ANSYS Inc (ANSS) 2007 Q1 法說會逐字稿

Good morning and welcome to the ANSYS first quarter 2007 earnings conference call. All participants will be in a listen-only mode until the question-and-answer session of the call. (OPERATOR INSTRUCTIONS) Today's conference is being recorded at the request of ANSYS, Incorporated. If anyone has objects, 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.

Thank you, good morning, and welcome, everybody, to the ANSYS call for Q1, 2007, and in keeping with tradition, joining me today is Maria Shields, our CFO. So we'll start this morning with an outline of the highlights of the quarter in a summary fashion. And we'll examine the operational results from a multitude of different dimensions. Just as in the past few quarters, there will be a couple of overarching themes. The first is a continuation of strong, sustained performance of the core ANSYS business, and the second is the continued momentum centered around the ongoing integration of last year's Fluent acquisition.

The net outcome is while each component of our business has performed very well, we're also seeing the significant effects of the blending of our business lines. And as a result of this, we saw business results and in turn accretion above our own earlier projections. We've been talking about this blending over the past few calls, and we're already starting to see the impact on our immediate efficiency. While simultaneously blending and building the foundation for our long-term future prospects. In fact, given this blending and how we've recently celebrated the one-year anniversary of the Fluent acquisition and the upcoming second quarter will almost be apples to apples, we just wanted to let everyone know that it's not our intention to try to dissect the business into segments that are either not meaningful or more importantly not reportable due to the way that we run and measure the overall business performance.

Basically demonstrably the customer base is embracing our directions and vision, but we still have a lot that remains to be done, and that's actually exciting for us. Maria will then update you on line item expense performance, balance sheet, and cash flows, and provide an update on our current outlook on earnings. And as a bonus, she'll also be giving an introduction to FIN 48 and its impact on the business. After that we'll be happy to respond to any questions that you might have. To begin with Maria, if you could give our Safe Harbor Statement, please.

Okay. Thanks, Jim. Good morning, and thank you for joining us to review the highlights of ANSYS' first quarter 2007 results. Before we get started, I would like to remind everyone that some matters that will be discussed throughout this call as either part of the prepared remarks or in response to questions may constitute forward-looking statements that involve risks and uncertainties that 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 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, and the 2006 annual report to shareholders, as well as this morning's earnings release, all of which are available at our web site, www.ANSYS.com.

Any forward-looking statements are based upon the Company's best judgment as of today, and ANSYS assumes no obligation, it does not intend to update any such information unless we do so in a public forum. During the course this call, we will be making reference to various non-GAAP financial metrics. We believe that these non-GAAP measures supplement our GAAP disclosures and are important indicators in measuring the underlying business performance and trends. A discussion and reconciliation of GAAP financial measures to comparable non-GAAP measures are included in this morning's earnings release and the related Form 8-K. Jim, I will turn the call back over to you.

Okay. Thank you. Q1 business performance, it represented results that I mentioned above our non-GAAP revenue and earnings guidance. While really we continued to build momentum on a broad range of fronts, I think highlighted by the progress in technical integration and some of the responses that we've seen in our customer engagements and the accelerations there. For the numbers I give, I'll be using the non-GAAP numbers in the same fashion that we have been using historically. It also maintains consistency, of course, with the calls that have passed quarters and years. The major factors relate to purchase accounting treatment of deferred revenue, which as I mentioned in past calls where the post acquisition, where the revenue seems to have vaporized even though the customers and the cash both remain. The good news is after this quarter, the issue was largely behind us, and that will be -- that will be welcomed.

From a high level perspective for the quarter, we reported solid financial performance with non-GAAP revenues of $89.6 million. This represents a 95% increase from last year's Q1 of $46 million. And as with the last couple of quarters, this growth numbers and many of the ones that I'm going to be discussing on this call will seem meteoric given the inclusion of Fluent in the numerator but not in the denominator, but also lose track of the fact that the ANSYS core revenue growth has remained quite robust. Even when considering the blurring of the business lines based on the progress of our integration. And -- and also the fact that last Q1 we had discussed the booking of a couple of mega orders. So basically maintaining our core growth given the strong comparables, particularly noteworthy and encouraging. Now the non-GAAP diluted earnings per share increased 38% with a non-GAAP EPS of $0.58, up from last Q1's comparable of $0.42. This was also above our guidance in the analysts' consensus, but it's indicative of what happens in our model when we over perform 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 when helped yield accretion above our earlier projections. And actually, the EPS number would have been higher if it were not for FIN 48 and its adverse impact of -- on both implementation costs we had, and the increased effective tax rate that followed. And Maria will discuss this in greater detail in a few minutes. Secondly, all major aspects of the business performed well. We saw a continued strong gross and operating margins, cash flows, stable business model, even on a blended company basis. I'll talk about that in more detail. But it also speaks to the quality of the integration and the market opportunity ahead of us.

Thirdly, we saw a continued acceleration of customer engagements basically for both for new adopters and long-standing relationship. We saw an expansion of cross selling and between various product lines, a deepening customer relationship that we've been actually mentioning on the past few calls. I noticed in particular an expanded light in which customers are interacting with us, particularly in the global and major account arena. So the discourse that we're having with them in terms of growth and market potentials is much more interactive than it's been in previous years. Anecdotally the customer said this is the result of basically the rapidly expanding product vision and the roadmap combined with the greater competitive pressures that they're facing. So it basically underscores a couple of major elements of our premises over the last couple of years. So looking at things from an operational slice here, as previously mentioned our non-GAAP revenue for the quarter was $89.6 million. And this revenue was adjusted to accurately represent the true nature of the ongoing business. And it's just under double the $46 million of Q1, 2006. Again, the two components of this are the addition of Fluent revenue and the aforementioned growth in the core ANSYS business.

Both business streams performed well, and they actually show signs of building off one another. As I mentioned earlier, the core growth rate could be a little confusing for our perfect storm of factors. First, the business lines have blurred particularly in the CFD area where we've been rationalizing product lines. And in the service area where we're increasingly established Fluent Service Organization on a companywide basis. Secondly, comparable OEM revenue from Fluent that we received from Fluent in Q1 of last year is now being treated as an internal transfer and is eliminated for purposes of external results. And of course we had the anomaly of the two seven-figure orders in last year's Q1. And that's a pleasant rarity but one that needs to be -- we need to be cognizant of when comparing the quarters. So even with all of these factors, the core growth rate was solid. When we viewed along with the other trend data, it represents a compelling growth that we can continue to build off of in future periods. The non-GAAP diluted earnings for the quarter, again to repeat grew 38% up to $0. 58 and that's up from $0.42 per share in Q1 of 2006. This exceeded the analysts' consensus which marks basically the 38th consecutive quarter that non-GAAP EPS has met or exceeded the consensus. And again from my comment, in the absence of 1040 the EPS would have been slightly higher.

Overall, non-GAAP operating margins for the quarter were 42.6%. Indicative in the result of the solid top line results. This compares to 43.4% in Q1 of 2006. And it's noteworthy in demonstrating I think the significant progress in one of the key areas that we focused on during the integration process of bringing the blended company rates toward the traditional ANSYS stand-alone level. Although we still have more to deal with in that line on an ongoing basis. Likewise, the adjusted gross margins continued in line with our business model at a healthy 85%, also representing a blended rate. So these margins occur even while we're absorbing some of the incremental costs to further integrate our global operations, migrate to common business platforms, and basically bring Fluent in full compliance with Sarbanes-Oxley and of course with the added burden of FIN 48. And finally underlying it all providing additional emphasis to it was we had continued, strong cash flows from operations of over $22 million for the quarter, compared to $12.6 million in Q1 of last year.

Now let's -- let's slice into the numbers now from the usual different perspectives that we look at. I'll kind of break this into category of business, look at the geographic breakdown. Various customer information and also some background on the product. So if we start by category of business, first, overall non-GAAP software license revenue grew 120% for the quarter. Again, the multipart story simply restates my earlier comment. The addition of Fluent license business complemented by our multiphysics and mechanical business, actually our traditional core multiphysics and mechanical paid up license business grew in excess of 20%. The core elite business grew in the high teens and continues to represent 20% of the core revenue. So that's staying strong. But including Fluent, the total lease business grew over 300% and now represents about 39% of our total non-GAAP revenues for the quarter. This continues to strengthen our repeatable business space, and of course continues to aid in our overall disability. Total maintenance and service growth for the core business was in the mid teens for the quarter again indicative of the health of the overall core business and with the inclusion of Fluent, the maintenance and service grew 59%.

Now while there was good balance between both the high end and the desktop products, the upper end products definitely saw a disproportionately higher growth, basically across the board, in the mid to upper 20%. There were noticeable gains from the continuing migration of customers to the ANSYS work bench platform. And this is a topic that you'll continue to hear more about as our product strategy and integration plans continue to evolve. In the products and services, they're just continuing to resonate with the customer, customer base. There's a lot below the surface on that. Our direct and indirect businesses both performed well. Maintaining a consistent balance in our core business of roughly 51% to 49%, the slight skewing toward the direct but right around that balance we have. Including Fluent, approximately 70% of our overall business was direct. And as a repeat from last call, this is significant for a couple of reasons.

First, it shows continued strength in our indirect channel, but it also shows a future opportunity to selectively expand the product portfolio in that channel to take advantage of market opportunities. So we're pretty pleased on that overall balance of our hybrid model. Business intake has stayed strong with double-digit core growth, which combined with the Fluent acquisition has allowed deferred revenue to rise to over $120 million. Which is a company record. And well over double that of the same point in 2006. Our already strong core repeatable business base has grown to 63%, which is above last year's end of Q1 number. One of the greatest strengths of our business model is the consistent ability to maintain that solid base of recurring or repeatable revenue. We believe that this is a byproduct of our commitment to reinvest a high percentage of revenue back into R&D, that's basically driven by the growing complexity of the problems that our customers are trying to solve in increasing number on a daily basis. We have a strong balance sheet. Strong cash flows that easily support the amortization of the debt that we took on with the Fluent acquisition. And throughout 2006, we accelerated the paydown of the debt. And have continued that theme judiciously to start off 2007.

From a geographic perspective we saw strong core growth for all regions with the exception of North America where the full effect of that multimillion-dollar orders in last Q1 were felt in the comparable numbers. And also Japan continues to be a focus and we believe an increased opportunity for us. Of course, growth in every geography was substantially greater when Fluent was included, and we continue to be encouraged by the industry breadth, new customers, and even existing customer expansion. We still have a couple of areas that provide opportunity for performance, but we mentioned in the past few quarters, these fortuitously fall into regions where the integration activities are already starting to play a stronger role in broadening our footprint and relationships with key customers. Notably the Japan situation that I mentioned. From a total business perspective, North America increased 72% for the quarter. Particularly strong was the performance of our major account oriented direct sales offices. Each of thee offices grew at over 25% with the exception of one office which grew at 15%. In aggregate these offices have grown well in excess of the ANSYS rate for the quarter. Major orders in North America came from long-standing and new customers, such as Pratt and Whitney, let's see, Honeywell, General Electric, Parker-Hannifin, IBM, Solar Turbines, Arrow Jet, ATK-Thiokol, Lockheed Martin, Harley Davidson, Army Research Labs, Westinghouse, General Motors, Rockwell Collins, Eaton, General Dynamic, Northrop Grumman, Department of National Defense, BAE systems, and the list goes on for a while. As you can see, a good industry breadth and significant customers there.

Europe continued to perform well with an overall 108% growth for the quarter. The overall core growth was 27% for the quarter and was fairly balanced across all the subregions of Europe. There was a positive currency effect for the quarter still netting out to a core growth of around 20%. Ex-currency. The largest deals in Europe included both names you've heard us talk about in past calls as well as a few additions from new customers such as Siemens, Airbus, Ferrari, BMW, (Allustom), Volvo, [Scecma], Rolls Royce, [Faelis], Bosch, Mann, BASF, Hilte, and the interorganization, we mentioned that a couple of calls ago. But that's the initiative for a new generation of nuclear energy in Europe, where ANSYS was selected and starting to see major business building off of that. Our general international area was slightly more of a mixed bag just as we discussed last quarter, while the region grew at 116% or over double for the quarter. It was a two-part story. The first part is a core growth rate for the quarter in single digits for Japan. But in the upper 20s for the rest of the region. We mentioned in earlier calls that we were looking forward to leveraging the strong Fluent presence in Japan for ramping up the future business low there. And this is already starting to solidify. But as I mentioned earlier, there's still more that we'd like to do, probably there as well as everywhere else in the world. The currency impact was marginally positive for the region. Slightly negative for Japan. But I'd say overall, pretty negligible for the quarter in the general international area, largely governed by the Asia-Pacific region.

Key customer engagements in the region leaded Honda, Toyota, Toshiba, Shanghai Turbine, Japan Nuclear Energy Safety, Taka Motor, Honeywell, Hitachi, Canon, Mitsubishi, Quist, Wooshi, Super Computing. We basically also in this area continued to see the encouraging mix of a variety of orders from not only multinational expansions but also from local-based businesses, as you can see, just from the -- from some of the top orders in that particular area. Now as we spoke about for the last few calls, we're continuing to see strength breadth and increased penetration within our strong and broad customer base, and the pipeline of new opportunities is solid. Every day we get a mix of global opportunity and uncertainty, but we're seeing continually growing interest, particularly in light of an expanded ANSYS geographic and technical presence. So in spite of the daily headlines relative to increasing energy costs, tightening labor markets, slowing growth in US capital expenditures, currency fluctuations, geo-political events, all or any of which can positively or adversely influence the timing and pattern of our customers' buying decisions, we are encouraged that our existing and our new customer attainment has continued to grow off the moment that we built over the course of the last year with the addition of the Fluent product and services to our suite of offerings.

So in summary, strong, balanced regional growth with a couple of areas that we'd like to continue to focus on for improvement. And as -- as hopefully you can tell from the list of customer names, there was good industry and major account activity. Continuing strong performance in Europe, with good balance. There was continued momentum in North America, particularly in major accounts. And -- and progress in GIA virtually everywhere. But I always have to say with an ability to improve nearly everywhere also. So as we continue into 2007, we've already merged, as I mentioned on the previous few calls our customer facing organization which was a very good move. And while it's been a huge task, it was necessary to provide a focused, consistent foundation to the future. Our leadership teams were able to get this process going in the field with minimal disruption in business results as evidenced by the results themselves. And we're starting to recognize synergies in terms of some of the joint sales opportunities as well as the co-location of some of our remote teams and building up some critical mass and momentum in those areas. So, again, we've been talking to this now almost a decade. But we're always examining our sales strategies in each of the key geographies. But given the current market interests, we're ramping up our customer organization in response to the growing opportunities that we've seen. But we'll also do it in our normal -- I would argue prudent fashion. So that's -- takes the geography.

Let's move on to products. From a product revenue standpoint, we saw no significant changes in either the trend we've been giving or the guidance. Consolidated paid up software, license revenues grew by 31% quarter to quarter. Core paid up multiphysics and mechanical license, they're both a major part of our core business. And actually the only one that's not affected by the integrations, stand alone, and that's been noticeably and end notably solid at 24% for the quarter. Lease business has grown both in total and core, and all parts of the product spectrum did well. As I mentioned before, there was disproportionate movement to the upper end. ANSYS Workbench continued to gain traction, and we're already expanding its capacity through the utilization of new Fluent capabilities. Actually good news is we've -- we've already had a Fluent implementation demonstrable in Workbench, and the even better news is that we've been able to specify some, I would say, dramatic improvements for our integration architecture that's -- will become manifest toward the end of 2007. Now these are direct outcomes with a commitment and the progress of the technology integration teams. Basically in response to the feedback from our sales team and working with our key customers across the globe.

So I think they've -- in the early going they've done a heck of a job. AFP's for the quarter increased at both the high end and the low end. The high end increased, seems to have partially maybe largely be due to the shift in product mix toward the higher end multiphysics offering. So, you know, at least by category business it increased. We also noticed as I mentioned, disproportionate growth on the high end, multiphysics, when which has been a hallmark of ours from a differentiated standpoint for a number of years. From the qualitative standpoint, the broadest deepest set of integrated simulation tools for the engineering community has continued to get broader and deeper. We spent a lot of time on the product release that occurred in early Q1, during our year-end call which occurred February of this year, I'm not going to go into it again here. We're did release an amazing set of products including but not limited to, ANSYS 11, -- AUTODYN, CFX11, Fluent for TIA version three, Polyflow. I mean, there's a range of those. Basically we'd invite any of they are interested in that level of detail go to go to ANSYS.com for the various details. Basically, perhaps the most impressive from a long-term standpoint is the ongoing evolution of the integration platform and what it mean for the future of simulation. Our ongoing investment in R&D is really starting to manifest itself in some pretty encouraging ways. And we'll be discussing that on some upcoming calls. So in summary, it was another I think very strong quarter. Quantitatively and qualitatively. Continued financial and market performance on a stand-alone core business, and continued positive impact from the Fluent acquisition.

And in spite of the increasing web of compliance and accounting requirements, thank you Enron, thank you, Washington, our earning and cash flows remain solid. Long-time listeners to these calls will recognize our long-term commitment to taking our markets to a new level through a methodical investment pattern and technology sales and infrastructure. Interwoven with a strong financial discipline, and these are the underpinnings of what we feel is a fairly unique business model. It's allowed us over many years to continue our pursuit of meeting customer expectations and corporate commitments to our stakeholder, something that we take incredibly seriously.

Over the long term we've demonstrated our ability to grow the top line in accordance with our guidance while maintaining solid margins and continuing to provide solid earnings growth. So we'll continue to drive toward the -- the long-term vision that we've been espousing for many years now. With our long-term optimism intact and increasing confidence, of course, being an engineer I always temper that with the short-term engineer's paranoia to make sure we don't stumble. But bottom line is we seem to get continued validation. And the customers are picking up on some of the direction. So with that I'll turn it over to Maria Shields, our CFO, to provide you with the more detailed look at our financials including expense structure items, balance sheet, highlights. Other key factors of this quarters business and our outlook on the future and including FIN 48 and other marvels of U. S. GAAP. So, Maria?

Okay. Thanks, Jim. Good morning, everyone. As Jim said I'll do a brief recap of expenses. Those would be expenses excluding the impact of acquisition related amortization and stock option expense. Review the impact of the adoption of FIN 48, take a quick look at the balance sheet and some cash flow highlights, and then move on to guidance. Starting with cost of sales, excluding amortization and the impact of stock-based compensation which combined total $5.2 million, cost of sales for the quarter totaled $13.5 million, and that compares to $6 million in the first quarter of 2006. This resulted in an overall non-GAAP gross profit margin of 85%. The comparative increase over last year's first quarter is driven by the inclusion of Fluent's operations in this year's first quarter. On the SG&A front for the first quarter, expenses excluding $1.5 million, related to stock-based compensation, totaled $25.4 million versus last year's first quarter of $11 million.

The increase in expenses when comparing to prior year's first quarter were related to the inclusion of Fluent's operational results in the 2007 first quarter, as well as increased headcounts and compensation, and an increase in third-party consulting fees relative to various integration products as well as the company's adoption of FIN 48 in the first quarter of 2007. In the area of R&D, total expenses net of approximately $500,000 related to stock-based compensation for the quarter increased to $12.5 million compared Q1 of 2006 at $9.1 million. The increase year over year was also primarily driven by the inclusion of Fluent's results in this year's first quarter. While we continue to make investments in key areas across the company, many focused on integration efforts we also delivered a solid non-GAAP operating profit margin of about 43% for the first quarter.

Our consolidated effective tax rate including the impact of adopting FIN 48 in the first quarter of 2007 was 37% on both the GAAP and non-GAAP basis. The first quarter, 2007, tax rate unfortunately was negatively impacted by approximately $600,000 or 2% in connection with FIN 48. And at this time, when you take into account the combined adverse impact of the American Jobs Creation Act of 2004, along with the adoption of FIN 48 we're looking at an overall tax rate of between 36% to 38% for the remainder of 2007. ANSYS reported a 38% increase in total non-GAAP diluted EPS to $0.58 on $40.4 million diluted shares. That's compared to non-GAAP diluted EPS of $0.42 on 34.2 million shares in the first quarter of last year. At the current time we're projecting non-GAAP diluted EPS in the range of $0.52 to $0.53 for the second quarter, and $2.14 to $2.17 for the full year of '07. Based upon current visibility we're targeting second-quarter GAAP diluted EPS in the range of $0.35 to $0.38 and $1.46 to $1.53 for the full year. I would like to call your attention to the fact that the initial 20.1 million reduction in Fluent deferred revenue related to purchase accounting of which approximately $1.8 million negatively impacted the Q1, 2007, reported GAAP revenue results is now for the most part behind us, and looking forward into Q2, this will no longer be an issue so GAAP and non-GAAP revenues will be substantially comparable.

As we take a quick look at the March 31 balance sheet, it continues to remain healthy. Our total cash, short-term investments, are at $117.5 million, our consolidated net DSO was at 47 days, our deferred revenue grew to an all-time high of $120.5 million, the outstanding balance on our debt totals $114.8 million, the interest rate on the debt is variable and is set at an average rate of about 5.8% for the upcoming quarter. In the first quarter, the business generated over $22 million in operating cash flow. Of which we invested $2.3 million in CapEx and we utilized about $2.5 million to repurchase about 50,000 shares under our currently unauthorized stock repurchase program. This leaves about 2 million shares available that can continue to be bought back opportunistically over time. And with that I'll turn it back to you, Jim.

Thanks, Maria. Getting an echo here. Let's see. So to recap, sustained strong financial performance of all major parameters of the business, revenue, earnings, margin, cash flow, business base, visibility for both core and combined, continued strong integration of Fluent, which positively impacted combined with the core performance of the quarter's non-GAAP revenue and EPS. Increasing customer interest at higher levels resulting in increasing activity marked by industry and geographic diversity, broad-based adoption and also accelerating interest in our combined offerings. And finally, a rapidly expanding product portfolio that's basically augmented by a series of partnerships and relationships in technology distribution and with our customers now in increasing numbers, the long-term outlook stays bullish. For the remainder of 2007, we're raising our estimates from the last call based on Q1's performance and the newest data available to us. We anticipate a good Q2 performance with non-GAAP revenue in the $87 to $89 million range with non-GAAP earnings in the $0.52 to $0.53 range.

For the fiscal year of 2007, our guidance for non-GAAP revenue is an increase to the $365 to $368 million range with non-GAAP EPS increasing to the $2.14 to $2.17 range. Again, I'll reiterate that this is not only an increase in guidance but it also takes into account -- it absorbs the negative effects of FIN 48 being the higher effective tax rate than we had anticipated going into the year. And as such represents an even higher operational performance on a comparable basis. As I mentioned, we're already ramping up parts of our business in a controlled fashion, but we'll continually monitor the market factors as we demonstrated over the years to take advantage of market opportunities throughout the globe and across a vast array of industries and with that we are now prepared to respond to any specific questions you might have.

(OPERATOR INSTRUCTIONS) . We ask that you limit yourself to one question and one followup question. We'll go first to Barbara Coffey

Yes. As I look at the results and hear what you said, are you seeing greater adoption of -- when you see greater adoption of technology in your existing account, is it sort of a grassroots effort where people are using it and, therefore, spreading it to their colleagues, or is it more of a top-down approach? And could you speak about your push into sort of education, how do you see the next generation of engineers?

Well, first of all, the growth dynamics are -- as we mentioned before, they are multidimensional, and it tends to be company specific. So we have seen ones where successes in one business unit or one development program tend to propagate over to other ones when they've seen the positive impact of that. The secondary aspect as even within an existing using group, as they -- as they, first of all, validate success, which has been going on for a number of years and people get just more comfortable being around the technology and we may get continually easier to use and also more bullet proof, that tends to grow in that particular standpoint. Now you have another interesting dimension on -- dimension on the issue. And we're not seeing the issue where these are just disembodied top-down mandates. I would say what we see is that over many years we built up technical credibility in the user community. Then we built up viable strategic viability in the minds of companies as a good, sustainable, long-term partner. And then when the -- when the top-down teams which we are interacting with on a much, much frequent basis, that tends to be more on implementation of a technology as opposed to the introduction or initiation of a technology. So they are getting involved but the necessary first step is actually building -- I would say building the chops, building the credibility. And that basically takes a number of years. And then -- I think your last part of your second part of the question was on the -- trade thing. It's interesting, we were recently doing a recent count, and the number of university seats are actually over 200,000 give or take. And approaching a quarter of a million. And it's -- it's pretty broad based across the world. You know, I hopefully -- I'm a big proponent of continuing to build engineering talent in the US. But it's also a global phenomenon. And -- and it is picking up in that standpoint. We're actually -- you know, qualitatively I was basically asked to participate, basically ANSYS participates in a couple of new things which are innovative, innovative think tanks and incubation activities, operating in conjunction with some of the universities that we've been building course curriculum up with. So in general, that is tending to -- tending to build -- I think it's getting more innovative in the US and certainly has been accelerating across the globe. But it's an important element. The one thing we want to do is -- is people get into some of the very high-end parts of our technology is we don't want to have them stumbling over some of the entry-level familiarity and not even try to step into it. So building that baseline understanding that is a foundation for them understanding some of the uniqueness of ANSYS is a very important part of building the potential user base over the next 10, 15 years.

Thank you.

We'll go next to Mark Schappel with Benchmark.

Hi, good morning. Good job on the quarter. Maria, first question for you. Could you explain what the lease business was as a percentage of total revenue.

Yes. I think Jim mentioned --

Do it on core and on total --

Yes. On the core business, it held out about 20%, which is where it's been for at least probably the past eight quarters. And on the combined side, total lease is now at 39% of total non-GAAP revenues.

Okay of the great. And Jim, in the past you had made some favorable comments on what you're seeing in the sector as far as that industry starting to embrace this technology more and more.

Right.

Could you just, you know, any further developments in that front?

I think some of them were particularly good. Even the last time I was talking about all the hydro turbine manufacturers, Vestis Wind system, G.E., the wind system, alternate energy, maintenance of the oil and gas reserves as well as efficient handling of -- of the reserves that are there going after pressurization techniques to be able to harvest from places that were considered a little bit lax. So whether it's conventional , traditional hydrocarbon base, whether its alternative energy, hydrogen cells. There is a resurgence. I realize there's a lot of factions that are both pro and con. But there is a lot of attention being paid to a resurgence in nuclear energy. In this quarter alone, some of the companies, if I didn't mention them I could have been mentioned them, activities in Japan with nuclear, the Europe consortium with -- in terms of coming up with new, I say some of the things they're talking about almost approach "Star Wars" type of technology, which in my parlance means it's really cool. But it is continuing to push there. And the bottom line is that disruption of energy causes demonstrably bad things. And there's no doubt that the demand for energy is going way up, increasing dramatically, and simultaneously we're trying to figure out how to be smarter in how we generate it and what any of the off shoots in terms of pollution or other things like that. So it's -- use look at all the pressures, industry with the intense demand with requirements for a lot of innovation, and a lot of it, and basically also a lot of (geopoliticism) behind it. There are a lot of factors there that just tend to make it. And it kind of pushes things into our sweet spot. Probably the biggest thing now is there will probably be some recognition curve over the next few years as companies that did not traditionally use this or have to use these kind of technologies start utilizing it. Just -- it parallels decades and decades ago, it was rocket science stuff. And then the automotive industries moved in a few years later and started leveraging it. Now virtually, 30, 40 years later, everybody leverages it. And on a little microcosm basis, I think you see that from the energy standpoint. We're seeing continually these kind of names popping up with significant investments in the technology. I think that would explain what the driving factors are for that and why we think it's -- that's not going to calm down in the upcoming time

Okay. Thanks. And with respect to your -- your prepared remarks on Japan, I -- unfortunately I missed those when you said this. Could you read that once again. Particularly that is a good quarter for Japan.

I'll summarize. It was a good -- first of all, it was -- it was a good quarter for Japan, flat out. It -- in the core business, it was even an okay, you know, it was -- it was okay kind of thing. We had a little bit of negative currency impacts. Nothing to -- nothing to whine or moan about. Just stating it as it was. We have started to build up the organizations in terms of being able to simultaneously leverage a nice footprint that we inherited there from Fluent. And that's already starting to bear fruit in terms of -- in terms of structure and direction. And then you layer on top of that the fact that we've actually had positive movement in conjunction with all of this, with the distribution mechanisms we had there. So the whole engagement thing is increasing. It's just one of those things that you heard us talk, you know, several years ago. We -- we mentioned a couple of spots in Europe that we wanted to work on. And after a year we had those perking up. It takes a little time to get the engine running, but we are seeing a lot of positive -- positive signs. And I guess the other thing is that no matter what we have in any geography, we see more potential. So we're always trying to figure out how to do that. So you have to take a little of that with a grain of salt. The positive signs definitely are there. Like I said, the mid digits single growth even with the -- you know, a very slight negative currency. Overall, strong organization, overall nice growth in Japan as a total business. And a foundation that we've never had before in history and it would take us years to boot straps and build up. Some of the best news is still to be seen, but it's largely a positive message. And, you know, a lot of ground for optimism. But we -- we've still got a lot of teamwork do.

And Maria, what was the international domestic mix as far as how much revenue came from -- percentage of revenue coming from North America or Europe?

Basically -- well, for the core business, about the same thing we'd seen before. About 35, 65, 35 North America, 65 international. Non North America. For the blended company basis, it was a tick-up. It was about mid -- you know, mid upper 30s, like 37% versus 63%. It's all in that. We've seen this trend. It's been getting increasingly balanced, ex-currency. If that -- ex-currency, probably even turns a little bit more balance. But it is starting to approach that one third, one third, one third mix, with, of course, certain pockets of Asia-Pacific and the developing world increasing at higher levels.

Okay. Thank you.

We'll go next to Dan Cummins with Banc of America.

I'm curious about ANSYS 11, looking at the product announcement there were quite a few references to improvements around integrating some of the CFX capabilities into the production and you've talked a lot here today about turbine and energy. If you could give us a sense of how the book of business is building around release 11 and sketch the current customer base in terms of what releases they're on predominantly.

Well, again, boy, it's really tough for us -- in fact, we have some customers that may be using two or three versions simultaneously. Same number of simultaneous users but using multiple versions. Because sometimes for -- for certain things like certain aircraft engine programs, you have to -- you have to maintain the original code. It was maintained on just so you have good comparables. But in general, I -- I say if you look -- first of all, I'd say qualitatively the response to the products has been good. Of course, you'd expect me to say that. I think to back that up with numbers is we spoke this time in particular about I think the last few quarters, the structural products, for instance, have been growing in the 20%-plus kind of range. You look at even this quarter. The multiphysics and high-end offerings were also growing, and obviously if 11 wasn't having some positive momentum if you would not probably see that increased adoption and confidence in it. You mentioned -- we talked about the CFX ANSYS integration. We talked for years about the couple of domain solves and things like to. When you take that into play, it's really more the way we have technologies working together as opposed to some kind of arcane, hard-wired, smoke and mirrors behind the code kind of standpoint. So the same thing that we've learned in terms of general multiphysics of which fluid structure interaction is a -- is one element, we're able to now bring over into even the addition of the Fluent product. So that's not even a lost effort. In fact, that's part of the stuff I related to when I said that we're already expanding our Workbench architecture in light of some of the new opportunities in front of that. So in general, the attraction has been -- the traction has been quite good. Even if you just didn't look at the aggregate numbers, if you look at some of the major engagements, the customer names, the repeat business. There's a whole range of things where, you know, people are expanding on the broad basis. So I don't know -- I tried to poke on a number of different things. If there's something specific on your -- that didn't hit, hit me with a followup.

No, that's fine. I'm curious whether we saw any material revenue for version 11 orders in the March quarter or -- do you think that this is substantial upside relative to the guidance?

Well, actually, we built our factored upside into our renewed guidance. Want to make that clear. Secondarily, we don't necessarily have a model where when a new release comes out people jump -- we don't have an upgrade model. We have combinations of subscription models and enhancement, you know, enhancement standpoint. I think that it's the -- it's that common thing which has also built the repeatable business basically because there are people that are essentially are -- are actually subscribing just to make sure they get the capabilities as soon as they're out on the street. Now apart from that I'm sure there's always, as new capabilities are put in, it may push certain people above the threshold, and -- and cause an increase in buying. And I think that very easily -- I don't have specific points I can talk to here. But I'm sure that it is one of the factors that has continued to increase the mix of our multiphysics offerings. And basically, kind of been driving up at least slightly in a sane manner the -- the order size that we've -- we've been seeing. And even over the last few calls, if you recall, there were a few times when I mentioned that we were actually seeing the nice side of -- a lot of times companies talk about, well, an order or two slipped. We talked about orders that were coming forward. And that's what was driving up some of our positive revenue upside. We talked about that for a few calls. And I think that that could also be a function of the acceleration of the new capabilities. But that -- with all the other things I talked about, I can point to a lot of specific, discreet data points. With this one it's more of a holistic feel. Just to be totally straight.

Okay. Thanks. I'll get back in the queue. Reporter: We'll go to Richard --

We'll go to Richard Davis with Needham and Company.

Thanks. With regard to when you guys look at the M&A environment, Howe do you look -- how do you look at buy versus build and what areas do you see as growth markets and what if any is your tolerance for dilution and how you modulate that? Historically you've done periodic acquisitions.

We've done periodic acquisitions but you've never said they've been purely for finances. Second of all they have always been to accelerate the product vision -- again, we think -- first presented that right at the end of the last millennium. We're a few years into it. It's been consistent. And everything that we picked fits on a map on there. It was really to do that. Then you get to the first part of your question which is make versus buy, and at that point it's not just are you covering this capability, is it a sustainable capability? Is it a good, solid technology that's not at the end of its generation? Are there a team of people that can help build the next generation and actually help effect the integration which we've been able to do over the last few years. So in many cases, particularly if it's main line technology a lot of the times it makes more sense to continue to incubate it there. But that can be a slow process when you get a short window of opportunity. And in general, then we might look at being able to -- to quickly, quickly acquire that. And at the same standpoint get great technologies and a great customer engagement people. That's what I think we've demonstrated over the last couple of acquisitions. Right now, I'd say we're -- we're doing well in integration, but there's still a little bit more that needs to be done there. With that in mind we're still doing the same things that we talked about year upon year, it's just we're trying to maintain a network of relationships. Sometimes they turn out to be OEMs, sometimes they turn out to be acquisitions, sometimes they turn out to be marketing partnerships. In any event you're building market potential, building familiarity with other companies. And if the crossroads tends to merge sometime in the future, a lot of the -- a lot of the introduction and groundwork is done. There is a continual blending of technology, and expanding of technology that we -- we will continue to want to do. There's a couple of things that we are doing organically that I won't talk about now, it's premature. But it's not in the distant future. And -- again, if you went back and looked at our -- our product vision, you would probably be able to guess what some of those things might be. And that -- that's something that we'll continue to do. But building a combination of our core R&D investment and acquisition, those are two things that are going to be part of a go-forward model.

Got it. And just a product announcement. I guess you guys announced Fluent for CATIA V5 a couple weeks ago. And could you talk briefly about where you plan to deepen or improve your partnership relationships with other adjacent vendors.

Well, the bottom line is, I'll put this in a flat-out statement. We said this before. First of all, just to correct -- I think it was Fluent for the CATIA version 3 for the -- but for the V5 architecture. I don't want anybody to get confused on that or have customers say, how come they're two versions behind. But the standpoint is, we are going to create a good simulation backbone. But we also realize that we don't drive our customers' IT philosophies. We're here to serve the customers. Historically we've always had of the top four or so major CAD providers, each one of them have constituted between 20% and 30%. Nobody overwhelming, nobody off the radar screens. So we've always had to work with a broad range of those. Now additionally, we're more than happy under a win-win business relationship to work with companies to actually put portions or all of the code in the, in their internal environments. We've demonstrated that, of course, with, Auto Desk, and we're doing -- doing it with those kind of solutions in -- in that. From that standpoint we're basically serving the customers and if we do that with our own backbone, that's fine. And if we do it in conjunction with other partners -- in conjunction with other partners, I mean the rest of the computer industry works on more of a plug-in-play kind of basis, and artificial market barriers they don't tend to stand too much the test of time. Again, we -- we're going to focus on serving the customer, and that could mean a number of different manifestations. We just want to get the technology in the hands of the engineers.

Got it. Okay. Thank you very much.

We'll go to Berle Das with Thomas Wiesel International.

Hello? Hello? Is anybody there?

And you may want to check your mute button. Your line is open. And that was Berle Das with Thomas Weisel International. We'll go next to Synial Asidar with Centennial Asset Management.

Hi, Jim, the activity in North America was quite warm. What are you seeing in the North American market here?

Sorry it came across as lukewarm. I think if you draw a trend line over sustained periods, you'll see a very good story. And if you look at the name, the list of the names of the customers, I mean, it's like a who's who. And the size, the size and the commitment of the order is the only thing that I was -- the only thing that I was alluding to was, you know, like a stock curve where you can have different spikes on a localized basis that may look—make any two points -- you draw the trend line through it, and it is a solid store. I'm sorry I created the -- the feeling of the lukewarm because as I said, North America has a continuing -- a continuing momentum in it. It's a very -- it's a very solid - it's a very solid base. So I mean, it's -- obviously I think we're all aware of their -- there are certain industry pockets that are performing better or worse than others. And those are pretty well documented. But North America continues to be a very good market.

Okay. The second question was given the trends that you have been seeing for the last couple of quarters, three quarters, I think the trend toward, migration toward higher ASP products, do you think that trend will continue for the foreseeable future, or do you see that some kind of probably a picking of those kind of trends out here? In fact, your ASP's were high at both the high end and low end. Do you see that continuing also with that --

Well, we don't -- our model's not predicated on them continuing. I think what you're seeing now and as I mentioned I think some of it's a migration to the four-level kind of capabilities. I think if you look at that wave of that set of customers at that level of maturity, at some point that will peak. But coming behind it are waves of new adopters who are kind of replicating that old start basic and build up over time. And you see that, it's like a multilayer kind of standpoint. So I -- I say in general we've never set this as guidance we have never built this in -- I say that we're basically -- we basically look at the ASP's to stay largely stable where the continued value injected tends to -- tends to counter some of the other pressures going down. So it's -- it's basically more of a value issue than a price issue. But we don't -- I guess I see neither a collapse nor a continual build-up but a -- basically a consistency there. The other thing you have to realize that the ASPs can also be dictated not only by the feature capability but by, by the size of the other. The typical volume, purchase discount type of things. And the standard pricing. And things like that. So I'd say if you looked at them holistically, we looked at those as being stable.

Right. Can I ask one more question?

Sure.

On the operating margin side, in fact last conference call you had mentioned that it would be close to two years that you would see including trailing operating margins. But we see that in the first quarter that you tried to get a lot of leverage in the model here. Is there any leverage remaining in the model to get to be able to -- in order to profit in the next few quarters?

Well, the answer is yes. And I -- I made a comment and I'll explain that. Because that was a multipoint question. If you -- if you recall, we said there is still more to do as we get those blended rates up. What we are seeing is two factors. First of all, I don't want to occlude the fact that we are making substantial progress. We have wonderful models that include models for blending toward the ANSYS business model. So there has been demonstrable progress on the margin growth. If you take the two-point measurements, you would say, oh, well, the margins are really high. Keep in mind we also over achieved to the top line. And with our model, with the leverage in our model, when had occurs, an awful lot of that excess flows down into the bottom line.

So if you net it all out, there is room for continued integration progress and move toward that blended model of where we go for. We think it will continue to be several quarters. We actual have some -- have data that suggests it did, it continues to build over a couple of years. But it continues to do it so we maintain the business lines. But we also continue to gain and increase the efficiency. But at any point in time, you may see small perturbations around that, not as a function of the business model but as a function of the filtering of the excess of the top line, both basically manifests itself both in the gross and the operating margin lines. If we compare it to Q1 which was not blended back then, it actually of slightly higher in Q1 of last year. Again, that was also bumped up because of those mega orders that I talked about. So it's -- there's really two different things going. Yes, we are seeing that. No, we're not all the way there. And no, the point we're at right now is not the standard operating metric. It is a function of a -- accelerating margins based on the internal. Even without the revenue overage, though, I think we would have said we had very solid operating margins that were trending in the right direction we wanted them to be. Do you agree, Maria?

Yep.

With limited time left, we ask that participants limit themselves to one question and one followup. We'll go next to Tim Fox with Deutsche Bank.

Good morning. First question I had was on -- on the mega deals, as you referred to in your last point, Jim. You had two last year. Wondering if you had any seven-figure deals in the quarter, and in that same vein, are you generally seeing an uptick in the overall size of your orders given the strength in your global accounts?

We did have a big order but it is the one us two in the scale that we had before, tends to make it a little bit different. Your question I would probably say we are not aiming toward seven-figure deals. We still like to have that continual thing where you'll notice that some of the premiere customers just continue, maybe two or three quarters throughout the year to continue to invest. And it's almost like a -- almost like a pay-as-you-go kind of value creation. And an ongoing building relationship with the customer. Those are the ones that we highly value. But nevertheless, some of those big ones, in fact, are going to -- they're going to occur. It's just that they -- they occur of their own volition, not as a result of in order of an effort we put there because you swim through for the fences a lot, you strike out a lot. We would continue to build value with all customers. Now I say in the absence of that, maybe it's a function of increased adoption rates by our customers, maybe it's a function of some of the ASP's migration to multiphysics. I would say that if you took kind of the average of larger deals, there are more of them occurring and the mean value of them are, in fact, pushing up. I mean -- that's just an observation as opposed to a strategy.

Understood. Okay. And secondly, you highlighted a few times during the call about new adoptions, and I was wondering if you could address whether those are new customers coming in from some of the verticals you mentioned, maybe energy, not traditional customers, or are you actually starting to see a little bit more market share shift? If you could just talk about your new adoption profile, that would be very helpful.

I think when we're talking about market shift, it's a lot more about serving the -- the growing primary demand as opposed to haggling over, secondary demand, and -- and a fixed pie kind of model. That growth and innovation is basically where we have been for years, seeing that growth at a time when people said simulation of a flat market or not growing market. That was the conventional wisdom of years ago and even up to recent with a certain standpoint. So that's -- that's basically where we -- we see that going. With regard to industries and new adopters, we have this every time we get the question, I'm sorry his to drag everybody through this. But is it a new -- new logo company, a new division of the existing logo'd company, is it a new design group, was it an existing -- we are seeing basically growth across all those areas, albeit I did mention sectors, the Biomed, energy sectors over recent years that have been tending to go up. And again, you can kind of track where is an awful lot of the global focus and the perceived need for advances. Those are places where we tend to get pulled in. It's along those lines. I say that we -- sometimes when I say new adopters, I'm also talking about? A new, major division of a recognizable named company adds in, we call that a new adopter. So we always have to make sure we're using the same terminology. But it's pretty much across the board.

Understood. Thank you. Nice quarter.

Thank you.

We'll go next to Scott Barnum am with Segal Bryant.

Good morning.

Good morning.

Quick question about R&D expense. I know after you did the Fluent acquisition you talked about R&D coming down to 16%, 18%. It looks like in the recent quarter it's around 14%. Do you expect it to stay there, or is that just a little bits of an anomaly from the outperformance?

That -- that's probably -- that is primarily it. The other thing is at some standpoint with the growth rates, it's -- you know, difficult to -- to hire at the -- at the rate we're going. So we -- I say we're continuing to build a number of thing. Yes, you're right. When that numerator in the revenue goes up, a -- obviously the gross margin goes up. But there's other things on a percentage basis tend to drop. But our commitment to R&D, you're not seeing a -- you're not seeing a trendline there. Still say that, that mid/upper teens on the blended thing, the company rate, those are still kind of the target ranges. It still is -- it still is a rate that we can sustain. It's still one that -- that maps nicely with the -- with the product projections and the market ability to absorb those new products, our ability to create those. There's a -- there's a pretty long-standing and a sustainable pattern on there. So that really is more of the pattern you should be looking at.

Okay. Thanks, Jim. Nice quarter.

Thank you.

And due to time constraints we will take one final question from Jay Vleeschhouer from Merrill Lynch.

This is Woojin Ho for Jay Vleeschhouer. What are you seeing in terms of customers, especially major industrial customers investments in compute capacity for simulations? Now since cycles seem to become increasingly cheap, are you seeing more such infrastructure spending? And would that affect the demand for the simulation licenses? And I have a followup.

Well, I have to say that an awful lot of -- an awful lot of the infrastructure things in terms of networking and things like that, we don't get involved with, however we become somewhat aware of it as we interact with the IT teams. And there is no doubt that some of that factoring, particularly when it gets to global networking between multinational companies, I say processing power and bandwidth are probably the two -- and bandwidth are probably the two overriding ones. I know that those are things that we're up against. But the one thing that I've seen is that we have for whatever the reason is, there used to be many times in past years where there would be a software order that would sit in there saying, well, we're waiting for approval on hardware. We're waiting for xyz. And an awful lot that has in fact -- we don't come across those things. Those things become less and less a barrier. It's just the normal financial controls of companies that we come against. Now I -- I wouldn't pause -- well, I don't have a theory oh it. I might pause -- for instance, that one time it used to be an engineer sat in front of a box and if they didn't have a box, they couldn't solve it. Now the way we're structured with a lot of the work that we've done on our own backbone and infrastructure, basically the computers that are almost on every engineer's work desk now are a window into a very vast set of situations. A very vast network that basically allows multiple users to load level across a much greater standpoint. So it just might be that we don't, that we don't see those things. But it seems to be becoming less of an issue albeit computer cycles and bandwidth are the two things that people thing people are very focused on.

Mr. Cashman, I'll turn it back over to you for any additional or closing comments.

Thank you. I think we pretty much covered it. Thanks for the questions. I just have to characterize us as having increased enthusiasm due to the encouraging response that we've seen to our product vision and offering. Again, apologies to the one gentleman if I made it sound like I was not as comfortable with some of the parts. No, that was not the case as I hope we covered. Again, while we're seeing that kind of response, we're also trying to keep our eye squarely on the ball. We're not -- we've never taken anything for granted. We -- but we continue to be bolstered by a strong combination. The solid business model. We got the loyal customers, they are a part that repeat business, part of the ongoing, new acquisition of capabilities from us. Have to thank the channel partners. We maintained balance there. We're having increased desire for them to continue to grow with us. That's a major sweeping trend. I think the technology speaks for itself. The talent, committed employees that have been with us, basically all these elements. We don't take them for granted. They're fundamental to our D.N.A. They're fundamental to our sustained performance. And they're fundamental to our future. So in fact as we close, I'd like to thank all of those members of the team, also to the long-term shareholders, and all of the business partners that have been on this journey to date with us. And we'll look forward to seeing you next quarter. Thanks, everybody.

This does conclude today's conference. Thank you for your participation. You may disconnect at this time. Have a nice day.