ANSYS Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
August 3, 2022

There are 11 speakers on the call.

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 Anacina, Chief Financial Officer and Kelsey DeBryan, Vice President, Investor Relations. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask Please note this event is being recorded. At this time, I would like to turn the conference over to Ms.

Operator

DeBryne 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 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 Q2 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.

Speaker 1

Forward looking statements are based upon our view of the business as of today, and ANSYS undertakes no obligations to update any such information. During this call, we will be referring to non GAAP financial measures unless otherwise stated. A discussion of the various items that are excluded and reconciliations of GAAP to the comparable non GAAP financial measures are included in our earnings release materials. I would now like to turn the call over to our President and CEO, Ajay Gopal, for his opening remarks. Ajay?

Speaker 2

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 3 year, nearly $25,000,000 agreement with an international electronics brand.

Speaker 2

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 products yield while decreasing verification time for signal and power integrity. Another multimillion dollar agreement in Q2 enables an international automotive OEM to expand its usage to include ANSYS solutions for enterprise level materials 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 Thanks to several large contracts, including one with Murata Manufacturing, a Japanese company that specializes in electronic components.

Speaker 2

With Murata, the multiyear agreement spans our multi physics portfolio and provides the company with an important thermal aware System simulation flow for radio frequency modules. 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 multiyear agreements from companies around the world. For example, long time customer WEG, a global leader in electrical engineering power and automation technology Sign a multiyear contract in Q2 to standardize on ANSYS simulation.

Speaker 2

This new agreement will help the Brazilian company rethink its development process by creating and implementing digital twins of its motors. This agreement will drive WEG's electrification and Green Energy Initiatives. 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.

Speaker 2

And we are proud here at ANSYS for the role that we played in its creation. Naturally, it was impossible to physically test And given the unforgiving environment of space, the mission had to run as expected The first time. Any era would have cost 1,000,000,000 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. 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.

Speaker 2

Engineers use 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 1000000 miles from earth. And the results, well, they're simply out of this world. Turning to our leadership in solutions for multi physics simulation.

Speaker 2

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 multi physics leadership, while enabling customers to make their next generation products a reality.

Speaker 2

I am also excited that TSMC recently certified ANSYS' power integrity software for its industry leading N4P and N3E process technologies. The certification for ANSYS Red Hawk 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 Services Cloud Alliance. Our Electronics and Semiconductor Suite, which includes Ansys Red Hawk SC, Ansys HFSS and Ansys Raptor X 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' industry leading multi physics solutions to develop designs on the most advanced chips, 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.

Speaker 2

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. To that end, we have announced that we have set a 15% reduction of Scope 1 and Scope 2 emissions by 2027.

Speaker 2

To hit that target, We recently submitted to the carbon disclosure project for the 3rd year in a row and continue to enhance our task force on climate related financial disclosures. I'm 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 I'm also proud that ANSYS has been certified as a most loved workplace by the Best Practice Institute. This honor was bestowed on ANSYS because of our collaboration, our corporate values and practices, as well as the outcomes we drive and demonstrates while we are an employer of choice. Next week, we'll have an opportunity to discuss ANSYS' longer term business and financial goals as part of our investor update.

Speaker 2

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 It 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. And with that, I will turn the call over to Nicole. Nicole?

Speaker 3

Thank you, Ajay. Good morning, everyone. Let me take a few minutes to add some additional perspective on our 2nd quarter financial performance and provide context for our outlook and assumptions for Q3 and full year 2022. The Q2 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.

Speaker 3

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 460,300,000 and grew year over year 7% or 13% in constant currency. We saw strong performance across all geographic regions and 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.

Speaker 3

ACV from recurring sources represented 81% of the total in the Q2. Q2 total revenue was $475,900,000 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% 12%, respectively. In both Q2 and the first half, we executed against our business model of double digit growth, including tuck in M and A.

Speaker 3

We closed the quarter with a total balance of GAAP deferred revenue 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 2nd 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.

Speaker 3

Our effective tax rate in the 2nd quarter was 18%, the tax rate we expect for the remainder of 2022. Our cash flow from operations in the 2nd quarter totaled $118,900,000 which benefited from continued strong collections. We ended the quarter with $517,600,000 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.

Speaker 3

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 However, offsetting our first half performance and strong full year outlook is continued and significant Let me start with our full year 2022 guidance. 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 $1,980,000,000 to 2,020,100,000 This represents growth of 5.8% to 8% or 11.3% to 13.5% in constant currency and a midpoint of $2,000,000,000 which puts us on track to achieve the 2019 Investor Day target. For additional context, the $2,000,000,000 midpoint of our ACV guidance when translated At 2019, foreign exchange rates would equal approximately $2,070,100,000 and would exceed our 2019 Investor Day ACV target.

Speaker 3

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 $29,000,000 relative to our May guidance. This operational momentum was offset by $19,000,000 of foreign exchange headwind. Turning to revenue, we expect revenue to be in the range of $2,500,000,000 to 2,055,000,000 which is growth of 3.8% to 6.4% or 9.2% to 11.8% in constant currency. We are raising the midpoint of our revenue guidance by 1 point of constant currency growth compared to our May guidance.

Speaker 3

This raise is driven by the strong revenue performance we saw in Q2 and improved forecast we see for the rest of the year. That underlying improvement drove a full year revenue operational increase of $18,000,000 relative to our May guidance. This operational momentum was offset by $23,000,000 of foreign exchange headwind. As a result, we expect Our full year EPS to be in the range of $7.50 to $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 which was driven by the timing of investments that moved from Q2 to the second half of the year.

Speaker 3

We continue to expect our full year operating margin to be in the range of 41% to 42%. Given the rapidly changing interest rate environment, we thought it would be helpful to provide full year interest expense for your modeling purposes. 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 22,000,000 up almost $10,000,000 from last year. Now let me turn to our full year Our 2022 outlook is a range of 570,000,000 to $610,000,000 Relative to our May guidance, our full year operating cash flow increased $6,000,000 from better operational performance, which was offset by $6,000,000 of foreign exchange headwind.

Speaker 3

Also note, on a year over year basis, operating cash flow continues to face non operational headwinds, including the timing impact of R and E capitalization regulations and higher interest expense given rising interest rates. Since January 2022, we have seen significant U. S. Dollar strengthening relative to the euro and Japanese yen. The trajectory of the movement of these currencies has been outsized relative to typical currency fluctuation impacts.

Speaker 3

When compared to the 2021 currency rates, our 2022 guidance is negatively impacted on ACV by approximately $100,000,000 and on operating cash flow by approximately 35,000,000 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 3rd quarter, we expect ACV in the range of $392,000,000 to $412,000,000 and revenue in the range of $455,000,000 to $475,000,000 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 and A. We expect Q3 operating margin in the range of 37.8% to 39.4 percent and EPS in the range of $1.56 to 1 0.70 Further details around specific currency rates, interest expense and other assumptions that have been factored into 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.

Speaker 3

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. 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. Our first question comes from Ken Wong with Oppenheimer. Please go ahead.

Speaker 4

Great. Thank you for taking my question. I guess what I wanted to just kind of check into was just 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?

Speaker 3

Sure. Thanks for your question, Ken. So yes, as we Pointed out, as we pointed out in our guidance, 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. And as we look as 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.

Speaker 3

And while we're certainly very sensitized to the macro environment overall and what's with the rest of the tech industry. Our business is highly exposed to R and D. And as you recall, R and D is usually the last thing to go off and the first thing to come back on when they're tightening. And so we're just not seeing, the same level of constraints that maybe some other Parts of the tech sector are seeing and 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.

Speaker 2

Got it. Just to amplify the point that Nicole was making, I mean many of our customers, 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 multiyear 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.

Speaker 2

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. And so 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.

Speaker 4

Got it. And if I could maybe just a quick follow-up for you, Ajay. You highlighted areas of strength From a verticals perspective, autos, aero, tech remained 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 Kind of open up as macro does improve?

Speaker 2

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

Operator

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

Speaker 5

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 multiyear 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 to get 3Q under your belt and then have more visibility on 4Q?

Speaker 3

Yes. 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, We've transitioned to a multiyear lease subscription model over the past couple of years.

Speaker 3

And so As you move into that multiyear lease model, your kind of timing of when the renewal base happens both within when the quarters and across quarters and within the years can start to shift over time. And so I would characterize the second half as 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 to 6 months long. So you have a little bit more clarity in terms of what the timing of those things may line up to. So I would characterize I think it's maybe a little bit slightly stronger from a growth rate standpoint. I think the overall SKU is pretty similar to Prior quarters, it might be a little bit heavier weighted into Q3 than maybe last year.

Speaker 3

But 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. And

Speaker 2

nothing And 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 in activity. So that drives the timing of some of the larger deals as well.

Speaker 5

And nothing specific to your SMB customer base. If there's been maybe one takeaway this earning see that 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?

Speaker 3

Yes. No, I mean, what I the kind of the SMB customer base is reflected in kind of our geography and momentum. 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.

Speaker 3

And when you look again at the mix of Q3 versus Q4 ACV, They're pretty close in terms of 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.

Speaker 2

Great. Thank you.

Operator

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

Speaker 6

Thank you. Good morning. Ajay, 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?

Speaker 6

And 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, then a follow-up.

Speaker 2

So Jay, as you know, I mean, we've been on this journey towards Multi physics sales for some time now and we continue to execute along that direction as you pointed out. And certainly our pipeline, especially if you consider the larger enterprise customers, our pipeline very much includes Solutions that comprise of products from multiple parts of our portfolio. And so the multi physics 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.

Speaker 2

So absolutely, As we look ahead, we have multi physics 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 permit, we see multi physics capabilities penetrating into the customer base.

Speaker 7

So I

Speaker 2

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, Given the amount of simulation information that's being created by our customers, managing that simulation data Effectively is important and that's Minerva plays a role in that.

Speaker 2

Materials I've also mentioned and I think I mentioned in a couple of places certainly in the past 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. 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, 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 is to make sure that you're compliant with the most recent regulations that's also important. And so that's another area where materials comes in. Model Based Systems Engineering, we continue to make progress in that area. It's really across the board where we've been able to have 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.

Speaker 2

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.

Speaker 6

Nicole, you made point that at 2019 rates, your 2022 ACV guidance would be $2,070,000,000 Which would imply a 3 year CAGR for ACV at constant currency of about 12%. Maybe we'll talk about this next week on the investor call. But is that do you think a sustainable ACV CAGR for the next number of years? Or if it were to accelerate, What would be the catalyst for that?

Speaker 3

Thanks, Jay. Yes, so 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 what I'll I can so I can't comment about the future, but Certainly, it's not too long before we can comment on the future, so stay tuned. But yes, I mean, what we have stated and what We continue to be confident in is a business model of double digit growth, including tuck in M and A.

Speaker 3

I think if you look at the course of this year, we have consistently delivered it In the second quarter and the half and our outlook for the second half of the year, 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. So, yes, we're looking forward to talking In more detail about those things next week.

Speaker 6

See you then. Thank you very much.

Operator

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

Speaker 8

Thank you and nice quarter guys. Ajay, just following on Jay's questioning, in terms of Standardization on the ANSYS platform. You mentioned in the WG win that they've decided to And this is something that's been around for a few years. Is this a trend that you're starting to see Pickup steam at all? And are you positioning or are you trying to help customers Get more towards standardizing their simulation needs on your product set?

Speaker 2

Well, I think it's a reflection of the fact that we have a broad Our platform and capability that allows us to be able to address the needs of our customers. And it's really the breadth and the depth of the portfolio That gives us the credibility to have those conversations with customers. And frankly, we believe we are differentiated in the marketplace Because of the breadth and the depth of our portfolio. So 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 They'll tell you how we continue to innovate and invest in our portfolio.

Speaker 2

And they know that when they are making an investment in ANSYS, They're not just buying the product that we have today. They know that we're continuing to make investments and we will 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. So I think that gives us a tailwind when we go into some of these broader conversations. It is a difficult market to do wholesale replacements for 1 code base to another. If a customer is using Yes, us particular simulation for a number of years, they may continue to use that same simulation code for some period of time.

Speaker 2

So it does take Some planning to do wholesale replacements, but we're seeing more of that and we're seeing competitive wins where we're replacing customers Within customers where we are replacing competitors who have been present for some number of years and the customers made to come to ANSYS, which we feel is a better choice. And obviously, the customers also felt it's a better choice. So we're seeing that take place as well. So the dynamic is I think driven by the strength of the product portfolio and the investments that we're making.

Speaker 8

Great. Thank you.

Operator

Our next question comes from Tyler Radke with

Speaker 9

So You clearly delivered really strong double digit ACV growth this quarter on a pretty difficult comp. 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 has kind of hit an inflection point where that double digit growth is sustainable. And I'm just curious if you think that that's something related to the go to market or the product strategy. If you could just comment on if you think that the business is kind of hitting inflection here.

Speaker 9

Thank you.

Speaker 3

Yes. So why don't I start and then Ajay, why don't you add The context to that. So, thanks Tyler for your question. Yes, 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 in M and A. And we've been able to pretty consistently deliver that.

Speaker 3

I mean, if you go back over the past couple of years and you look at heading into At the end of 2022, our guide of $2,000,000,000 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 the underlying macro environment that we have today, which has had a significant impact on foreign exchange rates. And so 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 Really important factors in setting us up to be able to consistently deliver that model. And so, 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, Ajay, if there's anything you'd like to add to that?

Speaker 2

Yes. I think you'll hear some more next week at our investor update. But certainly, as Nicole was saying, This is we've been making investments over the last several years. And 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 1.

Speaker 2

And 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. And so 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.

Speaker 9

Thank you. And as my follow-up, I just wanted to clarify the Performance, it looked like EMEA and APAC in particular were really strong, growing 30% or better. U. S. Was actually down year over year.

Speaker 9

Could you just talk about what drove that large variance in Geographic performance and just anything to call out how we're thinking about growth assumptions for the full year versus the U. S? Thank you.

Speaker 3

Sure. So let me start with a broader point on kind of just some statement about quarterly revenue dynamics in general, right? So ASC 606 introduces a lot of volatility. And when you have mixed differences in license compare 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. And so there's often 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.

Speaker 3

But to answer your question specifically, let me start with Asia Pacific and EMEA. I mean both had well, let me just start with, 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. And 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.

Speaker 3

We had a multiyear 8 figure sale to a European Telecommunications Company in Aerospace and Defense. We had several 7 figure contracts with customers And even in Industrial Equipment, also saw strong Q2 where we signed an 8 figure deal with a German industrial machine manufacturer. So we saw Strength in Europe across multiple industries. And in APAC, I mean APAC again has This is another quarter of consistently delivering growth in Asia Pacific. And it was the growth was particularly Strong in our geography and momentum accounts.

Speaker 3

And in terms of large deals, we also saw it across Multiple industries, high-tech, auto and it was really broad based. And 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. So 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. Now to your question on Americas. Again, as I will emphasize, All regions grew, ABC.

Speaker 3

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 did decline, but it was really expected. There was the growth year to year was impacted by a compare of Q2 2021, which had several large high-tech and automotive perpetual and multiyear lease sales. So Again, the revenue dynamic in Americas was really a function of 606 accounting and the comparability. Overall, We've just seen very consistent growth and performance across all geos.

Speaker 9

Thanks for the detail. Look forward to the Analyst Day. Thank you. Yes.

Operator

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

Speaker 10

Good morning. This is David Ridley Lane on for Andrew.

Speaker 2

We had

Speaker 10

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?

Speaker 2

So obviously, we don't provide financial breakdowns on a per product basis. But let me give you some perspective on where we are with Twin Builder and the broader concept of digital twins. So the whole idea here is That with the digital twin, you're trying to create a digital equivalent of a product. And this is something that can transition from the design phase where typically our customers build 3 d models into the operation phase where the digital twin, which is a simplified model of that full fledged 3 d model that's used for design, where that digital twin can be used for things like predictive maintenance, can be used for Determining equipment uptime, replacement schedules and things of that nature. So we've seen certainly a lot of is essentially what we do, coupled with some understanding of statistical techniques.

Speaker 2

When you put that together, which we encapsulate into our offerings. That provides them a tremendous accuracy with respect to some of the predictive maintenance capabilities that I just mentioned. So we continue to see interest in with customers. We continue to see momentum in that space. It's still relatively early days.

Speaker 2

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 then they'll transition to other parts of the portfolio as well. So it's a great piece of the portfolio and we're excited about the long term

Speaker 10

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

Speaker 3

Yes. 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 we're really excited about it.

Speaker 3

It's a really Complimentary aspect to organic development in the space of native cloud. And so but that's Pretty immaterial contribution and the MotorCAD acquisition was actually a product that we OEM ed And so the net increment on the top line to that was immaterial as well. Just as a reminder, ZMAX, We did give guidance on ZEMAX, which is about $20,000,000 of inorganic impact this year. And so that would be We see it consistent to how we've seen in prior quarters in terms of what the inorganic impact of ZEMAX would be. So Does that answer the question?

Speaker 10

Absolutely. Thank you.

Operator

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

Speaker 7

Okay, great. Hey, good morning, guys. Thanks for fitting me in here. Ajay, maybe for you, I mean, since we're just talking about M and A, I was wondering if you could just talk about the forward opportunity For tuck in M and A, 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,

Speaker 10

can you just talk about

Speaker 3

that part of the strategy and kind of

Speaker 7

how that plays into the total growth algorithm?

Speaker 2

Yes. So 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. So it's always build partner by. And that's those are the considerations that we bring into the equation as we think about the future of our portfolio. And in that context, we are always looking out See if there are M and A opportunities that are consistent with our strategy.

Speaker 2

We believe that we're disciplined investors. We're Careful when we go into an M and A situation, we look carefully to make sure that there is the strategic value that we need. And that's how we think about the overall opportunity. And with valuations, Valuations obviously have come down and maybe that is a buying opportunity. But with quality, quality always is expensive.

Speaker 2

And so we want to make sure that we have the right technology and capability Of products that we're in a position or companies that we're in a position to buy. Look, we're the you should know that we see Most of the deals that are in our space, I mean because obviously they get presented to us And we are always when we look to that analysis, we look to make sure that we have great technology that we're bringing in. 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 passed. We've got a very rigorous process for diligence. We evaluate the core technology.

Speaker 2

We evaluate stickiness of customer relationships and when the technology isn't strong enough or customer relationships are superficial or we don't see strategic connections, We passed. So we're disciplined about this, but certainly we will continue to evaluate M and A as and when it's appropriate in order to advance our strategy.

Speaker 7

Got it. That makes a lot of sense. Nicole, maybe for my follow-up for you, just to the earlier points on the multiyear license model, which We've seen obviously a very successful transition over many years. 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 a net retention sort of rate On those renewals, and if you can talk to that even qualitatively?

Speaker 3

Yes. So I can give you Why don't I kind of give you 2 lenses to that. So 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. And 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 New growth on top of that, right?

Speaker 3

So it would just be the renewal of that. And so maybe just start a little bit with kind of the kind of strategic relationship strategy around multiyear leases. So as we engage with our customers, we engage with them on What is the outlook for the product roadmaps going forward? What is the mix of physics that may be required in solutions to be able to Kind of work against that roadmap and we signed 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 2 or a 3 year renewal ahead doesn't mean that customers' needs don't change, they don't grow, they buy companies, Their competitive dynamics change and so 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.

Speaker 3

And so when we think about it from kind of that renewal of the renewal base Coming up at the end of the 3 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. And so the relationships we have And this was part of the strategic selling transition model that we made over time. It was initially with a small subset of enterprise customers, But over the past 5 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 and having those conversations as well. And so that is the mode of strategic selling that really does support those not only those very high retention rates that we talk about went out, but also the ability to continue to grow on top of that.

Speaker 7

Got it. Very helpful. Thanks.

Speaker 1

Operator, we have time for one more question.

Operator

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

Speaker 5

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

Speaker 2

So, yes, I think you'll hear more about this next week. But Very quickly, 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. And obviously remember that a single engineer could run an ANSYS simulation that runs across hundreds of compute nodes for multiple hours. And so What we have got as part of our cloud strategy is a very, I think, a very thoughtful approach that addresses The needs of our customers and 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.

Speaker 2

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. But with respect to cloud native, that's when we're targeting new users and new use cases. And we're creating a cloud based platform for the development and the deployment of new workflows.

Speaker 2

And 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. And they bring they brought a host of critical capabilities that will allow us to develop New set of services and frankly the integration of what OnScale is doing in ANSYS is a powerful combination. So one example is OnScale's cloud native user interface connected to our industry leading simulation solvers in the back end. So we're excited about cloud. It is we have, I think, a very thoughtful and robust strategy.

Speaker 2

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. And frankly, we believe that we will be able to unlock a level of innovation across every industry around the world.

Speaker 1

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

Speaker 2

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. And 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. And 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.

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Earnings Conference Call
ANSYS Q2 2022
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