment by us without cause or by him for good reason. Certain benefits would also be provided in the event that Mr. Weyandâ€™s employment terminates due to his death or disability. The Compensation Committee determined that it was appropriate to provide Mr. Weyand with severance benefits under these circumstances in light of his position with the Company and as part of his overall compensation package. Mr. Weyandâ€™s severance benefits are generally determined as if he continued to remain employed by the Company for one year following his actual termination date. Because we believe that a termination by Mr. Weyand for good reason (or constructive termination) is conceptually the same as an actual termination by us without cause, we believe it is appropriate to provide severance benefits following such a constructive termination of this executiveâ€™s employment.
The Company believes that the occurrence, or potential occurrence, of a change in control will create uncertainty regarding the continued employment of our executive officers. This uncertainty results from the fact that many change in control transactions result in significant organizational changes, particularly at the senior executive level. In order to encourage our executive officers to remain employed with us during an important time when their prospects for continued employment following the transaction are often uncertain, we provide our executive officers, including the named executive officers, with severance benefits if their employment is terminated by the Company without cause or by the executive for good reason in connection with a change in control. The severance benefits for the named executive officers are generally determined as if they continued to remain employed by the Company for two-and-one-half years following their actual termination date for the President and Executive Vice Presidents and two years for Senior Vice Presidents. Under his employment agreement, Mr. Weyand would be entitled to similar severance benefits as those benefits provided to the President and Executive Vice Presidents if his employment terminated under these circumstances. As noted above, because we believe that a termination by the executive for good reason is conceptually the same as a termination by the Company without cause, and because we believe that in the context of a change in control, potential acquirers would otherwise have an incentive to constructively terminate the executiveâ€™s employment to avoid paying severance, we believe it is appropriate to provide severance benefits in these circumstances.
We have entered into separate change in control agreements with each of Messrs. Wienkoop, Mongelluzzo, Auriemma and Gorrell, as well as with 17 other high ranking employees. The agreements continue through December 31 of each year and are automatically extended in one-year increments unless we give 60 days prior written notice of termination.
The agreements for Vice Presidents generally provide that if, within two years following a change in control the covered employee is terminated for other than Cause or if he terminates employment for Good Reason (both as defined in the agreements), then the employee is entitled to the following severance payments:
base salary through the date of termination;
unused vacation (to the extent accrued);
one year annual bonuses at target plus a prorated share of bonus for the portion of the year the individual is employed by MSC;
one year salary;
acceleration of vesting of all unvested options and other equity awards; and
up to one year medical and dental coverage.
Messrs. Wienkoop, Mongelluzzo, Auriemma and Gorrell are entitled to enhanced benefits under their change in control agreements. If payments are triggered under their agreements, each of Mr. Wienkoop, Mongelluzzo and Auriemma would receive 2.5 times salary and annual target bonus (plus the prorated bonus for the portion of the year the individual is employed) and would be eligible to receive medical and dental coverage for up to two and one-half years. Mr. Gorrell would be entitled to receive two times salary and annual target bonus (plus the prorated bonus for the portion of the year he is employed), and would be eligible to receive medical and dental coverage for two years.
Under Section 4999 of the Internal Revenue Code, a 20% excise tax would apply to change in control benefits paid to each of our named executive officers if, and to the extent, the aggregate value of the benefits calculated under Section 280G and accompanying income tax regulations equals or exceeds three times the executiveâ€™s average taxable compensation for the five most recent tax years (or portion of such period the executive has been employed by the Company) ending before the change in control. As part of their change in control benefits, our named executive officers would be reimbursed for all excise taxes imposed under Section 4999 on their severance payments and any other related payments, and for all income and payroll taxes on the reimbursed amount. We provide these executives with a â€śgross-upâ€ť for all taxes that would be imposed on benefits paid because we determined the appropriate level of change in control severance protections for each executive without factoring in the adverse tax effects on the executive that might result from these excise taxes. The tax gross-up is intended to make the executive whole for any adverse tax consequences to which the executive might become subject under the tax law, and to preserve the level of change in control severance protections that we have determined to be appropriate. Furthermore, to the extent we pay change in control benefits to which the Section 4999 excise tax would apply, we would forfeit our right to a federal income tax deduction for the benefits paid. We have provided an estimate of the cost of the excise tax gross-up under the section entitled â€śEstimated Value of Change In Control Benefits at December 31, 2007.â€ť
In addition, the vesting of all RSUs and PSUs granted by the Company prior to 2008 to employees not subject to a change in control agreement will accelerate upon a change in control event. Equity awards granted in 2008 to employees not subject to a change in control agreement accelerate only if the employee is terminated by the Company within one year following a change in control event.
MANAGEMENT DISCUSSION FROM LATEST 10K
We manage our business under two operating segmentsâ€”software and services. Our revenue is derived through our direct sales force, a network of value-added resellers and other sales agents. Revenue generated by our software segment consists of licensing fees that are earned through time-based lease arrangements and paid-up (perpetual) license arrangements, whereby the customer purchases a license for the use of our software. Both lease and paid-up arrangements are typically sold with maintenance for a period of time. Revenue generated by our services segment consists of maintenance and services revenue. Maintenance revenue includes unspecified software upgrades, enhancements and technical post-contract support. Services revenue includes consulting and training services, including services provided in connection with software installation.
We operate our business in three geographic regions: The Americas (North America and Latin America), EMEA (Europe, Middle East and Africa), and Asia Pacific (Japan, Korea, The Peopleâ€™s Republic of China, Taiwan, Australia, Southeast Asia and India). We manage all of our operations based on software sold and services provided to our customers. These regions operate similarly with respect to industries, customer base and sales channels, but each has unique challenges and opportunities. Although our consolidated results are reported in United States dollars, our foreign regions conduct their transactions in local currency. As a result, our consolidated results of operations may be significantly impacted by changes in foreign currency exchange rates.
Significant portions of our current and past revenue sources are attributable to our long-term relationships with major OEMâ€™s and their key suppliers, who have embedded our software solutions within their collaborative design and manufacturing processes. Such embedding of our software provides new and recurring revenue opportunities with respect to the development and marketing of new products, renewal of maintenance contracts, and consulting services. Our customers typically fund purchases of our software and services largely out of their manufacturing and capital budgets and, to a lesser extent, their research and development (â€śR&Dâ€ť) budgets. As a result, our customersâ€™ business outlook and willingness to invest in new product development significantly affects the growth of our business.
Our customers, many of which have global operations, continue to re-evaluate their business models to obtain competitive advantages through product innovation, manufacturing efficiency, speed to market and lower cost. This focus has often resulted in massive shifts of production and manufacturing capabilities to lower cost regions of the world, including developing countries. This shift in turn creates both opportunities and challenges in the regions we operate. As our current customers expand or contract their operations and supporting supply chains, we are directly affected. In addition, the growth in developing countries within the regions we operate, namely Central and Eastern Europe, China, India and Korea, have allowed some companies who traditionally provided contracted services to expand into product development. This also will create new opportunities within new markets for us to pursue.
During times of economic uncertainty, companies will place greater emphasis on creating the most cost effective and competitive business model, which may result in expense reductions within their capital and R&D budgets. Some customers may reduce their PLM expenditures by decreasing their level of software purchases, use older generations of products or not renew maintenance services. In addition, customers will bargain more intensely on pricing and payment terms, which will affect PLM related revenues industry-wide. Lastly, some customers may consolidate their PLM purchases with fewer suppliers in order to lower their overall cost of ownership while at the same time meeting new technology challenges. This will increase competition among PLM vendors.
Recognizing that companies will continue to scrutinize their PLM spending and will work to aggressively contain costs, we are dedicated in improving our customersâ€™ product development and manufacturing capabilities by providing more fully integrated simulation software within an enterprise solutions environment and offering customers a wide range of software products and solutions. Over the long term, we believe PLM spending growth will continue to depend on growth in product development and engineering spending and on continued growth in key markets and industries we serve.
According to industry research firm CIMdata, CAE software and services spending is estimated to exceed $2 billion in 2008. Spending on PLM software and services totaled nearly $20.1 billion in 2006 a year-over-year increase of 10.7%. Approximately 9.1% of PLM investments came from CAE in 2006. CIMdata expects that CAE will be one of the rapidly growing segments within the PLM sector over the next five years, and forecasts that this market segment will exceed $2.6 billion in 2011, with a compound annual growth rate of approximately 7.5%. No assurance can be given, however that these forecasts can be realized or increase our revenues.
Product Development and Revenue Growth
Our goal for growing market share and profitability is to expand our leading position in the simulation software market by further penetrating our installed base, by adding new customers from the supply chains in our existing aerospace, automotive and heavy manufacturing markets, and by targeting new markets such as biomedical and consumer products.
During 2007, we introduced significant enhancements to our core engineering products, as well as our new enterprise simulation solutions, as described below.
Engineering Productsâ€”Substantial enhancements in product functionality were made to our engineering products such as MSC.Nastran, Patran, Adams, Marc, Dytran, and others. The extensive enhancements expand simulation capabilities, increase solution performance, and improve the overall productivity of the virtual product development process.
MD Solutionsâ€”New releases of MD Nastran, MD Patran, and MD Adams products improved interoperability and multi-disciplinary functionality to speed design efficiency, drive early design validation, and provide manufacturers with insight into total product lifecycle performance.
Enterprise Solutionsâ€”New releases of our SimEnterprise solutions of SimXpert, SimManager Enterprise, and SimDesigner Enterprise provided advanced capabilities to capture and reuse expert knowledge across engineering disciplines, user communities, and organizational boundaries in order to accelerate product development through enhanced productivity.
Channel Productsâ€”Our SimOffice product was enhanced to provide extended analysis functionality while maintaining a cost-effective price point.
To further enable our customers to operate in a multi-disciplinary simulation environment, we expanded our capabilities in both CFD as well as thermal analysis, via acquisitions. The acquisition of Pioneer Solutions, Inc. and its FluidConnection set of products in August 2007 provide MSC with a CFD solver-neutral offering to tie MSCâ€™s products to market-leading CFD solutions. The acquisition of Network Analysis, Inc. in January 2008 provides MSC with an advanced framework on which to enhance our thermal analysis offerings, particularly with respect to aerospace and defense customers.
We believe our strategy in providing our customers simulation solutions, including our enterprise simulation development platform â€“ SimEnterprise, and its related component solutionsâ€” SimXpert, SimManager Enterprise and SimDesigner Enterprise, together with our MD software that delivers highly enhanced multi-disciplinary capabilities, will differentiate us from our competition.
Results of Operations
We generate our revenue from the sale of software licenses, maintenance, consulting and training services. The timing and amount of revenue recognized from software licenses, maintenance and services agreements vary. We recognize (i) revenue on a paid-up software license in the period in which the license is delivered, and on a lease, ratably over the license term, (ii) maintenance revenue, generated either as an element of a software license or by a separate renewal agreement, ratably over the maintenance period (normally one year), and (iii) services revenue, generated primarily from consulting and training agreements are recognized when services are performed. A more complete description of our revenue recognition policy can be found herein under Critical Accounting Policies.
Due to the cyclical nature of new product releases and spending by larger global accounts, our revenue is sensitive to individual large transactions that are neither predictable nor consistent in size or timing. No single customer or reseller represented more than 10% of total revenue during the periods presented.
Total revenue for 2007 was $246.7 million, a decrease of 5.0% compared to $259.7 million for 2006. The decrease for the year ended December 31, 2007 reflects the loss of $2.4 million of sales attributable to our PLM business which we sold in March 2006. Changes in foreign currency rates during the 2007 period favorably impacted revenue by $7.2 million. The remaining decrease was primarily the result of lower software and services revenue recognized in all our regions, which are more fully discussed below. Total deferred revenue at December 31, 2007 increased 3.1% to $80.6 million compared to $78.2 million at December 31, 2006.
Total revenue for 2006 was $259.7 million, a decrease of 12.2% compared to $295.6 million for 2005. The decrease for the year ended December 31, 2006 reflects the loss of $7.7 million of sales attributable to our PLM business. Changes in foreign currency rates during the 2006 period decreased revenue by $3.9 million. The remaining decrease in total revenue resulted from lower software and services revenue recognized in all our regions. Total deferred revenue at December 31, 2006 decreased 17.3% to $78.2 million compared to $94.6 million at December 31, 2005.
Software Revenue. Software revenue in 2007 decreased 14.8% to $94.7 million compared to $111.2 million in 2006. The decrease for the year ended December 31, 2007 reflects the loss of $1.3 million of sales attributable to our PLM business. In addition, changes in foreign currency rates favorably impacted software revenue in 2007 by $2.6 million. As previously discussed, the Company has been transitioning from engineering tools to enterprise products. As a result of this transition, engineering tools decreased by approximately $30.0 million while enterprise products revenue increased by $14.0 million. Other factors that adversely impacted our 2007 revenue include discontinued products, competitive pressures, the timing of revenue recognition associated with the different mix of license arrangements more fully discussed below. As a percent of total revenue, software revenue was 38.4% in 2007 compared to 42.8% in 2006. During the year ended December 31, 2007 total deferred software revenue increased $1.3 million or 5.2% to $26.4 million.
Software revenue in 2006 decreased 22.8% to $111.2 million compared to $144.0 million in 2005. The decrease in 2006 reflects the loss of $4.5 million of sales attributable to the PLM business. In addition, changes in foreign currency rates decreased software revenue by $1.8 million. The remaining decrease was due to the transition to selling enterprise solutions that generally lengthened our sales cycle. As a result, engineering tools revenue decreased by approximately $39.0 million while enterprise product revenue increased by $6.3 million. As a percent of total revenue, software revenue was 42.8% in 2006 compared to 48.7% in 2005. During the year ended December 31, 2006 total deferred software revenue decreased $11.3 million or 31.0% to $25.1 million.
Maintenance Revenue. Maintenance revenue in 2007 increased by 9.0% to $125.5 million compared to $115.1 million in 2006. The changes in foreign currency rates favorably impacted maintenance revenue in 2007 by $3.6 million. The remaining increase is the result of incremental growth in our installed customer base from 2007 activity coupled with high renewal rates from our prior yearsâ€™ customer base. As a percent of total revenue, maintenance revenue was 50.9% in 2007 compared to 44.3% in 2006. During the year ended December 31, 2007 total deferred maintenance revenue increased $1.6 million or 3.1% to $52.9 million.
Maintenance revenue in 2006 increased by 7.1% to $115.1 million compared to $107.5 million in 2005. The changes in foreign currency rates unfavorably impacted maintenance revenue in 2006 period by $1.7 million. The remaining increase was the result of incremental growth in our installed customer base and high renewal rates. As a percent of total revenue, maintenance revenue was 44.3% in 2006 compared to 36.4% in 2005. During the year ended December 31, 2006 total deferred maintenance revenue decreased marginally by $0.6 million or 1.2% to $51.3 million.
Services Revenue. Services revenue in 2007 decreased by 21.0% to $26.4 million compared to $33.4 million in 2006. The decrease in 2007 reflects the loss of $1.1 million of services revenue recognized in 2006 attributable to our PLM business. Changes in foreign currency rates favorably impacted services revenue in 2007 by $1.0 million. The remaining decrease was due to changes in the nature, size and timing of consulting arrangements provided to our larger global accounts and the decision to discontinue certain low margin services. As a percent of total revenue, services revenue was 10.7% in 2007 compared to 12.9% in 2006. During the year ended December 31, 2007 total deferred services revenue decreased $0.5 million or 27.8% to $1.3 million.
Services revenue in 2006 decreased 24.4% to $33.4 million compared to $44.1 million in 2005. The decrease in 2006 reflects the loss of $3.2 million of services revenue recognized in 2005 that was attributable to our PLM business. The remaining decrease was due to the nature, size and timing of consulting and training arrangements provided to our larger global accounts and the decision to discontinue certain low value services. As a percent of total revenue, services revenue was 12.9% in 2006 compared to 14.9% in 2005. During the year ended December 31, 2006 total deferred services revenue decreased $4.6 million to $1.8 million.
Revenue by Geography
Americas â€”Total revenue in the Americas in 2007 was $75.3 million, a decrease of 0.6% compared to $75.7 million in 2006. The decrease in software revenue in 2007 was impacted by the loss of PLM software revenue totaling $1.3 million. The remaining decrease in software revenue in 2007 was the result of lower sales resulting from the transition to selling our MD and enterprise products. We experienced lower sales activities within the automotive industry due to weak market conditions, partially offset by continued strength in our major accounts within the aerospace industry. The increase in maintenance revenue in 2007 was due to a growing installed customer base coupled with high renewal rates. The decrease in services revenue was due to the loss of PLM services revenue totaling $1.1 million. The remaining decrease was the result of the completion and non-replacement of significant consulting arrangements provided to larger global accounts in the aerospace and automotive sectors and the decision to discontinue certain services.
In 2006, total revenue was $75.7 million, a decrease of 13.5% compared to $87.6 million in 2005. The decrease for the in 2006 reflects the loss of $4.5 million of software sales attributable to our PLM business. The remaining decrease was due to delays in orders resulting from the transition to selling our MD and enterprise solutions, which impacted sales to major customers in our key industries. Maintenance revenue increased 11.7% to $38.0 million due to a growing installed customer base coupled with high renewal rates. Our services revenue decreased 39.4% to $12.0 million due to the loss of PLM services revenue totaling $3.2 million. The remaining decrease was due to a decrease in training and consulting arrangements, particularly larger global accounts in the aerospace and automotive sectors, due to the completion of projects and the discontinuance of certain services.
EMEA â€”Total revenue in EMEA in 2007 was $95.9 million, a decrease of 7.3% compared to $103.4 million in 2006. Changes in the EURO favorably impacted total revenue by $8.2 million in 2007. Software revenue in 2007 was favorably impacted from changes in the EURO by $3.1 million. Sales to customers in the automotive industry were lower in key markets, such as France and Germany, while sales to major customers were higher in the aerospace industry by approximately $2.1 million. In addition, indirect channel sales were higher by $1.6 million compared 2006 as the result of increased focus on the channel program coupled with strong regional performance by our channel partners, particularly in Russia, the UK, Turkey and South Africa.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
We generate our revenue from the sale of software licenses, maintenance, consulting and training services. The timing and amount of revenue recognized from software licenses, maintenance and services agreements vary. We recognize (i) revenue on a paid-up software license in the period in which the license is delivered, and on a lease, ratably over the license term, (ii) maintenance revenue, generated either as an element of a software license or by a separate renewal agreement, ratably over the maintenance period (normally one year), and (iii) services revenue, generated primarily from consulting and training agreements are recognized when services are performed.
Due to the cyclical nature of new product releases and spending by larger global accounts, our revenue is sensitive to individual large transactions that are neither predictable nor consistent in size or timing. No single customer or reseller represented more than 10% of total revenue during the periods presented.
Total revenue for the three months ended March 31, 2008 was $61.2 million, an increase of 6% compared to $57.6 million for the same period in 2007. The increase for the period was favorably impacted by changes in foreign currency rates of $5.2 million. Excluding the effect of changes in foreign currency rates, total revenue decreased 3% or $1.6 million.
Software Revenue . Software revenue for the three months ended March 31, 2008 decreased 4% to $22.0 million compared to $23.0 million for the same period in 2007. During the three months ended March 31, 2008, enterprise solutions revenue increased $1.4 million, while revenue from engineering tools decreased $2.4 million, when compared to the same period in 2007. Changes in foreign currency rates favorably impacted software revenue by $2.0 million. Excluding the effects of changes in foreign currency rates during the three months ended March, 31, 2008, software revenue decreased 13% to $20.0 million. Total deferred software revenue at March 31, 2008 was $24.8 million compared to $26.4 million at December 31, 2007.
Maintenance Revenue. Maintenance revenue for the three months ended March 31, 2008 increased 15% to $33.0 million when compared to $28.8 million for the same period in 2007. The increase was primarily due to the timing of renewals, incremental growth in our installed customer base and continued high renewal rates from our prior yearsâ€™ customer base. Changes in foreign currency rates favorably impacted maintenance revenue by $2.7 million. Excluding the effects of changes in foreign currency rates during the three months ended 31 March, 2008 period, maintenance revenue increased 6% to $30.4 million. Total deferred maintenance revenue at March 31, 2008 was $68.7 million compared to $52.9 million at December 31, 2007.
Services Revenue. Services revenue for the three months ended March 31, 2008 increased 5% to $6.2 million and is comparable to $5.9 million for the same period in 2007. Changes in foreign currency rates favorably impacted services revenue by $0.5 million. Total deferred services revenue at March 31, 2008 was $0.9 million compared to $1.3 million at December 31, 2007.
Revenue by Geography
Americas â€“ Total revenue in the Americas for the three months ended March 31, 2008 was $18.5 million, essentially unchanged compared to the same period in 2007. Software revenue decreased 9% as a result of lower sales of engineering tools while customers continued to evaluate the transition to our MD and enterprise solutions. In this region, we continue to experience growth in sales of engineering tools in the aerospace industry. Maintenance revenue increased 5% to $11.1 million primarily due to a reinstatement of maintenance to a significant automotive customer totaling $0.7 million. Our services revenue increased 8% to $1.8 million mainly from training revenue generated from customers in the aerospace industry.
EMEA â€“ Total revenue in EMEA for the three months ended March 31, 2008 was $23.6 million, an increase of 20% compared to $19.7 million for the same period in 2007. Software revenue increased 14% due to a favorable impact from changes in the EURO totaling $1.0 million. Although we experienced growth in revenue from sales of enterprise solutions, this increase was offset by lower revenue from sales of engineering tools resulting from lower conversions of lease to paid-up licenses compared to 2007. Maintenance revenue increased 28% to $12.7 million due to a favorable impact from changes in foreign currency rates of $1.6 million, more timely renewals during the three months ended March 31, 2008 compared to the same period in 2007 and growth in our installed customer base. Services revenue increased 3% to $2.5 million primarily due to a favorable impact from changes in foreign currency rates.
Asia Pacific â€“ Total revenue in Asia Pacific for the three months ended March 31, 2008 was $19.1 million, essentially unchanged compared to the same period in 2007. Software revenue decreased 16% despite a favorable impact from changes of foreign currency rates of $0.9 million. The 2008 period was impacted by non-renewals of lease arrangements, the absence of significant conversions of leases to token-based licenses that occurred in 2007 and weakness in our indirect channel business compared to 2007. Maintenance revenue increased 11% to $9.2 million and services revenue increased 9% to $1.9 million primarily due to a favorable impact from changes in foreign currency rates.
Costs and Expenses
A significant amount of our costs and expenses are considered fixed and do not vary based upon revenue levels. Our most significant fixed expenses include compensation, benefits and facilities, all of which are difficult to reduce quickly should our revenue levels not meet expectations.
We allocate facility expenses among our income statement categories based on headcount. Annually, or upon a significant change in headcount (such as a workforce reduction, realignment or acquisition) or other factors, management reviews the allocation methodology and the expenses included in the allocation pool.
Cost of Revenue
Cost of Software Revenue . Cost of software revenue consists primarily of third-party royalties for technology embedded in or licensed with our software products, amortization of developed technology and the cost of product packaging and documentation materials. During the three months ended March 31, 2008, cost of software decreased 19% to $2.5 million compared to $3.1 million for the same period in 2007. The decrease was attributable to lower royalty expenses of $0.5 million resulting from lower revenue, changes in product mix, and renegotiated or terminated agreements. We expect the cost of software revenue percentage to be stable in the near-term.
Cost of Maintenance and Services Revenue. Cost of maintenance and services revenue consists primarily of personnel, outside consultancy costs and other direct costs required to provide post sales support, consulting and training services. Cost of maintenance and services revenue for the three months ended March 31, 2008 increased 12% to $9.6 million compared to $8.6 million for the same period in 2007. The increase was largely attributable to higher employee related expenses totaling $0.5 million resulting primarily from annual merit increases. Excluding the unfavorable effect of changes in foreign currency rates of $0.7 million, cost of maintenance and services increased 3% to $8.9 million.
Research and Development . Our research and development expenses consist primarily of salaries and benefits, facility expenses, contracted services, incentive compensation and computer technology. Major research and development activities include developing our enterprise solutions strategy, including our MD software, and enhancing the features and functionality of existing engineering tools. Research and development expenses for the three months ended March 31, 2008 increased 9% to $14.4 million compared to $13.2 million for the same period in 2007 due to higher employee related expenses of $0.3 million, higher contracted services cost of $0.3 million and increased facility costs of $0.4 million. Average headcount of research and development personnel (excluding contracted personnel), during the period in 2008 increased 2% to 272 from 266 in 2007.
Selling and Marketin g. Our selling and marketing expenses consist primarily of salaries and benefits, sales commissions, facility costs, travel and entertainment, incentive compensation, product marketing and promotional materials, trade shows and customer conferences and professional services. Selling and marketing expenses for the three months ended March 31, 2008 increased 17% to $23.6 million compared to $20.2 million in 2007. The increase was due to higher commissions and incentive compensation totaling $1.2 million resulting from changes in incentive plans, higher employee related expenses of $1.0 million resulting from annual merit increases, higher travel and entertainment expenses of $0.4 million and increased third-party agent commissions of $0.3 million. Excluding the unfavorable effect of changes in foreign currency rates of $1.8 million, selling and marketing expenses increased 8% to $21.8 million. Average headcount of sales and marketing personnel excluding contracted personnel during the period in 2008 decreased 12% to 388 from 443 in 2007.
General and Administrative. Our general and administrative expenses consist primarily of salaries, benefits and incentive compensation, facility costs, outside consulting and other professional services and travel and entertainment. General and administrative expenses for the three months ended March 31, 2008 decreased 19% to $15.2 million compared to $18.7 million for the same period in 2007. The decrease was attributable to lower fees incurred for accounting and tax projects totaling $1.8 million, reduction in employee benefit costs of $0.7 million resulting from favorable trends in medical insurance claims, lower facility costs of $0.6 million resulting from the consolidation and closure of facilities as part of the 2007 restructuring plan and decreased provision for doubtful accounts of $0.7 million. These decreases were partially offset by an increase in employeesâ€™ salaries and accruals for incentive compensation totaling $0.8 million. Excluding the unfavorable effect of changes in foreign currency rates of $0.6 million, general and administrative expenses decreased 22% to $14.6 million. Average headcount of general and administrative personnel excluding contracted personnel during the period in 2008 decreased 2% to 244 from 249 in 2007.
Amortization of Intangibles. Amortization of intangibles for the three months ended March 31, 2007 and 2008 was $0.2 million and $0.3 million, respectively. The increase resulted from the acquisitions of Pioneer Solutions, Inc. in August 2007 and Network Analysis, Inc. in January 2008, and the reclassification of trademarks and trade names with carrying value of $2.7 million from indefinite lived assets to other intangible assets at December 31, 2007.