FOOL CONFERENCE CALL SYNOPSIS*
By Debora Tidwell (MF Debit)

Structural Dynamics Research Corporation
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2000 Eastman Drive
Milford, OH 45150-2789
(513) 576-2400
http://www.sdrc.com/

UNION CITY, CA (February 8, 1997)/FOOLWIRE/ --- On January 28th, Structural Dynamics Research Corp reported revenues of $285.3 million for 1996, up 27% over last year. Net income was $33.7 million or $0.97 per share compared to a net loss of $7.5 million or $0.24 per share for the prior year. Excluding non-recurring charges of $1.1 million related to the acquisition of CAMAX Manufacturing Technologies, net income for 1996 totalled $34.8 million or $1.00 per share. Operating income for the year was $40.5 million, up 70% over 1995.

FOURTH QUARTER REVENUES & INCOME. For the fourth quarter, revenues were $81.8 million, up 19% over the year-ago period. Net income was $12.3 million or $0.36 per share compared with a net loss of $16.9 million or $0.54 per share in Q4 last year. Operating income for the quarter was $14.4 million, up 50% from last year's fourth quarter.

REVENUE BREAKDOWN FOR Q4. New software license revenue was $44.6 million, up 12% from last year's strongest ever quarter. New license revenue for the year was up 17% with new I-DEAS license revenue up 21% and maintenance and services up 42%. They had 50 total license orders in the quarter just ended over $100,000 each, with 7 of those being over $500,000. In total, they processed over 1100 license orders in the quarter. Their prospects for future license sales were increased significantly in the quarter with long-term contract relationships established with Mazda Motor Corporation and Xerox Corp. They have over $300 million of identified future revenue over the next 3 years from over 30 long-term client relationships like Ford, Xerox, and Mazda.

REVENUE BREAKDOWN FOR THE YEAR. For the year, I-DEAS license revenue grew 21% and PDM new license revenue grew 10% against a tough comparison. 1995 included a $7 million PDM order from Boeing in the third quarter. They processed almost 3400 license orders in 1996 with 25 of those exceeding $500,000. Their average license sale of about $41,000 underscores their broad-based appeal among a wide range of designers and manufacturers. Over half of their license orders in 1996 were for less than $20,000, although a large percentage of those are add-on business.

Software maintenance revenue was up 40% including a 40% increase in I-DEAS maintenance and a 108% increase in PDM maintenance. Consulting service revenues were up 46% including a 26% increase in I-DEAS consulting and a 128% increase in PDM consulting. Total PDM revenue was up 53% over last year and total I-DEAS revenue was up 27%. Software revenue represents 81% of total revenue for the year, including maintenance upgrades, and grew 23% over the prior year. Consulting revenue was 19% of sales and grew 47% over last year. 32 of their accounts exceeded the $1 million revenue threshold in 1996.

CLIENT/INDUSTRY MIX. Their top ten client accounts provided about 27% of sales for the year and included Ford Motor Company, Xerox, ABB, Lockheed Martin, Boeing, Siemens, Mitsubishi, Nissan, Samsung, and the US government -- primarily the Air Force. Their top ten accounts in the prior year accounted for about 21% of revenue. Ford Motor Company was about 11% of total revenue for the year. Their revenue breakdown by industry for the year was 32% automotive, 30% electronics, 24% industrial machinery, and 14% aerospace. That has automotive up 10% taking 4% from aerospace and 3% each from electronics and industrial machinery.

GEOGRAPHIC BREAKDOWN. For the year, their geographic revenue breakdown was 48% North America, 28% Europe, and 24% Asia/Pacific with annual growth of 33% in North America, 31% in Europe, and 13% in Asia/Pacific.

REVENUE BREAKDOWN FOR THE QUARTER. Total maintenance and services revenue for the quarter was $37.2 million, up 29% compared to last year's fourth quarter. Software revenue represented 80% of total revenue for the quarter, including software maintenance charges for product release upgrades, about an 18% growth over the same quarter last year. Consulting services represent about 20% of total revenue with about 24% growth over the prior year. Revenue mix by geography for the quarter was unchanged -- 45% North America, 30% Europe, and 25% Asia -- with 21% year-over-year growth in North America, 18% growth in Europe, and 17% growth in Asia. Their revenue mix by client industry for the quarter was 31% electronics, 29% automotive, 27% industrial machinery, and 13% aerospace. They sold 14,000 product licenses in the quarter bringing their cumulative number of installed software licenses to 234,000 as of December 31st. About 24% of the dollar volume of license sales orders in the quarter were to new accounts, with about 76% of licenses sold to existing customers.

COST OF REVENUE. SDRC's cost of revenue increased 40% over last year's fourth quarter from about 27% of revenue to 31% of revenue. Costs related to their Ford program account for about $2 million of the increase including labor and special product royalty fees. Among more routine costs, their royalty fees for PDM sales were about $1 million higher on higher PDM sales volume and they incurred about $900,000 more expense in PDM service costs than in the same quarter last year. Their royalty fees on I-DEAS sales were also about $1.4 million higher. Software amortization was up $1.4 million.

OPERATING EXPENSES. Total operating expenses grew only 3% year over year, primarily as a result of lower R&D expenses. Although their real R&D costs increased almost $3 million over last year's fourth quarter, they capitalized $2.6 million more internal R&D costs in the fourth quarter 1996 than they did in the prior year, reflecting increased resources in the higher level of coding intensity related to the development cycle of Master Series 5. It is interesting to note, however, that the total net capitalization in the two fourth quarters is about the same, including about $1 million worth of purchased software they added to the books in the fourth quarter of 1995 for the purchase of a C-CAD Systems product. Two other major items helped account for the variance between years in R&D expense. The 1996 quarter includes about $500,000 less compensation expense than 1995 since a good portion of product development's incentive cash bonus is now tied to the timely delivery of their next product release a few months from now. In addition, the 1995 fourth quarter includes non-recurring expenses of about $500,000 related to payments to Control Data for rights on certain development technology. Those items more than offset their real $3 million increase in development costs and accounts for virtually the entire variance.

OPERATING EXPENSES FOR THE YEAR. Expensed R&D costs for the year totalled $30.7 million, up $6.2 million or 26%, and comprised about 11% of revenue. The combination of expensed R&D with support costs, capitalized labor, and third-party royalty fees was about $62.8 million, an increase of 21% over last year and about 22% of total revenue. Their operating margin for the year was 14% compared to 11% for 1995, a 34% improvement in margin on a 27% improvement in revenue. At year end, SDRC had over 1600 employees, including 194 in sales and sales management and 371 in product development. With the acquisition of Metaphase and Control Data's PDM business, they now have 1780 employees including 438 in product development. Their direct sales force accounted for about 2/3 of their total revenue in 1996 with about 1/3 from resellers and distributors.

SG&A EXPENSES FOR THE QUARTER. Selling and marketing costs were up only 4% compared to Q4 last year. As a matter of fact, such costs were actually down 11% in last year's fourth quarter compared to the previous year reflecting their drive to improve efficiency in this area over the last two years. They kept their headquarters and corporate marketing costs relatively flat in the fourth quarter compared to the same quarter a year ago and also had some significant severance costs incurred for sales executives in 1995's fourth quarter compared to this year. All told, a 5 point improvement in sales costs to revenue for the full year provided their operating margin expansion from 11% to 14%. They will be investing in their sales and marketing efforts in 1997 with a 30% increase in direct sales headcount, more direct marketing thrust and creative initiative, the significant expansion of their marketing product management staff, a good investment in their Artisan product rollout and other projects. General and administrative costs for the fourth quarter include about $400,000 in litigation costs primarily related to the pursuit of insurance proceeds payable from their excess P&L liability carrier. Absent these G&A costs, it increased about 12% and actually decreased as a percentage of revenue.

OPERATING INCOME. Operating income increased 49% over last year's fourth quarter, improving to 18% of revenue compared to last year's 14%. Equity in earnings of affiliates is primarily their 50% share of Metaphase Technology Corporation results. Metaphase lost about $371,000 in the fourth quarter. For the full year, Metaphase Technology ate, in revenue, about $15 million and was close to breaking even on operations, but lost about $650,000 for the year after interest expense. Other income for the quarter includes about $1.4 million of interest income which interest income in the 1995 quarter was about $1.7 million. The variance in other income is due to a $1.6 million lease write-off in the fourth quarter of 1995. About half the quarter's income tax expense is European source income taxes and about one third is Japanese withholding taxes.

BALANCE SHEET. Cash and marketable securities totalled $100.3 million at December 31st, up $18.2 million from last year end and up $1.1 million from Q3. They had several significant uses of cash in the quarter including gross equipment expenditures of about $4.5 million, about $10 million prepaid on the Metaphase acquisition, real estate deposits in Korea of $1.5 million, and funding Metaphase operations of about another $1.2 million.

RECEIVABLES. Their trade receivables increased $3.8 million over last year and are up $11.9 million from the end of Q3. Their DSO at quarter end was 68 days, 8 days lower than last year. The relatively large volume of license orders received late in the quarter leaves little opportunity for collection at fourth quarter end. Their global objective, however, is to manage their receivables to under 70 days. Other accounts receivable are down $2.8 million from last December 31st due to the receipt of $5 million of insurance proceeds since then and ended up $2.3 million in the quarter due to unbilled receivables added in the quarter due from Ford.

PREPAID EXPENSES. Their prepaid expenses grew $1.6 million over last December 31st and $1.7 million in the quarter primarily due to a $1.5 million security deposit on real estate in Korea. As mentioned earlier, property, plant, & equipment is up $6.4 million last year and up $2.4 million in the quarter reflecting increases in equipment, leasehold improvements, and furniture to accommodate the increased headcount.

ASSETS. They reduced their software asset by about $2 million in an intensive year of development work, absorbing about a $0.06 per share effect. Other assets are up $8.3 million for the year and $6.1 million in the quarter due primarily to the recognition of $4.6 million in net deferred tax assets.

LIABILITIES. Deferred revenues included in current liabilities at year end totalled $36.5 million, up $3.2 million from last year and up $2.7 million in the quarter and they are looking for another increase in Q1. Total current liabilities were down $14 million for the year reflecting their cash payment of $17.6 million last January in connection with their shareholders' settlement, but up $10.5 million in the quarter due primarily to increases in accrued taxes, accounts payable, and the deferred revenue increase. The $47.9 million in shareholder's equity is a result of the $33.7 million in net income and the rest is primarily from stock option proceeds.

OPERATIONAL OVERVIEW. 1996 was a record year for sales and profits. The acquisitions of CAMAX and Metaphase along with new contract awards from Xerox and Mazda paced the activity in an exciting year. They also continued to make significant investments in their flagship product, I-DEAS Master Series, enabling them to offer the industry's most balanced suite of mechanical design automation tools for CAD/CAM/CAE and PDM (computer-aided design/computer-aided manufacturing/computer-aided engineering and product data management).

NEW PRODUCT -- I-DEAS ARTISAN SERIES. SDRC also announced availability of the new I-DEAS Artisan Series, a functionally advanced, affordable suite of solids-based mechanical design software tools available in the Windows NT environment. The core product, priced at $4,999, includes solid modeling, assembly design, drafting, and interface capabilities optimized for a production environment. Additional modules are available for advanced surfacing, standalone drafting, sheet metal design, and a fastener catalog.

The market for 3-D solid space design systems is estimated by industry analysts to be about 800,000 seats over the next three years. With the I-DEAS Artisan Series, SDRC is in position to take full advantage of that growing market and begin the process of introducing their approach to a total solution at much earlier stages with the customer. I-DEAS Artisan Series is based on I-DEAS Master Series with functionality suited to this emerging market. It will be offered only through value-added resellers (VARs). They have worked very closely with their top VARs to tailor the Artisan functionality and pricing. In addition to Artisan, their VARs will also be able to continue to provide I-DEAS Master Series, giving them a full range of offerings. None of the other mid-range products has a high-end compatible product available through the same reseller as does SDRC, which they feel is a distinct market advantage.

By offering I-DEAS Artisan Series to the mid-range market, they better position the I-DEAS solutions concept with potential future team users. By providing a product that protects a company's vital investment in 2D data and making it as easy as possible to provide the next direct migration path upward to full-team engineering when the time is right, SDRC will have a much higher visibility earlier in the process. They believe this represents a significant opportunity to reach new areas of the market in shortened selling cycles.

Their direct focus on the high-end market and partner relationships with their customer base serves them well and helps build loyalty. By providing a mid-range product to the marketplace through their reseller channel, they can continue to concentrate their direct sales efforts and people on the high-end, longer-cycle, and more profitable sales or product and services. With the exception of product introduction costs in support of their VARs, their cost of bringing this product to market were relatively small. This effort, SDRC's first broadly based product rollout, has already been hailed by several VARs as the best new product introduction in this product category they have ever seen.

THE EFFECT ON I-DEAS MASTER SERIES. Artisan is designed to be used in an environment with five or fewer seats. I-DEAS Artisan lacks certain functionality like teaming and libraries that would make it less effective in larger environments and it has reduced drafting capabilities. There is no CAE available on Artisan, no advanced surfacing or variational sweep. All versioning must be done manually. For users introduced to I-DEAS through Artisan, there are additional incentives beyond just the added functionality to migrate upward including full upgrade credits and volume discounts, again available through the same VAR. Artisan is a logical first step for many potential Master Series customers. They are pleased to report that they have already signed up more than 40 SDRC VARs who are taking orders for Artisan and they are in the process of certifying a number of additional VARs who have expressed an interest in selling it. They believe this product has the potential to be quickly embraced by the market and to quickly increase the visibility of SDRC.

METAPHASE ACQUISITION. SDRC has significantly added to their ability to capture high-end business with their acquisition of 100% of their Metaphase joint venture along with the customer contracts and most of the employees of the Control Data Systems PDM business. The Metaphase acquisition is very important to SDRC. As they mentioned in their conference call last quarter, PDM (product data management) provides the second element of their strategic plan for future new market growth opportunities. It also solidifies their complete solutions focus which gives them a strong position in the four basic areas of concurrent engineering -- CAD/CAM/CAE/PDM. PDM is an emerging market growing at more than 25% per year overall. Enterprise-level PDM, the area of PDM of interest to SDRC, is growing at a much faster pace. In fact, part of the Metaphase acquisition which just closed last week SDRC's 1996 enterprise PDM revenue grew by 53%. Metaphase Series II software currently holds the #1 position in enterprise PDM. Metaphase is clearly the system of choice with over 70% of all new license orders for this enterprise market.

Although the acquisition will slightly dilute SDRC's earnings in 1997, they expect profit contribution from the acquired businesses in 1998 as well as continued growth. They will manage Metaphase as a separate but complementary business using appropriate SDRC resources. This approach will allow them to both continue their strategy of providing the most comprehensive, integrated high-end solution in the MDA market and to take advantage of the emerging PDM market outside of their traditional customer base. The consolidation of PDM resources promotes operational efficiencies, allows marketing efforts to be coordinated, and reinforces the Metaphase market-leading product position.

Their additional focus will be toward the automotive and aerospace defense manufacturing sectors, primarily through their newly augmented Metaphase PDM sales force. Expanded teaming with systems integrators and service provider partners will be utilized to ensure rapid fulfillment of customer implementation requirements to augment their very capable implementation team assembled from CDSI and SDRC.

SDRC now has eliminated the previous channel conflict and can solidify Metaphase's leading position. They have many successful production implementations including Renault, Phillips, Michelin, Ericsson, Motorola, Mercedes Benz, General Instruments, and Boeing. At last count there are more than 300 Metaphase customers worldwide through CDSI, SDRC and the other channels. The customers have been very receptive to the new Metaphase and their reaction has been universally positive. In addition to acquiring the remaining interest in Metaphase, they also acquired certain business assets of Control Data as well as customer relationships with companies. They added a number of experienced sales and service professionals in North America and Europe. They expect that the addition of this highly trained and well-regarded sales and service talent will continue to add to their visibility in those markets.

OVERALL STATE OF THE BUSINESS. SDRC continues to be optimistic in their international efforts. Their European sales were on target for the quarter and year end. They believe, however, that there is still room for improvement. In that regard, they will be rolling out their solutions selling system to the European operations over the next few weeks. This approach has been met with enthusiasm by their North American sales force and they expect no less in other geographies. Overall, including North America, their 1997 plan includes an increase of 30% to their worldwide direct sales and sales support staffs. Their distributors efforts in Asia/Pacific have been mostly focused on the long-term relationship accounts like Mazda which was announced in the fourth quarter. They continue to work with these distributors and representatives on lead generation, prospecting, and communicating their successful team selling approach and are beginning to see some results. In addition to these efforts, SDRC will begin to sell directly in India and Korea in 1997 while still continuing to direct their resellers to the broader market opportunities as well. They believe that Artisan addresses specific customer and potential customer needs in both Asia/Pacific and Europe. By offering this mid-range product in these geographies, they anticipate not only higher visibility, but more rapid growth in license sales from the international arena.

FORD BUSINESS. As of the end of 1996, they are already ahead of schedule at Ford. They now have 1,500 activated licenses; have trained nearly 1,400 users; are in production in Dearborn, UK, and Germany; and continue to provide very significant services through their more than 120 Ford program office people. Ford is quite pleased with SDRC's efforts as evidenced by a recent article in Automotive Industry in which Dr. Richard Riff said, "We are ahead of our plan. When we started, many of my colleagues and the industry said it would be impossible to transfer Ford to a single vehicle development system within four years. We are proving them wrong and much faster than even we realized." User implementation of the full product is building rapidly.

1997 will see a continuation of the several-year supplier rollout as Ford ramps up its design efforts with the SDRC product on specific vehicle programs. Currently 190 supplier sites have implemented I-DEAS and Metaphase, most with a few initial seats. Their plan is to both broaden and deepen this penetration as production use of the product moves out to the suppliers. Each release of I-DEAS and Metaphase will bring additional functionality for the automotive segment, in particular in the broader market as well. Enhancements in ease-of-use, assemblies, surfacing, and variational design lead the list of planned improvements to be available in Master Series 5 which is due for release in Q2 1997. Metaphase release 2.3 will be on schedule, slated for Q1. They are also making good progress in their search for their new Chief Operating Officer. They are pleased with the quality of candidates and expect to be on the original schedule to finalize the selection by Q2.

PROGRESS IN 1996 ON REBUILDING SDRC. SDRC is changing. Re-establishing their company as an industry leader and innovator was Al Peter's first task on being named CEO in 1994 and it was not arrived at easily. Rebuilding the product required time and development dollars. It has now improved to the point that they can not only maintain their present client list, but they are able to win major high-profile accounts such as Ford and Xerox. They were also able to rebuild their sales force and distribution network while, at the same time, increasing margins. With the foundation of their products and distribution firmly in place, they then sought to take the concept of providing a total solution to a new level. Their consulting business was redefined with a focus on process automation and software implementation. As their software capabilities continue to expand, they fully expect to continue to employ services, direct and indirect, to assist their customers with implementation. With these weighty tasks behind them, they are excited about the many opportunities in both their traditional area of focus and the new adjacent markets established in 1996. They intend to continue to define new market opportunities and apply their blended resources to most effectively service them. Finally, they intend to continue revisiting their existing businesses with the objective of increasing efficiencies in their overall profitability.

FINANCIAL MODEL FOR 1997. Their internal target financial model for 1997 anticipates continuing the good rate of revenue growth they experienced from operations in 1996 plus the incremental sales provided by their recent Metaphase acquisition. Their composition of revenues between new license sales and maintenance and services is expected to be similar to their 1996 experience. They will continue their commitment to significant product improvements, expecting a similar 11-12% of revenue as R&D expense. They will also be investing in their direct sales force and transitioning their recent PDM acquisition. They look to maintain or slightly improve their operating margin in 1997 as they continue to review costs and improve operating efficiencies in all areas of the business. Short-term incentive compensation for senior SDRC management is tied to revenue and operating margin objectives, while stock option grants are the primary long-term performance incentives. Continuing management and sales economies combined with slower growth in product development costs would provide more margin expansion opportunity in 1998. In terms of growth for 1997 and what they are going to publicly project, the statements they have made in the past have been in excess of 25% growth. They grew a bit more than that this year and think they can certainly duplicate where they are this year. The target, though, is pretty much what they stated before. They see 25% range from internal growth and then the $20 million incremental from Metaphase. The range of analyst estimates seem pretty reasonable.

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