Autodesk Inc (ADSK) 2004 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the MoldFlow first quarter and fiscal year 2004 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded. I would now like to turn the conference over to your hosts for today, Mr. Roland Thomas, CEO, and Ms. Suzanne MacCormack, CFO. Mr. Thomas and Ms. McCormick, you may begin.

Thank you. Welcome, and thank you for joining the MoldFlow corporation conference call for the reporting of results for our fiscal quarter -- third fiscal quarter of financial year 2004. Sue and I will make a series of prepared remarks, and we will then take questions. Before we begin with these remarks, I will ask Sue to remind all listeners about risks and uncertainties surrounding forward-looking statements.

Good morning. During our conference call today, we will be making certain forward-looking statements, including statements related to our future business prospects and outlook. Pursuant to the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995, please note that any statements contained in this conference call that are not based on historical facts are forward-looking statements. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include those detailed from time to time in reports filed by MoldFlow with the Securities and Exchange Commission, including the company's filing on Form 10-K for the year ended June 30, 2003, and subsequent quarterly and annual filings.

Our comments will summarize the financial results for this first fiscal quarter ended September 27th, 2003. For more complete details of the financial results, please refer to the press release made earlier this morning, which also includes a description of specific risk factors. In addition, please note that during the course of this call, we'll making reference to free cash flow, which is a non-GAAP financial measure. Reconciliation of free cash flow to cash from operations, a GAAP measure, for each relevant period is available on our web site, www.MoldFlow.com. Roland?

Thank, Sue. I'm pleased to be able to report on the results for the first fiscal quarter of the '04 fiscal year, which were in line with or better than our guidance for the quarter. The guidance was set based on our view of a spidey (ph) but gradually stabilizing our market in many ways in many of our major markets. This quarter's results serve to validate our view that we have set the right setting for MoldFlow path going forward.

We are reporting revenue of 9.5 million for the quarter, and GAAP EPS of 4 cents a share. 9.5 million represents revenue growth of 15 percent compared with the same quarter last year, and is the second successive quarter with double-digit year-on-year revenue growth. Revenue is sequentially lower than Q4, which reflects the expected seasonally slower selling environment, particularly in Europe and to some extent North America Pearsall.

Consistent with our goal to manage the business to deliver improved earnings but not so much as to stifle the growth, we demonstrated some of the leverage potential of our current model by delivering operating margin results above our guidance level. This was a result of the mix of product sales with a greater percentage of the higher margin design products and our continued focus on cost control.

The business conditions that we have seen over the last two quarters showed an improved environment when compared to a year ago. However, it is not uniformly better across all segments and regions. In Asia, for the third successive quarter, we continue to see strength from Japan, and encouraging signs of growth from other parts of Asia, including China. The pattern in Japan appears to follow from the trend that suppliers further down the supply chain have been given greater design responsibility, and therefore have a need for our design products. This same trend has been occurring in the U.S. for a decade.

As I have reported over the last few quarters, the U.S. market continues to be soft. The OEM and tier one suppliers in the automotive sector are the most affected, although there is continued activity in the lower tiers of the supply chain as the trend of the last decade continues. We have seen new opportunities emerge on a company-by-company basis, as dictated by their individual outlooks, rather than a trend that indicates any major shift in one sector or another.

We have also seen some shift in the location of the design consulting services provided by our customers from the U.S. to Asia -- particularly India. This isn't necessarily negative in the aggregate, given our global presence, but may cause a gradual regional shift in our revenues towards Asia.

In China, where we currently are selling only design products, we believe that the year-over-year revenue growth is partially a result of local manufacturers recognizing the importance of expanding their capabilities to include value-added design components to their businesses, a trend we have seen in the past in other developing economies.

The European region remains stable, with France performing consistently well. The German market is holding its own, but is not showing signs of robust growth.

Overall, we saw growth in product sales of 18 percent, with 75 percent of product revenue coming from the existing customers. Among the strongest segment were electronics, which has continued its recovery, and smaller mold designers and mold makers.

Sales of our design products have been stabilizing in recent quarter, and this quarter we saw year-on-year growth of 25 percent in these revenues. Much of this is the result of the performance in the Asian markets, where we focused mainly on MPA and MPI product line. We have also seen a gradual positive trend in the sales of our high-end MPI modules, which include our MPI 3-D products. This follows key product extensions released during the financial year '03. Notably we had significant design solutions sales during the quarter to Molex, KMK Industrial (ph), SCI India (ph), Hitachi, Robert Bosch and Samsung.

Sales of manufacturing products were flat year-on-year. As I've said many times, revenue from this product line is lumpy, and the timing a little more difficult to forecast. A good example of that is the recently announced $300,000 sale to Elcom. Elcom is a subsidiary of the Japanese conglomerate Yazaki, and the second company in that group to undertake a plantwide implementation of our manufacturing solutions product. This purchase follows an earlier successful implementation at another subsidiary of Yazaki. Large deals like this, and Siva (ph) last year, can significantly impact the quarters MMS results.

When we laid out our plans for the year, we also said that we would focus greater attention on the indirect channel. During Q1, we appointed the Director of Strategic Alliances, John Twerdock. Initially, his focus will be on partner development for the design products -- in particular the MoldFlow Plastics Adviser line -- but it will also extent to include MPI opportunities and development of opportunities with the manufacturing products as well.

Our focus on earnings growth has not undermined our efforts to deliver products and services and technology to our customers to a level of technical excellence that they have come to expect from us. To that end, during the first quarter we released MoldFlow Manufacturing Solutions, or MMS, version 1.1. The MMX component of this is on the leading edge of process optimization technology, and so we continue to advance based on feedback primarily from existing customers and prospects. This release featured new capabilities in the setup and process control system.

We're on target to release the next version of the CPI product, which will become the production monitoring components of MMS. Currently only available in the French language market, by the end of the calendar year it will be made available beyond France, reaching the important U.S. and other English-speaking markets, as well as Spanish-speaking markets.

On the design side, we're on track with our plan to release modular modules which expand the breadth of our MPA products -- in particular, Mold Adviser -- beginning later this quarter. This release is in recognition of the demand from within the supply chain beyond tier one for a more sophisticated and powerful simulation product at a price point attractive to smaller companies.

Looking forward, we expect to see all regions contribute to our progress. Asia is on track, Europe is steadying, and we expect that the U.S. will see improvement over the course of the year. This in turn is based on the expected improvement to the market sectors of our end-use customers, as well as a more general improvement expected in the plastics industry as indicated by published statistics.

Our outlook over the upcoming quarters is that we will manage the business with year-on-year growth expectations which are similar to what we have experienced over the last couple of quarters, which I would characterize as moderate or mid-change (ph).

Our plan remains to manage the business, to deliver operating margins in the range of 8 percent to 10 percent over the full year. Specifically for the second quarter, we would expect revenue in the range of $9.8 to $10.3 million.

I will now ask Sue to provide a more detailed review of the operating results and guidance for the future.

Thank you, Roland. Total revenues for the first quarter ended September 27 2003 were $9.5 million. This was an increase of approximately 15 percent year-over-year, and a decrease of 4 percent sequentially, and was within the range of expectations that we had set out for the quarter in our last quarterly earnings call.

With respect to currency impacts, on a year-over-year basis, currency movements provided a benefit of 7 percent, as revenues in local currencies increased just over 8 percent. On a sequential basis, currency movements had an insignificant impact on revenue.

On a regional basis for the quarter, we had approximately 40 percent of our revenues in Asia-Pacific, with notable strength in Japan, where our design product sales continue to be strong; 35 percent in Europe; and 25 percent in the Americas region. When compared to the first quarter of fiscal 2003 revenues were higher in Europe and Asia by 9 percent and 41 percent, respectively, and lower in the Americas by 7 percent. On a sequential basis, revenues compared as follows. 20 percent growth in Asia Pacific, down 3 percent in the Americas, and down 22 percent in Europe, consistent with the normal seasonal trend.

We had 36 quarter-carrying (ph) sales reps on board at the end of the quarter. Sales productivity was down when compared to Q4, but was anticipated, as we have some new sales reps in the mix due to replacement and the normal Q1 seasonal factors.

Product revenues were $4.4 million. These revenues were up 18 percent over the comparable quarter of last year and were down 9 percent sequentially from Q4. On a constant currency basis, product revenues were up 10 percent from the same quarter of 2003.

We added 102 new customers in the quarter, and approximately 25 percent of our license revenues came from these new customers.

Service revenues were $5.2 million, reflecting 12 percent growth over the same period of last year and were flat sequentially. On a constant currency basis, service revenues were up 6 percent year-over-year. Within service revenues, revenues for maintenance and support contracts represented approximately 90 percent of the total, and were up by 14 percent year-over-year due to growth in the install base from new products sales over the last year, continued strong attach rates on these new product revenues and favorable foreign exchange movement.

Revenues from other services, including training, implementation, consulting, and material testing, were down approximately 5 percent.

Revenues by product family for the quarter were as follows. Design solutions products -- $3.4 million or 79 percent of product license revenues. These revenues were up 25 percent over the comparable quarter of last year, and were up sequentially by 5 percent -- again, primarily driven by the strength in Japan. And during the quarter, we shipped a total of 134 seats of MPA and MPI, bringing us to combine under cumulative seat counts of just under 7,500 seats of these products.

For the manufacturing solutions products, we recorded $928,000 or 21 percent of product revenues. This compares to $949,000 shipped in the same quarter a year ago, in which these products represented approximately 26 percent of our product revenues. On a sequential basis, this is down 38 percent over Q4, and further demonstrates the lumpiness of this product line revenue, as we've noted in the past, due to the relatively larger deal sizes in this product line. We shipped 90 new seats of the shop floor products (ph), bringing us to cumulative seat counts of just under 4,300 installed seats of these products. In this quarter, the mix was more heavily weighted toward the higher-end process control products as well as sales of product license upgrades for existing seats of our CPI product in France, and this is reflected in the higher ASP.

With respect to operations and earnings, we reported GAAP net income of 4 cents per diluted share in the first quarter, and this compares to GAAP earnings per share of breakeven or 0 cents reported in the same quarter a year ago.

We have noted on the call last quarter that we expected total expenses for R&D and SG&A for the first quarter would be at a level of approximately $7.8 to $7.9 million, and our actual spending was on target or just below that at $7.7 million. Amortization expense was 111,000 as per our plan, and we capitalized no software development costs in the quarter.

On a gross margin basis, we had also noted last quarter that we expected a blended gross margin of 83 to 84 percent for Q1. Our actual gross margin of 87 percent was better than planned due primarily to lower hardware cost of goods sold as a result of lower mix of manufacturing solutions ordered, and we had built into our margin projections.

And the annual effective tax rate applied in Q1 was 37 percent. This is a little bit higher than we'd originally forecast for the year, and reflects some shift in foreign taxable income based on our current view of the sales forecast.

Looking at the balance sheet and cash flows -- cash and marketable securities at the end of Q1 were $52.7 million with no debt, an increase of approximately $0.5 million over the prior quarter-end. Cash generated by operations was $287,000 during the first quarter, and total capital expenditures for $310,000, resulting in approximately breakeven free cash flow for the quarter.

Net unrealized foreign exchange translation gains on cash invested overseas -- primarily, for us, in the Australian dollar -- had a small impact on cash this quarter, increasing our U.S. dollar cash balances by $370,000. And finally, accounts receivable at $5 million represented 49 days sales outstanding at the end of the quarter -- ten days lower than the same quarter in the prior year, and down sequentially by seven days. This excellent result was the combination of directed effort to shorten payment terms in certain of our international operations, and to some extent the timing of maintenance renewal billings.

Now, turning to our outlook, I would like to provide you with a view of the business outlook for the future. This summary will include forward-looking statements that involve risks and uncertainties that could cause our actual results to differ materially from those projected, and so you should refer to our SEC filings and today's press release for a description of those risks and uncertainties. In addition, please refer to the web site for a full reconciliation of non-GAAP measures contained in the outlook to the relevant GAAP measures.

We continue to plan for growth and earnings in cash flows over the course of the full year as we seek to take another step toward our longer-term profitability target. For fiscal '04, we are managing the company for operating margins in the range of 8 to 10 percent over the year. Our Q1 result of 5 percent was in line with the plan, and we remain focused on this objective.

For our second fiscal quarter, with our current visibility we expect that total revenues will be sequentially higher, in the range of approximately $9.8 to $10.3 million. This would result in year-over-year growth for Q2 on the order of 10 to 15 percent, and for the first half of the year, growth in the low to mid teens.

We mentioned last quarter that our gross margin on total revenues will trend downward in fiscal 2004 reflecting the impact of the organizational changes for manufacturing systems implementation and post-sales support activities which we have been making and are continuing to make. We expect that the gross margin on total revenues will be in the range of 83 to 84 percent over Q2 and the course of the rest of the year.

As a reminder, this reflects an organizational shift, and so we don't expect this to result in bottom-line impact. The offsetting reduction will be seen in the sales and marketing expenses line item.

So we expect the total expenses for R&D and SG&A will be at a level of approximately 8.3 to 8.4 million in Q2, and this level of spending is higher than in the September quarter, reflecting our annual compensation adjustments which take effect on October 1st; higher marketing program spending in connection with a rollout of our English language production monitoring product and our next MPA release; as well as significantly higher professional fees due to Sarbanes-Oxley Section 404 compliance requirement.

In Q2, we expect our income from operations to therefore be between breakeven and $400,000. We expect other interest income and expense net to be approximately $200,000 for the quarter, and we are assuming an annual effective income tax rate of 37 percent.

These factors, taken together, result in our expectation that projected earnings per share in the first quarter will range from 1 cent to 3 cents. And finally, we expect free cash flow in the range of breakeven to negative $600,000 in the second quarter.

And so with that, I will turn it back to Roland to summarize.

Thanks Sue, so to summarize before I open up to questions, this year we laid out our objectives -- to manage the growth to deliver improved earnings, but not so much as to stifle that growth; to further refine our field operations to improve efficiency and execution; focus greater attention on the indirect channel; extend the reach of the CPI products into other geographic markets -- in particular the U.S.; and continue to seek out synergistic acquisitions.

We achieved the results that we expected to achieve in the first quarter which, when combined with a solid finish to the '04 year, are a demonstration that we have seen in net improvement in the performance and environment over the conditions a year ago. We have no reason to believe that this will reverse; hence, with our capacity to take advantage of these conditions intact, we are well-positioned over the year to seek out and find those companies who are planning for the future. We will now be happy to take any questions.

(OPERATOR INSTRUCTIONS). Dennis Wassung, Adams, Harkness & Hill.

Thank you, a couple of quick questions for you -- Roland actually just talked about the CPI products and potentially expanding that into the U.S. market a little bit more. I'm just curious as to what kind of an impact can that have? And do you see that as a significant upside -- selling I guess sort of an upselling opportunity into your install base in the U.S.?

Thanks, Dennis -- I think we had planned when we first acquired CPI that we would be looking at taking this product globally to all of our major markets. The production monitoring component of MMS is something which we have always had in our mind.

I think there are two ways in which we'll see it deployed. One is as a -- in fact, almost the reverse of what you're looking at, which is as a starting point. As a number of companies start out with an interest in production management and production monitoring ahead of process monitoring and process optimization -- and so in fact we could see it as a product which will lead the overall MMS product into an account. As well as people who have deployed MMS products as the purely plastics level, using the CPI extension as a method to go more broadly across their facility. The MMS products themselves can deal with applications beyond injection molding, but CPI is even broader a game (ph). So it's a way to start building in the plastics component into their overall treatment (ph) of manufacturing components.

Okay. Do you have an ASP target for this product at this point?

We are still finalizing the actual pricing and packaging of that. We'll have that out over the course of the quarter.

Okay, and I guess -- next question on the guidance. Sue, when you are talking about -- in fact, let me just kind of go over the number here -- you gave an $8.3 to $8.4 million number for Q2 -- was that all of operating expenses?

That's for R&D and sales and marketing.

Okay.

I'm sorry, SG&A -- sales and marketing and G&A. Does not include amortization.

Okay.

Amortization is trending at about $100,000 per quarter.

Okay, but that was all three categories -- R&D, marketing and sales and G&A.

It was, yes.

All right, good. And -- let me think here. Just one more question. Moving over the sort of the geographic strength that you are seeing in Japan and sort of the emerging strength in China. Roland, can you talk a little bit more about how I guess -- do you see this strength in Japan is something that is sustainable here? And I guess how much of the expansion you are seen in Asia is coming from Japan, and what type of opportunity is China right now? Is it a very small percentage of sales today, potentially growing to a much bigger percentage?

I'll deal with the Japanese one first. I think that the basis of the change -- of course, the environment there has improved somewhat. But the basis for the change for our design products we believe is part of quite a long-term trend that occurred in the U.S. probably over the last decade. A lot of the design work in the Japanese industry we have seen held pretty closely and tightly as the larger OEMs and the top of the supplier food chain. And that has been gradually moving beyond that, and we have seen greater responsibilities into the rest of the supply base. A lot of those sorts of companies out there -- there are typically a larger number of smaller companies. And so we are seeing that trend in the sorts of companies that we are dealing with. If it's a trend that is comparable to the same thing we saw in the U.S., that lasts for really a very long time.

As far as China is concerned -- I think right now it's not a huge part of our revenue, but it is becoming important already. I think it is -- the trends, again, that we are seeing in that market are not just sporadic events. I think the move to recognize the importance of design as part of a way for them to continue to gain market share and to move from more commodity production into a more sophisticated area, which is part of the sorts of evolution that we've seen in other similar markets. And I think that is something that will go on for a very long time. So I think -- we're looking forward to China at a reasonable rate to make a greater and greater impact on our business.

Sue, one less question for you. The tax rate -- 37 percent -- is something we should be modeling pretty much going forward at this point?

We think that our longer-term rate, Dennis, is in the range of 33 to 34 percent. But with this year's mix of revenues, we're thinking that this year will look a little bit higher than that.

So maybe 37 in fiscal '04, but back to 33, 34 in '05?

Right, trending down to 33, 34 next year.

(OPERATOR INSTRUCTIONS) Richard Eastman, Robert W. Baird.

Yes, Roland and Sue, just a couple of things -- I wanted to follow up for a second on Asia. Roland, do your comments apply primarily to the auto industry? Is your business skewed towards the auto industry there?

No. If I was going to characterize, I would have said auto and electronics represent two big pieces of that. But we have a pretty good mix across most of the sectors.

Okay. And then the amortization number -- Sue, you had mentioned kind of sits 100,000?

Correct.

Okay. And then also, on the CPI product -- I guess my understanding is that that is essentially an upgrade of the EasyTrack product? So -- again, when we introduced it in the U.S., would you expect -- does the former EasyTrack product get kind of scaled out?

It is a higher-level product, a sort of superset -- contains a superset of what the EasyTrack product was doing, and so yes, the actual EasyTrack product itself gets sort of subsumed into the CPI product. Certain elements will be included, and going forward, the CPI range will be the focus.

Okay. Do you expect to generate free cash flow in '04?

We do.

Jason Kraft, AG Edwards.

Hi, Sue and Roland -- it's actually Jamie McCarthy sitting in for Jason. Just a few questions. The CPI release coming out in English -- is that for fiscal year '04 or calendar year '04?

That's for the end of calendar year '03.

Got it -- okay, I'm sorry, that's what I meant. The indirect channel -- what -- your eventual goal there -- what kind of percent of license revenue do you think that will get to?

It's going to be a little difficult to predict. I think what we still see our major model being a direct sales model. And so we are not looking at a model where the majority of our revenue comes from an indirect channel. However, I think we should expect to see it increase from its current level over time. I don't think it's going to be a very rapid shift. I think, if we are going to look at extending that channel to where it sits today, I think we should expect to see some movement on the MPA line; we should see some movement over time on the MMS line.

But when -- as I said in the base text (ph), I think it's early days, but appropriate to be looking on the MMS side of it as well. But as that starts to kick in, that will have an impact. But not materially changing from where we are, but a gradual uptick.

Okay. Also, just one other thing -- were there any share repurchases during the quarter?

No, there were not.

Dennis Wassung, Adams Harkness & Hill.

Hi, one more question, Sue, on the guidance. Looking at the gross margin -- I know you talked about some of the -- sort of a reorganization of how some of those expenses fall. Can you just go into a little more detail there? How does that -- so were going from -- on the gross margin, from about 87 percent in Q1, 83 to 84 percent in Q2 -- and which accounts on the op-ex side sort of offset that?

The bulk of the impact that you would see would be in the sales and marketing line -- probably on the order of 80 to 85 percent of it comes from the sales and marketing line, where it's a shift of field technical resources into -- reflecting their efforts in post-sales activity -- and so, therefore, moving to the cost of services line.

And then the other 15 percent or so would be coming from the R&D expense line, where we have moved technical people who were focused on engineering activities for customer -- custom applications type work. We've moved that out of development and into post-sales activity, where we sell that as a service. We'll sell custom mass (ph). So the effort goes up into the margin line.

So we shouldn't really see any change on the cost of licenses side in terms of a percentage, but the cost of services piece would go up.

Yes, the bulk of the impact is in the cost of services line. Right.

Okay, fair enough. Thanks.

This concludes the question-and-answer session. Mr. Thomas, I'd now like to turn the conference back to you

Thank you. There being no more questions, I'd like to take this opportunity again to thank you for your support, and I look forward to speaking with you again next quarter. Thanks and bye-bye.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the conference. You may now disconnect. Have a good day.