ANSYS Inc (ANSS) 2008 Q2 法說會逐字稿

Welcome to the ANSYS 2008 second quarter conference call. Today's call is being recorded at the request of ANSYS. If you have any objections you may disconnect at this time.

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

Okay. Thanks, Anthony. Good morning and welcome to the ANSYS call for Q2, 2008, and with me as usual today is Maria Shields, our CFO. We have a really full agenda today. As usual we will outline the highlights of the quarter and the year-to-date and some overall summary comments and then go into greater depth on the operational results. We will then go into encouraging qualitative factors driving our business and in particular some opening comments on the acquisition of Ansoft Corporation, which closed on July 31st. In the short amount of time since then, we have already started our integration and will provide initial guidance for the combined entity toward end of the call. In the course of this, Maria will update you on our line items expense, balance sheet, cash flows, and provide an update on our current outlook on earnings. After discussing these topics we will respond to any questions you may have. To begin with, Maria our Safe Harbor Statement.

Good morning. Thank you for joining us. Before we get started, we will just do a little bit of house keeping and remind everyone that during the course though call, some matters that is will be discussed as part of the prepared remarks or in response to questions may constitute forward-looking statements. Those involve risks and uncertainties which could cause actual results to differ materially from those projected. The 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 in our public filings including our 2007 annual report to stockholders. All of which are available via our website. Any forward-looking statements are based upon our best judgment as of today, and ANSYS undertakes no able obligation to update such information unless we do so in a public forum. During the course of this call, we will be making reference to nonGAAP financial measures. In an effort to provide supplemental information and a discussion and full reconciliation of GAAP to non-GAAP is included in this mornings 8-K and earnings release.

So with that I will turn it back over the Jim.

Well, put, Maria. Thanks. Q2 performance was strong on virtually all aspects of the ANSYS business. It represented results at the upper end of the range of our non-GAAP revenue guidance and above our earnings guidance. As a repeat, the numbers we are using are nonGAAP in our historically consistent fashion we have been doing that for year after year. Actually GAAP and non-GAAP revenues are equivalent for 2008 and they will be compared to the non-GAAP revenues for the comparable Q2 and first half of '07. Non-GAAP earnings include the usual amortization and stock-based compensation adjustments for both 2007 and 2008 again as detailed in our earnings announcement. We feel this really does give the most accurate representation of the business.

So for a high leal perspective, this was another very solid quarter even by our standards and off of a string of strong comparables. For quarter, we reported non-GAAP revenue of $111.2 million, this represents a 21% increase from last Q2's of $92.3 million. This was at the high end of our guidance which was $109 million to $111 million. Non-GAAP diluted earnings per share increased 40% with non-GAAP EPS of $0.42 up from last Q2's comparable $0.30. This was above our guidance and the analysts consensus and driven by the solid revenue performance we saw. Just in the past few years, our non-GAAP revenue and EPS performance for the quarter both primarily a direct consequence of strong top line performance which basically has been driven by increasing customer adoption by the time you through everything.

All major aspects of the business performed well, double digit growth in each geography and major product line. We saw a continued strong growth in operating margins, cash flows, and a real stable business model, basically every metric was positive. There was continued acceleration of customer engagements that included expansion in our major accounts and the addition of many new customers. Our results included 12 seven figure orders that actually disproportionately went to deferred revenue. The majority of these were from existing customers and they were forecasted as part of our Q2 guidance. There was continued expansion of portfolio sales and cross selling, something we expect to cultivate with Ansoft over the next few years.

At the 50,000-foot level we hear the same message from customers, general economic concerns for sure that heighten the need for competitive advantages that basically we feel can greatly be facilitated by uncompromising simulation offerings. So, if we slice -- that was a summary comments.

If we slice down the operational highlights first. As previously mentioned, our non-GAAP revenue for the quarter $111.2 million, 21% over the $92.3 million of Q2, 2007. Non-GAAP diluted earnings for the quarter grew 40% to $0.42 up from $0.30 per share in Q2 of 2007. This exceeded the analysts consensus and basically marks the 43rd consecutive quarter we have exceeded or met non-GAAP EPS.

Overall non-GAAP operating margin for the quarter were 48%. The reason nor is threefold. First the strong revenue performance filtered down to the bottom line. Secondly license revenues composed a higher percentage than usual in the product mix. And then finally the Ansoft acquisition temporarily changed our expense landscape in a couple of ways. The first of these were discretionary expenses that were deferred or refactored in anticipation of the combined entity going forward. Secondly, we focused on completing the acquisition obviously and some of these expenses had to be classified as transactions costs and therefore they wen to the balance sheet instead of the income statement. The important thing is on a go forward basis, we are be looking at the traditional levels of operating margins with the ability to generate upside while continuing our investments for the long term opportunity which we stay bullish on.

Additionally from this point forward our margin also be a blended ANSYS/Ansoft margin that's a little lower than standard margins and therefore lower than those of this past quarter. But this has happened in every acquisition we have done and we demonstrated our ability to build off the strenth of the ANSYS model to grow these margins over time. Non-GAAP gross margin continued in line with our business model at a healthy 86%. We saw a continued strong cash flows from operations. It was for the quarter, it was over $55 million which is a 49% over the 49% increase over the comparable $37 million of last Q2.

If we expand out and look at the first six months of 2008, we reported total non-GAAP revenue of $220.8 million, which was a 21% over the first half of last year. Software license business was disproportionately strong but the maintenance also grew well. The year-to-date non-GAAP EPS was $0.82, a 39% increase over the $0.59 in 2007. Non-GAAP operating and gross margins were 48% and 86% respectively for the first half. The cash flows from operations were over $92 million from for the first six months, which is a 56% increase over the first half of 2007.

Now we can go through the numbers. We'll go through a number of different perspectives. Let's start with category of business first. So, overall consolidated non-GAAP software license revenue grew 24% for the quarter and 25% for the first half of the year. Total paid up licenses grew at 30% for the quarter and 31% for the year-to-date. The lease business grew at 20% for the quarter to remain around 40% of revenue. And for the year-to-date it also grew at 20% basically representing 39% of our total revenues and of course this always continues to aid in our overall visibility and strengthens our repeatable business base. Total maintenance and service grew about 15% for both the quarter and the year-to-date.

Now the pure software and enhancement subscription portion grew in the mid-20s for both the quarter and the year. The pure services element declined, which is partially in line with our guidance to focus on higher margin services but also we were drawn into supporting the expanding software license growth. So we see that still being pretty much in line with where we are heading corporate. We saw our continued good balance between both the high end and the desktop products. The upper end products continued to perform well with all portions of the multilevel in excess of 20%. The lower end products grew less than that but this is really a direct consequence of our recent ability over the last few years to provide the upper end solutions. I mentioned the need for noncompromising solutions but we combined those with the things we have been doing for almost a decade with the lower end ease of use. So, feel basically this is completely in line with the competitive pressures and customer desires for those high fidelity solutions.

Our direct and indirect businesses both performed proportionately well maintaining a 69% to 31% split. That's in favor of direct, and as a repeat from previous calls, we feel this is significant for a couple of reasons. First of all, it shows continued strength in our indirect channel, but it also shows -- demonstrates a future opportunity to selectively expand our portfolio to that channel to take advantage of market opportunities.

Business intake was also strong it grew right in line with our revenue growth and it basically is what allowed the deferred revenue to rise 25% from last Q2's to $158.7 million which is another Company record. Our strong repeatable business base it remains at a healthy 69%. So even with our robust growth the consistent ability to maintain a solid base of recurring or repeatable revenue has been one of the hallmarks of our business model, and affords us visibility going into the quarter and reduced the variable of the back end loading of revenue in quarter. Basically we think this is direct result of the commitment that we've had over the years to invest a high percentage of our revenue back into R&D which basically then allows our customers to solve their increasingly complex design issues.

So you pile all of those factors together and we have a solid balance sheet and strong cash flows as I mentioned before, $55 million for the quarter and $92 million for the year-to-date which we have used to totally retire the debt associated with the 2006 acquisition of Fluent, obviously several years ahead of schedule. Of course we will be taking on a new round of debt associated with the acquisition of Ansoft. We will have more on that later.

Turning our attention to the geographic view, as I mentioned at the opening comments, we saw strong double digit growth for all regions. It was accentuated by a combination of new customers and large scale expansion within existing customers. North America increased at 14% for the quarter, 13% year-to-date. And while certain pockets of North America have seen more economic slowdown, North America is also the place where we have seen some of the most robust large account activity. In fact, I mentioned those numbers seven figure deal, nine of those and many, many more at the $0.5 million above level came from North American customers. Its also important to note that a fair amount of business activity that in the past would normally be in North America was actually implemented and therefore accounted for in other regions of the world. US multinationals in particular appear to be expanding their global usages at a faster pace in light of their business opportunities and realities. Nevertheless, we saw strong growth typically in excess of 20% in each of the ANSYS direct major account offices basically and we also saw increasing activity out of the indirect channel too.

So major orders in North America came from a typical mix of long standing and new customers pretty long list here. Let see. They become common place, [Delphi, General, Honeywell, Goodrich, Intel, Caterbill ar, Lockheed Martin, which is a -- more on that later. Shell Oil, the United Launch Alliance, Train, Hewlett Packard, Westing House, Booing, GT Solar, NASA, Walter Reed, Army Medical Center, Haliberton, Exon Mobile and Whirlpool]l and the list is fairly impressive and goes on for a while. But again, indicates that general need for the high end comprehensive simulation solutions.

Europe continued its impressive performance with 28% growth for the quarter. While there was good balance across the region, Germany and the central Europe portion led with a 35% growth. There was a positive currency impact. It was $3.3 million for the quarter but the growth for the quarter was about 20% ex currency. For the year Europe has grown 17% and 18% in constant dollar terms. The largest deals in Europe included again repeat customers and new ones, Rolls Royce are, Areba, Red Bull Racing, Airbus, Siemens, Hitachi Power, X Pro. Northsea Limited, Shell, Fusion Energy, BAE, ABB, Phillips, BP, probably see some trends in there but I will be talking more on those in a few minutes.

Our general international area continued to grow well and with quite balanced performance. But there are a number of sub themes. The overall growth was 17% for the quarter and Japan grew at 20%. The rest of GIA grew in the lower double digits. Most of the higher potential areas grew well, China had a number of orders that were deferred as the Company turned it efforts to the internal response of the massive earthquake that hit them in Q2. Now we -- all indications are we expect to book these orders over the next few quarter, but it does serve as one traditional example of how our geographic diversity provides some protection just for the multitude of thing that is can happen around the globe. Growth for year-to-date in GIA is 24% or about 18% in constant currencies. And if we just go down a brief list of the key customer engagements in the region, [Mitsubishi, Toyota, Honda, heavy industries, Cannon, Hitachi, Honeywell, Mitsubishi truck,heavy electrical, FUJI Heavy Industries]. You are seeing a trend that I am going to point to. Toshiba, Sony, Electron, Japan Atomic Energy Agency. So as you can readily tell from this list, the short list here we saw a continued variety of orders from both locally based businesses as well as expansion with multinationals.

As you can tell on a world wide basis we are seeing continued industry breadth from the list of large orders, but evident in the smaller orders as well. The trend toward all forms of energy optimization, whether it is conventional or Petro, oil/gas, nuclear, alternative continues to be very important. But we are also seeing and you can tell from that list, we are seeing ripple effects from the rising energy costs benefiting us. The number of auto, aircraft, and engine companies that are modulating their business to the new economic reality of energy cost continues to grow. You can see that in the sub list I provided.

In the auto industry, the new calculus of energy cost, it is giving rise to a wave of invasion, electric drives, fuel cells, hybrid as well as aerodynamic performance. Even general efficiency improvements in existing technology is becoming important. One of them actually even borders around a complete revisiting of the internal combustion engine with the efficiency of diesel. Doing all of this is a conceptual standpoint even without prototypes. In all of these cases, a rapid understanding of very complex problems with extreme accuracy is essential. hat basically this is pure core strength of ANSYS multiphysics, a key differentiator.

A similar pattern in the airframe and aerospace with no margin for failure, to allowance for that it is paramount but it is not stopping there. In that list, the reason it was a little longer than usual, you might have noticed that metals and mining figure prominently as do general heavy industries involving construction and infrastructure renewal around the globe, and of course all of these are being driven by a combination of huge energy costs and environmental concerns or at least that's the word we get from these range over customers. Apart from industry, most other trends persist. There's increased penetration with our strong and broad customer base. You heard a lot of familiar names of people who have listened to these calls over the years. The pipeline of new opportunities is increasingly solid. So, even in amidst those challenges, we are seeing growing interest. We are encouraged by the continuing multiyear momentum both in existing and new customers.

But nonetheless, even with this increasing interest, there's also a cause for constant vigilance due to the daily headlines we see relative to increasing energy costs, tightening labor market, concerns about slowing growth in concern parts of the US economy, currency fluctuations and the list goes on. So all or any of these can positively or adversely affect pattern and timing. We included these issues in our last call and we tried to factor it into our revenue guidance. I think we did so with reasonable visibility and accuracy. We will continue to do so go forward, while also working with the Ansoft team to gain a similar level of confidence in their visibility.

So in summary, there was double digit growth around the globe and as you can tell from the list of customers names, there was good industry and major account activity, continuing strong performance in every major geography and virtually all of the subregions, with a few totally understandable minor exceptions. Like what had happened in China. Major accounts were particularly potent. In short there was solid performance but there are areas we can improve almost everywhere too. n light of this progress we are continuing our progress of the ramp up of the customer facing organization in response to this growing opportunity.

Now, obviously this is all, predicated on this core strength in some of the industry-leading products we have. So how did that reflect on those? From a product revenue standpoint, basically we saw no significant changes in either the trend or the guidance we have given you the past fee quarters, consolidated paid up grew by 30% quarter to quarter. Business as I mentioned has remained at 40% of total. All parts of our product spectrum did well with good overall balance. The software maintenance enhancement subscription business grew at 23% for the quarter and 24% for the year-to-date. As I mentioned earlier, high end sales grew disproportionately, but the bottom line is with the pressures our customers are facing they simply can't compromise on the scope of the scoop or the accuracy of the solutions they're trying to get. ASP for the quarter increased notably at the high end, largely driven by a move to more comprehensive solution purchases. This has been a multiquarter trend also we have talked about if you go back and review and at the low end, ASPs were slightly up.

From a qualitative standpoint, I just have to say that the broadest, deepest set of integrated simulation tools basically that has been driving this customer adoption it is just continued to get broader and deeper. And it will be getting even broader and deeper yet since we are able to close the Ansoft acquisition after a number of hurdles. We have been able, after a lot of anticipation and chomping at the bit, to finally apply attention to putting two great companies together. One early certainty is that we have a very good team of people and world class technology joining us. We also feel that there is the ability to leverage the strength of the ANSYS business model and technology over the long term to provide lasting value for customers, employees and shareholders. The net impact is that we are reiterating our projects of making this modestly accretive in the first 12 months and we will be elaborating on that toward the end of this call.

Now being able to do complete product simulations across all industries with our customers products becoming increasingly a blur of mechanical and electrical effects is particularly exciting to us. Especially key is be able to do this in an equalitarian plug and play manner in a cad neutral environment that exists in most of our supply chains and to do that with our partners. So a lot of existing things there that there has been a lot of news I will hit the highlights on real quickly. Some of them may sound a little anticlimactic, but there's been a lot going on. ANSYS was recently upgraded to the Russell 1,000, the corporate strides we made. We removed from the S&P 600 small cap to the S&P 400 mid cap. And finally, we were one of only 13 US based IT companies to be included in the S&P Global Challengers list, basically comprised of 300 strong performers across the globe. And of course, at the end of August, we will be holding our biannual international conference in Pittsburg. We have been doing a lot to prep for that. This is always a key event to introduce our upcoming software and to communicate with our customers throughout the globe. The timing of this is particularly good since it allows us a great opportunity to introduce our customer base to the new Ansoft capabilities and a similar opportunity in reverse for Ansoft customer. It is already already shaping up to be the largest in the Company's 38 year history.

In summary we had another very strong quarter by all metrics both the quantitative and qualitative factors showed progress. And the results are demonstrated in our continued financial and market performance. We are able to do this despite regulatory hurdles involved with the Ansoft acquisition, on the continuing R&D innovation and preparing for the ANSYS conference and a number of other initiatives we feel are essential will building the foundation for our future growth. Our earnings and cash flow remain solid which should serve to continue our investment patterns and technical innovation and in sales as well as to support the debt associated with the Ansoft acquisition. So we will reiterate our long term commitment to taking our markets to a new level and to continue our pursuit of meeting customer expectations and our corporate commitment to our shareholders. I think over the long term we have demonstrated the ability to grow the top line in accordance underscored we this past quarter but also to maintain solid margins and earnings growth. So with this, again we are going to maintain the drive to our long term vision, long term optimism, increased confidence and reason. They're both in tact but we will continue with our short term factors out there.

Actually now I think I will turn it over to Maria shields our CFO again to provide you with a more detailed look at our financial expense structure, balance sheet highlights as well as other key factors of the business and maybe some comments on Ansoft and outlook on the future.

Thanks, Jim. We will move right into cost of sales excluding acquisition related amortization and the impact of stock-based compensation which combined totaled $4.9 million cost of sales for the second quarter totalled $15.7 million that compared to $13.6 million in the second quarter of '07. This resulted in overall non-GAAP gross profit margin of 86% for the second quarter and year-to-date basis, 2008 non-GAAP cost of sales which exclude $10.1 million of acquisition-related amortization and stock-based compensation totaled $31.3 million compared to $27.1 million also resulting in an 86% non-GAAP gross profit margin for the first half.

On the SG&A front, for the second quarter our total expenses which exclude $2.3 million of stock-based comp were $25.9 million, compared to $25.6 million in last year's Q2 and for the first half, SG&A expenses excluding $4.1 million of stock-based comp were $52.7 million compared to $51 million in the first half of last year. Looking ahead for the second half, we will continue to make investments in building our global sales and business infrastructure, as we integrate the Ansoft acquisition to support scalability for the combined businesses going forward.

In the area of R&D total expense for the quarter, net of approximately $700,000 related to stock-based comp were $15.8 million compared to $13.1 million in Q2 of last year. And for the first half, our total investment in R&D excluding $1.4 million stock-based comp has reached $31.1 million compared to $25.6 million for the first six months of last year. Based upon our current outlook for the remainder of 2008 we are targeting a blended rate in the mid-teens rate, relative to our continued investment in R&D for the new combined company.

For the second quarter and the first half of 2008, we delivered a solid non-GAAP operating profit margin of 48%, admittedly these are above what we had planned coming out of the gates in 2008, but as Jim articulated earlier we have adjusted various aspects over our original '08 planned spin in the first half in anticipation of the Ansoft acquisition. Our consolidated effective tax rate for the second quarter, first half were at 35% and 37% respectively. The second quarter tax rate was below what we had originally targeted, and that's primarily as a result of increased domestic manufacturing benefits and a shift in pretax income to certain foreign jurisdictions that have lower tax rates than the US. At this time, we are anticipating that throughout the remainer of this year, we should be able to maintain a consolidated tax rate somewhere in that 37% to 39% range.

For the second quarter, ANSYS reported a 40% increase in non-GAAP EPS to $0.42 on 82.1 million diluted shares compared to $0.30 on 80.9 million shares in the second quarter of last year. And on a year-to-date basis, our non-GAAP EPS has increased 39% to $0.82 on 81.9 million diluted shares compared to $0.59 on 80.8 million shares for the first half of last year. So, just to quickly summarize, the highlights and the drivers of our Q2 earnings. We had solid organic revenue growth led by 20% growth in both the software license and annual maintenance subscription business, we expanded our operating margin, all be it this was influenced by the delay of the timing of Ansoft, and a more sustainable tax rate that they had originally projected coming into the quarter.

So if we take a quick look at the balance sheet at June 30th our total cash and short term investments were at $202 million, our consolidated net DSO was at 45 days, and the record cash flows of $55. 1 million in the second quarter and $92.3 million in the first half, enabled us to pay off the remaining debts from the Fluent acquisition well in advance of the original 2011 contractual pay off date. And with the recent closing of the Ansoft acquisition, the Company did borrow $355 million under a new five-year credit facility. The debt carries an initial effective rate of approximately 4.7% which will gradually migrate down to a lower rate tier as we utilize the operating cash flows to pay down the debt and reduce our leverage just like you saw us do with the Fluent acquisition.

Also, we saw in Q2 and for the first half, given our level of international business, our 2008 results may continue to be favorably impacted by currency. In our current projections we are assuming that rates stay roughly the same as the current rate environment and if things change in the future we will modulate our outlook and let you know accordingly. So, currently based upon the current business visibility and the pipeline we are increasing our annual outlook for nonGAAP EPS to a range of $1.61 to $1.64 for the full year of 2008. For the upcoming third quarter, which will include two months of Ansoft operations, we are targeted non-GAAP EPS of $0.36 to $0.37. This assumes fully diluted share count of about 91 million shares to Q3, and we look forward to updating all of you relative to our progress with the Ansoft acquisition if our business in general as we get through this upcoming important first quarter of combined operations.

Jim?

Okay. Thanks, Maria. So to recap, first I'd say the continued strong and sustained diversified financial performance of all major parameters of the business slice it by revenue, earnings, margin, cash flow, business base, and even going forward, visibility. Secondly the closure of the Ansoft acquisition. Third of which is probably just the increasing customer interest, marked by the increased activity, it is across a broad front. It is evidenced by industry, geography, commitment levels, everything at least that's kind of how it is being represented by how the customers are interacting with us. And then probably finally a rapidly expanding product portfolio augmented by partnerships, relationships and technology distribution and customers that just got a lot bigger as a result of the July 31st Ansoft closure. So, the long-term outlook staying bullish for the remainer of 2008. As Maria mentioned, we are raising our estimates for the last call based on Q2 performance and the data available to us and combine them with the Ansoft contributions.

We anticipate strong Q3 performance, but just to remind everyone that with Europe contributing around 40% of our revenues this is always a challenging quarter with summer seasonality. Of course we will also have the noncomparable expense of the ANSYS conference.. There are a couple of other nonstandard factors to keep in mind with the combined guidance. First we will be including a couple of months of Ansoft contribution in this quarter. Just a reminder, Ansoft was an April 30th fiscal year and so we only get a couple of months from that. Also their historical revenue patterns within the quarter exhibit a much steeper hockey stick affect than that of ANSYS. As such the disproportionately large third month of their traditional quarter will not come into play in our calendar Q3. Secondly, the initial financing charges will be highest during this period.

Nevertheless, for Q3 we expect non-GAAP revenue in the $123 million to $127 million range with non-GAAP earnings in the $0.36 to $0.37 range. For fiscal year 2008 our guidance for non-GAAP revenue is an increase to the $493 million to $499 million range with non-GAAP EPS raising again in the $1.61 to $1.64 range. Even despite the mild initial delusion from the Ansoft acquisition, 2009 is shaping up to be accretive on a non-GAAP basis, totally consistent with our earlier projections of accretion in the first 12 months of combined operation. Although we are not giving specific guidance for 2009 at this juncture.

As I mentioned we continued to ramp up parts of our business in a judicious manner particularly market opportunities. We are going to continue to monitor the shorter term market factors on a global basis again as we have demonstrated over the years and of course our acquisition teams will be striving to maximize the opportunity of the Ansoft acquisition. As we have done with our other acquisitions. Overall we are pleased that given the and the 2009, we are still forecasting to deliver for Q3 and remainder of 2008 that will strengthen the foundations we enter into next year. With that in mind, probably it would be good if we just concluded here for the time being and see if there are any specific questions you might have. A lot of things going on.

Thank you, Mr. Cashman. (OPERATOR INSTRUCTIONS). We will take your first question from Andrew Matorin with JP Morgan.

Thank you very much. If you could talk a little bit, Jim about where, how you are seeing kind of adoption across verticals and if you are seeing kind of large deal volume in specific verticals or across all of your verticals and how you see that kind of playing out over time?

Okay. Well actually and I apologize because really the list of these, of the accounts I know is probably a little bit longer but it was actually just to illustrate that specific point. And again, I think that the, first of all you still see this continuing thing across the globe of any kind of things directly related to all forms of energy whether it be conventional maintenance and expansion of the traditional oil and gas kind of capabilities but also resurgence of nuclear but also trying to drive innovation and ultimate forms even quicker. That's why you will see a bunch of those. I won't go through those names again but those were some of the ones that were in there.

And of course we also talked a really bit and I think if you read in the business publications you will see how the new, the new factors of energy are driving things in the automotive and the traditional, industry, I mean the whole, the whole economic concerns in terms of fuel efficiency for airlines and therefore the impact on, on airframe in particular aero engine manufacturers is particularly key but also the amount of invasion going in, I mean the, a lot of the legacy concerns that used to drive automotive have shifted over to how do we take advantage of these, these new innovations that are going to be necessary for ongoing survival.

But I also spoke of some of the things I think have a ripple effect because this, you look at I mentioned a lot of heavy industry companies, making the massive machinery and construction equipment and things like that, that we are seeing a lot of infrastructure building around the globe and a lot of attention toward infrastructure renewal even inside US and North America. We are seeing that and we are seeing also the, the general metals, materials and mining sector is because if you look at the cost of, of finding, extracting, and refining all of those materials, obviously there's a lot of environmental and energy cost concerns with those. So I'd say, I'd say we are still seeing the same thing I have always said for years is that the leaders in all industries are heavily flocking to ANSYS solutions, and simulation in general. But particular those industries and I think the only new twist on it compared to the previous last few quarters has been what I call this ripple effect of other industries that are also being driven by those overall concerns. Did that --

Great. Thank you. Now a question for Maria. On the operating margins, post Ansoft, I mean I know you are not gifting guidance longer term on that how should we model that with respect to Fluent and the nice margin expects overtime. Do you expect kind of a similar type of performance with the Ansoft acquisition or is there something fundamentally different about their business that might prevent that?

Well, one of the fundamental differences is coming right out of the gate, they were their operating profit margins were stronger than Fluent's were when we acquire them. Certainly I'd say for the rest of '08 you are probably looking at combined operating profit margins more in the low 40s and I believe over time we are going to make investments just like we did in Fluent and every other acquisition to build, processes and infrastructure to absorb Ansoft into the ANSYS business that will derive synergies but they won't be becoming out of the gate.

I'd agree with Maria's comments but as she stated them. I'd say in general you will see a very consistent contour, maybe a slightly expanded time frame, but, not, not oceaned apart. So the fact is there's a lot of things that as we expand into these new spaces we want to make sure that we maximize the total area. So looking at the long term is a key aspect to but I think the similar phenomenon you have looked at it is going to play a big roll on this also.

Great. Thank you very much.

We will take your next question from Barbara Coffey with Kaufman Brothers.

Could you walk through how you expect to cross train your sales people and the timetable you expect it will take for the ANSYS people to be selling through Ansoft solutions and vice versa?

Well it may be, first of all some high level precepts but it is probably a little premature since we are now about four or five business days into being able to do that standpoint but it is going be in a manner very similar to how we have expanded. If you think of how far we have some in the last ten years in terms of expanding all of this. When you are talking about not only expanding breath but also extreme depth there's a lot to come into play and it usually doesn't exist in any one person to do that. We have set up a, we have set up a network to continue to have people who are very deep subject matter sales and support people. But we still have to work those under an overall frame work of dealing with major account customers. So it is almost, you almost have to think of it as moving down a pyramid where you don't take everybody and turn them into you though, geniuses in all aspects of the business. So that takes a certain amount of that will take a certain amount of time. But the fact is that the people who already know the physics are already in place and will be focusing on that. Then we need to provide the tools and basic understanding for those higher level people. That actually can occur rather quickly.

The final part is now rolling out to the channel. We will see those same things. There are certain channel partners. This has always been the case immediate grasp this, they make immediate investments and come up the curve very quickly. There's another group that is probably the largest or the larger part of the group that is very interested but it will take them a little more time. Typically that's typically in kind of a one to two year window type of thing to ramp up. Frankly our indirect channel is very consistent, but it is not totally homogeneous. There's probably a small portion of those that may not ever get to that point or they may choose not to move in that area but that's the same dynamic we have seen forever.

Basic familiarization so we can start to combine the technologies, basically have our technology teams determine how to get an immediate impact by linking together capabilities for the with the development then of a long term product road map and follows on and also maintaining the deep quality expertise and sales support and technology that exists many those companies today and still allow those to be applied together. In fact the one way we have started is we actually have if you will a bipartisan team that actually is defined the best way to assemble those assets and do it in a way that provides value to the customer but also provides career growth and satisfaction for the employees.

And just as a follow up, generally speaking are they the same head of engineering type buying the software for Ansoft as ANSYS?

No, not really. There is a lot of company overlap by name but if you look at it traditionally because of the DNA pools from which these things came you know the electronics people some times ten to be different buying or different clusters than the traditional ones not unlike I think if you ask the same question of someone that buys an Ecad system versus buying an Mcad system. Those people making those choices and solving the problem ten to be different people however they do converge. We do see overlap in terms of central technology bodies, IT groups, and even in some cases the board rooms. So even if the engineering might be done in different groups we do converge at least in some of those, those are the ones where we already have those interactions but this will be a progressive evolutionary migration on top of it all.

Thank you.

We will take your next question from Mark Schappel with The Benchmark Company.

Hi. Good morning.

Morning.

Just to start with you or with concerns over the general economy out there are you seeing any above average movement within your customer base to move toward your leasing your software?

No. As you have probably heard, if anything, I mean if I had to say at that the, that there was a slight leaning like a very small tick it actually seems like the companies that are thriving if anything they lean slightly towards the perpetual license because they view this as being now a long term commitment in survival issue. It is kind of difference of buying versus renting. But I mean as evidence in the numbers and at the end of the day, the numbers pretty much paint the picture is the lease business has continued to grow along with it. As I mentioned it has stayed right around that 39%, 40% of total business. It has been kind of growing somewhat proportionately. If you slice it down just a little bit, if you need to shade it one way or the other. If other it is a slight trim. The only other for a short period of time, post 9-11 and things like that, some people did tend to and they couldn't get access to capital or approval, they are just not seeing that now. It normally manifest itself not deciding not to buy something but changing the ground rules under which they acquire it but that's just what we have seen so far and one historical footnote we can point out.

A follow up, this was the second consecutive quarter we have seen seven seven figure deals for the Company. You did five the quarter before that. Obviously much higher than the one to two deals we generally associate with the Company. I was wondering if we should change the way we view the company with are respect to large deals going forward.

We are, we still are not. In fact one thing I said back when we had not many six figure orders I said this is, the string of grow with the customer realtime in a symbiotic fashion. That's what we started targeting ten years ago. We said we are not actually -- we are interested in supplying the demand as soon as it pops up not waiting for it to get pent up and then shoot behind the dock and go after it. So actually we did have a disproportionate number last quarter. This quarter we had what 12, 12 of them. I mentioned that the majority of that stuff though however went into deferred revenue. So the bottom line is we are not changing the way we interact with customers. They may buy in certain patterns again based on their reality but we are going after the continued growth and expansion inside customers as they evolve to newer generations of simulation usage and realities and I think this is, these seven figure deals are really just more of an artifact opposed to anything we are changing and what we are doing. So we are not for instance we are not inferring fig going forward and we are not changing the way we do that standpoint because frankly the relationships we have with our customers, have been I think serving both our customers and us well. Maria, do you notice any patterns?

No. I would just say particularity if you listen to some of the names, Mark, those that are experiencing either doing extremely well and who are no doubt leaders in their space and want to continue to be leaders coming out of the slow downs in certain geographies, are no doubt investing more just to drive innovation for when the times turn.

Okay. Thank you.

Our next question from David Heinz with Needham and Company.

Hi. Thanks. Jim can you update oz us as to where you think rein the market penetration in the business and then give us some perspective as to the size of the market opportunity that Ansoft bring into's the fold and how this might change the market penetration as a combined entity.

Let me wind those back wards because the easy one is that every time, every time we have added a world class significant technology to the ANSYS portfolio, we have almost immediately seen at least increased interest across customer base and usually subsequent adoption that tracks with that. So, in general, that's obviously some of the things our technology teams and our customers teams needs to deal with is saying okay we have we now have increased opportunity. What do we choose to do with that opportunity and obviously the right choice is to try to optimize it.

In terms of the, and boy this is the most bedeviling question, in term of percent penetration and total market size because the fact is this is not a fixed aggregate pie that's growing in a certain standpoint anymore than, ask anybody what the size of the home computing market was, the home PC market back in the '80's with MSDoss and ask them the same you know same question when this other thing came out. So in general we are still have a long way to go and even the traditional core ANSYS business because the core ANSYS business is not a static concern. It is not an incremental concern. We are trying to push through the threshold barriers to people utilizing it such that if people are trying to now, if the traditional automotive industries at least some of them are trying to implement new technologies that they don't have 30 years of tried and true practices on they have to have tools that allow them to project that without the benefit of all of the prototype and all of the experience. So you have to have predictive and accurate solutions. So, that is in essence something you couldn't see as being a creeping organic growth when people try to say here is the size of the current market and it is growing in aggregate at X%. These are things that are causing these dislocations that are driving the opportunity.

But I think it is very safe to say that under any metric, the core penetration is, is way low and I don't think that we can think in terms of the long term market as clearly being, an existing pie that grows at some arbitrary percentage per year because that will, that will miss all of the new innovations and customer realities that were try to go go forward. But I would still say any of the numbers I have thrown out in the past that deal with all of this fuzzy logic is that 20%, 30% kind of thing is still but keep in mine the target is continuing to grow. And all I have to do is turn you back ten years ago when people were saying the size of the market is this and it is basically saturated and going to grow at 5%. I mean that has not been the truth, and that kind of methodology would not have led in fact it probably kept people from even saying why bother in vesting in this because this is what the reality is.

I guess I just definitely have a problem answering the question because I have problems with the underlying premise but it is underpenetrated by any metric you can use and we think long term opportunity while not knowing is it going to, is it going to bubble up in three year, five years or ten years the fact is that the driving trends that are forcing customers to use this they're increasing and don't show signs of slacking off. At the end of the day, I think I have said a number of times we probably won't sleep until every engineer has these tools at their beck and call just the way they have word processing these days and ten years ago you would have been laughed at if you said every engineer would have word processing, they would say that's a waste of engineering talent.

Got it. That's helpful color. One quick follow up. As combined with Ansoft, what percent of total will be recurring? Will it give you more or less visibility heading into a given quarter?

Starting out slightly less, their model doesn't have very few models out there have traditionally had either the profitability or the visible. They actually have pretty good profitability as Maria eluded to. Those are elements in sol of the pines I was trying to get earlier on, of the ANSYS business model that I think will be one of those, one of those hit in synergies that will allow us to build the go far. It is something we will ramp up over time but it starts just like the blended margins and drops a little bit. As the business model tends to proliferate we plan on building those over time. Likewise for things like visibility and the like. But at the heart of that the good news is you have two solid businesses you are breaking together, two good groups of people and obviously you have a bunch of fairly uncontested technology to work with.

Got it. Thanks for taking my questions.

Okay.

We will take your next question from Steve Ashley with Robert Baird.

Hi, guys this is actually Jack Miller in for Steve. Just a quick question on your 2008 revenue guidance, curious if the total amount of the raise is all from Ansoft or r to what extent have you raised your outlook for the organic growth of the business.

No, first answer cat boar include no, it was not, it was not just Ansoft but we actually raised our revenue, our revenue guidance. I don't know if.

Overall we are still targeting in the probably 15% to 17% for the organic business and opportunity as we get more visibility going forward.

So that mid to upper teens long term that we have been talking about for ages as kind of like a baseline kind of that is still in tact but there was definitely an increase both top and bottom line for the core business.

Okay. Great. And then just a related question, you talked about retaining all of the Ansoft employees just curious if that has been the case or if there has been any attrition in the sales force of the developers, have you been able to retain all of the key employees you had hoped to?

Well, in general, we never, we never start off with a predication of obviously of doing, we start from a bias of saying wait a minute, good company, remember I said that from the beginning, good people, great technology. So we are going keep that. But again in these situations there's always a little bit of situation that changes. But relative, and some people do it for good reasons and some people do it for not very good reasons. So, in general, apart from the fact that the CEO retired, but that was a planned activity, it is basically the teams are pretty much in place.

Great. Thanks, guys.

We will now take your next question from Greg Halter with Great Lakes Review.

Yes. Congratulations on the fine results. On a combined basis, do you anticipate any significant changes in your capital spending either for 2008 or going into 2009?

No. I think, I think that the rates you have been seeing of what we have been doing because some of what we are invested in in the past couple of years has been migrating Fluent on to some of the ANSYS platforms and investing in infrastructure. With that behind us you will see some investment relative to those same investments but I don't think you will see any huge additional ramp up.

That's correct. Keep in mind we have been talking actually over the last three or four quarters we have the financial systems is one aspect we do to do that obviously with Ansoft but we talked about in response to the customer demand and increasing footprint we have got that over several quarters we had a project underway to converge the front of office or basically customer relation management sales force automation capabilities. So that was already underway and of course those are things that we, obviously now we will also factor in the right way to bring Ansoft in. But again no major trajectory changes I can see.

thank you. Maria, I think you said about $13 million for '08 is that still approximately the figure you would expect.

Yes, organic business and then I would probably add in for, for Ansoft, maybe an incremental 1 million on the topside.

Okay. Great. Thank you.

We will now take your next question from Greg Dunham with Deutsche bank.

Yes. Thank you. On the more favorable mix of revenue going forward and what you have posted here. As services declined while deal sizes are going up and you are doing multinational, could you just talk about that in terms of that migration and how we should expect that going forward?

Well, again we are been trying to track and determine what is the difference between spikes and trends. Let's talk about first of all, there are trends that we are driving to and trends we observe and then trends we are trying to determine in aggregate because when you have a user base and geography, this diversified making sure you don't overcategorize is also a concern. With regard to the pure body for hire service we are a software/technology company. For us services are a way to amplify and accelerate software adoption.

So we said from the very beginning there were certain areas that would not grow at the same rate and for instance, if we didn't have a core competency in certain types of services we would use our channel l our partners for a change of those things which would allow us to deploy our people driving the technology and opening new horizons of adoptions. That's pretty much what we have exhibited over previous quarters. There will always be an element of that high end service business. We are getting increased demands from our customer partners for technology development, and platform development, as they standardize on ANSYS solutions. So that is an example of a shift of a higher value thing as opposed to just doing traditional service and implementation type of work. That's the first one that's very much keeping with the trajectories we have been talking about for several years now.

The other one is we are talking about providing entrance to new users, driving things with ease of use, but the one good news is as we have been driving the technologies at the high end and we have simultaneously been able to take those ease of use concepts and put those in to the higher end products. So it is very much like these, even if you are buying home computer electronics or PCs or things like that. What's going on inside the box is incredibly complicated but the ease of use for people who can use it are increasing. What that has allowed is it is helping to knock down the, the, it is, the barrier of adoption, "it is too hard to use". And say okay I want the accuracy and power to solve really tough problems, but obviously I want it easier to use and I want you know less confusion to have to go through. That has been driving a trend toward the higher end products, which in course it is manifested itself in every aspect from our ASP to our margin and et cetera.

So those are some of the overall trends. When you talk about the other ones we have already hit the issue of some of the bigger order profile that is have come in and some of the other adoption rates and those probably, I don't know if we can aggregate those into mega trends, they tend to be more specific to the individual realities of individual customer adoption patterns.

That makes sense. One follow up quickly, given the the $12 million deals but a lot of that hitting if balance and at the same time it appears you are doing less lease business than I am sorry. Yeah less lease business than perpetual, what is the dynamic there? How is that revenue going to be recognized?

The key thing is when it hits the, first of all, I said the majority of which you know there was still a significant amount of new business that came from those orders. I am just saying it was greater I think if I aggregated all of them, greater than 50% by by a safe margin going into the deferred. Now in that deferred there were on going maintenance or enhancement subscriptions and lease. There was a lot of all of that business going on. So that is why for instance you didn't see a huge, you didn't see any decay in the lease business as a per sen of tote, boom still right at the 39, 40% total we have been parked at for quite a while all be it though the paid was particularly strong but it is you look at the way our model goes and subscription enhancement even perpetual licenses served to help build our long term visibility. I think all of those factors again they just continue to line up in a tapestry that support that. That's why you wouldn't see any of these major long term trends shifting.

Okay. Thank you.

Okay.

We will take your final question from Ross MacMillan with Jefferies and Company.

Thanks. As I look at the last two quarters for ANSYS alone I think your known GAAP operating margins is about 40% on average. If I look at the last two quarters of Ansoft it is about had 42%. There's a fourth quarter in there. So I know the third quarter was 41%. But anyway, it suggests the blended rate is more like 46% but your guidance obviously suggests a lower margin than that for the second half of the year. Can you just maybe comment on that and I guess specifically maybe talk about some of the costs that you didn't make in Q2 but you plan to spend going forward?

Yes, Ross. You heard my commentary earlier, no doubt one of the things for Q3 to keep in mind that Jim alluded to is the Ansoft model was no doubt more back end loaded toward the third month than our model is given the lease base.

Later quarters also.

So Q3 our calendar Q3 that will only have the first two months has a different profile of operating margin than when you add in that important third month of their quarter which will go into Q4. We have always got some investments we have got to make relative to that weren't in, in their original profitabilities that will involve making investments to platforms and things in the short term that we need to get behind us. So, we are no doubt making taking a conservative outlook and hope that if we can get these things together quickly going then you will see improvement going forward.

Great. And then, just on the comment on China, Jim can you just recap on that in terms of are there orders really already bounced back? In other words you are kind of able to determine what specifically around the earthquake issue or just trying to get some color in that?

And the final one just Maria if you can provide a total FX impact I heard Jim's comments on Europe but I'm not sure if that was a total FX number.

Okay. First of all the color on China was essentially when that earthquake happened there were some, some Government, I can't, I know the legal work is edict or mandate but there was a big push for the internal country you to rally around that. It is not unlike a way a lot of people reacted to Katrina here in terms of sending relief aid whether it was official or a private or public sector. That definitely happened. I will tell you to the other thing is that there is another thing of a nonnatural disaster kind of thing going on in China that as a lot of people tied up. That's the getting ready to kick off the Olympics. The only word we got is that, that in general, these, the planned purchases didn't vaporize but they took a backseat to helping basically the provinces get themselves back on their feet and try to get ready for this, something they view as a major show case event.

So what I am trying to say is that yeah China did did have a blip. We think it is explainable and projections we have is that over the next few quarters it really unearth itself out, however we try to give as much color to all of the pluses and minuses as we can. And this was one example.

Great.

The FX question.

Yeah, FX, to the top line rough $4.7 million and $2.3 million at the operating margin level.

Perfect. Thank you.

That does conclude today's question-and-answer session. With that I will turn it back to Mr. Cashman for closing or additional remarks.

We have pretty much hit everything. But all I would say is for those of you that have followed the ANSYS story for years this will come as no surprise. We remain bullish on the long term, some short term cautious optimism. That's why Maria did the Safe Harbor because there are those driving factors and we are excited or I'm excited about the opportunities that lie ahead for our customers, employees, partners, shareholders take the whole echo system. We don't take our commitments lightly. We will strive to deliver on them. In the short term emphasis is continued execution, but the customer acceptance we are seen of our existing vision and products combined with closing the Ansoft acquisition and being able to build upon that. The only bolster enthusiasm, nothing is ever going to be easy but by do we have some things to work with here. So we continue to be propelled by a strong combination, we have got the solid business model. We have got loyal customers and partners. We have great technology and we have got and even know larger talented pool of committed employees. So, a lot of opportunity, still a lot of work do to reach our full potential and I guess I will just close by saying I'd like to thank everyone on the extended ANSYS team for the first half and in advance for the remainder of this year and the one's to go. Thanks a lot and hopefully we will be talk to go you in the next few months. That's signing off.

That does conclude today's teleconference. Thank you for your participation. You may now disconnect your lines.