Ansoft (ANST) 10-Q 2007 Q1 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 July 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
Pittsburgh, Pennsylvania	15219-1119
(Address of principal executive offices)	(Zip Code)

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.

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). Yeso  Noþ

The number of shares of the registrant’s Common Stock outstanding as of the close of business on July 31, 2006 was 23,573,139.

ANSOFT CORPORATION
FORM 10-Q
INDEX

	Page
Part I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets – July 31, 2006 and April 30, 2006		1
Consolidated Statements of Operations – Three months ended July 31, 2006 and 2005		2
Consolidated Statements of Cash Flows – Three months ended July 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		8
Item 3. Quantitative and Qualitative Disclosure about Market Risk		15
Item 4. Controls and Procedures		15
Part II OTHER INFORMATION
Item 1A. Risk Factors		16
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		16
Item 6. Exhibits		17
Signatures		18
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)

	July 31,			April 30,
	2006			2006
Assets
Current assets
Cash and cash equivalents	$	16,703		$	16,456
Accounts receivable, net of allowance for doubtful Accounts of $640 and $545, respectively		11,890			20,264
Deferred income taxes		164			164
Prepaid expenses and other assets		2,653			1,938
Total current assets		31,410			38,822
Equipment and furniture, net of accumulated depreciation of $6,530 and $6,249, respectively		2,532			2,599
Marketable securities		36,298			33,621
Other assets		140			131
Deferred income taxes		6,344			6,226
Goodwill		1,239			1,239
Other intangible assets, net		2,096			2,442
Total assets	$	80,059		$	85,080
Liabilities and stockholders’ equity
Current liabilities
Accounts payable	$	189		$	274
Accrued payroll		1,176			3,027
Accrued income taxes		1,526			928
Other accrued expenses		2,890			3,609
Current portion of deferred revenue		19,204			19,893
Total current liabilities		24,985			27,731
Long-term portion of deferred revenue		940			1,088
Total liabilities		25,925			28,819
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; 50,000 shares authorized; issued 28,672 and 28,576 shares, respectively and outstanding 23,573 and 23,764, respectively		287			286
Additional paid-in capital		77,926			76,795
Treasury stock, 5,099 and 4,812 shares, respectively		(43,650	)		(37,913	)
Accumulated other comprehensive loss, net		(1,350	)		(1,539	)
Retained earnings		20,921			18,632
Total stockholders’ equity		54,134			56,261
Total liabilities and stockholders’ equity	$	80,059		$	85,080

All share, except shares authorized, information has been adjusted to reflect the two-for-one stock split effected in the form of 100% stock dividend that was declared on March 7, 2006 and distributed on May 9, 2006.

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 July 31,
	2006		2005
Revenue
License	$	8,185	$	6,820
Service and other		9,138		7,970
Total revenue		17,323		14,790
Costs of revenue
License		120		99
Service and other		333		329
Total cost of revenue		453		428
Gross profit		16,870		14,362
Operating Expenses
Sales and marketing		7,478		7,143
Research and development		4,826		4,060
General and administrative		1,384		1,383
Amortization		346		369
Total operating expenses		14,034		12,955
Income from operations		2,836		1,407
Net realized loss on sale of securities		—		(2	)
Other income, net		815		340
Income before income taxes		3,651		1,745
Income tax expense		1,362		576
Net income	$	2,289	$	1,169
Net income per share
Basic	$	0.10	$	0.05
Diluted	$	0.09	$	0.05
Weighted average shares used in calculation
Basic		23,609		23,834
Diluted		26,174		25,954

All share and per share information has been adjusted to reflect the two-for-one stock split effected in the form of 100% stock dividend that was declared on March 7, 2006 and distributed on May 9, 2006.

See accompanying notes to the unaudited consolidated financial statements.

Page 2

ANSOFT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)

	Three months ended July 31,
	2006			2005
Cash flows from operating activities:
Net income	$	2,289		$	1,169
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation		270			340
Amortization		457			471
Stock-based compensation		636			—
Excess tax benefit from stock-based compensation		(133	)		—
Loss on sale of marketable securities		—			2
Changes in assets and liabilities
Accounts receivable		8,357			7,644
Prepaid expenses and other assets		(715	)		(723	)
Other long-term assets		(10	)		—
Accounts payable and accrued expenses		(2,046	)		(1,192	)
Deferred revenue		(863	)		(825	)
Net cash provided by operating activities		8,242			6,886
Cash flows from investing activities:
Purchases of equipment and furniture		(203	)		(578	)
Proceeds from the sale of marketable securities		—			3,177
Purchases of marketable securities		(2,497	)		(5,934	)
Net cash used in investing activities		(2,700	)		(3,335	)
Cash flows from financing activities:
Purchase of treasury stock		(5,737	)		(7,111	)
Proceeds from the issuance of common stock, net		362			236
Excess tax benefit from stock-based compensation		133			—
Net cash used in financing activities		(5,242	)		(6,875	)
Net increase (decrease) in cash and cash equivalents		300			(3,324	)
Effect of exchange rate changes		(53	)		(443	)
Cash and cash equivalents at beginning of period		16,456			11,910
Cash and cash equivalents at end of period	$	16,703		$	8,143
Supplemental disclosures of cash flow information
Cash paid for income taxes	$	747		$	—

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, 2006 consolidated financial statements and notes thereto included in Ansoft’s Annual Report on Form 10-K filed with the Securities and Exchange Commission.

On March 7, 2006, the Company’s Board of Directors declared a two-for-one stock split of the Company’s common stock, payable in the form of a 100% stock dividend. On May 9, 2006, one additional share of Company common stock was distributed for each share held of record as of the close of business on May 2, 2006. An amount equal to the par value of the shares issued was transferred from the additional paid-in capital account to the common stock account. All references to number of shares and to per share information, except shares authorized, in the unaudited consolidated financial statements and the notes to the unaudited consolidated financial statements have been adjusted to reflect the stock split on a retroactive basis.

On April 20, 2006, the Company’s stockholders approved an amendment to the Company’s Amended Certificate of Incorporation increasing the number of authorized shares of common stock from 25,000,000 shares to 50,000,000 shares.

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 July 31,
	2006			2005
Net income	$	2,289		$	1,169
Unrealized gain (loss) on marketable securities		290			(38	)
Reclassification adjustment for loss on sale of marketable securities included in net income		—			2
Foreign currency translation adjustments		(101	)		(285	)
Comprehensive income	$	2,478		$	848

(3) Net Income Per Share

Basic net income per share is calculated using the weighted-average number of common shares outstanding during the period. The weighted-average basic shares were 23,609 for the three month period ended July 31, 2006. 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 26,174 for the three month period ended July 31, 2006. 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 periods ended July 31, 2006 and 2005 are included in the computation of diluted earnings per share.

Page 4

(4) Stock-Based Compensation

Prior to May 1, 2006, the Company accounted for stock-based compensation in accordance with the Financial Accounting Standards Board’s (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 123 “Accounting for Stock-Based Compensation.” This statement permitted 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 had 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. Pursuant to APB Opinion No. 25 the Company did not recognize compensation expense in its statements of operations for the three-month period ended July 31, 2005.

Effective May 1, 2006, the Company adopted the fair value recognition provisions of FASB SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS 123R), using the modified-prospective transition method. Under this method, compensation cost is recognized beginning with the effective date for (a) any stock-based awards granted through, but not yet vested as of April 30, 2006 based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R and (b) any stock-based awards granted subsequent to April 30, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. The estimated fair value of the Company’s stock-based awards, less expected forfeitures, is amortized over the awards’ vesting period on a straight-line basis. The results for prior periods have not been retroactively adjusted.

As a result of adopting SFAS 123R, the Company’s income from operations and income before income taxes was reduced by $0.6 million and net income was reduced by $0.5 million for the three month period ended July 31, 2006. The adoption of SFAS 123R reduced basic and fully diluted net income per share by $0.02 for the three month period ended July 31, 2006. The stock based compensation expense was recorded in sales and marketing, research and development, and general and administrative. As of July 31, 2006, the total unrecognized stock-based compensation related to non-vested stock option grants was $2,457, net of estimated forfeitures, which will be recognized over a weighted average period of 2.5 years.

The following table illustrates the effect on net income and net income per share if the Company had applied the fair value recognition provisions of SFAS 123R to stock option awards for the three months ended July 31, 2005.

	Three months
	ended July 31,
	2005
Net income as reported	$	1,169
Deduct: Total stock-based employee compensation expense determined under fair value based method, net of tax		(542	)
Pro forma net income	$	627
Net income per basic common share, as reported	$	0.05
Pro forma net income per basic common share	$	0.03
Net income per diluted common share, as reported	$	0.05
Pro forma net income per diluted common share	$	0.02

The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model, which includes the assumptions noted in the following table. The risk-free rate for the periods within the contractual life of the option is based on the U.S Treasury yield in effect at the time of the grant. Expected volatility is based on the historical volatility of the Company’s stock. The expected life of the options represents the period of time the options granted are expected to be outstanding based on historical experience with similar grants. The dividend yield is based on the historical dividend yield of the Company. The weighted average grant date fair value of options granted during the three-month periods ended July 31, 2006 and 2005 were $11.00 and $6.90, respectively. The weighted average assumptions used in the model for the three months ended July 31, 2006 and 2005 were as follows:

	Three months		Three months
	ended July 31,		ended July 31,
	2006		2005
Risk-free rate (%)		5.00		4.04
Volatility (%)		55.07		68.40
Expected life (in years)		5.3		6.0
Dividend yield (%)		0.00		0.00

Page 5

On November 10, 2005, the FASB issued FASB Staff Position No. FAS 123(R)-3, “Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards” (FSP 123R-3). The Company has elected to adopt the alternative transition method provided in FSP 123R-3 for calculating the tax effects of stock-based compensation under SFAS 123R. The alternative transition method includes a simplified method to establish the beginning balance of the additional paid-in capital pool (APIC pool) related to the tax effects of employee stock-based compensation, which is available to absorb tax deficiencies recognized subsequent to the adoption of SFAS 123R.

The Company currently has stock options outstanding under the 1995 Stock Option Plan and 2006 Stock Incentive Plan (collectively the “Plans”). Stock options generally vest over five years in 20% increments from the date of grant and expire 10 years from the date of grant. The 2006 Stock Incentive Plan (2006 Plan)authorizes the issuance of 1,340 shares of common stock for the grant of incentive or nonstatutory stock options or restricted stock to employees and directors. As of July 31, 2006, there were 1,254 shares of common stock available for issuance under the 2006 Plan. There were no shares of restricted stock issued under the 2006 Plan as of July 31, 2006. The Company issues new shares of common stock upon exercise of stock options.

A summary of the changes in stock options outstanding and exercisable under the Plans during the three months ended July 31, 2006 is as follows:

						Weighted-
						Average
						Remaining
				Weighted-Average		Contractual Life		Aggregate
	Number of Shares			Exercise Price		(Years)		Intrinsic Value
Outstanding, April 30, 2006		4,177		$	4.36
Granted		12		$	20.31
Exercised		(99	)	$	2.73
Cancelled		(12	)	$	8.88
Outstanding, July 31, 2006		4,078		$	4.43		4.87	$	66,684
Exercisable, July 31, 2006		3,002		$	4.03		4.29	$	50,270

The aggregate intrinsic value in the table above is based on the Company’s closing stock price of $20.78 as of the last trading day of the period ended July 31, 2006.

The Company recorded cash proceeds from the exercise of stock options of $0.4 million and $0.2 million and related tax benefits of $0.1 million and $0.2 million during the three-month periods ended July 31, 2006 and 2005, respectively. All of the tax benefits for the three-month periods ended July 31, 2006 and 2005 were classified as excess tax benefits and accordingly were recorded in additional paid-in capital. The total intrinsic value for stock options exercised during the three-month periods ended July 31, 2006 and 2005 was $1.7 million and $0.5 million, respectively.

During the three-month periods ended July 31, 2006 and 2005, the total fair value of options vested was $0.1 million. The nonvested stock option activity during the three-month period ended July 31, 2006 is presented in the following table:

				Weighted-Average
	Number of Shares			Fair Value
Nonvested, April 30, 2006		1,104		$	4.19
Granted		12		$	11.01
Vested		(28	)	$	3.81
Forfeited		(12	)	$	5.83
Nonvested, July 31, 2006		1,076		$	4.26

Page 6

The following table summarizes additional information about stock options outstanding as of July 31, 2006:

	Options Outstanding						Options Exercisable
			Weighted-
			Average		Weighted-				Weighted-
			Remaining		Average				Average
			Contractual		Exercise				Exercise
Range Of Exercise Prices	Shares		Life (Years)		Price		Shares		Price
$2.37-$3.47		1,661		3.85		2.58		1,295		2.60
$3.65-$5.45		1,434		5.00		4.50		1,190		4.49
$6.23-$8.18		846		5.99		6.53		504		6.49
$10.59-$15.07		112		8.79		11.45		13		10.63
$19.58-$22.09		25		9.82		20.50		—		—

(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”). At the Company’s option, borrowings under the credit facility bear interest at the Bank’s prime lending rate or the LIBOR rate plus a margin of .050 basis points. The facility is secured by the Company’s marketable securities.

The ability of the Company to borrow under the credit facility is subject to its ongoing compliance with certain financial and other covenants, including a tangible net worth covenant. As of July 31, 2006, the Company was in compliance with its covenants under the credit facility.

As of July 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.

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 July 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 July 31, 2006:

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

Total accumulated amortization as of July 31, 2006 was $21,334.

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 July 31, 2006 is as follows: 2007 — $926; and 2008 – $1,170.

(8) Recent Accounting Pronouncements

In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). FIN 48 is an interpretation of FASB Statement No. 109, “Accounting for Income Taxes,” and requires expanded disclosure with respect to the uncertainty in income taxes and is effective as of the beginning of the Company’s 2008 fiscal year. The Company is currently evaluating the impact, if any, that FIN 48 will have on its consolidated financial statements.

Page 7

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 first quarter of fiscal year 2007, revenues increased by 17.1% from the previous fiscal year’s first quarter. New license revenue increased by 20.0% and maintenance revenue increased 14.7%. The Company experienced growth in both our domestic and international markets for the quarter ended July 31, 2006.

Net income for the quarter was $2.3 million compared to $1.2 million during the first fiscal quarter of 2006.

Results of Operations

						Percentage
	Three months ended July 31,					change
	(In thousands)
	2006		2005
Revenue	$	17,323	$	14,790			17.1	%
Cost of revenue		453		428			5.8	%
Gross profit		16,870		14,362			17.5	%
Operating Expenses
Sales and marketing		7,478		7,143			4.7	%
Research and development		4,826		4,060			18.9	%
General and administrative		1,384		1,383			0.1	%
Amortization		346		369			(6.2	%)
Total operating expenses		14,034		12,955			8.3	%
Income from operations		2,836		1,407			101.6	%
Net realized loss on sale of securities		—		(2	)		—
Other income, net		815		340			139.7	%
Income before income taxes		3,651		1,745			109.2	%
Income tax expense		1,362		576			136.5	%
Net income	$	2,289	$	1,169			95.8	%

Page 8

Comparison of the Three Months Ended July 31, 2006 and 2005

Revenue. Total revenue in the three-month period ended July 31, 2006 increased 17.1% to $17.3 million. License revenue during the three-month period ended July 31, 2006 increased 20.0% to $8.2 million from $6.8 million during the comparable period in the prior fiscal year. The increase is 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-month period. Service and other revenue in the three-month period ended July 31, 2006 increased 14.7% due to the continued growth of the installed base of customers under annual maintenance agreements.

International revenue accounted for 58% and 61% of the Company’s total revenue in the three-month periods ended July 31, 2006 and 2005, respectively. Revenue in Asia accounted for 44% and revenue in Europe accounted for 14% and 17% in the three-month periods ended July 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-month period, using current year exchange rates for the prior year revenues, the international revenue as a percentage of total revenue would decrease 4% to 57% of total revenue for the period ended July 31, 2005.

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-month period ended July 31, 2006 increased 5.8%.

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-month period ended July 31, 2006 increased 4.7% to $7.5 million. Stock compensation expense of $0.1 million was included in sales and marketing expenses for the three-month period ended July 31, 2006 due to the adoption of SFAS 123R. Sales and marketing expenses represented 43% and 48% of total revenue in the three-month periods ended July 31, 2006 and 2005, respectively. This decrease is a result of the Company continuing to gain leverage from its sales force.

Research and development expenses. Research and development expenses include all costs associated with the development of new products and enhancements to existing products. Total research and development expenses for the three-month period ended July 31, 2006 increased 18.9% to $4.8 million. Total research and development costs increased primarily due to the additional personnel required to meet software development requirements. Further, the increase in research and development costs can be attributed to the adoption of SFAS 123R, which resulted in the recognition of $0.4 million in stock-based compensation costs. Research and development expenses represented 28% and 27% of total revenue in the three-month periods ended July 31, 2006 and 2005, respectively.

General and administrative expenses. General and administrative expenses for the three-month period ended July 31, 2006 remained flat at $1.4 million. Included in general and administrative expenses for the first quarter of fiscal 2007 was $0.1 million in stock based compensation expense due to the adoption of SFAS 123R. General and administrative expenses represented 8% and 9% of total revenue in the three-month periods ended July 31, 2006 and 2005, respectively.

Amortization expense. Amortization expense for the three-month period ended July 31, 2006 decreased 6.2%. The decrease is due to various intangible assets being fully amortized in the prior fiscal year.

Page 9

Other income, net. Other income for the three-month period ended July 31, 2006 was $0.8 million, an increase of $0.5 million from the same period in the previous fiscal year. The increase is primarily due to gains realized on foreign currency exchange during the three-month period ending July 31, 2006.

Income tax expense.In the three-month period ended July 31, 2006, the Company recorded tax expense of $1.4 million compared to $0.6 million for the same period in the previous fiscal year. The Company’s effective tax rate in the previous fiscal first quarter was favorably impacted by the research and development credit. The US Research and Development Tax Credit expired at the end of 2005 and, as a result, the Company has not taken any benefit for this credit in the period ending July 31, 2006. Congress is considering proposals to extend this Tax Credit, retroactively to January 1, 2006. If such legislation is enacted, any impact would be recorded in future quarters.

Liquidity and Capital Resources

As of July 31, 2006, Ansoft had $16.7 million in cash and cash equivalents and $36.3 million of marketable securities. Net cash provided by operating activities in the three-month periods ended July 31, 2006 and 2005 was $8.2 million and $6.9 million, respectively.

Net cash used in investing activities in the three-month periods ended July 31, 2006 and 2005 was $2.7 million and $3.3 million, respectively. Capital expenditures were $0.2 million and $0.6 million in the three-month periods ended July 31, 2006 and 2005, respectively. Proceeds from the sale of marketable securities were $-0- and $3.2 million in the three-month periods ended July 31, 2006 and 2005, respectively. Purchases of marketable securities were $2.5 million and $5.9 million in the three-month period ended July 31, 2006 and 2005, respectively.

Net cash used in financing activities was $5.2 million and $6.9 million in the three-month periods ended July 31, 2006 and 2005, respectively. Proceeds from the issuance of common stock were $0.4 million and $0.2 million in the three-month periods ended July 31, 2006 and 2005, respectively. Funds used for the repurchase of common stock were $5.7 million and $7.1 million in the three-month periods ended July 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. As of July 31, 2006, the Company had no borrowings under the credit facility. 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 July 31, 2006 is as follows (in thousands and for fiscal year):

	Operating Leases
2007	$	1,673
2008		1,622
2009		640
2010		141
2011		102

For fiscal year 2007, the balance of $1,673 represents the remaining payments due as of July 31, 2006. For fiscal year 2011, the balance of $102 represents the payments through January 31, 2011.

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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

• Stock-Based Compensation Expense

• 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 generally 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 July 31, 2006 and April 30, 2006 was $0.6 million and $0.5 million respectively. We had no significant changes in our collection policies or payment terms during the three-month period ended July 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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Stock-Based Compensation Expense.The Company accounts for stock-based compensation in accordance with the fair value recognition provisions of SFAS 123R. The Company uses the Black-Scholes option-pricing model which requires the input of assumptions. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them, the estimated volatility of the Company’s common stock price over the expected term and the number of options that will ultimately not complete their vesting requirements. Changes in the assumptions can materially affect the estimate of fair value of stock-based compensation and consequently, the related amount recognized on the consolidated statements of operations.

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 a net loss in one 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 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.

As part of our efforts to increase revenue and expand our product and service offerings we may acquire additional companies or assets 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 62% and 57% of our total revenue in each of the years ended April 30, 2006 and 2005. 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 $77.2 million in fiscal year 2006, and the number of employees has grown from 69 in April 1996 to 298 as of April 30, 2006. 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. Since 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, who are also principal stockholders, own approximately 26% 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, 2006.

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

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

	Three months ended		Three months ended
Foreign Currency	July 31, 2006		July 31, 2005
Yen		114.3		108.8
Euro		1.27		1.24

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 1A. Risk Factors

There have been no material changes in the Company’s risk factors from those disclosed in our 2006 Annual Report on Form 10-K. [See additional risk factors under Management’s Discussion and Analysis of Financial Condition and Results of Operations.]

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 July 31, 2006:

					Total number of		Maximum
					shares		number of
					repurchased as		shares that may
	Total				part of publicly		yet be
	number of		Average		announced		repurchased
	shares		price paid		plans or		under the plans
Period	repurchased		per share		programs		or programs (a)
May 1, 2006– May 31, 2006		47,000	$	22.37		5,749,120		2,250,880
June 1, 2006 – June 30, 2006		201,800	$	19.67		5,950,920		2,049,080
July 1, 2006 – July 31, 2006		37,800	$	18.92		5,988,720		2,011,280
Total		286,600	$	20.02

(a) All repurchases were made pursuant to a share repurchase program publicly announced in 1998 and amended in 2002 and 2004. On March 1, 2006, the Company announced that the Board of Directors voted to amend its existing common stock repurchase program to permit the Company to acquire an additional 2,000,000 shares of its common stock. 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 8,000,000 shares.

On March 7, 2006, the Company announced a two-for-one stock split effected in the form of a 100% stock dividend that was distributed on May 9, 2006. Accordingly, all share and share price information have been adjusted to reflect the stock split.

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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: September 6, 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

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