ANSYS Q3 2021 Earnings Call Transcript

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Provided by Quartr
November 3, 2021

Key Takeaways

  • Q3 outperformance: ANSYS beat all key financial guidance metrics in Q3 and raised its full-year ACV, revenue, operating margin, EPS, and operating cash flow outlook.
  • Secured a $58 million three-year contract with a North American high-tech leader, marking the second-largest multiyear deal in company history and expanding user adoption across its multi-physics portfolio.
  • Enhanced its optical simulation suite through organic development (Lumerical and SPEOS) and the ZEMAX acquisition, positioning ANSYS for applications in autonomous vehicles, telecommunications, and medical imaging.
  • SMB segment recovery accelerated, with small and medium-sized customers significantly increasing investments in ANSYS solutions across industries, contributing to broad-based growth.
  • Deepened strategic partnerships by embedding electromagnetic analysis in Autodesk Fusion 360, integrating with Rockwell Automation’s Studio 5000, collaborating with TSMC on thermal analysis for multi-die semiconductor designs, and optimizing ANSYS LS-DYNA on Fujitsu’s energy-efficient supercomputers.
AI Generated. May Contain Errors.
Earnings Conference Call
ANSYS Q3 2021
00:00 / 00:00

There are 12 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the ANSYS Third Quarter 2021 Earnings Conference Call. With us today are Ajei Gopal, President and Chief Executive Officer Nicole Anacinas, Chief Financial Officer and Senior Vice President of Finance and Kelsey O'Brien, Vice President, Investor Relations. All participants will be in listen only mode. Please note, today's event is being recorded. At this time, I would now like to turn the conference over to Ms.

Operator

DeBryant for opening remarks. Please go ahead.

Speaker 1

Good morning, everyone. Our earnings release, the related prepared remarks document and the link to our Q3 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 Q3 financial results and business update as well as our Q4 and updated fiscal year 2021 outlook and the key underlying quantitative and qualitative assumptions. Today's presentation contains forward looking information. Important factors That may affect our future results are discussed in our public filings with the SEC, all of which are available on our corporate website.

Speaker 1

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

Speaker 1

Ajay?

Speaker 2

Good morning, everyone, and thank you for joining us. Q3 was another excellent quarter for ANSYS where we beat our financial guidance across all key metrics. With strong ACV growth in the quarter, I'm delighted that Year to date, we're on a stated goal of double digit ACV growth with tuck in acquisitions. Our accomplishments thus far in 2021 are further evidence of the success of our strategy of making simulation pervasive across the product lifecycle, our multi physics product leadership and our strong customer relationships. Those factors combined with customers' continued investment in R and D initiatives are driving demand for ANSYS' multi physics solutions.

Speaker 2

With a robust deal pipeline and momentum in the business bolstering our confidence, we are raising our full year financial guidance above and beyond the impact of our strong Q3 top line performance. Nicole will have the details in a few minutes. From vertical and geographical perspective, Our Q3 results came in as expected. The high-tech and semiconductor, aerospace and defense, And automotive and ground transportation sectors were again our largest contributors. Looking at our major geographies, the Americas again led the way followed by Asia Pacific.

Speaker 2

We expect each region to have its largest quarter in Q4 with this quarterly SKU to be more pronounced in Q4 for Europe. 1 of Q3's highlights was a 3 year $58,000,000 agreement with a North American high-tech customer. From an ACV perspective, this deal was the 2nd largest multiyear contract in our history. This customer was already using solutions from across the ANSYS multi physics portfolio and is now expanding its number of simulation users. It is using ANSYS for diverse applications Another key deal in Q3 was a multi year agreement with Seagate Technology, a leader in mass data storage solutions.

Speaker 2

Seagate is a long time ANSYS customer and this new contract broadens the company's use of multi physics to address next generation product challenges faced by its global customer base. For example, Seagate is using ANSYS multi physics products to assess thermal effects and acoustics to create a seamless workflow to enable higher capacity hard drives and to streamline process integration for heat assisted magnetic recording. The company also now has access to our optical suite of products to drive further innovations. As we have discussed, our small And medium sized customers or SMBs were disproportionately affected by the pandemic. However, during the last few quarters, we are seeing a recovery And SMB customers have increased their investment in ANSYS simulation.

Speaker 2

Our ongoing increase in sales from our SMB customers Thanks for the ANSYS business. In the past, I've discussed our best in class electromagnetic solutions, our unparalleled product scalability and the extreme accuracy of our structural solutions. As you heard me discuss with Seagate, optical simulation is becoming increasingly important for our customer base. In fact, in Q3, about 5% of our agreements included an optical simulation product in the order. Given that, as well as our recent closing of the ZMAX acquisition, I would like to spend some time today discussing our offerings for optical simulation.

Speaker 2

3 years ago, ANSYS did not have any optical simulation products in our portfolio. Today though companies can rely on ANSYS for an end to end solution Spanning the gamut from photons to electrons based on 3 product lines. The first, ANSYS Lumerical empowers users to design and analyze integrated photonic components and systems and model challenging product problems, including interacting optical, electrical and thermal effects. The second product line ANSYS Spios Simulates the system's optical performance and evaluates the final illumination effect by enabling high fidelity visualization based on human vision and camera sensing capabilities. 3rd is our recent acquisition of ZMAX, which enables customers to accurately model the behavior of light through complex optical lens systems.

Speaker 2

Instead of working independently as a siloed offering, Our optical simulation suite operates as part of a complete multi physics workflow. Taken together, The ANSYS optical solution is used for a diverse set of applications ranging from camera and lidar arrays found in autonomous vehicles to telecommunications and mobile phone cameras, to medical equipment and other visual aids. For example, in Q3, Sandia National Labs signed an agreement leading to expanded use of Lumerical Technologies. Sandia develops leading edge integrated photonic and nanophotonic solutions The lab uses numerical tools to design, model and simulate custom photonic components and their behavior in a circuit environment. In the automotive sector, industry leader Ford uses ANSYS products including SPEOS and the ANSYS vehicle headlight solution in the styling and design of its predictive smart headlamps and to optimize and validate headlight performance.

Speaker 2

Our headlight solution features real time physics based optical simulation and driver in the loop functionality to replicate the physical world with a high degree of predictive accuracy. Automotive giant Mazda is also increasing its use of SPEOS for internal and exterior lighting, head up displays and cameras, thanks to a sales agreement in Q3. In Aerospace and Defense, an ANSYS customer is using all three of our optical product lines The customer relies on Lumerical for creating photonics integrated circuits. It uses SPEOS for detecting radiation leaks from aircraft enclosures and this customer is also using ZMAX to study lens deformation. While still new to our portfolio and a relatively small contributor to our overall financial results, these optical solutions Fits squarely into our go to market motion and our sales team understands how to market these products.

Speaker 2

Based on the ANSYS strategy of pervasive simulation, Our optical customers can easily access products across our portfolio to perform true multi physics analysis. We saw an excellent example of that with another aerospace and defense customer that was challenged with a wing camera that was capturing blurry images. By using a combination of ANSYS optical and ANSYS Fluids products, the customer was able to correct the problem and deliver crisp images even at extreme speeds in bad weather. Moving to our partners, I'm excited that we are Our relationship with Autodesk by embedding ANSYS' electromagnetic simulation capabilities to explore and validate Printed circuit board designs within the Fusion 360 workflow. This first of a kind Autodesk Fusion 360 extension We'll enable CAD users to perform near real time PCB analyses and to retrieve real time insights into their electromagnetic performance to accelerate the development of next generation products.

Speaker 2

We have also expanded connectivity of ANSYS Twin Builder to industrial control systems through Rockwell Automation's enhanced Studio 5000 simulation interface. Users can connect digital twins to emulated controllers to optimize production at the design stage or physical controllers to enhance equipment performance in real time, for example, in predictive maintenance. I am pleased that we have expanded our partnership with TSMC to create a comprehensive thermal analysis solution for multi die semiconductor designs. Using ANSYS Red Hawk SC Electrothermal And ANSYS ICEpak, along with TSMC's silicon stacking and advanced packaging technologies, users can analyze complete We are also collaborating with Fujitsu To enable more sustainable product development for our customers, ANSYS LS Dyna now supports Fujitsu's energy efficient prime HPC Supercomputers, which will help customers reduce energy consumption and costs by offloading simulation workloads to a more energy efficient machine. Keeping with our environmental, social and governance initiatives for a moment, We recently published our simulation product handprint for autonomous vehicles.

Speaker 2

This report illustrates the role That simulation plays in the development of autonomous vehicles, including in sensors, automated driving software and safety testing. Using simulation to develop autonomous vehicles will lead to significant societal and environmental benefits ranging from a drop in traffic fatalities to a reduction in emissions. We have also submitted our initial report with the climate disclosure project and expect results by the end of the year. Similarly, we have begun working on our reports to the task force on climate related financial disclosures, which focuses on governance, strategy, risk management and metrics and targets. In summary, Q3 was another remarkable quarter for ANSYS.

Speaker 2

We beat guidance across all key financial metrics and have met our goal of delivering double digit growth year to date. We are also expanding our product leadership in our core solutions as well as an important emerging areas such as optical simulation. These factors combined with strong Q4 sales pipeline and outstanding execution give me further confidence in our ability to meet our newly increased outlook for 2021. And with that, I'll turn the call over to Nicole. Nicole?

Speaker 3

Thank you, Ajay. Good morning, everyone. Let me take a few minutes to add some additional perspective on our Q3 financial performance and provide context for our outlook and assumptions for Q4 and 2021. The 3rd quarter demonstrated the strength of our business as we delivered robust growth during the quarter. ACV was strong and in line with our expectations, while revenue, operating margin and EPS Exceeded the high end of our Q3 guidance, driven by the mix of license types sold in the quarter.

Speaker 3

Both our large enterprise customers and SMB customers performed well and our growth during the quarter was broad based. Now let me discuss some of our Q3 financial highlights. Q3 ACV was 300 and $65,400,000 and grew year over year 20% or 19% in constant currency. We saw strong performance across customer types, geographies and industries. ACV from recurring sources represented 76 Percent of the total.

Speaker 3

Q3 total revenue was $445,400,000 and grew 21% or 20% in constant currency, which as I mentioned, exceeded the high end of our guidance driven by license Q3 revenue growth was also wide ranging across customer types and industries. For the 1st three quarters of 2021, we had strong top line performance with ACV and revenue both growing double digit at 17% 19%, respectively. As Ajay mentioned, for both Q3 and Q3 year to date, We are executing against our business model of double digit growth, including tuck in M and A. We closed the quarter with a total balance of GAAP deferred revenue and backlog of 899,500,000 During the quarter, we continued to manage our business with fiscal discipline. This yielded a solid third quarter gross margin of 89.9% and an operating margin of 39.7 percent, which was better than our Q3 guidance.

Speaker 3

Operating margin was positively impacted by revenue performance from license mix as well as the timing of investments. The result was 3rd quarter EPS of $1.59 which was also above the high end of our guidance. Similar to operating margin, EPS benefited from strong revenue results from license mix and the timing of investments. Our effective tax rate in Q3 was 19%, the tax rate we expect for the Q4 of 2021. Our cash flow from operations in Q3 totaled $157,800,000 which benefited from strong collections, primarily driven by robust Q2 growth, favorable timing of intra quarter sales and a reduction in the percent of receivables past due.

Speaker 3

We ended the quarter with $1,081,400,000 of cash and short term investments on the balance sheet. In line with our capital allocation priorities, we repurchased approximately 97,000 shares during the quarter for around $36,000,000 We have 2,700,000 shares available for repurchase under the current authorized share repurchase program. Additionally, on October 1st, we acquired ZEMAX repurchase price of $399,100,000 net of cash acquired. Now let me turn to the topic of guidance. We continue to build confidence in our outlook for the year given the improved deals pipeline we see in the 4th quarter.

Speaker 3

As a result, we are initiating guidance for Q4 and increasing our ACV revenue, operating margin, EPS and operating cash flow outlook for the full year. This raise reflects the strong financial performance in the 3rd quarter and the increased momentum of our sales pipeline going into the 4th quarter. For the Q4, we expect revenue in the range of $614,900,000 to 654,900,000 Operating margin in the range of 44.5 percent to 47 percent and EPS in the range of $2.48 to $2.81 As I mentioned, for the full year, we are raising our ACV revenue, Operating margin EPS and operating cash flow outlook. We are increasing our full year ACV outlook to be in the range of $1,825,000,000 to 1,860,000,000 This represents growth of 12.9% to 15.1% or 12.6% to 14.7% in constant currency. Our Q4 and full year 2021 guidance is based on continued momentum in the business and a Q4 pipeline that has accelerated since our August guidance.

Speaker 3

It does not include a repeat of the outside spending behavior we saw in December 2020 after vaccines were announced. The raise also incorporates approximately $6,000,000 to $8,000,000 contribution from ZEMAX in Q4, which is offset by approximately $6,000,000 to $8,000,000 of currency headwind. As a result, we are raising the midpoint of our ACV guidance by $20,000,000 which translates to an increase of 1.5 points of Constant currency growth compared to our August guidance. We expect revenue to be in the range of $1,885,000,000 to $1,925,000,000 which is growth of 11.2 to 13.5 percent or 10.6% to 12.9% in constant currency. This raise reflects our strong Q3 revenue performance driven by license mix as well as the incremental organic revenue from the momentum of our Q4 pipeline.

Speaker 3

Like ACV, our increased revenue incorporates approximately to $8,000,000 contribution from ZEMAX, which is offset by approximately $6,000,000 to $8,000,000 of currency headwinds. As a result, we are raising the midpoint of our revenue guidance by $40,000,000 which translates to constant currency growth of 3 points higher and the midpoint of our August guidance. As you know, ASC 606 Introduces revenue growth volatility within the quarters. However, on a full year basis, revenue growth is less volatile. In the Q4 of 2021, we expect the revenue growth rate to be impacted by the year over year compare and mix of license types sold in the Q4 2020 versus our current 2021 Q4 pipeline.

Speaker 3

We are increasing our full year operating margin and now expect operating margin to be in the range of 40.5 percent to 41.5 percent. Additionally, we are increasing our full year EPS and now expect EPS to be in the range of $7.05 to $7.38 This increase incorporates our Q3 performance and is offset by approximately 0 point It is worth noting that some of our strong Q3 EPS performance was driven by the timing of investments that moved from Q3 to the Q4 of the year. Now let me turn to our full year operating cash flow guidance. We are increasing our 2021 outlook to a range of $505,000,000 to 535,000,000 This increase is driven by stronger collections expected during the year and is partially offset by approximately $3,000,000 to $5,000,000 of currency headwinds. Further details around specific currency rates and other assumptions that have Been factored into our Q4 and 2021 guidance are contained in the prepared remarks document.

Speaker 3

Consistent with our standard practice, we will provide detailed 2022 guidance once we finalize our 2022 planning process and close out I would like to thank the ANSYS team for their outstanding execution during the quarter, which drove our robust Q3 financial performance and continued momentum going into our last quarter of the year. We once again delivered a strong quarter, which coupled with our recurring business model and growing sales pipeline demonstrated the strength of the ANSYS business. We are well positioned to deliver on our 2021 outlook as well as our longer term financial objectives. Operator, we will now open the phone lines to take questions.

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer session. We do ask that you please limit yourself to one question and one follow-up. At this time, we will pause momentarily to assemble our roster. And ladies and gentlemen, our first question today comes from John Ruewink with Baird.

Operator

Please go ahead.

Speaker 4

Great. Hi, everyone. Just on the point of ANSYS growing in line with the targets you provided back in 2019, How different is the composition of the growth today relative to the original budget? For instance, something like optical, Not around in 2019 now, 5% of bookings. Is it true to say there's maybe newer and faster growing contributors to ACV.

Speaker 4

And if that is true, does it suggest that there's also areas of the business that might be on The lagging end of recovery and so you get bigger contributors in future years?

Speaker 3

Yes. So, I'll take that. Thanks so much for your question, John. So yes, as you can as you point out, we are Well within our model of double digit growth with tuck in acquisitions on a year to date basis, our growth certainly puts us squarely on that model. What I would say is, there's 2 components to that.

Speaker 3

So the core itself, the core structures fluids, those businesses Are still solid contributors to growth and continue to grow. As you point out, we have been building the broadest, deepest simulation portfolio Over multiple decades and that has only accelerated in the past 5 years. And so I think Ajay's talk about the optical business is an example of something that was maybe quite nascent a couple of years ago that is Quite robust, competitive and extensive right now. And so I would give that as an example. Ajay, do you want to comment?

Speaker 2

Yes. So When we talked about in 2000 when we gave long term guidance, if you look at the addressable market, we talked about the core, the foundations Of the business, and then we talked about high growth adjacencies, including areas such as autonomy, electrification, IoT 5 gs. And we talked about some of the investments that we were making and in particular we did talk about optical as an area that we are that we were investing In particular to support things like autonomous vehicles as well as to support things like 5 gs for the purposes of interconnects and so forth. And so we've essentially been executing against the strategy that we laid out. I also want to correct a point that you made in your question.

Speaker 2

You said 5% of the bookings came from optical. That's not what I said in my script. What I said is that 5% of the deals had some optical Components within the agreement with the customer. So there was some aspect of optical within that. Optical, of course, is a relatively small piece of our business today.

Speaker 4

Okay. Thanks, Ajay, for the clarification. I'll leave it there. Thanks.

Operator

And our next question today comes from Andrew Obin at Bank of America. Please go

Speaker 5

Hey guys, good morning.

Speaker 1

Good morning.

Speaker 2

Good morning.

Operator

Just a question, if

Speaker 5

you look at the numbers, sort of Fairly significant outgrowth in the U. S. Relative to the rest of the world. Could you just talk about how this COVID, A, what's driving it? I assume a lot of it is COVID driven and how the reopening dynamic could sort of change this going into the year end and Into next year, I.

Speaker 5

E. What would it take for the rest of the world to catch up with the U. S. And why is the U. S.

Speaker 5

So robust? Thank you.

Speaker 3

Yes. Thanks so much for your question, Andrew. So as you point out over the last 12 months, Americas has continued to be a consistent strong performer And lead the company in creating value for our customers. A couple of deals with the one that Ajay mentioned in his remarks, the $58,000,000 agreement with leading North American technology company is an example of I think the model that We have exported around the world and leads to some strength in our other regions like APAC where the customer has already been using solutions from across the ANSYS Multiphysics portfolio, but is now expanding the number of simulation users. And so We've done a very good job at building deep relationships with customers, understanding their short and their long term development roadmaps And enabling them to be able to propagate the use of simulation to broader use cases to connect the physics and to also Connect other users in the process to leverage that simulation.

Speaker 3

And so that model, that Americas executes quite well Is the model that we're executing around the world and just as an example, our Asia Pacific region has executed exceptionally. They had another quarter A very strong growth with 21% constant currency growth I'm sorry, 21% growth in the region at a constant currency basis. And the strength in that region was broad based across industry customer types, geographies. We had several 7 figure contracts in Asia Pacific that added growth to the high-tech sector where customers are really showing enthusiasm for not just the Core portfolio, but the adjacencies as well. So there's a common theme here where we're broadening and deepening the relationships within the customer With our core technology having strong footholds and solid growth, but also leveraging investments that we've been making over the past 5 years to accelerate the footprint globally.

Speaker 3

And so I would say the core strength The portfolio and the investments that we have been making during the course of the pandemic, with our customers and in our portfolio are really The drivers of the acceleration in the performance of growth, to some degree, there is some there is a little bit of recovery. I'd say Asia Pacific probably had With a little bit ahead in the recovery versus Americas, there's still unevenness in terms of how customers are preferring to meet in person. So I wouldn't characterize things as a return to normal quite yet. But Certainly, the business model resilience is showing through regardless of the challenges that we've seen in the pandemic.

Speaker 5

Thank you. So it's as much as sort of reopening as structural changes in the business model. Is that the right way of reading it?

Speaker 3

Yes, I'd say it's the success that the management team is enjoying as a result of building out that robust portfolio and that business model. But I think also the point around investing during the pandemic is important to note. I mean, it's really easy in a tough time to barrel down the hatches And not make investments in the business. That's kind of what people might expect. But there was a very proactive or a very deliberate decision to not Over pivot in that direction because of our confidence in the opportunity around what we do and the value that we can add to our And so I really do feel like we're going to be coming out of the pandemic whenever that might be in a real position of strength.

Speaker 2

And I think just to add one small point to Nicole's response there. When you think about the investments that customers make in ANSYS, it's really triggered by their investments in R and D. And obviously, globally, you're seeing investments in R and D customers continuing to Look at next generation products and offerings and that's where simulation comes in. So the fact that we can help them with building their next generation, again points to The importance of our technology and that's what allows us to be in a position to make these relationships and sales during a pandemic or any other time for that Thank

Operator

you.

Speaker 5

And just a follow-up question. I think on a previous call, you guys highlighted how small and medium business sort of tends to lead Your core business and you made some remarks about small and medium, you are continuing to see improvement. But can you just Talk about sort of sequential trends in SMB and what this if that if you still view it as a leading indicator for The business going to the year end and next year. And I know you did improve your 4Q outlook, but just maybe more color there. Thank you so much.

Speaker 3

Sure. I'll start and if there's anything you have to add you'd like to add, Ajay. So yes, as I mentioned in our opening remarks, we continue to see strength In the SMB customer set in Q3, and we're really pleased with the momentum that we've seen now 4 quarters in a row. And so I think that that is That's what's given us the confidence in continuing to raise throughout the year. In addition to the fact that our pipeline with our large customers It's solid, robust and continues to evolve and improve.

Speaker 3

And so, I'm not sure that the 2 are interrelated. I think that they're Somewhat related in the broader sense of recovery, but I do feel like, although we're not quite at pre pandemic Behavior within the SMB set, we're really pleased with the ongoing momentum And what we've been delivering in that business.

Speaker 6

Yes.

Speaker 2

And just to amplify one of the points Nicole made, the large customer dynamic It's somewhat different from the SMB. For the most part, the large customer dynamic is driven by the long term relationship We've maintained with our direct sales force with these customers. Many of these are long term customers of ours. They've built their processes around ANSYS. And when it comes to a new project or a new activity, as they start to continue to evolve their R and D efforts, they turn to us as a vendor.

Speaker 2

And so There's an opportunity within those customers to expand the footprint based on long term relationships. In the case of SMBs, in many cases, the SMBs are Relationships that we have through channel partners and some of these customers may be relatively new customers. They may be relatively early in their life as And so I wouldn't necessarily say SMB is a leading indicator, which was the point that you made. I wouldn't necessarily say it's a leading indicator. These are 2 different Slightly different dynamics between across both the SMB and enterprise and each one of them has their own

Operator

And our next question today comes from Gal Munda with Berenberg. Please go ahead.

Speaker 7

Yes, good morning and thank you for taking my questions. Maybe the first one just In terms of the raised ACV guidance that we're seeing, again, you did a second time in a row, kind of becoming material. I was just wondering what enabled you that. Is it the strength that you've seen in SMB in Q3 And also coupled with strength in Asia that you mentioned? Or is it just the outlook as you look into Q4?

Speaker 7

You mentioned the pipeline looks really Strong in terms of what's still to come in Q4 versus what you originally expected?

Speaker 3

Sure. So in Q3, we had a really strong Q3 as you point out with that strong double digit growth. The Q3 ACV did come in line really close within our expectations. And so the raise on ACV in Q4 is really a function of The improved momentum that has been building since the last time we shared guidance in August, across the board. And so what I would say is, when you look at How we delivered year to date and in the quarter, it's been pretty broad based Across industries and customers and that's kind of a reflection of what I would characterize, the momentum in Q4.

Speaker 3

There's not any isolated one off You've been seeing as you rightly point out, we've been able to raise throughout the year. I mean, as you recall in the beginning of the year, we still were not sure whether What the kind of dynamics around recovery were going to look like. And so we've been Kind of sharing with you as we see things ahead of us and systematically raising the expectations over time.

Speaker 7

That's very helpful. Thanks for Nicole. And then just as a follow-up, maybe Ajay to you. You mentioned Autodesk partnership that It's expanding again, especially in terms of the electromagnetics introducing PCB simulation within the Fusion 360 product. You've also worked closely with PTC on the CAD side with both Discovery Life and ANSYS Simulation.

Speaker 7

It's kind of a slightly different physics for each of the partners. Is there a possibility that you start introducing More of the traditional physics solvers into the Autodesk partnership and vice versa, would you expand the PTC partnership with electromagnetic side as

Speaker 2

Well, I think the look at the end of the day Gal, when you think about it, partnerships allow ANSYS To really expand our market reach by leveraging what our partners bring to the table. They'll bring complementary technology skills. They have a brand, they can help us reach different customer segments, so that more people can benefit from simulation. Partnering allows us to Create a combined solution with a leading vendor. So at the end of the day, customers can benefit from a more complete solution than either one of us can provide on our own.

Speaker 2

Now key to our partnerships and you'll see this all along, key to our partnerships is maintaining an open ecosystem. So we're not about our partnerships are not about Blocking things off, but I'm making things available, opening things up. And our strategy and our products remain open, so that customers can create The optimal system to meet their needs. So as you think about our partnership strategy, just think about that. We are open to trying to make sure that we can leverage and work with our partners To make our customers benefit from the entirety of what we can bring to bear because we have an open strategy.

Speaker 2

I can't comment about Specifically any individual partnership of the direction that it may go, but hopefully you have some perspective of how we think about partnerships.

Speaker 7

That's helpful. Thank you, Ajay.

Operator

And ladies and gentlemen, our next question comes from Tyler Radke at Citi. Please go ahead.

Speaker 6

Hey, thanks. Good morning. Ajay, just a high level question for you. I mean, clearly, You put up a couple really strong quarters here and it sounds like the pipeline is really healthy into Q4. Just as we think about what's going on more broadly with supply chain constraints and obviously putting Pressure on kind of physical testing requirements.

Speaker 6

How much of the strength do you think could be attributed to some of the Supply chain and just macro challenges that customers are going through. And I guess, Just curious if you feel like this period is further evangelizing or potentially accelerating the need for Simulation, in other words, do you feel like this is kind of a new sustainable

Speaker 7

growth rate going forward? Thank you.

Speaker 2

Well, so let me address your question in 2 sort of timeframes. 1 is you think about the short term. So in the short term, Supply chain disruptions may be affecting many businesses, but we're really not one of the businesses that's affected by the supply chain. And the reason is, As I mentioned earlier, the use of our software is tied to the design of products. It's tied to the R and D phase for the most part and not It's not denominated by manufacturing.

Speaker 2

So whether if a customer has challenges with the supply chain and they can't produce as many units A particular product that's been designed with our technology that doesn't affect our relationship with the customer. They're already designing what that next product looks like And they're working with our engineers, so they're working with our technology to figure out what the future looks like. So our customers continue to make investments during In R and D, and it's really not affected by the supply chain in the short term. So we have no real short term issues there. When you think about it from a long term perspective and I think you're also alluding to this in your question.

Speaker 2

When you think about the long term perspective, Companies, I think, around the globe are questioning exactly how they need to think about their supply chains going forward. So, will there be a change in the way they've been thinking about supply chains? And in some cases, you're seeing customers thinking about Moving manufacturing closer to where the final product is actually going to be used. This isn't necessarily Building factories in a more traditional way, in many cases customers are thinking about building next generation factories where they have much more automation, robotics, Next generation manufacturing techniques, all of these things are relevant for simulation. We're in a position we at ANSYS are in a position to help our customers as they go through this Rethinking process as they go through the design of these next generation capabilities as they start to think about advanced manufacturing techniques, materials As they work through the simulation that goes with that, we're in a position to help them.

Speaker 2

And so we see this as a long term tailwind, where we can help customers as they try to figure out What this next generation looks like in their own evolution.

Speaker 7

Great. Thank you.

Operator

And our next question today comes from Jay Vleeschhouwer with Griffin Securities. Please go ahead.

Speaker 8

Thank you. Good morning. First question, Ajay. At the company's IDEAS conference last month hosted by your semiconductor There were 2 very interesting comments from management regarding the strategic vision that ANSYS has. There was a reference to your becoming a cloud first digital platform as a foundation for your future growth.

Speaker 8

That's Quote from the presentation, similarly that you foresee a time of simulation platforms and insights as a service, again, that's a direct quote. So in thinking about your cloud future, was the commentary at your conference meant to suggest that Cloud is not just an adjunct or complement to what you're doing today in terms of delivering technology, but Ultimately, it becomes the nexus of how you deliver technology, perhaps not unlike what PTC discussed for itself on their call last night. And then as a follow-up question, in light of the improving visibility in terms of pipeline and the like, Can you talk about the investments you're making or planning to make in technical support and consulting? That's typically your shortly lately, your 2nd highest number of open positions after R and D and you look like you're ramping up in that area. So maybe talk about those investments and the availability of the necessary personnel for that function.

Speaker 2

Sure. Jay, so let me try to unpack your question and let me start with the longer term direction comment that you asked. And I think look you'll hear a lot more about strategic direction for and where we're going over the next year and so on. Think of some of the comments that you heard As adenbrating some of the super exciting times that are ahead for ANSYS and our customers. You talked a little bit about cloud.

Speaker 2

We've got ANSYS Cloud out there which manages access to high performance computing resources. Just remember that many of our customers For them cloud is about being able to access high performance computing at scale and enabling some of these larger high fidelity simulations to run at scale. And In this last quarter on this call, I talked about the scalability of some of our products that was enabled by a customer of ours of the Technical University of Eindhoven where they had solved an aerodynamic problem with something like 3,000,000,000 computational cells with 20,000,000,000 unknowns. And that scalability is possible, of course, because of core technical advancements that we've done. So for example, we sped up Generation by 20x, which is obviously a bottleneck in the creation of detailed simulation of transient phenomena.

Speaker 2

But also we were in a position to give access to cloud computing resources. And in fact just this week, Satya Nadella in his keynote at Microsoft Ignite used the same example to show what is possible on the ANSYS cloud platform which is essentially ANSYS products running on Azure on the world's most powerful AI supercomputer. So that was one example I think of cloud that I'm excited about. We support flexible licensing models. We support an elastic pay as you go model.

Speaker 2

We support a hybrid model, which mixes and matches Elastic as well as lease licenses. And this year, we've continued to expand the number of products that we've added into our cloud Capabilities, for example, we've added in LS Dyna, we've added in Lumerical products, we've added in SOC 2 certification. We continue to improve our overall customer experience and we've also seen significant increases in cloud usage. So one of the ways that we monitor that of course is by looking at core hours. And this year, year to date, We're seeing almost 4 times as many core hours as compared to this time last year.

Speaker 2

And we still haven't hit that inflection point. So we believe that there is still much greater demand within our customer base. And we're watching our customers, we're seeing where they're going, we're where they're going and we're giving them the opportunity to be able to drive some of the scale out compute. So I'm really excited about where we are with cloud and some of that capability. There was a number of other things, I'm sure, that were also mentioned in that conversation.

Speaker 2

Some of the things that we're excited about are the new capabilities we have in our product. We've talked about AIML and how AIML supports our technology and simulation. All of those are interrelated because the advances that we make In one area can be delivered to our customers in other ways and that allows us to be a more A responsive vendor to our customers or partner to our customers that allows us to continue to drive leadership in the marketplace. So that was the first question. What was the second question, Jay?

Speaker 2

It was around

Speaker 8

The investments in technical consulting and support positions, which as I noted is typically your 2nd largest number of open positions after R and

Speaker 2

D? Yes. No, so I think if the question is are we continuing to make investments in that area, that's absolutely the case. We do continue to make investments in the area. We think our relationship that we have with our customers at a technical level is something that our customers value.

Speaker 2

It gives us Insight into the way we work with our customers use our technology and it's a two way street. We're in a position to help our customers as they evolve And certainly we're in a position to take customer feedback and insight into the next generation of our products coming in from the So I think we're excited and we continue to make investments in those areas.

Speaker 7

Okay. Thanks a lot, Jay.

Operator

And our next question today comes from Jason Celino with KeyBanc Capital Markets. Please go ahead.

Speaker 9

Hi. Thanks for taking my question. Related to ZEMAX, I'd be curious on how that Acquisition came together. I know in the past you said that sometimes customers make requests and I was wondering if this was one of those Instances and then maybe a quick follow-up. ZEMAX contribution on an annual basis, is it fair to think it's $24,000,000 to $26,000,000 if we just Annualize the contribution for Q4?

Speaker 9

Thank you.

Speaker 3

Yes. So I can quickly answer that question and on the contribution. So We expect so we had as we had said, we think it will have about $6,000,000 to $8,000,000 of ACV impact and revenue impact this year, which will be offset by largely offset by currency. Next year, it's we're estimating an incremental Approximately $20,000,000 inorganic

Operator

impact.

Speaker 2

And as far as how the acquisition comes together, as I've said many times, acquisitions are not a strategy unto themselves. Acquisitions are in support of the strategy. And clearly, one of the areas that we have continued to drive is the broadening of our multi physics capability. As I mentioned on the call, we have some leading optical simulation products and capabilities, But ZEMAX obviously has been on our radar for a while as an opportunity for us to be able to broaden and deepen our portfolio in that space. And I think in the script you heard me talk about customers who are using all of the products and how the technologies can work together to support their R and D efforts.

Speaker 2

And so this kind of technology fits right into our go to market motion. Our salespeople are very familiar with being able to position technology of this nature. So it's a very natural acquisition for us to conclude. We're excited about the technology. We're excited about bringing those people on board.

Speaker 9

Great. Excellent. Appreciate the color.

Operator

And our next question today comes from Ken Wong, Guggenheim Securities. Please go ahead.

Speaker 10

Great. Thank you for taking my question. Ajay, I wanted to touch on an announcement you guys made last The ANSYS and Apple RF safety testing simulation module from ANSYS. Apple obviously has a very large Partner Ecosystems, should we expect that this brings in a wave of new potential customers or is this simply additive to your existing Tech Relationships.

Speaker 2

So I can't talk about what any specific company may or may not do. But what I can tell you is that We're really excited that we can make our technology available to customers who are not necessarily Experts in using simulation, our strategy for simulation is to take simulation and make it more pervasive across the product lifecycle. And part of that is creating applications that are easier for non engineers to use. And so as part of our strategy, We're creating applications that include various elements of our technology that can be integrated together to deliver A SaaS experience for our end users wherein they can simply invoke our technology under the covers if you will to solve specific problems. So those are the kinds of applications that we are excited also about bringing to market.

Speaker 2

And those are not that's typically not an area that we've Historically participated in, but we certainly see that as being part of the overall strategy that we've driving of making simulation Pervasive across the product lifecycle.

Speaker 10

Got it. Really appreciate the color there. And Nicole, just wanted to touch on the higher mix of perpetual. Is that simply a snapback of suppressed perpetual buying from 2020? Or is there some other element causing that Higher perpetual mix.

Speaker 3

Yes. No, I would characterize it as you recall perpetual licenses during the pandemic did Take a quite a significant hit in particularly in the 1st 3 quarters of last year. And so they did recover Quite a bit in the Q4 of last year, which is one of the reasons why that compares a little more challenging in Q4. But customers continue to prefer time based licensing models, because it really enables them to be more flexible as Their needs evolve. And so over the past several years, the business model has really been shifting away from perpetual licenses.

Speaker 3

If you look over longer periods of time, it's been Pretty flat and the growth has been primarily through the acceleration of leases. And so and that's really built a very strong annuity business for us Over the past 5 years and has been a very successful evolution of the business. And so while we did see We are seeing kind of some of the compare effects in the 1st 3 quarters of this year. We believe over the long term, that the shift The customer we're seeing from customers is going to continue towards that lease based licensing.

Speaker 10

Great. Thank you very much.

Operator

You're welcome. And our next question today comes from Blair Abernathy of Rosenblatt Securities. Please go ahead.

Speaker 11

Thanks and nice quarter everyone. Just following on Jay's question around the cloud. Ajay, I was just wondering if you can Maybe help us understand where the customer interest lies right now in terms of cloud based simulation tools. So not just HPC, which has been in use for a long time, but our customers looking to Shift from on prem to cloud with our tools and if they are sort of where are you seeing the traction out there?

Speaker 2

So we're seeing we're certainly seeing customers wanting to take More advantage of the cloud, during the and certainly that happened during the pandemic when people were working remotely and didn't have access as easy Access to their offices. And that certainly drove some cloud usage. I mean the fact remains that we can give our customers Who want to take advantage of our technology, we can give our customers an experience where they have elastic compute Driven from the cloud, it's a SaaS like experience. We can give them that using our elastic licensing capabilities. So that feels to them like a SaaS And similarly, we can give our access we can give our customers access to on premises technology in a lease model, which they've So we give our customers a choice of what they want to be in a position to do.

Speaker 2

ANSYS cloud gives them that ability to support their need for cloud compute, both from the solver perspective as well as scale up for HPC. So it really is up to the customers and Many of our customers have made investments that are within their own Building out data centers, so they take advantage of they prefer to take advantage of their own data centers. Some customers will look at The amount of data that they have to manage, I mean, when you think about a simulation, a complex multivariate simulation That's running across multiple or multivariate optimization could result in terabytes of information. And So then there's a question of where do you store that information? How do you keep it?

Speaker 2

Do you move it from one cloud to another? What is their standard model? So It's not simply a matter of moving piece parts into the cloud. It's really thinking holistically from the part of the customers on where and how they want to make this transition because it's an entire workflow That's across multiple vendors that needs to be managed. And I think we're very well positioned.

Speaker 2

Our technology is ready for the cloud. We're very well positioned. We're excited about our capabilities. And it really is a matter of meeting the customers as and when they're ready.

Speaker 11

Great. Thank you.

Operator

And our next question today comes from Jackson Adler with JPMorgan. Please go ahead.

Speaker 6

Great. Thanks for taking my questions guys. Actually just if we can follow-up on I mean, I know there's A lot of questions on the cloud, but if we think about if there are more deals that shift to either the ANSYS cloud or maybe through your partnership With Microsoft, how would that actually impact the revenue line items? And is there any kind of a difference in recognition depending on where the cloud

Speaker 3

Yes. I mean, I would say that the part of the business that is That customers are using on the cloud itself is very small and immaterial. The vast majority of the use case is around Seamless access to HPC capacity and other capacity outside the cloud, which has no impact on our current it's exactly the same revenue recognition model that we have in the model that we have in the whether it's a lease or perpetual license because their entitlements would be separate from that usage.

Speaker 2

And the way we built our product, Jackson, is that customers can bring their own licenses, right? So it turns you can Seamlessly take advantage of both ANSYS cloud compute capabilities as well as you can take advantage of the same license running on premises. And so the fact that we give you the flexibility of managing that, that's what customers are looking for. And so we're not asking them to give up their investments in They're on prem compute. If they've got that, that's great.

Speaker 2

They can take advantage of that. And in addition, they can take advantage of cloud or if they want to choose to Completely take advantage of the cloud, they can do that too. So that flexibility is what customers are looking for and we're in a position to support them with that.

Speaker 6

Okay. That makes sense. And then a follow-up on Dyna. So, the use cases that we're kind of talking about here are Different and are expanded from what we probably would have thought when you first acquired LS Dyna, right down the middle of crash and impact. Is the malleability of the Dyna Solver specific To Dyna or is this also something that like other software portfolios can do, they can kind of be flexible outside of their core use case?

Speaker 2

Yes. I'm not sure what you mean by the malleability. I think that firstly, Dyna provided An explicit analysis capability into the portfolio, which obviously has use cases of wide variety of use cases And we've continued to expand those use cases within the ANSYS portfolio as we've integrated the technologies together and combine both explicit and implicit capabilities. It broadens the addressable opportunity. So that's obviously the case.

Speaker 2

I think perhaps you might be referring To the announcement we the comment I made about Fujitsu. And I think in that, what is important to recognize is that the Dyna Solver is available On the Fujitsu machine on their prime HPC supercomputer and essentially because That machine is efficient. We can help our customers because they are supporting diner on the they're supporting their large scale Dyna runs on the Fujitsu hardware platform and that's more efficient because they can offload Some of their simulation workload onto an efficient compute platform. So that was the point on that piece and hopefully That clarifies the comment about switches too.

Speaker 7

Yes. Okay. Thank you.

Speaker 1

Thank you. That's all the time we have. I'm going to turn it over to Ajay for some closing comments.

Speaker 2

Thanks, Kelsey. So I'm really excited about our excellent execution, our broad Customer base and our robust pipeline. Our customers' reliance on simulation, the strengthening of the small and medium business market And our ability to close large contracts only add to that excitement and give me further confidence as we look to close out 2021. I would like to express my sincere gratitude to our customers and to our partners for their continued support. And a special thank you to my ANSYS colleagues.

Speaker 2

You have my gratitude for delivering yet another strong quarter. Thank you everyone for joining the call today. Enjoy the rest of your day.

Operator

Thank you. Ladies and gentlemen, this concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.

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