ANSYS, Inc. (ANSS) on Q2 2022 Results - Earnings Call Transcript
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. After today's presentation, there will be an opportunity to ask questions. 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. Kelsey DeBriyn: Good morning, everyone. Our earnings release, the related prepared remarks document and the link to our second quarter 2022 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 updated fiscal year 2022 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 obligation 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, 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 , 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 WAGO'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 NTE 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? Nicole Anasenes: Thank you, Ajei. Good morning, everyone. Let me take a few minutes to add some additional perspective on our second quarter financial performance and provide context for our outlook and assumptions for Q3 and full year 2022. The second quarter demonstrated the strength of our business as we delivered robust growth during the quarter and beat our financial guidance across all key metrics. ACV was strong and better than our guidance. Revenue, operating margin and EPS exceeded the high end of our Q2 guidance, driven by ACV outperformance and the mix of license types sold in the quarter. Now let me discuss some of our Q2 financial highlights. Q2 ACV was $460.3 million and grew year-over-year 7% or 13% in constant currency. We saw strong performance across all geographic regions and industries. ACV from recurring sources grew 14% in constant currency year-over-year on a trailing 12-month basis. This momentum in recurring ACV growth is driven by the strong annuity created by our ongoing shift towards subscription lease licenses. ACV from recurring sources represented 81% of the total in the second quarter. Q2 total revenue was $475.9 million and grew 5% or 12% in constant currency, which, as I mentioned, exceeded the high end of our guidance, driven by outperforming our expected ACV. Asia Pacific and EMEA drove strong Q2 revenue growth. We had robust top line performance in Q2, with ACV and revenue both growing double digit in constant currency at 13% and 12%, respectively. In both Q2 and the first half, we executed against our business model of double-digit growth, including tuck-in M&A. We closed the quarter with a total balance of GAAP deferred revenue and backlog of almost $1.2 billion, which grew 27% 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 40.7%, which was better than our guidance. Operating margin was positively impacted by outperforming on revenue as well as the timing of investments that have moved into the second half of the year. The result was second quarter EPS of $1.77, which was also better than our guidance. Similar to operating margin, EPS benefited from strong revenue results and the timing of investments. Our effective tax rate in the second quarter was 18%, the tax rate we expect for the remainder of 2022. Our cash flow from operations in the second quarter totaled $118.9 million, which benefited from continued strong collections. We ended the quarter with $517.6 million of cash and short-term investments on the balance sheet. Now let me turn to the topic of guidance. The underlying momentum in our business and demand for our best-in-class portfolio continues to be strong. We are operationally increasing our outlook on ACV revenue, EPS and operating cash flow for the full year. We delivered a robust Q2, and our strong 2022 forecast reflects our continued breadth and depth of customer demand. However, offsetting our first half performance and strong full year outlook is continued and significant U.S. dollar strengthening, which impacts the exchange rates embedded in our guidance. Let me start with our full year 2022 guidance. We are raising the midpoint of our ACV guidance by 1.6 points of constant currency growth compared to our May guidance. We expect our full year ACV outlook to be in the range of $1.98 billion to $2.020 billion. This represents growth of 5.8% to 8%, or 11.3% to 13.5% in constant currency and a midpoint of $2 billion, which puts us on track to achieve the 2019 Investor Day target. For additional context, the $2 billion midpoint of our ACV guidance when translated at 2019 foreign exchange rates would equal approximately $2.07 billion and would exceed our 2019 Investor Day ACV target. Our full year ACV raise is driven by the strong performance we saw in Q2 and improved forecast and momentum we see in the business, especially for Q3. That underlying improvement drove a full year ACV operational increase of $29 million relative to our May guidance. This operational momentum was offset by $19 million of foreign exchange headwind. Turning to revenue. We expect revenue to be in the range of $2.05 billion to $2.055 billion, which is growth of 3.8% to 6.4% or 9.2% to 11.8% in constant currency. We are raising the midpoint of our revenue guidance by one point of constant currency growth compared to our May guidance. This raise is driven by the strong revenue performance we saw in Q2 and improved forecast we see for the rest of the year. That underlying improvement drove a full year revenue operational increase of $18 million relative to our May guidance. This operational momentum was offset by $23 million of foreign exchange headwind. As a result, we expect our full year EPS to be in the range of $7.50 to $7.88. Relative to our May guidance, our full year EPS increased $0.07 from better operational performance, which was offset by $0.12 of foreign exchange headwind. As a reminder, some of our strong Q2 EPS performance was driven by the timing of investments that moved from Q2 to the second half of the year. We continue to expect our full year operating margin to be in the range of 41% to 42%. Given the rapidly changing interest rate environment, we thought it would be helpful to provide full year interest expense for your modeling purposes. As a reminder, our term loan structure has floating interest rates and rising interest rates will continue to impact interest expense. Our current outlook projects our full year 2022 interest expense to be $22 million, up almost $10 million from last year. Now let me turn to our full year operating cash flow guidance. Our 2022 outlook is a range of $570 million to $610 million. Relative to our May guidance, our full year operating cash flow increased $6 million from better operational performance, which was offset by $6 million of foreign exchange headwind. Also note on a year-over-year basis operating cash flow continues to face nonoperational headwinds, including the timing impact of R&E capitalization regulations and higher interest expense, given rising interest rates. Since January 2022, we have seen significant U.S. dollar strengthening relative to the euro and Japanese yen. The trajectory of the movement of these currencies has been outsized relative to typical currency fluctuation impacts. When compared to the 2021 currency rates, our 2022 guidance is negatively impacted on ACV by approximately $100 million and an operating cash flow by approximately $35 million. Notwithstanding the negative impact of exchange rates, our underlying business is operationally strong and has considerable momentum. Now let me turn to guidance for Q3. For the third quarter, we expect ACV in the range of $392 million to $412 million and revenue in the range of $455 million to $475 million. Our outlook implies double-digit ACV constant currency growth for Q3 and the full year 2022, in line with our business model of double-digit growth, including tuck-in M&A. We expect Q3 operating margin in the range of 37.8% to 39.4% and EPS in the range of $1.56 to $1.70. Further details around specific currency rates, interest expense and other assumptions that have been factored into our outlook for 2022 and Q3 are contained in the prepared remarks document. We have a strong forecast, diversified business model and high level of recurring ACV, all of which contribute to our confidence in our outlook and the underlying momentum of our business. This is reflected in the increased outlook for constant currency ACV and revenue growth and the operational improvements in our cash flow outlook. To the entire ANSYS team, thank you for your outstanding execution in the quarter, which drove our robust Q2 financial performance and continued momentum going into the second half of the year. We once again delivered a strong quarter, which coupled with our recurring business model and growing sales forecast, demonstrated the strength of the ANSYS business. We are well positioned to deliver on our 2022 outlook as well as our long-term strategy. I am more confident than ever in our future. Operator, we will now open the phone line to take questions. Operator: Thank you. We will now begin the question-and-answer session. Our first question comes from Ken Wong with Oppenheimer. Please go ahead. Ken Wong: Great. Thank you for taking my questions. I guess what I wanted to just kind of check into is just the commentary that you guys both provided very strong, very robust. As far as macro goes, just wondering what type of macro environment are you predicting for the second half as we think about this -- the elevated guide? 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. Ajei Gopal: Just to amplify the point that Nicole was making, I mean, many of our customers they're certainly aware of these broader geopolitical concerns and pressures that we all see, but they continue to face competitive pressures. And they've got multiyear product road maps that they've been driving. And frankly, that's where simulation comes in. Simulation helps them to deal with some of the competitive pressures that they're dealing with. It allows them to innovate more rapidly. And at the same time, it allows them to save money and time because we can reduce reliance on physical testing, we can reduce warranty costs and so forth. And so the value proposition for simulation, which is it helps our customers both drive top line growth as well as achieve bottom line savings, that value proposition is really a compelling value proposition, and that's, I think, what we're seeing in the market. 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? Ajei Gopal: No. I think -- as I said in the comments, our performance was pretty consistent across the verticals as we expected to see. Certainly, the bigger verticals are high-tech and semiconductor, aerospace and defense, automotive and ground transportation, but we saw strength in other areas as well. So nothing specifically to note in terms of explicit areas of consideration or concern. Operator: Our next question comes from Joe Vruwink with Baird. Please go ahead. Joe Vruwink: Great. Hi, everyone. I guess a question on seasonality in the business. I think in the past, you've talked about maybe ANSYS increasingly having a skew of -- into 4Q, just given ACV generation with bigger enterprise customers signing multiyear agreements. Just given where the guidance stands currently, it looks like a really strong 3Q and then proportionately less coming from 4Q relative to a year ago. Is that in any way reflecting SMB versus enterprise activity? Or is it maybe just leaving you some wiggle room or cushion to get 3Q under your belt and then have more visibility on 4Q? 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 SKU 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. Ajei Gopal: And operationally, when you think about it, I mean the sales team manages relationships with the customers. And obviously, as Nicole said, there's a lot of timing around that in terms of when projects are kicked off in activity. So that drives the timing of some of the larger deals as well. 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? Nicole Anasenes: Yes. No. I mean what -- the kind of -- the SMB customer base is reflected in kind of our geography and momentum. Momentum accounts primarily continue to be consistent in what they deliver. They're consistent with what we expected coming into the year. The second half pipeline is consistent with what we would have expected to see. And when you look again at the mix of Q3 versus Q4 ACV, I mean they're pretty close in terms of percentages. So in terms of the percentage of ACV that occurred last year versus this year, the growth rates again might be a little bit skewed. Joe Vruwink: Thank you. Operator: Our next question comes from Jay Vleeschhouwer with Griffin Securities. Please go ahead. 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 LST and , then I have a follow-up. Ajei Gopal: So Jay, as you know, I mean, we've been on this journey towards multiphysics sales quite for some time now, and we continue to execute along that direction as you pointed out. And certainly, our pipeline, especially as you consider the larger enterprise customers, our pipeline very much includes solutions that comprise of products from multiple parts of our portfolio. And so the multiphysics message is strong. It addresses what customers are looking for. We have been a pioneer in that space, and we continue to see benefit from that, and we certainly see traction from customers as we continue to support them. So absolutely, as we look ahead, we have multiphysics activity and multiple product sales into our customer base, certainly at the larger end, but it's also increasingly -- as you start to look down the pyramid, we see multiphysics capabilities penetrating into the customer base. So I think that's very important. You mentioned a couple of product lines. Obviously, we don't give quantitative breakouts by products, but I can give you some qualitative color. You asked about Minerva. I gave you, I think in the script, I mentioned some of the workflows that we've put in place in the health care area. Minerva continues to be an important aspect managing simulation data given the amount of simulation information that's being created by our customers, managing that simulation data effectively is important, and that's -- Minerva plays a role in that. Materials, I've also mentioned -- and I think I mentioned in a couple of places, certainly in the past couple of calls, materials is also important, and we certainly recognize customers as they start to go through design optimization opportunities the choice of materials is really important. Materials plays another interesting role in sustainability as well because when you consider the long-term compliance with regulations about materials that could be used, understanding the materials within our product design, something which could potentially take a number of years from design into actual implementation, really understanding what's in the product that's being built to make sure that you're compliant with the most recent regulations, that's also important. And so that's another area where materials comes in. Model basis and engineering, we continue to make progress in that area. It's really across the board where we have been able to have -- build on the strength of our ANSYS, traditional ANSYS products. We've supplemented that with acquisitions as and when appropriate, as it makes sense given our strategy. And we've continued to build the portfolio out to something that I'm very excited about and I know our customers are very excited about. 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? Nicole Anasenes: Thanks, Jay. Yes. So as you pointed out, we have our investor update scheduled for next week. We're really looking forward to sharing that long-term guidance with you next week. But what I -- so I can't comment about the future. But certainly, it's not too long before we can comment on the future. So stay tuned. But yes, I mean what we have stated and what we continue to be confident in is a business model of double-digit growth, including tuck-in M&A. I think if you look at the course of this year, we have consistently delivered it in the second quarter in the half -- in our outlook for the second half of the year. We're squarely on that model, and we're really confident given the strength of demand from our customers, the success of our business model transition and our sales model transition, and just the portfolio that we have that is broader and deeper than anything else available in the market. So yes, we're looking forward to talking in more detail about those things next week. Jay Vleeschhouwer: See u then. Thank you very much. Operator: Our next question comes from Blair Abernethy with Rosenblatt Securities. Please go ahead. 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 WG 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? Ajei Gopal: Well, I think it's a reflection of the fact that we have a broad platform and capability that allows us to be able to address the needs of our customers. And it's really the breadth and the depth of the portfolio that gives us the credibility to have those conversations with customers. And frankly, we believe we are differentiated in the marketplace because of the breadth and the depth of our portfolio. So if you talk to customers, they'll tell you they value the accuracy of what we do, they'll tell you they value the completeness of our solutions and our offerings. They'll tell you how we continue to innovate and invest in our portfolio. And they know that when they are making an investment in ANSYS, they're not just buying the product that we have today, they know that we're continuing to make investments, and we will continue to enhance the portfolio, and we'll make things better. And we'll deal with the challenges that they're likely to face in the future as well. So I think that gives us a tailwind when we go into some of these broader conversations. It is a difficult market to do wholesale replacements for one code base to another. If a customer is using a particular simulation for a number of years, they may continue to use that same simulation code for some period of time. So it does take some planning to do whole-scale replacements. But we're seeing more of that, and we're seeing competitive wins where we're replacing customers within customers, where we are replacing competitors who have been present for some number of years, and the customers made the decision to come to ANSYS, which we feel is a better choice. And obviously, the customer has also felt it's a better choice. So we're seeing that take place as well. So the dynamic is -- is, I think, driven by the strength of the product portfolio and the investments that we're making. Blair Abernethy: Great. Thank you. Operator: Our next question comes from Tyler Radke with Citi. Please go ahead. 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. Nicole Anasenes: Yes. So why don't I start. And then, Ajei, why don't you add any context to that? So thanks, Tyler, for your question. Yes, I mean I think what I would say is that the consistency of the performance throughout the year in the first half and the outlook for the second half is again on our model of double-digit growth, including tuck-in M&A. And we've been able to pretty consistently deliver that. I mean if you go back over the past couple of years and you look at heading into the end of 2022, our guide of $2 billion of ACV at the midpoint is consistent with guidance we gave in 2019 before there was a global pandemic, before there were significant shifts in the trade environment, and the underlying macro environment that we have today, which has had a significant impact on foreign exchange rates. And so I think that if you look back at the investments that we've made in the business to transition to a highly recurring subscription lease model, transition our go-to-market to build deeper customer relationships and build alongside their long-term road maps. And then the organic and the inorganic investments in our portfolio have all been really important factors in setting us up to be able to consistently deliver that model. And so we're really pleased with the performance of the business this year and the outlook that we're able to give for the rest of the year, and look forward to updating you guys a little bit more on what's to come. I don't know, Ajei, if there's anything you'd like to add to that? 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. Tyler Radke: Thank you. And as my follow-up, I just wanted to clarify the performance. It looked like EMEA and APAC, in particular, were really strong, growing 30% or better. U.S. was actually down year-over-year. Could you just talk about what drove that large variance in geographic performance? And just anything to call out how we're thinking about international growth assumptions for the full year versus the U.S. Thank you. 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. Tyler Radke: Thanks for the detail. Look forward to the Analyst Day. Operator: Our next question comes from Andrew Obin with Bank of America. Please go ahead. David Ridley-Lane: Good morning. This is David Ridley-Lane on for Andrew. We have the opportunity to attend a demo of the ANSYS Twin Builder a few months back. Just curious, how is that product growing relative to your internal plans? And what is the kind of feedback you're getting from the market? 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. David Ridley-Lane: Sounds good. And just maybe a quick one for Nicole. On the recent tuck-in acquisitions, did they have much benefit to ACV or revenue in 2022? 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 answer the question. David Ridley-Lane: Thank you. Operator: Our next question comes from Saket Kalia with Barclays. Please go ahead. Saket Kalia: Okay, great. Hi, good morning, guys. Thanks for fitting me in here. Ajei, maybe for you. I mean, since we're talking about M&A, I was wondering if you can just talk about the forward opportunity for tuck-in M&A. How do you feel about just the number of opportunities out there. And of course, as valuations hopefully adjust and with ANSYS' strong balance sheet, can you just talk about that part of the strategy and kind of how that plays into the total growth algorithm? 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. Saket Kalia: Got it, got it. That makes a lot of sense. Nicole, maybe for my follow-up for you. Just to the earlier points on the multiyear license model, which we've seen, obviously, a very successful transition over many years. Now that we've had sort of several years of this model with good data on renewals, I'm wondering if you've looked at sort of a net revenue retention or net retention sort of rate on those renewals? And if you can talk to that, even qualitatively. 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. Saket Kalia: Got it. Very helpful, thanks. Kelsey DeBriyn: Operator, we have time for one more question. Operator: Thank you. Our next question comes from Adam Borg with Stifel. Please go ahead. 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. Ajei Gopal: So yes, I think you'll hear more about this next week. But very quickly -- in a previous call, I talked about how the engineering simulation software, a market that we participated in, is quite different from traditional enterprise applications. And we talked about the importance of high-performance computing to our users. And obviously, remember that a single engineer could run an ANSYS simulation that runs across hundreds of compute nodes for multiple hours. And so what we have got as part of our cloud strategy is a very -- I think, a very thoughtful approach that addresses the needs of our customers. And it's to really enable our customers, both existing and new, to be able to benefit from the insights of physics-based simulation and optimization, as well as to be able to scale out -- or to support the scale-out capabilities in the cloud. We've got two distinct classes of offerings, Cloud Marketplace and Cloud Native. We've talked at length, I think, in past calls, about some of the Cloud Marketplace offerings in -- I think, in the previous quarter and the one before that. So I'll skip that in the interest of time. But with respect to Cloud Native, that's when we're targeting new users and new use cases. And we're creating a cloud-based platform for the development and the deployment of new workflows. And our recent acquisition, as you said, of OnScale, which is the leader in cloud-based simulation, that's accelerating our ability to be able to do that. And they bring -- they brought a host of critical capabilities that will allow us to develop a new set of services. And frankly, the integration of what OnScale is doing in ANSYS is a powerful combination. So one example is OnScale's cloud-native user interface connected to our industry-leading simulation solvers in the back end. So we're excited about cloud. It's -- we have, I think, a very thoughtful and robust strategy. It's still early days. We do offer customers a variety of capabilities as they need it, when they need it. We believe that our capabilities are flexible and scalable. And frankly, we believe that we will be able to unlock a level of innovation across every industry around the world. Kelsey DeBriyn: Thank you. And that's all the time we have today. I will turn it over to Ajei for his closing remarks. Ajei Gopal: I am more excited than ever by our excellent execution in the first half of the year, our expanding product leadership and our robust pipeline, and I remain confident in our ability to achieve our ambitious goals. I want to thank all my colleagues at ANSYS for their commitment, their focus and their many successes. And with that, I want to thank you for attending today's call, and I look forward to giving you more details on our long-term business and financial goals at next week's investor update, thank you. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.ANSS Ratings Summary
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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.
