CIMdata PLM Industry Summary Online Archive
3 May 2007
Financial News
ANSYS, Inc. Delivers Record First Quarter Operating Results
ANSYS, Inc. announced a new Company record for first quarter non-GAAP operating results.
"We are very excited to start off 2007 with record first quarter operating results. These results are the outcome of the persistent dedication and efforts of the global ANSYS team and demonstrate our continued progress in executing on our long-term vision," stated Jim Cashman, ANSYS President and CEO. "We entered into this fiscal year with enthusiasm and momentum, and we continue to be pleased with the measurable progress against our integration plans for the Fluent acquisition, particularly as we have reached another important milestone with the one year anniversary this week."
ANSYS' first quarter 2007 financial results are presented below. The non-GAAP results exclude the income statement effects of stock-based compensation, purchase accounting for deferred revenue and acquisition-related amortization of intangible assets. Non-GAAP and GAAP results reflect:
• Total non-GAAP revenue of $89.6 million in the first quarter of 2007 and total GAAP revenue of $87.9 million in the first quarter of 2007 as compared to $46.0 million in the first quarter of 2006;
• A non-GAAP operating profit margin of 42.6% in the first quarter of 2007 as compared to 43.4% in the first quarter of 2006; a GAAP operating profit margin of 30.5% in the first quarter of 2007 as compared to 38.7% in the first quarter of 2006;
• Non-GAAP net income of $23.5 million in the first quarter of 2007 as compared to $14.5 million in the first quarter of 2006; GAAP net income of $16.2 million in the first quarter of 2007 as compared to GAAP net income of $12.9 million in the first quarter of 2006; and
• Non-GAAP diluted earnings per share of $0.58 in the first quarter of 2007 as compared to $0.42 in the first quarter of 2006; GAAP diluted earnings per share of $0.40 in the first quarter of 2007 as compared to GAAP diluted earnings per share of $0.38 in the first quarter of 2006.
The Company's GAAP results reflect stock-based compensation charges of approximately $2.2 million ($1.8 million after tax) or $0.04 diluted earnings per share for the first quarter of 2007.
The non-GAAP financial results highlighted above, and the non-GAAP financial outlook for 2007 discussed below, represent non-GAAP financial measures. A reconciliation of these measures to the appropriate GAAP measures, for the three months ended March 31, 2007 and 2006, and for the 2007 financial outlook, is included in the condensed financial information included in this release.
Continuing his comments, Cashman noted, "We remain committed to provide an unparalleled array of world-class engineering simulation solutions as demonstrated by the recent delivery of new product releases to the market, which included ANSYS 11.0. This release represents the continued advancement of our integrated, best-in-class computer-aided engineering (CAE) functionality, including advanced analysis, meshing, optimization, multiphysics and multibody dynamics."
Cashman concluded, "Looking ahead, our first quarter results lay the groundwork for continued momentum in 2007, and as such, we are increasing our outlook for the year. We believe that we are well positioned to invest and capitalize on the global market opportunities for growth, leveraging our extensive customer base, strategic vision, technology leadership, and solid business model, to drive technological and operational excellence."
Management's Remaining 2007 Financial Outlook
The Company has provided its 2007 revenue and earnings per share guidance below. The revenue and earnings per share guidance is provided on both a GAAP basis and a non-GAAP basis. Non-GAAP revenue and non-GAAP diluted earnings per share exclude charges for stock-based compensation, as well as the income statement effects of purchase accounting for deferred revenue and acquisition- related amortization of intangible assets.
As required by SFAS No. 123R and guidance issued by the Securities and Exchange Commission, effective January 1, 2006, the Company records expenses and tax benefits related to stock-based compensation. As a result, the GAAP estimates for earnings per share provided below reflect the anticipated impact of stock-based compensation. The Company issues both nonqualified and incentive stock options; however, incentive stock options comprise a significant portion of outstanding stock options. The tax benefits associated with incentive stock options are unpredictable, as they are predicated upon an award recipient triggering an event that disqualifies the award and which then results in a tax deduction to the Company. GAAP requires that these tax benefits be recorded at the time of the triggering event. The triggering events for each option holder are not easily projected. In order to estimate the tax benefit related to incentive stock options, the Company makes many assumptions and estimates, including the number of incentive stock options that will be exercised during the period by U.S. employees, the number of incentive stock options that will be disqualified during the period and the fair market value of the Company's stock price on the exercise dates. Each of these items is subject to significant uncertainty. Additionally, a significant portion of the tax benefits related to disqualified incentive stock options is accounted for as an increase to equity (additional paid-in capital) rather than as a reduction in income tax expense, especially in the periods most closely following the adoption date of SFAS No. 123R. Although all such benefits continue to be realized through the Company's tax filings, this accounting treatment has the effect of increasing tax expense and reducing net income. For example, the Company realized a tax benefit of $1.3 million during the first quarter of 2007 related to disqualified incentive stock options; however, only $99,000 of such amount was recorded as a reduction in income tax expense. Because there are significant limitations in estimating the impact of SFAS No. 123R, including those discussed above, the actual impact of stock-based compensation on GAAP earnings per share may differ materially from the estimated amounts included in the guidance below.
Impact of Adoption of FIN 48
Effective January 1, 2007, the Company adopted FASB Interpretation No. (FIN) 48, "Accounting for Uncertainty in Income Taxes" - an Interpretation of SFAS No. 109, "Accounting for Income Taxes." Pursuant to FIN 48, ANSYS identified, evaluated and measured the amount of income tax benefits to be recognized for all of its income tax positions. The adoption of FIN 48 resulted in an increase to income tax expense in the first quarter of 2007 of $584,000 and a corresponding adverse impact on the effective tax rate of 2.3%. Income taxes as a percentage of GAAP earnings before income taxes were approximately 37% in the first quarter of 2007 as compared to 34% in the first quarter of 2006. This rate fluctuates over time based on the income tax rates in the various jurisdictions in which the Company operates, and based on the level of profits in those jurisdictions.
Second Quarter 2007 Guidance
The Company currently expects the following for the quarter ending June 30, 2007:
• GAAP revenue in the range of $87 - $89 million
• Non-GAAP revenue in the range of $87 - $89 million
• GAAP diluted earnings per share of $0.35 - $0.38
• Non-GAAP diluted earnings per share of $0.52 - $0.53
Fiscal Year 2007 Guidance
The Company currently expects the following for the fiscal year ending December 31, 2007:
• GAAP revenue in the range of $363 - $366 million
• Non-GAAP revenue in the range of $365 - $368 million
• GAAP diluted earnings per share of $1.46 - $1.53
• Non-GAAP diluted earnings per share of $2.14 - $2.17
Non-GAAP revenue and diluted earnings per share are supplemental financial measures and should not be considered as a substitute for, or superior to, revenue and diluted earnings per share determined in accordance with GAAP.
ANSYS will hold a conference call at 10:30 a.m. Eastern Time on May 3, 2007 to discuss first quarter results. The replay will be available for one week by dialing 719-457-0820 or 888-203-1112 and entering the passcode "ANSYS" or "26797". The archived webcast can be accessed, along with other financial information, on ANSYS' website at http://www.ansys.com/corporate/investors.asp .
Use of Non-GAAP Measures
The Company provides non-GAAP revenue, non-GAAP operating income, non-GAAP operating profit margin, non-GAAP net income and non-GAAP diluted earnings per share as supplemental measures to GAAP regarding the Company's operational performance. These financial measures exclude the impact of certain items and, therefore, have not been calculated in accordance with GAAP. A detailed explanation of each of the adjustments to such financial measures is described below. This press release also contains a reconciliation of each of these non-GAAP financial measures to its most comparable GAAP financial measure.
Management uses non-GAAP financial measures (a) to evaluate the Company's historical and prospective financial performance as well as its performance relative to its competitors, (b) to set internal sales targets and spending budgets, (c) to allocate resources, (d) to measure operational profitability and the accuracy of forecasting, (e) to assess financial discipline over operational expenditures and (f) as an important factor in determining variable compensation for management and its employees. In addition, many financial analysts that follow our Company focus on and publish both historical results and future projections based on non-GAAP financial measures. We believe that it is in the best interest of our investors to provide this information to analysts so that they accurately report the non- GAAP financial information. Moreover, investors have historically requested and the Company has historically reported these non-GAAP financial measures as a means of providing consistent and comparable information with past reports of financial results.
While management believes that these non-GAAP financial measures provide useful supplemental information to investors, there are limitations associated with the use of these non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance with GAAP, are not reported by all of the Company's competitors and may not be directly comparable to similarly titled measures of the Company's competitors due to potential differences in the exact method of calculation. The Company compensates for these limitations by using these non-GAAP financial measures as supplements to GAAP financial measures and by reviewing the reconciliations of the non-GAAP financial measures to their most comparable GAAP financial measures.
The adjustments to these non-GAAP financial measures, and the basis for such adjustments, are outlined below:
Purchase accounting for deferred revenue. As announced on May 1, 2006, ANSYS acquired Fluent Inc. in a series of mergers. In accordance with the fair value provisions of EITF 01-3, "Accounting in a Business Combination for Deferred Revenue of an Acquiree," acquired deferred revenue of approximately $31.5 million was recorded on the opening balance sheet, which was approximately $20.1 million lower than the historical carrying value. Although this purchase accounting requirement has no impact on the Company's business or cash flow, it adversely impacts the Company's reported GAAP software license revenue primarily for the first twelve months post- acquisition. In order to provide investors with financial information that facilitates comparison of both historical and future results, the Company has provided non-GAAP financial measures which exclude the impact of the purchase accounting adjustment. The Company believes that this non-GAAP financial adjustment is useful to investors because it allows investors to (a) evaluate the effectiveness of the methodology and information used by management in its financial and operational decision-making and (b) to compare past and future reports of financial results of the Company as the revenue reduction related to acquired deferred revenue will not recur when related annual lease licenses and software maintenance contracts are renewed in future periods.
Amortization of intangibles from acquisitions and its related tax impact. The Company incurs amortization of intangibles, included in its GAAP presentation of amortization of software and acquired technology, and amortization expense, related to various acquisitions it has made in recent years. Management excludes these expenses and their related tax impact for the purpose of calculating non-GAAP operating income, non-GAAP operating profit margin, non-GAAP net income and non-GAAP diluted earnings per share when it evaluates the continuing operational performance of the Company because these costs are fixed at the time of an acquisition, are then amortized over a period of several years after the acquisition and generally cannot be changed or influenced by management after the acquisition. Accordingly, management does not consider these expenses for purposes of evaluating the performance of the Company during the applicable time period after the acquisition, and it excludes such expenses when making decisions to allocate resources. The Company believes that these non-GAAP financial measures are useful to investors because they allow investors to (a) evaluate the effectiveness of the methodology and information used by management in its financial and operational decision-making and (b) compare past reports of financial results of the Company as the Company has historically reported these non-GAAP financial measures.
Stock-based compensation expense and its related tax impact. The Company incurs expense related to stock-based compensation included in its GAAP presentation of cost of software licenses, cost of maintenance and service, research and development expense and selling, general and administrative expense. Although stock-based compensation is an expense of the Company and viewed as a form of compensation, management excludes these expenses for the purpose of calculating non-GAAP operating income, non-GAAP operating profit margin, non-GAAP net income and non-GAAP diluted earnings per share when it evaluates the continuing operational performance of the Company. Specifically, the Company excludes stock-based compensation during its annual budgeting process and its quarterly and annual assessments of the Company's and management's performance. The annual budgeting process is the primary mechanism whereby the Company allocates resources to various initiatives and operational requirements. Additionally, the annual review by the board of directors during which it compares the Company's historical business model and profitability as it relates to the planned business model and profitability for the forthcoming year excludes the impact of stock-based compensation. In evaluating the performance of senior management and department managers, charges related to stock-based compensation are excluded from expenditure and profitability results. In fact, the Company records stock-based compensation expense into a stand-alone cost center for which no single operational manager is responsible or accountable. In this way, management is able to review on a period-to-period basis each manager's performance and assess financial discipline over operational expenditures without the effect of stock-based compensation. The Company believes that the non-GAAP financial measures are useful to investors because they allow investors to (a) evaluate the Company's operating results and the effectiveness of the methodology used by management to review the Company's operating results, and (b) review historical comparability in its financial reporting, as well as comparability with competitors' operating results.
Acquired in-process research and development. The Company incurs in- process research and development expenses when technological feasibility for acquired technology has not been established and no future alternative use for such technology exists. Management excludes these expenses and their related tax impact for the purpose of calculating non-GAAP financial measures when it evaluates the continuing operational performance of the Company because these costs do not relate to the Company's ongoing operations and generally cannot be changed or influenced by management at the time of or after the acquisition. Accordingly, management does not consider these expenses for purposes of evaluating the performance of the Company during the applicable time period after the acquisition, and it excludes such expenses when making decisions to allocate resources. The Company believes that this non-GAAP financial adjustment is useful to investors because it allows investors to (a) evaluate the effectiveness of the methodology and information used by management in its financial and operational decision-making and (b) to compare past and future reports of financial results of the Company as the expense related to in-process research and development is a one-time item recorded on the date of acquisition.
Non-GAAP financial measures are not in accordance with, or an alternative for, generally accepted accounting principles in the United States. The Company's non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable GAAP financial measures, and should be read only in conjunction with the Company's consolidated financial statements prepared in accordance with GAAP.
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