Autodesk Inc (ADSK) 2003 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the quarter 2 2003 earnings release conference call. At this time all participants are in a listen only mode. We will conduct a question and answer session and instructions will follow at that time. This conference call is being recorded. Mr. Roland Thomas (ph), you may begin.

Thank you and welcome. Thank you for joining this MoldFlow corporation conference call. Sue (ph)and I will make a series of prepared remarks and we will then take questions. Before we begin I would ask to remind all of risks and uncertainties with these forward looking statements.

During our conference call today, we will be making forward looking statements related to our future business prospects and outlooks. Pursuant to the safe harbor provisions of the U.S. private security litigation act of 1995, please note that any statements made in this conference call are forward looking statements that are not based on facts. Forward looking statements involve risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties include from time to time followed by Moldflow including the company's recent filing for the form 10K and quarterly filings. Risk factors are also described in the press release in which we report our second fiscal quarter of 2003 financial results. And with that, I'll turn it over to Roland.

Thanks Sue. On our last conference call we reported on the first (ph) quarter considering it a forward result and looking to determine whether it was a good reference point to gage (ph) the current economic condition. We're encouraged that the predict ability of our sales cycle and forecast of new software orders continue a positive trend that we saw last quarter. I would characterize that also as solid adding somewhat to the view without entering the double digit we may have seen the worst of this economy. We're pleased to report revenues for the second quarter which were above the expectations that we have given. They were 8.9 million. Just a bit below the second quarter of fiscal 2002. In the first quarter we saw the leverage demonstrated by the increase revenue flowing to the bottom (ph) line. This was the case in the second quarter. It was approximately $200,000 or 2 cents (ph) for the diluted share, and pro forma (inaudible) and it counts for the second quarter were $360,000 or 4 cents per diluted share. This result was also consistent with our short-term goal to manage to catch neutral or better. If we compared the first six months to the same period of fiscal '02. We get support that the market leveled out somewhere in that period. It shows results that were very similar. Also earning were similar being within $50,000.

In addition, in spite of the economic challenges facing customers we expensed growth in total revenues in Europe, United States and Asia pacific. Within the $8.9 million, 4.2 million came from product sales. Service revenues made up the remaining $4.7 million. We're up modestly on a basis as well. Looking to our product families, revenue for manufacturing solutions represented 22% of product revenues compared to 17% the same quarter a year ago. We've seen this as a indication of traction. As (inaudible) expected sales the electron Nicks comprise the majority of our shop orders. But we have also seen a steady improvement for sales. (inaudible) Die casting represents a market opportunity for us. It's a market that had some presence before we acquired them. Our strategy is taking shop products from small implementation or pilot to plant to corporate as we like to call it appears to be taking hold as a significant. (inaudible) Seeing the design product account for 78% of total product revenues and going from Q1 was a pleasing result following two quarters of decline. Overall, we added 87 new customers during the quarter and addition to further investments for existing customers. We saw relative softness in the consumer good sector and a strength for what we call the service industry. Which includes molders and mold design services. Electronics were weaker than in Q1 and sales in the automotive sector were flat. We haven't slowed that much to build additional value into our product line. As stated earlier, we had scheduled to release in site at high end designer software to begin shipping in Q3. As expected this has now occurred. We began shipping in December following the successful conclusion of the beta program. Mpi 4 contains an (inaudible) applications programming environment which allows their customers to optimize their use of Mpi and build it more closely into their design processes. It also includes two important advances. These are products used for big or chunky parts by extending the ability and including the molding. The innovation wheel doesn't stop turning, the next Mpi release for customers is in summer of '03. For our MoldFlow plastics (ph) advisor product which is analyst to be done and integrated further up into the design stream (ph). We announced the availability of (inaudible) version three which includes support of the latest version to (inaudible) design systems being solid works (inaudible) and solid edge (inaudible) keeping our customers up to date with the latest design tools. We have also been keeping you up-to-date our progress towards Out vision (ph) that a common hardware platform, an integrated software environment on the manufacturing shop floor which we call MoldFlow Manufacturing Solution or MMS. I indicated last quarter that the next phase would be released in the March quarter following by the next released in the next fiscal year. The project continues to run on schedule. Earlier this month we purchased assets from a company called cci. I've said that our acquisition in the manufacturing space is to accelerate our plans and build the infrastructure that we need for our customers going forward. We started cci (ph) with the ability to advance both of these objectives enabling us to build that in valuable ways. Extend the European technical and customer service presence with a small but experienced (ph) (inaudible). We think our customers will view it positively. A (inaudible) validated by Mr. Allen Cole (ph) with (inaudible) who characterizes this as a perfect match of our technically strong product line with a committed industry leader who can drive the technology and support internationally. It is a large disbursed building product to our customer of cci. We are not expecting significant revenue in the current quarter and any small amount in Q4 while we reposition the product line to view a global market. Let me now turn to the outlook. I would characterize the market conditions as stable but the customers remain cautious. While there are individual exceptions, as a whole the customers are being careful not to build too much improvement into their plans. U.S. industries such as the (inaudible) which includes Mold contains mixed results.. Our immediate outlook is that we're planning that revenues will be similar in Q3 as in Q2. At this point when we look out to Q4 it does not look different. I will now hand you over to Sue with the operating review for guidance in the future.

Thank you, Roland. So my comments will summarize the financial results in the December 28th, 2002 and for more complete details I'll refer you to the press release available now on our web-site at Moldflow.com. Our total revenues ended December 28, 2002 were 8.9 million dollars. The above high end of the range that we set out in the quarter in our last earning call. This was 2.6% lower from the same quarter a year ago. Currency benefited us on a year over year basis on about 4 1/2%. Total revenues were down approximately 7%. For the first six months of the year, total revenues of 7.2 million were flat of the prior year. We had approximately 27% of our revenues in Europe, 32% in Asia Pacific. Revenues for the second quarter grew in all regions. 9% in the Americas, 7% in Europe and 6% in Asia pacific. When compared, revenues were down in the Americas and Europe by 5% and 6%. And up 4% in Asia Pacific. We had 35 sales reps on board during quarter. We know that they continued to improve in Q2 driven by primarily by further improvement in Europe. Product license revenues for $4.2 million dollars were up 14% from Q1 and down 14% from the quarter of last year. Approximately 31% for license revenues came from new customers. This is lower than historic levels and was mostly lower in Europe and the United States. We saw (ph)sales of mps and Shotscope into additional installation. In one case we filled an amount of Shotscope hardware and software up grades to a customer who've had the product installed for a number of years this in anticipation of the charging hardware requirements of upcoming release of mps and Shotscope products on the common software platform.

Service revenues in the quarter were 4.7 million dollars and were up 2% and grew by 11% over the same period of last year. With service revenues approximately 88% of the total. Due to growth in the base from new products sales over the last year continued tax rates in new product revenues and from favorable foreign exchange movement. Revenue from other service were up by approximately 5%. Revenues by product family were as follows, design solution products $3.3 million dollars or 78% of revenue. Design revenues were down from Q2 last year increased by 19%. Progressing two quarters from revenues from these products. We shipped of mpi bringing us of just under 7,100. Manufacturing solution products, revenues were just under a million dollars or 22% of software revenues. This compares to $860,000 shipped in the same quarter a year ago. It represents growth of 10% year over year in these revenues. This level is flat with the revenues of these products in Q1. We shipped 133 new seats this quarter bringing us to a count of 1727 in stalled seats of these products.

Turning to our net results, this compares to so cents reported in the same quarter a year ago. these results for the second quarter of each fiscal year exclude noncash (inaudible) charges and in 2002, exclude a nonrecurring net gain on the sale of long term assets. Further our results of 4 cent of earnings per share increase. It also excluded the impact of noncash amortization. At the operating line our income excluding noncash was an income of $385,000 which were above our expectations. Operating profit was higher than planned due to the higher revenue. And due to -- than expected cost software costs. With the exception of these software costs which total $170,000, operating spending was generally in line with our expectations with the quarter. With respect to income tax x the provision was in line with our previous forecast. Turning to the balance sheet, cash in marketing security of December 28th were $49.2 million dollars with no debt unchanged. Cash generated by operations was $352,000 in the quarter. Capital expenditures were $645,000 resulting with negative $293,000 consistent with our guidance last quarter. Finally, accounts receivable at $5.6 million represented 56 days at the end of 2/2 which are 7 days (ph) lower of the same quarter of last year and down by three days. This level similar to Q1 was better of our DSO target.

Turning to our outlook, I'd like to provide you with a view of our business outlook for the future. I will remind you that this summary will involve forward looking statements that could cause our actual results to differ materially from those projected. I'll ask you to refer to our 10K ended June 30, 200 for a describe of those risks and uncertainties. We said in our last two conference calls that we have built our fiscal 2003 financial plans consecutively and look to manage an increase of free cash flow in the fiscal year. With our forecast results and current -- for Q3, we expect that we'll achieve of about 1.1 million dollars or perhaps a little higher for the year and continue to expect these results in a modest increase of free cash flow for the coarse of the full fiscal year. For Q3 we expect that our total revenues will be in the range of approximately 8.6 or 9 million dollars. We expect our gross margins to remain at 88% and expect the operating spending for R&D and SG&A will be higher than Q2 by 5%. Spending in Q3 is expected to increase due to a combination of factors. Including higher professionals, operation which include 8 additional employees and no costs will be (inaudible). Therefore in Q3, we expect to break even to a small negative result to operations. We expect financial income to be until range of approximately $200 -- -$250,000 to the quarter. We anticipate in the range of 100-200,000 in the March quarter. We expect to have an income tax of $225,000 in Q3. As we mentioned in our last conference call, we have an effective tax rate this year which results from tax losses which do not get tax provision benefits. We expect it to be the same amount each quarter before returning to a more tax rate during fiscal '04. These factors all taken together result in our expectation approximately break even in Q3. Excluding the impact of the acquisition that we completed in the early part of January, we would have expected 2 cents per diluted share for if third quarter. We expect the acquisition to be neutral in the fourth quarter. Finally, we expect positive free cash flow in the range from300-$500,000 in the quarter. And with that, I'll turn it back to Roland.

Thanks Sue. To summarize before I go to questions, this quarter builds on the solid results from Q1. While I'm pleased the performance at the first part have been ahead of our expectation, I did not see the signs of an economic recovery that would drive growth in the near term. Rather still consolidating to current conditions with a work smarter or a wait-and-see mind set. We will continue to manage to generate cash and modest profit levels. At the same time assuring that we have the capacity to capitalize when capital spending improves further. So with that, I'll be happy to take questions.

If you have a question at this time, please press the one key on your touch tone telephone. If you question has been answered or you wish to remove yourself from the queue, please press the pound key. One moment for questions. Our first question is from Dennis Lawson (ph) of Adams Harkness.

Hi, thanks for taking the question. A couple of quick questions. The guidance that you gave Sue you talked about a pvt number for 3. What was that number?

In the range of $100-$200,000 for the March quarter.

So that was an income from 1-1-200.

Financial income in the range of 200-250. Operating income approximately break even.

Okay. And for Q4 you mention add flee cash flow of 300-500,000.

For fiscal 03 many.

No , for Q4.

I didn't give a number for q 4.

Is there any guidance at all for Q4. I know Roland mentioned roughly similar expectation for Q4 but there's no detailed numbers right now?

Right, we're going to keep with our practice that we have had the last couple of quarters on the upcoming quarter. I think Roland's comments are appropriate and stand for the fourth quarter. With similar results.

Okay. Fair enough. I wanted to touch on some of the newer product releases that you talked about here. For both mpi and the other design products, Mpi. Are these new releases of these products do you see this driving new revenue opportunities or are these upgrades given to people on maintenance already or is there an update fee as well. I just want to understand the impact of these releases and what the huge benefits are.

Sure. Dennis, both of the release of these design products represent products that would be delivered under the maintenance and service agreements with those customers. They represents an increase which has value to -- especially the newer products which hasn't got as enough traction as the historical ones. I turn my attention to the (inaudible) product that has been to the market for a little while now. To date it has had a filling testing and calling for those who don't follow all that closely that means that they deal with one aspect of the design process. One of the most popular components that has been accepted by customers is the prediction of the. (inaudible) That's an issue with it. Adding the capability would flow to a walk and 3-d customer will bring more customers into the 3-d realm at the time. I think the other aspect of it really and more significant to our customers is a broad group. This allows them to mostly integrate into the product's design environment and then increase utilization over time therefore having an impact over a long period of time. It's not a short-term module for sale though.

Okay. You expect the new version of mmpi out in the summer of '03?

That's right.

And what do you anticipate for the major enhancements there or do you want to talk about this?

We haven't released details on the content of that yet.

I guess lastly, I wanted to touched on environment in general. Obviously still being cautious like everyone else is at this point. Can you talk about what you saw in the second quarter that charged over if first quarter or was it a confirmation of what you saw in the first quarter. This is two quarters in a row that you exceed your expectations. Just wanted to understand anything that's changing out there. In terms of industry and customer dynamics.

Roland Thomas I think it's more of the way you characterize it in the line of characterization it's a confirmation that we saw in Q1. We are seeing some science of improved closure and the predict ability had changed by being the behavior of customers in the way we interpreted it. I saw it more of a continuation of that than a change between those two quarters. Around the world, if I could talk to the sales force, the message is definitely stable but cautious. If I look to the different regioning, there are many people out there with (inaudible) are a better resource to answer the broader question than I am. Looking in that area, we still see mixed signals from Europe and it's as many negative as positive coming out of Europe a little differently in the U.S. No one is making any strong positive statements but it seems to be more indications of those positive small positive views lining up. Outside in Asia where especially in the more developed parts of the Asia markets. From the external view I see with trouble. But they continue to work well for us. And over time that will have an impact as well.

So there's growth in the manufacturing business for Moldflow recently is that what you're saying or in general?

No, in general I'm trying to gauge with what's going on in our markets. If you look at the Asian market there's (inaudible)developed areas there is to be troubled. But -- imposed on this we have a train for manufacturing to grow in that region (ph). That will over take the negative trends that we see.

Okay one quick follow up to clarify something sue mentioned earlier. A rest in the quarter, is that 36?

It was 35.

That's a change from what before?

)Sue: It was 36 I think the prior quarter. We had an unfortunate and untimely death of one of our sales reps. He was in a car accident. That person -- what roll has been rehired so we enter this quarter with 26 reps on board.

I'm sorry to hear that. One last question. On the manufacturing side of the business, it seems like it's continuing to hang in there. 22% of the business here. Any interesting dynamics there. You talked about one customer who reupped on the side. Increasing requirements due to mps product going forward. Can you talk about that?

/Think we saw generally the plan that had been putting in place to start with initial implementation and try to grow them. We saw evidence that that was taking hold. It was a number of accounts represented customers in that situation with the head start with the initial implementation and we're growing them during the quarter. So the customer that you're referring to was looking to take advantage of the integrated product line. That's a result of the strategy of bringing these products together so they can be shared across the same platform.

Thank you for the time.

Thank you.

Our next question is from William Brown of AG Edwards.

Good morning.

Hi, Bill.

A couple questions here. One would be talking about the on the sales force. On two items. You said you're entering Q3 with 36 reps. Any plans to add there. If so, any particular (inaudible) where you're looking to add. Also guarding the sales force in a broader construct, you both mentioned that you felt like predict ability in the quarter is getting better. Is that a function of customer behavior? Have you made some charges in how you make deals. Tell me if you could talk about what's driving the predict ability what you're doing to constitutionalize that.

We like predictability as much as you do. On the sales floor numbers of that question, in the short-term we don't intend to increase the number of direct reps as we still have -- we're still upgrading were there is current productivity. We still think there's some opportunity to respond to improvements in the market and certainly if the markets make may recollects a recognize able shift and improvement that's will be the. (inaudible) On the predict ability side I think with the combination with both to be honest the customers behavior and buying patterns did improve in Q1 and in Q2. Certainly coming into when we gave guidance on Q1 a and before that would recognize the behavior changed and it weren't what we used to seeing. So it did make adjustments in the areas where we've seen it. It allowed us to be more accurate with the models going forward. It was a combination of those two.

Okay. Great. Kind of a bigger picture question here, with the growth in the manufacturing business as you get deeper penetration there. You're talking to more folks, how is that helping you with visibility into demand in the future -- it's a different set of folks that you typically talk to a couple years ago. Do you feel that's give giving you a better broader picture of what's happening in the marketplace?

As far as direct products are concerned?

I guess both. I the more robust and certainly molding industry is obviously that would seem to go well for you guys going forward. It would see like you're first on the factory floors where you would seem toll have a larger presence now than you once did.

Certainly it is a larger presence. I think the people that are acquiring the manufacturing products have taken the decision. The over awl market hasn't charged signs that it's going to take off. These are the businesses that are making the decision that are going to make the best of that market. We are seeing a buy in the utilization rates within the U.S. If we look at this in the U.S., you'll see a interesting phenomenon which is the middle ground is disappearing those. They're moving onto the higher and lower. I think that's another sign different types of customer attitudes that we're seeing. So we're fighting too become part of the upper group. So I think it's an indication of the mind sets that we're having an approach to this economy.

One last question. Going back to the Asia Pac region, China is obviously continued to make in roads into molding. Just curious I know you have some efforts over there. Any update you can give on that?

We watch it very carefully, Bill because it is clearly gaining more and more or bigger, bigger piece of the manufacturing in the world. We still see at the moment that they have priorities which are ahead of stimulation products. Although it's not exclusively so. Within China you get the entire extreme of the most advanced organizations through too. They are producing parts. So it is obviously at the top end of that growth. So I think so does their opportunity. The gap every time we'll close in that industry we'll start looking for automation products that make them competitive on a technology grounds as well as labor grounds right now. We're starting to see small signs of that. But nothing that I'll characterize what's significant in the short-term. So watch closely. Be prepared for it.

Great. Thank you.

Our next question is from Pat Sadouken (ph) at Global Scan Capital.

Yes, some of us are new to your company so please help us in understanding your company and operations. So my question I have three of those will be from that perspective. The size of the market -- now, you are a small company about $40 million dollars per year revenue, now, my question what is the size of the market. My reading indicates that at least one attribute of these markets is that historically, the companies better involving with molding are similar they use softer developed by their in house people and your company apparently will (inaudible) that. Is that the nature dynamic -- or one of the attributes of that market? So please elaborate on that.

Okay.

I may or may not be correct but that's what I know.

I think a number of years ago first let me break the product line into two groups. Which is our design and manufacturing products. In the design side, that statement would not be true. There's not been any significant trends now or in the past for in house development for design products. It's a market we've been building for a couple years. On the manufacturing side, maybe a number of years ago there were in-house systems designed to do things such as counting parts. Although not particularly extensively used but there were a number of systems built that way. This(inaudible)is collection of counters and rolling those into numbers. The demand today are significantly more than that, so those systems are being re-evaluated and as it's something that needs to be replaced but the cost of local development on those systems is not going to be something which most of the companies today want to undertake. That doesn't represent the major part of it but that's just the dynamic which occurs. I think it charged the view. We've focused more on profit amortization. That's a bigger problem being solved in optimizing the injection molding process. Making it more effective and giving a greater deal of control of the process not just monitoring it.

Very good. In that bigger proposition, you are presenting to your customers. That means scope of the market is much larger. The proposition is much bigger than what it might appear. What market size do you foresee going forward in two or three or five years from now? The best you can tell us about that.

If you're looking at it early it will depend on the conditions but if I look at it in the over all market, we can take a couple of slices of that. One is that there are about 750,000 molding machines in the world. There's a distribution to the type of uses that those machines and to the size of the machines and types of materials. But regardless of that distribution, we have only attached to approximately 1600 of them. There is a very big difference (ph) between the number that we've attached to and the number of machines which are out there. We regardless to each of those machines. What we have seen is when we've been entering these markets, is that notwithstanding the plan to go from initial pilots to plant the corporate. By the time it gets to the plant it is a typical plant of 20,000 I'm sorry 20 molding machines and typical installation. If you multiply that and give the total picture. It recognizing that there's new machines entering the market every year. We're not going to get to that in the next two or three years. It will depend on conditions over the next few years.

Are there any large market relative to our annual revenue?

Yes.

Okay. My next question is it seems that your industry or business is typical (ph), if it is true, what is the best index one can look at to get some of the ideas going forward. How your business track best with any kind of index like -- growth I think you mentioned pmi. Any such index whether it is in this country or do you know Europe or European region. Is there any index with your business?

I'd love to be able to point you to a single index but if it it's there I'll be honest, we haven't found it. We follow a number of industries and try to weigh them up. I think the -- thing is to maintain a global view on those industries. You can get the wrong impression if you're looking at mold making figures in the United States which have been guesstimated over the last few years and project that to the inside world. The down trend of mold building in the U.S. is compensated by mold building in Asia. So you need to look at these things on a global basis (inaudible) but we would rook at all the trends. We look at material shipments, material ships, machine rates. Possibly we look at what's happening in our market. That dictates our area our customers, customers. (inaudible) a production rate. That tends to be a long term trend and difficult to interpret that in anything other than the general help of the industry.

The last question is, are there other companies that you compete against?

Were we have a very significant piece of the design markets. What we have competitors that are typically regionally, we do have a particular market or another. But we have a very strong pox ton manufacturing side. We are delivering a value proposition so competitive in the conventional seasons are difficult to characterize. They're a big corporation selling design automotive that we compete in the plant automation.

The technology is in anyway. (inaudible)

It's a partner of ours. With have a selling agreement with them.

Thank you very much. You have been very helpful.

Again, if you do have a question, please press the one key ton touch tone telephone.

Our next question is from Rob Mason (ph) of Robert W. Baird.

Good morning. Most of my questions have been answered. But I guess one housekeeping item. Sue, the cape x outlook for the fiscal '03 is that still in the 1.6-1.8 million dollar range?

Yeah I would say that.

Roland, you spoke about operating leverage and to reference your comments earlier about the live rang that you think you have in the sales force. If we were to see a modest increase of business over the next 6-12 months your ability to hold the out backs over this 7 1/2 to $8 million dollars rage. Do you feel comfortable with what?

Something in the range we're building that plan. We are looking at the market going forward so if we see a charge, we'll make a decision as to whether we feel it's best to invest to capture it. But while we're operating in the market where we're not seeing that sort of change we'll be looking to keep control of the market anyway.

Then just one last comment, if you could talk about the way business trended as you moved through the quarter. Did you see anything different in December than you did in the preceding two months. Anything that might give you more confidence as you move into the March quarter?

No, Rob (ph) I think the dynamics of their own quarter would wash that out. We have the typical software quota. So we wouldn't really see any differences within the quarter. That has to be strong indicators.

But anything related to the dynamic mix of the December month. Was that just difficult in the quarter.

The December piece of it would be dynamic. Our second quarter is up over Q1. There's an expectation that some of it comes from our budget flush. I think people are keeping control of their budget these days.

Thanks a lot.

Our next question is from Shawn Leonard (ph) of Paradigm Capital Management.

I'm trying to follow up ton market size question. I think early manufacturing solution installed was reference at 17.27. I think a question or two ago with response to an attach rate of 1,600 machines. Were those the same numbers or are there a 130 machines?

No, that was the rounding. They should have been the same number at 1722.

Are there a multiple tax rates (ph)? Is that one of the growth strategies, getting penetration - a lot of a -- 20 machine plant can you expect to plant can you expect to be have 20 go up on each machine and one expert in the whole plant. How does that work?

I think there will be a distribution. I think it's early to tell what that is. The patent which is emerging at the moment would place a shop scope on each machine and some percentage is distributed around the other machines.

Is it fair to say a minimum of one to make sense?

That makes sense to me, but we have to go a little bit further as far as generating any patent that we try to a more existing patent.

Thank you.

Thank you. Mr. Thomas, we're showing no further questions.

Okay there are being no more questions I would like to take this opportunity to thank you for your support. I look forward to speaking to you again next quarter. Thank you very much.

Ladies and gentlemen that concludes today's conference. Thank you for your participation. You may disconnect at this time. Have a good day.