Autodesk Inc (ADSK) 2006 Q4 法說會逐字稿

Good afternoon. My name is Jessica, and I will be your conference operator today. At this time, I would like to welcome everyone to the MoldFlow fourth quarter fiscal 2006 earning release conference call. [OPERATOR INSTRUCTIONS]. Mr. Thomas, you may begin your conference.

Thank you. Welcome, and thank you for joining the MoldFlow Corporation conference call for the reporting of results for the fourth quarter and 2006 financial year. Chris and I will make a series of prepared remarks and then we will take questions. Before we begin with these remarks, I will ask Chris to remind all listeners about the 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. Please note that any statements contained in this conference call that are not based on historical facts, are forward-looking statements, within the meaning of the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995.

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 annual report 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 of our fourth fiscal quarter and fiscal year ended June 30, 2006. For more complete details on our financial results, please refer to our press release issued early 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. A reconciliation of these non-GAAP measures to the most directly comparable GAAP measures for each relevant period is attached to our press release and also available now in the Investor's section of our website at www.MoldFlow.com.

With that, I will now turn it back over to Roland.

Thanks, Chris. I'm here today to report on our fourth quarter and fiscal 2006 year-end results, which were in line with the guidance we gave on our May 4th earnings call.

Beginning with the results from the fourth quarter, we are reporting worldwide revenue of $17.1 million, which represents a 5% sequential increase and a 7% year-over-year decrease. Total product revenue of $9.9 million is up 4% compared to our third quarter and down 12% over the same period of the prior year.

Non-GAAP net income for the fourth quarter was $1.8 million, or $0.15 per diluted share, which excludes certain charges for restructuring, share based compensation expenses, and a tax provision related to cash repatriation.

During the fourth quarter we initiated a share repurchase program, which was designed to partially offset the diluted effects of the equity issuances to our employees and directors which resulted in the repurchase of 196,100 shares of our common stock.

Looking to the individual business unit results for the fourth quarter, our Design Analysis Solutions business produced revenue of $12.8 million, which represented 75% of total revenue. During the quarter, revenue from this business segment increased 10% sequentially, but was flat on a year-on-year basis. $6.2 million of this revenue was from product sales.

Our Design Analysis Solutions business saw sequential growth in every region during the fourth quarter, with particular strength coming out of the United Kingdom, Germany, China and Taiwan.

On a year-over-year basis, we even noted a slight increase in North America, despite continued struggles in our Automotive markets.

In our Manufacturing Solutions business unit, revenue of $4.3 million represented 25% of the total fourth quarter revenue. This represents 6% sequential and 22% year-over-year decreases respectively. Of this revenue, $3.7 million came from product sales.

As I mentioned before, these results were in line with the guidance we gave on our third quarter earnings conference call. And while disappointing when compared to last year, do reflect some stabilizing trends.

First, our Manufacturing Solutions business unit was able to achieve the revenue levels that we forecast at the end of the prior quarter. This validates our new more conservative sales approach and forecasting method and allows us to move into fiscal 2007 with a high level of confidence with regard to the range of which we will address our market opportunity.

Second, in our Design Analysis Solutions business unit we saw strength coming out of the growth areas of China and Taiwan. These emerging growth markets are part of the focus of our geographic expansion for this business unit and are starting to produce solid results.

Now I'd like to turn to our full fiscal year results. For fiscal 2006, we are reporting worldwide revenue of $55.6 million, with non-GAAP net income of $5.9 million, or $0.50 per diluted share. On a GAAP basis, net income was $1 million or $0.8 per diluted share. The difference being charges for equity-based compensation expense, restructuring activities and the tax provision that I mentioned.

Looking at the full year's results for our business segments, at Design Analysis Solutions business produced $48.5 million of revenue, representing 74% of total revenue and a 3% year-over-year increase.

Of this revenue, $24 million came from product sales, which is flat when compared to fiscal 2005. In our Manufacturing Solutions business segment, full-year revenue of $17.1 million represented 26% of total revenue for fiscal 2006 and is essentially flat when compared to fiscal 2005. Of this revenue, $14.3 million came from product sales, slightly down from fiscal 2005.

Looking back on fiscal 2006, unquestionably, it was a challenging year for MoldFlow. Our well-discussed issues in our Manufacturing Solutions business unit and our resulting efforts to right-size that business led to a diminished focus for our Design Analysis Solutions business, primarily in the area of delayed personnel investments and deployment of our development resources.

As we enter fiscal 2007, we believe our Manufacturing Solutions business is now a solid business with a strong and loyal North American customer base for our Altanium hot runner process control product. Over the course of fiscal 2006, we enhanced the capability of this product line with multiple updates and releases, with the latest of these releases the new Altanium X series, now shipping.

With these product enhancements in place, properly sized sales and research and development organization, reduced worldwide expenses and our renewed market and product focus, we feel this business unit is now positioned to operate more autonomously as we move forward into fiscal 2007.

Our Design Analysis Solutions business unit remains a strong core business that continues to show year-over-year growth and maintain its worldwide technology and market leadership. The fiscal 2006 growth rate of this business was negatively affected by currency impact. However, if you eliminate the currency effects, the business unit grew by an estimated 6% year-over-year.

Moving forward, our primary management focus for fiscal 2007, will be executing on our plan to return this business to its expected level of long-term growth levels. We believe our consolidated fiscal 2006 results will more closely reflect the high gross margins and resulting profitability that this business unit generates and will no longer be negatively impacted by the expenses of the Manufacturing Solutions business.

As I have previous stated, we will be operating our Manufacturing Solutions business to yield breakeven to profitable results.

Looking ahead into fiscal 2007, we will continue the level of technological innovation that has made us the undisputed market leader for injection molding design analysis products for many years. During the year we will work with our large enterprise customers on options to make our technologies more accessible to multiple users throughout their infrastructures.

We will continue with the pace of technological innovation we are known for with major releases or our flagship Design Analysis Solutions products, while continuing to create new technologies that target specialty processes on the high end in design for manufacturing solutions for the mainstream.

We will expand the geographic reach of this business unit with a particular focus on emerging markets in Eastern Europe, South America and Asia. And finally, we will continue to pursue on-sell and up-sell opportunities to our customers around the world to increase the operating leverage this business unit provides.

We expect this business segment to lead the way as we head into fiscal 2007.

In summary, while the challenges of fiscal 2006 were frustrating for both MoldFlow Management and shareholders, I do believe we have taken the actions to size our organization appropriately for increased profitability. With a renewed focus on our core Design Analysis Solutions business and a solid market leadership position, we believe we are on track to deliver revenue growth, along with increased profitability to our shareholders over fiscal 2007.

Looking forward, our plan for fiscal 2007 is to, in our Design Analysis Solutions business we will focus on a geographic expansion that takes into account the West to East trends being seen in Europe, while making continued investments in the emerging markets in South America and Asia. We'll introduce products to address emerging needs in different market segments around the world. In our Manufacturing Solutions business we will work to continue to operate this business to capitalize on the products with strong market positions that carefully monitor the spending.

In both business segments we will continue to seek out strategic partnerships and acquisition targets that strengthen our sales and product leadership position. We will continue to leverage the global trend toward manufacturing optimization with the introduction of new technologies and services to enhance our market leadership position and we'll work towards improved scale and margin development in both business units to bring us close to our target operating model.

Turning to our financial outlook for fiscal 2007, beginning this fiscal year and moving forward, we will be giving guidance on a yearly basis only. Accordingly, we anticipate that our full-year fiscal 2007 revenue will grow by approximately 5% to 7% when compared to fiscal 2006. With full-year non-GAAP income per diluted share expected to grow between approximately 35 to 50% or $0.68 to $0.75 on a year-over-year basis.

These growth rates take into account our Manufacturing Solutions business that we believe will achieve a revenue level that is flat to slightly negative for the fiscal 2007 year.

Finally, as indicated in our press release from earlier today, in June 2006 the Company undertook a voluntary internal review of its stock-based compensation practices. This review was not in response to any government inquiry or whistleblower complaint.

The Board of Directors established a special committee of their Audit Committee to review these practices and we have reached the conclusion that the actual measurement date of one stock option brand issued in August 2002 differed from the reported grant date by a day. It was further concluded that this difference was not the result of any intentional backdating or spring-loading or any other intentional manipulation of option grant dates by the Company.

However, based on the result of the investigation, we may record a non-cash charge of half a million dollars. The Company has concluded that any portion of this charge that may be allocated to the first quarter of 2006, which is the last quarter that this charge could be applied, would not have any material adverse effects on our statement of operations for that period.

As we work through these issues with our auditors, we made determine that some portion of this charge may be material to a prior period. In that case we would restate that period in our 10-K to be filed in September for our 2006 year.

And with that, I'll now ask Chris to provide a more detailed review, including a more detailed look at our guidance on a GAAP basis.

Thank you, Roland. Total revenue for the fourth quarter of fiscal 2006 was $17.1 million, which represented a decrease of 6% over the corresponding period of the prior year, and a decrease of 5% sequentially. Total revenue for fiscal year 2006 was $65.6 million, a 2% year-over-year increase, in line with the guidance provided on our May 4th, 2006 earnings conference call.

Movements in foreign currency, in foreign exchange rates, had an inconsequential effect on quarterly revenue when compared to the corresponding period of the prior fiscal year. Sequentially, currency movements had a 2% positive impact on revenue, primarily due to the strengthening of the Euro and the Yen.

For the full year 2006, currency movements had a 2% negative impact on revenue when compared to fiscal year 2005.

Regionally, revenue in Europe represented 32% of total revenue for the fourth quarter, while Asia-Pacific and Americas regions both represented 34% of the total revenues, respectively. These regional results were of similar percentages for the full fiscal year.

Compared to the prior year, revenue derived from our Asia-Pacific region for the full fiscal year increased 6%, while our European region increased 2% and our Americas region decreased 3%. These results highlight a number of trends we have noted over the past 12 months, including strong sales into the Korean, Chinese and Taiwanese electronic industries and continued softness in the North American markets, in particular, in the American Automotive industry.

Sequentially, revenue for North America decreased 3%, resulting from the number of lower-priced C-series Altanium units sold, versus the number of higher-priced A-series sold in the previous quarter. Although the number of HRPC units sold increased sequentially, the quantity of the smaller units sold accounted for the revenue decline.

Revenue in Europe and Asia-Pacific increased 14% and 7% respectively, due to increases in product revenue across both our business divisions.

Moving on to the composition of revenue by type. Q4 product revenue of $9.9 million decreased 12% year-over-year, but was up 4% sequentially. On a constant currency basis, product revenue was down 12% year-over-year, but up 3% sequentially. Approximately 27% of our product sales this quarter came from sales to 78 new customers added during the quarter.

Q4 Service revenue of $7.2 million reflected growth of 3% over the same period of last year and 7% sequentially. On a constant currency basis, service revenue was up 4% year-over-year and 5% sequentially.

Viewing the revenue by business unit, our total Design Analysis Solutions revenue represented 12.8 million or 75% of our total Q4 revenue. Of this amount, Design product license revenue accounted for $6.2 million or 63% of total Q4 product revenue. Design product revenue this quarter was down 5% from the previous year, but up 10% sequentially, primarily the result of strong MPI sales in Germany and the United Kingdom.

During the quarter we shipped a total of 105 new seats of Design Analysis products for a total cumulative combined DASC count of approximately 8,800 seats.

Our Manufacturing Solutions division produced fourth quarter revenue of $4.3 million, representing 25% of our total Q4 revenue. Of this amount, 3.7 million came from product sales, representing 37% of the Company's overall total product revenue for the quarter. Manufacturing product revenue decreased 22% year-over-year and 5% sequentially.

With respect to our sales force, we ended the quarter with 51 quarter-carrying sales reps, of which 39 were in Design and 12 in Manufacturing. We completed the quarter with 50 quota-carrying sales reps of which 38 were in Design and 12 were in Manufacturing.

Sales productivity for the full quarter of the Design business was approximately $353,000 per effective head. In the Manufacturing business, the quarter sales productivity was approximately $506,000 per effective head.

Turning to operations and earnings. During the quarter we enacted a plan to restructure our Manufacturing Solutions business unit, with a goal of refocusing the product development, manufacturing and sales efforts to be breakeven to profitable as we enter fiscal 2007. As a result of this restructuring, we recorded a charge of $1.3 million, which was primarily attributable to severance pay and related legal costs and was within the guidance range established for these actions on our conference call of May 4th, 2006.

Although these actions taken in Q4 had some favorable impact on the fourth quarter's operating results, we anticipate the full benefit of these actions will remove approximately $500,000 of spending each quarter, beginning with the first fiscal quarter of 2007. When combined with the actions taken in our Q2 restructuring, we expect annual savings of approximately $3 million.

Our GAAP results for the quarter, which include the aforementioned restructuring charge, was a net loss of $440,000, or $0.04 per share. The GAAP results also include share-based compensation charges of $589,000 net of related taxes as required under FAS 123R and nonrecurring tax expense of approximately $500,000 related to our cash repatriation during the quarter.

Our GAAP results compares to $0.12 per diluted share in the same period of the prior year. And as a reminder, our fiscal year '05 GAAP EPS does not include charges for share-based compensation.

On a non-GAAP basis, which excludes the effect of share-based compensation, restructuring charges and the nonrecurring tax expenses related to certain cash repatriation actions, our Q4 net income was $1.8 million, or $0.15 per diluted share.

During the fourth quarter, our overall gross margin on total revenue was approximately 75%, a 1-point increase over Q3. The gross margin in our Design Analysis Solutions business for the fourth quarter was 89%, up 1% from Q3.

Increased third-party royalties and additional amortization of capitalized development cost, detracted from our typical 90% margins in Design. Our gross margin in the MMS business unit decreased 2 percentage points sequentially, to 35%, driven by increased warranty expense and the HRPC product mix previously mentioned.

Total operating expenses on a GAAP basis, excluding cost of product and services, were $12.7 million, a 16% increase from last quarter and primarily a result of our Q4 restructuring charges. Operating expenses increased 6% year-over-year, primarily due to share-based compensation charges.

On a non-GAAP basis, operating expenses of $11 million declined 9% year-over-year, principally due to lower commission expenses paid to sales staff and saving in G&A expenses.

Breaking the expenses down a bit further on a GAAP basis, our R&D cost for the quarter were $2.4 million and in line with last quarter. Year-over-year R&D cost increased 13%, primarily due to a shift of our product line management personnel from our marketing department to R&D, which resulted in quarterly shift of expenses and the additional cost associated with equity based compensation.

On a non-GAAP basis, R&D expenses of $2.3 million increased 9% year-over-year and were down 1% sequentially.

Sales and marketing expenses were $6 million in the quarter, up 4% from last quarter, primarily due to increased program spending for a national tradeshow. Sales and marketing spending decreased 4% year-over-year as a result of the redeployment of our product line management staff and reduced commission expenses.

G&A costs on a GAAP basis were $3 million for the fourth quarter, up 11% sequentially, but down 17% from the same period of the prior year. This sequential increase was mostly due to professional service fees related to the ongoing tax audit and the timing of work performed related to our year-end financial statement audit.

The year-over-year decrease was primarily due to realization of several cost-saving measures enacted in fiscal 2006, including the overall reductions to our professional fees incurred in conjunction with our financial statement in Section 404 audits. Savings from these measures were partially offset by equity-based compensation expenses under FAS 123R.

On a non-GAAP basis, excluding compensation expense, G&A expenses were $2.7 million, down 23% year-over-year and increased 13% sequentially. Sequential net currency fluctuations during the quarter had no impact on spending.

Our Q4 tax provision on a GAAP basis was 1.3 million, which equates to a quarterly effective tax rate of 148%. Included in this amount was 525,000 of tax expense related to the repatriation of $10.6 million from our Australian subsidiary to the United States, under the provisions of the American Jobs Creation Act of 2004.

In addition, the increase in our effective tax rate for the quarter and the year was primarily due to unfavorable impact of the recognition in equities, rather than income, of our option compensation tax deductions and the non-deductibility of current year share-based compensation costs.

The impact of these items was partially offset by favorable tax rate differentials between US and certain foreign jurisdictions. You will note that for the full year we have an effective tax rate of 66% of which 18% related to the repatriation.

We started Q4 with 349 employees and ended with 331. The decrease is primarily a result of the restructuring activities.

Now looking to the balance sheet and cash flows. Total cash and investments of $60.6 million at the end of the quarter, decreased $785,000 from the previous quarter. Our operations consumed $1 million of net cash in our fourth quarter, primarily the result of payments of $1.1 million related to obligations arising from our restructuring and an increase in inventories, prepaid expenses and other current assets which totaled $3.1 million.

The most significant component of the $3.1 million was our payment of $2.2 million of cash to the Australian tax office, related to the audits of fiscal 1994, 1995 and 2001 tax years of our Australian subsidiary.

These amounts, which were recorded as current assets, were paid to limit interest that may accrue on the amounts in question from the date of assessment through the ultimate resolution of these matters. As we believe that the positions taken in our tax returns with respect to these matter have merit and will be sustained, and as we are taking steps to preserve our rights to the tax authorities objection process, no liabilities have been reported related to the amounts of additional tax penalty or interest that have been assessed to date or may be assessed in the future.

During the quarter the Board enacted a stock buyback program under which to date we have repurchased 196,100 shares at an average price of $13.15 per share. This repurchase consumed $2.6 million in the quarter.

During Q4 we incurred depreciation expense of $333,000 and amortization expenses of $277,000. Our EBITDA for the quarter, calculated on a GAAP basis, was $804,000 and on a non-GAAP basis, was $2.6 million.

Our capital expenditures for fixed assets was $235,000 and we had $86,000 of capitalized software development costs. We have no outstanding long-term debt.

DSO for the fourth quarter was 67 days, a sequential decrease of 12 days and an increase of 1 day year-over-year.

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 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. And again, I note that you should refer to our SEC filings and to our earnings press release for a description of those risks and uncertainties.

For the full fiscal year 2007, we expect revenue to grow in the range of 5 to 7% when compared to fiscal 2006 and non-GAAP net income per diluted share for the full fiscal year 2007 to increase between 35% and 50%, as compared to fiscal 2006. Resulting in non-GAAP earnings per diluted share of approximately $0.68 to $0.75.

Non-GAAP net income per diluted share excludes charges for share-based compensation expenses, which throughout the full fiscal year are expected to be approximately $1.9 million net of related tax effects.

GAAP earnings per diluted share is therefore expected to be between $0.53 to $0.60. The estimates assume an annual effective tax rate of approximately 25%.

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

Thank you, Chris. In summary, we exit a challenging year, but we approach our new year with a renewed optimism that we have addressed the issues that have kept us from executing on our plan over fiscal 2006.

We enter fiscal 2007 with a more tightly controlled Manufacturing Solutions business with strong healthy Design Analysis Solutions business and seeing the initial signs that our decisions over the past fiscal year should move us back towards our target business model.

Our Management team will remain focused on driving the bottom-line growth, leveraging our market strength and focusing on the core businesses and products that have made MoldFlow great for the last 28 years.

And with that, I'd be happy to take any questions.

[OPERATOR INSTRUCTIONS] Dennis Wassung with Canaccord Adams.

A couple of quick ones I guess. You mentioned the point that you're giving fiscal year '07 guidance. I guess you made a comment there that made it sound like you're not going to give quarterly guidance anymore. Is that the case and what brought you to that decision?

That was a correct interpretation of what I was saying. We certainly looked at how we were viewing the business and the way we were looking at the business was to build an overall plan for the fiscal year and the distinction between the quarters was something quite artificial put on by the guidance cycle within those quarters. We didn't want to continue with that artificial overlay, when we were viewing the business in the way we were and so just reflected the, as we would do for most of our disclosures, is reflect the disclosures in the manner which we view the business.

I don't think we're alone in taking that view. Although I'm sure there are--and I've already had, you know, people have approached me about what they would prefer to see in the future have already spoken about why don't you do this and why don't you do that as far as guidance is concerned. And I don't think that there was any particular consistency in the view. But nor was there a consistency around maintaining quarter by quarter.

So, the real focus was on just trying to get our comments in line with our view of the business.

Okay, that's good. And second question, in terms of the changes and restructuring that you guys have made, do you have any other--is it all complete at this point? Do you see any other changes you're making? What else do you see in the operations that you need to work on at this point or do you feel like you're fairly completed with the efforts that you've undertaken?

We've really gone through and completed the actions that we'd planned. We're, of course, growing, a growing business and as we introduce different products into different areas you'll see investments in certain areas. But they're more going forward changes and I think you were referring to retrospective change, looking backwards over the business and saying if we need to change from the way it looks now. And as far as that's concerned, our changes are essentially complete for the moment.

Brian Bayers of Bayers Capital Management.

When you made your comments about looking back on the past year, you had said that the trouble in the manufacturing segment had led to some degree of neglect in the design analysis solutions segment. You had made a comment about investment in personnel and am I correct in interpreting that statement to mean that there will be an increase in headcount in the design analysis segment going forward?

Yes, there are certainly investment plans for our Design Analysis Solutions business. And there, in fact, was over the course of '06, but what I was referring to in sense was the [inaudible] implications of that neglect, as you called it, was a decision with respect to hiring practices or hiring timing, rather, when we would put people on, were constrained. So for example, one of our expansion plans called for expansion that would have occurred in Q1 and Q2 that really ended up appearing later in Q4. So some of it has actually in effect, caught up, but caught up in a way that didn't produce any positive impact on '06.

But that said, we have long-term growth prospects and plans for the Design business and one of the primary vehicles for that is growing our channel into the more active parts of the market, so we certainly have personnel increase plans that reflect that. So you can read back into that from our major areas of growth. So you're getting more significant focus in areas such as Asia, with some investment, but not as much in the US and Europe.

You feel pretty good going forward about the personnel that you have in place, particularly in sales and marketing in the Design business and in particular how they're compensated and motivated to get the top-line moving again?

I believe so. We're always looking for better ways to do it, but I think we've got a good team in place. There's always change, especially in sales forces. But I think as far as the quality of the Design sales team and the Design sales management, I can say they're a good team.

[OPERATOR INSTRUCTIONS] Jerry Heffernan with Lord Abbett.

I was wondering if you could just review--I know you were reviewing the headcount there, but in regards to the overall restructuring of the manufacturing segment, I just wish you would review the expenses that you said you expect to be able to take out, or on a quarterly basis I believe you said 500,00?

And also, whether you expect it to be at a breakeven run rate by the end of fiscal year '07, if you expect it to be breakeven for the year fiscal year '07? I just wasn't perfectly clear with that was explained there, I apologize.

As far as the plan for fiscal year '07 where Manufacturing is concerned, our plan is to be basically breakeven for the aggregate of fiscal year '07. Now you might--whenever you run a broadly breakeven plan you can fluctuate a little bit up or a little bit down, even in any particular quarter. But by the time we get to the end of the year we expect to be breakeven.

As far as the personnel, there are approximately 15 people in the restructuring. That was in the Q4 restructuring.

Understand. I know you went through the headcount. I believe at one point you said we expect to, for the year '07, we would expect to see a reduction in expenses of 500,000 a quarter?

I think what Chris said was we took out approximately $3 million of expenses in the combined restructuring.

Okay. That's actually the part that had confused me, because I thought I heard 500,000 a quarter and then the total was 3 million and even my calculator doesn't work that way. So I was confused. So 3 million is what we think we've taken out on an annual basis?

Essentially in two tranches, yes.

At this time there are no further questions.

Okay. Well, once again, I would like to take this opportunity to thank all of you for joining us today. Chris and I look forward to speaking with you at the conclusion of the first quarter of our 2007 fiscal year and reporting on our overall progress towards the business goals we've been discussing today.

Thank you and goodbye.

This does conclude today's conference call. You may now disconnect.