ANSYS, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the ANSYS second 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 may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. At this time, I would now like to turn the conference over to Ms. DeBrien for opening remarks. Please go ahead.

Good morning, everyone. Our earnings release, the related prepared remarks document, and the link to our second 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 second quarter financial results and business update, as well as our Q3 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 obligations to update any such information. During this call, we will be referring to non-GAAP financial measures, unless otherwise stated. A discussion of the various items that are excluded and reconciliations of GAAP to the comparable non-GAAP financial measures are included in our earnings release materials. I would now like to turn the call over to our President and CEO, Ajay Gopal, for his opening remarks. Ajay.

Good morning and thank you for joining us. Q2 was another excellent quarter for Ansys, where we significantly beat our financial guidance across all our key metrics. I'm particularly pleased with our ACV performance for the quarter, which grew at nearly 23% in constant currency. Our growing momentum from Q4 of 2020 and the first half of this year gives us increased confidence in our business and in our ability to execute against our goals. It is also further validation of our strategy of pervasive simulation, where simulation is used throughout the product development process by engineers in every discipline. That strategy, combined with our best-in-class multi-physics products, our comprehensive go-to-market approach, and our deep and lasting customer relationships has paved the way for our consistent success. The COVID-19 pandemic continues to evolve with the uncertainties of the Delta variant making headlines around the world. Despite these uncertainties, our customers are continuing to invest in innovation, R&D, and product design to drive their future successes. As such, we are continuing to see demand for ANSYS simulation increase in the marketplace and our pipeline for the remainder of 2021 is strong. As a result of that continued strength and our track record of execution, we are once again increasing our annual guidance for ACV, revenue, EPS, and operating cash flow. Nicole will provide more details in just a few minutes. Looking at Q2, all our major geographies performed well with the Americas leading the way. I'm very proud of our team in India, which came in above our internal plan despite challenging COVID-19-related conditions in the country. From an industry perspective, high-tech and semiconductors, aerospace and defense, and automotive and ground transportation were our top verticals. We also saw ongoing strength with our enterprise customers. Following the trend of the past two quarters, we saw improved spending with small and medium-sized customers. While these smaller customers have not yet returned to their pre-pandemic spending levels, the progress we've seen over the past several months gives me added confidence in the future. One of the largest deals of the quarter was with a North American leader in semiconductors. This $39 million multi-year agreement ensures that the company will have the necessary capacity to run 5 nanometer and eventually 3 nanometer designs on Ansys Redhawk SC, a gold standard power noise and reliability sign-off solution for digital design. The company has also standardized on Ansys multi-physics technology across chip, package, and system to reduce power consumption, thereby increasing its competitiveness in the marketplace. We also closed a $30 million agreement with a long-time automotive customer. This leader in electric vehicle technology has expanded its use of mechanical, fluids, and electromagnetic solutions and has adopted additional ANSYS technologies including automated design analyses, multi-body dynamics, and process integration and design optimization. This customer is working with the ANSYS ACE teams to jointly develop workflows for noise and vibration analysis and topology optimization. The company is also using ANSYS Discovery to decrease its simulation backlog and get products to market faster, all the while holding the line on development costs. Just a few weeks ago, we unveiled ANSYS 2021 Release 2, which features advances across our multiphysics product line. from structures, fluids, and electromagnetics to materials, photonics, and embedded software. R2 includes a number of advancements in core physics, simplified workflows, and integrated data management. Our solutions are based on our decades of experience and cannot be easily duplicated, creating high barriers to entry for potential competitors. While I could spend the entire hour detailing each product's capabilities, today, I will focus on just one key differentiator which cuts across our entire portfolio, namely scalability. As customer problems become increasingly more challenging, the size of those challenges require simulation software that can scale to unprecedented levels. Throughout our history, Ansys has been a leader in product scalability, and we have extended that leadership in recent releases. Our ability to create high-resolution fluid mechanics simulations with practical turnaround times enables customers to solve next-generation challenges ranging from rotating machinery to external aerodynamics to environmental simulations. Four years ago, Ansys flew and scaled to nearly 200,000 CPU cores, enabling customers to solve challenging problems faster than ever by calculating billions of cells. To the best of our knowledge, that remains a record for commercial computational fluid dynamics code. This massive scalability has enabled our customer at the Technical University in Eindhoven to solve a complex aerodynamic problem with 3 billion computational cells with 20 billion unknowns. The most recent advances in ANSYS 2021 R2 have sped up parallel mesh generation by 20x, removing what is often the bottleneck for detailed simulations of transient phenomena which occur in aerodynamics and gas turbine simulations. But 225 times speed up over the last decade has enabled ANSYS customers to reduce simulation time on a full thermal mechanical model from two weeks to an hour and a half. And now with ANSYS 2021 R2, those calculations could take just minutes, leading to improved product reliability as users run more simulations faster. That breakthrough was made possible by doubling the core counts while reducing the memory required by 40%. In our latest LS Dyna release, we have significantly improved performance, which enables customers to run transient behavior studies with 28 trillion calculated variables. and that's trillion with a T. That means safer cars and more reliable electronics. A global high-tech customer used Ansys HFSS and our new Ansys Mesh Fusion to solve a previously unsolved integrated circuit and packaging problem by scaling across a multi-node HPC cluster with 18 terabytes of RAM and 576 cores. In Ansys 2021 R2, we introduced the Phi Plus Mesher, which extends mesh fusion to deliver additional speed and capacity. C++ has sped up meshing on PCB plus BondWire package models by 18X, which will bring new innovations to the 5G, autonomy, and industrial Internet of Things market. Ansys semiconductor customers are using next generation distributed and grid computing techniques to model and solve chips with 2.6 trillion or more devices. Ansys RedHawk SC set a capacity and performance record in power integrity sign-off last year by extracting 66 billion electrical nodes on the design of a GPU and solving it over 2,400 CPUs in a fully distributed manner. In Ansys 2021 R2, our solver performance doubled, enabling customers to sign off even larger chip designs using the same compute resources and runtime. Scalability is one of Ansys' many differentiators and is becoming increasingly important to our customers as they develop next-generation products. We believe that our history of product scalability, along with accuracy, ease of use, and speed to solution, create a difficult environment for any would-be competitor, while giving our users the functionality they need to solve the most challenging product problems. We are continuing to train the next generation of engineers in the use of ANSYS solutions by expanding our free offering for students. To date, nearly 2 million students around the world have downloaded our products. And just a few weeks ago, we launched an additional offering for students to download our electronics desktop and to enroll in ANSYS innovation courses for training. These students now have access to our leading electronics products, including HFSS, Maxwell, and Iceback to train them in developing the products of tomorrow. And thanks to our new partnership, Cornell University will design and develop online training courses with real-world applications from ANSYS. Moving to partnerships, I'm excited to announce that we have expanded our work with TSMC to include new certifications for ANSYS RedHawk and ANSYS Totem. These new certifications for power network extraction, power integrity and reliability, signal electromigration, and transistor level custom designs enable joint customers to meet critical power, thermal, and reliability standards for next generation product applications. Ansys continues to be recognized for our inventive approach to engineering technology. I'm proud that for the third year in a row, Fast Company has named us one of the best places to work for innovators. I'm even more excited that five of my colleagues have been recognized with the prestigious Women of Color STEM Awards. These awards showcase the outstanding scientific and engineering achievements of women around the world. And ANSYS is proud of these pioneers who serve as an inspiration for us all. Turning to our environmental, social, and governance initiatives, I'm pleased that MSCI has upgraded our ESG rating to AA, naming us a leader in the software and services industry. MSCI cited Ansys' comprehensive talent pipeline relative to our peers, our focus on business ethics, and our capabilities in helping customers to innovate in areas such as clean technologies. To summarize, Q2 was another great quarter for Ansys and a further validation that our pervasive simulation strategy is resonating with the market. Our strong sales pipeline, our ongoing momentum with enterprise customers, the resurgence of small and medium businesses, and our continued leadership across our product portfolio give me further confidence in our ability to meet our newly increased outlook for 2021. And with that, I'll turn the call over to Nicole.

Thank you, Ajay. Good morning, everyone. Let me take a few minutes to add some additional perspective on our second quarter financial performance and provide context for our outlook and assumptions for Q3 and 2021. Our strong Q2 results reflect an outstanding execution across our business, which yielded revenue, operating margin, and EPS all above our Q2 guidance. As Ajay mentioned, and exceeded our expectations. Both our large enterprise customer and our small and medium-sized customer spending patterns performed better than expected, and our growth during the quarter was broad-based. Now let me discuss some of our Q2 financial highlights. Q2 ACV was $430.5 million and grew year-over-year 25% or 23% in constant currency. We saw strong performance across customer types, geographies, and industries. ACV from recurring sources represented 82% of the total. Q2 total revenue was $452.6 million and grew 16% or 14% in constant currency, which exceeded the high end of our guidance. Like ACV, Q2 revenue growth was from across the business. In the first half of 2021, we had strong top-line performance with ACV and revenue both growing double-digit, 16% and 18% respectively. We closed the quarter with a total balance of GAAP-deferred revenue and backlog of $927.1 million, representing a 10% increase over last year's second quarter balance. During the quarter, we continued to manage our business with fiscal discipline. This yielded a solid second quarter gross margin of 90% and an operating margin of 41.7%, which is better than our Q2 guidance. Operating margin was positively impacted by revenue performance above our guidance, as well as the timing of investments. The results with second quarter EPS of $1.85, which was also above the high end of our guidance. Similar to operating margin, EPS benefited from strong revenue results and the timing of investments. Our effective tax rate in Q2 was 19%, the tax rate we expect for the remainder of 2021. Our cash flow from operations in Q2 totaled $118.9 million, which benefited from strong collections driven by a reduction in the percent of receivables past due and was partially offset by differences in the timing of tax payments as compared to Q2 2020. We ended the quarter with $958.2 million of cash in 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 Q2, we are initiating guidance for Q3 and increasing our ACV, revenue, EPS, and operating cash flow outlook for the full year. This increase reflects the strong broad-based financial performance in the second quarter and our current sales pipeline. For the third quarter, we expect revenue in the range of $400 million to $425 million and EPS in the range of $1.22 to $1.39. 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 to be in the range of $1,800,000,000 to $1,845,000,000. This represents growth of 11.4% to 14.1% or 10.8% to 13.5% in constant currency. we are raising our full-year ACV guidance to reflect the Q2 performance which exceeded our expectations and our increased confidence in the full-year pipeline. This raise was offset by a few million dollars of currency headwind. As a result, we are raising the midpoints of our ACV guidance by 30 million, which translates to an increase of 2.7 points of constant currency growth compared to our May guidance. As a reminder, it is best to look at full-year ACV growth, as quarterly growth can be variable. As we mentioned in May, ACV quarterly growth rates in 2021 will vary with Q2 and Q3 being the strongest two quarters. Based on our performance in Q2, we expect Q2 to have the highest ACV growth rate for the year. As a reminder, we still expect Q4 growth to be muted given the Q4 2020 growth comparison. Consistent with prior years, the dollar value of ACV will be highly skewed toward the fourth quarter. We expect revenue to be in the range of $1,840,000,000 to $1,890,000,000, which is growth of 8.5% to 11.5% or 7.3% to 10.2% in constant currency. Similar to our ACV guidance, this increase reflects our strong Q2 revenue performance and increase confidence in our full-year pipeline offset by a few million dollars of currency headwind. As a result, we are raising the midpoint of our revenue guidance by 23 million, which translates to constant currency growth of 1.5 points higher than the midpoint of our May guidance. As you know, ASC 606 introduces revenue growth volatility within the quarters. However, on a full-year revenue basis, revenue growth is less variable. In the second half of 2021, we expect revenue growth to be impacted by the year-over-year compare and mix of business. We are increasing our full-year EPS and now expect EPS to be in the range of $6.85 to $7.15. This increase incorporates our strong Q2 performance and is offset by a few cents of currency headwinds. It is worth noting that some of our strong Q2 EPS performance was driven by the timing of investments that moved from Q2 to the second half of the year. Now let me turn to our full year operating cash flow guidance. We are increasing our 2021 outlook to a range of $495 million to $535 million. This increase is driven by stronger collections expected during the year and continued improvement in payment terms toward pre-pandemic levels. we are pleased with our strong first half in operating cash flow but as a reminder second half cash flow is most impacted by whether large q4 deals close near the beginning or the end of the quarter for modeling purposes we're expecting third quarter operating margin in the range of 34 to 36.5 percent And for the full year, we continue to expect operating margin to be in the range of 40 to 41%. Further details around specific currency rates and other assumptions that have been factored into our outlook for Q3 and 2021 are contained in the prepared remarks document. I would like to thank the ANSYS team for their continued commitment to our customers and fellow colleagues during this prolonged time of uncertainty. the team delivered exceptional execution during the quarter, which drove our strong Q2 financial performance. The combination of best-in-class execution with a strong recurring business model and growing sales pipeline sets us up well to deliver on our 2021 outlook as well as our longer-term financial objectives. 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 one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. Please limit yourself to one question and one follow-up. At this time, we will pause momentarily to assemble our roster. The first question comes from Ken Wong with Guggenheim Securities. Please go ahead.

Great. Thanks for taking my question. Nicole, I just wanted to maybe check on ACV, really solid performance here. Would you characterize the strong results as just sort of increasing the conversion rate of the pipeline, or did you actually see an uptick in demand and potentially a boost to the overall pipeline as giving you higher confidence in the raise?

Yeah, thanks, Ken. Yeah, we were really pleased with not only the second quarter but where we landed on the first half overall, as you know, translated to 16% growth overall for the half, which was fantastic. The team really delivered. I would say that it went back to a very similar pattern that we saw in Q1, which was it was broad-based across geographies and industries. As you recall, coming into the year, we were a little bit cautious about SMB and kind of the underlying momentum of SMB, and we had expected enterprise customers to perform as expected. I would say in the second quarter, we got, you know, a bit more out of the enterprise than we expected to get, which was great because it's It showed people are really seriously committing to their R&D portfolios and accelerating development. But we saw for the second quarter in a row that resurgence on the SMB side. And there wasn't anything that was specific, localized, or kind of in narrow form. It was just kind of everywhere. So I would say it's that really kind of broad-based performance that we saw really in the second quarter, in the first half, that contributed to the confidence that we had in raising our overall ACV for the year by the 2.7 points at constant currency.

Got it, got it. And then you touched on SMB. Also, you guys mentioned that it was kind of tracking back towards pre-COVID levels. Any rough sense of kind of where we are? I'm not sure if there's a way to kind of quantify if we are maybe 60% of the way there, 70% of the way there, but would love to get a sense for how much more there is to close the gap before we're back to what you might consider normal for that piece of the business.

Yeah, I mean, as I mentioned before, we were really pleased with the momentum we saw in the quarter and the strength we saw. What I would say is it is the guidance that we have going into the raise in the full year was really not counting on SMV coming back to those pre-pandemic levels. There certainly is a lot more activity, there's a lot more engagement, but this does happen over time, market by market. It does vary too in terms of the rate and pace and speed. of how these customers are coming back. And so while I don't have a specific quantification to give you, what I would say is that, you know, if it happened at a more accelerated rate, that's not, you know, and we were all of a sudden back to pre-pandemic levels by the end of the year, that's not something we've really contemplated in our rate.

Great. Thank you very much.

The next question comes from Gal Munda with Berendory. Please go ahead.

Good morning, and thank you for taking my questions. The first one would just kind of reflect a little bit on friends and folks in terms of the um operating cash flow and the acv and how you know acv outperforming also kind of allowed you to raise the cash for estimates for the year uh it's interesting because what we've seen is you know 30 million operating acvs resulting about 15 million operating in operating cash flow which kind of suggests that this is an incremental conversion there. Is that something that we could, you know, is that something that as you continue to perform, Phil kind of is replicable going forward? Yeah, just maybe a little bit in light of potential investments or something that you might also balance out on the other side.

Sure. So let me break apart the components of cash flow. So as you point out, cash flow is more highly correlated to ACV because of the way 606 treats revenue recognition. So that is exactly the right way to look at it. So there's two components to it. There's the collections piece along the ACV side, and then there's the payment side. um and so on the collection side we've seen um we have seen a a an improvement at a more accelerated rate both in terms of you know lack of asking for extension on payment terms people catching up on on each payment and people overall maintaining a level of current balance at higher rates than they had through the pandemic so all of that is um i think contributing to part of the acceleration on the cash flow side. The headwind in this particular quarter was really tax payments and the timing of tax payments, particularly in a quarter. can have a more distorting dynamic overall and so as you recall last year there were some deferral incentives during the pandemic that you know raised cash flow in the second quarter and then this year you know those payments were due as you know, as expected in the second quarter. And so overall, you know, I would expect to see still a little bit of capitulation and volatility in the relationship between the two just because the nature of the payments piece is not kind of back to normalized levels. But what you can count on is that underneath the covers, the momentum around collections and customers' kind of behavior around that has been quite good, and we're really happy with where we're at.

And then just as a follow-up, you said that, you know, S&B strength has really come in. And what we say usually is that S&B is a good indicator, leading indicator of the kind of underlying demand for the business. But the other way that you could say also if the larger deals are starting to kind of, you know, close a little bit earlier, is it something that you're starting to see as well at better close rates? Did you have any pull-ins potentially from a quarter as well?

No, I mean, I think we saw very balanced growth and performance across the enterprise side and the SMB side. And so what we are seeing is that customers are – you know, using simulation to continue to accelerate their development roadmaps and the optimism around needing to make those investments overall. And so there was really no timing dynamic here of any meaningful, to any meaningful degree other than the normal things that fall before and after the dateline in any normal quarter. It really is the performance in the quarter was really a statement of the overall momentum that we're seeing in customers' behavior overall.

Right, which is the part that betters more our deals as well. Awesome. Thank you so much. Great.

The next question comes from Adam Borg with Beeple. Please go ahead.

Hey, guys. Thanks so much for taking the questions. Maybe just on Ansys Cloud, Ajay, we'd love an update there and how things are tracking as we think about post-pandemic plans.

Sure, Adam. So as you know, Ansys Cloud provides managed access to HPC resources, and that allows our customers to essentially learn larger and higher fidelity simulations. And as you know, the cloud also supports a very flexible licensing model, and that includes an elastic pay-as-you-go model, as well as a hybrid model that allows customers to mix and match elastic as well as lease licenses. Now, we have a number of internal metrics that we deploy to measure the business. And we are seeing probably a 5x, five times greater usage as compared with this time last year. So very nice growth as a result of the activities that we've done, as well as, of course, external conditions with people working from home. This year, if you think about what we've done to augment the cloud, we've added cloud support for Ansys LSTC, for Ansys Dyna, for our Lumerical products, We've completed SOC 2 certification, and we also continue to focus on the overall customer experience. And that's really translated very positively for customers. And a couple of months ago, a few months ago, we published a release about a customer, Van Ord, who talked about how they could speed up their simulations by 7x. which obviously is a significant perspective because they're able to take advantage of the most recent and most capable hardware in the cloud, as well as the cloud capabilities that we have. So we're very excited about our cloud direction. We've made all of the necessary investments. And of course, it's still early days because we're talking about a relatively small portion of our business.

That's really helpful. And maybe just a quick follow-up for Nicole. Just on perpetual license, that's been really strong the last few quarters. I know there's been this ongoing trend towards term versus paid off. But I'd love to think about or hear a little bit more about how you're thinking about perpetual license growth over the back half of the year. And is that strength in part due just to increasing confidence in that market and the ability to deploy larger deals like that? Thanks so much.

Yeah, so we did see, in the first half of the year, we did see relatively more perpetual license growth than we've seen in the past. And what I would say is that that long-term trend of shifting towards the lease model still continues, right? So as you recall, there were dynamics last year where perpetual was a little bit more muted, and I think what you're seeing this year is just some of the return of some of that business overall. But if you look at the business over longer periods of time, The growth and acceleration of the business is really driven by the lease model, and the perpetual business has been roughly flat over those longer periods of time. In terms of the second half, I think one of the dynamics that we saw in Q4 last year was not only exceeding the high end of guidance by $45 million, there was a significant perpetual mix in Q4. And so how we're looking at it on a go-forward basis is, you know, not really expecting that repeat performance in Q4 overall is some of the underlying factors that are based into the guidance.

Super helpful. Thanks so much.

The next question comes from Jay Bleachour with Griffin Securities. Please go ahead. Thank you. Thank you. Good morning. Ajay, for you first. Within the context of your large multi-solution solver sales, could you talk about the incremental demand within those deals that you may be seeing for any or all of the smaller brands, such as Minerva, Granta, Esterel, Miracle, and so forth? Are those becoming incrementally important within the context of those deals? And then as well, In your prepared remarks, you noted your semiconductor and high-tech business. As this week is the 10th anniversary of the Apache acquisition closing, perhaps you could share your thoughts on how you're thinking about your EDA business for the next number of years. and the kinds of internal investments that you think you'll need to be making over the next number of years to keep that business growing. And then lastly for Nicole, your services revenue were down sequentially from Q1. And yet over the last few months, there's been a discernible uptick in your openings for technical support and consulting positions. So from that, should we infer that you are anticipating an improving pipeline in terms of engagements and deployments activity?

Jay, thanks for the question. Let me start with your comment or question about some of the smaller products. As you know, some of those products are organically developed. Others came in through acquisition. And we embark on activities such as an M&A or organic development, specifically when we see opportunities in the market where customers are either leading us or where we see an opportunity to provide greater functionality to solve a customer problem. And so all of the acquisitions or all of the internal development that we do is driven by an analysis of what that market would look like. And I'm delighted that we're generally seeing what we expected to pan out is in fact panning out. You talked about Lumerical, Photonics, that's obviously a very important part as you think about data centers, for example, and we're seeing obvious traction there because this product fits into our overall portfolio. So when we go to customers, we can go to them with a broader set of capabilities that includes critical capabilities, such as Lumerical that you mentioned, where we can go in and talk about an end-to-end solution that addresses the needs that the customer may have. And you see that repeated across our portfolio where smaller products are playing important roles in being able to stitch together an end-to-end workflow to allow customers to solve some of the most complex problems that they're dealing with. So I think that's hopefully that addresses your first question. With respect to your second question, I'm excited, obviously, with our performance in high-tech and semiconductor. I no longer think of the Apache acquisition. That's part of our semiconductor organization and has been for a number of years. And obviously, we have a number of deep integrations across our portfolio between our semiconductor business and our electromagnetic activities. And you start to think about next-generation products like 3DIC and Challenges. And that's when the entire Ansys portfolio comes in, going from our semiconductor portfolio all the way through our more Newtonian physics, if you will. And so I'm very excited about the portfolio, the capabilities. I think we have market-leading products across the board there, and customers tell us that they're able to solve tremendous challenges with our offerings, and we're excited about the future.

Yeah, and Jay, to your services question, so specifically this year, we do expect to see services disproportionately impacted by COVID just because of the nature of services being more in-person, particularly with the Delta variant and some of the either self-imposed or imposed restrictions that customers are having around in-person engagement. So we're not anticipating in our guidance any increase, any meaningful change in the trajectory of the services business. In terms of the skill sets that you're referring to, I'd say that, yes, we are hiring, we are investing in the business, we're investing in the areas that you and Ajay just discussed now around helping our customers connect physics together, multi-physics, and so those are skill sets that we continue to invest in. And that investment in services business is also a reflection of the momentum we're seeing in the pipeline around sales because those individuals also support the selling process to some degree. So overall, I think what you're seeing is a good set of momentum around customers starting, you know, continuing to accelerate their R&D pipelines and leveraging Ansys to do so. And so that's why we're making the investments in those spaces.

Thanks very much.

The next question comes from Andrew Obin with Bank of America. Please go ahead.

Male Speaker 1 Yes, good morning. Male Speaker 2 Good morning. Male Speaker 1 Yes, just looking at the indirect channel, it seems like it's performing very well. Are there any partnerships that are really gaining traction or other reasons for this growth? And you might have touched on them in your previous comments, but just unpack that.

Male Speaker 1 Yeah, you should think of our indirect channel You should think of our indirect channel consistent with some of the growth that we're seeing in SMB because our indirect channel partners are oftentimes supporting customers who are lower down in the pyramid, while some of the larger global organizations are handled by direct sales force. So that's really the dynamic that you're seeing, and that growth is reflective of that dynamics.

And just a broader question, your outperformance this quarter, you know, internally, how do you think, you know, if you put it like into three buckets, one, reopening, B, your customers structurally investing more, and C, you know, just your strategy as you're sort of expanding and getting your products into the partner's ecosystem, your adjacencies. you know, internally, if you're trying to sort of attribute this outperformance this quarter, you know, short-term macro, long-term structural thing, or your strategy, you know, how would you sort of allocate the outperformance into these two buckets? Sorry for a long question.

Yeah, I think it's really difficult to point to a specific allocation of one bucket to another because these things are all related to each other. Look, at the end of the day, if you just reflect on the ANSYS portfolio, What we've built is a market-leading set of capabilities of individual physics which are connected together. And so this multi-physics capability is what's necessary for customers as they solve some of the most challenging problems that they're dealing with. And so when you think about electrification, for example, or 5G or IoT, all of these areas are complex. Customers are investing a significant amount of money. They're looking for simulation offerings to be able to support them in their R&D efforts. And we have the technology, we have the capabilities, we have the relationships, and we can support them on their journey. So that's a very important aspect. You've got to have the right goods when people need them. The second thing is that, obviously, around the world, we're seeing customers recognizing that there is going to be an end to the pandemic and that they have to continue to make investments in R&D. And you're certainly, the small and medium business customers are perhaps most emblematic of that because they are Earlier in the pandemic, you saw a shutdown for SMB customers, right? They were most concerned about cash. They're most concerned about the potential demand future because these are smaller companies and they have less cash resources than some of the larger companies. But what we're seeing now is obviously an opening up of spending there, which is reflective of the fact that customers around the world, not just SMB customers, customers around the world are looking at the world after things completely open up again or certainly after a pandemic world. post-pandemic world where things start to get back to normal with respect to the broader economy. And they recognize that in order for them to be successful, they have to have products that people want. And that means more investment in R&D and more investment in product design, as I mentioned in my comments. So the demand is also increasing. And I think that those two things work together. You have to have the right products. You have to have the growing demand. If you didn't have either one of them, you wouldn't necessarily be able to deliver the results. And I think that we are – that's exactly what we're seeing, and we're very excited about what we can provide to our customers and where the market's going.

Yeah, and I would add just one additional point to what Ajay said, which is the ANTHES team and the execution of that team. I mean, the – The sales team and services teams were there alongside customers throughout the pandemic. We've made investments in supporting our customers throughout that pandemic. And that puts us in a position of strength as customers are coming out of it and making the decisions that Ajay referred to. As you know, I mean, in enterprise software, sales cycles are long. So if you're not there and you're not committed to your customers and you're not delivering value, even at times where they're not quite ready to invest at the levels that you're um that that you know they're comfortable with in a time like a pandemic um it pays off in the end and you can see that particularly uh in some of our markets like asia pac and other places where the team has just been exceptional uh in the way that they have managed to deepen those relationships with customers was there a follow-up

Oh, apologies, I put myself on mute. No, thank you very much.

Thank you. The next question comes from Saket Kalia with Barclays. Please go ahead.

Okay, great. Hey, guys, thanks for taking my questions here and fitting me in. Nicole, maybe just for you, just a little bit of a housekeeping question. I think you mentioned the ACV constant currency guide was about 10.8% to 13.5%. Can you just remind us how much of that is organic versus inorganic?

Yeah, so at the beginning of the year, we talked about AGI contributing $80 million to this year. And so we're still seeing that as the current trajectory.

Okay, got it. That's helpful. And then for my follow-up, maybe for you, Ajay, can you just talk a little bit about Simulation Live and how you feel that's trending? I know that's a little bit of a longer, sort of a long-term story, but curious what the update is and how you feel about it.

You mean Discovery, right? Is that

I'm sorry, yes, absolutely, Discovery Live. Sorry, I was calling it the PPC. Sorry, Discovery Live, yes.

Yeah, so look, we're very excited about Discovery, and I think perhaps to make it real, a little bit more tangible, Perhaps I can go back to the example I gave in the script, which was one of our customers who's using Discovery in a very interesting way. So for this particular customer, some of the detailed flow and thermal management simulation is done by experts using ANSYS flagship products. But the typical turnaround time is, you know, maybe 60 days because of the complexity of the simulation. And they have a relatively small analyst team serving a larger design team. So they introduce discovery as a way for the design engineers to do some of the simpler simulation on their own. So things like, you know, flow distribution or pressure drops. So they're able to do that by themselves. And they can improve the design of their components before they hand off the design for a complete system simulation to the expert analysts. So that's an example where the whole thesis that we had was this is something that design engineers could use to really amplify the capability of the analyst. That's something that's borne out here. And for this customer, they also had some outsourced CAE spend And they're using Discovery now to help train their designers on some basic structural analysis so they can limit some of this outsourced work on simple geometry changes. And what that does for them is it changes the design iteration time, and it takes it down from a couple weeks to a couple of days. So that gives you some perspective. We're very excited about the technology. We continue to make advances in the technology. And obviously, I mentioned a couple of customer examples. You talked briefly about PTC and the use of Creo Simulation Live. And on PTC's earnings call last week, I believe they reported continued traction with increased expansions driven by a migration around Creo 7. As you know, they are OEMing our discovery products into Creo, Creo Simulation Live, Creo Ansys Simulation. And that Creo 7 is their latest enterprise release, and so obviously there's increased traction that comes from that. And they also talked about a customer win where the real-time simulation capabilities were helping to simplify the customer's design process. So we're very excited about the technology. It continues to perform as we had expected. Obviously, it's a relatively small piece of our business. and the market dynamics around what we're seeing is strong.

Very helpful. Thanks, guys.

Thank you.

The next question comes from John Walsh with Credit Suisse. Please go ahead.

Hi. Good morning, everyone. Good morning. Good morning. Good morning. I wonder if you could talk a little bit about your acquisition pipeline. You know, you were able to get Phoenix done, which looks like it bolts on nicely to AGI. Just what are you seeing there and what can we kind of expect there from a capital allocation perspective?

Yeah, so as you point out, you know, the greatest return we've been able to provide on deployment of excess cash has been utilizing it to acquire second M&A. And, you know, the example of something like Phoenix is a great example of, you know, premier technology, which helps us accelerate another investment we made in December around NAGI. Phoenix provides model-based technology. engineering. So I would say that you should expect that we will continue to execute strategy which is consistent with our model, which is, you know, to achieve double-digit growth, but talking acquisitions overall. So the decision on the capital allocation decision and the focus on M&A hasn't changed.

Great. And maybe just a follow-up to that, you know, during the quarter you had put out a press release about a customer, you know, it looks like expanding the relationship they had with ANSYS. One of the things that I found interesting was, you know, more stringent regulations around greenhouse gas reduction and how they're using simulation to help that. You've talked in the past about sustainability and how you can help your customers, but the drumbeat just seems to be getting louder and louder. Are you seeing customers accelerate any decisions around this sustainability focus, or is it still, you know, is that still kind of an extra add-on benefit to what you're already bringing to the customers?

So I think the sustainability aspect is clearly important across a number of different interventions for different customers. When you look at, let's take, for example, a big trend in the automotive industry, which is around electrification, right? Obviously, there's a discussion about the future of the internal combustion engine and the rate and pace at which electric cars and vehicles will be adopted broadly. And you're seeing car companies, for example, making the decision to just simply move from one to the other. And that's obviously driven in part by issues of emissions and being more eco-friendly. We talked last year about in the aerospace industry, we talked about some customer wins where the motivation for the customer was really to make their engines more fuel efficient. So it was about light weighting. It was about reduced fuel consumption, increased efficiency of fuel. And so even in aircraft engines, for example, you're seeing that as being a primary driver for new design of engines. And so it's absolutely part of a broader trend. I mentioned Vanward earlier. They're, of course, building sustainable offshore wind turbines, and they're a simulation user. But again, their focus is on renewable energy sources. So compliance purposes as well as eco-friendly, all of these things are drivers of product design and product requirements. And obviously to ensure that customers can meet those standards, simulation plays a really important role.

Great. Appreciate you taking the questions. Thank you.

The next question comes from Blair Abernethy with Rosenblatt Securities. Please go ahead.

Thank you. Nice quarter, guys. Just a vertical question here. Ajay, just first off on the auto vertical. As you look at the shift from ICE development to electrical vehicles, obviously a completely different product. Do you have a sense at this stage as they move away from ICE design and new model introductions to pure electrical. You know, what does the ANSYS footprint change in the auto vertical look like? Does it grow? I mean, obviously, 10 years from now, maybe we have a lot less ICE engineers out there. And secondly, you called out in your prepared remarks the healthcare vertical and a large win in using simulation software to train some algorithms. Can you just expand on that a bit and how big might that –

opportunity be in in in the healthcare vertical thanks firstly with respect to automotive um what's what's exciting for us is that we have uh the technology and the capabilities from a product perspective and a relationship perspective to support our customers as they go through that transition so we can help them with battery management technologies We can help them with electric drive trains, electric motor design, all of the elements that you would expect that would sort of go into the replacement of the internal combustion engine with an electric battery-powered environment. But above and beyond that, if you think about the challenges that some of our customers are facing as they make this transition, An electric car is not just simply an internal combustion car with one means of propulsion replacing another. It's an opportunity for our customers to redesign. In fact, they have to redesign it because the assumptions that are previously made of an engine in the front of the car, which concentrates the weight in the front of the car, Those assumptions are no longer relevant because perhaps now you have a battery that's uniformly distributed across the floor of the car. And so that changes the weight distribution and changes the assumptions of the way that the car was originally designed. And so there is a significant rethinking taking place in these car companies, especially the auto companies who historically relied on the reuse of technology from one generation to another. There is a rethinking of saying, what does it mean for us to support this, to build an electric car? And so all of that leads to and drives increased use of simulation, and certainly for ANSI simulation. You think about crash design, right? So the problems that you may have been dealing with earlier for a crash might have been, how do you think about the passenger? Will the passenger be protected? And that's a complex multi-physics problem because you're dealing with the structural integrity, you're dealing with the deployment of the airbag, which is a fluids problem. So there are multi-physics problems in nature that need to be addressed through simulation. Now the question is, it goes above and beyond that, and it says, well, what is the likelihood of a fire, some kind of a catastrophic fire that might take place as a result of a battery rupture? Can you solve that problem? So it starts to become more and more challenging. And so this transition is not just a matter of supporting the design of the engine per se. It is the actual car and the aggregate, and that sort of plays well to our strength and our capabilities. Now, with respect to your second question about healthcare, while healthcare is still an overall relatively small part of the Ansys business, simulation continues to grow and we do well in, for example, the design and the manufacturing of medical devices, and that was obviously reflected in the performance in the quarter. But as we look to the future, we are excited about the increased use of simulation as a validation in the market. So the use of in silico trials as opposed to just in vitro, in vivo, and the use of simulation techniques supporting that, those in silico trials, I think is really helpful. And we're working with early adopters who are using simulation to target specific surgical outcomes. And this is obviously Early, early stage. You know, there's not really much revenue associated with it. Very, very early stage. But this is about how do you support a physician as they're making decisions about surgery. Those are, at the end of the day, some of those can be simplified into problems of computational fluid dynamics. And, of course, we have fantastic technology in that space. And so being able to put all of that together and packaging that, I think that's certainly something for the future.

Thank you. That's all the time we have today. I will turn it over to Ajay to make some closing comments.

So thank you all for your questions. And I want to thank all my colleagues at ANSYS and our global partner network, for your amazing work, your dedication to the company, and for continuing to drive the success for Ansys and our thousands of customers around the world. With our excellent start to the year, a strong pipeline, and the unprecedented levels of innovation that we're driving across our multi-physics products, I am confident that we will meet our newly raised goals for 2021. And with that, thank you all for attending today's call, and I hope you enjoy the rest of your day.

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