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ANSYS Q1 2023 Earnings Call Transcript

Participants

Corporate Executives

  • Alec Di Ruzza
    Manager, Investor Relations
  • 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 the ANSYS First Quarter 2023 Earnings Conference Call. With us today are Ajei Gopal, President and Chief Executive Officer; Nicole Anasenes, Chief Financial Officer; and Alex Di Ruzza, Investor Relations Manager. [Operator Instructions]

At this time, I would like to turn the conference over to Mr. Di Ruzza for opening remarks. Please go ahead.

Alec Di Ruzza
Manager, Investor Relations at ANSYS

Good morning, everyone. Our earnings release, the related prepared remarks document and the link to our first quarter 2023 Form 10-Q have all been posted on the homepage of our Investor Relations website. They contain the key financial information and supporting data relative to our first quarter financial results and business update as well as our Q2 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. 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 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, 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. Q1 was an outstanding quarter for ANSYS with the company once again surpassing expectations across all key metrics. We grew ACV by 19% in constant currency over Q1 2022, which reflects the power of our world-class products, the ongoing demand from our customers and the strength of our business. As a result of our strong Q1, we have operationally raised our full year guidance for ACV revenue and EPS. Nicole will have the details in a few minutes. ANSYS realized broad-based growth across the business in Q1. We grew revenue by double-digits in every region in the quarter with the Americas leading the way. From a vertical perspective the high-tech and semiconductor, aerospace and defense, and automotive and ground transportation sectors were again our top contributors. Our largest agreement in the quarter was a nearly $74 million three-year contract with a multinational aerospace and defense technology company based in the US We grew the account by showcasing the value ANSYS is driven at this long-time customer including a new workflow with our digital mission engineering and electromagnetic solutions that reduce the time required to bring a critical product to market by 50%. That same workflow is being reused by multiple groups within the company helping to drive more users, more products and more computations. On these calls, I often highlight a specific aspect of our business.

Over the past several quarters, I have discussed the critical role that ANSYS solutions play in sustainability. I highlighted how customers are using our solutions in the development of next-generation semiconductor and I reviewed our leading suite of optical simulation products. For this call, I would like to give you additional insight into the innovation we are driving across our multiphysics portfolio through an easy-to-understand taxonomy of five technology pillars. Our investments in these pillars are applicable across our portfolio and demonstrate how we are building upon our product and technology leadership to further differentiate our solutions. Even more exciting is the interplay amongst these pillars, which is benefiting customers by helping them to solve more complex challenges, while driving our growth through more products, more users and more computations. As you know ANSYS is the leader in advanced numerical simulation methods that accurately predict the multiphysics behavior of engineered products. Our continued investment across our core multiphysics products is reflected in our first technology pillar, which is numerics. Accurately predicting physical phenomena in the real world, is intrinsically complicated.

The numerics pillar encompasses the latest advances in science, mathematics and analytics, which help us gain a deeper understanding of the physical world. It is the essence, of what we do at ANSYS with our core products. Over the last several releases, we have further differentiated our products with advanced numerics capabilities. Let me give you just, a few examples. In ANSYS Mechanical, new functionality enables customers to automatically predict structural crack initiation and growth without the need for expert knowledge. In ANSYS HFSS, our leading electromagnetic solution users can now solve increasingly complicated problems by creating simulations eight times larger than before. And in CFD, our fluids blade row analysis, enables customers to automatically mesh complex blade features while retaining the efficient Hex measures, that turbomachinery engineers demand. In Q1, we signed a new contract with a long-time customer INNIO, which uses advanced numerics capabilities from ANSYS to develop engines that run on a broad range of energy sources including hydrogen and biomethane. INNIO is expanding its usage of ANSYS multiphysics solutions, including structures and fluids, to accelerate time to market and to increase engine efficiency and performance.

Our second technology pillar is high-performance computing or HPC, which is enabling customers to solve problems they couldn't solve otherwise, and to do so faster than anyone thought possible. ANSYS has close partnerships with hyperscale computer partners, and has long taken advantage of distributed memory, multiprocessing and multiple cores to accelerate our customers' products to market, and in the process drive more computations. Again, I could cite numerous examples of new HPC technologies, in our solutions. But in the interest of time, here are just a few. In ANSYS Mechanical, technologies such as hybrid parallel, which blends distributor and shared memory parallel programming techniques, enables simulations to scale to tens of thousands of compute cores. A new multi-GPU solver, empowers users to run ANSYS Fluent natively on multiple GPUs. This CFD solution, which we believe is the first general-purpose CFD solver for GPUs is seven times less expensive in hardware purchase costs and consumes four times less power than an equivalent CPU solution. In Q1, we signed a contract with the International Technology Group, Andritz, which offers a broad portfolio of innovative, power plants, equipment, systems, services and digital solutions for a wide range of industries and end markets.

As part of this agreement, Andritz is leveraging HPC to more rapidly solve complex structural and fluid simulations, to increase the efficiency of its turbines. As a result, Andritz is reducing the amount of physical testing needed to deliver its products to market. The next area of technology emphasis, is artificial intelligence and machine learning. AI is not restricted to a specific ANSYS product line. Instead, it is architectured across our portfolio to improve ease of use, to accelerate time to solve and to further democratize simulation. Let me start with the use of AI to accelerate the time required to complete the simulation. You might recall, that a single large complex simulation, can run for days across hundreds of cores. We are incorporating AI techniques directly into multiple products, to increase the speed and scale of a single simulation. For example, our real-time radar functionality enhances HFSS, is being used to train machine learning algorithms, for radar systems in cluttered environments with moving targets. Combining synthetic radar responses with machine learning, has resulted in a 1,000x speed up, compared to previous methods and has opened the door to exciting new opportunities, for automotive radar and autonomy. Artificial intelligence can also address the multiple iterative simulations needed to get to an optimal design point.

Often customers use ANSYS products to run complex multi-variant optimizations, where they vary design parameters and boundary conditions over multiple simulation runs to reach the best design. Such multiple intrusive runs can be time-consuming due to the number of simulations that need to be performed. To address this issue, our optimization engine ANSYS optiSLang uses AI techniques to reduce the time it takes to intuitively run thousands of simulations for products across the ANSYS portfolio. For example, one customer designing electric motors initially needed seven hours to run an ANSYS-Motor CAD multivariate optimization with 4800 simulations. But with the AI techniques in optiSLang, they solve the same problem in an astonishing 17 minutes. Our fourth technology pillar is cloud and experience. We have made some recent announcements about our cloud marketplace offerings and we are continuing to invest in cloud native capabilities as well as user experience. ANSYS offers two distinct kinds of cloud offerings. The first is Cloud Marketplace and the second is cloud native. And this combination of marketplace and native takes full advantage of past innovations as well as some of our newly announced cloud capabilities. The marketplace offerings deliver flexibility to our customers by taking advantage of familiar ANSYS products, while leveraging the benefit of cloud computing and their own pre-existing relationships with cloud service providers.

ANSYS has announced partnerships with key cloud providers AWS and Microsoft Azure. In quick, Q1, a developer of sustainability technologies for buildings and electric vehicles began using ANSYS Max well on the cloud thanks to ANSYS Gateway powered by AWS. Using this cloud-powered solution the customer is optimizing the electromagnetics of its smart motor design via cloud bursting on several independent workstations. Users can spin up a cluster in minutes and add remote users from satellite locations to improve overall agility and speed proof-of-concept. The company's engineers are simultaneously running 125,000 simulations and analyzing design seven times faster, thanks to the solution. On the cloud native space, we are targeting new users and new use cases with a cloud-based platform for the development and deployment of new workflows and applications. While cloud native simulation is still early in the maturity cycle, we are continuing to advance this exciting technology. The final technology pillar empowers customers to optimize product designs to meet physical and behavioral requirements throughout the engineering design life cycle, thanks to digital engineering. Digital engineering relates to a set of connected federated and interoperable technologies that enable the collaborative execution of engineering tasks.

Today, the vast majority of time and money spent on R&D goes towards failure mode avoidance. Digital engineering enables a more rigorous R&D process based on model-based engineering, system-level simulation and an agile iterative methodology that results in improved product quality and faster throughput with reduce costs. The latest release of ANSYS Minerva improves engineering productivity with efficient stimulation process and data management, while connecting powerful simulation and optimization solutions to an existing ecosystem of tools and processes. And ANSYs SCADE users can employ model-based systems engineering methods to design and generate reliable embedded software. As you might expect, this pillar is driving more users and more products. In Q1, we signed an agreement with a global automotive OEM that is expanding its use of ANSYS products to include additional electronics and model-based system engineering technologies. By taking advantage of these solutions, the automaker can enforce architecture from existing models, allowing for reuse and traceability of parts. The automaker has reported that the use of ANSYS simulation has decreased product development time by month, which is helping the company to keep pace with increasing customer demands.

Our investments across these five technology pillars: Numerics, HBC, AI/ML, Cloud and Experience and digital engineering are critical for our ongoing successes. Even more important is the interplay amongst them, which is fueling ANSYS' growth and widening our product leadership across the board. Our customers across industries are benefiting from many of these advances today, which is helping them to deliver their own innovations to market. Moving to our partner ecosystem. We recently announced a collaboration with Synopsys and Keysight Technologies, in which we developed a radio frequency design reference flow for TSMC's 16-nanometer FinFET compact technology. TSMC's technology is critical for advanced autonomous systems including automotive radar, 5G connectivity, security applications and environmental monitors. We also recently announced that ANSYS is expanding our university partnerships to train the next generation of engineers through a funded curriculum program. We are financially supporting educators to help them develop undergraduate engineering curricula at universities around the world. ANSYS is already being taught at more than 3,000 universities across nearly 90 countries and there have been more than 2.75 million downloads of our free student product.

In Q1, we published the updated version of our corporate responsibility report. In it, we discussed the progress we have made against our ESG goals. Additionally, ANSYS has developed a focused strategy to support our customers' sustainability objectives with a particular emphasis on clean environment, materials and circularity, energy solutions and manufacturing and operational efficiency. Finally, I'm excited to announce that ANSYS has again been certified as a most loved workplace. This certification recognizes great workplaces based on employee surveys that gauge levels of respect, collaboration, support and a sense of belonging. In summary, Q1 was an outstanding quarter that has set the stage for the rest of 2023. As we have demonstrated by again beating guidance across all key metrics, our end markets remain robust and our business has proven its resilience, despite some economic uncertainties. Customers understand our compelling value proposition, which is driving their top line growth and delivering bottom line savings. Our continued momentum, the strong customer relationships, we have consistently demonstrated and our ongoing investments in technology will propel us through 2023 and beyond. 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?

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

Thank you, Ajei. Good morning, everyone. Let me take a few minutes to add some perspective on our first quarter financial performance and provide context for our outlook and assumptions for Q2 and 2023. The first quarter demonstrated the strength of our business, as we delivered robust growth during Q1, and beat our financial guidance across all key metrics. ACV exceeded expectations and beat the high-end of our Q1 guidance in constant currency. Revenue, operating margin and EPS also exceeded the high-end of our guidance. Given the strength of demand for simulation and the momentum we see in our pipeline, we are operationally raising our full year ACV revenue and EPS. Operational improvements in our full year ACV outlook, is above and beyond our Q1 outperformance. I'll provide additional details on our guidance in a few minutes. Now, let me discuss some of our Q1 financial highlights. Beginning with ACV, we delivered $399.4 million in Q1, which grew 16% year-over-year or 19% in constant currency. As Ajei mentioned, our growth was broad-based in the quarter, with growth seen across geographic regions, customer types and industries.

Our wide ranging growth is evidence of the essential nature of our market-leading simulation portfolio. ACV from recurring sources grew 12% or 18% in constant currency year-over-year on a trailing 12-month basis and represented 82% of the total. This momentum in recurring ACV growth is driven by the strong annuity created by our ongoing shift to subscription leases. Q1 total revenue was $509.4 million and grew 19% or 22% in constant currency, which as I mentioned exceeded the high-end of our guidance, driven by the favorable mix of license types in the quarter. All geographic regions grew double-digits and contributed to revenue growth with the Americas leading the way. We had strong top line performance in Q1 with ACV and revenue, both growing double-digit in constant currency at 19% and 22% respectively. During the quarter, we delivered growth in excess of our model of double-digit growth including tuck-in M&A. We closed the quarter with a total balance of GAAP deferred revenue and backlog of $1.4 billion, which grew 13% year-over-year. During the quarter, we continued to manage our business with financial discipline. This yielded a solid first quarter gross margin of 91.2% and an operating margin of 39.8%, which was better than our guidance. Operating margin was positively impacted by outperforming on revenue, the favorable mix of license types as well as the timing of investments. The results with first quarter EPS of $1.85, which was also better than our guidance.

Similar to operating margin, EPS benefited from strong revenue results and the timing of investments. Our effective tax rate in the first quarter was 17.5%, which is the rate that we expect for the remainder of 2023. Our unlevered operating cash flows in the first quarter totaled $269.5 million and grew 26.5% year-over-year, which benefited from strong collections. We ended the quarter with $507.9 million of cash and short-term investments on the balance sheet. In line with our capital allocation priorities, we repurchased approximately 650,000 shares during the quarter for around $196.5 million. We have 1.1 million shares available for repurchase under the current authorized share repurchase program. Now let me turn to the topic of guidance. We delivered an outstanding first quarter coming off an exceptional Q4 2022 and our updated 2023 forecast reflects the continued broad-based customer demand for a market-leading simulation portfolio. Looking to the remainder of the year, the pipeline of business has improved and continues to show momentum, which bolsters our confidence in achieving our 2023 and long-term outlook. However, offsetting our improved full year outlook is further strengthening of the US dollar against certain currencies particularly the Japanese Yen and Korean Yuan, relative to the exchange rates that were embedded in the outlook we provided in February.

Notwithstanding the negative impact of exchange rates, our underlying business continues to demonstrate considerable momentum. Let me start with our full year 2023 guidance. We expect our full year ACV outlook to be in the range of $2.265 billion to $2.335 billion, which represents growth of 11.5% to 14.9% or 10.8% to 14.2% in constant currency. We are raising the midpoint of our ACV guidance in constant currency growth by approximately one-point. That constant currency increase is driven by robust demand and translates to an operational increase of $16 million relative to our short February guidance. Our improved outlook is in excess of the Q1 overperformance we delivered relative to our Q1 guidance. This operational momentum was fully offset by $16 million of foreign exchange headwind. We expect revenue to be in the range of $2.242 billion to $2.322 billion, which is growth of 8.2% to 12% or 7.7% to 11.6% in constant currency. We are raising the midpoint of our revenue guidance in constant currency growth. Relative to our February guidance, our full year revenue increased $15 million from operational performance, which was fully offset by $15 million of foreign exchange headwind. As a result we expect our full year EPS to be in the range of $8.39 to $8.91 which represents an increase of $0.05 at the midpoint. Relative to our February guidance, our full year EPS increased by about $0.18 from better operational performance lower share count and higher interest income estimates, which was partially offset by absorbing $0.13 of foreign exchange headwind.

Now, let me turn to our full year unlevered operating cash flow guidance. As a reminder, we now provide guidance for unlevered operating cash flow as it aligns to the long-term cumulative $3 billion cash flow outlook we provided at our 2022 investor update in August. Our 2023 guidance is a range of $699 million to $749 million. Relative to our February guidance, our full year unlevered operating cash flow guidance is adversely impacted by $11 million of foreign exchange headwinds. The underlying operating leverage in our business remains robust. Despite the foreign exchange headwinds that have emerged since our February guidance, our current outlook of 8% to 16% unlevered operating cash flow growth building off 16% growth in 2022 demonstrates cumulative cash flow which exceed the ACV growth. Further details on the reconciliation of GAAP operating cash flow to the comparable non-GAAP unlevered operating cash flow are contained in our prepared remarks document. Now, let me turn to guidance for Q2. For the second quarter, we expect ACV in the range of $474 million to $494 million. Seasonal SKU of our renewal base that is unique to 2023 is driving a relatively more muted Q2 dynamic. However, as I've mentioned in the past quarterly dynamics can be volatile. For the first half of 2023, we expect to deliver strong double-digit growth. Our full year ACV outlook implies growth above our model in the second half of 2023 and is supported by a robust pipeline and a strong base of renewals that underpin that ACV growth.

The first half second half dynamics embedded in our guidance are playing out as we expected when we initiated guidance in February. Turning to the P&L. We expect Q2 revenue in the range of $473 million to $498 million. We expect Q2 operating margin in the range of 31.9% to 34.1% and EPS in the range of $1.35 to $1.53. Further details around specific currency rates and other assumptions that have been factored into our outlook for 2023 and Q2 are contained in the prepared remarks document. We have a strong forecast a highly recurring business model with three vectors of growth and a healthy backlog and pipeline all of which contributed to our confidence in our outlook and the underlying momentum of our business. This is reflected in the operationally increased outlook for ACV revenue and EPS. I would like to thank the entire ANSYS team for their outstanding execution in the first quarter, which drove robust financial performance and a strong start to 2023. We once again delivered a strong quarter, which coupled with the improvements in our sales forecast demonstrate the strength and resilience of the ANSYS business. I remain confident in our ability to deliver our 2023 and long-term outlook.

Operator, we will now open the phone lines to take questions.

Questions and Answers

Operator

We will now begin the question-and-answer session. [Operator Instructions] The first question is from Jay Vleeschhouwer with Griffin Securities. Please go ahead.

Jay Vleeschhouwer
Analyst at Griffin Securities

Thank you. Good morning. Ajei, let me start first with your comments regarding multi-solution sales. And you -- on occasion given the statistic as to the contribution of the number or -- of those transactions? And within that are there any notable mix trends that you're seeing with regard to the contribution of various types of solvers for example is CFD growing in particular industries relative to solver mix or electronics perhaps within certain industries becoming as material as structural or CFD or others. So I think if you could comment on some of those solver mix trends, I think that would be interesting on a per-industry basis. My follow-up question is with regard to your comments on the partner ecosystem. If you could speak more broadly about that, within engineering software ANSYS has an unusual number of such relationships. So it would be very interesting to hear, if you could comment on the materiality individually or collectively of those relationships, or how you think about that ecosystem relative to guidance in terms of your, relationships with companies like Synopsys, Altair etc. Thank you.

Ajei Gopal
President and Chief Executive Officer at ANSYS

So Jay to answer there was a lot of -- there were a lot of questions embedded in there, so let me try to do some justice to a couple of them perhaps. So when you think about the large sales so customers who have purchased more than $1 million or so in the quarter, I would say over 90%, have three or more physics and purchased three or more physics from ANSYS. And so that gives you some perspective of the strength of the multiphysics capabilities that we are able to bring to bear. As far as our products are concerned, obviously the strength of our flagship products is legendary. I mean everybody understands that we have a terrific product in the space. But what we've also seen is the interplay between products and the multiphysics nature of the portfolio I think coming through. So that's also been really helpful. And obviously the advances that we've made that I've talked about in electromagnetics, in CFD and structures etc. across the portfolio in Optics, all of those advances we've made across those five vectors of technology that I talked about are all helpful and important in the way that we engage with our customers and in the value that they see from our products.

So I'm feeling very good about our product portfolio. I'm feeling very good about our multiphysics strategy and our ability to service our customers. With respect to our partnership ecosystem maybe it's best to step back and talk a little bit about the philosophy. Look, we believe in an open ecosystem. I think it's very important for us for our customers to recognize that the vendors that they're working with are participating in the open ecosystem which means providing APIs, which means providing for interoperability and things of that nature. And so we are committed to that. We are working obviously with multiple -- other vendors to make sure that customers can benefit from technologies. And obviously no single customer is going to be completely dedicated to a single-vendor. They're going to have technologies from multiple-vendors. We want to make sure that that works for our customers. And so our partnership strategy is driven by that belief in an open ecosystem and the ability to work collaboratively to support customer needs.

Jay Vleeschhouwer
Analyst at Griffin Securities

Thank you.

Ajei Gopal
President and Chief Executive Officer at ANSYS

Thanks Jay.

Operator

The next question is from Jason Celino of KeyBanc Capital Markets. Please go ahead.

Jason Celino
Analyst at KeyBanc Capital Markets

Great. Thank you. Ajei, you mentioned cloud native the strategy is targeting new users and new use cases. Can you just talk about the SAM extension a little bit? Is it about moving down or earlier in the design cycle or down market? Thanks.

Ajei Gopal
President and Chief Executive Officer at ANSYS

Yeah. So as far as moving earlier or sort of the democratization of simulation there are a number of things that we've been doing and I think that's continues to be important in our strategy. Number one is making our technology more accessible easier to use. We have certainly advances with respect to our discovery product portfolio. We continue to try to make the technology more accessible to less experienced engineers. Some of the -- if you -- I talked about some of the advances that we've made on technology on things like numerics and other areas of physics. We're democratizing simulation by really expanding the use case of problems think about problems that we can solve today that couldn't be solved earlier in a reasonable amount of time. The investments that we're making are allowing customers to take advantage of this advanced simulation capability and we see that as a form of democratization and certainly the investments that we're making across the GPUs, as well makes technology easier.

There's some really interesting work that we're doing with AI/ML to help democratize simulation. As you know simulation can be difficult to set up and take an example of setting up something like a turbulent flow can be quite complex. And we're using AI/ML techniques, for example, to help democratize that and make that easy for end users to set up fluent simulations. And I could go on and on. With respect to cloud, obviously, accessing simulation on the cloud opens the door to smaller customers who may not necessarily have access to high-speed computing. That's certainly democratizing simulation and our continued investments in APIs I think also makes that easier for customers to build automation or special purpose applications on top of simulation. All of this in the aggregate extends the reach of simulation into areas where it wasn't being used before.

Jason Celino
Analyst at KeyBanc Capital Markets

Okay. Interesting. Thanks. And then just a quick follow-up, really strong Q1 ACV. I know you mentioned for Q2 some renewal dynamics, but I thought I'd just double check. Was anything closed earlier in Q1? Thanks.

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

Yeah, Jason, thanks for the question. Yeah, the business is playing out as we expected at the start of the year. Our Q2 renewal dynamic is something that was considered in our full year guidance when we initiated in February. And as I mentioned in the prepared remarks, there's a structural dynamic -- timing dynamic in our renewal base for Q2 and that happens from time to time. But quarterly dynamics as we've always said can be really volatile and are not representative of momentum in the business. But what has changed since we initiated guidance in Q1 was as you point out we had a great Q1 where we not only grew 19% in constant currency, but we beat the midpoint of our guidance. And in addition to that our constant currency outlook for the quarter has improved. Our view of ACV growth before the impact of foreign exchange, which we talked about in the prepared remarks it's increased based on the development of our pipeline since initiating guidance in February. It's also underwritten by a highly recurring ACV model with over 80% of our ACV is recurring and a very strong base of renewals that we see in the second half.

So if we step aside from the volatility quarters can have and you look at the implied ranges in our guidance, our guidance range implies double-digit constant currency growth for the first half and growth above our model of 12% in the second half again underwritten by that very strong renewal base, resulting in a 12.5% constant currency growth outlook at the midpoint, which is almost one point above the midpoint we indicated in February. So we feel really good about where we landed in Q1 after a really strong Q4 and strong 2022. And the guidance that we gave reflects the continued and improved optimism that we have overall in the business, notwithstanding, structural dynamics that sometimes happen in quarters, which introduced volatility. And that's why we are always focused on the full year and how we progress our view of the full year.

Jason Celino
Analyst at KeyBanc Capital Markets

Great. Thanks for the comprehensive answer. Thank you.

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

You're welcome.

Operator

The next question is from Steve Tusa of JPMorgan. Please go ahead.

Steve Tusa
Analyst at JPMorgan Chase & Co.

Hi, good morning.

Ajei Gopal
President and Chief Executive Officer at ANSYS

Good morning.

Steve Tusa
Analyst at JPMorgan Chase & Co.

Just a follow-up on that question. You mentioned the structural dynamics. Can you maybe just delve into that a little more? That just sounds like it's some timing from that perspective? And then secondly just on the remarks there were a few less seven and eight-figure deals mentioned in the remarks than last quarter in particular. Anything to read into there as far as the size of the deals that you're booking this quarter?

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

Sure. So let me start with the first -- your first question. And then will go to the second. So in terms of the renewal base, the timing of customer renewals happen at natural cycles within the quarter. And as we have been moving to the strategic selling motion and bringing individual, kind of, development teams projects, in a customer to more strategic multiyear lease arrangements, sometimes the timing of renewals can shift on a year-to-year basis over time, right, which is the reason why we're very focused on the full year dynamic, because we take deals when they naturally occur because it optimizes the outcome for our customers, and it optimizes the outcome for ANSYS, which ultimately optimizes the outcome for investors. And so, the dynamic around the quarter is just something that happens from time to time. We had very, very strong Q1. The first half, is still strong in double digits. So we're feeling really good about where we're at, and there's nothing about Q2 that wasn't contemplated or seen or known when we started the year. As it relates to fewer seven- and eight-figure deals, I would say, the underlying dynamic around our large deal progression is not unchanged from any other prior Q1s. As you know, Q4 is our seasonally highest quarter, you tend to have a lot more closing in the quarter. And so on a relative basis, there may be more mentions. But the underlying dynamics, around the strength of the pipeline, around the ability to drive strategic relationships, and larger deals with our customers customers' willingness to engage, customers willingness to close. None of those aspects have changed since we spoke in February, about how the shape of the business is progressing.

Steve Tusa
Analyst at JPMorgan Chase & Co.

That makes a ton of sense. And then just one more longer-term follow-up Ajei, I'm probably not the smartest tech guy on this call for sure, but obviously, AI/ML HPC all this stuff just seems to be pretty incredible and moving at a very fast pace. When do you think that inflection can tangibly influence your growth rate? I know you guys, have kind of a 10-year view on this stuff. But I mean, it seems like with the acceleration in these technologies that may be it is, pulling forward that impact to your growth, perhaps from several years from now, to maybe I don't know 18 24 months? I mean, is it that visible of a growth driver, given the progression that's happening and how accelerated it's been?

Ajei Gopal
President and Chief Executive Officer at ANSYS

Well, Steve, I think one of the important things to recognize is, we've been investing in these technologies for a while. And so one of the reasons why, I wanted to take the time during the call, to go through them is, because there's just -- because of exactly the dynamic you mentioned. There appears -- there is a lot of activity in the marketplace and certainly people are aware of advances in technologies, and it's an area where there's been a lot of discussion. But if you think of areas like numeric, as an example, that's been the bread and butter of ANSYS. That's really understanding the mathematics, and the engineering, and the science around being able to appreciate and predict physical phenomena, and that is applicable of course across our portfolio. The HPC activity is certainly been included within our business, for a while. And if you think about the vectors of growth that we talked about in our Investor Day last year, we talked about more users. We talked about more products, and we talked about more computations. And the more computations vector is being driven by high-performance computing, and the desire for customers to solve larger and larger problems, which are solvable as you start to introduce additional cores, you starting to use GPUs and other architectures. So AI/ML is obviously, an area where we've been investing, as I said, for a while. And we have products in the market today, that are taking advantage of AI ML capabilities. So these are all technologies and I don't want to repeat what I said on the call, but these are all technologies and areas where there continues to be investment in -- within ANSYS, of course, across the industry and we continue to reap the benefit within our products to benefit our customers.

Steve Tusa
Analyst at JPMorgan Chase & Co.

Great. Thanks a lot.

Operator

Next question is from Ken Wong of Oppenheimer. Please go ahead.

Ken Wong
Analyst at Oppenheimer

Great. Thank you for taking the questions. Nicole, just back on the 2Q ACV, I realize you're maybe beating the dead horse here, but I think kind of the one kind of consistent question, we're getting from investors is, just making sure that this has nothing to do with extended sales cycles or potentially smaller deal size commitments. The structure of those particular KPIs are consistent with, what you're seeing in past quarters?

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

Yes. That's absolutely, the case. I mean this is just about an over -- and you -- I know have been have been with us quite a while. You've seen quarters go up and down based on these renewal dynamics which is again why we focus on the full year. So there's nothing about the underlying dynamics in Q2 that are indicative of anything other than an underlying renewal base that has a SKU within the year that is driving those dynamics.

Ken Wong
Analyst at Oppenheimer

Got it. Perfect. Perfect. And then maybe just wanted to check on direct versus SMB. I mean with all the kind of disruption in our banking system right now, I was always a little concerned that maybe SMBs will have a harder time getting financing. Any changes in terms of what you're seeing on the lower end of the market?

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

No. I mean the underlying dynamics across all of our different customer segments have been performing pretty consistently as we've seen in prior Q1s. We had a lot of strength of course in the enterprise segment with the larger deals that we did this year and really strong in the Americas. But I would say we had strong growth across all three customer segments consistent with what we've had in the past.

Ken Wong
Analyst at Oppenheimer

Great. Thank you very much.

Operator

The next question is from Adam Borg of Stifel. Please go ahead.

Mike Richards
Analyst at Stifel Nicolaus

Hey, good morning. This is Mike Richards on for Adam Borg. Thanks for taking the question. I was just wondering if you could talk about linearity in the quarter and how that's shaping up so far in the second quarter. Thanks.

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

Yes. I mean I would say overall revenue linearity was somewhat -- was pretty similar to what it was last year. It was slightly more skewed to the third month but it was pretty much in line overall.

Mike Richards
Analyst at Stifel Nicolaus

Great. Thanks.

Operator

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

Joe Vruwink
Analyst at Robert W. Baird

Hi, everyone. Ajei just going back to your earlier discussion on democratizing simulation. I think to this point a lot of people think of Discovery when you say that and moving ANSYS into design and early stage development. Do the AI capabilities you've embedded with the high-end solvers begin to remove any sorts of bands or ceilings you maybe once associated with just the addressable users of an upper end products?

Ajei Gopal
President and Chief Executive Officer at ANSYS

So when you think about the AI capabilities that we've got, we're using AI in multiple areas. And one area that I mentioned of course is making it easier for people to use products. And I gave you example of Fluent earlier in what -- in response to one of the questions. That's a great example of making the technology, making our flagships easier to use. Discovery is also making the technologies easier to use in a more in a more broad-based manner. The use of AI/ML is very targeted within the portfolio. But another direction that we're going and we talked about this in our investor meeting or Investor Day last year was our ability to start to support applications. And so one of the ways in which we can democratize simulation is not -- is allowing users to take advantage of applications, purpose-built applications for their needs that are built -- that take advantage of simulation. And to that end we've created a set of APIs based on Python which allow people to build applications workflows things of that nature that further democratize simulation. So we're taking multiple routes to be able to make that happen. And in each of the directions we're addressing a different opportunity to be able to broaden the use case of a simulation.

Joe Vruwink
Analyst at Robert W. Baird

And then maybe just as a follow-up and related to your last comment when you have customers, end users creating purpose-built applications, this really gets into I would imagine more domain expertise aligned within high tech, within Aerospace and Defense, within Auto. Do you think this is kind of the conduit for of course, bigger deals more strategic deals that's already been happening but does this kind of unlock a second wave of that phenomenon?

Ajei Gopal
President and Chief Executive Officer at ANSYS

Well certainly, the fact that we have the ability for people to write these automations or extensions taking advantage of the power of our portfolio using Python, where they can use other routines open source other things that are outside of simulation to bring that into a sort of an overall workflow. That is something that has helped us -- that's helping us today. I mean there are examples of customers who have increased their use of ANSYS technologies because they've been able to build a very integrated workflow on top of this technology that allows more users to take advantage of what was previously restricted to a relatively small number of users. So that phenomenon that you're saying of driving incremental opportunity within our portfolio is absolutely the case. Furthermore, we would imagine outside of our outside of -- even outside of the engineering use case you could imagine long-term and this is a long-term statement, you can imagine other applications targeting others who are looking for the insights of physics-based simulation to be delivered to them. And we've talked about -- and certainly last year we talked about a healthcare example where someone delivering medical care or surgeon delivering medical care uses an application, which is built for that surgeon. It has nothing to do -- as far as their concern nothing to do with physics per se. They're all about delivering the care that they need to deliver. But underneath simulation is being done to influence the directions that they go. So those are examples of next-generation applications, which we believe will happen in the long-term but that's not a short-term impact. And so as we build out our capabilities we believe that we're enabling both the short-term opportunity as well as the long-term opportunity, which we've been calling the notion of being able to get pervasive insight.

Joe Vruwink
Analyst at Robert W. Baird

Thank you very much.

Operator

The next question is from Blair Abernethy of Rosenblatt Securities. Please go ahead.

Blair Abernethy
Analyst at Rosenblatt Securities

Thank you. Ajei just wondering if you could drill in a little bit for us on the aerospace and defense vertical $74 million deal there. That's great. And I just wanted to see -- what are you seeing in the defense side in particular given what's been happening in the last 12 months? And any shift in buying patterns in that market?

Ajei Gopal
President and Chief Executive Officer at ANSYS

Well, I mean, obviously A&D continues to be one of our top industries. And our aerospace customers are facing complex challenges things like engine width design lightweighting those continue to be areas of investment for our customers, but also a lot of work on Space 2.0 and the ability to be able to launch payloads into space. That's another area where there continues to be a lot of interest. Obviously, commercial air is recovering post pandemic there continues to be more interest. And then of course from a defense perspective there's obviously a global perspective. You're seeing this certainly in the United States. You're seeing this as you see increased spending in Germany, for example. So all of that represents long-term tailwinds into the aerospace and defense industries. And we certainly are very well-positioned given the nature of our technologies to be able to take advantage of that.

Blair Abernethy
Analyst at Rosenblatt Securities

Great. Thank you.

Operator

The next question is from Josh Tilton of Wolfe Research. Please go ahead.

Josh Tilton
Analyst at Wolfe Research

Hi, guys. Thanks for taking my first one. My first one is an easy one. What was the contribution of DYNAmore to ACV in the quarter?

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

Yes. So we had spoken about DYNAmore for the full year as being about EUR30 million to EUR35 million with about half of it being in Q1 in our February call. And you can -- the underlying assumption you can make is that we're pretty in line with what we expected in February.

Josh Tilton
Analyst at Wolfe Research

Perfect. Thank you. And then, I guess, my follow-up is. I totally understand that the first half, second half dynamics are kind of playing out as you expected when you first gave guidance in the beginning of the year. But I guess, my question is the world has kind of changed since then? And is there anything you can give us maybe from your conversations with customers that's just increasing your confidence that some of these second half renewals won't get pushed out if the macro continues to deteriorate?

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

Yes. I mean -- so here's the pragmatic answer to that is, if customers don't renew they lose access to the software and they can't build their products. And so the renewal base is very, very sticky because it affects their R&D cycles. And so -- and just to kind of take it a step back and to contextualize kind of, where we sit in the corporate decision-making process and what has happened in other kind of economic events. Simulation tends to be the last thing that gets shutoff and the first thing that gets turned back on. And that's because it is connected to people's R&D. And R&D tends to be -- the investments in R&D tend to be longer -- long-term views as opposed to short-term tactics. So that's one. The second is, even within the R&D process the areas that are most susceptible would be areas that are connected to seat counts and people and that's not how the economics of our software work. So our software is -- the way customers use our software is based on the capacity of compute that they need and the software that they need to run their simulations within their R&D cycle.

And so, if there are underlying changes in the footprint of the R&D part of the business, it doesn't really affect our part of the software stack in the R&D cycle. And the last part is, simulation actually can provide tailwinds for -- and support the underlying cost efficiencies of our customers in their R&D cycle. Using simulation reduces the need for physical prototyping. It shortens the innovation cycle. You can have a single analyst run multiple simulations at the same time. And so, the throughput that you get and the efficiency that you get from using simulation to build products, has a very high ROI. And in times where you're looking to transform simulation is valuable, not just in accelerating time to value to accelerate the top line, but also to support running R&D in a more efficient manner. And so, those are the underlying qualitative dynamics, but the real answer on the renewal base is that, it's very, very sticky and a small short-term disruption in economic outlook has historically not had an impact on our overall business.

Ajei Gopal
President and Chief Executive Officer at ANSYS

Yes. And just to amplify what Nicole said and to add a little bit more color as well. We're not tied to the number of units produced, right? So, if you cut back on production for whatever reason, your R&D efforts still continue, because you're building for the long term. And if you look at all of the industries that we serve, there are major transformations that are taking place in each of the industries and the long-term competitiveness of organizations is at stake. So if you're in the automotive industry, for example, electrification is front and center, autonomy is front and center. And stepping back from any of these activities will result in a long-term degradation of their business and no one wants to go to it. And so, what we're seeing and what we saw in the past, we saw this when we had this -- when Lehman went out of business back in the day, we saw that R&D was the last that was cut and we saw that it was the first thing that was restored. And the lesson that was learned after that and there were reports and the there were -- there was a lot of post-mortem done after that. But the lessons that we've learned is that the organizations that continue to invest in R&D were the ones that came out of that downturn and were successful afterwards. And so you see when we talk to customers, our value proposition is not just about accelerating R&D as I described. But our value proposition as Nicole said is also about being able to help cost. And we have well estab chapter inverse we can talk about how we can reduce warranty costs, how we can make engineers more efficient. We can talk about how we can reduce the amount of raw materials that have been used for experimentation purposes. They move away from physical prototyping. So that is a very hard ROI that we can make and we can make that case. Now I've spent -- I've talked to our sales leaders around the world. I've talked to customers around the world.

And I'm only getting -- I'm getting strong support for our -- for the guidance that we've given you. We're seeing the markets -- the customers are committed. We're seeing that the nature of the technology that we provide is critical and we see our negotiations and discussions with customers kind of going as we expect. We call it as we see it. We're not trying to come up with sort of speculation of what the markets might look like. We just call it as we see it. We can give you a perspective on where our customers are how they're buying and all of that is reflected within -- all that is reflected within our within the way that we're guiding. So we feel great about the guidance we've given you. We feel great about the second half of the year. We feel great about Q2. And as Nicole has said several times on this call, there is an underlying dynamic of our -- the renewals of our business. And for those of you who have been following our company for multiple years that underlying dynamic is exactly something that we've seen year after year after year. And we've always had quarters which are stronger in quarters which are relatively weaker in that context of the overall full year and so we manage to the full year. And that's important for us and we feel really good about where we are right now.

Josh Tilton
Analyst at Wolfe Research

Super helpful. Really appreciate the thoughts and response.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to management for closing remarks.

Ajei Gopal
President and Chief Executive Officer at ANSYS

I'm excited about our outstanding start to 2023. I would like to thank the one ANSYS team around the world for our ongoing success. Our superior technology, our broad-based business momentum and our strong customer relationships give us even greater confidence in our ability to execute against long-term goals. Thank you for joining us this morning. I hope you all have a great day.

Operator

[Operator Closing Remarks]

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