Autodesk Inc (ADSK) 2005 Q3 法說會逐字稿

Good morning, and welcome to the Moldflow Corporation Third Quarter 2005 Earnings Conference Call. At this time, all lines have been placed on a listen-only mode, and the floor will be open for questions following the presentation.

It is now my pleasure to introduce the host of your conference call, Chris Gorgone, CFO, and Roland Thomas, CEO. Mr. Thomas, you may begin.

Welcome, and thank you for joining the Moldflow Corporation conference call for reporting of results for the third quarter of our 2005 financial year. Chris 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 Chris 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 in 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 third fiscal quarter ended March 26, 2005. 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. Roland?

Thanks, Chris.

For the third quarter of fiscal 2005, we are reporting revenue of $15.9 million and GAAP EPS of $0.17 per share. This represents a 20% increase in revenue when compared to the same quarter last year, and a more than three-fold increase in EPS.

Our total product revenues for the quarter were $9.5 million, a 25% year-over-year increase, and flat sequentially. The strength in our second quarter result gave us the optimism to forecast continued momentum across all product lines. We saw that momentum continue to be realized in our design analysis solution products, and we saw advances in our manufacturing solutions products. However, the latter did not progress as far as expected, and a number of significant transactions extended beyond our third quarter. Several orders did in fact close early in April.

On the expense side, we, along with all other small public companies, continue to be challenged to address the rising expenses related to compliance with Section 404 of the Sarbanes-Oxley Act. We are taking a disciplined approach to both contain these costs and make compensating savings while not reducing the quality of our efforts or unnecessarily constraining our business.

Overall, we noted growth in all regions, and strength across a broad spectrum of our many vertical market segments. [Inaudible] performance from Asia and the Americas was particularly strong this quarter. Our fiscal Q3 is the traditional year-end for many Japanese companies providing a local year-end effect. The growth was mainly driven by continued investments by companies in the consumer groups, packaging, medical, and electronic markets, as well as sustained activity from automotive and electronics manufacturers in Europe.

With that, I’d like to look at the activity and results in our business units over the last quarter, starting with our design analysis business. We saw a steady year-over-year growth in this business segment, with revenue of $11.7 million, a 22% year-over-year increase. $5.9 million of this revenue was from product sales, representing a 34% year-over-year increase. The result was largely driven by strong sales of both MPA and MPI in all regions.

It was pleasing to see the improvements in the Americas region that I had noted when reporting our Q2 results, continue into the third quarter. We saw a continuation of the demand from manufacturers working in consumer group industries, such as [bird and snowboards], as well as investments from manufacturers who use specialty injection molding processes, such as microchip encapsulation. And these are evidenced by sales to well-known chip manufacturers.

We also noted follow-on investments from customers in Asia working in the electronics sector by industry giants such as Foxcon, Samsung, LG and Olympus. Significant sales to new customers such as Green Point Technology, also contributed to the revenue generated by this business segment. You may note from previous quarters that this represents a continued investment from existing customers that are broadening the use of our design product within their operations.

During the quarter, we were in a highly successful bidder program for a Moldflow Plastics Insight Version 5.1 product, which was released commercially yesterday. An MPI 5.1 contains a number of new customer-driven features and enhancements, including a new interface that allows users with ANSYS structural analysis software from ANSYS, Inc., to directly interface with Moldflow Plastics Insight products, bringing the benefit of Moldflow design for manufacturing analysis directly to the desktop of the average user. Now, these updates in MPI 5.1 flow directly from the customers’ desire to use Moldflow knowledge in material behavior to improve the accuracy of structural analysis.

Now, I’d like to turn to the results for our manufacturing solutions business segment. Revenue for the third quarter of financial year 2005 were $4.2 million, which is flat from last quarter, and up 13% over the same quarter last year. Of this revenue, $3.6 million came from product sales representing a 13% year-over-year growth.

For the fourth consecutive quarter, we saw strong sales of our Altanium hot runner process control products to a range of customers in the Americas. We also noted a significant follow-on order form a customer recently converted from a competitive solutions. The growing pipeline of deals, follow-on order and customer conversion we have seen over the four quarters of selling the AMSI solutions continue to validate our belief that this technologically superior product is a necessary and valued addition to our suite of product solutions.

During the third quarter, we took steps, the steps that we had planned to expand the reach of our manufacturing solutions sales channel in Asia, with the establishment of Japanese and Southeast Asian operations. This, combined with a distribution agreement previously announced with Yudo, Ltd., is the basis from which we can address the broader Asian region.

Beyond that, over the past several months, we worked closely with Yudo, Ltd., to negotiate an extension of the distribution agreement we announced in our second fiscal quarter, to enable the manufacturing and assembly of hot runner components in China for the local market. This manufacturing arrangement allows us to further penetrate the large Chinese market for hot runner process controllers with a partner who is already the leading supplier of hot runner solutions in Asia. It also allows us to focus on optimizing our own manufacturing process for these products for the American and European markets as we continue to expand our market share in these regions.

The MMS business unit also made progress in its strategy to provide tighter integration between our products and the major ERP systems in order to make it easy for customers to optimize the effectiveness of their solutions -- of their shop floor applications.

Yesterday we announced a relationship with Junot Systems, which allows us to easily connect our Shortscope and Celltrack products to it’s AP-based [VRP] systems. This interface will reduce the customer implementation costs by providing seamless, direct communication of production data between multi-voice products and SAP [VRP] systems without the need for expensive customized solutions.

As we head into our final quarter of 2005, we remain committed to further our strategic product vision and achieving our stated financial goals. International operating performance for the first three quarters of fiscal 2005, and the currency movements over the past year, as you’ll hear shortly from Chris. We’re modifying the range of our full fiscal 2005 revenue guidance. We expect to exit the year with a total revenue of between $62.7 and $65 million, with earnings of $0.67 to $0.65 per diluted share.

Performance at this level will represent overall growth between 29% and 33% in revenues, and between 138% and 171% in earnings, as compared to fiscal year 2004, and will represent an important milestone in our longer-term plan to build scale and realize the operating leverage in our business.

So to summarize, I'm believe our business remains strong and our execution on our product strategy on track. We continue to make strides towards our goal of maximizing shareholder value for all of our investors, and remain focused on our key objectives of penetrating broader plastics mid-market and design market; taking our hot runner process controller product in Moldflow’s global markets; of making further investments in Asia for both product lines; of continuing the expansion of our OEM, reseller, distributor and other creative partnership opportunities; and delivering the revenue and earnings growth in line with our stated financial model and objectives.

So with that, I will now ask Chris to provide a more detailed review of the operating results and outlook for the future. Thank you.

Thank You, Roland. Total revenues for the third quarter of fiscal 2005 were $15.9 million, which was approximately $600,000 less than the low end of our guidance range that we established on the most recent investor conference call in January. This level represented an increase of 20% over the corresponding period of the prior year, and a 2% sequential decrease. Revenues for the first nine months of 2005 were $46.1 million, a 38% year-over-year increase.

With respect to currency effects on the total quarterly revenue, currency movements provided a benefit of 3% on a year-over-year basis, as revenues in local currencies increased approximately 17%. On a sequential basis, currency movements had a negligible impact, as revenues in local currencies decreased 2%.

Regionally, revenues in North America represented 37% of the total revenue for the third quarter, while the Pacific and European regions represented 32% and 31% of the total revenue, respectively. When compared to the third quarter of last fiscal year, revenues were higher in all regions, with Europe up 25%, the Americas up 14% and Asia Pacific up 21%. Sequentially, revenues increased 13% in the Americas, 5% in Asia Pacific, and a decrease of 20% in Europe.

Moving to the composition of revenues by type. Product revenues for Q3 were $9.5 million, up 25% over the comparable quarter of last year, and flat from the last quarter. On a constant currency basis, product revenues were up 23% year-over -year, and flat sequentially from the previous year -- previous quarter. Approximately 29% of our product sales this quarter came from sales to the approximately 96 new customers that we added during the quarter.

Service revenues for the quarter were $6.4 million, reflecting a growth of 12% over the same period of last year, and a decrease of 4% sequentially from last quarter. On a constant currency basis, service revenues were up 9% year-over-year, and decreased 5% sequentially.

Viewing the revenues by business unit, our total design analysis solutions revenues represented $11.7 million, or 73% of our total Q3 revenues. Design product license revenues accounted for $5.9 million, or 62% of our total Q3 product revenues. Design product revenues this quarter were up 34% from the previous year, and decreased 4% sequentially. The decrease in the second quarter of fiscal 2005 was primarily driven by an 18% decline in design analysis solutions revenue from Europe, a region that had enjoyed considerable strength in Q2. The softness in this region was particularly felt in our central European markets.

During the quarter, we shipped a total of a 134 new seats of design analysis products, bringing us total cumulative combined seat count of approximately 8,300 seats for these products.

For our manufacturing solutions business, we had total revenues in the third quarter of $4.2 million, representing 27% of our total Q3 revenues. Of this amount, $3.6 million came from product sales, representing 38% of the company’s overall total product revenues this quarter.

The manufacturing product revenues grew by 13% over the same quarter of last year, due in large measure to the impact of the American MSI acquisition that occurred in January, 2004. Had our entire quarter’s product revenue -- had the entire quarter’s product revenue of AMSI for the equivalent fiscal period -- financial period -- been included in our prior year’s MSS product revenue, the year-over-year decrease in our manufacturing product revenue this quarter would have been approximately 10%.

With respect to our sales force, we entered the quarter with 42 quota-carrying sales reps, and completed the quarter with 41, of which 31 were in the design analysis business unit, and 10 were in the manufacturing solutions business unit.

Annualized sales productivity for the design business unit was approximately $1.6 million per effective head. In the manufacturing business, annualized sales productivity was $1.8 million per effective head. Historically, because we didn't have business units in place in the past, we looked at our productivity over all product lines combined. On that basis, the combined productivity of the design and manufacturing teams was down 6% from Q2 '05, and up 29% from the same period of the prior year.

Turning to operations and earnings. We are reporting GAAP net income of $0.17 per diluted share for the third quarter of fiscal 2005, a more than three-fold increase from the $0.05 per diluted share reported in the same period of the prior year. The $0.17 in this quarter exceeded the high end of our range of estimates for the quarter, which was $0.12 to $0.14, provided on the last earnings call. Six cents of this was a direct result of a one time tax benefit of $741,000 that I will discuss in a moment. Earnings of $0.47 per diluted share for the first nine months of the year were more than triple the EPS recorded in the first nine months of last year.

In the third quarter, our overall gross margin on total company-wide revenues was approximately 77%, a slight decrease from Q2. We would expect our gross margin to remain at similar levels for Q4, depending on the mix of the product.

The gross margin in our design analysis solutions revenue was 90%, and was in line with traditional levels for this business and our expectations. The gross margin on the manufacturing solutions business in the third quarter was 40%, decreasing slightly from 42% in the second quarter. We continue to expect to see these margins trending up to the level up near 50%.

Total operating expenses were $10.8 million, unchanged from the preceding quarter. When comparing to operating expenses of $9.6 million in the same quarter of the prior year, other factors come into the mix. The Q3 ’05 results reflect the combined impact of a full quarter of the AMSI acquisition, and unfavorable foreign exchange on expenses, as well as increased costs of compliance.

Breaking down the expenses a bit further, R&D costs for the quarter of $2.1 million increased 6% from the second quarter, and 27% from the same period of last year. While no software development costs were capitalized during the current quarter, in the same quarter of the previous year, we had capitalized approximately $220,000 of development costs. Other factors driving the increased spending over Q2 in last year included unfavorable currency movements, particularly in relation to the Australian dollar, and increased compensation expenses.

Sales & marketing expenses were $5.6 million in the quarter, unchanged from last quarter, and up 12% from the same period of last year. The increase from the previous year was a result of increased sales commissions expense relative to higher revenues year-over-year, increases in marketing promotional activities, and unfavorable currency movements. The addition of the American MSI sales team also contributed to the increase of the sales expenses from the previous year.

G&A costs at $2.9 million for the quarter were down 6% sequentially, and up 31% from the same period of the prior year. On a sequential basis, we have tried to forecast and mitigate the magnitude of the expense that the Sarbanes-Oxley implementation would have on our Q3 G&A line by proactively managing discretionary expenses in this area. Included in this was limiting expenses incurred for other professional fees, suspension of spending on discretionary products, and delays to headcount additions where feasible. The increase from the previous year is a direct result of the high costs of professional fees related to our Sarbanes-Oxley compliance effort. In the third quarter, we incurred approximately $260,000 of external expenses related to Sarbanes-Oxley compliance.

As we have a large number of material operating sites, the documentation requirements are more expensive than our original estimates. As a result, we anticipate incurring $400,000 to $600,000 for professional fees related to Sarbanes-Oxley in the remaining quarter of fiscal 2005. A significant portion of these costs will be incurred in the attestation process by our independent auditors. However, like most companies, we have never engaged our auditors to do a full audit in attestation of our internal controls. Therefore, our estimates of their time and fees remain preliminary at this stage. We expect to be able to refine these estimates as we get closer to year end.

Finally, our annual effective income tax rate for fiscal 2005 is expected to be 20.5%, compared to the actual effective rates of 37% for fiscal 2004. In the third fiscal quarter of 2005, our actual income tax rate was 31.3% on a pretax income of $1.9 million. However, our overall tax provision for Q3 was benefited by a one-time adjustment of $741,000 resulting from a favorable change in our tax accrual.

We currently estimate that our income tax rate in the remaining quarter of fiscal 2005 will be approximately 31.3%, and that that will result in an estimated effective income tax rate of approximately 20.5% for the fiscal year.

Looking at the balance sheet and cash flows. Total cash and investments of $58.8 million at the end of the quarter were up $4.6 million from the previous quarter. As you may recall, that on our last conference call we noted that we would have a more meaningful level of positive cash flows in the third quarter. This in fact was the case. We generated significant operating cash flows totally $4.6 million in the quarter, compared to $718,000 of cash consumed in Q2 ’05, and $3.4 million of cash generated in Q3 ’04.

Cash was primarily generated from the collection of cash created through our strong future results and the significant renews of our maintenance contracts. This result is consistent with our seasonal trends as many of our European customers renewing their existing maintenance and support contracts in January. During the third quarter, capital purchases consumed $125,000 of cash.

DSOs of 68 days were up 3 days from the previous quarter, and 6 days from and the same period of the prior fiscal year. This was a direct result of our growing business in Southeast Asia, where our collection terms are typically longer than that of North America or Europe. Combined with the large seasonal increase in maintenance contract filled in Europe, and the back-ended nature of our sales taking place in both the DAS and MMS businesses.

Our accounts receivable agings remain strong, with nearly 93% of our balances less than 90 days, which is comparable to Q2, and slightly down from Q3 ’04.

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

For the upcoming fourth fiscal quarter of 2005, we are projecting revenues between $16.6 million and $18.9 million. Operating margins for the quarter are expected to in the range of 8% and 16%. With this operating result, we expect GAAP EPS for Q4 to be in the range of $0.10 to $0.18 per diluted share. With these expectations, our annual revenues for fiscal 2005 would be in the range of $63.7 million to $65 million, with operating margins in the range of 10% to 12%. Our full year earnings would be in the range of $0.57 to $065 per diluted share.

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

Thank you, Chris.

So in summary, we remain confident in the strength of our plan in our primary market segments and in Moldflow’s long-term value proposition. We look forward to the final quarter of 2005, and as we look ahead to fiscal 2006.

And with that, I would be happy to take any questions. Cheryl, if you could open the lines.

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

A few questions for you. I guess first off, on the Q3 results, when you look at the services revenue, they declined about 300,000 sequentially. And I was modeling that up and I think -- I guess you would expect that number to be up sequentially. Any comments there? Why was that number down and how should we view that going forward?

Dennis, we had some -- in Q2, we had some back maintenance build in Germany. And we had some training and consulting revenue in Q for about 110,000. The back maintenance in Germany was about $129,000. So, I’d say that the Q2 was probably higher. And you know, the Q3 results were probably typical of what we had expected.

Okay. So when we look at that number going forward, should we see that trend up from quarter to quarter? And what’s the seasonal impact from June to September for you guys?

It’s Roland. It will, quarter to quarter, you’ll still the sorts of impact that you see -- that you saw even between two and three, if there are non-maintenance related service components, such as training, consulting, other sorts of services. So, that can happen as a sort of an underlying impact. The long-term trend of maintenance is to go up with license renewals. And Q4, as indicated, is typically -- well, it would be our year end and so it has seasonally been an up quarter for us.

Okay. Secondly, when you look at the guidance for Q4, there’s a much wider range through the revenue and the earnings than you’ve had in prior quarters. What’s the rationale behind that and, I guess, what would drive business to the lower or upper end of those ranges?

Yes, it’s a fair question. I look at the range and, I guess from my perspective, any point on that range represents a successful result and demonstrates the progress that we’ve made in revenues and earnings over the past couple of years. But, the range itself reflects what we feel is a realistic set of outcomes. We’ve a number of [inaudible] increases that are contributing to the progress that we’ve made over the course of FY ’05. On the top side we’ve got a pretty high activity period as far as the SOX 404 compliance work is concerned. And while we’ll do our best to prepare for those expected costs, they’re not known costs at this stage and we have to work within that reality.

On the revenue side, we have two pretty dynamic business units entering our corporate year-end. The dynamic -- the design solutions business may be more predictable given that we have longer trends available to us and a deeper knowledge of the cycle, sale cycle. But that said, there’s still a range of outcomes to it.

The MMS business has some pretty big moving pieces laid on top of what’s clearly -- and which is demonstrated although it’s a predictable sales cycle and generally larger transactions. So, it’s to do with the number of moving pieces. And as we lay out the possible way cycles fall, it resulted in a wider range than we would normally have given. When you put it all together, we see all of them as rational.

And it’s not just a -- it’s not just a large range. Each of them could be treated by events. I think the single largest moving piece is the dynamics within the manufacturing solutions business. And how the quarter to quarter progress occurs with respect to the -- you know, especially some of the larger transactions that we’ve been -- that we’ve certainly been working on.

As I mentioned earlier in the call, we did see some of the transactions that we had expected from Q3 begin to resolve in -- a strong early quarter results, indications for manufacturing. So, that’s a positive sign along that line, but as you know, the quarter has a long way to play out from here. And so while we’re trying to map a -- it’s a trend of a changing trend -- it’s the movement that can occur.

Okay. So on those manufacturing deals that slipped, and looking at the guidance going forward, I mean, the shortfall in the revenue line in Q3, would you say that’s mostly driven by the manufacturing business? Obviously, we just talked about the services revenue piece, but is the manufacturing business the piece that came in a lot lighter than expected? You also talked about the design analysis side that was weak in Europe. Was that sort of unexpected?

The -- seasonally, Europe has a really strong Q2. And it’s not uncommon for -- and mostly in design -- and it’s not uncommon for Europe to have a larger Q3 than a Q2. You know, the degree of how much lighter it is is a year to year thing, but it’s not uncommon to see that trend. So, I think on the design side, it was more expected. [Inaudible] marginally more, but it was not an unexpected trend to see.

I think the biggest change was the -- you know, we had mapped out the forward progress in the transactions that we had seen building, and continue to see building, on the manufacturing side. And a lot of that was also in Europe. And they -- it’s not that they entered a negative trend, it’s just that the positive trend didn’t go as fast as we’d hoped. And as I said, that became evidenced by the way we opened up with Q4.

Okay. And last quick question. When you look forward -- and I know you don’t want to give guidance going into fiscal ’06, but have you seen any changing conditions in your business that would prevent you from growing at the 20%-plus kind of range that you have been growing at?

Nothing that would indicate a change in that, Dennis. You know, our view on ’06 is it’s still a very positive one from a revenue point of view, and we expect to continue our earnings growth and get into our target range for ’06.

Walter Ramsley, Walrus Partners.

Good morning, Roland. Congratulations. I guess most of those questions were answered, the ones I had. I was just wondering if you could spend a second and go over the European decline again a little bit, and just kind of make sure I understand why that dropped, and whether it’s likely to just get back to the previous level in the fourth quarter.

Sure, Walter. You know, you’ve got the two businesses, and with looking at Europe, we have a lot of history on designs, not so much history on manufacturing. And so, we would quite commonly see that the year end effect for Europe in terms of the calendar year end effect was strong and drove good Q2 results. That would, in some respects, lead to restocking the pond for the beginning of Q3 and then the cycle repeats. And that’s certainly been true.

And as I said, the degree of which it happens really just depends on the nature of the particular year. So, the design side I think is quite normal. The manufacturing side, the reason I’m differentiating it from the -- you know, when I’m saying it’s not as normal is simply that we don’t have as much history. We’ve introduced a whole new business line in the Altanium business that we’ve been building over the course of FY ’05, which is, you know, the whole product line is different. It’s new to us as a company.

And Europe is new to both Moldflow and the former AMSI chain. So, the dynamics of those products in that market aren’t as well known and modeled over history. And so, it makes it -- and it made it more difficult in the quarter. But, we still see the trending that we’re looking for going forward being the increased adoption of the products in both Altanium and in our shop floor, you know, our shop floor product line.

Okay. That sounds good. And then you indicated that you’re hopeful that operating margin will get 16% to 22% next fiscal year. Is that -- driving up?

That’s -- we’re driving it.

Okay. And the SAP deal, or whatever it was exactly, that arrangement. Do you envision that having a significant positive effect?

Well, these are all parts of the strategy to remove obstacles, if you like, for people implementing shop floor systems. Part of that whole shop floor strategy is to, as much as we can, package into applications many areas of implementation, which traditionally has been supplied with customized services. Customized services tend to be very expensive for the customers to swallow. And not particularly attractive as far as margins are concerned for a business. So, as best you can convert custom working through applications the better it becomes. And so, this is one step in that direction. So, my view is that it’s an enabling product for those shop floor manufacturing solutions.

Jim Jenchub, Meadowbrook Capital.

I was wondering if you could talk a little bit, on the Sarbanes-Oxley Compliance side, how much costs have you incurred so far this fiscal year?

We have incurred -- let me just--.

Are you particularly looking for the external--?

--The incremental costs that you’ve -- yeah, the external that you’ve been impacted by this year so far. Just trying to get an idea of what the full year cost is going to be, full fiscal year.

Yes, that’s no problem.

Probably about $600,000.

Based on your guidance, then, you could run up from anywhere from $1 million to $1.2 million total.

Yes, you’ve sort of got it characterized correctly.

And then how much next year do you expect that to stick? How much is that? Is that going to go away -- half of it, or do you know yet?

Well, I know that it’s -- well, I said I know. I expect that it will be less. How much less is a moving piece for us now. I’m looking to see -- obviously, I’m looking to see what’s happening to the December 31 because, having never been through this process before, it’s difficult to know. I mean, you’re still going to have education pieces that you should be able to reduce a lot of the consulting work that’s going on to prepare all the documentation and mapping of processes. But, honestly, it’s pretty difficult to lay an estimate out there.

Fair enough. And then the R&D side, the 2.2 million this quarter. Looking ahead a little bit, that was about 13 -- between 13% and 14% of revenue. Do you have a target there or do you expect that 2.2 million to stay pretty steady as you go forward now into next fiscal year?

We’re actually running our -- have been running our R&D at slightly below our target model typically. The -- you know, 13% and 14% is our target range. Over the last several quarters, we’ve been more like 12%. And so that represents getting back to about what our target range is. I don’t see it becoming an increased percentage of revenue over time.

And do you -- then, based on your guidance -- I guess what I’m trying to get at over all here is your guidance of 16% to 22% operating margins. And I know I think you mentioned already the 20% top line growth as kind of a target. I’m just trying to get an idea of where the leverage is going to come from in your -- on your expense side, and that’s the basis for some of these questions regarding--.

Well, the leverage comes generically from G&A, to begin with. It’s not just the Sarbanes-Oxley piece, although that represents an area where you can make a net saving. The G&A infrastructure, even apart from that, is one which is leveragable across an increased level of business. You know, we have offices and businesses that are in some 15 countries and supported by a G&A structure to do that. It doesn’t increase proportionately with revenue; certainly, over the next few levels of revenue that we’ve got in front of us.

The other is on our -- on a related area, which is on our sales infrastructure. We have a sales and support infrastructure in all of those locations. Now, we are at a point where we’re adding sales reps and not simply relying on increased sales productivity, although as you see, productivity continues to move forward year over year. But, we are beginning to add individual reps, but at a much -- we will be adding management -- top management at a much lower rate than we add reps. And so you get to leverage the sales management side of it as well.

On top of that, there’s a -- you know, we continue to move to push out slightly our indirect revenue component, which of course itself has a lower direct sales and marketing cost associated with it, which helps you push your margin up. Now, that’s not a -- I think we’ve mentioned before, that’s not taking our 10% to 15% to 30%, but it may take 10% to 15% to 15% to 20%.

What about on the -- when you said you’re adding sales reps, is this more on the design analysis side or the manufacturing side?

That’s both. You know, the principal focus on it has been Asia, where there’s a lot of activity and opportunity. But, it applies to both the design solutions business and the manufacturing solutions business. The two -- we mentioned we started up -- or I mentioned earlier that we started up operations in Japan and Southeast Asia for manufacturing. It was primarily sales related activities and that’s for manufacturing. So, it’s both.

And can you tell us what the typical link of time it takes for one of your new sales reps to get productive? Three to six months? Is that typical?

Yes, we typically look at about three.

So, not as long as one would expect.

It doesn’t take a huge amount of time, but it varies rep by rep. But, you get some people that come out of the gate very strongly. And then you will get some that take six months to become effective. But, we’d like to see them contributing in about three. Sequentially, every three quarters is what happens. It keeps coming up.

Well then, to get back to some points somebody [inaudible] before. I mean, the manufacturing solutions, the 13% increase, I would assume that that is a little bit below what you expect to do overall, especially since that’s coming from kind of a small base. Is there some -- I mean, aside from the push-backs, I guess what you talked about, should we expect more revenue growth in that area, 25% to 30% instead because of the -- or am I missing something here?

We would expect high growth rate from the manufacturing solutions going forward. The push from three to four did -- certainly slowed us down in Q3, but our expectation that this is a business with certainly is long-term rates, you know, probably higher than design’s.

And there was no -- when you bought -- I’m sorry, I for got the name -- AMI, was it?

MSI.

MSI, thank you. Were the integration of the sales people, there was not problems with losing anyone, I guess, in that integration piece?

We actually took that opportunity to segment our sales force and created a design solution sales force and a manufacturing solutions sales force. And to a fairly large degree, not exclusively. Actually, well, very much along these lines in the United States. The former Moldflow team of direct reps, there’s some management infusion, but of direct reps, mostly the U.S. Moldflow team ended up in design, and the U.S. AMSI team ended up in manufacturing. It was more mixed in Europe where some went in both directions.

And I’d say the transition went extremely well from a personnel point of view. You know, we did a number over the last few quarters; didn’t go about and start from scratch and rebuild a [inaudible] on the manufacturing side as far as shop floor solutions were concerned. But, by doing it the way we did, they were able to keep up and, in fact, enhance the momentum of the Altanium product line inside this new structure that may seem -- in this stand alone structure.

So, I think from a personnel point of view, it was very smooth. I’m not saying it didn’t require adjustment, but it was smooth. And the -- from the business line, Altanium picked up steam and we’ve been rebuilding the shop floor pipeline ever since we started to see results, but they’re not quite as fast as we might have liked.

Steve [Brink], Mazama Capital.

Couple questions, if I might. I just wanted to get back to the operating margin goal. I think it was 16% to 22%. Is that a fiscal ’06 goal, or is that a longer term goal? And is that -- if it’s ’06, is that something that you want to hit for the entire period, or hope to get there by the end of the year? Help me out on that a little.

Okay. The operating margin goal of 16% to 22% is a long-term model goal for the business, where we think we should be operating in a more normalized -- or in a normalized way. We’ve been stepping towards that in some pretty big steps over the last couple of years.

As far as the indication that we made for ’06, what we said is that we should be able to operate at the -- somewhere within that range over the course of ’06. So, I don’t mean enter it, I mean for ’06. And it’s -- I expect that we’ll -- there’ll still be a ramping of that over the course of ’06, so it’s not necessarily every day of the quarter. And Q1 for us is always a -- or typically is a seasonally lower quarter. So, we actually manage that part of it into the yearly average. But, we would expect to be operating in that range for the year.

Okay. And second question. I know this has been asked a number of times over the years, but I feel like I have to ask it again. Cash balance. If my numbers are correct, you have had a cash of at least $40 million over the last four years. And the return on that particular asset can’t be that high. And it doesn’t seem like the return on that particular asset is adding value to shareholders. It just seems like you’ve got way too much cash. And I kind of wonder how you think about that in terms of your cash needs and how that benefits shareholders.

Sure. Well, it’s not [inaudible] driving a need for high end working capital. We’re a educated people business is our [inaudible]. You know, it’s primary goal is for -- is to support acquisitions. And we’ve done four over the course of our public life. And as we grow, the sorts of transactions that we can undertake also grows.

Our acquisitions remains an important piece of our go forward strategy and the businesses that we have acquired have had revenue run rates from very little, $7 million to $9 million is the sort of range that we’ve been looking at over the past few years, and part of that’s judged on the ability of the company to absorb them in a reasonably low risk way. Going forward, as we get larger, the transactions themselves can get larger.

I think I’ve said that we’re sort of in the 10 to 25 sweet spot now, which gives you a higher demand for use of cash going forward. So, I think it’s something that has an appropriate place in our strategy, albeit building, as you’ve observed, and we’ve been able to generate as much cash we’ve spent on the acquisitions that we’ve done.

I guess that was going to be my comment. I mean, you’ve done acquisitions but you’ve been able to generate the amounts needed. So effectively, your cash has stayed the same or built. So, it seems to me that unless you make a quantum leap in the size of the acquisitions, which I guess you are considering, then cash is going to continue to build. And from a total return on assets or equity point of view, it’s continuing to be a drag.

Yes, it would be. But I think our appetite grows as we grow. And I think that we’ll -- that problem -- if you want to call it that -- will address itself.

Jason [Crawshaw] of [Brace Speshula].

Couple of quick questions here. Can you give some color just how things look by end markets as far as verticals? I mean, on the past you’ve discussed what’s going on in auto, electronics, sort of consumer and the like. Can you just give us some color on that aspect?

Okay. It’s a little bit different by region. I think here in the U.S., where we’ve been seeing a gradual improvement, it has not come as much from our traditional higher segments, such as autos, which I think growth in the U.S. continues to be soft. It’s come more from the consumer goods industry. And we’re certainly seeing also activity from the medical industry here in the United States. So, the traditional auto has not really been part of what we’ve seen here in the U.S.

Do you think auto could continue to get weaker, as far as your U.S. business? Or not?

It’s not getting any weaker. It’s just not one of the [inaudible] it’s one of the strengths that led to the growth that we’ve seen build back into the U.S. business. It’s still an important part of our business, it’s just not as much a part of the growth.

If you move outside, the auto and electronics are very important to both the European markets and to the Asian markets. And our Japanese results continue to have a high automotive component, as well as some electronics. And our Korean and China results continue to have a substantial amount of electronics in them, as you might expect from that -- as you might expect from that region. Yes, not so much automotive in that part of the world.

Okay. I guess just trying to understand some of the issues in the quarter. I mean, if you had to sort of apportion blame, to what extent do you think the problems were sort of internal execution sales issues as compared to a change in the operating environment?

I don’t think it was a change in the operating environment. I think it’s in terms of the external world. I think it was a dynamic business. And we anticipated a certain rate of forward progress and it wasn’t as fast as we thought it was. And I think the people in the field were pushing those transactions effectively and diligently. It’s just that the -- we overestimated the speed of the cycle.

Okay. I think you mentioned that some of the deals, particularly on the manufacturing side, that slipped have closed. Can you give us an idea of sort of the total value of the deals that you anticipated to come in Q3 that have closed in Q4? What would that dollar value be, ballpark?

We haven’t put that sort of information on the street before. We really can’t do that now. The transactions have to all go through the normal scrubbing process. And the dynamic of the rest of the quarter is still before us. So, I don’t think it’s a number I want to hang out there, but I will say that it was a disproportionately large number of transactions in the first quarter than we usually see.

And then last question, just to touch--.

--[Inaudible] of the quarter. I’m sorry.

Just to touch on this issue as far as the cash balance and acquisition opportunities. If you look at what’s out there and what could be sort of potential deals in the pipeline, what sort of multiples would you be required to pay? I mean, if we look at your stock on an enterprise valued EBITDA basis, obviously, you know, pretty darn cheap. Can you continue to do accretive deals as far as what you see out there?

We certainly -- you know, our current modeling of the businesses we look at make that possible.

But obviously only using cash.

It’s preferable to use cash. The reason why stock ends up coming into it isn’t to do with our own preference, it’s to do with the nature of some of the businesses that you buy. It’s the entrepreneur -- if it’s a private business and the entrepreneur is again to be an important part of your go forward strategy, you know, stock comes into play. But, the preference is to use as much cash as possible in the transaction. Absolutely. But, the -- we are able to find deals which can be managed short-term accretive, which is still our view of what we need to do. And obviously, valuations move with time and have done. But, the -- in fact we find with our process that we’ve been going through over the past year and a half that, in fact, we see a continuing increase of -- a pool of companies that look interesting to us.

Christina Ferrido, DGHM.

I have a couple questions. The first relates to the forecast for the fourth quarter. And I was just wondering, given the slips in the third quarter, particularly on the manufacturing side, I’m wondering how you’re approaching guidance for the fourth quarter in that segment differently, or whether -- how conservative you’re being versus your original expectations.

The key elements of the way Q3 affects Q4 guidance comes from your analysis of the speed of the cycle. You know, you try to take into account what you saw, or what we saw, factor that cycle on a going forward basis, and sort of rematch your speed of transaction expectations on one hand. On the other hand, you’ve got the transactions that moved from one quarter to another. That’s why there are moving pieces in this quarter and why the guidance range is wider than we normally put out there because, as the -- the range of outcomes can be from the things that moved from Q3 to Q4 entirely cumulative, to the things that moved into Q3 moved out of Q4 because of the cycle speed. And the reality is that neither of those two things is as likely as the combination -- it’s something between the two. And so, you know, we’ve tried to re-factor those dynamics into the business. It’s hard to put a qualitative estimate [inaudible]. And we just recount based on what we see the potential moving pieces are.

Do you feel that in any way the market opportunity on the manufacturing is less than what you originally anticipated?

I haven’t seen anything that would lead me to believe that.

And the last question is, given what people are talking about in terms of your guidance for next year, does that operating margin target and, you know, the sort of target -- I think you said 20% of revenue growth anticipated and acquisitions.

You know, what we said was that we think -- we can see on the revenue side the current trends continuing in that operating line to enter that range. We’re talking about doing that organically. You know, whatever we could do from an acquisition would be on top of that.

Thank you. Our final question is coming from Dennis Wassung of Adams, Harkness.

Just a couple of quick follow-ups. I missed the number of new seats in the design analysis group that you sold in the quarter.

What was that, Dennis?

The number of new seats sold in the design group. I think you said the cumulative number is about 8,300.

It was about 134.

Perfect. And then lastly, any impact from the solid works business or opportunity that you guys have talked about in the past? Any progress on that project or any initial revenues at this point?

I think we’re already seeing that the increased activity is stirring up interest in the MPI line. I think, as a program to actually build direct revenue, I think we indicated something that comes either late this year or next year predominantly, although, as we’ve said, we’ve already seen that the general education and interest level is stirring up interest.

We have transacted the Moldflow work product, so it is in the revenues and starting to contribute. But, I wouldn’t characterize it as the direct revenues associated with that product as a key driver at this stage. It’s something which I would look to have more impact in ’06. And it may be true that it’s always had an indirect impact because we always present the entire MPI suite. And which products derive benefit from that is something we’re not particularly concerned about.

Thank you. There are no further questions at this time. I would like to turn the floor back over to Roland Thomas for any closing remarks.

Okay, well there being no further questions, I would like to take the opportunity to thank all of you for your support. Chris and I look forward to speaking with all of you again from what will be our new corporate headquarters in Framingham, Massachusetts to discuss the fiscal year end. Thank you and goodbye.

Thank you. This does conclude today’s teleconference. You may disconnect your lines at this time and have a wonderful day.