James Cashman - President, Chief Executive Officer Maria Shields - Chief Financial Officer & VP of Administration.

Anil Kumar Doradla - William Blair Jason A. Rodgers - Great Lakes Review Monika Garg - Pacific Crest Securities Jay Vleeschhouwer - Griffin Securities Saket Kalia - Barclays Capital Steve M. Ashley - Robert Baird Steve R. Koenig - Wedbush Securities Shateel Alam - Goldman Sachs.

Good morning, and welcome to the ANSYS Quarter Two 2016 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please note that this event is being recorded.

With us on the call today are Jim Cashman, CEO and President, and Maria Shields, Chief Financial Officer. I would now like to turn the conference over to Jim Cashman, President and CEO. Please go ahead..

Okay. Thank you. Good morning and thanks to everyone for joining us to discuss our second quarter and first half of 2016 financial results. But of course before we get started I will introduce Maria Shields, our CFO, for our Safe Harbor statement.

Maria?.

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

They contain all of the key financial information and supportive data relative to Q2 and the first half 2016 business results as well as our current Q3 and fiscal year 2016 outlook and the key underlying assumptions.

I’d also 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 related Form 8-K. So Jim, I will now turn it over to you..

Okay, thanks, Maria. Well, first, I would like to start with a recap of the results that the ANSYS team achieved in Q2. Basically, the quick headline is that all of our recent communications on performance metrics, including at our last Investor Day, they are track or even ahead of projections.

So as you may recall from our Q1 earnings call and from the Investor Day in early June, we laid out a number of key financial and operational objectives for Q2.

These included, first, achieving non-GAAP revenue in the range of $240 million to $248 million; secondly, achieving strong margins and earnings per share; three, high rates of recurring revenue; fourth, continued growth in both deferred revenue and backlog; and then finally, an improvement in our direct sales and channel productivity, particularly in those areas where we have ramped up the new sales hires.

And I am encouraged to say that we did, in fact, deliver on every one of these goals in the second quarter. So specifically, first, our non-GAAP revenue for the quarter was $246.1 million, in the upper half of our range.

Our revenue growth was led by solid sales execution, particularly in Germany and Japan, which reported, let’s see, 12% and 9%, respectively, growth in constant currency, as well as in China, which was actually our fastest growing of the larger markets. Now this in turn was offset by the UK and France, which were the softer performing parts of Europe.

Our overall revenue growth was also suppressed in the short term for the quarter by a shift away from perpetual licenses to leased licenses whereby the revenue is spread ratably over the term of the contract. But this shift also contributed to the record deferred revenue and backlog. And we will talk about that in a few minutes.

Now this shift was particularly true in the more mature markets like the U.S. and Japan. So notably growth came across a broad base of industries, including aerospace and defense, electronics and automotive.

And all of these are actually highlighted in more detail in this quarter’s prepared remarks, which are posted on the website so you can check into that if you haven’t already. Okay, secondly, non-GAAP EPS in Q2 was $0.93, which is actually above the high end of our guidance range.

The 2016 second quarter and year-to-date results included approximately $2.4 million, or about $0.03 per share, related to incremental tax benefits that were associated with some end of the structuring and related repatriation activities that were not included on our previous guidance.

Our non-GAAP operating margin was 47%, well within the projected margin range. Okay, so now if we dig into just highlights, operational highlights in the first quarter included, well, 31 customers’ orders in excess of $1 million.

This is inclusive of the five enterprise agreements, actually one of which was in excess of $16 million with one of our long-standing aero and defense customers. So through the first half we’ve now closed eight enterprise agreements and we continue to build a solid pipeline for the second half.

This should put us in good position to achieve our target of around 15 of these deals by the end of 2016. In particular, these deals are a validation of the evolving licensing and increasing usage trends that we are seeing within some of our largest and most long-standing in terms of time customers.

They tend to be very similar to Cummins and P&G, customer stories that were actually highlighted if you attended our Investor Day in June. In addition, I am actually pleased to report that in addition to those long-standing customers that we also added over 350 new company logos to the roster of ANSYS customers during our second quarter.

It’s really important because ANSYS really has a long history of retaining and growing our relationships with customers for, well, basically literally decades. This remains true today in our recurring revenue as I think are demonstrative of that success. These new logos complement our solid customer base.

And basically, they represent all major verticals, but I’d say there was a particular strength in sales to new companies, particularly in the sectors like, let’s see, electronics, industrial equipment, automotive and the material and chemical processing areas. Okay. Our recurring revenue for the quarter was 74%.

And our deferred revenue and backlog as of June 30 was at a record-high $524 million. So I guess overall the second quarter results, they reflect a mixed bag of pluses and minuses. Most importantly, we saw improved execution in targeted areas of our business, while we also saw the continuation of softness in certain markets and parts of the channel.

In addition, we see the same ongoing geopolitical tensions that we highlighted last quarter and everybody is seeing. They maybe got a tweak worse in the short term as a result of things like the recent Brexit vote and some of the other activities going on around the globe.

So on the technical side during Q2 we also released the latest ground-breaking version of our software, ANSYS 17.1. In this we also launched our new ANSYS SeaScape platform and our SeaHawk solution. And both of these are spelled out in more detail in separate releases you can find on our website.

But the key of these is that they leverage the power of really what are ANSYS-proven technologies for low-power designs, but it also combines them with Big Data analytics, and taking techniques that are useful in all forms of high-performance computing, such as Big Data, MapReduce, Hadoop and machine learning, we’ve actually applied them to chip design.

So coupled with an open interface, we are able to do things that really are very revolutionary compared to the previous state of the art.

So basically what it does is it creates a system of aware chip flow and also a chip aware system flow that our customers can leverage the technology to predict expensive failures and optimize designs and innovate actually before volume production.

So enabling this faster design convergence is extending our leadership in this important and growing market.

I think the combination of advances of existing products such as chip package system and this next-generation innovation is what was really behind driving accelerated bookings growth in the first half of the year in our semiconductor business unit even amidst all the consolidations that we’ve talked about and heard about in the news.

And I would also say we are well-positioned to leverage these technologies to close deals that are filling up the pipeline in the second half. So now the one thing on the technology, as we’ve said a number of times and particularly in recent calls, we know we have to make our software easier to use to bridge now to a broader range of engineers.

For several decades we’ve had strong relationships with academia. But we have really taken it to another level recently with new initiatives. These include, I am thinking, including our campus-wide licensing, our student version of the software, which actually recently went over the hundred thousand-download mark.

And with massive online courses, or MOOCs, that actually one of - the largest ever with over 20,000 participants.

And then capped off by at our Investor Day on June 2 we also announced our new partnership with Carnegie Mellon University which basically includes an ANSYS simulation site to be built near the engineering - actually built on the engineering campus.

On top of that we also recently announced our University of Pittsburgh partnership whereby we actually jointly established and added a manufacturing lab to further education and research in next-generation manufacturing.

So I think the key of all this is we are moving into not just providing current technology to students but we are actually proactively teaming with world-renowned institutions to drive how tomorrow’s engineers are actually being prepared to tackle the challenges of the future.

And this is a really big part of pre-equipping an ever-expanding user community. So with that I’ll - those brief comments, I will actually turn it back over to Maria and she will discuss our Q3 and 2016 guidance and then we will move on to Q&A.

So, Maria?.

Okay. Thanks, Jim. So as we outlined in this morning’s press release, we’ve initiated our outlook for Q3 with non-GAAP revenue in the range of $244 million to $253 million and non-GAAP EPS in the range of $0.90 to $0.94.

With respect to our previous guidance for fiscal year 2016, we’ve tightened the revenue range and factored in Q2 EPS outperformance as well as incremental tax benefits in the second half that we believe now are more likely to occur.

So this translates to our updated outlook of non-GAAP revenue in the range of $990 million to $1.01 billion and non-GAAP EPS of $3.57 to $3.67. For the second half of 2016 we are assuming no significant changes either way in the overall macro climate.

We also see sales rates ramping up, particularly in Q4 as some of the newer sales investments have been brought on and begin producing and as the channel improvement and expansion initiatives also continue to drive incremental sales.

Our updated guidance also factors in assumptions around the enterprise agreements that are in the pipeline for the second half and the high probability that those deals will be recognized ratably over the contract period given what we experienced in the first half of 2016 and also given the current dialogue with many of these customers around the compositions of the deals and the licensing terms.

Further details around specific currency and tax rates and some of the other key assumptions that we factored into Q3 and 2016 outlook are outlined in the prepared remarks. So during the second quarter we repurchased 1 million shares at an average price of $86.08 and for the first half we repurchased 1.5 million shares at an average price of $85.84.

And as of the end of June we’ve got 3.5 million shares of capacity left in our share repurchase program. So consistent with what we have been communicating, including at Investor Day, it is our intention to continue to dedicate a portion of our free cash flow to returning capital to shareholders through our share repurchase program.

We currently anticipate that the second half share repurchase activity will be similar to that of what we did in the first half. So with that, operator, now we can open up the phone lines and take some questions..

We will now begin the question-and-answer session. [Operators Instructions] Our first question is from Anil Doradla from William Blair. Please go ahead..

Hey, guys, Jim and Maria. Good job on the quarter. I had a couple of questions. So Jim, obviously, you know, you folks have embarked on big changes within the company, whether it is sales force, whether it is products, whether it is pricing. We saw some positive impacts through the channel it looks like in some of the Asia Pac regions.

Can you help us understand a little bit where you are on - or what innings you are on in terms of improving sales force productivity, improving [ph] B channel (14:20) and....

A - James Cashman:.

And adoption of these new products?.

But you also mentioned a couple of other things. Because actually it is not that we are changing because things were inherently bad, because actually they have been very good for a long time. Actually we are changing because - we are evolving because the world is evolving an awful lot.

So the presence of cloud computing, some of the buying preferences of customers, basically being able to embrace all of those. One of the most notable recent additions is we’ve always had - perpetual - we’ve always had software as a service, we’ve always had time-based licenses.

But now you get into some of these things that are being prompted about by cloud and you get into the concept of elastic licensing and different kinds of mechanisms like that. And that’s really just meeting an evolving consumer demand.

So all the while, while technology is continuing to progress because we see with new technologies like additive manufacturing come forth, well, it brings a new set of pressures as to what can really benefit from simulation. So it’s just one of those things. You cannot stand pat in this industry. You have to continue.

So we’ve done a lot of organic investment, but we also continue to stay very active, even in these kind of like tricky valuation times, of a heavy search on potential partners for mergers and acquisitions..

Q - Anil Kumar Doradla:.

So we actually mentioned about a year ago that we - actually more than that. We started to shift some of our sales force because there are an increasing number of customers that are interested now in moving toward these system-wide adoptions of simulation. However, there is still a lot of traditional base. They’re still doing tactical, technical buys.

And we need to be able to serve both of those markets as that latter market continues to mature. So what we started to do was actually segment from what was basically an all-geographic-based sales force to one that are actually more targeted toward those larger engagements while also not leaving the tactical, territorial ones behind also.

So in fact that was part of the transition and turbulence that we were seeing, talking about probably even as recently as four quarters ago. So that’s still going on in place. But the fact is we are now starting to ramp up. And I think you can even see from the measures of these that they are, in fact, starting to ramp up.

The other interesting part of this is that we’re also seeing, though, that once people get into this mode, they’re able to now adopt the value much more quickly. And we’re seeing that we’re getting some periodic additions from companies that may have already even committed to a multiyear deal, but now they’re actually accelerating that.

It’s just that we’ve removed some of the barriers by making it very easy for them to adopt on an enterprise basis and quickly learn internally as to which paths are the right way to go..

Q - Anil Kumar Doradla:.

A - James Cashman:.

[Operator Instructions] Our next question comes from Jason Rodgers with Great Lakes Review. Please go ahead..

Q - Jason Rodgers:.

A - Maria Shields:.

Q - Jason Rodgers:.

Now, how sustainable is it? Yes, it is sustainable. I think that even during this ramp-up thing we will see some ebbs and flows, but if you could pass a trend line through it you will see positive activity.

Because, again, the same things that we saw in North America and Japan are fairly evident also in Germany where you’ve got a strong industrial base, it’s fairly mature, developed, we’ve got long-standing relationships and now we just have to bring those same skills and processes into it.

I don’t think it will be like a monotonically linear type of uptick curve, but it will be a - it should be trending continually up-wise and being in particular pretty positive. Now that being said, any time you talk about anything projected for Q3 in Europe, there is always a bit of ups and downs in there.

So I mean I will put that caveat in any - well, I’d probably put that in every Q3 for the last 17 years that we have been doing this.

Did that hit you?.

Q - Jason Rodgers:.

And I think during this situation where you have more and more companies entering that kind of thing on top of the macroeconomic choppiness, I think there will be some chop in those numbers.

The bottom line is, at the end of the day, I don’t want to be cavalier about this, we don’t care that much over the long term because as long as we lock in customers we know our retention rates are very high. And right now, we are really trying to get the ramp of having more people utilizing the technology.

So we just want to make sure that there are numerous ways and no particular enforced financial hurdles that could slow down that potential ramp-up..

Q - Jason Rodgers:.

A - James Cashman:.

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

Q - Monika Garg:.

So you can have a pretty dramatic swing in a shift toward lease-based licenses. But if you compare it to the total accumulated over history standpoint, it may look like a lower number but it’s really showing some fairly significant growth.

I think that’s maybe the big comparison is when you compare perpetual growth, you are comparing it to only what happened last year. When you are comparing lease growth, you are comparing to what added on to what preceded by the previous 30 years or 40 years of accumulated lease base. I think that’s more of just a mathematical analysis of it.

The other thing is when you shift from a perpetual to a lease, I mean while the deferred balances go up and things like that, first of all, an annual lease is less than a perpetual license. And on top of it it gets ratably recognized, so you don’t even see all the impacts of that. But in general you see a steady growth going up.

But I think that’s how the math is working if I am understanding the question right..

Q - Monika Garg:.

A - Maria Shields:.

Q - Monika Garg:.

A - Maria Shields:.

Q - Monika Garg:.

A - Maria Shields:.

Q - Monika Garg:.

A - Maria Shields:.

Q - Monika Garg:.

Our next question is from Jay Vleeschhouwer from Griffin Securities. Please go ahead..

Also for you, we see that you are now providing your bookings numbers, which is very helpful, and you were up 4% year-to-date and by our calculation about 2% to 3% bookings growth trailing 12. What does your guidance contemplate in terms of the annual increase in bookings? And then for Jim. Thanks..

A - Maria Shields:.

Q - Jay Vleeschhouwer:.

A - Maria Shields:.

A - James Cashman:.

And relatedly, with respect to the SeaScape architecture, could you talk about the longer-term implications of that for pricing and packaging? When we think about the modular architecture of SeaScape around the three different services that it is built upon and your wanting to become more of a platform, so to say, what are the longer-term implications for the business of SeaScape, particularly for non-EDA applications?.

Amidst all that we are also - over the years we’ve tended to get a very complicated number of SKUs, if you will, and we are trying to simplify the SKU base. So even while it’s getting broader, it’s probably going to have more discrete chunks in there.

That being said, I really want to wait until we get the specific product release information on that, which is going to be later this year. Because anything else would be - there could still be some fine tuning. It would be like a pre-announce. It really wouldn’t be right.

Other than the fact that trajectory-wise those are the trends that we are doing, but they are also in support of what we have done forever. So now the second part of the question was related to SeaHawk and SeaScape, right? You are absolutely right. Now, it got its start in the chip business.

And that was really where some of the main brain power from our technology group put that to play.

And also you look at the complexity, when you are talking about 5 billion to 10 billion transistors and how you look at all the permutations and how do you actually simulate all that, and just doing brute force computations is one of the reasons why it was very difficult to apply that. Well, so that’s why it came out in that manner.

But as opposed to putting things in individual products, we - you just mentioned the word platform, and as that, there are certain things that need to transcend and go across all products. So you look at multi-physics; that’s got to be handled at a platform level through our flagship products. You look at the advanced kind of calculations.

So in general the SeaScape-SeaHawk was actually made a platform element. And it is our full intent, again, not pre-announcing specific releases here, but it is our intent to actually apply that in.

So I think you can see, as you started to do some very complicated simulations, maybe particularly of complete mechanical systems, or you look at complex hybrid systems between software, mechanics and electronics all combined, it might be needed in Internet of Things or autonomously driven cars, those type of things, or very, very complicated non-linear calculations, even in a particular, like mechanics or fluids, kind of situation.

These kind of capabilities for handling the big data and then also using machine learning to learn from that and make it more efficient are clearly things that we have slated on. It is just that we haven’t attributed those to any specific release, but they have applicability across a broader range of calculations for sure..

Q - Jay Vleeschhouwer:.

A - James Cashman:.

Our next question is from Saket Kalia with Barclays. Please go ahead..

Q - Saket Kalia:.

A - James Cashman:.

A - Maria Shields:.

Q - Saket Kalia:.

A - James Cashman:.

Q - Saket Kalia:.

A - James Cashman:.

A - Maria Shields:.

A - James Cashman:.

Q - Saket Kalia:.

A - James Cashman:.

Q - Saket Kalia:.

A - James Cashman:.

Q - Saket Kalia:.

A - Maria Shields:.

Q - Saket Kalia:.

A - James Cashman:.

Our next question is from Steve Ashley with R. W. Baird. Please go ahead..

Q - Steve Ashley:.

So it is clearly - I can only think of maybe one of the situations where that wasn’t the case, where it was just in some cases they were just expanding and already well staffed that group.

But really the premise of that is, if you will, moving down the pyramid into broader bases of usage and usually involved with that also is utilizing it earlier in the design cycle where you have a disproportionate impact on innovation..

Q - Steve Ashley:.

I am just saying that our relative positioning in it as a result of both chip package system and the SeaScape kind of platform type of things have put us in a much better competitive situation which in turn has led to accelerating growth where actually it’s - well, it is all time-based and you have got a long pipeline of things.

The pipeline is building nicely. And as we mentioned, the growth is accelerating, which kind of turned - reversed the trends that we might have been seeing last year.

So I still think the - I don’t know, Maria, do you have different comments on this? I still think the headwinds are still kind of there but our relative stead in there has actually improved..

Q - Steve Ashley:.

A - James Cashman:.

Our next question is from Steve Koenig with Koenig (sic) [Wedbush Securities]. Please go ahead..

Q - Steve Koenig:.

A - James Cashman:.

And I will add in opportunistically just to follow up to Monika’s question on cash flow. For the full year, it’s flat, relatively flat.

What - despite the increase in deferred - and, Maria, I guess the follow-up there is why? Can you give us some color on that?.

Relative to cash flow, if you look at the plan and the way the numbers are working out, since Q4 is going to be the strongest growth quarter and the build-up of receivables, you will see that manifest in improved cash flow going into early 2017..

Q - Steve Koenig:.

A - James Cashman:.

Q - Steve Koenig:.

That being said, they are still right now comparing what does it mean to turn loose that amount of computing, pay for it through a service versus the not having to maintain an IT staff and all the different things that are associated with that. And that really is what has been the major things that people have been doing.

It’s almost the comparative of the cost of the infrastructure, control of the infrastructure, things like that.

Now that being said, there will be an additional layer there, so okay, what’s the advantages of actually doing flexible licensing versus actually hosting owned licenses, be they time-based or perpetual? That’s one that people will only be starting to dig into now, but that’s really kind of the age-old question on anything.

Do you buy something? Do you lease something? Or do you just rent it for the weekend that you need it, if you are buying like - getting access to yard equipment, things like that? So that’s part, given the elastic pricing hasn’t been out that long and given the fact that people are still trying to single out, if you will, the infrastructural cost, we are still at the early stages of that.

But we have time to adjust. I agree with you there is interest. There’s maybe a little bit of a gap between interest and ultimate adoption, but that ultimate adoption will come..

Q - Steve Koenig:.

A - James Cashman:.

[Operator Instructions] Our next question is from Shateel Alam with Goldman Sachs. Please go ahead..

Q - Shateel Alam:.

And that being said, I’d say that, if you will, our independence has actually made us attractive in mixed-vendor environments and mixed supply chains to being able to do that.

So it really - we really haven’t seen a lot of change, I mean other than the fact that - I’d say the one change we’ve seen, which usually happens when a CAD/CAM company buys a simulation product, is people that were on a different platform now are strongly kind of looking at moving into that environment with us.

So really it’s - I guess we really don’t see any directional change or we’re not really surprised by too many things.

Now, to answer the first part of your question or at least one of the parts of the question is, oh, yeah, we still like some of the larger ones, but you said which parts of the - we have the basic families of physics all covered, had that for a while, and the only ones who do. However, every one of those continue to need to be continued to develop.

So even though our home PC was around for many years, the processors need to get faster, the graphics need to get better, the connectivity needs to get better.

Likewise, even though we have got industry-leading capabilities and have had, we need to continue to progress those further in addition to meeting the evolving and emerging new trends that are pretty much in the news today, like the Internet of Things, like autonomously driven car, getting into additive manufacturing, all those things that put new twists, if you will, on building virtual prototypes..

Q - Shateel Alam:.

A - James Cashman:.

Q - Shateel Alam:.

A - James Cashman:.

[Operator Instructions] This concludes the question-and-answer session. I would now like to turn the conference back over to Jim Cashman for any closing remarks..

Okay. Well, thanks. And I would like to thank actually all of you for your participation in our call today and for the ongoing support of ANSYS. So we’re really encouraged by what we accomplished in the first half of 2016.

But again, as we discussed on this call, and thanks to your questions, we have a lot of work ahead to deliver on our goals for the full year and the years beyond. Nevertheless, I would still like to thank our entire ANSYS team, as we mentioned some of our key partners for their commitment to driving results.

So all I would say is I think in general, the general tenor here is it is a really exciting time to be in the simulation market. We have seen a lot of trends that are driving that. We see other companies that are now interested in entering it.

And it’s really exciting in terms of the product advancements, things that we didn’t even envision a few years ago like additive manufacturing, like the autonomously driven cars, like this whole concept of a digital twin for industrial use for prescriptive analytics, just to name some of the opportunities.

So it just continues to grow from this point and it tends to be pretty exciting and we’re happy to be in the position we are to be able to embark upon that. So basically as the simulation market is proposed to enter what we feel is a new era, we are proactively evolving our ANSYS teams. I know some of your questions brought that up.

But this is in terms of technology, infrastructure, the actual ANSYS sales teams and even the partner ecosystems to take advantage of what we see as a really tremendous opportunity over the next few years. So I think basically, unimpeachably, we have a proven product strategy, one that other people are trying to emulate.

We’ve got a progressing go-to-market plan, and on top of it all we have got a solid financial foundation that enables us to continue to invest in our business. So I guess over the decades we have built I think unparalleled product offerings.

We’ve got longevity with our customers, very high reoccurring revenues and the opportunity to augment growth through new features and exciting technology. So bottom line is we’re continuing to expand our direct sales force.

We have a renewed focus on the indirect channel and we’re basically committed to driving those solid financial results we have been talking about and generating long-term value for our shareholders and everyone else involved. So with that I thank you very much, and we will catch you on the next call if not sooner..

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect..