This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk07: Ladies and gentlemen, thank you for standing by, and welcome to the ANSYS Third 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 DeBrian, Vice President, Investor 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, today's event is being recorded. At this time, I would now like to turn the conference over to Mr. Bryan for opening remarks. Please go ahead.
spk05: Good morning, everyone. Our earnings release, the related prepared remarks document, and the link to our third 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 third quarter financial results in business update, as well as our Q4 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.
spk10: Ajay? Good morning, everyone, and thank you for joining us. Q3 was another excellent quarter for Ansys, where we beat our financial guidance across all key metrics. With strong ACV growth in the quarter, I'm delighted that, year to date, we're on our stated goal of double-digit ACV growth with tuck-in acquisitions. Our accomplishments thus far in 2021 are further evidence of the success of our strategy of making simulation pervasive across the product lifecycle, our multi-physics product leadership, and our strong customer relationships. Those factors, combined with customers' continued investment in R&D initiatives, are driving demand for Ansys' multi-physics solutions. With a robust deal pipeline and momentum in the business bolstering our confidence, we are raising our full-year financial guidance above and beyond the impact of our strong Q3 top-line performance. Nicole will have the details in a few minutes. From vertical and geographical perspectives, our Q3 results came in as expected. The high tech and semiconductor, aerospace and defense, and automotive and ground transportation sectors were again our largest contributors. Looking at our major geographies, the Americas again led the way, followed by Asia Pacific. We expect each region to have its largest quarter in Q4, with the quarterly skew to be more pronounced in Q4 for Europe. One of Q3's highlights was a three-year, $58 million agreement with a North American high-tech customer. From an ACV perspective, this deal was the second largest multi-year contract in our history. This customer was already using solutions from across the ANSYS multi-physics portfolio and is now expanding its number of simulation users. It is using ANSYS for diverse applications, ranging from ensuring the reliability of radio frequency systems to meeting sustainability goals across its product line and to chip packet system analyses for power and signal integrity. Another key deal in Q3 was a multi-year agreement with Seagate Technology, a leader in mass data storage solutions. Seagate is a longtime Ansys customer, and this new contract broadens the company's use of multi-physics simulation to address next-generation product challenges faced by its global customer base. For example, Seagate is using Ansys multi-physics products to assess thermal effects and acoustics to create a seamless workflow to enable higher capacity hard drives and to streamline process integration for heat-assisted magnetic recording. The company also now has access to our optical suite of products to drive further innovations. As we have discussed, our small and medium-sized customers, or SMBs, were disproportionately affected by the pandemic. However, during the last few quarters, we're seeing a recovery, and SMB customers have increased their investment in Ansys simulation. Our ongoing increase in sales from our SMB customers gives me further confidence as we plan for Q4 and beyond. During these calls, I typically give you some insights into various aspects of the Ansys business. In the past, I've discussed our best-in-class electromagnetic solutions, our unparalleled product scalability, and the extreme accuracy of our structural solutions. As you heard me discuss with Seagate, optical simulation is becoming increasingly important for our customer base. In fact, in Q3, about 5% of our agreements included an optical simulation product in the order. Given that, as well as our recent closing of the ZMAX acquisition, I would like to spend some time today discussing our offerings for optical simulation. Three years ago, Ansys did not have any optical simulation products in our portfolio. Today, though, companies can rely on Ansys for an end-to-end solution spanning the gamut from photons to electrons based on three product lines. The first, Ansys Lumerical, empowers users to design and analyze integrated photonic components and systems and model challenging product problems, including interacting optical, electrical, and thermal effects. The second product line, Ansys Spios simulates the system's optical performance and evaluates the final illumination effect by enabling high fidelity visualization based on human vision and camera sensing capabilities. Third is our recent acquisition of ZMAX, which enables customers to accurately model the behavior of light through complex optical lens systems. Instead of working independently as a siloed offering, our optical simulation suite operates as part of a complete multi-physics workflow. Taken together, the ANSYS optical solution is used for a diverse set of applications ranging from camera and LiDAR arrays found in autonomous vehicles, to telecommunications and mobile phone cameras, to medical equipment and other visual aids. For example, in Q3, Sandia National Lab signed an agreement leading to expanded use of numerical technologies. Sandia develops leading-edge integrated photonic and nanophotonic solutions for quantum computing, imaging, and sensing. The lab uses numerical tools to design, model, and simulate custom photonic components and their behavior in a circuit environment. In the automotive sector, industry leader Ford uses Ansys products, including SPIOS and the Ansys Vehicle Headlight Solution, in the styling and design of its predictive smart headlamps. and to optimize and validate headlight performance. Our headlight solution features real-time physics-based optical simulation and driver-in-the-loop functionality to replicate the physical world with a high degree of predictive accuracy. Automotive giant Mazda is also increasing its use of SPIOS for internal and exterior lighting, head-up displays, and cameras, thanks to a sales agreement in Q3. In aerospace and defense, an ANSYS customer is using all three of our optical product lines across multiple applications. The customer relies on Lumerical for creating photonics integrated circuits. It uses SPIOS for detecting radiation leaks from aircraft enclosures. And this customer is also using ZMAX to study lens deformation. While still new to our portfolio and a relatively small contributor to our overall financial results, These optical solutions fit squarely into our go-to-market motion, and our sales team understands how to market these products. Based on the ANSYS strategy of pervasive simulation, our optical customers can easily access products across our portfolio to perform true multiphysics analysis. We saw an excellent example of that with another aerospace and defense customer that was challenged with a winged camera that was capturing blurry images. By using a combination of ANSYS Optical and ANSYS Fluids products, the customer was able to correct the problem and deliver crisp images even at extreme speeds in bad weather. Moving to our partners, I'm excited that we are expanding our relationship with Autodesk by embedding ANSYS's electromagnetic simulation capabilities to explore and validate printed circuit board designs within the Fusion 360 workflow. This first-of-a-kind Autodesk Fusion 360 extension will enable CAD users to perform near real-time PCB analyses and to retrieve real-time insights into their electromagnetic performance to accelerate the development of next-generation products. We have also expanded connectivity of ANSYS TwinBuilder to industrial control systems through Rockwell Automation's enhanced Studio 5000 simulation interface. Users can connect digital twins to emulated controllers to optimize production at the design stage, or physical controllers to enhance equipment performance in real time, for example, in predictive maintenance. I am pleased that we have expanded our partnership with TSMC to create a comprehensive thermal analysis solution for multi-die semiconductor designs. Using Ansys RedHawk SE Electrothermal and Ansys IcePak, Along with TSMC's silicon stacking and advanced packaging technologies, users can analyze complete chip and package systems with high fidelity results. We are also collaborating with Fujitsu to enable more sustainable product development for our customers. Ansys LS Dyna now supports Fujitsu's energy efficient prime HPC supercomputers, which will help customers reduce energy consumption and cost by offloading simulation workloads to a more energy efficient machine. Keeping with our environmental, social, and governance initiatives for a moment, we recently published our simulation product handprint for autonomous vehicles. This report illustrates the role that simulation plays in the development of autonomous vehicles, including in sensors, automated driving software, and safety testing. Using simulation to develop autonomous vehicles will lead to significant societal and environmental benefits, ranging from a drop in traffic fatalities to a reduction in emissions. We have also submitted our initial report with a climate disclosure project and expect results by the end of the year. Similarly, we have begun working on our report to the Task Force on Climate-Related Financial Disclosures which focuses on governance, strategy, risk management, and metrics and targets. In summary, Q3 was another remarkable quarter for Ansys. We beat guidance across all key financial metrics and have met our goal of delivering double-digit growth year-to-date. We are also expanding our product leadership and our core solutions, as well as in important emerging areas, such as optical simulations. These factors, combined with a strong Q4 sales pipeline and outstanding execution, 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. Nicole?
spk06: Thank you, Ajay. Good morning, everyone. Let me take a few minutes to add some additional perspective on our third quarter financial performance and provide context for our outlook and assumptions for Q4 and 2021. The third quarter demonstrated the strength of our business as we delivered robust growth during the quarter. ACV was strong and in line with our expectations, while revenue, operating margin, and EPS exceeded the high end of our Q3 guidance, driven by the mix of license types sold in the quarter. Both our large enterprise customers and SMB customers performed well, and our growth during the quarter was broad-based. Now let me discuss some of our Q3 financial highlights. Q3 ACV was $365.4 million and grew year-over-year 20% or 19% in constant currency. We saw strong performance across customer types, geographies, and industries. ACV from recurring sources represented 76% of the total. Q3 total revenue was $445.4 million and grew 21% or 20% in constant currency, which, as I mentioned, exceeded the high end of our guidance driven by license mix. Q3 revenue growth was also wide-ranging across customer types and industries. For the first three quarters of 2021, we had strong top-line performance with ACV and revenue both growing double digits at 17% and 19% respectively. As Ajay mentioned, for both Q3 and Q3 year-to-date, we are executing against our business model of double-digit growth, including tuck-in M&A. We closed the quarter with a total balance of GAAP deferred revenue and backlog of $899.5 million. During the quarter, we continued to manage our business with fiscal discipline. This yielded a solid third quarter gross margin of 89.9% and an operating margin of 39.7%, which was better than our Q3 guidance. Operating margin was positively impacted by revenue performance from license mix, as well as the timing of investments. The result was third quarter EPS of $1.59, which was also above the high end of our guidance. Similar to operating margin, EPS benefited from strong revenue results from license mix and the timing of investments. Our effective tax rate in Q3 was 19%, the tax rate we expect for the fourth quarter of 2021. Our cash flow from operations in Q3 totaled $157.8 million, which benefited from strong collections primarily driven by robust Q2 growth, favorable timing of intra-quarter sales, and a reduction in the percent of receivables past due. We ended the quarter with $1,081.4 million of cash and short-term investments on the balance sheet. In line with our capital allocation priorities, we repurchased approximately 97,000 shares during the quarter for around $36 million. We have 2.7 million shares available for repurchase under the current authorized share repurchase program. Additionally, On October 1st, we acquired ZMAX for a purchase price of $399.1 million net of cash acquired. Now let me turn to the topic of guidance. We continue to build confidence in our outlook for the year given the improved yields pipeline we see in the fourth quarter. As a result, we are initiating guidance for Q4 and increasing our ACV revenue, operating margin, EPS, and operating cash flow outlook for the full year. This raise reflects the strong financial performance in the third quarter and the increased momentum of our sales pipeline going into the fourth quarter. For the fourth quarter, we expect revenue in the range of $614.9 million to $654.9 million, operating margin in the range of 44.5% to 47%, and EPS in the range of $2.48 to $2.81. As I mentioned, for the full year, we are raising our ACV revenue, operating margin EPS, and operating cash flow outlook. We are increasing our full year ACV outlook to be in the range of $1,825,000,000 to $1,860,000,000. This represents growth of 12.9% to 15.1% or 12.6% to 14.7% in constant currency. Our Q4 and full year 2021 guidance is based on continued momentum in the business and a Q4 pipeline that has accelerated since our August guidance. It does not include a repeat of the outside spending behavior we saw in December 2020 after vaccines were announced. The raise also incorporates approximately 6 to 8 million of contribution from ZMAX in Q4, which is offset by approximately 6 to 8 million dollars of currency headwind. As a result, we are raising the midpoint of our ACV guidance by $20 million, which translates to an increase of 1.5 points of constant currency growth compared to our August guidance. We expect revenue to be in the range of $1,885,000,000 to $1,925,000,000, which is growth of 11.2 to 13.5%, or 10.6% to 12.9% in constant currency. This raise reflects our strong Q3 revenue performance driven by license mix, as well as the incremental organic revenue from the momentum of our Q4 pipeline. Like ACB, our increased revenue incorporates approximately $6 to $8 million contribution from ZMAX, which is offset by approximately $6 to $8 million of currency headwinds. As a result, we are raising the midpoint of our revenue guidance by 40 million, which translates to constant currency growth of three points higher than the midpoint of our August guidance. As you know, ASC 606 introduces revenue growth volatility within the quarters. However, on a full year basis, revenue growth is less volatile. In the fourth quarter of 2021, We expect the revenue growth rate to be impacted by the year-over-year compare and mix of license types sold in the fourth quarter 2020 versus our current 2021 fourth quarter pipeline. We are increasing our full-year operating margin and now expect operating margin to be in the range of 40.5 to 41.5%. Additionally, we are increasing our full-year EPS and now expect EPS to be in the range of $7.05 to $7.38. This increase incorporates our Q3 performance and is offset by approximately 5 cents of currency headwinds. It is worth noting that some of our strong Q3 EPS performance was driven by the timing of investments that moved from Q3 to the fourth quarter 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 $505 million to $535 million. This increase is driven by stronger collections expected during the year and is partially offset by approximately $3 to $5 million of currency headwinds. Further details around specific currency rates and other assumptions that have been factored into our Q4 and 2021 guidance are contained in the prepared remarks document. Consistent with our standard practice, we will provide detailed 2022 guidance once we finalize our 2022 planning process and close out 2021. I would like to thank the ANSYS team for their outstanding execution during the quarter, which drove our robust Q3 financial performance and continued momentum going into our last quarter of the year. We once again delivered a strong quarter, which coupled with our recurring business model and growing sales pipeline, demonstrated the strength of the ANSYS business. We are well positioned 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.
spk07: Thank you. Ladies and gentlemen, 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're using a speakerphone, we ask that you 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 do ask that you please limit yourself to one question and one follow-up. At this time, we will pause momentarily to assemble our roster. And ladies and gentlemen, our first question today comes from John Ruink with Barrett. Please go ahead.
spk11: Oh, great. Hi, everyone. You know, just on the point of ANSYS growing in line with the targets you provided back in 2019, how different is the composition of the growth today relative to the original budget? You know, for instance, something like optical, not around in 19, now 5% of bookings. Is it true to say there's maybe newer and faster-growing contributors to ACVs? And if that is true, does it suggest that there's also areas of the business that might be on the lagging end of recovery, and so you get bigger contributors in future years?
spk06: Yeah, so I'll take that. Thanks so much for your question, John. So, yes, as you point out, we are well within our model of double-digit growth. We tuck in acquisitions on a year-to-date basis. Our growth certainly puts us squarely on that model. What I would say is there's two components to that. So the core itself, the core structures, fluids, those businesses are still solid contributors to growth and continue to grow. As you point out, you know, we have been building the broadest, deepest simulation portfolio over multiple decades, and that has only accelerated in the past five years. And so I think Ajay's Ajay's talk about the optical business is an example of something that was maybe quite nascent a couple of years ago that is quite robust, competitive, and extensive right now. And so I would give that as an example. Ajay, do you want to comment?
spk10: Yeah. So when we talked about in 2000, when we gave long-term guidance, if you look at the addressable market, we talked about the core, the foundations of the business, and then we talked about high growth adjacencies, including areas such as autonomy, electrification, IOT 5G. And we talked about some of the investments that we were making, and in particular, we did talk about optical as an area that we were investing in, in particular to support things like autonomous vehicles, as well as to support things like 5G for the purposes of interconnects and so forth. And so we've essentially been executing against the strategy that we laid out. I also want to correct a point that you made in your question You said 5% of the bookings came from optical. That's not what I said in my script. What I said is that 5% of the deals had some optical component within the agreement with the customer. So there was some aspect of optical within that. Optical, of course, is a relatively small piece of our business today.
spk11: Okay. Thanks, Ajay, for the clarification. I'll leave it there. Thanks.
spk07: And our next question today comes from Andrew Obin at Bank of America.
spk08: Please go ahead. Hey, guys. Good morning.
spk07: Good morning.
spk08: Good morning. Just a question. If you look at the numbers, sort of a fairly significant outgrowth in the U.S. relative to the rest of the world. You know, could you just talk about how this COVID, A, what's driving it? I assume a lot of it is COVID-driven. and how the reopening dynamic could sort of change this going into the year end and into next year, i.e., what would it take for the rest of the world to catch up with the U.S., and why is the U.S. so robust? Thank you.
spk06: Yeah, thanks so much for your question, Andrew. So as you point out, over the last 12 months, Americas has continued to be a consistent, strong performer and lead the company in creating value for our customers. You know, a couple of deals, the one that Ajay mentioned in his remarks, the $58 million agreement with the leading North American technology company is an example of, you know, I think the model that we have exported around the world and leads to some strength in our other regions like APAC where, you know, the customer has already been using solutions from across the ANSYS multi-physics portfolio, but is now expanding the number of simulation users. And so, that we've done a very good job at building deep relationships with customers understanding their short and their long-term development roadmaps and enabling them to be able to propagate the use of simulation to broader use cases to connect the physics and to also connect other users and in the process to leverage that simulation and so that model that america's executes quite well is the model that we're executing around the world and just as an example our asia pacific region has executed exceptionally. They had another quarter of very strong growth with 21% constant currency growth. I'm sorry, 21% growth in the region at a constant currency basis. And the strength in that region was broad-based across industry, customer types, geographies. We had several seven-figure contracts in Asia Pacific that added growth to the high-tech sector where Lauren Krznaric- customers are really showing enthusiasm for not just the core portfolio, but the adjacencies as well, so there's a common theme here where we're broadening and deepening the relationships within the customer. Lauren Krznaric- With our core technology having strong footholds and solid growth, but also leveraging the organic and the inorganic investments that we've been making over the past five years. to accelerate the footprint globally. And so I would say the core strength of the portfolio and the investments that we have been making during the course of the pandemic with our customers and in our portfolio are really the drivers of the acceleration and the performance of growth. To some degree, there is a little bit of recovery. I'd say Asia Pacific probably had a little bit ahead in the recovery versus America. There's still unevenness in terms of how customers are preferring to meet in person. So I wouldn't characterize things as a return to normal quite yet, but certainly the business model resilience is showing through regardless of the challenges that we've seen in the pandemic.
spk08: Oh, wow. Thank you. So it's as much as sort of reopening as structural changes in the business model. Is that the right way of reading it?
spk06: Yeah, I'd say it's the success that the management team is enjoying as a result of building out that robust portfolio and that business model. But I think also the point around investing during the pandemic is important to note. I mean, it's really easy in a tough time to barrel down the hatches and not make investments in the business. That's kind of what people might expect. But there was a very proactive or a very deliberate decision to not over pivot in that direction because of our confidence in the opportunity around what we do and the value that we can add to our customers. And so I really do feel like we're going to be coming out of the pandemic whenever that might be in a real position of strength.
spk10: And I think just to add one small point to Nicole's response there, when you think about the investments that customers make in ANSYS, it's really triggered by their investments in R&D. And obviously, globally, you're seeing investments in R&D customers continuing to look at next generation products and offerings, and that's where simulation comes in. So the fact that we can help them with building their next generation, again, points to the importance of our technology, and that's what allows us to be in a position to make these relationships and sales during a pandemic or any other time for that matter.
spk08: Thank you. And just a follow-up question. I think on a previous call, You guys highlighted how small and medium business sort of tends to lead, you know, your core business. And you made some remarks about small and medium. You are continuing to see improvement. But can you just talk about sort of sequential trends in SMB and what this, you know, if you still view it as a leading indicator for the rest of the business going to the year end? And next year, and I know you did improve your 4Q outlook, but just maybe more color there. Thanks so much.
spk06: Sure. I'll start, and if there's anything you'd like to add, Ajay. So, yes, as I mentioned in our opening remarks, we continue to see strength in the SMB customer set in Q3, and we're really pleased with the momentum that we've seen now four quarters in a row. And so I think that that is Um, that's, what's given us the confidence and, um, continuing to raise throughout the year. In addition to the fact that our, our pipeline with our large customers is solid, robust, and continues, uh, continues to evolve and improve. And so, um, I'm not sure that the two are interrelated. I think that they're, you know, somewhat related in the broader sense of recovery, but I do feel like, um, you know, although we're not quite at pre pandemic behavior within the SMB set. we're really pleased with the ongoing momentum and what we've been delivering in that business.
spk10: Yeah, and just to amplify one of the points Nicole made, the large customer dynamic is somewhat different from the SMB. For the most part, the large customer dynamic is driven by the long-term relationships that we've maintained with our direct sales force with these customers. Many of these are long-term customers of ours. They've built their processes around ANSYS, and when it comes to a new project or a new activity that they start to continue to evolve their R&D efforts, they turn to us as a vendor. And so there's an opportunity within those customers to expand the footprint based on long-term relationships. In the case of SMBs, in many cases, the SMBs are relationships that we have through channel partners, and some of these customers may be relatively new customers. They may be relatively early in their life as an organization. And so I wouldn't necessarily say SMB is a leading indicator, which was the point that you made. I wouldn't necessarily say it's a leading indicator. These are two different, they're slightly different dynamics across both the SMB and enterprise. And each one of them has their own go-to-market motion and supporting activity.
spk08: Fantastic. Thanks so much.
spk07: And our next question today comes from Gal Mundo with Bernberg. Please go ahead.
spk14: Yeah, good morning and thank you for taking my questions. Maybe the first one, just in terms of the race ATV guidance that we're seeing, again, you did a second time in a row, kind of becoming material. I was just wondering what enabled you that. Is it the strength that you've seen in SMB in Q3 and also coupled with strength in Asia that you mentioned? Or is it just the outlook as you look into Q4? You mentioned the pipeline looks really strong in terms of what's still to come in Q4 versus what you originally expected.
spk06: Sure. So in Q3, we had a really strong Q3, as you point out, with that strong double-digit growth. Q3 ACV did come in line really close within our expectations. And so the raise on ACV in Q4 is really a function of the improved momentum that has been building since the last time we shared guidance in August across the board. And so what I would say is, you know, when you look at how we delivered year to date and in the quarter, it's been pretty broad based across industries and customers. And that's kind of a reflection of what I would characterize the momentum in Q4. There's not any isolated one-off thing that is driving that view, it is more kind of an overall, an overall, you know, momentum building that you've been seeing, if you rightly point out, we've been able to raise throughout the year. I mean, as you recall, in the beginning of the year, we still were not sure whether what the kind of dynamics around recovery were going to look like. And so we've been kind of sharing with you as we see things ahead of us and, you know, systematically raising the expectations over time.
spk14: That's very helpful. Thank you, Nicole. And then just as a follow-up, maybe, Ajay, to you, you mentioned Autodesk partnership that is expanding again, especially in terms of the electromagnetics, introducing PCB simulation within the Fusion 360 product. You've also worked closely with PTC on the CAD side with both Discovery Live and ANSI simulation. It's kind of a slightly different physics for each of the partners. Is there a possibility that you start introducing more of the traditional physics solvers into the ULTADES partnership and vice versa? Would you expand the PTC partnership with the electromagnetic side as well?
spk10: Well, I think the... Look, at the end of the day, Gal, when you think about it, partnerships allow ANSYS to really expand our market reach by leveraging what our partners bring to the table. They'll bring complementary technology skills. They have a brand. They can help us reach different customer segments so that more people can benefit from simulation. Partnering allows us to create a combined solution with a leading vendor, so at the end of the day, customers can benefit from a more complete solution than either one of us can provide on our own. Now, key to our partnerships, and you'll see this all along, key to our partnerships is maintaining an open ecosystem. So our partnerships are not about blocking things off, but are making things available, opening things up. And our strategy and our products remain open so that customers can create the optimal system to meet their needs. So as you think about our partnership strategy, just think about that. We are open to trying to make sure that we can leverage and work with our partners to make our customers benefit from the entirety of what we can what we can bring to bear because we have an open strategy. I can't comment about specifically any individual partnership or the direction that it may go, but hopefully you have some perspective of how we think about partnerships.
spk14: That's helpful. Thank you, Ajay.
spk07: And, ladies and gentlemen, our next question comes from Tyler Radke at Citi. Please go ahead.
spk03: Hey, thanks. Good morning. Ajay, just a high-level question for you. Clearly, you put up a couple really strong quarters here and it sounds like the pipeline is really healthy in the Q4. Just as we think about what's going on more broadly with supply chain constraints and obviously putting pressure on kind of physical testing requirements, how much of the strength do you think could be attributed to some of the supply chain and just macro challenges that the customers are going through. And I guess, you know, just curious if you feel like this period is further evangelizing or potentially accelerating the need for simulation, you know, in other words, do you feel like this is kind of a new sustainable, you know, growth rate going forward? Thank you.
spk10: Well, so let me address your question in two sort of time frames. One is you think about the short term. So in the short term, you know, Supply chain disruptions may be affecting many businesses, but we're really not one of the businesses that's affected by the supply chain. And the reason is, as I mentioned earlier, the use of our software is tied to the design of products. It's tied to the R&D phase for the most part, and it's not denominated by manufacturing. So if a customer has challenges with the supply chain and they can't produce as many units of a particular product, that's been designed with our technology, that doesn't affect our relationship with the customer. They're already designing what that next product looks like, and they're working with our engineers, or they're working with our technology to figure out what the future looks like. So our customers continue to make investments in R&D, and it's really not affected by the supply chain in the short term, so we have no real short-term issues there. When you think about it from a long-term perspective, and I think you're also alluding to this in your question, When you think about the long-term perspective, companies, I think, around the globe are questioning exactly how they need to think about their supply chains going forward. So will there be a change in the way they've been thinking about the supply chains? And in some cases, you're seeing customers thinking about moving manufacturing closer to where the final product is actually going to be used. This isn't necessarily building factories in a more traditional way. In many cases, customers are thinking about building next generation factories where they have much more automation, robotics, next generation manufacturing techniques. All of these things are relevant for simulation. We're in a position, we at Ansys are in a position to help our customers as they go through this rethinking process, as they go through the design of these next generation capabilities, as they start to think about advanced manufacturing techniques, materials, as they work through the simulation that goes with that, we're in a position to help them. And so we see this as a long-term tailwind. where we can help customers as they try to figure out what this next generation looks like in their own evolution.
spk03: Great. Thank you.
spk07: And our next question today comes from Jay Vlieshauer with Griffin Securities. Please go ahead.
spk09: Thank you. Good morning. First question, Ajay. At the Companies Ideas Conference, last month hosted by your semiconductor business unit, there were two very interesting comments from management regarding the strategic vision that Ansys has. There was a reference to your becoming a, quote, cloud-first digital platform as a foundation for your future growth. That's a quote from the presentation. Similarly, that you foresee a time of simulation platforms and insights as a service. Again, that's a direct quote. So in thinking about your cloud future, was the commentary at your conference meant to suggest that cloud is not just an adjunct or complement to what you're doing today in terms of delivering technology but ultimately becomes the nexus of how you deliver technology perhaps not unlike what PTC discussed for itself on their call last night. And then as a follow-up question, in light of the improving disability in terms of pipeline and the like, can you talk about the investments you're making or planning to make in technical support and consulting? That's typically your, certainly lately, your second highest number of open positions after R&D, and you look like you're ramping up in that area. So maybe talk about those investments and the availability of the necessary personnel for that function.
spk10: Sure. Jay, so let me try to unpack your question, and let me start with the longer-term direction comment that you asked. And I think, look, you'll hear a lot more about strategic direction and where we're going over the next year and so on. Think of some of the comments that you heard as adumbrating some of the super exciting times that are ahead for ANSYS and our customers. You talked a little bit about cloud. We've got Ansys Cloud out there which manages access to high-performance computing resources. Just remember that many of our customers, for them, cloud is about being able to access high-performance computing at scale and enabling some of these larger high-fidelity simulations to run at scale. And so, you know, in this last quarter, last quarter on this call, I talked about the scalability of some of our products that was enabled by a customer of ours at the Technical University of Eindhoven, where they'd solved an aerodynamic problem with something like 3 billion computational cells with 20 billion unknowns. And that scalability is possible, of course, because of core technical advancements that we've done. So, for example, we sped up mesh generation by 20x, which is obviously a bottleneck in the creation of detailed simulation of transient phenomena. But also, we were in a position to give access to cloud computing resources. And in fact, just this week, Satya Nadella in his keynote at Microsoft Ignite used the same example to show what is possible on the Ansys cloud platform, which is essentially Ansys products running on Azure on the world's most powerful AI supercomputer. So that was one example, I think, of cloud that I'm excited about. We support flexible licensing models. We support an elastic pay-as-you-go model. We support a hybrid model, which mixes and matches Elastic as well as lease licenses. And this year, we've continued to expand the number of products that we've added into our cloud capabilities. For example, we've added in Ellis Dyna. We've added in Alumerical products. We've added in SOC 2 certification. We continue to improve our overall customer experience. And we've also seen significant increases in cloud usage. So one of the ways that we monitor that, of course, is by looking at core hours. And this year, year to date, we're seeing almost four times as many core hours as compared to this time last year. And we still haven't hit that inflection point. So we believe that there is still much greater demand within our customer base. And we're watching our customers, we're seeing where they're going, we're anticipating where they're going, and we're giving them the opportunity to be able to drive some of the scale-out compute. So I'm really excited about where we are with cloud and some of that capability. There was a number of other things I'm sure that were also mentioned in that conversation. Some of the things that we're excited about are the new capabilities we have in our product. We've talked about AI ML and how AI ML supports our technology and simulation. All of those are interrelated because the advances that we make in one area can be delivered to our customers in other ways. And that allows us to be a more responsive vendor to our customers or partner to our customers that allows us to continue to drive leadership in the marketplace. So that was the first question. What was the second question, Jay? It was around...
spk09: The investments in technical consulting and support positions, which, as I noted, is typically your second largest number of open positions after R&D.
spk10: Yeah, so I think if the question is, are we continuing to make investments in that area, that's absolutely the case. We do continue to make investments in the area. We think our relationship that we have with our customers at a technical level It's something that our customers value. It gives us insight into the way we work with our customers, use our technology. And it's a two-way street. We're in a position to help our customers as they evolve, and certainly we're in a position to take customer feedback and insight into the next generation of our products coming in from the field. So I think we're excited, and we continue to make investments in those areas.
spk09: Thanks, Ajay.
spk07: And our next question today comes from Jason Salino with KeyBank Capital Markets. Please go ahead.
spk13: Hi. Thanks for taking my question. Related to ZMAX, I'd be curious on how that acquisition came together. I know in the past you said that sometimes customers make requests, and I was wondering if this was one of those instances, and then maybe a quick follow-up. you know, ZMAX contribution on an annual basis. Is it fair to think it's, you know, 24 to 26 million if we just annualize the contribution for Q4? Thank you.
spk06: Yeah, so I can quickly answer that question and on the contribution. So we expect, so we had, as we said, we think it'll have about six to eight million of ACV impact and revenue impact this year, which will be offset by, largely offset by currency. Next year, we're estimating an incremental, you know, approximately 20 million in organic impact.
spk10: And as far as how the acquisition comes together, you know, as I've said many times, acquisitions are not a strategy unto themselves. Acquisitions are in support of a strategy. And clearly, one of the areas that we have continued to drive is the broadening of our multi-physics capability As I mentioned on the call, we have some leading optical simulation products and capabilities, but ZMAX obviously has been on our radar for a while as an opportunity for us to be able to broaden and deepen our portfolio in that space. And I think in the script, you heard me talk about customers who are using all of the products and how the technologies could work together to support their R&D efforts. And so this kind of technology fits right into our go-to-market motion. Our salespeople are very familiar with being able to position technology of this nature, so it's a very natural acquisition for us to conclude. We're excited about the technology. We're excited about bringing those people on board.
spk13: Great. Excellent. Appreciate the color.
spk07: And our next question today comes from Ken Wong at Guggenheim Securities. Please go ahead.
spk02: Great. Thank you for taking my question. Andre, I wanted to touch on an announcement you guys made last month, the ANSYS and Apple RF safety testing simulation module for MagSafe. Apple obviously has a very large partner ecosystem. Should we expect that this brings in a wave of new potential customers, or is this simply additive to your existing tech relationships?
spk10: So I can't talk about what any – specific company may or may not do. But what I can tell you is that we're really excited that we can make our technology available to customers who are not necessarily experts in using simulation. Our strategy for simulation is to take simulation and make it more pervasive across the product lifecycle. And part of that is creating applications that are easier for non-engineers to use. And so as part of our strategy, we're creating applications that include various elements of our technology that can be integrated together to deliver a SaaS experience for our end users, wherein they can simply invoke our technology under the covers, if you will, to solve specific problems. So those are the kinds of applications that we are excited also about bringing to market. And that's typically not an area that we've historically participated in, but we certainly see that as being part of the overall strategy that we're driving of making simulation pervasive across the product lifecycle.
spk02: Got it. Really appreciate the color there. And Nicole, just wanted to touch on the higher mix of perpetual. Is that simply a snapback of suppressed perpetual buying from 2020, or is there some other element causing that higher perpetual mix?
spk06: Yeah, no, I would characterize it, as you recall, perpetual licenses during the pandemic did take quite a significant hit, particularly in the first three quarters of last year. And so they did recover quite a bit in the fourth quarter of last year, which is one of the reasons why that compares a little more challenging in Q4. But customers continue to prefer time-based licensing models because it really enables them to be more flexible as their needs evolve. And so over the past several years, the business model has really been shifting away from perpetual licenses. If you look over longer periods of time, it's been pretty flat. And the growth has been primarily through the acceleration of leases. And that's really built a very strong annuity business for us over the past five years and has been a very successful evolution of the business. And so while we are seeing kind of some of the of the compare effects in the first three quarters of this year, we believe over the long term that the shift that we're seeing from customers is going to continue towards that lease-based licensing. Great.
spk13: Thank you very much.
spk07: You're welcome. And our next question today comes from Blair Abernathy in Rosenblatt Securities. Please go ahead.
spk12: Thanks, and nice quarter, everyone. Just following on Jay's question around the cloud, Jay, I was just wondering if you can maybe help us understand where the customer interest lies right now in terms of cloud-based simulation tools. So not just HPC, which has been in use for a long time, but are customers looking to shift from on-prem to cloud with their tools? And if they are, where are you seeing the traction out there?
spk10: So You know, we're seeing, we're certainly seeing customers wanting to take more advantage of the cloud during the, and certainly that happened during the pandemic when people were working remotely and didn't have access, as easy access to their offices. And that certainly drove some cloud usage. I mean, the fact remains that we can give our customers who want to take advantage of our technology, we can give our customers an experience where they have elastic compute driven from the cloud. It's a SaaS-like experience. We can give them that using our elastic licensing capabilities so that that feels to them like a SaaS experience. And similarly, we can give our customers access to on-premises technology in a lease model which they've used for a while. So we give our customers a choice of what they want to be in a position to do. ANSYS Cloud gives them that ability to support, support they need for cloud compute, both from the server, from the solver perspective, as well as scale up for HPC. So it really is up to the customers. And the, you know, many of our customers have made investments that are, that are within, within their own, you know, the building out data centers. So they take advantage, they prefer to take advantage of their, their own data centers. Some customers will look at the, the, the the amount of data that they have to manage. I mean, when you think about a simulation, a complex multivariate simulation that's running across multiple or multivariate optimization could result in terabytes of information. And so then there's a question of where do you store that information? How do you keep it? Do you move it from one cloud to another? What is their standard model? It's not simply a matter of moving piece parts into the cloud. It's really thinking holistically from the part of the customers on where and how they want to make this transition because it's an entire workflow that's across multiple vendors that needs to be managed. And I think we're very well positioned. Our technology is ready for the cloud. We're very well positioned. We're excited about our capabilities. And it really is a matter of meeting the customers as and when they're ready.
spk12: Great. Thank you.
spk07: And our next question today comes from Jackson Adler with JP Morgan. Please go ahead.
spk04: Great. Thanks for taking my questions, guys. Actually, just if we can follow up on, I mean, I know there's been a lot of questions on the cloud, but if we think about, you know, if there are more deals that shift to either the Ansys cloud or maybe, you know, through your partnership with Microsoft, how would that actually impact the revenue line item And is there any kind of a difference in recognition depending on where the cloud deployment is?
spk06: Yeah, I mean, I would say that the part of the business that customers are using on the cloud itself is, you know, very small and immaterial. The vast majority of the use case is around seamless access to HPC capacity and other capacity outside the cloud, which has no impact on our current – it's exactly the same revenue recognition model that we have in the – whether it's a lease or perpetual license, because their entitlements would be separate from that usage.
spk10: And the way we built a product, Jackson, is that customers can bring their own licenses, right? So it turns – you can – seamlessly take advantage of both ANSYS cloud compute capabilities, as well as you can take advantage of the same license running on premises. And so the fact that we give you the flexibility of managing that, that's what customers are looking for. And so we're not asking them to give up their investments in their on-prem compute. If they've got that, that's great. They can take advantage of that. In addition, they can take advantage of cloud. Or if they want to choose to completely take advantage of the cloud, they can do that too. So that flexibility is what customers are looking for and we're in a position to support them with that.
spk04: Okay, that makes sense. And then a follow up on Dyna. So the use cases that we're kind of talking about here are different and are expanded from what we probably would have thought when you first acquired LS Dyna, you know, right down the middle crash and impact. Is the malleability of the Dyna solver specific to to Dyna or is this also something that like other solver portfolios can do? They can kind of, you know, be flexible outside of their core use case.
spk10: Yeah, I'm not sure what you mean by the malleability. I think that firstly, you know, Dyna provides Dyna provided an explicit analysis capability into the portfolio, which obviously has use cases of wide variety of use cases. and we've continued to expand those use cases within the ANSYS portfolio as we've integrated the technologies together and combined both explicit and implicit capabilities, it broadens the addressable opportunity. So that's obviously the case. I think perhaps you might be referring to the announcement, the comment I made about Fujitsu, and I think in that what is important to recognize is that The Dynasolver is available on the Fujitsu machine on the Prime HPC supercomputer. And essentially, because that machine is efficient, we can help our customers because they're supporting their large-scale Dynaruns on the Fujitsu hardware platform. And that's more efficient because they can offload some of their simulation workload onto an efficient compute platform. So that was the point on that piece, and hopefully that clarifies the comment about Fujitsu.
spk05: Thank you. That's all the time we have. I'm going to turn it over to Ajay for some closing comments.
spk10: Thanks, Kelsey. So I'm really excited about our excellent execution, our broad customer base, and our robust pipeline. Our customers' reliance on simulation, the strengthening of the small and medium business market, and our ability to close large contracts only add to that excitement and give me further confidence as we look to close out 2021. I would like to express my sincere gratitude to our customers and to our partners for their continued support. And a special thank you to my ANSYS colleagues. You have my gratitude for delivering yet another strong quarter. Thank you, everyone, for joining the call today. Enjoy the rest of your day.
spk07: Thank you. Ladies and gentlemen, this concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.
Disclaimer