Q2 2019 Earnings Call
The revised senior director of Global Investor Relations.
At this time I would like to turn the call over to Mr. read out for some opening remarks.
Good morning, everyone.
Our earnings release and the related prepared remarks document have been posted on the home page of our Investor Relations website. This morning.
They contain all the key financial information and supporting data relative to our second quarter financial results and business update as well as our Q2 2019 outlook and the key underlying assumptions.
I would like to remind everyone that in addition to any risks and uncertainties that we highlight during the course of this call important factors that may affect our future results are discussed at length in our public filings with the FCC all of which are also available via our website.
Additionally, the company's reported results should not be considered an indication of future performance as there are risks and uncertainties that could impact our business in the future.
These statements are based upon our view of the business as of today and Ansys undertakes no obligation to update any such information unless we do so in a public forum.
During this call and in the prepared remarks, we'll be referring to non-GAAP financial measures unless otherwise stated.
We take any reference to revenue to mean revenue under S.C. six so six.
A discussion of the various items that are excluded and a full reconciliation of GAAP to comparable non-GAAP financial measures under AOCI. Six. So six is included in this morning's earnings release materials and related form 8-K.
In closing I would like to remind everyone that our 2019 Investor day will be held on Thursday September 12th in Pittsburgh, where the reception and technology showcase event the thing before.
Further details around vacation logistics agenda and registration can be found on our IR website.
I would now like to turn the call over to our CEO logical Paul for his opening remarks are Jay.
Thank you Annette and good morning, everyone.
Q2 was another record setting quarter for answers.
We surpassed the high end up our guidance in revenue as well as going in Russia.
Setting new Q2 record in each category.
Our ACB growth was excellent coming in at mid teens for the quarter in constant currency.
Based on our outstanding financial performance.
And the strength of our pipeline I'm excited to announce that we're raising our 2019 revenue.
Yes, and HCV guidance for the second time this year.
Maria will provide the details shortly.
Our success over the past several quarters is due to a number of factors.
Including a strategy of making simulation pervasive across the product lifecycle.
That strategy is driving more simulation and up a larger deals.
Well operating across two vectors to increase the size of ideals.
Well that's.
By enabling deeper penetration to be single physics through new use cases and users.
And second cross selling abroad, multi physics portfolio to help customers address modern product challenges.
Let me give you an example of the first vector.
In Q2, we closed a 49 million dollar deal.
The third largest in our history.
With the South Korean Hi Tech leader.
This is the largest single physics deal in our history demonstrates that we can significantly increase the size of our transactions with the power of our gold standard solution.
Moving to the second vector as products become more complex companies are increasingly addressing a lot of challenges that involve multiple physics.
That creates significant opportunities across our market, leading multi physics portfolio.
In Q2, we closed a large multi physics deal with the U.S. Department of defense Prime contractor.
In addition to our flagship physics solution.
Our materials intelligent solution from this year's granted design acquisition, coupled with the additive manufacturing applications built on a foundation from threesome acquisition.
What key considerations on the deal to help them modernize the workforce and accelerate the development of complex system.
This is just one of many examples that demonstrate our technology leadership.
And the broad moat that separates us from our competitors.
On the partnership side I was excited to discuss their lives with Sep and the value that we are jointly bringing to customers. During a presentation at Sep is so far now conference.
During the conference we heard how Sep predictive venturing insights enabled by Ansys has helped the customer to streamline its water timeline for months to date.
And they'd be representative ultra join me during June Paris Air show, where we showcased the benefits of digital twin technology with leaders from the aerospace and defense industry.
Our partnership with PTC.
Where else is discovery life has been embedded into Ptcs, new Creo simulation lives.
He is also gaining momentum.
During its most recent earnings call.
PTC reported but it is close to 76 transactions with an average deal size above the previous quarter's level.
Our two companies collaborated at the defense contractor I mentioned earlier.
Resulting in PTC lending the largest ever Creo simulation life deal and the Ansys team closing a substantial discovery like order.
That contract or is noteworthy because it intends to deploy both creo simulation life and as this discovery life to potentially thousands of users across multiple business units.
That demonstrates the opportunity for discovery life at some of the largest enterprises, where it complements traditional simulation and cat offering.
And drive even more value for users.
Staying with discovery life for a moment I'm excited that this new product continues to garner accolades from the market as what is the media.
The most recent recognition what's from fast company, which ended September issue named and this is one of the 50 best workplaces for innovators.
For our development office groundbreaking product.
In past earnings calls I've highlighted specific products or solution areas in the ansys portfolio.
For example, during our Q1 call I spoke about how our goal started solutions like as they age of ISS and answers Red Hawk are driving success in their respective markets.
In Q2, I'd like to highlight the as the solutions that are making autonomous vehicles the reality.
With an estimated seven trillion dollar.
Impact on the global economy by 2050.
The financial implications of autonomous vehicles are considerable and will dramatically impact Oems and the entire supply chain.
Given the sophistication complexity and safety critical nature of these products. It is clear that they cannot be developed without the extensive use of simulation.
As a result, we are seeing increased interest from automotive Oems.
Andy companies and their entire supply chains to make these next generation vehicles the reality.
And while they may be speculation around the timing of when truly autonomous vehicles will take to our roads and Airways. The simulation work around autonomy is paying dividends in the form of ongoing improvements in vehicle safety features and efficiency.
As this is best in class multi physics products.
Coupled with leading technologies that we've obtained through our recent acquisitions, including the Denien Optus are enabling automakers and aircraft manufacturers to virtually test their products to ensure safety and reliability for these future transportation system.
In Q2, we announced the landmark deal with automotive leader BMW to create what we believe to be the industry's first holistic simulation tool chain for developing autonomous vehicle technologies.
The tool chain will optimize valuable test data, but providing a development framework around rigorous safety planning.
Efficient chesapeakes exploration and data analytics in a virtual driving environment.
Using this solution the company expects to launch its highly automated BMW I next in 2021.
As part of this agreement as this will also assume exclusive rights to the BMW developed portion of this tool chain the commercialization to the wider market.
Autonomy will affect multiple industries, including automotive and aerospace and defense.
In Q2, we also announced an agreement with Airbus Defense and space, which will use ansys scaled solutions to enable safety could a critical controls with sophisticated artificial intelligence.
With the goal of fully autonomous flight by 2030.
Airbus plans to use our solutions to link traditional model based software development with new AI based workflows.
Their goal is to drive the development and certification of drawn flight control software to accelerate time to market and cut associated expenses.
We further expanded our product leadership in a simulation of autonomous systems with the Q2 release of Ansys 2019 are too.
In our two we've expanded the capabilities of our VR experience driving simulator to prepare advanced scenarios and run simulations with complete and accurate multi body vehicle dynamics.
This innovation is already being used by automotive lead over no to reduce physical testing shorten time to market and ensure safety for the autonomous vehicle initiative.
Our two also dramatically enhances capability is crucial to the design and analysis of radar use and autonomous vehicles.
Our new innovation around accelerated DAPL of processing provides more than 100 ex feed up all the time it takes to simulate radar systems.
This new breakthrough capability deliver the gold standard accuracy and enhances collaboration between radar sensor designers and the Oems that incorporate the sensors on vehicles.
Autonomous vehicle have the potential to fundamentally reshape the way, we think about safety mobility land use and our environment with a powerful multi physics solutions and partnership I'm excited that Ansys is well positioned strategically and can play a role in making the dream autonomous vehicles the reality.
This represents a significant long term market opportunity for answers.
Switching gears I'd like to welcome Lin led with as our Vice President of marketing.
Glenn has more than 30 years of experience and brings an outstanding track record across digital and feel marketing as well as corporate branding.
She has held marketing leadership positions at worldwide clinical trials, Qlik technologies, Sungard Zemin and H.B. amongst others.
Lynn brings a fresh approach to how we market that will open new avenues to build demand and to branding.
In summary, I'm proud of what we've accomplished in Q2.
Our excellent financial performance.
Coupled with the increased functionality of our goals data solutions.
And our ability to help customers take advantage of Mega trends like autonomy electrification, fiveg aiotv and others.
Give us confidence in our ability to achieve our goals for the remainder of 2019 and beyond.
And with that I'd like to turn the call over to Maria.
Maria.
Thank you okay.
Good morning, everyone I'll share a few highlights from our Q2 results and now let me take a few minutes to add some additional perspective on our very strong second quarter financial performance.
And provide color around our outlook and key assumptions for Q3 and the remainder of 2019.
Consistent with our standard practice my comments will be in terms of non-GAAP unless I state otherwise.
Oh record Q2 results reflect continued strong customer and business momentum combined with solid execution across the business.
We finished the quarter with constant currency revenue growth of 23%.
And operating margin and EPS results that were both well above the high end of our Q2 guidance.
The revenue performance in Q2 was driven by strong sales execution, including a larger dollar value of multiyear lease transactions.
And the closing of a few deals that were originally forecasted to close in the second half of the year.
The combination of our strong second quarter and first half results.
Which have been driven by success, most notably in high Tech automotive and Andy and the strength of our pipeline gives us confidence that we are on a path to continue to make progress against our strategic priorities and to deliver another year of what our financial performance in 2019.
He financial metrics for the quarter begin with Q2 ACB of 326 million.
Or constant currency growth of 14%.
And total revenue of 370.5 million.
He currency exchange rates well within the ranges that we provided with our Q2 guidance.
The increase in software lease license sales combined with strong maintenance renewals contributed to building our deferred revenue and backlog to a Q2 total of 717 million a 22% increase over last year's comparable balance any new record Q2 high.
The exceptionally strong topline results helped to drive a second quarter gross margin of 91% and an operating margin of 46%.
We also experienced a slightly slower pace of hiring than we had planned for the quarter.
That being said, we did increase our employee base by approximately a 100 employees in Q2.
It's our intention to continue to execute on hiring plans throughout the second half of the year.
We reported record second quarter EPS of $1.61.
Benefiting from the revenue Overperformance and representing growth of 19% over Q2 of 2018.
With respect to taxes, our effective tax rate in Q2, it was 19% which was slightly below the range that we guided coming into the quarter.
Going forward, we expect our effective tax rate to be in the range of 20% to 21% for Q3, and 20% to 25% for the full year.
Our cash flow from operations totaled 89 million for the quarter and 240 million for the first half.
And we closed Q2 with a total of 632 million in cash and short term investments.
We repurchased 80000 shares during the quarter, which leaves us with 3.5 million shares available for repurchase under the current authorized program.
Now, let me turn to the topic of guidance.
Coming off our exceptionally strong finish in Q2, we are initiating guidance for the third quarter and increasing our revenue, earning an ACB outlook for 2019.
Before I get into the specific numbers, let me just provide a few comments with respect to the impact of the ongoing trade discussions between the U.S. in China.
I'd like to remind everyone that in 2018, our China business accounted for less than 5% of our total annual revenue.
And point out that our increased outlook for 2019 does take into consideration our reduced expectations from China.
Now, let me move to the details of our outlook for Q3, we expect non-GAAP revenue in the range of 320 to 340 million and non-GAAP EPS in the range of $1.15 to $1.28.
For the full year were increasing our outlook to non-GAAP revenue in the range of 1.460 billion to 1.500 billion.
Or constant currency growth in the range of 14% to 17% or 15% at the midpoint.
And EPS in the range of $5 to 98 cents to $6.28.
We are also increasing our ACB outlook for 2019 to a range of 1 billion or 440 million to 1.475 billion.
This represents constant currency ACB growth of 10% to 13%.
Our outlook for the remainder of 2019 sectors in everything that we are currently aware of with respect to ongoing trade discussion.
Political situations and customer sentiment across our geographically and industry diverse customer base.
It also reflects additional spending in the second half related to several business infrastructure and digital transformation projects.
Increased sales commissions and hiring costs that were delayed from the first half.
Hi, Ray shortfall.
With respect to annual operating cash flow currently we're maintaining our outlook for 2019 in the range of 470 to 510 million.
I would like to remind everyone that our outlook for operating cash flow in 2019 includes higher tax payments that relate to the acceleration of lease license revenue and the related profitability under assay six so six including additional tax payments relating to the strong Q4, finishing 2018 and the first year impact of the acquisitions that we closed earlier this year.
Looking ahead to Q3, we are expecting operating margins of 39% to 40%.
And for the full year, we're expecting a slight uptick in operating margin in the range of 43, and a half to 44 and a half or so.
Further details around specific currency rates and other key assumptions that have been factored into our outlook for Q3 and 2019 are contained in the prepared remarks document.
The key take away from our Q2 and first half result is that our strategy to make simulation pervasive is working.
As evidenced by double digit growth on both the top and bottom line and strength across the business.
Part of our confidence behind raising our guidance for the remainder of the year is based upon the continued momentum that we see from our diverse customer base.
We believe that the Mega trends that Archie mentioned, along with industry wide recognition. It's simulation can drive a competitive advantage for our customers are bolstering demand for our products and services.
We remain confident that our continued focus on execution and investing in the business combined with the ongoing growth in our recurring business, our strong customer relationships and healthy sales pipeline full body solid foundation to continue to deliver on our 2019 goals as well as our longer term 2020 financial targets.
Operator, we will now open the phone lines to take questions.
We will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two we kindly ask that you limit yourself to one question and one follow up.
At this time, we will pause momentarily to assemble the roster.
And our first question today comes from Ken Ken Wong with Guggenheim. Please go ahead.
Hi, Thanks, a lot for taking my question guys. Linda another great quarter, you know on the topic of China could you tell us whether or not you guys saw any immediate impact.
In Q2, and then as as we look ahead, you mentioned news in God, you guys have factored in some conservatism and guide.
Any any chance you guys can help quantify what that headwind is and as far as kind of recent headlines obviously that the there's a lot of currency headlines right. Now was that also already considered in the in the outlook.
Yes, so Ken I'll take that yes, we did see a little bit of positive impact from some of the China situation in Q2, which help to drive some of the over performance in revenue that being said it wasn't material to the quarter, we have factored in a reduction in our expectations from the China business in the second half.
I would say somewhere in the $5 million to $10 million range and yes, the what what transpire relative to currency is all factored into the outlook that we that we gave.
Last evening in our earnings announcement.
Got it and then they did well for Jay you mentioned that the large single physics steel.
You know the $49 million multiyear deal when you think about kind of.
Similar type transactions in the past is there an opportunity to turn this into a multi physics type of a transaction and you know.
Typically what kind of uplift could something like that deliver in terms of <unk> future results.
Oh, yeah there's.
There's always an opportunity for us to convert.
Single physics deals into multi physics deals obviously some of it depends on the use cases I'm speaking in generalities, but it depends on the use cases the customers are.
Half a day specific application, but I said in general as I said on the call. We're trying to expand deal sizes not only by focusing on single physics as is the case with this one but we're also trying to drive the multi physics or cross sell across the across the organization.
And those two work together so even as we deepen single physics were continuing to look at broadening the multi physics and even in a CLO organization, which has a multi physics sale there's opportunities to deepen individual.
So they both kind of work in parallel with each other but absolutely it's the basis of our ability to drive larger deals.
And our next question comes from Jay Vleeschhouwer with Griffin Securities. Please go ahead.
Thank you good morning, RJ two questions for you.
You noted the strength and high Tech which is.
Quite evident and we're also seeing momentum in Aero and auto, but you do seem to be.
See not quite the same growth in industrial equipment for the last couple of quarters or more perhaps you could talk about that end market and what your thinking is for the intermediate term in terms of.
The industrial market showing some improved momentum.
That's the shorter term question long term question.
At the design automation conference two months ago in Las Vegas.
HM answers management, including a new CTO good very interesting presentation on.
And this is long term technology vision.
And there were references for example to things like new computational methods and new business areas collaboration and cloud services based architecture.
Including interestingly at least for me.
PBM services. So the easy question is with regard to that technology vision, how is that today.
Informing your your internal investments in R&D and perhaps even.
In sales and marketing to effectuate that longer term vision.
So let me start with the second question for Us.
Yes, as you know we had answers.
Pride ourselves on the on the nature of our technology, the accuracy of us solutions and the effectiveness that we had in bringing new ideas and new technologies and new techniques to market and we continue to make investments.
And obviously, Jay what you're referring to in what you saw.
He is a glimpse into some of the work that were doing within our organization to continue to to drive innovation.
The you mentioned the cloud obviously, we're continuing to make investments in the cloud we continue to drive product.
Product capabilities in the cloud we have most recently an announcement.
I think a couple of quarters ago four for Ansys cloud.
Which is obviously driving which is driving cloud usage as well as of course HPC usage within within the traditional data center.
We we've we've talked about.
Oh, the investments that we're making in computational techniques that result in in faster speed up our algorithm. We continue to make investments in fact I referred to.
One of those investments, we were able to get 100 Expedia.
In some of our capabilities in my script.
So I think that.
I think that there is a I think that there is a significant amount of investment that we're making in a different set of actions you mentioned componentize architectures.
And that obviously reflects the next generation as we invest in our platform activity, we have a industry leading platform in the form of Ansys workbench and we continue to make.
Investments in that technology as well so there is a number of different.
Investments, we're making in machine learning artificial intelligence.
Big data analytics, all of which we think support our business and make our most successful. So that's that's obviously the case and you're seeing some of that and I'm glad you were able to move that presentation.
As far as the industry verticals are concerned.
What I'm what I'm excited about of course is the growth that we're seeing in in the high Tech markets Aerospace and defense and automotive and all of these areas are dr., there's a there's a significant level of industry focus on those areas.
And frankly, those constitute tailwinds that are driving the growth of our business.
And we're excited about the activity that's taking place on the activity that's taken place really permeates the entire supply chain and.
And in many cases as you know when we think about the end markets, we referred to customers, where they belong even though from a an electronics company might be supplying other companies elsewhere in the supply chain as well.
So I hope that answers your question.
And our next question comes from Matt <unk> with William Blair. Please go ahead.
Hey, guys. Thanks for taking my question.
Just wanted to get some additional detail on how you're driving.
Deeper penetration with single physics products within your customer base, and I guess I'm trying to understand how you gain additional business units are you getting new types of engineers to use ansys or are they competitive displacements and some additional detail there would be helpful. Thanks.
[noise], so usually what happens is firstly.
There are obviously two vectors one is there is there more users using the technology.
There's more usage of that technology and that might be in more use cases that may be more complex products that require greater amounts of simulation. Our sales teams engage with the customer as we try to understand the nature of the technologies admission of the problems are they trying to solve and we obviously effective in positioning simulation as a way of being able to address some of the challenges and so as they take on more and more different products in some cases across different departments across different parts of the organization. The success that we are enjoying in one part of the organization starts to become infectious across that organization.
And and so I think that that's that's one important.
Dimension. The other thing to realize is is as problems become more complex.
The amount of.
Simulation required to validate or to effectively launch those products increases.
And that requires more more stimulation to be run so thats greater use of HPC high performance computing.
And that translates obviously into ultimately more business for answers and so it's more users. It's more use cases, it's more HPC all of which drive use it within a single physics and then of course as I've said before our problems tend to be multi physics in nature for especially for larger companies.
And and and brought a product and in that case, we're able to then leverage the single physics into a multi public sale.
Great. Thanks for taking my.
And our next question comes from Sterling Auty with JP Morgan. Please go ahead.
Okay. This is Jackson ader on for Sterling This morning.
If we could just touch maybe going back streets.
If we take autonomous driving out of the automotive sector, how does the maybe traditional simulation in.
In the automotive space, particularly in the U.S. low.
In the first half was 19 and then for the second.
So its when we when we think about the the automotive industry the too broad.
Trends I would say that up perhaps addressing and changing the way that the automotive industry. Thanks.
The first is electrification and the use of electric power to drive these cars and the second is the second is autonomy.
And the the use of.
You know and the creation of a safer and.
Oh smaller cars are leading ultimately to autonomous cars.
And both of those a massive massive levels of investment in both of those areas.
And if you have a conversation with an automotive company.
Those two areas tend to be huge areas, where they're spending their spending money. There retooling. They are trying to make sure that they can stay ahead.
As as the industry goes through this transition so those those those remain big but at the same time car companies are building cars. So there still worried about the fundamentals that they've worried about for many years, which include which include.
How do you deal with how do you deal with.
Structural analysis and integrity, but to give you. One example.
B b the problems the structures and vibration analysis and noise isn't is an area that we've we've been in for a number of years, we have help customers solve that problem.
Well when you move to an electric car.
That problem become even more pronounced and so what might have been okay with an internal combustion engine, which was drowning out the noise in a car is no longer okay, when you're dealing with an electric car, which might be much quieter.
So the problems that they're dealing with and the product they're trying to solve in some cases are even more complex because of this new technology.
And so absolutely we see an ongoing demand for simulation to be used not only where it's historically been used but also for these for these incremental new use cases like electrification in the sort of me the other thing that I would.
Would draw attention to is materials I mean companies are starting to look at the use of different materials and understanding the role of materials and the the nature of the interaction between the materials they use and the outcome to they get that's also important and of course, that's where some of the acquisitions and technology that we got through grants will come into play a role. So when I think about the automotive industry every single one of our technologies and techniques, whether it was original Ansys mechanical which was you know the heritage and the foundation of the company to the most recent acquired technologies that we have are all relevant for the automotive industry and solving problems that are absolutely permanent and center for them being successful as they go forward in the industry.
Okay great.
Thank you for the [noise] it with her answer one quick follow up for you Maria just on the cash flow.
I think we want to make sure we're clear so the.
Are these large lease deals that you signed.
First half or particularly in second half or they leading to larger tax payments than you previously contemplated and that's why they are the operating cash flow guidance has remained unchanged.
Yes, so so you know.
Just to be clear that deal was actually in our forecast. It wasn't you know an outlier, but that being said as we as we began to articulate in in Q1 that under six so six no doubt the tax payments have increased so as a result, the combination of the increase in tax payments under six so sick.
As well as about a 2% headwind for the full year.
And the dilutive impact on cash flows from the acquisitions that we did earlier in the year all lead to us deciding that it's probably prudent not to take up the cash flow guidance until we get a sense of the timing around closing of those larger deals in the second half to see whether or not they will impact I'm 2019 cash flows or move into Q1 of 2020.
And our next question comes from Ken Talanian with Evercore ISI. Please go ahead.
Hi, Thanks, Thanks for taking the question I was wondering if you could give us a sense for how you're thinking about organic ACB growth for the remainder of the year.
Yeah, I would say the impact the inorganic impact of the acquisitions that we did this year or about 3%. So the remainder is all organic.
Okay, Great and then I guess it sounds like our two offers a more integrated work flow then available before could you discuss where you are more broadly in terms of technical integration for both your existing products and recent acquisitions.
Well as you know we've had a strategy for a number of years.
That we've been executing against to integrate our products together through the Ansys workbench and that continues to be that continues to be the strategy.
It it was in a very innovative solution.
That make that made simulation dramatically easier and it gave us a framework in a mechanism by which new technologies.
Could be integrated together.
And frankly, our strategy continues to be to drive that level of platform integration, both for workbench and as I said earlier, we continue to invest in our ongoing platform work.
To to Componentize the platforms to make it easier for people to drive that level of integration.
Because we believe an open strategy here isn't the best interests of Ansys and our customers. So we define npis, we allow third parties to integrate NB certainly integrate our our technologies together, we defined workflows.
And we continue to do that and Thats part of the strategy that we've had for a number of years of course, we continue to increase our level for the best.
All right. When you think about some of these next generation challenges that were addressing with our customers I mentioned electrification I mentioned autonomy fiveg et cetera.
These are also intrinsically multi physics solutions, which require a which require an integrated workflow and were able to position and provide those to our customers as well based on the integration work we've done across all products.
And our next question comes from Steve Koenig with Wedbush Securities. Please go ahead.
Perfect. Thank you very much high answers congratulations on a great quarter.
I can't comment.
A follow up for RJ.
Don't mind as well.
So for Maria.
We've been hearing from some other companies about maybe something like that weakness in certain countries, maybe towards the end of the quarter and.
Not some sort of kind of non linear already from some people in certain certain countries did did you see any pockets of weakness or was it was everything pretty much good across most most every country and how did your linear already looked like.
Yes, so I would say the linear and he was about the same as as Weve experienced throughout 2018 and Q1 of 2019.
I can't speak to any specific country that we saw weakness at the yen, obviously, the tariff situation in China, but but we've got enough resiliency in the model from our geographic and our vertical distribution that that we were able to execute against our forecast and closed close successfully and as you saw each of the major geography or deliver double digit constant currency revenue growth. So we feel good about our execution in Q2, and obviously as we've taken up our guide on all of our key metrics for earnings ACB in revenue for the full year, we still see a lot of momentum and we've got a healthy pipeline. So now we just need to focus on execution for the remainder of the year.
Got it got it great.
Thank you and for you I'd say.
Could you give us some color on the discovery live activity that you're seeing and.
Like what's the what's the value proposition for discovery live and it maybe distinguish that from the value prop or the situations in which you're selling as part of that PTC CAD work flow.
I mean, the the value proposition for discovery life is.
It's really unchanged from what it's been and what I've described in the past, namely discovery life offers.
Hi, and individual.
A very quick way, a real time way of getting.
A directionally accurate solution in.
And our analysis of a particular problem.
Is that the real time nature of discovery alive is what makes it so valuable and the fact that it makes it so intuitive.
To use and so easy to use is what makes discovery life accurate.
Now we felt we found that there are use cases, certainly where customers.
Oh users are completely new to simulation, we'll see the benefit of views of discovery live and there are you know we have cases, where that's the case.
And we also have other cases, where discovery live is being used by much by people who are much more adept who have used simulation in the past in fact are able to use the answer flagship tool as part of their day to day work, but are using discovery life to give them a directional idea of where they may need where they need to apply deeper levels of simulation and obviously as I said the value proposition for discovery lives. It gives them that immediate it gives them that immediate feedback without having to do the deeper analysis and then they can use that immediate feedback to figure out whether it's where they should start looking to do deeper analysis. So we see both of those kinds of use cases.
Certainly certainly when you think about enterprise customers.
You see exactly that because there are people in within larger enterprise organizations, who are users of Ansys and you see people in there who are taking advantage of rely who are not currently users of the answers.
Oh suite, but take advantage of discovery life to give them insights simulation base inside.
No as far as the coexistence with with PTC and is concerned as an example in cat or in general with CAD.
There are some there's a cadre of users who are using a whole using CAD from.
CAD from.
From their vendor.
And what we are in a position to do in that model with PTC of course is to make.
Discovery life capabilities visible to the CAD user natively. So that someone is laying out a CAD design will we'll be able to use the the PTC creo simulate life solution to be able to quickly hit rate and that gives them. Obviously, an integrated work flow within the within the PTC solution and so thats an advantage.
But there were also users as I pointed out in the case of the defense de contractor that I referred to in my script. There are also users who are not currently CAD users.
And we have a situation where.
You know in that case, where the customer made a decision to purchase both discovery live as well as.
As well as PTC Creo simulate live.
They are trying to strategically drive upfront upfront simulation.
Across the supply chain, both internally and externally and what they want to try to do is to get every single engineer to be able to run their own simulation, whether they're a simulation expert or not so that they can get to more rapid and informed decisions early.
And as I said in that situation, we expect to see potentially hundreds or thousands of engineers across multiple business units, taking advantage of simulation. Some case there'll be QAD users using the PTC solution in some cases, they won't be CAD users will be taking advantage of the discovery life solution.
And of course.
If if if a customer is using another CAD solution, we have natural interconnections between discovery live and the other cat solutions, where you have the ability to take advantage of both technologies in parallel.
And our next question comes from Tyler Radke with Citi. Please go ahead.
Hey, thanks, very much for that.
So I'm sorry to ask a question here.
You touched on China, and obviously it sounds like you didn't see much macro weakness broadly in.
In Q2, I guess my question have you seen any changes.
Here in the first.
Come on their side you know five weeks since you've closed Q2, and how are you just thinking about you know the ability to close large deals in the second half of the year relative.
To the first half just given it potentially.
Weaker macro backdrop. Thank you.
I mean, I think we I I think be various common actually said said it very clearly.
We have looked closely at our pipeline.
And given given where we are the guidance that we're giving takes into account everything that we understand about our pipeline and what we understand about the macro.
And the situation in the trade discussions between the U.S. and China as well as the broader macro. So we are we're in a position our guidance is based on what we know now and what our analysis is based upon the circumstances that we see in the market today.
Great and then you talked a lot about kind of some of the autonomous and electrification trend.
In the the autos and high high Tech end markets. You know in addition, you talked about Fiveg I guess, just how far do you think.
We are through that opportunity is this just a multiyear.
Opportunity to calm or how are you thinking about just.
Where we are.
The various stages of that thank you.
All of the all the ones that I mentioned autonomy electrification Fiveg T. all of these I think a very early.
In their development, we think we're broadly a very early in their development, we certainly see customers.
Who will make significant levels of investments and this over multiple over multiple years as products get better and better and as technology starts to improve.
Certainly in the case of autonomous as I mentioned.
And I alluded to I think in my script.
Hi, I I don't think you would you can get experts to agree on when you'd level five full autonomy is going to be ready in the marketplace.
Some people will say sooner or some people will say later, but the fact remains that on the path to a level five.
Full autonomy there are all kinds of innovations, which are being created that will make vehicles, better and safer and even partial autonomy starts to significantly improve the safety capabilities on the road.
And simulation plays a significant role. So this is a multiyear journey that the industry is on where simulation with simulation is going to play a huge role in autonomy and I would make the observation of course that it's not just in automotive. It's it's aerospace it's other industrial equipment.
I think I talked in an earlier.
Oh, yes.
<unk> conference call about.
On the sea equipment as well so a a thought on the submersible. So there are there are all kinds of areas where autonomy is applicable.
And there continues to be enormous amounts of work ahead of us as an industry. A similarly similarly for electrification I can go through it in similar detail and equally for Fiveg equally for bio team. All of these are major major mega trends that we believe to be multiyear trends that are frankly, driving the growth of our core business.
And so I think we're in a very enviable position as a company to have a core business. That's in a very strong and actively growing part of the market.
And and with products that are leading edge products to be able to address customers' problems in these multiyear mega challenges that they're facing.
And our next question comes from Gal Munda with Baird Bird capital markets. Please go ahead.
Hi, everyone. Thanks for taking my questions. So the first one is just for you guys in terms of.
The ability to to full cost those large deals that are coming in now we've had before.
Well above 2 million coming in less than a year and a half what have you learned from those deals and what is when you look at your pipeline and the potential for those deals to close kind of towards the end of the year, but even going forward are you able to say the more confident in kind of having the ability to to predict when those deals might close considering the fact that it's only really started a year and a bit ago.
I think that.
Anytime you're looking at.
Looking at our pipeline and trying to predict exactly what happens in the pipeline, especially for some of these larger deals it varies on a on an individual customer by customer basis.
We're not assuming we obviously that you know the acis business as you think about the overall volume we do have a certain number of large deals and larger customers, but of course, we have a large amount of the business. That's much more that's much smaller more transactional in nature, and obviously that's easier to predict.
Because because we because we know we have the the a law of large numbers of volumes working as many dealing with be the more transactional piece of the business.
But the larger deals of course, we understand exactly what the customer problem is we know what the value proposition is in many cases, we have been working with the customer for a while we understand the challenges that they're dealing with.
And we understand the compelling event, that's driving them to to spend the money with us they're trying to make a particular product launch they're trying to get some particular technology out to market there trying to compete in a different way in the market. All of these are major drivers and they're spending money with us to help achieve these business objective and so when weak link these business objectives with our understanding of the value that we can provide.
And we put it together given the nature of the relationships we have with some of these customers, we can predict and we factor that into our prediction of the pipeline. So if it's a it's a more its a forceful analysis of where we are and that results in the in the guidance. Obviously that we guys that we give to you guys.
That's helpful. Thank you so much and then just as a follow up but a question on discovery life. It seems like from both from a a commentary around to you and what PTC has said recently and it's getting more traction definitely.
We understand that there's nothing materially into numbers, especially for this year, but could it become more material driver of growth in let's say a year or so do you have expectations for that did you think that discovery life will take another few years in order to really ramp up in terms of volume to two moved the needle.
Yeah, you know, we will obviously be able to give you a longer discussion during investor day, and we'll talk a little bit more about discovery lives and the technology, but I think a quick way to think about it gallas that in our industry, our customers tend to be quite conservative and even for a breakthrough product like discovery lie.
Our internal expectations are that it will take time for customers to take advantage of these.
Technologies, and so as you rightly point out it's not really a material part of our business.
As we think about it this year or in the short term. So we'll give you more insight perhaps.
Be able to address these questions and others during the Investor day presentation in it in a couple of months.
Next month.
And our next question comes from Adam Borg with Stifel. Please go ahead.
Great. Thanks for taking the question.
Regarding services. So it's great to see the continued strong services momentum as you sell a broader platform to customers and I'm. Just curious about your plans to continue getting partners involved with services and how sustainable that recent trends and a 3rd% to 40% growth is.
[noise] so one of the one of the areas one of the reasons why customers.
Looking to answers for more services business starts to solve some of these more complex problems, we're able to help them understand using services capabilities.
Using our services capability how to solve some of these next generation problems. So they are looking to sell some of these complex problems are reaching out to us to help them do that and that's why we provide services, but as you know our business model is not to be a services company, we are up where software business.
And you know services is not a big portion of our business and it's not going to be.
A big portion of our business going forward. Our plan is to our plan is to.
Workers, because you need to work with third parties and partners as appropriate.
And we're continuing to evaluate third parties to take to take on responsibility for some of these newer solution areas that customers are looking to.
And and we will continue to drive our investment in our business where services driving license revenue. So that's that's the way you should think about the services business and obviously, we don't see that services ratio really changing as a percentage of our overall revenue.
In in the term.
That's really helpful and maybe just a quick follow up for Maria could you just remind us for what the percentage of lease deals are that are one year versus multi year and what's the average duration for the multi year deals. Thanks.
Yeah, we don't we don't bifurcate between a one year and multiyear today. The one year are tend to be at the transactional level.
And the multiyear obviously tend to be at the enterprise and strategic level.
And the second part of your question.
Oh duration hasn't really changed I'd say, those multiyear deals still tend to be between two and three years.
And our next question comes from Rich Valera with Needham and company. Please go ahead.
Good morning. This is Nate truck on for rich. Thanks for taking my question thinking about the simulation tool chain Tech Christy MW, other really snow that sense as well.
Assume exclusive rights for commercialization and were.
We were wondering if you've begun marketing this product Martina talked to other auto Oems our fuel.
Can share anything regarding vision or plans in this space and then I do have one fall.
Well, we'll talk more about autonomy in general or perhaps that are at our at our Investor day, and you'll have a chance to.
Understand a little bit more about half that of technical detail about what we're doing and autonomy in general.
But but nowhere in essence, a direct answer your question no. We're not marketing that externally at this point of time, we're working with BMW.
As they lead up to the to the launch of the BMW next which is expected to launch within the next but the next couple of years.
Okay. All right. Thank you and then also.
In it into two we saw very strong revenue year over year growth in other Asia Pacific up 70, 474% in constant currency and.
Considering the following the prepared remarks regarding some of the second half deals closing in closing I really are ahead of schedule. How we're wondering if some of the strengths and.
The other Asia Pacific Geography, as result of company is buying a had to trade relations or if you can provide really any additional detail here.
Yeah, I would say it was driven by two things, yes. Some companies buying ahead, but that was a smaller portion. The other was the large transaction that that RJ referred to in his prepared remarks. So the impact of both are what drove the performance and in those numbers that you referred to.
And our next question comes from Jason Selena with Keybanc capital. Please go ahead.
Hey, guys. Thanks for taking my question you know when I look at Q3 guidance for operating margins are kind of suggest.
Four or 500 basis points of operating margin compression can you just talk about some of the investments you plan, making or at least the increase in spend just a little more color.
Yes, so I would say first of all its lower revenue is is really the primary driver, but no doubt if you heard my commentary in my remarks, we are in the second half contemplating I'm continuing to hire and making up for some of the slower pace in the first half we've got a number of digital transformation projects underway or that we will continue to invest in heavily across across the business and of course the impact of the acquisitions that we closed earlier. So a combination of all of those all what's driving the operating margin outlook for Q3, and the remainder of the year.
Great. Thank you.
And our next question comes from Robert Simmons with RBC. Please go ahead.
Great. Thank you.
So just like you just mentioned you didn't behind on your hiring both Q1 and Q2 s that a few questions on that.
Are there particular areas that you're behind on or is it kind of across the board and then kind of what's the bottleneck.
Yeah, it's across the board as I spoke on the last earnings call Q1 was a it was a combination of not only I'll call. It a challenging hiring environment and that's not just a domestic issue that's really globally, but that was also impacted by as you can imagine when you do two acquisitions in a corridor before we just keep the hiring pipeline open when we take a look at the new talent that is joined Ansys to see if there's opportunities to still open position and to broaden some of our new teammates responsibilities. So that slowed down some of the activity in Q1 as I said, we did hire you know 100 people in Q2 and the reality is we're going to continue to aggressively pursue our hiring plans throughout the remainder of the year.
And adding where we're recruiting for positions across the business. So there is no single function or part of the business that disproportionately impacted it's really across the business and it is.
A more challenging hiring environment than we've seen at least I've seen in at least a decade.
Okay, great. Thanks, and then.
Are you seeing from ever.
People quitting rising or has that been pretty steady and are you seeing wage demand going up or is that just heard to find people.
Yeah, No we still got single digits turnover. So we're we're able to retain but it is the the recruiting efforts that just take longer and as you can imagine sometimes when you have very highly talented employees, who who go to their existing employer and allows for gonna be leaving their existing employers are getting more aggressive relative to what do they have to do to retain those people. So it.
It's tricky, we're continuing to find people as you as you also know we are looking for highly selective candidates and in what we're hiring for so it's not always easy to find them, but we're confident that we can continue to attract and retain our talent as we've done for you know almost 50 years now.
And ladies and gentlemen, this will conclude our question and answer session I'd like to turn the conference back over to Archie Grupo for any closing remarks.
Thank you all for your questions before I sign off I'd like to once again, thank my colleagues at Ansys as well as our channel partners around the world.
For all of their hard work and their efforts that are leading to our success. Thank you all so much.
And and for the rest of you. Thank you for joining the call and please enjoy the rest of your day.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect. Your lines at this time and have a wonderful day.
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