Q2 2023 ANSYS Inc Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to you.

A second quote is 20th twenty-three earnings conference call.

Today or.

Paul.

President and Chief Executive Officer, Nicole and a female Chief financial Officer, and Kelsey Bryan Vice President that's their relation.

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After today's presentation there'll be an opportunity to ask questions.

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I'd like to turn the conference over to you and that's Dwyane for opening remarks. Please go ahead.

Good morning, everyone. Our earnings release, the related prepared remarks document.

To our second quarter 2023 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 second quarter financial results in business updates as well as our two three and fiscal year 2023 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 disgusting or public filings.

Looking statements are based upon our view of the business as of today and the Anzus undertakes no obligation to update any such information.

During this call, we will be referring to non-GAAP financial measures unless otherwise stated.

Discussion of the various items that are excluded and reconciliation a gap to the comparable non-GAAP financial measures are included in our earnings release materials I would now like to turn the call over to our President and C. E O J Paul for his opening remarks.

Good morning, and thank you for joining today's call.

Building on the momentum of the first quarter of 2023.

One of our largest contracts quarter was a four year eight figure agreement with a multinational industrial company based in Japan.

This longtime customer is growing the number of users.

More products.

Expanding its use of new products across a multi physics portfolio.

As part of this customer's digital transformation.

It is using answers to establish a virtual product environment, which is helping to drive the company's sustainability and go to market strategies by accelerating its product development initiatives.

One of the calls I typically highlight a specific aspect of our business.

Over the past several quarters I have discussed the critical role that answers solution Splain sustainability.

Highlighted how customers are using our solutions in the development of next generation semiconductors.

And I have given you insight into the innovation, we're driving across a multi physics portfolio 205 technology pillars.

Second largest sector.

I would like to use today's call to discuss this critical industry.

In fact.

Largest contracted the quarter was the nearly 57 million dollar multi your agreement with a global Aerospace and defense company based in the United States.

This contract reflects significant growth over the previous contract to keep up with user demand.

The aerospace industry has experienced a resurgence since the pandemic with commercial air travel returning to record levels the summer.

From a product development perspective.

Industry leaders are challenging old assumptions about their aircraft.

And as the simulation is playing a key role in this industry transformation.

For example.

[noise] past most airplanes were powered by traditional aircraft fuel.

Today, though commercial aircraft manufacturers can choose from those fuels.

They can use the sash or sustainable aviation fuel blend.

Or they can consider alternative fuels, including hydrogen.

These critical choices not only have a significant economic impact for an organization, but they also play.

In sustainability initiatives of aerospace companies.

Sustainability is a key driver at aircraft engine makeup Pratt and Whitney, which has a vision of enabling the transportation sector to achieve net zero carbon emissions by 2015.

Today, the company's engines are certified to run on 50 per cent thefts.

By using stimulation from answers the company plans to increase that number close to 100%.

And the solutions are used in a number of sustainability initiatives at Pratt and Whitney, including developing a hydrogen propulsion system and optimizing the company's geared turbofan, which is reducing fuel consumption by 16% and cutting Nox emissions.

House.

In addition to the fuel source.

Sure Aerospace companies are using as the simulation to boost the efficiency of their aircraft.

For example, technical aircrafts services leader Lufthansa Technic has used this multi physics simulation to design, a bio memetic coding that emulates sharkskin to significantly reduce fuel consumption.

Societally carbon dioxide emissions.

Using <unk> the company quickly modelled aircraft and aerodynamic behavior and an accurate.

<unk> and computationally efficient manner.

An accelerated critical certification.

The European and U S aviation agencies.

At its current stage of development the Arab shock modification already makes two types of Boeing triple seven long haul aircraft more efficient.

Will have a positive environmental impact.

Another consideration for those commercial aerospace leaders is who will pilot the aircraft.

Automation technology has already had a profound impact on the industry and it is one that will continue for the foreseeable future.

To better prepare the industry one sky systems is integrating its aerospace domain expertise and technology with answers solutions to create AI based software that streamlines optimizes the development validation and certification of autonomous advert.

Asked air mobility systems.

The collaboration enables one sky, an endless customers to train and validate neural networks with mission driven simulation to reduce the risk.

Time and costs required for airworthiness certification.

Our success in the commercial aerospace sector wasn't display at the reasons, Paris Air show, where anzus exhibited.

During the event, we encountered a number of answers customers that are using a simulation to further disrupt the industry.

For example, answers customer Rolls Royce.

Chris to meet with clients.

The company recently announced that it has reduced the time that it takes to perform a crucial someone mechanical model of its gastro main engines from 1000 hours to less than 10 hours using answered simulation in a high performance computing environment.

As a result rolls Royce is able to rapidly deliver clean and complex proportions proportional solutions for safety critical applications.

No discussion of the aerospace and defense industry is complete without touching upon developments in the space sector.

Given the unforgiving environment of space.

And the inability to perform physical testing there.

Simulation is playing a critical role for space stood auto companies.

One of our key contracts and Q2.

Space to Dot O leader that takes advantage of the full as this portfolio, including our core products as well as newer solutions for materials Motor design Digital mission engineering and digital twins.

This through your agreement increases the number of products the company's leveraging as well as the number of users of answers solutions.

One of the trends amongst our space to the other customers.

Is to employ microsatellites to perform certain missions, such as delivering radar coverage for broadband services.

These small light satellites are less expensive to develop and launch than the heavier traditional ones.

<unk> customer <unk> launched its first satellite earlier this year with the aim of delivering low cost broadband service anywhere in the world.

With abuse of S with mechanical fluids electronics and digital mission Engineering solutions.

<unk> is a great example of customers expanding the role of stimulation to include more products and more users.

Similarly, we reached an agreement in Q2 with long time space to the old customer I sigh.

Which uses answers analysis and simulation solutions to help deliver synthetic aperture radar coverage of the globe.

Installations, a small satellites.

S. As digital mission Engineering solutions help the company to design and operate at satellite systems insuring.

Ensuring unparalleled accuracy for Earth imaging and satellite maneuver planning.

Here in Pittsburgh, we are eagerly awaiting the launch later this year of Astral body technologies lunar lander called Peregrine.

Using this multiphysics technology.

The company rapidly iterate through lender designs that are capable of withstanding the tremendous pressures of launch.

<unk> space and the impact of landing.

Astra Balik is understanding how it's kraft will operate in space using guidance navigation simulation.

This will help put humans back on the Moon and beyond.

Further expand our knowledge of the Cosmos.

Given aircraft increasing complexity.

Need to quickly explore all design options.

The complexities of space travel, we believe that stimulation will play an even greater role in commercial air space and space do that Oh in the near future.

Companies.

These sectors must take advantage of all areas of physics.

Holding structures fluids, electromagnetics optics and materials.

And with a highly scalable solutions and access to high performance computing by the cloud.

<unk> is in a unique position to propel the industry forward.

Turning to our partnership activities.

[noise] foundry services has certified are leading semiconductor solutions for power integrity sign off verification of integrated circuits design would be Intel 16, silicon manufacturing process.

And it's the solutions provide unparalleled capacity to analyze a full chip design, while verifying the effectiveness of that ships electrostatic discharged protection circuitry.

I'm also pleased to announce the number of developments in a relationship with Samsung foundry.

At the foundries recent safe conference, where my presentation <unk> reviewed the importance of three D. I C. As in the critical role that answers plays in designing them.

Samsung certified <unk> S C for the company's family of heterogeneous multi died packaging technologies.

Red Hawk S. C. As you May remember is our power integrity in Tamil verification platform.

Samsung Foundry also certified <unk> Reddoch S C and S. As told them power integrity sign of solutions for Samsung's latest two nanometer silicon process technology.

We have also expanded our relationship with some offices.

Our two companies recently announced a new reference low for Samsung's 14, L. P U technology, which delivers the accuracy of ancestors Golden sign off electromagnetic analysis with leading custom design flow from synopsis.

And Q2, we also announced an expansion of a partnership with P. T C.

Our teams are pursuing more integrated materials management and sustainability workflows between P. T CS krio and windshield products and answers granta.

This collaboration will help engineers balanced performance.

Environmental footprint priorities as they do.

Design products.

Turning to our ESG initiatives I'm very happy to report that answers has been named the USA today's inaugural list of America's climate leaders.

The list recognize those companies that have been.

<unk> the greatest reduction in court emissions intensity between 2019 and 2021.

Finally, I'm excited that adds this has been named Newsweek's list of most loved global workplaces.

This recognition celebrates companies with employees, who feel included recognised and valued.

S. This rank twenty-seventh globally on the supposed to just list, which is yet another indication of a tremendous team and the impact we are having around the world.

In summary, Q2 was another excellent quarter for answers.

I'm excited that the market is vibrant and.

And the demand for answers solutions remains robust thanks to the unique value proposition that we provide.

With a strong pipeline our industry, leading portfolio in a deep customer relationships.

I am confident in our ability to meet our short and long term goals.

And with that.

Will turn the call over to Nicole.

Nicole.

Thank you I say good morning, everyone.

Let me take a few minutes to add some perspective on our second quarter financial performance.

And provide contacts burnt out what can assumptions for Q3 and fully your 2023.

The second quarter demonstrated the strength of our business as we delivered solid performance during Q2, and Pete are financial guidance across all key metrics.

A C V came in better than guidance.

Revenue operating margin and EPS also exceeded our guidance driven by a C. P outperformance and it makes them license type sold in the corner.

Given the strength of demand for simulation and the momentum we see in our pipeline, we're raising our full year ACB and revenue.

The improvement in <unk>, your ACB outlook is above and beyond our queue to outperform it.

I will provide additional details in our guidance in a few minutes.

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

Getting with a C V. We delivered 488.3 million in Q2.

Which grew 6% year over year.

Seven per cent in constant currency.

R. S M P customers performed while during the quarter and we sound growth across most industries.

A C V from recurring sources grew 13% or 17% in constant currency on a trailing 12 month basis and represented 82 per cent of the total.

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

Q2, total revenue with 496.6 million and grew 4% or 5% in constant currency.

As I mentioned.

<unk> guidance driven by the ECB outperformance.

And that makes a license types in the corner.

<unk> for both a C V and revenue by geography was in line with our expectations.

Here's a date our top line performance with robust with a C V and revenue both growing double digit in constant currency at 12% and 13 per cent, respectively with broad based growth across industries geographies and customer types.

Because the quarter with a total balance a gap deferred revenue in backlog of 1.3 billion, which grew 10% year over year.

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

Yelled at a solid second quarter gross margin of 91% and an operating margin of 36.4%, which was better than her guidance.

Operating margin was positively impacted by outperformance on revenue.

Favorite will make some license types.

Well, it's the timing of expenses.

The result, with second quarter EPS of $1.60, which was also better than our guidance similar.

Similar to operating Martin E.

P. S benefited from strong revenue results and the timing of expenses.

Are effective tax rate in the second quarter with 17.5%, which is the rate that we expect for the remainder of the year.

Our unlevered operating cash flow in the second quarter totaled 72.1 million.

And was in line with expectations.

The underlying momentum and or cash collections from Maine strong. However, unlevered operating castle was down here over a year due to the timing of tax payments.

We are raising our full year ACB outlook to a range of 2.275 billion to $2.340 billion, which represents growth of 12% to 15.2% for 11.4% to 14.6% in constant currency.

We are raising the mid point of our a C V guidance in constant currency growth.

Have a point.

Are improved outlook is in excess of the queue to overperformance, we delivered relative to our queue to guidance.

And it's partially offset by a few million dollars of foreign exchange settlement.

We are increasing our revenue outlook to a range of 2.257 billion to 2.327 billion, Richard <unk> of 8.9% to 12.3% or 8.5% to 11.9% in constant currency.

We are raising the midpoint of our revenue guidance in constant currency growth fire half a point.

Within the increase guidance, we are absorbing a similar amount of foreign exchange headwind that we anticipate <unk> and a C V.

We expect <unk> E P S to be in the range of $8.39 to $8.88.

Relative to our me guidance.

Updated full year EPS contemplate four cents of operational improvement from increased full year revenue guidance, which was more than offset by six cents of higher interest expense and one time items in other expense.

Now, let me turn to our full year Unlevered operating cashflow guidance.

As a reminder, we now provide guidance for Unlevered operating cashflow is it a lines to the longterm cumulative 3 billion dollar Cachepot outlook, we provided at our 2022 investor update.

Our twenties twenty-three guidance is a range of 699, two $749 million <unk>.

Relative to or make islands absorbs the small additional foreign exchange headwind, we see in the second half.

The underlying operating leverage in our business remains robust.

Further details on the reconciliation of GAAP operating cashflow to the comparable non-GAAP Unlevered operating cashflow are contained in our prepared remarks document.

For the third quarter, we expect a C V in the range of $460.5 million to $480.5 million.

R E C V growth outlook for both Q3 and the full year is 13 per cent constant currency growth at the mid point, which is above our financial model and an acceleration from the 12 per cent constant currency growth we saw in the first half.

Turning to the piano.

We expect Q3 revenue in the range of 453.7 million to $473.7 million.

We expect to Q3 operating margin in the range of 29.62, 31.3%.

And E P S in the range of $1.18 to $1.31.

As I have noted in the past quarterly dynamics can be volatile and often times gross dynamics and the piano can be disconnected from a C V.

Quarterly mix of license type that generate upfront recognition create a year over year headwind in the third quarter, which is causing the piano to be disconnected from the strong accelerating third quarter and second half a C V outlook.

The year over year revenue and resulting P&L in the third quarter is not a reflection of a change in business momentum.

Our full year raised ECB guidance continues to be the best metric to observe momentum in our business.

Further details around specific currency rate and other assumptions that had been factored into our outlook for 2023 and Q3 are contained in the prepared remarks document.

I am really proud of the strong execution in the first half of the year are expanding product leadership and a robust pipeline. These factors along with our diversified business and laser focus on execution are giving us business momentum.

This is reflected in increased outlook for a C. P in revenue.

To the entire anzus team. Thank you for your dedication to the lighting, our customers and delivering world class innovation.

Your efforts not only contributed to our strong performance in the first half of 2023, but also fuels the continued momentum going into our second half of the year.

I remain confident in our ability to deliver our 2023 and longterm outlook.

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

Ladies and gentlemen at this time, we are ready to begin the question and answer session.

To ask a question you May press star one on your telephone keypad.

If you're using a speaker phone please pick up your handset before pressing the key.

To withdraw your question please press start them too.

In order to get as many people as possible the opportunity to ask questions. We do ask you <unk> you. Please limit yourself to one question and one follow up.

At this time, we will cause momentarily to stop our roster.

My first question comes from joke or link with <unk>. Please go ahead.

[noise], great I had one.

I wanted to start with a question on a I and I appreciate that so that's been part of a product roadmap for a long time, it's been making your flights are products better for a long time.

My question was more coming off design automation conference during the corner and hearing about some of the all new products that are in development that answers things like machine learning day soldiers or even new cloud platforms that will play into K I M simulation data I just wanted to see.

Tensile for these new things to become Addle. Their then how do you think about it kind of the new monetizing that would be separate and distinct from what's been pointing out cause I'm kind of course all of our data. So if you will.

Hey, good morning, Joe Hey, Thanks for the question. So as I've said before you know AI has been part of our roadmap and we have five broad areas that we're investing in from a technology perspective.

To improve b to improve I'll continue to improve our products and <unk> I talked about them at some length at the last earning school. So I won't go through all five areas, but AI of course is one of those key pillars. We've continued to have investments in error and we will continue to make investments in AI and you'll see products coming out is there ready.

We have products in the market already.

Roared areas, where I think you'll see the benefit of the impact on answers. One is of course, we will improve the experience with the user experience events as tools that plays a role where we continue to focus on that area. The <unk>. The second is brought him speaking, making simulation easier to use.

And you may have seen a recent announcement that we made about and says G. P. T. A.

Which is which is.

Which will support technology, that's based on G. P T, which is really designed to help customers use and the solutions are more easily it's a it's a virtual multilingual tool and it can go against our information and summarize public information in a way that's appropriate based on how the user is.

Using our technology. So that's a really interesting interesting use case that we've we've made available recently and then of course, we've been focusing on making simulation.

Faster and that's making a pollux faster I talked about this at the last earnings call and one of the examples I gave was on in the area of optimization and I think I gave the example of a customer who is using our our multi variable optimization using our AI capabilities and there you are in a position.

Large European automaker and they were in a position to get to a <unk> solution a thousand times faster.

Then using traditional Monte Carlo simulations. So there's a lot of exciting exciting things that are taking place as we start to look at the overall landscape.

Does that answer your question.

Yeah that that's great. Thank you and then as a quick follow up just given my focus on aerospace and defense is for that I wanted to ask.

<unk> has the evolution of a T V or or maybe a net retention rate is the best way to think about it that's within the existing customers and there's some market you obviously talked about.

A really big deal in the corner, there's a current customer about expanding how did I use answers I guess, what what's kind of the experience broadly across the market and are you <unk>.

Just multi it says X as a driver, but more cross pollination between the simulation <unk> the new when acquired solution span again two missions engineering.

Yeah, I mean, what I would say generally is the dynamics that that we see are are really across all three dimensions of the growth drivers that we see right. So the example that we we highlighted in our remarks with an example of a customer who already has broad sense is capable of.

<unk> added a couple of additional capabilities, but really with with with demand can <unk> with with supply constrained in terms of their the licenses that they had to be able to accommodate the breath of the users that we're we're propagating at these <unk> in the aerospace and defense space in particular.

They're very complex multi physics problems, which drive really significant amount of computation right and so the license constraint that that our customers face that is driving growth also has that that third dimension of our gross model around you know needing to have additional capacity to accommodate the cough.

Amputation, all the complexity of all the things they have so I think the aerospace and defense industry, given kind of tipping points and at the beginning of some of the transformation that it's going through is very emblematic of what you know and industry can uhm and industry experiences in their evolution of answers software.

Sure because it comes from you know those those adding more products to solve a solution driving more usage across the development lifecycle and then the problems themselves are very complicated I don't know actually if you'd have anything to add yeah. Okay.

Okay, great. Thank you.

Alright next question comes from Jamie Lee shower weird.

Griffin Security. Please go ahead.

Thank you good morning, Adria following up on the commentary about the aerospace and defense market. It. It is very interesting to see how it has now become your second largest market surpassing.

Automotive for which for many years, so it was pretty similar per cent.

But it's also interesting to consider that I think the a and the market is perhaps somewhat more concentrated in terms of the the customers.

A number of logos for example, and how were you thinking about the sustainability of that kind of growth for a M. D, which is outgrowing your largest market hi Tech and could you foresee for example of that perhaps automotive my start seeing an acceleration.

<unk> for the same kind of reasons that you've been seeing the acceleration in a day.

Good morning today. So you know it's it's it's a really interesting point when when you consider b dynamics of every individual market. They go through.

Different they're different drivers that are that are changing the way people are thinking of changing the level of innovation that I'll tell ya, that's taking place in specific markets and of course, when we talk about markets, we're talking about and markets and so if you consider any and customer they're relying on a supply chain of components some of which would be consider.

To be from that same and market and some of which will be produced for example, semiconductors would come from the high Tech vertical we may be selling to a customer of the supply chain, but they're providing semiconductors ultimately might get us in in the in building an airplane for example, so it it crosses it crosses industry verticals, but that being said, that's how we categorize that'd be and mark.

<unk> look aerospace is going through a really interesting transition as I mentioned, that's one of the reasons why I landed on a call. It's not just fuels as I discussed there's a whole discussion taking place in the industry about different kinds of take off modalities of vertical takeoff is it short takeoff is it traditional.

<unk> electric and electric motors versus more traditional more traditional means of propulsion, there's a number of different vectors, whether it conversations taking place I mentioned, the Paris Air show at the in my script I was actually at that Air show and I had an opportunity to meet with some of our very large customers as you point out we have some very large area.

Based companies, who are customers of hours, but it was really interesting walking around the show floor. They were thousands of people representing small companies boots all over the place where you will be the small companies that are part of the supply chain dealing with this this this changing landscape that's that.

That'd be aerospace industry is dealing with right now and there is a number of designs with aircraft and there are smaller companies out there pursuing their dreams it'd be receiving their opportunity and every single one of those companies is is designing technology building technology.

Which makes them either a potential customers advances so perhaps already customers advances. So it's a really vibrant area. Every one of these verticals goes through it <unk>. It goes through its drivers, but we're very excited about the aerospace market, we have some great technologies and capabilities from a more traditional physics.

Things like mission engineering, there's lots of different interesting technologies that we can bring to bear to support b the transformation abuse aerospace companies or to help them achieve what they're trying to do in this rapidly changing market.

Mmk as follow up I'll I'll ask you obligatory a I M. L. A question three weeks ago with the E. P. A conference S. A C T O.

Very interesting keynote on a and depicted an unusually detailed roadmap for your product releases over 15 products. Just this year alone across mailing different stacks and it was nowhere to question about AI, but what I wanted to see if you could tell you. This.

<unk> is how do you see a I affecting new use cases, which you have posited as an important growth driver for you over and above renewals.

And as well for what you called integrated workflows or or industry solutions <unk> commented on S. A squirrel driver for Ya.

Well look you know there there's obviously a lot of discussion about AI and you know Joe asked the question earlier.

As as I've said, you know multiple times. This is an area. We've been investing in we have we have product activity, we have customer activity and obviously there are there are use cases that were driving that are perhaps made more interest.

Thanks for the use of <unk> and I talked about and I talked about you know the Yusuf Multivariable optimization for example, and how AI techniques can improve that for the perspective of being able to get to optimize and it's great to be able to get for design, but I I think I'll take a slightly different angle here to respond to your question as well and let's talk a little bit about the end markets and.

So when you think about sort of the design activity clearly, we see and I as I've articulated we see.

I received the use of AI, helping us run our own company. That's obviously something that we will do is every other company will do so that's no different from every other company. The second is and I've talked at length. About this is the use of AI to improve you know all products, making simulation easier to use making simulation faster the user experience and I'm not gonna go into that.

The third is really how do we see the end markets being affected potentially by.

And if you look at it from that perspective.

If the the hijacking semiconductor industry is clearly being affected most most reasons most yeah instead of at the most leading edge and so we have customers. You know we have customers like in video for example, they are taking advantage of our technology is to be able to pursue the physical design limits just to be able to manage risk as they start to you.

<unk> use red Hawk Raptor, all of our products to to to improve their design you look at you look at a cerebral for example, they're using Ah Red Hawk S. C for their wafer scale engine, which is really focused on the market and and they're helping and we're helping them with you know challenges of mixed signal <unk>.

More integrity with electrostatic discharge and things of that nature. So so those are just a couple of examples of customers in the high tech market, but clearly that's at the leading edge in terms of how this is being this is being rolled.

Rolled out if you're willing customers. When you think about some of the other heavier industries. It's important to recognize that these industries have a longer design cycle than the high tech market. So when you think about aerospace and we've just talked about aerospace or you think about automotive they have developed in cycles.

<unk> longer than the traditional high tech cycle, and so as they start to incorporate more AI techniques into their into their products. It starts to change.

It'll have an impact but the impact is a little bit further out as we see it now from our perspective the use of the reason we're talking about this is that as customers start to take more use of AI to help drive for example design iterations, we feel that that drives greater use the simulation. Because then you start to use AI techniques for example to explore different design options.

That drives more simulation because simulation is validating whether those designs makes sense or not it's sort of the <unk> the.

Question about generative designs that we've had for some time and so that translates into additional simulation intensity, which benefits answer so as we start to look at some of these markets and market. They will develop at different rates and paces, but net net as these markets develop it continues to be a longterm tailwind for answers as they as customers are driving more design options and explore.

More design spaces as as techniques give them that capability.

Very good thank you Roger.

Alright next question comes from Andrew Open with Bank of America. Please go ahead.

Yeah good morning.

Good morning.

Morning, altering their call Kelsey Yeah, <unk> you <unk>, you highlighted sort of strikes on small and medium enterprises and I just wanted to dig into it from two angles, a I I think it was sort of set that small medium enterprises tend to lead.

Just a larger enterprises in terms of sort of economic sensitivity. So is there a message here on how the underlying demand for software is good and second you know just maybe an update and add some startup program. What are you seeing if there is that accelerating.

Sure. So uhm so yes, we as we had mentioned in the in our prepared remarks, we we've seen pretty sustained performance.

In in the SNB sector throughout the throughout the first half and when you look and when you. When you look at the total first half performance, we've seen broad base growth across industries geography, as a customer segments entirely. So so you know when you when you look at where we're sitting here to date and we're we're looking at.

Go forward basis, you know is that underlying Bradbury base strength that has persisted in the first half that we're expecting to see in the second half because we haven't seen we haven't seen any changes in that profile overall, so uhm. So that's kind of how we think about how we're thinking about the under.

Online momentum in our business and what's driving it as it relates to the to the anti startup program. You know we've helped more than you know 1900 startups from over 58 countries. We've graduated more than 415 startups to commercial relationships once or commercially viable I mean these are.

This is a really I think successful program to be at the forefront of simulation first R&D thinking and we're really really proud of the teams that have kind of works closely with these startups to be able to help get them to help get the you know their processes.

<unk> two that simulation first model. So so that's you know.

We're we're really happy with the progress of the program. It drives a lot of momentum again, it's not a program that drives massive amounts of near term near term a C V. But it is an indication of where our thought leadership is and where influence is in kind of being forward thinking about how the future of R&D each block.

<unk> been a couple of <unk>.

I was just gonna say there were a couple of how companies that you. You know you <unk> you may know that have graduated from the program that have done very well relativity. As an example climbed works is another example, so that we've had a number of.

Customers have taken advantage of this in their early stages have gone on to see tremendous success.

I Gotcha, and just a follow up question as you're all global supply chains to globalize.

The margin you are sort of rebuilding tech ecosystem in the U S was Siamese plans how to sort of this impact your a C. V growth was the fact that more incremental growth is shifting to North America. If you could just expand on that that's a longer term question. Thank you.

Yeah, I mean, what I would say is just as a reminder.

<unk>, where our business is place is really in the R. N D space right. So that question, you're answering about kind of decoupling and moving is a complex answer because the is a complex question to answer because it really is <unk> relies upon.

An understanding of what is the nature of what actually happened and that decoupling. If it's lifted shift of manufacturing. Then then it isn't is exposed to the R&D cycle as fundamentally changing the way R&D works or are changing the innovation model or the way the process of R&D works, which would be more amenable.

To where where the role of simulation place because we plus exactly <unk>.

Question Yeah.

Yeah. That's my question. So what are you.

Yeah. So I mean, so that yeah. So what I would say is that is that it is too early to tell because the kids are in D. As you know the decoupling is really a mixed mixed dynamic around you know shifting manufacturing at.

And and <unk> customers are still in the early process of thinking about what that looks like and what it changes right. So so I would say that there isn't anything definitive 2.2 at this moment, but that is the framework for Hollywood think about where it would impact our business and where it wouldn't impact our business.

Oh really appreciate that Sir thanks, a lot.

Alright next question comes from Tyler Radke with city. Please can I have.

Yeah. Thanks for taking my question actually I wanted to ask you about a couple of trends are you seeing in the semiconductor market, partially as it relates to generative AI, but you talked a little bit about how obviously the the odd auto industries pivoting more towards building custom chips, just this vehicle complexity rises and.

Then obviously is is yep.

G P u's or taken out because of generative a I work with I guess my my question is how are you seeing kind of the simulation intensity and and attach right differ in in some of these new types of chips, whether it's from the auto industry, making their own ships or or in a G. P U.

<unk> relative to a C P U where where you're probably more more dominant historically thank you.

So there are a couple of areas that I think I think are are important to consider one is when you consider some of these high performance chips that are being built.

There's there's.

There are and and you look at sort of advanced designs, one is being able to get certified for the most are being able to support the most advanced processed no capability as we can that's certainly a very important and the the amount of stimulation that's necessary given the cost of failure or if you will have a failed tape out amount of simulation that's.

Necessary is quite significant and so for the sign off at these advanced process knows you clearly need a lot of simulation.

B B N. So that's obviously a tailwind for us because <unk> workloads are creating these very complex chipsets. The second thing is that as you start to as you start to think about a next generation Silicon design technology.

You're starting to look at three D. I C is what's that triplets and then that really changes the the kind of technology.

<unk> that unnecessary to support that are different from traditional from the more traditional S. O C kind of designs that people have have worked with you know there. There are two there are two primary ways of thinking about those challenges one is that you're dealing with a multi scale challenges because now you're dealing as a semiconductor does.

<unk>, you know dealing with a chip design, which is at the nanometer scale, you're dealing with things like package design at the millimeter scale and then P. C. P designer the centimeter scale and the fact that you're dealing with these multiple you know different levels of upscale introduces a lot of challenges and the physics challenges can change as you scale. So.

For example, thermal effects, which skins, you know can smooth out the temperature in very small chip geometry skills, but large temperature differences can appear when you're dealing with a sizeable multi die modules and so that's really that's really one one challenge upscale the second challenges of multi physics and and and that.

Case, you're dealing not just because you're dealing with this novel structure, you're not just dealing with a traditional challenges the vessel S. S easier dealing also with the fact that you've got interconnections between these different these different ship that so for example, you know you you you worry about electromagnetic interference for example, and so you need to do that.

Like from magnetic stimulation to prevent that your mind to ensure signal integrity, you've gotta be able to handle cooling and mortgage reliable soda ball connection. So there's photonics. So there's a number of different areas, where you're bringing in different physics from what you may have traditionally used to build out an S. O C. A traditional ship.

And so that's another area, where we are really shine because our technology is about multi physics, we can help our customers with three D. I CS deal with these challenges multi scale and multi physics, and and I think that that puts us in a in a in a really good place. So we're we're very excited about we're very excited about what we can.

Offer as customers up rebuilding some of these next generation silicon and systems to address the needs of a I M L.

That's helpful and <unk>.

Nicole just on the performance you saw here in the second quarter in Q3 outlook, you know sounded like there was a lot of strength and in Europe and a pack at least in the prepared remarks could you talk a little bit about the U S performance. I know you you you did beat the mid pointed to the Guy.

Right here in Q2 on on a T V. But it was the the lowest growth rate, we've seen for for awhile and and it seems like duration came in a bit softer was there any type of change and contract duration just may be driven by macro conditions, just help us understand the the seasonality and and trends that you saw in the U.

Thank you.

Yeah. So so first I'll start out by saying that the overall dynamics in the quarter that we saw from a geography next standpoint from it they will make standpoint are very much in line with what we expected want me guidance. So so there's nothing that was surprising of that changed in the quarter that is different from the outcome and you know when you look at Americans.

Overall America's you know has led the company in creating value for our customers and we continue to expect it to be as our largest region. We continue to expect it to be a strong performer and you know revenue growth in the corner with his phone per cent in constant currency <unk>. The we we highlighted in the prepared remarks, you know.

Some emblematic large deals that we had in the quarter. So you know the.

Quarterly dynamics around around what we delivered in America with inline with the expectations. We had and then and the geographic makes overall you know we're really pleased with the with the with the performance that we saw in Egypt Pacific and and to me as well as.

As we pointed out in our prepared remarks, and you know we had pretty diversified in the industry industry dynamics and growth <unk> and a pack as an example, aerospace and defense automotive industrial equipment performed really well when you look at <unk>, we had similar kind of broad.

Industry growth automotive and ground transportation, Andy and industrial equipment were all strung materials and chemicals were also particularly the strong. So so we we thought you know we saw a quarter in queue to very much in the way in which we envisioned it would play out and it it actually ended up being a little bit better.

Which allowed us to beat the mid point of our guidance in the quarter and the dynamics in the building pipeline that we've seen across the globe across industries Geography's customer segments is what gave us the confidence to raise the full your a C V by a half a point, which is you know in excess of the beat that we had in Q2.

Okay. Thank you.

Alright next question comes from Andrew.

It gets Perry.

Please go ahead.

Thanks for taking my question, maybe a two part question on the Lemonade Shard I'm just wondering at first you could maybe elaborate a little bit the <unk>, maybe Nicole could you just tell us what the contribution is from a per cent growth from the second half for a dollar amount of any time.

And then secondly, <unk>, maybe if you could touch on the portfolio that you have do you expect to invest more in that and more broadly do you. How do you balance that with your partnership with synopsis. Thanks.

Yeah. So let me just give you the quick rationale for the cop to it and then and then I'll turn it back over to Nicole and then maybe I can answer the question.

So so <unk> was a was was really I P.

That was complimentary to our core business. It was developed by you know relatively small but extremely high performance.

Performance team of of subject matter experts they were very early in the commercialization process.

And it was really about shifting left in the design cycled <unk>. They were addressing some key challenges for analog and mixed signals. So could design and that that application is important for things like you know automotive electronics, and Orange communications and things of that nature. So it's a very natural complement to our existing semiconductor products as I said it's.

It supports that that shift left Nicole you Wanna, Yeah, and as as I said I mean this was a this is amazing technology, great I P really talented team. It was it was not in it and then advanced commercial fee. So there's no material impact from this particular acquisition in the quarter or in the.

The second half outlook.

Got it and made with respect to Ya.

Sorry, sorry go ahead.

I'm Gonna place you asking question go ahead [laughter].

Go ahead.

So with with respect to the question that you asked about you know <unk>, how 'bout portfolio fits then I think you asked on semiconductors look we we have we have historically had.

You know one of the areas of sort of Golden sign off if you will with our answers Red Hawk portfolio.

Dealing with things like power integrity, and thermal effects and so forth and that's been an area that we have we have continued to make investments and and we are very very excited about our product capabilities electric I talked talked about some other certifications we received from from the foundries and at the most advanced process nose and we're very excited about that as you look more <unk>.

<unk> going into the future I'm I talk at some length about three D. I C. As in the use of the Multiphysics portfolio and that's really bringing in different technologies that were historically not being used by by people who are designing a traditional ice fees and you start to think about thermal effects.

And others, you know depending on the placements of this I mean, we talked about the automotive segment, if you're putting in chips into cars you have to know recognize that these trips are not sitting in air conditioned environments, they're sitting in a car which could be extremely extremely you know, it's it's <unk> could get extremely hot it can get you know <unk>.

The vibrations so if there's a whole different set of analysis that needs to be done to be able to ensure the reliability of the solutions for these different use cases are increasingly becoming common and that <unk> that leads to the traditional answers portfolio and so we believe in an open ecosystem. We believe in partnering and certainly we are excited.

<unk> are areas of our strength and and obviously we are in a position to to make sure that we work with all the vendors to ultimately make sure that our customers are successful.

Operator, we have time for one more question.

Alright last question will be from Steve <unk> J P. Morgan. Please go ahead.

Hi, good morning, Thanks for the man.

Good morning, Sir.

Can you just maybe talk about just the mechanics of of the of the third quarter just from an accounting perspective like just a little more color on on what's driving those those headlines just mechanically obviously there's.

It reflects some sort of a a change in behavior to a degree.

Obviously, if you've put it doesn't really change the longer term value in the cash flows but just just.

To be a little more color on the moving parts there.

On the <unk> on the non-GAAP income statement front.

Yeah sure. So so as as I've noted in the past and we <unk>. We haven't had a quarter that has this much disconnection and a couple of quarters and in quite a while but sometimes you have a quarter, where you can have a a meaningful disconnect between the piano and a T. V. So again is you know if you look at the underlying ACP.

<unk> in the quarter and and have it is accelerating both from the first half and and throughout Q3 and Q4 and so the overall dynamics around ECB, which is the basis of cash generation have a very consistent now in the court or the mix of license types, which generate.

Recognition within the Q3 outlook is is relatively lower than 20 twenty-two versus 2023. So that's what's creating the here over your head wind and a quarter.

And that's what's causing the disconnect between the piano in the corner from the strong and accelerating thirdquarter and second half ACB outlook now when you look that year over year revenue and the resulting piano in the third quarter. As we said is it's not a reflection of momentum or any change in the business and when you if you.

If you consider the full year guidance and a Q3 guidance and you can evaluate the implied queue for revenue growth you can see that that outlook returns to shrunk double digit growth and so you know that's the reason why we are.

Are fully your ACB guidance is really the best metric to observe momentum in our business and that's where we've seen kind of the continued progress and momentum you know the the increased just under appointment and a half since February of our outlook and a C. V. With you know when you add this additional half point that we gave so that's that's the underlying dynamic that's driving that does.

Connect between the quarter and I'm, sorry, the quarter in the foyer. So <unk>. So just you're just as a follow up to that so just mechanically like like what what is actually changing between the the third and the fourth quarter just on the ground again acknowledging that it doesn't change a C V or cash flow, but like what what is there any vertical.

Where you know there's a bit of a different skew or profile or you know what what is kind of the the the change on the ground at the drive this kind of volatility.

Ended up in that in that piano.

You know what what what are what are you reading too at <unk> at a high level.

Yeah. So there's really nothing operational because the pipeline is the pipeline and the mix of kind of license types that renew are are those that <unk>, there's nothing really operational but on occasion, you can get the comparison of Ah high mix of upfront a license types that have upfront <unk> recognition like you know <unk>.

Actual licenses are multi year leases compared to compared to a different period, where you have a relatively different makes a a higher mix of one year leases as an example, right. So so you can have you can have a different makes in a comparative period, which drive anomalies in growth rate, but it doesn't fundamentally change the overall.

Uhm dynamics in the business in fact, if you look at the overall scheme of the business and the implied skew of of what we're delivering kind of implied in the guidance and the second half of the year. It is very consistent with what has been done in prior quarters. It's just that the revenue recognition rules can tend to have some really odd compare.

[noise] of dynamics when you have the comparative of license type snakes in in one period versus the comparison in another period and so that's that's a dynamic that is that is sometimes challenging it hasn't happened in a couple of quarters, but every once in a while you have a quarter, where you have just a very different dynamic on a quarter to quarter <unk>.

You're over your basis within a quarter yeah. It makes it makes a ton of sense. Thanks, I really appreciate it.

Yeah no problem.

Thank you for joining us today, that's all the time, we have and I will turn it over to <unk> for closing remarks.

I'm excited by our excellent execution on the first half of the year are expanding product leadership.

Strong pipeline those factors as well as a proven track record of success and a unique value proposition add to my confidence in our ability to achieve our goals I want to thank all my colleagues that answers and at a global channel partners for the commitment.

<unk> and the many successes thank you for joining us and have a great day.

That's all branches now concluded. Thank you for I can think today's presentation you may now disconnect.