ANSYS Q2 2021 Earnings Call Transcript

Quartr
Provided by Quartr
August 5, 2021

There are 10 speakers on the call.

Operator

Thank you for standing by, and welcome to the ANSYS Second Quarter 2021 Earnings Conference Call. With us today are Ajay Gopal, President and Chief Executive Officer Nicole Anacinas, Chief Financial Officer and Senior Vice President of Finance Kelsey DeBryan, Vice President, Investor and Government Relations. All participants will be in listen only mode. Please note this event is being recorded. I would now or at this time, I would now like to turn the conference over to Ms.

Operator

DeBryan for opening remarks. Please go ahead.

Speaker 1

Good morning, everyone. Our earnings release, The related prepared remarks document and the link to our Q2 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 2nd quarter financial results 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.

Speaker 1

We note that uncertainty regarding the impact of the COVID-nineteen pandemic on our performance could cause actual results to differ materially from our projections. Forward looking statements are based upon our view of the business as of today and ANSYS undertakes no obligation to 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?

Speaker 2

Good morning, and thank you for joining us. Q2 was another excellent quarter for ANSYS, Where we significantly beat our financial guidance across all our key metrics. I'm particularly pleased with our ACV performance for the quarter, Which grew at nearly 23% in constant currency. Our growing momentum from Q4 of 2020 and the first half of this year Gives us increased confidence in our business and in our ability to execute against our goals. It is also further validation of our strategy of pervasive where simulation is used throughout the product development process by engineers in every discipline.

Speaker 2

That strategy, combined with our best in class multi physics products, our comprehensive go to market approach and our deep and lasting customer relationships Has paved the way for our consistent success. The COVID-nineteen pandemic continues to evolve With the uncertainties of the Delta variant making headlines around the world. Despite these uncertainties, our customers are continuing to invest in innovation, R and D and product design to drive their future successes. As such, we are continuing to see demand for ANSYS simulation increase in the marketplace And our pipeline for the remainder of 2021 is strong. As a result of that continued strength and our track record of execution, we are once again increasing our annual guidance for ACV, revenue, EPS and operating cash flow.

Speaker 2

Nicole will provide more details in just a few minutes. Looking at Q2, all our major geographies performed well with the Americas leading the way. I'm very proud of our team in India, High-tech and Semiconductors, Aerospace and Defense and Automotive and Ground Transportation were our top verticals. We also saw ongoing strength with our enterprise customers. Following the trend of the past two quarters, We saw improved spending with small and medium sized customers.

Speaker 2

While these smaller customers have not yet returned to their pre pandemic spending levels. The progress we've seen over the past several months gives me added confidence in the future. One of the largest deals of the quarter was with a North American leader in semiconductors. This $39,000,000 multiyear agreement ensures that the company will have necessary capacity to run 5 nanometer And eventually 3 nanometer designs on ANSYS RedHawk SC, our gold standard powered noise and reliability sign off solution for digital design. The company has also are on ANSYS multi physics technology across chip, package and system to reduce power consumption, thereby increasing its competitiveness in the marketplace.

Speaker 2

We also closed a $30,000,000 agreement with a long time automotive customer. This leader in electric vehicle technology Has expanded its use of mechanical, fluids and electromagnetic solutions and has adopted additional ANSYS technologies, including automated design analyses, multi body dynamics and process integration and design optimization. This customer is working with the ANSYS ACE teams To jointly develop workflows for noise and vibration analysis and topology optimization. The company is also using ANSYS Discovery to decrease Its simulation backlog and get products to market faster, all the while holding the line on development costs. Just a few weeks ago, we unveiled ANSYS' 2021 Release 2, which features advances across our multi physics product line from Fluids and Electromagnetics to Materials, Photonics and Embedded Software.

Speaker 2

R2 includes a number of advancements In core physics, simplified workflows and integrated data management. Our solutions are based on our decades of experience and cannot be easily duplicated, creating high barriers to entry for potential competitors. While I could spend the entire hour detailing each product's capabilities, today I will focus on just one key differentiator, which cuts Across our entire portfolio, namely scalability. As customer problems become increasingly more challenging, The size of those challenges require simulation software that can scale to unprecedented levels. Throughout our history, ANSYS has been a leader in product scalability and we have extended that leadership in recent releases.

Speaker 2

Our ability to create high resolution fluid mechanics simulations with practical turnaround times enables customers to solve next generation challenges ranging from rotating machinery To external aerodynamics to environmental simulations. 4 years ago, ANSYS Fluent scaled to nearly 200,000 CPU cores, enabling customers to solve challenging problems faster than ever by calculating 1,000,000,000 To the best of our knowledge that remains a record for commercial computational fluid dynamics code. This massive scalability has enabled our customer at the Technical University in Eindhoven to solve a complex aerodynamic problem with 3,000,000,000 computational cells With $20,000,000,000 unknowns. The most recent advances in ANSYS 2021 R2 have sped up parallel mesh generation by 20x, removing what is often the bottleneck for detailed simulations of transient phenomena, which occur in aerodynamics and gas turbine simulations. A 2 25 times speed up over the last decade has enabled ANSYS customers to reduce simulation time on a full thermal mechanical model from 2 weeks To an hour and a half.

Speaker 2

And now with ANSYS 2021 R2, those calculations could take just minutes, leading to improved product reliability as users run more simulations faster. That breakthrough was made possible by doubling the core counts, While reducing the memory required by 40%. In our latest LS Dyno release, we have significantly improved performance, which enables customers to run transient behavior studies with 28,000,000,000,000 calculated variables, And that's trillion with a T. That means safer cars and more reliable electronics. A global high-tech customer used ANSYS HFSS and our new ANSYS MeshFusion to solve a previously unsolved are In ANSYS 2021 R2, we introduced the fee plus measure, which extends mesh fusion to deliver additional speed and capacity.

Speaker 2

C plus has sped up meshing on PCB plus bondwire package models by 18x, which will bring new innovations to the 5 gs, Autonomy and Industrial Internet of Things market. ANSYS Semiconductor customers are using next generation distributed and grid computing techniques to model and solve chips with 2,600,000,000,000 or more devices. ANSYS Red Hawk SC set a capacity and performance record in Power Integrity sign off last year by extracting 66,000,000,000 electrical nodes on the design of the GPU and solving it over 2,400 CPUs in a fully distributed manner. In ANSYS 2021 R2, our solver performance doubled, enabling customers to sign off even larger chip designs using the same compute resources and runtime. Scalability is one of ANSYS' many differentiators and is becoming increasingly to our customers as they develop next generation products.

Speaker 2

We believe that our history of product scalability along with accuracy, ease of use and speed to solution create a difficult environment for any would be competitor, while giving our users the functionality they need to solve the most challenging product problems. We are continuing to train the next generation of engineers in the use of ANSYS solutions By expanding our free offering for students. To date, nearly 2,000,000 students around the world have downloaded our products. And just a few weeks ago, we launched an additional offering for students to download our electronics desktop and to enroll in ANSYS innovation courses for training. These students now have access to our leading electronics products, including HFSS, Maxwell and Icepak to train them in developing the products of tomorrow.

Speaker 2

And thanks to our new partnership, Cornell University will design and develop online training courses with real world applications from ANSYS. Moving to partnerships, I'm excited to announce that We have expanded our work with TSMC to include new certifications for ANSYS Red Hawk and ANSYS Toten. These new certifications for power of network extraction, power integrity and reliability, signal electro migration and transistor level custom designs Enable joint customers to meet critical power, thermal and reliability standards for next generation product applications. ANSYS continues to be recognized for our inventive approach to engineering technology. I'm proud that For the 3rd year in a row, Fast Company has named us one of the best places to work for innovators.

Speaker 2

I'm even more excited that 5 of my colleagues have been recognized with the prestigious Women of Color STEM Awards. These awards showcase the outstanding scientific and engineering achievements of women around the world. And ANSYS is proud of these pioneers who serve as an inspiration for us all. Turning to our environmental Has upgraded our ESG rating to AA, naming us a leader in the software and services industry. MSCI cited ANSYS' comprehensive talent pipeline relative to our peers, our focus on business ethics And our capabilities in helping customers to innovate in areas such as clean technologies.

Speaker 2

To summarize, Q2 was another great for ANSYS and a further validation that our pervasive simulation strategy is resonating with the market. Our strong sales pipeline, Our ongoing momentum with enterprise customers, the resurgence of small and medium businesses and our continued leadership across our product portfolio Give me further confidence in our ability to meet our newly increased outlook for 2021. And with that, I'll turn the call over to Nicole.

Speaker 1

Thank you, Ajay. Good morning, everyone. Let me take a few minutes add some additional perspective on our Q2 financial performance and provide context for our outlook and assumptions for Q3 and 2021. Our strong Q2 results reflect an outstanding execution across our business, which yielded revenue, Operating margin and EPS all above our Q2 guidance. As Ajay mentioned, Q2 ACV was especially strong and exceeded our expectations.

Speaker 1

Both our large enterprise customer And our small and medium sized customer spending patterns performed better than expected and our growth during the quarter was broad based. Now let me discuss some of our Q2 financial highlights. Q2 ACV was $430,500,000 And grew year over year 25% or 23% in constant currency. We saw strong performance across Q2 total revenue was $452,600,000 and grew 16% or 14% in constant currency, Which exceeded the high end of our guidance. Like ACV, Q2 revenue growth was from across the business.

Speaker 1

In the first half of twenty twenty one, we had strong top line performance with ACV and revenue both growing double digit, 16% 18%, respectively. We closed the quarter with a total balance of GAAP deferred revenue and backlog of $927,100,000 representing a 10% increase over last year's 2nd quarter balance. During the quarter, we continued to manage our business with fiscal discipline. This yielded a solid second quarter gross margin of 90% and an operating margin of 41.7%, which is better than our Q2 guidance. Operating margin was positively impacted by revenue performance above our guidance as well as the timing of investments.

Speaker 1

The results with 2nd quarter EPS of $1.85 which was also above the high end of our guidance. Similar to operating margin, EPS benefited from strong revenue results and the timing of investments. Our effective tax rate in Q2 was 19%, the tax rate we expect for the remainder of 2021. Our cash flow from operations in Q2 totaled $118,900,000 which benefited from strong collections driven by in the percent of receivables past due and was partially offset by differences in the timing of tax payments as compared to Q2 2020. We ended the quarter with $958,200,000 of cash and short term investments on the balance sheet.

Speaker 1

Now a long finish in Q2, we are initiating guidance for Q3 and increasing our ACV revenue, EPS and operating cash flow outlook for the full year. This increase reflects the strong broad based We expect revenue in the range of $400,000,000 to $425,000,000 and EPS in the range of 1.22 To $1.39 As I mentioned, for the full year, we are raising our ACV revenue, EPS and operating cash flow outlook. We are increasing our full year ACV outlook to be in the range Of $1,800,000,000 to $1,845,000,000 This represents growth of 11.4% to 14.1% or 10.8% to 13.5% in constant currency. We are raising our full year ACV guidance to reflect the Q2 performance, which exceeded our expectations And our increased confidence in the full year pipeline. This raise was offset by a few $1,000,000 of currency headwind.

Speaker 1

As 2.7 points of constant currency growth compared to our May guidance. As a reminder, it is best to look at full year ACV growth as quarterly growth can be variable. As we mentioned in May, ACV quarterly growth rates in 2021 will vary with Q2 and Q3 being the strongest 2 quarters. Based on our performance in Q2, we expect Q2 to have the highest ACV growth rate for the year. As a reminder, we still expect Q4 growth to be muted given the Q4 2020 growth comparison.

Speaker 1

Consistent with prior years, the dollar value of ACV will be highly skewed towards the 4th quarter. We expect revenue to be in the range of $1,840,000,000 to $1,890,000,000 Which is growth of 8.5% to 11.5% or 7.3% to 10.2% in constant currency. Similar to our ACV guidance, this increase reflects our strong Q2 revenue performance And increased confidence in our full year pipeline offset by a few $1,000,000 of currency headwinds. As a result, we are raising the midpoint of our revenue guidance by $23,000,000 which translates to constant currency growth Of 1.5 points higher than the midpoint of our May guidance. As you know, ASC 606 Introduces revenue growth volatility within the quarters.

Speaker 1

However, on a full year revenue basis, revenue growth is less variable. In the second half of twenty twenty one, we expect revenue growth to be impacted by the year over year compare and mix of business. We are increasing our full year EPS and now expect EPS to be in the range of $6.85 To $7.15 This increase incorporates our strong Q2 performance And is offset by a few cents of currency headwinds. It is worth noting that some of our strong Q2 EPS performance was driven by the timing of investments that moved from Q2 to the second half of the year. Now let me turn to our full year operating cash flow guidance.

Speaker 1

We are increasing our 2021 outlook to a range of $495,000,000 to $535,000,000 This increase is driven by stronger collections expected during the year and continued improvement in payment terms toward pre pandemic levels. We are pleased with our strong first half in operating cash flow. But as a reminder, second half cash flow is most impacted by whether large Q4 deals closed near the beginning or the end of the quarter. For modeling purposes, We're expecting 3rd quarter operating margin in the range of 34% to 36.5%. And for the full year, we continue to expect operating margin to be in the range of 40% to 41%.

Speaker 1

Further details around specific currency rates And other assumptions that have been factored into our outlook for Q3 and 2021 are contained in the prepared remarks document. I would like to thank the ANSYS team for their continued commitment to our customers and fellow colleagues during this prolonged time of uncertainty. The team delivered exceptional execution during the quarter, which drove our strong Q2 financial performance. The combination of best in class execution with a strong recurring business model and growing sales pipeline sets us up well to deliver on our 2021 outlook as well as our longer term financial objectives. Operator, we will now open the phone lines to take questions.

Operator

We will now begin the question and answer at this time, we will pause momentarily to assemble our roster. The first question comes from Ken Wong with Guggenheim Securities. Please go ahead.

Speaker 3

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

Speaker 1

Yes. Thanks, Ken. Yes, We were really pleased with not only the second quarter, but where we landed on the first half overall, as you know, Translated to 16% growth overall for the half, which was fantastic. The team really delivered. I would say that it went back to a very similar pattern that we saw in Q1, which was it was Broad based across geographies and industries.

Speaker 1

As you recall coming into the year, we were a little bit cautious about SMB and kind of the underlying momentum of the SMB and we had expected enterprise customers to perform as expected. I would say in the Q2, we got a bit more out of the enterprise than we expected to get, which was great because it showed people are really seriously committing to their R and D Portfolios and Accelerating Development, but we saw for the Q2 in a row that resurgence on the SMB side and there wasn't anything that was Specific localized or kind of in narrow form, it was just kind of everywhere. So I would say It's that really kind of broad based performance that we saw really in the second quarter and the first half That contributed to the confidence that we had in raising our overall ACV for the year by the 2.7 points at constant currency.

Speaker 3

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

Speaker 1

Yes. I mean, as I mentioned before, we were really pleased with the momentum we saw in the quarter and the strength we saw. What I would say is, It is the guidance that we have going into the the reason the full year was really not counting on SMB coming back to those Pre pandemic levels. There certainly is a lot more activity. There's a lot more engagement.

Speaker 1

But this is This does happen over time market by market. It does vary too in terms of the rate and pace and speed of how these customers are coming back. And so Well, I don't have a specific quantification to give you. What I would say is that if it happens at a more accelerated rate, that's not And we were all of a sudden back to pre pandemic levels by the end of the year. That's not something we've really contemplated in our race.

Speaker 3

Great. Thank you very much.

Operator

The next question comes from Gau Mungat with Berenberg. Please go ahead.

Speaker 4

Good morning and thank you for taking my questions. The first one was just kind of reflect a little bit on Brands and Closure in terms of the operating cash flow and ACV and how ACV outperformance also kind of allow you to raise the cash flow estimates for the year? It's interesting because what we've seen is €30,000,000 upgrade in ACV resulting about $15,000,000 in operating cash flow, which kind of suggests that this is an incremental conversion there. Is that something that we could is that something that as you continue to perform, it still kind of is replicable going forward? Yes, just maybe a little bit in light of potential investments or something that you might also balance out on the other side?

Speaker 1

Sure. So let me break apart the components of cash flow. So as you point out, cash flow is more highly correlated to ACV Because of the way 606 treats revenue recognition. So that is exactly the right way to look at it. So there's 2 components There's the collections piece along the ACV side and then there's the payment side.

Speaker 1

And so on the collection side, we've seen We have seen an improvement at a more accelerated rate both in terms of Lack of asking for extension on payment terms, people catching up on aged payments and people overall maintaining a level of current At higher rates than they had through the pandemic. So all of that is, I think contributing to that Part of the acceleration on the cash flow side. The headwind in this particular quarter was really Tax payments and the timing of tax payments, particularly in a quarter, can have a more distorting dynamic overall. And so as you Last year, there were some deferral incentives during the pandemic that raised cash flow in the second quarter. And then this year, those payments were due as expected in the Q2.

Speaker 1

And so Overall, I would expect to see still a little bit of capitulation and volatility in the relationship Just because the nature of the payments piece is not kind of back to normal normalized levels, but what you can count on is that underneath the covers, The momentum around collections and customers kind of behavior around that has been quite good and we're really happy with where we're at.

Speaker 4

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

Speaker 1

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

Speaker 4

Right, Just the purchase of the smaller deals as well. Awesome. Thank you so much. The

Operator

next question comes from Adam Borg with Bifel. Please go ahead.

Speaker 5

Hi, guys. Thanks so much for taking the question. Maybe just on ANSYS Cloud, Ajay, would love an update there and how things are tracking as we think about post pandemic plans.

Speaker 2

Sure, Adam. So as you know, ANSYS Cloud provides managed access to HPC resources And that allows our customers to essentially learn larger and higher fidelity simulations. And as you know, the cloud also supports a very flexible licensing model And that includes an elastic pay as you go model, as well as a hybrid model that allows customers to mix and match elastic as well as lease licenses. Now we have a number of internal metrics that we deploy to measure the business and we are seeing probably a 5x, 5 times greater usage As compared with this time last year. So very nice growth as a result of the activities that we've done as well as of course Small conditions with people working from home.

Speaker 2

This year, if you think about what we've done to augment the cloud, We've added cloud support for ANSYS LSTC, for ANSYS DYNA for our Lumerical products. We've completed SOC 2 certification, and we also continue to focus on the overall customer experience. And that's really translated very positively for customers. And we a couple of months ago, few months ago, we published a release about a customer Van Ord, who talked about how they could speed up their simulations by 7x, Which obviously is a significant perspective because they're able to take advantage of the most recent and most capable hardware in the cloud as well as the cloud capabilities that we have. So we're very excited about our cloud direction.

Speaker 2

We have made all of the necessary investments. And of course, it's still early days because we're talking about a relatively small A portion of our business.

Speaker 5

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

Speaker 1

Yes. So we did see in the first half of the year, we did see relatively more professional license growth than we've seen in the past. And what I would say is that that long term trend of shifting towards the lease model still continues, right. But if you recall, there was There were dynamics last year where perpetual was a little bit more muted and I think what you're seeing this year is just some of the return Some of that business overall. But if you look at the business over longer periods of time, the growth and acceleration of the business is I think one of the dynamics that we saw in Q4 last year was not only Exceeding the high end of guidance by $45,000,000 but there was a significant perpetual mix in Q4.

Speaker 1

And so How we're looking at it on a go forward basis is not really expecting that repeat performance in Q4 overall Is some of the underlying factors that are baked into the guidance.

Speaker 5

Super helpful. Thanks so much.

Operator

The next question comes from Jay Bleeschhouwer with Griffin Securities. Please go ahead.

Speaker 6

Thank you. Thank you. Good morning. Ajay, for you first. Within the context of your large multi solution solver sales, could you talk about the incremental demand within those deals that you may be seeing for any or all of the smaller brands such as Minerva, Granta, Esterrel, Americold and so forth, are those becoming incrementally important within the context of those deals?

Speaker 6

And then as well, In your prepared remarks, you noted your semiconductor and high-tech business as this is the This week is the 10th anniversary of the Apache acquisition closing. Perhaps you could share your thoughts on how you're thinking about your EDA business for the next number of years the kinds of internal investments that you think you'll need to be making over the next number of years to keep that business growing? And then lastly for Nicole, your services revenue were down sequentially from Q1. And yet over the last few months, there's been a discernible uptick in your openings for technical support and consulting position. So from that should we infer that you are anticipating an improving pipeline in terms of engagements and deployments activity?

Speaker 2

Jay, thanks for the question. Let me start with your comments, your question about some of the smaller products. As you know, some of those products organically developed, others came in through acquisition. And we embark on activities as an M and A or organic development, specifically when we see opportunities in the market, where customers are either leading us or where we An opportunity to provide greater functionality to solve the customer problem. And so all of the acquisitions or in all of the internal development that we do It's driven by an analysis of what that market would look like.

Speaker 2

And I'm delighted that we're generally seeing what we expected to see pan out is in fact Panning out, you talked about Lumerical Photonics, that's obviously a very important part as you think about Data centers for example and we're seeing obvious traction there because this product is fits into our Our overall portfolio. So when we go to customers, we can go to them with a broader set of capabilities that includes Critical capabilities such as Lumerical that you mentioned, that we can go in and talk about an end to end solution that addresses the needs of the customer may And you see that repeated across our portfolio, where smaller products are playing important roles in being able to stitch together an end to end To allow customers to solve some of the most complex problems that they're dealing with. So I think that's hopefully that addresses your first question. With respect to your second question, I'm excited obviously with our performance in Hi Tec and Semiconductor. I no longer think of the Apache acquisition That's part of our semiconductor organization and has been for a number of years.

Speaker 2

And obviously, we have a number of deep integrations across our portfolio Between our semiconductor business and our electromagnetics activities and you start to think about next generation products like 3 d IC and challenges And that's when the entire ANSYS portfolio comes in, going from our semiconductor portfolio all the way through our more Newtonian physics, if you will. And so I'm very excited about the portfolio, the capabilities. I think we have market leading products across the board there And customers tell us that they're able to solve tremendous challenges with our offerings and we're excited about the future.

Speaker 1

Yes. And Jay, to your services question. So specifically this year, we really we do Expect to see services disproportionately impacted by COVID just because of the nature of services being more in person, Particularly with the Delta variant and some of the either self imposed or imposed restrictions that customers are having around in person Engagement. So we're not anticipating in our guidance any increase, any meaningful change in the trajectory of the services business. In terms of the skill sets that you're referring to, I'd say that, yes, we are hiring, we are investing in the business, we're investing in the areas That you and Ajay just discussed now around helping our customers connect physics together and multi physics.

Speaker 1

So those are skill sets That we continue to invest in. And that services business is also that investment in services business is also a reflection of the momentum We're seeing in the pipeline around sales because those individuals also support selling process to some degree. So overall, I think what you're seeing Is it a good set of momentum around customers starting continuing to accelerate their R and D pipelines and leveraging Answers to do so. And so that's why we're making the investments in those spaces.

Speaker 6

Thanks very much.

Operator

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

Speaker 2

Yes, good morning. Good morning. Yes, just looking at the

Speaker 7

indirect channel, it seems It's performing very well. Are there any partnerships that are really gaining traction or other reasons for this growth? And you might have touched on it in your previous comments to just unpack that, please?

Speaker 2

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

Speaker 7

Imminent. And just a broader question, your outperformance this quarter internally, how do you think if you put it like Into 3 buckets. 1, reopening, b, your customers structurally investing more And see just your strategy as you're sort of expanding and then your products and partners like ecosystem, your adjacencies. Internally, if you're trying to sort of attribute this outperformance this quarter, short term macro, long term structural thing or your strategy, How would you sort of allocate out performance into these three buckets? Sorry for a long question.

Speaker 2

Yes. No, it's I think it's really difficult to point to a specific allocation of 1 bucket to another because these things are all related to each other. Look, at the end of the day, if you just reflect on the ANSYS portfolio, what we've built is a market leading set of capabilities of individual physics, which are connected Together. And so this multi physics capability is what's necessary for customers as they solve some of the most challenging problems that they're dealing with. And so As you think about electrification, for example, or 5 gs or IoT, all of these areas are Customers are investing a significant amount of money.

Speaker 2

They're looking for simulation offerings to be able to support them in their R and D efforts. And we have The technology, we have the capabilities, we have the relationships and we can support them on their journey. So that's a very important aspect. You've got to have the right goods when people need The second thing is that obviously around the world we're seeing customers recognizing that there is going to be an end to the pandemic And that they have to continue to make investments in R and D. And you're certainly the small and medium business customers are perhaps most emblematic of that because they are Early in the pandemic, you saw a shutdown for SMB customers, right.

Speaker 2

They were most they're most concerned about cash. They're most concerned about The potential demand future because these are smaller companies and they have less they have lesser cash resources than some of the larger companies. But what we're seeing now is obviously an opening up of spending there, which is reflective of the fact that customers around the world, not just SMB customers, customers around the world Are looking at the world after things completely open up again or certainly after a pandemic world, post pandemic world where where things start to get back to normal with respect to the broader economy, which means and they recognize that in order for them to be successful, they have to have products that people want. And that means more investment in R and D and more investment in product design as I mentioned in my comments. So the demand is also increasing.

Speaker 2

And I think that those two things work together. You have to have the right product. You have to have the growing demand. If you didn't have either one of them, You wouldn't necessarily be able to deliver the results. And I think that we are that's exactly what we're seeing and we're very excited about what we can provide to our customers and where the market is going?

Speaker 1

Yes. And I would add just one additional point to what Ajay said, Which is the ANTHUS team and the execution of that team. I mean, the sales team and the services teams were there Alongside customers throughout the pandemic, we've made investments in supporting our customers throughout that pandemic and that puts us in a position of strength As customers are coming out of it and making the decisions that Ajay referred to. As you know, I mean, in enterprise software sales cycles are long. If you're not there and you're not committed to your customers and you're not delivering value, even at times where they're not quite ready to invest at the levels That you're that they're comfortable with in a time like a pandemic.

Speaker 1

It pays off in the end and you could see that Particularly in some of our markets like Asia Pac and other places where the team has just been exceptional in the way that they have managed and deepened those relationships

Operator

was there a follow-up?

Speaker 7

I apologize. I put myself on mute now. Thank you very much.

Operator

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

Speaker 4

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

Speaker 1

Yes. So at the beginning of the year, we talked about AGI contributing $80,000,000 to this year. And so we're still seeing that as the current trajectory.

Speaker 4

Okay, got it. That's helpful. And then for my follow-up, maybe for you, Ajay. Can you just talk a little bit simulation live and how you feel that's trending.

Speaker 8

I know that's a little bit of a longer sort of

Speaker 4

a long term story, but curious what the update is and how you feel about it?

Speaker 2

You mean Discovery, right? Is that

Speaker 4

I'm sorry. Yes, absolutely Discovery Live. Sorry, I was calling the PTC. Sorry, Discovery Love, yes.

Speaker 2

Yes. So look, we're very excited about Discovery. And I think perhaps to

Speaker 5

make it

Speaker 2

real, a little bit more tangible, perhaps I can go back to the example I gave in the script, Which was one of our customers who's using Discovery in a very interesting way. So for this particular customer, Some of the detailed flow and thermal management simulation is done by experts using ANSYS flagship products. But the typical turnaround time is maybe 60 days because of the complexity of the simulation and they have a relatively small analyst team Serving a larger design team. So they introduced Discovery as a way for the design engineers to do some of the simpler simulation on their own. So things like flow distribution or pressure drops.

Speaker 2

So they're able to do that by themselves and they can improve the design of their components before they hand off the design for a complete system simulation to the expert analysts. So that's an example where the whole thesis that we had was This is something that design engineers could use to really amplify the capability of the analyst. That's something that's borne out here. And for this customer, they're also using they also have some outsourced CAE spend and they're using Discovery now to help Train their designers on some basic structural analysis so they can limit some of this outsource work on simple geometry changes. And what that does for them is it changes The design iteration time and it takes it down from a couple of weeks to a couple of days.

Speaker 2

So that gives you some perspective. We're very excited about the technology. We continue to make advances in the technology. And obviously, I mentioned a couple of customer examples. You talked briefly about PTC and the use of Creo Simulation Live.

Speaker 2

And on PTC's Earnings call last week, I believe they reported continued traction with increased expansions driven by a migration around Creo 7. As you know, they are OEMing our discovery products into Creo, Creo Simulation Live, Creo ANSYS simulation and that Creo 7 is their latest enterprise release. And so obviously, there's increased traction that comes from that. And they also talked about a customer win Where the real time simulation capabilities were helping to simplify the customer's design process. So we're very excited about the technology.

Speaker 2

It continues to perform as we had expected. Obviously, it's a relatively small piece of our business And the market dynamics around what we're seeing is strong. Very helpful. Thanks guys.

Speaker 1

Thank you.

Operator

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

Speaker 9

Hi, good morning everyone.

Speaker 1

Good morning.

Speaker 2

Good morning.

Speaker 9

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

Speaker 1

Yes. So, as we point out, the greatest return we've been able to provide on deployment of excess cash has been utilizing it to Acquire such in M and A. And example something like Phoenix is a great example of premier technology, which helps us Accelerate, another investment we made in December around in AGI. Pfenex provides model based Engineering. So I would say that you should expect that we will continue to execute strategy, which is consistent with our model, Which is to achieve double digit growth with tuck in acquisitions overall.

Speaker 1

So the decision on the capital allocation decision and The focus on M and A hasn't changed.

Speaker 9

Great. And maybe just a follow-up to that. During the quarter, you had put out a press release about a customer, it looks like Expanding of the relationship they had with ANSYS.

Speaker 2

One of the things that I

Speaker 9

found interesting was You know more stringent regulations around greenhouse gas reduction and how they're using simulation to help that. You've talked in the past about Sustainability and how you can help your customers, but the drumbeat just seems to be getting louder and louder. Are you seeing customers accelerate any decisions around this sustainability focus or is it still is that still kind of an extra add on benefit to what you're already bringing to the customer?

Speaker 2

So I think the sustainability aspect It's clearly important across a number of different dimensions for different customers. When you look at, let's take for example, A big trend in the automotive industry, which is around electrification, right? Obviously, that is there's a discussion about the future of the internal combustion engine And the rate and pace at which electric cars and vehicles will be adopted broadly. And you've seen car companies, for example, making the decision to Simply move from one to the other. And that's obviously driven in part by issues of emissions And being more eco friendly.

Speaker 2

We talked last year about in the aerospace industry, we talked about some customer wins, where the motivation for the customer was really to make their engines more fuel efficient. So it was about light weighting, it was about reduced fuel consumption, increased efficiency of fuel. And so even in aircraft engines, for example, you're seeing that as being a primary driver for new design of engines. And so it's absolutely part of a broader trend. I mentioned Van Ward earlier.

Speaker 2

They're of course building sustainable offshore wind turbines and they're a simulation user, but again, their focus is on renewable energy So compliance purposes as well as eco friendly, all of these things are drivers of product design And product requirements and obviously to ensure that customers can meet those standards, simulation plays a really important role.

Speaker 9

Great. Appreciate you taking the questions. Thank you.

Operator

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

Speaker 8

Thank you. Nice quarter guys. Just a vertical question here. Ajay, just first off on the auto vertical. As you look at the shift from ICE development to electrical vehicles, obviously a completely different product.

Speaker 8

Is there do you have a sense at this stage as they move away from ICE design and new model introductions to pure electrical. What is the ANSYS footprint change in the auto vertical look like? Does I mean, obviously, 10 years from now, maybe we have a lot less ICE engineers out there. And secondly, you called out in your prepared remarks Healthcare vertical and a large win in using simulation software to train some algorithms. Can you just expand on that a bit and how big might that opportunity be in the healthcare vertical?

Speaker 8

Thanks.

Speaker 2

Firstly, with respect to automotive, what's exciting for us is that we have the technology and the capabilities from a product perspective And a relationship perspective to support our customers as they go through that transition. So we can help them with battery management technologies. We can help them with electric Drivetrains, electric motor design, all of the elements that you would expect that Sort of go into the replacement of the internal combustion engine with an electric battery powered environment. But above and beyond that, if you think about the challenges that some of our customers are facing as they make this transition, an electric car is not just simply an internal combustion car with one means of propulsion replacing another. It's an opportunity for our customers to redesign.

Speaker 2

In fact, they have to redesign it because the assumptions that are previously made Of an engine in the front of the car, which concentrates the weight in the front of the car, those assumptions are no longer relevant because perhaps now you have a battery that's Uniformly distributed across the floor of the car. And so that changes the weight distribution and changes the assumptions of the way that the car was originally designed. And so There is a significant rethinking taking place in these car companies, especially the auto companies who have historically relied On the reuse of technology from one generation to another, there is a rethinking of saying what does it mean for us to support this to build an electric car. And so that all of that leads to and drives increased use of simulation and certainly for ANSYS simulation. You think about crash design, right.

Speaker 2

So the problems that you may have been dealing with earlier for crash might have been, how do you think about the passenger, will the passenger be protected and that's a complex multi physics problem because you're dealing with the structural integrity, you're dealing with the deployment of the airbags, which is a fluids problem. So those are multi physics problems in nature that need to be addressed through simulation. Now the question is, it goes above and beyond that and it says, well, what is the likelihood of a fire, some kind of a catastrophic fire that might place as a result of a battery rupture. Can you solve that problem? So it starts to become more and more challenging.

Speaker 2

And so this transition is not just a matter of supporting the Design of the engine per se, it is the actual car and the aggregate and that sort of plays well to our strength and our capabilities. Now with respect to your second question about health Yes. While healthcare is still an overall a very relatively small part of the ANSYS business, Simulation continues to grow and we do well in, for example, the design and the manufacturing of medical devices and that was obviously reflected in the performance in the quarter. But as we look to the future, we are excited about the increased use of simulation as a validation in the market. So the use of in silico Trials as opposed to just in vitro, in vivo, and the use of simulation techniques supporting that, those I think it's really helpful.

Speaker 2

And we're working with early adopters who are using simulation to target Specific surgical outcomes. And this is obviously early, early stage. There's not really much revenue associated with it, very, very early stage. But this is about how do you support a physician as they're making decisions about surgery. Those are at the end of the day, Some of those can be simplified into problems of computational fluid dynamics.

Speaker 2

And of course, we have fantastic technology in that And so being able to put all of that together and packaging that I think that's certainly something for the future.

Speaker 1

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

Speaker 2

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

Operator

the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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Key Takeaways

  • ANSYS delivered 23% constant-currency ACV growth in Q2, significantly beating guidance and leading to higher full-year targets for ACV, revenue, EPS and operating cash flow.
  • All major regions saw strength, led by the Americas, while key industries—especially semiconductors and electric vehicles—drove wins like a $39 million multi-year RedHawk SC deal and a $30 million automotive agreement.
  • The 2021 R2 release introduced groundbreaking scalability—Fluent on 200,000+ cores, 20× faster mesh generation and thermal-mechanical runs cut from weeks to minutes—to tackle next-generation simulation challenges.
  • ANSYS Cloud usage jumped 5× year-over-year as the company added LS-DYNA, Lumerical support and earned SOC 2 certification, giving users elastic HPC access and flexible licensing.
  • ANSYS was upgraded to an MSCI AA ESG rating, named a top workplace for innovators by Fast Company, and expanded free student offerings—now serving 2 million downloads and Cornell-developed courses.
AI Generated. May Contain Errors.
Earnings Conference Call
ANSYS Q2 2021
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