Q1 2022 ANSYS Inc Earnings Call
Ladies and gentlemen, good morning, and thank you for standing by and welcome to the answers first quarter 2022 earnings Conference call.
With us today are RJ, Gopal, President and Chief Executive Officer, Nick.
Nicole and Athena, Chief Financial Officer, and senior Vice President of Finance, and Kelsey to Brian <unk>, Vice President Investor Relations.
All participants will be in a listen only mode.
Should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions.
Can I ask a question you May press Star and then one on your telephone keypad.
So what's your all your questions you May press star two.
Please also note today's event is being recorded.
At this time I'd like to turn the conference call over to Mr. Brian for opening remarks.
Ma'am.
Please go ahead.
Good morning, everyone, our earnings release, and the related prepared remarks document and the link to our first quarter 'twenty 'twenty. Two Form 10-Q have all been posted on the homepage of our Investor Relations website. They contain the key financial information and supporting data relative to our first quarter financial.
And business update as well as our Q2 and updated fiscal year 2022 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 forward looking.
Payments are based upon our view of the business as of today and the answers 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 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.
L J.
Jay Gopal for his opening remarks.
Jay good.
Good morning, everyone and thank you for joining us I'm happy to report that Q1 was another great quarter for answers.
We again beat across all our key metrics and grew ACB by nearly 11% in constant currency.
We believe that this continued momentum combined with our strong customer relationships and leading multi physics product suite will set the tone for Q2 and the rest of the year.
These strong results came in the midst of continued disruptions caused by the ongoing COVID-19, pandemic, which has spurred additional lockdowns in certain regions as well as geopolitical dynamics.
As we have previously announced we have suspended all new and ongoing business with Russia, and Belarus and remove them from our 2022 forecast.
And this has contributed to the Ukrainian relief efforts and our Hearts go out to all those affected by these tragic events.
We're not only absorbing the headwinds from sanctions, but based on the strength of the forecast and the ongoing demand for our multi physics solutions, we are increasing our operational outlook on ACB revenue EPS and operating cash flow for the full year nickel.
Nicole will have the details in a few minutes, including a discussion of the impact of global currency exchange rates on our outlook.
Focusing now on Q1 from a revenue perspective, we saw good growth as expected across all our geographies led by the Americas and Asia Pacific.
The demand for answers simulation has been relatively consistent across industries for the last several years.
Given recent events and market conditions, we are now seeing an increased activity in energy and sustainability initiatives, which I will discuss in a few minutes and in aerospace and defense accounts.
Our largest contract for the quarter was a three year of 44 million dollar agreement with a north American defense contractor.
This long time customer is using our broad solution set to power its digital transformation through integrated digital engineering multidisciplinary design optimization and digital mission engineering.
The customers realizing a strong return on its investment in answers by helping it to win new government contracts, while driving cost out of its organization.
On these calls I typically highlight the specific aspects of our business.
Over the past several calls I have discussed the unparallel scalability of our best in class fluid products.
I highlighted the critical role that answer solutions are playing in the development of next generation semiconductors.
And I reviewed our leading suite of optical simulation products.
But this call I would like to discuss the critical role that answers place in sustainability.
Sustainability is a crucial and complex topic that crosses industries and want that place to emphasis strength in multi physics simulation.
And so simulation has traditionally enabled companies to save resources in energy before physical products are ever built thanks to virtual prototyping.
Today, though through the use of a broad multi physics portfolio, we can enable a number of our customers' sustainability initiatives.
Too many in fact I mentioned on this call.
Let me give you just three representative examples so you have a sense as to the role that simulation is playing in sustainability.
First an increasing fuel efficiency.
Next in driving electrification and.
And finally in decreasing the rates of emissions.
Let me start with fuel and energy efficiency were a variety of answers multi physics products are being used to solve challenges ranging from engine effectiveness two electric battery design.
The outcomes from these initiatives are reducing dependence on pollution producing fossil fuels.
We announced earlier this week that were working with Safran aircraft engines to support its aviation sustainability efforts, while advancing productivity and cost efficiency.
Using as is the structural and thermal solutions for an advanced open fan architecture, new materials and hybrid electrification capabilities the company expects to reduce fuel consumption and carbon dioxide emissions by more than 20% when compared to today's most efficient engines.
Similarly in Q4, we announced a new five year enterprise license agreement with LG electronics to support the company's sustainability initiatives.
Hence this is multi physics solutions are enabling more resource sufficient production that makes product development more sustainable by significantly reducing material use cost and multiple redesigns. For example, emphasis virtual model offers one to three decoupling to support the development of the compressors used in lgs.
Home appliances as.
As a result, LG electronics can introduce this next generation products faster than ever while accelerating its digital transformation and decreasing its carbon footprint.
Turning to electrification customers are employing <unk> solutions to improve the efficiency of electric motors, which today consume over 45% of the world's electricity.
For example in Q1, we signed a multi year contract with turn type technologies, which developed solutions that accelerate electrification and sustainable operations for energy intensive industries.
Turning tide is a longtime emphasis user and this new contract broadens the company's use of multi physics simulation to optimize product and engineering efficiency, while reducing the need for physical prototyping as well as cutting development time and costs.
On past calls Ive discussed the use of <unk> solutions in the development of electric cars.
In Q1, the tag Hoyer Porsche Formula E team one of the top two spots at the Mexico City. He agree with the help of a customized powertrain developed with Anthos technologies.
Working working with Anthos Porsche Motorsport engineer has accelerated the virtual testing of design concepts to provide the best powertrain solution without using physical prototypes.
The powertrain innovations used on the racetrack will spur development of energy efficient affordable and sustainable commercial vehicles at Porsche.
To complement the <unk> electric machine design offering we recently acquired motor design limited.
By combining motor designs motor CAD product, but the rest of the answers portfolio, we will offer customers. The most comprehensive multi physics workflow for electric machine design.
This end to end solution will enable customers to not only design more efficient electric machines, but but also apply them to more applications, which will reduce the environmental impact as well as the cost.
Motor design is an established answers OEM partner and is already integrated seamlessly into our go to market motion.
Moving to emissions as the simulation is helping customers reduce their carbon footprint through the development of renewable energy sources, including wind and solar power.
We recently announced that we're working with leading renewable energy company Vestas to deliver safer and more sustainable power management solutions for its wind turbine control systems.
These controllers are responsible for optimizing power performance and preventing component damage across a range of wind conditions.
Using a model based software development environment versus merge data from multiple sensors and creative control algorithms to drive better turbine designs at lower costs.
We also announced that we're working with as a startup program members and hellion to convert carbon dioxide and water into synthetic fuels, including gasoline diesel and jet fuel.
Then hellion uses mirrors to concentrate sunlight onto a solar receiver that drives the thermo chemical reactor that produces the sustainable fuels.
Using anzus this innovative company can stimulate the thermal fluid dynamics needed to design and validate its equipment. Despite the intense conditions caused by the searing temperatures.
As I mentioned earlier. These are just a few of the examples of how answers stimulation is fueling the sustainability initiatives of some of the most innovative organizations on the planet.
You will hear even more real world sustainability use cases during our upcoming simulation world event on may 18th.
During simulation World, you'll also learn about the launch of Earth rescue or online series that will showcase other answers customers use of simulation in combating the climate crisis.
I encourage you to attend.
And to learn more about these remarkable use cases of answers stimulation.
Moving to emphasis on sustainability initiatives in Q1, we released our corporate responsibility report.
In this annual updates we focused on our core pillars of advancing sustainability through our leading multi physics products.
By investing in our employees by operating responsibly and through our collaboration with various stakeholders.
As an example of our growing ecosystem stakeholders, the University of Colorado, Boulder will give engineers hands on experience by incorporating answers multi physics solutions into its new Masters program in high speed digital engineering.
These students will join their peers and more than 3300 universities in 90 countries, who are developing industry bodies simulation skills. Thanks to <unk> products.
To summarize Q1 was another great quarter for answers and one that will set the tone for the rest of 2022 our continued momentum our strong customer relationships and our best in class multi physics product suite will help us drive even further success in 2022 and beyond.
Before I turn the call over to Nicole I'm excited to announce that long time Anzus executive Waldhorn is now leading our global sales and customer excellence teams, replacing industry veteran Rick Mahoney.
Walt has an unparallel track record of success with answers and most recently has led our largest and fastest growing region. The Americas. He has personally overseeing some of the largest contracts from our enterprise accounts and has led the modernization of our go to market motion with.
With his energy industry knowledge deep customer relationships and mastery of our complete product portfolio. What is the right executive to assume leadership of this next phase of our go to market journey.
And with that I will turn the call over to Nicole Nicole.
Thank you Hey, good morning, everyone.
Let me take a few minutes to add some additional perspective on our first quarter financial performance and provide context for our outlook and assumptions for Q2 and 2022.
The first quarter demonstrated the strength of our business as we delivered robust growth during the quarter and beat our financial guidance across all key metrics.
C. P was strong and revenue operating margin and EPS exceeded the high end of our Q1 guidance driven by the mix of license types sold in the quarter.
Now, let me discuss some of our Q1 financial highlights.
One a C V with $344 1 million and grew year over year, 8% or 11% in constant currency.
We saw strong performance across most geographic regions and industries.
E C V from recurring sources grew 16% in constant currency year over year on a trailing 12 month basis.
This momentum in recurring ACB growth is driven by the strong annuity created by our ongoing shift towards subscription lease licenses.
Q1, total revenue was $428 6 million and grew 15% or 18% in constant currency, which as I mentioned exceeded the high end of our guidance driven by the timing of perpetual license deals that closed in the quarter.
Q1 revenue growth was broad based across geographies.
We had strong top line performance in Q1 with E C V and revenue both growing double digits in constant currency, and 11% and 18% respectively.
We closed the quarter with a total balance of GAAP deferred revenue and backlog up 1.2 billion, which grew 28% year over year.
During the quarter, we continued to manage our business with financial discipline.
This yielded a solid first quarter gross margin of 89, 6% and an operating margin of 34.7%, which was better than our guidance.
Operating margin was positively impacted by outperforming on revenue.
The result, with first quarter EPS of $1 36, which was also better than our guidance.
Operating margin.
P S benefited from strong revenue results.
Yeah.
Our effective tax rate in the first quarter was 18% the tax rate, we expect for the remainder of 2020 two.
Our cash flow from operations in the first quarter totaled $210 9 million, which benefited from strong collections.
We ended the quarter with $657 8 million of cash and short term investments on the balance sheet.
In line with our capital allocation priorities, we repurchased approximately 500000 shares during the quarter for around $156 million.
We have 2 million shares available for repurchase under the current authorized share repurchase program.
Now, let me turn to the topic of guidance.
Although Russia and Belarus are not material in size to our overall business, we have fully absorbed the removal of Russia, and Belarus from our outlook for the remainder of the year given the sanctions.
The momentum of our business exceeds this impact and as a result, we are operationally increasing our outlook on E V revenue EPS and operating cash flow for the full year.
The underlying momentum in our business is strong.
We delivered a robust Q1 coming off a great Q4, 2021 and.
And our strong 2022 forecast reflects our continued breadth and depth of customer demand.
However, offsetting that strong outlook is significant U S dollar strengthening which impacts the exchange rate embedded in our guidance.
Let me start with our full year 2022 guidance.
We are updating our full year ACB outlook to be in the range of $1.960 billion to $2 billion $20 million.
This represents growth of 4.8% to 8% or 9.2 to 12, 4% in constant currency.
We are raising the midpoint of our E. C V guidance by one point of constant currency growth compared to our February guidance.
This raise is driven by the strong E. C. V performance, we saw in Q1 and improved forecast, we see for the rest of the year.
That underlying improvement drove a full year E. C V operational increase of 35 million relative to our February guidance.
This operational momentum with offset by absorbing 18 million of Russia, and Belarus business and $47 million of foreign exchange headwind.
We expect revenue to be in the range of 2.005 billion Q2 billion 65 million, which is growth of 3.8 to six 9%.
Or 8% to 11.1% in constant currency.
We are raising the midpoint of our revenue guidance in constant currency growth.
Relative to our February guidance, our full year revenue increased 20 million from operational performance.
Which was offset by absorbing 15 million from Russia, and Belarus, and $45 million a foreign exchange headwind.
As a result, we expect our full year EPS to be in the range of $7.53 to $7.94.
Relative to our February guidance, our full year EPS increased around 25 cents from better operational performance and lower share count.
Which was offset by absorbing 14th sense from Russia, and Belarus, and 24 cents a foreign exchange headwind.
Now, let me turn to our full year operating cash flow guidance.
Our 2022 outlook is a range of 570 million to $610 million, which as discussed with our February guidance include the $60 million to $80 million of cash flow timing impact of R&D capitalization regulations that are in effect as of January one two.
'twenty two.
Relative to our February guidance, our full year operating cash flow increased $20 million from better operational performance.
Which was offset by absorbing 12 million from Russia, and Belarus collections and $18 million of foreign exchange headwind.
Since January 2022 we have seen significant U S dollar strengthening relative to the euro and Japanese yen.
The trajectory of the movement of these currencies has been outsized relative to typical Clark currency fluctuation impact.
When compared to the 2021 currency rates, our 2022 guidance is negatively impacted on a C V by approximately $80 million and an operating cash flow by approximately $30 million.
Notwithstanding the negative impact of exchange rates, our underlying business is operationally strong and has considerable momentum.
Now, let me turn to guidance for Q2 for the second quarter, We expect E. C V. In the range of 442 million to 462 million.
And revenue in the range of 458 million to 475 million.
Our outlook implies double digit E C. The constant currency growth for both the first half and full year 2022.
In line with our business model of double digit growth, including tuck in M&A.
We expect Q2 operating margin in the range of 36% to 38, 1%.
And EPS in the range of $1 46 to $1 64.
Further details around specific currency rates and other assumptions that have been factored into our outlook for 2022 and Q2 are contained in the prepared remarks document.
We have a strong forecast diversified business model and high level of recurring ACB, all of which contribute to our confidence in our outlook and the underlying momentum in our business.
As reflected in the increased outlook for constant currency E. C V in revenue growth and the operational improvements in our cash flow outlook.
I would like to thank the Anthos team for a strong Q1 financial performance and for all of the efforts from not only this past quarter, but for those of the last few years as we continue to grow invest in our business and execute against our strategic priorities.
I appreciate the can do attitude the push for excellence and the customer centric focus of the entire team.
Our people and physics based simulation solutions has earned us our industry, leading world class reputation as the go to source to solve the most difficult problems and to create what was previously impossible.
We are well positioned to deliver on our 2022 outlook and our strategic investments will propel us into the journey.
To enhance our value to customers to our shareholders and to make a world the world a better place for years to come.
Operator, we will now open the phone lines to take questions.
Ladies and gentlemen at this time, we'll begin the question and answer session.
I'll ask a question you May press Star and then one using a touchtone telephone.
So all your questions you May press star two.
If you are using a speaker phone would you ask you. Please pick up the handset before pressing the numbers to ensure the best sound quality.
We also we also ask you to please limit yourselves to one question and a brief follow up.
With those instructions in mind, we will pause momentarily to assemble the roster.
Yeah.
And our first question today comes from Jay Boucher, who each hour from Griffin Securities. Please go ahead with your question.
Thank you good morning.
Nicole.
Okay, Let me start with you.
Somewhat broad question about trends within the overall engineering software industry.
Over the last number of years simulation has surpassed P. L M to become the second largest category within.
Within engineering software and seems not that far behind the curve.
Market, maybe even perhaps over already surpass that.
It's very close.
And the question is as we now are much more of a simulation centric world than let's say a card centric world that we've had for the last 20 or more years, what are the implications for you in terms of the kinds of internal investments incrementally you would need to make perhaps.
Services and support perhaps alter when your product release cadence from the three a year that you have now anything about kind of given the the altered status, let's say.
Accumulation within the overall engineering software market and then a follow up for you Nicole with regard to cash flow stripping out currency effects, just looking at operational trends within cash flow. How are you thinking about working capital leverage is there anything structural let's say that is a korean or that you.
Could make happen in terms of a R or deferred to just get more velocity out of your working capital.
Good morning, Jay This is Andre thanks for the question.
So as you rightly point out stimulation is something that.
We have always said is really critical for our customers.
And obviously, we're seeing we're seeing the greater use of simulation in the market as.
As you've alluded to and the reason as you know is is it comes directly from product design and the complexity of the products are all customers are facing and in their own products.
You know for us and as you know from your experience.
You know simulation the when you're building a product.
The more you can stimulate the more simulation you run the better it is in terms of the product performance the cost the effectiveness of that product customers are recognizing that and they're running more and more simulations, that's a tailwind for us.
You also recognizing as products become more complex, it's not just about individuals' physics excellence and we certainly invest in individuals' physics excellence. It's also about the integration of the technologies together to be able to create a multi physics solution in the multi physics capability and that's also been an area for investment for us if.
If you look at for example, some of the recent investments we've made on the platform. We've talked a lot about pi answers. The API is that we've made available where people can write python applications and directly invoke our simulation capabilities and at the same time have access to the wide variety of the Python ecosystem. So those are.
Some examples of where we're trying to make.
Make it much easier for our customers to take advantage of simulation not just to the traditional tool as they may have used in the past, but as part of a broader end to end platform on which they can anchor that product design.
Design capabilities.
And of course, much more and it's a virtuous cycle the more they use simulation the more they needed in the future because with simulation. They can explore explore these new edge cases boundary conditions, where they couldnt have essentially done the analysis before now they're in a position to because of this platform centric approach that we have.
We've taken recently towards towards simulation. So that's you know that's hopefully that gives you some perspective, we've talked a lot in the past about things.
Things like simulation data management, our materials design all of these are essential aspects of a broader platform that we're in a position to support for other for our customers. The other broad area as you've seen from what we've talked about in the past has been our investment in supporting the Hyperscale are supporting.
Our cloud computing investing and supporting some of the latest hardware Gpus.
Scale out Cpus all of that again make simulation much more relevant and continues to be areas, where we're investing.
As we support our customers dealing with the complexity that they're working with and then finally I'll make the point that we have where it's not just about using simulation in the validation of products, we see the opportunity to take simulation more broadly and take the insight from simulation to make that available. So if you look at things like mission Engineering as an example, those are.
All areas, where those areas of discovery all of that is taking us to areas digital twin taking us to areas, where stimulation opens new market opportunities for us as well. So that's reflective in our investments Jay and certainly we see the increased opportunity for simulation out there and.
And our investments parallel that.
Yeah, and Jay on your cash flow question, you know as as you know cash flow is a more highly correlated to a C. V. Then to revenue because of the financial model transition that we've been undergoing and that transitioned to this highly recurring subscription leases.
And in terms of the operating leverage in particular, the dynamics around working capital I think that you start to see this in our 2022 guidance you could see that the operating leverage in the business for it from the operating cash flow right. So ACD is expected to grow faster than revenue.
And cash flow is expected to grow faster than E. C V and what's driving that underlying dynamic is really.
It kind of the acceleration of that subscription lease business and the underlying annuity that gets generated from it which generates cash collections and there's a slightly.
Different revenue recognition profile behind those because that revenue recognition is 50 50.
Is that.
Yes. Thank you you bet.
Thank you both recovers.
Yeah.
And our next question comes from Tyler Radke from Citi. Please go ahead with your question.
Hey, good morning, Mr Iraq, and taking the question.
Can you hear me okay.
But we can hear you yes, Sir you May proceed okay.
Okay, great. Thanks, Thanks, so much.
Good morning.
You talked a lot about our sustainability in your opening remarks this quarter and.
Excuse me I'm, just curious you know how.
How much more just in terms of your conversations.
It's coming up.
The key driver for your business, and obviously stimulation kind of by definition helps on the sustainability effort by reducing their physical testing needs but.
Maybe just give us a sense for how you're thinking about the the ability for this conversation.
To drive more awareness and accelerate growth you know for answers and then I have a quick follow up for Nicole. Thank you.
Oh good morning, Tyler Thanks for the question. So as you rightly point out you know the historical use of simulation has been in.
In the product design area, and and there's 30 value because we've reduced the number of physical prototypes. That's obviously more sustainable we can make products more efficient and so forth I mean, that's been the historical value that we've provided.
What's been happening of course in the recent past suddenly in the last few years is is a focus on sustainability.
And we've seen this as I mentioned briefly in my remarks in the script earlier, we've seen this manifest in different industries in different ways and certainly in the automotive industry. We've seen this with electric cars are battery technology and trying to figure out what comes after or what replaces the internal combustion engine or how what the trans.
Session of the future of the automobile looks like so theres been that one set of discussions are there other assets are areas, where we've continued to have conversations with customers for a number of years has been on other forms of energy so things like wind solar tie. It. All these these are other important areas outside of the traditional hydrocarbon ecosystem.
Uh Huh and and of course, we've we've talked about things like light weighting and and so on for for a while these conversations have continued and they continue with more and more urgency and suddenly as you start to look at the broader discussions that are taking place right now around the geopolitical climate are.
The focus on energy I think it comes back and we're having these conversations with with energy companies as to how they can be more efficient to how our customers are how customers can be more efficient and so we see this as a as an ongoing customer requirement that continues to gain momentum and it's a long term tailed.
And for Us.
At that we are able to respond to so where we are excited that we can support the industry as they think about the sustainability initiatives frankly across multiple industry verticals.
Yep great.
Thank you and.
Maybe a quick follow up question. So obviously ACD performance in Q1 adjusting for currency was in line with your with your guidance yet you raised the full year outlook.
Operationally ex the Russia headwind, just just help us understand what gives you the confidence to do that you know a lot of businesses out there are taking a bit more of a conservative posture and then everything come out. So is it something you saw in the quarter in terms of improvement versus your expectations or what's what.
Preventing you from taking more of a conservative posture on the guide thank you.
Yeah, I mean, I think thanks, Tyler I think as you know kind of our approach to guidance is kind of is two quarter by quarter and update you on the full year, we're very focused on the full year number and take things as we see them right and so what you saw in Q1 was that we had an incredibly strong start to the year with 11% constant.
Currency growth that was off of a pretty exceptional 2021 with a lot of momentum building out of the back end of the year and so while there were you know the dynamics that word discussed in the in the prepared remarks that we just shared around the elimination of Russia and Belarus.
And the currency headwinds underneath it the core business momentum.
Continues to be strong and I think it it really is emblematic of the value that we create are independent of what is occurring in the macro environment. I think you know the sustainability example that you and RJ just discussed I think is a perfect example of the complexity of the problems that our customers are trying to solve.
That really plays to our unique strength I mean, our unique strength is that we can solve problems from the component level all the way through the mission level and the more complex. The problem. The more we are able to solve it in a highly differentiated way relative to the alternatives out there and so we provide you know a lot of.
A lot of certainty and a lot of and the ability to help our customers kind of reverse some of these are more challenging our product problems that they're facing and so to me. It's just the overall strength of the business that continues to consistently deliver.
Deliver and and just the focus we've had on our customers throughout the pandemic. The focus that we've had on our portfolio over the past five years is really what gives us confidence in our full year view.
Thanks, so much.
Yeah.
And our next question comes from Joe <unk>.
<unk> from Baird. Please go ahead with your question.
Great Hi, everyone I, maybe wanted to just start with your outlook within your SMB customer base and how you're thinking about this.
This is ware.
There was the economic sensitivities in 'twenty 'twenty and so I'm wondering if you're thinking about this exposure any differently just given the current macro backdrop.
Yeah. I mean currently we are not seeing them. So again kind of to the to the point that I made to Tyler you know our outlook is based on the the kind of forecast of the business that we see today, where we did not see any kind of meaningful shift in the underlying momentum or the underlying opportunity set in front of us.
In that in that space and so our outlook does consider kind of continued you know continued business as usual last year. There was a pretty big resurgence back post COVID-19 are towards the back ended the year you know, it's kind of normalized towards more normalized purchasing behavior and business behavior in F&B space.
And so that's that's essentially what we're considering on a go forward basis, but we continue to monitor the situation and if we were to see any changes we would certainly update you.
Okay, and then as a follow up when I try to reconcile how you see the growth by end market. It seems your Hy Tech business.
Maybe high teens over the LTM period, even if I remove M&A when I think about R&D spending and hi tech its maybe more like low teens growth can you may be.
Thinking is correct help reconcile the answer's outperformance.
Well I mean, let me let me just quickly.
Dress that when you think about our portfolio for high Tech, we have a differentiated portfolio and once again, it's focused on the simulation aspects of that and as I've mentioned before as products get more complex the need for stimulation continues to grow and so.
When you when Youre dealing with you and the next generation Telecommunications for example, you need very accurate simulation capabilities, that's where products like answers hff's that's come in.
In big industry trends like electrification.
The entire end to end electric motor design, Oh tool chain is is absolutely essential. That's an example of an area where as I mentioned in my remarks, we just recently announced a within within the last day or so we recently announced an acquisition of motor design again, helping in that end to end.
Electrification tool chain. So we have been very careful to not only have invested in our products. So that there we feel that they're best in breed, but we've also been investing in our products too.
Areas, where customers are really struggling and I was in areas like next generation telecommunications.
The other interesting thing of course is that there's a connection between our semiconductor offerings and our and our broader simulation capabilities as customers in the semiconductor world I'm looking at two.
Two and a half and three D integrated circuits.
When a that's when you start to see.
The use of <unk>.
<unk> tools and technologies like the more traditional analyst simulation capabilities in the semi cold semiconductor domain as well and so that crossover as well represents a long term tailwind for us. So we feel like we are well positioned with our portfolio, we've been meeting and making the right investments and the right levels of integrations to allow our customers to solve some of the problems in the areas where they are investing in some of them.
Most challenging areas with these highly complex products of the future and so that's why we feel very good about our high Tech business, Yeah, and just to just to kind of answer your question on on the on the gross point that you ask so you know as you know, we don't give growth by industry, but in the industry. Just closer you do see that on a trailing 12 month basis as a as a percentage.
Tech and A&D represent a higher amount.
And you know they continue to be our largest contributors to the business as well.
Thank you.
And our next question comes from Andrew <unk> from Bank of America. Please go ahead with your question.
Hey, good morning.
Good morning, good morning.
I guess my first question was going to be more of a confirmation I just want to make sure 11% constant currency growth was better than the midpoint of your HCV guidance right is that correct because somebody if you didn't you didn't beat the numbers, but I thought it was better than the midpoint of your guide is that a fair statement, yes, absolutely it was.
Better than you were talking about the Q1 number yeah.
Yes, yes, okay.
I was confused I was confused there for a second okay fine Yeah, no no no. It was it was actually well exceeded the midpoint of our guidance.
That's what I find perfect fine.
No that was what 9% in Q1 yeah.
Remember at the midpoint with 9% in Q1 and coming in at 11% constant currency is it's quite significantly over that excellent. Thank you.
Sure.
So the question going back to the trailing 12 months ACB chart we've.
We've been getting questions on your aerospace and defense exposure and it does show that up to 21 over 19 Ah versus a year ago, and just trying to understand what's driving it and just to you know.
I appreciate the stuff you do sort of a longer cycle in nature, but how should we think commercial aerospace recovery and on top of it you know what it looks like globally higher structurally higher defense budget and your Western Europe , given what's happening in your crane.
Should impact your aerospace and defense business over the next 12 to 24 months.
Yeah I know.
Aerospace and defense is one of our.
Top three verticals.
And as you heard in my comments, we're seeing we saw good performance in.
In Q1.
And we're also seeing increased activity with those with customers in the aerospace and defense market. Most recently so are these these global events certainly cause our conversations with customers and while it's too early to declare I think it's pretty clear that these increased activity is.
Good indicator of you know longer term tailwind for our business in those clubs from those conversations are but you know our business in aerospace and defense is very broad.
And and it's it's again based on the overall capabilities of our portfolio and what we can bring to the table.
Terrific.
Trying to understand looking at the auto business and from the disclosures.
That indicate the German and Japanese businesses have sort of shrunk or should.
Should I be thinking about a lower share of auto and decline in Germany and Japan.
Does that go should I be thinking is that it's Germany, and Japan are automakers or is there something else going on.
Yeah. So let me comment on the on the revenue growth in those markets I'll, let RJ I, just like give more commentary on the market dynamics. So you said the AR in the quarter. So for those two at an actual rate basis, then you're going to have the most disproportionate impact on the Japanese yen.
Weakening against the dollar and the euro weakening against the dollar, but so there was a significant impact there. The other the other thing just to note in general is that the revenue variability because of license mix and differences in license mix on a year to year comparative basis can be quite volatile and so when you look at a quarter I'm even at.
The answers level, there could be a lot of a lot of volatility within a quarter and once you get to the country level. The quarterly numbers are quite volatile. So so it's not a so so the quarterly number is not necessarily an indicator of a kind of broader dynamics that are happening in the environment.
<unk> got a trend that's also what we're share facts I should have thought about thank you yes.
Yes.
Our next question comes from the Cat Calia from Barclays. Please go ahead with your question.
Okay, Great Hey, guys. Good morning, Thanks for taking my questions here.
Good morning.
Hey, good morning, a J and maybe I'll, maybe I'll start with you.
I'd Love if you could talk about the on scale acquisition a little bit.
I think it happened in the at the beginning of the quarter.
How does that sort of fit into the high performance computing portfolio that answers has and you know any thoughts on just understanding it's early any thoughts on how you sort of ticked up to market and whether that's.
On how you take that to market rather than whether that's different than how answers currently goes to market.
So it's like it.
There are two important elements to our cloud strategy.
The first is location independence and the second is a device independence and so let me start with location independents and let me take you back to that last earnings call. We had when I think in answer to a question I described how our products take advantage of cloud and what's important to customers and then as you as you alluded to in your question I.
Pointed to how simulation is different from the typical enterprise application in that the amount of compute that's required for simulation can be enormous and I and I set out some a single simulation could run four hours across hundreds of cores single user could launch multiple simulations in parallel and that's why high performance computing or H B C is so important to us.
Customers and I talked about our strategy to support our customers as they use <unk> products and take advantage of high performance computing in the public cloud of their choice, we talked in that in that response about answers cloud.
I talked about how that allows our customers to use our flagship products, while taking advantage of compute power in the Azure cloud while running under managed instance from answers and we also talked about answers gateway powered by AWS, which allows customers to pair their hardware access with AWS with their answers flagship software. So in other words.
Last time I talked about how our cloud strategy supports our full featured.
Products are suppose a full featured user interfaces for those products, while providing location independent high performance computing for answer solvers.
So the recent announcements are coming to your question with on scale is really part of the next leg of our strategy, which is to allow access to answers solve our technology in a device independent manner through a browser.
So on skill as you know had created an exciting SaaS offering that coupled a simple web and intuitive web user interface to simulation with cloud native infrastructure and so now to your point in your question now that on scale as part of answers, we will continue to enhance their front and of course, and we will supplement that.
With backend access to be anchored to the answers flagship solvers in the cloud in other words, we will enable customer access to our industry, leading solvers through a SaaS experience through about browser interface in a device independent manner and so this allows us to provide also in the future of SaaS option option to stimulation.
One that might be attractive to new users in small and medium business or and in areas that have not traditionally used as is our flagship products or maybe even new users and existing customers. So when you add all of that together our cloud strategy is to provide customers with device independent and location independent access to really the best.
And most comprehensive set of multi physics simulation capabilities in the market.
Got it got it that makes a lot of sense Nicole maybe just for a quick follow up just housekeeping can you just remind us how much you are including in E. C V for inorganic this year end.
And I and whether it includes the motor design acquisition I, just wanted to check kind of how much that constant currency <unk> growth is on an organic basis I don't think theres too much inorganic this year, but just to make sure. It's asked.
Yeah, you're correct and let me kind of take you through the description of that so I.
As you know we increase the ECB guidance this quarter by 35 million operationally and that translates to about a point of constant currency growth that brings us to 11% constant currency growth at the midpoint.
On the basis of that increase is based on the increased organic momentum in the business.
And then we've previously mentioned that and it was in our prior guidance that we expect the inorganic contribution of <unk> to be around $20 million of ACB and then our two recent acquisitions on scale and motor design on both of them are immaterial contributors to the top line on scale is is an early stage technology acquisition with minimal revenue.
And motor design as as discussed in the press release Motor design and answers had a private partnership where we were the primary OEM up the product. So there's a de minimis incremental topline benefit from the acquisition is here. So now while the initial financial contributions are not material of these two things yeah were real.
Excited about the long term impact of these investments.
To accelerate two really important aspects of our roadmap is RJ discussed the the cloud roadmap as well as the electrification roadmap, which connects to the to the sustainability conversation. We had earlier today. So I mean that so our guidance were still reflects the $20 million of E. C V contribution from V. Max.
Which would put us around 10% constant currency growth a N. A C V. When you exclude the marks from the full year outlook, which again is on the business model of a double digit growth, including tuck in M&A.
Things is to notice that as it relates to operating margin and cash flow.
The net of these two acquisitions actually had a negative impact on both operating margin and cash flow, but we've absorbed we fully absorbed Ah that negative impact in our full year guidance that you received.
Got it that's all really helpful. Thanks, guys.
Hmm.
And our next question comes from Adam Borg from Stifel. Please go ahead with your question.
Great. Thanks, so much for taking the questions and the details about the guidance and also the details on the inorganic contribution.
David just on the NGL acquisition. So obviously as you talked about you've got about a partnership for a couple of years. It has already been established go to market motion. So I'd love to understand you know why I decided to buy it versus continuing to partner and then more broadly you know just helps you get deeper in some respects, it's a cat and I'm just thinking about is there an opportunity for you to get deeper into cat and other areas.
The design market.
Thanks, so much.
So I'm.
I'm excited about the acquisition of of motor design as up as I've said.
We've had a successful partnership for a couple of years, they're the best in class solution in.
In the market targeting the electric motor and machine market.
And obviously.
With the increased amount of electric vehicles, the complexity of electric motors, they bring a lot to the table.
What we what we have is a is a seamless tool chain that includes a motor CAD.
That connects that into other elements of our flagship of our simulation portfolio.
So for example, we have connections with answers discovery with Maxwell with fluent with mechanical so it's really connected to the full suite of our multi physics capabilities and so acquiring motor design really gives us the ability to control that product roadmap and drive greater levels of product integration across our portfolio, obviously as an independent company that had their own.
Our objective, but now that they're part of answers will be in a position to really streamline.
Streamline that end to end and support that seamless.
<unk> left in the multi physics workflow that we have around electric motors. So we're excited about that.
We're excited about that and you see that you know that that the importance of that that streamline workflow.
Shephelah for example, a customer of ours that coupled motor CAD with answers after flying which gives us the the optimization solutions.
And now what you're seeing is a much better designed to validation workflow for electric machines.
And that that kind of capability becomes possible when we have greater visibility.
<unk> into the road map and we're in a position to be able to drive that organically out from the R&D organization. So we're excited about the acquisition I think it's a great acquisition and the teams are very strong.
That's really helpful and maybe just as a quick follow up so congrats to Walter on the promotion I know it just it just happened and it's still really early but any initial observations on any plan go to market changes and if you think about a change at the top of the helmet. Thanks again.
Well as I said in my as I said in my comments you know Walt is a long time as his executive and he has been.
I mean, he has just a tremendous track record of success with an answers he's been running our largest and fastest growing region. The Americas.
He's intimately involved in all aspects of our go to market he's dealt with some of the largest contracts in the enterprise space. He.
He's been involved all involved in the go to market transformation. He is spearheading some of the inside sales efforts.
He he knows the industry he knows our products. So he's been intimately involved in the creation of our strategy and.
And I'm excited about I'm excited about.
His leadership he he was a clear choice to move our sales team's forward, we have an exceptional deep bench of talent here at answers.
And I'm really excited about the future.
Super clear thanks again.
And our next question comes from Jason So we know from Keybanc capital markets. Please go ahead with your question.
Yeah.
Okay.
Okay.
And is it possible your phone is on mute.
Yeah.
Oh, sorry about that that's a marathon.
Hum.
Thanks for fitting me in.
Europe is on everyone's minds I'm curious on what trends, you're seeing there and how the pipeline is shaping up and then maybe more pointed what would've EMEA grown it.
Didn't exclude any of the sanction them back in the corner.
Yeah. So I mean overall what are you know and in Q1, we saw we saw constant currency growth of 8% in EMEA in the first quarter, which was pretty strong we saw industrial.
The industrial equipment industry in particular is quite strong and we saw relatively strong demand.
In A&D overall.
And so the impact of the overall impact of Russia in a full year of of a 15 million on revenue was a couple of million dollars in Q1.
Okay excellent. Thank you for that and then.
I guess really quickly you know the hiring environment remains relatively tight, especially if its offerings and software sales.
Our hiring plans going and how do you feel about capacity and predicted would be heading into the second half.
Yeah. So our Q1 pace of hiring came in as expected and it was at a higher rate than we did in Q1 'twenty 'twenty. One so you're you know we're planning to continue to ramp up hiring in Q2 and second half as planned.
Thank you operator, we have.
Operator, we have time for one more question.
Okay.
Our final question today comes from Matthew Broome from Mizuho Securities. Please go ahead with your question.
Okay. Thanks, very much so.
And so this is obviously a mature company, but it's there's still some significant greenfield opportunity for simulation within within your sort of legacy kind of customer bases and and do you view sustainability as sort of part of that.
Yes, this has been around.
We are proud of the fact that as a company we've been around for 50 years, and so from that extent to that extent, we wanna be.
Longer tenured if you will software companies out there, but the reality is that the technology that we deliver and the value proposition that we deliver which is helping our customers to be able to drive topline growth by bringing a product to market faster.
And as she bothered bottomline savings through cost savings in terms of testing and validation to reduce warranty costs.
More increased efficiency all of those are our evergreen value propositions and as I've said before as products become more complicated and you're seeing this every single product is getting.
Significantly more sophisticated than products of the past, it's not just a matter of solving a particular or understanding a particular discipline like structures of fluids is understanding the interplay between all of these different capabilities. So you take something like a car a car today is a very different beast.
Beast than the car was the internal combustion engine human driven car was a number of years ago. As you think about on this autonomous vehicle. For example, that's powered by an electric motor.
It calls for different skills and capabilities and look we are we are excited that we are in a position to support our customers as they go through this journey. So so the ongoing value of simulation is is is is really there is driven one by virtue of the fact that we make the more simulation you run the.
Better your product and so there was a continued demand for customers to use more stimulation because the more they run the better the product is you're really limited by your imagination sort of by the operating environment with some of your products run and.
And the product complexity continues to drive that and the final point I want to make here is is when you think about the use of simulation.
When you start to use simulation.
Within the company you start to rely on it more and more and it's a virtuous cycle for answers and so there are examples of.
Changes were in the past, where where you may not have necessarily done a deep detailed design. If there was an incremental change which may have led to some warranty issues or things of that nature.
Today companies, who are using answers are in a position to just run simulation to validate that those what might seamless small incremental changes haven't really fundamentally made a difference when supply chain get disrupted and you would swap out one component for a different component that's requires analysis and validation and that's again what simulation can.
Provide so the value proposition and the use of simulation is continues to be strong and then of course areas like sustainability electrification autonomy Iot AR telecommunications. These are all areas, where our customers are spending enormous amounts of effort energy and money trying to build next generation capabilities and once again, we're in a position to help them.
So I'm very excited about the opportunity in the future of simulation advances.
Yeah.
That is all the time.
That is all the time, we have today I will turn it over to Andre for closing remarks, I am excited about our strong start to 2022, our strong execution and industry, leading multi physics portfolio combined with strong customer demand gives me confidence as we plan for the rest of the year and beyond I want to thank my.
The answers colleagues for their stellar execution and for their commitment which produced these great results. Thank you everyone for joining the call today and please enjoy the rest of the day.
Yeah.
Ladies and gentlemen, with that we'll conclude today's conference call and presentation. We thank you for joining you may now disconnect your lines.