ANSYS, Inc.

Ladies and gentlemen, thank you for standing by and welcome to ANSYS�s fourth quarter 2018 earnings conference call. With us today are Ajay Gopal, Chief Executive Officer, Maria Shields, SVP and Chief Financial Officer, and Annette Arebus, Senior Director, Global Investor Relations. If you require operator assistance, please press star then zero. Please note the call is being recorded. At this time, I would like to turn the call over to Ms. Arebus for some opening remarks.

Good morning, everyone. Our earnings release and the related prepared remarks document have been posted on the home page of our Investor Relations website this morning. They contain all the key financial information and supporting data relative to our fourth quarter and full year 2018 financial results and business updates, as well as our initial Q1 and fiscal year 2019 outlook and the key underlying assumptions. I would like to remind everyone that in addition to any risks and uncertainties that we highlight during the course of this call, important factors that may affect our future results are discussed at length in our public filings with the SEC, all of which are also available via our website. Additionally, the company's reported results should not be considered an indication of future performance, as there are risks and uncertainties that could impact our business in the future. These statements are based upon our view of the business as of today, and ANSYS undertakes no obligation to update any such information unless we do so in a public forum. During this call and in the prepared remarks, we'll be referring to non-GAAP financial measures, unless otherwise stated. Please take any reference to revenue to mean revenue under ASC 606, unless we explicitly note that we are referring to ASC 605 results. Note that all references to growth will be in terms of ASC 605 results, since we have no baseline for last year under 606. A discussion of the various items that are excluded and a full reconciliation of GAAP to comparable non-GAAP financial measures under both ASC 605 and 606 are included in this morning's earnings release materials and related form 8K. In closing, I'd like to announce that our 2019 Investor Day will be held on Thursday, September 12th in Pittsburgh with a reception and technology showcase event the evening before. Further details around location, logistics and the agenda will be announced in the very near future and will be available on our IR website. I would now like to turn the call over to our CEO, Ajay Gopal, for his opening remarks. Ajay?

Thank you, Annette, and good morning, everyone. Q4 was yet another exceptional quarter for Ansys. We delivered double-digit growth in revenue, earnings per share and operating cash flow. Our ACV growth of 28% in constant currency was particularly notable because of the challenging comparison with Q4 of 2017. For the year, revenue grew by 11% and ACV grew 17% both in constant currency. We ended the year with a record $957 million in 605 deferred revenue and backlog, which is a 24% increase over Q4 in 2017. To summarize, our financial results in Q4 were outstanding and provided a great ending to a stellar 2018. At Investor Day in 2017, we announced that our objective was sustained double-digit growth by 2020 while maintaining industry-leading margins. We introduced several strategic pillars to guide our journey to that objective. I'm pleased that we have made important advances across all these priorities over the course of the past year. And with double-digit revenue growth in both 2017 and 2018, I am confident we are tracking to our 2020 objective. The central pillar of our growth strategy was the need to extend our leadership in the core business by introducing new innovations and by transforming our -to-market. Let me start with products. Building on the momentum from last year's 19.x series of releases, we launched ANSYS 2019 R1 earlier this month. R1 features innovation after innovation, including a new multi-body dynamics product line, an Intuitive User Experience Influent, our flagship CFD solution, an electromagnetic interference scanner that delivers results in seconds as part of our industry-leading electronic solutions, a new heads-up display capability in SPIOS, our flagship's optic solution, and multi-core platform support in SCADE, our embedded software solution. Each of these individual innovations is important in helping customers solve some of their most challenging problems. Taken together, however, they show that ANSYS is leading the industry with advanced multi-physics simulation capabilities. We also recently launched a new ANSYS cloud-native solution enabled by Microsoft Azure that offers customers seamless access to on-demand high-performance computing in the public cloud. The offering is optimized for ANSYS solutions. Initially ANSYS is mechanical and fluent and dovetails nicely with offerings by ANSYS cloud hosting partners, which include both ANSYS and third-party products. Based on the advances in our core products and the integration across our portfolio, we're continuing to help customers address some of their most challenging problems where they're aggressively investing in R&D. Today, let me highlight some of our successes with autonomous systems. 3M has developed advanced materials that enable sensors to deliver additional information from enhanced infrastructure to advanced driver assistance systems, or ADAS. ANSYS tools and services are opening the doors to new opportunities in the fast-changing automotive market by providing 3M credibility in demonstrating their sensor material performance under adverse weather and lighting conditions. This is another example of how ANSYS is helping a customer chase a multi-billion dollar market opportunity. Another great example of our integrated solutions is with Oceaneering, which is developing autonomous submersible vehicles for use with offshore oil rigs. They are using a multi-physics ANSYS solution to digitally test obstacle avoidance algorithms, a technique that could reduce costs by 90% and that's critical when in-water tests can run up to $150,000 each day. Moving to sales, you may recall that two years ago, we had embarked on a transformation of our -to-market strategy to allow us to maximize our market opportunity and to correct underperformance in key geographies, notably Europe. Our new -to-market approach enables us to effectively grow and close large enterprise deals through the ANSYS direct sales team, while simultaneously efficiently addressing the large volume of our transactional or momentum business through a combination of territory sales, channel partners, and inside sales. That strategy has unlocked new opportunities, as you can see from our revenue and ACV growth numbers. We saw strength in all of our geographies. While North America led the way with 19% constant currency growth, I am delighted that Europe grew 10% in constant currency both in Q4 and in 2018, continuing the growth recovery we had expected. On the large enterprise front, we began 2018 with a $50 million customer contract, at the time the largest in the history of ANSYS. And I am thrilled to announce that we capped off the year with a Q4 $59 million contract across multiple product lines with a long-standing customer. The second pillar of our growth strategy was selectively investing in high potential adjacencies to expand our addressable market. You may remember that simulation has traditionally been used primarily as a validation tool. As part of our vision of pervasive simulation, we are expanding the use of simulation upfront in the design process with Discovery Live, during manufacturing with our additive manufacturing solutions, and in operations with TwinBuilder. 2019 will be a validation and building year for these offerings, setting the stage for additional growth in 2020 and beyond. With its real-time simulation capabilities, Discovery Live has captured the attention of design engineers across the globe. One of the new users of Discovery Live, longtime ANSYS customer Anderson Hauser, is seeing the benefits of simulation and product ideation. This global leader in measurement instrumentation, services, and solutions for industrial process engineering is cutting costs and reducing time to market by bringing simulation earlier in the product development process with Discovery Live. To quote one of the company's engineers, with Discovery Live, we are agile, we are fast, and we are efficient. Discovery has picked up more best new product awards than any other ANSYS solution in the last decade. And at the end of Q4, we signed our first seven-figure Discovery deal. Another new solution, TwinBuilder, enables our customers to build, validate, and deploy simulation-based digital twins. The market for TwinBuilder is enormous, with half of the large industrial companies expected to deploy digital twins in the next three years. And we are seeing early traction in the market. The home appliance and air solution division of the global giant LG is using TwinBuilder to create virtual prototypes at the component level and share IoT information amongst products, supporting research to boost product reliability, reduce the time to market, decrease the need for physical testing, and improve product development. The next pillar of our growth strategy was pursuing strategic partnerships and acquisitions. On the partnership side, last week, PTC released Creo Simulation Live, which embeds ANSYS Discovery technology into Creo. With PTC's market leadership, this partnership grows the ANSYS reach to a new and broader base of design engineers around the world. While it is too soon to evaluate market success, early indications are positive. During its most recent earnings call, PTC reported that it already had orders from 20 customers following its December preview release, as well as more than 160 customers in its short-term pipeline. M&A continues to be a highlight for us. As you know, ANSYS has a long history of successful M&A, where we acquire companies with leading technologies, invest in both innovation and integration with the broader ANSYS portfolio, and take advantage of the vast ANSYS customer footprint to increase customer adoption and sales and drive growth for ANSYS. We're following that same playbook with our two most recent acquisitions, both of which closed earlier this month. The first is Granta Design, the pioneer of material intelligence and information technology. With the variety of materials available to product developers today, having accurate, traceable, and reliable materials information is increasingly critical to simulation accuracy. Granta has proven world-class technology that has enjoyed success in some of the largest and most sophisticated companies. Rolls-Royce, for example, used Granta to save $10 million through reduced testing, legacy data capture, and other cost avoidance. And although we share a few customers with Granta, including Lockheed Martin, Saudi Aramco, and Airbus, their distribution was limited because of their size. Now, as part of ANSYS, with our ability to reach customers in all geographies, there are many new opportunities to drive growth by introducing the Granta material solution to a much larger customer base. We also closed a smaller acquisition, Helix, which builds great technology to analyze and mitigate the risk of electromagnetic crosstalk for semiconductor designs. This is particularly relevant because mega trends like 5G and artificial intelligence are driving the need for extensive on-chip electromagnetic analysis to combat electromagnetic noise. Helix solutions, when combined with ANSYS PowerArtist, our power integrity and noise analysis technology, as well as our market-leading electromagnetic solvers, will help engineers deliver on the promise of next-generation solutions. Our 2019 strategy for growth remains the same as last year. We'll continue to grow our core, expand into the adjacencies we've selected, drive partnerships, and pursue appropriate M&A. With this strategy in place, I'm excited that our guidance for 2019 is 12% constant currency 606 revenue growth at the midpoint for the full year. This is an ambitious growth objective, especially in the light of our stellar performance in 2018, and it is a testament to the strength of the ANSYS franchise. I want to take a minute to talk about corporate commitment to environmental, social, and governance initiatives. Last month, we were named to the global 100 most sustainable corporations by Corporate Knights, a firm slowly focused on tracking and ranking companies committed to sustainability. This is a powerful recognition of our company and our employees. And now, I'd like to turn the call over to Maria.

Thank you, Ajay. Good morning, everyone. As you heard from Ajay, by any financial measure, we delivered another quarter and year of exceptional results. This is quite an accomplishment when you consider the strong comparable of both Q4 and 2017. I'll take a few minutes to add some additional commentary around our fourth quarter and annual financial performance, and we'll close with an update on our outlook and key assumptions for Q1 and 2019. Throughout 2018, we have been providing financial results and outlook under both ASC 605 and 606. Consistent with our messaging throughout the past year, beginning in 2019, we will transition to only reporting our financial results under ASC 606. For purposes of today's commentary, any comparisons that I make relative to growth rates will be comparing 2018 to 2017 results under ASC 605 and in constant currency. And for the last time, I'll provide key financial metrics under both 605 and 606. And consistent with our standard practice, my comments will be in terms of non-GAAP unless I state otherwise. We would also like to announce that we will be removing the statistics on cumulative orders above $1 million in our future communications. While this metric was relevant when we first introduced it over a decade ago, the $1 million threshold is arbitrary and has become less meaningful over the past two years as the company has begun to experience higher deal values with transactions increasingly incorporating multi-physics. It gives equal weight to both the $59 million transaction that Ajay previously mentioned and to a transaction that may be less than 2% of that value, which we believe is not useful in evaluating our performance. As we move forward, we believe the best indicator of our -to-market and large deal progress is the overall ACB growth across the full calendar year. I do want to mention that we closed the fourth quarter with 68 customers that had orders over $1 million, a 39% -over-year increase, and four customers that had orders of over $10 million. Our Q4 results reflect a great finish to our strongest year ever, one in which we experienced continued accelerated business momentum and execution across the company. We reported constant currency revenue growth of 14% for the quarter and 11% for the year, and EPS results that were above the high end of our guidance under both ASC 606 and 605. Our ongoing record of execution throughout every quarter of 2018 gives us confidence that we are on a path to continue to make progress against our strategic priorities and to deliver another record year of financial results in 2019. Other key financial metrics that I would like to highlight begin with Q4 and fiscal year 2018 constant currency ACB growth of 28% and 17% respectively. For the year, we reported total revenue of $1.2 and $1.3 billion under 605 and 606 respectively. Fourth quarter revenue under ASC 605 and 606 totaled $340 and $418 million, with the large disparity between the two coming primarily from the upfront recognition of the license component of leases under ASC 606. As mentioned earlier, the strong fourth quarter results included a $59 million four-year deal, the largest in our history. This deal, which was not included in our guidance, was a principal driver of the overachievement in our Q4 606 results on both the top and bottom lines. It also illustrates the increased volatility that results from the upfront recognition of the entire license component of multi-year lease transactions. And further, the earnings volatility is even more pronounced because the additional upfront revenue comes with minimal variable cost. The inclusion of this deal in our 2018 results also adversely impacts our fiscal year 2019 growth rates by approximately 1% for ACV, 2% for revenue, and 5% for diluted EPS. The increase in software license sales combined with strong maintenance renewals contributed to our deferred revenue and backlog under 605 of $957 million, representing a new record Q4 high and a 24% increase over last year's very strong comparable. Deferred revenue and backlog under ASC 606 totaled $659 million. Total recurring revenue for the quarter and the year under 605 grew 16% and 12% in constant currency to totals of $245 and $933 million, or 72 and 76% of total revenue respectively. Lease and maintenance revenue each grew double digits for the quarter and the year, indicative of strong renewals and expansions within our global customer base, as well as the value that our customers place on the ongoing investment in innovation and the high quality of our support services. This increase in our recurring revenue streams in Q4 and 2018 was relatively balanced across each of our three major geographies, each of which delivered double digit constant currency growth in recurring revenue. Under ASC 606, recurring revenue totaled $305 million for Q4 and $962 million for the year, or 73 and 74% of total revenue respectively. Our strong and growing base of recurring revenue improves the predictability around our future performance. The operating margins under 605 were .5% for the quarter and .4% for the full year. The lower fourth quarter margin is consistent with our recent financial guidance and reflects the significant incremental sales commissions that typically occur in the fourth quarter as high achieving sales personnel hit their commission accelerators. The full year margin is also consistent with the expectations that we set at the beginning of 2018 and maintained throughout the year. The operating margins under 606 were .6% for the quarter and .4% for the year. Both results exceeded our expectation and were driven primarily by the revenue overperformance under ASC 606. Both sets of results are evidence that we are committed to managing our business with discipline and to ensuring that the incremental investments are driving the annual ACB and top line growth that we have planned. We reported fourth quarter EPS of $1.39 under 605, a 30% growth over last Q4 and $2.13 under 606. And for the year, we also finished with record EPS of $5.30 under 605, a 32% growth over fiscal year 2017 and $5.98 under 606. The overperformance on EPS in the quarter was driven by the very strong top line finish. With respect to taxes, under both standards, our effective tax rate was approximately 18% for the year and 17 to 18% for the fourth quarter. Looking ahead into 2019, we currently expect our effective tax rate to be $1.39 per year, and for 2019, we have assumed a slightly higher mix of income in foreign jurisdictions, which have a higher tax rate as compared to the U.S. Our cash flow from operations totaled $133 million for the fourth quarter and $486 million for the year. We closed the year with a total of $777 million in cash and short-term investments, of which 79% was held domestically. And while we are discussing our cash balance, I wanted to also note that we just closed a five-year, $500 million revolving line of credit. While the line of credit is new for ANSYS and is not for any imminent need, but simply intended to give us additional capital flexibility as we continue to grow the business. Also, in line with our previously communicated capital allocation priorities, we repurchased 500,000 shares during the quarter and 1.7 million shares during 2018 at a total cost of $77 and $270 million respectively. Currently, we have 3.8 million shares available for repurchase. Now, let me turn to the topic of guidance. We are initiating our guidance for Q1 and expect non-GAAP revenue in the range of $290 to $310 million and non-GAAP EPS in the range of $0.98 to $1.11. And for fiscal year 2019, we expect non-GAAP revenue in the range of ,000,000 to ,000,000. Or, constant currency growth of 10 to 14 percent and EPS in the range of $5.55 to $6.00. Our 2019 outlook includes the contributions from the recently acquired grant to design and HELIC businesses. We are currently forecasting a range of 20 to 25 million of revenue and ACV for 2019. The combined impact of the capital utilized in the acquisitions and the incremental integration investments that will be necessary throughout the remainder of the year will result in the near-term impact of approximately 5 to 7 cents of dilution for 2019 as we integrate these acquisitions into our core business. Our ACV outlook for 2019 is a range of ,000,000 to ,000,000. This represents constant currency ACV growth of 8 to 12 percent. Our initial outlook for annual operating cash flows is a range of $470 to ,000,000 for 2019. I would like to highlight that our outlook for 2019 includes higher tax payments that relate to the accelerated lease license revenue and related profitability that incurred in the fourth quarter of 2018 under ASC 606, as well as the expected adverse first year impact of the acquisitions. For modeling purposes, we're expecting first quarter operating margins in the range of 36.5 to 38.5 percent and for fiscal year 2019 in the range of 43 to 44 percent. The recently announced acquisitions of granted design and HELIC are expected to adversely impact our operating margin by approximately 1 percent in 2019. As we head into 2019, I would like to again remind everyone that our focus will be on progress against annual targets as opposed to quarterly results simply due to the volatility in quarterly revenue, operating margin, and EPS that result from the timing of large lease transactions under 606. As we saw in our 2018 results, our Q4 business volume with 28 percent constant currency ACV growth continues to grow seasonally stronger. It is by far our largest quarter for new business, particularly for large multi-year deals. As we look ahead to 2019, we see a very similar seasonal pattern with a disproportionately large Q4 dynamic. Further details around specific currency rates and other key assumptions that have been factored into our outlook for both Q1 and 2019 are contained in the prepared remarks document. In summary, we are very pleased to have delivered another excellent quarter and year with strength across all of our key financial metrics. We also continue to deploy capital to drive long-term stockholder value through investing in our core business, pursuing important M&A targets, and additional share repurchases. Our strong close to another year gives us confidence that our continued focus on execution and investing in the business both organically and through M&A, supplemented by our growing base of recurring business, strong customer relationships, and a healthy sales pipeline provide a solid foundation to deliver on another strong year in 2019 as well as our 2020 financial targets. Operator, we will now open the phone lines to take questions.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. Due to the number of people in the queue, limit yourself to one question and no follow-up. At this time, we will pause momentarily to assemble our roster. The first question comes from Rich Valera of Needham & Company. Please go ahead.

Thank you. Congratulations on the strong results. Just wanted to hone in on Discovery Live here, Ajay, and get your sense on the potential impact both in 2019 and beyond. Sounds like some promising initial returns from the PTC agreement as well as some sort of organically. So if you could just frame that out for us in terms of maybe what you've baked in for 2019 and how you think about that longer term. Thank you.

Thanks Rich. Thanks for the question. As far as Discovery is concerned, as I said in my comments, we are very excited about what we have in terms of the technology. Obviously, we're taking it to market both directly through our Salesforce as well as in conjunction with the OEM that we have with PTC. PTC recently announced its new product. It was announced last week. There was a webcast webinar yesterday. I think that 2,000 customers or 2,000 individuals had signed up for that webinar as well. So there's obviously a lot of excitement in the PTC customer base as well for that. So we're very excited about it. We see 2019 as essentially a validation year. We don't really see this as being a big revenue year yet. This is still early stages for a product which I think is transformative, but the fact is in our market, it takes a while for products to gain momentum. So we see this as a building year and we'll continue to come out with new versions of the technology. PTC will continue to improve their product with the integration of our technology into it. We'll learn this year and I'm looking forward to, you know, I'm looking forward really next year to seeing some more tangible results from a revenue perspective.

The next question comes from Ken Wong of Guggenheim Securities. Please go ahead. Great. Thanks for taking my question.

This question may be geared towards Maria. When looking at your margin outlook of 43%, 44%, obviously that's consistent with how you guys have been framing where the margins could go with your investments in double digit growth. But obviously it's a step down from what we saw in fiscal year 18. Can you maybe just talk about kind of where some of those investments are coming and maybe some of the headwinds on the margins for 19?

Yeah. Ken, I'd say the biggest headwinds on the margins are for the dilutive impact from the two acquisitions that Ajay spoke to in his remarks. As you can imagine, most of the acquisitions that we're looking at, particularly the smaller tuck-ins, have no margin structure that's near ours. But they're important technologies that advance our roadmap and extend our multi-physics capabilities. So we will be making some investments relative to integrating those two acquisitions and as a result of the capital deployed as well as those integration investments, we'll have dilution in 2019 and we'll see them becoming more creative to profitability as we head into 2020. Additionally, from the core business, we are continuing to invest in the business, in talent, R&D, AEs, field engineers, and infrastructure to continue to be able to scale the business over the long term.

The next question comes from Gal Munda of Berenberg Capital Markets. Please go ahead.

Hey, thanks for taking my question. I would just like to focus a bit on the very, very large deals. I don't know if we can call them mega deals. In terms of the fact that 2018 was kind of a breakthrough year for you, maybe after the number of those have come through now, can you talk a bit about the predictability and the nature of those deals that you're seeing in terms maybe of the sales cycle compared to what the usual large deal previously would take and how much effort it takes? I hope that makes sense.

Sure. Hey, Gal. Thanks for the question again. So a couple of quick comments about large deals. Firstly, large deals don't just happen by themselves. They happen as a result of a long term relationship between us as a company and the customer. That's a relationship that takes years to develop and it's a relationship that we pride ourselves on and we maintain because of the levels of investments we're making both in our product as well as in our technical capabilities with customers. So that's one important aspect of those relationships. And the $59 million deal that we talked about is from a long standing customer of ours as an example. And the second thing is what we're seeing is many of these large deals are obviously not just single product deals. These pull together multiple products from multiple product lines and so they're essentially multi-physics deals. And that's really important for us because when we think about the direction where some of these large companies are going, they're looking at more challenging problems. They're looking at solutions which require necessarily this multi-physics analysis that we can bring to

the table.

So that's another element as well of some of these large deals. And so when you think about the pipeline that we're seeing for this year for some of the larger deals, we're kind of back in focus. We're back in load of this year. So a lot of activity is happening in the latter part of the year. Q4 is obviously going to be a heavier quarter much like Q4 in 2018 was a heavier quarter. And that's also part of the way that we're thinking about the year. So we have visibility into the pipeline. We have been developing these deals and these relationships with customers. And as I said, the relationships take years to develop. And this is part of the cadence that we're building into our business as we go forward, understanding how to manage these large deals, to understand what they look like in the pipeline, make sure that we can bring the relevant sets of solutions to bear with both our sales organizations or the technical organization, and then slot it in from an execution perspective.

The next question comes from Sir Lengalty of J.P. Morgan. Please go ahead.

Yeah, thanks. Hi, guys. In your prepared remarks, you talked about some of the crosstalk and semiconductor design. I'm kind of curious as you look at 2019, how much of the growth dynamics are you expecting to come from more of your EDA portfolio versus the rest of the portfolio? And then Maria, just to sneak in, can you give us a sense, what did 2018 acquisitions actually contribute to the 2018 full year ACV?

So again, thanks for the question. So let me address very quickly the opportunity in 2019. Obviously, electronics in general is very strong for us. We have solutions that help us both in the traditional EDA market as well as in the broader high-tech market. And frankly, we see tremendous opportunity in 2019 and beyond. And it's obviously being fueled by the complexity of semiconductors that are rolling into solutions for autonomous and for 5G, for AI, cloud computing, all of these things that are demanding more and more complexity for semiconductors. Obviously, that's driving customers towards advanced process nodes. But from our perspective, that also pulls in a need to be able to do multi-physics analysis. And it's not uniquely about looking at one individual physics. It's understanding the implications of the chip level, at the board level, at the system level. And that requires necessarily an understanding across all of the different physics as we've discussed in the past. And so I think that's going to be very important, certainly, as we see the use of semiconductors in these next-generation applications. Maria?

Yes. Sterling, relative to the contribution to ACB in 2018 from the acquisition, it was $25 million.

The next question comes from Saket Kahlia of Barclays. Please go ahead.

Hey, thanks for taking my question here. Maybe for you, Maria, on the large $59 million lease deal in the quarter, can you remind us how the cash collections on that multi-year deal will work?

Yes. So, Saket, as you saw in the materials, it's a four-year deal with annual payments. And that first payment will come into 2019.

The next question comes from Steve Koenig of Wedbush Securities. Please go ahead.

Hi, Anses. Thanks for taking my question. I'd like to maybe dig into what you're doing in cloud here. And so, Ajay, you mentioned you've got a new cloud-native solution on Azure. Can you back up a little bit and remind us how are you currently going to market through hosting partners? And then what's different about the new Azure solution that you're offering relative to either product or pricing model? And just remind us, are the hosting partners, is that a BYOL model for them and then customer's rent? So just kind of refresh me on how you're going to market in cloud and how the new offering might be different here.

Right. Great question. So we currently go to market, as you rightly pointed out, with a network of cloud hosting partners who are essentially around the globe. And they provide turnkey access to the Anses portfolio. So our cloud hosting partners take advantage of whatever public cloud infrastructure they choose to use. The customer works with them and they're able to work with both Anses technology as well as third-party technology and offer that essentially as a cloud solution. So they serve as the cloud partner, if you will, for the customer. And the customer directly works with them. And that's a great partnership with us and the cloud hosting partners that's been working very well. What we've done with the Anses cloud is we've taken a slightly different approach. And here now within, directly within our flagship products initially with Fluent and Mechanical, you can directly access the HPC capabilities in the cloud, in this case the Azure public cloud. And so it's completely seamless, it's completely built into the UI, and you have an option when you're using the product to then choose to use the public cloud, which essentially provides seamless HPC for our customers. And obviously that makes the cloud a little bit more accessible, it provides convenience because customers or engineers can, without having to leave the environment that they work in every day, they can enlist this additional compute power without even being an expert in HPC. And obviously this makes HPC easier to use and we're excited about that. And in the coming months we'll be adding more services and capabilities to the Anses cloud. It dovetails nicely with our cloud hosting partners, what they provide, and we're excited about providing our customers a choice of how they want to take advantage of the public cloud.

The next question comes from Gabriel Borges of Goldman Sachs. Please go ahead.

Hi, good morning. Arjay, I wanted to ask about the dynamic at your top 100 customers. We're in, as Anses has dedicated more technical resources to those customers, we've actually grown as a planter to sales. How do you think about how penetrated you are at your largest customers? And as part of that, any metrics you can share on multi-physics penetration and adoption would be helpful. Thank you.

Sure. So as you well know that these larger deals, as I mentioned already, these larger deals do include multi-physics deployments or multi-physics, I mean the multi-physics in nature. I would say that for our largest 100 customers, most of them probably have three or more products from, or three or more physics if you will, installed and are taking advantage of them. So I would say that it's a pretty broad penetration of multi-physics into the largest 100 customers. That being said, I think that the market for simulation is still early stages because when you think about where the use of simulation is, even at the very large customers, there's plenty of opportunity to continue to increase the use of simulation. Our strategy for simulation and the use of simulation is to make it more pervasive. Historically, it's obviously been used in the validation phase, and even there I think we're under-penetrated. But if you start to think about the opportunity going upstream to the designers and then downstream into manufacturing and operations, I think we have a significant opportunity. And we're seeing that because with some of these larger deals, yes there is improved sales execution, obviously there's improved sales execution, but it's also the case that the customers need the technology, right? No one would be buying things if they didn't need it. The customers need the technology because we're able to demonstrate the value of the technology in different use cases and to addressing different customer needs. And that's translating into greater demand for our offerings. And so you see with these large deals, these are customers we've had for numbers of years, and then we continue to expand the footprint and the penetration into those organizations. And I don't believe that we're reaching an asymptote or anything of that nature. So we're excited about our future. We're excited about the opportunity in front of us.

The next question comes from Ken Telenian of Evercore ISI. Please go ahead.

Hi. Thanks for taking the question. I was wondering if you could give us a recap of the changes you made to both the sales force and the channel this year and your plans for 2019.

Sure. I think the further the importance, and I couldn't tell you exactly what happened in 2017 versus 2018, but essentially what we did is did a pretty deep segmentation of our customers and separated them into different categories, if you will. There's a segment customer base where we directly address the customer through the ANSYS Direct Sales Force. And these tend to be the largest of customers. And typically you'll have an account manager looking after a small number or one customer with technical support. And this is where a lot of the large deals come from. We also have what we call, we also have territory sales individuals who are focused on the largest of accounts. And we have what we call a momentum sales motion, which is more transactional in nature. And these are the next generation or the next level, if you will, of customers where the coverage is less. It's not so much -to-one. It's less. A single sales individual may cover several different accounts. Or we would have channel partners who are then working with us to also cover accounts. And so through the combination of channel partners and territory sales, we're able to cover some of these accounts. We also have invested in inside sales. And our inside sales activity is doing well. And we're able to then not just create inside demand. It's not just an organization to set up meetings, but we have an organization that can actually close business telephonically through our inside sales organization. Obviously those tend to be smaller deals, but some of them are very nice deals as well. And so that combination of being able to direct to large organizations with more focus, being able to manage the territories effectively and leveraging the channel partners and leveraging inside sales to be able to scale the transactional aspects of a business is really what's been contributing to our success on both fronts, on the large enterprise side as well as on the smaller enterprise side. As we go forward into 2019, the challenges for the sales organization obviously are we have two new acquisitions in the form of Granta and Helik. We're integrating them into the sales organization into a -to-market motion. That technology will be available to obviously our direct sales people as well as to our channel partners to be in a position to take to market. So we're excited about that work. And that means integrating the technical sales organizations as well as well as teaching our sales organization. Outside of that, the same structure that I described, namely going after a large enterprise customer is being able to manage some momentum accounts that remains in place as we think about a business in 2019.

The next question comes from Matt Fow of William Blair. Please go ahead.

Hey guys, thanks for taking my question. Just wanted to ask on Discovery Live, maybe you could talk about the initial traction you're seeing. Is it different users than you typically see using Ansys? And then the funding for these deals, is it coming from different budgets that would typically be used to purchase Ansys? Thanks.

So our approach for Discovery has been twofold. One is that we think that it could be customers we've historically had, larger customers, or taking advantage of Discovery. Although it may be a different user base within that large customer. So it may be a different cadre of users who have not historically used the Ansys flagship solutions, but who could benefit from the use of simulation. So even though it would be the same large customer, it would be a different user within that. And we're seeing that certainly within our own -to-market with Discovery, but we're also seeing that as you think about some of the conversations we've been having with our colleagues at PTC in terms of how they're thinking about positioning a Creo Live as well. And then the other area that we think that we will be able to bring in customers is customers that have historically not necessarily been Ansys users who tend to, who are smaller, haven't found, haven't felt that they could manage the use of simulation even though they would benefit from that. And we believe that there's an opportunity there as well. And that's, I would say that that's, you know, harder for us to quantify right now, but that's also an opportunity that we are excited about.

The next question comes from Ross McMillan of RBC Capital Markets. Please go ahead.

Thank you very much and congratulations from me as well. So when I look at 18, I think your organic constant currency ACV growth was about 14 percent. And even if we take out the large deal in Q4, I think it would be 12 percent. And then when I look at 19, it's on a constant currency organic basis in the kind of 7, 8 percent range. So a big sort of step down. And I just wanted to know if that's just

elements

of prudence or are there any other things that you're thinking about that would, you know, create that deceleration? And maybe related to all of this is just, can we just touch on the philosophy on these large multi-year transactions? You said the one in Q4 was not in the guidance. Does that imply that you are excluding deals like this from your future guidance? Thanks so much.

So Ross, relative to our outlook for 2019, I would say we have forecasted based on our visibility in the pipeline as it exists. And no doubt we are going to be a little bit prudent as it's just the beginning of the year and similar to what we experienced in 2018, given that the majority of those large transactions are currently forecasted for Q4, we want to build in a little bit of conservatism, if you will. That being said, relative to that $59 million deal in particular, we did not include it in our guidance because at the time that we gave our outlook back in November, there were still a number of moving parts relative to that deal, including some competitive dynamics that, quite frankly, could have easily made that a Q1 deal. And given the size of it, particularly the impact under 606 with, you know, $30 million of earnings, to the extent that it had closed in Q1, it would have just left too big a gap. So the downside risk was not worth trying to be aggressive on forecasting that deal. The reality is, you know, we're still in the learning stages relative to the predictability of these. And as it becomes more of an ongoing part of our business and we learn more about, you know, exactly different personalities that have different perspectives on closing, we'll get better at it. But for now, we are going to build a little bit of caution into our outlook so that we don't have any downside surprises.

The next question comes from Jay Vlishauer of Griffin Securities. Please go ahead.

Thank you. Good morning. Could you comment, Maria, on your expectation for expense growth in 2019? You grew your headcount by about 500 for the year versus a prior many-year average of just about 100 or so increase in head account per year. So pretty considerable difference there. And relatedly for Ajay, having spent the last six to eight quarters on your -to-market and AE investments, could you talk about the relative investments or initiatives on those two things for the next year or more as compared to the past year or two? And the preparations you need to make or investing in -a-vis infrastructure, acquisitions integration, data centers, and the like to prepare for future growth. Thank you.

Yes. So, Jay, let me take your first question relative to our plans relative to investing. Our 2019 plans currently anticipate adding about 300 new employees to the organization throughout 2019. As of the end of January, we've got about 176 positions open for hire across the globe. Other things that I spoke to earlier, we will be absorbing the two recent acquisitions, which will require some additional integration costs in 2019. And then as you just mentioned, we do have a number of infrastructure investments, not necessarily data centers, certainly some of our own HPC capacity internally. But most of our investments around talent and additional costs that come with talent relative to licensing, around digital technology that they're leveraging, and we're also investing in our own digital technology to really be able to automate and scale our processes consistently across the globe.

And I think, Jay, the other part of your question was around our investment in our technical capability, customer-facing capability, our ACE organization. And yes, it continues to be an area that we are making investments. And you'll see that if you go online and look at the kinds of people that we're looking to hire. And we're making investments in our ACE organization, essentially across the product portfolio across the world. Obviously, we've got some new talent coming in through the acquisitions of Granta and Hellick. And those individuals will obviously join the company and will be central, of course, as we start to expand in those areas as well. So there will be expansion in our ACE capabilities in 2019.

The next question comes from Monica Garg of KeyBank. Please go ahead.

Thanks for taking my question. The question for you, Maria, the question is like you are guiding cash flow flatish year over year. Could we add some color around that? I mean, you did talk about could be slightly higher taxes. Could you quantify that number, how much increase you are baking in year over year? Thank you.

Yeah, Monica. So I'd say as you think about cash flow for 2019, there's a few headwinds that we're facing in addition to the additional taxes from the 606 over performance. We've also got a headwind of about one to 2% from currency. And the two acquisitions that we did are expected to be dilutive to cash flow in 2019. If you think about relative to quantification of the tax impact, our tax rate in 2018 was about 18% for the full year and we're guiding to 21 to 22% for 2019. So that's really kind of the differential in tax payments relative to 606 as we head into 2019.

The next question comes from Matt Lemonager of Robert W. Baird and Company. Please go ahead.

Great. Thanks. It's Matt on for our Rob. Thanks for taking the question. The question around North America, it's now grown 13% or faster, I think, six of the past eight quarters. Ajay, is there anything in particular driving that, simply sharper execution or anything standing out direct versus indirect, anything that's kind of driving that?

So I think there's obviously great execution in North America and there's been a lot of large deals activity as well that we've been able to drive from America. And I think to a certain extent, just given the nature of some of these large deals, these tend to be long-term customers historically have been with us for a long time. We've been able to build on that given the way the North America team has been laid out. But no, I think from a market demand perspective and what customers are looking for, it's kind of, you would expect the same sort of thing from customers, whether they're based headquartered in North America, whether they're headquartered in Europe or whether they're headquartered in Asia. And I think that the execution aspects of the North America business has also been very strong.

This concludes our question and answer session. I would like to turn the conference back over to Ajay Gopal for any closing remarks.

Thank you. Thank you, Andrew. So 2018 was another outstanding year for Ansys with strength across all of our key financial metrics. We improved our -to-market execution and we broadened our product capabilities. These important accomplishments continue to move business in the right direction and give us confidence in our ability to achieve our long-term targets. We look forward to another exciting year in 2019. In closing, I would like to express my sincere gratitude to our customers and to our partners for their support. And a shout out to my Ansys colleagues. Thank you all for your efforts and thank you for another exceptional quarter and an exceptional year. Thank you all for joining the call today and I look forward to our next call. Enjoy the rest of your day.

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