ANSYS Inc (ANSS) 2003 Q1 法說會逐字稿

Good morning, and welcome to the first quarter investor relations conference call for ANSYS. All participants will be able to listen only until the question and answer session of the call. This conference is being recorded. 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.

James E. Cashman, III: Thanks, Missy. Good morning, and welcome to the ANSYS Q1 fiscal year 2003 call. With me today, as always, I'm joined by Maria Shields, our CFO. I'll provide some summary comments to outline the highlights and then go into a little bit greater depth from the operational results. In addition to the numbers, we'll delve into a number of the qualitative factors that were in play in Q1, and that will have a significant impact, and we feel in a positive way, in our business. Most notable of these is the acquisition of CFX.

As usual, Maria will then take you through the balance sheet and expense structure performance, and some additional financial factors. There will be one additional element to her presentation today that I'd like to specifically address your attention to. As a result of factors related to the CFX acquisition, we'll be making reference to additional adjusted financial results which are non-GAAP, but we feel are important to gain a full understanding of the actual business performance of the company. These are in addition to our usual reporting, and they're fully explained and presented in our earnings release as well as the 8-K. After that, we'll be happy to respond to your questions. So to begin with, Maria, the Safe Harbor Statement?

Thanks, Jim. Good morning, everyone, and thank you again for joining us. Before we begin, I'd like to remind everyone that some matter that we'll 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 Form 10-Q, 10-K, and our annual report to shareholders.

Additionally, I'd like to point out that during the course of this call, Jim and I will be making reference to adjusted revenue and adjusted EPS, which are non-GAAP results within the context of the SEC's Reg. G. We believe that these non-GAAP financial metrics are important indicators in measuring the underlying business performance, and are used by management in our assessment of business performance. A detailed discussion and reconciliation of GAAP financial measures to comparable adjusted revenue and EPS is included in this morning's earnings release and the related Form 8-K. With that, I'll now turn it back over to Jim.

James E. Cashman, III: Thanks, Maria. In summary, comparable to Q4, Q1 was a reasonable quarter in a continuation of a tough economy, but with some hints of upticks in certain sectors. We posted steady operational numbers and continued to deliver on the commitments we've made. This was accomplished while consummating the significant CFX acquisition, which took a great deal of management attention, but we feel proved to be well worth it.

From a high level perspective for the quarter, we reported good financial performance, with adjusted revenue at $25.1 million dollars, and adjusted diluted earnings per share of 32 cents, up from last Q1's comparable of 26 cents. Excellent stable operating margins and then the solid business model that helped to continue to adapt well to the range of economic situations. We had continued customer momentum that is underscored by some progressive relationships with major name companies, and also beta releases of each of our product lines in anticipation of our Q2 releases of [Avansys, CAD-Away] [phonetic] ICEM CFD, and Workbench products. This is particularly noteworthy because of the repeatability we've been able to put into our multi-product releases, but it also creates opportunities for incremental sales to our existing accounts.

Now, focusing in on the operational end of things, as previously mentioned, our adjusted revenue for the quarter was $25.1 million. This, of course, represented an all-time Q1 high for ANSYS, and was an 18 percent increase over the reported $21.3 million of Q1 in 2002. Adjusted diluted earnings for the quarter were even stronger, with a 23 percent increase to 32 cents, up from 26 cents per share from comparable EPS Q1 in 2002. And this marks the 22nd consecutive quarter that EPS has met or exceeded the consensus.

Overall, adjusted operating margins, excluding amortization, were 29 percent, in line with our business model, and the gross margins were at a healthy 84 percent. Now, I'll draw your attention to the fact this is slightly lower than our traditional 87 percent, and it's primarily due to the more intensive service elements from the CFX business. We're working on the leverage of this business throughout our distribution chain, in a manner very comparable to what we did a couple of years ago with the ICEM CFD model. And we'll continue to evolve this as we gain synergy between the CFX product offerings with the ANSYS business model, and this is already starting to occur at a very rapid rate.

We also experienced very strong cash flows from operations at $11.5 million dollars. Now, we're going to examine the numbers from a few different perspectives, as usual, by category of business, geography, customer and product. By category of business for the quarter, product license revenue increased at 14 percent. The most notable increases were due to increases in our upfront simulation products and the CFX acquisition. Although the specific contribution of the CFX business was easily distinguishable in Q1, going forward we'll let you know that the integration of this business will make the comparisons increasing more difficult as we leverage the product lines between the comparable offerings of ANSYS, CFX and ICEM CFD, and also consolidating many of the sales and G&A functions, which we have already got underway.

Service growth was 22 percent for the quarter, which was primarily driven by our product enhancement subscription and software maintenance, and was also impacted somewhat by CFX. Lease business stayed solid. ANSYS Professional and DesignSpace continued to perform well. This sector of the design-oriented upfront simulation business outpaced the growth of the traditional high-end business, and grew to 18 percent of ANSYS core sales for the quarter, continuing to nudge up from the previous quarter.

Business intake was also strong, and strong enough to expand our base of recurring or repeatable revenue. Another strength of our business model. For Q1, 65 percent of our core business fell into this category, and it continues to be encouraging to maintain this level of repeatable business base with our overall growth. The 65 percent for the core compares to the 59 percent reported last quarter. And 63 percent for the prior Q1 in 2002. Basically, if we include the impact of CFX, the total is still a solid 63 percent. So, all in all, our deferred revenue grew to an all-time high of $36.7 million dollars.

This all contributed to a strong balance sheet of over $50 million dollars in cash and equivalents; all of this while we were continuing to invest in R&D and our global sales and marketing infrastructure, not to mention the whole cash purchase of the CFX acquisition.

From a geographic perspective, there was a little bit of a spread in the regional performance. There were no real changes in the economy we saw, but we're starting to see some areas that are showing signs of a little greater promise down the way. North America was relatively flat quarter to quarter. Longstanding relationships with our customer base continued to lead our results in this area. Major customers included, for the quarter, Delphi, General Motors, Pratt & Whitney, General Electric, Visteon, ABB, Technik Offshore, Mercury Marine, NASA, the U.S. Army, Belcan – these all had six figure orders for the quarter. It should be noted that basically all but one of our direct offices realized double-digit GAAP growth for the quarter, and we're addressing that other issue.

Europe continued its steady improvement, both from an economic as well as an execution standpoint. Europe grew at 22 percent in our core business and at 38 percent overall. All sectors performed well, basically, all things considered, with the exception of Germany, which was relatively flat. But we are particularly pleased with the early contributions of a strong German organization that has combined CFX, ANSYS, and ICEM CFD personnel, and it's been recently established to bring a greater focused into this very important segment for us.

We continued to see very good progress in France, and continued strength in England and the Northern Europe region. The largest six-figure deals here consisted of OlVo, Allston, Piaggio, AirBus, Siemens, Phillips, [Tahalas] [phonetic], ABB, [ManKoris, Microsulis Medical Bosch] [phonetic], and SKF, just to name a few. This is the broadest array of industry penetrations that we've seen in Europe in a long time, so a lot of the activities we've had underway are starting to bear fruit in accelerating fashion.

Our general international area, largely governed by the Asia Pacific region, grew at 24 percent with, again, double-digit growth in our overall core business. Japan is actually one other key area to which CFX brings an established organization to increase our footprint there, and it basically serves to supplement our longstanding distribution relationship with Cybernet Systems. Key customer engagements here included Mitsubishi, Seiko, Minolta, Hitachi, Canon, Sony, Infotek, desto, Amberson – again, just to name a few – where obviously the consumer electronics and automotive businesses were leading the way there.

And we still have, as always, pockets of concern, but the industry breadth and the emerging strength in some non-traditional industries gives a foundation upon which we can build. And we'll also be adding to that industry base via the CFX acquisition.

The addition of key organizational and sales strengths in the major markets of Japan and Germany are particularly welcome to us, and basically allow us more cycles to address some of the pockets of performance that we saw in North America.

As I mentioned earlier, the pipeline of new opportunities is quite solid, even though they've continued to remain at the longer sales cycles we've been cautioning before, given the current environment. But nevertheless, we're pleased that the new customer attainment continued even during these times of uncertainty, particularly when a lot of our customers continue to examine their expenditures very closely.

So, in summary for geography, again, double-digit growth in core business everywhere except North America, and there was good industry and major account activity throughout each. Particularly encouraging results in France, which had been previously – basically, we had mentioned this as an area of concern about a year ago, but we've continued to ramp up from there.

And also, we look forward to the ability to leverage the established operations in Germany and Japan, but they've been augmented through our CFX acquisition. Obviously, a major part of the next few months are going to focus on aligning, training, and integrating the various sales and operational teams, post-acquisition, so that'll keep us pretty busy for a few months. And Maria will talk about the guidance, which is still quite good, for this acquisition.

We'll continue caution through the middle, at least, of 2003, in line with the earlier guidance as we've been giving in previous quarters, and continue to monitor and adjust our sales and distribution strategies in response to the uncertainties we see, as well as towards some of the emerging opportunities we're seeing.

From a product revenue standpoint, our multi-quarter guidance and trends have continued. As mentioned earlier, the software license revenues grew by 14 percent quarter to quarter. The high end sales remain steady and the upfront simulation products DesignSpace and ANSYS Professional stayed strong, again, as previously mentioned, providing approximately 18 percent of our quarterly core sales. The high-end seats constituted about 22 percent, which is consistent with Q1 trends, but it also is reflective of the relative strong contribution of the design-oriented seats. For those of you who ask, the ASP's continue to remain relatively stable. We made progress on all fronts, as we prepare for multiple releases of all of our major product lines for the Q2 time frame.

The ANSYS 7.1 release continues to raise the bar on non-linear and advanced mechanics, with advanced surface to surface and assembly contact capability. In this case, ANSYS internally [builds] [phonetic] the constraint equations based on the contact kinematics. In addition to other new enhancements – we won't go into an exhaustive list here – but we've also expanded our multi-physics offerings with advances in fluid structure interaction, providing also parallel code couplings, so that's going to play very well in terms of short-term integration with the CFX acquisition.

We've also added two new products, DesignModeler and DesignExplorer VT. DesignModeler is basically a new concept modeling tool that furthers our longstanding commitment to upfront simulation, where basically the design refinements can have a much greater impact. And as you've seen, the design and upfront simulation part of the businesses has been a relatively strong performer for us. The DesignExplorer VT brings the power of variational technology to the designer's desktop, giving a designer the ability to visualize effects of a multitude of simultaneously changing design parameters in a single solving scenario. So these two products are some of the first new range of accelerated products that have been spawned and enabled by the ANSYS Workbench framework architecture that we've been talking about for some time now. So we're starting to see the ramp-up of that.

We also have a new version of AI environment, which brings the experience of ICEM CFD in handling automated large scale modeling with very robust geometry handing to structural simulation. It supports a number of third party codes, but it's used as the primary pre-processor for the new release of our AI*NASTRAN product.

Now, the CFX acquisition brings to our simulation suite state of the art capabilities for computational fluid dynamics, and these are critical to our customers' ability to understand the effects of the environments in which their products will have to perform. And, just to illustrate, these can include a broad range of practical uses, such as the turbulence around aircraft, combustion processes, performance of engines, cooling of delicate and electronic assemblies, performance of sensitive biomedical applications, as well as things leading to safer and more efficient operation of process plants. In addition to bringing this range of capabilities, it is very logical extension of the existing ICEM CFD technologies, and the mainline ANSYS technologies, just a case in point, via the previously mentioned fluid structure interaction capabilities we were discussing in ANSYS 7.1.

Obviously, we look forward to the ongoing stream of technology and the acceleration that CFX brings to our array of products – their product line such as CFX 5 and [BlayGen] [phonetic]. Even toward the end of the quarter, we announced the release of TurboGrid 2.1. And a new version of CFX 5, actually version 5.6, is slated for Q2. CFX adds strength to our traditional major customers; in fact, there are many cases where we have synergy in those. But it also adds new industries, most notably that in the chemical and the process industries, into which we can leverage the entire range of ANSYS products over time.

And then I have to say that another welcome opportunity in the works that already underway is the cross-leveraging of the CFX technology with the ANSYS Workbench and the ICEM CFD modeling capacities.

So, in summary, we remain, as always, committed to and encouraged by the long-term strategic direction of the mission. We've been able to meet the operational commitments in some tough times, but we've done so while continuing to evolve both our distribution capability and substantially generate a groundswell of new capabilities that just continue to underscore our current technical leadership.

So we've even able to keep the top line progressing while maintaining solid margins. This is evidenced by the fact that we've meet our exceeded the analysts' earnings consensus for 22 straight quarters. This has allowed us to further our technology and sales investments. And I'm particularly pleased that we've gradually built an organization and processes that we're able to keep the business progressing while we were in the midst of closing and integrating what we feel is going to be a significant acquisition in the embodiment of CFX.

So these investments, coupled with industry and geographic breadth, have provided us the tools by which we react to some of the uncertainty in the economy. And we'll continue to monitor the global situation, as we've been saying for several quarters now, and adjust the business model accordingly with some short-term caution, but longer-term optimism.

So with that overview, I'll now turn it over to Maria Shields, our CFO, to provide you with a more detailed look at our financials, including the expense structure, balance sheet highlights, as well as particulars related to the acquisition of CFX.

Thanks, Jim. For the next few minutes, I'm going to go through a brief recap of Q1 expenses, a few balance sheet highlights, and provide some guidance regarding our outlook at this time for Q2 and the remainder of 2003.

Before I get started, I'll once again remind everyone that the figures that I'm going to be discussing will be expenses as a percent of revenue adjusted for the impact of the purchase accounting adjustment relative to deferred software license revenue.

From a cost of sales perspective, cost of sales for the quarter totaled $4.1 million. That compares to $2.9 million in last year's first quarter and resulted in an overall adjusted gross profit margin of 84 percent. The comparative increase over last year's first quarter primarily related to additional head count and increased royalty costs associated with the CFX acquisition. The reduction in our adjusted gross profit margin when compared to prior period is largely attributable to the CFX acquisition and the impact of the service component that they have in their business.

In the area of sales and marketing for the quarter, expenses increased to $5.5 million versus last year's first quarter comparable of $5.2 million. Once again, the increase in expenses compared to last year's quarter was really related to head count facility costs associated with the CFX acquisition.

In the area of R&D, total expenses for the quarter increased to $5.7 million, compared to $4.8 million in last year's Q1. The increase year over year was primarily driven by the CFX acquisition, but we've also made some additions in the core ANSYS ability to increase R&D to support all of the expanded products that Jim talked about earlier. One thing I will point out is that during the first quarter of 2003, we did capitalize about $100,000 of internal labor costs related to some of the new products. In the area of G&A, expenses totaled to $2.6 million, as compared to $2.3 in last year's first quarter, largely related to CFX.

While we continued to make investments in all of these key areas across the company, including the acquisition, we also delivered solid operating profit margin, excluding the impact of purchase accounting adjustments and amortization of 29 percent for the quarter. Our effective tax rate was 34.3 percent; the increase from prior periods is also a direct result of the acquisition. And at this time we're anticipating that throughout the remainder of 2003, our overall tax rate should be somewhere in the 34 to 35 percent range. However, as I've done on several of the past calls, I'll continue to caution that there are a number of tax-saving vehicles that we currently have in place that could potentially be changed by upcoming legislation that could have an adverse on the company's tax rate, depending on the outcome of that legislation, so we'll be keeping a close eye on that.

ANSYS reported total adjusted EPS, excluding purchase accounting adjustments and acquisition-related amortization of 32 cents on 15.6 million diluted shares. That compares to adjusted EPS of 26 cents in last year's first quarter. I'd also like to add that the positive contribution to adjusted earnings in Q1 was about 2 cents from the CFX acquisition, and that's directly attributable to the fact that the CFX business, March has always been historically, their strongest month from both a revenue and a profit-generating perspective. As we proceed into the upcoming second and third quarters, the CFX business has a very similar seasonality to the ANSYS business, in that both of these quarters are traditionally the more challenging quarters. Including the impact of the first quarter adjusted earnings performance, we continue to anticipate adjusted EPS for calendar '03 in the range of $1.43 to $1.45, and in the range of 33 cents for upcoming second quarter.

I'll also comment at this time that we estimate, on a go-forward basis, the total impact of the purchase accounting adjustment relative to the write-down of deferred revenue from CFX software leases, for the remainder of 2003, will be approximately $2.5 million dollars. And essentially that will have an impact on reported revenue in Q2 of about $1.1 million; in Q3, $900,000, and in Q4 about $500,000. The remaining impact for calendar 2004 is about $400,000.

I would also like to highlight that while under GAAP the total of $3.4 million dollars of software lease revenue from CFX will never be reflected as revenue due to the purchase accounting rules, the substantial portion of the cash flow from those orders will flow into the business, and this is why we believe that the adjusted revenue is such a critical non-GAAP measure that really needs to be emphasized.

Taking a quick look at our balance sheet, it continues to remain quite strong. Total cash and short-term investments at the end of the quarter were $51.8 million. Our consolidated net DSO was up to about 69 days, largely related to CFX, and we will target, as we begin the operational integration and working CFX into our back operations, to work on improving that. Total gross deferred revenue grew to $36.7 million.

So all in all, in closing, I'd just like to comment that while the current global economic and political environment continues to add some level of uncertainty and unpredictability to operating the business, consistent with our recent performance during challenging times, we remain very committed to aggressively manage our costs and our investments in line with our sales visibility in and effort to continue to deliver possible results to our shareholders. With that, I'll turn it back over to Jim. Thanks.

James E. Cashman, III: Thanks, Maria. So to recap – continued financial performance in difficult times, a significant acquisition in CFX that dovetails directly with our previously [indiscernible] repeated strategy. Measurably strong performance and customer endorsements from the collaborative engineering products that we've discussed for the last few quarters. New technologies of all ANSYS products, including ANSYS, CadAway, AI*NASTRAN, ICEM CFD and CFX. Expanding sets of truly strategic relationships, as evidenced by recent announcements with LMS International, as well as a couple quarters ago, with companies such as AutoDesk. And finally, increased penetration into a broader range of industries, which can get a little bit broader as a result of the CFX acquisition.

With regard to the outlook for the remainder of 2003, we continue to be cautious about certain sectors of the economy, and particularly vigilant given the issues of sales cycle during these times. The long-term outlook stays solid. For the year, we're expecting adjusted revenue in the range of $115 to $117 million, and as Maria said, adjusted EPS of $1.43 to $1.45, in that range. And of course, we'll continue to keep an eye toward ratcheting up performance per our track record if the economy should start to warm up.

So with that, we're now prepared to respond to any specific questions you might have.

Thank you. At this time, if you would like to ask a question, please press *, then 1. You will be announced prior to asking your question. And to withdraw your question, you may press *, then 2. Once again, to ask a question, please press *, 1 on your touchtone phone.

Our first question today is from Tim Fox of SG Cowen. You may ask your question.

Hi, thank you. Congratulations on another solid quarter. The first question I had was regarding a comment you made, Jim, a little bit earlier about the new product rollout you were expecting in Q2. And you said something that I found interesting, that it could generate incremental sales to existing customers. I'm wondering if you could just expand on that a little bit, because I was under the understanding that most new product releases were covered under maintenance.

James E. Cashman, III: Well, no, no – good question. First of all, yes, it does create incremental sales opportunities, but they each have their own selling cycles associated with them, particularly related to new technology. With some of the modular approach, yes, when we have – for instance, when I mention the 7.1 capabilities and we talked about the advanced contact kind of capabilities – that's an example of a very significant expansion in the existing product line. And that typically would be covered by the ongoing maintenance contracts.

But when we add new capabilities, particularly those related to the variational technology or the DesignModeler type of technologies, those are very logical add-ons, but they really constitute new modules. Very much in the way that the CFX products will be new modules. So, for instance, a person on ANSYS maintenance would not be entitled to, for instance, CFX upgrades also. So it really is governed by how distinct the new capabilities are.

So, particularly with DesignModeler and DesignExplorer VT, for instance, as well as with the new release of AI Environment and AI*NASTRAN, those would be ones that fit in very well from a needs standpoint with our existing customer base, but if they're not extension of previously accepts ANSYS capabilities, those typically would be new add-on modules. And from that standpoint, we basically do have incremental sales capability. But whenever you come up with a unique new technology, the market often wants a little bit of time to prove to themselves that, in fact, it does work. But eventually it does pay off.

Great. That's very helpful. If I could, a question about the service side on CFX. Is there a dynamic there with that product line that you expect over time, that the ease of use, similar to what you saw in some of your high-end products, will improve? And as a result, that service component may actually soften a bit going forward?

James E. Cashman, III: That's exactly the case. In general, I think the CFD market tends to have a little bit higher service content, probably because of a number of factors, some of them related to ease of use; some of them related to the special education of the advanced users of that capability. So that's a very standard kind of capability. In general, a lot of what we see is that, yes, the ease of use, the Workbench-related integration will allow us to – I'd probably say democratize – the use of CFD. Not unlike what we saw as we started to release DesignSpace and ANSYS Professional. And that'll be an evolutionary type of process that will span quarters and probably even years. But I think we'll start to see advances with that, in particular, over time.

And in general, what we see is that the service element tends toward the higher value things in terms of customization and tailoring toward specific customers, integration with in-house codes, as well as maybe the development and application of solving new map models with the core technology. So yes, it will change; you know, it will change over time. And that's very similar to some of the evolution we did with the ICEM CFD, where a few years ago we committed toward evolving the gross margins of that particular business unit, and in fact, followed through with that. So that's very much part of our objective.

We also want to be able to continue to leverage our very vast indirect channel, in terms of supporting the services as they've done over a number of years. So all of those elements come together to basically evolve those margins over time.

Great. Thank you very much.

James E. Cashman, III: Thank you.

Our next question is from Kim Caughey of Parker Hunter. You may ask your question.

Good quarter, guys. I just have a couple of quick questions, I hope. First of all, the total number of large sales in the quarter? Big sales.

James E. Cashman, III: Well, if you look at the six figure, it was two, three dozen, as usual. I rattled off just kind of a subset of those.

And they're trending up?

James E. Cashman, III: I guess you could call it a trend, but it's a very modest trend. That's some of the signs of promise we see. But it's fairly traditional – it's obviously not as good as we think it's going to get over the next couple of years, over the long term. But at a minimum, it has been sustaining.

Okay, great. It's an issue that a lot of companies have been unable to achieve in this tough environment.

James E. Cashman, III: Actually, if I'd say it was characterized by one thing, Kim, it was probably a slightly greater number, but I'd say that people, at least the ones we're seeing, are now taking -- where you might see a seven-figure order or a high six-figure order – we still have some of those high six-figure orders, to be sure. But I think the list of six-figure orders probably expanded, but they probably notched down a little bit, and it seems like they're taking more cautious and metered steps even as they're implementing some of the new technologies they're expanding. So I think that's just another evidence of a certain range of caution. But at least there are more companies starting to come up. And I think, in particular, you saw that with both the number and the list of Europe and Asia Pacific, in particular.

Great. And the direct sales office that didn't quite grow as quickly as you'd hoped – was that in North America?

James E. Cashman, III: That one was in North America.

Okay. That's all I have Thank you very much.

James E. Cashman, III: Thank you.

Our next question is from Richard Davis of Needham. You may ask your question.

Thanks. Kind of one detailed and one general question. I guess the general question is, was there any shift this quarter between the percent of revenues derived from your direct sales channel versus your partner sales channel, and does that change at all with the CFX acquisition?

James E. Cashman, III: I'll have to answer that question in two parts. It was fairly stable and kind of at the model at which we've been targeting over the last few quarters. However, in the go-forward aspect of that, there is no doubt that in the short term, CFX has had more of a direct model. Now, as we've continued to expand, even with the ICEM CFD organization, we've actually expanded in the last couple of quarters there in direct presence. So with CFX, we would look at that as being, if anything, in the short term, it's going to add more percentage of the direct, but we've also going to look toward expanding that to the qualified and certified channel partners that we have, as an ability to put additional reach in there. So there's going to be counter valance in the opportunity, where short-term, see the direct percentage go up a little bit, and then over time, see it start to mellow out into a little bit of a mixed model itself.

Okay. That's helpful. And then I was looking at the launch information on ANSYS 7. And it's just a nitpick question. But it said in there that you can mesh solids and surfaces in a single assembly when you're doing the analytics on that. I thought that was in Version 6. Or is it just improved?

James E. Cashman, III: Well, it's a number of improved things, and over time, of course, we're spending a lot of time building in – I talked about some of the integration activities that are going on with ICEM CFD, which was always a great tool for meshing extremely large models, which obviously get into more and more with the assembly aspect. But in general, the way we're handling assemblies has also expanded quite a bit, in terms of we announced, for instance, the multi-body initiative with LMS International. We talked in 7.1 about the contact on assembly basis kind of standpoint. So I think you're going to see a steady evolution there, because again, the stated purpose is handling complex, multi-body, complete products and then simulating them in their environment. Hence bringing in the capabilities of companies like CFX.

Got it. Okay, thanks.

Our next question is from Herb Tinger of Advest. You may ask your question.

Thanks. Jim, the one North America sales office that didn't measure up – is there anything regarding their customer base, their target customers may be skewed more towards one particular vertical market that might have accounted for their performance?

James E. Cashman, III: First and foremost, there were execution issues. But every company always deals with execution issues somewhere in the organization. So that's just something we do on a regular basis, and it's nothing to moan about. However, there was a confluence with an industry standpoint, and I'll just say that it was related to some of the electronics and the telecom sectors. But apart from that, it's something we have to address, we will address, and it is addressable.

Okay. And a couple questions on the CFX acquisition. Since it was only about a month's worth of revenues in the quarter, will you say how much they generated in revenues in the quarter?

James E. Cashman, III: Maria can get that number. First and foremost is, it represented basically the equivalent of the last month of their year, which makes it a very big blip according to their - they've got a very strong hockey stick in their model, and of course, that's something that we'll continue to evolve as we've taken that through.

Herb, on an adjusted basis they added about $2.7 million for the quarter.

Okay. And from an expense structure going-forward, in terms of bringing out some efficiencies, head count – when you acquired them versus what you think it might be a quarter or so out?

Actually, one of the things that we did in structuring the deal, Herb, was to have the right-sizing be done pre-deal. We wanted to be able to get a right-sized organization, day one, so that we were focusing on building synergy and focusing on opportunity as opposed to going through head count reduction exercises. So we've really structured the deal in such a fashion that we're going to work on integration now, not head count opportunity.

So those issues are behind you already, then?

James E. Cashman, III: Well, I'd say largely behind us. I mean, we did most of the heavy lifting, but obviously we wanted to continue to consolidate and rationalize the sales forces. We've already had group technical meetings and actually have product plans in place that actually share technologies. I mentioned the amount of management cycles that were into it, but we wanted to make sure that – we knew it strategically made sense, and what we wanted to do was convince ourselves during that process that, operationally, it would make sense in a reasonably contracted time frame.

Okay. And last question, time-based licenses – what percent of sales were those in the quarter?

James E. Cashman, III: We'll have to do a quick calculation here for that.

About 16 percent.

Okay, thank you very much.

Our next question is from [Cardic Sarma] [phonetic] of Tiger Management. You may ask your question.

Hi, Jim, Maria. Congrats on the quarter; those are actually fantastic numbers.

James E. Cashman, III: Thank you.

On the CFX front, I think you just mentioned that you had $2.7 million dollars of revenue.

On an adjusted basis.

James E. Cashman, III: Adjusted basis, not GAAP.

Right. How much of that was license versus services?

They're about fifty-fifty.

Okay, fifty-fifty. And in our model for CFX for this year -- I mean, clearly, we shouldn't be modeling 2.7 times 9 for the last nine months.

No, no.

Right. What should we be looking at?

Well, on a consolidated basis, Jim talked about 1.15 to 1.17.

Right.

That's adjusted. And that is taking into consideration the fact that, quite frankly, their strongest quarter is going to implement in our first quarter of '04. So if you look at the guidance that Jim originally gave for core business last quarter, it was low double-digit, somewhere in that 9 to 10, and adds incremental coming from CFX.

James E. Cashman, III: The other thing is that, as we start to score this business, again, we're focusing heavily on the overall simulation integration aspects, and as such, the way that the products cross-leverage - we've always had some form of a CFD capability in ANSYS. ICEM CFD was a major modeling tool for the CFD environment. So all those things start to triangulate very quickly. And over the next few months, it will become increasingly difficult to distinguish the distinct business aspects of that. Plus, as you know, we're very major account focused, and what that means is not having a multitude of competing sales force running in under the ANSYS banner.

So we've actually spent a lot of time in terms of consolidating sales teams, IT teams, and the overall G&A infrastructure aspect. And of course, that will all blend in, in the next few quarters. So just to make a little differentiation there. But the main thing is, that's why we have to look at things on a consolidated basis and why we're trying to put the guidance there, because the pieces tend to change and adapt, because it's not just a distinct kind of business. It's one that strategically fits in with where we wanted to head and we're going to leverage that as quickly as we can, and we only do that by consolidating, not by partitioning.

Right. I think one number you had given us – you had given us in the acquisition announcement that the FY '02 revenues for CFX – do you have a similar number for FY '03 – the March ending '03 numbers for CFX?

No, because the seller never went through putting together any kind of comparable GAAP that wasn't relative to them at any point in time. And we were more focused on creating what's the picture going to be going forward.

Okay. And one last question on this topic. If I look at the 2.7 number, 50 percent being license, 50 percent being services, is it fair for me to assume that the services number is fairly even across three months, and it's only the license portion that's back-end loaded? So when I'm modeling CFX for the rest of the year, should I just think of roughly, as least on a pro forma basis, the CFX [indiscernible] at the $1.3 million dollar per month services revenue?

James E. Cashman, III: No, actually, I think what you would see – like many companies, there will be a strong closure rate on projects to fit financial cycles, so you do get a back-end loading. And there is some cyclicity in the service business. So in Q2 and Q3, typically, and particularly Q3, with the strength of some of the Europe business there -- you know, things tend to quiet down. So you'll see a number of pockets. So I don't think that would be a very accurate go-forward.

But when we say service, everybody's gotten very used to, when we say 'service,' we're almost always talking about maintenance kind of contracts -- you know, that service-related revenue. With this particular standpoint, we have a mix of that service-related revenue , which probably could be considered pro rata, but the consulting aspect would have those pockets and spikes that I mentioned. And that probably is the predominant part of their service business right now. Does that make sense? There were a lot of factors we tried to cover there.

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

James E. Cashman, III: Okay, thank you very much. And thanks to everybody who participated and asked questions. So, in close, short-term caution, long-term enthusiasm, backed by a solid business model, loyal customers – thanks to them. Channel partners that have continued to stay dedicated over many years with us and of course, tip of the hat to the range of employees that we have here, including some very nice additions with the CFX acquisition. This combination continues to afford us consistent performance with an expanding customer and industry base, and an exciting new base of technology to support the enterprise initiative. So with that, I thank all of you, and be talking to you again next quarter if not sooner. Thanks.