Autodesk Inc (ADSK) 2005 Q1 法說會逐字稿

Welcome to the MoldFlow Corporation first quarter 2005 earnings conference call. (OPERATOR INSTRUCTIONS). I would now like to turn the floor over to your host, Mr. Roland Thomas. Sir, you may begin.

Welcome and thank you for joining the MoldFlow Corporation conference call for reporting of results for the first quarter of our 2005 fiscal year. Sue and I will make a series of prepared remarks and we will then 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.

Thank you, Roland. 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, 2004, and our subsequent quarterly and annual filings.

Our comments today will summarize the financial results for the first fiscal quarter ended September 25, 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. Over to you.

Thanks, Sue. I'm very pleased to be here today discussing yet another positive quarter at MoldFlow. We have begun fiscal 2005 with the same momentum that we had exiting fiscal 2004. We have seen strength in our key markets and our product initiatives are delivering results. Our first fiscal quarter produced results that were in line with or better than the guidance we gave for the quarter, a continuation of our trend of meeting or exceeding expectations.

For the first quarter, we are reporting revenue of 14 million and GAAP EPS of 15 cents per share. The reported revenue for the quarter represents a 47 percent increase when compared to the same quarter last year, and an almost fourfold increase in earnings per share. Revenue is slightly below the prior quarter, which is consistent with our normal seasonal pattern. Our total product revenues for the quarter were $7.9 million, an 82 percent year-over-year increase and a 12 percent decrease sequentially; again, consistent with our historical seasonal patterns.

We had a strong quarter in every region and noted continuing economic strength in many of the geographies and markets we serve. Once again, the performances from Asia and Europe were very strong, with sales to manufacturers in a variety of end-user industries such as Asahi Plastics, Bic, Hyundai Motors, Samsung, Sanyo, Siemens, amongst them.

During the first quarter, we took our very successful MoldFlow International users group format to Asia for the first time, with the event being held in Tokyo late in August. This event was presented with a Japanese flavor featuring a number of the main programs from our user groups held in the Americas and Europe, while including renowned locals and invited foreign speakers. By all accounts it was a great success. We were gratified to see so many new and longtime users attend. The event provided us with yet another opportunity to let our customers help us drive the direction of our product features to direct feedback to our executive management and research and development teams. We also took the opportunity to introduce our manufacturing solutions products to the Japanese market, an area of emerging focus for these products.

I would like to turn now to look at the activity and results in our business units over the last quarter, starting with our design analysis unit. Once again we saw steady growth in this business unit, with revenue of $10.66 million, a 29 percent year-over-year increase. $5.2 million of this revenue was from product sales, representing a 52 percent year-over-year increase. For the first fiscal quarter, design analysis revenues represented approximately 3/4 of our total revenue.

We noted continued successes in the automotive, electronics and consumer markets in Korea, Japan and Europe in particular. During the first quarter we continued with our focus on channel expansion for these products in order to reach the growing base of potential midmarket users. As I've said before, this market segment is populated by potential customers that are familiar with and dependent on mechanical design software, but who still need to be educated on the extensive benefits of having the ability to perform analysis to determine the efficiency and ultimate manufacturability of a part in the earliest phase of their design process.

At the end of last fiscal year we announced MoldflowXpress, the entry-level analysis tool integrated in SolidWorks 2005, which we designed specifically to address this market. SolidWorks shipped this product to their user base during the month of September. You may recall that SolidWorks has over 140,000 maintenance paying users of their Solid modeling CAD software product. We have already started to see interest generated by this product.

To that end, our first -- in our first fiscal quarter we released a follow-on product called MoldflowWorks to the SolidWorks reseller channel. MoldflowWorks is based on MoldFlow Plastics Adviser technology and provides an upgrade path for SolidWorks users who need more than the basic functionality provided by MoldflowXpress. We believe that the interest generated by MoldflowXpress will lead many SolidWorks now 2005 users designing products manufactured with injection molding plastics to take the next logical step and upgrade to the more fully-featured MoldflowWorks product. We are excited about working with the SolidWorks channel as it is clear they've demonstrated their effectiveness with SolidWorks products, recently including analysis tools. We have begun a program to fully support the channel partners with training and support of MoldflowXpress and MoldflowWorks as they are rolled out.

I am also pleased to report that during the first quarter we launched Version 5 of our flagship MPI, or MoldFlow Plastics Insight product. As you will recall, MPI 5 offers the widest range of simulation and analysis capability in the engineering market today. It can be used to simulate nine unique molding processes. It also contains the world's largest materials database, with approximately 8000 materials characterized for use in CAE for plastics.

The most recent MPI release followed on new simulation capabilities for 3D simulation of complex molding processes such as gas injection molding, insert overmolding, and added enhanced unit productivity and improved solvent (ph) performance with up to 40 percent faster analysis runtime. These advances allow our users to push their own technology boundaries to produce innovative designs. The user reviews so far have been very positive.

Finally, as planned during the first quarter, we released Version 7 of our MoldFlow Plastics Advisers product in the Chinese language, which will better address the growing need in that market to produce more sophisticated products requiring technologies that address critical manufacturability and quality issues during part and mold design. Our use of the native language will further the key objective of broadening our product presence in Asia.

As we move into the second quarter, we will continue to focus our direct and indirect sales activities on driving our products into the midmarket accounts around the world, leveraging our important product and reseller partnerships and pursuing on-sell and up-sell opportunities.

Now I'd like to look at the results for our manufacturing solutions business unit. For the first quarter, we are reporting $3.4 million of revenue, up 2.1 million, or 169 percent over the same quarter of last year. Of this revenue, 2.7 million came directly from product sales, which represents 192 percent year-over-year growth. In particular we saw strong sales of our Altanium hot runner process control products, which are currently primarily sold in the United States. Our manufacturing solutions sales force is working to integrate the selling models for both our hot runner process control products and MoldFlow MMS historic shop floor products, MPX Shotscope, and the Celltrack production monitoring system. As this integration continues, we hope to see an increased ability to sell multiple shop floor product to the same customer.

Similarly, we are on track with our plans to manage the gross margin on the shop floor products by incorporating innovative product modifications combining hardware elements and removing complete elements which we were able to make redundant through new architecture design. We released upgrades to our operator interfaces, both the Compact Neo (ph) interface and the Matrix interface. The latter is planned to provide the basis for a hardware and software platform to support a number of MMS products.

During the quarter we continued the process of taking the Altanium hot runner process control products into MoldFlow's global markets. We began establishing a manufacturer's rep sales channel throughout Europe and added to the existing network in the United States. This gives us many new feet on the street to help us expand the sales of our hot runner process controls into previously untapped geographies and take our traditional shop floor products to manufacturers around the world.

With respect to the overall business, I am pleased to report that our restructuring of the business unit, which was officially fully effective on July 1, has already accomplished some of the goals we had set out. We are seeing a high level of focus on our customers by each business unit, with the right MoldFlow people communicating with the right customer people. This gives us insights going forward that assist in product development and implementation plans. We also have increased the pace of our partner and reseller relationships, again, primarily because of the unique focus that each business units brings to identifying quality partners.

Most worldwide trends also continue to be favorable. U.S. molding centering (ph) continues to show positive signs, despite rising oil prices, as do key plastics segment in many of our major markets and regions. Industry analysts also report that the CAE digital simulation market will be the growth engine of the PLM -- or product life cycle management -- market over coming years.

Lastly, I wanted to comment on the announced planned resignation of Sue MacCormack. As you know, Sue has been a valued member of our team since long before the public offering. Her contributions to MoldFlow have been numerous and have been vital in shaping the vibrant and growing business that we now have. While I'm sorry to see her go, we understand her desire to further her personal and professional goals and wish her every success in her future endeavors.

We are actively engaged in a search process for a new CFO. Sue has provided us with notification of her plans at an early stage, so we anticipate a smooth process of migrating to a new Chief Financial Officer.

So to summarize, I'm pleased with our operating performance and financial results during the first fiscal quarter. We entered this fiscal year with a plan to build upon the business platform created in fiscal '04, and I'm confident that the steps we are taking in our business are in line with our goals to continue to penetrate the broader plastics midmarket and design market, to take our hot runner process control products into MoldFlow's global markets, to follow our success in Asia with further investments for both product lines, to expand our OEM, reseller, distributor and other creative partnership opportunities, and to deliver revenue and earnings growth in line with our stated financial model and objectives. We achieved strong results during the first quarter to kick off the year, and I'm excited about our prospects moving into the rest of fiscal 2005.

With that, I will now ask Sue to provide a more detailed review of the operating results and outlook for the future.

Okay. Thank you, Roland. So total revenues for the first quarter of fiscal 2005 were $14 million, which was towards the high end of the guidance range that we established on the most recent investor conference call in August. This level represented an increase of 47 percent over the corresponding period of the prior year and a decrease of 8 percent sequentially, which is consistent with normal seasonal trends for our first quarter.

Regionally, revenue in the Americas region represented 36 percent of our total revenues for the first quarter, and the Asia Pacific and European regions represented 33 percent and 31 percent of the total revenue, respectively. This is consistent with our expectation due to the concentration of the former AMSI revenues in the United States.

With respect to currency effects on our total quarterly revenue, currency movements provided a small benefit of 6 percent on a year-over-year basis, as global revenues in local currencies increased approximately 41 percent. On a sequential basis, currency movements had a negligible favorable impact as revenues in local currencies decreased approximately 9 percent. When compared to the first quarter of last fiscal year, revenues were higher in all regions by 115 percent in the Americas, 27 percent in Europe and 23 percent in Asia Pacific. Sequentially, we experienced our seasonal decrease in all regions with revenues in the Americas down 6 percent, Europe down 13 percent, and Asia Pacific down 6 percent.

Moving to the composition of revenues by type, product revenues for Q1 were $7.9 million, up 82 percent over the comparable quarter of last year, and down 12 percent sequentially from last quarter. And on a constant currency basis, product revenues were up 75 percent year-over-year and down 13 percent sequentially from the previous quarter. Approximately 32 percent of our product sales this quarter came from sales to the approximately 90 new customers that were added during the quarter.

Service revenues for the first quarter were $6.1 million, reflecting growth of 17 percent over the same period of last year and a slight decrease sequentially. On a constant currency basis, service revenues were up 12 percent year-over-year and down slightly sequentially, as currency had no meaningful impact compared to last quarter.

Viewing our revenues by business unit, our total design analysis solutions -- or DAS -- revenues represented $10.6 million, or 76 percent of our total Q1 revenues, and represented $5.2 million, or 66 percent of our Q1 product revenues. Quarterly DAS product revenues were up 52 percent from the previous year, down 5 percent sequentially from the previous quarter. These results were driven by solid performances by our sales teams in Europe, in particular in Germany, and in Asia Pacific, and particular in Japan and Korea.

Sales of new products, including MPA 7 and MPI 5, were the main source of growth in the quarter. We continue to see returns from our international MoldFlow user group meetings held over the last six months in both Germany and Japan. These sessions provided opportunities for introducing our newer product releases and modules for on-selling into our established user base. In Europe, these factors, along with the more robust economic environment, allowed us to grow design product sales by 241 percent year-over-year despite the slow summer selling period. In addition, in Japan economic conditions continued to improve, translating into a more favorable purchasing climate, especially in the key automotive, electronics, consumer and molder markets.

During the quarter we shipped a total of 213 seats of the design analysis products, bringing us to total cumulative combined seat counts of just over 8100 seats for these products. For our manufacturing solutions -- or MS -- products, we had total revenues in the first quarter of $3.4 million, which represented 24 percent of our total Q1 revenues. And of this amount, 2.7 million came from product sales, representing 34 percent of the Company's overall total product revenues this quarter. This compares to approximately 21 percent in the same quarter a year ago.

The manufacturing product revenues grew by 192 percent over the same quarter of last year, due of course to the impact of the American MSI acquisition. Had the product revenue of American MSI for the equivalent financial period been included in our prior year product revenues, the increase in our manufacturing product revenue this quarter would have been approximately 5 percent.

With respect to our sales force, we entered the quarter with 40 quota-carrying sales reps, completed the quarter with 39, of which 29 were in our design business unit and 10 were in our manufacturing business unit. We had plans to add to our sales force; however, we did have some turnover and did not reach our full hiring plans for field sales staff by the end of the quarter. We expect to regain ground on adding to our sales team during Q2 and Q3 of this year with additions in Japan and China in particular.

Annualized sales productivity for the design business was approximately $1.4 million per effective head. In the manufacturing business, annualized sales productivity was similar at 1.3 million per head. Historically, because we didn't have the business units in place in the past, we looked at our productivity over all of our product lines combined. On that basis, our history has shown much lower productivity experienced in the first quarter each year. Typically it's been on the order of $1 million on an annualized basis. So we do feel that this quarter's results reflects the success of our new focus on the unique needs of the design and manufacturing customers, respectively. The combined productivity of the design and manufacturing sales forces was essentially unchanged from the fourth quarter of last year.

Now turning to operations and earnings, we are reporting GAAP net income of 15 cents per diluted share for the first quarter of fiscal 2005. In this compares to GAAP net income per diluted share of 4 cents reported in the same period of the prior year. The overachievement in earnings was primarily due to product mix, slower-than-anticipated hiring across most functions, spending delays and a discrete tax benefit of $230,000 which was equivalent to 2 cents per share. And I will touch further upon the elements of our Q1 spending in a moment.

First, turning to gross margins. I'd like to take a minute to review the different drivers that impact our blended gross margin. First as you will recall, our design analysis solutions products are traditional off-the-shelf software products, user installable, sold with annual maintenance contracts which entitle the customer to periodic updates and telephone support. In this business unit, the attachment rate for service contracts is very high, and as a result, nearly half of the design business unit revenue comes from such contracts. Blended product service gross margins on these revenues have traditionally been in the high 80 percent to low 90 percent, and Q1 performance was consistent with this level.

Manufacturing solutions products have enabling hardware components, and accordingly have a higher direct cost of product revenue and a corresponding lower gross 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 mix. That said we have made investments in building the necessary infrastructure to support the implementation of these products with a view towards faster, more efficient implementations, with correspondingly higher customer satisfaction. These investments have weighed on the margin and have resulted in blended product service gross margins for the manufacturing business in the first quarter in the high 30 percent range. We expect to see these margins trend toward a level of near 50 percent over the course of the year.

So in the first quarter, our overall gross margin on total company-wide revenue was approximately 78 percent, up from 76 percent in Q4, due mainly to the richer mix of design software sales. We would expect our gross margin to remain at or about 76 percent over the course of the fiscal year.

R&D costs for the quarter were $1.65 million, net of $201,000 of capitalized software development costs. This was consistent with our spending in the previous quarter and up slightly from the prior year due to staff added in our acquisition of American MSI. Sales and marketing costs of $4.7 million were up from $4.2 million in the same period a year ago. This represents an increase of 12 percent, which is primarily the result of staff added in the acquisition of American MSI, sales commission expenses related to higher revenues in the quarter and an increase in marketing promotional activities.

Now, you may note that on a sequential basis, our selling and marketing costs are down significantly from fiscal Q4 of last year. This is due to a combination of three key seasonal factors.

First, our costs for sales commissions in Q1 were lower due to the fact that in Q4, many of our sales reps had reached their accelerators. In Q1, the quarters are reset and commission percentages revert to lower rates. Second, our marketing program spending is always much lower in Q1 than Q4 due to the slow summer season, with fewer tradeshows and events. Finally, travel costs for sales and marketing personnel were much lower, again, because of the lower activity level in the summer. We expect to see sales and marketing costs ramp up throughout the year as activities and revenues increase.

G&A costs at $2.5 million for the quarter were up 31 percent year-over-year and 8 percent sequentially, and reflect the high cost of professional fees related to tax and compliance matters, including Sarbanes Oxley, internal controls documentation and testing requirements. In the quarter, we incurred approximately $106,000 of expenses related to Sarbanes Oxley compliance, and we anticipate spending similar and potentially somewhat greater amounts in each of the remaining quarters of fiscal 2005.

It is worthy to note that we expect that the largest portion of the costs to be incurred will be in the attestation process by our independent auditors. As is true this year in most companies, because the auditors have never been engaged to do a full audit and attestation of our internal controls, our estimates of their time and fees are very preliminary at the stage. We expect to be able to refine these estimates as we proceed through the fiscal year. However, it remains very difficult to forecast these costs at this time.

Currency fluctuations during the quarter had a small favorable impact on our net income results, as currency effects on the year-over-year revenue were approximately 6 percent, while the effect on the total spending was an increase of approximately 4 percent over the same quarter last year.

And finally, our estimated annual effective tax rate for fiscal 2005 is 29 percent. In the first fiscal quarter of 2005, our actual tax -- income tax rate was 20.9 percent on pre-tax income of $2.2 million. The difference between the effective income tax rate of the first fiscal quarter of 2005 and the full year estimate is due to a onetime benefit of $230,000 arising from the reduction of a valuation allowance recorded against net operating losses of one of our subsidiaries. We currently estimate that our income tax rate in each of the remaining quarters will be approximately 32 percent, and that this will result in the estimated effective income tax rate of approximately 29 percent for the fiscal year.

Now looking at the balance sheet and cash flows, total cash and investments of $52.8 million at the end of the quarter were up $1.1 million from the previous quarter. Operations yielded $1.2 million in cash flow in the quarter, partially offset by payments for capital purchases, which included the capitalization of software development costs, and totaled $728,000. DSOs of 53 days were on target with our expectations and the normal trends.

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

As we look out into the remainder of the 2005 fiscal year, we continue to believe that our annual revenues will reach into the range of 60 to $63 million. Closer in, for the upcoming second fiscal quarter of 2005, we are projecting revenue between 14.6 million and $15.3 million. Because we anticipate that some of the spending that was deferred from Q1 will occur in Q2, our Q2 operating margins are currently estimated to be between 9 percent and 12 percent. With this operating result, we expect GAAP earnings per share in the range of 10 cents to 12 cents per diluted share.

For the full year, our earnings expectations remain unchanged from our prior guidance, as we believe that our GAAP earnings per share will be in the range of 52 cents to 57 cents per diluted share, a level which would represent more than a doubling of the 2004 results. Again, while we did have significant overachievement in earnings per share in Q1, we expect that a significant portion of the expense savings in Q1 will occur as spending later in the year. Accordingly, at this early stage of the fiscal year, we remain comfortable with our original guidance and are not advising as to any change at this time. And finally, we expect to generate modest positive cash flow in fiscal Q2, which is again consistent with our seasonal trend.

And with that, I'm going to turn this back to Roland.

Thanks, Sue. So in summary, we believe we have a strong start to fiscal year 2005 and we intend to build on the success of fiscal year 2004 with continued product innovation, responsible fiscal management and aggressive expansion of our sales model. We believe these exciting times at MoldFlow will continue, and we look forward to delivering continued strong results in the quarters to come.

And with that, I would be happy to take questions.

(OPERATOR INSTRUCTIONS). Dennis Wassung, Adams Harkness.

Thanks guys. A few questions here. On the financial side here, Sue. As you look at the expenses going forward, do you expect to see a pretty sharp rise in that marketing sales line from here? You talked about some lower expenses here, but I am assuming you're planning to get back over that Q4 level as you get later in the year.

By the end of the year, certainly, I think you would expect to see a reasonable rise quarter-to-quarter something on the order of 10 percent or so quarter-to-quarter, rising toward that same level and a little bit above by the end of the year.

Similarly on the G&A line, that's I'm assuming where you're going to see that Sarbanes Oxley increase. So you're expecting to see that line continue to go up from here at a pretty reasonable clip.

It will continue to rise, obviously. As I mentioned, it will be difficult -- it is difficult to forecast the Sarbanes Oxley-type expenses later in the year. We've got a baseline in the current quarter of about a little over $100,000, as I mentioned. I would expect that number to rise a bit over the course of the ensuing quarters, but I wouldn't expect the G&A expenses to rise at the same clip as sales and marketing expenses, for example.

Over on the gross margin side, I want to make sure I got your comments right. You're looking at 76 percent as sort of the number to be looking at going forward?

Yes. We're looking at on the year 76, 77 percent kind of margins, with sort of mid to higher-70s blended gross margins.

So you're sort of looking at it more momentum from the manufacturing side as you move through the year?

Yes.

A quick question for Roland, and I apologize if I missed this. I got on a little bit late here. Can you just talk a little bit about the MoldflowXpress products, and how that has been impacting your sales of the MPA and MPI side of the business? And also similarly, the MoldflowWorks initiative, and how that is going and how big the opportunity is for that product.

Okay, Dennis. The MoldflowXpress product is, of course, the product that we announced with SolidWorks back in June, and in fact, was -- had the beginnings of its rollout in September when SolidWorks rolled out its 2005 product. So it's started to be shipped to their customers or it's been shipped to their customers over the last I guess few weeks. And following on directly from that, we have been beginning the process of tracking interest from people who are receiving it, and that interest is growing.

The adoption rate of these types of products -- in other words, when you put them into the market, how quickly the customers install or then start to use them -- it happens over several months. So I think we get to see the impact of people installing and using and getting familiar with it, and therefore, generating the interest. Over the second and third quarter of that year, we start to get some indications. I'd say even by the end of the third quarter, there will be some people who haven't yet converted. But we should have a lot of them that have.

Then the area that this then turns into revenue from us is of course through the -- primarily focused on the MoldflowWorks product, which is the follow-on product that was specifically designed to complement the MoldflowXpress product and be focused on the same channel. This product we released in September to be ready for the (technical difficulty) adoption process from the Xpress users. So this product hit the market. It's a little too early to call it yet as they both hit the market at the same time. But most certainly we had significant interest in it from the channel, who were the first people to get involved. And this has been behind some of the increased activity we've had coming out of the -- or actually leading to our ability to develop our indirect channel more aggressively over the last several months, as this has been in the pipeline and starting to generate some significant interest.

As far as our opportunity is concerned, the underlying target of this is that there are about 140,000 SolidWorks (indiscernible) paying customers who received the MoldflowXpress product, and that represents a universe of users for us to sell into. It's typical of the plastic -- of the solid molding industry, I think 30, 40 percent of them may be involved in injection molded plastics. So that then becomes the more realistic group that you would be looking to sell into.

As far as really what size that turns into us, I think we need to get some sort of catch rate data from actually executing on that strategy before we try and float the real magnitude of that. But certainly it is a group of very targeted people who have -- who are of the style and size of companies that these products are aimed at. And we think it's going to be pretty attractive to them.

This last question, I guess, on that product. How does the capability level of MoldflowWorks compare to the MPA product?

MPA, of course, has its multiple favors as well. MPA starts with Part Adviser, and you know, moves into the Multiple Mold Adviser modules, two of which we released last December. You know, MoldflowWorks had a slightly different profile. It's more closely akin to the Part Adviser product, with a focus on initial product design, but has a slightly different profile. It's more tightly integrated and makes use of several of the SolidWorks tools instead of some of the MoldFlow tools. They're doing similar things, but it gives it a slightly different profile. So it's more aimed at the Part Adviser end of the spectrum.

(OPERATOR INSTRUCTIONS). Steve Simone, Trigren (ph) Investments.

Sue, sorry to hear the news, but I guess we'll talk about that later. You guys did a real nice job with the operating margins in the first quarter. Obviously, some of these expenses got deferred. You talked a little bit about what you thought the operating margin would be in Q2, and I think previously you had said you were looking at in the second half of '05, 16 to 22 percent, somewhere in that range.

Reaching into that range, definitely.

And that's still the plan?

That still remains our objective.

Jeff Drummond, Evergreen Investments.

I was just wondering, you didn't talk about the work's ASP, if you could kind of categorize that at least. And I've got one or two follow-ups.

Given the product design to be released in terms of actual -- an average selling price, it doesn't have the market history of doing that. But again, it's a comparable pricing range to our MPA product line (multiple speakers) Part Adviser.

I think it lists at 5000, and then it goes through distribution. So the ASP to us will be net of distribution from the channel, but it will be similar to our Part Adviser pricing.

Is there anything unique to Xpress relative to Deso's base that makes it kind of a unique offering, besides the integration software, or could that -- could Xpress be transferable to other CAD companies pretty easily?

We have gone to quite some effort to make sure that when we integrate the product, that it makes use of the local environment provided by SolidWorks. So it's leveraging the feature set which is inside the product. At the core of its capability set it's using our base technology, which is leveraged out of the MPA product line. So that is a business of generally applicable technology. But when we look at these parts of integrations, we do try to leverage the basic strengths of the local system. So if it was to look at another environment, you'd look to do the same thing again.

Last question. With the more muted growth in the manufacturing solutions ex the AMSI, I know you had begun to see an uptick in the injection molding utilization, I think. I am wondering did the price -- did the energy prices affect at all cap spending or behavior from the injection molders?

It's a really interesting question. Whenever you see something which affects the basic economics of your customers, you really do need to take some notice of it. I think the way it affects our customers is that the continued rise in worldwide oil prices will overtime translate into higher prices of plastic resins, although it's not a direct relationship in that the increase in resin prices is significantly less than the increase in crude oil. And it does vary quite a bit by resin to resin. You'll still see that supply and demand affects have a more volatile swing than the actual resins prices.

Right now, we haven't seen any immediate negative impact that's been able to be identified as relating to oil prices. Many of our products are driven by new product designs, which the designs were begun and committed to over prior periods. This is certainly true of our design analysis solutions. I know you mentioned the manufacturing products. Additionally, the current increases are taking place in an environment of generally increasing top-line sales for our customers, which tends to mitigate the effect somewhat of increased operating expenses, which may have otherwise constrained capital expenditures. I guess at the bottom-line, one of the primary value propositions for all our products is the ability to reduce operating expenses, either through more efficient design or more productive manufacturing. Therefore, our products are designed to address the ability for companies to improve their bottom-line. So this supports the anecdotal view that we've not identified over our history a direct relationships between oil prices and sales. In fact, in Korea we hadn't noticed that there was direct pressure from our customers as a result of increasing cost of resins to drive further implementation of our design products. I think it would be foolish of us not to pay attention, but to date we haven't seen our customers respond that way.

The last question. I think my understanding was relative to the unexpected sales turnover, that was primarily early in the quarter based on the reorganization. Did that kind of settle down toward the end of the quarter, and what is your estimate or what is your goal for net sales heads added in this quarter? And that is it. Thanks.

Actually, the turnover that occurs in Q1 wasn't directly associated with our reorg; it was part of the natural operation of the business. So it wasn't really focused on any particular part of the quarter. You know, we look -- going forward we look to get back into -- back onto the plan, as Sue had mentioned earlier, and follow on with our strategy of leveraging our strength in Asia and other parts of the world. But in terms of actual -- in terms of putting actual numbers of reps out there, we haven't done that.

Jerry Heffernan (ph), Lord Abbott.

Thank you very much for this call. If I ask any questions that you went over at the beginning of the call, I apologize for my redundancy. Did you go over how many new customers were added?

I did. It's 90 new customers in the quarter, which is kind of consistent with the past several quarters.

Okay. You went through the gross margin. I believe you made a statement that you're expecting to remain at or above the 76 percent level for the year. Is that correct?

Yes.

And here's where I have to throw myself upon the mercy of the court here. It was in the 80s for a while, and we've made a step function down. Is that because of the manufacturing piece of the business?

Yes. There are two factors, and the manufacturing piece of the business is a significant factor, because the manufacturing products do indeed have hardware components enabling the software. The other element is that over the past year as we restructured the Company and reorganized some of our technical resources, what we really saw was that we had more people focused in post sales technical support than were actually accounted for as such. They were really kind of managed and organizationally under the sales organization, and so their expenses had been flowing through their in prior period sales expense. And as we reconfigured management around the functions that represent post-sale support, technical support, we moved those people accordingly in the accounting. And so that happened throughout the course of the latter quarters of last year, and so you would see more cost in the cost of services, less cost in the sales organization, our cost of selling. They are offsets, not increments.

So certainly if you look at it from just the operating margin line it all washes out, and it looks a lot cleaner from that perspective. If I look at the operating margin that you achieved this quarter -- and that certainly takes the tax effect out of it -- I am looking at a 13.7 percent result now. And this comes very close to hitting -- in the last seven years you've only topped that result twice. Because of the protracted down period that the Company/industry went through and your reorganization efforts, does the company's business model have the ability to obtain and maintain an operating margin that is at a level above what you have historically demonstrated?

Yes. We have said fairly consistently that our target margin level for the business is in the range of 16 to 22 percent operating margins, that we believe we can get into that range during the second half of this year. We believe that in particular as we expand the revenues, there are a number of costs that don't have to scale at the same rate. G&A cost is very much a leveragable cost in our P&L. When you look at the public company type costs, those don't have to scale with revenue growth.

On the sales line, as we drive the manufacturing -- growth in the manufacturing products, the selling model for those products is not a direct sales model primarily, it is an indirect manufacturer's rep kind of model. So it has more variable cost in the cost model for those products. So we do believe that with the existing sales management that we have in place we can grow revenues at a faster rate than we have to add to the sales infrastructure, if you will. So our plan is to reach into that target range in the second half of this year and maintain that objective going forward.

Getting into that target level, and that's including the understanding of the increased expenses, at least for the year, of Sarbanes Oxley, correct?

Based on our current expectations of what those costs will be. I guess what I've been trying to convey, that those costs, first-year costs are very, very difficult to forecast. And I think we're seeing that across the industry, across all industries for first-year compliance.

I have way too many examples to support that thesis.

Exactly. So all I can say is I think you're going to have to build that into your model, but there is some uncertainty in that number.

Thank you very much for your time, and congratulations on some wonderful results. Best of luck on your move.

David Verhees (ph), Brate (ph) Specialized Funds.

Great quarter. Just a couple of quick questions from me. Firstly, deferred revenues being down slightly sequentially -- is that just a seasonal issue?

It is. A lot of -- that maintenance number is based on our -- that deferred revenue number is based on our maintenance and support contracts, a large proportion of which renew in the March quarter. So typically what happens is you see a drawdown throughout the June and September quarters on that maintenance revenue.

Just sort of a general market comment here. Just wondering how do you guys control for piracy, especially with regards to your off-the-shelf products, and even more so as you sell outside the U.S.?

Piracy is something we take seriously and look to, firstly, monitor, and then to try and address directly. We have several efforts at the software level that attempt to make piracy more difficult. I think the industry realizes that piracy -- an absolute guarantee against piracy is not a practical consideration, so you are doing -- your efforts -- all your efforts are involved in trying to minimize it and make it difficult.

At the high end of our software products, we have a natural barrier, which is that these are products that are typically used in conjunction with being connected into the MoldFlow community, so connected to the training programs, support programs, and that makes it just inherently more difficult. At the simpler end and the design end, that's not quite the case. So you would expect the piracy levels to be higher. I'm not sure it's affected, however, by whether we sell into the other geographies or not. Our direct presence there just enables us to take benefit from the marketplace which is prepared to pay for it. If there were regions which were likely to be heavy pirates, I believe they would be heavy pirates whether we were honestly selling there or not. They would get it through other means. So we're keeping focused on it. It's clearly -- it does occur to some extent, but I don't think it's having a significant negative impact on us.

(OPERATOR INSTRUCTIONS). Mr. Thomas, we have no further questions at this time.

There being no further questions, I would like to take the opportunity to thank you all for your support. I would also like to note that Sue and I will be presenting at the AeA Financial Classic in Monterey November 10th and 11th. For those of you who are attending, I hope to see you there. And I look forward to speaking with all of you next quarter. Thank you and goodbye.

Thank you, everyone. This does conclude today's teleconference. You may disconnect all lines at this time and have a wonderful day.