Q4 2021 ANSYS Inc Earnings Call
Ladies and gentlemen, thank you for me, Brian welcome to the Anixter fourth quarter and full year 2021 earnings conference call.
Let's say, Oh, Jacob President and Chief.
Executive Officer, Galena, Salinas, Chief Financial Officer, and senior Vice President of Finance and tells me that Brian Vice President of Investor Relations.
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Please go ahead.
Good morning, everyone. Our earnings release, the related prepared remarks document and the link to our 'twenty 'twenty. One Form 10-K have all been posted on the homepage of our Investor Relations website. They contain the key financial information and supporting data relative to our fourth quarter and full year financial results.
And business update as well as our Q1 and fiscal year 2022 outlook and the key underlying quantitative and qualitative assumptions.
This 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.
Forward looking statements are based upon our view of the business as of today and Anzus 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 GAAP to 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.
L O J Gopal for his opening remarks.
Hey, good morning, everyone and thank you for joining us.
Q4 was another strong quarter for answers and the largest quarter in our history.
We beat our financial guidance for the quarter across all key metrics, including a C V revenue.
Earnings per share and cash flow.
Q4 was the capstone to an excellent year in which we grew a C V by 16% in constant currency.
Our industry leading product portfolio.
Strong execution and growing markets enabled us to beat and raise our guidance each quarter of 2021 .
We saw strength across all major industries geographies and go to market routes over the course of the year.
Our direct and indirect channels grew at double digits.
Similarly, each of our go to market customer segments enterprise strategic and volume accounts all grew by double digits.
The high Tech and semiconductor.
Aerospace and defense and automotive and ground transportation sectors were again, our top industry and each demonstrated robust year over year growth.
From a geographical perspective, we saw strong performance with each region growing ACB at double digits.
I'm also pleased that we saw broad based growth consistent with our expectations across product lines from our more established flagship products in structures fluids electromagnetics and semiconductors.
Our newer offerings, such as optics materials and digital mission engineering.
Our customer relationships continue to be strong and are helping to fuel that growth.
In Q4, one of our key contracts came from Asia Pacific.
A five year multimillion dollar agreement with LG electronics.
This long time customer uses as a simulation to enable resource efficient production by significantly reducing material use cost and the number of redesigns.
That's sustainability initiative has enabled the electronics giant to introduce high quality next generation products faster than expected, while reducing its carbon footprint.
I'm also excited that fraunhofer.
German research organization with seventy-six institutes spread across the country.
Saturdays on the answers simulation platform with a three year seven figure contract in Q4.
Its researchers and engineers will use the entire asset portfolio to support innovation efforts in the automotive chemical energy aerospace and healthcare segments.
Our ongoing broad based business momentum and our strong customer relationships give us even greater confidence for our prospects in 2022 and beyond.
We expect our 2022 a C V to grow at about 10% at the midpoint in constant currency, which positions answers to surpass our long term target of $2 billion in a C V.
Nicole will walk you through our guidance for 2022 in a moment.
During these calls I, often highlight different aspects of our technology.
For example, I discussed our solutions for optical simulation on our last call and our unparalleled colic scalability in August of 2021 .
Given the strength of our semiconductor and electronics business in Q4, I'd like to spend a little bit more time discussing that important segment.
Faced with mounting customer expectations today's semiconductor companies operate at the cutting edge of innovation and the products are continually pushing the boundaries of what is possible.
Furthermore, some systems companies are turning to custom built a bespoke silicon to give them products and edge.
At a cost of hundreds of millions of dollars for advanced process node tape out the cost of failure is prohibitively expensive.
The semiconductor and system companies are maximizing their likelihood of success by turning to technologies like scalable multi physics simulation. Some answers to develop advanced process nodes and topologies like three D. In two and a half the multi die chip assemblies.
A key deal in Q4.
It is a multi year agreement with M D. A global leader in high performance computing and visualization products.
AMD is a long time and this strategic customer.
This new contract reflects Andy's rapid growth and the expanded use of amphora simulation and sign off tools.
As a result, Amd's global engineering teams have increased access to answer solutions, improving collaboration and organization across the company.
Customers are also using answers electromagnetic simulation to prevent electromagnetic interference and to ensure signal integrity.
Our best in class structural and fluid stimulations are critical to predicting cooling and thermal warping and to ensuring reliable IC package designs.
Customers are relying on our optical simulation to ensure the success of high speed Photonics Interconnectivity amongst data hungry systems.
And they are leveraging our safety solutions for.
For example, a large semiconductor supplier to the automotive industry is using answers to support workflows that graphically link semiconductor design to key functions within the electronics architecture for electric vehicle battery management system.
Customers can rely on answers because we continue to drive significant technological advances into the marketplace.
In our recently released <unk> 2022 our one we introduce breakthrough new semiconductor functionality that targets D. V. D oar dynamic voltage drop which has traditionally been difficult to model and understand.
D V D as a drop in the voltage rails caused by high transient current drawn from the power grid.
It is analogous to your house lights dimming for a moment when your air conditioning turns on.
Our new technology Sigma D V. D is a powerful approach that significantly increases coverage of dynamic voltage drop.
Would this functionality we are empowering our customers to move from stimulating triplets to stimulating an entire chip all switching scenarios.
We believe this breakthrough will spur innovation throughout the semiconductor industry.
And so this has always advocated for open ecosystems, which allows for best of breed interoperability and give our customers the ability to make the right decisions for their unique businesses.
This is particularly important for semiconductor and systems companies.
And that is why we partnered with foundries and other leading software companies.
As part of our partnership Synopsys is integrated answers electronic solutions into its three D. IC compiler for highly accurate signal thermal and power data.
Automated back annotation amongst these solutions enables faster convergence with fewer iterations to enable customers to bring next generation products to market faster.
Earlier in 2021, we signed a multiyear multimillion dollar contract with a major semiconductor company, which started on NCS multi physics solutions, including SSH, a assess and answers Red Hawk S. C for the latest Finfet technologies and advanced three D. I C techniques.
Not only was this customer are able to realize the benefits from answers products, but it was able to drive faster time to value. Thanks to our integration with Synopsys is best in class technologies.
Moving to our semiconductor foundry partners Samsung Foundry has certified answers Raptor H electromagnetic simulation solution for developing advanced systems on chip.
As well as for three D Ics.
That industry Forest certification enables answers to help Samsung designers as well as Samsung foundry customers more accurately analyze and mitigate risks from electromagnetic effects when adopting samsung's new sign off Clos.
In Q4, TSMC named answers as an O I P partner of the year for a joint development of four nanometer design infrastructure, which led to the certification of answers where like I see it as just told them for Tsmc's, most advanced three and four nanometer processes.
TSMC honored us with an award for our development of answers Red Hawk S. C electrothermal for full chip and package thermal analysis.
And since there's also partnered with Intel foundry services to become an inaugural member of the design ecosystem Alliance.
Through this alliance Intel will use answers is market, leading multi physics solutions to enable intel customers to create unique chips with tailor made silicon.
Turning to our environmental social and governance initiatives answers and three M have launched a material modeling training program that is helping engineers refined product development processes and reduce material waste.
Three am is offering verified material models for its taping of diesel products to all answers to users to help power environmental sustainability initiatives.
Finally, I'm excited that answers has recently been recognized for our product innovation as well as for a winning culture at the International Society for optics and Photonics presented the Prism Award in software for our optic studio Star module. This technology streamlines optical designs, while reducing does.
<unk> errors development time and material costs.
And this has also been recognized by the Great Places to work Institute as a preferred employer in China, Japan, South Korea and Taiwan.
That is a testament to our colleagues in Asia.
As well as to our culture of innovation.
In summary.
Q4 was a great quarter.
<unk> off an exceptional year for answers.
We beat guidance across all our key financial metrics and we delivered the best year in company history.
Thanks to our market, leading portfolio and deep customer relationships, our customers are continuing to grow their answers stimulation for products as diverse as consumer electronics electric vehicles rocket ships and life saving medical devices.
These factors combined with the momentum we experienced in Q4 will propel us through this year and beyond and with that I'll now turn the call over to Nicole Nicole.
Thank you RJ. Good morning, everyone. Let me start off by saying that financially 2021 with our strongest year ever and we are optimistic about 2022 given the momentum in our business for.
For both the fourth quarter and full year 2021 we beat our financial guidance across all key metrics and this is especially noteworthy as we raised our full year guidance for ACB revenue EPS and operating cash flow for all three quarters throughout the course of the year.
Additionally, in 2020 , one we achieved new company records across key financial metrics, including E. C V revenue EPS and operating cash flow.
As RJ mentioned, our growth was broad based in 2020 , one with each of our customer segments and geographic regions growing double digits.
Despite the lingering uncertainties around the pandemic, we saw growth across all industries as well as all product lines, our wide ranging growth is evidence of the critical capabilities our products deliver to our customers.
2021 was an outstanding year, and we are entering 2022 with momentum and a strong backlog.
Now, let me take a few minutes to add some additional perspective on our fourth quarter and full year financial performance and then I will provide our outlook and key assumptions for 2022 and Q1.
Beginning with a C V. We delivered $755 4 million in Q4, which grew year over year, 14% or 16% in constant currency.
For the full year, we recognized $1 9 billion and a C V growing 16% in both reported and constant currency.
We saw strong performance across customer types geographies and industries.
Full year E. C V from recurring sources represented 81% of the total.
Q4, total revenue was $661 4 million and grew 5% or 8% in constant currency, which exceeded the high end of our guidance.
Full year revenue with $1 9 billion and grew 14% in both reported and constant currency.
We had strong top line performance in 2021 with a C V and revenue both growing double digit at 16% and 14% respectively.
At our 2019 Investor day, we outlined our business model of double digit growth, including tuck in M&A.
Both the fourth quarter and full year, we executed against this business model.
We closed the quarter with a total balance of GAAP deferred revenue and backlog of $1 3 billion, which grew 30% year over year.
During the quarter, we continued to manage our business with financial discipline. This yielded a solid fourth quarter gross margin of 92, 3% and an operating margin of 46.8%, which was better than our guidance.
We had full year gross margin of 95% and operating margin of 41, 4%.
Operating margin was positively impacted by outperforming revenue.
The results with fourth quarter EPS of $2.81, which was also better than our guidance.
For the full year EPS was $7.37 similar to operating margin EPS benefited from strong revenue results.
Our effective tax rate in the fourth quarter and full year was 19%.
Our cash flow from operations in the fourth quarter totaled 101.7 million, which benefited from strong collections.
For the full year, we had operating cash flows of $549 5 million.
We ended the quarter with 668 million of cash and short term investments on the balance sheet.
In line with our capital allocation priorities, we repurchased approximately 250000 shares during the quarter for around 99 million.
For the full year, we repurchased approximately 347000 shares for around 135 million.
We have two 5 million shares available for repurchase under the current authorized share repurchase program.
Yeah.
Now, let me turn to the topic of guidance.
We expect the momentum we saw in 2021 to continue which gives us confidence as we look ahead to 2020 two.
It's RJ mentioned, our 2022 full year a C V guidance surpasses the $2 billion goal, we laid out at our 2019 Investor day.
We are also on our model of double digit growth, including tuck in M&A with industry leading margins.
Let me start with our full year 2022 guidance.
We expect our full year ACB outlook to be in the range of $1.990 billion to 2.050 billion.
This represents growth of 6.4 to nine 6% or 8.3 to 11, 5% in constant currency.
We have a balanced and diversified business, which is driving the broad based performance and double digit ACB growth at constant currency that we expect to see in 2022 .
We expect revenue to be in the range of 2.040 billion to $2.110 billion, which is growth of 5.6 to nine 2% or 7.4 to 11, 1% in constant currency.
Let me touch on some of the assumptions considered in our full year guidance.
We continue to expect broad based growth and continued momentum from our large enterprise customers and SMB customers.
We also assume that going forward, we have a more normalized mix of business with our subscription lease licenses growing faster than perpetual licenses.
As a result E. C V is expected to grow faster than revenue as the business model shift to subscription lease licenses continues.
Additionally, our full year guidance is based on how we see our book of business and pipeline today.
As a result, we have assumed a neutral inflationary impact to our topline. However, we have assumed a moderate impact from inflation on expenses.
This brings me to our operating margin guidance, we expect our full year operating margin to be in the range of 41% to 42%.
As a result, we expect our full year EPS to be in the range of $7.64 to $8.10.
We expect our full year effective tax rate to be 18%, which is one point lower than the 19% rate we had in 2021 due to recurring tax savings expected from tax planning initiatives.
Now, let me turn to our full year operating cash flow guidance. Our 2022 outlook is a range of 580 million to $620 million we.
We expect to see significant growth in operating cash flow levels year over year, driven by strong operating leverage in our business model.
However, our cash guidance absorbs the negative impact of approximately $60 million to $80 million in additional cash income taxes.
This is driven by R&D capitalization tax legislation and other law changes that impact taxi or starting January one 2022 .
Although our overall 2022 tax rate is expected to be lower.
The effect of the law change change, it's the timing of cash tax payments.
Which creates near term cash flow headwinds that will normalize through the amortization dynamics that occur over time.
Well there is still a possibility that legislation will be enacted that defers the requirement to capitalize our knee, we are including higher cash taxes in our current outlook as we will be required to make these payments unless the existing law is amended.
This legislation impacts timing of cash flow. It has no impact on our ability to operationally grow cash flow and does not create any incremental expense obligation.
We remain optimistic about our cash generation in both the short and the long term.
As you can calculate from our guidance our current outlook absorbing the timing impact expect operating cash flow to grow faster than E. C V in 2020 two.
Additionally, since quarterly operating cash flow can be volatile growth in our full year cash outlook continues to be the best measure of success.
We have seen significant currency volatility so far in 2020 two.
When compared to the 2021 currency rates, our 2022 guidance is negatively impacted on a C V by approximately $34 million and an operating cash flow by approximately $12 million.
Further details around specific currency rates changes in tax legislation and other assumptions that have been factored into our outlook for 2022 and Q1 are contained in the prepared remarks document.
Now turning to guidance for the first quarter.
This year, we will provide quarterly a C V guidance to help with your modeling.
As a reminder, annual a C V is the best metric to observe the momentum in our business.
We expect first quarter ACB in the range of 328 million to 348 million revenue in the range of 395 million to $420 million.
Operating margin in the range of 29.1% to 31, 9%.
And EPS in the range of $1 five to $1 22.
Heading into 2022, we have a strong pipeline diversified business model and a high level of recurring E. C V all of which contribute to our confidence in our outlook.
I would like to thank the anzus team for another outstanding quarter topping off a fantastic year.
Despite a continued challenging macro environment, we delivered broad based growth.
The team's exceptional operational discipline and customer centricity enables to us to meet or exceed our internal models across every geography and customer segment.
And deliver extraordinary value to our customers across the globe.
We continue to build on that momentum invest in our business, while executing against our strategic priorities and we are well positioned to deliver on our 2022 outlook.
Operator, we will now open the phone lines to take questions.
Ladies and gentlemen.
Yeah.
Well now begin the question and answer session.
One on you touched on the phone.
Parents.
Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
This time, we'll pause momentarily to assemble the roster.
First question come from Mr. John <unk> of Credit Suisse. Please go ahead.
Hi, good morning, everyone.
Yeah.
Good morning can you hear me all right.
Yeah.
Okay, great well, a nice nice performance in the quarter start off there.
Really my questions are first how should we think about the SG&A costs for 2022 maybe what's the incremental annualized from M&A. Some of the inflationary pressures you talked about and then obviously also gross investments.
And then the second question just to make sure I have the tax adjustment correct to the cash flow. If we get an amendment from the government, which I think you know at least in our coverage. There are some companies that believe that'll happen you know would we just reverse out that $70 million.
Simple as that thank you.
Sure. Thanks, John Yeah. So I'll answer your second question first and then the first question. So yes that if the if there was legislation that are delayed or repealed a law.
That $60 million to $80 million would be added back to our the cash flow outlook. Now that is that is pending you know any changes in tax law that could occur as a result of you know of that repeal. So if it was just a straight repeal of that or delay of that then then that would be the right interpretation.
From an SG&A standpoint, I think the way to think about it is that it would be fairly consistent from a from an ETR standpoint overall.
Yeah.
Did we lose you.
Oh, sorry, I was on mute there.
Great. Thank you for for <unk>.
The questions I'll I'll pass it along.
Okay. Thanks, so much John .
Thank you.
Our next question comes from Jay Warshauer Griffin Securities. Please go ahead.
Thank you good morning Akshay.
Okay. Let me start with you with a question concerning the 2022 or one release.
One of the interesting components of the release was the reference to what you call a costume workspaces or perhaps otherwise known as industry solutions could you comment on.
Your broader plan.
I had a revision or a packaging was software in that way, but these custom work spaces.
For additional industries and the one you started with with our one.
How do you think this might affect your multi solution sales over time for example.
Perhaps since you have such a large focus on process in the release.
How do you think this might affect your demand before but never booked.
Overtime.
And then through for you Nicole.
According to the 10-K, there was a very large increase in your.
<unk> revenue from our P O or 2022 .
Considerable increase in pack versus a year ago and from Q3 is that mostly an artifact of the number of large transactions.
Transactions that you concluded in Q4 and is this perhaps a new more normal level.
Got it.
Wherever you're coming out of our poker for next 12 month period.
Yeah, Okay object. Good morning, first I'll, let me take the first question and then I'll hand, it over to Nicole for the second.
So the the.
A point that you're making actually is a very good point, we have invested in creating a comprehensive platform that supports stimulation.
And that platform allows for workflow at odds, but data management allows for a number of other elements that come together and allow us to move from being a provider of tools to a broader provider of solutions and so for example, one of the things that you saw in our 2021 .
2022 our one release was with Anthos fluids, where we now have a dedicated aerospace workflow that tailors. The UI the user interface to external aerodynamics simulations. So that delivers built in atmospheric conditions at optimum optimize the solver settings.
Relevant input and output parameters and so on so that's an example of the power that we can bring to bear as a result of the investments that we've made and of course you can see some of this is being reflected throughout the portfolio.
Nicole Yeah, and so Jay to your question on the deferred revenue and backlog balance. Yes, you are correct, we closed the quarter with a deferred revenue and backlog of about 1 billion three and that grew about 30% year over year.
Now the strong growth came from the great momentum, we've been seeing in our business and the success of the sales strategy to shift the business model to multiyear subscription leases. So to the point that you made earlier about strong multiyear performance now Q4 was especially strong because of the timing of some of the start dates of contracts executed in Q4 and so.
Since these contracts were signed before Q4 ended these contractual obligations.
Are included in the deferred revenue and backlog balance at the end of the year, but if you normalize for some of these contractual commitments, which had a later start dates the growth would still be really strong it would be close to the mid teens and so I would say that overall I'm really strong performance.
Okay, maybe one quick follow up any update on the adoption of <unk> cloud you did announce the new relationship with AWS recently.
At the Ada Conference in December there was considerable focus by our answers at the conference.
Your cloud work with Microsoft, perhaps you could comment on that as well. Thanks.
So Jay I think I think to better understand our cloud strategy. It might just take me a moment to maybe repeat or summarize for.
What how it ends it takes advantage of the cloud and what's important to customers.
So let's consider a typical enterprise application that's not simulation so typical enterprise application.
Like an ERP system for example that enables some workflows and data sharing between users and the user interactions with that application typically involves something like a database look up in a database update the amount of compute power. That's required is small and predictable and that allows the application vendor the SaaS vendor to choose a cloud for their application based on that criteria.
The application runs in the vendors instance, in that cloud and the vendor will typically charge a customer a fee to use the application based on the number of users or all the metrics now.
Now with simulation simulation is very different from the traditional enterprise application in that the amount of compute required to launch simulation can be enormous. So a single simulation can run for hours across hundreds of course, a single user can launch multiple simulations in parallel and that can translate into a lot of compute and related costs and that's why.
High performance computing or H B C. Its scale is so important to us and to our customers.
Now historically customers have run H B C workloads in their own data centers, so their own private clouds, if you will.
And simulation has been one of their more demanding workloads now as well as the cost of and the availability of H B C has come down in the public cloud.
Some of our customers on working directly with the Hyperscale cloud vendors to migrate or augment their private clouds with H B C. In the public cloud and so a customer might often do this in the context of a broad data center update strategy in which multiple workloads, including the H P. C workload being migrated to the public cloud and obviously different customers.
We'll pick different hyperscale public cloud providers, depending on the terms and the needs in the commercial arrangements and so forth.
So there are two conclusions jaded raw from these facts. The first is that it is essential for us to support H B C. On multiple hyperscale cloud providers and the second is because simulation workloads could be run on premises in a private cloud one day and it can be run in the public cloud. The next we have to support flexible licensing and specifically we must allow customers to be able.
To purchase incremental elastic licenses to support their public cloud simulation work as well as giving them the ability to bring in use the licenses that they may have used on premises to bring it to the cloud. So that's the essence of our strategy and we've continued to support our customers with flexible licensing as they use answers products and in the public cloud of their choice. So you mentioned.
Couple of a couple of announcements. So first let me talk about <unk> a cloud. This is a product we've had in the market for a while and I've spoken off it before it's built on Azure. It supports flexible licensing it allows our customers to take advantage of scale out compute on the Azure cloud running on the answers managed instance answers.
And so as cloud revenues customer usage are both growing at we are seeing a forex increase in compute usage year over year.
The second product that you referred to which we announced earlier this year is in collaboration with Amazon Web services.
<unk> gateway proud by AWS. It provides a seamless access and deployment of answers products on AWS. It offers scalability and flexibility it allows customers to maintain their existing AWS relationships by pairing their hardware access through AWS with their answer software in other words the customers run on there.
Your own instance, and not on the answers and stuff and so this obviously provides a path for monetization for AWS and of course for answers as well.
So that's the strategy that's the that's the context of those products are.
And obviously hopefully this.
Explains what we're trying to accomplish.
Yes, thanks very much.
Thank you and the next question comes from Mr. Adam Borg with Stifel. Please go ahead.
Great. Thanks, so much for taking the question, maybe just a follow up on that.
The answers gateway question so.
I understand that that act as a gateway.
Ws excuse me that's a browser based solution is.
Is the goal for the entire assets portfolio to be made available over time odd assets gateway.
So obviously it would be the intent is to make sure that our customers can take advantage of the portfolio of the.
The answers portfolio on the public cloud.
And and you should expect to see answers products being broadly available on book on the cloud.
Great and maybe just to follow up with more of a housekeeping question. The call could you just comment on what the organic constant currency growth rate was for ATV and revenue just for the <unk> would also of calendar 'twenty one. Thank you so much.
Yeah.
No.
Sure.
Sure.
Yes.
T G I.
Yeah.
Yes.
Yeah.
Thanks again.
Thank you the next question.
Belmond Bahrenburg. Please go ahead.
Hey, good morning, and thank you for taking my questions. The first one is just around the commentary that we're getting on the on the automotive and just in general transportation and district, but maybe zooming out zooming in on the automotive side, it's something that's been.
Recovering after years of kind of subdued investment and now it seems like everyone's.
Spending the R&D.
Expenditures in terms of what Youre seeing in your results today, when you were saying that those are the <unk>.
People are starting to really ramp up would you say, it's the first inning of that or have you started seeing the real benefits of electrification, obviously autonomy coming later.
Later down the line.
Basically is this another short cycle that is that is better off the week cycle or do you think this could start of a more more substantial structural growth in the industry or for you.
Well, let me, let me quickly take that.
So when you think about the automotive industry, obviously, it's one of our top three verticals.
Electronics and semiconductors automotive Grand spreads transportation aerospace are the top three verticals.
It's an area, where we've historically had a lot of strength as you rightly point out the areas, where there is a lot of customer interest right now is in both electrification and autonomy and a few years ago I would've said that there was significantly more.
More interest perhaps in autonomy as a as a possibly the more near term.
Activity, but what were seeing right now is that are.
That some of the vendor as well some of the Oems that pull back a little bit from there expectations, maybe the more aggressive timelines they had but a lot of the work. That's on autonomy is going towards eight as improving driver safety and so forth. So that continues to be lots of investments in that space, even though full autonomy might be further away as.
As far as electrification is concerned as you know it's not just about the powertrain, obviously when youre thinking about the powertrain.
And the electric.
A transformation from the internal combustion engine and electric motor that's where our high fidelity multi physics workflows come in that allows you to design.
Better and more thermal efficient motors and batteries and power electronic components all of that is part of electric electrified powertrain.
But in addition.
There is a change it's not just about changing the internal combustion engine to an electric motor this as an opportunity to rethink and redesigned the car and so that means there's more analysis for for example for safety.
And understanding what failure modes look like more analysis on a noise and vibration and understanding what the ambience within the Ob ambient.
<unk> in the car car Calvin is going to look like on crash analysis, an impact analysis. So there's a number of different areas all of which where we have all of which we have strengthened our which are which are companies are pursuing in their pursuit of electrification. So we're very excited about the work that's taking place and we see this as being an ongoing long term.
A tailwind for us in that particular vertical.
That's very helpful. Thank Gotcha, and then maybe you can call just the question on the guidance when you think about the ACB growth.
And the ACB number crossing the 2 billion for the first time.
What are you assuming underlying in terms of the recurring ACB as a proportion of ACB as you have as the recent trends of growing crossing the 80% and recurring is that what youre assuming in the in other words is there could there be.
Little headwind for the next couple of years coming from the fact that you are assuming to sign more.
Deals versus perpetual.
Yes that is definitely implicit in our guidance is that as you recall in 2020. There was you know a more there was more of a trough around perpetual 2021 reflected I'd say kind of getting back you know back to the normal levels of perpetually had so our underlying view is that the momentum of cut.
<unk> is moving towards time based licensing and that will continue overtime isn't as the business model has shifted pretty substantially towards that over the past.
Five years, and so our underlying assumption in 'twenty 'twenty. Two is that then makes it a little bit more normalized and as a result, you know ACB is growing faster than our than revenue as a result of that mixed compare dynamic.
That's perfect. Thank you so much.
Thank you next question comes from Tyler Radke of Citi. Please go ahead.
Yes. Good morning, Thanks for taking the question.
I wanted to ask you about some of the semiconductor deals that you did this quarter. It seemed like there was a lot of activity.
I mean, some of the certification on Samsung's three and four nanometer as well as.
Number of eight figure deals I guess, just a couple of questions. You know I guess when you. When you are building out. These partnerships are you seeing kind of you know.
Your semiconductor customers take on more of your products I guess, you know or is this a number of solutions beyond just red Hawk.
Some of the leading node processes and then more broadly as you think about some of the.
You know a multiyear chip shortages that semiconductor companies are facing like how is this kind of changing their roadmap for using <unk> products.
Okay.
Yeah. So when you think about our involvement with semiconductor companies and as I mentioned this.
Obviously, the companies that have been historically doing semi as well as some of the system companies that are doing doing semi is there's obviously been a lot more activity.
That space, what we are what we are.
We're able to bring to bear is the entirety of the portfolio and I mentioned some of this during during my my script.
Look when you think about three D. Ic's for example.
That's that's that's really where you can scale performance of functionality across multiple die in a single package and that requires an integrated multi physics approach and that includes simulating for example, the structures the optics <unk> photonics electromagnetics all of those are outside of the traditional Red Hawk product line right. So, it's H FSS and others.
So so when you think about these complex designs and its certainly when you move beyond the chip itself and you think about chip packet system.
For electronics, it really brings in the <unk> brings to bear the entirety of our portfolio. So and I gave you. An example also in the script of a company that's using some of our safety analysis, providing automotive.
Providing semiconductors for the automotive industry and how our safety analysis work, which seemed might seem counterintuitive or unintuitive. The safety analysis work is relevant at the semiconductor level all the way up to be to the larger automotive level. So those are examples of how our portfolio is being used but but we feel like we have a lot to offer our customers because.
Cause of the multi physics investments that we've made over the years and the strength of the portfolio.
Great and just on the second point of my question just around the supply chain constraints in semiconductor shortages like do you think thats.
Further evangelizing are increasing.
Increasing.
The amount of stimulation that semiconductor companies or are deploying.
Yeah look I think I think for.
You know the shortage with semiconductors, obviously, there's a you know there's there's.
There's a there's a challenge in terms of being able to get semiconductors to where the where they need to be used and we're seeing this across multiple industries.
But it hasn't fundamentally affected the design activity and that's really where we come in we work with our customers on the design.
As opposed to the manufacturing of their products and and obviously part of what we're doing with respect to the certifications with the foundries is to make sure that we are in a position to support them with our technologies.
As they as they go into the foundry.
But those are those are examples of us proactively working to make sure that the industry has is able to move forward.
But look it's it's you know we're not tied to manufacturing we tried to design and that's really primarily that's across all of our product lines and so even.
Even if a semiconductor shortage causes a shortage for example, or some delay on an assembly line in our automotive company again it doesn't affect the design work that were involved within the automotive company. So so that's that's I think the strength of the answers the answers business and that gives us.
Confidence in the way, we think about our business going forward.
Great and then just one last one for Nicole.
If I look at.
Your guidance on constant currency organic ACD for this year, it's a few points higher than the initial guidance that you gave.
Last year, so I just wanted to understand kind of what's what's giving you.
That that level of confidence, especially comping, a pretty pretty strong year, you know any changes in kind of your guidance philosophy or is it maybe the strong backlog number that that's giving you that confidence. Thank you.
Yeah, I mean, I would say you know fundamentally 2021 was with a really strong year and I'd say, if you compared to where we were at the beginning of last year. We had just come off of a really significant compare dynamic around Q4 of 2020, right, but the underlying momentum of the business as the U S.
It seems to be to the full year of beat and raise definitely exceeded our expectations as we exited a 2021 so going into 'twenty 'twenty. Two you know our expectation is that you know guidance will or that our performance will continue to be broad based it was broad based across customer search geographies industries. I mean, it was it was pretty consist.
And so I would say that that's the primary factor in the underlying confidence around you know what we consider to be a pretty strong expectation of double digit growth of 10% at the midpoint an ACB.
Great. Thanks, a lot.
Mhm.
Thank you. The next question will be from Ken Wong of Guggenheim Securities. Please go ahead.
Great. Thank you for taking my question I wanted to build off Tyler's question, just now, but perhaps this one targeted in the direction of RJ just thinking about that.
ACD growth number next year.
Any changes in the strategic priorities that you might be focusing on whether it's a go to market.
Mark its partnership.
We should be thinking about that.
Uh huh.
Hope kind of influence the growth either at the lower or the high end of.
Those targets.
Well as I said in my script, if you look back in 'twenty, two 2021 and certainly Q4 as well in 2021, we saw strength across all major industries across all major geographies across all of our major go to market routes.
And we saw growth in both direct as well as indirect.
We saw we saw growth if you look at the pyramid with enterprise customers at the Tippy top and the volume accounts at the bottom of the pyramid, we saw growth across the customer segments.
And.
You know.
The regions contributed there that they all grew.
You know double digits from ACB perspective last year and the product lines kind of grew as expected. So I feel very good about all of that that just.
It goes to show that the business is performing across multiple dimensions.
In a way that you would that you would want to have happen and so part of our.
Plan going forward is to continue to be able to build on that momentum into 2022.
Got it got it.
And then for the call just wanted to.
Ask about on the operating margin side.
When we think about that.
<unk> 41, 42%.
Is this more.
February amount of catch up spend inflation, that's embedded in the relative to a typical year and potentially we can see that.
I don't want say a trough but.
Kind of abnormally lower than typical.
Or is this.
Generally a heavier investment cycle that we should be thinking about.
Just love some some thoughts and color on kind of what's what's baked into the spend dynamics.
Sure. So so let me just start by saying you know and I think I've mentioned this a couple of times that where we are committed to industry, leading margins and the answers business model is is highly efficient we have substantial operating leverage and low variable cost now in our 2022 published guidance you can see that operating leverage in the business model.
When when the guidance projects a C V to be stronger than revenue growth and cash flow to grow faster than the E. C V and that cash flow growth is after absorbing the impact of our any capitalization right now in terms of operating margin specifically.
Revenue growth headwinds from expected license mix really is the primary driver of those operating margin headwinds.
And that dynamic is more about accounting and the P&L then operating leverage the operating leverage really can be seen in those underlying dynamics between ACB and cash flow. Now. In addition, I mentioned in the prepared remarks that in both cash flow and operating margin. We do have assumptions of a moderate impact of inflation on expenses and so.
So that is a bit of a headwind to both but I would say primarily it's it's the underlying dynamic around you know just accounting and where revenue is this year relative to ACB.
Got it fantastic. Thank you so much for the color.
Yeah.
Okay.
Thank you and the next question comes from Scott.
How are you out of Barclays. Please go ahead.
Okay, Great Hey, guys.
Thanks for squeezing me in here.
J J, maybe maybe for you. It was very helpful explanation earlier, just around emphasis strategy for simulation in the cloud and it certainly got the message across around flexible licensing as customers can can choose either private or public.
Maybe the follow up question to that though is.
And in the years that you've been in Anthos.
Have you seen any changes I guess in that trend on customers, preferring one versus the other and how do you think about that going forward.
Well if you go back to if you go back to be years that I've been with answers. If you go back you know five six years ago, obviously, the use of public cloud for H B C was much lower than it is today.
And today, the hyperscale or is or the hyperscale public cloud providers have invested in building out HBC infrastructures.
And they're all working with with.
With their customer bases and you know as I think about our own customers. Some of our customers are working with Hyperscale is to figure out what their long term data center strategy is going to look like do they continue to invest in their own datacenters will they do they take advantage of the public cloud. Some combination of the two where you have a hybrid structure, where some stuff is running on Prem and you use the.
Cloud as a as a burst capacity or peak load periods or things of that nature. So those are conversations that are ongoing I think everyone realizes that there is now investment in the public cloud to support our high performance computing and high performance computing nodes and so that's obviously a possibility that's available to our customers from our perspective.
One of the Wadsworth Francis has always been flexibility to support and meet our customers where they want and so we are in a position to support our customers. If they want to take advantage of our you know as this cloud product. We can take it we can support them and we can make it very easy for them to take advantage of the public cloud if they want to run completely on premises, we can support that and they can continue.
To do that if they want to run on an another public cloud we can support that so we are they want to run on Amazon. We are in a position to support that and Azure. We're in a position to support that so it was really it really is a flexible structure that we have in place and I believe that this is exactly what customers are looking for that.
That that choice and flexibility on something as important to them is where there are where the computing and the cost of the compute that they're driving.
That makes sense Nicole maybe for my follow up for you.
I actually missed what you said earlier just on the organic constant currency <unk> growth in 2021 could you just could you just recap that for us and it's part of that can you just remind us how much <unk> is adding in or maybe just broadly what the organic constant currency ECB.
Growth is assumed in the 2022 guide.
Sure Yeah, I apologize I had some technical difficulties earlier, so I apologize for those who couldn't hear my answer yeah. So for both the fourth quarter and full year 2021, our ACB growth in constant currency was 16% and when you back out the $86 million to $88 million associated with the combination of E. G. I N Z Max you can see that's really strong.
Organic growth both in the quarter and for the full year now.
Now as we move into 2022, we're really pleased with the ECB guidance.
Of approximately 10% at constant currency at the midpoint and again, you know on that business model of double digit growth, including tuck in M&A.
And within 2022, we still expect the Max to have an inorganic impact of about $20 million.
That's very clear thanks, very much guys.
Thank you.
Thank you next question will be from Andrew <unk> Bank of America. Please go ahead.
Hi, guys good morning.
Good morning, good morning, good morning.
First question on cash flow if you exclude.
The $68 million incremental drag from the U S. R&D tax credit change 'twenty, two free cash flow guidance.
Is actually a nice step up from last year.
What are the key factors driving the improvement in free cash flow conversion on how sustainable that is going forward.
Yeah, I mean, I would say you know as we go as we exited went throughout 2021 and going into 2020 . Two you know we saw more of a return to a more normalized collection environments as steel environment and so the underlying momentum of the business and collections is quite strong.
And you know in addition to that in the 2022 guidance as I had mentioned in my earlier.
Answer you know there is significant operating leverage in the business overall around E. C. V. So although you know operating in operating margins overall are relatively flat, but on it you know when you compare the cash flow generation against a C V. Because ACP is growing faster than revenue you really see strong operating leverage so it's a combination.
<unk> of you know the underlying momentum of kind of getting back to more normalized collection patterns and the underlying operating leverage in the business that has really driven the strength of the performance going into 'twenty two.
Got you and then just a broader question philosophically, how do you think about the share price.
When considering buybacks versus M&A opportunities.
And do you have any constraints really given that the balance sheet here.
100 million net debt.
Yeah, No I mean, obviously the strength of the cash generation of the business and the balance sheet or are you know great assets and you know over the years. The greatest return we've been able to provide to shareholders is the deployment of excess cash using it to acquire premier simulation technologies to fill out the portfolio.
To complete what is already the broadest and deepest portfolio.
And last year you know.
Sometimes there's just not the right timing or there's nothing imminent to deploy that cash against our we're not gonna or theres not something that's going to deliver the right return for shareholders and so at those times.
We do repurchase shares last year, we repurchased about 347000 shares for about $135 million and so we would we would expect to continue to to think along those lines of you know, how we think about capital allocation overall.
Terrific. Thank you very much.
So thank you everyone for joining us that's all the time, we have today I am going to turn it over to RJ for some closing remarks.
Thank you Kelsey once again I am excited by the excellent progress that answers has made in 2021.
I would like to thank the one anzus team around the world for our ongoing success Youll work, along with our broad based business momentum and our strong customer relationships give us greater confidence for our prospects in 2022 and beyond.
You all for joining today's call have a great day.
Okay.
Yeah.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.