Ansys' CEO Discusses Q2 2011 Results - Earnings Call Transcript

| About: ANSYS, Inc. (ANSS)
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Ansys (NASDAQ:ANSS) Q2 2011 Earnings Call August 4, 2011 10:30 AM ET

Executives

James Cashman - Chief Executive Officer, President and Director

Unknown Executive -

Maria Shields - Chief Financial Officer, Principal Accounting Officer and Vice President of Finance & Administration

Andrew Yang - Co-Founder, Chairman of the Board and Chief Executive Officer

Analysts

Richard Davis - Canaccord Genuity

Ross MacMillan - Jefferies & Company

Saket Kalia - JP Morgan Chase & Co

Gregory Halter - Great Lake Review

Daniel Cummins - ThinkEquity LLC

Jay Vleeschhouwer - Griffin Securities, Inc.

Steven Ashley - Robert W. Baird & Co. Incorporated

Barbara Coffey - Brigantine Advisors LLC

Blair Abernethy - Stifel, Nicolaus & Co., Inc.

Steven Koenig - Longbow Research LLC

Operator

Ladies and gentlemen, thank you for standing by, and welcome to our second quarter 2011 conference call. With us today are Mr. Jim Cashman, President and Chief Executive Officer; and Maria Shields, Chief Financial Officer of ANSYS; and also Dr. Andrew Yang, Co-Founder and President of Apache Design Solutions. At this time, I would like to turn the call over to Jim Cashman.

James Cashman

Okay. Good morning, and again thanks to everybody for joining us to discuss our 2011 second quarter financial results. So again consistent with our previous Q1 protocol, the general information and key topics relative to Q2's business results are included in the earnings release and in the prepared remarks that we posted on the homepage of our Investor Relations website this morning.

Also as you heard in the operator's introduction, we have a special guest joining us this morning. And I'd like to welcome Dr. Andrew Yang, the Cofounder and President of Apache. And the newest number who joined the ANSYS executive management team, and he'll be joining us for the call. So before we get started, I'm going to introduce Maria Shields, our CFO, and for our Safe Harbor statement. Maria?

Maria Shields

Okay. Thanks, Jim, and good morning, everyone. I'd like to remind you 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 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 our view of the world and our business as of today. And we undertake no obligation to update any such information, unless we do so in a public forum.

Consistent with our standard practice, 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 measures are included in this morning's earnings release, the related prepared remarks in the Form 8-K.

So Jim, I'll turn it back over to you for some opening commentary.

James Cashman

Okay. Thanks, Maria. So again before we open up the call for Q&A, I'd like to briefly highlight a few points about our future results and the updated 2011 outlook.

So let me begin by saying that Q2 was a strong quarter and ended better than we originally expected and with the added milestone of the Apache announcement that we made on the last day of the quarter. We continue to see momentum that's been building over the past several quarters. And as a result, we exceeded the upper end of guidance for revenue, which drove operating leverage and earnings beyond what we had guided.

Overall, we maintained all of the historical strength of ANSYS over a multiyear period with double-digit growth in both software license and maintenance revenue, including reaching a new all-time high deferred balance, and this, in turn, yielded strong margins and cash flows. And consistent with last quarter, our industry composition remains diverse. We're continuing success in areas such as energy, automotive, aerospace and electronics.

Most importantly, this was accomplished while we maintain the core tenets of our long-term vision, including the recent addition of Apache to our portfolio. Many of you may recall that when we met in early March at our Investor Day in New York City, we laid out some of the key themes of our long-term strategy, including opportunities that lay ahead of us for the future of Simulation Driven Product Development. This acquisition is yet another step forward that enabled us to respond to our customers' new reality, a business environment where they simply can't afford to compromise on depth, breadth or quality of the simulation tools that they use to solve their increasingly complex design challenges. It also uniquely positioned us to provide end-to-end simulation solutions for the explosive market around mobile devices and computing power.

The obvious result of all this has been we updated our outlook on revenue and EPS for Q3 in 2011 as discussed in our earnings release. So I'd like to maybe provide some qualitative context around the guidance we provided for Q3 and the remainder of 2011.

First, we are raising the core organic outlook for the year. Second, we've added in, of course, the over performance in the core business in Q2. Third, we've added the impact of Apache for Q3 in the fiscal year 2011. And then lastly, we've updated our currency rates in line with the current rate environment. However, we will be able to [indiscernible] to continue to counter balance or offset with some caution around macro environment. Also as Japan, our second largest market in the world, continues to work its way through the catastrophic events of Q1. Not unlike what others are seeing in their Japanese business, the uncertainty, at least in the next several quarters around the predictability and timing of deal closings, is a reality that we have to be cognizant of and we'd build into our guidance.

The final point I want to briefly highlight is around our strong cash flows from operations in Q2 and the first half and our thoughts around the future uses of cash, consistent with what we've been saying for the past several calls and what we highlighted at our Investor Day, in fact. First, we plan to continue to invest in our business for the long term. Nothing's changed on that front. And then secondly, as the Apache acquisition demonstrates, we have been and will continue to step up our activities around strategic M&A that allows us to accelerate our vision and extend and elevate our customer engagements.

So with that, actually, I'd like take advantage of Andrew being here and maybe just turn it over to him for a few comments he might have on the transaction before we open up the phone lines to take your questions. So Andrew, is there anything you'd like to say?

Andrew Yang

Yes, Jim. Thank you, Jim. I'd like to add a few personal comment about this acquisition and what it means to me and all of the Apache stakeholders. First, I would like to say this is really an exciting day for all of Apache's employees, customers and particularly me being here with the team. We were able to realize this merger in such a short time because it just makes sense. And Apache, over the years, has established itself as undisputedly the market and technology leader in IC power analysis for mobile and high-performance Computing markets.

By joining ANSYS, Apache now accelerates its long-term vision of expansion from chip-level focus to system-centric convergence to meet customers' aggressive power efficiency time-to-market and cost-down initiatives. So as this engineering simulation software space continues its evolution, it is more than ever important and critical to have the size, scope and scale that will enable us, as a combined company, to continue to invest in innovation that ultimately result in very real and measurable benefit to our customers.

Now finally, both ANSYS and Apache have longstanding reputations for being technology leaders providing best-in-class and highly differentiated product. So I'm confident that we can continue to drive operational performance, furthering customer and employee satisfaction while also focusing on long-term value creation for our stockholders. So I look forward to working with Jim and the ANSYS team to take full advantage of the many opportunities that we have ahead of us. Thank you, Jim.

James Cashman

Well, thank you, Andrew, and I echo those sentiments. So operator, I think we're now prepared to begin with the Q&A, if there are any questions.

Question-and-Answer Session

Operator

[Operator Instructions] Please note, this event is being recorded, and we ask that you please limit yourself to one 1-part question with a quick follow-up. [Operator Instructions] The first question is from Dan Cummins of ThinkEquity.

Daniel Cummins - ThinkEquity LLC

I'll just go with this one. Jim, could you give us a comment about the U.S. business? It looks like it -- I'm sorry, North America, just a pretty good-sized deceleration at constant currency. And we didn't see you cite in the prepared remarks electronics as among the growth leaders as it has been in recent quarters.

James Cashman

Okay, well, again what I did highlight was the back of the industry to me was continuing to be quite strong. So I did highlight the ones that were maybe like the leading ones. Again energy, energy conservation, that type of thing. But electronics sector was strong. Our traditional electronics business, likewise, grew disproportionately. It was actually one of the top performers from a product set. Again when we talk about industries, there is electronics industry. But there is electronics, physics and applications built in diversely every industry that we're in, so for instance, automotive, electronics, defense avionics, for instance, and unmanned surveillance and things like that. So I don't want to draw a distinction between the 2 of those. But all of those sectors were pretty good. The second thing is keep in mind that when we talk about -- we scored the U.S. standpoint, keep in mind, there's an awful lot of that. We score that not by the nationality of the company buying it, but where the software is actually being installed and utilized. And as a result of that, I think that you read collateral headlines, you'll see that there's a lot there's a lot of expansion even by U.S. and other foreign multinationals into other parts of the world. So I think what you saw was a little bit of displacement there. Part of that, of course, is a long-standing theme that we've talked about in terms of the availability of engineering talent, which has been extremely tight particularly in the U.S. and more abundant in other parts of the world, most notably Asia. And therefore, you would see a dislocation of that particular standpoint. Also quite frankly, I'd say that there's some places in the world where the business climate is better. And I think that a lot of companies and manufacturing go to that particular realm. And the other thing is there were a couple of slippages that -- not making excuses for it, but there were a couple of things that came in a day or 2 late in the quarter, but relatively minor. But those are the 3 primary factors. And if we're looking at any prevailing trend, basically, built into the guidance is pretty good performance by a continuation of all our geographies.

Daniel Cummins - ThinkEquity LLC

And just if I could, one follow-up on maybe on a larger basis. Looking at the constant currency growth at the company level here, we are at around 11% for the quarter. I'm not sure what is year-to-date, but 11% is a decent distance from high teens, which is, I think, what you typically project organically. What's your outlook here, kind of opinion looking forward x Apache in terms of where that 11% goes in the second half of the year?

James Cashman

Well, first of all, to answer part of the question is within that 13% to 14% year-to-date, in terms of constant currency -- currency has been obviously incredibly very volatile and sometimes just the timing of when things come in can affect that quite a bit. So if you look at the x currency thing, at least implied from there is basically probably going to be the midteens kind of range. So in that 14% to 16%. Again that's the organic constant currency rates.

Operator

The next question is from Steve Koenig of Longbow Research.

Steven Koenig - Longbow Research LLC

I'll make it maybe a multipart question with no follow up. How's that?

James Cashman

Go ahead. We'll see how it works out, though, Steve.

Steven Koenig - Longbow Research LLC

Yes, I'd like to drill into -- you raised your EPS guidance for the year considerably. Certainly, you had to beat this quarter. You've got some accretion from Apache, which we're modeling in the back half as maybe being $0.02 or so. So if you could comment on what are the sources of that EPS upside aside from those things? What's driving that big raise in your EPS guidance? And the related question is it looks like the margins for the core business are going up, that you're actually exploiting some of the margin potential you have there in the core business as you're adding Apache separately. So those are my questions. I'll leave it at that.

James Cashman

Okay, yes. I'm going to try to weave those together. First of all, I think the first thing was in terms of parsing the earnings guidance. And well, first of all, we have the baseline of our old guidance. But first of all, we had a clear beat on the Q2 performance. I mean, that's just flat out. Of course, regardless of constant currency or whatever, our currency rates were obviously published into that range. So that was just numerically a clear beat and a pretty significant one. And second of all, we have factored in some accretion, as we mentioned, from the Apache standpoint. I don't know the particulars of your model. But we do have few pennies in there. And then third, and not insignificant either, is the fact that we've actually increased the guidance obviously on the top line. And whenever we do that, of course, we'll be continuing to invest, but that tends to also drive up the EPS. And obviously, there was a margin improvement. But as historically as this happened, our margin improvement is primarily a direct result of the increase in the revenue attainment, also coupled with the standpoints that we've been talking about for, I think, maybe 4 or 5 quarters back. As we were ramping up our investment pattern, when we bring on new people, we look at them as being not filling a 1 quarter kind of earnings management kind of thing. No, we're building with the idea of maintaining these employees as we have for 10, 15, 20, 30 years. And therefore, we want to make sure we are getting the top quality. And as I mentioned, the market has been fairly tight in terms of the supply. And then so secondarily, as we go through that process, it also becomes an issue for us also. But we still plan on doing the investment. It's just that some of it tends to slip. If it slips a couple of months or so, that obviously drives it into later quarters, most typically. Help me out, guys. I think that was all the things.

Maria Shields

Yes.

Operator

Next, we have a question from Ross MacMillan of Jefferies.

Ross MacMillan - Jefferies & Company

I just wanted to go back and make sure I understand the organic assumption. Because by my calculations on a constant-currency basis, you did decelerate this quarter to 11% from 14% in Q1 and you talked about raising your core organic outlook for the year. So to understand, was that -- I mean, that 14% to 16% rate that you just gave, is that for total revenue for the year? Is that total revenue for the second half? What exactly is that number?

James Cashman

Yes. The thing you talked about was Q3. It's actually a little over for the full year. But the second point is again there's a couple of things you have to take into account. First of all is we did guide headed to this with all the currency, things like that, that was built in. We're still coming out. We're still washing through some of the -- all the bumpiness of '09 to '10 to '11 comparables. And in fact, that has been built in to the guidance. But we now started approach more of a typical seasonality that we've had for a longstanding reason for the seasonality and the [indiscernible] of the revenue. And the other thing is again all the things we're talking about here when we're doing these comparisons is on core in constant currency.

Ross MacMillan - Jefferies & Company

So that was a 3Q comment for 14% to 16%? Is that correct?

James Cashman

Yes.

Ross MacMillan - Jefferies & Company

Okay. And then the other question, follow-up, is going back to the cost. So when we came into this year, you guided for ANSYS pre-Apache at 47% to 49% operating margin. The first half has been 50.7%. So materially, above the high end of that range. How would you have us think about the core ANSYS business in terms of operating margin either for the full year or for the second half?

James Cashman

Well, actually, we do have that in the remarks that we posted on the web. But we're still looking in that 49% to 50% range, which says that we are able to kind of pull in somebody in-process investment that we're trying to do. But obviously, a lot of it is already in the bank along that level. And of course, we look at -- we'll have the issue as we blend the margins with Apache. We want to maintain all the solid aspects of the business while leveraging some of the advantages that the ANSYS business model has been able to do with other partners over a multi-quarter kind of standpoint. And then the other thing is that, as always, while we got that target we're hoping to invest, again this has been a repeated pattern for just a ton of quarters is that if we continue to over perform on the top line, it can increase the leverage. And that's not a bad thing as long as we're not delayed too much in our investment that really is the building pattern for the 3- to 5-year kind of timeframe.

Operator

The next question is from Richard Davis of Canaccord.

Richard Davis - Canaccord Genuity

So with regard to your commentary kind of for the balance of the year, is the guidance that you've given based on kind of consensus economic growth of 3% of 4% for U.S. GDP or basically what's your underlying assumption so that we can calibrate off of that?

James Cashman

Well, the bottom line is none of our calculations plugged in a 3% or 4% growth. But it did in fact plug in the amalgamated view and forecast from a bottoms-up standpoint that, in turn, probably factors in all of the different spending sentiments. Of course, that also breaks down roughly 1/3, 1/3, 1/3 by different geographies. So obviously, there's a lot of different things that can happen that could drive it up or down. But it assumes pretty much kind of a status and not a huge mention in either particular way. Again the one thing I did say is that the one reality that's already in play that we already mentioned was -- it happens to be our #2 market, as you know, is the effect of the demand and the progress and things we're doing in Japan are quite solid. But focus by customers and therefore, predictability and timing of orders particularly across quarterly boundaries, those are a little bit tougher for us to predict. And in fact, we did have we did experience -- we did see some of that in Q2 also. I didn't mention that, but you could also draw that from the prepared numbers that are posted on the website. I probably shouldn't mention it because it wasn't an insignificant thing when you consider all of our Asia business versus the Japan portion of that.

Richard Davis - Canaccord Genuity

And then with regard to Apache, have you made all your personnel decisions with regard to that combination? And then from a customer standpoint, when should they expect Apache to be kind of integrated into your broader workbench suite or however you're planning to integrate that?

James Cashman

I think -- okay, understood. The first thing, and I don't know if I'm trying to read between the lines, but yes, we made all of our personnel decisions on Apache. And they've got a really solid team and they're an efficient structure that, I think, can gain by the combination with ANSYS. But in other words, we're not looking at now what are we going to do to reduce headcount. In fact, we'd like to keep the investment going and probably even ramp it up in addition to combining it with some of the technical capabilities of ANSYS. So in general, if you think back to every major acquisition, we've never predicated it on -- it was always -- it was never buying a troubled asset and getting rid of people. It's always buying top-quality software and leveraging and growing it. So that is especially true with this particular aspect. Now with regard to the integration, we have a multiphase kind of approach, again as we have done with every acquisition. And the first one is we will merge the financial systems, get IT interaction, a range of those infrastructural things partially because it's actually mandatory from a compliance standpoint. But other things, because it allows us to do immediate collaboration. With regard to technology standpoint, actually Andrew and I have put together plans that, hey, we're not going to do a complete shift and disrupt customers and any. But we do have some immediate things that we can do. And in fact, they are probably on, an annual basis, will be some significant market-related technical integrations to start with our other electronics simulation products and then combine with some of the multi-physics aspects. And you'll see some of those over each of the next few years. And then the final part is the customer aspect. And in general, customers, I don't think we'll see any disruption in the kind of flow and interaction they have from a support and that kind of standpoint. However, we will be continuing to open up maybe more opportunities to things that really weren't even possible for people to consider before but actually can leverage in. And I think again that's something that we've been able to do with each of the individual applications. And actually, since I read some of your notes, I kind of want to make a little comment that this doesn't really signal us moving into EDA anymore than it sees us, any more than over the past few decades we were moving into MDA. This is purely about simulation of product performance and complete systems. And whether you're looking at the defense industry, the auto industry, look at anything, look at the handheld devices and what's the biggest thing on every new smartphone? Battery life. Battery life. I mean, it's always on there. So this is really not inching into thing. It's just a recognition that the electronics and the mechanical worlds are converging. And we want to simulate entire products because it's the entire product is what drives customer satisfaction, not a superior component in an inferior system.

Operator

Your next question is from Steve Ashley of Robert W. Baird.

Steven Ashley - Robert W. Baird & Co. Incorporated

Kind of continuing on the same line of questioning, if you can provide some color on your plans for increasing the distribution capacity for Apache? Any color on how long it'll take for you to ramp up your sales reps, and channel, and get them trained on Apache products would be helpful.

James Cashman

Okay, absolutely. The one I'd like to maybe state for the people running the infrastructure here, it seems that each time we're getting a question at least from what we're hearing, the first part is chopping off. I think, so far, it's just been introductions, but if maybe we could just build a couple of seconds delay in there so we don't miss something crucial on that. But with regard to the customer integration and things like that, I think was the question. The channel thing. Again while there's no cookie cutter for this, there are some best practices. And if you look at what we've done. First of all, we have direct and indirect channels. We also -- from whether you're a direct or indirect, there is a certification process you have to go through because we're not going to sacrifice our ISO commitment to quality and that quality is not just product quality, but it's customer support quality. So there are things we have to go through there. With our indirect channel, we also have to see that this is not just somebody looking to have something else to add to the price list, but they actually have to have an investment commitment commensurate with the kind of investment that we're making internally to make those work. Historically, what we found is just like people are not homogeneous, our channel is not homogenous. And as a result of that, you'll find, I think I've said this many times over the last decade, you'll see probably about 20% of our channels that will make immediate investments and will have the technical capacity to quickly start to move into this. And there'll be another 50% or 60% that over the next one to 2 years, will be able to achieve that kind of certification. And there usually are a couple that just really either are in geographies where there isn't a huge push for it, or for any number of reasons, they'll definitely lag. And I see something very similar to this. Now on the customer standpoint, the interesting thing is I think there's -- I don't want to put words in Andrew's mouth, but he had said something earlier about the size, scale and scope. Apache, obviously, has done a really wonderful job in 10 years if you've read their documents. But again as you're rapidly growing, you're constrained a little bit. So they had a much more concentrated user base, and it was focused at some subsegments of the market. Now you combine that with the entry into almost 40,000 ANSYS customers. And the fact that almost all of them are embedding electronics and they have concerns about that, we have a chance to actually now start to introduce those. But we'll be doing that gradually because we don't want to cause a major disruption by, let's say, not fully qualified customers and not fully trained sales people disrupting things. The good news is if you take the top 20 Apache counts, 12 of ANSYS in most of those but 12 of those also have to be very significant ANSYS accounts. And we actually have already had initial contacts by customers that are intrigued by opportunities they see now, that might not have seen before. I don't know, Andrew, is that a -- can you add to that or disagree if you disagree with anything?

Andrew Yang

Yes. I think since the beginning of our discussion with Jim, I think we always focus on 1 point, that is no disruption. No disruption to Apache's customers. I think we want to maintain the core momentum, which has been very strong for Apache. And we will look for opportunity that we can leverage ANSYS' specialty strong channel. But keep in mind, as Jim said, we really want to add value together to the customers. And combined together, I think, we have a lot of opportunity. But we're going to do it progressively, gradually. And that's the key.

Operator

The next question is from Blair Abernethy of Stifel, Nicolaus.

Blair Abernethy - Stifel, Nicolaus & Co., Inc.

Jim, I wonder if you could expand a bit more on the strategy in the high-performance Computing area and particularly, what you're doing with IBM?

James Cashman

Well, obviously, the key thing is that we talked about power-hungry applications. That was one of the themes from Apache. But you talked about people, I mean, now that simulation is really taking hold, the one thing you'll see is that -- and this is why the low end really has not been a huge thing because low-end users are not solving simpler problems. They are actually needing to get into full fidelity simulation. And it turns out that when you look at the cost of computing, and even the cost of software compared to the cost of engineers, and the lack of supply of the engineers, you take all that, and it's essentially people are trying to amplify the engineering talent they do have. And computing and simulation is one particular way of really driving that. So we have seen -- I think we first started talking about this like in Q2 of '10, when we had released the new packs. And they just continue to grow from that. So really, what it gets down to is the desire for increasing power of simulation. And basically, I don't think that's any different than you see that what smartphones did a couple of years ago were kind of cool. Now they're driving all this thing about streaming video and all this other stuff. So it's kind of like at each new level of success opens up, a complete new range of opportunity along those lines. So it continues to be a fast-growing sector. It is a way for people to accelerate the computing capacity and do it very efficiently, sometimes actually utilizing infrastructure that they already have in place. Sometimes, they might sit idle at certain times of the day. So it's an overall balancing aspect. That being said, HPC, I'd say that most times, you can't get through anything without saying the word cloud. And cloud right now for most of our customers is largely related to what some people would call internal cloud applying that kind of standpoint. But ultimately, it has the possibility to expand beyond there. So with that demand and given the fact that, that demand involves software, customer need, hardware, telecom, a range of things, for a number of years actually, we've had basically a number of partners, significant partners, basically anybody in the space in our overall ecosystem for helping to provide that complete capability because, of course, we don't provide -- we don't sell hardware per se. I mean, we have had a Software-as-a-Service offering for 10 years or more and continue to, and that will continue to be a part of our potential offering. But with that, companies like IBM, Microsoft, just a couple of copies. I mean, IBM perhaps we were actually involved in their additional introduction of basically the IBM Engineering Solutions for the Cloud and basically one of the lead technical software-providing capabilities. And it is just continuing to -- we have the capacity to do it and now this is the way of reaching out, helping to expand the reach and the availability to customers.

Operator

The next question is from Greg Halter of Great Lakes Review.

Gregory Halter

Jim, I know in the past you've given some details on some of the customers in the various regions. And just wondering if you have any kind of information such as that, which I know there's comments in the prepared remarks, but I'm not sure you went through some of your customers.

James Cashman

Well, yes. Sometimes, as you know, sometimes, we're just starting to view this as a kind of a competitive advantage or the like, so they tend to -- sometimes, we're constrained on what we say on that. But the main customers, I mean, there are a number of them. And the interesting thing is they continue -- I mean, obviously, we've always had a very broad base, even when simulation was only used by a few people. So we've been able to even slightly broaden the base, but more specifically continue to expand the usage within those bases. So when you look at that, very significant -- I'm trying to get a feel. I think there was somewhere 12, 13, 14 of the 7-figure deals, I believe. And they were spread across multiple regions. Again everything from aerospace companies, the traditional ones. But if you went down, you look at Hewlett-Packard, General Motors, Rolls-Royce, you have some of the oil companies, automotive companies in Japan. I mean, there's -- again it's the usual list of suspects. But it's really along those particular lines.

Gregory Halter - Great Lake Review

Okay. And also in the remarks -- and we've noticed this relationship that you have, the new relationship you have with IBM relative to the cloud, which you were discussing cloud earlier, just wondered if you could elaborate on how you see that relationship playing out.

James Cashman

I'm sorry, with regard -- I mean, just with regard to the cloud in general or? I'm sorry, I want to make sure I understand what you're saying.

Gregory Halter - Great Lake Review

Sure. You have an announcement with IBM. IBM named ANSYS as one of the ISV partner in their engineering solutions for cloud. And just wondered how you see that playing out to ANSYS' benefit?

James Cashman

Well, obviously, anytime you partner with great customers and/or great industry partners, it is a net positive. I think in general, like I said, when you say cloud, there a number of different manifestations of that. And of course, in the case of IBM, they're capable of satisfying both internal and external clouds. Now as I've also talked about on previous calls, first of all, all of the heavy lifting that we needed to do to upgrade the cloud has actually been done over a decade-long period. And that is really the parallelization of the code, basically making it officially break up into something that can span hundreds and thousands of processors. I mean, that's a given. If you don't have that, then you really even can't enter the party. Now beyond that, our customers have been very interested in actually utilizing the HPC things internally. Big issues as we've always talked about. Bandwidth, international property protection, and those continue to be aspects. But also when they do that, they wanted to be a cost-efficiency thing and all I'm saying is that there will a continuum of evolution of the model because frankly, the talking about how you commercialize the utilization of simulation software in an external cloud is quite a bit different than for instance taking utility like a CRM system or an e-mail system or something like that saying, hey, I know that each person is going to be doing this series of transactional type of things. And I can somewhat clock into it. In the case of running this over an external cloud, you can have a situation where somebody would like to avail themselves of it. And they might only use it for a few days, a month for overflow kind of capability. But you may have somebody that gets on and ties up several thousand processors, and it would be the equivalent of -- so in other words, you can't find a "one size kind of fits all" on a monthly fee. And also the predictability of those runs is kind of like people that have teenagers like I do and you let them -- you don't have unlimited texting, and you find out how many text messages can be done at $0.05 and $0.10 and the bill comes in, it turns out to be quite a shock. So that's the business predictability of that. But the fact is the software does run. It is available. And it actually at least from our customer base, we don't have a ton of push for that. I mean, our Software-as-a-Service type of solution, which can run in a cloud has been around for many, many years and it produces a small bit of revenue. It has been a huge growing thing for the aforementioned customer concerns that I mentioned. But these things are going to progress over time. We'll have to see how they progress and the best way to provide those. But obviously, someone with the infrastructure and the resource of an IBM and some of the other major companies that we mentioned are people that are more than able to help wrestle these types of things to the ground. So it is a trend. It is coming. But we want to make sure we keep the substance in front of the hype.

Gregory Halter - Great Lake Review

Okay. And one more quick one -- and I also have 3 teenagers, and I've seen that bill. Relative to your balance sheet now with the Apache completed, it looks like there's about $170 million plus of net cash. Just wanted your thoughts on capital structure, debt rates, debt repayment, things of that nature that you've discussed in the past.

Maria Shields

Yes, certainly. At this point in time, given that the existing roughly $150 million worth of debt that remains, it's carrying a pretax rate of 1%. I really can't see a need for aggressive repayment there, Greg. But as Jim mentioned earlier, we will continue, in addition to Apache, there are many other ideas relative to M&A that we will continue to pursue as we try to broaden and make our way ahead in what's happening in the world of simulation. So that's probably where you're going to see us spend our focus over the course of the next 12 to 18 months.

Operator

The next question is from Saket Kalia of JPMorgan.

Saket Kalia - JP Morgan Chase & Co

It's Saket here for Sterling. Few questions from our side. So first, how much is Apache expected to contribute this year to non-GAAP revenue? And what kind of growth rate do you think that could sort of generate over the next year or 2?

Maria Shields

Well, how about if we stick to 2011 right now? For Q3, we're estimating probably, on a non-GAAP basis, about $9 million. And for the remainder of 2011, roughly on a non-GAAP basis, about $23 million. But we don't see any reason that Apache joining ANSYS should slow down the Apache growth from what they would've expected as a standalone company.

Saket Kalia - JP Morgan Chase & Co

Great. That's helpful. I guess, question on the op margin guidance. Given the guidance for the third quarter and I guess, the implied guidance for the fourth quarter, is it fair to think about operating margin being flat to down in the fourth quarter as that'll be the first quarter that you kind of digest Apache?

Maria Shields

Yes, probably a 1% impact.

James Cashman

The blended.

Saket Kalia - JP Morgan Chase & Co

Got it. And by 1%, meaning 1% kind of down quarter-over-quarter?

James Cashman

It is down, yes.

Maria Shields

Right.

Saket Kalia - JP Morgan Chase & Co

Lastly, on cash flow, I think we're at about $160 million, $465 million here in operating cash flow at the midpoint of the year, which is pretty similar to kind of what you did for the full year last year. So how do you kind of think about cash flow for the remainder of 2011?

Maria Shields

For the full year, roughly somewhere in the $260 million to $275 million range.

James Cashman

Yes. The main difference is here we've actually -- things related to Japan, the flow of the Japan restructuring. By the way, that's not cash that's disappeared. It's just actually a delay type of asset. We got a small inclusion for increased cash flow from Apache. And also this cash flow comes in as a result of our increased -- our raised guidance for the remainder of the year. I think those are the 3 majors, right? And then the predominant one, basically, is the delay in the Japan restructuring.

Maria Shields

Saket, we'll be putting up the 10-Q in a little bit. If you take a look at the liquidity section, there's going to be an update relative to Japan.

Operator

Next, we have a question from Jay Vleeschhouwer of Griffin Securities.

Jay Vleeschhouwer - Griffin Securities, Inc.

Jim, given the progression of your maintenance revenues last quarter and the last few quarters, I'd like to ask about what's going on beneath that in terms of your active installed base. At the analyst meeting 5 months ago, you shared a number of about 475,000 active commercial licenses, which, if I'm not mistaken, was up by about 1/3 or more from the year-earlier number. How are you thinking about the increase you might see in the active base this year excluding Apache versus the number that you talked about for earlier this year and for early 2010? Then a follow-up.

James Cashman

Okay. Well, the first thing is as you start to see the continual ramp-up, you're actually seeing, I think, a paling factor from, as we mentioned there -- we talked a couple of years ago about in '09 where people didn't have access. Some of the maintenance renewal rates dropped a couple of percentage points. Then we talked about 2009 and 2010, how then people came back into that. And then as a result, you can still have some of the growth coming as a result of the noncomparable beginning with a phase back in on maintenance. So the bottom line is, the number one thing driving it though is back to return, traditionally high rates in basically in people going on maintenance and continuing on the enhancement subscription that we have. The other thing is there's no doubt that customers even now, they're driving up on their HPC usage. And the HPC usage has been driving up seat count for us. And again what we're talking there is the active number of processors that can be run because, in general, just counting users, it really can skew the data because you have a clump of users that are like more of the CAD model. One seat, one user, that type of thing. But now we're getting to the standpoint where users are using banks and much more of these. And that's actually driving up the seat count disproportionate to user count. I think we talked a little bit about that at the investor day when you were there. And then you said you had a follow-up?

Jay Vleeschhouwer - Griffin Securities, Inc.

Yes, actually 1.5 follow-ups. But question regarding customer concentration. Last year, 2010, about 33% of your revenues, you say, had come from your top 100 customers and that was a little bit more of a proportion than in the prior couple of years. Again some of the question, how are you seeing the customer concentration progressing this year? Do you think the top 100 become more or less a percentage of your business in 2011? And just to sneak in that half technical question for Andrew to bringing EDA back into the Q&A. Some of your larger peers specifically, Cadence and Synopsys specifically, are incorporating low-power capabilities and methodologies into their flows for digital and custom. As they have done that, how has that affected you, if at all, competitively given that they've embedded low-power capabilities through their tools and through their flows?

James Cashman

Well, first of all, I'm going to try and knock off your follow-on question and maybe you can do an intro for Andrew. This is the first time we've thrown him into the bridge here. But in general, yes, concentration crept up a little bit in the top 100. But again I think we mentioned that during the toughest time, the more solid-leading companies were a little bit more resilient. I mean everybody felt the punch, but they felt it a little bit less. And now we've returned a little bit more to normalcy, if I can even use that word. And as a result, during the -- the top 100 are probably about in the low 20% in terms of -- and again I'm talking about sales intake here, which is very proportional, of course, to revenue. But there are obviously recognition issues based on our revenue rec policies and the like of that. And then with regard to the issue on -- I mean, at least in my -- I'm still heavily in learning mode myself. But in general, the fact that the Cadence or Synopsys, I mean, to me it's very much equivalent to on the MCAD side for many, many years -- for 20, 30 years, CAD players have had some form of maybe a less technical leading edge but still a product that they would offer. These are viable products and things like that. And from my standpoint, it's not really a ton [ph] different metaphorically. But Andrew, you've actually lived it for 10 years and do you have any?

Unknown Executive

Right. I guess, the question is as some of the so-called EDA vendor building to their flow, the low-power design technique, how will that impact Apache from a business standpoint, right? So as Jim said, we've been through this many, many years. We have executed, not just one step ahead, but multiple steps ahead of our competitors. Now bear in mind that keeping is we focus on highly differentiable simulation technology that customers use for sign-off before manufacturing. That's the most critical piece of solution they need for low power. But they also use our solution, gradually migrating to early prototyping, early power reduction and optimization and also expanding it from chip to overall system-centric power. So I think we have built sufficient technique surrounding our core business. At the same time, technology that we can defend our stronghold, our [indiscernible] of so-called core differentiation. So we will continue to do that. We'll continue to look at fore view but also our rearview mirror and we keep track of our competitive landscape and the key thing is we stay ahead. I think that's not going to change, being standalone or as part of ANSYS.

James Cashman

I think I basically, obviously agree with that. And I think the one thing is that again as I mentioned, we're not moving into MCAD, or ECAD or things like that. We focus on simulation. And that was one thing that Apache very much did also. So the point is our continued investment in R&D, coupled with the fact that over decades, we've accumulated really the strongest development team of simulation experts. If you combine that investment with the established people, you continue to push on that standpoint. Also you start to look at the opportunities to balance. It doesn't make any difference that you've got the absolute best electronics, if they are thermally unbalanced, if they overheat, if they're fragile to shocks, so ultimately over time, making sure -- and we can do it on the front end, the ability to predict not only how something will perform but how survivable will it be. And continuing to drive that along with the focus and the increased investment is basically that's something we had to do individually. And we'll do collectively. We had to do it for years, and we'll have to do it years into the future. You can't rest on your laurels.

Operator

Your next question is from Barbara Coffey of Brigantine.

Barbara Coffey - Brigantine Advisors LLC

As you're taking a look at the market for the simulation management systems, what kind of companies are you seeing adopting that, trailing it? What kind of applications are they really using it for?

James Cashman

Well, I'll tell you, it's really interesting because, of course, on one parallel screen, you can compare it to the PDM systems of the '80s and the '90s. But you can also say that when you talk about data knowledge, simulation, process demand and that entire thing, you're almost talking -- I mean, you're talking almost about infinite space and there's everything from personal productivity things to workflow management and best practices propagation. With all that in mind, I mean, we have people that are actually utilizing it to -- as kind of like personal productivity tools. But I'd say there's probably 2 major thrust areas that we have seen moving along those lines. The first of all are major companies when they realize that because of their scale, keeping things in sync and being able to share and collaborate across multiple physical and geographic silos is particularly key. They wind up where just the [indiscernible] is a huge problem. The second part though that's very interesting is the concept of, as we mentioned, engineering talent has been difficult for anybody around the globe to find. What they found is that they may want to take these kinds of applications. And in essence, give the ability to manipulate the knowledge from a simulation to someone who's not even an engineer or simulation person. Key point is when you look at the keeping uptime on an oil platform, but when you're out on the platform, you may not have exactly all the kind of experts out there and the ability to get access to that information and distill it down and make it usable by a much broader range of people. So we've seen it as an extension tool to the people who can benefit, not from doing simulations, but from the knowledge that's gained from simulation. And then finally, increasingly complex environments that our increasingly global spread and being able to unify those. Again the long [indiscernible] implementation is obviously it has to mesh in with the people, organizations and the data. So there's always that kind of a rollout period.

Barbara Coffey - Brigantine Advisors LLC

And then, do you find that there's a need to be linking your systems other PLM or those types of collaborative systems or existing a bit on its own?

James Cashman

No, no, look, it exists on its own but like many things, it also provides disproportionate benefit by allowing it linked together. And as a result, having an affinity between the things that combine our complete systems, for instance, has a very natural linking path to the PDM elements or a PLM kind of environment where you're dealing with product structures and different combinations of data like that. So it is kind of the natural transfer of information as opposed to doing everything point-wise. And so that's becoming a very common way for us to interface.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Jim Cashman for any closing remarks.

James Cashman

Okay. Thanks. Okay, so in close, emphasis for the remainder of 2011 will be the integration of the Apache business and a continued focus on execution, growth and customer engagement, and that's on all aspects of the business commensurate again with our raised guidance. Again customer receptivity in our long-term vision, it just continues to strengthen. We're expecting the release of ANSYS 14 later this year. Actually, we've gone through a number of customer previews already, the addition of the Apache products to our already broad portfolio only serve to strengthen it further. So again it's the same elements. We continue to be propelled by a strong combination of a vision, but a strong business model, loyal customers. We talked about those on this call. The partners, we talked about those. Great technology. And of course, our growing base of exceptional employees. We've been hiring organically. And of course, we just gained a whole new team of great people. And these are all the elements that we continue to build off of. So again, I'll thank everybody for their time. And we'll speak to you next quarter, if not sooner.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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