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

Anil Kumar Doradla - William Blair & Co. LLC Jay Vleeschhouwer - Griffin Securities, Inc. Saket Kalia - Barclays Capital, Inc. Jason A. Rodgers - Great Lakes Review Sterling Auty - JPMorgan Securities LLC Steve M. Ashley - Robert W. Baird & Co., Inc. (Broker) Steve R. Koenig - Wedbush Securities, Inc. Mark W. Schappel - The Benchmark Co.

LLC Ross MacMillan - RBC Capital Markets LLC Erik Karlsson - Bodenholm Capital AB.

Welcome to the ANSYS First Quarter 2016 Earnings Conference Call. With us today are Jim Cashman, President and Chief Executive Officer, and Maria Shields, Chief Financial Officer. At this time I'd like to turn the conference call over to Mr. Jim Cashman, for some opening remarks..

Thanks, Robert. Good morning and thank you, everyone, for joining us to discuss our first quarter financial results. But before we get started I'm going to introduce Maria Shields, our CFO, and she'll take us through our Safe Harbor statement.

Maria?.

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

They contain all the key financial information and the supporting data relative to Q1 business results as well as our current Q2 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. In the course of this call and in the prepared remarks we will be making reference to non-GAAP financial measures.

Discussions of various items that are excluded and a full reconciliation of GAAP to comparable non-GAAP financial matters are included in this morning's earnings release materials and related form 8-K. So, Jim, I will now turn the call back over to you..

Okay. Thanks, Maria. I'd like to start with a recap of the results the ANSYS team achieved in the first quarter. Q1 was a solid quarter on many fronts as highlighted by strong earnings, a record deferred revenue and backlog balance of over $506 million, non-GAAP operating margin of 46%, and strong cash flows of $109 million.

Our non-GAAP revenue growth for the quarter was 5%, driven by 5% growth in North America off a strong comparable, 6% growth in Asia-Pac, and 5% in Europe, all in constant currency.

Our recurring revenue for the quarter was at 78% and growth came from a broad base of industries and these are highlighted in more detail within this quarter's prepared remarks. Our reported revenue was within our guidance range and we achieved non-GAAP EPS of $0.77 in the first quarter, at the high end of our range.

Now I just want to comment that this is both a testament to the strength of the ANSYS business model and the ongoing spending discipline of the team. We've demonstrated over many years our ability to balance the need to continue to invest in the business while also being aware of the business environment that we are all operating in.

We also continued returning capital to our shareholders through share repurchases. During Q1 we repurchased 500,000 shares, leaving 4.5 million shares in our authorized pool as of March 31.

While our primary use of excess capital is for acquisitions, we remain committed to returning capital to our shareholders while simultaneously growing our top line. Operational highlights in the first quarter included 22 customer orders in excess of $1 million.

These orders included a $10 million enterprise license agreement with one of our long-standing industrial equipment customers. This deal is yet another validation of the evolving licensing and usage trends we're seeing within our broad customer base.

More importantly, it represents the single largest displacement of a competitor's mechanical code in our history. Now, as we've been highlighting on the past several calls, during the first quarter we continued to see ongoing challenges in the semiconductor industry.

While we have not lost any business, we did see a combination of new and renewal business that slipped from Q1 into Q1 and Q3. While ANSYS and our customers continue to work our way through the evolving dynamics of this industry, there were some bright spots and I'd like to take some time to highlight those.

First, we saw important competitive wins in Europe. Second, we are also seeing new market opportunities that were secured in data center markets for early power modeling and reliability analysis.

And then finally, through our long-standing partnership with TSMC, we have strengthened our leadership in next-generation technology and this includes a range of things like 7 nanometer design starts, 10 nanometer FinFET production and new packaging technology that will be critical for our key semiconductor customers.

In addition to these developments, I'm also pleased to report that we added over 300 new company logos to the roster of ANSYS customers during the first quarter. Now as you know, ANSYS has a long history of retaining and growing our relationships with customers for literally decades.

This is evidenced by our recurring revenues and new logos are key elements of our longer-term growth potentials. They complement our solid customer base and represent all major verticals with particular strength in sales to new companies in the electronics, industrial equipment, automotive and energy sectors.

On the R&D side, as you know, during Q1 we released ANSYS 17.0, delivering major enhancements across ANSYS's entire portfolio and we have yet another release planned in the very near future. So stay tuned for additional announcements and updates on that front.

And now for the last few quarters we've been talking about a systematic approach toward evolving ANSYS for accelerated growth, including increasing our direct sales capacity. While we've made progress on many fronts, our performance is not at the level we had planned.

Despite the reality of growth challenges that both we and our customers are working our way through, we're focused on a variety of initiatives to drive that growth and attain the long-term goals that we have set for ourselves. So, without a doubt, the major push for us right now is the generation of top line growth.

To be very clear, all the major themes that we have mentioned on recent calls are still very much in play. We're still adding both an increased number of users and new logos.

The penetration rates for total users is low, which bodes very well for us in the long-term, but it is still dependent on multi-year investments and usability and, by the way, without comprise in product capabilities. Our recent sales capacity increase has been enacted and now the focus is the maturation of that investment into productive results.

We have had initial success with our enterprise agreements but, with the increasing size and new arrangement of those agreements, longer sales cycles have been observed. Now, we've also benefited from an increase in competitive displacements, which are typically pretty rare in our industry.

And the new customer pipeline has been expanding, but they are also subject to slower sales cycles and ramp-up times. So, these positive long-term factors are balanced by some short-term realities that are beyond the typical macro and industry and currency turbulence.

Notably, there is an evolution in the manner in which companies are choosing to acquire software. So, for example, we've talked over the past few calls as to the fact that there are some shifts from perpetual to time-based or leased licenses. But it's really too early to discern if this is a broad-based trend or not.

Secondarily, new procurement options related to cloud computing have been introduced, and they're getting interest and attention based on the success of other basic IT software in the industry. Now, it's not taken serious hold as of yet, but many of our major customers are doing economic evaluations of the alternatives.

This is extending purchase cycles, as these decisions now entail both the R&D and the IT organizations within our customers to be aligned in the decision process. So in summary, as we move forward, we have a number of explicit goals. First and foremost, our initiatives to reinvigorate sales and top line growth.

Second, we remain absolutely focused on generating substantial operating cash flow, reinvesting in our business, looking for acquisitions that accelerate the company's strategy, and returning capital to our shareholders.

And third, we'll remain at the forefront of technology development to further the competitive advantage that we possess, that are necessary for us to harvest the opportunities that we see over the long term.

So with that, I'll now turn it back to Maria to discuss our Q1 results in a little more detail, as well as our Q2 and full-year outlook, before we move into Q&A..

Okay. Thanks, Jim. Morning, everyone. As Jim highlighted in his remarks, our results for the first quarter reflect continued solid performance on many fronts, albeit not the higher end of the sales and revenue growth expectations that we targeted in our original Q1 outlook.

As you may recall, when we last reported our year end results back in February, I highlighted in my comments that we were facing a macro environment that was presenting challenges for both ANSYS and our customers.

And the reality is that our concerns around slow growth in certain geographies and extended customer procurement cycles continued to play out as we closed out the first quarter.

I am pleased to note that we continued to deliver a strong operating margin of 46% for the quarter, above the 45% that we had guided, and non-GAAP EPS of $0.77 per share, which was also at the high end of our expectations. Both of these were driven by our continued rigor around the management of expenses in a challenging environment.

Currency continued to be a headwind in the first quarter, with a negative $4 million impact on revenue and $3 million at the operating income line.

As we look out towards Q2 and the balance of the year, we're continuing to target a gross profit margin of 88% to 89%, and operating margins 46.5% to 47.5% for the second quarter, and 47% to 48% for the full year. I also want to provide some commentary around the tax rate for Q2 in 2016, very much in line with what we have been guiding.

We did see an uptick in our Q1 tax rate to 34%, largely as the result of an expiration of a prior tax benefit, and also impacted by a late Q1 rate change in Japan. Looking ahead into Q2, we expect a decline in the rate to 31% to 32% as a result of some one-time tax benefits. This will be the lowest rates that we expect to see in the 2016 quarters.

And for the remaining quarters, we're forecasting 33.5% to 34.5%, and for the full year, a rate of 33% to 34%.

We ended the quarter with cash and short-term investments of $864 million and capital expenditures for the first quarter totaled $2.7 million, and we're currently planning total capital spending of approximately $17 million to $22 million for 2016.

As we outlined in this morning's press release, we have initiated our outlook for Q2 with non-GAAP revenue in the range of $240 million to $248 million, and non-GAAP diluted EPS in the range of $0.86 to $0.90.

With respect to fiscal year 2016, we are revising our previous outlook for the full year to reflect the slower growth in perpetual licenses we experienced in Q1 and foresee continuing into the second quarter. We've also factored in a slightly increased tax rate and updates in our currency assumptions.

Those updates translate to our revised outlook of non-GAAP revenue in the range of $990 million to $1.2 billion, and non-GAAP EPS of $3.48 to $3.62.

Our guidance also takes into consideration reduced revenue projection and a tax rate increase of 1%, primarily due to the recently proposed IRS regulations intended to reduce inversions which we are projecting to adversely impact EPS by $0.02 to $0.04.

From a qualitative perspective, we're assuming no significant changes either way in the overall macro climate through the end of the year.

We also see sales and revenue growth rates ramping up as the second half of the year progresses, particularly as the new sales heads continue to increase their productivity rates and the deals which are in the pipeline for the second half continue to mature and begin closing.

I would like to take a moment to take this opportunity to personally invite you to the June 2 Investor Day event.

We have a full day planned, including a roster of industry experts and some of our key customers to share their insights with you in addition to presentations by our management team on our current and longer-term strategy and we hope to see you there. So with that, operator, we can now open up the phone lines to begin some questions..

The first question comes from Anil Doradla from William Blair and Company. Go ahead..

Hey, guys. A couple of questions. Jim, you talked about the semiconductor industry and some of the moving parts there. Obviously there's some consolidation going on. But these consolidation trends will continue to persist.

So, given the significant exposure that you have with some of these industries, how do you look at 2016? Does your guidance bake into account continued issues with some of these consolidations going on or do you expect some kind of snap-back in some of these areas? And I have a couple of follow-ups..

No, for this particular example, we're continuing to assume that the semiconductor industry will continue through these patterns, albeit we are involved in some very interesting advanced R&D activity for – in preparation for as they launch out of this.

But as that will continue on for the next few months, it will then take time for the sales cycles to kick back in and for companies to take stock of what their post-consolidation requirements are..

Switching gears, you've got ANSYS 17.0, AIM was out there, 16.0 obviously last year. Can you talk to us a little bit about the pricing environment? Do you have some pricing power or the macro issues are hurting you on that front? Any commentary would be helpful..

Well the pricing power, in terms of being able to defend the very strong referring base continues very strong and that's based on long-term trajectory with our customers. That being said, with the macro environment the way it is and you see it every day, some of the statements and some of the softening in different parts of the global market.

We do see there are pressures on customers. So, there are the additional cost sensitivities that we're seeing out there. But again, nothing like we saw like five years ago..

Okay. Jim, finally, big picture when you step back and look at the trends last, call it, couple of years, from a growth point of view, obviously you were not double-digit grower, granted you've got some strong impacts on FX.

But you have embarked upon a very transformative set of initiatives, whether it's sales force, whether it's cloud initiatives, whether it's pricing.

How would you address some of the concerns with some segments of the investment community that ANSYS is perhaps maybe saturating, struggling for growth, struggling to get back into the double digits because clearly the numbers in near term are pointing more towards that trend..

Well, first and foremost, I'd say that all the tenets that we talked about for the long-term are still pretty much in play. Actually, I wouldn't say pretty much, very much in play. Now, the question is as you look at some of these long-term initiatives, you look at the impact of cloud computing.

It is going to play a factor in our market over the next 5 years to 10 years. Various people have posited all sorts of different lengths of that. It's going to play a role right now but companies are starting to shift and evaluate that right now.

That is part of the evaluation cycles that we're seeing now are companies are trying to refactor the way that they may even equip their overall compute environments. So we continue to see those things going on. Third of all, the macro is pretty evident but if you look at the totality of things, we are winning more than our share of those.

Our comparable growth rates are strong and, like I mentioned, it's a little bit rare but normally you don't see the kind of competitive displacements that we've been involved in.

That being said, I would say that what we're seeing right now is that we're seeing much more movement out of the higher end accounts that we have which is not too surprising because they tend to be more resilient in a tougher macro and they tend to be more advanced along the maturation of adoption curve so they can tend to make those things up.

All of those factors are going on but the trend line still for the long term point to basically the basic theses that we've been talking about for a couple of years now..

Great. Thanks a lot, guys..

The next question comes from Jay Vleeschhouwer of Griffin Securities..

Thank you. Good morning, Jim and Maria..

Good morning, Jay..

Morning. Two quick clarifications for you, Maria. One, do you have an updated operating cash flow guidance number for the year? And then, secondly, your SG&A number was up only $1 million year-over-year.

And I'm wondering if perhaps the year-over-year increases in SG&A might begin to get larger than that, particularly having grown your direct sales force (19:41)..

Okay. So, first of all, Jay, on the operating cash flows, we are projecting currently $350 million to $375 million for 2016. On the SG&A front, or G&A, yes, G&A we continue to get some of the efficiencies from automation.

We have traditionally done as much as we can, particularly post acquisitions, to leverage the infrastructure that we already have so that G&A does not have to continue at the same pace as sales and marketing and R&D.

One of the major things that we're doing this year relative to scalability and efficiency, not only on the G&A side of the house but in the, I'll call it, sales operations is a significant investment in updating our global CRM system.

I think you will continue to see us push efficiency in the G&A model so that the profitability can be invested in both the R&D and the sales marketing engines..

All right.

For Jim, with regard to your pipeline, could you give us your thoughts on some of the specific verticals that comprise the pipeline? In other words, how are you thinking about the contribution from, let's say, auto, aero (21:12) and the like and to what extent does the pipeline including an assumption of further displacements of the kind that you talked about?.

Well, first of all, I'll take the – we never take displacements for granted because this industry tends to be very sticky. I mean, that's one of our good defensive moats but it also tends to prevail. So I'm saying that these happen in significant things and they are normally not done in wholesale movement.

They're typically done as part of major long-term commitments. You'll see that with a handful of very big accounts as opposed to an overall covering. Now with regard to your industry question.

As we mentioned, we already discussed the semiconductor industry which long-term will continue to be good for us but over the short term we talked about the issues there.

If you see the couple of areas that are probably most notable, if you look at the, and we try to track the trailing 12 months so we just don't get – even out some of the spikes here. But we continue to see good growth in the automotive industry. A lot of that is related to efficiency.

A lot of it's related to electrification and even some of the things moving into some advanced topics like autonomous driving and collision avoidance type of systems. A second area which might be a little bit counterintuitive is in the industrial equipment sector.

However I want to highlight that that was also perturbed by one or two particularly large deals. And why I say it's counterintuitive is that sometimes when the commodity and construction in those areas might be a little bit down you might expect that to go down but we're seeing that there's a major push in those. Those are probably the two major ones.

I'd probably say that the aerospace is actually staying pretty steady at a comparable rate..

Okay.

Lastly, if I may, what is it that's making your competitors, perhaps one competitor in particular, incrementally susceptible here to being displaced? Is it just raw functionality in terms of simulation speed, or perhaps, are there other issues going on?.

Well, I think – and keep in mind, a lot of these products out there, they're commendable working products.

But what we do see, particularly in our lead customers, are that products that maybe over the years were bought as individual productivity tools are now being viewed by R&D management and IT industries (23:52) as being part of an overall portfolio and, therefore, having systems of software that perform admirably, but also link with one another.

It's very much akin to when companies have individual business systems that popped up in different parts of the business, then all of a sudden now they want those to link together. I really think the portfolio and platform have been the driving factor in all of these enterprise license agreements.

A single physics, or even having a couple of them, really isn't enough to move the dial. Once you've covered (24:25) the entire expanse, that seems to be the thing that – well, that's been evident in every one that we've seen so far..

Thanks very much..

Thank you..

The next question comes from Saket Kalia of Barclays. Go ahead..

Hey, guys. Morning.

How you doing?.

Hello, Saket..

Thanks for taking my questions here. Just one question and one follow-up. First, Maria, can you just talk about what bookings grew on an organic constant currency basis? It sounds like more perpetual license dollars are shifting to other models, and therefore ratable rev rec, but (25:07-25:10).

Wasn't sure if there was something else to account for when looking at deferred and backlog..

Yes, so, Saket, if you just do the math from your visibility to the numbers, it will appear that bookings were negative in constant currency. However, there're two things that play a role that, when we dissect numbers, you have to factor in.

One is, in Q4 of this past year, we had about $6 million to $7 million in orders that were renewal orders that had Q1 start dates that got booked in Q4. That had about a negative 3% impact, is what we're estimating.

And also, if you heard Jim's dialogue, in his talking points, the semiconductor deals from the traditional Apache part of the business that slipped out of Q1 into Q2 and Q3, we have not lost those deals, but they are taking longer to close, is about a negative 2% impact.

So if you take those two factors, that would suggest that bookings growth for first quarter was relatively flat..

Very helpful. Then, maybe a little bit more strategic for you, Jim. Jim, you talked about cloud computing impacting the industry.

Can you just talk about what sort of growth you've seen in some of your cloud simulation products, and are you starting to see maybe some of the traditional lease and perpetual business shift towards those sort of form factors, and potentially having an impact on revenue as well?.

Currently, we have not seen a shift in revenues.

What we have seen is a lot of disruption and focusing of activity on the evaluation of them, because what people are doing now is saying, well, if I utilize cloud with this kind of a hardware infrastructure, versus my traditional one, how do the economics play off? And in reality, there's a lot of data that's been generated for the typical kind of business application, the scatter-gather kind of thing.

But the highly compute intensive environments in which we work in, there really aren't a lot of metrics there. So, while we think it is going to be very big, it could be several years before we start to see that transfer of the internal utilization preferences. But the fact is, customers are looking at it right now.

In fact, virtually every engagement that we have right now on cloud is with existing customers who are doing this as a sidelight comparison. So that's really not too surprising. In fact, their typical term is proof of concept. That's the way that they're viewing it.

That being said, we really haven't expended any useless energy, because it's going to play a role in the future, but the same architecture that we built to work within our customers' compute environments from a high-performance computing standpoint, it's the exact same architecture that we're utilizing here.

So, all this is, is a way of extending this into increasing the availability of access of our software. But I wouldn't expect anything super meaningful in the next year or two, in terms of ramp-up, particularly compared against our billion-dollar base..

Got it. Very helpful. That's it for me, guys. Thanks..

Okay. Thank you..

The next question comes from Jason Rodgers of Great Lakes Review..

Yes, just had a question on the new pay-per-use license.

Is it a risk with the current lease and paid-up customers that it might be more cost effective in the future to switch to an elastic license or do you see the pay-per-use as purely additive to your business?.

We view it largely – I mean, there may be some shifts of buying preferences across there as people get involved with it but it's basically going to be a net add to what we're doing based on the way that the pricing is done. And primarily, essentially what you will be trading off is the flexibility to pay for what you use.

But that flexibility has a certain economics associated with it also. So I think in general, what the main tenet is going to be is people that might have not jumped in and bought an entire cadre of software now will be able to step in and do their own proof of concepts and their own usage until they build up that ramping.

So really what it does is, it's really lowered that first step on the staircase to overall utilization and makes it easy for people to take that first step..

Okay. And just as a follow-up, the cash balance increased nicely in the quarter, and just wanted to get your latest thoughts on the share repurchase as well as any current M&A opportunities. Thanks..

investing in our business, continuing to look at a pipeline of M&A opportunities, as well as share repurchases. As you saw in Q1, we did repurchase 500,000 shares. Q1 is typically our shortest open window. But I think you will see us continue at a minimum to hold the share count flat throughout the course of the year.

And obviously, we will follow our traditional framework and be opportunistic around share repurchases depending on what's happening in the overall market..

Thank you..

The next question comes from Sterling Auty of JPMorgan. Go ahead..

Thanks. Hi, guys.

Wondering, when you look at the current environment and compare it to the last slowdown, obviously the last slowdown was major but one of the things you got huge kudos for was you didn't really invest heavily because it was pushing on the string in terms of trying to generate demand so you managed your margins and we saw those operating margins go into the 50%s.

What's different now? It seems like in this (31:51) environment, there's macro concerns and squishiness out there but this time around it seems like you're more focused on investing and pushing harder to try to generate the top line.

So, maybe help me compare and contrast to understand why it's better to invest this time around?.

Well, first of all where not necessarily of vesting across the board at all levels at that same rate. Second of all, this is not the same parameters that we were dealing with in 2009. There are some similarities but it's really no comparison. In 2009, it was really locked down.

So what you've seen, even in light of a macro environment where we are still outgrowing the market, what you're seeing is that we're still able to deliver the earnings results, the margins and everything else. So all we've done is we've just scaled, and that was one thing I tried to mention on our business model.

We're trying to scale the requirements such that we're still building for the long-term but we're also being very cognizant of the environment that we're operating in right now.

And what that means is, we may be more subdued in our spending, but we're still going to focus on building those key things that are going to be important to harvesting the opportunity that we see over the next 5 years to 10 years..

Got you. And then, on the lease versus perpetual and cloud models, listening to the commentary, it sounds very much like you're listening to the customers and waiting to see what the customer wants to do instead of maybe proactively working with the customers and trying to decide the direction they are headed and maybe help push that direction.

Meaning, we've watched Adobe and Autodesk and PTC and others move in that true subscription format.

What's the pros and cons to maybe just choosing that direction and moving more fully in that direction?.

Well, the first part is, of all the companies that have tried to force something, there are mixed results. There are some that, different industries have done pretty well. There are others that, let's just say that the results are remaining to be seen.

Now we are, make no mistake, we are engaging with our customers in terms of understanding their preferences and trying to accommodate the best procurement matters for them. But keep in mind we've got almost 50,000 customers.

With that in mind we want to make sure that we don't, for instance, come up with the perfect model for, let's say, the top 10% and all of a sudden create a barrier to people getting involved at the lower level.

So, we, at this early stage of adoption of our technology, we want to make sure that we've got multiple ways to fit the way people are naturally going to want to acquire software.

In fact, if you check, if you expand the sphere of other companies as you're looking out in the space, there are some that are even commenting on the fact and saying, well, they're going to go beyond there.

But you mentioned subscription model and the one thing I'd like to mention is that for decades we've had a model that had a very high subscription element to it and a very high part of repeat business. So, we already had factored that element in no matter which way someone might appear to acquire it..

Yeah, and one thing I would like to add to follow on to that point that Jim made is, when we look back, we've got 46 years of history that show when we have a flexible model for licensing and procurement that fits the needs of our customers, we have been able to increase customer lifetime value.

I think that 46 years of history is why we are doing what we're doing as opposed to doing a forced march because of the people think that that's the right answer..

Got it. Thank you..

Thank you..

The next question comes from Steve Ashley of Robert W. Baird & Company..

one, macro challenging; two, sales execution not where you wanted.

Is the change in the perpetual license expectation due more to the sales execution or to a change in macro?.

More macro, basically. I mean, there are elements of both because, as we mentioned, the maturation curve, we need it to be a little bit faster than it was. But it is the macro thing. I mean, you just, again, if you even read the news that's come out over the last three months.

I mean it's not that we're reading that news and adjusting, we are hearing from our customers things that echo what you are also reading in the broader news. So there are pockets in Asia that were typically much more robust 12 months ago. Now, a couple of those are tending to soften up. There's a lot of mixed bag in Europe, so we factored those in.

But, again, it's all driven out of the pipeline build, the forecast and the guidance going in. But as you say, it's a very modest – it's not much of a change, but we still want to reflect it in the things that we actually see..

And then your comment about direct sales productivity not exactly where you'd hoped it'd be at this point. And then I think Maria even mentioned in the guidance, the expectation to see some improvement or some productivity maturity at the second half of the year.

Can you talk a little bit about direct sales productivity, the concept of it's not exactly where we want.

Can you give us a little more color on that?.

Okay, well, the first thing you'd see is that at the upper accounts where we had the focus, we've got a very good coverage there. Now keep in mind, we did a couple of specific things. We took our more experienced sales reps and we put them into a named account realm.

I'm sorry, for recent listeners who may not know some of those terms, but essentially it was on focusing them on limited number of accounts such that they would actually spend their time doing more developmental activities as opposed to ad hoc responses. Now, those have started to ramp up in the next cadre.

However, it took those people time to evolve and cover those accounts. Now, in the territory basis then we had more of the new sales capacity put in there. And essentially, that is one that therefore needs to take a little bit more ramp-up and that is the area where we have seen the slowest uptake.

And you would expect a little bit more resistance in that given the fact that the macro headwinds are a little bit higher. So we think that it takes a little bit more time to ramp those up and basically those will key right at a handful of initiatives that I mentioned that we already have in place because that is a strong target area for us..

Perfect. Really helpful. Thank you..

The next question comes from Steve Koenig of Wedbush Securities..

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

Hi, Steve..

No problem. Good morning, Steve..

I guess for the first one, maybe cloud competing. So, to us, and I'm sure to you, simulation seems pretty ideal for cloud computing. And it sounds from your commentary as if customers are needing to consider this and that that consideration could in fact be impacting your sales cycles in some cases.

I'm just wondering, what are the issues – you clearly have the vision for where you want to go in cloud, but what are the issues on ANSYS executing on this vision that could inhibit you from moving more quickly to address those customer needs that may be already impacting sales cycles?.

Well, you're absolutely right, cloud computing does fit this model in the long term very well. And for the very reason that it implies virtually infinite computing, however, therein also lies the issues that customers are looking at. Because infinite computing can cost – even if it's more economic, it can cost infinite dollars.

And as a result, what they don't want to do is, for instance, open up the tap and leave the water running and then all of a sudden find out that they've gotten caught in a very difficult economic model. That is the reason, as I mentioned, for the economic evaluations and proof-of-concepts that are going on right now.

Now, this really is not fundamentally different than what they always did when they were building their internal clouds. And, in general, that's why a lot of people didn't have 100,000 node clusters because, well, they don't need it most of the time, so they are not going to invest to have one sitting around.

So, we also think that being able to look at that model, of how people do that internal, and buy what they normally would, but now have the access to scale up on those periodic bases when they need a full scale simulation.

But, given the fact that there isn't a body of history on this, and that people are very cognizant of budgets right now, that is what's driving the overall issue.

Now, on top of it, it used to be that R&D would decide, okay, I'm going to buy this computer and as long as IT says, yes, this is an okay computer, then the purchase was relatively an R&D expenditure.

We find, as the cloud and the larger scale computing comes in, R&D has to do it, but in addition, IT has to also really sanction and bring it into play. Actually make it usable, take care of cybersecurity concerns that weren't there before, all the budgetary concerns, and things like that.

And the expansionary opportunities of that model are what also drives the complexity and uncertainty that's causing these extended evaluation cycles right now..

Okay. Thanks for that, Jim. Then for the follow-up. Maria, you explained what your priorities were in terms of use of cash. So, my question really is a follow-up. I want to just ask why.

So, why not use the balance sheet and free cash flow generation more aggressively to return cash to shareholders, beyond the opportunistic approach that you've been taking?.

Well, Steve, if you look back, our ability to return value to our stockholders, the greatest value has been created through the M&A that we've done over the past two decades. And so, there are opportunities for us to continue to accelerate our longer term strategy and our customer adoption model with our customers, through M&A.

So we want to make sure that we balance and prioritize where we think the greatest opportunity to return value to our shareholders is..

Okay. Thanks, Maria. Thank you very much..

The next question comes from Mark Schappel of Benchmark. Go ahead..

Hi. Good morning..

Good morning, Mark..

Good morning. So, most of my questions have been answered, but I do have one regarding the large deal. And Jim, let me just start off and say, I agree with your comments that competitive displacements like this are a rarity in the engineering tools industry.

But I was just wondering if you could just give us some details around that $10 million deal, such as why this particular customer decided to actually boot out the incumbent, instead of just layering ANSYS of top of what they already have?.

Well, I think the first part is, you have to have requisite capabilities, and normally for people to shift, you have to have additional capabilities over and above. But as I mentioned, the portfolio, there are a couple of elements, one of which – using moving to a broader usage pattern.

Second of all was also being able to use a broader usage pattern in terms of users, I'm sorry. And then, broader usage in terms of the span of products there, in some of the portfolio aspect.

So, again, superior capabilities and superior breadth in terms of that, plus a platform running on those, it just turns out, from a long-term perspective, if you're building a long-term strategy for simulation adoption, this currently has a much better survivability curve..

Great. Thank you..

The next question comes from Ross MacMillan of RBC Capital Markets..

Thanks a lot. And apologies for the background noise. Maybe we can start with revenue growth of 5% constant currency year over year.

If you could isolate and exclude the drag from your semiconductor business, what do you think the underlying growth rate is?.

Well, sorry if you see the – the semiconductor market for us grew at a low single-digit amount. So, given the fact that it's a fair amount of our business, mathematically it had probably a 1% (46:21) drag associated with that. Again, being short-term one, as we said, we don't think it's a fundamental one..

Ross, just one point to add on to that. One of the things that we are seeing is, China was a very bright spot for us in the quarter. And, one of the bright spots around China is the government's push in the semiconductor industry.

As a result of that, we are seeing benefits from our portfolio of solutions that we've got for semis, as the Chinese government makes a push into that. So while there were some dampening effects from continued consolidation, we are seeing some positive aspects of portfolio in China from semis..

That's helpful. Just a couple of quick follow-ups.

Have you made any changes to your head count growth plans for the year?.

No..

And just curious on the competitive environment. We saw CD-adapco got bought by Siemens earlier this year.

I was just curious any changes that you see in the market post that acquisition?.

At this point in time, no, but keep in mind that I don't think that's closed.

Maria, add anything?.

I don't think that's closed. I think they announced the acquisition..

We really haven't seen an impact one way or the other on that currently. But no, it's not been a factor..

Okay. Okay, that's helpful. Very last one, just can you give me the impact for deferred revenue, sequential impact from foreign exchange? Thanks so much..

Yes, hold on, Ross. Negative $5.1 million..

Great. Thank you so much..

The next question comes from Erik Karlsson of Bodenholm Capital. Go ahead..

Thanks for taking my question.

The extended decision cycle you're seeing among your customers, if that were to become a bigger (49:06) and more prolonged, should we expect to take a little bit longer time for you to return to the long-term growth targets you have?.

Well, yes, it is now. We see the – first of all, in the first iteration of somebody moving to an enterprise license agreement, that type of assumption, it's the first one that takes the time. Thereafter, it then tends to ramp up.

Sometimes it can get into several months when you talking about the dollars and you're talking about the legal agreements and understanding all the terms going in there. So we'll see that. That's usually a cost of switching the kind of arrangement that's felt in the first iteration and then isn't felt in the outlying years.

The second part is we also mentioned the addition of the new logos. Now, the new logos, that's a real good thing for us because we have a pretty good track record of continuing to build off of those and retaining those customers.

However, whenever a customer takes that first step into simulation, they normally take a little bit longer to absorb it also. So you'll see at both ends of the curve that just from the procurement differences that the sales cycles are lengthening out.

I am saying that's in addition to the overall effect you might see from the macros that can go up or down at any given period of time..

Great.

And just to follow up on that, if these behaviors prevail, do you still think you can return to the growth rate you are targeting in the next couple of years?.

Well, yeah. When you stretch out the time, yes. The thing is that even if these behaviors persist, we would expect that the low-end customers will have that normal digestion process for their first iteration of software.

However, as we get more and more customers on the enterprise license agreement, we've already cover that first cost of getting them on. But as we mentioned, it's getting those added on is a several-year process. It just tends to taper off and build over time. But once you hit steady state, you're really past that large-end digestion problem..

Okay. Thank you very much..

The next question comes from Sterling Auty of JPMorgan..

Hey, guys. I'm back. I'm going to ask a question that's high-level, qualitative and tough to answer.

But I'm getting hit with a question from investors and I've got the same question myself, which is not given all the comments around the macro and the shifts, etcetera, what have you factored in to this new guidance? Meaning, how much of additional macro sluggishness can we see before there may need to be an additional cut? So did you cut with a chainsaw or did you cut with a scalpel?.

I'm not sure. We did not cut with a chainsaw, Sterling. What we did was took a look, as I said in my comments. One, we are at this point factoring in no economic improvement through the remainder of the year. So we expect the same kind of headwinds that we've been facing. We will see (52:35) upticks in oil and gas happening anytime soon.

So our business in parts of Europe, in Brazil, in Southwest, in Canada will continue to be unfortunately negatively impacted by that factor. We have factored in the pipeline that we see of those larger accounts in the second half that are currently being worked now largely (53:00) in North America with a handful in Europe.

And we've also factored in some of the softness in some of the parts of Asia. So we have tried to take a conservative view on our business for the remainder of the year so that we don't have to repeat this going forward..

Perfect. Thank you..

This concludes our question-and-answer session. I would like to turn the conference back over to Jim Cashman for closing remarks..

Okay, thanks, Robert, and thanks everybody on the call. So I'd actually like to thank all of you for your participation on our call today and for the continuing following and support of ANSYS.

And I'd also like to thank the entire ANSYS team by the way for their dedication in Q1 and the continued commitment to driving the results that we've been talking about. So, bottom line is that we believe that we're well-positioned to drive growth and achieve our goals. So basically we have an unparalleled product offering.

We've got extraordinary longevity with our customers. We've got extremely high recurring revenues and the opportunity to augment our growth through new product features and exciting technologies from acquisition.

So, we're committed to driving revenue and earnings growth, but also keeping that operating cash flow and significant returns for our stockholders. So I thank all of you very much and we will catch you no later than at the next quarterly call..

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..