Annette Arribas - IR Ajei Gopal - President & CEO Maria Shields - CFO.

Anil Doradla - William Blair Ken Talanian - Evercore ISI Jay Vleeschhouwer - Griffin Securities, Inc. Monika Garg - Pacific Crest Securities Rich Valera - Needham & Co. Matt Lemenager - Robert W. Baird Mark Schappel - The Benchmark Co.

Ross MacMillan - RBC Capital Markets Steve Koenig - Wedbush Securities Saket Kalia - Barclays Capital Sterling Auty - JPMorgan Erik Karlsson - Bodenholm Capital AB.

Ladies and gentlemen, thank you for standing by, and welcome to ANSYS First Quarter 2017 Earnings Conference Call. With us today are Ajei Gopal, Chief Executive Officer; Maria Shields, Chief Financial Officer, and Annette Arribas, Senior Director, Global Investor Relations. Please note, this call is being recorded.

At this time, I'd like to turn the conference over to Ms. Arribas for some opening remarks..

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 supportive data relative to our first quarter financial results and the business update, as well as, our Q2 and fiscal year 2017 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 on 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'll 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. I'd now like to turn the call over to our CEO, Ajei Gopal for his opening remarks.

Ajei?.

Thank you, Annette and good morning, everyone. I have been CEO of ANSYS for just over four months, and I’m delighted to join you today to discuss the results of Q1 2017, which is my first full quarter as CEO of this great company. These are exciting times at ANSYS.

As you saw in our earnings document, we started 2017 with a record quarter that exceeded the guidance we provided in February.

I’m especially pleased with our revenue growth of 13% in constant currency, and with our booking performance that resulted in record deferred revenue and backlog of $653 million, which is a leading indicator of the ongoing health of our business.

We’re also off to a fast start in Q2 with continued momentum from the higher growth that we just experienced in Q1.

Our excellent performance this quarter coming on the heels of a strong Q4 is a testament to outstanding teamwork to a strong focus on go-to-market and sales execution, and to our world-class solutions and to reflect our performance, we are raising our 2017 annual revenue guidance. Maria will go into more details in her section.

The merger of the physical and digital world is creating an unprecedented disruption, resulting in a new generation of innovative and transformative products that are significantly more complicated to design and manufacture than anything on the market today.

Simulation is the most important solution companies have to help them address product complexity and accelerate time to market. As I said in our last call, ANSYS 18, which we released in Q1, expands simulation from digital prototyping, upstream to design engineers, and downstream to the manufacturing, operations and maintenance of products.

We call this pervasive engineering simulation, and we believe it will transform the industry. We are not alone in that belief. A record number of customers and prospects participated in our ANSYS 18 virtual product launch, and in follow-on webinars and in-person events. Our customers recognize and value the innovations we are bringing to market.

Let me give you an example. As you know, additive manufacturing and 3D printing are transforming product development Topology optimization, one of the exciting new innovations in ANSYS 18, finds the optimal shape for a part based on loading and support criteria.

The result is a lighter yet stronger part that saves the manufacturer money, and is perfectly suited for both traditional manufacturing, as well as the additive manufacturing process.

In the two-plus months since it has been released, over 500 customers across the automotive, industrial and aerospace industries have taken advantage of ANSYS topology optimization. Customers are increasing their commitment to ANSYS.

This is a testament to the strength of the ANSYS product portfolio and the strong technical relationships we have built with our customers. For example, in Q1, Eaton Corporation, a leader in power management and a customer for over 20 years, increased its adoption of ANSYS simulation solutions through a new agreement.

The company now has access to the full suite of structures, fluids, electromagnetics, embedded software and system solutions, enabling it to standardize on ANSYS as a single-simulation platform, thereby accelerating innovation and reducing costs.

This new agreement will also allow Eaton to move simulation upstream, to allow design engineers to use simulation early in the design phase, thereby preventing costly late-stage design changes, and to move simulation downstream to incorporate Internet of Things technology into product design and create digital twins for new products In Q4, Pratt & Whitney, also a customer for over 20 years, expanded its use of ANSYS technology through a new multi-year enterprise agreement that gives it access to a broad range of ANSYS products.

Of special importance to this aerospace innovator was ANSYS’s ability to support collaboration across global engineering and product teams. In addition to increasing adoption, our vision for pervasive engineering simulation is also helping us drive competitive displacements.

In Q1, a major automotive chip manufacturer expanded its use of our semiconductor products, effectively replacing the competition.

Recognizing that safety-critical automotive applications require the sophisticated power and reliability analysis that only ANSYS can provide, the customer has adopted our solutions across all process nodes for its designs going forward. It’s not just long-established customers who are benefiting from pervasive engineering simulation.

In our latest success in the space 2.0 revolution, a North American channel partner closed a seven-figure agreement in Q1 with a disruptive company in the commercial space sector. The company will use ANSYS technology to design its innovative new rockets, and expects to improve simulation time by 20%.

Pervasive engineering simulation continues to help democratize our solutions, and expands the use of ANSYS technology from our traditional user base to design engineers and to smaller companies.

Using ANSYS AIM, Jet Towers, a small and innovative manufacturer of telecommunications towers in Brazil, has developed a better understanding of the performance of its towers, and has reduced wind drag and removed unnecessary material from its products. By doing so, Jet Towers gained a five times delivery advantage over its competitors.

Now, let me give you some color into the performance of our sales regions. North American revenue grew 17% in Q1, including over 20% growth in lease revenue. This is further evidence of the shift in preference for time-based licenses that we have highlighted in recent quarters.

Electronics, aerospace and defense, and automotive were the strongest industries again this quarter. Driven by strong performance in China, Japan, India, Taiwan and South Korea, Q4 results in Asia-Pacific included 15% revenue growth and 21% increase in perpetual revenue, both in constant currency.

We had double-digit growth from our indirect channels in the region, which was offset by slower growth in our direct business in South Korea. From an industry perspective, electronics was by far the strongest sector in Asia-Pacific, followed by industrial equipment and automotive.

Our softest region was Europe, delivering constant-currency revenue growth of 5% in Q1. France led the region with 19% constant-currency growth for Q1, albeit off a weak compare. Our business in Germany reported mixed results with the channel delivering double-digit growth that was offset by the performance of our direct business.

We also continue to experience challenges in the U.K. Our performance in Europe, while disappointing, is in line with the challenges that we highlighted in the last earnings call, and we are taking appropriate actions. With regard to industry performance in Europe in Q1, automotive, electronics, aerospace and energy all contributed relatively equally.

I’d like to talk about a major and strategic account program for a moment. A few years ago, we started down a path of building deeper relationships with our largest customers, and I’m delighted with our ongoing success. We have reported our progress with major accounts using two metrics.

First, the number of customers with orders in excess of $1 million in the quarter and in the year. And second, the number of enterprise agreements. We have continued to show strong progress in both metrics. In Q1, we had 31 customers with orders in excess of $1 million in the quarter, including five who spent over $5 million.

This compares with 22 customers who spent over $1 million in Q1 last year, including one customer with orders of over $5 million. In Q1, we closed four enterprise agreements. This compares with one enterprise agreement in Q1 last year, and 18 for the fiscal year 2016.

Going forward, however, we will continue to report on the number of customers with orders in excess of $1 million, and we will not be reporting on the number of enterprise agreements. There are two reasons for this. First, our definition of enterprise agreements is overly constraining.

I would prefer to give Rick Mahoney the ability to structure the right relationship with the customer, one that optimizes the value to ANSYS rather than focus on whether a deal can technically be classified as an enterprise agreement under a legacy definition.

Second, based on Rick’s years of success with strategic selling and large transactions, we are further investing in and evolving our major accounts program. Our goal is to build increasing momentum in our largest accounts through a repeatable and measureable model.

So, through a combination of strong account planning, pragmatic execution, and to mapping the specific needs of each customer to ANSYS’s differentiated capabilities, we believe that we will increase our value to our customers, increase customer loyalty, and grow our revenue and share of wallet.

We will be discussing more of our plan with major accounts during the upcoming Investor Day in September I’d like to turn to M&A for a moment. Our Medini acquisition in Q4 is showing early success and has been integrated into the ANSYS sales channel. I’m excited that we closed our first cross-physics Medini sale.

This was to a semiconductor company for components targeting the automotive industry.

This is further proof that our multi-physics strategy drives cross-sell within our customer base In Q1, we acquired the assets of CLK Design Automation, a small company that provides exciting technology to address timing and voltage variability for sign-off for high-end mobile processor design.

Although the company’s revenue is not material to our financial outlook, the technology will be a strong addition to our semiconductor portfolio. I’d like to turn to M&A for a moment. Our Medini acquisition in Q4 is showing early success and has been integrated into the ANSYS sales channel.

I’m excited that we closed our first cross-physics Medini sale. This was to a semiconductor company for components targeting the automotive industry. This is further proof that our multi-physics strategy drives cross-sell within our customer base.

In Q1, we acquired the assets of CLK Design Automation, a small company that provides exciting technology to address timing and voltage variability for sign-off for high-end mobile processor design. Although the company’s revenue is not material to our financial outlook, the technology will be a strong addition to our semiconductor portfolio.

I’m also delighted that Matt Zack joined our team as VP of Business Development and Corporate Marketing about a month ago. Matt is an outstanding executive with an impressive track record of executing both large and small acquisitions, and building strategic partnerships.

He brings strong financial knowledge and acumen, and a deep understanding of how a large and complex software company runs. In addition, he was part of the management team that transformed Ariba to the cloud, fueling its growth and a nearly 400% increase in share price.

Matt has already made an impact in his short time here, and I look forward to telling you more about his successes on future calls. As I said in the last earnings call, we at ANSYS are working to reinvigorate our top line growth while preserving our commitments on our strong margin structure and cash flow.

I am very excited and proud of the progress that we’ve made over the past few months, and I am more confident than ever in our ability to execute. However, we still have a lot of work ahead of us. We have a number of ongoing initiatives on the sales front. First, Europe remains a top area of focus for us in 2017.

As I mentioned on our last call, we have already made key leadership changes and operational changes in Europe, and we will continue to take actions to improve sales execution and sharpen our go-to-market strategy in the region. Secondly, as already described, we will be evolving our major account program.

And third, we will continue our efforts to expand the indirect channel, especially in Europe and North America. On the product side, we continue to invest to address the ADAS, additive manufacturing and Internet of Things opportunities, and also continue to improve our capabilities in cloud and machine learning.

From an infrastructure perspective, we are in the middle of implementing a new CRM system, which is, of course, critical to our go-forward of sales effectiveness. We also need to modernize our HR information system to allow us to more effectively manage our worldwide workforce.

And with that, I would now like to turn the call over to Maria to discuss our financial results in a little bit more detail.

Maria?.

Okay. Thank you. Ajei. For the next few minutes, I’ll add some additional perspective on our Q1 2017 operational performance, touch on some key financial highlights, and also comment on our Q2 and fiscal year 2017 outlook. Also, just a note, I will be commenting in terms of non-GAAP, unless I otherwise state.

The results of Q1 reflect solid execution across most aspects of our business. This enabled us to deliver both revenue and earnings, which exceeded the upper end of our guidance. Key highlights include total revenue of $253.5 million for the quarter, a y-over-y growth of 13% in constant currency.

Our Q1 revenue includes a negative currency impact of $1.8 million. Recurring revenue for Q1 was a hefty 78%. Our ability to consistently maintain a solid base of recurring revenue remains one of the hallmarks of our business model. Sales bookings growth outpaced revenue growth in Q1.

This was driven by a combination of the 31 seven-figure deals which were closed in the quarter, including five customers with orders in excess of $5 million.

We also reported increases in software license sales and solid maintenance renewals, both of which contributed to deferred revenue and backlog of $653 million, representing a new Q1 record high and 29% growth as compared to Q1 of 2016. This positions us well for Q2 and the remainder of 2017.

In Q1, we achieved a gross margin of 90% and an operating margin of 46.4%. We reported EPS of $0.89, representing 16% growth over last year’s first quarter earnings. Q1’s GAAP earnings included approximately $9.3 million or $0.07 per share related to our previously announced workforce realignment.

Currently, we expect to incur additional charges of $2 million to $4 million or $1.3 million to $2.8 million net of tax primarily during Q2 2017. Our operating cash flow for Q1 totaled $126 million, a 14% increase over last year’s Q1, and we ended the quarter with cash and short-term investments of $867 million.

Keeping with our commitment to return capital to our stockholders, during Q1, we repurchased one million shares at an average price of $100.35. There are 4.5 million shares capacity remaining in the authorized repurchase program. Now, let me spend a moment on our current outlook.

We’ve initiated outlook for Q2 with non-GAAP revenue in the range of $254 million to $263 million. This represents constant-currency revenue growth in the 6% to 7% range at the midpoint, and non-GAAP EPS in the range of $0.88 to $0.93. I’d also like to mention that last year’s Q2 results included $0.03 tax benefit that will not repeat this year.

With respect to fiscal year 2017, we are increasing our outlook to factor in our Q1 performance, our outlook for the remainder of the year, and movements in currency since we last provided guidance in February. This translates to non-GAAP revenue in the range of $1.03 billion to $1.058 billion, and non-GAAP EPS of $3.68 to $3.85.

We’re targeting non-GAAP gross profit margin of approximately 88% to 89% for the quarter and the year, and non-GAAP operating margin to 45% to 46% for Q2, and 46% to 47% for fiscal year 2017.

Further details around specific currency rates and other key assumptions that we factored into our outlook for Q2 and for 2017 are contained in the prepared remarks document. Kate, we'll now open the phone lines to take questions please..

We'll now begin the question-and-answer session. [Operator instructions] The first question comes from Anil Doradla of William Blair. Please go ahead..

Hey guys. Good morning. And very impressive results. Congrats to you all..

Thanks Anil..

So, Ajei, so thanks a lot for sharing your new philosophy around the enterprise-level agreements and using the million dollar as kind of the -- as kind of a tipping point in terms of highlighting the number of deals.

But just digging a little bit onto that, why are you using the million dollars as kind of the -- as the milestone for highlighting the number of deals? Is there something around the million dollars which leads you guys to believe that once you touch $1mm dollars at a client, the prospects are more often better than not? Can you help us understand the philosophy behind that?.

Sure, Anil. I mean, we’re being very pragmatic here. The million-dollar number is something that we have reported over a number of years. So, if you go back all the way to 2007, you’ll see how we’ve done against million-dollar deals.

We wanted to give you some continuity so that you could continue to see the growth that we’re driving in our larger accounts. So that was the rationale behind that..

So it isn’t like because we had -- we used to look at ELAs, right? And ELAs was the way for us to view the company in terms of how it’s shaping out.

So, what I’m trying to really get at is the million dollars versus your previous ELA commentary, what is the correlation there?.

Well, let me give you a little bit more, perhaps a few more words around why we’re trying to move away from this counting of the enterprise agreements on the call.

Look, as you know, we have increased our focus on building strategic relationships with the largest and most important customers, and success in major accounts will play an important role in our business.

And our goal and our objective is to try to build a platform between the customer and ANSYS, which aligns both the customer’s short-term and long-term objectives with our capabilities and our long-term road map. And we want to create an opportunity for the customer to maximize their use of ANSYS technology.

And frankly, if we do this, we believe that we’ll be able to optimize our financial relationship with the customer, and this might result in a sequence of transactions that happen over time over multiple quarters. We’re trying to move away from a constraining definition of enterprise agreements that we’ve used in the past.

So, let me make that very specifically concrete. So, our current definition of enterprise agreements that we’ve reported to you requires that the agreements span multiple physics. Now, suppose you have a large customer who’s ready to standardize on ANSYS Mechanical, as an example, but they’re not yet ready to engage on the additional physics.

So that standardization could represent a huge enterprise relationship. But if you operate under today’s definitions, the sales team would be trying to shoehorn other physics into the deal even if the customer is not ready.

I would rather, instead, that the sales team focus on the long-term opportunity with the customers, which is to choose to close the agreement on standardizing on ANSYS Mechanical, whether it happens to be classified technically as an enterprise agreement or not, and then expand to include multiple physics when the customer is ready.

So that’s what I mean by building a platform between the customer and ANSYS. It’s the mechanism by which we can continue to monetize the relationship on an ongoing basis. And our former definition forced us to think very transactionally while we believe in the long-term platform.

And as a result, with some of our customers, we are in a position to close multiple deals. Even after we have closed large enterprise agreements, we continue to do deals with customers. And so, we feel like this ongoing activity is a better view of the nature of this platform relationship between us and our largest customers.

Now -- and we’re excited about the million-dollar metric because that -- by looking at that metric, you can clearly see the growth of our -- some of these larger relationships with our customers..

Very good..

And finally -- yeah. During Investor Day, you’ll hear more about this from Rick and myself. We will talk a little bit more about our strategy for major accounts. But obviously, Rick brings enormous amounts of credibility and expertise there based upon his experiences in the past..

Great. And as a follow-up, Ajei, and by the way, thanks a lot for clarifying that, that helps. I know it’s not a very fair question, but nevertheless, I will ask. You’ve embarked on kind of a reorganization of the sales force. Europe was identified as an issue, you’re seeing that.

I know you’re in the midst of many changes, but in what innings are you in relative to Europe in terms of turning it around?.

Look, we made some changes in Europe that we reported on last quarter that included some changes in leadership and management. It included some changing of territories and redefining sort of our countries or the regions, if you will.

And, of course, I talked about how we’re changing some of our go-to-market strategy, how we’re dealing with a finer segmentation. I talked about some of our channel relationships and how we’re trying to broaden some of the channel relationships in Europe. All of these things take time. We believe that we’ve made very good progress so far.

We believe that we will continue to make progress through the year. We’ll see early results of this towards the end of the year, but we expect the broad-based financial impact to start to make its presence known in next year and the latter part of this year..

The next question comes from Ken Talanian of Evercore ISI. Please go ahead..

Hi guys. Thanks for taking the question. You saw a healthy uptick in perpetual licenses in the quarter.

I was curious, was most of that growth coming from APAC? And as we look into the rest of 2017, could we see perpetual licenses actually grow for the year?.

Yes. So, Ken, absolutely.

If you recall, for the past several calls, I’ve been highlighting that while some software companies are making a push towards all subscription, we’ve chosen to remain flexible so that we cannot lengthen sales cycles in particular geographies where customers still prefer perpetual models, and Asia-Pac happens to be one of those geographies.

So, we believe that based on our current guidance and based on our current visibility, that we should see some modest growth in perpetuals. But I don’t believe it will be double-digit unless something changes in second half that we don’t have visibility into.

But we are very happy that our Asia-Pac region, our hybrid licensing model enables customers to adopt our technology..

Okay. And I was also curious. Has there -- just sort of bigger picture question. Has there been any change in the percentage of your customer base who’s adopted multiple physics? I know you talked about the desire to push that over a longer period of time rather than sort of forcing it through an ELA, but I’m curious as to what the trend has been..

So, when we look at the top 100 customers who tend to be the larger customers who buy more and have more sophisticated products, a lot of them tend to be multiphysics. I would say approximately 35%, 40%, somewhere in that region, are adopting multiple physics for the large customers..

The next question comes from Jay Vleeschhouwer of Griffin Securities. Please go ahead..

Yeah. Thank you. Good morning. Maria, let me start with you and ask about the relationship of perpetual with maintenance revenue. So, over the quarter and for the trailing 12 months, maintenance continued to substantially outperform the perpetual license revenue. In 2016, for example, perpetual revenue was down 5%, maintenance up 8%.

And then now, for the trailing 12 months ended Q1, perpetual’s down 2%, even with the uptick in Q1; and maintenance up 9%.

So, given your historically very high correlation between maintenance and perpetual, could you perhaps talk about why the maintenance revenue growth would continue to be so much stronger than the corresponding perpetual? Then a follow-up for Ajei..

So, Jay, I think it’s a combination of not only what happened in the current quarter, but previous quarters’ paid up strength also result in increase in maintenance revenue. We continue to have extremely high renewal rates and attach rates on the maintenance.

And then, of course, in Q1, you will also see some of the impact of the price increase that we announced with the latest release in late July. So, I think those are really the three combining factors that drove the strength of the maintenance revenue in Q1..

Okay. For Ajei, we track your bookings by end market fairly closely, and it’s good that you disclosed those percentages. When we look back over time, including Q1 and on a trailing 12-month basis, it’s generally the case that you have one or two or maybe three end markets that most contribute to your bookings growth.

More recently, as you noted, you had -- auto and electronics were quite good for you in the quarter, and last year, of course, in Q4, electronic, semis and A&D were the main drivers. The point I want to bring out is that your industrial equipment segment has been lagging for some time now, partly due to tough comps perhaps.

But could you talk about when you think you’re going to start seeing some momentum in that category as you have in the past? And then more broadly, does your guidance encompass an assumption of double-digit bookings growth for all of 2017, as you showed in Q1?.

So, I think look, your point about the -- Jay, it’s a good question about the industries. Obviously, we’re seeing enormous strength in electronics. We’re seeing enormous strength in automotive, aerospace and defense, semiconductors. These are areas that have been performing significantly above perhaps the past.

I mean the automotive sector, for example, with electrification and with ADAS, the level of investment continues to accelerate there. So, we’re seeing, in some sense, outperformance in some of those areas. Certainly, if you think about industrial equipment in the aggregate, oil and gas has been somewhat depressed for a while.

And we would expect that as the oil companies adjust to a new reality or oil prices start to change, they may be some in what that looks like. That being said, of course, we are not just in exploration, we’re also in pipeline, and we continue to sell into that part of the oil industry as well.

But obviously, oil and gas fits into our view of the industrial equipment market, and there’s been some downward pressure there. I’ll let Maria answer the question about bookings..

Yes. So, Jay, our current guidance would -- if everything on the high end would go well, could result in double-digit bookings growth for the full year. However, I will caution that there’s two major factors that could yield high single-digit growth. First being, as we get into second half, our Q4 comparable will be extremely challenging.

With that being said, we also have a number of multi-year deals that are in the pipeline. And the timing of when those close, whether they be Q4 or Q1 of 2018, will also have an impact on where we finish relative to the growth in bookings. So, it is very possible.

However, I will caution that there are some things that could yield some of those deals shifting into Q1 of next year just based on timing of closure rates, so..

The next question is from Monika Garg of Pacific Crest Securities. Please go ahead..

Hi. Thanks for taking my question. First on Q1, Q1 much better than expected. Maybe can you walk through more details what led to beat? And also, when I kind of model the guidance for Q2 and rest of the year, it seems you are -- in Q2, your midpoint is about 5%, 6% growth, and second half, the guidance implies less than 5% growth.

So, given such good performance in Q1, why would we see such deceleration in rest of the year?.

So, let me address the issues about performance in Q1, and then I’ll hand the question over to Maria. So Q1, Monika, look, I think we approached Q1 with the focus on execution. And we were very clear about making sure that we got off to a fast start within our sales organization.

And we did a number of things that were tactically important, as well as strategically set the stage for a very strong year. From relatively simple things like moving our sales kickoff meetings earlier in the year to being thoughtful about how we drive the start-of-the-year activities around ANSYS 18 and so forth.

So, there were some, I would say, sort of thoughtful execution. And then, of course, we’ve had Rick Mahoney, who’s our new VP of Sales. Rick came on board. Rick has a particular view on how he wants to drive accountability and execution in the sales organization, and that’s been tremendously well received and been tremendously successful.

So, it’s been a combination of execution. It’s been a combination of fresh sets of eyes on the company, and our ability, most importantly, to work as a team across ANSYS to make sure that we can support the needs of our customers in the best way. So, I’m very proud of the work that’s been done this quarter, and a lot of it is just about execution..

And, Monika, relative to your question regarding outlook for the full year, and particularly, second half, what I’d say is our current outlook considers a number of factors.

First of all, as I mentioned on the earlier question, as we get to second half, the strength of last year’s Q4 will make the comparable in this year’s Q4 a little bit more challenging. And as you heard in the prepared remarks during the script, we are cautious about Europe.

It is going to take us the better half of 2017 to do a lot of the heavy lifting that we’ve got ahead of us, and to begin to see the fruits of our labor.

And we’re also a little bit, relative to the larger deals, to the extent that the mix of those deals shifts toward leases, particularly the trends that we’ve commented on in North America, that could have an impact on short-term revenue. So, I just think it’s Q1.

We’ve got good visibility, but there are some moving parts that could yield differences in short-term revenue recognition under the current rules, but result in better bookings growth for the long term..

Got it. Thanks. Then, Maria, on the 606 revenue recognition, you’re shifting model -- or you’ve seen more lease -- ELAs than lease revenue. So how do you think that could impact that lease revenue line? Thank you..

So, Monika, not unlike what we have been saying for at least a quarter now, no doubt the standard’s final.

And while there are interpretations that the FASB and the powers that be are working through, as some of the people understand that the volatility that’s going to be caused by the new standard is going to raise, we still, working with our independent auditors and some of the consultants that we’ve brought on to help us through this transition, believe that we will have to recognize a portion of those leases upfront because of our model.

And that it will have a material impact on revenue recognition in any given quarter, and have implications relative to deferred revenue. We’re working through all of that. And when we have better visibility as we get into the second half, we will share some of that at Investor Day..

The next question is from Rich Valera of Needham & Company. Please go ahead..

Thank you. Congratulations on the very nice results.

Just wanted to sort of follow up on that line of questioning, particularly if your perpetual licenses, as I think, Maria, you indicated you thought could be flat for the year, are, in fact, flat, it’s sort of challenging to get to your overall full year revenue number given that the other two line items in your revenue, sort of your revenue statement, the lease licenses and typically maintenance tend to progressively increase as the year goes on.

So just trying to -- wonder if you could give a little more color in terms of the lease line or the maintenance line, how you’re thinking about those lines for the full year in the context of a perpetual license line that was flat to sort of get to your full year revenue guide. Thank you..

Yes. So, I would say at the low end of our guidance, it would assume in constant currency perhaps negative to flat, which would mean we would continue to see growth in the lease and maintenance lines.

And at the higher end of the guidance, depending on mix and the timing of some of the deals, we would see, I would call, mid-single digits perpetual growth, as well as stronger growth in both the lease and maintenance lines as the drivers. And service, we’re continuing to see some growth, albeit off of a much lower denominator..

Got it. And then looking at the industry segment data that you provided, it does look like, over the past couple quarters, that the semiconductor segment has come back pretty strongly. Just wondering if you can provide any color on that, what’s driven that and how the new Apache product is fairing out in the market, the new RedHawk product. Thank you..

So, look, we -- firstly, to address your question about the new architecture, we believe that the SeaHawk, SeaScape architecture, we believe it’s a great game changer because essentially, what SeaHawk does is it combines the big data architecture that we’ve been working on as part of SeaScape, and it combines that with our capabilities which allow chip designers to essentially do the power -- to meet their power and performance goals, while reducing the need, if you will, for overdesign to make sure that they’re being conservative.

So, I think we’ve proceeded very well with SeaHawk. We have a number of engagements under way. We’re seeing tremendous interest.

More broadly, this is an example of our commitment to continue to innovate within our portfolio to maintain the leadership across all of our physics so that we can dig that technical moat that separates us and our competitors. We can dig it deeper and wider from a position of strength.

More broadly, in the semiconductors, as we see customers moving to advanced process nodes, 60 nanometers and below, the designs are becoming more complex. The risk of failure is really high. And so, customers are driving more and more simulation. And that drives more and more use of our technology.

And certainly, with the big data analytics, we’ve become much stronger. And so, we’re very excited about that movement, it plays directly to our strength. And then when you start to think more broadly about where the industry’s going, it’s not just about the chip itself, it’s about how the chip fits into the package, into the system.

And that chip package system requirement is driving the need for multiple physics. Again, it’s not just the semiconductors, you have to understand the thermal, the mechanical, the structural elements of this. And so, that again leads -- brings in the ANSYS portfolio. So, we’re very excited about what we’re doing. We’re seeing more customers now.

Think about silicon, not just the traditional semi guys, but also the systems guys are building custom silicon to capture their intellectual property. Think mobile devices, etcetera. So, we’re very excited. We think the technology gives us a good start, and we think that the market is very strong for us..

The next question is from Rob Oliver of Robert Baird & Company. Please go ahead..

Thanks, this is Matt Lemenager on for Rob. Thanks for taking our question. Is any part of this acceleration in bookings coming from pushing upstream to design engineers who maybe weren’t using your product for simulation in the past vs. the historical market of core analysts? I’m just trying to parse out maybe where that acceleration is coming from..

We certainly have customers who are up and down, traditional analysts, as well as designers, now taking advantage of our technology. But I would say that our growth is coming and being driven from our core business and the strength of our core portfolio within our flagship products.

Because obviously, that’s -- the denominator’s sufficiently large when you start to think about growth. Some of the emerging products that we put out there are relatively small. With a large denominator, the growth is being driven by the growth in our flagship offerings.

And so that’s driving usage, not just within the traditional base, but of course, within the designer community as well within our existing customers..

Great. And this is for….

Did that help?.

Yes, that’s helpful. And for Maria, I don’t know if I missed it on the call.

Is there an update to the full year cash flow guidance?.

Yes. We are updating outlook on cash flow to $365 million to $385 million for the year..

The next question is from Mark Schappel of Benchmark. Please go ahead..

Hi. Good morning. And nice job on the quarter. Ajei, the company did exceptionally well in North America this quarter. And with that said, though, the discussion of late has really been around the operational changes in Europe.

So, I was wondering if you’d just discuss a little bit about maybe some of the changes you’ve made in North America just to help drive these good results..

Well, I think we had a very strong team in North America. We have a leader in North America who’s been in his position now for a while, and we have a set of lieutenants below him who are very skilled at what they do. What Rick has been able to bring on board is a set of discipline around execution, a focus on the basics.

It’s just looking at forecast, being very disciplined about forecasting; looking at deals, doing analysis around especially some of the large deals, which, of course, continue to be very important for us, doing an analysis of what they look like, making sure we have customer engagements. And so, we certainly have better execution.

We’ve got a very mature market. We’ve obviously been in the North America market for a long time. We have a long history with our customers. And if you take, for example, the comments I made in my prepared remarks or in the script around Eaton Corporation, for example, or Pratt, in both cases, these are long-established customers.

Their needs have continued to change. They’ve historically bought a set of products, but their needs have continued to change. Their vision has changed. They’re looking at IoT. They’re looking at ADAS manufacturing. They’re looking at the use of design engineers.

And they’ve come to us as a critical strategic partner, and they’ve asked us, how can we stay ahead of this curve, this industry arc that’s changing? How do we get ahead of this? And obviously, we have answers for these customers.

And so that’s what’s leading to some of these larger transactions, that’s what’s leading to some of this success in the field. So, our strategy of multiphysics, our strategy of being a simulation specialist, our strategy of making sure that we have the right solutions for the customers ahead of their needs, that’s paying off.

And so, we’re seeing better sales execution. We’re seeing the impact of great relationships with customers over the years. We’re seeing the impact of a great team, and we’re seeing the impact of really great products that are the best in the industry..

Thank you. That’s helpful. And as a follow-up here, obviously, a lot of internal initiatives going on at the company to drive sales, that’s good. But based on the good revenue and bookings numbers we’ve seen the last couple of quarters, is it fair -- I would assume it’s fair to assume that the overall demand conditions are also improving as well.

Is that correct?.

Yeah. I think it’s fair to say that the overall demand is improving, especially around areas like the electrification, if you will, of the electronics everywhere. And you’re seeing that clearly as a trend.

Products that were traditionally not sort of electronics, if you will, and not electronics-enabled, these things are now IP addressable and there’s more electronics in the bill of materials everywhere. So, for example, in a car, 35% of the bill of materials of a car is electronics now, and it’s going to go raise to 50%.

All of that leads to and points to our strengths, which is strength in electronics and strength across multiple physics. So, yes, there is some improvement, but it’s also not just the macro, it’s also the fact that our products are perfectly positioned for where the demand in the market is.

And I don’t necessarily -- I don’t want to say it’s just one or the other, it’s both. There is some demand, but clearly, we have the best products in the marketplace..

The next question is from Ross MacMillan of RBC Capital Markets. Please go ahead..

Thanks so much and congratulations from me as well on a strong quarter. Ajei, I had just a question in terms of maybe changes to the sales compensation. I was curious if you’ve put anything in place or Rick has put anything in place this year, or indeed, if it happened last year, that’s fundamentally different than what preexisted.

And related to that, has there been any change on the cadence of lease deal renewals? I’m just curious as to whether lease renewals are happening in the timeframe that they sort of normally would be expected to renew or whether there’s anything changing on that cadence of renewal. Thank you..

Yeah. So, to your point about sales compensation, we put in place the bulk of the compensation structure for the sales team. Last year, we put the model in place kind of at the end of last year. And obviously, we’re incenting our sales people to win business, and that’s where the variable compensation comes from.

And so that’s how the variable compensation is structured. This year, at the start of the year, one of the additional things we did to drive the fast start that I talked about is we put in place a small spiff for deals that were brought in earlier in the quarter.

And so, for deals that came in above a certain threshold level, so the larger deals that came in above a certain threshold but that came in earlier, there was a little bit of incentive put in place as an incremental spiff for the sales organization. And so, we’ve done a little bit of that as well.

But for the most part, the sales organization is being incented on new business. And that’s the basis by which we’re driving the organization. Yeah. And by the way, equally so for the channel, the channel also has a similar incentive around driving and closing new business for us..

Thanks.

And just on that spiff, is that something that you will not carry through to subsequent quarters or is it something you plan to keep in place this year?.

It was a one and done for Q1. So, it was a Q1 fast start, and it was only for the first part of the quarter, so it’s in the past..

The next question is from Steve Koenig of Wedbush Securities. Please go ahead..

Hi everyone. Congrats on a great quarter. My first question I want to ask you, I just want to maybe augment Mark’s question just a little bit here. You talked about in terms of improving North America, acceleration there. You talked about the sales execution and leadership, that’s been a change in terms of something different in ANSYS.

You did agree that there’s a secular demand trend towards more electronics, you pointed out to.

But I’m wondering in the demand environment, is there also a cyclical component? What are you seeing there in terms of kind of market conditions?.

Well, each individual vertical is different. I mean, oil and gas has its own parameters. But for the most part, we’re seeing essentially a continuation of what we saw in Q4. It’s not like there’s been any dramatic difference between Q4 and Q1 that we can discern.

There’s always been this trend towards electronification, if you will, if that’s a word, and some of the other metrics that I talked about. So, I don’t see any fundamental difference between Q4 and Q1..

Okay. And then on the follow-up, I’d like to ask about initiatives at the lower end of the market, where you’ve been growing more slowly, you’ve been growing very fast at the high end of the market.

What’s -- anything new for the low-end and what’s your thinking there in terms of what things you might want to pursue?.

Well, I’ll sort of make two observations, one is around channels. We have continued to make investments in the channel, and our channel gives us reach into customers that we would not historically be calling on ourselves. And you can see from the performance of the channel, the channel has done really well.

We’ve driven double-digit growth, for example, in our channel partners in Asia. And I think that they are -- that’s been very helpful for us, bringing in a number of new logos into the company through the channels.

The second part of the answer is if you think about our product offerings, I mentioned this briefly in my remarks, we introduced Version 3 of our AIM offering in ANSYS 18, and that is obviously seeing some good traction with customers. And I would say something like 60% of the customers to whom we’ve sold that product are new logos to ANSYS.

And that is something that the channel has been able to embrace, as well as -- and its still early days, of course, for that product. So, yeah. So, I mean, we’re seeing our ability to get there driven through both product, as well as channels..

The next question is from Saket Kalia of Barclays Capital. Please go ahead..

Hey guys. Thanks for taking my questions here. Listen, most of mine have been answered, but two quick modeling questions for you, Maria, if I may. First, you mentioned that bookings could grow double digit for the year, and of course, some of that, as you said, will come from some multiyear contracts.

Can you just talk about how you think about current bookings growth or maybe annual contract value growing for this year?.

Yeah. I would think that if you look at the bookings growth and the current in Q1, they were very similar. So, to the extent that the timing and the mix hold up based on our current visibility, I would think that they would be -- the current portion would be similar. It may be a little bit impacted by timing..

Got it. And then you can tell by all of our questions, we’re all trying to understand sort of the driver behind the big deals strength. So, I’ll ask you a different variation of it. How will you, qualitatively, of course, think about some of the big deals strength in terms of contracts up for renewal vs.

expanded usage?.

So, I would say it’s a combination of both. I mean those deals that we highlighted in prepared remarks and in the script, those 31 seven-figure deals and those five over $5mm, not only are they renewals, but there is also expansion of new business. So those are customers, and two of them that Ajei highlighted.

We have had decades of relationships with some of these customers, particularly in North America where we started and where a number of the companies that we’ve acquired over time started.

So, the goodwill and the brand recognition that we’ve been able to develop with these customers as they do tool consolidation, as they make changes in their business to deal with additive manufacturing and IoT, and digital twins and all of the things that are relevant to them, we are uniquely positioned because of those decades of relationships to help them through their own transformation.

So, it’s a very exciting time for us given the breadth and depth of our portfolio, and how we can help our customers to continue to solve the problems of tomorrow..

The next question is from Sterling Auty of JPMorgan. Please go ahead..

Yeah thanks. Hi guys.

Can you just remind us what was included in guidance and what the contribution in the quarter from the Medini acquisition was?.

For the full year, I think the Medini acquisition is relatively immaterial, it’s about $2mm, and the contribution for Q1 was probably a quarter of that.

It’s not material, it’s early in the day, but we were excited, as you heard Ajei talk about, the integration of that and having the opportunity now to leverage our installed base and those customer relationships to grow that given that, that Medini technology is very much aligned with some of the current things that are happening relative to our customers..

Got it. And then….

Yeah, and that allows us to drive a conversation -- I’m sorry. Just to amplify what Maria said, that allows us to drive a conversation with our customers about if they start to think about these next generation, for example, of vehicles, we can drive a discussion about safety and that broadens the discussion down to the multiphysics strategy.

So, it’s a symbiotic relationship driving the business forward..

And on that point in terms of auto, given the strength that you’ve had, can you update us, at this point, where do you see the biggest concentration of ANSYS usage within the automotive market? So, what area of automotive, design, simulation, where are the biggest use cases?.

Well, look, traditionally, if you go back a decade or so ago, a few years ago, traditionally, it’s been -- it was in structures, it was in thermal, it was in fluids, looking at things like integrity, vibration analysis, looking at aerodynamics, looking at combustion for thermal and so forth. That’s where traditionally it’s been.

Where it’s evolved to is now things like electric motors. So, companies that are building electric motors are using our technology to help design these electric motors. It’s evolved to electronics, so antenna placement.

So, for example, as companies are thinking about vehicle-to-vehicle or V2X or go V-to-anything, it’s where would you place the antenna. If you start to think about -- as you start to think about ADAS, then it becomes much more sophisticated because you’re dealing now with essentially, a supercomputer on wheels.

You’re dealing with a very challenging environment, and that requires a lot of electronic simulation. Of course, multiphysics simulation as you start to think about vibration and its impact on electronics, for example. There’s opportunities with embedded software, and we’ve had some success there with our SCADE offerings.

Certainly, we’ve talked about Medini and our opportunities there. So, there’s a new standard, the ISO 26262, that’s driving sort of a standard set of requirements that the automotive manufacturers have to comply with, and that’s something that our products allow them to easily comply with. And that, again, gives us a strategic advantage.

So, historically, we’ve been in sort of structures, fluids, thermal, etcetera.

And increasingly, as the bill of materials of the car migrates, goes from 35% electronics to 50% in the future, we’re seeing the electronics part of our portfolio, the embedded software part of our portfolio, the safe -- all of that come in as well in addition to our traditional strengths..

The next question comes from Erik Karlsson of Bodenholm. Please go ahead..

Thanks for taking my questions. My first question is on the major and strategic account program. We have seen some acceleration in bookings and sales growth here, which is very positive for us shareholders, of course.

But do you think there’s incremental upside from this program as you improve the focus even further here?.

Oh, absolutely. Absolutely. We see incremental upside. We see our performance continuing to improve. We see -- as I mentioned in the script, we had, I believe, four enterprise agreements as compared with one enterprise agreement this time last year. So, we continue to drive progress forward. We’re excited about this at the relationship.

And as we were saying earlier in the relationship, for example, with Eaton Corporation, we’re a trusted vendor. We are in a position to engage with the customer as they themselves are thinking about how to respond to these changing market demands of IoT, et cetera, additive manufacturing.

And we’re in a position with the right solutions to come in to help have that conversation with the customer. And obviously, that drives more business for us. So, we believe that our relationship with these large customers is very strong. It’s based on a very robust platform, a robust foundation.

And we have the ability because of our capabilities and because of the technical relationships that our ACE team has been able to build with the customers. We have the ability to then drive that conversation forward towards incremental opportunity.

And so that drives both new business, as Maria was saying, as well as our ability to renew the portfolio. And that’s where the strength of the franchise comes from..

Very good. And a question on cost as well, if I may. You were investing for growth in a number of initiatives, such -- R&D, sales force incentives, HR and so on, which is really very positive.

Where have we already seen the increase in the SG&A costs due to this? And where do you think there are more costs to come in the quarters ahead?.

I would say across the business because each component of the business, each functional line item, we have a lot of exciting opportunity. Now, the challenge will be the prioritization of those opportunities and the sequencing.

But I believe you will see continued investment in innovation, in R&D, particularly around some of the high growth opportunities that we see that Ajei mentioned around additive manufacturing, around IoT, around digital twin.

On the SG&A side, not only are we investing in some of the go to market initiatives in expanding the channel, but we’re also investing in infrastructures such as CRM. We’re working our way through the implications of the revenue recognition changes. So, we’ve had to bring in some outside parties to help us through that.

So, there’s a number of areas across the company that we’ll continue to invest in because we really see the opportunity for longer-term growth, and we need to invest now to be able to capture that growth..

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

Great. Thank you, Kate. So, I’d like to close by expressing my sincere gratitude to our customers and to our partners and a big shout-out to my ANSYS colleagues. Thank you for all your efforts and thank you for a great quarter. Thank you all for joining our call today. I look forward to our next conversation. Please enjoy the rest of your day..

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