Q2 2021 ANSYS Inc Earnings Call

[music].

At this time I would now like to turn the conference over to Mister Brian for opening remarks. Please go ahead.

Good morning, everyone. Our earnings release, the related prepared remarks document and the link to our second quarter form 10-Q have all been posted on the homepage of our Investor Relations website. They contain the key financial information and supporting data relative to our second quarter financial results and business up.

Date, as well as our 2.3 and updated fiscal year 2021 outlook and the key underlying quantitative and qualitative assumptions.

Today's presentation contains forward looking information important factors that may affect our future results are discussed in our public filings with the SEC all of which are available on our corporate website. We note that uncertainty regarding the impacts of the COVID-19 pandemic on our performance could cause actual results.

Else to differ materially from our projections forward looking statements are based upon our view of the business as of today and Ansys undertakes no obligations to update any such information.

During this call we will be referring to non-GAAP financial measures unless otherwise stated a discussion of the various items that are excluded and reconciliation of GAAP to the comparable non-GAAP financial measures are included in our earnings release materials.

I would now like to turn the call over to our President and C. E O R. G.

<unk> Gopal for his opening remarks.

J.

Good morning, and thank you for joining us Q.

Q2 was another excellent quarter for answers, where we significantly beat or financial guidance across ball R key metrics.

Particularly pleased with our ACB performance for the quarter, which grew at nearly 23% in constant currency.

[noise] Ah growing momentum from Q4 of 2020 and the first half of this year gives us increased confidence in our business and in our ability to execute against our goals.

It is also further validation of our strategy of pervasive simulation, whereas simulation is used throughout the product development process by engineers in every discipline.

That strategy combined with a best in class Multiphysics products, a comprehensive go to market approach and a deep and lasting customer relationships has paved the way for a consistent success.

The COVID-19 pandemic continues to evolve with the uncertainties of the Delta variant, making headlines around the world.

Despite these uncertainties our customers are continuing to invest in innovation R&D and product design to drive their future successes.

As such we are continuing to see demand for Ansys simulation increase in the marketplace and our pipeline for the remainder of 2021 is strong.

As a result of that continued strength and our track record of execution. We are once again, increasing our annual guidance for a C V revenue EPS and operating cash flow.

Nicole will provide more details and just a few minutes.

Looking at Q2, all our major Geography's performed well would be America's leading the way.

I'm very proud of our team in India, which came in above our internal plan. Despite challenging COVID-19 related conditions in the country.

From an industry perspective, hi.

Hi Tech in semiconductors.

Aerospace and defense.

An automotive and ground transportation, where our top verticals.

We also saw ongoing strength with our enterprise customers.

Following the trend of the past 2 quarters, we saw improves spending with small and medium sized customers.

While these smaller customers have not yet returned to their prepandemic spending levels.

The progress we've seen over the past several months gives me added confidence in the future.

1 of the largest deals of the quarter was with a north American leader in semiconductors. This 39 million dollar multi year agreement ensures that the company will have been necessary capacity to run 5 nanometer and eventually 3 nanometer designs on Ansys Red Hawk S. C. A gold standard.

Powered noise and reliability sign off solution for digital design.

The company has also standardise on Ansys Multiphysics technology across chip package and system to reduce power consumption, thereby increasing its competitiveness in the marketplace.

We also closed a 30 million dollar agreement with a longtime automotive customer.

This leader in electric vehicle technology has expanded its use of mechanical fluids and electromagnetic solutions and is adopted additional ansys technologies, including automated design analyses multi body dynamics and process integration and design optimization.

This customer is working with the answers as themes to jointly develop workflows for noise and vibration analysis and topology optimization.

The company is also using Ansys discovery to decrease its simulation backlog and get products to market faster.

All the while holding the line on development costs.

Just a few weeks ago, we unveiled Ansys 2021 release, too, which features advances across our multiphysics product line from structures fluids, and electromagnetics to materials photonics, an embedded software.

Or 2 includes a number of advancements in core physics simplified workflows and integrated data management.

Our solutions are based on our decades of experience and cannot be easily duplicated, creating high barriers to entry for potential competitors.

While I could spend the entire hour detailing each product's capabilities.

Today, I will focus on just 1 key differentiator, which cuts across our entire portfolio, namely.

Namely scalability.

As customer problems become increasingly more challenging the size of those challenges requires simulation software that can scale to unprecedented levels.

Throughout our history and this has been a leader in product scalability and we have extended that leadership in recent releases.

Our ability to create high resolution fluid mechanics simulations with practical turnaround times enables customers to solve next generation challenges ranging from rotating machinery to external aerodynamics to environmental simulations.

4 years ago, Ansys fluent scale to nearly 200000 CPU cores.

Enabling customers to solve challenging problems faster than ever by calculating billions of cells.

To the best of our knowledge that remains the record for commercial computational fluid dynamics code.

This massive scalability has enabled a customer at the technical University in Eindhoven to solve a complex aerodynamic problem with 3 billion computational cells.

With 20 billion unknowns.

The most recent advances in Ansys 2021, or 2 have sped up parallel mess generation by 20 ex removing what is often the bottleneck for detailed simulations of transient phenomena, which occur in aerodynamics and gas turbine simulations.

225 times speed up over the last decade has enabled answers customers reduce simulation time on a full thermal mechanical model from 2 weeks to an hour and a half.

And now with Ansys 2021, or 2 those calculations could take just minutes, leading to improved product reliability as users run more simulations faster.

That breakthrough was made possible by doubling the core counts, while reducing the memory required by 40%.

In our latest Ellis Dino release, we have significantly improved performance, which enables customers to run transient behavior studies with 28 trillion calculated variables and that's trillion with a T.

That means safer cars and more reliable electronics.

A global high tech customer use ansys each of assess and our new ansys mesh fusion to solve a previously unsolved integrated circuit and packaging problems by scaling across the multi node H P. C cluster with 18 terabytes of Ram and 576 course.

And as as 2021 or 2 we introduced the fee plus measure, which extends mesh fusion to deliver additional speed and capacity.

Fee plus has sped up meshing on PCB, plus bond, where a package models by 18, ex which will bring new innovations to the 5 G autonomy and industrial Internet of things market.

And says semiconductor customers are using next generation distributed and grid computing techniques to model and solve chips with 2.6 trillion or more devices.

Ansys read all Cassie said, a capacity and performance record in power integrity sign off last year by extracting 66 billion electrical nodes on the design of a G P U and solving it over 2400 Cpus in a fully distributed manner.

In Ansys, 20th 21, or 2 or solve a performance doubled enabling customers to sign off even larger chip designs using the same computer resources and runtime.

Scalability is 1 of emphasis many differentiators and is becoming increasingly important to our customers as they develop next generation products. We believe that our history of products scalability, along with accuracy ease of use and speed to solution create a difficult environment for any.

He would be competitor, while giving our users the functionality they need to solve the most challenging product problems.

We are continuing to train the next generation of engineers and the use of answer solutions by expanding our free offering for students.

To date, nearly 2 million students around the world have downloaded our products.

And just a few weeks ago, we launched an additional offering for students to download our electronics desktop and to enroll in Ansys innovation courses of training.

These students now have access to our leading electronics products, including Asia possess Maxwell and ice back to train them in developing the products of tomorrow.

And thanks to a new partnership Cornell University will design and develop online training courses with real world applications from Ansys.

Moving to partnerships I'm excited to announce that we have expanded our work with T. S. M. C to include new certifications for Ansys Red Hawk and Ansys total.

These new certifications for power network extraction power integrity, and reliability signal electro migration and transistor level custom designs enable joined customers to meet critical power thermal and reliability standards for next generation product applications.

Ansys continues to be recognized for our inventive approach to engineering technology.

I'm proud that for the third year in a row fast company is named US 1 of the best places to work for innovators.

I'm, even more excited that 5 of my colleagues have been recognized with a prestigious women of color stem awards.

These awards showcase the outstanding scientific and engineering achievements of women around the world.

And answers is proud of these pioneers who serve as an inspiration for us all.

Turning to our environmental social and governance initiatives. Please that MSCI has upgraded R. E. S. G rating to double a naming as a leader in the software and services industry.

[noise] MSCI sighted ancestors comprehensive talent pipeline relative to our peers are focused on business ethics, and our capabilities and helping customers to innovate in areas such as clean technologies.

To summarize.

You too was another great quarter for answers and a further validation that are pervasive simulation strategy is resonating with the market.

A strong sales pipeline are ongoing momentum with enterprise customers, the resurgence of small and medium businesses and our continued leadership across our product portfolio give me further confidence in our ability to meet our newly increased outlook for 2021.

And with that I'll turn the call over to Nicole.

Thank you RJ. Good morning, everyone. Let me take a few minutes to add some additional perspective on our second quarter financial performance and provide contact for our outlook and assumptions for Q3 and 2021.

Our strong Q2 results reflect an outstanding execution across our business, which yielded revenue operating margin and EPS all above our queue to guidance.

As I mentioned Q2, a C V was especially strong and exceeded our expectations.

Both our large enterprise customer and our small and medium sized customer spending patterns performed better than expected and our growth during the quarter with broad base.

Now, let me discuss some of our queue to financial highlight key to a C V with 430.5 million and grew year over year, 25% or 23% incompetent currency we.

We saw a strong performance across customer types geographies and industries AC.

E C D from occurring sources represented 82% of the total.

Q2, total revenue with 452.6 million and grew 16% or 14% in constant currency.

Which exceeded the high end of our guidance like a C V Q2 revenue growth with from across the business.

In the first half of 2021, we had strong topline performance with a C V and revenue both growing double digit, 16% and 18% respectively.

We closed the quarter with a total balance of GAAP deferred revenue and backlog of 927.1 million, representing a 10% increase over last year second quarter balance.

During the quarter, we continued to manage our business with fiscal discipline.

This yielded a solid second quarter gross margin of 90% and an operating margin of 41.7%.

Which is better than our queue to guidance.

Operating margin with positively impacted by revenue performance above our guidance as well as the timing of investments.

The result, with second quarter EPS of $1.85, which was also above the high end of our guidance Sim.

Similar to operating margin EPS benefited from strong revenue resolved and the timing of investments.

Our effective tax rate in Q2 with 19% the tax rate, we expect for the remainder of 2021.

Our cash flow from operations in queue to totaled 118.9 million, which benefited from strong collections driven by a reduction in the percent of receivables past due and with partially offset by differences in the timing of tax payments as compared to Q2.2020.

We ended the quarter with 958.2 million of cash and short term investments on the balance sheet.

Now, let me turn to the topic of guidance.

We continue to build confidence in our outlook for the year.

Coming off our strong finish in queue too we are initiating guidance for Q3, and increasing our a C V revenue EPS and operating cash flow outlook for the full here.

This increase reflects the strong broad based financial performance in the second quarter and our current sales pipeline.

For the third quarter, we expect revenue in the range of 400 million to 425 million and EPS in the range of $1.22 to $1.39.

As I mentioned for the full year, we are raising our a C V revenue EPS and operating cash flow outlook.

We are increasing our full year a C V outlook to be in the range of 1.800 billion to 1.845 billion.

This represents growth of 11.4% to 14.1% or 10.8% to 13.5% in constant currency.

We are raising our full year a C V guidance to reflect the queue to performance, which exceeded our expectations and our increased confidence in the fully hear pipeline.

This raised with offset by a few million dollars of currency headwind.

As a result, we are raising the midpoint of our a C V guidance by 30 million, which translates to an increase of 2.7 point of constant currency growth compared to our me guidance.

As a reminder, it is best to look at full year, a C V growth at quarterly growth can be variable.

As we mentioned in May a C V quarterly growth rates in 2021 will vary with Q2 and Q3 being the strongest 2 quarters.

Based on our performance in queue too, we expect Q2 to have the highest a C V growth rate for the year.

As a reminder, we still expect Q for growth to be muted given the queue for 2020 growth comparison.

Consistent with prior years, the dollar value of a C V will be highly skewed towards the fourth quarter.

We expect revenue to be in the range of 1.840 billion to 1.890 billion, which is growth of 8.5% to 11.5% or 7.3% to 10.2% in constant currency.

Similar to our a C V guidance. This increase reflects our strong Q2 revenue performance and increased confidence in our full year pipeline offset by a few million dollars of currency headwind.

As a result, we are raising the midpoint of our revenue guidance by 23 million, which translates to constant currency growth of 1.5 points higher than the midpoint of our may guidance.

As you know a F E..6 O 6 introduces revenue growth volatility within the quarters. However on a full year revenue basis revenue growth is less variable.

In the second half of 2021, we expect revenue growth to be impacted by the year over year compare and mix of business.

We are increasing our full year EPS and now expect EPS to be in the range of $6.85 to $7.15.

This increase incorporates our strong Q2 performance and is offset by a few cents of currency headwind.

It is worth noting that some of our strong Q2 EPS performance was driven by the timing of investments that moved from Q2 to the second half of the year.

Now, let me turn to our full year operating cash flow guidance.

We are increasing our 20th 21 outlook to a range of 495 million to 535 million.

This increase is driven by stronger collections expected during the year and continued improvement and payment terms towards pre pandemic levels.

We are pleased with our strong first half in operating cash flow, but as a reminder, second half cash flow is most impacted by whether large queue for deals clothes near the beginning or the end of the quarter.

For modeling purposes, we're expecting third quarter operating margin in the range of 34% to 36.5% and for the full year. We continue to expect operating margin to be in the range of 40% to 41%.

Further details around specific currency rates and other assumptions that have been factored into our outlook for Q3 and 2021 are contained in the prepared remarks document.

I would like to thank the anzus team for their continued commitment to our customers and fellow colleagues. During this prolonged time of uncertainty the team delivered exceptional execution during the quarter, which drove are strong Q2 financial performance.

The combination of best in class execution with a strong recurring business model and growing sales pipeline sets us up well to deliver on our 2021 outlook as well as our longer term financial objectives.

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

We will now begin the question and answer session.

To ask a question you May press Star then 1 on your telephone keypad.

If you were using a speaker phone please pick up your handset.

Before pressing the keys if at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then too please.

Please limit yourself to 1 question and 1 follow up.

At this time, we will pause momentarily to assemble our roster.

The first question comes from Ken Wong with Guggenheim Securities.

Please go ahead.

Great. Thanks for taking my question.

Nicole I just wanted to maybe check on on a C V really solid performance here what would you characterize the the the strong results.

Sort of increasing the conversion rate of the pipeline or did you actually see an uptick in demand and potentially a boost to the overall pipeline, that's giving you higher confidence in it and the rays.

Yeah. Thanks, Ken Yeah. We were we were really pleased with not only the the second quarter, but when we landed on the first the first half overall as you know.

Translated to 16% growth overall for the half, which is which was fantastic the team really delivered.

I would say that it went back to a very similar pattern that we saw in Q1, which was it was broad based across geographies and industries.

As you recall coming into the year, we were a little bit cautious about S. M b and kind of the underlying momentum of S. M B M.

And we had expected enterprise customers to perform as expected I would say in the second quarter, we got a bit more out of the enterprise and that we expect it to get which was great cause. It's showed people are really seriously committing to their R&D portfolios and accelerating development, but we saw for the second quarter in a row that.

Net resurgence on the S. M B side and there wasn't anything that was specific localized or or kind of in narrow farm. It was just kind of everywhere. So I would say, it's it's that really kind of broad based performance.

Performance that we saw it really in the in the second quarter in the first half that contributed to the confidence that we had and raising.

Our overall a C V for the year by the 2.7 point that constant currency.

Got it got it and then you touched on S. M B.

Also <unk> and you guys mentioned that it was kind of tracking back towards pre COVID-19 levels any any rough sense of kind of where we are not sure. If there's a way to kind of quantify if we are maybe 60% of the way there are 70% of the way there, but we'd love to get a sense for how much more there is to close the gap before where we're back to what you might consider normal for.

For that piece of the business.

Yeah I mean.

Yeah as I mentioned before we were really pleased with the momentum we saw in the quarter and the strength we saw when.

When I would say is.

It is.

The items that we have going into the reason the full year was really not calm counting on S. M b coming back to those prepandemic levels. There certainly is a lot more activity and there's a lot more engagement.

But this is this does happen over time market by market. It does vary too in terms of the rain pieces speed.

How how these customers are coming back and so while I don't have a specific quantification to give you.

I'd say that if it happened at a more accelerated rate, that's not you know and and.

We were all of a sudden back to prepandemic levels by the end of the year, that's not something we've really contemplated and a raise.

Great. Thank thank you very much.

The next question comes from Galle Boondock with burn burn please.

Please go ahead.

Good morning, and thank you for taking my question.

With just kind of.

Back on.

On friends and close.

Operating cash flow and a T V and how you know atvs woman, whose though.

To read the cashback that for Ya.

Christine because what we've seen a $30 million upgrade the resulting in about $15 million.

Operating cash flow, which kind of suggest that.

Medical.

Conversion that is that something that we could you know is that something that as you continue to perform so <unk> is replicable going forward, yeah, just maybe maybe a little bit enlightened potential investments or something do you might also balance out on the other side.

Sure. So let me break apart that the component of cash flow. So as you point out cash flow is more highly correlated to a C V b.

Because of the way 6 O 6 treats revenue recognition. So that is exactly the right way to look at it.

There's 2 components to it there's the collection piece along the ECB side and then there's the payment side.

And so on the collection side, we've seen we have seen a a an improvement Adam more accelerated rate both in terms of you know.

Lack of asking for extension on payment terms people catching up on on each payment.

And people overall, maintaining a level of current balance at higher rates and they had third pandemics. So all of that is I think.

Contributing to that excel at the end of the acceleration on part of the acceleration on the on the cash flow side.

The headwind in the Petite and this particular quarter was really tax payments and the timing of tax payments, particularly in a quarter.

Can have a more distorting dynamic overall and so as you recall last year there were some.

Deferral incentives during the pandemic that.

Cash flow in the second quarter and then this year.

Those payments for do as.

You know as as expected in the second quarter and so.

Overall, I would expect to see still a little bit of of capitulation and volatility in the relationship between the 2 just because of the nature of the payments piece is not kind of back to normal normalized levels, but what you can count on is that underneath the covers the momentum around collections and customers kind of behavior.

Here around that has been quite good and we're really happy with where we're at.

But yeah and then just as a follow up you said that you know S. M. B strength has really come in and what we say usually it's M. B as a good indicator leading indicator of the kind of underlying demands of the business that the other way that you could sales. So if the larger deals are starting to kind of.

You know closed a little bit earlier is it something that you're that you're starting to see as well better close right did you have any poland's but potentially from from a closer as well.

No I mean, I think we saw very balanced growth and performance across the enterprise side and the SMP side.

And so what what I do what we are seeing is that customers.

Customers are.

Using simulation to continue to accelerate their development roadmaps and the.

The optimism around needing to make those investments overall.

And so there was really no timing dynamic here of any meaningful.

To any meaningful degree other than the normal things that solved before and after the day line in any normal quarter. It really is the performance in the quarter was really a statement of the overall.

I mentioned that we're seeing in customers behavior overall.

Right, which is supported by the smaller deals as well. Thank you so much alright.

The next question comes from Adam Borg with people who.

Please go ahead.

Hey, guys. Thanks, so much for taking the questions maybe just on answers cloud RJ with love and update their and how things are tracking as we think about close pandemic plan.

Sure Adam So as you know Ansys cloud provides managed access to H B C resources and that allows our customers to essentially learn larger and.

And higher fidelity simulations and as you know the cloud also supports a very flexible licensing model and that includes an elastic pay as you go model as well as a hybrid model that allows customers to mix and match elastic as well as as well as least licenses now we have a number of internal metrics that redeploy to measure the business and we are seeing.

Probably a 5 ex 5 times greater usage as.

As compared with this time last year. So that is very nice growth as a result of the activities that we've done.

As well as of course external conditions with people working from home. This your if you. If you think about what we've done to augment the cloud we've added cloud support for Ansys L. S. T C.

Ah for for for Ansys Dino for our Lemaire uncle products.

We've completed sock to certification and we and we also continue to focus on the overall a customer experience and that's really translated very positively for customers and we a couple of months ago few months ago, We published a Ah Ah Ah release about a customer vanward, who talked about how they could speed up the simulations by 7 ex which obviously is.

Is a significant perspective, because they are able to take advantage of the most recent and most capable hardware in the cloud as well as the plowed cable believes that we have so we're very excited about our cloud direction. We've made all of the necessary investments and of course, if it's still early days because we're talking about a relatively small portion of our business.

That's really helpful and maybe just a quick follow up for Nicole just all perpetual license that's been really strong in the last few quarters I know, there's been an ongoing trend toward.

Term vs paid off but I'd love to think about her here a little bit more about how you're thinking about perpetual license growth over the back half of the year and is that strength and park you'd just to increasing confidence net markets and their ability to deploy larger deals like that thanks. So much.

Yeah. So we did see in the first half of the year, we did seem relatively more perpetual license growth.

And we've seen in the past and what I would say that that long term trend of shifting towards the least model still continues right. You recall there was there were dynamics last year, where perpetual with a little bit more muted and I think what you're seeing this here is just some of the return of some of that business over all but if you look at the business over.

Longer periods of time.

The the growth and acceleration of the business is really driven by the least model.

And and the perpetual businesses, roughly roughly flat over those longer periods of time.

In terms of the second half.

I think 1 of the dynamics that we saw in queue for last year was.

Not only.

Exceeding exceeding the high end of guidance by $45 million, but there was a significant perpetual mix in queue for and so how are looking at it on a on a go forward basis is not really expecting that repeat performance in queue for overall is some of the underlying factors that are baked baked into the guidance.

Yeah.

Super helpful. Thanks, so much.

Mhm.

The next question comes from day, we shower with Griffin Securities. Please.

Please go ahead. Thank you. Thank you good morning, Audrey for you first within the context of your large multi solution solver sales could you talk about the incremental demand within those deals that you may be see any or all of the smaller brands, which was Minerva grant.

Astro Miracle and so forth goes becoming incrementally important within the context of those deals and then as well and your prepared remarks, you noted new.

Your your semiconductor and in high Tech business. As this is the this week is the 10th anniversary of the Apache acquisition closing.

Perhaps you could share your thoughts on how you were thinking about your Uda business for the next number of years.

Kinds of internal investments that you think you would need to be making or with an ex member of yours to keep the business growing and and luxury for Nicole Your services revenue were down sequentially from Q1.

And yet over the last few months, there's been a discernible uptick in your openings for technical support and consulting position. So from that should weird for that you were anticipating and improving pipeline in terms of engagements and deployments activity.

So J. Thanks for the question Ah, Let me, let me start with your comments to your question about some of the smaller products.

As you as you know some of those products organically developed others came in through acquisition and we embark on activities such as in M&A or organic development, specifically, when we see opportunities on the market.

Where customers are the leading us or we see an opportunity to provide greater functionality to solve a customer problem and.

And and so all of the acquisitions or in all of the internal development that we do is driven by an analysis of what that market would look like and I'm delighted that we generally seeing what we expected to see pan out as in fact panning out you talked about you talked about.

Numerical photonics, that's obviously a very important part as you think about data centres for example, and we're seeing obvious attraction there because because this product is fits into our overall our overall portfolio. So when we go to customers. We can we can go to them with a broader set of capabilities.

That includes critical capabilities, such as America that you mentioned that we can where we can go in and talk about an end to end solution that addresses the needs of the customer may have and you'll see that repeated across our portfolio, where where are smaller products are playing important roles and being able to fish together and into M work flow to allow customers to solve some of the most complex problems that they're dealing with.

So I think I think that's Ah hopefully that addresses your first question with respect to your second question I'm excited obviously with our performance and hydrogen and semiconductor B I no longer think of the Apache acquisition.

That's part of our semiconductor organization and has been for a number of years.

And obviously, we have a number of deep integrations across our portfolio between between a semiconductor business in our electromagnetics activities and you start to think about next generation products like 3 D. I C and challenges and that's when the entire Ansys portfolio comes in.

Going from from US semiconductor portfolio, all the way through our Ah more Newtonian physics, if you will and so I'm very excited about the the the portfolio the capabilities I think we have market leading products across the board there and our customers tell us that they're able to solve.

Tremendous challenges with our with our offerings and we're excited about the future.

Yeah, and and J T or services question.

So specifically this year, we really we do we do expect to see services disproportionately.

Disproportionately impacted by Covid, just because of the nature of services being more in person.

<unk> with the Delta variant and and some of the either self imposed or imposed restrictions that that customers are having around in person engagement. So we're not anticipating in our guidance any increase any meaningful change in the trajectory of the services business interest.

The skill set that you're referring to.

I would say net yes, we are hiring we are investing in the business for investing in the areas.

<unk> agent to discuss now around.

Helping our customers connect physics together amongst a day.

Those are skill set.

We continue to invest in and.

And that services businesses also.

That investment in the services business is also a reflection of the momentum we're seeing in the pipeline around sales because those.

Individuals also reported selling process some degree so.

Overall, I think what you're seeing is is.

A good set of momentum around customers starting continuing to.

Hillary.

Leveraging.

Assets to do so that's that's fine we're making the investments in those spaces.

Thanks very much.

The next question comes from Andrew Ogan with Bank of America.

Please go ahead.

Yes, good morning.

Good morning, Miami.

Yes.

Right channel it seems like it's performing very well are there any partnerships that are really gaining traction or other reasons for this growth and the amount of touch from M. Your previous comments interest on packed up.

Yeah, you should think of our indirect channel.

And.

You should think about under a channel consistent with some of the growth of we're seeing an S. M b.

Because our indirect channel partners are.

Oftentimes supporting customers.

Who are lower down in the pyramid, while some of the larger.

Global organizations are handled by direct sales force. So that's really the dynamic that you're seeing and that growth is reflective of that that dynamic.

M M and just a broader question your outperformance growth <unk> quarter, you know internally how do you think if you put his legs into 3 buckets 1.

<unk> B your customers structurally.

Invest anymore.

And see.

Just your strategy is your sort of expanding inventing new products from from partners ecosystem, you're adjacent shoes.

And chocolate, if you're trying to sort of a tribute to solid performance this quarter.

Short term macro long term structural thing Oreo strategy, how it you're sort of.

The outperformance into this 3 buckets sorted for 1 question.

Yeah, no. It's it's I think it's really difficult to point to a specific allocation of 1 bucket to another because these things are all related to each other look at the end of the day. If you just reflect on the answers portfolio. What we've built is a market leading set of capabilities of individuals physics, which are which are connected together and so this multi.

Physics capabilities, what's necessary for customers as they saw some of the most challenging problems that they're dealing with and so what do you think about electrification for example, our 5 G. R. I O T. All of these areas of complex customers in investing a significant amount of money. They are looking for simulation offerings to be able to support.

Short them in their R&D efforts and we have the technology, we have the capabilities, we have the relationships and we can support them on their journey. So that that's a very important aspect you've gotta have the right goods when people meet them. The second thing is that obviously around the world. We're seeing a set up we're seeing customers are recognizing that there is going to be an end to the pandemic.

And that they have to continue to make investments and R&D and you're suddenly the small and medium business customers are perhaps most.

Emblematic of that because they are.

Earlier in the pandemic you saw a shutdown for S. M b customers right. They they were most of the most concerned about cash the most concerned about.

The the potential demand a future because these are smaller companies and they have less of have lesser cash resources than some of the larger companies, but what we're seeing now is obviously an opening up of spending their which is reflective of the fact that customers around the world not just S. M b customers customers around the world are are looking at the world <unk>.

After things completely open up again or certainly after a pandemic world post pandemic world, where where things start to get back to normal.

With respect to the broader economy, which means and they recognize that in order for them to be successful. They have to have products that people want and that means more investment in R&D and more investment in product design as I as I mentioned in my in my comments. So so the demand is also increasing and and and I think that those 2 things work together.

You have to have the right products you have to have the growing demand. If you didn't have either 1 of them you wouldn't necessarily be able to deliver the resolved and I think that we are that's what it is that's exactly what we're seeing and we're very excited about what we can provide to our customers and and where the market's going.

Yeah, and I would add just 1 additional point to what Ozzy said, which is.

Which is the assets team and and the execution of that team I mean.

The sales team in certain scenes, where there alongside customer throughout the pandemic, meaning.

Estimates.

Our customers throughout the pandemic and that puts us in a position of strength as customers are.

Are coming out of it and making the decisions that <unk> referred to as you know I mean, an enterprise software sales cycles are long. So if you are not there and you're not committed to your customers and you're not delivering value even.

Even in times, where they're not quite ready to invest at the levels that your debt debt you know they're comfortable with in a time like a pandemic. It pays off in the end and you can see that particularly.

And some of our markets like each pack and other places where the team has just been exceptional and the way that they have managed to deepen those relationships with customers.

Was there a follow up.

Oh I apologize hypercard so from your no. Thank you very much.

The <unk> the next question.

Western comes from socket.

Korea with Barclays. Please go ahead.

Okay, Great Hey, guys. Thanks for taking my questions here fitting me in.

The cool maybe maybe just for you just a little bit of a housekeeping question.

I think I think the you mentioned the C V constant currency guide was about 10.8% to 13.5% can you just remind us how much that is organic vs inorganic.

Yeah. So at the beginning of the year, we talked about I agi contributing $80 million to this here and so we're we're still seeing that as.

The current trajectory.

Okay got it that's helpful than than from a follow up maybe maybe for you O J.

Can you just talk a little bit about simulation live in and how you feel that's trending another you know a little bit of a longer sort of a long term story, but curious what the update is and how you feel about it.

You mean, you mean discovery right is that.

I'm, sorry, yes, absolutely discovery life, So I was calling for the P. P C [laughter].

<unk>, sorry discovery Love, Yes, [laughter], yeah. So it look.

We're very excited about discovery and and I think perhaps to make it real a little bit more tangible perhaps I can go back to the example, I gave him the scripts, which was 1 of our customers who's using discovery.

In the in a very interesting way so for this for this particular customer some of the detailed flow and thermal management simulation.

Is done by experts using ansys flagship products, but the typical turnaround time is is you know maybe 60 days because of the complexity of a simulation and they are a relatively small analysts team serving a larger design team. So they introduce discovery is away for the design engineers to do some of the simpler simulation on their own.

So things like you know flow distribution or pressure drops. So they are able to do that by themselves and they can improve the design of the components before the handoff the design.

For a complete system simulation to the expert analysts. So that's an example, where the the whole thesis that we had was this is something that design engineers could use to really amplify the the capability of the of the analyst that's something that's borne out here and for this customer they're also using they they also have some outsource CAE spend.

And they're using discovery now to help straying their designers on some basic structural analysis that they can limit some of this outsource work on simple geometry changes and what that does for them is it changes the.

The designers ration time and it takes it down from from a couple of weeks to a couple of days. So that that that gives you. Some perspective, we're very excited about we're very excited about the technology, we continue to make advances in the technology.

And obviously.

And obviously I mentioned a couple of customer examples you talked briefly about about P. T C M b and the use of krio simulation alive and.

On P. T CS earnings call last week day, I believe they they reported continue traction with increased expansions driven by a migration around 3 O..7 as you know they are Oh, a M. A R. A discovery products into krio career simulation like clear answers simulation and and that Oh 7 is the latest.

Relief and so obviously doesn't there's increased direction that comes from that and and they also talked about a customer when where the real time simulation capabilities were helping to simplify the customers.

Design process. So we're very very excited about the technology continues to perform as we had expected obviously, it's a relatively small piece of a business and.

And and the.

But the market dynamics around what we're seeing a strong.

Very helpful. Thanks, guys.

Thank you.

The next question comes from John Walsh with Credit Suisse.

Please go ahead.

Hi, good morning, everyone.

Good morning.

I'm wondering if you could good morning Wonder if you could talk a little bit about your acquisition pipeline. You know you were able to get Phoenix done, which looks like it bolts on nicely to a G. I just what are you seeing there and what can we kind of expect there from a capital allocation.

<unk>.

Yeah. So as you point out the greatest return we've been able to provide on finding it back to the cash has been and utilizing it required.

And.

Example, something like Phoenix is a great example of Premier technology, which helps us.

Accelerate another investment we made in December around and in Hei Phoenix provide small base.

Engineering, So uhm, so I would say that you should expect that we will continue to execute strategy, which is consistent with our model.

Which is.

Double digit growth with Huck and acquisitions overall M decision on the capital allocation decision and the focus on M&A hasn't changed.

Great and and maybe just a follow up to that you know during the quarter you had put out a press release about a customer.

You know it looks like expanding of the relationship they had with Ansys 1 of the things that I found interesting was you know more stringent regulations around greenhouse gas reduction and how they're using simulation to help that you've talked in the past about.

Sustainability and how you can help your customers, but the drumbeat just seems to be getting louder and louder are you seeing customers accelerate any decisions around the sustainability of.

Focus or is it still you know is that still kind of an extra add on benefit to what you're already bringing to the to the customer.

So I think the sustainability aspect.

Clearly important across a number of different dimensions for different customers. When you. When you look at let's take for example.

Big trend in the automotive industry, which is around electrification right. Obviously that that is there is a discussion about the future of internal combustion engine eye, and the right and pasted, which electric car.

Cars and vehicles will be adopted.

Broadly and you're seeing car companies for example, making the decision to just simply move from 1 to the other I and that's obviously, that's obviously driven in part by by issues of emissions and and.

More eco friendly.

We talked last year about in the aerospace.

Aerospace.

Industry, we talked about some customer wins, where the motivation for the customer was really to make their engines more fuel efficient. So it was about lightweighting. It was revived reduced reduce fuel consumption increased efficiency of fuel.

And so even in even in aircraft engines for example, you're seeing that as being a primary driver.

For the new design off off engines, and so it's absolutely. It's absolutely usually part of a part of a broader trend. We I mentioned vanward earlier, they're they're of course building a sustainable offshore wind turbines and they're they're.

They're a simulation user but again, they're focuses on renewable energy sources, so uhm compliance purposes, as well as as well as.

Eco friendly all of these things are are drivers of product design and product requirements and obviously to ensure that customers can meet those standards simulation plays a really important role.

Great I appreciate you taking the questions. Thank you.

The next question comes from Blur Abernethy with Rosenblatt Securities. Please go ahead.

Alright, Thank you a nice nice order guys just.

Vertical question here, just first off on the auto vertical as she looked at the shift from I C. E development to electrical vehicles, obviously, you are completely different product.

Is there you know do you have a sense at this stage as they move away from icy designed a new model introductions teach your electrical what does the answers footprint change in the auto vertical look like does it does it grow or does it I mean, obviously.

10 years from now maybe we have a lot less icy engineers.

And secondly, you called out in your prepared remarks that health care vertical and a large when.

In in some using simulation software to train some algorithms could you just figured expand on that a bit and how big might that opportunity B M. In in the health care Russell. Thanks.

Firstly with respect to automotive, what's what's exciting for US is that we have the technology and the capability from a product perspective, and a relationship perspective to support our customers as they go through that transition. So we can help them with battery management technologies, we can help them with electric Drivetrains electric motor design.

All of the all of the elements that you would expect that would sort of go into the replacement of the internal combustion engine with an electric.

Battery powered environment, but above and beyond that if you think about the challenges that some of our customers are facing as they make this transition.

And an electric car is not just simply an internal combustion car with 1 means of propulsion, replacing another if it's a it's an opportunity for our customers to redesign in fact, they have to redesign it because the assumptions that have previously made of a of an engine in the front of the car, where which which concentrates the wait in the front of the car that those are some.

No longer relevant because pops now you have a battery that's that's uniformly distributed across the floor of the car and so that that changes the weight distribution of changes the assumptions of the way that the car was originally designed and so there is a there is a significant rethinking taking place in these in these car companies, especially the auto companies, who have historically relied on weed.

The use of technology from 1 generation to another there is a rethinking of thing what does it mean for us to support this to build an electric car and so that all of that leads to and drives increased use of simulation and certainly France a simulation.

About crash design right. So the problems that you may have been dealing with earlier for crash might've been how do you think about Ah how do you think about the the passenger will the passenger would be protected and that's a complex multi physics problem, because you're dealing with you're dealing with the structural integrity, you're dealing with the deployment of the airbags, which was a fluids problem.

So there's a multiphysics problems in nature that needs to be addressed through simulation now now. The question is it goes above and beyond that it says well what is the likelihood of a of a fire some kind of a catastrophic fire that might take place as a result of a battery rupture can you solve that problem. So it starts to become more and more challenging and so this transition is not just a matter of support.

The design of the engine per se. It is the actual car in the aggregate and that's that's sort of plays well to our strength and our capabilities now with respect to your second question about health care.

While health care is still an overall very relatively small part of the answers business simulation continues to grow and we do well in for example, the design in the manufacturing of medical medical devices and that was obviously reflected in the performance in the quarter, but as we look to the future. We are excited about the increased use of simulations.

<unk> is a validation in the market. So the use of Insilco trials as opposed to just in vitro in vivo and use a simulation techniques supporting that those in Silicle trials. I think is really helpful and we're working with early adopters who are using simulation.

To target specific surgical outcomes and this is obviously early early stage, there's not really much revenue associated with a very very early stage, but this is about how do you support a physician as they're making decisions about about surgery. Those are at the end of the day some.

All of those can be simplified into problems of computational fluid dynamics and of course, we have we have fantastic technology in that space and so being able to put all of that together.

And and packaging that I think that's certainly something for the future.

Thank you that's all the time, we have today I will turn it over to our day to make some closing comments.

So thank you all free or questions and I want to thank all my colleagues Ansys 4 and a global partner network for your amazing work dedication to the company and for continuing to drive a success for answers in our thousands of customers around the world with our excellent start to the year, a strong pipeline and the <unk>.

Residents levels of innovation that we're driving across the Multiphysics products I'm confident that we will meet on UV rays goals for 2021 and with that thank you all for attending today's call and I Hope you enjoy the rest of your day.

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

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