Autodesk Inc (ADSK) 2007 Q1 法說會逐字稿

Good morning. My name is Lisa and I will be your conference operator today. At this time, I would like to welcome everyone to the Moldflow first-quarter fiscal 2007 earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS). At this time, I would like to turn the call over to Mr. Roland Thomas, President and CEO. Please go ahead, sir.

Welcome and thank you for joining the Moldflow Corporation conference call for the reporting of results for the first quarter of our fiscal 2007 year. Chris and I will make a series of prepared remarks and then we'll take questions. Before we begin with these remarks, I'll 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 U.S. 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, 2006 and our subsequent filings with the SEC.

Our comments today will summarize the financial results of our first fiscal quarter ended September 30, 2006. For more complete details on our financial results, please refer to our quarterly report on form 10-Q for the quarter ended September 30, 2006 filed earlier today and our press release filed 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. 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 section of our website at www.Moldflow.com. And with that, I will now turn it back over to Roland.

Thanks, Chris. We are here today to report the results of our first quarter of our 2007 fiscal year, which should be considered in conjunction with our earnings announcement and filing on form 10-Q, both of which were released earlier today.

As we reported to you when we exited our fiscal 2006 year, Moldflow's fiscal 2007 strategy is to unlock the value built into the business by focusing on the individual needs of our two divisions. For our Design Analysis Solutions division, this leads to greater focus on the drivers of our penetration strategy, namely the channel development and product strategy.

For our Manufacturing Solutions business, this followed on from our restructuring activities undertaken last year to bring our expenses in line with expected revenue levels. We also brought a renewed profit focus to this division.

In combination, we acknowledge that this focus on earnings leverage would likely come at the expense of short-term revenue growth. We believe the results of this quarter, namely strong earnings on flat year-on-year revenue, are early reflections of these actions and solid steps towards our annual goals.

I would now like to report on each division's progress towards these goals. In our Design Analysis Solutions division, our strategy for fiscal 2007 is to expand our sales channel and introduce new products to bring out the earnings leverage inherent in the business model.

During the quarter, revenue generated by this division increased slightly when compared to the same period of last fiscal year and was down sequentially, consistent with seasonal norms. The growth came from recurrent maintenance and support contracts underlining the ongoing value that our customers see in our Design Analysis Solutions products.

Correspondingly, product revenue was weaker when compared to last year. This is an expected outcome as the impact of channel expansion, specifically increases to the direct sales force, as well as new distributors and the rollout of our product plan we felt later in the fiscal year.

During the quarter, this division saw strong sales performance out of our Korea, Taiwan, China region where we had invested in additional sales personnel earlier in our fiscal 2006 year. Our Japanese region saw increased channel orders, but revenue was slightly down overall as this region's sales hires have been more recent and therefore not yet fully effective.

The Americas region had a strong performance with more robust sales than we have seen recently. However, we had another challenging quarter in Europe. A difficult selling environment in many European countries coupled with the traditional short selling quarter, particularly in France, Italy and Germany, have led to delays in investments in our products across many (indiscernible) in the industry.

Our geographic expansion efforts moved forward in all of our target regions. Our direct sales office in India is expanding our channel in that emerging market with the addition of qualified resellers. We announced that a redirected sales effort in both South America and Eastern Europe with the appointment of existing sales reps to focus on these growing regions. We believe that a full-time sales focus on these regions will help establish our market leadership in these important growth markets and allow us to more effectively identify and optimize resellers and distributors.

The pace of innovation in the Design Analysis Solutions division remains high and we are planning a second-quarter release of our Moldflow Plastics Insight product version 6.1. Its release of our flagship design analysis product will feature many new capabilities, but in particular it contains functionality targeted specifically at glass replacement and plastic lens applications.

We see an established trend in the automotive and electronics industries towards replacing glass with plastic for reasons including weight and safety. The freedom of shape that plastics provide and the complexity added by the manufacturing process makes trading optical quality plastics difficult. The new tools in our MPI product will help to assess these effects during design.

Also, the convergence of our DAS for plastics and CAE for structures that we have seen in many customers' requirements has led us to offer improved communication with world leading structural CAE programs such as ANSYS, Abacus, LS-DYNA, Patran and Nastran. The information that we provide on the complex behavior of the plastic material significantly enhances the value of structural analysis.

Finally, certain versions of this product release will also include features to help our largest enterprise customers deploy our technology in a new way throughout their infrastructure. We had the opportunity to preview MPI 6.1 at our highly successful iMUG Tokyo event, which was held mid-October. This event, which gives us the opportunity to directly communicate with our customers and learn more about their applications for Moldflow products, have been steadily increasing in size since its inception. In fact, attendance was up almost 30% over the last iMUG event in Japan. The preview of this product was met with great enthusiasm by the customers who attended the iMUG.

So overall, we are pleased with this division's progress over the course of the first quarter. We took a number of steps towards our stated goals and believe this division is on track to meet our expectations for fiscal 2007.

Now, I would like to turn to our Manufacturing Solutions division performance for the first quarter. As I mentioned earlier, the focus for this business unit is to establish and execute on a new operating model. The target was to be at least neutral to earnings this year, which would lead to being a profit contributor in the near future. We achieved that goal this quarter.

Operating profit was slightly positive coming with the improvement evident both in the gross margin and the operating expenses. The improved profitability came notwithstanding a revenue level in this division, which was down on a year-on-year basis as was anticipated in connection with the 2006 restructuring.

During the first quarter, we saw a mix of products sold in this division with sales of each type of product coming from different regions. We saw sequential increased revenue from our Altanium [run-up] process controllers out of Europe and Asia and from our traditional shopfloor products in our American and Asian regions.

Our sales efforts for the first quarter in our Manufacturing Solutions division represented the phasing out of our Altanium A and C and the phasing in of our Altanium X and XE series and our reconfigured [modac] shopfloor data acquisition unit.

These products showcase advances in technical capabilities, as well as revised designs that can be manufactured with a lower product cost. The results of all these measures give us a gross margin that is considerably higher than the margin we were able to attain on earlier versions of this product. All in all, the first quarter's results in the Manufacturing Solutions division are very encouraging. We believe we have now an organization with a controlled cost structure, redesigned products and a focused selling effort capitalizing on regions and products where we have had strength and competitive advantage. We believe this division is on track to operate at breakeven to marginally profitable levels in fiscal 2007.

So overall, I am pleased with our first-quarter results and the progress we're making towards our corporate-wide and business division goals. This first quarter represents a solid step in unlocking the leverage found in our Design Analysis Solutions business model operation, operating our Manufacturing Solutions division with a product focus and providing shareholder value through increased earnings.

And with that, I would like to turn it over to Chris so he can give a more in-depth review of the financial results for this quarter.

Thank you, Roland. In fiscal 2007, we changed the approach by which we use financial data to make operating decisions. Under this new approach, all costs and operating expenses directly related to our Manufacturing Solutions division are now included in that reporting segment's operating results. All remaining previously unallocated costs and expenses, including the majority of the costs associated with being a public company, are now reflected in the operating results of the Design Analysis Solutions division.

This change was made in an effort to better analyze the results of each business division by the elimination of unallocated costs. For comparability purposes, our segment footnote in Form 10-Q filed earlier today and in today's remarks reallocates the results of Q1 FY '06 in a similar manner. Certain previously unallocated expenses were not fully tracked by division in prior fiscal years. Therefore the basis of allocation applied in previous fiscal periods does include significant estimates and may differ from that employed in the current fiscal year.

Total revenue for the first quarter was $15.3 million, unchanged from the corresponding period of the prior year. Movements in foreign exchange rates had an inconsequential effect on the quarterly revenue when compared to the corresponding period of the prior fiscal year.

For the first quarter, cost of revenue was $3.3 million, down 21% from the corresponding period of the prior year. Operating expenses were $11.3 million, down 4% from the corresponding period of the prior year. These improvements are primarily attributable to savings resulting from the restructurings undertaken in fiscal year 2006, as well as our success in reducing certain product component costs relating to our Manufacturing Solutions division and the implementation of more cost effective designs in some of our key products.

Resulting income from operations for the first quarter was $736,000 compared to a loss of $667,000 for the corresponding period of the prior year. Net income per common share on a diluted basis was $0.14 for the quarter compared to $0.00 for the corresponding period of the prior year. On a non-GAAP basis, which excludes non-cash share-based compensation expense, net income per common share on a diluted basis was $0.18 for the first quarter compared to $0.05 for the corresponding period of the prior year. Approximately 25% of our total product revenue came from sales to 50 new customers added during the quarter.

I will now discuss the results of the operations of these two divisions. Turning to Design Analysis Solutions division, or DAS, DAS revenue was $11.6 million, represented 76% of our total first-quarter revenue. DAS product license revenue was $5 million. $5 million accounted for 62% of total product revenue. DAS product revenue this quarter was down 10% from the previous year primarily a result of turnover and sales personnel in our European region, which led to lower-than-expected sales productivity. Our Q1 revenue was consistent with historical trends, which reflects the negative impact of summer holidays on our sales performance, particularly in Europe.

Gross margin for DAS product revenue was 93% in both the current and prior year. DAS service revenue was $6.6 million for the first quarter, an increase of 14% from the corresponding period of the prior year. The increase was primarily a result of growth across all geographic regions in our installed base arising from software license sales made during the current and previous reporting periods. DAS service gross margin was 85% in this quarter compared to 83% in Q1 fiscal year 2006.

During the quarter, we shipped a total of 130 new seats of DAS products for a total cumulative combined seat count of approximately 8900 seats. With respect to our DAS sales force, we entered the quarter with 38 quota carrying sales reps and we completed the quarter with 43 quota carrying sales reps. Our DAS sales productivity for the full quarter was approximately $309,000 or $1.2 million annualized for effective head compared to $378,000 or $1.5 million in the prior year.

DAS cost of revenue was $1.4 million for the first quarter, unchanged from the corresponding period of the prior year. DAS gross margin for the first quarter was 88%, unchanged from the corresponding period of the prior year. DAS operating expenses of $9.5 million did not increase from the corresponding period of the prior year. Income from operations for the Design Analysis Solutions division was $729,000 compared to $469,000 for the corresponding period of the prior year.

Turning to our Manufacturing Solutions division, or MMS, our MMS division produced first-quarter revenue of $3.7 million, representing 24% of our total Q1 revenue. Of this amount, $3 million came from product sales representing 38% of the Company's overall total product revenue for the quarter. Manufacturing product revenue decreased by 6% year-over-year.

The product revenue was affected by an overall slowdown in the automotive market in North America resulting in a regional decrease of $423,000. This was partially offset by a stronger automotive market in Europe, which resulted in an increase of $134,000 of product revenue relative to same period last year. The year-over-year revenue decline was expected as a result of our restructuring.

With respect to our Manufacturing Solutions division sales force, we entered the quarter with 12 quota carrying sales reps. We completed the quarter with 11 quota carrying sales reps. Sales productivity for the full quarter for the Manufacturing Solutions business was approximately $349,000 or $1.4 million annualized per effective head compared to $338,000 or $1.8 million in the prior year.

Our gross margin in our MMS division increased 19 percentage points to 48% year-over-year. This consists of product gross margin of 45% and services gross margin of 60% for the first quarter of fiscal year 2007 compared to product gross margin of 32% and service gross margin of 16% for the first quarter of fiscal year 2006. The improved gross margin was the result of reductions in cost of products primarily due to our 2006 restructuring plan and reductions in product material costs. The latter being a result of our success at reducing certain product component costs and the implementation of more cost effective designs of some of our key products.

Additionally, reductions in cost of services revenue for our MMS division were primarily a result of our prior year restructuring plans pursuant to which the role of our MMS support personnel changed from that of post sales support and implementation function into a technical sales function. Accordingly, the cost of these personnel is now included as a component of our selling and marketing expenses, which reduced our cost of services revenue when compared to previous periods.

Total operating expenses in our MMS division were $1.8 million, a 22% decrease from the same quarter of the prior year. The decrease was primarily due to our prior year restructuring actions. As a result, income from operations for the Manufacturing Solutions division was $7,000 for the first quarter of fiscal 2007 compared to a loss of $1.1 million for the corresponding period of the prior year. Year-over-year, net currency fluctuations did not have a significant impact on spending for either the DAS or MMS divisions.

Income taxes and net income. Interest income for the three months ended September 30, 2006 was $786,000 versus the corresponding period of the prior year and fiscal 2006 of $562,000. Overall, we maintained a higher percentage of our cash invested and had increased yields over the same period of the previous year.

We recorded the tax benefit of $158,000 on income before tax of $1.5 million resulting in an effective income tax benefit of 10%. The significant reconciling items between the 34% U.S. federal statutory income tax rate and the effective income tax benefit rate of 10% included a benefit of $562,000 related to a change in tax position of one of the Company's foreign subsidiaries and taxes payable in certain foreign jurisdictions at rates lower than that of the U.S.

We currently estimate that our income tax rate in each of the remaining quarters of fiscal 2007 will be approximately 25% and that this will result in an estimated effective income tax rate of approximately 20% for the full fiscal year. This estimated annual rate does not take into account any other discrete items and is subject to change.

We started Q4 with 331 employees and ended Q1 with 330 employees. Of the 330 employees, 252 were in our DAS division and 78 were in our MMS division.

Now looking at the balance sheet and cash flow. Total cash and investments were $60.6 million at the end of the quarter, an increase of $79,000 from the previous quarter. Our operations generated $1.2 million of net cash in the first quarter. Net cash used in financing activities was $945,000. The principal component of which was the purchase of treasury stock.

Under our stock buyback program during the quarter, we repurchased 114,500 shares at an average price of $12.12 per share. This repurchase consumed $1.4 million in the quarter. To date, under the stock buyback program, we have repurchased 310,600 shares at an average price of $12.77 per share at a total cost of approximately $4 million.

During Q1, we incurred depreciation expense of $285,000 and amortization expense of $344,000. Our capital expenditures for fixed assets was $259,000 and we had $52,000 of capitalized software development costs. We have no outstanding long-term debt. DSO for the fourth quarter was 64 days, an increase of four days year-over-year.

I would 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 our earnings press release for a description of those risks and uncertainties.

For the full year 2007, we are reiterating our previous guidance. 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 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 benefit effects. GAAP earnings per diluted share are therefore expected to be between $0.53 and $0.60.

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

Thanks, Chris. So in summary, we are encouraged by what we see in our first fiscal quarter. We are just beginning the work we have set out to do during this fiscal year. 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 the leading provider of optimization solutions for discrete product development and manufacturing industries that work with complex processes.

And with that, I will be happy to take your questions.

(OPERATOR INSTRUCTIONS). At this time, there are no questions.

Okay. There being no further questions, I would like to thank all of you for joining us today. Chris and I look forward to speaking with you at the conclusion of our second quarter to report on our financial and corporate progress towards our stated goal for fiscal 2007. Thank you and goodbye.

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