Operator:

Ladies and gentlemen, thank you for standing by, and welcome to the ANSYS Third Quarter 2023 Earnings Conference Call. With us today are Ajei Gopal, President and Chief Executive Officer; Nicole Anasenes, Chief Financial Officer; and Kelsey DeBriyn, Vice President, Investor Relations. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. At this time, I would like now to turn the conference over to Ms. DeBriyn for opening remarks. Please go ahead.

Ajei Gopal:

Good morning, everyone. And thank you for joining us today. In Q3, ANSYS was on track to deliver against our third quarter guidance commitments when we were notified by the U.S. Department of Commerce of additional restrictions on sales to certain Chinese entities, as well as incremental approval processes and export restrictions on the sale of some ANSYS products and services to entities located in China. These incremental approval processes take the form of additional vetting of prospects located in China. They introduce delays in transacting certain orders for prospects in China, resulting in the potential loss or deferral of some business that was scheduled to be closed in Q3. As a result, we came in below our expectations in both ACV and revenue for the quarter. Despite these developments, ANSYS delivered a strong quarter marked by double-digit growth in ACV. These updated export restrictions and incremental processes will mute ANSYS’ growth in China in 2023 and 2024, after which we expect our business in China to return to steady state growth. Nicole will give the specifics in a few minutes. It is important to remember that China represents only a small portion of our overall business. Given the strength of our business worldwide, I’m confident in our ability to execute on our short and long-term objectives. Looking back on Q3, high-tech and semiconductors, aerospace and defense, and automotive and ground transportation were our top contributing industries. We saw strength in Q3 for ACV across all customer types, and our geographical performance was as expected with the exception of China as I already mentioned. Our largest contract in the quarter was a three-year eight-figure agreement with the North American aerospace and defense company that has used our solutions for years. The new agreement with this customer increases the number of users of ANSYS technology. Thanks in part to ANSYS technology, the customer has secured a key contract with the U.S. government. On our calls, I typically highlight a specific aspect of our business. I have discussed the critical role that ANSYS solutions play in sustainability initiatives as well as in the development of next generation semiconductors and how ANSYS simulation is driving fundamental changes in the commercial aerospace industry. A similar simulation power transformation is taking place in the automotive industry, which is where I’d like to focus today’s discussion. As you were aware, automotive and ground transportation is our third largest industry, and ANSYS is already working with over 50 of the top transportation OEMs around the world and 93 of the top 100 global automotive suppliers. Yet with all the innovation taking place within the sector, there is still significant room for ANSYS to grow through more users, more products, and more computations. ANSYS simulation is helping to usher in a new era of mobility through key – to three key areas, electrification, autonomy and driver assistance and software defined vehicles. And of course, we’re also driving continued innovation in vehicle development. I’ll walk through each with some pertinent examples. The first area of profound change in the industry is around electrification. From battery management systems to fuel cells to integrated electrified powertrain systems, ANSYS solutions are enabling rapid electric vehicle innovation from the components to the system levels. For example, our multiphysics battery simulation solutions provide interdisciplinary expertise at different scales. ANSYS’ solutions for powertrain electrification provide a complete development flow from the system level to the software level, including system simulation, model-based development and functional safety analysis. Using ANSYS, customers have reduced battery project costs by up to 30% and design cycle times by up to 50% [ph]. Porsche Motorsports turns to ANSYS simulation to speed up development time for its electric race car. With ANSYS, the engineers from the TAG Heuer Porsche Formula E Team optimize their cars inverter and e-motor efficiency and then test it on a virtual racetrack. Simulation has proved to be pivotal for managing the battery’s temperature and maximizing the cost performance within these demanding driving conditions. The next area I’d like to discuss is autonomy and driver assistance systems. While the road to truly autonomous vehicles may be a long one, the simulation driven advances required to bring this technology to market are leading to safer driving experiences today. Using ANSYS, customers are improving advanced driver assistance systems, also known as ADAS. For example, sensors play a critical role in providing human drivers as well as autonomous systems, the data they need to make intelligent and safe decisions. ANSYS solutions for lidar, radar, and cameras enable engineers to improve sensor performance to determine optimal vehicle integration configurations and to examine their behavior across a range of operational scenarios. ANSYS customer continental is using ANSYS simulation for optical integration analysis and corner case studies that are integral to the development and validation of new sensors and computer vision algorithms. ANSYS simulation is helping continental/development time and physical testing, while reducing costs and freeing up engineering resources. The next area I would like to discuss is the development of software-defined vehicles. These automobiles have features that are primarily enabled through software and can be remotely upgraded over the cars’ lifetime. The market for software-defined vehicles is expected to grow from about $35 billion today to over $200 billion early in the next decade. Thanks to software-driven features for safety, infotainment and efficiency. ANSYS solutions enable these feature-rich functions through model-based, certified embedded software and code generation, electronics reliability and connectivity systems. These advances enable engineers to meet industry safety requirements faster than manual approaches and at lower costs. Longtime ANSYS customer ZF Group is using our solutions to reduce the complexity of analysis for embedded systems. These embedded systems must be capable of operating reliably and safely on a challenging environmental conditions. In the past, ZF used different tools for failure modes and effects analysis and for fault tree analysis. By standardizing on ANSYS, the company reports saving hundreds of hours on each of the many analysis projects they run. The final area I would like to mention is in vehicle development. This is a space in which ANSYS has a long history as we play a key role in such critical areas as aerodynamics, lighting, crash safety analysis, and material management for sustainability initiatives. For example, ANSYS LS-DYNA simulates crash scenarios and accurately predicts the impact on the vehicle as well as the driver and passengers. Thanks to human body models. On materials intelligence solutions enable vehicle lightweighting efforts while assessing the environmental impact of materials throughout their lifecycle. With the growth of lighting technologies and headlamps and tail lamps, ANSYS lighting solutions have reduced the need for prototypes. One of our key contracts in the quarter was with a global automotive OEM based in Europe that has standardized on ANSYS for virtual crash testing and impact analysis replacing a competitive product. The company is leveraging ANSYS simulations to help meet its goal of reducing engineering lead time by 30% and cutting the cost of physical testing by 50%. In Q3, we also signed a contract with the leading provider of automotive seeding products. This longtime customer has expanded its use of ANSYS multiphysics solutions from explicit dynamics, electromagnetics and functional safety to include mechanical, fluids and high performance computing. This expanded ANSYS footprint benefits a number of projects. For example, enabling the company to simulate the fan noise from its ventilated seats. With ANSYS technology, this automotive leader has dramatically cut development costs, reduced simulation time from days to hours, and enabled the company to respond faster and more accurately to customer requests for quotes. I’d also like to mention a different kind of customer win. I’m excited to congratulate ANSYS customer Oracle Red Bull Racing on an amazing season, which culminated in capturing the 2023 Formula 1 World Constructors’ and World Drivers’ Championships. Using ANSYS solutions, the team simulated airflow interactions with differing shapes of the car’s surface, while also analyzing engine cooling intakes. As a result, the team drove away with the championship. Moving beyond the automotive industry, I’m excited to announce that we have enrolled our 2000th companies as a member of the ANSYS Startup Program. As I have said in the past, while members of our Startup Program represent a small piece of our overall business, they’re amongst the most innovative users of our products. And with the program’s strong graduation rates more and more expand their use of ANSYS technology and become larger ANSYS customers. I’m also proud that ANSYS has received a number of awards this quarter related to employee engagement and satisfaction from organizations such as Newsweek, Best Workplaces in Europe in U.S. News and World Report. These recognitions are a testament to our supportive, diverse, and inclusive culture, as well as the quality of our team around the world. In summary, Q3 was marked by an external challenge that impacted our ability to process certain transactions. Our global business remains strong and the demand for ANSYS technology is robust. That’s because companies across industries rely on ANSYS to solve the most challenging problems that they’re facing. These global organizations understand that ANSYS’ expertise and deep and broad portfolio of multiphysics solutions can help them solve their key product and business challenges. That combined with our best-in-class product portfolio, our deep customer relationships and the ongoing strength of our pipeline give me confidence in our ability to meet our commitments. And with that, I will turn the call over to Nicole. Nicole?

Operator:

[Operator Instructions] Our first question comes from Jay Vleeschhouwer of Griffin Securities. Please go ahead.

Ajei Gopal:

Hey. Good morning, Jay. So let me take that. And so there's a – there's clearly a bit of a misunderstanding in your question. So let me just try to sort of lay this out so that you have more clarity on the context here. So as you know, in the context of the broader U.S. foreign policy shifts, the Department of Commerce is engaging both privately and publicly with companies to apply export controls to China of certain technologies. And of course, elite high-tech companies are facing new restrictions. And given the capabilities of ANSYS products and their broad applicability across industries and across use cases we have implemented an additional layer of vetting for prospects located in China to comply with the incremental requirements from the U.S. Department of Commerce. So let me just sort of walk through how the quarter unfolded. So we were on track to delivering against our third quarter guidance commitments when the Commerce Department informed us of these additional restrictions as well as incremental approval processes on the sale of certain ANSYS' products to entities located in China. And so we immediately complied. We suspended processing orders from those affected prospects that were located in China pending the resolution of some ambiguities that were related to the process. And we work with the Commerce Department, but unfortunately, by the time we received clarity on the incremental vetting that was required above and beyond our existing compliance program, it was the last business day of Q3, and that made it too late to complete our vetting process within the quarter. Now moving forward, we have internally aligned our business operations to adjust to these new betting requirements and the result is an increase in the time that it takes us to process transactions with certain prospects that are located in China. But as I said in the call, despite these developments related to prospects in China, the ANSYS business overall is performing well. We delivered a strong quarter, marked by double-digit growth in ACV, and we continue to see robust and broad-based demand for our technologies and the products. And given the critical role that our solutions play in our customers' product development initiatives, and the strength of the underlying foundations of our global business, we're confident in our ability to execute against our short and our long-term objective.

Nicole Anasenes:

So Jay, maybe I'll just take the Q4 guidance question, and then we can add some more color on your last part of your question. So although we experienced an unexpected impact from changes in export compliance in China, the underlying model remains strong, as Ajei said. And as a testament to this year-to-date, we achieved 12% ACV growth in constant currency, which is of course on our model. Our business is very resilient. As you know, 80% of it comes from recurring sources. And as we look to Q4, the robust renewal business that we see in the fourth quarter gives us confidence in achieving our guidance. And maybe just to add an additional data point to add some color as to where we stand as of October. As of the end of October we have just under half the business in our Q4 outlook already committed, so despite the disruption from changes required for export or compliance in China, we're continuing to see the operational momentum in the rest of our business. That's what gave us the confidence in raising the full year ACV by $11 million compared to the August guidance, which, of course, was offset by the $25 million of impact from additional restrictions and processes in our business in China and of course, the foreign exchange impact of $28 million. But outside of this impact, we continue to see momentum across the business, and we haven't seen any notable changes in customer activity.

Operator:

The next question comes from Joe Vruwink from Baird. Please go ahead.

Nicole Anasenes:

Sure. Happy to do that. So why don't I kind of take you through – why don't I take you through the kind of the Q3 impact, how we – kind of how that we think that impacts 2023 and what the flow-through impact to 2024 in the long-term will be to kind of try to holistically answer some of your questions. But just too kind of give some overall context going into that in terms of your question around China exposure overall. Our business is broad and diverse, and as you know, we're diversified across many industries and geographies and customer types. And our business in China is around 5% of ACV, both on a trailing 12-month basis and full year 2022. So it's a relatively a smaller portion of the portfolio. Now in the third quarter, again, our ability to deliver that double-digit constant currency growth in the quarter despite the disruptions we saw is really a testament to the resilience of our business model, which as we talk about 2024 is what gives us the confidence in our outlook. Now the third quarter results were impacted by those incremental vetting processes and restrictions to certain prospects in China that created about a $20 million headwind to ACV and revenue, which was not contemplated in our third quarter guidance. But without this impact, we would have landed near the high-end of our third quarter guidance range on ACV and above the high end of our revenue guidance. Now we expect that the majority of the $20 million to be a timing shift with a small portion of being lost in business. So as you extend into our 2023 outlook – embedded in the 2023 outlook, it does reflect that incremental operational performance and the momentum that we've seen in the business overall, which is of course, offset by the impact from the export compliance changes, but for the full year in 2023, we expect the impact from incremental export restrictions in the vetting processes in China to have a $25 million impact on ACV and revenue, and we believe just to kind of give a rough sizing, about a third of that is loss of business and two-thirds of that would be an expected timing shift from the elongated transaction cycle. So the effect of this will mute 2023 growth in China. Now as we look to the future, the incremental export restrictions and vetting processes, we also believe will mute ANSYS' ACV and revenue growth in China in 2024 and we expect that impact just – since you asked about sizing, we expect it to be about $10 million to $30 million on both ACV and revenue in the full year in 2024. And as the majority of that headwind will be loss of business, we would expect the 2024 cash impact to be similar in that range as well. Now despite these headwinds, in February, we still expect to initiate full year 2024 guidance on our model with ACV around 10% constant currency growth, excluding tuck-in M&A. And really, the double-digit performance we saw year-to-date, the strong pipeline and momentum in our business, all of these really give us the confidence not only in our 2024 outlook, but in our ability to achieve our long-term outlook which, of course, was a 12% constant currency ACV growth, including tuck-in M&A and $3 billion of cumulative unlevered operating cash flows from 2022 to 2025.

Joe Vruwink:

And just on that point, Ajei, and that was great, Nicole. Thank you. Organic growth and I'll say ex-China, it was better than your formal framework in 2022; it's been better year-to-date. I guess, how do you think about the recent drivers of outperformance relative to your midterm plan and whether those maybe factor positively in 2024?

Joe Vruwink:

Thank you.

Jason Celino:

Hi. Thanks for taking my question. Just a couple on the China export restrictions. Ajei, I hear you on the news, optically, I think we're a little surprised because it appears others may not be affected. Do you know if other companies were approached as well?

Jason Celino:

Okay. And then just a quick one for Nicole, on the types of revenue that was affected, was it more perpetual or lease? Sorry, just a modeling that question.

Kelsey DeBriyn:

Operator we can take the next question.

Ken Wong:

Great. thanks for taking y question. Maybe first off for you, Ajei, maybe change gears a little bit. Just wanted to ask about the auto industry, there has been some concern that maybe with the strike that that could have caused some deal slippage or anything like that. Just wondering if you saw any erosion in your auto business at all?

Ken Wong:

Got it. And then, Nicole, just because I don’t want to be excluded from the China Party, it sounds like what you guys have baked into the expectations is that these deals do come back into the pipeline. As we think about 2024, is it assumed that the 2023 deals fall into 2024, or should we assume that both 2023, 2024 don’t return until fiscal 2025, in terms of how you guys are embedding into your outlook?

Ken Wong:

Okay, perfect. Thank you for the color.

Steven Tusa:

Hi guys. Good morning.

Steven Tusa:

Can you just talk about what kind of is this a customer type issue in China or is it more general than that?

Steven Tusa:

I guess though, on your ACV, it looked like electronics was kind of weaker than expected. We assume that it was kind of focused in that piece of the pie.

Steven Tusa:

Exactly.

Steven Tusa:

What type of industry is what I’m like trying to just wrap my head around here a little bit.

Steven Tusa:

Right. That makes sense. And is this like ANSYS specific or is it something that they kind of cast a bit wider of a net? Obviously, there’s a lot going on out there between our two countries. Rockwell had some issue, I believe. Is this like – is this really ANSYS specific?

Steven Tusa:

Right. Sorry, one really quick last one.

Steven Tusa:

Right. And that’s why it’s not – it’s 1% of ACV or whatever you want to call it right now, as opposed to it being like across the board, 5% of ACV, which would be a real impairment in the ability to kind of do business over in China, right?

Ajei Gopal:

Yes.

Operator:

The next question comes from Adam Borg with Stifel. Please go ahead.

Ajei Gopal:

So let me sort of just since you asked the question, let me sort of explain what those are. And – but to get to your question about pricing, some of this is still being worked out in terms of how we would – exactly what we would price them. But I can give you some philosophy as we go through this. So obviously, AIML is one of our critical pillars that we are focused on across our portfolio. In Q2, we released a beta version of our support technology called ANSYSGPT that’s based on GPT-4. And that’s a virtual multilingual support tool that can answer customers technical questions by retrieving and summarizing ANSYS information. And we believe that will provide ANSYS to the most frequently asked questions that customers have in a matter of seconds. And obviously, it’s going to be available 24/7. So that’s the first area. The second thing that we announced last week is this new generation of products called the AI plus products. And those are building on the AI capabilities that we have available today. So these are new products that will be packaged and priced accordingly. And these new AI plus products include things like ANSYS Granta, AI plus, optiSLang AI plus. And these new products will incorporate and extend some of the AI features that we already have within these products. The SimAI technology that we talked about, this is a brand new offering that is a cloud. It’s a cloud native AI platform that will augment our 3D physics simulation capabilities. And it’s essentially one where our customers will be able to do things like design analysis optimization by using simulation results to train an AI model to predict new design configurations using deep learning techniques. And so this can predict performance across design changes, geometry changes, and so forth. It’s really a physics neutral technology. It applies across industry segments. And we can leverage simulation data whether it originates from ANSYS or from anyone else for that matter. So this is a – this is again, a new product that will be priced accordingly. The actual pricing has not been announced yet.

Kelsey DeBriyn:

Operator, we have time for one more question.

Tyler Radke:

Yes. Thanks for taking the question. Just wanted to follow up on the international performance. Looked like Germany in particular was a bit weaker. It sounds like you are seeing pretty resilient trends in autos. But wasn’t sure if that was a tougher compare or just anything to call out in Europe.

Tyler Radke:

Okay. That’s helpful. And just to follow up on the long-term…

Tyler Radke:

Yes.

Tyler Radke:

That’s helpful. And…

Tyler Radke:

Yes, I did. I did. So just as I think about the 2024 comments and your helpful breakout of the China impacts in terms of I think, two thirds being just delayed business, should we think about that all happening in 2024? And then as I think about your reiteration of your long-term targets, I guess if you could just kind of unpack the puts and takes and do you assume to kind of have the China business normalize and get that full two thirds through the long-term targets? Thank you.

Tyler Radke:

Okay. Thank you.

Ajei Gopal:

Thank you, Kelsey. With our market leading product portfolio and strong pipeline, ANSYS is well positioned to meet our commitments. I want to thank my colleagues around the world for their continued dedication to ANSYS. I want to thank our channel partners, and I want to thank, of course, our global customer base. Thank you your time today, and have a great day.

Operator:

Ladies and gentlemen, thank you for standing by, and welcome to the ANSYS Second Quarter 2023 Earnings Conference Call. With us today are Ajei Gopal, President and Chief Executive Officer; Nicole Anasenes, Chief Financial Officer; and Kelsey DeBriyn, Vice President, Investor Relations. [Operator Instructions] Please note this event is being recorded. At this time, I would like to turn the conference over to Ms. DeBriyn for opening remarks. Please go ahead.

Ajei Gopal:

Good morning. And thank you for joining today's call. Building on the momentum of the first quarter of 2023, Q2 was another excellent quarter for ANSYS in which we beat our guidance across all key metrics. For the first half of 2023, we saw double-digit growth in ACV and revenue, as well as broad-based growth across industries, geographies and customer types. I'm excited about our outstanding performance in Q2 and the first half of the year as well as our strong pipeline. And I'm delighted to announce that we are raising full year guidance for ACV and revenue. Nicole, will have the details in a few minutes. For Q2, our top three contributors by industry for high-tech and semiconductors, aerospace and defense, and automotive and ground transportation. We saw robust growth in our small and medium-sized accounts and from a geographical perspective, our growth was as we expected. One of our largest contracts of the quarter was a four year 8-figure agreement with a multinational industrial company based in Japan. This long-time ANSYS customer is growing the number of users of our core products while expanding its use of new products across our multiphysics portfolio. As part of this customer's digital transformation, it is using ANSYS to establish a virtual product environment, which is helping to drive the company's sustainability and go-to-market strategies by accelerating its product development initiatives. On our calls, I typically highlight a specific aspect of our business. Over the past several quarters, I have discussed the critical role that ANSYS solutions play in sustainability. I have highlighted how customers are using our solutions in the development of next-generation semiconductor and I have given you insights into the innovation we are driving across our multiphysics portfolio through our five technology pillars. Given our continuing strength in aerospace and defense, our second largest sector, I would like to use today's call to discuss this critical industry. In fact, our largest contract in the quarter was a nearly $57 million multiyear agreement with a global aerospace and defense company based in the United States. This contract reflects significant growth over the previous contract to keep up with user demand. The aerospace industry has experienced a resurgence since the pandemic with commercial air travel returning to record levels this summer. From a product development perspective, industry leaders are challenging old assumptions about their aircraft. And ANSYS simulation is playing a key role in this industry transformation. For example, in the past, most airplanes were powered by traditional aircraft fuel. Today, though, commercial aircraft manufacturers can choose from those fuels. They can use a SAFB or sustainable aviation fuel blend or they can consider alternative fuels, including hydrogen. These critical choices - impact for an organization, but they also play an important role in sustainability initiatives of aerospace companies. Sustainability is a key driver at aircraft engine maker present with me, which has a vision of enabling the air transportation sector to achieve net 0 carbon emissions by 2050. Today, the company's engines are certified to run on 50% SAFB. By using simulation from ANSYS, the company plans to increase that number close to 100%. ANSYS solutions are used in a number of sustainability initiatives at Pratt & Whitney, including developing our hydrogen propulsion system and optimizing the company's geared turbofan which is reducing fuel consumption by 16% and cutting NOx emissions by half. In addition to the fuel source, commercial aerospace companies by using ANSYS simulation to boost the efficiency of their aircraft. For example, technical aircraft services leader, Lufthansa Technik has used ANSYS multiphysics simulation to design a biomimetic coating that emulates shark skin to significantly reduce fuel consumption and the associated carbon dioxide emissions. Using ANSYS, the Company quickly modeled aircraft and aerodynamic behavior in an accurate, robust and computationally efficient manner and accelerated critical certification from the European and U.S. aviation agencies. In its current stage of development, the air short modification already makes two types of Boeing 777 long-haul aircraft more efficient which will have a positive environmental impact. Another consideration for those commercial aerospace leaders is who will pilot the aircraft. Automation technology has already had a profound impact on the industry, and it is one that will continue for the foreseeable future. To better prepare the industry, OneSky Systems is integrating its airspace domain expertise and technology with ANSYS solutions to create AI-based software that streamlines and optimizes the development, validation and certification of autonomous advanced air mobility systems. The collaboration enables OneSky and ANSYS customers to train and validate neural networks with mission-driven simulation to reduce the risk, time and cost required for airworthiness certification. Our success in the commercial aerospace sector was in display at the recent Paris Air Show, where ANSYS exhibited. During the event, we encountered a number of ANSYS customers that are using our simulation to further disrupt the industry. For example, ANSYS customer Rolls-Royce was in Paris to meet with its clients. The company recently announced that it has reduced the time that it takes to perform a crucial thermomechanical model of its gas turbine engines from 1,000 hours to less than 10 hours using ANSYS simulation in a high-performance computing environment. As a result, Rolls-Royce is able to rapidly deliver clean and complex propulsion solutions for safety-critical applications. With our new discussion of the aerospace and defense industry is complete without touching upon developments in the space sector. Given the unforgiving environment of space, and the inability to perform physical testing there, simulation is playing a critical role for space to royal companies. One of our key contracts in Q2 was with a Space 2.0 leader that takes advantage of the full ANSYS portfolio, including our core products as well as newer solutions for materials, motor design, digital mission engineering and digital twins. This three year agreement increases the number of products the company is leveraging, as well as the number of users of ANSYS solutions. One of the trends amongst our Space 2.0 customers is to employ micro satellites to perform certain missions such as delivering radar coverage of broadband services. These small light satellites are less expensive to develop and launch than the heavier traditional ones. ANSYS customer, Astranis launched its first satellite earlier this year with the aim of delivering low-cost broadband service anywhere in the world. With its use of ANSYS mechanical, fluids, electronics and digital mission engineering solutions, Astranis is a great example of customers expanding the role of simulation to include more products and more users. Similarly, we reached an agreement in Q2 with long-time Space 2.0 customer, [ISI], which uses ANSYS analysis and simulation solutions to help deliver synthetic aperture radar coverage of the globe through constellations of small satellites. ANSYS digital mission engineering solutions help the company to design and operate its satellite systems ensuring unparalleled accuracy for Earth imaging and satellite maneuver planning. Here in Pittsburgh, we are eagerly awaiting the launch later this year of Astrobotic Technology's, lunar lander called Peregrine. Using ANSYS multiphysics technology, the company rapidly iterates through lander designs that are capable of withstanding the tremendous pressures of launch, the vacuum of space and the impact of landing. Astrobotic is understanding how its craft will operate in space using guidance navigation simulation. This will help put humans back on the moon and beyond and will further expand our knowledge of the Kosmos. Given aircraft increasing complexity, the need to quickly explore all design options and the complexities of space travel, we believe that simulation will play an even greater role in commercial aerospace and Space 2.0 in the near future. Companies in these sectors must take advantage of all areas of physics, including structures, fluids, electromagnetics, optics and materials. And with our highly scalable solutions and access to high-performance computing via the cloud, ANSYS is in a unique position to propel the industry forward. Turning to our partnership activities. Intel Foundry Services has certified our leading semiconductor solutions for power integrity sign-off verification of integrated circuits designed with the Intel 16 silicon manufacturing process. ANSYS solutions provide unparalleled capacity to analyze a full chip design while verifying the effectiveness of that chip's electrostatic discharge protection circuitry. I'm also pleased to announce a number of developments in our relationship with Samsung Foundry. At the foundry's recent SAFE conference, where my presentation reviewed the importance of 3D ICs and the critical role that ANSYS plays in designing them, Samsung certified ANSYS RedHawk-SC for the company's family of heterogeneous multi-die packaging technologies. Red Hawk-SC, as you may remember, is our power integrity and thermal verification platform. Samsung Foundry also certified ANSYS RedHawk-SC and ANSYS Total Power Integrity signoff solutions for Samsung's latest 2-nanometer silicon process technology. We have also expanded our relationship with Synopsys. Our two companies recently announced a new reference flow for Samsung's 14 LPU technology, which delivers the accuracy of ANSYS' golden sign-off electromagnetic analysis with leading custom design flow from Synopsys. In Q2, we also announced an expansion of our partnership with PTC. Our teams are pursuing more integrated materials management and sustainability workflows between PTC's Creo and Windchill products and ANSYS Granta. This collaboration will help engineers balance performance and environmental footprint priorities as they design products. Turning to our ESG initiatives, I'm very happy to report that ANSYS has been named to USA TODAY's inaugural list of America's climate leaders. The list recognizes companies that have achieved the greatest reduction in core emissions intensity between 2019 and 2021. Finally, I'm excited that ANSYS has been named to Newsweek's list of most loved global workplaces. This recognition celebrates companies with employees who feel included, recognized and valued. ANSYS ranked 27th globally on this precedes list, which is yet another indication of our tremendous team and the impact we are having around the world. In summary, Q2 was another excellent quarter for ANSYS. I'm excited that the market is vibrant and the demand for ANSYS solutions remains robust, thanks to the unique value proposition that we provide. With our strong pipeline, our industry-leading portfolio and our deep customer relationships, I am confident in our ability to meet our short- and long-term goals. And with that, I will turn the call over to Nicole. Nicole?

Operator:

[Operator Instructions] Our first question comes from Joe Vruwink with Baird. Please go ahead.

Ajei Gopal:

Good morning, Joe. Thanks for the question. So as I've said before, AI has been part of our road map, and we have five broad areas that we're investing in from a technology perspective to improve the - continue to improve our products. And I talked about them at some length at the last earnings call, so I won't go through all five areas. But AI, of course, is one of those key pillars. We've continued to have investments in area, and we will continue to make investments in AI. And you'll see products coming out as they're ready. We have products in the market already. The broad areas where I think you'll see the benefit and the impact on ANSYS. One is, of course, we'll improve the experience of - the user experience of ANSYS tools. AI plays a role there. We continue to focus on that area. The second is broadly speaking, making simulation easier to use. And you may have seen a recent announcement that we made about ANSYS GPT which is a virtual support technology that's based on GPT, which is really designed to help customers use ANSYS solutions more easily, it's a virtual multilingual tool, and it can go against our information and summarize public information in a way that's appropriate based on how the user is using our technology. So that's a really interesting use case that we've made available recently. And then, of course, we've been focusing on making simulation faster, and that's making our products faster. I talked about this at the last earnings call, and one of the examples I gave was on - in the area of optimization. And I think I gave an example of a customer who's using our multivariate optimization using our AI capabilities and they're in a position as a large European automaker and they were in a position to get to an ADAS solution 1,000x faster than using traditional Monte Carlo simulations. So there's a lot of exciting things that are taking place as we start to look at the overall AI landscape. Does that answer your question?

Nicole Anasenes:

Yes. I mean what I would say generally is the dynamics that we see are really across all three dimensions of the growth drivers that we see, right? So the example that we highlighted in our remarks was an example of a customer who already use broad sets of capabilities, added a couple of additional capabilities, but really was demand was supply constrained in terms of their - the licenses that they had to be able to accommodate the breadth of the users that we're propagating it. These - in the aerospace and defense space, in particular, these are very complex multiphysics problems, which drive really significant amount of computation, right? And so the license constraint that customers face that is driving growth also has that third dimension of our growth model around needing to have additional capacity to accommodate the computational complexity of all the things they have. So I think the aerospace and defense industry given kind of the tipping points and at the beginning of some of the transformations that it's going through is very emblematic of what an industry can an industry experiences in their evolution of ANSYS software because it comes from those adding more products to solve the solution, driving more usage across the development life cycle and then the problems themselves are very complicated. I don't know, Ajei, if you'd have anything to add.

Operator:

Our next question comes from Jay Vleeschhouwer with Griffin Securities. Please go ahead.

Ajei Gopal:

Good morning, Jay. So it's a really interesting point when you consider the dynamics of every individual market, they go through different drivers that are changing the way people are thinking or changing the level of innovation that's taking place in specific markets. And of course, when we talk about markets, we're talking about end markets. And so if you consider any end customer, they're relying on a supply chain of components some of which would be considered to be from that same end market and some of which will be produced, for example, semiconductors would come from the high-tech vertical. We may be selling to a customer in the supply chain, but they're providing semiconductors that ultimately might get used in the - in building an airplane, for example. So it crosses industry verticals. But that being said, that's how we categorize the end markets. Look, aerospace is going through a really interesting transition, as I mentioned. That's one of the reasons I highlighted on the call. It's not just fuels, as I discussed, there is a whole discussion taking place in the industry about different kinds of takeoff modalities is vertical takeoff, is it short takeoff, is it traditional electric motors versus more traditional prunes of propulsion. There's a number of different vectors where there are conversations taking place. I mentioned the Paris Air Show at the - in my script, I was actually at that air show, and I had an opportunity to meet with some of our very large customers. As you point out, we have some very large aerospace companies who are customers of ours. But it was really interesting walking around the show floor. They were thousands of people representing small companies, booths all over the place where these are small companies that are part of this supply chain dealing with this changing landscape that the aerospace industry is dealing with right now. And there's a dizzying number of designs of aircraft and there are smaller companies out there pursuing their dreams and pursuing their opportunity. And every single one of those companies is designing technology, building technology which makes them either potential customers of ANSYS or perhaps already customers of ANSYS. So it's a really vibrant area. Every one of these verticals goes through its ups and it goes through its drivers but we're very excited about the aerospace market. We have some great technologies and capabilities from a more traditional physics, things like mission engineering, there's lots of different interesting technologies that we can bring to bear to support the transformation of these aerospace companies or to help them achieve what they're trying to do in this rapidly changing market.

Ajei Gopal:

Well, look, there's obviously a lot of discussion about AI and Joe asked the question earlier. As I've said multiple times, this is an area we've been investing in. We have product activity. We have customer activity. And obviously, there are use cases that we're driving that are perhaps made more interesting through the use of AI. And I talked about the use of multivariate optimization, for example, and how AI technique can improve that for the perspective of being able to get to optimize and iterate to be able to get to the design. But I think I'll take a slightly different angle here to respond to your question as well. And let's talk a little bit about the end markets. And so, when you think about sort of the design activity, clearly, we see, and as I've articulated, we see AI, we see the use of AI, helping us run our own company. That's obviously something that we will do as every other company will do. So that's no different from every other company. The second is, and I've talked at length about this, is the use of AI to improve our products, making simulation easier to use, making simulation faster, the user experience. I'm not going to go into that. The third is really how do, we see the end markets being affected potentially by AI. And if you look at it from that perspective, if you - the high-tech and semiconductor industry is clearly being affected most - sort of at the most leading edge. And so we have customers - we have customers like NVIDIA, for example, they're taking advantage of our technologies to be able to pursue the physical design limits to be able to manage risk as they start to use Red Hawk Raptor, all of our products to improve their design. You look at Cerebras, for example, they're using Red Hawk-SC for their wafer-scale engine, which is really focused on the AI market and they're helping. And we're helping them with challenges of mixed signal power integrity with electrostatic discharge and things of that nature. So those are just a couple of examples of customers in the high-tech market, but clearly, that's the leading edge in terms of how this is being - this is being rolled out, if you will, in customers. When you think about some of the other heavier industries, it's important to recognize that these industries have a longer design cycle than the high-tech market. So when you think about aerospace, and we've just talked about aerospace or you think about automotive, they have development cycles that are longer than the traditional high tech cycle. And so, as they start to incorporate more AI techniques into their products, it starts to change. It will have an impact, but the impact is a little bit further out as we see it. Now from our perspective, the use of AI. The reason we're talking about this is that as customers start to take more use of AI to help drive, for example, design iterations, we feel that, that drives greater use of simulation, because as you start to use AI technique, for example, to explore different design options that drives more simulation, because simulation is validating whether those designs make sense or not. It's sort of the - question about generative design that we've had for some time. And so, that translates into additional simulation intensity, which benefits ANSYS. So as we start to look at some of these markets, the end markets, they will develop at different rates and paces. But net-net, as these markets develop, it continues to be a long-term tailwind for ANSYS as they - as customers are driving more design options and exploring more design spaces as AI techniques give them that capability.

Operator:

Our next question comes from Andrew Obin with Bank of America. Please go ahead.

Nicole Anasenes:

Good morning.

Ajei Gopal:

Good morning.

Nicole Anasenes:

Sure. So yes, as we had mentioned in our prepared remarks, we've seen pretty sustained performance in the SMB sector throughout the first half. And when you look - and when you look at the total first half performance, we've seen broad-based growth across industries, geographies and customer segments entirely. So when you look at where we're sitting year-to-date and where we're looking on a go-forward basis, it is that underlying broad-based strength that has persisted in the first half that we're expecting to see in the second half, because we haven't seen any changes in that profile overall. So that's kind of how we're thinking about the underlying momentum in our business and what's driving it. As it relates to the ANSYS start-up program. We've helped more than 1,900 start-ups from over 58 countries. We've graduated more than 415 start-ups to commercial relationships once they're commercially viable. I mean these are - this is a really I think, successful program to be at the forefront of simulation first R&D thinking. And we're really, really proud of the teams that have kind of worked closely with these start-ups to be able to help them - to help get their processes aligned to that simulation first model. So - we're really happy with the progress of the program. It drives a lot of momentum. Again, it's not a program that drives massive amounts of near-term ACV, but it is an indication of where our thought leadership is and where our influence is in kind of being forward thinking about how the future of R&D can look.

Andrew Obin:

Got you. And just a follow-up question. As global supply chains, you globalize that on the margin, you are sort of rebuilding tech ecosystem in the U.S. with semis, EV plants. How does sort of this impact your ACV growth was the fact that more incremental growth is shifting to North America. If you could just expand on that. That's a longer-term question? Thank you.

Andrew Obin:

That exactly the part. That's my question. Yes. That's my question. So what are you?

Andrew Obin:

Well, really appreciate the answer. Thanks a lot.

Tyler Radke:

Yes. Thanks for taking the question. I wanted to ask you about a couple of trends that you're seeing in the semiconductor market, partially as it relates to generative AI. But you talked a little bit about how, obviously, the auto industry is pivoting more towards building custom chips just as vehicle complexity rises. And then obviously, as GPUs are taking off, because of generative AI workloads. I guess my question is, how are you seeing kind of the simulation intensity, and attach rate differ in some of these new types of chips, whether it's from the auto industry, making their own chips or in a GPU chip relative to CPU where you're probably more dominant historically? Thank you.

Tyler Radke:

That's helpful. And Nicole, just on the performance you saw here in the second quarter and Q3 outlook. It sounded like there was a lot of strength in Europe and APAC, at least in the prepared remarks. Could you talk a little bit about the U.S. performance? I know you did beat the midpoint of the guide here in Q2 on ACV, but it was the lowest growth rate we've seen for a while, and it seems like duration came in a bit softer. Was there any type of change in contract duration just maybe driven by macro conditions? Just help us understand the seasonality and trends that you saw in the U.S.? Thank you.

Tyler Radke:

Okay. Thank you.

Andrew DeGasperi:

Thanks for taking my question. Maybe a two part question on the M&A side. Just wondering if, first, you could maybe elaborate a little bit the Diakopto acquisition and maybe Nicole, could you just tell us what the contribution is from a percent growth in the second half or a dollar amount as any kind. And then secondly, Ajei, maybe if you could touch on the EDA portfolio that you have. Do you expect to invest more in that? And more broadly, do you - how do you balance that with your partnership with Synopsys. Thanks.

Nicole Anasenes:

Yes. And as Ajei said, I mean this was - this is an amazing technology, great IP really talented team, it was not in an advanced commercial phase. So there's no material impact from this particular acquisition in the quarter or in the second half outlook.

Kelsey DeBriyn:

Operator, we have time for one more question.

Steve Tusa:

Hi. Good morning. Thanks for letting me in.

Steve Tusa:

Can you just maybe talk about just the mechanics of the third quarter just from an accounting perspective, like - just a little more color on what's driving those headlines just mechanically. Obviously, there's - it reflects some sort of a change in behavior to a degree. Obviously, as you put it, doesn't really change the longer-term value in the cash flows. But just maybe a little more color on the moving parts there on the non-GAAP income statement front.

Steve Tusa:

So just as a follow-up to that. So just mechanically, like what is actually changing between the third and the fourth quarter, just on the ground, again, acknowledging that it doesn't change ACV or cash flow. But like what - is there any vertical where there's a bit of a different SKU or profile? Or what is kind of the change on the ground that drives this kind of volatility in that P&L. Like what do you read into at a high level?

Steve Tusa:

Yes, makes a ton of sense. Thanks. I really appreciate it.

Ajei Gopal:

I'm excited by our excellent execution in the first half of the year, our expanding product leadership and our strong pipeline. Those factors as well as a proven track record of success and our unique value proposition adds to my confidence in our ability to achieve our goals. I want to thank all my colleagues at ANSYS and at our global channel partners for their commitment, focus and their many successes. Thank you for joining us, and have a great day.

Operator:

Ladies and gentlemen, thank you for standing by and welcome to the ANSYS First Quarter 2023 Earnings Conference Call. With us today are Ajei Gopal, President and Chief Executive Officer; Nicole Anasenes, Chief Financial Officer; and Alex Di Ruzza, Investor Relations Manager. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. At this time, I would like to turn the conference over to Mr. Di Ruzza for opening remarks. Please go ahead.

Ajei Gopal:

Good morning, everyone and thank you for joining us. Q1 was an outstanding quarter for ANSYS with the company once again surpassing expectations across all key metrics. We grew ACV by 19% in constant currency over Q1 2022, which reflects the power of our world-class products, the ongoing demand from our customers and the strength of our business. As a result of our strong Q1, we have operationally raised our full year guidance for ACV revenue and EPS. Nicole will have the details in a few minutes. ANSYS realized broad-based growth across the business in Q1. We grew revenue by double-digits in every region in the quarter with the Americas leading the way. From a vertical perspective the high-tech and semiconductor, aerospace and defense, and automotive and ground transportation sectors were again our top contributors. Our largest agreement in the quarter was a nearly $74 million three-year contract with a multinational aerospace and defense technology company based in the US We grew the account by showcasing the value ANSYS is driven at this long-time customer including a new workflow with our digital mission engineering and electromagnetic solutions that reduce the time required to bring a critical product to market by 50%. That same workflow is being reused by multiple groups within the company helping to drive more users, more products and more computations. On these calls, I often highlight a specific aspect of our business. Over the past several quarters, I have discussed the critical role that ANSYS solutions play in sustainability. I highlighted how customers are using our solutions in the development of next-generation semiconductor and I reviewed our leading suite of optical simulation products. For this call, I would like to give you additional insight into the innovation we are driving across our multiphysics portfolio through an easy-to-understand taxonomy of five technology pillars. Our investments in these pillars are applicable across our portfolio and demonstrate how we are building upon our product and technology leadership to further differentiate our solutions. Even more exciting is the interplay amongst these pillars, which is benefiting customers by helping them to solve more complex challenges, while driving our growth through more products, more users and more computations. As you know ANSYS is the leader in advanced numerical simulation methods that accurately predict the multiphysics behavior of engineered products. Our continued investment across our core multiphysics products is reflected in our first technology pillar, which is numerics. Accurately predicting physical phenomena in the real world, is intrinsically complicated. The numerics pillar encompasses the latest advances in science, mathematics and analytics, which help us gain a deeper understanding of the physical world. It is the essence, of what we do at ANSYS with our core products. Over the last several releases, we have further differentiated our products with advanced numerics capabilities. Let me give you just, a few examples. In ANSYS Mechanical, new functionality enables customers to automatically predict structural crack initiation and growth without the need for expert knowledge. In ANSYS HFSS, our leading electromagnetic solution users can now solve increasingly complicated problems by creating simulations 8 times larger than before. And in CFD, our fluids blade row analysis, enables customers to automatically mesh complex blade features while retaining the efficient Hex measures, that turbomachinery engineers demand. In Q1, we signed a new contract with a long-time customer INNIO, which uses advanced numerics capabilities from ANSYS to develop engines that run on a broad range of energy sources including hydrogen and biomethane. INNIO is expanding its usage of ANSYS multiphysics solutions, including structures and fluids, to accelerate time to market and to increase engine efficiency and performance. Our second technology pillar is high-performance computing or HPC, which is enabling customers to solve problems they couldn't solve otherwise, and to do so faster than anyone thought possible. ANSYS has close partnerships with hyperscale computer partners, and has long taken advantage of distributed memory, multiprocessing and multiple cores to accelerate our customers' products to market, and in the process drive more computations. Again, I could cite numerous examples of new HPC technologies, in our solutions. But in the interest of time, here are just a few. In ANSYS Mechanical, technologies such as hybrid parallel, which blends distributor and shared memory parallel programming techniques, enables simulations to scale to tens of thousands of compute cores. A new multi-GPU solver, empowers users to run ANSYS Fluent natively on multiple GPUs. This CFD solution, which we believe is the first general-purpose CFD solver for GPUs is 7 times less expensive in hardware purchase costs and consumes 4 times less power than an equivalent CPU solution. In Q1, we signed a contract with the International Technology Group, Andritz, which offers a broad portfolio of innovative, power plants, equipment, systems, services and digital solutions for a wide range of industries and end markets. As part of this agreement, Andritz is leveraging HPC to more rapidly solve complex structural and fluid simulations, to increase the efficiency of its turbines. As a result, Andritz is reducing the amount of physical testing needed to deliver its products to market. The next area of technology emphasis, is artificial intelligence and machine learning. AI is not restricted to a specific ANSYS product line. Instead, it is architectured across our portfolio to improve ease of use, to accelerate time to solve and to further democratize simulation. Let me start with the use of AI to accelerate the time required to complete the simulation. You might recall, that a single large complex simulation, can run for days across hundreds of cores. We are incorporating AI techniques directly into multiple products, to increase the speed and scale of a single simulation. For example, our real-time radar functionality enhances HFSS, is being used to train machine learning algorithms, for radar systems in cluttered environments with moving targets. Combining synthetic radar responses with machine learning, has resulted in a 1,000x speed up, compared to previous methods and has opened the door to exciting new opportunities, for automotive radar and autonomy. Artificial intelligence can also address the multiple iterative simulations needed to get to an optimal design point. Often customers use ANSYS products to run complex multi-variant optimizations, where they vary design parameters and boundary conditions over multiple simulation runs to reach the best design. Such multiple intrusive runs can be time-consuming due to the number of simulations that need to be performed. To address this issue, our optimization engine ANSYS optiSLang uses AI techniques to reduce the time it takes to intuitively run thousands of simulations for products across the ANSYS portfolio. For example, one customer designing electric motors initially needed seven hours to run an ANSYS-Motor CAD multivariate optimization with 4800 simulations. But with the AI techniques in optiSLang, they solve the same problem in an astonishing 17 minutes. Our fourth technology pillar is cloud and experience. We have made some recent announcements about our cloud marketplace offerings and we are continuing to invest in cloud native capabilities as well as user experience. ANSYS offers two distinct kinds of cloud offerings. The first is Cloud Marketplace and the second is cloud native. And this combination of marketplace and native takes full advantage of past innovations as well as some of our newly announced cloud capabilities. The marketplace offerings deliver flexibility to our customers by taking advantage of familiar ANSYS products, while leveraging the benefit of cloud computing and their own pre-existing relationships with cloud service providers. ANSYS has announced partnerships with key cloud providers AWS and Microsoft Azure. In quick, Q1, a developer of sustainability technologies for buildings and electric vehicles began using ANSYS Max well on the cloud thanks to ANSYS Gateway powered by AWS. Using this cloud-powered solution the customer is optimizing the electromagnetics of its smart motor design via cloud bursting on several independent workstations. Users can spin up a cluster in minutes and add remote users from satellite locations to improve overall agility and speed proof-of-concept. The company's engineers are simultaneously running 125,000 simulations and analyzing design seven times faster, thanks to the solution. On the cloud native space, we are targeting new users and new use cases with a cloud-based platform for the development and deployment of new workflows and applications. While cloud native simulation is still early in the maturity cycle, we are continuing to advance this exciting technology. The final technology pillar empowers customers to optimize product designs to meet physical and behavioral requirements throughout the engineering design life cycle, thanks to digital engineering. Digital engineering relates to a set of connected federated and interoperable technologies that enable the collaborative execution of engineering tasks. Today, the vast majority of time and money spent on R&D goes towards failure mode avoidance. Digital engineering enables a more rigorous R&D process based on model-based engineering, system-level simulation and an agile iterative methodology that results in improved product quality and faster throughput with reduce costs. The latest release of ANSYS Minerva improves engineering productivity with efficient stimulation process and data management, while connecting powerful simulation and optimization solutions to an existing ecosystem of tools and processes. And ANSYs SCADE users can employ model-based systems engineering methods to design and generate reliable embedded software. As you might expect, this pillar is driving more users and more products. In Q1, we signed an agreement with a global automotive OEM that is expanding its use of ANSYS products to include additional electronics and model-based system engineering technologies. By taking advantage of these solutions, the automaker can enforce architecture from existing models, allowing for reuse and traceability of parts. The automaker has reported that the use of ANSYS simulation has decreased product development time by month, which is helping the company to keep pace with increasing customer demands. Our investments across these five technology pillars

Operator:

We will now begin the question-and-answer session. [Operator Instructions] The first question is from Jay Vleeschhouwer with Griffin Securities. Please go ahead.

Ajei Gopal:

So Jay to answer there was a lot of -- there were a lot of questions embedded in there, so let me try to do some justice to a couple of them perhaps. So when you think about the large sales so customers who have purchased more than $1 million or so in the quarter, I would say over 90%, have three or more physics and purchased three or more physics from ANSYS. And so that gives you some perspective of the strength of the multiphysics capabilities that we are able to bring to bear. As far as our products are concerned, obviously the strength of our flagship products is legendary. I mean everybody understands that we have a terrific product in the space. But what we've also seen is the interplay between products and the multiphysics nature of the portfolio I think coming through. So that's also been really helpful. And obviously the advances that we've made that I've talked about in electromagnetics, in CFD and structures et cetera across the portfolio in Optics, all of those advances we've made across those five vectors of technology that I talked about are all helpful and important in the way that we engage with our customers and in the value that they see from our products. So I'm feeling very good about our product portfolio. I'm feeling very good about our multiphysics strategy and our ability to service our customers. With respect to our partnership ecosystem maybe it's best to step back and talk a little bit about the philosophy. Look, we believe in an open ecosystem. I think it's very important for us for our customers to recognize that the vendors that they're working with are participating in the open ecosystem which means providing APIs, which means providing for interoperability and things of that nature. And so we are committed to that. We are working obviously with multiple -- other vendors to make sure that customers can benefit from technologies. And obviously no single customer is going to be completely dedicated to a single-vendor. They're going to have technologies from multiple-vendors. We want to make sure that that works for our customers. And so our partnership strategy is driven by that belief in an open ecosystem and the ability to work collaboratively to support customer needs.

Ajei Gopal:

Thanks Jay.

Jason Celino:

Great. Thank you. Ajei, you mentioned cloud native the strategy is targeting new users and new use cases. Can you just talk about the SAM extension a little bit? Is it about moving down or earlier in the design cycle or down market? Thanks.

Jason Celino:

Okay. Interesting. Thanks. And then just a quick follow-up, really strong Q1 ACV. I know you mentioned for Q2 some renewal dynamics, but I thought I'd just double check. Was anything closed earlier in Q1? Thanks.

Jason Celino:

Great. Thanks for the comprehensive answer. Thank you.

Operator:

The next question is from Steve Tusa of JPMorgan. Please go ahead.

Ajei Gopal:

Good morning.

Nicole Anasenes:

Sure. So let me start with the first -- your first question. And then will go to the second. So in terms of the renewal base, the timing of customer renewals happen at natural cycles within the quarter. And as we have been moving to the strategic selling motion and bringing individual, kind of, development teams projects, in a customer to more strategic multiyear lease arrangements, sometimes the timing of renewals can shift on a year-to-year basis over time, right, which is the reason why we're very focused on the full year dynamic, because we take deals when they naturally occur because it optimizes the outcome for our customers, and it optimizes the outcome for ANSYS, which ultimately optimizes the outcome for investors. And so, the dynamic around the quarter is just something that happens from time to time. We had very, very strong Q1. The first half, is still strong in double digits. So we're feeling really good about where we're at, and there's nothing about Q2 that wasn't contemplated or seen or known when we started the year. As it relates to fewer 7- and 8-figure deals, I would say, the underlying dynamic around our large deal progression is not unchanged from any other prior Q1s. As you know, Q4 is our seasonally highest quarter, you tend to have a lot more closing in the quarter. And so on a relative basis, there may be more mentions. But the underlying dynamics, around the strength of the pipeline, around the ability to drive strategic relationships, and larger deals with our customers customers' willingness to engage, customers willingness to close. None of those aspects have changed since we spoke in February, about how the shape of the business is progressing.

Ajei Gopal:

Well, Steve, I think one of the important things to recognize is, we've been investing in these technologies for a while. And so one of the reasons why, I wanted to take the time during the call, to go through them is, because there's just -- because of exactly the dynamic you mentioned. There appears -- there is a lot of activity in the marketplace and certainly people are aware of advances in technologies, and it's an area where there's been a lot of discussion. But if you think of areas like numeric, as an example, that's been the bread and butter of ANSYS. That's really understanding the mathematics, and the engineering, and the science around being able to appreciate and predict physical phenomena, and that is applicable of course across our portfolio. The HPC activity is certainly been included within our business, for a while. And if you think about the vectors of growth that we talked about in our Investor Day last year, we talked about more users. We talked about more products, and we talked about more computations. And the more computations vector is being driven by high-performance computing, and the desire for customers to solve larger and larger problems, which are solvable as you start to introduce additional cores, you starting to use GPUs and other architectures. So AI/ML is obviously, an area where we've been investing, as I said, for a while. And we have products in the market today, that are taking advantage of AI ML capabilities. So these are all technologies and I don't want to repeat what I said on the call, but these are all technologies and areas where there continues to be investment in -- within ANSYS, of course, across the industry and we continue to reap the benefit within our products to benefit our customers.

Operator:

Next question is from Ken Wong of Oppenheimer. Please go ahead.

Nicole Anasenes:

Yes. That's absolutely, the case. I mean this is just about an over -- and you -- I know have been have been with us quite a while. You've seen quarters go up and down based on these renewal dynamics which is again why we focus on the full year. So there's nothing about the underlying dynamics in Q2 that are indicative of anything other than an underlying renewal base that has a SKU within the year that is driving those dynamics.

Nicole Anasenes:

No. I mean the underlying dynamics across all of our different customer segments have been performing pretty consistently as we've seen in prior Q1s. We had a lot of strength of course in the enterprise segment with the larger deals that we did this year and really strong in the Americas. But I would say we had strong growth across all three customer segments consistent with what we've had in the past.

Operator:

The next question is from Adam Borg of Stifel. Please go ahead.

Nicole Anasenes:

Yes. I mean I would say overall revenue linearity was somewhat – was pretty similar to what it was last year. It was slightly more skewed to the third month but it was pretty much in line overall.

Operator:

The next question is from Joe Vruwink with Baird. Please go ahead.

Ajei Gopal:

So when you think about the AI capabilities that we've got, we're using AI in multiple areas. And one area that I mentioned of course is making it easier for people to use products. And I gave you example of Fluent earlier in what – in response to one of the questions. That's a great example of making the technology, making our flagships easier to use. Discovery is also making the technologies easier to use in a more in a more broad-based manner. The use of AI/ML is very targeted within the portfolio. But another direction that we're going and we talked about this in our investor meeting or Investor Day last year was our ability to start to support applications. And so one of the ways in which we can democratize simulation is not – is allowing users to take advantage of applications, purpose-built applications for their needs that are built – that take advantage of simulation. And to that end we've created a set of APIs based on Python which allow people to build applications workflows things of that nature that further democratize simulation. So we're taking multiple routes to be able to make that happen. And in each of the directions we're addressing a different opportunity to be able to broaden the use case of a simulation.

Ajei Gopal:

Well certainly, the fact that we have the ability for people to write these automations or extensions taking advantage of the power of our portfolio using Python, where they can use other routines open source other things that are outside of simulation to bring that into a sort of an overall workflow. That is something that has helped us – that's helping us today. I mean there are examples of customers who have increased their use of ANSYS technologies because they've been able to build a very integrated workflow on top of this technology that allows more users to take advantage of what was previously restricted to a relatively small number of users. So that phenomenon that you're saying of driving incremental opportunity within our portfolio is absolutely the case. Furthermore, we would imagine outside of our outside of -- even outside of the engineering use case you could imagine long-term and this is a long-term statement, you can imagine other applications targeting others who are looking for the insights of physics-based simulation to be delivered to them. And we've talked about -- and certainly last year we talked about a healthcare example where someone delivering medical care or surgeon delivering medical care uses an application, which is built for that surgeon. It has nothing to do -- as far as their concern nothing to do with physics per se. They're all about delivering the care that they need to deliver. But underneath simulation is being done to influence the directions that they go. So those are examples of next-generation applications, which we believe will happen in the long-term but that's not a short-term impact. And so as we build out our capabilities we believe that we're enabling both the short-term opportunity as well as the long-term opportunity, which we've been calling the notion of being able to get pervasive insight.

Operator:

The next question is from Blair Abernethy of Rosenblatt Securities. Please go ahead.

Ajei Gopal:

Well, I mean, obviously A&D continues to be one of our top industries. And our aerospace customers are facing complex challenges things like engine width design lightweighting those continue to be areas of investment for our customers, but also a lot of work on Space 2.0 and the ability to be able to launch payloads into space. That's another area where there continues to be a lot of interest. Obviously, commercial air is recovering post pandemic there continues to be more interest. And then of course from a defense perspective there's obviously a global perspective. You're seeing this certainly in the United States. You're seeing this as you see increased spending in Germany, for example. So all of that represents long-term tailwinds into the aerospace and defense industries. And we certainly are very well-positioned given the nature of our technologies to be able to take advantage of that.

Operator:

The next question is from Josh Tilton of Wolfe Research. Please go ahead.

Nicole Anasenes:

Yes. So we had spoken about DYNAmore for the full year as being about €30 million to €35 million with about half of it being in Q1 in our February call. And you can -- the underlying assumption you can make is that we're pretty in line with what we expected in February.

Nicole Anasenes:

Yes. I mean -- so here's the pragmatic answer to that is, if customers don't renew they lose access to the software and they can't build their products. And so the renewal base is very, very sticky because it affects their R&D cycles. And so -- and just to kind of take it a step back and to contextualize kind of, where we sit in the corporate decision-making process and what has happened in other kind of economic events. Simulation tends to be the last thing that gets shutoff and the first thing that gets turned back on. And that's because it is connected to people's R&D. And R&D tends to be -- the investments in R&D tend to be longer -- long-term views as opposed to short-term tactics. So that's one. The second is, even within the R&D process the areas that are most susceptible would be areas that are connected to seat counts and people and that's not how the economics of our software work. So our software is -- the way customers use our software is based on the capacity of compute that they need and the software that they need to run their simulations within their R&D cycle. And so, if there are underlying changes in the footprint of the R&D part of the business, it doesn't really affect our part of the software stack in the R&D cycle. And the last part is, simulation actually can provide tailwinds for -- and support the underlying cost efficiencies of our customers in their R&D cycle. Using simulation reduces the need for physical prototyping. It shortens the innovation cycle. You can have a single analyst run multiple simulations at the same time. And so, the throughput that you get and the efficiency that you get from using simulation to build products, has a very high ROI. And in times where you're looking to transform simulation is valuable, not just in accelerating time to value to accelerate the top line, but also to support running R&D in a more efficient manner. And so, those are the underlying qualitative dynamics, but the real answer on the renewal base is that, it's very, very sticky and a small short-term disruption in economic outlook has historically not had an impact on our overall business.

Josh Tilton:

Super helpful. Really appreciate the thoughts and response.

Ajei Gopal:

I'm excited about our outstanding start to 2023. I would like to thank the one ANSYS team around the world for our ongoing success. Our superior technology, our broad-based business momentum and our strong customer relationships give us even greater confidence in our ability to execute against long-term goals. Thank you for joining us this morning. I hope you all have a great day.

Operator:

Welcome to the ANSYS Fourth Quarter and Fiscal Year 2022 Earnings Results Conference Call. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Alex Deruta, Investor Relations Manager. Please go ahead.

Ajei Gopal:

Thank you, Alex. Good morning, everyone, and thank you for joining us. Q4 was another excellent quarter for ANSYS and the largest quarter in our history. We beat our financial guidance for the quarter across all key metrics, including ACV, revenue, operating margin and earnings per share. Q4 was the culmination of a strong year for ANSYS. Our industry-leading product portfolio, loyal customer base, strong execution and growing markets enabled us to beat and operationally raise our guidance each quarter of 2022. This, of course, was despite the continued economic uncertainties brought on by trade sanctions and the war in Ukraine. We grew ACV at 14% in constant currency for the full year. And in the process, we achieved our goal of $2 billion of ACV in 2022. Thanks to this excellent performance, we realized our long-term financial goal set at our Investor Day in 2019. I want to congratulate the entire one ANSYS team, including our dedicated channel partners for the significant accomplishment. In a few minutes, Nicole will discuss our guidance for Q1 and the entire year. This guidance reflects the power of our world-class products, the ongoing demand from our customers and the strength of our business. I am excited that our results from 2022 and as well as our guidance for 2023 keep us on track to achieving the long-term goals we set out in our investor update in August of 2022. Looking back at 2022, we saw broad-based growth across all major industries, geographies and go-to-market routes. Our direct and indirect channels grew at double digits. Similarly, each of our go-to-market customer segments, enterprise strategic and volume accounts also grew by double digits in constant currency. The Hi-tech and semiconductor, aerospace and defense and automotive and ground transportation sectors were again our top contributors. From a geographical perspective, we saw strong performances with each region growing ACV better than we expected. And I'm excited to announce that one of our regions, the Americas, recorded over $1 billion in ACV for the first time in our history. I'm also pleased with the performance of our product lines from a more established flagship solutions to our newest offerings. Our top 2 customer agreements for Q4 ACV or in the global high-tech and semiconductor vertical and totaled more than $125 million. Through these contracts, 1 for 3 years and 1 for 4 years, the customers are expanding their use of ANSYS technology into new business segments, which is driving more users, more products and more computations. These customers have realized a number of benefits by using ANSYS solutions. These include identifying silicon issues during the tape-out sign-off phase, which has saved millions of dollars in respin as well as reducing multilayer PCB preprocessing time from a month to just hours. In Q4, we also signed a contract with NuScale Power, an energy company that is developing modular light water reactors to supply reliable and abundant carbon-free nuclear energy. Instead of relying on cost save physical prototypes, NuScale leverages ANSYS technology to simulate designs for containment, thermal hydraulics and the structural integrity of reactors. ANSYS solutions play a key role in an extensive product development process that must navigate a strict nuclear approval process in which delays can cost up to $3 million per day. As you heard with this new scale example, structural analysis plays a key role in customer sustainability initiatives. Continuing with the theme of sustainability through our structured solutions I would like to highlight a few examples of how these structures products working in conjunction with the rest of the ANSYS portfolio address this important topic. ANSYS, of course, was founded as a structured company. Over the last 50 years, we have continually invested to enhance our structure's offerings. The applications for structural simulation have evolved as even the simplest products have become more complicated and today's structure is critical for customers to meet their sustainability goals. Two additional Q4 sales agreements totaling nearly $60 million are driving sustainability in the energy sector. They are both anchored in structural simulation combined with other physics. The first is with an energy company that is using ANSYS simulation to make its traditional gas and steam industrial turbines more efficient as well as developing blades and the cells for its wind turbines. The second agreement is to assist with the digital transformation of another energy industry leader. This organization is expanding its use of our solutions to include a variety of applications, including structural design, thermal stress, and electric motor design for its robotic arms. By using ANSYS technology, the company has helped to decrease its development costs by 20%. While materials is a newer ANSYS product offering, it works hand-in-hand with structures, particularly when it comes to meeting customers' sustainability goals. That's because as customers seek to develop more sustainable products, they often consider nontraditional materials, which includes new steels, composites and short fiber reinforced plastics. Structural simulation on these new materials can assess performance to ensure safety and durability while also reducing weight and waste through topology optimization. ANSYS customer nature architects, one of over 1,700 members of our start-up program, is using ANSYS simulation to help its customers further their sustainability programs. As companies look for more environmentally friendly materials for their products, many are turning to artificially designed metal materials to incorporate functions such as heat conduction, deformation and weight reduction. Using ANSYS for structural analysis and fluid structure interaction Nature's architectures implemented a scripting language that automates simulation tasks and streamlines workflows, which enables the team to visualize and explore new structures. Our recent release of ANSYS 2023 are one is also helping customers with their sustainability initiatives. For example, ANSYS Granta Selector's enhanced Ecodata and Eco audit functionality helps engineers explore and rapidly iterate amongst design scenarios and material options. The tool empowers users to make sustainable materials straight off early in the product development process before high-fidelity structural analyses are performed and costs are locked in. ANSYS solutions are not only helping customers to develop more sustainable products, but we are enabling them to do so in a more resource-friendly manner. One such capability is in our one is resource prediction which leverages artificial intelligence and machine learning to predict how much time and memory will be required. Resource prediction will help guide users to achieve their business objectives for example, reducing salt time or decreasing energy consumption. Another innovation in R1 is aimed at helping customers increase the safety of electric vehicles. As you know, EV fires caused by battery abuse or impacts can be catastrophic. This advanced capability anchored in our structures portfolio brings together multiple ANSYS physics to analyze this complex problem. Specifically, our new safety workflow in ANSYS LS Dyna simultaneously simulates the comprehensive structural electrochemical and thermal responses of batteries that are damaged in an accident or through some other event. We are not aware of any other commercial solution with this critical functionality to help make electric vehicles safer. In addition to our organic development, we are furthering our structures product leadership through M&A, namely with our recent acquisitions of and Rocky. Dynamor was a longtime ANSYS partner and leader in developing and selling explicit simulation solutions with an emphasis in the automotive industry. develops dummy and human body models in addition to providing development expertise for [indiscernible]. This critical capability provides customers with complete software solutions for crash simulation, occupant safety and production processes. Our acquisition of Rocky solves a sophisticated customer challenge. Nearly 70% of industrial products experienced bulk granular material flows, where different sized particles with complex shapes interact, potentially impacting our product efficiency or structural integrity. Solving this difficult problem requires deep knowledge of both structural mechanics and fluid dynamics. With the solution from longtime partner, fully integrated into the ANSYS portfolio, users can solve these complex design problems. As a result, our customers will be able to reduce waste improve product quality and predict the performance and durability of equipment. Thanks in part to our sustainability initiatives, Newsweek has named ANSYS to its list of America's most responsible companies for 2023. ANSYS was included in the annual ranking of the 500 most responsible companies based on environmental, social and corporate governance initiatives. Our inclusion on this list demonstrates our commitment to making customers improve efficiency and reduce waste by minimizing the need for physical prototyping. Turning to partners. I'm excited that Autodesk Fusion 360 Signal Integrity extension powered by ANSYS was commercially released in November by embedding ANSYS' electromagnetic simulation capabilities within Autodesk Fusion 360 printed circuit board designers can access near real-time insights earlier in the design process for smart consumer products. I'm also pleased that our electromagnetic and semiconductor solutions including ANSYS Redhawk-SC, ANSYS RaptorH and ANSYS HFSS have received GLOBALFOUNDRY certification for its flagship 22FDX platform. That certification enables trip designers to lower costs by reducing excess safety margins and improving system performance without compromising reliability or risking unexpected and damaging interactions amongst design elements. In summary, Q4 was an excellent quarter that kept a fantastic year for ANSYS. We beat guidance across all key metrics and delivered the best year in company history. And of course, we exceeded our long-term goal of $2 billion in ACV. I am confident in our ability to achieve the goals we set during our most recent investor update in August. Despite some economic uncertainties, our end markets remain robust, and our business has proven its resilience over the years. Over the past few weeks, I've had the opportunity to speak with members of our direct sales team as well as several of our global channel partners. Reporting strength in the market from the largest enterprises through SMB accounts. Given the importance of research and development, and innovation. The demand for ANSYS simulation continues to be strong because customers understand our compelling value proposition. And that is continuing to drive more users, more products and more computations throughout our customer base. Our momentum coming out of Q4, our strong customer relationships, our robust end markets and our leading product portfolio will propel us through 2023 and beyond. As a result, we are more confident than ever in our ability to achieve future milestones. And with that, I'll now turn the call over to Nicole. Nicole?

Operator:

[Operator Instructions]. The first question is from Ken Wong of Oppenheimer.

Ajei Gopal:

Sure. Ken. So let me briefly talk about aerospace. Our aerospace customers are facing relatively complex challenges, and it's pretty broad-based. And so when you think about some of our business -- we have customers who are focusing on aircraft engines. And obviously, there are a number of trends in that space, whether it comes to lightweighting and energy efficiency, in some cases, electric engines, different fuel sources, so there's a number of different levels of innovation taking place at various points in the AMB aerospace industry. Obviously, in the Space 2.0 world, there are -- there continues to be a lot of innovation and both in larger companies as well as smaller companies. And then, of course, you've seen some of the work that we've done with significant projects like the web telescope and the dark mission where our project where our technologies were used in the development of those projects. So there's a lot of different activity across the space in this entire aerospace and defense world for us. And I believe that the demand for our offerings continues to be robust, and we see a pipeline in that space as well.

Nicole Anasenes:

Yes. Well, thanks, Ken. And yes, we were really, really pleased with the exceptional close of our cash flow performance at the end of the year, as you point out, it grew quite substantially delevered operating cash flow in 2022 in our outlook range of 10% to 17% unlevered operating cash flow indicates continued momentum in the business overall. As you know, I mean, we gave long-term guidance in August. We're not prepared to update the long-term guidance. But when you look at the combined -- the 2-year growth rate of 2022 and 2023 from the ECB perspective, and the comparative unlevered operating cash flow growth rate over that period, you could see the substantial operating leverage and margin expansion associated with that it's a little early for us to update long-term guidance we just gave it 6 months ago. But what I can say is -- and there's a lot of exogenous factors that impacted unlevered operating cash flow number as you know, foreign exchange had a pretty meaningful impact to that last year. As an example, we're still not quite out of the woods as it relates to that so not really prepared to give anything longer term than 2023 today, but we feel really good about the underlying strength of the operational momentum of the business. We have a very disciplined investment model around putting investment in, that drives incremental growth. And those are things that we -- that we expect to be able to continue to build on over the next couple of years.

Joseph Vruwink:

Great. ACV in an organic basis seems to be growing, I think, several hundred basis points above the framework that was provided last year. I guess my question is, within that 2022 to '25 time line, were the years 2022 and 2023 always intended to be this way, just given, I don't know, pricing or renewals or the shift to leases? And if that's not the case, maybe you can just walk through some of the upside drivers the last year and then in terms of your outlook for this year?

Joseph Vruwink:

Okay. Great. was a bit bigger now. I was thinking. So that's all helpful. And then there was an interesting comment on just performance across your different customer segments. I guess, I'll ask, are there any, I guess, noticeable changes in spending patterns when you think inside your top 100 and outside? And I guess, at the heart of this question, is the strong pace of the outlook for 1Q. Typically, I think about that being outside the big year-end enterprise activity. And so is this indicating maybe strength that is more broad across the customer base at the start of the year?

Operator:

The next question is from Jay Vleeschhouwer of Griffin Securities.

Ajei Gopal:

So Jay, so firstly, when you think about our technical priorities will be areas that we're making investments in our business, I would say that probably 5 broad areas where we're making technological investments. The first I would broadly categorize as numerics and that includes physics models and methods for both the physics and multiphysics. That's just the core physics part of what we do. The second area is in AI machine learning where we're making significant investments across the portfolio. Our customers today are seeing the benefits of ANSYS products that have been enhanced through AI. We've, of course, filed patents to cover some of our work in the space, and we continue to make significant investments in AI and getting our customers to be able to take advantage of this great technology in the context of our offerings. The third area is high-performance computing. That obviously includes -- that obviously includes both HBC as well as CPUs, GPUs and so for example, if you look at R1, we just announced some really exciting work on [indiscernible] for example, our optical solver where we can show that a single GPU is something like 8x faster than the 32 core CPU machine. And then, of course, we're very excited about a fluent multi-GPU solver which allows fluid simulations to run natively on multiple GPUs, and that is a game changer in terms of performance, and we can show tremendous orders of magnitude scale up and in terms of both performance as well as, of course, cost savings when it comes to things like energy usage and others. So we are very excited about the work that we've done in the GPU space, and we continue to make investments over there. Cloud and experience is the fourth area. That includes the work that we're doing in cloud. You may have seen some recent announcements where we're -- we've announced some of our cloud technology in the context of our cloud marketplace offerings, and we continue to invest in cloud native capabilities as well as user experience. And the last area is in digital engineering, and that includes things like digital twins, mission, system simulation and there, we continue to make advances. And you saw, obviously, some of the capabilities of our product lines on the space. Unintended when you -- when we talked about James Webb as well as the dark mission, but certainly, we have ongoing investments in that space as well, and that includes things like NBFC. So broadly, there are 5 areas

Operator:

Next question is from Steve Tusa of JPMorgan.

Nicole Anasenes:

Sure. So first, one of the aspects to the business since the accounting change for the 606 accounting change several years back. is that the dynamics around revenue recognition creates a lot of volatility in the P&L and particularly on a quarterly basis. And that's because the difference in the underlying mix of licenses on a year-over-year basis can significantly influence the dynamics around revenue recognition. And so the margins the kind of pattern throughout the year is a little less meaningful in kind of extrapolating kind of where directional momentum is going particularly in the P&L. We do also have similar variability in quarters as customers have moved to multiyear leases -- it is not as much of a selling motion where it's only about an event at a point in time that kind of comes up once a year, there's an ongoing selling process that happens kind of throughout the year where ACV can be remixed relative for a single customer relative to what the prior year looks like. So there's considerable volatility that happened throughout the quarters. And that's why we're really focused on being really clear about our full year guidance where our full year outlook is for ACV and operating cash flow and particularly in particular, in the P&L overall. And the way that we feel we're indicating kind of the change in the trajectory of the business is with our updates to the full year guidance. And so that's how that's how we would think about it overall is really around that. And I think you could see that in kind of how we went through our guidance last year. And if we could look at the beginning of the year, there was a 4-point difference in ACV as an example, as we progressed throughout the year. And that's because our philosophy is that we look -- we give guidance based on what we see ahead of us today and what the pipeline in the book of business looks like today. And as things change, up or down, we will be clear about what changes. We don't try to create wide ranges, which predict macro trends or things that we can't control. We try to look at it in terms of where our book of business is today. So does that answer your question?

Nicole Anasenes:

Yes, absolutely. I mean it is the variability within the timing of things in the quarters can create some ups and downs throughout the year. But the overall outlook, which we think is quite strong out of the gate is really a reflection of broad-based demand, as you point out.

Nicole Anasenes:

Cash flow, so we do not give quarterly cash flow guidance because the dynamics around cash flow within a quarter because change because of timing of payments that fall over date lines -- or timing of collections that could sell over datelines quite easily and make really meaningful differences. But for modeling purposes, I think you can assume that a meaningful portion of the cash flow occurs in Q1, particularly off of a strong Q4. And Q1 and Q4 tend to be the largest cash flow quarters. The middle 2 quarters tend to be a little bit more muted with Q2 being probably the lower water mark.

Saket Kalia:

And well done on a strong finish to -- thank you Nicole, maybe for you, very helpful on the ACV contribution from inorganic. I was wondering if you could just talk about that from just a margin and free cash flow perspective. And just to preface it a little bit, I mean, ANSYS is, of course, so profitable. It's rare that a tuck-in acquisition is accretive to margins. But can you just maybe just give us some broad brushes on operating margins, that is. Can you just give us some broad brushes on how and and maybe any of the other kind of acquisitions for mid-'22 are impacting that margin here in '23? And whether those acquisitions are maybe additive or dilutive to operating cash flow?

Saket Kalia:

Got it. Got it. That's very helpful. Ajei, maybe for my follow-up for you. You touched on this in the question just around R&D priorities with some of the public cloud announcements, which I thought were very notable this quarter with both AWS and Azure. Maybe just a higher-level question. How do you sort of think about the mix of simulation being done on public cloud hyperscalers versus more traditional on-premise or private cloud simulation being done within your customer base -- and how do you sort of see that mix shifting? How -- does that make sense?

Operator:

The next question is from Tyler Radke of Citi.

Ajei Gopal:

Sure. I mean, look, the automotive business is one of our top 3 industries, as you know, top 3 verticals as we define it, growth high tech and semiconductor, aerospace and defense and automotive and ground transportation. And it continues to be a strong area. And we've got deep relationships with our automotive customers as they continue to face these complex challenges with their products. And there's a number of things -- there's a number of areas where they're continuing to innovate. Firstly, obviously, if you think about passenger cars for a moment, there is clearly a direction towards fuel efficiency and so on in more traditional cars in the traditional internal combustion engine and that deals with lightweighting, et cetera, crash testing, those are across all of the product lines. But as you start to think about the next-generation electrification alternative energies, those are all important themes where customers are investing and making investments for the long term. Battery technology. And I hope me mention an example of some of the work that we're doing there with impact analysis with the -- in my script earlier. So there's a lot of work in multiple areas taking place that are supporting the automotive customers I would just point out, by the way, that as we think about the work that takes place, for example, with electrification in the automotive industry, the work that leads to that includes the entire supply chain and then may be suppliers who are in our high-tech vertical or building very high-tech components that are then being used in the automotive space. And so if you start to look at the entire supply chain, the impact of automotive is very large across the industry as they're looking at all of these different areas. Now the breadth of our technology and the breadth of the portfolio I mean it's so large that we are able to help our customers as they are looking at all of these different issues. Sustainability is another example. And that's why I think you're seeing strength in these industries, the sophisticated industries, which require these -- which are going through these transformations, we are able to help our customers navigate through these next-generation [indiscernible] that they're facing or trends of the dealing with the market.

Nicole Anasenes:

Thanks, Tyler. So what I would say is, yes, that the operating -- we have very strong operating leverage in the business because we have relatively low variable costs and so that's why you can definitely see as we continue to accelerate growth, the operating leverage in the business. Now it comes down to what do you do with that incremental growth? And how do you reinvest it and I would say that we have a tremendous amount of operational discipline around decision-making around investments that is not new to ANSYS. It is kind of embedded in how we make decisions and how we prioritize where we put investments with an eye towards how do we get return with a balance on what is helping us for the short term and how are we making sure that we're prudently investing for the long term. And so that strategy has served us well. It has allowed us to continue to invest in the business as things -- as things are good and make sure we can accelerate our road map. It also helps us understand how we need to monitor things over time. And so there's nothing quite new and an always-on basis, we're always reevaluating our processes and looking at have a pretty robust enterprise-wide transformation process around how do we remove the unnecessary work in the way that we support the business. And again, that's not new to influence the outlook, but it is the reason why we can stay the course on the strategy that we have because we've always been operationally disciplined. So even when there's times with uncertainty, we're confident that we have the maneuverability to execute.

Ajei Gopal:

Once again, I am excited by the excellent progress ANSYS made in 2022. I would like to thank the one ANSYS team around the world for our ongoing success. The team's work our broad-based business momentum and our strong customer relationships give us even greater confidence in our ability to execute against long-term goals. Thank you again for joining today's call, and have a great day.

Operator:

Ladies and gentlemen, thank you for standing by. And welcome to the ANSYS Third Quarter 2022 Earnings Conference Call. With us today are Ajei Gopal, President and Chief Executive Officer; Nicole Anasenes, Chief Financial Officer; and Kelsey DeBriyn, Vice President, Investor Relations. All participants will be in a listen-only mode. [Operator Instructions] Please note today's event is being recorded. At this time, I would like to turn the conference over to Ms. DeBriyn for opening remarks. Please go ahead.

Ajei Gopal :

Good morning, everyone. And thank you for joining us. Q3 was yet another excellent quarter for ANSYS, where we once again beat across our key metrics, including ACV, revenue, operating margins and earnings per share. This gives us further confidence in the business and has enabled us to operationally raise our full year guidance for ACV, revenue, EPS and operating cash flow. Nicole will have the details in a few minutes. As we have previously discussed the strength and the resilience of the ANSYS business come in part because of the number and the diversity of customers we serve, ANSYS has 10s of 1000s of customers across multiple industries, including high tech and semiconductor, aerospace and defense and automotive and ground transportation. Those three sectors were again our largest contributors in Q3. Our largest contract for the quarter was in the high tech and semiconductor space, a $59 million three-year agreement with an international electronics company. This global brand has been challenged by the increasing complexity of its products, as semiconductor chips continue to get smaller, which has led to issues such as voltage drop. By continually enhancing our solution to semiconductor and other areas of physics, we will not only be able to stave off any competitive challenges in this long-term account, but we increase the number of ANSYS products the customer uses, the number of end users as well as the amount of computations performed. This new contract broadens our existing footprint, which included products from across our multi physics portfolio, such as structures, fluids, electromagnetics, and materials. This is a perfect example of a discussion at a recent investor update that ANSYS is growing across three vectors, more products, more users, and more computations. ANSYS is also well balanced across geographies, with a little less than 50% of our business coming from the Americas and the remainder roughly split between EMEA and Asia Pacific. This diversity in our customer base means that we can harness growth from a wide variety of sources. It also means that we are resilient to the business or economic dynamics of any specific customer or industry or country. In Q3, I'm excited to report that from a geographic perspective, we saw a very strong revenue growth from both Asia Pacific and EMEA while the Americas came in as expected. Adding to the strength of our business is a broad and deep product portfolio, which includes flagship product in structures, fluids, electromagnetics, semiconductors, optics and mission. As such, we are not over reliant on any individual product line, which further contributes to ANSYS’ resilience. Additionally, our proven portfolio enables us to attract new customers, as well as to displace competitor technology. For example, our startup program is continuing to grow as these nascent companies take advantage of ANSYS solutions. The program has had over 1,600 customers across 53 countries. While members of our startup program represent a small piece of our overall business, they are aggressive users of our products. And with the program's high graduation rates, more and more of these customers become active contributors to the ANSYS business. While it can be difficult to replace an incumbent in our space, we have also grown our customer base by displacing competitors. For example, in Q3, we won a contract with an industrial tool manufacturer, that was a key account at one of our competitors. That customer is now using ANSYS’ structural, fluids and electronic solutions for the development of its power tools. On these calls, I often highlight a specific aspect of our business. Over the past several calls, I have discussed the unparalleled scalability of our best-in-class fluid products. I highlighted the critical role that ANSYS solutions play in sustainability. I discuss how customers are using our solutions in the development of next generation semiconductors. And I reviewed our leading suite of optical simulation products. But this call, I would like to reiterate some of the key takeaways from a recent investor update. During the update in August, we discussed how typical enterprise software companies have only two vectors of growth, more products, and more users. ANSYS however, has a third, more computations, let me briefly discuss each of them. Traditionally, simulation involves a single user leveraging a single ANSYS product for each individual simulation. Today, as we partner with our customers to solve more complex R&D challenges, there is an increased demand for multiple physics, including structures and fluids, electronics, photonics and others to work together by transcending individual physics to connect workflows that solve complex multi physics problems. Our customers can simulate and analyze the physical world at a system and admission level. Addressing these complex new use cases inherently requires the use of multiple physics solvers, leading to an increased number of multi product sales. In Q3, we signed a seven-figure contract with a longtime Space 2.0 company that has standardized on ANSYS as multi physics solutions across all of its engineering departments to develop safer and more reliable launch vehicles. With this new agreement, the company is now expanding its ANSYS footprint to include our material intelligence solution as its central materials database. We have also invested in the overall user experience, which is driving more end users of ANSYS solutions. Remember that in the past, only expert engineering analysts could take advantage of simulation. Today, ANSYS simulation is being used by all levels of engineers, thanks to our automated workflows and integrations with other systems that make answer solutions more intuitive and easier to use. That means that different types of engineers can fully take advantage of the benefits of ANSYS simulation, and it is driving the expansion of simulation usage to more users upstream and downstream of the validation process. In Q3, ANSYS calls the largest healthcare contract in our history, a seven-figure agreement that will dramatically expand the number of users at an American eyecare company. realizing the benefits of simulation, this existing customer has launched a digital twin and digital engineering initiative that will triple the number of users of engineering simulation technology in the next 18 to 24 months. The third vector of our growth is through more computations. ANSYS is able to monetize customers workloads, as they run the larger, more complex calculations needed to solve next generation product challenges. A single ANSYS user can leverage multiple products and can run hundreds of simulations across 1000s of cores in parallel, which is critical functionality, as even the most common products become more complex. We provide our customers with open, scalable offerings, supported by the major cloud platforms to enhance and extend our industry leading simulation portfolio. This flexibility enables our customers to maximize the value they realize from simulation, while scaling up to address the increasing complexity of next generation product development. We recently announced the launch of our ANSYS Gateway powered by Amazon Web Services. With this addition to our comprehensive cloud offering, customers can easily access, subscribe and configure ANSYS applications from a single location. ANSYS Gateway powered by AWS allows broader access to high performance computing by bringing down the traditional hardware barriers that have limited innovation for many of our customers. Our focus on expanding the portfolio of physics on creating a platform to enable and manage complex multi physics solutions. And an expanding simulation use cases unlocks greater customer value, which enables all three vectors of growth for ANSYS. The application of ANSYS simulation technologies can be manifested in varied and distinct ways. For example, last time, I discussed the multiple roles ANSYS solutions played in the testing, launch and deployment of the James Webb Space Telescope. Keeping with the applications of ANSYS and space, I'd like to briefly highlight the role that we played in NASA's recent dark mission. As you may recall, in September, NASA smashed an unmanned spacecraft into an asteroid in an attempt to alter its orbit. The Johns Hopkins Applied Physics Lab extensively used ANSYS SCK through a mission planning process from formulating darts trajectory through the asteroid system, as well as to visualize relevant vectors and attitudes. The thermal team use SCK’s for mission environment when checking the location of the sun, relative to the satellite during critical maneuvers. NASA has announced that the dark mission exceeded its highest expectations by shortening the asteroids orbit by 32 minutes. This marks the first-time humanity has changed the orbit of a celestial object. And I would like to congratulate the team at Johns Hopkins and NASA for this success in this inspirational and potentially lifesaving mission. This example demonstrates the range of use cases, as well as the impact of ANSYS solutions. Next, I'd like to highlight 1000s of ANSYS employees around the world. They are of course, what makes ANSYS so special. So I'm very proud that Newsweek Magazine has ranked ANSYS as 13th amongst the most loved workplaces at US companies. The ranking considers employee survey responses, external ratings, and interviews with company leaders. This recognition is just one more testament to ANSYS’ unique culture and the impact we have on the world. In closing, Q3 was another excellent quarter for ANSYS, one that provides momentum as we close out the year, and look ahead to 2023. With our product leadership, proven performance and resilient business model, I'm more confident than ever in the future of ANSYS and the innovations, we're helping our customers to drive. And with that, I'll turn the call over to Nicole. Nicole?

Operator:

[Operator Instructions] And our first question today will come from Gal Munda with Wolfe Research.

Ajei Gopal:

Gal, good morning. That's a great question. So the way you should think about how we monetize that is, it's really through product licensing. So when we license our technology to customers, we give them access to the use of us, take a multi-year lease as an example, we give them access to use our technology for a duration of time. And we also give them access to high performance computing capability. And that HPC translates into license software for us, license revenue for us or license ACV. And of course, access to the solvers themselves also show up as licenses. So in the aggregate, both the ability to use the technology on more processing translates into license for us. And the ability to use more of our software in that context translates into more license. So that's how we monetize it. And that's how it shows up in our financials.

Ajei Gopal:

Why don’t I jump in Gal, because I have some context. And then maybe I'll ask Nicole to add a little bit more. So if you look back at 2019, and you consider the evolution of our business, and we describe some of this in the investor update presentation that we did earlier this year, we've been in the process of a transformation in our business model, where we've been taking advantage of these three vectors of growth that you alluded to earlier. And we've been using that to really transform our business model in the way that we support our customers. So we've increased the amount of lease that we do with our customers. And that translates into obviously stickier relationships with our customers as we go forward. So look, at the end of the day, it comes down to the products that we have, and the capabilities that we provide and our ability to address some of our customers’ most challenging market needs. And we have an amazing portfolio, we've continued to build in that portfolio, we've continued to expand that capability that makes it even more relevant for our customers today as compared with years ago. And the nature of the business model, the nature of the ability to monetize that relationship, all of that translate into our ability to be very resilient, no matter what happens out there in the market. So we have a very resilient business model that I'm excited about. We've talked about how we are and I mentioned this in my script, we talked about how our technology is very broad across multiple physics, we're not overly reliant on a single product line, we talked about how we're, we have presence in multiple industry verticals. And we mentioned, I mentioned high tech, I mentioned automotive, I mentioned aerospace as examples. And of course, we have presence in others. And we talked about our geographical distribution as well. So that gives us the ability to be resilient when a particular industry changes or when there are particular challenges in an individual market. Now, in the face of a global pandemic, of course, as you saw going through this, that's an overarching global phenomenon. And there, it just goes back to the core value proposition of our products, which is we help our customers build better products, bring them to market faster, at lower cost, we help them reduce warranty costs, we help them be more efficient. And so that combination of being able to support them from a top line perspective and drive both top line growth, as well as support them from a cost perspective really stands us in good stead in rough economic times, which is obviously what we've seen in the last couple of years. So that part, in part contributes to the momentum of the business that we've seen in the past. And frankly, that contributes to the momentum of the business that we're seeing, that we're seeing today. And I've had the opportunity to now spend a number of over the last couple of months, I've had an opportunity to spend time with customers in person in the US, in Europe, in Asia. And what I'm hearing from customers around the globe, is very consistent perspectives on the pressures that they're having to be able to continue to drive their businesses forward. So they've all got multiyear product roadmaps that they need to advance their businesses. And frankly, they're use-- they're relying on us. They're relying on simulation to be able to not only deliver on those roadmaps but to be able to deliver on those roadmaps as efficiently as possible. Because they know that simulation can help them save time and money through the avoidance of physical testing and things of that nature. So that's all contributed to the momentum that we have in the business. And I'm really excited about where we are right now.

Tyler Radke:

Yes. Good morning. Thanks for taking the question. Ajei in the opening remarks, you referenced a number of deals where you displace competition in accounts and just feels like this is something that you're talking about more here on these earnings call relative to historical quarters. So could you just walk-through kind of the opportunity that you see there? Have you seen kind of win rates pick up and is this kind of a function of some of the innovation at ANSYS. And perhaps inorganically, just kind of combining products that you've acquired into the core suite that's allowing you to do this, just kind of talk about the opportunity on the competitive displacement side. And then I had a quick follow up for Nicole. Thank you.

Tyler Radke:

Thanks. And Nicole, as I look at the Q4 ACV guide. So obviously, it was a really strong beat here in Q3, but it looks like the race for the full year was much less than the operational beat in Q3, could you just help us understand what's giving you the moving pieces in the guide for Q4, where there's some deals that maybe came in a bit earlier here in Q3, are your kind of de- risking Q4 further based on what you see on the macro environment? Just help us understand the relatively large outperformance in Q3 and then the much smaller operational raise for the full year. Thank you.

Operator:

Our next question will come from Jay Vleeschhouwer with Griffin Securities.

Ajei Gopal:

Hey. So let me start first, Jay, thank you for the question. Let's talk about a little bit about R&D and prioritization. As you know, and I think we've discussed this in our investor updates, we have a pretty robust mechanism of being able to allocate resources against priorities. And we do that analysis. And that ultimately influences where we're spending our money and our resources in order to achieve the outcomes that we're looking for. From a product perspective, I think you should understand that we look at sort of the core physics evolution, and there is an amount of work that we have focused on the evolution of the core physics, and that's algorithmic advances, all of the work that you would expect to continue to make structures better than ever, or fluids, the fluids better than ever electromagnetics, et cetera. So we have a stream of activity within the R&D organizations which do that. We also have, as we broaden the portfolio, we have some platform level work. And that really addresses the needs across multiple products. So it's a support for the cloud. It’s support for products like Minerva, these are value propositions that apply across all of the physics and all of the verticals, as we deliver to our customers, the simulation platform that allows them to manage these really complex simulations that we're dealing with. If you look at technologies like materials, for example, that's again, very valid as you start to think about multi product sales materials comes in and provides a significant amount of capability in that context. So the other thing to note is that some of the techniques that we have developed, for example, GPU acceleration, where we've done some incredible work, that's technology that can be shared across the physics, some of the ray tracing techniques that we've developed, and once those are applicable across others, so we're leveraging the teams to be able to take advantage of learnings from one team to the other. So I'm very comfortable with our position with our R&D footprint, I think we have a fantastic roadmap. And I think it continues to add to the value proposition for our customers, which is we can continue to help them solve their most challenging problems now, and they have confidence in our roadmap, going into the future to support them. They understand the value proposition of being able to reduce costs, they understand we can help them reduce warranty costs. All of those things are reflected and supported by our R&D roadmap.

Operator:

Our next question will come from Steve Tusa with JP Morgan.

Nicole Anasenes:

Yes. So first, I just kind of reiterate the point around growth rates in any given quarter, on a quarter-to-quarter basis. I mean, the absolute growth rate in Q4 that you see in the underlying guidance, remember, there's about 700 basis points of foreign exchange in that absolute number overall. So when you adjust for foreign exchange, the midpoint is around that double digit growth, which is in line overall, with our model, on a quarter-to-quarter basis, you sometimes get lumpiness in terms of when deals happen, and when there's kind of year-to-year comparison of when those deals happen. So the quarterly growth rates in the patterns of quarterly growth rates are just less indicative of overall momentum than the overall which is why kind of in responding to Tyler, I kind of gave that description of the overall momentum and so now and when you look at what can happen in any given quarter again 12,000 contracts in a quarter. Sometimes timing isn't a different, it falls into different quarters and then one would expect and so overall, the underlying optimism the business had didn't change. The underlying momentum in the business hasn't changed. We have -- we are very focused on the full year, and delivering the full year number making sure that we're getting the right deals for our customers and for the business at the right time. And so sometimes that can affect the overall underlying dynamics environment growth. But overall, Q4 is midpoint, it is still in that 10% range, which is -- which brings the second half to approximately 14% constant currency.

Nicole Anasenes:

You had -- I didn't answer your backlog question. I apologize. So the backlog, on the backlog, that's really a sequential pattern as well. If you go back and you look, there's some seasonality to the way backlog kind of rolls off. And so that you also have to look into longer patterns as well. So if you look at the same quarters last year, you see that kind of seasonal pattern of the dip in backlog on a quarter-to-quarter basis, and then it kind of returns to different. So the quarter-to-quarter dynamics are less indicative of than the overall kind of full year dynamics that you see on backlog growth.

Nicole Anasenes:

Yes, no. I would say that the overall – over, I'll let Ajei comment because he's been speaking to customers. So he can give you the more contextual cover. But the overall, our overall outlook has improved since August. And so we're not seeing any fundamental difference other than the timing of when customers have closed deals in the quarter, so that on a constant currency basis, our growth rate is increased for the full year. And that's really driven by that $8 million operational rate. So there's nothing specific that we're seeing other than normal quarter-to-quarter dynamics in terms of when things close. But Ajei, maybe you can add some color.

Operator:

Our next question will come from Blair Abernethy with Rosenblatt Securities.

Ajei Gopal:

Well, it's multifaceted. I mean, firstly, the observation that you're making, which is that it's easier for engineers to use simulation and more engineers are using simulation is absolutely accurate. And there are a number of reasons why that's the case. Number one, we'll start from the product perspective. The products are easier to use. And we've had significant investments in usability, in integration, all of those things over the last several years after the last decade or two, which is culminated to the situation right now, where the product is so easy to use. I don't know if you recently that you saw this, it ran by my newsfeed this morning. But there was a high schooler in California, who used ANSYS simulation to simulate the loading of backpacks on students and the impact of a backpack. And they did that analysis using ANSYS simulation, they use granter, they use mechanical, they use a number of these products working together in order to come up with a with a solution and won a very prestigious award. That's an example of how easy the technology has been to -- has become to use for people where high schoolers are able to take, motivated high schoolers are able to take advantage of the technology. That's number one. Second thing is we continue to increase our level of investment with universities, we have presence in over 1,600 universities around the world. Cornell University teaches a massive online course using ANSYS, over a quarter of a million people have signed up for that. We've had millions of people downloading the student version of our products around the world. So there is broad based understanding of our technologies at the undergraduate level. And simulation is being taught as part of the curriculum. So graduating students are coming out aware of how to use simulation, aware of the value proposition, aware of the benefits, and aware of how to use ANSYS. And that is another aspect where the entering engineering workforce is very comfortable with this technology as opposed to a few decades ago. The other thing is, of course, the use of computing, we have continued to make the technology more efficient. We've also leveraging high performance computing, we're leveraging GPUs and with the overall broad-based availability of compute, that's making it easier for people to take advantage of simulation as well. So it's all of those things. It's work flows, its product capabilities, it’s ease of use, it's integration with the academia, all of the availability computing, all of that is really exciting. And frankly, I would encourage all of you to go to the most to our website, we have a magazine called ANSYS Advantage. And the most recent one, for example, talks about some academic success stories. And that'll give you some perspective of how we're more deeply engaging with the academic community as well.

Jason Celino:

Hey, thanks for letting me ask a question here. Obviously, a good quarter, curious on kind of the linearity of strength. And then maybe if you were able to kind of discuss how things might be trending through October.

Jason Celino:

Yes. So you talked about in earlier questions, you can't control when customers close deals. So I'm curious on the strength that you saw or the linearity of the activity through each month of the quarter.

Jason Celino:

Perfect. And then maybe just a quick housekeeping question. I think you made a small tuck-in acquisition, C&R Technologies. Again, small tuck-in, but how should we think about contribution for Q4, if there's any. Thanks.

Ajei Gopal:

Yes, just to jump in here. And while the transaction is obviously not material from a financial perspective, I just want to note that I'm really excited about the people who are joining the company as a result of joining ANSYS as a result of the acquisition of C&R. And, of course, the technology that C&R has built over the years. They're a leading provider of thermal analysis that used to optimize thermal systems. And they use in a number of applications, but most especially in the space in the satellite industry. So them -- their focus is on providing system level simulation for thermal and they've had a number of use cases. And they were, in fact being used as part of the James Webb telescope as well, where NASA use the C&R thermal desktop to provide a detailed thermal model of these optical and instrumentation systems. And it was used to predict things like transient profiles and gradients and heat flows as a payload transition from ambient to cryogenic conditions and back again. So by adding that to our portfolio, we will then be able to provide analysis to the customers, thermal analysis to customers from every stage from system design, all the way up to optimization from 1D tools, all the way up to 3D tools that gives us a comprehensive perspective. And then, of course, with the work that we're doing with space applications with a mission engineering suite of offerings. This further supports that and increases our competitiveness in that market as well.

Andrew DeGasperi :

Thanks for fitting me in. I just wanted to maybe ask a question on the large number of automotive deals you saw in Q3. I think it's Germany, if I'm looking at the revenue mix. Just wondering given the news, we're hearing about that region. Can you elaborate how long were those deals in the making, and maybe tell us if the macro political situation there is accelerating some of these deal closures, given the energy issues there and things like that.

Nicole Anasenes:

Yes. And so just to give a little bit of color on the question you asked. The overall growth in EMEA was strong to reinforce Ajei’s point or on the backup of that in automotive. Automotive was a strong quarter in EMEA. There were several seven figure sales automotive companies really focused on things that Ajei mentioned electrification and autonomous vehicle. But high tech, the high-tech industry was also an area of strength in Q3, which was an element of the performance around EMEA.

Operator:

And our question will come from Ken Wong with Oppenheimer. It appears Ken has disconnected. And that will come from Adam Borg with Stifel.

Nicole Anasenes:

Yes, thanks for the question. Yes, we mentioned I think it was on the last call, we had done a strategic review of the portfolio to identify some targeted areas where we thought that the relative value that we provide versus the pricing in the market was maybe a little askew. And so we did some targeted price increases on a subset of elements of the portfolio in July. Now, just to provide some context. So the underlying yield from that is, of course, embedded in our guidance, because we did an in July. But what I would say is that even the price increase in July, our sales cycles tend to be three to six months long on average. And when you look at the larger deals that you see in Q4, many of those are -- you're starting those conversations in January. And so our expectation with that price increase is that it would have relatively less impact in 2022.

Kelsey DeBriyn:

That's all the time we have today. I'm going to turn it over to Ajei for some closing remarks.

Operator:

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your line at this time.

Operator:

Ladies and gentlemen, thank you for standing by, and welcome to the ANSYS Second Quarter 2022 Earnings Conference Call. With us today are Ajei Gopal, President and Chief Executive Officer; Nicole Anasenes, Chief Financial Officer; and Kelsey DeBriyn, Vice President, Investor Relations. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please also note today's event is being recorded. At this time, I would like to turn the conference over to Ms. DeBriyn for opening remarks. Please go ahead.

Ajei Gopal:

Good morning, everyone, and thank you for joining us. Q2 was yet another excellent quarter for ANSYS, where we once again beat across our key metrics including revenue, ACV, operating margin and earnings per share. That, coupled with our healthy pipeline, gives us further confidence in the business and has enabled us to raise our full year guidance on ACV and revenue in constant currency. Nicole will have the details in a few minutes. Our largest contract of the quarter was a three-year, nearly $25 million agreement with an international electronics brand. This new contract includes ANSYS solutions for semiconductors, electronics, fluids, as well as our Learning Hub to make users more familiar and productive with our software. By standardizing on ANSYS solutions, this customer expects to increase its products yield while decreasing verification time for signal and power integrity. Another multimillion-dollar agreement in Q2 enables an international automotive OEM to expand its usage to include ANSYS solutions for enterprise-level materials intelligence, electromagnetic interference and autonomous driving. This customer has already realized up to 5x improvements in aerodynamics and thermal engineering productivity, a reduction of more than 40% in material properties acquisition costs and a 10% improvement in hydrogen storage for its fuel cells. From a geographical perspective, we saw strong revenue growth from Asia Pacific and EMEA and the Americas came in as expected. Our 36% constant currency growth in revenue in Asia Pacific was thanks to several large contracts, including one with Murata Manufacturing, a Japanese company that specializes in electronic components. With Murata, the multiyear agreement spans our multiphysics portfolio and provides the company with an important thermal aware system simulation flow for radio frequency modules. This solution is expected to provide faster thermal sign-off by reducing the number of redesigns and by improving the ease of use of ANSYS products through a single interface. From an industry perspective, the high-tech and semiconductor, aerospace and defense and automotive and ground transportation sectors were again our largest contributors. We also saw continued strength in the energy space, reflecting a mix of traditional and renewable use cases as well as in the industrial equipment sector, where we recorded a number of multiyear agreements from companies around the world. For example, longtime customer WEG, a global leader in electrical engineering, power and automation technology signed a multiyear contract in Q2 to standardize on ANSYS simulation. This new agreement will help the Brazilian company rethink its product development process by creating and implementing digital twins of its motors. This agreement will drive WEG's electrification and green energy initiatives. Now I'd like to briefly mention a different kind of customer success story. I would like to congratulate NASA and Northrop Grumman on the success of the James Webb Space Telescope. We have all seen the stunning images that have come from this largest and most precise optical instrument ever developed, and we are proud here at ANSYS for the role that we played in its creation. Naturally, it was impossible to physically test the entire mission before launch. And given the unforgiving environment of space, the mission had to run as expected the first time. Any era would have cost billions of dollars in expenses with perhaps an even greater scientific loss. That is why the team developed the rocket, the telescope and the entire mission in part using ANSYS simulation. With ANSYS, engineers overcame a number of unique challenges, including folding a structure of the size of a tennis court into a rocket, and then unfolding it. And then understanding how perpetual solar radiation would affect its operations. Engineers use ANSYS mechanical to identify solutions to ensure the satellites' connected segment and mirror would behave the same way of monolithic mirror would. Our optical solutions were used to design and test each step in the mirror alignment process from the initial segment search to the final phasing. In addition, Mission Planer has used our digital mission engineering solutions to test variables that impact how the satellite is launched and to determine how to keep the satellite stationary 1 million miles from Earth. And the results, well they're simply out of this world. Turning to our leadership in solutions to multiphysics simulation. Our customers now have access to ANSYS 2022 Release 2, a comprehensive set of solutions and capabilities that cross physics, engineering disciplines and industries. Included in this release are machine learning techniques in our core products, which are automatically optimizing repetitive processes, predicting workflows and enhancing user productivity. We have also delivered artificial intelligence technology that enables customers to perform massive design optimization studies to arrive at an optimal design in a fraction of the time once required. This release also provides new high-performance computing capabilities and custom workflows for industry-specific applications, which will help more users address computationally complex problems by examining the impact of multiple physics at the same time. This added functionality is extending our multiphysics leadership, while enabling customers to make their next-generation products a reality. I am also excited that TSMC recently certified ANSYS' Power Integrity software for its industry-leading N4P and N3E process technologies. The certification for ANSYS RedHawk SC and ANSYS Totem enables next-generation silicon designs for machine learning, connectivity and high-performance computing applications. I'm also pleased to announce that ANSYS has joined the Intel Foundry Services Cloud Alliance. Our electronics and semiconductor suite, which includes ANSYS RedHawk SC, ANSYS HFSS and ANSYS RaptorX, are available as part of the design flow that will help enable Intel customers to enhance their productivity. Rounding out our partner updates, Samsung Foundry has announced that it is using ANSYS' industry-leading multiphysics solutions to develop designs on the most advanced chips, nodes and process technologies. Using ANSYS, Samsung Foundry will deliver a comprehensive design flow with greater capacity, speed and integration capabilities for the company's most advanced semiconductor technology to boost high-speed connectivity while helping to reduce design error and risk. On our last call, I discussed the role that ANSYS solutions are playing in our customers' sustainability initiatives, including for increasing fuel efficiency, in driving electrification and in decreasing the rate of emissions. We have recently created a cross-functional Center of Excellence composed of members of our development and consulting teams to advance sustainability initiatives for our customers and partners. Our subject matter experts are focused on how ANSYS simulation can help accelerate the creation of new, more efficient and lower-impact products beginning at the design and development phase. As part of our own sustainability endeavors, ANSYS is committed to reducing our environmental footprint. To that end, we have announced that we have set a 15% reduction of Scope 1 and Scope 2 emissions by 2027. To hit that target, we are implementing projects identified in energy audits, including lighting enhancements and on-site renewable energy. We recently submitted to the Carbon Disclosure Project for the third year in a row, and continue to enhance our task force on climate-related financial disclosures. I am also excited to announce that Fast Company has recognized several ANSYS employees with its world-changing Ideas Award for the ANSYS Minerva template. This template is built in our Minerva solution for simulation process and data management, and provides an FDA guided approval process for medical devices to speed potentially life-saving products to patients more quickly. I'm also proud that ANSYS has been certified as the Most Loved Workplace by the Best Practice Institute. This honor was bestowed on ANSYS because of our collaboration, our corporate values and practices as well as the outcomes we drive and demonstrates why we are an employer of choice. Next week, we'll have an opportunity to discuss ANSYS' longer-term business and financial goals as part of our investor update. I'm looking forward to further explaining the expansive role that simulation is playing in product development and sharing with you how ANSYS has become a trusted business partner with some of the top brands around the world. To summarize, Q2 was another excellent quarter for ANSYS, resulting in us beating our guidance across all key metrics. Our business momentum, our expanded product leadership and the ongoing strength of our customer pipeline gives me even more confidence in our ability to meet our outlook for 2022. And with that, I will turn the call over to Nicole. Nicole?

Operator:

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Ken Wong with Oppenheimer. Please go ahead.

Nicole Anasenes:

Sure. Thanks for your question, Ken. So yes, as we pointed out, as we pointed out in our guidance, we have -- we are seeing -- we're really seeing underlying strong momentum in the business. The beat to the Q2 numbers was really kind of evidence of continuing broad-based building pipeline. And as we -- now that we're in the second half of the year, we have a much clearer visibility to kind of what that second half pipeline looks like and kind of how it will land over the next couple of quarters. And while we're certainly very sensitized to the macro environment overall and what's occurring with the rest of the tech industry, our business is highly exposed to R&D. And as you recall, R&D is usually the last thing to go off and the first thing to come back on when they're tightening. And so we're just not seeing the same level of constraint that may be some other parts of the tech sector are seeing. And the outlook of our guidance really reflects the broad-based demand across industries, geographies and customer segments that we saw in Q2 and that we kind of see coming into the pipeline in the back half of the year.

Ken Wong:

Got it. And if I could maybe just a quick follow-up for you, Ajei. Look, you highlighted areas of strength from a verticals perspective, auto, aero. Tech remain really strong. Are there any end markets that you feel maybe are still catching up to some of their peers in terms of maybe seeing heavier COVID or macro pressures that could potentially kind of open up as macro does improve?

Operator:

Our next question comes from Joe Vruwink with Baird. Please go ahead.

Nicole Anasenes:

Joe, thanks for the question. So how I would characterize the second half guidance is just much clearer visibility to where deals land. As you know, we've transitioned to a multiyear lease subscription model over the past couple of years. And so as you move into that multiyear lease model, your kind of timing of when the renewal base happens both within the quarter and across the quarters and within the years, can start to shift over time. And so I would characterize the second half as the kind of clearest visibility we have from where we're sitting today, which is quite clear once you get into the second half because your sales cycles tend to be three to six months long. So you have a little bit more clarity in terms of what the timing of those things may line up to. So I would characterize it -- I think it's maybe a little bit slightly -- it's slightly stronger from a growth rate standpoint. I think the overall skew is pretty similar to prior quarters. It might be a little bit heavier weighted into Q3 than maybe last year. But I would characterize it as kind of a reflection of the timing of the yield of the pipeline we see today with a slightly stronger Q4 growth rate as a result of the year-to-year compare.

Joe Vruwink:

And nothing specific to your SMB customer base, if there's been maybe one takeaway this earnings season, there's maybe initial indications of moderation as opposed to enterprise being quite strong. But nothing in your kind of forecast that would call out one segment versus the other?

Joe Vruwink:

Thank you.

Jay Vleeschhouwer:

Thank you. Good morning. Ajei, in your prepared remarks, you gave some examples of multi-solution sales with some of the larger transactions. And of course, that's been going on for some time now. When you look at your pipeline for the remainder of the year or for the next 12 months, could you comment on that multi-solutions component of the pipeline? And within that, I'd be especially interested in anything you're seeing in terms of incremental demand or contribution from any role of Minerva, the materials business, which you highlighted. And any of the other more recent acquisitions such as Phoenix and MST and [Miracle], then I have a follow-up.

Jay Vleeschhouwer:

Nicole, you made the interesting point that at 2019 rates your 2022 ACV guidance would be $2.07 billion, which would imply a three-year CAGR for ACV at constant currency of about 12%. Maybe we'll talk about this next week on the investor call. But is that, do you think, a sustainable ACV CAGR for the next number of years? Or if it were to accelerate, what would be the catalyst for that?

Jay Vleeschhouwer:

See u then. Thank you very much.

Blair Abernethy:

Thank you. And nice quarter, guys. Just Ajei, just following on Jay's questioning. In terms of standardization, on the ANSYS platform, you mentioned in the WEG win that they've decided to standardize on ANSYS. And this is something that's been around for a few years. Is this a trend that you're starting to see pick up steam at all? And are you positioning or are you trying to help customers get more towards standardizing their simulation needs on your product set?

Blair Abernethy:

Great. Thank you.

Tyler Radke:

Good morning. Thank you for taking the question. So you clearly delivered really strong double-digit ACV growth this quarter on a pretty difficult comp. You talked about not really seeing any demand impacts from your customers and the recurring piece of ACV is growing double digits as well. I guess I'm curious if you feel like the business has kind of hit an inflection point where that double-digit growth is sustainable? And I'm just curious if you think that's something related to the go-to market or the product strategy. If you could just comment on -- if you think that the business has kind of hit an inflection here.

Ajei Gopal:

Yes. I think you'll hear some more next week at our investor update. But certainly, as Nicole was saying, this is -- we've been making investments over the last several years. And as I mentioned just earlier in this call, the strength of the product portfolio, I think, is really added to our ability to support our customers, and that obviously helps tremendously in the market. That's number one. And as you pointed out, the go-to-market has also been really important. We've gone through a process of transforming over the last several years of go to market. And we have great customer relationships. We continue to maintain those great customer relationships we have momentum. And our customers know that we support them and they know they can rely on us. And so when you start to put all of that together, it creates an environment where the value of simulation shines through, and our customers recognize that they can take advantage of ANSYS in order to achieve their own business objectives.

Nicole Anasenes:

Sure. So let me start with the broader point on kind of just some statement about quarterly revenue dynamics in general, right? So ASC 606 introduces a lot of volatility. And when you have mix differences in license compare on a year-over-year basis within a quarter, sometimes you get a lot of volatility. You get much more of it down at the geographic level. And so there's often not always consistency between the overall ACV growth in a region or in a market versus revenue growth. And that's why we kind of focused on longer-term revenue metrics and longer-term ACV metrics. But to answer your question specifically, let me start with Asia Pacific and EMEA. I mean, both had -- well, let me just start with -- as we stated in our prepared remarks, all markets -- we saw growth in all markets from an ACV standpoint, which is kind of that key metric of momentum. And from a revenue standpoint, as you point out, APAC and EMEA really did have great performance. I'd say there's a couple of dynamics going on there. In EMEA, we saw some pretty broad-based performance across all of our key industries in the high tech. We had a multiyear 8-figure sale to a European telecommunications company in aerospace and defense. We had several 7-figure contracts with customers and even in industrial equipment. Also saw strong Q2 where we signed an 8-figure deal with the German industrial machine manufacturer. So we saw strength in Europe across multiple industries. And in APAC, I mean APAC, again, is another quarter of consistently delivering growth in Asia Pacific. And it was -- the growth was particularly strong in our geography and momentum accounts. And in terms of large deals, we also saw it across multiple industries, high-tech auto. And it was really broad-based. And so to put this one into context, the management team in APAC really has been investing in deeper customer relationships and stuck with those customers through the pandemic. So that transformation of the go-to-market model and kind of aligning to the strategic road maps of your customers, and really being there for them in their time of need is really paying off in the consistent growth that we're seeing from the Asia Pacific region. Now to your question on Americas, again, as I will emphasize all regions grew, all regions grew ABB. Americas over the last 12 months has really been leading the company and delivering value for our customers. And we're expecting the region to be a strong performer in 2022 and beyond. In the second quarter, revenue did decline, but it was really expected. There was -- the growth year-to-year was impacted by a compare of Q2 '21, which had several large high-tech and automotive perpetual and multiyear lease sales. So again, the revenue dynamic in Americas was really a function of the 606 accounting and the comparability. Overall, we've just seen very consistent growth and performance across all geos.

Operator:

Our next question comes from Andrew Obin with Bank of America. Please go ahead.

Ajei Gopal:

So obviously, we don't provide financial breakdowns on a per product basis. But let me give you some perspective on where we are with Twin Builder and the broader concept of digital twins. So the whole idea here is that with the digital twin, you're trying to create a digital equivalent of a product. And this is something that can transition from the design phase where typically our customers build 3D models, into the operation phase, where the digital twin, which is a simplified model of that full-fledged 3D model that's used for design, where that digital twin can be used for things like predictive maintenance, can be used for determining equipment uptime, replacement schedules and things of that nature. So we've seen certainly a lot of customer interest in that space. It's still early days. What we're demonstrating to customers is that physics-based digital twins, which is essentially what we do, coupled with some understanding of statistical techniques, when you put that together, which we encapsulate into our offerings, that provides them with tremendous accuracy with respect to some of the predictive maintenance capabilities that I just mentioned. So we continue to see interest in -- with customers. We continue to see momentum in that space. It's still relatively early days. It's still a relatively small market. Many customers are excited about the fact that we can do digital twins. They will lead with that conversation. And then they'll transition to other parts of the portfolio as well. So it's a great piece of the portfolio, and we're excited about the long-term future for this product area.

Nicole Anasenes:

Yes. The tuck-in acquisitions, I think we may have talked about that in the last call. They're very small tuck-ins. The on-scale acquisitions, a technology play, it was -- we're really excited about it. It's a really complementary aspect to organic development in the space of native cloud. And so -- but that's a pretty immaterial contribution. And the Motor-CAD acquisition was actually a product that we OEM-ed. And so the net increment on the top line to that was immaterial as well. Just as a reminder, Zemax, we did give a guidance on Zemax, which is about $20 million of inorganic impact this year. And so that would be -- we see it consistent to how we've seen in prior quarters in terms of what the inorganic impact of Zemax would be. So does that answered the question.

Operator:

Our next question comes from Saket Kalia with Barclays. Please go ahead.

Ajei Gopal:

Yes. So as I -- as we've always said, we think about -- when we think about the future of our industry and where we need to go, we think about the combination of organic development, partnerships and acquisitions. So it's the -- it's always build, partner, buy. And that's -- those are the considerations that we bring into the equation as we think about the future of our portfolio. And in that context, we are always looking out to see if there are M&A opportunities that are consistent with our strategy. Where we believe that we're disciplined investors, we're careful when we go into an M&A situation. We look carefully to make sure that there is the strategic value that we need. And that's how we think about the overall opportunity. And with valuations, valuations obviously have come down, and maybe that is a buying opportunity. But with quality, quality always is expensive. And so we want to make sure that we have the right technology and capability of products that we're in a position -- or companies that we're in a position to buy. Look, we're the -- you should know that we see most of the deals that are in our space, I mean -- because obviously, they get presented to us. And we are always -- when we look to that analysis, we look to make sure that we have great technology that we're bringing in. And if the technology is too far from the core, if we don't see a connection to our existing portfolio or go-to market, we pass. We've got a very rigorous process for diligence. We evaluate the core technology. We evaluate the stickiness of customer relationships. And when the technology isn't strong enough or customer relationships are superficial or we don't see strategic connections, we pass. So we're disciplined about this. But certainly, we will continue to evaluate M&A as and when it's appropriate in order to advance our strategy.

Nicole Anasenes:

Yes. So I can give you -- why don't I kind of give you two lenses to that. So we -- why don't we start with just kind of the overall qualitative description of what drives the kind of overall high retention rates we have. And again, when we talk about retention rates around 90%, we're talking about the renewal of the original content, not kind of the net renewal, which includes new growth on top of that, right? So it would just be the renewal of that. . And so maybe just start a little bit with kind of the kind of strategic relationship strategy around multiyear leases. So as we engage with our customers, we engage with them on what is the outlook for the product road map going forward, whether it's the mix of physics that may be required and solutions to be able to kind of work against that road map. And we signed those multiyear lease agreements with them, kind of aligned to that overall road map. Now as you know, the world changes. And it doesn't -- just because it may be a two or three-year renewal ahead doesn't mean that customers' needs don't change, they don't grow. They buy companies. The competitive dynamics change. And so we are in a constantly ongoing relationship with those clients on a year-after-year basis in kind of preparing for that renewal that comes up. And so when we think about it from kind of that renewal of the renewal base coming up at the end of the three-year license, we have already had multiple years of conversations with those customers about the road map. And we have a lot of clarity around not only kind of what is the content that they'll continue to renew, but what are the new growth areas on top of that, that will extend them into the next chapter of their multiyear agreement. And so the relationships we have -- and this was part of the strategic selling transition model that we made over time. It was initially with a small subset of enterprise customers that, over the past five years, the go-to-market teams have really translated those best practices through the broader segmentations of our customer base and even into supporting the channel and having those conversations as well. And so that is the mode of strategic selling that really it does support those -- not only those very high retention rates that we talk about went up, but also the ability to continue to grow on top of that.

Kelsey DeBriyn:

Operator, we have time for one more question.

Adam Borg:

Great. Thanks so much for taking the question and fitting me in. Maybe just for Ajei, on the cloud. I haven't heard too much about that today, and I'm sure we'll talk a lot about it more next week. But just any updates on your various cloud ambition, including the recent on-scale acquisition that was just referenced. Thanks so much.

Kelsey DeBriyn:

Thank you. And that's all the time we have today. I will turn it over to Ajei for his closing remarks.

Operator:

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

Operator:

Ladies and gentlemen, good morning, and thank you for standing by, and welcome to the ANSYS First Quarter 2022 Earnings Conference Call. With us today are Ajei Gopal, President and Chief Executive Officer; Nicole Anasenes, Chief Financial Officer and Senior Vice President of Finance; and Kelsey DeBriyn, Vice President, Investor Relations. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please also note today's event is being recorded. At this time, I'd like to turn the conference call over to Ms. DeBriyn for opening remarks. Ma'am, please go ahead.

Ajei Gopal:

Good morning, everyone, and thank you for joining us. I'm happy to report that Q1 was another great quarter for ANSYS. We again beat across all our key metrics and grew ACV by nearly 11% in constant currency. We believe that this continued momentum, combined with our strong customer relationships and leading multiphysics product suite, will set the tone for Q2 and the rest of the year. These strong results came in the midst of continued disruptions caused by the ongoing COVID-19 pandemic, which has spurred additional lockdowns in certain regions as well as geopolitical dynamics. As we have previously announced, we have suspended all new and ongoing business with Russia and Belarus and removed them from our 2022 forecast. ANSYS has contributed to the Ukrainian relief efforts, and our hearts go out to all those affected by these tragic events. We are not only absorbing the headwinds from sanctions, but based on the strength of the forecast and the ongoing demand for our multiphysics solutions, we are increasing our operational outlook on ACV, revenue, EPS and operating cash flow for the full year. Nicole will have the details in a few minutes, including a discussion of the impact of global currency exchange rates on our outlook. Focusing now on Q1. From a revenue perspective, we saw good growth, as expected, across all our geographies, led by the Americas and Asia Pacific. The demand for ANSYS simulation has been relatively consistent across industries for the last several years. Given recent events and market conditions, we are now seeing an increased activity in energy and sustainability initiatives, which I will discuss in a few minutes, and in aerospace and defense accounts. Our largest contract for the quarter was a three year $44 million agreement with a North American defense contractor. This long-time customer is using our broad solution set to power its digital transformation through integrated digital engineering, multidisciplinary design optimization and digital mission engineering. The customer is realizing a strong return on its investment in ANSYS by helping it to win new government contracts while driving cost out of its organization. On these calls, I typically highlight a specific aspect of our business. Over the past several calls, I have discussed the unparalleled scalability of our best-in-class fluid products. I highlighted the critical role that ANSYS solutions are playing in the development of next-generation semiconductors, and I reviewed our leading suite of optical simulation products. For this call, I would like to discuss the critical role that ANSYS plays in sustainability. Sustainability is a crucial and complex topic that crosses industries and one that plays to ANSYS' strengths in multiphysics simulation. ANSYS simulation has traditionally enabled companies to save resources and energy before physical products are ever built, thanks to virtual prototyping. Today, though, through the use of our broad multiphysics portfolio, we can enable a number of our customers' sustainability initiatives, too many, in fact, to mention on this call. Let me give you just three representative examples so you have a sense as to the role that simulation is playing in sustainability

Operator:

[Operator Instructions] And our first question today comes from Jay Vleeschhouwer from Griffin Securities. Please go ahead with your question.

Ajei Gopal:

Good morning, Jay, this is Ajei. Thanks for the question. So, as you rightly point out simulation is something that we’ve always said is really critical for our customers. And obviously, we’re seeing the greater use of simulation in the market as you’ve alluded to. And the reason as you know is it comes directly from product design and the complexity that products are – customers are facing in their own products. You know, for – and as you know from your experience, simulation, when you’re building a product, the more you can simulate, the more simulations you run, the better it is in terms of the product performance, the cost, the effectiveness of that product. Customers are recognizing that, and they’re running more and more simulations. That’s a tailwind for us. You also recognize as products become more complex, it’s not just about individual physics excellence. And we certainly invest in individual physics excellence. It’s also about the integration of the technologies together to be able to create a multi-physics solution and a multi-physics capability. And that’s also been an area for investment for us. If you look at, for example, some of the recent investments we’ve made on the platform, we’ve talked a lot about clients, the APIs that we’ve made available where people can write Python applications and directly invoke our simulation capabilities. And at the same time have access to the wide variety of the Python ecosystem. So those are some examples of where we’re trying to make it much easier for our customers to take advantage of simulation, not just as the traditional tool as they may have used in the past. But as part of a broader end-to-end platform on which they can anchor their product design capabilities and of course, much more. And it’s a virtual cycle. The more they use simulation, the more they need it in the future, because with simulation, they can explore these new edge cases, boundary conditions where they couldn’t have essentially done the analysis before. Now they’re in a position to, because of this platform centric approach that we’ve taken recently towards simulation. So that’s – hopefully that gives you some perspective. We’ve talked a lot in the past about things like simulation data management, materials design, all of these are essential aspects of the broader platform that we’re in a position to support for our customers. The other broad area, as you’ve seen from what we’ve talked about in the past has been investment in supporting the hyperscalers. So supporting cloud computing, investing in supporting some of the latest hardware GPUs, scale out CPUs, all of that again makes simulation much more relevant and continues to be areas where we’re investing as we support our customers, dealing with the complexity that they’re working with. And then finally, I’ll make the point that we’ve – it’s not just about using simulation in the validation of products. We see the opportunity to take simulation more broadly and take the insight from simulation and make that available. So if you look at things like mission engineering, as an example, those are all areas where – those are areas in discovery. All of that is taking us to areas digital twin, taking us to areas where simulation opens new market opportunities for us as well. So that’s reflective in our investments, Jay and certainly we see the increased opportunity for simulation out there and our investments parallel down.

Jay Vleeschhouwer:

Yes. Thank you. Thank you both. That covers it.

Tyler Radke:

Hey, good morning. Thanks for taking the question. Can you hear me okay?

Operator:

Yes, sir. You may proceed.

Ajei Gopal:

Good morning, Tyler, thanks for the question. So as you rightly point out, the historical use of simulation has been in the product design area and there's clearly value because we’ve reduced the number of physical prototypes. That's obviously more sustainable. We can make products more efficient and so forth. I mean, that's been the historical value that we've provided. What's been happening of course, in the recent past, certainly in the last few years is the focus on sustainability. And we've seen this, as I mentioned briefly in my remarks in the script earlier, we've seen this manifest in different industries in different ways. And certainly in the automotive industry, we've seen this with electric cars, battery technology, and trying to figure out what comes after or what replaces the internal combustion engine or how – what the transition of the future of the automobile looks like. So there's been that one set of discussions. The other sets of areas where we've continued to have conversations with customers for a number of years has been on other forms of energy. So things like wind, solar, title, these are other important areas outside of the traditional hydrocarbon ecosystem. And of course, we've talked about things like lightweighting and so on for a while. These conversations have continued and they continue with more and more urgency. And certainly as you start to look at the broader discussions that are taking place right now around the geopolitical climate, the focus on energy, I think comes back and we're having these conversations with energy companies as to how they can be more efficient or how customers can be more efficient. And so, we see this as an ongoing customer requirement that continues to gain momentum and it's a long-term tailwind for us that we are able to respond to. So we are excited that we can support the industry as they think about these sustainability initiatives, frankly, across multiple industry verticals.

Nicole Anasenes:

Yes, I mean, I think – thanks, Tyler. I think as you know, kind of our approach to guidance is kind of, is to quarter by quarter, update you on the full year. We're very focused on the full year number and take things as we see them right. And so what you saw in Q1 was that we had an incredibly strong start to the year with 11% constant currency growth that was off of a pretty exceptional 2021 with a lot of momentum building out of the back end of the year. And so while there were the dynamics that were discussed in the prepared remarks that we just shared around the elimination of Russian, Belarus and the currency headwinds underneath it, the core business momentum continues to be strong. And I think it really is emblematic of the value that we create independent of what is occurring in the macro environment. I think the sustainability example that you and Ajei just discussed, I think is a perfect example of the complexity of the problems that our customers are trying to solve. That really plays to our unique strengths. I mean, our unique strength is that we can solve problems from the component level all the way through the mission level and the more complex the problem, the more we are able to solve it in a highly differentiated way, relatively alternatives out there. And so we provide a lot of certainty and a lot of – and the ability to help our customers kind of traverse some of these more challenging product problems that they're facing. And so to me, it's just the overall strength of the business that continues to consistently deliver. And just the focus we've had on our customers throughout the pandemic, the focus that we've had on our portfolio over the past five years is really what gives us confidence in the full year view.

Operator:

And our next question comes from Joe Vruwink from Baird. Please go ahead with your question.

Nicole Anasenes:

Yes. I mean, currently, we are not seeing – so again, kind of to the point that I made to Tyler, our outlook is based on the kind of forecast of the business that we see today. We did not see any kind of meaningful shift in the underlying momentum or the underlying opportunity set in front of us in that space. And so our outlook does consider kind of continued business as usual. Last year, there was a pretty big resurgence back post COVID towards the back end of the year. It's kind of normalized towards more normalized purchasing behavior and business behavior in the SMB space. And so, that's essentially what we're considering on a go-forward basis, but we continue to monitor the situation. And if we were to see any changes, we would certainly update you.

Ajei Gopal:

Well, I mean, let me just quickly try to address that. When you think about our portfolio for high tech, we have a differentiated portfolio and once again, it's focused on the simulation aspects of that. And as I've mentioned before, as products get more complex, the need for simulation continues to grow. And so, when you're dealing with next-generation telecommunications, for example, you need very accurate simulation capabilities. That's where products like ANSYS HFSS come in. In big industry trends like electrification, the entire end-to-end electric Motor Design tool chain is absolutely essential. That's an example of an area where, as I mentioned in my remarks, we just recently announced – within the last day or so, we recently announced an acquisition of Motor Design, again helping in that end-to-end electrification tool chain. So we have been very careful to not only have – invest in our products so that they're – we feel that they're best in breed, but we've also been investing in our products to – in areas where customers are really struggling in areas like next-generation telecommunications. The other interesting thing, of course, is that there's a connection between our semiconductor offerings and our broader simulation capabilities. As customers in the semiconductor world are looking at 2.5 and 3D integrated circuits, that's when a – that's when you start to see the use of tools and technologies like the more traditional ANSYS simulation capabilities in the semiconductor domain as well. And so that crossover as well represents a long-term tailwind for us. So we feel like we are well positioned with our portfolio. We've been making the right investments and the right levels of integrations to allow our customers to solve some of the problems in the areas where they're investing, in some of the most challenging areas with these highly complex products for the future. And so, that's why we feel very good about our high tech business.

Joe Vruwink:

Thank you.

Andrew Obin:

Hi, good morning.

Ajei Gopal:

Good morning.

Nicole Anasenes:

Yes, absolutely, it was better than – you're talking about the Q1 number?

Nicole Anasenes:

Yes.

Nicole Anasenes:

Yes. No, no, no. It was actually well exceeded the midpoint of our guidance.

Nicole Anasenes:

Given the midpoint was, what 9% in Q1 – yes. I just remember, yes, the midpoint was 9% in Q1 and coming in at 11% constant currency is quite significantly over that.

Ajei Gopal:

Aerospace and defense is one of our top three verticals. And as you heard in my comments, we're seeing – we saw good performance in Q1 and we're also seeing increased activity with customers in the aerospace and defense market most recently. So these global events certainly cause conversations with customers. And then while it's too early to declare, I think it's pretty clear that these increased activity is a good indicator of longer-term tailwinds for our business from those conversations. But our business in aerospace and defense is very broad, and it's, again, based on the overall capabilities of our portfolio and what we can bring to the table.

Nicole Anasenes:

Yes. So let me comment on the revenue growth in those markets. I'll let Ajei give more commentary on the market dynamics. So the – in the quarter, so first, those two, at an actual rate basis, they're going to have the most disproportionate impact on the Japanese yen weakening against the dollar and the euro weakening against the dollar, but so there is a significant impact there. The other thing, just to note, in general, is that the revenue variability because of license mix and differences in license mix on a year-to-year comparative basis can be quite volatile. And so, when you look at a quarter, even at the ANSYS level, there could be a lot of volatility within the quarter. Once you get to the country level, the quarterly numbers are quite volatile. So, it's not – so the quarterly number is not necessarily an indicator of kind of broader dynamics that are happening in the environment.

Nicole Anasenes:

Yes.

Saket Kalia:

Okay. Great. Hi, guys. Good morning. Thanks for taking my questions here.

Saket Kalia:

Hi, good morning. Ajei, maybe I'll start with you. I wonder if you could talk about the OnScale acquisition a little bit. I think it happened in the beginning of the quarter. How does that sort of fit into the high-performance computing portfolio that ANSYS has? And any thoughts on just – or understanding it's early, any thoughts on how you sort of take that to market and whether that's – on how you take that to market rather and whether that's different than how ANSYS currently goes to market?

Saket Kalia:

Got it. Got it. That makes a lot of sense. Nicole, maybe just for a quick follow-up, just housekeeping, can you just remind us how much you're including an ACV for inorganic this year and I – and whether it includes the Motor Design acquisition? I just wanted to check kind of how much that constant currency ACV growth is on an organic basis. I don't think there is too much inorganic this year, but just to make sure it's asked.

Saket Kalia:

Got it. That's all really helpful. Thanks guys.

Adam Borg:

Great. Thanks a lot for taking the question and the details about the guidance and also the details on the inorganic contribution, maybe just on the MDL acquisition. So obviously, as you talked about, you guys have had a partnership for a couple of years. It's already been established in our go-to-market motion. So I'd love to understand why decide to buy it versus just [indiscernible] partner. And then more broadly, this helps you get deeper in some respects into CAD. I'm just thinking about is there an opportunity for you to get deeper into CAD and other areas of the design market. Thanks so much.

Adam Borg:

That's really helpful. And maybe just as a quick follow-up, so congrats to Walt on the promotion. I know it just happened and it's still really early, but any initial observations on any planned go-to-market changes as you think about a change at the top of the helm? Thanks again.

Adam Borg:

Super clear. Thanks again.

Jason Celino:

Oh, sorry about that. That's embarrassing. Thanks for getting me in. Europe is on everyone's minds. I'm curious on what trends you're seeing there and how the pipeline is shaping up. And then maybe more pointed, what would have EMEA grown if it didn't exclude any of the sanction impact in the quarter? Thanks.

Jason Celino:

Okay. Excellent. Thank you for that. And then I guess, really quickly, the hiring environment remains relatively tight, especially for software sales. How are hiring plans going? And how do you feel about capacity and productivity heading into the second half? Thanks.

Jason Celino:

Thank you.

Operator:

Our final question today comes from Matthew Broome from Mizuho Securities. Please go ahead with your question.

Ajei Gopal:

Yes. ANSYS has been around – we're proud of the fact that, as a company, we've been around for 50 years. And so from that extent – to that extent, we're one of the longer-tenured, if you will, software companies out there. But the reality is that the technology that we deliver and the value proposition that we deliver, which is helping our customers to be able to drive top-line growth by bringing product to market faster and achieve bottom line savings through cost savings in terms of testing and validation to reduce warranty costs, more increased efficiency, all of those are evergreen value propositions. And as I've said before, as products become more complicated and you're seeing this, every single product is getting significantly more sophisticated than products of the past, it's not just a matter of solving a particular or understanding a particular discipline like structures of fluids. It's understanding the interplay between all of these different capabilities. So you take something like a car. A car today is a very different beast than the car was – the internal combustion engine human-driven car was a number of years ago. If you think about an autonomous vehicle, for example, that's powered by an Electric Motor, it calls for different skills and capabilities. And look, we are excited that we are in a position to support our customers as they go through this journey. So the ongoing value of simulation is really there – is driven, one, by virtue of the fact that we make – the more simulation you run, the better your product. And so there is a continued demand for customers [Audio Dip] environment with new products run. And the product complexity continues to drive that. And the final point I want to make here is when you think about the use of simulation when you start to use simulation within a company, you start to rely on it more and more, and it's a virtuous cycle for ANSYS. And so there are examples of changes, where in the past, where you may not have necessarily done a detailed design if there was an incremental change, which may have led to some warranty issues or things of that nature. Today, companies who are using ANSYS are in a position to just run simulation to validate that those – what might seem less small incremental changes haven't really fundamentally made a difference. When supply chains get disrupted and you want to swap out one component for a different component, that's requires analysis and validation, and that's again what simulation can provide. So the value proposition and the use of simulation is – continues to be strong. And then, of course, areas like sustainability, electrification, autonomy, IoT, telecommunications. These are all areas where customers are spending enormous amounts of effort, energy and money trying to build next-generation capabilities, and once again, we're in a position to help them. So I'm very excited about the opportunity in the future of simulation and of ANSYS.

Nicole Anasenes:

That is all the time we have today. I will turn it over to Ajei for closing remarks.

Operator:

Ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We thank you for joining. You may now disconnect your lines.

Operator:

Ladies and gentlemen, thank you for standing by, and welcome to the ANSYS Fourth Quarter and Full Year 2021 Earnings Conference Call. With us today are Ajei Gopal, President and Chief Executive Officer; Nicole Anasenes, Chief Financial Officer and Senior Vice President of Finance; and Kelsey DeBriyn, Vice President, Investor Relations. All participants will be in listen-only mode. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note, today’s event is being recorded. At this time, I would now like to turn the conference over to Ms. DeBriyn for opening remarks. Please go ahead.

Ajei Gopal:

Good morning, everyone, and thank you for joining us. Q4 was another excellent quarter for ANSYS, and largest quarter in our history. We beat our financial guidance for the quarter across all key metrics, including ACV, revenue, earnings per share and cash flow. Q4 was the capstone to an excellent year, in which we grew ACV by 16% in constant currency. Our industry-leading product portfolio, strong execution and growing market enabled us to beat and raise our guidance each quarter of 2021. We saw strength across all major industries, geographies and go-to-market routes over the course of the year. Our direct and indirect channels grew at double-digit. Similarly, each of our go-to-market customer segment, enterprise, strategic and volume accounts, all grew by double-digit. The high-tech and semiconductor, aerospace and defense, and automotive and ground transportation sectors were again our top industry and each demonstrated robust year-over-year growth. From a geographical perspective, we saw strong performance with each region going ACV at double-digit. I'm also pleased that we saw broad-based growth consistent with our expectations across product lines from our more established flagship products in structures, fluids, electromagnetics and semiconductors to our newer offerings such as optic, material and digital mission engineering. Our customer relationship continue to be strong and are helping to fuel the growth. In Q4, one of our key contracts came from Asia Pacific, a five-year multimillion dollar agreement with LG Electronics. This longtime customer uses ANSYS simulation to enable resource efficient production by significantly reducing material use, cost and the number of redesigns. That sustainability initiative has enabled the electronics giant to use high-quality next-generation products faster than expected, while reducing its carbon footprint. I'm also excited that Fraunhofer, a German research organization with 76 institutes spread across the country, standardized on the ANSYS simulation platform with a three-year seven-figure contract in Q4. It's researchers and engineers will use the entire ANSYS portfolio to support innovation efforts in the automotive, chemical, energy, aerospace and healthcare segments. Our ongoing broad-based business momentum and our strong customer relationships give us even greater confidence for a prospect in 2022 and beyond. We expect our 2022 ACV to go at about 10% at the midpoint in constant currency, which positions ANSYS to surpass our long-term target of $2 billion in ACV. Nicole will walk you through a guidance for 2022 in a moment. During these calls, I often highlight different aspects of our technology. For example, I discussed our solutions for optical simulation on the last call, and our unparalleled product scalability in August of 2021. Given the strength of our semiconductor, electronics business in Q4, I'd like to spend a little bit more time discussing that important segment. Based with mounting customer expectations, today semiconductor companies operate at the cutting edge of innovation and their products are continually pushing the boundaries of what is possible. Furthermore, some systems companies are turning to custom-built bespoke silicon to give the product an edge. At a cost of hundreds of millions of dollars for advanced process node tape out, the cost of failure is prohibitively expensive. The semiconductor and system companies are maximizing their likelihood of success by turning to technologies like scalable multiphysics simulation from ANSYS to develop advanced process node, and topologies like 3D and 2.5-D multi-die chip assemblies. A key deal in Q4 was a multiyear agreement with AMD, a global leader in high-performance computing and visualization product. AMD is the longtime ANSYS strategic customer. This new contract reflects AMD's rapid growth and the expanded use of ANSYS simulation and signoff tools. As a result, AMD's global engineering teams have increased access to ANSYS solutions, improving collaboration and organization across the company. Customers are also using ANSYS electromagnetic simulation to prevent electromagnetic interference and to ensure signal integrity. Our best-in-class structural and fluid simulation a critical to predicting cooling and thermal warping and to ensuring reliable IC package design. Customers are relying on our optical simulation to ensure the success of high-speed photonics interconductivity amongst data-hungry systems. And they are leveraging our safety solutions. For example, a large semiconductor supplier to the automotive industry is using ANSYS to support workflow that graphically link semiconductor design to key functions within the electronics architecture for electric vehicle battery management system. Customers can rely on ANSYS, because we continue to drive significant technological advances into the marketplace. In our recently released ANSYS 2022 R1, we introduce breakthrough new semiconductor functionality that targets DVD or dynamic voltage drop, which is traditionally been difficult to model and understand. DVD is a drop in the voltage rails cause by high transient current drawn from the power grid. It is analogous to your house lights dimming for a moment when air-conditioning turns on. Our new technology Sigma DVD is a powerful approach that significantly increases coverage of dynamic voltage drop. With this functionality we are empowering our customers to move from simulating triplets to simulating an entire chip for all switching scenarios We believe this breakthrough will spur innovation throughout semiconductor industry. ANSYS has always advocated for open ecosystems, which allow for best-of-breed interoperability and give our customers the ability to make the right decisions for their unique businesses. This is particularly important for semiconductor and systems companies. And that is why we partner with Foundry and other leading software companies. As part of our partnership, Synopsis has integrated ANSYS electronic solutions into its 3D IC compiler for highly accurate signal thermal and power data. The automated back annotation amongst these solutions enables faster convergence with fewer iterations to enable customers to bring next generation products to market faster. Earlier in 2021, we signed a multi-year, multi-million dollar contract with a major semiconductor company, which standard on ANSYS' multiphysics solutions including ANSYS HFSS and ANSYS RedHawk-SC for the latest finFET technologies and advanced 3d IC techniques. Not only was this customer able to realize the benefits from ANSYS products, but it was able to drive faster time to value. Thanks to our integration with synopsis's best-in-class technologies. Moving to our semiconductor foundry partners. Samsung Foundry has certified ANSYS RaptorH electromagnetic simulation solution for developing advanced systems on chip as well as for 3d ICs. That industry first certification enabled ANSYS to help Samsung designers, as well as Samsung foundry customers more accurately analyze and mitigate risks from electromagnetic effects when adopting Samsung's new sign-off flow. In Q4 TSMC named ANSYS as an OIP partner of the year for a joint development of four nanometer design infrastructure, which led to the certification of ANSYS RedHawk-SC enhances Totem for TSMC's most advanced three and four nanometer processes. TSMC honored us with an award for our development of ANSYS RedHawk-SC electrothermal for full chip and package thermal analysis. ANSYS has also partnered with Intel Foundry Services to become an inaugural member of the design ecosystem alliance. Through this alliance, Intel will use ANSYS's market-leading multi-physics solutions to enable Intel customers to create unique chips with tailor-made silicon. Turning to our environmental, social and governance initiatives. ANSYS and 3M have launched a material modeling training program that is helping engineers refine product development processes and reduce material waste. 3M is offering verified material models for its tape and adhesive products to all ANSYS users to help power environmental, sustainability initiatives. Finally, I'm excited that ANSYS has recently been recognized for our product innovation, as well as for our winning culture. The international society for optics and photonics presented the Prism Award in software for our OpticStudio STAR Module. This technology streamlines optical designs while reducing design errors, development time and material costs. ANSYS has also been recognized by the great places to work institute as a preferred employer in China, Japan South Korea and Taiwan. That is a testament to our colleagues in Asia, as well as to our culture of innovation. In summary, Q4 was a great quarter capping off an exceptional year for ANSYS. We beat guidance across all our key financial metrics and we delivered the best year in company history. Thanks to our market leading portfolio and our deep customer relationships, our customers are continuing to grow their ANSYS simulation for products as diverse as consumer electronics, electric vehicles, rocket ships and life-saving medical devices. Those factors combined with the momentum we experience in Q4 will propel us through this year and beyond. And with that, I'll now turn the call over to Nicole. Nicole?

Operator:

Ladies and gentlemen, we'll now begin the question and answer session. [Operator Instructions] First question comes from Mr. John Walsh, Credit Suisse. Please go ahead.

Ajei Gopal:

Good morning.

Ajei Gopal:

Yes.

Nicole Anasenes:

Sure. Thanks John. Yes. So I'll answer your second question first and then the first question. So yes, if there was legislation that delayed or repeal the law that $60 million to $80 million would be added back to the cash flow outlook. Now that is that is pending. Any changes in tax law that could occur as a result of that repeal. So if it was just a straight repeal of that or delay of that then that would be the right interpretation. From an SG&A standpoint, I think the way to think about it is that it would be fairly consistent from an [Indiscernible] standpoint overall. Do we lose you?

Nicole Anasenes:

Okay. Thanks so much John.

Jay Vleeschhouwer:

Thank you. Good morning. Ajei, let me start with you with a question concerning the 2022 R1 release. One of the interesting components of the release was the reference to what you call custom workspaces or perhaps otherwise known as industry solutions. Could you comment on your broader plan or vision for packaging the software in that way with these custom work spaces for additional industries than the one you started with R1. How do you think this might affect your multi-solution sales over time, for example? And perhaps since you have such a large focus on process in the release, how you think this might affect your demand for Minerva over time? And then for you Nicole, according to the 10-k there was a very large increase in your expected revenue from RPO for 2022. Quite considerable increase in fact versus a year ago and from Q3. Is that mostly an artifact of the number of large transactions that you concluded in Q4? And is this perhaps a new more normal level of expected revenue coming out of RPO for the next 12 month periods?

Nicole Anasenes:

Yes. And so, Jay, to your question on the deferred revenue and backlog balance. Yes, you're correct. We closed the quarter with deferred revenue and backlog were about a 1.3 billion and that grew about 30% year-over-year. Now the strong growth came from the great momentum we've been seeing in our business and the success of the sales strategy to shift the business model to multi-year subscription leases. So to the point that you made earlier about strong multi-year performance. Now Q4 was especially strong because of the timing of some of the start dates of contracts executed in Q4. And since some -- since these contracts were signed before Q4 ended these contractual obligations are included in the deferred revenue backlog balance at the end of the year. But if you normalized for some of these contractual commitments which had later start dates, the growth would still be really strong. It would be close to the mid-teens. And so, I would say that overall really strong performance.

Ajei Gopal:

So Jay, I think to better understand the cloud strategy, it might just take me a moment to maybe repeat or to summarize for what -- how ANSYS takes advantage of the cloud and what's important to customers. So let's consider a typical enterprise application that's not simulation. So typical enterprise application like an ERP system for example. It enables some workflows and data sharing between users and a user interaction with that application typically involves something like a database lookup and a database update. The amount of compute power that's required is small and predictable and that allows the application vendor, the SasS vendor to choose a cloud for their application based on their criteria. The application runs in the vendor's instance in that cloud and the vendor will typically charge a customer a fee to use the application based on the number of users or other metrics. Now, with simulation, simulation is very different from the traditional enterprise application in that the amount of compute required to launch simulation can be enormous. So a single simulation can run for hours across hundreds of cores. A single user can launch multiple simulations in parallel. And that can translate into a lot of compute and related costs. And that's why high performance computing or HPC at scale is so important to us and to our customers. Now, historically customers have run HPC workloads in their own data centers, so their own private clouds if you will. And simulation has been one of the more demanding workloads. Now as a cost of and the availability of HPC has come down in the public cloud, some of our customers are working directly with the hyperscale cloud vendors to migrate or augment their private clouds with HPC in the public cloud. And so, a customer might often do this in the context of a broad data center update strategy in which multiple workloads including the HPC workload are being migrated to the public cloud. And obviously different customers will pick different hyperscale public cloud providers depending on the terms and the needs and the commercial arrangements and so forth. So there are two conclusions, Jay, to draw from these facts. The first is that it's essential for us to support HPC on multiple hyperscale cloud providers. And the second is because simulation workload could be run on premises in a private cloud one day and it could be run in the public cloud the next, we have to support flexible licensing. And specifically we must allow customers to be able to purchase incremental elastic licenses to support their public cloud simulation work, as well as giving them the ability to bring and use the licenses that they may have used on premises to bring it to the cloud. So that's the essence of our strategy. And we've continued to support our customers with flexible licensing as they use ANSYS products and in the public cloud of their choice. So you mentioned a couple of -- a couple of announcements. So first let me talk about ANSYS cloud. This is a product we've had in the market for a while. And I've spoken of it before. It's built on Azure. It supports flexible licensing. It allows our customers to take advantage of scale out compute on the Azure cloud running on the ANSYS managed instance. ANSYS cloud revenues customer usage are both growing. We've seen a ForEx increase in compute usage year over year. The second product that we refer to which we announced earlier this year is in collaboration with Amazon web services. The ANSYS' gateway powered by AWS, it provides a seamless access and deployment of ANSYS products on AWS. It offers scalability and flexibility. It allows customers to maintain their existing AWS relationships by pairing their hardware access through AWS with their ANSYS software. In other words, the customers run on their own instance and not on the ANSYS instance. And so this obviously provides a path for monetization for AWS and of course for ANSYS as well. So that's the strategy, that's the context of those products and obviously, hopefully this explains what we're trying to accomplish.

Operator:

Thank you. And the next question comes from Mr. Adam Borg of Stefil. Please go ahead.

Ajei Gopal:

So obviously, the intent is to make sure that our customers can take advantage of the portfolio of -- the ANSYS portfolio on the public cloud. And you should expect to see ANSYS products being broadly available on the cloud.

Nicole Anasenes:

Yes. So thanks Adam. We saw strong growth [Indiscernible]. So as you can calculate some prior guidance on the impact of DGI and that the same actually investigated before. In 2021, we had really stronger growth [ph].

Operator:

Thank you. The next question is from Gal Munda of Berenberg. Please go ahead.

Ajei Gopal:

Well, let me let me quickly take that, Gal. So when you think about the automotive industry, obviously, it's one of our Top Three verticals, electronics and semiconductors, automotive and ground transportation, aerospace, the top three verticals. It's an area where we've historically had a lot of strength. As you rightly point out, the areas where there is a lot of customer interest right now is in both electrification and autonomy. And a few years ago I would have said that there was a significantly more interest perhaps in autonomy as a possibly than more near-term activity. But what we're seeing right now is that some of the vendors or some of the OEMs have pulled back a little bit from their expectations maybe the more aggressive timelines they had. But a lot of the work that's on autonomy is going towards ADAS improving driver safety and so forth. So there continues to be lots of investment in that space even though full autonomy might be further away. As far as electrification is concerned, as you know, it's not just about the powertrain. Obviously when you're thinking about the powertrain and the electric, the transformation from the internal combustion engine into an electric motor, that's where our high fidelity multiphysics workflows come in that allows you to design better and more thermal efficient motors and batteries and power electronic components, all of that is part of the electrified powertrain. But in addition there is a change. It's not just about changing the internal combustion engine to an electric motor. This is an opportunity to rethink and redesign the car. And so that means, there's more analysis, for example, for safety and understanding what failure modes look like. More analysis on a noise and vibration and understanding what the ambience within the or the ambient experience in the car cabin is going to look like, on crash analysis and impact analysis. So there's a number of different areas, all of which where we have -- all of which we have strength in, which companies are pursuing in their pursuit of electrification. So we're very excited about the work that's taking place. And we see this as being an ongoing long-term tailwind for us in that particular vertical.

Nicole Anasenes:

Yes. That is definitely implicit in our guidance is that, as you recall in 2020 there was a more -- there was more of a trough around perpetual 2021 reflected I'd say kind of getting back to the normal level of perpetual we had. So our underlying view is that the momentum of customers is moving towards time-based licensing and that will continue over time as the business model has shifted pretty substantially towards that over the past five years. And so, our underlying assumption in 2022 is that the mix is a little bit more normalized. And as a result, ACV is growing faster than revenue as a result of that mixed compare dynamic.

Operator:

Thank you. Next question comes from Tyler Radke, Citi. Please go ahead.

Ajei Gopal:

Yes. So, when you think about our involvement with semiconductor companies and as I mentioned this, obviously, the companies have been historically doing semis as well as some of the system companies that are doing semis. There's obviously been a lot more activity in that space. What we are able to bring to bear is the entirety of the portfolio. And I mentioned some of this during my script. Look when you think about 3D ICs for example, that's really where you can scale performance and functionality across multiple dyes in a single package. And that requires an integrated multiphysics approach. And that includes simulating for example, the structures, the optics, the photonics electromagnetics, all of those are outside of the traditional RedHawk product line, right? So it's HFSS and others. So, when you think about these complex designs. And then certainly when you move beyond the chip itself and you think about chip package system for electronics, it really brings in -- brings to bear the entirety of a portfolio. So, and I gave you an example also in the script of a company that's using some of our safety analysis providing automotive -- providing semiconductors for the automotive industry and how our safety analysis work, which might seem counterintuitive or unintuitive. The safety analysis work is relevant at the semiconductor level all the way up to the larger automotive level. So those are examples of how our portfolio is being used. But we feel like we have a lot to offer our customers, because of the multiphysics investments that we've made over the years and the strength of the portfolio.

Ajei Gopal:

Yes. Look, I think for the shortage of semiconductors, obviously, there's a challenge in terms of being able to get semiconductors to where they need to be used and we're seeing this across multiple industries, that hasn't fundamentally affected the design activity. And that's really where we come in. We work with our customers on the design as opposed to the manufacturing of their products. And obviously, part of what we're doing with respect to the certifications with the foundries is to make sure that we are in a position to support them with our technologies as they go into to the foundry. But those are examples of us proactively working to make sure that the industry is able to move forward. But look it's -- we're not tied to manufacturing. We tied to design. And that's really primarily -- that's across all of our product lines. And so, even if a semiconductor shortage causes a shortage for example or some delay on an assembly line in a automotive company, again it doesn't affect the design work that we're involved with in the automotive company. So that's I think the strength of the ANSYS business and that gives us confidence in the way we think about our business going forward.

Nicole Anasenes:

Yes. I mean, I would say, fundamentally 2021 was a really strong year. And I'd say, if you compare to where we were at the beginning of last year, we had just come off of a really significant compare dynamic around Q4 2020, right? But the underlying momentum of the business as you could see through the full year of beat and raise, definitely exceeded our expectations as we exited 2021. So going into 2022, our expectation is that guidance will -- or that performance will continue to be broad-based, it was broad-based across customer sets, geographies, industries, I mean it was pretty consistent. And so, I would say that that's the primary factor in the underlying confidence around what we consider to be a pretty strong expectation of double-digit growth of 10% at the midpoint in ACV.

Operator:

Thank you. The next question will be from Ken Wong of Guggenheim Securities. Please go ahead.

Ajei Gopal:

Well, as I said in my script, if you look back in 2020 to 2021 and certainly Q4 as well. In 2021, we saw strength across all major industries, across all major geographies, across all of our major go-to-market routes. And we saw growth in both direct as well as indirect. We saw growth -- if you look at the pyramid with enterprise customers at the tippy top and the volume accounts at the bottom of the pyramid, we saw growth across the customer segments. And the regions contributed there, they all grew double digits from ACV perspective last year. And the product lines kind of grew as expected. So I feel very good about all of that. That just should go goes to show that the business is performing across multiple dimensions in a way that you would want to have happen. And so, part of our plan going forward is to continue to be able to build on that momentum into 2022.

Nicole Anasenes:

Sure. So, let me just start by saying, and I think I've mentioned this a couple time is that, we're committed to industry leading margins and the ANSYS business model is highly efficient. We have substantial operating leverage and low variable costs. Now, in our 2022 published guidance, you can see that operating leverage in the business model, When the guidance projects ACV to be stronger than revenue growth and cash flow to grow faster than ACV. And that cash flow growth is after absorbing the impact of R&E capitalization, right? Now, in terms of operating margin specifically, revenue growth headwinds from expected license mix really is the primary driver of those operating margin headwinds. And that dynamic is more about accounting in the P&L than operating leverage. The operating leverage really can be seen in those underlying dynamics between ACV and cash flow. Now, in addition, I mentioned in the prepared remarks in both cash flow and operating margin, we do have assumptions of a moderate impact of inflation on expenses. And so that is a bit of a headwind to both. But I would say primarily it's the underlying dynamic around just accounting and where revenue is this year relative to ACV.

Operator:

Thank you. And the next question comes from Saket Kalia of Barclays. Please go ahead.

Ajei Gopal:

Well, it's like, if you go back to the years that I've been with ANSYS. So if you go back five six years ago, obviously, the use of public cloud for HPC was much lower than it is today. And today the hyperscalers or the hyperscale public cloud providers have invested in building out HPC infrastructures. And they're all working with their customer bases. And as I think about our own customers, some of our customers are working with hyperscalers to figure out what their long-term data center strategy is going to look like. Do they continue to invest in their own data centers? Or they do take advantage of the public cloud -- some combination of the two where you have a hybrid structure where some stuff is running on-prem and you use the cloud as a burst capacity or for peak load periods or things of that nature. So, those are conversations that are ongoing. I think everyone realizes that there's now investment in the public cloud to support high performance computing and their high performance computing nodes. And so that's obviously a possibility that's available to our customers. From our perspective, one of the watch we're experience has always been flexibility to support and meet our customers where they want. And so, we are in a position to support our customers if they want to take advantage of our ANSYS cloud product, we can take it -- we can support them. And we can make it very easy for them to take advantage of the public cloud. If they want to run completely on premises, we can support that, and they can continue to do that. If they want to run on another public cloud, we can support that. So we -- if they want to run on Amazon, we are in a position to support that. In Azure, we're in a position to support that. So it's really -- it really is a flexible structure that we have in place. And I believe that this is exactly what customers are looking for that choice and flexibility on something as important to them as where they're computing and the cost of the compute that they're driving.

Nicole Anasenes:

Sure. Ye, I apologize. I had some technical difficulties earlier, so apologize for those who couldn't hear my answer. Yes. So, for both the fourth quarter and full year 2021, our ACV growth in constant currency was 16%. And when you back out the $86 million to $88 million associated with the combination of AGI and Zemax, You can see that's really strong organic growth both in the quarter and for the full year. Now, as we move into 2022, we're really pleased with ACV guidance of approximately 10% at constant currency at the midpoint. And again, on that business model of double digit growth including tuck-in M&A. And within 2022, we still expect Zemax to have an inorganic impact of about $20 million.

Nicole Anasenes:

Thank you.

Andrew Obin:

Hi, guys. Good morning.

Ajei Gopal:

Good morning.

Nicole Anasenes:

Yes. I mean, I would say, as we go -- as we exited, went throughout 2021 and going into 2022, we saw more of a return to a more normalized collection environments past new environments. And so, the underlying momentum of the business and collections is quite strong. And in addition to that in the 2022 guidance, as I had mentioned in my earlier answer, there's significant operating leverage in the business overall around ACV. So although, operating margins overall are relatively flat, but on an -- when you compare the cash flow generation against ACV, because ACV is growing faster than revenue, you really see strong operating leverage. So it's a combination of the underlying momentum of kind of getting back to more normalized collection patterns and the underlying operating leverage in the business that has really driven the strength of the performance going into 2022.

Nicole Anasenes:

Yes. No. I mean, obviously, the strength of the cash generation of the business and the balance sheet are great assets. And over the years the greatest return we've been able to provide to shareholders is the deployment of access cash using it to acquire premier simulation technologies to fill out the portfolio, to complete what's already the broadest and the deepest portfolio. And last year, some -- sometimes there's just not the right timing or there's nothing imminent to deploy that cash against, so we're not -- there's not something that's going to deliver the right return for shareholders and so in those times we do repurchase shares. Last year we repurchased about 347,000 shares for about $135 million. And so, we would expect to continue to think along those lines of how we think about capital allocation overall.

Kelsey DeBriyn:

So, thank you everyone for us. That's all the time we have today. I'm going to turn it over to Ajei, for some closing comments.

Operator:

Conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

Operator:

Ladies and gentlemen, thank you for standing by, and welcome to the ANSYS Third Quarter 2021 Earnings Conference Call. With us today are Ajei Gopal, President and Chief Executive Officer; Nicole Anasenes, Chief Financial Officer and Senior Vice President of Finance; and Kelsey DeBriyn, Vice President, Investor Relations. All participants will be in listen-only mode. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note, today’s event is being recorded. At this time, I would now like to turn the conference over to Ms. DeBriyn for opening remarks. Please go ahead.

Ajei Gopal:

Good morning, everyone, and thank you for joining us. Q3 was another excellent quarter for ANSYS, where we beat our financial guidance across all key metrics. With strong ACV growth in the quarter, I’m delighted that year to date, we’re on our stated goal of double-digit ACV growth with tuck-in acquisitions. Our accomplishments thus far in 2021 are further evidence of the success of our strategy of making simulation pervasive across the product lifecycle, our multiphysics product leadership, and our strong customer relationships. Those factors, combined with customers’ continued investment in R&D initiatives are driving demand for ANSYS’ multiphysics solutions. With a robust deal pipeline and momentum in the business bolstering our confidence, we are raising our full-year financial guidance above and beyond the impact of our strong Q3 top-line performance. Nicole will have the details in a few minutes. From vertical and geographical perspectives, our Q3 results came in as expected. The high-tech and semiconductor, aerospace & defense, and automotive and ground transportation sectors were again our largest contributors. Looking at our major geographies, the Americas again led the way, followed by Asia Pacific. We expect each region to have its largest quarter in Q4, with the quarterly skew to be more pronounced in Q4 for Europe. One of Q3’s highlights was a 3-year $58 million agreement with a North American high-tech customer. From an ACV perspective, this deal was the second largest multiyear contract in our history. This customer was already using solutions from across the ANSYS multiphysics portfolio and is now expanding its number of simulation users. It is using ANSYS for diverse applications, ranging from ensuring the reliability of radio frequency systems to meeting sustainability goals across its product line and to chip-package-system analysis for power and signal integrity. Another key deal in Q3 was a multiyear agreement with Seagate technology, a leader in mass data storage solutions. Seagate is a longtime ANSYS customer, and this new contract broadens the company’s use of multiphysics simulation, to address next generation product challenges faced by its global customer base. For example, Seagate is using ANSYS multiphysics products to assess thermal effects and acoustics to create a seamless workflow to enable higher capacity hard drives and to streamline process integration for heat-assisted magnetic recording. The company also now has access to our optical suite of products to drive further innovations. As we have discussed, our small and medium-sized customers, or SMBs, were disproportionately affected by the pandemic. However, during the last few quarters, we are seeing a recovery. And SMB customers have increased their investment in ANSYS simulation. Our ongoing increase in sales from our SMB customers gives me further confidence as we plan for Q4 and beyond. During these calls, I typically give you some insights into various aspects of the ANSYS business. In the past, I have discussed our best-in-class electromagnetic solutions, our unparalleled product scalability and the extreme accuracy of our structural solutions. As you heard me discuss with Seagate, optical simulation is becoming increasingly important for our customer base. In fact, in Q3, about 5% of our agreements included an optical simulation product in the order. Given that, as well as our recent closing of the Zemax acquisition, I would like to spend some time today, discussing our offerings for optical simulation. Three years ago, ANSYS did not have any optical simulation products in our portfolio. Today though, companies can rely on ANSYS for an end-to-end solution, spanning the gamut from photons to electrons based on 3 product lines. The first, ANSYS Lumerical empowers users to design and analyze integrated photonic components and systems, and model challenging product problems including interacting optical, electrical and thermal effects. The second product line, ANSYS SPEOS simulates the system’s optical performance and evaluates the final illumination effect by enabling high-fidelity visualization based on human vision and camera-sensing capabilities. Third is our recent acquisition of Zemax, which enables customers to accurately model the behavior of lights through complex optical lens systems. Instead of working independently as a siloed offering, our optical simulation suite operates as part of a complete multi-physics workflow. Taken together, the ANSYS optical solution is used for a diverse set of applications ranging from camera and lidar arrays found in autonomous vehicles, to telecommunications and mobile phone cameras, to medical equipment and other visual aids. For example, in Q3, Sandia National Lab signed an agreement leading to expanded use of Lumerical technologies. Sandia develops leading-edge integrated photonic and nano-photonic solutions for quantum computing, imaging and sensing. The lab uses Lumerical tools to design model and simulate custom photonic components and behavior in a circuit environment. In the automotive sector, industry leader, Ford, uses ANSYS products including SPEOS, and the ANSYS vehicle headlight solution in the styling and design of its predictive smart headlamps, and to optimize and validate headlight performance. Our headlight solution features real time physics-based optical simulation and driver in the loop functionality to replicate the physical world with a high degree of predictive accuracy. Automotive giant Mazda is also increasing its use of SPEOS for internal and exterior lighting, head up displays and cameras, thanks to a sales agreement in Q3. In aerospace and defense, an ANSYS customers using all 3 of our optical product lines across multiple applications, the customer relies on Lumerical for creating photonics integrated circuits, it uses SPEOS for detecting radiation leaks from aircraft enclosures, and this customer is also using Zemax to study lens deformation. While still new to our portfolio and a relatively small contributor to our overall financial results, these optical solutions fit squarely into our go-to-market motion, and our sales team understands how to market these products. Based on the ANSYS strategy of pervasive simulation, our optical customers can easily access products across our portfolio to perform true multi-physics analysis. We saw an excellent example of that with another aerospace and defense customer that was challenged with a wing camera that was capturing blurry images. By using a combination of ANSYS optical and ANSYS fluids products, the customer was able to correct the problem and deliver crisp images even at extreme speeds in bad weather. Moving to our partners, I’m excited that we are expanding our relationship with Autodesk by embedding ANSYS’ electromagnetic simulation capabilities to explore and validate printed circuit board designs within the Fusion 360 workflow. This first of a kind Autodesk Fusion 360 extension will enable CAD users to perform near real time PCB analysis and retrieve real time insights into their electromagnetic performance to accelerate the development of next generation products. We have also expanded connectivity of ANSYS Twin Builder to industrial control systems through Rockwell Automation enhanced Studio 5000 Simulation Interface. Users can connect digital twins to emulator controllers to optimize production at the design stage, or physical controllers to enhance equipment performance in real time, for example, in predictive maintenance. I am pleased that we have expanded our partnership with TSMC to create a comprehensive thermal analysis solution for multi-dye semiconductor designs using ANSYS RedHawk-SC Electrothermal and ANSYS Icepak. Along with TSMC’s silicon stacking and advanced packaging technologies, users can analyze complete chip and package systems with high fidelity results. We are also collaborating with Fujitsu to enable more sustainable product development for our customers. ANSYS LS-DYNA now supports Fujitsu’s energy efficient prime HPC supercomputers, which will help customers reduce energy consumption and costs by offloading simulation workloads to a more energy efficient machine. Keeping with our environmental, social and governance initiatives for a moment, we recently published our simulation products handprint for autonomous vehicles. This report illustrates the role that simulation plays in the development of autonomous vehicles, including in sensors, automated driving software, and safety testing. Using simulation to develop autonomous vehicles will lead to significant societal and environmental benefits, ranging from a drop in traffic fatalities to a reduction in emissions. We have also submitted our initial report with the climate disclosure project and expect results by the end of the year. Similarly, we have begun working on our reports to the task force on climate related financial disclosures, which focuses on governance, strategy, risk management, and metrics and targets. In summary, Q3 was another remarkable quarter for ANSYS. We beat guidance across all key financial metrics, and have met our goal of delivering double-digit growth year-to-date. We’re also expanding our product leadership in our core solutions as well as an important emerging area such as optical simulation. These factors combined with a strong Q4 sales pipeline and outstanding execution give me further confidence in our ability to meet our newly increased outlook for 2021. And with that, I’ll turn the call over to Nicole. Nicole?

Operator:

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] And, ladies and gentlemen, our first question today comes from John Vruwink with Baird. Please go ahead.

Nicole Anasenes:

Yeah. So I’ll take that. Thanks so much for your question, John. So, yes, as you can – as you point out, we are well within our model of double-digit growth. With tuck-in acquisitions on the year-to-date basis, our growth certainly puts us squarely on that model. What I would say is, there are 2 components to that. So the core itself, the core structures, fluids, those businesses are still solid contributors to growth and continue to grow. As you point out, we have been building the broadest, deepest simulation portfolio over multiple decades. And that has only accelerated in the past 5 years. And so, I think Ajei’s talk about the optical business is an example of something that was maybe quite nascent, a couple of years ago, that is quite robust, competitive and extensive right now. And so, I would give that as an example. Ajei, do you want to comment anything for that?

Joe Vruwink:

Okay, thanks, Ajei, for the clarification. I’ll leave it there. Thanks.

Andrew Obin:

Hey, guys, good morning.

Ajei Gopal:

Good morning.

Nicole Anasenes:

Yeah. Thanks so much for your question, Andrew. So as you pointed out, over the last 12 months, America has continued to be a consistent strong performer, and lead the company in creating value for our customers. A couple of deals with the, one that Ajei mentioned in his remarks, the $58 million agreement with a leading North American technology company is an example of – I think the model that we have exported around the world and leaves some of the strength in our other regions like APAC, where the customer has already been using solutions from across the ANSYS multiphysics portfolio, but is now expanding the number of simulation users. And so, we’ve done a very good job at building deep relationships with customers, understanding their short and their long-term development roadmaps, and enabling them to be able to propagate the use of simulation to broader use-cases, to connect to physics and to also connect to other users and in the process to leverage that simulation. And so, that model that America executes quite well, is the model that we’re executing around the world. And just as an example, our Asia-Pacific region has executed exceptionally. They had another quarter, a very strong growth with 21%, constant currency growth – I’m sorry, 21% growth in the region at a constant currency basis. And the strength in that region was broad-based across industry, customer types, geographies. We had several 7 figure contracts in Asia Pacific, that added growth to the high-tech sector, where customers are really showing enthusiasm for not just the core portfolio, but the adjacencies as well. So there is a common theme here, where we’re broadening and deepening the relationships within the customer, with our core technology, having strong footholds and solid growth, but also leveraging the organic and the inorganic investments that we’ve been making over the past 5 years, to accelerate the footprint globally. And so, I would say the core strength of the portfolio and the investments that we’ve been making, during the course of the pandemic, with our customers and in our portfolio are really the drivers of the acceleration and performance of growth. To some degree, there is a little bit of recovery. It’s that Asia Pacific probably had a little bit ahead in the recovery versus America. There are still unevenness in terms of customers are preferring to meet in person. So I wouldn’t characterize things as returned to normal quite yet. But certainly, the business model is resilient. It is showing through, regardless of the challenges that we’ve seen in the pandemic.

Nicole Anasenes:

Yeah, I’d say it’s the success that the management team is enjoying as a result of building out that robust portfolio in that business model. But I think, also the point around investing during the pandemic is, is important to note. I mean, it’s really easy in a tough time to barrel down the hatches and not make investments in the business. That’s kind of what people might expect. But there is a very proactive or very deliberate decision to not over-pivot in that direction, because of our confidence in the opportunity around what we do and the value that we can add to our customers. And so, I really do feel like we’re going to be coming out of the pandemic, whenever that might be in a real position of strength.

Andrew Obin:

Thank you. And just a follow-up question, I think on a previous call, you guys highlighted how small and medium business sort of tends to lead your core business. And you made some remarks about small and medium. You are continuing to see improvement. But can you just talk about sort of sequential trends in SMB? And what this portend – if you still view it as a leading indicator for the rest of the business go into the yearend and next year? And I know you did improve your 4Q outlook, but just maybe more color there. Thanks so much.

Ajei Gopal:

Yeah. And just to amplify one of the points Nicole made, the large customer dynamic is somewhat different from the SMB. For the most part, the large customer dynamic is driven by the long-term relationships that we’ve maintained with our direct sales-force with these customers. Many of these are long-term customers of ours. They’ve built their processes around ANSYS. And when it comes to a new project, or a new activity, as they start to continue to evolve their R&D efforts, they turn to us as a vendor. And so, there’s an opportunity within those customers to expand the footprint based on long-term relationships. In the case of SMBs, in many cases, the SMBs are relationships that we have through channel partners. And, some of these customers may be relatively new customers. They may be relatively early in their life as an organization. And so, I wouldn’t necessarily say SMB is a leading indicator, which was the point that you made. I wouldn’t necessarily say it’s a leading indicator. These are two different – there are slightly different dynamics across both the SMB and enterprise. And, each one of them has their own go-to-market motion and supporting activity.

Operator:

And our next question today comes from Gal Munda with Berenberg. Please go ahead.

Nicole Anasenes:

Sure. So, in Q3, we had a really strong Q3 as you point out with that strong double-digit growth. Q3 ACV did come in line really close within our expectations. And so, the raise on ACV in Q4 is really a function of the improved momentum that has been building since the last time we shared guidance in August, across the board. And so, what I would say is when you look at how we delivered year to date and in the quarter, it’s been pretty broad-based across industries and customers. And, that’s kind of the reflection of what I would characterize the momentum in Q4. There is not any isolated one-off thing that is driving that view. It is more kind of an overall momentum building that you’ve been seeing, as you rightly point out, we’ve been able to raise throughout the year, I mean, as you recall in the beginning of the year, we still were not sure whether what the kind of dynamics around recovery were going to look like. And so, we’ve been kind of sharing with you as we see things ahead of us, and systematically raising expectations over time.

Ajei Gopal:

Well, I think, look at the end of the day, Gal, when you think about it, partnerships allow ANSYS to really expand our market reach by leveraging what our partners bring to the table. They’ll bring complementary technology skills. They have a brand. They can help us reach different customer segments, so that more people can benefit from simulation. Partnering allows us to create a combined solution with a leading vendor. So at the end of the day, customers can benefit from a more complete solution than either one of us can provide on our own. Now, key to our partnerships and you’ll see this all along, key to our partnerships is maintaining an open ecosystem. So we’re not about – our partnerships are not about blocking things off, but are making things available, opening things up. And our strategy and our products remain open, so that customers can create the optimal system to meet their needs. So as you think about our partnership strategy, just think about that, we are open to trying to make sure that we can leverage and work with our partners to make our customers benefit from the entirety of what we can bring to bear, because we have an open strategy. I can’t comment about specifically any individual partnership of the direction that it may go. But, hopefully have some perspective of how we think about partnerships.

Operator:

Ladies and gentlemen, our next question comes from Tyler Radke of Citi. Please go ahead.

Ajei Gopal:

Well, so let me address your question in 2 sort of timeframe, one is you think about the short term. So in the short-term, supply chain disruptions may be affecting many businesses, but we’re really not one of the businesses that’s affected by the supply chain. And the reason is, as I mentioned earlier, the use of our software is tied to the design of products, is tied to the R&D phase for the most part, and it’s not denominated by manufacturing. So whether if a customer has challenges with the supply chain, and they can’t produce as many units of a particular product that’s been designed with our technology that doesn’t affect our relationship with the customer, they’re already designing what that next product looks like, and they’re working with our engineers, or they’re working with our technology to figure out what the future looks like. So our customers continue to make investments during – in R&D, and it’s really not affected by the supply chain in the short-term, so we have no real short-term issues there. When you think about it from a long-term perspective, I think, you’re also alluding to this in your question. When you think about the long-term perspective, companies, I think, around the globe are questioning exactly how they need to think about their supply chains going forward. So will they be a change in the way they’ve been thinking about the supply chains, and in some cases, you’re seeing customer thinking about moving manufacturing closer to where the final product is actually going to be used. This isn’t necessarily building factories in the more traditional way. In many cases, customers are thinking about building next generation factories where they have much more automation, robotics, next generation manufacturing techniques, all of these things are relevant for simulation. We’re in a position – we had ANSYS there in a position to help our customers as they go through this rethinking process, as they go through the design of these next generation capabilities, as they start to think about advanced manufacturing techniques, materials, as they work through the simulation that goes with that we’re in a position to help them. And so, we see this as a long-term tailwind, where we can help customers as they try to figure out what this next generation looks like in their own evolution.

Operator:

And our next question today comes from Jay Vleeschhouwer with Griffin Securities. Please go ahead.

Ajei Gopal:

Sure, Jay, so let me try to unpack your question. And let me start with the longer-term direction comment that you asked. And, I think, look you’ll hear a lot more about strategic direction for where we’re going over the next year, and so on, think of some of the comments that you heard as [dembrading] [ph] some of the super exciting times that [our hit branches] [ph] and our customers. You talked a little bit about Cloud, we’ve got ANSYS Cloud out there, which manages access to high performance computing resources, it’s just remember that many of our customers for them Cloud is about being able to access high performance computing at scale, and enabling some of these larger high fidelity simulations to run a scale. And so, in this last quarter on this call, I talked about the scalability of some of our product products that was enabled by a customer for us at the Technical University of Eindhoven, where they solved a an aerodynamic problem with something like 3 billion computational cells with 20 billion unknowns. And that scalability is possible, of course, because of core technical advancements that we’ve done. So, for example, we sped up mesh generation by 20X, which is obviously a bottleneck in the creation of detailed simulation of transient phenomena. But also, we were in a position to give access to cloud computing resources. And, in fact, just this week, Satya Nadella in his keynote at Microsoft Ignite use the same example to show what is possible on the ANSYS Cloud platform, which is essentially ANSYS’ products running on Azure on the world’s most powerful AI supercomputer. So that was one example, I think of Cloud that I’m excited about. We support flexible licensing models, we support an elastic pay-as-you-go model, we support a hybrid model, which mixes and matches elastic as well as lease licenses. And this year, we’ve continued to expand the number of products that we’ve added into cloud capabilities. For example, we’ve added an LS-DYNA, we’ve added in Lumerical products, we’ve added in SOC2 certification, we continue to improve our overall customer experience. And we’ve also seen significant increases in cloud usage. So one of the ways that we monitor that, of course, is by looking at core hours. And this year, year-to-date, we’re seeing almost 4 times as many for core hours as compared to this time last year. And we still haven’t hit that inflection point. So we believe that there is still much greater demand within our customer base. And we’re watching our customers, we’re seeing where they’re going, we’re anticipating where they’re going, and we’re giving them the opportunity to be able to drive some of the scale out compute. So I’m really excited about where we are with cloud and some of that capability. There was a number of other things, I’m sure, that were also mentioned in that conversation, some of the things that we’re excited about the new capabilities we have in our product. We’ve talked about AIML, and how AIML supports our technology and simulation. All of those are interrelated, because the advances that we make in one area can be delivered to our customers in other ways, and that allows us to be a more responsive vendor to our customers or partner to our customers that allows us to continue to drive leadership in the marketplace. So that was the first question. What was the second question, Jay? It was around…

Ajei Gopal:

Yeah, so I think if the question is, are we continuing to make investments in that area, that’s absolutely the case. We do continue to make investments in the area, we think our relationship that we have with customers at a technical level is something that our customer’s value, it gives us insight into the way we work with our customers use our technology, and it’s a 2-way street, we’re in a position to help our customers as they evolve. And, certainly, we’re in a position to take customer feedback and insight into the next generation of our products coming in from the field. So, I think, we’re excited and we continue to make investments in those areas.

Operator:

And our next question today comes from Jason Celino with KeyBanc Capital Markets. Please go ahead.

Nicole Anasenes:

Yeah, so I can quickly answer that question on the contribution. So we expect – so we had – as we’ve said, we think it’ll have about $6 million to $8 million of ACV impact and revenue impact. This year, which will be offset by – largely offset by currency. Next year, we’re estimating an incremental approximately $20 million in organic impact.

Jason Celino:

Great. Excellent. I appreciate the color.

Ken Wong:

Great. Thank you for taking my question. Ajei, I wanted to touch on an announcement you guys made last month, the ANSYS and Apple, RF safety testing simulation module for MagSafe. Apple obviously has a very large partner ecosystem should we expect that this brings in a wave of new potential customers? Or is it simply additive to your existing tech relationships?

Ken Wong:

Got it. Really appreciate the color there. And, Nicole, just wanted to touch on the higher mix of perpetual, is that simply a snapback to suppress perpetual buying from 2020? Or is there some other element causing that that higher perpetual mix?

Ken Wong:

Great. Thank you very much.

Operator:

And our next question today comes from Blair Abernethy of Rosenblatt Securities. Please go ahead.

Ajei Gopal:

So, we’re certainly seeing customers wanting to take more advantage of the cloud during the – certainly that happened during the pandemic, when people were working remotely and didn’t have access as easy access to their offices. And that certainly drove some cloud usage, I mean, the fact remains that we can give our customers, who want to take advantage of our technology, we can give our customers an experience where they have elastic compute driven from the cloud, it’s a fast like experience, we can give them that using our elastic licensing capabilities. So that that feels to them like a SaaS experience, and similarly, we can give our customers access to on premises technology in a lease model, which they’ve used for a while. So we give our customers a choice of what they want to be in a position to do. ANSYS Cloud gives them that ability to support they need for cloud compute, both from the server perspective as well as scale up for HPC. So it really is up to the customers. And, many of our customers have made investments that are within their own to building out data centers, so they prefer to take advantage of their own data centers, some customers will look at the amount of data that they have to manage. I mean, when you think about a simulation, a complex multivariate simulation that’s running across our multivariate optimization could result in terabytes of information. And so then there’s a question of where do you store that information? How do you keep it? Do you move it from one cloud to another? What is their standard model? So it’s not simply a matter of moving piece parts into the cloud. It’s really thinking holistically from the part of the customers on where and how they want to make this transition, because it’s an entire workflow that’s across multiple vendors that needs to be managed. And I think we’re very well positioned. Our technology is ready for the cloud. We’re very well positioned. We’re excited about our capabilities. And it really is a matter of meeting the customers as and when they’re ready.

Operator:

And our next question today comes from Jackson Ader with J.P. Morgan. Please go ahead.

Nicole Anasenes:

Yeah, I mean, I would say that the part of the business that customers are using on the cloud itself is very small and immaterial. The vast majority of the use-case is around seamless access to HPC capacity and other capacity outside the cloud, which has no impact on our current – it’s exactly the same revenue recognition model that we have in the – whether it’s a lease or perpetual license, because their entitlements would be separate from that usage.

Jackson Ader:

Okay, that makes sense. And then, a follow-up on DYNA. So the use-cases that we’re kind of talking about here are different and are expanded from what we probably would have thought when you first acquired LS-DYNA, right down the middle, crash and impact. Is the malleability of the DYNA solver specific to DYNA or is this also something that like other solver portfolios can do, they can kind of be flexible outside of their core use-case?

Jackson Ader:

Yeah. Okay. That’s helpful. Thank you.

Ajei Gopal:

Thanks, Kelsey. So, I’m really excited about our excellent execution, our broad customer base and our robust pipeline. Our customers’ reliance in simulation, the strengthening of the small and medium business market, and our ability to close large contracts only add to that excitement and give me further confidence as we look to close out 2021. I would like to express my sincere gratitude to our customers and to our partners for their continued support. And a special thank you to my ANSYS colleagues. You have my gratitude for delivering yet another strong quarter. Thank you, everyone, for joining the call today. Enjoy the rest of your day.

Operator:

Ladies and gentlemen, thank you for standing by, and welcome to the ANSYS Second Quarter 2021 Earnings Conference Call. With us today are Ajei Gopal, President and Chief Executive Officer; Nicole Anasenes, Chief Financial Officer and Senior Vice President of Finance; and Kelsey DeBriyn, Vice President, Investor and Government Relations. All participants will be in listen-only mode. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded. At this time, I would now like to turn the conference over to Ms. DeBriyn for opening remarks. Please go ahead.

Ajei Gopal:

Good morning and thank you for joining us. Q2 was another excellent quarter for ANSYS, where we significantly beat our financial guidance across all our key metrics. I'm particularly pleased with our ACV performance for the quarter, which grew at nearly 23% in constant currency. Our growing momentum from Q4 of 2020 and the first half of this year gives us increased confidence in our business and in our ability to execute against our goals. It is also further validation of our strategy of pervasive simulation, where simulation is used throughout the product development process by engineers in every discipline. That strategy, combined with our best-in-class multi-physics products, our comprehensive go-to-market approach and our deep and lasting customer relationships has paved the way for our consistent success. The COVID-19 pandemic continues to evolve with the uncertainties of the Delta variant making headlines around the world. Despite these uncertainties, our customers are continuing to invest in innovation, R&D and product design to drive their future successes. As such, we are continuing to see demand for ANSYS simulation increase in the marketplace, and our pipeline for the remainder of 2021 is strong. As a result of that continued strength and our track record of execution, we are once again increasing our annual guidance for ACV revenue, EPS and operating cash flow. Nicole will provide more details in just a few minutes. Looking at Q2, all our major geographies performed well, with the Americas leading the way. I'm very proud of our team in India, which came in above our internal plan despite challenging COVID-19 related conditions in the country. From an industry perspective, high tech and semiconductors, aerospace and defense and automotive and ground transportation were our top verticals. We also saw ongoing strength with our enterprise customers. Following the trend of the past two quarters, we saw improved spending with small and medium-sized customers. While these smaller customers have not yet returned to their pre-pandemic spending levels, the progress we've seen over the past several months give me added confidence in the future. One of the largest deals of the quarter was with a North American leader in semiconductors. This $39 million multiyear agreement ensures that the company will have necessary capacity to run 5-nanometer and eventually 3-nanometer designs on ANSYS’ RedHawk-SC, a gold standard power noise and reliability signoff solution for digital design. The company has also standardized on ANSYS’ multi-physics technology across chip, package and system to reduce power consumption, thereby increasing its competitiveness in the marketplace. We also closed a $30 million agreement with a longtime automotive customer. This leader in electric vehicle technology has expanded its use of mechanical, fluids and electromagnetic solutions, and has adopted additional ANSYS technologies including automated design analyses, multi-body dynamics and process integration and design optimization. This customer is working with the ANSYS ACE teams to jointly develop workflows for noise and vibration analysis and topology optimization. The company is also using ANSYS Discovery to decrease its simulation backlog and get products to market faster, all the while holding the line on development costs. Just a few weeks ago, we unveiled ANSYS 2021 Release 2, which features advances across our multi-physics product line, from structures, fluids and electromagnetics to materials, photonics and embedded software. R2 includes a number of advancements in core physics, simplified workflows, and integrated data management. Our solutions are based on our decades of experience and cannot be easily duplicated, creating high barriers to entry for potential competitors. While I could spend the entire hour detailing each product’s capabilities, today, I will focus on just one key differentiator which cuts across our entire portfolio, namely scalability. As customer problems become increasingly more challenging, the size of those challenges requires simulation software that can scale to unprecedented levels. Throughout our history, ANSYS has been a leader in product scalability, and we have extended that leadership in recent releases. Our ability to create high resolution, fluid mechanics simulations with practical turnaround times enables customers to solve next generation challenges ranging from rotating machinery to external aerodynamics to environmental simulations. Four years ago, ANSYS Fluent scaled to nearly 200,000 CPU cores, enabling customers to solve challenging problems faster than ever, by calculating billions of cells. To the best of our knowledge, that remains the record for commercial computational fluid dynamics code. This massive scalability has enabled our customer at the Technical University in Eindhoven to solve a complex aerodynamic problem with 3 billion computational cells with 20 billion unknowns. The most recent advances in ANSYS 2021 R2 have sped up parallel Mesh generation by 20x, removing what is often the bottleneck for detailed simulations of transient phenomena, which occur in aerodynamics and gas turbine simulations. Our 225x speed up over the last decade has enabled ANSYS customers to reduce simulation time on a full thermal mechanical model from two weeks to an hour and a half. And now with ANSYS 2021 R2, those calculations could take just minutes, leading to improved product reliability as users run more simulations faster. That breakthrough was made possible by doubling the core counts, while reducing the memory required by 40%. In our latest LS-DYNA release, we have significantly improved performance, which enables customers to run transient behavior studies with 28 trillion calculated variables, and that's trillion with a T. That means safer cars and more reliable electronics. A global high tech customer used ANSYS HFSS and our new ANSYS Mesh Fusion to solve a previously unsolved integrated circuit and packaging problem by scaling across a multi-node HPC cluster with 18 terabytes of RAM and 576 cores. In ANSYS 2021 R2, we introduced the Phi Plus mesher, which extends Mesh Fusion to deliver additional speed and capacity. Phi Plus has sped up meshing on PCB plus bondwire package models by 18x, which will bring new innovations to the 5G, autonomy and industrial Internet of Things market. As the semiconductor customers are using next generation distributed and grid computing techniques to model and solve chips with 2.6 trillion or more devices, ANSYS RedHawk-SC set a capacity and performance record in power integrity signoff last year by extracting 66 billion electrical nodes on the design of a GPU and solving it over 2,400 CPUs in a fully distributed manner. In ANSYS 2021 R2, our solver performance doubled, enabling customers to signoff even larger chip designs using the same compute resources and runtime. Scalability is one of ANSYS’ many differentiators and is becoming increasingly important to our customers as they develop next generation products. We believe that our history of product scalability, along with accuracy, ease-of-use and speed to solution, create a difficult environment for any would-be competitor, while giving our users the functionality they need to solve the most challenging product problems. We are continuing to train the next generation of engineers in the use of ANSYS solutions by expanding our free offering for students. To date, nearly 2 million students around the world have downloaded our products. And just a few weeks ago, we launched an additional offering for students to download our Electronics Desktop, and to enroll in ANSYS innovation courses for training. These students now have access to our leading electronics products, including HFSS, Maxwell and Icepak to train them in developing the products of tomorrow. And thanks to our new partnership, Cornell University will design and develop online training courses with real-world applications from ANSYS. Moving to partnerships, I'm excited to announce that we have expanded our work with TSMC to include new certifications for ANSYS RedHawk and ANSYS Totem. These new certifications for power network extraction, power integrity and reliability, signal electromigration and transistor level custom designs enable joint customers to meet critical power, thermal and reliability standards for next generation product applications. ANSYS continues to be recognized for our inventive approach to engineering technology. I'm proud that for the third year in a row, Fast Company has named us one of the best places to work for innovators. I'm even more excited that five of my colleagues have been recognized with the prestigious Women of Color STEM awards. These awards showcase the outstanding scientific and engineering achievements of women around the world. And ANSYS is proud of these pioneers, who serve as an inspiration for us all. Turning to our environmental, social and governance initiatives, I'm pleased that MSCI has upgraded our ESG rating to AA, naming us a leader in the software and services industry. MSCI cited ANSYS’ comprehensive talent pipeline relative to our peers, our focus on business ethics, and our capabilities in helping customers to innovate in areas such as clean technologies. To summarize, Q2 was another great quarter for ANSYS, and a further validation that our pervasive simulation strategy is resonating with the market. Our strong sales pipeline, our ongoing momentum with enterprise customers, the resurgence of small and medium businesses, and our continued leadership across our product portfolio, give me further confidence in our ability to meet our newly increased outlook for 2021. And with that, I'll turn the call over to Nicole.

Operator:

We will now begin the question-and-answer session. [Operator Instructions]. Please limit yourself to one question and one follow up. At this time, we will pause momentarily to assemble our roster. The first question comes from Ken Wong with Guggenheim Securities. Please go ahead.

Nicole Anasenes:

Yes. Thanks, Ken. Yes, we were really pleased with not only the second quarter, but where we landed on the first half overall, as you know, translated to 16% growth overall for the half, which was fantastic. The team really delivered. I would say that it went back to a very similar pattern that we saw in Q1, which was it was broad-based across geographies and industries. As you recall, coming into the year, we were a little bit cautious about SMB and kind of the underlying momentum of SMB. And we had expected enterprise customers to perform as expected. I would say in the second quarter, we got a bit more out of the enterprise than we expected to get, which was great, because it showed people are really seriously committing to their R&D portfolios and accelerating development. But we saw, for the second quarter in a row, that resurgence on the SMB side, and there wasn't anything that was specific, localized or kind of in narrow form. It was just kind of everywhere. So I would say it's that really kind of broad-based performance that we saw really in the second quarter and the first half that contributed to the confidence that we had in raising our overall ACV for the year by the 2.7 points at constant currency.

Nicole Anasenes:

Yes. As I mentioned before, we were really pleased with the momentum we saw in the quarter and the strength we saw. What I would is, the guidance that we have going into -- the reason the full year was really not counting on SMB coming back to those pre-pandemic levels. There certainly is a lot more activity, there's a lot more engagement. But this does happen over time market by market. It does vary too, in terms of the rate and pace of speed of how these customers are coming back. And so, while I don't have a specific quantification to give you, what I would say is that if it happened at a more accelerated rate that's not -- and we were all of a sudden back to pre-pandemic levels by the end of the year, that's not something we've really contemplated in our race.

Operator:

The next question comes from Gal Munda with Berenberg. Please go ahead.

Nicole Anasenes:

Sure. So let me break apart the components of cash flow. So as you point out, cash flow is more highly correlated to ACV because of the way 606 treats revenue recognition, so that is exactly the right way to look at it. So there's two components to it. There's the collections piece along the ACV side, and then there's the payment side. And so on the collection side, we have seen an improvement at a more accelerated rate, both in terms of lack of asking for extension on payment terms, people catching up on each payment, and people overall maintaining a level of current balance at higher rates than they had through the pandemic. So all of that is I think contributing to the acceleration on -- part of the acceleration on the cash flow side. The headwind in this particular quarter was really tax payments and the timing of tax payments, particularly in a quarter can have a more distorting dynamic overall. And so, as you recall, last year, there were some deferral incentives during the pandemic that raised cash flow in the second quarter, and then this year those payments were due as expected in the second quarter. And so, overall, I would expect to see still a little bit of capitulation and volatility in the relationship between the two, just because the nature of the payment piece is not kind of back to normalized levels. But what you can count on is that underneath the covers, the momentum around collections and customers’ kind of behavior around that has been quite good. And we're really happy with where we're at.

Nicole Anasenes:

I think that we saw a very balanced growth and performance across the enterprise side and the SMB side. And so what we are seeing is that customers are using simulation to continue to accelerate their development roadmaps and the optimism around needing to make those investments overall. And so there was really no timing dynamic here of any meaningful -- to any meaningful degree other than the normal things that followed before and after the dateline in any normal quarter. It really is -- the performance in the quarter was really a statement of the overall momentum that we're seeing in customers’ behavior overall.

Operator:

The next question comes from Adam Borg with Stifel. Please go ahead.

Ajei Gopal:

Sure, Adam. So, as you know, ANSYS Cloud provides managed access to HPC resources and that allows our customers to essentially run larger and higher fidelity simulations. And as you know, the cloud also supports a very flexible licensing model. And that includes an elastic pay-as-you-go model as well as a hybrid model that allows customers to mix and match elastic as well as lease licenses. Now we have a number of internal metrics that we deploy to measure the business. And we are seeing probably a 5x greater usage as compared with this time last year. And that has very nice growth as a result of the activities that we've done as well as, of course, external conditions with people working from home. This year, if you think about what we've done to augment the cloud, we've added cloud support for ANSYS LSTC, for ANSYS DYNA, for our Lumerical products. We've completed SOC2 certification and we also continue to focus on the overall customer experience. And that's really translated very positively for customers. And we -- a couple of months ago, few months ago, we published a release about a customer, Van Oord, who talked about how they could speed up their simulations by 7x, which obviously is a significant perspective, because they're able to take advantage of the most recent and most capable hardware in the cloud, as well as the cloud capabilities that we have. So we're very excited about our cloud direction. We have made all of the necessary investments. And, of course, it's still early days, because we're talking about a relatively small portion of our business.

Nicole Anasenes:

Yes. So we did see -- in the first half of the year, we did see relatively more professional license growth than we've seen in the past. And what I would say is that that long-term trend of shifting towards the lease model still continues, right. So as you recall, there were dynamics last year where perpetual was a little bit more muted. And I think what you're seeing this year is just some of the return of some of that business overall. But if you look at the business over longer periods of time, the growth and acceleration of the business is really driven by the lease model, and the perpetual business has been roughly flat over those longer periods of time. In terms of the second half, I think one of the dynamics that we saw in Q4 last year was not only exceeding the high end of guidance by $45 million, but there was a significant perpetual mix in Q4. And so how we're looking at it on a go-forward basis is not really expecting that repeat performance in Q4 overall. It is some of the underlying factors that are baked into the guidance.

Operator:

The next question comes from Jay Vleeschhouwer with Griffin Securities. Please go ahead.

Ajei Gopal:

Jay, thanks for the question. Let me start with your comments or question about some of the smaller products. As you know, some of those products organically developed, others came in through acquisition. And we embark on activities such as an M&A or organic development, specifically when we see opportunities in the market where customers are either leading us or where we see an opportunity to provide greater functionality to solve the customer problem. And so all of the acquisitions or an all of the internal development that we do is driven by an analysis of what that market would look like. And I'm delighted that we're generally seeing what we expected to see pan out is in fact panning out. You talked about Lumerical photonics, that's obviously a very important part as you think about data centers, for example, and we're seeing obvious attraction there, because this product fits into our overall portfolio. So when we go to customers, we can go to them with a broader set of capabilities that includes critical capabilities, such as Lumerical, that you mentioned, where we can go in and talk about an end to end solution that addresses the needs that the customer may have. And you see that repeated across our portfolio, where smaller products are playing important roles in being able to stitch together an end to end workflow to allow customers to solve some of the most complex problems that they're dealing with. So I think that's -- hopefully that addresses your first question. With respect to your second question, I'm excited, obviously, with our performance in high tech and semiconductor. I no longer think of the Apache acquisition. That's part of our semiconductor organization and has been for a number of years. And obviously we have a number of deep integrations across our portfolio between our semiconductor business and our electromagnetics activities. And you start to think about next generation products like 3D-IC and challenges, and that's when the entire ANSYS portfolio comes in, going from our semiconductor portfolio all the way through our more Newtonian physics, if you will. And so I'm very excited about the portfolio, the capabilities. I think we have market leading products across the board there. And customers tell us that they're able to solve tremendous challenges with our offerings, and we're excited about the future.

Jay Vleeschhouwer:

Thanks very much.

Andrew Obin:

Yes. Good morning.

Nicole Anasenes:

Good morning.

Ajei Gopal:

Yes, you should think of our indirect channel consistent with some of the growth that we're seeing in SMB, because our indirect channel partners are oftentimes supporting customers who are lower down in the pyramid, while some of the larger global organizations are handled by a direct sales force. So that's really the dynamic that you're seeing, and that growth is reflective of that dynamic.

Ajei Gopal:

I think it's really difficult to point to a specific allocation of one bucket to another, because these things are all related to each other. At the end of the day, if you just reflect on the ANSYS portfolio, what we built is a market leading set of capabilities of individual physics, which are connected together. And so this multi-physics capability is what's necessary for customers as they solve some of the most challenging problems that they're dealing with. And so as you think about electrification, for example, or 5G or IoT, all of these areas are complex customers that are investing a significant amount of money, they are looking for simulation offerings to be able to support them in their R&D efforts. And we have the technology, we have the capabilities, we have the relationships, and we can support them on their journey. So that's a very important aspect. You've got to have the right goods when people need them. The second thing is that, obviously, around the world, we're seeing a set -- we're seeing customers recognizing that there is going to be an end to the pandemic, and that they have to continue to make investments in R&D. And certainly the small and medium business customers are perhaps most emblematic of that, because they are -- early in the pandemic, you saw a shutdown for SMB customers, right. They’re most concerned about cash, they're most concerned about the potential demand future because these are smaller companies and they have less, they have lesser cash resources than some of the larger companies. But what we're seeing now is obviously an opening up of spending there, which is reflective of the fact that customers around the world, not just SMB customers, customers around the world are looking at the world after things completely open up again, or certainly after a pandemic world, post pandemic world where things start to get back to normal with respect to the broader economy, which means -- and they recognize that in order for them to be successful, they have to have products that people want. And that means more investment in R&D and more investment in product design, as I mentioned in my comments. So the demand is also increasing. And I think that those two things work together. You have to have the right products. You have to have the growing demand. If you didn't have either one of them, you wouldn't necessarily be able to deliver the results. And I think that we are -- that's exactly what we're seeing. And we're very excited about what we can provide to our customers and where the market is going.

Ajei Gopal:

Was there a follow up?

Ajei Gopal:

Thank you.

Operator:

The next question comes from Saket Kalia with Barclays. Please go ahead.

Nicole Anasenes:

Yes. So at the beginning of the year, we talked about AGI contributing $80 million to this year. And so we're still seeing that as the current trajectory.

Ajei Gopal:

You mean Discovery, right?

Ajei Gopal:

Yes. So, look, we're very excited about Discovery. And I think perhaps to make it real, a little bit more tangible, perhaps I can go back to the example I gave in the script, which was one of our customers who's using Discovery in a very interesting way. So for this particular customer, some of the detailed flow and thermal management simulation is done by experts using ANSYS flagship products. But the typical turnaround time is maybe 60 days, because of the complexity of the simulation. And they have a relatively small analyst team serving a larger design team. So they introduced Discovery as a way for the design engineers to do some of the simpler simulation on their own. So things like flow distribution or pressure drops. So they're able to do that by themselves. And they can improve the design of their components before they hand off the design for a complete system simulation to the expert analysts. So that's an example where the whole thesis that we had was, this is something that design engineers could use to really amplify the capability of the analysts, that's something that's borne out here. And for this customer, they're also using -- they also have some outsourced CAE spend, and they're using Discovery now to help train their designers on some basic structural analysis so they can limit some of this outsourced work on simple geometry changes. And what that does for them is it changes the design iteration time and it takes it down from a couple of weeks to a couple of days. So that gives you some perspective. We're very excited about the technology. We continue to make advances in the technology. And obviously I mentioned a couple of customer examples. You talked briefly about PTC and the use of Creo Simulation Live. And on PTC’s earnings call last week, I believe they reported continued traction with increased expansions driven by a migration around Creo 7. As you know, they are OEM-ing our Discovery products into Creo Simulation Live, Creo ANSYS simulation, and Creo 7 is their latest enterprise release. And so, obviously, there's increased traction that comes from that. And they also talked about a customer where the real-time simulation capabilities were helping to simplify the customer's design process. So we're very, very excited about the technology. It continues to perform as we had expected. Obviously, it's a relatively small piece of our business. But the market dynamics around what we're seeing is strong.

Nicole Anasenes:

Thank you.

John Walsh:

Hi. Good morning, everyone.

Ajei Gopal:

Good morning.

Nicole Anasenes:

Yes. So, as you point out, the greatest return we've been able to provide on the deployment of excess cash has been utilizing it to acquire a second M&A. And the example of something like Phoenix is a great example of a premier technology which helps us accelerate. Another investment we made in December around in AGI. Phoenix provides model-based engineering. So I would say that you should expect that we will continue to execute strategy, which is consistent with our model, which is to achieve double digit growth with tuck-in acquisitions overall. So the decision on -- the capital allocation decision and the focus on M&A hasn't changed.

Ajei Gopal:

So I think the sustainability aspect is clearly important across a number of different dimensions for different customers. When you look at, let's say, for example, a big trend in the automotive industry, which is around electrification, right? Obviously, there's a discussion about the future of the internal combustion engine and the rate and pace at which electric cars and vehicles will be adopted broadly. And you're seeing car companies, for example, making the decision to just simply move from one to the other. And that's obviously driven in part by issues of emissions and being more eco-friendly. We talked last year about -- in the aerospace industry, we talked about some customer wins, where the motivation for the customer was really to make their engines more fuel efficient. So it was about light-weighting, it was about reduced fuel consumption, increased efficiency of fuel. And so even in aircraft engines, for example, you're seeing that as being a primary driver for new design of engines. And so it's absolutely part of a broader trend. I mentioned Van Oord earlier. They're, of course, building sustainable offshore wind turbines. And they're a simulation user. But again, their focus is on renewable energy sources. So compliance purposes as well as eco-friendly, all of these things are drivers of product design and product requirements. And obviously to ensure that customers can meet those standards, simulation plays a really important role.

Operator:

The next question comes from Blair Abernethy with Rosenblatt Securities. Please go ahead.

Ajei Gopal:

Firstly, with respect to automotive, what's exciting for us is that we have the technology and the capabilities from a product perspective and a relationship perspective to support our customers as they go through that transition. So we can help them with battery management technologies. We can help them with electric drive trains, electric motor design, all of the elements that you would expect that would sort of go into the replacement of the internal combustion engine with an electric battery powered environment. But above and beyond that, if you think about the challenges that some of our customers are facing as they make this transition, an electric car is not just simply an internal combustion car with one means of propulsion replacing another, it's an opportunity for our customers to redesign. In fact, they have to redesign it, because the assumptions that are previously made of an engine in the front of the car, which concentrates the weight in the front of the car, those assumptions are no longer relevant, because perhaps now you have a battery that's uniformly distributed across the floor of the car. And so that changes the weight distribution and changes the assumptions of the way that the car was originally designed. And so there is a significant rethinking taking place in these car companies, especially the auto companies who have historically relied on the reuse of technology from one generation to another, there is a rethinking of saying, what does it mean for us to support this to build an electric car? And so all of that leads to and drives increased use of simulation and certainly for ANSYS simulation. You think about crash design, right? So the problems that you may have been dealing with earlier for crash might have been, how do you think about the passenger and will the passenger be protected? And that's a complex multi-physics problem, because you're dealing with the structural integrity, you're dealing with the deployment of the airbag, which is the fluids problem. So there's a multi-physics problems in nature that need to be addressed through simulation. Now the question is, it goes above and beyond that, and it says, well, what is the likelihood of a fire or some kind of a catastrophic fire that might take place as a result of a battery rupture? Can you solve that problem? So it starts to become more and more challenging. And so this transition is not just a matter of supporting the design of the engine per se, it is the actual car in the aggregate and that sort of plays well to our strengths and our capabilities. Now with respect to your second question about healthcare. While healthcare is still and overall a relatively small part of the ANSYS business, simulation continues to grow. And we do well in, for example, the design and the manufacturing of medical devices. And that was obviously reflected in the performance in the quarter. But as we look to the future, we are excited about the increased use of simulation as a validation in the market. So the use of in-silico trials as opposed to just in vitro, in vivo. And the use of simulation techniques supporting those in-silico trials I think is really helpful. And we're working with early adopters who are using simulation to target specific surgical outcomes. And this is obviously early, early stage. There's not really much revenue associated with it; very, very early stage. But this is about how do you support a physician as they’re making decisions about surgery. Those are at the end of the day, some of those can be simplified into problems of computational fluid dynamics. And, of course, we have fantastic technology in that space. And so being able to put all of that together and packaging that, I think that's certainly something for the future.

Ajei Gopal:

So thank you all for your questions. And I want to thank all my colleagues at ANSYS and our global partner network for your amazing work, your dedication to the company and for continuing to drive the success for ANSYS and our thousands of customers around the world. With our excellent start to the year, a strong pipeline and the unprecedented levels of innovation that we're driving across our multi-physics products, I'm confident that we will meet our newly raised goals for 2021. And with that, thank you all for attending today's call. And I hope you enjoy the rest of your day.

Operator:

Ladies and gentlemen, thank you for standing by, and welcome to ANSYS First Quarter 2020 Earnings Conference Call. With us today are Ajei Gopal, President and Chief Executive Officer; Nicole Anasenes, Chief Financial Officer and Senior Vice President of Finance; and Kelsey DeBriyn, Vice President, Investor and Government Relations. [Operator Instructions]. At this time, I would like to turn the conference over to Ms. DeBriyn for opening remarks. Please go ahead.

Ajei Gopal:

Thank you, Kelsey, and welcome to ANSYS, and thanks to everyone for joining us this morning. I am excited to report that Q1 was an excellent quarter for ANSYS, where we beat our financial guidance for revenue, operating margin and EPS. I'm also pleased that we are ahead of our internal plan for ACV. This is significant because, as I explained on our previous call, ACV is heavily loaded towards the back end of the year following the pattern of the past several years. And we are seeing the continued strengthening of the pipeline of ANSYS customer activities across all major geographies. The strong Q1 and our growing sales pipeline, coupled with our excellent Q4 last year, gives us increased confidence in the momentum of our business and in our ability to execute against our goals. As a result, we are increasing our annual guidance for ACV, revenue, EPS and operating cash flow. We expect to see annual ACV growth, for example, to increase by over 1 percentage point in constant currency at the midpoint of our new guidance range. Nicole will provide more details in just a few minutes. In Q1, we were pleased to see that small and medium-sized customers who had slowed their purchasing decisions during the pandemic, showed stronger-than-expected sales growth across geographies and industries. Large customer behavior was as anticipated. From an industry perspective, our traditionally strong sector of hi-tech and semiconductor, aerospace and defense, and automotive and ground transportation continue to be our largest contributors. Our largest deal in the quarter was a 5-year multimillion-dollar agreement with a large North American automotive OEM. This long-time customer is realizing savings by using ANSYS Simulation for its strategic warranty cost control initiative. The manufacturer is also using ANSYS Simulation to identify the sources of electromagnetic noise to prevent interference and wireless communications. This new contract deepens and expands the customer's use of ANSYS solutions for wireless communications, autonomy, explicit dynamics, materials intelligence and electrification. We saw numerous examples of simulation spurring product innovation and reducing development costs at our recently concluded Simulation World Virtual Conference. Nearly 40,000 engineers, designers, executives, students, investors and members of the press registered for this event, which showcased simulation success stories from a number of ANSYS customers, from small start-ups, to multinational organizations to span industries, including Northrop Grumman, Whirlpool, Medtronic, SC Microelectronics, Boeing and Regeneron Pharmaceuticals. Participants attended tracks on electrification, autonomy, digital transformation, 5G connectivity and digital mission engineering and listened to simulation use cases for vaccine distribution, spacecraft risk mitigation, crack propagation and gas turbines, virtual crash testing and automobiles and so on. We heard from Formula One's Red Bull Racing, which is relied on the power of pervasive simulation to provide a competitive edge. Red Bull Racing's engineering team operates within a tight development window to optimize its racecar aerodynamics and shave milliseconds off lap times. With only a few days between competition, ANSYS Simulation becomes the team's virtual wind tunnel to run external aerodynamic analysis. Simulation is also key to developing the chassis control circuits, in selecting the right materials and in ensuring driver safety through virtual crash analysis. We had an entire track dedicated to electrification, where start-up Lucid Motors discussed taking advantage of simulation to develop its luxury electric automobile entirely on a computer, significantly reducing the need for physical prototypes. Lucid achieved its goal of creating a battery that will run for 400 miles on a single charge while providing enough power to propel the car from 0 to 60 miles per hour in 2.5 seconds. In the process, the company addressed key customer needs, solved difficult engineering problems and brought a world-class vehicle to market in a fraction of the time required by conventional approaches. Electrification, of course, is not limited to ground vehicles. Simulation-led breakthroughs in battery technologies are powering all-electric aircraft. During Simulation World, we also heard from Air Race E, which is sponsoring a series of international racing competitions for electric aircraft. Air Race E teams are using ANSYS Simulation to develop batteries to deliver more power with less weight. And designing electric powertrains that overcome difficult thermal and high-voltage challenges. The lessons learned from these races could advance the development and adoption of electrification for commercial aircraft. Nokia discussed its use of ANSYS HFSS and our electromagnetic solutions to investigate and optimize material properties and the performance of phased antenna arrays. By using ANSYS Simulation, Nokia was not only able to develop an alternative design that was fast, inexpensive and accurate, but also one that facilitates design sharing with vendors and mobile network operators. One of the most exciting presentations was from NASA's Jet Propulsion Lab, which highlighted simulation's role in the Mars Perseverance Rover mission. The JPL simulated every component of the landing, giving engineers confidence that the Rover would successfully endure the so-called 7 minutes of terror from atmospheric entry to landing. Simulation was also used to ensure that the Mission Ingenuity Helicopter could navigate the thin Marsian atmosphere. Simulation World let me more confident than ever that the ANSYS strategy of pervasive simulation is working. With over 60 hours of content and more than 300 speakers from companies around the world, there are simply too many ANSYS customer success stories to mention on this call. So I encourage you to visit simulationworld.com to learn how ANSYS Simulation is changing the way these organizations are developing, testing and operating their next-generation products. ANSYS partners were represented in Simulation World as well. Microsoft sponsored several sessions where they highlighted how users can leverage the Microsoft Azure cloud platform to gain easy access to high-performance computing resources directly from ANSYS products. Rockwell Automation discussed the key role that simulation plays in production, automation and digital transformation. In the PTC sessions, we learned how Creo Simulation Live and Creo ANSYS Simulation are driving a key change in product development. We also heard how ANSYS and Synopsys are bringing their integrated capabilities to cover a variety of multiphysics domain like power, timing, reliability and thermal simulation to maximize the speed and density achievable in advanced multi-die systems while ensuring robust reliability. Turning to ESG. ANSYS recently published our annual corporate responsibility report, which highlights progress across our environmental, social and governance initiatives. On ansys.com, you can view the report and learn more about how those pillars are driving long-term growth for our stakeholders through responsible and sustainable business activities. I'm also proud that Fast Company has named ANSYS to its list of the world's most innovative companies. ANSYS joins the prestigious list of organizations, including Microsoft, SpaceX, Sony and Honeywell. Fast Company has also recognized our digital twin at the human heart as one of its 2021 world-changing ideas. To summarize, Q1 was another great quarter for ANSYS, resulting in us beating our guidance for revenue, operating margin and EPS. The energy and enthusiasm seen during Simulation World and the strength of our customer pipeline gives me even more confidence in the importance of simulation, in the effectiveness of our pervasive simulation strategy and in our ability to meet our newly increased outlook for 2021. And with that, I'll turn the call over to Nicole. Nicole?

Operator:

[Operator Instructions]. And the first question comes from Gal Munda with Berenberg.

Nicole Anasenes:

Sure. So thanks for the question, Gal. Yes, we were really, really pleased with our Q1 performance and especially the green shoots that we started to see from the SMB segment, which was part of why we -- what led to our raise, as you noted, the $19 million raise in guidance. So I would say -- I would characterize our outlook to be consistent with what we saw in Q1, which was that large deal performance came in and enterprises came in as we expected them to behave. And we have some more growing optimism around the kind of improvement in the patterns of the smaller customer set, which, as you recall, was the customer set that we were a little bit more cautious about coming into the year. And so I'd say the shape of the things that came out in Q1 are similar things that affect our outlook for the full year.

Nicole Anasenes:

Yes. I mean -- so what I would say is that our capital allocation strategy hasn't changed. And as you point out, our greatest return typically comes from investing in the business and acquiring best-in-class simulation technology in support of our clients and the digital transformations that they're undertaking. So M&A is preferred, but we are selective. And so as a result, share repurchases and debt repayments are other areas that we've deployed cash, and we'll continue to do so.

Jay Vleeschhouwer:

Two questions. First, the company has previously said that your customer concentration, that is among your top 100 or so customers, has evolved from -- they are accounting for roughly 1/3 of your business to closer to now half of your business. And the question there is, how is that affected or might -- how it might continue to affect your internal investments, resource requirements, pipeline foreseeability, any of those sorts of metrics pursuant to that higher customer concentration? And then secondly, there are a number of external and internal technology catalysts coming up, some of which were mentioned at Simulation World a couple of weeks ago. For instance, you have a new upcoming ANSYS Rockwell integration coming up. You have additional solvers for ANSYS Cloud coming up over the summer, I think, with the R2 release, plus some additional high core count configurations. Microsoft is going to be previewing manufacturing cloud. And then lastly, the materials business unit is going to be expanding, I think, more into the fluids area. So lots going on in the technology pipeline. Maybe you could talk about how any one of those are factored into your thinking?

Ajei Gopal:

And Jay, thanks for the question. So just to quickly jump in, this is Ajei. When you think about smaller versus larger customers, we have over 1,000 customers have gone through the ANSYS start-up program. And these companies tend to be some of the most innovative companies in their use of simulation and they push the envelope. Oftentimes because they approach the problem with no frequency of how to build a solution, and they're in a position to take advantage of the best technologies and the best solutions in the market, and of course, they turn to ANSYS. And so we have -- we are seeing the technologies that we are building and developing being used across the board by large companies as well as small companies. And you alluded, and you mentioned several of these technologies. I think it's fair to say that the strategy that we laid out a few years ago, pervasive simulation is working. And if you recall, what we said there at the time was that we were going to diversify or focus from just focusing on the high-end analyst to with a broader set of individuals, so it's a broader engineering population so that we could address the needs of engineers across the entire product development life cycle. And you talked about our relationship with Rockwell. That's a great example where we're trying to address the needs of the manufacturing engineer, for example. And in other areas with digital twin technologies, we can go after operations engineers and so on. So there's a very different -- it's a very different approach than we may have had 5 or 7 years ago. It's a much broader approach. And as you see, the technologies that we have developed, the acquisitions that we've made have all been in support of the core of the business as well as this diversification towards the pervasive simulation strategy, and it benefits both large companies as well as small companies.

Andrew Obin:

You mentioned that there was some sort of hiring that lagged in the quarter. What do you think about the sort of the broader job market? How do you think about your ability to hire people as a potential gating factor in 2021 as the economy continues to recover?

Ajei Gopal:

Yes. If I could just add to that, I mean one of the things that we pride ourselves for is our -- is the culture within ANSYS. We see our employee engagement scores continue to go up and to the right, which I think is really important. We've won some Employer of Choice Awards, which I think is important as well. So all of that points to a great culture within the company. And given the technology and given the capabilities that we provide, frankly, for a number of students graduating from engineering school, what we do and the technologies that we provide represent their career objectives. They want to work in ANSYS. What we do is essentially what they've been training for as they've been getting their bachelor's degrees and their master's degrees or even their PhDs. And so we have that capability to attract, I think, top-quality talent into the organization, both from universities as well as from -- as well as people who are working at other organizations. So I'm very pleased about our ability to create that pipeline and also about the culture that we've been able to build at ANSYS.

Ajei Gopal:

Well, the way you should think about our technology is really helping our customers, primarily with the design of their products, whether it's semiconductors or frankly, with any product that they may be working with. And so as you start to look at investments, for example, in other geographies, for example, in the U.S., across the board, whether it's in semiconductors or elsewhere. And you start to look at the increase in capacity, that translates into the need for more simulation. And that translates into the need for more ANSYS. And because of the breadth of the portfolio because we have the ability to support multiphysics simulations, I think this puts us in a very, very good position. If you look at our capabilities for advanced process nodes for semiconductors, if you look at the abilities -- capabilities that we have for 3D ICs, that's where, as I said, this multiphysics portfolio that we have really shines. And so we're in a position to support our customers as they evolve their plans and their design capabilities.

John Walsh:

Maybe a first question, just thinking about and appreciate the color you provided thinking first half to second half. Just wanted to understand maybe the margin driver dynamics a little bit more, maybe particularly around either the SG&A line? And then just as a follow-up to that, great discussion earlier on the small and medium businesses. Was just curious if that's kind of the economy coming back? Or if you also have some targeted sales initiatives into those customers?

Ajei Gopal:

And then with respect to your comment about the small and medium business, as you recall, last year, when we talked about the impact of the pandemic, we pointed out that small and medium business was likely to be disproportionately affected. They typically don't have the financial resources that larger organizations do, and therefore, have to be a little bit more conservative with cash. Obviously, now we're in a situation where there is vaccine rollout in parts of the world. Obviously, we have tragic situations in parts of the globe, like, for example, the situation in India. But at the same time, we have a broad-based perception that there's going to be a recovery around the world, and that translates into the economy coming back. So we certainly see that in general across the space and SMB is no exception. In many cases, the smaller customers are seeing the need to catch up with activities that they may have missed out on. And so there's perhaps an even greater emphasis on trying to drive some of this work. The other point here is that we have global channel partners. And our channel partners oftentimes manage the relationships with the small and medium businesses. And so we have many, many arms and legs on the Street working with these smaller companies to help them get to the stage where they can get back into the main line of their operations. And so we're able to leverage this global channel network to also help us by being able to reach the small and medium business customers.

Tyler Radke:

First question for -- maybe for you, Ajei. Obviously, you talked about some large auto wins in the quarter, I think, one with a leading kind of EV company. Curious if that was kind of an expansion deal on an existing relationship. And if so, how much it expanded? And then more broadly, could you just kind of talk about your pipeline in the auto industry? I know this has been an area of strength and with a lot of the trends around autonomous and electrification, you've had a lot of success there. But are there large deals coming up for renewal? Maybe just give us a sense for how the automotive pipeline looks relative to years past?