ANSYS Inc (ANSS) 2003 Q4 法說會逐字稿

Good morning. Welcome to the ANSYS Fourth Quarter Earnings conference call. All participants will be able to listen-only until the question and answer session of the call. The 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.

Thanks a lot. Well, good morning, everybody, and welcome to the ANSYS Q4 Fiscal Year 2003 call. And joining me this morning is our Chief Financial Officer, Maria Shields.

So after giving a brief overview of the highlights we’ll then go into greater depth on the operational results from a variety of perspectives, as we always do, and we’ll do this for both Q4 and for the fiscal year 2003. And then on top of that we’ll be discussing a number of quantitative and qualitative factors of the quarter including some particular significant customer activity, and we’ll also highlight a series of business partnership and product announcements that have been recently made which we feel help prepare us, and in fact, are already starting to seem to show some promise for 2004. Maria will then take you through our balance sheet, our expense structure performance, and some additional factors. And then we’ll be happy to respond to any questions you may have.

So to begin with, Maria, if you’d give us our Safe Harbor statement, please.

Sure. Thanks, Jim. Good morning, and again thank you everyone for joining us to review the highlights of our fourth quarter and full year 2003 results.

Before we get started I’d like to remind everyone that some matters that we’ll discuss throughout this call as either part of our prepared remarks or in response to questions will contain forward-looking statements that involve risks and uncertainties which could cause actual results to differ materially from those projected.

Reported results should not be considered an indication of future performance. The potential risks and uncertainties are discussed at length in our public filings including the Forms 10-Qs, 10-Ks, and the annual reports. Any forward-looking statements are based upon the company’s best judgment as of this date, and we undertake no obligation to update any such information.

Before we get started I’d also like to point out that during the course of this call we’ll be making reference to adjusted revenue and adjusted EPS which are non-GAAP results within the context of the SEC’s Reg G. These non-GAAP financial metrics are used by management in our assessment of business performance, and we believe they’re important indicators in measuring our underlying business results. A detailed discussion and reconciliation of GAAP financial measures to comparable adjusted revenue and EPS is included in our earnings announcement that went out this morning and the related Form 10-K.

With that, I’ll now turn it back over to you, Jim.

Okay, thanks, Maria.

Well, in short, Q4 was a very strong and in fact a record quarter in the continuance of a challenging economy. We posted operational numbers that exceeded all of the analyst’s expectation for both revenue and earnings. Our product progression accelerated even by our typically industry leading standards, but it was especially driven by advances in our Workbench architecture and integration between our different product lines. And as always, we continue to bolster aspects of our distribution system both direct and indirect.

So from a high level perspective for the quarter we reported adjusted revenue at 33.8m, which as I mentioned, was a record quarter for ANSYS and was above the analysts’ expectation. We also reported comparably strong earnings per share growth of 16 percent with an adjusted EPS of 50 cents, up from last Q4’s record quarter of 43 cents.

Secondly, we maintained excellent and stable operating margins on a solid business model including discretionary spending disciplines that helped to insulate us from the economic softness. And as a result our adjusted gross margins were at a healthy 85 percent with overall adjusted operating margins of 35 percent.

Thirdly, even in this somewhat subdued environment customer momentum continued, and it’s underscored not only by the larger customer commitment than we’ve seen of recent, but more importantly by the continued expansion of our extremely broad customer base on a steady and ongoing basis which basically supports our business model, and it also increases our visibility.

And then, finally, we had an on target release of ANSYS 8.0 and Workbench, AI Workbench products, and especially a rapid deployment of integrated products sharing the technology of ANSYS CFX and the ICEM CFD product line. And we’ll go to that in a bit more detail coming up.

So looking at these high levels in a little bit more detail, from an operational highlight standpoint, as previously mentioned, our adjusted revenue for the quarter was 33.8m which represented a record quarter for ANSYS. And it’s also a 34 percent increase over last Q4’s all time high. As Maria indicated actual reported GAAP revenue was slightly lower at 33.3m, but that’s still also exceeded all of the analysts’ estimates.

And we’ll go into this in a little bit more detail shortly. But the difference in the numbers really is purely a function of the impact of reported software license revenue and in particular lease revenue due to the purchase accounting adjustments related to the CFX acquisition at the beginning of the year. So, basically, the customers are there, substantial cash flow is there, and so adjusted revenue is the most representative factor of the business conditions. And it will also provide a more accurate baseline for subsequent periods.

On the earnings side, adjusted earnings for Q4 were 50 cents per share, up from 43 cents per share in Q4 of 2002. And this is indicative of our increased sales performance and the effectiveness of the past year’s integration of the CFX business. It also marks the 25th consecutive quarter where the earnings were at or above the consensus.

Now looking at the whole year for the fiscal year ended December 31st, 2003, we reported total adjusted revenues of 116.5m for a 28 percent increase over the 91m recorded in 2002. And this was at the upper end of expectations for the year. For the year adjusted earnings per share rose to $1.60, and this was up 24 percent from the $1.29 of 2002.

Overall adjusted operating margins for the year were 32 percent in line with our business model and the adjusted gross margins remain strong at 85 percent. Operating cash flows remain strong, actually very strong throughout the year at 38.8m.

So now we’ll look at the numbers, not just from a high level, but from a number of different perspectives, it’ll allow us to triangulate on a number of factors. And first, let’s look at the category of business. From this standpoint the lease business stayed solid and grew for both the quarter and the fiscal year 2003, actually each growing in excess of 40 percent. Paid up license growth also experienced good growth at 15 percent for the quarter and 11 percent for the year.

And then for both the quarter and the fiscal year we had a really nice balance in both the license and the total license, and service revenue. For the quarter adjusted software licenses and service, and keep in mind that service is primarily our software maintenance, both grew in excess of 30 percent. And for, and that was for the quarter. And for the year the software license grew at 27 percent, and the service and maintenance business grew at 29 percent, and so a good business balance in the quarter and throughout the year.

Also good was that the business intake levels outpaced our revenues to increase our strong base of recurring or repeatable revenue which continues to be a strength of our business model. For Q4 60 percent of our business fell into this category, actually an increase over 59 percent of Q4 2002. And so even while we’ve been able to experience growth we’ve also been able to do so in a way that actually increases our visibility.

For the year the repeatable business base grew and it represented 64 percent of revenue. And so all of this netted out to increase our deferred revenue to about $38m, again, both from a growth and a visibility standpoint increasing. And the DSOs stayed stable at 61 days. So all of these factors together combined to keep our balance sheet strong including currently over $83m in cash and equivalents.

If we look at things from a geographic perspective, I guess the bottom line from geographic perspective was an improving picture with growth in each of our three major geographies although North America continued to lag the performance of Europe and Asia.

In Q4 North America grew, oh, in the middle single digit range. The industry breakdown had good breath and was fairly uniform. Relative strengths in automotive, defense, and aerospace, in addition to continued ANSYS dominance in the electronics and power generation area. As I mentioned, North America probably saw the greatest impact of economic slowness, but all but one of the ANSYS direct offices grew in the double digit range for both Q4 and the year, but the performance was a little more mixed in the indirect channel.

By every measure performance in Europe was strong. For both the year and the quarter every major market geographically grew in excess of 30 percent. And the growth was strong even when currency rate adjusted, with particularly solid performance in our French and German businesses.

Our general international area also grew in the 20 percent plus range for the quarter with each major geographic sector performing well. For the year 2003 Japan and India were particularly strong areas, each of which logged strong overall growth, and also, 20 percent plus growth in the core areas.

So in summary all the geographies had growth for both the quarter and the year. Europe continued positive momentum from 2001 and 2002 with all of the major areas performing well. And GIA had uniformly strong performance in a similar vein. North America clearly had the toughest time but maintained a good base of business and grew, albeit at a lower range.

With this in mind, you know, we continue our caution for the early part of 2004, just as we did in 2003, and we continued to monitor and adjust the sales and distribution strategies in response to any of the economic uncertainties. You know, the good news is that with our long-term investment patterns in R&D we’ve already prepared the technology for a recovering marketplace when it occurs so we can quickly, you know, adapt to that. There’s not really a production factor in place.

Looking at things from a product revenue standpoint there’s really not any real change from our earlier guidance. The high end sales remain strong with double digit growth for both the quarter and the year. Designed space and ANSYS professional stayed balanced, as previously mentioned, providing over 15 percent of our core business for both the quarter and the year. And the average selling prices were stable for all segments of our business.

And while we’re always talking about new releases of our product lines it also seems like we continue to raise the bar on our standards of each release. In the middle of Q4 we released and shipped ANSYS 8.0, which continues to expand our high end multi-physics and our non-linear simulation capabilities. And it’s actually probably the most compelling release in recent years, due primarily to three major high level factors. It’s, first of all, there was a dramatic extension in our core functionality. Secondly, we made amazing strides in terms of integrating across our various multiple product line. And then we continued to advance the underlying Workbench architecture which, in fact, actually helped facilitate that aforementioned integration.

So if we look at each of these, at the heart of the core functionality is ANSYS 8.0. And for years we’ve been enabling multi-physic simulation for the simple fact that in the real world products are subjected to a range of these simultaneous factors and everyday use, and they can compound themselves in very dangerous ways if the products are not really conceived to handle those different potential outcomes.

So in ANSYS 8.0, in addition to our usual advances in multi-physics and non-linear capabilities we also released the true multi-field [SOL] [ph] that we spoke a little bit about last quarter. And with this capability customers can utilize different experts throughout their company, and even engineers in their supplier network, each simulating their own design issues, and combine these into an overall system simulation. And so this means different solvers, different analysis types, different mesh models can all be utilized in what would truly would have to be seen as an advance in open system simulation. In fact, even third party and customers in-house codes can be used in this overall scheme.

We also increased our advanced direct coupled field elements and coupled fluids solid interaction, including large deformation and boundary changes, you know, and a whole plethora of advances. And taking one other industry just as an example, to expand upon our leadership position in electronics we added Ion Optics charged particle tracting, electro magnetic contact. So as before, I’d like to point you to our web site at ansys.com for a more complete discussion of the overall product and core capabilities of ANSYS 8.0 and all of our products because, frankly, I could burn up a lot of time talking about the literally hundreds of new capabilities that we offered in 2003.

Now, a second major advance was the integration of the products. And this is significant not only because of the capabilities that we were able to extend with this but also because of the speed at which we accomplished it. In Q4 we continued to release products which cross leveraged our various component technologies from ANSYS [ICFM] [ph] engineering, and CFD engineering and CFX, and this was probably most evident in two factors. A new modeling environment for computational fluid dynamics that brings CFX 5 to a new level, and also with our fluid structure integration.

And then the final, on the third factor, we continue to see major benefits in this release from our Workbench platform. Again, it was the enabler for the capabilities listed above. And it also allowed us to provide advanced modeling capabilities and automation of best simulation practices. So it allowed us to combine best in class capabilities to expand our design modeler and design explorer products, and even to release a new product, ANSYS [Perimesh] [ph] which I think is particularly exciting because it provides the capability of taking a simulation model and allowing it to be parametrically optimized in a system simulation without the necessity of repeatedly going back to a CAD System.

And it’s actually especially exciting to companies that are trying to leverage the wealth of Legacy analysis models they have for which maybe a CAD model doesn’t even exist. And so it opens the door for rapid engineering evaluations and design verification prior to finalizing the design. And we think it really opens the door for the reality of simulation centric product design, you know, basically helping products meet performance specs as opposed to the traditional process of making detailed designs of products that might be unproven at the time.

And so in summary, we continue to make a lot of progress across our entire technology base, both in our core capabilities, our inter-product integration, and our infrastructural architecture, providing capabilities to further the impact of simulation throughout all the phases of the design and engineering process.

The bottom line is continued progress in traditional solutions, world class architecture, demonstrated technology integration, and the release of an array of unique new capabilities to the point actually, and we’ve been saying this as an ongoing theme, one of our major ongoing efforts is the ongoing education of our customers, our partners, and our employees. So that basically creates a very rewarding opportunity for us.

From the customer perspective we continued with our, continued our historical performance of broad industry acceptance. Basically, continual ongoing incremental sales to our customer base, and some significant new customer engagements. If we look geographically while we noticed that the growth rate in North America was lower than the other geographies the major account activities continue to provide a base of business across all industry lines and sub-classifications. And just going through the range in Q4, Pratt & Whitney, Honeywell, Rockwell, Raytheon, Visteon, John Deere, General Motors, Northrop Grumman, Seagate, General Electric, [Vectel] [ph], and Shell Oil all produced business in the six-figure range, spanning up to the low seven figure range.

In Europe the top deals also were present, and they showed exceptional breadth, including [Alston] [ph], Siemen, Schnieder Electric, British Nuclear Fuels, Turbo, Mecca, [Bausch] [ph], EGA, [Micro Electronique] [ph], [McLaren International] [ph], [Magnetti Morelli] [ph], the [Davenport Royal Dockyard] [ph], and a particularly good engagement with Airbus France. And GIA, Fuji, Samsung, Addidi, [Kaoba] [ph], [Avichi] [ph], and the [Cion] [ph] high performance Computing Center, in addition to the Indian Naval Science Technology and the Physics and Oceanographic Laboratories represented a mix of new and existing customers.

So there are several things to be encouraged about by these orders. You know, first of all, the size. Secondly, the continued industry breadth and expansion. And the geographic diversity. So while all of these are important maybe perhaps the largest factor is the sustained confidence of our customer base demonstrated when they expand the overall reach and depth of their simulation. So it basically continues to play a vital role in our repeatable business and our relative resiliency to a range of economic scenarios.

As mentioned earlier, the pipeline of new opportunities remains solid and is even strengthening somewhat, but we still are seeing caution in the customer bases and in their buying patterns. And I mentioned last quarter that the larger order sizing inquiries, actually I think we referred to them as ‘opportunities’ the last quarter, seem to be slowly reappearing. But they also seem to have much more financial discipline and longer sales cycles attached to them than before. So in general, we’ll continue to pace our business and our plans around those tangible things we can see, at least for the first part of 2004.

So in summary, we remain encouraged with and strongly committed to our long-term strategic direction and mission. Our strategic plan and business model, they have provided us a vehicle for success even in the difficult times of the last few years. And it’s also given us a roadmap to invest with a high degree of confidence in the various technical and market initiatives that have been driving our successes as of recent.

We’ve been able to keep the top line progressing while maintaining strong margins and this is, I guess this is evidenced by meeting or exceeding original analysts’ consensus for the, each quarter of the last six years. This, in turn, has allowed us to further our technology and sales investments. We believe these investments position us well both in the market and our channels and have been a factor in balancing our performance throughout the year. And not to mention maintaining performance through all types of economies. And I guess I’d also like to thank ‘Business Week,’ ‘Forbes,’ and ‘Business 20,’ for continuing to recognize the efforts of the ANSYS Team during this past year and in years prior.

So coupled with our industry and geographic breadth, these investments have provided us the tools, I think, by which to react and adjust to uncertain factors that have been played throughout the year. And we’ll continue to monitor the global situation and these factors, and adjust our business model accordingly with what I continue to call ‘short-term caution but longer term optimism.’

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

Thanks, Jim.

For the next few minutes I’ll quickly go through an overview of our Q4 and full year 2003 expenses. I’ll point out a couple of the highlights of the balance sheet and cash flows, and provide some overall guidance regarding our outlook at this time for Q1 and full year 2004, particularly as it relates to adjusted EPS.

Before I get into the expense discussion I just wanted to point out that the figures I’ll go through are based upon expenses as a percent of revenue adjusted for the impact of the purchase accounting adjustment relative to deferred software license revenue which totaled 545,000 in Q4 and approximately 3m for the full year.

Looking at expenses, starting off from a cost of sales perspective, total expenses for the fourth quarter were 4.9m, and that compares to 3.2m in last year’s fourth quarter. This resulted in overall adjusted gross profit margin of 85 percent for the quarter, and on a year-to-date basis cost of sales totaled 19.1m compared to 12.3m last year, resulting in an 84 percent adjusted gross profit margin for the year. The increase over last year’s fourth quarter and year-to-date comparative totals is largely related to additional headcount and increased costs associated with the CFX acquisition.

For the fourth quarter out total sales and marketing expenses increased to 7.5m versus last year’s fourth quarter of 5m and on a year-to-date basis sales and marketing expenses totaled 24.8m compared with 20.1m last year. Once again, the increase in expenses as compared to last year was primarily impacted by increases due to the CFX acquisition as well as additional headcount added within our own internal worldwide sales and support organization, and an increase in third party commissions. These costs were partially offset by reduced discretionary spending as well as the absence of costs related to our biannual users conference which last occurred in 2002.

In the area of R&D our total expenses for the quarter were 6.2m or 18 percent of adjusted revenue and that compares with 4.7m in Q4 of last year, and for the year our total investment in R&D reached 23.8m or 28 percent of adjusted revenue compared to 19.6m last year. Both the quarter to date and year-to-date increases were once again attributable to the CFX acquisition.

For the full year 2003 I just want to point out that we have capitalized about 550,000 in internal labor costs which compares with 600,000 in 2002. In the area of G&A our expenses totaled 3.3m in the fourth quarter or 10 percent of adjusted revenue compared to 2.6m in last year’s fourth quarter, and for the year our G&A costs totaled 12.1m compared to 10.2 last year. Both the quarter and year-to-date increases also were a direct result of the CFX acquisition.

For the fourth quarter and the full year the overall business yielded an adjusted operating profit margin excluding acquisition related amortization of 35 percent and 32 percent, respectively. Other income for the fourth quarter was unfavorably impacted by foreign exchange issues, and our effective tax rate for the quarter and the year was 31 percent on an adjusted basis and 30 percent on a GAAP basis. And at this time we are anticipating that for 2004 we should be able to maintain our overall tax rate somewhere in that 30 to 32 percent range, however, as in prior calls I’d like to remind everyone that any future changes in legislation that would reduce the tax credits or eliminate some of the tax savings vehicles that we currently have available to us could have an adverse impact on our effective tax rate going forward.

For the fourth quarter we reported adjusted EPS excluding purchase accounting adjustments and acquisition related amortization of 50 cents on 16.4m diluted shares, and that compares to 43 cents on 15.4m shares in last year’s fourth quarter. And for the year adjusted EPS totaled $1.60 on 15.9m shares, as compared to $1.29 on 15.6m shares for 2002.

At the current time we anticipate adjusted EPS of between 35 and 36 cents in the first quarter, and $1.69 to $1.70 for 2004. I’d also like to briefly comment that these projections do include the estimated impact of additional healthcare and Sarbanes-Oxley combined costs that will be incurred in 2004 that weren’t in the 2003 base numbers. We’re anticipating that these additional costs could have a potential of three to five cent impact on 2004 earnings. However, we’ll be in a better position to refine our estimate once the Public Accounting Oversight Board issues the final document regarding internal control testing under Sarbanes 404 which they’ve recently moved back until the end of the first quarter.

So taking a quick look at the yearend balance sheet. As Jim mentioned, it continues to remain quite strong. Our total cash and short-term investments balance has grown to 83m. Consolidated DSO was at 61 days. Deferred revenue is at 37.9m. And we generated 10.1m in operating cash flow for the fourth quarter, and almost 39m for the full year of 2003, and we continue to remain debt free.

So one thing I’d like to before I conclude I’d like to add that the 2004 impact of the purchase accounting adjustment relative to the write-down of deferred revenue from the CFX software leases is estimated at about $300,000, of which $120,000 will be the Q1 impact.

So with that, I’ll now turn it over to Jim who will go through a brief recap before we open up for questions.

Okay, thanks, Maria.

So in recap, continued strong financial performance providing above line, above consensus earnings and top line growth, backed by measurably strong performance and customer endorsements from the products we've been discussing the last few quarters. Growth in continued opportunity in all geographies, product lines, and market segments. Continued proliferation of our technology base that’s been accelerated by the integration of our multiple product lines under the Workbench architecture, and increased penetration on a continuing basis into a broader range of industries.

With regard to the outlook for 2004 we continue to be cautious about certain sectors of the economy, and we’re particularly vigilant on the issue of sales cycles during these times. But the long-term outlook stays solid. And consistent with our last call we’re still anticipating a comparative top line growth for the year somewhere in the eight to 11 percent range, or at about 126m with the earnings, as Maria mentioned, in the $1.69 to $1.70 range, and that’s even after absorbing the increased compliance costs that Maria discussed. So, obviously, if we see an appreciable pickup in the economy, and we’ll build upon that.

Annual cash flows, cash flows margins, other business metrics continue to be strong but they may fluctuate on a quarterly basis in line with our historical seasonality and the timing of key business investments, such as our biannual international conference.

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

Thank you, Mr. Cashman. (Caller Instructions.)

Mr. Tim Fox with SG Cowen, you may ask your question.

Thank you. Congratulations on a strong quarter. First question, I guess, Maria, on the sales and marketing expenses, they appear to be up about 34ish percent sequentially. And despite the 17 percent or so sequential growth in revenues, that was a little bit higher than we had modeled. You named a couple of reasons why that went up. Could you talk a little bit more about why we saw such a spike in sales and marketing, and where you might see that going in ’04?

I would say for the full year ’04 it’ll be consistent with the long-term model, probably somewhere between that 21 and 23 percent. It’ll fluctuate quarterly. It may pick-up in Q2 because of the impact of the conference, which will be a significant investment. Q4 basically we had a couple of larger deals that came direct, so commissions related to those. And we, you know, some advertising and spending relative to the release. And we do, we’ve made some investments in, if you remember in Q2 and Q3 we talked about some performance issues we were dealing with within North America, and we’ve ramped up some of those salespeople. And so all those factors contributed to an up tick in sales and marketing.

Okay, and on the revenue side, what would you attribute the up side to? It sounds like the license mix was pretty consistent and geographies fairly consistent. Was there a difference in the product mix at all, or you did just indicate you had a couple of larger deals?

Not really the product mix per se, but we did start to see some ramp-up from the product integration of some of the combined technology. And so we started to see some of our first orders which combined, you know, traditionally people used to buy individual products, and now they’re starting to get more complete solutions. So some of the add-on follow-on sales we actually saw probably a little bit ahead of our projections.

Okay.

But the overall mix issue was pretty much as we expected, and that’s – I’m not sure when you say ‘mix,’ it was consistent on the leased, licensed, service balance. It was consistent on the product line balance. It was consistent on the design and mid-range versus the high end basis. So those, there really weren’t any surprises.

Right, right. Okay, great. And I guess lastly, you mentioned that there were some fairly significant new customer engagements. And I was wondering are those new engagements, are they primarily competitive displacements or are you penetrating accounts that had their in-house simulation tools?

Well, I wouldn’t, I guess, you know, we wouldn’t have some of the insight to say that these are competitive displacement in the standpoint of saying that somebody’s [code] [ph] got moved out, but they are in places where maybe we did not have as strong a footing, and as they’re making new investments those are gearing more in our direction. And so it’s not where – we’re not displacing but we’re getting, maybe we’re getting a slightly better share of the incremental side of things.

Okay, great. That’s it for me. Thank you.

Thank you.

Ms. Kim Caughey with Parker Hunter, you may ask your question.

And I have to congratulate you on a good quarter, too. Can you disclose the number of large deals that were done in the quarter?

It was in the dozens, and you’d have to say, you know, what comprises a large deal? The one thing I want to say, you know, we continue to get, you know, a good share of those deals, but we want a balanced portfolio. And frankly, we like some of these accounts that almost on a quarterly basis appear on our significant deal chart, and have that to be a continual process of building and adopting the technology versus the somewhat chunkier aspect of living and dying by the big deals.

And so I think we’ve got a pretty good balance there in terms of, you know, several dozen of the traditionally large ones, but also telling would be if you start to amalgamate the quarterly progressions and see what the major customers were doing in terms of investments over the year, too, as opposed to a pure transaction basis.

Sure. you know, the, I guess what you’re saying is some of the Divisions add on as time goes on?

Well, we actually like that as part of a proliferation strategy because it’s, what it does is it continues to highlight the standpoint that we continue to add value, and that value demonstrates to customers and tends to lead to new opportunity. And it basically is part of, as opposed to a very stepped function, or start-stop kind of approach to a customer engagement, it’s kind of a constant interaction basis. And basically, that also helps us with our, you know, with our visibility. So, you know, combining singles and home runs, you know, can put together a pretty good offense.

Sure. Getting to the, let’s see, the product integration orders, they’re ordering a bunch of products and using ANSYS as the framework. You are outsourcing that integration or at least letting your ASD’s do that, is that correct?

Yes and no. It really depends because integration can have many facets and it can be extremely, it can be extremely deep or it can be, you know, it can be more moderate. And in many cases we’ve got, I’d say in many cases our traditional channel partners as well as a new breed of some of the service, and integration, and IT partners are able to do this quite a bit. There’s also another range where they actually want to expand capabilities, they want to in some cases move in-house code onto the platform, and things like that. When it gets into those ranges that tends to be, those are fewer in number, bigger in size, higher in value, and those tend to be more dominated by a greater percentage of ANSYS involvement in those.

Okay, and my final question, can you give some industry color? Like especially in the U.S., did you see more pickup in automotive? You just briefly went over that, so if you could just talk about what’s going on in North America with industry focus?

I guess I wouldn’t see that there was any one, there was any one industry where we looked at it and said ‘wow, that really knocked our socks off, and surprised us.’ It was really quite broad based. You know, there was, as I mentioned there was goodness in automotive, there was continued goodness in the aerospace. But you know, we just continued on a broad range, and that was probably the overall aspect. And so it’s kind of like at this time there was a general, you know, we saw a general warming across, you know, across multiple industries, but none of them went super nova.

Okay, great. Thanks.

Thank you.

Mr. [Herb Pinger] [ph] with [Advest] [ph], you may ask your question.

Thanks a lot. Jim, Maria, a nice job for the 25th time! Jim, regarding North America, what are your customers telling you or are they telling you anything regarding any optimism they might have regarding their spending plans for 2004, changing over, you know, what they were in 2003?

Probably pretty much along the lines as I indicated throughout the call. I mean the main thing we’re hearing is that there still is a lot -- the two major things is they think things are going to get better. Secondly, they’re still as a result of, because they only think and they don’t know, they’re still exhibiting caution. And the one thing that they’re saying is that they’re still is a much tighter scrutiny on all the dollars they spend, which I think in part is one of the reasons why instead of seeing these things where they’ll, you know, do these mega deployments where you see this continual add-on to the recurring base. You know, essentially I think what that’s saying is ‘okay, we’re going to be more discreet,’ and I don’t mean discreet in terms of wise, I mean more piece stepwise in terms of how we’re going to implement the technology, pay as we go, and not get too far ahead of the expenditure.’

The other thing is that in some cases the hiring practices also, you know, have had a minor dampening on some of the potential users, although as we mentioned before we have a number of customers with a number of licenses that are being run in parallel and in some cases outnumber the number of users, number of physical human users in the chain.

And so it’s really still about that hazy, and that’s the reason for our, you know, for the caution even though, you know, we’ve really got some killer products that have been released in the last few months. And we’re, you know, we’re in pretty good shape on a long range of fronts. But, again, we don’t have to open up a factory and hire workers to meet a demand once it comes in. You know, we’ve essentially got the software products ready to go, and they’re selling well now. It’s just that as they accelerate, and we just need to ship more CDs.

I take it’s safe to assume your current guidance for ’04 does not call into play a marked turnaround in North America? That it’s business as usual?

That’s correct.

Okay. Regarding the new industries you said you’re broadening, you saw a broadening of your technology being used in additional industries. I was wondering if you could maybe tell us if there was any one or two industries in particular that are showing, you know, good growth for you guys? And secondly, regarding Asia specifically are you seeing any impact from companies involved in consumer electronics using your software?

Well, in fact, we’ve, you know, we’ve already seen that. In fact, some of the ones we’ve mentioned is, you know, the Chinese customers as they get into the commercialization of their electronics technology, you know, that’s clearly one aspect. I’m trying to think, you asked a couple of questions. One I think was related to …

What new industries you’re actually, you know, you mentioned several new industries that you reported into.

Well, the main thing is the process industries have picked up quite a bit. Electronics in the form of analytical equipment and consumer products in general. And apart from that the only thing we see are that maybe some of the traditionally strong simulation product users now are looking at ways of using those in different standpoints to meet the competitive pressures they’re under. And so it’s, if anything it’s like a new generation of using that’s starting to emerge and pick-up.

Okay. And Maria, just a couple of quick questions for you. Regarding the adjusted results in 2004 I guess I thought that this would have ended in Q1 of this year but it sounds like it’s going to go beyond that. When do you see that impact ending?

Well, essentially, I mean Q1 is the largest impact of the 300 on the top line, 300,000 of, you know, 120 is Q1 and the rest of it becomes almost [diminimous] going into the future quarters. It will be done by the end of 2004.

But it carries as far as Q4 but in very small amounts?

Very small amounts, yes.

Okay. And one last question, did you give what percentage of your license revenues were recurring versus perpetual?

Well, we said 60 percent of the business for Q4 was of a recurring nature.

Yeah, that includes the lease and the maintenance business, and that basis.

Right. But you …

On the license piece the total lease component is software license, for both the year on an adjusted basis for both the year and the quarter was about 20 percent.

And then you can, then obviously, the other 40 percent is on the service side.

Correct.

It’s that kind of a mix.

Okay, terrific. Thanks a lot, guys.

Thank you.

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

Yes, this is [John Myellis] [ph], actually, for Richard. So, my initial questions are already asked, so I’ll just piggyback off that last question. That 60 percent of revenue is that the percentage going forward in terms of recurring revenue that we could expect to see over the next several quarters?

On average, I mean we fluctuate anywhere between like 58 and 64, it just depends on the composition but on average for the year I don’t see it, you know, maybe it’s ticking up or ticking down a point or two.

Okay.

And it’s been that way for, it’s been that way for years, let’s say, at least for the, you know, for the last three or four years easily.

And, you know, what potentially could that number be if in fact we do see a sustained pickup in the U.S.?

Well, we see a sustained pick-up you may see that, that ratio is a pretty good ratio for us, because if you see a sustained pick-up there were factors that could happen. First of all, the paid-up licenses could go and, therefore, if the paid-up licenses increased dramatically, you know, that might make the relative percentage of the ongoing slightly lower but you also pick-up maintenance business, service business with that, with those new licenses, and as we’ve demonstrated our lease business continues to be strong. And so I think you’d see, you know, basically, you know, the rising tide would lift all the boats in that particular case. And I think that the percentages would stay roughly in the same, you know, in the same kind of range that we’ve been seeing historically.

Okay, thank you.

Thank you.

Mr. Mark Schappel with McDonald Investments, you may ask your question.

Hi, can you hear me?

Yes, sir.

Okay, very good job in the quarter. It was very impressive. Just a couple of questions. Most of mine have been answered here. Did you release what the direct and indirect mix was in the quarter?

It’s about 55, 45.

55,45?

Yeah, and the 55 in this case is in favor of the direct business. As we mentioned before, you know, we tend to, you know, we tend to want to modulate around that 50, 50 barrier, but as we have different cycles in the major accounts and, you know, the CFX business when it came in was predominantly direct -- I mean there will be variations through there, but we’re, you know, we’re always trying to achieve that, you know, a similar kind of balance that we’ve tried to maintain in virtually every aspect of our business.

Okay. And foreign exchange could you just review real quick what kind of impact that had on the top and bottom lines?

For the year about 2m top line, and bottom line pretax about 1.2.

How about for the quarter?

For the quarter about 700 of the top line, and pretax about 350.

Okay, and then one final question, and I’ll let somebody get on here, someone else get on. But the design explorer product, the old [Cadaway] [ph] stuff, are customers starting to warm-up to this technology and put some money on the table for this yet?

Oh, yeah.

Or is it still a visionary sell at this point?

Yes to both of those questions. You know, whenever you get a new technology selling to the engineering marketplace it always turns out to be, it always turns out to be that kind of a factor. So it’s, you know, any new product that’s going to take well, you know, we have to make sure there’s no, you know, there’s no magic in the mathematics. They want to be very comfortable with it, particularly when they’re using it up front to design products that they’re going to be making some major commitments on. So but it definitely has been picking up.

Okay, thanks. That’s all for me.

Okay, thank you.

Our last question comes from Mr. Scott Barnum with Credit Suisse First Boston, you may ask your question.

Good morning, everyone.

Good morning.

Just a couple of quick questions. I wanted to touch on the organic growth that you saw in the quarter. If you could kind of strip-out the impact of CFX and maybe give us an idea for the fourth quarter or for the entire year?

It continued to be in that mid single-digit range as we’ve been saying all along.

For both the quarter and the year.

Both the quarter and the year.

Okay, great. And then, I’m not real familiar with the end markets of CFX, but if you stripped out CFX impact in North America would North American had been more of a flat growth, or?

Yes, it would have been less.

So it would have been …

No, I mean North America is not one of the strongest areas for CFX.

Okay, but if you stripped it out North America would be …

Yeah, it’d be flatter.

It’d be flat, okay. And then just to touch on, I guess, going forward and looking at potentially another acquisition. I know it’s been a year and a nice cash balance. But when you look at the market are you seeing targets that are, you know, very promising or desirable to your business model? Or are good companies hard to find right now, and if you do find one which direction could we expect you to go with maybe?

Well, we’re – I mean I won’t comment on the second point because we’re looking at a range of things and I don’t want to give, you know, because there’s a whole number of factors that are involved in bringing one of these to play. But we think there are a number of attractive companies out there, and in general these are companies that tend to be, you know, quite good on the technical and product standpoint but that might benefit from some of our integration capabilities, our business discipline, and our sales channel. And, you know, that’s a place where we’ve, you know, we’ve been able to demonstrate some fairly rapid traction. And so we do think that there are those, you know, those capabilities out there. And, you know, we continue to look at those on a, you know, just on a regular basis. I mean more than monthly.

Okay, great. Thank you.

Thank you.

At this time there are no further questions.

Okay, well, then in closing I’d like to thank everybody. But we continue our long-term optimism, it’s tempered by the short-term caution that we’ve talked about. And the reason for the optimism is I think a demonstrably solid business model. We’ve got loyal customers, longstanding channel partners, and talented, committed employees. And the combination has afforded us a history of consistent performance while simultaneously expanding our customer base, making new breakthroughs in strategic technologies, and continuing to grow our existing customers. So with that, I’ll thank everybody for attending, and talk to you next quarter.

This concludes today’s conference call.

64