ANSYS, Inc. (ANSS) on Q3 2022 Results - Earnings Call Transcript
Operator: Ladies and gentlemen, thank you for standing by. And welcome to the ANSYS Third Quarter 2022 Earnings Conference Call. With us today are Ajei Gopal, President and Chief Executive Officer; Nicole Anasenes, Chief Financial Officer; and Kelsey DeBriyn, Vice President, Investor Relations. All participants will be in a listen-only mode. Please note today's event is being recorded. At this time, I would like to turn the conference over to Ms. DeBriyn for opening remarks. Please go ahead. Kelsey DeBriyn: Good morning, everyone. Our earnings release, the related prepared remarks document and the link to our third 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 third quarter financial results and business update, as well as our Q4 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. Q3 was yet another excellent quarter for ANSYS, where we once again beat across our key metrics, including ACV, revenue, operating margins and earnings per share. This gives us further confidence in the business and has enabled us to operationally raise our full year guidance for ACV, revenue, EPS and operating cash flow. Nicole will have the details in a few minutes. As we have previously discussed the strength and the resilience of the ANSYS business come in part because of the number and the diversity of customers we serve, ANSYS has 10s of 1000s of customers across multiple industries, including high tech and semiconductor, aerospace and defense and automotive and ground transportation. Those three sectors were again our largest contributors in Q3. Our largest contract for the quarter was in the high tech and semiconductor space, a $59 million three-year agreement with an international electronics company. This global brand has been challenged by the increasing complexity of its products, as semiconductor chips continue to get smaller, which has led to issues such as voltage drop. By continually enhancing our solution to semiconductor and other areas of physics, we will not only be able to stave off any competitive challenges in this long-term account, but we increase the number of ANSYS products the customer uses, the number of end users as well as the amount of computations performed. This new contract broadens our existing footprint, which included products from across our multi physics portfolio, such as structures, fluids, electromagnetics, and materials. This is a perfect example of a discussion at a recent investor update that ANSYS is growing across three vectors, more products, more users, and more computations. ANSYS is also well balanced across geographies, with a little less than 50% of our business coming from the Americas and the remainder roughly split between EMEA and Asia Pacific. This diversity in our customer base means that we can harness growth from a wide variety of sources. It also means that we are resilient to the business or economic dynamics of any specific customer or industry or country. In Q3, I'm excited to report that from a geographic perspective, we saw a very strong revenue growth from both Asia Pacific and EMEA while the Americas came in as expected. Adding to the strength of our business is a broad and deep product portfolio, which includes flagship product in structures, fluids, electromagnetics, semiconductors, optics and mission. As such, we are not over reliant on any individual product line, which further contributes to ANSYSâ resilience. Additionally, our proven portfolio enables us to attract new customers, as well as to displace competitor technology. For example, our startup program is continuing to grow as these nascent companies take advantage of ANSYS solutions. The program has had over 1,600 customers across 53 countries. While members of our startup program represent a small piece of our overall business, they are aggressive users of our products. And with the program's high graduation rates, more and more of these customers become active contributors to the ANSYS business. While it can be difficult to replace an incumbent in our space, we have also grown our customer base by displacing competitors. For example, in Q3, we won a contract with an industrial tool manufacturer, that was a key account at one of our competitors. That customer is now using ANSYSâ structural, fluids and electronic solutions for the development of its power tools. On these calls, I often highlight a specific aspect of our business. Over the past several calls, I have discussed the unparalleled scalability of our best-in-class fluid products. I highlighted the critical role that ANSYS solutions play in sustainability. I discuss how customers are using our solutions in the development of next generation semiconductors. And I reviewed our leading suite of optical simulation products. But this call, I would like to reiterate some of the key takeaways from a recent investor update. During the update in August, we discussed how typical enterprise software companies have only two vectors of growth, more products, and more users. ANSYS however, has a third, more computations, let me briefly discuss each of them. Traditionally, simulation involves a single user leveraging a single ANSYS product for each individual simulation. Today, as we partner with our customers to solve more complex R&D challenges, there is an increased demand for multiple physics, including structures and fluids, electronics, photonics and others to work together by transcending individual physics to connect workflows that solve complex multi physics problems. Our customers can simulate and analyze the physical world at a system and admission level. Addressing these complex new use cases inherently requires the use of multiple physics solvers, leading to an increased number of multi product sales. In Q3, we signed a seven-figure contract with a longtime Space 2.0 company that has standardized on ANSYS as multi physics solutions across all of its engineering departments to develop safer and more reliable launch vehicles. With this new agreement, the company is now expanding its ANSYS footprint to include our material intelligence solution as its central materials database. We have also invested in the overall user experience, which is driving more end users of ANSYS solutions. Remember that in the past, only expert engineering analysts could take advantage of simulation. Today, ANSYS simulation is being used by all levels of engineers, thanks to our automated workflows and integrations with other systems that make answer solutions more intuitive and easier to use. That means that different types of engineers can fully take advantage of the benefits of ANSYS simulation, and it is driving the expansion of simulation usage to more users upstream and downstream of the validation process. In Q3, ANSYS calls the largest healthcare contract in our history, a seven-figure agreement that will dramatically expand the number of users at an American eyecare company. realizing the benefits of simulation, this existing customer has launched a digital twin and digital engineering initiative that will triple the number of users of engineering simulation technology in the next 18 to 24 months. The third vector of our growth is through more computations. ANSYS is able to monetize customers workloads, as they run the larger, more complex calculations needed to solve next generation product challenges. A single ANSYS user can leverage multiple products and can run hundreds of simulations across 1000s of cores in parallel, which is critical functionality, as even the most common products become more complex. We provide our customers with open, scalable offerings, supported by the major cloud platforms to enhance and extend our industry leading simulation portfolio. This flexibility enables our customers to maximize the value they realize from simulation, while scaling up to address the increasing complexity of next generation product development. We recently announced the launch of our ANSYS Gateway powered by Amazon Web Services. With this addition to our comprehensive cloud offering, customers can easily access, subscribe and configure ANSYS applications from a single location. ANSYS Gateway powered by AWS allows broader access to high performance computing by bringing down the traditional hardware barriers that have limited innovation for many of our customers. Our focus on expanding the portfolio of physics on creating a platform to enable and manage complex multi physics solutions. And an expanding simulation use cases unlocks greater customer value, which enables all three vectors of growth for ANSYS. The application of ANSYS simulation technologies can be manifested in varied and distinct ways. For example, last time, I discussed the multiple roles ANSYS solutions played in the testing, launch and deployment of the James Webb Space Telescope. Keeping with the applications of ANSYS and space, I'd like to briefly highlight the role that we played in NASA's recent dark mission. As you may recall, in September, NASA smashed an unmanned spacecraft into an asteroid in an attempt to alter its orbit. The Johns Hopkins Applied Physics Lab extensively used ANSYS SCK through a mission planning process from formulating darts trajectory through the asteroid system, as well as to visualize relevant vectors and attitudes. The thermal team use SCKâs for mission environment when checking the location of the sun, relative to the satellite during critical maneuvers. NASA has announced that the dark mission exceeded its highest expectations by shortening the asteroids orbit by 32 minutes. This marks the first-time humanity has changed the orbit of a celestial object. And I would like to congratulate the team at Johns Hopkins and NASA for this success in this inspirational and potentially lifesaving mission. This example demonstrates the range of use cases, as well as the impact of ANSYS solutions. Next, I'd like to highlight 1000s of ANSYS employees around the world. They are of course, what makes ANSYS so special. So I'm very proud that Newsweek Magazine has ranked ANSYS as 13th amongst the most loved workplaces at US companies. The ranking considers employee survey responses, external ratings, and interviews with company leaders. This recognition is just one more testament to ANSYSâ unique culture and the impact we have on the world. In closing, Q3 was another excellent quarter for ANSYS, one that provides momentum as we close out the year, and look ahead to 2023. With our product leadership, proven performance and resilient business model, I'm more confident than ever in the future of ANSYS and the innovations, we're helping our customers to drive. And with that, I'll turn the call over to Nicole. Nicole? Nicole Anasenes: Thank you, Ajei. Good morning, everyone. Let me take a few minutes to add some additional perspective on our third quarter financial performance and provide context for our outlook and assumptions for Q4 and full year 2022. The third quarter demonstrated the strength and resiliency 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 also exceeded our Q3 guidance driven by ACV outperformance. Both our large enterprise customers and SMB customers performed well during the quarter. Now let me discuss some of our Q3 financial highlights. Q3 ACV was $409.3 million and grew year-over-year 12% or 20% in constant currency. We saw broad base constant currency growth across customer types, geographies and industries. ACV from recurring sources grew 16% 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 79% of the total in the third quarter. Q3 total Revenue was $473.7 million and grew 6% or 15% in constant currency, which as I mentioned, exceeded our guidance driven by outperforming our expected ACV. Asia Pacific and EMEA drove strong Q3 revenue growth. We had robust top line performance in Q3 with ACV and revenue both growing double digit in constant currency at 20% and 15%, respectively. In both Q3 and year-to-date, we executed against our business model of double-digit growth, including tuck-in M&A. We close the quarter with a total balance of GAAP deferred revenue and backlog of over $1.1 billion, which grew 23% year-over-year. During the quarter, we continued to deliver a business model with strong operating leverage. This yielded a solid third quarter gross margin of 91.1% and an operating margin of 41%, 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 fourth quarter of the year. The result with third 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 third quarter was 18%. The tax rate we expect for the remainder of 2022. Our operating cash flows in the third quarter totaled $127.2 million. Our unlevered operating cash flows were $132 million. We ended the quarter with $632.7 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 Q3 and our strong 2022 forecast reflects our continued breadth and depth of customer demand. Offsetting our year-to-date performance and strong full year outlook is persistent and significant US dollar strengthening, which impacts the exchange rates embedded in our guidance. Let me start with our full year 2022 guidance. We expect full year ACV outlook to be in the range of $1,975 million to $2 billion, which represents growth of 5.6% to 6.9% or 12% to 13.4% in constant currency. We are raising the midpoint of our full year constant currency ACV growth compared to our August guidance. For additional context, the midpoint of our ACV guidance when translated at 2019 foreign exchange rates would be equal to approximately $2,080 million and would exceed our 2019 investor day ACV targets. Our full year constant currency ACV growth raise is driven by the strong performance and our resilient business model. That performance drove a full year ACV operational increase of $8 million relative to our August guidance. This momentum was offset by $20 million of additional foreign exchange headwind. Our strong performance has been consistent throughout 2022. Since we issued full year ACV guidance in February, we have raised the midpoint of our constant currency growth rate guidance by almost three points from around 10% in February to almost 13%, constant currency growth with our current guidance. The strong organic growth in our business has been driving our improving outlook. Turning to revenue, we expect revenue to be in the range of $2 billion to $2,035 million which is growth of 3.55 to 5.4%, or 10.1% to 11.9% in constant currency. We are raising the midpoint of our constant currency revenue growth compared to our August guidance, which reflects a full year revenue operational increase of $12 million. This momentum was offset by $24 million of additional foreign exchange headwind. Similar to ACV, for revenue, we have raised the midpoint of our full year 2022 constant currency growth rate guidance by almost two points from around 9% in February to 11% with our current guidance. Turning to EPS, we expect our full year EPS to be in the range of $7.48 to $7.80. Relative to our August guidance, our full year EPS increased $0.12 from better operational performance, which was offset by $0.17 of incremental foreign exchange headwind. As a reminder, some of our strong Q3 EPS performance was driven by the timing of investments that moved from the third quarter to the fourth quarter. We continue to expect our full year operating margins to be in the range of 41% to 42%. Now let me turn to our full year operating cash flow guidance. Our 2022 outlook is a range of $570 million to $600 million. Relative to our August guidance, our full year operating cash flow increased $2 million from better operational performance, which was offset by $7 million of incremental 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&D capitalization regulations, and higher interest expense given rising interest rates. Since January 2022, we have seen significant US dollar strengthening relative to all global currencies that contribute to our results. Our largest exposures are to the euro and Japanese yen. When compared to the 2021 currency rates, our 2022 guidance is negatively impacted on ACV by approximately $120 million, and operating cash flow by approximately 40 million. Now, let me turn to guidance for Q4. For the fourth quarter, we expect ACV in the range of $761.3 million to $786.3 million, and revenue in the range of $621.8 million to $656.8 million. We expect Q4 operating margin in the range of 45.6% to 48.5%, and EPS in the range of $2.58 to $2.90. Further details around specific currency rates and other assumptions that have been factored into our outlook for 2022 and Q4 are contained in the prepared remarks document. Our core simulation market is strong and diversified with consistent demand from our customers as they encounter increasingly complex product development challenges. This strong core market, coupled with our market leading portfolio, deep customer relationships, and highly recurring financial model with three vectors of growth, makes ANSYSâ business highly resilient. All of this is driving the underlying momentum in our business and gives us confidence in the increased outlook for full year constant currency ACV and revenue growth. I would like to thank the ANSYS team for their outstanding execution during the quarter, which drove a robust Q3 financial performance and momentum going into our last quarter of the year. We once again delivered an exceptional quarter which demonstrated the ongoing strength of the ANSYS business. I am confident in our ability to continue to execute against our outlook. Operator, we will now open the phone line to take questions. Operator: And our first question today will come from Gal Munda with Wolfe Research. Gal Munda: Hi, good morning. Thank you for taking my questions. The first one is just, Ajei, you mentioned how the different vectors of growth are working for you. And I wanted to kind of double down a little bit on the computational power that your customers use. And just relate that to the business model you have today. Can you just give us a little bit more color on how you're able to capture that as people? Is that relationship from one engineer using one license at a particular problem? When they start solving more complex problems? How do you capture the value from economic perspective as well? Thank you. Ajei Gopal: Gal, good morning. That's a great question. So the way you should think about how we monetize that is, it's really through product licensing. So when we license our technology to customers, we give them access to the use of us, take a multi-year lease as an example, we give them access to use our technology for a duration of time. And we also give them access to high performance computing capability. And that HPC translates into license software for us, license revenue for us or license ACV. And of course, access to the solvers themselves also show up as licenses. So in the aggregate, both the ability to use the technology on more processing translates into license for us. And the ability to use more of our software in that context translates into more license. So that's how we monetize it. And that's how it shows up in our financials. Gal Munda: That is really helpful. Thank you. Interesting. And then I like kind of the point that Nicole made, which is if you look at the constant currency exchange rates from 2019, you as a team managed to beat the guidance -- well manage to be the guidance by about 4%, 5%. If you look back and kind of, think about when you gave us that guidance, I think it was in September â19. And what happened during that time we had, we had COVID, and everything, what has allowed you, which parts have potentially played out better then when you still look the time to allow you too, even though anything that was going on, from a macro perspective, you're able to kind of achieve those targets, what surprised you maybe on the positive or maybe even on the -- what ended up being maybe a little bit slower than you thought. Thank you. Ajei Gopal: Why donât I jump in Gal, because I have some context. And then maybe I'll ask Nicole to add a little bit more. So if you look back at 2019, and you consider the evolution of our business, and we describe some of this in the investor update presentation that we did earlier this year, we've been in the process of a transformation in our business model, where we've been taking advantage of these three vectors of growth that you alluded to earlier. And we've been using that to really transform our business model in the way that we support our customers. So we've increased the amount of lease that we do with our customers. And that translates into obviously stickier relationships with our customers as we go forward. So look, at the end of the day, it comes down to the products that we have, and the capabilities that we provide and our ability to address some of our customersâ most challenging market needs. And we have an amazing portfolio, we've continued to build in that portfolio, we've continued to expand that capability that makes it even more relevant for our customers today as compared with years ago. And the nature of the business model, the nature of the ability to monetize that relationship, all of that translate into our ability to be very resilient, no matter what happens out there in the market. So we have a very resilient business model that I'm excited about. We've talked about how we are and I mentioned this in my script, we talked about how our technology is very broad across multiple physics, we're not overly reliant on a single product line, we talked about how we're, we have presence in multiple industry verticals. And we mentioned, I mentioned high tech, I mentioned automotive, I mentioned aerospace as examples. And of course, we have presence in others. And we talked about our geographical distribution as well. So that gives us the ability to be resilient when a particular industry changes or when there are particular challenges in an individual market. Now, in the face of a global pandemic, of course, as you saw going through this, that's an overarching global phenomenon. And there, it just goes back to the core value proposition of our products, which is we help our customers build better products, bring them to market faster, at lower cost, we help them reduce warranty costs, we help them be more efficient. And so that combination of being able to support them from a top line perspective and drive both top line growth, as well as support them from a cost perspective really stands us in good stead in rough economic times, which is obviously what we've seen in the last couple of years. So that part, in part contributes to the momentum of the business that we've seen in the past. And frankly, that contributes to the momentum of the business that we're seeing, that we're seeing today. And I've had the opportunity to now spend a number of over the last couple of months, I've had an opportunity to spend time with customers in person in the US, in Europe, in Asia. And what I'm hearing from customers around the globe, is very consistent perspectives on the pressures that they're having to be able to continue to drive their businesses forward. So they've all got multiyear product roadmaps that they need to advance their businesses. And frankly, they're use-- they're relying on us. They're relying on simulation to be able to not only deliver on those roadmaps but to be able to deliver on those roadmaps as efficiently as possible. Because they know that simulation can help them save time and money through the avoidance of physical testing and things of that nature. So that's all contributed to the momentum that we have in the business. And I'm really excited about where we are right now. Operator: And our next question will come from Tyler Radke with Citi. Tyler Radke: Yes. Good morning. Thanks for taking the question. Ajei in the opening remarks, you referenced a number of deals where you displace competition in accounts and just feels like this is something that you're talking about more here on these earnings call relative to historical quarters. So could you just walk-through kind of the opportunity that you see there? Have you seen kind of win rates pick up and is this kind of a function of some of the innovation at ANSYS. And perhaps inorganically, just kind of combining products that you've acquired into the core suite that's allowing you to do this, just kind of talk about the opportunity on the competitive displacement side. And then I had a quick follow up for Nicole. Thank you. Ajei Gopal: Yes, so firstly, Tyler, the first point is competitive displacements are in our industry relatively difficult, right? They don't happen. They don't happen on a regular basis. These are relatively difficult. And when they do happen, it's something that you are excited about because the customer has a specific need. And obviously, they're not able to satisfy that need, based on whatever products that may currently be using. And whatever they're using right now may or may not, if it's not able to address their needs, not able to solve their problems, not able to provide the level of fidelity or accuracy they're looking for, not able to integrate with the systems that they need to, they'll look for another solution. And as you rightly pointed out, we were excited. And I mentioned this in my script, we were excited about one of our competitive displacement this year, that we noted. But more generally, the nature of these displacements is driven by as you pointed out the strength of the portfolio. Look, we've made a lot of investment in improving the product from a performance perspective, from a usability perspective, from an integration perspective, if you look at some of the releases that we've announced, for example, most recently, in R3, in R2 in 2022 R2 one example on scalability. I mean, we're using a GPU scalability and achieving enormous acceleration in solving capacity for our customers. These are all incredible innovations that they value. And as they start to look at our roadmap and the organic activity that we've got, they realize that they should be committing to us, because we will be able to help them not just only today, but out in the future. So that's how I see it. And obviously, as you mentioned, inorganic, obviously we continue, we've made a number of good acquisitions. They have been integrated into our portfolio as well. And that just adds to the breadth and depth of our technology and capability. Tyler Radke: Thanks. And Nicole, as I look at the Q4 ACV guide. So obviously, it was a really strong beat here in Q3, but it looks like the race for the full year was much less than the operational beat in Q3, could you just help us understand what's giving you the moving pieces in the guide for Q4, where there's some deals that maybe came in a bit earlier here in Q3, are your kind of de- risking Q4 further based on what you see on the macro environment? Just help us understand the relatively large outperformance in Q3 and then the much smaller operational raise for the full year. Thank you. Nicole Anasenes: Yes, sure. Thanks. And great question, Tyler. So let me start with a perspective of how we view the overall momentum in our business. Our focus is really on how we improve our full year ACV outlook over time. And that's because the quarter-to-quarter revenue growth dynamics are really less indicative of momentum, because of the lumpiness of large deals. And also timing, the precision of predicting the timing within a specific quarter is also a little more challenging. For example, in Q3, we close over 12,000 deals in a quarter. So you can't always control the timing of when customers are deciding to close those deals. And so to illustrate the momentum we see in the business, I would point out two things. So first is looking at what we â what they started -- the answer was here I am looking at the raises throughout the year. So our $8 million operational raise that we gave in this guidance really is a follow on to a $29 million operational raise in August, which was a follow on to a $35 million operational raise in May. And so overall, we've seen consistent momentum and improvement in the business, that translated to about three points of incremental constant currency growth throughout the year. So from about 10%, in February, when we started to about 13% at the midpoint. The second thing that I'd point out is, while quarters are a little lumpy, and it's a little bit more challenging to see patterns, if you can look at kind of the first half and the second half to understand the underlying momentum of the business. So in the first half our constant currency ACV growth was around 12%. And if you look at the midpoint of our constant currency ACV growth implied in our guidance for the second half, that would be about 14 points. So you can clearly see from the first half to the second half the improvement in the momentum of the business. In addition, the incremental $8 million raise on top of the guidance we gave in August, it's an indicator of the overall improvement in the second half. Operator: Our next question will come from Jay Vleeschhouwer with Griffin Securities. Jay Vleeschhouwer: Thank you. Good morning, Ajei for you, first, you noted the breadth of the product line. And that for me raises the question of resource allocation to that greater breadth of portfolio specifically for R&D. At your analysts meeting five years ago, you gave us a number of priorities that you had for internal investing specifically for R&D. And here five years later looking ahead, given the greater breadth of the portfolio and the various dimensions you spoke of, how are you thinking about critical resource allocations, especially as R&D is steady or slightly higher percentage of revenues than it was a number of years ago. For you, Nicole. as follow up for the year-to-date, you've been adding typically between 100 and 200 employees per quarter. How are you thinking about the ongoing headcount adds from here, specifically in one of your largest categories, which is technical support and consulting, or the AE area? Ajei Gopal: Hey. So let me start first, Jay, thank you for the question. Let's talk about a little bit about R&D and prioritization. As you know, and I think we've discussed this in our investor updates, we have a pretty robust mechanism of being able to allocate resources against priorities. And we do that analysis. And that ultimately influences where we're spending our money and our resources in order to achieve the outcomes that we're looking for. From a product perspective, I think you should understand that we look at sort of the core physics evolution, and there is an amount of work that we have focused on the evolution of the core physics, and that's algorithmic advances, all of the work that you would expect to continue to make structures better than ever, or fluids, the fluids better than ever electromagnetics, et cetera. So we have a stream of activity within the R&D organizations which do that. We also have, as we broaden the portfolio, we have some platform level work. And that really addresses the needs across multiple products. So it's a support for the cloud. Itâs support for products like Minerva, these are value propositions that apply across all of the physics and all of the verticals, as we deliver to our customers, the simulation platform that allows them to manage these really complex simulations that we're dealing with. If you look at technologies like materials, for example, that's again, very valid as you start to think about multi product sales materials comes in and provides a significant amount of capability in that context. So the other thing to note is that some of the techniques that we have developed, for example, GPU acceleration, where we've done some incredible work, that's technology that can be shared across the physics, some of the ray tracing techniques that we've developed, and once those are applicable across others, so we're leveraging the teams to be able to take advantage of learnings from one team to the other. So I'm very comfortable with our position with our R&D footprint, I think we have a fantastic roadmap. And I think it continues to add to the value proposition for our customers, which is we can continue to help them solve their most challenging problems now, and they have confidence in our roadmap, going into the future to support them. They understand the value proposition of being able to reduce costs, they understand we can help them reduce warranty costs. All of those things are reflected and supported by our R&D roadmap. Nicole Anasenes: And, Jay, on your hiring question. Yes, our Q3 pace of hiring came in as expected, and it was at a slight -- it is at a higher rate than we did in Q3 2021. So we are keeping to our plans, we're tracking to our plans, we're continuing to hire in Q4 as planned. I mean, the overall additional point I would make is that our overall attrition still remains lower than industry averages. And that really positions us well to have the consistency and the stability in our overall organization to continue to invest in growth. And really in take advantage of the opportunities that Ajei just articulated in his response to you around your R&D question. And so we're continuing to execute against the 2022 hiring, as planned. Operator: Our next question will come from Steve Tusa with JP Morgan. Steve Tusa: Hi, good morning. Appreciate it you guys have kind of over driven on the annual guide this year. I think that's something that it's pretty clear. So obviously, the trends through the third quarter here very strong, just still not kind of understanding what's going on in the fourth with the slowing growth on the ACV side. Is there something in the macro that is maybe some pull forward in the 3Q that made that look a little better? So the trend is still very strong. It's just that there's a little bit of lumpiness. I know, the backlog and the leading indicators were down, that's probably a Forex issue. But just trying to get a little more color on what's happening there in the fourth quarter, again, totally appreciating that the trendline is very strong. And you guys have done a great job this year of beating numbers consistently. Nicole Anasenes: Yes. So first, I just kind of reiterate the point around growth rates in any given quarter, on a quarter-to-quarter basis. I mean, the absolute growth rate in Q4 that you see in the underlying guidance, remember, there's about 700 basis points of foreign exchange in that absolute number overall. So when you adjust for foreign exchange, the midpoint is around that double digit growth, which is in line overall, with our model, on a quarter-to-quarter basis, you sometimes get lumpiness in terms of when deals happen, and when there's kind of year-to-year comparison of when those deals happen. So the quarterly growth rates in the patterns of quarterly growth rates are just less indicative of overall momentum than the overall which is why kind of in responding to Tyler, I kind of gave that description of the overall momentum and so now and when you look at what can happen in any given quarter again 12,000 contracts in a quarter. Sometimes timing isn't a different, it falls into different quarters and then one would expect and so overall, the underlying optimism the business had didn't change. The underlying momentum in the business hasn't changed. We have -- we are very focused on the full year, and delivering the full year number making sure that we're getting the right deals for our customers and for the business at the right time. And so sometimes that can affect the overall underlying dynamics environment growth. But overall, Q4 is midpoint, it is still in that 10% range, which is -- which brings the second half to approximately 14% constant currency. Steve Tusa: Right? And I guess just, yes, sorry, go ahead. Nicole Anasenes: You had -- I didn't answer your backlog question. I apologize. So the backlog, on the backlog, that's really a sequential pattern as well. If you go back and you look, there's some seasonality to the way backlog kind of rolls off. And so that you also have to look into longer patterns as well. So if you look at the same quarters last year, you see that kind of seasonal pattern of the dip in backlog on a quarter-to-quarter basis, and then it kind of returns to different. So the quarter-to-quarter dynamics are less indicative of than the overall kind of full year dynamics that you see on backlog growth. Steve Tusa: Right. So there's really nothing that you guys are seeing. I know, everybody is very sensitive to the macro these days. But there's really nothing you're kind of seeing, as far as an extension of closed cycles or anything like that, where people are being just a little bit more cautious. Because the annual midpoint growth was on an organic basis was touched down a little bit, there's really nothing there, macro guys macro wise that you guys are seeing to just to put a cap on this question. Nicole Anasenes: Yes, no. I would say that the overall â over, I'll let Ajei comment because he's been speaking to customers. So he can give you the more contextual cover. But the overall, our overall outlook has improved since August. And so we're not seeing any fundamental difference other than the timing of when customers have closed deals in the quarter, so that on a constant currency basis, our growth rate is increased for the full year. And that's really driven by that $8 million operational rate. So there's nothing specific that we're seeing other than normal quarter-to-quarter dynamics in terms of when things close. But Ajei, maybe you can add some color. Ajei Gopal: Yes, sure. Just to jump in here. Obviously, we read the same headlines that everyone else does. But look, our outlook is based on the reality that we're seeing in the field. And as I mentioned earlier, up in the last couple of months, I've had the opportunity to spend a fair amount of time on the road. And as I said earlier, I've talked to customers across in different geographies, I've also spent time with the sales force in the field, in these different geographies as well. And we're not seeing the challenges that you might read about in the headlines reflected in our business. And I will sound like a broken record. And forgive me for repeating myself. The value proposition that we provide is tied to R&D. And customers have multiyear R&D product roadmaps and the competitive environment for customers is more challenging today than it's ever been. And so they understand the lessons of the past, which is that if you see concerns in the headlines, then you pull your R&D investment back when those concerns are passed, you're now behind and you lose market share. And that's to your detriment. They've seen this play out time after time after time. And so the investment in R&D activity continues unabated. And our value proposition is tied to R&D, because of that said, again, repeatedly, we make R&D efficient, more efficient, and we help customers dry product to market faster. So that's where our excitement comes from. It comes from what we're seeing from forecasts perspective, what we're seeing from the field, what we're seeing with our customers, and the nature of the products in the market we serve. Operator: Our next question will come from Blair Abernethy with Rosenblatt Securities. Blair Abernethy: Thank you, nice quarter. Ajei, just wanted to ask you back to your prepared remarks around users of simulation software, if we look back a decade or so ago, really a very technical master's level or higher kind of user base was predominant. And now it seems like things are starting to broaden finally, as had been long predicted, is this -- are you seeing this actively out there across your verticals and what exactly do you see ANSYS doing in order to encourage broader engineering adoption? Ajei Gopal: Well, it's multifaceted. I mean, firstly, the observation that you're making, which is that it's easier for engineers to use simulation and more engineers are using simulation is absolutely accurate. And there are a number of reasons why that's the case. Number one, we'll start from the product perspective. The products are easier to use. And we've had significant investments in usability, in integration, all of those things over the last several years after the last decade or two, which is culminated to the situation right now, where the product is so easy to use. I don't know if you recently that you saw this, it ran by my newsfeed this morning. But there was a high schooler in California, who used ANSYS simulation to simulate the loading of backpacks on students and the impact of a backpack. And they did that analysis using ANSYS simulation, they use granter, they use mechanical, they use a number of these products working together in order to come up with a with a solution and won a very prestigious award. That's an example of how easy the technology has been to -- has become to use for people where high schoolers are able to take, motivated high schoolers are able to take advantage of the technology. That's number one. Second thing is we continue to increase our level of investment with universities, we have presence in over 1,600 universities around the world. Cornell University teaches a massive online course using ANSYS, over a quarter of a million people have signed up for that. We've had millions of people downloading the student version of our products around the world. So there is broad based understanding of our technologies at the undergraduate level. And simulation is being taught as part of the curriculum. So graduating students are coming out aware of how to use simulation, aware of the value proposition, aware of the benefits, and aware of how to use ANSYS. And that is another aspect where the entering engineering workforce is very comfortable with this technology as opposed to a few decades ago. The other thing is, of course, the use of computing, we have continued to make the technology more efficient. We've also leveraging high performance computing, we're leveraging GPUs and with the overall broad-based availability of compute, that's making it easier for people to take advantage of simulation as well. So it's all of those things. It's work flows, its product capabilities, itâs ease of use, it's integration with the academia, all of the availability computing, all of that is really exciting. And frankly, I would encourage all of you to go to the most to our website, we have a magazine called ANSYS Advantage. And the most recent one, for example, talks about some academic success stories. And that'll give you some perspective of how we're more deeply engaging with the academic community as well. Operator: Our next question will come from Jason Celino with KeyBanc Capital Markets. Jason Celino: Hey, thanks for letting me ask a question here. Obviously, a good quarter, curious on kind of the linearity of strength. And then maybe if you were able to kind of discuss how things might be trending through October. Nicole Anasenes: Yes. So Jason, can I just clarify your first question? I want to make sure I answer it correctly. Jason Celino: Yes. So you talked about in earlier questions, you can't control when customers close deals. So I'm curious on the strength that you saw or the linearity of the activity through each month of the quarter. Nicole Anasenes: Yes, so I would say that, I mean, do you mean, in terms of when deals closed? I'd say that the linearity was somewhat more consistent, although I believe we saw a little bit more in the third month of the quarter. I'm just looking at the data here to make sure I've got it right. Yes, so we saw a little bit more in the third month of the quarter than we've seen it in prior quarters, but overall it's been largely consistent. Jason Celino: Perfect. And then maybe just a quick housekeeping question. I think you made a small tuck-in acquisition, C&R Technologies. Again, small tuck-in, but how should we think about contribution for Q4, if there's any. Thanks. Nicole Anasenes: Yes, so C&R Technologies is closed yesterday November 1, let's check. Closed yesterday, and so we'll have $2 million I'm sorry, two months, not $2 million, two months of top line this year, it was a very, very small technology acquisition with a de minimis impact on the overall top line of the business. And maybe you could talk a little bit. Ajei Gopal: Yes, just to jump in here. And while the transaction is obviously not material from a financial perspective, I just want to note that I'm really excited about the people who are joining the company as a result of joining ANSYS as a result of the acquisition of C&R. And, of course, the technology that C&R has built over the years. They're a leading provider of thermal analysis that used to optimize thermal systems. And they use in a number of applications, but most especially in the space in the satellite industry. So them -- their focus is on providing system level simulation for thermal and they've had a number of use cases. And they were, in fact being used as part of the James Webb telescope as well, where NASA use the C&R thermal desktop to provide a detailed thermal model of these optical and instrumentation systems. And it was used to predict things like transient profiles and gradients and heat flows as a payload transition from ambient to cryogenic conditions and back again. So by adding that to our portfolio, we will then be able to provide analysis to the customers, thermal analysis to customers from every stage from system design, all the way up to optimization from 1D tools, all the way up to 3D tools that gives us a comprehensive perspective. And then, of course, with the work that we're doing with space applications with a mission engineering suite of offerings. This further supports that and increases our competitiveness in that market as well. Operator: Our next question will come from Andrew DeGasperi with Berenberg. Andrew DeGasperi : Thanks for fitting me in. I just wanted to maybe ask a question on the large number of automotive deals you saw in Q3. I think it's Germany, if I'm looking at the revenue mix. Just wondering given the news, we're hearing about that region. Can you elaborate how long were those deals in the making, and maybe tell us if the macro political situation there is accelerating some of these deal closures, given the energy issues there and things like that. Ajei Gopal: Yes, so if I can jump in and give you some color on automotive, I don't have exactly the numbers in front of me. So I will have to be a little bit more qualitative. So one of the countries that I was in a few weeks ago was Germany, I did have a chance to meet with automotive customers there. And certainly I did an Asia as well in Japan. And obviously, I spent time with our teams. Look, again, it's the same value proposition that we're dealing with the automotive industry is looking at technologies like electrification, and they're recognizing that they need to make investments to be able to move more aggressively, and consider the future of their product lines and how they're going to evolve their product line. So that's one area. In autonomy, whilst it's true that full-fledged autonomy people are recognizing is a more difficult problem to solve. There is a tremendous amount of investment, certainly in making sure ADS happens, which is safety features. And so there continues to be investment in those areas. When you consider both electrification and autonomy, these are not traditional internal combustion engine, traditional views of how a car is built, these are incremental, different, it's a different approach. It's different skills. It's different tooling, it is different technologies. And as these companies are scaling up both the OEMs as well as the tier ones and the supply chain in general. They're facing pressures to start to think differently. And that's where simulation comes in. So we have an opportunity to continue to monetize those relationships and to continue to support our customers. And that's, I think, where we see strength in automotive. Nicole Anasenes: Yes. And so just to give a little bit of color on the question you asked. The overall growth in EMEA was strong to reinforce Ajeiâs point or on the backup of that in automotive. Automotive was a strong quarter in EMEA. There were several seven figure sales automotive companies really focused on things that Ajei mentioned electrification and autonomous vehicle. But high tech, the high-tech industry was also an area of strength in Q3, which was an element of the performance around EMEA. Kelsey DeBriyn : Hi, operator, we have time for one more question. Operator: And our question will come from Ken Wong with Oppenheimer. It appears Ken has disconnected. And that will come from Adam Borg with Stifel. Adam Borg: Hey, guy, thanks so much for fitting me in. Maybe just a quick housekeeping item. I know earlier this year; you guys made a price increase. I think back in July. I was just curious. Maybe Nicole, you could help understand kind of what kind of benefit that had in the quarter? And how should we think about that in coming quarters? Nicole Anasenes: Yes, thanks for the question. Yes, we mentioned I think it was on the last call, we had done a strategic review of the portfolio to identify some targeted areas where we thought that the relative value that we provide versus the pricing in the market was maybe a little askew. And so we did some targeted price increases on a subset of elements of the portfolio in July. Now, just to provide some context. So the underlying yield from that is, of course, embedded in our guidance, because we did an in July. But what I would say is that even the price increase in July, our sales cycles tend to be three to six months long on average. And when you look at the larger deals that you see in Q4, many of those are -- you're starting those conversations in January. And so our expectation with that price increase is that it would have relatively less impact in 2022. Operator: Kelsey DeBriyn: That's all the time we have today. I'm going to turn it over to Ajei for some closing remarks. Ajei Gopal: Thanks, Kelsey. I'm excited by our outstanding performance in Q3 and thus far in 2022, along with our robust pipeline and deep customer relationships. These factors, along with a diversified business and laser focus on execution are giving us momentum as we close out the year and move into 2023. And I'm confident in our ability to achieve the ambitious long-term goals we announced during our investor update. Thank you to my colleagues at ANSYS for your dedication to our customers and to advancing the state of art, save the art of simulation. And thank you all for attending today's call. Have a great day. Operator: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your line at this time.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.
