ANSYS Inc (ANSS) 2010 Q2 法說會逐字稿

Good morning and welcome to the ANSYS second quarter earnings conference call. (Operator Instructions) After today's presentation, there will be an opportunity for you to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Jim Cashman. Please go ahead, Sir.

Okay, thanks a lot. Good morning and welcome everybody to the ANSYS call for quarter two, 2010. And with me today as usual is our CFO, Maria Shields. We have made available all of the second quarter and year-to-date revenue detailed by geography and category on the IR website so we're going to use our commentary to focus on key operational results and what we see is the key business drivers.

And then Maria will update you our income statement balance sheet and cash flow highlights. And then we will wrap up with an update on the current outlook for quarter three and the remainder of 2010 and after that we will be happy to respond to any questions you might have. So, as we get started, Maria, would you start with the Safe Harbor statement, please.

Yes, thanks Jim and good morning everyone. I would like to remind you that in addition to any risks and uncertainties that we highlight during the course of this call, important factors that may affect our future results or discussed at length in our public filings with the SEC, all of which are also 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 made 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 will be making reference to non-GAAP financial measures consistent with our standard practice and discussion of the various items. They are excluded in the full reconciliation of GAAP to comparable non-GAAP financial measures are included in this morning's earnings release and the related Form 8-K. Jim, I'll turn it back to you.

Okay. So, overall quarter two a very good quarter for ANSYS and it was highlighted by double-digit revenue and earnings growth. And also, if they were comparing to a prior year denominator that was relatively more resilient than most other software companies. Despite greater than anticipated negative currency impacts at both the top and bottom line, our reported results were in the upper half of our outlook on revenue and top guidance -- (music playing) -- on EPS. Okay. Okay, a little musical interlude. So -- and I, as Maria said, I probably should highlight as always these numbers we are talking about -- that we're discussing are non-GAAP in a historically consistent fashion.

Our quarter two results suggest a modest improvement in customer sentiment and spending patterns, ongoing penetration into existing customer accounts, strengthening of new business and growth in constant currencies across all of our major geographies. In particular, our general and national area led by Asia Pacific led the way with a growth of 20% in constant currency.

During quarter two, we had eight seven-figure customers, with about 18% of the deals contributing to new business for the quarter and the remainder building the deferred to revenue balance to a new record high of $198 billion. Both our direct and indirect businesses continue to perform well, with a 72% to 28% split for the quarter, a little bit up versus a 74% to 26% for the first half. This is indicative of two primary factors. First, a gradual certification of the channel and the newer products, and secondly the significance of the channel, the indirect business, in our Asia-Pacific area which I just mentioned had our strongest quarter two growth.

The non-GAAP operating margin for the quarter was strong at 50%, which was above our targeted range which we have quoted the upper 40s. And a few key factors here. First of all, the strength of the higher margin indirect business and then secondarily the natural lag that we have experienced in on-boarding new talent.

And while we have made good progress in the first half around planned investments that we have been talking about in the various aspects of the business, you have to admit that in certain geographies locating and recruiting the premier engineering computer science and sales talent takes a little bit longer that we'd like. So we going to continue to focus on our talent and infrastructure investment efforts for the second half, again with that target in the upper 40s for operating margin.

Most major aspects of the business performed well with all of our major geographies growing during the quarter. North America and Europe were relatively balanced in constant currency, while GIA as I mentioned grew at 20% constant currency.

We saw continued expansion in many of our major accounts, balanced by the addition of new customers. Equally important, our recurring revenue base continued to be strong at about 70% for both the quarter and the first half. We continued progress in cross-selling activities and in building pipeline, something that we will continue to cultivate further with the Ansoft portfolio over the next few years. These ramp-up efforts will take some time as they always do before the majority of both the direct and indirect channels increase both their comfort and their capability of selling the complete portfolio.

So with that ,we can now take a closer look at the business results from a few of the broad perspectives we normally do, like category of business, geography, customer and product. So let's -- starting with category of business. Overall, our revenues in the second quarter continued to follow similar contours as quarter one and were fairly consistently spread with 32% lease, 27% paid-up licenses, 38% maintenance and 3% fewer service.

We saw another quarter of healthy increases and paid-up licenses, up 32% from constant currencies in fact. Our maintenance business also continued to grow and our blended tax renewal rates held steady above the 90% level. There was continued expansion in our major accounts and they provided contributions to new license revenue as well as to the deferred revenue balance. And as I mentioned earlier, we had eight seven-figure customers this second quarter and that compares to four at a year ago.

Our strong repeatable business base grew to 70% on a larger base of business, and this compares to 69% for quarter one, the earlier quarter of this year 2010, and to 74% at this time last year, although this time last year, there was a much more subdued paid-up base, so in general that's still a very positive direction.

From a geographic perspective, looking at revenue, the business increased by 9% in North America in quarter two. Major orders in North America came from a mix of customers including, wow, General Motors, Trane, Goodrich, Caterpillar, Molex, Intel, BP, [Rapion], Parker Hannifin, Westinghouse, Hatch, Boeing, Seagate and HP just to name a few. Across these accounts we saw not to be -- not surprisingly, we saw a mix of strong maintenance renewals with a good annual lease and new business components combined in there.

Europe continued its track record for growth and despite some pockets of economic challenges and, as I mentioned, greater than anticipated currency head winds. The overall growth there was 4% or 10% in constant currencies. Germany continued to lead the way with double-digit revenue growth in constant currency. Most areas did fairly comparably but the UK was probably the most noticeably impacted by a combination of currency and macro economic issues, including a change in Government that delayed certain deals into the future as they work through the transition and various austerity measures.

Largest deals in Europe included again new and renewal business with Allsom, Rolls Royce, Siemens, ABB, Sauber Motorsport, Hitachi Power, Dyson Technology, AMD, [Solsa], [Ercut], Atlas Copco Airpower, [Faylas], Core Technology, and [Bowmow], just to provide a sample there.

Our general international area was our strongest performing region in quarter two, growing 23% overall or as I mentioned 20% in constant currencies. Key customer engagements in the region included Samsung, Cannon, Hitachi, Panasonic, Toshiba, Toyota, Honda, Tata, Hinyx Semiconductors, General Motors, DENSO, Sumitomo Metal Mining and Impotech. And I think from this global list of major orders, but it's also evident in the smaller ones too, we saw continued improvements in a number of market sectors. For instance, in electronics, we saw strength in the higher tech aspects of that, especially semiconductors, computing and server markets as well as networking and storage gear.

The vast growing consumption of wireless data also is a trend that really bodes well for ANSYS technology, particularly in complex problem areas, such as signal integrity, power integrity, and EMI, electromagnetic interference. We are seeing also in good traction in our high performance computing offerings in this particular market sector, where we continue to gain opportunity, actually both from the direction in cloud computing and high-scale computing but also in our customers' need for increasingly exacting simulation. So these high-performance computer aspects actually help us in a number of sectors.

The general automotive sector, both of the OEM and the (inaudible) level continue to grow as the industry buys to renovate itself. We've seen that the electrical vehicle startups are pushing the OEM to hasten the pace of EV development. Actually, the recently announced recently announced Tesla- Toyota partnership is just one example of that.. And then also, one that we've been talking about for many quarters now, the energy and clean tech sector continued to see that, the continued momentum, and customer investment in all forms of energy acquisition and optimization, whether it's conventional or petro, nuclear or alternative. And also with the recent disaster in the Gulf, it should come as no surprise that there's a heightened interest in the role of simulation to play an improving platform performance and safety of both existing and new oil and gas fields as well as all other forms of energy production. We don't see any indicators that things are going to slow down in this sector any time soon.

Also, the areas related to heavy equipment, mining, infrastructure, and materials also continue to show positive momentum, building off of an increasing demand for investment and infrastructure. So basically we have continued to focus our efforts and investments on penetrating our existing but this also expanding broad customer base. The pipeline of new opportunity has continued to improve quarter-on-quarter, and there remains little doubt about the long-term opportunity.

But, again, in the short term, and I will continue to add this caveat, that even while there's an increasing interest, there is a cause for continued vigilance of the macro economy in many geographies still recovering slowly and customers are still remaining extremely diligent in their investment decisions. And we tried to factor all of these realities and uncertainties into our guidance and of course we'll continue to continue to endeavor to do so in the future.

From a product perspective, well same thing we have been talking about for a while here. Our high-end sales continued to lead the way with fluid, mechanical and electronics all positively contributing to the mix. As we mentioned last quarter, and I just mentioned earlier that the -- we are continuing to see increasing sales of parallel licenses in our HPC or high performance computing offering, which supports our premise that with the ever-increasing pressures that our customers are facing, they just simply can't compromise on the speed, scope or accuracy of the solution. So we -- a very positive factor there. We also continue our efforts on the academic license front to expand the global market opportunity for future revenue and user growth, particularly as we see the increases in Asia Pacific.

From a pricing perspective, we normally comment on that. I just say that overall ASP in the quarter was stable really across the spectrum, both at the high and the low ends. So, in that overview and backing up the info we have on the IR website, Maria I'm going to turn it over to you. Would you please provide some additional color on the quarter and various aspects related to outlook?

Certainly. Thanks. As a follow on to quarter one, our second quarter performance, I think can be summarized as one as -- one of continued and ongoing business execution, supported by improving market conditions in certain key geographies on one side of the equation, whilst also impacted by ongoing volatility in both currencies and customer psyche on the other side.

Despite pockets of uncertainty, this combination led to solid performance on both the revenue and expense side of the equation. The continuing double-digit growth on the topline shows strong growth and operating margins of 89% and 50% for the second quarter, and 88% and 49% for the first half. The second quarter results were adversely impacted by about $1.4 million in negative currency at the revenue line and $1 million at the operating income line, as compared to the prior year second quarter. And additionally, during the quarter, the Euro weakened beyond the $1.30 which was the lowest end of the currency range that we provided at the time of the quarter two guidance. This resulted in an adverse impact of revenue of approximately $765,000 when you compare the quarter two results to that of our early May range.

For the first half of the year, the currency impact was a net positive of $2.6 million at the top line and $900,000 to the operating income line, or about $0.01 to earnings per share. So, as we look ahead into quarter three and for the full year of 2010, and in line with our earlier forecast, we continue to target non-GAAP gross profit margin in the 88% to 89% range and operating margins in the 48% to 49% range for quarter three and 49% to 50% for the full year. And we are assuming that includes a relatively robust quarter four.

As we also discussed last quarter, while certain pockets of the global economy remain somewhat mixed, we continue to focus our efforts on building for the long term by continuing to invest in areas that is we think are fundamental to driving our future success. Which includes strengthening our global sales and marketing team, continuing to invest in R&D so we that we can maintain our technology leadership, and continuing to expand and evolve the global business infrastructure to gain efficiencies and scalability across our global organization.

For quarter two, the non-GAAP effective tax rate was approximately 32%, which was slightly below our outlook for the quarter. We had the benefits of some positive favorable tax income as a result of the finalization of some outstanding audits. And that netted up the favorable rate variance of about 2% or $1.2 million in the quarter.

As with we look ahead into quarter three and the remainder of the year, we continue to forecast a non-GAAP tax rate of between 33% to 35%, and at this time, we are not assuming that the R&D credit will be retroactively reinstated. To the extent that it does happen, it will have a positive impact of less than 1% on the effective tax rate for the year.

One other item I would like to note. We are also continuing to work with our advisors on an international tax planning initiative, and should we finalize it in 2010, it may have a significant favorable tax impact in the second half. This would be considered a one-time event and it is not currently factored into our outlook. We will update you to more specifics as we finalize the research and make some further progress on this project.

So quickly taking a look at cash flow in the balance sheet, total cash flows from operations were up 38% over last year's second quarter to $60 million and $120 million for first half of the year. And these positively contributed to our total cash and short-term investments balance, rising to slightly north of $416 million and 50% of that is held domestically.

Our collection efforts remain strong, as evidence by a net DSO at 45 days. In the quarter, we continued to pay down additional principle on the debt with the total payment of $35 million, which leaves the remaining debt balance at $170 million and an interest rate of approximately 1.28% for the third quarter. One other item to note, the interest rate hedge is now fully amortized as of the end of quarter two. So beginning this quarter, the remaining debt balance will have a carry rate of three months LIBOR plus 75 basis points.

Capital expenditures were $2.5 million in the quarter, and $4.4 million in the first half. And if we took -- take a look at our plans, based on everything we know today, we are anticipating total CapEx of $14 million to $18 million for the full year. So overall, cash flows from operations were strong and the balance sheet is in a good position to continue to support the business for the long term.

To wrap up, I would just like to briefly comment on currency, which admittedly has proven to be quite a bit of a challenge in the first half. Our current outlook -- in the current outlook we are assuming average rates for the quarter in the range of $1.3 to $1.34 for the Euro, $1.54 to $1.58 for British pound and JPY 85 to JPY 89 for the Japanese Yen. And as these rates continue to -- if they continue to significantly fluctuate beyond these ranges, we will adjust our outlook for the remainder of the year at the time of the quarter three announcement and I hope that you consider this when you are updating your models. So Jim, I'll turn it back over to you.

Okay. Thanks, Maria. Also, as we have been really consistently saying for many years, the long-term outlook remains bullish. To summarize, this means that first, the long-term premise remains intact and the opportunity is there, as the adoption of simulation continues to evolve and broaden. And we believe and are committed to having the best technology to have -- be able to meet these demands.

Secondly, we continue to have a solid business, with a good foundation of recurring revenue streams, and longstanding and expanding relationships with marquee customers. These all combine to continue to generate net income and solid cash flows. As I said earlier, but want to re-emphasize, we will be focusing on maintaining strong operating margins in the upper 40s while continuing to invest in our business, building our annuity base at recurring revenues and expanding at really the maximum rate allowed by the macro market conditions.

So what does all of this equate to in terms of numbers. For quarter three, we're look at revenue in the range of $137 million to $142 million which equates to an earnings range of $0.46 to $0.49 per share.

This outlook factors in traditional seasonality issues of quarter three, particularly in Europe, and it should continue to ramp up into quarter four , you know, barring an unforeseen market surge or retreat. Based on our current visibility around sales pipelines, economic trends and markets, and our own internal spending plans, combined with our performance in the first half of the year, we are refining our outlook for 2010 revenues to the $565 million to $580 million range or top line growth in the 8% to 10% range. This is even in light of absorbing the expected negative currency impacts for the second half of the year. So essentially eating that currency loss, while maintaining the ceiling and still raising the floor.

Consequently our earnings projection for 2010 is being raised to $1.95 to $2.03. This guidance remains [congnitant] that the pace and the timing of the global recovery still has ongoing pockets of what some experts recently described as unusually uncertain. However, as we have said in the past, there are some things that we have no control over. Timing and momentum of the economic recovery, changes in government regulation and tax policies, and currency volatility.

But our outlook is based on a model that allows us to balance our cost structures, really without hindering our ability to capture revenue upside as it becomes available. So combined with our repeatable business base, diversified geographic footprint, world-class customer base, and our deferred revenues, we plan to continue what we've been doing now for many years. Focus the investment on growing the revenues and strengthening our customer relationships, which in turn ultimately should generate strong margins, good cash flows and earnings.

So with that, we're now prepared to respond to any specific questions you might have. So Denise, if you're ready then we're ready for

We will now begin the question and answer session. (Operator Instructions). At this time we will pause momentarily to assemble our roster. We have a question from Steve Ashley from Robert W. Baird. Please go ahead Sir.

Thanks. Hi, guys.

Hello.

Good morning.

I just had a question on the lease business, that was down maybe 1% year-over-year. I am just wondering if you could maybe give some color on what's might be going on with that financing option and how we might think about that performing as we go forward?

Well, basically there is one thing. It's basically mathematically very stable, but if you recall over the past couple of years, we have talked about the fact that during the downturn, some people were shifting a little bit more toward lease but we normally historically expect those to slightly revert back to what the normal buying preference would have been, if there hadn't been for this meltdown. So first of all, the change is very minuscule. The -- so mathematically, almost statistically insignificant. And while I don't have an exact number, I know that there have been things where people have started to revert back to their normal buying pattern. So I -- we don't see anything in particular that's particularly onerous there.

Perfect. And then on the large deals, you just continue to do a real good job there, eight large deals. Can you give us a little flavor on the composition of those and maybe what is driving those larger deals?

Well, okay, is that the full question?

Yes.

Okay, okay. I'm sorry. The main thing that we see as you can tell we continue to add some significant new business in that, typically the major accounts, it tends to predominate in the new license. But there is new lease that is applied with that. But what we see more often is with the broadening of the relationship, the fact that we maintain the residual business with the enhancement subscriptions and everything like that, what you're seeing is this general, if you will, a general building up of the business where basically the level of business in each of these major accounts tend to increase. So it's not like going out and swinging from the fences with these huge make or break home runs.

It is really building off an already solid business base and actually continuing to grow very nicely in those account. Most notably, because in the bigger accounts they've been utilizing it longer and they have already developed faith in it and they're in a multi-year progression in terms of being able to actually expand it now, now that it is proven inside their companies to actually expand the usage. So it all pretty much plays in line with the expected adoption curves.

Thanks so much.

The next question is from Sterling Auty from JPMorgan. Please go ahead.

Yes. Thanks, hi guys. I got two questions for you. The first one is on R&D. I understand the comment about taking longer to hire but I'm a little confused that the actual absolute dollar amount set on R&D was down quarter-over-quarter. Can you give me some additional color as to why that would be?

Yes, we've been -- in the first quarter we did some ramping up on some specific projects relative to R&D that don't necessarily repeat themselves. And from a headcount perspective, as Jim said, our hiring plans anticipated more heads at this point of the calendar year than we have been able to ramp up on. It's just becoming more challenging relative to finding talented computer science and skilled engineers to fill some of the open positions that we need.

So would the headcount in R&D actually be flat or at least up some degree quarter-over-quarter in June for R&D?

Well, it is nominally up, but the other thing keep in mind 2009 was a rough year for everybody, but we fared pretty well through it and keep if mind when you are doing those comparisons, if you're talking sequential, we have a lot of annual bonus pay outs. There's a lot of different things that can be involved in there. Overall, the net headcount is not as much up as we would have liked it to be, but we're continuing to ramp that up.

Okay, the other question, I want to go back to the lease versus the paid-up. But let's talk about the paid-up side. Was there anything that you saw in the customer behavior or was there anything in the way you negotiated the deal to incentivize more paid-up activity in the quarter?

Absolutely no to the second part. And that's something that we have been fairly dogmatic on for a number of years. We don't want to try tilt the balance, we want to provide multiple ways for people to acquire.

So there was absolutely -- I mean, you can't say at some microscopic level something might have happened, but on a general basis, absolutely not. Apart from that, didn't really see -- the kind of flows coming in didn't seem to show any kind of major shift in terms of the new acquisition of technology though, so it was pretty much on target. It was pretty much in accordance with the pipeline. It was pretty much in line with on forecasts. So, really, no major perturbation or variances that would cause us any concern.

Okay. Thank you.

Hello. Are we still connected? Denise? Are we still connected?

Our next question is from Blair Abernethy from Stifel Nicolaus. Please go ahead.

Hi, good morning. Just a couple of things. On the staffing front again, can you just give us a sense as to where you are trying to get to in terms of bodies and geographically for sales and marketing, and R&D as well? Just to give us some --

First of all geographic expanding -- basically we are expanding everywhere. Disproportionately, I mean not a major disproportion but slightly in favor of Asia-Pacific where a we've always had an ongoing building process and you can see that, and if you look over the multi-year trajectory that we have been talking about in terms of percentage of business that was Asia-Pacific based versus what it is today and you combine that with the opportunity.

So clearly that was one that we were working on, and it is somewhat proportionate if you will to the growth rate that we have been talking about over multiple quarters on a region-by-region basis. Now, on the development side, we have a number of development centers throughout the globe, obviously depending upon which discipline, there are centers of gravity for each things, but we will take advantage. I mean, it is a sad fact, well not a sad fact. It is just a fact that if you look at the graduation rates of engineers that it tends to be fairly explosive in Asia-Pacific, kind of lack luster in Europe, and even less so in the US. So, very often we have got to go where some of those talented people are.

The one thing I would say is that the main thing about the slowness is the fact that we are look at this as being a long-term building block of the Company, and as such we are not looking to just fill bodies, we are not compromising. That's really the cause for the delay. So we are being very selective in that standpoint.

But in that line, we are doing -- obviously we are continuing to invest very heavily in the core technologies, but there's a whole broader range of IP interaction as we become much more ubiquitous in some of our major customers on global networks. The way our software has to function with that as well as with the high performance computing aspects, it brings a little bit more of a cost side aspect into the productization of our code. So it really balances across those. Again looking where the talent is but making sure that it anchors near one of our major development locations.

Okay. Great. Thank you. And just -- I'm wondering if you can expand a little more on the high performance computing commentary, Jim. What are you seeing out there, what are -- which of your customers are sort of driving this and is this being done on their hardware or is some of your CapEx -- are you setting up for some of your customers to do it on your systems?

Well the -- okay. The -- first of all, boy, many parts to the question, and I will try to remember all of them. The upper-end customers, the more mature ones, are the ones that are the most usual users of that. The driving mechanisms are things we've been talking about actually for a few years now in terms of the growth drivers. This multiplier effect for a single user might harness 100 or 1,000 processes simultaneously, because if they're trying to solve some big problem that may even be in the news, if they're trying so solve a bunch -- a major problem, having a thousand computers give them the answer if a few hours versus having one computer churn on it for a couple of weeks, that calendar time is extremely precious. So that is one of the things that drives it.

Secondarily is sometimes if you are looking at a huge thing like an entire vehicle or an entire oil platform, or you could take any number of different huge complex structures, they are so large that that extra computing capacity allows you to look more closely at complete systems. So those are the things that are driving it.

Now as to the nature of how they're implementing it, quite frankly the high performance computing, while it would fit very -- while it could fit into a general external cloud, a computing structure, customers mostly are using this on what we call internal cloud. That means inside their firewall. Primarily issues around intellectual property protection. Not letting your -- this is not really a scatter gather kind of model for cloud computing. It is really a heavily harnessed connect -- highly connected form of computing and then secondarily, is there's vast amounts of data that all come at given times in spurts. So bandwidth issues, those won't be long-term issues.

So the same thing we had to do to get the software ready for these internal clouds make us ready for external clouds with some of the other barriers getting knocked down. And actually we have, for many years, had that kind of even before it was called software as a service, we've had that capacity in there that the very de minimis quantity that people use to sample the software maybe to do some overflow cloud standpoint. But it is not a major part of the business right now and it is not a surging trend, at least from the external cloud standpoint. Did I get all parts of that question?

Yes, that's helpful. Thank you. And just on the CapEx $14 million to $18 million, can you just give us -- any special projects that you are looking at this year and anything sort of -- ?

Yes, we have got a number. Some of them are overflow from last year when like many people in the world, we slowed some things down. Continuing expansion of our CRM efforts. We started that last year and we still -- we tend to do projects of that scale in multiphases opposed to one big hit. So this is -- we are continuing to migrate our CRM system out across the globe. Just upgrading, you know. More storage, development machines, clusters for bigger problem sizes, so a variety of things.

Yes, basically we are increasing our investment of yield just higher bodies in the R&D standpoint particularly when you have got high performing computing that's also driving it. So there's a fairly large load that comes along with that.

Okay. Great. Thanks very much.

(Operator Instructions). And due to the high volume of questioners, please limit your questions to one question and one follow up. Thank you. And we have a question from Steve Koenig from Longbow Research. Please go ahead.

Hi, Jim and Maria.

Hi.

Good morning.

Just got one question and one follow up. My question is, let's see, the hiring of your sales reps, since you're talking alot about hiring today. You hired ten last quarter, I think you were trying to hire eight to ten more in the remainder of the year. How are you tracking to that goal? And are the reps that you have hired, are they starting to become productive and when will it be fully productive?

Wow. Okay. So relative to hiring, I would say this quarter we've made a little bit of progress but not the complete additional ten. I will say the same things to follow on Jim's earlier comments relative to locating talented engineers and computer science backgrounds.

It is also difficult to find the level of sales talent that can sell complex software to highly sophisticated customers. So, we are hiring for unique profiles that aren't necessarily always as easy to find as we would like.

I mean, one other thing I would mention is that in the case of when do you count it as a hire. There's actually people that we have secured and hired but their start dates don't happen until outside the quarter for any number of contractual or other issues. So I mean there is a timing standpoint on that.

Yes, particularly when you are hiring sales management.

Okay.

Was there a follow up?

Yes, there is a follow up. I would like to ask you all about -- if you can comment even just qualitatively if you will, give us some color on Ansoft performance. I know it is integrated, part of the business, but how is that coming along?

Ansoft business has had an actually fairly significant recovery, albeit off of a fairly depressed denominator. It is roughly -- 2009 was tough for electronic types of applications and paid-up business, but it definitely has been a net positive contributor to us, really through the first half of this year and that continued through quarter two. It is actually part of the reason that Asia-Pacific in fact progressed the way it did.

The integration efforts are starting to go pretty well. We are starting to actually see some crossed couple of sales even while the products are not native but they're data integrated and will be that way for a year or two. So we actually have seen a lot of momentum along that way and some of it macro and some of it internal in terms of things we have been able to accomplish.

Great. Thanks a lot.

Our next question is from Mark Schappel from Benchmark Company. Please go ahead, Sir.

Hi. Good morning. Maria, I just want to make sure I heard you correctly. Did you say the foreign currency only impacted the top line by $1.4 million?

Yes.

Okay. Great. Thank you. And then, Jim, obviously one of big trends with engineering simulation tools have been the way industries keep using the technology in new and interesting ways. I was wondering if you'd just give us some examples of where you are seeing new uses of your technology, that you never thought possible say even a few years ago?

Well, yes, the one that still gets me is the issue of -- as it moves into biomed, the concept of patient-specific modeling. Now we are really cutting edge there but the concept of looking at all sorts of different people of different ages with different bone density or severity of tumors or aneurysms. Being able to bring all of that together. I mean that is a whole body of science that has been kind of new.

If you look at the different high efficiency vehicle aspect, I mean I guess probably from the standpoint of wherever you see something that's heavily in the news, an identified need, and you know the technology is being put at the base of that. So, everything along that line. Even to the point of new fuel cell technologies that actually were featured in the last few months on major news outlets, that really kind of changed the way people look at things.

And of course, for the sci-fi fans when you talk about pushing into -- but this is one is an example of something that was a sweet spot of what we've always worked with. Like these new generation of fusion reactors which are much cleaner, much safer, but pushing the other end of that envelope are these people working on antimatter drive engines, like you would only hear about in Star Trek kind of activities.

So it is really kind of amazing. Even when you see applications of law firms and city planners looking at city safety, evacuation routes, contaminant spreads and a whole range of things like that. So it is just a -- it continues to -- everywhere we turn it continues to amaze me the way people are creatively utilizing the software. And I mean that's just a tip of the iceberg type of thing.

Thanks.

Our next question from Jason Rogers from Great Lakes Review. Please go ahead Sir.

Good morning.

Good morning.

I wonder if you could talk about your cash uses. You've had a nice paydown of debt and you're building cash. Just wondering if the plan is to keep paying down the debt or are you looking at share repurchases and acquisitions?

Well, it's going to be -- I will give you the general tenor of what we do with cash has really not changed fundamentally. Just becomes very situational based on standpoint. In general we want to continue to accelerate our investment. One form of that is through ongoing acquisitions but that tends to be -- there tends to be a number of factors that is affect both the timing and the utilization of that.

You know, you don't just put them on a schedule and reel them in. nd that's probably I will say my -- our personal favorite use of it because it is a thing that builds the foundation for the future and we still feel like we have a huge opportunity ahead of us.

But there's no doubt in the past, we have used it to accelerate the paydown of the debt, more so in past years than this time because basically the spread between what we earn on the money versus what we are paying for the debt really isn't that huge of a driver. So -- and when it comes to share repurchase, an awful lot of that is the function of the spot prices of the stock and being able to -- it is basically an opportunistic grab, but those continue to be major standpoints but the overriding one is the investment in the business to help drive the future growth.

Okay.

I know, Maria, do you --

Do you have a follow on?

Yes, can you give the performance of the different business segments? The lease, paid-up, maintenance and service for the quarter?

Well, like we have said, the lease was -- the lease -- if we look at it for both the quarter and year-to-date, essentially flat as we mentioned before, slightly maybe just a mathematical tweak down on the lease as some of the '09 conversions and things like that came in. Secondarily is that the paid-up business as we talked about grew at about 30%. So getting closer to the historically levels and the total maintenance grew at low teens, what around, was it around 13% roughly?

13%.

Yes.

Okay. Thank you.

Jason, all of that information is on those sheets that are posted on the IR website.

Okay. Great.

We have another question Ross MacMillan from Jefferies. Please go ahead.

Thanks a lot. So Jim, you obviously had really nice strength in the other international business. You mentioned Ansoft's strength. Maybe the two are related so maybe just clarification on that. But the other question I really had was on the channel. It sounds like you are certifying more of a channel to carry more products. And I think that's specifically relates to the CSD products. Can you just talk to kind of where we are in that process as certifying the channel? Are we 25% of the way, are we 75% of the way? Any color on that would be great.

My guess is we are probably about 25% to 50% of the way in terms of fluids, probably 25% or less in terms of the electronics. The normal thing, and we talk about this for years, it is, there's some that jump in the very first year and really are able to channel that is able to jump in.

There's a couple of -- a few others that are just kind of like well I think it is good but I want to wait to see if anybody else -- I don't want to jump in the pool first. And then there's always a handful of stragglers that are delaying. But normally that's a two to three year kind of process to at least get to the parado distribution of coverage on that.

So in -- yes, in the Asia-Pacific and other parts of Asia, it wasn't like it was the only place. We're seeing progress in every area. We actually saw, for instance from the Ansoft standpoint, we saw good revenue growth in each of the regions, at least in -- both in revenue but particularly in new license sales. But the fact is that we did -- I'd say it wasn't just electronics and it wasn't that electronics was only in Asia. We were seeing it across all product lines. And in particular, Japan was actually quite strong from a number of factors, both direct and indirect.

Great. And then just a follow up and this is a higher-level question. You talk about your target margins in the high 40% range.

Yes, sir.

You -- historically you kind of, maybe even a year ago just, you talked about how you felt maybe your product portfolio was running ahead of where customer needs were. In other words, it was almost like you were sufficiently ahead of customer demand from the portfolio products, that you didn't really need to accelerate investment. Do you feel like now that customer has caught up and there the need to continue to push that manifold, hence the investments?

Well, the thing is, we always like to be a little bit ahead of or at least in step with our major customers. But being way ahead in 2009 was not the right thing to do, particularly when in 2009 we didn't know what 2010 really was going to look like. So, with that in mind, I would say a with the customer sentiment opening up, the first thing are the customers have been more receptive to the new technology.

The second thing is, we have already seen that some of the things that we have been talking about have started to gain some resonance. And therefore in some small way we might be even a catalyst in the issue. And I am talking particularly in some of the things that we have seen in this world of converging engineering discipline with mechanical and electronic systems, having to work in concert. You scan -- if you remember the news headlines over the last six months, there are numerous standpoints where the mechanical and electronic impacts caused major issues for some very respectable major companies. And that's tended to -- that tends to open up the opportunity there.

Great. Thank you.

We have our final question is from Dan Cummins from Thinkequity. Please go ahead, sir.

Thanks very much. I wanted to just pursue that a little bit more. Ross' previous question about not really channel certification because I guess you've covered that, but the -- your direct generalists with respect to their capabilities for the Ansoft portfolio. Can you talk about progress there? And then my follow up, I will just put it out there, if you can talk to me about any significant plus or minus tweaks to your second half of the year, sales funnel assumptions, even if the net is the same. Would just be interested in hearing about maybe any differences in the component assumptions. Thanks.

Okay. So, the first one related to the --

The general.

The general.

Yes, the -- actually if you look at it, think of it as a curve that kind of mirrors the -- what we talked about for the indirect, albeit it has a higher intensity and a shorter timeframe on it. So yes, there still is a learning curve, there still is a comfort zone that has to be increased. However, our sales models always comprehended an extremely broad set of engineering disciplines and therefore the goal will support model which actually supports those becomes -- was already in place to provide those capabilities.

You have to get to that comfort and capability level. So in general, the sales force has continued to progress up and even at a rate I would say in advance of indirect. Now on the --

Sales funnel.

Yes. Go ahead.

No real change in the sales funnel. I mean the pipeline are strong. I'd say we tried to build in a little bit of conservatism relative, particularly on the larger deals. Timing is still an element of volatility relative to the model itself. It probably will be -- if you look at the license versus maintenance, it's probably around 60%-40% is where we'll end up for the full year. So nothing outside of the norm.

Just close rates overall, pretty much just the same?

Yes. As I said -- and it really depends on the customer itself, Dan. For those customers where the use of simulation is pervasive throughout the organization, it is much easier, they understand if they use it all the time and they continue to increment their investment. For brand new users that are just getting used to and understanding the use of simulation, it is takes a little bit longer.

Yes, and the other thing we have seen is even customers where they may not be doing a lot of extra hiring, they are acquiring extra [seat]. I don't know how much of that is displacement and how much is amplification and the like. But one thing I would say -- the thing that's really strange is -- for 2009, the first six months were really almost in permafrost and we started to see some decent improvement the second half.

So, the relative comparables for quarter-by-quarter throughout the year can be a little bit choppy. That's more a function of the '09 denominator. Maria's earlier point, if you look at kind of the contour of the seasonality of the business, it is tracking on pretty traditional levels quarter-by-quarter.

Okay. Thank you very much.

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

Okay. Okay. Well, so in close, as we just kind of said on these questions, not much as changed from what we said last quarter. Our emphasis is going to be on the continued focus on execution, as well technological differentiation and leadership. The customer acceptance of our existing vision and I think fairly unique value proposition, coupled with our ongoing investments we are making, tend to make us continue to be long-term optimistic about the long-term opportunity.

And all I will say in closing is it's been true for the last forty years. We tend to be propelled by a strong combination of a solid business model, great customers, the dedicated channel partners that we have spent time talking about on these questions. Obviously great technology and of course all of the employees that have made it happen year upon year. So thanks everybody for joining us today and we will catch you on the next call in a few months.

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