ANSYS, Inc.

Good morning and welcome to the ANSYS Q4 and Fiscal Year 2019 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touchtone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Annette Erebus. Please go ahead.

Good morning, everyone. Our earnings release and the related prepared remarks document have been posted on the homepage of our investor relations website this morning. They contain all of the key financial information and supporting data relative to our fourth quarter and our full year 2019 financial results and business update, as well as our initial Q1 and fiscal year 2020 outlook and the key underlying assumptions. I would like to remind everyone that today's presentation contains forward-looking information. 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. During this call and in the prepared remarks, we'll be referring to non-GAAP financial measures unless otherwise stated. A discussion of the various items that are excluded and a full reconciliation of GAAP to comparable non-GAAP financial measures is included in this morning's earnings release materials and related form 8K. 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, capping a stellar year. In the fourth quarter, we delivered record revenue, earnings per share, and operating cash flow. Let me focus on annual contract value, or ACV, which we believe to be the best indicator of the underlying health of our business. Q4 ACV at well over half a billion dollars in the quarter for the first time in our history, represented growth of 13% in constant currency, which was particularly gratifying considering the strong baseline set in Q4 of 2018. For the full year 2019, ACV grew a robust 12% in constant currency. As we look to 2020, we're guiding to over 12% growth in ACV in constant currency at the midpoint of our range. This gives us further confidence that we will achieve our goal of $2 billion in ACV by 2022, while maintaining our industry-leading margins in the 42% to 44% range. Maria will provide more details in just a few minutes. Now let me provide insight into some of the growth drivers in the fourth quarter and for all of 2019. During Q4, 10 longstanding customers made eight-figure commitments. And nearly all of the deals, over a million dollars, included offerings from at least three of our product lines. From a geographic perspective, we saw strength in all our major territories last year. While North America led with 26% revenue growth for the year, I'm delighted that revenue in Europe grew 29% in Q4 and 14% in 2019, both in constant currency. For the full year, Asia-Pac revenue grew 15% in constant currency, despite a modest 2% revenue growth in Q4, which was attributable to variations in deal timings. In Japan, we grew revenue 20% in Q4. From an industry standpoint, high-tech continues to be our largest sector, fueled by electronics and our semiconductor solutions, and supported by our multi-physics portfolio. And, as you will hear shortly, We are continuing to add new capabilities to our product offerings so our customers can keep driving innovation in this key industry. Moving to automotive, other vendors have signaled weakness in the sector, perhaps because of their focus on legacy programs or their inability to pivot to emerging customer requirements. For ANSYS, however, automotive is an area of strength, in part because we have successfully broadened our offerings to address key growth drivers, namely solutions for autonomous and electric vehicles. We have seen repeated evidence of that success in electric vehicles, first with Volkswagen, which we have previously discussed, and now with Porsche. In Q4, we announced that Porsche Motorsport is using Ansys to create an advanced electric powertrain for its electric race car. After proving itself on the track, Porsche expects to use the car's electric powertrain to usher in a new era of commercial e-mobility vehicles. Moving to other industries, although energy is going through a transition, we are seeing increased demand in that sector, including an extended collaboration with leading energy technology company Baker Hughes. This longtime customer signed a new agreement in Q4 to use ANSYS simulation to drive down design and development costs including additive manufacturing, while sparking innovation. We continue to see success in aerospace and defense, driven by increased customer investment in North America. In fact, the aerospace and defense industry is responsible for four of our top deals in Q4. The complex product challenges facing aerospace and defense organizations require a true multi-physics approach, including solutions for electromagnetics, fluids, and next generation materials. For example, a leading North American gas turbine manufacturer signed an eight-figure deal in Q4 to shorten its design cycle using faster, more reliable, and accurate combustion simulations. By deploying our mosaic meshing and enhanced workflows, this industry leader reduced preparation time from hours to minutes while getting more consistent and robust results twice as fast. By using ANSYS solutions, we expect this global leader to save millions of dollars a year in reduced labor and related costs. Another large aerospace company is also benefiting from our comprehensive multiphysics portfolio. This company faced a complex set of operating conditions that made identifying potential failure mechanisms a challenge. It is using our best-in-class electrical, thermal, and mechanical products, as well as our electronics reliability simulation solution from last year's acquisition of DFR, to improve designs and to mitigate possible failures. This resulted in an eight-figure deal in Q4, and it demonstrates our ability to efficiently integrate new technologies into our selling motion. As you can see, our customers are benefiting from the formidable combination of Ansys solutions across physics. This is a powerful endorsement of the strength of the full portfolio, and it is one that we believe other vendors cannot match. We continue to extend our product leadership across the entire portfolio with our recently launched Ansys 2020 R1. R1 accelerates companies' digital transformation by enhancing the interfaces, functionality, workflows, and scalability of our products. R1 includes multiple product and technology advances. But in the interest of time, I'll focus on areas of particular interest to the high-tech industry. To make 5G a reality, the industry must develop new array and beam steering technologies that overcome millimeter wave impediments, such as signal propagation at 28 gigahertz. To overcome those challenges, we continue to make major investments in ANSYS HFSS, our flagship product for designing and simulating high frequency electronic products. R1 includes groundbreaking new phased array antenna technology, that enables 5G designers to model complete antenna arrays, a task that was previously computationally prohibitive. Developing modern antennas is only one challenge in realizing 5G systems. Chip designers must develop new architectures to co-locate the chip and the antenna, which introduces topology constraints and electromagnetic crosstalk challenges that did not previously exist. We recently announced a new product Ansys Raptor H to solve these challenges. With its unparalleled accuracy, its unmatched capacity and speed, and its smooth design flow integration for advanced nanometer integrated circuit design, we believe Raptor H is the most feature-rich electromagnetic tool in the market for system-on-chip flows. Raptor H marries the best-in-class engines from Ansys Raptor X, which we gained in last year's Helix acquisition, and Ansys HFSS, into a single chip packet system design environment. Helic was acquired in Q1 2019, and this product shows the speed at which the Ansys R&D teams can incorporate new technologies into our portfolio. Our platform strategy is based on an extensible vendor-neutral architecture that works both on-premises and in the cloud. Ansys Minerva is based on this architecture, and empowers companies to solve the seemingly intractable problem of dealing with the enormous amount of data created by multi-physics simulations of complex systems, such as 5G components and equipment. In R1, Minerva's scalable traceability, configuration management, and versioning system ensures reliability and connectivity of simulation data to drive collaboration and insights across the product lifecycle and across departmental silos. That traceability is critical to companies like Eaton Corporation that rely on Minerva to streamline their user experience when designing and manufacturing part using additive manufacturing and other processes. These innovations are empowering our customers to solve some of their most challenging product problems. Our ongoing commitment to improving our best-in-class solutions is further widening the technology gap between us and our competitors. That gap is certainly evident with Ansys Discovery Live, where we have significantly broadened structural use cases and expanded generative design capabilities while adding a GPU-based steady-state computational fluid dynamic solver. This breakthrough enabled the design engineers to predict airflow and heat removal at rates 100 times faster than the previous GPU solver within Discovery Live. One customer told us that they reduced component design time from three months to less than two weeks. Q4 marked the first large renewals for the Discovery business, and we are happy to see our early adopters expand their commitment to Discovery. On its most recent earnings call, our strategic partner, PTC, announced that it was also seeing a ramp-up of adoption and average deal size with its Creo Simulation Live product, which incorporates Discovery Live. As I mentioned previously, we expect the near-term financial impact of Discovery Live to be modest, but we see a strong long-term opportunity. Over the course of Q4, we also expanded our relationships with industry leaders Autodesk, Microsoft, and Rockwell Automation. With Autodesk, we built on our previously announced automotive workflow between our lighting simulation solution, Ansys Spios, and Autodesk vRed. Our new connection between Ansys Mechanical and Autodesk Fusion will drive revolutionary design and engineering agility for our customers, helping them expedite products to market. Our partnership with Microsoft also expanded, growing beyond our initial collaboration where we empowered customers to access high-performance computing on demand via Ansys Cloud, which runs on Microsoft Azure. In Q4, we grew our collaboration to make it easier for customers to adopt and deploy digital twins. Through our expanded partnership, manufacturers that model and connect assets using Azure Digital Twins can optimize asset production and operations using Ansys Twin Builder. That enables users to slash product maintenance costs and speed high-quality products to market. Similarly, with Rockwell Automation, we're enabling customers to benefit by creating a digital twin of their full manufacturing process to create and test virtual what-if scenarios. In doing so, industrial companies can adapt to market demands with more agility and minimize risk. We're also continuing to expand the market for simulation by reaching future users. Over 3,000 universities use our technology for research and teaching, including students at Carnegie Mellon University who are building and testing their own simulations in the newly opened Ansys Hall. More than 150,000 people have enrolled in Cornell University's massive online course and simulation based on Ansys. And I'm pleased to announce that we have seen over 1 million downloads of our student products. I'd like to take a moment now to recognize my colleagues at Ansys. As you know, the coronavirus is a rapidly evolving situation. Our number one priority remains, of course, the safety and the well-being of our employees and their families around the world. And I am humbled and grateful for the commitment that our colleagues in China and elsewhere are showing as they continue to drive business execution in difficult circumstances. Switching to our commitment to environmental, social, and governance initiatives for just a moment, I am proud that Newsweek recently named us to its 2020 list of America's most responsible companies. And I'm delighted that 2020 women on board recognized Ansys as the winning W company for 2019 with at least 20% women on our board of directors. To summarize, building on double-digit ACV growth in 2018, 2019 was a record-breaking year for Ansys. These results, combined with our 2020 forecast of double-digit ACV growth and our continued investment in our market-leading products, gives us further confidence that we will achieve our goal of $2 billion in ACV by 2022. So you can understand why I'm excited for 2020 and beyond. As I have told you before, the future for ANSYS is brighter than ever. And with that, I'd like to turn the call over to Maria. Maria?