Q2 2022 ANSYS Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the second quarter of 2020 earnings Conference call.
With us today.
They'll call President and Chief Executive Officer Nicole.
Chief Financial Officer, and Kelsey <unk>, Vice President Investor Relations.
Participants will be in listen only mode should you need assistance. Please.
All conference specialists all person Ms Staci, followed by you all.
After today's presentation there'll be an opportunity to ask questions.
Question, you Michael Steinmann, what's on your telephone keypad to withdraw your question. Please press Star then two.
We think with the BOP is being recorded.
I would like to turn the conference over to MS. Deparle for opening remarks. Please go ahead. Good morning, everyone. Our earnings release, the related prepared remarks document and the link to our second quarter 2022 Form 10-Q have all been posted on the homepage of our Investor Relations website. They contain the key.
Information and supporting data relative to our second quarter financial results and business update as well as our Q3 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 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 CEO RJ Gopal for his opening remarks.
Hey.
Good morning, everyone and thank you for joining us.
Q2 was yet another excellent quarter for answers, where we once again beat across our key metrics, including revenue.
A C V.
Operating margin and earnings per share.
That coupled with a healthy pipeline gives us further confidence in the business and has enabled us to raise our full year guidance on E C D and revenue in constant currency.
Nicole will have the details in a few minutes.
Our largest contract of the quarter with a three year nearly 25 million dollar agreement with an international electronics brand.
This new contract includes anther solutions for semiconductors.
<unk> fluids as well as our learning hub to make users more familiar and productive with our software.
By standardizing on <unk> solutions, this customer expects to increase its products yield.
While decreasing verification time for signal and power integrity.
Another multimillion dollar agreement in Q2 enables an international automotive OEM to expand its usage to include as a solutions for enterprise level materials intelligence.
Electromagnetic interference and autonomous driving.
This customer has already realized up to five X improvements and aerodynamics and thermal engineering productivity.
A reduction of more than 40% in material properties.
Acquisition costs.
And a 10% improvement in hydrogen storage for its fuel cells.
From a geographical perspective, we saw strong revenue growth from Asia Pacific and EMEA, India.
In the Americas came in as expected.
Our 36% constant currency growth in revenue in Asia Pacific with thanks to several large contracts, including one with Murata manufacturing a Japanese company that specializes in electronic components.
With Murata, the multiyear agreement spans a multi physics portfolio and provides the company with an important thermal aware system simulation flow for radio frequency modules.
The solution is expected to provide faster thermal sign off by reducing the number of redesigns and by improving the ease of use of answers products through a single interface.
From an industry perspective the.
The high Tech and semiconductor era.
Space and defense and.
And automotive and ground transportation sector is where again our largest contributors.
We also saw continued strength in the energy space, reflecting a mix of traditional and renewable use cases.
As well as in the industrial equipment sector, where we recorded a number of multi year agreements from companies around the world.
For example, longtime customer web a global leader in electrical engineering power and automation technology signed a multiyear contract in Q2 to standardize on as the stimulation.
This new agreement will help the Brazilian company, we think it's polyp development process by creating and implementing digital twins of its motors.
This agreement will drive wags electrification and green energy initiatives.
Now I'd like to briefly mention a different kind of customer success story.
I would like to congratulate NASA and Northrop Grumman on the success of the James Webb space Telescope.
We have all seen the stunning images that have come from this largest and most precise optical instrument ever developed.
We are proud here with answers for the role that we played in its creation.
Naturally it was impossible to physically tests the entire mission before launch.
And given the unforgiving environment of space the mission had to run as expected the first time.
Any error would've cost billions of dollars in expenses with perhaps an even greater scientific loss.
That is why the team developed the rocket.
Telescope and the entire mission in part using as a stimulation.
With Anthos.
Engineers overcame a number of unique challenges, including folding a structure of the size of a tennis court into a rocket and then unfolding it.
And then understanding how perpetual solar radiation would affect its operations.
Engineers use answers mechanical to identify solutions to ensure the satellites connected segmented mirror would behave the same way a monolithic neuro wood.
Our optical solutions, we used to design and test each step in the mirror alignment process from the initial segments search to the final phasing.
In addition mission plateaus used our digital mission engineering solutions to test variables that impact how the satellite is launched and to determine how to keep the satellite stationary a million miles from Earth.
And the results.
Well, there's simply out of this world.
Turning to our leadership in solutions for multi physics simulation all customers now have access to as of 2022 released to a comprehensive set of solutions and capabilities that cross physics engineering disciplines and industries.
Included in this release are machine learning techniques, and our core products, which are automatically optimizing repetitive processes predicting workflows and enhancing user productivity.
We have also delivered artificial intelligence technology that enables customers to perform massive design optimization studies to arrive at an optimal design in a fraction of the time once required.
This release also provides new high performance computing capabilities and custom workflows for industry specific applications, which will help more users address computationally complex problems by examining the impact of multiple physics at the same time.
This added functionality is extending our multi physics leadership, while enabling customers to make their next generation products a reality.
I'm also excited the TSMC recently certified answers as power integrity software for its industry, leading and four P and N three E process technologies.
The certification for answers Red Hawk S. C and answers told them enables next generation silicon designs for machine learning connectivity and high performance computing applications.
I'm also pleased to announce that as this has joined the Intel foundry services Cloud Alliance.
Our electronics and semiconductor suite, which includes answers Red Hawk S C and H FSS.
And as this Raptor X are available as part of the design flow that will help enable intel customers to enhance their productivity.
Rounding out our partner updates.
I'm song Foundry has announced that it is using emphasis industry, leading multi physics solutions to develop designs on the most advanced chips nodes and process technologies.
Using anzus Sam.
Samsung foundry will deliver a comprehensive design flow with greater capacity speed and integration capabilities for the company's most advanced semiconductor technology to boost high speed connectivity, while helping to reduce design error and risk.
On our last call I discussed the role that <unk> solutions are playing in our customers' sustainability initiatives, including four increase increasing fuel efficiency in driving electrification and in decreasing the rates of emissions.
We have recently created a cross functional center of excellence composed of members of our development and consulting teams to advance sustainability initiatives for our customers and partners.
Our subject matter experts are focused on how answers simulation can help accelerate the creation of new more efficient and lower impact products beginning at the design and development phase.
As part of our own sustainability endeavors.
This is committed to reducing our environmental footprint.
To that end, we have announced that we have set a 15% reduction of scope, one and scope two emissions by 2027.
To hit that target, we are implementing projects identified in energy audits, including lighting enhancements and onsite renewable energy.
We recently submitted to the carbon disclosure project for the third year in a row and continue to enhance our task force on climate related financial disclosures.
I'm also excited to announce that fast company has recognized several answers employees with its world changing ideas award for the answers Minerva template.
This template is built on a manoeuvre solution for simulation process and data management and provides an F. D. A guided approval process for medical devices to speed potentially lifesaving products to patients more quickly.
I'm also proud that emphasis has been certified as the most loved workplace by the best practice Institute.
This order was bestowed on answers because of our collaboration.
But values and practices as well as the outcomes, we drive and demonstrates why we are an employer of choice.
Next week, we'll have an opportunity to discuss emphasis longer term business and financial goals as part of our investor update.
Looking forward to further explaining the expensive roll that simulation is playing in product development and sharing with you how answers has become a trusted business partner with some of the top brands around the world.
To summarize Q2 was another excellent quarter for answers, resulting in all beating our guidance across all key metrics.
Our business momentum, our expanded product leadership and the ongoing strength of our customer pipeline give me even more confidence in our ability to meet our outlook for 2020 two.
And with that I will turn the call over to Nicole Nicole.
Thank you Jay good morning, everyone.
Let me take a few minutes to add some additional perspective on our second quarter financial performance and provide context for our outlook and assumptions for Q3 and full year 2022.
The second quarter demonstrated the strength of our business as we delivered robust growth during the quarter and beat our financial guidance across all key metrics.
E C. P was strong and better than our guidance revenue operating margin and EPS exceeded the high end of our Q2 guidance driven by E. C V outperformance and the mix of license types sold in the quarter.
Now, let me discuss some of our Q2 financial highlights.
Q2, a C V with $460 3 million and grew year over year, 7% or 13% in constant currency we.
We saw strong performance across all geographic regions and industries.
E C V from recurring sources grew 14% in constant currency year over year on a trailing 12 month basis.
This momentum in recurring ECB growth is driven by the strong annuity created by our ongoing shift towards subscription lease licenses.
A C V from occurring sources represented 81% of the total in the second quarter.
Q2, total revenue was $475 9 million and grew 5% or 12% in constant currency.
As I mentioned exceeded the high end of our guidance driven by outperforming our expected E C V.
Asia Pacific and EMEA drove strong Q2 revenue growth.
We had robust top line performance in Q2 with a C V and revenue both growing double digit in constant currency at 13% and 12% respectively.
In both Q2 and the first half we executed against our business model of double digit growth, including tuck in M&A.
We closed the quarter with a total balance of GAAP deferred revenue and backlog of almost $1 2 billion, which grew 27% year over year.
During the quarter, we continued to deliver a business model with strong operating leverage.
This yielded a solid second quarter gross margin of 91% and an operating margin of 47%, which was better than our guidance.
Operating margin was positively impact by outperforming on revenue as well as the timing of investments that have moved into the second half of the year.
Yeah.
The result, with second quarter EPS of $1 77, which was also better than our guidance.
Operating margin EPS benefited from strong revenue results and the timing of investment.
Our effective tax rate in the second quarter was 18% the tax rate, we expect for the remainder of 2022.
Our cash flow from operations in the second quarter totaled $118 9 million, which benefited from continued strong collections.
We ended the quarter with $517 6 million of cash and short term investments on the balance sheet.
Now, let me turn to the topic of guidance.
The underlying momentum in our business and demand for our best in class portfolio continues to be strong.
We are operationally, increasing our outlook on ACB revenue EPS and operating cash flow for the full year.
We delivered a robust Q2, and our strong 2022 forecast reflects our continued breadth and depth of customer demand.
Offsetting our first half performance and strong full year outlook is continued and significant U S dollar strengthening which impacts the exchange rates embedded in our guidance.
Let me start with our full year 2022 guidance, we are raising the midpoint of our ECB guidance by 1.6 points of constant currency growth compared to our may guidance.
We expect our full year ACB outlook to be in the range of $1 billion $980 million to 2.020 billion.
This represents growth of 5.828% or 11.3 to 13, 5% in constant currency and a midpoint of 2 billion.
Which puts us on track to achieve the 2019 Investor day target.
For additional context, the 2 billion midpoint of our ACB guidance when translated at 2019 foreign exchange rates would equal approximately $2.070 billion and would exceed our 2019 Investor day ACB target.
Our full year ACB raise is driven by the strong performance, we saw in Q2 and improved forecast and momentum we see in the business, especially for Q3.
That underlying improvement drove a full year ACB operational increase of 29 million relative to our may guidance.
This operational momentum was offset by $19 million of foreign exchange headwind.
Yeah.
Turning to revenue, we expect revenue to be in the range of 2.005 billion two $2.055 billion, which is growth of 3.8 to six 4% or 9.2 to 11, 8% in constant currency.
We are raising the midpoint of our revenue guidance by one point of constant currency growth compared to our may guidance.
This raise is driven by the strong revenue performance, we saw in Q2 and improved forecast, we see for the rest of the year.
That underlying improvement drove our full year revenue operational increase of $18 million relative to our may guidance. This operational momentum was offset by 23 million of foreign exchange headwind.
As a result, we expect our full year EPS to be in the range of $7 50 to $7.88.
Relative to our May guidance, our full year EPS increased 7% from better operational performance, which was offset by 12 cents a foreign exchange headwind.
As a reminder, some of our strong Q2 EPS performance was driven by the timing of investments that moved from Q2 to the second half of the year.
We continue.
Can you to expect our full year operating margin to be in the range of 41% to 42%.
Given the rapidly changing interest rate environment, we thought it would be helpful to provide full year interest expense for your modeling purposes.
As a reminder, our term loan structure has floating interest rates and rising interest rates will continue to impact interest expense.
Our current outlook projects, our full year 2022 interest expense to be $22 million up almost $10 million from last year.
Now, let me turn to our full year operating cash flow guidance.
Our 2022 outlook is a range of 570 million to $610 million.
Relative to our May guidance, our full year operating cash flow increased $6 million from better operational performance, which was offset by $6 million of foreign exchange headwind.
Also note on a year over year basis operating cash flow continues to face non operational headwinds, including the timing impact of R&D capitalization regulations and higher interest expense given rising interest rates.
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 currency fluctuation impact.
When compared to the 2021 currency rates, our 'twenty to 'twenty two guidance is negatively impacted on a C V by approximately $100 million and an operating cash flow by approximately $35 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 Q3.
For the third quarter, we expect E. C V. In the range of 392 million to $412 million and revenue in the range of 455 million to $475 million.
Our outlook implies double digit E. C V constant currency growth for Q3, and the full year 2022.
In line with our business model of double digit growth, including tuck in M&A.
We expect Q3 operating margin in the range of 37, 8% to 39.4% and EPS in the range of $1 56 to $1 70.
Further details around specific currency rates interest expense and other assumptions that have been factored into our outlook for 2022 and Q3 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 of our business.
This is reflected in the increased outlook for constant currency E. C V in revenue growth and the operational improvements in our cash flow outlook.
To the entire anzus team. Thank you for your outstanding execution in the quarter, which drove a robust Q2 financial performance and continued momentum going into the second half of the year.
We once again delivered a strong quarter, which coupled with a recurring business model and growing sales forecast demonstrated the strength of the anthem business.
We are well positioned to deliver on our 2022 outlook as well as our long term strategy I am more confident than ever in our future.
Operator, we will now open the phone lines to take questions.
Thank you we will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble all work.
Our first question comes from Ken Wong with Oppenheimer. Please go ahead.
Alright, Thank you for taking my question I.
I guess, what I wanted to just.
Well check into a ship.
Yeah. The commentary that you guys both provided very strong very robust.
As far as macro goes just wondering what type of macro environment are you predicting for the second half as we think about this are the elevated guide.
Sure. Thanks for your question, Ken So yeah, as we pointed out you know or as we pointed out in our guidance. You know we have a we're seeing we're really seeing underlying strong momentum in the business are the beat to the Q2 numbers was really kind of evidence of continued continuing broad based building.
Pipeline and as we look at now that we're in the second half of the year, we have a much clearer visibility to kind of what that second half pipeline looks like and kind of how it will land over.
And while we're certainly very sensitized to the macro environment overall and what's occurring.
With with the rest of the tech industry.
Our business is highly exposed to R&D and as you recall R&D is.
Is usually the last thing to go off and the first thing to come back on when they're tightening and so we're just not seeing the same level of constraint that may be some other.
Parts of the tech sector are seeing them and the outlook of our guidance really reflects the broad based demand across industries geographies and customer segments that that we saw in Q2 and that we kind of see coming into the pipeline in the back half of the year.
Got it to amplify just to amplify the point that Nicole was making I mean, many of our customers.
You know they suddenly aware abuse broader geopolitical concerns and pressures that we all see but they continue to face competitive pressures and they've got multiyear product node roadmaps that they've been driving and frankly, that's where simulation comes in simulation helps them to deal with some of the competitive pressures that they're dealing with it allows them to innovate more rapidly.
<unk> and.
And at the same time, it allows them to save money and time.
We can reduce our reliance on physical testing, we can reduce warranty costs and so forth and so the value proposition for stimulation, which is it helps our customers both drive topline growth as well as achieve bottom line savings that value proposition is really a compelling value proposition and that's I think what we're seeing in the market.
Got it and if I could maybe just a quick follow up for you Andre.
Highlighting areas of strength from a verticals perspective autos Aerotech remained really strong are there any end markets that you feel maybe are still catching up.
To some of their peers in terms of maybe seeing heavier COVID-19 or macro pressures that that could potentially.
Kind of open up as as macro does improve.
No I think our as I said in the comments our performance was pretty.
Consistent across the verticals as we've as we expected to see suddenly the bigger verticals are high tech and semiconductor aerospace and defense automotive and ground transportation, but we saw strength in other areas as well so nothing specifically to notes in terms of explicit areas of consideration of concern.
Yeah.
Our next question comes from Joe Goodwin with Baird. Please go ahead.
Great Hi, everyone.
I guess a question on the CS.
Seasonality in the business.
Bank in the past you've talked about maybe answers increasingly having a SKU.
Got into for Q, just given a T V generation with bigger enterprise customers signing multiyear agreements.
Just given where the guidance stands currently.
It looks like a really strong <unk> and then.
Proportionately less coming from for Q relative to a year ago is that in any way, reflecting SMB versus enterprise activity or is that maybe just leaving us.
Wiggle room or cushion.
<unk> under your belt, and then we'll have more visibility on <unk>.
Yeah, Hi, Joe Thanks for the question so.
So what how I would characterize the second half guidance is just much clearer visibility to where where deals land. As you know you know we transitioned to a a multi yearly subscription model over the past couple of years and so when as you move into that multi year lease model you're kind of.
Timing of when that renewal base.
And both within when the quarter, then across the quarters and within the years can start to shift over time and so.
So I would characterize the second half <expletive>.
You know that.
Clearest visibility, we have from where we're sitting today, which is quite clear once you get into the second half because your sales cycles tend to be three to six months long. So you have a little bit more clarity in terms of what was what the timing of those things mainline up too so.
I would characterize it.
I think it's maybe a little bit slightly it's slightly stronger from a grocery standpoint, I think the overall SKU is pretty similar to prior quarters, it might be a little bit heavier weighted into Q3 than maybe last year, but I would I would characterize it as kind of a reflection of the timing of the yield that the pipeline, we see today with with.
Slightly stronger Q4 growth rate as a result of the ear to ear compare.
And nothing no operational operationally when you think about it I mean, the sales team managers relationships with the customers.
And obviously as Nicole said, there's a lot of timing around that in terms of when projects that kicked off in activity. So that drives the timing of some of the larger deals as well.
And nothing specific to your SMB customer base.
There's been maybe you want to take away those are and I can say is that theres, maybe a initial indications of moderation as opposed to enterprise being quite strong in.
And you're kind of forecast I wanted to call out one segment versus the other.
Yeah, No I mean, what are they the kind of the SMB customer base. It is reflected in kind of her geography and momentum momentum accounts primarily.
Continued to be consistent in what they they deliver they are consistent with what we expected coming into the year. The second half pipeline is consistent with what we would've expected to see and when you look again at the mix of Q3 versus Q4, a C V. I mean, they're they're pretty they're pretty close in terms of.
Persons you know percentages. So Ah in terms of the percentage of E. C. V that occurred last year versus this year the growth rates again might be a little bit skewed.
Skewed.
Great. Thank you.
Our next question comes from Jay Gould shallow.
Please go ahead.
Thank you good morning.
In your prepared remarks, you gave some examples of <unk>.
Multi solution sales with some of the larger transactions and of course, that's been going on for some time now when you look at your pipeline for the remainder of the year or for the next 12 months could you comment on that.
<unk> solutions are components.
Components of the pipeline.
And within that I'd be especially interested in anything youre seeing in terms of incremental demand or contribution.
From any role.
<unk> the materials business, which.
You you highlighted and any of the other more recent acquisitions, such as our Phoenix and how much do you have a miracle.
And then a follow up.
So Jay as you know I mean the.
We've been on this journey towards <unk>.
Multi physics sales are quite for some time now.
And we continue to execute along that direction as you pointed out and.
And certainly our pipeline, especially as you consider the larger enterprise customers. Our pipeline very much includes a solutions that are comprised of products from multiple parts of our portfolio.
And so the multi physics, our message is strong it addresses what customers are looking for.
We have been a pioneer in that space and we continue to see benefit from from.
From that and we suddenly see traction from customers as we continue to support them. So absolutely as we look ahead, we have multi physics activity and multiple product sales into our customer base.
Suddenly at the larger end, but it's also increasingly as you start to look down the permit we see multi physics capabilities penetrating into the customer base. So I think that's very important you mentioned a couple of product lines. Obviously, we don't we don't give quantitative breakouts by products, but I can give you. Some some qualitative color you asked about Minerva I gave you.
You I think in the script I mentioned.
So some of the workflows that we've put in place in the healthcare area Minerva continues to be an important aspect managing simulation data given the amount of stimulation information that's being created by our customers managing that simulation data effectively is important and that's the Nova plays out.
Rolling that materials are also mentioned.
And I think I mentioned it a couple of places certainly in the past couple of calls materials is also important and we certainly recognize customers as they start to go through design optimization opportunities the choice of materials Israeli important material squeeze another interesting role in sustainability as well because when you consider the bill.
Long term.
Compliance with regulations about materials to be used understanding the materials within our within our product design, something which could potentially take a number of years from design into actual implementation really understanding what's in the in.
In the product that's being built to make sure that you're compliant with the most recent regulations. That's also important and so that's another area where materials comes in model based on some engineering, we continue to make progress in that area.
It's really across the board, where we have been able to have <unk>.
Built on the strength of our answers traditional answers products, we've supplemented that with acquisitions as and when appropriate as it makes sense given our strategy and we've continued to build the portfolio out to something that I'm very excited about and I know our customers are very excited about.
Okay.
Nicole you made the interesting point that a 2019 rates you were 2022 HCV guidance would be two point over $7 billion.
Which would imply a three year CAGR for HCV at constant currency of about 12%.
Maybe I'll talk about this next week and on the Investor call.
But is that do you think a sustainable ACB CAGR for the next number of years or if.
If it were to accelerate what would be the.
The catalyst for that.
Ah Thanks, Jay Yeah. So as you pointed out we have our investor update scheduled for next week were really looking forward to sharing that long term guidance with you next week.
But what else I can't so I can't comment about the future, but certainly it's not too long before we can comment on the future so stay tuned.
But yeah, I mean, what what we have stated and what we continue to be confident in is our business model of double digit growth, including tuck in M&A I think if you look at the course of this year, we have consistently delivered it.
In the second quarter in half and our outlook for the second half of the year were squarely on that model and we're really we're really confident in it given the strength of demand from our customers. The success of our business model transition and our sales model transition and just the portfolio that we have that is broader and deeper than.
Anything else available in the market so.
If we're looking forward to talking in more detail about those things next week.
See you then thank you very much.
Yes.
Our next question comes from Blair Abernathy with Rosenblatt Securities. Please go ahead.
Thank you and a nice quarter guys.
Jay just following on Jays.
A question in terms of standardization on empty answers platform.
I mentioned in the.
WG win.
They've decided to standardize on answers and this is something that's been around for a few years.
It's just a trend that youre starting to see.
Pick up steam at all in our view.
As this thing or are you trying to help customers.
Get more towards that.
Standardizing their simulation needs on your on your product set.
Well I think it's.
A reflection of the fact that we have a broad platform and capability that allows us to be able to address the needs of our customers.
And it's really the the breadth and the depth of the portfolio that all that gives us the credibility to have those conversations with customers and frankly, we believe we are differentiated in the marketplace.
Cause of the breadth and the depth of our portfolio. So if you talk to customers. They will tell you they value the accuracy of what we did do they will tell you the value of the completeness of our solutions and our offerings they'll tell you how we continue to innovate and invest in our in our portfolio and they know that when they are making an investment in answers, they're not just buying the product that we.
Today, they know that we're continuing to make investments and we will continue to enhance the portfolio and we will make things better and we'll deal with the challenges that they are likely to face the future as well. So I think that that gives us a tailwind when we go into some of these broader conversations. It is you know it is a difficult market to do wholesale.
Replacements for one for one codebase to another if a customer is using.
Particular simulation for a for a number of years. They may continue to use that same simulation code.
For some period of time, so it does take some planning to do whole scale replacements, but.
But we're seeing more of that and we're seeing competitive wins, where we're replacing customers within customers, where we are replacing competitors who have been present for some number of years and the customers made the decision to come to answers, which we feel is a better choice and obviously the customers also felt it's a better choice. So we're seeing that take place.
As well so the dynamic is.
Is I think driven by the strength of the product portfolio and the investments that we're making.
Great. Thank you.
Okay.
Our next question comes from Tyler Radke.
Wow.
Good morning, Thank you for taking the question.
So you've clearly delivered a really strong there.
Double digit AC close this quarter on a pretty difficult comp.
About not really seeing any demand impacts from your customers in the recurring piece of ACB is growing double digits as well I guess I'm curious if you feel like the business is kind of hitting an inflection point where that double digit growth.
Is sustainable and I'm just curious if it's if you think that that's something related to the go to market or the product strategy. If you could just comment on it.
If you think that the business has kind of hit an inflection here. Thank you.
Yeah. So why don't I start and then I'll tell you why don't you add any context to that so thanks Tyler for your question. Yeah. I mean, I think what I would say is that the consistency of the performance throughout the year and in the first half and the outlook for the second half.
Again on our model of double digit growth, including tuck in M&A.
And we've been able to pretty consistently and deliver that I mean, if you. If you go back over the past couple of years and you look at you know.
Heading into the end of 2022 our guide of 2 billion of V. C V. At the midpoint is consistent with guidance. We gave in 2019 before there was a global pandemic before there were significant.
Significant shifts in the trade environment.
And you know the underlying macro environment that we have today, which has had a significant impact on foreign exchange rates and so I think that if you look back at the investments that we've made in our business to transition to highly recurring subscription lease model.
Transitioning our go to market to build deeper customer relationships.
And build alongside their long term road map and then the organic and inorganic investments in our portfolio have all been you know really important factors in setting us up to be able to consistently deliver that model and so we're really pleased with the performance of the business this year and the outlook that we're able to.
For the rest of the year.
And look forward to updating you guys a little bit more on what's to come I dunno objects, there's anything you'd like to add to that yeah. I think you'll hear some more next week at our investor update, but certainly as Nicole was saying this is we've been making the investments over the last several years.
And as I mentioned just earlier in this call the strength of the product portfolio I think as is.
Really added to our ability to support our customers and that obviously helps tremendously in the market that's number one.
And as you pointed out the go to market has also been really important we've gone through a process of transforming over the last several years, our go to market and we have great customer relationships. We continue to maintain those great customer relationships, we have momentum.
And our customers know that we support them and they know they can rely on us and so when you start to put all of that together it creates an environment where the.
Thank you and this is my follow up I just wanted to clarify the <unk>.
The performance it looked like our EMEA and APAC in particular, where we're really strong.
You know growing 30% or better U S was actually down.
Year over year could you just talk about.
What drove that large.
A large variance in geographic performance and.
Just anything to call out how we're thinking about channel growth assumptions for the full year versus the U S. Thank you.
Sure. So let me start with the broader point on I'm kind of just some a statement about quarterly revenue dynamics in general right. So ASC 606 introduces a lot of volatility and when you have you know mixed differences in license compare them on a on a year over year basis within a quarter, sometimes you get a lot of volatility.
To get much more of it down at the geographic level and so theres often you know not always consistency between the overall ACB growth in AR in a region or in a market versus our revenue growth in that and that's why we are kind of focused on longer term revenue metrics and longer term a C V metrics.
But to answer your question, specifically, let me start with Asia Pacific and EMEA I mean, both had well let me just start with as we stated in our prepared remarks, all markets. We saw growth in all markets from an ACB standpoint, which is kind of that key metric of momentum.
And from a revenue standpoint, as you pointed out APAC and EMEA really did have great performance.
I'd say, there's a couple of dynamics going on there and in EMEA, we saw some pretty some pretty broad based performance across all of our key industries in our high Tech a we had a multi year eight figure sale to a European telecommunications company and aerospace and defense, we had several seven figure contracts with customers.
And and then even in industrial equipment also saw strong Q2, where we signed an eight figure deal with a German industrial machine manufacturer. So we saw strength in Europe across multiple industries and in APAC I mean, APAC again is.
Another quarter of consistently delivering growth in Asia Pacific.
And it was the growth was particularly strong in our geography and momentum accounts and Ah.
And in terms of large deals we also saw it across multiple.
Multiple industries Hi Tech.
Auto and you know it was really it was really broad based and so you know to put it. This one into context as the management team in APAC really has been investing in deeper customer relationships and stuck with those customers through the pandemic. So that's.
And that transformation of the go to market model in kind of aligning to the strategic roadmaps of your customers and really being that there for them in their time of need is really paying off and the consistent growth that we're seeing from the Asia Pacific region.
Now to your question on Americas again, as I will emphasize all regions grew.
All regions grew ABB Americas over the last 12 months has really been leading the company and delivering value for our customers and we're expecting the region to be a strong performer in 2022 and beyond.
In the second quarter revenues it did decline.
But it was really expected there was the growth year to year was impacted by a compare of Q2, 'twenty, one which had several large high tech and automotive perpetual and multi yearly sales. So again the revenue dynamic in Americas. It was really a function of.
606, accounting and the comparability.
Overall.
We've just seen very consistent.
And performance across all Geos.
Thanks for the detail look forward to the analyst day.
Yep.
Our next question comes from Andrew Wilson with Bank of America. Please go ahead.
Good morning. This is David Ridley Lane on for Andrew.
We have the opportunity to attend a demo of the answers twin builder a few months back.
Just curious how is that product growing relative to your internal plans and what is the kind of feedback you're getting from the market.
Okay.
So obviously you know we don't provide financial breakdowns.
On a per product basis, but let me give you some perspective on where we are with with twin builder and the broader concept of digital twins.
The whole idea here is that with the digital twin you're trying to create a.
A digital equivalent of.
Off a product.
And this is something that can transition from the design phase where typically our customers build three D models into the operation Phase, where the digital twin which is a simplified model off that full fledged three D model. That's used for design, where that digital twin can be used for things like predictive maintenance.
Can be used for a four.
Determining equipment uptime replacement schedules and things of that nature. So we we've seen we've seen suddenly a lot of customer interest in that space. It's still early days.
What we're demonstrating to customers is that a physics based digital twins, which is essentially what we do coupled with coupled with some understanding of statistical techniques. When you put that together, which we have which we encapsulate into our offerings.
That provides them a tremendous accuracy with respect to some of the predictive maintenance capabilities that I. Just mentioned so we continue to see interest in with customers. We continue to see momentum in that space. It's still relatively early days, it's still a relatively small market. Many customers are excited about the fact that.
We can do digital twins, they will lead with that conversation and then they'll transition to other parts of the portfolio as well. So it's a it's a it's a great piece of the portfolio and we're excited about the long term future for this product area.
Okay.
Sounds good.
And just maybe a quick quick one for Nicole.
On the other recent tuck in acquisitions do they have much benefit till you see to your revenue in 2022.
Yeah, the tuck in acquisitions.
I think we may have talked about that in the last call, they're very small tuck ins.
The on scale acquisition is a technology play. It was you know we're really excited about it it's a really.
Entry aspect of organic development and in the face of native cloud.
And so, but that's a pretty immaterial contribution and the motor CAD acquisition was actually a product that we Oems and so the net increment on the topline to that was immaterial as well just as a reminder, you know the Max.
We did give we did give the guidance on the Max which is about $20 million of inorganic impacted this year and so that would be.
Yeah.
We see it consistent to how we've seen in prior quarters in terms of what the inorganic impact of the Max would be so.
Does that answer the question.
Thank you.
Yeah.
Our next question comes from.
Okay.
Hum.
Okay, Great Hey, good morning, guys. Thanks for fitting me in here.
Hi, Jane maybe maybe for you I mean since we're talking about.
M&A I was wondering if you just talk about the forward opportunity for tuck in M&A. How do you feel about just the you know the number of opportunities out there and of course as valuations hopefully adjust and with Anthos a strong balance sheet can you just talk about that that part of the strategy and kind of how that plays into into the total.
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Yeah, so as I as we've always said we.
We think about when we think about the future of our industry and where we need to go we think about the combination of organic development partnerships and acquisitions. So it's it's the it's always build partner or buy.
And that's those are the considerations that we bring into the equation as we think about the future of our portfolio.
And in that context, we are always looking out to see if there are M&A opportunities that are consistent with our strategy.
We believe that we're disciplined investors were careful when we when we go to into an M&A situation. We look carefully to make sure that there is the strategic value that we need and and.
And that's and that's how we that's how we think about the overall opportunity.
And with valuations in evaluations, obviously have come down and maybe that that is a buying opportunity, but with quality quality always is expensive and so we want to make sure that we have the right technology and capability.
Our products that we're in a position or companies that were in a position to buy.
Look you know where the you should know that we see.
Most of the deals that are that are in our space I mean, there because obviously they get presented to us and we're always when we look to that analysis, we look to make sure that we have you know great technology that we're bringing in and if the technology is too far from the core if we don't see a connection.
Our existing portfolio of go to market.
We passed we've got a very rigorous process for diligence, we evaluate the core technology, we reevaluate the stickiness of customer relationships and when the technology isn't strong enough for customer relationships, a superficial or we don't see strategic connections. We pass so weird were disciplined about this but suddenly.
We will continue to evaluate M&A as and when it's appropriate in order to advance our strategy.
Got it got it that makes a lot of sense, Nicole maybe maybe for my follow up for you.
Just to the earlier points on the multiyear license model, which we've seen obviously very.
A very successful transition over many years now that we've had sort of several years of this model with with good data on on renewables I'm wondering if you've looked at sort of a net revenue retention or net retention sort of right on on those renewals.
And if you can talk to that even qualitatively.
Yeah. So I can give you a when do they kind of give you two two lenses to that so we why don't we start with just kind of the overall qualitative description of what drives the kind of overall high retention rates, we have and again when we talk about retention rates around 90%, we're talking about the renewal.
Of the original content not kind of the net renewal, which includes you know new growth on top of that right. So it would just be the renewal of that.
And so maybe just start a little bit with kind of the the kind of strategic relationship strategy around multi year leases. So as we engage with our customers we engage with them on on what is what is the outlook for the product Roadmaps going forward. What is the mix of physics that may be.
I'd be required and solutions to be able to kind of work against that roadmap and we sign those multi year lease agreement with them.
Aligned to that overall roadmap now as you know the world changes and it doesn't just because it might be a two or a three year renewal ahead doesn't mean that customers needs don't change they don't grow they buy companies.
The competitive dynamics change and so we are in and constantly ongoing relationship with those clients on a year after year basis in kind of preparing for that renewal that come comes up and so when we think about it from from kind of that that renewal of the renewal base.
Coming up at the end of the three year three year license, we have already had multiple years of conversations with those customers about the roadmaps and we have a lot of clarity around not only kind of what is the content that they that they'll continue to renew but what are the new growth areas on top of that.
That will extend them into the next chapter of their of their multiyear agreement and so the relationships. We have and this was part of the strategic selling transition model that we've made over time. It was initially with you know a small subset of enterprise customers that over the past five years. The go to market teams have really translated those best.
Practices through.
Through the broader segmentation of our customer base.
And even into supporting the channel and having those conversations as well and so that is the mood of strategic selling.
That really it does support those not only those very high.
Retention rates that we talk about when asked but but also the ability to continue to grow on top of that.
Got it very helpful. Thanks.
Operator, we have time for one more question.
Thank you. Our next question comes from Adam Borg with Stifel. Please go ahead.
Great. Thanks, so much for taking the question and fitting me in maybe just broadly on the cloud haven't heard too much about that today and I'm sure. We'll talk a lot about it more next week, but just any updates on your various cloud ambition, including the recent on scale acquisition that was just referenced thanks so much.
So yeah, I think you'll hear more about this more about this next week, but.
You know very very quickly.
In a previous call I talked about how the engineering simulation software.
A market that we participate in is quite different from traditional enterprise applications and we talked about the importance of high performance computing to our users.
Obviously remember that a single engineer could run an asset stimulation that runs across hundreds of compute nodes for multiple hours and so what we have got as part of our cloud strategy is a very I think a very.
Thoughtful approach that addresses the needs of our customers and it's to really enable our customers both existing and new to be able to benefit from the insights of a physics based simulation and optimization as well as to be able to scale out or to support the scale out capabilities in the cloud.
We've got two distinct classes of offerings are cloud marketplace and count cloud native we've talked at length I think in past calls about some of the cloud.
Cloud our marketplace offerings.
And I think in the previous quarter and the one before that so I'll skip that in the interests of time, but with respect to cloud native that's when we're targeting new users or new use cases.
And we're creating a cloud based platform for the development and the deployment of new workflows and our recent acquisition as you said have on scale, which is the leader in cloud based simulation, that's accelerating our ability to be able to do that and they bring they brought a host of critical capabilities that will allow us to develop a new set of services and frankly be it.
Gration of what unskilled as doing an emphasis is a is a powerful combination and so one example.
Is on skills cloud native user interface connected to our industry, leading a simulation solvers in the backend.
So we're excited about cloud. It is it's we have I think a very thoughtful and robust strategy.
It's still early days.
We do offer our customers a wide variety of capabilities as they needed when they need it we believe that our capabilities are flexible and scalable and frankly, we believe that we will be able to unlock a level of innovation across every industry around the world.
Thank you and that's all the time, we have today I will turn it over to Ajay for closing remarks.
I am more excited.
Than ever by our excellent execution in the first half of the year, our express expanding product leadership, and a robust pipeline and I remain confident in our ability to achieve our ambitious goals I want to thank all my colleagues at answers for their commitment their focus and their many successes.
And with that I want to thank you for attending today's call and I look forward to giving you more details on our long term business and financial goals at next week's investor update Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.