Q3 2022 ANSYS Inc Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the answers third quarter 2022 earnings conference call with US today are all Jacob Paul President and Chief Executive Officer, Nicole and Athena, Chief Financial Officer, and Kelsey, Good Brian Vice President Investor Relations.

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

Good morning, everyone. Our earnings release, and the related prepared remarks document and the link to our third quarter 2022 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 third quarter financial results and business update as well as our Q4 and updated fiscal year 2022 outlook and the key underlying quantitative and qualitative assumptions.

Today's presentation contains forward looking information important.

Important factors that may affect our future results are discussed in our public filings.

<unk> looking statements are based upon our view of the business as of today and <unk> 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'd now like to turn the call over to our President and CEO RJ Gopal for his opening remarks RJ.

Good morning, everyone and thank you for joining us.

Q3 was yet another excellent quarter for answers, where we once again beat across our key metrics, including HCV revenue operating margin and earnings per share.

This gives us further confidence in the business and has enabled us to operationally raised our full year guidance for HCV revenue EPS and operating cash flow.

Nicole will have the details in a few minutes.

As we have previously discussed the strength and the resilience of the answers business come in part because of the number and the diversity of customers we serve.

This has tens of thousands of customers across multiple industries, including high Tech and semiconductor aerospace and defense and automotive in ground transportation.

Those three sectors, where again our largest contributors in Q3.

Our largest contract for the quarter was in the high Tech and semiconductor space.

$59 million three year agreement with an international Electronics company.

This global brand has been challenged by the increasing complexity of its products as semiconductor chips continue to get smaller which has led to issues such as voltage drop.

By continually enhancing our solutions for semiconductor and other areas of physics, we were not only able to stave off any competitive challenges in this longtime account, but we increased the number of <unk> products the customer uses.

The number of end users.

As well as the amount of computation is performed.

This new contract broadens, our existing footprint, which included products from across our multi physics portfolio. So just structures fluids electromagnetics and materials.

This is a perfect example of a discussion at our recent investor update.

<unk> is growing across three vectors more products more users and more computations.

And this is also well balanced across geographies with a little less than 50% of our business coming from the Americas and the remainder roughly split between EMEA and Asia Pacific.

This diversity in our customer base means that we can harness growth from a wide variety of sources.

It also means that we are resilient to the business or economic dynamics of any specific customer or industry or country.

In Q3, I am excited to report that from a geographic perspective, we saw very strong revenue growth from both Asia Pacific and EMEA, while the Americas came in as expected.

Adding to the strength of our business is a broad and deep product portfolio, which includes flagship products and structures fluids electromagnetics semiconductors optics and mission.

As such we are not over reliant on any individual product line, which further contributes to emphasis resilience.

Additionally, our proven portfolio enables us to attract new customers as well as to displace competitive technology.

For example, our startup program is continuing to grow as these nascent companies take advantage of <unk> solutions.

The program has had over 1600 customers across 53 countries.

While members of a startup program represents a small piece of our overall business. They are aggressive users of our products.

And with the programs high graduation rates more and more of these customers become active contributors to the <unk> business.

While it can be difficult to replace an incumbent in that space.

We have also grown our customer base by displacing competitors.

For example in Q3, we won a contract with an industrial tool manufacturer that was a key account at one of our competitors.

Mmm.

Let me briefly discuss each of them.

Additionally, stimulation involve a single user leveraging a single answer this product for each individual simulation.

Today, as we partner with our customers to solve more complex R&D challenges. There is an increased demand for multiple physics, including structures and fluids electronics photonics and others to work together.

By transcending individual physics to connect workflows that solve complex multiphysics problems.

Our customers can stimulate and analyze the physical world at a system and a mission level.

Addressing these complex new use cases inherently requires the use of multiple physics solvers, leading to an increased number of multi product sales.

In Q3, we signed a seven figure contract with a longtime space to auto company that has standardized on ancestors Multiphysics solutions across all of its engineering departments to develop safer and more reliable launch vehicles.

With this new agreement the company is not expanding its answers footprint to include our material intelligence solution is at central materials database.

We have also invested in the overall user experience, which is driving more end users of <unk> solutions.

Remember that in the past only expert engineering analysts could take advantage of simulation.

Today and to simulation is being used by all levels of engineers, thanks to our automated workflows and integrations with other systems that make anzus solutions more intuitive and easier to use.

That means that different types of engineers can fully take advantage of the benefits of anzus simulation.

And it is driving the expansion of stimulation usage to more users upstream and downstream of the validation process.

In Q3, and says closed the largest healthcare contract in our history <unk>.

Seven figure agreement that will dramatically expand the number of users at an American Eyecare company.

Realizing the benefits of simulation. This existing customer has launched a digital twin and digital engineering initiative that will triple the number of users of engineering simulation technology in the next 18 to 24 months.

The third vector of our growth is through more computations.

And is able to monetize customers workloads as they run the larger more complex calculations needed to solve next generation product challenges.

A single as this user can leverage multiple products and can run hundreds of simulations across thousands of course in parallel which is critical functionality as even the most common products become more complex.

We provide our customers with open scalable offerings supported by the major cloud platforms to enhance and extend our industry leading simulation portfolio.

This flexibility enables our customers to maximize the value they realized from simulation while.

While scaling up to address the increasing complexity of next generation product development.

We recently announced the launch of our answers gateway powered by Amazon Web services.

With this addition to a comprehensive cloud offering customers can easily access subscribe and configure answers applications from a single location.

And since gateway powered by AWS allows broader access to high performance computing by bringing down the traditional hardware barriers that have limited innovation for many of our customers.

All focused on expanding the portfolio of physics.

On creating a platform to enable and manage complex Multiphysics solutions.

On expanding simulation use cases, unlocks greater customer value, which enables all three vectors of growth for answers.

The application of answers simulation technologies can be manifested in varied and distinct ways.

For example, last time I discussed the multiple roles as the solutions played in the testing launch and deployment of the James Webb space Telescope.

Keeping with the applications of answers in space.

I'd like to briefly highlight the role that we played in Nascar's recent dark mission.

As you May recall in September NASA smashed an unmanned spacecraft into an asteroid in an attempt to alter its orbit.

The Johns Hopkins applied Physics lab extensively used answers SDK throughout the mission planning process from formulating dark trajectory through the asteroid system as well as to visualize relevant vectors and attitudes.

The thermal team used sdk's full mission environment when checking the location of the Sun relative to the satellite during critical maneuvers.

NASA has announced that the dark mission exceeded its highest expectations by shortening the asteroid's orbit by 32 minutes.

This marks the first time humanity has changed the orbit of a celestial object and I would like to congratulate the team at Johns Hopkins and NASA for the success in this inspirational and potentially life saving mission.

This example demonstrates the range of use cases as well as the impact of answers solutions.

Next I would like to highlight thousands of answers employees around the world.

They are of course, what makes anzus those special.

So I'm very proud that Newsweek magazine has ranked answers as 13th amongst the most loved workplaces at U S companies.

The ranking considers employee survey responses external ratings and interviews with company leaders.

This recognition is just one more testament to ancestors unique culture and the impact we have on the world.

In closing Q3 was another excellent quarter for answers one that provides momentum as we close out the year and look ahead to 2023.

With our product leadership proven performance and resilient business model I'm more confident than ever in the future of answers and the innovations, we're helping our customers to drive.

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

Thank you <unk>. Good morning, everyone. Let me take a few minutes to add some additional perspective on our third quarter financial performance.

And provide context for our outlook and assumptions for Q4 and full year 2022.

The third quarter demonstrated the strength in Brazil, E&C of our business as we delivered robust growth during the quarter.

And beat our financial guidance across all key metrics.

<unk> was strong and better than our guidance <unk>.

Revenue operating margin and EPS also exceeded our queue three guidance driven by HCV outperformance.

Both are large enterprise customers and SMB customers performed while during the quarter.

Now, let me discuss some of our queue three financial highlights.

Q3, ACB with 409, 3 million and grew year over year, 12% or 20% in constant currency.

We saw broad based constant currency growth across customer types geographies and industries.

ECB from recurring sources grew 16% in constant currency year over year on a trailing 12th month basis.

This momentum and recurring ACB growth is driven by the strong annuity created by our ongoing shift towards subscription lease licenses.

ACB from recurring sources represented 79% of the total in the third quarter.

Q3, total revenue with $473.7 million and grew 6% or 15% in constant currency.

Which as I mentioned exceeded our guidance driven by outperforming are expected ACB.

Asia Pacific in EMEA drove strong Q3 revenue growth.

We had robust topline performance in Q3 with ACB and revenue both growing double digit in constant currency at 20% and 15% respectively.

In both Q3 and year to date, we executed against our business model of double digit growth, including Tucking M&A.

We closed the quarter with a total balance a gap deferred revenue in backlog of over $1.1 billion, which crew 23% here every year.

During the quarter, we continued to deliver a business model with strong operating leverage.

This yielded a solid third quarter gross margin of $91, 1%.

And an operating margin of 41%, which was better than our guidance.

Operating margin was positively impacted by outperforming on revenue as well as the timing of investments that have moved into the fourth quarter of the year.

The result was third quarter EPS of $1.77, which was also better than our guidance.

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

And we are effective tax rate in the third quarter was 18% tax.

Tax rate, we expect for the remainder of 2022.

Our operating cash flows in the third quarter totaled $127.2 million hour Unlevered operating cash flows were $132 million.

We ended the quarter with $632.7 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 Q3, and our strong 2022 forecasts reflects our continued breadth and depth of customer demand.

Offsetting our year to date performance and strong full year outlook is persistent insignificant U S dollar strengthening which impacts the exchange rates embedded in our guidance.

Let me start with our full year 2022 guidance.

We expect full year ACB outlook to be in the range of 1.975 billion to 2 billion.

Which represents growth of 5.6% to 6.9% or 12% to 13.4% in constant currency.

We are raising the midpoint of our full year constant currency ACB growth compared to our August guidance.

For additional context, the midpoint of our ACB guidance when translated at 2019 foreign exchange rates would be equal to approximately $2 billion 80 million and would exceed our 2019 Investor day <unk>.

Our full year constant currency ACB growth Reyes is driven by the strong performance and are resilient business model.

That performance drove a full year ACB operational increase of $8 million relative to our August guidance.

Momentum with offset by $20 million of additional foreign exchange headwind.

Our strong performance has been consistent throughout 2022.

Since we issued full year ACB guidance in February we have raised the midpoint of our constant currency growth rate guidance by almost three points from around 10% in February two almost 13% constant currency growth with our current guidance.

The strong organic growth in our business has been driving our improving outlook.

Turning to revenue, we expect revenue to be in the range of $2 billion to $2 billion $35 million, which is growth of 3.5 to five 4% or 10, one 211, 9% in constant currency.

We are raising the midpoint of our constant currency revenue growth compared to our August guidance, which reflects a full year revenue operational increase of $12 million.

This momentum was offset by $24 million of additional foreign exchange headwind.

Similar to ACB for revenue, we have raised the midpoint of our full year 2022 constant currency growth rate guidance by almost two points from around 9% in February 211% with our current guidance.

Turning to EPS.

We expect our full year EPS to be in the range of $7.48 to.

To $7.80.

Relative to our August guidance.

Your full year EPS increased 12 from better operational performance, which was offset by 17 of incremental foreign exchange headwind.

As a reminder, some of our strong Q3 EPS performance was driven by the timing of investments that moved from the third quarter to the fourth quarter.

We continue to expect our full year operating margin to be in the range of 41% to 42%.

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

Our 2022 outlook is a range of $570 million to $600 million.

Relative to our August guidance, our full year operating cash flow increased $2 million from better operational performance, which was offset by $7 million of incremental 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 our any capitalization regulations and higher interest expense given rising interest rates.

Since January 2022, we have seen significant U S dollar strengthening relative to all of our all global currencies that contribute to our results.

Our largest exposures are to the euro and Japanese yen.

When compared to the 2021 currency rates are 2022 guidance is negatively impacted on ACB by approximately 120 million and operating cash flow by approximately $40 million.

Now, let me turn to guidance for Q4.

For the fourth quarter, we expect ACB in the range of $761.3 million to $786 $3 million in revenue in the range of $621.8 million to $656 $8 million.

We expect Q for operating margin in the range of 45.6% to 48.5% in EPS in the range of $2.58 to.

Two $2.90.

Further details around specific currency rates and other assumptions that had been factored into our outlook for 2022 and Q4 are contained in the prepared remarks document.

Our core simulation market is strong and diversified with consistent demand from our customers as they encounter increasingly complex product development challenges.

This strong core market, coupled with our market, leading portfolio deep customer relationships and highly recurring financial model with three vectors of growth.

Makes ancestors business highly resilient.

All of this is driving the underlying momentum in our business and gives us confidence and the increased outlook for full year constant currency ACB and revenue growth.

I would like to thank the anzus team for their outstanding execution during the quarter, which drove a robust Q3 financial performance and momentum going into our last quarter of the year. We once again delivered an exceptional quarter, which demonstrated the ongoing strength of the answers business.

I am confident in our ability to continue to execute against our outlook.

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

Thank you ladies.

Ladies and gentlemen at this time, we will now begin the question and answer session.

To ask a question you record star than one on your telephone keypad.

You're using a speaker phone please pick up your handset before pressing the keys withdraw.

Withdraw your question please growth garden to in order to give as many people as possible the opportunity to ask questions. We do ask that you. Please limit yourself to one question and one follow up.

And at this time, we will pause momentarily to assemble the Rockford.

And our first question today will confirm <unk>.

Research. Please go ahead.

Hi, Good morning. Thank you for taking my questions. The first one is just you mentioned how the different factors of growth are working for you and I wanted to kind of a double down a little bit on the.

Under computational power.

Your customers use.

And just related back to the business model you have today can you just give us a little bit more color on how you're able to capture that as people is that relationship from one engineer using one license.

At a particular.

At a particular problem.

When they start.

More complex problems, how do you capture value.

From an economic perspective as well thank you.

Gallup good morning, that's a great question. So the way you should think about how we monetize that is is really true product licensing. So when we license our technology to customers, we give them access to the use of us take a take a multi year leases. An example, we give them access to use our technology.

For a duration of time.

And we also give them access to high performance computing capability and that H P. C <unk>.

Translates into license software for Us license revenue for auto license ACB.

And and of course access to the silver themselves also show up his license so in the aggregate both be the ability to use the technology on more processing translates into license for us and the ability to use more of our software in that context translates into more license.

So that's how we monetize it and that's how it shows up in our in our financial.

That is really helpful. Thank you interesting and then.

I like kind of the point that Nicole made which is if you look at a constant currency exchange rates from 2019.

You as a team managed to beat the guidance.

<unk> managed to be the guidance by without <unk>.

5%.

If you look back and kind of think about when you gave us that guidance I think it was in September 9th.

19.

And what happened.

During that time, we had we had COVID-19 and everything Uhm, what is allowed you, which parts potentially played out better than what you thought at a time.

To allow you to even though anything that was going on from a macro perspective, you're able to kind of.

Achieve those targets what surprised you might be on the political maybe even alright, what what ended up being might be a little bit slower than usual.

What did what did I jump in Gal, because I have some contacts and then maybe I'll ask Nicole put out a little bit more.

So if you look back at 2019, and you consider the the evolution of our business.

And we describe some of this and the Investor update presentation that we did earlier this year, we've been in the process of transformation in our business model, where we've been taking advantage of the three victory the growth that you alluded to earlier.

And we've been using that to really transform our business model and the way that we support our customers. So we've increased the amount of of.

At least that we do with our customers and that translates into obviously stick your relationships with our customers as we go forward. So look at the end of the day. It comes down to the products that we have and the capabilities that we provide in our ability to address some of our customers most challenging challenging.

Market needs and we have an amazing portfolio. We've continued to build in that portfolio. We've continued to expand that capability that makes it even more relevant for our customers today as compared with years ago.

And the nature of the business model the nature of the the ability to monetize that relationship all of that translate into our ability to be very resilient no matter what happens out there in the market. So we have a very resilient business model that I'm excited about.

We've talked about we've talked about how we are and I mentioned this in my script, we talked about how.

Our technology.

Is very broad across multiple physics were not overly reliant on a single product line, we talked about how we are we have presence in multiple industry verticals.

And you mentioned I mentioned high Tech I mentioned automotive I mentioned aerospace's examples and of course, we have president others, and we talked about our geographical distribution as well so that gives us the ability to be resilient when a particular industry changes or when there are particular challenges in a in an individual market.

Now in the face of a global pandemic of course as you as you saw going through this that's an overarching global phenomenon and buried this goes back to the core value proposition of our products, which as we help our customers build better products bring them to market faster at lower cost. We helped introduce warranty costs, we help them be more efficient and so that combination of being able to.

Support them from a top line perspective, and drive to both top line growth as well as support them from a cost perspective really standards in good stead in rough economic times, which is obviously, what we've seen in the last couple of years, so that that part and part contributes to the momentum of the business that we've seen in the past and frankly that contributes to the momentum of the business that we're seeing that we are.

Seeing today.

I've had the opportunity to announce spend a number of over.

Over the last couple of months I've had an opportunity to spend time with customers in person in the U S in Europe and Asia.

And what I'm hearing from customers around the globe is.

Is very consistent perspective on the pressures that they're having to be able to continue to drive their businesses forward. So they've all got multiyear product roadmap that they need to advance their businesses.

And frankly, they're used they're relying on us they are relying on simulation to be able to not only deliver on those roadmaps, but to be able to deliver on those roadmaps as efficiently as possible because they know the simulation can help them save time and money through the avoidance of physical testing and things of that nature. So.

That's all contributed to the momentum that we have in the business and.

Cited about wherever you are right now.

Okay, that's very helpful.

And our next question will come from Tyler Radke with the city.

Good.

Yes. Good morning, Thanks for taking the question.

In the opening remarks, you reference to a number of deals where you displaced competition in accounts and.

You know it just feels like this is something that you.

You are talking about more here on this earnings hall relative to.

Historical.

[noise] quarters, So could you just walk through the.

The opportunity that you see there have you seen kind of when rates pick up and it was.

This is kind of a function of.

The innovation and it it answers and perhaps inorganically just kind of combining products that you've acquired in the course week, that's allowing you to do this just kind of talk about the opportunity on the competitive displacement side and then I had a quick follow up for Nicole. Thank you.

Yeah. So firstly Tyler the first point of competitive displacements are in our industry relatively difficult right. They don't happen they.

They don't happen on a regular basis.

These are relatively difficult.

And when they do happen, it's something that you are excited about because the customer has a specific need and obviously, they're not able to satisfy the need based on whatever products that may currently be using.

And whatever they are using right now may I mean, if it's not able to address their needs not able to solve that problem not able to provide the level of fidelity or accuracy. They are looking for are not able to integrate with the systems that they need to they will look for another solution and as you rightly pointed out we were excited and I mentioned this in my script, we were excited about.

About one of our competitive displacement this year.

We noted.

But but more generally the the nature of these displacements are driven by as you pointed out the strength of the portfolio look we've made a lot of investment.

Yeah in improving the products from a performance perspective from a usability perspective from an integration perspective, if you look at some of the releases.

We have that we've announced for example, most recently in in in our three in our two and 2022 or two one example on scale ability I mean, we are using a GPU scale ability and achieving enormous acceleration in solving capacity for our customers. The these are all incredible.

Nations that they value and as they start to look at our roadmap and.

Organic activity that we've got that.

They realized that they should be committing to us because we will be able to help them not just only today, but in the future. So that's that's how I see it and obviously you mentioned an organic obviously, we continue we've made a number of good acquisitions. They have been integrated into our portfolio as well and that just adds to the breath and the depth of our our technology and capability.

Thanks, and Nicole is I look at the Q4 ACB guide. So obviously it was a really strong beat here in Q3, but.

It looks like the the race for the full year was much less than the operational B and Q3 could you just help us understand what's giving you.

The moving pieces and the Guy for Q4, where there's some deals that maybe he came in a bit earlier here hearing Q3 or are you kind of derisking queue for further based on what you see on the macro environment just help us understand the relative large outperformance in Q3, and then the much smaller operational raise for for before you. Thank you.

Yeah sure. Thanks, and Great question, Tyler So let me start with a perspective of how we view the overall momentum in our business and our focus is really on how we improve our full year ACB outlook overtime.

And that's because of the quarter to quarter revenue growth dynamics are really lessen indicative of momentum because of the lumpiness of large deals and also timing precision of predicting the timing within a specific quarter is also a little more challenging for example in Q3, we closed over 12000 deal with alone. So you can't always control the timing of when.

<unk> of when customers, our our designer clothes those deals and so to illustrate the momentum we see in the business I would point out two things. So first is.

Looking at what we used where they started the the answer with here I'm looking at the races throughout the year. So are 8 million dollar operational raised that we gave in in this guidance. It really is a follow on two of $29 million operational Raisin August which was a follow on to a $35 million operational Reyes and may and so.

Overall, we seen consistent momentum an improvement in the business that translated to about three points of incremental constant currency growth throughout the year. So from about 10% in February when we started to about 13% at the midpoint.

Second thing that I would point out is while quarters are a little lumpy and it's a little bit more challenging to see patterns.

You can look at kind of the first half and the second half to understand the underlying momentum of the business. So in the first half our constant currency ACB growth was around 12 per cent and if you look at the midpoint of our of our.

Our constant currency ACB growth implied in our guidance for the second half that would be about 14 point. So you can clearly see from the first half to the second half the improvement in the momentum at the business and in addition, the incremental $8 million raised on top of the guidance. We gave in August it's an indicator of the overall prevent.

The second half.

Okay. Thank you.

Thank you.

And our next question will come from J Blue shower with Griffin Securities. Please go ahead.

Thank you good morning, All day for you first you noted the breath of the product line.

And that for me raises the question of resource allocation to that greater breath a portfolio.

Specifically for R&D.

As your analysts meeting five years ago.

You gave us a number of priorities that you had or internal investment specialist specifically for RMB.

And here five years later looking ahead.

Give them a greater breadth of the portfolio and the various dimensions you spoke of how.

How are you thinking about.

Critical resource allocations, especially as R&D is steady or slightly higher percentage of revenues that it was a number of years ago.

Unicol as follow up for the year today, you've been adding typically between 102 hundred employees per quarter.

How are you thinking about the ongoing headcount ads from here.

Specifically one of your largest categories, which is technical support consulting or the area.

Okay. So.

So let me start first Jay Thank you for the question.

Let's let's talk about a little bit about R&D and prioritization.

As you know and I think we've discussed this at our Investor updates, we have a pretty robust mechanism of being able to allocate resources against priorities.

And and we do that analysis, and that's ultimately influences, where we're spending our money and our resources.

In order to achieve the outcomes that we're looking for <unk>.

From a from a from a product perspective, I think you should understand that.

We look at sort of the core physics evolution and there is an F.

Amount of work that we have focused on the evolution of the core physics.

And that's L. Algorithmic advances at all of the work that you would expect to continue to make a structure is better than ever affluent fluids better than ever electromagnetics et cetera. So we have a stream of activity within the R&D organizations, which do that we also have as we broadened our portfolio. We have some platform level work and that really addresses.

The needs across multiple products. So it's it's a support for the cloud is.

Support for products like Minerva. These are these are value propositions that apply across all of the all of the physics and all of the verticals as we deliver to our customers.

The Ah simulation platform that allows them to manage these really complex simulations that we're dealing with if you look at technologies like materials. For example, that's again very valid as you start to think about Multiproduct sales materials comes in and provides a significant amount of capability in that context. So the other.

Thing to note is that some of the techniques that we have developed for example, GPU acceleration, where we've done some incredible work that's technology that can be shared across the physics some.

Some of the Ray tracing techniques that we've developed in one sense are applicable across other so we are leveraging the the teams to be able to take advantage of learning from one team to the other so I'm very comfortable with opposition with the with our R&D footprint I think we have a fantastic roadmap.

And I think it continues to add to the value proposition for our customers, which is we can continue to help them solve their most challenging problems now and.

They have confidence in our roadmap going into the future to support them. They understand the value proposition of being able to reduce costs. They understand we can help them reduced warranty costs all of those things.

Reflected in supported by our R&D roadmap.

And J on your on your head on your hiring question. Yeah. R Q3 piece of hiring came in as expected.

And it was and it's like it is at a higher rate than we did in Q3 2021. So we we're keeping to our plans were tracked into our plans, we're continuing to hire in queue for his plan I mean, the overall the overall additional point I would make is that our overall attrition still remains lower than industry averages and that really possess.

<unk> as well to have the consistency and instability in our overall organization to continue to invest in growth and really and take advantage of the opportunities that RJ dust articulated in his response you around your R&D question and so so artwork continuing to execute against the 20 twenty-two hiring as planned.

Okay. Thank you very much.

And our next question will come from <unk> with J P. Morgan. Please go ahead.

Hi, good morning.

Mine.

I appreciate you guys have.

Kind of over driven on the annual guide this year I think that's something that that's pretty clear. So obviously, the the trends through the third quarter here very strong.

Still not kind of understanding what what's going on in the fourth with.

The slowing growth on the <unk> side.

Is there something you know.

And in the macro that you know is.

And maybe some pull forward into three Q that made that look a little better. So the trend is still very strong. It's just that there is a little bit of of Lumpiness.

And I know I know the backlog in the leading indicators were down that's probably a four X issue but.

Trying to get a little more color on what's happening there in the fourth quarter again totally appreciating that the trend line is very strong and you guys have done a great job this year of beating numbers consistently.

Yeah, Yeah. So so first I just kind of reiterate the point around his growth rates in any given quarter.

On a quarter to quarter basis, I mean, the absolute growth rate in queue for that you see in the underlying guidance remember, there's about 700 basis points of foreign exchange in that absolute number overall, so when you adjust for foreign exchange.

The mid point is is is around that double digit growth which is.

In line overall with our model on a quarter to quarter basis, you, sometimes get lumpiness in terms of when when deals happen and when there's kind of a year to year compares of windows deals happen. So the quarterly growth rates in the patterns of quarterly growth rates are.

Or just less indicative of overall momentum than the overall, which is why I kind of in responding to Tyler I kind of gave that description of of the overall momentum and so now when it and and when you look at what can happen in any given quarter again.

12000 contracts and a quarter, sometimes timing is is in a different it falls into different quarters, and one would expect and so overall the the underlying optimism the business hasn't changed the underlying momentum in the business hasn't changed.

We have we are very focused on the full year delivering the full year number making sure that we're getting the right deals.

For our customers and for the business at the right time, and so sometimes that can affect the overall underlying dynamics van growth, but overall queue for his keyboards midpoint is still in that in that 10% range, which which is which brings the second half to approximately 14 per cent constant currency.

Right and I guess just.

Yeah. Sorry go ahead of you I didn't answer I didn't answer your backlog question I apologize so the backlog on the backlog that's really a sequential pattern as well if you go back and you look there's there's some seasonality to the way backlog kind of rolls off and so that you also have to look into longer patterns as well. So if you look at the same <unk>.

<unk> last year, you see that kind of seasonal pattern of the depth and backlog and a quarter to quarter basis, and then and then it kind of turns to different so so the quarter to quarter dynamics are lesson indicative of than the overall kind of a full year dynamics that you see on backlog growth.

Right. So there's really.

There's really nothing that you guys are seeing I know everybody is very sensitive to the macro. These these days, but there's really nothing you're kind of seeing as far as.

An extension of closed cycles or.

And anything like that where people are being just a little bit more cautious.

The annual midpoint growth was an organic basis was touched down a little bit there's really nothing there macro guys that macro wise that you guys are seeing just to put a cap on this question yeah, Yeah, no I would say that that that the overall over I'll, let RJ comment because he's been speaking of customers that he can give you the more contextual cover but.

The overall, our overall outlook has improved since since August and so we're not seeing any fundamental difference other than the timing of when customer they're closed deals in the corner. So that on a constant currency basis. Our growth rate has increased for the full year and that's really driven by that 8 million dollar operational right.

So there's nothing nothing specific that were that were seeing other than normal quarter to quarter dynamics in terms of when things close, but maybe you can add some kind of short just jump in here you know obviously, we we read the same headlines that everyone else does.

But look our outlook is based on the reality that we're seeing in the field and as I mentioned earlier in the last couple of months I've had the opportunity to spend a fair amount of time on the road.

And as I said earlier, I've I've talked to customers across in different different geographies I'll also spend time with the salesforce in the field in these different geographies as well.

And we're not seeing we're not seeing.

The challenges that you might read about in the headlines reflect in in our business and I.

And I will sound like a broken record and forgive me for repeating myself the value proposition that we provide is tied to R&D and customers have multiyear R&D product roadmap and the competitive environment for customers is more challenging today than it's ever been and so they understand the lessons of the past.

Fast, which is that if you see concerns on the headlines and you pull your R&D investment back when those concerns of past you are now behind and you'll lose market share and that's to your detriment they've seen this play out time after time after time and so the investment and R&D activity continues unabated and our valued <unk>.

Opposition is tied to R&D because of that said again repeatedly we make R&D efficient more efficient and we help customers.

Drive product to market faster.

So so that's where our excitement comes from it comes from what we're seeing from a from a from a forecast perspective, what we're seeing from the field, what we're seeing with our customers and the nature of the products on the market research.

Great. Thank you so much really appreciate the color.

And our next question will come from Blair Abernathy with Rosenblatt security.

[laughter].

Thank you a nice quarter.

Just wanted to ask you about your your prepared remarks around users of simulation software. If we look back you know that.

Eight or so ago really a very technical master's level or higher kinda user base.

Was predominant.

And now it seems like things are starting to broaden finally.

As had been long predicted is this is this are you seeing this actively out there across your verticals and what exactly do you see your answers.

Doing in order to encourage <unk>.

Broader engineering adoption.

Well you know, it's it's it's multifaceted I mean, you personally the observation that you're making which is that it's easier for engineers to use similar.

Simulation and more engineers are using simulation is absolutely accurate.

And there are a number of there are a number of reasons why.

Why that is the case number one will start from the product perspective.

The products are are easier to use.

And we've.

We've had we've had.

Significant investments in usability.

Integration all of those things over the last several years after the last decade, or two which has culminated since situation right now where the product is so easy to use I don't know if you recently that you saw this I. It's it ran by my news feed this morning.

But there was a a high schooler in California, who use anzus simulation to simulate the loading of backpacks on students and the impact of a backpack and they did that analysis using as the simulation. They use granted they used mechanical they use a number of these products working.

Together in order to come up with a with a solution and one a one a very prestigious award.

That's an example of how easy the technology has been too has become to use for people were you.

High Schoolers are able to take motivated high schoolers are able to take advantage of the technology. That's number one second thing is we continue to increase our level of investment with universities, we have presence in over 1600 universities around the world.

<unk> University teachers, a massive online course using.

Using ansys over a quarter of a million people have signed up for that.

We've had.

Millions of people downloading the student version of our products around the world. So there is broad based understanding of our of our technologies at the at the undergraduate level and simulation is being taught as part of the curriculum. So graduating students are coming out aware of how does he use simulation aware of the value proposition of.

The benefits and aware of how to use answers and that is another aspect where the entering engineering workforce is very comfortable with this technology as opposed to a few decades ago.

The other thing is of course, the use of computing Ah we have continued to make the technology more efficient.

We have also leveraging high performance computing, we're leveraging gpus and with the with the overall broad based availability of compute.

That's making it easier for people to take advantage of take advantage of stimulation as well. So it's all of those things is workflows its product capabilities ease of use if it's integration with the with the academia all of the availability to computing all of that is all of that is is is really exciting and frankly I would.

I would encourage all of you to go to the most to our website, we have a a magazine called and says advantage and the most recent one for example talks about some academic success stories.

And that'll give you some perspective of how we're more deeply engaging with the academic community as well.

That's great. Thanks for the color.

And our next question will come from Jason Kulina Keybanc capital markets go ahead.

Hey, Thanks for letting me ask a question here you know obviously, a good quarter I'm curious on kind of the linearity of strength.

And then maybe if if you're able to kind of discuss how things might be trending you October .

Yeah. So Jason can I just clarify your first question I Wanna make sure I answer it correctly.

Yeah. So you talked about an earlier question.

Can't control when customers close deals. So I'm curious on the strength that you saw the linearity of of the activity through each month of the quarter.

Yeah, So I would say that I mean, Oh, you mean in terms of when deals cause I'd say that the linearity with with somewhat more consistent although I believe we saw a little bit more in the third month of the quarter.

I'm just looking at the data here to make sure I've got it right. Yeah. So we felt a little bit more in the third month of the quarter than we've seen it in in in prior quarters, but overall, it's been largely consistent.

Perfect and then maybe just a quick housekeeping question I think you made a small talk to an acquisition CNR technologies again small tuck in but how should we think about contribution for two four if there is any thanks.

Yeah. So C. In our technologies is closed yesterday yesterday November 1st Blush, [laughter] cause yesterday, and so we will have 2 million I'm sorry, two months not 2 million two months of of top line. This year. It was a very very small technology acquisition with <unk>.

Packed on the overall on the overall top line of the business.

Maybe you could talk a little bit of jumping here, while the transaction is obviously not material from a financial perspective I. Just wanted to note that I'm really excited about the people who are joining the company as a result of joining us as as a result of the of the acquisition CNR and of course the technology.

The Cnrs built over the years, they're they're a leading provider of thermal analysis, that's used to optimize thermal systems and they're using the number of applications, but most especially in the space and the satellite industry. So them their focus is on providing system level simulation for thermal.

And.

I've had a number of use cases and they were in fact being used as part of the James Webb telescope as well.

NASA use the CNR thermal desktop to provide a detailed thermal model of these optical and instrumentation systems.

And it was used to predict things like transient profiles ingredients and heat flows as as the payload transition from ambient cryogenic conditions and back again, so by adding that to our portfolio. We will then be able to provide.

Analysis to customers thermal analysis to customers from every stage from system design, all the way up to optimization from from one day tools, all the way up to three D tools.

That gives us a comprehensive perspective, and then of course with the with the work that we're doing with space applications with our mission is drink sweet of offerings. This further supports that and and increases our competitiveness in that market as well.

Great. Thank you.

And our next question will come from Andrew <unk> go ahead.

Thanks for fitting me and I just wanted to maybe ask a question on the large number of automotive deals you saw in Q3, I think it's Germany, if I'm looking at the revenue.

<unk> just wondering.

Given the nearest we're hearing about that region can you elaborate how long were those deals in the making and maybe tell us if the macro political situation. There is accelerating some of these deal closures given the energy issues, there and things like that.

Yeah. So if I can jump in and give you some color on automotive.

I don't have exactly the numbers in front of me. So I will have to be a little bit more qualitative. So one of the countries that I was in a few weeks ago with Germany, I did have a chance to meet with automotive customers, there and certainly and certainly I did in Asia as well in Japan, and obviously I spend time with our teams look at it again, it's the same.

<unk>, it's the same value proposition that we're dealing with the automotive industry is looking at technologies like electrification.

And they are recognizing that they need to make investments to be able to move more aggressively.

And consider consider the future of their product lines, and how they're going to evolve product line. So that's one area in in autonomy, while it's true that full fledged autonomy people are recognizing as a more difficult problem to solve there is a tremendous amount of investment suddenly and making sure <unk> happens, which is safety features.

And so they continues to be investment in those areas. When you consider both electrification and autonomy. These are not traditional internal combustion engine.

Traditional a traditional views of how a car is built these are incremental.

Different it's a different approach it's different skills. It's different tooling is it different technologies and as these companies are scaling up all the Oems as well as a tier ones and the supply chain in general they they are facing pressures to start to think differently and that's the way with simulation comes in so we have an opportunity to continue to monetize those relationships and to continue to.

Support our customers and that's I think where we see strengthen automotive yeah. Instead of just to give a little bit of color on the question. You asked me you know the overall overall growth and an enemy of a strong.

To reinforce Andres point or on the backs up at that in automotive automotive was strong quarter in EMEA. There were several seven figures sales automotive company gets really focused on on the things that RJ mentioned electrification, an autonomous vehicle uhm, but high tech the high Tech industry with also an area of strength in Q3, which was an element of the performance around.

<unk>.

Hi, operator, we have time for one more question.

And that question will come from Ken wrong with Oppenheimer. Please go ahead.

It appeared Ken.

And that will come from Adam bored with people go ahead.

Hey, guys. Thanks, so much for <unk>, maybe just a quick housekeeping item I know early this year you got me to price increase I think back until I was just curious maybe they'll call you could help understand kind of what kind of benefits that had and a quarter and how we should think about that and then come in <unk>.

Yeah. Thanks for the question Uhm as we mentioned I think it was on the last call. We had done a strategic review as a portfolio to identify some targeted areas, where we thought that you know the relative value that we provide versus the pricing and the market was was maybe a little askew and so we did some targeted price increases on.

A subset of element to the portfolio in July now just to provide some <unk> and so you know the underlying.

The underlying yield from that is of course embedded in our guidance because we did in in July , but what I would say is that even the price increase in July .

<unk>, our sales cycles tend to be three to six months long at on average and when you look at the larger deals that you see in queue for many of those are you know you're starting those conversations in January and so our expectation with that price increase instead, it would have relatively less impact in 2022.

Excellent. Thank you so much.

Mmm, that's all the time, we have today I'm gonna turn it over to <unk> for some closing remarks.

Thanks, Kelsey I'm excited by our outstanding performance in Q3, and thus far in 2022, along with a robust pipeline and deep customer relationships. These factors along with a diversified business and laser focus and execution are giving us momentum as we close out the year and move into 2023 and I'm confident in our ability to achieve the ambitious long.

<unk> goals, we announced during our Investor update.

Thank you to my colleague that answers for your dedication to our customers and to advancing the state of heart failure at a simulation and thank you all for attending today's call have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.

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