Autodesk Inc (ADSK) 2006 Q1 法說會逐字稿

Good morning. My name is Mary Anne and I'll be your conference facilitator today. At this time I'd like to welcome everyone to the MoldFlow Corporation quarter one 2006 earnings conference call. [OPERATOR INSTRUCTIONS]. I will now turn the conference over to our speakers, Mr. Roland Thomas, Chief Executive Officer, and Chris Gorgone, Executive Vice President and Chief Financial Officer. Mr. Thomas, you may begin your conference..

Thank you, Mary Anne. Welcome and thank you for joining the MoldFlow Corporation conference call for the reporting of results for the first quarter of our 2006 financial year. Chris and I will make a series of prepared remarks and we will then take questions. Before we begin with these remarks, I'll ask Chris to remind all listeners about risks and uncertainties.

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 on 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, 2005 and our subsequent filings with the SEC. Our comments today will summarize the financial results for the first quarter of 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.

In addition, please note that during the course of this call, we'll be making reference to non-GAAP measures. Reconciliation of these non-GAAP measures to the closest GAAP measures for each relevant period is also available now in the investor section of our Web site at www.MoldFlow.com.

With that, I will turn this back over the Roland.

Thanks, Chris. For the first quarter of fiscal 2006, we are reporting revenue of $15.3 million, a 9% year-over-year increase and total product revenue of 8.7 million, representing a 10% year-over-year increase. As you know, on July 1, 2005, MoldFlow adopted FAS123R which requires companies to report compensation expense related to share-based awards. Accordingly a total charge of $539,000 net of related tax effects was recorded in the first quarter of fiscal 2006.

Excluding the impact of these newly acquired expenses our non-GAAP net income for the first quarter was $569,000 or $0.05 per diluted share. Net income is reported under GAAP with $30,000 resulting in break-even GAAP EPS. Chris will provide you more details regarding our compliance with FAS 123R and the breakdown of the compensation expense in Q1.

Revenue of $15.3 million, representing a 9% year over year growth rate is less than our previously stated expectation for the quarter. Similarly with the lower revenue resulted in a commensurately lower expected earnings per share for the quarter. While disappointing in the short-term we feel the strategies we have in place for our two business units will continue to lead double digit growth, revenue growth when compared to fiscal 2005.

During the quarter, we confirmed the trend that we have previously discussed of the variability in the selling cycle for our manufacturing solutions product. We also saw the negative impact of the fluctuation in currency rates, primarily the Yen and the Euro across product lines. Based on what we have learned, we have determined to take a more cautious approach to currency and the expected closure rates over the course of the year and have modified our expectations with respect to FY '06 guidance.

In addition in the second quarter, we have taken action on a plan for selective restructuring of elements in our business. This will result in our ability to largely protect our earnings expectations within the context of a revised revenue model. We will speak more about these actions later in the call.

During the quarter we noted continued growth in the Asia Pacific and Americas region with strong sales across a variety of markets. The performance in the Americas marks the fifth successive quarter of year-over-year revenue growth which was primarily driven by investments in our MoldFlow Plastic Insight Product, and our Hot Runner Process Controllers.

The performance in Asia was largely made up of sales to companies in the automotive and electronics sectors, including investments by such notable manufacturers as Fuji Electric, Toyota, Canon, Nikon and Ford. We're pleased to see another follow-on purchase coming from Samsung Electric in Korea. You may note from previous quarters that this represents a continued investment from this customer to broaden the use of our products within their operations.

Finally, during the quarter, a Japanese sales and marketing team exhibited a highly successful IPF trade show in Tokyo and we believe the results we garnered from this exhibition will help support continued pipeline development for all products in this region, moving forward.

Now I'd like to turn and look another the activities and results in our business units over the quarter starting with our design analysis business. During the quarter, this business unit grew 7% on a year-over-year basis with revenue of $11.3 million. $5.5 million of this was from product sales representing a 5% year-over-year increase.

During the quarter, our design analysis business unit launched Version 7.2 of the MoldFlow Plastics Adviser suite of products. This release featured a variety of user-driven productivity enhancements as well as new product features. We also released new versions of our connectivity products, MoldFlow CAD Doctor and MoldFlow Design Link to make analysis with MoldFlow products more accessible to users of a variety of CAD systems.

Also during the quarter, we ran a beta program for our version six of our MoldFlow Plastics Insight product which will be released commercially during the U.S. winter. We are all very excited about MPI 6 and took the opportunity to preview the product to our power users at the fourth annual International MoldFlow Users Group Conference, which took place in Orlando, Florida, at the end of October. Our feedback from our users was very positive.

Next, I'd like to return to the results from our manufacturing solutions business segment. Revenues for the first quarter was $4 million, which is up 18% over the same period -- same quarter last year. Revenue -- $3.2 million came from product sales, representing a 19% year-over-year growth.

Despite the -- during the quarter, the business units successfully launched a Version 4 of our Shotscope and MoldFlow Plastics Xpert shop floor products. We've been working closely with our customers to better understand their needs not only on the manufacturing floor, but also in the front end business office. Both of these products were significantly enhanced to increase manufacturing and user efficiency and to bring us another step closer to tie that integration between our products and the major business systems our customers use. In order to make it easier for them to optimize their shop floor operations.

As I mentioned earlier, one trend that has continued in our MMF business unit is the inability to predict with certainty the selling and closing cycles for large orders. This is particularly true outside the United States. In Q1, we had a number of large deal that is ended up closing within the first few weeks of Q2. We're still learning how to deal with this type of unpredictability in the sales cycle, but did not see it as a sign of overall weakness in the business unit, which is reflected in the actual growth of 18%, year-upon-year.

Finally, we are pleased to note during the quarter we began shipping our Altanium product from our new manufacturing facility in Ireland. While this had short-term negative impact on the gross margin in Q1, we believe focusing our manufacturing in the U.S. and Ireland will not only cut our manufacturing costs but allow us to react more quickly when hardware orders are received.

Turning to the remainder of the fiscal year, I'm confident that our long term business is sound and our financial model achievable. However, we must always be responsive to current conditions and we're therefore providing a revised view of fiscal 2006 revenue, which we expect to be in the range to 12-15% growth over 2005. In order to structure our expense model in line with this revised level of revenue growth, we have proceeded with a focused restructuring plan that is estimated to result in a charge of $1 and $1.5 million in Q2.

Building in the run rate savings for this plan, we anticipate that our full-year earnings will be in the range of $0.71 to $0.85, reflecting significant earnings growth when compared to fiscal 2005. This reflects the underlying leverage in the business that we are committed to delivering. We expect our second quarter revenue to be in the range 4-7% growth when compared to Q2 of FY'05.

I realize this represents a wide range of outcomes which consequently flows into earnings, however, it is the range that we can see, so it is what we are conveying to you. So with that, I will now ask Chris to provide a more detailed review of the operating results and the outlook for the future.

Thank you, Roland.

Total revenue for the first quarter of fiscal 2006 was $15.3 million, which represented an increase of 9% over the corresponding period of the prior year and a decrease of 16% sequentially. With respect to currency effects, on the total quarterly revenue, currency movement had little impact on a year-over-year basis, however on a sequential basis, currency movements due to the softening of the Japanese yen and euro negatively impacted revenue by approximately 2% or $300,000.

Revenue and local currencies decreased 14% on a sequential basis. These unfavorable currency movements also contributed to our revenue shortfall compared to our original first quarter guidance. Regionally, revenue in North America represented 36% of the total revenue for the first quarter, while the Asia Pacific and European regions represented 33% and 31% of total revenue respectively.

When compared to the first quarter of last fiscal year, revenue was higher in all regions with Europe up 9%, the Americas up 10%, and Asia Pacific up 9%. Reflecting our normal seasonal patterns, our revenue was sequentially lower in all regions with Europe down 12%, the Americas down 19%, and a decrease in Asia Pacific of 17%.

Moving on to the composition of revenues by type. Product revenue for Q1 was $8.7 million, up 10% over the comparable quarter of last year, and down 22% from last quarter. On a constant currency basis, product revenue was up 10% year-over-year, and down 21% sequentially from the previous quarter. Approximately 30% of our product sales this quarter came from sales to approximately 84 new customers that we added during the quarter.

Service revenue for the first quarter was $6.5 million reflecting growth of 8% over the same period of last year, a decrease of 7% sequentially from last quarter. On a constant currency basis, service revenue was up 8% year-over-year and decreased 5% sequentially. Viewing the revenue by business unit, our total design analysis solutions revenue represented 11.3 million or 74% of our total Q1 revenue.

Design product license revenue for this quarter accounted for $5.5 million o or 63% of our total Q1 revenue. Design product revenue this quarter was up 5% from the previous year and down 16% sequentially. The year-over-year growth in design was evidenced in increased sales of MPI and MPA. All regions experienced increase in design product sales as compared to the first quarter of last fiscal year.

The rates for the Americas, Europe, and Asia Pacific were 10%, 7%, and 3% respectively. Sequentially, the growth rate for the Americas was 13%, unusually strong growth for a typically slow quarter while Europe and Asia Pacific had decreases of 9 and 26% respectively. During the quarter, we shipped a total of 117 new seats of design analysis products, bringing us to a total cumulative combined seat count of approximately 8500 seats for these products.

For our manufacturing solutions business, we had total revenue in the first quarter of $4 million, representing 26% of our total Q1 revenues. Of this amount, $3.2 million came from product sales representing 37% of the company's overall total product revenue for the quarter. The manufacturing product revenue grew organically by 19% over the same quarter of last year due in large measure of impact of the globalization of the Altanium Hot Runner process controller.

With respect to our sales force, we entered the quarter with 44 quota-carrying sales reps; 34 in design, and 10 in MMS, and completed the quarter with 47, of which 35 were in design analysis business unit and 12 were in the manufacturing solutions business unit. Sales productivity for the full quarter for the design business was approximately $353,000 per effective head. In the manufacturing business, the quarter's sales productivity was approximately $438,000 per effective head.

Historically, we experience lower productivity in the first quarter of each year due in part to summer holidays. In the first quarter of last fiscal year, design and manufacturing sales productivity were $1.4 million and $1.3 million on an annualized business representatively.

Turning to operations and earnings, we are reporting GAAP net income of $30,000 or $0.00 per diluted share for the first quarter of fiscal 2006, which includes stock option expense of $539,000 net compared to $0.15 per diluted share which does not include expenses for stock options reported for the same period of the prior year. In our first quarter of fiscal 2006 we adopted the provisions of FAS 123R which requires that we record compensation expense related to equity instruments.

Accordingly, we recorded stock based compensation charges of approximately $570,000, and related tax benefits of approximately $31,000, most of which related to options granted in prior fiscal years. On a non-GAAP basis which excludes the effects of FAS123R, our Q1 net income was $569,000 or $0.05 per diluted share. Our stock option expense under FAS123R for Q1 was approximately $0.05 per diluted share.

In the first quarter, our overall gross margin on a total companywide -- on total company-wide revenue was approximately 73%, a one point decrease from Q4. Although our gross margin for our design products was in line at 90%, our MMS business unit declined 12 percentage points from Q4 to 25%. The decrease in margin was primarily due to a decrease in the number of Hot Runner process controllers sold, a reduction in the per unit Hot Runner process control revenue, due to product configuration, Timing of some higher margin shop floor revenue products slipping from Q1 into Q2 and an increase in MMS business unit costs associated with the startup costs incurred to bring our Irish manufacturing facility online.

In an effort to mitigate the high temporary labor cost experienced at the end of the quarter, we pre-built an inventory several hot runner process control sub-assemblies. Although this had a slight negative impact on the quarter, we hope will help transition the MMS Q2 gross margin into the mid-to-high 30 range over the year and into the 40s overtime. Gross margin was also negatively affected by adoption of stock-based compensation under FAS 123R where $46,000 was charged the cost of revenue.

Total operating expenses were $11.8 million, a decrease of 2% from last year and an increase of 32% over the same period last year. The year-over-year increase was primarily due to stock-based compensation expense under FAS 123R which accounted for $523,000 of operating expense. Costs of compliance and professional fees, most specifically those related to Sarbanes-Oxley section 404 compliance and related audit and increased selling and marketing costs incurred due to higher year-over-year revenues.

Breaking the expenses down a bit further, R&D costs for the quarter were $2.5 million. This represents a sequential increase of 16% over last quarter and an increase of 51% from the same period of last year. The primary drivers of the sequential increase were reallocation of personnel from our marketing department to R&D, which resulted in a $300,000 shift. Stock based compensation under FAS 123R for the quarter of $76,000 and some increased spending on consulting and outside services of approximately $80,000.

The year-over-year increases were primarily due to the reallocation of resources, increases in salary and wages resulting from our annual salary review process and increased research and development personnel costs. Also costs associated with FAS 123R and approximately 160,000 less capitalized R&D expense over Q1 of the previous year.

Sales and marketing expenses were $5.7 million in the quarter, down 10% from the last quarter and up 20% from the same period of the prior year. The decrease from the previous quarter was a result of decreased sales commissions expense relative to lower revenue and the reallocation of some marketing resources to R&D noted above.

Stock based compensation under FAS 123R for the quarter was $134,000. Our year-over-year increases were a result of $480,000 of compensation expenses, a result of additional personnel and annual salary increases, an increase of $213,000 in travel expenses, additional overhead allocations of $128,000 as a result of additional personnel, FAS 123 stock option expense of $134,000, and additional third party commissions of approximately $80,000, all of which was partially offset by the previously mentioned reallocation of resources to R&D. G&A costs of $3.6 million for the quarter were up 1% sequentially and 43% from the same period of the prior year.

The year-over-year increases were primarily a result of increased professional fees, particularly those incurred in conjunction with our Sarbanes-Oxley compliance and Section 404 audits, increases in personnel and applicable salary and wages and FAS 123 stock option expense of approximately $314,000. During Q1, 2006, we incurred approximately $506,000 of external SOX-related expenses, which is approximately $400,000 more than Q1, 2005.

Sequentially net currency fluctuations during the quarter had a 1% favorable intact on spending, which helped to offset the 2% negative effect on the revenue due to the strengthening of the dollar in relation to the yen and the euro over the first quarter.

Finally, for the quarter we are reporting a tax benefit of $154,000 of a GAAP loss before tax of $124,000. The tax benefit of $154,000 includes a discrete benefit of $126,000 from the reversal of reserves for transfer pricing exposures in foreign countries due to the expiration of statute of limitations in Germany and France -- Germany and Japan.

Our expected effective income tax for the year is approximately 22.5% compared to our actual effective rates of approximately 20% in fiscal 2005. Looking at the balance sheet and cash flows, total cash investments of $63 million at the end of the quarter were up $2.4 million from the previous quarter, as operations yielded $1.5 million of cash in the quarter.

We have no outstanding, long-term debt. DSOs at 60 days improved by six days from last quarter when they were at approximately 66 days, but are up 7 days from the same quarter last fiscal year. The year-over-year increase was primarily due to the 9% year-over-year increase in revenue in combination with the level of revenue booked in the third month of the quarter.

Our accounts receivable agents remain strong and slightly improved on a year-over-year basis and similar on composition on a sequential basis with approximately 95% of our balances less than 90 days.

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

For the upcoming second fiscal quarter of 2006, we are projecting a 4-17% year-over-year increase in revenue. We are projecting EPS on a non-GAAP earnings per diluted share for Q2 to be in the range of $0.12 to $0.21 per diluted share. In the second quarter, in an effort to more closely align our expenses to our forecasted revenue, we have taken actions on an selective plan to restructure elements of our business which will result in a charge for the quarter of between $1 million and $1.5 million.

For fiscal 2006, we are projecting year-over-year growth to be in the range of 12-15%. Our fiscal 2006 non-GAAP earnings per diluted share is projected to be in the range of $0.71 to $0.85 cents per diluted share. Please note that effective July 1st, MoldFlow is required to expense stock options expenses in our financial statements in accordance with SEC requirements. Our EPS guidance today, both or the second quarter and for the full fiscal year excludes the impact of any net compensation expenses or any one-time restructuring charges and we have, for ease of comparison, provided EPS guidance on non-GAAP basis.

With that, I will turn it back to Roland.

Thank you, Chris. In summary, I believe we're taking the necessary steps to protect profitability while staying on track with our strategic vision, distribution, expansion, and product commercialization. We head into our second quarter optimistic about our potential, and with that, I'd be happy to take questions.

[OPERATOR INSTRUCTIONS]. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Dennis Wassung with Adams, Harkness.

Thank you. A few questions. First on the manufacturing side of the business, you guys have had a little bit of a challenge on the forecastability of this business. A couple of quarters ago, and then again this quarter, I'm just curious as to your thoughts on, the selling cycle at this point and that part of the business. Is it more driven on the Altanium side, or is it across the board, and how do you view that pipeline going forward at this point?

Thank you, Dennis. A couple of elements. The -- I guess the focus is really on the shop floor part of it. I think the Altanium business has historically proved to be really quite predictable. Forecasting is an imperfect science, but I think we have found that the Altanium business is quite predictable. It's had a long-term selling model and has gotten particularly, I think it's done quite well even over the periods thatyou're talking about, Q3 and Q1 in comparison to the shop floor business.

I think we're seeing, I had thought we had seen the contracting of those selling cycles as we went from Q3 to Q4, but I think we're -- we still obviously have some difficulty in predicting what those cycles are going to be, and it was probably more an issue of, closing off some longer cycles transaction data out of Q3 and Q4 and then adding a reasonable amount from the pipeline in what is a strong quarter for us in Q4. And then there's a lot of similarity between that and between Q1 and Q2, and it's just, I guess similarly, we've got a breadth of outcomes that shows a similar pattern as well.

It does, ultimately, you relate back to how many deals you have in parallel, and in any particular period, and so that's something that we're working on to be able to manage more, just to account for that variability, because really it's a variability, it's in the customer's hands. They have obviously the -- the customers have particular business needs and desires and the timing cycle's significantly controlled by those. We have to respect that. And if we were to bring those cycles shorter, we can't just deny that they're there.

The way to deal with those are to move to a large number of parallel deal which speaks to your pipeline question. And that's something that has been growing significantly since we changed -- since we changed selling models. It continues to grow. So we think we have the underlying solution, in our strategy and it's going to take a little while for it to work its way through to a point where, you know, there's enough breadth in the deal flow to compensate for the natural deal-by-deal movement. As I said, we thought we might have brought that in to may a little more quickly, but clearly we've got some work to do on that looking forward.

Okay. To follow on that, in terms of, a larger number of deals in parallel going on and you mentioned sort of customer dynamics, is there one factor more than another driving the fact that it's harder to determine or close these deals? Do you see it as more of having the sales team execute on getting these deals closed or is it more driven on the customer's delay or process in getting these deals done?

I -- as you might have imagined -- I've spent quite a lot of time looking through on a deal-by-deal basis looking at what happens, would have emerged. There was just a large number of unique situations where the patent was certainly the product line, and market we were dealing with it and to some extent, the region. There was certainly a larger percentage of those occurring in a European region than we'd seen in other parts of the world.

But the fact you're seeing a wide number of really quite different situations that just reflect the customer's situation, for example, there was one transaction which would have followed a shipment of supplies from a Katrina-affected area. That was to the customer's customer. That sort of thing is going to happen. There was a put off from one quarter to another.

I'm not really stacking them up to add support to the reasoning, it's to indicate the variety of customer issues you may find as you look into these things. I think it's more realistic for us to accept them. And we'll work to improve them. I really just didn't think it was as much an execution issue as a, we've got to learn to manage that variability and our process.

Okay. Shifting over to the operating expenses side. A couple of questions there. The expense level seemed to be, I guess, a little bit higher than I would have expected. I'm just curious what your thoughts are here going forward for the rest of year. Are we beginning to see sequential increases on the expense side from here? Are expecting to see the Sarb-Ox related costs fall out going forward? You talked about some reallocation from marketing to R&D. Is that a one-time effect or is that sort of a permanent transition?

That was a permanent transition, Dennis, of one group of our people. So that area will, it will stay probably the same. As far as Sarb-Ox go, we are still in the process of reassessing what's going to happen in 2006.

We have certainly learned from 2005. We have -- we're going to take some of the, external consulting costs that we've had. We're going to bring some of that inside and hope to lower our expenses overall in that area.

Okay. So, I guess, on the whole then would you expect to see each of these three categories kind of increase or decline as we move through the year?

The Sarb-Ox in in Q1 had some effects on the closing of the whole Q4, bringing it all to fruition. We're still assessing where that's going to be for the year. I think on a percentage-type basis, I don't think there'll be too much variability in the model going forward.

Okay. And last quick question, I'll let somebody else get in here. On the gross margin side, you've seen the margins come down over the last couple of quarters. You talked about some impacts from Q1 on the manufacturing side.

Are we still looking at a mid-70, mid-75ish gross margin or as near term as possible. What do you see impacting that going forward from here?

Well, I think they'll -- we'll certainly will be aiming towards the mid-70s for an overall gross margin. I think that's probably a good model.

So given the kind of snapback you're expecting on the manufacturing side, you're expecting to see a pretty decent jump from Q1 to Q2, is that fair?

I think it will improve progressively. You're going to have -- there are fixed cost elements that exist within the gross margin that will progressively, progressively come back as just revenue levels, come up in a good spread across a larger number -- a larger amount of revenue. That debt would happen progressively as revenue comes through.

Plus there are some specific cost reduction exercises that are going on in order to -- in order to drive down specific components in the, in the manufacturing, particularly related to the Hot Runner process controls. So, provided we don't see a commensurate change -- increase in charges of supplies, which we had seen earlier. But I don't think we're expecting anything to change. We haven't been advised of anything like that. You should see a progressive change that -- in line with revenue increases.

Okay. Thank you.

Thanks Dennis.

Your next question comes from Eric Wanger of Wanger Investment Management.

Hi. Good to hear from you.

Thank you, Eric. I didn't catch the 2006 revenue guidance. If you could repeat that and also the cash flow numbers for the year, if you would please.

The revenue guidance for the year was 12 to 15%, Eric.

Okay.

Year-over-year growth. The cash flow in Q1 was -- operating cash flow was $1.5 million.

Did you give a depreciation and amortization figure?

We did not.

Is that something you can provide?

Sure. Let's just see. Depreciation was about $300,000 and the amortization was about $260,000.

Okay. Thanks. One other question, also. Could you speak a little bit to the UDO adventure, how that's going, what the status of it is? Any color commentary you might give on that?

Absolutely. I didn't really touch on that particularly because some of things that were said didn't really relate to the quarter. We set up in Q2 to be able to manufacturing Hot Runner process controllers in conjunction with UDO. In fact the first units have actually come off the production line now. So that's the relationship which is progressing nicely. We think that that ability to build the product in the region, which is obviously an important part of our growth plan will make us, will make us both very competitive and responsive. So we're pleased with the way -- we're really pleased with the way that's coming along.

Great. One other question is to the competitive landscape. Competitors pop up from time to time, are you seeing any -- what are you, maybe just some color commentary on the competitive landscape currently.

I don't think we have seen any significant change in the competitors who we see in the marketplace. You know, on the design side, there's still relatively small, predominantly regionally based players, although, these people have some degree of reach which is outside their local region, but predominately. We feel that our market position is holding very strongly. On the design side, I haven't really seen anything that's changed.

Similarly, I think on the on most of the manufacturing side, our Altanium and MPX, our products are pretty well, or very well positioned. The competitors haven't changed. We've always said that our production monitoring capability is in the most competitive environment of all of our manufacturing, manufacturing products, or a number of people around the the world that manufacture products for production monitoring in this space.

So that's probably one of the most highly competitive areas. I don't think that it's particularly changed in any recent times.

Any new or interesting partnering relationships you can speak to?

Well, we've seen on both sides of the business, our partnering and whether it's with respect to product development for corporate products or whether it's with respect to channel development, that form of partnering is an important part of our strategy. I think the -- where we're at, our user group which was interestingly enough in Florida in the year, in the end of October, which was an interesting time to be in Florida, the -- while we were there, a number of our partners were there with us.

People that we've spoken about, such as Elysium with their cooperative product that we have together, the CAD Doctor product, which has received a lot of interest. We saw -- we have seen over the last several months the interest in combinations between our design products and structural analysis products, which were also evident during the user group. Folks like Abacus are now working more closely with us and we with them to meet this emerging customer need.

On the manufacturing side, we're continuing to develop our partnerships with the folks like UDO, and as well as building partnerships with our manufacturer's representative network, especially building that across Europe. I think you're going to see that same sort of development or those developments of increasing the number of channel partners that we see.

It's something we expect to see continue as we start to get deeper and deeper into the Asia Pacific region, we'll see partnership form and announced as it's publicly available. So it's an important part of our business strategy. It covers both design manufacturing and we've got in place.

One last question, if I may. I don't know how many other people are queued up. This is a question I ask every software company so please don't take it personally. If you can speak to piracy in China as an issue?

Sure. No problem at all. I think piracy is something that occurs and there's no point in just hiding or shying away from it. We can build in whatever security systems we want, but a determined pirate will find ways to battle with you and break security. I think that's something the software industry lives with.

We continue to provide newer and more sophisticated obstacles to slow them down. When we do identify pirates, we very serious about our interaction with them. That said, I think that we are dealing with a relatively sophisticated user in terms of the person who would use the majority of our products, and they are typically in fairly well-funded and very reputable businesses, and so our market in China is still an attractive sales environment for us to be selling into and if there are pirates in less reputable business,so our market in China is still an attractive sales environment to be selling into, and if there are still pirates in less reputable businesses, I don't think we should stop let us approaching that marketplace because that's just not taking whatever revenue is in that marketplace and leaving it to the pirates.

That seems to be not a strategy we would pursue. But, we will just continue to ramp up our efforts to find and go after them as we can identify them.

Okay. Good enough. Do I have time for one -- I don't want to hog the call, is there time for another question or should I come back?

It's fine. Ask away.

You mentioned restructuring, could you be a little more specific about the restructuring goals?

Yeah, look, we've built a plan which was, which was focused on bringing forward some improved leverage in our model. We focused on increasing or bringing that leverage that was in the long-term interest of the business, in other words, it wasn't, it's not a short-term question, it's a matter of identifying where we want to be and bringing some of that, bringing some of the forward into the present day.

It's certainly not broad-based. You know the announced amount, $1 to $1.5 million charge reflects the entirety of the plan, so it's not a big broad-based thing, it's selectively aimed at improving areas of the business where we feel there was leverage that would have ultimately come and we just needed to bring it forward.

Okay. Thank you.

Your next question comes from [Lawrence Patrone] of Walden Brook Capital.

I wonder if I could come back to the discussion of margins just a bit. Roland, you mentioned that you see a gradual improvement, potentially, through the rest of the fiscal year in regard to product margins as opposed to a sharp jump on a quarter-over-quarter basis. I'm just wondering, looking back historically at your product margins, are you thinking your product lines would approach the mid-70s, or do you think there's a possibility depending where the top line goes that product margins could in fact approach high 70s to 80% where you were if you go back three or four quarters?

I think the mid-70s is a good place to focus. The biggest driver isn't in fact any one margin of any one product line, it's actually product mix. Is there things that could drive it into the high 70s a very, very high software component or design component in the revenue mix is the thing that can move it beyond that point.

We've taken a reasonable view o where we think the mix will come in and that brings us to the mid-70s. If you go back a few quarters, you'd find the mix balance the other way in terms of a greater degree of design revenue relative to MMS revenue. As the MMS business has grown, that mix has just shifted to where it is now.

Does that assumption also -- does that also assume rather that that the margins on the manufacturing side improved slightly during the course of year of the

Yes, from where they are now.

Also one other question on the operating side or operating expenses. Does the restructuring efforts that you're taking potentially reduce some of your operating expenses, or is this more, it seems like it's more of a realignment of businesses or doing some things to structure yourselves positively for the long-term or are there potentially some reduction expenses here?

There is a second half impact on our expense line. So it achieves both goals for us. And that's reflected in the guidance that we gave.

And just touching on the guidance, I wondered. As you said earlier, you have, or I think Chris said, a wide guidance for the next quarter, I'm just curious if you achieve the high end of your guidance for next quarter in terms of earnings, would that cause you potentially to re-look at your guidance for the course of the year. I realize you want to take a conservative approach to what's going on given the moving parts here. I'm just wondering, if you're at the high end, potentially could have some push upward on your overall guidance for this year.

What we would do, if we went through the quarter at the upper end of our guidance, we'd be more focused on looking into the fundamental reasons as to why we were there. And our view going forward would be based upon understanding whether those fundamental reasons were going to continue for or not for the rest of year. There are different reasons why you can get to your revenue level on a quarter-by-quarter basis.

It's really difficult to sit here and say what you're going to do in certain things, if something like that, like that occurs without actually knowing, being able to look back on it and analyze, just like we've done this quarter. Look back on Q1 and analyzed it. You could get extremely high levels of sales in a softening currency environment.

If you thought that was going to continue or maybe worsen, then you might leave everything the same. There's too many moving pieces to be really [seministic] about that answer.

I assume part of that reevaluation, would be what are the contributing factors from the two businesses, is it mostly from design or manufacturing and what parts of the globe are they coming from?

We would certainly do our analysis on a business unit by business unit basis. The source of factors that you look into apart from economic things that might be occurring around the world at that time. We don't really have the ability to either control or see right now.

But apart from that, I think that if we were doing a comparison, then to now, the whole variability on the manufacturing side is the issue. We're not looking at variability on the design side particularly. Yet, currency exposure affects both units, but because it includes both the yen and the euro and design has a much bigger exposure to the yen than does MMS, then however that was going would affect that design business unit. So there are different dynamics for the business unit.

I see. One other quick question. What's your assumption in regard to currency movements with regard to guidance for the year? Stays the same that the dollar weakens, improves some more or what's built into that guidance?

It's pretty -- we don't really get into currency speculation all that much, we look at what's happened recently and use that as our -- as how we are going forward.

Last question. I wondered if you could just give us a little color on what you're seeing from some industry verticals. I'm particularly interested in the automotive and consumer electronic businesses. It seems like you're seeing good interest based on the customers that you announced.

Yeah. I think especially if we look to Asia, we see, strong business coming out of both Japan and Korea in those areas. The customers that you, that you heard me refer to, Samsung, Nikon, those sort of blue-chip electronics folks. Continue to, continue to invest in the product, Canon as well.

And so within the Korea, Taiwan, China, Japan, that general area. Over several quarters we've seen that come quite robust. We've had reasonable, we've seen reasonably, not great, but decent things in electronics in France over a few quarters as well. Not necessarily something I'd measure on a quarter by quarter basis, but if you look at it over a number of quarters, you've seen some reasonable investments in that area.

On the automotive side, I think in two of the big automotive markets being Detroit and Germany, I'd say that that was pretty soft and haven't really seen other than some sort of spotty activity anything that would -- that would indicate any underlying strengths there. In complete contrast is the Japanese automarket which is providing equal support to the revenue model in Japan as the electronics industry.

So I think some of our more traditional markets, Detroit and Germany, which haven't been so strong that the Japanese market remains pretty buoyant for automotive. Here in the U.S., despite that, we've continued to see medical and consumer goods be important market segments. Both for design and manufacturing product lines and I think there's some underlying, some underlying reasons to that.

Especially in terms of medical where the regulatory environment, the complexity and the precision required in the molding process means that it's something which is not threatened, but it's something that I think has a, some long-term viability in the marketplace.

Okay. Thank you very much, Roland.

Thanks.

[OPERATOR INSTRUCTIONS]. Your next question comes from Walter Ramsley of Walrus Partners.

Good morning. Congratulations.

Good morning, Walter.

Questions. Maybe you went over this. I got interrupted a couple of times, but the orders that were postponed, can you tell us how much they amounted to?

We haven't given the total amount, but you've seen the difference in the revenue number and Chris gave you the indication as to how much of that was due to currency, so the balance is predominantly related to the orders that moved out of the quarter.

Okay. And can you just kind of just briefly explain what caused the delay?

Yeah. It's, speaking to, you know, to the individual causes, it's really a sequence of customer by customer issues that that reflect a variability into those transactions that we had -- or I had felt that we would be able to affect the variability. I think what this has demonstrated is we need to manage around the variability and build a broad enough number of transactions to compensate for it to try and narrow the the difference in outcomes.

Basically when these numbers are getting to the point where five deals can be $1 million, you get five different customers with slightly different circumstances and a lot of money moves from one quarter to another and I don't think that there was any pattern any other than the geographic one we mentioned, which was that it tended to be more European-focused.

Part of that is actually because our strategy calls for a lot of expansion in Europe and a big portion of their revenue, a larger proportion of their revenue comes from these parts of transactions. It's not even necessarily a reflection of the market. It's partly a reflection hat their revenue stream requires a large number of these transactions to close and therefore the variability hurts them more.

Okay. Is there any potential at all that the manufacturing solutions business will begin to really accelerate the way it was kind of expected to originally or is that just kind of, going to run into some resistance that just isn't going away?

I think we're plowing our way through it. I think, I certainly would say we're plowing through it at a speed that is slower than we would have liked, but we had some pretty good traction in there in the manufacturing solutions business, and we could see that we needed to make some changes in order to bring the -- turn the revenue into earnings, because we needed to be able to sell and implement these systems in a cost effective way so we made the changes to our sales model which I think are appropriate.

They delivered the year-on-year of 18% even in a quarter when deals slipped out. The underlying growth rates are still pretty strong. We'll continue to plow our way through these obstacles, but we can see the margins. We can see the margins improving. We can see a continued strengthening in the pipelines and frustrating as it is, in the midterm, we can certainly see where the light's coming from.

As far as the restructuring goes, can you give us an idea as to what the savings will be once that is implemented?

The savings will relate to the second half of the year and are baked into the guidance that we gave.

Right. I'm just wondering. I mean, you're kind of laying out essentially a $1 million to $1.5 million, are you going to get that back?

It should exceed that on an annualized basis.

Oh, okay. All right. Tax rate, the last time around, you predicted maybe 25% for the year, is that still good?

I'd bring it down to about 22.5 or something like that.

The thing is, it fluctuates because the way we have to treat discrete items. It's a little hard to nail down if we ended up with an underlying rate that was 25 and we have some discrete items that can result in an average reductions of the number. But the discrete items flow through, it's going to be a little bit bouncy. I think -- what we are seeing that continued improvement from FY '05 to FY '06. I think it's not something we believe is going higher.

Okay. Great. Thanks a lot.

Thank you.

Your next question comes from Dennis Wassung of Adams, Harkness.

So, are we -- should with be modeling 22.5 per quarter, or given the change we had in Q1, you're beginning to see an annual rate at 22.5?

You know, I think if you're modeling and you're going to try to take out the one-time effect, you might try to average it out for the year as opposed to -- I think there'll be no one quarter that has 22.5 in it, but over the course of the year, that's probably a reasonable model.

All right so, sort of on a quarterly basis, a 25% rate is still reasonable?

Yes, put that in there and bake some fluctuation in there.

Okay. Last quick one. On the Ireland manufacturing, you started shipping the Altanium out of there this quarter. What's the plan there? Is that to go 100% of your manufacturing out of this or what's the transition plan and?

We don't intend to do 100% of manufacturing out of there. It's really set up to allow us to manage the growth primarily out of the European or the EMEA region in a way which is local to their marketplace.

And so that we can build the opportunity, we think we've got the opportunity for long-term cost improvements, but you build in a natural hedge in the cost structure, which is, which is important for the stability of planning purposes, long-term. I don't think we're -- I know we're not planning on doing worldwide manufacturing from there. We still see the Americans supplied from U.S. facility, and for a long time, large part of Asia will be supplied from the U.S. facility, as well.

Okay. And last question. What was the head count at the end of the quarter, and how much of a change was that? What's your expectation next quarter?

Head count as the year goes forward is -- we're certainly heading people in, predominantly in the sales and market area, headcount is currently 336, which I think is up over the course -- over the course of the quarter. I think you should expect it to go up a little over the course of -- over the course of the year, but maybe it goes up to 340, 350.

Okay, so when you look at this restructuring that's going on, is that --

I've baked that in.

All right. Okay. Fair enough. Thank you.

Thank you.

Your next question comes from Eric Wanger of Wanger Investment Management.

Hi, one follow up question. I forgot to ask you. What was the usable Capex number for the quarter, please?

CapEx was about $500,000, I believe, Eric. Let me check for a second.

Great, thanks.

It was 456 and we then capitalized some software of $40,000.

Good enough. Thank you.

At this time there are no further questions. Mr. Thomas, are there any closing remarks?

Well, thank you everybody. There being no further questions, I'd certainly like to take this opportunity to thank you all for your support. Chris and I look forward to speaking with you at the conclusion of Q2 and reporting to you on our Q2 progress. Thank you and we'll speak to you again at the end of next quarter. Good-bye.

Thank you, this concludes today's MoldFlow Corporation quarter one, 2006 earnings conference call. You may now disconnect.