ANSYS Inc (ANSS) 2006 Q4 法說會逐字稿

Good morning and welcome to the ANSYS fourth quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS] Today's conference is being recorded at the request of ANSYS, Inc. If anyone has any objections you may disconnect at this time.

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

Thanks. Good morning everybody, and welcome to the ANSYS call for Q4 2006 and for the fiscal year of 2006 and with me today as always is Maria Shields, our CFO.

So to begin, we'll summarize the highlights of the quarter and the full year in a general outline fashion and we'll examine the operational results from a variety of the different perspectives as we always do, and similar to recent calls we'll focus on two major themes for the quarter. The first theme is a continuation of a strong sustained performance of the core ANSYS business, and the second is around the continued substantial progress of integration with the recent Fluent acquisition. The net outcome is that both of our major business streams performed extremely well, this in turn yield accretion on a non-GAAP basis and general business results above that of our own earlier projections. We accomplished this while simultaneously continuing the effective integration that helps build our foundation for the long-term future prospects. The ongoing customer enthusiasm certainly seems to underscore this opportunity, but there's still a lot of work that remains to be done. Maria will then update you on our line item, expense performance, balance sheet, cash flows, and provide an update on our current outlook on earnings. After that we will be happy to respond to any questions you may have. So to begin, Maria, our Safe Harbor statement, please.

Thanks, Jim. Good morning and again thank you everyone for joining us to review the highlights of ANSYS' fourth quarter and full year 2006 results. During the course of this 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.

In addition, 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, 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 earnings per share which are non-GAAP financial measures within the context of the SEC's Reg G. I would just like to remind everyone that the non-GAAP financial results and the 2007 non-GAAP outlook that we are 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 and are important indicators in measuring the underlying business performance and trends. Non-GAAP results are used by management in its assessment of actual business performance and to plan and forecast 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 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. With that all on the record, Jim, I'll turn it back over to you.

Thanks, Maria. On a cheerier note Q4 business performance basically represented results above the high end of our non-GAAP revenue and earnings guidance and while we continued to build momentum on a broad range of fronts highlighted by progress in technical integration and customer engagement. As Maria just mentioned, for the numbers I give I'll be using non-GAAP numbers but this is in the same fashion that we have been talking about historically over many quarters. It maintains the consistency with the recent calls and frankly we feel that it gives the closest and clearest indication of the business and provides an apples to apples comparison with past years and quarters. Obviously the most obvious of some of these differences relate to the purchase accounting treatment of deferred revenue, which, as I've talked about on recent calls somehow magically vanishes post-acquisition even though the customers and the cash and the business both remain, but the good news is that after next quarter this will be a very minor and dwindling issue but we want to clarify that now from.

From a high level perspective for the quarter we reported solid financial performance with non-GAAP revenue at $90.4 million this represents 107%, or a little bit more than doubling from last year's Q4 of 43.7 million. And as with last quarter, this growth number and many of the ones that we're going to discuss will seem somewhat meteoric given the inclusion of eight months of Fluent business, but don't lose track of the fact that ANSYS core revenue growth continued in the upper teens for the quarter and year to date also. I'll add that due to some of the rapid integration process that we have been making that the delineation between the the core business and ANSYS -- ANSYS core business and the Fluent business is already starting to blur and will increasingly do so in the upcoming quarters as we continue to further integration technology offerings.

So the non-GAAP diluted earnings per share increased 29% with a non-GAAP EPS of $0.53, up from last Q4's comparable of $0.41. This was also above our guidance and the analyst consensus but it's indicative of what happens in our model when we overperform on the top line. Our non-GAAP revenue and EPS performance for the quarter were driven by a combination of solid top-line performance and continued efficient Fluent integration which helped to yield the accretion above our earlier projections.

Secondly there was a continuation of the strong growth in operating margins, cash flows, and stable business models even on a blended company basis. So a consistent theme over the years. A continued acceleration on the customer front that was a balance of both new adopters and an expansion of longstanding relationships. We actually saw an expansion of cross-selling and deepening customer relationships that we mentioned on previous calls. Much of the revenue upside was in the pipeline but it was business that either pulled forward into the quarter or actually grew in excess of what was originally forecasted. Anecdotally customers said this was the result of basically the rapidly expanding product vision that we had along with the road map we have been enunciating and also the greater competitive pressures that they are facing out there and the role that they think that the simulation technology plays in that.

So if we look at -- in more detail on the operational highlights as previously mentioned the non-GAAP revenue for the quarter was $90.4 million. The revenue was adjusted to accurately represent the true nature of the ongoing business. And like I said, it's just double over the 43.7 million of Q4 2005. Two components of this are the addition of the Fluent revenue and the aforementioned double-digit growth in the core ANSYS business. So as I said both business streams performed well and they actually showed signs of building off each other. Non-GAAP diluted earnings for the quarter grew 29%, up basically $0.53 up from $0.41 per share in Q4 2005. This exceeds the analyst consensus which actually marks the 37th consecutive quarter that non-GAAP EPS has met or exceeded consensus.

Overall non-GAAP operating margins for the quarter were 38%, indicative of the solid top-line results. Adjusted gross margins continued in line with our business model at a healthy 85%, and these remain strong even considering the blending with Fluent. As we continue to further assimilate the Fluent operations into our overall business model we envision that the blended operating margins will continue to move toward traditional ANSYS levels over the next several quarters and, of course, this is after we absorb some of the incremental costs to further integrate our global operations and to bring Fluent in full compliance with Sarbanes-Oxley.

Obviously this performance led to some continued strong cash flows from operations, and this increased over $29 million for the quarter. For the total fiscal year of 2006 we reported total non-GAAP revenue of 282 million, or a 78% increase over the 158 million of 2005. Again with the addition of Fluent and with the core growth in the upper teens. Software license business was actually disproportionately strong but the maintenance and service business also grew in double digits. So the year to date or full year non-GAAP EPS was $1.85, which is a 34% increase of the $1.38 in 2005. The non-GAAP operating and gross margins for the year were respectively 39% and 85%. Again, for the year. And the cash flows from operations were $90 million for fiscal year 2006.

Now, we'll now go through the numbers from the usual different perspectives that we look at, the category of business, geography, customer, a variety of product aspects. So by categories business overall the non-GAAP software license revenue more than doubled with a 139% increase for the quarter and 105% for the full year. Same story here. Fluent contribution which is augmenting strong double-digit core growth. The core license growth was 20% for both the quarter and the year. And this is even considering the fact that some of last year's comparatives included royalty revenue that we were getting from Fluent which really no longer counts as revenue. So that's actually a -- those are conservative numbers I gave you.

The core lease business grew in the teens for both the quarter and the year to date remaining at 20% of both the Q4 and the total year core revenues. Including Fluent, the lease business grew to 36% of non-GAAP year to date revenue, which further increases our repeatable business and aids in the overall visibility of our business which continues quite strong. If we look at paid-up licenses, they increased 52% for the quarter and 42% for the full year. The core growth rates for paid-up licenses were 24% for the quarter and 26% for the year. As I mentioned, maintenance and service growth was also double-digit core for both the quarter and the year to date, with the software maintenance growth greatly outpacing the pure labor-based service work. For the total business, service grew at 66% for the quarter and 47% for the year to date.

On the category of business, while there -- we actually saw a good balance between both the high end and the desktop products but the upper end products definitely saw a disproportionately higher growth. There were noticeable gains from the continuing migration of customers to the ANSYS workbench platform. This is a topic you are going to hear more about on this call and also in future upcoming calls. Our direct and indirect businesses both performed well maintaining a consistent balance of our core business at roughly 50/50 direct to indirect. So the indirect channel continues to strengthen right along with us, including Fluent, about 70% of our overall business was direct.

I mention that this is important for a couple of reasons. First of all, it shows the strengthening in our already strong indirect channel but it also hints at the future opportunity to selectively expand the product portfolio in that channel, as a means of increasing the reach. Business intake, of course, has stayed strong with double-digit core growth which when you combine with the Fluent acquisition has actually allowed deferred revenue to rise above $100 million for the first time in our company's history. For the fourth quarter our already strong core repeatable business remained at 60% while our total repeatable base grew to 66%. And one of the greatest strengths of our business model is the consistent ability to maintain a solid base of recurring or repeatable revenue and basically we believe this is a byproduct of our commitment to reinvest a high percentage of our revenue back into R&D. Even on a blended basis our traditional 20% is still in the upper teens in terms of the reinvestment into R&D. 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 throughout 2006, in fact, we have accelerated the paydown of the debt.

Now, from a geography perspective we saw core growth across all major geographies and of course a much higher growth when you include the Fluent contribution there. We continue to be encouraged by the combination of industry breadth, new customers, and existing customer expansion. We still have a couple of areas that provide opportunity for improvement, but as we mentioned last quarter, these fortuitously fall in areas where integration activities can play a strong role. From a total business perspective North America increased at 110% for the quarter, an 88% improvement for the year to date. The core business continued to grow with a 15% increase for the quarter and a 22% increase in the core business for the full year. Particularly strong was the performance of our major account-oriented direct sales offices. Each of these grew for the year and then, actually, all but one of them grew in excess of 28% for the quarter and 30% and above for the year in core terms. In aggregate these offices have grown well in excess of the ANSYS core growth rate for both the quarter and year to day, and at a composite rate in excess of 40%.

Major orders in North America came from longstanding and new customers such as Pratt & Whitney, Honeywell, General Electric, Train, Parker Hanofin, John Deere, Raytheon, Aerojet, Tyco, Hitachi, Lockheed Martin, Bisdeon, Bechtel, Boeing, General Motors, FMC, 3M, and the lists are getting fairly long these days. Europe continued to perform well also, with an overall 105% growth for the quarter and 72% for th year to date for total company. Overall the core growth rate was over 20% for the quarter and 16% for the full year. It was fairly balanced across all the sub regions of Europe. There was a mild positive currency effect for the quarter, but basically it was neutral for the year. The largest deals in Europe included, well, both names that you have heard us talk about in past calls as well as a few addition from the Fluent side and some new customers such as Siemens, VOIP, Alstum, Vestus Wind Systems, I have been talking about this resurgence in energy now for a while, Piagio, Snecma, ILP, FGN, RWE Nuclear Power, Bessia Dugoti, British Nuclear Fuels, Kinetics, BCN, Volvo, DuPont, so again, a broad range of industries, new business, repeat customers, et cetera, across the board.

Then finally, our general international area or largely the governed by some of the Asia Pacific businesses was -- it was slightly more of a mixed bag as we discussed last quarter. While the region grew at 106% for the quarter and 75% for the year to date, it was a two-part story. The first part is core growth rate for the year in the single digits for Japan but in the upper teens for the rest of the region. We mentioned in earlier calls that we're looking forward to leveraging the strong Fluent presence in Japan as a basis for ramping up the future business flow there. In fact, in Q4 the core business grew about 10%, but there's still a lot more that we'd like to do there. The rest of the region grew at 20% for the quarter for a combined mid teens growth.

Currency impact was negligible for the quarter and actually slightly negative for the year. So no major swings there. Key customer engagements in the region included InfoTech, Cummins, Canon, Ishikau Ijima, Heavy Industries, Toyota, Samsung, Petrobras, Shansi, Applied physics, Korea SE Power, Goodrich, Emerson, Mather & Platt, so there's also a nice mix of Fluent business. We saw a variety of orders from local-based businesses as well as the expected multinational expansion in that area.

So as a continuation of what we have spoken about on the last few calls. We are continuing to see industry breadth and increased penetration within our strong and broad customer base and the pipeline of new opportunities is strong. Every day we get a mix of global opportunity and uncertainty but we are seeing continually growing interest particularly in light of an expanded ANSYS geographic and technical presence. So in spite of the everyday worries like energy costs, higher labor costs, healthcare expenditures, currency fluctuations, geopolitical events, any of which can affect customer buying decisions, we're basically encouraged that our existing and new customer attainment has continued to grow nicely through 2006, and in particular that the customer reception to our broadening technology and service base has been so strong.

So in summary, geographically strong balanced regional growth with a couple of areas for improvement. There's good industry breath, there was a very strong major account activity, continuing strong performance in Europe with good balance, continued momentum in North America, progress in GIA basically virtually everywhere but also with an ability to improve everywhere also. So as we head into 2007, a couple of pluses here. We have actually already merged our customer facing organizations, and while this has been a huge task, it was necessary to provide the focused, consistent foundation for the future. Our combined leadership teams were able to get this process going in the field with minimal disruption in business results obviously. We have already started to recognize synergies in terms of joint sales opportunities and even the co-location of some of our remote teams. So very good progress on this front.

We have been talking about this for almost a decade now but we continue to examine our sales strategies in each of the key geographies. We'll continually align the sales and distribution investments we have been making in response to our customers' requirements and to the general market conditions. But top priority is going to be given to the ongoing integration of our combined field teams to meet the increasing customer interest that we have already started to see. So that is kind of an overview on geography.

From a product revenue standpoint, we basically saw no significant changes in either the trends or the guidance we have been talking about on a number of calls. As mentioned earlier consolidated paid-up software revenues grew by 52% quarter to quarter, and 42% year to date. The core paid-up license has been notably solid at 24% for the quarter and with a 26% growth for the full year. As I mentioned, lease business has grown both in total and in core. All parts of our product spectrum did well. As I mentioned also, with a disproportionate bump though to the upper end.

ANSYS workbench continued to gain traction, and we're already expanding its capacity through the utilization of new Fluent capabilities. The good news is that we already have a Fluent implementation demonstrable in workbench and the even better news is that we have been able to specify some dramatic improvements for our integration architecture that will become manifest in 2007 and beyond, and basically these are direct outcomes of the commitment and progress of the technology integration teams and response to our key customers across the globe. ASPs for the quarter basically remained stable at the high end, actually increased slightly at the low end, not to a statistically overwhelming mark but noticeable nonetheless.

And then from a qualitative standpoint the summary is that the broadest, deepest set of integrated simulation tools has continued to get broader and deeper. In the past few months we have released Fluent 6.3, IcePack 4.3 and most recently ANSYS 11 which just became available this quarter. Fluent 6.3 is a significant release focusing on core advances in all, there's probably more than 100 new capabilities aimed it at increased efficiency, accuracy, and robustness including high end enhancements to moving mesh, reacting flow, multiphase flow situations. Basically these capabilities are ideal for a range of critical applications, an example of which internal combustion engine efficiency and emissions modeling and a number of other things that are very germane these days. In addition, Fluent capabilities have seen a different manifestation in the release of version 2 of Fluent for CATIA V5. In a manner similar to when we made ANSYS capabilities available within the autodesk inventor series Fluent for CATIA V5 continues the strong focus on a full product lifecycle management integration, and provides CATIA V5 PLM users with fully generative bidirectional associative -- association between 3-D modeling and analysis.

IcePack 4.3 released a number of new technologies for thermal design of complex electronic systems including some advanced interaction with electronic design world and e-CAD systems with some complicated high fidelity handling of traces, and vias, a lot of things that used to be handled through assumption sets dealing with difficult geometries. Additionally it provides enhanced libraries including thermal electric cooler modules and new material, heat transfer coefficient correlations and modeling of temperature-dependent powers. So combining this with the broad suite of ANSYS applications, such as the new random vibration capabilities for mill standard shock testing, new e-MEG capabilities, and even a couple field elements for electro elastic analysis, similar to what you'd see in dielectrics, a lot of ability to address a very potent electronics market.

ANSYS 11 is just a continuation of our decades-long commitment to providing our customers innovative best in class simulation products, simply put. It basically represents the further organic outgrowth of our existing multiphysics analysis, optimization, meshing, and multibody dynamic solutions for simulation driven product development. Among the new capabilities are the use of our unique variation on technology solver which allows very complicated nonlinear and transient analyses to be done in the range of four to five, 30 times faster, taking advantage of the range of meshing capabilities throughout the ANSYS family of products. We have been able to create a new generation of multiphysics adaptive modeling that you will be hearing about in the near future with some major customer endorsements. There's been continued advancement in our wide array of advanced structural dynamics capability, integrating frequency response and time history of flexible structures with dynamic systems for vastly improved design performance simulations. A lot of additional things.

Advanced material models, elements for everything from composites including crack initiation and delamination failures that are particularly suitable in the aerospace and automotive world and isotropic biomaterials and some of the advances we've been making into the biomedical industries, and even soil models that's been driven by to the construction but also the energy, customer bases that became available in 11. So there's been a significant progress to what's already a significant suite of capabilities. So rather than go on, I'd probably invite anyone interested in more detail to visit our website at ANSYS.com for more details because we could easily swallow up a few days covering some of the details of this.

One thing that is worth a brief discussion is the ongoing success of our integration platform. It's kind of like integration is as integration does, I guess. The ANSYS workbench platform has been continuing to make gains in giving customers the freedom to evolve their simulation capabilities without sacrificing best in class capabilities. The architecture has already allowed us the ability to provide the embedded PLM integration as I mentioned, but even quickly provide functionality when the specific PLM systems as mentioned like with the autodesk and CATIA V5 examples. It's also allowed us to cross seminate capabilities from different disciplines to make each one stronger.

Finally, recent acquisitions and the expanding array of partnership benefits as we release the workbench integrated version of our recently acquired Autodyne product and we've already, as I mentioned earlier been able to host a Fluent prototype in the workbench after only a few months. So in general this provides a ground swell of new opportunities from a technology standpoint. It also implies that there's also still a lot of work to be done but it's totally fair to say that the progress has exceeded our expectations to date. So in conclusion, basically a very strong quarter, quantitatively and qualitatively. Continued financial and market performance on a stand alone core basis and continued positive impact from the Fluent acquisition.

The progress of the past few years on all fronts is a direct result of the continued focus that we have been hammering and the execution against our long-term strategic direction and a very solid business model which has allowed us to provide sustainable revenue and earnings growth but also quickly respond to market and economic opportunities. So we have maintained a significant investment in technology. We have maintained a significant investment in customer service. And that's allowed us to continually expand our global coverage and basically that global coverage transcends industries, it transcends geographies and basically positions us quite well. This has allowed us to continue our pursuit of meeting customer expectations while also maintaining a financial discipline to meet the corporate commitments to our stakeholders. Our core performance and the addition of Fluent I think only accentuate this point.

Over the long term we have demonstrated our 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 much larger scale of operations we continue to drive toward the long-term vision we have been espousing, and while there are many uncertainties out there our long-term optimism remains intact and with even higher confidence. So with that I will turn it over to Maria Shields, our CFO to provide you with a more detailed look at our financials including expense structure, balance sheet highlights, as well as some other key factors of this quarter's business and outlook. Maria.

Thanks, Jim. For the next couple of minutes I'm just going to go through a brief recap of Q4 and the full year 2006 expense highlights. I'll provide you some guidance regarding our outlook at this time for Q1 and the full year 2007 and close with some comments relative to balance sheet and cash flow highlights.

So starting off with cost of sales, excluding acquisition related amortization and the impact of stock-based compensation, which combined totaled approximately 5.1 million, cost of sales for the fourth quarter was 13.9 million and that compares to 5.4 million in the fourth quarter of 2005. This resulted in an overall non-GAAP gross profit margin of 85% for the quarter and for the full year of 2006, non-GAAP cost of sales, which exclude a combined total of 14.8 million related to acquisition related to amortization and stock based compensation were 41.9 million and that compares to 21 million in 2005 also resulting in a year to date non-GAAP gross profit margin of 85%. The comparative increases over last year's fourth quarter and 2006 full year cost of sales totals are largely related to the inclusion of Fluent's operations in the 2006 reported results since the May 1, 2006 acquisition date, as well as increased third-party royalties and higher salaries, incentive comp, and headcount related intents.

Moving to SG&A for the fourth quarter our total SG&A expenses excluding about 1.4 million of stock based compensation were 27.3 million and that compares with 11.4 million in last year's Q4 and for the full year SG&A expenses net of approximately 4 million of stock-based compensation totaled 82.9 million compared with 43.3 million in the prior year. The increase in expenses as compared to the prior year's quarter to date and annual figures were largely impacted by the inclusion of Fluent in the 2006 operational results, increased salaries, incentive comp, and headcount related expense, the inclusion of about $550,000 of incremental costs expended in connection with the ANSYS biennial International Users Conference that we held in the second quarter of '06, and these expenses were offset by an overall reduction in bad debt expense. In the area of research and development, our total expenses net of about $500,000 related to stock-based compensation for the quarter totaled 14.7 million or about 16% of non-GAAP revenue, and that compares with 8.2 million in Q4 of last year. On an annual basis our total investment in R&D excluding about 1.4 million in stock based compensation reached 48 million or 17% of non-GAAP revenue and that compares to 30.7 million in 2005. The quarter to date and annual comparative increases were related to once again the inclusion of Fluent's operations since May 1, as well as an increase in salaries, incentive comp, and headcount related expenses. I'd also like to note that during 2006 we did capitalize about $900,000 of internal development costs. That compares to 270,000 last year, much of that related to the broad array of products that Jim mentioned earlier.

And as we previously disclosed the 2006 GAAP results, including a -- included a one-time in-process R&D charge of 28.1 million that was recorded in the second quarter, which specifically relates to the Fluent acquisition. For the fourth quarter and the full year of '06 we delivered solid non-GAAP operating margins of 38 and 39% respectively. During the fourth quarter we did incur about 2.6 million in interest expense on the outstanding debt that we incurred in connection with the Fluent acquisition, and on a year-to-date basis interest expense ran about 7.8 million.

Our consolidated GAAP effective tax rate for the fourth quarter and the 12 months of '06 was approximately 32% and 57% respectively. The fourth quarter tax rate I will point out was favorably impacted by about $900,000 or $0.02 a share, and that's in connection with the retroactive restatement of the U.S. R&D tax credit for full year of 2006 that took place in Q4. While the year to date tax rate was unfavorably impacted by the nondeductability of the 28.1 million second quarter in-process R&D charge.

We are currently expecting effective tax rate of approximately 33 to 35% for the first quarter and the full year of '07. The 2007 effective tax rate will be adversely impacted by lost export benefits under the transaction -- transition rules of the American Jobs Creation Act. I would also like to point out that our current estimated tax rate for Q1 and for '07 that I just spoke about does not take into consideration any impact from the adoption of FASB interpretation number 48, uncertainty in income taxes, which we are currently undertaking and we will adopt in the first quarter of 2007. For the fourth quarter, ANSYS reported non-GAAP EPS of $0.53 on 40.4 million diluted shares and that compares to $0.41 on 34.1 million shares in the fourth quarter of last year.

For the full year non-GAAP EPS totaled $1.85 on 38.2 million diluted shares, and that compares to $1.38 on 33.7 million shares last year. Currently based opinion our visibility we're projecting non-GAAP EPS in the range of $0.48 to $0.50 for the upcoming first quarter and a range of $2.05 to $2.08 for the full year of 2007. Our current GAAP earnings outlook which includes acquisition related amortization, the purchase accounting effects of the Fluent acquisition and the impact of stock-based compensation is $0.28 to $0.34 for the first quarter and $1.34 [sic, see press release] to $1.46 for fiscal 2007.

I would like to highlight that these earnings estimates do take into consideration the incremental expenses that will be incurred in 2007 as we continue to integrate the Fluent acquisition. These include costs relative to our financial system integration, the buildout of common business infrastructure, the adoption of FIN 48, and Sarbanes-Oxley compliance for the Fluent subsidiaries, all of which are important to building a solid foundation for our future growth and in the aggregate equate to several million dollars of incremental investment over 2006 results. Taking a quick look at the balance sheet at December 31, it continues to remain very solid. Our total cash and short-term investments balance at 104.5 million. Our total growth deferred revenue reached over 101 million, and I'd also like to point out that as it relates to the initial 20.1 million reduction in Fluent deferred revenue, related to the purchase accounting, of which 5.2 million and 18.4 million negatively impacted the Q4 and year to date 2006 reported GAAP revenue results, approximately 1.9 million remains and will adversely impact Q1 2007's GAAP results.

For those of you who may be new to the ANSYS story we have provided detailed explanation relative to this particular aspect of purchase accounting in this morning's earnings release as well as our previously filed third quarter 10-Q. And as we previously reported in connection with the acquisition of Fluent the Company did borrow approximately 198 million from the syndicated banks. The December 31, balance sheet reflects the current remaining outstanding borrowings of approximately 122 million under that facility and the interest rate on the debt is variable, and is set at an average rate of about 6.2%, a portion of the debt has an interest reset date at the end of the first quarter and the remaining portion resets at the end of Q3 of 2007. And the Company generated 89.7 million in operating cash flow in fiscal 2006, which provided us with ample ability to not only fund the business but to aggressively pay down the debt. So with that I'll now turn it back over to Jim.

Okay, thanks, Maria. So to recap, first, strong financial performance on all major parameters of the business, revenue, earnings, margin, cash flow, business base, visibility, and this is true for the stand-alone core business and the combined operation. Secondarily -- or not secondarily, but number two, strong continued integration of Fluent which positively impacted the quarter's non-GAAP revenue and EPS. Third, increasing customer activity accentuated and underscored, in fact, by industry and geographic breadth and increased areas of adoption including accelerating interest in our combined offerings. Finally, a rapidly expanding product portfolio augmented by partnerships and relationships in all phases of the business. Technology, distribution, and even customer partnerships.

The long-term outlook, as I said, stays bullish. For 2007 we're raising our estimates from the last call based on the newest data. As a result of early integration and rapid technology sharing as I mentioned also some of the comparative information going forward will be increasingly difficult to report but we'll try to parse those out as we have on recent calls. We anticipate a good Q1 performance with non-GAAP revenue. Again, that deferred revenue issue will affect us for the first part of the year, but the revenue didn't really vaporize. The non-GAAP revenues will be in the 85 to $87 million range with non-GAAP earnings in the $0.48 to $0.50 range. For the fiscal year 2007 our guidance is for non-GAAP revenue increasing to the 362 million to $365 million range with non-GAAP EPS increasing to the $2.05 to $2.08 range. But we'll maintain an eye toward ratcheting up the performance if the positive signs sustain themselves or even increase, and I think we have demonstrated that over the past few years. With that we are now prepared to respond to any specific questions you may have.

Thank you, Mr. Cashman. [OPERATOR INSTRUCTIONS] Our first question, John Maietta with Needham & Company.

Hello?

Hello.

Can you hear me.

Yes.

Great. Hey, Jim, first question I had was, you had talked about seeing a good level of cross selling between the ANSYS and fluent base. Where did you see the most traction? Where would you expect to see cross-selling pick up in the next few quarters?

Well, just to clarify, when I say -- good is a relative term, we saw it picking up, we saw it accelerating we haven't seen it hit its full stride yet. I want to be clear and fair on that. In essence we -- actually we saw it across numerous geographies, and the interesting part is that we saw it at major accounts in Europe early on in the process. We then saw significant major account activity in the second half of the year in North America, and I think maybe one of the least anticipated ones is we actually -- sometimes you've got indirect channels that carry a number of different products and even starting to see them, for instance, over in Asia Pacific start to interact. So it's -- it's been a -- it's been incubating and percolating across all the geographies, but it has been actually very significant. It's one of those things you hope for, but it doesn't happen automatically, and it definitely has happened, and I think the other thing is that -- as the organization starts to see the success and the power of it, that tends to draw a lot of people that would like to continue that. So it's not like there's any industry, it's not like there's any one pocket or geography. It's more of a general bubbling process.

Got it.

Did that make sense?

That makes perfect sense. Thanks very much.

We'll go to our next question from Ruchir Lahoty with Thomas Weisel.

Congratulations on a great quarter. My first question relates to industries. What verticals have you seen special interest or special growth coming from -- or any new verticals that you are seeing interest coming in from?

Well, the first thing is that, as we have mentioned it's usually the leaders across all industries that tend to pick up the upside of this technology being taken to a new generation of usage. So as you can tell, even from some of the long list of customer names I was giving, it's across many, many industries. The other thing is, as broad as our user base is it's kind of like we have got a footprint in virtually every industry, but if I had to point out one that you could also kind of infer from the list of customer standpoints, we have been -- there has been an increased general interest in the overall energy producing fields, and that's everything.

In previous quaters -- we didn't talk about it it this quarter but in previous quarters we talked about the resurgence in hydro power and efficiency of hydro turbine generated power. We mentioned actually about a lot of the wind farm technology but this year -- this quarter I think we talked about vestas and some of the other areas that are driving that. A lot of input into kind of a rekindling of the nuclear industry, obviously the strengthening of the refining and offshore drilling platform type of technology, so it's been pretty -- it's been pretty pronounced across all that, even new generations of different kind of energy plants, hydrogen energy, fuel cell. So that's pretty predominating. As you might guess, like I said, across all industries, but starting to pick up a lot on the electronic side and continued kind of interest in the biomedical, which, of course, is very broad in and of itself. It has electronic devices, it actually has modeling of human tissue and prosthetic devices and things like that, but that's probably a good overall summary. Can you think of anything else, Maria? No, I think that's it.

Changing tracks, on Fluent's site, has the R&D team and the operation and support team been integrated or is it still some time away?

Well, no, as I mentioned, it's probably two particular things, the first of which is, as I mentioned the customer facing functions have been fully integrated. In 2007 they are -- it is one team. It doesn't make sense to have the breadth of this integrated portfolio and then it be like these office suite products trying to sell the spreadsheet separate from the word processor and things like that which would be kind of goofy.

On the technology side even more interesting because very early on in the process, we gave the technology teams with all of the opportunity ahead of us to map out what they thought would be the ideal organization, and then we supported that decision. And as a result, there are very few people in the combined technology organization that continue to be in the same silo as they were pre-acquisition. We have actually set up a much broader and complete organizational structure, and the product road map, in fact, is predicated on that.

So I'd say the vast majority of people are aligned into different ways, basically also doing that to try to remove some of the natural redundancies that you might expect in two different families, three different families of software that were coming together, being able to take best practices from each of those, so, no, that was done -- first of all, that was done very quickly and it was also done, basically that's why I have been talking the last two or three calls about how amazed and I guess I could say proud I am of the technology teams and how they tackled this problem because sometimes you run across a resistance to change or being stuck in the -- in old methods of doing things, and they really went after this from an opportunity standpoint, and I think there was a lot of mutual respect that came into that, and I think the structure they came up with is a testament to them but it also is really good for the future foundation. So, I mean, I had to put a plug in there for some people that did a really good job. The short answer to your question is, yes, the technology teams have gone across -- have transcended the traditional boundaries already.

Okay. Just a follow-up, what's the headcount at the end of this quarter?

1400.

It's around -- a little over 1400, south of 1500.

Okay. Final question, and then I'll get back into the queue. How is the design space -- what response in design space been in this quarter?

When you say the response is I'm not sure I understand. Design space, we continue to sell as a low end entry opportunity, but actually what we are seeing now are more people are wanting to get access to the entire suite, and there are ways of getting low-end capability that is inherently scalable up to the upper end of our products. So design space is a product that allows channels to basically offer that capability. It continues to be a good part but most of our major account activity is being driven by more of a workbench-centric kind of activity.

So the only reason I spell out that dichotomy is that there is a difference -- I mean, some people are asking about design space, the product, and some people when they say it it, they're speaking of designer simulation tools. And we have a way of providing designer simulation tools in our major accounts through a scalable workbench offering that allows them to interoperate with the high-end simulation needs also. But design space, if you're just looking at it from that product standpoint, it continues to be a solid part and an entry point of our product road map.

Okay. Thank you. I'll get back into queue.

Our next question [Synial Asidar] with Centennial Asset Management.

Jim, thanks. You mentioned in the call that there was disproportionately higher growth in the high end system. Did you see any particular things going on in the marketplace that caused that or did you have any kind of changes in the sales policy during the quarter that the price points between the low end and the high point were not high enough that caused them to buy more high-end product?

There wasn't a price sensitivity. In the past we have had -- in the past we have seen where other companies may come in with different discounting schemes. We didn't have anything out of -- and that can create a pressure, but we didn't have -- we didn't really have any of that that was noticeable on a pandemic basis at the Company level. What we really saw was that people were trying to use the broader range of the capabilities, and essentially it was more -- it was almost like a -- I wouldn't call it an up-sell but I'd call it an up buy from the customer base. So in particular, ANSYS multiphysics and ANSYS mechanical, which are -- one is the high end multiphysics offering and one is kind of like the ultimate of our purely mechanical structural tools. Those came up quite a bit. Likewise, on the CFD side of things it started to go for higher end capabilities, and then frankly some of the higher end sales were also ones that were, as I mentioned before, the broader portfolio sales which of course then takes those two previous comments I made and takes that to a completely different level. But there wasn't -- I think you also asked a question in there, was there anything we did from a sales -- no, there was no pricing differential, there was no -- there were no extra variables thrown into the equation. It was a natural customer acquisition process.

So it was more like a demand from the customers. Do you see that in all the geographies, or it was particularly strong in North America? And in other areas of the world you are seeing that, okay, the demand for the lower end products continues to be strong?

I'd say that probably there was a correlation. I'm kind of computing this on the fly but there was a correlation between the more traditional industrialized pockets and that increased on higher swell. It was probably also strongly not so much driven by geography, because now it's still companies that buy the software and companies sometimes transcend, in fact, very often transcend basic geographic borders, and I'd say that some of the major accounts that we have been dealing with that have been on a multiyear ramp-up of assimilating these capabilities, I'd say there's more of a correlation to that, that we saw.

We'll take our next question from Tim Fox with Deutsche Bank.

First question on the license upside, I think, Jim you addressed it in some detail but I was wondering if you could talk about the large deal activity in the quarter and the pipeline there.

Well, like I said, first of all, the pipeline, it almost seemed like it was turning out to be a baseline as opposed to a pipeline. As I mentioned we had things we had slated for the first half of this year that actually came forward, I guess one of these -- some of them said, hey, sometimes it was like additional money in the budget, sometimes it was a function of saying -- I'm just telling the anecdotal information a customer shared with me, that we have demonstrated we can get value from this so we want to start extracting the value more quickly. That would be a reason for pull-through.

There were some where the orders actually came in above what was on our forecast methodology, where they were deciding to do that. Now, I don't know if that's a function of increased demand or if it was the previous phenomenon I just mentioned. So that was probably the key thing, but we saw the opportunities continuing to build, and we're always a little bit careful about taking customer accolades or anecdotal information and extrapolating that to what we think the business will grow to, but it certainly has been tracking along with that standpoint.

Okay. And along the same lines, for Maria, has there been any change at all to the lease versus buy mix from Fluent? Obviously if some of these fluent customers decide to buy versus lease that could drive incremental revenues up in the near term. But have you seen any shift there at all, and do you anticipate any?

We have seen no major trends. I would suggest that there may be some in the future not driven by us but driven by customers who may be customers of both the the legacy ANSYS and legacy Fluent who, years ago made the decision to standardize on assets and decided to go the capital route and now just want to ramp in all of their simulation under a capital model as opposed to a lease model, but we are not doing anything to incent the sales force to drive that. We are very happy to have them to continue to lease and give us that recurring business that Jim talked about as an important part of our model.

In fact, we have actually taken extra steps to further neutralize that potential migration with some of the incentive standpoints. I'd say actually probably one of the -- I think Maria has got one point there that's particularly key, is that we have always neutralized it, which probably explains why even as we grow our lease business maintains even on a core basis maintains a steady percentage. But I think there was some standpoints where it certainly takes uncertainty out of the customer's minds in terms of a technology people to partner with, so that increased certainty sometimes brings in the financial people, and they will make the decision.

So Maria is exactly correct in the assessment that that's driven by the financial preferences of the customer, but I can take one example of a very significant order, one of the ones I mentioned, but I won't specify by name, but they actually, as part of that continued investment with us, they did buy some licenses, but they actually reupped some of the length of the existing leases they had. So they actually maintained it, and this is one very significant data point with a significant dollar number attached to it. So we're trying to -- basically, we are trying to keep the fidelity of that keep our basic business practices of saying, listen, we want a sustainable business, we like the visibility, we have talked about it for years in terms of that, we want the customer to be able to decide and at the end of the day if we don't serve them then we deserve what comes as a result of that. So we're going to -- the lease business continues to be an important part, and we want to provide a number of options for our customers and basically knock down some of the barriers to them acquiring the software.

[OPERATOR INSTRUCTIONS] We will move next to Jay Vleeschhouwer with Merrill Lynch.

Jim, this is Woojin Ho for Jay. Couple of questions. Aus look back at your past several years of growth, how would you rank the following contributing factors? One, customers displacing physical prototyping. Two, new end markets. Three, cheap competing hardware. Four, ANSYS product refresh schedule. And/or five, sales and channel strategy? It's probably going to be some of each but as you look ahead do you see any differences in these influences?

Well, the standpoint is that there's probably one that you haven't mentioned there, you talked about cheaper hardware, but increasing and -- increasing cost and scarcity of the engineers that are actually doing something and using the software to amplify that, clearly there's been an increasing need for these kind of capabilities. So part of it is having the technology, and so I'd have to rank in the upper half the portion you mentioned to our continued investment in the technology. Secondarily, though, if you have got that best product and no way to really engage the customer, of course, it can wither on the shelf. So I think that your -- I think your fifth item was related to sales and distribution and some of the services associated with making these things a success. So I'd have to put that in an upper tier also.

I think displacing -- I think you had displacing prototypes. I think that's one aspect of it, but that's one of many comparative cost accounting measures for determining an ROI, and the thing you have to realize is that the kind of virtual prototyping we're talking about, even though people have been using that term for years, is really people are only nipping at the iceberg right now, the 10% that's above water, because there's so many technological advances that need to happen to make that an everyday occurrence very early on in the design cycle. That's why we have been so committed to the increase in computing efficiency, the problem sizes, the range of technology, as well as pioneering ease of use capabilities and CAD integration type of technology. So that continues to be an issue but I'd hate to just parse it down to that one aspect and albeit that is an important -- that is an important aspect. So that gives kind of a rough ranking given the fact that statistically I probably couldn't go one, two, three, four, five, in that particular order, but that gives you kind of an idea.

Then also the other thing that's really driving this is that the whole competitive landscape with our customers amongst themselves have changed, and therefore, being able to drive competitive advantage, not -- reducing a prototype is one standpoint but getting that stream of innovative products out there is in particular the very key standpoint because that's what's driving the customer success, not necessarily saving dollars here. Saving dollars is important but you need to have a steady stream of products that come out at the right time, capture the customer's imagination and proceed as advanced. So you are facing functionality versus time versus cost. There's a huge continuum there that all need to be balanced, and simulation is one key aspect of that.

All right. My follow-up is are there any particular markets or individual customers where the number of simulation users is growing significantly, or is the license capacity the main driver to the total software revenue growth?

I guess I didn't understand the second part of your statement, but I would say that first of all, as it's always been, the industry is under the most competitive pressure or government scrutiny or I liability issues. Those are the ones that always -- they tend to take it first. when it's got an early start almost a half century ago with aerospace, failure is not an option lind of mentality. well, these days, whether failure is a tire problem, an exploding battery in a laptop, or whatever, there are many ways that failure can manifest itself to the detriment of a company. So those things are changing. Now, the second part of your question I'm not sure I -- could you maybe restate that, and then I'll try to make sure I understand it. Hello?

[OPERATOR INSTRUCTIONS]

I'm sorry. Maybe if we can go to the next question, then let them back in. Again, I wasn't sure -- I wasn't really sure I caught the second part of that question and I wanted to make sure I understood it.

Your line is open.

Thank you. Jim, how much more license capacity do you think you have remaining to continue to drive revenue growth?

Oh, my gosh, like I said, first of all, why would we even stop until every engineer can -- I mean, every engineer should be able to utilize this technology. I mean, ten years ago, people would have laughed if you said every engineer is going to have a computer on their desktop running word processing software. So why not allow them to amplify and solve these kind of things. But there's a lot of things in terms of ease of use, breadth, fidelity of application that needs to go on there. The second thing is, if you look at all the factors that people are trying to balance, my goodness, there's -- it's not -- do not think of this -- do not think of this market as being driven by the number of users, because each user can be simultaneously using a number of licenses to simultaneously look at a range of different phenomenon. Because all of those things are highly important and the companies are under time pressure. As you mentioned, the cost of hardware going down quite a bit. The cost of time becomes a governing factor here.

So I don't -- there's a lot of things we have to do to bring that barrier of entry down. For instance, if people were using -- if people still had -- if the computers were a ton faster but people still had to punch cards and feed them into a computer we wouldn't have so many home computers these days. There's a lot of usability things that have to be addressed. Power usability, convenience, availability. There's a lot of ground that still needs to be covered, but we're trying to meter our capabilities at the adoption -- or adoptability rate of the client base out there. But I don't view this as being anywhere near a saturated market. But there's just a lot of work that needs to be done.

Can I squeeze one more in on GLs?

Your line is still open.

Great. Jim, question about Japan. I understand that you want to leverage the Fluent base to grow your Japanese business. Is there anything about the conditions in Japan that may be limiting growth given that your other CAD and PLM compadres have seen some issues in that region?

Well, yes, but -- and first of all I want to make sure, we're not leveraging the Fluent installed base. We are leveraging an organization and an infrastructure there that allows us to work in partnership with a channel partner there to grow it. So a first clarification. Second of all, yes, macro -- the macroeconomics in a geography always play a factor, but I don't know if you -- if you were a listener on calls a few years ago. People used to be surprised, for instance, just to take one example, of why we were growing so robustly in Germany when everybody else was having problems. At the end of the day with the problems we're solving, macroeconomics can play a factor, but superior value will tend to be recognized in a wide range of geographies. So while that's a factor that's not this insurmountable mountain that we have to push up. There's a lot of things that we can do operationally to improve our prospects there. And that's what we're focused on. That's the part we can control.

We'll go to our next question from Barbara Coffey with Kaufman Brothers.

Thank you. I will be quick. When you're looking at the sales force, both direct and indirect, I know that you guys were cautious on letting sort of Fluent people sell ANSYS and vice versa. Can you sort of give an update on where you are in sort of that cross-selling, or having those people sell those products and sort of what the path is going forward?

First of all, there are different layers of caution. We want to make sure that we still maintain the same levels of customer satisfaction, we want to make sure that there was cross training. Frankly, we didn't want -- as we were combining these we didn't want to break some good momentum on both sides, but as I mentioned the customers' facing organizations have come together. We continue to ramp it up. So if you look at it overall, probably -- there's several things that go on. We have different functions where people still are subject matter experts. They are very deep, they are brought in to back up a general portfolio sales force when they are up against the -- maybe the Ph.D., heavyweights, or some of the key subject matter experts at a customer. So we deploy that at the right time as opposed to having to them try to build the overall customer relationships. We also have some however, that have broadened into being overall -- overall portfolio reps can represent the overall ranges of simulation and then bring in the subject matter experts as necessary. So there's been a good migration there, but I'd say probably we're somewhere in the 130 to 140, 150 range for those overall commission-based kind of portfolio or high end salespeople.

And internationally, is it the same as domestically in the cross selling and sales force being cross trained?

In general, yes, it's the same methodology where some are cross-trained and some remain subject matter experts, because we have customers that are all, at all ranges of evolution of doing that, and we have many customers, even at our high end broadest range, where we have corporate relationships. However, when it it gets down to user bases they might be organizationally historically set around a certain discipline. And so we need to be able to cover that and cover that with excellence as well as we have to be able to offer up the complete portfolio.

Our next question, Scott Blumenthal with Emerald Advisors.

Good morning, Jim and Maria.

Good morning.

Maria, you're not getting any help from me with this financial systems integration. Okay.

Is that an inside joke?

Scott helped us years ago.

Oh.

When we did a prior platform.

Okay.

Go ahead, Scott.

Probably multiple prior platforms. The deferred revenue that we see, the record 100 million, can you talk about the run rate there? Does that represent 12 months, 18 months, how long is that going to take before you get that back into--?

For the most part it's roughly 12 months. A small piece of it may go into 2008 but the majority is definitely 12 months out.

We have some that actually are slightly shorter than that, but on balance, I mean, 12 months is the vast, vast majority. I'd say probably easily 90% plus without getting out a calculator.

Great. Maria, you mentioned in your comments the GAAP diluted earnings per share, 1.34 to 1.46, and the press release said 1.37. Should we go with the 1.34 or 1.37? Not that it matters so much, but I didn't know if you misspoke or what the real--?

1.37 to 1.46.

I thought that you had said -- I thought it was 1.37 in the press release. I thought you had mentioned 1.34.

No. Probably $0.28 to $0.34 for GAAP for the first quarter.

Okay. And one last thing. Very good. One last thing. The plan is still to get through the balance of the debt by the end of this fiscal year? Am I assuming that correctly?

I would say the plan is to continue as cash flows allow to aggressively pay it down. I think you would be probably a little aggressive on assuming that it would be cleared out in 2007. Because as I said, I mean, we have got -- we'll be expending capital on building out common infrastructures, so we'll continue to aggressively pay it down, but I wouldn't make that assumption.

In all fairness, we have just basically said we are going to look for those opportunities. We haven't put together a time table. You can look at some past performance and maybe infer some stuff but as Maria also mentioned, we are dedicated to first of all getting the financial systems converged. We are talking about Sarbanes-Oxley compliance for the Fluent subsidiaries. We are trying to tackle this stuff with FIN 48. So there's a lot of things on there. Again, we're going to build the foundation and we are also going to be preparing for the future and to whatever degree the strong cash flows allow to us balance that and also continue to pay down the debt. We'll look to that with a high degree of desire, but, on the other hand we also have the metrics that allow us to support even the current level or the existing schedule.

Ladies and gentlemen, due to time constraints we have time for one more question. For any additional questions or comments, please contact the company directly. Now our final question will come from Jason Rogers with the Great Lakes Review.

Hello. It's actually Greg Halter for Jason.

Hey, Greg. How you doing?

I'm doing fine and congratulations on the excellent results. Couple questions for you. One is I know obviously the Fluent was done within 2006, but just wondering if you could comment on the outlook for additional mergers and acquisitions by the Company.

Well, I mean, I'll tell you actually I could probably pull back some of the outline notes that I've used on earlier calls. I'll tell you, it's one of those things where we look at acquisitions for primarily -- first of all we want to be able to continue to maintain a strong core business. So that's a key thing. We also want to accelerate that product vision. I have mentioned on some previous questions that we are -- we are driven by -- I said there's a lot of work that needs to be done on the technology front, so we look to acquisitions that can actually help do that and help us engage with our customers. So you have to realize that's a basic philosophy.

But in general, what we have done over the last few years, we continue to maintain a range of partnerships. Sometimes they're OEMs, sometimes they're joint selling, joint marketing, sometimes they're technology transfer, and they almost always change and grow or take on a different tenor over time. But you want to maintain that kind of relationship. There are no short-cut quick fixes in this as part of long-term building process. So as such we continued to maintain those relationships even over the last year. However, we have been I'd say laser focused on maintaining or making sure that we address the integration issues associated with this most recent acquisition that we have done.

However, that doesn't mean that we don't have continuing relationships as I have mentioned, over the years. So the bottom line is we haven't really changed the -- we haven't really changed the philosophy for that, and we'll continue to maintain those relationships, and as I've mentioned, some of the integration activities have gone quite well but we have got a lot of work still ahead of us. So it's basically a status quo kind of standpoint of continuing to build relationships, continue to integrate well, and continue to clear the road ahead of us so as opportunities present themselves we're both financially and operationally able to seize them at the opportunities that they present themselves, but until then we can keep a strong core business and we can continue to keep a network of partners that allow us to extend our reach. It's basically as simple as that. I don't -- that may have sounded vague but it really is how we have operated for years.

One follow-up that's in conjunction with that. If you had to look at the Company, how it would look in the next five to ten years, let's say, on a long-term basis in terms of geographic and product mix and so forth, how would you frame that question?

Well, first of all, we have been so global for at least the last ten years, if anything, it's become even more balanced, so we're getting to that point where we're really approaching, basically a one-third, one-third, one-third geographic aspect. As you can tell, we have continued to keep our indirect channels very strong and in fact they have been growing with us and that's an important part, and again, I'd like to thank them for the loyalty and everything else that we have built up but there's been trust and strength that's been built up over the number of years and, in fact, as I mentioned, this past quarter we were like at about 50/50 roughly on the core business, direct to indirect. So I see that part going on.

The rest of it becomes a little bit trickier to say just because it's going to depend an awful lot on the adoption rates and the absorbability that our customers have on some of the customers, but what we are seeing, at least with the leading indicators, i.e., the lead major accounts are that they go for the scalable solutions, they expand those, then they start to build processes around those, all of which take time but I would see that happening across a broad range of customer bases also. And I think basically that's why we have always talked about this being at one time a 10 to 15-year horizon which still has incorporated in it your 5 to 10 year kind of horizon. So I think it's basically you have that -- you have that going on. It basically covers all of our business to the point where you look at the strengths we have in the university program, continuing to help train that next range of users coming up to meet that demand, but like I said, it's not like an over next three or four quarters we are going to build XYZ. No, it takes a long time. You have got to build credentials, you have got to build credibility, because at some standpoint you have to be able to deliver. And with some companies, that is a five- to ten-year kind of basis. So I will continue to expect to see that growing and I think we can maintain a good core business on top of that and I think we can probably do some things to accelerate that adoption curve. We're not even near the inflexion point of it right now.

That will conclude our question-and-answer session. Mr. Cashman, I would like to turn the conference back to you for any additional or closing remarks.

Okay. Let's see. Close. Okay. In close, I'd have to say it's underscored increasing long-term enthusiasm, lot of encouraging signs. We have got the normal vigilance which I think some of you that have been on the calls for awhile have probably come to expect but we continue to be bolstered. We have got the strong combination of our -- of our continued business model, the loyal customers. I have mentioned the dedicated channel partners and, of course, continual props to the base of talented, committed employees which I think are just world-class. They are basically both elemental to our DNA and essential to our future.

So, in fact as we close I'll continually express the thanks to the combined ANSYS teams on yet another strong quarter of combined operations and for the long term success that we have shared during the past I probably should mention that I think we're -- we have closed our 10th year as a public company. The continued efforts of the team ANSYS and the dedication, it's given us a great path and a great foundation for ongoing success so I would like to thank everybody and thank all of you for attendance on the call and for your interest. Thanks and we'll be talking to you probably three months or a quarter from now. Take care.

Ladies and gentlemen that will conclude today's teleconference. We thank you for your participation. We ask that you disconnect your phone line at this time.