ANSYS Inc (ANSS) 2009 Q1 法說會逐字稿

Good morning and welcome to the ANSYS first quarter 2009 earnings conference call. All participants will be in a listen-only mode until the question and answer session of today's call. Today's conference is being recorded at the request of ANSYS, Incorporated. If anyone has 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.

Well, good morning, everybody, and welcome to the ANSYS call for Q1 2009. And as usual, I'm joined this morning by our CFO, Maria Shields.

We'll start with highlights of the quarter and then go into greater depth on the operational results. Then we'll go into a discussion of some of the qualitative factors which cover our groundbreaking version 12, R12 release and some significant steps we've taken to help buttress ourselves against the current economic client, which we think also strengthen us for the future. And then also some progress on our integration with Ansoft. All of these actually reinforce our long-term optimism while providing shorter term maneuverability. In the course of this, Maria will update you on our line item expense performance, balance sheet and cash flows, as well as giving greater detail on some of our responses to the economy. And then we'll go into initial projections for Q2 and an update for the full year of 2009. And after discussing those topics, we'll be prepared to respond to your questions.

So Maria, if you'll give us our Safe Harbor statement, please.

Okay. Thanks, Jim. Good morning, and again, everyone, thank you for joining us to review the highlights of our first quarter results.

Before we begin, I'll remind everyone that in addition to any risks and uncertainties that we'll highlight during the course of this call, important factors that may affect our future results are discussed at length in our public filings with the SEC, all of which are available via our website. Additionally, the Company's reported results should not be considered an indication of future performance as there are risks and uncertainties that could impact our business in the future. These statements are based upon our view of the world and our business as of today and ANSYS undertakes no obligation to update any such information unless we do so in a public forum. During the course of this call, we'll 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 to non-GAAP is provided in this morning's earnings release.

Jim, I'll turn the call back over to you to go through some of the highlights of Q1.

Okay. Well, overall, Q1 played largely in line with our guidance from the February call, but with greater operational efficiency. We faced all of the challenges that we had expected and then some, but considering the environment, we executed pretty well. Our revenue was at the floor of our guidance, actually slightly below, but our earnings were toward the upper end of the range and ahead of the consensus. From a high level perspective, this was, again, a challenging quarter. It highlighted the strength of the ANSYS business model, even in spite of the economic times. And it was also very strong comparable and in the face of over $7 million of the anticipated currency head winds we talked about before. So for the quarter, we recorded steady performance with non-GAAP revenue of $121.4 million. This represents and 11% increase from last year's Q1 of $109.5 million and non-GAAP diluted earnings per share were $0.37 compared with non-GAAP EPS of $0.40 in Q1 of 2008. And for long-term followers, this represented the 46th straight quarter of meeting or beating the non-GAAP earnings consensus.

EPS performance was adversary affected by the economically depressed revenues, by currency head winds to the operating income, but was balanced with adjustments to our business model for net exceeding of the earnings consensus. Secondarily, the major, most of the major aspects of the business performed as anticipated with new business generation slightly below our projections. We said that on our last call that we were going to focus on the parts of the business that we had some control over, namely, the margins, recurring revenues and cash flows and all of these did quite well. We saw a fair amount of resiliency in our key customer engagements that mirrored our commentary of last quarter. There was some minor shift to lease. There was generally good renewal activity, although not without delays and some very minor short-term contractions. Customers are telling us, they're still telling us, in fact, that even in the tougher economic times, there's a heightened need for product innovation. But they also experienced every ounce of the delayed procurement that we had anticipated due to the economy and uncertainty about what governmental interventions might take place. While all of this doesn't make us economy-proof, they generally feel that they can't compromise, the customers can't compromise with less capable solutions. And we believe that the impact of our new R12 release should strengthen that position considerably for the long term.

So, if we home in on the operational highlights for now, as previously mentioned, our non-GAAP revenue was $121.4 million, which included $21.7 million from Ansoft. The ANSYS legacy business was basically flat, actually down a couple of percent in constant currency while the Ansoft business was more negatively impacted than the core business and it was more negatively impacted by a combination of factors. Most notably, the fact that Ansoft historically has a higher reliance on paid up revenues and paid up licenses and a disproportionate exposures to industries most affected by the downturn. Now, I'll say that it's really hard to try to parse through the numbers and trying to interrelate GAAP and non-GAAP and organic and constant currency numbers and all of their permutations, particularly in the two different economic scenarios, but given that we were largely in line with our guidance, I'll try to focus on the key metrics while trying to provide general commentary on how various sectors are doing. Now, overall, non-GAAP operating margins for the quarter were 46% compared to our guidance in the lower mid-40s. This compares to 47% in Q1 of 2008, but that number didn't include the impacts of the Ansoft business, which did not historically have the same level of operating margins as the ANSYS legacy business. Non-GAAP gross margins were at a healthy 88%, and we also saw continued strong cash flows from operations of over $51 million, which is a 38% increase over the $37 million of last Q1.

So with that highlight, we can now take a look at the Q1 picture and we'll do that through the usual different perspectives we take, category of business, geography, customer and product. So, starting with the category of business first, overall, the consolidated non-GAAP software license revenue was down 4% for the quarter. The main story and main components of this is the lease was up 5%, which includes about $1 million from Ansoft, and paid ups were down 15%, which includes about $7.5 million from Ansoft. This was comprised of a few factors, including negative currency and the expected slowing of new licenses in the current climate, and against a strong comparable quarter in better times. Nevertheless, we still added almost $27 million in new paid up license business. The lease business grew 5% for the quarter to increase to about 36% of our total business. The main takeaways from this are that the lease base is steady and we also saw some of the temporary shifting to lease due to the economic situation. This is a mild pattern that we talked about earlier and we also saw in the post-9/11 timeframe. But it's just another element of the flexible model that allows us to meet the business needs of customers in a variety of different ways as the economy goes up and down.

The total maintenance and service grew at 40% for the quarter. The pure software and enhancement subscription portion grew at 53% for the quarter with about a $13 million contribution from Ansoft. Because our recurring base is an important part of our business model, organic comparison is particularly important here. We saw a 10% growth organically. And the engineering services element represented about 4% of total revenue for the quarter. There was balance across the major product families with the upper end products being more resilient. Our direct and indirect businesses both felt comparable impacts, but there was a slightly greater shift toward direct versus indirect. Some of this is major account related. Some of this is Ansoft related, but there were also some international areas where a greater impact was felt on the indirect side. Business intake contributed to a rise in deferred revenue to an all-time high of $186 million and our strong repeatable business base grew to 75% on a much larger base, which compares to 67% at this time last year, even including the less visible Ansoft component. Now, there are two major components for this. First of which is the recurring base continues to be strong. And there's a healthy, but admittedly, lower new business component. So those two factors.

So, I'll highlight this year's or this quarter, I'm sorry, renewals business, included eight seven-figure deals, and that compares to seven last year. It's interesting to note that this year's percentage of renewal business for these seven-figure deals is at about 79%. That compares favorably to last year's 78%. So, this gives us some confidence that our business with our key global customers remains solid. The consistent ability to maintain the strong base of recurring or repeatable business is one of the hallmarks of our business model and it is a foundation for us navigating these particularly tough economies. And largely, we believe this continues to be a result of our long-term commitment to R&D, and it's continually driven our product leadership, most recently demonstrated with the ANSYS R12 release this month. We have a strong balance sheet and strong cash flows, actually $51.3 million for the quarter. These strong cash flows afford us flexibilities in dealing with a range of things, accelerated debt buydown, ANSYS share repurchase, or economic insulation as needs may dictate. In fact, in this past quarter, we did repurchase over 2 million shares when the stock dropped to what we considered to be very attractive prices. We felt that the share repurchase provided greater shareholder value than accelerating the debt buydown, especially given the comparative interest rates, and we also maintained our cash reserves through this.

Now, if we look at the geography, geography also was largely in line with the previous commentary we'd given. The economic woes that have our customers, it's affected us globally, all markets. We had good business everywhere, but not at the rates of previous years. So, the general gist is we grew everywhere in constant currencies on a combined basis. Organically, we did decline globally in single digits with varying currency impacts and roughly in line with our guidance. But in general, our business bases increased and our key customer retention was good. North America increased at 14% with a 10% organic decline. We definitely saw more wait and see as virtually every company was trying to simultaneously estimate the economy and anticipate which range of government intervention, including stimulus priorities and levels and directions and how those might unfold. And this was true for both the direct and the indirect businesses. And it affected all product lines, although the Ansoft effects were greater. Major orders in North America came from a typical mix of longstanding and new customers. General Electric, United Technologies, Intel, IBM, Train, Corning, Rolls Royce, North (inaudible), Raytheon, Lockheed Martin, Cummins, Solar Turbines, Dow, General Dynamics, Boeing, A&D, just to mention a few of them. As I mentioned earlier, a significant portion of these major deals went into deferred revenue.

Europe actually performed generally well in spite of the currency head winds. For the quarter, there was an overall 4% decline, but a 14% increase in constant currencies. Organic growth was mid-single digits for Europe in constant currencies and all regions saw adverse currency effects, but the British pound was especially hard hit for us in Q1. The largest deals in Europe included repeat customers and new ones such as BMW, Airbus, Soles or Hydro Turbines, Volkswagen, (inaudible), (inaudible), Renault, (inaudible), Schneider, ABB, Valeo, Siemens, Bosch, Ericcson and, again, about three-quarters of these major orders also went into deferred. Our general international area also grew, but faced the same economic realities as the rest of the world. While most currencies were negative, the yen was actually positive in line with our earlier expectations. The overall growth for the region was 30% for the quarter in total and down single digits organically in constant currencies. Japan grew at 34% in total and declined slightly organically in constant currency. The rest of the region followed the general trend of adding good business, especially with major accounts. Some of these key customer engagements included Toyota, Honda, Honeywell, (inaudible), Kawasaki, Heavy Industries, Cannon, Toshiba, GM, Mitsubishi, (inaudible), Japan Aerospace, Panasonic, Olympus, NEC, and TDK.

From the worldwide list of large orders, but added in smaller ones, also. They're a few trends that we've seen. Basically, no industry was untouched, but the better companies in each seemed to be less affected. The major pushes that we have seen in energy and infrastructure temporarily slowed as oil stayed relatively low. We did see increased interest in simulation for advanced research, particularly in automotive, of all places, as they felt the increasing energy efficiency and emission requirements, but it's pretty early in this cycle of innovation to project the long-term prospects. So, there's little doubt of the long-term opportunity as evidenced by the continuing multi-year momentum that are both in our existing and some new customers, but in the short-term, I'll add this caveat. Even with this increasing interest and while we don't see things getting a lot worse, we don't see them getting dramatically better are quite yet. And as such, we've tried to factor that into our guidance and we'll continue to endeavor doing so going forward.

So in summary, there are pockets of success around the globe in constant currencies, even in this tough climate. As you can tell from the list of customer names, there was good industry and major account activity. And the major accounts were particularly important in their contribution to the new license revenue, as well as to the deferred revenue balance. From a product standpoint, our high-end products continued to lead the way. Additionally, the high-end ASPs for the quarter were basically stable over last Q1 in constant currencies. At the low end, the ASPs were actually slightly up. And while I mentioned the economy hit the Ansoft business a little harder, it also historically has rebounded more quickly. So, thinking longer term, we're still 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 effects and in effect combining the form and function of a product in the real world. And we feel that it's especially key to be able to do this, basically in a galatarian plug and play manner. In the CAD-neutral environment that exists in most of our clients and their extended supply chains. And also be able to do that with the many partners in our ecosystem. So -- in fact, you may have seen our announcement earlier this week regarding an important milestone in terms of coupling technology for ANSYS and Ansoft, even in advance of our projections.

So, in conclusion, in summary, we had a respectable quarter. We were expecting a very challenging one, and that definitely is what we expected. All things considered, it was roughly in line with the broad range of our February guidance. We set about the quarter with a few key goals. We were going to focus on quality earnings, maintaining strong margins, solid cash flows and increasing our robust recurring revenue base, and we're going to fulfill available customer demand at the best rate possible, and then basically also focus on some structural and process refinements to strengthen us for the short-term, but also to better prepare us for whenever the recovery does occur. And finally, we wanted to make good continued progress on the Ansoft integration. So essentially, these key elements, they remain in our control and enable us to better weather the storm, and we're going to continue to plan on this course of action for the next few quarters. As for our major customers, they're telling us that they need to continue their R&D in innovative products, but as we witnessed the past quarter, all the procurements are taking longer internally. Renewal rates, especially with key customers, have stayed solid. Gross pipelines have actually increased and we're adding new business. Again, albeit at a lower pace.

So net-net, our long-term vision remains solid, which basically serves to keep our long-term optimism intact, but we're carefully watching the range of short-term factors that can continue to challenge the business and we're proactively refining our business model and the parameters, basically, to mitigate any of the downside risks that still can continue through the remainder of this year. So I guess basically, that means we're using the same short-term caution that we've exercised, I think to positive effect, during the past difficult times. But we've taken them to greater levels due to the current prolonged economic environment and we're continually sizing the Company to the evolving realities of business to solidify our foundation in an effort to protect earnings, the margin structure and our recurring base.

So with that as an overview, I'll now turn it back to Maria Shields, our CFO, to provide you with a more detailed look at our financials, including some of the steps that we've been taking and will continue to take into Q2. So, Maria?

Okay. Thanks, Jim.

For the next few minutes, I'll go through summaries, some of the key financial highlights as they relate to Q1. I'll just briefly point out for those of you who may be new to the ANSYS story, the majority of the cost fluctuations between this quarter and last year's first quarter relate to the inclusion of Ansoft in this quarter's financial results. While we announced the deal in Q1 of 2008, we didn't actually close the transaction until the third quarter of 2008. So, taking a look at costs of sales, excluding acquisition-related amortization and the impact of stock-based compensation, which combined, totaled $9.2 million, cost of sales for the first quarter totaled $14.5 million compared to $15.6 million in last year's fist quarter. This resulted in an overall non-GAAP gross profit margin of 88% for the quarter. In line with our outlook from the last call, if you take a look ahead for those of you building models, we continue to target a non-GAAP gross profit margin in the 87% to 89% range for the remainder of 2009. On the SG&A front, our total expenses, excluding $2 million of stock-based compensation expense, were $31.8 million compared with $26.9 million last year. Looking ahead, we plan to continue to make investments in areas that we deem to be critical to strengthening our global sales and business infrastructure to support improved productivity, scalability and future growth, including the rollout of a new global CRM platform to our sales services, support and business operations teams beginning in Q2.

Our Q2 marketing expenses will also include spending in connection with the global launch of R12 and various customer focused activities that we plan to cross each of the major geographies. We believe that these are critical to a successful deployment across our customer base and have built these costs into our current outlook for Q2. Taking a look at R&D, our total expenses for the quarter net of about $850,000 related to stock-based compensation were $19.2 million compared to $15.3 million last year. Looking at 2009, we are currently targeting a mid-teens range relative to our ongoing investment in R&D. For the first quarter, we delivered respectable non-GAAP operating profit margin of 46%. I do want to point out that this includes the impact of about $600,000 of expenses that were incurred in connection with head count right sizing initiatives that took place in Q1. On our last call in February, we had highlighted that we would aggressively manage our spending to maintain our margins and earnings targets in line with sales momentum. We believe that our Q1 financial results reflect our committment to managing costs through one of the toughest economies that we've seen in decades.

Given the current sales outlook and the continued uncertainties around the macro economy, we believe that it's prudent to extend our head count right sizing initiatives and, as a result, as we reported in this morning's earnings release, we anticipate that Q2 will include further right sizing charges in the range of $4.5 million to $5.7 million dollars. Collectively, the Q1 and planned Q2 reductions, which have an impact across most geographies and functional expense lines will result in approximately $9 million to $10 million of annual savings going forward. We believe that these actions, combined with aggressive cost management initiatives, will help to set the foundation for continued solid operating margins and earnings performance despite the current macro economy and, more importantly, will not only position ANSYS as a leaner and more cost efficient Company going forward, but will also give us some flexibility to make targeted investments in the business to support the future needs of the Company. Our non-GAAP effective tax rate for the quarter at 35% was within the range that we forecasted in the last call. And looking ahead into 2009, we're continuing to plan for an overall annual non-GAAP consolidated tax rate in the range of 35% to 37%. We will continue to update our estimates as potential changes in future global tax legislation begins to solidify, and we can estimate the impact of those on our business.

So just to quickly summarize, the key factors that impacted our Q1 financial performance, we reported a total increase in non-GAAP revenue of 11%, which included the Ansoft contribution of $21.7 million, as well as a decline in organic revenue of about 2% in constant currencies. While paid up licenses declined, the leased and maintenance business for both the combined and the organic business grew. The Q1 results include negative impacts from currency of approximately $7.2 million at the revenue line and $1.9 million at the operating income level. And even with Q1 revenue coming in at the very bottom end of our outlook, we delivered strong gross profit and operating margins, which included $600,000 of charges related to head count right sizing initiatives. Our results also included a full quarter of operating results from Ansoft, as well as the negative impacts of the interest expense and the additional shares that were issued in conjunction with the deal. Taking a quick look at the March 31st balance sheet, it continues to remain very strong. Total cash and short-term investments are at $230 million. And despite a few isolated pockets of receivable issues, our consolidated net DSO remains healthy at 43 days.

We had strong operating cash flows of $51.3 million that enabled to us repurchase about $2.1 million shares in the early March timeframe at an average price of $19.28 per share, as well as pay down $7.3 million of debt and still maintain our total cash reserves in line with the December 31st balances. For those of you updating your models, the average interest rate on the outstanding debt is about 3.7% for Q2. As we saw in Q1 and are currently projecting into Q2, given our level of international business, our 2009 results will be negatively impacted by currency, particularly on the Euro and British pound front with some slightly positive benefits planned from the Japanese yen assuming current rates. Our current outlook, we're assuming rates in the range of 1.3 to 1.35 for the Euro, 1.45 to 1.5 for the British pound, and 98 to 100 for the Japanese yen. As rates continue to change in the future, we'll modulate our outlook and trust that you'll take this into consideration as you update your projections.

Jim, I'll now turn the call back over to you for some summary comments.

Thanks, Maria.

To recap, continued strong performance of the major parameters of the business, revenue earnings, margins, cash flow, business base, even in light of the current environment and with the slightly hazier visibility. Progress on Ansoft integration on both the product and sales fronts, sustained customer interest marked by some activity on a broad front as evidenced by the industry, the geographic commitment levels, the renewal rates that we talked about earlier, albeit with a lot more increased customer discretion and some delays. Our world class product portfolio augmented by the broad range of ecosystem of partnerships and relationships we have continues to be strong and dramatically increased with the release of R12 and with the inclusion of Ansoft technology. The long-term outlook stays bullish, but we are preparing ourselves for another tough quarter in Q2. For 2009, we're refining our guidance from the beginning based on current data and with the value of a quarter of hindsight. We're still seeing the same basic contours for the year, where in the first half, we'll be restrained as customers remain highly cautious in their spending patterns. We are expecting some stabilization and maybe even some minor improvement toward the latter half of this year, but not a lot.

In the short-term, we'll focus on effective revenue attainment, which is another way of saying not spending a lot of effort trying to push on a rope. The focus will be on prudent growth and maintaining our earnings trajectory and business model. So to reiterate, this basically means, first, the long-term premise and opportunity are still there and we feel we have the best technology to meet them. Second, we've seriously looked at our business to adjust to certain aspects, as Maria's outlined. Particularly, those that don't hurt the long-term premise in response to the economic uncertainty. So, at the floor of the assumptions, we continue to have a good business with good recurring revenues, marquee customer relationships, all of which combine for good earnings potential and cash flows. We'll be focusing on maintaining strong operating margins about mid-40s early year to upper 40s at the end of the year while continuing to build our annuity base of recurring revenues and expanding at the maximum rate allowed by the macro market conditions. So, what does this all equate to in terms of numbers? Well in general, there are a couple of major themes. We're tightening our ranges and we're gearing up for a model that projects slightly lower revenues for the year after absorbing the adverse currency. And we're also tightening the earnings range, although the floor has remained intact. It should continue to build modestly through the year barring unforeseen further market softening.

So, we're projecting currently for 2009 non-GAAP revenues in the $510 million to $560 million dollar range, which tightens the range. albeit at a slightly lower level. Our non-GAAP earnings projections remain largely intact with our February outlook in the $1.54 to $1.81 range, largely reflective of our cost modifications. Included in this is our initial outlook for Q2, which consists of non-GAAP revenues in the range of $120 million to $126 million and non-GAAP EPS of the range of $0.34 to $0.38. Of course, we've done virtually nothing to limit our ability to capture any revenue upside that becomes available, but we're not gearing up our cost structure to any unproven optimism, either. Combined with our repeatable business base, our diversified geographic footprint, the world class customer base and the deferred revenues, we're driving the same business model that's allowed us to weather a wide range of economic situations over the last decade.

So with that, we're prepared to respond to any specific questions, and I'll actually, because of the environment being so turbulent realtime, I'll actually be inviting our head of Global Sales, Joe Fairbanks, and as well as our Global Controller, Lee Detwiler, in for the Q&A period. So, gentlemen, come on in and I'll open the floor for questions.

(Operator Instructions) We'll take our first question from Richard Davis with Needham & Company.

Hey, thanks very much. Question, what we're hearing, it sounds to be echoed from what you're seeing is that customers are just kind of buying smaller chunks and they still intend to buy, let's say, 100 seats, but they're buying 10, initially. So, if it's not about -- it seems like that would, therefore, be the economy, it's not so much about price, not that anyone doesn't want lower prices, but is there anything that you've heard from your customers feature-wise or functions that you don't have that you could add that would move them off a dime or is this just more about you've got to do outreach and stay in front of people until their budgets open up?

Well, it's primarily that latter part where we have to stay in touch with them. Yes, we are seeing more fragmentation in the orders, almost like just in time kind of procurement. We are also seeing where sometimes people are changing the purchase patterns to fit in under a certain threshold of approval cycle, meaning the level of order and therefore signature that somebody would sign, and we are seeing as you can tell, the lease base is rising, so we're seeing that happen as people are using that as a short-term way of getting a hold of the software, and when you look at it in terms of the non-GAAP, the impact on revenue, it's like every -- there's almost a 5:1 or 6:1 ratioing of the short-term impact of the lease, even though it's better for us long-term. But, in general, it is a function of staying out in front of the customers. You mentioned a point about the new -- about any blocking capabilities. In general, first of all, with our customers and 30-year relationships, they are always asking for something new, but in general of any comparative or competitive pressures, no, we're not hitting those.

However, an awful lot of things that people had been asking for over the last year or year and a half, we feel are largely embodied in the R12 release. And in particular, while there's a lot of work, it will be one of those things once we get out there, we'll probably find that we exceeded expectations in some standpoints, maybe we missed a little bit in some, once it really gets out in full production use, there'll be some things we'll learn from that as we do with all of our releases. But in terms of the integration, the user environment, the ease of use, the ability to actually build repeatable processes with a broad range of plug-ins, those are things in terms of building a footprint or a foundation for future innovation that the customers had been asking for, and actually collaborating with us as we brought R12 into delivery. And equally importantly, it starts to bring some of the major technologies we've acquired over the years into play. Most notably, the CFX and fluent families. But I'd have to even say that even though it wasn't released in this particular cycle, some of the Ansoft team had been particularly aggressive and actually put in place several prototypes in solving new classes of problems that really weren't even solvable before with the separate technologies. And that's exciting stuff to see because the fact that it's already hit the proof of concept means that it's that much closer to being a production reality. Joe, do you have any different perspectives from your --

No, certainly not a different perspective. Just to reiterate what Jim just said, I think that our customers have been bought into our vision for quite a while now and, of course, associated with that vision is a product road map and a product plan. And so, there's nothing specific that's driven by the current environment that they're asking for, however, R12 does, in fact, meet a lot of the commitments that we've made to them and address at least some of the requirements that they've been asking us for. So, that's getting addressed in that way. The other one that Jim touched on, I think, which is interesting, is that as we start to make visible more and more the potential of the Ansoft ANSYS integration, I expect that would draw further customer requirements and we'll address those as the opportunity presents itself.

Got it. That's helpful. Thanks so much.

Thank you. Our next question comes from Barbara Coffey with Kaufmann brothers.

Yes. Could you speak to me about what sort of enhancements are going to be in version 12 and is there any application to sort of new industries or some sort of broadening of seats you can get from having this new version?

Well, I'd say the main thing on the R12 release is basically the concept of process maps, of shared utilities that allow us to bring all of the strengths, for instance, the combined meshing technologies from a number of best in class products into one, one super brand, if you will. Doing the same things in terms of pushing the fluids capability where you've got a wide range of everything from the combustion that's needed in alternate engine type of cars to the ability to tackle some of the green energy initiatives that we've been hearing a lot about those on commercials over the last few months, but not a lot of funding's been released. So, you look at what can be along those standpoints. So, the ability to do those, but most importantly, do them in multi-physics because as people try to rush these things out, they don't have ten years to sit there and figure out how things are going forward.

Secondarily, people are looking to how they can optimize their computing environment, particularly when head count resources are sometimes scarce and one of the major tools for this and in fact, there was basically a joint release we did with Intel Corporation recently in terms of the promotion of new capabilities for driving high performance computing, which really uses the silicon footprint that people already have to amplify the engineering capabilities that they have going forward. So, we're seeing a number of those type of situations. As for new industries, I don't think -- since our industry footprint was already so broad to begin with, it's not like it's unlocked the door for any new one; however, it started to send some very interesting thrusts into areas that we talked about in terms of now looking at retooling automotive toward electrical and hybrid type of vehicles in the interest in terms of being able to, if you will, gain decades of experience in the span of a few months through repetitive experimentation using simulation as that way of going through there. We also have started to see more innovation in the way that the pharmaceutical and bio med industries have been pushing forward, but apart from that, I'd say most of the other industries, it's just kind of like absorbing what's there and taking it to the next level. Again, Maria or Joe, if you get different perspectives from that, feel free to try them.

No, I think, Barbara, the only thing I'll mention is, as Jim pointed out, we really very rarely take an approach to a single industry. It's really broad-based physics that are applicable across industries to solve problems. One of the things I will say is some of the early response from customers relative to the customer events that I mentioned and some of the webinars we're holding to educate them about all of the new advances in Workbench are very positive and hopefully bode well for the future as they get their hands on it and get a much better understanding of everything that we've invested in over the past year and a half to bring this to fruition.

Thank you.

Thank you. Next, we'll go to Greg Halter with Great Lakes Review.

Yes, good morning. I know in the past, you had indicated some difficulties, maybe, with one of the channel partners overseas, I think. Just wondering if you could give us an update there.

I think what I probably said for almost every call for the last eight or nine years is we always have, I mean, no matter what, there's always somebody at the bottom of the pile, even in the best of times or the worst of times. So we're always working on the lower parts of the channel. In general, in general, it's kind of tough to say. I'd say that in this environment, that all the channel partners have been hanging somewhat with us, some better than others. None of them -- nobody's been shooting the lights out in this environment. And I don't think that would surprise anybody. And like I said, in aggregate, the direct business fared slightly better than the indirect. And again, that's because the major customers are those ones that are tending to be more resilient in this economy, but in general, they've moved somewhat in the same cycle, so it's not like there is -- I'd say maybe the toughest ones were when we had maybe smaller distributors that were in areas that had the most manic of currency shifts that that could cause some issues, but that's nothing that had a material impact on the business. Joe, did you see anything or Maria, Lee, from your perspective?

No, not really. I would say that one of the things we have to be aware of and continue to support our channel on is they are, in fact, different businesses so their ability to manage through and react to the current environment may be much different than ours, right? So we have to continue to work with them in that regard. I can't think of any specific single channel part of it I would single out.

Okay. And it may have been current currency related, as well, in this particular case. Last question, given the dynamics of the economic situation here, have you changed your thoughts on what your capital spending would be for the year?

Greg, capital spending's probably going to be somewhere between $10 million and $15 million and whether we end up at the low end or the high end will depend on if, in fact, things get better, but there are certain things that, as I mentioned on the call, that we are investing in for the future ala CRM as an example. So, we definitely cut back on some plans that would have been nice to do and are focusing on the things that are absolutely critical for the current and the future of the business.

Great. Thank you.

Our next question comes from Steve Ashley with Robert W. Baird.

My questions are about Ansoft and I'm sorry if I missed this on the call, but did you indicate what dollar amount of revenue they contributed in the first quarter? Secondly, what do you think the contribution of Ansoft might be revenue-wise for the full year?

Well, yes, Steve, we did. I did highlight the fact that there was a $21.7 million dollar contribution from Ansoft. And we're looking somewhere around the $100 million to $102 million, a floor just a little bit above $100 million and maybe as up to $110 million, $113 million at the upper end.

And if we look at the adjustment you made at the low end of revenue guidance, did that incorporate any reduction in the outlook for the core business, the non-Ansoft business?

Yes. Well, probably both sides, again, disproportionately for Ansoft, and of course, capturing the part that we already knew with certainty, which was Q1. So maybe a tad more for the -- a tad down for the ANSYS organic business, but again, I'll say that we have seen that thing we thought might happen with regard to the short-term displacement or lease, which has, has a short, has a short-term major impact. Then secondarily, is still a continued softness in the Ansoft business, again, with the high paid up base. We are and we have started offering a more, a friendlier lease kind of option for them. How quickly those buying patterns change, it's still early for to us predict when that happens. Nevertheless, it is there. It has been something that has been asked for, but also, the other thing is that historically, we've also seen that when the recovery does come, particularly in those industries and particularly at a macro level, the Ansoft business historically does have a slightly quicker and somewhat higher recovery rate, too. So all of those things are factored in. I threw a bunch of variables at you, so did that --

Sure. And just one real quick follow-up and then I'll hop off. Do you know what percentage of the core ANSYS business was leased this quarter versus a year ago?

Well, it's about 48% -- it's 43%. It's 43% that basically --

Year ago, it's probably high 30s.

Yes.

Great. Thank you.

Thank you. Next, we'll go to Sterling Auty with JPMorgan.

Yes, thanks. Hi, guys. I missed it if you said it, but when you look at the head count reductions that you're doing, can you give us an idea of what areas the cuts are going to come from?

It basically is all functions, all geographies. This is general. If you look at, I mean, frankly, we tried to run a very, a very stable, tight business, so it wasn't like we had pockets of bloating anywhere. I mean, if you look at the margin structure we had; however, when we looked at everything, we sized it based on hey, here's the base of the business and as such, it was -- it wasn't a mathematical exersice, but the natural outcome of it was that it did cover the broad range of operations.

Given that you have such a competitive advantage, at least based on talking with customers on the technology side, why not do a slightly bigger cut in R&D, keep the sales and marketing, because it would seem to me as you look at the revenue and the revenue guidance, you need to fill the pipeline with more opportunities because the close rates are small and given the macro opportunity.

Well, in general, not talking about all of the specifics there, I would say the key thing is that we're -- those key technologists we have are very rare. They're also working since every software project tends to have one, two, and three year horizons. You can't -- they're not like shift workers that can be laid off and then brought back when it's convenient. And they're also working on things that -- so, while we're not as comfortable with the remainder of 2009, when you start looking at the 2011 timeframe or things like that, it looks pretty good. And historically, that R&D is one of the reasons why people have felt that they can bank on us, even during tough times. So in other words, it's not like oh, when times get tough, will I expect slower or lesser product commitment because my pressures aren't decreasing any. Now, on the other hand, we've kept the sales and support levels at very sane levels, but we want to make sure that we can make a dollar on a marginal dollar of standpoint.

So, again, what we've done is we've redeployed certain assets into continuing to support the recurring revenue base commitments and also, but we could, we could hire 20 extra sales people to go into any given major customer and scream in the lobby asking for orders and if they don't have them, they won't have them with the kind of relationship we have. So, like I said, we've really tried to go toward efficient revenue attainment without skewing the leverage toward something that could adversely affect the earnings and margins. And we are at a minimum, while we have taken some actions in our overall product groups, we have really focused on maintaining the strength that has really been our found foundation for 30 years and easily for the next ten or more years.

And then, on the product business that you did do, can you give us characterization of what the average discounting looked like in the quarter? Meaning, did you have to discount more than normal just to get the product revenue that you did do or did you walk away from some deals because of discounting necessary to get it done would have been a little bit too much and maybe it comes back as things heal up?

Well, one thing I will jump in, and that's one reason why I want to let the person who's living this hourly where I only live it daily is that a, on a recurring base, we're very -- we've got a fair value proposition for that, and it's something that we protect above all others. So, while there are always pressures, that was one that we held tight on. My sense of it, really, was that there wasn't -- that we would work with customers in a variety of different ways other than discounting to help them get access to the value. Sometimes, that was that short-term lease kind of standpoint. I didn't see anything because I have to sign off on deals above certain levels and certain discount levels, and I didn't see a plethora of those coming through. So in general, we tried to work -- my perception was we tried to work in different ways so it wasn't a -- we worked hard to get the value where it does seem to be something that was sustainable over a number of years and then we'll try to navigate through short-term policies, not long-term policies. But Joe, what are you seeing on a regular basis?

Yes, I think, as Jim said, anecdotally or intuitively, we were not seeing that, but however, we had the same question so we went and looked at it specifically as we do typically on a semi-annual basis or whatever. And I would tell you that the discount levels that we saw were in line with what they've been historically. To answer your other question, Sterling, I wouldn't say there were any deals we had to walk away from, but I will tell you that the sales channel is geared so that they are not driven by quarterly deadlines or anything. So, we're not going to let a customer use some perception that we've got some pressure from a quarterly standpoint to use that as a negotiating tool against us. So, there are probably some deals that we could have had if we wanted to get really, really agressive that we didn't in a quarter, but they're still alive. I wouldn't say we walked away from them.

Well, the other thing, as part of that ongoing analysis we do, first of all, people aren't blind to quarters, but we don't make that the overriding standpoint because most of our customer relationships are built on years, not on days. But the one thing we could quantify, we could quantify the substantial amount of business that is still on the docket, but has been, in fact, deferred. Now the question is is it deferred a month, thee months or toward later in the year? And there's a variety of different answers that are customer specific on that.

All right. Great. Thank you, guys.

Yes.

Our next question comes from Steve Koenig with KeyBanc Capital Markets.

Good morning. Thanks for taking my question.

No problem.

I guess the first one I'd like to ask and then one follow-up would be the mix between paid up and leases. Where do you see that mix trending as the year moves on and then maybe more qualitatively, what are your thoughts on how much of that mix shift is cyclical versus longer term secular? Then just one follow-up if I may.

I think as to the mix, depending upon how you define the timeframe, I'd have to say it's largely cyclical because we have been seeing trends toward more stabilization along that, and I think the shift we've seen is just a temporary thing. Now, the thing we don't know is how long the temporary actually lasts. As for the relative proportions of them, boy, there's two ways to answer that question, one of which is by the actual licenses being procured and one is by the dollar amount procured. As we mentioned, on average in a year, a perpetual will bring in about six times the revenue of a lease when you consider the revenue recognition of it and the average point at which it happens in the year whereas in later years, the lease becomes preferable. The thing that changes that dollar amount quite a bit is there's one aspect. What percent of paid up license business went to lease? But secondarily, how much paid up license business happened period because that obviously is going to drive the factor. I guess, we'd start to see as the year folds out, hopefully a little bit more build-up in the paid up, but we'll also see -- expect some build-up in the lease.

Okay. All right. I appreciate that. On the follow-up question, I would be curious to know on -- back to ANSYS 12 and Workbench 2, how do you see the penetration of the base of trending over time for that product and do you anticipate incremental revenue that's noticeable? Is there an upcharge for the Workbench or what kind of impact could the Workbench 2 have on revenue? Is that a significant release for you?

Well, first of all, there's not enough charge. That's actually based in the people who had the enhancement subscription portion of our, let's say, our maintenance and enhancement combinations. Second, so I wouldn't see that spike that you might see in some standpoints. However, it should over the long haul kind of start to tick up the acquisition slope. So, if you look at areas under the curve over a longer timeframe, it could be significant over the shorter timeframe, it probably won't show up as being material in the next couple of months, but as it continues to take hold, it should be pretty strong.

Now, as for implementation patterns, every customer will get access to it; however, depending upon where customers are in the various product development cycles and the like, some of them implemented immediately and some of them may wait three or four months till they get to a logical break in the middle of some kind of a development process they're going. I know within the first day or couple days or so, we were already into the thousands of downloads from the center. So, I mean, there was certainly a lot of interest and by the same standpoint, we tried to host some webex kind of things and we were way oversubscribed where we thought we'd be on that. There were thousands upon thousands of registered users for both the live and the webex sessions that we held. So, the -- let's say the intrigue around it has certainly been, been above our expectations so far, which you thought might be muted in comparison with the rest of the economy.

The only thing I would comment is the webinars that Jim referred to is a little bit of a new approach that we're taking with this launch. I think we announced it, Maria, what, three weeks ago, four weeks ago?

Yes.

And I just saw the numbers this morning and we have just shy of 8,000 people registered for a series of webinars we're just doing in the month of May. That doesn't include the ones we'll do throughout the course of June and going forward. So, the level of interest is unprecedented, I think.

Great. Thanks a lot for your answers.

Thank you.

Thank you. Next, we'll go to Mark Schappel with The Benchmark Company.

Hi, good morning.

Good morning, Mark.

Hi, Mark.

Jim, in the past, you've highlighted a trend of increasing computational cycles where customers may have multiple engineering simulation seats for a single user. I was just wondering if there was any movement in that trend during the quarter that you noticed?

It's a general trend up but it's just more of a steady standpoint. That's why I mentioned the high performance. There's two aspects. First of all, one school of usage is in the high performance computing. The second is what might be crudely called design of experiments where somebody says -- the first one says I'm going to take a really large project and I don't want to wait a few days for the computer to crunch on it. I want to send it over many computers and get the answer back overnight because time is my enemy. Secondarily, there is one that says, hey, I've got maybe these four or five different alternatives. And they might operate in the different parameters of operating conditions and temperature ranges and rpm and the like. And I'd like to see which one of these might hold up better so I can just narrow down quickly to the two that I might try to refine. We have seen more of that coming in, but I'd say it's more of a climate change than it is a weather pattern. So, it's not like over the last couple of months we would've seen anything change, but we certainly haven't seen a reversing of the trend, and a steady increase of the standpoint, but we also have an awful lot of customers that are trying to get their new product cycles out but also kind of refactor their organizations. So there are a lot of different variables in play.

Thanks. And then, in your prepared remarks, you mention that your process industry business may have been a bit soft. What areas of process were maybe a little bit softer than others?

Well, I think -- the one I think I mentioned about the energy and the infrastructure sectors, and in general, it was, a lot of things slowed down a little bit on the -- if you recall in previous quarters, we talked a lot about these surges and alternate energy, I mean, everything from bio mass to water turbines to wind turbines, solar, that whole range of things. As the oil prices drop down, of course, now they're rising back up and people are waiting to see, well, we're hearing that there may be a bunch of new green initiatives and green jobs and -- but that money never really has been, really never given an indication of it, so, it's more like people before they jump into the pool, they're kind of waiting to see how much water there might be. So, I'd say there hasn't been a decrease in interest, but there certainly has been a lot more, well, we've got to wait and see what happens on here before we start placing our bets. And that was -- those were some of the major things that were driving that.

Thank you.

Next, we'll go to Ross MacMillan with Jefferies & Company.

Thanks. So, maybe start with the maintenance number. It's particularly strong, I guess, given currency and I just have two questions around that. Can you just remind us of the pricing on maintenance this year and whether there were any inflators in there, additional price uplifts? And we've seen a number of companies also in software take additional provisions or (inaudible) on certain debts against maintenance. I was curious if you could make a comment on what you've done there as well. Thanks.

Well, first of all, I think the provision answer is no, but I will defer to Lee.

Yes. No unusual provisions.

Yes? Okay. He's agreeing to the negative answer. No answer on that. Also, in this environment, we did not generically kind of, like, raise prices. However, there were a couple of locales where we made adjustments for things that were covering longer term, currency rationalizations and the likes to bring local price lists in line with local pricing kind of standpoints. But nothing on a real major kind of basis, but no, but we did focus, you're correct, we did focus on keeping that total maintenance base strong and yes, of course it was strong when you add in the addition of Ansoft, but even the fact that it grew 10%. In fact, if you look at constant currency and that kind of standpoint, even higher, but the fact is, it's one of the things that drives that is that ongoing commitment to the R&D. Just people say, okay, in this environment, I can't buy a lot, so I've got to buy smart and what's my best long-term play and we certainly feel it's us, but a lot of our customers did, too.

Great. I may be switching just to the cost side. We're just trying to balance the comments you made with regard to some of the additional investments against the additional head count cuts. How should we think about all op ex on a non-GAAP basis? Is it going to grow sequentially this quarter? Is that how we should think about it?

Yes. A little bit to compensate for some of the major spend that I highlighted so probably I'd say as opposed to Q1, we're at 46%, maybe somewhere in the 43% to 45% for Q2 to compensate for the fact that we are going to invest in CRM, we are going to invest in R12 and none of those are in the Q1 base. You'll really probably largely feel the impact of some of the head count right sizing initiatives moving into Q3.

Great. Just one last one. Though the perpetual paid up license was down a lot, it was actually better than I thought it could be. Is that -- do you think that reflects some of these larger customers or are those larger customers, generally, pushing towards leases as well? And so, it's a more general -- that perpetual number is just more general reflection of the environment?

Well, the general reflection of the environment, I will tell you that I'm personally aware, I won't mention the individuals by name, but I know this are some major customers that did go heavily leased in the short-term on some things. Again, secondarily, is again, you can't downplay the GAAP -- the revenue recognition impact of a lease versus a license, again particularly, in year one. So, those things were particularly key in any of those calculations.

Great. Thank you.

Thank you. Our next question comes from Greg Dunham with Deutsche Bank.

Yes, thanks for taking my question. You mentioned that Ansoft historically rebounds more quickly and clearly in the $100 million in guidance for the year or (inaudible) and since expectations, you're embedding a strong second half for that business. The question is, how do you characterize your lead lag exposure in the core ANSYS business? Is there a three-month lag to the economy, a six months, a nine months? How should we think about that?

First of all, it varies by sector and varies by geography. One thing that makes this a very difficult one is we've had cycles before where one or two of the major regions of the world were depressed but not one where all three were simultaneously depressed. Likewise, there are always a couple of industries even in the worst of times that continue to bob up, so like I said, all of the industries have been a little bit affected even though some of the other ones, so it's going to be an interesting standpoint, and again, I'm not even sure which factor, because there's so many things going on in the market right now, is this a bold period, is it a bear bounce, there's so many things going on right now, it's really tough to put a three or a six months, maybe I should stop digging hole and say, hey, finance experts.

But the answer is that one's really tough for to us tell, which is the reason why we've done the cost structuring that we've done, it's the reason why we're focusing on the recurring base, it's the reason why we've refactored the business and we've tried to do it in such a way that when the recovery does come, we don't sacrifice any ability to capture that. If it drags on in the doldrums a little bit longer, we still have a solid business that's generating cash because -- and I've asked a ton of people this out in the outside and asked for when they see the various aspects of the recovery coming, and don't really have too many people that have nailed it down. Maria? Lee? Please.

No.

Okay.

Part of the reason why I ask is because Europe was still strong where North America was still weak. It's kind of a reversal from what we're seeing from some of you competitors. But I guess one question on top of that is, maybe this is for Joe. Could you characterize the capacity -- your capacity to fulfill demand and how shall we think about investment plans in sales and head count as you return to more normalized growth rates looking out to 2010 and 2011?

Well, I think the capacity is where it needs to be right now. One of the things that I think about quite a bit is the risk of inertia, if you will, right? Where it's becoming the norm. So, we're constantly looking at ways of injecting energy into our customer base, injecting energy into the sales channel. Certainly release 12 does that in a big way. As you see more and more of the integration between Ansoft and ANSYS take place, that's an opportunity to do that in a big way. So, we see the pipeline building so we can see the opportunities out there. It's just the ability to predict them, especially in the short-term, is the biggest challenge. But, we are prepared for it when, in fact, it does happen.

Thank you.

Thank you. And our last question comes from Blair Abnernethy with Thomas Weisel Partners.

Just, Jim, back to the verticals. I wonder if you would just sort of characterize for us on the Ansoft business and then also on the core ANSYS business. What verticals in Q1 were sort of weakest for you and which ones were strongest for you?

Verticals?

Both Ansoft and ANSYS.

Auto and consumer electronics.

Yes, I think on the Ansoft side, they're not as -- they haven't been as diversified as we are, right? So, they're more narrowed from an industry segment perspective and when you think about consumer electronics, semiconductor business, and to some degree in their context, automotive, all three of those have been impacted disproportionately by the current economic conditions, I think. So that hurt in that regard. In terms of having said that, I would say that automotive has been a very interesting opportunity for us in the first quarter. You see companies that are looking to respond to the new realities of that industry and making incremental investments in technology, especially in the tier one supply segment of that market. I think our core markets of aerospace continue to be strong. Even defense certainly continues to be strong. Others that I think are in a little bit of transition but I'm very optimistic about are energy, both in terms of the kind of carbon fossil fuel aspects of energy, but also the alternative energies, as well. I think there's a little bit of transition now, but I see knew opportunities on the horizon in those.

Okay. Great. Thank you. Second question, in terms of now that you've had Ansoft under the hood for a couple quarters, what sort of -- what customers or what areas are you seeing the most traction in in terms of when you go out to pitch sort of mechanical, electrical, comprehensive simulation?

Automotive is certainly one of those, especially in the area of hybrid electric vehicles. That's a big one. I think in the alternative energy, one of the ones that's really interesting to me is the wind turbine. ANSYS has been very strong in that area for a while now, but as you may have picked up in our recent press release, if you combine that with the Ansoft capabilities, we have an even more compelling value proposition for that particular industry and without taking a lot of time there, that is one that I think about that's in a little bit of transition in terms of things they need to do to be competitive. So those are two other examples. I don't know, Jim, do you have any --

That's what I've seen. You're much closer.

Okay. That's great. Thank you.

Thank you.

And Mr. Cashman, I'll turn things to you for any additional or closing remarks.

That's it for questions then. Okay. Basically, just in close, I guess, overall, it's in line quarter despite what I'd have to call unprecedented conditions. Looking ahead, the emphasis is going to be, as I tried to emphasize, continued focus on execution in tough times. Try effective integration of Ansoft and supported by years the history. So just echoing what we've answered a lot of questions here, the customer acceptance of the existing vision and a fairly unique value proposition, it's really not waivered, and the expansion of our product portfolio with R12 and Ansoft, it basically only strengthens the longer term prospects. So, at the heart of this, we've still got the same combination of the solid business model with all of the parameters that I've talked about in this call. The loyal customers as demonstrated by what they've been doing with us along with us during these tough times, the channel partners who have been hanging in there with us during all this, great technology, talent and poise. It's a real good combination. We've tried to make ourselves a lot leaner and more nimble, particularly during these tough times. But we still have all of the elements that have kept us strong over the years, so we'll just keep navigating the storm and continuing to build for the future. So, thanks for your time, thanks for your questions, and we'll talk to you next quarter.

That does conclude today's conference. Thank you for your participation.