Overview:

ANSYS, Inc.'s (hereafter the "Company" or "ANSYS") results for the three months ended March 31, 2009 reflect a revenue increase of 6.2% as compared to the three months ended March 31, 2008, and basic and diluted earnings per share of $0.24 and $0.23, respectively. These results were significantly impacted by the July 2008 acquisition of Ansoft. The Company experienced higher revenues in 2009 from both the Ansoft acquisition and from maintenance growth in the Company's other products and services, partially offset by a decline in software license revenue. The revenue contribution from the Ansoft business was lower than the Company had expected for the first quarter of 2009. As compared to the Company's non-Ansoft business, the Ansoft business derives a higher percentage of its revenue from sales of perpetual licenses. Accordingly, there tends to be higher volatility with respect to Ansoft's revenue performance in any quarter than for the non-Ansoft component of the Company's business, which has a higher percentage of lease and maintenance revenue. The unfavorable state of the global economy in the first quarter of 2009 adversely affected the Company's Ansoft revenues more significantly than the non-Ansoft revenues, contributing significantly to the revenue underperformance as compared to the Company's expectations.

The Company incurred increased operating expenses associated with the Ansoft business and decreased non-Ansoft related operating expenses, including salaries, incentive compensation, and headcount-related costs. Incentive compensation was lower due to the Company underperforming its internal operating plan in the 2009 first quarter. As part of the Company's ongoing effort to manage expenses and its overall cost structure, the Company has committed to reduce its global workforce by approximately 6%, which is expected to be substantially completed by the end of the second quarter of 2009 and to result in estimated pre-tax charges in the range of approximately $4.5 million - $5.7 million, consisting primarily of severance costs, that will be expensed in the second quarter of 2009, of which approximately $2.0 million is expected to be paid in the second quarter of 2009 and the balance of which is expected to be paid in the third and fourth quarters of 2009. Also, in connection with the acquisition of Ansoft on July 31, 2008, the Company borrowed $355.0 million and incurred interest expense of $2.9 million during the three months ended March 31, 2009. As of March 31, 2009, remaining outstanding borrowings totaled $271.7 million. During the quarter ended March 31, 2009, the Company repurchased 2.1 million shares of treasury stock for $39.9 million. The Company's financial position includes $229.6 million in cash and short-term investments, and working capital of $113.5 million as of March 31, 2009.

ANSYS develops and globally markets engineering simulation software and services widely used by engineers and designers across a broad spectrum of industries, including aerospace, automotive, manufacturing, electronics, biomedical, energy and defense. Headquartered at Southpointe in Canonsburg, Pennsylvania, the Company and its subsidiaries employ approximately 1,700 people as of March 31, 2009 and focus on the development of open and flexible solutions that enable users to analyze designs directly on the desktop, providing a common platform for fast, efficient and cost-conscious product development, from design concept to final-stage testing and validation. The Company distributes its ANSYS and Ansoft suites of simulation technologies through a global network of independent channel partners and direct sales offices in strategic, global locations. It is the Company's intention to continue to maintain this mixed sales and distribution model.

The Company licenses its technology to businesses, educational institutions and governmental agencies. Growth in the Company's revenue is affected by the strength of global economies, general business conditions, currency exchange rate fluctuations, customer budgetary constraints and the competitive position of the Company's products. Given the current global economic conditions and the increased strength of the U.S. Dollar relative to other currencies in which the Company conducts transactions, the Company believes that there may be a future adverse impact on the Company's revenue. The Company believes that the features, functionality and integrated multiphysics capabilities of its software products are as strong as they have ever been. However, the software business is generally characterized by long sales cycles. These long sales cycles increase the difficulty of predicting sales for any particular quarter. The Company makes many operational and strategic decisions based upon short- and long-term sales forecasts which are impacted not only by these long sales cycles but by current global economic conditions. As a result, the Company believes that its overall performance is best measured by fiscal year results rather than by quarterly results.

The Company's management considers the intense competition and price pressure that it faces in the short- and long-term by focusing on expanding the breadth, depth, ease of use and quality of the technologies, features, functionality and integrated multiphysics capabilities of its software products as compared to its competitors, investing in research and development to develop new and innovative products and increase the capabilities of its existing products, supplying new products and services, focusing on customer needs, training, consultation and support, and enhancing its distribution channels. From time to time, the Company also considers acquisitions to supplement its product offerings and distribution channels.

The following discussion should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and notes thereto for the three months ended March 31, 2009, and with the Company's audited financial statements and notes thereto for the year ended December 31, 2008 filed on the Annual Report on Form 10-K with the Securities and Exchange Commission. The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to fair value of stock awards, bad debts, contract revenue, valuation of goodwill, valuation of intangible assets, income taxes, and contingencies and litigation. The Company bases its estimates on historical experience, estimated future cash flows and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including, but not limited to, the following statements, as well as statements that contain such words as "anticipates," "intends," "believes," "plans" and other similar expressions:

• The Company's intentions related to investments in global sales and marketing, research and development, its global business infrastructure and in complementary companies, products, services and technologies.

• Statements regarding the Company's increased exposure to volatility of foreign exchange rates.

• The Company's plans related to future capital spending.

• Statements regarding the Company's expected effective tax rate.

• The Company's intentions regarding its mixed sales and distribution model.

• The sufficiency of existing cash and cash equivalent balances to meet future working capital, capital expenditure and debt service requirements.

• Management's assessment of the ultimate liabilities arising from various investigations, claims and legal proceedings.

• The Company's statements regarding the strength of its software products.

• The Company's statements regarding its short-term investments in the event an immediate cash need arises.

• The Company's statements regarding the strength of its financial position.

• The Company's statements regarding the benefits of its acquisitions.

• The Company's expectations regarding future claims related to indemnification obligations.

• The Company's estimates regarding the impact of the purchase accounting adjustment to acquired Ansoft deferred revenue on the Company's revenue.

• The Company's estimates regarding expected interest expense on its term loan.

• The Company's statement regarding the impact of current global economic conditions and the strengthening of the U.S. Dollar on the Company's revenue.

• The Company's expectations of its revenue growth rate in 2009 and the related impact on the Company's operating income, net income and earnings per share.

• The Company's statement that the acquisition of Ansoft is expected to increase operational efficiency and lower design and engineering costs for customers, and accelerate development and delivery of new and innovative products to the marketplace.

• The Company's expectations regarding the revenue growth rate of the non-Ansoft operations as compared to recent historical periods.

• The Company's statement regarding the estimated pre-tax charges related to the workforce reduction.

Forward-looking statements should not be unduly relied upon because they involve known and unknown risks, uncertainties and other factors, some of which are beyond the Company's control. The Company's actual results could differ materially from those set forth in forward-looking statements. Certain factors that might cause such a difference include risks and uncertainties detailed in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section in the 2008 Form 10-K Annual Report to Stockholders and any such changes to these factors have been included within Part II, Item 1A of this Quarterly Report on Form 10-Q.

Results of Operations

Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008

Revenue:



                                            Three Months Ended
                                                March 31,                Change
     (in thousands, except percentages)      2009        2008       Amount        %
     Revenue:
     Lease licenses                       $   43,645   $  42,094   $  1,551       3.7
     Perpetual licenses                       26,844      31,542     (4,698 )   (14.9 )
     Software licenses                        70,489      73,636     (3,147 )    (4.3 )
     Maintenance                              40,967      29,738     11,229      37.8
     Service                                   4,854       6,171     (1,317 )   (21.3 )
     Maintenance and service                  45,821      35,909      9,912      27.6
     Total revenue                        $  116,310   $ 109,545   $  6,765       6.2

The Company recorded an increase in lease license revenue which was more than offset by a decline in perpetual license sales. The decline in perpetual licenses sales was driven by certain macroeconomic factors as discussed further below. The Company's license revenue for the quarter ended March 31, 2009 included $600,000 of lease license revenue and $7.5 million of perpetual license revenue from Ansoft.

The increase in maintenance revenue was primarily the result of annual maintenance subscriptions sold in connection with new perpetual license sales in recent quarters and Ansoft-related maintenance revenue of $8.5 million for the quarter ended March 31, 2009.

The decrease in service revenue was primarily the result of reduced revenue from engineering consulting services.

With respect to revenue, on average, for the first quarter of 2009, the U.S. Dollar was approximately 11.1% stronger, when measured against the Company's primary foreign currencies, than for the first quarter of 2008. The U.S. Dollar strengthened against the British Pound, Euro, Indian Rupee, Swedish Krona and the Canadian Dollar, while it weakened against the Japanese Yen and Chinese Renminbi. The net overall strengthening resulted in decreased revenue and operating income during the first quarter of 2009, as compared with the corresponding 2008 first quarter, of approximately $7.2 million and $1.9 million, respectively.

A substantial portion of the Company's license and maintenance revenue is derived from annual lease and maintenance contracts. These contracts are generally renewed on an annual basis and have a high rate of customer renewal. In addition to the recurring revenue base associated with these contracts, a majority of customers purchasing new perpetual licenses also purchase related annual

maintenance contracts. As a result of the significant recurring revenue base, the Company's license and maintenance revenue growth rate in any period does not necessarily correlate to the growth rate of new license and maintenance contracts sold during that period. To the extent the rate of customer renewal for lease and maintenance contracts remains at current levels, incremental lease contracts and maintenance contracts sold with new perpetual licenses will result in license and maintenance revenue growth.

The Company's revenue in the quarter ended March 31, 2009 increased 6.2% as compared to the quarter ended March 31, 2008. The Company's quarterly growth rate is influenced by the Company's organic growth rate, incremental growth from acquired companies and the impact of currency exchange rate fluctuations. Although the Company's overall revenue growth in 2009 will benefit from the inclusion of a full twelve months of Ansoft operations as compared to five months of Ansoft operations in 2008, the Company is anticipating a reduction in the revenue growth rate of the non-Ansoft operations as compared to recent historical periods, particularly with respect to perpetual license revenue. This slowing revenue growth is significantly impacted by the current disruption in domestic and global economies, as well as by the Company's expectation that currency fluctuations will continue to have an adverse impact on revenue growth in 2009. Reductions in the Company's revenue growth rate are also expected to continue to adversely impact the Company's operating income, net income and earnings per share in 2009.

International and domestic revenues, as a percentage of total revenue, were 67.3% and 32.7%, respectively, during the quarter ended March 31, 2009 and 67.9% and 32.1%, respectively, during the quarter ended March 31, 2008.

In valuing deferred revenue on an acquired company's balance sheet as of the acquisition date, the Company applies the fair value provisions of Emerging Issues Task Force Issue No. 01-3, "Accounting in a Business Combination for Deferred Revenue of an Acquiree" ("EITF No. 01-3"). Although this purchase accounting requirement has no impact on the Company's business or cash flow, the Company's reported revenue under accounting principles generally accepted in the United States, primarily for the first 12 months post-acquisition, is less than would otherwise be reported by the acquired company absent the acquisition.

In accordance with EITF No. 01-3, acquired deferred revenue of $7.5 million was recorded on the Ansoft opening balance sheet. This amount was approximately $23.5 million lower than the historical carrying value. The impact on reported revenue for the quarter ended March 31, 2009 was $500,000 for lease license revenue and $4.6 million for maintenance revenue. The expected impact on reported revenue for the quarter ended June 30, 2009 is approximately $2.2 million. The expected impact on reported revenue for the remaining part of 2009 is approximately $751,000.

Cost of Sales and Gross Profit:



                                          Three Months Ended March 31,
                                            2009                 2008               Change
                                                 % of                 % of
(in thousands, except percentages)    Amount    Revenue    Amount    Revenue    Amount       %
Cost of sales:
Software licenses                    $  2,300       2.0   $  2,347       2.1   $    (47 )   (2.0 )
Amortization                            8,996       7.7      5,184       4.7      3,812     73.5
Maintenance and service                12,332      10.6     13,376      12.2     (1,044 )   (7.8 )
Total cost of sales                    23,628      20.3     20,907      19.1      2,721     13.0
Gross profit                         $ 92,682      79.7   $ 88,638      80.9   $  4,044      4.6

The change in cost of sales is primarily due to the following:

• Ansoft-related total cost of sales was $4.3 million for the quarter ended March 31, 2009, including cost of goods sold of $300,000, amortization of $3.6 million and cost of services sold of $300,000.

• Increase in amortization of $1.5 million on certain trademarks, which were reconsidered in the third quarter of 2008 to have a finite useful life of ten years (see below). This increase was partially offset by certain acquired software intangibles becoming fully amortized in early 2008.

• Decrease in salary and headcount-related costs, including incentive compensation, of $1.4 million.

• Decrease in third party royalties of $400,000.

The improvement in the gross profit was a result of the increase in revenue offset by a smaller increase in related cost of sales.

The Company reconsidered the indefinite lives associated with certain trademarks as part of the product and naming strategy changes that occurred as a result of the July 31, 2008 acquisition of Ansoft. The Company determined that such trademarks had a remaining useful life of ten years and therefore amortization began July 31, 2008.

Operating Expenses:



                                                  Three Months Ended March 31,
                                                    2009                 2008              Change
                                                         % of                 % of
(in thousands, except percentages)            Amount    Revenue    Amount    Revenue    Amount     %
Operating expenses:
Selling, general and administrative          $ 33,825      29.1   $ 28,709      26.2   $  5,116   17.8
Research and development                       20,030      17.2     15,958      14.6      4,072   25.5
Amortization                                    3,998       3.4      2,170       2.0      1,828   84.2
Total operating expenses                     $ 57,853      49.7   $ 46,837      42.8   $ 11,016   23.5

Selling, General and Administrative: Ansoft-related selling, general and administrative costs were $8.2 million for the quarter ended March 31, 2009. Non-Ansoft related expenses decreased by $3.1 million during the quarter ended March 31, 2009, primarily the result of decreased incentive compensation expense and headcount-related costs of $2.3 million and decreased marketing event costs of $300,000.

The Company anticipates that it will make targeted investments throughout 2009 in its global sales and marketing organization and its global business infrastructure to enhance major account sales activities and to support both its worldwide sales distribution and marketing strategies and the business in general.

Research and Development: Ansoft-related research and development costs were $4.9 million for the quarter ended March 31, 2009. Non-Ansoft related expenses decreased by $800,000 during the quarter ended March 31, 2009, primarily driven by decreased incentive compensation expense of $1.4 million and partially offset by increased salary costs of $300,000.

The Company has traditionally invested significant resources in research and development activities and intends to continue to make investments in this area, particularly as it relates to ongoing integration and evolution of its ANSYS WorkbenchTM platform and its broad portfolio of software technologies.

Amortization: Ansoft-related amortization expense was $2.0 million for the quarter ended March 31, 2009.

Interest Expense: The Company's long-term debt incurred interest expense, including the amortization of debt financing costs, as follows:

                                                     Three Months Ended
                                                  March 31,       March 31,
          (in thousands)                             2009           2008
          Bank interest on term loans            $      1,839    $       830
          Loss on interest rate swap agreement          1,047             -
          Amortization of debt financing costs            311            115
          Other                                            80             40

          Total interest expense                 $      3,277    $       985

The increased interest costs shown above for the 2009 period are primarily a result of a higher average outstanding debt balance, partially offset by a lower weighted-average effective interest rate of 4.14% as compared to 5.54% in the prior year quarter. The increased amortization costs shown above for 2009 are primarily a result of the additional amortization related to the 2009 term loan.

Interest Income: Interest income for the quarter ended March 31, 2009 was $569,000 as compared to $1.6 million for the three months ended March 31, 2008. Interest income decreased as a result of a decline in interest rates in the 2009 period as compared to the 2008 period.

Other (Expense) Income, net: The Company recorded other expense of $500,000 during the quarter ended March 31, 2009 as compared to other income of $900,000 during the quarter ended March 31, 2008. The net change was primarily the result of changes in foreign currency transaction gains and losses. As the Company's presence in foreign locations continues to expand, the Company, for the foreseeable future, will have increased exposure to volatility of foreign exchange rates.

Income Tax Provision: The Company recorded income tax expense of $10.5 million and had income before income taxes of $31.6 million for the quarter ended March 31, 2009. This represents an effective tax rate of 33.3% in the first quarter of 2009. During the quarter ended March 31, 2008, the Company recorded income tax expense of $17.5 million and had income before income taxes of $43.3 million. The Company's effective tax rate was 40.4% in the first quarter of 2008. The Company's effective tax rate in the first quarter of 2009 was favorably impacted, when compared to the rate in the first quarter of 2008, by the U.S. research and experimentation credit, which had not yet been approved during the first quarter of 2008, and a rate reduction in several foreign jurisdictions.

When compared to the federal and state combined statutory rate, these rates are favorably impacted by lower statutory tax rates in many of the Company's foreign jurisdictions, domestic manufacturing deductions and research and experimentation credits. These rates are also impacted by charges or benefits associated with the Company's uncertain tax positions. The Company currently expects that the effective tax rate will be in the range of 34% - 36% for the year ending December 31, 2009.

Net Income: The Company's net income in the first quarter of 2009 was $21.1 million as compared to net income of $25.9 million in the first quarter of 2008. Diluted earnings per share was $0.23 in the first quarter of 2009 and $0.32 in the first quarter of 2008. The weighted average shares used in computing diluted earnings per share were 92.2 million in the first quarter of 2009 and 81.6 million in the first quarter of 2008.

Liquidity and Capital Resources

As of March 31, 2009, the Company had cash, cash equivalents and short-term investments totaling $229.6 million and working capital of $113.5 million as compared to cash, cash equivalents and short-term investments of $233.9 million and working capital of $129.5 million at December 31, 2008. The short-term investments are generally investment-grade and liquid, which allows the Company to minimize interest rate risk and to facilitate liquidity in the event an immediate cash need arises.

The net $14.1 million increase in operating cash flows in the three months ended March 31, 2009 ($51.3 million) as compared to the three months ended March 31, 2008 ($37.1 million) was primarily related to:

• A $16.6 million increase in cash flows from working capital fluctuations whereby these fluctuations produced a net cash inflow of $20.2 million for the three months ended March 31, 2009 and a net cash inflow of $3.6 million during the three months ended March 31, 2008

• An increase in other non-cash operating adjustments of $2.3 million from $7.7 million for the three months ended March 31, 2008 to $10.0 million for three months ended March 31, 2009. This increase was most significantly impacted by an increase of $6.1 million in depreciation and amortization, partially offset by a decrease in deferred income tax benefits of $3.3 million.

• A decrease in net income of $4.8 million from $25.9 million for the three months ended March 31, 2008 to $21.1 million for the three months ended March 31, 2009

The Company's investing activities provided net cash of $1.7 million and $2.0 million for the three months ended March 31, 2009 and March 31, 2008, respectively. Total capital spending was $3.3 million in 2009 and $2.4 million in 2008. In 2009, maturing short-term investments exceeded purchases by $5.0 million. In 2008, maturing short-term investments exceeded purchases by $4.5 . . .