ANSYS Inc (ANSS) 2014 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to ANSYS's third quarter 2014 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 conference call over to Mr. Jim Cashman for some opening remarks. Sir?

Okay. Well, thanks, Mike. Good morning, and thank you everyone for joining us to discuss our 2014 third quarter financial results. So before we get started, I will introduce Maria Shields, our CFO, for our Safe Harbor statement and some housekeeping details. Maria?

Okay. Thanks Jim. Good morning, everyone. Let me just start by saying that our earnings release and the related prepared remarks documents have been posted on the home page of our Investor Relations website this morning. It contains all the key financial information and supporting data relative to Q3, and the year-to-date 2014 business results, as well as our current Q4 FY14 and FY15 outlook. I would also like to remind everyone that in addition to any risks and uncertainties that we highlight during the course of this call, important factors that may affect our future results are discussed at length in our public filings with SEC, all of which are also available via our website.

Additionally, the Company's reported results should not be considered an indication of future performance as there are risks and uncertainties that could impact our business in the future. These statements are based upon the view of the business as of today, and ANSYS undertakes no obligation to update any such information unless we do so in a public forum. During the course of this call 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 materials, and the related Form 8-K. So Jim, I will turn it back over to you.

Okay. Thanks, Maria. Let's see. Before we open up the call for Q&A, I would like to provide some commentary about our Q3 results, and our updated outlook for the balance of this year, and our preliminary outlook for 2015. So continuing the trends from first two quarters of the year, ANSYS achieved strong results in Q3 as solid revenue growth in North America, the UK and Asia Pacific outweighed some weakness in Germany. We reported consolidated non-GAAP revenue of $235.5 million. This is at the midpoint of our guidance range when factoring in the significant strengthening of the dollar in the last month of the quarter. This represents also a 10% in both reported and constant currency, as compared with the prior year period.

Our double-digit revenue growth was driven by really widespread growth across our major product lines, as well as across many different industry sectors notably electronics, semiconductor, aerospace, defense, automotive and energy. Importantly, our recurring revenue base continued to be very strong at over 70% of total revenue for the quarter and the year-to-date. We had 22 customers with orders over $1 million, including one customer with orders over $10 million for the quarter. This compares actually to 15 of over $1 million in the prior year period.

Also significance, are two facts relative to this population of customers and the transactions, and I would like to briefly cover those. First is that the average deal size among transactions over $1 million increased more than 50% over the comparable deals in the same period of last year. And secondly, six of these customer deals were comprised of time-based licenses.

Now these are becoming larger in size, and are more multi-physics based. For revenue recognition purposes, they are spread ratably. So while they may not have the same impact as a perpetual deal in the current or near-term or even in the current year, depending upon when they are recorded, they will impact bookings deferred, revenue, and backlog growth. Most importantly though, they enable our customers to choose the licensing model that fits the needs and constraints of their own business models. So in summary, for the quarter, the top-line growth and especially the bookings growth was substantial and solid.

Okay, non-GAAP operating margins for the quarter were 50%, above our expected range, but this was a combination of the solid revenue growth and the continued cost discipline that drove strong results. Non-GAAP EPS for the quarter was $0.89, a 7% improvement over the $0.83 recorded in the prior year period, which included $0.05 of incremental tax benefits at that time. The results for Q3 were above the high end of our guidance range. Operating cash flow for the third quarter was approximately $82 million.

Continuing our commitment to driving stockholder returns, we repurchased over 460,000 shares during the quarter, and over 1.4 million shares year-to-date. Now historically, the Board has authorized 3 million shares in each of our repurchase programs, and each time we were about halfway through the authorization, they improved -- they approved actually an increase back to the 3 million level. This week in recognition of the Company's strong liquidity, excellent growth pipeline and confidence in the future, the Board increased the share repurchase authorization to 5 million shares, and we intend to be more aggressive in our repurchase activity over the next two quarters.

Okay. Now let's spend a moment on our revised outlook for the balance of this year and our preliminary look at 2015. Now while Q3 was strong, and earnings significantly outperformed our expectations, there were a number of smaller factors which when taken collectively have slightly dampened our near-term outlook. As I mentioned a few moments ago, we are seeing some weaker growth in Germany and parts of Europe. In China, like many multi-nationals, we have exposure to state-owned enterprises and we have experienced prolonged sales cycles there as of late. I might note also, that we are also in the process of enhancing some longstanding channel relationships in China, in an effort to accelerate sales growth through the channel in addition.

Our updated look at foreign exchange, and the recent significant strengthening of the dollar adversely affected both the Q4 and 2015. Also we anticipate some near-term costs related to consolidating redundant offices, the move to our new headquarters, as well as continued integration and organizational evolution efforts. So generally speaking, these are the near-term factors which will have an impact on Q4 and into next year.

When taken in the context of all the significant opportunities we see next year and beyond, we remain of the view that double-digit top and bottom-line growth can be achieved. And let me give you a few examples of why we remain confident. First, our growth and weighted pipelines have increased by statistically significant amounts, and our recurring revenues as you can see are also increasing.

What we are seeing is a continuation of trends that we mentioned over the last few calls, and they both relate to shifts in buying preferences that bode well for the long-term. First, the lease business progressed at a faster rate than the paid up business. We mentioned this as a new data point on the last couple of calls, but we were holding back on calling it a trend at that point.

Secondly as I mentioned earlier, we are seeing early signs of a shift in buying preferences in increasing numbers of established customers, customers who are historically oriented toward perpetual licenses. And they are starting to shift engagement discussions towards multi-year time-based licenses, particularly as they start to expand their base of multi-physic usage. We have already seen this manifested in the accelerated growth of our bookings, which grew in excess of 20% for the quarter, and even mid-teens after removing the effect of Apache deals which tend to be longer-term and more varied in their timing. So if these larger multi-year deals continue to become more prevalent, the long-term end point prospects are the same, but in the near-term, there will be a steadier, more modest ramp-up. Also bookings could be a little lumpier in a scenario, that includes seven and eight-figure multi-year orders, versus the ones that renew on a steady annual basis. But the revenue ramp should be smoother over that long-term period.

Now these trends, combined with some significant themes of previous calls to accentuate the impetus for enhanced investment patterns, many of which are already underway. First and foremost, we are accelerating our investment to improve sales execution, capacity and growth. Last year at this time, we made significant changes to our leadership team for overall Asia Pacific. We spoke about that on those calls including leadership and structure in Japan, India, Taiwan, and most recently China. We are now seeing the payoff in the double-digit revenue growth for first nine months for both GIA, Asia Pacific overall, and Japan, our second largest market in the world.

We continued that trend at the global level, most notably with a new head of worldwide sales and service, who has strong enterprise and channel experience. In addition, we have augmented the team with two additional hires. The first is a global channel leader to focus on some of the channel opportunities that we have discussed, and including earlier on this call. We would also mention, that service will be an increasing part of our business to help customers expedite the adoption of our simulation tools. And to that end, we have recently hired an experienced global services leader.

And also finally if you check our website, you will note that we're hiring a record number of positions to expand our sales footprint as we head into 2015. And actually just last week, we added a CIO which is a new position for us. This is in response to -- not only our own internal requirements, but also to help us guide through the increasingly complex opportunity that is provided by those enterprise sales, as well as the SMB and cloud customer evolutions.

So our Q4 2014 and preliminary 2015 guidance is detailed in both the prepared remarks and earnings release documents. We are currently expecting Q4 non-GAAP revenue in the range of $245 million to $253 million, and Q4 non-GAAP EPS in the range of $0.78 to $0.82. This translates to 2014 full-year revenue of $931 million to $939 million, and EPS of $3.29 to $3.33.

The fourth quarter revenue and earnings per share guidance is lower than what was implied when we last provided guidance in August. The reduction in revenue is primarily the result of increased softening in Europe, and weakness in sales from our independent channel partner in China. But the largest factor was the strengthening of the US dollar, which really that counts for about half of the overall revenue guidance adjustment.

The change in revenue was the primary driver also behind our adjustment to the earnings per share guidance. However, I want to note that our Q4 guidance also includes one-time charges of $0.02 to $0.04 that is related to headcount reduction costs, including those related to acquisition integration, and office location reduction, and moving and duplicate rent costs related to our new headquarters facility.

We are still in the process of finalizing details around our 2015 operating plan. But our preliminary outlook for 2015 is for non-GAAP revenue in the range of $984 million to $1.014 billion, with non-GAAP EPS in the range of $3.53 to $3.64. This early outlook factors in some shifts in the preference for the time-based licenses that we have discussed on this call, the recent significant strengthening of the US dollar, the continuation we are assuming of similar economic and geopolitical climate, and the more aggressive share repurchase activity that I mentioned earlier.

So as we close out 2014, and enter into 2015, we are excited about our ability to reinvest in our business, return capital to shareholders, and explore the opportunities to accelerate growth with acquisitions. So with that, I will now open it up to Q&A.

Thank you, sir.

(Operator Instructions)

As a reminder, today's conference call is being recorded.

(Operator Instructions)

The first question comes from Anil Doradla of William Blair. Please go ahead.

Hey, guys. Couple of questions, Jim. You talked about reverting to double-digit growth on the top line and bottom line, whereas if we look at the preliminary guidance for next year, it's more in the single-digits. So can you help us understand, how do we reconcile your comments about double-digits versus some of your preliminary guidance?

Well, the main thing is, again, we talked about the currency turbulence -- and actually our guidance does factor a range of high single-digits to double-digits. So 7% to 11% in constant currency. It is just that these currency headwinds, I mean, the movement in like for instance, the yen alone in the last few days was very significant as we have seen.

Those kind of things can shift. But it still maintains the trajectory that we're talking about. And that is even factoring in the impact of these -- I mean, we love the fact that the recurring revenue and the buildup and the interest by customers in the time-based licenses. But the fact that those are building up, they will tend to build up in current periods visibly a little bit slower, just because of what is recognized from a GAAP standpoint. So I think it is pretty consistent. But like I mentioned, currency is probably one of the major stories for us right now.

You talked about softness in Germany, and you talked about some channel partner weakness, too. Could you elaborate a little bit on that, and how long do you think this is going to persist?

Well, I think the bottom line is we, first of all, we have already started to take steps to go under that. There has been -- the general economic outlook in Europe has softened a little bit over the longer term, and Germany was -- felt a little bit more of that going on. Also we have got very strong longstanding channel partners in Germany. I mentioned some of the other channel partners throughout the world.

And part of what we are -- if there is a major theme, a lot of those tended to still be in a legacy mode of selling individual physics. And what we have been trying to do is, one of the real strengths of our product has been manifested. It shows up in those -- the large mega orders that we talked about. It shows up in the disproportionate growth of those more established customers.

And as a result of that, we have been trying to bring the channel up to the point, where they can also avail themselves of the ability to really sell the whole portfolio, as opposed to a fragmented story. So what that gets into is the normal ramp-up for the technical and business certification, as well as is coaching them through the process. And that is one reason why, when I mentioned the fact of actually having someone to focus, not just on sales production but on the development of the channel, we instituted -- and actually this was an internal promotion of a person who has been very effective in dealing with channel.

And we have actually had them focus on mechanisms to both instruct, to guide and to help drive the channel. So those things are already underway but they will be a steady building process. And that has been built into -- also built into our guidance with the more conservative view obviously driving the lower end, and accelerated view as moving to the higher end.

Great. If you don't mind me squeezing in one final one, HBC has been a great business for you guys, low double-digits as a percentage of revenues I think. Can you share some color around HBC? How was the growth during the quarter, and what are your projections say, for 2015? Thank you.

Well, it still continues to grow. Now there is going to be a couple of things. First of all, some of the growth initially was pent-up demand, and that demand continues to grow, however. But the second part of it is, we are actually getting into that situation where extreme volumes will start to play into it.

So for instance, the scalability occurs when customers are now talking about 50,000, when they wouldn't have even considered 10,000 before. There will be a thing where the per unit cost actually will start to taper at those larger installations, but the overall volume will grow up. However, HBC is just getting to -- is just continuing to be a major driver of the business.

And while we don't see that -- we don't see those mega amounts growing, it is a significant part, and it will continue to be a good growth element for us going forward. That has always been the case. We want to continue, of course, to drive those other axes of the new user. And as I mentioned, and some of the pops that we are starting to see in the early stages in the multi-physics adoption, which also links back to why we are trying to get the channel more fully engaged in that opportunity.

Great. Thanks a lot, Jim.

Next we have Jay Vleeschhouwer of Griffin Securities.

Thank you. Good morning. Jim, I would like to follow up on your comments regarding the shift to TBLs.

Yes.

Are you seeing that in any particular geos or verticals or both thus far? And with respect to how you think that will evolve in 2015 and beyond --

Right.

What is your expectation for the mix of TBL versus perpetual versus what it has been? And I would think there would also have to be a strong corollary effect on your maintenance revenues, not just upfront licenses. By our calculation, the R-squared of your maintenance and perpetual is very high, which is not terribly surprising. And a follow-up.

Yes. Well, okay, I will try to parse the question down. The first part is related to the geos. I think more related -- more than related to geos, I think it is more correctly attributed to developed large companies, most of whom we can't mention by name but you certainly would recognize the name. And as such, you would see them in Asia Pacific, you would see them more likely in Japan.

You can guess where you might see them in Europe. And a lot of them are actually traditional North American customers. And the reason why I pointed that out is, these are people that traditionally for years have just done the traditional perpetual paid-up model. And the fact that they are looking at this as a way of broadening the reach of the software, it is one that we started to see.

But it is just very significant that whenever you see a modulation of those buying patterns. Like I say, long-term it is really good for us, but it has some of the short-term effects. The second part of the question I think was related to the impact on the maintenance business. I am not sure -- I could actually attack that from a couple of different directions, but could you -- I mean are you -- could you just give us a little bit more color on what you are asking on that, Jay?

Well, sure. Again, the question was what do you think the ultimate mix between TBLs and perpetuals might be? And as part of your 2015 guidance to the extent there is a shift, have you factored in that there would be a corollary weakening of you maintenance revenues to the extent that the perpetuals also slacken?

Well, yes, of course, I mean, if that ramps up -- but again, we count the maintenance combined with the lease is the major part of our recurring revenue, and therefore we are -- we still see that overall strengthening. I think you have seen already the impact of increasing numbers of TBLs, time-based licenses, even in the early phases, and what that has done to our recurring revenues. Now with regard to the ultimate mix, I would be really concerned about having something with such an early low denominator. It is very early in the process of this, and the fact is we are seeing those lead customers come in.

But as we have also seen, those lead customers that were doing the accelerated adoption, they sometimes are three, four, five years ahead of the masses, and therefore you could have a real heavy skewing. And as I mentioned, that is part of what we are trying to factor in as we continue our operating. I mentioned that we're in the mid phases of our 2015 operating plan, and that is really part of the things that we are trying to calibrate on. While not driving the business toward any particular expectation in a 12-month period, but just being cognizant of what a trend is going to be over the next few years.

Okay. With respect to the sales capacity, we took your advice and did a spot check of your website, and today you are showing about 80 openings in sales-related positions. As recently as last week, it was about 65 or so, and that's up from just a couple of dozen in late 2013, early 2014. What are your assumptions about how quickly you will be able to fill those open positions, and ramp up their sales contribution?

Well, first of all, that is the number one priority, and then actually that is underway. Some of which are on the website, some of which are being done through other means, and all of which have been underway for actually several weeks in terms of going on. The -- let's just say the -- we are in that stage now where we have got a very strong -- at least the last report I got, was we have got a very strong pipeline of candidates.

Now what the close rate is on that and the close percentage and things like that, a little bit early for us to say. But the bottom line is, we are aiming toward -- the stuff we are doing now isn't going to really onboard, and show something in Q4. But what we want to do is, we want to be able to come out of the gates strongly in the early part of 2015.

And so, really what we want to also be able to do then is get the -- get that mass of people ready for the normal sales force launch event that we have, that is a training and driving event. And that is really what the motion is aimed towards right now, because we have seen that some of these -- just from the number of requests, the number of leads, the growing of the pipeline, we don't want to get caught with a capacity problem.

Understand. Thanks very much, Jim.

Thank you.

Next we have Steve Ashley of Robert W. Baird.

Thanks so much. I would actually like to ask about ANSYS 16 which I know has been teed up here, and you have put a lot of work into that. And that, really you talked in the press release about the focus on ease of use. I was just wondering if we could get a little color around what kind of ease of use we might see, improvements within the product, and what are the new user groups you might be trying to reach out to with that product?

Well, the bottom line is the -- think of -- well, okay, I have got to break 16 into two major constituency groups. And they are both important, but they are not different. They are really extensions of the same thing. So first of all, one thing you always expect from ANSYS is the continuation of market-leading capabilities for broad based-physics full stop. I mean, it has been that way for 40 years, and it's our intent to keep that going another 40 years.

So I could run out the clock going through hundreds of features there. But just take that on word right now, and we can go through website kind of stuff. The second part, though, and the part that I think is particularly exciting is the -- first of all, we talk about three phases of Workbench evolution. The first one of this concept of multi-physics.

The second part was the concept of data integration that linked things together. That was the workbench platform. Now the third layer is actually -- we talk about, would be the evolution of the user experience. We will actually be showing a first preview of that for some of the baseline capabilities.

So the bottom line is, if somebody has invested in our physics, they can rely on those physics for a long time to come. But there will be alternate ways for them to get access to it, some that will appeal to a broader range of users. Some of it is in the user experience, some of it is in the customization kind of capability, that now our customization tool kit has gone through a series of maturation. And there are customers that are doing some pretty exciting things. One that we will be talking about soon, in terms of patient-specific modeling for eye surgeons, where they can actually look at the impact of various approaches, and actually get that viewpoint, or get the results in advance.

And then the third part is that ability to just general journaling and scripting kind of capabilities that will actually support the overall things that we talked about, in terms of helping it fit into the engineering processes of our customers, which also by the way links into why we are upping the game in terms of the services in terms of our service organization and service leadership.

So really the first part is capabilities, the ongoing endless stream of features that you always expect from an ANSYS release. But this next one is the first unveiling of the -- a new user interface, user experience that allows a much broader range of things, and one of the things that you almost have to really kind of see to fully comprehend. But it is something that we will -- it covers a baseline of some of our capabilities, so people can get started now and over the next few releases, we will actually be expanding back that access to our full range capabilities.

Terrific. And then just lastly, I would like to just touch back on the larger deals, and just find out if you think that the go-to-market and the sales execution was just a part of driving that increased number of large deals, just effectiveness and combining product and upsizing deals?

Well, it -- that is definitely part of it. Like any [grado] our top 20% tend to kick in sooner. That is part of it. But frankly, the strength and capabilities of the software driven by if you will, years of customer's internal validation -- basically I would say prove to them that they would to do a -- continue to put that at a broader basis. Because their products are getting more complicated and complex. There is bigger regulatory concerns that they have to go through, and their job just isn't getting any easier.

So we find, kind of like that accelerating lower ramp of our S curve, is that the people who have been using it now through a few good product cycles, have started to work it through their organizations. We see that ramp up. And so I think that is also -- it is a combination of the effectiveness of the sales engagement team, but underlying it all is the strength of the product that actually can solve the problems. And as we have said over the last few calls the big thing for us, why we push for services, why we are expanding the sales capacity is helping bridge between the customer's current implementation, to where if you would say their need is, that takes some path finding and some assistance that we are trying to help them do as a number one means of driving the growth.

Great. Thanks so much.

Thank you. Hello? Is anybody there?

Next we have Ross MacMillan of RBC Capital Markets.

Thanks so much. Jim, can you just help me understand the difference between a time-based license and a lease, if there is a difference?

No, they are essentially the same. If there is one kind of thing in the informal lexicon is that time-based licenses actually are tending to have a patina of multi-year, an extended kind of commitment thing, and it shifts. Sometimes historically why a person might have bought leases is kind of a little bit different, than why existing perpetual customers are now considering time-based licenses.

Some of it gets down to the flexibility of the implementation, flexibility of utilization to match the product design cycles, and what they might need at any particular time, so they can continue to refactor within an envelope. And sometimes, it just gets down to the economics and the purchase dynamics that exist within a customer. And the one thing we have said -- I mean, for as long as I can remember, at least 15 years is -- we never tried to drive any one eventuality on that. Whether it was lease, whether it was pay for use in our software-as-a-service and cloud stuff, or whether it was a perpetual license.

We just really wanted to provide multiple avenues for them to get access to the technology, and let them pick the right way. But like I said, right now, and I don't know how much is being driven by economy. I don't know how much is being driven by cloud mentality. There could be a number of things, but the fact is the customers are in fact, at least be beginning to show those signs of changing, and that is what is factoring in. Like I say, long term, it's great. But we have to be able to selectively engage with a broad range of customers during whatever transition period might exist.

Thanks. And just related to that, a question maybe for Maria, we are seeing this divergence between your short-term deferred growth, and your short-term backlog growth. In other words, your short-term bookings are growing much faster than your short-term billings. Is that related to this in any way, or is that just a anomaly for this particular quarter? Thanks.

I think that is just an anomaly. I wouldn't see that as a trend right now, Ross.

And can I just squeeze in one last one? Just on the repurchase, so you are going to be spending, call it a $100 million run rate for the next couple of quarters, which is a little bit above I think your annualized free cash flow rate. I guess, the question is on the sustainability of that level of buyback relative to free cash flow. Put another way, when we think about your cash balance, approximately getting up towards $1 billion, are there still M&A opportunities (multiple speakers) that would you want to grow your cash balance effectively? (Multiple Speakers).

Absolutely. First of all, acquisitions continue to be number one, okay. Just flat out. The bottom line is, though, yes, if you take that $100 million per quarter, that is not too much off the steady state. But keep in mind, we have got excess capacity, excess liquidity that has been built up now.

And as we look at the trajectory of some of the things that we are looking at, combined with the availability of debt in the traditional markets, we don't see anything that would really constrain, nor would we constrain the strategic aspect of us being able to do those acquisitions. So with this, this is really just taking advantage of an opportunity. And again, I said the factors going on.

When you look at the confidence we have in the future, when you look at the excess liquidity that we think we have right now over the needs for near-term acquisitions and running the business. And it's also -- we think it's an attractive way to return capital to our stockholders. I mean, you combine all that together, and it's a very logical thing, and something that we think bodes well for the long-term of the Company and the stock.

That's great. Is there a target though, you have, in terms of a cash balance, or a rate of or percentage of free cash flow that you think is a good framework for us to think about in terms of the share repurchase program?

No, I think right now, Ross, we mentioned in the documents we are going to target over the next two quarters to invest about $200 million in that program. But at the same time, we will do what we have been doing for the past decade plus. And there are certainly opportunities for M&A that we will continue to pursue that continue to add to the physics, and to distinguish our portfolio from others in this space.

Yes, I think the key thing to keep in mind is that all of these things are temporal. We have some -- right now what we are doing we think is a really good thing, also combined in lockstep with the acquisition path that we see going forward. I can't necessarily speak to what the acquisition target list might look like a year and a half from now.

So I am not talking about a -- here is a steady state long-term because if we get to a point and say, hey, here is an opportunity, and we are going use the capital for that, that's what we will do. But when we do that, we will also have a mind toward having the kind of success for everybody, that I think we have demonstrated in previous acquisitions. So this one is very much metered over the next few quarters. And not really a -- something we carry on five years into the future at -- on an auto pilot kind of basis.

Next we have Steve Koenig of Wedbush Securities.

Thanks for taking my questions. Hello, Jim. Hello, Maria.

Good morning.

Hello, Steve.

I'll try to keep within the two question limit by asking two very multi-part questions if that's okay.

No, one brief follow-up. No, go ahead, go ahead. (Laughter).

Okay. (Laughter). Well, let me do the first one. So the jump in open positions on your website was -- looked like it really was one to two weeks ago. Was in that response to the strong Q3 bookings? And then more generally, can you comment on your headcount plans and your thoughts about deferred revenue growth for next year?

Okay. Well, first of all, the thing is obviously we have many ways of going after -- I mean, we have got a pretty strong, I hate to call it a rolodex, but I just did. We have got a pretty good group of sales candidates, because recruitment is kind of like an ongoing process for us. It's not just an event that is driven by certain things.

So and then we also bring the website in as a way of another means in there, but, yes that has been underway. I wouldn't say it was directly as a result of the bookings. I think it was more a result of the opportunity -- and remember I mentioned pipeline and the growth. And what we have already seen from our -- we talked about the Asia Pacific. So that combined with the new leadership in Asia, in globally and everything else, it was that thing that allowed us to cast towards something and drive.

It dovetails with the enterprise success that we see. So when you look at the pipeline and things like that, you get down to a situation where if we didn't accelerate this, we find ourselves caught in, what I call a bandwidth issue in terms of how well you can process these kind of things. So it was a combination of many factors. I would say more that the bookings growth is a supporting data point that backs up all the other qualitative things that I said.

Okay. And then second -- (Multiple Speakers) Go ahead, Jim, sorry.

There was a second part of your question and I think I kind of garbled it. So I wanted to let you get to that.

Okay. No, thank you. So question 1b, thoughts on deferred revenue growth for next year and headcount plans more generally?

Yes, that's one where, Steve, I mean, we could give some pretty loose guidelines. But this is -- we are still in the baking process for the 2015 plan, and bringing in some of these new leaders and capturing their input into it. So it's probably a little bit premature for us to do that, but we will be talking about that in future sessions.

Okay. Great. Now for question two, and then I will finish up. So obviously there is a lot of positive things going on in the business with the strong bookings, the plans to reinvest along with bigger share repurchases. Yet the stock is still -- it is down a little bit today, which kind of surprises me. So I think the only fundamental issue here appears to be the European results and the commentary about Europe.

So given that the European PMIs actually are remaining pretty steady, I would love to get your thoughts on the weakness. Are you seeing any signs of improvement in October? Could we see a return to the mean, the mean being maybe just sluggish growth, but we are not falling off a cliff? Are you making any tweaks to execution, and is your guidance thoroughly derisked, and maybe possibly overly de-risked if we see some improvements there?

When you say thoroughly or adequately derisked, I mean, it is derisked -- when you put a qualitative term on there, not exactly sure. Now keep in mind, Europe we had, like I say, Germany is a very strong market for us typically. And that can change.

We have got some other areas of Europe that have performed pretty well, but in general, the -- but they tended to be in some of the smaller markets. So we are trying to really assess that and not overdrive the equation. Again, long term you can't -- I mean, the strong industrials are -- industrial nations are always going to be a good long-term market for us. But there are a little bumps that happen along the way there that continue on, and those are things that we are going to have to assess. But right now, trying to pin those down at this point, it would be finger in the wind at best.

Okay. Great. Well, thanks a lot, Jim and Maria.

Thank you.

Thank you.

Next we have Sterling Auty of JPMorgan.

Hey, guys. How are you doing?

Hello, Sterling.

So in terms of the buying behavior you are seeing in Europe, how does it compare with the slowdown as we went into the great recession? And what I mean by that is, choice of lease or time-based license versus perpetual, the type of contracts, the size of contracts? How does it compare?

Okay. Well, it really, I would have to say that there is really not a comparison. The again, the time-based -- the perpetual to lease shift in a short-term standpoint, that is fundamentally different, because we saw how that recalibrated nine months, three quarters later. We saw how that recalibrated and kind of readjusted itself, if you recall back in the 2010, 2011 time frame.

That is a fundamentally different motion than someone who used to buy perpetual licenses, and saying hey, what about a four-year deal that -- they are really looking at something a little bit different. The other thing is that those lease shifts tended to be the smaller companies that were looking for some financial respite during a rough time, versus major companies that are looking at a different form of expanded their usage. So I really can't -- I hadn't thought of it in those terms, I think basically because they really were kind of fundamentally different. And again, it tends to focus, as I mentioned earlier, not so much on geographic pockets, but on classification of customer that would want to expand into this level. And they tend to be the bigger names, probably the ones that anybody could rattle off the tip of their tongue type of thing if we could mention them.

Got it. And I missed this, if you said it. But what was the space claim contribution so we can figure out the organic (multiple speakers)?

It was pretty de minimis, but it was a couple of million. Or just around that. It was pretty -- keep in mind, that one gets to be a little bit difficult. Because we were also an OEM of them at one time, and we are actually embedding a lot of that software into the ongoing product.

And in fact, what I was talking about -- when somebody asked about RS 16, well, space claim plays a very interesting role in that new user experience in the way that people interact with their models. And I am not going to say anything more than that, until we actually do the formal release. But that tends to kind of skew the numbers on that, too. But that would at least give you a talking point to rig the numbers around.

All right. Thank you.

Next we have Saket Kalia of Barclays. Please go ahead.

Hello, guys. Thanks for taking my questions here. So first -- just going back to the shift to lease, not to beat a dead horse, but it feels like design overall is starting to feel a little bit more comfortable buying on a lease, and it almost sounds more structural this time around. And I think what you mentioned Jim, was that some of that is particularly happening in some of the multi-physics engagements. Can you just remind us what the benefit is to the customer that is using multi-physics on a lease basis, rather than buying perpetual, excluding kind of the OpEx versus the CapEx trade?

No, no, understood. And so, you ruled out the financial thing, which as I mentioned, is one factor that goes in here. The one thing I would like to draw a distinction between is the difference -- there is a difference in the selling motion of the old, do I do a lease, or do I perpetual license, versus this new emerging kind of set of factors where a major company that used to buy, oh, every year they would buy a few more perpetual licenses. They are sitting there saying, hey, I have got these design cycles.

And let's just take for example, my product -- I have got a very complex product that maybe has a couple year development cycle. And sometimes, I need a lot of access to electronics for the electronics design portion, and sometimes I need to work on embedded software, and sometimes I need -- so depending upon the shifts, being able to look at adjusting those things on the fly, without the traditional thing -- of, well, no, here is your license, if you want to change. So I think it is that flexibility, given the fact they have already made the decision they want to expand the physics and the breadth of usage.

The other thing is then, what that allows them to do -- now this is different than capital versus necessarily OpEx, there is a certain then predictability to them over a long-term period of what to spend, of what the spending patterns will be, and their ability to budget around that. Now that is just -- I would just say that anecdotal from a handful of ones that I have engaged with. I can't guaranteed that is across all the people who are talking about this. But I know that is a constant theme that comes up.

So just to hit on that point of sort of the ability to get more product within a lease -- so just to be clear, is a lease a token-based engagement similar to like an Aspen Technology --

No.

Or is it similar to the EDA companies where you can sort of remix into and out of products depending on need? Just to be able to explain the benefits of lease a little bit more?

Well, a lease is not a token-based one. However, at an enterprise level, a time-based license often has -- I mean, the license mechanism is not distinctly token-based, but it has the same impact of flexibility and remix within certain guidelines. So it has an element that kind of does that. And it also then gets around all the individual first steps that are required for any kind of like, oh, we are going to do a complete new purchase. And then each one almost has to be a new cycle that has gone through. So again, lease, don't think in terms -- that was never a token-like kind of approach. But the enterprise massive time-based licenses does have that element of flexibility and utilization and adoption built into it.

Got it. Got it. And then for my follow-up if I could squeeze it in, goes to the margin side. Maria, I think the prepared remarks said that fourth quarter operating margins should be about 44% without that one-time charge, which I think from this quarter would be a 6 point kind of sequential decline. Typically, we have seen it only maybe between 1 to 3 points down sequentially. First, can you just bracket what that one-time charge will be on a dollar basis? And then why do you think that sequential decline is going to be greater this fourth quarter than what we have seen historically?

So on the one-time cost, it's probably somewhere between $3 million and $5 million. From a sequential cost, it is just, if we take a look at the dynamics of the Apache and the [Esterol] businesses combined with, albeit while there are certain parts of our sales that are not performing as well as planned or we would like, there are other elements of sales that are doing very well, and this is the accelerator time frame for them.

So a lot of the cost around Q4 and people being in accelerators have been factored in. And like any other quarter including this one, to the extent that we deliver towards the higher end of the range on revenue and or above, you will probably see improvement in what we have guided to. But there is just a lot of unknowns right now, and I would rather be safe than sorry.

Understood. That's it for me. Thanks.

Next we have Matt Williams of Evercore.

Hey, good morning, guys.

Hello, Matt.

Thanks for taking the questions. I will try and stick to two. Just on the -- in EMEA, I know we have talked about it a little bit, and sort of going back to some of the success you have had in Asia Pacific with some of the operational changes you have made there. Is there anything operational in EMEA that needs to change, or that you are taking steps to change relative to -- (multiple speakers) -- I know the business environment is not particularly great in some of those markets, but --

No. Well, I mean, the bottom line is, there have been a lot of times where the economic thing might not be all that great, and there are still ways for us to succeed. But I think that, A, we continue to look at some of the -- and some of them are similar, and some of them may be a little different than what we did in Asia Pacific and other parts of the world. But obviously, some of the things we talked about with regard to channel has an impact on that --

Capacity.

As well as the broadening of the multi-physics space. And the capacity issues we talked about are also a major element of that. So we are adding capacity in Europe too, because again the pipelines have strengthened in Europe. But we need to make sure that we can actually close them, and actually probably even expand them over what they are now.

Okay. That's helpful. And then again, sort of sticking with the sales or organizational stuff, in the prepared remarks you talked about making some organizational changes and go-to-market changes. You have talked about increasing sales, hiring, and somewhat of a shift towards these term-based licenses. Is there anything within the sales or go-to-market model that needs to really change, in terms of maybe pursuing the term based approach with the larger customers relative to what you have done in the past?

Well, in terms of -- again, in terms of whole sale shifts of what we would be doing, I would go back to our initial tenet is, where we are going to make many opportunities to acquire the software available to them. And we even to the point of being able to talk about the advantages of each, but then let the customer make the decision. So the last thing we are trying to do is say, oh, we have seen this trend around some of these larger established customers moving in this direction, we see some of the data moving that direction.

That doesn't mean that we want to now force everybody wholesale into that, because there will be some that still continue to have that preference. But what we need to do then, is arm our people with the data and the background to be able to help consult with their customers as to the best way to adopt. By the way, that adoption again, links back into the service motion that we are also accelerating.

Great. Thanks for taking the questions.

Thank you.

The next question we have is a follow-up from Ross MacMillan of RBC Capital Markets.

Thanks a lot. Jim, I just wanted to go back to the $10 million deal. Have you ever signed a $10 million deal before? And also, can you just maybe talk to the duration of a deal like that? Is that also a longer contract duration? Thanks so much.

Oh, yes, it's -- that particular one is a three-year deal. Actually, we did -- we have had larger ones, but maybe over a longer period of time, and things like that. But all that does is it just speaks to the point of, this is not a singular occurrence that happened with one wacky customer. This is something that many people are actually effecting with their dollars today. And then you pile that on top of the fact that we are hearing it from many other customers, and that just becomes too much of a trend in one direction.

Great. Thanks for the clarification.

Okay. Thank you.

Well, at this time, we are showing no further questions. We will go ahead and conclude our question and answer session. I would now like to turn the conference call back over to Jim Cashman for any closing remarks. Sir?

Okay. Thanks a lot, Mike. In close, okay, so let's see, the results of the third quarter reflect strong execution across our product line, across many of the industry sectors, and across almost all geographies. I will just say we are pleased with what we have been able to achieve in the third quarter and year-to-date. We are extremely well positioned to continue our growth into the balance of this year and into next year, with strong recurring revenue, in depth and deepening penetration of our top customers, and the continuous improvement in the functionality of our software solutions.

So all of this, coupled with our disciplined cost management, our industry-leading competitive position, and, of course, our base of talented employees gives us the confidence in our ability to drive the shareholder returns over time, and as we pursue that over $1 billion in revenue mark in 2015. So I will just thank everybody for your time and questions, and we will speak with you again next quarter.

And we thank you, Mr. Cashman, and Ms. Shields for your time today. The conference call has now concluded. At this time, you may disconnect your lines. Thank you again everyone, and have a great day.

Thank you, Mike.

Take care.