Q1 2020 Earnings Call
[music].
With us we have RJ, good <unk>, Chief Executive Officer ratios, SVP, and Chief Financial Officer lead the.
VP of finance at this time I'd like turn.
The call labor to Mr. <unk>.
Works. Please go ahead.
Good morning, everyone.
Our earnings release related prepared remarks document.
So our first whatever form 10-Q.
[music] age our Investor Relations website.
They contain the key financial information supporting data relative to our first quarter financial results.
As well as our Q2 and updated fiscal year 2020 outlook.
The key underlying quantitative and qualitative assumptions.
I would like to remind everyone.
In addition to any risks and uncertainties, we highlights during the course of this call.
Important factors that may affect our future results artist Scott.
Our public filings with the FCC all of which are also available via our website.
Turned out to be invaluable and are helping those run our business today.
We are continuing to pay all a salaried an hourly workers and we are not planning any job Max.
In fact, we are on boarding new employees remotely and provisioning dental work from home.
We have a number of open job requisitions and are seeing is wrong flow of candidates who are looking for the stability that accompanied like answers can provide.
We believe that are ongoing investments in our growing team put emphasis in a strong position to capture additional opportunity. Once this crisis is the better.
As you may recall from when we got in February we were expecting the first quarter and the first half the year to be challenging because it's tough Europa you're comparing.
Back to China sanctions.
Back and loaded full year.
Of course worldwide economic conditions worsened through March.
Nonetheless, I am very proud that that sort of execution by the answers team or revenue burnings and pretty much <unk>. One came in just about at the midpoint Oh God.
In Q1, we saw strength in a number of industry, including automotive Hi Tech and energy.
<unk> solutions to support the key initiatives of autonomy electrification and five g. continue to resonate with our customers.
For example in Asia, we'd games, a new three year contract with an existing consumer electronics customer to expand its usage about flagship multi physics solutions as.
As well as to expand into digital twins.
In North America, we close several large deals in the high tech in semiconductor sectors, including the they global hardware provider that agreed to standardize enhances displacing several competitors.
We also close to seven figured deal with new scale power to bring it small module a nuclear reactor design to reality through the power of simulation.
We were also able to forge new relationships organizations that have not previously used <unk> <unk>.
For example, we sign is seven speaker contract, but then you customer software motor company or S.N.C.
By using S. multi physics solutions supportive biases cloud S.N.C. is developing an automated work flow too rapidly design and analyze motors for use across industries.
Enhanced work flow can compress the weeks of simulation and months a prototype testing typically required for these virtually silent motors.
And cure one.
We deliver answers twentytwenty release, one and despite working from home, we will deliver our released to the customers in the summer as originally scheduled.
He's a major releases and include new capabilities across a multi physics product portfolio.
Oh products continue to receive recognition and accolades from our customers and partners.
For example industry leader T.S.M.C. recently certified as this <unk> S.C. next generation system on chip power noise sign off platform for T.S. embassies spent that process no.
This helps customers verify the power requirements and the reliability on ships for using artificial intelligence machine learning five gene and high performance computing application.
Similarly, Sampson foundry has certified be answers wrapped her age electromagnetic simulations solution for design using his new three dimensional integrated circuit packaging technology.
Chapter H. marries the best and class engines from <unk> wrapped her ex which we gained in last year's held like acquisition and answers flagship age of S.S.
Into a single chip back in system design environments.
Validating electromagnetic effects incense and Sweetie Assembly rafter, H. and powers designers eliminate it's critical points of failure and accelerate the rate of new technology adoption.
Where continue to look at opportunities to expand a portfolio <unk> emanate.
We recently clothes or acquisition of who americorps, which will enable answers customers to predict the behavior of light within complex Platonic devices.
True and assistance.
This is critical as five g. applications and autonomous vehicles are producing massive amounts of data, forcing organizations to handle even more information faster than ever.
Numerical products enabled designers to develop new high throughput optical networks by modeling the most challenging problems and protonix, including interacting optical electrical and thermal effects.
We were able to virtually onboard the low medical team and I'm excited to welcome them into our one asks family.
Oh, no like to discuss the answers business and explain it's <unk>.
The answers value proposition as compelling both in good times, and and tough economic times, because simulation helps a customer's drive both supplying revenue growth and achieve significant cost savings.
<unk> simulation customers can rapidly innovate.
Leave L.A. design ideas and improve cycle time.
This means that they can launch more of the right products and do so at a faster pace, which translates to top line growth.
In addition.
<unk> get help customers get more impact from type R. and D. budget.
By giving engineers the tools to evaluate multiple design options cost effectively and in parallel and by reducing or even eliminating the need for coffee physical testing.
That is particularly relevant during this global crisis, when some customers cannot get access to that lasted physically test products.
The compelling value and the mission critical nature of simulation is why customers continue to rely on answers even during periods of uncertainty.
It is important to know that the bulk of customers investments and simulation come from their research and development or are in the budget.
Already is the lifeblood of our customers, it's the key differentiator.
Our experience is that in tough economic times R. and D. is typically the least impacted by budget cuts and the first restored primarily because it drives future growth and market success.
We believe that this is a commonly accepted perspective and it just corroborated by studying the Harvard business review and by consulting firm Kinsley.
This ongoing investment in our Indian and simulation Intel Economic times is best illustrated it'd be automotive industry, where softening the men and worker safety concerns caused by the covert 19 crisis has forced manufacturers to shut down factory and cut budgets.
However, fold smog in general Motors, Honda and other automakers of public group reported continue investments that are the.
Especially in next generation technologies, such as autonomy and electrification.
If you recall from earlier discussions B.'s next generation technologies are exactly where ancestors didn't making strategic investments to both organic development and acquisitions.
And as soon as we continue to see investments and simulation by automotive over your hands and their supplies suppliers across geography.
Let me give you two examples from Q. too.
In Asia dense though.
Oh, one automotive supplier recently signed in three or multi million dollar deal to adopt as the solutions for automotive parts development for electrification and autonomy.
As well as for our platform technology.
In Europe or channel partner died a more recently instant important deal with a major automotive Oh, yeah for the adoption of L.S. diner per bushel crash testing, replacing it competitive product.
This is exciting news indeed coming just a few months after we close the acquisition abilities.
They also disgusted last year was Investor day, and this is a resilient model due in part to the number and diversity of customers we serve.
We have thousands of customers across multiple industries, including high Tech.
Conduct aerospace defense automotive industrial and energy.
We are well balanced across the geography is with about 40% of our business coming from the Americas.
And the rest split roughly evenly between Europe and Asia.
Diversity means that we can harness growth from a wide variety of sources.
And it also means that we are resilient the business or economic dynamics of any individual customer industry or country.
Furthermore, our sales channels are diversify with about 75% coming from a direct force.
With the remainder coming from channel partners.
We are very flexible in a licensing and consumption models and customers can purchase it perpetual license Elise license or a p. as you go elastic license and think consumer technology on premises or in the cloud.
We believe this diversity and flexibility allows us to reach and support a broad range of customers around the world.
No like two different color on the challenges by uses the spacing and how we're accommodating them and provide additional comments on the demand environments, including a perspective by industry in by geography.
It is important to know that our analysis of demand has already been factored into our cute too and pull your guidance.
Let me also cautioned that wouldn't be unprecedented market volatility we are all experiencing the man could change in either direction as the global situation continues to evolve.
We expect the most significant business disruption to occur in the second quarter when our teams.
And those about customers work remotely.
We are currently assuming a modest recovering the business environment during the third quarter as states and countries slowly reopened and business and consumer sentiment begins to improve.
We also assume business activity in customer sentiments will continue to improve it through the fourth quarter.
Comparing this period of disruption, but the pre coping environments, we expect different kinds of customers will be impacted in different ways.
Oh.
It is likely to be more challenging to close deals with brand new customers.
Primarily because of the difficulty in building new relationships and driving demand with new prospects remote.
Fortunately for answers over the course of our 50 year history, we have built a large and loyal customer base and so one new customers are important the majority about business comes from existing customers.
Second.
We expect larger accounts to perform more strongly than small and medium size buttons.
This is to our advantage as the majority about business comes from these larger accounts.
Larger customers have stronger liquidity in capitals position and we believe that a majority of then we'll be able to maintain their r. and b. cycles.
Contrasts smaller customers tend to be more sensitive to liquidity constraints and I'm more likely to delay purchases.
No one whoever that we believe government programs, especially in Europe will mitigate some of this risk.
Furthermore, during this period of disruption, we expect renewal raised to remain strong oh, the new businesses will come under incremental pressure.
Well the more during this period of disruption, we expect renewal raised to remain strong all the new business will come under incremental pressure.
We also expect customers superbowl leases over perpetual because of the smaller initial financial commitment to police.
And we will see the additional scrutiny given to large multi year contract, which could result in delays in signing up for have smaller commitments and we had previously expected.
This could introduce incremental timing uncertainty into our top line.
I've prepared remarks containing more comprehensive discussion of the attributes affecting our pipeline conversion and they're related impact.
[noise], well done backdrop or shift to an industry with you.
We are seeing little to no reduction in demand the high second semiconductor vertical which accounted for about a third of our business in 2019.
Many of these customers have deep pockets and are developing products against the multi or road map and they are not willing to let a few portions of uncertainties for them now.
Although companies enlarge markets, which is fine g. or in the global race for leadership positions within their industry and are unwilling to delay their r. and D.F. race and does see that future to a competitor.
Let me know moved to aerospace and defense.
We anticipate investments will continue for defense and military aerospace driven by long term government programs and we expect to see little to no reduction in demand for instance, technology and the vertical.
Commercial aerospace in contrast will be impacted on the short term driven by both pre covert challenges faced by some companies and by the dramatic reduction in passenger air travel as a result pandemic.
However in the medium to long term I believe this will be somewhat mitigated by the continued need won't true r. and d. initiatives that address environmental issues and government regulations.
[noise] it'd be automotive industry, although there has been widespread idling of manufacturing plant R. and D. is still receiving funding and that is particularly true for emerging solutions like autonomy and electrification were asked his plays a key role.
However, we're expecting to see headwins on more traditional r. and d. activities in the sector.
Given the need for competitive differentiation, we expect to see ongoing investment in new product introductions for industrial equipment.
Although we anticipate reduction in our in D. spending on existing products in this vertical.
The low price of oil is causing headwinds as the energy sector.
Fortunately this vertical accounts for a relatively small portion of pop it.
[noise], let me turn down to a geographical view.
[noise] relative to our expected performance of the geography is at the time of full last burning school, we believe North America. Both are the best.
North America has the largest installed base, a big enterprise customers and a number of these customers are are due to renew their leases some answers products and twentytwenty.
We expect a high renewal race for those leases and we also expect to attach new product sales manuals.
Part of North America customer base includes the good percentage of high Tech in semiconductor company and we expect there are Indian simulation initiatives to continue to receive funding.
Asian Pacific into the coping 19 crisis, a few weeks before the rest of the world.
We didn't see it initial reduction in demand activity there, but we're now seeing a return of the man.
For example, we saw China and Q1 stronger than we had expected and it continues to have momentum into too.
The high Tech in semiconductor industry remains strong throughout the region.
However, we do see some headwins in the more traditional automotive investments.
Heavy industrials.
We're expecting some disruptions in business in the media in part because it's headwins related to industrial in traditional automotive activities.
<unk> Park, because we saw some customers struggled with a transition to work from home model.
Still we see release coming in the form of government programs designed to help companies, especially small ones deal within your time financial stress.
With all these uncertainties, we're producing a full your revenue in a C.D. garden by mid single digits was the greatest impact coming cute too.
Maria will go through guidance in more detail.
Before I finish I would like to mention that we are preparing for simulation world are exciting you online conference that brings together simulations thought leaders and users from around the world.
Simulation World will feature a who's who have answers customers, including folks Haagen Motor Sports Baker, Hughes, Ericsson and Porsche Motor Sports.
Simulation World already has more than 10000 registers, demonstrating the value of simulation in the marketplace.
I'm very excited the this forum gives us a new and unique opportunity to generate the man for a multi physics portfolio.
Despite the uncertainties in the market, we believe that our strategy a pervasive simulation and the value that we deliver to our customers is more important than ever.
On strategy accelerates customers key research and development initiatives, which are not typically impacted by economic slowdown and we support critical emerging areas like electrification autonomy five G.N.B. industrial internet of things.
And the amount of proposition is compelling to customers both in good times and telling me comic times, because we can help our customers drive both top line revenue growth and achieve significant cost savings.
I'm confident in our ability to continue to drive long term grow.
And without continued investment in the business I believe we are well positioned to emerge from this crisis stronger than ever.
And with that I'd like to turn the call over to Maria to discuss a financial 61, and provide more detail around or outlook and assumptions for the remainder of twentytwenty.
Maria.
Thank you okay.
Good morning, everyone.
Again with their perspective on our first quarter of financial performance.
Then I'll also provide qualitative and quantitative color in context around their outlook assumptions for kids to.
The remainder of 2020.
In connection with our updated outlook I will encourage you to please review I would be earnings documents that we impose it to our Investor Relations website.
Before I get started I wonder if you take a moment to say thank you. So my answer is calling what Oh successfully navigating the work from home transition to enable us to continue to operate our business support our customers and should be able to me all of our financial reporting deadline.
Including all of the effort that have gone into supporting today's earnings call.
You are teamwork flexibility dedication in innovation has me personally inspiring.
And for that I, just want to say thank you.
Oh really taste more challenging customer demand environment in the latter part of March as compared to our expectations at the time, we provided or February guidance.
Financial results reflect stolen execution, which yielded revenue.
Operating margin and G.P.S.
Oh towards the midpoint of the guidance ranges that we previously provided for the corridor.
Are starting to here is very encouraging.
Considering the tough Q1, 2019 comparable in which we reported double digit rather than as well.
And the negative impact because like 19 wicked on global economy in the first quarter.
Okay financial metrics begin with Q1, H.T.V. 301 meal again.
82% coming from recurring source it.
And total revenue of 309 million.
I'm glad.
Currency exchange rates well within the range is that we provided with our first quarterback.
We close the quarter with a total balance of deferred revenue in backlog of $835 million.
<unk>, a 24% increase over last year's first quarter balance.
During the quarter, we continue to manage our business with fiscal discipline.
Which yielded a solid first quarter gross margin of 88% and an operating margin of 29%.
In line with our Q. when guidance.
Markings were positively impacted my slower pace of hiring them, we had planned.
As well as reduce travel incorporated then spending.
Nice talking and variances were partially offset my higher that that expense.
And that result, which first quarter E.P.S. 83 cents.
Which was slightly above the midpoint of our guidance range.
With respect to taxes are effective tax rate in Q1 with 19.5%.
And going forward, we've adopted in normalize effective tax rate approach for non gap reporting.
I'd expect are effective tax rate to remain it 19.5% for the full year.
Okay, well from operation totally $147 million.
And we ended a quarter, what the total with $718 million in cash and short term indefinitely.
Yeah mine with our capital allocation priorities, we purchase 690000 shares during the quarter and an average price.
$233 in 48 that.
We have 2.8 million shares available for repurchase under the current authorize program.
Against the backdrop ongoing bowler, Chile, and I'm certainly in the global markets.
We will continue to assess both our own financial performance as well as market conditions as they continue truly ball.
Determining when might be the most opportune time to reinstate any teacher share repurchase it.
[noise] read the combination of our current cash position.
The additional 500 million that we have available under our I'm drawn revolver.
And our projections for 2020 operating cash well, we believe that we have insulin liquidity continue to progress against our long term strategy.
Well at the same time remaining cognizant of the current environment.
Now, let me turn to the topic of guidance.
And this crisis has evolved 13 has created multiple scenarios to build out what we believe it's the most appropriate framework forgetting investors it for cooking view.
Yeah.
It's on everything that we currently now.
That'd be fun, because isn't very significant market and economic uncertainty associated with the close with 19 outbreak.
Arrangements for outlook or wider than those that we have historically provider.
Let me also bad it's the entirety of our guidance reduction really to the expected effect of the global pandemic.
Factoring in or Q1 result.
We are initiating guidance for two two and updating our revenue E.P.S.H.T.V. and operating cash flow outlook for the full here.
It's update reflects our craftiness for the remainder of the year as well as the minor contribution.
Miracle acquisition, we close on April 1st.
For the second quarter, we expect non half revenue in the range of 335 to 375 million.
Nongaap P.P.S. in the range of a dollar one to $1.33.
[laughter] outlook assumes that we will experience the most significant business disruption in the second quarter.
Based upon discussions with our customers and channel partners.
Anticipate delays in the timing of closing certain transactions.
And in particular larger enterprise skills, maybe especially challenging.
We have also soon but some customers will delay certain purchases until later in the year.
Oh, the poor here, we're updating the revenue and U.P.S. outlook.
I'm Gaffer Avenue in the range of 1.555 billion 1.630 billion.
Or constant currency grows up to 7%.
E.P.F. in the range of $5 in 60 ones, then just $6.23.
We are also updating or full year A.C.B. outlook two range of 1 million 500 million 1.575 billion.
This represents constant currency H.T.V. growth in the range of 3% to 9%.
With respect to the remainder of the here, we expect a modest recovery in the business environment and kids free as employees, we turn to work and businesses begin to resume operation.
Our car assumptions anticipate a stronger recovery in the fourth quarter.
By a combination of sales transaction. It may have been differed from earlier corners.
On the sales outlook for more time year leases that are currently forecasted to close in keen for.
With respect to annual operating cash flows.
We're updating our outlook for 2022, a range of $425 million to $470 million.
This is reflective of our updated for your H.T.V. revenue and profitability estimates.
We have also factors into our outlook and incremental 10 to 20 million of customer payments.
Otherwise been made in 2020, it may be delayed into 2021 as a result.
Ended payment term request on new contracts.
And delayed payments on existing contracts.
Modeling purposes, we're expecting second quarter operating margin 33, and a half just 39%.
And for the full year, we expect operating margin in the range of 40% to 42%.
These targets for reflective of our adjusted spending plans for keeps you and the remainder of the year.
They include a slower pace of hiring and reduced discretionary spending.
As well as decrease spending on certain non critical facilities and infrastructure projects.
On the other hand, we will continue to invest in certain digital transformation projects such as our local C.R.M. in H.R.A.S. initiative.
These projects are critical elements in building the foundation to efficiently operate and scale our business over the long term.
Further details around specific currency rates and other quantitative and qualitative assumption that had been factor into our outlook for Q. too and 2020 are contained in the prepared remarks document.
In our effort to provide greater insight and transparency to investors. We've added additional commentary chore prepared remarks, inform 10, q. specifically related to the impact of cope with 19.
And the caviar I will remind everyone. But this information is based upon everything that we know as of today.
And given the uncertain and unprecedented environment that we're operating under.
Our assumptions are subject to change.
Our car expectation as reflected in our updated financial outlook.
Is it there will be a delay in business.
With an adverse impact on our Q2 until your results.
Beyond the points that aren't you mentioned earlier regarding the various elements that have contributed to the resiliency our business model over the long term.
[noise], probably financial perspective, I also like highlighting or high level of recording a C.D.
Historically stable, we know rates for both leases and maintenance.
And the strength, our balance sheet and operating cash flow.
We are trying to be as transparent as we can and appreciate it you roll stinking information details in perspective on our future outlook.
We tried to take into account the uncertainty, particularly around the timing of larger enterprise skills.
We also trust you will appreciate if there is no certainty in our assumption and the things will continue to evolve and change in either direction.
Depending on how long this situation continues to negatively impact global economy.
Customers sentiment and purchasing decisions.
As it has since this global pandemic first began into one.
We will continue to remain focused on the things that we can control.
Trying to strike a balance between short and long term strategic initiatives that we believe are critical to our long term success.
In closing, we're very fortunate to start the year with solid first quarter financial an operational results.
Being able to deliver when R. Q1 financial commitments, despite the extreme volatility.
Is a testament to both the resiliency Oh, the answers business model.
And to the collective effort and dedication of the broader answers eco system that includes our employees customers and partners.
As we just go ahead, we remain committed to invest in our business and to continue to execute against our long term strategic priorities.
Our focus and commitment to the long term.
Lined with our best in class product portfolio.
Longstanding customer relationships and resilience business model.
Give us confidence that we will emerge from this crisis.
Better position to capitalize on our long term growth aspirations.
Operator, we will now open the phone lines to take question.
People are now begin the question and answer session to ask a question you wait for star than one on your touch tone food, if you're using a speaker phone. Please pick up your headset before pressing the keys to withdraw. Your question. Please press started then too we currently I see you. Please limit yourself to one question at this time real paused momentarily.
To assemble the <unk>.
In our first question today comes from J.V. slower with gripping Securities. Please go ahead.
Thank you a good morning, everyone I shape for you let me ask it longer term question about where you and me at your favorite software industry ongoing as though coded did not exist, maybe where you and your peers seems to be going on or off to go over the next task.
Eight or more.
So the question is there seems to be at age 50 into arms race going on among engineering software companies in terms of their underlying architecture some data platforms.
As their future.
Architectures.
You have the nerve P.T.C. recently alluded to Atlas or the best cause forage and so of course, there's three D.X. So the question is how are you thinking about the the long term impact or importance to you in terms of maintaining or gaming share from this new architecture that you have.
Are there any extra tastings in terms of your moving from a highly discrete deliverable schedule as he just alluded to earlier remarks to more of a continuous flow Oh deliverable spoke with time and.
And then secondly, the question has to do with a with Kobe beef and at the risk of extrapolation are there any attributes of the business that you think might go on indefinitely or or that you would have to think about doing more on an ongoing basis for example, investing more in inside sales.
Potentially even immediate store <unk> or in some way all train or or doing things differently with too many partners like Microsoft Rockwell et cetera.
Yeah.
So j. that's a long question, let me try to address that.
Address the second part first and then I'll get the first part with respect to with respect to be be What'd, you do in a in a covert world.
You may have as I mentioned in my comments, we have a a very large event simulation world that we're running on line and that is I think one of the largest it's not the largest simulation event online and we have a number of speakers a signed up for that we have I think over 10000 people.
Who haven't registered and the month is the bottom and do business about a month away. So there's a lot of interest in the technology and the capabilities and obviously, we're driving demand from online events to excuse me from in person events to online events with with respect to a partnership relationships, we continue to drive on relationships, but partners and.
With our customers M.B.M.B. importance of what we do together his roommate remains unchanged with respect to the first part of your question. The long term view of of our industry. I think it's important to know that ought to be industry, where answers lives, which is simulation. We believe is the most important aspect the customers of dealing with.
They're being needs simulation in order to be able to validate the design of the products to be able to design the products. Some of the other companies that you mentioned are in other parts of the end to end ecosystem wearing the simulation space and we believe that this is an extremely valuable parnaby into an ecosystem, it's something that customers do need now to your point about platforms.
Look you know I think that there are that there is some in the industry, who believed that you need to have you know a single monolithic platform, which is a single source of truth, an ideal single vendor are modeling environment. We don't believe that's the case are strategies completely open we believe instead in an authoritative source of truth, which is.
Ecosystem of opened Federated and purpose built domain specific solutions and we participate in that I think that's a much more realistic way of addressing the digital transmission neat skill, it's not about picking one platform and mocking a vendor are looking a customer into political platform, it's vendors like ourselves.
Playing in an open environment, recognizing that we need to be in a position to support our customers as they understand how to create these complex products in future.
And and you just one thing no option that is as you spoke about as we think about our own business and how are models will transition or ways of interacting with customers that is the primary reason that for the past several years, we have been aggressively investing.
On our own digital transformation, so that we can enable automation and and feels they spot forms that will allow us to efficiently scale. Our business from you know 2 billion to 5 billion N.B.U. on so that is the primary driver of why we've been pushing.
So much of our own digital transformations.
Thank you okay.
In our next question comes from Pinball with you could could please go ahead.
Great. Thanks, Thanks for taking my question goes so I just wanted to I guess touch on a couple of climate you guys made so in the prepared remarks. He goes highlighted not seeing any material impact on your business Cove at 19, and then also Maria when you talked about guidance that it was based entirely on just how it relates to <unk>.
It affects the the pandemic. So it it seems to suggest that you guys currently aren't exactly seeing any erosion to your business I guess I want to yeah, maybe dig into that a little bit make sure I'm understanding that correctly in terms of how your forecasting and then to the extent that there is any any concerns well in terms of the Lord Guy. That's just wanted to understand kind of what's.
Coming from maybe just pushed out good deal and maybe what is coming from contraction you know potential contracts that you guys are looking to renew or sign.
Q.
So can I just to clarify I think you you need to to take a look at prepared remarks again, what we sat is we didn't see a material impact only into one so if you look at our Q1 results.
They came all of the key metrics came in at at basically the mid point or a little bit better than what we had forecasted when we gave guidance at the end of February now that being sad when when we gave that guidance.
We were we were basically assuming that cope with 19 with somewhat limited to China, and perhaps South Korea, but just like everyone in the world as large progressed things got progressively worse as this really became a global pandemic. So as a result of that you know.
Toughest change in the past six weeks and so that is why we've modified pull your outlook, which which now does factor in what we believe is an email on gated impact from 19, the most dramatic being too too.
[laughter] God and then in terms of what kind of go bad impact is coming from any any sense of it that again, it's it's more about customer pushing out stuff.
It's a reduction in H.T.V.
Customers, I guess kind of bringing in deal size or.
Not catching as many new products are just trying to understand kind of where the where the softness is coming from in terms of the outlook.
Oh, So I'd say, it's it's a combination of yeah deals being pushed out as our customers are are dealing with their own responses, but I'd say, probably the majority of where we're seeing it are particularly too too is that the S.N.B. level.
So in in two aspects.
Oh small or medium business two aspects one some of those customers that traditionally were paid up customers.
Are shifting towards taking a look at annual Lisa's just because their access to capital is a little bit more constrained in this environment.
And then just in in certain cases, they're just delaying so so as we modeled as we've worked with our field teams. We believe the largest impact we're gonna feel across the business is cute you and if you recall when we fill our outlook for 2020, even before <unk>.
We were we were assuming a very back and loaded you're just because the timing of when those multi year leases were scheduled to renew largely getting too for around customers year round purchasing cycles.
Great. Thank you for the code.
I know next question comes from Jason So either with tea bag capital market. Please go ahead.
[noise] hi, Thanks for take my question. It's good to hear from everyone. You know Maria can you maybe go into more details about.
This you get you mentioned multiple scenarios in your guidance can you just frame the the low end and in the high end.
So so yeah. If you look at for the full year basically we've reduced you know to revenue now we're at at the low when.
2% and if the high end seven per cent and constant currency, we ran a variety of scenarios and and if we also used you know what what happened to our business and in 2009 as a nother illustration Oh a.
Global economic shock and based on everything all the scenarios that we came to we believe that the curtains guidance that we provided is is a good proxy for where we will end of year and I will caviar that by saying that's based on everything that we know today.
She was things.
Transition either way improve.
Quicker than than we've we've estimated or or unfortunately, detract, we will continue to as as the rest of our software peers.
That's our business every single day in every single week work our way through it and then as we as we execute you. We will give you a fresh update all of the data that we've collected during the second quarter.
Okay, and if you like you ask one quick follow up you know the perpetual license decline of 20 per cent in the corridor. Maybe can you talk about linear narrative that maybe how January and February were compared to you know the wider end of the quarter.
Oh, yeah, so what I'm, saying is you know the the if you look at the linear already have any corridor.
The third month is always the the largest volume for leases unpaid up so relative to to the the decline in paid up.
Shouldn't come as any surprise because if you think about in large impact on the business thinking one was the Kobe situation in China and China today still is largely it paid off market. So when when we see pressure on the business in China, you'll also.
See it reflected in in the results into paid up.
Paid off line.
Great I I appreciate the color. Thank you.
In our next question comes from that K. Calia with Barclays She'd go ahead.
Okay, Great Hey, Thanks for taking my questions here, guys and and also things by the way for the detailed guidance. During this in certain time, certainly not everybody's doing that so one of their knowledge.
Maybe maybe first for you Maria you don't and I think you touch to listen to prior question, but just to African expressly clearly we've seen more of a shift police contracts in this environment versus perpetual for a range of reasons, but I'm wondering what you've seen on contract terms and and how are you thinking about that much.
Died this year or so so specifically or or your least customers still largely opting for multiple year contract or have some maybe opted to shorten that and given given the current environment.
Oh, sorry, what I'm, saying is if you think about our customer base, you should really kind of bifurcated at the enterprise level.
We are still see our large customers thinking long term because r. and D. is really a long term investment and so a an example that O.J. spoke to in in his remark is Jens though.
Very long standing customer that just entered into a three year multi year lease.
We're we're really seeing the biggest dynamic right now and and what we've built into our outlook for 2020 is that at the small medium business level that those customers are probably and and we're seeing some of this going to choose an annual.
Police versus a paid off just given the current economic environment and their access to capital, but I will also just comment that today. The majority of our leases are still annual Lisa that transition to multiply your leases has really been the journey.
At the enterprise and strategic level, because that that that customer tends to think longer term and then then perhaps smaller businesses Joe.
Got it the three helpful. Oh Gee, maybe a quick follow up for you you don't understand that that that you've already given the guide for key tune the full year, but you know well of course, that's being out from a lot of companies. Here is just obviously the end of March was a very dramatic time, let's say some companies I've seen a a little bit of it bounced back.
In the month of April can you talk qualitatively of course to to sort of how activity levels have been here in the month of April at all.
I I think it's I think it's important to recognize that when you. When you think about the actual many hours he was going to be quarter of our business. Most of it is back in loaded.
So leave earlier part of the quarter, there's a lot of customer activity in terms of meetings and and things of that nature, but in terms of actual cause contracts that starts to come in towards the towards the third month quarter and and what we're seeing in in April 4th is as customers would transitioning to work from home mom.
Oh, there was obviously some disruption I I would say March with people with thinking through the transition process and trying to make sure that they could get their but today, we're seeing a number of our customers working from home. Our teams are effectively working from home. We can engage a a lot of the challenges are around being able to do things like damn demos and so on in our case organization, which my second call.
Oh, Oh customer facing organization is able to deliver those demos and those capabilities. So we feel we feel very confident in our ability to continue to support our customers that they work from home a and b. activity levels that we're seeing a consistent with that.
[noise] very helpful. Thanks, guys.
And the next question comes from Andrew Degasperi from third grade. Please go ahead.
[noise] hi, Thanks for taking my question I guess in the first I wanted to look at a long term picture.
When it comes to the physical poodle typing and how that potentially transitioning into their current conditions have you any seen engagement from some of these customers or any type of discussions with them that might indicate here that this sort of transmission might accelerate.
Well I think there are too there are two.
There are a couple of things that I think of what sharing number one is that some customers are not able to access physical labs or were not able to access physical labs.
And as a result of that physical experimentation is suffering and obviously simulation does not require you to access the physical lab you can do all your work on the computer and you know you know work from home scenario. So that is that is clearly swings away from physical testing two words more simulation activity in that that's obviously.
Tail, one for us and that's that's helpful.
The other thing is and and I think this has been very well established part of the value proposition what part of the value proposition of simulation is is really being able to address cost and in particular, you can reduce the number of physical prototypes and you can test in parallel instead of.
Utilizing a sequence of events or can test a number of things in power on the computer and the fact that you can reduce costs is a isn't important driver and again in b.'s topic. It on the times people looking to reduce costs and that again is a is a good guy detailed infer simulation.
So so I'm I'm I'm pretty excited about I'm pretty excited about those dynamics.
Another point I'd I'd actually like to make which is which is kind of interesting is is we we've been able to.
Liver that's unique situation in this pandemic as we've been able to deliver a number of you know simulation based inside too odd to out there that people have been using our technology to come up with ideas or assessments of things like social distancing the creation of P.B.E. the creation of medical drop a creation of medical devices.
A lot of that as being done because of the speed of the reason pace at which of his work is being done. It was unexpected a lot about work is being done through simulation as well and that that also demonstrates the effectiveness of simulation I do starting to think about be agility that we can bring to bring to bear.
Yeah. Thanks for that for me on a follow up I mean can you may be help us think through your M.N.A. strategy at this stage I mean, I know you're not to hear longterm plan at all but has the current crisis sort of change your thinking around that in terms of you're making.
Well I I think I think it's it's really very premature to talk about you know M.A. exactly what the long term implication on it I mean, it's gonna be obviously, we continue to we can then you'll have a pipeline of customer off up provincial companies that were.
Anyway and.
We.
And be you know.
<unk> <unk> customers I mean, if those companies if you look at what we did with the acquisition Americold. We we just close the loop I recall a couple of you know a few weeks ago. During during the lock down period, we were able to on board, albeit employers remotely.
But we continuing age with potential acquisition targets, we'll see what happens as as the as the situation place though.
Very helpful. Thank you.
Yeah.
In this little couldn't create a question and answer session I'd like to turn the conference back over to assure you go.
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[noise]. Thank you very much so I'd like to close by saying that while there is uncertainty in the market I know the answers has the right team the best products in the market and strong customer commitments.
With our investments in infrastructure and collaboration technologies, the special accommodations for our customers and without continued fiscal discipline I believe the answers as well positioned help our customers. During this critical time.
Well into the future.
When this crisis is the beta I believe that we will emerge an even better leadership position to make simulation pervasive across a product life cycle.
Might do again acknowledge are more than 4000 employees around the world, but managed to grow a customer base in support our existing customers. During these challenging time. Thank you all so very much we are one answers.
And finally I'd like to encourage all the few to join US online and simulation World June 10th and 11th you can find more information and registering the answers website, oh by going to simulation world Dot com.
Thank you for joining the call be safe and enjoy the rest of is that.
[noise] recovered there's no concluded. Thank you for attending today's presentation. You may now disconnect realize at the time and that's great.
Oh.
[noise].