ANSYS Inc (ANSS) 2007 Q2 法說會逐字稿

Good morning, and welcome to the ANSYS second quarter 2007 earnings conference call. All participants will be in a listen-only mode until the question-and-answer session. Today's conference is being recorded it at the request of ANSYS Incorporated. If anyone has any objections you may disconnect at this time. I would now like to introduce your speaker for this morning's call, Mr. Jim Cashman, President and Chief Executive Officer. You may begin.

Thanks a lot. I'll add my good morning and welcome to the ANSYS call for Q2 2007. I won't be the only speaker because I'm joined as usual by our CFO Maria Shields. We are going to use what's our fairly traditional agenda wherein I'll outline the highlights of the quarter and the year-to-date in some overall summary comments and then go into greater depth on the operational results. In general, the whole gist of this call will center on two major themes. The first is a continuation of strong sustained performance of the ANSYS core business, which now has largely integrated key aspects of last year's acquisition of Fluent. And the second centers around the synergistic impact of our business streams and some advances in our technology that have intertwined with expanding market opportunities. So this has resulted in an overall business result and accretion above our earlier projections and a correlated increase in our outlook for the year.

Now, we have been talking about this blending over the past few calls and are already starting to see the impact of our immediate efficiencies while we're simultaneously able to build foundation for long-term future prospects. And as we mentioned last quarter, the first anniversary date of the acquisition has come and gone and by the second half of the year the GAAP affects of purchase accounting at least related to revenue are mostly behind us. In short the customer base is measurably and increasingly embracing our directions, but as always there's still a lot that remains to be done. So we will go through that in summary form and then Maria will update you on line item expense performance, balance sheet cash flows, and provide an update on our current outlook on earnings. It should also be noted that the strong operational results were even including substantial efforts with our back office and communication systems integration and a significant phase of tax compliance activities. So after those topics we will be happy to respond to any questions you may have. So as always Maria if you would start with our Safe Harbor statement please.

Okay. Good morning and thank you everyone for joining us to review the highlights of our 2007 second quarter results. Before we get started I would like to remind everyone that 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 involves risks and uncertainties which could cause actual results to differ from those projected. Additionally, 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 the 10-Q, 10-K, 8-K and our annual report, all of which are available at our website. Any forward-looking statements are based upon the company's best judgment as of today and we undertake no obligation to update any such information unless we do it in a public forum.

During the course of this call we will also be making reference to non-GAAP financial measures. In an effort to provide supplemental information to our GAAP disclosures, a discussion and full reconciliation of GAAP financial measures to comparable non-GAAP measures is included in this morning's earnings release and the 8-K. And one final housekeeping point before we begin, all the EPS and share data that will be talked about have been adjusted to give effect to the two-for-one stock split that took place in June. So Jim, I'll turn it back over to you.

Thanks a lot Maria. So Q2 summary. Basically Q2 business performance represents results above our non-GAAP revenue and earnings guidance, but we did this while continuing to increase progression on a really broad range of activities and fronts with highlights in technical innovation and customer engagement. Again for the numbers I give, I'll be using non-GAAP numbers basically in the same fashion as we have been using historically. This maintains consistency with our calls of past years and quarters and we feel and I think actually demonstrate that it provides a more accurate representation of the business. So with that in mind from the high level perspective, I have to say this was a strong quarter even by our standards. For the quarter we reported solid financial performance with non-GAAP revenues of $92.3 million. This represents a 35% increase from last year's Q2 of $68.2 million.

This quarter is fairly comparable although full quarter of this year is compared to only the final two thirds of last Q2, so accounting for this and our previous discussions of integration efficiencies our core growth rate would be high teens. Non-GAAP diluted earnings per share adjusted for the recent two-for-one stock split increased 43% with non-GAAP EPS of $0.30 that was up from last Q2's comparable of $0.21. This is also above our guidance on the analyst consensus, but it's primarily 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 both both primarily a direct consequence of strong top line performance, basically stirred by an uptick in customer adoption. Basically all major aspects of the business performed well. Each product line had really strong results. We saw strong continued gross and operating margins, strong cash flows and a stable business model. So basically every major metric was positive.

There was a continuation of the acceleration of customer engagements for both new adopters and longstanding relationships. So we saw continuation of the deepening customer relationships we have been mentioning on the previous calls in an accelerating fashion the last few. These transcended both geography and industry. We have noticed in particular an expanded light which customers are interacting with us particularly in the global and major accounts arena. Anecdotally customers said this was basically a result of their increasing market pressures and ANSYS execution as a long-term business and technology partner. Now, before I started into the operational results in more detail we're aware from some past calls and conferences that some people have a strong focus on core versus consolidated growth, we actually agree, that's why we have been reporting on it for the last few calls. But during these calls, we've also been talking about the blurring of that demarcation line and it's really a function of the rapid integration we have undertaken and it's one we do again all things being the same.

For the purpose of this call now that we're past the first anniversary of the Fluent acquisition, we will be focusing on consolidated revenues since we have been running the company that way as a combined business and there are too many factors that make the pure concept of core misleading. First the loss of OEM revenues from the core business that was basically a direct outcome of the acquisition itself and not any decline in the core business. Second we have done significant rebundling of the technology, what used to be core revenue might be sold and included in the fluent numbers because we have worked on front end with legacy meshing technologies and we really don't have a good way to capture, quantify, nor is there a good return for even trying to record that. But we know those effects are there. And then just as a third factor, with the combination of Fluent CFX, we have basically seen that our customers are focused on choosing technology offering the best solution for the type of problem they're solving. For instance CFX is very strong in turbo machinery, fluid mechanical processes, a range of other things, but in the past customers may have selected either technology purely based on the vendor relationship and that's no longer the case.

So now we may see sales pick up in either the core or the Fluent side of the business and it really causes comparisons to be a little bit misleading on that. So the bottom line is we will focus on the business metrics just as we have it our non-GAAP numbers, focus on the real trends and directions of the business. When you sort through all the numbers the core revenue business remains very healthy, it's growing in the high teens as will be evidenced throughout consolidated numbers that we're about to discuss. Fortunately, Q2 had two months overlap, second half is pure apples to apples and any of the transition confusion should dissipate with time. With that in mind I mentioned earlier that our non-GAAP revenue for the quarter was $92.3 million. And this revenue is 35% over the $68.2 million of Q2 of 2006. The non-GAAP diluted earnings again repeating for the quarter grew 43% to $0.30 up from $0.21 in 2006. So this exceeded the analyst consensus and it marks the 39th consecutive quarter that non-GAAP EPS has met or exceeded the consensus.

The overall non-GAAP operating margins for the quarter were 43% indicative of the solid top line results. This compares to 38% in Q2 of 2006 and it's noteworthy I think particularly not only from its self standing strength but in demonstrating the significant progress in one of the key areas that we focused on during the integration process and that's bringing the acquired business into the ANSYS business model. And I think we demonstrated that. Adjusted gross margins continued in line with our business model at a healthy 85%. And these margins occurred even while we were continuing to absorb some of the incremental costs to integrate global operations, basically migrating to customer common business platforms and bring Fluent in full compliance with Sarbanes-Oxley. We also had and full compliance with Sarbanes-Oxley. And we also had continued strong cash flows from operations of over $37 million which is a 46% increase over the $25 million of last Q2. For the six months of 2007 we reported total non-GAAP revenue of $181.9 million or 59% increase over the first half of the year. Now, similar to the results for the quarter this also represents equivalent core growth net upper teens range we discussed a couple minutes ago.

Software license business was disproportionately strong but the maintenance and service business also grew well. The year-to-date non-GAAP EPS was $0.59, it was a 37% increase over the $0.43 of 2006. Again the EPS numbers I'm talking about are split adjusted. Non-GAAP operating and gross margins, 43% and 85% respectively for the first half, and the cash flows from operations were over $59 million for the first six months, which is a 56% I be crease over the first half of 2006. So with that high level we will now slice and dice the numbers from a number of different perspectives, categories of business, geography, customer product, etc., so let's dig into category of business first. First of all the overall consolidated non-GAAP software license revenue grew 46% for the quarter and for the first half of the year is was 75%. Total paid up licenses grew at 34% for the quarter and 33% for year-to-date. The lease business grew 55% for the quarter and now represents 40% of our revenues. For the year-to-date it's more than double to again 40% of total revenues. So this continues strengthen our repeatable business base and aids in our overall visibility.

Total maintenance and service growth both grew at about 20% for the quarter. We saw our continued good balance between the high end and the desk top products, the upper ends products continue to perform well with multiphysics growing at 20% or above for both the quarter and the year. And there were impressive gains from the continuing migration of customers to the ANSYS workbench platform which is unifying all of our technologies both internal and acquired. We will be talking more about this on upcoming calls as our product strategy and integration plans continue to evolve into the products and services that basically are gaining momentum with our already large but expanding customer base. Different cut of business, our direct and indirect businesses both performed well maintaining the 70/30 split, that's 70 in favor of direct. As a repeat from previous calls we think this is significant for two reasons. It shows combined strength in our indirect channel, but also a future opportunity to selectively expand the product portfolio in that channel to take advantage of market opportunities.

Business intake was particularly strong and grew well in excess of the revenue growth which has allowed deferred revenue to rise to $126.8 million, which is a company record. Our already strong core repeatable business base has grown to 70% compared to 68% at this time last year. Even with the robust growth we have been experiencing, one of the greatest strengths of our business model is the consistent ability to maintain a solid base of recurring or repeatable revenue. It affords us visibility going into the quarter and has helped reduce the variability of traditional back end loading of revenue in the quarter. So we believe this is a by-product of our commitment to reinvest a high percentage of our revenue back into R&D which allows our customers to solve increasingly complex design issues. And that's what it's all about. We have a solid balance sheet. As I mentioned strong cash flows were $37 million for the quarter. That cash flow can easily support the amortization of the debt we took on with last year's acquisition. And throughout 2006 and 2007 to date we have accelerated the pay down of that debt.

From a geographic perspective, we saw strong growth for all reasons. 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 the past few quarters these luckily fall in regions where integration activities are already starting to play a strong role in broadening our footprint and relationships with key customers. And for the last ten years we have always been talking about some of the area in the world that we want to improve, so we will probably be talking about that every quarter as we go forward. From a total business perspective North America increased at 24% for the quarter. In general this was balanced across all aspects of the business including ANSYS direct office's channel and for the first half of the year the growth was 44%, but again that carries the noncomparable of the Fluent sales. Major orders in North America came from the same mix of both the longstanding and some new customers that we have come to expect such as Pratt and Whitney, General Electric, General Motors, Train, Goodrich, John Deere, Boeing, Lockheed Martin, NASA, Cummins, Hewlett-Packard, Solar Turbines, U.S. Nave, Lockheed Martin, Westinghouse, General Dynamics, Northrup Grubb, and we could go on for awhile here. But in general, strong across industries and combination of new and expanding customers and existing customers.

Europe continued to perform well with an overall 45% growth for the quarter. Again, the balance throughout the region was actually in a good way monotonously uniform across the major regions. Now there was a positive correcting impact of about $1.8 million, but the growth for the quarter was still in the upper 30% ex currency. The largest deals in Europe included both names you have heard us talk about in the pass as well as some new customers such as Siemens, Airbus, BMW, Dyson, Olsen Power, Atlas, Turbomecha, the UK Atomic Energy Authority, PRW, FT Microelectronics, Peugot, Citro, Envirotherm, MAN, as well as a number of firms associated with the nuclear reactor consortium that we mentioned on the last call, so starting to see some trickle down from that. A third region, our general international area, primarily the Asia Pacific, South America area continued -- it was probably less balanced than the other one, but with improvement over previous quarters. The region grew at 37% for the quarter.

Most regions grew in excess of 40% while Japan grew at 30%. Given our discussion on prior calls and the size of the Japanese operation we're pretty pleased with the recent progress in Japan, but we will still continue to focus on areas that continue to improve and one quarter doesn't make a trend, so we will, we continue to work on all aspects of that. India was a little slower than usual. Some of which seem to center around the repatriation of business, but we're still putting additional vigilance into some of the sub markets there. Currency impact for GIA was slightly negative for the region, almost a $0.25 million both for the quarter and year-to-date, so really not much of an impact there. Our key customer engagements in the region included Honeywell, Hitachi, National Aerospace, Toshiba, HCL, Petrobras, Info Tech, Power Pacific, General Electric, Panasonic, Brother Industries, Chung Aircraft, Texas Instruments, and so we saw a continuing variety of orders from both local based business and multinational expansion. Even though some of that appeared to come through repatriation at the HQ level, that's a natural expectation coming out of major and global accounts.

As a continuing theme we're seeing industry breadth and increased penetration within our strong and broad customer base and the pipeline of new opportunities is increasingly solid. The interest keeps growing but the challenges also keep growing. So it's a never ending kind of progression. We're encouraged are existing and new customer payment has continued to grow off the momentum we built over the course of the past few years. Nevertheless even with this increasing interest there is also cause for constant vigilance. We see on the daily headlines every day relative to the energy costs, they're increasing, tightening labor markets, slowing growth in pockets in the U.S. economy, currency fluctuations, geopolitical events, all these things that happen, they can be major or minor, but they can positively or adversely influence the timing and patterns of our customers' buying decisions.

So in summary, we saw strong balanced regional growth. Again there's always areas we're attempting it to strengthen, but again we have been saying that for ten years. Some of the ones that we mentioned recently are already starting to show signs of improvement while new opportunities to evolve in various parts of the world are also always presenting themselves. As you can see from the list of customer names there was a good industry and major account activity, continuing strong performance in every major geography and virtually all the sub regions, again particularly in our major accounts. But we still have a lot of improvement that we can tap on. So in light of this progress, I am stating we are continuing to ramp up our customer facing organization, both in response and in preparation for this growing opportunity.

Now, looking at things from a product revenue standpoint we saw no significant changes in either the trends or the guidance that we have been talking about from a product standpoint. Consolidated paid up license revenues for software grew at 34% quarter-to-quarter, lease business as I mentioned has grown to 40% of total. All parts of our product spectrum did well again with a good overall balance. Just to hit on another metric of the concept of the core business. We talked about the blurring, but we do have one area that's basically untouched by the blurring and that's the traditional ANSYS structural software business. If you took that part and just combined the lease, license and maintenance, the entire ball of wax for software, this part grew at 23% for the quarter and 20% year-to-date so it clearly supports the premise of the strong core growth.

ANSYS Workbench continued to gain traction and we're already expanding its capacity through the utilization of some new Fluent capabilities. And the good news is that we have been able to specify some dramatic improvements for our own integration architecture that will become manifest later this year and moving into 2008. These are direct outcomes of the commitment and progress of the technology integration in response -- the technology integration teams I should say in response to feedback, working with key customers about the globe and we're very appreciative and excited by their efforts.

ASPs for the quarter increased slightly at both the high and low end. This has been a multi-quarter trend as customer confidence has led to more licensing of increasingly comprehensive product steps. From a qualitative standpoint, the summary is that the broadest deepest set of integration simulation tools is continuing to get broader and deeper and we spent quite a lot of time on the product releases that occurred in early Q1 during our previous call this year in February and May. So I'm not going to belabor those now, but I invite anybody whose interested to visit us at ansys.com and there is details of the release this year as well as some upcoming news. Perhaps the most impressive from a long-term standpoint is the way that we have accelerated the evolution of our integration platform and what it means for the future of simulation and for ANSYS. We feel that our R&D expenditures coupled with customer collaboration can yield some very exciting technology progress.

So basically in summary, again another very strong quarter quantitatively and qualitatively. There was continued financial and market performance. In spite of the web of compliance and accounting requirements, our earnings and cash flow remain solid. So we will reiterate our long-term commitment to taking our markets to new level through what I call methodical investment pattern and technology that in fact takes years to build. And we have been at it for years. Sales and infrastructure that's interwoven with strong financial disciplines as the underpinnings of our unique business model combined with our customer satisfaction and isostats, basically this has allowed us over many years to continue our support of we feel meeting customer expectations and corporate commitments to our stakeholders. Over the long-term we have demonstrated our ability to grow top line in accordance with our guidance while maintaining solid margins and continuing to provide solid earnings growth while not sacrificing future prospects in the process.

We will continue to drive toward the long-term vision. Our long-term optimism and in the increasing confidence of recent are both intact. Even as we increase our outlook, this will also be tempered of course by our short-term engineers paranoia which I have to say has also served us well. So with that I'll turn it over to Maria Shields, our CFO, to provide you a more detailed look at our financials, looking at the expense structure, balance sheet highlights, as well as some other key factors of this quarter's business and our outlook on the future. Maria?

Thanks Jim. I'm just going to touch upon some highlights, then turn it back over to Jim. So kick it off with cost of sales, excluding acquisition related amortization and the impact of stock-based compensation which combined totaled $5.4 million, cost of sales for the second quarter totaled $13.6 million and that compares to $9.8 million in the second quarter of last year. This resulted in an overall non-GAAP gross profit margin of 85% for the second quarter. And tor the first half, our non-GAAP cost of sales that exclude $10.7 million of acquisition related amortization and stock-based compensation, totaled $27.1 million and that compares with $15.8 million in the 2006 period, also resulting in an 85% non-GAAP gross profit margin for the first half of the year. The comparative increase over last year's second quarter and the year-to-date period is largely related to the inclusion of the Fluent operations for a full quarter in 2007 compared to two months in '06 as well as increased third-party royalties. And as we take a look out through the second half of '07, we're targeting non-GAAP gross profit margin in the 85% range through the end of the year.

On the SG&A front, for the second quarter, SG&A expenses excluding $1.5 million of stock-based compensation were $25.6 million and that compares with $21.1 million in last year's Q2. And for the first half SG&A excluding about $3 million of stock-based comp was $51 million and that compares with $32.1 million in the first half of '06. The increase in both the quarter and year-to-date figures was largely impacted by the inclusion of Fluent's operational results in the 2007 period, higher head count cost, an increase in third-party consulting fees relative to the various IT integration projects that we have going on, as well as an increase in some tax compliance costs. All of these increases were partially offset by reduction of about $550,000 relative to the biannual international conference that we had in last year's second quarter. So looking ahead for the second half, as Jim previously mentioned, we're continuing to make investments in building our global sales and business infrastructure to support scalability and growth out into the future.

On the R&D front, in the area of R&D our total expenses for the quarter net of about $500,000 of stock-based comp were $13.1 million and that compares to $11.3 million in Q2 of last year. And on a year-to-date basis our total investment in R&D, excluding about $1 million of stock based compensation expense, reached $25.6 million compared to $20.4 million in last year's comparable period. Both the quarter to date and year-to-date increases were once again primarily driven by the full inclusion of Fluent's operations in the 2007 results as well as an increase in salaries and head count expenses. And also during the first half of '07 we have capitalized about $100,000 of internal development costs and that compares to $375,000 in last year's first half. For the second quarter in the first half, we delivered solid non-GAAP operating profit margins of 43%. The consolidated effective tax rate for the second quarter and first half was about 37%. And at this time, we're anticipating that throughout the remainder of '07 we should be able to maintain an overall tax rate of somewhere in that 36 to 38% range.

For the second quarter ANSYS reported an increase in non-GAAP EPS to $0.30 on 80.9 million diluted shares compared to $0.21 on 76.8 million shares in the second quarter of last year. For the first half non-GAAP EPS has increased 37% to $0.59 on 80.8 million diluted shares compared to $0.43 on 72.5 million shares in the first half of '06. Based upon our current business visibility we're increasing our annual outlook for non-GAAP EPS to a range of $1.14 to $1.16 for the full year of '07. That equates to about a 23 to 25% increase over 2006. And for Q3 we're currently targeting non-GAAP EPS of $0.26 to $0.27 and this outlook assumes that a share count, diluted share count of about 81 to 81.5 million shares. If we take a quick look through the balance sheet at June 30th, it remains very strong. Our cash in short-term investments are about $138 million, our consolidated net DSO was at 44 days. The outstanding balance on the debt is at $98.5 million and the interest rate on that is about 5.8% for the upcoming quarter. And the business generated record cash flows from operations of over $37 million for the quarter and $59 million for the first half. So with that Jim, I will turn it back over to you.

Okay, thanks Maria. To recap, sustained strong diversified financial performance of all major parameters of the business be it revenue, earnings, margin, cash flow, business (inaudible), visibility, for both the core and the combined business. Secondly, continued synergy with Fluent which positively impacted the quarter's non-GAAP revenue margins and EPS. Increasing customer interest at higher levels resulted in increased activity marked by industry and geographic diversity, broad-based adoption and accelerating interest in our combined offerings. And finally, a rapidly expanding portfolio of products augmented partnerships and relationships again a number of those mentioned on the ansys.com website, examples of our inclusion and featuring in the HP and Microsoft release on high performance computing, basically technology, distribution, customer relationships across the board. The long-term outlook stays bullish. For the remainder of 2007 we're raising our estimates from the last call based on Q2's performance and the newest data we have in front of us.

We anticipate a good Q3 performance. But just a reminder to everyone that with Europe contributing around 40% of our revenues, this is this is always a challenging quarter with summer seasonality. Nevertheless, we expect non-GAAP revenue in the $89 million to $90 million range with non-GAAP earnings in the $0.26 to $0.27 cent range. For fiscal year 2007 our guidance for non-GAAP revenue is an increase to the $369 million to $373 million range with non-GAAP EPS increasing the $1.14 to $1.16 range, which as Marie just mentioned is an annual increase of 23 to 25% over 2006. As I mentioned we're already ramping up parts of our business to take advantage of market opportunities in a controlled fashion across geographies and industries, but we will continually monitor the market factors as we have demonstrated over the past few years. So with that we're now prepared to respond to any specific questions you might have.

Thank you Mr. Cashman. Ladies and gentlemen, today's question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS) We will take our first question today from Richard Davis of Needham & Company.

Thanks a lot. Is it fair to conclude when I kind of think about your business that you have almost kind of a barbell typeset of growth. In other words you have seen larger maybe initial deal sizes on the high end, but at the same time you're growing, seeing good growth at the low end at the design space, I know you don't pull down product mix, but is that the logical way to think about the business.

When you say barbell I infer from that like a pure bimodal distribution. It's not, it's a little bit flatter than what you would normally see in a traditional bimodal distribution. However there are definite poles around some of the desk top markets and the high end. The problem is now that the buying patterns have gotten to be more periodic, where before they used to be event kind of sales, where there would be large sale and we'f go through it. Now they tend to be more, organically progressing along with the customer and in fact sometimes those high end and low end seats are occurring at the same time to the same customer. So that's more a realization of some of the things that people are -- that's being bought but not necessarily the way people buying them.

Some companies have tried to put project based almost rental of software where you have a hosted product. Have any of your customers expressed interest in that or does that seem like an extremely niche product offering.

When you have a customer base as large as ours you're always going to get that. Yes, we do have, we do have people that utilize it that way. I say by far the predominating, and even the trending information is that particularly from a major account aspect, the investment is to kind of bring those in. In other words maybe something equivalent to do you rent a tool or own one, it probably depends on how much you use it. And the economics as they start to increase the utilization of our software trend in that direction. However, we do have -- we do have our software available for use on that kind of basis. I'd say that traditionally it's the ones that are more spot usage, where for instance data centers at retail firms, retail firms that don't make a manufactured product, but they will utilize our software over the internet, over the web to actually optimize the cooling of their data centers for instance if they have got huge amount of server farms they need to cover.

So it's -- we are having that, but it tends to fill certain need gaps as opposed to being what I call a hugely secular trend. I'd say also the other thing is in many cases there are a lot of companies that when the usage builds up to a certain level, they are sensitive to having what they consider the crown jewels in terms of their new innovative type of products which they are highly sensitive and secure about. They just don't want to have any ability to have that leak out through unintended means. And because of that they tend to like to keep within its virtual corporate fire wall if you will.

Got it. Okay, well, thank you very much.

We will go next to Tim Fox with Deutsche Bank.

Thank you, good morning.

Morning.

First question a bit off of track, you mentioned a couple customers like ST Micro, TI, I was wondering if you could just elaborate a little bit on what kind of products you're selling into the ST Micros of the world and is that an area that you might think of expanding your functionality in the electronics vertical over time.

First of all we have been talking about doing that in the -- we have been talking about electronics for quite some while. When we say that we're talking about the totality of what's involved in the electronics. If you look at the thing of being able to use our explicit technology for drop shock of electronic equipment, there's an awful lot of things in terms of what we're doing with material -- material technology to basically allow new technologies, new sub straights such that the mechanical failures associated with that are key, but also the packaging of the technology so things can stay, can stay cool so they can operate, there's a minimum of electromagnetic field interference, basically if you look at electronics it's probably one place where a lot of multiphysics comes heavily into play. And it tends to be organizationally where a lot of that type of work is being done by the same people, they're kind of like the Renaissance men and women of engineering. So it tends to be something where we are tending to push the envelope. But if you look, they have these increasingly short design cycles, miniaturization, new components and technologies, increasing government regulations, FCC and above, and it just tends to have increasing competitive and market pressures. As a result that's the reason why those companies have continued to show up.

Interesting, thanks. That's useful. On my follow up would be on your commentary around billing out your sales force a bit. If you could just talk a little bit more, if you see that on the direct side or is that more investment indirect and is there any particular regions or even maybe vertical industries that you feel you need to address more deeply.

Well, first of all, I think it's one of those things if you look it at the breadth of the ANSYS space and we look at industry, we have a footprint in every industry. However, there are certain industries that are in different ebbs and flows, sometimes those industries are different depending upon the geography. So the way the traditional U.S. automotive market, the pressures that they're fighting, they may be in one particular area, where some of the Asian auto manufacturers are pushing ahead in other standpoints. As a result of that, we're tending to kind of push ahead in a lot of different industries, but continuing to build strengths as we're building customer relations. In terms of where we're expanding the customer presence, it's a pretty much across the board as you can see our geographic performance and proliferation of global major accounts is evidenced by just the short list of companies I went through. That's progressing, that's kind of transcending any one particular geography. As always we tend to be disproportionate with the leaders across all industries, regardless of what cycle those industries might be in. So it's a pretty significant issue both on support and business relationships of our customer facing organization. I guess I can't think of an area where we're not expanding. Can you think of one? I think across the board it's there.

Very good, congratulations on another good quarter.

Thank you.

We will go now to Barbara Coffey with Kaufman.

Yes, good morning. I know that Workbench 11 came out and I was wondering if there are features or functions in that that address different parts of the market or are ideal for different verticals, if you see any sales issues related to having a new product out in the market.

Well, first of all, any time you have a new product out in the market there's always issues, there's the introduction, the realization phase and things like that. Issues, yes, problems, no. The other thing is that with regard to features, the main thing is -- keep in mind that most of the features and the verticals that are served are primarily served by all the various functional aspects that plug into Workbench. As a result Workbench is a way of being able to link into a diverse IT environment, it's a way for us to bring acquired and internal technologies and in fact they can share it and basically being able to support the overall aspect of true with the emphasis on the word true multiphysics kind of capability. Now, that being said, there are certain industries that may not be as mature or deep into their utilization simulation and therefore Workbench provides a capability for increased streamlining and tailoring toward the specific of individual customers and industries that might be able to utilize that.

And one example for instance -- well, I've got an example on the low end and I've got an example on the high end. On the high end our biggest power users actually utilize the Turbo MacHinery Suite for developing aircraft engines, because you've got a combination of whirling high speed mechanics and you've got putting in simple terms, many of our technologists would wince if they heard me describe it it this way, but you've also got massive amounts of combustion, compressing air moving through there. So that's really high end stuff and that's an example of a tailored product on that. Now on another end you've also got a situation as I mentioned in the electronics industry being able to weave together all of these standpoints, so kind of in one portfolio people can determine will it survive a drop shock, will it survive vibration, will it overheat, will it have electromagnetic problems, so having all those things together in a in a single package that has some commonality and data integration with it is also an issue. So what I'm saying is it's a means towards being able to serve specific customers and their needs and specific industries and their needs, but the beauty of it is it allows us to marshal all of our technologies together with a minimum of redundancy and allows us to work in a very diverse multi-PLM and complex IT environment.

Thank you.

We will take our next question from [Mark Chappelle], Benchmark.

Hi, good morning and good job on the quarter.

Morning mark.

Morning. Jim, I believe in your prepared remarks you mentioned that the traditional structural software business grew about 23% in the quarter. First of all, did I catch that number right?

Yes, and the only reason I throw that out is that we've been talking about the blurring and I talked about the very substantial ways that that blurring happened. And it happened as a result of the integration we did and we're pleased with it and we think it helped propel the business and we'd do it again this a heartbeat. It was just -- and because of that we were able it to look at the business and say that even though anybody could divide any two numbers on a financial statement and come up with any percentage they wanted, we want to try to give an idea where that business is. And it's really in that range we have been talking about over the past few quarters. The only reason I put out that other piece of data is because it stands there as one significant chunk of business that really is outside the blurring, because it wasn't affected by the OEM crossover, it wasn't affected by the transfers of technology. And as such if you take that business in its totality, which I've said all lease, all license, all maintenance business and put that together, that grew at 23%. So again I don't want, you don't need to lock onto that number, all that says is hey, that's a pretty good growth rate for a major part of your business and it is the purest measure we have out there of the core business. In fact we actually think that 23% does support what we could say was in that high teens kind of range that we anecdotally had pegged the core growth business at. We didn't want to get confused over those comparables or have people connect the dots in the wrong way.

Would that be more of a proxy for license revenue growth versus total?

No, no, because if you look at the percentage of our software business, that's why I included the maintenance business. And that's why I included the whole thing, not just license business. Because I want to try to get something that would be I think very, very indicative. So I think that really is indicative of a major chunk of our historical business. So if anybody says that structural business, that that traditional business can't grow, no, there are growth prospects there, there are growth prospects in the CFD and all the other market spaces we're in, and there's particular opportunity in unifying all those together in a true multiphysics structure.

Okay. And moving on to large deals, did you have any deals over $1 million in the quarter?

Yes, we did. Yes, again, the interesting thing, we can't -- we can't specifically attribute the customer name to that, but the thing that was interesting was it was a longstanding ANSYS customer that also augmented with a significant chunk of Fluent revenue, because we got around that issue of which way do they have to -- do they have to go forward. Now, the other thing is there was also a reasonable lease portion of that business, too. And then there were -- there were a lot of deals in the upper six figure kind of thing. So it was in that kind of range. But again, probably what you would see is that we have a number of these customers that are repeat with significant deals throughout the year as opposed to getting one big lumpy deal every -- every couple years or something like that.

So is it fair to assume it was just one large deal then?

Of the seven figure magnitude, yes.

If you throw in the high six figures the number got bigger.

That's fine. One last question here, a couple quarters ago you had kind of gone out of your way to make some remarks about some favorable trends you're seeing in the energy sector as far as their adoption of engineering simulation technologies. I was wondering if you could expand on that, maybe give us a little bit of an update.

First of all it's continued, actually it's gotten kind of interesting. I talk about the fact of for instance alternate energy. I talked about -- in fact you even noticed when I mentioned companies like this quarter I think I certainly must have mentioned VA Hydro and (inaudible) -- those were major water turbine manufacturers, we talked about the wind farms, we talked about a lot, we talked about nuclear power, mentioned the U.K. and Asia Pacific, we talked about the new generation of environmentally friendly nuclear reactors, high efficiency, but in the past we talked about oil and gas, but it's even gotten more interesting at that standpoint where looking at alternate fuels in terms of biofuels, biomass, all of those kind of standpoints. So, actually driving what's driving those efficiencies. Secondarily there's been a lot of interest in terms of for instance in hybrid technology and how do you drive the driving of fuel cells, of batteries, of the control systems that actually combine those. Sometimes even they bridge on beyond that particular aspect. So it it just continues to do that. And even in the -- even in North America you probably noticed some activity there from us and the investment and CAE is continuing there even despite some of the stories you sometimes here coming out of Detroit. Can you think of anything?

No, I was going to say that's probably some of the investment in technology in some of the Big Three in Detroit that are going through their own financial struggles right now. The competitive environment is so incredible for them that we are seeing an uptick in our business in Detroit, which hasn't historically been an area of strength for us.

I mean, actually, there is one where they are actually working -- and this is where some of the concept of the combination of our simulation plus the ability even to simulate the chemical processes and combustion and things like that that go on, there's even things you have heard me talk about like the antimatter engine in past calls and things like that, there's actually one where they're talking about working on fuel from chicken, cow, animal fat. I mean, so it's amazing when you look at things they're doing. And the other thing is a lot of the impact of advanced materials. The interesting thing is people are getting into nontraditional development of energy, nontraditional use of materials, all of a sudden you don't have those years of engineering expertise people relied on. Therefore if you can simulate it and kind of run the impacts, high speed computer 20 or 30 years in the future, you may be able to avoid some significant blind alleys or problems. So in some ways that innovation is happening in a lot of different products is actually spurring people to get out of the status quo age of the way they used to look at simulation.

Thanks and good job again.

We will go now to Jason Rodgers, Great Lakes Review.

Good morning.

Morning.

Maintenance and service revenue, what was that as a percent of sales?

As a percent of total revenue?

Right.

36% for the quarter and 35% for the first half.

Yes.

Okay.

Basically, the predominating portion of that is the maintenance, the software portion of that, not the services for hire.

Okay. And what was that, what was that up on a core basis, the maintenance and service revenue?

On a quarterly basis it was up 19% and 36% for the first half.

Yes.

I mean on a core basis like ex Fluent.

Again, it would be in that high, it would be in that upper teens range.

Okay.

That's why we came across that.

Yes, upper teens for both periods.

Yes.

Okay. And you mentioned Europe is about 40% of revenue, what's North America.

North -- well for the quarter North America was in the upper 30s. Upper 30% I mean.

And was there any share repurchases in the quarter?

None.

No.

Okay. And I know it's small, but what was accounts payable in the quarter?

Accounts payable, hold on, let me pull up the balance sheet, accounts payable right now on June 30th it's about $3.5 million.

Okay. And finally, what do you estimate for CapEx and D&A for '07?

Cap Ex for the remainder of the year, we're at 6.5 through the first half and it's probably the equivalent thereabouts for the second half.

All right. Okay, thank you.

And our final question comes from Sanil Daptardar from Sentinel Asset Management.

Thanks. Do you see any help from (inaudible) customer base being migrated from 2D to 3D, do you see that in your business helping your business?

Well, it's helping us, it's not the major driver, but it's also any time up a migration thing it tends to move along there. So it's, there's two aspects of it, one of which is what part comes as a result of the product and autodesk ship and that's, that's a small nice but growing revenue stream for us. Then the other part is the upgrade, the upgrade path for us which has been, which has been a reasonable augmentation of the business, but it's not a hugely material aspect of it right now. But it can -- it certainly has the opportunity to build overtime.

So if the penetration of the 2D base increases to 3D in fact, 3D, then can we see acceleration in business, as you say it could be a material impact later on going forward.

It clearly could be. I mean, right now if you look at our footprint this is one other entry avenue, our primary entry avenue is with the major accounts we already have significant standpoints with. And as such we're growing in need to their need for simulation, of which 3 D migration can help support those aspects that aren't already at 3D.

Okay. You talked about the repeat business being very strong, I think the growth was 45% year over year if I got it correctly. 40% of revenues.

Well, it's the lease business is up to 40%. When you combine that with the actual ongoing maintenance streams that we have that are purely software related that's what took us up to 70%.

Okay. So do you think that the repeat business may continue at that kind of strong growth going forward or you think that --

Well, I think first of all we have a business model that tries to maintain that balance. 70% is higher than it traditionally has been seasonally adjusted for Q2, but keep in mind we have been talking about this for many years and it's historically been in the 60 plus range, but it has been ticking up over time. So there is a definite ticking up as we continue to build the software maintenance business, as our OEM sources of revenue provide opportunities for growth and as the lease base has also grown and stayed strong.

Okay. When you look into the second half in 2008, of course last full quarters had uneven exceptional growth, how do you view the growth going forward? Of course we had that acquisition of Fluent in this, but do you believe that the growth is going to come down to more normalized level to mid teens kind of going forward?

We have also said it it's kind of like a baseline, that mid, upper teens rate is kind of like a sustainable one without worrying about would a market spike happen that would drive it up, you get that time where things ramp through the curve and of course there might be other acquisitions in the future, you never know. So those type of situations, but we feel for a sustainable investment pattern with good earnings performance and a good sustainable solid growth by balancing our customer phasing expenditures, our R&D expenditures and the like, that we continue on that and continue to try to overachieve on the top line and continue to try to provide superior earnings performance.

If I may ask one last question in terms of the verticals, do you think any of the verticals still interpenetrated in (inaudible) simulation and you think --

I think they all are. I seriously think they all are. It's all a matter of degree. I don't think there's any that are saturated. They may be saturated from the 1990s, early 2000 view of what simulation was, but that's not, that's not really where this is all heading going forward. So there's a lot of things and only with a committed long-term pattern of innovation and R&D that solve some of the problems that have been impeding the adoption of simulation, you need to do that over the long-term and we have been doing it and we're committed to doing it for the future, those type of things, that opens up a wealth of new opportunities, I think that's something we have demonstrated over the last few years.

So which means that we are still in the early stages of the game, right?

I think so, yes, definitely. And that was the thesis several years ago, actually during the dot com craze when everybody said it was a dead market.

Okay, thanks a lot.

Thank you.

And Mr. Cashman with no other questions in queue, I'll turn it back to you for closing remarks.

Okay. Well, in close, we will continue to focus on execution, but I have to characterize us as having an increased enthusiasm due to basically pretty encouraging response that we have been seeing to our product vision as well as the current offerings. We don't take that for -- take for granted that we do have a strong combination of a solid business model, we have got longstanding loyal customers, we have got a channel partner that I'm biased, but I think is second to none, great technology and of course the talented employees, we're very appreciative of all those contingency groups. Like I've said before they're if fundamental to our DNA, they're fundamental to our sustained performance and they're fundamental to our future. So we still have a lot of opportunity as we just mentioned in the last question and a lot of work to do to reach our full potential. I would like to thank everybody on the extended ANSYS team for the first half and in advance for the second half of the year and thank all of you on this call. We will hopefully be talking to you next quarter. Thank you.

Ladies and gentlemen, thank you so much for your participation. This does conclude the conference, and you may now disconnect your line.