ANSYS Inc (ANSS) 2011 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to our second quarter 2011 conference call. With us today are Mr. Jim Cashman, President and Chief Executive Officer; and Maria Shields, Chief Financial Officer of ANSYS; and also Doctor Andrew Yang, Co-founder and President of Apache Design Solutions. At this time I will turn the call over to Jim Cashman.

Okay, good morning and again, thanks to everybody for joining us to discuss our 2011 second quarter financial results. Again, consistent with our previous Q1 protocol of the general information and key topics relative to Q2s business results are included in the earnings release and the prepared remarks that we posted on the home page of our Investor Relations website this morning. Also, as you heard in the Operator's introduction, we have a special guest joining us this morning and I would like to welcome Doctor Andrew Yang, the Co-founder and President of Apache and the newest member to join the ANSYS Executive Management Team. He'll be joining us for the call. So, before we get started I'm going to introduce Maria Shields, our CFO and for our safe Harbor Statement for you.

Okay, thanks, Jim and good morning everyone. I'd 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 future results or discuss 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 we undertake no obligation to update any such information unless we do so in a public forum. Consistent with our standard practice during the course of the call and in the prepared remarks, we will be making reference to non-GAAP financial measures. A discussion of various items that are excluded in a full reconciliation of GAAP to comparable non- GAAP measures, are included in this morning's earnings release related to prepared remarks and the Form 8- K. Jim, I will turn it back over to you for some opening commentary.

Okay, thanks Maria. So again, before we open up the call for Q&A, I'd like to briefly highlight a few points about our Q2 results and the updated 2011 outlook. Let me begin by saying that Q2 was a strong quarter and ended better than we originally expected and with the added milestone of the Apache announcement that we made in the last day of the quarter. We continue to see momentum that has been building over the past several quarters and as a result we've exceeded the upper end of guidance for revenue, which drove operating leverage and earnings beyond what we had guided. Overall, we maintained all the historical strength of ANSYS over a multi-year period with double digit growth in both software license and maintenance revenue; including reaching a new all-time high deferred balance and this in turn yielded strong margins and cash flows.

And consistent with last quarter, our industry composition remained diverse with continuing success in areas such as energy, automotive, aerospace and electronics. Most importantly this was accomplished while we maintained the core tenets of our long-term vision including the recent addition of Apache to our portfolio. Many of you may recall that when we met in early March at our Investor Day in New York City, we laid out some of the key themes of our long-term strategy, including opportunities that lay ahead of us for the future of simulation driven product development. This acquisition is yet another step forward that enabled us to respond to our customers new reality. A business environment where they simply can't afford to compromise on depth, breadth or quality of the simulation tools that they used to solve their increasingly complex design challenges.

It also uniquely positions us to provide end to end simulation solutions for the explosive market around mobile devices and computing power. The obvious result of all this, is that we updated our outlook on revenue and EPS for Q3 in 2011 as discussed in our earnings release. So, I'd like to maybe provide some qualitative context around the guidance we provided for Q3 and the remainder of 2011. First, we are raising the core organic outlook for the year. Second, we have added in, of course, the over performance in the core business in Q2. Third we've added the impact of Apache for Q3 and the fiscal year 2011. And then lastly, we've updated our currency rates in line with the current rate environment.

However, we feel it prudent to continue to counterbalance or offset with some caution around macro environments, also as Japan, are second-largest market in the world, continues to work its way through the catastrophic events of Q1. Not unlike what others are seeing in their Japanese business, the uncertainty, at least in the next several quarters around the predictability and timing of deal closings is the reality that we have to be cognizant of and we build into our guidance. The final point I want to briefly highlight, is around our strong cash flows from operations in Q2 and the first half, and our thoughts around the future uses of cash. Consistent with what we've been saying for the past several calls and what we highlighted at our Investor Day, in fact. First, we plan to continue to invest in our business for the long-term. Nothing has changed on that front.

And then, secondly as the Apache acquisition demonstrates, we have been and will continue to step up our activities around strategic M&A that allows us to accelerate our vision and extend and elevate our customer engagements. So with that, actually I'd like to take advantage of Andrew being here and maybe just turn it over to him for a few comments he might have on the transaction before we open up the phone lines to take your questions. So, Andrew, is there anything you would like to say?

Yes, Jim. Thank you, Jim. I'd like to add a few personal comments about this acquisition and what it means to me and all of the Apache stakeholders. First, I would like to say this is really an exciting day for all of the Apache employees, customers and, particularly, me being here with the team. We were able to realize this merger in such a short time because it just made sense.

Apache, over the years has established itself as undisputedly the market and technology leader in IC power analysis for mobile and high-performance computing markets. By joining ANSYS, Apache now accelerates its long-term vision of expansion from chief level focus to system centric convergence to meet customers aggressive power efficiency, time to market, and cost down initiatives. As this engineering simulation software space continues its evolution, it is more than ever important and critical to have the size, scope and scale that would enable us, as the combined Company, to continue to invest in innovation that ultimately results in very real and measurable benefits to our customers.

Now finally, both ANSYS and Apache have long standing reputations for being technology leaders providing best in class and highly differentiated products. So, I'm confident that we can continue to drive operational performance, furthering customer and employee satisfaction, while also focusing on long-term value creation for our stockholders. So, I look forward to working with Jim and the ANSYS team to take full advantage of the many opportunities that we have ahead of us. Thank you, Jim.

Thank you, Andrew, and I echo those sentiments. So, Operator, I think we are now prepared to begin with Q&A -- if there are any questions.

We will now begin the Q&A session. Please note, this event is being recorded. We ask that you limit yourself to 1, 1 part question with a quick follow-up.

(Operator Instructions)

The first question is from Dan Cummins of ThinkEquity.

-- Andrew. I will just go with this one. Jim, could you give us a comment about the US business? It looks like, I'm sorry North America, pretty good-sized deceleration at constant currency, and we didn't see you site in the prepared remarks electronics as among the growth leaders as it has been in recent quarters. Thanks very much.

Okay, well again what I did highlight was the fact that the industry continued to be quite strong, so I did highlight the ones that were like the leading one's again, energy, energy conservation, that type of thing. But the electronics sector was strong. Our traditional electronics business, likewise grew disproportionately and was actually 1 of the top performers for our product set. Again, when we talk about industries, there is electronic industry but there is electronics physics and applications built into virtually every industry that we are in. So for instance, automotive electronics, defense avionics and for instance unmanned surveillance and things like that, so I don't want to draw distinction between the 2 of those, all of those sectors were pretty good. The second thing is, keep in mind what we talk about, we scored the US standpoints.

Keep in mind there is an awful lot of that, we score that not by the nationality of the company buying it, but where the software is actually being installed and utilized. And as a result of that, I think if you read collateral headlines, you'll see that there is a lot of expansion even by US and other foreign multinational's into other parts of the world. So I think what you saw was a little bit of displacement there. Part of that, of course is a long standing theme that we have talked about in terms of the availability of engineering talent, which has been extremely tight, particularly in the US.

And more abundant in other parts of the world, most notably Asia, and therefore you would see, a dislocation of that particular standpoint. Also, quite frankly, I would say that there are some places in the world where the business climate is better, and I think that a lot of companies and manufacturing go that particular route. And the other thing is, there were a couple slippages, not making excuses for it but there were couple of things that came in a day or 2 late in the quarter, but relatively minor. But those were the 3 primary factors and if you were looking at any prevailing trend, basically, built in the guidance is pretty good performance by a continuation of all of our geographies.

Okay, if I could one follow-up on a larger basis looking at constant currency growth at Company level here we are around 11% for the quarter. I'm not sure where it is here to date, 11% is a decent distance from the high teens which I think it's what you typically project organically. What is the kind of your opinion looking forward, ex-Apache in terms of where that 11% goes in the second half of the year?

Well first of all to answer part of that question is, it was in that 13% to 14% year to date in terms of constant currency. Currency has been, obviously, incredibly very volatile and sometimes just the timing of when things come in can affect that quite a bit. So if you look at the ex-currency thing at least implied from there, is basically probably going to be the mid teens kind of range so, in that 14% to 16% that again is the organic constant currency rates.

Okay, thank you.

Thank you.

The next question is from Steve Koenig of Longbow Research.

I will make it a multi-part question with no follow-up, how is that?

As long as the multi- no, go ahead. We'll see how it works out though Steve, thanks.

Okay, all right, thanks Jim. I'd like to drill into -- you raised your EPS guidance for the year considerably. Certainly you have the deed to this quarter. You've got some accretion from Apache, which we are modeling in the back half as maybe being $0.02 or so. So if you could comment on what are the sources of that EPS upside?

Aside from those things. What is driving that big raise in your EPS guidance? And the related question is, it looks like the margins for the core business are going up. You are actually exploiting some of the margin potential you have there in the core business as you are adding Apache separately. Those are my questions, I will leave it at that.

Yes, I'm going to try to weave those together. First of all, I think the first thing was in terms of parsing the earnings guidance. First of all, we have the baseline of our old guidance but first of all, we had a clear beat on the Q2 performance. That was just the flat-out of course, regardless of constant currency, whatever our currency rates were obviously published in that range, so that was numerically a clear beat. And a pretty significant 1.

Second of all, we have factored in some accretion as we mentioned from the Apache standpoint. I don't know the particulars of your model, but we do have a few pennies in there. And then, third, and not insignificant either is the fact of, we have actually increased the guidance obviously on the top line and whenever we do that, of course, we will be continuing to invest, but that tends to also drive up the EPS. And obviously there was a margin improvement, but, as historically as this happened, our margin improvement is primarily a direct result of the increase in the revenue attainment. Also coupled with the standpoint of something we have been talking about maybe 4 or 5 quarters back where as we were ramping up our investment pattern, when we bring on the people we look at them as being -- not filling a 1 quarter kind of earnings management kind of thing, we are building with the idea of maintaining these employees as we have for 10, 15, 20, 30 years.

And, therefore, we want to make sure we are getting the top quality. And as I mentioned, the market has been fairly tight in terms of the supply, and secondarily as we go through that process, it also becomes an issue for us also. But we still plan on doing investment it's just that some of it tends to slip. And if it slips a couple months or so that obviously drives it into later quarters most typically. Help me out guys, I think that was all the things.

Yes.

That sounds pretty good, thanks a lot.

Okay, thank you.

Next we have a question from Ross MacMillan of Jefferies.

Thanks. Yes, I just wanted to go back and make sure I understand the organic assumption, because by my calculations on a cost of currency basis you did decelerate this quarter to 11% from 14% in Q1 and you talk about raising your core organic outlook for the year. So, I'm trying to understand, was that 14% to 16% rate that you just gave, is that for total revenue for the year, is that total revenue for the second half? What exactly is that number? Thanks.

Yes, the thing you talked about was Q3, which is actually a little over for the full year. But, the second point is, again, there's a couple of things you have to take into account. First of all, we did guides with this with all the currency, things like that that was built in, but we are still coming out, we are still washing through all the bumpiness of '09, '10 to '11 comparables, and in fact, that has been built in to the guidance. But, we've now started to accrete more of a typical seasonality that we've had in the longstanding reason for the seasonality and the quarterization of the revenue. And, the other thing is again all the things we are talking about here when we are doing these comparisons is on core and constant currency.

So that was a 3Q comment for 14-16, is that correct?

Yes.

Okay, and the other question follow-up is going back to the costs. When we came into this year you guided for answers pre-Apache at 47% to 49% operating margin. The first half has been 50.7% so materially about the high end of that range. How would you have to think about the core ANSYS business in terms of operating margin, either for the full year or for the second half? Thanks.

Actually we do have that in the remarks that we posted on the web, but we are still looking in that 49% to 50% rate that says we are able to pull in some of the in-process investment that we are trying to do, but obviously, there is a lot of it already in the bank along that level. And of course, we will have the issue as we blend the margins with Apache. We want to maintain all the solid aspects of the business while leveraging some of the advantages that the ANSYS business model has been able to do with other partners over the multi-quarter kind of a standpoint.

And the other thing is, as always, while we have got that target and while we are hoping to invest, again, this has been a repeated pattern for a ton of quarters, is that if we continue to over perform on top line it can increase the leverage. And that's not a bad thing as long as we are not delayed too much in our investment that really is the building pattern for the 3 to 5 year kind of timeframe. Hello?

Thank you.

Oh, okay.

The next question is from Richard Davis of Canaccord.

Thanks. With regard to your commentary, guys, for the balance for the year is the guidance that you've given based on consensus economic growth of 3% to 4% for the US GDP or basically what is your underlying assumptions so that we can calibrate off of that.

Well, the bottom line is we did -- none of our calculations plugged into 3% or 4% growth, but it did in fact plug in the amalgamated view and forecast from a bottoms up standpoint that in turn, probably factors in all of the different spending sentiments. Of course, that also breaks down roughly one-third, one-third, one-third by different geographies so obviously there's a lot of different things that can happen that could drive it up or down, but it assumes a status and not a huge mention in either particular way. The one thing I did say, the one reality that is already in play that we already mentioned was, and it happens to be our number 2 market as you know, is the fact of the demand and the progress and the things we are doing in Japan are quite solid, but focus by customers and therefore, predictability and timing, of orders particularly across quarterly boundaries.

Those are a little bit tougher for us to predict. And in fact we did have -- we did experience -- we did see some of that in Q2 also, I didn't mention that but you could also draw that from the prepared numbers that are posted on the website. I probably should have mentioned it because it wasn't an insignificant thing when you consider all of our Asia business versus just the Japan portion of that.

With regard to Apache, have you made all your personnel decisions with regard to that combination. And from a customer's standpoint, when should they expect Apache to be integrated into your broader workbench suite? Or however you're planning to integrate it.

I think, the main -- I understood, the first thing I had, I don't know if I'm trying to read between the lines but yes, we made all of our personnel decisions on Apache. They have got a really solid team and they're an efficient structure that I think could gain by the combination with ANSYS, but in other words, we are not looking at, now, what are we going to do to reduce headcount. In fact, we'd like to keep the investment going and probably even ramp it up in addition to combining it with some of the technical capabilities of ANSYS.

And in general, if you think back to every major acquisition we've done we've never predicated it on -- it was always -- it was never buying a troubled asset and getting rid of people. It was always buying top-quality software and leveraging and growing in so that is especially true with this particular aspect. Now, with regard to integration, we have a multi phase kind of approach. Again as we have done with every acquisition.

And the first 1 is, we will merge the financial systems, get IT interaction, a range of those infrastructural things because, partially because it's absolutely mandatory from a compliance standpoint but other things because it allows us to do an immediate collaboration. With regard to the technology standpoint, actually Andrew and I have put together the plan that, hey, we are not going to do a complete shift and disrupt customers but we do have some immediate things that we could do. And in fact, there are probably on an annual basis will be some significant market related technical integrations that start with our other electronics simulation products and then combined with some of the multi-physics aspects and you will see some of those over each of the next few years.

And then the final part is the customer aspect, and in general, customers I don't think will see any disruption in the kind of flow and interaction they have from support and that kind of standpoint. However, we will be continuing to open up maybe more opportunities to things that really weren't even possible for people to consider before, but actually can leverage in. And I think again, that's something we've been able to do with each of the individual applications. And, since I read some of your notes, I kind of want to make a little comment that, this doesn't really signal us moving into EDA any more than it sees us -- any more than over the past few decades we were moving into MDA.

This is purely about simulation a product performance and complete systems and whether you are looking at defense industry, the auto industry, look at anything. Look at the hand-held devices and what is the biggest ding on every new smart phone? Battery life, battery life, it's always on there. So this is really not inching into things, this is just a recognition that the electronics and mechanical worlds are converging and, we want to simulate entire products because it's the entire product that drives customer satisfaction, not a superior component in an inferior system.

Got it, thanks very much.

Our next question is from Steve Ashley of Robert W. Baird.

Kind of continuing on the same line of questioning, if you could provide some color on your plans for increasing the distribution capacity for Apache. Any color on how long it will take for you to ramp up your sales reps and channel and get them trained on Apache products would be helpful.

Okay, absolutely. I'd like to state for the people running the infrastructure here, it seems like each time we're getting a question, at least from what we're hearing, the first part is chopping off. I think so far it's just been introduction but if maybe we could do a couple second delay in there so we don't miss something crucial. But with regard to the customer integration and things like that, and the channel thing. But there is no cookie-cutter for this, there are some best practices, and if you look at what we have done, first of all we have direct and indirect channels.

We also, whether you are direct or indirect, there is a certification process you have to make -- go through because we are not going to sacrifice our ISO commitment to quality, and that quality is not just product quality but it's customer support quality so there are things we have to go through there. With our indirect channel, we also have to see that this is not just somebody that is looking to have something else added to the price list, but they actually have to have investment commitment commensurate with the kind of investment that we are making internally to make those work. Historically what we found is, just like people are not homogeneous, our channel is not homogeneous. As a result of that, you'll find, I think I've said this many times over the last decade, you will see about 20% of our channels that will make immediate investments and will have the technical capacity to quickly start to move into this.

And they will be under 50% or 60% that over the next 1 to 2 years will be able to achieve that kind of certification and there usually are a couple that really either are in geographies where there isn't a huge push for it, or for any number of reasons they will definitely lag and I see something very similar to this. Now, on the customer standpoint, the interesting thing is, and I don't want to put words in Andrew's mouth but he had said something earlier about the size and scale and scope. Apache obviously has done a really wonderful job in 10 years, if you've read their documents.

But again, as you are rapidly growing, you're constrained a little bit so they had a much more concentrated user base and it was focused in some sub-segments of the market. Now you combine that with the entry into almost 40,000 ANSYS customers and the fact that almost all of them are embedding electronics and they have concerns about that. We have the chance to actually now start to introduce those, but we will be doing that gradually because we don't want to cause a major disruption by, let's say, not fully qualified customers and not fully trained salespeople disrupting things. The good news is, if you take the top 20 Apache counts, 12 of those all happen to be very significant ANSYS accounts and we actually already had initial contacts by customers that are intrigued by opportunities that they see now that they might not have seen before. I don't know, Andrew, can you add to that or disagree if you disagree with it.

Yes. I think since the beginning of our discussion with Jim. I think we have always focused on one point and that is, no disruption, no disruption to Apache's customers. I think we want to maintain the core momentum, which has been very strong for Apache. And we will look for opportunities that we can leverage. ANSYS is an especially strong channel, but keep in mind as Jim said, we really want to add value together to the customers and combined together, I think we have a lot of opportunity but we will do it progressively, gradually and that is the key.

Thank you.

That is great, thank you.

The next question is from Blair Abernethy of Stifel Nicolaus.

Jim, I wondered if you could expand a bit more on the strategy in the high-performance computing area, and particularly what you are doing with IBM?

Obviously, the key thing is, we talked about power-hungry applications, that was one of the themes for Apache. But you talk about people, now the simulation is really taking hold. The one thing you will see is that -- this is why the low end really has not been a huge thing because the low end users are not solving simpler problems. They are actually needing to get into full fidelity simulation.

It turns out when you look at the cost of computing and even the cost of software compared to the cost of engineers and the lack of supply of the engineers, you take all of that, and it's essentially people are trying to amplify the engineering talent they do have. And computing and simulation is one particular way of really driving that. So, we have seen -- I think we first started talking about this in, wasn't it like Q2 of '10 when we released the new packs and they just continued to grow from that. So really what it gets down to is the desire for increasing power of simulation. And, basically I don't think that's any different than you see, while what smart phones did a couple years ago were kind of cool, now they are driving all this thing about streaming video and all this other stuff. So it's kind of each new level of success opens up a complete new range of opportunity along those lines.

So it continues to be a fast-growing sector, is a way for people to accelerate the computing capacity and do it very efficiently. Sometimes actually utilizing infrastructure that they already have in place sometimes that might sit idle at certain times of the day, so it's an overall balancing aspect. That being said HPC, I would say that most times you can't get through anything without saying the word Cloud. And, Cloud right now for most of our customers is largely related to what some people would call internal Cloud and applying that standpoint. But ultimately it has the possibility to expand beyond there.

So with that demand and given the fact that that demand involves software, customer need, hardware, telecom, a range of things, for a number of years actually we had basically a number of partners, significant partners, basically anybody in the space in our overall ecosystem for helping to provide that complete capability because we don't sell hardware per se. I mean we have had a software as a service offering for 10 years or more and continue to and that will continue to be part of our potential offering, but with that, companies like IBM or Microsoft, just a couple of copies. I mean, IBM, we were actually involved in their initial introduction of the IBM engineering solutions for the Cloud and basically 1 of these really technical software providing capabilities. And it is just continuing to -- we have the capacity to do it and now this is the way of reaching out and helping to expand the reach and the availability to customers.

Okay, great. Thank you.

The next question is from Greg Halter of Great Lakes Review. Go ahead please.

Yes, thank you, good morning.

Good morning.

Jim, I know in the past you have given some details on some of the customers in the various regions, and just wonder if you have any information such as that. I know there's comments in the prepared remarks but I'm not sure you went through some of your customers.

Yes, and sometimes as you know, sometimes we are starting to view this as a competitive advantage of the like, so they tend to -- sometimes we are constrained on what we say on that. But the main customers, there are a number of them. And the interesting thing is, they continue. Obviously we always had a very broad base even when simulation was only used by a few people. And so we've been able to even slightly broaden the base but more specifically continue to expand the usage within those bases.

So when you look at that, very significant -- I'm trying to get a feel. I think there were 12, 13, 14 of the 7 figure deals in there I believe. And they were spread across multiple regions. Again, everything from aerospace companies, the traditional ones, if you went down, you look at Hewlett-Packard, General Motors, Rolls Royce, you have some of the oil companies, automotive companies in Japan. And again, it's the usual list of suspects but it's really along those particular lines.

Okay. And also in the remarks, we have noticed this relationship that you have, new relationship you have with IBM relative to the Cloud, which you were discussing Cloud earlier. Just wondered if you could elaborate on how you see that relationship playing out?

I'm sorry. Just with regard to the Cloud in general or -- I'm sorry, I just want to make sure I understand what you're saying.

Sure. You had an announcement with IBM, IBM named ANSYS as 1 of the ISV partners in their engineering solutions for Cloud, and I just wondered how you see that playing out to ANSYS' benefit?

Well obviously any time you partner with great customers and/or great industry partners, it is a net positive. I think in general like I said, when you say Cloud, there are a number of different manifestations of that. Of course, in the case of IBM they are capable of satisfying both internal and external Clouds. Now, I've also talked about on previous calls, first of all, all of the heavy lifting that we needed to do to embrace the Cloud has actually been done over a decade long period. That is really parallelization of the code, basically making it efficiently break up into something that can span hundreds and thousands of processors. That's a given.

If you don't have that then you really even can't enter the party. Now, beyond that our customers have been very interested in actually utilizing the HPC things internally. These issues we've always talked about, bandwidth, intellectual property and protection. And those continue to be aspects. But also when they do that, they want it to be a cost efficiency thing and I'll say that there will be a continuum of evolution in the model because frankly, talking about how you commercialize the utilization of simulation software and external Cloud is quite a bit different than for instance, taking utility like a CRM system or an e-mail system or something like that, saying hey, I know each person will be doing this series of transactional type things and I can somewhat clock it to it.

In the case of running this over an external Cloud, you could have a situation where somebody would like to avail themselves of it and they might only use it for a few days, a month for overflow capability. But you may have somebody that gets on and ties up several thousand processors, it would be the equivalent of -- so in other words you can't find a one size fits all in a monthly fee and also the predictability of those runs. It's kind of like people who have teenagers like I do and you don't have unlimited texting and you find out how many text messages can be done at $0.05 or $0.10 and the bill comes and it turns out to be quite a shock, so there's the business predictability of that. But the fact is the software does run, it is available and actually, at least, from our customer base, we don't have a ton of push for that.

Our software as a service type of solution which can run and Cloud has been around for many, many years and it produces a small bit of revenue. It hasn't been a huge growing thing for the aforementioned customer concerns that I mentioned, but these things are going to progress over time and we want to see how they progress and the best way to provide those. But obviously someone with the infrastructure and the resource of an IBM and some of the other major companies that we mentioned are people that are more than able to help wrestle these types of things to the ground. So it is a trend that is coming, but we want to make sure we keep the substance in front of the hype.

I have 1 more quick 1, and I also have 3 teenagers and I have seen that bill. (laughter)

Okay, the metaphor worked, at least.

Relative to your balance sheet now with the Apache completed it looks like there's about $170 million plus of net cash. I just wondered your thoughts on capital structure, debt rates, debt repayment and things of that nature that you have discussed in the past.

At this point in time, given that the existing roughly $150 million worth of debt that remains, is carrying a pretax rate of 1%. I really can't see a need for aggressive repayment there, Greg. But as Jim mentioned earlier, we will continue in addition to Apache, there are many other ideas relative to M&A that we will continue to pursue as we try to broaden and make our way ahead in what is happening in the world of simulation. And so that is probably where you're going to see us spend our focus over the course of the next 12 to 18 months.

Okay, thank you.

The next question is from Saket Kalia of JPMorgan.

Hi guys, it's Saket here for Sterling. A few questions from our side. So, first, how much is Apache expected to contribute this year to non-GAAP revenue? And, what kind of growth rate do you think that can generate over the next year or 2?

How about if we stick to 2011 right now? For Q3 we are estimating on a non-GAAP basis about $9 million, and for the remainder of 2011, roughly on a non-GAAP basis about $23 million. But we don't see any reason that Apache joining ANSYS should slow down the Apache growth from what they would have expected as a stand-alone company.

Great, that's helpful. Question on the op margin guidance. Given the guidance for the third quarter and maybe the implied guidance for the fourth quarter, is it fair to think about operating margin being flat to down in the fourth quarter? As that will be the first quarter you will digest Apache?

Yes, probably a 1% impact.

And by 1%, meaning 1% kind of down quarter?

Negative, down, yes.

Right.

Got it. Lastly on cash flow I think we are at about $164 million, $165 million here in operating cash flow at the mid point of the year which is pretty similar to what you did for the full year last year. So, how do you think about cash flow for the remainder of 2011?

For the full year, roughly somewhere in the $260 million to $275 million range.

The main differences here, things related to Japan, the blow to Japan restructuring, by the way that's not cash that disappeared it's just actually a delay type of asset. We have a small inclusion for increased cash flow from Apache and also there is cash flow that comes in as a result of our increased, raised guidance for the remainder of the year. I think those are the 3 majors, right? And the predominant one is the delay in the Japan restructuring.

Saket, we will be putting out the 10-Q in a little bit, if you take a look at the liquidity section there is going to be an update relative to Japan.

Got it. Very thankful, thanks guys.

Next we have a question from Jay Vleeschhouwer from Griffin Securities. Got it, thank you, good morning. Jim, given the progression of your maintenance revenues in the last quarter and last few quarters, I'd like to ask about what's going on beneath that in terms of your active installed base. At the analyst meeting 5 months ago you shared a number of about 475,000 active commercial licenses, which, if I am not mistaken, was up by about a third or more from the year earlier number. How are you thinking about the increase you might see in the active base this year excluding Apache versus the number that you talked about for earlier this year and for early 2010? And then a follow-up.

The first thing is as you start to see the continual ramp up, you're actually seeing a tailing factor from, as we mentioned, we talked a couple years ago about in '09, where people didn't have access to some of the maintenance renewal rates dropped a couple percentage points. And then we talked about 2009 and 2010 how then people came back into that and then as a result you can still have some of the growth coming as the result of the non- comparable beginning when they phased back in on maintenance. So the bottom line is, the number one thing driving it back to return traditionally high rate and basically people going on maintenance and continuing on the enhancement subscriptions that we have.

The other thing is there's no doubt that customers even now have been driving up on their HPC usage and the HPC usage has been driving up seat count for us. And again, what we are counting there are the active number of processors that can be run. Because in general, just counting users can really skew the data because you can have a clump of users that are more the CAD model, 1 seat, 1 user, that type of thing.

But now, we're gaining a standpoint where users are using banks of much more of these, and that's actually driving up the seat count disproportionately. I think we talked about that at the Investor Day when you were there. And you said you have follow-up?

Yes, actually 1.5 follow-ups. A question regarding customer concentration. Last year in 2010 about 33% of your revenues you say have come from your top 100 customers and that was a little bit more of a proportion than in the prior couple of years.

Again, similar question, how are you seeing the customer concentration progressing this year? Do you think the top 100 becomes more or less of a percentage in your business in 2011? Just to sneak in that half technical question fro Andrew, to bring EDA back into the Q&A, some of your larger peers, Cadence and Synopsis specifically are incorporating low-power capabilities and methodologies into their flows. Particularly in custom. As they have done that, how has that affected you, if at all, competitively given that they have embedded low-power capabilities through their tools and through their flows?

First of all, I am going to try and knock off your follow on question and maybe even do an intro for Andrew since this is the first time we have thrown him into the breach here. But in general, yes, the concentration creeped up a little bit in the top hundred but again, I think we mentioned that during the toughest times, the more solid leading companies were a little bit more resilient. Everybody felt the punch but they felt it a little bit less and now we've returned a little bit more to normalcy, if I can even use that word.

And as the result, the top hundred are probably about in the low 20% again, I'm talking about sales intake there which is very proportional, of course, to revenue but there are obviously recognition issues based on our revenue rec policies and the like of that. And then with regard to the issue on -- at least in my -- I'm still heavily in learning mode myself, but in general, the fact that I have a Cadence or a Synopsis, to me it's very much equivalent to on the MCAD side for many, many, many years. For 20, 30 years, CAD players have had some form of a maybe less technical leading edge, but still a product that they would offer and the survival products and things like that, and from my standpoint, it's not really a ton different metaphorically, but Andrew, you have actually lived it for 10 years. Do you have any--?

Right. The question is, as some of the basic so called EDA vendor building to their flow, the low power design technique, how would that impact Apache from a business standpoint? Right? So, as Jim said, we have been through this many, many years. We have executed not just one step ahead but multiple steps ahead of our competitors. Now, bear in mind, keeping as we focus on highly differentiable simulation technology that customers use for sign off before manufacturing, that's the most critical piece of solution they need for low power.

They also use our solutions gradually migrating to early prototyping, early power reduction and optimization, and also expanding it from chip to overall system centric power. I think we have built sufficient technique surrounding our core business, but at the same time, technology that we can defend, our stronghold, our forte of so-called core differentiation. We will continue to do that. We continue to look at our fore view but also our rear view mirror and we keep track of our competitive landscape. And the key thing is we stay ahead. I think that's not going to change its standalone or as part of ANSYS.

And I basically obviously agree with that. I think the 1 thing is, again, as I mentioned, we're not moving into MCAD or ECAD or things like that. We focus on simulation. That is 1 thing Apache very much did also.

So, the point is, I'll continue investment in R&D, coupled with the fact that over decades we accumulated really the strongest development team of simulation experts, and you combine that investment with the established people, you continue to push on that standpoint and also, you start to look at the opportunities to balance. It doesn't make any difference if you've got the absolute best electronics if they're thermally unbalanced, if they overheat, if they're fragile to shock. So, ultimately over time making sure that we can do with the front end. The ability to predict not only how will something will perform but how survivable will it be.

And continuing to drive that along with the focus of increased investment is basically something we had to do individually and will do collectively. We have had to do it for years and we'll have to do it years into the future. You can't rest on your laurels.

Thank you.

Our next question is from Barbara Coffey of Brigantine.

As you're taking a look at the market for the simulation management system, what kind of company do you see adopting that, trialing it? What kind of applications are they really using it for?

Well, I tell you, it's really interesting because I have 1 parallel stream you can compare it to the PDM systems of the 80's and 90's, but you can also say that when you talk about data knowledge and process innovation, that entire thing, you are almost talking about infinite space and there's everything from personal productivity things to workflow management, best practices propagation. With all that in mind we have people that are actually utilizing it to -- as kind of like personal productivity tools, but I'd say there are probably 2 major thrust areas that we have seen moving along those lines. First of all, are major companies where they realize that because of their scale, keeping things in sync and being able to share and collaborate across multiple physical and geographic silos is particularly key.

They wind up where just the hysteresis loss is a huge problem. The second part though, that's very interesting is the concept as we mentioned, engineering talent has been difficult for anybody around the globe to find. What they found is, they may want to take these kind of applications and, in essence, give the ability to manipulate the knowledge from its simulation to someone who is not an engineer or simulation person.

The key point is, when you look at the keeping up time on an oil platform, but when you are out on the platform, you may not have exactly all the kind of experts out there, and the ability to get access to that information and distill it down and make it usable by a much broader range of people. We have seen that as an extension tool to people who can benefit not from doing simulations but from the knowledge that is gained from simulation. And then finally, increasingly complex environments that are increasingly global spread and being able to unify those. Again the long pole of the tent on the implementation is obviously it has to mesh in with the people, organizations and the data, so there is always that kind of roll in period.

And then, do you find that there is a need to be linking your systems to other PLM or those types of collaborative systems or is it existing a bit on its own?

It exists on its own but like many things it also provides disproportionate benefit by allowing it linked together. And as a result having an affinity between the things that can combine our complete systems, for instance, as the very natural linking path to the PDM elements of a PLM kind of environment where you are dealing with product structures and different combinations of data like that. So it's kind of a natural transfer of information as opposed to doing everything point wise. And that's becoming a very common way for us to interface.

Thank you.

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

Okay, thanks. Okay in close, emphasis for the remainder of 2011 will be the integration of the Apache business and a continued focus on execution, growth and customer engagement and that's on all aspects of the business commensurate with our raised guidance. Again, customer receptivity to our long-term vision just continues to strengthen. We are expecting the release of ANSYS 14 later this year. Actually, we have gone through a number of customer previews already.

The addition of the Apache products to our already broad portfolio only serve to strengthen further. Again, the same elements. We continue to be propelled by a strong combination of division, but a strong business model, loyal customers, we talked about those on this call, the partners, we talked about those, great technology and of course our growing base of exceptional employees. We have been hiring organically and of course we just gained a whole new team of great people, and these are all the elements that we continue to build off of. So, again, I'll thank everybody for their time and we will speak to you next quarter, if not sooner.

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