ANSYS Inc (ANSS) 2011 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to ANSYS's fourth quarter and fiscal year 2011 conference call. With us today are Mr. Jim Cashman, President and Chief Executive Officer; and Maria Shields, Chief Financial Officer. At this time, I would like to turn the call over to Mr. Cashman.

Good morning, and again, thanks to everybody for joining us to discuss the ANSYS fourth quarter and fiscal year 2011 financial results. So, consistent with what we were doing through 2011, we're going to stay with that same protocol. I'll just say, all of the general information, key topics relative to the quarter and the full year business results, as well as our future outlook are included within the earnings release and in the prepared remarks that we posted on the home page of our Investor Relations website this morning. So, as always, before we get started, I'd like to introduce Maria Shields, as pre-mentioned, our CFO, for the safe harbor statement. Maria?

Thanks, Jim. Good morning, everybody. I'd like to remind everyone on the call 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 out 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.

Consistent with our standard practice, during the course of this call and in the prepared remarks, we will 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. I'd also like to remind everyone take the ANSYS Team will be hosting an Investor Day in New York next week, on March 1, at the NASDAQ market site in Times Square. Please see the Investor Relations area at ansys.com for details about the meeting and the webcast. So Jim, I'll turn it over to you for some opening commentary before we open up for Q&A.

Okay. Thanks. So before the Q&A, I'd just like to maybe briefly highlight a few points that I think are particularly significant about the Q4 and 2011 results, and also our Q1 2012 outlook. I've got to start by saying that Q4 was just another milestone quarter for ANSYS in most respects. We saw continued momentum in various parts of the business that we've been investing in, and building for the past few years, so those of you who have been with us over the years would probably find nothing surprising there. It was evidenced, of course, by our new record financial performance. Excluding the corporate tax rate change in Japan that resulted that $0.05 share, in an unanticipated tax charge, at least from an operational basis, we exceeded the upper end of guidance for both revenue and earnings, and that's even despite the fact that the average currency rate for the Euro and the British pound fell below the end of what we had assumed when we built our Q4 and 2012 outlook back in early November.

The strong Q4 finish translated to a 17% organic annual revenue growth, supplemented by the contribution from Apache, which drove us up to a 22% combined revenue growth for Q4, and 21% for the full year, or that's actually 17% in constant currency. We also reported double-digit revenue growth within our 3 major geographic regions for both the fourth quarter and the full year, and in both the major categories of revenue, license and maintenance. The top line performance, in turn, not surprisingly, yielded strong margins, record cash flows, and earnings for the quarter and the year. I'd say, also worth noting, we delivered above the high end of the full year revenue and EPS guidance that we committed to on this very same call a year ago.

In the fourth quarter of 2011, ANSYS heightened our dedication to partnering with our customers to achieve their vision. Basically we are doing, helping this by delivering ANSYS 14. So our latest release provided, really, a vast array of new and advanced features. Those of you who know me, I could go on for a couple hours here, going on, but they're all posted on the website. We'll be covering some of those, of course, next week in New York. But the net result is it gave customers the ability and confidence to accelerate and innovate in their product programs by delivering, again, what is the highest fidelity, productivity, and performance in simulation available today.

As we look back at 2011, we continued to make important strides with our huge, broad array of customers that was spread across all geographies and industries. We continued to see the growing importance of product integrity and product quality as critical business issues that are driving the use of simulation in our customer base. Just going through a couple of examples that are topical today, we can go into these in more detail in the Q&A, but in telecom we see, we saw, and continued to see an ever-increasing demand for wireless data transfer in consumer electronics, a transition to 4G networks, new applications involving wireless integration, be it medical equipment, power monitoring, satellites, defense, household appliances.

In the automotive sector we saw innovation, new classes of problems that are driving new levels of simulation, be it hybrid electric vehicles, or fuel efficiency, as well as a drive that we're seeing throughout there in increasing demands of utilization of electronics for safety, performance, entertainment, and general regulatory compliance. In the industrial and electrical segments, the growth was driven by demand for renewable energy, energy efficiency across all stand points, as well as smart product design, and obviously the need for increasing efficiency in electronic power utilization. So all of these were areas that drove the increased interest in, and the need for, our systems and multi-physics simulation capabilities.

In each case, they have the same basic causal factors at the root of them. They require rapid understanding of extremely complex problems with a high degree of fidelity and accuracy, and they need to be able to do that in a very easy manner, very early on in the design process, and that's really been the mission, and really, I think the strength of the ANSYS vision and strategy. Our ability to solve these increasingly complex problems, was further enhanced by the addition of Apache to basically our world class portfolio of solutions. I think the other thing is that, while we did all of these things in 2011, and we're meeting all of these customer demands and pressures, it was done while we maintained the core tenets of the long-term vision. So we were being able to support an environment where our customers couldn't afford to compromise on depth, breadth, or quality of the simulation tools that they use to solve their increasingly complex design challenges.

The result of all this, in addition to what I talked about, and what you can read about on Q4 and 2011 performance, is that we have initiated our outlook on revenue and EPS for Q1, and we updated the fiscal year 2012 outlook, as discussed in the earnings release. So, essentially, this is a combination of a slight uptick in our business outlook, so a slight uptick in business outlook, but it was also offset by the impact of the strengthening of the dollar against the Euro and the British pound since early November, and against the yen more recently. So what we've done is we've factored in solid pipelines, and our plans for an increased sales capacity, albeit tempered by the economic uncertainty that we see in different parts of some of the sub-geographies.

After we did that, and after we factored in the various changes in currency rates, which are documented, this translates to our current outlook of non-GAAP revenue of a range of $185 million to $192 million in Q1, and $808 million to $830 million for fiscal year 2012. And comparably, non-GAAP EPS of $0.64 to $0.67 in Q1, and for 2012 a range of $2.77 to $2.87. Now, more specific details around currency rate and other key assumptions are contained in the prepared remarks that we posted on our Investor Relations home page earlier this morning. So that really is the quick run-through, and with that I'd be happy, I think, to open up the phone lines to take any questions you might have.

Thank you. We will now begin the question-and-answer session.

(Operator Instructions).

First question comes from Steve Ashley from Robert W. Baird.

Hi, guys. I was going to ask about this 8-figure deal that you had booked in the period. I'm just wondering, was that a multi-year deal, or was that a deal that was booked and billed where it would manifest in revenue or deferred revenue, all of that in the period?

Actually, what that was, it was really our first 8-figure customer. What that represents is the accumulation over the calendar year and fiscal year of 2011, the business, the new business volume, business and recurring of that customer. So it was really kind of a hallmark of the -- while we talked about 7-figure orders and many 7-figure customers, it was kind of significant, at least to us, that this was the first one to actually crack that barrier, in terms of the business this year.

Terrific. Maria, on Apache, you had said last time that you were hoping that they might contribute $60 million to revenue in 2012. You've adjusted the full year number. I'm wondering if you can update that, or maybe also comment on what you're thinking about Apache contribution in the first quarter.

Yes, for the first quarter, Steve, probably around $15 million for Apache, and for full year 2012, around $62 million to $63 million.

Terrific. Thank you.

Absolutely.

Thank you. The next question comes from Ross MacMillan from Jefferies.

Thanks a lot. Jim, I wondered if you could just spend a minute talking about geographic performance, because I saw that your organic growth in North America was a little lower than Europe, which maybe is somewhat counter to what we would have expected. Could you just maybe provide us with some kind of color on what you're seeing on a geographic basis? Thanks.

There's a couple of things. First of all, I mean, you always have to look at the comparable. The main thing is, if you look at the 10-year progression charts for all the geographies, they're all really good, but it's kind of like the difference between climate and weather. You can see climate as a long-term trend, but on any given quarter, or any given month, or days, the trend could be up, which obviously would make them be -- the comparable of Q4 of this year -- I mean last year, for instance, we had a pretty strong Q3. This year, you look at comparables. If you look at that, in general the trends were that the comparables were kind of skewed a little bit last year, but then on top of it, the thing we've been talking about is there has been this globalization of some of our major customers, and that trend continues. Just for clarification, and for any newbies on the call, we actually recognize the revenue at the place it's being used. Even if something is being built, acquired by, let's say, a US-based multinational company, if they're going into Eastern Europe, for instance, or if they're going into parts of Asia, wherever they might go, the revenue would be scored in that way. So in some ways, I'd treat it -- it's always a good thing to check what's happening in the various regional areas, but it also is important to understand where the business really is going, because that's also what's driving our long-term investments.

That's helpful. Thank you. And just one follow-up. I think last quarter you talked about your plans for sales headcount growth in calendar '12, and I think you talked about a 10% growth number. Is that still the plan? Any changes to that build capacity growth?

Within a margin of error, that still is the plan. I mean, again, we're going to be driven by the quality of -- we've certainly found that the kind of relationships we build with customers are long-term, so we clearly want scalable, long-term people for the Sales Team. But we're continuing to grow, and it's somewhat commensurate with the fact of, like I said, our business is really -- like I said, we came up apart from the currency that we're swimming against, we're still seeing, in terms of the net business, that slight uptick. So if you measure, the growth we had in headcount was somewhat commensurate with what we saw in 2011, and we also saw -- envision doing that in 2012. The other thing I'd like to maybe highlight is something that doesn't show up in that figure is, we have a significant channel presence, and the channel is also growing there. So I mean, you have to factor both sides of the equation.

Thanks a lot.

Thank you. The next question comes from Blair Abernethy from Stifel Nicolaus.

Hi. Thank you. Just actually back on the geography question, your general international business was very strong, obviously, and particularly Korea, India, and China. Jim, I wonder if you could just dig in a bit more there in terms of the split, I guess, of multi-nationals driving that growth, versus local growth, or growth through partners.

Well, in those areas there are some multi-nationals, but there are some very strong -- there are actually some very strong locally based multi-nationals in those areas. So the particular growth in the Korean [chi-bowls], China probably was a combination of multi-nationals going there, but there's also with the twelfth 5-year plan that China is going into right now. They are also looking toward commercializing major parts of their business, so you see them getting more involved in wind energy and in consumer electronics and things like that. So those are areas where we're seeing those particular areas going on right now, and there's no doubt that places like China, Korea, India actually we saw good progress. Brazil is an increasingly important emerging market to us. And the other thing I'd say is that you know that we also are concerned about making sure that the channel can grow with our vision, and can be a commensurate part of our business, and I'd say that you'd see that that's been a pretty parallel kind of growth thing. So the channel has kind of progressed along with that standpoint, particularly important in GIA, because there's a slightly higher composition of channel revenue in the GIA or largely Asia-Pacific part of our business.

Thank you.

Thank you. The next question comes from Richard Davis from Canaccord.

Thanks. Two questions. So on the Apache side, you kind of gave guidance for '12. Before they got acquired by you guys, I wasn't following it, but I thought they were expected to grow kind of like 25% a year on a go-forward basis. Is the number that you gave us assume that kind of similar rate of growth or if so, why or why not? And then the second one -- go ahead. Do that. I'll give you a follow-up.

I'm sorry. If you look at it, Richard, there's a couple of things. First of all, if you looked at historically, like a lot of the smaller companies, the growth rates might be a little bit higher when the company is smaller and the denominators were a little bit lower. But if you looked at it, they were probably looking in the range of, let's say, the 16% to 20% level, but the one thing is, on their growth rates, keep in mind that almost 100% of their business is a time-based license, much of which stretches out into the 3 year basis. I think you'll start to see that in the scoring of the long-term deferred revenue balances, if you look like at the balance sheet and things like that, the difference between the short-term. So as you do that, it tends to build, and it's a typical thing of a timed-base license subscription type of model, where it may grow more steadily, but it grows more controllably. So right now we're basically, if you look at it, they are still on target with their internal plans.

They're still on target with the things that we had discussed with them in our due diligence preceding the acquisition. So basically everything is going well there. I mean, if I can answer the un-asked question, in some ways we're even ahead of the integration curve, if you look in terms of technical integration, some of the projects that are being done there, you look at -- if you look at our number of 7-figure deals that we sometimes talked about, we actually had a couple that happened because of a combined Apache and ANSYS presence. So in many cases some of those things are progressing along quite nicely. You have a follow-up that you were holding on?

Just a quickie. So we've now seen kind of Autodesk do it in rendering, and Allfair and MSC do it on the simulation side with an on-demand kind of cloud computing tools. Why or why not do you guys think your customers would have interest in that, or what's your point of view on that kind of delivery mechanism, whatever you want to call it?

We've had it for 11 years. We've had it ongoing for 11 years. Even our partners deliver their own version of it with their own hosted hardware. So we've had it for over a decade. We built the workbench platform, at the time it was called grid computing. Then it became something else. Then it became the cloud. It went from ASP to SAS, fast model, things like that. If you even hear us talk about some of the things that we've been doing in high performance computing, that was also built in mind with this, if you will, a form of virtually infinite computing available. So it has been in the ANSYS offering for ages. Now, there are a number of issues when you talk about how it plays in the cloud. Again, when we talk about the cloud, we can dice that into private cloud, public cloud, and a number of different things like that, hosted applications.

In general we're seeing that it's already being used in private clouds by our key customers actually pretty heavily. That's one of the things that's helped fuel the HBC growth. Without getting overly burdensome on this call, there are a number of reasons why it sounds really good, but this is different than the type of ERP applications, or mail applications, or utility type of applications, and it really gets down to bandwidth, security, and latency. Those problems are going to be taken care of over time with some technological breakthroughs. But those tend to be the major either technical or emotional reasons why customers are a little bit slower to move on to that particular standpoint. And then, quite frankly, there will be pricing things that will have to be dealt with. And it's somewhat analogous to what you saw with cell phone plans, where you used to have unlimited data plans, and all of a sudden, oops, when the data explosion happens, the model kind of goes a little bit strange. A lot of things people like about some of the cloud pricing models that are out there is the predictability, versus, if you will, the electric utility meter model. And those things have to work out.

With cell phones, they've gotten to the point where now they've put data limitations on them. At a certain level, they'll actually throttle the data and things like that. At the end of the day, there is no free lunch. But I'd say right now, again, we had it we've had it for many years continuously, and again, bandwidth, security, and latency are probably the 3 major classifications of technical hurdles that take these -- that drive the ability for people to really effectively utilize these. These are massive computation engines that need to -- sometimes when you send out a run and you've got hundreds an thousands of simultaneous cores running, they all need to be in communication with one another, and that can't always been guaranteed on the overall cloud in the time frames that are needed to keep things in sync. Bottom line is, architecturally with the software, we're ready. Business model, billing mechanism, everything else, we've been running it for 11, 12 years. It's never been a huge growing thing. It's a nice supplemental. Sometimes people use it for overflow type of situations, sometimes people use it to get their foot in the water without being totally committed, and things like that. But for broad-based propagation and proliferation, there will be some things that still have to move on. But the bottom line is, we're in place, and we've done all the heavy lifting years ago that we needed to do to be ready for it.

Got it. That's helpful. Thanks so much.

The next question comes from Sterling Auty with JPMorgan.

Yes, thanks. Hi, guys. You commented I think in the prepared remarks about the impact on the operating margins from Apache. What I'm kind of curious about is how should we think about the operating margin trends and trajectory from here, and maybe tie into that the rest of your integration and cost synergy plans for Apache.

First of all, they are -- first of all, it's a relatively small thing so the blending doesn't have the same impact as some of our previous ones. But the second thing is, first of all, our holistic margins, we still look at in that 48% to 49% range. Part of that is the blending of Apache. But part of it is the, for the last 6 or 7, maybe 8 quarters, we've been talking about coming out, since the economy was kind of breaking out of its perma frost, we were actually gearing back up to investing back for the next 10 years of growth. So you see an element of that. Now, commensurate, on the Apache side, though, as part of the goals we have, and really the thing that we've seen with every other acquisition that we've done, and I mean you can actually go back furthest from all the financial charts is, there will be a steady improvement in the Apache margins, and some of this happens by effective utilization of the ANSYS channel. Sometimes it happens by blending of the infrastructural aspects, non-duplication of public company costs, which might have been in their margin assumptions at the time that they were looking at that option, and in general things like that. Now, the other thing is that -- well, basically that's the -- that's kind of the overall margin thing. I don't want to -- I'll make sure that answers your question first and foremost.

Okay. And then the follow-up would be on the channel, you talked about the sales investment, but can you give us some metrics and some additional color around the channel initiatives, maybe what are the total number of resellers that are doing business with you now, how would that compare against maybe a year ago, and where are you getting the biggest bang for your buck, is it the top 20 or top 100 resellers?

It's basically the same -- first of all, it's the same number. Second of all, I want to caution, maybe I'm being overly concerned about this but, it's not really what we call a reseller by the traditional model. Again, our channel is pretty unique, and it tends to be people that have been built up with us over 20 or 30 years, so it's not surprising that they're still with us. But they tend to get 80%-plus of their business with ANSYS, and the rest of it is just kind of like supporting kind of things. That's a typical model. There may be one or two outliers on that, but the majority of their business is really driven by ANSYS kind of sources, or else they have divisions that are devoted to it, if they're a larger company. And so the thing is, these kind of relationships and the technical expertise that it takes to support customers at the level we require, and understand the breadth of our technology, these people don't really grow on trees, so it's not -- it tends to be a very specific one. As such, the number is very kind of commensurate with what we're doing now. Therefore, when we talk about the channel growing at the same general rates as we have at ANSYS, it's because they've also continued to invest, build scale within themselves.

Okay. Thank you.

Thank you. The next question comes from Perry Wong from Goldman Sachs.

Hi. Good morning. Thanks for taking the question. I was hoping to ask a question about the performance in Japan. Could you provide a little more color on the nature of the impact from the Thailand flooding, and possibly how you see the supply chain returning to normal levels over the course of fiscal '12, and also how has this kind of been factored into fiscal '12 guidance? Are you sort of expecting Japan revenues to be soft through, say, maybe the first half of the year, and then sort of bounce back once the supply chain issues are resolved?

You're absolutely correct. That has all been factored in. Basically, in a word, yes. That is factored in. Yes, it will be softer in the first half of the year. We'll see it start to recover second half of the year. There are some things that are sometimes have us scratch our head about what's going on with the yen, and things like that, but that tends to affect things also. You pretty much nailed it with your hypothesis. Maria?

Absolutely. And Perry, you've seen, because of the strength of the yen, that's played on some of our customer profits. So I think as currency kind of settles out, and as they really get some of the things that impacted them in early 2011 and in late 2011 behind them, that the second half of the year will probably be more robust for Japan than the first half.

Got it. That makes sense. Also maybe if I could a quick follow-up. The tax rate change in Japan, it looks like it may have impacted fiscal '12 tax guidance by about 1 percentage point. I think the upper end of the tax guidance range was raised from 32% to 33%. Just wanted to get a sense of the incremental impact to earnings guidance, which it looks like it might be $0.01 to $0.02.

Actually, Perry, the tax rate change does not take effect until 2013.

Okay.

So Japan itself didn't have a huge impact on 2012 guidance. I think part of what you're seeing in the rate creep, compared to traditional, is Apache, which had a much higher effective tax rate than ANSYS did. Also, recently there's been some tax changes in the US that have reduced some of the benefits that we used to get out of our UK structure. So moving parts in -- oh, of course the R&E credit has never been reinstated. There's a lot of moving parts in different parts of the world that are going to, unfortunately, in the current environment, negatively impact that tax rate.

Got it. Thank you.

Thank you. The next question comes from Dan Cummins from ThinkEquity.

Thanks. I wanted to reference the prepared remarks. Your paragraph about the automotive market is very interesting. You've got some strong language in there about shift and trends. It seems modest to say that it's growing double digits. I wondered if you could give a little more color on the strength in that vertical? And also, you do discuss the Chinese market and the shift there just in relative terms. How does that affect ANSYS business model, pricing, your dedication to building channel resources? Thanks.

Well, I guess the first one is on the automotive one. Again, the one thing I'd like to highlight is, we try to just kind of like cycle through some, if you will, slightly human interest stories on some interesting things going on in industries. But the 3 that we talked about, all the industries grew well, but the 3 we talked about were kind of like greater among equals, and had some interesting byline stories with them. You can kind of almost infer from that what the automotive and some of those other sectors were slightly above, we had pretty strong overall growth rates, maybe slightly above that in terms of automotive, energy, and electronics and -- well, actually aerospace I think was more this year. So now on the China one, actually I may have lost the question, but the fact is, what we've got there is we're we've got a renewed strengthened relationship with the channel partner there, but we've also continued to build our own direct presence, and that's not -- that's really being done collaboratively with the channel, because we've got a good partner there, but we also see that as the size of business grows, the nature of the relationships we have require touch points at local areas for advanced support, for advanced services, for different kind of communications in there. So you'd see both of those continue to grow over time. And they should grow at reasonably healthy levels.

So we shouldn't expect any explicit pressure on operating margins, as you position for more opportunity in China?

Nothing that isn't already factored into our plan. Of course, we have that factored into our plan, which is one of the investment areas that we've talked about. We have strengthened up some of those areas of higher international growth, and we've most certainly, since I talked about barriers to adoption and technological hurdles, even on some of the Q&A of this call, investing that technical, that next generation of products. So I mean, it's kind of like at the computer, they didn't stop when they had the spinning hard drives. Now you've got solid state drives. You've got all sorts of different things. We need to keep jumping the curve there, because the demands that our customers are having are just so great that you can't sit pat with today's technology.

Thanks, Jim.

Okay.

Thank you. The next question comes from Steven Koenig from Longbow Research.

Good morning. Let me start with a question for Maria or Jim on CapEx. Looks like you're expecting it to be up pretty sharply in fiscal '12, looks like over about 50% or so. What's behind that?

Two things. One, we've got some upgrades in our infrastructure relative to storage and computers, and the other thing is we've got some facilities consolidation plans for existing facilities, where we've got duplicates in some countries, or where we've outgrown the existing space. So 2012, I'd say, has a disproportional amount set aside for some of the facilities upgrades that we need to do, given the size of the business in certain countries.

Okay. Great. And I've got a follow-up, just clarification. Infrastructure investments, is that -- are we talking employees workstations, or are we talking hosting infrastructure for some of the private clouds, or hosting initiatives you have?

Yes, most of it, no, is related to employees, and also integration, tying in relative to how we do storing of source code, and sharing builds across the globe, so we've got to tie in Apache to that. We've still got some things where we've got to tie in some of the offices that haven't been. It's basically an every 3 or 4 year cycle, so that we can continue to solve the complex problems we're solving, we need to upgrade the hardware and the infrastructure.

Okay. Great. And then if I could count this as my second question, probably for Jim here. Jim, can you talk a little bit in the near term, little bit more about sales synergies, potentially, between Apache and Ansoft that you're starting to see, or may realize this year? A little bit longer term, what's your vision in terms of where you're going in terms of simulating electronics?

First and foremost, if you look at the integration with Ansoft, obviously in the long run, really all products with integrate with one another. Even when you're talking about laying out chip design and things like that, the heat dissipation, vibration resistance, packaging concerns, all those things, so the mechanical things are also important. You have to take these in digestible chunks. Some of the key ones are making sure that, as you're optimizing your power utilization, you're not sacrificing signal integrity, you're not sacrificing the functioning of things. So there have been things that in terms of the first steps are maybe getting too minute here, but having SI wave integrate with Sentinel, for instance, to actually link some of those things together.

But long term, we want all of those operating together, because, in general, at the end of the day, when you think in terms of doing a virtual prototype, early on, sometimes even pre-design in some cases, before you even get into a CAD environment, looking at different concepts that you might look at, the balancing of electrical and electronic needs with the overall mechanical delivery and packaging and the like, they all have to play into one another. They all affect manufacturing cost. They all ultimately affect reliability and meeting the functional specifications. If you're looking at the whole product, you just can't start to parse out part of it, and just say -- I'll only worry the structural part, or I'll only worry about heat management, or I'll only worry about the circuit. We've already seen a number of examples where not attention to detail of the holistic impact of all those things working together actually can cause some major product hiccups, and so it really all has to work in a combination standpoint.

Jim, just lastly, sounds like the synergy, near term, is more towards selling to those device makers, or the product makers, as opposed to semiconductor designers.

It actually can flow both directions. If you think about it, some reasons that it hadn't been done was the connectivity and interoperability really hadn't been there for people to even wrap their minds around utilizing. That's one of the things that's pretty interesting in terms of having data integration between these products. You don't even have to worry about translating data and writing files and slipping things around. Just like there are concerns, if you look about chip manufacturers, as maybe as you start to get to more 3D type of devices, and system on chip type of things, it becomes -- the mechanical aspects become important. At some point, the structural liability of increasingly more delicate and thinner leads and connection points between them become more. But definitely the ability to package those things in a number of varieties across all industries, I mean, electronics is becoming increasingly important in all forms of what used to be traditionally mechanical products, and that trend is simply going to continue on. So it really moves in both directions, but I think in many cases, in the near term, it might fit more into the work flows of the larger product integrators.

Great. Thanks a lot.

And the next question comes from Mark Schappel from The Benchmark Company.

Good morning. Jim, changing gears a little bit here, wondering if you could give us an update on where you believe your customers are with respect to embracing simulation data management, or in your case, EKM. Are your customers still kicking the tires in this area, with respect to these concepts and technologies, or are they more aggressive here?

They're getting more aggressive, but they're still kicking the tires. It's one of those type of things. The situation is, it's one of those things where a lot of times you don't realize you have a problem until all the -- until the usage picks up in large amounts, and then all the clutter and the chaos can start to ensue. Like when you first get your new laptop, you're not too worried about storage space and things like that. As the data kind of builds up and you lose track how you name things and you try to find stuff, that becomes more of an issue. The other thing is that even when that happens, when people become aware that they have problems, they're not always aware of what the solution is.

It tends to be a combination of enabling technology like we're providing, but it also provides that thing of now how will they utilize that internally to solve their problems, and then that's where it links in with their organization and process. That becomes the long pole in the tent. I'd say the other thing is that the more people have tried older, earlier generation solutions, the more actually legacy can be -- it could be a stumbling block, in terms of being able to look at new things. You see that throughout history in terms of industry. If you've got a green field to build on, you can be a lot more flexible, whereas if you're trying to bridge from something that you already had in place, sometimes that can be more constraining. In general, it's still relatively early. When it does take hold, it takes hold very quickly but -- so accelerating but still kicking the tires, is still a pretty good summary.

Thank you.

Next question comes from Jay Vleeschhouwer with Griffin Securities.

I was wondering if you could give us your annual update on the revenue contribution and growth from both your top 10 customers and your top 100 customers.

Okay. Well, the first thing is that the percentages have stayed relatively good. We don't have -- again, our top 10 are roughly about 10%. Our 30, I still think we're under 30%. We've typically been in that high 20% for the top 100. That's probably about 30% now. And that's somewhat consistent with something we stated at Investor Day last year, might see a persistent trend going here is that the more penetrated users, academically the more penetrated ones, are also very underpenetrated, but they tend to outgrow the average a little bit, because they're starting to -- they've gotten to the point where they can start to accelerate that. You might see that's why there may be a slight tweak-up in both of those. But nevertheless, we still don't have any single customer above the -- well, let's say, safely above the 5%. It's actually lower than that. So those trends are still pretty much what we've been talking about, actually, for the last couple of years.

Okay. The second question is combined active commercial base, and recurring revenue question, and the question is with or without HBC effects, would it be fair to say that the average number of commercial licenses, particularly for structural, mechanical, and CFD, let's put electrical to the side for the moment, is generally increasing amongst your commercial customers, and would it be also fair to say that the revenues per license or per user are increasing as well on the commercial side?

The answer to both those questions are yes. The net base is growing but actually -- so if you -- some of you, and I know you have, Jay, but we talk about terms of the number of usage is one growth avenue for us, but the density of usage and intensity of usage are also one. So HPC, one plays into what percent of people's time are they actually utilizing this, or is it a very sporadic usage. The other one is how intensely are they using it and that's where HPC fills in. Yes, the user count has been, and the base number of licenses, have been growing but on a much smaller denominator, HPC continues to be a big grower for us also.

Okay. If I could perhaps just insert one more. Could you talk about competition you're seeing in the CFD market, specifically?

Actually, there are a number of spot competitors. I'd say maybe the most significant probably still tends to be legacy in-house programs. If anything, it's maybe slightly tapered off, but it's still -- like we still see individual competition in each of the individual segments of the business. I mean, it's a pretty broad parameter. But if anything, there's always both legacy and some spot new competition kind of across the board, and it's really kind of spread out across all of it. It's maybe lessened a little bit in certain areas, but nothing major of a seat change there. Maria, do you see anything different?

The only thing I'd say, Jay, and it's something that we've been talking about is, while in each of the individual physics pillars, no doubt there are people who focus in on that, and we compete. But when you're talking about enterprise deployment, where they're looking for integrated solutions to solve complex systems problems, the reality is we've got the most physics available in an integrated, open, and flexible platform, and that's what people are looking for.

All right. Thanks very much.

Thank you. The next question comes from Greg Halter with Great Lakes Review.

Yes. Good morning everyone there in Pittsburgh.

Good morning.

I don't know if you've commented yet, but just wondered if you could talk about the average selling price trends that you may have seen in the most recent quarter and for the year.

It's been pretty steady. I'm actually going to do a quick scan here. But no, it's been -- there's basically been -- there's definitely not a downward trend, but I don't think there's a strong upward one. I'd probably call it pretty darn stable. The thing is, I was just looking at some charts that I have, and the one thing that -- the thing is, sometimes these things have to be seasonally adjusted, because of some of the volume purchase kind of things that are contractual. But there wasn't anything that stands out. As you know, we've been really formally tracking them for almost a decade now.

Right. Right. Which is a good sign that they're steady. You guys have done such a good job selling the product, and the R&D side, and integrating the acquisitions you've made. One concern that we would have is something I'm sure you've shared and seen, and it's relative to the job environment. Just wondered if you could comment on the number of openings you may have, and the difficulty you have in finding people, and pay that you have to pay and so forth and so on.

No, it's a pain. I think that's the technical term. First of all, I mean, there's two things on the job side. First of all, as I mentioned, increasing number of users out in the job market, and people hiring there. That definitely creates an improvement for us, but even when people haven't, it's interesting to see how people have been utilizing this software to amplify the engineering talent that they do have. We see that trend. If we take it internally, because I think part of your question was also on that, yes, we have been hiring. Anybody that goes to our website can see that we have high double-digits of places we're still looking, but the key thing is that some of these people we're looking for are very unique kind of individuals, those high end engineering algorithmists that also understand advanced comp-sci kind of issues, that can blend those things together, which, by the way, is why it's really difficult for anybody else to build an ongoing quality team of this nature.

But nevertheless, we do that. The second thing is that in this -- since we're going for the best people out there, a lot of the best people are the ones that are most secure in their jobs, and in particular, in this market, they tend to be some of the more resilient, protected people. You add to that the fact that, as we've bemoaned for several years, the US in particular, and Europe not a whole lot better, haven't been graduating a ton of new engineers and technical talent. That's why we've been investing so heavily over the years in the academic program and our co-op and intern programs, and things like that to get access to it. It is difficult to build that up, particularly if you're somewhat uncompromising in the type of talent that you're bringing in. So that has been an issue. We definitely have had better prospects over the last year than we have in some of the prior years. It still is a challenge.

I guess on the reverse side, are you losing people to firms that would like to hire them to do their simulations?

Sometimes we do. And sometimes it's actually done by mutual consent with the customer and our employees, and sometimes they actually help us in that process. The general departures are not very high, but when they do, it's usually to go back and concentrate on full-time degree, or actually getting into that customer environment. So that's probably the number one issue, albeit on a pretty low base of number.

Okay. One last one for you, give you the chance to bring out any new customers you may want to highlight, and what they may be doing in terms of solving problems with your software.

Well, the key -- the first thing I'd want to say is that this is one of these things that an awful lot of stuff we just have embedded. We have the knowledge of what's going on. What I'm not always current on is who has given us permission to talk about it. Some customers, particularly the most innovative ones, are the ones that guard that with a strict secrecy. We have to respect that, and in the absence of certainty, I have to err toward being more cautious on that. The only thing that I will give a general answer, and when we do get some of those, we do try to put those out on press releases, and highlight them on our website. So there is a section that we'll do that. One of the more recent ones, and we can talk about this --

I think so. Well, maybe, we'll cover it next week.

All I can say is by next week we'll be able to talk about a specific example, but it's one that's really, really cutting edge. It's been in the news, and it really gets into -- it really underscores the concept of being able to use comprehensive multi-physics, but it also is combined in something of really getting it right before you even have the first prototype to work with, and being able to work an awful lot of these particular issues, and continue to drive it. So I'd really like to be able to check on that, but we'd be coming out with that, and it would become public next week. It may be public now. I don't want to take that chance.

Thank you.

We have a follow-up question from Blair Abernethy from Stifel Nicolaus.

Thank. Can you hear me?

Yes.

Just wanted to ask you, Jim, in your top customers, your top 100 customers, just want to get some color on the adoption rate there, which in the past year or so you've talked about that picking up, and secondly, what's happening there in terms of the trend towards shifting to paid-up licenses in order to clean up some of the lease licenses.

Well, as you can tell, as you can tell from the base, the leases, they also grow with us, and given the fact that leases tend to accumulate over time, the new leases don't bump up, the addition of a new lease doesn't bump up the lease base as much as a license has an impact. So we continue to see growth in those particular areas. I'd say generally, if there's a long-term standpoint, there's maybe a slight trend toward owning versus renting, particularly by the bigger companies, once they get to a broader proliferation, but that's largely a decision that's made by their finance team, not by anything we're doing. But as you see, as you can probably check the charts, the general lease base stays at that 30% amount. Actually, it bumps up a little bit when you add Apache into the mix, because they're largely, almost exclusively, time-based licenses. But we see that thing continuing to go on. So that part doesn't really tend to -- it grows, but we don't see wholesale shifts, nor do we try to really induce them one way or the other.

Okay. And in terms of adoption rates?

You mean -- I'm not sure I understand the question. You mean for new customers or --?

No, for your large, existing customers, if we take you back to your Investor Day last year.

Oh, yes. Apart from the lease issue in.

Yes.

Okay. Like I think we said during Jay's question, the large scale adoption tends to spread, it grows slightly in aggregate above the average. They're tending to, again, if you kind of can visually picture an S curve, they're kind of on that slightly more accelerating part of it, albeit everybody's in the first half of the curve.

Okay.

That trend has continued.

That's great. Thank you.

Thank you. As there are no more questions, I'd like to turn the call back over to Management for any closing remarks.

So no more questions? Okay. So I guess just closing, if you haven't kind of picked it up already, even in these questionable times, we're excited about the opportunities that lie ahead for 2012. But again, there are going to be challenges, but everybody's having those. The emphasis on 2012 is going to be the ongoing integration of the Apache business, combined with a continued focus on basically differentiating and extending our technology, and then apart from that, execution on the plan we've talked about, growth, customer engagement. So again, I'll give my usual shout-out to the combination of, basically, the customers that have been with us a year, the partners that have been with our year, our employees. You combine that with the vision, the business model, and our technology base, and that gives us a lot of tools to navigate through any kind of time with. So I thank you for joining us this morning, and we look forward to talking to you the next quarter, and hopefully seeing a bunch of you next week in New York City. Thanks a lot.

Thank you. That does conclude today's teleconference. You may now disconnect your phone lines. Thank you for participating, and have a nice day.