ANSYS Inc (ANSS) 2009 Q2 法說會逐字稿

Good morning, and welcome to the Good morning, and welcome to the Good morning, and welcome to the ANSYS second quarter earnings conference call. second quarter earnings conference call. morning, and welcome to the ANSYS second quarter earnings conference call. second quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question and answer session. (Operator Instructions)

Thank you, Mr. Jim Cashman, ANSYS CEO, you may begin your conference.

Okay. Thanks, Amber, and thanks, everybody.

Good morning, and I'd like to welcome you to the ANSYS call for Q2 2009. And joining me today, as usual, is our CFO, Maria Shields. We'll start with highlights for the quarter and the year to date, and then we'll go into greater depth on the operational results and then following this, we'll cover a fairly diverse set of qualitative factors related to our progress in product releases, most notably, the release of ANSYS R12, some Ansoft integration, and an update on some of the steps that we've been taking in response to the economy. We feel that all of these provide a pretty decent balance of short term flexibility while not throttling our long term opportunity. In the course of this, Maria will then update you on line item expense performance, balance sheet, cash flows, as well as giving greater detail on some of our responses to the economy. And then we'll then go into the initial projections for Q3 with an update for the full year 2009 and after discussing all those topics, we'll be happy to respond to any questions you may have.

So, Maria, if you'd start us off with the Safe Harbor statement, please.

Okay. Thanks, Jim. Good morning, and again, thank you everyone for joining us.

Before we get started, I'll remind everyone that in addition to risks and uncertainties that we may highlight throughout the course of this call, important factors that may affect our future results are discussed at length in our public filings with the SEC and they are all available at our website and 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 as a world in our business as of today and we undertake no obligation to update any such information unless we do so in a public forum. And finally, throughout the course of this call, we will be making reference to non-GAAP financial measures, a discussion and full reconciliation of GAAP to comparable non-GAAP is included in this morning's earnings and related form 8-K.

So, with that, Jim, I'm turn it back over to you.

Okay. Thanks, Maria.

Well, essentially, Q2 played out totally in line with our guidance from the May call, but with some greater operational efficiencies. I'll say we continue to face the challenges that we had expected and that all things considered, we continued to execute well. Our revenue was at the middle of our guidance and our earnings was above the upper end of the range. From a high level perspective, this is another quarter that highlighted the strengths of the ANSYS business model, even considering the economic times off of a very strong comparable and in the face of almost $7 million of currency headwinds. So, for the quarter, we reported non-GAAP revenue of $124.2 million and this represents a 12% increase from last year's Q2 of $111.2 million. Non-GAAP diluted earnings per share were $0.43 or $0.41 excluding restructuring and certain tax benefits compared with non-GAAP EPS of $0.42 in Q2 of 2008. And for long term followers, this represented the 47th straight quarter of meeting or beating non-GAAP earnings consensus. More importantly, the EPS performance was encouraging considering all of the previous factors we just mentioned. Of those major aspects of the business performed as anticipated, we've been staying -- actually saying on the last couple of calls that we were going to focus on the parts of the business that we had some control over; namely, margins, recurring revenues and cash flows and these all did quite well.

Our key customer engagements were fairly stable, which mirrors our commentary of the past couple of quarters also. There was some minimal continuation of a shift to lease and there was generally good renewal activity, although not without some delays. We saw a growth in our recurring business streams. For the near term, the story is basically the same. Customers are telling us that they don't have the ability to opt out of new product innovations, which drive our software opportunities, but all expenditures are being heavily scrutinized and/or delayed. While we're not really seeing any signs of a sustainable recovery, we're also not seeing appreciable further deterioration, either. So, if we cut in at the -- a little bit more depth on the operational highlights, as previously mentioned, the non-GAAP revenue for the quarter, $124.2 million, and this included $20.7 million from Ansoft. The ANSYS organic business was basically flat in constant currency, while the Ansoft business continues to be more negatively impacted by a combination of factors, most notably, a heavier reliance on paid up licenses and a disproportionate exposure to the industries that are the most affected by the downturn. Similar to last quarter, it can be really difficult to try to parse through all the numbers when we're trying to interrelate GAAP, non-GAAP, organic, constant currency and all those permutations.

So, given that we were largely in line with our revenue guidance, I'll focus on the key metrics while trying to provide a general commentary on how the various sectors are doing, and this is a similar fashion to what we did on the previous call. So, the overall non-GAAP operating margins for the quarter were 47%, which is slightly above our guidance and above the 46% of Q1. It represents an aggregation of progress in Ansoft integration and operational efficiencies, but also countered by more challenging times for new business closure. Non-GAAP gross margins were at a healthy 88% and we also saw solid cash flows from operations of over $43.4 million. For the first half of 2009, we reported non-GAAP revenues of $245.6 million compared to $220.8 million for the first half of 2008 with the same contours as Q1; namely, Ansoft contribution on top of core ANSYS business that was essentially flat in constant currencies. Non-GAAP EPS was $0.80 compared to $0.82 influenced by the non-comparable of Ansoft and the current business climate and excluding an additional $0.02 tax benefit. Non-GAAP operating margins were 46.7%. Non-GAAP gross margins held steady at 88% and we saw for the first half continued strong cash flows from operations of over $94 million.

So, with that laid out, we can -- we can now take a look at the Q2 picture from our usual range of different perspectives. We'll look at categories of business, geography, customer, and products. So, let's take category of business first. The major story is that recurring streams of lease and software maintenance increased. While a large amount of new business came in, it was below the prior year, predominantly driven by the macro factors. Overall, consolidated Non-GAAP software license revenue was essentially flat for the quarter. Lease was up a little over 1%, mostly from Ansoft additions to a relatively stable ANSYS. For the year to date, it was up 3%. Paid ups were down 3% for the quarter, including about $7 million of Ansoft, but down in between 8% and 9% year to date. The major factors for the first half were the same - or for this quarter, were the same as basically last quarter. There were a large amount of currency headwinds, there was slowing of new licenses in the current climate and against a strong comparable quarter in better times. Nevertheless, we still added about $29 million in new paid up license business for the quarter and over $55 million for the year to date.

The lease business grew nominally for the quarter and represented 36% of total business, actually, for both the quarter and the year. There were some modest additions to a short term shift we'd been seeing from license to lease in the quarter, but no continued acceleration of that trend. This was a mild pattern that we also saw in the post 9/11 time frame and is further reflective of the economic situation. But it's just another element of our -- the flexible model that allows us to meet the business needs of customers and we've also introduced this flexibility to the Ansoft product lines. Total maintenance and service grew to about 41% for the quarter and year to date. The pure software maintenance and enhancement subscription portion grew at 46% for the quarter and 50% for the year with about a $12 million contribution from Ansoft for the quarter and $25 million for the year to date. Now, because the recurring base is such an important part of our business model, in this case, I will go back to it and organic comparison and it's particularly important for that particular reason. On pure organic terms, we saw an 8% growth for the quarter and 9% for the year. And the engineering services element represented about 4% of total revenue for both the quarter and the year to date.

We saw a balance across the major product families with the upper end products continuing to be more resilient. This is tended to be indicative of in these times of value consciousness being more important than just a pure price consciousness in our customer base. As direct and indirect businesses, they both felt the same eco impacts, but there was a slightly greater shift toward indirect versus direct or about a 74% to 26% split. That's in favor of direct. Business intake contributed to a rise in deferred revenues to an all time high of over $190 million. Our strong repeatable business base was 74% compared to 68% at this time of the year, even including a less visible Ansoft component. There are two major components of this. First of all, a continuing strong recurring base of business, but with a healthy and admittedly lower new business component. Following recent trends, this quarter's business included four seven figure deals with over 70% in total going into the recurring business revenue or via the business renewal and/or new lease and maintenance additions.

There were a number of other upper six figure orders that didn't cross the threshold of seven figuredom due to the lower content of new license, but they were significant due to the renewal impact. This gives us confidence that our business with our key global customers remains solid. And the consistent ability to maintain a solid base of recurring or repeatable revenue is basically one of the hallmarks of our model and it's the foundation for navigating the tough economics. We continue to believe that this has been a long term result of our long term commitment to R&D, which has continually driven product leadership, most recently demonstrated with ANSYS R12. We have a solid balance sheet and cash flows, I mentioned $43.4 million for the quarter and it affords us flexibility in dealing with the evolving climate, be it through accelerated debt buydown, ANSYS share repurchase or insulation as the needs may dictate. In this past quarter, we did elect to buy down debt to get to lower rates and we have built up our reserves. We did not do any share repurchase in the quarter.

From a geography standpoint, again, largely in line with the previous commentary and trends with every region feeling some effects of the economy. We had a good business everywhere, but not at the rates of the previous couple of year. The general gist is that we grew everywhere in constant currency on a combined basis for both the quarter and the year to date. North America increased at 21%, but there was a 5% organic decline. There was still a lot of the wait and see kind of scenario that we mentioned last quarter as virtually every company has been trying to simultaneously estimate the economy and anticipate a range of government intervention, including stimulus priority levels and a range of things. Major orders in North America came from typical mix of both longstanding customers and some new ones. General Electric, Delphi, Lockheed Martin, General Motors, Goodrich, Intel, Honeywell, Army Research Labs, General Atomic, Westinghouse, Caterpillar, Boeing, and Shell Oil. And as I mentioned earlier, a healthy portion of these deals also went to deferred revenue. Europe actually did pretty well in spite of the continued currency headwind that hit the every region of Europe.

For the quarter, there was an overall 8% decline, but a 6% increase in constant currencies. The largest deals in Europe included repeat customers and some new ones there, too, as Rolls-Royce, Alstom, ADB, Volvo, Siemens, Hitachi, Areva, Airbus, Shell, Atlas Air Power, and (inaudible) kind of led the way. Actually, in Europe, over 85% of our major orders went into deferred. And our general international area also grew but, again, faced the same realities as the rest of the world. While most currencies were negative or nominal, the end was actually a little positive. The overall growth for the region was 39% for the region, in total, or 36% in constant currency. Organically, the region was flat to up in both real and constant currencies for the quarter and the year to date. This story, though, it breaks along two lines. That Japan is a very major portion of our GIA area and the -- so, looking at the non-Japan portions first, they grew at 59% for the quarter and 41% for the year to date. Organically, the non-Japan portion grew at 27% for the quarter and 7% year to date.

Now taking Japan by itself, it grew at 24% for the quarter and 29% for the year. Organically, it declined 2% for the quarter and 5% for the year. So, essentially, each of these regions GIA was still able to maintain good business creation with key customer engagements that included Mitsubishi Heavy Industries, Canon, IHI, Panasonic, (inaudible), Honda, Toyota, Hitachi, Sumitomo, Tokyo Electric, General Motors, and (inaudible) Electric Locomotive. So, looking at if we combine all those large orders on the worldwide list, we basically see no change in recent trends that we've been discussing now for a couple of calls. Basically, every industry has been touched, but the better companies in each seem to be a little more resilient and with an ability for forward-looking. Energy has bobbed up a little as has heavy equipment and materials, somewhat driven by some global infrastructure projects. We did see increased interest in simulation for advanced research, particularly in automotive of all places, as they faced increasing pressures on energy efficiency and emissions. So, it's pretty early in the cycle to project long term prospects, but there's -- and there's a lot of turbulence out there still, so we're staying out of the prognostication business, but there were signs that looked like they could show some promise.

There's little doubt of the long term opportunity as evidenced by the continuing multi-year momentum, both in existing and new customers. There's interest everywhere, but there's also sluggishness. We don't see things getting a lot worse, but we also have not seen them get markedly better quite yet, even as the years continue to evolve. As such, we have tried to factor it into our guidance and we'll continue to endeavor to do so going forward. So, in summary, there are pockets of success around the globe, and you can tell from the list of customer names, good industry breadth, good major account activity. In fact, major accounts were particularly important in their contribution to new licensed revenue, as well as to the deferred revenue balance.

From a product revenue standpoint, our high end products continued to lead the way. Basically, additionally, the high end ASPs for the quarter, again stable, basically flat. Essentially, the products have been able to hold value. At the low end, ASPs were slightly down as those doing more routine tasks were slightly more price sensitive, but as we've been able to increase the requisite ease of use into our high end products, the entry level products have been less of a factor in our ongoing business. While I mentioned that the economy hit the Ansoft business a little harder, I mentioned that previously, thinking longer term, we're still excited about the prospects of being able to complete product simulations across all industries with products that are increasing a blur of mechanical and electrical effects, including both the form and the function of those products. Our progression toward this vision is already starting to take hold, not only through our early product integration efforts, actually some of these will be seen in the Ansoft release during the next few months, but also through the release of ANSYS R12. This has been significant as both an array of new capabilities and also extensive integration across multi-physics capability. This same platform, R12, vastly enables flexible work flows and provides the framework and utilities to support a convergence with the Ansoft product lines. And, of course, it also extends to support of non-ANSYS products also to provide the interoperability so crucial for our customers and their extended supply chains and all the multiple CAD and TDM and ERP systems that they have.

The first few months of response from users and independent assessments from the trade press have actually been quite encouraging. So, most of these, in addition to some more detailed product info, can be found on our website, so I won't take a long time discussing those now. So, in summary, we had a very respectable quarter that met or exceeded our guidance. We certainly wish the macro environment was not as it is, but we continued to build our foundation and extend our technology base while keeping in line with our financial goals. Specifically, we focused on quality earnings, maintaining strong margins, solid cash flows, and increasing our robust recurring revenue base. Secondly, we said we were going to fulfill available customer demand at the best rate possible given this sluggishness, and in the past quarter, we actually added over $30 million in new business via lease, license and service. Next, we implemented structural and process refinements to strengthen our short term, but also to better prepare us for whenever the recovery occurs. Finally, we wanted to make good progress on Ansoft integration. Essentially, these remain key elements that are in our control and they'll enable us to better weather the storm. So, we plan to continue this course for the next few quarters. As for our major customers, they are telling us that they need to continue their R&D into innovative products, but as we witnessed the first half of the year, all procurements are taking longer internally.

Renewal rates, while not totally unaffected, have stayed solid, especially with key customers. Gross pipelines have actually increased as have the deferred and the recurring revenues, and we're adding new business, albeit at a slower pace. So, net net, our long term vision and optimism remains solid, but we're carefully watching the range of short term factors that could continue to challenge our business, and we're proactively refining our business model and all the parameters around it to mitigate the downside risk. So, the same short term caution that we exercised positively during past difficult times, but we've actually probably taken them to a higher level. We're continuously calibrating the Company to the evolving realities of the business to solidify a foundation, basically in an effort to build business while protecting earnings, the margins, and our recurring base.

So, with that, I'll now turn it over to Maria Shields, our CFO, and she'll provide you a more detailed look, as I mentioned before, of the financials, including some of the steps that we've been taking and we'll continue to take into Q3 and the final part of the year. So, Maria?

Okay. Thanks, Jim.

For the next few minutes, I'll add some additional perspective on our Q2 and first half performance, and I'll also cover a summary of some key financial highlights. The first point I'd like to make is that the majority of the cost fluctuations between the second quarter and the first half of 2009's results and last year's comparable periods are substantially related to the inclusion of Ansoft in the 2009 results. While we announced the deal in Q1 of last year, we didn't actually close the transaction until the third quarter of 2008. So, beginning with cost of sales, excluding acquisition-related amortization and the impact of stock-based compensation, which combined, totaled $9.2 million, cost of sales for the second quarter totaled $14.9 million. And on a year to date basis, non-GAAP cost of sales, which excludes $18.3 million of acquisition-related amortization and stock-based compensation, totaled $29.3 million. This contributed to an overall non-GAAP gross profit margin of 88% for the second quarter and for the first half of 2009. So, in line with the outlook from our previous call, looking ahead, we continue to target a non-GAAP gross profit margin in the 87% to 89% range for the remainder of 2009.

Moving on to the SG&A front, our total expenses, excluding approximately $1.9 million and $3.8 million, respectively, of stock-based compensation expense, was $30.7 million and $62.5 million for the quarter and first half of 2009. Looking out to Q3 and the remainder of the year, we plan to continue to make target investments in areas that we deem to be critical to strengthening our global sales, marketing and business infrastructure to support improved productivity, scalability and future growth. Our Q3 and Q4 marketing expense will also include spending in connection with our fall user group meeting and other customer focused activities that we have planned around the continued rollout of ANSYS 12.0 and Ansoft 12.0, which is coming our shortly. In the area of R&D, total expenses for the quarter, net of about $900,000 of stock-based compensation, were $19 million and for the first half, non-GAAP R&D expense totalled $38.2 million, excluding approximately $1.8 million of stock-based comp. Looking at the remainder of 2009, we continue to target a mid-teens percent of revenue range relative to the ongoing investment in R&D. For the second quarter, we delivered respectable non-GAAP operating profit margin of 47.3%, and I will point out that this does include the impact of approximately $1.3 million of expenses incurred in connection with the headcount right-sizing initiatives. As you will recall, since the beginnings of the year, we've been aggressively managing our spending to maintain our margin and earnings targets in line with sales projections. We believe that our Q2 and first half results are indicative of our commitment to managing costs through challenging environments.

Given the current sales outlook, which factors in both, continued uncertainties around the economy as well as the predictability of the timing of closing sales, particularly larger deals, we believe that it's prudent to finalize the headcount right-sizing initiatives that we previously announced. As such, as we reported this morning in the earnings release, we anticipate that Q3 will include further right-sizing charges in the range of $3.2 million to $4.5 million. Collectively, the first half and the planned Q3 headcount reductions, which have an impact across most geographies and all functional expense lines are projected to result in approximately $9 million to $10 million of annual savings going forward. These actions combined with continued aggressive cost management initiatives are the foundation for solid operating margins and earnings performance and more importantly, will not only position ANSYS as a leaner and more cost efficient Company, but will also give us some flexibility to make target investments in critical aspects of the business to support the future needs of the Company as we move ahead. Our non-GAAP effective tax rate of 30% for the quarter was below the range that we had previously forecasted coming into the quarter, largely as a result of the final settlement of several audits, the timing of which we couldn't predict with any certainty, but we're certainly glad that they are now behind us. The conclusion of these did contribute favorably to the second quarter's results by an increment of about $0.02 per share.

Looking ahead into the remainder of 2009, we're forecasting an overall annual consolidated non-GAAP tax rate of approximately 34% to 35%, including an estimated non-GAAP tax rate of 35% to 36% for the second half of 2009. We'll continue to update our outlook as potential changes in future global tax legislation begin to solidify, and we can estimate the impact of those on our business. So to quickly summarize, the key factors impacting the Q2 and first half financial performance, we reported a total increase in non-GAAP revenue of 12% for the quarter, 11% year to date, and these include the Ansoft contribution of $20.7 million and $42.3 million for the quarter and first six months, as well as a slight decline in organic revenue growth of 1% and 2% in constant currencies for the second quarter and first half. While both those periods reflect a decline in paid up licenses, the maintenance business for both the combined and the organic business continued to grow nicely. The Q2 and year to date results include negative impacts from currency of approximately $6.6 million at the revenue line and $2.9 million at the operating income level for the second quarter, and $13.8 million and $5.4 million for the year to date results. We continue to deliver strong gross profit and operating margins that included a full quarter and first half of Ansoft contribution and this led to non-GAAP earnings for the quarter of $0.43 or $0.41 when you exclude restructuring charges and $2 million of tax benefits, and $0.80 or $0.79 excluding these items for the first half 2009. These compare to $0.42 and $0.82 in the comparable periods of 2008. And also, these non-GAAP results reflect diluted shares outstanding of $91 million for the second quarter and $91.6 million for the first half compared to $82.1 million and $81.9 million in 2008.

Moving quickly to the June 30th balance sheet, total cash and short term investments are at over $254 million and despite a few isolated pockets of receivable issues, our consolidated net DSO remains very healthy at 41 days. We had continued solid operating cash flows of $43.4 million in the quarter, and this enabled us to pay down $33.3 million of debt in the quarter, which has left us net cash positive as of the end of Q2. And for those of you updating your models, the weighted average interest rate on the remaining debt is approximately 3.3 % for Q3. As we saw in both Q1 and Q2 given our significant 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 from the current rate of the Japanese Yen. So, in our current outlook, we are assuming rates in the range of 1.4% to 1.5% for the Euro, 1.65% to 1.7% for the British Pound, and 92% to 97% for the Japanese Yen. And as these rates continue to fluctuate, we'll modulate our outlook accordingly and trust that you'll also take this into consideration as you update your projections.

So, with that, I'll turn the call back over to you, Jim.

Okay. Thanks, Maria.

So, let's recap here. Basically, there was continued financial performance of the major, basically, the major parameters of the business. Revenue, earnings, margins, cash flow, business space, even in light of the current environment and with some slightly hazier visibility. We made progress on the Ansoft integration on both the product and the sales fronts, and while that part was particularly hard hit in the first half, we anticipate some stabilization in the second half. There was sustained customer interest marked by activity on a broad front, albeit with increased customer discretion and this was borne out, I think, in the results we just discussed, whether it was industry, geography, et cetera. Our world-class portfolio of products augmented by our broad ecosystem of partnerships and relationships continued to get much greater and dramatically increase with the release of ANSYS R12 and the inclusion of Ansoft technology with even more planned in the later 2009 standpoint. So, the long term outlook stays bullish, but we're also preparing ourselves for more of the same in the second half. For 2009, we're refining our guidance based on the current data and with the value of an extra quarter of hindsight. On the last call, we had said that we were expecting some stabilization and improvement toward the latter half of the year, but not a lot of improvement, and that probably covers how we're looking at the second half.

We have seen some stabilization and the deterioration, at least, has not continued. And while there may be some improvement towards the end of the year, we continue to not expect a lot. That means that we'll continue to focus on effective revenue attainment. We'll hope for some upside, but we're not going to bet the business on it. The focus will be on prudent growth and maintaining our earnings projectory and business model. So, to reiterate, this means, first, the long term premise and opportunity are still there and we have the best technology to meet them. Second, we have seriously modulated our business parameters in response to the economic uncertainty, but not at the expense of the long term. As our baseline, we continue to have a solid business that's got good recurring revenues, relationships with marquee customers and all of these combine for good earnings and cash flow. We'll be focusing on maintaining the strong operating margins for the second half while continuing to build our annuity base of recurring revenues and expanding at the maximum rate allowed by the macro market conditions.

So, translating this into numbers, there are a couple of major themes. We're tightening the revenue ranges. The floor remains the same. The top comes down largely due to the fact that we just experienced another quarter without recovery and most of the market projections that used to be calling for a market rebound in the second half are really not calling for it now, so that was what's hoped for, not providing as much fertile ground in the near term. We're also tightening the earnings range, raising the floor quite a bit, but tightening the top a little. We're currently projecting 2009 non-GAAP revenues in the $510 million to $528 million range. Our non-GAAP earnings projections have risen to the $1.66 to $1.76 range. Now, included in these numbers is our initial outlook for Q3, which is always our historically most variant quarter. It consists of non-GAAP revenue in the range of $124 million to $130 million and non-GAAP EPS of in the $0.40 to $0.42 range. Now, of course, we've done virtually nothing to limit our ability to capture any revenue upside that becomes available, but we did not gear our cost structure to any unproven optimism, either. This positions us well for the present as well as for the future. So, combined with our repeatable business base, our diversified geographic footprint and we've got a world-class customer base and strong deferred revenues, we're driving the same business model that has allowed us to weather a wide range of economic situations over the last decade and that will be what we continue to assert ourselves to in the second half of the year.

So, with that, we are now prepared to respond to any specific questions you may have, so, Amber?

(Operator Instructions) Your first question comes from Richard Davis with Needham & Co.

Hey, thanks. So, first, kind of a tactical question. With regard -- when you get employment headcount declines in your customers, it sounds like you're managing through it well, but do you have to do anything with regard to -- how do you manage the pricing with that if they come up for a renewal? Or do they keep the seats and assign more seats to one guy so they have a guy that's like three different types of seats and things like that? So, that would be the first question. And then the second was related to the comment that I put out or whatever a couple days ago about just kind of how you guys think about how your kind of non-recession organic growth. So, those are the two questions that I had.

Okay. Well, on the first one, if customers do lay off, reduce headcount in the usage groups, now, some of the engineering groups are some of the last places they'll reduce, but there's no place that's unaffected. When they do do that, it does at least have some form of a dampening effect on us, I mean, to be sure. However, it's not the typical kind of one-to-one ratio because there are still a significant number that will be actually leveraging the computing capacity that they do have and actually maybe utilizing -- utilize having a heavier density of usage amongst the fewer people, because they still want to try and get the same amount of innovative products out. So, there's still a certain amount of work that has to go on. So, it's an attenuated effect, but it still is partially there. Bottom line is that I wouldn't say that there's been any kind of a kind of increase in discounting as evidenced probably by the ASP numbers that we talked about and things like that. However, any number of customers if they change their mix, they might be at different volume discount levels, but that's kind of a natural flow of business. So, I think that covers the first. Is that everything on the first questions?

Yes. Correct.

And then the second question was related to non-recession organic growth?

Right.

And from this standpoint at what we see and, again, this is not even allowing for pent-up demand that happens in the post recession kind of standpoint, but it's still our core premise long term is as we've been saying and largely delivering with the exception of the last couple of quarters, in that mid-to high teens top line growth, and with similar or better performance on the earnings side. And essentially, all the commentary that we've had from customers and even some of the resiliency, being able to keep basically flat organically in these times is kind of bolts that up. So, we still don't see that. And when the recession comes, some of the headcount we reductions that you've mentioned beforehand actually, that trend starts to (inaudible). We really haven't seen any data that dissuades us from that.

Got it. Thanks a lot.

Okay.

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

Hi, thank you. My first question is around Ansoft. Do you believe that that business is bottoming here or could we still see the revenue slip a little bit in the third quarter? And then how might we think about the revenue contribution from Ansoft for the full year of 2009?

Okay. Well, first of all, they were particularly -- they were particularly hard hit in the early going, as we've seen. Before I forget, for 2009, we're probably looking at revenue in the low to mid-90s kind of range. Which does -- which, first of all, probably implicitly answers part of your other question, which was the, yes, we have seen the -- at least some of the bottoming out and the forecast for what -- given the fact that forecasts are particularly tricky during this time, the forecasts do show that ramp up to happen. Largely, a (inaudible) of the stabilization against a fairly slow first half, so again, not seeing this meteoric pendulum swing in the other direction, but do see it popping up. I think that's encouraging in and of itself.

Something that's encouraging beyond that are the number of people that seem to now be pushing more into the mindset of saying what does it really mean to simulate the electronics and the mechanical simultaneously, and the fact that they're even thinking about that even though all the buying patterns have been a little disruptive seems to show that people are even starting to think about what that means where, historically, those were largely separate kind of worlds. Does that cover everything?

It does, and then, quickly, was Ansoft profitable just qualitatively in the EBIT line this quarter? And I want to confirm --

Oh, yes, just before you -- I don't want to lose track of all the questions, but yes, it was not at the traditional margin rates of ANSYS, nor did we predict they would get up to that. That's usually a two or three year kind of projectory. To put it in perspective, look at their margins probably being in the mid, maybe the mid- to upper 30% kind of margin range. So, we've still been able to make some very good progress there, continued to progress. We've also incorporated that into a lot of the integration activities, some of the structuring things that Maria talked about. But, no, just to dispel that concern.

And the confirmed number of million dollar deals were four versus 12 a year ago?

Yes. And again, if you look at that, I probably -- I'm trying to think of what I said back then, but -- I mean, a little bit ago. But the bottom line is we had a bunch of, you could almost call them quasi seven figure deals, but they were up in the high six figure where last year some of them might have creeped over and been low seven figures. So, basically, the slowdown in the new business largely would shove it just below the line. We just didn't round up and fabricate the number on that. So, in general, that number is indicative mostly of the fact that the recurring business has become (inaudible) a strong rate, we're adding new business, but not at the same rate. If you saw those factors occurring at the 2006, 2007, first half of 2008 levels, you probably would have seen a pretty strong comparability, so maintaining the recurring base, adding new business at different levels, so high sixes where they might have been low sevens last year.

Thank you.

You next question comes from Greg Dunham with Deutsche Bank.

Hi. Yes, thank you. You mentioned some, at least, the view that we're kind of at a floor here on ANSYS -- I'm sorry, on Ansoft. And then looking at the guidance in terms of the high end, obviously, you could get some upside with a strong sequential Q4. The question is, did you see the business becoming more predictable as you went through the quarter?

Well, more predictable, I don't think I'd say that. I think in some cases, there was a quick recalibration of some of the forecasting methodologies because, in some cases, as we mentioned back in Q4 and Q1, sometimes the customers weren't even -- the buying centers inside our customers weren't always that aware of what internal process plugs they were going to be hitting. And so, we had a chance to build around that. So, it's more along the lines maybe of stabilizing, bumping along the bottom. Maybe slightly better visibility, but building a little bit. Obviously, we were able to quantify a little bit more the conservatism that goes into the forecast. Maria, sometimes you see a different angle. You want to --

Yes, what I'll just say, and I think both Jim and I alluded to it in our talking points is probably the largest amount of unpredictability was around the larger deals that included components of new business. Largely driven, as we've talked about, not dissimilar from how we're running the business. More people having to be involved and not the sense of urgency around it's the end of the quarter.

Yes. And because that new business, the Ansoft business hit a little bit more hardly because it always had a much higher component of it related to in particular combinations of new business and in particular, new license business.

That makes sense. One quick follow-up. Switching gears, kind of. The restructuring charge was embedded into your EPS this quarter for non-GAAP. Looking at the next quarter, are you not including it? Or are you excluding it in terms of the guidance --

We'll use the same methodology as we did today where we will give you with and without.

Okay. Thank you.

Your next question comes from Sterling Auty with JPMorgan.

Hi, thanks. Hi, guys.

Hello.

Hello.

So, first, actually a request. It would be extremely helpful if you guys put out a supplemental sheet or put in the press release for things like the lease versus the perpetual mix, the geographic breakdown and a breakout of the stock comp into the different line items. That would help with our modeling a lot. So, that would be great. But on in terms of questions. First, on those four deals that were over a million, was there any large deals that were 10% of products in the quarter? I just want to make sure. Those, of course, are all perpetual, right?

No, there were none of those, Sterling.

Okay. So, no 10% in there, all perpetual deals, right?

No. They were, as Jim said, about 70% of those deals were of a renewal nature, so (inaudible) and lease.

Okay, I'm sorry. I missed that. And then, on Ansoft, if I'm looking at this correctly, did the Ansoft maintenance actually decline sequentially the last two quarters? And if so, can you drill into what might be happening there in terms of renewal rates? I would expect that some of the deferred revenue that was written down would start to come back on as you start to renew contracts as we move forward.

Hey, Sterling, I don't have sequential stuff in front of me. We can take that offline.

Okay. Fair enough. That's all I had. Thanks, guys.

Yes. I'll have [Annette] pull that stuff and we'll take a look at it.

Your next question coming from Barbara Coffey with Kaufman.

Hey, there. Can you speak a bit about the new product offerings? Does it get you into different kinds of accounts? Is it easier to penetrate into potentially a different set of users? And any kind of adoption rates or sort of interest level you're seeing for Release 12?

Well, the interest level is actually pretty good. The adoption rate -- we've always talked about it not necessarily day one shifting the curve up, but day one shifting the slope of the curve up as additional attractants or barriers to adoption have gone in. As for the -- I mean, clearly, solving problems that weren't solvable before at least gets people thinking about their application very early on. And then it's a matter of just ramping up along those lines. Now, I think one other aspect that we've noticed is that when you start to get two traditionally separate buying centers that are interested in those products and you start having an (inaudible) usage, you start rising up in the visibility in the organization to the nexus point of where those two groups ultimately conjoin. And from that standpoint, that tends to open the door for additional problem solving. But the number of people that have started to move in and say, okay, what does it really mean, because there are a wide range of people that are really hitting this situation where they have the combination of electronics and mechanical aspects in all of their product lines. But they've tended to deal with them either piecemeal or on a modular basis, some of them in the past.

So, that definitely has opened up things. I think in general if you look at new industries, we've always had a very broad industry footprint. In some places, certain industries were more thinly penetrated than others. So, obviously, we've got the opportunity to provide a much more comprehensive solution into those. Maria, do you --

Plus the combination of particularly in what we're seeing in auto where they're dealing with new problems that have never been solved, we've got the unique opportunity to have tools available to help them solve those problems. So, it's a new frontier.

I'll say one thing, so if sometimes there are customers on this call, I mean, the response to R 12 was so high, I mean, we got swamped at our download centers. So, the response was incredibly high. But I also want to apologize to anybody who achieved any -- felt any frustration during that time. It was just kind of like -- it was amazing the volume of data and the bandwidth that was being dragged on.

And as you're taking a look at what the product offers, better or more efficiently than the old product, are there certain pieces we should be sort of looking for in reviews as being particularly important?

Well, I think the thing is that a company like us -- and we've done it for years -- I mean, we can always come up with a nerdy exhaustive list of (inaudible) speeches and functions that came in. But where we actually saw it was -- where we saw a lot of it was from the integration aspect. I'm not just talking about integration for integration sake, I'm talking about when you get various products that can share all the same utilities, automatically they can solve new classes of problems that they couldn't before. So, the whole concept of -- I'll give you one example and, again, this will come out being nerdy also. But we've been doing parametric simulations (inaudible) analyses in the mechanical product realm for years. Those applications by virtue of some of the computational fluid dynamics, the big fluid flow capabilities, they were able to access those algorithms and actually start to do a greater design of experiments and parametrics in there. I think the other thing is that people are just scratching the surface on if the whole concept of having work flows to aid the simulation process, but also allowing customers to modify and create their own as they go along. And what that entails is when they're trying to streamline and get increasing efficiencies with a stable or maybe even slightly declining amount of staff, it basically allows the throughput of a constant resource to be greater and that's one thing that they're doing to actually minimize some of the costs.

Thank you.

Your next question comes from Mark Schappel with The Benchmark Co.

Good morning. Jim, last quarter your process industry business softened a little bit. You mentioned that in the call and I was wondering if that trend has continued or if things have evened out a little bit.

Well, the process industry didn't change. That one didn't change a whole lot. So, it kind of bobbed along with the other thing. The only one -- and sometimes in the process industries, you get certain things that are related. I mentioned the energy sector, which screamed as oil prices rose and then kind of tapered a little bit as a combination of oil prices decreasing and what might be the energy policy of different countries. We saw energy start to creep up a little bit, continue as a nuclear outside the US. continues to be fairly strong. You will notice that even a list of some of the customers and some of the imperical data I have is that even the oil and petro stuff has gone in, there's obviously a process element to the refining. So, little tick-ups along that line. The only other industry comment that might have stood out, I did mention some of the infrastructure thing, materials, industrial machinery type of applications where there's been increasing push for efficiencies.

But I also mentioned -- you may have noticed a pretty comprehensive list of automotive companies at a time when conventional wisdom would say that would be kind of down, but you look at the number of new initiatives where people have to rapidly come up the learning curve and really verify products that may be relatively new in their experience. Those type of things came on. And in addition to just verifying the design will be good, simulation also has been turning out to be a very good tool for giving people a rapid grasp of new technologies and how they might be applied where in those cases where you don't have 40 and 50 years of experience in hybrid drives and how to perfect them. Having something that will quickly go through those iterations and allow them to do what if's have seemed to have some attractiveness to those customers.

And then last quarter, you had mentioned that you had introduced a lease option for the Ansoft side of the business and, granted, it's still early days here, but I was wondering if you'd been able to detect any kind of early trends with respect to --

Oh, there have been a couple of tweaks here and there, but it would take really tsunami type changes to move the dial at all, But yes, we did see that. It did help preserve a couple of orders or at least accelerate ones that might have been more (inaudible), but it wasn't like a student body right toward that standpoint. And the key thing I didn't mention that in like the outline, the talking points at the beginning, but with that lease thing, obviously, it continues to help build up business for the long term. Actually, long term, It's actually probably net better for us. But in the current order, that transfer of a licensed sale to a lease sale has a big end quarter effect. But I think we saw that when we see that the lease actually grows, the other recurring streams actually grow, but even when the paid-ups might be a little bit down. So, again, nothing to move the dial with specifically with regard to Ansoft, but being able to continue to build that recurring base and at least provide value to customers who otherwise might have been really slowed down in their ability to jump on it.

Thank you.

Your next question comes from Ross MacMillan with Jefferies.

Thank you. Three questions, if I could. Could your just go through the breakout between paid-up lease, maintenance, and services again?

On a combined base or on a organic basis, Ross?

Combined.

Okay. So, on a combined basis, total lease is about $45 million, or 36% of total revenue. Paid-ups are $28.5 million, or about 23%. Maintenance is $46 million, or about 37%. Service is $4.6 million, or 4%.

Perfect.

(Inaudible) 124.2.

Perfect. Thanks. Secondly, do you have -- Ansoft used to have a fiscal year end at April. When you think about your paid-up licenses for the combined business for the third quarter, do you have a view as to whether you think that would be flat, up or down relative to the second quarter?

I'd say probably sequentially slightly up if everything turns out the way that the current forecast suggests.

And that's quite a bit different. In addition to all the economic things and things affecting certain industry sectors, as we started to incorporate into a consolidated calendar year, fiscal year, there has been that change in the model where before they've shifted from an April, April to a stub period during the partial year, and then initiating this year as the first consistent year. And of course, that really makes an awful lot of the comparables almost meaningless because of the way normal business closures cycles and the internal pressures the companies would change. So, typically, you would have seen a huge dropoff from basically their old Q4 ending in April. So, the Q2 to Q3 normally would look lower. But in this case, it's become part of a consolidated ANSYS year, again, like Maria said. Stable to probably slightly up, sequentially.

Okay, great. And then final one, just going back on the EPS guidance, so I've got it clear. Which 2Q non-GAAP EPS are you using in your full year non-GAAP EPS guidance range? 43 or 41? And I guess I'm sort of confused about why you included restructuring in 2Q but you exclude it specifically in your guidance for Q3 and beyond.

But we provided both for Q2. But --

Well, maybe just -- okay. So, is it the 43 or the 41 that's included for the full year guidance? Thank you.

For the full year, it's 43. I'm sorry, Maria. Go ahead.

Okay. Perfect. That's helpful. Thanks so much. Good job on the cost control.

Thank you.

Thanks, Ross.

Your next question comes from Jason Rodgers with Great Lakes Review.

Good morning.

Good morning.

I was wondering if you had any long term deferred revenue in the quarter?

Yes. There's $7.7 million of deferred revenue that's long term.

Okay. And what was that a year ago?

I don't have that information in front of me right now, Jason, but we can certainly get it out.

Okay. And what was the bad debt reserve in the quarter?

Bad debt reserve is $4.9 million.

Any change in customer payments?

I think that -- I mean, we have some pockets of extended payment terms that we're working in certain geographies, but for the most part, as you see on a consolidated basis, the DSO is healthy and we continue to have our best people on top of it.

Jason, going -- scrambling through the books here, the long term portion of that deferred was $5.4 million.

A year ago.

A year ago.

Okay. Thank you. And then, you mentioned for the Company in total, the core revenue in the quarter was about flat. Is that right?

Yes. That's correct.

Okay. And then finally, now that you're at a --

Constant currency.

I'm sorry?

In constant currency.

Okay. And now that you're at a net cash position, just wondering what the plan is for cash flow and cash going forward? Is it further debt reduction, share repurchases, or even acquisitions?

Could be a combination of all those.

It's going to vary on a lot of parameters that we see going forward. That's something that we take at a --

You probably won't see us at least through the remainder of 2009 until things significantly stabilize. We are now at the lowest rate level on the debt. So, given that it's pretax, 3.3%, there's really no reason for us at this point in time to accelerate it. So, you'll probably see us build up the cash reserves and use them for any of the various opportunities that you mentioned.

Okay. Thank you.

Your next question comes from Matthew Weiss with Maxim Group.

Good morning, everyone. How are you?

Good morning.

I wanted to drill down further on Europe. Are there any areas there performing better or worse than expectations? The reason I ask is given typical heightened seasonality coming out of that region into 3Q, do you feel you're any more at risk this time around given what's going on over there economically?

Like I said, the results were pretty encouraging overall when you consider like the -- particularly the constant currency growth, currency has been the predominating factor there. I would say that there are a number of major trends. Most of the major geographies continuing to do fairly well. I think we were pleasantly surprised by how resilient the UK was. Germany performed quite well. I would say that some of the exuberance of the eastern European boom a year ago has clearly sobered quite a bit, but that was a relatively small part albeit ramping up during that time frame. Does that give you the kind of --

Yes. No, that's helpful. I was just trying to figure out, because obviously it puts you at greater risk given your exposure there and given the heightened seasonality. But I think -- I guess where you were at this point last year versus now, do you feel that you're any more at risk in the current quarter than you were last year?

I think the risk is reflected in the current outlook.

Okay, fair enough. And then, on the competitive landscape, obviously, there's been a notable player in the space agreeing to be taken private. Can you discuss how you guys view them as affecting the landscape either positively or negatively? I would assume the former, but whatever color you can give there would be much appreciated.

It's largely kind of a nonfactor and one of the main reasons for that was that most of our growth was coming from the new opportunities that were emerging and we were in a pretty good position on that. And however, the legacy basis of all the products in our space tend to be somewhat pretty resilient. So, right now, it's -- I guess it might be a slight positive, but the -- it's a ripple in the middle of the tidal wave that the economy is providing right now, so it's -- the macro economic effects are predominantly what's driving the issue right now.

Okay. And then on the cash flow. I think you've talked in the past about operating cash between $170 million and $200 million. Is that still your target?

Yes. Probably $170 million to $190 million given that we brought down the ceiling on revenue production.

Okay. And then CapEx, you're looking for $10 million to $15 million?

Yes. Probably closer to $10 million, I'd say.

Okay. And then, what was CapEx this quarter?

About $1.2 million and $4.5 million for the first half.

Okay. All right. That's helpful. Thank you very much.

Thank you.

Your last question comes from Blair Abernethy with Thomas Weisel Partners.

Thank you. Just, Jim, I wonder if you can comment a little more in terms of areas of interest on the product development side and particular as it reflects using some of your cash to do something externally. What areas are you looking at these days?

Well, again, I'll answer because that question is always answered first by what are the areas that we're interested in pushing the technology in? And then, that's done normally by internal developments, as well as if there is an existing kind of technology that can be licensed, acquired. And it really is a go forward one as opposed to maybe one that's been around for a number of years. We play it from that standpoint. Now, if I probably looked at things overall, there's an awful lot of work that we can get by actually combining a lot of the strengths of the continuing the ANSYS and Ansoft product lines, but in addition to that, there are a number of things, I'd say particularly a lot of them would lump into the general, what I would call, materials realm, be it a composite, fracture, crystalline structures, things like that. So, the same physics governs everything, but with a wealth of new product materials coming out and the importance that they might play in manufacturability in terms of environmental soundness, in terms of lightness and portability and things like that, it continues to move along.

Even moving into some of the biomed materials, since the biomedical has also been an expanding standpoint, so really getting into the (inaudible) and the continuing evolving physics of that is probably one area that we continue to -- we continue to look at pretty -- pretty tensely. We do that internally. There's also a number of things that have actually working with larger material manufacturers because they, in fact, can -- they, in fact, also have databases and the ability to help provide those kinds of materials and the like. So, really more along those lines. Given the fact that we've obviously got the most comprehensive, but we've got a very strong base across the major physics lines, it would be the (inaudible) develop elements of our portfolio.

Okay. And just shifting over to the combined mechanical, electrical, now that you've owned Ansoft for a year. Can you give us some kind of gauge as to how much more interest or how much more awareness there is out there in your customer base as to the opportunity -- and some sense of where we are on the opportunity. Are we just 5% of the way along here or --

Oh, we're at a very low percentage. And actually, we're probably a little bit lower than we normally would have been because, frankly, a lot of people fighting the economy weren't thinking about how they could use all sorts of new things. It was more about how can we do the same stuff a lot more effectively. So, we're very much on that on the very beginning of that standpoint. The other thing is keep in mind that most of the companies that are doing this have historically kind of done these in separate realms inside their companies. And sometimes there are cultural and organizational barriers to that happening. However, the ability to solve really sticky problems tends to transcend a lot of that. So, I think as the -- at least as the economy has stabilized, it tends to at least allow people to step out a little bit more and at least test the waters on what this might do.

There's obviously a cycle that will be involved in terms of them getting comfortable that what exists today will solve their problems as opposed to seeing the generic classification. So, that validation process internally tends to take time. But there is -- I mean, it's very obvious that products are going that way. And it's highly intuitive that therefore people want to be able to get the same validation of those products early on.

Okay. Fair enough. Thank you. And just, Maria, one quick one for you. You may have answered this earlier, but maintenance pricing, given this recession has dragged on here for a year and a half or so, any sort of change you can comment on that you're seeing in terms of maintenance pricing pressure?

No. I mean, there are no doubt certain of our longstanding customers who are going through, I'll call it survival challenges, where we have worked with them through these unique times in, perhaps, ways that we might not have done in the past. But relative to have we seen tremendous amount of discounting on renewals? Absolutely not. And the reality is, I mean, part of the conversation that we have with our customers is the amount of money that we are reinvesting to continue to evolve and expand the technology is a significant investment and obviously for us to continue to do that, we need to continue to be able to invest.

Okay. Great. Thanks very much.

I'll now turn the call back over to Jim Cashman for closing remarks.

Okay, well thanks, everybody, and in close overall a pretty good quarter despite the ongoing unprecedented conditions. So, looking forward, there's no expectation of a short econ miracle. And there's going to be an ongoing emphasis on execution. I think we covered that pretty comprehensively on this call. Also, focusing on effective integration. Again, just basically supported by the years of history of our business model. So, at the bottom of it all, we continue to have great customers. We've got an exciting product platform. I mean, it's got interest even in these difficult times. There's good long term prospects for the Ansoft/ANSYS product convergences and at the heart of it all, there still lies a strong combination of a really solid resilient business model. Again, we've got the most loyal of loyal customers. We mentioned the role that the dedicated longstanding channel partners have had with this. Great technology, and of course, the talented employees that have kept us through this over the years. So, we basically continue to see these continue bolstering us and we'll look forward to talking to you next quarter. So, thanks for your attendance.

This concludes today's conference call. You may now disconnect.