Q3 2021 ANSYS Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the answers third quarter of 2021 earnings Conference call.
What's up today or is there you go Paul President and Chief Executive Officer.
Nicole Anicetus, Chief Financial Officer, and senior Vice President of Finance.
Let's see the Brian Vice President Investor Relations.
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Please note today's event is being recorded.
At this time O knowledge to turn the conference over to Mister Brian for opening remarks. Please go ahead. Good morning every line our earnings release, they're related prepared remarks document and the link to our third quarter Form 10-Q have all been posted on the homepage of our Investor Relations website. They contain the key finance.
Information and supporting data relative to our third quarter financial results in business update as well as our queue for an 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 S. E C. All of which are available on our corporate website. We note that uncertainty regarding the impact of the COVID-19 pandemic on our performance could cause actual results 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 reconciliations of gas 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 RJ good Paul for his opening remarks, Hi, Jay.
Good morning, everyone and thank you for joining us.
Two three was another excellent quarter for instance, where we beat a financial guidance across all key metrics.
With strong ACB growth in the quarter I'm delighted that you're two days, we were on a stool goal a double digit ACD growth with fucking acquisitions.
Our accomplishments thus far in 2021 or further evidence of the successful strategy of making stimulation pervasive across the Pollock lifecycle or.
Ah Multiphysics Pollack leadership, and a strong customer relationships.
Those factors combined with customers continued investment in R&D initiatives are driving demand for answers as Multiphysics solutions.
With a robust deal pipeline and momentum in the business bolstering our confidence we are raising a full year financial guidance above and beyond the impact of a strong Q3 topline performance.
Nicole we'll have the details in a few minutes.
From political and geographical perspective, Ah Q3 results came in as expected.
The high Tech in semiconductor.
Aerospace and defense.
An automotive and ground transportation sectors were again, our largest contributors.
Looking at our major Geography's be America's again led the way followed by Asia Pacific.
We expect each region to have its largest quarter in queue for with the scholarly cute skew to be more pronounced in queue for for Europe.
One of Q. Please highlights was a three year 58 million dollar agreement with the North American High Tech customer from.
From an ACD perspective. This deal was the second largest multiyear contract in our history.
This customer was already using solutions from across the answers multiphysics portfolio and is now expanding its number of simulation users.
It is using answers for diverse applications ranging from ensuring the reliability of radio frequency systems to meeting sustainability goals across this product line and to chip package system analyses for power and signal integrity.
Another key deal in Q3 was a multi year agreement with Seagate technology, a leader in mass data storage solutions.
Seagate is a longtime answers customer and this new contract broadens the companies use of Multiphysics simulation to address next generation product challenges faced by its global customer base for.
For example, Seagate is using answers multiphysics products, two s's thermal effects and acoustics to create a seamless workflow to enable higher capacity hard drives and to streamline process integration fajitas. This didn't magnetic recording.
The company also now has access to our optical suite of products to drive further innovation.
As we have discussed are small and medium sized customers or S. M. B's would disproportionately affected by the pandemic. However.
However, during the last few quarters, we're seeing a recovery and F&B customers have increased their investment in as a simulation.
Our ongoing increase in sales from our SNB customers gives me further confidence as we plan for Q4 and beyond.
During these calls I typically give you some insights into various aspects of the answers business and.
In the past of discuss a best in class electromagnetic solutions are unproper unparalleled products scalability and the extreme accuracy of a structural solutions.
As he heard me discuss with Seagate optical simulation is becoming increasingly important for our customer base. In fact in Q3 about 5% of our agreements included an optical simulation product in the order.
Given that as.
As well as a recent closing of the V Max acquisition.
I would like to spend some time today discussing our offerings for optical simulation.
Three years ago, and says did not have any optical simulation products in our portfolio.
Today, though companies can rely on the answers for an end to end solution spanning the gamut from photons two electrons based on three product lines.
The first.
This is the medical empowers users to design and analyze integrated photonic components and systems and.
And model challenging product problems, including interacting optical electrical and thermal effects.
The second product line and says spills simulator systems optical performance and evaluates the file final illumination effect by enabling high fidelity visualization based on human vision and camera sensing capabilities.
Bird is a recent acquisition of Z, Max which enables customers to accurately model the behavior of light through complex optical lens systems.
Instead of working independently as a siloed offering our optical simulation suite offer operates as part of a complete multiphysics workflow.
Taken together the answers optical solution is used for a diverse set of applications ranging from camera and light or erase found in a ton of Ms vehicles.
To telecommunications and mobile phone cameras.
Medical equipment and other visual AIDS.
For example in Q3 Sandia National Labs sign an agreement leading to expanded use of numerical technologies.
[noise] Sandia develops leading edge integrated photonic and nano photonics solutions for quantum computing imaging and sensing.
The lab uses the medical tools to design model and simulate custom platonic components and their behavior and a circuit environment.
In the automotive sector industry leader Board uses as his products, including Speos and the answers vehicle headlights solution in the styling and design of its predictive smart headlamps and to optimize invalidate headlight performance.
Our headlights solution features real time physics based optical simulation and driver in the loop functionality to replicate the physical world with a high degree of predictive accuracy.
Automotive joined Mazda is also increasing its use of spills for internal an exterior lightning head up displays and cameras. Thanks to a sales agreement in Q3.
It aerospace and defense and answers customers using all three of our optical product lines across multiple applications.
The customer lives on the miracle for creating photonics integrated circuits.
It uses spills for detecting radiation leaks from aircraft enclosures.
And this customer's also using Z Max to study lens defamation.
While still new to our portfolio and a relatively small contributor to our overall financial results.
These optical solutions fit squarely into our go to market motion.
And our sales team understands how to market these products.
Based on the answers strategy, a pervasive simulation or optical customers can easily access products across a portfolio to perform true Multiphysics analysis we.
We saw an excellent example of that with another aerospace and defense customer that was challenged with a wing camera that was capturing blurry images bye.
By using a combination of answers optical and answers fluids products. The customer was able to correct the problem and deliver crisp images, even at extreme speeds in bad weather.
Moving to our partners I'm excited that we are expanding our relationship with autodesk by embedding emphasis electromagnetic simulation capabilities to explore invalidate printed circuit board designs within the fusion 360 workflow.
This first of a kind autodesk fusion 360 extension will enable CAD users to perform near real time, PCB analyses, Andrew retrieve realtime insights into their electromagnetic performance to accelerate the development of next generation products.
We have also expanded connectivity of answers twin builder to industrial control systems through Rockwell Automations enhance studio 5000 simulation interface yeah.
Users can connect digital twins to emulated controllers to Optimise production at the design stage.
Or a physical controllers to enhance equipment performance in real time for example, and predictive maintenance.
I am pleased that we have expanded our partnership with TSMC to create a comprehensive thermal analysis solution for multi dies semiconductor designs.
Using anzus Red Hawk S C electrothermal and answers ice back along with Tsmc's Silicon stacking and advanced packaging technologies users can analyze complete chipman package systems with high fidelity results.
We are also collaborating with fujitsu to enable more sustainable product development for our customers.
And says Ellis diner, now supports fujitsu's energy efficient Prime H B C supercomputers, which will help customers reduce energy consumption and costs by Offloading simulation workloads to a more energy efficient machine.
Keeping with our environmental social and governance initiatives for a moment, we recently published or simulation products Handprint four autonomous vehicles.
This report illustrates the wall that simulation plays in the development of autonomous vehicles.
Including in sensors.
Automated driving software and.
And safety testing.
Using simulation to develop economists vehicles will lead to significant societal and environmental benefits ranging from a drop in traffic fatalities to a reduction in emissions.
We have also submitted our initial report with the climate disclosure project and expect results by the end of the year.
Similarly, we have begun working on a report to the task force on climate related financial disclosures, which focuses on governance strategy risk management.
And metrics and targets.
In summary.
Q3 was another remarkable quarter for answers.
We beat guidance across all key financial metrics and have met our goal of delivering double digit growth year to date.
We're also expanding our product leadership and of course solutions as well as an important emerging areas such as optical simulation.
These factors.
Combined with a strong queue for sales pipeline and outstanding execution give.
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 Nicole.
Thank you I say good morning, everyone.
Let me take a few minutes to add some additional perspective on our third quarter financial performance and provide context for our outlook and assumptions for Q4 and 2021.
The third quarter demonstrated the strength of our business as we delivered robust growth during the quarter.
A C D was strong and in line with our expectations, while revenue operating margin and E. P. S exceeded the high end of our Q3 guidance driven by the mix of license typed filled in the quarter.
Both are large enterprise customers and F&B customers performed well and.
And our growth during the quarter with broad based.
Now let me discuss some of our Q3 financial highlight Q3, a C V with 365.4 million and grew year over year, 20% or 19% in constant currency.
We saw a strong performance across customer type geographies and industry.
[noise] ACB from recurring sources represented 76% of the total.
Q3, total revenue with 445.4 million and grew 21% or 20% in constant currency, which as I mentioned exceeded the high end of our guidance driven by license Max.
Q3 revenue growth was also wide ranging across tough customer types and industry.
For the first three quarters of 2021, we had strong topline performance with a C V and revenue bolf growing double digits at 17% and 19% respectively.
As I mentioned for both Q3 and Q3 year to date, we are executing against our business model of double digit growth, including tuck in M&A.
We closed the quarter with a total balance of gap deferred revenue in backlog of 899.5 million.
During the quarter, we continued to manage our business with fiscal discipline.
This yielded a solid third quarter gross margin of 89.9% and an operating margin of 39.7%, which was better than our Q3 guidance.
Operating margin was positively impacted by revenue performance from license mix as well as the timing of investment.
The result was third quarter E. P. S of $1.59, which was also above the high end of our guidance Sim.
Similar to operating margin E. P. S benefited from strong revenue results from license mix and the timing of investment.
Our effective tax rate in Q3 with 19% the tax rate, we expect for the fourth quarter of 2021.
Our cash flow from operations in Q3 totaled 157.8 million, which benefited from strong collections, primarily driven by robust hue to growth favourable timing of Intraquarter sales and a reduction in the percent of receivables pasty.
We ended the quarter with $1 billion 81.4 million of cash and short term investment on the balance sheet.
In line with our capital allocation priorities, we repurchased approximately 97000 shares during the quarter for around 36 million.
We have 2.7 million shares available for repurchase under the current authorized share repurchase program.
Additionally on October 1st we acquired the Max for a purchase price of 399.1 million net of cash acquired.
Now, let me turn to the topic of guidance.
We continue to build confidence in our outlook for the year given the improved deals pipeline, we see in the fourth quarter.
As a result, we are initiating guidance for Q4 and increasing our a C V revenue operating margin E. P S and operating cashflow outlook for the full year.
This raise reflects the strong financial performance in the third quarter and the increased momentum of our sales pipeline going into the fourth quarter.
For the fourth quarter, we expect revenue in the range of 614.9 million to 654.9 million operating margin in the range of 44.5% to 47% and E. P. S. In the range of $2.48 two two dogs.
And 81 cents.
As I mentioned for the full year, we are raising our a C V revenue operating margin EPS and operating cashflow outlook.
We are increasing our full year a C V outlook to be in the range of 1.825 billion to 1.860 billion.
This represents growth of 12.9% to 15.1% or 12.6% to 14.7% in constant currency.
R Q4, and full year 2021 guidance is based on continued momentum in the business and a queue for pipeline that has accelerated since our August guidance.
It does not include a repeat of the outside spending behavior. We saw in December 20th 20, after vaccines were announced.
The rays also incorporates approximately $6 million to $8 million contribution from the Max in queue for which is offset by approximately $6 million to $8 million of currency headwind.
As a result, we are raising the midpoint of our ACB guidance by 20 million, which translates to an increase of 1.5 point of constant currency growth compared to wear August guidance.
We expect revenue to be in the range of 1.885 billion to 1.925 billion, which is growth of 11.2% to 13.5% or 10.6% to 12.9% in constant currency.
This raise reflects our strong Q3 revenue performance driven by license mix as well as the incremental organic revenue from the momentum of her queue for pipeline.
Like a C V. Our increased revenue incorporate approximately six to 8 million contribution from the Max which is offset by approximately $6 million to $8 million of currency headwind.
As a result, we are raising the midpoint of our revenue guidance by 40 million, which translates to constant currency growth of three point higher than the midpoint of our August guidance.
As you know a C. Six O six introduces revenue growth volatility within the quarters. However on a full year basis revenue growth is less volatile.
In the fourth quarter of 2021, we expect the revenue growth rate to be impacted by the year over year compare and mix of license types sold in the fourth quarter Twenty-twenty versus our current 20th 21 Fourthquarter pipeline.
We are increasing our full year operating margin and now expect operating margin to be in the range of 40.5% to 41.5%.
Additionally, we are increasing our full your E. P. S and now expect E. P S to be in the range of $7.05 to $7.38.
This increase incorporates R Q3 performance and is offset by approximately five cents of currency headwind.
It is worth noting that some of our strong Q3 E. P. S performance was driven by the timing of investments that moved from Q3 to the fourth quarter of the year.
Now, let me turn to our full your operating cash flow guidance.
We are increasing our 20th 21 outlook to a range of 505 million to 535 million.
This increase is driven by stronger collections expected during the air and is partially offset by approximately three to 5 million of currency headwind.
Further details around specific currency rates and other assumptions have been factored into our Q4 and 2021 guidance or continue contained in the prepared remarks document.
Consistent with our standard practice, we will provide detailed 20 twenty-two guidance. Once we finalize are 20 twenty-two planning process and clothes out 2021.
I would like to thank the Anthos team for their outstanding execution during the quarter, which drove a robust Q3 financial performance and continued momentum going in our last quarter of the year.
We once again delivered a strong quarter, which coupled with a recurring business model and growing sales pipeline demonstrated the strength of the answers business.
We are well positioned to deliver on our 20th 21 outlook as well as our longer term financial objected.
Operator, we will now open the phone lines to take questions.
Thank you ladies and gentlemen, we will now begin the question and answer session.
Can I ask a question you when it first started in one of the telephone keypad.
User a speaker phone, we ask that you. Please pick up your handset before pushing the keys to withdraw your question please grow stolen too.
In order to <unk>.
I was wondering people as possible the opportunity to ask questions. We do would you. Please limit yourself to one question and one follow up at this time, we will pause momentarily to assemble our roster.
And gentlemen, our first question today comes from John ruined Roseburg. Please go ahead.
Oh great.
Just have a point of answers growing alive.
Gets you provided back in 2019, how different is the composition of the great today relative to the original budget for instance, something like optical not around a 95% of bookcases.
Is it true to say, there's maybe you were in faster growing contributors a C V and it is that is true does it suggest that there's also areas.
That might be on the lagging under recovery and so you get bigger contributors in future years.
Yeah, So I'll take that thanks, so much for your question John Uhm. So yes as you can as as you pointed out we are well within our model of double double digit growth, where tuck in acquisitions on a year to date basis, our growth certainly puts us squarely on that model what I would say is there's two two component to that so the core.
[noise] itself.
The core structures fluids. Those businesses are are still solid contributors to growth and continue to grow as you point out you know we have been building the broadest deepest simulation portfolio.
Over multiple decades and that has only accelerated in the past five years and so I think as a.
As as talk about the optic optical business as an example of something that was may be quite Nathan a couple of years ago that is quite robust competitive and extensive right now and so I would give that as an example, RJ do you want to comment yeah. So when he talked about in 2000. When he gave long term guidance. If you look at the addressable market, we talked about the cough.
For the foundations of the business and then we talked about a high growth adjacencies, including areas such as autonomy electrification Iot five G.
And we talked about some of the investments that we were making it in particular, we didn't talk about optical as an area that we are that we were investing in particular to support things like autonomous vehicles as well as to support things like five G for the purposes of Interconnects and so forth and so we have essentially been executed against the strategy that we laid out I'll I'll also one of correct a.
Or a point that you made in your question you said, 5% of the bookings came from optical that's not what I said in my script, what I said is that 5% of the deals had some optical components.
Component within the within the the the the the agreement with the customer. So there was some aspect of optical within that optical of course is a relatively small theater piece of our business today.
Okay. Thanks for the clarification I'll leave it there thanks.
And our next question today comes from Andrew Open a bank of America. Please go ahead.
Hi, guys good morning.
Good morning, good morning.
Just a question of if you look at the numbers sort of a fairly significant outgrow from the U S. A relative to the rest of the world.
You know could you just talk about how this COVID-19.
What's driving it I've seen a lot of it is colver, driven and how the reopening dynamic good sort of change that has gone into the year round them until next year are you what would it take for the rest of the world to catch up with your wife and why is that your wife, so robust. Thank you.
Yeah. Thanks, so much for your question, Andrew So I as you point out over the last 12 months America's has continued to be a consistent shrunk performer.
And leave the company in creating value for our customers you know a couple of deals with the one that as I mentioned in his remarks to 58 million dollar agreement with the leading North American Technology Company is an example of you know I I think the model that we we have exported around the world and at least somewhat strengthen our other regions like.
APAC, where you know the customer has already been using solutions.
From across the Anthis Multiphysics portfolio, but is now expanding the number of simulation users and so that we have done a very good job at building a deep relationships with customers understanding their short in there long-term development, roadmaps and enabling them to be able to propagate the use of simulation to brother used.
[noise] cases to connect the physics and to also connect to other users and in the process to leverage that simulation and so that model.
That America's executes quite well is the model that we're executing around the world and just as an example, our Asia Pacific region has executed exceptionally they had another quarter, a very strong growth with 21% constant currency growth.
I'm, sorry could you 21% growth in the region at a constant currency basis.
And the strength in that region was broad based across industry customer types. Geography's. You know we had several seven to figure contracts in in Asia Pacific that added growth to the high tech sector, where customers are really showing enthusiasm for not just the core portfolio, but the adjacencies as well so.
There's a common theme here, where we are broadening and deepening the relationships within the customer.
With our core technology, having strong foothold in solid growth, but also leveraging the organic any inorganic investments that we've been making over the past five years to accelerate the footprint globally, and so I would say the core strength of the portfolio and the investments that we've been making during the course of the Pan.
MC with our.
Customers and in our portfolio are really the drivers of the acceleration in the performance of growth.
To some degree there is there is some there is a little bit of recovery at the Asia Pacific probably had with a little bit ahead in the recovery versus America's there's still unevenness in terms of how customers are preferring to to meet in person. So I wouldn't characterize.
You know things as as a return to normal quite yet, but certainly the business model is a resilience is showing through regardless of the challenges that we've seen independent attic.
Oh Wow.
Thank you so much of a sort of reopening of structural changes from the business model is the right word reading it.
Yeah, I'd say, it's the success that the management team is.
Is enjoying as a result of of building out that robust portfolio in that business model, but I think also the point around investing during the pandemic is is important to note I mean, it's really easy in a in a tough time til to barreled down the hatches and not make investments in the business, that's kind of what people might expect but there was.
Very proactive a very deliberate decision to not over pivot in that direction because of our confidence in the opportunity around what we do and the value that we can add to our customers and so I really do feel like we're going to be coming out of.
The pandemic whenever that might be in a in a real position of strength and I think just to add one small point to Nicole's response there.
When you think about the investments that customers make in answers, it's really triggered by their investments in R&D and.
And obviously globally are seeing investments in R&D customers continuing to look at next generation products that offerings that mess with simulation comes in so the fact that we can help them with building their next generation again points to the importance of our technology and that that's what allows us to be in a position to make.
These relationships in sales during during a pandemic or or any other time for that matter.
Oh, Thank God and dropped a follow up question I think on a previous called you guys highlighted how small medium business sort of comes to read.
You know your core business and you made some remarks about small and medium you are continuing to see improvement.
Can you just talk about sort of sequential trends in S. M B, a and what the <unk> you know if that if you're still viewed as a leading indicator for the rest of the business going through the year round and next year and I know he did improve your for sure I would work, but just maybe more color there. Thanks so much.
Sure I'll start and if there's anything you have to add you'd like to add as a so yeah. So as I mentioned in her opening remarks, we continued to see strength in the SMB customer set in Q3.
And we're really pleased with the momentum that we've seen now four quarters in a row and so I think that that is.
That's what's given us the confidence and continuing to raise throughout the year. In addition to the fact that our our pipeline with our large customers is solid robust and continues.
Continues to evolve and improve and so.
I'm not sure that the two are interrelated I think that there you know somewhat related in the broader sense of recovery, but I do feel like you know, although we're not quite at prepandemic behavior within the SMB set.
You know, we're really pleased with the ongoing the ongoing momentum and and what we've been delivering in that business.
To amplify one of the points Nicole made.
The large customer dynamic is somewhat different from the S. M. B for the most part the large customer dynamic.
Is driven by the long term relationships relationships that we've maintained with a direct salesforce with these customers. Many of these are long term customers of ours, they built their processes around answers.
And when it comes to a new project or a new activity that they start to continue to evolve their R&D efforts they tend to us as a vendor and so there's an opportunity within those customers to expand the footprint based on long term relationships.
In the case of S. M B as in many cases the S. M. B's are relationships that we have through channel partners and and some of these customers may be relatively new customers that maybe you know relatively early in their life as a as an organization and so I wouldn't necessarily say S. M. B, the leading indicator, which was the point that you made I wouldn't necessarily say, it's a leading indicator. These are two different.
Aren't the slightly different dynamics across both the S, a b and enterprise and and and each one of them has their own go to market motion and supporting activity.
Fantastic. Thank you so much.
Don't know next question today comes from God Mambo with Bird Berg. Please go ahead.
Yeah. Good morning, and thank you for taking my questions Uhm, maybe the first one just in terms of the race a T. V Guide is that we see again, either the second time in a row kind of becoming material I was just wondering what enables you. The the discharge is at this time that you've seen in S. M B a.
<unk> three or and also coupled with strength in Asia that you mentioned mmm or is it just the outlook as you look into cute pool, you mentioned the pipeline looks really strong in terms of what bill to come in you know an cupel versus what you originally expected.
Sure. So so in Q3, we had a really strong Q3 as as you point out with that strong double digit growth at Q3 ACB did come in line really close within our expectations and so the rays on a C V. In queue for is really a function of the improved momentum that has been building.
Since the last time, we shared guidance in August across the board and so what I would say is when you look at how we delivered year to date in in the quarter.
It it's been pretty broad base across industries across industries and customers and that's kind of a reflection of what I would characterize the momentum in queue for there's not any isolated one off thing that is driving that view it as more kind of an overall an overall you know momentum building.
You've been seeing if you rightly point out we've been able to raise throughout the year I mean, what is he recall in the beginning of the year. We we still were not sure whether what what the kind of dynamics around recovery, we're going to look like and so we've been kind of sharing with you as we see things ahead of us and.
You know systematically raising expectations overtime.
That's very helpful. Thank Nicole and then just as a follow up maybe I'll give it to you you mentioned you open. This partnership that is expanding again, especially in terms of the electromagnetic introducing PCB simulation within the fusion 360 product.
You've also work closely with P. P C on the Cat's fries with.
Covered lives in simulation.
Kind of a slightly different physics fruit for each of the Parker is there is there a possibility that you start introducing more uhm more of the traditional critics sobers into the into the ultra this partnership and vice versa would you expand the P. T C partnership with electromagnetic side as well.
Well I think I think the.
Look at the end of the day of golf when you think about it partnerships allow answers.
Truly expand our market reach by leveraging what our partners bring to the table you know they'll bring complementary technology skills. They have a brand they can help us reach different customer segments. So that more people can benefit from simulation partnering allows us to create a combined solution with the with the with the leading vendor. So at the end of the day customers can benefit from a more complete so.
Lucian.
Then either one of us can provide our own wall now Quito partnership then you'll see this all along Quito partnerships is maintaining an open ecosystem. So we're not about all partnerships and not about blocking things off but I'm, making things available opening things up and our strategy and our products remain open so that customers can create the optimal system to meet their needs. So as you think about.
Partnership strategy, just think about that you know we are open to trying to make sure that we can leverage and work with our partners to make our customers benefit from the entirety of what we can we can bring to bring to bear because we have an open open strategy I can't comment about it specifically an individual partnership the direction that it may go.
But hopefully you have some perspective of how we think about partnerships.
There's no fucking treasure.
[noise] and what it is one of our next question comes from caller rug.
Please go ahead.
Hey, Thanks, good morning Audrey.
Level question for you I mean.
Clearly you put up a couple of really strong quarters here and it sounds like the pipeline is really healthy in the queue for just.
Just as we think about what's going on more broadly with you know supply chains and screams in obviously, putting pressure on on kind of physical testing requirements.
How much of the strength do you think.
Be attributed to some.
Some of the supply chain and just macro challenges the customers are going through and I guess.
Just curious if you if you feel like this period is is further vandalizing or potentially accelerating the need for stimulation you know in other words do you feel like this is kind of a new.
Sustainable grocery calling for it thank you.
Well, so let me let me address your question and to and to sort of Timeframes why don't you think about the short term so in the short term.
Supply chain disruptions may be affecting many businesses, but we're really not one of the businesses that's affected by the supply chain and the reason is as I mentioned earlier the use of our software is tied to the design of products is tonight to the R&D phase for the most part and not it's not the nominated by manufacturing so whether.
Other if a customer has challenges with the plot with the supply chain and they can't produce as many units of a particular product that's been designed with our technology that doesn't affect our relationship with the customer they're already designing what that next product looks like and they're working with our engineers will they're working with our technology to figure out what the future future what looks like so so.
You know our customers continue to make investments during.
R&D and it's really not affected by by the supply chains in the short term. So we have no real short term issues. There when you think about it from a long-term perspective, and I think you're also alluding to this and your question. When you think about the long term perspective companies I think around the globe are questioning exactly how they need to <unk>.
About their supply chains going forward, so will they be a change in the way they've been thinking about supply chains and in some cases, you think customer thinking about moving manufacturing closer to weigh the final product is actually going to be used if this isn't necessarily a building frack factories in the more traditional way and.
[noise]. Many cases customers are thinking about building next generation factories, where they have much more automation robotics next generation manufacturing techniques. All of these things are relevant for simulation. We're in a position weird answers are in a position to help our customers as they go through this rethinking process as they go through the design of these next generation capabilities as they start to think about advanced manufacturing.
[noise] techniques materials as as they walked through the simulation that goes with that we're in a position to help them and so we see this as a long term tailwind, where we can help customers as they try to figure out what this next generation looks like in their own evolution.
Great. Thank you.
And then the next question today comes from <unk> Blue shower with group Insecurities. Please go ahead.
Thank you. Good morning first question RJ at the company's ideas conference last month posted by your semiconductor business unit. There were two very interesting comments from management regarding B, a strategic vision, but answers has there was a reference to.
You're becoming a quote cloud first digital platform as a foundation for your future growth. That's quote from an <unk> presentation. Similarly that you foresee a time of simulation platforms insights as a our service again, that's a direct quote so insecure about your your <unk>.
Loud future.
Was the commentary of your conference meant to suggest that.
Cloud is not just an adjunct or compliments to what you're doing today in terms of delivering technology, but ultimately becomes the nexus of how you deliberate technology, perhaps not unlike with P. T. C discussed porch cellphone on their call last night and then there's a follow up question.
You'd like to be improving a disability in terms of pipeline and the like could you talk about the investments you're making are planning to make in technical support and consulting.
Mm that's typically your shortly lately your second highest number of open positions. After R. D and you look like you're wrapping up in that area. So maybe talk about those investments and the availability of the necessary personnel for that function.
Sure J. So let me try to unpack your question and let me start with the the the longer term direction comment that you asked and and I think look you can you hear a lot more about strategic direction for and where we're going over the next year and so on think of some of the comments that you heard as a Denver ratings.
Some of the the Super exciting times that are ahead, Frances and our customers you you talked a little bit about cloud. We we've we've got answers cloud out there, which manages access to high performance computing resources, just remember that many of our customers for them cloud is about being able to access high performance computing a scale.
And enabling some of these larger high fidelity simulations do you run a scale and so you know in this last quarter last quarter on this call I talked about the scalability of some of our products products that was enabled by a customer frazzled the technical University of Eindhoven, whether it's solved a an aerodynamic problem with something like 3 billion computational cells.
It's 20 billion on unknowns and that and that scalability as possible of course because of court technical advancements that we've done. So for example, we sped up mess generation by 20 X, which is obviously a bottleneck in the creation of detailed simulation. This off transient phenomena, but also we were in a position to.
<unk> access to to cloud computing resources and in fact, just this week sucking nadella in his keynote at Microsoft Ignite use. The same example to show what is possible on the answers cloud platform, which is which is essentially answers products wanting an azure on the world's most powerful AI supercomputer. So that was one example.
I think of cloud that I'm excited about you know we support flexible licensing models, we support an elastic pay as you go model, we support a hybrid model, which mixes and matches the elastic as well as least licenses.
This year, we've continued to expand the number of products that we've added into a cloud capabilities. For example, we've added an L. S. Diner, we've added in the American products. We've added in sock to certification we continue to.
Improve our overall customer experience.
And we've also seen significant increases in cloud usage. So one of the ways that we monitor the that of course is by looking at core hours and this your year to date, we're seeing almost four times as many for core hours as as compared to this time last year and we still haven't hit that inflection point. So we believe that there is.
Still much greater greater demand within our customer base and in a world where watching our customers were seeing where they go and we're anticipating where they're going and we're giving them the opportunity to be able to drive some of the scale out compute so I'm really excited about where we are we're cloud and and some of that capability that there was a a number of all the things I am sure that we're.
Also mentioned in that conversation some of the things that were excited about the new capabilities. We have enough product, we've talked about a I M L and how a I M. L supports our technology and simulation all of those are interrelated because the advances that we make in one area can be delivered to our customers in other ways and.
That allows us to be a more responsive vendor to our customers a partner to a customer that allows us to continue to drive leadership in the marketplace.
So that was the first question what was the second question J was.
[laughter] it was around yeah.
There was around the investments in technical consulting and support positions, which is a noted is typically your second largest number of open positions after R&D.
Yeah, no. So I think I think if if the question is are we continuing to make investments in that area. That's absolutely. The case, we do continue to make investments in the area. We think our relationship that we have with our customers that are technical level.
Is something that our customers value it gives us insight into the way we work with our customers use our technology.
And it's a two way street were in a position to help our customers as they evolve and suddenly we're in a position to to take customer feedback and insight into the next generation of our products coming in from the field. So so I think I think we're excited and we continue to make investments in those areas.
Perfect. Thanks archery.
And our next question today comes from Jason Celaeno, with Cuba and capital markets. Please go ahead.
Hi, Thanks for taking my question.
Uhm related to the Max I'd be curious on how got you know acquisition came together I know in the past you said that you know sometimes customers make requests and I was wondering if this was one of those instances and then maybe a quick follow up.
Max contribution on an annual basis is it fair to think it's 24 to 26 million to produce annualize the contribution for Q4. Thank you.
Yeah. So I can quickly answer that question and and on the contribution. So we expect so we had as we said we think it'll have about $6 million to $8 million a V. C V impact in revenue impact this year, which will be offset by.
Julie offset by currency next year, it's where we're estimating an incremental approximately 20 million inorganic impact.
And as far as far as how the acquisition comes together.
You know as a as I've said many times acquisitions are not a strategy unto themselves acquisition throw in support of our strategy.
And clearly one of the areas that we have continued to drive is the is the broadening of Ah multiphysics capability.
As I mentioned in the call. We had we have some leading optical simulation products and capabilities because EMACS, obviously would have been on our radar for awhile as as an opportunity for us to be able to broaden and deepen our portfolio in that space.
And I think in in the script you you heard me talk about our customers.
Who are using all of the products and and had how the technologies could work together in two to support to support.
There are N D efforts and so this kind of technology fits right into I'll go to market motion are salespeople are very familiar with being able to position technology of this nature. So it's a very natural acquisition for us to for us to conclude.
We're excited about the technology, we're excited about bringing those people on board.
Great excellent I appreciate the color.
Not our next question comes from kind of a long do you get homesick.
Please please go ahead.
Great. Thank you for taking my question.
I wanted to touch on and announce what you guys made last month, the answers and Apple R. A safety testing simulation module for Max.
Obviously is a very large part of our ecosystem should we expect that this brings in a wave of new potential customers or is this simply added her to your existing tech relationships.
So I I can't talk about what any specific company mail and I may not do but what I can tell you is that we're really excited that we can make our technology available.
Available to to to customers, who are not necessarily experts in using simulation strategy for simulation is to take a simulation and make it more pervasive across the product lifecycle and part of that is creating applications that are easier for a non engineers to use and.
So as part of a strategy, we're creating applications that include various elements of our technology that can be integrated together to deliver SaaS experience for for our end users Ah wherein they can they can simply invoke our technology under the covers if you will to solve specific problems. So.
Those are the kinds of applications that we are excited also about bringing to market and those are not those that's typically not in the area that we've historically participated in but we certainly see that as being part of the overall strategy that we've driving of making simulation pervasive across the product lifecycle.
Got it really appreciate the colder and Nicole.
I wanted to touch on the higher makes a perpetual.
That's simply a snapback of suppressed perpetual buying from 2020 or is there some other element, causing that that that higher and higher perpetual mix.
Yeah, No I I I would characterize it as he recalled perpetual licenses during during the pandemic did take quite a significant hit it particularly for three quarters of last year and so they did recover.
Quite a bit in the fourth quarter of last year, which is one of the reasons why that compares a little more challenging in queue for but customers continued to preferred time based licensing models, because it really enables them to be.
More flexible is there there needs evolve and so over the past several years the business matters really been shifting away from perpetual licenses. If you look over longer periods of time, it's been pretty flat and the growth has been primarily through the acceleration of leases and so and that's really built a very strong annuity business for us over the past five years and it has been a very.
Successful.
Evolution of the business.
And so while we we we did see we do our seeing kind of some of the of the compare effects in the first three quarters of this year, we believe over the long term that the shift that customer we're seeing from customers is going to continue towards that lease space licensing.
Great. Thank you very much.
You're welcome.
And our next question comes from Blair Iron Mask Rosenblatt Securities. Please go ahead.
Thanks, a nice quarter, everyone. Just following on Jay's question around with cloud actually I was just wondering if you can maybe help us understand where the customer interest lies right now in in terms of cloud based simulation tool. So not just not just H P C, which has been in use for.
For a long time, but but you know our customers looking to to shift from on prime to cloud with her tools and and if they are sort of you know where where are you seeing the traction uhm.
Uhm out there.
So we're.
We're seeing we're certainly seeing customers wanting to take more advantage of the cloud.
During the suddenly that happened during the pandemic when people were working remotely and didn't have access as easy access to their offices.
And that's certainly drove some some cloud usage I mean, the fact remains that we <unk>. We can all let give our customers who want to take advantage of our technology, we can give our customers a.
An experience where they have elastic compute driven from the cloud. It's a fast like experience, we can give them that using our elastic licensing capabilities, so that that feels to them like a sauce experience and similarly, we can give our access we can give our customers access to on premises technology in a least model, which they which they have used for awhile. So we can.
Give our customers a choice of what they want to be in a position to do [noise] and says cloud gives them the ability to support.
Support they need for cloud compute both from the from the solver perspective, as well as skill off for H P. C. So it really is after the customers and Ah you know many of our customers have made investments that are that are within within their own you know the building out data centers. So they take advantage of they prefer to take advantage of it.
Their their own data centers, some customers will look at the the the the amount of data that they have to men manage I mean, when you think about when you think about a simulation a complex multivariate simulation that's running across multiple a multi very optimization could result in terror.
Oh bites of information and so so then there's a question of where do you store that information how do you keep it do you move it from one club to another what is their standard model. So it's not simply a matter of moving piece parts into the cloud, it's really thinking holistic loose on the part of the customers on whether and how they want to make this transition because it's an entire work flow that's it.
Ross multiple vendors that needs to be managed uhm and I think we're very well positioned our technology is is is ready for the cloud we're very well positioned we're excited about our capabilities and it really is a matter of meeting the customers as and when they are ready.
Great. Thank you.
Our next question today comes from Jackson J.
J P. Morgan. Please go ahead.
Great. Thanks for taking my question.
Actually the.
If we can follow up on I mean, I know, there's been a lot of questions going to cloud, but if we think about you know if there are mirrored deal <unk>.
Beer cloud maybe through your partnership with with Microsoft.
How would that actually impact the revenue line of items and is there any kind of a difference in recognition depending on where the cloud deployment.
Yeah, I mean, I I would say that that part of the business that is.
That customers are using on the cloud itself is.
Very small and immaterial the vast majority of the use case is around [noise] seamless.
Seamless access to H P. C capacity another capacity outside the cloud, which has no impact on our on our current until it's exactly the same revenue recognition model that we have in the whether it's at least their perpetual license because they're entitlements would be separate from that usage.
And the way we built our the way we built a product Jackson is that customers can bring their own licenses right. So it turns you can you can seamlessly take advantage of both answers cloud computing capabilities as well as you can take advantage of the same license running on premises and so the fact that we give you the flexibility of managing.
That that's what customers are looking for and so when we're not asking them to give up their investments in there on on on Prem compute if they've got that that's great. They can take advantage of that and in addition, they can take advantage of cloud or if they want to choose to completely take advantage of the clouds. They can they can do that too. So that flexibility is what customers are looking for and we're in a position.
To support them with that.
Okay that makes sense and then a forward one diner so.
The use cases that were kind of talking about here are different in our expanded from what we'd probably would've thought when you first required Alice Dot I know you know right down the middle craft an impact is the malleability of the diner.
Over.
Okay, two two diner or it's also something that like other software portfolios can do they can kind of be.
Flexible outside of their core use case.
Yeah, I'm not sure what you mean by the malleability.
I think that firstly.
Dino provides a diner provided.
And explicit Ah analysis capability into the portfolio, which obviously has use cases of wide variety of use cases.
And we've continued to expand those use cases within the answers portfolio as we've integrated the technologies together and combined both explicit and implicit capabilities. It broadens the it broadens the addressable opportunity. So that's that's obviously the case I think perhaps you might be referring to the to the announcements we the comment I made about Fujitsu and.
I think in Bath.
What is important to recognize is that the the dinosaur over is available on the Fujitsu on the Fujitsu Uhm a machine on that on their prime H B C supercomputer and essentially because that that machine.
Machine is efficient we can help our customers because they're supporting diner on the on the they're supporting the large scale dyno runs on the Fujitsu hardware platform and that's more efficient because they can offload some of their their their their simulation workload onto inefficient computer platform. So that was the point on that.
On that piece and hopefully that that clarifies the comments about fujitsu.
Okay. Thank you.
Thank you that's all the time, we have to turn it over to I J for some closing comments.
Yeah.
Thanks, Kelsey so I'm really excited about our excellent execution, a broad customer base and a robust pipeline our customers rely on some simulation the strengthening of the small medium business market and our ability to close large contracts only add to that excitement and give me further confidence as we look to close out 2021, I would like to.
Yes, my sincere gratitude to our customers into a partner for their continued support.
And a special thank you to my answers colleagues, you'll have my gratitude for delivering yet another strong quarter.
Thank you everyone for joining the call today enjoy the rest of your day.
Thank you ladies and gentlemen. This concludes today's conference call. We thank you all for attending today's presentation, you may not as furniture lines and have a wonderful day.