Autodesk Inc (ADSK) 2004 Q2 法說會逐字稿

Good morning, and welcome to the Moldflow Corporation Q4 '04 earnings conference call. At this time all participants have been placed on a listen-only mode and the floor will be opened for questions following the presentation. It is now my pleasure to turn the floor over to your hosts, Roland Thomas and Suzanne MacCormack.

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

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 our subsequent quarterly and annual filings.

Our comments today will summarize the financial results for the fourth fiscal quarter and fiscal year ended June 30, 2004. 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 the call we will be making reference to certain non-GAAP financial measures and a reconciliation of such non-GAAP measures to the closest GAAP measures for each relevant period is also available on our website at Moldflow.com.

Thanks, Sue. I am very pleased to be here today discussing yet another exciting quarter and in fact year at Moldflow. We are leaving FY '04 in a very different position than that from which we exited fiscal year '03. This year we achieved overall revenue of just under 50 million compared to 37 million last year, our earnings rebounded significantly as our cost improvement effort showed the results of two years hard work and we entered FY '05 with a new business unit organization focused on our key business areas.

For the fourth quarter we are reporting record revenue of 15.2 million and GAAP EPS of 10 cents per share. The reported revenues for the quarter represented 54 percent increase when compared to the same quarter last year and a fivefold increase in earnings per share. That total product revenues for the quarter were 9 million, almost a 90 percent year-over-year increase. Overall for the full fiscal year of 2004 we are reporting revenue of $48.7 million, 33 percent higher than the fiscal 2003 year. For the full year GAAP EPS was 24 cents per share. This compared to a loss of 1 cent per share for FY '03, a trend of meeting or exceeding expectations in operating performance has continued throughout the 2004 fiscal year.

Once again we saw revenue growth in every region, a reflection of continued economic expansion, we had seen in many of our end-user markets. For yet another quarter the sales performance of our chain in Japan as well as the rest of Northern Asia was outstanding followed by another solid performance from Europe evidenced by sales to such notable manufacturers as Master Motor Corp., Robert Bosch, Nikon, Gillette, West Pharmaceutical, Cannon, Prematine, and Kimono (ph) Seiko.

Fourth quarter was also our first full quarter under the new business unit structure we announced in January after the acquisition of American MSI. We have organized our business around our primary product areas, Design Analysis solutions and Manufacturing Solutions and the reorganization of personnel and focus is largely complete. I believe that the reorganized structure has given Moldflow and its employees renewed energy and focus. And that we will see the benefits of that focus as we go forward in our earnings, in the technologies and products we bring to the market as well as our sales pipeline.

During the fourth quarter we held the third annual Moldflow International users group in Frankfurt, Germany, our first time in a European venue. Over 200 users representing over 25 countries from around the world attended this important event. We received extensive feedback from our users during this conference that will form the basis of our near-term and future product developments in customer support plans. In August we will hold this event in Tokyo, Japan for the first time and we are looking forward to receiving even more customer feedback to help us continue to focus our research and development efforts and providing the tools and technologies that customers and prospects require in order to remain competitive in this changing global environment.

Now I'd like to turn to look at the activity and results in our business units over the last quarter starting with our Design Analysis unit. We saw steady growth in this business unit over the full fiscal year and we are reporting Design Analysis revenue of $10.9 million for the quarter, of which 5.5 million was from product sales. This represents approximately 60 percent of our total product revenues. We believe that a major factor in the improvement in the design solutions business this year was the successful implementation of our strategy designed to bring the benefits of design to manufactured simulation and analysis to a new class of users comprising the midrange product and mold design market.

This coupled with the continued improvements in the global economy that we observed over the course of the year will add us to experience substantial year-over-year growth in our design product revenues. Initiated internally during 2003 the externally visible implementation of our midrange product and market strategy came about in our December 2003 release of Moldflow Plastic (technical difficulty) at 7.0 a product which continues to play an important part in our ability to address what we believe to be an underpenetrated segment of potential analysis users by offering new and innovative capability to expand the applicability of these analysis tools.

The focus on expanding our base of users continued during the fourth quarter through our joint announcement with SolidWorks of the brand new Moldflow Express product. Based on Moldflow plastics advisor technology this exciting new product provides an introductory plastics design validation tool that is fully integrated within SolidWorks 2005, one of the most widely used mechanical design software packages available today.

Moldflow Express will ship later this month with SolidWorks 2005 to 140,000 plus maintenance paying customer base. Many of these users will for the first time have access to a tool that allows them to experience the benefits of plastics analysis in the early stages of parts design where the benefits are greatest. This potential market segment is important to us as these users represent people who become familiar with independents on the mechanical design software but may not yet be familiar with the extensive benefits resulting from having the ability to perform sophisticated plastics analysis at the front end of their design process.

Once MoldFlow Xpress is delivered to the SolidWorks install base we will be targeting (indiscernible) channel programs to convert these users to Moldflow customers by offering them specialized upgrade products. I'm also pleased to report that during the fourth quarter we initiated what we consider to be one of the most successful beta programs ever for our flagship Moldflow Plastics Insight or MPI 5 product. We received extremely positive feedback on the many enhancements and the new features that MPI 5 delivers to our loyal and growing user base. And they are announcing the launch of this product today.

Moving forward we will continue the rapid pace of technological innovation that our Design Analysis business unit has been long known for around the world; we will build on the strong foundation we have laid with our new midmarket products by expanding our offerings in that area. We will continue to enhance and improve our MPI product line utilizing many of the custom driven enhancements that we received during our (technical difficulty). Our direct and indirect sales activities will focus on bringing our message of sales of analysis driven designs to customers and prospects around the world by leveraging existing and new product partnerships, as well as pursuing on sell and off sell opportunities with an eye on further increasing the operating leverage of our design business.

Turning next to the results of our Manufacturing Solutions business unit. For the fourth quarter we are reporting $4.4 million of revenue comprising 3.5 million in product revenue which represents approximately 40 percent of our total product revenue. 136 percent year-on-year growth. Of this product revenue 2.6 million came from sales of our new Altanium (indiscernible) process control product acquired in January with American MSI. In fact during the fourth quarter we installed what we believe to be the industry's first and only 210 (indiscernible) hot runner process control system at Kortek, a longtime American MSI customer and one of the first companies to embrace the business combination.

This important milestone represents yet another instance of the technological leadership that we felt that American MSI had demonstrated in the years leading up to the acquisition. In our mixed revenue excluding Altanium was lower for the quarter, driven by lower sales in the U.S. and to a lesser extent Europe. We believe that this was the result of the sales force transition arising from the business unit structure which had its largest impact in the U.S. The organizational and sales account transition was largely completed at June 30.

In this quarter we expanded and enhanced our Moldflow Manufacturing Solutions product as it relates to conversion 2.0 (ph) the suite of process monitoring optimization and control product featuring a number of customer driven enhancements, the injection molding and die cast market. At Altanium hot runner process control product continues to impress customers and prospects around the world evidenced by our first product sales to European customers by the new (indiscernible). Also during the quarter we took another step towards reaching further into our target customer base by announcing a distribution agreement with HASCO, a leading manufacturer of hot runner systems. Where HASCO will resell our hot runner process control products in conjunction with their own products.

This agreement allows us to take our Altanium hot runner process control process to a broader segment of the North American injection molding market. Our strategy of developing pilot to plant to corporate implementation continues to pay off in our Manufacturing Solutions business with a number of large follow-on transactions appearing during the most recent quarter. We will continue to pursue these strategies in fiscal year '05.

As we look forward to fiscal year 2005 we intend to leverage the hybrid direct indirect sales model successfully operated by American MSI to include all Manufacturing Solutions products. This helps to reduce out (indiscernible) sales in the Americas as well we will introduce this model to commercial our hot runner process control product into the European and Asian markets. In summary, we will continue towards our vision of providing our worldwide Shotscope (ph) customers with the integrated solutions that are required to make critical business decisions that directly affect their bottom lines through new product introductions, new partnership arrangements that extend their markets, and benchmark level of service and attention.

So, overall, I'm pleased with our operating performance and financial results during this exciting time. WE have seen economic growth in many of our end-user markets as companies make investments in Moldflow products to increase their productivity and profitability. We continue to deliver on our (indiscernible) strategy and strategic goals and we are leading the way in technological innovation in the markets we serve. With our organizational changes complete and our change in place and focus we believe our employees, products and services are well positioned to meet the ever changing demand of their diverse customer base.

Looking forward our plan for FY '05 is to build upon the platform created in fiscal '04. With a more predictable global manufacturing economy we will continue to penetrate the broader plastic midmarket and design market through product introduction and channel development to the Design Analysis business. We will cross-pollinate our Manufacturing Solutions products and markets by taking hot runner process control products into Moldflow's global markets and by taking the traditional Moldflow manufacturing product and applying the hybrid sales model. We will follow our success in Asia with further investments for both product lines. We will expand our OEM reseller distributor and other credit partnership opportunities to capitalize on cross selling and complementary marketing arrangements that allows us to reach a broader potential base of users for both their product lines.

With this strategy we aim to deliver revenue and earnings growth in line with our stated financial model and objective. As I look around me I see a company taking advantage of the hard work and careful fiscal management for the past several years. Our strategy is firm. Our ability to enter new markets successfully has been demonstrated. We are well positioned to succeed in fiscal 2005 and I look forward to the opportunity to report to you on our progress throughout the coming year.

I'll now ask Sue to provide a more detailed review of our operating results and outlook for the future.

As a reminder, during the previous quarter, that is the March quarter we had completed the acquisition of American MSI Corporation. Accordingly the financial results that I will speak to now include the American MSI results except where specifically noted. Total revenue for the fourth quarter of fiscal 2004 or $15.2 million which was above the high end of the guidance range that we established in the most recent investor conference call. This level represented an increase of 54 percent over the corresponding period of the prior year and an increase of 15 percent sequentially. Included in this amount were revenues of $3.1 million for the American MSI Altanium hot runner process control products, and services which are now part of our Manufacturing Solutions product line.

We note that the integration of the MSI business and products continued throughout the quarter; going forward we don't plan to break out the hot runner process control product separately, however, we will speak to the Manufacturing Solutions business unit as a whole. Regionally revenue in the Americas region represented 35 percent of our total revenues for the fourth quarter. The Asia-Pacific and European region represented 33 and 32 percent for the total revenue respectively. With the addition of AMSI whose revenues have historically been concentrated in the United States, our North American revenues in our third and fourth fiscal quarter represents a much more significant proportion of the total relative to the first half of the year.

As we further develop our distribution capabilities for these products in Europe and Asia over the coming year, we expect this effort to be somewhat more muted in future quarters. With respect to currency effects on our total quarterly revenue on a year-over-year basis currency movements provided a small benefit of 4 percent, as global revenues and local currencies increased approximately 50 percent. On a sequential basis currency movements had a similarly negative, small negative impact of about 3 percent as revenues in local currencies actually increased approximately 18 percent.

When compared to the fourth quarter of last fiscal year revenues were higher in all regions by 122 percent in the Americas, 13 percent in Europe and 58 percent in Asia-Pacific. And on a sequential basis this also represents a growth of 4 percent in the Americas, 25 percent in Europe and 18 percent in Asia-Pacific.

With respect to our sales force we entered the quarter with 42 quota carrying sales reps and completed the quarter with 40. Included in this are five sales reps who came over in the AMSI acquisition. Annualized sales productivity for the historical Moldflow business increased about 17 percent from the previous quarter to approximately $1.4 million per effective head. This was driven by strong results from our Asia-Pacific region where we continue to see strong adoption of our design products.

On the AMSI side, annualized sales productivity was approximately $2.4 million per sales rep, reflecting the hybrid nature of the selling model which employs the largest proportion of manufacturer’s reps and distributors, then did the Moldflow direct selling model. As the AMSI business becomes blended into our existing MMS business and quotas realigned, this is likely to change and in fact will no longer be tracked separately in our next fiscal year. However, again I think it is useful in providing some perspective on the cost leverage available to be drawn from the sales model of AMSI business as we move into fiscal 2005.

Moving to the composition of revenues by type, product revenues for Q4 were $9 million and were up 89 percent over the comparable quarter of last year and up 19 percent sequentially from Q3. On a constant currency basis product revenues were up 83 percent year-over-year. And up 22 percent sequentially from Q3. Approximately 24 percent of our product sales this quarter came from sales to the 91 new customers that we added during the quarter.

Service revenues for the fourth quarter were 6.2 million reflecting growth of 21 percent over the same period of last year and 9 percent sequentially. And on a constant currency basis service revenues were up 19 percent year-over-year and 11 percent sequentially. Currency had a small negative impact compared to the third quarter. Service revenues include approximately $481,000 from the spare parts and service business of American MSI, again for context these service revenues typically represent about 15 percent of the total hot runner process control or revenues recognized.

Viewing our revenues by business unit, our total Design Analysis solutions or DAS revenues represented $10.9 million or 71 percent of our total Q4 revenues and represented $5.5 million or 61 percent of our Q4 product revenue. Quarterly DAS product revenues were up 68 percent from the previous year and up 24 percent sequentially from the previous quarter. These results were driven by solid performances by our sales teams in Japan, Korea, the rest of our Asia region where design product revenues doubled year-over-year. As in Q3, sales of MPA 7 including the additional modules of this product focused on cooling and warpage contributed to the strong growth. In addition improving economic conditions in Japan as well as throughout the region seemed to translate to a more favorable purchasing climate especially in the key automotive, electronics, consumer and molder markets. We also noted strength in Europe particularly in our French and German market. As with Asia, MPA 7 was a key contributor in Europe.

We also hosted the International Moldflow Users Group meeting in Europe providing a great opportunity for onselling of MPA 7 and MPI modules to our established user base there. These factors coupled with a more robust economic environment in Europe also allowed us to grow design product sales by some 68 percent year-over-year. During the quarter we shipped a total of 107 seats of the Design Analysis products bringing up the total cumulative combined seat counts of just under 7900 seats.

For our Manufacturing Solutions or MMS products including the recently acquired hot runner process control products we had total revenues in the fourth quarter of $4.4 million which represented 29 percent of our total Q4 revenues. Of this amount, $3.5 million came from product sales representing 39 percent of the Company's overall total product revenues for the quarter and this compared to approximately 32 percent in the same quarter a year ago. The manufacturing product revenues grew by 136 percent over the same quarter of last year to of course to the impact of the AMSI acquisition. Excluding the AMSI product revenues our MMS revenues were down year-over-year by about 41 percent a fact which demonstrates why focused management of this product line was initiated in the second half of fiscal year 2004 and remains a key priority for our team as we look forward to fiscal 2005.

Turning to operations and earnings we are reporting GAAP net income of 10 cents per diluted share for the fourth fiscal quarter and this compares to GAAP net income per share of 2 cents reported in the same period one year ago. For the full fiscal year our GAAP net income of 24 cents per diluted share compares to GAAP net loss per share of one cents reported for the last fiscal year. This level of GAAP EPS is toward the high end of our range of estimates for Q4 provided on last quarters' earnings conference call. We did make some investments in the quarter to provide a foundation consistent with our business objectives for the coming year. And to establish a basis for the required financial compliance requirements in fiscal 2005.

As such, the overperformance on the revenue line did not translate to an EPS result above our guidance range however, we are comfortable with the nature of such spending does not reflect the need for a change in our near or longer-term model. I'll touch further upon the elements of our Q4 spending in just a moment. Also as you will note that our press release tables contain presentation of certain non-GAAP P&L results. As you will recall there are a number of nonrecurring charges related to our Q3 acquisition of American MSI which affected the comparability of our year to date results to those of the previous year. Which also included a restructuring charge that was reflected in our reporting of certain non-GAAP numbers for the fiscal 2003 period.

Accordingly we are providing today a non-GAAP presentation of our operating results and earnings per share for both the quarter and the full fiscal year, which excludes the impact of these effects as well as a full reconciliation for the related GAAP financial measures. These materials can also be found on our website. For the full fiscal year on a non-GAAP basis we had 34 cents of earnings per diluted share which would compare to 9 cents for the fiscal year 2003. Significant reconciling items comprising the difference between reported GAAP and net income and non-GAAP net income include the effect of a restructuring charge taken in our third fiscal quarter this year related to employee termination costs arising out of the reorganization and acquisition and non-cash amortization charges in respect to acquired intangible assets reported throughout the year.

Now last quarter we also said we would provide a view of the impact of acquired operations of American MSI on the fourth quarter. That is the first full quarter immediately following the acquisition. So viewed on a stand-alone basis after amortization expenses, American MSI contributed to our operating profit approximately $305,000 or 10 percent of the $3.1 million of revenues generated from the sales of these products. Representing earnings accretion of approximately 2 cents per share during the quarter. This was consistent with our plan for the acquired operations.

Turning to growth margins I would like to take a minute to review the different drivers that impact our blended gross margins. First, our Design Analysis solutions products are traditional off-the-shelf software products. User installable, sold with annual maintenance contracts which entitled the customer to periodic updates and telephone support. In this business unit the attach rate for service contract is very high and as a result nearly half of the design business unit revenue comes from such contracts. Blended products service gross margins on these revenues have traditionally been in the high 80 percent to the low 90 percent range and Q4 performance was consistent with this level.

Manufacturing Solutions products have enabling hardware components and accordingly have a higher direct cost to product revenue. And a corresponding lower growth margin. This business unit’s model is more heavily weighted toward product revenues as service revenues have represented only approximately 15 percent of the total revenue mix. That said, we made investments in building the necessary infrastructure to support the implementation of these products with a view towards faster more efficient implementation with correspondingly higher customer satisfaction. These investments have weighed on the margin and have resulted in blended, product service gross margins for the MMS business in the second half of 2004 in the low 40 percent range.

As we look forward to fiscal 2005, gross margin improvement for the MMS business is identified as a priority as we seek to optimize the currently existing implementation and support capabilities to meet new and existing customer requirements. We expect to see these margins trend toward a level near 50 percent over the course of next year.

So in the fourth quarter our overall gross margin on total companywide revenues was 76 percent, unchanged from Q3. While lower than the trend of our business in the first half of the year it is consistent with our expectations. The lower growth margin level was driven almost entirely by the revenue mix change that results from the sales of American MSI products. As we complete the integration of the AMSI business with the existing Moldflow manufacturing business we expect that our companywide margins will remain similar to the Q4 level in the near term.

R&D costs for the quarter at 1.650 million were on track with our spending plan and were net of $414,000 of capitalized software development costs. R&D costs were up approximately 26 percent over the same quarter last year driven primarily by the effect of unfavorable currency movements. Particularly in the Australian dollar and the addition of the American MSI development staff. Sales and marketing costs of $6.1 million were up from $5.2 million in the same period a year ago and this represents an increase of 16 percent primarily the result of the increased revenue and staff added in the acquisition of American MSI and sales commission expenses related to higher revenues in the quarter.

G&A costs at $2.3 million for the quarter were up 22 percent year-over-year and 6 percent sequentially, and reflect the high cost of professional fees related to tax and compliance matters including Sarbanes-Oxley internal control documentation and testing requirements. Currency effects did not have a significant impact on our net income results for the quarter as currency effects on year-over-year revenue growth were approximately 4 percent while the effect on total spending was an increase of approximately 4 percent over the same quarter last year.

And finally, our annual effective tax rate applied in fiscal Q4 was 36.8 percent and is consistent with last quarter. Looking at the balance sheet and cash flow, total cash and investments of $51.7 million were up $2.3 million from the previous quarter as operations yielded $2.9 million in cash in the quarter. This is partially offset by payments for capital purchase including the capitalization of software development costs of $418,000. This level of operating cash flows was significantly higher than our beginning of quarter estimates due largely to the combined efforts of our sales force and Collections team throughout the quarter. DSO results were significantly better than expectations at approximately 50 days, significant improvement from 56 days in the same quarter of the previous year.

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

As Roland just stated, we continue to plan for growth and earnings as we move toward achievement of our business model and profitability target. We remain intently focused on achieving expansion of our operating margins and our cash flows. As we look out into fiscal 2005 we are projecting a revenue growth rate in the high 20 percent range to a level of annual revenues reaching into the range of $60 to $63 million. Further, we are building our spending and resource plans to achieve operating margins that will reach into our target operating margin range during the second half of the year. Accomplishment of these plans would mark another year of significant progress toward our target financial models. With this foundation we expect this to result in GAAP earnings per share for the coming year in the range of 52 to 57 cents, a level which would represent more than a doubling of the 2004 results.

Looking closer in for the September quarter and with our current visibility, we expect our total revenue will be in the range of 13.6 to $14.1 million representing growth of approximately 43 to 48 percent year-over-year. It's important to note that while this range of estimates for Q1 represents a drop from the Q4 revenue level reported today, it is entirely consistent with our historical seasonal pattern for the summer quarter.

On a GAAP earnings per share basis we expect this level of revenue will result in a range of 4 cents to 7 cents per diluted share for the first quarter of 2005. And we expect to generate modest positive operating cash flow in fiscal Q1 again consistent with our seasonal trend. And with I will turn this back to Roland.

In summary, in the fiscal year 2004 we have taken Moldflow to a new operational level as well as laying the groundwork for even greater success in future years. I'm excited to be leading Moldflow into the next phase of its expansion where we believe we can leverage the foundation built in fiscal 2004. During FY '05 as you have heard, we expect to deliver strong revenue growth in tandem with further margin improvements which should provide the framework to see our operating margin into the target range later in the year and should translate into increased value for our shareholder. And with that I would now be happy to take some questions. Thank you.

(OPERATOR INSTRUCTIONS) Brian Foote from Independent Research.

Good morning, congratulations. My question on the current quarter that we are in right now, the 4 to 7 cent range in EPS, in particular, what kind of spending is expected in the current quarter versus the quarter just reported wherein lies the range? Sue, can you talk about for the coming year how much of your G&A expenses will be comprised of Sarbanes-Oxley and other compliance components? And how does that look in coming years? Is that something that's just specific to fiscal 05?

Specific to the question on G&A, it is fair to say that we will make incremental investments in order to meet the requirements of Sarbanes-Oxley and related compliance requirements. We have made provision in our plans for an increased level of spending and its contemplated in our plan to get -- that would still have us being in our target operating margin range in the second half of the year. It's also fair to say that it's not an insignificant amount though I am not at this point prepared to give the details of our projected spending levels. It is certainly fair to say that we will continue to incur professional services fees as well as having dedicated some internal resources. The equivalent probably of about a couple people to the required ongoing efforts for documentation, testing and compliance. That is really also goes to the fact that the Sarbanes requirements are ongoing requirements and as companies like to us continue to improve our financial systems, our internal control systems, over time as the systems are modified we need to update and improve our documentation. It's not a onetime situation, it's not a onetime effect on the financial statements; it will be built into our G&A rate going forward.

In terms of the full year guidance the implications are very strong leverage in the final three quarters and presumably especially in the back half. What kind of sales and marketing spending is taking place in the first quarter? What level should we be looking at there? How should we modeling R&D relative to what we have looked at in the prior quarter? And wherein lies the back half leverage?

I think with respect to sales and marketing spending you should expect to see that spending decrease perhaps on the order of 10 percent or so on a sequential basis. Recognizing that again, sales costs are largely a function of the sales volume; there is a high degree of leverage in our selling expense model related to variable commission elements. So with a lower revenue number you should expect to see the sales compensation line adjust accordingly in the first quarter. That is entirely consistent with our historical trends for the first quarter where you would expect to see both revenues flat to down, and sales and marketing spending decrease in the first quarter. You should be looking at a model that translates the reduction in revenue to a reduction in sales expense as well. On R&D I think the spending models for the coming year represent a modest step up in our spending where we would expect to see some additional investments in R&D over the course of the year. But I would not characterize it as a significant step up.

Does the R&D step up relate at all to the AMSI acquisition of the overall R&D spending that we should be looking at for next year, is there a way to split it between business lines?

We haven't really split the R&D spending between the business lines. It's fair to say that the investment in R&D on the manufacturing side comprises elements investment relating to integration of the data platform which is a consequence of both our strategy to do so and in the acquisition. And that is part of a platform standardization that we've been undertaking since we first acquired Brandon a couple years ago so something of that nature would in the '05 year as well. We have the ability to move resources between the two business lines from an R&D perspective deliberately, and so we don't really split them out by number.

In terms of the MMS sales during the quarter, the 41 percent decline that you talked about, you said it was partly a function of the sales force realignment. Can we look at those sales as potentially delayed, how much was it a function of demand? And with what you said about your different geographies, are there any pockets of demand heating up relative to what we saw last quarter vis-a-vis the MMS product?

I think if we look at the MMS results during the quarter, this was not a (indiscernible) phenomenon, the MMS sales process does require active focused management. In the sales organization its bringing a lot of parties together and (indiscernible) to reach a conclusion on ROI and targeting investments in a number of other areas. So when we reorganized our sales organization back in February and into March of this year, we were able to get some belief that when we had done so -- on balance there were balancing forces at the end of the fiscal year.

Of course these sales groups were going to divide one into the design area and one into the manufacturing area, which brings up some balancing forces once the people who are moving out of the manufacturing area they would have an impetus to close their manufacturing pipeline since the next year it wouldn't be available to them. But the balance to that was that things that arose in the period it wouldn't be closed before the end of the quarter wouldn't -- it would be handed off to another group who would then develop them separately. So that was the dynamic I think that was occurring during the quarter.

I think what we observed was that as the quarter progressed the new units or people who were going to form the new units, began to build their pipeline and move them into their new product area and the focus to sell off the manufacturing process during the quarter. I don't think it represents anything that was particularly lost; I think all those transactions are still in a good place, we managed to get concluded during the course of the quarter.

Strength for the region -- I mean even within the context of what we are discussing was the European region reported some of those same areas, the European result was much stronger and in particular the French result was very strong. I think there are certainly are already even within the existing numbers pockets of strength but I expect that since the transition was almost completed, virtually completed by June 30, that cliff effect is largely behind us.

Great. Thanks.

(OPERATOR INSTRUCTIONS) There appear to be no further questions at this time.

Okay. There being no further questions I would like to take the opportunity to thank you all for your support over the past fiscal year. As always, we will work hard to continue to deliver strong results, technologically superior products, and improve shareholder value. I certainly look forward to speaking with you again next quarter. Thank you. Goodbye.

Thank you. This concludes today's teleconference. Please disconnect your lines and have a wonderful day.