ANSYS Inc (ANSS) 2003 Q2 法說會逐字稿

Good morning and welcome to the ANSYS Second Quarter Investor Relations Conference Call. All participants will be able to listen-only until the question and answer session of the call. This conference is being recorded at the request of 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.

Ok, thanks a lot. Good morning and welcome to the ANSYS Q2 fiscal year 2003 call. With me today as usual is Maria Shields, our CFO. I'll give a general summary to outline the highlights and then go into greater depth on the operational results and then as unusual we'll look at the numbers from different perspectives and also talk about some of quality of the -- aspects of the things we've been doing.

In addition to the current results we'll be discussing, well, we've also continued to prepare for future opportunities with progress on the strategic initiatives that we've being just discussing for a - an ongoing basis here. Maria will then take you through our balance sheet, the expense structure performance and some additional financial factors and then after that we'll be happy to respond to any questions you may have. So, to begin with Maria, our Safe Harbor Statements please.

Thanks Jim. Good morning everyone and thank you again for joining us to review the highlights for the ANSYS's second quarter and year to date 2003 results. Before we begin, I'd like to remind everyone that some matters that will be discussed 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 2002 annual report to shareholders.

I'd also like to comment -- that at this point, during the course of this call we're going 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 the business performance. A detailed discussion and reconciliation of GAAP financial measures to comparable adjusted revenue and EPS is included in this morning's earning release and the related Form 10-K.

Jim?

Okay, thanks. Well -- Q2 summary comparable to the last three quarters due to -- was a good quarter in what continued to be difficult economic times. We delivered on our commitments and earlier guidance and we posted strong operational numbers. So looking at those numbers from a high level prospective, for the quarter we reported solid financial performance with adjusted revenue at $28.8m, which was solidly in the analyst range. Adjusted earnings per share growth of 16% with an adjusted EPS of 37 cents up from last Q2's 32 cents and this exceeded both the consensus and the analyst range.

Continued strong stable margins and a solid business model, they continued to insolate us from the current economic environments out there. Excellent progress in bringing our Q-1, CFX acquisition on line, and we'll discuss that in more detail coming up, and continued -- encouraging signs from both a product and customer standpoint. So, focusing on the operational cut of the numbers first, as previously mentioned, our adjusted revenue for the quarter was $28.8m, again within the expected range. This compares to $22.7m in Q2 of 2002 and represents a 27% increase over the previous comparable quarter.

The actual recorded GAAP revenue was slightly lower at $27.6m but that also was solidly in the analyst range. Maria has already given you a little insight of that, but we'll go into more detail shortly. -- But, the difference in numbers is purely a function of the impact of reported license revenue, due to purchase accounting adjustments. -- Basically the customers are there, substantial cash flow is there and so it actually somewhat mistakes the status of the business to report the revenue as if it isn't.

Our earnings also grew with an adjusted EPS at 37 cents, up from, as we said before, 32 cents per share from Q2 of 2002; again, above the consensus and the upper end of the analysts range. This is the 23rd consecutive quarter that we have met or exceeded the analyst's expectations and obviously over that timeframe we've been able to perform both in up and down economies. Our overall adjusted operating margins excluding amortization were 29% and in line with our business model and adjusted gross margins on target at 82%. These also were in line with our projections and largely were impacted by the assimilation of the CFX operations, which historically tend to have a more service-dominated lower margin structure. Maria will go into more detail but we've also made rapid progress in the area of DSO discipline.

For the six months ended June 30th, 2003, we reported total adjusted revenues of $53.8m or a 22% increase over the first six months of last year, including a good balance in the increase of both license and service business. The year-to-date adjusted earnings per share were 69 cents, which is a 19% increase over the 58 cents of 2002, or the first six months thereof. Overall adjusted operating margins, again excluding amortization, were 29% for the first six months and an adjusted gross margin of 83% and cash flows from operations were over $10m for the quarter which brings us to over $21m for the first half of this year. We'll take a moment and examine the numbers from a number of different vantage points, -- so, category of business, geography, customer and product.

By category of business, we saw again a very good balance. For the quarter the lease business was stable, software license revenue grew at 28%. In addition to the impact of the CFX business, our mainline product sale (Indiscernible) ground the design oriented products design space, ANSYS Professional, grew in excess of this and we had a modest(Inaudible) about low EM revenue. Our service growth was 25% for the quarter, which also was impacted by the CFX acquisition and was also driven by the product enhancement subscriptions and software maintenance but we also had a good balance of some of our nature account-related implementation services.

Design and ANSYS Professional continued to perform well, growing at about 20% each for the current quarter and the year-to-date. They continue to represent about 15%, mid-teens or so of ANSYS sales. At the upper end of the ANSYS product line, ANSYS multi-physics (ph) and the ANSYS mechanical remain steady. Business intake increased also, although we'd like to see higher levels as a pre-cursor to improving economic conditions, but nevertheless our repeatable business space grew and it remained at 66% of total revenue, compared to 66% of Q2 of last year and actually up from 63% in Q-1 of this year. This is encouraging from a couple of perspectives. First, it's an indicator of the rapid integration path for the CFX business and secondly, as always, maintaining this reputable business space provides long-term visibility and also short term support during the tougher economic cycles.

All in all, our deferred revenue stands at over $36m and that's up from $25.7m at the end of last Q2. In addition to our pipeline, license growth and expanding partner relations, other space basically continues to aid in our overall visibility. So all of this contributed to a strong balance sheet, which Maria will go into in a few minutes, of over $62m in cash and equivalents; all of this while we were continuing to invest in R&D and our global sales and marketing infrastructure, and it's probably worth noting that this cash balance is already above the year-end levels of 2002, even with the acquisition of CFX, so, very encouraging from a cash flow standpoint.

Now looking at things from a geographic perspective, the bottom line from that perspective is, two conditions continued from our previous calls. First of all, there still was a spread in the regional performance and that was due in part to the macro economic conditions and the general economy was a factor and we'll continue to monitor that with caution as we have for a number of quarters now. It affected all regions to different extents but with the CFX contribution, we saw growth in each of the three major geographies and in a majority of our sub regions.

Starting with Europe, the improving trends we've been talking about for a number of quarters now, continued with an overall growth of 40% plus for both Q2 and the first six months. Our core growth, in fact, was even double digits in all the major European areas for the quarter and 17% year-to-date. All of the sub regions are doing reasonably well for the first half. Germany is still the most affected by economic factors, but it also grew double digits, nevertheless and the other regions are producing well. Probably most notable of these, because it also is indicative of some of the issues that we had sighted a couple years ago, that we are working on, but the most notable of these is probably France, where our momentum continues and we've seen growth rates in excess of 20% for the quarter and year-to-date. Major European orders came from Allston (ph), Rolls Royce, Bellayo (ph), Phillips, Pedasione (ph), Setanasa (ph), Bentley Motors, Delphi Diesel and (Indiscernible), so, a number of good accounts even in these tough times.

Our general international area continued to grow in all areas. All major areas and GIA grew typically around the 20 to 30% area, with Japan actually leading the way. Even in core business, Japan generated high-teens growth for the quarter. I do have to say though, we are still cautious about the Japanese economy in spite of this quarterly performance and we've got that in our claiming cycle.

The rest of the region garnered double-digit growth and we continued to see good performance out of India and China, which continues to perform well in revenue and intake even with some of the vastly reported health issues that were in the region that, basically, I think overall, -- slowed the overall business efficiency we are seeing there, but still good performance. Key customer engagements there included Toshiba, Mitsubishi, Rico (ph), Fuji Electric, Kata (ph) and the higher energy acceleration research (indiscernible) organizations. So, again, a good array of customers there with significant orders. North America continues to be most affected by the economy. There was marginal growth in North America with some softening in the core business, primarily on the overall economy, but also on some specific performance issues which have already been addressed, and we did this before they turned into any significant problems. Orders from Maxstore (ph), Delphi, CJ(ph), Pratt Whitney (ph), Northwood Drummond Bowing (ph), Westinghouse, Solar Turbans (ph) and Daimler Chrysler dominated the list of the company's six figure deals for this past quarter. And the industry breadth continues with a slight up tick in the automotive and aerospace sectors in this previous quarter. So in addition to continued and increased commitment from our large accounts, we are encouraged by the performance of our direct offices, and the fact that in North America they, -- in aggregate, they had double digit growth. So, we do have pockets of strength there also.

So in summary, all geographies grew in total business and we maintained our industry and customer breadth. There were varied impacts from the economic factors in various industry sectors, but we were able to maintain progress, while staying on our strategic path, or actually maybe I should say by staying with our strategy. Nevertheless, we have ongoing evolution and growth and remediation plans for each region as part of the normal growth and rejuvenation process and that's something we've been saying now for a -- year after year.

Overall, we are encouraged by our major account progress, the strengthening of our overall industry breadth and the momentum in our direct offices, and of course, the broad base of customers that have provided for our recurring base and -- they're a continuing source of opportunity for expanding our license business. So again, we'll continue as we've been saying most of last year and this year, we'll continue our caution with the -- through the end of 2003 and continue to monitor and adjust our sales and distribution strategies in response to the economic uncertainties that are still out there and lingering in different areas.

Now from a product stand point, as usual, R&D investments (indiscernible) to highlight and continue to yield advances in our products suite. Each major product line introduced significant releases in the quarter. The flag ship product line, ANSYS released version 7.1. In addition to the usual advances in our multi-physics and non-linear capabilities, we also unveiled significant offerings in three modules, all of which can be used throughout the design and verification process. Design-Explorer for design of experiments, based interrogation of design sensitivities from the aspect of physical behavior of products, Design-Explorer VT, which provides unique variational technologies for optimizing designs in basically about 1/10 of the time of traditional technologies and Design-Modeler, which allows functionally-oriented concept development.

We also released AI Environment, which is a general purpose modeling tool aimed at heterogeneous modeling scenarios and basically its world class capabilities prepare metric links to CAD systems, the healing of incomplete geometry and mesh manipulation, also help make it the de-facto choice for a wide range of open systems based modeling.

And even our recent acquisitions CFX, released CFX 5.6, which expands its range of physical models, parallel processing, advanced solubers [ph] and automation tools. So, we could go on for some length on the detail of these capabilities, but feel free to visit the website or contact our marketing folks if you'd like to get some additional information.

One of the most encouraging aspects of our product initiatives has been the rate at which we've been able to integrate the range of technologies that we have underway. The ANSYS 7.1 Workbench has been used to facilitate the integration of new technologies and the important aspects of unifying them within our multi-physics strategy.

As mentioned last quarter, this is already starting to blur the conventional sales and R&D lines between ANSYS CFX CAD-Away [ph] and the ICEM CFD [ph] derived products. With regard to numerical progress as previously mentioned, adjusted software license growth was 21% year-to-date. High-end sales, for example, the multi-physics and mechanical products, remained strong contributors to our business. Design and ANSYS Professional both grew in the 20% range and provided approximately 15% of quarterly sales.

Our ASP's for the quarter actually rose, reflecting sales that tended to the upper end of both the multi-physics and the design product lines, so, basically when people are ordering, they are tending to order slightly upgraded versions compared to previous times. With all of this momentum, the largest issue we have with our technology progression is the efficient evolution of our distribution capabilities, both direct and indirect and to this end, we're spending a lot of time on and a lot of attention on continuous training and the development of our key customer relationships because the breadth of what we are offering as well as the complexity continues to grow and we just want to make sure that we can continue to convey that to our customers.

The bottom line, continued progress in extending of our technology base, both in our core products, our new product lines, our acquisitions and our unified architecture and they're all aimed at furthering the impact of simulation throughout all phases of the design and engineering process. That's really what we are all about. So, in conclusion, we remain committed to and continually encouraged by our long-term strategic direction and mission and with good reason. We've been able to continually meet our operational commitments in difficult times, but we've done so while continuing to evolve our distribution capability and generating a veritable ground swell of new product capabilities to accentuate our current technical leadership.

Our top line has continued to grow in line with our guidance and in difficult times and we've been able to maintain our gross and net margins according to our guidance and this is obviously evidenced by the fact that we've met or exceeded the original annual earnings consensus for the last 23 straight quarters.

Our recurring base continues to grow and our major account and customer proliferation activities continue to progress and this is - - creates a cycle where it allows us to further our technology and sales investments and all of these combined to help us to be recognized as one of Business Weeks Top 100 Hot Growth Companies, actually number 48 and a number of other - - number of other mentions.

So, in general, these investments coupled with our industry and geographic breadth have provided us with the capacity to react and adjust to some very uncertain economic factors that have been in play of recent times and particularly of recent and we're just going to continue to monitor the global situation and adjust our business model accordingly with ongoing short-term caution, but with longer term optimism.

So with that, I'll now turn it over to Maria Shields, our CFO, who will provide you a more detailed look at our financials including both the expense structure and balance sheet highlights. Maria.

Yes. Thanks Jim. For the next few minutes, I plan on going through a quick recap of Q2 2003 and the year-to-date expense results. I'll touch upon some balance sheet and cash flow highlights and provide some overall guidance regarding our outlook at this time for Q3 and the full year, particularly as it relates to adjusted EPS. Before I get started with expenses, for those of you who may be joining our call, who are new to the story, I just wanted to briefly comment that the figures that I'll discuss are based upon expenses as a percent of revenue, adjusted for the impact of the purchase accounting adjustments, relative to deferred software license revenue, which totaled about $1.1m in this quarter and $1.6m on a year-to-date basis.

Moving on to expenses. From our cost of sales perspective, total expenses for the quarter were $5.2m, compared to $2.8m in last year's second quarter and that resulted in overall adjusted gross profit margin of 82%. For the first half, our cost of sales totaled $9.2m, compared to $5.7m last year resulting in a first half gross profit margin- - adjusted gross profit margin of 83%.

The increase over last year's second quarter and year-to-date totals is directly related to additional head count and increased royalty costs associated with the CFX acquisition. The slight reduction in our adjusted gross profit margin when compared to prior periods, is largely attributable to the CFX acquisition and the impact of the service component of that business. From a sales and marketing perspective for the second quarter, our total sales and marketing expenses increased to $6.1m, versus last year's second quarter of $5.2m and on a year-to-date basis, sales and marketing expenses totaled $11.6m, compared with $10.4m in the first half of last year.

The increase in expenses as compared to the prior year's quarter and year-to-date figures, was largely impac---was largely impacted by increased head count and facility cost associated with the CFX acquisition, and these increases were partially offset by some reduced discretionary cost, particularly in the areas of advertising and promotions, as well as the absence of costs related to our bi-annual users conference, which took place in last year's second quarter.

Looking at our current plans for the remainder of the year, we intend to continue to make investments in strategic areas throughout the world, to further support our sales efforts and integrate the CFX team and as such, we expect that total sales and marketing expenses should continue to increase throughout the second half of the year, when compared to the first half of the year.

In the area of R&D, our total expenses for the quarter was $6.1m or 21% of adjusted revenue and that compares to $4.9m in last year's Q2. And on a year-to-date basis, our total investment in R&D reached $11.7m, compared to $9.8m for the first six months of last year. The quarter-to-date and year-to-date comparative increases were primarily attributable to an increase in head count and cost associated with CFX, as well as resources necessary to support the continued expansion of our various product offerings. One thing I'd like to point out is during the second quarter we did capitalize $250,000 of Cap-Con for the first half and for the first half of the year we've capitalized $350,000 and this compares with $240,000 for the first half of 2002.

In the area of G&A our expenses totaled $3.1m in the second quarter or 11% of adjusted revenue, compared to $2.7m in last year's second quarter and on a year-to-date basis G&A cost totaled $5.8m compared to $5m last year. Both the quarter and year-to-date comparative increases are a direct result of the CFX acquisition.

During the first six months, we've been faced with the continuing challenge of trying to balance, making continued investments, in key areas while also maintaining a strong focus on controlling non-critical and discretionary expenses. This has resulted in a reported adjusted operating profit before amortization of 29% for the second quarter and the first half of the year. Other income for the second quarter included a favorable currency benefit of about $450,000 that's related to an inter-company transaction associated with the CFX acquisition.

This loan will be fully hedged in Q3 and we don't anticipate similar, either positive or negative benefits going forward running through the other income line. Our effective tax rate for the quarter and year-to-date was 34% and at this time we're anticipating that for the remainder of the year, we should be able to maintain an overall effective tax rate somewhere in 32% to 33% range. However, I'd also like to re-emphasize an important point that I've been mentioning for the past several quarters and that being the fact that any future changes in tax legislation that would reduce tax credits or eliminate tax savings vehicles which are currently available to the company, could have an adverse impact on our effective tax rate in future periods.

For the second quarter ANSYS reported adjusted EPS, excluded---excluding purchase accounting adjustments and acquisition-related amortization of 37 cents, on 15.9 million diluted shares and that compares with 32 cents on 15.8 million diluted shares in the second quarter of last year. And for the first half adjusted EPS totaled 69 cents on 15.7 million diluted shares, compared to 58 cents on 15.8 million shares for the first half of 2002.

At the current time we continue to feel comfortable with an outlook of adjusted EPS of about 32 cents to 33 cents for the third quarter and somewhere in the range of a $1.44 to $1.46 for the full year of 2003. I'd also like to comment that as we enter Q3, we will be faced with what has traditionally been our toughest quarter, as well as the uncertainty that continues to exist in the global economy, however, we'll continue to balance with the need to focus on cost containment without sacrificing our delivery to customers or without sacrificing our product or service integrity.

Taking a quick look at our June 30th balance sheet, it continues to remain quite strong with total cash in short-term investments at $62.8m. We were able to make some progress in the area of DSO, our consolidated DSO was at 60 days and our total gross deferred revenue totaled $36.2m.

The company generated $10.2m in operating cash flow for the second quarter and $21.6m in the first half of the year so far and we continue to remain debt free. Before concluding, I'll add at this time that we estimate on a go forward basis, the total impact to the purchase accounting adjustment, relative to the write-down of deferred revenue from CFX software leases, for the remainder of 2003 will be approximately $1.4m and will impact Q3 by about $900,000 and Q4 by about $500,000 and at this time looking at 2004 that impact should significantly reduce to about $300,000 in the first quarter. With that I'll now turn it over to Jim who'll go through a brief recap and then we'll open up for questions. Jim?

Okay thanks Maria. So, the recap, continued steady financial performance, meeting commitments to the top and bottom line with excellent cash flows and margins and all of this in difficult economic times. Balance growth in the high end and low end product lines and in product and service sides of our business and then also an increased penetration into a broader range of industries.

Excellent progress on the integration of the CFX acquisition from an operational and technical standpoint, basically as demonstrated by all the financial aspects of sales margin and receivables and a range of our new technologies that basically are now starting to come out in increasing quantities.

In general we're slightly ahead of our expectations and slightly below our aspirations. With regard to the outlook towards the remainder of 2003, we continue to be cautious about the economy in general and are particularly vigilant on the issue of more arduous sales cycles during these times. The long-term outlook still stays solid.

We're still anticipating total adjusted revenues for the year in the $115m range with adjusted earnings in the, as Maria said $1.44 to $1.46 range and as always we'll keep an eye toward ratcheting up the performance for our track record if the economy should start to warm up. And with that we're now prepared to respond to any specific questions you might have.

At this time we are ready to begin the formal question and answer session. If you'd like to ask question you may press star one on your phone. You will be announced prior to asking your question. To withdraw your question you may press star two. Again if you would like to ask a question please press star one on your phone.

Our first question is from Kim Caughey of Parker Hunters please ask your question.

Good quarter guys, let's see my first question is, is (---) are CFX revenues mostly yearly licenses (indiscernible) perpetual?

Thanks a lot. A culmination of leases, perpetual, maintenance and service revenues.

But is the greatest proportion kind of like the yearly?

Annual leases they have a nice lease space.

Which is why we haven't lost the purchase counting adjustments in there and they also have a stronger service element, than the traditional basis and that's part of the integration aspect that we're doing is leveraging that, while getting the advantages of the traditional ANSYS business model.

Okay, great. Do you have any pending releases for the second half of '03? You know big product - -

You mean product releases?

Um-hum.

Well we traditionally - - obviously they've not been announced and I'm not prepared to announce these right now, but we traditionally have a Q4, you know, usually an early Q4 release and that's a - - you know, those things we clearly have technology that is queuing up to be released in that standpoint and that also plays towards the integration, that we're saying. So that's a fairly traditional path for us.

And with - - currency of any help, not necessarily, you know, on the income statement but from a sales perspective in Europe and Asia.

When you say help up on the revenue standpoint there's usually couple things that happened, sometimes it affects the - - it affects the price elasticity equation and sometimes it just returns a flat out currency, so on balance sometimes, it helps you a little bit, sometimes it hurts a little bit. We did have a modest positive impact from that, but nevertheless we still had great results in Europe and, you know, we don't moan about it when it adversely affects us and we don't blow it out of proportion when its - - you know, basically it - - there's always someplace where you're seeing some kind of currency impact but nevertheless European performance was good.

Yeah, one thing Kim, I would also like to point out, if you keep in mind particularly in Asia, where the largest portion of our business is through Japan, that's through the indirect channel and the indirect channel pays us in U.S dollars so a lot of that foreign currency, whether it be positive, or negative impact is really on their side.

Sure.

Same thing in Europe, we've got a lot of our distribution that's really through the indirect channel, particularly in Germany and Italy, Spain, so while there are some areas where we're direct we're not as affected as some other companies who have 100% direct model.

Okay, great. Good quarter, thanks that's all I have.

Thank you.

Our next question is from Tim Foxx of SG Cowen (ph), sir you may ask your question.

Hi, good morning Jim and Maria.

Good morning

Good morning.

One question clarification, I think Jim you may have mentioned some performance issues that you had identified in North America and some steps that you had taken.

Yeah.

Could you comment further on that.

Well its one of the things that occurs in every sales organization on a yearly basis and sometimes the only problem is that if you choose not to address them or just hope they get better. And I mean its - - you know, I've never known an organization where you don't have people who perform very well and people who don't perform quite as well and we addressed that, there was -- it was more pockets in various places than anything endemic.

Okay, this is primarily direct or indirect related?

Primarily direct.

Okay. Regarding North America, what do you think is going to be outside the - - obviously the environment but the catalyst to revving up sales in North America? Is there any competitive dynamic that you're seeing or, I mean obviously the other regions are performing very - -

Yeah.

- - very well in retrospect. What do you think might be the catalyst - -

When you say competition that normally evokes two different branches for me, one of which is competition we might see on a product standpoint and the other of which is the competition that our customers are seeing as they compete with one another. On the former, that we're not seeing appreciable anything, you know, there, and I, yeah I think the various performances will provide guidance on that but where we are seeing pockets of interest and progression and early signs of life, its where, you know, customers are coming to grips with the competitive environment that they're in and how do they gain competitive advantage, and we've - - for several years now we've been talking about our belief that by understanding the physical behavior of how your products are going to perform and not just creating designs and testing them, that you're going to be able to squeeze more performance and derive more innovation and product, and that leads to competitive advantage, its also a longer term investment that is basically is driven by the customers either realization or their ability to leverage and adapt to that kind of a paradigm.

Okay. And, large deal flow, you commented last quarter I think that things looked a little bit more encouraging around large deals, wondering if that continued into this quarter at all.

Well, into this quarter I would have to say it was probably much on a par in terms of pipeline, I would say that it - - we're seeing more and larger things start to show up on the measurable horizon, you know, not just the hope and prayer kind of situation, but you know, actual engagements where we're working with customers on specific things and I do see more of those things popping up, but the financial hurdles and all the issues associated with ultimately getting to the implementation stage, you know its still as varied as the customers we're selling to.

Okay, lastly just one question on margins, has there been any change in your long-term view of your model given the (indiscernible) affects acquisition and a slightly higher amount of service revenue there - -

Well they're all - - I mean there always is, and first of all in our long-term model even pre CFX, there were certain aspects we knew as we were taking these new technologies that offered new opportunities to customers that there would have to be assistance in helping to drive those, but those tend to be higher margin services and in general I'd see that - - its, you know, you'll see a progression, but its going to be very much in line with the guidance that we've been giving and first and foremost we remain committed to technologically based product company and we use the services to augment the successful implementation of those products and capabilities as opposed to being a generalized service company.

Okay, great. That's it for me good quarter, thank you.

Okay, thank you.

Our next question is from Herb Tinger of Advest, sir you may ask your question.

Morning. Jim is it safe to say that in North America the toughest vertical market is the automobile industry?

Boy, it's a function of time, its always historically been a very interesting sector to deal in, I'd say, you know, we've been having a fair amount of activity there, I guess in short I couldn't make a generalization to that particular degree. It's always a challenging environment to sell into, but in some - - its somewhat exacerbated by the economy is by-procated (ph) to the point where in some cases its driving some of our biggest opportunities, in other cases there are companies that are hunkering down and it's actually slowing so it's a real mixed bag

Okay keeping you on that topic a lot of the manufacturers are looking to cut their cost in the automotive industry. In talking to your customers are you seeing any signs at all that they're you know contemplating taking their physical testing budgets and allocating some of that funding to simulation and analysis tools instead?

I would say what they're say - well first of all you asked two question and I'll say that the two things you've said are correct. But the casual relationship with them is maybe a little bit more distant. I'd say that they definitely are looking at those cost control things. They are not viewing simulation as a tactical replacement, as a tactical cost reduction in the short-term. But they are viewing that as being a long-term direction that they are taking. The two are linked but it's not a one causing directly the other.

Okay and final question what was time based licenses as a percentage of sales for the quarter?

Lets see on an adjusted basis, lets see you're going to find - they were about 10 roughly 10.

10%?

Yes.

Okay thanks a lot and nice draw up on the quarter.

Thank you very much.

Our next question is from Jay Weinstien(ph) of Oak Forest. Sir you may ask your question.

Hi good morning.

Morning.

Is the cash flow for your business seasonal? I mean the first two quarters were pretty much identical I was wondering is it - weighted to the beginning of the year, end of the year or is it pretty much on going.

I would say it heavily weighted - there is two particular quarters that are very strong from the cash flow perspective for us, Q1 and Q4 just because of the timing of renewals on leases and maintenance agreements. Q2 tends to trend down a little. We did have - like I said we made up from a cash flow perspective, we got particularly aggressive on trying to improve the DSO from the CFX acquisition and they really worked hard with us. And then Q3 just given particularly with Europe being you know 30% of our business and Europe being largely inactive during Q3 it trend down.

Yes close of the continent during the month of August.

Yes.

So the second quarter for instance as we go to look to next year that number may be difficult because of the one time sort of collections from CFX?

Yes I mean probably you know somewhere in the tune of $1m to $1.5m.

Okay have you made any kind of an EBITDA forecast or guidance in line with kind of the earnings - the other guidance's you've given?

No we're not going to get ready to talk about 2004 until the --.

No I meant for 2003.

Oh EBIT - well $1.44 to $1.46 bottom line adjusted basis. I really don't focus on EBITDA.

Okay that's fine. Okay thank you.

Sure.

Thank you.

Due to time constraint our last and follow up question is from Kim Caughey of Parker Hunter. Ma'am you may ask your question.

Hi I just had a couple of quick questions on products specific you know how they did in the quarter. First have you gotten any traction on AI Nastran (ph)?

Well now that - now things tend to perk up a little bit there was a - there was a lot of exogenous issues surrounding that particular market. But the pipeline here have picked up quite a bit and I thing the logjam is a little bit behind there.

Okay and my second question I don't know what's - I think it's may be Design Explorer which is the Cad-Away (ph) stuff?

Well the Design Explorer and you're probably talking about - I mean there are a number of things where we are putting the Cad-Away stuff. But the variational technology is probably the key thing.

And you've got a fair amount of interest in there?

Oh I mean with out a doubt keep in mind that we tend to (indiscernible) a technical engineering market place that says okay this is so new and so unique let us - we need to explore it a little bit. So there is two issues one of which is getting our channel to speed with some thing that is non-conventional. The only other thing is getting the customers comfortable with some thing that is - it sounds very appealing but in some cases it sounds almost too good to be true.

Great.

And once they find out that wait a minute there is something here then it becomes you know then it becomes a lot easier. If you recall we started announcing new products just a few months after that. But that was like the end of last year. So we're only the first few months into -- the really the strong selling process of this. But let’s put it this way, as the more people see the interest only increases it doesn't decrease once they kick the tire. And we'll have to see how quickly that turns into dollars. Again we'll do the short-term caution because of the acquisition rates and economy. And long-term we do thing that this can fundamentally change the impact of simulation in a wide range of our customers.

Great thank you very much.

Well thank you very much. If there are no more questions - so in close short-term caution, long-term enthusiasm backed by a solid business model, we got the loyal customers as you can tell quarter after quarter. Our channel partners who have been with us for years and years and again talented committed employees. This combination which continued to provide us consistent performance with the expanding customer base and an increasingly exciting new base of technology to support our enterprising initiatives. So with that I thank you and look forward to seeing you again next quarter.