ANSYS Q2 2022 Earnings Report

ANSYS EPS Results

• Actual EPS: $1.39
• Consensus EPS: $1.20
• Beat/Miss: Beat by +$0.19
• One Year Ago EPS: $1.38

ANSYS Revenue Results

• Actual Revenue: $475.89 million
• Expected Revenue: $466.70 million
• Beat/Miss: Beat by +$9.19 million
• YoY Revenue Growth: N/A

ANSYS Announcement Details

• Quarter: Q2 2022
• Date: 8/3/2022
• Time: After Market Closes
• Conference Call Date: Wednesday, August 3, 2022
• Conference Call Time: 7:34PM ET

ANSYS (NASDAQ:ANSS) develops and markets engineering simulation software and services for engineers, designers, researchers, and students in the United States, Japan, Germany, China, Hong Kong, South Korea, rest of Europe, the Middle East, Africa, and internationally. It offers structural analysis product suite that provides simulation tools for product design and optimization; the Ansys Mechanical product, an element analysis software; LS-DYNA solver for multiphysics simulation; and power analysis and optimization software suite. The company also offers electronics product suite that provides electromagnetic field simulation software for designing electronic and electromechanical products; Ansys High Frequency Structure Simulator product for radio frequency and microwave design; SCADE product suite, a solution for embedded software simulation, code production, and automated certification; fluids product suite that enables modeling of fluid flow and other related physical phenomena; Ansys Fluent computational fluid dynamics software package; Ansys RedHawk-SC for electronic design automation; Ansys Optics software; and mission-simulation, modeling, testing, and analysis software. In addition, it offers Ansys Granta MI system for materials information management; Ansys Granta Selector technology for materials selection and graphical analysis; CES EduPack product, a set of teaching resources; Granta Materials Data for Simulation; Ansys Lumerical product, a photonics simulation software solution; safety-certified embedded software solutions; Discovery product family for use in the simulation of product design; academic product suite for research and teaching settings. ANSYS, Inc. was founded in 1970 and is headquartered in Canonsburg, Pennsylvania.

ANSYS Q2 2022 Earnings Call Transcript

Key Takeaways

• ANSYS beat across revenue, ACV, operating margin and EPS in Q2 and raised its full-year guidance to $1.98B–$2.02B ACV and $2.50B–$2.055B revenue in constant currency.
• Major deal wins included a ~$25 million, three-year contract with an international electronics brand covering semiconductors, electronics, fluids and training, and a multimillion-dollar automotive OEM agreement delivering up to 5× productivity gains and 10% hydrogen storage improvements.
• Geographical momentum was led by a 36% constant-currency revenue increase in Asia Pacific (anchored by a multiyear Murata deal) and robust EMEA growth, while the Americas performed in line with expectations.
• Released ANSYS 2022 Release 2 featuring cross-physics machine learning, AI-driven design optimization and new HPC workflows, and secured key partnerships with TSMC, Intel Foundry Services and Samsung Foundry.
• Advanced sustainability and culture initiatives via a cross-functional center of excellence, a 15% reduction target for Scope 1/2 emissions by 2027, Fast Company awards for its Minerva template and “Most Loved Workplace” certification.

Presentation

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Ansys second quarter 2022 earnings conference call. With us today are Ajei Gopal, President and Chief Executive Officer, Nicole Anasenes, Chief Financial Officer, and Kelsey DeBriyn, Vice President, Investor Relations. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. At this time, I would like to turn the conference over to Ms. DeBriyn for opening remarks. Please go ahead.

[Kelsey DeBriyn, VP of Investor Relations at ANSYS]

Good morning, everyone. Our earnings release, the related prepared remarks document, and the link to our second 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 second quarter financial results and business update, as well as our Q3 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.

[Kelsey DeBriyn, VP of Investor Relations at ANSYS]

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, Ajei Gopal, for his opening remarks. Ajei?

[Ajei Gopal, President and CEO at ANSYS]

Good morning, everyone, and thank you for joining us. Q2 was yet another excellent quarter for Ansys, where we once again beat across our key metrics, including revenue, ACV, operating margin, and earnings per share. That, coupled with our healthy pipeline, gives us further confidence in the business and has enabled us to raise our full year guidance on ACV and revenue in constant currency. Nicole will have the details in a few minutes. Our largest contract of the quarter was a three-year, nearly $25 million agreement with an international electronics brand. This new contract includes Ansys solutions for semiconductors, electronics, fluids, as well as our learning hub to make users more familiar and productive with our software. By standardizing on Ansys solutions, this customer expects to increase its product yield while decreasing verification time for signal and power integrity.

[Ajei Gopal, President and CEO at ANSYS]

Another multi-million dollar agreement in Q2 enables an international automotive OEM to expand its usage to include Ansys solutions for enterprise-level materials intelligence, electromagnetic interference, and autonomous driving. This customer has already realized up to 5x improvements in aerodynamics and thermal engineering productivity, a reduction of more than 40% in material properties acquisition costs, and a 10% improvement in hydrogen storage for its fuel cells. From a geographical perspective, we saw strong revenue growth from Asia-Pacific and EMEA, and the Americas came in as expected. Our 36% constant currency growth in revenue in Asia-Pacific was thanks to several large contracts, including one with Murata Manufacturing, a Japanese company that specializes in electronic components. With Murata, the multi-year agreement spans our multiphysics portfolio and provides the company with an important thermal-aware system simulation flow for radio frequency modules.

[Ajei Gopal, President and CEO at ANSYS]

This solution is expected to provide faster thermal sign-off by reducing the number of redesigns and by improving the ease of use of Ansys products through a single interface. From an industry perspective, the high-tech and semiconductor, aerospace and defense, and automotive and ground transportation sectors were again our largest contributors. We also saw continued strength in the energy space, reflecting a mix of traditional and renewable use cases, as well as in the industrial equipment sector, where we recorded a number of multi-year agreements from companies around the world. For example, longtime customer WEG, a global leader in electrical engineering, power, and automation technology, signed a multi-year contract in Q2 to standardize on Ansys simulation. This new agreement will help the Brazilian company rethink its product development process by creating and implementing digital twins of its motors. This agreement will drive WEG's electrification and green energy initiatives.

[Ajei Gopal, President and CEO at ANSYS]

Now I'd like to briefly mention a different kind of customer success story. I would like to congratulate NASA and Northrop Grumman on the success of the James Webb Space Telescope. We have all seen the stunning images that have come from this largest and most precise optical instrument ever developed, and we are proud here at Ansys for the role that we played in its creation. Naturally, it was impossible to physically test the entire mission before launch. Given the unforgiving environment of space, the mission had to run as expected the first time. Any error would have cost billions of dollars in expenses with perhaps an even greater scientific loss. That is why the team developed the rocket, the telescope, and the entire mission in part using Ansys simulation.

[Ajei Gopal, President and CEO at ANSYS]

With Ansys, engineers overcame a number of unique challenges, including folding a structure the size of a tennis court into a rocket and then unfolding it, and then understanding how perpetual solar radiation would affect its operations. Engineers used Ansys Mechanical to identify solutions to ensure the satellite's connected segmented mirror would behave the same way a monolithic mirror would. Our optical solutions were used to design and test each step in the mirror alignment process from the initial segment search to the final phasing. In addition, mission planners used our digital mission engineering solutions to test variables that impact how the satellite is launched and to determine how to keep the satellite stationary a million miles from Earth. The results, well, they're simply out of this world.

[Ajei Gopal, President and CEO at ANSYS]

Turning to our leadership and solutions for multiphysics simulation, our customers now have access to Ansys 2022 Release 2, a comprehensive set of solutions and capabilities that cross physics, engineering disciplines, and industries. Included in this release are machine learning techniques in our core products, which are automatically optimizing repetitive processes, predicting workflows, and enhancing user productivity. We have also delivered artificial intelligence technology that enables customers to perform massive design optimization studies to arrive at an optimal design in a fraction of the time once required. This release also provides new high-performance computing capabilities and custom workflows for industry-specific applications, which will help more users address computationally complex problems by examining the impact of multiple physics at the same time. This added functionality is extending our multiphysics leadership while enabling customers to make their next-generation products a reality.

[Ajei Gopal, President and CEO at ANSYS]

I am also excited that TSMC recently certified Ansys's Power Integrity Software for its industry-leading N4P and N3E process technologies. The certification for Ansys RedHawk-SC and Ansys Totem enables next-generation silicon designs for machine learning, connectivity, and high-performance computing applications. I'm also pleased to announce that Ansys has joined the Intel Foundry Cloud Alliance. Our electronics and semiconductor suite, which includes Ansys RedHawk-SC, Ansys HFSS, and Ansys RaptorH, are available as part of the design flow that will help enable Intel customers to enhance their productivity. Rounding out our partner updates, Samsung Foundry has announced that it is using Ansys's industry-leading multiphysics solutions to develop designs on the most advanced chips, nodes, and process technologies.

[Ajei Gopal, President and CEO at ANSYS]

Using Ansys, Samsung Foundry will deliver a comprehensive design flow with greater capacity, speed, and integration capabilities for the company's most advanced semiconductor technology to boost high-speed connectivity while helping to reduce design error and risk. On our last call, I discussed the role that Ansys solutions are playing in our customers' sustainability initiatives, including for increasing fuel efficiency, in driving electrification, and in decreasing the rates of emissions. We have recently created a cross-functional center of excellence composed of members of our development and consulting teams to advance sustainability initiatives for our customers and partners. Our subject matter experts are focused on how Ansys simulation can help accelerate the creation of new, more efficient, and lower-impact products beginning at the design and development phase. As part of our own sustainability endeavors, Ansys is committed to reducing our environmental footprint.

[Ajei Gopal, President and CEO at ANSYS]

To that end, we have announced that we have set a 15% reduction of Scope 1 and Scope 2 emissions by 2027. To hit that target, we are implementing projects identified in energy audits, including lighting enhancements and on-site renewable energy. We recently submitted to the Carbon Disclosure Project for the third year in a row and continue to enhance our Task Force on Climate-related Financial Disclosures. I am also excited to announce that Fast Company has recognized several Ansys employees with its World Changing Ideas Award for the Ansys Minerva template. This template is built on our Minerva solution for simulation process and data management and provides an FDA-guided approval process for medical devices to speed potentially life-saving products to patients more quickly. I'm also proud that Ansys has been certified as a Most Loved Workplace by the Best Practice Institute.

[Ajei Gopal, President and CEO at ANSYS]

This honor was bestowed on Ansys because of our collaboration, our corporate values and practices, as well as the outcomes we drive, and demonstrates why we are an employer of choice. Next week, we'll have an opportunity to discuss Ansys's longer-term business and financial goals as part of our investor update. I'm looking forward to further explaining the expansive role that simulation is playing in product development and sharing with you how Ansys has become a trusted business partner with some of the top brands around the world. To summarize, Q2 was another excellent quarter for Ansys, resulting in us beating our guidance across all key metrics. Our business momentum, our expanded product leadership, and the ongoing strength of our customer pipeline give me even more confidence in our ability to meet our outlook for 2022. With that, I will turn the call over to Nicole. Nicole?

[Nicole Anasenes, CFO and Senior VP at ANSYS]

Thank you, Ajei. Good morning, everyone. Let me take a few minutes to add some additional perspective on our second quarter financial performance and provide context for our outlook and assumptions for Q3 and full year 2022. The second quarter demonstrated the strength 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 exceeded the high end of our Q2 guidance driven by ACV outperformance and the mix of license types sold in the quarter. Now, let me discuss some of our Q2 financial highlights. Q2 ACV was $460.3 million and grew year-over-year 7% or 13% in constant currency. We saw strong performance across all geographic regions and industries.

[Nicole Anasenes, CFO and Senior VP at ANSYS]

ACV from recurring sources grew 14% 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 represented 81% of the total in the second quarter. Q2 total revenue was $475.9 million and grew 5% or 12% in constant currency, which as I mentioned, exceeded the high end of our guidance driven by outperforming our expected ACV. Asia Pacific and EMEA drove strong Q2 revenue growth. We had robust top-line performance in Q2 with ACV and revenue both growing double-digit in constant currency at 13% and 12% respectively. In both Q2 and the first half, we executed against our business model of double-digit growth, including tuck-in M&A.

[Nicole Anasenes, CFO and Senior VP at ANSYS]

We closed the quarter with a total balance of GAAP deferred revenue and backlog of almost $1.2 billion, which grew 27% year-over-year. During the quarter, we continued to deliver a business model with strong operating leverage. This yielded a solid second quarter gross margin of 91% and an operating margin of 40.7%, 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 second half of the year. The result was second 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 second quarter was 18%, the tax rate we expect for the remainder of 2022.

[Nicole Anasenes, CFO and Senior VP at ANSYS]

Our cash flow from operations in the second quarter totaled $118.9 million, which benefited from continued strong collections. We ended the quarter with $517.6 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 Q2, and our strong 2022 forecast reflects our continued breadth and depth of customer demand. However, offsetting our first half performance and strong full-year outlook is continued and significant US dollar strengthening, which impacts the exchange rates embedded in our guidance. Let me start with our full-year 2022 guidance.

[Nicole Anasenes, CFO and Senior VP at ANSYS]

We are raising the midpoint of our ACV guidance by 1.6 points of constant currency growth compared to our May guidance. We expect our full-year ACV outlook to be in the range of $1.98 billion-$2.02 billion. This represents growth of 5.8%-8% or 11.3%-13.5% in constant currency and a midpoint of $2 billion, which puts us on track to achieve the 2019 Investor Day target. For additional context, the $2 billion midpoint of our ACV guidance when translated at 2019 foreign exchange rates would equal approximately $2.07 billion and would exceed our 2019 Investor Day ACV target.

[Nicole Anasenes, CFO and Senior VP at ANSYS]

Our full-year ACV raise is driven by the strong performance we saw in Q2 and improved forecast and momentum we see in the business, especially for Q3. That underlying improvement drove a full-year ACV operational increase of $29 million relative to our May guidance. This operational momentum was offset by $19 million of foreign exchange headwind. Turning to revenue, we expect revenue to be in the range of $2.005 billion-$2.055 billion, which is growth of 3.8%-6.4% or 9.2%-11.8% in constant currency. We are raising the midpoint of our revenue guidance by 1% of constant currency growth compared to our May guidance. This raise is driven by the strong revenue performance we saw in Q2 and improved forecast we see for the rest of the year.

[Nicole Anasenes, CFO and Senior VP at ANSYS]

That underlying improvement drove a full-year revenue operational increase of $18 million relative to our May guidance. This operational momentum was offset by $23 million of foreign exchange headwind. As a result, we expect our full-year EPS to be in the range of $7.50-$7.88. Relative to our May guidance, our full-year EPS increased $0.07 from better operational performance, which was offset by $0.12 of foreign exchange headwind. As a reminder, 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. We continue to expect our full-year operating margin to be in the range of 41%-42%. Given the rapidly changing interest rate environment, we thought it would be helpful to provide full-year interest expense for your modeling purposes.

[Nicole Anasenes, CFO and Senior VP at ANSYS]

As a reminder, our term loan structure has floating interest rates, and rising interest rates will continue to impact interest expense. Our current outlook projects our full-year 2022 interest expense to be $22 million, up almost $10 million from last year. Now let me turn to our full-year operating cash flow guidance. Our 2022 outlook is a range of $570 million-$610 million. Relative to our May guidance, our full-year operating cash flow increased $6 million from better operational performance, which was offset by $6 million of foreign exchange headwind. 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 US dollar strengthening relative to the euro and Japanese yen.

[Nicole Anasenes, CFO and Senior VP at ANSYS]

The trajectory of the movement of these currencies has been outsized relative to typical currency fluctuation impacts. When compared to the 2021 currency rates, our 2022 guidance is negatively impacted on ACV by approximately $100 million and on operating cash flow by approximately $35 million. Notwithstanding the negative impact of exchange rates, our underlying business is operationally strong and has considerable momentum. Now let me turn to guidance for Q3. For the third quarter, we expect ACV in the range of $392 million-$412 million, and revenue in the range of $455 million-$475 million. Our outlook implies double-digit ACV constant currency growth for Q3 and the full year 2022, in line with our business model of double-digit growth, including tuck-in M&A.

[Nicole Anasenes, CFO and Senior VP at ANSYS]

We expect Q3 operating margin in the range of 37.8%-39.4% and EPS in the range of $1.56-$1.70. Further details around specific currency rates, interest expense, and other assumptions that have been factored into our outlook for 2022 and Q3 are contained in the prepared remarks document. We have a strong forecast, diversified business model, and high level of recurring ACV, all of which contribute to our confidence in our outlook and the underlying momentum of our business. This is reflected in the increased outlook for constant currency ACV and revenue growth and the operational improvements in our cash flow outlook. To the entire Ansys team, thank you for your outstanding execution in the quarter, which drove our robust Q2 financial performance and continued momentum going into the second half of the year.

[Nicole Anasenes, CFO and Senior VP at ANSYS]

We once again delivered a strong quarter, which, coupled with our recurring business model and growing sales forecast, demonstrated the strength of the Ansys business. We are well positioned to deliver on our 2022 outlook as well as our long-term strategy. I am more confident than ever in our future. Operator, we will now open the phone line to take questions.

[Operator]

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our operator. Our first question comes from Ken Wong with Oppenheimer. Please go ahead.

[Ken Wong, Md and Senior Analyst at Oppenheimer & Co. Inc]

Great. Thank you for taking my question. I guess that what I wanted to just kinda check into was just, you know, the commentary that you guys both provided, very strong, very robust. As far as macro goes, just wondering what type of macro environment are you predicting for the second half as we think about this, the elevated guide?

[Nicole Anasenes, CFO and Senior VP at ANSYS]

Sure. Thanks for your question, Ken. So yeah, as we pointed out, you know, or as we pointed out in our guidance, you know, we have, we're seeing, we're really seeing underlying strong momentum in the business. The beat to the Q2 numbers was really kind of evidence of continuing broad-based building pipeline. Now that we're in the second half of the year, we have a much clearer visibility to kind of what that second half pipeline looks like and kind of how it will land over the next couple of quarters. While we're certainly very sensitized to the macro environment overall and what's occurring with the rest of the tech industry, our business is highly exposed to R&D.

[Nicole Anasenes, CFO and Senior VP at ANSYS]

As you recall, R&D is usually the last thing to go off and the first thing to come back on when they're tightening. We're just not seeing the same level of constraint that maybe some other parts of the tech sector are seeing. The outlook of our guidance really reflects the broad-based demand across industries, geographies, and customer segments that we saw in Q2, and that we kind of see coming into the pipeline in the back half of the year.

[Ken Wong, Md and Senior Analyst at Oppenheimer & Co. Inc]

Got it. Got it.

[Ajei Gopal, President and CEO at ANSYS]

Yeah, just to amplify.

[Ken Wong, Md and Senior Analyst at Oppenheimer & Co. Inc]

Got it.

[Ajei Gopal, President and CEO at ANSYS]

Just to amplify the point that Nicole was making, I mean, many of our customers, you know, they're certainly aware of these broader geopolitical concerns and pressures that we all see, but they continue to face competitive pressures, and they've got multi-year product roadmaps that they've been driving. And frankly, that's where simulation comes in. Simulation helps them to deal with some of the competitive pressures that they're dealing with. It allows them to innovate more rapidly, and at the same time, it allows them to save money and time, because we can reduce reliance on physical testing, we can reduce warranty costs and so forth. The value proposition for simulation, which is it helps our customers both drive top line growth as well as achieve bottom line savings, that value proposition is really a compelling value proposition, and that's, I think, what we're seeing in the market.

[Ken Wong, Md and Senior Analyst at Oppenheimer & Co. Inc]

Got it. If I could maybe just a quick follow-up for you, Ajei. Look, I mean, you highlighted areas of strength from a verticals perspective, autos, aero, tech remain really strong. Are there any end markets that you feel maybe are still catching up to some of their peers in terms of maybe seeing heavier COVID or macro pressures that could potentially, you know, kind of open up as macro does improve?

[Ajei Gopal, President and CEO at ANSYS]

No, I think, as I said in the comments, our performance was pretty, you know, consistent across the verticals, as we expected to see. Certainly the bigger verticals are high tech and semiconductor, aerospace and defense, automotive and ground transportation, but we saw strength in other areas as well. Nothing specifically to note in terms of explicit areas of consideration or concern.

[Operator]

Our next question comes from Joe Vruwink with Baird. Please go ahead.

[Joe Vruwink, Senior Research Analyst at Baird]

Great. Hi, everyone. I guess a question on seasonality in the business. I think in the past, you've talked about maybe Ansys increasingly having a skew into 4Q, just given ACV generation with bigger enterprise customers signing multi-year agreements. Just given where the guidance stands currently, it looks like a really strong 3Q, and then proportionately less coming from 4Q relative to a year ago. Is that in any way reflecting SMB versus enterprise activity, or is it maybe just leaving you some wiggle room or cushion, you know, to get 3Q under your belt and then, you know, have more visibility on 4Q?

[Nicole Anasenes, CFO and Senior VP at ANSYS]

Yeah. Hi, Joe. Thanks for the question. So how I would characterize the second half guidance is just much clearer visibility to where deals land. As you know, you know, we've transitioned to a multi-year lease subscription model over the past couple of years. As you move into that multi-year lease model, your kind of timing of when the renewal base happens both within and the quarters and across the quarters and within the years can start to shift over time.

[Nicole Anasenes, CFO and Senior VP at ANSYS]

I would characterize the second half as, you know, the kind of clearest visibility we have from where we're sitting today, which is quite clear, once you get into the second half, because your sales cycles tend to be 3-6 months long, so you have a little bit more clarity in terms of what the timing of those things may line up to. I would characterize it. I think it's maybe a little bit slightly. It's slightly stronger from a growth rate standpoint. I think the overall skew is pretty similar to prior quarters. It might be a little bit heavier weighted into Q3 than maybe last year.I would characterize it as kind of a reflection of the timing of the yield of the pipeline we see today with a slightly stronger Q4 growth rate as a result of the year-to-year compare.

[Joe Vruwink, Senior Research Analyst at Baird]

And nothing-

[Ajei Gopal, President and CEO at ANSYS]

Joe, operationally, when you think about it, I mean, the sales team manages relationships with the customers, and obviously, as Nicole said, there's a lot of timing around that in terms of when projects are kicked off and activity. That drives the timing of some of the larger deals as well.

[Joe Vruwink, Senior Research Analyst at Baird]

Nothing specific to your SMB customer base. If there's been maybe one takeaway this earnings season, there's maybe initial indications of moderation as opposed to enterprise being quite strong. Nothing in your kind of forecast that would call out one segment versus the other?

[Nicole Anasenes, CFO and Senior VP at ANSYS]

Yeah, no. I mean, the kind of SMB customer base is reflected in kind of our geography and momentum. My momentum accounts primarily continue to be consistent in what they deliver. They're consistent with what we expected coming into the year. The second half pipeline is consistent with what we would have expected to see. When you look again at the mix of Q3 versus Q4 ACV, I mean, they're pretty close in terms of you know, percentages. So, in terms of the percentage of ACV that occurred last year versus this year, the growth rates again might be a little bit skewed.

[Joe Vruwink, Senior Research Analyst at Baird]

Great. Thank you.

[Operator]

Our next question comes from Jay Vleeschhouwer with Griffin Securities. Please go ahead.

[Jay Vleeschhouwer, Md of Software Research at Griffin Securities]

Thank you. Good morning. Ajei, in your prepared remarks, you gave some examples of multi-solution sales with some of the larger transactions, and of course, that's been going on for some time now. When you look at your pipeline for the remainder of the year or for the next 12 months, could you comment on that multi-solutions component of the pipeline? Within that, I'd be especially interested in anything you're seeing in terms of incremental demand or contribution from any role of Minerva, the materials business, which you highlighted, and any of the other more recent acquisitions, such as Phoenix and LST and Lumerical. A follow-up.

[Ajei Gopal, President and CEO at ANSYS]

Jay, as you know, I mean, we've been on this journey towards multiphysics sales for some time now, and we continue to execute along that direction, as you pointed out. Certainly our pipeline, especially as you consider the larger enterprise customers, our pipeline very much includes solutions that comprise of products from multiple parts of our portfolio. The multiphysics message is strong. It addresses what customers are looking for. We have been a pioneer in that space, and we continue to see benefit from that, and we certainly see traction from customers as we continue to support them.

[Ajei Gopal, President and CEO at ANSYS]

Absolutely, as we look ahead, we have multiphysics activity and multiple product sales into our customer base, certainly at the larger end, but it's also increasingly, as you start to look down the pyramid, we see multiphysics capabilities penetrating into the customer base. I think that's very important. You mentioned a couple of product lines. Obviously, we don't give quantitative breakouts by products, but I can give you some qualitative color. You asked about Minerva. I gave you, I think in the script I mentioned, some of the workflows that we've put in place, in the healthcare area. Minerva continues to be an important aspect, managing simulation data.

[Ajei Gopal, President and CEO at ANSYS]

Given the amount of simulation information that's being created by our customers, managing that simulation data effectively is important, and Minerva plays a role in that. Materials I've also mentioned, and I think I mentioned in a couple of places, certainly in the past couple of calls, materials is also important, and we certainly recognize customers as they start to go through design optimization opportunities. The choice of materials is really important.

[Ajei Gopal, President and CEO at ANSYS]

Materials plays another interesting role in sustainability as well, because when you consider the long-term compliance with regulations about materials that could be used, understanding the materials within a product, a design, something which could potentially take a number of years from design into actual implementation, really understanding what's in the product that's being built to make sure that you're compliant with the most recent regulations, that's also important. That's another area where materials comes in. Model-based system engineering, we continue to make progress in that area. It's really across the board, where we've been able to build on the strength of our Ansys, traditional Ansys products. We've supplemented that with acquisitions as and when appropriate, as it makes sense given our strategy, and we've continued to build the portfolio out to something that I'm very excited about and I know our customers are very excited about.

[Jay Vleeschhouwer, Md of Software Research at Griffin Securities]

Okay. Nicole, you made the interesting point that at 2019 rates, your 2022 ACV guidance would be $2.07 billion, which would imply a three-year CAGR for ACV at constant currency of about 12%. Maybe you'll talk about this next week on the investor call. Is that, do you think, a sustainable ACV CAGR for the next number of years? If it were to accelerate, you know, what would be the catalyst for that?

[Nicole Anasenes, CFO and Senior VP at ANSYS]

Thanks, Jay. Yeah. As you pointed out, we have our investor update scheduled for next week. We're really looking forward to sharing that long-term guidance with you next week. But I can't comment about the future, but Certainly, it's not too long before we can comment on the future, so stay tuned. Yeah, I mean, what we have stated and what we continue to be confident in is a business model of double-digit growth, including tuck and M&A. I think if you look at the course of this year, we have consistently delivered it in the second quarter, in the half, in our outlook for the second half of the year.

[Nicole Anasenes, CFO and Senior VP at ANSYS]

We're squarely on that model, and we're really confident in it, given the strength of demand from our customers, the success of our business model transition and our sales model transition, and just the portfolio that we have that is broader and deeper than anything else available in the market. Yep, we're looking forward to talking in more detail about those things next week.

[Jay Vleeschhouwer, Md of Software Research at Griffin Securities]

See you then. Thank you very much.

[Operator]

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

[Blair Abernethy, Md and Senior Research Analyst at Rosenblatt Securities]

Thank you, and a nice quarter, guys. Just, Ajei, just following on Jay Vleeschhouwer's questioning, in terms of standardization on the Ansys platform, you mentioned in the WEG win that they've decided to standardize on Ansys, and this is something that's, you know, been around for a few years. Is this a trend that you're starting to see pick up steam at all? Are you positioning or are you trying to help customers get more towards, you know, standardizing their simulation needs on your product set?

[Ajei Gopal, President and CEO at ANSYS]

I think it's a reflection of the fact that we have a broad platform and capability that allows us to be able to address the needs of our customers. It's really the breadth and the depth of the portfolio that gives us the credibility to have those conversations with customers. Frankly, we believe we are differentiated in the marketplace because of the breadth and the depth of our portfolio. If you talk to customers, they'll tell you they value the accuracy of what we do. They'll tell you they value the completeness of our solutions and our offerings. They'll tell you how we continue to innovate and invest in our portfolio. They know that when they are making an investment in Ansys, they're not just buying the product that we have today.

[Ajei Gopal, President and CEO at ANSYS]

They know that we're continuing to make investments, and we'll continue to enhance the portfolio, and we'll make things better, and we'll deal with the challenges that they're likely to face in the future as well. I think that gives us a tailwind when we go into some of these broader conversations. It is, you know, it is a difficult market to do wholesale replacements for one code base to another. If a customer is using a particular simulation for a number of years, they may continue to use that same simulation code, even for some period of time. It does take some planning to do wholesale replacements.

[Ajei Gopal, President and CEO at ANSYS]

We're seeing more of that, and we're seeing competitive wins where we're replacing customers, where we're within customers, where we're replacing competitors who have been present for some number of years, and the customer's made the decision to come to Ansys, which we feel is a better choice, and obviously the customer has also felt it's a better choice. We're seeing that take place, as well. The dynamic is, I think, driven by the strength of the product portfolio and the investments that we're making.

[Blair Abernethy, Md and Senior Research Analyst at Rosenblatt Securities]

Great. Thank you.

[Operator]

Our next question comes from Tyler Radke, Citigroup. Please go ahead.

[Tyler Radke, Md and Senior Analyst at Citigroup]

Good morning. Thank you for taking the question. So you clearly delivered a really strong double-digit ACV growth this quarter on a pretty difficult comp. You know, you talked about not really seeing any demand impacts from your customers and the recurring piece of ACV is growing double digits as well. I guess I'm curious if you feel like the business is kind of hitting an inflection point where that double-digit growth is sustainable. I'm just curious if you think that that's something related to the, you know, go-to-market or the product strategy. If you could just comment on, you know, if you think that the business is kind of hitting inflection here. Thank you.

[Nicole Anasenes, CFO and Senior VP at ANSYS]

Yeah. Why don't I start, and then Ajei, why don't you add any context to that? Thanks, Tyler, for your question. Yeah, I mean, I think what I would say is that the consistency of the performance throughout the year, in the first half and the outlook for the second half, is again on our model of double-digit growth, including tuck and M&A. We've been able to pretty consistently deliver that. I mean, if you go back over the past couple of years and you look at, you know, heading into the end of 2022, our guide of $2 billion of ACV at the midpoint is consistent with guidance we gave in 2019, before there was a global pandemic, before there were significant shifts in the trade environment and, you know, the underlying macro environment that we have today, which has had a significant impact on foreign exchange rates.

[Nicole Anasenes, CFO and Senior VP at ANSYS]

I think that if you look back at the investments that we've made in a business to transition to highly recurring subscription lease model, transition our go-to-market to build deeper customer relationships, and build alongside their long-term roadmaps, and then the organic and the inorganic investments in our portfolio have all been, you know, really important factors in setting us up to be able to consistently deliver that model. We're really pleased with the performance of the business, this year and the outlook that we're able to give for the rest of the year, and look forward to updating you guys a little bit more on what's to come. I don't know, Ajei, if there's anything you'd like to add to that.

[Ajei Gopal, President and CEO at ANSYS]

Yeah. I think you'll hear some more next week at our investor update. Certainly, as Nicole was saying, we've been making investments over the last several years. As I mentioned just earlier in this call, the strength of the product portfolio, I think, is really added to our ability to support our customers, and that obviously helps tremendously in the market. That's number one. As you pointed out, the go-to-market has also been really important. We've gone through a process of transforming over the last several years of go-to-market, and we have great customer relationships. We continue to maintain those great customer relationships. We have momentum, and our customers know that we support them, and they know they can rely on us.

[Ajei Gopal, President and CEO at ANSYS]

When you start to put all of that together, it creates an environment where the value of simulation shines through and our customers recognize that they can take advantage of Ansys in order to achieve their own business objectives.

[Tyler Radke, Md and Senior Analyst at Citigroup]

Thank you, as my follow-up, I just wanted to clarify the performance. It looked like EMEA and APAC in particular were really strong, you know, growing 30% or better. The US was actually down year-over-year. Could you just talk about what drove that, you know, large variance in geographic performance and, you know, just anything to call out how we're thinking about international growth assumptions for the full year versus the US? Thank you.

[Nicole Anasenes, CFO and Senior VP at ANSYS]

Sure. Let me start with the broader point on kind of just some a statement about quarterly revenue dynamics in general, right? ASC 606 introduces a lot of volatility, and when you have, you know, mixed differences in license comps on a year-over-year basis within a quarter, sometimes you get a lot of volatility. You get much more of it down at the geographic level. There's often, you know, not always consistency between the overall ACV growth in a region or in a market versus revenue growth, and that's why we kind of focused on longer-term revenue metrics and longer-term ACV metrics. But to answer your question specifically, let me start with Asia-Pacific and EMEA. I mean, both had...

[Nicole Anasenes, CFO and Senior VP at ANSYS]

As we stated in our prepared remarks, all markets, we saw growth in all markets from an ACV standpoint, which is kind of that key metric of momentum. From a revenue standpoint, as you point out, APAC and EMEA really did have great performance. I'd say there's a couple of dynamics going on there. In EMEA we saw some pretty broad-based performance across all of our key industries. In the high-tech, we had a multi-year eight-figure sale to a leading European telecommunications company. In aerospace and defense, we had several seven-figure contracts with customers. Even in industrial equipment, also saw strong Q2, where we signed an eight-figure deal with a German industrial machine manufacturer. We saw strength in Europe across multiple industries.

[Nicole Anasenes, CFO and Senior VP at ANSYS]

In APAC, I mean, APAC, again, is another quarter of consistently delivering growth in Asia-Pacific. The growth was particularly strong in our geography and momentum accounts. In terms of large deals, we also saw it across multiple industries, high tech, auto, and, you know, it was really broad-based. You know, to put this one into context, the management team in APAC really has been investing in deeper customer relationships and stuck with those customers through the pandemic. That transformation of the go-to-market model and kind of aligning to the strategic roadmaps of your customers and really being there for them in their time of need is really paying off in the consistent growth that we're seeing from the Asia-Pacific region.

[Nicole Anasenes, CFO and Senior VP at ANSYS]

Now to your question on Americas. Again, as I will emphasize, all regions grew ACV. Americas, over the last 12 months, has really been leading the company in delivering value for our customers, and we're expecting the region to be a strong performer in 2022 and beyond. In the second quarter, revenues, it did decline, but it was really expected. The growth year-to-year was impacted by a comp of Q2 2021, which had several large high-tech and automotive perpetual and multiyear lease sales. Again, the revenue dynamic in Americas was really a function of ASC 606 accounting and the comparability. Overall, we've just seen very consistent growth and performance across all geos.

[Tyler Radke, Md and Senior Analyst at Citigroup]

Thanks for the detail. Look forward to the analyst session.

[Nicole Anasenes, CFO and Senior VP at ANSYS]

Yep.

[Operator]

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

[David Ridley-Lane, Director and Equity Research Analyst at Bank of America]

Good morning. This is David Ridley-Lane standing in for Andrew Obin. We had the opportunity to attend a demo of the Ansys Twin Builder a few months back. Just curious, how is that product growing relative to your internal plans, and what is the kind of feedback you're getting from the market?

[Ajei Gopal, President and CEO at ANSYS]

Obviously, you know, we don't provide financial breakdowns on a per product basis. Let me give you some perspective on where we are with Twin Builder and the broader concept of digital twins. The whole idea here is that with a digital twin, you're trying to create a digital equivalent of a product. This is something that can transition from the design phase, where typically our customers build 3D models, into the operation phase, where the digital twin, which is a simplified model of that full-fledged 3D model that's used for design, where that digital twin can be used for things like predictive maintenance and determining equipment uptime, replacement schedules, and things of that nature.

[Ajei Gopal, President and CEO at ANSYS]

We've seen certainly a lot of customer interest in that space. It's still early days. What we're demonstrating to customers is that physics-based digital twins, which is essentially what we do, coupled with some understanding of statistical techniques, when you put that together, which we encapsulate into our offerings, that provides them with tremendous accuracy with respect to some of the predictive maintenance capabilities that I just mentioned. We continue to see interest with customers. We continue to see momentum in that space. It's still relatively early days. It's still a relatively small market. Many customers are excited about the fact that we can do digital twins. They will lead with that conversation, and then they'll transition to other parts of the portfolio as well. It's a great piece of the portfolio, and we're excited about the long-term future for this product area.

[David Ridley-Lane, Director and Equity Research Analyst at Bank of America]

Sounds good. Just maybe a quick one for Nicole. On the recent tuck-in acquisitions, do they have much benefit to ACV or revenue in 2022?

[Nicole Anasenes, CFO and Senior VP at ANSYS]

Yeah. The tuck-in acquisitions, I think we may have talked about that in the last call. They're very small tuck-ins. The OnScale acquisition is a technology play. It was, you know, we're really excited about it. It's a really complementary aspect to organic development in the space of native cloud. But that's a pretty immaterial contribution. The Motor-CAD acquisition was actually a product that we OEMed, and so the net increment on the top line to that was immaterial as well. Just as a reminder, you know, Zemax, we did give a guidance on Zemax, which is about $20 million of inorganic impact this year that would be, you know, we see it consistent to how we've seen in prior quarters in terms of what the inorganic impact of Zemax would be. Does that answer the question?

[David Ridley-Lane, Director and Equity Research Analyst at Bank of America]

Absolutely. Thank you.

[Operator]

Our next question comes from Saket Kalia with Barclays. Please go ahead.

[Saket Kalia, Md and Senior Analyst at Barclays]

Okay, great. Hey, good morning, guys. Thanks for fitting me in here. Ajei, maybe for you, I mean, since we're just talking about M&A, I was wondering if you could just talk about the forward opportunity for tuck-in M&A. You know, how do you feel about just the number of opportunities out there and, of course, as valuations hopefully adjust and with Ansys' strong balance sheet. Can you just talk about that part of the strategy and kind of how that plays into the total growth algorithm?

[Ajei Gopal, President and CEO at ANSYS]

Yeah. As we've always said, we think about when we think about the future of our industry and where we need to go, we think about the combination of organic development, partnerships, and acquisitions. It's always build, partner, buy. Those are the considerations that we bring into the equation as we think about the future of our portfolio. In that context, we are always looking out to see if there are M&A opportunities that are consistent with our strategy. We believe that we're disciplined investors. We're careful when we go into an M&A situation. We look carefully to make sure that there's the strategic value that we need.

[Ajei Gopal, President and CEO at ANSYS]

That's how we think about the overall opportunity. You know, with valuations, you know, valuations obviously have come down, and maybe that is a buying opportunity. But with quality always is expensive. We wanna make sure that we have the right technology and capability of products or companies that we're in a position to buy. Look, you know, you should know that we see most of the deals that are in our space. I mean, because obviously they get presented to us. We are always, when we look to that analysis, we look to make sure that we have, you know, great technology that we're bringing in.

[Ajei Gopal, President and CEO at ANSYS]

If the technology is too far from the core, if we don't see a connection to our existing portfolio or go-to-market, we pass. We've got a very rigorous process for diligence. We evaluate the core technology. We evaluate the stickiness of customer relationships. When the technology isn't strong enough or customer relationships are superficial, or we don't see strategic connections, we pass. We're disciplined about this, but certainly we will continue to evaluate M&A as and when it's appropriate, in order to advance our strategy.

[Saket Kalia, Md and Senior Analyst at Barclays]

Got it. That makes a lot of sense. Nicole, maybe for my follow-up for you know, just to the earlier points on the multi-year license model, which we've seen obviously, you know, very successful transition over many years. You know, now that we've had sort of several years of this model with good data on renewals, I'm wondering if you've looked at sort of a net revenue retention or net retention sort of rate on those renewals, and if you can talk to that even qualitatively.

[Nicole Anasenes, CFO and Senior VP at ANSYS]

Yeah. I can give you, why don't I kind of give you two lenses to that? We, Why don't we start with just kind of the overall qualitative description of what drives the kind of overall high retention rates we have? Again, when we talk about retention rates around 90%, we're talking about the renewal of the original content, not kind of the net renewal, which includes, you know, new growth on top of that, right? It would just be the renewal of that. Maybe just start a little bit with kind of the strategic relationship strategy around multiyear leases. As we engage with our customers, we engage with them on what is the outlook for the product roadmaps going forward?

[Nicole Anasenes, CFO and Senior VP at ANSYS]

What is the mix of physics that may be required and solutions to be able to kind of work against that roadmap, and we sign those multiyear lease agreements with them kind of aligned to that overall roadmap. Now, as you know, the world changes, and it doesn't just because there may be a two or a three-year renewal ahead doesn't mean that customers' needs don't change, they don't grow, they buy companies, their competitive dynamics change. We are in a constantly ongoing relationship with those clients on a year after year basis in kind of preparing for that renewal that comes up.

[Nicole Anasenes, CFO and Senior VP at ANSYS]

When we think about it from kind of that renewal base coming up at the end of the three-year license, we have already had multiple years of conversations with those customers about the roadmaps, and we have a lot of clarity around not only kind of what is the content that they'll continue to renew, but what are the new growth areas on top of that that will extend them into the next chapter of their multiyear agreement. The relationships we have, and this was part of the strategic selling transition model that we made over time.

[Nicole Anasenes, CFO and Senior VP at ANSYS]

It was initially with, you know, a small subset of enterprise customers, but over the past five years, the go-to-market teams have really translated those best practices through the broader segmentations of our customer base, and even into supporting the channel in having those conversations as well. That is the mode of strategic selling that really, it does support those, not only those very high retention rates that we talk about when asked, but also the ability to continue to grow on top of that.

[Saket Kalia, Md and Senior Analyst at Barclays]

Got it. Very helpful. Thanks.

[Nicole Anasenes, CFO and Senior VP at ANSYS]

Operator, we have time for one more question.

[Operator]

Thank you. Our next question comes from Adam Borg with Stifel. Please go ahead.

[Adam Borg, Md at Stifel]

Great. Thanks so much for taking the question and fitting me in. Maybe just for Ajei on the cloud, haven't heard too much about that today, and I'm sure we'll talk a lot about it more next week. Just any updates on your various cloud ambitions, including the recent OnScale acquisition that was just referenced? Thanks so much.

[Ajei Gopal, President and CEO at ANSYS]

I think you'll hear more about this next week. You know, very quickly, you know, in a previous call, I talked about how the engineering simulation software, a market that we participate in, is quite different from traditional enterprise applications, and we talked about the importance of high-performance computing to our users. Obviously remember that a single engineer could run an Ansys simulation that runs across hundreds of compute nodes, for multiple hours. What we have got as part of our cloud strategy is a very, I think, very thoughtful approach that addresses the needs of our customers.

[Ajei Gopal, President and CEO at ANSYS]

It's to really enable our customers, both existing and new, to be able to benefit from the insights of physics-based simulation and optimization, as well as to be able to scale out or to support the scale-out capabilities in the cloud. We've got two distinct classes of offerings, cloud marketplace and cloud native. We've talked at length, I think in past calls about some of the cloud marketplace offerings in, I think in the previous quarter and the one before that, so I'll skip that in the interest of time. With respect to cloud native, that's when we're targeting new users and new use cases. We're creating a cloud-based platform for the development and the deployment of new workflows.

[Ajei Gopal, President and CEO at ANSYS]

Our recent acquisition, as you said, of OnScale, which is the leader in cloud-based simulation, that's accelerating our ability to be able to do that. They brought a host of critical capabilities that will allow us to develop a new set of services. Frankly, the integration of what OnScale is doing in Ansys is a powerful combination. One example is OnScale's cloud native user interface connected to our industry-leading simulation solvers on the back end. We're excited about cloud. We have, I think, a very thoughtful and robust strategy. It's still early days. We do offer customers a variety of capabilities as they need it when they need it. We believe that our capabilities are flexible and scalable. Frankly, we believe that we will be able to unlock a level of innovation across every industry around the world.

[Operator]

Thank you, and that's all the time we have today. I will turn it over to Ajei for closing remarks.

[Ajei Gopal, President and CEO at ANSYS]

I am more excited than ever by our excellent execution in the first half of the year, our expanding product leadership, and our robust pipeline. I remain confident in our ability to achieve our ambitious goals. I want to thank all my colleagues at Ansys for their commitment, their focus, and their many successes. With that, I want to thank you for attending today's call, and I look forward to giving you more details on our long-term business and financial goals at next week's investor update. Thank you.

[Operator]

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

Participants

Executives

• Ajei Gopal, President and CEO
• Kelsey DeBriyn, VP of Investor Relations
• Nicole Anasenes, CFO and Senior VP

Analysts

• Adam Borg, Md at Stifel
• Blair Abernethy, Md and Senior Research Analyst at Rosenblatt Securities
• David Ridley-Lane, Director and Equity Research Analyst at Bank of America
• Jay Vleeschhouwer, Md of Software Research at Griffin Securities
• Joe Vruwink, Senior Research Analyst at Baird
• Ken Wong, Md and Senior Analyst at Oppenheimer & Co. Inc
• Saket Kalia, Md and Senior Analyst at Barclays
• Tyler Radke, Md and Senior Analyst at Citigroup