ANSYS Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
February 23, 2023

There are 9 speakers on the call.

Operator

Welcome to the ANSYS 4th Quarter and Fiscal Year 2022 Earnings Results Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. We ask that you limit yourself to one question and one follow-up. Please note this event is being recorded.

Operator

I would now like to turn the conference over to Alec DeRusa, Investor Relations Manager, please go ahead.

Speaker 1

Good morning, everyone. Our earnings release, the related prepared remarks document and the link to our 2022 Form 10 ks have all been posted on the homepage of our Investor Relations website. They contain the key financial information and supporting data relative to our Q4 and full year financial results and business update, as well as our Q1 and fiscal year 2023 outlook and the key underlying quantitative and qualitative assumptions. Today's presentation contains forward looking information. Important factors that may affect our future results are discussed in our public filings.

Speaker 1

Forward looking statements are based upon our view of the business as of today, and ANSYS undertakes no obligations to update 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 the reconciliations of GAAP to the comparable non GAAP Financial measures are included in our earnings release materials. I would now like to turn the call over to our President and CEO, Ajay Kapal for his opening remarks. Ajay?

Speaker 2

Thank you, Alex. Good morning, everyone, and thank you for joining us. Q4 was another excellent 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, operating margin and earnings per share. Q4 was the culmination of a strong year for ANSYS.

Speaker 2

Our industry leading product portfolio, loyal customer base, strong execution and growing markets enabled us to beat and operationally raise our guidance each quarter of 2022. This of course was despite the continued economic uncertainties Brought on by trade sanctions and the war in Ukraine. We grew ACV at 14% in constant currency for the full year. And in the process, we achieved our goal of $2,000,000,000 of ACV in 2022. Thanks to this excellent performance, We realized our long term financial goal set at our Investor Day in 2019.

Speaker 2

I want to congratulate the entire OneAnsys team, including our dedicated channel Thank you, Nicole. In a few minutes, Nicole will discuss our guidance for Q1 and the entire year. This guidance reflects the power of our world class products, the ongoing demand from our customers and the strength of our business. I'm excited that our results from 2022 as well as our guidance for 2023 keep us on track to achieving the long term goals we set out Our investor update in August of 2022. Looking back at 2022, we saw broad based growth across all major industries, geographies and go to market routes.

Speaker 2

Our direct and indirect channels grew at double digits. Similarly, each of our go to market customer segments, enterprise, strategic and volume accounts also grew by double digits in constant currency. The High-tech and Semiconductor, Aerospace and Defense and Automotive and Ground Transportation sectors were again our top contributors. From a geographical perspective, we saw strong performances with each region growing ACV better than we expected. And I'm excited to announce that one of our regions, the Americas, recorded over $1,000,000,000 in ACV for the first time in our history.

Speaker 2

I'm also pleased with the performance of our product lines from a more established flagship solutions to our newest offerings. Our top two customer agreements for Q4 ACV were in the global high-tech and semiconductor vertical And total more than $125,000,000 Through these contracts, 1 for 3 years and 1 for 4 years, The customers are expanding their use of ANSYS technology into new business segments, which is driving more users, more products and more computations. These customers have realized a number of benefits by using ANSYS solutions. These include identifying silicon issues during the tape out Sign off phase, which has saved 1,000,000 of dollars in re spin, as well as reducing multi layer PCB pre processing time from a month to just hours. In Q4, we also signed a contract with NuScale Power, An energy company that is developing modular light water reactors to supply reliable and abundant carbon free nuclear energy.

Speaker 2

Instead of relying on cost C physical prototypes, MuseScale leverages ANSYS technology to simulate designs for containment, Thermal Hydraulics and the Structural Integrity of Reactors. ANSYS solutions play a key role in an extensive product development process that must navigate a strict nuclear approval process in which delays can cost up to $3,000,000 per day. As you heard with this NuScale example, structural analysis plays a key role in customer sustainability initiatives. Continuing with the theme of sustainability to our structured solutions, I would like to highlight a few examples of how these Structures products, working in conjunction with the rest of the ANSYS portfolio address this important topic. ANSYS of course was founded as a Structures company.

Speaker 2

Over the last 50 years, we have continually invested to enhance our structures offerings. The applications for structural simulation has evolved As even the simplest products have become more complicated and today's structures is critical for customers to meet their sustainability goals. 2 additional Q4 sales agreements totaling nearly $60,000,000 are driving sustainability in the energy sector. They are both anchored in structural simulation combined with other physics. The first is with an energy company that is using ANSYS simulation to make its traditional Gas and steam industrial turbines more efficient as well as developing blades and nacelles for its wind turbines.

Speaker 2

The second agreement is to assist with the digital transformation of another energy industry leader. This organization is expanding its use of our solutions To include a variety of applications, including structural design, thermal stress and electric motor design for its robotic arms. By using ANSYS technology, the company has helped to decrease its development costs by 20%. While materials is a newer ANSYS product offering, it works hand in hand with structures, particularly when it comes to meeting customers' Sustainability goals. That's because as customers seek to develop more sustainable products, they often consider non traditional materials, which includes new steels, composites and short fiber reinforced plastics.

Speaker 2

Structural simulation on these new materials Can assess performance to ensure safety and durability, while also reducing weight and waste through topology optimization. ANSYS customer Nature Architects, one of over 1700 members of our startup program, Is using ANSYS simulation to help its customers further their sustainability programs. As companies look for more environmentally friendly materials for their products, Many are turning to artificially designed metamaterials to incorporate functions such as heat conduction, deformation and weight reduction. Using ANSYS for structural analysis and fluid structure interaction, Nature's Architect has implemented a scripting language that automates simulation tasks And streamlines workflows, which enables the team to visualize and explore new structures. Our recent release of ANSYS 2023 R1 Is also helping customers with their sustainability initiatives.

Speaker 2

For example, ANSYS Granta Selector's enhanced Eco Data and Eco Audit functionality Helps engineers explore and rapidly iterate amongst design scenarios and material options. The tool empowers users To make sustainable materials trade offs early in the product development process before high fidelity structural analyses are performed and costs are locked in. ANSYS solutions are not only helping customers to develop more sustainable products, but we are enabling them to do so in a more resource friendly manner. One such capability is in our one is resource prediction, which leverages artificial intelligence machine learning to predict how much time and memory will be required. Resource prediction will help guide users to achieve their business objectives.

Speaker 2

For example, reducing solve time or decreasing energy consumption. Another innovation in R1 is aimed at helping customers increase the safety of electric As you know, EV fires caused by battery abuse or impacts can be catastrophic. This advanced capability Anchored in our structures portfolio brings together multiple ANSYS physics to analyze this complex problem. Specifically, our new safety workflow in ANSYS LS Dyna simultaneously simulates the comprehensive Structural, electrical, electrochemical and thermal responses of batteries that are damaged in an accident or through some other event. We are not aware of any other commercial solution with this critical functionality to help make electric vehicles safer.

Speaker 2

In addition to our organic development, we are furthering our structures product leadership through M and A, namely with our recent acquisitions of DynaMORE And Rocky. DynaMORE was a one time ANSYS partner and leader in developing and selling explicit simulation solutions With an emphasis in the automotive industry, DynaMORE develops dummy and human body models in addition to providing development expertise for LS Dyna. This critical capability provides customers with complete software solutions for crash simulation, occupant safety and production processes. Our acquisition of ROCE solves a sophisticated customer challenge. Nearly 70% of industrial products Bulk granular material flows where different sized particles with complex shapes interact, Potentially impacting a product's efficiency or structural integrity.

Speaker 2

Solving this difficult problem requires deep knowledge of both structural mechanics And Fluid Dynamics. With the solution from longtime partner, Rocky fully integrated into the ANSYS portfolio, Users can solve these complex design problems. As a result, our customers will be able to reduce waste, improve product quality and predict the Thanks in part to our sustainability initiatives, Newsweek has named ANSYS to its list of America's Most Responsible companies for 2023. ANSYS was included in the annual ranking of the 500 most responsible companies based on environmental, social and corporate governance initiatives. Our inclusion on this list demonstrates our commitment to making customers improve efficiency and reduce waste by minimizing the need for physical prototyping.

Speaker 2

Turning to partners, I'm excited that Autodesk's Fusion 360 signal integrity extension Powered by ANSYS was commercially released in November. By embedding ANSYS' electromagnetic simulation capabilities within Autodesk Fusion 360, Printed circuit board designers can access near real time insights earlier in the design process for smart consumer products. I'm also pleased that our electromagnetic and semiconductor solutions, including ANSYS Red Hawk SC, ANSYS Raptor H Ansys HFSS have received GlobalFoundry certification for its flagship 22 FDX platform. That certification enables ship designers to lower costs by reducing excess safety margins and improving system performance Without compromising reliability or risking unexpected and damaging interactions amongst design elements. In summary, Q4 was an excellent quarter that capped a fantastic year for ANSYS.

Speaker 2

We beat guidance across all key metrics and delivered the best year in company history. And of course, we exceeded our long term goal of $2,000,000,000 in ACV. I am confident in our ability to achieve the goals we set during our most recent investor update in August. Despite some economic uncertainties, our end markets remain robust and our business has proven its resilience over the years. Over the past few weeks, I've had the opportunity to speak with members of our direct sales team as well as several of our global channel partners.

Speaker 2

They're reporting strength in the market from the largest enterprises through SMB accounts. Given the importance of research and development And innovation. The demand for ANSYS simulation continues to be strong because customers understand our compelling value proposition. And that is continuing to drive More users, more products and more computations throughout our customer base. Our momentum coming out of Q4, our strong customer relationships, Our robust end markets and our leading product portfolio will propel us through 2023 beyond.

Speaker 2

As a result, we are more confident than ever in our ability to achieve future milestones. And with that, I'll now turn the call over to Nicole. Nicole?

Operator

Thank you, Ajay. Good morning, everyone. Let me begin by saying that 2022 was another outstanding year for ANSYS, and we're optimistic about our 2023 and our long term outlook given the momentum in our business. For both the Q4 and full year 2022, We beat our financial guidance across all key metrics. This is particularly noteworthy Given that we operationally raised our full year guidance across ACV revenue, EPS and operating cash flow for all 3 quarters throughout the course of the year.

Operator

Additionally, in 2022, we reached new company records across Key financial metrics, including ACV, revenue, EPS and operating cash flow. As Ajay mentioned, our growth was broad based in the quarter and full year 2022 with growth seen across geographic regions, customer types And industries. As a result of our broad based performance, we achieved $2,032,000,000 in ACV in 2022, which surpasses the $2,000,000,000 commitment we made at our 2019 Investor Day. For additional context, When translated at 2019 foreign exchange rates, full year 2022 ACV would equal approximately $2,113,000,000 further demonstrating the magnitude and quality of our outperformance, which we delivered amidst A global pandemic and a challenging and volatile macroeconomic environment. On all accounts, 2022 was an outstanding year and we are entering 2023 with momentum and a strong backlog.

Operator

Now let me take a few minutes to add some additional perspective on our Q4 and full year financial performance, And then I'll provide our outlook and key assumptions for 2023 and Q1. Beginning with ACV, we delivered $818,000,000 in Q4, which grew year over year 8% or 13% in constant currency. For the full year, we recognized $2,032,000,000 in ACV, growing 9% or 14% in constant currency. For the quarter and full year, performance was broad based across customer types, geographies and industries. Our wide ranging growth is evidence of the essential nature of our market Leading simulation portfolio and exceptional execution.

Operator

For additional context, our full year ACV growth of 4 percent in constant currency came in 4 points higher relative to where we initially set guidance last February. Throughout the course of the year, we absorbed $82,000,000 of non operational headwinds, including unprecedented U. S. Dollar strengthening and the exit from business in Russia and Belarus, which was more than offset by 94,000,000 of incremental operational momentum. ACV from recurring sources in 2022 grew 9% or 15% in constant currency year over year and represented 81% of the total.

Operator

This momentum in recurring ACV growth is driven by the strong annuity created by our ongoing shift towards subscription leases. For the full year 2022, ACV performance continues to be fueled by the strong growth in subscription leases, which grew 18% or 24% in constant currency. Subscription lease ACV crossed over 1,000,000,000 to $1,200,000,000 or 57 percent of total ACV for the full year. We continue to expect the growth of our subscription leases to be the underlying driver of the strong annuity that has been building over time and will continue to be a foundation for future growth. Q4 total revenue was 694,700,000 and grew 5% or 10% in constant currency, which exceeded the high end of our guidance and was positively impacted by outperforming on ACV.

Operator

Full year revenue was 2,073,000,000 and grew 7% or 13% in constant currency. We had strong top line performance in 2022 With ACV and revenue both growing double digit in constant currency at 14% 13%, respectively. In both Q4 and the full year, we executed against our business model of double digit. We closed the quarter with a total balance of GAAP deferred revenue and backlog of over $1,400,000,000 which grew 13% year over year. During the quarter, we continued to deliver a business model with strong operating leverage.

Operator

This yielded a solid 4th quarter gross margin of 94% and an operating margin of 48%, Which was better than our guidance? We had full year gross margin of 91.8% And operating margin of 42%. Operating margin was positively impacted by outperforming on revenue. The result was 4th quarter EPS of 3.09 dollars which was also better than our guidance. For the full year, EPS was $7.99 Similar to operating margin, EPS benefited from strong revenue results.

Operator

Our effective tax rate in the 4th quarter And full year was 18%. Our operating cash flows in the 4th quarter totaled $174,000,000 which benefited from outperforming on ACV and strong collections. Our unlevered operating cash flow was $181,100,000 For the full year, we had operating cash flow of 6 131,000,000 which grew 15% meaningfully outpacing ACV growth despite significant foreign exchange and non For modeling purposes, 2022 operating cash flow translates to unlevered operating cash flow of $648,100,000 For additional context, we absorbed $39,000,000 of non operational headwinds since initiating 2022 operating cash flow guidance last February. These headwinds, including the exit from business in Russia and Belarus and the adverse impact of foreign exchange were on top of the headwinds from R and E capitalization tax legislation and other law changes already factored into our February 2022 guidance. The $39,000,000 of non operational headwinds was offset by $70,000,000 of incremental operational performance throughout the year.

Operator

The result was operating cash flow that was $31,000,000 better than the midpoint of our February guidance. This outperformance was driven by several factors, including outperforming on the ACV, margin expansion and the timing of collections. We ended the quarter with $614,600,000 of cash and short term investments on the balance sheet. In line with our capital allocation priorities, we repurchased approximately 225,000 shares during the quarter for around $50,000,000 For the full year, we repurchased approximately 725,000 shares for around $206,000,000 which was 174% of the average capital return to shareholders in the form of share repurchase over the past 3 years. We have 1,700,000 shares available for repurchase under the current authorized share repurchase program.

Operator

Now let me turn to the topic of guidance. The underlying momentum in our business and demand for our best in class portfolio Continues to be strong. We delivered an outstanding Q4 and full year 2022, and we are entering 2023 with momentum and a robust pipeline and backlog, which gives us continued confidence in achieving the long term outlook that we laid out At our 2022 investor update of 12% constant currency ACV compounded annual growth inclusive of 1 to 2 points of tuck in M and A and $3,000,000,000 of cumulative unlevered operating cash flow from 2022 to 2025. Let me start with our full year 2023 guidance. We expect our full year ACV outlook to be in the range of $2,265,000,000 to $2,335,000,000 which represents growth of 11.5% to 14.9% or 9.9% to 13.4% in constant currency.

Operator

We have a balanced and diversified business, which is driving the broad based performance and double digit ACV growth that we expect to see in 2023. Notably, the midpoint of our guidance is on our model of 12% constant currency compounded annual growth that we set at our investor update in August. We expect revenue to be in the range of $2,242,000,000 to $2,322,000,000 which is growth of 8.2% to 12% or 6.9% to 10.8% in constant currency. Let me touch on some of the assumptions embedded in our full year guidance. We continue to expect broad based growth and continued momentum from our large enterprise customers and SMB customers.

Operator

We also continue to assume that our subscription leases grow faster than perpetual licenses and as a result, ACB is expected to grow faster than revenue as the business model shift towards subscription lease continues. Our full year guidance is based on how we see our book of business and pipeline today. 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 $8.34 to $8.86 We expect our full year effective tax rate to be 17.5%, which is a half point lower than the 18% rate we had in 2022.

Operator

Now let me turn to our full year Unlevered operating cash flow guidance. We are providing guidance for unlevered operating cash flow as it aligns to the long term $3,000,000,000 cumulative cash flow outlook we provided at our 2022 investor update in August. Our 2023 unlevered operating cash flow guidance is a range of $710,000,000 to $760,000,000 We expect to see another year of significant growth in cash flow levels year over year. The implied unlevered operating cash flow growth of 10% to 17% for 2023 on top of the 16% unlevered operating cash flow growth we saw in 2022 Exhibits the continued strong operating leverage in our business model. Further details on the reconciliation of GAAP Operating cash flow and the comparable non GAAP unlevered operating cash flow are contained in our prepared remarks document.

Operator

Now let me turn to the guidance for Q1. For the Q1, we expect ACV in the range of 3.80 to $400,000,000 and revenue in the range of $482,500,000 to $507,500,000 We expect Q1 operating margin in the range of 35.3% to 37.3% And EPS in the range of $1.53 to 1.71 Further details around specific currency rates and other assumptions that have been factored into our outlook for 2023 and Q1 Fantastic quarter rounding out another exceptionally strong year. Our performance is evidence of the critical nature of our leading simulation portfolio as well as the team's operational discipline and focus on customer excellence. Our consistent performance and execution enabled us to deliver above and beyond our 2019 Investor Day and 2022 annual commitments, despite a continued challenging and volatile macro environment. Our core simulation market is Strong and growing and we are excited about the immense opportunity that lies ahead as we continue to help our customers solve their most complex Product Development Challenges.

Operator

We are entering 2023 with considerable momentum, a resilient and diversified business model with Three vectors of growth and a healthy backlog and pipeline, all of which feels the optimism embedded in our full year and long term outlook. Operator, we will now open the phone lines to take questions. We will now begin the question and answer session. As a reminder, we ask that you limit yourself to one question and a follow-up. The first question is from Ken Wong of Oppenheimer.

Operator

Please go ahead.

Speaker 3

Great. Fantastic and fantastic quarter from you guys. Ajay, I wanted to just maybe touch on some of the strength in ACV. I noticed one segment that really stood out To me, it was the Aerospace and Defense from a rev mix perspective, it jumped up. You talked up 7, 8 figure deals.

Speaker 3

Can you maybe highlight some of the underlying drivers there? And as we look out to 'twenty three and beyond, is there still decent runway For those particular growth tailwinds in that particular vertical?

Speaker 2

Sure. Good morning, Ken. So let me Briefly talk about aerospace. We our aerospace customers are facing relatively complex challenges And it's pretty broad based. And so when you think about some of our business, we have customers who are focusing on aircraft engines.

Speaker 2

And obviously, there are a number of trends in that space, whether it comes to light weighting and energy efficiency, in some cases, electric engines, different fuel sources. So there's a number of different levels of innovation taking place at various points in the aerospace industry. Obviously, in the Space 2.0 World, there are there continues to be a lot of innovation and both in larger companies as well as smaller companies. And then of course, you've seen some of the work that we've done with significant projects like the Webb Telescope and the DART mission, where our projects where our technologies were used in the development of those projects. So there's a lot of different activity across the space in this entire aerospace and defense world for us.

Speaker 2

And I believe that the demand for our offerings continues to be robust, and we see a pipeline in that space as well.

Speaker 3

Great. And then a follow-up for you, Nicole. Just wanted to touch on the unlevered operating cash flow guide. I mean, look, it's a Fantastic number of building off of a really strong 22. I guess as we think about the long term targets, I think there was Sort of an underlying assumption that there would be expansion.

Speaker 3

I guess my calculation suggests it's kind of closer to, I think, it looks like 32% of a 32% number, is it just you guys see a little more room for growth this year and we should still assume long term that that number does continue to expand? Just some puts and takes there would be fantastic.

Operator

Yes. Well, thanks, Ken. And yes, we were really, really pleased with the exceptional close of Our cash flow performance at the end of the year as you point out, it grew quite substantially. Unlevered operating cash flow grew 16% in 2022. And our outlook range of 10% to 17% unlevered operating cash flow Indicates continued momentum in the business overall.

Operator

As we know, I mean, We gave long term guidance in August. We're not prepared to update the long term guidance. But when you look at the combined The 2 year growth rates of 20222023 from an ACV's perspective and the comparative unlevered operating cash flow growth rates over that period, You can see the substantial operating leverage and margin expansion associated with that. It's a little early for us Update long term guidance, we just gave it 6 months ago. But what I can say is and there's a lot of Factors that impact that unlevered operating cash flow number.

Operator

As you know, foreign exchange had a pretty meaningful impact to that last year. As an example, we're still not Quite out of the voice as it relates to that. So, not really prepared to give anything longer term than 2023 today, but we feel really good about the underlying Strength of the operational momentum of the business. We have a very disciplined investment model around putting investment in that drives incremental growth. And those are things that we expect to be able to continue to build on over the next couple of years.

Operator

The next question is from Joe Vruwink of Baird. Please go ahead.

Speaker 4

Great. Good morning, everyone. ACV on an organic basis seems to be growing, I think several 100 basis points Above the framework that was provided last year. I guess my question is within that 2022 to 2025 timeline, When the years 2022 2023 always intended to be this way, just given, I don't know, pricing or renewals or the shift to leases? And if that's not the case, maybe you can just walk through some of the upside drivers Yes, last year and then in terms of your outlook for this year?

Operator

Yes, sure. So maybe just kind of level set on what the makeup of 2022 wasn't 2023, we can talk about the long term. So as we previously mentioned, the inorganic contribution From ZMAX last year, we had said it was about $20,000,000 and that as you point out, contributed Around a point of growth to the overall performance last year. As we look into 2023, We completed 2 acquisitions at the end of the quarter after our earnings announcement. Rocky and Dynamo were the most Notable, or were the 2 that completed at that time.

Operator

Just some context for those. Rocky is a product we were the primary reseller for, already, And it's also a pretty small product line. So it doesn't have a very material run rate to the business. And although we already had a relationship with DynaMar, we expect the inorganic contribution from that transaction to be around €30,000,000 to €35,000,000 ACV and revenue. So, with just under half of that in Q1, so there's a pretty different SKU to that business relative to ours.

Operator

So that would put us around The 10% constant currency growth in ACV when you exclude Dynamo to our full year outlook, which is on our business model of double digit growth, As it relates to the long term view of ACV and how we see it, I mean, we There isn't a perspective in particular around what happened in 2022 and how that would change The outlook in the future are out. We still remain confident in the 12% compounded annual growth rate through the course That time and certainly as trends in the business change and the underlying, anything that foundationally would shift That growth objective, we would certainly update our long term guidance at that But right now, we're really pleased with what we delivered in 2022. We're building we have a really strong outlook for 2023 on top of A really strong performance in 2022, and we're really pleased to continue to be on that model that we set out in August.

Speaker 4

Okay, great. Dynamo was a bit bigger than I was thinking, so that's all helpful. And then there was an interesting comment on just performance across Different customer segments, I guess, I'll ask, are there any, I guess, noticeable changes in spending patterns when you Thanks. Inside your top 100 and outside and I guess at the heart of this question is the strong TCV outlook for 1Q. Typically, I think about that being outside the big year end enterprise activity.

Speaker 4

And so is this indicating Maybe strength that is more broad across the customer base at

Speaker 2

the start of the year?

Operator

Yes. I mean, I think as we said in our prepared remarks and I think we've said this throughout last year, the underlying drivers growth in 2022 was very broad based across customer sets, geographies and industries and the outlook considers very There is one element to Q1 guidance, and I had I think I briefly mentioned this in the first part of my answer to you on M and A impact that DynaWear does have a slightly different SKUs of their business. It is just under half of the business that actually happens in Q1. And so a little bit more than half a little bit less than More than less than half of the business in Q1. So there is a little bit of a dynamic around DynaMar that is earlier on in the year relative To the future periods in the year that we have a slightly different pattern than maybe some of the more kind of smaller impacts on a quarterly basis that you see of some of the other M and A that we've done in the past.

Operator

The next question is from Jay Plesshouwer of Griffin Securities. Please go ahead.

Speaker 5

Thank you. Good morning. Ajay, let me ask you a question that we've been posing to your CEO peers at the other companies in the group. And that is in the context of what you've defined as a dozen elements of your long term technology strategy. You think about 2023 spending priorities and beyond, what are, in terms of your R and D, the most Incremental or newest priorities over and above your base investments in solvers and not in solvers, what would you say are some of your Most important or newer executables as far as R and D are concerned.

Speaker 5

And then second question, at the analyst meeting 6 months ago, Spoke of a variety of growth vectors, among which you described traditional use cases and new use cases. When you think about 'twenty three guidance, is there any way you could relate the way you thought about Those growth vectors to 'twenty three guidance in terms of the traditional use cases and new or which you also refer to as

Speaker 2

So, Jay, good morning. So firstly, when you think about Our technical priorities are the areas that we're making investments in our business. I would say there are probably 5 broad areas We're making technological investments. The first I would broadly categorize is numerics, And that includes physics models and methods for both physics and multi physics. That's just the core physics part of what we do.

Speaker 2

The second area is in AI machine learning, where we're making significant investments across the portfolio. Our customers today are seeing the benefits of ANSYS products that have been enhanced through AI. We've, of course, filed patents to cover some of our work in the space, and we continue to make Significant investments in AI, getting our customers to be able to take advantage of this great technology in the context of our offerings. The 3rd area is high performance computing. That obviously includes both HPC As well as CPUs, GPUs.

Speaker 2

So for example, if you look at R1, we just announced Some really exciting work on SPEOS, for example, our optical solver, where we can show that a single GPU It's something like 8 times faster than a 32 core CPU machine. And then of course, we're very excited about our Fluent multi GPU solver, which allows fluent simulations to run natively on multiple GPUs and that is a game changer in terms of performance. And we can show tremendous orders of magnitude scale up and in terms of both performance as well as cost savings when it comes to things like energy usage and others. So we're very excited about the work that we've done in the GPU space and we continue to make investments over there. Cloud and experience is the 4th area that includes the work that we're doing in cloud.

Speaker 2

You may have seen some recent announcements, where we're we've announced some of our Cloud technology in the context of our cloud marketplace offerings, and we continue to invest in cloud native capabilities, as well as user experience. And the last area is in digital engineering, and that includes things like digital twins, mission, system simulation, and there we continue to make advances. And you saw obviously some of the capabilities of our product lines in

Speaker 1

the space,

Speaker 2

no pun intended, when you talked about James as well as the dark mission. But certainly, we have ongoing investments in that space as well and that includes things like MBSE. So broadly, there are 5 areas: Numerics, AI, ML, high performance computing, cloud and experience and digital engineering, and these are the areas that are driving our next generation activities.

Operator

Yes. And Jay, to answer your question on kind of connection to customer demand, I think the way that you could think about it, if you look at If you kind of referred to the trends that Ajay just referred to, as well as the underlying kind of performance in our industry mix, I mean, much of what's driving that demand are the complex multi physics use cases and the trends that are driving investment in those areas, right? So We talked about double digit growth in automotive in Q4 as an example and the things that are driving those Trends

Speaker 4

are really

Operator

around the next generation of vehicles and technology that are connected to things like Sustainability, those types of things. As you know, those are not single component level, single physics problems which are all into that traditional use case. They are complex multi physics problems that involve both component level all the way to the system and systems of systems level particularly in cases like Space. 2.0 and other things. And so, what we are seeing is More and more of that strategic selling motion becoming the main focus of or The main motion of how we engage our customers and be solving those higher order complex problems, which makes us a very important partner, regardless of what kind of economic times people may be having, we help solve The next question is from Steve Tusa of JPMorgan.

Operator

Please go ahead.

Speaker 6

Hey, guys. Good morning.

Speaker 2

Good morning. Good

Speaker 6

morning. Just a question on the kind of the cadence of the guide. I think you mentioned the acquisition influence on the 1Q. It seems like the 1Q It's pretty strong from a margin and revenue growth perspective. And then that if you just kind of back out the next three quarters, it's Slower and margins I think are down year over year, maybe I'm doing the calc wrong.

Speaker 6

Can you just talk about a bit of what's going on there?

Operator

Sure. So first, one of the aspects to, the business since the accounting change for The 606 accounting change several years back is that the dynamics around revenue recognition create a lot of volatility in the P and L and particularly on a quarterly basis. And that's because the difference in the underlying mix of licenses On a year over year basis can significantly influence the dynamics around revenue recognition. And So the margin the kind of pattern throughout the year is a little less meaningful and kind of extrapolating kind of where directional momentum is going particularly in the P and L. We do also have similar variability in quarters as Customers have moved to multiyear leases.

Operator

It is not as much of a selling motion where it's only about You know, an event at a point in time that kind of comes up once a year, there's an ongoing selling process that happens kind of throughout the year, where ACV can be remixed relative for a single customer relative to what the prior year looks like. So there's considerable volatility that happens throughout the And that's why we're really focused on being really clear about our full year guidance, where our full year outlook is for ACV and operating cash flow and particularly in particular in the P and L overall and The way that we feel we're indicating kind of the change in the trajectory of the business is with our updates to that full year guidance. And so That's how I would think about it overall is really around that. And I think you could see that in kind of How we went through guidance last year, and if you could look at the beginning of the year, there was a 4 point difference And ACV is an example as we progress throughout the year. And that's because our philosophy is that we're we look we give guidance based on what we see ahead of us today And what the pipeline in the book of business looks like today.

Operator

And as things change, up or down, we will be clear About what changes, we don't try to create wide ranges which predict macro environment macro trends or things that we can't control. We try to look at it in terms of where our book of business is today. So does that answer your question?

Speaker 6

Yes. That's helpful. I guess You were pretty clear in mentioning that you're seeing strength across large enterprises as well as small and medium sized businesses, which is Clearly different than what some other obviously not simulation companies, but more of the PLM and CAD guys are saying. So I just wanted to make sure there was nothing in that guidance that was contrary to that comment where It seems like the strength is broad based and really not slowing. So the guidance is really not meant to reflect that kind of macro outlook.

Operator

Yes, absolutely. I mean, it is the variability within the timing of things in the quarters It can create some ups and downs throughout the year, but the overall outlook, which we think is quite strong out of the gate is really a reflection of broad based demand as you point out.

Speaker 6

Great. Just one more on 1Q. Any color on cash flow for 1Q?

Operator

Cash flow, so we do not give quarterly cash flow guidance because the dynamics around cash flow within a quarter could Could change because of timing of payments that fall over date lines or timing of collections that could fall over date lines quite easily and make really meaningful differences. But for modeling purposes, I think you can assume that a meaningful portion of the cash flow occurs in Q1, particularly off of a strong Q4. And Q1 and Q4 tend to be the largest cash flow quarters. The middle two quarters tend to be a little bit more muted with Q2 being Probably the lower watermark. The next question is from Scott I'm sorry, go ahead.

Operator

No, go ahead. Go ahead. Okay. The next question is from Saket Kalia of Barclays. Please go ahead.

Speaker 7

Okay. Hey, good morning, guys. Thanks for taking my questions and well done on a strong finish to the 'twenty two.

Speaker 2

Thank you.

Speaker 7

Nicole, maybe for you, very helpful on the ACV contribution from inorganic. I was wondering if you could just talk about that from just a margin and free cash flow perspective. And just to preface it a little bit, I mean, ANSYS is of course so profitable. It's rare that a tuck in acquisition is accretive to margins. But can you just maybe just give us some broad brushes on operating margins that is?

Speaker 7

Can you just give us some broad brushes on how Dynamo and Rocky and Maybe any of the other kind of acquisitions from mid-twenty 2 are impacting that margin here in 'twenty 3 and whether Those acquisitions are maybe additive or dilutive to operating cash flow.

Operator

Yes. Thanks, Saket. So As you point out, in almost every acquisition we do, is dilutive to actual margin. So there is no accretion for margin that occurs with the sum or any individual acquisition we have. Now as it relates to cash flow, cash flow is also relatively more muted in the 1st year.

Operator

I mean, Sometimes it can have some slight positive impact to cash flow, but as you know, there's meaningful year 1 Expenses associated with integration and those types of things, which are normal operating cash flow outflows. And so, as it relates to the most significant kind of individual contributor To the overall portfolio would be the DYNAMAR example, that did have some contribution to the underlying cash flow guide, but it's really modest relative to what it might be on an ongoing basis.

Speaker 7

Got it. Got it. That's very helpful. Ajay, maybe for my follow-up for you. You touched on this in the question just Around R and D priorities with some of the public cloud announcements, which I thought were very notable this quarter with both AWS and Azure.

Speaker 7

Maybe just a higher level question. How do you sort of think about the mix of simulation Being done on public cloud hyperscalers versus more traditional on premise or private cloud Simulation being done within your customer base. And how do you sort of see that mix shifting? How does that make sense?

Speaker 2

Yes, it does, Saket. Thank you for the question. Look, the way you should think about it is, from an ANSYS perspective, We are really agnostic as to where someone might be able to run our solutions. I mean, we want I mean, one of the primary uses of cloud Today is for high performance computing applications. And so we know that we have customers who are taking advantage of the licenses that we make available to them and they're using them in the public cloud.

Speaker 2

And really from our perspective, we want people to have the flexibility To be able to use whatever environment where they have compute available. Obviously, as time goes on, there is a clear trend Even in the largest of organizations which have invested in data centers, there is a clear trend towards taking advantage of public cloud. And obviously, as the public Needs for scientific computing, that's also driving incremental usage. So it is clearly an ongoing Going direction and something that we expect to see happen. From our strategy, I mean, look, we are very excited About the public cloud being used from our strategy perspective, we have, as you know, 2 distinct kinds of cloud offerings, what we call cloud marketplace And what we call cloud native and this combination of marketplace and native takes full advantage of everything that we previously talked about As well as some of the newly developed and announced cloud capabilities.

Speaker 2

The marketplace offerings are really about delivering flexibilities to our existing customer base. So it's really giving customers, as I said earlier, giving them the option to maintain the same patterns that they employ today, taking advantage of familiar ANSYS products, While leveraging the benefit of cloud computing and their own pre existing relationships with cloud service providers. And so you mentioned the Anthos Gateway with AWS, which we released Q4 of last year, you talked about the announcement we made in February of this year, where we extended our Microsoft partnership in the Azure Marketplace offering. So there's a number of activities in that space. On the cloud native space, we're targeting new users and new use cases.

Speaker 2

And that's really a cloud based platform for the development And deployment of new workflows and applications. And as you can remember, back at our Investor Day, we talked about a new area of verticalized simulation applications Where the power of simulation gets extended far beyond its current user base to frankly anyone who needs predictive analytics. And so we have initiatives and R and D efforts underway in that space. And it's still very early days, but you Stay tuned for more progress as we continue to move this exciting technology further along.

Operator

The next question is from Tyler Radke of Citi. Please go ahead.

Speaker 8

Yes, good morning. Thanks Some really impressive results in Germany and Japan this quarter and I think you talked about some Big wins with the automakers. Could you just talk about some of the drivers of that Outperformance in the quarter and in these large deals with the automakers, like what exactly is driving the large And maybe go into some detail in terms of the higher simulation core count that you're seeing in electronic Motor design and if you could just elaborate on some of the trends driving that? Thank you.

Speaker 2

Sure. I mean, look, the automotive business is one of our top 3 industries, as you know, top 3 Verticals, as we define it, are globe in high-tech and semiconductor, aerospace and defense and automotive and ground transportation. And it continues to be a strong area. And we've got Deep relationships with our automotive customers as they continue to face these complex challenges with their products. And there's a number of things there's a number of areas where they're continuing to innovate.

Speaker 2

Firstly, obviously, if you think about passenger cars for a moment, There is clearly a direction towards fuel efficiency and so on in more traditional cars, in the traditional internal combustion engine and That deals with light weighting, etcetera, crash testing, those are across all of the product lines. But as you start to think about the next generation electrification, alternative energies, those are all important themes where customers are investing and making investments for the long term. Battery technology, and let me mention an example of some of the work that we're doing there with impact analysis in my script earlier. So there's a lot of work in multiple areas taking place that are supporting the automotive customers. I would just point out by the way that as we think about the work that takes place for example with electrification in the automotive industry, The work that leads to that includes the entire supply chain and there may be suppliers who are In our high-tech vertical, we're building very high-tech components that are then being used in the automotive space.

Speaker 2

And so if you start to look at the entire supply chain, the impact of automotive is very large across the industry as they're looking at all of these different areas. Now the breadth of our technology and the breadth of the portfolio is so large that we are able to help Customers as they are looking at all of these different issues, sustainability is another example. And that's why I think you're seeing strength In these industries, these sophisticated industries which require these which are going through these transformations, we are able to help our customers navigate Through these next generation trends threats that they're facing or trends that they're dealing with in the market.

Speaker 8

Thank you. And a follow-up for Nicole. Obviously, the profitability performance in the quarter and outlook It was pretty strong. I'm wondering if there's any cost savings or OpEx specific Initiatives that you're undertaking or if this is just a result of the top line outperformance, but if you could just obviously, A lot of companies out there taking a look at the processes and people. Certainly, you're not facing The level of growth challenges is a lot of other software companies, but just curious if there's any incremental initiatives on the cost side that you're pursuing here.

Speaker 8

Thank you.

Operator

Yes. Thanks, Tyler. So, so what I would say is that the operating we have very strong operating leverage in the business because we have relatively low variable Costs, and so that's why you can definitely see as we continue to accelerate growth, the operating leverage in the business. Now it comes down to, Well, what do you do with that incremental growth and how do you reinvest it? And I would say that we have a tremendous amount of operational discipline Around decision making, around investments that is not new to ANSYS.

Operator

It is kind of embedded in how we make decisions and how we prioritize Where we put investments with an eye towards how do we get return with a balance on what is helping us for the short term And how are we making sure that we're prudently investing for the long term. And so that strategy has served us well. It has allowed us to continue to invest in the business As things go as things are good and make sure we can accelerate our roadmaps, it also helps us understand, how we need to moderate things over time. And so There's nothing quite new. On an always on basis, we're always reevaluating our processes and looking at have a pretty robust Enterprise wide transformation process around how do we remove the unnecessary work in the way that we support business.

Operator

And again, That's not new to influence the outlook, but it is a reason why we can stay the course on the strategy that we have, Because we've always been operationally disciplined, so even when there's times with uncertainty, we're confident that we have the maneuverability to execute. This concludes our question and answer session. I would like to turn the conference back over to management for closing remarks.

Speaker 2

Once again, I am excited by the excellent progress ANSYS made in 2022. I would like to thank the 1 ANSYS team around the world for our ongoing success. The team's work, our broad based business momentum and our strong customer relationships give us even greater confidence in our ability to execute against long term goals. You again for joining today's call and have a great day.

Operator

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

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Earnings Conference Call
ANSYS Q4 2022
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