ANSYS, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the ANSYS First Quarter 2020 Earnings Conference Call. Today with us, we have Ajay Gopal, Chief Executive Officer, Maria Shields, SVP, and Chief Financial Officer, EF Finance. At this time, I'd like to turn the call over to Mr. Dwight for some opening remarks. Please go ahead.

...remarks document and the link. to our first quarter form 10Q and our investor relations website. They contain the key financial information and supporting data relative to our first quarter financial results, as well as our Q2 and updated fiscal year 2020 outlook and the key underlying quantitative and qualitative 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. In particular, that uncertainty regarding our performance really from our projections. 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 on today, and ANSYS undertakes no obligation to update any such in a public forum. In remarks, we will be referring to non-capitalized financial measures unless otherwise stated. It is good and a full reconciliation of 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 opening remarks. Ajay?

Thank you, Lee. Good morning, everyone, and thank you for joining us during these uncertain times. I would like to start by thanking the entire ANSYS team. Their professional practices have been exemplary. Let me first and describe our Q1 performance and how we are operating our business in these unusual times. Then I will take a step back and discuss the answers, particularly why answers is important to customers and why the business is resilient. Finally, I will provide some color on key elements, description of some of the headwinds that we are seeing and before I turn the call. Of course, ANSYS's first responsibility is to the health and safety of our employees and their families, and to the ANSYS community around the world. And enabled our employees to work from home. As the crisis around the world. Today, with the improving situation in China and Korea, our offices in those countries maintaining appropriate social distances and health and safety protocols. Our offices elsewhere remain closed or open only to a majority of employees worldwide continuing to work from home. Our employees have quickly adapted to this challenge, moving us forward in a work-from-home model. In the last several years, we have invested in our applications, including our networking and remote access capabilities, as well as collaboration technology. These investments have turned our business today. We are continuing to pay all our salaried and hourly workers. In fact, we are onboarding new employees remotely and provisioning them to work from home. We have a number of open job requisitions and are seeing a strong flow of candidates a company like ANSYS can provide. Investments in our growing team additional opportunity once this crisis ends. As you may recall from when we guided in February, we were expecting the first quarter and the first half of the year to be challenging because of tough year-over-year compares and a back-and-loaded full year. Worldwide economic conditions worsened through March. Nonetheless, I am very proud that the solid expectations Our revenue, earnings, and operating margin 51 came in just about at the midpoint of our guidance. A number of industries, including automotive, high-tech, and energy. In these verticals, our solution economy, electrification, and 5G continue to resonate with our customers. In Asia, we inked a new three-year contract with an existing to expand its usage of our as well as to expand into digital . In North America, we closed several large including at a global hardware provider that agreed to standardize ANSYS displacing several competitors. We all new scale power to bring its small modular nuclear reactor of simulation. We were also able to forge new relationships with organizations that have not previously used ANSYS, or contract with a new customer, software motor company, or SNC. By using ANSYS Multiphysics, SNC is developing an automated workflow to rapidly use across industries. The enhanced workflow can compress the weeks of prototype testing typically required for these virtually silenced motors. In Q1, we delivered ANSYS 2020. Despite working from home, we will deliver our release to the customers in the summer as originally scheduled. These are major releases and include new capabilities across a multi-physics product. Our products continue to receive recognition and accolades from our customers and partners. For example, industry-wide ANSYS, Redhawk S-Chip, power and noise sign-off process nodes. This helps customers verify the power requirements for use in artificial intelligence and high-performance computing applications. Similarly, Samsung Foundry has certified the ANSYS Raptor H electromagnet using its new three-dimensional integrated circuit packaging technology. Raptor H marries the best which we gained in last year's Helix acquisition and ANSYS flagship HFSS system design environments. By validating electromagnetic effects in Samsung's 3D assembly, Raptor H empowers designers to eliminate critical points of failure and accelerate the rate of new technology adoption. We are continuing to look at opportunities to expand a portfolio through M&A. We recently closed our acquisition of Lumerical, which will enable Ansys customers to predict the behavior of live devices, structures, and systems. This is critical as 5G applications take massive amounts of data, forcing organizations to handle even more information faster than ever. Lumerical's process enable designers to develop new, high throughput optical networks by modeling the most challenging, including interacting optical, electrical, and thermal effects. We were able to virtually onboard the Lumerical team, and I'm excited to welcome them into our one Ansys family. I'd now like to discuss the Ansys business and explain its resilience. The Ansys value proposition is compelling. both in good times and in tough economic times because simulation helps our customers drive both top line revenue growth and achieve significant cost savings. Using answer simulation, customers can rapidly innovate, easily validate design ideas, and improve cycle time. This means that they can launch more of the right products and do so at a faster pace, which translates to top line. In addition, Simulation can help customers get more impact from tight R&D budgets by giving engineers the tools to evaluate multiple design options cost-effectively and in parallel, eliminating the need for costly physical testing. That is particularly relevant during this global crisis when some customers cannot get access to their labs to physically test products. The compelling value and the mission-critical nature of simulation is why customers continue to rely on Ansys, even during periods of uncertainty. It is important to note that the bulk of customers' investments in simulation comes from their research and development, or R&D, budgets. R&D is the lifeblood of our customers. It's their key differentiator. Our experience is that in tough economic times, R&D is typically the the first restored, primarily because it drives future growth and market success. We believe that this is a commonly accepted perspective, and it is corroborated by studies in the Harvard Business Review and by the consulting firm McKinsey. This ongoing investment in R&D and in simulation in tough economic times is best illustrated in the automotive industry, where softening demand and worker safety concerns caused by the COVID-19 crisis have forced manufacturers to shut down factories and cut budgets. However, Volkswagen, General Motors, Honda, and other automakers have publicly reported continued investments in R&D, especially in next-generation technologies such as autonomy and electrification. If you recall from earlier discussions, these next-generation technologies are exactly where Ansys has been making strategic investments through both organic development and acquisitions. At Ansys, we continue to see investments in simulation by automotive OEMs and their suppliers across geographies. Let me give you two examples from Q2. In Asia, Denso, the tier one automotive supplier, recently signed a three-year, multi-million dollar deal to adopt ENSA solutions for automotive parts development for electrification and autonomy, as well as for our platform technologies. In Europe, our channel partner, Dynamore, recently inked an important deal with a major automotive OEM for the adoption of LS Dyna for virtual crash testing, replacing a competitive product. This is exciting news indeed, coming just a few months after we closed the acquisition of LSDC. As I also discussed at last year's Investor Day, ANSYS is a resilient model due, in part, to the number and... We have thousands of customers across multiple industries, including high-tech, semiconductor, aerospace, defense, automotive, industrial, and energy. And we are well-balanced across the geographies coming from the Americas, and the rest split roughly evenly between Europe and Asia. That diversity means that we can harness growth from a wide variety of sources. And it also means that we're resilient to the business or ecosystem individual, customer, industry, or country. Furthermore, our sales channels coming from our direct force, with the remainder coming from channel partners. We are very flexible in our licensing and consumption models, and customers can purchase a perpetual license, a lease license, or a pay-as-you-go elastic license, and can consume our technology on premises or in the cloud. We believe this diversity and flexibility allows us to reach and support a broad range of customers around the world. I'd now like to give some color on the challenges our users are facing and how we're accommodating them and provide additional comments on the demand environment, including a perspective by industry and by geography. It is important to note that our analysis of demand has already your guidance. Let me also caution that with the unprecedented market volatility we are all experiencing, demand could change in either direction as the global situation continues to evolve. We expect the most significant business disruption to occur in the second quarter when our teams and those of our customers work remotely. We are currently assuming a modest recovery in the business environment during the third quarter as states and countries slowly reopen. and business and consumer sentiment begins to improve. We also assume business activity and customer sentiment will continue to improve through the fourth quarter. Comparing this period of disruption with the pre-COVID environment, we expect different kinds of customers will be impacted in different ways. First, it is likely to be more challenging to close deals with brand new customers. primarily because of the difficulty in building new relationships and driving demand with new prospects remotely. Fortunately for Ansys, over the course of our 50-year history, we have built a large and loyal customer base. And so while new customers are important, the majority of our business comes from existing customers. Second, we expect larger accounts to perform more strongly than small and medium-sized businesses. This is to our advantage as the majority of our business comes from these larger accounts. Larger customers have stronger liquidity and capital positions, and we believe that a majority of them will be able to maintain their R&B cycles. In contrast, smaller customers tend to be more sensitive to liquidity constraints and are more likely to delay purchases. Note, however, that we believe government programs, especially in Europe, will mitigate some of this risk. Furthermore, during this period of disruption, we expect renewal rates to remain strong or the new businesses will come under incremental pressure. Furthermore, during this period of disruption, we expect renewal rates to remain strong or the new business will come under incremental pressure. We also expect customers to prefer leases over perpetual because of the smaller initial financial commitment of the lease. And we will see additional scrutiny given to large multi-year contracts, which could result in delays in signing or perhaps smaller commitments than we had previously expected. This could introduce incremental timing uncertainty into our top line. Our prepared remarks contain a more comprehensive discussion of the attributes affecting our pipeline conversion and their related impact. With that backdrop, I'll shift to an industry view. We are seeing little to no reduction in demand in the high-tech and semiconductor vertical, which accounted for about a third of our business in 2019. Many of these customers have deep pockets and are developing products against a multi-year roadmap, and they are not willing to let a few quarters of uncertainty slow them down. Other companies in large markets such as 5G are in a global race for leadership positions within their industry and are unwilling to delay their R&D efforts and thus cede their future to a competitor. Let me now move to aerospace and defense. We anticipate investment will continue for defense and military aerospace driven by long-term government programs, and we expect to see little to no reduction in demand for ANSYS technology in this vertical. Commercial aerospace, in contrast, will be impacted in the short term, driven by both pre-COVID challenges faced by some companies and by the dramatic reduction in passenger air travel as a result of this pandemic. However, in the medium to long-term, I believe this will be somewhat mitigated by the continued need of long-term R&D initiatives that address environmental issues and government regulations. In the automotive industry, although there has been widespread idling of manufacturing plants, R&D is still receiving funding. And that is particularly true for emerging solutions like autonomy and electrification, where ANSYS plays a key role. However, we're expecting to see headwinds on more traditional R&D activities in the sector. Given the need for competitive differentiation, we expect to see ongoing investment in new product introductions for industrial equipment, although we anticipate a reduction in R&D spending on existing products in this vertical. The low price of oil is causing headwinds in the energy sector. Fortunately, this vertical accounts for a relatively small portion of our business. Let me turn now to a geographical view. Relative to our expected performance of the geographies at the time of our last earnings call, we believe North America will fare the best. North America has the largest installed base of big enterprise customers, and a number of these customers are due to renew their leases of Ansys products in 2020. We expect a high renewal rate for those leases, and we also expect to attach new product sales to the renewal. Our North America customer base includes a good percentage of high-tech and semiconductor companies, and we expect their R&D and simulation initiatives to continue to receive funding. Asia Pacific entered the COVID-19 crisis a few weeks before the rest of the world. We did see an initial reduction in demand activity there, but we're now seeing a return of demand. For example, we saw China end Q1 stronger than we had expected, and it continues to have momentum in Q2. The high-tech and semiconductor industry remains strong throughout the region. However, we do see some headwinds in the more traditional automotive investments and the heavy industrials. We're expecting some disruptions in business in EMEA, in part because of headwinds related to industrial and traditional automotive activities, and in part because we saw some customers struggle with the transition to a work-from-home model. Still, we see relief coming in the form of government programs designed to help companies, especially smaller ones, deal with the near-term financial stress. With all these uncertainties, we are reducing our full-year revenue and ACV guidance by mid-single digits, with the greatest impact coming in Q2. Maria will go through guidance in more detail. Before I finish, I would like to mention that we are preparing for simulation world, our exciting new online conference that brings together simulation thought leaders and users from around the world. Simulation World will feature a who's who of ANSYS customers, including Volkswagen Motorsports, Baker Hughes, Ericsson, and Porsche Motorsports. Simulation World already has more than 10,000 registrants demonstrating the value of simulation in the marketplace. I'm very excited that this forum gives us a new and unique opportunity to generate demand for our multi-physics portfolio. Despite the uncertainties in the market, we believe that our strategy of pervasive simulation and the value that we deliver to our customers is more important than ever. Our strategy accelerates customers' key research and development initiatives, which are not typically impacted by economic slowdowns. And we support critical emerging areas like electrification, autonomy, 5G, and the industrial Internet of Things. And our value proposition is compelling to customers, both in good times and in tough economic times, because we can help our customers drive both top-line revenue growth and achieve significant cost savings. I am confident in our ability to continue to drive long-term growth. And with our continued investment in the business, I believe we are well positioned to emerge from this crisis stronger than ever. And with that, I'd like to turn the call over to Maria to discuss our financials for Q1 and provide more detail around our outlook and assumptions for the remainder of 2020. Maria? Thank you, Ajay.