ANSYS Inc (ANSS) 2004 Q4 法說會逐字稿

Good morning and 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 Inc. If anyone has any objection, you may disconnect at this time.

I'd like to introduce your speak for this morning's call, Mr. James Cashman, President and Chief Executive Officer. Mr. Cashman, you may begin.

Thanks a lot. Good morning and welcome, everybody. We're here today for the ANSYS Q4 for fiscal year 2004 call. With me this morning, as usual, is Maria Shields, our CFO.

So first to start off, we'll summarize the highlights of the quarter and the year, in a general outline. And then successively delve deeper into the operational results. And in the course of this, we'll of course look at the numbers from a number of different perspectives. And also talk about as a matter of some of the qualitative aspects of the progress that we've made, I'd say, on a comprehensive range of topics. Maria will then take you through our balance sheet, expense structure, performance and outlook on earnings and after that we'd be happy to respond to any questions you may have.

To begin, Maria, our safe harbor statement.

Thanks, Jim. Good morning everyone. Thank you for joining us to review the highlights of ANSYS fourth quarter and full year 2004 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 should not be an indication of future performance and all of these potential risks and uncertainties are discussed at length in our public filings, including our forms 10-Q, 10-K, and our 2003 annual report to shareholders. Additionally, I'd 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 that they are important indicators in measuring the underlying business performance. A detailed discussion and reconciliations of GAAP financial measures to comparable adjusted revenue and EPS is included in this morning's earnings release and the related form 8-K. And one final point before we begin, all the EPS and share data that will be mentioned throughout this call has been adjusted to give effect to our recent 2 for 1 stock split.

So with that, Jim, turn it back over to you.

Okay. Q4 and actually the year in general saw a sustained pattern of long-term performance and I think solid execution. We delivered on all of our major commitments and we exceeded the earlier guidance and we continued to post strong operational numbers. So from a high level perspective for the quarter, you know, we reported strong financial performance with adjusted revenue at $39 million, which exceeded the upper end of the analyst range. And adjusted earnings per share growth of 40 percent with an adjusted EPS of $0.35, up from last Q4's comparable of $0.25. This also exceeded both the consensus and the analyst's range.

Secondly, we continued our pattern of strong stable margins and a solid business model that helped us to insulate us from what we still see as a still pretty twitchy economy. But was also able to allow us to leverage some advanced signs of improvement.

We made strong progress in integrating all product lines and have a number of continued technology breakthroughs, which set the stage for future opportunity for us. And in concert with that, of course, continued encouragement that we received from industry acceptance and customer standpoint, many of which we're starting to benefit from the product integration with acquisitions and implementations of multiple product implementations.

So looking at the operational highlights first, as previously mentioned, our adjusted revenue for the quarter was $39 million and this compares to 33.8 in Q4 2004. You may notice that on some of the sheets that actual reported GAAP revenue was only slightly lower, 38.9. And we only point this out because the difference in the numbers is quite minuscule and it's a vestige of our reporting of adjusted results is more indicative of actual business conditions following the acquisition of CFX in early 2003. So this represents a core growth rate of 17 percent GAAP or 15 percent adjusted, coming off a very strong comparable Q4 of 2003.

Earnings, again adjusted for the 2 for 1 stock split, also grew with adjusted EPS of $0.35 up from $0.25 per share Q3 of 2003, which we just mentioned. This too was above the consensus and the upper end of the analyst range and it marks the 29th consecutive quarter that we've met or exceeded the analyst expectations. Actual earnings were, in reality, a few cents higher due to a one-time tax benefit that we've not included in our adjusted results as more reflective of our actual operating performance. And Maria will go into more detail on this one-time benefit shortly.

Over all adjusted operating margins for the quarter, excluding of course acquisition related amortization, were 41 percent. And this compares to 35 percent of Q4 2003. And of course carries kind of a leverage impact of the higher than expected revenues.

Adjusted gross margins also remained strong, growing to 87 percent up from 85 percent of last comparable quarter. This represents basically an ongoing strong execution, coupled with the addition of some high value-added services.

For the fiscal year ended 2004, we reported total adjusted revenue of 134.9 million, or a 16 percent increase over the comparable 116.5 million of 2003. And this included a good balance in increase of both license and service business.

Year-to-date adjusted earnings per share were $1.09, which is a 36 percent increase over the comparable $.80 of 2003. Overall adjusted margins, excluding of course the acquisition related amortization, were 37 percent for 2004, compared to last year's 32 percent. And we had adjusted gross margins at 86 percent. And this all allowed us to provide cash flow from operations of over $11.7 million for the quarter and over 51.4 million for the year.

Now we'd like to take a moment and examine the numbers from the normal number of different vantage points that we do -- you know, categories of business, geographic, customer, product, and things like that. So by category of business, we saw, as I mentioned before, a very good balance. For the quarter, on an adjusted basis, lease business remains strong at 20 percent of our total quarterly revenues and strengthened to 22 percent for the year. Software license revenue grew at 20 percent for the quarter and 17 percent for the year.

Service growth was 10 percent for the quarter and, as usual, this was driven by our product enhancement subscriptions and software maintenance. For the full year, service grew at 15 percent and we've also continued to see an evolving interest in Workbench based process automation services, particularly at our major accounts.

All major product sectors performed well with a very even balance between the various product classifications. Sales of the high end mechanical products and the midrange ANSYS professional lines grew in double digits. And, actually the CFX license revenue also grew at these higher rates.

Business intake increased also, actually out pacing revenue growth. And this is a really good sign because it allowed our business base of repeatable business to register at 60 percent of total revenue, even in light of the strong new business growth. So as always, maintaining this repeatable business base provides long term visibility and short-term support during the less predictable times. So all in all, this has contributed to a deferred revenue that now stands at 43.9 million, compared to 37.9 million at the end of last year or a 16 percent increase.

In addition to our pipeline license growth and expanding partner relationships, this base continues to aid in our overall visibility. So all of this contributed to a strong balance sheet of over 138.4 million in cash and equivalents and we remain debt free. All the while we've done this, we've continued our investment profiles in R&D and in our global sales marketing and business infrastructures.

From a geographic perspective, the bottom line from geography is we continue to see growth in virtually all geographies and subregions with a trend toward some balance in regional performance and return on certain sectors. And I'll talk about that in a little more detail coming up.

Similar to the past couple of quarters, we continue to see a mixed bag. There are pockets of optimism and they continue to be interspersed with lingering spending restraints and discipline and also some pockets of uncertainly. It affects all the regions to differing extent and all industries to differing extents.

Europe continued to progress well, growing off an already established, strong denominator of the last couple of years. We saw an overall growth of 15 percent for Q4 and 25 percent for the year, with particularly strong performance from Germany, basically in excess of 20 percent for the quarter and 30 percent for the year. But all the major subdivisions did quite well for the quarter and the year, particularly the major markets of U.K. and France, in addition to Germany.

Typical of previous quarters, there was a positive impact of currency in Europe for the quarter. But even with that, as we look at the whole year, the growth for Europe for the year has been in the high teens even in real terms. Major European orders came from Airbus, Volvo, Alsum, MTU Arrow, Siemens, British Nuclear Fuels, Infinion, Dupont, Mclaren, Framatone, SKF France and Cummins Europe, so again, continuing a trend of broad industry coverage and the addition of some significant new customers, so positive signs there also.

Our GIA was relatively flat, but grew in most regions with the slight contraction in Japan, for which Q4 is seasonally a weaker quarter for them. For the year, GIA grew around 10 percent with Japan's high single digit balanced by the rest of the region's double-digit growth, led by particularly good performance in India and China, in particular.

Key customer engagements in GIA were Cummins India, Japan Atomic Energy Research, Hitachi, Ashingyon (ph), Arrow Engines, InfoTech, Cannon, Denso, the Max Store, Emerson.

We continue to see, in GIA, 3 growth mechanisms that we've been talking about for the last couple of quarters. First of all, supporting our global major accounts as they expand into the region. Second of all, providing tools for engineering offshore outsourcing entities. And third of all, building off the growing off the industrial base throughout the region.

Last, but by no means least, North America continued a positive momentum for another quarter, with growth in excess of 30 percent for the quarter and 18 percent year-to-date. Major customers accounted for a disproportionate part of this growth, with a broad representation of industries, but we saw a smattering of other companies increasing investment. There was actually a fairly noticeable increase in 6 figure orders and even the emergence of a 7 figure order, which we'll discuss in a little bit more detail. But I emphasize that this is an effect of our sales traction and really not a shift of our sales philosophy towards the -- and I put this in quotes for a reason -- "the big orders" that often times can tend to slip a quarter.

Our main strategy is we're continuing to strive and build for sustain-ability, consistency and scalability, so that will continue to be a hallmark. And I think the -- occasionally, the big orders will come. The major orders came from General Electric, Pratt & Whitney, Trane, Honeywell, Rockwell, Pictogray (ph), John Deere, Raytheon, Vistion, General Motors, Whirlpool, Hewlett Packard, 3M, Motorola, Dow, Amoco, just to name a subset. I think the strength -- the industry breadth and the significant number of industry leaders expanding their relationships with us are all noteworthy.

In continuing, in addition we saw increased commitments from our large accounts. And are also encouraged by the increase in the number of larger orders. For our earlier guidance, we did commence the sales expansion initiative in Q3 and I will note that we plan on continuing this investment through 2005, but I'll highlight that it will be carefully modulated to observable buying trends and in preparation for more sustained spending patterns, not on any hope and prayers.

So in summary, all geographies continued good trends. We maintained our industry and customer breadth. There were good signs of potential in each region, although to varying degrees. And we saw quite a strong traction of our strategic message and the acceptance of it. Nevertheless we have ongoing evolution growth and acceleration plans for each region and that's something we hadn't talked about for years on these calls.

Overall we are encouraged by our major account progress, the strengthening of our overall industry breadth, the performance of our direct offices and, of course, the broad base of customers that provide the recurring base we spoke about. You know, be basically being a continuing source of opportunity for expanding our license business. But we're going to continue our degree of caution, but it's still mixed with the tempered optimism for the simple fact that we continue to see glimmers of loosening of budgets and spending patterns and we're also seeing remaining pockets of pessimism.

Our pipeline of new opportunities continues to gain strength but we're still seeing caution in the customer bases. The larger order size opportunities continue their uptick, but so have longer sales cycles and they will also probably be more susceptible to slippages as many customers continue to examine their expenditures quite closely. But at least the signs of re-emergence continues and we consider that to be overall reasonably positive.

Based on the response to our offerings, as I mentioned, we continue to anticipate a controlled ramp-up of customer engagement capabilities throughout 2005. And as we've demonstrated, we already have a strong inventory of intellectual property from our long term R&D investments and, as such, it's relatively easy to meet increased demand for our software offerings, as it occurs. So that's the approach that we've been on and we will continue on that as being quite prudent.

From a product standpoint and when we talk about this commitment to R&D, it's also on these calls very customary for us to take a look at both qualitative and quantitative looks at our product progression. In Q4, we continued our commitment to our customer base with the release of ANSYS 9.0. This release contained a lot of serious advances in our mainline technologies, but also some significant new offerings within the continuing momentum of our unified Workbench environment.

In the mainline areas of mechanical analysis, we made strides in non-linear and multi-physics simulations with strong offerings in fluid structure interaction, advanced materials, thermoelectric coupling. For example, this being critical to electronic schooling applications, high frequency electromagnetics and magnetostatics, which is -- emerging has been very important in motors and control systems and the like, just to same name a few.

Our CFX and our ICEM CFD lines also continued to grow, by customer and by capabilities both, continuing to be able to leverage and exploit the shared Workbench capabilities. And while we are quite pleased with the progress of our existing products, there were a number of expansions that long time listeners to our call will recognize as being predicted advances against our long term product road map.

First our design for Six Sigma offering was augmented with robust design. And basically allowing the utilization of simulation to conveniently predict many of the uncertainties that occur out in the real world and sometimes can cause some major field problems for our customers. So with this module, customers can consciously consider both controllable and uncontrollable parameters in the success of their product. So uncertainties such as material and manufacturing variations, environmental swings during product usage, and product deterioration and fatigue can all be considered to determine failure rates, as well as the costs and sensitivities that would be involved in their mitigation. So it's all aimed at basically providing improved products and decreasing product life cycle cost.

Secondly design modeler offers a bi-directional CADD interface key to major CADD packages key to our integration and fitting into our customer environments. But also offers CADD data manipulation, providing a parametric bottling and simulation simplification work within the Workbench, again still focusing on the bi-directionality of that.

We've also added an engineering data application that offers a repository of all data that is accessed during the simulation cycle, so this data can be utilized by all Workbench modules to handle things such as multiple material libraries, physical properties, functional data curves. For example, as in convection curves, and even parameterized engineering tables.

Then also, if you recall, we talked I think it was the last call about -- or last couple of calls -- about some large-scale real network problems in our pioneer work in expanding solution limits, cracking through the 100 million degree of freedom barrier and the like. With ANSYS 9.0, we've now added distributed ANSYS where an entire solution can run in parallel, including generating the problem matrix, solving the equations and generating the results. This can be done across many uniprocessers or multiprocessors, many of these sitting idle on desktops after normal work hours have closed. Basically it provides a very scalable solution that maximizes the utilization of computing resources and our customers IT environments and basically allows much larger problem sizes and more realistic simulations to be done.

So obviously technology is the central theme, and any of the above things I've just highlighted, plus more, could easily swallow up all the time we have here. But if you'd like to scratch beneath the surface, we really invite you to dig a little deeper at ansys.com, where some of this is spelled out in more detail.

Getting back to the quantitative factors, with regard to numerical progress, as previously mentioned, adjusted software license growth was 20 percent for the quarter and 17 percent for the year, pretty well balanced across all tiers of our product lines. Our ASPs were slightly up. And I'd say this is the -- basically across all product lines, with the exception of one product line. But basically this was solely a function of preestablished volume purchase arrangements of a few of the very large orders that we previously mentioned. So again, ASPs could be considered to be quite stable.

So with all this momentum, the largest issue we continue to have -- again repeating this over the number of quarters -- is to have, with all this technology progress we're making, is the efficient evolution of our distribution capabilities, both direct and indirect. We mentioned in the past the criticality of broad spectrum education to support the competitive advantages we've created. And we've come off of a couple of very encouraging events, including our sales kickoff, so we hope to demonstrate the value of these over the next year or two.

But while we continue to build on our technologies and partnerships, probably one of the more noteworthy recent news events was announced actually in early January of this year, 2005, capping off obviously a lot of effort in the latter part of 2004. And that's the acquisition of Century Dynamics, Inc. Century Dynamics is a leading provider in a smaller, related parallel simulation field to our conventional business and it has a focus toward expanding our solution business in non-linear explicit multibody dynamic products, including hydrodynamics.

They also expand our solvers libraries to encompass finite volume solvers for CFD, mesh-free particle solvers for high velocity, large defamation and fragmentation problems such as in ballistics. And a couple of field solvers for multi physics. Their technologies through, while they are broadly applicable and will provide us some cross leverage opportunities over time, they also bring a strong presence relatively in the government defense areas and the offshore arena. So again, you can find more information on that on the ansys.com website.

So the bottom line with product is accelerated progress in extending our technology base, both in our core products, our new product lines, some acquisitions, and in our unified architecture. Basically all of this is with a consistent focus of furthering the impact of simulation throughout all phases of the design and engineering process.

So in summary, and at the expense of possibly sounding like a broken record, we remain committed to and increasingly encouraged by our long-term strategic direction admission. I think the main difference is that now we have several years of meeting our operational commitments in a sustained manner through a complete spectrum of economic situations. And this has just allowed us the ability to further our technical leadership, invest in our future, expand in our universe of partners, and, again, all with the goal of simulation driven product design in mind. Each of these in concert allows to us continue to pave the way for the on going realization of our vision admission.

Our top line has continued to grow, in line with our guidance. We've maintained our financial disciplines and our gross and net margins and our DSOs, and again, this is evidenced by the fact that we have met or exceeded the original analyst's earning consensus for 29 straight quarters. We successively increased guidance each quarter of last year and always at such time as we are able to accurately predict it on facts and not hopes or guesses.

Our recurring base continues to grow in our major accounts and our customer proliferation activities continue to make progress. This has allowed a continual cycle of wise technology investment, customer adoption, continued investments, and continuing the cycle. These investments, coupled with our industry and geographic breadth, have provided us the capacity to react and modulate to the recent economic ups and downs, but also to quickly seize on opportunities when they come.

So, netted out, I think the long term optimism we've been talking about in the last few years is been demonstrably justified with some room to go. But so too has the prudence of our short-term caution. Positive signs of market potential continue, tracked by our judicious expansion, to prepare for the opportunity we see growing ore the next few years.

So with that, I'll now turn it over to Maria Shields, our CFO, to provide you with a more detailed look at our financials, including expense structure, balance sheet highlights, some insight into our guidance and other items. Maria?

Thanks, Jim. For the next few minutes, I'll briefly go through a recap of Q4 and 2004 year-to-date expense results. As Jim mentioned, I'll touch upon some of the highlights from a balance sheet and cash flow perspective. And provide some outlook relative to Q1 and full year 2005 adjusted EPS.

So, let's get stated. Taking a look at cost of sales, total expenses, excluding amortization related to acquired software for the fourth quarter, were 5.1 million. That compares with 4.9 million in the fourth quarter of 2003, which resulted in overall adjusted gross profit margin of 87 percent for the quarter. Full year of 2004, our cost of sales, excluding amortization related to acquired software, totaled 18.8 million and that compares to 19.1 million in 2003, resulting in an 86 percent adjusted gross profit margin for the year.

From a sales and marketing perspective, for the fourth quarter, expenses totaled 7.1 million versus last year's fourth quarter of 7.5 million. And on a year-to-date basis, sales and marketing expenses totaled 25 compared with 24.8 million in 2003.

Consistent with the our actions in the latter half of 2004, as we move ahead into 2005, as Jim mentioned earlier, we intend to continue to make investments in strategic sales areas throughout the world and we anticipate that total sales and marketing expenses in absolute dollars should continue to increase throughout the year.

In the area of research and development, our expenses for the quarter were 6.8 million compared to 6.2 million in Q4 of last year. And on a year-to-date basis, our total investment in R&D grew to 26.3 million or approximately 20 percent of revenue, as compared to 23.8 million last year.

The quarter-to-date and year-to-date comparative increases were primarily attributable to an increase in head count and related costs, as well as the inclusion of the CFX operations for the full year in 2004, compared to 10 months in 2003.

For the full year we capitalized approximately 540,000, which compares with 550,000 of capitalized costs last year. Looking forward to 2005 we are committed to continue to invest in the R&D area, commensurate with our historical trends or somewhere in the range of about 20 percent of revenues.

In the area of G&A, our expenses totaled 4 million in the fourth quarter versus 3.3 million in last year's comparable quarter. And for the full year, our G&A costs totaled 14.8 million compared to 12.1 million in 2003. The quarterly comparative increases are primarily attributed to higher consulting, legal, and auditing expenses in connection with our increased compliance efforts in 2004. The year -to-date increase was also impacted, as I mentioned earlier, by the inclusion of CFX for a full year and all the head count that we have 12 months of burden versus versus 10 months last year.

For the fourth quarter and full year, the overall business yielded an adjusted operating profit, excluding acquisition related amortization, of 41 percent and 37 percent, respectively. Our effective tax rate for the quarter was 23 percent and this included a one-time tax benefit of $1.1 million. This 1. -- this one-time tax benefit, as we explained in this morning's press release, resulted from the successful completion of a number of governmental audits for the years 2001 through 2003. If you excluded this one-time benefit, our effective tax rate for both the fourth quarter and the full year was about 30 percent.

I'd like to briefly comment on some current changes in legislation under the American Jobs Creation Act of 2004. This legislation significantly reduces export-related tax benefits and these benefits will essentially be phased out beginning in 2005 and will be replaced by a deduction for qualified manufacturing income. We currently anticipate that these changes will begin to adversely impact our overall effective tax rate in 2005 with the greater adverse impact in 2006 and beyond. So at this time, we anticipate a tick up in our effective tax rate for 2005 somewhere in the range between 31 and 32 percent.

For the fourth quarter, ANSYS reported adjusted EPS, excluding purchase accounting adjustments, acquisition related amortization, and the one-time tax benefit I mentioned, of $0.35 on 33.6 million diluted shares, compared to $0.25 on 32.8 million shares in last year's fourth quarter. And for the year, adjusted EPS, excluding the items that I just mentioned, was $1.09 on 33 million diluted shares, compared to $.80 on 31.9 million shares in 2003.

Currently, we are projecting adjusted EPS in the range of $0.27 to $0.28 for the first quarter and a range of $1.15 to $1.18 for the full year 2005. Just a comment. This adjusted EPS outlook does not factor in growth for a number of dynamics that did impact our 2004 results, including the 7-figure Q4 deal that Jim mentioned earlier that added a few pennies to Q4 earnings, as well as the positive impact of currency in 2004. Our outlook also factors in the tick up in the effective tax rate that I mentioned and excludes the impact of expensing stock options.

From a GAAP perspective, we're estimating earnings for 2005 in the range of $1.00 to $1.06. We're providing an initial range that is quite wide, as we're currently in the midst of working through some of the purchase accounting relative to the CDI acquisition, as well as the of implications of option expensing. And we anticipate providing more guidance on our GAAP estimates in conjunction with our first quarter earnings release.

Just taking a quick look at the balance sheet at December 31st, our total cash and short-term investments have grown to an all-time high of 138.4 million. Our consolidated DSO is at an all time year-end low of 49 days. Deferred revenue is at a historical high of 43.9 million and the Company generated 11.7 million in operating cash flow for the fourth quarter and 51.4 million in 2004, which is a 32 percent increase over 2003 operating cash flow. And we continue to remain debt free.

I'd like to close by adding that we're very excited about the upcoming year and the prospects that it holds, while recognizing that there are a number of variables, as always, that could work against us or alter some of our short-term plans.

With that, I'll now turn it back over to Jim, who will go through a brief recap and then we can open it up for questions. Jim?

Thanks, Maria.

To recap, continue steady and strong financial performance, meeting commitments to top and bottom line with excellent cash flows, margins and other business fundamentals. Balanced growth in most aspects of our business product lines and geographies. Increased customer acceptance, as demonstrated by the industry breadth, the geographic spread and the order size. New technology breakthroughs that are coming out in increasing quantity.

In general, we are slightly ahead of our expectations, but we think there is still quite a bit more progress to be made.

With regard to the outlook for 2005, we're going to increase our capacities, as we mentioned, but we're going to continue to watch all the external factors closely as we have for years. We still see a mixed bag with a tenuous market improvement. The long-term outlook remains solid.

For 2005, we're making no provisions for wholesale changes in the economy, which translates to a revenue growth in the 11 to 13 percent range, which would bring us to 150 million or slightly north thereof. Maintaining consistent growth trajectory and comparable adjusted earnings growth, as Maria mentioned, in the buck 15 to $1.18 range. Again, representing continued earnings growth in operation, but not assuming currency, one-time benefit, big orders as part of the growth denominator. Both revenue and earnings are above the current consensus. With that in mind through, we'll continue our track record of keeping an eye toward ratcheting up the performance and, if the economy should start to warm-up, then we'll be prepared to do that. Something I think we've demonstrated over the recent quarters.

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

Thank you. We will now again the question and answer session. (OPERATOR INSTRUCTIONS)

Our first question comes from Mr. Tim Fox of Deutsche Bank. Mr. Fox?

I'm here

Thank you.

Hi, can you hear me now?

Yes, we can.

Sorry about the mix-up there. Congratulations on another solid quarter.

Thank you.

First question -- maybe you can address the follow on deals that you highlighted. Was there anything in these major follow ons that's being -- that's driving further adoption within the customer base? Is it more of a -- the adoption of the simulation-driven design that you've been speaking of, or is it more around some of the new products that are rolling out?

Actually, there are 3 factors. Both of which you stated are valid factors. The third one is kind of the obvious one. There is just a growing base of the legacy usage, and some of that is just in the normal expansion of our customers and since we've got a very good customer base, we tend to focus well on that standpoint.

We have started, of course, getting more ramp up of some of the newer products and we highlighted some of the very ones that were released in the 9.0 release in Q4. But, for instance, we also mentioned that some of the newer products, for instance, that came out of the CFX integration have also grown at some of those higher rates. And then a measurable, not inconsequential amount, but a lower amount, is moving more toward the up front simulation and simulation-driven product design and that's pretty much expected.

We've been talking about a lot of times that involves some process evolutions inside of customers that are already doing a great job of getting products out to market, but wanting to accelerate it. And obviously you don't invoke process changes in a cavalier fashion, but the leading companies are definitely doing that. And as you noticed, we had quite a few name plate or marquis-type of companies that we're getting very significant and we're starting to see more and more of that ramp up. Those are probably the 3 major factors.

And from a competitive perspective, you mentioned that there were several significant new customers. Were those competitive displacements for ANSYS?

It's a mixed bag. You know, sometimes -- sometimes they are competitive displacements. Sometimes they are actually places where maybe numerous products were and maybe our expansion might, in those particular cases, be going a little bit more. And in some cases, they are just -- in some cases, they are green field accounts, particularly when we are meeting new demands or helping to populate new product lines or new design centers for our major customers. So it's not like there's any one thing that's predominating that.

Okay. And Maria, if I could just, a couple of quick ones. You mentioned there were some obvious positive effects from currency. What was the total for the quarter?

For the quarter was about 1.1 million. It's kind of in line with almost, you know, every quarter this year.

Right. And I noticed other income jumped up a bit, sequentially. Anything to read into that?

You know, some tick up in the interest rate environment that we're appreciating in the growth and the cash balance and some slight FX.

Okay. All right. I'll move on. Thank you.

Okay. Thank you.

Mr. Eric Wanger of Barrington Research Associates. You may ask your question.

Hi, everybody. Fabulous quarter.

Thank you.

Couple of quick questions. One is -- one of the most striking things this quarter was the operating margins above 40 percent. It looks like you had a big jump in sales with a relatively small jump in selling expenses. Was that because of bigger deals? Was that because of more channel? How did that play out?

Well, what you're actually talking about is something that's a multifactor manifestation of something that is fairly part and parcel. That's basically our overall business model. So in general we choose to -- we choose our expense patterns based on the long-term opportunity and the short-term reality, so that helps govern that. But when the revenues come in, because of the high leverage in our model and the particular distribution philosophy we have, it does have a disproportionate effect, going down into the -- particularly the operating margin wide.

So that for instance is why we can have a very -- you know, we can have a very good model that's predicated on what we see, but since it's very easy for us to meet new demand, if people buy additional licenses, because essentially we're just burning more CDs with the same distribution mechanism in place that's already continuing to grow at a very manageable rate, that tends to percolate down to the bottom line. And it really gets down to -- there's a lot of mystery in execution -- I mean, a lot of details in the execution, but there's no mystery in the actual leverage of the model. And that's the effect that we saw actually the last couple of quarters, but particularly this past one. It doesn't take a huge build up for us to deliver and recognize additional revenue opportunities.

Okay. Sales and marketing expenses were essentially flat year-over-year, which was striking, so that's --. Maria did mention that that number is going to be increasing, but that would imply continued operating margin expansion. Is that -- ?

Well, in general, we want to be able -- again we want to ramp it up commensurate with the opportunity. We are looking at continuing a sustained pattern of long term building and scalability because we think the market over the years has a number of legs. It's also one that sometimes is slower to adapt to some of the new capabilities, so that gives us time to ramp those things up. So it is something that we balance and manage quite carefully. And we don't, you know, from that standpoint, since a significant opportunity lies in front of us, we want to do anything but cash cow that opportunity because it does have, you know, it does have some nice upsides to it.

Okay. I'll move on to a different question. As far as the organic growth, I assume the acquisitions contributed very little with respect to your growth numbers in the sector.

When I gave the Q4 numbers, I mean, basically that's an apples to apples. Core equals growth.

So apples -- organic equals growth. Fabulous. And lastly you mentioned that you intend to come out with an option-expensing strategy. I noticed you had -- in 8-K the other week about cash bonuses. And I guess one question I had, is that related to -- does that give us some kind of view into your option expense strategy or -- ?

Not at all. It's just a matter of getting things out on -- you know, basically some of our operating methodologies and philosophies. So it's unrelated to option expensing. I mean, you can talk about the -- what has to be done and the timing.

Yeah. We'll, you know, at this point in time, we will be subject to FASB 123 expensing beginning in July, at which time we will. But you can see, you know, clearly the impact of the option expensing in, you know, last year and beyond all in the 10-Q and the annual report disclosures that were provided in the footnotes.

Sure. Some people are planning on restating for full year. Some people are just going forward. Is that the kind of thing?

Yeah. We're going through that with our audit committee right now.

Great. That's all my questions. Beautiful quarter. Thank you.

Thank you.

Mr. Richard Davis of Needham. You may ask your question.

Thanks. So I'm over here at this Daratech Conference here in Cambridge. We've kind of seen a couple interesting things here. So one is that simulation -- the interest in simulation is far higher than CADD or PDM, which would probably be a good thing for you guys. But the other thing that is interesting is when you listen to like what UG and DISO say, they both say that they intend to imbed simulation in everything they do. So you listen to DISO and these guys are clearly in love with MSC, but Unigraphics and PTC have both said that they want to partner with other firms, although Unigraphics, as you know, has that kernel of the old (indiscernible).

So the whole question I have for you really is this. Clearly simulation is of interest to both the users and some of the big PDM and PLM vendors and the CADD guys. So at least the low end, do you think you'll see them as a competitor and, if not, talk a little bit about how you plan to, you know, partner or at least make it easy for me as a user for me to link from you into whatever system you might have on the 3D design side.

First of all, we anticipate, you know -- CADD providers or PLM providers have always largely had some form of simulation offering. It's, you know, obviously we've steen seen the opportunities for a number of years and that's what we've been talking about. The expenditure profiles I think drive toward some of the core elements. The main thing is that we focus on it and so we plan to try to you utilize that focus. It's very difficult to be an expert in everything in a one-stop shop excellence across-the-board. I think that carries -- we've seen that in other industries recently of note.

So there will be elements of competition. That's clearly part of it. But keep in mind, over the last couple of years, we also have been talking about, you know, the Workbench environment, the role that that can play in terms of being a self-serving, self-standing integration platform for us in our acquisition and our industry partners. But it was always conceived with the standpoint of saying -- we'll have to work with the wide range of products, be those CADD products, DOM, be them in house programs of our customers. And so we've already been leveraging that.

And the other thing I'd highlight is our industry base for years has been strongly tied to a wide range of CADD providers, so we basically have a very good ability to interact with our customer base, historically has been pretty well split amongst the leaders in the CADD world. So just working with that has been a normal part of our DNA and our operating requirements. It's basically part of life.

I don't see a whole lot of difference in the environment. Yes, there will be new competitors that pop up from time to time in different situations. But still at the end of the day, the people buying simulation have to be able to do the job and, at the end of the day, that's going to be what dictates successful implementations.

Okay. And then I know this may be a little bit of a technical question, but one of the things we heard from some of the users guys like GM and stuff like that, is the fact that there's still no common data model. That CADD is generally B wrap (ph) and DMU is tesilated and CA is meshed. And so they say, well, we have to have 3 data basis or at least 3 data repositories. Do you think -- is that a tempest in a teapot? Are we ever going to get to a single data model? Are you guys trying to work in that direction or do you have any point of view on that?

A -- what we are trying to do -- I mean, single data models -- it depends upon where they are emanating from. There's been a request for single data models just like there was a quest for UNIX at one point in time -- a unifying operating system and things like that. In general -- and there were the p-dez (ph) and the step initiatives and I-gist (ph) in years past and things like that.

It's just very difficult to have something that is that all serving, but also can progress at the rate of technology. You know, in general, when we extend certain data models from our standpoint, it's just because the traditional PLM view of data hasn't comprehended the realities of very esoteric and highly volumed engineering calculations. So, it (indiscernible).

But the main thing is how can you get down to -- I mean at a minimum, what you want to have, is effective seamless interactivity. And that's one reason why with the early simulation driven initiatives, we were trying to work toward abstraction layers that basically allow us to not create, you know, separate bases, but be able to work off of the geometry. And that's how we've been able to drive some of the bi-directionality of the software. So it's a very tricky issue and you try to balance the needs of the integration versus the power of the capability that you're providing to the customer to solve their problems.

Okay. So I'm going to violate the thing and ask you one other quick question as a follow-up. If you believe that the worlds of simulation and, at least, including electronics analysis or even EDA, maybe not down to the chip design level or intersecting, just because you have more electronics in your mechanical goods, which you guys have kind of touched on. Is this a discipline in a customer base that it is more effective to get into that business through acquisition or is it -- do you have in-house R&D talent that says look, we can figure this out and design our own software to integrate electronics into mechanical objects?

It's a combination of both and that's pretty much even in our bread and butter areas, we've had a combination of building things internally, but also acquiring as a means of getting there more quickly. So obviously we've had a lot of things in terms of being very strong in the electronics market. We've had a number of people that deal and even on this call, I think I probably mentioned things done with the high frequency, low frequency, electromagnetics, the cooling characteristics, and things like that. I see a continuation of that, but also there's the ability to, while we can do things internally, the same thing holds, it's difficult to be expert in everything. So sometimes the acquisition is a great way for building up that talent base that you need to progress on it, but we see those trends continuing.

Thanks very much.

Mr. Scott Barnum of Credit Suisse First Boston. You may ask your question.

Good morning. Another great quarter.

Thank you.

I want to talk a little bit about the gross margin line. It continues to tick up. You're at I guess 87 percent for the quarter. Can you talk about what's driving that, and what you believe is sustainable going forward?

Well, I think the key thing is we've always targeted our model as being kind of in the mid-'80s kind of standpoint. But obviously where you get quarters where the product sales go up and the relatively proportioning of the higher gross margins of software, you know, disproportionately exceed the planned amount of body -- you know, of basically labor-intensive service revenues, that will drive the gross margins up.

However, we've also been driving toward -- because leveraging the strengths of our distribution model is allowing, you know, some of our partners do some of the business. We tend to focus on some of the more software, intellectual property intensive aspects of the service business, which tend to have a higher value add and a higher gross margin associated with them. So the net impact is that the blended model can still be very strong even with the addition of services, but it's disproportionately raised during those times, most notably in Q4, when the historically larger patterns of software contribution comes in.

Right. So would you say then, going forward, you'd be comfortable with something in the 85 to 86 percent range?

Yeah. And really I guess, again, that cash cow question. If we wanted to drive that up, but we want to also proliferate the adoption of technology, and there are some service aspects of that that are used in helping customers evolve into the most effective utilization of that. And that's starting to emerge as a pretty interesting adjunct to our business.

Okay. And if I could just switch gears a little bit. I wanted to talk about the Autodesk relationship. I know that you are bundled with their 3-D product that starts shipping in the third quarter, so you've had a full quarter now of that relationship. Wanted to get a feel for how that's going and maybe what kind of a revenue contribution you're seeing. And then I know it's mainly a royalty basis, but I'd like to know if very many users are looking to bring in add-on -- some of the add-on features or how you see that relationship going so far.

Maybe you can address the timing of the --.

From just a general perspective, the relationship did not have a significant impact on the quarter's results. It's kind of in the infancy stages. We believe that, long term, there is opportunity there as customers use the software and get comfortable with some of the elements of the ANSYS software that have been embedded, but we don't see that as being a necessarily short sales cycle.

Okay. And then just one follow up question on Century Dynamics. Could you give us an idea of what the revenue base was in 2004 and what kind of growth opportunities you see for that business?

Think of it it as low to mid single digits and --

Yes. Scott, they didn't have audited numbers for 2004, so I really don't want to throw out numbers that may or may not be relevant. But based on what we're looking at going into 2005, we're looking for them to contribute somewhere in the 4 to 5 million in revenue.

And consistent with our other philosophies, we're planning on trying to, you know, basically making it accretive -- or neutral to accretive by year-end. So basically the same pattern we've used with the other acquisitions.

Okay. Thank you.

Mr. Greg Halter of LJR, Great Lakes Review. You may ask your question.

Good morning, guys, and congratulations n a very good quarter. Maria, you gave the number on the FX on the top line. On the pretax line?

Yes. Operating profit it was about 460,000. Kind of, as I mentioned, the impact on top line and operating profit have been kind of similar in almost every quarter this year.

Okay. And I don't know if you mentioned it regarding the direct and indirect split of the revenue business in percent.

Yes. It was about a -- pretty consistent with trends, but about a 55, 45 in favor of direct.

Okay.

Again, a lot of that skewed by some of the major orders, but pretty consistent with our overall portfolio approach.

And one last one. What is your cash invested in and what do you see the uses of that -- either acquisition, share repurchase, dividends, so forth?

Cash is invested, you know, largely in I'll call it non-risk, you know, T bills, money markets. We try to keep it liquid, as we basically tell everybody. Yes, acquisitions are part of our strategy, so to the extent that we we can use cash as a currency, we will. We do have a repurchase program that still has roughly -- what 2 million (indiscernible) shares that were approved by the board several years ago. That's available. I don't think at this point in time we're going to start a dividend program, but we are always looking for -- what are the best ways to utilize the cash in the most positive impact for the shareholders.

Okay. And one last quick one. On the option expense, I know that in '03 your reported figure was $0.67 with a pro forma at 58. Do you have those same type of figures early on here in '04?

We'll be coming out with that shortly as we come out with the 10-K and the annual report. We're going through the final revisions on that, so look for that full disclosure in the annual report to be coming out in March.

Okay. Should it still be in that range of 13 to 16 percent or so?

Yes. I don't think I don't think that there be any significant changes from prior years but as I said, we're still working through with the accountants the finalization of the variables and the model and everything.

Okay. Thank you.

Our final question comes from Mr. Jay Vleeschhouwer of Merrill Lynch.

Thanks. Good morning, Jim. Couple questions for you. Just to follow up on the earlier line of questioning regarding the interplay or role of CADD and PLM Engineering. First when we think about PLM, one of the issues with that sector has been the maturity of the technology and being able to measure its productivity and returns on investment. CAU has been around somewhat longer, but have there been any significant advances in your ability to measure the cost efficiency or productivity of analysis relative to your peers in CADD and PLM? And would it be that improvement in price performance, in effect, that is leading to this greater interest in the part of some of the major customers, for example GM and others?

That is part of it now. The thing is that the -- when you get down to the ROI, that almost gets down to the specific calculation of the company because, in general, it sometimes tends to defy cost accounting when you're -- you know, what's the impact, you know, how do they assess the qualitative -- how do they quantity the qualitative aspects of what they think is an improved product? And how improved would it have been if they hadn't used the technology?

So we're seeing again that these leading companies are starting to kind of come up with their own internal metrics, where there isn't anything when you kind of look at an income statement or a project plan and automatically come up with the ROI. But that, in fact, has been what's been driving some of the major customers toward -- that was the part of I was talking about of being able to perform a simulation versus being able to do the job.

Now, you commented earlier on the fact that the major integrated CADD companies each have some internal technology. The largest one of those would be UG with the largest business (inaudible - multiple speakers).

Right. Always have, yes.

And DISO talked about its simulation driven design, but their internal business is still relatively small for analysis, maybe just a few tens of millions of euros a year. So should we be seeing, in your case, a greater penetration or attach rate into the DISO base, particularly since you highlighted Germany. That's a strong region for them. Is that attach rate and share gain showing up in your numbers?

We actually are already seeing that. Some of it is quantitative. Some of it is qualitative. We're being engaged in situations that, I guess frankly, 3, 4 years ago, we might have have said may not be as high a probability, but that is something that is visibly happening. It's also happening in -- and that's not just a one company phenomenon. We are seeing that across, you know, other companies where, if anything, they are maybe not having a reliance on any one vendor is considered not a bad thing.

What's your sense, Jim, of the kind R&D commitments that the larger integrated vendors are making to this technology? It's one thing to have products; it's another thing to keep them up-to-date.

That's definitely a function. The other thing is that they also -- one of the other things they have to do is also make sure that they play within the realm of their own architectures, which sometimes can be a limiting factor in that. You know, the integration can be a plus, but also having to comply with the, you know, the constraints of the larger -- of larger entities.

So I think maybe it's -- you know, there's 2 questions. One of which is how much are they spending in R&D and how effectively are they spending the money? Because, you know, in general you look at the number -- you know, one of the things we tab -- we we've got a few targeted breakthroughs that we wanted to come through. And one of those was, in fact, the size of the problem because as soon as you start turning loose an entire PLM database, you can get some very, very large simulations. And if you don't have good stratagems for either simplifying those simulations without compromising the fidelity of the results or being able to run them at that size, it can be a very weak chain.

And so I think both of those factors are going to be very important, but again, it's just tough to focus and be best at everything simultaneously. And that's one reason why we've just chosen to focus on our core competency.

Okay. Thanks, Jim.

At this point we do not have time for further questions. Mr. Cashman, I'll turn the call back to you.

Okay. So in closing, we're maintaining the tempered optimism of last quarter. We're keeping a close eye on the short-term ups and downs that we still see. But we've been increasing our momentum and this continues to be predicated on a quantifiable opportunity. So as always at the heart of all of this is, I think, a long standing technological strength of ANSYS and the solid business model.

But I want to take a few seconds to give our continued and our continual thanks to the base of loyal customers who are growing with us and the expanding array of industry partners we have and the employees of the ANSYS team. They are both the reason for and the demonstration of any successes we may have seen over the years. So this combination in their effort has really afforded us the consistent performance with the expanding customer base and exciting base of technologies to support our enterprise initiatives.

So with that, we thank you and we'll talk to you in the next few months. Thank you.