Q3 2019 Earnings Call
Welcome to answer this third quarter 2019 earnings conference call.
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I would now like turn the conference over to a net Rebids senior director of Global Investor Relations. Please go ahead.
Good morning, everyone. Our earnings release stimulated prepared remarks document have been posted on the home page of our Investor Relations website. This morning. They contain all the key financial information and supporting data relative to our third quarter financial results and business update as well as our Q4 in full year 2019 outlook and the key underlying assumptions.
I would like to remind everyone that today's presentation contains forward looking information. In addition to any risks and uncertainties that we highlight during the course of this call important factors that may affect our future results are discussed at length in our public filings with the FTC all of which are also available via our website.
Additionally, the company's reported results should not be considered an indication of future performance. There are risks and uncertainties that could impact our business in the future.
These statements are based upon our view of the business as of today and answers undertakes no obligation to update any such information.
During this call and in the prepared remarks, we'll be referring to non-GAAP financial measures unless otherwise stated.
We used take any reference to revenue to me revenue under ASV six so six.
Discussion of the various items that are excluded and a full reconciliation of GAAP comparable non-GAAP financial measures under HFC. Six subjects is included in this morning's earnings release materials and related form 8-K.
I would now like to turn the call over to our CEO jingle ball for his opening remarks RJ bank.
Thank you went out and good morning, everyone.
Q3 was another exceptional quarter Francis we surpassed the high end up our guidance in both revenue and earnings per share.
Our annual contract value or HCV came in at a robust 14% growth in constant currency.
Based on our continued outstanding financial performance and the ongoing strength about pipeline I'm excited to announce that we are again, increasing our 2019 revenue.
Yes, and ACB guidance.
Maria will provide the detailed in a few minutes.
Q3 was about execution across all aspects of our business.
At all our normal routes to market.
This strong across the board performance highlights the robustness and the resilience of the answers business.
Considering sales activity from a geographical perspective.
The Americas its contributed strong consistent performance throughout the year.
As we had expected youre kind of slow first half would be or but Q3 was strong and we expect Q4 to also be robust based on some larger deals in the pipeline.
Asia has also performed well this year.
But full year growth in China is expected to be muted as a result of the ongoing trade restrictions.
Our guidance of course takes into consideration into account.
Our channel, which continues to represent about a quarter about sales activity grew consistently with our direct business.
From an industry perspective, the semiconductor and high Tech.
Automotive and aerospace and defense verticals continued to lead the way.
As has been the kids, so many quarters or larger deals are driven by the strength of a multi physics portfolio.
In fact over 80% of our largest deals in Q3 included four or more products across all physic suite.
Our enterprise and strategic accounts performed well and included three customers with waters in the eight figure range.
Let me share a few of our Q3 successes.
Oh, leading innovator in high tech materials in process. These so I did $12 million multiyear agreement to develop next generation OEM component.
With increased access to simulation more engineers with the company can use answers to provide tailored solutions for its customers.
Through a new multimillion dollar deal as is multi physics solutions are enabling an electronics leader to be first to market.
The company has demonstrated that answers can materially reduce the number of physical prototype saving $5 million in one of its business groups alone.
Another large technology company signed an eight figure agreements to drive innovation and new markets, while growing its footprint in existing business segments. The companies using answers from silicon through the entire platform to innovate reduced tied to market and mitigate the risk of next generation mobile phone and data center.
Yep.
Oh the answer is good fulfilling demand from fast high fidelity multi physics modeling, resulting in a nice win over our competition.
On a recent calls I've highlighted specific product well solution areas in the answers portfolio.
For example in Q1 I discussed all leadership in electronics with probably the products such as each of US that's an essence red Hawk.
On a last call we discussed on multi physics autonomy solution, which includes core products like SSH pets that coupled with leading technologies that we've obtained through recent acquisitions, including the Deeni and Optus.
With so many recent advances in essence mechanical as one of the acquisition of LSC see on this call I'd like to focus on mechanical instructions products.
As this was founded as the mechanical and structural simulation company.
Nearly 50 years later that product line continues to accelerate.
Customers use our mechanical simulation to validate the design structural integrity and the performance of that products across a broad spread them up applications.
From jet turbine blades to offshore oil pumping platforms and everything in between.
That's due in part to our ongoing focus on accuracy.
We're also consistently driving new functionality and ease of use into answers mechanical.
Including innovations that we added in Q3 for streamlined and simplified workflows.
As well as a prediction of electronic hardware failure gained from our acquisition of Dfour solutions.
Those enhancements and many more are resonating with new and existing customers.
Our recent acquisition of LTC is further broadening of footprint in the structural space.
Oh SIFI is the world's premium provider of explicit dynamics and other advanced finite element analysis technology.
Let's see seems flagship product Ellis dyno, if used to simulate high speed short duration events for example, a cell phone drop or an automotive crash.
In fact, the automotive industry has widely adopted Ellis dyna to accurately predict a vehicles behavior and the effects of occupancy during a collision.
Over the yards and let's see see has evolved it solutions from a leading explicit dynamic solver say broad multi physics suite, but can solve a range of use cases.
Automotive impacts to airbags, aerospace and defense applications and beyond.
The L.C.C. technology and customer use cases are complementary to and dovetail nicely with the broader answers mechanical products would solve for longer term phenomena like structural loads and vibrations.
Well as this is part there, but let's see see for nearly 25 years.
We had focused on a limited set of Ellis diner use cases and not on the primary use cases, such as automotive crash testing.
No that let's see fees part of Ansys, our comprehensive go to market capabilities will enable us to better serve the automotive aerospace and defense in other markets with the full breadth and depth of the Ellis Dyna suite.
And by combining our product portfolios, we will be able to solve even more challenging customer problems that either company could individually.
Industry legend drawn Holquin started Ellis D.C. and he will remain part of the answers team.
Both L.C.C.N.S. share at similar culture based on a profound respect for technology and an unwavering commitment to customer success.
And I'm excited but the combination will allow answers customers to deliver more sophisticated products faster and more efficiently than ever before.
We also closed in our acquisition of Dinardo, a leading provider of multi disciplinary analysis and optimization technology.
And existing Ansys partner Dinardo developed state of the OTT solutions for optimization.
Uncertainty qualification.
Robustness.
Sensitivity analysis and data mining.
And while this acquisition isn't financially material.
Adding dinardo products into the answers portfolio will give customers access to the full suite of process integration and robust design tools.
Empowering users to identify optimal product designs faster and more economically.
I'm delighted to welcome to be LSD forget dinardo employees into our answers family.
We also continue to make strong progress with integrating technology from our earlier acquisitions into our portfolio as we saw in our newly released and since 2019, our three.
On the material side, we introduced answers granted materials data for simulation, which increases the number off off the shelf materials available directly in our flagship products.
Would be a far solutions, we have upgraded the shell or pre processor and core solving engine using answers technology.
Our sales teams have embraced these upgrades, helping us to expand existing accounts open sales opportunities at new customers and accelerate pending deals.
On the partnership side, we recently announced an alliance with Microsoft to help mutual customers improve operations through digital twins.
This collaboration will empower customers to more accurately predict an asset future performance and reduce unscheduled downtime.
<unk> expenses, using Azure digital twin and answers twin builder.
We also announced an exclusive partnership with motor design limited to distribute its motor CAD software.
Motorcar enables design engineers to evaluate motors apologies and concepts across the full operating range and to produce designs that are optimized for performance efficiency and size.
By combining their electric motor design software tool with our multi physics analysis capabilities, we're extending simulation into the design phase of the electric machine product lifecycle.
Our previously announced partnerships continue to build momentum.
And its most recent earnings call PTC reported 126 transactions.
A 66% increase in the number of deals from the previous quarter.
Creo simulation lives, it's CAD solution powered by Ansys discovery lives.
PTC expects adoption to further accelerate and its next fiscal year.
Turning now to our environmental social and governance initiatives stem education remains a key element of our E.S.G. focus.
I was excited last week to attend the opening of answers call in New Engineering building complete with state of the art make a space on the campus of the Carnegie Mellon University here in Pittsburgh.
As part of a partnership with CMU, we're providing students with access to the answers portfolio and the only enabling them to prepare for life outside of academia by solving real World Engineering challenges.
We also expanded all women in technology efforts through a granted to the Leila put up all the foundation, which provide scholarship and training for aspiring female engineers in India.
These initiatives are incredibly exciting to all of us that answers.
As we held to train the next generation of engineers and scientists.
In summary.
I'm extremely proud of our accomplishments of the third quarter and frankly for all of 2019.
We recorded another quarter of double digit topline growth and best in class margins.
We are in a growing market.
With a winning strategy of pervasive simulation.
And a world class product portfolio bolstered by a strong pipeline and then established track record of execution.
That gives us tremendous confidence as we close out 2019 and prepare for 2020 .
And with that I'd like to turn call over to Maria Maria.
Thank you okay.
Good morning, everyone now, let me take a few minutes.
Additional perspective on our very strong third quarter financial performance.
And provide color around our outlook and key assumptions for Q4.
Consistent with our standard practice my comments will be in terms of non-GAAP unless I state otherwise.
Before we begin to the detail I'd like to point out that we have increased our 2019 guidance.
Not only to include the impact of our recently closed LTC and dinardo acquisitions, but also to take into account the strength of the Standalone business and our improved outlook on New York organic pipeline of opportunities.
Our record Q3 results reflect continued customer and business momentum combined with solid execution across the enterprise.
We finished the quarter with constant currency revenue growth of 19%.
Operating margin and EPS results that were also above the high end of our Q3 guidance ranges.
The revenue performance in Q3 was driven by strong sales execution, including a larger dollar value of multiyear lease transaction, then we initially forecasted coming into the quarter.
This is reflected in the strong lease revenue growth that we reported for Q3.
And a continuation of the growth trend that we have seen throughout this year.
The combination of our success in delivering on our 2019 financial commitment.
And the strength of our sales pipeline gives us confidence we're on a path to continue to execute against our strategic priorities and to deliver another year of record financial performance in 2019.
Key financial metrics for the quarter begin with total revenue of 345 million.
Q3, ACB totaled 291 million or constant currency growth of 14%.
With 73% ACB in the quarter coming from recurring sources.
The increase in software lease license sales combined with strong maintenance renewal.
I'm trying to get to building, our deferred revenue and backlog tweak Q3 total of $650 million, a 19% increase over last year's comparable ballot.
Moving onto profitability in Q3, we continue to build on our great first half financial performance was strong top line results that helped to drive a third quarter gross margin of 90% and an operating margin of 43%.
We also reported record third quarter EPS of $1.42.
Which increased 8% despite an eight cents tax benefit in the prior year quarter related to entity restructuring activity.
With respect to taxes, our effective tax rate in Q3 was 21% and for Q4, we expect our rate to be in the range of 20% to 21%.
Our cash flow from operations grew 9% and totaled $120 million for the third quarter and $360 million for the first nine months.
And we close Q3 with a total 733 million in cash and short term investments.
Now, let me turn to the topic of guidance.
We're pleased to yet again increased guidance for the full year, while also initiating our Q4 outlook.
First focusing on the existing business, we've increased our full year outlook to reflect the very strong performance in Q3, combined with positive business momentum and our ability to continue to execute and deliver on our commitment as we look ahead to close out 2019th.
Second we've incorporated contributions to our full year guidance from the recent acquisition of Eleni P. C ended Argo deals that have both closed in the pathway.
This includes an incremental $10 million in revenue for 2019.
As well as the impact from both the use of the capital.
And the issuance of new debt and equity to fund the acquisition.
In connection with the acquisition of LS T.C., we recently added $500 million in term debt at an initial interest rate of approximately 3%.
And we also issued 1.4 million shares.
Before I get into specific number.
Just provide a brief comment with respect to the impact of the ongoing trade discussion between the U.S. in China.
Consistent with what we had previously communicated.
Our outlook for the remainder of 2019 takes into consideration are reduced expectations from China.
We're also assuming that the current export restrictions and be entity list will remain in effect throughout the remainder of this year.
Moreover, we remind investors that China accounted for less than 5% of our total revenue in 2018.
And accounts for approximately 4% of our revenue in the first nine months of 2019.
Now, let me move to the details of our outlook for Q4, we expect non-GAAP revenue in the range of 454 to 479 million and non-GAAP EPS in the range of $1.87 to $2 inside that.
For the full year, we're increasing both revenue and EPS outlook to non-GAAP revenue in the range of 1.490 billion to 1.515 billion.
For constant currency growth in the range of 16% to 18%.
And as in the range axles and 20.
[laughter] Dollison 38 cents.
We're also increasing our ACB outlook for 2019 to a range of 1.460 billion to 1.480 billion.
This represents constant currency ACB growth of 12% to 13%.
With respect to annual operating cash flow. We're also increasing the midpoint of our outlook by $7.5 million for 2019, 20 range of $485 million to $510 million.
Looking ahead to Q4, we're expecting operating margin of 45% to 46.5%.
And for the full year, we're increasing our forecast for annual operating margin to a range of 44 it has to 45%.
Further detail around specific cards right any other key assumption that had been factored into our outlook for Q4 and 29 team are contained in the prepared remarks document.
Just to close out on the topic of guide our outlook for the remainder of 2019 factors in everything that we're currently aware up with respect to ongoing trade discussion.
Geopolitical situation and customer sentiment across our geographically and industry diverse customer base.
It also reflects continued investments related to several business infrastructure and digital transformation project.
Increased sales commission and personnel related costs.
As well as the financial impact of the two most recent acquisition.
As we look ahead into 2020 I'd like to remind you that our recent investor day I shared our longer term financial metric in the form of an ACB target for 2022.
Given the increased variability in revenue under 86, so sick due to the accounting treatment of multiyear leases.
We provide ACB as he supplemental financial metric to help evaluate the annual performance of the business.
Comed over the long term ACB in revenue lead to the exact same number.
However, it is important to note. It's there will be years, where ACB growth like revenue growth as we will see in 2019.
The other years, where ACB growth will lead revenue growth.
Consistent with this dynamic we will continue to encourage you to gauge the operating strength of answer like focusing on our annual ACB performance. In addition to our other key financial metrics.
In line with our practice from the past few years, we will provide more detailed guidance on 2020, once we finalize our annual planning process and close out 2019.
And in summary, we delivered another quarter of excellent financial performance with strength across our key financial metric.
ACB topline growth operating margin EMEA operating cash flows and deferred revenue and backlog.
The strong third quarter and year to date result, give us confidence that we are on a path to deliver on our increase 2019 financial commitment as well as our longer term 2022 financial target.
And operator, we will now open the phone line it take questions.
Thank you.
We'll now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
Using a speakerphone please pick up your handset before person the keys to withdraw your question. Please press Star then too.
We ask that you. Please limit yourself to one question. If you have further questions. You may reentered. The question queue at this time, a pause momentarily to assemble a roster.
Our first question comes from Ken Talanian with Evercore ISI. Please go ahead.
Hi, Thanks for taking the question Maria could you give us a sense for the inorganic contribution to ACB in three Q, how you're thinking about for Q.
And how much of the AC.
TV guide increase was organic versus inorganic.
[noise] yeah.
So with respect to Q3 D. He was you had about three or 4% the quarterly growth was from the acquisition.
You saw we broke out relative to the he shouldn't do acquisitions work for the remainder of 2019, we broke out separately in the prepared remarks, so with respect to their contribution it's about $10 million from those two for the remainder of the year.
And you're looking at it from a perspective, a both revenue and ACB for for the 10 million or.
Yes, yes.
Okay, I mean, it just as a quick follow up on that it looked like Ellis TCV is more in the range of 60 million in terms of HCV I would've thought.
The CV portion.
In Fourq, you would be a bit higher than than what were recognized.
Only two months, it's only two months.
Okay. Thank you.
Our next question comes from Ken wrong with Guggenheim. Please go ahead.
Hi, Good morning, guys I'm looking for Arguer.
We always get asked about the sustainability or others that youre momentum that you guys with the county.
The reason green Pepper herded activity.
But would impact next year quite born and beyond.
Thanks for the question Oh, So as you as I said at the Investor Day, which we had in September we have started to focus on these larger accounts to the so called enterprise accounts and we've increased the census.
All the number of those accounts from just a handful.
All over dozen a couple of years ago.
Two around 85 today.
And as I mentioned that during Investor Day, I think I walk through a case study of particular customer which shows how by focusing on that customer as we would within enterprise, we do with enterprise accounts by focusing on the customer we're able to deliver significantly incremental value to that customer.
Customer base upon based upon the capability and the full suite of our portfolio and that translates into incremental growth opportunity. So for that particular customer that I walk through you know we had had we had a modest growth for a number of years and then as we started to focus a bit when an enterprise account. We grew ACB by about 10% end up in the first couple of.
Beyond that as an enterprise enterprise account and then subsequently we've grown ACB at about 17% CAGR over the over a couple of years afterwards, and there's still significant opportunity ahead, because in the case for that particular customer are there opportunities electrification of the number of other areas and we're seeing the story being repeated across our enterprise account base it.
By by focusing on the accounts, we can deliver incremental value to our customers and of course that translates to incremental growth. So that's the dynamic that you're really seeing taking place in our business as we look forward.
Great. Thank you.
Our next question comes from Saket Kalia with Barclays. Please go ahead.
Hey, guys. Thanks for taking my question here.
Maybe maybe for you Maria.
Probably be a tough oh really tough to breakout because so much what what ansys does its multi physics, but you know a couple the big deals this year are.
If you look do they have been they've been geared towards sort of the semi space or have been very electrical too.
Heavy so I guess I'm wondering if you could just talk about the general growth in the business, maybe segmenting between the electrical portfolio versus all the other physics, if that makes sense.
Hey, John socket, but what else I guess, we don't report on any individual physics and leagues, because that's not really the lens through which we view the opportunity you mentioned in your in your.
Comment about multi physics, and that's really the strength of the breadth and depth of our portfolio in how we think about our go to market opportunity. One one data point I'll point you to its the combat that Oh Gee had in his prepared remarks is that if you think about the large deal.
Sales in Q3.
80% of those deals included products strong floor or more needs. Your physics family. So we really are going to market and enabling our customers to sold incredibly complex problems because the problems are really multi physics and no longer single physics.
Oriented.
Our next question comes from Jay If we shower with Griffin Securities. Please go ahead.
Thank you good morning.
Sure. Let me start with you and ask God knows how do you see any or all of your newer businesses.
Being leading indicators of or leading edge drivers to new business, meaning specifically Minerva for us pdm granted for materials or even a less in the mechanical area do you see any or all of those.
Perhaps becoming.
The good leading indicators of new business and then secondly, there.
A follow up on a comment you made regarding the channel business, it's quite interesting that proportionately. It's staying the same in spite of your obvious focus on large deal business.
So what do you have done or what do you intend to do the sustained that momentum in SMB.
Suit to continue to grow that business.
Particularly from a multi physics perspective, and not just a single solve a perspective.
In the SMB market.
So so Jay Thank you for the after the questions I'm, sorry, if I just focus on the on the second one for a moment and talk about the channel.
We're absolutely right the channel has grown consistent with the direct business.
And as you would imagine the channel partners the channel partners.
Tend to given our go to market some of them tend to be more transactional in nature of smaller deals in nature. Some of them of course have very strategic relationships with their customers. It really depends on the channel partners and as Rick May have mentioned again in during our Investor day. When we were talking about our go to market strategy, we continue to invest in the channel partners.
And we have continued to increase the number of channel partners as well as far as a channel partners are seeing significant opportunity. So they themselves are increasing the number of people within the within individual partners are selling our technology. So there's more feet on the street in the aggregate from the channel partners selling our technology, which typically ends up at a at sort of these lower transaction levels.
Furthermore, as you know our go to market is differentiated.
So so we have we have a.
An opportunity to yet to address the enterprise accounts, but with our momentum motion and our inside sales activity. We can address more of this volume business more transactional business and so we have our go to market and one of the hallmarks of instead of the business is the fact that we have this pretty sophisticated and well develop go to market that allows us to address needs.
The largest customers as well as the more transactional business that we've discussed and they're both very important to us and we continue to.
We continue to make sure that were successful across both of those motions, which you saw the CR and I made made clear in my commentary.
With respect to your first question.
Regarding the.
The products certainly some of the new products that we have in the marketplace and perhaps some of the acquisitions.
You're absolutely correct you know our strategy has as I've described is to make simulation pervasive, which means we want to make simulation capabilities, we want to inject them into multiple ecosystems into multiple use cases, if you look at some of the work we've done without platform and in particular with them, but within the nervous that allows us to take the answer simulation capabilities and to enjoy.
Correct it.
Into other into other phases, the product lifecycle and to be and to drive the broader use simulation and certainly our acquisition of dinardo fits right into that right into that so that gives us access to more customers salt helps to solve more problems at some of the acquisitions that we've done you mentioned are you mentioned granta I think that.
Cereals is a very important aspect of the of the end to end product equation.
In many ways materials as the lifecycle unto itself, it's very closely related it's almost a platform onto itself since very closely relates to on the nerve activities.
But at materials gives customers a real understanding of where the two costs are and what the design implications are and that exposes us at different levels and an organization in a customer as well as to different sets of customers.
You mentioned, you mentioned Ellis T C.
And I was pretty broad in my comments I think I in my in my script I went through this and in some detail, but the fact is that the Ellis Tc technology because of the nature of the technology and because of our go to market, we had not been focusing on the core LTC use cases.
That that like for example, automotive crash testing and now that that LSP CNL as dinos part of the answers portfolio, we have an opportunity to position the breadth in the depth of LTC across industries, and lets dyna across multiple industries and by putting our technologies together, we think we can solve.
Oh, we can help our customers really solve the most amazing problems.
And do so very efficiently so where we're excited about those acquisitions. They all fit with our our strategy of pervasive simulation that fit with our go to market.
And our go to market supports the acquisitions and then that relationships that these customers have had with their own channel partners with their own customers for the supports our our go to market. So it's a mutually reinforcing outcome that we are excited about.
Right.
Our next question comes from Matthew Hedberg with RBC capital markets. Please go ahead.
[noise], well hey, guys. Thanks for taking my question.
There's been a lot of consternation over the macro environment should but clearly I think you know the breadth of your portfolio Global diversity was was able to offset any that weakness.
He referred to Mark you talked about China.
Seems like that's factored into your guidance, but I wanted to dig in a little bit more in the UK, obviously, there's a lot of questions on Brexit.
But then Germany. It would have some really strong results. So maybe a little bit more on on European results relative to sort of the urea and what's factored into your outlook.
Yeah, So as I said in the and I'll, Let me also jump in but as I said again in my script.
B B second half of your I mean, Europe had a pretty pretty decent Q3 from a sales activity perspective, and the second half of the here in Q4, Oh, we're expecting to see we have some or larger deals with the pipeline.
B B.
The revenue when you look at it from a revenue perspective, because of the volatility of six so six you'll see some variations in revenue, which may not necessarily allied exactly with with with sales activity, but to give you. Some perspective as I said, we expect the second half the year to be stronger in Europe .
And and with some with some large deal activity I said, the Americas have been pretty strong throughout Asia has been pretty strong really went out here and I think if you just look at UK. It's a comparable so it is it is indicative of what you're going to see relative to some of the variability that 86% introduce it is depending.
On the timing of when deals here, so I would not read into the UK and as I said our plan all along as we've been communicated since we first guided on 2019.
Earlier in the year is that the the pipeline in the deal opportunities were really back end loaded and a lot of those those are just aligned with the yearend planning and budgeting cycle all of our large customers.
Our next question comes from Jackson at her with JP Morgan. Please go ahead.
Great. Thanks, Good morning, everybody. Thanks for taking my question.
The first thing that is a follow up to an earlier question.
And as Jay you mentioned, so you you weren't necessarily partnering with them more or.
The use cases.
Their traditional craftsmen Pat.
So can you just help.
Maybe I understand.
If you were to go into an automated burn arrow customers potential customers say and look to sell kind of a broad based deal what did the conversation actually looked like once you came to a crash NIM.
What was the work around there previously.
So thanks for the question.
I too to to make sure that.
To make sure that you understand the context.
Our focus as I said from a go to market perspective was not really on the automotive on them automotive customers for the automotive crash testing a lot of that activity was effectively taken.
By Dyno true true through some of their other channel partners and we had.
Let's see seats are there other channel partners. It wasn't really a focus with answers so that wasn't our primary business and so in those areas as you could imagine.
Because we were we were.
We would partner, where we would work with the customer they would take advantage of the technology of Ellis Tcs technology, Dyna, perhaps working with another channel partner.
And and that's how we what's kind of need at the customer that's.
The automotive crash test use case wasn't really something that we were majoring in that wasn't our focus and that wasn't where the ansys LTC business was.
Obviously is an area of tremendous strength for them.
And when they come with not only amazing technology, but they also come with with great relationships and customer relationships in that space.
Our next question comes from Rich Valera with Needham <unk> co. Please go ahead.
Thank you. Thank you good morning.
Based on your prepared remarks, it sounds like you're continuing to see really good demand from the auto industry, but I think a couple of your design software peers have called out at least selective weakness with some other auto customers can you just give us an update on on your view of your auto customers your opportunity in the auto space and.
You know your sense of how that's going to look over the next you know one or two years.
Thanks again for the question.
We can I can I can address it from the perspective of what we see in the marketplace.
And perhaps I can and set the context as I talk about some of the conversation, we're having that I personally have had and certainly our salespeople are having with our customers in the automotive space.
When you consider to be aggregate of what the automotive customers the dealing with.
Vacation and by the way electrification is not uniquely something that's being driven by the automotive companies in enough themselves. There's also government regulations and other activities that are driving their desire to meet certain deadline dates and so forth, but if you consider electrification you consider the opportunity with autonomy.
Just two examples there was a profound change taking place and there is a significant level of investment that we're seeing and interests that we're seeing in making sure that they can address these up these these upcoming needs or these upcoming demand after the portfolio in many cases.
Hey, and activity a focus on electrification might isn't just about the battery. It's a much of its about a broader outcome because of building an electric car requires different points of optimization than building an internal combustion engine car. The transmit everything is different or many things that.
And so there and that opens up incremental opportunities for us so from from our perspective. The fact that we've identified electrification autonomy and we have compelling solutions in those areas. In addition to the rest of on multi physics solution. We believe positions us very well those are growth areas people are people are spending R&D dollars on those.
Areas to be competitive in the future and we have technologies and solutions that addresses those customers and so when I talk to automotive customers.
The conversation often starts with electrification or autonomy. We may eventually get into other conversations of traditional that we've traditionally had with them about structural integrity or airflow and combustion and other areas, but certainly we start with those areas and those can we see those as continued areas of interest for the automotive.
The next question from from Stephen or Tony with Wedbush Securities. Please go ahead.
Hi, Thank you appreciate the middle initial tier congratulation Vance, it's a great quarter I'm going to focus my question here on Maria.
So maybe just some housekeeping first maria or any changes in Q3 duration of contract length.
Yeah billings terms.
And any trends that you might be seeing there I have a few companies that are seeing more annual billing for must multi year and then just also can you remind me what approach.
We're taking to the larger deals, particularly here in Q4 they'd probability weighted and more generally what are the puts and takes it you factored into the Q4 guys. Thank you very much.
Yes, so with respect to duration, Steve what I would say is we're not seeing any extension duration just to give you a a couple of data point.
At the end of Q3, if you look at deferred revenue on the current is about 5.2 months, which is about the same as it was last year at this time on the long term deferred Isabel.
And just some of those larger deals that that RJ spoke to in his prepared remarks on those on average our two to three year deals. So the larger enterprise deals and the strategic accounts were still seeing that they are choosing multiyear as opposed to annual annual we.
We're still seeing though in into momentum and the more a traditional SMB space.
And what I'm talking about what do we bring in Q4, you know obviously, we've got a pipeline Rick and his team are very seasoned and so some of them they balance some of the risk.
You know around holidays and around how many people need to be involved in the approval process and so you know we try our best given that the larger these deals get if one slips to Q1 for whatever reason it can have a significant impact intersects does that so.
We try our best too.
Everything that we know about Matt well as well as individual deals that that really could have an impact on a quarter and try to use the best judgment when they can one were formulating our guidance.
Great. Thanks, Maria Congrats again.
Thank you.
Our next question comes from Rob Bolivar with Baird. Please go ahead.
Great. Thanks, guys. Good morning appreciate it.
My question is for RJ Andre just around discovery lives I. Appreciate your comments relative to the PTC partnership and I know just got realize it's an important part of you know your your your go to be more pervasive within large accounts to just wanted to get a sense for the progress.
Discovery live in.
Any early thoughts on penetration, but in some of the larger deals. Thanks.
Thanks for the question Rob.
So again I hate to go back to be Investor day, but we had a pretty robust discussion about discovery live at Investor day that was about a month ago.
A month and a half ago. So the dynamic remains.
Remains the same where were tremendously excited about the technology our customers excited by the technology. We've got we've got initial penetration into the enterprise accounts.
And something like I think 20% of our enterprise accounts.
In terms of an initial penetration.
And we continue to develop against an extremely aggressive roadmap.
And where the technologies moving into right direction, we're excited about adoption.
It's it's just very early in the cycle of the of the product. It's a brand new products, it's creating category in a marketplace. That's historically relatively conservative in terms of adoption of new technology. So as we've said as he said repeatedly it will take time for this product to develop but all indications so far apart.
And we are excited about where we are in the marketplace with this but this essentially breakthrough technology.
The next question comes from and Andrew The Gaspari with Berenberg. Please go ahead.
Thanks for taking my question I guess I wanted a switch gears into H.P.C. I think at the Investor Day, you mentioned 100 customers on sure Im just wondering if you're thinking about opening that up through other hyperscalers.
Hi, Thanks again for the question, yes. So we have a we have our technology is able to work across different top providers.
And and we're not tied to any individual cloud provider.
That being said the answers cloud itself is running on Azure.
But we have the capability to run on any hopper like.
Got it and then maybe just a quick comment on PTC acquisition of on shape.
I mean anything in terms of your relationship with them on on Korea.
[noise] well I mean, I think that first let's see I think it's on shape is tremendous technology and capabilities from what we understand obviously were not in that space and we're not in that market. So I can't really I don't really have we don't have a formulator opinion per se and the technology.
But but from everything that we've seen its amazing technology, it's a great. It's a great it's great product.
And and certainly as it as PTC absorbed this I think they just closed the acquisition a few days ago as they absorb this will continue to have.
Discussions in conversations with PTC about about our relationship and how our relationship broadens to take into account whatever changes they may if.
To the portfolio.
But that being said PTC has an aggressive roadmap with respect to create simulation life. They continue to see traction the marketplace that we've talked about.
That I talked about that that Jim Heppelmann has talked about in his calls.
And they have a robust roadmap that includes that includes.
The next generation of CSL. So for example, I think in next year marches 2020 , they're going to expand to include Cfd use cases from where they currently are and that obviously expands the applicability of South Korea simulation lives. So we're very excited about about the relationship with PTC, we think that they're they're they're executing.
As they need to and and obviously, we'll we'll continue to discuss with them as as as they start to absorb the the that's true terrific on ship acquisition.
The next question comes from Tyler Radke with Citi. Please go ahead.
Hey, Thanks, Good morning, I was hoping that.
I would just expanded a little bit upon your commentary I'm seeing you know expecting strength here in Q4 in Europe , I think a lot of companies. If you called out kind of the opposite with some of the macro challenges, but is there is there specific end market or vertical you're seeing the strength I know you had a pretty.
Large deal with it.
Large automotive company over there I last quarter, you kind of expecting strength to continue from that market or is it or is it more across the board.
So where we yes. We obviously are my comments are based upon our understanding of our pipeline. So it's not it's not a general comments about macro conditions is very specifically about our pipeline. So perhaps our pipelines are different from other other vendors pipeline. So that might account for the differences that you are.
That you're pointing out that's point number one.
With respect to your second question about about you know as any particular area.
Again I my expectation is that we will see next quarter, along the lines of where we've seen a pass through in terms of the b the split across industry verticals. So we're not seeing a particular vertical.
Changed dramatically and it's highly unlikely that these changes are going to happen.
Month over month as we look at the end of Q3 two to stick to the early part of Q4 as you can imagine many of these customers who are in our pipeline for Q4 have been enough pipeline for some period of time. These are not new deals that come into the into the pipeline in Q4 and close in Q4, especially these larger deals and so we have pretty good visibility and.
Finger on the pulse of some of those deals we're not expecting any profound change in the industry verticals as we look forward to Q4.
Our next question comes from Mark Schappel with benchmark. Please go ahead.
Hi, good morning, congratulations on the on nice job in the quarter Andre question on our Dinardo I was wondering if you just provide a couple of a real world real World. Examples on how you expect customers to use the solution.
Hey, Mark Thanks, so much for that for the question. So so as I said dinardo is a is a.
Process integration in an optimization tool.
And their flagship product is something called Optus slaying, which is essentially a design optimization solution and so the idea is as a designer you can provide.
You can you can try to solve for a multi objective optimization problem. So you can stably should set us boundary conditions and use cases and you can you can you can used in order to drive the simulation to gets to an optimal point, where you're trying to get to with sensitivity reliability design capabilities and so forth. So you can drive that optimization.
And you can you can use off this line to be able to chain. These simulation lows.
So you can automate the design space exploration.
So effectively what it's allowing you to do is very rapidly chain together different elements different simulation elements solve for a point of optimization that you're trying to get to a in a market an automated way and that allows you to reduce development time.
Of course, it can accelerate product design. So that's the that's the that's the nature of the technology and and cost and.
Engineers will use it to try to rapidly get to a conclusion that they're trying to drive but it drives an enormous amount of simulation that triggers off an enormous amount of simulation in order to get to that to that design point.
Thank you.
Our next question comes from Adam Board with Stifel. Please go ahead.
Great and thanks for taking the questions I just had two quick ones first just it's great to see continued momentum with you called out three eight figure deals anyway to quantify the type of uplift you're seeing in total contract value of these deals versus you know these deals previously and then secondly, just on the motor CAD OEM relationship.
Really interesting what led you to look to OEM CAD software around you know electric motor design and are there other areas to OEM other types of CAD software as well. Thanks, so much.
Yes, so so with respect to.
Your first question.
Yeah.
Well, we can't give the largest account I would say double digit growth, absolutely, especially as we expand our footprint across more users and more application.
And with respect to the OEM, we've been Oh, we I mean in partnering not just with cats players, but with with many other technology companies throughout our history. As you heard LSD. She is an example is doing a partner of ours for 25 years.
And we thought others and the motor CAD design opportunity was just wasn't that that where we've got to use case scenario with common customers and it made sense for them to be able to leverage their technology and our global go to market.
Yeah, I, just sort of just to amplify what Maria said, I mean with motor CAD, but do a technology helps us in the electrification space and we talked about electrification of being one of the important growth drivers.
And they have developed upfront design capabilities.
That are in the area of electric machines and that integrated with our technology will really allow these.
Electric machine designers.
Two to two rapidly.
To be able to build the to build electric motors and machines more quickly. So to give you. An example, they can do things like fast thermal analysis from the front end. So it's it's a it's a it's a more so it's a it's a pretty sophisticated technology.
It couples electromagnetic thermal mechanical modeling capabilities, it's really designed for the rapid design and deployment of electric machines across these different operating conditions.
And what we can do is dovetail, our technology really nicely in our with what they have so customers can benefit from a more streamlined electric machine workflow.
Okay.
This concludes our question and answer session I would like turn the conference back over to management for any closing remarks.
[noise]. Thank you operator.
So our strategy, which is to make simulation pervasive is working as evidenced by another quarter of double digit revenue in HCV growth combined with best in class margins and continued strength across the business.
That coupled with the exciting opportunity to unite the incredible technology talent and customer relationships of Lses again, dinardo with our global distribution platform and resilient business model gives us confidence for the future.
Our continued focus on execution, our investment in the business and a healthy sales pipeline provides a solid foundation for us to deliver another year of record financial performance and they set the stage for us to execute against our recently announced 2022 financial targets.
I want to thank my answers colleagues from around the world for once again delivering these outstanding results.
And with that I'd like to thank you for listening and please enjoy the rest of today.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
[noise].