Ansoft (ANST) 10-Q 2006 Q3 Quarterly report

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, 2006

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

ANSOFT CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	72-1001909
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification no.)

225 West Station Square, Suite 200	15219-1119
Pittsburgh, Pennsylvania	(Zip Code)
(Address of principal executive offices)

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. Yesþ Noo

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

     Large accelerated filero Accelerated filerþ Non-accelerated filero

     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, 2006 was 11,833,310.

ANSOFT CORPORATION
FORM 10-Q
INDEX

		Page
Part I	FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)
	Consolidated Balance Sheets — January 31, 2006 and April 30, 2005	1
	Consolidated Statements of Operations — Three and nine months ended January 31, 2006 and 2005	2
	Consolidated Statements of Cash Flows — Nine months ended January 31, 2006 and 2005	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	14
Item 4.	Controls and Procedures	14
Part II	OTHER INFORMATION
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	15
Item 6.	Exhibits	16
Signatures		17
EX-31.1
EX-31.2
EX-32.1

PART I FINANCIAL INFORMATION

     Item 1. Financial Statements

ANSOFT CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

(unaudited)

	January 31,			April 30,
	2006			2005
Assets
Current assets
Cash and cash equivalents	$	10,498		$	11,910
Accounts receivable, net of allowance for doubtful accounts of $525 and $425, respectively		12,660			17,388
Deferred income taxes		566			229
Prepaid expenses and other assets		1,780			1,148
Total current assets		25,504			30,675
Equipment and furniture, net of accumulated depreciation of $7,764 and $6,961, respectively		2,696			2,811
Marketable securities		31,365			28,496
Other assets		128			146
Deferred income taxes		5,733			6,177
Goodwill		1,239			1,239
Other intangible assets, net		2,800			3,877
Total assets	$	69,465		$	73,421
Liabilities and stockholders’ equity
Current liabilities
Accounts payable	$	500		$	231
Accrued payroll		1,429			2,290
Other accrued expenses		2,522			3,076
Current portion of deferred revenue		15,114			17,500
Total current liabilities		19,565			23,097
Long-term portion of deferred revenue		1,189			1,039
Total liabilities		20,754			24,136
Stockholders’ equity
Preferred stock , par value $0.01 per share; 1,000 shares authorized, no shares outstanding		—			—
Common stock , par value $0.01 per share; 25,000 shares authorized; issued 14,194 and 13,901 shares, respectively and outstanding 11,833 and 12,083, respectively		142			140
Additional paid-in capital		75,596			70,410
Treasury stock, 2,361 and 1,818 shares, respectively		(36,119	)		(21,762	)
Accumulated other comprehensive loss, net		(1,267	)		(338	)
Retained earnings		10,359			835
Total stockholders’ equity		48,711			49,285
Total liabilities and stockholders’ equity	$	69,465		$	73,421

See accompanying notes to the unaudited consolidated financial statements.

Page 1

ANSOFT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(unaudited)

	Three months ended January 31,				Nine months ended January 31,
	2006		2005		2006			2005
Revenue
License	$	11,251	$	10,182	$	27,194		$	25,012
Service and other		8,404		7,198		25,279			20,992
Total revenue		19,655		17,380		52,473			46,004
Costs of revenue
License		135		141		368			363
Service and other		368		355		1,019			1,015
Total cost of revenue		503		496		1,387			1,378
Gross profit		19,152		16,884		51,086			44,626
Operating Expenses
Sales and marketing		8,013		7,424		22,477			22,522
Research and development		4,188		4,204		12,377			12,230
General and administrative		1,122		1,199		3,692			3,592
Amortization		370		415		1,108			1,208
Total operating expenses		13,693		13,242		39,654			39,552
Income from operations		5,459		3,642		11,432			5,074
Net realized gain (loss) on sale of securities		—		—		(2	)		732
Other income, net		269		374		749			975
Income before income taxes		5,728		4,016		12,179			6,781
Income tax expense		1,468		1,232		2,655			2,076
Net income	$	4,260	$	2,784	$	9,524		$	4,705
Net income per share
Basic	$	0.36	$	0.24	$	0.80		$	0.41
Diluted	$	0.33	$	0.21	$	0.73		$	0.35
Weighted average shares used in calculation
Basic		11,849		11,490		11,852			11,574
Diluted		12,957		13,390		12,961			13,342

See accompanying notes to the unaudited consolidated financial statements.

Page 2

ANSOFT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)

	Nine months ended January 31,
	2006			2005
Cash flows from operating activities
Net income	$	9,524		$	4,705
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation		995			1,076
Amortization		1,412			1,437
Loss (gain) on sale of marketable securities		2			(732	)
Changes in assets and liabilities
Accounts receivable		4,016			(1,411	)
Prepaid expenses and other assets		(670	)		(446	)
Other long-term assets		(11	)		202
Accounts payable and accrued expenses		2,140			723
Deferred revenue		(1,405	)		2,930
Net cash provided by operating activities		16,003			8,484
Cash flows from investing activities
Purchases of equipment and furniture		(905	)		(633	)
Proceeds from the sale of marketable securities		3,177			17,264
Purchases of marketable securities		(6,876	)		(17,758	)
Net cash provided by (used in) investing activities		(4,604	)		(1,127	)
Cash flows from financing activities
Repayment of line of credit, net		—			(8,000	)
Purchase of treasury stock		(14,357	)		(11,443	)
Proceeds from the issuance of common stock, net		2,200			3,771
Net cash used in financing activities		(12,157	)		(15,672	)
Net decrease in cash and cash equivalents		(758	)		(8,315	)
Effect of exchange rate changes		(654	)		454
Cash and cash equivalents at beginning of period		11,910			15,218
Cash and cash equivalents at end of period	$	10,498		$	7,357
Supplemental disclosures of cash flow information
Cash paid for interest	$	—		$	85
Cash paid (received) for income taxes	$	(44	)	$	853

See accompanying notes to the unaudited consolidated financial statements.

Page 3

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, 2005 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 US 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 other unrealized gains and losses, net of tax. A summary of comprehensive income follows:

	Three months ended					Nine months ended
	January 31,					January 31,
	2006		2005			2006			2005
Net income	$	4,260	$	2,784		$	9,524		$	4,705
Unrealized gain (loss) on marketable securities		213		(133	)		(524	)		60
Reclassification adjustment for (gain)/loss on sale of marketable securities included in net income		—		—			2			(732	)
Foreign currency translation adjustments		—		158			(407	)		325
Comprehensive income	$	4,473	$	2,809		$	8,595		$	4,358

(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 11,849 and 11,852 for the three and nine month periods ended January 31, 2006, 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 12,957 and 12,961 for the three and nine month periods ended January 31, 2006, 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. All unexercised stock options for the three-month period ended January 31, 2006 are included in the computation of diluted earnings per share. Unexercised stock options of 5 shares for nine-month period ended January 31, 2006 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.

Page 4

(4) Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with the Financial Accounting Standards Board’s (“FASB”) SFAS No. 123 “Accounting for Stock-Based Compensation.” This statement permits a company to choose either a fair value based method of accounting for its stock-based compensation arrangements or to comply with the Accounting Principles Board (“APB”) Opinion No. 25 intrinsic value based method, adding pro forma disclosures of net income and earnings per share computed as if the fair value based method had been applied in the financial statements. The Company has adopted SFAS No. 123 by retaining the APB Opinion No. 25 method of accounting for stock-based compensation with pro forma disclosures of net income and earnings per share. The pro forma effects of stock options on the Company’s net income for those periods may not be representative of the pro forma effect for future periods due to the impact of vesting and potential awards. Pursuant to APB Opinion No. 25 the Company did not recognize compensation expense in its statements of operations for the three and nine month periods ended January 31, 2006 and 2005.

The Company’s pro forma information follows:

	Three months ended January				Nine months ended January
	31,				31,
	2006		2005		2006		2005
Net income as reported	$	4,260	$	2,784	$	9,524	$	4,705
Deduct: Total stock-based employee compensation expense determined under fair value based method, net of tax		473		506		1,575		1,744
Pro forma net income	$	3,787	$	2,278	$	7,949	$	2,961
Net income per basic common share, as reported	$	0.36	$	0.24	$	0.80	$	0.41
Pro forma net income per basic common share	$	0.32	$	0.20	$	0.67	$	0.26
Net income per diluted common share, as reported	$	0.33	$	0.21	$	0.73	$	0.35
Pro forma net income per diluted common share	$	0.29	$	0.17	$	0.61	$	0.22

(5) Line of Credit

On October 28, 2005, 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”). The facility had replaced the Company’s $20,000 secured facility which was terminated during the first quarter of fiscal 2005. 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 our ongoing compliance with certain financial and other covenants, including a tangible net worth covenant. As of January 31, 2006, the Company was in compliance with its covenants under the credit facility.

As of January 31, 2006, 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.

Page 5

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, 2006. 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, 2006:

Purchased Technology	$	2,230
Non-Compete		2,500
Trademark		212
Customer list		18,488
Total	$	23,430

Total accumulated amortization as of January 31, 2006 was $20,630.

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. Estimated fiscal year amortization as of January 31, 2006 is as follows: 2006 - $358; 2007 — $1,272; and 2008 – $1,170.

(8) Stockholders’ Equity

The Company has consistently repurchased its common stock in public market transactions over the past several years. During the nine-month period ended January 31, 2006, the Company purchased a total of 543 shares of its common stock at an average price of $26.44. The Company utilized $14,357 in cash to effect these common stock purchases. The Company may choose to continue purchases of its common stock in the future.

In October 2004, the Company’s Board of Directors increased the authorized share repurchase amount by 1,000 shares to 3,000.

The Company currently has two stock option plans (1988 Plan and 1995 Plan). Under the terms of both plans, options to purchase common stock are granted at no less than the stock’s fair market value at the date of the grant and may be exercised during the specified future periods as determined by the Board of Directors. Both plans provide that the options shall expire no more than ten years after the date of the grant. During the first nine months of the fiscal year 2006, 48 shares were granted at an average exercise price of $23.34. At January 31, 2006 options to purchase 1,607 shares of common stock were exercisable at an average exercise price of $7.82.

Page 6

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 certain 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, and (5) the ability to attract and retain key personnel.

Overview

Ansoft is a developer of electronic design automation (“EDA”) software used in high technology products and industries. Ansoft’s software is used by electrical engineers in the design of state of the art technology products, such as cellular phones, internet networking, satellite communications systems, computer chips and circuit boards, and electronic sensors and motors. Engineers use our software to maximize product performance, eliminate physical prototypes, and reduce time-to-market.

During the third quarter of fiscal year 2006, revenues increased by 13% from the previous fiscal year’s third quarter. New license revenue increased by 11% and maintenance revenue increased 17%. The Company experienced growth in both our domestic and international markets for the quarter ended January 31, 2006.

Net income for the quarter was $4.3 million compared to $2.8 million during the third fiscal quarter of 2006.

Results of Operations

	Three months ended							Nine months ended
	January 31,							January 31,
	(In thousands)				Percentage			(In thousands)					Percentage
	2006		2005		change			2006			2005		change
Revenue	$	19,655	$	17,380		13.1	%	$	52,473		$	46,004		14.1	%
Cost of revenue		503		496		1.4	%		1,387			1,378		0.7	%
Gross profit		19,152		16,884		13.4	%		51,086			44,626		14.5	%
Operating Expenses
Sales and marketing		8,013		7,424		7.9	%		22,477			22,522		(0.2	%)
Research and development		4,188		4,204		(0.4	%)		12,377			12,230		1.2	%
General and administrative		1,122		1,199		(6.4	%)		3,692			3,592		2.8	%
Amortization		370		415		(10.8	%)		1,108			1,208		(8.3	%)
Total operating expenses		13,693		13,242		3.4	%		39,654			39,552		0.3	%
Income from operations		5,459		3,642		49.9	%		11,432			5,074		125.3	%
Net realized gain (loss) on sale of securities		—		—		—			(2	)		732		—
Other income, net		269		374		(28.1	%)		749			975		(23.2	%)
Income before income taxes		5,728		4,016		42.6	%		12,179			6,781		79.6	%
Income tax expense		1,468		1,232		19.2	%		2,655			2,076		27.9	%
Net income	$	4,260	$	2,784		53.0	%	$	9,524		$	4,705		102.4	%

Page 7

Comparison of the Three and Nine Months Ended January 31, 2006 and 2005

Revenue. Total revenue in the three and nine-month periods ended January 31, 2006 increased 13.1% and 14.1% to $19.7 and $52.5 million. License revenue during the three-month period ended January 31, 2006 increased 10.5% to $11.3 million from $10.2 million during the comparable period in the prior fiscal year. License revenue during the nine-month period ended January 31, 2006 increased 8.7% to $27.2 million from $25 million during the comparable period in the prior fiscal year. The increases are due in part to an improving economy, particularly an improvement in the technology sectors resulting in an increased demand for our software products worldwide. Growth occurred in both our high performance electronics and electromechanical (EM) product lines for the three and nine-month periods. Service and other revenue in the three and nine-month periods ended January 31, 2006 increased 16.8% and 20.4%, respectively, due to the continued growth of the installed base of customers under annual maintenance agreements.

International revenue accounted for 63% and 56% of the Company’s total revenue in the three-month periods ended January 31, 2006 and 2005, respectively. Revenue in Asia accounted for 45% and 39% and revenue in Europe accounted for 18% and 17% in the three-month periods ended January 31, 2006 and 2005, respectively. International revenue accounted for 62% and 57% of the Company’s total revenue in the nine-month periods ended January 31, 2006 and 2005, respectively. Revenue in Asia accounted for 44% and 39% and revenue in Europe accounted for 18% in the nine-month periods ended January 31, 2006 and 2005, respectively. 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 decrease 2% to 54% and 1% to 56% of total revenue for the periods ended January 31, 2005, 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, 2006 increased 1.4% and remained flat when compared to the same periods 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, 2006 increased 7.9% to $8.0 million and remained flat at $22.5 million when compared to the same periods in the prior fiscal year. Sales and marketing expenses represented 43% and 49% of total revenue in the nine-month periods ended January 31, 2006 and 2005, respectively.

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, 2006 remained flat at $4.2 million and increased 1.2% to $12.4 million. Research and development expenses represented 24% and 27% of total revenue in the nine-month periods ended January 31, 2006 and 2005, respectively.

General and administrative expenses. General and administrative expenses for the three-month period ended January 31, 2006 decreased 6.4% to $1.1 million. General and administrative expenses for the nine-month period ended January 31, 2006 increased 2.8% to $3.7 million. General and administrative expenses represented 7% and 8% of total revenue in the nine-month periods ended January 31, 2006 and 2005, respectively.

Amortization expense. Amortization expense for the three and nine-month periods ended January 31, 2006 decreased 10.8% and 8.3%, respectively. The decrease is due to various intangible assets being fully amortized in the prior fiscal year.

Page 8

Net realized gain (loss) on sale of securities. Net realized gain (loss) for the nine-month periods ended January 31, 2006 and 2005 was $ (2,000) and $0.7 million, respectively.

Other income, net. Other income for the three and nine-month periods ended January 31, 2006 was $0.3 million and $0.7 million, a decrease of $0.1 million and $0.2 million from the same periods in the previous fiscal year. The decrease is primarily due to losses realized on foreign currency exchange during the nine-month period ending January 31, 2006.

Income tax expense.In the three and nine-month periods ended January 31, 2006, the Company recorded tax expense of $1.5 million and $2.7 million compared to $1.2 million and $2.1 million for the same periods in the previous fiscal year. During the second quarter of fiscal 2006, the Company elected to claim a federal tax credit and refund related to foreign taxes previously paid. As a result, net income for the nine-month period ended January 31, 2006 includes a tax benefit of $0.5 million for an expected refund of prior years federal tax payments. The Company anticipates utilizing excess foreign tax credits claimed during the current fiscal year. This would favorably impact the full year effective rate by approximately 7%.

Liquidity and Capital Resources

As of January 31, 2006, Ansoft had $10.5 million in cash and cash equivalents and $31.4 million of marketable securities. Net cash provided by operating activities in the nine-month periods ended January 31, 2006 and 2005 was $16.0 million and $8.5 million, respectively.

Net cash used in investing activities in the nine-month periods ended January 31, 2006 and 2005 was $4.6 million and $1.1 million, respectively. Capital expenditures were $0.9 million and $0.6 million in the nine-month periods ended January 31, 2006 and 2005, respectively. Proceeds from the sale of marketable securities were $3.2 million and $17.3 million in the nine-month periods ended January 31, 2006 and 2005, respectively. Purchases of marketable securities were $6.9 million and $17.8 million in the nine-month periods ended January 31, 2006 and 2005, respectively. Auction rate securities purchases and sales totaling $3.1 million were included in the current year activity.

Net cash used in financing activities was $12.2 million and $15.7 million in the nine-month periods ended January 31, 2006 and 2005, respectively. Proceeds from the issuance of common stock were $2.2 million and $3.8 million in the nine-month periods ended January 31, 2006 and 2005, respectively. Funds used for the repurchase of common stock were $14.4 million and $11.4 million in the nine-month periods ended January 31, 2006 and 2005, respectively. The Company expects to continue to purchase common stock under its share repurchase plan.

The Company had available a $30.0 million secured line of credit from a domestic financial institution at an interest rate equal to LIBOR plus 50 basis points or the Bank’s prime lending rate, at the Company’s option. The line of credit was established in January 2005. As of January 31, 2006, the outstanding balance was $-0-. The Company believes that the net cash provided by operating activities will be sufficient to meet its anticipated cash needs for working capital and capital expenditures for the foreseeable future. Thereafter, if cash generated from operations and existing cash and marketable securities are insufficient to satisfy the Company’s liquidity requirements, the Company may seek additional funds through equity or debt financing. There can be no assurance that additional financing will be available or that, if available, such financing will be on terms favorable to the Company.

A summary of Ansoft’s significant contractual obligations and commitments as of January 31, 2006 is as follows (in thousands and for fiscal year):

	Operating Leases
2006	$	572
2007		1,732
2008		1,298
2009		539
2010		112
2011		80

For fiscal year 2006, the balance of $572 represents the remaining payments due as of January 31, 2006. For fiscal year 2011, the balance of $80 represents the payments through January 31, 2011.

Page 9

Critical Accounting Policies

Ansoft’s critical accounting policies are as follows:

• Revenue Recognition

• Valuation of Accounts Receivable

• Impairment of Long-Lived Assets

• Impairment of Marketable Securities Available for Sale

• Deferred Tax Asset Valuation Allowance

Revenue Recognition.Revenue consists of fees for licenses of software products and service and other revenue. Ansoft recognizes revenue in accordance with SOP 97-2, “Software Revenue Recognition,” and related interpretations. Accordingly, revenue is recognized when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the vendor’s fee is fixed or determinable, and collectibility is probable.

License revenue. Ansoft licenses its software on a perpetual basis with no right to return or exchange the licensed software. License revenue is recognized based on the residual method.

Postcontract customer support (“PCS”) for an initial three month period is bundled with the perpetual license fee. Revenue related to the three-month PCS is deferred and recognized ratably over the three-month term. Ansoft’s vendor-specific objective evidence of fair value, or VSOE, for the three-month PCS is based upon the pricing for comparable transactions when the element is sold separately. Ansoft’s VSOE for the three-month PCS is based upon one fourth of the customer’s annual maintenance contract renewal rates.

Service and other revenue consists primarily of PCS revenue. Following the initial three month PCS period, Ansoft offers customers one-year maintenance contracts generally at 15% of the list price of the respective software products. Ansoft recognizes all maintenance revenue ratably over the respective maintenance period. Customers typically renew maintenance agreements annually.

Revenue from customer training, support and other services is recognized as the service is performed.

Valuation of Accounts Receivable.Management reviews accounts receivable to determine which are doubtful of collection. In making the determination of the appropriate allowance for doubtful accounts, management considers Ansoft’s history of write-offs, relationships with its customers, and the overall credit worthiness of its customers. The allowance for doubtful accounts as of January 31, 2006 and April 30, 2005 was $0.5 million and $0.4 million respectively. We had no significant changes in our collection policies or payment terms during the nine-month period ended January 31, 2006.

Impairment of Long-Lived Assets.The Company reviews assets for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. A determination of impairment is made based on estimates of future cash flows. If such assets are considered to be impaired the amount of the impairment is based on the excess of the carrying value over the fair value of the assets.

Goodwill and purchased intangibles with indefinite lives are reviewed annually for impairment. A determination of impairment is based on the estimated fair value of the reporting entity.

Impairment of Marketable Securities Available for Sale.An impairment charge is recorded if a decline in the market value of any available for sale security below cost is deemed to be other than temporary. The impairment is charged to earnings and a new cost basis for the security is established.

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Deferred Tax Asset Valuation Allowance.Deferred tax assets are recognized for deductible temporary differences, net operating loss carryforwards, and credit carryforwards. To the extent that it is more likely than not that some portion or all of the deferred tax asset will not be realized, a valuation allowance is established. The Company considers projected future taxable income and tax planning strategies in making this assessment.

The judgments used in applying the above policies are based on management’s evaluation of the relevant facts and circumstances as of the date of the financial statements. Actual results may differ from those estimates.

Additional Risk Factors that may affect Future Results

Our Future Operating Results Are Uncertain.

Ansoft has incurred net losses in two of the past five fiscal years. There can be no assurance that Ansoft’s revenue and net income will grow or be sustained in future periods or that Ansoft will be profitable in any future period. Future operating results will depend on many factors, including the degree and the rate of growth of the markets in which Ansoft competes and the accompanying demand for Ansoft’s products, the level of product and price competition, the ability of Ansoft to develop and market new products and to control costs, the ability of Ansoft to expand its direct sales force and the ability of Ansoft to attract and retain key personnel.

Our Quarterly Operating Results Are Difficult To Predict.

We are unable to accurately forecast our future revenues primarily because of the emerging nature of the market in which we compete. Our revenues and operating results generally depend on the size, timing and structure of licenses. These factors have historically been, and are likely to continue to be, difficult to forecast. In addition, our current and future expense levels are based largely on our operating plans and estimates of future revenues and are, to an extent, fixed. We may be unable to adjust spending sufficiently or quickly enough to compensate for any unexpected revenue shortfall. Accordingly, any significant shortfall in revenues in relation to our planned expenditures would seriously harm our business, financial condition and results of operations. Such shortfalls in our revenue or operating results from levels expected by public market analysts and investors could seriously harm the trading price of our common stock. Additionally, we may not learn of such revenue shortfalls, earnings shortfalls or other failure to meet market expectations until late in a fiscal quarter, which could result in an even more immediate and serious harm to the trading price of our common stock.

Our quarterly operating results have varied, and it is anticipated that our quarterly operating results will vary, substantially from period to period depending on various factors, many of which are outside our control. Due to the foregoing factors, we cannot predict with any significant degree of certainty our quarterly revenue and operating results. Further, we believe that period-to-period comparisons of our operating results are not necessarily a meaningful indication of future performance.

Our Stock Price Is Extremely Volatile.

The trading price of our common stock has fluctuated significantly in the past, and the trading price of our common stock is likely to be highly volatile and could be subject to wide fluctuations in price in response to such factors as:

• Actual or anticipated fluctuations in our operating results;

• Announcements of technological innovations and new products by us or our competitors;

• New contractual relationships with strategic partners by us or our competitors;

• Proposed acquisitions by us or our competitors; and

• Financial results that fail to meet public market analyst expectations of performance.

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In addition, the stock market in general, the NASDAQ National Market and the market for technology companies in particular has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of such companies. These broad market and industry factors may seriously harm the market price of our common stock in future periods.

Businesses Or Assets We Acquire May Not Perform As Projected.

We have acquired a number of technologies, assets and companies in recent years, including the Agilent Technologies’ HFSS™ product line within the past five years. As part of our efforts to increase revenue and expand our product and service offerings we may acquire additional companies in the future. In addition to direct costs, acquisitions pose a number of risks, including potential dilution of earnings per share, delays and other problems of integrating the acquired products and employees into our business, the failure to realize expected synergies or cost savings, the failure of acquired products to achieve projected sales, the drain on management time for acquisition-related activities, possible adverse effects on customer buying patterns due to uncertainties resulting from an acquisition, and assumption of unknown liabilities. The foregoing factors could seriously harm our business, financial condition and results of operations.

We May Lose Competitive Advantages If Our Proprietary Rights Are Inadequately Protected.

Ansoft’s success depends, in part, upon its proprietary technology. We rely on a combination of trade secrets, copyrights, trademarks and contractual commitments to protect our proprietary rights in our software products. We generally enter into confidentiality or license agreements with our employees, distributors and customers, and limit access to and distribution of our software, documentation and other proprietary information. Despite these precautions, a third party may still copy or otherwise obtain and use our products or technology without authorization, or develop similar technology independently. In addition, effective patent, copyright and trade secret protection may be unavailable or limited in certain foreign countries. It is possible that we may fail to adequately protect our proprietary rights. This would seriously harm Ansoft’s business, operating results and financial condition.

We May Be Unable To Attract And Retain The Key Management And Technical Personnel That We Need To Succeed.

Ansoft’s future operating results depend in large part upon the continued services of its key technical and management personnel. Ansoft does not have employment contracts with any executive officer. Ansoft’s future success will also depend in large part on its ability to continue to attract and retain highly skilled technical, marketing and management personnel. The competition for such personnel, as well as for qualified EDA engineers, is intense. If Ansoft is unable to attract, hire and retain qualified personnel in the future, the development of new products and the management of Ansoft’s increasingly complex business would be impaired. This could seriously harm Ansoft’s business, operating results and financial condition.

We Depend On International Sales for a Significant Percentage Of Our Revenue.

International revenue, principally from Asian customers, accounted for approximately 57% of our total revenue in each of the years ended April 30, 2005 and 2004. We expect that international license and service revenue will continue to account for a significant portion of our total revenue for the foreseeable future. Our international business activities are subject to a variety of potential risks, including:

• The impact of recessionary environments in foreign economies;

• Longer receivables collection periods and greater difficulty in accounts receivable collection;

• Difficulties in staffing and managing foreign operations;

• Political and economic instability;

• Unexpected changes in regulatory requirements;

• Reduced protection of intellectual property rights in some countries; and

• Tariffs and other trade barriers.

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Currency exchange fluctuations in countries in which we license our products could also seriously harm our business, financial condition and results of operations. In addition, the laws of certain countries do not protect our products and intellectual property rights to the same extent, as do the laws of the United States. Moreover, it is possible that we may fail to sustain or increase revenue derived from international licensing and service or that the foregoing factors will seriously harm our future international license and service revenue, and, consequently, seriously harm our business, financial condition and results of operations.

We Need To Successfully Manage Our Expanding Operations.

Revenues have grown from $8.7 million in fiscal 1996 to $67.7 million in fiscal year 2005, and the number of employees has grown from 69 in April 1996 to 287 as of April 30, 2005. Ansoft’s ability to manage growth effectively will require it to continue to improve its operational and financial systems, hire and train new employees and add additional space, both domestically and internationally. Ansoft may not be successful in addressing such risks, and the failure to do so would seriously harm Ansoft’s business, financial condition and results of operations.

We Depend On The Growth Of The Communications, Semiconductor And Electronics Industries.

Ansoft is dependent upon the communications and semiconductor industry and, more generally, the electronics industry. These industries are characterized by rapid technological change, short product life cycles, fluctuations in manufacturing capacity and pricing and gross margin pressures. Segments of these industries have from time to time experienced significant economic downturns characterized by decreased product demand, production over-capacity, price erosion, work slowdowns and layoffs. Any significant downturn could be especially severe on Ansoft. During such downturns, the number of new integrated circuit design projects often decreases. Because acquisitions of new licenses from Ansoft are largely dependent upon the commencement of new design projects, any slowdown in these industries could seriously harm Ansoft’s business, financial condition and results of operations.

We Are Controlled By Our Principal Stockholders And Management Which May Limit Your Ability To Influence Stockholder Matters.

Our executive officers, directors who are also principal stockholders own approximately 29% of the outstanding shares of Ansoft common stock. As a result, they have the ability to effectively control us and direct our affairs, including the election of directors and approval of significant corporate transactions. This concentration of ownership also may have the effect of delaying, deferring or preventing a change in control of our company and may make some transactions more difficult or impossible without the support of these stockholders. The interests of these stockholders may conflict with those of other stockholders.

Anti-Takeover Provisions in Ansoft’s Certificate Of Incorporation, Bylaws, And Under Delaware Law Could Prevent An Acquisition.

We have adopted a number of provisions that could have anti-takeover effects. The Board of Directors has the authority to issue up to 1,000,000 shares of Preferred Stock without any further vote or action by Ansoft’s stockholders. This and other provisions of Ansoft’s Certificate of Incorporation, Bylaws and Delaware Law may have the effect of deterring hostile takeovers or delaying or preventing changes in control or management, including transactions in which the stockholders of Ansoft might otherwise receive a premium for their shares over then current market prices.

Seasonal Effects.

Traditionally, sales in the first quarter will decrease from the fourth quarter of the prior fiscal year. Traditionally, revenues will sequentially increase over the next three quarters of the fiscal year. The fourth quarter is typically the highest revenue quarter for the fiscal year.

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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, 2005.

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.

Mutual bond funds are subject to variable interest rates. As of January 31, 2006 and April 30, 2005, the Company had mutual bond funds with a carrying value of $15.2 million and $11.9 million, respectively. The mutual bond funds are recorded at fair value of $14.6 million and $11.5 as of January 31, 2006 and April 30, 2005, respectively. The average rate of return for the mutual bond funds at January 31, 2006 and April 30, 2005 was 6.5% and 5.6%, respectively.

Foreign Currency Risk. The majority of our foreign currency transactions are denominated in the yen or the euro, 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:

	Nine months ended		Nine months ended
Foreign Currency	January 31, 2006		January 31, 2005
Yen		113.2		109.3
Euro		1.22		1.22

Item 4. Controls and Procedures

Under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, the Company evaluated the effectiveness of the design and operation of its disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q, and, based on their evaluation, the Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures are effective. There were no significant changes in the Company’s internal control over financial reporting during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table sets forth, the repurchases of common stock for the quarter ended January 31, 2006:

							Maximum
					Total number of		number of
					shares repurchased		shares that
					as		may yet be
	Total				part of publicly		repurchased
	number of		Average		announced		under the
	shares		price paid		plans or		plans or
Period	repurchased		per share		programs		programs (a)
Nov. 1, 2005 — Nov. 30, 2005		21,000	$	33.25		2,675,510		324,490
Dec. 1, 2005 — Dec. 31, 2005		27,000	$	34.44		2,702,510		297,490
Jan. 1, 2006 — Jan. 31, 2006		102,800	$	33.07		2,805,310		194,690
Total		150,800	$	33.34

(a) All repurchases were made pursuant to a share repurchase program publicly announced in 1998 and amended in 2002 and in 2004. Unless terminated earlier by resolution of our Board of Directors, the share repurchase program will expire when we have repurchased all shares authorized for repurchase thereunder. Under the plan the Company is authorized to repurchase 3.0 million shares.

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Item 6. Exhibits

31.1 Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, and Section 302 of the Sarbanes Oxley Act of 2002—Filed herewith.

31.2 Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, and Section 302 of the Sarbanes Oxley Act of 2002—Filed herewith.

32.1 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002—Filed herewith.

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: February 16, 2006	ANSOFT CORPORATION
	By: /s/ Nicholas Csendes
	Nicholas Csendes
	President and Chief Executive Officer
	By: /s/ Thomas A. N. Miller
	Thomas A. N. Miller
	Chief Financial Officer