ANSYS, Inc. (ANSS) on Q2 2023 Results - Earnings Call Transcript

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. Kelsey DeBriyn: Good morning, everyone. Our earnings release, the related prepared remarks document and the link to our second quarter 2023 Form 10-Q have all been posted on the homepage of our Investor Relations website. They contain the key financial information and supporting data relative to our second quarter financial results and business update, as well as our Q3 and fiscal year 2023 outlook and the key underlying quantitative and qualitative assumptions. Today's presentation contains forward-looking information. important factors that may affect our future results are discussed in our public filings. Forward-looking statements are based upon our view of the business as of today, and ANSYS undertakes no obligations to update any such information. During this call, we will be referring to non-GAAP financial measures unless otherwise stated. A discussion of the various items that are excluded and reconciliations of GAAP to the comparable non-GAAP financial measures are included in our earnings release materials. I would now like to turn the call over to our President and CEO, Ajei Gopal, for his opening remarks. Ajei? 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? Nicole Anasenes: Thank you, Ajei. Good morning, everyone. Let me take a few minutes to add some perspective on our second quarter financial performance and provide context for our outlook and assumptions for Q3 and full year 2023. The second quarter demonstrated the strength of our business as we delivered solid performance during Q2 and beat our financial guidance across all key metrics. ACV came in better than guidance, revenue, operating margin and EPS also exceeded our guidance, driven by ACV outperformance and the mix of license types sold in the quarter. Given the strength of demand for simulation and the momentum we see in our pipeline, we are raising our full year ACV and revenue. The improvement in our full year ACV outlook is above and beyond our Q2 outperformance. I will provide additional details on our guidance in a few minutes. Now let me discuss some of our Q2 financial highlights. Beginning with ACV, we delivered $488.3 million in Q2, which grew 6% year-over-year or 7% in constant currency. Our SMB customers performed well during the quarter, and we saw growth across most industries. ACV from recurring sources grew 13% or 17% in constant currency on a trailing 12-month basis and represented 82% of the total. This momentum in recurring ACV growth is driven by the strong annuity created by our ongoing shift towards subscription lease licenses. Q2 total revenue was $496.6 million and grew 4% or 5% in constant currency, which, as I mentioned, exceeded our guidance driven by the ACV outperformance and the mix of license types in the quarter. Growth for both ACV and revenue by geography was in line with our expectations. Year-to-date, our top line performance was robust with ACV and revenue, both growing double digit in constant currency at 12% and 13%, respectively with broad-based growth across industries, geographies and customer types. We closed the quarter with a total balance of GAAP deferred revenue and backlog of $1.3 billion which grew 10% year-over-year. During the quarter, we continued to deliver a business model with strong operating leverage. This yielded a solid second quarter gross margin of 91% and an operating margin of 36.4%, which was better than our guidance. Operating margin was positively impacted by outperformance on revenue, the favorable mix of license types, as well as the timing of expenses. The result with second quarter EPS of $1.60, which was also better than our guidance. Similar to operating margin, EPS benefited from strong revenue results and the timing of expenses. Our effective tax rate in the second quarter was 17.5%, which is the rate that we expect for the remainder of the year. Our unlevered operating cash flow in the second quarter totaled $72.1 million and in line with expectations. The underlying momentum in our cash collections remain strong. However, unlevered operating cash flow was down year-over-year due to the timing of tax payments. We ended the quarter with $478 million of cash and short-term investments on the balance sheet. Now let me turn to the topic of guidance. We delivered an outstanding first half coming off an exceptional 2022 and our updated 2023 forecast reflects the continued broad-based customer demand for our market-leading simulation portfolio. Looking to the remainder of the year, the business continues to show momentum, which bolsters our confidence in achieving our 2023 and long-term outlook. Let me start with our full year 2023 guidance. We are raising our full year ACV outlook to a range of $2.275 billion to $2.340 billion, which represents growth of 12% to 15.2% or 11.4% to 14.6% in constant currency. We are raising the midpoint of our ACV guidance in constant currency growth by 0.5 point. Our improved outlook is in excess of the Q2 overperformance we delivered relative to our Q2 guidance and is partially offset by a few million dollars of foreign exchange headwind. We are increasing our revenue outlook to a range of $2.257 billion to $2.327 billion, which is growth of 8.9% to 12.3% or 8.5% to 11.9% in constant currency. We are raising the midpoint of our revenue guidance in constant currency growth by 0.5 point. Within this increased guidance, we are absorbing a similar amount of foreign exchange headwind that we anticipate seeing in ACV. We expect our full year EPS to be in the range of $8.39 to $8.88. Relative to our May guidance, our updated full year EPS contemplates $0.04 of operational improvement from increased full year revenue guidance, which was more than offset by $0.06 of higher interest expense and onetime items in other expense. Now let me turn to our full year unlevered operating cash flow guidance. As a reminder, we now provide guidance for unlevered operating cash flow as it aligns to the long-term cumulative $3 billion cash flow outlook we provided at our 2022 investor update. Our 2023 guidance is a range of $699 million to $749 million and relative to our May guidance, absorbs the small additional foreign exchange headwind we see in the second half. The underlying operating leverage in our business remains robust. Further details on the reconciliation of GAAP operating cash flow to the comparable non-GAAP unlevered operating cash flow are contained in our prepared remarks document. Now let me turn to guidance for Q3. For the third quarter, we expect ACV in the range of $460.5 million to $480.5 million. Our ACV growth outlook for both Q3 and the full year is 13% constant currency growth at the midpoint, which is above our financial model and an acceleration from the 12% constant currency growth we saw in the first half. Turning to the P&L. We expect Q3 revenue in the range of $453.7 million to $473.7 million. We expect Q3 operating margin in the range of 29.6% to 31.3% and EPS in the range of $1.18 to $1.31. As I have noted in the past, quarterly dynamics can be volatile and oftentimes, growth dynamics in the P&L can be disconnected from ACV. The quarterly mix of license types that generate upfront recognition creates a year-over-year headwind in the third quarter, which is causing the P&L to be disconnected from the strong accelerating third quarter and second half ACV outlook. The year-over-year revenue and resulting P&L in the third quarter is not a reflection of a change in business momentum. Our full year raised ACV guidance continues to be the best metric to observe momentum in our business. Further details around specific currency rates and other assumptions that have been factored into our outlook for 2023 and Q3 are contained in the prepared remarks document. I am really proud of the strong execution in the first half of the year, our expanding product leadership and our robust pipeline. These factors along with our diversified business and laser focus on execution are giving us business momentum. This is reflected in increased outlook for ACV and revenue. To the entire ANSYS team, thank you for your dedication to delighting our customers and delivering world-class innovation. Your efforts not only contributed to our strong performance in the first half of 2023, but also fuels the continued momentum going into our second half of the year. I remain confident in our ability to deliver our 2023 and long-term outlook. Operator, we will now open the phone line to take questions. Operator: [Operator Instructions] Our first question comes from Joe Vruwink with Baird. Please go ahead. Joe Vruwink: Great. Hi, everyone. I wanted to start with a question on AI. And I appreciate this has been part of the product roadmap for a long time. It's been making your flagship products better for a long time. My question is more coming off of the Design Automation Conference during the quarter and hearing about some of the all new products that are in development at ANSYS, things like machine learning-based solvers or even new cloud platforms that will play into AI and simulation data. I just wanted to see the potential for these new things to become additive. And how you think about kind of the new monetizing that would be separate and distinct from what's been playing out within kind of the core silver business, if you will. 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? Joe Vruwink: Yes, that's great. Thank you, Ajei. And then as a quick follow-up, just given the focus on Aerospace and Defense cord, I wanted to ask how has the evolution of ACV or maybe a net retention rate is the best way to think about this within existing customers in this end market, you obviously talked about a really big deal in the quarter. There's an occurring customer but expanding how they use ANSYS. I guess what's kind of the experience broadly across the end market? And are you seeing not just multiphysics as a driver, but more cross-pollination between the simulation business and the new acquired solutions spanning into missions engineering? 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. Joe Vruwink: Okay. Great. Thank you. Operator: Our next question comes from Jay Vleeschhouwer with Griffin Securities. Please go ahead. Jay Vleeschhouwer: Thank you. Good morning. Ajei, following up on the commentary about the aerospace and defense market. It is very interesting to see how it has now become your second largest market, surpassing automotive for which for many years, it was a pretty similar percent. But it's also interesting to consider that I think the A&D market is perhaps somewhat more concentrated in terms of the customers and a number of logos, for example, and how are you thinking about the sustainability of that kind of growth for A&D, which has been outgrowing your largest market, high tech and could you foresee, for example, that perhaps automotive might start seeing an acceleration for the same kind of reasons that you've been seeing the acceleration in A&D. 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. Jay Vleeschhouwer: Okay. As a follow-up, I'll ask the obligatory AIML question. Three weeks ago at the EDA conference, I ask the CTO a very interesting keynote on AI and depicted an unusually detailed road map for your AI product releases, over 15 products just this year alone, across nine different stacks. And it was an earlier question about AI. But what I want to see if you could tie this into is how do, you see AI affecting new use cases, which you have posited as an important growth driver for you over and above renewals, and as well for what you call integrated workflows or industry solutions, which you've also commented on as a growth driver for you? 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. Jay Vleeschhouwer: Great. Thank you, Ajei. Operator: Our next question comes from Andrew Obin with Bank of America. Please go ahead. Andrew Obin: Yes. Good morning. Nicole Anasenes: Good morning. Andrew Obin: Good morning Ajei and the call I can see. Ajei Gopal: Good morning. Andrew Obin: Yes, Just a question - you highlighted sort of strength in small and medium enterprises. And I just want to dig in into it from two angles. A) I think you sort of said that small and medium enterprises tend to lead just larger enterprises in terms of sort of economic sensitivity. So is there a message here on how the underlying demand for software is doing? And second, just maybe an update on ANSYS start-up program. What are you seeing there? Is that accelerating? 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. Ajei Gopal: I was just going to say there were a couple of companies that you may know that have graduated from the program that have done very well Relativity is an example Climb works is another example. So we've had a number of customers have taken advantage of this in their early stages have gone on to see tremendous success. 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. Nicole Anasenes: Yes. I mean what I would say is, just as a reminder, where we - where our business is placed is really in the R&D space, right? So the question you're answering about kind of decoupling and moving is a complex answer, because the - it's a complex question to answer, because it really relies upon an understanding of what is the nature of what actually happens in that decoupling. If it's lift and shift of manufacturing than it isn't as exposed to the R&D cycle as fundamentally changing the way R&D works or changing the innovation model or the way the process of R&D works which would be more amenable to where the role of simulation plays, because we… Andrew Obin: That exactly the part. That's my question. Yes. That's my question. So what are you? Nicole Anasenes: Yes. So that - I mean, so that's the - yes, so what I would say is that it is too early to tell, because the R&D is - the decoupling is really a mixed dynamic around shifting manufacturing and where customers are still in the early process of thinking about what that looks like and what it changes, right? So, I would say that there isn't anything definitive to point to at this moment, but that is the framework for how I would think about, where it would impact our business and where it wouldn't impact our business. Andrew Obin: Well, really appreciate the answer. Thanks a lot. Operator: Our next question comes from Tyler Radke with Citi. Please go ahead. 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. Ajei Gopal: So, there are a couple of areas that I think are important to consider. One is when you consider some of these high-performance chips that are being built, there's - there are - and you look at sort of advanced designs. One is being able to get certified for the most of being able to support the most advanced process node capability as we can, that's certainly very important. And the amount of simulation that's necessary given the cost of failure, if you will, of a failed tape-out, amount of simulation that's necessary is quite significant. And so for the sign off at these advanced process nodes, you clearly need a lot of simulation. And so that's obviously a tailwind for us, because the AI workloads are creating these very complex chip sets. The second thing is that as you start to think about a next-generation silicon design technology, you're starting to look at 3D ICs or stack chiplets. And then that really changes the kind of technologies that are necessary to support that are different from traditional -- from the more traditional SoC kind of designs that people have worked with. There are two sort of primary ways of thinking about those challenges. One is that you're dealing with multiscale challenges because now you're dealing as a semiconductor designer, you're now dealing with chip design, which is at the nanometer scale, you're dealing with things like package design at the millimeter scale and then PCP design at the centimeter scale. And the fact that you are dealing with these multiple different levels of scale introduces a lot of challenges and the physics challenges can change as you scale. So for example, thermal effects, which can smooth out the temperature on very small chip geometry scales, but large temperature differences can appear when you're dealing with sizable multi-die modules. And so, that's really one challenge of scale. The second challenge is of multiphysics and in that case, you're dealing not just, because you're dealing with this novel structure, you're not just dealing with the traditional challenges of SoCs, you're dealing also with the fact that you've got interconnections between the different chip labs. So for example, you worry about electromagnetic interference, for example. And so you need to do electromagnetic simulation to prevent that EMI to ensure signal integrity, you've got to be able to handle cooling and warpage reliable soda ball connection. So, there's photonics. So there's a number of different areas where you're bringing in different physics from what you may have traditionally used to build out and SoC or traditional ship. And so, that's another area where we really shine because our technology is about multiphysics. We can help our customers with 3D ICs, deal with these challenges of multiscale and multiphysics and I think that, that puts us in a really good place. So, we're very excited about what we can offer as customers are building some of these next-generation silicon and systems to address the needs of AIML. 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. Nicole Anasenes: Yes. So first, I'll start off by saying that the overall dynamics in the quarter that we saw from a geography mix standpoint, from a deal mix standpoint, are very much in line with what we expected when we initiated guidance. So, there's nothing that was surprising or that changed in the quarter that is different from the outcome. And when you look at Americas overall, Americas has led the company in creating value for customers, and we continue to expect it to be - it's our largest region. We continue to expect it to be a strong performer and revenue growth in the quarter was 12% in constant currency. We highlighted in the prepared remarks, some emblematic large deals that we had in the quarter. So, the quarterly dynamics around what we delivered in Americas was in line with the expectations we had. And then in the geographic mix overall, we're really pleased with the performance that we saw in Asia Pacific and EMEA as well, as we pointed out in our prepared remarks. And we had pretty diversified industry dynamics and growth in APAC as an example, aerospace and defense, automotive, industrial equipment performed really well. When you look at EMEA, we had similar kind of broad industry growth, automotive and ground transportation, A&D and industrial equipment were all strong. Materials and Chemicals were also particularly strong. So we saw a quarter in Q2 very much in the way in which we envisioned it would play out. And it actually ended up being a little bit better which allowed us to beat the midpoint of our guidance in the quarter. And the dynamics in the building pipeline that we've seen across the globe, across industries, geographies, customer segments is what gave us the confidence to raise the full year ACV by 0.5 point, which is in excess of the beat that we had in Q2. Tyler Radke: Okay. Thank you. Operator: Our next question comes from Andrew DeGasperi with Berenberg. Please go ahead. 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. Ajei Gopal: Yes. So let me just give you the quick rationale for Diakopto and then I'll turn it back over to Nicole and then maybe I can answer the question. So Diakopto was really IP that was complementary to our core business. It was developed by a relatively small but extremely high performance team of subject matter experts. They were very early in their commercialization process. And it was really about shifting left in the design cycle. So they were addressing some key challenges for analog and mixed signal circuit design. And that application is important for things like automotive, electronics and RF communications and things of that nature. So it's a very natural complement to our existing semiconductor products. as I said, it supports that shift left. Nicole, do you want? 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. Ajei Gopal: So with respect to the question that you asked about how our portfolio fits in, I think you asked on semiconductors. Look, we have historically had one of the areas of sort of golden sign off, if you will, with our ANSYS RedHawk portfolio dealing with things like power integrity and thermal effects and so forth. And that's been an area that we have continued to make investments in, and we are very, very excited about our product capabilities. Like I talked about some of the certifications we have received from the foundries and at the most advanced process nodes. And we're very excited about that. As you look more broadly though, going into the future, I talked at some length about 3D ICs and the use of the multiphysics portfolio. And that's really bringing in different technologies that were historically not being used by people who are designing traditional ICs, and you start to think about thermal effects and others. Depending on the placements of this, I mean, we talked about the automotive segment. If you're putting in chips into cars, you have to now recognize that these chips are not sitting in air-conditioned environments, they are sitting in a car, which could be extremely - could get extremely hot. It can get lots of vibrations. So there's a whole different set of analysis that needs to be done to be able to ensure the reliability of these solutions for these different use cases that are increasingly becoming common. And that leads to the traditional ANSYS portfolio. And so we believe in an open ecosystem, we believe in partnering and certainly, we're excited about our areas of our strength. And obviously, we're in a position to make sure that we work with other vendors to ultimately make sure that our customers are successful. Kelsey DeBriyn: Operator, we have time for one more question. Operator: Our last question will be from Steve Tusa with JPMorgan. Please go ahead. Steve Tusa: Hi. Good morning. Thanks for letting me in. Ajei Gopal: Good morning, Steve. 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. Nicole Anasenes: Yes, sure. So as I've noted in the past, we haven't had a quarter that has this much disconnection in a couple of quarters in quite a while. But sometimes you have a quarter where you can have a meaningful disconnect between the P&L and ACV. So again, if you look at the underlying ACV growth in the quarter and in the half, it is accelerating both from the first half and throughout Q3 and Q4. And so the overall dynamics around ECB, which is the basis of cash generation are very consistent. Now in the quarter, the mix of license types which generate upfront recognition within the Q3 outlook, is relatively lower in 2022 versus 2023. So that's what's creating the year-over-year headwind in the quarter and that's what's causing the disconnect between the P&L in the quarter from the strong and accelerating third quarter and second half ACV outlook. Now when you look that year-over-year revenue and the resulting P&L in the third quarter, as we said, it's not a reflection of momentum or any change in the business. And when you - if you consider the full year guidance and the Q3 guidance, and you can evaluate the implied Q4 revenue growth, you can see that, that outlook returns to strong double-digit growth. And so that's the reason why we've - our full year ACV guidance is really the best metric to observe momentum in our business. And that's where we've seen kind of the continued progress and momentum. The increased just under 1.5 points since February of our outlook in ACV with - when you add this additional half point that we gave. So that's the underlying dynamic that's driving the disconnect between the quarter and the - I'm sorry, the quarter and the full year. 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? Nicole Anasenes: Yes. So there's really nothing operational because the pipeline is the pipeline and the mix of kind of license types that renew are those that were new. So there's nothing really operational. But on occasion, you can get the comparison of a high mix of upfront of license types that have upfront recognition like perpetual licenses or multiyear leases compared to a different period where you have a relatively different mix, a higher mix of one-year leases as an example, right? So you can have a different mix in a comparative period, which drives anomalies in growth rates but it doesn't fundamentally change the overall dynamics in the business. In fact, if you look at the overall SKU of the business and the implied SKU of what we're delivering kind of implied in the guidance in the second half of the year, it is very consistent with what has been done in prior quarters. It's just that the revenue recognition rules can tend to have some really odd comparative dynamics when you have the comparative of license types mix in one period versus the comparison in another period. And so that's a dynamic that is sometimes challenging. It hasn't happened in a couple of quarters, but every once in a while, you have a quarter where you have just a very different dynamic on a quarter-to-quarter - year-over-year basis within a quarter. Steve Tusa: Yes, makes a ton of sense. Thanks. I really appreciate it. Kelsey DeBriyn: No problem. Thank you for joining us today. That's all the time we have. And I will turn it over to Ajei for closing remarks. 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: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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ANSYS Jumps 20% On Sales Rumors

Shares of ANSYS (NASDAQ:ANSS) experienced a significant rise of more than 20% intra-day today following a Bloomberg report suggesting that the company is exploring various options, including a potential sale, in response to takeover interest.

According to Bloomberg, sources close to the matter indicated that ANSYS, a provider of engineering software, is currently working with financial advisors. However, it's important to note that no definitive decision has been made, and the Pennsylvania-based company may still opt to maintain its independence.

Reacting to the news, Oppenheimer analysts, who maintain an Outperform rating on ANSYS with a $320 price target, commented on the situation. Given ANSYS's market capitalization, which exceeds $25 billion, the analysts anticipate a limited number of potential buyers. They noted that in the context of recent large-scale mergers and acquisitions in the software sector, traditional valuation ratios are taking a back seat to the more turbulent market conditions seen before and after the pandemic. Instead, they suggest that 2021 levels should be considered, which could mean a potential sale price of around $400 per share is feasible.

ANSYS Reports Better Than Expected Q1 Earnings

ANSYS (NASDAQ:ANSS) reported its Q1 earnings results, with EPS of $1.85 beating the Street estimate of $1.61. Revenue came in at $509.4 million, better than the Street estimate of $492.1 million.

Results were strong with double-digit ACV growth driven by broad-based strength, consistent execution and resiliency of the platform in a challenging macro backdrop.

For Q2/23, management anticipates EPS to be in the range of $1.35-$1.53, compared to the Street estimate of $1.87, and revenue of $473-498 million, compared to the Street estimate of $521.15 million.

For the full year, the company expects EPS in the range of $8.39-$8.91, compared to the Street’s $8.65, and revenue of $2.24-2.32 billion, compared to the Street’s $2.29 billion.

ANSYS Reports Better Than Expected Q1 Earnings

ANSYS (NASDAQ:ANSS) reported its Q1 earnings results, with EPS of $1.85 beating the Street estimate of $1.61. Revenue came in at $509.4 million, better than the Street estimate of $492.1 million.

Results were strong with double-digit ACV growth driven by broad-based strength, consistent execution and resiliency of the platform in a challenging macro backdrop.

For Q2/23, management anticipates EPS to be in the range of $1.35-$1.53, compared to the Street estimate of $1.87, and revenue of $473-498 million, compared to the Street estimate of $521.15 million.

For the full year, the company expects EPS in the range of $8.39-$8.91, compared to the Street’s $8.65, and revenue of $2.24-2.32 billion, compared to the Street’s $2.29 billion.

ANSYS Price Target Lowered to $282 From $420 at Berenberg Bank

Berenberg Bank analysts lowered their price target on ANSYS, Inc. (NASDAQ:ANSS) to $282 from $420 on the back of a slight estimate cut to reflect some slowdown in H2/22 and H1/23 and the impact of higher yields.

According to the analysts, the company is the leading simulation provider globally with both depth and breadth in its product offerings that they believe will help outgrow the market over the next few years. Design software is cyclical but diverse geographic/vertical exposure, the company’s shift to multi-year contracts, growing share of recurring revenue, customer R&D that is resilient to macro headwinds, and a return to free cash flow growth underpin the analyst’s Buy rating on the company.

The company has a 25% share and is growing above market growth rates of 8-10%, which the analysts expect will continue long term.

ANSYS to Acquire OnScale

ANSYS, Inc.(NASDAQ:ANSS) shares closed more than 4% lower yesterday following the company’s announcement, according which it had entered into a definitive agreement to acquire OnScale, a cloud simulation platform founded in 2017 that offers a broad spectrum of cloud-based solvers from mechanical, thermal, to parametric sweeps.

According to the analysts at Berenberg Bank, OnScale is a key acquisition that should directly benefit from the industry’s trend to lower the barriers of simulation adoption. The cloud-based simulation will make simulation much more accessible to designers and smaller companies, removing the barriers to hefty license and IT commitments.

The analysts believe that cloud simulation platforms can be a positive gateway for designers to start exploring simulation.