ANSYS Inc (ANSS) 2009 Q3 法說會逐字稿

Good morning. Welcome to the ANSYS Inc. third quarter 2009 conference call. All participants will be in listen-only mode. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Mr. Jim Cashman, CEO, and Ms. Maria Shields, CFO. Please go ahead.

Okay. Well, thanks. Good morning, everybody and I'd like to welcome you to the ANSYS call for Q3 2009. As mentioned, joining me as usual is our CFO Maria Shields. So we'll start this call with highlights for both the quarter and year to date, then we'll do our usual look at the multiple views of the operational results, and dig into things at a greater depth.

Following this, we'll cover a wide range of some of the qualitative factors that are related to our progress in product releases, organizational and infrastructure enhancements, and an update on various aspects of our view of and adjustments to the economy. In the course of this Maria will update you on our line-item expense performance and the balance sheet as well as giving greater detail on some of our restructuring initiatives. We'll then go into initial projections for Q4 and the full year 2009 followed by a preliminary trajectory for 2010. And then, after discussing those topics, we'll be happy to respond to any questions you may have. So, Maria, would you start us off with our Safe Harbor statement, please.

Yes, certainly. Good morning, everyone. And again, thank you for joining us to review the highlights of our third quarter results. Just a few house keeping point before we get started.

I'd like to remind everyone that in addition to any risks and uncertainties that we've highlighted 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 we undertake 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 measures, a discussion of full reconciliation of GAAP to comparable non-GAAP financial measures is included in this morning's earnings release and the related Form 8-K. Finally this morning we have also posted some supplemental information on the ANSYS investor relations home page that corresponds to some of the Q3 and year to date data that we'll be highlighting in the prepared remarks this morning. This information will be further supplemented by the Form 10-Q, which we plan to file tomorrow. With that, Jim, I will turn the call back over to you.

Okay. Thank you. So essentially Q3 was a continued stabilization of various aspects of the business, but it was pocketed by the same uncertainties in the macro environment. We continued to face the challenges we had expected, and all things considered, continue to execute well. Our revenue moved to the upper end of our guidance, and our earnings above the upper end of the range. So from a high-level perspective, it basically was another quarter that highlighted the resilience of the ANSYS business model, even considering the economic times and in face of currency headwinds that were lessening, but still about a negative $3 million to the top line.

So for the quarter, we reported non-GAAP revenue of $128.8 million, which was equivalent to last year's Q3. Non-GAAP diluted earnings per share were $0.45 or $0.46 adjusted for the restructuring charges, compared with non-GAAP EPS of $0.43 in Q3 2008. This growth was encouraging, all things considered. Most major aspects of the business performed as anticipated. We continue to focus on the parts of the business that we have some control over, namely the margins, recurring revenue, working capital management, and these all did well. Our key customer engagements remain fairly stable, which mirrors our commentary of the past couple of quarters. There was some minimal continuation of a shift to lease, and there was consistent renewal activities, although not without delays.

We saw a growth in our recurring business streams. For the near term, the story is basically the same. R&D expenditures at our customers are not growing at pre-recession levels, but they are staying fairly level, and while they're challenged to sustain reasonable levels of new product development all meaningful expenditures are still being heavily scrutinized and/or delayed. While we're not really seeing the key data points of a sustainable recovery, we're not seeing appreciable further deterioration either. The bright spots are slightly outnumbering the negatives but the unpredictability around timing remains an issue.

So focusing on the operational highlights for a few minutes, as previously mentioned non-GAAP revenue for the quarter was $128.8 million, which included $23.1 million from Ansoft. The ANSYS organic business was down slightly in constant currency. The Ansoft business showed some signs of stabilization, but still continue to be more vulnerable to a combination of factors, most notably a heavier reliance on paid-up licenses and disproportionate exposure to industry and certain geographies most acted by the downturn.

Similar to the last few quarter, it can be confusing to try to parse through the numbers of all of the various permutations we can come up with GAAP or non-GAAP, organic or constant currency. Given we were at the upper end of our revenue guidance, I'll focus on a key metric, but also try to provide a commentary on how the sectors and geography are doing.

Our overall non-GAAP operating margins for the quarter were 50% or 51% excluding restructuring compared to 47% and 48% respectively last quarter and 46% in Q3 of last year. The improvement represents a combination of the realization of integration synergies, coupled with the restructuring we did earlier this year. Non-GAAP gross margins were strong at 89%, and we also reported cash flows from operations of over $34 million.

Now, looking at this from the first 9 months of 2009, we reported non-GAAP revenues of $374.4 million compared to $349.6 million for the same period 2008, with essentially the same contours of the rest of this year. Namely Ansoft by a contribution on top of a core ANSYS business that was relatively stable at about minus 2% in constant currencies. Non-GAAP EPS was $1.25, which was consistent with the same period of 2008. Non-GAAP operating margins were 48% or 49% excluding the restructuring, and the non-GAAP gross margins held steady at 88%, and for the first 9 months we also saw continued strong cash flows from operations of almost $129 million.

So with that in place, let's dig in and dissect the Q3 picture from our -- from our usual array of perspectives, like category, geography, customer, products, et cetera, and we'll start with a category of business, our combined recurring stream of lease and software maintenance increased consistent with the past quarter. We continue to capture a large amount of new license business, but technology was lower from the prior year predominantly driven by macro factors and currency. Overall consolidated non-GAAP software license revenue was down 6% for the quarter, lease was flat for the quarter, and for the year to date, it was up 2%. Paid-ups were down 12% for the quarter, including about $9 million of Ansoft and about 10% down year to date. This is reflective of the paid up to lease shifts we mentioned earlier in the year combined with the economic lethargy and currency headwinds of $70 million in total for the year, not to mention, a strong comparable that was that part of 2008. So nevertheless, we still added over $30 million in new paid-up license business for the quarter, and over $86 million for the year to date.

The lease business, stayed level for the quarter and represents 35% of total business for the quarter and 36% for the year, and in this quarter, we really saw no appreciable shift from paid-up to lease so that trend is tending to be tapering off as things have stabilized. Software maintenance grew about 16% for the quarter and 36% for the year to date, which includes about a $13 million contribution from Ansoft for the quarter and about $38 million for the year to date. Because our recurring base is such an important part of our business model, organic comparison is particularly important, and we saw a 6% growth for the quarter and 8% for the year, or, actually, this translates to lower double digits in constant currency for the quarter and 15% for year to date. The pure engineering services element of our business represented around 4% of total revenue for year to date.

We saw a balance across the major product families with the upper-end products continuing to be more resilient. In particular, the mechanical and multiphysics products were essentially even with the comparable quarter of last year, and so while price is on everybody's minds these days, the value embodied in our upper-end products has remained quite important in our customer's decision-making and one of the reasons why it stayed resilient.

Our direct and indirect businesses both felt the eco impacts and as such, there remained a balance in our direct versus indirect for both the quarter and year, about 74% direct, 26% indirect. Business intake contributed to a deferred revenue of $170 million. This actually includes $8 million that's in the longer-term deferred category. Our strong repeatable business base was 74% compared to 69% at this time last year, even including the less visible Ansoft component. And just as we've mentioned in the previous couple of quarters, there are two major components to this. First and foremost, a strong continuing recurring base of business that -- just as we've discussed, but secondly with a healthy but admittedly lower new business component. There were two 7-figure deals in the quarter and a half dozen at $0.75 million and above level. This is primarily a factor of continued business renewal augmented by lower more granular additions of new business.

We also continued to see a sluggishness in paper flow as some renewals came in October missing the Q3 time frame in which they happen to be booked last year, but this was basically immaterial to Q3 revenue, but it does -- it does provide a sort of vignette of the general customer zeitgeist out there. This bolsters our 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 one of the hallmarks of our business model and a foundation for navigating the tough economies, even when the new expansions of licenses are less predictable. So while the current conditions are hopefully short-term, our demonstrated continued commitment to R&D is one of the bedrocks of our long-term customer relationships, and it's continued to drive our product leadership, actually most recently showcased with the ANSYS R-12 and Ansoft product releases.

So it basically leads to a solid balance sheet and cash flows, as I mentioned $34.1 million for the quarter, and this basically affords us flexibility in dealing with the evolving economic climate be it accelerated debt buy-down or share repurchase or economic insulation as the needs may dictate. As I mentioned this past quarter we built our cash reserves particularly cognizant of the U.S. reserves. We did no share repurchase, and we did no acceleration of our debt buy-down in this quarter.

With that in mind, looking from a -- let's look at geography next. Just as the results were in line with the upper end of our guidance, so was geography largely in line with the previous commentary and trends that we have been discussing for a few quarters now. Every region felt the effects of the economy, but we saw a slightly broader spread across three major regions in this quarter. We added good business everywhere, but again not at the rates of the previous couple of years. Our GIA was slightly down, and that's heavily influenced by a continued sluggishness in our Japan business, which actually constitutes over half of our GIA business. Japan was actually down 3%.

Other regions of Asia Pacific were slightly better. Although we started to see some uplift in pipeline activity in the other areas, it's not yet -- actually the other areas of Asia Pacific. It's not yet translated into order; but while the general market was more subdued, the existing customer base and key accounts continue to standout, and these are evident in a number of significant activities with companies such as Sony, Petrobras, Samsung, Ishi Kauajima, Toshiba, Panasonic, Abichi Commercial, Aircraft, Mitsubishi, LG and a host of others, and of all of the major orders, we saw about two-thirds of the volume going into deferred with, again, the new business coming in, but at the rates below the historical norms. There was some early spark of life in the electronics sector, although a meaningful recovery will probably take a little longer from what we see right now in that.

Europe continued to perform well. Even though Q3 is usually not a dynamic quarter for the European region, the region was at a 3% growth in constant currency, with a 5% decline in reported dollars. This is pretty much balanced across all of the major sectors. There was over $4 million in negative FX impact for Europe for the quarter. For the year to date, Europe was down 6% on a reported basis, but up 8% in constant currencies. Again, this was fairly balanced across the region, although the UK has proven to be particularly resilient. Actually, so far, there's been over $19 million in negative currency impact so far this year, so a major account activity in Europe was -- quite similar to the situation in GIA; but with a slightly higher percentage going into the deferred category at a little over 70%. Renewals continued strong, and we added some nice pockets of new business, again, at the more subdued rates. So major customers included Ferrari, Arriba, Scota Auto, Snechma, Siemens, Bosch, Rolls Royce, Leap Hair, Stato Hydro look. Alstone and BOLBO. In this case, power, energy and transportation appear to be relatively more pronounced in this part of the world.

North America was slightly better with an 8% growth. For the year to date, the growth was 14%, but this contains the aforementioned non-comparable and soft revenue in the first part of the year. Nevertheless after a very few tough quarters, we see some positive data points, but we still see a lot of sluggishness, hesitation and concern in general here. Amidst the constant headlines of recession and subdued recovery, jobless this and that, we still categorize North America as fairly stable, but not counting on any healthy balance in the near future, although we'll continue to hope for one.

Major orders in North America came from a number of long-standing customers that we mentioned earlier is a back-bone of our business as well as some new customers, so companies like General Motors, United Technologies, Parker Hannifin, Conoco Phillips, Proctor & Gamble, the U.S. Department of Energy, Northrop Grumman, Westinghouse, Broadcom, Haliburton, BAE, Chrysler, Rockwell Collins, San-D and Nova Research all basically stood out as significant business in this quarter. But very similar to other regions of all of those major orders. About 65% went into the deferred revenue.

So kind of summarizing geography, all areas held steady, but with varying signs of stabilization or improvement. There was fairly diverse industry activity. Major accounts continue to be particularly important in their contribution to new license revenue as well as to the deferred revenue balance.

So if we take all of these regions and accounts into play, we see the same macro trends, but with some minor shifts in the mix. I'd say no industry is super heating or breaking away, but energy, both conventional and alternative branches of that. It showed some constant positive signs. But also including parallel industries that are highly energy-dependent, such as alternative vehicles, for instance,. Industrials and electronics are also showing some slight signs of disproportionate life, and we have some interesting engagements in the domestic defense spending centered around combined electronics mechanics capabilities and new defense priorities.

Actually, one interesting sidelight just came in a day or two ago from Formula One racing where competitive advantages were obviously very crucial, as they are all to all industries. But as the season ended, the top two teams; and in fact, three of the top four teams leveraged ANSYS technology as part of their winning formula. In addition I would say the overwhelming majority of individual races were also won by cars improved by ANSYS. That's something we try to bring to all of our major accounts.

So we still see ups or downs. It's pretty early in this cycle to project the long-term prospects, but there's still a lot of turbulence, so we're still focusing more on execution as opposed to guessing. There's little doubt of the long-term opportunity by the continuing multi-year momentum both in our existing and new customers that the pipeline activity has been kicking up, and the interest is fairly high, but the ramp and sluggishness remains.

Again, I'll just reiterate. We saw no further deterioration, but we also haven't seen signs of an unambiguous global recovery. So this is what we'll be factoring in our guidance in longer-term preliminary outlook and continue to do so going forward.

Now, if we look at things, I guess next from a product standpoint, from a product sales standpoint, as I mentioned before, our high-end products continued to lead the way. Additionally the high-end ASPs for the quarter were actually up. This was driven by the premier products in the upper end comprising a larger proportion of our high-end sales, but also at the low end. The ASPs were also up, compared to last Q3, but to a lesser degree than we saw with the high-end products. And while I mentioned that the economy hit the Ansoft business a little harder, we did see relative stabilization in the Ansoft business with the exception of a few geographic differences here and there.

Certain areas showed signs of recovery while other important regions still languished. We're still bullish about the long-term prospects of being able to do simulation of complete products across all industries. Obviously products out there are increasingly becoming a combination of mechanical and electrical effects where both form and function need to be mutually and simultaneously addressed.

The combination of ANSYS 12, the workbench and the recent release of the next generation of Ansoft products have already started to open up some new horizons and opportunities and in product innovation for our customers. Again, they all continue to be supported by the requisite ANSYS strengths of depth and breadth of capabilities and true multiphysics, but also combined with the flexible workloads and framework that basically provides an unbiased plug and play with multiple other systems out there in the industry. The first few months of response from users and the trade press have really been encouraging; but, in fact, throughout Q4 we'll be engaging with -- we actually have thousands of users signed up for our multiple global user group meetings; and then, of course, the challenge will be to continue to tap this enthusiasm and to convert it into sustainable business.

So in summary, we had a respectable quarter that fell within or exceeded the upper ranges of guidance. We continue to welcome a return to whatever normalcy as soon as we can; but given the fact that we can't predict the timing or the shape of that recovery, we continue to build our foundation and extend our technology base, while keeping aligned with our financial goals, because to us, it's not a question of if; it's a question of when. And specifically we focus on quality earnings, maintaining strong margins, solid cash flows and increasing our robust revenue base.

Secondly, we said we were going to fulfill available customer demand at the best rate possible and in the past quarter, we added over $45 million in new sales via sales, license and service. Next we implemented structural and process refinements to strengthen our short term, but also to better prepare us for wherever the recovery occurs. So finally, we said we wanted to say we made good progress on Ansoft integration and succeed in the expansion of our leadership environment across all aspects of the global business. Actually,, in fact, one of these is a VP of Marketing to strengthen our executive team, and this was actually covered under a separate announcement this week. These actions are aligned with our strategy to continue to invest for the long term and to better position ourselves to capture the market opportunity when the market actually does rebound eventually.

So essentially these are the major items in our control, and they enable us to better weather the storm. We basically plan to continue this course for the next couple of quarters. R&D has been steady, if not robust. Customer interests has remained good. Renewal rates, while not totally unaffected, have stayed solid, especially with our key customers. Gross pipe lines have actually increased, as have recurring revenues. Deferred revenues are strong, and we're adding new business, again at a slower pace, but still adding healthy parts to that. What this all amounts out to is that the long-term vision and the optimism remains solid, but we are carefully watching the range of short-term potholes that continue to challenge our business, and we're going to continue a heavy focus on execution.

We're continuously positioning the Company to the evolving realities of the business to solidify our foundation, but also in an effort to build business while protecting those earnings, the margin structure, the recurring base and the relationship with key customers. So with that as a highlight, I'd like to shift it over now to Maria, an she'll provide you with a more detailed look at our financials, the expense structure and an update on some of the steps that we have been taking and will continue to take into the final part of the year and into 2010. So Maria?

Okay. Thanks, Jim. For the next few minutes, I'll add some additional perspective on Q3 and year to date performance and touch on the summary of some key financial highlights. So just a general comment about the year to date comparisons. A substantial portion of the cost increases between '09 and '08 are related to the inclusion of Ansoft in the 2009 financial results for the full 9 months as compared to only 2 months of Ansoft operations in '08.

If we take a look at non-GAAP cost of sales, excluding acquisition-related amortization, the impact of stock-based compensation and restructuring charges, which all combined totaled about $9.4 million, cost of sales for the quarter totaled $14.5 million. And on a year to date basis, non-GAAP cost of sales, which excludes about $28.2 million of the previously mentioned items totaled $43.4 million. This contributed to an overall non-GAAP gross profit margin of 89% for the third quarter and 88% year to date. So as we look ahead, we're targeting a non-GAAP gross profit margin to continue in the 88 to 89% range for the remainder of '09 and into 2010.

In the area of SG&A, our total expenses excluding approximately 2.1 million and $5.9 million, respectively of stock-based compensation expense were $29.6 million, and $92.2 million for the quarter and year to date. Looking ahead into the remainder of 2009 and into 2010, we plan to continue to make targeted investments in the areas that we deem to be critical to strengthening our global sales and marketing teams and the infrastructure to support improved productivity and future growth.

In the area of R&D, total expenses for the quarter, net of about $800,000 related to stock based compensation expense or $18.7 million. For the year to date, non-GAAP R&D expense totaled $56.9 million, and that excluded about $2.6 million of stock-based compensation expense. Looking out to Q4 and as we move into 2010, we continue to target a range in the mid teens percent of revenue relative to our ongoing commitment to invest in R&D.

So for the third quarter, we delivered a record non-GAAP operating profit margin of 50% or 51% when you exclude the restructuring charges, and despite the lower revenue levels, our disciplined spending combined with the impact of the right-sizing initiatives that are targeted to be substantially completed in Q4, this has enabled us to sustain a strong margin and earnings models for what has proven to be a very volatile earning environment throughout most of this past year. Given our current sales outlook, which continues to factor in both uncertainties around a return to growth in certain geographies as well as the predictability of timing of closing sales, particularly larger deals, we believe that it's prudent to finalize the head count right-sizing initiatives that we previously announced and have been working on throughout the year and anticipate that Q4 will include charges in the range of 1.1 million to $1.9 as we finalize working through the various labor law issues in the respective impacted countries.

These headcount reductions have impacted most geographies and all functional expense lines, and as a result, they result in approximately 9 million to $10 million of annual savings going forward. They also position us to be able to target critical investments in our business while still delivering respectable margins and earnings even in the face of a challenging revenue growth environment. So with that, our non-GAAP effective tax rate of 34% in Q3 was right in the range that we had forecasted coming into the quarter. As we look into the remainder of '09 and into 2010, we're forecasting an overall annual consolidated non-GAAP tax rate of about 34 to 35% for Q4. I do want to highlight this rate does not include charges of up to about $3 million related to some cash repatriation activities that we currently have planned for the fourth quarter. And one other point of reminder for those folks who might be looking at a tax rate comparison between the Q4 '09 projected and the Q4 '08 actuals last year, last year's Q4 did include about $2 million or $0.02 of tax benefit relative to the reinstatement of the federal R&D credit for the full year of '08, which was not enacted until the fourth quarter of last year. For 2010, we're currently estimating non-GAAP tax rate in the range of 34 to 36% and we'll continue to update our outlook as potential changes in tax legislation begin to solidify and we can estimate the impact of those on our tax rate.

So briefly, to summarize the key factors that impacted Q3 and the year to date financial performance, we reported a modest increase in total non-GAAP revenue of about 2% in constant currencies for the quarter, and approximately 12% year to date. These results did include the Ansoft contribution of 23.1 million and $65.4 million for the quarter and year year to date as well as a slight decline in organic revenue growth of 3% and 2% in constant currencies for the third quarter and 9 months of '09. While both the third quarter and year to date performance reflect a decline in paid-up licenses, the maintenance business for both the combined and organic business continue to grow, and the lease revenue remain relatively stable.

The Q3 and year to date results include negative impacts for currency at approximately $2.6 million at the revenue line and $1.5 million at the operating income level for the third quarter, and 16.4 million and $6.9 million for the year to date results.

We continue to deliver strong non-GAAP gross profit and operating margins, which include a full quarter and 9 months of results from the Ansoft business. This led to non-GAAP earnings for the quarter of $0.45 or $0.46 if you take out restructuring, and $1.25 year to date. This compares to $0.43 and $1.25 in the comparable periods of 2008. These results reflect eluded shares outstanding of 915.6 million for the third quarter and year to date. That compares to 90.1 million and 84.6 million in the '08 comparable periods.

So moving on to the balance sheet, at September 30, it continues to be strong and flexible, and positions us well to support our business as we move into 2010. Cash and short-term investments are at $294 million, despite a few continued isolated pockets of some receivable issues, our consolidated net DSO remained very healthy at 40 days.

For those of you updating models, the interest rate on the remaining $232 million of outstanding debt is approximately 2.5% for Q4; and as we've seen throughout 2009, given the significant contribution from international business, our results will, no doubt, be impacted by currency fluctuations, particularly in rate movements in the euro, British pound and Japanese yen. So in our current outlook, we are assuming rates in the range of 1.45 to 1.5 for the euro, 1.62 to 1.67 for the British pound and 0.87 to 0.92 for the yen. And as these rates continue to fluctuate, we will adjust our outlook accordingly.

So thanks for the time, and, Jim, I will turn the call back over to you for some final wrap-up before we get into Q&A. Jim?

Thanks, Maria. So Kay. So to recap, first continued financial performance highlighted by the earnings margin cash flow, business base, even with the current environment we're able to generate revenue toward the upper end of our guidance. We made progress on Ansoft integration on both the product and sales fronts, and while they were particularly hard hit in the first half, we saw some stabilization last quarter, and we were able to launch the newest release of Ansoft products.

Thirdly, the customer interest remained high across the broad front, as evidenced by the results from an industry, a geography, renewal rates and commitment levels, albeit with increased customer discretion. And then, we also saw, a world-class product portfolio that saw significant releases of all of the ANSYS. In addition those Ansoft technologies augmented by an ecosystem of partnerships and relationships.

With all this in mind, the long-term outlook stays bullish, but we're preparing ourselves in the event of a subdued recovery for the remainder of this year and into 2010. We see stabilization and some improvement, but not a lot. If it's more, we're prepared for it, but our model does not rely on it, nor does it bet the business on it. We'll continue to focus on effective revenue attainment. The focus will be on prudent growth, maintaining our earnings trajectory, and the aforementioned solid margin structures, and our business models.

So to reiterate, this means first long-term opportunity and core premise remain intact, and we feel we've got the best technology to meet those. Secondly we've already refactored our business parameters in response to the economic uncertainty, but I want to underscore, not at the expense of the long-term. As our base line, we continue to have a solid business. We'll be building our core capacities, but still focus on maintaining strong operating margins for the remainder of '09 and 2010, and continue to build our annuity base of recurring revenues and basically expanding at the maximum rate allowed by the macro market conditions.

So for Q4, we're projecting non-GAAP revenues in the 136 million to $142 million range. This represents tightening the range with the floor coming up slightly, and the ceiling coming down, primarily due to not having a global recovery, and really no -- we don't have no clear indication that the traditional year end budget flush will come into play this year. It's unprecedented, so we don't -- we didn't make assumptions on that. For 2009, this equates non-GAAP revenues in the 510.4 million to $516.4 million range. Our non-GAAP EPS estimates for Q4 anticipate earnings in the $0.47 to $0.49 range. As a reminder last Q4 results included a $0.02 onetime tax benefit or this 47 to 49% relates to a $0.48 apples to apples. For 2009, non-GAAP earning projections have risen to the $1.72 to $1.74 range. And basically Q4 and 2009 projections exclude restructuring charges and exclude onetime tax benefits and charges of that nature.

So I'd like to emphasize we've done virtually nothing to limit our ability to capturing revenue upside or global recovery that becomes available, but we did not gear our cost structure or business plan to any unproven optimism either. So this positions us well for the present as well as for the future. So in that same vein we're taking a more prudent approach to our preliminary outlook for 2010. This takes into account the fact that we have yet to even close out the current year and a lot of economic uncertainties persist. So this translates to scenarios that we indicated top-line growth in the 6 to 11% range. A continuation of margins in the upper 40s, which then should yield earnings growth in that 5 to 10% range, and we'll continue to refine this as we close out 2009, and continue to monitor the evolving world stage. So combined with our repeatable business base, the diversified geographic footprint we have, most notably with world-class customer base, and our 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, and in particular through 2009.

So with that, we'll make it your turn now, and we're prepared to respond to specific questions.

Amy?

So Amy?

Yes. Thank you. (Operator Instructions) Our first question is from Richard Davis with Needham. Please go ahead.

Thanks. Jim, I just want to make sure I'm clear on your opinion for next year. So the low end of your guidance, at least when I talked to a bunch of other guys, and maybe they're confused or whatever, but the low end of your guidance would imply that you would lose market share relative to at least a handful of competitors out there, again, under the assumption of -- I think most other people out there are kind of assuming a 1 to 2% GDP growth next year. So the question is, A, is that a correct conclusion, or B, does the low end of your opinion assume meaningfully slower economic growth, and so, therefore, you're comparing apples to oranges?

It is apples to oranges comparison. Again, ours is not driven by market share or competitive, we've not really -- if anything we've been less affected this year, by competitive losses as a more established value comes into play. It really gets down to the standpoint of, a lot of what we talked about this year, in terms of that's such a wide range of projections out there of what the economy is going to do, and obviously what we've tried to do is sit there and say, We're going to have something that even in the dreariest look of those, allows us to maintain a solid business model, and continues to add customer standpoint, but again, I tried to emphasize that, nothing we have done, since we've already had years of invested R&D to get into our products, nothing we had done really would hamstring us if the higher ends of that did happen. So again, this is really driven more out of absolute economic environment than really not anything else is a pure artifact of calculation.

Okay, and then Maria, you kind of touched on it, but explicitly with the debt repayment next year in terms of how we're thinking about modeling it next year, should we assume that the vast preponderance of your free casual flow goes into debt repayment, or would you kind of build up both side by side?

Side by side. Given how -- how, quite frankly cheap and flexible that debt is, unless there is some event that would compel us to do that I wouldn't assume that we're going to do -- you'd see the majority of the excess cash to aggressively pay down debt.

Okay. Those are my questions. Thanks very much.

Thank you, Richard.

Our next question combs from Greg Dunham with Deutsche Bank. Mr. Dunham, please go ahead.

Yes, thank you. I wanted to hit on the short-term deferred revenue. Clear that has seasonality to it.

Yes.

Looking back a couple years. I mean, I think last year is probably not a good comparison because of Ansoft, but two years ago, it was down 9%. Although it was down a little bit more than I expected even this quarter, you mentioned timing on renewals. How big of an impact was that?

Well, I'll tell you, at a minimum, there was one healthy 7-figure renewal, and last year, it came in at -- it came in -- I'm sorry. It came in in September. Now, it has no revenue impact, because it doesn't kick in until Q4. However, when you look at that, it does -- it does shift the balance quite a bit. So seasonality was -- seasonality always comes into play, but, the timing of those things, and all it kind of underscores, probably as a microcosm is that even with these major customers, the business is still coming in, but, if anything, that kind of underscores the fact that sometimes it takes several more weeks, for things to go through. I know in particular cases it had to go through additional signatures, had to go through additional approvals, and quite frankly, I wouldn't be surprised if there's a dynamic. In fact, I know with some customers there are, a dynamic that says, we're going to hang on to cash until the exact moment of necessity, and since these things were really for to keep things in place, that's what we saw. So, I really don't -- really don't see anything major in there other than the fact of, an embodiment of stable business, but the sluggish progression of the customer decisions.

Okay. So then, would you characterize, I guess, new business intake as basically consistent with the June quarter?

Yes, yes. The difficult part with that is that Q3 always has a little bit more variability because of, all of the things that normally happen with the vacation, and in particular, we tend to get that in Europe. But in general, maybe it was even slightly -- it was slightly better in Q3.

Okay.

Compared to Q2.

Okay. Okay. And then one final question. Q4 has no assumptions for budget flex.

Right.

Is that just a function of just prudence, or is it related to kind of pipeline stage and where deals are?

No, no. First of all, very limited related to pipeline, because actually, the pipeline has consistently through the year continued to grow and expand and actually been clogged up at the spigot, where the customer has actually released it. So the interest has it weighing. The pipelines have increased, but the process has taken over. The only thing we don't know, is historically, under normal conditions, we know there are certain mechanics and certain patterns that happen at the end of the year, and in this particular time frame, given what we have seen, with all of the approval processes, again, the interest is there, the engagements are there, the orders are in place, but what we don't know is, at the end of the year, where people look at utilizing some of the budget, or will they be instructed to preserve that and carry that over a long time? And we really -- we don't know. I guess I would probably have to categorize that as the majority of that is prudence, and maybe there's a few anecdotal things here and there, but it is largely the fact that this is uncharted waters for this type of situation. So again, we're not basing the business on it; but again, if it does happen, we actually have no problem needing anything that arises out of it.

Makes sense. Thank you.

Okay. Thank you.

Our next question is from Steve Ashley with Robert W. Baird. Please go ahead, sir,.

If we look at the 2010 revenue guidance calling for 6 to 11% and we were to look at Ansoft, just qualitatively, would you expect Ansoft to grow at that same rate or slower than that in 2010?

Roughly the same. As I mentioned, we started to see some greater stabilization in the Ansoft business. We did start to see certain parts of things perk up; but, you know, there are still -- there's still a lot of questions out there. So if anything, we've reached -- that stabilization brings with it, a certain amount of -- a certain amount of poise with it, so, basically seeing it progress at the -- at the same -- at the same rate.

Great. And then kind of the 2010 guidance again, if we look at it by geography, kind of the three major geographies, which of those do you think will be the faster growing in 2010?

Well, clearly we hope that -- we hope to see some things, because we have been a little more depressed for both macro and other factors on Asia Pacific. But we continue to -- like I mentioned, we started to see some improvement in North America; but, a couple of points of light don't necessarily make a really big global trend. So, if you look at what weave seen this -- actually throughout this year, it was like everything got hit. Everything kind of stabilized a little bit more. But we saw a different pocket that came up. A lot of it, being acted by different currency up ticks here and there, and a variety of things. So I guess I don't -- we're not seeing necessarily the major, major sector trends by geography having, like, one massive winner and, a couple of minor losers. It's going to be a still relatively tight spread. I think we see a little more with some of the sparks we've seen in claims, and frankly the comparable wasn't that robust either. But that's still -- it's still pretty early in this -- early in this game as we go forward, but probably ranking in that situation. Maria gave you some guidance on the currency, but there can still be a number of swings on there, and that has both a calculated effect in dollars, but also in the business flow and transfer of payment type of things.

Thank you.

(Operator Instructions) Our next question comes from Jason Rodgers with Great Lakes Review. Mr. Rogers, please go ahead.

Oh, hi. Just a question on the 2010 guidance. Looking at the non-GAAP assumptions, it looks like you're forecasting possibly some margin erosion, and I was just wondering why that is, given--?

Well, first of all, I don't think -- I guess I take compensation with the term "margin erosion," because "erosion" has kind of -- it connotes something different than what we're doing. If you think about what we've talk about, and we talked about this for years. As we continue to gain efficiencies throughout the year we were talking about the fact that we would have upper -- that we would build the business around those margins in the upper 40s, and then when we had the able to overachieve or something like that, then obviously we'd get that ability. It actually -- it actually turns into higher margins, but that's merely a calculation at the end. So essentially we have these same baselines. This past quarter, we were toward the upper end of our guidance, and some of that spilled down into the margin; however, we don't want to keep trying to build the margins for any short term hit, that's going to act our affect our ability to build the business for the long term, which is I think we've demonstrated over years that this approach gives us good protection on the bottom, but also allows us to harvest the upside as it comes.

So in these tough times we're not sitting bloated and when things are going really well we're able to satisfy it. So if the revenue does tend to pick up, those margins are going to expand. They can't help but to expand, because most of our building is in terms of head count and longer-term capital expenditures, and those take time to ramp up. But we did want to build a floor around our business that said, hey, we want to continue to invest, because this is still -- I've got to emphasize the long-term optimism we have as we come out of that; and when that happens, we don't want to then be sitting and figuring out, Okay, how do we address that. We're going for that in the long term, but we also want to have a very sane model that takes into account all of the uncertainties we talked about economically. But that's a lot different scenario in my mind than just saying, oh, things are eroding. That's really not the case.

But you're not looking for too much in the way of expansion.

Totally dependent on the way the top line -- and how quick the recovery comes. We're sitting here in November, looking back to when people said the recovery would be in Q2 of '09, and we have other people that said -- so there are all sorts of ranges out there. We have a solid base line of a business that allows us to provide the strengths that I think we've done through this choppy water, but it also allows us -- we'll be able to respond very quickly if things -- if things ramp up quickly in '10, and we'll be able to continue to provide a solid business model if they stay stagnant for awhile. So it's -- it really is a function, given by how much how things open up. Maria, do you have anything to add, or you disagree with anything I just said?

No, just one thing I'll add, and Jim pointed out one example that we announced earlier this week. This currently market also, provides a unique opportunity for us not to waste relative to supplementing our global talent. Not for necessarily this quarter or next quarter, but for the next two, three, five years, and we don't want to short-change the business and miss that opportunity.

Okay. Fair enough. Thank you.

Our next question is from Mr. Blair Abernathy from Thomas Weisel Partners. Please go ahead.

Thank you. Jim, I'm just wondering if you can clarify or expand a little bit on the, in-soft side of the business. You had stated that licensed revenue was 9 million, I believe, in the quarter. Is that total revenue, or is that paid up in lease?

That was paid-up. I think, at that time -- I have to go back to my bullet points here -- yes, at that time, we're talking about the product increases. There was about 23 million in total, about 9 million in the -- in the new paid up -- I guess paid up by definition is new, and that is -- that is -- that is a lower level; but we've been continuing to close -- close the gap on some of those things, and that was at the heart of some of what we talked about, some of the stabilization of those -- of that business.

Okay. And further to that, how can you -- can you just describe a little bit of how the Ansoft business is transitioning, or is it transitioning towards the lease -- the lease model; and also with that, how has cross selling been going between the electrical and mechanical sides?

No. Understood, and first of all, there has been some movement, but it's not been -- it's not been a major -- a major shift. It's been more an accommodation. Quite frankly, I don't know if a major shift in the model of how the software will be maintained, or I don't know if it was a short-term dislocation as a means for people to get access to capability that they may not have been able to financially get any other way. Keep in mind it's not -- we're fairly agnostic. We just want to make it easy for people to gain -- get ahold of the software. So from that standpoint you've noticed that, we weren't driving the ANSYS business toward lease or toward paid-up. That's why it stayed at at such a stable percentage over such a long time. It's just this equilibrium point. So we don't see -- we don't see a major shift in there. There was a second part of the question. I want to make sure I didn't miss that part.

The cross selling on the electrical mechanical.

Okay. The bottom line is, I will -- in general, yes. But it's tip of the iceberg kind of stuff. If you think about it, you have -- all these products are becoming increasingly a blur of mechanical electric, when you're talking about household appliances or vehicles or anything like that. However, most companies, this being a relatively new phenomenon, most companies still are organized into kind of organizationally separate buying centers and separate technology groups that are only starting to come together; and in some ways, we hope our technology can be a catalyst for that.

However, I will mention that -- we mentioned about 7-figure deals, and I'll mention one of them specifically. This is why I mentioned the tip of the iceberg. One of them clear was an example of how cross selling brought us into accounts, and it's actually a pretty exciting -- I can't go into the details of it here, but it's something you'd read about in various papers and technical journals as being something of an emerging trend and a lot of interest to a major industry. So it was something that it enabled the utilization of technology across the broader front to sell predominantly, what was traditionally thought of as a mechanical industry, if you will, into being one that was more of a combined one. But again, to say that there's hundreds of these things out there, no, it's premature for that.

But there are -- there is a countable number of these, and like I mentioned, there's one that just happened to be a 7-figure deal in -- basically, I will mention one thing else, that at least what we've been told. I won't make any promise on this, but they just said this is just the first stage of a longer-term plan, because it is an emerging use of technology and a very vital element of some of these companies, where they're going. So the cross selling takes a little bit of time, because it was never really on people's radar screens before and if anything there's organizational barriers. But we definitely do see the tip of the iceberg, and there's no doubt that product releases are trending that way.

Maria, just one for you. Of your $294 million in cash, how much of that is offshore at this point?

Two-thirds.

Two thirds?

Yes.

Okay.

But if you heard me in the call, we are planning some repatriation activities in Q4 that will bring probably about $50 million of that back from some of the foreign geographies.

Okay. That's great. 50, 5-0?

5-0, yes.

Great. Thanks very much.

Our next question is from Ross MacMillan with Jefferies. Please go ahead.

Thanks. Jim, can you just recap on is is is the deals over a million what you said on the quarter? And then as you think about Q4, for example, relative to last year's deal over a million count, what's your base-line assumption that's kind of embedded in your guidance? Thanks.

Okay. First of all, I think the first part of the question was the 7-figure orders. Actually, I wasn't really trying to do a sleight of hand here but as you really equivalenced some of the big orders and things like that. First of all there were two 7 figure orders, but the one thing -- the thing is that those traditionally come in with an merging expanding base with recurring and also additions of new licenses. The portion that is new licenses were coming in -- they're coming in, but they're coming in at a lower rate, as you can tell by the amount of these major orders that are going in there for the balance. Well, that alone, that mathematical thing is enough to knock some of these, you know, just below the technical threshold of 1 million. So that's why I mentioned that there were quite a few of those that were in the 0.75 million and above. So all that is is you just look at the set point of that shifting, because there was new business being added but not at the same levels in 2007 and '08. That's what is going on there.

What it underscores is, first of all, solidification and, continuation of the recurring base, and addition of new licenses albeit at a lower level. But these are still what we would call -- we still consider a high six-figure order a very significant order in our parlance. Now, for the -- I want to make sure I understand the nuance of the assumptions going into '010.

I meant for Q4, actually. You said you don't assume any budget flux.

I'm sorry.

I guess I'm curious, as you look to last year, which obviously was into the eye of the storm--?

Yes. How are you comparing this quarter compared to last quarter in terms of large deals? Well, I don't know how it will translate to large deals for the exact reason -- the phenomenon that I just mentioned with the fact that you can shift things back and forth. Obviously, we're going to have -- we're going to have one fairly significant order from the one that I mentioned that just came in a couple of weeks later than it did the time before. So that's kind of one there already.

This Q4, I think we're going to see many things that are similar to Q4 of last year, albeit it was a hybrid. last Q4, we had certain customers that were saying, we don't know how '09 is going to be locked down. So, therefore, we're going to do this before the draw-bridge closes. In this particular case, throughout '09, there has been a sustained amount of restraint and, if you will, rigor in the financial sectors of our customers that will control the flow of cash, and, therefore, those things are in place. So I don't think you'll see -- on one hand, I don't think you'll see -- we are not counting, for instance, on seeing as many of these last-minute slipping under, but on the other hand there may be some that are starting to see -- maybe they're starting to see lights or at least making the decision to loosen up things going into2010; and if that's the case, it might be a push-pull kind of thing, where we don't have -- you know, some companies don't have the latitude to release additional spending, while others may make the conscious effort to go forward, and that's the thing . They're really not comparable. They're clear not comparable to the middle part of this decade, but they're probably not really comparable to all of the turmoil going on in the Q4 of last year.

As you think about next year, fiscal '10 and your guidance range on revenues, what are you assuming, if you will, within that? I know I think you described earlier this year, when you provided guidance what your assumptions were--?

Yes.

--in terms of improving or not improving. What's your assumption within this 6 to 11%?

The bottom line, if you look at it -- we're looking at the continued floor of stabilization that we've been bouncing along. I think everyone has been bouncing along the last few months. We built our cost structure around that. It still allows us to do very significant technological advances, albeit we're not massively accelerating those at this point in time. It allows us to build. We mentioned some of the infrastructure and organizational improvements, if fact, tying together something else. We've done some significant building in the Asia Pacific region that, -- as of late to prepare for some of that, but, we'll continue to -- we're continuing to do that, we'll see -- I think we're seeing balanced revenue across the core and for Ansoft. We assume, again, bouncing along the bottom. Albeit, the one thing in this case, you've also noticed that compared to what we said last year, again, I want to caution people that we're not really calling this guidance. This is really kind of a trajectory. We're not finished with the current year and obviously that switches numerators and denominators all over the place, but what we are looking at is an assumption of saying, if it bounces along the bottom, we have a cost structure that we can still continue to support very well. We're not hamstringing things. If things start to ramp up.

In Q2 -- in last year, when we were looking at things, there were projections from all over the map from Q2 to 2011 when the recovery would occur; and with that range of economic assumptions that tended to contain quite a bit of variance, and so we have a much wider spread in our trajectory last year. However, we continue to build the cost base around that so that we could maintain the margins that we're talking about and experiencing over the last few quarter here, and we're taking a fairly similar approach here, and I would just say the emphasis here is that we want to -- we're not in a bunker mentality. So we want to continue to do very selective enhancements to business that we know will be crucial to the long term, but we also want to be prepared to handle, you know, a wide range of recovery scenarios as they map out through '010.

And then last one, the R&D spend, obviously this year, has, through some of the restructuring effort come down slightly on a quarterly run rate basis, and I think you obviously had launched a major platform release this year.

Right.

And I think you mentioned before, that your sense is that your product -- your product roadmap is probably ahead of where the vast majority of where your customers currently are in terms of adoption.

Yes.

In other words you're kind of ahead of them.

Right.

So when I think about R&D investments going forward, when do you think you have to start to dial back up, i.e., when do you think the gap between where you are and what customers want has narrowed sufficiently such that you need to dial back up.

A very fair question. The fact is an lot of's in the software are things that built up over a three or four-year period. And the fact we've still kept a healthy standpoint to that. But to your point, yes, we are unabashedly a little ahead of the market, because frankly, we're ahead of the mean of the market, but we're kind of like right in lockstep with the vanguard of our top customers, and, therefore, the ability to deliver those capabilities are very important, and then we see that once we're successful with them, it's anywhere from a two to five-year kind of tail where the rest of the people come along but it's very important to maintain those relationships the long term.

So that's why you'll still see it and we still have a long commitment to that. However, as we start ramping up, what that tends to do -- because it's not like someone comes up with a genius algorithm and turns it into a complete product. You know in operating systems for PCs how long those cycles are. It will take -- the new people we bring in -- will start to bring in the advances that probably are, maybe two to three years out, and that's something that we can kind of -- we can ramp up and transfer resources to as we continue to -- as we continue to see a ramp-up, I assume we'll start to see ramp ups when the recovery comes as opposed to this huge step function increase where the economy does it as a huge jolt, and those ramp UPS allow us to build the things as they go along also.

So we have more runway on the expansion of those capabilities, but keep in mind we already have several person centuries of development embedded in the code and a really strong organization right now that, keep in mind we released Ansoft -- the Ansoft 12 family of products and Workbench with essentially the team that we have got now. So it's -- it's not insignificant as we go forward, albeit in normal situations you would see us ramping up the way we did throughout most the earlier part of this decade.

Thank you.

Our next question is from Greg Halter with Great Lakes Review. Please go ahead.

Yes. Thank you. I'm wondering if you could discuss your thoughts relative to the share count for 2010 and your buy-back expectations as well, and then also what kind of option expense is implicit in the 2010 guidance?

Okay. On the share count, right now probably somewhere in the 93 million to 93.5 million, relative to buy-back, we've made no assumptions right now. Relative to buy-back. And on the option expense front, probably about $0.15 or $14 million after tax for full-year 2010 at this time.

Okay. And what do you anticipate full-year 2009 capital spending to be and your thoughts for 2010?

Right now, through the months, we're about 6.4. Yes. We'll finish out between 9 and 11. And probably -- largely, whether we move from the 10 as a starting point up to 15 for some of the things that are not critical, but we would like to do to continue to invest in 2010, it will largely depend on whether we're at the low end or the upper end of revenue growth. So we're working on those plans relative to I would say the base-line 10 are things we need to continue to do for the business, and then any incrementalism will be driven by increases in revenue.

Okay. And one last quick one relative to the repatriation, I think you said you'd bring 50 million back or you're planning to?

Yes.

That seems to equate to about a 6% tax rate. Why not bring it all back?

We're restricted. You can't. I mean, we can do something very tax efficiently that works through various repatriation guidelines, but to bring it all back, then you subject yourself to that 35% tax rate, and given that we don't have something on the table right now that would make any sense to do that, we're bringing back what we can in a tax-efficient method.

Yes. We're just focusing on what we can bring back efficiently. That's not the only thing we're taking advantage of now.

Okay. Well, I applaud you on the 6% proficiency.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Jim Cashman for any closing remarks.

Okay. Well, thanks, everybody. So basically I think we kind of covered it all through the questions, but basically we're going to continue the business model that we think has been very solid, the commitment to technology as some of you brought up, and, business retention, but also business expansion in current times. So I think the main focus here is the focus on execution, focusing on the customer, and still continuing to build for the long term, and with that, I'd like to thank the customers and the extended ANSYS team that made it possible, and I look forward to seeing you all again next quarter.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.