MSC.Software Shifts Gears To Match New Technology.

FASTER computers and the explosive growth of the Internet have spurred a lot of established companies to rethink their long-term strategies. MSC.Software Corp. is certainly among them.

If the name doesn't sound familiar, it's because the company opened its doors in 1963 as MacNeal-Schwendler Corp. and became one of the more prominent engineering firms, specializing in designing simulation for manufacturers.

MacNeal-Schwendler's computer-assisted programs helped aircraft builders and automakers predict now well a car might survive a collision or how well a space capsule might survive re-entry into Earth's atmosphere without having to physically test the product in real-world conditions.

These programs require massive processing capacity and power. Until recently, a company wanting to use simulation software had to buy mainframe computers and maintain an in-house management information systems department.

But as computing power got cheaper, MSC saw an opportunity -- it developed versions of its software that work on Windows- and Linux-based desktop computers. The company also is using the Internet as a customer-service tool, selling software in cyberspace and letting customers use its Web site as a way to virtually test products designed with its software.

"We had to change from being an engineering company that used software to a software firm that's a damned good engineering company," said Frank Perna Jr., the company's president and chief executive.

MacNeal-Schwendler acknowledged its Internet oreientation when it changed its name to MSC.Software last year.

The changes have been prompted by a shift in the industry's cost structure. An MSC customer once would have had to spend $100,000 on a mainframe computer that occupied an entire room, paid a similar amount for a software package and hired a UNIX programmer to operate the system. Plus, it had to keep MIS staff on board to make sure the computer kept running.

Now that customer can perform the same tasks by spending as little as $25,000 on a software package that will run on a desktop PC that anyone who can click a mouse can be trained to run. The computers themselves have become so cheap that MSC just gives them away for free.

"We sell the software and allow the purchaser to keep the shipping container -- a Dell computer," Perna said.

MSC is also using its Web site to help customers work out complicated engineering problems. It's possible for an engineer who is designing a specific part to e-mail the design to MSC for its in-house testers to check whether the part is likely to work. "It's like a spellchecker for engineers," Perna said.

MSC is pioneering another use of the Internet -- on-demand licensing. It may be impractical for a freelance engineer working on a particular project to pay $100,000 for a software program he plans to use just once. But for maybe $5,000, MSC will issue a license for a finite time, say a week -- long enough to complete the project.

Investors have been impressed with the changes, as the stock moved to all-time high of $10.13 in late December. It was trading at $9.75 as of late last week.

"They've done a good job of keeping their core business while adding to it," said Merrill Lynch analyst Jay Vleeschhouwer, the only analyst who covers the company. "Their customers will enjoy savings in prototype development as the software gets even more user-friendly."

Evidence of Vleeschhouwer's bullishness came in October, when he raised his recommendation on MSC from "accumulate" to "buy."

For the third quarter ended Sept. 30, MSC reported net income of $1.2 million (9 cents per diluted share), compared with $679,000 (5 cents) in the year-earlier period.

The Internet is a small part of MSC's revenue stream. Perna estimates that the Web site generated about $500,000 in revenue last year.

But the market for desktop-based engineering applications was expected to top $300 million last year, and it has grown at a 50 percent rate annually.

"The company is taking advantage of what are now subtle trends to expand its core business," Vleeschhouwer said. "Its longstanding customers are also using these new applications more frequently."

                            MSC.Software Corp.
YEAR (Dec. 31)                   1998   1997
Revenue (millions)             $125.4 $133.3
Operating Expenses (millions)   135.4  114.3
Operating Income (millions)    (10.0)   19.0
Net Income (millions)          (13.0)    9.9
Earnings Per Share            ($0.95)  $0.73

SUMMARY

Business: Engineering and design software

Headquarters: Los Angeles 

CEO: Frank Perna Jr.

Market Cap: $130.6 million

Dividend Yield: N/A [*]

Total Liabilities: $104,290

P/E Ratio: N/A

Long-Term Debt: $56,574

(*.) MSC.Software Corp. does not pay dividends.