Autodesk Inc (ADSK) 2008 Q2 法說會逐字稿

Good morning. My name is Wendy and I'll be your conference operator today. At this time I'm glad to welcome everyone to the Moldflow Second Quarter Fiscal 2008 Earnings 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)

Thank you. Mr. Thomas, you may begin your conference.

Thank you. Welcome, and thank you for joining the Moldflow Corporation Conference Call to report the results for the second quarter of our fiscal 2008 year. Greg and I will make a series of prepared remarks and then we will take questions.

I will now ask Greg 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 can 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, 2007.

Our comments today will summarize the financial results for our second fiscal quarter ended December 31, 2007. For more complete details on our financial results, please refer to our quarterly report on Form 10-Q for the quarter ended December 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 financial measure -- 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 Web site at www.Moldflow.com.

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

Thanks, Greg. I'm pleased to be here today to report another successful quarter at Moldflow. Once again we delivered year-over-year growth in products and services revenue, operating margin, earnings per share, and EBITDA. We saw larger orders coming out of all sales regions worldwide, with a mix of new investments and repeat investments from some our larger and mid-size customers. And naturally, the continued penetration into both new and existing customers over the past few quarters has provided a boost to our service revenue this quarter, which is comprised largely of maintenance and support contracts.

As we expected this year, revenue growth plus a focus on the control in spending company wide is showing the earnings leverage our business is capable of. We have continued to make investments in head count in growing markets while strategically placing head count in new and emerging markets. These placements targeted market efforts in those regions and our frame of cutting edge technology introductions have begun to lead to the increased market penetration we anticipated.

We are pleased with our progress thus far and will continue to focus on these areas so that we can make further steps towards our financial goals as we move through the second part of our fiscal year.

I'd like to turn now to our worldwide sales efforts for the second quarter. As has been the case for quite a few quarters now, Asia Pacific delivers another very strong sales performance. This region produced historically high quarterly revenue resulting in a 28% year-over-year growth in the region. This growth was largely driven by sales into electronic OEMs and contract manufacturers throughout Asia with larger orders coming from such notable names as Mitsubishi Manufacturing, Foxconn, Samsung, and Hitachi.

In our European region, we had another quarter of modest growth, with a good mix of orders coming from companies in a variety of energies industries such as [Savig], TRW Automotive, and Corning Cable. Once again the automotive industry led sales in this region, followed by the mold makers and material suppliers.

The North American market was challenging again during the second quarter producing moderate growth, however we did note that our investments in Central and South America are starting to gain some traction. We continued to monitor this region as we head into our second half.

999 Many of the investments in our products made during the second quarter were by companies with worldwide footprints and the flexibility in their ability to license and deploy our software. These companies are looking for software solutions that impair engineers across their entire enterprise to analyze and optimize product designs.

To answer those needs, in the second half of fiscal 2007 we embarked upon a strategy to deliver products suited to broad deployments within a customer's existing infrastructure. We call this strategy Enterprise Enabled Simulation, which involves this creation of technologies that are accessible enterprise-wide, configurable, and process integrated.

One key element of this strategy was the introduction of a concurrent usage licensing option in our flagship Moldflow Plastics Insight product line, which we call MPI-Enterprise, or MPI-e. MPI-e gives companies greater accessibility to the functionality of MPI suite of products by making it available as tasks across an entire enterprise. Instead of purchasing individual modules, companies purchase tasks in bundles so multiple users in different locations around the world can run simulations in multiple modules. The more bundles or tasks a company buys, the more access to different modules the users have.

We believe this new licensing option will allow us to gain further market penetration with some of the specialty modules of Moldflow Plastics Insight that have not been as widely licensed on a standalone basis, but can bring tremendous benefits to our users by allowing them to simulate more specialty molding processes on their product designs. We've seen this new packaging of our technology gain traction, not only in our licensed customers, but also mid-size customers who operate in multiple locations or countries.

To date, over 100 companies around the world have licensed MPI-e and those who have made the investment have provided positive feedback on the functionality available in this product.

I'd like to turn now to our technology introductions and (inaudible) innovation. During the second quarter we had two product releases, Moldflow Plastics Advisors version 8.1, and Moldflow Structural Alliance version 1.1. Our November release of Moldflow Plastics Advisors version 8.1 or MPA, featured an extension of the 3D analysis capabilities found in MPA to support more model types and extend our 3D capabilities to companies working primarily in the designing and building of molds.

Also in the MPA products is the first stage of a new workspace feature that can be used to create and save user interface layout that has been customized to support a specific workflow that meets a customer's needs. These customized workspaces can also be exported and shared with other MPA users. Allowing our users to customize their interface environments and share them company wide is another example of how our strategy of enterprise-enabled simulation has been incorporated into our product release.

Our early December release of Moldflow Structural Alliance version 1.1 or MSA connects users of ABAQUS and ANSYS, two of the world's leading structural analysis products to Moldflow product offering. Because the structural integrity of plastics injection molded parts is largely determined by the manufacturing process, it is critical to account for those effects when performing structural analysis. Specifically, in MSA 1.1, we have addressed the need to improve the accuracy of the analysis of the product that contains multiple plastic parts as well as parts that may be made from other materials. These products are referred to as assemblies and are the integrated building blocks that are evaluated for structural integrity.

MSA 1.1 allows customers to map highly accurate plastics material property information to the correct individual plastic component in our assembly by taking into account the unique properties of plastics and their affect on the overall product assembly. We believe that the increased ability of our products to work in combination with advanced structural analysis will help drive at the plastics analysis expertise further down into the design to manufactured process.

Finally, also during the second quarter we participated in the largest plastics trade show in the world, which is held every three years in Dusseldorf, Germany. Attended by nearly a 250,000 people from over 100 countries. The show gave us another venue to show existing and potential new customers our cutting edge technologies and help our sales people develop their pipeline for future quarters.

So all in all, the second quarter was a very successful one, not only in terms of financial growth, but also in terms of the extension of our technology leadership. We're very pleased with the results for the second quarter as well as the results of our entire first half, which are at the high end of our expectations for this point in our fiscal year. We feel that we have the right pieces in place to continue this (inaudible) to the second half and believe that we are trending towards the higher end of our stated guidance range for the full 2008 fiscal year.

With that, I'd now like to send this over to Greg so he can give more color around the financial results for the second quarter and our business outlook.

Thank you. As Roland has stated, we are very pleased with our second quarter results and the progress we've made towards our fiscal 2008 operating targets. Our growth and revenue, driven by strong results from our Asian Pacific region and increased traction from sales of MPI-e, combined with good controls over spending, to result in historically high operating profitability. Our second quarter non-GAAP operating margin was 25%, which compared to 17% in the same period of the prior year. Further, EBITDA in our second quarter was $4.7 million, which represented a 59% increase from the same period of the prior year.

Growing our operating profitability, it is critical as a corporate objective as is growing our top line revenue. We are very encouraged by the leverage demonstrated in our operating model so far in fiscal 2008. Before getting into the specific results from our second fiscal quarter, I will take a moment to bring three items to your attention.

First, I remind you that the results I'm about to discuss exclude the impact of our non-cash share based compensation charges and their related tax effects. Therefore, the following financial data should be considered non-GAAP financial measures. The reconciliation of these measures in the most closely associated GAAP financial measure has been included in our press release issued this morning or in the investor's section of our website.

Second, as you recall, we completed the sale of our manufacturing solutions division, the Husky Injection Molding Systems on June 30, 2007. Accordingly, my comments from this point forward relate solely to the continuing operations of the company.

And third, I'll take a moment to remind you of the seasonality of our business. Our quarterly operating results are subject to significant seasonal fluctuations. For example, we typically experience seasonal sales slowdowns in our first and third fiscal quarters. As a result, sequential comparisons of our results are not necessarily meaningful. As such unless specifically stated, my comments focus on year-over-year comparisons between the second fiscal quarter of 2008 and the corresponding period of fiscal 2007 as we believe that this is the most meaningful comparative view of our business.

Total second quarter revenue of $17.1 million represented a 19% year-over-year increase, 12% of which was a result of organic growth and 7% of which was the result of changes in exchange rates. Product revenue was $8.9 million, representing a 17% year-over-year increase, of which 10% was derived from organic growth and 7% from changes in exchange rates.

Regionally we experienced another solid quarter coming from our Asia Pacific region where product revenue growth of 29% was primarily driven by sales into the electronics markets of Japan, Korea, and China. In Europe, the growth in product revenue was a more modest 4%, which is primarily a result of changes in exchange rates, and sales of MPI-e made to some of our larger customers.

In our Americas region, product revenue increased 5% despite challenges posed by a softening U.S. economy. Services revenue was $8.2 million, which represented a 22% year-over-year increase, 15% of which was derived from organic growth and 7% of which was a result of exchange rate movement.

The organic increase was primarily a result of sales of maintenance and support contracts across all geographic regions, a reflection of our long-term growth in our installed customer base.

In our second quarter, we derived 47% of our revenue from our Asia Pacific region, 38% from Europe, and 15% from North America. During the quarter, we sold a total of 125 new seats of our traditional software solution, bringing our cumulative seat count to approximately 9,500 seats. During the quarter we sold 44 tasks of MPI-e, bringing our cumulative number of deployed tasks to 121.

With respect to our sales force, we completed the quarter with 54 quota-carrying sales reps, compared to 49 at the end of the second quarter of fiscal 2007, and 53 at the end of the previous quarter.

Total cost of revenue was $1.8 million, representing the year-over-year increase of 14%, or $220,000. The change in costs of revenue for the period was largely a result of having seven additional customer support application engineers on staff. Our total gross margin was 90%, a slight increase from the same period of the prior fiscal year.

For the quarter, total operating expenses were $11 million, representing an 8% or $772,000 year-over-year increase. This change was primarily due to increased compensation costs throughout all departments, a result of having 12 additional employees, impact of annual salary increases for our existing employees, and also due to increased commission expenses paid on our growing revenue base.

Income from continuing operations for the second quarter was $4.2 million, which represented a 25% operating margin. This compared to income from continuing operations of $2.4 million, or 17% operating margins for the same period of the prior fiscal year. As previously stated, this increased profitability was driven by the increase in revenue and good controls over spending, and it begins to demonstrate the leverage inherent in our operating model.

Interest income was $1.1 million, compared to $784,000 in the prior year, representing 37% year-over-year increase and was the result of having more cash on hand. We reported a tax provision of $969,000 on income before tax of $5.3 million, resulting in an effective income tax rate of 18% for the quarter. In the same period of the prior year, we recorded a tax provision of $699,000 on income before taxes of $3.2 million, resulting in an effective income tax rate of 22% for that quarter.

The year-over-year decrease in our tax rate is primarily a reflection of our geographic mix of revenue whereby releasing to a greater portion of our orders in the current period from foreign jurisdictions whose tax rate is lower than that of the United States.

For our second quarter, we are reporting non-GAAP net income of $4.4 million, which equates to $0.35 per diluted share. This compared to non-GAAP net income of $2.5 million, or $0.21 per diluted share in the same period of the prior year.

We incurred depreciation in amortization expenses of $438,000 in our second quarter. EBITDA was $4.7 million in our second fiscal quarter, which represented a 59% year-over-year increase.

Our results for the first six months 2008 show progress towards our longer-term target-operating model. For the first six months of 2008, total gross margins were 89%, which compared to a longer-term target of 90%. As a percentage of total revenue from the first six months, ending on R&D was 13%, which is in the range of our long-term target of 14% to 15%.

Spending on sales and marketing was 35% of total revenue from the six-month period, which is in the range of our long-term target of 35% to 36%. Spending on G&A was 22% of total revenue from the six-month period, which compares to a longer-term target of 13% to 14%. Finally, operating margins were 19% for the first half of 2008, which compares to our longer-term target of 25% to 28%.

While pleased with the current results, these comparisons demonstrate that we believe there is a significant opportunity to extract additional profitability from our business model going forward by leveraging our spending on G&A as we continue to grow our revenue. Our current level of G&A spending includes costs associated with being a U.S. public company, including the costs of our audits, and costs of compliance with internal control requirements. In addition, our G&A spending includes costs associated with supporting an international direct sales team working in 15 countries. While this structure has required a level of G&A spending, that is currently above our long-term target model, we expect that the spending on this infrastructure will not increase at the same rate as our growth of revenues, allowing us to grow our profitability towards our longer-term target model.

Turning to our balance sheet and cash flows, total cash and investments were $81.6 million at the end of the quarter, an increase of $226,000 from the previous quarter. Our operations generated $882,000 in cash during the second quarter, our investing activities generated $1 million in cash, primarily related to the net sales of marketable securities proceeds received related to the sale of our former MS division, both of which were partially offset by purchase of fixed assets capitalized software development costs. Financing activities generated $38,000 of cash, primarily from the exercise of stock options, while changes in exchange rates decreased cash by $106,000.

DSOs for the second quarter were 68 days, improvement of one day compared to the previous quarter. We continue to have no outstanding long-term debt.

I'll now spend a few minutes to 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 form 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.

The current business outlook is based on information as of today, February 7, 2008, and is current as of today only. As we have previously communicated to you, it is our expectation that total revenue for fiscal 2008 would grow in a range of 10% to 13% when compared to fiscal 2007. We expect EBITDA to grow in the range of 13% to 20% in fiscal 2008. We expect non-GAAP net income per diluted share of approximately $0.94 to $1.00, based upon an estimated 12.1 million diluted shares.

We believe at this time that the strong results from the first six months of fiscal 2008 have put us on a track to achieve the higher end of these ranges. Our full year non-GAAP net income to diluted share guidance excludes charges per share based compensation expense, which are expected to be approximately $1.8 million net of related tax effects and assumed an effective tax rate of approximately 21%.

Taking these share based compensation expenses into account, our GAAP net income per diluted share for fiscal 2008 is expected to between -- be between $0.78 and $0.84 based upon an estimated 12.1 million diluted shares. This GAAP estimate assumes an effective -- an annual effective tax rate of approximately 25%.

We continue to monitor our expected tax rate for the complete fiscal year. For the first six months, the geographic composition of revenue resulted in a tax rate that was lower than our forecasted rate. If that trend continues, our EPS will be positively impacted. Given uncertainty in the geographic composition of future revenues however, we do not reforecast our annual tax rate guidance based upon quarterly changes in our actual tax rate.

With that, I'll turn it back over to Roland.

Thanks, Greg. As I normally do each quarter, before sending to questions, I'd like to restate the corporate goals we're driving towards during fiscal 2008. And these are increasing the penetration of our existing customer base and expanding a customer base in order to have more users use our products to design more plastic parts more often. And introducing new technologies that will maintain Moldflow's leadership in the plastic CA marketplace, seeking out strategic partnerships and acquisition targets that strengthen our sales and product leadership positions. And focusing the development of our business model in such as way as to unlock more of the leverage inherent our business.

And with that, I'll be happy to take any questions you may have.

(OPERATOR INSTRUCTIONS)

Your first question comes from the line of Jim Gentrup.

Good morning, gentlemen. How are you?

Very good.

Good, thank you.

I would just -- you're giving the guidance that you just reiterated, I think that was basically what you said at the beginning of the fiscal year, correct?

That -- that is correct.

Just -- given that your six-month growth rate in the top line has been nearly 17%, are you expecting a slow down or are you just being conservative?

Well, it's not -- it's not so much looking at a -- at a slow down. It's like your bet. You start it off on a race and you've got to the halfway point and your -- you're at a pace which is about the rate of what you wanted. Our focus is on where we get to at the end of the race, so we're looking at being able to get to the end of -- of our year and -- and be at the higher end of what we thought we would be at the beginning. It's not -- we're not looking at a -- at a particular slowdown.

Okay. Well, and so you would -- I mean if you continue at this pace I guess is -- I would assume that you would adjust it next quarter.

We -- we look at where we are every quarter.

Okay.

So we would -- we would review that at the end of -- at the end of any period that -- that we think we've got meaningful information that would impact it.

Okay. And then you partially answered this question, Roland, about -- want to talk about your end customer strength right now given that they're manufacturers and all the talk about a slowdown. Can you give us a little color on what you're seeing out there, what -- what people are saying to you and how that might affect you?

Sure. I -- I mean it's -- there's certainly discussions about the -- what our -- what might happen in the world of our customer's customer. It's -- it's a topic of conversation that's at the level of the press in most countries, let alone the company. However, we're not really seeing it in terms of -- in terms of sales development. The -- the source of offerings that we have help our customers drive their -- drive their bottom line in all sorts of circumstances, so as of now it hasn't had a -- an impact on our -- on our development and it's out there, it's -- it's discussed, so it's something that we keep an eye on.

Would it -- would it tend to be a little counter cyclical because they're trying to drive costs out of it? Would that -- would that help you actually in some ways do you think or not?

That -- that has happened in the past where when there are first signs of difficulties, people who are more aggressive with their own and they're willing to take control of their own destiny actually invest in these types of tools in order to -- to protect their bottom lines if their top lines are -- are affected. So we have seen that and I can't say that that's exactly what will happen next -- if that happens again, but certainly we've seen it in the past.

This MPI-e product that you -- I guess has been out now for a little less than a year I take it?

Right around a year.

Seems like it's gaining some traction. Is this -- is this going to increase the size of the opportunity that you have in the marketplace? Is this -- do you have much competition in this -- in this area? I mean can you talk about that a little bit?

Sure. What -- what MPI-e really is is taking the function of -- functionality of -- the base functionality or the value proposition of -- of MPI and putting it in a form which is more accessible. So what it does is it allows us to -- to reach the opportunity that we've been talking about, now we've been discussing for some time, that the opportunity for us in terms of the number of people designing plastic parts and molds that exist out there, or that we believe exist out there, and the number of them that are actually using tools like Moldflow, it's -- it's a very small percentage. And many of the people who do design plastic parts and molds are fitting inside customers that we already have, just with a very small penetration.

So the intent of this is to make it a more attractive proposition for -- for our -- primarily for our existing customers to deploy the technologies more broadly throughout their enterprise and deliver it to engineers, and designers, and lots of different players within an organization with whom you might not have gone out and bought a full suite of Moldflow for, but would like access to part of it in order to do their job. I mean even procurement people can get access to the economic data that -- that the products provide. So it's more to enable it to -- to gain reach within -- within the -- the user base, but interestingly enough it's -- it has -- it has produced equally attractive to people that are just started out and are interested in getting access to a broad range of our products on a flexible basis.

So, is it like a -- I mean how you -- how do you package that and sell that I guess is my -- I can't quite -- I mean you sell perpetual license yet, but how does that work? No?

Well, the -- the conventional way is to -- is to take all of the modules that we have and everyone of them has its own perpetual license and most likely maintenance contract attached to it. So if you wanted every -- if you wanted to get access to all of our products, you'll end up buying 18 or 19 modules and -- and if you wanted a second seat and you wanted the person to have access to all of those things, then you buy another group of modules.

And our offer has appeal and it has a high value proposition as you try to deploy it further into the organization that many of the people have interest only in parts of it. Some people have a small interest in one of the modules, but not enough to drive the purchase of that module independently and so we've bundled them together so that they can get access to a broader range of the tools from a single license, like only use one at a time, that they can get access to some of those capabilities that they're unable to get before, as well as the ability to -- to share it more within the -- within the company. So the sales process is the same. It's more that it is easier for the customer to deploy it.

Okay. And will that drive -- will that do anything to the ASPs then on this -- on this product? Or on your overall?

Too early to tell at this stage. There's -- there's obviously an initial sale and a follow on sale, which is potential is the -- as -- as you get collisions of usage, two people trying to use it at the same time and the usage within an organization grows, you expect follow on tasks to be -- to be purchased and how that -- how that combination of new and existing transactions goes it's a little early to tell. But we'll -- we -- we do monitor that and if there's a meaningful shift then that's something we'll talk about.

With the -- just getting back -- circling back to the seasonality issue that you raised a little bit. Q3 -- last year's Q3 was -- was sequentially higher than Q2. Was there an anomaly in last year's Q3 that -- that we should know about looking forward to -- so that -- so we model this correctly? I mean was there -- was there a (inaudible)?

Sure. We -- we can talk to that a bit. We -- as we said at the time in both the third quarter and the fourth quarter last year that the -- the third quarter was very -- obviously a very strong result for us and what we had experienced was that we were -- we had the benefit of closing some orders that were in the pipeline on a bit quicker pace than what we had anticipated. So effectively we drew some Q4 orders into Q3 that -- that gave benefit to Q3 and really was sort of contrary to what the seasonality that we've seen in the business for a number of years, where we typically have a weaker sales first quarter sale -- sale results, strong Q2, a little bit of step down in Q3, with a strong finish in our fourth quarter. So last year was a bit of an anomaly and it was more just an acceleration of -- of the sales cycle on -- on a few big orders.

Okay. All right. So -- and then my last question, I'll somebody else jump in. Is -- is the -- is the buyback issue, I mean your stock is obviously in our eyes quite undervalued and you have $80 million some of cash, I mean what's -- what's your use of cash right now? The plans.

For the -- to answer in the sort of the order that you put it, we have a -- an authorized buyback in place. We've been trading in a -- in a closed window period -- or operating in a closed window period for some time. The -- but we have a plan in place, which is a follow on from the plan that we've included in the second half of our 2007 year. And that's -- that's designed primarily as an anti-diluted measure.

When does the window open back up then?

Trading windows is -- is not something we -- we talk about typically. But it normally gets closed down anyway just with respect to normal quarterly knowledge and those sorts of things. But there's lots of things that could impact -- impact trading with those other times that we could then talk about those.

But the -- the primary use of cash is -- is still to drive an M&A strategy and -- and we have an active strategy in place with a pipeline of companies that we work with and consulted ranging from -- from solid businesses that have CA offerings in specialty and vertical areas, broad based offerings, as well as some technology offerings, so we have a pretty broad portfolio of things that we look at and we believe that offering our -- our customers a -- a wider range of capabilities in -- in a way which is connected to the business that we currently do is something which is capable of creating a lot of value in the future.

Okay. Thanks, guys. I appreciate it.

Thank you.

Thank you.

(OPERATOR INSTRUCTIONS)

There are no further questions at this time.

Okay. Well, I would like to thank all of you for joining us today. We look forward to speaking with you to discuss our third quarter results and our overall progress towards our corporate goals in May. We also have to see some of you at the B. Riley Conference in Las Vegas in early April, where Greg and I'll be presenting and holding one-on-one meetings. So once again, thank you and goodbye.

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