Q3 2020 ANSYS Inc Earnings Call
Ladies and gentlemen, thank you for sending pie and welcomed to answer third quarter Twenty-twenty earnings conference call with US today are all should go Paul Senior Executive Officer, Maria Shields S V P and she financial officer.
Sure.
[noise] Rebus senior director.
Global Investor Relations at this time I would like to turn the call over to my service for some opening remarks.
Please proceed.
Good morning, everyone. Our earnings release, the related prepared remarks document and the link to our third quarter form tank you have all been posted on the homepage of our Investor Relations website. They.
They contain the key financial information and supporting data relative to our third quarter financial results in business update as well as our queue for it and updated fiscal year 2020 outlook and the key underlying quantitative and qualitative assumptions.
I would like to remind everyone that 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 SEC all of which are also available via our web site.
We note that the impacts of the COVID-19 pandemic on our performance could cause actual results to differ materially from our projections.
Additionally, the companies reported results should not be considered an indication of future performance is 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 asked US undertakes no obligations to update any such information.
During the call and in the prepared remarks will be referring to non-GAAP financial measures unless otherwise stated.
Discussion of the various items that are excluded and a full reconciliation of gap.
With a comparable non-GAAP financial measures is included in this morning earnings release materials and related form 8-K I.
I would now like to turn the call over to our C. E O R. G. Gopaul for his opening remarks J.
Good morning, everyone and thank you for joining us Q.
Q3 was another strong quarter for answers meeting or beating up financial guidance on all key metrics.
Performance demonstrates that a core value proposition of helping organizations increase that top line, while driving bottom line savings continues to resonate with the market.
I'm excited that the demand for emphasis multi physics solutions is strong and growing and it's bothering a strategy of making simulation pervasive across the product lifecycle.
Based on a year to date performance and the strength of all pipeline for the fourth quarter, we are increasing both behind and the midpoint of what 2020 guidance for a C V revenue and E. P. S.
Maria we'll have the details in a few minutes.
All prepared remarks documents has details about the quarter, but let me provide some regional perspective.
We anticipate to be America's will be our strongest reason for the full year from.
From a poorly perspective Asia Pacific was strong in Q3, with Japan, leaving the way, reflecting our ongoing progress towards multi physics multi year lease deals.
We expect immediate a show good growth in queue for driven by the timing of larger deals.
During Q3 or enterprise and strategic account programs continue to show strength with approximately 50 per cent of for Q3, a C V coming from a top 100 customers.
I'm excited that because the five year 72 million dollar lease with a north American enterprise customer.
Ah largest agreement in the quarter and the second largest in the history of the company.
This deal results in a C V and revenue in Q3, and primarily in Q4 and comes after the almost $100 million sales, but we announced last quarter.
We still continued headwinds this quarter with small and medium businesses across geographies consistent with what we have previously communicated.
From an industry point of view, the high Tech automotive and ground transportation and aerospace and defense sectors continue to be our strongest performance with a full year.
Oh, no path calls I have given some additional color, Iran particular aspects of our business today.
Today, I will discuss our successes in the aerospace and defense vertical.
A N D is answers the second largest sector at about 18% of our trailing 12 months a C V.
Although the pandemic is impacted commercial air travel, we continue to see spending in the sector. Thanks to important strategic initiatives.
These include eco friendly fuel efficient engines.
Space to do two initiatives, such as rocket design and satellite deployments.
And National Defense.
I would like to highlight two important Q3 deals in which companies will use Edison simulation to develop equal friendlier aircraft engines.
These companies are relying on S as to improve engine efficiency reduced engine weight and avoid fuel inefficient overdesigned.
The first agreement was with Honeywell, which is using as a simulation to automated engineering workflows to maximize operational efficiency and drive process improvements.
As a result, Honeywell will benefit from product wide crease ability and reusability, while significantly cutting development cycle times.
The second was with a major aircraft engine manufacturer that is investing $34 million over the next five years to standardize on answers to achieve its vision of developing next generation engines at lower cost.
Space to auto companies are democratizing space by launching satellites and astronauts into orbit and they are embracing the use of stimulation to develop better products and to make smarter decisions faster.
Firefly aerospace one of the more than 1000 companies that have benefited from the answers startup program.
Recently announced that it is realized about $15 million in savings from using our simulation for critical tasks, leading to a design that can withstand the extreme conditions of liftoff flight and space travel.
We are seeing ongoing investments in multi physics simulation by government agencies and defense contractors, which are trying to solve next generation problems in the interests of national security.
These organizations are turning to answers because the thought simulation leadership in advance multi physics capabilities.
In Q3, we saw investment from a large north American defense contractor for the design of an advanced aircraft optical sensor.
To help calibrate censor algorithms to reduce noise and blurred us due to high speed airflow, our team developed and deployed a fully coupled arrow optical solution.
This competitive when was possible not only because of instances multi physics leadership, but also because of the unparalleled accuracy of our products.
And is this simulations eliminated eight weeks of testing for the company lowering test costs by 60% and increasing engineering productivity by up to 15% using the new work flow.
We signed another multimillion dollar Q3 deal this time with a government agency to us answers to design chips that are more secure.
This organization is relying on an important multi physics breakthrough by answers R&D and which simulation can be used to help chip designers prevent hard to detect slight channel attacks.
Specifically, the new answers offering which is deployed and runs on the customers secure private cloud.
Enables ship and system designers dissimulate and measure their vulnerability to security attacks, while the chip is being designed.
As an aside this organization was amongst the first customers to serve the needs of its users and prime contractors using and answers private cloud.
That is answers products deployed and running on a shed secured infrastructure.
Let me move from customers to acquisitions.
Last week, we announced our intend to acquire a G I, a pioneer and leader in the analysis and simulation of missions, such as satellite launches National defense and search and rescue operations.
And this has not traditionally participated in this area, which is growing due to the increasing number of missions.
Historically customer needs with partially addressed by commercial software with multiple applications all by in House Kohl's.
A G. I has a purpose built solution for mission analysis, and simulation and has become a leading firm in this area.
Products on the latest and highest performance compute and networking infrastructure available in the market.
Furthermore, ansys cloud supports flexible consumption models lowering the barrier to entry for customers.
These include.
And elastic pay as you go model that gives users fast access to answers products and high performance computing infrastructure and Azure for greatest convenience.
A bring your own license model that allows customers to use their existing answers leased licenses, thus preserving their existing investments.
Team of dedicated employees and channel partners.
Our compelling value proposition of helping customers to decrease costs, while spring topline growth continues to gain traction in the market.
Those factors.
Combined with our close customer relationships the power of Ansys products and the strength of our pipeline gives us continued confidence as we work to deliver against our objectives for the remainder of 2020.
I hate to be a 305 million of which 78% is coming from recurring sources.
This is a new record for Q3 with respect to both total HCV.
And the percent that is attributable to recurring sources.
Q3's results reflect the continued trend in strong lease sales that we've been experiencing throughout 2020.
With a 10% increase in lease license revenue.
This combined with high renewal rates on maintenance contract contributed to building, our deferred revenue and backlog to a Q3 record total of $880 million.
35% increase over last year's comparable balance.
The solid top line results combined with our focus on fiscal discipline helped to drive third quarter gross margin of 89% and.
And an operating margin of 39.8%.
Which finished above the high end of our Q3 guidance.
In line with the plans that we communicated last quarter, we continued to manage our business at reduced levels of discretionary spending.
Particularly in the category of business travel and entertainment.
A G I acquisition from our updated guidance.
Because the closing date is not certain.
To the extent that the deal closes in the fourth quarter as we expect.
The impact on our non-GAAP financial results will be immaterial.
Now, let me move onto the specifics of our outlook.
Q for we expect non-GAAP revenue in the range of 542 to 582 million and non-GAAP EPS in the range of $2.36 to $2.67.
For the full year, we are increasing our outlook to nausea for Avenue in the range of 1.610 billion to 1 million 650 million.
Your constant currency growth in the range of 5% to 7%.
And E P S in the range of $6.90.
Two $6.40.
Three 7% of the purchase price and catch and 33% and answers called the stock.
We expect to finalize closing later in queue for.
With respect to 2021, we expect the deal to contribute an additional 75 to 85 million of non-GAAP revenue.
And then it will be modestly accretive to non-GAAP EPS.
This acquisition is yet another milestone in our continued deployment of capital to grow and expand our business and our leadership in this exciting and growing market.
Operator, or now I'm ready to open the call for questions.
And so all of that is what gives us the confidence and and the increased outlook.
We put up this morning.
Great. Thank you.
Next question comes from 10 long Google.
<unk> security <unk>. Please proceed.
Great. Thanks for taking my question.
Oh Maria.
Maybe to put a final point on what what time was asking just wondering did you guys see anything in the underlying Kpis that gave you this higher confidence in terms of whether it's pipeline conversion sales cycles shortening an uptick in new business just from our end of you know with with the macro still a little sore.
Would just love to get a sense for kind of what do you guys see internally that gives you. This this elevated confidence.
Yeah.
Yeah.
Yeah.
You know.
Yeah.
[laughter].
When it comes to these free.
Nah.
In a way a professional model the reality is.
Customers need to to make sure that we close.
Yeah.
To the technology, that's critical too.
So.
Visibility.
Only relationship and.
Nature of what we provide to our customers.
Continue to give us confidence that we've got a strong pipeline.
That's gonna be.
But finally, the largest quarter in the company's history.
Original execution suspect.
Just to add onto a verdict.
If you look at Q2 for example, we closed.
The largest deal.
History of the company, while everyone was working from home.
At a time when I think people had a much more bearish view a P.
Situations.
Becoming something that you're seeing.
A key theme as Youre getting these deals across the finish line.
Backlog in combined backlog and long term backlog and the revenue is far more than than.
Revenue growth in the quarter. So just curious if you're seeing lengthening contract terms from all areas of your business.
Yes.
Say again.
Five.
Deals.
Our our still an anomaly and what I'd say is if you look at the particular customers that have decided to extend the five year deals some of them are already too.
Michael into these leases these multi year leases.
So they've got a lot more confidence and they also tend to be in in verticals, where the product lifestyle life cycles are much longer and they've been using simulation for much longer than some of the the customer. So the combination of all those factors.
This is whats really driving them to have the confidence to extend the term so that that they can plan accordingly, and we can work with them on successful deployment.
Particularly new technologies that they're trying to rollout across across their R&D teams.
Okay. That's helpful. Then just a quick follow up.
Given the the election session everybody's minds.
Funny, and we didn't spend a lot of time going back and trying to recreate what they are they're GAAP results would look like.
They were growing they were profitable and absolutely. We are very excited about the opportunity to extend our presence in in aerospace and defense, particularly as you think about over the course of the next decade, where a lot of that spend is going to be.
I'm coming from I mean, the amount of investment that the private sector is putting into space is incredible.
Kind of larger contract is signed thank you.
No I don't think there's.
There's a one size fits all that you can really apply to these deals, especially when you're dealing with larger customers.
Using multiple product lines.
Hi, Susan this I cannot tell you on a one size fits all because it's very it's very bespoken a case by case basis.
That's perfect. Thank you guys yet I appreciate it.
Our next question comes from.
<unk> <unk> Uh-huh hour.
Griffin Securities J. Please proceed.
Yeah. Thank you good morning, Uhm <unk>, starting with you a.
<unk> G question stemming from your conference back in June simulation World and then more recently the semiconductor conference and then time that into the Hei acquisition. So there are a number of references that your events that got my attention having to do with what were described as answers domain specific.
Yup locations in industry solutions and so the question is should we expect more and more overtime more explicit dedicated domain specific applications. Our industry solutions as commented on at at your conferences, and then tying that into a G. I.
Much more effectively and rapidly integrate these solutions for these technologies together to address the needs of customers and so you're starting to see some of these domain specific solutions being made available because.
It's just so much easier to be able to integrate our technologies together to create a multi physics capability. So absolutely you should see more of that <unk>.
The side effects of that is it becomes easier to integrate accurate quite technologies into our portfolio as well.
The second part of your question with you made the observation that mission.
Mission of simulation.
And.
And connecting that with component level and since the level simulation you made the observation that there may be other use cases other than space.
And satellites and the and the answer of courses.
Yes, yes, certainly on the use cases of one could imagine telecommunications for example, five G infrastructure you mentioned autonomous vehicles. These are all potential future opportunities.
That we would have to explore to evaluate whether those would be opportunities for us to engage with.
With respect to the hiring comment when I stand.
You know.
Against our our plans.
Early in the year when.
Began to impact the business.
And with the recent extending lockdowns in a manner and in certain parts of the United States, We just think theirs.
Volatility and uncertainty that it makes more sense for us to continue to be pregnant and are hiring and.
Things that are not critical to the long term success.
The business.
And and Additionally, as we think about you know Q for our plans.
To to go ahead and clothes, a G I, which will add you know a couple of hundred new employees into into the emphasis family. So I would think much more certainty around the the pace of recovery in in the overall global economy Wood.
What makes us much more comfortable to perhaps return to a more rapid pace of investment as you saw perhaps a 2018 or 2019 like right now I think it's a little bit too early for us to pull the trigger on more increased investment particular in the <unk>.
In their own data centers are in private clouds and.
And our objective is to make sure that our technology is there it's available and ready to go and as and when the customers are ready, where we're able to support them with as well.
That's great and maybe just a quick follow up the Maria.
Just the housekeeping could you just comment and I'm, sorry, if I missed it but could you comment on the inorganic contribution for both revenue and ACB not just for this quarter, but expectations for Fourq you. Thanks, so much.
Yes.
For Q3 in the first nine months.
Thanks Stan.
And for the full year, Adam it's about 5%.
Excellent. Thank you thanks again.
Got it very helpful. Thanks, guys.
Thank you.
This concludes our question and answer session I would now like to turn the conference back over for any closing remarks.
Thank you operator, as I think about the remainder of the.
I'm excited by our continued execution.
First customer base and a strong pipeline.
Our customers continued reliance on simulation and our ability to growth too close large deals mostly only add so that excitement had confidence.
In closing I would like to express license Yo gratitude to our customers and swap partners for their continued support.
And a special thank you to my answers colleagues around the world. You'll work continues to inspire you have my gratitude for delivering another strong quarter.
Thank you everyone for joining the call today. Please enjoy the rest of the day.
Okay.
The conference concluded. Thank you for coming to this presentation you may now disconnect.