ANSYS Inc (ANSS) 2010 Q4 法說會逐字稿

Good morning, and welcome to the ANSYS fourth-quarter 2010 earnings conference call. All participants will be in listen-only mode. (Operator Instructions). After today's presentation, there will be an opportunity 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, Maureen. Good morning, and, well, welcome, everybody, to the ANSYS call for actually Q4 and the fiscal year of 2010. And with me as always is our CFO, Maria Shields.

So as usual, as we've been doing over the last few periods, we posted all of the Q4 and year-to-date revenue detail by geography and category on the spreadsheet link that's provided on our IR home page. So with that in mind, we'll jump right in and we'll discuss the operational results and major business drivers, and then we'll have Maria update you on our income statement, the balance sheet, and the cash flow highlights. And then we'll provide an update on our current outlook for Q1 and for 2011, and then respond to your questions.

So as always, Maria, would you start us off with the Safe Harbor statement?

Absolutely. Good morning, everyone. And thank you for joining us to review the highlights of our fourth quarter and our annual 2010 results.

This morning I'd like to remind everyone 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 are 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 based upon our view of the world, and our business as of today, and ANSYS undertakes no obligation to update any such information unless we do so in a public forum.

During the course of this call, we'll be making reference to non-GAAP financial measures. A discussion of the various items that are excluded and a full reconciliation of GAAP to comparable non-GAAP financial measures are included in this morning's Earnings Release and the related Form 8-K.

One more housekeeping item before I turn the call back over to Jim. I'd like to remind everyone that the ANSYS team will be hosting an Investor Day in New York on March 3 at the NASDAQ market site. Please see our Investor Relations area at ANSYS.com for details about the meeting and the webcast.

So now I'll turn it back over to you, Jim.

Okay, thanks. Well, let's just start by saying basically Q4 and 2010 were important periods for ANSYS on number of fronts, and we're going to spend some time highlighting that today. We believe that our financial results are indicative of the progress that we've made. Like most businesses across the globe, we entered 2010 with a bit of uncertainty and volatility, but we focused our efforts on those things that were in our control. And the results of that focus, combined with I think a really solid execution by all of the team, and it enabled us to deliver a strong Q4 finish above our earlier guidance on both revenue and EPS.

Also worth noting is that we delivered at the high end of the full-year revenue range, and above the annual EPS guidance that we committed to on this very same call roughly a year ago.

So as we delve into some of the key metrics, as always I'll just highlight that the numbers that we're using are non-GAAP in our historically consistent fashion. To put our Q4 performance into perspective, simply put, it was, again, a very good quarter for us, even off an exceptionally strong comparable in Q4 2009 that included 14 seven-figure deals that quarter, and resulting in our being $11.5 million or so over the midpoint of revenue guidance, and $8.6 million over the upper end.

So in the fourth quarter of 2010, our lease revenues totaled $48.8 million, that was up 3%, which is 4% in constant currencies. Paid-up licenses grew 17%, to $56.2 million in the fourth quarter of 2010, or 18% in constant currencies. Our maintenance business continued to grow in Q4. It's $56.8 million in revenue, increasing 14%, which was the same in both reported and constant currencies. And our pure service business remained fairly consistent at about 3% of revenue.

From a geography standpoint, North America grew 10%, Europe was down 2% in reported revenue, but grew 5% in constant currency, and GIA was up 29%, or 23% in constant currency. Our total revenues in Q4 were $166.6 million, which was up 11%, which translates to 12% in constant currencies. And in this quarter, the results include a contribution of 18 seven-figure deals, which is a new all-time high for us. Overall, about 27% of the aggregate value of these deals contributed new license business for the quarter, with the remaining balance contributing to the growth of our deferred revenue balance, which also hit a record high of $209 million.

Both our direct and indirect businesses performed well. We maintained that 73/27 split, respectively. That's 73% direct and 27% indirect for the fourth quarter and for fiscal year of 2010. Now, again, on this indirect balance, as we've highlighted on earlier calls, this balance is indicative of the channel becoming certified to represent the additional elements of our expanding product portfolio, as well as continued positive channel performance, particularly in the Asia-Pacific region in Q4 and throughout 2010.

Most major aspects of the business performed as anticipated. Again, with our three major geographic regions all growing in constant currencies through 2010. The breadth and depth of our product portfolio continued to drive a richer mix of product sales, particularly within some of our largest customers, as evidenced, of course, by that number of seven-figure deals that I just mentioned. This level of engagement with our leading customers across the globe enabled us to further secure, extend, and even continue to elevate those relationships. And then equally important, as always, our recurring base continued to be strong at 63% of revenues for the quarter, and 68% year-to-date, indicative of the strong paid-up license component typical of our Q4 business.

So we'll take a few minutes now, taking a deeper dive on the results from the usual different perspectives that we take -- category, geography, customer product. I'll start with category of business first, I think. Overall, our revenues exhibited a very typical composition for us -- 29% lease, 34% paid-up licenses, 34% maintenance, and 3% service for Q4. These percentages change only somewhat for the full year with 32% lease, 29% paid-up licenses, 36% maintenance, and 3% service, and that's, again, indicative of the typical strong paid-up element in Q4.

We saw healthy increases in paid-up licenses in Q4, up 18% in constant currency. Our maintenance business also continued to grow, up 14% in constant currency. And we saw double-digit growth for the quarter in all of our high-end products, both on the multi-physics and the electronics products, and the mechanical multi-physics and electronic products grew at double digits for the year also, on top of that. And as I mentioned, our major accounts made important contributions to the new-license revenue, as well as the deferred revenue balance.

The growth in business intake grew in excess of the revenue at 18% for the fourth quarter, and 19% for full year, which is a good leading indicator as we head into 2011. Deferred revenue for Q4 totaled $208.9 million, as compared to $176.6 million in Q4 of 2009, again, representing an 18% increase there also. For 2010, our strong repeatable business base remained at a healthy 68% on a larger base of business and with a stronger paid-up revenue component, comparing to the 71% in 2009.

As we've been saying for a number of years here, the ability to maintain and continue to grow a solid base of the recurring and predictable revenue streams is one of the hallmarks of our business model. We actually believe also that those strong renewal rates that we've fully returned to are an outcome of our long-term commitment and investment to R&D, which we've actually, on previous calls, we've mentioned that we've actually increased that as of recent. And it's driven our product leadership, and basically in turn allows our customers to solve increasingly tougher design issues and actually grow along with us.

Challenging times, actually it brings the benefit of our technology to the forefront. I think 2010 was a watershed year. If you consider all the headlines that we saw over that time, everything from product recalls to branding missteps, to things that were on the front-page news, you'll basically get no argument that in 2010 the market for new and innovative and safer products was as competitive as ever. Organizations facing global competition and ever-expanding customer performance and environmental expectations, on top of the quality and regulatory hurdles, it basically was really an important part driving things. So, I've said it before, but basically to cost it wrong has never been greater, and the value of being right has also never been greater.

So, for most of our customers, business as usual is not an option anymore. And that's been what's driving a lot of that. It's why Best-in-Class companies are systematically integrating engineering simulation into their design processes, and obviously the breadth and depth of the ANSYS portfolio with that product developers are leveraging our simulation tools to optimize cost savings for them, but also to innovate new designs and basically get it right the first time.

2010, ANSYS heightened dedication to partnering with customers to achieve the vision with our delivery of ANSYS 13.0, which was well received. The latest release provides basically a strong array of new and advanced features, and basically what I'll do is, anybody that has interest, we've actually upped our website and there's a wealth of information both from the customer and product side. So we won't go into a lot of depth on this call on that. And basically the combination is breadth and depth of our simulation capabilities, combined with the power and scalability of a very flexible and open workbench platform; it just puts us in a position to not only increase our footprint, but expand our relationships within the customer base, and also to solve new classes of problems for new adopters. We'll actually give some interesting examples of that in a few minutes here.

From a geography standpoint, as I mentioned, North America grew 10% in Q4, and 8% for the year. And basically as customer sentiment improves, and trends continue around the proliferation of products that they're designing that have these combined critical issues of both electronic and mechanical aspects, we've seen and we believe the future opportunities for our electromechanical and multi-physics solutions will continue to expand.

Major orders in North America -- if I just go down, look down this list here real quick, it came obviously from a mix of both long-standing and new customers --Honeywell, General Motors, Pratt & Whitney, Boeing, Ford, Northrop Grumman, Broadcom, Tyco, John Deere, Raytheon, Lockheed Martin, Westinghouse, Bellcan, Aerojet, Bechtel Bettis, ExxonMobil, ConocoPhillips, just naming a few skims off the list there.

Now, given the ongoing macro-volatility, it should come as no surprise that Europe was our weakest performing geography for the quarter. However, despite pockets of weakness, such as in the UK, overall Europe did grow, as I mentioned, 5% in constant currencies for the quarter. For 2010, we saw 8% growth in constant currency. Germany, our largest market there, continued to lead the way with solid double-digit growth, up 12% for both the quarter and the year in constant currency. While the UK, as I mentioned, being the weaker segment, we'll look at the other side of this, was down 7% for the quarter. It also grew double digits, or up 13% for the year in constant currencies.

So, general take-away from this is, with the currency volatility and some of the austerity measures that we see going on over there, government budget cuts and general uncertainty about the macro-business, Europe was no doubt the most challenging region, Q4. However, the key point is, we still have a solid team and customer base throughout Europe. And we still see a variety of opportunities in the region, including a whole range of things -- including reprioritization of defense spending, which is increasing the need and justification for simulation. And we're also starting to see some traction from the cross-selling of products, basically in the electronics, automotive and consumer product sectors.

The largest deals in Europe included customers such as Siemens, Continental, Airbus, Snecma, Arriva, Bosch, Peugeot, Valeo, Man, Red Bull, AVV, Volvo, a range of companies there. So again, the same kind of major customers and diversified industry coverage.

Now, our general international area, which is primarily Asia-Pacific, was the strongest performing in Q4 and for the year, growing 23% for the quarter and 18% for the year in constant currencies. There was a balanced performance from both the direct and indirect channels in the region, and the region continued to benefit from stronger economic background and the growth from global multi-nationals in the region. Key customer engagements in the quarter here were -- Honeywell, Cummins, Samsung, J-Devices, Infotech, Nippon Steel, Canon, Toshiba, Hitachi, Mitsubishi, [REKO], and just a long list of those type of companies.

So, as we look at this vast and broad array of customers spread across geographies and industries, we see the growing importance of product integrity and product quality as critical business issues that require the use of simulation come to the forefront. Just for example, in telecom we're seeing an increasing demand for wireless data transfer and consumer electronics, a shift to 4G networks, and a whole range of new applications involving wireless integration in medical equipment, power monitoring, and even household appliances.

In the automotive sector, well, in addition to the well-publicized (inaudible) things like hybrid electric vehicles and fuel efficiency, we're seeing a big push now for the increasing utilization of electronics for safety, performance, and even entertainment systems. We're seeing pushes in the industrial and electrical segments, where the growth is being driven by the demand for renewable energy, energy efficiency actually of all sorts of things, and a whole range of smart product designs including smart grid, et cetera, as well as the growth in more efficient power electronics.

So all of these are areas that are driving increased interest and need for our multi-physics capability, and one of the things that underlies some of the results and trends that we're seeing. And I'd say the one thing that ties them together is, in each of these cases, rapid understanding of extremely complex problems but with no sacrifice in accuracy. It's really essential, and of course, that's been a hallmark of our vision and strategy for many, many years.

And so, I guess as we've been saying for just a little over 40 years now, and probably will continue to say in the future, there's little doubt for us of the long-term opportunity, and it's evidenced and validated by these list of problems that are coming up all the time, the multi-year momentum in existing and new customers. So, basically that long-term optimism is there, but I'll say even with the increasing interest, we still see pockets of ongoing uncertainty. There still are prolonged sales cycles, not unlike what we experienced in parts of Europe this past quarter. And we tried to factor that into both the positive, but the uncertain elements that influence the timing and pattern of the customer spending decisions into our guidance, and we'll continue to endeavor doing so going forward.

Throughout Q4, we continue to strategically invest in elements of our development and customer-facing organizations in particular, in response to this demand, but also in preparation for the available opportunity. And I think during 2010 we made some good progress, but we still have some other key investments to make that are important to our business for the long term, and we can talk about some of that with the expense structure discussions coming up.

Looking at things from a product standpoint, I guess I would just have to say we saw no real surprises. The high-end sales, and our electronics products in particular, grew disproportionately, as I previously hinted at. Basically, the bottom line is, with the pressures our customers are facing, they really can't compromise on the scope of the problems, the depth of the software they're using or the accuracy of the solution, and of course, that plays well to us. Therefore, not surprisingly, if we look at ASPs, overall ASPs for the quarter were stable, actually up over last Q4. And at the low end, ASPs were also stable, actually when you adjust them for the normal volume purchase schedules that are just part of the normal course of things.

In Q4, again, this is a trend we've talked about for a while, we continue to see a combination of increasing interest in and sales of parallel license and HPC, or high performance computing, offerings as, again, these trends support the thesis that the overall business pressures, they're driving the need for people to solve more complex problems, bigger problems, but they also have to get them solved much more quickly, and again, with no compromise in capability or accuracy of solutions. So, ever since we really introduced these in earnest over a year -- for over a year or so ago, it's continued to be one of the fastest growing segments of our business.

As I mentioned earlier, we released ANSYS 13 during Q4. This new release aligns with ANSYS vision that basically is just continuing to knock down barriers to adoption, making multi-physics engineering simulation tools accessible to a much broader range of people. Ultimately, we want to get those in the hands of every engineer. The suite of products makes it easier and more cost effective than ever for organizations to apply this simulation technology, and actually introduce it into an evolving process set that they're -- and set of best practices -- that they are developing. No surprises there from the product standpoint.

So with those, I'll actually now turn it over to Maria Shields, our CFO, to provide you with a more detailed look at the financials. So, Maria?

Okay. Thanks, Jim. So, very much in line with what I've been saying is, we progressed throughout each quarter of 2010. I'd classify our Q4 performance as one of continued business execution and great teamwork. Our performance was supported by improving market conditions and some fiscal year-end spending in certain geographies on one side of the equation, countered by some volatility in other markets and customer caution on the other side. So, despite all of this, we continued, as Jim mentioned earlier, to focus on the things that we could control. And by doing so, we were able to deliver solid performance in revenue margins and earnings.

The overperformance in the top line drove strong growth and operating margins of 89% and 49.7% for the quarter, and 89% and 49.5% for 2010. The fourth-quarter results were adversely impacted by about $1.5 million in negative currency at the revenue line, and $900,000 at the operating income line as compared to last year's Q4. And for the full year, the currency impact was fairly nominal. We ended up with a net $200,000 negative impact to revenue, and $600,000 to operating income. So, overall, despite all of the currency volatility that we saw throughout the course of 2010, our natural hedge, which is basically the partial offsetting of global revenues and expenses, has provided us reasonable bottom line protection from a currency risk perspective.

So, as we look ahead into Q1 and full-year 2011, we continue to plan for non-GAAP gross profit margin of around 88%, and operating margins in the 47% to 49% range for Q1 and for the full year. So, baked into these assumptions are an ongoing R&D investment in the 15% target range. Also directly linked to the outlook are continued plans around hiring and investing in the business for the long term. In Q4, we added 39 net new employees, bringing the total population at year-end to around 1,660, with plans to continue hiring and investing in various aspects of our business throughout the year.

We closed out 2010 with fourth-quarter effective tax rate of 27% on a non-GAAP basis, and about 30% for the full year. Q4's rate was somewhat lower than what we had forecasted on the last call, primarily due to a number of factors that include tax adjustments for filed tax returns, some changes in uncertain tax positions, and the extension of the R&D tax credit, which we were not counting on. I will note that these effective tax rates are inclusive of the positive tax benefits that related to the third quarter Japan subsidiary merger that we talked about at length on our last earnings call and in the third quarter 10-Q. So, in summary, the adverse impacts of the Japan restructuring on Q4 cash flow was about $66 million, and income tax expense was reduced by $2.1 million.

As we look out into 2011, we're estimating about $8 million in positive tax benefits, and this has been factored into our 2011 outlook. And for additional details, I'll refer you to this morning's Earnings Release, which tries to walk through the estimated impact of the Japan mergers. For fiscal-year 2011, we're currently forecasting a non-GAAP effective tax rate in the 30% range.

If we take a look at cash flow and balance sheet, we reported cash flows from operations for the year of $167 million. This does include a net $55 million adverse impact related to the Japan merger in the second half of 2010. For the fourth quarter, our cash outflows from operations were $25 million. If you exclude the impact of the Japanese restructuring, operating cash flows in the quarter would have been $41 million, and $222 million for the full year.

We closed out the year with cash and investments balance at $473 million, of which 71% is now held domestically. This has moved up from the 50% that we held domestically last quarter, due to a combination of a significant tax payment in Japan, and the repatriation of European cash in the fourth quarter.

So, as we've seen throughout 2010, our collection efforts remained strong, and this was evidenced by net DSO at 45 days as we closed out the year. We paid down $5 million of the debt, which leaves us with about $160 million outstanding, with a rate of 1% going into Q1. We had capital expenditures of $5 million in the fourth quarter, which brought us to about $14.3 million for the year. And if we take a look at our 2011 full-year CapEx plans at this time, we're projecting somewhere in the $15 million to $20 million range for 2011. So, overall, cash flows continue to be strong. We closed out the year with a great balance sheet that's in a solid position to continue to support the business for the long term.

And to wrap up, I'd just like to briefly comment on some of the other assumptions that are in our 2011 outlook. If we take a look at fully diluted shares, we're currently estimating around 95 million. And on the currency front, we've made some modifications to our assumptions from our last call to reflect some of the slight movements in rate since we last provided our guidance. So our current outlook for 2011 assumes average rates in the range of $1.36 to $1.39 for the euro, $1.61 to $1.64 for the pound, and JPY81 to JPY84 for the yen. So as always, we'll continue to update the assumptions as we progress throughout the year and make adjustments as necessary.

Jim, I'll turn it back over to you for some closing comments.

We'll do that, and then a little bit on some of the guidance I think -- so we'll move in with that. As a recap, basically the numbers somewhat speak for themselves. But it was a continued good diversified financial performance, basically of all the major parameters of the business, whether you look at revenue, earnings, margins, cash flow, repeatable business space, the normal things that we track.

Secondly, we had sustained customer engagement that was marked by activity on a broad front. Whether you look at it from an industry basis, a geography basis, commitment levels from the customers and the renewal rates. So continued strong movement on the customer front.

The product portfolio, again, this is a multi-decade story here, but the product portfolio continued to expand, even augmented with some partnerships, relationships that we had with both technology distribution and with some customer engagements. And again, I could point you toward ANSYS.com website for more information on some of that.

And then in 2010, we continued to demonstrate our ability to grow the top line in line with our guidance, while also maintaining industry-leading margins and an optimal earning profile, while simultaneously upping our investment in R&D and key infrastructures. As we say good-bye to 2010, we close our first 40 years and another decade as the global leader in engineering simulation technologies. As we head into 2011, we're embarking upon the next decade of our journey, and continue to be excited about the opportunity that lies ahead.

So, to map it out, this means first of all, long-term premise and the opportunity that we've been talking about the past 10 years, they're there, they're growing, and we feel we have demonstrably the best technology to meet them. Secondly, at the floor of our assumptions, we continue to have a solid business with good recurring revenues, great customer relationships, and all of these combined for good net income and cash flows. And consistent with 2010, as Maria had mentioned earlier, we'll be focusing on maintaining strong operating margins in the upper 40%s while continuing to build our annuity base of recurring revenues, and then expanding at the maximum rate on the top line, as allowed by the macro-market conditions.

So what does all this equate to in terms of numbers? Well, for Q1 of 2011, we're looking at a revenue range of around $151 million to $157 million, which would equate to an earnings range of around $0.53 to $0.56. For the full year, we're currently projecting 2011 revenues in the $640 million to $660 million range; and consequently our earnings projection for 2011 are in the $2.27 to $2.35 range.

And, as always, I'll acknowledge that our current views on outlook are cognizant of the number of unknowns that are out there. And as we've seen over the course of the last decade, there are many things that we have absolutely no control over -- the timing of economic improvements within the various geographies, government and tax policies, currency volatility, just to highlight a few. But our guidance is based on a model that allows us to balance our cost structures, and I think demonstrably without hindering our ability to capture revenue upside. So, combined with our repeatable business space, again, diversified geographic footprint, and those world-class customers, on top of a strong deferred revenue base, we plan to focus our 2011 efforts toward driving top line revenues with strong margins, good cash flows, and optimal earnings.

So, that's it in summary. With that, if there are still any questions, we would be happy to try to address those.

We will now begin the question-and-answer session. (Operator Instructions) The first question is from Steve Ashley, Robert W. Baird. Please go ahead, sir.

Thanks very much. Very nice job on the quarter. My question relates to competition. Autodesk announced they were acquiring Blue Ridge Numonics, put them in the CFD business, they had already acquired ALGOR -- just a couple questions around that. Number one, do you see them targeting a different customer group than you're currently targeting? And, number two, if so, is the group that they are targeting something you intend to or intend to down the road to go at as well? Thanks.

Okay. Well, you know, there are a lot of -- bottom line is, there have been a ton of companies that have been in some form of basic analysis for -- from the very beginning, for 20, 30 years. And they're all credible offerings, but what it really amounts to is there's really not a whole lot of change. We really don't see even the -- much of the even earlier structure standpoint. Again, ours is mainly a lot of the high end things with the, obviously, leading companies. Actually, even our biggest installed bases, where we've got the biggest installed bases, are actually our fastest growing segment of our business, as they start to ramp into this. And then the next tier companies tend to follow in.

So, I think all it is is the recognition that simulation is for real, but we approach this from the high end with uncompromising product quality, solution quality, product depth and solution of type of capabilities. So, it's one more player at a different part of the market, but it really, it's not a whole lot different than the kind of people that were around there at the time.

Okay. Great. Maria, I just had a kind of a housekeeping question. Had the tax benefit guidance of $8 million to $8.4 million for the full year been in your previous full year earnings guidance that you had provided after the third quarter call?

Yes.

Yes, yes, the guidance that we initially provided back in November did include the impact of Japan, and if you take a look at the third quarter or the last earnings announcement, it's all specifically laid out there as well.

But not like the R&E.

Great. I'll get back in the queue and let some other people ask questions. Thanks very much.

You're welcome.

The next question is from Richard Davis, Canaccord. Please go ahead.

Hello, thanks very much. So what is your -- I guess actually the better question would be this. Is the math and physics of seismic and the human body sufficiently different, that it makes for a hurdle for you guys to expand materially in this? I know you're doing some in the human body side.

Right.

But -- or is it more about getting reference deals in the space, because historically you've been more in the manufacturing space?

Well, yes, there's two things. First of all, physics is physics. So, that really, there's no fundamental thing there. Now what you start to see, and the two examples you mentioned -- what you'll start to see is differences in material properties. The material property of muscle tissue is typical than the traditional steel and aluminum that many industrial products were made of over time. And likewise for all the variations and if you talk about seismic and rock strata and things like that, but, nevertheless, there are basic laws of physics. So, the materials are one aspect of it. But we've even seen over the past few years all industries changing in materials technologies, as we move to plastics, as we move to composites, as we move to a whole range of those particular things. So, this is one aspect of t it.

A secondary part, though, as you get to these new industries, they traditionally have done things a certain way. The industrial base has been moving along using simulation and physics simulation and this predictive thing going forward. They've continued to -- they continue to utilize the technology, get comfortable with it. That's always been one thing that as a barrier to adoption, is companies don't want to just roll the dice on unproven technology and when we've been with our customers 20, 30, 40 years, we've continued to build that base of trust in a series of baby steps, if you will.

So, when we come up with new dramatic releases -- people don't normally like to change. Now, what that means is when you're entering a new industry, or a new segment such as the biosciences, we've been in there for a little bit of time even with implant, endoscopy, drug delivery, things like that. But, there's a whole new series of regulatory pressures, processes that have to be gone through, evolutions in the customer's mindset as to what this means, how they apply it safely without putting themselves at risk. And even further down that maturity curve is -- are things like the seismic and the geo sciences kind of standpoint.

But the one thing I would say is, if you think about 10, 15 years ago, when people were saying that simulation was saturated and we were upping the gain on it, because the cost of being wrong was going to be a huge thing. Well, when you're talking about healthcare liabilities and things like that, those things are clearly a problem. And as we've seen whenever you're interacting, whether it's earthquake mitigation or even acquisition of natural resources, if something isn't done quite right it can be front page news for a long amount of time. So, those things have to be gotten right. And, obviously, looking at the physics and starting to blend that in are areas that we think we can grow into.

Got it. No, that's helpful. Thanks very much.

The next question is from Dan Cummins, ThinkEquity. Please go ahead.

Thanks. Good morning. Can you talk about the contribution to growth this year that you might be expecting from cross-sell success? We're looking for any additional color on the cross-sell initiatives, particularly differences between the direct side and the channel side. Thank you.

Okay. Well, the cross-sell is something, it just like an emerging trend that's coming on, and of course it sometimes is difficult for us to precisely quantify, because even when we have customers with the same logos coming together, they might be different buying centers within those organizations. So, but, nevertheless, we can tell that -- qualitatively we can tell that when those major orders come in, ones that came in recently where they start to have all of the individual physics bundled in. Now, ultimately, behind closed doors, how are they ultimately used in that? Simultaneously on problems, or are they used independently on problems, we don't know, but the fact is, they are being aggregated and purchased and we know that the customer interest in applying those is particularly key. Now, on the channel side of things, obviously we've seen that areas that were relatively under-saturated in terms of sales coverage, we've seen some nice growth in there.

From electronic side in Europe, we've seen that as more companies get certified and it gets more available in the channel, at least from an introductory standpoint, that that allows us to grow. But as we've also said, there's a business certification process of that, and there's a technology certification process to make sure that we're maintaining the quality of Customer Service and solutions put in there and as we've mentioned, that's not like a few month process. That is a two -- I think I've even posed it as being a two to four year kind of process where the early adopters can get on-board within a year and start to be net productive in two years and some of the people that are adopting a little bit slower will extend on a little bit. So, if anything, I think we're just on the very front end of that particular equation. I think it's maybe a little more developed on the cross -- on the generic cross-sell, but there's still a ton of move. We haven't even approached the inflection point of that and we're much less developed in terms of the channel pick-up of the capabilities.

Okay. Thank you. Could I ask one follow-up about the UK? What were the weaker factors of demand that you saw? Do you think it's temporary? Any color there?

Well, it's always been a good sector, but if you think about it, there were a lot of things that were going on with some of the austerity measures and things where we could see things actually slow down. If you recall, earlier calls, we talked about major companies that might be headquartered in the UK, but because of global situations were channeling those dollars to other problem spots of the world and we always recognized the revenue where it's being used, not where the home base of the company is. And we actually commented on that on earlier calls, but that -- there was pure evidence of the translocation of that kind of revenue. But I think a lot of the structural and infrastructural changes that's were going on inside the UK -- and UK is one of our top five markets in Europe, so we just pointed out from that standpoint. But I think the thing is that a lot of the initial austerity and restructuring things basically pretty much stabilized.

Okay. Thank you.

The next question is from Steve Koenig, Longbow Research. Please go ahead.

Hi. Good morning.

Good morning.

Good morning.

One question and one follow-up here. Jim, when we last talked, you expressed your desire to accelerate sales hiring, and I'm wondering if you could add some color on how you've done on that, maybe through Q4 and year-to-date, et cetera.

Well, actually quite good. And I think part of it is I think that's -- in particular, we strengthened quite a bit in Asia-Pacific and that was almost like you will just in time for the response that we saw there. I think you saw it in -- I think you saw it in some of the Japan performance, which is a major sector for us. If you look at it, we added a number of new quota carrying people and so we're up to roughly the 220 mark in the quota carrying of our direct sales force. Of course, we've got a very sizable one in the indirect also and we're adding more in Q1. I think the thing we talked about was, while we plan to do that and while we've been pretty happy with the progress on there, we also viewed this as not being a one quarter, one year kind of thing.

This is part of a multi-year building process and, as such, we -- I think in Q3 and Q4, we might have talked about well, it was a little slower than we would have liked, but that was because we weren't going to compromise the quality and we found some pretty good quality, obviously, as evidenced by some of the results, but we're continuing to grow that going forward. Again, we'll always do everything we do, we kind of do judiciously and we are always factoring on the long-term forecast and the general conditions, but right now we're continuing to build.

Okay. Great. Great. Thank you. If I could ask one follow-up? I'd like to ask about -- you had a very strong sequential trend in the deferred, even stronger than normal seasonality. Can you remind me, or maybe help me understand, how much of that is coming from renewal of maintenance versus lease bookings? And what's the seasonal pattern of your lease renewals as well?

Well, I actually gave the breakdown of the leases as a percentage business and the maintenance. What I'm -- so that's -- we pretty much covered that. What I don't know is the sequential strength. I could never parse it down to that level and know what part of the sequential strength was related to that. But the bottom line is, our lease, which tends to be a high inertia, but a good protectant, it grew at a pretty nice rate for the lease base and, obviously, continued to be a strong part of the business. I think part of the sequential -- there's always the time lag effect we had talked about in 2009, how some of the -- how some companies that had to really kind of slow down their renewal, but we also talked by the end of '09 and into '10, we had recovered a lot of rate. So, when you put the time lag effect in there, some of that can also to grow in.

I'd probably say the other thing you look at is there's a seasonality to the normal times when some of these renewals come in. Actually, both for lease and for maintenance and traditionally they relate to Q4 and Q1 being by far the strongest quarters for those renewal times. Maybe they're related to the calendar year aspects of most companies, sometimes it relates to year-end budgets and the like, but those normal seasonality factors were there. But, nevertheless, they -- all of those aspects, as you point out, were quite strong. They were positive and I think the thing is that the trajectory of the direction was definitely pointed in the right direction.

Well thank you and congratulations on the quarter.

Okay. Thank you.

The next question is from Jason Rodgers, Great Lakes Review. Please go ahead.

Good morning.

Good morning.

Looking at the seven-figure deals, you mentioned 18, was that for the quarter, or the year?

Quarter.

Quarter.

Okay. That's pretty strong compared --

Yes.

To last year, even --

Yes. It was -- I think I mentioned it was like -- I've got the sheet here somewhere, but, yes, that was strong. Now keep in mind, there's a couple things. One of which was, there was a -- like I said, you can look at the trend line and there was increasing demand. The other thing we see is that some of these deals tend to have a recurring base to them, and as such, as I mentioned, some of our biggest customers are our fastest growing. So, we have started to see amalgamations. When the cross-sells come in on top of new product lines being brought into that, it tends to build an increasing base and while that might not stay forever, that is one aspect that we've seen over a multiple quarter standpoint. Whenever you look at the comparables, obviously there's seasonality adjusted also, but they've tended to be building. But the other thing that's interesting is even when you look at some of those big deals, usually some other time during the year, there might be another quarter where there were other significant spends going on.

So, you look at it and aggregate it, and they're kind of growing along with us. The other aspect is, quite frankly, when you get to Q4, you get to year-end spending. And I wouldn't call it necessarily a budget flush-thing, but normally when you get toward the end of the game, you have an idea how the game's going to turn out, and sometimes it makes purchase decisions more certain, be they yes or no, but they become more certain. And there's no doubt that there's a year-end spending component. And, likewise, even there was a year -- sometimes pulling forward out of prior years. In other words, if you've got it, they get it in place now as opposed to, say, well something might happen the beginning of next year. I think all of those factors came into place.

Yes. That was great performance. Just as a follow-up, cash still continuing to be strong with debt going down.

Yes.

I wanted to get your latest thoughts on acquisitions and share repurchases.

Well, yes, the bottom line is, acquisitions, we do want to do. I would say, in general, we have never done them just for the sake of doing them. We've never done them for a financial engineering exercise, and I've mentioned that year after year. We've always tried to find quality organizations with quality products that actually accelerate the long-term product road map, which stretches easily out 10 years and beyond. And allows us to get there quicker while at the same time acquiring a lot of proven great talent as opposed to trying to hire people by individual ones and twos. So, we're continuing to push along those lines. So -- Hello?

Thanks.

Oh, I didn't know if we were still on.

The next question is from Ross MacMillan from Jeffries. Please go ahead.

Thanks a lot. So, Maria, just on margins -- so, your margin guidance for the fiscal '11 year is the same as it was before, which is in this 47% to 49% range. So, the midpoint would be lower than where we exited fiscal '10.

Yes.

Which would imply basically costs growing faster than revenues. And I look to the kind of headcount growth on an annualized basis that you did in Q4, and I think it's about 9%. So, it would clearly, everything would point towards acceleration of hiring, acceleration of cost-based growth. If that's the case, could you just maybe frame where that's going to happen? I understand, obviously, sales and your distribution is a focus, but it just still seems like a big acceleration to actually keep margins -- well actually, at the midpoint, down year-over-year. So, just trying to get some color around the pace in the area.

Yes, I would say it's not exclusive to just sales. For sales to be successful, it's got to be combined with services, pre- and post-sale services. We are expanding on the marketing front relative to not only programs, but our investment in some of the things that we're doing in branding and customer engagement. R&D is extremely critical to us right now. We have some things going on relative to things like EKM, which are relatively new, but we feel are really important relative to our future relationships with our customers.

So, we think given everything that we saw in 2010 and, more importantly what we see going into 2011 and beyond, now is the time to invest to build a really solid foundation to capture upside. And I think, as you saw in Q4, Ross, if we execute and we overperform on the top line, it disproportionately will drive the margins just because of how we spend and the cost structure.

Yes. I don't mean to butt in, but for many, many years we talked about -- we weren't -- I realize it's kind of fashionable for companies to talk about margin expansion, but just cost cutting and things like that is kind of the short-term path. We want to invest toward growing the top line and, in fact, if you look at our margins now versus years ago, they were never driven toward -- on a thesis of margin expansion. It was based on driving the top line and having superior performance there that continued to grow and expand. So, even now, while we're investing in development resources, creating products that might really launch and take shape in three, four or five years, we still might be driving revenues strong and if that happens, then the margins naturally grow. But they grow as a result of the top line growing versus a largely fixed cost structure, because the gross margins are so high, the labor resource is built in there. But if we don't do the long-term investment, we risk starving the real opportunity.

And given a point where companies are just coming on-board and even our most installed customers are our fastest growing, we're on the shallow end of the S curve. And for us to take the foot off the accelerator at this point -- we're obviously judicious in anything we hire, but that investment is important and most of what it's doing is going to be creating products that -- creating people that will interact with customers that might take months or years to build relationships with those customers and we're writing software that might take two or three years before it actually comes into a sellable product. But based on our existing business model, it allows us to grow the overall continuum and this is a time when it makes sense for us to invest, even if it kind of keeps the growth rates on par, on earnings, compared to the top line.

Okay. Great. That's helpful. Thank you. And then maybe just a couple of quick follow-ups. One is on Japan. You guys had very strong performance in Japan in calendar '10 and a lot of companies have not. Is that a significant reflection of the rebound in the Ansoft business, the electronics business, or do you actually think that you're penetrating across the product portfolio in Japanese accounts in a way that you didn't historically?

Well first of all, Ross, I'm going to give you a multi-dimensional answer. I'll apologize in advance for it. But this is not unlike when Germany was not going well for a lot of companies, and we were growing at 20%, 30%. Again, because we are so relatively low on the penetration thing, and we're such a low port -- part of the GDP of that part of the world, there are companies there that are succeeding. We all know names of marquee Japanese companies, and they're continuing to grow. So, there's one aspect of it. But you're absolutely correct on one aspect is, in general, there was a general softening of the electronics market in that '09 -- '08, '09 kind of time frame and it started to rebound. So, that's definitely one aspect of it, but I would mention that every aspect of our business in Japan, and even our indirect channel, which doesn't cover the electronics products, also did quite strong.

So, I think there was a function of, yes, the economy was better, the majors were doing better, sectors came back, but you'll also remember, if you look back to -- and I can't remember precisely which one, but if you talk about previous calls that we talked about over the last two or three years, we felt that we could do better in Japan. We talked about putting a lot of effort into building that. And some of those steps have come into play and in fact we've done a -- the group there has done a good job. We've added some good talent, some of the hiring that we talked about was strengthening that particular area. It's always been one of our top three particular markets. So, it was a combination of all those factors. Us stepping up our own individual game, the markets and industries aligning more along those particular lines, and indirect and direct performance, both progressing well.

That's helpful. And then just one last one, and it relates to something I think you said before. You said earlier in the year, last year, that you were going to get some -- I don't know if this is the right term, but some co-terminating of contracts, so, where customers historically had maybe bought products from Ansoft and bought products from ANSYS, you were going to get that re-contracting together. Was that -- I think you mentioned this, but was that part of what maybe helped beyond budget flush and so forth, was that certainly an additional help in the quarter?

Well, at a minimum I know it did effect a couple of the emergence of the more mega deals. But in general I'd say that just the combining of the contract itself didn't generate anything, but the confidence that the customers were exhibiting by viewing this more holistically and actually viewing this as a combined simulation front probably -- I'd say it was probably more of an effect rather than a cause. It was the effect of companies coming together and using more of it and realizing that somewhere down the line they were inherently linked, even if there were organizational and process changes that they might have to evolve into to get the full impact of those. So, again, I think a little bit more effect than a causal relationship, but it definitely is a correlated set of circumstances.

That's very helpful. Thanks a lot. Congratulations.

Thank you.

Next question is from Barbara Coffey, Brigantine. Please go ahead.

Hi, there. I was --

Good morning.

Taking a look at your new product, are -- is it making it easier for accounts to get on? Is it making the process of doing simulation easier? Which pieces are being best adopted and most adopted, and why are companies stepping up and how are they stepping up?

Well, it largely depends on the customer. But I think if there were major themes, it was, we spent a lot of time after we brought together these key technologies and coming up with a framework where we could leverage common components and have something that helps facilitate process emergence. So, in the recent release of the software, obviously now there was a return back to these feature-rich, deep-set capabilities. But we always, of course, we're always trying to make things more automated, easier to use. I call these not quantum leap kind of things, but a continual graduation of that.

But as we start to move in, moving into things that increase the scripting and automation capability, increases the linkage between the various physics, because that's where automation really tends to help quite a bit, because sometimes organizationally they aren't -- companies aren't always set up to be able to combine the electronics and mechanical and fluids kind of simulations, because organizationally sometimes they were set up differently. So, doing things that help knock down the inner connect barriers like that allow them to string together processes that fit them. But, frankly, there's still a ton of really fun work that we have ahead of us to continue to exploit that. But it was one of the factors that tended to get people working together.

More often than not, though, when you see a surge in the demand in a current period, it largely is the aftershock from some things that happened a year or so ago in terms of the -- sometimes the companies need to go through a validation stage. They need to be able to get the process, standardize it and then proliferate it through the organization. So, it's not just like somebody tries something and then, boom, they decide to roll it out all at once. There's an awful lot of proof of concept to make sure that whatever product rolls off the assembly line, that it's going to work with high quality, high reliability and with the right kind of functionality. So, it's going to be -- it's a long progression, but again, the good news is, we've been on this progression with some of our customers 20, 30 years and so the confidence is built up there.

Thank you.

The next question is from Brad Reback, Oppenheimer. Please go ahead.

Hey, guys. How are you?

Good morning.

Jim, do you see a scenario where the indirect business could grow meaningfully faster than the direct business over the next couple years?

The big question is is define meaningful. But, as you've seen, the direct performance actually has slightly grown faster. Now, part of this is, as we mentioned, is because Asia-Pacific was a little more vibrant as a region, and we're more indirect composition of business in Asia-Pacific. But, at least -- philosophically we would like -- you do not grow this type of a channel on a tree. You just do not go out and hang out a shingle. So, the bottom line is you want to make sure that they can progress and grow at the same level as ANSYS. So, as a baseline, we would like to see that stay pretty much in concert.

Now, when you do that, as I mentioned, there's this two to four to five year kind of overall assimilation process for getting the indirect channel to assimilate and be able to effectively represent a broader range of products. And so when that happens, you might expect small percentage increases over a longer term period. But I don't think you'll see any -- when you say meaningful, I think of like a step function or a dislocation, and I don't think you see that immediately. And in general, we've had better luck with having long, sustainable trends than short-term blips and spikes. So, and we are starting to see that gradual adoption of expanding technologies in the indirect channel. And we, obviously even before that, we did start to see a channel that at one time hadn't been able to keep pace with us, but over recent years has been continuing to grow at roughly the rate of ANSYS.

Now, this is always counter-balanced, of course by -- at some point when customers become very major parts of our business, they almost demand a direct relationship with us. But as a result of our hybrid distribution model, the channel partner's still involved and even though it may come in as direct revenue, we still -- they still get compensation and participate in the success of that customer. So, the percentages at that point can actually become a little bit skewed as we increase our major account process, even while the channel is growing with us.

Great. Thanks a lot.

Okay.

The final question is from Saket Kalia, JPMorgan. Please go ahead.

Hi, guys. Thanks for taking my question. It's Saket here for Sterling Auty.

Oh, hi.

First, it sounded like electronics and maybe multi-physics did better than you expected this quarter. Can you add any color on the fluid side? And then secondly, can you give us any detail on maybe how many open positions you plan on adding in fiscal '11? That's it from me. Thanks.

Okay. Well, first of all, I want to say that, obviously, since we performed above even our guidance, then I'd say that, while we weren't surprised, I'd say that all of the -- most of the success is being driven by the upper end products and therefore, most of the overage that we saw over our guidance was also coming from them. But I wouldn't say it was like a, oh, we're surprised and that's the reason we did it. No, it just came more in the areas that we were already expecting and targeting and to see. All of the business units, all of the physics lines did grow, like we had mentioned, coming off a weaker denominator and with a little help from Asia-Pacific, the electronics related products grew a little bit more, but there was a pretty good balance, a pretty good balance throughout. And then in terms of the overall headcount, it's a -- let's just say it's upper double digits that we're still hoping to get with quality. Hello? Are we still on?

Yes, you are, sir.

Oh, okay.

This does conclude the question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Okay. Well, thanks, everybody. So, basically, just a quick close. Again, emphasis for 2011, as always, a continued focus on execution, driving that technology, differentiable technology. And again, all I can say is just no real changes in terms of mega directions, but supported by decades of history. We talked a lot about the customer accepts -- acceptance of what we think is a -- we're biased, but we think it's a very exciting vision and a pretty unique value proposition. And with the things we talked about like expanding our product portfolio and what we've seen in the early stages with ANSYS 13, it really only bolsters the enthusiasm.

So, again, I'll close with my final shout out, propelled by a strong combination, basically the business model, but thanks to all those loyal customers that continue to grow with us, the channel partners as we mentioned that have also grown with us, all the people in ANSYS that create the technology that's really cool. And, by the way, we'll be showing some of that at the Investor Day that Maria talked about. And, as we talked about, we've got a really -- we've got now a growing base of those talented committed employees that made it all happen, and I would like the to thank each and every one of them. So, thanks for joining us today. We look forward to seeing many of you next week in New York City. So, thanks again.

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