ANSYS Inc (ANSS) 2006 Q3 法說會逐字稿

Good morning, and welcome to the ANSYS Third Quarter 2006 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, Incorporated. If anyone has any objections, you may disconnect at this time.

I would like to introduce your speaker for this morning's call, Mr. Jim Cashman, President and Chief Executive Officer. Mr. Cashman, you may begin.

Okay. Thanks, Alison. Good morning and welcome, everybody. We're here today, of course, as previously stated, for the ANSYS Q3 fiscal year 2006 call. And I am joined today as usual by Maria Shields, our CFO.

As usual, I will give a general summary to outline the highlights of the quarter, after which we will examine the operational results from a variety of different perspectives.

There are two major themes for the quarter. The first is a sustained continuation of strong performance of the core ANSYS business, and the second is around the continued and substantial progress of integration with the recent Fluent acquisition.

The net outcome is that both of our major businesses' streams performed well which, in turn, yield accretion and general business results on a non-GAAP basis above that of our earlier projections. We were able to accomplish this while continuing the effective integration that we feel helps build our foundation for future prospects; and the initial enthusiastic customer response certainly seems to underscore this opportunity, although there is still a lot that remains to be done for us.

Maria will then take you through a quick update on our line item expense performance, balance sheet, cash, and update on our current outlook on earnings. And after that, we'll be happy to respond to any questions you may have. So, to begin with Maria, our Safe Harbor Statement please?

Okay, thanks Jim. Good morning again and everyone thank you for joining us.

Before we begin, I'd like to remind everyone that our third quarter financial results do include a full quarter of Fluent revenue and operations. And also during the course of the conference call some matters that will be discussed as either part of the prepared remarks or in response to questions may constitute forward-looking statements that involve risks and uncertainties which could cause actual results to differ materially from those projected.

The company's reported results should not be considered an indication of future performance as there are potential risks and uncertainties that could impact our business in the future. These are discussed at length in our public filings, including our Forms 10-Q, 10-K, 8-K and our 2005 annual report to stockholders. 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.

During today's call we'll be making reference to various non-GAAP financial metrics, including but not limited to, non-GAAP revenue and non --GAAP diluted EPS which are non-GAAP financial measures within the context of the SEC's Reg G.

To clear up any confusion, I'd like to bring up everyone's attention to the fact that we've made a change from our second quarter 2006 disclosure and that's a non-GAAP financial result and a non-GAAP outlook that we're discussing today and will discuss in the future do not include charges for stock-based compensation.

We believe that these non-GAAP financial metrics supplement our GAAP disclosures are important indicators in measuring the underlying business performance and trends. Non-GAAP results are used by management in our assessment of actual business performance and to plan and forecast for future periods. Non-GAAP financial measures should be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for or superior to GAAP results.

A discussion and reconciliation of GAAP financial measures to comparable non-GAAP measures is included in this morning's earnings release and the related Form 8-K. In adherence with Regulation FD, ANSYS will provide forward-looking guidance in its quarterly financial results, press release, and in publicly announced financial results conference calls.

We will not provide any further guidance or updates on our performance or outlook during the quarter, unless we do so in a public forum. So, with all of that behind us, Jim, I'll turn it back over to you.

Wow! Thanks. Okay, Q3 summary. Well, in summary, Q3 business performance represents results above the high-end of our non-GAAP revenue and earnings guidance, while we continue to build momentum on a broad range of fronts.

And I have to say the fact that this all occurred during our most challenging quarter and during heavy but I have to say rewarding integration efforts only makes it more satisfying. For the numbers I give, just to be clear after Maria's words, I will be using non-GAAP numbers in the same fashion as we have been using historically for many years and quarters here. We feel that this gives the clearest indication of the business and provides apples-to-apples comparisons with past years and quarters. Some of these relate to the purchase accounting treatment of deferred revenue which somehow magically vanishes post acquisition, even though the customers and the cash both remain.

So, the numbers I am talking about will be basically consistent with the way we've been talking about them on a number of calls here.

So, from a high level perspective for the quarter, we reported basically solid financial performance with non-GAAP revenue that was $77.4 million which mildly exceeded the upper-end of our guidance and it represents a 98% increase from last Q3's $39 million. Now, obviously this growth number and many of the ones that we're going to discuss will seem to be meteoric given the inclusion of five months of Fluent business. But, also don't lose track of the fact that the ANSYS core revenue growth continued in double-digits for the quarter and year-to-date. And, I'll also add that due to the rapid integration progress really the delineation between core business and Fluent business is already starting to blur and will increasingly do so in the upcoming quarters as we continue to further integrate the technology offerings and our field operations.

Non-GAAP diluted earnings per share increased 29% with non-GAAP EPS of $0.45, up from last Q3's comparable of $0.35. This was also above our guidance and the analysts' consensus. Our non-GAAP revenue and EPS, like I said, both exceeded the analysts' consensus for the quarter driven by above-projected top-line performance and the continued efficient Fluent integration, which helped to yield accretion above our earlier projections.

Secondly, we had a continuation of strong growth and operating margins, cash flows, and basically a stable business model and this is even on a blended company basis we are making lot of progress. There was an acceleration on the customer front that's underscored by both new adopters and expansion of long-standing relationships and we're already witnessing cross-selling and deepening customer relationship opportunities and basically this is a result of a rapidly expanding product division and roadmap.

So, let's dig in from the operational standpoint. As previously mentioned, our non-GAAP revenue was $77.4 million for the quarter and this revenue was adjusted accurately to represent the true nature of the ongoing business. And it's just under double the 39 million in Q3 2005. The two components of this are the addition of Fluent revenue and the aforementioned double-digit growth in the ANSYS core business. Both business streams performed well and showed signs of building off of each other.

Non-GAAP diluted earnings for the quarter grew 29% to $0.45, up from $0.35 per share of EPS in Q3 of 2005. This exceeded the analysts' consensus which marks the 36th consecutive quarter that non-GAAP EPS has met or exceeded consensus.

Our overall non-GAAP operating margins were 37%, indicative of the solid top-line results. Adjusted gross margins continued in line with our business model at a healthy 84%. And these remained strong even considering the blending with Fluent.

As we continue to assimilate Fluent operations into the overall business model, we envision that the blended operating margin should start to move toward traditional ANSYS levels over the next several quarters. We also had strong cash flows from operations which increased to over $22 million.

Now, additionally for the first nine months of 2006, we reported total non-GAAP revenue of $191.6 million or 68% increase over the first nine months of last year, again with the addition of Fluent and with a core growth in the upper teens.

Software license business was disproportionately strong, but the maintenance and service business also grew well.

The year-to-date non-GAAP EPS was $1.31, also a 35% increase over $0.97 in 2005 for the comparable period. Non-GAAP operating and gross margins were 39% and 85% respectively for the first nine months, and cash flows from operations for the first nine months were over $60 million.

I'll now take you through numbers from some different perspectives--category of business, geography, customer, product line, basically slice and dice it from a number of different perspectives.

So, let's start with category of business first. Overall non-GAAP software license revenue increased 136% for the quarter and 91% for the year-to-date. Same story held here. There was a Fluent contribution augmenting double-digit core growth. The year-to-date, the core license growth is 20% even considering the fact that some of last year's comparative included royalty revenue that came from Fluent, which obviously we no longer count as revenue. So, even losing that, the core license growth was up 20%.

The core lease business grew double digits for the quarter and the year-to-date, actually growing to 23% of Q3 core revenues and 21% for the year. Including Fluent, the lease business grew to 35% of non-GAAP year-to-date revenue, which increases our repeatable business base and aids in our overall visibility.

Paid-up licenses increased 21% for the quarter and for the first nine months paid-up revenue grew in excess of 30% and a core rate in the upper 20's.

Maintenance and service business was also double-digit core for both the quarter and year-to-date, with the software maintenance growth greatly outpacing the pure labor-based service component. So, for the total business, service grew at 55% for the quarter and 41% year-to-date. There was a balance between both the high-end and the desktop products and there were noticeable gains from continuing migration of customers to the ANSYS work-bench platforms. If anything, there is even a slight skew toward the upper-end.

Our direct and indirect businesses both performed maintaining a fairly consistent balance in our core business of roughly 60% to 40% direct to indirect, 60% direct, 40% indirect. Including Fluent, about 70% of our overall business was direct.

Business intake has stayed strong which combined with the Fluent acquisition has allowed deferred revenue to rise to an all-time seasonal high of about $90 million. For the third quarter our already strong core repeatable business base grew to 67% while our total repeatable business base is at 74%.

As we consistently pointed out one of the strengths of our business model is the ability to maintain a solid base of recurring or repeatable revenue. We basically believe this is a bi-product of our commitment to reinvest a high percentage of our revenue back into R&D. And I'll say that we're maintaining that; our traditional 20% is still in the high-teens on a blended basis.

Countering or combined with this, we have a strong balance sheet and strong cash flows that can easily support the amortization of the debt that we took on with the Fluent acquisition and Maria will talk about that in a few minutes.

From a geographic perspective, we saw core growth across all major geographies with the usual Q3 seasonality and, of course, obviously it was much higher growth when you include the impact of Fluent or at least a higher increase.

We are very encouraged by the combination of industry breadth, new customers, and existing customer expansion. There are a couple of areas that will provide opportunity for improvement, but I have to say these fortuitously fall into areas where integration activities can play a strong role in helping our growth prospects there.

So, starting with North America, North America increased at 102% for the quarter and 80% year-to-date. The core business continued to grow with a 25% year-to-date performance, particularly strong with the performance of our major account-oriented direct sales offices. Each of our offices has grown in excess of 20% for the quarter, and basically all but one of them has basically grown 20% plus for the year-to-date.

In aggregate, the offices have grown well in excess of the ANSYS core growth rate for both the quarter and the year-to-date.

Major orders came from long-standing and new customers such as Honeywell, Siemens, Parker Hannifin, Pratt & Whitney, John Deere, Goodrich, Raytheon, US Army, Rockwell, Bechtel Bettis , Williams International, Textron, Los Alamos, and Sandia National Labs, and Caterpillar. So, a good broad base there across all product lines.

Europe continued to perform well with an overall 96% growth and 59% year-to-date. Overall core growth was in the mid-teens for both the quarter and year-to-date and was actually fairly balanced with Germany leading the way in high-teens core growth. The largest deals in Europe included both names you've heard us talk about in past calls as well as a few additions from the Fluent side of the business, such as Siemens, Bosch, Arriva, Rolls-Royce, LeapAir, MAN, [Singlemoi], [Bourings], [Loop], [Canthal], Thames Water Utilities, [Stimler], Conceptum, Schlumberger, Benelux, Volvo, Volkswagen. The list goes on fairly extensibly here but a broad range of industries and strong names there. We also expanded our major activity with the [ITER] project which is a multinational advanced reactor program.

Our general international area was slightly more of a mixed bag as I intimated earlier. While the region grew at 96% for the quarter and 63% for the year-to-date, I'd have to call this one a two-part story. The first part is a core growth rate year-to-date in the low single digits for Japan, but upper-teens for the rest of the region, so we've got kind of -- we're looking forward basically to leveraging the strong Fluent presence in Japan as the basis for ramping up the business flow there.

Key customer engagements in the region included Petrobras in South America, Train, Toshiba, Cummins, Beijing, Mechanical Research, DIC, Mitsubishi, Honda, Hitachi, Seagate, and Shanghai Scientific. There was also a nice mix of Fluent business, and we saw a variety of orders from not only the multinational expansion but also from local based business so we are building a strong base across this growing area.

Now, as we spoke for the last couple of calls, we are continuing to see industry breadth and increased penetration within our strong and now I'd say with Fluent expanded customer base and the pipeline of new opportunities is strong. So, everyday there seems to be something going on in the world somewhere that causes jitters, but we are continually seeing a growing interest and particularly in light of an expanded ANSYS geographic and technical presence. In spite of everyday worries like energy cost, high labor, health care expenditures, currency fluctuations, all of which can influence the timing of customers' buying decisions, we're basically encouraged that the existing and new customer attainment has continued to grow nicely through 2006, and the customer reception to the acquisition has been strong.

So, in summary, good regional growth across the world with a couple areas slated for improvement.

Actually, I just realized that I didn't mention currency effects, but in summary it was mildly positive for the quarter and modestly negative for the year-to-date. Modestly negative equates to about three quarters of a million dollars at both the top-line and the operating profit line.

There was good industry and major account activities, continuing strong performance in Europe, in particular Germany and France, continued momentum in North America and progress in GIA virtually everywhere with an acknowledgment that we'll focus on and slate improvements in Japan.

Overall, we've already merged the customer facing organizations. And while this has been a huge task, it was necessary to provide a focused, consistent foundation for the future. I have to say I am very proud of the way our organizations were able to get this process going in the field with minimal disruption in business results. And we are encouraged by the addition of the Fluent business which is already starting to show some synergy with the core business and helps augment us in areas of desired growth.

We continue to examine sales strategy in each of the key geography; and just as we've been talking about over the past several years, we plan to continue to align our sales and distribution investments in response to the strength and the sustainability of improvements or changes in the environment. But, above all, the attention will be to the ongoing integration of our combined field teams to meet the increasing customer interest that we're already starting to see.

From a product revenue standpoint, we saw really very few significant changes in either the trends or the guidance. As I mentioned earlier, consolidated paid-up software licenses grew by 21% quarter-to-quarter and 38% year-to-date. Core paid-up license has been notably solid with a 27% year-to-date growth. Lease business has grown both in real and percentage of business terms both total and core.

All of our product spectrums did well with a disproportionate bump to the upper-end which I mentioned earlier. ANSYS Workbench continued to gain traction, and we are already expanding its capacity through the utilization of new Fluent capabilities.

The good news is that we actually already have a Fluent implementation demonstrable in Workbench and actually the even better news is that we've been able to specify some dramatic augmentations and improvements for our integration architecture that will become manifest in 2007. These basically are just direct outcomes of the commitment and the progress that our technology and product integration teams have made. They've been doing an awesome job.

ASPs for the quarter stayed stable, particularly at the upper end. There was a slight decrease in the lower-end products, but they also constituted a lower percentage of our business. Now, at this point I'd normally go into a fair amount of detail on technology progression and product news; however, since we are in this news, a new and exciting phase, much of the activity is involved in integration of multiple great and I might add already existing technologies between the core technologies of the ANSYS families and those of Fluent.

So, as this is actively in progress after only a couple of months, I'll allow those plans to further develop and cover them on upcoming calls. But, it's fair to say that the progress really has exceeded the expectations we had going in.

And then, of course, there is always a lot of news going on, but there has been a wide range of other news that continues to highlight the emerging interest in simulation. ANSYS was actually chosen by the Chinese Mechanical Engineering Society and the Examination Center of the Ministry of Education to formerly incorporate ANSYS software into their National Mechanical Design Engineering Qualification Examination.

So, this certification actually started in China in I think around April 2006 and is designed to improve the skill level of professionals in the Chinese manufacturing sector. ANSYS software was also used to help break the world land speed record for diesel powered cars for the second time on the week of August 23, 2006 at the Bonneville Salt Flats in Utah. The JCV diesel Maxx car achieved over 350 miles per hour and a record that had been standing for more than 30 years.

Finally, ANSYS made the software industry sustained success honor roll for the third consecutive year, and this is an independent group that culls from a list of over 500 public software companies compiled annually by Cape Horn Strategies. ANSYS is one of 20 that made the 2006 honor roll and one of only 8 public software companies from all software sectors to maintain profitable growth for 10 years or more.

So, in conclusion, a strong quarter, continued financial and market performance on a stand alone core basis, and continued positive impact from our Fluent acquisition. Now as we've articulated for several years now, we feel our progress on all fronts is a direct result of our continued focus and execution against a long-term strategic direction and business model. It's allowed us to provide sustainable revenue and earnings growth, but also quickly respond to the broad range of market and economic opportunities and conditions that have happened during that time frame.

By meeting our commitments, which we take very seriously, for 36 straight quarters, we've maintained a significant investment in both technology and customer-facing capacity that allowed us to continue the cycle, expand our global reach of engineering simulation across the growing base of our customers, partners, and industry applications. So, I think our core performance and the addition of Fluent only accentuate this.

Over the long-term, we've demonstrated the ability to grow the top-line in accordance with our guidance while maintaining solid margins and continuing to provide solid earnings growth. With this in mind and with a larger scale of operations, we will continue to drive toward our long-term vision and sure while there are many uncertainties out there, our longer-term optimism remains intact with, I'd even say, increasing confidence.

So, with that, I will turn it over to Maria Shields, our CFO, to provide you a more detailed look at our financials including the expense structure, balance sheet highlights, as well as other key factors of this quarter's business and outlook. So, Maria?

Okay. Thanks, Jim. As Jim mentioned, I am going to spend a couple of minutes taking you through a recap of Q3 and 2006 year-to-date expense highlights. I will give some guidance regarding our outlook at this time for Q4, year-end 2006, and full year 2007 and close with some comments related to the balance sheet and cash flows.

So beginning with cost of sales, excluding acquisition-related amortization and the impact of stock option expense, which combined totaled approximately $5.1 million, cost of sales for the second quarter were $12.2 million and that compares with $5.3 million in the third quarter of 2005. This resulted in an overall non-GAAP gross profit margin of 84% for the quarter.

On a year-to-date basis, 2006 non-GAAP cost of sales, which exclude a combined total of $9.6 million related to acquisition-related amortization and stock-based compensation, were $28 million versus $15.6 million in 2005, resulting in a year-to-date non-GAAP gross profit margin of 85%.

The comparative increase over last year's third quarter and the 2006 year-to-date cost of sales totals is largely related to the inclusion of Fluent operations in the 2006 reported results since the May 1, 2006 acquisition date. In addition, we've had increased salaries, incentive compensation, and headcount-related costs as well as an increase in third party royalties.

For the third quarter, our total SG&A expenses, excluding approximately $900,000 of stock-based compensation, were $23.5 million and that compares with $10.7 million in last year's Q3; and on a year-to-date basis SG&A expenses, net of $2.6 million of stock-based compensation, totaled $55.6 million; and this compares with $31.9 million in the comparative nine months of 2005. The increase in expenses as compared to the prior year's quarter-to-date and year-to-date figures was also largely impacted by the inclusion of Fluent's results in 2006,increased incentive compensation expense and the inclusion of approximately $600,000 of incremental costs expended in connection with the ANSYS Biannual International Users Conference that we held in the second quarter of 2006.

In the area of R&D, total expenses, net of $300,000 related to stock-based compensation, for the quarter totaled $13 million or about 17% of non-GAAP revenue compared to $7.7 million in Q3 of last year. And on a year-to-date basis, our total investment in R&D excluding approximately $900,000 in stock-based compensation reached $33.4 million or 17% of non-GAAP revenue compared to $22.5 million for the comparative nine months of 2005. Once again, the quarter-to-date and year-to-date comparative increases were largely driven by the inclusion of Fluent's operations as well as increase in salaries, incentive compensation, and headcount related expenses.

During the nine months ended September 30, 2006, we capitalized approximately $400,000 of internal development cost and that compares with $270,000 in the same period of 2005. As we previously disclosed, the 2006 year-to-date results include a one-time in-process R&D charge of $28.1 million that was recorded in the second quarter and which specifically relates to the Fluent acquisition. For the third quarter and nine months of 2006, we delivered solid non-GAAP operating profit margins of 37% and 39% respectively. During the third quarter the company incurred $3 million in interest expense on the outstanding debt incurred in connection with the Fluent acquisition, and on a year-to-date basis interest expense totaled $5.2 million.

Our consolidated GAAP effective tax rate for the third quarter and nine months of 2006 was approximately 25% and 87%. The third quarter tax rate was favorably impacted by a $400,000 tax benefit that related to the filing of the 2005 tax returns as well as recorded benefits related to losses associated with purchase accounting in higher tax rate jurisdictions. The year-to-date rate was unfavorably impacted by the non-deductibility of the $28.1 million second quarter in-process R&D write-off that I mentioned earlier. And we currently expect an effective tax rate of between 32% and 34% for the fourth quarter and around 33% to 35% for fiscal 2007. I will point out that the 2007 rate will be adversely impacted by lost export benefits under the transition rules of the American Jobs Creation Act. And, I'd also like to call everyone's attention that estimate of 33% to 35% for 2007 does not factor in the impact of FASB Interpretation #48, uncertainty in income taxes which we are currently reviewing and will adopt in the first quarter of 2007.

For the third quarter, ANSYS reported non-GAAP EPS of $0.45 on 40.3 million diluted shares and that compares to $0.35 on 33.9 million shares in the third quarter of last year.

On a year-to-date basis non-GAAP EPS totaled $1.31 on 37.5 million diluted shares, compared to $0.97 on 33.7 million shares for the comparative nine months of 2005.

Based on our current visibility, we are anticipating finishing 2006 with non-GAAP EPS in the range of $1.74 to $1.76 for the full year and that translates to non-GAAP EPS of $0.44 to $0.46 for the fourth quarter.

Our current GAAP earnings outlook which includes acquisition-related amortization, all of the purchase accounting effects of the Fluent acquisition and the impact of stock-based compensation is $0.24 to $0.27 for the upcoming fourth quarter and $0.27 to $0.33 for the full year 2006.

Our current outlook for 2007 targets non-GAAP EPS in the range of $2 to $2.03 and GAAP EPS of $1.31 to $1.41.

And taking a quick look at the September 30th balance sheet, it continues to remain very solid. Our total cash and short-term investments are at approximately $102 million. Our total gross deferred revenue reached $89.7 million, and this is despite the initial purchase accounting reduction of $20.1 million of which $7.3 million and $13.2 million negatively impacted the Q3 and year-to-date 2006 reported GAAP revenue results.

The estimated Q4 2006 impact is approximately $5.1 million, and the remaining estimated adverse impact for fiscal 2007 is approximately $1.9 million. A detailed explanation relative to this particular aspect of purchase accounting is provided in this morning's earnings release and the related Form 8-K.

As we previously reported in connection with the acquisition of Fluent, the company did borrow approximately $198 million from a syndicate of banks. The September 30th balance sheet reflects the current remaining outstanding borrowings of approximately $147 million under those facilities. The interest rate on the debt is variable and is set at approximately 6.4% on about $87 million of the outstanding balance for the fourth quarter and 6.3% on the remaining $60 million through September of 2007. And the company generated over $60 million in operating cash flow for the nine months of 2006.

So, Jim, I'll turn it over to you for a recap.

Okay. Thanks, Maria. So, to recap, strong financial performance at all major parameters of the business revenue, earnings, margin, cash flow, business base, visibility; continued strong integration in collaboration with Fluent, which positively impacted the quarter's non-GAAP revenue and EPS; increasing customer activity, accentuated by industry and geographic breadth and increased areas of adoption, including accelerating interest in our combined offerings; and finally expanding sets of partnerships and relationships across a range of technology, distribution, and customers.

So, with regard to the outlook for the remainder of 2006, we see signs of solid prospects which we'll continue to monitor with our usual prudence in light of all the macro economic events that may impact our customers' buying patterns. The long-term outlook stays bullish. For the remainder of 2006, we are raising our year-end estimates comprised of a combination of strong organic performance and positive contribution by Fluent.

As a result of early integration technology sharing, some of the comparative metrics going forward will be increasingly difficult but, nonetheless, we anticipate good Q4 performance with non-GAAP revenue and again those deferred revenues didn't really vaporize.

For the quarter we expect non-GAAP revenues in the $82 to $84 million range with non-GAAP earnings in the $0.44 to $0.46 range. As such, this translates to raising our year-end guidance with non-GAAP revenue targeted in the $273 to $275 million range with non-GAAP EPS of basically between $1.74 and $1.76.

For 2007, we are targeting our guidance to consolidated non-GAAP revenues in the range of $360 to $365 million and non-GAAP EPS in the range $2 to $2.03, both of which translate to mid-teens growth. But as always, and we've continually demonstrated this, we will keep an eye toward ratcheting up performance if positive signs sustain themselves or increase.

So, with that overview, we are now prepared to respond to any specific questions you may have.

So, any questions?

Thank you, Mr. Cashman. [OPERATOR INSTRUCTIONS]

And, we will take our first question from Richard Davis with Needham & Company. Please go ahead.

Hi, thanks. When you kind of think about your business, I mean, obviously you have a lot of growth potential left to kind of penetrate your existing portfolio in the markets and stuff like that. But also, over the last few years you've kind of expanded or inched over closer in towards electronics. I mean you are not in chip design, but with Fluent you're obviously simulating [heat] flows and things like that. So, could you talk about your potential ambitions towards electronics?

And then actually I was also wondering as it makes sense for you guys at some point to model bigger systems, such as even as large as a factory or a plant or something like that, and just kind of how you think of this company's roadmap in addition to kind of growing whatever same-store sales, but just bigger presence in simulating a lot of different systems?

Well, I mean, well that's a -- it's a multi-faceted question. As far as getting into circuit designs and things like that, that's really not in our short-term horizons. However, you look at when something doesn't go well in electronic product, it's largely mechanical in nature, a lead broke, a chip -- something overheated, something like that. So, the mechanical impact of all these things are something that we've done for years and we continue to grow into. So, that's a -- that's just a foregone conclusion. The electronics products industry have always been a big part of it.

Additionally, you see electronics coming over into many traditional lines. So, you look at the amount of electronics in automobiles and look at avionics and things like that. So, it clearly is something that takes a place where we've been historically strong and allows us footholds into a range of other industries.

Secondarily on the same-store sales kind of thing, I think again the thing is, just because there is an existing customer, doesn't mean that there is not huge growth potential inside those customers. So, getting to a much broader range of users, much in the way that 20, 25 years ago having a computer on everybody's desk was considered a pipedream and now you almost take it for granted.

So, along those lines -- simulation why should not every engineer have simulation tools in the long run and that itself creates a huge market. As for larger systems, actually we are doing that today. I mean looking at complete systems of a wide range of things probably one of the biggest and most comprehensive I can think of are like complete offshore oil rigs and things like that. In some standpoints, the ability of our customers to migrate where they used to organizationally think in terms of either components or they -- or maybe the computing, processing wasn't strong enough to historically support it, but now getting into those type of situations are becoming increasingly possible with the ability of computing to handle that and then to support the algorithms that we've been writing to do that.

But at the heart of that also will be basically major companies being able to actually marshal their own forces around doing that effectively also. I mean we still see today that there are some groups where they might use both our fluids capabilities and our structural capabilities, but they are done in different organizational groups from a legacy standpoint and there are others where they are starting to get together on a multi-physics standpoint. So, those are the things we can do together, but there is -- in general there is an adoption phase and there is also an incubation phase for companies to be able to utilize this as new technology to help drive their businesses forward.

Got it. And then, the followup question would be, I kind of think I know what's going on in MSC and I am going to be visiting with Altair on Monday, but do you have any comment on what's going on like at ABAQUS and such. I am sure I got a biased response, but I talked to a guy that just left there, and let's just say he wasn't happy and I guess obviously if someone leaves a company they are not happy. But, do you have any point of view on them? Do you see them as a competitor at all or what's up there?

First of all, the general answer to your question is no. I mean, in terms of general viewpoints, in general we kind of have our hands full with a fairly ambitious and I think exciting roadmap for ourselves. But, I think there are number of companies that might compete with us on portions of our business from either a legacy standpoint or maybe some subsegment of the business. So, I haven't seen any major -- major changes to that. I am clearly not well versed to speak on what might be going on internally there. I just don't know.

Got it. Okay. Thanks a lot.

And, we'll take our next question from Tim Fox with Deutsche Bank.

Thank you. Good morning. Can you hear me okay?

Yes, yes, Sir.

Okay. Thanks. First question I had was on the channel development. I think you mentioned in your prepared remarks that the customer-facing portion of the integration work was complete and I was wondering if that was primarily on the direct sales side; and if it is just on the direct side, what are the plans and time frame for rolling out the products throughout your indirect channels?

Okay. I mean that's a fair point and thank you for saying that the comments appear to be prepared. The customer-facing standpoint we were looking at was in fact getting the direct presences together. Now, when you talk about the indirect channel, the main thing we've got to point out is first and foremost we serve the customer, even though those direct channel, or indirect channel relationships have been around for a number of years. So, we are not going to compromise technical accuracy, quality, anything like that. So, that means that takes a certain amount of time for a channel who has an interest in picking up new products to go through the certification process and be able to assure that we can get that kind of coverage and that there will be no disruption from a customer standpoint.

That takes a wide -- that can take a relatively short amount of time depending upon that -- which side of the non-homogenous indirect channel is grabbing hold of it and it may be never based on some of the desires of other channel partners. So, I'd say in general and I think we talked about this maybe a few years ago that any time we have a new product, a lot of people have interest in it, but I'd say that there is probably about 20% to 30% of the channel that immediately kind of gets it and starts investing and commits to that and they get it very quickly.

I'd probably say there is maybe another 50% that's kind of sitting in the wings saying, "Yeah, I'm interested," but a little bit of a show-me mentality and they phase in over the next one to two years. And then finally in any given band of technology just because of the expertise or the desires of that particular indirect channel partner, there may be another 10% to 20% that never get it or never have an interest in it.

That's a model that we've had and it's been very strong for the last few years, and almost any acquisition that we had over recent years kind of followed that pattern; but you would normally start to see the indirect channel bump coming a year to two after the acquisition, but it does come, it just takes time to -- you can't instantaneously synthesize the standard excellence in terms of support and technical knowledge that our indirect channels have a chance to develop over 20 years with us on other products.

Okay, great. That's helpful. And a followup would be more of a market question around some news out of Toyota. There was an article a few months ago, I think in the Wall Street Journal, talking about how the over-reliance on simulation technology may have been part of the issues with quality of Toyota and I am just curious to hear what your reaction would be. I tend to think that that's well overstated, but what's your view about simulation being used in the auto industry? Is there a move to more of it? Do you think that there is issues around quality because of an overuse of simulation? What's your view there?

Well, first of all I don't know -- now as of recent -- we've been mentioning Toyota as kind of increasingly interested in that standpoint. I don't think that you can sit there and say, just categorically that this causes -- any one factor causes that. I think we may have an issue and I don't know about this particular article you are referencing, but I can certainly understand -- I mean I see all the upsides and I see a lot of the warts of simulation. And, really what you are talking about is don't go for quantity of simulation over quality of simulation. You have to understand the tools you are using. Now we tried to do a lot of things to really advance both the usability and the fidelity and predictability of a tool. That's why multi-physics had been a strong push for us for a number of years, that's why taking it down into usability is a factor because frankly you can use any good tool in a wrong way or maybe inefficient way and get wrong results, so a little bit of that from the old space race thing, GIGO for computers, garbage in, garbage out; and I am not calling anybody garbage. I am just saying that you can utilize even the best tools and draw wrong conclusions from it.

And those are some of the things that we want to continue to bulletproof. The other thing is that there is still a lot of fertile ground to push toward making these tools broadly used. So, I can clearly maintain my confidence in the proper use of simulation to have dramatic impact. We see it through hundreds upon hundreds of customers everyday. However, I also can see somebody being able to utilize a generic simulation product and draw wrong conclusions from it.

I mean that may not be a meaty answer, but in general terms I could see an article like that coming out. I can see that. And at the end of the day, you need a combination of the best simulation tools in the hands of the best engineers. When you add that combination and that it is kind of like having a good woodworking shop and having a knowledge of woodworking to combine those with.

Now, that is a helpful perspective. And I am assuming, Jim, you weren't at the wheel of that diesel car that set the new land speed record with ANSYS tools.

No, 350 miles per hour is too slow for me, if you ask the people around ANSYS. I'll wait till it gets a little faster. No, no but I would like to be.

Well, congratulations on your quarter. Thanks for your guidance.

Thank you.

And we will take our next question from Barbara Coffey with Kaufman Brothers. Please go ahead.

Yes, good morning.

Good morning.

When you are looking at the Fluent products and the ANSYS products, how are you thinking about putting them together? Are they going to be sold separately for a while and sort of layered in over time? And what are you seeing your customers ask for in this regard?

Well, we're going to sell them like we sold every other thing. In general, what we want to do is, we have a broad suite of simulation tools. When we go in, we are not necessarily selling a feature function package. That's kind of a fairly old way of selling that. We want a broad base of simulation. Again, being able to simulate complete products in their simulated environments, allow a broad range of people have access to those. I mean, the way we use point and click at our homesin computers, where before you used to go into air conditioned rooms with punch cards to get the computer to do something. So, we want that overall span of things. So, we go in with the standpoint of saying, "Here is how simulation can help you." Now, normally companies can't digest the entire portfolio all at once; sometimes they do. But that's the -- more the tip of the iceberg this day.

So, typically we will present the portfolio and right now we present all of our capabilities including Fluent and traditional capabilities as part of that portfolio. However, we sell those modularly because the specific need, the specific IT environment, the specific usage patterns may have a different thing, and we build those over time which is also why you very often will hear the same customers being mentioned quarter-after-quarter as making significant continued investments in the technology because, in fact, they are growing with us over a part of multi-year progression strategy.

So, in essence, that's what we are doing --we're doing with the Fluent product right now and, of course, I've mentioned the product integration teams and what they are doing for the future generations of products.

And, as a followup to that. At what point are you in the integration? Is it as much as the front ends all look the same now, at the back end, shares data, or is it still little less seamless than that?

Oh, it, well -- I mean, first of all this is software and we are like about 4 or 5 months into it. So, yes, it's less seamless and even the best clothing has seams in it. So, seamless doesn't necessarily connote greatness.

More importantly, what we are concerned about is helping to increase the way that simulation has a major impact in customers. So, that means it's more workflow kind of oriented as opposed to appearance-oriented.

In these days so many applications look so similar because of the standard paradigm, the point and click, and that kind of orientation. So, a lot of those utilizations are very similar. So, there is always kind of a familiarity to the utilization of it. However, you want to make sure you break down some of the barriers of utilization. In fact, I think there are too many companies out there that put up artificial barriers to integration and being able to allow customers to pick a wide range of those. I mean, maybe take a chapter from the PC industry where a lot of software programs can plug into one another from different manufacturers and different manufactures of peripherals can plug in. And that's the way this thing should happen, so people can pick best of breed and put together their own situation. But probably too much focus on the parochial systems kind of standpoint. But, that's basically the direction we want to go.

Thank you.

Thank you.

And we will take our next question from Mark Schappel with Hapoalim Securities. Please go ahead.

Hi. Good job on the quarter, let me first say that. And Jim I'll start off with you. If you could just review some of the third quarter year-over-year metrics in the core ANSYS business such as license revenue and total revenue?

Well, I mean in addition to the things that I kind of already mentioned? So in general basically the software license revenues were basically up to, excluding Fluent, up to almost $23 million, good growth there. Like I mentioned, the year-to-date, the total paid-ups were up to $45 million or about 27% growth.

The lease phase, like I said, went from 21% of our total revenue -- sorry, from the low 20's. I think we talked about last quarter, we grew about 23% for the quarter and 21% year-to-date.

The total, total software license revenues somewhere around $74, $75 million. I mean so -- and representing a 20% kind of core growth rate and like I mentioned some of that, as I mentioned, areas where core can become very difficult. I am giving you kind of like the most conservative view of this. It actually might -- it's probably higher because we had OEM revenues for technologies we provided to Fluent when it was a separate company. And now, those don't count. Those don't double count as revenues; they'd show up perhaps in the Fluent listing while it now just shows as an inter-company kind of like cost transfer. So, that tends to even deflate the core but it will stay strong with that.

The other thing is, we can't track, in fact we've made it a point where we don't care. If somebody is -- we just want them to pick the best technology between a variety of different capabilities. So, if they pick the traditional CFX product versus Fluent or vice versa, we don't care. We just want them to be able to utilize the best technology, particularly from ANSYS that they can. So, the core has been the -- the cores continued good like I mentioned quarter and year-to-date and, of course, obviously the combined's gone well.

Okay. And with respect to your average deal sizes, what kind of trends are you seeing in the business?

I'd say this one -- this quarter -- and it' still is kind of the same trajectory we've had where, I'd say that the -- as the confidence tends to increase, we tend to -- we still tend to have that bimodal distribution where we have a group of the more traditional, in the mid-five figures and obviously from the list, the sampling of customers I gave there is another chunk that comes but at the lower six figure range but in quite a few numbers of new business.

So, continuing to see those progress. Actually, like I have mentioned on several calls, that whole standpoint of having a long-term trajectory with customers that allow us to continually build at their -- largely governed by their -- not so much by their financial capacities but by their ability to absorb and deploy the technology internally. Those are things that in addition to our recurring business base, we think provides a multi-year kind of visibility in terms of growing with the customer; and I think one of the offshoots of that is that, as opposed to them putting in a big chunk of software and then somebody coming a couple of years later and saying "Well, there were problems; we didn't see value", we're kind of demonstrating and helping to generate value as we go, kind of pay as you go implementation.

So, we haven't seen a lot of changes in there. Probably what we've seen are maybe more companies joining that list of frequent purchasers and expanders.

Does the Fluent business, help move your ASPs up or does it--?

No, no, not a real big. Not a major change, one way or the other. And again every time I'm asked the ASP question, when I talk about ASPs, I normally break that down to the atomic level to see what that is to any particular individual license sale. Now, because you mentioned the question about six-figure quarters, we don't have a single product that has a six-figure price on it, which means when we have those orders, it has multiple licenses associated with it. So, I want to make sure we are talking the same thing. When we say ASPs, are we talking about an individual license price as broken down out of a major order, or are we talking about a major order size? And I guess that's a follow-on question to you. I wasn't sure which way you were posing the question.

I guess I'm just referring to when your customers call up and place an order, I mean what are you seeing as far as some of the trends goes? I mean are they ordering more seats or--?

Basically a continuation that I think we're on the -- we are kind of on a pretty good adoption curve with the long-standing customers and that's why you see their names coming up continually. So, it's kind of like water flowing through pipe at kind of a steady state and the tank keeps filling up. But there are more customers, a broader range of customers that are starting to adopt that. It used to maybe the early adopters of that expansion capability were a couple of years ago and now we see more and more of those adding those links.

Okay. I'll let somebody else get on. Thank you.

And we will take our next question from Ruchir Lahoty with Thomas Weisel Partners. Please go ahead.

Good morning.

Good morning.

I have a couple of questions on the industry side. Is there any vertical that has seen some real interesting trends or has seen some really worrying trends?

Okay, I'd say that there is probably -- the first comment I'd say is that in general we've seen more of the bifurcation happening between the leading top flight companies in an industry versus the other participants in an industry. And as you might guess, the innovative forward-thinking ones are the ones that are tending to utilize more of our technology. I mean I think we mentioned the list, the innovative companies list on BusinessWeek and things like that which is predominated by basically, virtually every manufacturing company in those lists are ANSYS' customers.

Apart from that, yes, we see that across all industries, the one thing that's kind of popped up quite a bit in the last year or so though is the energy sector. And far be it from a homogenous quantity also because I've seen it in hydroelectricity generation, wind energy generation, new generations of clean nuclear reactors. I also mentioned the very advanced European consortium for that. We are seeing it in fuel cells, in solar; we're also seeing it in offshore oil rigs and refineries where basically sustainability from wind and flood damage might be an issue; also seeing it in various pipeline kind of transports to make sure that the -- everything from sludge inside the pipeline slowing down delivery to the ability to -- basically the ability to maintain oil flows.

So, we've been seeing that across just a broad range of issues and it just seems to be a very strong standpoint right now.

Okay, and again on the deferred revenue side that was down $5 million on a quarter-over-quarter basis, I understand that September is traditionally a low quarter, but is this in trend or is this higher?

No, no, it's higher on a comparable basis. It is always because of the seasonality of Q3, there is always a drop -- a minor drop from the comparable quarter, which is normally followed then by a rise in Q4 and we don't -- because those are seasonally continually revalidated patterns, we don't worry too much about those. Those patterns have all been particularly good. The one thing that I would point out is that the -- we look at some other metrics in terms of like, in engineering terms, I call it second and third derivatives. But, in general the deferred revenue and business intake in various aspects of our business mildly outpaced even the current performance which is a leading indicator that points us up a little bit. So, yes, those are all well within parameters and those are all positive indicators for us.

Okay. Thank you. Congratulations, good quarter again.

Thank you.

Due to time constraints, we will take one final question from Sanil Daptardar with Sentinel Asset Management. Please go head.

Hello. Are you there?

And Mr. Daptardar did disconnect. And this does conclude today's question and answer session. I would like to turn the conference back over to Mr. Cashman, for any additional or closing comments.

Okay. Well, just briefly in close, still long-term enthusiasm with many encouraging signs. But, guess what? We are going to continue the strong degree of vigilance because lots of stuff happens, and we continue to be bolstered by a strong combination of what we think is a solid business model. We've got loyal customers with high retention. We've got dedicated channel partners that have been with us a number of years and just a pool of what I think are some of the most talented and committed employees around.

So, these are the basic ingredients that have afforded us consistent performance for revenue and expense with an expanding customer base and an expanding base of technology to support our long-term initiatives, all of which I have to say becomes stronger as a result of Fluent acquisition. So, in fact, as we close, I'd like to congratulate the ANSYS and the Fluent teams on yet another strong combined quarter of operations. If any of you ever listen to us on playback, your continued efforts and dedication just basically continue to give us a great foundation for our ongoing success. And with that, I thank you for your attention and we will see you in a few months on an upcoming call. Thanks a lot.

This does conclude today's conference call. We thank you for your participation. You may disconnect at this time.