ANSYS Inc (ANSS) 2005 Q4 法說會逐字稿

Good morning and welcome to the ANSYS fourth-quarter 2005 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. If anyone has any objections you may disconnect at this time. I would now like to introduce your speaker for this morning's call, Mr. James Cashman, President and Chief Executive Officer. Mr. Cashman, you may begin.

Good morning, everybody, and welcome. We're here today actually for a combined call that will cover ANSYS' Q4 and fiscal year 2005 results. And also, at the end -- a strategic definitive agreement that we announced this morning to acquire Fluent, Inc. As always this morning Maria Shields, our CFO, is joining me. First, we'll summarize the highlights of the quarter and the year in a general outline and we'll then delve deeper by examining the operational results from a number of different perspectives.

We'll also talk about some of the qualitative aspects of the progress we've made on a broad range of issues that support our sustained future directions. Maria will then take you through our balance sheet, expense structure performance and outlook on earnings. We'll then go through a general overview of the transaction and have Dr. Bart Patel, the current CEO of Fluent, join us for that segment of the call. And once we've gone through all the materials we'll be happy to respond to your questions. So to begin, Maria, our Safe Harbor statement.

Good morning and, again, thank you, everyone, for joining us. 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. 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 forms 10-Q, 10-K, our 2004 annual report to shareholders and this morning's press releases.

Additionally, I'd like to point out that during the course of this call we will be making reference to adjusted gross margins, adjusted operating profit margins and adjusted EPS which are non-GAAP results within the context of the SEC Reg G. We believe these non-GAAP measures supplement our GAAP disclosures and these 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 discussion reconciliation of GAAP financial measures to comparable adjusted EPS is included in this morning's earnings release and the related Form 8-K. So with that I'll turn the call back over to Jim.

Thanks, Maria. Q4 -- well, basically in summary Q4 and the year in general maintained and in some ways accelerated the sustained pattern of strategic and operational execution of the past several years. We delivered on all of our major commitments and exceeded earlier guidance and we continue to post strong operational numbers in virtually every facet. From a high-level perspective, for the quarter we reported strong financial performance with total GAAP revenue of 43.7 million which exceeded the upper end of the analyst range. Adjusted earnings per share growth was over 17% with an adjusted EPS of $0.41, up from last Q4's comparable $0.35. This also exceeded both the consensus and the analyst range.

We continued our strong stable margins and a solid business model that basically allows us to invest in future growth with strong earnings leverage. We had our usual steady progress in integrating all productlines and continued technology breakthroughs, continued encouragement from an industry, partner and customer standpoint and expansion of our core capabilities with the acquisition of Harvard Thermal, a small technology company in early Q4.

As I mentioned in the intro, our revenue for the quarter was $43.7 million, this compares to $38.9 million in Q4 of 2004 and represents a 12% growth which we're really pleased with. It's above our plan which had already baked in the effect of last Q4's seven figure deal. This had already been accounted for in our yearly and quarterly guidance and is still growing double-digits with that and the denominator as a testament to our offering and to the ANSYS team.

Our earnings also grew with an adjusted EPS of $0.41, up from $0.35 per share, excluding the onetime tax benefit from Q4 of 2004. Overall adjusted operating margins for the quarter excluding acquisition related amortization were 43%. This compares to 41% in Q4 of 2004. Now we're not changing our business model but investing in sustained growth which yields margin upsides as we build upon our success. Adjusted gross margins also remain strong at 88% for the quarter, slightly above our traditional model and this represents basically ongoing strong execution coupled with high value added services.

For the fiscal year ended December of 2005 we reported total revenue of $158 million or a 17% increase over the comparable $134.5 million of 2004 including a good balance in the increase of both license and service business, although weighted toward the license. Total year adjusted earnings per share were $1.38, a 27% increase over the comparable $1.09 of 2004. Overall adjusted operating margins, again excluding acquisition related amortization, rose to 40% for 2005 compared to last year's 37% and adjusted gross margins were at 87%. And then finally, our cash flow from operations were over $20.7 million for the quarter and over $67.8 million for the year or about a 30% annual growth.

We'll now scrutinize the numbers from a number of different vantage points -- category, geographic, customer, product -- a number of those different metrics. So starting with a category of business, we saw -- basically we saw very good balance. For the quarter on an adjusted basis leads remained strong and 20% of our total quarterly revenues and 21% for the year. Software license revenue grew at 11% for the quarter, again, off of last year's strong Q4, and 20% for the year. Service growth was 15% for the quarter driven by a product enhancement, subscriptions and software maintenance as usual. And for the full year service grew at 14%. We continue to see an increased 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 all of our productlines were good lead by the upper end, the ANSYS multi-physics -- the flagship product, grew at 25% or around there for both the quarter and the year. Business intake also stayed strong. This allowed even with the growth -- our repeatable business base is registering at 60% of total revenue. And as always, maintaining this repeatable business base provides long-term visibility and short-term support during less predictable times. All in all our deferred revenue now stands at $49.9 million compared to $43.9 million at the end of last year or 14% increase.

In addition to our pipeline, license growth and expanding partner relationships this base obviously continues to add in our overall visibility. All of this contributed to a strong balance sheet of over $194.2 million in cash and equivalents. All of this while we continued our investment profiles in R&D and continued growth in our global sales, marketing support and business infrastructures.

From a geographic perspective, if we cut it from that directive, we continue to see growth in virtually all geographies and sub regions. Similar to the past few quarters, we saw a mixed bag with some pockets of optimism interspersed with lingering spending restraints and uncertainty. We did feel some pinches from the weather disasters, the hurricanes and fuel prices, but nothing that we didn't weather. Essentially these factors affected all regions to differing extends.

North America continued strong performance and, while it had single digit growth in Q4, it carried the burden of last year's large order in its denominator, so it's very encouraging and above expectations. For the year even with a tough comparable it registered a solid double-digit growth. By matter of comparison, each ANSYS office in North America registered a 20% plus growth for the quarter with the exception of Houston which was particularly hard hit during the hurricane Katrina area. For the year all offices had strong growth, most in the 25 plus percent range, but even the lowest growing office was still over 15%.

From a qualitative standpoint major orders from an impressive list of industry leaders came in -- most notable of these were Honeywell, General Electric, Pratt & Whitney, John Deere, Maxtor, Raytheon, BAE, Eaton Engines, 3M and the list could go on.

Europe continued its multiyear progress as well growing off an already established standard of performance. All the major sub regions did well for the quarter and the year, particularly the major markets of the UK and France for the quarter. One difference from prior periods where we had talked about strong performance made even stronger by positive currency effects, for the year and Q4 in particular currency was a net detractor. But even with this performance was good. Germany grew about 10% for the quarter in real terms and in the teens in adjusted terms allowing for the currency. Growth for the year was 16% in real terms and in local.

Overall Europe grew at 14% for the quarter and 20% for the year in real terms, again, with negative currency impact. Adjusting for currency effects the growth was 20% for the quarter and the full year. Major European orders came from Siemens, Rolls-Royce, Alstom, Volvo, Bosch, [Gramatone], Honeywell, STMicroelectronics, British Nuclear Fuels, [SBMI] -- basically representing a broad industry coverage with the addition of some significant new customers.

Our GIA, largely driven by the Asia-Pacific, was very strong across the board with all sectors performed well. For the quarter GIA grew in excess of 30% and 23% for the year, each had a very slight negative currency impact. Japan, by far the largest entity in the region, grew at 26% for the quarter and 17% for the year. And not surprisingly China was very strong, India recorded above 45% growth for both the quarter and the year. Key customer engagements in GIA were InfoTech, Toshiba, Hitachi, Cummins India, China Marine, Canon, Bharath Earth Movers, Honeywell, Kayaba and, again, a long list of industry diverse people.

We continue to see the three growth mechanisms, however, in GIA that we mentioned the last couple of quarters -- supporting our major accounts expansion into the region, firstly. Secondly, providing tools to offshore engineering outsourcing entities. And third, building off of the growing local industrial base in that region.

In addition to the continued and increased commitment from our large accounts, we're encouraged by the increase in the number of larger orders. Per our earlier guidance, we continued the sales expansion initiative in Q4 and we plan on continuing this investment, carefully modulated basically to follow observable buying trends and in preparation for more sustained spending patterns.

So in summary, all geographies continued good growth trends and we maintained our industry and customer breadth. There were good signs of potential in each region, although to varying degrees, and we saw strong traction of our strategic message. All ANSYS offices achieved double-digit growth for the year; nevertheless we have ongoing evolution, growth and acceleration plans for each region as part of the normal growth process.

Overall we are encouraged by the major account progress, the strengthening of the industry breadth, the performance of the direct offices and, of course, without saying the broad base of customers that provide our recurring base and basically the continuing source of opportunity for expanding our license business. So frankly, all the major themes that we've been mentioning the past few years, few quarters are in place. We're increasingly optimistic -- nowhere near the giddy stage, but optimistic.

We still see many ups and downs which we continue to manage with the help of our flexible leveraged business model. We see many things to improve upon; we still see customers exercising financial prudence and we still see many ways to increase our value for our customers. And as such we'll continue to focus on continuing the customer expansion with a model that allows for disproportionate earnings when we achieve and overachieve as I think we've demonstrated. And we'll continue the trend of continuing to judiciously increase our investment in customer facing sales and support functions. And with this focus on customers and technologies we'll also continue to invest wisely in R&D.

So obviously, speaking from a product standpoint, in light of this commitment to R&D it's customary for us to take both qualitative and quantitative looks at our product [progression]. In Q3 we had mentioned and we continued our commitment to our customer base with the release of ANSYS 10. This release continued to extend our unified Workbench environment provided for the foundation of delivering a range of nonlinear and multi-physics capabilities all of which have been targeted providing customers what we feel are unparalleled capabilities for accelerating innovative lower-cost products with Six Sigma quality. That's really our reason for being.

This has already provided benefit in our ability to bring nontraditional capabilities quickly to market. And examples of this, as I mentioned in the highlights, we acquired the technology and key employees of a small technology company called Harvard Thermal, or HTI, in early Q4. We're excited about the addition of their simulation technology; it's directed at solving problems in the area of cooling of electronics components and printed circuit boards. These application-specific tools are used by electronics, aerospace engineers to thermally simulate heat transfer in a variety of MEMS, consumer electronics, satellite applications, any form of electronics.

We immediately began the integration of key meshing technology components from ANSYS Workbench into the TAS family, that's the HTI family of products. The integration of technology into the ANSYS Workbench has already begun and we expect to ship integrated products with ANSYS 11 due out in the second half of this year. Also in Q4 we demonstrated the new AutoDyne version integrated into the ANSYS Workbench for the first time. This product is in beta test with key customers and will also ship with ANSYS 11.

With regard to numerical progress, as previously mentioned, software license growth was 11% for the quarter and 20% for the year balanced across all of our productlines. Our ASPs were relatively flat on the design seats but up sharply on the high-end seats. I think last year's high-end ASPs were affected by the standard volume purchase discounts on the major orders, in particular the one major order that affected Q4 of last year. But overall the net effect was an increase in ASPs over last year's levels, I think driven by the increased percentage of the upper end products. We talked about the strength for instance of ANSYS multi-physics which is the upper end of our productline. But I don't think we necessarily see a trend per se other than the fact that ASPs could be considered to be holding.

With all of this momentum the largest issue we continue to have with our technology progression is the efficient evolution of our distribution capabilities both direct and indirect. We mentioned the criticality of broad spectrum education to support our competitive advantages and product breadth and we've just come off of a couple very encouraging events. So as we keep adding capabilities and partners on a regular basis this is going to be a continuing process and a continuous theme that we've been dedicated to.

There are a number of other bits of news that I'll hit on briefly, but partnerships were expanded in Q4 with an Interface with materiality completed and delivered to users. This capability allows users access to detailed material property libraries for a wide range of materials and applications in a range of industries from automotive to aerospace to electronics. This was a continuation of our efforts to broad base sources of electronic data that users can import and leverage into their Workbench ANSYS session. We expect to continue this process over the next year also.

And beyond product news we also announced a special three-year global agreement with AREVA, a worldwide leader in energy. In addition, we were recognized in Q4 by Forbes magazine as one of Forbes 200 best small companies and this is actually the fourth consecutive year that ANSYS has made the Forbes list.

So the bottom line is accelerated progress in extending our technology base, in our core products, our new productlines, our acquisitions, our unified architecture, plus also expanding the cadre of partners that will help provide value to our customers. And basically all of this is all aligned with the consistent focus that we've been talking about for quite a while now of furthering the impact that simulation can have throughout all phases of the design and engineering process.

So in conclusion, basically in the summary it was a strong quarter and a year from almost any metric or viewpoint. We remain committed to and increasingly encouraged by our long-term strategic direction and mission as evidenced by both our progress and by the feedback that we're getting from customers. This has allowed the ability to further our technical leadership, invest in our future and expand our universe of partner and support vehicles, again, all with the goal of simulation driven product design in mind. Each of these in concert allow us to continue to pave the way for the ongoing realization of that vision and mission.

Our top line has continued to grow even slightly ahead of our forecast which then drives our bottom line also ahead of forecast. We've maintained our financial disciplines and our gross and net margins and our DSOs. We [successively] increased guidance each quarter of last year in line with our visibility and growth; our recurring base continues to grow and be strong; our major account and customer proliferation activities continue to make progress and, again, this just allows that ongoing cycle of wise technology investment and customer adoption. And coupled with that we've had the ability to react and modulate to all sorts of economic and topical uncertainties, but also to quickly seize on opportunities.

So if you net it out, I think the long-term optimism that we've been talking about for the last few years is being demonstrably justified and we continue to plan our business expansion to prepare for the opportunity we see growing over 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 items such as expense structure, balance sheet highlights and some insights into our guidance. So Maria, if you would.

Thanks, Jim. For the next few minutes I'll briefly go through a recap of Q4 and 2005 year-to-date expense results. I'll touch upon some balance sheet and cash flow highlights and, as Jim mentioned, I'll provide some outlook relative to Q1 and our full-year 2006 adjusted EPS at this time.

Taking a quick look at expenses beginning with cost of goods sold, total expenses excluding amortization related to acquired software for the fourth quarter were $5.4 million as compared to $5.1 million in the fourth quarter of 2004 which resulted in overall adjusted gross profit margin of 88% for the quarter. And for the full year of 2005 our cost of sales, excluding amortization related to acquired software, totaled $21 million as compared to $18.8 million in 2004 resulting in an 87% adjusted gross profit margin.

On the sales and marketing front for the fourth quarter expenses totaled $7 million versus last year's fourth quarter of $7.1 million, and on a year-to-date basis sales and marketing expenses totaled $26 million compared with $25 million in 2004. Going into 2006 it's our intention to continue to make investments in strategic sales areas throughout the world and as such we anticipate the total sales and marketing expenses in absolute dollars to continue to increase throughout the year.

In the area of our R&D our total expenses for the quarter were $8.2 million and that compares with $6.8 million in Q4 of last year. And on a year-to-date basis our total R&D expense grew to $30.7 million or approximately 19% of revenue and that compares to $26.3 million in 2004. The quarter-to-date and year-to-date comparative increases were primarily attributable to an increase in headcount related costs as well as the inclusion of the CDI operations in 2005.

For the full year we capitalized approximately $270,000 of internal development costs which compares with $540,000 of capitalized costs in 2004. Also looking at 2006, we are committed to continue to invest in R&D in a range commensurate with our historical trends in the range of 20% of revenues. In the area of G&A our expenses totaled $4.5 million in the fourth quarter versus $4 million in last year's comparable quarter and for the year our G&A costs totaled $17.3 million and that compares with $14.8 million in 2004. The quarterly and annual increases are primarily attributable to the inclusion of CDI in the 2005 results as well as an increase in headcount related cost.

For the fourth quarter and the full year the overall business yielded an adjusted operating profit margin, excluding acquisition related amortization, of 43 and 40% respectively. Our effective tax rate for the quarter was 31% and the full year was 30%. As I've done on the past several calls, I'd like to briefly comment on the impact of the American Jobs Creation Act of 2004 on our 2006 estimated effective tax rate.

As most of you are probably aware, this legislation significantly reduces export related tax benefits. The phase-out of these benefits started in 2005 and they're being replaced by a deduction for qualified manufacturing income. We currently anticipate that these changes will adversely impact the Company's effective tax rate going forward and in this time we anticipate that our 2006 effective tax rate will be in a range between 32 and 33% and will increase to 34 to 35% in 2007.

For the fourth quarter ANSYS reported adjusted EPS excluding acquisition related amortization of $0.41 on 34.1 million diluted shares and that compares to $0.35 on 33.6 million shares in the fourth quarter of 2004. On a year-to-date basis adjusted EPS excluding acquisition related amortization totaled $1.38 on 33.7 million diluted shares and that compares to $0.09 on 33 million shares in last year. At the current time we're projecting adjusted EPS in the range of $0.35 to $0.36 for the first quarter and a range of $1.51 to $1.53 for the full year 2006. Our current outlook factors in the anticipated increase in our annual effective tax rate that I mentioned earlier and excludes the impact of expensing stock options.

The Company's current GAAP earnings guidance, which reflects the impact of stock based compensation, is $0.33 to $0.36 for the first quarter and $1.38 to $1.53 for the full year of 2006. As we highlighted in this morning's announcement, the Company has a significant number of incentive stock options and the tax benefits related to incentive stock options are highly unpredictable as they are recorded under GAAP only when an award recipient triggers an event that disqualifies the option. Because of the significant uncertainties involved in the timing and the amount of incentive stock option tax benefits, the Company's estimate for GAAP earnings per share may differ materially from actual results.

Just to clarify, a guidance that I gave earlier -- the adjusted guidance does not include the impact of the acquisition that we announced earlier today as it's our plan to provide updated earnings guidance and further details about the go forward combined business after the transaction closes.

Taking a quick look at December 31st balance sheet, our total cash and short-term investments grew to $194.2 million; our consolidated DSO is at an all-time year end low of 45 days; our deferred revenue totaled $49.9 million; and the Company generated $20.7 million in operating cash flow for the fourth quarter and $67.8 million in 2005, a 32% increase over 2004 operating cash flow.

I'd like to just close by adding that we're extremely excited about the upcoming year and the prospects that it holds while recognizing that there are a number of macroeconomic variables that, as always, could work against us and alter some of our short-term plans, but we have some strong things working in our favor -- a strong foundation and legacy to build off of as well as a combination of two solid companies, ANSYS and Fluent, that will further our evolution as a global provider of innovative engineering simulation solutions to our customers throughout the globe. So with that I'll now turn it back over to Jim. Jim?

Thanks, Maria. So to recap. First, continued steady and strong financial performance with meeting commitments at top and bottom line as well as excellent cash flows, margins and the other fundamentals of the business. Secondly, balanced growth in most aspects of our product and business lines; increasing customer acceptance as demonstrated by industry, geography and order size; and new technological breakthroughs and partnerships that are coming out in increasing quantity plus the addition of HTI.

In general we are slightly ahead of expectations, but we think there's more progress to be made. With regard to the outlook for 2006, we're going to increase our capacities but continue to watch all of the external factors closely as we always do. We still see a mixed bag and a tenuous market improvement, the long-term outlook stays solid. For 2006 we're making no provisions for wholesale changes in the economy, and in our current trajectory we are raising estimates to 13 to 14% top-line growth which translates to revenue in the $178 to $180 million range and a comparable adjusted earnings in the $1.51, $1.53 range or commensurate double-digit growth.

Both revenue and earnings are above the current consensus and with that in mind we'll continue our track record of keeping an eye toward ratcheting up performance if the opportunities escalate and that's something we've demonstrated numerous times. For Q1 we envision $41 to $42 million with an adjusted earnings increase to the $0.35 to $0.36 range -- and all the guidance I've given here is for ANSYS standalone.

We're now ready to move to the next segment of the call which will provide a general briefing of the transaction and why it fits into the ANSYS long-term vision. So with that I'm going to ask -- I think that we've given instructions for working off of a slide deck. This is a little different than what we've been working on, but we'll go off of that. And in general this morning it centers around the standpoint that ANSYS announced its planned acquisition of Fluent, a global provider of computer aided engineering simulation software in a cash and stock transaction.

The addition of Fluent's technology is complementary and expands ANSYS' suite of simulation capabilities and also plays very heavily into the expanding customer interaction and support activities we've talked about. And joining us for this part of the call, I'm very pleased to introduce Dr. Bart Patel, the CEO of Fluent. So Bart, thanks for joining us and thanks for (multiple speakers) step on our journey.

I'm excited about it.

As our we. Now again, moving to slide two which is the Safe Harbor statement. Maria, I'll ask you to just kind of summarize very quickly.

I'm not going to spend too much time, but just want to remind everyone of what I had talked about earlier that we'll make forward-looking statements and there are risks and uncertainties that you can certainly read about in all of our public filings.

Okay, fair enough. So moving to basically a transaction summary, which would be slide 3 if you're following along with us. Basically as I mentioned, we announced the acquisition -- the effective purchase price is basically $300 million in net cash subject to certain adjustments and 6 million shares of ANSYS stock. We expect the deal to close in the second quarter of 2006, of course subject to the customary closing conditions and regulatory approvals.

And at this point the senior management team will consist of the current management team but augmented by a series of talented individuals from Fluent. The two key leaders and founders, the CEO, Dr. Bart Patel, who I've already mentioned, and the President and COO, Dr. Ferit Boysan, have both committed in the form of long-term arrangements. Bart Patel through a multiyear consulting arrangement and Ferit through a multiyear employment agreement. And in addition, we've secured the ongoing support of key Fluent managers. The combined headquarters will happen to be in Canonsburg where ANSYS is currently, but we'll be leveraging the Fluent locations throughout the world.

Moving to slide 4, Company highlights. Basically we're enthused about this for a number of reasons, most notably the way in which the software and service offerings complement one another, but also in the relative consistency of the company visions and culture, something we've had a chance to experience and get to know from one another for a few years working together sometimes through OEM relationships, etc. Both companies have been singularly devoted to excellence in engineering simulation for many years. Both have been serving a broad global industrial base and providing quality software products, maintenance and services. Both run viable strong businesses.

For 2005, as we previously mentioned in the first part of this call, ANSYS posted revenues at $158 million, Fluent has announced under separate announcement revenues of $121.9 million.

Moving to slide 5, it says overview of Fluent. Basically with approximately 750 people around the globe, Fluent brings a range of physics capability for fluid flow, heat mass transfer and related phenomenon involving turbulent reacting multiphase flows. So to those of you frequent attendees on ANSYS earnings calls, you'll notice a similar theme -- that Fluent provides their capabilities across a broad range of industries, government entities, academic institutions serving a very broad constituency group. They have executed consistently a profitable business model, also something we share.

In 2005 they achieved a revenue growth of 16.7% with operating margins, unaudited mind you, of 26%. Both of these are healthy, but as we go through the integration process we start to leverage the strength of both companies and also utilize some of the strengths of the ANSYS business model as we've typically done with some of our partnerships.

So first, ANSYS has always been committed to a broad range of capabilities supporting the vision of simulation product design. As you can see, there are many parallels but that's only part of why this deal makes strategic sense and we tried to outline some of these in page 6. So again, ANSYS committed to a broad range of capabilities supporting our vision of simulation driven product design, the complementary capabilities help us achieve that vision more quickly and the diversity of the customer base also allows us the opportunity to provide value in so many new ways, tapping into historical Fluent strengths in terms of support and technology.

The ability to take simulation to a new level is afforded by literally -- we talk about man years, I would speak of man millennia of deep industry experience and engineering expertise. I truly believe this will provide the standard in driving simulation to the levels that customers have been constantly needing and demanding. Both ANSYS and Fluent have been committed to technology advancement over the years in the combined entity will continue to invest in the range of 16 to 20% of revenues (technical difficulty) this will be performed on a global basis in 17 development centers on three continents, allowing us to bring innovation closer to our customers.

And being close to our customers has been a passion for both companies historically. I've been encouraged on how complementary our direct presences are and when you couple these with the significant ANSYS indirect distribution channels, we have a powerful capability to bring this technology to the market and to serve our customers.

Now as I mentioned a number of times, and this is a key aspect on a go forward basis, the company cultures are very similar in their commitment to serving those customers, maintaining long-term relationships with employees and partners and in general treating their commitments very seriously. To net it out, we're looking at companies that share a vision, a passion for technology and base it on a strong business model that allows sustainable growth. The growth rates for each company were in the 17% range, profitability was good and the solid base of recurring revenues allow for a good visibility and the ability to manage the business going forward.

So if you turn to slide 7 where we talk about the broad customer presence you can actually see some of the metrics and the range of customers. It's a broad diversity of customers, it's a solid install base, strong educational ties and, importantly, an open environment that invites partner channel and customer relationships that help us build for the long-term because we know we have to fit into a wide range of capabilities and we want to make our capabilities fit into our customer environments.

So on slide 8 we're going to have a very strong global presence, probably about 1,350 employees worldwide and over 40 offices on three continents, plus most other customer locations covered by an extensive cadre of dedicated channel partners many of whom have been with us for 10 to 20 years. Again, many of these employees are going to be involved in that commitment to R&D distributed throughout the world.

Looking at slide 9 you'll see that global distribution; it is in fact well diversified and distributed. Fairly typical to ANSYS norms, just under 40% for North America and Europe and just under 25% for the GIA or Asia-Pacific areas.

So in summary, moving to 10, you have two world-class companies with complementary offerings but a shared vision and a demonstrated commitment to customers, employees, partners, technology and superior execution all backed by a multifaceted distribution engine that provides growth for customer opportunities and satisfaction.

11 -- moving to slide 11. We think it really creates an ultimate win win win scenario. For customers we give a trusted viable long-term partner with a commitment to engineering simulation demonstrated over the years and an ability to deliver accelerated world-class capabilities to solve their critical problems. For employees a chance to maintain an engineering focus within a company that can provide critical mass, long-term stability and provide enriched career growth opportunities. And for the stockholders, this deal basically is not only good for the long-term but is expected to be immediately financially accretive on a non-GAAP basis.

So to 12, the key financial highlights. Basically strong revenue growth, strong revenue visibility -- we'll have just under $100 million in combined deferred revenues as of December 31, 2005. Strong cash flow generation from the combined businesses combined with strong gross and operating margins. And basically we're truly excited about the opportunity this affords. Bart, is there anything that you'd like to add?

I would actually like to reinforce what you said, which is I think this is a combination of two companies which will definitely bring customers what they've been asking for for a long time which is to be able to do their complete design process from structural to fluid flow to sending it to their PLM system without a glitch. And I think this will -- this will definitely accomplish that.

You'll have to stay tuned because we'll be working a lot of issues, but in general excited about the performance, excited about the ability to team with best in class companies and, most notably, Fluent and the ongoing trajectory of ANSYS. So in close, on the ANSYS front continued sustained strong execution with a plan for business buildup that balances top-line growth with earnings performance and this will clearly be helped by the addition of the Fluent team to that. We've been increasing our momentum and we'll continue to predicated on quantifiable opportunity.

As always, at the heart of this is the technological strength and a solid business model, but again, I can't go through one of these calls I know without giving continued and continual thanks to our base of loyal customers who are growing with us, an expanding array of industry partners and the employees of the ANSYS team current and future. They're the reason for and the demonstration of any of the successes that we've seen over the year.

This combination and their effort has allowed us consistent performance with an expanding customer base and an exciting new base of technology to support our enterprise initiatives. I'm basically extremely excited personally am proud to be part of a team like this and look forward to working with Bart, Ferit and other members of the Fluent team as we focus on building on the strong foundations of our great companies; basically to continue focus on, as Bart said, delivering innovative solutions to our customers, valuing the incredible pool of these engineering and technical dedicated employees and partners and delivering shareholder value.

And I'm confident that today is just another important step in our long journey to industry leadership, innovation, growth and profitability. So I thank you and with that we'll now open the call to some questions and answers -- hopefully some answers but definitely some questions.

(OPERATOR INSTRUCTIONS). Richard Davis, Needham & Co.

Jim, Fluent is a great company and, Bart, you and I have known each other for a while. so congratulations. I think this is a game changer type of combination so you guys should have a lot of fun. A question for you, with regard to integration, sales integration and interface integration of the software, how do you expect that to proceed? If I'm a customer what changes will I see? If I'm a joint customer who will be my salespeople? How do you plan to work that out over the next few months?

Well, the thing that's going to drive -- the predicate on all of this is continue taking care of the customers. Now obviously we're going to consolidate and remove any confusion for the customers, but bottom line is it should just be a plus scenario for the customer. Obviously we've had a lot of success in leveraging the ANSYS sales vehicle, but we also want to take advantage of those capabilities that are in Fluent also.

I think the key is we've talked about the value of the employees and as such we're going to have a cross company integration team that will be working on some of these issues. But obviously for right now, until we get the regulatory approvals coming through, these companies operate in their standard mode going forward. So an awful lot of that is a little bit premature but I think you can look at past performance of how we've dealt with the various acquisitions we've done over the years.

And if you extrapolate that you probably won't be too far off. However, we want to take advantage of all the assets that we've got. And as I mentioned, this is financially accretive from the get go which also provides us the capability of taking what we think is a very strong technical team and now looking at that complete base of foundation to build forward from that and a great sales and support mechanism from both teams and allow us to build from that.

So the materials that we have to build forward on can only make us stronger. And in general with the opportunity we see in front of us, the ability to provide sales -- good quality people are always going to be part of this picture going forward whether they're creating products, whether they're serving customers or supporting the business. So in general, this is one of taking two good companies and allowing them to truly become better over time and leverage the standpoint, but anything else would be a little bit premature.

Okay. And then the follow-up would be sometimes companies have contractual tails and things like that. Does Fluent have any contractual tails with regards to Avid that as an outside analyst we should care about or is relevant to looking at the fundamentals of the business?

This is Bart Patel. As far as I know there are no tails, Richard. I think this is a clean transaction. The hardware side is being spun off, so it will be a clean break.

Okay, great. Thank you very much and congratulations, I think it's going to be a good combination.

Thanks.

Thank you.

Mark Schappel, KeyBanc Capital Markets.

Good morning and congratulations on the deal, everyone. Let me just start off with just a few operational type of questions. Bart, what would be a typical or a common license service mix for the Fluent business?

For the Fluent business a typical license service mix in terms of revenues -- services would be definitely less than 15%; we run anywhere between 10 and 12 and license revenues make up the rest. Fluent tends to have a very strong annual license base; typically in any given year over 70% of licenses tend to be annual. So I hope that helps.

Okay. And the next question I guess would be besides ANSYS' CFX business, who does Fluent typically compete with?

Fluent competes with a very wide variety of competitors. As you know, Fluent is spread out in many, many industries and we also compete at many different levels in those industries. To give you an example, in the electronics cooling market we compete with a software called Flowmatics who are currently the market leader there. We also compete with design type CFD software such as CFD design, flow works and so on. Of course at the upper end we compete with STAR-CD in the automotive industry significantly. So depending -- the aerospace industry there are several other competitors so, yes, CFX is one of the codes we used to compete in in a couple of the market segments, but Fluent competes with a pretty wide range here.

And additionally, and this is one I'd say historically there's also been a huge preponderance of in-house and internal software too from an historical basis. So there are a number of competitors and they tend to be aligned along a lot of different industries, as Bart had mentioned.

Okay. And is there a breakup fee associated with the transaction?

I don't believe there is a fee associated with it, no.

Okay. And then just one final question and I'll as someone else ask. Jim, you're taking about 200 million in bank financing to help finance the deal?

Yes, approximately.

Okay, any intentions to seek maybe a little bit longer -- down the road to seek some longer-term type of financing for that?

I guess basically we wouldn't rule out -- we're not ruling out anything. Right now we're well within typical leverage ratios. We've done strong cash flows. A lot of upside potential here. We continue to always -- I mean, just like every quarter we're looking at sales, headcounts and R&D mixes and all sorts of things like that. We continue to look at all aspects of the business. However, this is not one of those things where we're doing something transient with an urgency to jump to something else. But those other options are things that we will consider, but it will be part of a strategic go forward foundation as opposed to a tactical reaction.

Okay, good. That's all for me. Good job on the quarter and good job on the deal.

Thank you, Mark.

Tim Fox, Deutsche Bank.

Congratulations on the quarter and the impending deal. First question related to Richard's earlier question about CFX and Fluent combined. Could you talk a little bit about where your market share may fall out after given the fact that is a pretty diverse market? Just trying to get a sense of whether there may be some issues regarding total market share in this space.

Well again, when you segment the market by industry it is so populated by a broad range of different people and different industry strengths. If you look at the overall simulation markets we're focused on, so focused on multi-physics and the like and stuff like that. And when you compare it against the -- our size relative to the major PLM providers -- I mean I guess you could parse this anyway you want, but at the end of the day it's really not so much about what is but about what can be accomplished in providing capabilities to the customer that really haven't been -- there hasn't been the ability to deliver before. That's really the focal point.

Because as Bart mentioned, if you look at electronics, it's kind of like electronics cooling, they compete with a few other companies there and we're really not as present there. And in automotive, we're not as present in that particular aspect; however, we have increasing performance in the structural side of the business, albeit -- so any way you cut it it's such a miasma of different numbers.

Again, it's really -- our entire story has been not so much about looking where the simulation market is but what the customers need and where we can take it. This allows two excellent engineering companies to provide largely complementary offerings to take that forward. And anything else is out of our hands, but that's really what we're focused on.

Okay. And related to the comment about complementary, you showed two concentric circles with customers and it overlapped a little bit. I was wondering if you could just talk a little bit about, based on sort of a percentage of roughly how much of your customer base overlaps?

The problem is -- I'd love to answer it but I just don't know how to because the fact is whenever you've got two very broad companies there's going to be -- do you count overlap by an overall company logo of somebody that might have 20 divisions worldwide and if we're in one division and they're in another division, do you count it if it's even in the same division but if it's in different design groups? The fact is you've got such broad coverage on all these things.

The overlap isn't as important as the fact of we both touch a broad range of companies and I'd say it's fair to say that virtually any company out there, if not now, sometime in the future is going to benefit from the ability to combine many forms of physical simulation into a comprehensive look at their product concepts such that they can drive it and get the best innovative product out to market the quickest time. We could have a lot of fun with numbers on that, but there's nothing specifically telling on there other than the fact that you've got two companies that were very successful in their own rights covering broad ranges of customers.

Okay. And you mentioned that the deal -- you expect it to be immediately accretive on a pro forma basis.

Yes.

And it sounds as if there's a fair amount of recurring revenue here. So presumably you're going to have the same situation with CFX where you're going to have some amount of that deferred revenue not allowed to be reported. Are you going to -- is there an intention to report, as you did with CFX, a sort of non-GAAP or pro forma revenue?

Absolutely. And our reason for that is the exact same reason; we think it's the most straightforward and honest way to present the business. Because in general, if you recall what we said on our previous acquisitions, the customers are there, the ongoing business is there, the cash flow is there, those are things that you can all see. And we think it's more telling to talk about the true trajectory of the business, again from a customer focus, as opposed to having deflated revenues one year and then talking about 100% growth the next year.

That's more misleading than talking about the strength of two businesses coming together that can build upon one another. And I think when you look at all the other metrics, I think the cash flow and all those other things, the recurring revenue, the deferred revenue, some of those kinds of things that they tend to grow those are going to show the real indication of the business. That's served us well with previous acquisitions and we just think it's a more straightforward honest look at the business even if the accounting is kind of weird. Frankly, I'll turn it over to the accountants; I don't understand all the aspects of why that accounting thing is because the business didn't vaporize even if the GAAP revenue did. But I'll get off that.

Agreed. And lastly, and I'll turn it over -- it looks just rough numbers that the average revenue per employee is about double at ANSYS. I'm just curious if there's something structurally different with the Fluent productline as far as ASP or support that's needed. And do you intend to try to drive that number closer toward an ANSYS average?

Again, over time. Keep in mind, the two companies have different models, but I would say one thing you have to take into account is that in the longevity both companies have maintained a good viable business over multiple years. Not all companies in software or in our space or anything else have done that. It's a difficult thing to do. As such, you continue to evolve. If we do things the way things were done ten years ago those probably wouldn't work as well right now.

Keep in mind, when you're comparing the ANSYS model we have a hybrid model that relies heavily on indirect channels of distribution. However, we also focus very heavily on surveying our major customers which have been increasing in time in a key account standpoint. What we've determined is that as you serve those customers and you increase the direct support presence, we've been doing it judiciously and ramping it up over time, we've talked over quarters about being able to continue to ramp that up. And we've proven, I think, that that does not necessarily mean that margins implode.

Fluent already has a nice margin structure for a predominantly direct business. But as we start to cross leverage the capabilities there are two things that will probably happen. A lot needs to be worked out over the next couple of months, but first and foremost is there will be ways that Fluent can leverage the indirect channels as every one of our other acquisition have already experienced and where we've gotten leverage. And conversely, ANSYS will be able to accelerate the ramp up that we've been talking about for several quarters in terms of our ability to directly support our major customers and drive the technology.

So when you look at that combined standpoint, we'll do that. And guess what happens? It wasn't only a few years ago that ANSYS' margins were in a different position than they are. But that business success and taking care of customers allow you to continually evolve the business and in general it's going to be -- I think we have the tools to make that a positive direction.

Great, thank you very much. Congrats.

Philip Volpicelli, CIBC.

Congratulations on the transaction. I was just hoping that you could give us some more numbers on Fluent. You gave us sales of 121.9. Do you have operating profit or EBITDA numbers that we can look at?

Actually there was a -- I believe there was actually a stand-alone Fluent announcement that went out this morning. Bart, --?

I have the numbers here and it also went out -- there was an 8-K release that went out; we also released our numbers early this morning. Fluent's operating income for 2005 was $32 million on a revenue of $121.9 million.

Great. And the depreciation and amortization component of that is -- do you remember what that might be?

This is operating income, this is before -- the EBITDA, just so you know, these are the unaudited numbers. But the EBITDA was of the order of $40 million.

Great, thank you very much. Good luck.

[Sunil Daptodar], [Premo] Capital Management.

Looking at your guidance when you talked about for fiscal '06, 13 to 14% revenue growth, and you mentioned in the presentation that general economy or it looks like a mixed bag. 13 to 14% growth is basically a slowdown from what you did in the previous years or previous quarters. Does it imply that the customers are reluctant in order to buy new software? If that's the case, what was the number of new customers you added in the fourth quarter? Because you mentioned that your repeat business was 60% of your revenues? Could you just expand on that or try to give an explanation?

First of all, we're upping our guidance and in particular we build the business model around being able to provide consistent earnings growth and provide technology investment that allows a long-term revenue trajectory. And when that long-term revenue trajectory goes above the base business model, we get the leverage for the business model which is what has been experienced for a year -- for basically years now. We continue to add -- so in general we have upped the revenue guidance and whenever we get the opportunity to over perform on that we do and when it does it continues to filter in. And we've seen that dynamic repetitively and we're continuing to do that even while we are upping the guidance a little bit.

You also look at the number of things that are changing, the deals sizes actually because of the portfolio sales that we've been doing are getting larger. The larger they get the more scrutiny they get, the more scrutiny they get the longer the sales cycle happens. Sometimes they extent into quarters, sometimes they come early. So you have a number of different situations there. So it's a balancing between the short-term and the -- the short-term and the long-term.

Now the one question you mentioned on the new customers, and actually I've said this over the last few calls also, is because people tend to talk in terms of new customers. And when you look at the base of logoed customers that we have, we always have to ask the question is it a new customer, a new corporate logo, is it a new division of an existing corporate location, is it a new design product or project? Because many of these individual division have multiple design groups within them and at the end of the day it's very difficult to kind of -- everybody has a different view of what a new customer is.

At our standpoint with the base of the pyramid going so broad we've actually gotten a very broad coverage. And what we look to do now, in terms of taking simulation to a new level, is getting a much broader proliferation of this technology, so very much along the lines of 20 years ago not many people had a computer on their desk, ten years ago it quite a bit more and now most people have one on their desk. Well simulation should be able to play that kind of a role across the engineering organization. Take it out of the province of just the very high end analyst, and that's what we've been talking about for at least eight to ten years now and so that's very much the extra right there.

Yes, I mean to say you explained it very well in terms of the new customer. You tend to expand within a customer base with different divisions rather than having new customers in place. Is that the way I can put it or --?

No, it's a mixture of all, but categorizing which falls into which category depends upon what your [taxotomy] system is quite frankly. We have many new customers that are first-time buyers of ANSYS. That's what we've talked about those over the last few calls too. We also have a very strong repeat buying stand point. And quite frankly, the repeat buying is not even a function of the current penetration as far as I can see. We've got some of the sites where we've got hundreds upon hundreds of licenses that come back and buy many, many more licenses.

So we've got some that have one or two seats and expand by a like number. We've got some that are 20. So across -- basically across the spectrum. So if you see a certain consistency across -- we talk about consistency of productline, consistencies of geography, consistency of different regions and various business aspects and we're seeing that still in terms of customer acquisition. If I see any trend is it's not unlike the new adoption curves are. It's not like any industries are running wholesale to this. It's like the top companies in all industries are taking the lead in the adoption of this technology as leaders often do?

Okay. On the Fluent acquisition, now obviously you would be integrating the products, and at this stage probably it might be too early to comment on the road map, but when the integration is done probably -- would you be able to command higher license prices for the new sets that you're selling to the consumer base?

That's not the kind of road we've ever taken with any acquisition and that's really -- again, what we're trying to do is provide additional capability. Now additional capabilities of course might be additional modules, but in general what we want to do is we want to combine the aggregate capabilities of these offerings. Because as people start to increase simulation early on they're going to want to look at the cross coupling effects of all the physics we provide, with all the physics that Fluent adds to us and all the other new partners that we come in with.

And as such, then an awful lot of the integration comes from offering an interoperability between those, interoperability with third-party systems be they simulation systems, be they computer-aided design or cad systems or PLM systems or the like. That's really where it gets into and making these capabilities more accessible, more available and easier to use by a broader range of audience is what brings this closer to bear. It's very much the analogy to using -- having desktop systems in everybody's home versus 30 years ago when I used to walk into air-conditioned rooms with punch cards to access a computer.

Greg Halter, Great Lakes Review.

Congratulations on the good results, the outlook and the acquisition. Obviously I see the 8-K from Avid Thermal. Just wondering what parts of the balance sheet will be acquired or moving over to ANSYS, if you will? How should we be looking at that?

Maria, do you want to take a jump on that?

If you take a look at their combined balance sheet and forgive me because I haven't spent a lot of time with their 8-K, but for instance deferred revenues is all coming as part of Fluent. There's nothing on the hardware side with regard to deferred revenues. The deal will include a portion of cash that largely is in the foreign locations that will allow us to continue to operate the business as well as software and some fixed assets, I believe those are probably the -- and the receivables.

And their receivables for that total Company are much higher than yours. Just wondering if you could comment on the DSOs and so forth regarding receivables, whether or not it's up to par within ANSYS.

At this time I'm not comfortable commenting on those numbers.

Okay. And from the ANSYS perspective on a stand-alone basis, can you let us know what your capital spending was in 2005 as well as your depreciation and amortization?

We'll have to thumb through the book to get you something there, but hang on just a second.

Okay.

Total CapEx was about $4.5 million.

Okay.

Depreciation and amortization was $8.1 million.

And for '06 any thoughts on where you look for CapEx and D&A as a separate ANSYS company and then do you have any comments on a combined entity?

No, as we said, we're not going to comment on the combined. We'll follow up after the transaction closes.

All right, I thought I'd try.

From an ANSYS perspective, yes, I'd say somewhere in the -- in line with what we spent in 2005. And depreciation and amortization probably similar.

There's been a high degree of consistency.

All right. Thank you and congratulations on the announcement.

Jay Vleeschhouwer, Merrill Lynch.

Jim, good morning. A couple of technical and marketing questions. Now that you've with this acquisition further broadened your portfolio, can you comment on your thoughts or capabilities with respect to simulation data management? Is that an increasingly important part of the strategy or the technology base?

The second question for Fluent, can you comment on your installed base or license base with respect to how it's apportioned across the various cad and PLM systems? In other words, how much of your customer base is aligned into let's say the UG or [Deso] or PTC basis and so on?

Let me tackle the first question and I'll ask if Bart wants to grab into that. The first one is data management and basically we already had some things in the works on that. Clearly, data management takes on two specific -- actually probably more than that. Because you get into the overall data management, you get into the process management aspect of things also. The data management, there are a couple aspects, one of which is being able to if you've got that much of a proliferation of simulation usage, being able to sort through and being able to leverage all that information. But also the interfaces to the various PDM systems that are out there.

We've already demonstrated the PBM link, but we obviously now, as we continue to expand the simulation aspects, want to be able to sort that and basically increase the intelligence of the hand off. I to think the other thing that becomes important is the way simulation is being used, it's not just the traditional data management hanging on to clumps of data, it's really the influence of knowledge and insight that's gained through the innovation process that allows people to extrapolate and synthesize knowledge from that data. It's not just a librarian and sorting kind of function.

And those are some of the things that -- I don't want to get into too much detail preproduct kind of standpoint. But it is a very important aspect as it is working with a broad range of systems and any time you've got a broad range of customers, guess what? You tend to work with a broad range of PLM and systems. From the ANSYS stand-alone standpoint, if you have roughly the top, you've got four major players out there, we're probably pretty evenly balance distributed across those players. And I'll actually now turn it -- if you'd like to comment on your aspect, but I suspect that yours is fairly balanced across a broad range of PLM systems also. Is that fair or --?

That is fair. And the only thing is that we see a little bit more of the [sole] PLM base in ours primarily from the aerospace area.

Okay.

And to address that we have specifically a Fluent [forcatea] and we are very excited about that product. We have been working with Deso, have gotten a lot of support from them in that area. So we hope to expand into that base soon. There is a comment I would like to make on the EBITDA question that was given to me. I think it was from CIBC. The EBITDA I quoted was the cash EBITDA. I come from the debt side, so servicing debt you always keep the cash EBITDA in mind. So the cash EBITDA was 40. If you look at the GAAP EBITDA, the difference being the deferred revenue there, the GAAP EBITDA would be closer to 35.

And that concludes the question-and-answer session for today. At this time, Mr. Cashman, I will turn the conference back over to you for any additional or closing remarks.

In general I basically appreciate everybody for the time and the attendance on this call and basically, again, hope to maintain the trajectory and look forward to the increased opportunities provided by our joining with Fluent in the near future. So with that I'll thank you all and look forward to talking to you next quarter.

That does conclude today's conference, ladies and gentlemen. Thank you for your participation and you may disconnect at this time.