Autodesk Inc (ADSK) 2006 Q2 法說會逐字稿

Good morning. My name is Joy, and I'll be your conference operator today. At this time I'd like to welcome everyone to the MoldFlow's Q2 '06 earnings conference call. OPERATOR INSTRUCTIONS]

Now I'd like to introduce the CFO of MoldFlow, Mr. Chris Gorgone, and the CEO of MoldFlow, Mr. Roland Thomas. Mr. Thomas, you may begin your conference..

Thanks, Joy. Welcome and thank you for joining the MoldFlow Corporation conference call for the reporting of results for the second 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 would 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 US 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 of 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 of our second fiscal quarter, ended December 31st, 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 will be making reference to certain non-GAAP or pro forma financial results and measures. Reconciliation of these non-GAAP measures to the closest GAAP measures for each relevant period is also available now in the Investors section of our Web site at www.MoldFlow.com.

And with that, I will turn this back over the Roland.

Thanks, Chris. I'm pleased to be here today to report our second quarter of fiscal 2006 results, which were in line with the guidance we provided at the end of Q1.

For the second quarter, we are reporting revenue of $16.9 million, a 4% year-over-year increase and 11% sequential increase. Total product revenue of $10.1 million, represents a 5% year-over-year increase and a 15% sequential increase.

Once again, during the second quarter we experienced negative currency movements in relation to the Yen and the Euro, which impacted our overall revenue by approximately $300,000, relative to our guidance.

During the second quarter we completed a restructuring plan, which resulted in a new charge of $1.3 million. We have already begun to see the savings from this action and anticipate a payback in a little over a year's time.

Also during the second quarter we recorded a charge of $579,000 net of related tax effects for compensation expenses required under FAS 123R. Excluding the impacts of these charges, the non-GAAP net income for the second quarter was $1.8 million, or $0.15 per diluted share.

Over the course of the second quarter we were pleased to see a rebound in sales in our European region. These results were driven by sales of our flagship MoldFlow Plastics Insight and real-time performance management products to many automotive and medical manufacturers, with the majority of that revenue coming from Germany and France.

In our Asia Pacific region, specifically in Korea, we had an outstanding quarter, with MoldFlow Plastics Advisors and MoldFlow Plastics Insight software sales to many electronics manufacturers.

The US was softer this quarter in both business units. We believe that this is a temporary condition based on a variety of general effects in the US plastics industry in the second half of 2005, the calendar year.

In the second quarter we saw significant investment in MoldFlow software and hardware made by many manufacturers around the world, including Stanley Electric, Foxconn, TRW, Boston Scientific, Millipore, Peugeot Citroen, Smiths Plastics Ltd. and [Tauter massive] Mold Works Corporation, a tier-1 supplier for [Aswan de Mudget] Corporation.

Also during the quarter we continued our geographic expansion with additional sales resources being added in China and by putting the mechanisms in place to establish our first direct presence in India. This growing import market offers opportunities for sales of both product lines and establishing a direct presence in this country is a necessary step to properly service emerging markets.

We expect this office will be completely up and running in our third quarter and will supplement our existing distributor business in India.

I'd like to turn and look to the activity and results in our business units over the quarter, starting with our design analysis business. During the quarter this business unit grew 4% on a year-on-year basis and 12% sequentially, with revenue of $12.7 million. $6.6 million of this revenue was from product sales representing a 7% year-over-year increase and 65% of total product revenue for the second quarter.

This business unit continues to grow on both a year-over-year and sequential basis, with strong sales of our MoldFlow Plastics Insight and MoldFlow Plastics Adviser product, across geographies and across end-user industries.

We see the demand for CAE continuing to increase, as evidenced by many follow-on orders, from such companies as Samsung, FCI, Foxconn, Peugeot Citroen, who are making part and mold optimization technology a mandated part of their product manufacturing process.

At the end of the second quarter we launched version 6.0 of our flagship MoldFlow Plastics Insight product. This important release delivers new technologies and key enhancements, as well as provides 2 new technology breakthroughs for our 3-D filling and warpage application. The new technologies found in our MPI 6.0 embody the combination of major research and development undertakings and employ the latest numerical simulation techniques to breakdown former speed and accuracy and capacity barriers.

We believe this release will not only help secure our position as the technology leader for customers who are working in 3-D application, but will also set the standard in the market for speed and accuracy in CAE simulations for injection molded plastics.

Over the course of our third quarter we plan to release the MoldFlow Communicator. It's free download will enable the sharing of the insight which comes from the use of MoldFlow's Design Analysis Solutions product at multiple points in design through manufacture value chain.

Next I'd like to turn to the results for our manufacturing solutions business segment. Revenue for the second quarter of fiscal 2006 was $4.2 million, which is up 3% over the same quarter last year, and 6% sequentially. Of this revenue, $3.5 million came from product sales, representing 3% year-over-year growth rate [inaudible] sequential growth.

After our acquisition of American MSI in 2004, we embarked on a vigorous program related to the refinement of MoldFlow's traditional shop floor, or real-time performance management product, to make them easy to use, easy to sell and less expensive to support. This resulted in intensive R&D efforts, which have resulted in upgraded products that we now feel more effectively meet our customers' needs.

In Q2 we were able to take steps to decrease the R&D spending on these products and refocus their marketing and sales efforts. As while the overall MMS results appears modest, it contains the important milestone, namely, a substantial increase in the sales of our real-time performance management products in Europe and in the US. This result follows the buildup of pipeline, which is more than doubling on the year-on-year basis, which we have discussed over several quarters.

While I do not intend to explicitly report on pipeline on an ongoing basis, I thought it was important to provide some insight into the science that we see leading to the development of this business.

As I have mentioned in previous quarters, our R&D efforts are continuing in the important area of integration between our product, across both product lines. We continue to believe that this will result in a more robust product line that clearly establishes our competitive position and makes us unique in the market.

Finally, turning to our business outlook. We have recently achieved some important milestones in the development of the business. These include the improvements in the RPM product sales, the recent positive contribution from the NMS unit and an increase in the number of referenceable customers due to our customer care program.

We've also been taking a number of steps to improve the predictability of this product line, not withstanding the array of factors which can affect revenue. While these steps have improved predictability, I feel that a stronger approach is necessary to take greater control. Therefore, we are applying thresholds of higher certainty to NMS forecasting.

Going forward we will refine this view, looking back on what we have done, rather than assume the effects of what we plan to do.

Based on this view and continued unfavorable currency movements, we have reforecast our FY '06 revenue plan. We expect revenue for the third quarter of fiscal 2006 to be in the range of 12 to 21% of growth, when compared to Q3 of 2005, with non-GAAP EPS to be in the range of $0.16 to $0.23.

Our full-year guidance of revenue growth is 8 to 12%, with earnings in the range of $0.60 to $0.73.

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

Thank you, Roland. Total revenue for the second quarter of fiscal 2006, was $16.9 million, which represented an increase of 4% over the corresponding period of the prior year, and an increase of 11% sequentially. This fell within our guidance range previously established on our November 2nd earnings call.

Revenue in the first half of 2006, were $32.2 million, a 6% year-over-year increase.

With respect to currency effects on the total quarterly revenue, currency movement had a negative impact of 5% on a year-over-year basis, as revenue and local currencies increased approximately 9%. Sequentially, currency movements had a 2% negative impact on revenue, primarily attributed to the softening Japanese Yen and Euro.

Regionally, revenue in Europe represented 39% of the total revenue for the second quarter, while Asia Pacific and the Americas region represented 31% and 30% of the total revenue respectively. When compared to the second quarter of last fiscal year, revenue was higher in Asia and Europe, with growth rates of 8% and 6% respectively, while the Americas were down 2%.

Sequentially, revenue for Asia and Europe were up 3% and 40% respectively, while the Americas were down 8%.

Europe's recovery was strong in both business units; DAS, where product revenue increased 75% sequentially and in MMS, where product revenues increased by 150%, led by our traditional shop floor real-time production management products.

Revenue in the Americas struggled for both business units and we saw little calendar year-end budget flush, which is typically seen as a Q2 revenue driver.

Moving on to the composition of revenues by type, product revenue for Q2 was $10.1 million, up 5% over the comparable quarter of last year, and up 15% from last quarter. On a constant currency basis, product revenue was up 11% year-over-year, and up 17% sequentially. Approximately 33% of our product sales this quarter came from sales to 99 new customers that we added during the quarter.

Service revenue for the second quarter was $6.8 million, reflecting growth of 2% over the same period of last year, an increase of 4% sequentially from last quarter. On a constant currency basis, service revenue was up 87 year-over-year and increased 6% sequentially.

Viewing the revenue by business unit, our total design analysis solutions revenue represented $12.7 million or 75% of our total Q2 revenue.

Design product license revenue accounted for $6.6 million, or 65% of our total Q2 product revenue. Design product revenue this quarter was up 7% from the previous year and up 20% 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 second quarter of last fiscal year.

During the quarter, we shipped a total of 100 new seats of design analysis products, bringing us to a total cumulative combined seat count of approximately 8600 seats for these products.

For our manufacturing solutions business, we had total revenue in the second quarter of $4.2 million, representing 25% of our total Q2 revenues. Of this amount, $3.5 million came from product sales, representing 35% of the Company's overall total product revenue for this quarter.

The manufacturing product revenue grew by 3% over the same quarter of last year and 8% sequentially.

With respect to our sales force, we entered the quarter with 47 quota-carrying sales reps; 35 in design, and 12 in MMS, and completed the quarter with 51, of which 38 were in design analysis business unit and 13 were in the manufacturing solutions business unit.

Sales productivity for the full quarter for the design business was approximately $391,000, for $1.6 million annualized per effective head. In the manufacturing business, the quarter's sales productivity was approximately $371,000, $1.5 million annualized per effective head.

Turning to operations and earnings. During the quarter we enacted a restructuring plan to realign certain aspects of our business. The plan included the elimination of certain positions across business units and geographies and the termination of an operating lease for one of our facilities.

As a result, we recorded a net charge of $1.3 million, which was primarily attributable to severance pay and related legal costs. This charge was within the guidance range established for such an action during our last earnings conference call. We estimated that these actions will remove approximately $300,000 of spending each quarter and allow us to continue to streamline our operations.

Our GAAP results for the quarter, which included the restructuring charge, was a net loss of $109,000, or $0.01 per share. The GAAP results also included stock option expense of $579,000, net of related taxes.

The stock option expenses are the result of our adoption of provisions FAS 123R in our first quarter, which requires that we record compensation expense related to equity instruments granted. Most of this expense related to options granted prior fiscal years.

Our GAAP results compares to $0.14 per diluted share for the same period of the prior year, which excluded stock option expense and restructuring charges.

On a non-GAAP basis, which excludes the effect of equity based compensation and restructuring, our Q2 net income was $1.8 million, or $0.15 per diluted share.

In the second quarter, our overall gross margin on total Company-wide revenue was approximately 75%, a 2-point increase over Q1. The gross margin on our Design Analysis Solutions business for the second quarter was 90% and was in line with traditional levels for this business.

Our gross margin in our MMS business unit increased 6 percentage points sequentially, to 31%, driven by 38% product gross margin, which was 9% improvement from Q1. This improvement was a result of expected savings from one-time charges incurred in Q1 for the setup of our Irish facility and some prebuilt subassemblies, in combination with the increased sales of our shop floor real-time production management systems.

Total operating expenses were $13 million, an increase of 10% from last quarter and an increase of 20% from the same period of last year. The year-over-year increase was primarily due to the restructuring charge of $1.4 million and stock-based compensation under FAS 123R, which accounted for $622,000 of operating expenses.

Breaking the expenses down a bit further, R&D costs for the quarter were $2.2 million. This represents a sequential decrease of 12% and an increase of 8% from the same period of last year. The primary driver of the sequential decrease was software development costs being capitalized in the amount of $370,000.

The year-over-year increase for the quarter was primarily due to the reallocation of product marketing personnel from our marketing department to R&D, which resulted in a $311,000 quarterly shift, and where the spending is recorded, and costs associated with equity based compensation of approximately $96,000. There were no capitalized costs in Q2 of the previous year.

Sales and marketing expenses were $5.9 million in the quarter, up 4% from the last quarter and up 5% from the same period of the prior year. The sequential increase was a result of our annual international users group conference and increased commissions from a higher base of revenue. The year-over-year increase was the result of stock-based compensation under FAS 123R for the quarter of $141,000, additional salespeople and annual salary increases.

G&A costs were $3.5 million for the second quarter, down 3% sequentially and up 14% from the same period of the prior year. The year-over-year increases were primarily a result of $204,000 increased professional fees incurred in conjunction with our financial statement and Section 404 audits, increases in personnel and corresponding salary and wages, and FAS 123R stock option expense of approximately $340,000.

Sequentially, net currency fluctuations during the quarter had a 1% favorable impact on spending, which helped to offset the 5% negative effect on the revenue due to the strengthening of the dollar in relation to the Yen and the Euro over the second quarter.

Finally, for the quarter we are reporting a tax provision of $548,000 on profit before tax of $439,000, for an effective tax rate of approximately 125%. This apparent anomaly is the result of the application of FASBI interpretation #18, which covers the calculation of tax provisions in an interim period. FIN 18 requires companies to exclude from ordinary income base the non-benefiting losses generated in some entities when calculating the interim tax provision. This will be worked out over the course of this fiscal year. Our current estimated annual effective income tax rate for fiscal 2006 is between 25 and 27%. This estimated rate does not take into account any further discreet items and is subject to change.

EBITDA for Q2 on a GAAP basis, was $312,000 and on a non-GAAP basis, was $2,321,000. We started the quarter with 336 employees and ended with 341.

Now looking at the balance sheet and cash flows. Total cash in investments of $59.4 million at the end of the quarter were down $3.2 million from the previous quarter, as operations consumed $2 million of cash in the quarter. Combining the $2 million of cash consumed by operations, predominantly increases in accounts receivable, and in prepaid and other current assets with fixed asset purchases of $300,000 and the capitalization of software development costs of $370,000 resulted in negative free cash flow of $2.7 million.

We have no outstanding, long-term debt. DSO for the second quarter was 63 days, an increase of 3 days sequentially and a decrease of 2 days year-over-year. There was a slight deterioration in the [age in] [inaudible] receivables, with 93% of the receivables aged less than 90 days old, compared to 95% at the end of the first quarter. This is typical of our second fiscal quarter.

Included in inventories prepaid and other current assets is an amount of approximately $667,000, representing the payment made to the Australian tax office in late December. This payment represented 50% of the 2001 tax assessment, which was levied upon us by the ATO in November in regards to our ongoing tax audit. The $667,000 prepayment was made in accordance with the rules and regulations of the ATO and in order to limit interest charges from being assessed on a going forward basis.

On December 8th, 2005, we received a general interest charge advice relating to the 2001 tax assessment, amounting to approximately $800,000. The Company and its Counsel lodged a submission to the ATO in December for remission of penalties and GIC. To date, there is no resolution.

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 and to today's press release for a description of those risks and uncertainties.

For the upcoming third fiscal quarter of 2006, we are projecting year-over-year revenue growth of 12 to 21%. For our third quarter, we are projecting EPS on a non-GAAP basis, to be in the range of $0.16 to $0.23 per diluted share.

For our fiscal 2006, we are projecting year-over-year revenue growth to be in the range of 8 to 12%. Our fiscal 2006 non-GAAP earnings per diluted share is projected to be in the range of $0.60 to $0.73 per diluted share.

Please note, that effective July 1st, 2005, MoldFlow is required to include stock options expenses in our financial statements in accordance with SEC requirements. Our EPS guidance today, both for the third quarter and the full fiscal year, excludes the impact of any net equity compensation expenses or any one-time restructuring charges we have, for ease of comparison, provided EPS guidance on a non-GAAP basis.

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

Thank you, Chris. So, in summary, I believe that we're taking the necessary steps to ensure improved profitability and predictability with our aggressive product plans and our geographic expansion both moving forward as expected, I believe we head into the future well-poised to take advantage of the market opportunities in front of us.

Our plan remains in our design analysis solutions business to deliver greater flexibility to the enterprise level customers as well as the product and mold design markets and our manufacturing solutions business will grow up in revenue and globalize the Hot Runner Process Control product. We'll focus on the expansion of our Asia Pacific sales network as well as our worldwide OEM and reseller sales strategies.

We will continue to seek out strategic partnerships and acquisition targets to strengthen our sales and product leadership position. All this is to work towards improved scale and margin development.

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

[OPERATOR INSTRUCTIONS] Dennis Wassung of Canaccord Adams.

A couple of quick questions here. First, on the guidance, Roland, you talked about some changes in the way you're forecasting the MMS business and trying to maintain a greater level of predictability there. I'm curious what you can talk about in terms of your guidance. A little bit of a tighter range this quarter than last, but still a little bit wider than we've seen in prior quarters. I'm curious as to whether or not you have a backlog coverage or is there another metric we can use to see how predictable or how much of your business for the March quarter is fairly confident or in backlog or something along those lines?

I'm not sure that there's a metric I can give you that really gives you something that I could use on certainly an ongoing basis. I think what we did when we looked coming out of Q2 was to see all the—there are still a number of variables that affected what we could do, in terms of predictability. And that level of control was below the level that we thought was necessary in order to plan the business. And so really what we were doing is taking the threshold of certainty up and tightening the requirements of what it would take to move something into the expected column is the effect of what it does. It's a little more complicated than that, but that's the effect of what it does.

And so, the consequence of that affects your forecasting. All of the same transactions exist. All of the same pipeline exists. All those things are exactly the same. We're just really increasing the threshold of what it takes to move something into the expected side of revenue.

Now it is true that coming out of Q2, I think we saw in both business units in the Americas that we didn't see the sort of budget flush that we had seen in most of Q2. Otherwise the quarter progressed fairly normally, except for the end and it reacted a little differently. For MMS what we saw is that you still took the orders for delivery in a subsequent period. Whereas if you were in a situation where there was a lot of budget flush, people would just use the budget and take delivery now.

So that, we saw. And that was in some respects a positive sign for us, although you didn't get to take it as revenues. But as far as quantifying that, I don't think that Q2 budget flush phenomena is something that goes on every quarter anyway, so I don't think it would be a very good measure.

Okay. When you look at the manufacturing business in general, I guess through this greater threshold that you're holding, I guess in reality it puts a better level, I guess a more conservative approach on that number. Are you still expecting—how would you handicap the growth expectations in the manufacturing business as we look into Q3 and Q4, as opposed to where you where in the first half, I guess on the product side?

The growth expectations, we've sort of outlined what they are for the overall business. The design business has seen some impact that's come along through currency, but largely it's performing within the range of expected levels. But most of the change can be attributed to change in our forecasting on the MMS side over the course of the year.

What we're saying is that I don't think that the long-term growth expectations for the MMS business necessarily changed, I'm just going to report those to you retrospectively as we see the movement of pipeline conversion increase, as opposed to trying to estimate when that's going to happen prospectively.

Okay. And sort of geographically here, you talked about a couple of points. Europe was strong in the quarter. Do you expect that strength to continue? And then also on the US side, being a little bit weaker, you mentioned some short-term impacts there. What's your expectation there in the coming quarters here on the US side? Do you expect that business to return to where it was? And I guess on the same side, the European strength to continue or to fall back at all?

Not withstanding seasonal effects to Europe. Europe does see a strong quarter seasonally in Q2 most years. So it's not an overall surprise to see Europe do well. That said, or within that backdrop, I think we did see some good signs in the European region that would lead us to believe that we shouldn't see the sort of drop-off that we saw in last year, where Europe had a very difficult period going forward. You always see some tightening over it, but I don't think it will be to that level.

As far as the US is concerned, we certainly have been looking into what the industry was saying and I guess the indications were that there are a bunch of things that came together in the December quarter or even the last half of calendar 2005 that put a blip through the US plastics industry. And that was just an overlay on an industry, which actually I think is in pretty good shape, broadly speaking.

I think the order levels, production rates are in good shape for the US plastics industry. However, you did have a couple of events that took out some production facilities and delayed the ability to ship resins, delayed or put a spike in prices for a while. Although I think the long-term trend is for prices to ease.

But those things I think were things that just came through in the half that are not things that you expect to become a pull on the industry. So I think broadly speaking, I and most people expect the US plastics industry to continue to progress forward on the part that we've seen over a lot of quarters, which is not rampant, but steady in that marketplace.

Okay, great. And last question for you. On the restructuring charge you took in the quarter and the restructuring activities here, was there a headcount impact here? I think from Chris' comments, the headcount actually went up about 5 people sequentially. And I'm just curious what the restructuring really entails, in which areas, if you can give any more details there and was there a cash impact on that as well? You talked about severance. I guess some of the details there would be helpful.

It did include headcount. I think in total there was about 7 people involved. The focus of the people were primarily in the area of development and implementation for some of our shop floor products. We put a lot of investment into the development of these products over a couple of years and we really did reach the point at which we—based on where pricing and packaging planning is going forward, we didn't need to continue at that level. And so we really more aligned the cost structures with that pricing and packaging plan looking forward.

We also included in it some restructuring in the infrastructure of our sales management, although not from a customer-facing point of view, more on the internal layers within the business.

I'm sorry, you asked about cash impact on that. Basically there's a cash impact on the business [to the amount of charge].

Jim Bradshaw.

My question is kind of to do with the large cash balance that you currently and always seem to have. Could you go into a little bit of detail about what you and the Board are kind of thinking about the use of that, whether it be you're mulling over some acquisitions or with what we at least consider the stock price to be fairly low, maybe that would be better deployed in repurchasing shares, or what your thoughts are there?

Thanks, Jim. It's a fair question. We do carry a large cash balance. The primary focus as you alluded to, has been to support our acquisition strategy and it has done so over the years, certainly the years that we've been public. And looking forward as our business grows and the appetite for the size of business that we can acquire without disrupting our operations does continue to grow as our infrastructure grows both the potential use of or the potential impact [inaudible] acquisition growth.

That said, we have been able to build in our acquisition activities and continue to generate cash over a number of years. And so I think it's realistic for us to be reviewing the balance of the deployment of that cash, which has dogmatically being assigned to acquisitions in the past.

As far as what we would do, when and what rate, I'm not really in a position to discuss that right now. Obviously, it has to be balanced by the primary use, but it's certainly something which is I guess now getting some level of review. Whereas it has previously been pretty well exclusively targeted on acquisitions.

[OPERATOR INSTRUCTIONS]

Okay, there being no further questions, I'd like to thank everybody. I'd like to take the opportunity to thank you all for your support. Chris and I will look forward to speaking with you at the conclusion of the third quarter and reporting on our progress in the second half of fiscal 2006. Thanks and I'll speak to you then.

This concludes today's conference call. You may now disconnect.