Autodesk Inc (ADSK) 2007 Q2 法說會逐字稿

At this time I would like to welcome everyone to the Moldflow Corporation's FY '07 Q2 earnings release conference call. (OPERATOR INSTRUCTIONS). I would now like to turn the conference over to Mr. Roland Thomas, Chief Executive Officer.

Thank you, [Aileen]. Welcome, and thank you for joining the Moldflow Corporation conference call for the reporting of results for the second quarter of our 2007 fiscal year. Chris and I will make a series of prepared remarks and then we will take questions. Before we begin with the prepared 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. 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 second fiscal quarter ended December 31, 2006. For more complete details on our financial results, please refer to our quarterly report on Form 10-Q for the quarter ended December 31, 2006, filed earlier today, and our press release issued 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 investors section of our Web site, at www.Moldflow.com.

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

Thanks, Chris. During this call we will report the results of the second 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.

During the second quarter we again produced results that validate our primary goal for fiscal 2007, which is to bring out the earnings leverage inherent in our business model. We saw sequential and year-over-year increases in net income, earnings per share, product revenue and total revenue. We benefited from our geographic expansion, which was to put more sales representatives and resellers in place in both business divisions in regions around the world.

Our pace of innovation remained steady with a significant product release in our Design Analysis division, and our U.S.-based material testing lab receiving accreditation from the American Association for Laboratory Accreditation. Overall we made good progress towards our stated goals for fiscal 2007 during the second quarter.

I would now like to talk in more detail about each division's progress towards their fiscal 2007 goals, beginning with our Design Analysis Solutions division.

As we have stated, a major focus of our fiscal 2007 business model is to unlock the value inherent in the Design Analysis Solutions division. During the second quarter, total revenue generated by this division increased on both a sequential and year-over-year basis. This revenue increase, coupled with our focus on controlling costs, represents another step towards both our fiscal 2007 business goals and our longer-term business model, which will be driven by the performance of the Design Analysis Solutions division.

We were further encouraged by the year-over-year increases in both product and service revenue in the Design Analysis Solutions division. Over the last 12 months we have made significant investment in sales headcount, which are now becoming effective. These investments, made primarily in Asia-Pacific and, to a lesser extent, the Americas, should position us well to maximize the selling opportunities, as do our new product introductions scheduled for the second half of the year.

In the Korea/Taiwan/China region, we saw continued strong sales performances in the electronics and automotive markets. In fact, the second quarter results from this region represent the strongest sales ever in a quarter for this region.

In North America, once again we had a robust quarter. We also began to see a rebound in certain European geographies; however, Europe as a whole remains soft, and we are closely monitoring its progress.

As I noted earlier, the pace of innovation in the Design Analysis Solutions division continued with the commercial release of Version 6.1 of our Moldflow Plastics Insight product. As I mentioned last quarter, this release features many new capabilities in functionality-targeted specialty processes such as glass replacement and plastic lens applications, as well as enhanced interfaces with world-leading structural CAE products.

If you look at the history of innovation Moldflow has brought to the marketplace, it is clear that we are the clear market driver when it comes to the creation of foundation plastic simulation technology. One example is our Dual Domain technology, which is a patented technical solving method that powers the speed and accuracy advancements of our Moldflow Plastics Advisers and Moldflow Plastics Insight products.

However, our market leadership extends beyond foundation technologies, as we also lead the way with new capabilities, a strategy that is central to our product development plans. New capabilities that we've introduced in the past as new modules include add-on modules to our Moldflow Plastics Adviser product, and specialty process enhancements that we created for our Moldflow Plastics Insight product. These capabilities have not only produced incremental revenue for the Company, but also enable our customers to keep up with the ever-increasing complexity of injection molded parts and mold designs. As we -- as well, we have reduced time to -- we help them reduce time to market.

Our response to these complexities, as well as specific end-user industry needs, helps facilitate the inclusion of analysis as a part of a company's design through manufacture cycle. Our goal is to make analysis a critical step in the design process for more and more companies, which we are accomplishing in the marketplace by targeting the specific needs -- the needs of specific industries with targeted technical capabilities. This product development strategy is evidenced by our inclusion in MPI 6.1 of a module designed to solve the problems faced by lens replacement manufacturers.

So, once again, we are pleased with this division's progress during the quarter. We continued to solidify our market leadership position through product introductions with enhanced and targeted capabilities benefited from products and total Design Analysis Solutions revenue growth, and saw increased leverage coming out of this division.

Now I'd like to turn to the Manufacturing Solutions division second-quarter results. As we have stated previously, our goal for this division is to operate at or around breakeven this financial year on flat to lower revenue. During the second quarter we saw a typical mix of products sold in the Americas and the European regions, which included a higher proportion of sales of traditional shop floor technologies.

The weakness we have experienced in some of our end-user industries that our Manufacturing Solutions division serve tends to drive manufacturers to make investments in process optimization products, such as our traditional shop floor products. This is generally because they have more time between manufacturing projects, which allows them to identify and implement process optimization systems that enable them to become more efficient in their processes.

Sales of our hot runner process controller products, particularly in North America, were lower than in past quarters. We believe this is due to weakness in the automotive and consumer products end-user industries. This weakness led to delayed purchases and an absence of the end-of-year budget spending, which we have seen in the manufacturing end-user markets in the past.

Looking historically at the Manufacturing Solutions division business, we have seen second-quarter product revenue decrease sequentially over the past two fiscal years, and this second quarter was no different. We did experience continued improvement in the gross profit margins in this business -- that this business produces, with slightly negative overall profit during the quarter.

Overall, the second-quarter results for our Manufacturing Solutions division are generally as expected. The gross margin improvement continued to be encouraging, as well as the revitalized interest in our traditional shop floor product offerings. And we do anticipate an increased level of controller sales for the second half of our fiscal year. We continue to believe this division will operate at breakeven to marginally profitable levels over the second half of fiscal 2007.

Taken as a whole, I am encouraged by the results we're reporting today. We believe that revenue will follow a seasonal pattern for the remainder of the year, and we will continue to make progress towards our target operating model. Each quarter we are building upon the success of the previous quarter, as we work to unlock leverage found in our Design Analysis Solutions division and operate our Manufacturing Solutions division with a focus on controlled costs, targeted products and services and longer-term profitability.

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

Thank you, Roland. Total revenue for the second quarter was $17.7 million, a 757,000, or 4%, increase over the corresponding period of the prior year -- the result of an increase in revenue from our Design Analysis Solutions division, and the impact of favorable foreign exchange movements, both of which were partially offset by a reduction in revenue from our Manufacturing Solutions division.

Total product revenue was 10.4 million, a 335,000, or 3%, increase over the corresponding period of the prior year. Approximately 33% of our total product revenue came from sales to 67 new customers added during the quarter.

For the second quarter, cost of revenue was 3.5 million, down 16% from the corresponding period of the prior year. This improvement was primarily attributable to savings resulting from the restructuring undertaken in fiscal -- fiscal year 2006, as well as our success in reducing certain product component costs relating to our Manufacturing Solutions products, and the implementation of more cost-effective designs in some of our key products.

Operating expenses were $12.6 million, down 3% from the corresponding period of the prior year. The decrease in spending was primarily a result of our prior-year restructuring actions, which gave rise to a $1.4 million charge in the second quarter of fiscal 2006, which had no equivalent in the current fiscal year.

Resulting income from operations for the second quarter was $1.6 million, compared to a loss of $245,000 for the corresponding period of the prior year.

Net income per common share on a diluted basis was $0.15 for the quarter, compared to a loss of $0.01 for the corresponding period of the prior year. On a non-GAAP basis, which excludes non-cash share-based compensation expense, net income per diluted share was $0.19 for the second quarter, compared to $0.15 for the corresponding period of the prior year.

I will now discuss the results of operations for our two divisions. First, I remind you that beginning in fiscal 2007, we changed the approach by which we use financial data to make operating decisions. Under this new approach, costs and operating expenses directly related to Manufacturing Solutions 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.

For comparability purposes, the segment footnote in our Form 10-Q filed earlier today and today's remarks reflect the results of Q2 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.

Turning to our Design Analysis Solutions division, Design Analysis Solutions revenue of $14 million represented 79% of our total second-quarter revenue. Product license revenue was $7.3 million and accounted for 70% of our total product revenue. In the second quarter, product revenue was up 11% from the previous year, 5% of which was due to foreign exchange movements. The remainder of the increase was primarily a result of strong sales performances from our Asia, Australia and Americas regions.

Gross margin for the Design Analysis Solutions product revenue were 95% in both the current and prior year. Design Analysis Solutions services revenue was $6.7 million for the second quarter, an increase of 9% from the corresponding period of the prior year, 4% of which was due to foreign exchange movements. The remainder of the increase was primarily due to increased revenue from maintenance and support contracts, resulting from a growth in our installed customer base arising from software license sales made during the current and previous reporting periods. Design Analysis Solutions services gross margin was 82% in this quarter, compared to 83% in Q2 FY '06.

During the quarter we shipped a total of 147 new seats of product for a total cumulative combined seat count of approximately 9100 seats. With respect to the sales force, we entered the quarter with 43 quota-carrying sales reps and we completed the quarter with 47 quota-carrying sales reps.

Design Analysis cost of revenue was 1.6 million for the second quarter, an increase of 17% from the corresponding period of the prior year. The year-over-year increase was primarily a result of planned additions to our service group and compensation increases to existing personnel. Total Design Analysis gross margin for the second quarter was 89%, unchanged from the corresponding period of the prior year.

Design Analysis Solutions operating expenses were $10.5 million in the second quarter of 2007, compared to 10.4 million in the same period of the prior year, which included a $1.3 million restructuring charge. Operational spending increased in this division as a result of investments made in sales personnel in Asia and America, and the impact of capitalizing less research and development costs in fiscal 2007 than in the same period of the prior year. General and administrative expenses related to this division were flat year-over-year. As a result, income from operations for the Design Analysis Solutions division was $2 million, compared to $942,000 for the corresponding period of the prior year.

Turning to our Manufacturing Solutions division, second-quarter revenue of $3.6 million for the Manufacturing Solutions division represented 21% of our total Q2 revenue. Of this amount, 3.1 million came from product sales, representing 30% of the Company's overall total product revenue for the quarter. As we expected, our fiscal 2006 restructuring actions resulted in a less-than-mature selling model, which contributed to a decrease in revenue when compared to the prior year.

With respect to the sales force, we entered the quarter with 11 quota-carrying sales reps and completed the quarter with the same number.

The gross margin in our Manufacturing Solutions division increased 15 percentage points year-over-year to 48%. This consists of product gross margin of 49% and services gross margin of 42% for the second quarter of fiscal year 2007, compared to product gross margin of 40% and services gross margin of 1% for the second quarter of fiscal year 2006.

The improved gross margin was a result of reductions in the cost of product, primarily due to our 2006 restructurings, and reductions in product material costs, the latter being the result of our success in reducing certain product component costs and the implementation of more cost-effective designs for some of our key products. Additionally, reductions in our cost of services revenue for this division were also primarily a result of our prior-period restructuring plans, pursuant to which the role of our Manufacturing Solutions support personnel changed from that of a post-sales support and implementation function into a technical sales function. Accordingly, the costs of these personnel are now included as a component of our selling and marketing expenses, which reduced our cost of services revenue when compared to the previous periods.

Total operating expenses in this division were $2.1 million, a 19% decrease from the same quarter of the prior year. The decrease was primarily due to our prior-year restructuring actions. As a result, loss from operations for the Manufacturing Solutions division was $343,000 for the second quarter of fiscal 2007, compared to a loss of $1.2 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 Design Analysis or Manufacturing Solutions divisions.

Turning to interest income, income taxes and net income. Interest income for the three months ended December 31, 2006 was $784,000, versus $631,000 for the corresponding period of the prior fiscal year. Overall, we maintained a higher percentage of our cash invested and at increased yields over the same period of the previous year.

We recorded a tax provision of $643,000 on income before tax of $2.4 million, resulting in an effective income tax rate of 27%. The most significant difference between the 34% U.S. federal statutory income tax rate and the effective income tax rate of 27% is a result of taxes payable in certain foreign jurisdictions at rates lower than the U.S. We currently estimate that our income tax rate in each of the remaining quarters for 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 tax does not take into account any discrete items during the remaining quarters and is subject to change.

We started Q2 with 330 employees and ended Q2 with 334. Of the 334 employees, 260 were in the Design Analysis division and 74 were in our Manufacturing division.

Now looking at the balance sheet and cash flows. Total cash and investments were $60.7 million at the end of the quarter. Traditionally, our operations consume cash in our second fiscal quarter, a result of sequential revenue increases and the timing of when a majority of our European and Japanese customers renew their maintenance contracts. In Q2 fiscal '07, growth of our net income outweighed these seasonal impacts, as operations generated $147,000 of cash.

Net cash used in financing activities was $35,000, the principal component of which was the purchase of treasury stock. Under our stock buyback program, during the quarter, we repurchased 40,000 shares at a cost of $13 per share. This repurchase consumed $520,000 in the quarter. To date, under the 2006 stock buyback program, we have repurchased 350,600 shares at an average cost of $12.80 per share, at a total cost of approximately $4.5 million.

During Q2 we incurred depreciation expense of $313,000 and amortization expenses of $324,000. Our capital expenditures for fixed assets was $396,000, and we had $31,000 of capitalized software development costs.

We have no outstanding long-term debt. DSO for the second quarter was 68 days, an increase of five 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 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 year, 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 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 believe the second-quarter results continue to validate our fiscal 2007 business model and bring us closer to our target operating ranges. We believe that our continued focus on driving bottom-line growth, controlling costs, focusing on our market strengths and attending to the individual needs of our business divisions will continue to yield solid results and unlocked leverage inherent in our business to provide shareholder value. And with that, I'd be happy to take any questions.

(OPERATOR INSTRUCTIONS). Dennis Wassung, Canaccord Adams.

A few questions. First, on the manufacturing side of the business, you made a lot of progress on the profitability, given the revenue levels there. Gross margin was up significantly. How do you approach that business at this point? I know you've refocused your energy there, kind of de-emphasized the revenue growth side of it, and tried to make it more profitable. How do you think about that business in terms of that process, and when would you expect to see renewed revenue growth there?

I think you're correct. We really have set up our Full year '07 plan to be one where we create and implement the new operating model, both from a cost structure and from a selling structure. And the reason why we started this year saying we would expect to make the business effectively neutral to maybe slightly positive on the year was not so much risk on the cost side, but just making sure that we had the settings okay on the sales side, because we did change the model.

So, as we then look forward, and the selling organization under its structure becomes more mature, more experienced at operating the way that we want them to operate, then I expect that this is an area of the business that I believe we should expect to see return to revenue growth. I think we're looking for the milestones of that. And as a part of -- as a part of our business planning processes. But I think that we need to watch (indiscernible) something quite closely quarter by quarter. It's not something that I think is years out in the future. I think we need to watch it for signs that the -- that those strategies are taking hold in all the different regions.

That said, I think I wouldn't want to correct the impression that the sales channel is entirely new. A lot of the sales channel is in fact still in place, and that's sort of what the underlying baseline for that business comes from. But we did transition a number of people from technical to selling roles, and that's essentially like bringing on a new sales force. So, there is -- there is risk associated with that. But I still think the opportunity that underlines that growth exists. I think that the Altanium business, which is much -- much more strongly represented in the market here in the United States, has a market in Europe, which can -- which is of similar size to the U.S. market, but one which has to be penetrated competitively; it's not a greenfield market. And the market in the Asia-Pacific region is not the size of either of the U.S. or Europe right now for that product. But it's growing and becoming more interesting. So, I think that the opportunity is there, and we'll just keep looking sort of quarter for quarter for the signs that we're starting to see it.

Great. Second question. When you look at the Design Analysis side of the business, obviously, you guys are refocused in driving the Company's margins and target models from that business. Do you feel like you've got that business refocused now, and what do you look for for milestones in that business, in terms of new products or are there new modules, new releases coming of the core products? And what do you look for in terms of expansion in that product line?

Up to date, we've addressed some of the important aspects that drive the business, and we've made our investments in our channel. And we refocused our product efforts to get a more continuous feed of upgrades and enhancements and modules into the marketplace. And the release of our MPI 6.1 in Q2 was one of those steps.

As we look forward, we have said that we will bring out MPA modules over the second half of '07. We haven't announced a date or content for those yet. However, we have said that we would bring new modules for MPA out over that timeframe. And whether going beyond that we are dealing with new capabilities, new modules, or supporting the retention and the interest and the needs of our existing installed base, I think that our product introduction strategy is certainly a key part of the underlying position that the design business holds. And so, we'll see a stream of products that come out -- without giving the exact dates and content -- more consistent with what we have done historically than what you've seen over the sort of '05/'06 period.

Last question from me. You guys have made a lot of changes operationally here, and you have taken some expenses out of the model. Where are we in that progression? Are the cost savings built into the model at this point, or do you expect to see continued operating expense reductions or cost savings here as we look toward the next couple of quarters?

The majority of the cost savings that were made through -- all of the cost savings that were made through structural changes are in place and reflected in our run rate. I think the only thing that may change is that we are constantly trying to optimize the gross margin of our products. And as we do so, we work on the engineering of them, and we get a varying proportion of the high-gross margin products in our sales, then that has the ability to create some small changes. But I think the majority of all of those efforts have been enacted, and most of it will now play out for the rest of the year, [as we've seen].

You don't see really any major change in those operating expense line items in either direction over the next couple of quarters?

There's -- they move around from quarter-to-quarter a little bit, but there's nothing dramatic that's going to happen in any of those line items.

(OPERATOR INSTRUCTIONS). At this time there are no further questions. Are there any closing remarks?

There being no further questions, I would like to thank all of you for joining us today. We look forward to speaking with all of you to discuss our third-quarter results and to report on our progress towards our corporate and business division goals for fiscal 2007. Thanks and good bye.

Ladies and gentlemen, this concludes today's Moldflow Corporation FY '07 Q2 earnings release conference call. You may now disconnect.