ANSYS Inc (ANSS) 2012 Q2 法說會逐字稿

Good morning, and welcome to the ANSYS 2012 second-quarter financial results conference call. All participants will be in listen-only mode.

(Operator Instructions)

After today's presentation there will be an opportunity to ask questions.

(Operator Instructions)

Please note, this event is being recorded. I would now like to turn the conference over to Jim Cashman, please go ahead.

Okay, thanks Amy. Good morning and thanks everyone for joining us discussing our 2012 second-quarter financial results. So, again, consistent with our normal protocol, all the general of the general information and key topics, relative to both Q2 and the first half of 2012 business results, they are included in our earnings release, and in some prepared remarks that we posted on the homepage of our investor relations website this morning. But as always, before we get started, I'll introduce Maria Shields, our CFO, for our safe harbor statement. Maria?

Okay. Thanks Jim. Good morning everyone. I'd just like to remind you that in addition to any risks and uncertainties that we highlight during the course of this call, important factors that may affect our future results are discussed at length in our public filings with the SEC, all of which are available via our website. Additionally, the Company's reported results should not be considered an indication of future performance as there are risks and uncertainties that could impact our business in the future. These statements are based upon our view of the world and our business as of today and ANSYS undertakes no obligation to update any such information unless we do so in a public forum. Also, 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, the related materials, and the Form 8-K. Jim, I'll turn it back over to you for some opening comments.

Okay, thanks Maria. 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 2012 outlook. I will begin by saying Q2 was a strong quarter for us, but it was also a pretty busy quarter. It ended ahead of what we originally expected on earnings, and above the midpoint of the revenue range, and this was even factoring in some additional currency headwinds that we observed -- that we had actually absorbed during the quarter. As we demonstrated over many years the strength of the revenue performance, combined with our own discipline around spending, drove operating leverage and earnings beyond what we had originally guided. Overall, we achieved double digit growth in reported and constant currency in both software license and maintenance revenue, and of course, these yielded a new all-time high in deferred revenue balance. This in turn, as usual, drove strong margins and cash flows from operations.

Also consistent with what we've outlined about uses of cash, even dating back to the investor day we had in early March, during Q2 we repurchased 1 million shares of stock, which leaves around 2 million shares remaining in the authorized pool. We also continued our strategy to expand breadth and depth in our multi physics portfolio with the addition of Esterel, which we announced during the quarter and actually, just closed yesterday. Speaking back to that investor day, many of you might recall when we met in early March at that time in New York City, we laid out some of the key themes of our long-term strategy, including the opportunities that lay ahead for the future of simulation driven product development. The Esterel acquisition is just another step forward that enables us to respond to our customers new reality and that is a business environment where they simply can't afford to compromise on depth, breadth or quality of the simulation tools they are using to solve their own increasingly complex design challenges. But it also uniquely positions us to provide embedded system simulation with certified cogeneration, further differentiating our solutions.

Other comments you can find in there, but our industry composition, it remains diverse with continuing success in areas, in this particular quarter, such most notably, things like automotive, aerospace and defense, and material and chemical processing. The result of all this is, we reiterated our outlook on fiscal year 2012 non-GAAP revenue and non-GAAP EPS. This also translates to Q3 revenue in the range of $197 million to $204 million and EPS of $0.67 to $0.69 with revenue for the full year in the range of $810 million to $830 million and EPS of $2.78 to 2.87. Before we wrap up, I'd like to provide some qualitative context around the guidance. First and foremost, first and foremost, the fundamentals of our business and the customer interest and market demand remain intact. And although we are maintaining original revenue range, we'd not just slap an even probability across that range for a number of obvious reasons. First of all the variants that we are experiencing over this protracted period carried through for the first couple of quarters of results, and it has demonstrated the current unevenness in the macro environment. So as compared to our revenue outlook, while we were in our guidance range, we wound up in the lower half of guidance in the first quarter, and the upper half for Q2, so there's a lot of variance in that.

Secondly as we pointed out in our Q1 call during these kind of times our lease license ratios can be more volatile and that affects short-term impact. There is just an ocean of uncertainty regarding the resolution of the Eurozone and other global issues. The volatility of the currency rates remain. And there's also a continuation of general macro uncertainty around the predictability, timing and composition of deals. What does this mean? The bottom line is the timing of deals are difficult, but there's a greater probability that buying cycles extend, rather than compress, in these time frames. The sum of these factors would favor probably heavier probability below the mid-point of the range, but while the gross demand stays relatively stable this is the primary tenet for us reiterating that range.

In addition, we've also updated our currency rate assumptions to be in line with the current rates and added in the impact of Esterel for Q3 and the remainder of 2012. Essentially, the two of these things, one is a slight increase and one is a decrease, so essentially, the two of these net each other out. The outlook also assumes an increased ramp in our second half spend in connection with the hiring resources for 2012 and preparing for 2013 and beyond. Also, some marketing activities around the release of ANSYS 14.5, which we are really excited about, and of course, the inclusion of Esterel, even in the early stages. To net it all out, our long-term enthusiasm remains intact. We believe now is the time to invest in our business to prepare for the long-term and the opportunity that we see over the next three to five years, but we're also cognizant of the world around us.

A final point that we would like to add in there is that -- talk about some of the thoughts concerning the uses of cash, and I think we have been demonstrating that, particularly over the last couple of quarters on many fronts. But consistent with what we have been saying for the past several calls, several years, and we highlighted it at our investor day, first and foremost, we plan to continue to invest in our business for the long-term, nothing has changed on that front. Second of all, we will continue to pay down the outstanding debt, of course, which steps up a little bit to over $26 million in quarterly principal payments beginning in Q3. Number three, and not necessarily third in terms of importance, but as the Esterel acquisition demonstrates, we have been and we will continue to look at opportunities around strategic M&A that allow us to accelerate the realization of our vision and extend and elevate this overall theme in our customer engagements. With those brief words, Amy, I think we'll be prepared to begin with the Q&A.

(Operator Instructions)

Perry Huang, Goldman Sachs.

Good morning. Thank you for taking the question. I just wanted to ask a follow-up question for the Esterel acquisition, Jim, you mentioned that essentially FX and macro was offset by the Esterel acquisition in terms of guidance, but could you provide any more color around the revenue and earnings contribution for the September and fiscal '12 guidance?

Yes, somewhere in the 5, 6, 7 range for the remainder of the year. There are some interesting issues there in terms of the revenue recognition which is why we got to cover this very carefully. Because, in general the way it was set up, we may have to actually recognize things on a pro rata basis over an extended period which will stretch out. They may wind up a little bit depressed, and of course, we just closed so we will be getting into some of these details. We will be able to refine that over time, but we don't want to get premature. That is one of the big things. And of course, you can also infer the contra impact of rates from the guidance, the published rates that we posted compared. They are roughly a wash.

Keep in mind the other thing is, that when you factor in the Esterel -- the fact that we will have to kind of stretch it out, almost on a quasi lease kind of basis, even if it was a paid-up license, it's a BFOE kind of issue. The main thing is that if you look at the way some of the structure of these companies, Apache included, you look at the year end impact, and when you look at the back end loading of commission rates, it's actually, even though it is a good business over the next 12 months and we will be able to build it into our business model, it will be relatively flat in terms of earnings contribution, excuse me, for the next four or five months.

Got you. Thank you. That's helpful. As a follow-up, if I could ask a question about the performance in Europe. You'd highlighted continued macro issues in certain markets, and also longer sales cycles. I was wondering if you could provide any more color on the UK? I think last quarter you mentioned there were some execution issues there, but for this quarter it looks like revenue was up sequentially, just wondering if those issues have been largely resolved?

In this environment, first of all, there are always things that we can do better internally and there are the things that are around us that we just have -- it's the seas chopping around and we have to navigate them the best we can. The things that we have done on the internal front, yes, they are showing too, they definitely are showing some of the -- they are the causal relationships to some of the results you observed.

With regard to the other things related to the overall environment, there are so many ups and downs over the next few months, which we see on a global basis, not just England. And we haven't heard this yet, but I remember back in 2008, China slowed down for a quarter because of the Olympics. Will England slow down because of the Olympics? I haven't heard it, but those types of things always ebb and flow, those things are factored in the overall view. I really can't speak to all of the puts and takes that are going to happen in the macro environment, but we are relatively pleased, I'll say guardedly pleased, about some of the steps and some of the progress that we are seeing. For years I've never claimed that we have ever been all the way there in any market that we've been in, so I won't make that stretch here, but the direction vector is definitely in the right direction.

Okay, got it. Thank you very much.

Sterling Auty, JPMorgan.

Thanks. In terms of Esterel, I didn't hear in your answer, and I'm sorry if I misinterpreted, where is that going to be placed in terms of which part of the sales organization is going to be pushing it, how if any integration of their technology is going into any of the other product lines, and who makes the purchase decision at your core customers for their set of solutions at this point?

First of all, it's going to be relatively kept separate because there really is not a lot of overlap with our existing technologies and that is a very positive good thing. The second part is just like we have done in every integration that we have done, we actually, it's not done in one 100% chunk all at once. We actually take the very important parts, and where we focus first on this one is, for obvious reasons, how embedded software affects system functioning. It's going to be in our overall system portfolio type of solutions, and connecting up with that, so we can actually see the impact that the software functionality will add to the inherent design inputs of the more traditionally physical aspects of the hardware design. We're going to keep it in that particular direction.

The other thing is, one thing that's very interesting is, we haven't been able to do much of it because we hadn't closed until yesterday. The minute we announced the deal, the number of major customers that were actually coming and asking to participate in that, it was very evident right off the bat, to the point where we actually had to rein things in until we really legally could function at that. We had to function really, as continuing two separate companies. That speaks to integration, there was a third element of that question, wasn't there, Sterling?

No, I think that basically covers it. My follow-up question on a different topic, as you look at the guidance for the full year, what needs to happen in terms of organic growth for you to deliver on the guidance here in the back half? Does organic have to further accelerate, stay the same, or what is embedded in that part of the guidance?

It is roughly the same. As you can tell, we have been plunking along at that -- continuing to push up even over the last few quarters, pushing up toward that mid teens kind of thing. Again, there's an awful lot of uncertainty. It gets down to everything of how European government is going to react, how elections are going to go, how all sorts of things like that. You're probably looking at that 13%, 14% constant currency standpoint, and of course, our guidance, of course, assumes certain currency situations, so all of those things will factor in.

The only thing that makes this a little bit trickier, and the reason why I talked about, you just don't put a bell curve over the guidance range, is the fact that orders slip and slide. An order that slips out of Q1 into Q2 still counts in the annual guidance. An order that might slip, extend out of Q4, it's still there. Or, if it turns to a lease, all the goodness is still there, it is just that the snapshot of how it's recognized is different. We just want to be cognizant of that and basically up front. Those are really the basic overall assumptions. Of course, if there is a complete meltdown or if it goes supernova, of course, those things will change but nobody can really predict those. We can really only go off the forecast, the upside and other factors like that and then try to bounding box it with the -- with all the other exogenous factors.

We are all hoping there is no supernova in the back half. Thanks for the answers, I appreciate it.

Supernova would be good, meltdown would be bad. Supernova is where it really heats up. Meltdown is where it kind of --

Supernova is people unleash their budgets for year end.

I got you. All right, thanks.

Thank you.

Richard Davis, Canaccord Genuity.

Thanks very much. A simple question on Esterel, is it logical to assume, I know it's a small part of your overall business, but is it logical to assume that it will grow organically on a constant currency basis faster than ANSYS overall, since you've got a bunch of fresh-faced people to cross sell it and things like that?

The first thing is with the smaller denominator, apparent growth rates can be numerically higher, but I will tell you the overall assumption is that it would grow a little bit ahead of the overall base. And you are absolutely correct, one of which is that the increased reach of our channel basically provides opportunities that a smaller company that is operating financially soundly just can't flood the market with that. On the other hand, it is a combined technology that fits in with the engineering buying centers. However, it tends to happen sometimes at a higher group and in the systems side of things and as a result, there will be some latency in terms of the sales force getting up to speed on it, being able to communicate with customers. So it's not like it's going to be throwing on a light switch and a step function, but like I said, there was immediate interest that we've actually had to hold the reins in on.

I think over the next year or two you will see a combination of things. First of all, you will see the margin depression that we always see with any acquisition we do, start to get built into the ANSYS model and within a couple years we've got things operating pretty well, and that defines the latency in there. Yes, there definitely, on its own basis I think it would grow above the base rate, but with the expansion of the channel and being able to link that in, we do see that growing higher.

Got it. This is kind of a weird question, but a few software companies have priced their software in dollars so that they don't then have to worry about the excitement going on in Europe and I realize that would put pressure on guys in your customer side. Why would not you do that? Why does that not make sense or is it just, would that make you less competitive in competitive environments and stuff like that? Would that ever work or not?

Well, actually, at one time we came from that and it was somewhat filtered through our indirect channels that might bear the burden of it. But the bottom line is, we have been saying, if you look historically, there are ebbs and flows in currencies in all parts of the world and we look at this from a long-term perspective. Frankly, with the employees we have over there, we don't confuse them by paying them in dollars, because they have to live in local currency. Likewise, when customers overseas are buying in local currency, we don't want to have them sit there and think they have a certain budget amount that is approved and then find out that their budget got blown apart because of change.

If we've got that in there, first of all, it makes it simple for the customer, it all balances out over time, and particularly if we can -- we just don't want to create obstacles to people in acquiring the software. And we think that extra kind of turning them all into currency wizards really causes a bunch of unintended consequences into it. Long-term, we've got more users that way, and long-term, the currencies kind of balance out and when you figure out how much, even a paid up license contributes long-term into our recurring revenue base, it really is a good stable flow for us. If anything, we come in the other direction and then we just have to manage amongst that.

Got it. Okay, thanks.

Ross MacMIllan, Jefferies.

Thanks a lot. Jim, your large deal count, over $1 million was really a very strong number this quarter. I think relative to normal seasonality, I don't think we have ever seen such a strong Q2, and in absolute numbers, we've never seen such a strong Q2, can you just talk to the large deal activity in the quarter? It didn't look like March was particularly soft on the large deals so it strikes me that it's a very strong number after a very strong Q1.

Q1 was strong from a big deal standpoint comparatively, relatively, but from an absolute standpoint, if you look at the trend -- I tried to make that point earlier, that's what you don't just put a normal bell distribution over a range. Q1, we were actually in the lower half of the range, and basically some of that was -- were orders that were delayed, partially because of some of the issues that we saw in the macro and geopolitical environment. Actually, maybe a little bit of that is spillover. But keep in mind, if you look at what is going on, first of all there are several other factors. Apache is playing an increasing role in these things, and particularly the cross semination, or the cross buying of those two phenomenon with the rest of our mainline, just speaking to the integration, that is actually going forward.

The second part is, you look at -- a number of you have talked, we're growing across all sectors of our business, but since this is relatively new in its adoption, I'm talking about just the overall concept of the proliferation of simulation, we actually are seeing our major customers growing actually at a slightly higher rate than the aggregate of the rest of them. What that means is, that in these big deals you will actually start to see accumulation effect that comes on so that number does bump up. On top of it, Q2 was not a bad quarter. You put all of those factors together, and finally our customers are just, the same thing we've talked about for a decade but it has really has been in earnest the last few years under this stressful environment is, this is viewed as a means to competitive survival and excelling.

I think all of those factors come together but the one point I would also say, and I have been saying it for 10 or 15 years, we may be hitting some home runs but we're just trying to get good level contact and continual contact. It's not like we are trying to live and die by big deals. It is just that it is happening as a natural consequence of our business model and the execution that we're doing out in the field.

That makes sense. On the paid up, I think your comments, both today and previously, you may in tougher environments have deals flip from paid up to lease, or maybe even push, if they're paid up, they could move across quarters. The paid up number this quarter was certainly better than we saw in Q1. Do you just put that down to timing, mostly?

It was timing, like I said, and some of it was -- when we tell you that sometimes the thing can slip across, that is not a euphemism for we lost it. No, you are seeing =-- some of the Q2 effect was a slight amount. We were still in range in Q1, but a little on the lighter side, and now we are on the stronger side. Again, it's one of these things, if you try to just live in quarterly snapshots, you can get some small perturbations, but when you integrate it over the long-term it pretty much stands up.

Then pooling this together, last thing, I heard you say earlier, I just wanted to go back and make sure I heard that, you talked about your guidance for the year, but then you said, a line probably favor growth below the mid-point of the range. I don't know if that was -- if you said that meaning you would be having to think at the mid-point or lower is the most likely outcome or whether I just misinterpreted that comment. Thanks.

Essentially, if you look at it -- the way we look at it, we take all the factors we've got, and of course, there's a certain amount of sigmas on either side of the range. But the bottom line is, I was just saying, don't slap an even distribution, because this is not just an evenly distributed curve there. If you look at the various factors of where currencies can go, if you look at the, like I said, the one impact is the effects of timing stretching out is disproportionately higher than the chances of timing compressing and squeezing him. When you put all those things out, I'm just saying, it doesn't look like just a normal curve centered around the middle. I was trying to provide a little bit of color.

The range is intact because our customer demand functions are basically statistically the same. Same thing, when something changes from a -- tweaks from a license to a lease, again, the business is all there, but what you recognize and show is going to drift out into outlying quarters, or in this case outlying years. All I'm saying is that, you don't just -- I was just trying to give you a mental image. I wouldn't picture that bell curve, and by the way, those are things that we look at on an ongoing basis as we continue to look at our investment patterns and things like that. Finally, there is no saying that in terms of what is happening with either the European situation, recent elections there, upcoming elections here. These are cycles that will tend to have significant impacts. All of those factors together, it was just -- I was just trying to get away, sometimes people like to fit a nice, even, normal curve over the range, and that's really not the way we are looking at it, although we find that our ongoing range to be a statistically valid construct.

That's really great color, Jim. Thanks a lot and congrats on a solid quarter.

Thank you.

Steve Ashley, Robert W Baird.

Great, thanks. I'll echo my congratulations as well on the solid quarter. I think I would just like to try to reconcile the change in the full-year guidance. You've taken it down by $6 million to $9 million, you've said that Esterel will contribute $5 million to $7 million and you still need to hash through some rev req there, but your best guess today is $5 million to $7 million, but that FX probably changed by an equal-ish amount, $5 million to $7 million.

Yes.

Suggesting that just organically you're taking the core business down $6 million to $9 million. Does that all sound right?

No, we haven't changed the outlook on the core business. Basically Esterel's addition nets out FX headwinds that are greater than what we had guided to back in May, so we are still at $810 million to $830 million, which is where we were back in May.

Got it. Okay, I guess I was looking at GAAP numbers. Thanks

That would of course make a difference.

Yes, okay. And then, my other question was, Esterel, you paid $53 million, do you think that is the new normal in terms of size of acquisitions we might think about for you guys making in the future?

Actually, if you look at for the last, I think actually for the last two years, because everybody was after -- it was like every three years we'd do something that might be like a few hundred million purchase price, and first of all we made the stunning observation that there are a lower number of those available over the last decade, and that's the case. I think I even made the point starting 2, 3 years ago saying I would start to look at things in the $50 million range. Clumps of those things that really have significance. But the other thing is, if you chart everything we've -- the few we've done over the last 10 years, you couldn't find a normal. There isn't, and I don't really think there is a normal per se.

The only thing I'd say is the population of these larger ones, right in the sweet spot of our technological vision, they are just fewer. Because you can just look at all the tombstones that have happened on that, and it's a lower number. I think statistically it is just safer to stay that. You will see us sometimes I'm sure do tech tuck-ins. You will see us do these midrange kind of things. It can be all over the map. I just don't know how to clarify it, because even when we eye something it doesn't always happen at the exact time, at the exact price, at the exact anything that would be perfectly ideal for us. But it all turns out to work for the long-term good.

Thanks so much.

Thank you.

Jay Vleeschhouwer, Griffin Securities.

Thanks, good morning. Jim, I'd like to ask you about competition. With your results and with those reported last week for the Danuso's SEMoLa brand, you comprise, the two of you together, the majority of the market and would appear to be doing well collectively. But they appear to be growing more quickly than you, both in the second quarter and for the past year to date, versus your core CAE business, and by our calculations, they are now the equivalent of roughly three quarters of your core business size. The question is, given the compatibility between your size and theirs, where you compete, where are you seeing them and could you just overall talk about competition.

We really don't see them any differently than we have seen them over the last few years. Like I said, I don't know how they -- I have no idea how they internally account and divide up growth inside there, so I really can't speak to that. In terms of what we can see about ourselves, it has been significant, simulation is basically our focus, it's critical to our customer base. It is what we live and the things have been pretty much along the guidance that we have said, so it's really not much change.

I say the only major change on the overall competitive front is, if you look 10, 15 years ago, we were $40 million, $50 million, and we were much narrower, and we would get involved in a lot of micro transaction things, and we'd go head-to-head more often. I would say as of recent, it's not like -- there are probably literally dozens of people that we see niche competition from and really, there is nobody we see across the entire spectrum. That really hasn't changed. We still have technology providers, we still have the major CAD/CAM or PLM companies that are also getting in and trying to create a name for themselves, and then there are always new start ups. That dynamic, I really, that is really not been the major story for us in anything that we have encountered.

Okay, just a couple follow-ups. First, what is your thinking long-term about the correlation of your services capacity and revenue to your software business? We talked about this before, but services are a fairly low percentage of your business. But you've also talked about it's having to become larger in connection with growing the software business. Perhaps update us on that thinking. And just a clarification on Apache, could you talk about the number of new customers that are gaining, at around the time you bought them, they had 120 customers, and I'm wondering, are they adding a significant number of logos over the last year or are they largely growing with existing customers like Intel.

Well, the thing is -- first, let me tackle the service one. As I've mentioned, we think that is now one of the longer poles in the tent in terms of helping customers jump the chasm, if you will, in terms of doing that. Right now, it has been in the lower single-digit range, but we've also mentioned that we were investing along those lines and the actual service business has been, the peer service business is overall starting to grow fairly nicely, but we would like to get it, at least in the next 3 to 5 years, up into that mid-single digits kind of range.

Off the top of my head, I can't speak holistically with regard to the Apache integration, but I can think of situations where we were both strong, but we're in different buying centers and the same customer, and we've actually elevated in those customers. I know that are some that we have introduced Apache into, and I know there are some that even with our broad footprint, Apache was probably relatively more significant in that customer, and we've actually been able to use that to leverage in new capabilities. But I think other than that, we will have to mind the data in kind of a different way to give statistically meaningful information on the raw numbers of new platforms and things like that.

Thanks, Jim.

Thank you.

Blair Abernethy, Stifel Nicolaus.

Thanks very much. Nice quarter, guys. Jim, I wonder if you can give us a little more color on vertical performance this quarter and sort of stand out positive quarters verticals versus maybe some that were lagging a bit?

Again, it is one of those things where these lag, the one thing we try to do, I want to be really clear on this. If you look at it, we still have got a high degree of diversity in the business. And I want to be -- sometimes just for color we try to tell you what sectors were doing well in a quarter, but that is not to say, oh here is a big overwhelming trend that is significant for the next 3 to 12 months and going forward. First and foremost, so all sectors were doing okay. As I mentioned, first of all, if you haven't had a chance to look, we tried to put a lot of commentary and some numbers into the prepared remarks that are posted on our IR website. I clearly think you'd get a real good picture on that.

I'd say some of the interesting things, I think we mentioned automotive, I think we mentioned aerospace and defense, a relative newcomer was in terms of material and chemical kind of things, and that just kind of popped up. It's a first time for that, again, we are not saying long-term trend, we're just seeing that. But automotive there seems to be a change in terms of what people are doing in terms of fuel efficiency, HEV, and the like, as well as the increasing competition from overseas manufacturers, many of which are the relatively newer places in Asia.

In aerospace and defense, that, in some cases, we said that's maybe a little bit counterintuitive, but if you think about it, all the advanced research that's going into unmanned surveillance and electronic countermeasures and things like that, those are all new research as opposed to refining the next generation of battle tank or something like that, or the next strike fighter kind of project. And with those things, whenever they tend to be R&D and highly innovation driven, wow, that creates at least an uptick for simulation, even if those markets were not traditionally used to using it in that standpoint. Those are really the main things, and again, I would invite you to look at some of the prepared remarks because it will give that. In terms, we are still seeing the balance, we still see growth in sectors. It's just that any one quarter, if you've got an average, there are going to be a few that are above the average and a few that are below the average. Maria, do you have anything you'd --

The only other thing I would suggest is, our industry guys are constantly posting updates about customer successes and innovation within each of those important verticals, so check out ANSYS.com.

Okay great, I did get the industry highlights. Thank you. Can I also, Jim, just ask you to -- how about the electronics vertical in particular, how did that perform in the quarter?

It actually performed pretty well. There's also some regional things where you can see there are, particularly over in Asia, there are certain countries and companies that are kind of in ascendancy, there are other big names that are going through some more difficult stretches and things like that. In general, the push toward the denser chips, 3D, and basically just the overall drive for electronic system on chips, things like that, it's tended to increase.

Which by the way, is yet one more reason why we are very excited about the long-term prospects embodied in Esterel in terms of looking at embedded systems. Now you've got some of these microprocessor system on a chip things, and now you've got this drive in our customers across a wide range of industries for smart products. Well, this is where an awful lot of the smart comes from, is in that embedded software. For the system to properly function, you have got to have a unity of performance between the traditional mechanical hardware, electronic hardware and the software that's operating in it, and if they don't all work in concert you can have a dud of a product out there.

Thank you. Maria, just on the tax rate in the quarter, Q2 was a little bit lower than we were expecting, anything going on there and do you have a view yet for what the tax rate might be next year?

Next year, no. Let's see what happens in 95 days and then maybe I can give you a little bit more color on next year's tax rate. As far as the most recent quarter, we did file some tax returns for Apache in some of the foreign locations that ended up resulting in some slightly greater benefit than we had estimated coming into the quarter. For the second half of this year, were looking at 31% to 32% based on everything we know right now.

Okay, great. Thanks very much.

Jason Rogers, Great Lakes Review.

Hello. Looking at the number of open positions you have, I just wanted to get a figure for current open positions and how many were added in the second quarter?

I think probably around 50-ish in the second quarter. We've got probably over 100 right now.

The 100 is all functions, that you can check if you go to ANSYS.com and find about positions, but that is total positions across the Company.

Yes, in total across the Company, across the globe.

Disproportionately, the high end R&D technologists types and the customer facing types are probably the disproportionate portion of that.

Okay, and what was the performance of Japan on a constant currency basis, ex-Apache, for the quarter?

Jason, I think we called that out in the prepared remarks too.

Jason, in the prepared remarks

Okay.

Want to just verify that?

Japan total combined in constant currency was 13.5%.

So that takes out any contribution from Apache?

Apache wasn't there last year.

Right, I'm just trying to look for the core performance if you take out Apache.

10 plus a little bump for currency.

Okay. Do you anticipate that to improve a little bit for the coming quarters, given the sales force changes that you made as they get up to speed?

Yes. Absolutely. We highlighted that we were going through some net sales management issues in Q1. We've kind of worked through that, we've on boarded a new team and so we have a lot of confidence that the second half will look better for Japan than the first half did.

We're not guaranteeing what the ramp up rate will be, but again, the direction vector pointing in the right direction is definitely there.

Okay. Finally, Jim. I wonder if you could you give your best guess on the potential size of Esterel's market?

The problem is, again, this is almost kind of like saying -- again, this is like trying to predict the size of a PC market when you're sitting in 1990 and you are trying to predict what it will be in 2010, and all I can say is that, it is so many orders of magnitude bigger than what Esterel currently is, that is really not the long pole in the tent for us. If you would think of the amount of microprocessors going into all smart products, if you look at the amount of software that's required for those, if you look at the amount of certification that's required for everything from nuclear plant operation, to aircraft, to maybe running the smart train systems, and things like that, cars that drive themselves, and the like. I think there is really the opportunity for it to go viral over the next 5 to 10 years. It is so much bigger, trying to pin it down it's just not where we put the attention, because right now, the pole demand that we're getting from inquisitive customers is virtually enough to totally swamp us.

Thank you.

(Operator Instructions)

Dan Cummins, ThinkEquity.

Thank you very much. I apologize if this was asked previously, I wanted to see, Jim, if you could give a sketch Esterel as compared to Wind River and Green Hills and the embedded OS companies on the one hand, but also something like Symex, which a piece of simulation software that Intel acquired I think to pair with Wind River. Where is Esterel positioned competitively? And then a question about optimizing your direct/indirect model over the next two to five years. Thanks.

Yes, on some of the things, I wouldn't pretend to have the in depth knowledge of all those different companies. I can only tell you why we were interested in Esterel. I know sometimes when people say embedded software, even after we announced Esterel, I started getting a bunch of inquiries from all sorts of quote unquote embedded software companies. We are focused, there are many aspects of that, and it's not necessarily just the operating system.

With us, we're more interested in the functioning code that affects the functioning of an overall smart product. So you will see a level there. Now, there are people that will dice it. There are some people that manage the product lifecycle, if you will, of embedded code, and there are other people that will deal with the infrastructural aspects of it. Again, we are staying true to the simulation aspect, and as such, treating embedded software as one of many components that comprise a functioning system, all of which have to interact together.

I'm sorry. The second part of the question? Maria, did you?

Optimizing the --

Optimizing direct/indirect, yes. That is something that we continue to look at on an ongoing basis. The truth of the matter is that having the balance between the two is very important, as anybody has seen, over the last 10, 15, 20 years of our business, in terms of providing the resiliency, the recurring revenue, all of those kind of aspects. However, it is not easy to find high-quality new salespeople for the direct side. And it's even more difficult to percolate these indirect channels that you have built a 20-year history with, and you trust them, and you know that they will provide quality software, and they can actually perform. That's a thing that takes a long -- that's not to just go out and recruit, that is a long-term building process. If you look at a, we would still like to increase the rate at which our indirect channel can represent the full portfolio of products.

Obviously, there is the luring process of that, but we want both of those to grow, and frankly, over the last few years, you have seen that we have kind of reached a pretty good balance point, where in fact, both sides are growing somewhat symmetrically, and that is a very positive thing. We would like to see those kind of things going. If we can continue to get additional reach through everything from OEM partnerships, which sometimes are problematic, to increased indirect channels, in addition to continuing to grow our direct channel, we are interested in all aspects of that. And basically the whole situation will probably continue to change and evolve, because the distribution landscape of today looks very different from the one of 20 years ago. It's going to look different 10 years from now, and you start throwing things like the evolution of the cloud as it starts to become more significant for this massively parallel world that we operate in. There's going to be a lot of changes going in, but there's also a lot of things that have to happen for that to come into effect.

When you say balance you don't necessarily mean 50/50 but just some equilibrium?

Yes, in other words, we don't want to see one where there's a big trend line that shows that one or the other is dropping off a cliff.

Okay. All right. Thank you very much.

You're welcome. Thank you.

Steve Koenig, Wedbush.

Hi Jim, hi Maria. Thank you for taking my question. My main question here is deferred, it looked like it was up pretty sharply in Q2, more than just seasonally typical, and I'm wondering, is it FMC, what other factors come to play and any color on that you can give?

Yes, the bottom line is, the fact is, both on an organic and overall standpoint, the business intake grew at a faster rate than the revenue that we recognized. And when you have those things happen, it has to go somewhere, and it goes into deferred balance. But we actually view that as being a very positive thing, and frankly, that is one of the aspects, that even though there's a lot of uncertainty towards the end of the year, and then I talked about the skewing within the range, it still is one thing that speaks to a statistically stable kind of demand function.

Okay.

There is really no real surprise. I don't know, Maria, if sometimes we balance for FX, I don't know if there's any of that kind of thing.

The only other thing --

And we have strong renewal rates, are stronger, actually improving.

Good strong renewal rates. A portion of those 19 deals that we highlighted over $1 million certainly contributed to that deferred revenue.

Okay. Great. On the flip side I want to ask, on services, they looked a little light, and you mentioned core services was growing. Education and training, sometimes we see that as, that tends to drop off when people are worried about the macro, was that light, and is that any sort of an alarm or indicator to you?

Actually, training was actually up quite a bit. Again, that's not, your core assumption is actually valid, but the thing is that when people were starting to continue to invest in the technology, in some cases, what they were doing was they were training existing known resource, when they might be a little bit more reserved in hiring of new ones. And a lot of times when we expand and add new logos we do that. Actually, the training was relatively strong. It's just that even if it grows in the higher double digits, it's not going to move the dial a whole lot but that has been a pretty good portion for us.

Okay, great. That does it for me. Thank you and congrats on the quarter.

Thank you.

This concludes our question-and-answer session. Mr. Cashman, would you like to make any closing remarks?

Certainly. Always. I've got to think of some. Basically, let's just summarize. The emphasis for the remainder of 2012, it's obviously going to be the initial integration of the Esterel business, continued integration of the Apache, basically with a focus on, in those with execution growth, customer engagement. We'll continue our investment patterns, basically the customer receptivity of the long-term vision, it just continues to strengthen. We're going to focus of course on the release of ANSYS 14.5, which is expected toward the end of this year, but with the addition of Esterel solutions, the breadth of this portfolio should strengthen even further.

And the bottom line is, again, it's almost becoming like a mantra here, but we are continuing to be propelled, it's a strong combination of the vision, the business model is resilient, but our customers are great. They have been with us for a number of years. Same thing for the partners, and not only partially because of the strong technology we have, and frankly, I'll say the growing base of employees that we think are just really exceptional, thanks to any of them that might listen to his playback. But now it also includes a very talented team with new core competencies from Esterel. Those are the things, yes, we've got some uncertainties out there in the world, but everybody has got those. We've just tried to do with customers, technology, employees, and a solid business model, those things that allow us to make the best of whatever comes our way. So with that, I will just thank everybody for your time and we'll look forward to seeing you next quarter. Thanks.

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