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spk09: Ladies and gentlemen, thank you for standing by and welcome to the ANSYS Third Quarter 2022 Earnings Conference Call. With us today are Ajay Gopal, President and Chief Executive Officer, Nicole Anacinas, Chief Financial Officer, and Kelsey DeBrien, Vice President, Investor Relations. All participants will be in a 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 1 on your telephone keypad. To withdraw your question, please press star then 2. Please note that this 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.
spk03: Good morning, everyone. Our earnings release, the related prepared remarks document, and the link to our third quarter 2022 Form 10-Q 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 and business update, as well as our Q4 and updated fiscal year 2022 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. 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.
spk06: Good morning, everyone, and thank you for joining us. Q3 was yet another excellent quarter for Ansys, where we once again beat across our key metrics, including ACV, revenue, operating margin, and earnings per share. This gives us further confidence in the business, and has enabled us to operationally raise our full-year guidance for ACV, revenue, EPS, and operating cash flow. Nicole will have the details in a few minutes. As we have previously discussed, the strength and the resilience of the Ansys business come in part because of the number and the diversity of customers we serve. Ansys has tens of thousands of customers across multiple industries, including high-tech and semiconductor, aerospace and defense, and automotive and ground transportation. Those three sectors were again our largest contributors in Q3. Our largest contract for the quarter was in the high-tech and semiconductor space, a $59 million three-year agreement with an international electronics company. This global brand has been challenged by the increasing complexity of its products as semiconductor chips continue to get smaller, which has led to issues such as voltage drop. By continually enhancing our solution for semiconductor and other areas of physics, we were not only able to stave off any competitive challenges in this long-time account, but we increased the number of Ansys products the customer uses, the number of end users, as well as the amount of computations performed. This new contract broadens our existing footprint, which included products from across our multi-physics portfolio, such as structures, fluids, electromagnetics, and materials. This is a perfect example of our discussion at our recent investor update that Ansys is growing across three vectors, more products, more users, and more computations. Ansys is also well balanced across geographies with a little less than 50% of our business coming from the Americas and the remainder roughly split between EMEA and Asia Pacific. This diversity in our customer base means that we can harness growth from a wide variety of sources. It also means that we are resilient to the business or economic dynamics of any specific customer or industry or country. In Q3, I'm excited to report that from a geographic perspective, we saw very strong revenue growth from both Asia Pacific and EMEA, while the Americas came in as expected. Adding to the strength of our business is our broad and deep product portfolio, which includes flagship products in structures, fluids, electromagnetics, semiconductors, optics, and mission. As such, we are not over-reliant on any individual product line, which further contributes to ANSYS' resilience. Additionally, our proven portfolio enables us to attract new customers as well as to displace competitive technology. For example, our startup program is continuing to grow as these nascent companies take advantage of Ansys solutions. The program has had over 1,600 customers across 53 countries. While members of our startup program represent a small piece of our overall business, they are aggressive users of our products. And with the program's high graduation rates, More and more of these customers become active contributors to the ANSYS business. While it can be difficult to replace an incumbent in our space, we have also grown our customer base by displacing competitors. For example, in Q3, we won a contract with an industrial tool manufacturer that was a key account at one of our competitors. That customer is now using ANSYS structural, fluids, and electronic solutions for the development of its power tools. On these calls, I often highlight a specific aspect of our business. Over the past several calls, I have discussed the unparalleled scalability of our best-in-class fluid products. I highlighted the critical role that ANSYS solutions play in sustainability. I discussed how customers are using our solutions in the development of next-generation semiconductors and I reviewed our leading suite of optical simulation products. For this call, I would like to reiterate some of the key takeaways from our recent investor update. During the update in August, we discussed how typical enterprise software companies have only two vectors of growth, more products and more users. Ansys, however, has a third, more computations. Let me briefly discuss each of them. Traditionally, simulation involved a single user leveraging a single Ansys product for each individual simulation. Today, as we partner with our customers to solve more complex R&D challenges, there is an increased demand for multiple physics, including structures and fluids, electronics, photonics, and others to work together. By transcending individual physics, to connect workflows that solve complex multi-physics problems. Our customers can simulate and analyze the physical world at a system and a mission level. Addressing these complex new use cases inherently requires the use of multiple physics solvers, leading to an increased number of multi-product sales. In Q3, we signed a seven-figure contract with a longtime Space 2.0 company that has standardized on ANSYS' multi-physics solutions across all of its engineering departments to develop safer and more reliable launch vehicles. With this new agreement, the company is now expanding its ANSYS footprint to include our material intelligence solution as its central materials database. We have also invested in the overall user experience, which is driving more end users of ANSYS solutions. Remember that in the past, only expert engineering analysts could take advantage of simulation. Today, ANSYS simulation is being used by all levels of engineers thanks to our automated workflows and integrations with other systems that make ANSYS solutions more intuitive and easier to use. That means that different types of engineers can fully take advantage of the benefits of ANSYS simulation, and it is driving the expansion of simulation usage to more users upstream and downstream of the validation process. In Q3, Ansys closed the largest healthcare contract in our history, a seven-figure agreement that will dramatically expand the number of users at an American eye care company. Realizing the benefits of simulation, this existing customer has launched a digital twin and digital engineering initiative that will triple the number of users of engineering simulation technology in the next 18 to 24 months. The third vector of our growth is through more computations. Ansys is able to monetize customers' workloads as they run the larger, more complex calculations needed to solve next-generation product challenges. A single Ansys user can leverage multiple products and can run hundreds of simulations across thousands of cores in parallel, which is critical functionality as even the most common products become more complex. We provide our customers with open, scalable offerings supported by the major cloud platforms to enhance and extend our industry-leading simulation portfolio. This flexibility enables our customers to maximize the value they realize from simulation while scaling up to address the increasing complexity of next-generation product development. We recently announced the launch of our Ansys Gateway powered by Amazon Web Services. With this addition to our comprehensive cloud offering, customers can easily access, subscribe, and configure Ansys applications from a single location. Ansys Gateway powered by AWS allows broader access to high-performance computing by bringing down the traditional hardware barriers that have limited innovation for many of our customers. Our focus on expanding the portfolio of physics, on creating a platform to enable and manage complex multi-physics solutions, and on expanding simulation use cases, unlocks greater customer value, which enables all three vectors of growth for ANSYS. The application of ANSYS simulation technologies can be manifested in varied and distinct ways. For example, last time I discussed the multiple roles ANSYS solutions played in the testing, launch, and deployment of the James Webb Space Telescope. Keeping with the applications of ANSYS in space, I'd like to briefly highlight the role that we played in NASA's recent DART mission. As you may recall, in September, NASA smashed an unmanned spacecraft into an asteroid in an attempt to alter its orbit. The Johns Hopkins Applied Physics Lab extensively used ANSYS SDK throughout the mission planning process, from formulating DART's trajectory through the asteroid system, as well as to visualize relevant vectors and attitudes. The thermal team used SDK's full mission environment when checking the location of the sun relative to the satellite during critical maneuvers. NASA has announced that the DART mission exceeded its highest expectations by shortening the asteroid's orbit by 32 minutes. This marks the first time humanity has changed the orbit of a celestial object. And I would like to congratulate the team at Johns Hopkins and NASA for their success in this inspirational and potentially lifesaving mission. This example demonstrates the range of use cases as well as the impact of ANSYS solutions. Next, I'd like to highlight the thousands of ANSYS employees around the world. They are, of course, what makes ANSYS so special. So I'm very proud that Newsweek magazine has ranked Ansys as 13th amongst the most loved workplaces at U.S. companies. The ranking considers employee survey responses, external ratings, and interviews with company leaders. This recognition is just one more testament to Ansys' unique culture and the impact we have on the world. In closing, Q3 was another excellent quarter for Ansys. one that provides momentum as we close out the year and look ahead to 2023. With our product leadership, proven performance, and resilient business model, I am more confident than ever in the future of Ansys and the innovations we're helping our customers to drive. And with that, I'll turn the call over to Nicole. Nicole?
spk04: 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 full year 2022. The third quarter demonstrated the strength and resiliency of our business as we delivered robust growth during the quarter and beat our financial guidance across all key metrics. ACV was strong and better than our guidance. Revenue, operating margin, and EPS also exceeded our Q3 guidance driven by ACV outperformance. Both our large enterprise customers and SMB customers performed well during the quarter. Now let me discuss some of our Q3 financial highlights. Q3 ACV was $409.3 million and grew year-over-year 12% or 20% in constant currency. We saw broad-based constant currency growth across customer types, geographies, and industries. ACV from recurring sources grew 16% in constant currency year-over-year on a trailing 12-month basis. This momentum in recurring ACV growth is driven by the strong annuity created by our ongoing shift towards subscription lease licenses. ACV from recurring sources increased represented 79% of the total in the third quarter. Q3 total revenue was $473.7 million and grew 6% or 15% in constant currency, which, as I mentioned, exceeded our guidance driven by outperforming our expected ACV. Asia Pacific and EMEA drove strong Q3 revenue growth. We had robust top-line performance in Q3 with ACV and revenue both growing double-digit and constant currency at 20% and 15% respectively. In both Q3 and year-to-date, we executed against our business model of double-digit growth, including tuck-in M&A. We closed the quarter with a total balance of gap-deferred revenue and backlog of over $1.1 billion, which grew 23% year over year. During the quarter, we continued to deliver a business model with strong operating leverage. This yielded a solid third quarter growth margin of 91.1% and an operating margin of 41%, which was better than our guidance. Operating margin was positively impacted by outperforming on revenue as well as the timing of investments that have moved into the fourth quarter of the year. The result was third quarter EPS of $1.77, which was also better than our guidance. Similar to operating margin, EPS benefited from strong revenue results and the timing of investments. Our effective tax rate in the third quarter was 18%. the tax rate we expect for the remainder of 2022. Our operating cash flows in the third quarter totaled $127.2 million. Our unlevered operating cash flows were $132 million. We ended the quarter with $632.7 million of cash and short-term investments on the balance sheet. Now, let me turn to the topic of guidance. The underlying momentum in our business and demand for our best-in-class portfolio continues to be strong. We are operationally increasing our outlook on ACV revenue, EPS, and operating cash flow for the full year. We delivered a robust Q3, and our strong 2022 forecast reflects our continued breadth and depth of customer demand. Offsetting our year-to-day performance and strong full-year outlook is persistent and significant U.S. dollar strengthening, which impacts the exchange rates embedded in our guidance. Let me start with our full-year 2022 guidance. We expect full-year ACV outlook to be in the range of $1,975,000,000 to $2,000,000,000. which represents growth of 5.6 to 6.9%, or 12 to 13.4% in constant currency. We are raising the midpoint of our full-year constant currency ACV growth compared to our August guidance. For additional context, the midpoint of our ACV guidance, when translated at 2019 foreign exchange rates, would be equal to approximately $2.8 billion and would exceed our 2019 Investor Day ACV target. Our full-year constant currency ACV growth raise is driven by the strong performance and our resilient business model. That performance drove a full-year ACV operational increase of $8 million relative to our August guidance. This momentum was offset by $20 million of additional foreign exchange headwind. Our strong performance has been consistent throughout 2022. Since we issued full-year ACV guidance in February, we have raised the midpoint of our constant currency growth rate guidance by almost three points from around 10% in February to almost 13% constant currency growth with our current guidance. The strong organic growth in our business has been driving our improving outlook. Turning to revenue, we expect revenue to be in the range of $2 billion to $2.35 billion, which is growth of 3.5% to 5.4%, or 10.1% to 11.9% in constant currency. We are raising the midpoint of our constant currency revenue growth compared to our August guidance. which reflects a full-year revenue operational increase of $12 million. This momentum was offset by $24 million of additional foreign exchange headwind. Similar to ACV, for revenue, we have raised the midpoint of our full-year 2022 constant currency growth rate guidance by almost two points from around 9% in February to 11% with our current guidance. Turning to EPS, we expect our full year EPS to be in the range of $7.48 to $7.80. Relative to our August guidance, our full year EPS increased 12 cents from better operational performance, which was offset by 17 cents of incremental foreign exchange headwinds. As a reminder, some of our strong Q3 EPS performance was driven by the timing of investments that moved from the third quarter to the fourth quarter. We continue to expect our full-year operating margin to be in the range of 41% to 42%. Now let me turn to our full-year operating cash flow guidance. Our 2022 outlook is a range of $570 million to $600 million. Relative to our August guidance, our full-year operating cash flow increased $2 million from better operational performance, which was offset by $7 million of incremental foreign exchange headwinds. Also note, on a year-over-year basis, operating cash flow continues to face non-operational headwinds, including the timing impact of R&E capitalization regulations and higher interest expense given rising interest rates. Since January 2022, we have seen significant U.S. dollar strengthening relative to all global currencies that contribute to our results. Our largest exposures are to the Euro and Japanese Yen. When compared to the 2021 currency rates, our 2022 guidance is negatively impacted on ACV by approximately 120 million and operating cash flow by approximately 40 million. Now let me turn to guidance for Q4. For the fourth quarter, we expect ACV in the range of $761.3 million to $786.3 million and revenue in the range of $621.8 million to $656.8 million. We expect Q4 operating margin in the range of 45.6% to 48.5% and EPS in the range of $2.58 to $2.90. Further details around specific currency rates and other assumptions that have been factored into our outlook for 2022 and Q4 are contained in the prepared remarks document. Our core simulation market is strong and diversified with consistent demand from our customers as they encounter increasingly complex product development challenges. This strong core market, coupled with our market-leading portfolio, deep customer relationships, and highly recurring financial model with three vectors of growth, makes Ansys' business highly resilient. All of this is driving the underlying momentum in our business, and gives us confidence in the increased outlook for our full-year constant currency ACV and revenue growth. I would like to thank the ANSYS team for their outstanding execution during the quarter, which drove a robust Q3 financial performance and momentum going into our last quarter of the year. We once again delivered an exceptional quarter, which demonstrated the ongoing strength of the ANSYS business. I am confident in our ability to continue to execute against our outlook. Operator, we will now open the phone line to take questions.
spk09: Thank you. And ladies and gentlemen, at this time, 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, 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. And at this time, we'll pause momentarily to assemble the roster. And our first question today will come from Gal Munda with Wolf Research. Please go ahead.
spk12: Hi, good morning. Thank you for taking my questions. The first one is just, Ajay, you mentioned how the different vectors of growth are working for you. And I wanted to kind of double down a little bit on the computational power that your customers use and just relate that to the business model you have today. Can you just give us a little bit more color on how you're able to capture that as people, as that relationship from one engineer using one license at a particular problem, when they start solving more complex problems, how do you capture that value from an economic perspective as well? Thank you.
spk06: Gal, good morning. That's a great question. So the way you should think about how we monetize that is, is really through product licensing. So when we license our technology to customers, we give them access to the use of us. Take a multi-year lease as an example. We give them access to use our technology for a duration of time, and we also give them access to high-performance computing capability. And that HPC translates into license software for us, license revenue for us, license ACV, And, of course, access to the solvers themselves also show up as licenses. So in the aggregate, both the ability to use the technology on more processing translates into license for us and the ability to use more of our software in that context translates into more license for us. So that's how we monetize it, and that's how it shows up in our financials.
spk12: That is really helpful. Thank you. Interesting. And then... I like kind of the point that Nicole made, which is, you know, if you look at the constant currency exchange rates from 2019, you know, you as a team managed to beat the guidance, what will manage to be the guidance by about, you know, four or 5%. If you look back and kind of think about when you gave us that guidance, I think it was in September 19. And what happened, you know, during that time we had COVID and everything. What has allowed you, which parts have potentially played out better than what you thought at the time to allow you to, even though anything that was going on from a macro perspective, you're able to kind of achieve those targets. What surprised you maybe on the positive or maybe even on the, what ended up being maybe a little bit slower than you thought? Thank you.
spk06: Why don't I jump in, Gal, because I have some context and then maybe I'll ask Nicole to add a little bit more. So if you look back at 2019 and you consider the evolution of our business, and we described some of this in the investor update presentation that we did earlier this year, we've been in the process of a transformation in our business model where we've been taking advantage of these three vectors of growth that you alluded to earlier and And we've been using that to really transform our business model in the way that we support our customers. So we've increased the amount of lease that we do with our customers, and that translates into obviously stickier relationships with our customers as we go forward. So, look, at the end of the day, it comes down to the products that we have and the capabilities that we provide and our ability to address some of our customers' most challenging market needs. And we have an amazing portfolio. We've continued to build in that portfolio. We've continued to expand that capability. That makes us even more relevant for our customers today as compared with years ago. And the nature of the business model, the nature of the ability to monetize that relationship, all of that translates into our ability to be very resilient no matter what happens out there in the market. So we have a very resilient business model that I'm excited about. You know, we've talked about how we are, and I mentioned this in my script, we talked about how our technology is very broad across multiple physics. We're not overly reliant on a single product line. We talked about how we have presence in multiple industry verticals, and I mentioned high-tech, I mentioned automotive, I mentioned aerospace as examples, and, of course, we have presence in others, and we talked about our geographical distribution as well. So that gives us the ability to be resilient when a particular industry changes or when there are particular challenges in an individual market. Now, in the face of a global pandemic, of course, as you saw going through this, that's an overarching global phenomenon. And there it just goes back to the core value proposition of our products, which is we help our customers build better products, bring them to market faster at lower cost. We help them reduce warranty costs. We help them be more efficient. And so that combination of being able to support them from a top-line perspective and drive both top-line growth as well as support them from a cost perspective really stands us in good stead in rough economic times, which is obviously what we've seen in the last couple of years. So that in part contributes to the momentum of the business that we've seen in the past, and frankly that contributes to the momentum of the business that we're seeing today. I've had the opportunity to now spend a number of years Over the last couple of months, I've had an opportunity to spend time with customers in person in the U.S., in Europe, in Asia. And what I'm hearing from customers around the globe is very consistent perspectives on the pressures that they're having to be able to continue to drive their businesses forward. So they've all got multi-year product roadmaps that they need to advance their businesses. And frankly, they're relying on us. They're relying on simulation to be able to not only deliver on those roadmaps, but to be able to deliver on those roadmaps as efficiently as possible because they know that simulation can help them save time and money through the avoidance of physical testing and things of that nature. So, you know, that's all contributed to the momentum that we have in the business, and I'm really excited about where we are right now.
spk12: Thank you, Ajay. That's very helpful.
spk09: And our next question will come from Tyler Radke with Citi. Go ahead.
spk02: Yes, good morning. Thanks for taking the question. Ajay, in the opening remarks, you referenced a number of deals where you displaced competition in accounts, and it just feels like this is something that you're talking about more here on this earnings call relative to historical quarters. So could you just walk through kind of the opportunity that you see there? Have you seen kind of win rates pick up? And, you know, is this kind of a function of some of the, you know, innovation at ANSYS and, you know, perhaps inorganically just kind of combining products that you've acquired into the core suite that's allowing you to do this? Just kind of talk about the opportunity on the competitive displacement side. And then I had a quick follow-up for Nicole. Thank you.
spk06: Yeah, so firstly, Tyler, the first point is competitive displacements are in our industry relatively difficult, right? They don't happen on a regular basis. These are relatively difficult. And when they do happen, it's something that you are excited about because the customer has a specific need, and obviously they're not able to satisfy that need based on whatever products they may currently be using. and whatever they're using right now, if it's not able to address their needs, not able to solve their problems, not able to provide the level of fidelity or accuracy they're looking for, not able to integrate with the systems that they need to, they'll look for another solution. And as you rightly pointed out, We were excited, and I mentioned this in my script, we were excited about a competitive displacement this year that we noted. But more generally, the nature of these displacements are driven by, as you pointed out, the strength of the portfolio. Look, we've made a lot of investment in improving the products from a performance perspective, from a usability perspective, from an integration perspective. If you look at some of the releases recently, that we've announced, for example, most recently in R2, in 2022 R2. One example on scalability. I mean, we're using a GPU scalability and achieving enormous acceleration in solving capacity for our customers. These are all incredible innovations that they value. And as they start to look at our roadmap and the organic activity that we've got, they realize that they should be committing to us because we will be able to help them not just only today, but out into the future. So that's how I see it. And obviously, as you mentioned in organic, obviously we continue, we've made a number of good acquisitions. They've been integrated into our portfolio as well. And that just adds to the breadth and the depth of our technology and capability.
spk02: Thanks. And Nicole, as I look at the Q4 ACV guide, so obviously it was a really strong beat here in Q3, but It looks like the raise for the full year was much less than the operational beat in Q3. Could you just help us understand what's giving you the moving pieces in the guide for Q4? Were there some deals that maybe came in a bit earlier here in Q3? Or are you kind of de-risking Q4 further based on what you see on the macro environment? Just help us understand that the relative large outperformance in Q3 and then the much smaller operational raise for the full year. Thank you.
spk04: Yeah, sure. Thanks. And a great question, Tyler. So let me start with a perspective of how we view the overall momentum in our business. Our focus is really on how we improve our full-year ACV outlook over time. And that's because the quarter-to-quarter revenue growth dynamics are really less indicative of momentum. because of the lumpiness of large deals. And also timing, the precision of predicting the timing within a specific quarter is also a little more challenging. For example, in Q3, we closed over 12,000 deals alone. So you can't always control the timing of when customers are deciding to close those deals. And so to illustrate the momentum we see in the business, I would point out two things. So first is, You know, looking at what I started, the answer was here on looking at the raises throughout the year. So, you know, our $8 million operational raise that we gave in this guidance really is a follow-on to a $29 million operational raise in August, which was a follow-on to a $35 million operational raise in May. And so, overall, we've seen consistent momentum and improvement in the business. That translated to about... three points of incremental constant currency growth throughout the year. So from about 10% in February when we started to about 13% at the midpoint. The second thing that I'd point out is while quarters are a little lumpy and it's a little bit more challenging to see patterns, you can look at kind of the first half and the second half to understand the underlying momentum of the business. So in the first half, our constant currency ACB growth was around 12%. And if you look at the midpoint of our constant currency ACV growth implied in our guidance for the second half, that would be about 14 points. So you can clearly see from the first half to the second half the improvement in the momentum of the business. And in addition, the incremental $8 million raise on top of the guidance we gave in August is an indicator of the overall improvement in the second half.
spk09: Okay. Thank you. Thank you. And our next question will come from Jay Bleashour with Griffin Securities. Please go ahead.
spk07: Thank you. Good morning. Ajay, for you first, you noted the breadth of the product line. And that, for me, raises the question of resource allocation to that greater breadth of portfolio, specifically for R&D. At your analyst meeting five years ago, You gave us a number of priorities that you had for internal investing, specifically for R&D. Here, five years later, looking ahead, given the greater breadth of the portfolio and the various dimensions you spoke of, how are you thinking about critical resource allocations, especially as R&D is a steady or slightly higher percentage of revenues than it was a number of years ago? For Unicall's follow-up, for the year today, you've been adding typically between 100 and 200 employees per quarter. How are you thinking about the ongoing headcount ads from here, specifically in one of your largest categories, which is technical support and consulting or the AE area?
spk06: Great. So let me start first, Jay. Thank you for the question. Let's talk a little bit about R&D and prioritization. As you know, and I think we've discussed this in our investor updates, we have a pretty robust mechanism of being able to allocate resources against priorities, and we do that analysis, and that ultimately influences where we're spending our money and our resources in order to achieve the outcomes that we're looking for. From a product perspective, I think you should understand that we look at sort of the core physics evolution. And there is an amount of work that we have focused on the evolution of the core physics and that algorithmic advances, all of the work that you would expect to continue to make structures better than ever, fluids better than ever, electromagnetics, et cetera. So we have a stream of activity within the R&D organizations which do that. We also have, as we've broadened our portfolio, we have some platform level work. And that really addresses the needs across multiple products. So it's support for the cloud. It's support for products like Minerva. These are value propositions that apply across all of the physics and all of the verticals as we deliver to our customers a simulation platform that allows them to manage these really complex simulations that we're dealing with. If you look at technologies like materials, for example, that's, again, very valid as you start to think about multi-product sales. Materials comes in and provides a significant amount of capability in that context. So the other thing to note is that some of the techniques that we have developed, for example, GPU acceleration, where we've done some incredible work, that's technology that can be shared across the physics industry. Some of the ray tracing techniques that we've developed in one phase are applicable across others. So we're leveraging the teams to be able to take advantage of learnings from one team to the other. So I'm very comfortable with our position with our R&D footprint. I think we have a fantastic roadmap, and I think it continues to add to the value proposition for our customers, which is we can continue to help them solve their most challenging problems now, and they have confidence in our roadmap going into the future to support them. They understand the value proposition of being able to reduce costs. They understand we can help them reduce warranty costs. All of those things are reflected and supported by our R&D roadmap.
spk04: And, Jay, on your hiring question, yeah, our Q3 pace of hiring came in as expected, and it was at a higher rate than we did in Q3 2021. So we are keeping to our plans, we're tracking to our plans, we're continuing to hire in Q4 as planned. I mean, the overall additional point I would make is that our overall attrition still remains lower than industry averages, and that really positions us well to have the consistency and the stability in our overall organization to continue to invest in growth and really take advantage of the opportunities that Ajay just articulated in his response to you around your R&D question. And so, So we're continuing to execute against the 2022 hiring as planned.
spk07: Thank you very much.
spk09: And our next question will come from Steve Tusa with JP Morgan. Please go ahead.
spk01: Hi, good morning. Good morning. I'm appreciating you guys have kind of overdriven on the annual guide this year. I think that's something that's pretty clear. So obviously the trends through the third quarter here are very strong. I'm just still not kind of understanding what's going on in the fourth with the slowing growth on the ACV side. Is there something, you know, in the macro that, you know, is maybe some pull forward in the 3Q that made that look a little better? So the trend is still very strong. It's just that there's a little bit of lumpiness, you know, and I know the backlog and, you know, the leading indicators were down. That's probably a Forex issue, but Just trying to get a little more color on what's happening there in the fourth quarter. Again, totally appreciating that the trend line is very strong, and you guys have done a great job this year of beating numbers consistently.
spk04: Yeah, so first I just kind of reiterate the point around growth rates in any given quarter on a quarter-to-quarter basis. I mean, the absolute growth rate in Q4 that you see in the underlying guidance remember there's about 700 basis points of foreign exchange in that absolute number overall. So when you adjust for foreign exchange, the midpoint is around that double-digit growth, which is in line overall with our model. On a quarter-to-quarter basis, you sometimes get lumpiness in terms of when deals happen and when there's kind of year-to-year compares of when those deals happen. So the quarterly growth rates and the patterns of quarterly growth rates are just less indicative of overall momentum than the overall, which is why kind of in responding to Tyler, I kind of gave that description of the overall momentum. And so now when you look at what can happen in any given quarter, again, you know, 12,000 contracts in a quarter, sometimes timing falls into different quarters than one would expect. And so overall, the underlying optimism of the business hasn't changed. The underlying momentum of the business hasn't changed. we are very focused on delivering the full year number, making sure that we're getting the right deals for our customers and for the business at the right time. And so sometimes that can affect the overall underlying dynamics about growth. But overall, Q4's midpoint is still in that 10% range, which brings the second half to approximately 14% constant currency.
spk01: Right. And I guess just...
spk04: Yeah, sorry, go ahead. I didn't answer your backlog question. I apologize. So the backlog on the backlog, that's really a sequential pattern as well. If you go back and you look, there's some seasonality to the way backlog kind of rolls off. And so that you also have to look into the longer patterns as well. So if you look at the same quarters last year, you see that kind of seasonal pattern of the dip in backlog pattern. on a quarter-to-quarter basis, and then it kind of returns to different. So the quarter-to-quarter dynamics are less indicative than the overall kind of full-year dynamics that you see on backlog growth.
spk01: Right. So there's really nothing that you guys are seeing. I know everybody is, you know, very sensitive to the macro these days, but there's really nothing you're kind of seeing as far as, you know, an extension of closed cycles or, you know, and anything like that where people are being just a little bit more cautious, you know, because the annual midpoint, you know, growth was on an organic basis was significant. touch down a little bit? There's really nothing there, macro-wise, that you guys are seeing? Just to put a cap on this question?
spk04: Yeah. No, I would say that the overall... I'll let Ajay comment because he's been speaking to customers, so he can give you the more contextual cover. But our overall outlook has improved since August. And so we're not seeing any fundamental difference other than the timing of when customers have closed deals in the quarter. So on a constant currency basis, our growth rate has increased for the full year, and that's really driven by that $8 million operational rate. So there's nothing specific that we're seeing other than normal quarter-to-quarter dynamics in terms of when things close. But, Ajay, maybe you can add some color.
spk06: Yeah, sure. Just to jump in here. Obviously, we read the same headlines that everyone else does. But look, our outlook is based on the reality that we're seeing in the field. And as I mentioned earlier, in the last couple of months, I've had the opportunity to spend a fair amount of time on the road. And as I said earlier, I've talked to customers across in different geographies. I've also spent time with the sales force in the field in these different geographies as well. we're not seeing the challenges that you might read about in the headlines reflected in our business. And I'll sound like a broken record, and forgive me for repeating myself, the value proposition that we provide is tied to R&D, and customers have multi-year R&D product roadmaps, and the competitive environment for customers is more challenging today than it's ever been. they understand the lessons of the past, which is that if you see, you know, concerns in the headlines and you pull your R&D investment back, when those concerns are past, you're now behind and you lose market share, and that's to your detriment. They've seen this play out time after time after time. And so the investment in R&D activity continues unabated, and our value proposition is tied to R&D because, as I've said, again, repeatedly, we make R&D efficient, more efficient, and we help customers you know, drive product to market faster. So that's where our excitement comes from. It comes from what we're seeing from a forecast perspective, what we're seeing from the field, what we're seeing with our customers, and the nature of the products in the market we serve.
spk01: Great. Thank you so much. Really appreciate the call.
spk09: And our next question will come from Blair Abernethy with Rosenblatt Security. Go ahead.
spk10: Thank you. A nice quarter. Ajay, I just wanted to ask you about your prepared remarks around users of simulation software. If we look back, you know, a decade or so ago, really a very technical master's level or higher kind of user base was predominant. And now it seems like things are starting to broaden finally, as had been long predicted. Are you seeing this actively out there across your verticals, and what exactly do you see ANSYS doing in order to encourage broader engineering adoption?
spk06: Well, you know, it's multifaceted. I mean, firstly, the observation that you're making, which is that it's easier for engineers to use simulation and more engineers are using simulation is absolutely accurate. And, you know, there are a number of reasons why that's the case. Number one, we'll start from the product perspective. The products are easier to use, and we've had significant investments in usability and in integration, all of those things over the last several years after the last decade or two, which has culminated to the situation right now where the product is so easy to use. I don't know if you recently saw this. It ran by my news feed this morning, but there was a high schooler in California who used ANSYS simulation to simulate the loading of backpacks on students and the impact of a backpack And they did that analysis using ANSA simulation. They used Granta. They used Mechanical. They used a number of these products working together in order to come up with a solution and won a very prestigious award. That's an example of how easy the technology has become to use for people where motivated high schoolers are able to take advantage of the technology. That's number one. Second thing is we continue to increase our level of investment with universities. We have presence in over 1,600 universities around the world. Cornell University teaches a massive online course using ANSYS. Over a quarter of a million people have signed up for that. We've had millions of people downloading the student version of our products around the world. So there is broad-based understanding of our of our technologies at the undergraduate level, and simulation is being taught as part of the curriculum. So graduating students are coming out aware of how to use simulation, aware of the value proposition, aware of the benefits, and aware of how to use ANSYS. And that is another aspect where the entering engineering workforce is very comfortable with this technology as opposed to a few decades ago. The other thing is, of course, the use of computing. We have continued to make the technology more efficient. We're also leveraging high-performance computing. We're leveraging GPUs. And with the overall broad-based availability of compute, that's making it easier for people to take advantage of simulation as well. So it's all of those things. It's workflows. It's product capability. It's ease of use. It's integration with academia. All of the availability of computing is All of that is really exciting, and frankly, I would encourage all of you to go to our website. We have a magazine called Answers Advantage, and the most recent one, for example, talks about some academic success stories, and that will give you some perspective of how we're more deeply engaging with the academic community as well.
spk10: That's great. Thanks for the color.
spk09: And our next question will come from Jason Salino with KeyBank Capital Markets. Please go ahead.
spk11: Hey, thanks for letting me ask a question here. You know, obviously a good quarter. I'm curious on kind of the linearity of strength and then maybe if you were able to kind of discuss how things might be trending through October.
spk04: Yeah, so Jason, can I just clarify your first question? I want to make sure I answer it correctly.
spk11: Yeah, so you talked about in earlier questions, you know, can't control when customers close deals. So I'm curious on, you know, the strength that you saw or the linearity of the activity through each month of the quarter.
spk04: Yeah, so I would say that, I mean, oh, you mean in terms of when deals close? I'd say that the linearity was great. was somewhat more consistent although i believe we saw a little bit more uh in the third month of the quarter uh uh i'm just looking at the data here to make sure i've got it right uh yeah so we saw a little bit more in the third month of the quarter than we've seen it in in uh in prior quarters but overall you know it's been largely consistent perfect and then maybe just a quick housekeeping question i think you made a small
spk11: tuck-in acquisition CNR Technologies? Again, small tuck-in, but how should we think about contribution for Q4, if there is any? Thanks.
spk04: Yeah, so CNR Technologies is closed yesterday, November 1st, last check, closed yesterday. And so we'll have two million, I'm sorry, two months, not two million, two months of top line this year. It was a very, very small technology acquisition. with a de minimis impact on the overall top line of the business.
spk06: Maybe you could talk a little bit. Just to jump in here, while the transaction is obviously not material from a financial perspective, I just want to note that I'm really excited about the people who are joining the company as a result of joining Ansys as a result of the acquisition of CNR and, of course, the technology that CNR has built over the years. They're a leading provider of thermal analysis that's used to optimize thermal systems, and they're used in a number of applications, but most especially in the space and the satellite industry. So their focus is on providing system-level simulation for thermal, and they've had a number of use cases, and they were in fact being used as part of the James Webb telescope as well, thermal model of these optical and instrumentation systems. And it was used to predict things like transient profiles and gradients and heat flows as a payload transition from ambient to cryogenic conditions and back again. So by adding that to our portfolio, we will then be able to provide analysis to customers, thermal analysis to customers from every stage, from system design all the way up to optimization from 1D tools all the way up to 3D tools. that gives us a comprehensive perspective. And then, of course, with the work that we're doing with space applications, with our mission engineering suite of offerings, this further supports that and increases our competitiveness in that market as well. Great. Thank you.
spk09: And our next question will come from Andrew Degas-Berry with Ehrenberg. Go ahead.
spk08: Thanks for fitting me in. I just wanted to maybe ask a question on the large number of automotive deals you saw in Q3. I think it's Germany, if I'm looking at the revenue mix. Just wondering, given the news we're hearing about that region, can you elaborate how long were those deals in the making and maybe tell us if the macro political situation there is accelerating some of these deal closures? given the energy issues there and things like that?
spk06: Yeah, so if I can jump in and give you some, you know, color on automotive, I don't have exactly the numbers in front of me, so it'll have to be a little bit more qualitative. So one of the countries that I was in a few weeks ago was Germany. I did have a chance to meet with automotive customers there, and certainly I did in Asia as well, in Japan, and obviously I spent time with our teams. Look, again, it's the same value proposition that we're dealing with. The automotive industry is looking at technologies like electrification, and they're recognizing that they need to make investments to be able to move more aggressively and consider the future of their product lines and how they're going to evolve their product lines. So that's one area. In autonomy, whilst it's true that full-fledged autonomy people are recognizing is a more difficult problem to solve, There is a tremendous amount of investment, certainly in making sure ADAS happens, which is safety features. And so there continues to be investment in those areas. When you consider both electrification and autonomy, these are not traditional internal combustion engine, traditional views of how a car is built. These are incremental, it's a different approach, it's different skills, it's different tooling, it's different technologies. And as these companies are scaling up, both the OEMs as well as the Tier 1s and the supply chain in general, they are facing pressures to start to think differently, and that's where simulation comes in. So we have an opportunity to continue to monetize those relationships and to continue to support our customers, and that's, I think, where we see strength in automotive.
spk04: Yeah, and just to give a little bit of color on the question you asked, the overall growth in EMEA was strong. To reinforce Ajay's point around the backstop of that, in automotive, automotive was a strong quarter in EMEA. There were several seven-figure sales. Automotive companies really focused on the things that Ajay mentioned, electrification and autonomous vehicle. But the high-tech industry was also an area of strength in Q3, which was an element of the performance around EMEA.
spk03: Hi, Operator. We have time for one more question.
spk09: And that question will come from Ken Wong with Oppenheimer. Please go ahead. It appears Ken is connected, and that will come from Adam Borg with Skifold. Please go ahead.
spk05: Hey, guys. Thanks so much for fitting me in. Maybe just a quick housekeeping item. I know earlier this year you guys made a price increase, I think, back in July. I was just curious, maybe, Nicole, you could help understand kind of what kind of benefit that had in the quarter and how we should think about that in the coming quarter.
spk04: Yeah, thanks for the question. As we mentioned, I think it was on the last call, we had done a strategic review of the portfolio to identify some targeted areas where we thought that, you know, the relative value that we provide versus the pricing in the market was maybe a little askew. And so we did some targeted price increases on a subset of elements of the portfolio in July. Now, just to provide some, and so, you know, the underlying yield from that is, of course, embedded in our guidance because we did it in July. But what I would say is that even the price increase in July our sales cycles tend to be three to six months long on average. And when you look at the larger deals that you see in Q4, many of those are, you know, you're starting those conversations in January. And so our expectation with that price increase is that it would have relatively less impact in 2022. Excellent.
spk05: Thanks so much.
spk03: That's all the time we have today. I'm going to turn it over to Ajay for some closing remarks.
spk06: Thanks, Kelsey. I am excited by our outstanding performance in Q3 and thus far in 2022, along with our robust pipeline and deep customer relationships. These factors, along with our diversified business and laser focus and execution, are giving us momentum as we close out the year and move into 2023. And I am confident in our ability to achieve the ambitious long-term goals we announced during our investor update. Thank you to my colleagues at Ansys for your dedication to our customers and to advancing the state of the art of simulation. And thank you all for attending today's call. Have a great day.
spk09: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.
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