Autodesk Inc (ADSK) 2007 Q3 法說會逐字稿

Good morning. At this time, I would like to welcome everyone to the third-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 session. (OPERATOR INSTRUCTIONS).

I would now like to turn the call over to Roland Thomas, CEO, and Christopher Gorgone, CFO. You may begin.

Welcome and thank you for joining the Moldflow Corporation conference call to report the results of the third quarter of our 2007 fiscal year and give you more insight into our announcement of earlier today. Chris and I will make a series of prepared remarks, and then we'll take questions.

Before we begin with the prepared 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 involves 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 our Form 10-Q filed earlier today, and the Company's annual report on Form 10-K for the year ended June 30, 2006, as well as our subsequent filings with the SEC.

Our comments today will summarize the financial results of our third fiscal quarter, ended March 31, 2007. For more complete details on our financial results, please refer to our quarterly report on Form 10-Q for the quarter ended March 31, 2007 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 investor section of our website at www.moldflow.com.

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

Thanks, Chris. During this call, we will discuss the results of the third quarter of our 2007 fiscal year, which should be considered in conjunction with our earnings announcement and filing on Form 10-Q released earlier today.

The third quarter of fiscal 2007 marks a significant juncture in Moldflow's corporate development. As you will have seen in our press release this morning, we have announced our intention to hold our Manufacturing Solutions division for sale. Therefore, our ongoing strategies, and consequently our financial statements, will reflect the continuing operations of our Design Analysis Solutions software business. Our Design Analysis Solutions business division is a strong, market-leading, IP-rich core business that is showing year-over-year revenue growth in operating leverage as Moldflow moves ahead, focused on the CAE software business, we will pursue our penetration strategy and continue the level of innovation that has made us the undisputed leader in CAE software solutions for the plastics industry for almost 30 years.

Progressing forward, our corporate strategy for this business remains unchanged. We will continue the expansion of our geographic reach to include both traditional and emerging markets. This strategy provides growth through extending the use of our products within the existing customer base, as well as through introducing the technology to new companies. We will maintain our focus on the creation and launch of the next generation of software products for part and mold design analysis, and will manage this business to unlock the leverage inherent in our model, which has already been demonstrated.

As you know, during the year, we have been managing our Manufacturing Solutions business to achieve [neutral] operating results. Within the parameters of the plan, this has generally been the case, with Manufacturing Solutions business producing a small operating loss through the first three quarters of the year. Given the stabilization of the business around the revised operating model, as you would expect, we reviewed the future contribution of this business. In doing so, we have determined that the best path to renewed growth for that business division, as well as the Corporation overall, is to find an owner with the existing infrastructure needed to promote our market-leading Altanium and other shop-floor products in the geographies we serve around the world.

We feel strongly that this plan will provide a good ongoing platform for these hardware-based products and provide stability going forward for our Manufacturing Solutions customers. We are committed to supporting these customers in the short term and over the long term as we seek to sell this division. We are not planning on any restructuring activities in this business division at this time, and it will continue to be ably led by Fred Humbert, supported by our team of sales and manufacturing professionals.

Moving on to our results for the third quarter, for comparability purposes, I'm going to comment on our third-quarter results as we would have reported them if our operations were combined. Immediately following, Chris will give your own results of continuing Design Analysis Solutions operations.

During the third quarter, when looking at both business divisions as combined operations, non-GAAP total revenue was $18 million, up 11% from the corresponding quarter of fiscal 2006. Non-GAAP net income was $2.9 million or $0.24 per diluted share, yielding $0.61 for the year to date, up from $0.35 in the same period of the prior year.

I am now going to turn it over to Chris to give you our results of continuing Design Analysis Solutions operations. I will then give you more insight into our continuing operations and the prospects for the future of our business as we emerge as a focused, market-leading CAE software and services company.

Chris?

Thank you, Roland. As you have just heard from Roland, we have announced our intentions to sell our Manufacturing Solutions business division, and are presenting the division as a discontinued operation. For that reason, my comments today will include the results of our continuing operations, which are derived from our Design Analysis Solutions business division. But I will begin with a brief explanation of our goodwill impairment charge and the loss incurred in our discontinued operations.

Historically, Q3 is the quarter in which the Company conducts its annual goodwill impairment tests under SFAS 142, Goodwill and Other Intangible Assets. Based upon our commitment to divest the MS division, we tested the recoverability of the carrying value of this division. By reviewing non-binding indications of interest the third parties had expressed for the MS division, we determined that we had an impairment of goodwill related to the Manufacturing Solutions business of approximately $10.2 million. The resulting non-cash impairment charge was recorded in our net loss from discontinued operations and our unaudited condensed consolidated statement of operations.

Our net loss from discontinued operations net of income taxes of $10.7 million is primarily due to this non-cash impairment charge. On a GAAP basis, this resulted in a loss per share for discontinued operations of $0.91 for the three months ended March 31, 2007, versus a loss of $0.04 per share for the three months ended March 31, 2006. For the nine months ended March 31, 2007 and March 31, 2006, again on a GAAP basis, a loss of $0.94 and $0.21 per share, respectively, for discontinued operations.

Now, I would like to turn to the results of our continuing Design Analysis Solutions operation. Please note that all results I will give you from this (technical difficulty) forward are solely from our continuing operations. Total revenue for the third quarter was $14.7 million, a $3 million or 26% increase over the corresponding period of the prior year and up 5% sequentially. Foreign exchange movements favorably impacted revenue growth by $456,000. For the third quarter, cost of revenue was $1.5 million, flat from the corresponding period of the prior year.

Operating expenses were $10.5 million, up 24% from the corresponding period of the prior year. The increase in spending was primarily a result of higher selling costs due to an increased number of sales personnel, as well as increases in general and administrative personnel and facility-related costs, higher audit and other professional fees and costs incurred with the implementation of our ERP.

Resulting income from operations for the third quarter was $2.7 million, compared to $1.6 million for the corresponding period of the prior year, a 65% year-over-year increase. Net income per common share from operations on a GAAP diluted basis was $0.24 for the quarter, compared to net income of $0.17 per diluted share for the corresponding period of the prior year.

Product revenue increased $2.4 million to $8 million for a 42% increase when compared to the same period of the prior fiscal year, 4% of which was due to foreign exchange movements. The increase was primarily due to strong sales results in Japan, Korea and China, driven primarily by significant follow-on orders from large customers in the electronics and automotive sectors. In addition, we experienced overall increased sales into European automotive and electronic industries and the US medical supplies industry. The increases were primarily the result of the introduction into the marketplace of newer versions of our existing products and, to a lesser extent, the continued economic recoveries in certain of our key markets. Gross margins for the product revenue increased by 2 points to 95% in the current quarter, as compared to 93% in the same quarter of the prior year.

Service revenue increased $661,000 to $6.7 million or an 11% increase when compared to the same period of the prior fiscal year, 4% of which was due to currency. This increase came primarily from the sale of maintenance and support contracts, and is a reflection of long-term growth in the installed customer base arising from software license sales made during the current and previous reporting periods. Service gross margin increased 2 points to 83% in the current quarter, as compared with 81% in the same quarter of the prior year. Total gross margin for the third quarter was 90%, which is an increase of 3 points as compared to last year and up 1% sequentially.

Now, turning to interest income, income taxes and net income. Interest income for the three months ended March 31, 2007 was $788,000 versus $663,000 for the corresponding period of the prior fiscal year. 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 provision of $638,000 on income before tax of $3.5 million, resulting in an effective income tax rate of 18%, reflecting the effects of tax payable in certain foreign jurisdictions at rates lower than the US.

We currently estimate that our income tax rate in the remaining quarter of fiscal 2007 will be between 26% and 28%, and that this will result in an estimated effective income tax rate of between 17% and 19% for the full fiscal year. This estimated annual rate does not take into account any other discrete items.

We started Q3 with 260 employees in our continuing operations and ended with 258.

Now, looking at the balance sheet and cash flows, total cash and investments were $65.2 million at the end of the quarter, an increase of $4.5 million from the previous quarter. Operations generated $8.3 million of net cash in the first nine months of fiscal year 2007. Net cash used in financing activities for the first nine months of fiscal year 2007 was $2.4 million, the principal component of which was the purchase of treasury stock.

Under our stock buyback program during the quarter, we repurchased 249,400 shares at an average price of $14.16 per share. This repurchase consumed $3.5 million of cash in the quarter. Fiscal year to date, under the 2006 stock buyback program, we have repurchased 403,900 shares at an average price of $13.47 per share, at a total cost of approximately $5.4 million. In total, under the 2006 stock buyback program, we have repurchased 600,000 shares of our common stock, completing the authorized buyback amount under that program.

During Q3, we incurred depreciation expense of $273,000 and amortization expenses of $198,000. Our capital expenditures for fixed assets were $295,000, and we had $257,000 of capitalized software development costs. We have no outstanding long-term debt.

DSOs for the fourth quarter were 78 days.

With that, I'm going to turn this back over to Roland to give you more insight into our continuing operations results.

Thanks, Chris. I would now like to talk in more detail about the results of our continuing operations, which I remind you now include only our Design Analysis Solutions business division.

We began the year making investments in products and channels aimed at driving towards the growth levels that we feel are indicative of this business. For the third quarter, we saw total revenue growth generated by this division increase to a value of 13% for the full year to date. We were pleased to see this improved year-over-year increase in product revenue again this quarter.

The investments we have made and continue to make in sales headcount, specifically in Asia, have shown tangible progress. In fact, Asia generated 48% of the revenue coming from this business division during the third quarter.

In the Korea, Taiwan and China region, the strength of sales into the electronics and automotive markets continued, resulting in this region's largest sales quarter ever. We were also encouraged to see a strong result in Japan. Q3 is typically a good quarter in Japan, with the majority of their customers renewing their maintenance and support contracts during the period, but the region also saw increased product revenue growth contributing to the positive results.

In North America, our sales team produced one of that region's best results ever, driven primarily by sales into medical device companies, followed by electronics and, to a lesser extent, automotive manufacturing. In Europe, we saw several of our major accounts supplement their existing investment in our software solutions to include additional seats and add-on modules. Companywide, we saw a significant volume of high-value orders from both companies making add-on investments in our products, as well as new customers who clearly thought that our products' value proposition could quickly positively impact their bottom line.

In fact, during the quarter, we saw large orders from large and small manufacturers alike, in a multitude of industries. These companies include Daikyo, OMRON, Funai Electric, [Koabi Precision], [Daiwa Kathi], [Mowfilter], all out of Japan; [Igadishi] out of India; Zimmer Medical from North America; V-S Industries, Byd Company and [Issan Precision] from our Korea/Taiwan/China sales team.

We also took further steps during the quarter to extend the breadth of our Design Analysis Solutions products to the ever-increasing midmarket of potential users, with our March release of Version 8 of our Moldflow Plastics Advisers product. This major release delivers new technologies and key enhancements to help our customers analyze a broader range of parts with 3D technologies and improve their productivity through the use of our redesigned user interface.

While feature-packed, certainly one of the most exciting enhancements in MPA 8 is the new true 3D analysis. With plastics part geometry becoming increasingly more complex, the 3D technology in MPA ensures that our customers at all levels will be able to predict and avoid manufacturing defects and perform cost optimizations by increasing the range of models that can be accurately analyzed by MPA. Also in April, we released Version 6.1 of our Moldflow Plastics Insight product in the Chinese language to bring the benefits of many new capabilities and functionalities directly into this emerging and important market.

Throughout each quarter of fiscal 2007, we have been building upon the success of the previous quarter in this core business. As Moldflow emerges focused on the market-leading Design Analysis Solutions business, we're excited about the future. We intend to pursue growth opportunities in new geographic markets, with enhanced product offerings that will help us extend our industry-leading position, a position we have held for the 29 years we have delivered computer-aided engineering software to the plastics injection molding industry.

Now, I'm going to turn back over to Chris, who will give you a view of our outlook for the remainder of fiscal 2007.

Thanks, Roland. I would now like to give you our outlook, and provide you with a view of our business product for the future. 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. Again, I note you should refer to our SEC filings and to our earnings press release for a description of those risks and uncertainties.

In connection with our announcements today, we are adjusting our full-year fiscal 2007 guidance to reflect the results of continuing Design Analysis Solutions operations. We now expect revenue from continuing operations for fiscal 2007 to be between $54.9 million and $55.3 million, which represents year-over-year growth of 13% to 14% when compared to fiscal 2006. We expect non-GAAP net income per diluted share from continuing operations of approximately $0.87 to $0.90. Non-GAAP net income per diluted share from continuing operations excludes charges for share-based compensation expenses, which are expected to be approximately $1.6 million. We expect GAAP net income per diluted share from continuing operations for fiscal 2007 to be between $0.72 and $0.75 per share.

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

Thanks, Chris. Before turning to questions, I would like to take a moment to review the goals we set out for our corporation and to discuss our longer-term business model.

At the end of last fiscal year, we told you that we would focused on four things. Firstly, focus on a geographic expansion that takes into account the West-to-East trend being seen in Europe, while making continued investments in the emerging markets in South America in Asia. Secondly, continue to leverage the global trend towards manufacturing optimizations, with the introduction of new technologies and services to enhance our market-leading position. Thirdly, operate our Manufacturing Solutions business at or around breakeven on flat to lower revenue, while carefully monitoring spending. Finally, works towards improved scale and margin development to bring us closer to our target operating model. When you look at our results to date, we have been delivering on all of these goals so far.

As I stated earlier, we believe the best path to renewed growth for our Manufacturing Solutions division is to find an owner with the infrastructure to promote and support this division's hardware-based products, which should provide stability going forward for our Manufacturing Solutions customers. We believe our Design Analysis Solutions business, which is currently producing revenue growth percentages in the low teens and operating margins in the upper teens, will continue to benefit from the leverage in the business model. We are building a plan for the future of this business that will result in a longer-term target operating margin in the high 20's, which we will achieve through a combination of organic growth and acquisitions. We're very excited about the future of this business, and believe that we have taken the steps necessary to ensure a healthy future for the Corporation as we move ahead.

With that, I will be happy to take any questions.

(OPERATOR INSTRUCTIONS). Dennis Wassung, Canaccord Adams.

Congrats, guys. First question, just following on your commentary at the end there, Roland, about operating margin targets and how you see the business going forward, you mentioned you are currently at low teens revenue growth in the Design Analysis segment with high teens operating margin. You mentioned high 20's operating margin target. Can you put any timeframes on those, and where you might expect to see the business in the fiscal 2008 timeframe?

It's not so much a timeframe issue as a revenue issue. I think we've laid out that our expectations long-term is that the Design business will grow in that sort of 10% to 15% revenue growth range. We haven't put 2008 guidance out, but that's the sort of indications for the long-term model.

The leverage points, the key leverage points that we've got in the business are clearly our G&A line, as we absorb a public company infrastructure on a 50 plus revenue base. So the other point of leverage -- but to a much lesser extent now, because I think we've been working hard on that over the last couple of years -- is on the sales and marketing line.

So primarily, it comes from G&A leverage. But it just scales as the business grows, and if we can bring together some acquisition growth with the organic growth, it will come more quickly. Otherwise, you see the scale ticking gradually on the path towards about a $100 million revenue range.

So you're expecting the high 20's number to be more along the lines of $100 million revenue rate?

Well, I think it just continues to improve as you move along. But I think that's where the current modeling would indicate it. It would depend on the factors in between. Obviously, if you acquire businesses in the meantime, you may have to go through transitional changes with [that] business. There are a number of factors that could influence the actual state of that and the revenue run rate of that. But that's about where I think it comes in.

When you look at the Design Analysis business you have today, obviously, by refocusing the Company on solely in that area, you talked about some of the new versions of your core products that you've put out there. How do you look at the business as you try to either broaden out that product line or, I guess, drive it deeper, be it current things in development or expansion opportunities that you see in that business today? Or is it really sort of an M&A opportunity to expand it beyond where you are today?

Well, the organic numbers that I was talking about really relate to the market that we're attacking now, plus the immediate periphery of that market as you expand into it. So I think we have considerable opportunity to continue to get more [states] of the existing product line into two areas. One is as our existing customers broaden the use of their technology to cover a wider range of their products, as they focus more on optimizing their products rather than avoiding manufacturing problems, it increases the demand for seat count. In a similar way, as companies that haven't really considered themselves as focusing on the plastics industry, even though they produce the components with a large amount of plastics and then, come to the realization that they need to be better equipped to deal with their manufacturing designs we introduce into our new customers, into the fold of primarily the existing value proposition, of course, pricing and packaging, and things will change. But things around the current value proposition, I think that the area where we see a lot of interest, and we're certainly focusing a lot of our attention -- whether it be from development or partnership or M&A, to be honest -- is the interactions between the different types of optimization technologies which are out there and the need for our customer base -- or not just our customer base, but any people in the product development food chain -- to look at all aspects of performance optimization, whether it be driven from manufacturing, as we do, or through analysis of the operating environment or performance considerations.

These things all interrelate. You know, what is the environment for one can drive the performance of another. So we see quite a lot of activity in allowing these different technologies -- such as our products with structural analysis, to use a specific example -- driving both sides of the equation. We think it will help drive the structural side, as well as drive the Moldflow side of that. So I think that we'll see that kind of phenomena becoming more and more important in the future, and that will help drive our overall penetration.

Last thing, on the product side. Are there any specific milestones we should be looking for over the next couple of quarters, in terms of new releases or new major developments on that side?

Well, we have a product roadmap that delivers upgrades to or additions to our MPA and our MPI products over the next two years. We maintain a roadmap to do that. I think, when we look backwards, we would have seen that over 2006 we didn't do that. Part of what we have been able to achieve this year has been getting back onto a more regular introduction of modules and upgrades of technology into the marketplace.

So I'm not really going to announce a particular product introduction at a particular time. But I think you should expect to see a constant flow of products at a steady rate, more like what we have been doing in 2007, as opposed to what we did in 2006.

On the sale of the Manufacturing business, are you just starting that process at this point? Do you have potential buyers interested at this point? How would you look at potential timing of something like this? I know it's kind of uncertain, but any insight you can give us on that?

Yes. We are running a process, and we look at -- there are obviously a range of outcomes that can result from that process. Our goal is to progress in a timely manner. I can't really give you a forecast on timing, because these things are never entirely certain. But it's our intent to move as quickly as is practical without imperiling anything, so that both businesses can get on with their respective futures.

But we're not starting from scratch. As Chris indicated, we've been looking to see what might be available, and so we will pursue those opportunities as quickly as is practical, as I said, without imperiling either business.

(OPERATOR INSTRUCTIONS). [Michael Felice], Private Investor.

A couple of questions. Number one, the Company appears to have a bright future; at least, you have been indicating as such. But there has been a consistent pattern of insider selling of the stock over the most recent period, and at prices lower than the stock is today. Some investors often focus on the actions of management as an expression of confidence in the Company's future or a lack of expression of confidence. I'm wondering -- there seems to be some disconnect here between the insider selling and the relatively optimistic situation of the Company going forward. I wondered if you might be able to comment on that, and then I have another question.

Okay, that's fine. No, what you're just seeing is the operation of 10b5-1 plans, primarily aimed around options exercising. We have share-based incentive plans within the Company, and some of those options are coming up for expiry in the not-too-distant future. So in order to create an orderly environment around the exercise -- and, obviously, some sales are related to taxes and the like -- we set up 10b5-1 plans to, in fact, completely separate any thought that the selling and the operations were related. So what you're seeing is the result of those plans.

The next question pertains to your cash situation, which has been relatively healthy. I assume that once your sale is realized, there may be possibly more cash or stock, perhaps. In view of the Company's price improvement, is the stock repurchase program still ongoing, or is that being suspended? Or do you have any long-range plans in terms of stock repurchase, or any other particular focus targets for your cash accumulation?

To give you the couple of answers, we'll answer in a couple of parts. We essentially completed our existing approval under the stock repurchase plan in Q3, and so that particular program concluded. The intent of that program was to provide long-term dilution protection, was the primary focus of it. So we would consider what that means for us going forward. Obviously, in the period while we're considering the transaction of the MMS business, we wouldn't be actively involved in the market, and we would review that situation when that concluded.

Looking long-term, our primary use of the cash is for M&A opportunities. We think that our view of the CAE market is that we can add significant value to our customers and shareholders by offering a broader range of solutions. More and more, as I was saying to Dennis, we need to allow the customer to focus on their core products and design skills, to reduce the burden of being analysis gurus over a broader range of solutions. A lot of value that comes from that comes from the information which flows from one to another, as I was talking about earlier. So we have seen the opportunities for M&A in that area.

Sim Wooten, Investment Counselors.

First, I want to congratulate you all for the decision that you made. I think it took a lot of, obviously, foresight and thought, and I congratulate you on doing that.

On the tax rate, Chris, you indicated the tax rate was going to go up for the fourth quarter of this year. Could you give us an estimate of what you think the tax rate will be in 2008?

We haven't done any planning on 2008 right now.

So we really don't know what guidance could be? It has been low, and now it's going to go up, so --

Well, it's going to go up for the quarter. But overall, it's 17% to 19%, I think, for the year.

Right. I just didn't know whether that was going to carry forward to the next year.

In terms of the operating margin for the fourth quarter, what do the numbers calculate out to? I'm sorry, I didn't catch that. I calculated that you had roughly 18% this quarter, and I'm just trying to get a sense of what the baseline operating margin we should use going forward.

Just clarifying, you're talking about the ongoing continuing operations?

Yes, exactly.

I would say, in the 18%, 19% range on a GAAP basis.

Oh, on a GAAP basis? Okay.

Finally, on that upper operating margin goal, you indicated that the G&A was pretty flat. What does the model look for with respect to R&D? Do you expect to maintain that in the 13 to 15 area?

Yes, it's pretty close.

Yes, it's pretty close. It stays pretty right. We have been -- that's a pretty stable area of our business, and we have been able to introduce new products, as well as deliver a lot of value to our installed base to provide good value for our maintenance contracts. So we think that, certainly, over that range we expect it to be similar and in that range.

Dennis Wassung, Canaccord Adams.

A quick follow-on on Sim's question on the operating margin. Chris, you said 18%, 19%. That's what you're expecting in Q4. Is that sort of the range as you look forward for a few quarters? Obviously, you talked about the 20's and high 20's over time. But what was the time horizon on that 18% to 19%? Was that just a Q4 statement?

That was just a Q4 statement.

Fair enough. On the tax rate, the 26% to 28% -- just to clarify, that's just a Q4 number. You said 17% and 19% for the year, so there's nothing that says that you're going straight to a 26% to 28% rate for all of next year. Is that correct?

No, sir. That's correct.

Last question, for Roland. You talked about some strength in the US medical supplies market as being kind of, I guess, the biggest strength in the North American market for you this quarter. Is that something that's new for you? I know you have definitely sold into that market in the past. I'm just wondering if there's something happening there, new customer activity, or is that something you would expect to continue going forward?

A lot of the sales in that market -- we have been making sales in that market over a substantial period of time. I think we've seen medical and consumer goods be two markets which have been supporting our design solutions business in North America for a little while, while the automotive industry has been a bit [listful]. The electronics industry, I guess, has become stable now and starting to contribute, but a few years ago, it was sort of an area where it was detracting.

But as we look forward, I don't see any reason why the activity that we see in the medical device industry and the consumer goods industry would change substantially, other than quarter to quarter. The numbers are such that if you get a substantial order from one company in one quarter or you don't get it in one quarter, you can move the percentages around. But if you track it long-term, I don't expect that to change.

You mentioned that the Asian market was a substantial portion of revenue. Just to clarify, did you say it was 48% of product revenue came from Asia in the quarter?

48% of total revenue.

Total Design Analysis revenue?

Correct. So you can see that the things that we've all come to expect, the movement from Europe and North America into that region are reflected in our own numbers.

As you look forward, is the business condition or industry condition there in your markets supportive of continued strength there at these kinds of portions of revenue? Basically, do you expect to see the Asian portion of your business remain at that kind of level? I know historically, you have been more of a third, a third, a third split amongst the major geographies. Is that just a long-term shift you're going to see going forward?

I think that shift will be there for a long time. There's different -- if you look underlying our numbers over a number of years and just look at the Design Analysis Solutions numbers, that trend has been going on for quite a long time. I don't see anything that will change the long-term trend. As I said, in any one quarter you get a quarter that is strong in Europe or a quarter that is strong in Asia. But long-term, I wouldn't be surprised if it moved further.

Gerry Heffernan, Lord Abbett.

I'd like to discuss the goal of the operating margin that we spoke of throughout the call, and with that as a backdrop, think about what we saw in the third quarter as far as the operating margin as, per my calculations, just went from a 14% operating margin in the year-ago quarter to 18.3%. What you'd expect to see would be a very strong revenue growth.

However, when I analyze it, we're really not getting any leverage on the selling and marketing and G&A expenses. In fact, if we combine the two and look at those in aggregate, we went backwards. Most all of the leverage was over the R&D expense.

Is this just a one-quarter phenomenon? Because, if I look at it on the nine months, we're basically flat. We really didn't get much of anything, despite the 13% revenue increase for the nine-month year-to-date period. So why are we not really seeing any leverage over those two expense lines?

I think that's a relatively near-term question. If we look at it over a longer period, you would have seen quite substantial leverage that had come out of -- certainly, out of the sales and marketing line. We have been focusing a lot of attention on improvements to sales productivity. Some of that comes from our own efforts. Some of that comes from market conditions. Some of it comes from product introductions, but broadly getting some better results. I think, as I said, going forward that there was still some leverage to come out of the design and the sales and marketing line, but that the largest would be on the G&A side.

Over the course of this year, we have had a number of things that we have been putting in place in order to get that leverage going forward. We have been building an infrastructure around a centralized ERP system, for example, which is pay me now to get a benefit later.

So that kind of work -- investment like that. There's also other infrastructure areas which are designed to make sure that we are able to get that leverage out of the business going forward. So I think it's more of a near-term question and that we should start to see, based on revenue levels, that G&A line delivering leverage into the business. You just have to look at the model to see that that's the biggest leverage point.

Understood. I'm also concerned -- I'm sure, with the discontinued operations, you have an allocation process to calculate where all of the expenses go. Somewhat of a concern is at times, you have half a person working on each side of the fence, and you realize that you're not going to be able to get rid of half of that person, and you need to keep that person as part of ongoing operations. So when you actually have to make the split, you realize that perhaps there's a little bit more expenses on the continuing business than we would have given it in a previous way of looking at it. I'm just wondering if there's, perhaps, just a step-up here in the expense base while we go past this split-off period.

I think we have been operating under a process where we have had these businesses separated out internally, not just in the numbers but in actual operations, for the whole year. Whilst what you say may be true at the periphery, it really is something that would be at the periphery, not something I really expect to shift the needle.

I know that the in prepared remarks, you gave employee count. If I could ask you to repeat those numbers? But also if you could just go finer and give the salespeople count?

Yes. We had 260 people at the beginning of the quarter, and we ended up with 258. In the sales, we had 49.

49 salespeople?

Sales reps, yes.

Do you have a year-ago number on that?

39.

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 and for your support over the past fiscal year. We look forward to speaking with all of you to discuss our full fiscal year 2007 results, our progress on the sale of our Manufacturing Solutions business division and our fiscal 2008 corporate strategy. So thanks and goodbye.

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