ANSS

ANSYS, Inc. (ANSS)

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ANSYS, Inc. (ANSS)

Q3 FY08 Earnings Call

November 6, 2008, 10:30 AM ET

Executives

James E. Cashman III - President, CEO and Director

Maria T. Shields - CFO, VP - Finance and Administration

Analysts

Richard Davis - Needham & Company

Andrew Matorin - JP Morgan

Barbara Coffey - Kaufman Bros.

Mark Schappel - Benchmark

Woo Jin Ho - Merrill Lynch

Jack Miller - Robert W. Baird

Greg Dunham - Deutsche Bank

Steve Koenig - KeyBanc Capital Market

Ross Macmillan - Jefferies & Co.

David Schneider - Axiom International

Presentation

Operator

Good morning and welcome to the ANSYS Third Quarter 2008 Earnings Conference Call. All participants will be in a listen-only mode until the question-and-answer session of the call. Today's conference is being recorded at the request of ANSYS Incorporated. If anyone has any objections, you may disconnect at this time. I would like to introduce your speaker for this morning's call, Mr. Jim Cashman, President and Chief Executive Officer. Mr. Cashman, you may begin.

James E. Cashman III - President, Chief Executive Officer and Director

Okay, thanks Trisha. Good morning and welcome everybody to the ANSYS call for Q3 2008. We plan to announce another solid quarter and with me today to help me do that is our CFO, Maria Shields. I'm sure this is going to be an interest agenda and discussion today, but we plan on going through our usual outline of the highlights of the quarter and year-to-date in summary fashion and of course we'll go into greater depth on all the operational results and are also go into some discussion of some quality factors which accentuate our long-term optimism, as well as some firewalls that we put in place during this time of current upheaval or confusion in the market.

In general, the value proposition of our offerings remain quite strong, as essentially how tangible a value that we bring to our customers through these results is real in both good and bad times. And this value has been reinforced by our completion of the Ansoft acquisition on July 31st. In the short amount of time, since then we've already been able to start our integration efforts. Now in the course of this, Maria will then update you on our line item expense performance, balance sheet, cash flows and provide an update on our current outlook on earnings. We'll then go into projections for the remainder of this year, and our outlook for 2009. And after discussing those topics, we'll be happy to respond to any questions you may have. So let's get started. Maria, our Safe Harbor Statement, if you please?

Maria T. Shields - Chief Financial Officer, Vice President - Finance and Administration

Okay, thanks Jim. Good morning and again thank you everyone for joining us to review the highlights of ANSYS's third quarter results. Before we begin, I'd like to remind everyone that our third quarter results include two months of Ansoft operations, following the successful close of the acquisition on July 31st. Also during the course of this conference call, some matters that will be discussed that's either part of the prepared remarks or in response to questions, may constitute forward-looking statements that involves risks and uncertainties, which could cause actual results to differ materially from those projected.

Additionally, the company's reported results should not be considered an indication of future performance, as there are potential risks and uncertainties that could impact our business in the future. These are discussed at length in our corporate filings with the SEC, all of which are also available via our website. Any forward-looking statements are based upon the company's best judgment as of today, and ANSYS undertakes no obligation to update any such information unless we do so in a public forum. Also during the course of this call, we will be making reference to non-GAAP financial measures in an effort to provide supplemental information to our GAAP disclosures. A discussion and full reconciliation of GAAP financial measures to comparable non-GAAP measures is included in this morning's earnings release and the related Form 8-K.

Now with that all covered, I'll turn it back over to Jim. He's going to go through an overview of third quarter and year-to-date performance on a number of fronts including profit as it relates to the Ansoft acquisition, as well as our current outlook for the remainder of 2008 and fiscal 2009. Jim?

James E. Cashman III - President, Chief Executive Officer and Director

Okay. Let's start with the overall summary. So basically, Q3 business results saw continued strong performance at virtually all aspects of the ANSYS business. It represented a result above the upper ends of the range of our non-GAAP revenue guidance and above our earnings guidance as well. Now as always, the numbers that we're are using are non-GAAP. This is a historically consistent passion that we've taken. Non-GAAP earnings include the add back for purchase accounting treatment of acquired differed revenue, our acquisition related amortization and stock based compensation adjustments for 2007 and 2008 as detailed in our earnings announcement.

So to those of you who are new to our history, since we have moved into some new indexes after acquisition from a GAAP perspective, we actually in parenthesis, of course kind of lose some of the deferred revenue from leases and maintenance. But the business is still there, the cash is there and the revenue typically reduced at a very high rate. So that's the reason we make those distinctions. So in our non-GAAP numbers, we treat the business out as if it was in fact there, so as to not to deflate the current year's business or to artificially inflate subsequent year's growth. This has been our methodology for years, and we feel it gives the most accurate and historically comparable representation of the underlying business performance.

So with that said, from a high level perspective, this will begin a very solid quarter even in these tougher economic times and off of a strong comparable. For the quarter, we reported solid financial performance with non-GAAP revenues of $128.8 million. This represents a 37% increase from the last Q3's 94 million. This is a little over our guidance of the $123 to $127 billion rates and as Maria mentioned earlier, keep in mind; this does include two months of Ansoft revenue. So if we exclude all that, the organic growth was 19% or 17% in constant currencies.

Non-GAAP diluted earnings per share increased 39% with non-GAAP EPS of $0.43, up from last Q3's comparable $0.31. And this was also above our guidance in the analyst consensus. Now just as in the past few years, our non-GAAP revenue and EPS performance for the quarter and they're both primarily a direct consequence of strong top line performance, which is then driven by increasing customer adoption, but we're also aided by positive vectors in the Ansoft integration and our own longstanding disciplined approach to spending.

All major aspects of the business performed well. There is double digit growth in each geography and product line. We saw continued strong growth in operating margins, cash flows, the business model was essentially stable. Basically, every metric was positive. We saw continued acceleration of customer engagements that included expansions in our major accounts, and the addition of many new customers. We even saw a few of the seven figure orders, which contributed a little bit to new license business for the quarter, but disproportionately contributed to building the differed revenue balance. There was a continued expansion of portfolio sales and cross selling, something that we expect to cultivate with Ansoft over the next few years.

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