ANSYS Inc (ANSS) 2008 Q3 法說會逐字稿

Good morning and welcome to the ANSYS third quarter 2008 earnings conference call. (OPERATOR INSTRUCTIONS) 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, Tricia. Good morning and welcome, everybody, to the ANSYS call for Q3, 2008. We are pleased to announce another solid quarter, and with me today to help me do that is our CFO, Maria Shields. I'm sure this is going to be an interesting agenda and discussion today, but we plan on going through our usual outline of the highlights of the quarter and the year-to-date in summary fashion, and then of course we'll go into greater depth on all the operational results, and also go into some discussion of some qualitative factors which accentuate our long-term optimism, as well as some fire walls that we put in place during this time of current upheaval or confusion in the market.

In general, the value proposition of our offerings remain quite strong. Essentially, it's that tangible value that we bring to our customers' business results that is real in both good and bad times. And, this value has been reinforced by our closing of the Ansoft acquisition on July 31st. In the short time since then, we've been already been able to start our integration efforts. In the course of this, Maria will then update you on our line item expense performance, balance sheet, cash flows, and provide an update on our current outlook on earnings. We will then go into projections for the remainder of this year, and our outlook for 2009. After discussing those topics, we will be happy to respond to any questions you may have. So, let's get started. Maria, our Safe Harbor statement, if you please?

Okay. Thank, Jim. Good morning, and again, thank you, everyone for joining to us review the highlights of ANSYS' third quarter results. Before we begin, I'd like to remind everyone that our third quarter results include two months of Ansoft operations, following the successful close of the acquisition on July 31st. Also during the course of this conference call, some matters that will be discussed as either part of the prepared remarks, or in response to questions, may constitute forward-looking statements that involve risks and uncertainties which could cause actual results to differ materially from those projected. 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 with the SEC, all which have are also available via our Website. Any forward-looking statements are based upon the Company's best judgment as of today, and ANSYS undertakes no obligation to update any such information unless we do so in a public forum. Also, during the course of this call, we will 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 related form 8K. Now with that all covered, I'll turn it back over to Jim who is going to go through an overview of the third quarter and year-to-date performance on a number of fronts, including profit as it relates to the Ansoft acquisition, as well as our current outlook for the remainder of 2008 and fiscal 2009. Jim?

Okay. Let's start with the overall summary. So basically, Q3 business results saw continued strong performance of virtually all aspects of the ANSYS business. It represented results above the upper end of the range of our non-GAAP revenue guidance, and above our earnings guidance as well. Now, as always, the numbers that we are using are non-GAAP. This is a historically consistent fashion that we've taken. Non-GAAP earnings include the add back for purchase accounting treatment of acquired deferred revenue, acquisition related amortization, and stock based compensation adjustments for 2007 and 2008, as detailed in our earnings announcement. So, to those of you who are new to our history, since we have moved into some new indexes, after an acquisition from a GAAP perspective, we actually "kind of lose" some of the deferred revenue from leases and maintenance, but the business is still there, the cash is there, and the revenue typically renews at a very high rate, so that's the reason we make those distinctions. So, in our non-GAAP numbers, we treat the business as if it was, in fact, there, so as to not to deflate the current years business, or to artificially inflate subsequent years growth. This has been our methodology for years and we feel it gives the most accurate and historically comparable representation of the underlying business performance. So with that said, from a high level perspective, this was again a very solid quarter, even in these tougher economic times and off of a strong comparable.

For the quarter, we reported solid financial performance with non-GAAP revenues of $128.8 million, this represents a 37% increase from last Q3's $94 million. This is a little over our guidance of the $123 million to $127 million range. And as Maria had mentioned earlier, keep in mind this does include two months of Ansoft revenue. If we exclude all that, the organic growth was 19% , or 17% in constant currencies. Non-GAAP diluted earnings per share increased 39%, with non-GAAP EPS of $0.43, up from last Q3's comparable of $0.31, and this was also above our guidance in the analyst consensus. Now, just as in the past few years, our non-GAAP revenue and EPS performance for the quarter, and they are both primarily a direct consequence of strong topline performance, which has been driven by increasing customer adoption, but were also aided by positive vectors in the Ansoft integration and our own longstanding disciplined approach to spending.

All major aspects of the business performed well. There is double digit growth in each geography and product line. We saw continued strong growth in operating margins, cash flows, the business model is essentially stable. Basically every metric was positive. We saw continued acceleration of customer engagements, included expansions in our major accounts, and the addition of many new customers. We even saw few of the seven figure orders, which contributed a little bit to new license business for the quarter, but disproportionately contributed to building the deferred revenue balance. There was a continued expansion of portfolio sales and cross selling, something that we expect to cultivate with Ansoft over the next few years. On an anecdotal basis, customers have still been saying that even in tougher economic times, there's a heightened need for product innovation and they are not ramping down. Furthermore, they generally feel that they cannot achieve this mission with lower end or less capable solutions, and this is one element of our longstanding story that I guess sometimes escapes the listening community, but it's also one that's seen us through a wide range of economic conditions while still filling critical customer needs.

So, if we just focus on the operations for a few minutes, as previously mentioned, the non-GAAP revenue for the quarter was $128.8 million, again 37% over the $94 million of Q3 in 2007. The third quarter revenue results, they include a $1.6 million in positive currency benefit as well as $17.1 million from Ansoft. Our non-GAAP diluted earnings for the quarter grew 39%, to $0.43, up from $0.31 per share in Q3 of 2007. Actually, this marks the the 44th consecutive quarter that non-GAAP EPS has met or exceeded consensus, actually exceeding in this case. Overall non-GAAP operating margins for the quarter were 45.6%. This was a little down from past quarters, but also a little above the expected blending operating margins with Ansoft. The extra performance was partially due to the increased top line performance, but also due to some positive integration performance.

Non-GAAP gross margins continued in line with our business model and held the 87%, with pretty much the same story as the net margins. We also saw strong continued cash flows from operations of over $42.7 million, which was a 63% increase over the $26.3 million of last Q3. For the nine months of 2008, we reported total non-GAAP revenue of $349.6 million, and this is a 27% increase over the first nine months of last year. Again, the number includes a modest two month contribution from Ansoft, but excluding that, the organic growth was 21%, or 17% in constant currencies. Software license business was disproportionately strong, but maintenance of service revenue grew well, particularly in the software enhancement subscriptions. The year-to-date non-GAAP EPS for this period was $1.25, it's a 39% increase over the $0.90 of 2007. Non-GAAP operating and gross margins were 47% and 86%, respectively, for the first nine months, which both represent an improvement over 2007. And, the cash flows from operations were over $135 million for the first nine months and this is a 58% increase over the comparable 2007.

So now, I guess we can just take a quick look at the total picture from a number of different perspectives, so we will look at category of business, geography, customer, product. Let's look at category of business first. Overall, consolidated non-GAAP software license revenue grew 33% for the quarter, and 27% for the first nine months. On an organic basis, these were 18% for the quarter, and 22% for the year-to-date. Total pay up licenses grew at 61% for the quarter, or 25% organically, taking out the Ansoft contribution, and for the year-to-date paid up growth was 41%, or 29% organic. Lease business grew 17% for the quarter to equal about 35% of total business. This reflects a slight shift due to the historical Ansoft business being nonlease. For the organic business, it grew at about the same rate as well, so we kept that trend in place, and for the year-to-date it grew 19%, and represents about 38% total revenues.

This repeatable business base continues to aid in our overall visibility. The lease business may be something that we could see trending up, given the current challenges that some of our customers face relative to temporal access to capital budgets, but it's just one other element of a flexible business model that allows to us meet the business needs of our customers. Total maintenance and service grew about 45% for the quarter, and 26% year-to-date, or again in organic terms, 20% for the quarter and 17% for the year-to-date. The Peer Software maintenance enhancement subscription portion grew at 57% for the quarter, and 35% for the year-to-date. Again, if we just break that into the traditional Ansoft business in organic terms, the Peer Software maintenance and enhancement subscription portion grew at 25% for the quarter, 24% year-to-date, that's the organic comparison. The Peer Services element was around 5% of total revenue for both the quarter and the year.

Now, while we saw growth across all of our product lines, there is no doubt that we are seeing a disproportionate shift toward our multi-physics and higher level software. These lines grew in excess of 25%, which only goes to underscore that trend toward uncompromising solution power that our customers are requiring. But how can that be accelerated, but also the fact that we can accelerate that by bringing with that power, the desktop type of usability that we've been pioneering for years, and that's exactly the purpose of our Workbench based offerings. Our direct and indirect businesses both performed proportionately well, while maintaining about a 70/30 split in favor of direct. This reflects a very consistent organic performance with a very slight bump in favor of direct, exclusively related to the direct nature of the Ansoft business. Ultimately, portions of this business will be adopted by the Channel, but minimally in the short term, as technical competencies and business plans will have to be developed and assessed and worked into our long-term framework.

Business intake was also strong and it grew at 47% for the quarter and 29% year-to-date. Now, both of these are in excess of revenue growth, which is a good leading indicator for us and it's also allowed our deferred revenue to rise 33%, as compared to last year's Q3 to $153.1 million. Our strong repeatable business base remained at a healthy 68% on a larger base, even including a less visible Ansoft component. So even with our robust growth, the consistent ability to maintain a solid base of recurring or repeatable revenue is one of the hallmarks of our business model. It gives us visibility going into the quarter, it basically has helped to reduce the variability of traditional back end loading of revenue in the quarter. We basically believe that it's a direct result of our commitment to reinvest a high percentage of our revenue back into R&D, which in turn, allows our customers to solve their increasingly complex design issues. We have a strong balance sheet and strong cash flows. Maria will get into more of that in detail, but it was $42.7 million for the quarter, and $135 million for the year-to-date. These strong cash flows afford us a flexibility in dealing with accelerated debt buy down, and the share repurchase, or economic insulation as needs may dictate.

So turning our attention, let's turn it to geographic view right now. We saw double digit growth for all regions, although there were a range of economic realities in each. The geographic diversity has allowed us, for years, to respond to ever changing geo-economic landscapes which is particularly important now and into the future. Our business this quarter was once again accentuated by combination industry breadth, new customers and a wide expansion within our existing customers. North America increased to 25% for the quarter, and 18% year-to-date. US multi-nationals, in particular, appear to be expending a lot of their efforts basically expanding global usage at a faster pace in light of their business opportunities, and as such, the organic business was in the mid single digits, but in total, all of our direct offices and major account activities were at double digit range. Major orders in North America came from a typical mix of both longstanding and new customers. Just to name a few of the notables, going down the list here, General Motors, Pratt and Whitney, Northrop Grumman, Parker Hannifin, US Army, Daimler Chrysler, US Department of Energies, Sandia National Labs, Shell Oil, Nova Chemicals, Lockheed Martin, NASA, BAE Harris, Honeywell, Rolls Royce, and Becton Dickinson were all involved in major orders in North America. Europe continued it's impressive performance also, with an overall 31% growth for the quarter. While there was good balance across the regions, Germany led with a 40% plus, growth.

There was mild currency impact that was positive of about $800,000, but the growth in the quarter was still 29% , ex currency. For the year, Europe has grown at 28%, or over 22% in constant dollar terms. I would note that since Ansoft has a relatively small footprint in Europe, the total growth number is largely organic. In fact, if we just took the organic portion, European growth was 26%, or 20% ex currency, for the year-to-date. The largest deals in Europe included repeat customers, and new ones such as Ferrari, Siemens, Arriva, Airbus, Bosch, Schneider Electric, Luke Oil, Alstons, Rolls Royce, GlaxoSmithKline, EDS, Continental Automotive, Volvo, and Peugeot.

Our general international area also continued to grow well, and with actually quite balanced performance, but with a number of sub themes. The overall growth for the region was 65% for the quarter. This was boosted by a strong Ansoft presence for two months, but the organic growth rate was also strong at 31%. Japan grew at 55% for the quarter, 23% organic. The rest of GIA grew in excess of those numbers. The year-to-date growth in this region, 38%, and with a minor positive currency impact, or 33% year-to-date growth in the region, ex currency. Key customer engagements in the region included Petrobras, Honda, Ishikawajima Heavy Industries, Ibara, Cummins, Exa, Ibishi Commercial Aircraft, Andritz, Toshiba, BHEL, Mitsubishi, Vestas Wind, Honeywell Pioneer, China Locomotive, Sumitomo, Nippon Steel, and just from the short list, it's obvious that we saw continuing variety of orders from local based businesses and multinational expansion, along with broad based industry. And, that's one thing that tells us, on a worldwide basis, is we are seeing continued industry breadth.

From the list of large orders, but evident in some of the smaller ones also, there is a continued trend towards all forms of energy optimization, whether it's conventional, petroleum, nuclear or alternative. We also continue to see ripple effects from the rising energy costs and this is true even as the oil prices have dropped a little bit, but the number of auto, aircraft and engine companies that are adjusting their businesses to the new economic realities of energy costs, it continues to grow. In the new auto industry, this new calculus of energy cost has given rise to a wave of innovation which is right up our alley, in everything from electric drives, fuel cells, hybrids, and hydrogen engines, as well as aerodynamic performance. There was even a noticeable surge in the areas of turbochargers for engine efficiency in turbo machinery. Now this is confined with the proliferation of the electronic content cars for control and safety systems, entertainment systems, powertrain innovations, and the Ansoft conclusion in this portfolio serves these design initiatives extremely well. In all these cases. rapid understanding of really complex problems and with uncompromising accuracy is essential and that's basically a pure strength of ANSYS multi-physics. I would also say we've seen similar parallels in the heavy equipment and infrastructure renewal areas, and in the airframe, as I mentioned before, the aero engine area where energy efficiencies are paramount, but there still is no margin for failure.

So the net of all this is continued industry breadth, increased penetration with our strong and broad customer base, pipeline of new opportunities continues to be solid, even amidst the challenging economic environment, we are seeing growing interest. We are encouraged by the continuing multi-year momentum, both in existing and new customers. There is no doubt of the long-term opportunity, but nevertheless, even with this increasing interest there's also cause for increasing vigilance due to the turmoil that's affected most aspects of the global financial environment. So, this can positively, or adversely, affect the timing and patterns of our customers' buying decisions, and we try to factor this into our guidance, and we will continue to endeavor to do so going forward.

So in summary, there was double digit growth all around the globe, and as you can tell from the list of customer names, good industry, major account activity on top of that. There was continuing strong performance in every major geography in virtually all subregions with few minor exceptions. Major accounts were particularly potent and helped to contribute to both new license revenue as well as the deferred revenue balances. In short, there was solid performance everywhere, but boy, we have areas for improvement almost everywhere also. In light of this progress, we are cautiously ramping up the selected elements of our customer facing organization in response to the growing opportunity, but we are being ever mindful of the constantly shifting economic stance out there.

From a product revenue standpoint, we saw no significant changes in either the trend or the guidance we have given over quarters in a long time. Consolidated paid up license software revenues grew by 61% in total, and 25% organically, quarter-to-quarter. The lease business stayed strong at 35% of the blended total. All parts of our product spectrum did well with overall good balance, but as we mentioned those higher ends products did particularly well. Software maintenance and enhancement subscription business grew at 57% for the quarter and 35% for the year-to-date. And again, breaking into the organic terms so we don't get caught up with the Ansoft acquisition, and just the core organic terms, it was 25% for the quarter, or 24% for the year-to-date.. High end sales grew disproportionately, but the bottom line is with the pressures our customers are facing they simply can't compromise on scope or accuracy of solution.

ASPs for the quarter, those were seasonally steady. This has been a multi-quarter trend. At the low end, ASPs are actually slightly up. And from a qualitative standpoint, I would say the broadest, deepest set of integration tools for simulation that thrive in this customer adoption just continues to get broader and deeper, and even more so since we closed Ansoft at the end of July. It was actually fun to be able to start putting the two great companies together after a couple of months of waiting. We knew that we had a really good team of people, and world class technology joining us, so we were obviously eager to start to leverage that. Their business obviously added to do our success, but we are also able to start leveraging the strength of the ANSYS business model, and just a small forward taste of this was demonstrated in the partial quarter operating results.

We are well on the way toward making our projections, making modestly accretive during the first 12 months of combined operation, and even with all this said, I have to say that I've been personally excited as I've seen some of the technology more intimately than I could before, but also to see how these technology teams have embraced the combination as evidenced by fairly robust technical integration plans over the next few quarters and next couple of years. So we continue to be excited about the prospects of being able to do complete product simulations across all industries with products that are increasingly a blur of mechanical and electrical components and effects. And it's especially key to be able to do this in, let's say in egalitarian plug and play manner, in a CAD neutral environment that exists in most of our clients and their supply chains, and to be able to do that with our many partners.

Now, there have been a lot of other things going on, but most notably is, even in these tough times, the number of people that attended our user events across the globe, numbering well into the several thousands, and also seeing their reactions to the upcoming R12 release, it's been a major point of enthusiasm for us. The general consensus has been for continued commitment, increasing the simulation usage. So in summary, we had another very strong quarter by all metrics, both the quantitative and the qualitative factors showed progress, and the numbers demonstrated our continued financial and market performance. We did this amidst the turmoil out there in the market, and even against our own strong comparables and expectations, so we also started working on a variety of aspects related to the Ansoft integration, including combined 2009 planning. Our earnings and cash flows remain solid, which should serve to continue our investment patterns and technical innovations, sales and business infrastructure, as well as to support the debt associated with the Ansoft acquisition. We are going to iterate our long-term commitment, taking our markets to a new level, and to continue our pursuit in meeting those customer expectations, and forward commitments to our stakeholders. I think, over the long-term, we've demonstrated our ability to grow the top line in accordance with our guidance, underscored by this past quarter, but we've also been able to maintain solid margins and solid earnings growth.

So, we will continue to drive toward our long-term vision, our long-term optimism clearly intact, but we'll continue to temper this with an eye toward a range of short term factors out there, so I guess, I'm probably dusting off the short-term caution that we've exercised to positive advantage during past times of past years. So with that, I will turn it over to our CFO Maria Shields, to provide you with a more detailed look at our financials, including expense structure, balance sheet highlights as well as other key factors of this quarters business, and our outlook on future earnings.

Okay, thanks, Jim. For the next few minutes, I'll go through a summary of the some of the financial highlights as they relate to the ANSYS business for Q3 and year-to-date, take a quick look at the balance sheet, operating cash flows, and provide some commentary regarding outlook for Q4 and full year 2009, as it relates to non-GAAP EPS for the combined Company, and also give some incite as to some of the underlying key assumptions. Beginning with cost of sales, excluding acquisition related amortization and the impact of stock based compensation, which combined totaled $8.2 million, cost of sales for the third quarter totaled $16.4 million, versus $14 million in the third quarter of '07. This resulted in an overall non-GAAP gross profit margin of 87% for the third quarter. And on a year-to-date basis, cost of sales, which excludes $18.4 million of acquisition related amortization and stock based comp, totaled $47.7 million, versus $41.1 million for the first nine months of '07, resulting in 86% non-GAAP gross profit margin year-to-date for '08. Looking ahead, we are currently targeting a non-GAAP gross profit margin in the 86% to 87% range. On the SG&A front for the third quarter, total expenses excluding $1.9 million of stock based compensation expense, were $34.2 million, compared with $25.1 million in last year's Q3, and for the year-to-date, SG&A expenses excluding $6 million of stock based comp, were $86.9 million, compared with $76.1 million in 2008.

Looking ahead, we plan to continue to make targeted investments in building our global sales and business infrastructure as we continue to integrate the Ansoft acquisition to support scalability and future growth. Moving on to R&D, total expenses for the quarter, net of approximately $700,000 related to stock based comp, were $19.6 million, compared to $13.7 million in Q3 of last year. On a year-to-date basis, our total investment in R&D excluding $2.1 million of stock based compensation expense, reached $50.7 million, versus $39.4 million for 2008. For the remainder of '08 and going into '09, we are currently targeting a mid-teens range relative to our ongoing investment in R&D. For the third quarter and the first nine months of 2008, we've delivered solid non-GAAP operating profit margin of 45.6% and 47%. Admittedly, these are above what we had planned coming out of the gates in 2008. In both the first and second quarter earnings calls, we communicated that we had consciously adjusted, or held back, on various aspects of our original 2008 planned spend in the first half, in anticipation of the Ansoft acquisition. Given everything that's transpired subsequent to those calls, in retrospect, those decisions helped to set the foundation for our strong performance in Q3, despite the macro economy, as well as better positioned us for the remainder of 2008 and going into 2009.

The consolidated effective non-GAAP tax rate for the third quarter and year-to-date was 32% and 35% respectively. The third quarter tax rate was several percentage points below what we had targeted coming into the quarter, primarily as a result of the true up to the filing of the 2007 US tax returns, as well as some incremental 2008 domestic manufacturing deductions. This resulted in approximately $0.02 to $0.03 of incremental unplanned tax benefits in the Q3 '08 results. At this time, I will also point out that the recent reinstatement of the R&E credit will have a positive impact on our Q4 effective tax rate. This has been factored into our outlook and we are anticipating that throughout the remainder of this year we should be able to maintain an overall non-GAAP consolidated tax rate in the 35% to 37% range. For the third quarter, ANSYS reported a 39% increase in non-GAAP EPS to $0.43. That's on 90.1 million diluted shares, compared to $0.31 on 81.2 million shares in the third quarter of '07. And for the first nine months, non-GAAP EPS increased 39% to $1.25 on 84.6 million diluted shares, compared to $0.90 on 80.9 million shares in the '07 period.

So to summarize, the key factors impacting our Q3 operational performance, we had solid organic revenue growth led by over 20% growth in both the perpetual license and annual maintenance subscription business. We had positive impacts from currency of about $1.6 million at the revenue line and $800,000 at the operating income level. We had strong gross profit and operating margins. Our results included two months of revenue and profit contributions from Ansoft, but also included the negative impacts of the interest expense and the additional shares that we issued in conjunction with the deal. And, we experience a more favorable tax rate than we had originally projected, which contributed an incremental $0.02 to $0.03 to the quarter.

So, taking a quick look at the September 30th balance sheet, it continues to remain quite strong. Our total cash and short term investments balance is now at about $212 million. Our consolidated net DSO is at 42 days. We had record combined operating cash flows, $42.7 million in the quarter, and $135 million for the first nine months of '08. This enabled to us pay down $55 million of the original $355 million in debt under a new five year credit facility that we entered into to partially fund the Ansoft deal. The debt carries an initial effective rate of LIBOR plus 150, which will gradually migrate to lower rate tiers as we utilize the operating cash flows to say pay down the debt and reduce our leverage. I also want to point out that we did enter into an interest rate swap agreement in the third quarter to mitigate some of the interest rate volatility exposure on $300 million of the debt. Because of the swap, the recent volatility in LIBOR borrowing rates should not have any material impact on our interest expense going forward, relative to this debt. The average interest rate for Q4 is approximately 4.9%, excluding the amortization of loan fees. I'd also like to point out and remind everyone that we currently have an approved share buyback plan in place that allows for the repurchase of up to about 3.8 million shares.

Also, we saw in Q3, and more importantly projecting for Q4 and into 2009, given our level of international business, our results will be negatively impacted by currency, particularly on the Euro and British pound front, with some slightly positive benefits from the current rate on the Japanese yen. In our outlook, we are assuming that rates stay roughly the same as the recent spot rates, or in the $1.30 range for the Euro, $1.60 for the British pound, and $0.99 for the Japanese yen. If rates continues to change in the future, we will modulate our outlook accordingly and trust that you also take this into consideration as you update your models and your projections. So based on our current business visibility, we are targeting finishing the 2008 calendar year with non-GAAP EPS in the range of $1.68 to $1.70, and for the upcoming fourth quarter, which will include a full quarter of Ansoft operations, we are targeting non-GAAP EPS of $0.43 to $0.45. This outlook assumes a fully diluted share count of 94 to 95 million shares for Q4. Our current outlook for 2009 targets non-GAAP EPS in the range of $1.84 to $1.90, assuming the currency spot rates that I previously mentioned, which translates to $1.30 to $1.44 on a GAAP basis. So now, Jim, I'll turn it back over to you.

Sure. Okay. Well, thanks, Maria. So, let's just recap real quickly. First of all, I have to highlight the continued sustained strong diversified financial performance of all major parameters of the business, whether we are talking about revenue, earnings, margin, cash flow, business base, recurring visibility. Secondarily, there was some positive initial efforts on the Ansoft integration, even though we are only a few weeks into that. Thirdly, increasing customer interest marked by increased activity on a broad front. The broad front by geography, by industry and also, even by commitment levels. And let's say, fourth, it's basically this rapidly expanding product portfolio that we continue to be able augment with partnerships and different relationships, and it's basically, dramatically increased with Ansoft.

As I said before, the long-term outlook stays bullish. For the remainder of 2008, we are reinforcing our guidance based on Q3 performance and the newest data, and then combining with Ansoft contribution. We anticipate a good Q4 performance, even with the economic turmoil and currency headwinds that Maria just mentioned. So even with those, we expect non-GAAP revenue in the $145 million to $149 million range, with non-GAAP earnings in the $0.43 to $0.45 range, and this is good news since the comparable last year included, if you recall, all of those mega license deals from last Q4, and those are not in our base forecast for the year, and we also had that $0.04 tax benefit last year. We've actually maintained the guidance while compensating for negative currency effects to come up with a year end guidance of non-GAAP revenues in the $494 million to $499 million range, and non-GAAP earnings in the $1.68 to $1.70 range, both of which represent growth in the mid to upper 20s.

For fiscal year 2009, our guidance for non-GAAP revenue is in the $610 million to $630 million range, which is comprised of Ansoft acquisition and double digit organic growth under constant currency. Non-GAAP EPS increases to the $1.84 to $1.90 range, which also averages out to double digit growth, even with the economic environment and the strong comparable that we are in the midst of this year. This guidance though, however, is cognizant of a number of unknowns out there. Essentially, it allows to us build safety into our cost structures without hindering out ability to capture revenue upside, combined with our repeatable business base, our diversified geographic and customer base, and deferred revenues, we are utilizing the same business model that's allowed to us weather a wide range of economic situations over the last decade. And as I mentioned, we continue to ramp up parts of our business in a judicious manner, particularly in the sales and support realm, to take advantage of market opportunities. So, we'll continue to monitor the shorter term market factors on a global basis as we demonstrated year upon year for the last several years. And I guess with that, we are basically prepared to respond to any specific questions you may have.

(OPERATOR INSTRUCTIONS) We'll go to Richard Davis with Needham & Company.

Thanks very much. I wanted to ask you, now that you've added in Ansoft, we've tried to kind of put paper to pencil and think about the total addressable market. I guess one way we've looked at it, is kind of total addressable seats, and conservatively it ranges from five to, I don't know, maybe 15 million potential seats, and then you have to make some assumption on per seat pricing. Is the thought process, is that roughly analogous to how you're thinking about it, because we've come up with an addressable market from anywhere from $10 billion to $30 billion?

Well, that's a portion of it but, it's actually maybe longer term, one of the smaller portions. So, yes, the increase in number of potential users is one element, but the dimension that gets lost in that is the number of potential usages. And in that particular case, since people are fighting the clock as I mentioned in earlier quarters, we've got some places where individual users are using 20, 30 and sometimes even over 100 seats simultaneously. You get one element by the number of users, but what are they actual trying to do? In most cases, they are trying to look at increasing number of alternatives, look at innovative configurations that maybe they never took the time to look at before or basically because it hadn't been invented yet, and then basically saying, I want to do a lot of things in parallel to race the clock and get to market more quickly. So, like I said, maybe that's overkill, but the increase in the number of potential users, definitely, but increasing the changing the way they use it, also a big element.

Got it. And then, our conversations with other companies, public and private, is that demand is driven more by kind of what you were touching on, which is help me do my job better, and therefore, functionality and speed of processing is critical. That's the key thing, but the less important thing is, connectivity is obviously important, but are you finding that feature functionality is still the most important driver for purchase decisions?

Well, feature functionality, but keep in mind that usability is also a feature. So, yes, there's an element. A, they have to be able to solve the toughest problems, and a lot of those problems aren't even being solved today by anybody, but we are committed to continuing to knock down those barriers. Secondarily, since they are using those decisions early in the process, they are still making some critical commitments to tooling and to overall product costs through the lifecycle. So what that means is, they can't base that on crude approximations. They need highly accurate kinds of solutions. So, those are a couple of the other things that are driving it quite a bit. The other thing I want to say is, not to get caught in the old buzz phrase of the 80s, it's not even a productivity play, it's really about an effectiveness and efficiency, and an ability to do things that weren't done before, not doing the same things x% faster, and that's really what's been driving us for the last few years.

Got it. Okay. Thanks so much.

We'll take our next question from Andrew Matorin, JPMorgan.

Thanks very much. First question, if you could, Maria, perhaps, I think when you acquired Fluent, you had indicated the contribution Fluent made to your deferred revenue balance. I wonder if you could provide the same information with respect to Ansoft acquisition, what it contributed to the deferred revenue balance in the quarter?

Andrew, I don't have Ansoft's deferred revenue broken out. The only thing I have here right now is all on a consolidated basis.

I think it's also fair to say that the relative portion, the percentages are less.

We will get that for you.

Okay. Great. And then with respect to the margin performance in this quarter, certainly better than I think maybe you had anticipated, certainly I think most of the Street had anticipated, and the implied margin in your guidance would suggest that perhaps your outlook with respect to cost cutting or integration may have been improved from when you initially did the acquisition. If you could comment a little bit about that, and why it appears as though maybe there's a little bit more confidence in a more robust margin profile going forward?

Well, I will start off, and maybe Maria can clean up some of the detail things. But first of all, yes, there are two factors. First of all, as I mentioned a couple of times, some of the Ansoft integration showed, some of those initial activities did show a little bit more fruit than we would have prudently expected on the onset. So, I think it's just the very small baby step over what we can ultimately do, but there was an issue there. But I will tell you also, that as we started to pick up the lines of some of these concerns, as I mentioned, we've always continued to look at our cost structures on a judicious go forward basis, and when we see some strong winds coming up, we kind of batten down a little bit. We've got years of intellectual property already developed and underway from a longstanding profile of investing in technology. We are continuing to interact with the customers. However, we look at the situation as being there's a lot of things we won't be able to predict over the next few x months, I don't know how many, but the fact is we can do things to protect that, but also, as customer demand goes up, that doesn't really affect our ability to capture the revenue upside, and I think that's something that you could probably demonstrate graphically over about a ten year period. So, we've actually exercised a little bit of caution, not made any major cuts, but just exercised a lot of caution because there are unknowns. Maria.

I would just say, Andrew, during due diligence, it was a relatively small team that was working on identifying synergies and things like that, given two public companies and not wanting to have a lot of people find out, and as we've now broadened the teams that are involved, it's just even a better incite into some opportunities where putting these two great companies together allows us to get some cost efficiencies and remove some redundancy. So, we're bullish, but as we've always done and as we've demonstrated, we will definitely not let the spending reins get ahead of the sales momentum, so we're trying to balance both.

Great. Thank you. And lastly, if you can comment a little bit about some of your Channel partners. Is there any issues with respect to some of your Channel partners, given the lack of availability of credit as far as their ability to operate given their much smaller scale companies, have you kind of received any comments from some of your partners in the Channel with respect to that?

Actually no, but the one thing you can see is, at least on the organic parts of the business, that the balance has stayed relatively strong. The other thing is, keep in mind, that the strong deferred revenue balances that ANSYS sees, and the recurring revenue pattern that provides a strong base of business, and that's something that you would see mere mirrored in many elements of our Channel, and therefore, there's a certainty degree of insulation there.

Great, thank you very much.

We'll go next to Barbara Coffey, Kaufman Brothers..

Yes, good morning. Can you speak a bit about your thoughts on why the ASPs are going up? Are you seeing clients buy the more fully featured packages? It just feels a little anamulous in this environment.

Well, that's it. We started actively tracking these things many years ago with, let's say, a variety of the other premises, just a way of managing the business, and yes, it has been a continual migration toward the higher ends products. I could go into some product names to illustrate it, but it would be largely lost, but it's basically the increased capability versus the pricing, seems to be a fairly compelling ROI factor for most of our clients. Like I said, Q3 is usually the toughest one to compare. If we compare them to ASPs throughout the last few Q3s, as I said, it was very stable at the high end. The one that I can't draw any significance to on a statistical basis is the lower end products also popped up, and sometimes people use that as maybe a stepping stone to Simulation 101 and the fuller range products. No, but it has been, as I said, either stable or notching up has been a trend that's been several years, multiple quarters.

Can you also speak to, you briefly mentioned the pattern of leasing, has that changed at all or are you seeing any indications that that will change in this environment?

No, no, in fact I might have said that poorly. I'm not sure precisely what I said, but the bottom line is that there is several different dimensions, I will try to unwind these in some logical manner. If you look at the organic part of our business, the lease business stayed relatively same proportion, grew like it has been, quarter after quarter. It looks a little bit different when you blend in Ansoft because they did very little leasing, almost all paid up licenses. So when you blend those, they drop down a bit. So that's why for the quarter it was about 35%. If you recall, 35% is less than the 38% to 40% we've been talking about for several quarters after Fluent, but a few years ago, the lease base was only about 20% of our business, so it's still net up. It's just a function of the blending of the different business models when we do acquisitions, but it still stays at a very strong rate. Now the third point I'd want to put on there, it's just an anecdotal hypothesis, is that if the tough economic times stayed similar to the way we saw in the post 911 era, there were companies that still knew they needed to do get on board with simulation, and they knew it was going to be a competitive, or a survival aspect, for them, and as such. even if they couldn't get capital dollars, they might institute something from a lease basis, and then role it in when capital dollars came. They didn't want to hold off the usage. But, that was purely a direct result of whatever the internal finances of acquisition were at that individual customer. I'm just saying if the situation, the ups and downs that we've seen, would persist, we might see a slight tweak up in lease business. Does that make sense?

That does make sense, thank you.

Okay.

(OPERATOR INSTRUCTIONS) We'll go to Mark Schappel of Benchmark.

Good morning, and, Jim, first question for you. With oil and feedstock prices falling pretty considerably here in the past several months, are you seeing energy generation or process manufacturers starting to rethink some of their projects at all?

I tried to at least highlight in my comments, no. I think where we might, and this one would be tough for to us pick up, there are always a number of these new startups that will start to bootstrap themselves, new startup companies with alternative energies in particular, but if they don't show up, you'd never know that they are not there if they don't show up at all. So on the general energy front, whether we're looking at nuclear, as I mentioned, if you listened to some of the company names that I was mentioning in our major customer acquisition list, very strong. Bottom line is, even as oil bopped down to 60, immediately people started talking about, maybe we'll control supply to drive the price back up. I don't think that people are expecting oil to drop back to mid-teens any time in the next few years, and it seems like the supply is very much in question and the demand is continually increasing, and no matter what we do, it takes years to develop some of these technologies, it takes years to get new plants online, so a lot of things take time even if we can get past the regulatory issues. So, they are not stopping the innovation. They are not stopping the new exploration. I don't think that people are thinking that this is a long-term trend that's going to continue down. That's why you see these customers. You notice, when I was talking, hydro, wind, nuclear and oil all were prominent acquirers of the technology, this time around.

Thanks, and is the Version 12 release still on schedule for early '09?

Yes. Well, actually, selected customer ships even before, but the main part of the release is still '09. There hasn't been any stated change.

Thanks.

Next, (inaudible) with Merrill Lynch.

Thanks. Jim, in constructing the 2009 outlook, what are your expectations for Ansoft relative to the overall EDA spending? They've outperformed EDA in the past. Do you think that remains the case? And to follow up on Marks question on Version 12, are there any expectations on ASP or positive ASP trends, as a result of Version 12, and is that embedded into guidance as well? And I have one follow up.

Okay. Well, the ASPs I don't see necessarily, they will gradually, there won't be a jump function from R12, but I think it will help propel the higher usages up there. If you look at the Ansoft component, which is what you said, historically they always guide to a fairly wide range of 10% to 15%, and that's been a little bit above the normal market, and I think that we will tend toward the mid to upper end of that range as we go forward. I'm sorry, there was one other part that I missed?

You've covered it. I guess the follow up then is, with regards to the general simulation usage trends, can you just discuss the simulation consumption trends within the existing base? Has that been up, sideways or possibly down?

It's been up. I mean if I understand the question, as evidenced by our results, it's been a general upping of both capabilities, users and seats per users.

So it's been necessitating new licenses as a result, it seems?

That's why even if you look at our overall results, the new software license growth is even higher than the typical growth rates.

Great. Thank you.

Okay.

We'll go next to Steve Ashley with Robert W. Baird.

Hi, guys, this is actually Jack Miller, filling in for Steve. Just a couple quick ones on the 2009 guidance. Just wondering if that still assumes the 15% to 17% organic growth rate you called out before, and if so, is that a constant currency growth rate or does that include impact from FX?

Yes, I think what Jim spoke to earlier relative to revenue is basically more to the low double digits and constant currencies, not the traditional 15% to 17% on the organic side of the business, given the negative currency impacts and just given what's happened in the general market.

And that's a short-term thing. The long-term premise stays the same, just a strong, maybe even stronger, but the point is that we're able to provide to continue earnings growth and cash flows. As I said, we are controlling some of the costing, and if we get the revenue up surprises, we are able to get those we have a string of quarters that show that, but we also want to have the cost structure. Maria is right. It's basically after we eat up all the negative currency, we will be sailing in and stuff like that. We are still expecting an organic in the lower double digits, and I guess we have always talked about how currency has affected us positively over the last few quarters, if we backed out how it might negatively affect us, it would still be a pretty strong acquisition curve for customers going into '09.

Okay. Then on the Ansoft side, could you just remind us how their deal sizes compare to your own, and given some of the capital and financing concerns we talked about, do you think that there would be a shift towards offering their products as a lease more in line with your traditional model?

Well, that's going to be an option because, again, we are all about knocking down barriers to adoption, and most of the time we talk about technology barriers, but acquisition barriers and financial barriers are part of that, so we always had a standpoint of saying, hey, we will offer a number of alternatives and the customer can take what's right for them. So, adding that as a part of the portfolio, clearly, would be something that would be something we would do. As to the aggregate order size, it's still a little bit more of a developing technology base of usage and as such it tended to the aggregate order sizes, on balance, lower than the traditional ANSYS.

Great. Thanks.

We'll go next to Greg Dunham with Deutsche Bank.

Yes, thanks. One clarification, if I heard you right, you said 47% business intake growth in the quarter. Did I hear you correctly, first, and how do you guys define that?

Yes, that includes Ansoft, too, but that's correct.

Is that, if I look at the revenues plus change in deferred, that was 49% year-over-year, but that was obviously a benefit to ANSYS. Is that kind of how you are measuring it?

Yes, that's why maybe I over killed it, got the parallel charts of numbers here and that's why I've been breaking out which part was organic, which part was currency, because again we will be an open book on that. But generally, no matter how you slice it, the business intake was outpacing the comparable that it was compared about, when compared to revenue, which is a good thing. It means that the deferred base is going to be growing and that the leading indicators are that the new business is coming in faster then it's being recognized.

I guess I want to hit on that because, clearly, September wasn't a great month for a lot of companies in the software space, yet you seem to be doing well, looking at your guidance for double digit growth your forecasting that to continue.

Yes.

Can you, one, talk about linearity in the quarter, what you saw in September, and what you've seen so far in October? And then, two, kind of remind how customers buy your product in terms of what budget they fall under, and that sort of behavior? Just give us a little more comfort in double digit growth next year.

Well, first of all, our linearity from quarter to quarter is much flatter than a traditional software company. Our hockey stick, if you will, intra-quarter is also, relatively small. So we have less of an impact of those last month surprises. Now, a lot of that is when you are dealing with 68% recurring revenue base, a lot of it is already banked there. Now, that being said, that is our traditional model. We are also blending in Ansoft, which has more of an intra-quarter and intra-year inflection in the curve, and those will be things that we have to work on over time, but I think probably the most telling thing is, even as we started to imbed ourselves in the Ansoft results, which is less visible, even on that much larger combined base, we were still at 68%, which still gives us a certain amount of comfort, although nothing gives you perfect inoculation.

So you were pleased with the bookings at the very end of the month and the beginning of October? I mean, disregarding the recognition of revenues in the lease business, just from a new bookings perspective?

In a word, yes.

And just to follow up on the reasons why the buyers aren't facing the same kind of budget issues as maybe some other software companies?

I can't speak to what other companies are seeing, but we did have the advantage of having over the last few weeks, a number of different customer conferences, that's where I mentioned we had several thousand people, and the tenor was quite strong. Yes, there are some that have some question marks, and costs will always be a concern in those areas, but all the directions they were getting was toward continuing to drive the engineering innovation, and R&D was not really being the first target for people to gut.

Right, and that's an important point.

You have to draw a distinction. When you talk about the software companies, I'm not sure who you are referring to, but R&D is a much broader classification, or not an overlapping thing with general IT expenditures.

That was the point I was trying to make.

Okay.

Thank you.

Thank you.

We'll go to Steve Koenig with KeyBanc Capital Markets.

Hi, thanks for taking my question. I'm wondering in your comments, Jim, you suggested that the differential in growth rates in Europe relative to the US, if you think about a constant currency, was primarily due to multi-nationals offshoring or doing more purchasing overseas. I'm wondering, do you see a possibility of that, the macro situation which has recently started to deteriorate in Europe relative to the US, that that could impact those growth rates going forward, and we might see some of that European growth come down to a rate more similar to the US?

There's actually two answers to your question here. First of all, we expect the European growth to still be good, it's just that the inconstant currencies, it looks a little bit different, but it will still be strong. The second part is we have to kind of bifurcate. When I was talking about US multi-nationals, more often than not, those kind of things are going into Asia, Eastern Europe, and some of the other developing countries, and those seem to be continuing to do pretty well. And Ansoft provides a good opportunity for us there because it's very small part of their business in Europe, but it also gives us a footprint in to leverage in Asia. I think all of those are valid concerns. Those are things we look at, but I think that the overall acquisition patterns are going to be strong, even eating up some of the currency issue. And I think some of the investment patterns, they can change all over the map, but the good news is we are all over the map too, and so far, wherever they've put that usage, we just happen to go to that locale, so we are fairly neutral.

Okay, great. And then for my follow up, I'd just like to ask, in terms of Ansoft, last quarter you indicated you had some caution in terms of wanting to understand how solid that pipeline was. This being a sub quarter, probably not a lot of Ansoft licenses yet, what are you seeing relative to how solid that pipeline will be in terms of your ability to close business going forward and maintain Ansoft's historical close rate?

Well, it's one of the things we look at everything with, where can it go wrong, but in general, it's good, customer responses are good, the customer responses to the combined road shows have been good, and most of the general metrics, they obviously are good enough to support what we built into our guidance going forward. And basically, we have all the key salespeople still cranking along with us.

Great. Thank you very much.

Okay. Thank you.

We'll go next to Greg Halter with Great Lakes Review.

Yes, good morning, guys.

Good morning.

I wonder if you could comment on your portfolio, the $212 million, as to what that's invested in, the quality, where held, and what kind of rates you're earning?

I would say it is in line with our traditional conservative model. There is no equities in there. It's all largely money markets, probably about 60% of it is sitting in foreign jurisdictions because it's not tax efficient to bring that back to the US, although we would love the government to think about that. And, there's not a lot of risk relative to that portfolio. We've never been in the business of trying to make 20% on the money. So we are probably on average something in the 3% range.

That's a pre-tax type of return?

Yes.

All right. And I think the last quarter, you had commented about the earthquake over in China having some impact on deal deferrals and so forth, and obviously you had a pretty good growth rate in GIA. Does that situation have any bearing there?

We got some of it back. There is more coming over the next few quarters, so it wasn't like there were a bunch already gift wrapped that dropped in on us in September. But, no, it was good growth rate, not overtly extraordinary, but very solid, above the company rate and with pretty good prospects going forward.

Okay. Great. Thank you.

We'll go next to Ross McMillan with Jeffries.

Thank you. Jim, if we go back to '01 and '02, you saw a couple of years of mid single digit software license growth, and I think total revenue growth in '02 was also in the mid single digit range. Can you just hit on the points that make what you see in the business today different from back then that gives you the confidence in low to mid-teens?

The one thing is that you wind the clock forward seven to eight years, you look at the scale and the impact that we have on a wide range of major customers, and a much broader and partner oriented deeper footprint. I would say the other thing is that we've been able to build up some of the cost structures where we've been able to build infrastructure that basically helps us operate pretty efficiently in a wide range, which is why you can see some of the opportunities we've had for margin expansion and the like. And I think the other thing is, one of the big things, that not many of us saw coming was 911 and the rapid aftermath of that. Some of these other things we've been able to do, we get a little bit more warning on and a little bit more time to prepare on.

Okay, great. Then just on next year, Maria, just on the tax rate, what's your assumption for the '09 tax rate? Thanks.

The '09 tax rate for now, not knowing what the new administration might do on the tax front, I'd say 37% to 39%, and we'll all stay tuned.

Great. Thank you.

We'll go next to David Schneider with Axiom International.

Hi, good morning. One real quick question for you. You made a couple of comments at the beginning of the call on deferred revenues, how the cash was in there, but it may not be actually showing up on the balance sheet. Could you make some comments on that, please?

Yes, it's a purchase accounting mumbo jumbo, if you will. If you take a look at this morning's earnings announcement, we tried to explain it in there, but essentially, we had to take a write down of about $23.5 million on the Ansoft side out of deferred revenue under the theory that there are liabilities that have already been performed by the seller. So in short, we will still get the cash. We still have the customers, and next year when those renewals come up, they will renew it 100%. So we've historically, when we've had to take purchase accounting write down on revenue, we've added it back in so not to cause, as Jim alluded to, either inflating next year's revenue growth, but you wouldn't see it in the cash flow, necessarily.

So, if I want to do think about the true deferred revenue number for the third quarter, if I added back in the difference between your non-GAAP and GAAP revenue, into your deferred revenue balance stated in the balance sheet, that would give me a more realistic number for deferred revenue for the quarter?

Yes, because what you are seeing on the balance sheet is in fact GAAP and does include the impact of that purchase accounting write down.

Okay. Thank you .

We'll go next to Sanil Daptardar with Sentinel Asset Management.

Jim, when you look at the license revenue growth which I think was about 19%, if had you to break it down between the number of users and the migration to high priced products, do you see any kind of acceleration from the first half into the third quarter that the number of users actually increased, rather than migration to high end products? How can you give some color on that?

Yes, this is Maria. I think it wasn't necessarily migration to increased number of users. No doubt, we are seeing more broader enterprise portfolio cells. So, as Ross alluded to earlier, if you go back to the 2001 time frame where we were selling mechanical and multi-physics, today we go into a typical one of these larger customers and they are buying seats of multi-physics that also includes CFD technology, supreme host processing, perhaps some explicit technology and when you start bundling those, now you are looking at much larger deal sizes than you would seven or eight years ago.

That means they are buying more number of products then increasing the number of users.

It's a combination of both, but largely I would say, more on the number of products.

Okay. When you look at the '09 guidance, which is of course if you look at this year's and compare to that next year's, it's a low double digit to mid double digit year-over-year growth. And, when you look at the revenue growth compared to year-over-year, it's a very strong double digit, which is about 25% or so. So what is imbedded in the guidance that is basically the earnings growth is below the revenue growth?

Well, the revenue growth includes Ansoft and the Ansoft business is not as profitable as the traditional ANSYS business. Now we did say that our target is to make that deal modestly accretive in the first 12 months. But we still have the drag of the interest burden and increased shares, and just getting the whole foundation towards a traditional ANSYS model won't happen in two quarters.

So you're expecting the accretion from Ansoft in 2010 period in that case, not in 2009, then.

No, in later 2009 we believe that it will be modestly accretive, but not in early '09.

Okay. Great. Thanks,.

We will go to Michael Walker with Ark Asset Management.

Actually, you already answered my question. Thanks.

Mr. Cashman, it appears we have no further questions in queue.

Okay. Wow. So basically, we'll just in close, the emphasis is going to be a controlled focus on execution in tough times, effective integration of the Ansoft, and hopefully get supported by the years of history that we have in this. So, the customer acceptance of our existing vision. and the unique value proposition, and the expansion of our product portfolio through ANSYS, that basically only bolsters the enthusiasm long-term, continued to be propelled by that same combination of a solid business model, the loyal customers over the years, all the Channel partners, great technology and, of course, all the ANSYS employees. I would like to thank all of them, as well as you, for participating on this call. So I guess we will sign off until next quarter call in February. Thank you.

: Once again everyone, thank you for your participation. This does conclude today's conference call. (OPERATOR INSTRUCTIONS)