ANSYS Q4 2021 Earnings Report

ANSYS EPS Results

• Actual EPS: $2.41
• Consensus EPS: $2.27
• Beat/Miss: Beat by +$0.14
• One Year Ago EPS: $2.48

ANSYS Revenue Results

• Actual Revenue: $661.36 million
• Expected Revenue: $645.40 million
• Beat/Miss: Beat by +$15.96 million
• YoY Revenue Growth: +5.40%

ANSYS Announcement Details

• Quarter: Q4 2021
• Date: 2/23/2022
• Time: After Market Closes
• Conference Call Date: Thursday, February 24, 2022
• Conference Call Time: 8:10AM ET

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

ANSYS Q4 2021 Earnings Call Transcript

Key Takeaways

• ANSYS delivered its largest quarter in history in Q4 2021, beating guidance across ACV, revenue, EPS, and cash flow, and grew full-year ACV by 16% in constant currency.
• The company saw broad-based double-digit growth across all major industries (High-tech, Aerospace & Defense, Automotive), geographies, and go-to-market channels, with recurring ACV representing 81% of the total.
• Looking ahead to 2022, ANSYS expects ~10% constant-currency ACV growth to $1.99–$2.05 billion—surpassing its long-term $2 billion ACV target—while maintaining ~41–42% operating margin and strong cash flow.
• ANSYS bolstered its semiconductor portfolio with key multi-year deals (AMD), foundry certifications (Samsung 3D IC, TSMC 3/4 nm), and introduced Sigma DVD in its 2022 R1 release to enhance dynamic voltage drop analysis.
• Expanded cloud and sustainability initiatives by launching ANSYS Cloud on Azure and the AWS-powered Gateway for flexible HPC licensing, and securing a multimillion-dollar LG Electronics deal to reduce material use and carbon footprint.

Presentation

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to Ansys' fourth quarter and full year 2021 earnings conference call. With us today are Ajei Gopal, President and Chief Executive Officer, Nicole Anasenes, Chief Financial Officer and Senior Vice President of Finance, and Kelsey DeBriyn, Vice President, Investor Relations. All participants will be in listen-only mode. If you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there'll be an opportunity to ask questions. To ask questions, you may press star then one on your telephone keypad. To withdraw your questions, please press star then two. Please note that this event is being recorded. At this time, now I'd like to turn the conference over to Ms. DeBriyn for opening remarks. Please go ahead.

[Kelsey DeBriyn, VP of Investor Relations at Ansys]

Good morning, everyone. Our earnings release, the related prepared remarks document, and the link to our 2021 Form 10-K have all been posted on the homepage of our investor relations website. They contain the key financial information and supporting data relative to our fourth quarter and full year financial results and business update, as well as our Q1 and 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 with the SEC, all of which are available on our corporate website. Forward-looking statements are based upon our view of the business as of today, and Ansys undertakes no obligations to update any such information. During this call, we will be referring to non-GAAP financial measures, unless otherwise stated.

[Kelsey DeBriyn, VP of Investor Relations at Ansys]

A discussion of the various items that are excluded and reconciliations of GAAP to the comparable non-GAAP financial measures are included in our earnings release materials. I would now like to turn the call over to our President and CEO, Ajei Gopal, for his opening remarks. Ajei?

[Ajei Gopal, President and CEO at Ansys]

Good morning, everyone, and thank you for joining us. Q4 was another strong quarter for Ansys and the largest quarter in our history. We beat our financial guidance for the quarter across all key metrics, including ACV, revenue, earnings per share, and cash flow. Q4 was a capstone to an excellent year in which we grew ACV by 16% in constant currency. Our industry-leading product portfolio, strong execution, and growing markets enabled us to beat and raise our guidance each quarter of 2021. We saw strength across all major industries, geographies, and go-to-market routes over the course of the year. Our direct and indirect channels grew at double digits. Similarly, each of our go-to-market customer segments, enterprise, strategic, and volume accounts, all grew by double digits.

[Ajei Gopal, President and CEO at Ansys]

The high tech and semiconductor, aerospace and defense, and automotive and ground transportation sectors were again our top industry, and each demonstrated robust year-over-year growth. From a geographical perspective, we saw strong performance with each region growing ACV at double digits. I'm also pleased that we saw broad-based growth consistent with our expectations across product lines, from our more established flagship products in structures, fluids, electromagnetics, and semiconductors to our newer offerings, such as optics, materials, and digital mission engineering. Our customer relationships continue to be strong and are helping to fuel that growth. In Q4, one of our key contracts came from Asia Pacific, a five year multimillion-dollar agreement with LG Electronics. This longtime customer uses Ansys simulation to enable resource-efficient production by significantly reducing material use, costs, and the number of redesigns.

[Ajei Gopal, President and CEO at Ansys]

That sustainability initiative has enabled the electronics giant to introduce high-quality next-generation products faster than expected while reducing its carbon footprint. I'm also excited that Fraunhofer, a German research organization with 76 institutes spread across the country, standardized on the Ansys simulation platform with a three-year seven-figure contract in Q4. Its researchers and engineers will use the entire Ansys portfolio to support innovation efforts in the automotive, chemical, energy, aerospace, and healthcare segments. Our ongoing broad-based business momentum and our strong customer relationships give us even greater confidence for our prospects in 2022 and beyond. We expect our 2022 ACV to grow at about 10% at the midpoint in constant currency, which positions Ansys to surpass our long-term target of $2 billion in ACV. Nicole will walk you through our guidance for 2022 in a moment.

[Ajei Gopal, President and CEO at Ansys]

During these calls, I often highlight different aspects of our technology. For example, I discussed our solutions for optical simulation on our last call and our unparalleled product scalability in August 2021. Given the strength of our semiconductor and electronics business in Q4, I'd like to spend a little bit more time discussing that important segment. Faced with mounting customer expectations, today's semiconductor companies operate at the cutting edge of innovation, and their products are continually pushing the boundaries of what is possible. Furthermore, some systems companies are turning to custom-built bespoke silicon to give their products an edge.

[Ajei Gopal, President and CEO at Ansys]

At a cost of $hundreds of millions for an advanced process node tape-out, the cost of failure is prohibitively expensive. The semiconductor and system companies are maximizing their likelihood of success by turning to technologies like scalable multiphysics simulation from Ansys to develop advanced process nodes and topologies like 3D and 2.5D multi-die chip assemblies. A key deal in Q4 was a multi-year agreement with AMD, a global leader in high-performance computing and visualization products. AMD is a longtime Ansys strategic customer. This new contract reflects AMD's rapid growth in the expanded use of Ansys simulation and sign-off tools. As a result, AMD's global engineering teams have increased access to Ansys solutions, improving collaboration and organization across the company. Customers are also using Ansys electromagnetic simulation to prevent electromagnetic interference and to ensure signal integrity.

[Ajei Gopal, President and CEO at Ansys]

Our best-in-class structural and fluid simulations are critical to predicting cooling and thermal warping and to ensuring reliable IC package designs. Customers are relying on our optical simulation to ensure the success of high-speed photonics interconnectivity among data-hungry systems, and they are leveraging our safety solutions. For example, a large semiconductor supplier to the automotive industry is using Ansys to support workflows that graphically link semiconductor design to key functions within the electronics architecture for electric vehicle battery management systems.

[Ajei Gopal, President and CEO at Ansys]

Customers can rely on Ansys because we continue to drive significant technological advances into the marketplace. In our recently released Ansys 2022 R1, we introduced breakthrough new semiconductor functionality that targets DVD, or dynamic voltage drop, which has traditionally been difficult to model and understand. DVD is a drop in the voltage rails caused by high transient current drawn from the power grid.

[Ajei Gopal, President and CEO at Ansys]

It is analogous to your house lights dimming for a moment when your air conditioning turns on. Our new technology, SigmaDVD, is a powerful approach that significantly increases coverage of dynamic voltage drop. With this functionality, we are empowering our customers to move from simulating chiplets to simulating an entire chip for all switching scenarios. We believe this breakthrough will spur innovation throughout the semiconductor industry. Ansys has always advocated for open ecosystems which allow for best-of-breed interoperability and give our customers the ability to make the right decisions for their unique businesses. This is particularly important for semiconductor and systems companies, and that is why we partner with foundries and other leading software companies. As part of our partnership, Synopsys has integrated Ansys electronic solutions into its 3D-IC Compiler for highly accurate signal, thermal, and power data.

[Ajei Gopal, President and CEO at Ansys]

The automated back annotation amongst these solutions enables faster convergence with fewer iterations to enable customers to bring next-generation products to market faster. Earlier in 2021, we signed a multi-year, $multi-million contract with a major semiconductor company, which standardized on Ansys multiphysics solutions, including Ansys HFSS and Ansys RedHawk-SC for the latest FinFET technologies and advanced 3D IC techniques. Not only was this customer able to realize the benefits from Ansys products, but it was able to drive faster time to value thanks to our integration with Synopsys' best-in-class technologies. Moving to our semiconductor foundry partners, Samsung Foundry has certified Ansys' RaptorH electromagnetic simulation solution for developing advanced systems on chip as well as for 3D ICs.

[Ajei Gopal, President and CEO at Ansys]

That industry-first certification enabled Ansys to help Samsung designers, as well as Samsung Foundry customers, more accurately analyze and mitigate risks from electromagnetic effects when adopting Samsung's new sign-off flow. In Q4, TSMC named Ansys as an OIP partner of the year for a joint development of 4-nanometer design infrastructure, which led to the certification of Ansys RedHawk-SC and Ansys Totem for TSMC's most advanced 3- and 4-nanometer processes. TSMC honored us with an award for our development of Ansys RedHawk-SC Electrothermal for full chip and package thermal analysis. Ansys has also partnered with Intel Foundry Services to become an inaugural member of the Design Ecosystem Alliance. Through this alliance, Intel will use Ansys' market-leading multiphysics solutions to enable Intel customers to create unique chips with tailor-made silicon.

[Ajei Gopal, President and CEO at Ansys]

Turning to our environmental, social, and governance initiatives, Ansys and 3M have launched a material modeling training program that is helping engineers refine product development processes and reduce material waste. 3M is offering verified material models for its tape and adhesive products to all Ansys users to help power environmental sustainability initiatives. Finally, I'm excited that Ansys has recently been recognized for our product innovation as well as for our winning culture. The International Society for Optics and Photonics presented the Prism Award in software for our OpticStudio STAR Module. This technology streamlines optical designs while reducing design errors, development time, and material costs. Ansys has also been recognized by the Great Place to Work Institute as a preferred employer in China, Japan, South Korea, and Taiwan.

[Ajei Gopal, President and CEO at Ansys]

That is a testament to our colleagues in Asia as well as to our culture of innovation. In summary, Q4 was a great quarter, capping off an exceptional year for Ansys. We beat guidance across all our key financial metrics, and we delivered the best year in company history. Thanks to our market-leading portfolio and our deep customer relationships, our customers are continuing to grow their Ansys simulation for products as diverse as consumer electronics, electric vehicles, rocket ships, and life-saving medical devices. Those factors, combined with the momentum we experienced in Q4, will propel us through this year and beyond. With that, I'll now turn the call over to Nicole. Nicole?

[Nicole Anasenes, CFO and SVP of Finance at Ansys]

Thank you, Ajei. Good morning, everyone. Let me start out by saying that financially, 2021 was our strongest year ever, and we are optimistic about 2022, given the momentum in our business. For both the fourth quarter and full year 2021, we beat our financial guidance across all key metrics. This is especially noteworthy as we raised our full year guidance for ACV, revenue, EPS, and operating cash flow for all three quarters throughout the course of the year. Additionally, in 2021, we achieved new company records across key financial metrics, including ACV, revenue, EPS, and operating cash flow. As Ajei mentioned, our growth was broad-based in 2021, with each of our customer segments and geographic regions growing double digits. Despite the lingering uncertainties around the pandemic, we saw growth across all industries as well as all product lines.

[Nicole Anasenes, CFO and SVP of Finance at Ansys]

Our wide-ranging growth is evidence of the critical capabilities our products deliver to our customers. 2021 was an outstanding year, and we are entering 2022 with momentum and a strong backlog. Now, let me take a few minutes to add some additional perspective on our fourth quarter and full year financial performance, and then I will provide our outlook and key assumptions for 2022 and Q1. Beginning with ACV, we delivered $755.4 million in Q4, which grew year-over-year 14% or 16% in constant currency. For the full year, we recognized $1.9 billion in ACV, growing 16% in both reported and constant currency. We saw strong performance across customer types, geographies, and industries. For the full year, ACV from recurring sources represented 81% of the total.

[Nicole Anasenes, CFO and SVP of Finance at Ansys]

Q4 total revenue was $661.4 million and grew 5% or 8% in constant currency, which exceeded the high end of our guidance. Full year revenue was $1.9 billion and grew 14% in both reported and constant currency. We had strong top-line performance in 2021, with ACV and revenue both growing double-digit at 16% and 14%, respectively. At our 2019 Investor Day, we outlined our business model of double-digit growth, including tuck-in M&A. In both the fourth quarter and full year, we executed against this business model. We closed the quarter with a total balance of GAAP deferred revenue and backlog of $1.3 billion, which grew 30% year-over-year. During the quarter, we continued to manage our business with financial discipline.

[Nicole Anasenes, CFO and SVP of Finance at Ansys]

This yielded a solid fourth quarter gross margin of 92.3% and an operating margin of 46.8%, which was better than our guidance. We had full year growth margin of 90.5% and operating margin of 41.4%. Operating margin was positively impacted by outperforming revenue. The result was fourth quarter EPS of $2.81, which was also better than our guidance. For the full year, EPS was $7.37. Similar to operating margin, EPS benefited from strong revenue results. Our effective tax rate in the fourth quarter and full year was 19%. Our cash flow from operations in the fourth quarter totaled $101.7 million, which benefited from strong collections. For the full year, we had operating cash flows of $549.5 million.

[Nicole Anasenes, CFO and SVP of Finance at Ansys]

We ended the quarter with $668 million of cash and short-term investments on the balance sheet. In line with our capital allocation priorities, we repurchased approximately 250,000 shares during the quarter for around $99 million. For the full year, we repurchased approximately 347,000 shares for around $135 million. We have 2.5 million shares available for repurchase under the current authorized share repurchase program. Now let me turn to the topic of guidance. We expect the momentum we saw in 2021 to continue, which gives us confidence as we look ahead to 2022. As Ajei mentioned, our 2022 full-year ACV guidance surpasses the $2 billion goal we laid out at our 2019 Investor Day. We are also on our model of double-digit growth, including tuck-in M&A with industry-leading margins.

[Nicole Anasenes, CFO and SVP of Finance at Ansys]

Let me start with our full year 2022 guidance. We expect our full year ACV outlook to be in the range of $1.99 billion-$2.05 billion. This represents growth of 6.4%-9.6% or 8.3%-11.5% in constant currency. We have a balanced and diversified business which is driving the broad-based performance and double-digit ACV growth at constant currency that we expect to see in 2022. We expect revenue to be in the range of $2.04 billion-$2.11 billion, which is growth of 5.6%-9.2% or 7.4%-11.1% in constant currency. Let me touch on some of the assumptions considered in our full year guidance.

[Nicole Anasenes, CFO and SVP of Finance at Ansys]

We continue to expect broad-based growth and continued momentum from our large enterprise customers and SMB customers. We also assume that going forward, we have a more normalized mix of business with our subscription lease licenses growing faster than perpetual licenses. As a result, ACV is expected to grow faster than revenue as the business model shift to subscription lease licenses continues. Additionally, our full year guidance is based on how we see our book of business and pipeline today. As a result, we have assumed a neutral inflationary impact to our top line. However, we have assumed a moderate impact from inflation on expenses. This brings me to our operating margin guidance. We expect our full year operating margin to be in the range of 41%-42%.

[Nicole Anasenes, CFO and SVP of Finance at Ansys]

As a result, we expect our full year EPS to be in the range of $7.64-$8.10. We expect our full year effective tax rate to be 18%, which is one point lower than the 19% rate we had in 2021 due to recurring tax savings expected from tax planning initiatives. Now let me turn to our full year operating cash flow guidance. Our 2022 outlook is a range of $580 million-$620 million. We expect to see significant growth in operating cash flow levels year-over-year, driven by strong operating leverage in our business model. However, our cash guidance absorbs the negative impact of approximately $60 million-$80 million in additional cash income taxes.

[Nicole Anasenes, CFO and SVP of Finance at Ansys]

This is driven by R&E capitalization tax legislation and other law changes that impact tax years starting January 1, 2022. Although our overall 2022 tax rate is expected to be lower, the effect of the law changes the timing of cash tax payments, which creates near-term cash flow headwinds that will normalize through the amortization dynamics that occur over time. While there is still a possibility that legislation will be enacted that defers the requirement to capitalize R&E, we are including higher cash taxes in our current outlook as we will be required to make these payments unless the existing law is amended. This legislation impacts timing of cash flow. It has no impact on our ability to operationally grow cash flow and does not create any incremental expense obligation. We remain optimistic about our cash generation in both the short and the long term.

[Nicole Anasenes, CFO and SVP of Finance at Ansys]

As you can calculate from our guidance, our current outlook, absorbing the timing impact, expects operating cash flow to grow faster than ACV in 2022. Additionally, since quarterly operating cash flow can be volatile, growth in our full year cash outlook continues to be the best measure of success. We have seen significant currency volatility so far in 2022. When compared to the 2021 currency rates, our 2022 guidance is negatively impacted on ACV by approximately $34 million and on operating cash flow by approximately $12 million. Further details around specific currency rates, changes in tax legislation, and other assumptions that have been factored into our outlook for 2022 and Q1 are contained in the prepared remarks document. Now turning to guidance for the first quarter. This year, we will provide quarterly ACV guidance to help with your modeling.

[Nicole Anasenes, CFO and SVP of Finance at Ansys]

As a reminder, annual ACV is the best metric to observe the momentum in our business. We expect first quarter ACV in the range of $328 million-$348 million, revenue in the range of $395 million-$420 million, operating margin in the range of 29.1%-31.9%, and EPS in the range of $1.05-$1.22. Heading into 2022, we have a strong pipeline, diversified business model, and a high level of recurring ACV, all of which contribute to our confidence in our outlook. I would like to thank the Ansys team for another outstanding quarter topping off a fantastic year. Despite a continued challenging macro environment, we delivered broad-based growth.

[Nicole Anasenes, CFO and SVP of Finance at Ansys]

The team's exceptional operational discipline and customer centricity enables us to meet or exceed our internal models across every geography and customer segment and deliver extraordinary value to our customers across the globe. We continue to build on that momentum, invest in our business while executing against our strategic priorities, and we are well-positioned to deliver on our 2022 outlook. Operator, we will now open the phone lines to take questions.

[Operator]

Ladies and gentlemen, we will now begin the question-and-answer session. To ask a question, press star one on your touchtone phone. If you're using a keypad, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. This time we'll pause momentarily to assemble the roster. First question comes from Mr. John Walsh, Credit Suisse. Please go ahead.

[John Walsh, Analyst at Credit Suisse]

Hi. Good morning, everyone.

[Nicole Anasenes, CFO and SVP of Finance at Ansys]

Good morning.

[John Walsh, Analyst at Credit Suisse]

Can you hear me all right?

[Ajei Gopal, President and CEO at Ansys]

Yep.

[Nicole Anasenes, CFO and SVP of Finance at Ansys]

Yeah.

[John Walsh, Analyst at Credit Suisse]

Okay, great. Well, nice performance in the quarter. Start off there. Really, my questions are, first, how should we think about the SG&A costs for 2022? Maybe what's the incremental annualized from M&A, some of the inflationary pressures you talked about, and then obviously also growth investments. Then the second question, just to make sure I have the tax adjustment correct to the cash flow. If we get an amendment from the government, which I think, you know, at least in our coverage, there's some companies that believe that'll happen, you know, would we just reverse out that $70 million? Is it as simple as that? Thank you.

[Nicole Anasenes, CFO and SVP of Finance at Ansys]

Sure. Thanks, John. Yeah. I'll answer your second question first and then the first question. Yes, if there was legislation that delayed or repealed the law, that $60 million-$80 million would be added back to the cash flow outlook. Now that is pending any changes in tax law that could occur as a result of that repeal. If it was just a straight repeal of that or delay of that, then that would be the right interpretation. From an SG&A standpoint, I think the way to think about it is that it would be fairly consistent from an R&E standpoint overall. Did we lose you?

[John Walsh, Analyst at Credit Suisse]

Oh, sorry, I was on mute there.

[Nicole Anasenes, CFO and SVP of Finance at Ansys]

Oh, okay.

[John Walsh, Analyst at Credit Suisse]

No, that's great. Thank you for taking the questions. I'll pass it along.

[Nicole Anasenes, CFO and SVP of Finance at Ansys]

Okay. Thanks so much, John.

[Operator]

Thank you. The next question comes from Jay Vleeschhouwer of Griffin Securities. Please go ahead.

[Jay Vleeschhouwer, Managing Director at Griffin Securities]

Thank you. Good morning. Ajei, let me start with you, with a question concerning the 2022 R1 release. One of the interesting components of the release was the reference to what you call custom workspaces or perhaps otherwise known as industry solutions. Could you comment on your broader plan or vision for packaging the software in that way with these custom workspaces for additional industries than the one you started with R1? How do you think this might affect your multi-solution sales over time, for example? Perhaps since you have such a large focus on process in the release, how you think this might affect your demand for Minerva over time.

[Jay Vleeschhouwer, Managing Director at Griffin Securities]

For you, Nicole, according to the 10-K, there was a very large increase in your expected revenue from RPO for 2022. Quite considerable increase, in fact, versus a year ago and from Q3. Is that mostly an artifact of the number of large transactions that you concluded in Q4? And is this perhaps a new more normal level of expected revenue coming out of RPO for next twelve-month periods?

[Nicole Anasenes, CFO and SVP of Finance at Ansys]

Yeah.

[Ajei Gopal, President and CEO at Ansys]

Okay. Jay, good morning first. Let me take the first question, and then I'll hand it over to Nicole for the second. The point that you're making actually is a very good point. We have invested in creating a comprehensive platform that supports simulation. That platform allows for workflow, it allows for data management, it allows for a number of other elements that come together and allow us to move from being a provider of tools to a provider of solutions. For example, one of the things that you saw in our 2022 R1 release was with Ansys Fluent, where we now have a dedicated aerospace workflow that tailors the UI, the user interface, to external aerodynamic simulations. That delivers built-in atmospheric conditions.

[Ajei Gopal, President and CEO at Ansys]

It optimizes solver settings, relevant input and output parameters, and so on. That's an example of the power that we can bring to bear as a result of the investments that we've made. Of course, you can see some of this being reflected throughout the portfolio. Nicole?

[Nicole Anasenes, CFO and SVP of Finance at Ansys]

Jay, to your question on the deferred revenue and backlog balance, yes, you're correct. We closed the quarter. Deferred revenue and backlog were about $1.3 billion, and that grew about 30% year-over-year. The strong growth came from the great momentum we've been seeing in our business and the success of the sales strategy to shift the business model to multi-year subscription leases, so to the point that you made earlier about strong, multi-year performance. Q4 was especially strong because of the timing of some of the start dates of contracts executed in Q4. Since these contracts were signed before Q4 ended, these contractual obligations are included in the deferred revenue and backlog balance at the end of the year.

[Nicole Anasenes, CFO and SVP of Finance at Ansys]

If you normalized for some of these contractual commitments, which had later start dates, the growth would still be really strong. It would be close to the mid-teens. And so I would say that overall, really strong performance.

[Jay Vleeschhouwer, Managing Director at Griffin Securities]

Okay. Maybe one quick follow-up. Any update on the adoption of Ansys Cloud? You did announce the new relationship with AWS recently. At the EDA conference in December, there was considerable focus by Ansys at the conference on your cloud work with Microsoft. Perhaps you could comment on that as well. Thanks.

[Ajei Gopal, President and CEO at Ansys]

Jay, I think to better understand the cloud strategy, it might just take me a moment to maybe repeat or to summarize how Ansys takes advantage of the cloud and what's important to customers. Let's consider a typical enterprise application that's not simulation. A typical enterprise application, like an ERP system, for example, it enables some workflow, some data sharing between users, and a user interaction with that application typically involves something like a database lookup and a database update. The amount of compute power that's required is small and predictable, and that allows the application vendor, the SaaS vendor, to choose a cloud for their application based on their criteria.

[Ajei Gopal, President and CEO at Ansys]

The application runs in the vendor's instance in that cloud, and the vendor will typically charge a customer a fee to use the application based on the number of users or other metrics. Now, with simulation is very different from the traditional enterprise application in that the amount of compute required to launch simulation can be enormous. So a single simulation can run for hours across hundreds of cores. A single user can launch multiple simulations in parallel, and that can translate into a lot of compute and related costs. That's why high-performance computing or HPC at scale is so important to us and to our customers. Now, historically, customers have run HPC workloads in their own data centers, so their own private clouds, if you will, and simulation has been one of their more demanding workloads.

[Ajei Gopal, President and CEO at Ansys]

Now, as the cost of, and the availability of HPC has come down in the public cloud, some of our customers are working directly with the hyperscale cloud vendors to migrate or augment their private clouds with HPC in the public cloud. Obviously, different customers will pick different hyperscale public cloud providers depending on the terms and the needs and the commercial arrangements and so forth. There are two conclusions, Jay, to draw from these facts. The first is that it's essential for us to support HPC on multiple hyperscale cloud providers.

[Ajei Gopal, President and CEO at Ansys]

The second is because simulation workloads could be run on premises in a private cloud one day and it could be run in the public cloud the next, we have to support flexible licensing. Specifically, we must allow customers to be able to purchase incremental elastic licenses to support their public cloud simulation work, as well as giving them the ability to bring and use the licenses that they may have used on premises to bring it to the cloud. That's the essence of our strategy, and we've continued to support our customers with flexible licensing as they use Ansys products in the public cloud of their choice. You mentioned a couple of announcements. First, let me talk about Ansys Cloud. This is a product we've had in the market for a while, and I've spoken of it before.

[Ajei Gopal, President and CEO at Ansys]

It's built on Azure. It supports flexible licensing. It allows our customers to take advantage of scale-out compute on the Azure cloud running on the Ansys managed instance. Ansys cloud revenues, customer usage are both growing. We're seeing a 4x increase in compute usage year-over-year. The second product that you referred to, which we announced earlier this year, is in collaboration with Amazon Web Services.

[Ajei Gopal, President and CEO at Ansys]

The Ansys Gateway powered by AWS, it provides seamless access and deployment of Ansys products on AWS. It offers scalability and flexibility. It allows customers to maintain their existing AWS relationships by pairing their hardware access through AWS with their Ansys software. In other words, the customers run on their own instance and not on the Ansys instance. This obviously provides a path for monetization for AWS and of course, for Ansys as well. That's the strategy.

[Ajei Gopal, President and CEO at Ansys]

That's the context of those products. Obviously, hopefully, this explains what we're trying to accomplish.

[Jay Vleeschhouwer, Managing Director at Griffin Securities]

Yes. Thanks very much.

[Nicole Anasenes, CFO and SVP of Finance at Ansys]

Thank you. The next question comes from Mr. Adam Borg of Stifel. Please go ahead.

[Adam Borg, Managing Director of Equity Research at Stifel]

Great. Thanks so much for taking the question. Maybe just to follow up on the Ansys Gateway question. I understand that Ansys Gateway powered by AWS, excuse me, that's a browser-based solution. Is the goal for the entire Ansys portfolio to be made available over time on Ansys Gateway?

[Ajei Gopal, President and CEO at Ansys]

Obviously the intent is to make sure that our customers can take advantage of the portfolio of the Ansys portfolio on the public cloud. You should expect to see Ansys products being broadly available on the cloud.

[Adam Borg, Managing Director of Equity Research at Stifel]

Great. Maybe just to follow up with more of a housekeeping question. Nicole, could you just comment on what the organic constant currency growth rate was for ACV and revenue just for Q4 and also for calendar year 2021? Thank you so much.

[Nicole Anasenes, CFO and SVP of Finance at Ansys]

Sure. Yeah, thanks, Adam. We saw strong growth as we know in both Q4 in 2021 and the full year. As you can calculate from the prior guidance on the impact of AGI, and that would be maximum impact we gave in Q4 in 2021, we had really strong organic growth.

[Adam Borg, Managing Director of Equity Research at Stifel]

Thanks again.

[Operator]

Thank you. The next question will be from Gal Munda of Berenberg. Please go ahead.

[Gal Munda, Director of Equity Research at Berenberg]

Hey, good morning, and thank you for taking my questions. The first one is just around the commentary that we're getting on the automotive and just in general transportation industry, but maybe zooming in on the automotive side. It's something that's been recovering after years of kind of subdued investment, and now it seems like everyone's expanding the R&D expenditure there. In terms of what you're seeing in your results today when you're saying that those, you know, the vertical is starting to really ramp up, would you say it's the first inning of that? Or have you started seeing, like, the real benefit of electrification and obviously, autonomy coming, you know, later down the line?

[Gal Munda, Director of Equity Research at Berenberg]

Basically, is this another short cycle that is better off the weak cycle, or do you think this could start off a more substantial structural growth in the industry for you?

[Ajei Gopal, President and CEO at Ansys]

Well, let me quickly take that, Gal. When you think about the automotive industry, obviously it's one of our top three verticals. Electronics and semiconductors, automotive ground transportation, aerospace are the top three verticals. It's an area where we've historically had a lot of strength. As you rightly point out, the areas where there is a lot of customer interest right now is in both electrification and in autonomy. A few years ago, I would have said that there was a significantly more interest perhaps in autonomy as a possibly the more near-term activity. What we're seeing right now is that some of the vendors or some of the OEMs have pulled back a little bit from their expectations, maybe the more aggressive timelines they had.

[Ajei Gopal, President and CEO at Ansys]

A lot of the work that's on autonomy is going towards ADAS, improving driver safety, and so forth. There continues to be lots of investment in that space, even though full autonomy might be further away. As far as electrification is concerned, as you know, it's not just about the powertrain. Obviously, when you're thinking about the powertrain, and the electric, the transformation from the internal combustion engine to an electric motor, that's where our high-fidelity multiphysics workflows come in that allows you to redesign, you know, better and more thermal efficient motors and batteries and power electronic components. All of that is part of the electrified powertrain. In addition, there is a change. It's not just about changing the internal combustion engine to an electric motor. This is an opportunity to rethink and redesign the car.

[Ajei Gopal, President and CEO at Ansys]

That means there's more analysis for example, for safety, and understanding what failure modes look like, more analysis on noise and vibration, and understanding what the ambient experience in the car cabin is gonna look like, on crash analysis and impact analysis. There's a number of different areas, all of which we have strength in, which companies are pursuing in their pursuit of electrification. We're very excited about the work that's taking place, and we see this as being an ongoing long-term tailwind for us in that particular vertical.

[Gal Munda, Director of Equity Research at Berenberg]

That's really helpful. Thank you, Ajei. Then, maybe Nicole, just a question on the guidance. When you think about the ACV growth, and the ACV number, you know, crossing that $2 billion for the first time, what are you assuming underlying in terms of the recurring ACV as a proportion of ACV as you have? Is the recent trends of going, crossing the 80% in recurring, is that what you're assuming in there? In other words, could there be incremental, you know, little headwind for the next couple of years coming from the fact that you are assuming to sign more recurring deals versus perpetual?

[Nicole Anasenes, CFO and SVP of Finance at Ansys]

Yes. That is definitely implicit in our guidance is that, as you recall, in 2020, there was, you know, more of a trough around perpetual. 2021 reflected, I'd say, kind of getting back, you know, to the normal level of perpetual we had. Our underlying view is that the momentum of customers is moving towards time-based licensing, and that will continue over time as the business model has shifted pretty substantially towards that over the past five years. Our underlying assumption in 2022 is that the mix is a little bit more normalized. As a result, you know, ACV is growing faster than revenue as a result of that mix dynamics.

[Gal Munda, Director of Equity Research at Berenberg]

Sure. That's perfect. Thank you so much.

[Operator]

Thank you. Next question comes from Tyler Radke of Citi. Please go ahead.

[Tyler Radke, Managing Director and Senior Equity Research Analyst at Citi]

Yes, good morning. Thanks for taking the question. I wanted to ask you, Ajei, about some of the semiconductor deals that you did this quarter. Seemed like there was a lot of activity, you know, between some of the certification on Samsung's 3 and 4 nanometer, as well as, you know, a number of eight-figure deals. I guess just a couple questions.

[Tyler Radke, Managing Director and Senior Equity Research Analyst at Citi]

You know, I guess when you are building out these partnerships, are you seeing kind of, you know, your semiconductor customers take on more of your products, I guess? You know, is this a number of solutions beyond just RedHawk on the kind of the leading node processes and then, you know, more broadly as you think about some of the, you know, the multi-year chip shortages that semiconductor companies are facing. Like, how is this kind of changing their roadmap for, you know, using Ansys products? Thank you.

[Ajei Gopal, President and CEO at Ansys]

Yeah. When you think about our involvement with semiconductor companies, and as I mentioned this, obviously the companies that have been historically doing semis as well as some of the system companies that are doing semis, there's obviously been a lot more activity in that space. What we are able to bring to bear is the entirety of the portfolio, and I mentioned some of this during my script. Look, when you think about 3D ICs, for example, that's really where you could scale performance and functionality across multiple dies in a single package, and that requires an integrated multiphysics approach, and that includes simulating, for example, the structures, the optics, the photonics, electromagnetics, all of those are outside of the traditional RedHawk product line, right?

[Ajei Gopal, President and CEO at Ansys]

It's HFSS and others. When you think about these complex designs, and then certainly when you move beyond the chip itself and you think about chip package system for electronics, it really brings to bear the entirety of our portfolio. I gave you an example also in the script of a company that's using some of our safety analysis, providing semiconductors for the automotive industry and how our safety analysis work, which might seem counterintuitive or unintuitive. The safety analysis work is relevant at the semiconductor level all the way up to the larger automotive level.

[Ajei Gopal, President and CEO at Ansys]

Those are examples of how our portfolio is being used, but we feel like we have a lot to offer our customers because of the multi-physics investments that we've made over the years and the strength of the portfolio.

[Tyler Radke, Managing Director and Senior Equity Research Analyst at Citi]

Great. Just on the second point of the question, you know, just around the supply chain constraints and semiconductor shortage, like, do you think that's kind of further evangelizing or, you know, increasing, you know, the amount of simulation that semiconductor companies are deploying?

[Ajei Gopal, President and CEO at Ansys]

Yeah. Look, I think for you know, the shortage of semiconductors, obviously there's a you know, challenge in terms of being able to get semiconductors to where they need to be used, and we're seeing this across multiple industries, but hasn't fundamentally affected the design activity, and that's really where we come in. We work with our customers on the design as opposed to the manufacturing of their products. Obviously part of what we're doing with respect to the certifications with the foundries is to make sure that we are in a position to support them with our technologies as they go into the foundry. Those are examples of us proactively working to make sure that the industry is able to move forward.

[Ajei Gopal, President and CEO at Ansys]

Look, it's you know, we're not tied to manufacturing, we're tied to design, and that's really primarily across all of our product lines. Even if a semiconductor shortage causes a shortage, for example, or some delay in an assembly line in an automotive company, again, it doesn't affect the design work that we're involved with in the automotive company. That's I think the strength of the Ansys business, and that gives us confidence in the way we think about our business going forward.

[Tyler Radke, Managing Director and Senior Equity Research Analyst at Citi]

Great. Then just one last one for Nicole. You know, if I look at your guidance on constant currency organic ACV for this year, it's a few points higher than the initial guidance that you gave last year. Just wanted to understand kind of what's giving you that level of confidence, you know, especially comping a pretty strong year. You know, any changes in kind of your guidance philosophy or is it maybe the strong backlog number that's giving you that confidence? Thank you.

[Nicole Anasenes, CFO and SVP of Finance at Ansys]

Yeah, I mean, I would say, you know, fundamentally 2021 was a really strong year, and I'd say when, if you compare to where we were at the beginning of last year, we had just come off of a really significant compare dynamic around Q4 2020, right? The underlying momentum of the business, as you could see through the full year of beat and raise, definitely exceeded our expectations as we exited 2021. Going into 2022, you know, our expectation is that, you know, guidance will or that performance will continue to be broad-based. It was broad-based across customer sets, geographies, industries. I mean, it was pretty consistent.

[Nicole Anasenes, CFO and SVP of Finance at Ansys]

I would say that's the primary factor in the underlying confidence around, you know, what we consider to be a pretty strong expectation of double-digit growth of 10% at the midpoint in ACV.

[Tyler Radke, Managing Director and Senior Equity Research Analyst at Citi]

Great. Thanks a lot.

[Ajei Gopal, President and CEO at Ansys]

Mm-hmm.

[Tyler Radke, Managing Director and Senior Equity Research Analyst at Citi]

Thank you. The next question will be from Ken Wong of Guggenheim Securities. Please go ahead.

[Ken Wong, Managing Director at Guggenheim Securities]

Great. Thank you for taking my question. I wanted to build off Tyler's question just now, but perhaps this one targeted in the direction of Ajei. Just thinking about that ACV growth number next year, any changes in the strategic priorities that you might be focusing on, whether that's a go-to-market, end markets, partnerships, that we should be thinking about that might, you know, help kind of influence the growth either at the low or the high end of those targets?

[Ajei Gopal, President and CEO at Ansys]

Well, as I said in my script, if you look back to 2021 and certainly Q4 as well, we saw strength across all major industries, across all major geographies, across all of our major go-to-market routes. We saw growth in both direct as well as indirect. We saw growth if you look at the pyramid with enterprise customers at the tippy top and the volume accounts at the bottom of the pyramid. We saw growth across the customer segments. You know, the regions contributed there. They all grew, you know, double digits from ACV perspective last year. The product lines kind of grew as expected. I feel very good about all of that.

[Ajei Gopal, President and CEO at Ansys]

That just goes to show that the business is performing across multiple dimensions, in a way that you would want to have happen. Part of our plan going forward is to continue to be able to build on that momentum into 2022.

[Ken Wong, Managing Director at Guggenheim Securities]

Got it. And then for Nicole, just wanted to ask about the operating margin side. When we think about that 41%-42%, is this more? Is there a heavier amount of catch-up spend, inflation that's embedded in there relative to a typical year? And potentially we can see, you know, that as, I don't want to say a trough, but, you know, kind of abnormally lower than typical. Or is this, you know, generally a just a heavier investment cycle that we should be thinking about? And I'd just love some thoughts and color on kind of what's baked into the spend dynamics.

[Nicole Anasenes, CFO and SVP of Finance at Ansys]

Sure. Let me just start by saying, you know, and I think I've mentioned this a couple times, that we are committed to industry-leading margins, and the Ansys business model is highly efficient. We have substantial operating leverage and low variable costs. Now, in our 2022 published guidance, you can see that operating leverage in the business model. When the guidance projects ACV to be stronger than revenue growth and cash flow to grow faster than ACV, and that cash flow growth is after absorbing the impact of R&E capitalization, right? Now, in terms of operating margin specifically, you know, revenue growth headwinds from expected license mix really is the primary driver of those operating margin headwinds. That dynamic is more about accounting in the P&L than operating leverage.

[Nicole Anasenes, CFO and SVP of Finance at Ansys]

The operating leverage really can be seen in those underlying dynamics between ACV and cash flow. Now, in addition, I mentioned in the prepared remarks, in both cash flow and operating margin, we do have assumptions of a moderate impact of inflation on expenses. That is a bit of a headwind to both. I would say primarily it's the underlying dynamic around, you know, just accounting and where revenue is this year relative to ACV.

[Ken Wong, Managing Director at Guggenheim Securities]

Got it. Fantastic. Thank you so much for the color.

[Ajei Gopal, President and CEO at Ansys]

Thank you.

[Operator]

The next question comes from Saket Kalia of Barclays. Please go ahead.

[Saket Kalia, Managing Director at Barclays]

Okay, great. Hey, guys. It's Saket. Thanks for squeezing me in here. Ajei, maybe for you, it was a very helpful explanation earlier just around Ansys' strategy for simulation in the cloud, and certainly got the message across around flexible licensing as customers can choose either private or public. I guess maybe the follow-up question to that, though, is, you know, in just the years that you've been at Ansys, have you seen any changes, I guess, in that trend on customers preferring one versus the other? How do you think about that going forward?

[Ajei Gopal, President and CEO at Ansys]

Well, Saket, if you go back to the years that I've been with Ansys, you know, five, six years ago, obviously, the use of public cloud for HPC was much lower than it is today. Today, the hyperscalers or the hyperscale public cloud providers have invested in building out HPC infrastructures, and they're all working with their customer bases. You know, as I think about our own customers, some of our customers are working with hyperscalers to figure out what their long-term data center strategy is gonna look like. Do they continue to invest in their own data centers, or do they take advantage of the public cloud?

[Ajei Gopal, President and CEO at Ansys]

Some combination of the two, where you have a hybrid structure, where some stuff is running on-prem, and you use the cloud as a burst capacity or for peak load periods or things of that nature. Those are conversations that are ongoing. I think everyone realizes that there's now investment in the public cloud to support high-performance computing and the high-performance computing nodes. That's obviously a possibility that's available to our customers. From our perspective, you know, one of the watch words for Ansys has always been flexibility to support and meet our customers where they want. We are in a position to support our customers if they want to take advantage of our, you know, Ansys Cloud product.

[Ajei Gopal, President and CEO at Ansys]

We can support them, and we can make it very easy for them to take advantage of the public cloud. If they want to run completely on premises, we can support that, and they can continue to do that. If they want to run on another public cloud, we can support that. If they want to run on Amazon, we are in a position to support that. In Azure, we're in a position to support that. It really is a flexible structure that we have in place, and I believe that this is exactly what customers are looking for, that choice and flexibility on something as important to them as where they're computing and the cost of the compute that they're driving.

[Saket Kalia, Managing Director at Barclays]

That makes sense. Nicole, maybe for my follow-up for you. You know, I actually missed what you said earlier just on the organic constant currency ACV growth in 2021. Could you just recap that for us? As part of that, can you just remind us how much Zemax is adding in or maybe just broadly what the organic constant currency ACV growth is assumed in the 2022 guide?

[Nicole Anasenes, CFO and SVP of Finance at Ansys]

Sure. Yeah, apologies. I had some technical difficulties earlier, so I apologize for those who couldn't hear my answer. Yeah. For both the fourth quarter and full year 2021, our ACV growth in constant currency was 16%. When you back out the $86 million-$88 million associated with the combination of AGI and Zemax, you can see that's really strong organic growth both in the quarter and for the full year. Now as we move into 2022, we're really pleased with the ACV guidance of approximately 10% at constant currency at the midpoint. Again, you know, on that business model of double-digit growth, including tuck-in M&A. Within 2022, we still expect Zemax to have an inorganic impact of about $20 million.

[Saket Kalia, Managing Director at Barclays]

That's very clear. Thanks very much, guys.

[Nicole Anasenes, CFO and SVP of Finance at Ansys]

Thank you.

[Operator]

Thank you. Next question will be from Andrew Obin, Bank of America. Please go ahead.

[Andrew Obin, Managing Director of Equity Research at Bank of America Securities]

Hi, guys. Good morning.

[Nicole Anasenes, CFO and SVP of Finance at Ansys]

Good morning.

[Ajei Gopal, President and CEO at Ansys]

Good morning.

[Andrew Obin, Managing Director of Equity Research at Bank of America Securities]

First question on cash flow. If you exclude, you know, the $6 million-$80 million incremental drag from the U.S. R&D tax credit change, 2022 free cash flow guidance is actually a nice step up from last year. What are the key factors driving the improvement and free cash flow conversion, and how sustainable it is going forward?

[Nicole Anasenes, CFO and SVP of Finance at Ansys]

Yeah, I mean, I would say, you know, as we went throughout 2021 and going into 2022, you know, we saw more of a return to a more normalized collection environment, past due environment. The underlying momentum of the business and collections is quite strong. And, you know, in addition to that, in the 2022 guidance, as I had mentioned in my earlier answer, you know, there's significant operating leverage in the business overall around ACV. Although, you know, operating margins overall are relatively flat, but on a, you know, when you compare the cash flow generation against ACV, because ACV is growing faster than revenue, you really see strong operating leverage.

[Nicole Anasenes, CFO and SVP of Finance at Ansys]

It's a combination of, you know, the underlying momentum of kind of getting back to more normalized collection patterns and the underlying operating leverage in the business that has really driven the strength of the performance going into 2022.

[Andrew Obin, Managing Director of Equity Research at Bank of America Securities]

Just a broader question. You know, philosophically, how do you think about the share price when considering buybacks versus M&A opportunities? Do you have any constraints really, given that the balance sheet here, you know, under $100 million net debt?

[Nicole Anasenes, CFO and SVP of Finance at Ansys]

Yeah, no, I mean, obviously the strength of the cash generation of the business and the balance sheet are, you know, great assets. You know, over the years, the greatest return we've been able to provide to shareholders is the deployment of excess cash using it to acquire, you know, premier simulation technologies to fill out the portfolio, to complete what's already the broadest and the deepest portfolio. Last year, you know, sometimes there's just not the right timing or there's nothing imminent to deploy that cash against or there's not something that's going to deliver the right return for shareholders. In those times, we do repurchase shares. Last year, we repurchased about 347,000 shares for about $135 million.

[Nicole Anasenes, CFO and SVP of Finance at Ansys]

We would expect to continue to think along those lines of, you know, how we think about capital allocation overall.

[Andrew Obin, Managing Director of Equity Research at Bank of America Securities]

Terrific. Thank you very much.

[Kelsey DeBriyn, VP of Investor Relations at Ansys]

Thank you everyone for joining us. That's all the time we have today. I am going to turn it over to Ajei for some closing remarks.

[Ajei Gopal, President and CEO at Ansys]

Thank you, Kelsey. Once again, I am excited by the excellent progress that Ansys has made in 2021. I would like to thank the one Ansys team around the world for our ongoing success. Your work, along with our broad-based business momentum and our strong customer relationships, give us greater confidence for our prospects in 2022 and beyond. Thank you all for joining today's call. Have a great day.

[Operator]

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

Participants

Executives

• Ajei Gopal, President and CEO
• Nicole Anasenes, CFO and SVP of Finance

Analysts

• Adam Borg, Managing Director of Equity Research at Stifel
• Andrew Obin, Managing Director of Equity Research at Bank of America Securities
• Gal Munda, Director of Equity Research at Berenberg
• Jay Vleeschhouwer, Managing Director at Griffin Securities
• John Walsh, Analyst at Credit Suisse
• Kelsey DeBriyn, VP of Investor Relations at Ansys
• Ken Wong, Managing Director at Guggenheim Securities
• Saket Kalia, Managing Director at Barclays
• Tyler Radke, Managing Director and Senior Equity Research Analyst at Citi