ANSYS Inc (ANSS) 2005 Q3 法說會逐字稿

Good morning and welcome to the ANSYS Third Quarter Earnings Conference Call. All participants will be in a listen-only mode until the question-and-answer session of the call. Today's conference is being recorded at the request of ANSYS, Inc. [Operator Instructions]. I would like to introduce your speaker for this morning's call, Mr. James Cashman, President and Chief Executive Officer. Mr. Cashman, you may begin.

Okay. Thank you. Good morning and welcome everybody. We are here today, as mentioned, for the ANSYS Q3 fiscal year 2005 call. Actually I'm joined today by a special guest, the Pittsburgh CFO of the year for public companies, Maria Shields and she will be speaking a little bit later. But I'll go into a general summary to outline the highlights and then we'll delve deeper into the operational results on a broader front. We will look at the numbers that we always do from a number of different perspectives and then we'll also talk a little bit about some of the qualitative aspects of the progress that we have been making on a really wide variety of topics. So, also in addition to current results, we will be discussing some of the progress and initiatives that we have undertaken that we think are really in connection with the future directions we've been talking about for quarter upon quarter here. Maria will then take you through our balance sheet and expense structure performance, and outlook on adjusted earnings, and then after that we will be happy to respond to your questions. So as always, to begin, Maria, our safe Harbor statements please.

Okay. Thanks, Jim. Good morning everyone and again thank you for joining us to review the highlights of ANSYS' third quarter results. Before we begin, I'd like to remind everyone that some matters that will be discussed throughout this call, they constitute 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 our Form 10-Q, 10-K and our 2004 annual reports to shareholders. Any forward-looking statements are based upon the company's best judgment as of today, and ANSYS undertakes no obligation to update any such information.

Additionally, I'd like to point out that during the course of the call, we will be making reference to adjusted EPS, which is a non-GAAP measure within the context of the SEC's Reg G. We believe that this non-GAAP financial metric supplements our GAAP disclosures as an important indicator in measuring the underlying business performance and is used by management in our assessment of business performance. A discussion and reconciliation of GAAP financial measures to comparable adjusted EPS is included in this morning's earnings release and the related Form 8-K. All right Jim, I'll turn it back over to you.

Thanks Maria. Q3 business performance continue to track the momentum of the past few quarters and it seems to be ahead of our earlier expectations and guidance for both revenue and as a direct result earnings as well. We delivered on all of our major commitments and posted strong operational numbers really across the board. Looking at a high level perspective, for the quarter, we recorded revenue at 39 million, and adjusted earnings per share growth of 40% with an adjusted EPS of $0.35, up from last Q3, $0.25. On both count we exceed the consensus and the analysts' range.

However, on the adjusted EPS front, I will add one caveat, and that is the Q3 2005 results, they do include a tax benefit of 500 K that we do not factor in when examining the overall health of the business, nor do we currently anticipate that it will recur next year. Excluding this benefit, the adjusted EPS was $0.33 for the quarter but that is still about the analysts consensus range.

Secondly, we continued with our solid business model presenting strong, stable margins at both ends. We had excellent progress and further integrating all product lines and had a number of continuing technology breakthroughs, and continued momentum from industry and partners, basically in acceptance from the customer and finally, the addition of the employees and technology from Harvard Thermal, a small technology acquisition that we closed in early October. And I will spend some more time going into that a little bit later in the call. Operationally, focusing on math for a minute, as previously mentioned our revenue for the quarter was 39 million this compares to 32.3 million in Q3 of 2004 or 21% growth. The core growth rates for the quarter was 16%. Earnings also grew with adjusted EPS of $0.35, up from the $0.25 per share from Q3 of 2004. And it marks the 32nd consecutive quarter that we have met or exceeded the analyst expectations. So, obviously, over that timeframe, our business model was working a wide range of economic condition and situations. Our overall adjusted operating margins, excluding acquisition-related like amortization of course, was 39%. This compares to 35% in Q3 of 2004 and it's a natural upshoot of higher than expected revenue. Adjusted gross margins also remained strong and in line with our business model at 86%, so pretty typical there. For the nine months ended September, 2005, we reported total revenue of 114.3 million or a 20% increase over the comparable 95.7 million in the first nine months of last year, including good growth in both the license and the maintenance and the service components of the business. Year-to-date adjusted earnings per share were $0.97 or 33% increase over the $0.73 of 2004. For the first nine months the overall adjusted operating margins, again excluding the acquisition related amortization was 39% for the first nine months compared to last year's 35% and the adjusted gross margins were at 86% also. Cash flow from operations were over 14 million for the quarter and over 47 million for the first nine months.

With those high level numbers in mind, we will take a number at moment at least and look at those numbers. From a number of different vantage points by category, business, geography, customer and some of our product looks. So, with the category business first. Again, I mention that we saw very good balance and for the quarter software license revenue grew at 26% for the quarter and 24% for the first nine months. Lease business remains healthy at 21% of our total revenues also with the double-digit growth year-to-date. Service growth was 15% for the quarter driven by our product enhancement subscriptions and software maintenance. For the first nine months, service grew at a comparable, had 14% and there was a real like balanced growth between our various product lines.

Business intake for the quarter also increased actually, slightly outpacing the strong revenue growth. Overall, our repeatable business base was 64% of total revenue in line with the previous 2005 quarters and has always maintained this repeatable business phase, provide the long-term visibility and short-term support during less predictable time. All in all, our deferred revenue stands at over 46 million compared to a little bit on the 39 million at the end of last Q3. In addition to our pipeline license growth and expanding partner relationships, all these factors, this base continues to aid in our overall visibility. So, this all contributed to a strong balance sheet of over 174 million in cash and equivalents and all of this while we are continuing to invest in our usual levels in R&D, our global sales marketing business infrastructure.

From a geographic perspective, geography, the bottom line from a geographic perspective, we continue to see similar momentum from the prior quarters with double-digit growth in all major geographies and sub regions and this anyway you slice it total, quarter, quarterly, year-to-date, currently adjusted so, all of those in double digits. Quite like recent quarters, we continue to see pockets of optimism, their inner spheres with lingering spending restraint, uncertainty and certain bubble, but partially brought on by recent events such as increases in fuel prices, major weather-related disasters etcetera. They get affected in different regions to differing in extent, but nothing across the borders.

North America continued its positive momentum with a growth around 19% for the quarter and 16% year-to-date. Our all -- our North American offices have grown in healthy double digits year-to-date and almost all are in excess of 20%. Major customers continue to be probably the most compelling an important elements of this growth. Major orders came from host of companies, usually or actually a much longer list that normally occurs, perhaps, in Q3, but some of them, Parker Hannifin, Siemens, Westinghouse, Eaton engines, Train (ph), Belcan, U.S. Army Telecom, Magnicom, Boeing, CJ, Northrop Grumman and so on. Our GIA, or General International Area grew 26% for the quarter, with all major areas performing well and fairly evenly, but it was potentially led by performance in Japan, India, and China. Japan, our largest sub region in that area was particularly noteworthy with an 18% growth for the quarter. In the GIA, key customer engagements were also strong with, InfoTech, Petrobras, Larsen & Turbo, General Electric, Danfill (ph), Avici, (indiscernible), Mitsubishi, Toyota, PDVSA (indiscernible) Venezuela and Canon. We continue to see a demonstration of broad mechanisms, evident in GIA that we have been mentioning over the recent quarters basically several following our global major accounts that they expand into that region are basically providing tools, engineering offshore outsourcing, and building up the growing local industrial bases that are springing up in that region. So it's a three-headed spear here. All of this led to a composite growth of 21% year-to-date for the region. And again balanced throughout the major geographies.

And then finally Europe continued to perform well with an overall growth of 19% for Q3 and 22% for the first nine months with continued strong performance from Germany for the quarter and year-to-date, but most of the sector there were also performing balanced and well. Unlike some of the previous quarters, there actually is a slight negative impact of currency in Europe for the quarter. But even absorbing that, the growth was still in double-digit and at 19% even higher when you consider currency adjustment, but overall good growth there. Major European orders came from Siemens, Rolls-Royce, Bosch, TSA, Framatone, Infineon, Bouldo (ph), Alsom, AWE, but the list could go on quite a ways. But, it represented a particularly broad industry coverage and with the combination of expansion within our existing base, peppered with the addition of a nice combo to our new business.

So, in summary, for geography, all the major geographies experienced good growth trends. We broadened our industry and customer breadth. They are a good find with user potential in almost every geography, although to varying degrees, in each one. We are also gaining traction in our strategic message. Nevertheless, we have an ongoing evolution growth and acceleration plans for each region. So, 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 customer's that provide our recurring base and a continuing source of opportunity for expanding our license business, which grew quite healthily.

Our enthusiasm continues, however we have a real good handle on our business, and we repeat the caution that has been consistent and part of our guidance throughout 2005 for the simple fact that our Q4 comparable last year included a significant seven figure license order and a one-time tax benefit and we provide an improper basis for a comparable spike. But the good news is, we had this build into our business model and guidance, since the beginning of 2005. And the better news is that we continue to perform and increase our guidance throughout the year, which we have done in each quarter of 2005. Our pipeline of new opportunities continues to gain strength and closing on larger order sized opportunities definitely play a factor in our success so far this year. However, as I always mention, due to the logistical and political complexities of multi-national deals, or involvement of multiple sides of division, they still happen in longer timeframes, and they are more susceptible to slippages but, we have been seeing them continue to be an important contributor to each quarter-to-quarter's revenue growth.

Based upon a variety of positive indicators from our customers and the markets in general, we have been continuing a controlled ramp-up of our customer engagement capabilities, specifically our sales and support, and customer service functions throughout 2005. And we plan on doing so at a similar rate through 2006.

From a product standpoint, as usual, we have continued to focus in the area of R&D investments, to manage our potential opportunities, we have got 35 years of this under our belt and we got a lot of horizons still to accomplish even with our leadership in this area.

This quarter we shipped the ANSYS 10.0, it was the first major unified release of the entire software portfolio of our products. Basically in layman's terms, this release offer major advancements in performance, ease of use, interoperability, a couple of physics and multi-physics technologies such as fluid structure interaction. I won't spend a lot of time on details about the releases, we spent a lot of time on that on the last call, but for those of you who are interested in more detailed information, I will certainly point you to our website where there is probably more information that you could ever want of great technical detail in there.

I would like to highlight that also during this quarter, we also announced the latest release of AQWA 5.6 and ASAS 14, which were product offerings from our CDI acquisition that we closed and announced early in January this year. Both of these products are particularly geared for bringing in offshore markets where we have been seeing increasing demand of course, not been surprisingly given the geopolitical climate these days. The ASAS release introduces a number of new features including simple methods for defining tank loading for vessels, the unique non-linear coupled wave-structured interaction facility has also been enhanced with the addition of effective tension for dealing with the tubular nature of structures that occur in those types of offshore environments. The recent AQWA 5.6 introduces new features also including the ability to handle up to over 50 interconnected structures, user-defined multi-directional wave spectra as you might see in a different environmental loading, and all to improve handling of the irregular wave frequencies as well as standing waves. So, the ability to keep those offshore structures working over time is pretty topical item right now and these products aim right at this.

We also continue to see examples of the sensibility of the ANSYS Workbench simulation environment with recent announcements. We were always talking about new partners coming on board and this quarter we mentioned CoCreate 3D CAD capabilities, VISTAGY and they are both continuing examples of the ANSYS Workbench allows the greater number of users to leverage the power of simulation and that particularly including the offerings from third parties. We continue to focus our investments in two key areas, making the ANSYS Workbench more powerful and broad-based accessibility from the workbench standpoint. So, those two things are particularly important as we go forward expanding the overall sphere.

As I alluded to previously in the call, early in the fourth quarter this year we acquired the technology and key employees of the company Harvard Thermal or HTI, and while the acquisition was not material for a debt disclosure purpose. We stated about the addition of the simulation technology for solving problems in the areas of pooling of electronic components and circuit boards that really broadens the overall applicability of our ability to stimulate a broad range of capabilities. Basically, HTI's cutting edge software allow users to directly import data from their EDA systems and tools, basically resulting in unprecedented accuracy in the models that are created. The specific application tools are used by electronics and aerospace engineers. They thermally simulate e-transfer at a wide variety of MEMS, consumer electronics, satellite application and in general, I'd mention a couple of these acquisitions were extremely encouraged by the positive response that we received in connection with the broadening of our simulation capabilities and we really believe that both the CDI and HTI acquisitions will continue to build on the benefits of our integration platform from the sheer rate of which we have been able to accelerate our product innovation and introduction.

We demonstrated the new workbench based products to our US AUTODYN user community, which came from CDI and last month, and the reaction was overwhelmingly positive. With regards to the (indiscernible) progress, as previously mentioned, software license growth was 26% for the quarter and 24% year-to-date, distributed across all of our product lines. The ASPs in the quarter actually rose on the high end indicative of the increased proportion in mechanical and multi-physics sale. The ASP of our low-end design products slightly declined in Q2, but they are ahead of last few threes (ph) pace. So, in total, I have to categorize ASPs as very stable across the range of product, minor suites up and down according to product line. So, with all of this momentum, one of our biggest challenge is we continue to have with the technology progression is the efficient evolution of our distribution capabilities, both direct and indirect and to this end, we started making good progress on maintaining the path we've talked about in the last few quarters for continued training, the expansion of our TGF customer relationship, but we've still got a lot of heavylifting to do to continue to really fully realize the potential. There was one other thing that was kind of interesting that happened in the corridor anecdotally in addition to continuing to deliver and expand our simulation suite and business, in general. I thought it might be worth highlighting that we had our first ever South American user conference that included over 200 attendees from various South American countries. So, for a first, one of these is quite good. And I personally enjoyed having an opportunity to participate in a number of these sessions and basically to meet with key customers in the territory. I was somewhat surprised, but very encouraged by how advanced some of these groups are and then also by their policy of response to our Workbench vision and strategy. And I'm confident from what I saw that this can be an area of growing opportunity for us in the future.

And then a couple of side notes. We were also recognized in the Pittsburgh Tech 50, one of the top companies there and also recognized one of the 50 best places to work in Western PA, which is important because it's a indication of the relationship with the employees and also this quarter for the fourth straight time, we were mentioned in Forbes 200 best small companies. Again, not to mention again, the honor that we received second hand to Maria's selection as, `CFO of the Year,` for Pittsburgh public companies.

So, in conclusion, in summary, it was another strong quarter from almost every aspect of the business. The feedback we are receiving from the market encourages us to remain focused on our long-term strategic direction and mission, continuing to uptick that over time, our investments and resources are dedicated to further (indiscernible) simulation driven product design. Our top and bottom lines will continue to grow slightly ahead of our forecast for Q3. We have maintained our financial discipline through all this and our gross and net margins, our DSOs across the board, again evidenced by the fact that we've exceeded our commitments for 32 straight quarters, and we successively increased our earnings guidance each quarter of this year. Our recurring base continues to remain strong and our major account and customer proliferation activities continue to gain steam. It enabled us to continue the pattern and cycle of technology and sales investments to continue to build our foundation for the future. These investments coupled with customer, industry and geographic breadth have provided us the capacity to react and modulate their recent economic uncertainties, but also to quickly seize on the opportunities as they occur. So, I think we've got a good balance there. I think the long-term optimism that we have been talking about for the last few years has been demonstrably justified and we have the opportunity to continue it as such work continuing as I mentioned, to plan our ramp-up. Again, within our traditional level of standard is we continue building on our business and preparation for the next couple of 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, focusing on a number of things, including expense results, balance sheet highlights, etcetera. Maria?

All right, thanks Jim. I'll spend a couple of minutes supplying (ph) a recap of Q3 and 2005 year-to-date expense results, walk you through some of the balance sheet and cash flow highlights, and then provide some outlook relative to Q4 adjusted EPS as well as our current outlook on EPS for next year. So, moving on, we'll take a quick look at expenses from a cost of sales perspective. Total expenses excluding amortization related to acquired software for the third quarter were 5.3 million as compared to 4.8 million in last year's third quarter. And this resulted in an overall adjusted gross profit margin of 86%. On a year-to-date basis, cost of sales for 2005, also excluding the amortization related to acquired software, totaled 15.6 million and that compares to 13.8 million in 2004, also resulting in 86% adjusted gross profit margin for the first nine months of this year.

Taking a look at sales and marketing for the third quarter, expenses increased to 6.4 million versus last year's third quarter of 5.8 million and on a year-to-date basis, sales and marketing expenses increased to 19 million compared with 17.8 million in the first nine months of 2004. The increase in expenses as compared to the prior year's quarter and year-to-date figures were largely impacted by the inclusion of the CDI acquisition in our 2005 results, as well as higher salaries and related headcount costs.

One other item I will point out is that the 2004 year-to-date results also include $300,000 of incremental costs that were related to our biennial international conference, which was not held in 2005. So, that's not included in this year's results. For the remainder of this year and looking into 2006, we intend to continue to make investments in strategic sales areas throughout the world to further strengthen our sales efforts and broaden our abilities to sell an integrated suite of engineering simulation solution. So, we anticipate that sales and marketing expenses in absolute dollars should continue to increase. In the area of research and development, total expenses for the quarter was 7.7 million or 20% of revenue compared to 6.6 million in Q3 of last year and on a year-to-date basis, our total investment in R&D grew to 22.5 million, also 20% of revenue compared to 19.4 million for the nine months of 2004. The quarter-to-date and year-to-date comparative increases were primarily attributable to increase in headcount and related costs, as well as the inclusion of the CDI operations for the nine months of 2005. There were a minimal capitalized costs in the third quarter of 2005. In last year's third quarter, we had about 136,000 of labor related to the release of 9.0. For the first nine months of this year, we capitalized about 270,000 and that compares with 524,000 of capitalized costs for the first nine months of last year.

In the area of G&A, our expenses totaled 4.3 million in the third quarter or approximately 11% of revenue and that compares to 3.8 million in last year's third quarter. For the first nine months, our G&A cost totaled 12.9 million and that compares to 10.8 million in last year's first nine months. Both the quarterly and year-to-date comparative increases are also attributable to the inclusion of CDI, as well as increased compensation expense. For the third quarter and first nine months, the overall business yielded an adjusted operating profit margin, excluding acquisition related amortization of 39%. And excluding the impact of the third quarter 2005 tax benefits of 500,000 that Jim mentioned earlier, our effective tax rate for the quarter and year-to-date was about 31%. And at this time, we are anticipating being able to sustain a rate in the 31 to 32% range for the remainder of this year. As I have spoken about in a number of previous calls, the American Jobs Creation Act of 2004 significantly reduces our export-related benefits. These benefit are being placed out beginning in this year and will be replaced by a deduction for qualified manufacturing income. We currently anticipate that these changes will adversely impact the Company's effective tax rate in 2006 with a greater adverse impact in 2007 and beyond. This time we anticipate, looking at 2006 for an effective tax rate in the range of 32 to 34%.

For the third quarter, ANSYS reported adjusted EPS, excluding acquisition related amortization of $0.35 on 33.9 million diluted shares and that's compared to $0.25 on 33.2 million shares in last year's third quarter. On a year-to-date basis, adjusted EPS totaled $0.97 on 33.7 million diluted shares as compared to $0.73 on 32.9 million shares for the first nine months of 2004. At the current time, we are projecting adjusted EPS in the range of $0.35 to $0.36 for the fourth quarter and we are preliminarily looking at a range of adjusted EPS of $1.45 to $1.47 for the full year of 2006, excluding the impact of stock option expense, which we will adopt beginning in January 2006.

Taking a quick look at our balance sheet for September 30. It remains quite strong. Our cash and short-term investment balance are at about 174.5 million. Our consolidated DSO was at 44 days. Our deferred revenue was at 46.1 million. The Company generated 14.2 million in operating cash flow for the third quarter and 47.1 million in the first nine months of 2005. With that, I will now turn it back over to Jim.

Thanks Maria. To recap, solid financial performance delivering ahead of our quarterly commitments to top and bottom line and also with excellent cash flow and margin and all the other fundamentals. Balanced growth, I mean, the second hallmark here is balanced growth across our business, geographies, and product lines, increasing customer acceptance was demonstrated by that geography, but also industry in order size and also increasing the breadth of our engineering simulation suite obviously, would be launching of our ANSYS release ten, but also with the addition of, HDI in October this year, and CDI earlier, but also continued progress on the partnership front in this particular quarter with CoCreate and VISTAGY. In general, (indiscernible) slightly ahead of our expectations, there is more progress to be made. So, with regard to the outlook for the remainder of 2005, we are going to continue to focus on increasing the capacities, but we're going to continue to watch all of the external factors closely. The order sizes, they have picked up, but as I've mentioned, the sales cycle have not kicked down. All industries and geographies have shown a mixed bag of positive and negative issues. So, long-term outlook remains solid and with respect to Q4, we envision a topline in the 40 to $42 million range with the bottom line of $0.35 to $0.36, which will put us well above the early 2005 and recent guidance.

And adjusting for the two or four mentioned anomalies in the Q4, 2004 denominator on both revenue and earnings, the large seven-figure spike, etcetera, that will put us around a 15% annual revenue growth, which would be at the upper end of the range, that we have been forecasting since the beginning of the year. And with our business model, that incremental revenue growth provides a disproportionate growth and earnings.

For 2006, we're making no provisions for wholesale economies changes, but if those two comparable season as we've demonstrated over previous quarters, so this translates to revenue in the 175 to $178 million range, expanding on our mid-teens growth trajectory. And adjusted earnings growth as Maria had mentioned, to be $1.45 to $1.47, both of which are above the current consensus. So, with that, we are now prepared to respond to any specific questions you might have.

[OPERATOR INSTRUCTIONS] Richard Davis, Needham & Co.

This is hard for me to say, but good quarter. It's probably a jinx now.

Don't do that.

It's probably like being on the covers.

That is so unlike you.

Exactly.

But they're working good things and there's more good that we have to do. But, anyway your question.

Questions on two of your partnerships. VISTAGY, which we know is a neat little company. They did some cool stuff, and also Autodesk. How are those two partnerships going in terms of how do that -- are they providing any kind of deal volume in VISTAGY from the early days, but could you talk about those?

VISTAGY, is actually kind of just getting started. Autodesk is -- it's one of the things where it's a good thing for us. It's what we have always said, it was positive from a -- the venture itself was positive, but we are also seeing that, even things unrelated to that product line has introduced us into accounts that puts us on the radar screen. So, we've actually had a growth in overall business, not only from the OEM streams, which we expected, and not necessarily from just the ramp up, the upsell or capabilities, but just the overall tightness of that relationship. So, the other thing is that it's already now that it has and sometimes it can be like cats and dogs when channels get together, but there has been a cooperation in these sale channels, which -- that is something you never -- you always hope for but you never count on. So, that has been an overall net positive on all fronts, but we have gotten some benefits that's really more according to the plan. VISTAGY, a little bit early but yes, the technological ability to link our stimulation capabilities with some of the things that they offer in the composites and in other areas, that's just an important part of expanding into, you have the good product now, how can we make it and verify it more effectively.

And then the second question and the last one will be, you guys have been doing well in Germany now for several quarters and, as far as I can tell you, probably the only software company in the world that's doing well there. Is there anything in particular that you mean it is nothing beyond that is good solid execution that's helping you get there.

I think execution is part of it, but I think that even when, let's say that the economies are down, we found in certain areas that whether it is an industry sector or something like that, top performers can still do well in down economies. I think in particular, the typical German mindset towards engineering content and whatever, that's one that still has resonance that they have a big manufacturer and base and I think it is execution, but I think it is also a rapid acceptance of some of the engineering risk that we can help inject into their processes. I think that's it, but clearly the execution has been there also.

Great. Thank you very much.

By the way, before we take another question, I think one thing I probably forgot to mention is as I replay is, we also did, we were involved in a -- we kept our stock repurchase program going, but that was mentioned in the earnings analysis, but I apologize for not speaking that earlier. I am sorry. Back to questions.

Mark Schappel, KeyBanc Capital Markets.

Nice job in the quarter. I missed the first few minutes of your prepared comments, Jim. So, I apologize if something might be repetitive, but if you can maybe just start off with and just talk about any impact you saw, if any from the recent hurricane activity in the Gulf Coast and we have a sales office down there?

It clearly did impact us, but in general, you can always whine about currency ups and downs. You can always whine about flu outbreaks and things like that, but there is almost, somewhere, everywhere in the world -- there is always somewhere in the world where the economy isn't as good as you hope. There always -- industries go up and down and that's what the balance there. Yes, we did have some impact there. I say that in general, but what that has a tendency to do is delay or orders not to cancel them and the other thing is, in our Houston office, we, I think we are -- our fax machine got lost, which is really bad thing to happen in the last month of a quarter, but in general, it has also created some opportunities because obviously, nothing speaks to value like loss production in some of the oil areas and things like that and companies -- not if they are rushing out to buy stock right now, but they are certainly increasing inquiries and saying what can they do the decrease the amount of downtime that they have in their systems and obviously, some of the product expansions that we talked about can play an important role in helping to maintain those. So, there were some factors that were in there, but in general, we have to look at the whole part of it and probably, we have to do is try to have the breadth in the diversity to weather the ups and downs that happens down every quarter, every year, I've ever seen this business going around. So, there was an impact, but we tried to get around it.

Okay and with respect to Century Dynamics, is it fair to assume that they contributed about 1 million, 1.5 million of revenue in the quarter?

That's a good. Mark, I said we are still in the mid upper teens core growth and so that's still progressing well, but also the, we have continued to perform well. That's one thing I think that I would like to get through those to some of the people in the ANSYS team here in terms of, it's one thing to acquire a technology it is another thing to leverage it and start to get performance out of it, opposed to having it being a board anchor and I think we have done that year upon year, but this just relates the example and it has performed well and we are glad to have those team members on.

And license revenue was particularly strong this quarter for Q3 for you guys, does any of that have to do with maybe a deal or two closing a little bit early here?

We did have some. That did happen, that's clearly not a statistical norm. I hate to call that a trend, but the other thing we saw, we talked now in a number of quarters about the number of combinations failed between the various product lines we have. That's then a trend that is, if not rocketing, but it is continuing to ramp up ahead of expectations and I did mention that the order size involved, we are not going for fling for the fences whatever the order. The order sizes have been creeping up and in particular we consider Q3 being at, really, we've always told it's a twitchy quarter. The overall order size and number of larger orders continue to creep up also. I don't, Maria, do you have exact number you think?

Yes, I think so.

That's fine. Just one final question, I will get off here. Are you comfortable with the size of the sales force as you head into 2006 or do you think you can add some additional --?

Like I said, we said about two quarters, oh no, more than that, several quarters ago, we said, I guess about five, six quarters now, we saw a trend coming up. It wasn't one of the things where we were going to spend recklessly, but we were going to ramp it up and part of it is, you can gump a bunch of sales people, but if you don't train them and make them effective, they are not going to be a net (indiscernible). So, we continue to ramp that up and we are going to continue to ramp up the sales force. That's what I mean when I said, our customer engagement capabilities, I don't know if you were on at that part of the call, but we are continuing to ramp that up through 2006 and what we have found is, the juttings of steady stream in building that inexorably is something -- if we can train them and get them productive, that's very strong, it builds for the future, but when we get these short-term bumps, we are able to process those orders and squeeze them through. To net it all out, our foundation base, I am not saying that everybody is fully up to speed because it doesn't happen with a month of training and sometimes it takes a few months on the job, but overall, we are up 16%. In terms that, we see continuing to build that capacity. You might think 16%, I am talking about the number of heads we have. And it's easier for us to add that than it is necessarily to replicate some of our very strong channel partners who have been with us 20 years and they don't grow on trees.

Station Rogers (ph), Lakes Review (ph).

You mentioned the lease business was up double-digit year-to-date, do you have a figure for the quarter or the percent increase for the quarter?

It was in the low-teens. It was double-digit too. Our lease base continues to grow, it continues to be an important part of the business. It continues to be in the low 20%. It's probably is pretty reflective of the -- kind of a neutral quality, we don't try to encourage or discourage any particular thing, we leave it up to the financial decisions and as such it has kind of stayed at that point year upon year upon year, at least for the last few years, it's been pretty stable in that low 20%. And that's good because different people have different preferences when it comes to that. But it's also an important part of our recurring base which we are continuing to see strong.

Do you have a number for the amount of sales that were direct versus indirect?

I think we are still about 55 to 45.

We are still about 55 direct, 45 indirect roughly. Now, some of that becomes a little bit trickier because there are certain orders that we take directly that our channel participates in. So, it's not your traditional bifurcated or segmented model. That 55, 45 is probably a pretty good estimate for that.

And finally, regarding the order size creeping up, I know you mentioned in previous calls that it's pretty weird to have a seven figure order. Do you see the potential for those really large orders increasing now with the advancements that you are making?

Those things still continue to be spiked. In general, it has really lumped up the business. We've guided, we've planned for that for the last five, six quarters, we have talked about per year. But we've got a pretty good handle on the businesses that I mentioned. More what I see being a function of that is, if you have noticed the number of repeat customers that will have significant orders, it's just that they don't do it in as lumpy a fashion as they used to do. Though it might be every other quarter, some of our key customers maybe doing different clumps of still significant order, still low six-figure orders, but they are doing it on a pay-as-you-go, rolling it out, which we like because it actually, they are actually getting value immediately, spreading it out, they are ramping it up, it basically is, in my mind, a sign of a healthier implementation policy. And we like that. It's a -- you swing for home runs all the time, you run the risk of straightening out a lot, but if you can get a good line drive with power, you will start to stretch those into doubles and building up those is a pretty good way to keep moving.

Barbara Coffey, Brean Murray and Co., Inc.

Could you speak a bit about the competitive environment, especially as Tisco (ph) had taken over Abacus and are you into the same kind of accounts, is there much overlap, have the dynamics changed?

Well, the bottom line is, the thing is, when you consider that we are in so many companies and like around 95% of the Fortune 100 companies and things like that, there is going to be overlap. Right now, I have to say that, net net is, it is just too early to tell. I mean we haven't seen too much dynamics. We had some customers who are the sole users but they have reaffirmed their relationship with us. We have had the others that where making uses of other product that aren't related. It could be a dual-edged sword on both sides. But it's just too early to tell in this particular case. So, no immediate impact.

And are there any other players you're seeing in the market as in a competitive way?

Not across the board. I mean we still see the three normal clasp of competitor, probably nobody to compete across the board with us, but you got the legacy, you've got legacy providers, you've got some of the PLM providers and have a certain degree of capability embedded in their products, and you have always got a number of financial (ph) boutique suppliers that are very good and very focused (indiscernible) was one example of that. So those are the three main overall, but in general, nothing kind of across-the-board, and obviously if you look at comparable performance, we're probably doing pretty well on a lot of those fronts.

Jay Vleeschhouwer, Merrill Lynch

Jim, couple of questions. You mentioned, a few minutes ago, you're recurring revenue and in your prepared remarks you gave some examples of repeat accounts versus course of the norm, the question is that when you look at the sources of recurring revenue for your larger peers, in the kind of PLM space, by and large, their revenues that are recurring are growing more in the single digits and yours are growing in the double-digit as you say. So, from a problematic perspective or capacity requirement perspective, what do you anticipate that your customers will need to allow you to continue to grow your recurring revenues at a perhaps double-digit rate? Secondly, in terms of channel, again your larger peers have all become quite attentive off late to the SMP market. Everyone is pursuing that market, not strictly with analysis, but for their other products. How do you see that affecting you if at all, that Tisco, UG, PTC, everyone seems to be piling on into the SMP market?

Well, the first issue -- and I just want to make sure that I didn't create a confusion, but your first question, the first sub-section of your question I thought was related to recurring business, and just so you understand, I want to make sure that it's not selling to the same customers, though we sell new licenses to new customers, but that's not part of our recurring business base. It's only the ongoing subscription, service, the lease business, the maintenance, those type of things, they continue.

I understand the difference, I completely understand the difference, I was merely suggesting that, just about everyone else in this space is seeing only single digit growth in their sources of recurring revenue, presumably defined the same way --

Okay. I want to make sure there wasn't any confusion, but the bottom line is, it's the technology that is what is driving the Ricci business and in general as I mentioned, these crossover sales and things like that -- the relationship that we are having because of a steady stream of expansion and regular releases and the like has continued to drive up our renewal rates, our expansion rates. People basically building upon previous standpoints. In general, that's the dynamic we see. I can't just necessarily compare to the internals of any other company, but that is what specifically that has been driving our business. Now you mentioned the small business aspect is again the mixed channel we have had. I don't know a part of that was related to the direct and indirect business, but we've always had this point of building off of the major account leverage and the direct standpoint, but also having a number of avenues for getting to those smaller businesses. I think probably the key thing is that our mechanism and our approach has been in place for 20, 25 years and a lot of time that a range of industries the channels are in, channels are out, channels are in, channels are out, and it takes a long time to build up something with a third party company where you got the trust and we didn't gain (indiscernible). Nobody has a magic thing for this, but it takes a while to build up a fidelity in that relationship and get people really pumping on. So, we have been growing a lot obviously, our major accounts have been growing, but that alone wouldn't drive it. So, the small business aspect has been growing, but we have been doing it again through the hybrid distribution model that we have been doing now. I think one of the things that we should highlight is that sometimes the smaller businesses need some different set of tools. They may not have hard rays of the traditional experts in utilizing this technology and in general, even some of the things that we launched years ago with DesignSpace, but really capturing some of that within the workbench mentality was helping us with what are the industrial strength tools that definitely can solve the problem, but really have unprecedented ease of use that allows them to get through all of the historical confusion points of leveraging the technology and putting it to place. So, in general, that's one reason why I think we have gotten particularly attracted to some of those smaller companies that are trying to make it as bullet proof as possible.

We believe that if for example any of your larger peers does get better momentum in the channel and again more away from analysis, but if for example the (indiscernible) responsibility now for managing the business, we call a partner in the US, results in greater momentum through them in SMD. How much that affects you? It's not necessarily an abacus question, but just overall and then by the same token, if you (indiscernible) channel program, get some kind of traction for what it hopes to do in that respect, how might that affect you?

Obviously, having hard rays of people you mean you can be in a lot of different places. So, obviously, that's something that we had to pay attention to for literally over a decade, because the (indiscernible) companies are much larger, but the key thing is it's like there are as many greenfield accounts and given these very broad footprints we have got, maintain the relationship we have and continuing to put the technology from that standpoint, we are already kind of at the point of delivery for most of the accounts, and in and of that standpoint it is what you deliver, but the other thing is that we've a broad range of partnerships for years. There have been competitive offerings, but we have had even when it was direct or indirect, we have had almost an even split between our user base and each of the kind of CAD systems that they utilize. It's not totally different dynamic some of the pressure points change but at the end of the day as you have genes (ph) of the customers which have very broad footprint and can you just continue to deliver value in that, and that's what we're doing. In some standpoint, it's even -- many of our customers in fact, are not uni-CAD environment. They are multi-CAD environment and if they aren't within their own shop, with regards to their own supplier network, they are and sometimes the ability to bridge between those actually become the selling point for us. So it's always a difficult situation, but it's one we have lived with for ten, 15 years easily.

Tim Fox, Deutsche Bank.

This is probably a bit of a follow-up to Jay's question around recurring and expansion in capacity. I was wondering if you could talk a little bit about the strength in your license in particular and, if you could characterize, what percentage of your license growth comes from selling new technology into your existing base versus selling your, I guess, call it legacy technology into the base where your companies are actually adding capacity?

Okay, Well, first of all is, even with our traditional products, they are not static. They are the atomic (ph) technology that is going into each of those and therefore, I don't know if you categorize the growth in that -- I mean the growth in ANSYS Mechanical, and ANSYS Multiphysics, as I mentioned had been very strong. Now if a lot of that is driven by, of course, the new technology to continue to go in there, and likewise, the reoperate on all the subscriptions that we have for enhancements also is there because the confidence of like clockwork, everything coming in there is quite great. Now, as I also mentioned however, there is some crossover -- I don't want to call it cross-selling -- it isn't like do you want price with that, but there has been companies in terms of the CFD capabilities of the CFX acquisition a few years back, and of the overall strength of the meshing capabilities, that came originally from the ICEM, CFD acquisition of five years ago. Actually there -- we are regaining progress now because some of the automated meshing from ICEM that found its way into the ANSYS tent, growing in terms of particularly some of the shell and surface meshing enhancements that's gone there. The other thing is that, essentially, one of the reasons we embarked upon the Workbench platform was the ability then not just to have a bunch of best-of-class solutions, but the ability to link them together and get them interfacing with one another, but also allow other capabilities to fit into there, and as such it becomes a night vehicle or introducing new capabilities to existing units.

Presumably some of this technology for existing customers, they get through just ongoing maintenance, I guess I'm --?

Not through maintenance, but through enhancement subscriptions.

Was that sort of a recurring base?

Yes.

That's helpful. Second question was around ATI, I was wondering if you could just talk a little bit more about your strategy in that market and is that an area that you could see expanding your capabilities and further whether it'd be through internal development, or --?

When you're talking about multi business, and you're talking about looking at overall product, which we have been doing year-upon-year-upon-year, the amount of electronics going into things that we're traditional mechanical, be it an automobile, be it consumer things, or the like is increasingly strong. Therefore, you have to look, if you're going to look at simulating how an overall product works in an overall environment, you have to be able to work at those different aspects of that. Traditionally, these are the niche tools that have been fragmented, and utilized only by key experts, and the ability to bring all those together becomes something that can be very desiring, particularly when people are only periodic users of what can be very advanced, deep technologies. And that's the one reason why having a framework that's not an overbloated one, that really focuses on the needs of intense calculations and overall simulation, has been attractive to some of our premier users.

Very good, thank you. Nice quarter.

Thank you.

And at this time, I'd like to turn the call back over to Mr. Cashman or any additional or closing remarks.

Okay. Well, thanks, everybody. In close, we are maintaining our tempered optimism as we had in last quarter here again sticking with the guidance that we've had, but sequentially upping it. Looking into the year ahead and longer-term, we are seeing, looking in perhaps, even increasing the momentum. As always at the heart of all this, is just I think 35 years of continual recognized technological strength. We have got a solid and predictable business model that modulates in downtime, and it doesn't herd up unscalability when the opportunities pop up. We have got loyal customers, who are growing with us and expanding an array of industry partners. I mentioned a few more in this call. And the heart of all this of course, are the ANSYS employees and part of the overall global team of that and our partners, basically the combination just continues the ability to continue it before in withstanding customer base and as we demonstrated the ability to keep the cycle renovated by continuing to drive the technology to support all the initiatives that we have been talking about for years and hopefully have been able to demonstrate the progress along the way. So, I thank you for all your questions and for attending the call and we will look forward to talking to you in about three months. Thanks.

Once again that does concludes today's conference. You may now disconnect.