S&P 500   5,060.25 (+1.57%)
DOW   38,886.81 (+0.71%)
QQQ   435.59 (+2.34%)
AAPL   183.27 (+0.52%)
MSFT   411.04 (+2.20%)
META   484.56 (+3.53%)
GOOGL   144.27 (+1.21%)
AMZN   172.14 (+2.11%)
TSLA   194.56 (-0.11%)
NVDA   776.33 (+15.06%)
NIO   5.81 (-2.68%)
AMD   178.09 (+8.40%)
BABA   75.41 (-0.22%)
T   16.67 (-1.94%)
F   12.20 (+0.49%)
MU   85.28 (+4.65%)
CGC   3.44 (+0.00%)
GE   151.22 (+1.44%)
DIS   108.25 (+0.54%)
AMC   4.66 (+1.97%)
PFE   27.35 (-1.16%)
PYPL   57.76 (+0.49%)
XOM   103.95 (-0.86%)
S&P 500   5,060.25 (+1.57%)
DOW   38,886.81 (+0.71%)
QQQ   435.59 (+2.34%)
AAPL   183.27 (+0.52%)
MSFT   411.04 (+2.20%)
META   484.56 (+3.53%)
GOOGL   144.27 (+1.21%)
AMZN   172.14 (+2.11%)
TSLA   194.56 (-0.11%)
NVDA   776.33 (+15.06%)
NIO   5.81 (-2.68%)
AMD   178.09 (+8.40%)
BABA   75.41 (-0.22%)
T   16.67 (-1.94%)
F   12.20 (+0.49%)
MU   85.28 (+4.65%)
CGC   3.44 (+0.00%)
GE   151.22 (+1.44%)
DIS   108.25 (+0.54%)
AMC   4.66 (+1.97%)
PFE   27.35 (-1.16%)
PYPL   57.76 (+0.49%)
XOM   103.95 (-0.86%)
S&P 500   5,060.25 (+1.57%)
DOW   38,886.81 (+0.71%)
QQQ   435.59 (+2.34%)
AAPL   183.27 (+0.52%)
MSFT   411.04 (+2.20%)
META   484.56 (+3.53%)
GOOGL   144.27 (+1.21%)
AMZN   172.14 (+2.11%)
TSLA   194.56 (-0.11%)
NVDA   776.33 (+15.06%)
NIO   5.81 (-2.68%)
AMD   178.09 (+8.40%)
BABA   75.41 (-0.22%)
T   16.67 (-1.94%)
F   12.20 (+0.49%)
MU   85.28 (+4.65%)
CGC   3.44 (+0.00%)
GE   151.22 (+1.44%)
DIS   108.25 (+0.54%)
AMC   4.66 (+1.97%)
PFE   27.35 (-1.16%)
PYPL   57.76 (+0.49%)
XOM   103.95 (-0.86%)
S&P 500   5,060.25 (+1.57%)
DOW   38,886.81 (+0.71%)
QQQ   435.59 (+2.34%)
AAPL   183.27 (+0.52%)
MSFT   411.04 (+2.20%)
META   484.56 (+3.53%)
GOOGL   144.27 (+1.21%)
AMZN   172.14 (+2.11%)
TSLA   194.56 (-0.11%)
NVDA   776.33 (+15.06%)
NIO   5.81 (-2.68%)
AMD   178.09 (+8.40%)
BABA   75.41 (-0.22%)
T   16.67 (-1.94%)
F   12.20 (+0.49%)
MU   85.28 (+4.65%)
CGC   3.44 (+0.00%)
GE   151.22 (+1.44%)
DIS   108.25 (+0.54%)
AMC   4.66 (+1.97%)
PFE   27.35 (-1.16%)
PYPL   57.76 (+0.49%)
XOM   103.95 (-0.86%)

ANSYS Q4 2021 Earnings Call Transcript


Listen to Conference Call

Participants

Corporate Executives

  • Kelsey DeBriyn
    Head of Investor Relations and Government Affairs
  • Ajei Gopal
    President and Chief Executive Officer
  • Nicole Anasenes
    Chief Financial Officer and Senior Vice President, Finance

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, Chief Executive Officer; Nicole Anasenes, Chief Financial Officer and Senior Vice President, Finance; and Kelsey DeBriyn, Vice President, Investor Relations. [Operator Instructions] Please note that this event is being recorded. At this time, I'd like to turn the conference over to Ms. DeBriyn for opening remarks. Please go ahead.

Kelsey DeBriyn
Head of Investor Relations and Government Affairs 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. 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 Chief Executive Officer 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 the 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. 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 5-year multimillion-dollar agreement with LG Electronics. This long-time customer uses ANSYS simulation to enable resource-efficient production by significantly reducing material use, costs and the number of redesigns. 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 3-year, 7-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 health care 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. 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 of 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 that 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.

At a cost of hundreds of millions of dollars for 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 multiyear agreement with AMD, a global leader in high-performance computing and visualization products. AMD is a long-time 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 collaborations and organizations across the company. Customers are also using ANSYS electromagnetic simulation to prevent electromagnetic interference and to ensure signal integrity. 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 amongst 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. 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. 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 3DIC Compiler for highly accurate signal thermal and power data. 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 multiyear, multimillion dollar contract with a major semiconductor company with standard on ANSYS multiphysics solutions, including ANSYS HFSS and ANSYS RedHawk-SC for the latest FinFET technologies and advanced 3DIC 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 3DICs.

That industry-first certification enables 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. 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 Places to Work Institute as a preferred employer in China, Japan, South Korea and Taiwan. 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.

And with that, I'll now turn the call over to Nicole. Nicole?

Nicole Anasenes
Chief Financial Officer and Senior Vice President, Finance at ANSYS

Thank you, Ajei. Good morning, everyone. Let me start off 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. And 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. 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 the 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. 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 digits 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.

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 gross 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. 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. 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 to $2.05 billion. This represents growth of 6.4% to 9.6% or 8.3% to 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 to $2.11 billion, which is growth of 5.6% to 9.2% or 7.4% to 11.1% in constant currency. Let me touch on some of the assumptions considered in our full year guidance. 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% to 42%. As a result, we expect our full year EPS to be in the range of $7.64 to $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 to $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 to $80 million in additional cash income taxes. 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.

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. 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 to $348 million, revenue in the range of $395 million to $420 million, operating margin in the range of 29.1% to 31.9% and EPS in the range of $1.05 to $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. 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.


Questions and Answers

Operator

[Operator Instructions] First question comes from Mr. John Walsh, Credit Suisse. Please go ahead.

John Walsh
Analyst at Credit Suisse Group

Hi. Good morning, everyone. Can you hear me all right?

Ajei Gopal
President and Chief Executive Officer at ANSYS

Yes.

Nicole Anasenes
Chief Financial Officer and Senior Vice President, Finance at ANSYS

Yes.

John Walsh
Analyst at Credit Suisse Group

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? And 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, at least in our coverage, there's some companies that believe that will happen, would we just reverse out that $70 million? Is it as simple as that? Thank you.

Nicole Anasenes
Chief Financial Officer and Senior Vice President, Finance at ANSYS

Sure. Thanks, John. Yes. So I'll answer your second question first and then the first question. So yes, the -- if the -- if there was legislation that delayed or repeal the law, that $60 million to $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. So 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 either/or standpoint overall. Did we lose you?

John Walsh
Analyst at Credit Suisse Group

Sorry, I was on mute there. No, that's great. Thank you for taking the question. I'll pass it along.

Nicole Anasenes
Chief Financial Officer and Senior Vice President, 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
Analyst 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?

And 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? And then for you, Nicole, according to the 10-K, there was a very large increase in your expected revenue from RPO for 2022, quite a 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 expecting revenue coming out of RPO for the next 12-month periods?

Nicole Anasenes
Chief Financial Officer and Senior Vice President, Finance at ANSYS

Yes.

Ajei Gopal
President and Chief Executive Officer 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. So the point that you're making, actually, is a very good point. We have invested in creating a comprehensive platform that supports simulation. And 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 product -- provider of solutions.

And so for example, one of the things that you saw in our 2021 -- 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. So that delivers built-in atmospheric conditions, it optimizes the solver setting, relevant input and output parameters and so on. So that's an example of the power that we can bring to bear as a result of the investments that we've made. And of course, you can see some of those being reflected throughout the portfolio.

Nicole?

Nicole Anasenes
Chief Financial Officer and Senior Vice President, Finance at ANSYS

Yes. And so Jay, to your question on the deferred revenue and backlog balance, yes, you're correct. We closed the quarter with deferred revenue and backlog of about $1.3 billion, and that grew about 30% year-over-year. Now 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 multiyear subscription leases, so to the point that you made earlier about strong multiyear performance.

Now Q4 was especially strong because of the timing of some of the start dates of contracts executed in Q4. And since some -- since these contracts were signed before Q4 ended, these contractual obligations are included in the deferred revenue backlog balance at the end of the year. But if you normalize for some of these contractual commitments, which had later start dates, the growth would still be really strong. It would be to the mid-teens. And so I would say that, overall, a really strong performance.

Jay Vleeschhouwer
Analyst 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 applicants on your cloud work with Microsoft. Perhaps you could comment on that as well. Thanks.

Ajei Gopal
President and Chief Executive Officer at ANSYS

So Jay, I think to better understand the cloud strategy, it might just take me a moment to maybe repeat what I summarized for what -- how an ANSYS takes advantage of the cloud and what's important to customers. So let's consider a typical enterprise application that's not simulation. So typical enterprise application like an ERP system, for example, it enables some workflows and data sharing between users. And the user interactions with that application typically involve 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. The application runs in the vendor's instance in that cloud, and vendor will typically charge a customer a fee to use the application based on the number of users or other metrics. Now with simulation, 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 users can launch multiple simulations in parallel, and that can translate into a lot of compute and related costs. And 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 the more demanding workloads.

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. And so a customer might often do this in the context of a broad data center update strategy in which multiple workloads, including the HPC workload, are being migrated to the public cloud. And obviously, different customers will pick different hyperscale public cloud providers, depending on the terms and the needs and the commercial arrangements and so forth.

So 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. And the second is, because simulation workload could be run on premises in a private cloud one day and it could be run in public cloud the next, we have to support flexible licensing. And 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. So that's the essence of our strategy.

And we've continued to support our customers in flexible licensing as they use ANSYS products in the public cloud of their choice. So you mentioned a couple of announcements. So 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. 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, and we've seen a 4 times 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. 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. And so this obviously provides a path for monetization for AWS and, of course, for ANSYS as well. So that strategy, that's the context of those products, and obviously, hopefully, this explains what we're trying to accomplish.

Jay Vleeschhouwer
Analyst at Griffin Securities

Yes. Thanks very much.

Operator

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

Adam Borg
Analyst at Stifel Nicolaus

Great. Thanks very much for taking the question. Maybe just a follow-up on the Ansys Gateway question. So I understand that Ansys Gateway enabled 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 Chief Executive Officer at ANSYS

So obviously, the intent is to make sure that our customers can take advantage of the portfolio -- of the ANSYS portfolio on the public cloud. And you should expect to see ANSYS products being broadly available on the cloud.

Adam Borg
Analyst at Stifel Nicolaus

Great. And maybe just a follow-up but more of a housekeeping question. Nicole, could you just comment on what the organic constant currency growth rate was for ACV and revenues just for the 4Q and also for calendar year '21? Thank you so much.

Nicole Anasenes
Chief Financial Officer and Senior Vice President, Finance at ANSYS

Sure. Yes, and so thanks, Adam. We saw a strong growth, as you know, both in Q4 and 2021. So if you can calculate from the prior guidance on the impact of AGI and the Zemax impact we gave in Q4, in 2021, we had a really strong organic growth.

Adam Borg
Analyst at Stifel Nicolaus

Thanks, again.

Operator

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

Gal Munda
Analyst at Berenberg Bank

Hey, good morning. And thank you for taking my question. The first one is just around the commentary that we're getting on the automotive and just in general transportation industry, but maybe zooming out -- 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 their R&D expenditure there.

In terms of what you're seeing in your results today when you're saying that those -- 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 later down the line? So basically, is this another short cycle that is better off the cycle? Or do you think this could start off a more substantial structural growth in the industry for you?

Ajei Gopal
President and Chief Executive Officer at ANSYS

Well, let me quickly take that, Gal. so when you think about the automotive industry, obviously, it's one of our top three verticals: electronics and semiconductors, automotive and transportation, aerospace, the top three verticals. It's an area where we've historically had a lot of strength. As you rightly pointed out, the areas where there is a lot of customer interest right now is in both electrification and in autonomy. And a few years ago, I would have said that there was a significantly more interest perhaps in autonomy as a -- possibly as a more near-term activity.

But 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 time lines they had. But a lot of the work that's in autonomy is going towards ADAS, improving driver safety and so forth. So 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 engines and electric motor, that's where our high-fidelity multiphysics workflows come in that allows you to design better and more thermal-efficient motors and batteries and power electronic components. All of that is part of the electrified powertrain. But 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.

And so that means there's more analysis for, for example, for safety and understanding what failure modes look like, more analysis on noise and vibration and understanding what the ambience within the -- or the ambient experience in the car cabin is going to look like on crash analysis and impact analysis. So there's a number of different areas, all of which where we have -- all of which we have strength in, which companies are pursuing in their pursuit of electrification. So 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
Analyst at Berenberg Bank

That's very helpful. Thank you, Ajie. And then maybe, Nicole, just a question on the guidance. When you think about the ACV growth and the ACV number crossing that $2 billion for the first time, what are you assuming underlying in terms of the recurring ACV as a proportion of ACV that you have? Is the recent trends of growing -- crossing the 80% in recurring, is that what you're assuming in there? In other words, is that -- could there be incremental -- a 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
Chief Financial Officer and Senior Vice President, Finance at ANSYS

Yes. That is definitely implicit in our guidance is that, as you recall, in 2020, there was a more -- there was more of a trough around perpetual 2021 reflected, I'd say, kind of getting back to the normal level of perpetual we had. So 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. And so our underlying assumption in 2022 is that the mix is a little bit more normalized. And as a result, ACV is growing faster than revenue as a result of that mixed compared dynamic.

Gal Munda
Analyst at Berenberg Bank

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

Operator

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

Tyler Radke
Analyst at Smith Barney Citigroup

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. It seemed like there was a lot of activity between some of the certification on Samsung's 3- and 4-nanometer as well as a number of 8-figure deals. I guess, just a couple of questions. I guess, when you are building out these partnerships, are you seeing kind of your semiconductor customers take on more of your products, I guess?

Is this a number of solutions beyond just RedHawk on the kind of the leading node processes? And then more broadly, as you think about some of the multiyear chip shortages that semiconductor companies are facing, like how is this kind of changing their road map for using ANSYS products? Thank you.

Ajei Gopal
President and Chief Executive Officer at ANSYS

Yes. So when you think about our involvement with semiconductor companies, and as I mentioned this, obviously, the companies 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 3DICs, for example, that's really where you could scale up 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? So it's HFSS and others. So 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 in -- it brings to bear the entirety of our portfolio.

So -- and I gave you an example also in the script of a company that's using some of our safety analysis, providing automotive -- 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. So 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 multiphysics investments that we've made over the years and the strength of the portfolio.

Tyler Radke
Analyst at Smith Barney Citigroup

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

Ajei Gopal
President and Chief Executive Officer at ANSYS

Yes. Look, I think for the shortage of semiconductors, obviously, there's a challenge in terms of being able to get semiconductors to where they need to be used, and we're seeing this across multiple industries. That 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. And 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.

But those are examples of us proactively working to make sure that the industry is able to move forward. But look, it's -- we're not tied to manufacturing, we're tied to design. And that's really primarily -- that's across all of our product lines. And so 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. So 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
Analyst at Smith Barney Citigroup

Great. And then just one last one for Nicole. 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. So just wanted to understand kind of what's giving you that level of confidence, especially comping a pretty strong year. 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
Chief Financial Officer and Senior Vice President, Finance at ANSYS

Yes. I mean, I would say, fundamentally, 2021 was a really strong year. And I'd say, 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? But 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. So going into 2022, our expectation is that 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. And so I would say that, that's the primary factor in the underlying confidence around what we consider to be a pretty strong expectation of double-digit growth of 10% at the midpoint in ACV.

Tyler Radke
Analyst at Smith Barney Citigroup

Great. Thanks a lot.

Operator

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

Ken Wong
Analyst at Guggenheim Securities

Hi. 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 it's a go-to-market end markets, partnerships that we should be thinking about that might help kind of influence the growth, either at the lower or the high end of those targets?

Ajei Gopal
President and Chief Executive Officer at ANSYS

Well, as I said in my script, if you look back into 2021 and certainly Q4 as well, in 2021, we saw strength across all major industries, across all major geographies, across all of our major go-to-market routes. And 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. And the regions contributed there.

They all grew double digits from ACV perspective last year. And the product lines kind of grew as expected. So I feel very good about all of that. That just goes to show that the business is performing across multiple dimensions in a way that you would want to have happen. And so part of our plan going forward is to continue to be able to build on that momentum into 2022.

Ken Wong
Analyst at Guggenheim Securities

Got it. Got it. And then for Nicole, just wanted to ask about the -- on the operating margin side. When we think about that the 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 that -- I don't want to say trough, but kind of abnormally lower than typical. Or is this generally a heavier investment cycle that we should be thinking about? And just love some thoughts and color on kind of what's baked into the spend dynamics.

Nicole Anasenes
Chief Financial Officer and Senior Vice President, Finance at ANSYS

Sure. So let me just start by saying, and I think I've mentioned this a couple of 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 -- what 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 impacts of R&E capitalization, right?

And now in terms of operating margins, specifically, revenue growth headwinds from expected license mix really is the primary driver of those operating margin headwinds. And that dynamic is more about accounting in the P&L than operating leverage. The operating leverage really can be seen in those underlying dynamics between ACV and cash flow. Now in addition, I've mentioned in the prepared remarks, in both cash flow and operating margin, we do have assumptions of a moderate impact of inflation on expenses. And so that is a bit of a headwind to both. But I would say, primarily, it's the underlying dynamic around just accounting and where revenue is this year relative to ACV.

Ken Wong
Analyst at Guggenheim Securities

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

Operator

Thank you. And the next question comes from Saket Kalia of Barclays. Please go ahead.

Saket Kalia
Analyst 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 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? And how do you think about that going forward?

Ajei Gopal
President and Chief Executive Officer at ANSYS

Well, Saket, if you go back to the years that I've been with ANSYS, so if you go back 5, six years ago, obviously, the use of public cloud for HPC was much lower than it is today. And 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. And 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 going to look like. Do they continue to invest in their own data centers?

Or do they take advantage of the public cloud? Some combination of the 2, 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. So 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. And so that's obviously a possibility that's available to our customers. From our perspective, one of the watchwords perhaps has always been flexibility to support and meet our customers where they want.

And so we are in a position to support our customers. If they want to take advantage of our ANSYS Cloud product, we can take -- 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. So we -- 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. So it's really -- 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
Analyst at Barclays

That makes sense. Nicole, maybe for my follow-up for you. I actually missed what you said earlier just on the organic constant currency ACV growth in 2021. Could you just recap that for us? And 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
Chief Financial Officer and Senior Vice President, Finance at ANSYS

Sure. Yes, apologies. I had some technical difficulties earlier, so I apologize for those who couldn't hear my answer. Yes. So for both the fourth quarter and full year 2021, our ACV growth in constant currency was 16%. And when you back out the $86 million to $88 million associated with the combination of AGI and Zemax, you could 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 and, again, on that business model of double-digit growth, including tuck-in M&A. And within 2022, we still expect Zemax to have an inorganic impact of about $20 million.

Saket Kalia
Analyst at Barclays

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

Nicole Anasenes
Chief Financial Officer and Senior Vice President, Finance at ANSYS

Thank you.

Operator

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

Andrew Obin
Analyst at Bank of America

Hi, guys. Good morning.

Nicole Anasenes
Chief Financial Officer and Senior Vice President, Finance at ANSYS

Good morning.

Ajei Gopal
President and Chief Executive Officer at ANSYS

Good morning.

Kelsey DeBriyn
Head of Investor Relations and Government Affairs at ANSYS

Good morning.

Andrew Obin
Analyst at Bank of America

So first question on cash flow. If you exclude the $6 million to $8 million incremental drag from the U.S. R&D tax credit change, '22 free cash flow guidance is actually a nice step-up from last year. What are the key factors driving the improvement in free cash flow conversion? How sustainable it is going forward?

Nicole Anasenes
Chief Financial Officer and Senior Vice President, Finance at ANSYS

Yes. I mean, I would say as we go -- as we exited -- went throughout 2021 and going into 2022, we saw more of a return to a more normalized collection environment, past due environment. And so the underlying momentum of the business in collections is quite strong. And in addition to that, in the 2022 guidance, as I had mentioned in my earlier answer, there's significant operating leverage in the business overall around ACV. So although operating margins overall are relatively flat, but on -- when you compare the cash flow generation against the ACV, because ACV is growing faster than revenue, you really see strong operating leverage. So it's a combination of 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 '22.

Andrew Obin
Analyst at Bank of America

Got you. And just a broader question, philosophically, how do you think about the share price when considering buybacks versus M&A opportunities? And do you have any constraints really, given the balance sheet here on the $100 million net debt?

Nicole Anasenes
Chief Financial Officer and Senior Vice President, Finance at ANSYS

Yes. No, I mean, obviously, the strength of the cash generation of the business and the balance sheet are our great assets. And over the years, the greatest return we've been able to provide to shareholders is the deployment of excess cash, using it to acquire premier simulation technologies to fill out the portfolio, to complete what's already the broadest and the deepest portfolio.

And last year -- sometimes there's just not the right timing or there's nothing imminent to deploy that cash against or we're not -- or there's not something that's going to deliver the right return for shareholders. And so in those times, we do repurchase shares. Last year, we repurchased about 347,000 shares for about $135 million. And so we would expect to continue to think along those lines of how we think about capital allocation overall.

Andrew Obin
Analyst at Bank of America

Terrific. Thank you very much.

Kelsey DeBriyn
Head of Investor Relations and Government Affairs at ANSYS

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

Ajei Gopal
President and Chief Executive Officer 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

[Operator Closing Remarks]

Alpha Street Logo

 


Featured Articles and Offers

Search Headlines:

More Earnings Resources from MarketBeat

Upcoming Earnings: