ANSYS Inc (ANSS) 2002 Q4 法說會逐字稿

Good morning and welcome to the fourth quarter investor relations conference call. All participants will be able to listen only until the question-and-answer session of the call. The call is being recorded at the request of the Ansys, Incorporated. If anyone has any objections, you may disconnect at this time. I would like to introduce your speaker for this morning's call, Mr. James Cashman, President and Chief Executive Officer. Mr. Cashman, you may begin.

Okay. Thank you. Good morning, and welcome everybody to the Ansys Q4 fiscal year 2002 call. And with me as usual is Maria Shields, our CFO. Today, we will outline first outline the highlights of the quarter and then go into some greater depth on operational results, and we will do this, as we always do, from a variety of perspectives. We will do this, actually, for both Q4 and for the fiscal year 2002.

Additionally, we will be discussing some particularly significant customer activity and then also highlight the series of acquisition partnership and product announcements that have been recently made, which we feel will prepare us for, and in fact, they are showing progress for 2003. Maria will then take you through our balance sheet, expense structure performance and some additional financial factors, and then we will be happy to respond to questions you may have. So to begin with, Maria, let's do our Safe Harbor statement.

Okay. Thank you, Jim. Good morning. Again, thank you for joining us to review the highlights of Ansys's fourth quarter and full-year 2002 results. Before we get started, I would like to remind everyone that some of the matters we will be discussing throughout this call may constitute forward-looking statements that involve risks and uncertainties, which could cause actual results to differ materially from those projected. These risks and uncertainties are discussed at length in our public filings, including our forms 10-Q, 10-K, and our 2001 annual report to share holders. Okay, Jim.

Okay, thanks, Maria. In short, Q4 was a solid, stable quarter in what continues to be difficult economic times. We posted operational numbers in line with the target ranges that we made since the beginning of 2002. Our product progression was very strong, even by our historically high standards. It has taken a quantum level higher by some incremental product relationships. We also continued to bolster aspects of our distribution system, both the direct and indirect side. We will talk about those in a little bit.

From a high-level perspective, for the quarter, we reported good financial performance with revenue at 25.3 million, which was a record revenue quarter for Ansys. It was a little under our expectation. But it's still within the bounds of typical deals. We also reported strong earnings per share growth of 13%, with an adjusted EPS of 43 cents, up from last Q4's record quarter. That was above the analyst range and represented about 113% of the analyst consensus.

We also maintained excellent and stable operating margins, and a solid business model, including a discretionary spending discipline that helped insulate us from all the short-term economic events. As a result, our gross margins were slightly above target at 88%, and overall operating margins were ahead of plan at 39%. Thirdly, even in this subdued environment, we maintained significant continued customer momentum that is underscored by some nonstandard and progressive relationships with major-name companies.

In the quarter, we also had on target the release of Ansys 7-0, our AI workbench product. And we are particularly pleased by the rapid deployment of our Cadoe-based product less than a year after the acquisition. And then finally, almost a coincidental or at the same time as this earnings announcement, we announced our intent to purchase CFX from AEA technology, and CFX is a leader in computational fluid dynamics. And also a solid business that further augments our leadership in multiphysics virtual product simulation.

From an operational standpoint, as I previously mentioned, our revenue for the quarter was 25.3 million, which represented an all time high for Ansys. It was only slightly up from our last Q4, but we had understood that was a risk going into the year, as last Q4 was spiked by a singular event of a particularly large seven-figure deal that really distorts any comparisons. These deals are not common, especially in today's climate, so we are actually quite encouraged to have surpassed that and posted growth for the quarter. Earnings for Q4 were even stronger with a 13% increase, an adjusted EPS to 43 cents, up from 38 cents from Q4 of 2001.

Again, this exceeded the upper range of analyst expectation, and it also marks the 21st consecutive quarter where the earnings were at or above consensus. For the fiscal year ended December 31, 2002, we reported total revenues of 91 million or 7% increase over the 84.8 million recorded in 2001. Year-to-date adjusted earnings per share, excluding acquisition related amortization,n to $1.29, or 102% of the analyst expectations or consensus for the year. And in spite, again, of the economy. This is up 16% from $1.11 in 2002.

And we met the analyst expectations each quarter of 2002, I might add. Overall operating margins, excluding amortization, for the year were 32%, and very much in line with our business model. And gross margins remained strong at 87%. Operating cash flows stayed healthy at 22.1 million for the year. In even in light of the various blackout times, we were able to repurchase in excess of 500,000 shares for the year.

Now, we will also look at the numbers, as we always do, from a number of different perspectives by category of business, geography, customer, products, et cetera. First, by category of business. The lease business for us stayed solid. The license growth was basically flat, but again, this meant we had effectively compensated for the previously mentioned multi-seven figure order of Q4 2001. So again, there's a lot of goodness there.

For the fiscal year, we reported balance growth in both the license and service revenue, basically overcoming by this time the two major seven-figure deals we had throughout the course of 2001. Particularly encouraging, business intake outpaced the revenue growth, and was also strong enough to maintain the base of recurring revenue or repeatable revenue, which is another strength of our business model. For Q4, 58% of our business fell into this category, which is actually an increase over Q4 of 2001.

It continues to be encouraging to maintain and actually grow this repeatable business, even in difficult times. For the overall year, repeatable business grew to 63% for 2002, which is an increase of 58% that was in 2001. DSO's remained stable at 63 days.

It should also be noted while deferred revenue did grow, some of our customers had difficulties in actually processing some of the maintenance contracts and renewal contracts in 2002. So almost $2 million in backlog from several major customers fell into this category. The good news is that had no impact on GAAP revenue for the quarter, and the better news is we closed all the major orders in the first couple weeks so we added back to the deferred revenue base for 2003. All this comprises to contribute to a very strong balance sheet, which includes over $61 million in cash and equivalents.

From a geographic perspective, the bottom line from geographic perspective is, simply put, a real mixed bag. The general economy continues to be a factor that we are continuing to monitor on an ongoing basis. Basically, we felt the most impact of this from the major centers, which are North America, Japan and Germany, our major markets. Virtually everywhere else has performed quite well and in the double-digit growth range. In Q4, North America was actually down.

The industry breakdown was fairly uniform, with relative strength in automotive, defense and aerospace. In addition to continued Ansys dominance in electronics and power generation. North America probably saw the greatest overall impact of the economic slowness. But encountering this, each Ansys direct office grew, throughout 2002 largely fueled by major customer relationships. This was true both in North America and globally.

However, there were pockets of softness in some of the areas in the direct -- in the indirect channel. Europe grew in the low teens for the quarter and the high teens for the year. With the exception of Germany, which we mentioned, all the major segments of Europe also grew in double-digits. So in addition to our traditional strength in the UK, we were most pleased by the continued strength of the relatively new French operations, which began in earnest this year. And also the fact that we were able to rapidly rebuild our Italian business, which, you know, frankly had been devastated by the death of the owner of our former distributor there. So we have got things pretty well humming, and a nice recovery there.

Our general international area also grew double-digits for the quarter. While Japan continued to see tough economic situations, virtually every other area was strong. Particular bright spots were the continued performance of the China operations and really strong performance out of our India operations.

For the fiscal year, the combinations of all factors basically netted growth in all geographies. Europe grew in the upper teens, as I mentioned before; North America, GIA ,were more in the single-digit range. So in summary, all the geographies had growth throughout the year. The quarter was varied for each.

Obviously, the other thing I should mention is that North America was the one that was disproportionately factored by that large seven-figure order in 2001. Europe, continued positive momentum from 2001. If you recall from our earlier calls, even in spite of the German economic situation. GIA was strong, with the exception of Japan and North America. Continued a good base of business. We will continue caution for the early part of 2003, just as we did in 2002, and continue to monitor and adjust our sales and distribution strategies, and in response to all the economic uncertainties that we are still seeing.

For the product revenue standpoint, there's not really any change either from the trends or earlier guidance. The high end sales remain strong, design space and Ansys professional stayed balanced, as previously mentioned, providing over 14% of our business for both the quarter and the year. Average selling prices were stable for all segments. We did see some -- you know, some compression on some of the rates for the consulting services, but that's a relatively smaller part of the business.

Now one thing, while we are always talking about new releases of our product line, this quarter has to represent one of the most significant advances in our product availability. Both in our traditional lines and in some very new diverse ways. We announced and shipped the new version of our Ansys 7-0 flagship product, which continues to provide the ultimate in high-end multi-physics and nonlinear simulation capabilities. This version was integrated within the Ansys workbench, which we talked about the last few quarters. Additionally, we have already signed up numerous third parties and are encaging with customers to build a range of vertical applications and design utilities based off the workbench backbone.

We are starting to get really excited with some of the momentum that is starting to build there for the future. In addition, to the integration capabilities of this backbone we further demonstrated our commitment to working with a range of best in class partners. Probably headlined by our announcement of operating with LNS virtual lab environment, basically integration with them there. It provides further validation for simulation through its connection to LNS's rich history in physical testing and facilities for virtual prototyping. And then also at the very end of last year, we had announced our acquisition of Cadoe Technologies.

In Q4, on schedule, we released full products for design and simulation, basically design Explorer and FEM Explorer. These look like exciting add chunks to our product line, particularly engaged by initial customer receptivity, primarily based around the fact they allowed designers, engineers, and even engineering management to interrogate designs on the computer by manipulating parameters, parameters such as geometry and material properties, and basically being able to determine the results on the fly and see the results of permientation of various designs without having to reperform any additional simulations or analysis. So very, very advantageous, particularly in a design stage where people can interrogate and do "what if" studies right on the fly without having to turn around. And do simulations.

We also released and shipped the first production version of AI [INAUDIBLE],produced by our partnerships with SAS and in particular, Doctors Ed McNeil and Harry Schaffer. The combination of data compatibility for our customers, the AI workbench framework and basically the technical version of these industry pioneers provide additional avenues for the Ansys family of solutions. So the bottom line is, we have made a lot of progress in extending our technology base; again, both in the core product, but also the development architecture. We have also released unique and ground-breaking technology through the Explorer products, providing capabilities to further impact of simulation throughout the entire design process. But it didn't stop there, obviously, as evidenced by our recent announcement of our intent to purchase CFX from AEA Technologies.

This provides industry-leading technical capabilities for computational fluid dynamics and its important extension to our multiphysics capabilities, as well as being able to simulate the environment around the products that we have traditionally simulated. So obviously, the CFX activity kept us fairly busy through the end of the year. It's basically a testament to the overall team. I can't say enough about them. And Ansys, to be able to deliver these results in the light of the attention we devoted to that acquisition. From a customer standpoint, a number of customers made major commitments in Q4; in fact, several dozen entered into end user commitments of greater than $100,000.

Both divisions of General Electric extended agreements with Ansys; in North America, General Motors, Rockwell, Allied Signal, Raytheon, Pratt, Allied Motorola, John Deer, Motorola and 3m, were probably the most significant customers. As you can see, there's a very rich diversity in the industries there. We also in that quarter announced a strategic partnership with Honeywell Engines and Systems to aid their German design processes and reduce engineering process cycle timing which we think is a key and hallmark of what simulation can bring.

The multi-year agreement basically provides Honeywell with the latest in simulation technologies from Ansys, but it also provides engineers with new upfront design solutions, multidisciplinary simulation technologies, and basically tools for sharing knowledge of the implementation of a new upfront engineering and simulation process, basically will help move Honeywell to a CEA-driven design process as opposed to a traditional CAD centric process, really understanding how their products will behave.

In Europe, the top deals included Rolls Royce, Alstroke Siemens, Gravitone, Vallejo, Jaguar Cars and DuPont. While in GIA, [INAUDIBLE], Marine Diesel, [INAUDIBLE] Locomotive, Channon, [INAUDIBLE], Vidalia, [INAUDIBLE] Rubber; and [INAUDIBLE] where heavy industries led the way. The size of these orders are encouraging, to make no mistake about that. But we also continue to appreciate the geographic and industry breadth, including automotive, aerospace, and electronics. Essentially, it is the same confidence of our customer base in expanding simulation, plus the breadth of industry and geography played a role in our business basis, and also a relative resiliency to the economic times. As mentioned, the pipeline of new opportunities remains solid, and it is even strengthening somewhat. But we are still seeing caution in our customer bases.

The larger order size opportunities, they seem to be reappearing, but they are in longer time frames than before. They will probably be more susceptible to slippages, as many customers examine their expenditures closely. But at least they are starting to reappear. So in summary, we remain encouraged with and committed to, obviously, our long-term strategic direction and mission. It has provided the us the road map to continuously build for the future, as validated by the rich stream of extended products we have added this quarter.

Our business model has allowed us to operationally provide very solid results, even in these times of turbulence. We have been able to keep the top line progressing while maintaining strong margins, and this is obviously evidenced by meeting or exceeding original analyst expectations for the year, as well as for each quarter for the last five years. This in turn completes a cycle by allowing us to further our investments in sales and technology. We believe these investments position us well in both the market and our channels, and they have been a factor in balancing our performance throughout the year, not to mention maintaining performance through all types of economies.

Coupled with our industry and geographic breadth, these investments provided us the tools to react and adjust to the factors that have been played throughout the year. And as such, we will continue to monitor the overall global situation and continue to adjust our business model accordingly, with what I characterize as short term caution, but definitely longer-term optimism. So with that, I will now turn it over to Maria Shields, our CFO, to provide you a more detailed look at our financials. Maria?

Thanks, Jim. For the next few minutes, I am going to go through a recap of Q4 and 2000 year-to-date expense results. And just highlight some of the key balance sheet and cash flow figures. I will also provide some overall guidance regarding our outlook at this time for Q1 and full-year 2003 EPS.

Beginning with cost of sales, our total expenses for the fourth quarter remain relatively flat compared to Q4 last year at 3.1 million. This resulted in an overall gross profit margin for the quarter of 88%. And on a year-to-date basis, our cost of sales increased about 4% to 11.8 million, compared to 11.4 million last year. And an overall gross profit margin of 87%. For Q4, our sales and markets expenses totalled 5 million, which was about 20% of revenue. This was a slight decrease from 5.3 million reported in the last year's fourth quarter. And on a year-to-date basis, sales and marketing expenses total 20.1 million or 22% of revenue, compared with 19.7 million in 2001.

During the fourth quarter and most of 2002, our comment that the sales and marketing area was one which we closely monitored particularly for discretionary spending, in the areas of advertising and promotional activities, and in an effort to ensure that during some of these tougher times, we were able to meet our earnings commitment,. I will also add that given our current visibility into 2003, we plan to continue to closely manage our short-term discretionary spending to protect the bottom line.

In the area of research and development, our total expenses for the quarter were 4.7 million, or 19% of revenue, compared to 4.3 million in Q4 of last year. And on a year-to-date basis, our total investment in research and development reached 19.6 million or 22% of revenue compared to 16.9 million last year. During the fourth quarter of 2002, we capitalized about 380,000 of internal labor cost, in connection with the latest release of our Ansys and Cadoe products that Jim mentioned earlier this compares with costs that were capitalized in last year's Q4.

For the full year, we have capitalized about $600,000 in 2002 compared with 450,000 last year. Net of these capitalized labor costs, the quarter-to-date and year-to-date comparative increases were primarily attributable to an increase in head count-related costs, including those associated with the Cadoe acquisition, as well as resources we added to support the continued expansion of our various product offerings.

In the area of G&A, our expenses totalled 2.6 million in the Q4 or 10% of revenue compared with 3.4 million in last year's fourth quarter. On a year-to-date basis, our G&A costs were 10.2 compared to 13 million last year. The decrease in comparative cost in 2002 was primarily the result of a 2 million charge that we took in 2001 that we didn't repeat this year. As well a decrease in legal and outside consulting fees. For the fourth quarter and for the full year of 2002, we reported operating profit, before amortization, of 39 and 32%, respectively. Our effective tax rate for the quarter ending year fell in the 31% range.

One thing I would like to mention, I have talked about it on previous calls, but I would like to re-emphasize, the point that the WTO ruled earlier this past year that certain export benefits provided to U.S. taxpayers are prohibited tax subsidies, and that the European Union could impose substantial retaliateory duties on U.S. exports. A formal response to the ruling is expected in the near future, which could result in changes in legislation that would reduce substantial tax credits and eliminate tax saving benefits that benefit Ansys.

Any of these changes could have a significant adverse impact on our tax rate and decrease net income in future periods. So we will stay tuned to see what happens in that legislation arena. I would like to also briefly comment on the other income line for the fourth quarter, which was lower than previous quarters this year. In Q4, interest income amounts were offset by a 500,000 impairment charge related to an investment that was accounted for under the costs method.

For the fourth quarter, Ansys reported earnings per share, excluding acquisition related amortization, of 43 cents on 15.4 million diluted shares. That compares with 38 cents in last year's fourth quarter. And on a year-to-date basis, adjusted EPS totaled $1.29 on 15.6 million diluted shares, compared to $1.11 for full-year 2001. Consistent with the guidance I gave on our last call, we will plan to continue to target 2003 EPS growth, excluding the impact of the CFX acquisition, in the low double-digits; or a target at this point in the range of $1.42 to $1.43. And for Q1, we will target EPS in the range of 28 to 29 cents, also excluding any impact from the CFX acquisition.

Just spending a moment on that, our plan is assuming a February closing date, we currently anticipate that the deal should accretive to earnings in the first 12 months after closing, excluding the impact of acquisition-related amortization and purchase accounting adjustments relative to deferred revenue. Our plan is to provide more specific guidance post-closing, after we had an opportunity to finalize some U.S. GAAP figures and their estimated impact; and as well as finalize the details of the overall plan with the CFX management team.

As always, we will continue to monitor the economic situation, and provide future guidance regarding both our revenue and EPS outlook as our visibility into the year improves. Taking a quick look at our year end balance sheet and cash flows, we ended the year with total cash at 61 million. DSO of 63 days. Total deferred revenue of 26.4 million, and no debt. Additionally, for the fourth quarter, we generated 6.1 million in cash flow from operations, and for the full year we generated 22 million net cash from operations. With that, I will now turn it back over to Jim, who will do a brief recap and then we can open up for questions.

Thanks, Maria. To recap, continued strong financial performance providing above consensus earnings and topline growth. Measurably strong performance from customer endorsements from the collaborative engineering products we discussed for the last few quarters. Secondly, [INAUDIBLE] of our Cadoe-based Explorer products and AI Nastran, which again provide a range of capabilities that we can sell to our over 8,000 customers. Likewise, I have been particularly encouraged by the maturation of our workbench technology, and then also the emergence of a team of partner companies to develop specialized applications. This is showing promise.

And then finally the -- our intent to add advanced CFX capabilities into the Ansys multiphysics virtual prototyping arena. Then finally, obviously increased penetration into a broader range of industries, as evidenced by the customer base.

With regard-to-2003, we continue to be cautious about certain sectors in the economy and we will maintain vigilance on issues of sales cycles during these times. The long-term outlook stays solid and consistent with our last call. We are still anticipating comparative topline growth for the year in the low double-digits range, excluding the potential CFX acquisition. And as always, we will keep an eye toward ratcheting up our performance per our track record, should the economy start to warm up. Cash flows and margins should continue to be strong. With that, we are now prepared to respond to any specific questions you might have.

Thank you. At this time, we are ready to begin the question-and-answer session. If you would like to ask a question, please press star 1. You will be announced prior to asking your question. If you would like to withdraw your question, press star 2. Once again, to ask a question, please press star 1. One moment, please. Tim Fox from SG Cowen, you may ask your question.

Thank you, good morning. A couple questions on the quarter, and if I could on the acquisition. First on the quarter, were there any noticeable changes at all in the environment, either positive or negative from a customer buying behavior?

Oh, essentially, Tim, it was a -- it would have to be what I call a mixed bag. We are starting to see what I would say more word on the street, you know, more positive talking, but I would say there are some situations where things happened a little bit easier and some things where they didn't happen as easy, as evidenced by some of the very major companies were slow in being able to actually get paperwork through for some of the renewal business and things like that.

So the one thing that is probably the most encouraging, but I would not hazard a time frame at this point in time, are people are starting to talk about planning for some kinds of major engagements in the future, at least they are talking and thinking about it now or were they were hunkering down.

Okay. That's fair. I guess as a follow-up up to that, you mentioned last quarter somewhere in the range of 10 orders had slipped, that a couple had already closed on the last earnings call, and that you had eight others, that a few of them looked like they were going to close fairly soon. Do you have status on the remaining orders? Did you see anything of a similar nature this quarter?

Well, actually, it was quite similar, and you know, a couple of them continued to balance in. Some of them actually balanced out in the fiscal year. They didn't meet the fiscal year requirements of the customers. Some of them did close, so again it was pretty much a mixed bag that we were anticipating.

Okay. Regarding the acquisition, could you just talk briefly about the CFD market from an overall perspective, size and growth? And then specifically maybe a couple follow-ups on CFX?

Well, okay, again, we will be somewhat guarded in what we say, but in terms of general CFD market, it is probably an additional, you know, 25% of what the structures market was. So it is a pretty significant chunk. It is, you know, sometimes it is very bleeding to say what growth percentages are, sometimes they are a function of the companies in them and what is happening. Traditionally, it has been growing in the mid-teens, maybe the high teens range.

I think the -- that in itself is attractive, but the whole resurgence that we are seeing in multiphysics becomes interesting. There is a whole range of very difficult questions in terms of, even not just the individual markets, but what can the two markets do together, such as fluid structure interaction and, you know, you just -- you don't know what the impact of, you know, how this might be applied to, you know, all sorts of traditional things like the jet aircraft engines, and overall vehicle performance type of issues, chemical performance issues, but who knows what impact that might have on doing things like simulating re-entries of space shuttles coming in and things like that.

There's a lot of very complex things that when they go not according to plan, definitely need to be looked at. We are trying to push the technology in all directions along that line.

I guess lastly if I could, you mention in the release you will separately maintain products and services business for CFX. There wasn't anything you mentioned there about the channel. I was wondering if you might comment or can comment at this point about what your plans are for integrating their product line into the channel?

Oh, well, yeah, you shouldn't -- what we are trying to do is maintain the fact that, you know, from the business unit perspective, there is a really strong critical mass, and we want to maintain that as opposed to, you know, if you will, subliminate it to the larger Ansys product lines. So I mean, but in terms of the sales activity, we will be injecting that into the overall sales activity as soon as possible, and what that really means is that we are actually -- we would be introducing it very quickly into our major accounts through our direct major accounts sales force, and we also start to look at the indirect channel.

However, when ever we introduce a new product, we have to go through a certification process with them so they are technically capable to properly promote and support the products. So we will start that training opportunity. Of course, they also bring some additional sales assets and sales channels that likewise might provide avenues for the other array of Ansys products.

Great. Well, thanks. And congratulations on a solid quarter in this environment.

Thank you very much.

Kim Caughey from Parker Hunter, you may ask your question.

Hi. A very good quarter, guys. Although you don't want to talk about CFX, I mean clearly this is the big news in your earnings release here, or your news of the day. What's the customer overlap like between CFX and Ansys right now?

Well, I mean, I just talked very briefly about that. In some cases, the overlap is very strong and it actually strengthens us and significant major customers, particularly in some aircraft engine and turbo machinery, for instance. Not just that.

But then you look, there is places where we are strong and they are not as strong, and with these integrated offerings we think we can do quite well. And actually, they bring us into some industries where we have not been as strong in terms of overall chemical, you know, chemical processing and a range of activities like that. So I would actually say it is a pretty good mix. I wouldn't like it if they were so separated that we could never figure out a way to bring them together. Likewise, I wouldn't like it if it was just piled on top of one another and we couldn't start to use that as a way of branching out, and increasing the reach of the products. So I am pretty pleased with the balance of that mix in overlap.

Okay. The lease sales in the quarter, were they as strong as they have been, or are people transitioning back to buying --?

They haven't gotten stronger, but they haven't gotten any weaker. It has been stable. You are probably referring to the last few calls where we have talked in the tough economy that the percentage of leased business was going up as people were kind of putting placeholders when they couldn't actually do the capital purchases.

Exactly.

Okay. That has kind of -- it has peaked but not subsided now. I would say it is pretty consistent. Maria, would you concur with that?

Yes.

Well, that's kind of good news. And finally here, can you somehow break out the proportion of license sales to services for CFX, the statement -- or I'm sorry, the release says approximately $19 million in revenues for last year, or as of March 31, 2002.

Yeah, Kim, I am not comfortable at this point commenting. One thing I will mention is CFX was part of a large UK conglomerate, and it was actually not a separate business that had, you know, any capacity for U.S. GAAP reporting, so rather than comment on something that we are not certain of, we will give you further guidance when we have had a chance to finalize what U.S. GAAP results look like.

Okay, great. Oh, and by the way, I just -- this is just a fact clarification. The cash flow for the quarter and year, I missed that.

For the year it was 22.1 million and for the quarter it was just over 6 million.

Okay, great, thank you.

Thank you.

William Braun from A.G. Edwards, you may ask your question.

Thanks, good morning. A couple quick questions for you. One, Maria, around the cost control and the cost structures we looked at to 2003, obviously let's talk ex-CFX, do you feel like you can keep the cost structure essentially where we are now? Are there areas where you feel like you will have to do additional spending,say in the ad arena or promotional arena, to maintain demand?

And then from a competitive landscape, Jim, you mentioned pricing pressure on the service side of the business. I was curious if you are seeing anything significant on the product side, and if there were any difference between the high end of the market and the more midmarket perspective?

Okay, actually Bill, the tack will be the pricing thing. We track -- we have reported probably, I think, for probably about two or three years, basically, you know, on the overall sales proceed, the dollar proceed or the average selling price.

When I do that, we are not talking anything about average order size, we are going down to what the price per individual seat, whether they bought 10 or a hundred or whatever. That has stayed almost flat line for the past, golly, easily for the past eight quarters. And that's true at basically both the design space and at the high end, which would be traditionally what we would call the multi-physics or the mechanical sales. Those have stayed very close. You know, I think maybe part of it could be just the continued rich stream of capabilities that we are putting into it. I mean, there is a continual infusion of value into the products, you know, also, so it is a -- that has been fairly -- that has been fairly encouraging. Now, the second point you --

Cost measures. It is definitely our intention to keep closely monitoring expenses. What I will say is, you know, we aren't going to cut into any main arteries, so our typical spending pattern, particularly in the sales and markets arena, is we always see some heavy investment in Q1 in that area to kind of kick off the year and get everything in place, get the sales force and the channel trained, so what we are just going to do is continue that same level of discipline where each quarter we make trade-offs.

We will not cut at critical areas. But some of those nice-to-haves in good times are just things that we are not going to be doing until visibility improves.

Yeah, If you look at one area, it is not like we continue to do a lot of things, you know, with the channel. You know, we actually evolved a new Canadian distribution mechanism this year. We had -- we were forced into taking action in Italy for very unfortunate reasons. We are always continuing to do things. If there was a major theme of any place where we are putting attention is obviously the ongoing education of the -- both the sales and support channel becomes a vital part to us as we continue to expand the product breadth.

It is nothing longer a, you know, essentially a single product company, nor has it been for a number of years. So as we continue to broaden that, we have to continually put attention, we have a strong channel, but we have to put attention to our training on getting them up to speed as quickly as possible. With regard to R&D, we will stay basically on the same trajectory and discipline we have been on for years.

Okay, great. One quick follow-up on CFX. AEA, howl did they primarily take that to market? Was it primarily through a direct or indirect model?

Primarily direct. They have some indirect channels here and there. But it was primarily direct.

Okay. Great, thank you.

Richard Davis from Needham and Company, you may ask your question.

Thanks. First, a big picture question and a couple little details. On design space, we have had this I guess for a few years now, have you found there's a ratio of the number of design space seats that you guys get in a company relative to CAD seats? I know you get more design seats than way high simulation, is there a one-to-one, one-to-two? Have you found any kind of ratio there?

There really isn't a ratio. The reason is that it is really still starting to emerge. Probably the biggest impediment to that, Richard, is the fact that you take a major company, and even where we have ones where we have put several hundred seats of design space in there, they probably got thousands of seats, of CAD, and the big issue becomes how quickly can they adjust their internal design and development processes to basically comprehend utilizing this technology? And control it, you know, to their satisfaction?

So I think we are still emerging in that particular standpoint. So even if the mature companies I think we have only scratched the bubble, maybe, and this is a pure estimate, finger in the wind, but you know, somewhere in the order of a 10 or 20-to-1 at this point. It is very [INAUDIBLE] which we find encouraging.

Was -- Maria, was there a currency boost in the quarter? Did you mention that?

No material impact to the currency.

Okay. Great. A then just a follow-up on CFX, are you saying -- in terms of us thinking about the acquisitions impact, is 19 million a rough number that we should use to add into the projections, or are you saying, oh man, it could be $10 million or $25 million? Can you give us a sense of that?

Well, you know, obviously we will reserve until we get some of these numbers. But that's a fair target to work with less the fact of these accounting rules for revenue recognition of lease and maintenance revenue already brought in, because there are certain things you, even though the money is there and the business is there, you can't be carried over. I can have Maria go into more detail on that. That would be a first-year, initial-year phenomenon, but the main thing that we are working towards making sure it fits into our business model, and we are looking at this as being accretive by the end of 2003.

So 15 to 20 would be a reasonable figure just to do?

I would say based what we know, again.

Proforma return.

That's what I mean, right.

I just didn't want to be more than 12 standard deviations off. [ laughter ]

I think we got you in that range.

And the other question I had is, you guys said on the growth rate that you expect kind of acts of CFX is low double-digits 10 to 11%. And I know fourth quarter was a tough comparison. But in the March and September quarters, you know, licensed revenues were growing 6, 7% year-over-year.

So implicitly, what you are saying is you expect an acceleration in the revenue growth, which is great. Could you give us a little sense of what signs you are seeing that will give you confidence you will see those numbers spool up? Is it economy? Is it --?

I am not sure, we are not trying to either predict or even, from our vantage point, change the Macro economy, but in terms of the customer reactions we are seeing, what they are telling us, and the size of raw pipelines, in addition to overall forecast information, which spans several quarters and then build on top of the recurring business space that we have, I mean if -- there's several factors that come in play there.

That's just a combination of all those things?

Oh, yeah, in fact we watch all of those. Because any one of those can be a harbinger of either good or bad times.

Okay, thank you.

Herb Tinger from Advest, you may ask your question.

Yeah, thanks. Jim, you commented some customers were slow in getting their paperwork in to renew their licenses. Did you experience any customers electing not to renew their leases?

Absolutely nothing material. I mean, there is always -- there always might be, you know, a couple -- usually when somebody doesn't renew we find out there was one seat and the person who used that seat retired or moved to another company. But no, that's why we are very -- very explicit about the fact of saying, when we tracked it very seriously. I mean, obviously, we were paying attention to GAAP revenue a lot.

We always pay attention to the renewal base. That's why we were tracking early on in that last week of the year, that this this hadn't happened, there were always certain things in these times that have to go an extra signature line, the customer saying we didn't know it had to do this. And a number of different hoops to go through. Like I said, we were tracking that steadily, and in the first couple of weeks, you know, already -- basically we already had in hand all those major ones.

Okay. And as far as CFX goes, what does this acquisition bring you that ISOM didn't?

Well, ISOM gave us the ability to model the environment. You know, like the general fluids and electronics, electromagnetic environment; simply put, Ansys allows us to simulate the product, but ISOM allows you to simulate or basically model the environment around the product, but we used to rely on and we still have relationships with a number of CFD solving companies that would actually solve that environmental issue around the product, and CFX is one of those solver companies.

Now we have that solution company. And in addition to just having that capability, the ability now to blend and bring that into the overall multiphysics framework to get coupled field simulation for higher predictability in the virtual prototyping becomes a real exciting horizon for us.

Okay. Are there any plans, then, to integrate those two products to bring them together as one?

Well, actually, there are. But it interesting thing is the way we do it, and that's -- you are starting to peel back the onion in terms of the multi-facets of the Ansys workbench, which was initially conceived as a way for us to more efficiently share resources within Ansys.

It is something we have started to leverage in all the applications we run, which is why we got the Cadoe-derived products out so quickly. So all the solving technology will stay in the business unit, but they will be able to leverage the infrastructure of of Ansys and work off the workbench to share with structural simulations and basically allow us to increase overall efficiencies.

Okay. Good. A couple questions for Maria. That $500,000 impairment charge that you spoke about, was that for a financial instrument, or was that an investment in a private company?

Investment in private company, and when we took a look at the condition, and everything, we thought it was appropriate to take the impairment charge.

Can you give us any idea how large that line item stands at now and what the risks are for another charge? It is down to zero now?

It is down to zero.

Essentially, what it was was a few years ago when everybody was rushing toward the, you know, the dot-com bubble stuff, and internet centric things, we found a good way of getting a partnership. It was a wise choice at that time and we feel like it is not the proper place for it right now. You know, and -- obviously evidenced by what happened to that overall community. A very wise decision at the time and I think a prudent decision right now to zero it out.

Okay. One last thing concerning CFX, if you can answer it or not, I know you gave what the revenues were as of, you know, March of '02, which in this environment is like a lifetime away, a lifetime ago, can you give us any qualitative comments at all what the sales trends were like in the subsequent three quarters? Did they kind of match what you said, Jim, about low- to mid-teens growth?

Herb, I am going to go back to an earlier comment I made. Financial reporting for this particular entity that was really not a separate business within AEA is, is a little sketchy right now. We are finalizing it, and I would feel more comfortable giving commentary on numbers when we have gone through those final exercises.

Okay.

We will do that post-close.

Fair enough, thanks a lot.

Thank you.

That's all the time we have for questions today. I will turn the call back to you, Mr. Cashman.

Okay, thanks a lot. Basically thanks, everybody, for, you know, for those questions. In close, short-term caution, long-term enthusiasm, we think we have a solid business model that we continue to modulate.

You add that with loyal customers, the fact we have a stable long-standing channel, and again, I can't speak enough about the -- all the employees we were able to help pull us to the point we are with CFX currently and still deliver these kind of results in tough times. So the combination of all this supported this consistent performances, and we have simultaneously been able to expand our customer base; and more importantly, or equally important, add to our strategic technology base.

So with that, I thank all of you for your attention and look forward to talking to you next quarter.