Q3 2023 ANSYS Inc Earnings Call
<unk> conference call with us today or object Gopal President of Chief and Chief Executive Officer, Nicole N F penis, Chief Financial Officer, and Kelsey to Brian Vice President Investor Relations.
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After today's presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then too. Please note. This event is being recorded at this time I will I would like now to turn the conference over to Mister Brian for opening remarks. Please go ahead.
Good morning, everyone. Our earnings release, the related prepared remarks document and the link to our third quarter 2023 form tend to have all been posted on the homepage of Investor Relations website. They contain the key financial information and supporting data relative to our third quarter financial results.
In business updates as well as our queue for and fiscal year 2023 outlets and the key underlying quantitative and qualitative assumption.
Today's presentation contains forward looking information important factors that may affect our future results are discussed in our public filings.
Looking statements are based upon our view of the business as of today. The anzus undertake no obligation to update any second from Asia.
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 the reconciliation a gap to the comparable non-GAAP financial measures are included in our earnings release material.
I would now like to turn the call over to our President and C E O J.
<unk> for his opening remarks.
Okay.
Good morning, everyone and thank you for joining us today.
Q3, and this was on track to deliver against our third quarter guidance commitments. When we were notified by the U S Department of Commerce with additional restrictions on sales to certain Chinese and fees.
As well as incremental approval processes and export restrictions on the sale of some answers products and services to entities located in China.
These incremental approval processes take the form of additional bedding of prospects located in China.
They introduce delays.
Acting certain orders for prospects in China, resulting in the potential loss or deferral of some business that was scheduled to be closed.
Three.
As a result, we came in below our expectations in both ACB in revenue for the quarter.
Despite these developments and says delivered a strong quarter.
By double digit growth in a C V.
These updated export restrictions and incremental processes will mute answers as growth in China in 2023 and 2024.
After which we expect.
Our business in China to return to steady state growth.
Nicole will give the specifics in a few minutes.
It is important to remember that China represents only a small portion of our overall business.
Given the strength of our business worldwide I'm confident in our ability to execute on a short and long term objectives.
Looking back on Q3.
Hi Tech in semiconductor.
Aerospace and defense and automotive and ground transportation.
Our top contributing industries.
We saw strength in Q3 for ACB across all customer types in a geographical performance was as expected.
With the exception of China as I already mentioned.
Largest contracted the quarter with a three year eight figure agreement with a north American Aerospace and defense company that is use a solution spears.
The new agreement with this customer increases the number of users of answers technology.
Thanks in part to Anzus technology.
<unk> has secured a key contract with the U S government.
One of the calls I typically highlighted specific aspect of our business.
I have discussed the critical role that as the solutions play in sustainability initiatives as.
As well as in the development of next generation semiconductors and.
And how answered simulation is driving fundamental changes in the commercial aerospace industry.
A similar.
Mutilation powered transformation is taking place in the automotive industry, which is where I would like to focus today's discussion.
As you are aware.
Modem and ground transportation is a third largest industry and this is already working with over 50 of the top transportation oem's around the world and 93 of the top 100 global automotive suppliers.
Yet with all the innovation taking place within the sector. There is still significant room for answers to grow through more users more products and more computation.
And since simulation is helping to usher in a new era of mobility through T. The three key areas.
Electrification.
Autonomy and drive resistance.
Software defined vehicles.
And of course, we're also driving continued innovation and vehicle development.
I'll walk through each with some pertinent examples.
The first area of profound change in the industry is around electrification.
From battery management systems to fuel cells to integrate with electric powertrain systems.
The solutions are enabling rapid electric vehicle innovation from the components to the system levels.
For example are multi physics battery simulation solutions provide interdisciplinary expertise at different scales.
<unk> solutions for powertrain electrification provide a complete development slow from the system level to the software level, including system stimulation, Molly based development and functional safety analysis.
Using anzus customers that produce battery project costs by up to 30% and design cycle times by up to 50%.
Porsche Motorsports turns to ask the simulation to speed up development time for its electric racecar.
With answers the engineers from the Jags Hoyer Porsche Formula E team optimize the cards and Burger and E motor efficiency.
And then tested on a virtual racetrack.
Stimulation has proved to be pivotal managing the batteries temperature and maximizing the cards performance within these demanding driving conditions.
The next area I'd like to discuss with autonomy and driver assistance systems.
While the road to truly autonomous vehicles may be a long one the simulation driven advances required to bring this technology to market.
Leading to safer driving experiences today.
Using answers customers are improving advanced driver assistance systems.
Known as eight S.
For example, sensors play a critical role in providing human drivers as well as the economist systems the data they need to make intelligent and safe decisions.
As the solutions for Lidar radar and cameras enable engineers to improve censor performance.
To determine optimal vehicle integration configurations.
And to examine their behavior across the range of operational scenarios.
Is this customer continental.
Using the stimulation for optical integration analysis and call. A case studies there are integral to the development and validation of new sensors and computer vision algorithms.
And it's the simulation is helping continental's slash develop in time and physical testing.
While reducing costs and freeing up engineering resources.
The next area I would like to discuss is the development.
Vehicles.
These automobiles have features that are primarily enabled through software.
And can be remotely upgraded over the cars lifetime.
The market for software defined vehicles is expected to grow from about $35 billion today to over $200 billion early in the next decade. Thanks to software driven features for safety infotainment.
And efficiency.
And the solutions enable bees feature which functions through model based certified embedded software and cogeneration.
Electronics reliability.
And connectivity systems.
These advances enabled engineers to meet industry safety requirements Master the manual approaches and at lower cost.
Longtime customer is that F group.
Using our solutions to reduce the complexity of analysis for embedded systems.
Embedded systems must be capable of operating reliably and safely challenging environmental conditions.
In the past that if you use different tools to failure modes and effects analysis.
Fault tree analysis.
Standardizing on answers the company reports saving hundreds of hours on each of the many analyses projects they run.
The final area I would like to mention is in vehicle development.
This is a space in which answer this has a long history as we play a key role in such critical areas.
Aerodynamics lighting.
Crash safety analysis and material management for sustainability initiatives.
For example.
Tell us diner stimulates crash scenarios and accurately predicts the impact on the vehicle as well as the driver and passengers thanks to human body models.
Materials intelligence solutions enable vehicle lightweighting efforts, while assessing the environmental impact of materials throughout their life cycle.
With the growth of lighting technologies, and Headlamps and tail lamps.
<unk> solutions have reduce the need for prozac.
What if Archie contract from a quarter was with a global automotive OEM based in Europe that is standardized on answers for virtual crash testing an impact analysis, replacing a competitive product.
The company is leveraging Kansas simulation to help me with the goal of reducing engineering lead time by 30%.
Cutting the costs of physical testing by 50 per cent.
In Q3, we also signed a contract with a leading provider of automotive seating products.
This longtime customer has expanded its use of answers multiphysics solutions from explicit dynamics electromagnetics and functional safety to include mechanical fluids and high performance computing.
This expanded answers footprint benefits a number of projects for example, enabling the company to simulate the fan noise from expensive late it seats.
With this technology this automotive leader has dramatically cut development costs.
<unk> simulation time from days two hours.
Enabled the company to respond faster and more accurately to customer requests for quotes.
I'd also like to mention a different kind of customer when.
I'm excited to congratulate answers customer Oracle Red Bull racing on an amazing season, which culminated in capturing the 20 twenty-three formula one world Constructors and World Drivers' Championships.
Using as the solutions the team simulated airflow interactions with differing shapes of the car surface, what ulcer analyzing engine cooling intakes as a result, the team drove away with the championship.
Moving beyond the automotive industry I'm excited to announce that we have enrolled are 2000th company as a member of the <unk> startup program.
As I have said in the past while members of a startup program represent a small piece of our overall business. There are amongst the most innovative uses of our products.
And with the program strong graduation rates more and more expand their use of answers technology and become larger answers customers.
I'm also proud that answers was received a number of awards this quarter related to employee engagement and satisfaction from organizations such as Newsweek.
Best workplaces in Europe.
U S news and World report.
These recognitions are a testament to our supportive diverse and inclusive culture as well as the quality of our team around the world.
In summary Q.
Q3 was marked by an external challenge that impacted our ability to process certain transactions.
A global business remains strong and the demand for answers technology is robust.
That's because companies across industries rely on answers to solve the most challenging problems that they're facing.
These global organizations understand that answers his expertise and deep and broad portfolio of Multiphysics solutions can help them solve <unk> product and business challenges.
That.
Combined with a best in class product portfolio deep customer relationships and the ongoing strength about pipeline give me confidence in our ability to meet our commitments and with that I will turn the call over to Nicole Nicole.
Thank you <unk> good morning, everyone.
Let me take a few minutes to add some perspective on our third quarter financial performance and provide context for outlook and assumptions for Q4 until you're 2023.
Our ability to deliver double digit ACB constant currency crust in Q3, despite the disruption from the changes required for export complaints in China.
It's a testament to the resilience of our business model.
Our highly recurring business model significant base of renewables market, leaving simulation portfolio and deep customer relationships create a strong financial foundation and contribute to unwavering demand for our product.
As a result, we are raising our fill your ACB and revenue guidance for operational momentum in the business.
This momentum is offset by impact of incremental approval processes and export restrictions from China and foreign exchange headlines.
I'll provide additional details on our guidance in a few minutes.
Now, let me discuss some of our queue three financial highlights.
Beginning with a C V. We delivered 457.5 million in Q3, which grew 12% year over year or 10 per cent in constant currency.
Our growth with broad based across the customer types geographic regions and most industries.
A C V from occurring sources grew 13% or 16% in constant currency on a trailing 12 month basis and represented 83 per cent of the total.
This momentum and recurring ACP gross it's driven by the strong annuity created by our ongoing shifts towards description lease licenses.
This annuity creates resiliency and durability in our business model.
It provides April bust foundation for near and long term growth, which enables us to navigate the impact of business disruption that can occur from time to time.
The impact of the changes to export compliance that we saw in two three.
Two three total revenue with $458.8 million and was down 3% or 4% in constant currency, primarily due to a a C 606 dynamics given the quarterly mix of license types that generate upfront revenue recognition, which we previously.
Discuss on our August earnings call and detailed in our queue too prepared remarks documents.
During the third quarter, both a C V and revenue, we're below expectations as incremental approval processes and export restrictions on certain prospects in China created a 20 million dollar headwind.
When we set our guidance range, we guide based on the pipeline and book of business that we see in front of us.
During the third quarter, we saw an impact on the contracts, we expect it to sign.
Due to incremental approval processes and export restrictions that were not contemplated in our queue three guidance provided in August.
As a result R Q3, a C V and revenue result, or below our guidance.
Without this impact we would've landed near the high end of our third quarter guidance on a C V and above the high end of our revenue guidance.
We have a very strong track record of achieving our guidance and it was unfortunate that we were not able to achieve our guidance for a C V and revenue this quarter.
We continue to have a broad and diverse business model and a strong financial foundation with significant recurring ACP.
We remain optimistic on our future growth.
Despite the disruption in Q3 have a year to date a C. V performance was robust with a C V growing double digit in constant currency at 12% and broad based growth across geographies and customer types.
We closed the quarter with a total balance of gap deferred revenue in backlog of 1.2 billion, which grew 9% year over year.
During the quarter, we continued to deliver a business model with strong operating leverage.
<unk>, a solid third quarter gross margin of 91% and an operating margin of 34.1%, which was better than our guidance.
Operating margin was positively impacted by lower expenses and the timing of some investments.
The results with third quarter E. P. S. A $1.41, which was also better than our guidance.
Similar to operating margin a P S benefitted from lower expenses and the timing of some investments.
Oh, we're effective tax rate in the third quarter was 17.5%, which is the rate that we expect for the remainder of 2023.
How're Unlevered operating cash flow in the third quarter totaled 170.6 million and was in line with expectations.
And continues to be supported by strong cash collections.
We ended the quarter with 640 million of cash and short term investments on the balance sheet.
Now, let me turn to the topic of guidance.
Looking to the remainder of the year the business continues to show momentum, which bolsters our confidence in achieving our 20 twenty-three and longterm outlook.
Let me start with their full year 2023 guidance.
We are updating our full year ACB outlook to a range of 2.243 billion to $2.288 billion, which represents growth of 10.4% to 12.6% or.
11% to 13.3% in constant currency.
We continue to see our a C V growth driven by our Brian Pease customer demand for our products and.
And as a result, we are operationally increasing our for full year ACB by 11 million relative to our August guidance.
This momentum with all set by $25 million to impact from additional export restrictions and approval processes for certain prospects in China.
And 28 million of additional foreign exchange headwind.
This 25 million, China export restrictions and process headwind will mute answers as growth in China in 2023.
And include some timing and lots of business impact.
Despite the impact from China.
R. A C V growth outlook for the full year is 12 per cent constant currency growth at the mid point, which is on our financial model of 12 per cent ACP growth, including Tucking M&A.
We are updating our revenue outlook to a range of 2.234 billion to $2.284 billion, which is growth of 7.8% to 10.2% or 8.4% to 10.9% in constant currency.
We are operationally, increasing our full year revenue by 15 million relative to our August guidance.
This momentum with all set by $25 million of impact from additional export restrictions and approval processes for certain prospects in China.
And 23 million of additional foreign exchange headwind.
We expect are fully or E. P S to be in the range of $8.34 to $8.75.
Relative to our August guidance are updated fully or E. P. S. Contemplates 25 cents of operational improvement, which was offset by 21 cents its impact from additional export restrictions and approval processes for certain prospects in China.
And 13 cents of additional foreign exchange headwind.
Now, let me turn to our full year Unlevered operating cashflow guidance.
As a reminder, we now provide guidance for Unlevered operating cash flow is it a lines to the longterm cumulative 3 billion dollar cash flow outlook, we provided eder 20 twenty-two investor update.
2023 guidance is a range of 705 to 735 million.
Relative to our August guidance includes a 10 million increase from operational improvement.
Which was offset by 7 million of impact from additional export restrictions and approval processes for certain prospects in China.
7 million of additional foreign exchange headwind.
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 cash flow are contained in her prepared remarks document.
Although we experienced an unexpected impact in Q3 from changes in export compliance our underlying model remains strong.
This is driven by robust market growth a best in class portfolio deep customer relationships and a highly recurring business model with strong operating leverage.
Our current full year 2023 guidance bitcoins implies a two year unlevered operating cash flow <unk>, a 14% since 2021.
This reflects the strong topline momentum and operating leverage where unlevered operating cash flow growth outpaces ACB crest.
Now, let me turn to guidance for queue for.
For the fourth quarter, we expect ACB in the range of 897.8 to 942.8 million.
Turning to the P&L, we expect Q for revenue in the range of 769.22 $819.2 million.
We expect to queue for operating margin in the range of 48.9% to 51.2%.
E P S in the range of $3.48 to $3.89.
Given the robust renewal business inner fourthquarter, we are confident in achieving our queue for guidance.
Our core simulation market is strong and diversified with consistent demand from our customers as they encounter increasingly complex product development challenges.
Despite the headwinds we expect to see from the impact of additional export restrictions and approval processes for certain prospects in China.
We have confidence in our longterm model.
As a result in February we expect to initiate full year 2024 guidance with a C V of around 10 per cent constant currency growth, excluding tucking, M&A, which is consistent with our model.
Within this outlook, we are absorbing the impact of the updated export restrictions and incremental processes related to certain prospects located in China, which will mute ancestors ACB and revenue growth in China in 2024.
We continue to focus our efforts on areas of opportunity and innovation to ensure continued growth.
As a result, we also reaffirm our longterm outlook from 2022 2025 of 12 per cent constant currency ACB growth, including Tucking M&A.
And 3 billion of cumulative Unlevered operating cash flow.
Further details around specific currency rates and other assumptions that had been factored into our outlook for 2023 and T. Four are contained in the prepared remarks document.
Kansas is business is highly resilient with a diverse and broad customer base market, leading portfolio deep customer relationships and recurring financial model.
To the entire anzus team. Thank you for your dedication and hard work and supporting our customers and delivering world class innovation.
We saw some complexity during the quarter and we executed well in a challenging environment.
I remain confident in our ability to deliver our 20 twenty-three and longterm outlook, while working alongside the best team in the industry.
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 dress.
To ask a question you May press Star then one on your telephone keypad, if you're using a speaker phone. Please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then to in order to give as many people as possible the opportunity to ask questions. We do ask that you. Please limit yourselves to one question and one follow up.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from J V shower Griffin Securities. Please go ahead.
Thank you good morning, let's start with China.
With respect to be enhanced processes that you referred to in the prepared remarks, and the 10-Q could you elaborate on what that means what with answers not doing perhaps sufficiently internally Tibet the customers.
And would it be fair to say that the answers products in question were not solely CVA products in other words cause Susan just product that we're going to Chinese Chinese, but other non aviary products as well true, perhaps other and customers in China than my follow up.
Hey, good morning, J, So let me take that and so there's there's.
Basically a bit of a misunderstanding in your question. So let me just try to sort of the latest out. So that you you have a more clarity on the context here.
So as you know.
The context of the broader U S. Foreign policy shifts the department of Commerce is engaging both privately and publicly with companies to apply export controls to China of certain technologies.
And of course elite high Tech companies are facing new restrictions.
And given the capabilities of answers products and they brought up clickability across industries and across use cases, we have implemented an additional layer of bedding for prospects located in China to comply with be incremental requirements from the U S Department of Commerce. So.
So let me let me just sort of walk through how the quarter unfolded. So we were on track to delivering against our third quarter guidance commitments when the Commerce Department informed as with these additional restrictions as well as incremental approval processes on the sale of certain the answer some products to enter these look.
And China.
And so we immediately complied, we suspended processing orders from those affected prospects that will located in China.
Pending the resolution of some ambiguity is that were related to the process.
And we work with the Commerce department, but unfortunately by the time, we receive clarity on the incremental bedding that was required above and beyond our existing compliance program. It was the last business day up to three and that made it too late to complete a vetting process within the quarter now.
Now moving forward, we have internally aligned our business operations to adjust to these new bedding requirements.
And the result is an increase in the time that it takes us to process transactions with certain prospects that are located in China.
But as I said in the call you know despite these developments related to prospects in China. The answers business overall is performing well, we delivered a strong quarter Mark my double digit growth in a C V and we continue to see robust and broad based demand for our technology is on the products and given the critical role there are solutions play in our customers product development and Inez.
And the strength of the underlying foundations about global business, we're confident in our ability to execute against a short and a longterm objective.
Okay with respect to guidance for Q4, and the initial thoughts on next year.
What is the operational raised for Q4 boats renewals business in other words, you're expecting some hire a C V and the renewal and new new business, perhaps from new logos and then for the 10% for next year. How are you thinking about the contribution from the new a I M at all and have <unk>.
X, which are beginning to deploy as per the schedule you gave back in July.
So uhm Javed, maybe I'll just take the cue for thank you for guidance question and then we can <unk> color on your last part of your question.
So, although we experienced an unexpected impact from changes in export compliance in China, you know the underlying underlying model remains strong as a J said and is a testament to this year to date, we achieved 12 per cent ACB growth in constant currency, which is of course on our model.
Our business is very resilient as you know 80 per cent of it comes from occurring sources and as we look to queue for the robust renewal business that we see in the fourth quarter. It gives us confidence in achieving our guidance and maybe just to add an additional data point to add some color as to where we stand as of October at the end of October we have just under half the business in our <unk>.
For outlook already committed so despite the disruption from changes required for export compliance in China or continuing to see the operational momentum and the rest of our business. That's what gave us the confidence in raising the full your a C V by 11 million compared to the <unk> August guidance, which of course was offset by the 25 million.
<unk> of impact from additional restrictions and processes in in our business in China and of course, the foreign exchange impacts of 28 million, but outside of this impact we continue to see momentum across the business and we haven't seen any notable changes in customer activity.
Alright.
Thank you very much.
The next question comes from Joe Ruing from Bird. Please go ahead.
Great Tiger one I also wanted to start on the 10 per cent gross I would look for 2024.
I'm wondering how did you go about <unk> the potential risk from China export controls and the next year or is it just kind of run rating the 20th twenty-three experience or are you wearing an incremental assumptions and then I was hoping you could maybe be a bit.
More explicit I'm, just total J C V exposure from China, and then a sense of maybe how much business are assumed not to transact with them. The 2024 initial out of luck.
Sure happy to do that so so why don't I kind of take you through why did they take you through the the kind of the Q3 impact how we kind of how that we think that impacts 2023, and what the flow through impacts of 24, and the longterm will be to kind of try that holistically answer some of your questions, but but just to kind of.
Give some overall context going into that in terms of your question around China exposure. Overall, you know our business is broad and diverse and as you know we're diversified across many industries and geographies and customer typed in our business in China is around five per cent of a C V bolt on a trailing 12 month basis until you're 2022, so it's a realm.
<unk> Uhm throat feels a smaller portion of the portfolio now in in the third quarter, you know again, our ability to deliver that double digit constant currency grows in the quarter. Despite the disruption <unk> is really a testament to the resilience of our business model, which as we talk about 20th 24 is what gives us the confidence in in our outlook.
Now the third quarter results were impacted by those incrementals letting processes and restrictions to a certain prospects in China that created about a 20 million dollar headwind to a C V and revenue, which was not contemplated in our third quarter guidance.
But without the impact we would've landed near the high end of our third quarter guidance range on a C V and above the high end of our revenue guidance now we expect to that the majority of the 20 million to be a timing shift with a small portion of being lost in business. So as you extend into.
Or 20 twenty-three outlook embedded in the 20th twenty-three outlook. It does reflect that incremental operational performance and the momentum that we've seen in the business overall, which is of course offset by the impact from from the expert compliance changes, but for the full year in 2023, we expect the impact from incremental export restricts the.
Restrictions and the vetting processes in China have a 20.
25 million dollar impact on a C V and revenue and we believe just to kind of give a rough sizing about a third of that is lots of business and two thirds of that.
Would be unexpected timing shift from the elongated transaction cycle. So the effects of this will mute 20 twenty-three gross in China.
Now as we look to the future the incremental expert restrictions inventing processes. We also believe on mute <unk> answers as a C V and revenue growth in China in 2024, and we expect that impact just since you asked about sizing we expect it to be about 10 million to 30 million on both a C V and revenue in the full year and 24.
And you know as the majority of that headwind there'll be lots of business. We would expect the 24 cash impact to be similar in that range as well.
Now despite these headwinds in February we still expect to initiate full your 24 2024 guidance on our model with a C V around 10 per cent constant currency growth, excluding how can emanate.
And really the the double digit performance, we saw year to date, the strong pipeline of momentum in our business. All of these really give us the confidence not only in our twenty-four outlook, but in our ability to achieve or a longterm outlook, which of course was 12 per cent constant currency a C V gross including tucking M&A and 3 billion of cumulative.
Unlevered operating cash flows from 2022 to 2025.
And if I could just jumping a little bit just to talk to give you. Some color about the broader environment that we're working with I mean, I I have an option to you as part of my job to to talk to customers around the world to talk to channel partners around the world and the the the demand for our products and services you know continues to be.
As strong as ever a stronger and you know just given the nature of our technology, we feel very confident in our ability to solve some of our customers most challenging challenging problems. So we feel very good about our business, obviously, Nicole walk through the impact offbeat, China additional approval processes that we just.
Through.
And just on that point nausea, and that was the Greg Nicole. Thank you you know organic growth and Jose X China. It was better than your formal framework in 2022, it's been better year to date.
I guess, how do you think about the recent drivers of outperformance relative to your midterm plan and whether there was maybe factor positively in 2024.
Well I think I think one of the key things that we've been doing a very very clearly and explicitly in our strategy is to be focusing on some important technologies that continue to improve our product capabilities and as well as as well as being very explicit about going after.
Some of these high growth or or next generation use cases like electrification. So if you look at the nature of our technology.
We can support the use cases, where we're in a position to support our customers as they are thinking about these next generation use cases, it and that's those are the investments have you been making it all product portfolio and I talked about last time I talked about you know these five broad areas. They were investing in you know the new matrix of our business H P. C capabilities AI capabilities of course.
<unk> cloud as well as digital engineering and all of those abroad techniques. It be used across a portfolio an advantage of portfolio. So the <unk> investments that we're making up paying off as we support our customers.
Thank you.
The next question comes from Jason Selena of Keybanc capital markets.
Please go ahead.
Hi, Thanks for taking my questions just a couple on the China export restrictions <unk> I hear Ya on the on the on the news optically I think we're all a little surprise because it appears others may not be affected you know if other companies for approached as well.
So obviously you know, we we don't know <unk>.
We don't know who else has been approached privately because these conversations are taking place between the commerce department or privately as well as publicly so so I can't really comment on who else has been approached but the reality as I said before is is is you're seeing out their elite high tech companies facing these new restrictions and.
I would imagine that anyone who has products like answers, which are highly capable products, which are broad based an applicable across industries and across use cases might have similar discussions, but I, obviously I'm not in a position to comment about those I don't know.
Okay.
And then just a quick one critical you're on the on the types of revenue that was affected or is it more perpetual or at least.
Sorry, just a small link that question I'm sure. It was a combination of both so as you know our business model has been shifting too subscription lease over the over the longterm and this year in particular, you've seen uhm just generally outside of this quarter, a password shipped to lease and so there was a mix of both that were impacted in the corner.
Or we can take for now.
Question comes from Ken wrong of Oppenheimer and company. Please go ahead.
Great. Thanks for taking my question, maybe maybe first off for you all to maybe change gears a little bit just wanted to ask about the auto industry. You know there has been some concern that maybe with the strike that that could've caused some some.
Someone from the deal slippage or anything like that just wondering if you saw any any erosion in your auto business at all.
Hey, Thanks for the question Kid Uhm, so with with auto B, the broad based and I've said this multiple times and I'll I'll say it again I mean, we're tied to the overall R&D cycle and a broad based conversations that have taken place without automotive customers are around electrification around <unk>.
One of my and those those continue those continue those conversations in those design imperatives continue unabated as far as our customers are concerned so that's really driving our business and then of course, we as I mentioned in the script. We also have you know the traditional business crash testing external airflow things like that which we have been which we would do.
For a number of years. So all of that continues it's really designs. You know, it's really designed driven not manufacturing ribbon. The other important thing to consider and realizes that car companies and automotive companies I I frankly, all industries everyone's looking at reducing cycle time, and so you start to reduce cycle time, what's really happening is.
Is is many of our customers are recognizing that using digital techniques such a simulation allows them to achieve.
<unk> that reduction in cycle time, it allows them to the effect will be shipped left and that shift left reduces the time that it takes to bring innovation to market faster and in a highly competitive world like automotive for example, where you have multiple new entrants is coming in as well that design cycle is off Paramount importance, and that's really where we <unk>.
Seeing the opportunity and that's and that's reflected in in the conversations we're having with our customers.
Got it and then.
And then it will just cause I don't Wanna be excluded from the China Party.
[laughter].
Like what you guys have baked into into the expectation is that these deals do come back into the pipeline as we think about 24 or is it a is it assumed that the twenty-three.
Deals fall into 24 should we assume that both 23 24 don't return until fiscal 25 in terms of how you guys are are betting into your outlook.
Yeah. So so you know my reference to the 20th 23 impact of about two thirds timing shift and one third one third loss of business translates to 2024 as well right. So that the nature of this process is really just kind of an extension of that sells cycle, which.
And the current outlook or seeing is kind of a.
Shift of of that business kind of <unk> to the right. If you will but the 10 to 30 million dollar.
Headwind that we that we're expecting to see next year related to this specifically is our best estimate as to what would be the net loss in in 2024.
Okay perfect. Thank you for the color.
Mhm.
The next question comes from Stephen Tusa of J P. Morgan. Please go ahead.
Hey, guys good morning.
Good morning.
Can you just talk about what <unk>, what kind of is this a customer type issue in China or is it you know more general than that.
Well if this this issue affects prospects will located in China. So so you know that's the nature of the conversation. It's it's it's the sale of prospects who are located in China.
And.
You know, it's it's it's two people who are performing things like R&D and and some other activities in China. So it's it's a.
It's it's specifically restricted to those kinds of our customers so prospects.
Yes, the one you're a C V. It looked like electronics was you know kind of weaker than expected me assume that it was kind of focus in that in that piece of the pie.
Oh, sorry, you're talking about the industrial the industry makes charged I just wanna make sure like <unk> like <unk>.
Yeah like what what type of industry is is what I'm like trying to just you know wrap my head around here a little bit yeah.
Yeah, I would say so it it is it is industry.
The processes, the incremental vetting processes apply to.
<unk> essentially prospects in China that are <unk>, regardless of the industry right and so there's there's additional restrictions that that may be specific but the incremental processes are agnostic across the industry. The dynamics that you're referring to just to kind of answer that particular question. So when you look at those industry mix chart, you know those <unk>.
That relative that those kind of sightings of the of of representation by industry are all relative so really relative growth is is more of what's driving the the make shift in those countries and so all of our largest industries.
Have grown and given given but given the strong 12 months performance in automotive that kind of drove the overall makes sense. So it was really about relative strengths and automotive than than any particular weakness in any other place.
Right that that makes sense and is this like <unk> specific or is it something that you know they they they cast they you know they they kind of cast a bit wider than that obviously, there's a lot going on out there between our two countries you know Rockwell had some issue.
I believe is this like is this really answer specific.
I again, I can't I can't we don't know who the Commerce Department is engaged with because some of these conversations are private and some of these are public. So we don't really know who they are engaged with but as I said.
You know it it you know what we can see what we can see what what's in front of us and I believe it just has to do with the fact that all products are very capable in a broadly applicable across industries and use cases.
Right <unk> really quick we'll have one <unk> specific specifically to to fall on on that point, so that'd be incrementals betting that we're putting in place is really bad is an incremental vetting process that just adds a certain amount of latency to be to the approval process. So that's really what's what's happening in this context.
And obviously, we're just taking what we had before which was which was industry standard you know <unk> industry standard vetting and we've added some additional additional an additional layer above that.
Right and and and that's why it's not it's 1% of a C D or whatever you Wanna call. It right now as opposed to it being like across the board you know five per cent of a of a C V, which would be you know real impairment and the ability to kind of do business over in China right correct.
Correct Yep Yep, Okay, alright, thanks for all the details guys. Good luck.
Mhm.
The next question comes from Adam Board with Stifel. Please go ahead.
Everyone. This is Mike Richards on for at a board. Thanks for taking my question, maybe just on the innovations announce last week between semi and.
Yeah, and plus and then even answers GPT, maybe you guys could discuss how you guys are thinking about planning on pricing. These and you know what kind of pricing uplifts that'll that'll drive in a long term. Thanks.
So let me Uhm, let me sort of just since you ask the question, let me sort of explain what those those are.
And but to get to your question about pricing. Some of this is still being worked out in terms of how we would how we would exactly what we would probably some but I can give you some philosophy as we go through this so so obviously a I M. L. Is is is is is one of our critical pillars that we're focused on across my portfolio in.
Q2, we released a beta version off our support technology called answers GPT. That's based on G. P. Two four and that's a virtual multilingual support tool that can answer customers technical questions by retrieving in summarizing answers information and and we believe that that will provide answers to the most.
Can we ask questions our customers have in in a matter of seconds and obviously, it's going to be available 24, seven so that's the first area. The second the second thing that we announced last week is this a new generation of products called the AI plus products and those of building on the AI capabilities that we have available today. So these are new products that will be.
Package and priced accordingly, and these new AI plus products include things like answers grant, Yeah, plus <unk> plus and these new products will incorporate and extend some of the AI features that we already have within these products the swimming I technology that we talked about this is a brand new offering that is a.
Cloud and it's a cloud native AI platform that will augment our three D physics simulation capabilities and it's essentially one where our customers will be able to do things like you know design analysis optimization by using simulation results to train and AI model to predict new design.
Configurations, using deep learning techniques and so this this can predict performance across design changes geometry changes and so forth, it's really a physics neutral technology.
Flies across industry segments, and we can leverage we can leverage simulation data, whether it originates from ansys or from anyone else from them at all for that matter. So this is a this is again a new product that will be priced accordingly, the actual pricing has not been announced yet.
Thank you.
Operator, we have time for one more question.
Our last question comes from Tyler Rettke from city.
Please go ahead.
Yeah. Thanks for taking my question.
Just wanted to follow up on the International performance you know look look like Germany in particular was a bit weaker it sounded like you are sitting pretty resilient trends in and autos, but you know what wasn't sure if that was a tougher compare or just anything to call out in Europe.
Sure Uhm, so I just.
Just one reminder, on the overall revenue results that you see you see in the results. We saw a lot of impact from the 606 accounting change and so I'm Gonna I'll answer to your question specifically related to that but also kind of tried to give some broader context around a C V cause it's easier to call this quarter.
<unk> revenue are highly disconnected and their Germany answer or your Germany questions actually a Prime example of the Lisa County dynamics that played out creating that year over your headwind. So just use that as an example in Q3 22, Germany saw exceptionally robots revenue growth arriving in growth in Germany with 102 per cent.
Constant currency now the growth last year with with a function of both strong ECB gross but also the underlying accounting associated.
With the nature of the make some transactions in that quarter and so I think that just gives you kind of a microcosm in Germany being a relatively larger portion of Europe that was a dynamic that affected overall.
Overall revenue growth, but when you zoom out and although we don't give we don't typically provide a C V by by geography, but I may I had had good growth and a T V in Q3, and which was really reflective of the of the region's operational stability and just to give some kind of color to the to the dynamics in and the underlying <unk>.
History performance, there, Hi Tech Aerospace and defense industrial equipment industries, all we're strong and <unk> the quarter was highlighted by a sales to a global semiconductor manufacturer Anna and supplier.
We also saw a multiyear deal with the research and development company in a in the industry.
They provided more users within its growing simulation team to access our solutions and then we also had a multiyear deal with the European pump manufacturer that added more global users more products more physics, and H P. C capacity some more computation. So so that the revenue results are are you know really.
<unk> of the dynamics that we talked about unexpected in August but the underlying a C V performance in the region is is quite strong.
Okay. That's helpful and just a follow up on the the law and then just to just to yeah. Yeah, just to add to what Nicole was saying I mean, I think that we would.
When we when we talk about.
When I talk about my own experiences with customers that are anecdotally.
As I said before I I have an option needed to talk to customers and channel partners and we're really seeing strength as Nicole set across multiple industries and across also the different market segments and in particular, when I talked to channel partners, who focus more of the lower and we're seeing a lot of activity and obviously at our enterprise customers, where we directly engage we're seeing we're seeing a lot of.
Activity. So there's there's a lot of design work and <unk> and and R&D efforts that are taking place across these industries across the world and we believe and we're excited about our ability to support our customers in those spaces.
But that's helpful.
The question, Yeah, I did I did yeah.
So just as I think about the.
2024 comments and and you're you're you're helpful. You know break out of the the China impacts in terms of you know I think two thirds being just delayed business should should we think about that all happening in 2024, and then as I think about your reiteration of your long term targets I guess, if you could just kind of unpack.
<unk> puts and takes in do you assume to kind of have the China business normalize and get the full two thirds through through the long term targets. Thank you.
Yeah, Yeah, I mean, I'd say to that.
<unk> when you when you look underneath so as we said, we we expect to initiate an 20th 24 in February and 2024 at on the model. So 10 per cent constant currency gross excluding tucking M&A.
Now that the impact of what we're estimating to be drop out that we are kind of overcoming in that underlying model is the $10 million to $30 million of a C V and revenue now throughout throughout the year you know there'll be there's some there's some shift in timing from this year to the next year and next year to the hereafter, but kind of that just is like.
A permanent shift that we would expect underneath the covers but in terms of the the kind of the peer headwind, which is that we'd be rapping on coming out of 24, it would be that $10 million to $30 million.
Okay. Thank you.
Mmm.
That's all the time, we have today I will turn it over to RJ for some closing remarks. Thank you can also with a market leading product portfolio and strong pipeline <unk> is well positioned to meet our commitments I Wanna. Thank my colleagues around the world. So they continued dedication to answers I want to thank our channel partners.
And I Wanna. Thank of course, all global customer base. Thank you for your time today and have a great day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Mmm.
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