Autodesk Inc (ADSK) 2004 Q3 法說會逐字稿

This is for the MoldFlow Corporation's conference call taking place April 22, 2004, at 11:30 a.m. Eastern time with Roland Thomas.

Good morning and welcome to the MoldFlow Corporation Q3 conference call.

At this time, all participants have been placed on a listen-only mode and the floor will be open for questions at the end of the presentation.

At this time, it is my pleasure to introduce the call to Roland Thomas and Sue MacCormack.

You may begin.

Welcome and thank you for joining for the MoldFlow Corporation conference call for the reporting of our results of the third fiscal quarter of F Y 2004 and resent events.

Sue and I will make a series of prepared remarks and we will then takes questions. Before we begin with these remarks, I will ask to remind all of you about risks and uncertainties surrounding forward-looking statements.

Thank you, Roland, and 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 the 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 a report filed by Moldflow with the Securities Exchange Commission, including the company's filing on form 10K for the year ended June 30, 2003, and subsequent quarterly and annual filings. Our comments will summarize the financial results for the third fiscal quarter ended March 27th, 2004.

For more complete details of these financial results, please refer to the press release made earlier this morning, which also includes a description of specific risks factors.

In addition, please note that during the course of this call. we will be making reference to certain non-GAAP financial measures and reconciliation of such non-GAAP financial measures to the closest GAAP measures for each relevant period is also available at our website at www.moldflow.com.

Roland, back to you.

Thanks, Sue.

Well, the pass several months have been an exciting time at Moldflow. Not only have we completed the acquisition of American MSI, we have reorganized the company into two distinct business units. And in doing so, I believe we have re-energized the company and the employees. We managed the changes effectively and produced a strong operating result with positive signs from all the regions.

Further, the addition of the MSI business has helped us to expand our market reach and provided us new opportunities to cross-sell our products into existing customer bases. I will discuss the individual business unit results in a moment, but I'd like to start with our over-all operating results.

I am pleased to report third quarter results that are about the revenue guidance that we provided in January. Our third quarter for revenue growth across all graphic regions with strengthened evidence in all our product groups excellent evidenced in each of the product groups.

Further, the addition of our newly acquired (inaudible) process controlled business has contributed to higher than anticipated revenues in the first two months following the completion of the acquisition. We are reporting revenue of $30.3 million for the quarter and GAAP EPS at $.05 cents per share.. The reported revenue for the quarter represents a 40% increase when compared to the same quarter last year. Excluding currency impact, total revenue increased 30% over the same period as the prior year.

Sequentially, revenues increased 25%. These results represent the continuation of a trend toward double digit growth. Contributing to the growth was an over-all stellar performance coming out of Asia. Particularly Japan.

The third quarter is historically strong in Japan with many companies completing their fiscal year and making the investment they believe will be positively be impacting their bottom line as they enter the new year.

The European region also posted a strong third quarter with significant contributions coming from France and Germany.

Lastly, North America saw the beginnings of higher activity levels turning into orders. We believe that this increased activity is in its early stages. We still note that it is a positive sign.

Now, I would like to focus on the new business unit structure at Moldflow.

The reorganization of the company into two business units is largely complete and the team is now focused along the lines of their product groups for design analysis solutions and manufacturing solutions. I am pleased to note that the sales activity in both business units was sustained through the acquisition and reorganization and we expect that to continue to be the case as we complete the integration.

Along these lines, members the former American MSI and multi-management team have been integrated into leadership positions in the business unit sales and operation functions. Within the sales organizations, sales reps, managers, technical staff realignment has been defined, communicated and is in place.

Customer support implementation and marketing teams have also been put in place to serve the customer requirements of their perspective business units. We will continue with our transition management plan until the end of fiscal year at which point the transaction should be complete.

Looking now to the performance of these business units.

First, with regard to our design analysis business unit.

During the third quarter, design analysis products grew to a total of $9.5 million of which $4.4 million was a product revenue accounting for now 58 percent of total product revenue. Demand for these products was particularly strong in Asia and in parts of Europe. In fact, we noticed increased investments in the design products from companies throughout Japan, Korea and Taiwan.

With several large orders come from well known manufacturers in the automotive and electronic industries such as Sony, Nippon, (inaudible) and Samsung. We (inaudible) with the multi-plastics (inaudible) seven products we released late December.

MPA7 introduced two new modules, providing significant additional financially to the MPA product and allows users to simulate more phases of the injection molding process. The increased functionality of the product has appealed to a broader base of engineers seeking to design more efficient molds as part of their response to the global manufacturing imperative. In fact, MPA sales accounted for nearly a third of design analysis revenue in this quarter.

Moving forward, our objectives for design analysis solutions business unit focused on building upon the market and technical leadership that Moldflow is known for around the world.

We will continue to take the customer first approach through the on-going dialogue we maintain with the users. For example, in May we will be holding (inaudible), which is the international multi-users group for the first time in Frankfurt, Germany and we expect to attract users from around the world.

We will also continue our focus on expanding our MPA product line to the (inaudible) market with an eye on sale and up sale opportunities.

Then, finally, we intend to leverage our direct and indirect sales channels through product partnerships and manage the business to achieve operating margin leverage through those channels.

Now, I would like to turn to the manufacturing solutions business unit results.

Revenue from manufacturing solutions products during the third quarter, including revenue from the newly acquired (inaudible) control business, with approximately $3.7 million of which $3.1 million was product revenue. This represents 42% of total product revenue compared to 14% in the third quarter of the prior year. Of this product revenue, $2.2 million came from sales at American MSI products from the sales of flag ship altainium product.

Altainium is the industry's first and only modular mold footprint hot run process control solution that can support up to 384 zones with a modular design supporting a high level of configuration flexabilities for our customers. During the quarter the manufacturing solutions business made significant sales to such notable customers as Hitachi, Tyco, MCI, Gillette, Cortex, (inaudible) and Tupperware. Over all, the integration of the American MSI business has gone very smoothly and is nearly complete. We began longer range product Integration activities in February and that will continue over the next several quarters. The addition of the American MSI business provided greater access to potential market for our manufacturing solutions products, providing immediate cross-sell opportunities for both their product lines.

Unquestionably, the (inaudible) management team and employees of American MSI have brought Moldflow extensive knowledge by (inaudible) plastics manufacturing requirements on the factory floor and we are already utilizing the knowledge to extend the vision of design to manufacture (inaudible) automation in the injection mold plastics industry.

Moving forward, our focus for manufacturing solutions will be to gain an operating leverage in this business by building our established technology leadership and shop for operating platform and by providing outstanding support to new and existing customers. We remain firm in our strategy to develop accounts to (inaudible), to plant, to corporate approach which brings leverage opportunity through our cost of selling.

We will continue the product integration with the American MSI with a heavy focus on commercializing those products outside the United States, starting first in Europe where the manufacturing infrastructure is larger and throughout Asia soon after. We believe the business combination is being viewed favorably by the customers partners as well.

(Inaudible) since the acquisition and business reorganization and has received extremely positive feedback regarding this move. Our customers realize the acquisition and reorganization will allow us focus the customer support, sales and marketing activities in a way that is appropriate for the individual need for that design and manufacturing customer.

So over all, I am pleased with the performance and financial results during this exciting time we are optimistic that economic growth continues to return to our end-user market and that we will continue to seek companies making strategic advancements in Moldflow products to help increase productivity and profitability.

This is an environment within lean manufacturing is an imperative and not an option. A commitment to manage the company for growth and shareholder value is on track and we will continue to believe we will deliver the operating margin expansion that is inherent in our business model. Our financial position remains strong and with the (inaudible) acquisition and business unit reorganization, we have taken steps which will provide a solid foundation for future growth and revenues and earnings over both the short and long term horizon.

The future is bright, our company is re-energized and and we're focused on creating values (inaudible).

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

Thank you, Roland.

So as Roland mentioned in his remarks, during the third fiscal quarter we completed the acquisition of American MSI Corporation. The combination was accounted for using purchase accounting and, accordingly, the results of the MSI operations were included from the date of the acquisition in January, 2004.

The numbers I will speak to now include the MSI results unless specifically indicated and I will provide some insight into the impact of the MSI on the third quarter and on our future business model.

So to reiterate some of the key metrics that Roland touched upon, total revenue for the third quarter of fiscal 2004 were $13.3 million which was approximately 4% above the high end of the guidance range we established in the most recent investor conference call.

(Inaudible) represented an increase of 40% of over the corresponding period of the prior year and an increase of 25% sequentially. Included in this amount were revenues of $2.4 million for the MSI altainium hot run process control products and services.

With respect to currency effects on a year-over-year basis, currency movement provided a benefit of 10% as global revenues and local currencies increased approximately 30%.

On sequential basis, currency movement provided a benefit of only 2% as revenues and local currencies increased approximately 23%.

Regionally, revenue in the Americas region represented 39% of our total revenues for the third quarter. The Asia Pacific and European regions represented 31% and 30% of total revenue, respectively.

And you may recall that the Americas have been trending at a level of approximately 22% and 25% of total revenue in the four quarters leading up to this one. With the addition of AMSI whose revenues have historically been in the United States, our North American revenues now represent a much more significant proportion of the total.

As we further develop our distribution capabilities for these product in Europe and Asia over the coming year, we expect this effect to be a bit more muted in future quarters. When compared to the third quarter of last fiscal year, revenues were higher in all regions by 115% in the Americas, 19% in Europe and 11% in Asia Pacific. On a sequential basis, this also represented growth in the America's region of 123%, and Asia Pacific of 25% while Europe was lower by 20%.

With respect to our sales force, we entered the quarter with 36 quota-carrying reps and completed the quarter with 42. Included in this total of five sales reps, they came over in the AMSI acquisition.

Annualized sales productivity for the historical Moldflow business was about flat with last year at approximately $1.2 million. This is anticipated as we had some planned turnover and added some new sales reps in the quarter who had not become fully effective.

On the AMSI side, annualized sales productivity was approximately $2.9 million per sales rep, reflecting the hybrid nature of the selling model which employees a larger proportion of manufacturers, reps and distributors than the Moldflow direct selling model.

As the AMSI business becomes blended into our existing MMS business and quotas realize this may change and in fact no longer will be able to be tracked separately. However, I think it is useful in providing some perspective on the leverage available to be drawn from the selling class model of the MSI business.

Moving now to the composition of revenues by type.

Product revenues for Q3 were $76 million more, at 65% over the comparable quarter of last year and were up 48% sequentially from Q2. On a (inaudible) currency basis, product revenues were up 55% year-over-year and up 47% sequentially from Q2. Approximately 31% of our new product sales this quarter came from sales to the 111 new customers that we added during the quarter.

Service revenues for the third quarter were $5.7 million and reflected growth of 17% over the same period of last year and 4% sequentially. And on the (inaudible) currency basis, service revenues were up 8% year-over-year and were essentially unchanged on sequential basis.

Service revenues include approximately $200,000 from the spare parts and services business of American MSI. For context, these service revenues typically represent some 8% to 10% of the total hot run of process controller revenues recognized.

Viewing our revenues by business unit, our total design analysis revenues represented $9.5 million, or 72% of our total Q3 revenues, and represented $4.4 million, or 58%, of the Q3 product revenues. The growth and design product revenues at 12% represents a continuation of quarterly year-over-year double-digit revenue growth with the growth in these revenues being 20% on a year-to-date basis. Sequentially, design revenues were up by 7%.

During the quarter, we shift the total of 188 seats of the design analysis products bringing it up to total (inaudible) combined seat counts of just under 7800 seats.

For manufacturing solutions, our MMS products, including the newly-acquired hot run process control product, we had total revenues in the third quarter of $3.7 million, or 27%, of our total revenues. Of this amount, $3.1 million where product revenues representing 42% of the total product revenues. And this compares to approximately 14% in the same quarter a year ago.

Manufacturing product revenues grew by a factor of 5 over the same quarter of last year due, of course in large part, to the impact of the AMSI acquisition. However, if we were to exclude the impact of AMSI product sales from the quarter, the MMS products still grew at a rate of 44% over the same period as last year.

Turning now to operations and earnings, we are reporting GAAP net income at five cents per diluted share for the third fiscal quarter, and as compared to a GAAP net loss per share of $.06 cents in the same period one year ago. The nine-month period this represents GAAP net income of $.14 cents per diluted share which compared to GAAP net loss per share of $.04 cents reported in the same nine months of last year.

This quarter, there are a number of non-recurring impacts on our financial results related to the acquisition of AMSI which effect the comperablility of the results in the current period. So accordingly, we are providing a non-GAAP presentation of our operating results and earnings per share which excludes the impacts of these effects. We have included the details of the non-GAAP presentation in our press release, including a full reconciliation to the related GAAP financial measures which can also be found on the website.

On a non-GAAP basis we had $.11 cents of earnings per diluted share which would compare to $.01 cent in the same quarter of the prior year. And on a nine-month, year-to-date basis for the fiscal 2004, this represents $.22 cents of earnings per diluted share as compared to $.06 cents in the same nine-month period last year.

Significant reconciling items comprising the difference between reported GAAP net income and non-GAAP net income included will be the restructuring charge taken in respect of employee termination costs arising out of the reorganization and non-cash (inaudible) charges in respect of acquiring the tangible assets.

With regard to the impacts of American MSI operations on the quarter, if viewed on a stand-alone basis, MSI contributed operating profit of approximately $463,000, or 19%, on the $2.4 million of revenue generated on their product. After giving full effect to restructuring charges and non-cash amortize, MSI operations were essentially neutral to profit after tax in the two month period immediately following the acquisition.

Turning to margins, I note that the manufacturing solutions products, which have enabling hardware components, do have a higher direct cost-to-product revenue and, accordingly, have a lower gross margin than our design solution products, which are more traditional off-the-shelf software products. Both businesses have service revenues streams, however, the relative proportions of these revenues to the to the total business unit revenue, is different.

The design analysis product business has a large and solid base of customers, a large percentage of which purchase maintenance contracts or software updates and these revenues represent approximately 54% of total design revenue.

On the other hand, in the manufacturing solutions business, the model is more heavily weighted to product revenues as services revenues have historically represented only approximately 15% of the total revenue mix.

In the third quarter our overall gross margin on total company-wide revenues was 76%. This lower total gross margin than the trend of the last four quarters which had been in the mid- to high-80% range. This lower total gross margin was driven entirely by the revenue mix change resulting from the acquisition of AMSI.

That is, the greater proportion of revenues having a direct hardware cost component associated with them. And to a lesser degree, a reclassification of costs related to a number of our technical staff after implementation and post customer support cost. More accurately reflecting in the P&L where their time is actually being spent.

As we complete the integration of the AMSI business which (inaudible) manufacturing business, we expect that our company-wide margins will remain approximately the same in the short term.

As we look forward to fiscal 2005, over-all growth margin improvement will be identified as a priority as we seek to optimize the currently existing implementation of the support capabilities to meet new and existing customer requirements.

Our (inaudible) cost for the quarter at $1.7 million were on track with our spending plan and we net $220,000 of capitalized software development costs. R&D costs were up approximately 8% over the same quarter last year, driven primarily by the effective currency movement, particularly in the Australian dollars and the addition of the American MSI development staff.

Sales and marketing costs of $5 million were up from $4.8 million in the same period a year ago. This represents an increase of 4% which is quite a bit lower than the corresponding 40% year-over-year growth in revenues due to a combination of factors, but principally driven by the lower cost of selling and marketing for the AMSI products which are sold to a hybrid direct and indirect manufacturer rep selling model and the reclassification of technical staff to fill those roles as previously noted.

G&A costs of $2.2 million for the quarter were up 16% year-over-year and reflect the high cost of professional fees related to tax and compliance matters including (inaudible) and internal control documentation efforts.

Currency effects did not have a significant impact on the results for the quarter as currency effects on year-over-year currency growth were approximately 10%, while the effect on total spending was an increase of approximately 9% over the same quarter last year.

And, finally, our annual effective tax rate applied in fiscal Q3 was 36.6% and is consistent with last quarter.

Looking at the balance sheet and cash flow, we generated significant operating cash flow totaling $3.4 million in the quarter. (Inaudible) are on track with the expectations at 62 days. While higher sequentially due to seasonal trends from the timing of maintenance billings, this level is 2 days lower than the same quarter a year ago and this represents a favorable result.

Total cash and investments of $49.3 million were down $3.6 million from the previous quarter as the start up operating cash flow generated in the quarter was off set by the payment of $7.5 million of cash to acquire AMSI and payments for capital expenditures, including capital software costs totaling $572,000.

I now would like to provide you with a view of our business outlook for the future and this summary will include forward-looking statements which do involve risks and uncertainties that could cause results differ materially from those projected. Again, I note that you should refer to our SEC filing in today's press release for the description of those risks and uncertainties.

As Roland has indicated, we continue to plan for growth and earnings as we march forward to obtain our longer-term profitability targets. We remain focused on generating cash flow and operating leverage as we seek to build shareholder value by delivering profit-focused growth.

For the June quarter with our current visibility, we expect that our total revenue will be in the range of $14.1 to $14.7 million, representing growth of approximately 42% to 48%, year-over-year. For the final transition quarter, we note that included in this amount is a projected level of (inaudible) process control products and services revenues in the range of $3.0 to $3.4 million. In future periods, controller revenues will not be broken out separately as products become more integrated with the MMS sale.

On a GAAP earnings per share basis, we expect this level of revenues will result in a range of $.07 to $.11 cents per diluted share in the fourth quarter. Taken together with the results for the first three quarters of fiscal 2004 this would result in a full-year result for fiscal 2004 of $47.5 million to $48.2 million of total revenue. And that would represent growth of approximately 30% over F Y 2003 and range of $.21 cents to $.25 cents of GAAP earnings per share which would represent substantial growth from a net loss of $.01 cent per share last year.

Results at this level in the upcoming quarter would result in an operating profit margin at, or a shade under, the targeted levels for 2004 which was in the range of 8% to 10% for the year and this will leave us well positioned to enter fiscal 2005 with a (inaudible) for achieving further operating margin leverage as we seek to enter our targeted range of operating profitability of 16% to 22%.

We expect to, again, generate positive operating cash flow in fiscal Q4 on the order of $200,000 or so, which would result in positive operating cash flow for the full fiscal year 2004 for approximately $3.6 million.

And with that, I will turn this back to Roland.

Thanks, Sue.

In summary, we have posted another strong quarter and continue to deliver on our short- and long-term goals. Further, we continue to deliver on our stated objectives of manufacturing the growth to deliver improved earnings without sacrificing revenue, further refine our field operations to improve efficiency, focus on the direct channel, the indirect channel to gain sales leverage. Also to extend the reach of our acquired products in (inaudible) markets and continue to seek out strategic acquisition.

And with that, we will now be happy to take questions.

Thank you.

The floor is now open for questions.

If you have a question, please press star 1 on your touch tone phone at this time. If at any point your question is answered, you may remove yourself from queue by pressing the pound key.

The questions will be taken in the order they are received. We ask that while you pose your question, you pick up the hand set to provide optimum sound quality.

With those instructions in mind, if you have a question, please press star one on your touch tone phone at this time.

Please hold as we poll for questions.

Our first question is coming from Dennis Wasson of Adams Hartness Hill.

Thank you.

Great (inaudible) guys.

Couple of questions. First off, on the AMSI side, you guys talked about $2.2 million in the quarter.

Is that correct?

$2.2 million of product revenues, $200,000 of service revenues, so a total of$ 2.4 million. For the two month period in the quarter that we have them.

Okay. that was sort of the next part of my question. So that was for a two month period and you are expecting a little over $3.3 million to 3.4 in the current quarter. So, that's not you are not expecting a big growth in the total business there, it is sort of the way things played out, the timing?

From quarter to quarter sequentially.

Right.

It is the dynamics of the quarters. It may be a little different for us going forward in general, but it is predominantly to do with the timing.

Yeah, and it is important to view that in the context of the trailing 12 month of the company's business when we acquired them. They had done about $9 million of revenue in calendar 2003.

So it was a big step up from where they were.

So it was quite a big step up from where they were.

Okay. Perfect.

So when you talked about cross-selling opportunities with the products, obviously this kind of opens the door to new customers. Can you talk a little bit about any initial successes you have had there? Sort of antidotal at this point and you also talked about the ability to maybe sort of dampen some of the concentration in North America this quarter, sort of going forward, as the cross-selling opportunities have become realized.

Any progress there excitement in the sales force?

Any commentary there would be great.

A lot of it we have been going through the transition process for them and laying out the way the structure is going to roll out go forward.

I have been in and visited with a number of customers which is my first touch point on the sort of reaction from the customer base and in doing so, you know, when you first walk into a customer that may be from the control side, they are looking at you primely as a software company and asking you how does it fit together. About three seconds in, the understanding was really very clear.

Many of these companies are putting together products that they move all throughout the world and so they are very excited about the reach we give them to support the control systems in giving them a way to finally use them. And you know, I remember one conversation where they almost started their product development plan in their heads. And I say that to reinforce it. They're (inaudible) becomes quite obvious to them once it starts, what the platform leverage looks like.

Geographically, clearly American MSI's focus is here in North America, but Moldflow has a, obviously, much better infrastructure throughout the world, manufacturing infrastructure, it is stronger in Europe than Asia by design because we are focusing our efforts in Europe. So initially as we push forward we think that we should see more of rapid progress in the European region where we have infrastructure in place to leverage and build on the model we have here over there and then follow that with parts of Asia.

But I wouldn't like to under play the role Asia might play. I just think it is not that we are going to even wait, it is more of the matter do we have the infrastructure in place to leverage it more quickly.

Okay.

And I guess a question for Sue.

On the gross margins in their business. Are they sort of analogous to your manufacturing business, pre-AMSI? Or, (inaudible) softer content (inaudible), but I'm just a little bit more curious how that plays.

Yeah, their margins are similar. Maybe a little bit lower than our MMF margins or software products on the MMF side, and so they are similar but a little bit lower is the statement I would make.

We probably won't be providing a lot of detailed visibility into the growth margins by product for a couple of reasons.

One is pragmatically for competitive reasons.

Second is that the products over time will migrate toward a common platform with the ability to configure and structure systems that will have a different margin structure than they have today as a result of migrating the products together. I think it is not as meaningful to provide that data today.

Okay.

And a couple of other things here.

Actually, I notice that you didn't get a seat count for the manufacturing side. Is that something you are going to do going forward?

It is a little related to the previous question. For one, it is actually going forward at different kind of dynamic. You know, for the dynamic of manufacturing, certainly on the control side, or something that is driven by new molds entering the market running other control systems over the course of the year.

It is not a green field sort of run race where you progress according to the run race. So it is a different dynamic, we will try and develop a set of useful metrics for you. I think it is going to be the best ones going forward.

Okay.

Another quick one for Sue.

You mentioned 111 new customers in the quarter. And what was the percentage of revenue those generated?

31%.

31%?

Yes.

I guess lastly, on sort of the design analysis side and the broader market environment there. Sounds like things are improving. Some new capabilities with the 7.0 version of MPA. Any--I guess is that starting to stimulate, I guess, what do you see being required at this point to stimulate a lot of new seat sales in some of the design products at this point?

Is it just broadening market improvement or macro-economic improvement? Or do you see some of these capabilities that you are adding in here -- new modules driving new seat sales?

I think what we found is that we did need some improvement in the market conditions just to free up enough funds to get things moving. But the driver now, once we got to that level, it is more in the hands of the focus of our products in the modules has been really attractive to a broad base of engineers.

So it doesn't matter whether you are large or small. You still face the imperative of driving the manufacturing optimization of the business and so the products that enable mid-market companies to do that is I think something that will be attractive for some time and will probably have as much or more to do in the improved market condition.

Great.

Thanks again.

Thanks, Dennis.

Thank you.

Our next question is coming from Jason Kraft of A.G. Edwards

Thanks.

Hi, guys.

Hi, Jason.

Just a few housekeeping questions here real quick.

So if I heard it right, pretty much the op margin -- that you guys did this quarter is what you are expecting for next quarter, you know, kind of around the 8%, or so, range, right?

I think what I said was, I expect for the year to get into that 8% to 10% range.

On an annual basis? Are you talking about proforma, kind of non-GAAP margins?

On a full year basis, excluding the impact of the restructuring and the amortization so on a non-GAAP basis.

Okay.

Then just give us an update on what the amortization kind of, you know, said to be moved out into '05 on the deferred revenue take down is $100-- in the $98,000 and a quarter . Is that going to be staying straight line?

No, that's an anomaly. For the one-time effect of the acquisition.

Okay. So not a whole lot more there.

No more future impact on the margin, but we thought it was important to identify it because it really did depress the growth margin number a little bit but in terms of the amortization number going forward, the numbers that are reflected in this quarter, I think is $146,000 if I remember correctly.

126?

146 and that number is appropriate to use for planning.

Okay, and then on a given year two months of (inaudible), you know, as far as the share creep, what can you expect of the share creep with $11 million, excluding, you know, even the acquisition where they could creep to?

Yeah, well, the acquisition I think it was $373,000 stares for two months. So you would pick up 1/3 of that number into the weighted average calculation. And with respect to options, our planning models have looked at a level of approximately 100,000, 50 to 100,000 additional shares per quarter. Obviously, that's the function of the share price and so it's very difficult to give you a firm number to plan with.

With, you know, $2.2 million, that came apart from the acquisition, 200 K in services, you look at what you guys are guiding for next quarter.

Did the mix get back to kind of 85-90% split that would throw product revenue? What is the mix looking like? What can we expect of the product?

In the MMF? I'm sorry---

Yeah. Exactly.

The total MMF revenues, the mix is closer to 85, 15. The AMSI revenues have typically been closer to 90% product, 10% services.

Okay.

Because that was for AMSI $2.2 million in product revenue and 200 in services and into Q4 you are expecting total revenue 3.4.

From AMSI, correct

Okay.

Just to get an update, what is the field rep count looking like now with the two different segments? How is everyone kind of segmented? Is there one weight to the other or is it pretty evenly distributed?

No, in total, they are 42 reps on board. That is increased by net five, or an increase of five from American MSI and some (inaudible) during the quarter. The split is more -- is actually more weighted towards the design business.

We still have some substantial design business in Asia than we do, so that is predominantly focused, predominantly design reps. Whereas the split in the U.S. is very similar and that Europe is a little bit weighted towards design, but a more even split. So net-net, you end up with a weighting towards design which is not entirely comparable to revenue but not that far off.

Okay.

You know, a lot of kind of a lot of the smaller companies, I know, Sue, we talked about this before, but we come down to the deadline for Starbucks. What kinds of impact, it doesn't seem like it hit you guys as much as you thought? Do you have some color on that?

Well, we started into the year expecting to have to comply with Section 404 documentation and testing of internal controls and in the first two and some part of third quarter, continued down that path incurring some pretty significant consulting fee dollars to assist us in that documentation and preparedness effort. Probably on the order of $100,000, $250,000 of consulting fees per quarter.

In February, the FCC announced the change in implementation dates and so now we will be subject in next year, not this year, to the audit taxation requirement. And as such, I guess the good news about that is it gives us a little bit more time to do a very thorough job and to manage the product internally, attempting to consume less resources.

With that said, we are understanding from our audit firm as is our most companies from their audit firm, that the cost of audits will increase. Probably, in our case, to a level that will add similar kinds of dollars and in next year's plan to the audit fee.

So, Starbucks could us another $300,000 - $400,000 in the next fiscal year as well. It is very difficult to tell at this stage because our auditors can't define a test plan until they have reviewed all the documentation and that is still in process.

Okay.

One last question for Roland.

Just you are looking out into fiscal '05, especially the Asia Pac region. What are your expectations for what you want to do in China, for what you have done and get a sense for what is happening over there?

Certainly, it is an area of great focus for us. The design products have been, the products what we are selling into the market pretty much exclusively. We've done a little bit of manufacturing there but in a (inaudible) way, with specific customers.

We certainly have seen a trend which we interpret as the market there is seeing that it can no longer compete with the cost of labor, justified market and that it's starting to look for more sophisticated businesses. This is what is driving, and will continue to drive design products in that region.

The same dynamic I think will be the dynamic that we use to bring a manufacturing products into the region which we will begin to do over the course of '05. I think as the companies did be on at world stage for more sophisticated products.

What they will find is that the products that they are bidding for requires hot runner systems and so I believe that the natural dynamic will probably drive demand for the, on the control side, even ahead of the traditional MMS side.

That is yet to play out but that's the way it appears for us from this vantage point.

Okay.

Thanks.

Good quarter. Good cash flow.

Thank you.

Thank you.

Thank you.

Our next question is coming from Brian Foote from IRG.

Thanks.

Good quarter, guys.

Few questions related to AMSI.

How many customers did they have when you acquired them and how did it change over the two months?

They had approximately 3,000 customers when we acquired them. We added 111 customers in total during the quarter. I don't know actually know the split off the top of my head, Brian. But from a hundred customers, it is not going to move 3,000 materially.

If I could just add to Sue's point, I think that we wouldn't expect the AMSI business to be driven as much by the percentage of new customers because in the short term, because, you know, the opportunity exists to sell control back into the existing and that has still been a significant piece of opportunity looking back as new molds are introduced requiring the control systems. It is not entirely the same dynamic as we had.

Understood.

Now, in terms of the numbers, you were talking they did a $12 million run rate, versus $9 million as I recall. Is that correct?

They did last year, last calendar year, the 12 months prior to the acquisition, they did $9 million with the $2.4 million that they did in two months time in the quarter that we had them, that might suggest $14 million run rate on its surface.

What we said for Q3, I'm sorry, for our fiscal Q4, the June quarter, is we think a revenue in the range of $3.0 to $3.4 million is what we are building into our plans for a Q4, which, of course, would annualize out to 12 or 13.

Can you walk me through what the growth, what accounted for the growth?

That's pretty significant in terms of run rate and just for modeling purposes, how does that get repeated or is there some cyclicality built into it that we should be aware of?

Well, I think it is reflective of the changes that we are seeing in the North American market. Remember, it is primarily North American market driven.

And so as the market conditions improved and new molds get brought into design and production, that drives the need for hot runner systems and control systems that supported it. It is one of the environments where there is no option. If you have hot runner molds, you must have hot runner control systems so that the links are relatively direct.

On top of the improved condition, then you can add that, the general sophistication of U.S. molds, proportionately, is going up. That's partly because we're right in the middle of the recovering the sector of molding which is being held on to here on the sophisticated mold. So going forward, the percentage of iron molds is expected to continue to improve. And so, you know, you are getting a larger percentage of the molds for the hot runner systems. As I said, you need hot runner control once you've decided to use a hot runner system.

So there I think are the two dynamics really driving it and then on top of that, I think, quite honestly, the combination of the businesses has really made this combined application really quite attractive. We are dealing with local customers that are trying to deploy the applications throughout the world.

You know, typically, the supplies into this industry have been focused on one local market or another without, you know, strong rate into other parts of the world. But, this is a pretty attractive benefit for them to know the product will get supported and they won't be left with production waiting for you know, support and assistance long way from North America.

So I think it is all about (inaudible) driving it.

Great.

Now in terms of expanding beyond the North American continent, will you be adding sales force or using your pre-existing infrastructure and in other regions?

It will be a combination of the two.

You know, we have a (inaudible) sales force that we have been building certainly in Europe and we will certainly be leveraging that, but on top of that, we have the need to broaden into other parts of the market.

So it will be a mix of starts with leveraging what we have and then extends on to the addition of sales people. Especially as we move to other parts of the world.

As we look at it now, what region do you think is most ripe for the opportunity? Now that you have combined the companies and you can look at geographics, where should we be looking for the most growth?

I think it is an issue of timing. I think we are more advanced in Europe. So the expectation is that it will be the area that moves more quickly.

We have to build channel and things into the area as well, beyond the reps, because the model is a hybrid model, a sales model, between direct and direct sales people and manufacturer's reps, so we have a bigger presence to do that in Europe.

And we will not wait to do it in Asia, but we have to go through the two phases, one to build internal infrastructure and then to build the manufacturer's rep structures as well.

So it is an opportunity significant in both. I think the timing is going to be more favorable in Europe.

Great.

Thanks very much.

Thank you, Brian.

Thank you.

Our next question comes from Jason Crawshaw of (inaudible).

Good morning, guys.

Great job on the quarter.

Thank you.

I actually got on really late. Maybe you covered some things you already discussed so I apologize for that.

Couple of quick things. The Q4 guidelines that you've given at the EPS level, that's GAAP guidance, correct?

That's correct.

Okay. With that in mind, what do you think the non-GAAP EPS number would look like for Q4? What level of charges are we going to see in Q4?

I haven't given a non-GAAP number, but I would describe for you we don't anticipate that there would be any further restructuring charges and the charges that would typically be brought into the non-GAAP presentation would be the amortization charges.

Okay.

Which we talked about as being on the order of $150,000.

$150,000 a quarter.

A quarter.

Great.

Next issue. Just looking at the balance sheets, the contact cash level, from the acquisition that you did, have you paid out all the cash that is due, or is there still an earn-out or is there further cash to come out?

No. We paid out all the cash. There is no earn-out left to come out.

Okay. So what you have on the balance sheet as of March '04 is what you expect to have and you know, what ever cash you generate going forward as well.

Correct. No more payments with this acquisition.

Great.

Last question and it is reasonably general.

How would you describe the environment today vis-a-vis six months ago--just on a general basis for what you are saying?

It is one that has been steadily improving. I think that if we go back even further, go back 12 months, we started to see Asia improve steadily and its maintained the right for that entire period.

Europe, I think is in an especially, Germany is in a much stronger position. France, interestingly enough, remains quite strong for a long time and the German industry predominantly through from the automotive industry, you know, at six months to a year ago was, was difficult but that has improved over the last six months.

I think the most pleasing thing we have seen most recently is North America. I am not saying that it is in (inaudible), but we have been forecasting for some time that we have seen activity levels improving but hadn't translated into any change in order levels.

We saw it at the beginning of the quarter. We are looking forward to that gain traction going forward.

Okay. Great.

Thanks, guys.

Thank you.

Thank you.

Our next question is coming from David Hagar of Kennedy Capital.

Thanks.

Actually, my questions are answered.

Thank you, David.

Thank you.

Once again, if anyone does have a question, please press star 1 on the touch tone phone at this time.

Okay.

There appears to be no more questions.

I would like to take this opportunity to thank you all for your support. I certainly look forward to speaking with you again next quarter.

Thank you and see you next quarter.

Thank you.

This does conclude the teleconference. You may disconnect your lines at this time and have a great day.