James E. Cashman III - President, Chief Executive Officer & Director Maria T. Shields - Chief Financial Officer & Vice President, Finance and Administration.

Darren R. Jue - JPMorgan Securities LLC Monika Garg - Pacific Crest Securities Anil Kumar Doradla - William Blair & Co. LLC Steve M. Ashley - Robert W. Baird & Co., Inc. (Broker) Ross MacMillan - RBC Capital Markets LLC Steve R. Koenig - Wedbush Securities, Inc. Jay Vleeschhouwer - Griffin Securities, Inc. Stephen D.

Bersey - Mitsubishi UFJ Securities (USA), Inc. Mark W. Schappel - The Benchmark Co. LLC.

Good morning, everyone. And welcome to the ANSYS Q4 2015 Earnings Conference Call. All participants will be in a listen-only mode. After today's presentation there will be an opportunity to ask questions. Please also note that today's event is being recorded. At this time I'd like to turn the conference call over to Mr. Jim Cashman, President and CEO.

Sir, please go ahead..

Okay. Good morning. And thank you, everyone, for joining us to discuss our fourth quarter and fiscal year 2015 financial results. Before we get started I'll also introduce Maria Shields, our CFO, and she'll take us through our Safe Harbor statement.

So, Maria?.

Okay. Thanks, Jim. Good morning, everyone. Our earnings release and the related prepared remarks documents have been posted on the homepage of our Investor Relations website this morning.

They contain all of the key financial information and supporting data relative to our Q4 and fiscal year 2015 financial results and business update, as well as our current Q1 and fiscal year 2016 outlook and the key underlying assumptions.

I'd 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 SEC, 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 the course of this call and in the prepared remarks we will be making reference to non-GAAP financial measures.

A discussion of the various items that are excluded and a full reconciliation of GAAP to comparable non-GAAP financial measures are included in this morning's earnings release materials and the related Form 8-K. With that, Jim, I'll now turn the call back to you..

Okay. Thanks, Maria. Actually I'd like to start with a recap of the results that the ANSYS – the team achieved in 2015. And to frame this let's go back to, if you recall from our Investor Day in June of 2015, we laid out a number of key objectives for the year.

We set goals of achieving non-GAAP revenue growth of 8% to 10% in constant currency, achieving strong margins and cash flow, high rates of recurring revenue, and continued growth in our deferred revenue and backlog.

We also committed to deploy capital to invest in our business for the long term, continue to pursue attractive M&A opportunities, and return capital to our shareholders through share repurchases. So I can say that we did in fact achieve all of those goals with the exception of one, which we narrowly missed.

So first, our non-GAAP revenue growth for the year in constant currency was 7%, a result of our Q4 revenue coming in a little weaker than we had anticipated in early November. But as we'll talk about in a moment, the growth is susceptible to mix shifts toward time-based licenses and the VSOE effect of enterprise license agreements.

And both of these are good long-term factors for us. Our non-GAAP operating margin was 47.5%, slightly higher than projected. Our operating cash flow for the fourth quarter was 18% higher than last year's Q4. And we generated over $367 million for the year. Our recurring revenue for both the quarter and the year were solid at 70% and 72%, respectively.

And we closed out the year with another record-high deferred revenue in backlog balance of over $500 million. Okay. So we also accelerated the rate of returning capital to our stockholders through share repurchases. In total we repurchased 3.8 million shares of stock in 2015.

Now while our primary focus is and remains on growing our business, both organically and through acquisitions, we remain committed to returning capital to shareholders.

And I think you can – you'll see an example of this also included in our earnings release is that our board recently increased the authorized share repurchase pool back to 5 million shares. So on the acquisition front during 2015 we acquired Gear Design, Delcross, and Newmerical Technologies.

All important technology acquisitions, but with minimal revenue impact in 2015. These acquisitions, along with the groundbreaking technology we introduced last month in ANSYS version 17, they all contribute to expanding our broad portfolio of industry-leading solutions and also further distance us from the competition.

So now let's take a moment to highlight a few things from the fourth quarter. While we delivered within our target range, we did not achieve the full level of revenue production that we were expecting as we headed into the fourth quarter.

However, and it – our revenue was adversely impacted by a transaction with over $6 million of perpetual revenue, the large majority of which was deferred over a 2-year period. Now this is an example of the short-term VSOE effect that I mentioned earlier. But it's also reflected in our good bookings and our deferred numbers. So good for the long term.

There was continued weakness in the semiconductor industry. Actually if you recall we spoke about that on our last call, one of the earlier mentioners of that. And there were some pockets of weakness in Asia Pacific and Europe that also contributed to revenue growth of 4% in constant currency in Q4.

And I might say the weaker than planned Asia result had a more pronounced impact on the paid-up license line. So also keep in mind that last year we reported 14% growth in perpetual licenses, creating a strong comparable.

While the revenue was at the lower end of our range, our sales bookings growth was the highest it's been all year and grew in double digits in constant currency. We closed Q4 with notable contributions from two of our largest markets. Revenue grew 10% in Germany and 9% in Japan in constant currency.

Now North America and Asia-Pac both saw revenue grow at 5%. And we continue to see weakness in the rest of Europe, which had a 2% growth overall. For the year we saw pockets of strength from the performance of our three largest markets. Japan, North America, and Germany grew 9%, 10%, and 11% respectively in constant currency.

Now this is significant, because these are the areas where we have the most advanced customer relationships, and where we have our most experienced sales and support infrastructure. So we would have expected our go-to-market evolution to unfold more quickly in these areas. So this is a very encouraging validation.

Now from a high level perspective this was a respectable quarter, even in the face of weakening economic indicators and off a strong comparable in Q4 of 2014. Sales bookings growth outpaced revenue growth.

This was driven both by a number of enterprise agreements that were predominantly closed in North America and the healthy increase in time based licenses. This contributed to an 8% uptick in the deferred revenue in backlog to $504 million, as compared to $468 million in Q4 of 2014.

And as we previously highlighted through 2015 these deals, they tend to add a certain level of volatility around the timing of closure, the impact on revenue recognition, and even the size of the deals. But we foresee more of these types of deals in 2016, which is good for the long term health of the business. It's a net plus.

Recurring revenue for the year as I mentioned was a healthy 72%, which was higher than 2014 and on a larger revenue base. We really do – I mean we've been saying this for years. It's been part of our model. But the consistent ability to maintain a solid base of recurring revenue is one of the hallmarks of that business model.

And a foundation that's proven to be a real differentiator and a stabilizer for navigating tough economic cycles. Now we're also – we're seeing increased penetration within our broad customer base. And the pipeline and new opportunities they continue to improve, even amidst the continued challenging economic environment. We're seeing growing interest.

Also the procurement process remains protracted and a lot more diligent on our customer side. So there's little doubt of the long-term opportunity as evidenced by the – basically the continuing multi-year momentum both in existing and new customers.

But in the short term I'll add this caveat, because even with this increasing interest, there's also cause for continued vigilance in – basically you look at all the recent economic forecasts and financial market conditions, they become markedly more volatile over the last few weeks.

And this has had a dampening influence on customers' current buying cycles. So we tried to factor this into our current guidance. And we'll continue to do so going forward. In 2016 we're continuing to selectively ramp up elements of our customer facing organization in response to the available opportunity, both short and long term.

And we're also continuing to invest in upgrading our business systems and infrastructure to support the growth of our business over the long haul. So just with those opening few points, I'll now turn it over to Maria Shields, our CFO, to provide a more detailed look at our financials.

So, Maria?.

Okay. Thanks, Jim. So for the next few minutes I'm going to add some additional perspective on our Q4 and 2015 performance, touch on some key financial highlights, and also go through our outlook for Q1 and 2016. As Jim highlighted we continued to execute on most phases of our business. We saw gross margins of 89% for the quarter and the full year.

And strong operating margins of 47.5% for both the fourth quarter and the year. Currency continued to be a challenge in the fourth quarter with a negative $13 million impact on revenue and even greater on sales bookings and $8 million at the operating income line. The full year results were negatively impacted by $66 million and $39 million.

Looking ahead into Q1 and the full year 2016, we're currently targeting a gross profit margin in the 88% to 89% range and operating margins of 45% for Q1 and 47% to 48% for the full year. Our plan for 2016 calls for Q1 to be our lowest margin quarter and for improvement as we make our way through the year, not unlike what we just delivered in 2015.

I also want to highlight that in 2016, we expect to see an uptick in our effective tax rate from the 30.6% that we reported in 2015 to 32% to 33%.

And as we have previously discussed, this is largely a result of the expiration of a prior tax benefit from a subsidiary restructuring that had provided us with meaningful tax savings each year for the last 5 years.

So as we enter 2016, while the macro economy is increasingly uncertain, we believe that it is vital to our long-term strategy to continue to make investments in areas of the business that we deem to be critical for the future.

Some of those include, first and foremost, strengthening our global direct sales and field support teams, continuing to invest in R&D so that we can maintain our technology leadership, and continuing to evolve the business infrastructure to support improved productivity, automation, and our future growth plans.

So no doubt, the increased level of volatility in the overall macro environment has presented challenges to not only us but our customers, since we initiated our outlook for 2016 back in early November.

Given our current sales outlook, which continues to factor in both uncertainties around the timing of a return to growth in certain geographies as well as the predictability of the timing of closing sales, particularly larger deals, we believe that disciplined spending will continue to play an important role not only in our own business in 2016 but in our customers' as well.

If we move onto the balance sheet. We closed in a very strong position that affords us flexibility and a solid foundation to support our business in the upcoming year. We ended the quarter with cash and short-term investments of $785 million, of which 69% is held domestically.

We finished 2015 with total capital expenditures of $16 million for the year. And based on everything that we are planning currently, we're looking at CapEx in the $20 million to $25 million range.

And as we did see in 2015 our ultimate level of spending in this area will be managed through a combination of pursuing those critical projects, but also balancing the remainder against the overall health of the business and the macroeconomic climate.

As we outlined in this morning's press release, we've initiated our outlook for Q1 with non-GAAP revenue in the range of $224 million to $232 million, and non-GAAP EPS in the range of $0.74 to $0.77.

With respect to fiscal year 2016 we're revising our prior outlook to factor in a more cautious perspective on the overall economy, since we initially provided our outlook in early November. This translates to non-GAAP revenue in the range of $995 million to $1.03 billion and non-GAAP EPS of $3.53 to $3.69.

As we've been discussing throughout the year, we're continuing to work through and make progress on various parts of our evolving go-to-market strategy, some of which include an increasing number of enterprise agreements, a shift in certain customer preferences toward time-based licenses and the very early stage of our cloud launch.

We believe that we've made good initial progress on these efforts in 2014. But no doubt we have a lot of work ahead. We see that these trends will continue to evolve over the course of the year. And as such we're assuming an increase in revenue and earnings growth as we progress throughout 2016.

While other companies in our space are attempting to force customers towards a preferred licensing model, we're focusing on increasing customer adoption of our Workbench platform and our broad portfolio of solutions.

To achieve this we're maintaining our historical approach, which offers our customers a range of options to fit their licensing preferences and the realities of their business.

While this flexibility may inject some additional variability in our results in the short term or in any single quarter, we believe that these expanded customer relationships, combined with the ongoing maturation of the sales investments that we've made throughout 2015, should continue to reflect in the long-term rewards of growth in sales bookings, revenue, deferred revenue in backlog, and most importantly customer relationships that should continue to grow for many years.

Further details around specific currency rates and other key assumptions that have been factored into our outlook for Q1 and 2016 are contained in the prepared remarks document. So with that, operator, we'll now open up the phone lines to take some questions please..

Ladies and gentlemen, at this time we'll begin the question-and-answer session. We also please limit – we ask you to please limit yourselves to one question and a single follow-up. Our first question today comes from Sterling Auty from JPMorgan. Please go ahead with your question..

Hey. Thanks. It's Darren Jue on for Sterling.

I'm just wondering if you could talk about what parts of the product portfolio are you see the greatest pressure from? In particular in the energy and industrial areas?.

Actually could you clarify? I didn't know if you were asking – I thought you started off asking about the product portfolio. And then you – and then I thought you might be talking about industry. So could I – I mean I want to make sure I answer the right....

Yeah. I mean – yeah.

So the question is on product portfolio, but to the extent that you're seeing any particular pressure in energy and industrial areas?.

Yeah..

(16:43).

Well it – yeah. It tends to comp around the major – the emphasis points.

So for instance in the semiconductor area, we're more likely to see that for instance in the more electronic-oriented and semiconductor-oriented products that we have along those lines, with more minimal impact if you will on the major elements of the structural and fluids business.

Now when you move into the industrial and energy – and some of this also gets into what's happened with the general approach of the mining and commodity based markets and what – and how that ripples through the off-highway kind of market.

And basically you can pick up a paper any day and see by major customer names – or major company names that that plays through. Now those tend to be slightly more – actually more pronounced on the structural and the fluids part. I mean just lumping these into broader classifications..

Okay. That's helpful. Thanks. And just to follow up, I mean coming out of the last downturn, you were able to manage margins back to a 50% level by getting some efficiencies on the sales and marketing line. And I know you're not guiding to a 50% margin for the year.

But I'm just wondering if it's fair to think that maybe you could outperform in terms of margins in the current environment, if you start to see that you're not getting the return on your sales and marketing efforts as you move through the year..

Well l think the important thing to mention is the first part, is that when we look at other downturns and similar recent downturns is, we were by far, far more resilient than most companies in our space or in the market generally. And as such we actually even still grew in revenue, albeit at a much lower rate at those times.

However, we never at that time guided to higher margins. It's just that because we weathered that storm better based on our overall business model, the higher amounts of revenue that did come through that we were still able to take into account had the elevating aspect of margins.

But we were – and at that time we were talking about holding the high margins. And they actually elevated into that point. And I'd say that that's probably going to be a hallmark of most kind of economic downturn or softening cycles, where our recurring base and the solid customer base we have provides that good ongoing baseline of revenue.

But I think that the things that we've done from the product standpoint and the preparatory standpoint in our go-to-market model is that that allows to – basically allows us to harvest any of the upside when it occurs.

The other thing is that again we can't – we really can't emphasize as much, because we have been talking about this the last couple calls, is the concept of as customers are starting to get into the very first entries of the cloud based – and all those people are starting to shift. But we've been talking a lot about the time-based license.

We saw how our time-based licenses actually grew at a higher rate, but – and that's good for the long-term deferred balance. But it has a dampening effect of course on the short-term thing. So it's more of an appearance kind of thing. And the overall movement of enterprise license agreements also tends to add that volatility.

The other thing is with enterprise license agreements, we also get the situation where, because they cover a broader range of products, even if we have a small percentage that are related to products that don't have VSOE very often, we have to put the entire order into a time deferred kind of basis. And that's what happened.

I mean I even signaled – I even talked about the one – just taking one order and that was a $6 million order that had to be time deferred. I mean you can pretty much do the math yourself and determine how that can help drive the long term and show strong bookings growth, while it has that temporary dampening effect in the short term.

So I guess the bottom line is we're not guiding toward those things. But if the same things happen as before, and we are – we have the continued strength, relative strength in the top line, because we're gearing around that other assumption, that naturally filters down to the bottom line disproportionately..

Okay. Thank you..

Our next question comes from Monika Garg from Pacific Crest Securities. Please go ahead with your question..

Hi. Thanks for taking my question.

First is, are you guys seeing that customers are preferring more leases than perpetual licenses?.

Yes. Yes. Now the thing is as Maria mentioned in her comments, we've seen these trends – but keep in mind for years we've had a mix of basically cloud type of offerings, online type of offerings, of lease and of perpetual licenses. So we've always had that.

We feel it was more important to focus on providing flexibility for – in these early stages for customers to introduce and get involved in those kind of applications. So we still see that. We just see that the buying shift has been tending to shift a little bit more on that. Now that happens at a very personal level on a company by company basis.

So this is not like necessarily a herd mentality, but we are seeing shifts. And those numbers were borne out in the relative strength of the time-based license versus – going on. Now we also – on the large deals that we're going into also is – we've been seeing an increasing amount of that.

And companies that traditionally were doing that on a paid-up line. It doesn't take more than a handful of those as we've seen to change the results. And then keep in mind again this VSOE thing. I'll say one thing. When we encounter these things, when we get a big order with customers, we treat that as very, very good.

And if we find out there's a VSOE issue, we don't sit there and try to artificially do something to optically make the current quarter at the expense of a long-term growth and the customer disruption. So overall it's a net good thing for us if you look at the building of the business.

But that flexibility sometimes is what can also drive the additional VSOE.

I don't know, Maria? Do you have anything to add to that?.

Yeah. And so too – and some this lends itself to the earlier margin question.

So as that business that traditionally would have been recorded as perpetual in the current quarter gets recognized ratably over – in the case of the one deal that we mentioned a 2-year period – that no doubt is going to depress the margins, as opposed to how we may have historically recorded it even back in 2009.

But as Jim said we're not trying to do anything unnatural to either change the customer preferences or to pull those deals in to make the current quarter appear better than it is. Because obviously that will have long-term impacts on the future cash flows if you will..

Got it.

Then the question is with Siemens buying CD-adapco and now Siemens becoming second-largest simulation provider, do you see any impact from this acquisition they have made?.

Well, no, no, no. I mean not really. I mean you've got good technology and good companies that abound in general. Basically for the last 10 years, 15 years CAD companies have bought simulation companies.

And in general I mean it's tended to be neutral to a net plus for ANSYS, because in general we're agnostic when it comes to those overall CAD environments, which come – which tend to come and go. So it's just one of the natural – just kind of like the natural flow of life in this industry.

And if you roll the calendar back 15 years, you'll find many times that these things came in place. So it's just part of life but nothing unnatural. And really nothing unexpected. You have....

Yeah. No. Well one thing I will add. It does validate in our minds not only that the strategy that we've laid out for 15 years is the right strategy. And that simulation is in fact becoming a more critical aspect of what, not only Siemens, but other of our competitors are seeing in the marketplace.

So as Jim said, this has happened for 20 plus years in our industry. And our job is to continue to invest in R&D and to acquire technologies that continue to differentiate us from the rest of the pack..

Thanks.

Just the last follow-up, housekeeping question, what is your 2016 cash flow guidance?.

We are looking at currently somewhere in the $355 million to $385 million range..

Why would it be at the midpoint slot, just year-over-year?.

Some of it's going to be – we had a very strong – you saw 18% growth in cash flow in Q4. And some of it will depend on the timing of when some of these deals close. So if they close early in the year, you'll see improvement. If they close later, then it may impact flow over into 2017..

Got it. Thank you..

Our next question comes from Anil Doradla from William Blair. Please go ahead with your question..

Hey, guys. Thanks for taking my question. So, Jim, one very fundamental question that I'm trying to reconcile. So obviously you had record backlog and deferred revenue, which was great news..

Yeah..

So over the 3 months when I look at – or how you looked at the 2016 outlook. You certain – had a certain growth rate. Three months later we've got this great backlog and deferred revenue. But you're tweaking your 2016 growth rates downwards. So I'm trying to reconcile.

I mean even if I look at it, the backlog increased by $70 million, and the – at the midpoint, the top line comes down by $17 million, something like that.

So how do I reconcile these two moving parts?.

Well the bottom – the first and foremost is the macro. But second of all I think the – some assumption of the buying preferences that we talked about. Again good long term and over the short term. So bottom line is the good relationship is – or the good thing is we've got a really strong relationship with our customers.

And if you recall we actually were pretty good at – in the anticipation in the downturn a few years ago in the 2009, 2010 timeframe. And that came because of some relationship with the customer. But I mean, geez, even on the ride in today, picking up some of the latest forecast from Citigroup.

And that was kind of echoing – that was just putting frosting on the cake of some of the things that we're already seeing. But then you see that. And then how does that ripple through? First of all, customers are – they're going through purchases a lot more carefully and judiciously.

Second of all, when they buy things they might be tending to buy maybe even the same amount of licenses. But now it's being spread over. So we get that, the multiple impact of what we saw for instance with the – just that one illustrative order I talked about was the $6 million one, which is core to be (29:05) – I mean you can do the math on that one.

What does $6 million in a quarter mean, versus spreading it over 22, 24 different pay periods? So it's really taking into account all of those factors and trying to give a real accurate picture of everything we're seeing. I mean in terms of the long term prospects, man, no, there's nothing changing there.

I mean there are the things that we have to navigate, but everybody is going to have to navigate those type of things..

Great. And as a follow-up, Jim, the ELA program was kicked in, some very good sectors..

Yes..

You talked about couple of dozens to 50 people I think, or something like that.

Can you just give us an update and some color on how that's playing out? And how should that play out in 2016?.

Well I'll tell you. First of all, it's playing out very well. And second of all, I'll tell you we're learning. I mean because – and I'm just trying to be totally open with you on this.

Is that first of all, I think we mentioned the very first one at the tail end of Q4 of like – of 2014, which by the way was part of the reason for that really tough comparable we were talking about. We projected a handful, mid-single digits of those going on in 2015. And that absolutely occurred.

Now we're seeing a significant increase going into double digits, numbers of those going on. But as I mentioned we're learning on these things too.

So as you get to that broader base of customers, that's where we're finding out the things about – for deals of these size in this changing environment, what does that mean in terms of duration of contracts, multi-year contracts, augmentation with our cloud-type capabilities, broadening of the product line, all of those things.

And keep in mind this is happening at the same time as all the economic reports are coming out and saying, hey, there's some increased volatility here. So customers are making bigger, new relationship decisions with us at the same time the environmental factors are causing a little bit more cautious. So that's what I meant by the learning process.

And what that means in terms of how we structure these, because each time you to open up to a broader range of customers with these type of deals that really were unheard of before over the past time, it gets into a much broader range of contracting, delivery, additional things added on, and additional ways that we deliver that.

So we're continuing to moderate that as we go forward. And then as we also mentioned we wanted to come out the gates expecting this. So now we're getting to the point where we're now being able to take this into a slightly broader range of our sales and go-to-market.

Like I said we weren't just opening this up to everybody all at once and having chaos while we were learning. But we have some of those best practices already coming in play. So this is something that we see as going to be a continuing trend. And it's super good for the long term and building solid relationships with customers.

But it's one of those things that – most things that are really good, they don't happen with a snap of a finger. They build over time. And we want to make sure that they build in the right manner..

Our next question comes from Steve Ashley from Robert W. Baird. Please go ahead with your question..

Thanks.

Maria, I'd just like to ask the original fourth quarter guidance, had you made any allowance for some ratable deals to get done and for some revenue to be shifted to the balance sheet when you provided the original guidance?.

Yeah. So we had provided guidance. And a portion of that deal we had in our forecast. It ended up coming in much bigger than we had forecasted, but that was in the upside. Our – I would say as we went into Q4, our expectations for Asia were much stronger than where we finished.

And unfortunately for us Asia still – as Jim highlighted on the call, Asia still has, particularly in the larger economies, preference for paid-ups. So when things don't cross the finish line in December, it disproportionately impacts that top line..

Yes. And, Steve, as I mentioned before we could have – I mean we could have gone in and tried to take all that extra business that came in, which was significant, and say, oh my gosh, we had – and it wouldn't have been – it really wouldn't have meant anything long term to the customer, other than some frustration.

And we'd still have the same good pace of business going forward – and going forward. So again keeping with Maria's earlier comment, we just want to make sure that right now we create as few obstacles to the customers' financial procurement of the capabilities as possible.

And knowing that it's – at the end of the day the real name for us is getting more people using more software. That really flattens it out over time. Because as they start to use it, they usually don't start to unuse it or stop using it.

So it almost – it's always the platform that builds on, which again you've seen over the years and the building deferred and recurring base that we have going forward. So that's a constant (34:44). And also we didn't want to get into a situation of having to give up things for – if you will for just creating some smoke and mirrors..

Sure. Absolutely. And then in terms of – so the one TBL deal is very visible optically, because of the $6 million moving from the license line.

Were there any other leased base TBL deals in the period?.

Yeah. Yeah..

Oh yeah..

But keep in mind there through our entire history, there have been – those things always tended to happen at a lower level. And there were some gives and there were some takes. There were some plusses and minuses. So we were – we just focused on this one illustrative one, because it is very significant.

There were others that were in there, but I'm sure there were also others that might have gone the other direction. But the net trend overall was kind of – is pretty undeniable when you look at the relative growth in the leased space and along those lines.

And then all I can add is anecdotally I know of at least two or three other customers as we go forward that traditionally were that. And they're looking more at going into the time base, as they go through whatever financial decisions are on their plate..

Great. Thanks..

Yeah..

Our next question comes from Ross MacMillan from RBC Capital Markets. Please go ahead with your question..

Thanks. The first one is a housekeeping. And then I'll have a second question relating to it.

Do you have the sequential impact on deferred from foreign exchange? Do you have that number handy?.

Hang on a minute. I'd say it's close but not handy..

$2.2 million..

Looks like a little over $2 million. Yeah..

Sorry?.

I got $2 million..

$2.2 million, Ross..

Negative, right?.

Yes..

Yeah. Oh yeah..

Okay. So my question relates to trying to adjust basically for all the puts and takes between how your contracting, whether business is going into deferred, whether it's going into backlog. And when I look at trailing 12-month current bookings, that's bookings to be recognized in the next 12 months, I see 6% growth.

And then I look at your revenue guidance for next year and it's 7%. There's probably some FX in there. So it's probably closer to 8% plus.

So I'm just trying to understand what drives the conviction in the higher revenue growth in 2016, when it looks like your trailing 12 month current bookings is closer to 6% growth?.

So, Ross, I would say it's based on what we know today, two important things. One is the strength of the pipeline. Two is we are still convinced that the investments that we made in 2015 in ramping up the sales capacity are in a maturation phase. And that they are going to yield increased productivity in 2016.

And the strong bookings growth that we just saw in Q4 are three things that give us a lot of confidence.

And as Jim has been mentioning, these conversations that we're having with some of our long-standing customers about expanding our presence and our footprint across their enterprise give us a lot of conviction about the long term opportunities that we have with those customers to migrate well beyond the current installed base that we have in those customers..

And the only thing I'd add – I mean again the – I absolutely agree with those points. But the general pipelines are increasing, but also the targeted number of – as we move into that ramping up, which we're trying to manage the growth of, the ELA increase, those tend to be major ones.

And of course then we have to factor in the timing and the closing of those things. So you've got some very strong rifle shot anecdote information from the ELAs. You've got the general broad based from the amalgamation of the pipelines.

And then you've got the intuitive aspect of that sales team that we were building up through the course of 2015 that we admittedly said it takes 1 to 2 years to get to a full – well not a full, but I mean a really strong maturation of that thing.

And then you counter all of that against the macro backdrop, which also is factored into the pipeline and forecasts. And that's what it nets out.

But if you look at the growth of that and the general path of bookings outpacing revenue for the quarter and the year, and doing it significantly in the latter part of the year, I mean those are all the factors that basically that went into our calculations..

Our next question comes from Steve Koenig from Wedbush Securities. Please go ahead with your question..

Hi. Good morning. Thanks for taking my question..

Sure..

I'd like to get maybe really clear on some of these license definitions. And then I've got one follow-up.

So, Jim, when you're using the term time-based licenses, are you using that synonymously with lease licenses? And if not what do you mean by that?.

Right. Yeah..

And then related to that question, if I could just add, on the enterprise agreements. Could you please help us by characterizing those deals? To the extent you can generalize..

Yeah..

How do they typically split between paid upfront and lease portions of those deals?.

Okay. Yeah..

And to what extent are those – you have VSOE issues sometimes in those deals?.

Well the first part is that yes I am – I guess I am conflating terms. So I use time-based license, because traditionally we used lease to be like a 12 – a typical kind of annual license or 12-month lease. To me a time-based license is a period-based thing, whether it's 12 months or it's part of those 24 months to 36 months.

Maybe I should've defined that more clearly in the beginning. That's some of internal stuff that we're using. Now on the ELA thing. It tends to have some general characteristics that then can get perturbed by individuals. ELA is inconsistent. Perpetual time-based licenses, they can also even have some service associated with them.

Like if you will with embedded support and the like or certain services. On top of it with those that – no matter whether it is perpetual or lease, you can run into VSOE issues. So and these – my finance colleagues here are a lot more okay with these. I mean I think this is kind of – it's very interesting when you get in you've got something.

If you combine it only takes a small percentage of product added into an ELA, which are inherently broad-based in product to create a VSOE issue, where upon everything in that order has to be ratable.

Even if traditionally this one chunk was – had no VSOE, and it was all time-based, and it was like a few percent of the order and then the bulk of it is the same traditional perpetual. Everything has to be – and correct me if I'm missing some nuances here. But it all gets applied over those things.

So the bottom line is those tend to be – so even I'd say it's a mix, it's a matter of preference when customers decide if they want their ELAs to consist of perpetual or lease. And right now at small levels they can provide – they can have lots of choices. They can mix things in there.

But once those things are put together, then you can still have something applied that still makes – forces them to be ratable.

Maria, would you want to add anything?.

I think that's enough. And then we can see if Steve has anything....

Okay..

...he wants to ask specifically for clarification..

Sounds good. Okay. Thanks. That is helpful. So I'm going to move on then just to my second and last question, which is about the ratable portions of the ELA in conjunction with the time-based licenses overall.

Is this possible to tell us ideally for 2015 and 2016 what you're expecting? How much recurring or ratable revenue you had in total, beyond just the lease revenue that you recognized? In other words the contribution from cloud to revenue, plus the contribution from the ratable portion of the ELAs? And then for 2016 is that going up by quite a bit? Are we talking 1 point, 2 points, 4 points? Any sense of how big or small this is?.

The bottom line is we're at the very early stages of this transition. So yeah. I could say with a pretty good certainty it's going up. Now how much? Those are things that we're really trying to, as we proliferate this through the broader customer base. So in other words we don't have – right now we've got maybe 5, 10, 15 of these. And they're big.

And they can perturb the model by a couple of percentage points. Necessarily saying that this automatically ripples to a user base of tens of thousands of customers, and to what degree and how quickly, we're not at that predictive point in terms of being able to go.

However, we are – as we've mentioned before we are starting to construct some of these models as the ELA concept becomes a little bit more mature with that. As the cloud offering itself gets a little bit more mature. And as some of these buying preferences change. But there are a lot of moving pieces.

And we've tried to consolidate all of those into what I think shows a pretty good stable long-term picture. But it does provide a little bit more variability over that crossover period..

Okay..

So, Steve, if I can add to that. If this will help you in building your model, our 2016 model for ourselves, trying to factor in all of these pieces, some of which we don't have certainty or precision around, because these deals are kind of – each one is customer dependent.

We're looking at 58% in the software license line and 42% of revenue in the maintenance and service line. And I will also add one thing. I tried to make this in my comments, but our cloud initiation is still in its very early stages. So there is not material revenue in either 2015 or 2016 that is specific to cloud..

Okay. Great. That is very helpful, and I'll look forward to talking to you all in the callback. Thank you..

Okay. Thank you..

Our next question comes from Jay Vleeschhouwer from Griffin Securities. Please go ahead with your question..

Thank you. Good morning..

Morning..

Question first about Q4. First, your North America revenues were down sequentially from Q3, which seems unusual.

And the question is if that was solely related to the $6 million VSOE issue you mentioned? Or there was something in addition that caused that sequential decline? Also in Q4 your R&D revenues – sorry, R&D expenses were down slightly year over year and more so sequentially from Q3.

And I'm wondering if there was mostly a currency effect in there? Or if there was in fact something you did organically to change R&D in Q4?.

So if you – I mean if you look at it, no. That's a sheer thing in numbers. And I think you can see that when you roll that out and project that over an entire year and see that North America....

Double digit..

...was still in that 10%, 11% range. So what you had is – I mean there were a number of factors. But if you look at three major ones. First of all, in the comparable that the huge North American-centric deal with Cummins that was mentioned in part of that – the comparable. Now Q3 you've got – we talked about another one.

That was actually something that shifted forward. And so originally it was thought of in the Q4 thing. And that wound up in Q3. And then in Q4 we had the one deal where a large chunk of perpetual revenue drifted out. All of those things were factors in the – in that 5% for North America.

But again projecting it over an entire year is probably the best way to look at it as an overall trend rate. And by the way we saw the same picture, albeit in the other major markets, which were like if you will that first wave of our go-to-market with Japan and Germany. It's just that we didn't have those big perturbations based on the huge orders.

Does that....

Okay.

And then the R&D question?.

Oh I'm sorry. Yeah..

I mean can you repeat it, Jay?.

Yeah..

Oh sure. Your R&D was down fairly substantially from Q3, which is somewhat unusual in that case as well. And down a little bit year over year.

Was that currency? Or was something else going on in terms of R&D expenses?.

No. I think most of it is, Jay, related to variable compensation..

Okay. Looking forward, one of the things that we've seen from a number of your peers in engineering software is that they are working to consolidate or repackage their portfolios, not necessarily kill products off, but perhaps simplify into more suites and simplify the selections presented to customers.

And my question there for you now with R17 is – and given the overall multi-physics strategy, is whether you've begun to do anything like that? Or are planning to do anything like that in terms of consolidating or repackaging across the various business units? And if so how might that affect any leasing or potential of pricing?.

Yeah. Well the bottom line is, yeah, we've been doing it. As we typically do, we do these things in waves. So the very first one was actually, first of all, simplifying each product set if you will, so the mechanical, the fluids, the electronics, bringing those into overall simplicity. Because we had – over the years we had had multiple tiers of that.

Secondarily, as we then look to rationalize some of the add-on technologies if you will, the tech tuck-in acquisitions that we've been doing, as opposed to having a number of those. So those tend to get incorporated into each of their parent orbitals if you will.

Then the second part of that is, okay now combining those into – now we've always had a multi-physics package. But combining those into packages. But we've even gone one step further for markets when they proved to have a certain amount of centroid of effort.

So I will talk of one in specific, where you take the overall drive in everything from electronics, semiconductor, to Internet of Things. And the whole concept of chip package system type of simulation. Where you – traditionally there were individual tools applied by different groups and those kind of things. But bringing those together.

And then also combining not only the pure electronic side of those. But all of the – if you will the structural, the thermal, the cooling and flow, all of those types of capabilities.

Because one thing that there's – that's really a hot thing right now is that as people started to instrument things for the Internet of Things, it's not just one thing to have electronics that work and send the signals and do the readings and everything.

It's important that the electronics survive the same kind of harsh and hostile environments that the products that they're mounted on are able to do. So those are probably about four very significant things. But just suffice it to say the simple answer is yes. That is a general trending.

Because if anything we probably have a potentially broader issue, given the fact that we've got by far the broadest product offering. And trying to simplify that overall is a really, really key aspect for us..

Yeah. Jay, what I'll also say is as the result of some of these things, we're not planning to do a significant shift between the relationship between the perpetual and lease pricing. But we're trying to harmonize it across the broad portfolio. So there's more consistency across that portfolio and across some of these new offerings..

Yeah..

Our next question comes from Stephen Bersey from Mitsubishi UFJ. Please go ahead with your question..

Hi, guys. Thanks..

Hi..

Just wondering if you noticed any trends on your leasing side, maybe lengths of leases expanding or contracting? And also feedback during the pipeline reviews of that.

Did you get any feedback from the sales force?.

Yeah, yeah, yeah..

As far as customers that had planned on getting a license, but then snapped over to a lease?.

Yeah. Oh yeah. We're absolutely getting that. We're seeing that even heading into 2016. There are – and not surprisingly it's happened in some of the major geographies, most notably Japan and North America. But we are seeing those things. Now one thing I would say is that I'd say in general, in aggregate, the trends are toward longer term.

But parsing down what part of that is by individual customer versus what's being influenced by the increasing number of ELAs that are inherently multi-year, I don't have a precise answer on that.

And for the companies that are basically going from perpetual to lease, no matter what timeframe they elect for on that, it's not like we're comparing somebody that used to do a 12-month lease now going to a 24- or 36-month lease.

Someone who used to do perpetual going to any kind of lease, which in and of itself is a fairly significant kind of question. But I'd say in general if you look at it right now, sweet spot is typically about 2 to 3 years. I'd say – yeah.

And in general sometimes people will even try to look at both of your things, even though the financial commitment will stretch out into years four and five, albeit – and when that happens we don't count that, because that's really not a contractual order at that point in time. Did I cover every – did we cover each point of your....

Indeed. Yeah, and maybe just for ....

Okay..

... Europe, looks like Germany is trending nicely here. But wondering if you have any color on France, the U.K.? And please let us know if you've been over there. I know you traveled a lot recently..

Yeah. Yeah. I was actually – I've been in the U.K. twice the last 3 months as a matter of fact. And actually France only once. But those obviously – mathematically you can see that those are a little bit tougher areas. You look at – I'd say that in particular, part of our U.K. business is seeing some of the stuff.

Even though our North American business was strong, because it's a broad base of things, we mentioned before the Texas area and the impact of the – of oil and energy, had an impact there. Not an inconsequential part of our U.K. business of course is North Sea and that type of thing. So there's an element of that. So that was felt along those lines.

France had some difficulties. Oddly enough they're smaller parts of the business, but yet some of our – a couple of our Mediterranean areas actually did pretty nice performance. So it's a little bit of a mixed bag. But holistically it's been a little bit more sedate.

It's just that – when you get – basically what it gets down to more is not necessarily country by country, but where you've got the major multinational companies that are competing on the global stage. They're competing globally. They're not competing just in Europe. And there just tends to be a higher clump of those in the markets like Germany.

That's really more of what we're seeing, as opposed to what's the GNP of any individual country..

Great. Thanks, guys..

Okay..

Our next question comes from Mark Schappel from Benchmark. Please go ahead with your question..

Hi. Thanks for taking my question. Jim, switching gears for a little bit. With the R17 release it appears that the company's marketing materials are promoting as kind of a meaningful step change in capabilities, rather than just nice, linear incremental improvements..

Yeah..

I was wondering if that's way you would characterize the release in functionality? And if that is the case, maybe you could just highlight just a few of the significant features in the R17 release....

Well....

...that you think will catch the attention of engineers..

Well I think the main thing – I think the key thing is – and first of all I'll just say that every release that we've had the last 10 years has been sequentially significantly better than the previous one. And I'd be really disappointed if when [version] 18 comes out that we're not saying exactly the same thing.

But really to highlight it, we've talked about a couple of things, is really it looks in terms of how can you actually compress the cycles that people can meaningfully go through a range of these different evaluations? Because we really want people early on being able – the earlier simulation is applied, the earlier you can avoid downstream problems, the more robust you can make things, the more alternatives you can look at to really drive innovation.

That's really the key of it. But what was the problem? Two main things. First of all, the performance and throughput. And second of all, ease of use. Now it's not like you attack ease of use, and you throw the switch one day, and automatically it's there.

I mean just look at what happened with the home PC from 1985 all the way to even the current time with tablets. There was ease of use progression through each stage of that. But – and each one created additional business. But it took a number of applications of that to make that go. So we've actually done that.

If you look at really the – some of the main messages are if you will, reducing by significant amounts the amount of time it takes to actually get a model. Really at the end of the day we'd love to have somebody just not even worrying. They're just really trying to simulate their product, seeing what's there.

And not get caught up in all the nuances of all the modeling aspect or have to spend a lot of time doing that. And that's one area where we've done quite a bit. Secondarily is we look in terms of how long does it take? I mean it used to take – sometimes these things would crank for days in terms of getting results.

But with high performance computing and actually some really, really significant things we've done in terms of high performance computing and performance overall, being able to take things that might have cranked for a day, and now allow somebody to get things in a matter of minutes.

Well if you do that – it's not like I do a run, I go home at night, let it crank, come back the next morning and each cycle takes a day. If you're taking like 10 minutes or something like that, you can actually go through a number of progressive things.

Likewise I'd say that – on one of the earlier questions, we talked about what we were doing in terms of actually continuing to drive multi-physics. I mentioned the chip packet system. Well it used to be that a lot of these things were done sequentially by different groups using different mathematics. It had to be massaged and go together.

And sometimes the workflow is just making it to the point where you don't have to have the equivalent of 30 adapter cables when you're hooking up some kind of an electronics system and being able to go – you'll go through all of those things. So that's – if you look at, that's really been some of the major portion of that going forward.

So again performance, ease of use, and actually getting these work flows compressed. But even once you do that, as soon as you say well I've got multiple groups working together, now you have to also contend with the fact of, hey, there's organizational resistance to change.

And there's also some things that companies have to do to get repeatable processes in and of their own capabilities. And that's one reason why I'd say the final thing has been related to – we've talked about the – basically the customization tool kits that we had invoked in there.

And we've been able to proliferate those across a lot broader range of products, which allow individual companies to take pretty strong generic software and now tailor it to something that they can create as repeatable processes. Those are probably the major things that I think are particularly significant.

But on top of it I mean there's – in every one of our individual products, there's been a number of individual things. We'll get into it a little bit at Investor Day coming up.

And there's some pretty good information on the website along with some – actually some customer testimonials, because when they actually come through and see – say they saw these measurement things, it probably means a lot more than our – what our technologists or media or anybody inside ANSYS is talking about.

That's really where the proof points are..

Okay. Thank you..

And ladies and gentlemen, we have reached the end of the allotted time for today's question-and-answer session. At this point I would like to turn the conference call back over to Mr. Cashman for any closing remarks..

Oh okay. So well thanks, everybody, for the questions. And to recap basically, I'd say first, continued good diversified financial performance of most the major parameters of the business, even in light of the current environment and hazy build visibility. Secondly, sustained customer interest that is marked by activity on a broad front.

And I think that's evidenced – I mean we talked about it on some of the questions here with the industries, geographies. And I'd also mention the commitment levels and renewal rates, even while customers are going through a lot of additional discretion in terms of what they're doing.

Obviously the last question we talked about, the rapidly expanding product portfolio that we continue to augment with a range of partnerships and relationships. Not only on the technology side, but also in distribution and customers.

And I'd say maybe most importantly is over the long term, we've demonstrated an ability to grow the revenue in line with our range of guidance. And we still maintain the solid margins and delivered earnings growth in a range of economic situations. So a testament to the business model. So basically the long-term outlook stays bullish.

And basically to map this out it means first, the long-term premise and opportunity are still there. And we still have the best technology and the team to meet those.

Secondly, even at the floor of our assumptions, we continue to have solid business with good returning revenues, marquee customer relationships, and all of these combine for good earnings and cash flow.

So we'll be focusing on maintaining strong operating margins in the upper 40s%, while continuing to build our annuity base of recurring revenues, and expanding at the maximum rate allowed by the macro market conditions. And then lastly, we – as Maria mentioned, we have a very strong balance sheet.

It affords us a maximum flexibility should opportunities present themselves or should the macro economy even deteriorate further than some people are projecting. So we've seen over the years that the continued revenue performance creates upside margins.

But that the revenue performance – and again it's only sustainable with continued product and business investments. So we remain committed to that. So in close, the emphasis is going to be a continued focus on execution, continued technological leadership, and basically supported by our 45 plus years of history.

The customer acceptance of the existing vision is – and unique value proposition, the expansion of our product portfolio and through ANSYS 17, it really only bolsters our long-term enthusiasm. So I'd like to say thanks to our customers. I'd like to say thanks to my ANSYS colleagues and our long-standing partners.

And thanks to all of you for joining us today. And we'll be talking to you again in a few months..

Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending. You may now disconnect your telephone lines..