ANSYS, Inc. (ANSS) on Q1 2022 Results - Earnings Call Transcript
Operator: Ladies and gentlemen, good morning, and thank you for standing by, and welcome to the ANSYS First Quarter 2022 Earnings Conference Call. With us today are Ajei Gopal, President and Chief Executive Officer; Nicole Anasenes, Chief Financial Officer and Senior Vice President of Finance; and Kelsey DeBriyn, Vice President, Investor Relations. All participants will be in a listen-only mode. 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'd like to turn the conference call over to Ms. DeBriyn for opening remarks. Ma'am, please go ahead. Kelsey DeBriyn: Good morning, everyone. Our earnings release, the related prepared remarks document and the link to our first 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 first quarter financial results and business update as well as our Q2 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 obligations to update any such information. During this call, we will be referring to non-GAAP financial measures unless otherwise stated. A discussion of the various items that are excluded and reconciliations of GAAP to the comparable non-GAAP financial measures are included in our earnings release materials. I would now like to turn the call over to our President and CEO, Ajei Gopal, for his opening remarks. Ajei? Ajei Gopal: Good morning, everyone, and thank you for joining us. I'm happy to report that Q1 was another great quarter for ANSYS. We again beat across all our key metrics and grew ACV by nearly 11% in constant currency. We believe that this continued momentum, combined with our strong customer relationships and leading multiphysics product suite, will set the tone for Q2 and the rest of the year. These strong results came in the midst of continued disruptions caused by the ongoing COVID-19 pandemic, which has spurred additional lockdowns in certain regions as well as geopolitical dynamics. As we have previously announced, we have suspended all new and ongoing business with Russia and Belarus and removed them from our 2022 forecast. ANSYS has contributed to the Ukrainian relief efforts, and our hearts go out to all those affected by these tragic events. We are not only absorbing the headwinds from sanctions, but based on the strength of the forecast and the ongoing demand for our multiphysics solutions, we are increasing our operational outlook on ACV, revenue, EPS and operating cash flow for the full year. Nicole will have the details in a few minutes, including a discussion of the impact of global currency exchange rates on our outlook. Focusing now on Q1. From a revenue perspective, we saw good growth, as expected, across all our geographies, led by the Americas and Asia Pacific. The demand for ANSYS simulation has been relatively consistent across industries for the last several years. Given recent events and market conditions, we are now seeing an increased activity in energy and sustainability initiatives, which I will discuss in a few minutes, and in aerospace and defense accounts. Our largest contract for the quarter was a three year $44 million agreement with a North American defense contractor. This long-time customer is using our broad solution set to power its digital transformation through integrated digital engineering, multidisciplinary design optimization and digital mission engineering. The customer is realizing a strong return on its investment in ANSYS by helping it to win new government contracts while driving cost out of its organization. On these calls, I typically highlight a specific aspect of our business. Over the past several calls, I have discussed the unparalleled scalability of our best-in-class fluid products. I highlighted the critical role that ANSYS solutions are playing in the development of next-generation semiconductors, and I reviewed our leading suite of optical simulation products. For this call, I would like to discuss the critical role that ANSYS plays in sustainability. Sustainability is a crucial and complex topic that crosses industries and one that plays to ANSYS' strengths in multiphysics simulation. ANSYS simulation has traditionally enabled companies to save resources and energy before physical products are ever built, thanks to virtual prototyping. Today, though, through the use of our broad multiphysics portfolio, we can enable a number of our customers' sustainability initiatives, too many, in fact, to mention on this call. Let me give you just three representative examples so you have a sense as to the role that simulation is playing in sustainability: first, in increasing fuel efficiency; next, in driving electrification; and finally, in decreasing the rates of emissions. Let me start with fuel and energy efficiency, where a variety of ANSYS multiphysics products are being used to solve challenges ranging from engine effectiveness to electric battery design. The outcomes from these initiatives are reducing dependence on pollution producing fossil fuels. We announced earlier this week that we are working with Safran Aircraft Engines to support its aviation sustainability efforts while advancing productivity and cost efficiency. Using ANSYS' structural and thermal solutions for an advanced open fan architecture, new materials and hybrid electrification capabilities, the company expects to reduce fuel consumption and carbon dioxide emissions by more than 20% when compared to today's most efficient engines. Similarly, in Q4, we announced a new five year enterprise license agreement with LG Electronics to support the company's sustainability initiatives. ANSYS' multiphysics solutions are enabling more resource-efficient production that makes product development more sustainable by significantly reducing material use, costs and multiple redesigns. For example, ANSYS' virtual model offers one to three decoupling to support the development of the compressors used in LG's home appliances. As a result, LG Electronics can introduce its next-generation products faster than ever while accelerating its digital transformation and decreasing its carbon footprint. Turning to electrification. Customers are employing ANSYS solutions to improve the efficiency of electric motors, which today consume over 45% of the world's electricity. For example, in Q1, we signed a multiyear contract with Turntide Technologies, which develops solutions that accelerate electrification and sustainable operations for energy-intensive industries. Turntide is a long-time ANSYS user and this new contract broadens the company's use of multiphysics simulation to optimize product and engineering efficiency while reducing the need for physical prototyping as well as cutting development time and costs. On past calls, I've discussed the use of ANSYS solutions in the development of electric cars. In Q1, the TAG Heuer Porsche Formula E Team won the top two spots at the Mexico City E-Prix, with the help of a customized powertrain developed with ANSYS technologies. Working with ANSYS, Porsche Motorsport engineers accelerated the virtual testing of design concepts to provide the best powertrain solution without using physical prototypes. The powertrain innovations used on the racetrack will spur development of energy efficient, affordable and sustainable commercial vehicles at Porsche. To compliment the ANSYS Electric machine design offering, we recently acquired Motor Design Limited by combining motor designs, Motor-CAD product with the rest of the ANSYS portfolio, we will offer customers the most comprehensive multiphysics workflow for electric machine design. This end-to-end solution will enable customers to not only design more efficient electric machines, but also apply them to more applications which will reduce the environmental impact as well as the cost. Motor Design is an established ANSYS OEM partner and is already integrated seamlessly into our go-to-market motion. Moving to emissions, ANSYS simulation is helping customers reduce their carbon footprint through the development of renewable energy sources, including wind and solar power. We recently announced that we are working with leading renewable energy company Vestas to deliver safer and more sustainable power management solutions for its wind turbine control systems. These controllers are responsible for optimizing power performance and preventing component damage across a range of wind conditions. Using our model-based software development environment, Vestas merge data from multiple sensors and created control algorithms to drive better turbine designs at lower costs. We also announced that we are working with ANSYS startup program member Synhelion to convert carbon dioxide and water into synthetic fuels including gasoline, diesel, and jet fuel. Synhelion uses mirrors to concentrate sunlight onto a solar receiver that drives the thermochemical reactor that produces these sustainable fuels. Using ANSYS, this innovative company can simulate the thermo-fluid dynamics needed to design and validate its equipment despite the intense conditions caused by the searing temperatures. As I mentioned earlier, these are just a few of the examples of how ANSYS simulation is fueling the sustainability initiatives of some of the most innovative organizations on the planet. You will hear even more real world sustainability use cases during our upcoming simulation world event on May 18. During simulation world, you'll also learn about the launch of Earth Rescue, our online series that will showcase other ANSYS customers use of simulation in combating the climate crisis. I encourage you to attend and to learn more about these remarkable use cases of ANSYS Simulation. Moving to ANSYS’ own sustainability initiatives, in Q1, we released our corporate responsibility report. In this annual update, we focused on our core pillars of advancing sustainability through our leading multiphysics products, by investing in our employees, by operating responsibly and through our collaboration with various stakeholders. As an example of our growing ecosystem stakeholders, the University of Colorado Boulder will give engineers hands on experience by incorporating ANSYS multiphysics solutions into its new masters program in high speed digital engineering. These students will join their peers in more than 3,300 universities in 90 countries who are developing industry-ready simulation skills. Thanks to ANSYS products. To summarize, Q1 was another great quarter for ANSYS and one that will set the tone for the rest of 2022. Our continued momentum, our strong customer relationships and our best-in-class multiphysics product suite will help us drive even further success in 2022 and beyond. Before I turn the call over to Nicole, I'm excited to announce that longtime ANSYS executive, Walt Hearn is now leading our global sales and customer excellence teams, replacing industry veteran Rick Mahoney. Walt has an unparalleled track record of success at ANSYS. And most recently has led our largest and fastest growing region in the Americas. He has personally overseen some of the largest contracts from our enterprise accounts and has led the modernization of our go-to-market motion. With his energy, industry knowledge, deep customer relationships and mastery of our complete product portfolio, Walt is the right executive to assume leadership of this next phase of our go-to-market journey. 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 first quarter financial performance and provide context for our outlook and assumptions for Q2 and 2022. The first 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 revenue operating margin and EPS exceeded the high end of our Q1 guidance, driven by the mix of license types sold on the quarter. Now let me discuss some of our Q1 financial highlights. Q1 ACV was $344.1 million and grew year-over-year 8% or 11% in constant currency. We saw strong performance across most geographic regions 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. Q1 total revenue with $428.6 million and grew 15% or 18% in constant currency, which as I mentioned, exceeded the high end of our guidance driven by the timing of perpetual license deals that closed in the quarter. Q1 revenue growth was broad based across geographies. We had strong top line performance in Q1 with ACV and revenue, both growing double-digit and constant currency at 11% and 18% respectively. We closed the quarter with a total balance of GAAP deferred revenue and backlog of $1.2 billion, which grew 28% year-over-year. During the quarter, we continued to manage our business with financial discipline. This yielded a solid first quarter growth margin of 89.6% and an operating margin of 34.7%, which was better than our guidance. Operating margin was positively impacted by outperforming on revenue. The result with first quarter EPS of $1.36, which was also better than our guidance, similar to operating margin, EPS benefited from strong revenue results. Our effective tax rate in the first quarter was 18%. The tax rate we expect for the remainder of 2022. Our cash flow from operations in the first quarter totaled $210.9 million, which benefited from strong collections. We ended the quarter with $657.8 million of cash and short-term investments on the balance sheet. In line with our capital allocation priorities, we repurchased approximately 500,000 shares during the quarter for around $156 million. We have 2 million shares available for repurchase under the current authorized share repurchase program. Now let me turn to the topic of guidance. Although Russia and Belarus are not material in size to our overall business, we have fully absorbed the removal of Russia and Belarus from our outlook for the remainder of the year given the sanctions. The momentum of our business exceeds this impact. And as a result, we are operationally increasing our outlook on ACV revenue, EPS and operating cash flow for the full year. The underlying momentum in our business is strong. We delivered a robust Q1 coming off a great Q4 2021. And our strong 2022 forecast reflects our continued breadth and depth of customer demand. However, offsetting that strong outlook is significant U.S. dollar strengthening, which impacts the exchange rate embedded in our guidance. Let me start with our full year 2022 guidance. We are updating our full year ACV outlook to be in the range of $1.960 billion to $2.020 billion. This represents growth of 4.8% to 8% or 9.2% to 12.4% in constant currency. We are raising the midpoint of our ACV guidance by 1 point of constant currency growth compared to our February guidance. This raise is driven by the strong ACV performance we saw on Q1 and improved forecast we see for the rest of the year. That underlying improvement drove a full year ACV operational increase of $35 million relative to our February guidance. This operational momentum was offset by absorbing $18 million of Russia and Belarus business and $47 million of foreign exchange headwind. We expect revenue to be in the range of $2.5 billion to $2.65 billion, which is growth of 3.8% to 6.9% or 8% to 11.1% in constant currency. We are raising the midpoint of our revenue guidance in constant currency growth. Relative to our February guidance, our full year revenue increased $20 million from operational performance, which was offset by absorbing $15 million from Russia and Belarus and $45 million of foreign exchange headwind. As a result, we expect our full year EPS to be in the range of $7.53 to $7.94. Relative to our February guidance, our full year EPS increased around $0.25 from better operational performance and lower share count, which was offset by absorbing $0.14 from Russia and Belarus and $0.24 of foreign exchange headwind. Now let me turn to our full year operating cash flow guidance. Our 2022 outlook is a range of $570 million to $610 million, which as discussed with our February guidance includes the $60 million to $80 million of cash timing impact of R&E capitalization regulations that are in effect as of January 1, 2022. Relative to our February guidance, our full year operating cash flow increased $20 million from better operational performance, which was offset by absorbing $12 million from Russia and Belarus collections and $18 million of foreign exchange headwind. 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 $80 million and on operating cash by approximately $30 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 Q2. For the second quarter, we expect ACV in the range of $442 million to $462 million and revenue in the range of $450 million to $475 million. Our outlook implies double digit ACV constant currency growth for both the first half and full year 2022 in line with our business model of double digit growth, including tuck-in M&A. We expect Q2 operating margin in the range of 36% to 38.1% and EPS in the range of $1.46 to $1.64. Further details around specific currency rates and other assumptions that have been factored into our outlook for 2022 and Q2 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 in our business as reflected in the increased outlook for constant currency ACV and revenue growth and the operational improvements in our cash flow outlook. I would like to thank the ANSYS team for a strong Q1 financial performance and for all of the efforts from not only this past quarter, but for those of the last few years, as we continue to grow, invest in our business and execute against our strategic priorities. I appreciate the can do attitude, the push for excellence and the customer centric focus of the entire team. Our people and physics-based simulation solutions have earned us our industry leading world class reputation as the go-to source to solve the most difficult problems and to create what was previously impossible. We are well positioned to deliver on our 2022 outlook and our strategic investments will propel us into the journey to enhance our value to customers, to our shareholders, and to make a world – the world a better place for years to come. Operator, we will now open the phone lines to take questions. Operator: And our first question today comes from Jay Vleeschhouwer from Griffin Securities. Please go ahead with your question. Jay Vleeschhouwer: Thank you. Good morning, Ajei and Nicole. Ajei, let me start with you with a somewhat broad question about trends within the overall engineering software industry. Over the last number of years simulation has surpassed PLM to become the second largest category within engineering software. And it seems not that far behind the CAD market may even perhaps have already surpassed that. It’s very close. And the question is, as we now are much more of a simulation centric world than let’s say a CAD centric world that we’ve had for the last 20 or more years. What are the implications for you in terms of the kinds of internal investments incrementally you would need to make, perhaps in services and support, perhaps altering your product release cadence and the three year that you have now? Anything of that kind given the altered status let’s say of simulation within the overall engineering software market? And then a follow-up for you, Nicole. With regard to cash flow stripping out currency effects, I’m just looking at operational trends within cash flow, how are you thinking about working capital leverage? Is there anything structural, let’s say that is occurring or that you could make happen in terms of AR or deferred to just get more velocity out of your working capital? Ajei Gopal: Good morning, Jay, this is Ajei. Thanks for the question. So, as you rightly point out simulation is something that we’ve always said is really critical for our customers. And obviously, we’re seeing the greater use of simulation in the market as you’ve alluded to. And the reason as you know is it comes directly from product design and the complexity that products are – customers are facing in their own products. You know, for – and as you know from your experience, simulation, when you’re building a product, the more you can simulate, the more simulations you run, the better it is in terms of the product performance, the cost, the effectiveness of that product. Customers are recognizing that, and they’re running more and more simulations. That’s a tailwind for us. You also recognize as products become more complex, it’s not just about individual physics excellence. And we certainly invest in individual physics excellence. It’s also about the integration of the technologies together to be able to create a multi-physics solution and a multi-physics capability. And that’s also been an area for investment for us. If you look at, for example, some of the recent investments we’ve made on the platform, we’ve talked a lot about clients, the APIs that we’ve made available where people can write Python applications and directly invoke our simulation capabilities. And at the same time have access to the wide variety of the Python ecosystem. So those are some examples of where we’re trying to make it much easier for our customers to take advantage of simulation, not just as the traditional tool as they may have used in the past. But as part of a broader end-to-end platform on which they can anchor their product design capabilities and of course, much more. And it’s a virtual cycle. The more they use simulation, the more they need it in the future, because with simulation, they can explore these new edge cases, boundary conditions where they couldn’t have essentially done the analysis before. Now they’re in a position to, because of this platform centric approach that we’ve taken recently towards simulation. So that’s – hopefully that gives you some perspective. We’ve talked a lot in the past about things like simulation data management, materials design, all of these are essential aspects of the broader platform that we’re in a position to support for our customers. The other broad area, as you’ve seen from what we’ve talked about in the past has been investment in supporting the hyperscalers. So supporting cloud computing, investing in supporting some of the latest hardware GPUs, scale out CPUs, all of that again makes simulation much more relevant and continues to be areas where we’re investing as we support our customers, dealing with the complexity that they’re working with. And then finally, I’ll make the point that we’ve – it’s not just about using simulation in the validation of products. We see the opportunity to take simulation more broadly and take the insight from simulation and make that available. So if you look at things like mission engineering, as an example, those are all areas where – those are areas in discovery. All of that is taking us to areas digital twin, taking us to areas where simulation opens new market opportunities for us as well. So that’s reflective in our investments, Jay and certainly we see the increased opportunity for simulation out there and our investments parallel down. Nicole Anasenes: Yes. And Jay, on your cash flow question, as you know, cash flow is more highly correlated to ACV than to revenue because of the financial model transition that we’ve been undergoing and that transition to those highly recurring subscription leases. And in terms of the operating leverage in particular, the dynamics around working capital I think that you start to see this in our 2022 guidance. You could see that the operating leverage in the business is from the operating cash flow, right? So ACV is expected to grow faster than revenue. And cash flow is expected to grow faster than ACV. And what’s driving that underlying dynamic is really kind of the acceleration of that subscription lease business and the underlying annuity that gets generated from it, which generates cash collections. And there's a slightly different revenue recognition profile behind those because that revenue recognition is 50/50. Jay Vleeschhouwer: Yes. Thank you. Thank you both. That covers it. Operator: And our next question comes from Tyler Radke from Citi. Please go ahead with your question. Tyler Radke: Hey, good morning. Thanks for taking the question. Can you hear me okay? Nicole Anasenes: Yes. We can hear you. Operator: Yes, sir. You may proceed. Tyler Radke: Okay, great. Thanks. Thanks so much. Good morning. So, AJei, you talked a lot about sustainability in your opening remarks this quarter and excuse me – I'm just curious how much more just in terms of your conversations is this coming up is a key driver to your business and obviously simulation kind of by definition helps on the sustainability effort by reducing physical testing needs. But maybe just give us a sense for how you're thinking about the ability for this conversation to drive more awareness and accelerate growth for ANSYS. And then I have a quick follow up for Nicole. Thank you. Ajei Gopal: Good morning, Tyler, thanks for the question. So as you rightly point out, the historical use of simulation has been in the product design area and there's clearly value because we’ve reduced the number of physical prototypes. That's obviously more sustainable. We can make products more efficient and so forth. I mean, that's been the historical value that we've provided. What's been happening of course, in the recent past, certainly in the last few years is the focus on sustainability. And we've seen this, as I mentioned briefly in my remarks in the script earlier, we've seen this manifest in different industries in different ways. And certainly in the automotive industry, we've seen this with electric cars, battery technology, and trying to figure out what comes after or what replaces the internal combustion engine or how – what the transition of the future of the automobile looks like. So there's been that one set of discussions. The other sets of areas where we've continued to have conversations with customers for a number of years has been on other forms of energy. So things like wind, solar, title, these are other important areas outside of the traditional hydrocarbon ecosystem. And of course, we've talked about things like lightweighting and so on for a while. These conversations have continued and they continue with more and more urgency. And certainly as you start to look at the broader discussions that are taking place right now around the geopolitical climate, the focus on energy, I think comes back and we're having these conversations with energy companies as to how they can be more efficient or how customers can be more efficient. And so, we see this as an ongoing customer requirement that continues to gain momentum and it's a long-term tailwind for us that we are able to respond to. So we are excited that we can support the industry as they think about these sustainability initiatives, frankly, across multiple industry verticals. Tyler Radke: Thank you. And maybe a quick follow up question. So obviously ACV performance in Q1 adjusting for currency was in line with your guidance. You raised the full year outlook, operationally the Russia headwind, just help us understand what gives you the confidence to do that, a lot of businesses out there are taking a bit more of a conservative posture given everything come out. So was it something you saw in the quarter in terms of improvement versus your expectations or what's kind of preventing you from taking more of a conservative posture on the guide? Thank you. Nicole Anasenes: Yes, I mean, I think – thanks, Tyler. I think as you know, kind of our approach to guidance is kind of, is to quarter by quarter, update you on the full year. We're very focused on the full year number and take things as we see them right. And so what you saw in Q1 was that we had an incredibly strong start to the year with 11% constant currency growth that was off of a pretty exceptional 2021 with a lot of momentum building out of the back end of the year. And so while there were the dynamics that were discussed in the prepared remarks that we just shared around the elimination of Russian, Belarus and the currency headwinds underneath it, the core business momentum continues to be strong. And I think it really is emblematic of the value that we create independent of what is occurring in the macro environment. I think the sustainability example that you and Ajei just discussed, I think is a perfect example of the complexity of the problems that our customers are trying to solve. That really plays to our unique strengths. I mean, our unique strength is that we can solve problems from the component level all the way through the mission level and the more complex the problem, the more we are able to solve it in a highly differentiated way, relatively alternatives out there. And so we provide a lot of certainty and a lot of – and the ability to help our customers kind of traverse some of these more challenging product problems that they're facing. And so to me, it's just the overall strength of the business that continues to consistently deliver. And just the focus we've had on our customers throughout the pandemic, the focus that we've had on our portfolio over the past five years is really what gives us confidence in the full year view. Tyler Radke: Thanks so much. Operator: And our next question comes from Joe Vruwink from Baird. Please go ahead with your question. Joe Vruwink: Great. Hi, everyone. I maybe wanted to just start with your outlook within your SMB customer base and how you're thinking about this. I think this is where – there was the economic sensitivities in 2020 and so I'm wondering if you're thinking about this exposure any differently just given the current macro backdrop. Nicole Anasenes: Yes. I mean, currently, we are not seeing – so again, kind of to the point that I made to Tyler, our outlook is based on the kind of forecast of the business that we see today. We did not see any kind of meaningful shift in the underlying momentum or the underlying opportunity set in front of us in that space. And so our outlook does consider kind of continued business as usual. Last year, there was a pretty big resurgence back post COVID towards the back end of the year. It's kind of normalized towards more normalized purchasing behavior and business behavior in the SMB space. And so, that's essentially what we're considering on a go-forward basis, but we continue to monitor the situation. And if we were to see any changes, we would certainly update you. Joe Vruwink: Okay. And then as a follow-up, when I try to reconcile ACV growth by end market, it seems your high-tech business is up maybe high teens over the LTM period even if I remove M&A. When I think about R&D spending in high tech, it's maybe more like low teens growth. Can you maybe, if this thinking is correct, help reconcile the ANSYS outperformance? Ajei Gopal: Well, I mean, let me just quickly try to address that. When you think about our portfolio for high tech, we have a differentiated portfolio and once again, it's focused on the simulation aspects of that. And as I've mentioned before, as products get more complex, the need for simulation continues to grow. And so, when you're dealing with next-generation telecommunications, for example, you need very accurate simulation capabilities. That's where products like ANSYS HFSS come in. In big industry trends like electrification, the entire end-to-end electric Motor Design tool chain is absolutely essential. That's an example of an area where, as I mentioned in my remarks, we just recently announced – within the last day or so, we recently announced an acquisition of Motor Design, again helping in that end-to-end electrification tool chain. So we have been very careful to not only have – invest in our products so that they're – we feel that they're best in breed, but we've also been investing in our products to – in areas where customers are really struggling in areas like next-generation telecommunications. The other interesting thing, of course, is that there's a connection between our semiconductor offerings and our broader simulation capabilities. As customers in the semiconductor world are looking at 2.5 and 3D integrated circuits, that's when a – that's when you start to see the use of tools and technologies like the more traditional ANSYS simulation capabilities in the semiconductor domain as well. And so that crossover as well represents a long-term tailwind for us. So we feel like we are well positioned with our portfolio. We've been making the right investments and the right levels of integrations to allow our customers to solve some of the problems in the areas where they're investing, in some of the most challenging areas with these highly complex products for the future. And so, that's why we feel very good about our high tech business. Nicole Anasenes: Yes. And just to kind of answer your question on the growth point that you asked. So as you know, we don't give growth by industry, but in the industry disclosure, you do see that on a trailing 12-month basis, as a percentage, high-tech and A&D represent a higher amount and they continue to be our largest contributors to the business as well. Joe Vruwink: Thank you. Operator: And our next question comes from Andrew Obin from Bank of America. Please go ahead with your question. Andrew Obin: Hi, good morning. Nicole Anasenes: Good morning. Ajei Gopal: Good morning. Andrew Obin: I guess my first is not going to be a question. It's going to be more of a statement and confirmation. I just want to make sure 11% constant currency growth was better than the mid-point of your ACV guidance, right? Is that correct? Because somebody said you didn't beat the numbers, but I thought it was better than your guide, midpoint of your guide. Is that a fair statement? Nicole Anasenes: Yes, absolutely, it was better than – you're talking about the Q1 number? Andrew Obin: Yes. Nicole Anasenes: Yes. Andrew Obin: Okay. I was confused there for a second. Okay, fine. Nicole Anasenes: Yes. No, no, no. It was actually well exceeded the midpoint of our guidance. Andrew Obin: Yes, yes. No. because that's what I thought. Okay, fine. Nicole Anasenes: Given the midpoint was, what 9% in Q1 – yes. I just remember, yes, the midpoint was 9% in Q1 and coming in at 11% constant currency is quite significantly over that. Andrew Obin: Excellent, thank you, just making sure. So yes, the question going back to the trailing 12 month ACV chart, we've been getting questions on your aerospace and defense exposure, and it does show that up to 21 over 19 versus a year ago. And a) just trying to understand what's driving it and just to I appreciate that the stuff you do sort of longer cycle in nature. But how should we think commercial aerospace recovery and on top of it what looks like globally higher – structurally higher defense budget in U.S. and Europe given what's happening in Ukraine should impact your aerospace and defense business over the next 12 to 24 months? Ajei Gopal: Aerospace and defense is one of our top three verticals. And as you heard in my comments, we're seeing – we saw good performance in Q1 and we're also seeing increased activity with customers in the aerospace and defense market most recently. So these global events certainly cause conversations with customers. And then while it's too early to declare, I think it's pretty clear that these increased activity is a good indicator of longer-term tailwinds for our business from those conversations. But our business in aerospace and defense is very broad, and it's, again, based on the overall capabilities of our portfolio and what we can bring to the table. Andrew Obin: All right, terrific. And then just trying to understand, looking at the auto business and some of your disclosures that indicate that German and Japanese businesses have sort of shrunk, should I be thinking that lower share of auto and decline in Germany and Japan, does that go – should I be thinking is that it's German and Japan automakers? Or is there something else going on? Nicole Anasenes: Yes. So let me comment on the revenue growth in those markets. I'll let Ajei give more commentary on the market dynamics. So the – in the quarter, so first, those two, at an actual rate basis, they're going to have the most disproportionate impact on the Japanese yen weakening against the dollar and the euro weakening against the dollar, but so there is a significant impact there. The other thing, just to note, in general, is that the revenue variability because of license mix and differences in license mix on a year-to-year comparative basis can be quite volatile. And so, when you look at a quarter, even at the ANSYS level, there could be a lot of volatility within the quarter. Once you get to the country level, the quarterly numbers are quite volatile. So, it's not – so the quarterly number is not necessarily an indicator of kind of broader dynamics that are happening in the environment. Andrew Obin: Got you and that's also where we see FX. I should have thought about that. Thank you. Nicole Anasenes: Yes. Operator: Our next question comes from Saket Kalia from Barclays. Please go ahead with your question. Saket Kalia: Okay. Great. Hi, guys. Good morning. Thanks for taking my questions here. Nicole Anasenes: Good morning. Saket Kalia: Hi, good morning. Ajei, maybe I'll start with you. I wonder if you could talk about the OnScale acquisition a little bit. I think it happened in the beginning of the quarter. How does that sort of fit into the high-performance computing portfolio that ANSYS has? And any thoughts on just – or understanding it's early, any thoughts on how you sort of take that to market and whether that's – on how you take that to market rather and whether that's different than how ANSYS currently goes to market? Ajei Gopal: So, Saket, there are two important elements to our cloud strategy. The first is location independence and the second is device independence. And so, let me start with location independence, and let me take you back to that last earnings call we had, when I think in answer to a question I described how our products take advantage of the cloud and what's important to customers. And then as you alluded to in your question, I pointed to how simulation is different from the typical enterprise application in that the amount of compute that's required for simulation can be enormous. And I said a single simulation could run for hours across hundreds of cores, single user could launch multiple simulations in parallel and that's why high-performance computing, or HPC, is so important to us and our customers. And I talked about our strategy to support our customers as they use ANSYS products and take advantage of high-performance computing in the public cloud of their choice. We talked in that response about ANSYS Cloud. I talked about how that allows our customers to use our flagship products, while taking advantage of compute power in the Azure Cloud while running on the managed instance from ANSYS. And we also talked about ANSYS Gateway powered by AWS, which allows customers to pair their hardware access with AWS with their ANSYS flagship software. So in other words, last time, I talked about how our cloud strategy supports our full-featured products that supports our full-featured user interfaces for those products while providing location-independent high-performance computing for ANSYS solvers. So the recent announcement coming to your question with OnScale is really part of the next leg of our strategy, which is to allow access to ANSYS solver technology in a device independent manner through a browser. So OnScale, as you know, had created an exciting SaaS offering that coupled a simple web and intuitive web user interface to simulation with cloud-native infrastructure. And so now to your point and your question, now that OnScale is part of ANSYS, we will continue to enhance that front end, of course. And we will supplement that with back-end access to the ANSYS flagship solvers in the cloud. In other words, we will enable customer access to our industry-leading solvers through a SaaS experience through a browser interface in a device independent manner. And so this allows us to provide also in the future a SaaS option to simulation, one that might be attracted to new users in small and medium business or in areas that have not traditionally used ANSYS flagship products, so maybe even new users in existing customers. So when you add all of that together, our cloud strategy is to provide customers with device-independent and location-independent access to really the best and most comprehensive set of multiphysics simulation capabilities in the market. Saket Kalia: Got it. Got it. That makes a lot of sense. Nicole, maybe just for a quick follow-up, just housekeeping, can you just remind us how much you're including an ACV for inorganic this year and I – and whether it includes the Motor Design acquisition? I just wanted to check kind of how much that constant currency ACV growth is on an organic basis. I don't think there is too much inorganic this year, but just to make sure it's asked. Nicole Anasenes: Yes, you're correct. And let me kind of take you through the description of that. So as you know, we increased the ACV guidance this quarter by $35 million operationally, and that translates to about a point of constant currency growth that brings us to 11% constant currency growth at the midpoint. The basis of that increase is based on the increased organic momentum in the business. And then we've previously mentioned that – and it was in our prior guidance that we expect the inorganic contribution of Zemax to be around $20 million of ACV. And then our two recent acquisitions, OnScale and Motor Design, both of them are immaterial contributors to the top-line. OnScale is an early-stage technology acquisition with minimal revenue. And Motor Design, as discussed in the press release, Motor Design and ANSYS had a prior partnership, where we were the primary OEM of the product. So there is de minimis incremental top line benefit from the acquisition this year. So now while the initial financial contributions are not material of these two things, yes, we're really excited about the long-term impact of these investments to accelerate two really important aspects of our roadmap, as Ajei discussed, the cloud roadmap as well as the electrification roadmap, which connects to the sustainability conversation we had earlier today. So I mean that – so our guidance still reflects the $20 million of ACV contribution from Zemax, which would put us around 10% constant currency growth in ACV when you exclude Zemax from the full year outlook, which again is on the business model of double-digit growth, including tuck-in M&A. The other thing, just to note, is that as it relates to operating margin and cash flow. The net of these two acquisitions actually had a negative impact on both operating margin and cash flow, but we've absorbed – we've fully absorbed the negative impact in the full year guidance that you received. Saket Kalia: Got it. That's all really helpful. Thanks guys. Operator: And our next question comes from Adam Borg from Stifel. Please go ahead with your question. Adam Borg: Great. Thanks a lot for taking the question and the details about the guidance and also the details on the inorganic contribution, maybe just on the MDL acquisition. So obviously, as you talked about, you guys have had a partnership for a couple of years. It's already been established in our go-to-market motion. So I'd love to understand why decide to buy it versus just partner. And then more broadly, this helps you get deeper in some respects into CAD. I'm just thinking about is there an opportunity for you to get deeper into CAD and other areas of the design market. Thanks so much. Ajei Gopal: So I'm excited about the acquisition of Motor Design as I've said. We've had a successful partnership for a couple of years. They're the best-in-class solution in the market targeting the electric motor and machine market. And obviously, with the increased demand in electric vehicles, the complexity of electric motors, they bring a lot to the table. What we have is a seamless tool chain that includes Motor-CAD that connects that into other elements of our simulation portfolio. So for example, we have connections with ANSYS Discovery, with Maxwell, with Fluent with mechanical. So it's really connected to the full suite of our multiphysics capabilities. And so acquiring motor design really gives us the ability to control that product road map and drive greater levels of product integration across our portfolio. Obviously, as an independent company, they have their own objectives, but now that they're part of ANSYS, we'll be in a position to really streamline that end-to-end and support that seamless shift left in the multiphysics workflow that we have around Electric Motors. So we're excited about that. We're excited about that. And you see that – the importance of that streamlined workflow. Scheffler, for example, a customer of ours, they had coupled Motor-CAD with ANSYS OPTIS line, which gives us the optimization solutions. And now what you're seeing is a much better design to validation workflow for electric machines. And that kind of capability becomes possible when we have greater visibility into the road map, and we're in a position to be able to drive that organically out from the R&D organization. So we're excited about the acquisition. I think it's a great acquisition, and the team is very strong. Adam Borg: That's really helpful. And maybe just as a quick follow-up, so congrats to Walt on the promotion. I know it just happened and it's still really early, but any initial observations on any planned go-to-market changes as you think about a change at the top of the helm? Thanks again. Ajei Gopal: Well, as I said in my comments, Walt is a long-time ANSYS executive, and he has been – I mean he has just a tremendous track record of success within ANSYS. He's been running our largest and fastest-growing region in the Americas. He's intimately involved in all aspects of our go-to-market. He's dealt with some of the largest contracts in the enterprise space. He's been involved in the go-to-market transformation. He has spearheaded some of the inside sales efforts. He knows the industry. He knows our products. So he's been intimately involved in the creation of our strategy, and I'm excited about his leadership. He was a clear choice to move our sales teams forward. We have an exceptional deep bench of talent here at ANSYS. And I'm really excited about the future. Adam Borg: Super clear. Thanks again. Operator: And our next question comes from Jason Celino from KeyBanc Capital Markets. Please go ahead with your question. And Mr. Celino, it's possible that your phone is on mute. Jason Celino: Oh, sorry about that. That's embarrassing. Thanks for getting me in. Europe is on everyone's minds. I'm curious on what trends you're seeing there and how the pipeline is shaping up. And then maybe more pointed, what would have EMEA grown if it didn't exclude any of the sanction impact in the quarter? Thanks. Nicole Anasenes: Yes. So I mean, overall, with our – in Q1, we saw constant currency growth of 8% in the end of the first quarter, which was pretty strong. We saw industrial – the industrial equipment industry, in particular, is quite strong, and we saw relatively strong demand in A&D overall. And so the impact of the overall impact of Russia in full year of $15 million on revenue was a couple of million dollars in Q1. Jason Celino: Okay. Excellent. Thank you for that. And then I guess, really quickly, the hiring environment remains relatively tight, especially for software sales. How are hiring plans going? And how do you feel about capacity and productivity heading into the second half? Thanks. Nicole Anasenes: Yes. So our Q1 pace of hiring came in as expected, and it was at a higher rate than we did in Q1 2021. So we're planning to continue to ramp up hiring in Q2 and second half as planned. Jason Celino: Thank you. Nicole Anasenes: Operator, we have time for one more question. Operator: Our final question today comes from Matthew Broome from Mizuho Securities. Please go ahead with your question. Matthew Broome: Okay. Thanks very much. So ANSYS is obviously – it's a mature company, but is there still a sort of significant greenfield opportunity for simulation within your sort of legacy sort of customer bases? And do you view sustainability as sort of part of that? Ajei Gopal: Yes. ANSYS has been around – we're proud of the fact that, as a company, we've been around for 50 years. And so from that extent – to that extent, we're one of the longer-tenured, if you will, software companies out there. But the reality is that the technology that we deliver and the value proposition that we deliver, which is helping our customers to be able to drive top-line growth by bringing product to market faster and achieve bottom line savings through cost savings in terms of testing and validation to reduce warranty costs, more increased efficiency, all of those are evergreen value propositions. And as I've said before, as products become more complicated and you're seeing this, every single product is getting significantly more sophisticated than products of the past, it's not just a matter of solving a particular or understanding a particular discipline like structures of fluids. It's understanding the interplay between all of these different capabilities. So you take something like a car. A car today is a very different beast than the car was – the internal combustion engine human-driven car was a number of years ago. If you think about an autonomous vehicle, for example, that's powered by an Electric Motor, it calls for different skills and capabilities. And look, we are excited that we are in a position to support our customers as they go through this journey. So the ongoing value of simulation is really there – is driven, one, by virtue of the fact that we make – the more simulation you run, the better your product. And so there is a continued demand for customers environment with new products run. And the product complexity continues to drive that. And the final point I want to make here is when you think about the use of simulation when you start to use simulation within a company, you start to rely on it more and more, and it's a virtuous cycle for ANSYS. And so there are examples of changes, where in the past, where you may not have necessarily done a detailed design if there was an incremental change, which may have led to some warranty issues or things of that nature. Today, companies who are using ANSYS are in a position to just run simulation to validate that those – what might seem less small incremental changes haven't really fundamentally made a difference. When supply chains get disrupted and you want to swap out one component for a different component, that's requires analysis and validation, and that's again what simulation can provide. So the value proposition and the use of simulation is – continues to be strong. And then, of course, areas like sustainability, electrification, autonomy, IoT, telecommunications. These are all areas where customers are spending enormous amounts of effort, energy and money trying to build next-generation capabilities, and once again, we're in a position to help them. So I'm very excited about the opportunity in the future of simulation and of ANSYS. Matthew Broome: Okay. Thank you very much. Nicole Anasenes: That is all the time we have today. I will turn it over to Ajei for closing remarks. Ajei Gopal: I am excited about our strong start to 2022. Our strong execution and industry-leading multiphysics portfolio, combined with strong customer demand, gives me confidence as we plan for the rest of the year and beyond. I want to thank my ANSYS colleagues for their stellar execution and for their commitment, which produced these great results. Thank you, everyone, for joining the call today, and please enjoy the rest of the day. Operator: Ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We thank you for joining. You may now disconnect your lines.ANSS Ratings Summary
ANSS Quant Ranking
Related Analysis
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.
