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Q4 2008 Earnings Call

February 26, 2009, 10:30 am ET


Jim Cashman - President and CEO

Maria Shields - CFO


Greg Dunham - Deutsche Bank

Sterling Audi - JP Morgan

Steven Ashley - Robert W. Baird

Mark Schappel - Benchmark Company

Greg Halter - Great Lakes Review

Ross Macmillan - Jefferies & Company

Steven Koenig - KeyBanc Capital Markets

Blair Abernathy - Thomas Weisel Partners

D.J. Richards - Needham and Company

Sanil Daptardar - Sentinel Investment



Good morning, and welcome to the ANSYS Fourth 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 will now introduce your speaker for this morning's conference call, Mr. Jim Cashman, President and Chief Executive Officer. Please go ahead, Mr. Cashman.

Jim Cashman

Thanks a lot. Good morning and welcome to the ANSYS call for Q4 2008 and the fiscal year end of 2008. And with me today, as usual our CFO, Maria Shields. We will go through our usual outline of highlights of the quarter and the year-to-date at a high level.

And then we'll go into greater depth on the operational results. Then we will go into a discussion of some of the qualitative factors which basically reinforce our long-term optimism, but given the rampant unpredictability of the current economic situation, we will also talk about our approach to maintaining solid earnings and structure without unduly hampering the long-term opportunity.

In the course of this, Maria will then update you on our line item expense performance, balance sheet and cash flows.

And after that we'll go into projections for Q1, 2009, and after discussing those topics we will be happy to respond to any questions you may have. So let's get started, Maria. If you would, our Safe Harbor statement, please.

Maria Shields

Okay, thanks, Jim. Good morning, everyone. Before we begin, I would like to remind everyone that our fourth quarter results include a full quarter of Ansoft operations.

In addition to any risks that we highlight during the course this call, important factors that may affect our future results are discussed at length in our public filings with the SEC, all of which are also available via our website.

Additionally, the company's reported results should not be considered an indication of future performance as there are risks and uncertainties that could impact our business in the future. These 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 public forum.

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 related Form 8-K.

So with all that covered, I'll turn it back over to you, Jim.

Jim Cashman

Okay. Thanks. Let me just begin by saying that Q4 was a good quarter on a number of fronts. And in spite of everything that we faced, we still executed and delivered. The Q4 business results were slightly below our guidance on a revenue basis. But non-GAAP earnings turned out to be well above the guidance due to some of the precautionary controls that we had put in place through most of the past year, and then also some incremental tax benefits.

As always, the numbers that we are using are non-GAAP, and historically consistent fashion. And just as a reminder for us, non-GAAP earnings include the add-back for purchase accounting treatment of acquired deferred revenue, acquisition-related amortization, and stock-based compensation adjustments for 2007, 2008, and these are detailed in our earnings announcement.

So from a high-level perspective this was, again, a very good quarter. Even in these tougher economic times, and off a very strong comparable that included five seven-figure deals.

For the quarter, we reported solid financial performance with non-GAAP revenues of $143.3 million. This represents a 29% increase from last year's Q4 of $111.2 million. This is a tad under our guidance of the $145 million to $149 million range but currency was all over the map to the tune of slightly north of $5 million in net negative impact compared to last Q4. Non-GAAP diluted earnings per share increased 14%, with non-GAAP EPS of $0.50, up from last Q4's comparable of $0.44.

Now, I mentioned that the incremental tax benefits when we adjust for the incremental tax benefit in each of those quarters, the operational comparison is actually about $0.48, up from $0.40, or about a 20% increase. EPS performance was driven by steady non-GAAP revenues combined with business model adjustments that we made in connection with the Ansoft acquisition and in response to the economy.

Just as in the past few years, both have been driven by increasing customer adoptions. But we are also aided by positive vectors in the Ansoft integration and our own long-standing disciplined approach to spending.

Secondly, most of the major aspects of the business performed as anticipated. Each geography grew, and we had significant input from each major product line. We saw continued strong growths in operating margins, cash flows, and a stable business model. So basically almost every metric was positive there.

We saw a fair amount of resiliency in our customer engagements that included expansion in our major accounts and the addition of many new customers. Equally important, our recurring base continued to be strong, even in these difficult times. We even saw a few of the seven-figure orders which contributed some new license business for the quarter, but disproportionately to building the deferred revenue balance.

There was continued expansion of portfolio sales and cross selling, and something that we expect to cultivate with Ansoft over the next few years.

Anecdotally, customers are still telling us that even in the tougher economic times there's a heightened need on their part for product innovation. So while this is far from bulletproof, they generally feel that they can not achieve this mission with lower end or less-capable solutions.

So this is one of the major factors that's seen us through a wide range of economic conditions while still filling a critical customer need. We believe that the combination of this depth and breadth of our simulation capabilities combined with the power of a flexible and open Workbench platform put us in even better position to increase our market share and expand relationships within our existing and extensive customer base.

So with that in mind, I will go into the operational highlights. And I guess before I go into the operational highlights, I would like to set the high level stage because there will be a number of different ways that we are presenting numbers.

And I know everybody likes to look at them from a different perspective. So first of all, with the Ansoft acquisition we have some non-comparability in the quarterly numbers and, to a lesser degree, to an annual basis. So we are going to be talking in terms of both total numbers and organic numbers to provide that particular look.

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