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. On July 31, 2008, ANSYS acquired Ansoft Corporation. In accordance with the fair value provisions of accounting for deferred revenue in business combinations, acquired deferred revenue of approximately $7.5 million was recorded on the opening balance sheet, which was approximately $23.5 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 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 these 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.