ANSYS, Inc.

Thank you for standing by and welcome to the ANSYS first quarter 2021 earnings conference call. With us today are Ajay Gopal, President and Chief Executive Officer, Nicole Anacinas, Chief Financial Officer and Senior Vice President of Finance, and Kelsey DeBrien, Vice President Investor and Government Relations. 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 will press star, then 1 on your telephone keypad. To withdraw your question, please press star, then 2. Please note, this event is being recorded. At this time, I would like to turn the conference over to Ms. Bryan for opening remarks. Please go ahead. Ms.

Good morning, everyone. Our earnings release, the related prepared remarks document, and the link to our first quarter form 10Q 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 updates, as well as our Q2 and updated fiscal year 2021 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 with the SEC, all of which are available on our corporate website. We note that uncertainty regarding the impacts of the COVID-19 pandemic on our performance could cause actual results to differ materially from our projections. Forward-looking statements are based upon our view of the business as of today, and ANSYS undertakes no obligation to update any such information. During this call, we will be referring to non-GAAP financial measures, unless otherwise stated. A discussion of the various items that are excluded and reconciliations of GAAP to the comparable non-GAAP financial measures are included in this morning's earnings release materials. I would now like to turn the call over to our President and CEO, Ajay Gopal for his opening remarks. Ajay.

Thank you, Kelsey, and welcome to ANSYS. And thanks to everyone for joining us this morning. I'm excited to report that Q1 was an excellent quarter for ANSYS where we beat our financial guidance for revenue, operating margin, and EPS. I'm also pleased that we are ahead of our internal plan for ACV. This is significant because, as I explained on our previous call, ACV is heavily loaded towards the back end of the year, following the pattern of the past several years. And we are seeing the continued strengthening of the pipeline of Ansys customer activities across all major geographies. The strong Q1 and our growing sales pipeline, coupled with our excellent Q4 last year, gives us increased confidence in the momentum of our business and in our ability to execute against our goals. As a result, we are increasing our annual guidance for ACB, revenue, EPS, and operating cash flow. We expect to see annual ACV growth, for example, to increase by over one percentage point in constant currency at the midpoint of our new guidance range. Nicole will provide more details in just a few minutes. In Q1, we were pleased to see that small and medium-sized customers who had slowed their purchasing decisions during the pandemic showed stronger than expected sales growth across geographies and industries. Large customer behavior was as anticipated. From an industry perspective, our traditionally strong sectors of high tech and semiconductor, aerospace and defense, and automotive and ground transportation continue to be our largest contributors. Our largest deal in the quarter was a five-year multi-million dollar agreement with a large North American automotive OEM. This longtime customer is realizing savings by using ANSYS simulation for its strategic warranty cost control initiative. The manufacturer is also using ANSYS simulation to identify the sources of electromagnetic noise to prevent interference in wireless communications. This new contract deepens and expands the customer's use of ANSYS solutions for wireless communications, autonomy, explicit dynamics, materials intelligence, and electrification. We saw numerous examples of simulation spurring product innovation and reducing development costs at our recently concluded Simulation World virtual conference. Nearly 40,000 engineers, designers, executives, students, investors, and members of the press registered for this event, which showcased simulation success stories from a number of Ansys customers. From small startups to multinational organizations that span industries, including Northrop Grumman, Whirlpool, Medtronic, SC Microelectronics, Boeing, and Regeneron Pharmaceuticals. Participants attended tracks on electrification, autonomy, digital transformation, 5G connectivity, and digital mission engineering, and listened to simulation use cases for vaccine distribution, spacecraft risk mitigation, crack propagation in gas turbines, virtual crash testing in automobiles, and so on. We heard from Formula One's Red Bull Racing, which has relied on the power of pervasive simulation to provide a competitive edge. Red Bull Racing's engineering team operates within a tight development window to optimize its race car aerodynamics and shave milliseconds off lap times. With only a few days between competitions, ANSYS simulation becomes the team's virtual wind tunnel to run external aerodynamic analysis. Simulation is also key to developing the chassis control circuits in selecting the right materials and in ensuring driver safety through virtual crash analyses. We had an entire track dedicated to electrification where startup Lucid Motors discussed taking advantage of simulation to develop its luxury electric automobile entirely on a computer, significantly reducing the need for physical prototypes. Lucid achieved its goal of creating a battery that will run for 400 miles on a single charge while providing enough power to propel the car from 0 to 60 miles per hour in 2.5 seconds. In the process, the company addressed key customer needs, solved difficult engineering problems, and brought a world-class vehicle to market in a fraction of the time required by conventional approaches. Electrification, of course, is not limited to ground vehicles. Simulation-led breakthroughs in battery technologies are powering all electric aircraft. During Simulation World, we also heard from Air Race E, which is sponsoring a series of international racing competitions for electric aircraft. Air Race E teams are using ANSYS simulation to develop batteries that deliver more power with less weight, and designing electric powertrains that overcome difficult thermal and high voltage challenges. The lessons learned from these races could advance the development and adoption of electrification for commercial aircraft. Nokia discussed its use of ANSYS HFSS and our electromagnetic solutions to investigate and optimize material properties and the performance of phase antenna arrays. By using ANSYS simulation, Nokia was not only able to develop an alternative design that was fast, inexpensive, and accurate, but also one that facilitates design sharing with vendors and mobile network operators. One of the most exciting presentations was from NASA's Jet Propulsion Lab, which highlighted simulation's role in the Mars Perseverance rover mission. The JPL simulated every component of the landing, giving engineers confidence that the rover would successfully endure the so-called seven minutes of terror from atmospheric entry to landing. Simulation was also used to ensure that the mission's Ingenuity helicopter could navigate the thin Martian atmosphere. Simulation World left me more confident than ever that the ANSYS strategy of pervasive simulation is working. With over 60 hours of content and more than 300 speakers from companies around the world, there are simply too many ANSYS customer success stories to mention on this call. So I encourage you to visit simulationworld.com to learn how ANSYS simulation is changing the way these organizations are developing, testing, and operating their next generation products. ANSYS partners were represented at Simulation World as well. Microsoft sponsored several sessions where they highlighted how users can leverage the Microsoft Azure Cloud Platform to gain easy access to high-performance computing resources directly from ANSYS products. Rockwell Automation discussed the key role that simulation plays in production, automation, and digital transformation. In the PTC sessions, we learned how Creo Simulation Live and Creo Ansys Simulation are driving a sea change in product development. We also heard how ANSYS and Synopsys are bringing their integrated capabilities to cover a variety of multi-physics domains like power, timing, reliability, and thermal simulation to maximize the speed and density achievable in advanced multi-die systems while ensuring robust reliability. Turning to ESG, ANSYS recently published our annual corporate responsibility report which highlights progress across our environmental, social, and government initiatives. On Ansys.com, you can view the report and learn more about how those pillars are driving long-term growth for our stakeholders through responsible and sustainable business activities. I'm also proud that Fast Company has named Ansys to its list of the world's most innovative companies. Ansys joins a prestigious list of organizations, including Microsoft, SpaceX, Sony, and Honeywell. Fast Company has also recognized our digital twin of the human heart as one of its 2021 world-changing ideas. To summarize, Q1 was another great quarter for Ansys, resulting in us beating our guidance for revenue, operating margin, and EPS. The energy and enthusiasm seen during simulation world and the strength of our customer pipeline gives me even more confidence in the importance of simulation in the effectiveness of our pervasive simulation strategy and in our ability to meet our newly increased outlook for 2021. And with that, I'll turn the call over to Nicole. Nicole?

Thank you, Ajay. Good morning, everyone. Let me take a few minutes to add some additional perspective on our first quarter financial performance and provide color around our outlook and assumptions for Q2 and 2021. Our strong Q1 results reflect outstanding execution across our business, which yielded revenue, operating margin, and EPS all above our Q1 guidance. As Ajay mentioned, in Q1, our large customer behavior was as expected, and we were encouraged to see more momentum with our small and medium-sized customers. We're increasingly optimistic about SMB customer behavior for the full year based on the new deal activity we saw in Q1 which was broad-based across industries and geographies. Now let me discuss some of our Q1 financial highlights. Q1 ACV was $319.4 million and grew 6% or 3% in constant currency with strong performance from the channel and 78% of ACV coming from recurring sources. Q1 total non-GAAP revenue was $372.1 million and grew 20% or 17% in constant currency. We saw strong performance in lease revenue driven by new leases signed in the first quarter. In addition, we had a higher mix of sales than expected from perpetual licenses, which drives more upfront revenue recognition. The largest contribution to the growth in perpetual licenses came from Asia Pacific. We closed the quarter with a total balance of deferred revenue and backlog of $936.5 million, representing a 12% increase over last year's first quarter balance. During the quarter, we continued to manage our business with fiscal discipline. This yielded a solid first quarter gross margin of 88.5% and an operating margin of 33.5%, which was better than our Q1 guidance. Operating margins were positively impacted by revenue performance above our guidance, as well as the timing of expenses. The result was first quarter EPS of $1.12, which was also above our guidance. Similar to operating margins, EPS benefited from strong revenue results and the timing of expenses. Our effective tax rate in Q1 was 19%, which is the tax rate that we expect for the remainder of 2021. Our cash flow from operations in Q1 totaled $171.1 million, which benefited from higher collections given the strong Q4 finish in 2020. We ended the quarter with almost a billion dollars of cash and short-term investments on the balance sheet. Now let me turn to the topic of guidance. We continue to build confidence in our outlook for the year. coming off our strong finish in Q1, we are initiating guidance for Q2 and increasing our ACV, revenue, EPS, and operating cash flow outlook for the full year. This increase reflects the strong financial performance in the first quarter and our pipeline, while being mindful of regional uncertainties in a continuously evolving global pandemic environment. Let me also add that these increases to guidance occurred despite increased headwinds from currency exchange rates since initiating our full year guidance in February. For the second quarter, we expect non-GAAP revenue in the range of $415 million to $445 million and non-GAAP EPS in the range of $1.43 to $1.67. As I mentioned, for the full year, we are raising our ACV revenue, EPS, and operating cash flow outlook. We are increasing our full year ACV outlook range to $1,760,000,000 to $1,825,000,000. This represents growth of 9% to 13% or 7% to 11% in constant currency. The increase to full year ACV reflects our Q1 performance, which exceeded our expectations and increased confidence in our full-year pipeline, offset by approximately $14 million of foreign exchange headwinds. As a result, operationally we are raising the midpoint of our ACV guidance by $19 million, which translates to an increase of over one point of constant currency growth compared to our February guidance. As a reminder, it is best to look at full-year ACV growth as quarters can be variable. This year, quarterly ACV growth rates will vary based on how the pandemic impacted quarterly sales in 2020. Overall, we expect first half and second half ACV growth rates to be roughly similar to each other. Consistent with prior years, the dollar value of ACV will be highly skewed towards the second half of the year. We expect non-GAAP revenue to be in the range of $1,810,000,000 to $1,875,000,000, which is growth of 7% to 11% or 5% to 9% in constant currency. Similar to our ACV guidance, this increase reflects our strong Q1 revenue performance, offset by approximately $14 million of foreign exchange headwinds. As a result, operationally, we are raising the midpoint of our revenue guidance by $24 million, which translates to a constant currency growth of 1.5 points higher than the midpoint of our February guidance. As you know, ASC 606 introduces revenue growth volatility within the quarters. However, on a full year basis, revenue is less variable. We expect revenue growth to be higher in the first half versus the second half based on the mix of license types in our pipeline. Consistent with prior years, we expect the fourth quarter to be our largest revenue quarter in absolute dollars. We are increasing our full-year EPS outlook and now expect EPS to be in the range of $6.69 to $7.10. This increase incorporates our strong Q1 performance and a favorable 14-cent gain on an investment that we expect to record in other income in the second quarter. and is offset by approximately $0.06 of foreign exchange headwinds. It is worth noting that some of our strong Q1 EPS performance was driven by the timing of expenses that will occur in the remainder of the year as we redeploy spending to focused areas of investment. Now let me turn to our full-year operating cash flow guidance. We are increasing our 2021 outlook to a range of $480 million to $520 million. This increase relates to payments we are no longer expecting to make, offset by approximately $5 million of foreign exchange headwinds. We were pleased with our strong start to the year in operating cash flow. But as a reminder, we would expect cash flow to be skewed towards the fourth quarter based on the timing of large deals and whether they close near the beginning or the end of the quarter. For modeling purposes, we're expecting second quarter operating margin of 34.5% to 38%, and for the full year, we continue to expect operating margins of 40% to 41%. Further details around specific currency rates and other assumptions that have been factored into our outlook for Q2 and fiscal year 21 are contained in the prepared remarks document. I would like to thank the Ansys team for their exceptional execution during the quarter, which drove our strong Q1 financial and operational results. Our incredible technology, talent, and deep customer relationships drives our optimism in the long-term outlook for Ansys. Our focus on execution and investing in the business, combined with the strength of our recurring business and growing sales pipeline, provide a strong foundation to deliver on our 2021 goals, as well as our longer-term financial targets. Operator, we will now open the phone line to take questions.

Yes, thank you. Ladies and gentlemen, at this time, we are ready to begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. In order to give as many people as possible the opportunity to ask questions, we ask that you limit yourselves to one question and one follow-up. At this time, we will pause momentarily to assemble the roster. And the first question comes from Gamunda with Barenburg.

Hi, good morning, and thank you for taking my questions. The first one, I'd just like to double-click a little bit, maybe on the linearity of the ATV growth that you're expecting for the year. Obviously, you have significant confidence in the rest of the year, hence raising it 19 million midpoint. But can you just talk a little bit about how those deals might come through? And if you have significant large deals in the pipeline, they could affect that. And that's what gives you the most of the confidence?

Sure. So thanks for the question, Gail. Yeah, we were really, really pleased with our Q1 performance, and especially the green shoots that we started to see from the SMB segment, which was part of why we led to our raise, as you noted, the $19 million raise in guidance. So I would say I would characterize our outlook to be consistent with what we saw in Q1, which was that large deal performance came in and enterprises came in as we expected them to behave. And we have some more growing optimism around the kind of improvement in the patterns of performance. the smaller customer said which as you recall was the customer said that we were a little bit more cautious about coming into the year and so i'd say the shape of the things that uh came out in q1 are are similar things that affect our outlook for the full year

That's really helpful. Thank you. And then maybe the second question, a little bit more strategically thinking. You know, you guys have been fairly successful in allocating capital over the last couple of years, really consolidated some of that market. You're returning to a really strong cash position again, balance sheet is strong. How are you thinking about the opportunities at this stage, kind of balancing your strong position with the multiples that are still quite elevated? Do you have appetite to potentially add a little bit more to that organic growth with some opportunistic M&A?

Yeah, so what I would say is that our capital allocation strategy hasn't changed. And as you point out, our greatest return typically comes from investing in the business and acquiring best-in-class simulation technology in support of our clients and the digital transformations that they're undertaking. So M&A is preferred, but we are selective. And so as a result, shareable purchases and debt repayments are other areas that we've deployed cash and will continue to do so.

That's really helpful. Thank you. Appreciate it. Have a good day.

Thank you. And the next question comes from Jay Fischauer with Griffin Securities.

Thank you. Good morning. Two questions. First, the company has previously said that your customer concentration, that is among your top 100 or so customers, has evolved from their accounting for roughly a third of your business to closer to now a half of your business. And the question there is, how is that affected or how might it continue to affect your internal investments, resource requirements, pipeline foreseeability, any of those sorts of metrics pursuant to that higher customer concentration? And then secondly, there are a number of external and internal technology catalysts coming up, some of which were mentioned at Simulation World a couple of weeks ago. For instance, you have a new upcoming Ansys Rockwell integration coming up. You have additional solvers for Ansys Cloud coming up over the summer. I think with the R2 release, that puts some additional high core count configurations. Microsoft is going to be previewing manufacturing cloud. And then lastly, the materials business unit is going to be expanding, I think, more into the fluids area. So lots going on in the technology pipeline. Maybe you could talk about how any or all of those are factored into your thinking.

Yeah, so, Jay, maybe I'll take the first question. I'm going to have Ajay take the second question. So, as you point out, our strategy of pervasive simulation is playing out in the market, and more and more customers are making larger and larger investments in there. And I think that it speaks to the strength of and the strength of the portfolio that customers are kind of going in all in on ANSYS to help them accelerate product development. What I would say about the overall level of investment, I would say it's consistent with the strategy that we've had to be able to allow customers to evaluate products to leverage our technology using multi-physics solutions. And so that benefits our large customers, of course, but it benefits all customers. And I think that the momentum that we saw in SMB as an example is just one kind of proof point that would indicate that it approaches broader. So it's not as though we have, you know, a set of products and a set of investments that are for only large customers and only small customers. Those investments get, you know, really diversified across the customer base. And so it's really about the personalization of the selling motion and how we engage with customers, which has been, you know, pretty consistent across the past couple of years. So I don't see anything that's any meaningfully different. That would be any meaningfully different from an investment standpoint.

And, Jay, thanks for the question. So just to quickly jump in, this is LaJay. When you think about smaller versus larger customers, we have over 1,000 customers who have gone through the Ansys startup program. And these companies tend to be some of the most innovative companies in their use of simulation and they push the envelope, oftentimes because they approach the problem with no preconceived notions of how to build a solution. And they're in a position to take advantage of the best technologies and the best solutions in the market. And, of course, they attend to Ansys. And so we are seeing the technologies that we're building and developing being used across the board by large companies as well as small companies. And you alluded and you mentioned several of these technologies. I think it's fair to say that the strategy that we laid out a few years ago for basic simulation is working. And if you recall, what we said there at the time was that we were going to diversify our focus from just focusing on the high-end analyst to a broader set of individuals, so the broader engineering population, so that we could address the needs of engineers across the entire product development lifecycle. And you talked about our relationship with Rockwell. That's a great example where we're trying to address the needs of the manufacturing engineer, for example. And in other areas with digital twin technologies, we can go after operations engineers and so on. So it's a very different approach than we may have had five or seven years ago. It's a much broader approach. And as you see, the technologies that we've developed, the acquisitions that we've made have all been in support of the core of the business, as well as this diversification towards the pervasive simulation strategy, and it benefits both large companies as well as small companies.

Okay. Thank you. And the next question comes from Andrew Oglen with Bank of America. Good morning.

Morning. Morning. You mentioned that, you know, there was some sort of hiring that lacked in the quarter. What do you think about this sort of the broader job market? How do you think about your ability to hire people as a potential gating factor in 2021 as the economy continues to recover?

Yeah, so thanks so much for your question. In February, we spoke about more modest expectations for hiring in 2021, particularly in the first half. So in the second half of last year, we brought on about 300 new hires, plus we acquired AGI. And our focus, employee experience, is a very high priority for us at Anthos. And given all of those people that we brought on board, our focus, at least in the first half of the year, is really primarily to ensure all of them are properly onboarded, feeling engaged. And as all of us know, it's a little bit more challenging to do that during these times of COVID where we can't see each other. um so to date we're a bit behind their objective but that objective was a bit more modest and so overall we consider ourselves really on track and we would expect to close the gap throughout the year this is more of a matter of our own intentionality around our our customer experience and and you know the competitiveness in the market and the ability to attract talent has not changed

Yeah, if I could just add to that. I mean, one of the things that we pride ourselves for is the culture within Ansys. We see our employee engagement scores continue to go up and to the right, which I think is really, really important. We've won some Employer of Choice Awards, which I think is important as well. So all of that points to a great culture within the company. And given the technology and given the capabilities that we provide, frankly, for a number of students graduating from engineering school, you know, what we do and the technologies that we provide represent their career objectives. They want to work in ANSYS. What we do is essentially what they've been training for as they've been getting their bachelor's degrees or their master's degrees or even their PhDs. And so we have that capability to attract, I think, top-quality talent into the organization, both from universities as well as people who are working at other organizations. So I'm very pleased about our ability to create that pipeline and also about the culture that we've been able to build at Axis.

Oh, thank you. And just a follow-up question for me. The semiconductor industry is clearly one of your areas of expertise and dominance. And, you know, we have several high-profile announcements on semiconductor CapEx shifting to the U.S. How much visibility do you have in your penetration here? And how should we think about sort of longer-term opportunity for answers as incremental growth capex does start showing up in North America. Thank you.

well the way you should think about our technology is really helping our customers primarily with the design of their of their products whether it's semiconductors or frankly with with any product that they may be working with and so if you start to look at investment for example in other geographies for example in the u.s across the board whether it's in semiconductors or elsewhere uh and you start to look at the the increase in capacity uh that translates into the need for more simulation uh and that translates into the need for more answers uh and because of the breadth of the portfolio because we have the ability to support um multi-physical simulations i think we think this is in a very uh very very good position if you look at our capabilities for advanced process notes for semiconductors if you look at the abilities capabilities that we have for 3d ics That's where, as I said, this multi-physics portfolio that we have really shines. And so we're in a position to support our customers as they evolve their plans and their design capabilities.

Thank you very much. Thank you. And the next question comes from John Walsh with Credit Squeeze.

Hi. Good morning, everyone. Good morning. Maybe a first question, just thinking about and appreciate the color you provided, thinking first half to second half. Just wanted to understand maybe the margin driver dynamics a little bit more, maybe particularly around either the SG&A line. And then just as a follow-up to that great discussion earlier on the small and medium businesses, I was just curious if that's kind of the economy coming back or if you also have some targeted sales initiatives into those customers. Thank you.

Yeah, so thanks, John, for your question. Yeah, so how I would think about margin overall is – is related to the skew of the business. So as we've communicated in the past, you know, revenue is more highly skewed towards the fourth quarter and second half overall. First quarter tends to be kind of the smallest revenue generation quarter, just based on the pattern of our customers' purchases and behavior. With that said, our overall business is the cost structure associated with our business is largely people, which is not variable. And so the margin profile, as you go throughout the year, is going to be much more elevated in the back half of the year and much more muted in the first half of the year. And so that's a normal pattern. We saw it in one queue. We've seen it in prior years. And so we would expect that pattern overall to follow suit.

And then with respect to your comment about the small and medium business, as you recall, last year when we talked about the impact of the pandemic, we pointed out that small and medium business was likely to be disproportionately affected. They typically don't have the financial resources that larger organizations do, and therefore have to be a little bit more conservative with cash. Obviously, now we're in a situation where There is vaccine rollout in parts of the world. Obviously, we have tragic situations in parts of the globe, like, for example, the situation in India. But at the same time, we have a broad-based perception that there's going to be recovery around the world, and that translates into the economy coming back. So we certainly see that in general across the space, and the S&P is no exception. In many cases, the smaller customers are seeing the need to catch up with activities that they may have missed out on, and so there's perhaps an even greater emphasis on trying to drive some of this work. The other point here is that we have global channel partners, and our channel partners oftentimes manage the relationships with the small and medium businesses. many, many arms and legs in the street working with these smaller companies to help them get to the stage where they can get back and get back into the main line of their operations. And so we're able to leverage this global channel network to also help us by being able to reach the small and medium business customers.

Great. Thank you.

Thank you. And the next question comes from Tyler Radke with Citi.

Hey, thanks very much. First question maybe for you, Ajay. Obviously, you talked about some large auto wins in the quarter, I think one with a leading EV company. Curious if that was kind of an expansion deal on an existing relationship, and if so, how much it expanded. And then more broadly, could you just kind of talk about your pipeline in the auto industry? I know this has been an area of strength, and with a lot of the trends around autonomous and electrification, you've had a lot of success there. But are there large deals coming up for renewal? Maybe just give us a sense for how the automotive pipeline looks relative to years past.

sure um the the the customer that i referenced in the call was in fact a long time uh existing customer of answers and uh they obviously were in a position to uh remove some of their existing uh relationship uh or some of their existing product usage and and expand in other areas and so that was a that was a good uh that was a good um uh that was a good um a relationship and that was a that was important for us to be able to manage uh they they expanded for example into materials that was a new area for us uh and that that came in as you recall through an acquisition that we did a few years ago uh with with grantum what we're what we're excited about in uh the broader automotive space is i mean you pointed to electrification you pointed to to autonomy with electrification clearly the imperative seems to have continue to accelerate. And there continues to be activity, frankly, in all of the geos and through the supply chain. The complexity of electrification, new government mandates to becoming carbon neutral, frankly, all of those things are driving a huge demand for simulation. And we're seeing a wide adoption of our electric machine design solutions as customers try to get to more reliable and efficient motors for electric vehicle powertrains. We're seeing battery and battery management system designs. Those are areas where simulation is growing as you have new regulations in place regarding things like thermal runaway, which is the major cause of fires in electric vehicles. And then, of course, you see customers are trying to focus on EMI and C testing, things like cable harnesses. So there's just a number of situations and examples of electrification, which represent, frankly, a significant level of investment across the board. And then, of course, with respect to autonomy, that continues to be an area of ongoing interest. And you see certainly a lot of customers participating in that space. I would argue that the market expectations of when we will have fully autonomous vehicles on the market has been pushed back because I think people are coming to terms with the complexity involved in creating a fully autonomous car on public streets. And so that's being pushed back. But if you look at the work that we've been doing, we announced a partnership with BMW back in 2019, and over the last couple of years almost, we've had tremendous amount of positive customer feedback supporting our efforts. Earlier last year, we announced a partnership with FLIR that focused on hazard detection capabilities for autonomous driving. We've partnered with NVIDIA. We've talked at the NVIDIA conferences where we've talked about our advanced radar capabilities. We've done some work with Belladyne on their LiDAR design. So we have a comprehensive set of capabilities and a partnership strategy with Autonomy. Most recently, you may have seen we announced a partnership with National Instruments, which is another important partner where we can work with our physics sensors. So we've got a partnership strategy with Autonomy, which allows us to address the breadth and the complexity of that market as it develops as well. So I'm very excited about both of those markets. tailwinds, and frankly, we were early to invest in that space because we saw both electrification and autonomy as being important, and I think our investments have been validated.

Great. Thanks for the color. And just a quick follow-up maybe for Nicole. You talked about the F&B segment improving, which is good to see. But in terms of impacted industries or impacted verticals, kind of where are we in terms of those improvements? Did you kind of see those perform above expectations in Q1? And just maybe help us understand when you expect those to normalize.

Yeah, so what I would say about the SMB segment in particular is that it was broad-based. It was cross geographies, industries, and so that was not industry-specific. Overall industry performance was in line with the expectations we had coming into the quarter. And, you know, any volatility in any given industry in a quarter is usually due to the timing of large deals or the timing of renewals, and so that could vary. So overall, the performance of the business in its entirety in the quarter was really in line with our expectations around large customers. And as we had mentioned, what really exceeded our expectations and what was encouraging was just the broad kind of level of improvement that we saw in SMB overall.

Thank you. Thank you. And the next question, customer Runeck with Baird.

Oh, great. Hi, everyone. Just to stick on the SMB performance in the quarter, I think at one point last year, you had revised your top line plans by about $80 million, and you said about two-thirds of that related to SMB accounts. I'm just wondering how much of that two-thirds of $80 million is maybe expected to now actually come back over the course of 2021 to And then second question, more on just the midterm performance of SMB customers. You know, Ajay, the 1,000 customers that have gone through the ANSYS startup program, what's been the experience of graduating onto kind of the upper tiers of the go-to-market period? And do you have any changes and ambitions for SMB within kind of the midterm horizons?

So let me address the second part of the question first as we think about the SMB program that we have, or the startup program that we have. So the Anthem Startup Program is really targeting companies that are very, very early in their life cycle. They may be pre-revenue. They may have very small amounts of revenue. And we work with them as they continue to develop their capabilities. And as I said, in many cases, we continue to push the envelope for simulation in what's possible. I mentioned at Simulation World, we had a number of companies speak. You certainly heard from, I mentioned Lucid Motors. That was an example of a company in our startup program. Relativity, you may have heard me speak about them as well. Their business model is low Earth orbit as a service. They're using our additive solutions and our suite of technologies to be able to create to be able to create satellites and launch vehicles for low Earth orbit. So it's a very exciting group of companies. Now, obviously, small and medium business is not only related to the startup program. We have others as well who are just smaller companies who participate in that program. Our expectation for the startup program is that they continue to participate as part of members of the startup program. And once their revenue reaches a certain level, they then graduate, if you will, into being mainline Ansys customers. And we've seen, obviously, as I mentioned, success. I mentioned a couple of anecdotes. I don't have the statistics in front of me, but we certainly can give you more information on that later.

Yeah, so and on your question about the overall performance of the quarter, so look, we were really encouraged by what we saw, and I would characterize it as a beginning of a return to normalized patterns. This particular segment was very quick to shut things off when the pandemic hit, and they're going to be slower to return to normal as a result. They're just not as well capitalized as large companies. They're also more subject to any capitulation that continues to be in the market as the COVID pandemic, we get out of the pandemic. And so I would say our outlook includes a portion of that coming back, and it's really centered around we try to be transparent about what we see in front of us as opposed to speculate on how behavior can change. And so that's kind of how we've thought about the recovery in the context of our outlook.

Very helpful. Thank you.

Thank you. And the next question comes from Adam Broad with Stifel.

Hey, guys, and thanks so much for taking the questions. Maybe just two quick ones. First, Ajay, just on the competitive landscape, obviously you've seen a lot of success, but some of your competitors are talking more about getting deeper into the simulation market. So I'd love to hear a little bit on any changes competitively and what you're seeing there. And then maybe just as a quick follow-up for Nicole, more of a housekeeping, can you just help remind us what the inorganic contribution was in the quarter for revenue and ACV, and what the expectations are for the 21 Guide? Thanks so much.

Yeah, so I think, you know, Ansys is a unique company, and we are, I would argue, unequaled in the marketplace in terms of our expertise in physics-based simulation. We've got deep and lasting customer relationships. And frankly, that's allowed us to drive innovation across the portfolio. And it's allowed us to create a very efficient and sustainable business model and a very deep competitive mode. And that strength of the business model, it's no wonder that competitors want to try to enter the space because they see this as being an attractive model, perhaps more attractive than the markets in which they participate in. And over the years, we've seen competitors try to enter the space with a point solution or two. But in the meantime, we've continued to expand our physics. We've achieved integrated multi-physics at scale. I mean, some of our solutions scale up to 200,000 cores, for example, in our CFD space. And that's just an enormous capability for our customers. And we continue to deepen and broaden our understanding of customer pain points, We've added new techniques to be able to solve them. And you see these advancements taking place across our entire portfolio. So I'm very excited about our portfolio. I think we're laser focused on customer success. We have a strategy that we're executing. This is the right strategy for us. By being able to broaden and deepen our capabilities in physics, we continue to support our customers from small to large across a number of different industries. And I think that puts us in a very good position competitively. And frankly, you know, if there are any When a smaller company gets acquired by another company, it fundamentally doesn't make any difference in our competitive dynamic as we see the market.

Yeah, and Adam, just to answer your question quickly on inorganic contribution, our guidance hasn't changed from what we gave in February, which was the $75 to $85 million contribution of AGI is consistent with our outlook overall. The acquisition is going well, and we're tracking well against that.

Great. Thanks so much. Thank you. And the next question comes from Jackson Nader with J.P. Morgan.

Great. Good morning, guys. First question is actually on the – kind of more near term in the automotive space. You know, appreciate that the largest deal in the quarter came from an auto OEM, but if we just think about maybe any potential for – delays or spending patterns changing from the automotive sector just with the chip shortage that's just right here in front of us the next few quarters?

As you know, our technology is tied to R&D initiatives. We're not tied to manufacturing or to number of units that are being produced. And so what we are seeing is an ongoing continued interest in our customers to produce newer and better technology. As I mentioned, I talked about at some length about electrification. I talked about autonomy. But these have implications not only for the OEMs, but through the entire supply chain. The challenges of just getting electric cars to market, as I said, are quite significant. And again, that's where Ansys comes in. So in the design activity, in the R&D initiatives, that's where there continues to be significant levels of investment. And as I said, we're not tied to the number of units being produced. And so any shortage or challenge in being able to produce cars doesn't affect us from an economic perspective.

And then switching over to another industry, I'm just curious to hear You know what you're seeing in the commercial aerospace customer base and whether investments and budgets are growing and accompanying the growing vaccine rate.

Well, as we talked about last year, and I think I gave them a couple of other previous earnings calls, I talked a little bit about some of the activity that we have in the commercial aerospace segment. And in particular, I talked about engine manufacturers and how we are working closely with them, some of the challenges that they have. that they're dealing with are quite significant. When you think about an aircraft engine, it is a really sophisticated component. It is a sophisticated machine, and the tolerances are remarkably small. And so it requires the use of multi-physics simulation. It's a combination of fluids, of structures, of thermal. All of those things come together to be able to solve these problems. And of course, our customers are now struggling with not just the traditional use cases, but next generation use cases. For example, with eco-friendly and green initiatives, there is a significant amount of pressure on the commercial aerospace world to be able to come up with more efficient aircraft design. I talked in the script about electric aircraft. But that's still some time away, and so certainly that's a threat in the industry, but getting to these lighter weight, fuel efficient, eco-friendly engines continues to be an initiative. What's important to realize is that aircraft programs, engine programs, for example, or aircraft programs in general are multi-year initiatives. These are not things that change on a quarter-by-quarter basis. So these are multi-year initiatives with significant amounts of R&D that stretches over a long period of time, and obviously we're engaged with our customers and working with them to help them be successful.

All right.

Thank you. Thank you. And the next question, Councilman Ken Wong with Guggenheim.

Great. Thanks for taking my question. The first one's for you, Ajay. With about 2% of your business coming from construction, I guess it's not obvious that you guys might benefit meaningfully from an infrastructure bill. Are there other aspects of your business? that would potentially see some sort of an uplift. And then for Nicole, just wondering in terms of a rebound in discretionary spend that might have been suppressed during the pandemic, with five months in the bag now, any change to how you're thinking about the pace or magnitude of that recovery in spend?

Let me just take the first question. I think it's important to realize that when we are talking about infrastructure investment, Certainly we see the opportunity with heavy industries, construction equipment, manufacturing. So there are a number of industries for which we have where we have strong exposure, which we think will benefit from investment in infrastructure. And you're right, of course, about construction in and of itself, but it goes significantly beyond that. And then even in the context of construction, as you start to look at next-generation techniques like digital twins and physics-based digital twins, we have technology and capability that would be relevant. So we are very excited about the infrastructure, investments in infrastructure. We think that would benefit us and certainly the customers whom we serve.

Yeah, and on your discretionary question, well, the vast majority of our employees are still working in a remote setting today, and we expect that the return to work is going to be really market dependent, and we're really focused on providing alternatives to employees, which ensures they're engaged and feeling secure about returning to work. And so from an office standpoint, you know, we've considered incremental investments to ensure safe return to work, although we consider that it's probably going to be slow. Travel is the one specific unknown to everyone, and what we would expect is that it would ramp more in the second half as markets become more open. But whether or not people continue to feel comfortable traveling during that time frame or not is, you know, that remains to be seen because we're not further enough along in the recovery.

Got it. Thanks, Ajay. Thanks, Nicole.

Thank you. And the next question comes from Sahikaria with Barclays.

Okay, great. Hey, guys, thanks for taking my questions here. Nicole, maybe first for you, thanks for that tidbit on the inorganic contribution to ACV. You know, just maybe given the changing sort of effects backdrop and what sounds like certainly improved organic growth, I guess the question is how do you kind of think about organic constant currency growth in ACV for this year, just to sort of level set, broad brush. Does that make sense?

Yeah. I mean, well, I would think about it from the perspective of how we shared the AGI contribution. So the AGI contribution being $75 to $85 million is kind of how we think about the inorganic portion of business.

Right. But then also sort of the changing the FX. I know that there's an incremental 14 million FX headwind versus the guy that you gave last. But on a year-over-year basis, how does that sort of FX part of it kind of play into it as well?

Yeah, so the year-to-year impact overall, let's go back to the overall guidance. So overall guidance, we've raised constant currency growth by a little bit over a point at the midpoint, a little bit higher on the low end, right? And so how I would think about that raise is pretty consistent with the organic momentum in the business, given that our guidance around the inorganic component is remaining the same.

Okay, got it, got it. And then maybe to follow up is, you know, just kind of given what you're seeing from the SMB base and just broader kind of recovery, it was nice to see Perpetual actually kind of get back to maybe some more normalized levels that we've seen in the past. Now, I know you call that APAC, you know, so maybe the question is, is this perpetual performance maybe isolated to that region and to this quarter, or do you sort of see perpetual kind of maybe starting to get back to sort of pre-pandemic levels?

Yeah. So, I mean, Asia Pacific is a region that has a disproportionate percentage of customers who prefer the perpetual model, and that was a stronger performer in the quarter. And so there's a relationship between those two things. Overall, we feel that over the long term, there will be a continued shift towards the leasing model. Customers have very dynamic R&D needs and projects change and needs change over time. And so the leasing model provides customers with the level of flexibility to be able to you know, use the capabilities that they need to as they need them over time and change those things over time. And so overall, the long-term pattern and the momentum seems to be favoring more towards that more flexible model. And that's consistent with trends that are in the market today around customers wanting, you know, subscription licenses and more time-based licenses. So I would say there's nothing that we're seeing that is a sea change in preference. But in any given quarter, depending on the mix of customers, depending on the geographic region of customers, I wouldn't be surprised to see a dynamic like we saw in the quarter.

Got it. Very helpful. Thank you.

Operator, we have time for one more question.

Okay, and the last question comes from Jason Salino with KeyBank Capital Markets. Please go ahead, sir.

Hi. Thanks for fitting me in. I'll just ask one. Maybe to follow up the Sackett's question, you know, this is the highest perpetual growth quarter that we've seen maybe potentially ever. But was the strength in perpetual at all attributed to pull forward, which would explain maybe the growth rate? Just trying to understand the magnitude of the strength here. Thanks.

Yeah, no, the perpetual growth in the quarter is really attributed to customers in quarter, you know, disproportionately in the Asia-Pacific region who chose to purchase. They were in the pipeline and they chose to purchase in perpetual modes versus lease modes. So it really was about the in-quarter mix of pipeline and what resulted.

Okay, great. Thank you.

Mm-hmm. Thank you. And this concludes our question and answer session. I would like to turn the conference back over to management for any closing comments.

Thank you, operator. With our excellent start to the year, our strengthening customer pipeline, and the importance of simulation to our customers, I am confident that we will meet our newly raised goals for 2021. I want to thank all my colleagues at Ansys for their commitment, their focus, and their many successes. And I'd like to recognize the great contributions from our global channel partner network for their efforts in a difficult business environment. And with that, thank you for attending today's call, and I hope you enjoy the rest of your day.

Thank you. The conference has now concluded. Thank you for attending today's presentation. Minato Central Alliance.