ANST Ansoft Corp (MM)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For The Quarterly Period Ended January 31, 2008

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________to _________

Commission file number 000-27874

Registrant’s telephone number, including area code: (412) 261-3200

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  þ  No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o  No  þ

The number of shares of the registrant’s Common Stock outstanding as of the close of business on January 31, 2008 was 23,322,296.

 

 

ANSOFT CORPORATION
FORM 10-Q
INDEX

				Page
Part I		FINANCIAL INFORMATION
Item 1.		Financial Statements (unaudited)
		Consolidated Balance Sheets — January 31, 2008 and April 30, 2007			1
		Consolidated Statements of Operations — Three and nine months ended January 31, 2008 and 2007			2
		Consolidated Statements of Cash Flows — nine months ended January 31, 2008 and 2007			3
		Notes to the Unaudited Consolidated Financial Statements			4
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			7
Item 3.		Quantitative and Qualitative Disclosure about Market Risk			10
Item 4.		Controls and Procedures			10
Part II		OTHER INFORMATION
Item 1A.		Risk Factors			11
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			11
Item 6.		Exhibits			11
Signatures					11
EX-31.1
EX-31.2
EX-32.1

PART I FINANCIAL INFORMATION

See accompanying notes to the unaudited consolidated financial statements.

See accompanying notes to the unaudited consolidated financial statements.

ANSOFT CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
(unaudited)

(1) Basis of Presentation

The unaudited consolidated financial statements include the accounts of Ansoft Corporation (“Ansoft” or the “Company”) and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of financial position and results of operations have been made. Operating results for interim periods are not necessarily indicative of results which may be expected for a full year. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the April 30, 2007 consolidated financial statements and notes thereto included in Ansoft’s Annual Report on Form 10-K filed with the Securities and Exchange Commission.

The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. The estimates and assumptions used in the accompanying unaudited consolidated financial statements are based on management’s evaluation of the relevant facts and circumstances as of the date of the unaudited consolidated financial statements. Actual results may differ from those estimates.

(2) Comprehensive income

“Comprehensive income” includes foreign currency translation gains and losses and unrealized gains and losses on marketable securities, net of tax. A summary of comprehensive income follows:

(3) Net Income Per Share

Basic net income per share is calculated using the weighted-average number of common shares outstanding during the period. The weighted-average basic shares were 23,329 and 23,451 for the three and nine month periods ended January 31, 2008, respectively. Diluted net income per share is computed using the weighted-average number of common shares and potentially dilutive common shares outstanding during the period. The weighted-average dilutive shares were 25,182 and 25,454 for the three and nine month periods ended January 31, 2008, respectively. Potentially dilutive common shares consist of the incremental common shares issuable upon the exercise of employee stock options, and are computed using the treasury stock method. Potentially dilutive common shares are excluded from the calculation if their effect is antidilutive. Unexercised stock options of 152 and 15 shares for the three month periods ended January 31, 2008 and 2007, respectively, are not included in the computation of diluted earnings per share because the option exercise price was greater than the average market price, and therefore their inclusion would have been anti-dilutive. Unexercised stock options of 87 and 34 shares for the nine month periods ended January 31, 2008 and 2007, respectively, are not included in the computation of diluted earnings per share because the option exercise price was greater than the average market price, and therefore their inclusion would have been anti-dilutive.

The Company repurchased 241 and 103 shares at an average price of $23.97 and $25.38 in the three-month periods ended January 31, 2008 and 2007, respectively. The Company repurchased 1,349 and 429 shares at an average price of $27.22 and $21.83 in the nine-month periods ended January 31, 2008 and 2007, respectively.

(4) Stock-Based Compensation

The Company’s income from operations and income before income taxes includes stock-based compensation of $0.3 million and $0.6 million for the three month periods ended January 31, 2008 and 2007, respectively, and net income was reduced by $0.3 million, or $0.01 per diluted share, and $0.5 million, or $0.02 per diluted share for the three month periods ended January 31, 2008 and 2007, respectively, due to the inclusion of stock-based compensation. The Company’s income from operations and income before income taxes includes stock-based compensation of $0.9 million and $1.9 million for the nine month periods ended January 31, 2008 and 2007, respectively, and net income was reduced by $0.8 million, or $0.03 per diluted share, and $1.5 million, or $0.06 per diluted share for the nine month periods ended January 31, 2008 and 2007, respectively, due to the inclusion of stock-based compensation. The stock-based compensation expense was recorded in sales and marketing, research and development, and general and administrative.

(5) Line of Credit

On October 22, 2007, the Company renewed for an additional year its secured credit facility, with an aggregate commitment of up to $30,000, with a domestic financial institution (the “Bank”). At the Company’s option, borrowings under the credit facility bear interest at the Bank’s prime lending rate or the LIBOR rate plus a margin of .050 basis points. The facility is secured by the Company’s marketable securities.

The ability of the Company to borrow under the credit facility is subject to its ongoing compliance with certain financial and other covenants, including a tangible net worth covenant. As of January 31, 2008, the Company was in compliance with its covenants under the credit facility. As of January 31, 2008, the Company had no borrowings under the credit facility.

(6) Commitments and Contingencies

The Company sells software licenses and services to its customers under proprietary software license agreements. Each license agreement contains the relevant terms of the contractual arrangement with the customer, and generally includes certain provisions for indemnifying the customer against losses, expense and liabilities from damages that may be incurred by or awarded against the customer in the event the Company’s software or services are found to infringe upon a patent, copyright, or other proprietary right of a third party.

To date, the Company has not had to reimburse any of its customers for any losses related to these indemnification provisions and no material claims asserted under these indemnification provisions are outstanding as of January 31, 2008. For several reasons, including the lack of prior indemnification claims, the Company cannot determine the maximum amount of potential future payments, if any, related to such indemnification provisions.

(7) Intangible Assets

The following is a summary of intangible assets as of January 31, 2008:

These intangible assets are amortized over their estimated useful lives, ranging between three and seven years. There are no expected residual values related to these intangible assets. Remaining fiscal year 2008 amortization as of January 31, 2008 is $295.

(8) Income Taxes

The Company adopted the provisions of Financial Standards Accounting Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), an interpretation of FASB Statement No. 109 (“SFAS 109”), on May 1, 2007. As a result of the implementation of FIN 48, the Company was not required to record a cumulative effect of adoption of FIN 48 to beginning retained earnings. At the adoption date of May 1, 2007, the Company had $3.2 million of unrecognized tax benefits that is classified as a non-current liability, of which all would affect our effective tax rate if recognized. At January 31, 2008, the Company had $3.4 million of unrecognized tax benefits. The Company does not reasonably expect any material changes to the estimated amount of the liability associated with its uncertain tax positions through April 30, 2008.

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of May 1, 2007, the Company had approximately $0.2 million of accrued interest related to uncertain tax positions. The tax years 2005 — 2007 remain open to examination by the major taxing jurisdictions to which we are subject.

(9) Recent Accounting Pronouncements

In September 2006, the FASB issued FASB Statement No. 157, “Fair Value Measurements” (SFAS 157), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 is effective for the Company in the beginning of the Company’s 2009 fiscal year. The Company is currently evaluating the impact, if any, that SFAS 157 will have on its consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115,” (SFAS 159) which provides entities with an option to report selected financial assets and liabilities at fair value. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 will be effective for the Company beginning in the Company’s 2009 fiscal year. The Company is currently evaluating the impact that SFAS No. 159 will have on its consolidated financial statements.

(10) Marketable Securities

Marketable securities, classified as available for sale, are summarized as follows:

At January 31, 2008, the contractual maturities of the debt securities available for sale are:

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve substantial risks and uncertainties. When used in this Form 10-Q, the words “anticipate,” “plan,” “believe,” “estimate,” “expect” and similar expressions as they relate to Ansoft or its management are intended to identify such forward-looking statements. Ansoft’s actual results, performance or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements. Factors that could cause or contribute to such differences include (1) the degree and rate of growth of the markets in which Ansoft competes and the accompanying demand for Ansoft’s products, (2) the level of product and price competition, (3) the ability of Ansoft to develop and market new products and to control costs, (4) the ability to expand its direct sales force (5) the ability to attract and retain key personnel , and (6) other risks and uncertainties set forth in Ansoft’s public reports filed with the SEC, including, but not limited to, its annual report on Form 10-K for the fiscal year ended April 30, 2007. Ansoft does not undertake to publicly update or revise its forward-looking statements even if experience or future developments make it clear that any projected results expressed or implied therein will not be realized.

Overview

Ansoft is a leading developer of high-performance electronic design automation (EDA) software. Engineers use Ansoft software to achieve first-pass system success when designing mobile communication and Internet-access devices, broadband networking components and systems, integrated circuits (ICs), printed circuit boards (PCBs) and electromechanical systems. Ansoft markets its products worldwide through its own direct sales force and has comprehensive customer-support and training offices throughout North America, Asia and Europe.

During the third quarter of fiscal year 2008, revenues increased by 15% from the previous fiscal year’s third quarter. New license revenue increased 14% and maintenance revenue increased 16% when compared to the previous fiscal year’s third quarter. The Company experienced growth in both its domestic and international markets for the quarter ended January 31, 2008 when compared to the previous fiscal year’s third quarter.

Income from operations for the third quarter was $10.0 million representing a 36% increase when compared to operating income of $7.4 million in the previous fiscal year’s third quarter.

Results of Operations

Comparison of the Three and Nine Months Ended January 31, 2008 and 2007

Revenue . Total revenue in the three and nine-month periods ended January 31, 2008 increased 15% to $26.1 and $69.4 million, respectively. License revenue during the three-month period ended January 31, 2008 increased 14% to $15.0 million from $13.1 million during the comparable period in the prior fiscal year. License revenue during the nine-month period ended January 31, 2008 increased 15% to $37.1 million from $32.3 million during the comparable period in the prior fiscal year. The increases are due to continued advancements in electronic products resulting in an increased demand for our software products worldwide. Service and other revenue in the three and nine-month periods ended January 31, 2008 increased 16% and 14%, respectively, due to the continued growth of the installed base of customers under annual maintenance agreements.

International revenue accounted for 57% and 61% of the Company’s total revenue in the three-month periods ended January 31, 2008 and 2007, respectively. Revenue in Asia accounted for 40% and 41% and revenue in Europe accounted for 17% and 20% in the three-month periods ended January 31, 2008 and 2007, respectively. International revenue accounted for 61% and 60% of the Company’s total revenue in the nine-month periods ended January 31, 2008 and 2007, respectively. Revenue in Asia accounted for 43% and 42% in the nine-month periods ended January 31, 2008 and 2007, respectively. Revenue in Europe accounted for 18% in both the nine-month periods ended January 31, 2008 and 2007. As of January 31, 2008 and April 30, 2007, there were net assets of $10.2 million and $22.3 million in Asia. Generally, the Company believes international sales are subject to additional risks associated with international operations, including currency exchange fluctuations, tariff regulations and requirements for export.

Exchange rates will fluctuate throughout the fiscal year. When comparing the percentage of international revenues to total revenues for the three and nine-month period, using current year exchange rates for the prior year revenues, the international revenue as a percentage of total revenue would increase 2% to 63% and remain at 60% of total revenue for the three and nine-month periods ended January 31, 2007, respectively.

Cost of revenue . Cost of revenue consists primarily of software materials, personnel and other expenses related to providing maintenance, post-contract customer support, licenses and upgrades to customers. Cost of revenue for the three and nine-month periods ended January 31, 2008 increased 11% and 16% from the comparable period in the prior fiscal year.

Sales and marketing expenses . Sales and marketing expenses consist of salaries; commissions paid to internal sales and marketing personnel, promotional costs and related operating expenses. Sales and marketing expenses in the three and nine-month periods ended January 31, 2008 increased 13% and 9% to $9.1 million and $25.8 million from the comparable periods in the prior fiscal year. Stock based compensation expense of $0.1 million and $0.2 million was included in sales and marketing expenses for the three month periods ended January 31, 2008 and 2007, respectively. Stock based compensation expense of $0.3 million and $0.4 million was included in sales and marketing expenses for both the nine month periods ended January 31, 2008 and 2007, respectively. Sales and marketing expenses represented 37% and 39% of total revenue in the nine-month periods ended January 31, 2008 and 2007, respectively. This decrease is a result of the Company continuing to gain leverage from its sales force.

Research and development expenses . Research and development expenses include all costs associated with the development of new products and enhancements to existing products. Total research and development expenses for the three and nine-month periods ended January 31, 2008 decreased 5% and 2% to $4.8 million and $14.3 million from the comparable periods in the prior fiscal year. Total research and development costs for the nine-month period decreased primarily due to a reduction of $0.8 million in stock based compensation expense to $0.3 million. Stock based compensation expense of $0.1 million and $0.3 million was included in research and development expenses for the three month periods ended January 31, 2008 and 2007, respectively. Research and development expenses represented 21% and 24% of total revenue in the nine-month periods ended January 31, 2008 and 2007, respectively.

General and administrative expenses . General and administrative expenses for the three and nine month periods ended January 31, 2008 decreased 9% and remained flat from the comparable periods in the prior fiscal year. Stock based compensation expense of $0.1 million was included in general and administrative expenses for the three month periods ended January 31, 2008 and 2007. Stock based compensation expense of $0.3 million was included in general and administrative expenses for both the nine month periods ended January 31, 2008 and 2007. General and administrative expenses represented 6% and 7% of total revenue in the nine-month periods ended January 31, 2008 and 2007, respectively.

Amortization expense . Amortization expense for the three and nine-month periods ended January 31, 2008 increased 2% and decreased 11% from the comparable periods in the prior fiscal year. The decrease during the nine-month period is due to various intangible assets being fully amortized in the prior fiscal year.

Other income, net . Other income for the three and nine-month periods ended January 31, 2008 was $0.8 million and $2.3 million, an increase of $0.2 million and $0.4 million from the same period in the previous fiscal year.

Income tax expense. In the three and nine month periods ended January 31, 2008, the Company recorded tax expense of $4.3 million and $9.4 million compared to $1.6 million and $5.4 million for the same periods in the previous fiscal year. The effective tax rate was lower in the prior fiscal periods because net income for those periods included a tax benefit of $1.1 million for the U.S. Research and Development Tax Credit enacted by Congress retroactive to January 1, 2006 in December 2006.

Liquidity and Capital Resources

As of January 31, 2008, Ansoft had $30.5 million in cash and cash equivalents and $33.6 million of marketable securities. Net cash provided by operating activities in the nine-month periods ended January 31, 2008 and 2007 was $22.5 million and $20.3 million, respectively.

Net cash used in investing activities in the nine-month periods ended January 31, 2008 and 2007 was $12.0 million and $5.6 million, respectively. Capital expenditures were $0.5 million and $0.6 million in the nine-month periods ended January 31, 2008 and 2007, respectively. Purchases of marketable securities were $20.1 million and $4.9 million in the nine-month periods ended January 31, 2008 and 2007, respectively. Included in purchases of marketable securities in the nine-month period ended January 31, 2008 was $9.6 million of auction rate securities.

Net cash used in financing activities was $31.1 million and $6.5 million in the nine-month periods ended January 31, 2008 and 2007, respectively. Proceeds from the issuance of common stock were $2.4 million and $1.3 million in the nine-month periods ended January 31, 2008 and 2007. Funds used for the repurchase of common stock were $36.7 million and $9.4 million in the nine-month periods ended January 31, 2008 and 2007, respectively. Shares were repurchased at an average price of $27.22 and $21.83 in the nine-month periods ended January 31, 2008 and 2007, respectively. The Company expects to continue to purchase common stock under its share repurchase plan.

A summary of Ansoft’s significant contractual obligations and commitments as of January 31, 2008 is as follows (in thousands and for fiscal year):

For fiscal year 2008, the balance of $790 represents the remaining payments due as of January 31, 2008.

Critical Accounting Policies

As discussed in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 2007, the Company considers its policies on revenue recognition, valuation of accounts receivable, impairment of long-lived assets, impairment of marketable securities available for sale, stock-based compensation and deferred tax asset valuation allowance to be the most critical in understanding the judgments that are involved in preparing its consolidated financial statements. With the adoption of FIN 48 as of May 1, 2007, the Company has added “Uncertain Tax Positions” as a critical accounting policy.

Uncertain Tax Positions

The Company accounts for uncertain tax positions in accordance with FIN 48. The application of income tax law is inherently complex. Laws and regulations in this area are voluminous and are often ambiguous. As such, the Company is required to make many subjective assumptions and judgments regarding its income tax exposures. Interpretations of and guidance surrounding income tax laws and regulations change over time. As such, changes in its subjective assumptions and judgments can materially affect amounts recognized in the consolidated balance sheets and statements of operations. See Note 8 to the unaudited consolidated financial statements, “Income Taxes”, for additional detail on the Company’s uncertain tax positions.

Effect of Recent Accounting Pronouncements

In September 2006, the FASB issued FASB Statement No. 157, “Fair Value Measurements” (SFAS 157), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 will be effective for the Company beginning in the Company’s 2009 fiscal year. The Company is currently evaluating the impact, if any, that SFAS 157 will have on its consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115,” (SFAS 159) which provides entities with an option to report selected financial assets and liabilities at fair value. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 will be effective for the Company beginning in the Company’s 2009 fiscal year. The Company is currently evaluating the impact that SFAS No. 159 will have on its consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosure about Market Risk

There have been no material changes in reported market risks faced by the Company since April 30, 2007.

Interest Rate Risk. The Company’s exposure to market risk for changes in interest rates relates primarily to its investment portfolio. The Company mitigates its risk by diversifying its investments among securities and limits the amount of credit exposure to any one issuer. The Company does not hedge any interest rate exposures. The portfolio includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity.

Foreign Currency Risk. The majority of our foreign currency transactions are denominated in yen or euros, which are the functional currencies of Japan and Europe, respectively. As a result of transactions being denominated and settled in such functional currencies, the risks associated with currency fluctuations are primarily associated with foreign currency translation adjustments. We do not currently hedge against foreign currency translation risks and do not currently believe that foreign currency exchange risk is significant to our operations due to the short term nature of assets and liabilities denominated in foreign currencies.

The average foreign exchange rates used to translate the statements of operations were as follows:

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